-----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, PbW6jHcfMLHjhbPHgyt/oVgamam7DQ006dYmj1Iz7PT7QUCnHmtMFh6JruYL5+FK /fz/U0X7v3un+jqRcWuSDQ== 0000912057-01-510010.txt : 20010424 0000912057-01-510010.hdr.sgml : 20010424 ACCESSION NUMBER: 0000912057-01-510010 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 16 CONFORMED PERIOD OF REPORT: 20001231 FILED AS OF DATE: 20010423 FILER: COMPANY DATA: COMPANY CONFORMED NAME: MARKETING SPECIALISTS CORP CENTRAL INDEX KEY: 0001062184 STANDARD INDUSTRIAL CLASSIFICATION: WHOLESALE-GROCERIES & GENERAL LINE [5141] IRS NUMBER: 043411833 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: SEC FILE NUMBER: 000-24667 FILM NUMBER: 1608946 BUSINESS ADDRESS: STREET 1: 17855 N DALLAS PARKWAY STE 200 CITY: DALLAS STATE: TX ZIP: 75287 BUSINESS PHONE: 9723496200 MAIL ADDRESS: STREET 1: 17855 N DALLAS PARKWAY STE 200 CITY: DALLAS STATE: TX ZIP: 75287 FORMER COMPANY: FORMER CONFORMED NAME: MERKERT AMERICAN CORP DATE OF NAME CHANGE: 19980529 FORMER COMPANY: FORMER CONFORMED NAME: MONROE INC DATE OF NAME CHANGE: 19980520 10-K405 1 a2045432z10-k405.txt 10-K405 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------ FORM 10-K (MARK ONE) /X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2000 OR / / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ______________TO______________ COMMISSION FILE NUMBER 0-24667 ------------------------ MARKETING SPECIALISTS CORPORATION (F/K/A MERKERT AMERICAN CORPORATION) (Exact name of registrant as specified in its charter) DELAWARE 04-3411833 (State or other jurisdiction (IRS Employer Identification No.) of incorporation or organization)
17855 N. DALLAS PARKWAY, SUITE 200 DALLAS, TEXAS 75287 (972) 349-6200 (Address, including zip code and telephone number, including area code of Registrant's principal executive office) ------------------------ FORMER NAME AND ADDRESS MERKERT AMERICAN CORPORATION 490 TURNPIKE STREET CANTON, MASSACHUSETTS 02021 ------------------------ Securities Registered Pursuant to Section 12(b) of the Act: NONE Securities Registered Pursuant to Section 12(g) of the Act: COMMON STOCK, $0.01 PAR VALUE ------------------------ Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes /X/ No / / Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. /X/ The aggregate market value of the Common Stock of the Registrant held by non-affiliates of the Registrant on March 15, 2001, based on the closing price of the Common Stock as registered by the NASDAQ National Market on such date, was approximately $2,900,000. The number of shares of the Registrant's Common Stock and Restricted Common Stock outstanding as of March 15, 2001 was 25,912,809 and 72,736 respectively. DOCUMENTS INCORPORATED BY REFERENCE: None - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- MARKETING SPECIALISTS CORPORATION ANNUAL REPORT ON FORM 10-K INDEX
PAGE -------- PART I Item 1. Business.................................................... 4 Item 2. Properties.................................................. 20 Item 3. Legal and Administrative Proceedings........................ 21 Item 4. Submission of Matters to a Vote of Security Holders......... 21 PART II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters....................................... 22 Item 6. Selected Consolidated Financial Data........................ 25 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations................................. 26 Item 7A. Quantitative and Qualitative Disclosures about Market Risk...................................................... 42 Item 8. Financial Statements and Supplementary Data................. 43 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.................................. 43 PART III Item 10. Directors and Executive Officers of the Company............. 44 Item 11. Executive Compensation...................................... 47 Item 12. Security Ownership of Certain Beneficial Owners and Management................................................ 52 Item 13. Certain Relationships and Related Transactions.............. 55 PART IV Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.................................................. 60 Signatures............................................................. 68 Item 14A. Index to Consolidated Financial Statements.................. F-1
2 FORWARD-LOOKING STATEMENTS This Annual Report on Form 10-K contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the "Securities Act"), and Section 21E of the Securities Exchange Act of 1934 (the "Exchange Act"). These statements appear in a number of places including Item 1. "Business--Industry Overview" and "--Risk Factors", Item 2. "Properties", Item 3. "Legal Proceedings and Administrative Matters", Item 5. "Market for Registrant's Common Equity and Related Stockholder Matters", and Item 7. "Management's Discussion and Analysis of Financial Condition and Results of Operations". Such statements can be identified by the use of forward-looking terminology such as "believes", "expects", "may", "estimates", "will", "should", "plans" or "anticipates" or the negative thereof or other variations thereon or comparable terminology, or by discussions of strategy. These forward-looking statements are not guarantees of future performance and are subject to significant risks and uncertainties that could cause actual results to differ materially from those projected in the forward-looking statements as a result of various factors, including risk factors set forth below under "Risk Factors". This report also identifies other factors that could cause such differences. No assurance can be given that these are all of the factors that could cause actual results to vary materially from the forward-looking statements. 3 PART I ITEM 1. BUSINESS GENERAL Marketing Specialists Corporation (formerly Merkert American Corporation, the "Company", "we," "us" or "our") was incorporated on March 4, 1998, in order to create a leading food brokerage firm providing outsourced sales, merchandising and marketing services to manufacturers, suppliers and producers of food products and consumer goods ("Manufacturers"). The Company acts as an independent sales and marketing representative, selling grocery and consumer products on behalf of Manufacturers and coordinating the execution of Manufacturers' merchandising programs with retailers, wholesalers, mass merchandisers, supercenters, membership warehouses, drug stores and specialty food outlets ("Retailers"). The Company's principal source of revenue is commissions that it receives from Manufacturers. The Company represents more than 1,600 Manufacturers and more than 128,000 food and non-food stock-keeping units ("SKUs"), and has business relationships with key Retailers throughout the United States. On December 18, 1998, the Company consummated its Initial Public Offering of 4,400,000 shares of Common Stock (herein so called) at an offering price of $15.00 per share (the "Offering"). Simultaneously with the Offering, the Company purchased in separate transactions (collectively, the "Combination") all of the issued and outstanding capital stock of Merkert Enterprises, Inc., a Massachusetts corporation ("Merkert") and Rogers-American Company, Inc., a North Carolina corporation ("Rogers"). As a result, each of Merkert and Rogers became a wholly-owned subsidiary of the Company. Prior to December 18, 1998, the Company conducted operations only in connection with the Combination and the Offering. Effective March 31, 1999, the Company merged its several operating subsidiaries into one wholly owned subsidiary. References to the Company after the Combination also include its wholly-owned subsidiaries. BUSINESS COMBINATIONS AND DIVESTITURES Since the beginning of 1999, the Company has completed seven acquisitions, adding coverage in new geographical markets and expanding representation of Manufacturers' product offerings within existing markets. The Company's strategic acquisition plan included the selection, acquisition, and management of businesses in various brokerage markets, including retail food, food service, and private label markets. See "Private Label" below. SELL. In January 1999, the Company acquired Sell, Inc. d/b/a The Sell Group-Cincinnati ("Sell"), a brokerage firm operating in the Midwest region of the United States. The Company completed the acquisition of Sell for an aggregate discounted purchase price of approximately $8.5 million, which included approximately $3.1 million in cash payments, $3.8 million in new debt, and $1.6 million in assumed debt. UBC. In April 1999, the Company acquired United Brokerage Company d/b/a The Sell Group-Grand Rapids ("UBC"), a brokerage firm operating in the Midwest region of the United States. The Company acquired UBC for an aggregate discounted purchase price of approximately $6.7 million, which included approximately $1.0 million in cash payments, $3.3 million in new debt, and $2.4 million in assumed debt. BUCKEYE. In July 1999, the Company acquired Buckeye Sales and Marketing d/b/a The Sell Group-Cleveland ("Buckeye"), a brokerage firm operating in the Cleveland, Ohio; Pittsburgh, Pennsylvania; and upstate New York markets. The Company acquired Buckeye for an aggregate discounted purchase price of approximately $5.0 million, which included approximately $0.1 million in cash payments, $3.4 million in new debt, and $1.5 million in assumed debt. 4 RMSI. On August 18, 1999, the Company merged with Dallas, Texas-based Richmont Marketing Specialists Inc. ("RMSI"), one of the largest food brokers in the United States (the "Merger"). The Company completed the Merger for an aggregate discounted purchase price of approximately $236.8 million, which included approximately $3.4 million in cash payments, $170.0 million in assumed debt, and $63.4 million in Common Stock and options. Under the terms of the Merger, RMSI stockholders received 6,705,551 shares of Common Stock. The Company also granted certain RMSI stockholders and employees options to purchase 800,000 in additional shares of Common Stock at a price equal to $13.50 per share. Immediately following the Merger, the Company amended its certificate of incorporation to change its corporate name to "Marketing Specialists Corporation". Prior to the Merger, RMSI pursued consolidation opportunities within the food brokerage industry. RMSI's strategy was to complete acquisitions in areas where it did not currently operate to better service its Manufacturers and Retailers. Since the beginning of 1997, RMSI acquired, among others, Tower Marketing, Inc. ("Tower") and Atlas Marketing Company, Inc. ("Atlas"), for total consideration of approximately $14.4 million and $45.7 million, respectively. Tower served Manufacturers and Retailers primarily in Texas. Atlas was based in Charlotte, North Carolina, and served Manufacturers and Retailers primarily in the Southeast and mid-Atlantic regions of the United States. In April 1999, RMSI acquired Timmons-Sheehan, Inc. d/b/a The Sell Group--Minneapolis ("Timmons-Sheehan") for an aggregate purchase price of approximately $3.7 million, which included approximately $1.7 million in cash payments and $2.0 million in new and assumed debt. Prior to the acquisition, Timmons-Sheehan served Manufacturers and Retailers in Minnesota, Wisconsin, Iowa, the Dakotas, and Nebraska. INMAN. In October 1999, the Company acquired Paul Inman Associates, Inc. ("Inman"), a brokerage firm operating in the Midwest region of the United States. The Company completed the acquisition of Inman for an aggregate discounted purchase price of approximately $14.0 million, which included approximately $9.8 million in cash payments, $1.0 million in new debt, and $3.2 million in assumed debt. JOHNSON-LIEBER. On January 27, 2000, the Company acquired Johnson-Leiber, Inc. ("Johnson-Leiber"), a brokerage firm operating in the Seattle, Washington; Spokane, Washington; Portland, Oregon; Billings, Montana; and Anchorage, Alaska markets. The Company acquired Johnson-Leiber for an aggregate discounted purchase price of approximately $10.2 million, which included approximately $3.2 million in cash payments and $7.0 million in new debt and other incentives. SALES FORCE. On April 14, 2000, the Company acquired the Sales Force Companies, Inc. ("Sales Force"), a full service brokerage firm operating in the Central Region of the United States. The Company acquired Sales Force for an aggregate discounted purchase price of approximately $18.8 million, which included approximately $6.1 million cash payments, $7.8 million in new debt, and $4.9 million in assumed debt. PRIVATE LABEL. In 2000, the Company decided to exit the Private Label business. On July 31, 2000, the Company signed a letter of intent to sell its Private Label business, known as Buy Sell, to Woodland Partners. On January 19, 2001, the Company completed the sale of Buy Sell to Woodland Partners. See Note 20 of the Company's Notes to Consolidated Financial Statements for additional information. As of December 31, 2000, the Company had 76 offices servicing Retailers throughout the United States. In 2000 and 1999, the Company had revenues of approximately $380.8 million and $246.6 million, respectively. In 1999, the Company had pro forma combined revenues of approximately $379.6 million and pro forma combined net loss of approximately $(22.3) million (giving effect to the Merger only), exclusive of the estimated effects of the integration activities and the elimination of 5 certain nonrecurring charges. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." INDUSTRY OVERVIEW Food brokers are sales agencies that offer sales, marketing, merchandising and order management services to Manufacturers and Retailers. Food brokers are generally paid by Manufacturers on a percentage of product sales made to Retailers. Sales of Manufacturers' products are primarily made through grocery stores operated by Retailers. Manufacturers use food brokers as an alternative to a direct sales force and rely on food brokers to provide local market penetration, integrated brand and category management and access to local merchandising data. The services provided by food brokers enable Retailers to more efficiently source products from multiple Manufacturers and benefit from food brokers' merchandising and promotional expertise and knowledge of local market conditions. Over the past ten years, the entire food distribution chain, including Manufacturers, Retailers and food brokers, has been consolidating. Many companies in the food brokerage industry, including the Company, have participated in the trend toward consolidation by acquiring other food brokerage businesses. The Company believes that the consolidation of food brokers is primarily driven by the attempt of Manufacturers and Retailers to manage their businesses more efficiently and effectively by reducing the number of food brokers with which they must interact within a given region. The Company believes that consolidation within the food brokerage industry is being driven additionally in part, by the consolidation of Retailers and Manufacturers and the increasing demand for the application of more sophisticated information technology on the part of food brokers. Retail food brokers represent approximately 7,000 Manufacturers that sell to approximately 150,000 retail outlets, including chain and independent supermarkets, convenience stores, wholesale clubs and other outlets and more than 100 wholesalers nationwide. The industry includes the following three types of food brokers: RETAIL FOOD BROKERS. Manufacturers of branded food and non-food products use retail food brokers as a cost effective alternative to a direct sales force. They rely on retail food brokers to provide local market penetration, integrated brand and category-management and access to local merchandising data. Retail food brokers provide a full array of these services and generally earn commissions of approximately 3% of the Manufacturer's net sales to Retailers. Retail food brokers typically perform two types of services on behalf of Manufacturers: headquarter functions and retail store functions. Headquarters functions include services provided at the headquarters level to both Manufacturers and Retailers. At this level, retail food brokers conduct business development activities, on behalf of Manufacturers, including sales calls and new product introductions to Retailers. Retail food brokers also assist Manufacturers in developing, reviewing and executing annual marketing plans. Other headquarters services include order management, supervision of shelf space management, coordination of Manufacturers' promotional spending, and assistance with the resolution of billing issues between Manufacturers and Retailers. Additionally, retail food brokers assist Retailers at the headquarters level by gathering and analyzing demographic, consumer and store sales information. Retail store functions include all of the services and activities necessary at the store level for the execution of the Manufacturers' sales plans. These sales plans are executed by retail food brokers through merchandising, shelf and display management, new store set-ups, implementation of promotional plans, and placement of point-of-sale coupons, signs and other promotional information. Retail food brokers also assist Retailers with coupon and advertising programs, quality assurance and technical training, primarily in relation to prepared food. In addition, retail food brokers collect and analyze retail sales data, which they use to assist Retailers and Manufacturers in maximizing sales. FOOD SERVICE. Food service providers include operators of restaurants, school and hospital cafeterias and other similar institutional establishments. The food service business also includes 6 prepared meals sold at convenience stores. Food brokers sell Manufacturers' products to food service providers through a number of means, including headquarters sales calls and the representation of Manufacturers' products at trade shows. PRIVATE LABEL FOOD BROKERS. Private label food brokers work with Manufacturers to develop and manage private label programs on behalf of Retailers. These programs supply products to Retailers which are labeled with a Retailer's own brand. A food broker's responsibilities in connection with a private label program may include procurement, inventory management and in-store delivery of private label products. During 2000, the Company implemented a plan to eliminate this segment of the business. On July 31, 2000, the Company signed a letter of intent to sell its Private Label business, known as Buy Sell, to Woodland Partners. On January 19, 2001, the Company completed the sale of Buy Sell to Woodland Partners. See Note 20 of the Company's Notes to Consolidated Financial Statements for information regarding discontinued operations related to the Private Label segment. COMPANY STRATEGY The Company's objective is to be a leading national provider of outsourced sales, merchandising and marketing services to Manufacturers, Retailers and food service providers throughout the United States. To achieve this objective, the Company seeks to increase its representation of existing Manufacturers' product lines in new geographic markets and non-grocery trade channels, including mass merchandisers, food service providers, membership warehouses, drug stores and convenience stores and by attracting new Manufacturers to the Company. The Company intends to implement its overall strategy through the following measures: INCREASE CUSTOMER COVERAGE. The Company believes that the number of Retailers who capture the majority of the supermarket sales should continue to decline due to consolidation in the industry. By positioning itself as a leader in North America, the Company believes it will be able to both maintain current Retailer relationships and expand its Retailer base as a result of future Retailer consolidations. The Company is also seeking to enhance its Retailer base through its Channel Marketing Division by further developing relationships with mass merchandisers, membership warehouses, and drug stores. DEVELOP MANUFACTURER RELATIONSHIPS AND EXPANSION STRATEGY. The Company believes that its base of Manufacturer relationships will continue to increase, both through expansion of existing relationships and by attracting new Manufacturers that recognize the Company's ability to provide a wide range of marketing services on both a broad geographic and a local basis at a cost lower than Manufacturers would be able to attain with their own sales forces. The Company continues to seek expanding penetration of its existing Manufacturers' product lines into new geographic markets and non-grocery trade channels, including mass merchandisers, membership warehouses, drug stores and convenience stores. HYBRID SERVICES. The Company typically provides Retailers with a full range of account, retail, marketing and order management services for which it receives commissions from Manufacturers based on a percentage of product sales made to Retailers. The Company also has "hybrid" agreements, generally with Manufacturers that did not previously use a food broker's services, under which the Company provides only specified retail services for fees based on the services provided. The Company believes that such Manufacturers are moving toward outsourcing retail services at the store level in order to eliminate the significant expense associated with the maintenance of their own in-store retail representatives. With this in mind, the Company created the new In-Source Specialists Division ("ISS") to handle such needs. ISS will provide the additional personnel required for specific initiatives in a timely and efficient manner. The Company anticipates that ISS will position the Company to take advantage of this growing trend due to the Company's broad geographic coverage and knowledge of local markets. Although 7 hybrid agreements currently do not represent a significant portion of the Company's revenue, the Company believes that hybrid agreements will, in the future, generate substantial revenue and operating profits and may attract new Manufacturers, who may later expand their use of the Company's services. MARKETING SERVICES. The Company seeks to utilize its marketing expertise and information technology to develop and implement targeted consumer sales promotions for its Manufacturers' products. The Company also plans to continue to deploy category analysts who use local sales data to assist Retailers with shelf schematics, category layouts and total store space management. ACHIEVE COST SAVINGS. During its expansion phase, the Company reduced its operating overhead at acquired companies by eliminating duplicative personnel, operating expenses and facilities. The Company intends to continue its plan of consolidation of various management, sales and order entry functions to benefit from further operating efficiencies. SERVICES AND OPERATIONS The Company has traditionally provided Manufacturers with a full array of sales, marketing and administrative services and has been paid a commission by Manufacturers. In certain cases, the Company has entered into "hybrid" arrangements with Manufacturers under which the Company provides less than full geographic coverage and services. The functions and services provided by the Company are described below: FULL SERVICES. The Company currently provides full brokerage services to most of the Manufacturers that it represents. These Manufacturers generally pay the Company a commission of approximately 3% of the Manufacturer's net sales to Retailers. In general, our business managers service Manufacturers under these arrangements. Our managers, customer service personnel and support staff utilize information collected and developed by the Company to assist Manufacturers in devising strategic sales plans and achieving merchandising goals. In addition, the Company uses retail information to develop customized marketing strategies. These strategies include a determination of the optimum mix of current and new products to be offered and the type of promotions needed to increase revenues and profitability. These services accounted for approximately 92% of the Company's revenues for 2000. The Company also handles both order and certain billing management services for Manufacturers. The Company's order management system enables it to perform all major functions relating to orders for goods from Retailers to Manufacturers. The Company's category management analysts and shelf space management analysts link the Company, its business managers and Manufacturer teams with Retailer teams. These Retailer teams are comprised of headquarters account managers and retail merchandisers. These analysts develop information from retail data collected by the Company's Retailer teams and by outside sources, including A.C. Nielson Corp. and Information Resources, Inc. Business managers use this information in developing strategies with Manufacturers. The Retailer teams use this knowledge, as well as store-specific sales and demographic information provided by the analysts, to implement sales and merchandising strategies at the local store level. Headquarters account managers help execute sales plans developed by business managers and Manufacturers. The Company's retail merchandisers develop relationships with store managers and in-store category managers and assist headquarters account managers in executing sales plans for Manufacturers' products. The Company's retail merchandisers execute sales plans at the store level by providing shelf and display management, new store set-ups, stocking of new items and placement of point-of-sale coupons and signs. 8 CHANNEL MARKETING. The Company has developed its channel marketing division in response to the rapidly growing trend of non-grocery outlets, particularly mass merchandisers, super centers, membership warehouses, drug stores and specialty food outlets. This division's primary focus is to support Retailers to ensure Manufacturers' products are available to the consumers at the point of purchase. Scan data is utilized to identify retail problems, which are then communicated to the Company's field merchandisers for correction. In addition, store specific consumer demographics information is also utilized to support targeted merchandising programs. The Company's channel marketing division presently accounts for approximately 6% of the Company's revenues for 2000. HYBRID SERVICES. In response to increasing demand from certain Manufacturers that outsource only a portion of their retail services functions, the Company instituted the use of "hybrid" agreements. Under these agreements, the Company provides only the limited services, geographic coverage and/or Retailer coverage specified by the agreement. Providing retail-only services is a common hybrid arrangement. Retail-only services primarily include initial retail shelf set-ups and subsequent store shelf space management. These services generally provide for compensation equivalent to a commission of approximately 2% of the value of product sales to the Retailer. IN-SOURCE SPECIALISTS DIVISION. The Company is also expanding its services to include a new In-Source Specialists ("ISS") Division, which will serve as an arm of the Company's existing Retail Division. Designed to accommodate increasing demand for projects exceeding the time frame of standard category management, ISS will provide Manufacturers and Retailers with the additional personnel required to complete such initiatives in a timely and efficient manner. ISS is comprised of an internal, cross-functional team of Company associates who specialize in maximizing returns on non-budgeted projects and surge work requested by Manufacturers. Income derived from providing additional manpower required to complete special initiatives will be incremental to existing contractual agreements between the Company and its Manufacturer partners. DRUG DIVISION. In addition to current coverage in the mass, club, convenience, and specialty outlets, Marketing Specialists' now provides continuity coverage in some 15,000 retail drug outlets through the new Retail Drug Division. Nestle is the initial principal partner for the new venture. PRIVATE LABEL. The Company's private label division develops, procures, and manages inventory of private label products, including frozen fruits and vegetables and other products on behalf of certain Retailers. See Note 20 of the Company's Notes to Consolidated Financial Statements for information regarding discontinued operations related to the Private Label segment. STORE SUPPLIES. The Company's store supplies division operates as a distributor for Monarch Marking Systems, Inc., selling price marking equipment, labels and other related store supplies to Retailers in New England and metropolitan New York City. In addition, the Company sells a bio-degreaser product to Retailers' supermarket meat and bakery departments, restaurants and other food service customers directly and through local distributors. See Note 20 of the Company's Notes to Consolidated Financial Statements for information regarding discontinued operations related to the Private Label segment. SEASONALITY The Company has experienced and expects to continue to experience fluctuations in quarterly revenues and operating results as a result of seasonal patterns. The revenues of the Company have been stronger in the third and fourth calendar quarters as a result of historically strong sales associated with consumer consumption during the holiday season and weaker in the first calendar quarter following such season. Results of operations for any particular quarter therefore are not necessarily indicative of the results of operations for any future period. Future seasonal and quarterly fluctuations could have a material adverse effect on the Company's business, financial condition and results of 9 operations. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." MANAGEMENT INFORMATION SYSTEMS The application of information technology has become an increasingly important service in the food brokerage industry. The Company has followed this trend by investing in information technology. ELECTRONIC DATA INTERCHANGE. The Electronic Data Interchange ("EDI") was developed to streamline order communications between food brokers, Manufacturers and Retailers. Orders sent by EDI are transmitted on-line from Retailers to the Company and entered automatically into the Company's order databases. Orders are reviewed by the Company to verify that quantities, product codes, pricing, pack sizes and promotions have been correctly submitted. The Company then places orders with certain Manufacturers via EDI. By reducing manual effort, the system curtails order input errors, expedites order processing and reduces the number of personnel required to fulfill this function. Currently, a majority of all of the Company's Manufacturers utilizes EDI, including 60% of the Company's entire Manufacturer base and 70% of our retailer base. DISASTER RECOVERY/ORDER ENTRY. Marketing Specialists has implemented a fully fault tolerant disaster recovery plan for our more than 25,000 orders processed per day. We have two primary data centers in Charlotte, North Carolina and Dallas, Texas. The two sites are connected with multiple and redundant T-1's, with full database replication. If one site is out of service for any reason the entire country will be switched to run off the other center. This guarantees that our customers orders will be processed securely and reliably no mater what the situation. The architecture used is two identical Hewlett Packard N/4000's and a terabyte of EMC disk storage on each. DOCUMENT IMAGING. We have implemented a document imaging and critical records archiving system. With this system our corporate headquarters and field offices have the most current documents at their fingertips. This system has increased production, communication, and employee effectiveness for both corporate and field offices. WEB TECHNOLOGY. The Company uses a wide area network to provide on-line information to Manufacturers and Retailers. The Company utilizes the Internet and dedicated extranets to disseminate information and communicate with Manufacturers in a highly secure manner. The Company currently has 32 extranets with ten additional extranets in development. Retailers and Manufacturers using the Company's on-line service may access marketing, sales, new item introduction, store conditions and other information related to their products and operations. The Company's intranet has become a major tool in communicating with its employees by allowing the Company to provide its employees with policies and procedures, human resource forms, and other valuable information. The Company's Internet site located at www.mssc.com allows the Company to market its services to potential Manufacturers and Retailers. RETAIL INFORMATION. The Company utilizes an advanced retail reporting system called RW3 Enterprise ("RW3") to provide Manufacturers with current in-store data regarding their products. RW3's web-centric solutions link today's information directly with end users. Functionality is delivered directly via the Internet allowing access to current information from anywhere in the world using a web browser. RW3 provides a powerful proven solution for integrating field and headquarters sales teams, combining Windows CE-Registered Trademark- or computer telephone technology for the in-store sales representative data capture activities and web access to reporting in any format appropriate for management. The Company's current system makes information easier to access resulting in huge cost reductions, enabling more effective and targeted sales and services and ultimately improving customer satisfaction and profitability. 10 PEOPLESOFT-REGISTERED TRADEMARK-. The Company utilizes a software application commonly referred to as "PeopleSoft-Registered Trademark-." PeopleSoft-Registered Trademark- is used for financial systems including treasury, accounts payable, accounts receivable, budget, general ledger, as well as human resources and payroll. PeopleSoft-Registered Trademark- allows the Company to keep sales, expense and related data in one location. All of the other systems installed at the Company use PeopleSoft-Registered Trademark- as a base for all data. Since the consummation of the Merger, the Company has benefited from its use of PeopleSoft-Registered Trademark- in connection with the Company's acquisition of other entities and integration of the acquired entities' finance, human resources and payroll departments. The flexibility of the software allows the systems of the acquired companies to be more easily converted to the Company's systems. NETWORKS AND DATA COMMUNICATIONS. The Company utilizes redundant frame relay for connectivity to all of its branches. This provides a secure, and reliable method of data communications between all of our offices, including e-mail, Internet access, file sharing, order entry, PeopleSoft-Registered Trademark-, and many other processes. Our wide area network is monitored around the clock and is secured through CheckPoint firewalls. The Company utilizes Cisco routers and VisNet data service units ("DSUs") for bandwidth information, packet information and tracking. A virtual private network ("VPN") is provided for all remote users. TELECOMMUNICATIONS. The Company utilizes a national voice mail system for the routing of messages from office to office. This allows us to communicate more effectively across all offices instantaneously. We also utilize digital paging and cellular technology for users who travel. COMPETITION Despite the trend toward consolidation, the food brokerage market is large and fragmented, with many small brokers serving numerous local markets and a few large brokers serving multiple regions in the United States. The Company competes with other food brokers for product lines of Manufacturers and Retailers. Competition is based primarily on breadth of geographic coverage and the level of services provided. The entire food distribution chain, including Manufacturers, Retailers and food brokers, has been consolidating over the past ten years. As the market becomes more concentrated in terms of the total number of Manufacturer and Retailer accounts served by food brokers, the Company believes large brokers that can provide a full array of services to leading Manufacturers and Retailers across geographic markets have a competitive advantage. Accordingly, the Company expects that Manufacturers and Retailers will favor large regional and national food brokers having the resources to invest in the personnel and technology necessary to operate in an increasingly sophisticated and complex environment, while continuing to provide the local market focus required by Manufacturers and Retailers. The Company is one of the leading food brokers in the United States, with operations across the country. The Company competes with other national and multi-regional food brokers, including Advantage Sales, Crossmark and Acosta Sales Co., Inc. In addition, the Company competes with third-party merchandising companies and other retail services providers. EMPLOYEES The Company has approximately 5,800 employees, including approximately 4,600 full-time employees and 1,200 part-time employees. None of the Company's employees is a union member, and the Company and its employees have not entered into any collective bargaining agreements. The Company has not experienced any work stoppages or strikes. The Company believes that it has good relations with its employees. 11 FINANCIAL INFORMATION ABOUT SEGMENTS, FOREIGN AND DOMESTIC OPERATIONS AND EXPORT SALES The Company historically operated in two principal business segments: Food Brokerage and Private Label, principally in the United States. On July 31, 2000, the Company signed a letter of intent to sell its Private Label business, known as Buy Sell, to Woodland Partners. On January 19, 2001, the Company completed the sale of Buy Sell to Woodland Partners. See Note 20 of the Company's Notes to Consolidated Financial Statements for information regarding discontinued operations related to the Private Label segment. AVAILABLE INFORMATION The Company files annual, quarterly, and special reports, proxy statements and other information with the Securities and Exchange Commission (the "SEC"). You may read and copy any documentation the Company files at the SEC's Public Reference Room at 450 Fifth Street, N.W., Washington D.C. 20549. Please call the SEC at 1-800-SEC-0330 for further information on the Public Reference Room. SEC filings are also available to the public at the SEC's web site at http://www.sec.gov. 12 RISK FACTORS The following risk factors should be carefully reviewed in addition to other information in this Annual Report on Form 10-K. This Annual Report on Form 10-K contains, in addition to historical information, forward-looking statements that involve risks and uncertainties. The Company's actual results could differ significantly from the results discussed in the forward-looking statements. Factors that could cause or contribute to such differences include those risk factors set forth below as well as those factors discussed elsewhere in this Annual Report on Form 10-K. ABILITY TO CONTINUE AS A GOING CONCERN The Company has suffered recurring operating losses and negative operating cash flows and had negative working capital as of December 31, 2000. During 2000 and the first quarter of 2001, the Company has received funds from a related party for working capital purposes. These matters raise substantial doubt about the Company's ability to continue as a going concern. See Note 2 of the Company's Notes to Consolidated Financial Statements for further discussion. SUBSTANTIAL LEVERAGE The Company has and will continue to have a significant amount of indebtedness. The degree to which the Company is leveraged could have significant consequences, including the following: - The Company's ability to obtain additional financing in the future for working capital, capital expenditures, acquisitions or general corporate purposes may be impaired. - A substantial portion of the Company's cash flows from operations must be dedicated to the payment of interest and principal on its indebtedness, thereby reducing funds available to the Company for other purposes. - The agreements governing the Initial Credit Facility, the Amended Term Loan, the New Revolver, the First Union Amended Credit Agreement, and the Amended Credit Agreement (each as defined below) contain certain restrictive financial and operating covenants that may impact the Company's operations and ability to meet its obligations. The Company has been in violaion of these covenants from time to time, requiring waivers and/or amendments to covenants and facilities. - The Company's degree of leverage may limit its flexibility to adjust to changing market conditions, reduce its ability to withstand competitive pressures and make it more vulnerable to a downturn in general economic conditions or its business. - If the Company's cash flows and capital resources are insufficient to fund its obligations, the Company may be forced to sell its assets, seek additional equity or debt capital or restructure its debt. The Company cannot guarantee that its cash flows and capital resources will be sufficient for payment of interest and principal on its debt in the future. See "Management's Discussion and Analysis of Financial Condition and Results of Operations--Liquidity and Capital Resources." The Company has unsecured long-term obligations to related parties of approximately $44.7 million as of December 31, 2000. These obligations bear interest ranging from 6.00% to 10.125%. Principal and interest payments are due under various arrangements over terms ranging from one to thirteen years. A total of approximately $25.1 million of these obligations represents amounts due to either MS Acquisition Limited, the Company's largest stockholder ("MS Acquisition"), or an affiliate of MS Acquisition. 13 SENIOR SUBORDINATED NOTES In December 1997, concurrently with the sale by RMSI of $100.0 million of 10 1/8% Senior Subordinated Notes due 2007 (the "Issued Notes"), RMSI entered into an Exchange and Registration Rights Agreement with the initial purchaser of the Issued Notes. Under the terms of that agreement, RMSI agreed to file a registration statement regarding the exchange of the Issued Notes for new notes registered under the Securities Act, and to offer the holders of the Issued Notes an opportunity to exchange their unregistered notes for registered notes. On June 21, 1999, RMSI filed a Registration Statement on Form S-4 with the SEC to register $100.0 million of new notes (the "Registered Notes"). Subsequently, RMSI completed an exchange of the Issued Notes for the Registered Notes. The Registered Notes are identical in all material respects to the Issued Notes, except for transfer restrictions and registration rights. The Company assumed this outstanding indebtedness in connection with the Merger. The Registered Notes are unsecured and are subordinated in right of payment to all existing and future senior indebtedness of the Company. The Registered Notes are fully and unconditionally guaranteed on an unsecured, senior subordinated, joint and several basis by certain guarantor wholly-owned subsidiaries of the Company as defined in the Registration Statement, which comprise substantially all the direct and indirect subsidiaries of the Company. The Company is a holding company with no assets, liabilities or operations other than its interests in its subsidiaries. Separate financial statements and other disclosures for such subsidiaries have not been presented due to management's determination that such information is not material to investors. Interest on the Registered Notes is payable semiannually on June 15 and December 15 of each year, commencing June 15, 1998. The principal on the Registered Notes is payable on December 15, 2007, the maturity date. The Company may not redeem the Registered Notes prior to December 15, 2002, except as described below. On or after such date, the Company may redeem the Registered Notes, in whole or in part, at the following redemption prices: 2002--105.063%; 2003--103.375%; 2004--101.688%; 2005 or thereafter--100.000%, together with accrued and unpaid interest, if any, to the date of redemption. The Registered Notes are not subject to any sinking fund requirement. Upon a change of control, as defined (not triggered by the Merger), each holder of the Registered Notes will have the right to require the Company to make an offer to repurchase such holder's Registered Notes at a price equal to 101% of the principal amount thereof, together with accrued and unpaid interest, if any, to the date of repurchase. The Registered Notes subject the Company to certain limitations and restrictions primarily related to obtaining additional indebtedness, payment of dividends, and sales of assets and subsidiary stock, which may require the consent of the holders of the Registered Notes. In December 2000, the rating of the Registered Notes was lowered to CCC-. Based on recent trading information, the fair value of the Registered Notes is approximately $11.3 million, as compared to a carrying value of $100.0 million. CONSENT SOLICITATION During the first quarter of 2000, the Company refinanced and increased its existing senior credit facilities from approximately $68.0 million to $85.0 million. Because the Company's Indenture relating to the Registered Notes restricted the Company's ability to incur bank indebtedness in excess of $25.0 million, the Company had to solicit and obtain the consent of holders representing at least 51% of the Registered Notes to the refinancing. On March 28, 2000, the Company distributed consent solicitation statements to all of the holders of the Registered Notes for the purpose of seeking the required consent to the increase in bank debt and certain other matters. The Company received consent from a majority of the holders of the Registered Notes. In exchange for the consent to the 14 refinancing and other proposed amendments, the holders were paid a consent fee of $2.0 million in cash. The Company also paid a fee of $0.5 million to Chase Securities Inc. for its services as solicitation agent. INITIAL CREDIT FACILITY In connection with the Offering and Combination, the Company obtained a $75.0 million Credit Facility (as amended on August 18, 1999) from a bank (the "Initial Credit Facility"). The Initial Credit Facility consisted of a five-year, secured, fully amortizing $50.0 million term loan (the "Initial Term Loan") and a three-year, secured $25.0 million revolving line of credit (the "Initial Revolving Credit"). The balance outstanding under the Initial Credit Facility was $64.1 million as of December 31, 1999 ($20.3 million under the Initial Revolving Credit and $43.8 million under the Initial Term Loan). Amounts outstanding under this facility were collateralized by substantially all of the Company's assets. Interest was payable on the Initial Term Loan and the Initial Revolving Credit at the base rate, as defined in the amended Initial Credit Facility. The rate on the outstanding balance of the Revolver and the Initial Term Loan was 9.16% and 10.50%, respectively, as of December 31, 1999. The Initial Credit Facility required the Company to make certain mandatory prepayments of amounts outstanding under the Initial Credit Facility with the use of certain proceeds from asset sales and debt and equity financing. The amended Initial Credit Facility required the Company to comply with various affirmative and negative covenants, including the following, among others: - the maintenance of certain financial ratios - restrictions on certain additional indebtedness - restrictions on liens, guarantees, dividends and the disposition of assets - obtaining the lenders' consent to acquisitions involving cash consideration in excess of a specified amount AMENDED TERM LOAN On March 30, 2000, the Company became a party to a Second Amended and Restated Credit Agreement among the Company and First Union National Bank, N.A. as agent and the lenders named therein (the "Amended Term Loan"). The Amended Term Loan consisted of a two-year, secured $35.0 million term loan. The Company paid commitment and other fees of approximately $0.9 million in connection with obtaining the Amended Term Loan. Under the Amended Term Loan, the principal amount of the term loan was reduced from $43.8 million to $35.0 million. The Amended Term Loan was secured by a lien on substantially all of the Company's and its subsidiaries' tangible and intangible property. In addition, the Amended Term Loan was jointly and severally guaranteed by all current and future subsidiaries of the Company. Interest was payable on the Amended Term Loan at a rate based on one of two customary interest rates plus an additional interest margin of 375 or 500 basis points, as applicable. The Amended Term Loan contained customary events of default, including cross-default provisions related to the Registered Notes. In connection with the Amended Term Loan, the Company issued to an affiliate of First Union National Bank, N.A. detachable warrants to purchase up to 4.0% of the Company's Common Stock on a diluted basis. The exercise price of the warrants will be nominal, and the warrants will be exercisable at any time after the second anniversary of the issuance of the warrants. The proceeds of the Amended Term Loan were allocated between debt and warrants based on their respective fair market values. The 15 estimated fair value of the warrants appears as a component of Additional Paid-In Capital in the accompanying Consolidated Balance Sheet as of December 31, 2000. The letter of credit outstanding under the Initial Credit Facility was replaced by a $1.1 million letter of credit issued for the account of RCPI, which is an affiliate of MS Acquisition. The Company issued to RCPI a reimbursement note subordinated in right of payment to the Registered Notes in the amount of the letter of credit. The promissory note will become payable if the letter of credit is drawn. NEW REVOLVER On March 30, 2000, the Company also became a party to a Credit Agreement among the Company, certain of its subsidiaries, and The Chase Manhattan Bank, N.A., as agent, and the lenders named therein (the "New Revolver," and together with the Amended Term Loan, the "New Senior Credit Facility"). The New Revolver consisted of a two-year, senior secured $50.0 million revolving line of credit, subject to a borrowing base equal to a specified percentage of eligible receivables. The Company paid commitment and other fees of approximately $0.6 million in connection with obtaining the New Revolver. Funds advanced under the New Revolver were used by the Company to repay a portion of outstanding amounts under the Initial Credit Facility, to partially finance the acquisition of Sales Force, to finance the Company's working capital and capital expenditure requirements in the ordinary course of business, and to pay fees and expenses relating to the closing of the New Senior Credit Facility. The New Revolver contained customary events of default, including cross-default provisions related to the Registered Notes. The New Revolver was secured by a first priority security interest in cash, cash equivalents, accounts receivable and inventory of the Company and its subsidiaries and proceeds thereof but not in assets that are the proceeds of equipment, fixtures, real estate, intellectual property or the stock of subsidiaries. In addition, Inman, Marketing Specialists Sales Company ("MSSC") and Bromar, Inc. ("Bromar," a California corporation and a wholly owned subsidiary of MSSC) were co-borrowers under the New Revolver, jointly and severally liable for all borrowings and other related obligations thereunder. Interest was payable on the New Revolver at a rate based on one of two customary interest rates plus an additional interest margin ranging from 150 to 350 basis points. The applicable margin was determined based on certain financial ratios of the Company. The New Senior Credit Facility required the Company to comply with various affirmative and negative covenants, including, among others: - the maintenance of certain financial ratios - restrictions on additional indebtedness - restrictions on liens, guarantees, dividends and the disposition of assets - restrictions on certain mergers, consolidations and acquisitions FIRST UNION AMENDED CREDIT AGREEMENT On November 17, 2000, the Company became party to a First Amendment to the Credit Agreement among the Company, certain of its subsidiaries as guarantors, and First Union National Bank, N.A. as agent (the "First Union Amended Credit Agreement"). The First Union Amended Credit Agreement amends the Amended Term Loan and provides for the consent of First Union National Bank, N.A. to the Increase (as defined below), the Borrowing Base Amendment (as discussed below), and the repayment of the $2.5 million promissory note (as discussed below) to MS Acquisition. The First Union Amended Credit Agreement also amends the Amended Term Loan to reflect the terms of the Amended Credit Agreement. At December 31, 2000, the Company was not in compliance 16 with certain covenants related to this agreement. See "Amended Senior Credit Facility Amendments" below for discussion of these violations and related waivers and amendments. AMENDED CREDIT AGREEMENT On November 17, 2000, the Company became party to an amendment to the Credit Agreement among the Company, certain of its subsidiaries, The Chase Manhattan Bank, N.A. as the agent (the "Agent") and the lenders parties thereto (the "Amended Credit Agreement"). The Amended Credit Agreement provides for an increase in the maximum amount available under the New Revolver from $50.0 million to a maximum commitment of $60.0 million (the "Increase"), which is comprised of a $41.0 million variable commitment (the "Tranche A Note") and a subordinated $19.0 million fixed commitment (the "Tranche B Note"). MS Acquisition purchased a 100% participation interest in the Tranche B Note. The Tranche A Note provides for a $41.0 million revolving line of credit (the "Amended Revolver"), which accrues interest at rate equal to the Base Rate (a reference rate based on the prime rate) plus 2.25%. The Amended Revolver will revolve up to the lesser of $41.0 million or the Borrowing Base, which is a function of the Company's eligible receivables and the Advance Percent determined by the Agent. As part of the Amended Credit Agreement, the Agent has decreased the Advance Percent, thereby decreasing the Borrowing Base (the "Borrowing Base Amendment"). The Company must fulfill all payment obligations under the Amended Revolver before making any interest payments on the Tranche B Note. The Tranche A Note and any accrued and unpaid interest will mature on March 30, 2002. As a result of the Amended Credit Agreement, the Company had indebtedness of approximately $48.9 million as of December 31, 2000, which is substantial in relation to its stockholders' equity, as well as interest and debt service requirements that are significant compared to its income and cash flows from operations. The provisions of the Year 2000 credit facility refinancings are more fully described in "Management's Discussion and Analysis of Financial Condition and Results of Operations--Liquidity and Capital Resources" and the accompanying Notes to the Consolidated Financial Statements. The Tranche B Note bears interest at a rate equal to the Base Rate plus 2.25%. The Tranche B Note and any accrued and unpaid interest will mature on March 30, 2002. The fixed commitment under the Tranche B Note is not subject to the Borrowing Base. As discussed in Note 9 of the Notes to Consolidated Financial Statements, MS Acquisition funded the $19.0 million balance of the Tranche B Note, subject to the terms of a master participation agreement. At December 31, 2000, the Company was not in compliance with certain covenants related to this agreement. See "Amended Senior Credit Facility Amendments" below for discussion of these violations and related waivers and amendments. AMENDED SENIOR CREDIT FACILITY AMENDMENTS As of March 30, 2001, the Company was in violation of certain covenants under the Amended Credit Agreement and the First Union Amended Credit Agreement (collectively referred as the "Amended Senior Credit Facility") in connection with (i) its failure to provide annual financial statements within ninety (90) days of its fiscal year end, (ii) the certifying accountant's qualification of the Company's annual financial statements on a going concern basis, and (iii) the Company's failure to deliver certain items to the Agent by March 15, 2001 as required by the Amended Credit Agreement. On April 19, 2001, the Company entered into (a) a Waiver and Third Amendment to Credit Agreement amending the Amended Credit Agreement and (b) Second Amendment to Credit Agreement amending the First Union Amended Credit Agreement ((a) and (b) collectively defined as the "Amended Senior Credit Facility Amendments"). 17 Under the Amended Senior Credit Facility Amendments, the Company (i) received a waiver for its current defaults under the Amended Senior Credit Facility and (ii) paid a fee of approximately $0.2 million as consideration in obtaining the amendments and waiver of the defaults under the Amended Credit Agreement. The Amended Senior Credit Facility Amendments provide, among other things, that (i) the Agent may increase the Advance Percent as of March 31, 2001, but before June 1, 2001, thereby increasing the Borrowing Base under the Amended Senior Credit Facility, (ii) amends the definition of "EBITDA" in the Amended Senior Credit Facility to include certain write-offs in the amortization and depreciation expense deducted in determining Net Income, and (iii) amends the baseline amounts for determining Minimum EBITDA. Under the Amended Senior Credit Facility Amendments, the Company must meet certain post-closing covenants, including, among other things, the delivery of its annual financial statements by April 27, 2001 and the delivery of certain other items by May 31, 2001. OTHER NOTES PAYABLE INVOLVING RELATED PARTIES The Company also has a mortgage note with RCPI, an affiliate of MS Acquisition, that is secured by certain land, a building and fixtures. It bears interest at 8.5% with monthly payments of approximately $34,000 (including interest) and a balloon payment of approximately $3.6 million due in 2001. The balance outstanding under this mortgage was approximately $3.6 million as of December 31, 2000. On November 9, 2000, the Company issued a $2.5 million promissory note to MS Acquisition. This promissory note is subordinate to the senior debt of the Company. The proceeds were used for general corporate purposes. The $2.5 million promissory note bears interest at a rate equal to the sum of an interest margin of 2.75% plus the applicable prime rate on the last business day of the quarter for which interest is payable. Interest is payable quarterly in arrears, commencing on December 31, 2000, and will continue through the maturity date. The $2.5 million promissory note and any unpaid and accrued interest will be payable on November 9, 2002, or on demand, under specified conditions. The Company is not permitted to repay the principal and unpaid and accrued interest on the $2.5 million promissory note on demand if the Company's borrowing base 30 days prior to a payment date is not at least $10.0 million, or 25% of the sum of the Company's payroll for the last four consecutive pay periods, whichever is greater. In the first quarter of 2001, the $2.5 million promissory note was converted into redeemable convertible preferred stock. See Note 20 of the Notes to Consolidated Financial Statements for additional information. The Company had other notes payable to former employees of various acquired entities of approximately $8.5 million as of December 31, 2000. The total estimated payments have been discounted at rates ranging from 8% to 10%. The amounts due under the acquisition agreements are unsecured and extend through 2011. These amounts are payable in either monthly or quarterly installments. The fair value of these obligations approximates their carrying value. VOTING CONTROL BY DIRECTORS, EXECUTIVE OFFICERS AND PRINCIPAL STOCKHOLDERS As of March 28, 2001, MS Acquisition Limited ("MS Acquisition") beneficially owns approximately 81.9% of the outstanding shares of Common Stock of the Company. As the Company's largest stockholder, MS Acquisition is likely to be able to maintain effective control of the Company, including the ability to elect a majority of the Board of Directors (the "Board of Directors"). The ownership by MS Acquisition of shares of Common Stock may discourage or prevent unsolicited mergers, acquisitions, tender offers, proxy contests or changes of incumbent management, even when stockholders other than MS Acquisition consider such a transaction or event to be in their best interest. Accordingly, holders of Common Stock may be deprived of an opportunity to sell their shares at a premium over the trading price of the shares. See "Item 12. Security Ownership of Certain Beneficial Owners and Management". 18 As of March 28, 2001, an aggregate of approximately 83.3% of the Company's outstanding Common Stock is beneficially owned by its directors, executive officers and affiliates. This percentage ownership gives effect to the exercise of options to purchase 222,756 shares of Common Stock held by certain of these individuals, and conversion of the Series B and C Preferred Stock (defined below). Such concentration of ownership, together, in some cases, with certain provisions of the Company's Second Amended and Restated Certificate of Incorporation and Amended and Restated By-Laws and certain sections of the Delaware General Corporation Law, may have the effect of delaying or preventing a "change in control" of the Company. See "Anti-Takeover Effect of Certificate of Incorporation, By-law Provisions and Delaware Law" and "Item 12. Security Ownership of Certain Beneficial Owners and Management". HISTORY OF OPERATING LOSSES The Company has a history of operating losses. The Company may continue to experience net losses or may have a greater working capital deficit in the future. If they persist, the Company may have an increased net loss per share and the market price of the common stock and the Registered Notes may continue to decline as a result. The Company's ability to be profitable in the future will be dependent upon a number of factors, including: - the Company's ability to increase revenues by attracting and retaining national Manufacturers and Retailers; - the Company's ability to realize cost-savings as a result of the integration of the acquired companies; and - various other extraneous factors, including, without limitation, economic, financial and competitive conditions such as the consolidation occurring within the food distribution industry. INTEGRATION OF PRIOR ACQUISITIONS; RISKS ASSOCIATED WITH RAPID GROWTH The Company has grown rapidly and has expanded its operations throughout the United States. This growth is primarily attributed to several large acquisitions that the Company, or its predecessors, has completed since 1996. The Company expects to spend significantly less time and effort in identifying acquisition targets and to focus on integrating prior acquisitions. The Company's inability to successfully manage its growing business profitably could have a material adverse effect on the Company's business, financial condition and results of operations. There can be no assurance that the Company's growth strategy will be successful or that the Company will be able to generate cash flows sufficient to fund its operations and to support internal growth. The Company's inability to achieve internal earnings growth or otherwise execute its growth strategy could have a material adverse effect on the Company's business, financial condition and results of operations. See "Item 1. Business--Company Strategy". MANUFACTURER REPRESENTATION CONFLICTS The Company represents certain Manufacturers that do not allow the Company to market and sell their competitors' products in our assigned territories. Manufacturers can be highly subjective in their definition of a conflict and may contend that products with a varying degree of similarity are competing products. In addition, some Manufacturers object to the Company's representation of other Manufacturers that produce a similar product for sale even though such representation of the competing Manufacturer is for different geographic regions or trade channels. The Company is sensitive to potential conflicts and must exercise care in determining how to resolve conflicts and potential conflicts as new food broker businesses are acquired and as Manufacturers continue to grow, merge and expand into new product categories and geographic areas. The Merger has resulted in certain Manufacturer conflicts, particularly where the operations of the Company and RMSI overlapped. The Company may be required, in order to resolve a conflict, to represent particular lines or products in lieu of others, and the Company may not select the lines of products that are ultimately 19 the most successful. The inability of the Company to resolve or deal with Manufacturer representation conflicts or potential conflicts could have a material adverse effect on the Company's business, financial condition and results of operations. SHORT TERM AGREEMENTS A majority of the Company's contracts with its Manufacturers have 30-day terms. As a result, the Manufacturers can transfer their business to another food broker upon short notice. While the Company has long-term relationships with many of the Manufacturers it represents, it could lose relationships with these Manufacturers due to consolidations within the industry or the Company's inability to meet sales and performance objectives. DEPENDENCE ON KEY PERSONNEL The Company's business depends upon its retention of employees who maintain key relationships with its larger Retailers and Manufacturers. The loss of any of these employees to a competitor could have a significant adverse impact on the Company's business if major Manufacturers follow these employees and transfer business to the competitor. See "Item 10. Directors and Executive Officers of the Company" for the identification of certain of the Company's key employees. ANTI-TAKEOVER EFFECT OF CERTIFICATE OF INCORPORATION; BY-LAW PROVISIONS AND DELAWARE LAW Certain provisions of the Company's Second Amended and Restated Certificate of Incorporation and Amended and Restated By-Laws, certain sections of the Delaware General Corporation Law and the ability of the Company's Board of Directors to issue shares of preferred stock and to establish the voting rights, preferences and other terms thereof may be deemed to have an anti-takeover effect. These provisions may discourage takeover attempts not first approved by the Board of Directors, including takeovers that certain stockholders may deem to be in their best interests. In addition, these provisions could delay or frustrate the removal of incumbent directors or the assumption of control by stockholders, even if such removal or assumption of control would be beneficial to stockholders. See "Item 10. Directors and Executive Officers of the Company". ITEM 2. PROPERTIES EXECUTIVE OFFICES The Company operates two offices in connection with the performance of executive and corporate activities. The Company's primary executive and corporate facility is located in an office building in Dallas, Texas. This facility is leased under an operating lease expiring in September 2003 and consists of approximately 40,700 square feet. The Company also owns and continues to operate an approximately 45,000 square foot facility in Canton, Massachusetts. This office was formerly the headquarters of Merkert. SALES OFFICES As of December 31, 2000, the Company operated 74 sales offices in 37 states. A total of 15 additional facilities have been vacated and their functions consolidated with other offices. The Company is subject to continuing lease obligations in connection with these vacated facilities, although nine of these properties are currently under sublease agreements. CONDITION AND ADEQUACY The Company believes that its properties are generally well maintained, in good condition, and adequate for its present needs. Generally, the Company has been able to secure replacement and additional space as required by changing market conditions. 20 PROPERTY STRATEGY The Company's objective is to effectively manage facility decisions across all business units. To accomplish this objective, the Company plans to transition its properties to a 100% lease-based office portfolio. In connection therewith, the Company seeks to build maximum flexibility into all of its lease terms. Such a transition should allow the Company to adjust office presence and size to best meet changing Manufacturer and Retailer needs primarily created by Manufacturer and Retailer consolidation and centralized buying and merchandising. The Company shall continue the development of a centralized corporate oversight facilities management team established to: - improve lease terms through negotiations by internal real estate professionals; - reduce construction and furniture costs through centralized procurement; - develop a consistent facility image across all offices, and - properly manage facility maintenance. RECENT SALES OF PROPERTIES PHOENIX, ARIZONA. On February 17, 2000, the Company sold its improved real property containing general office space situated in Maricopa County, Arizona to RCPI Office Properties, LLC, ("LLC") an affiliate of MS Acquisition and Richmont Capital Partners I, LLP (RCPI), for approximately $2.4 million before related costs. In May 2000, LLC sold this property to an unrelated third party. ORANGE COUNTY, CALIFORNIA. On February 17, 2000, the Company sold its 3.47 acres of improved real property containing office and warehouse space situated in Orange County, California, to LLC for approximately $4.9 million before related costs. In May 2000, LLC sold this property to an unrelated third party. CHARLOTTE, NORTH CAROLINA. On December 15, 2000, the Company sold its 4.851 acres of improved real property containing office and warehouse space situated in Mecklenberg County, North Carolina, to Tower Point, LLC for approximately $2.6 million before related costs. ITEM 3. LEGAL PROCEEDINGS AND ADMINISTRATIVE MATTERS As reported in the Company's Current Report on Form 8-K dated July 6, 2000, and in the Company's Quarterly Report for the period ended June 30, 2000, a lawsuit was filed on June 8, 2000 in the Delaware Court of Chancery by William Brown, III, on behalf of the public stockholders, alleging that the offer price made in the proposal by the majority stockholder, RCPI, to purchase all outstanding shares of the Company is inadequate. The plaintiff class asserts that the Board of Directors has violated its fiduciary duties to the Company stockholders, including the duty of fair dealing. The plaintiff class seeks the enjoinder of the tender offer by RCPI or the rescission of the contract if the offer is consummated and the awarding of rescission damages. The suit has been consolidated with two other identical suits. All parties have been served, but there has been secured an indefinite extension to answer. Although discovery requests have been served by the plaintiff class's counsel, a response will not be due until 30 days after an agreement on the tender offer has been reached. No such agreement has currently been reached. Various other suits and claims are filed against the Company from time to time in the ordinary course of business and are currently pending. The Company is not party to any other legal proceeding that, in the opinion of its management, will have a material adverse effect on its business or financial condition. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. 21 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS Effective March 14, 2001, the Company's Common Stock is no longer listed on the Nasdaq SmallCap Market. The Company is eligible for trading on the OTC Bulletin Board. For the years ended December 31, 2000 and 1999, the Company's Common Stock traded on the Nasdaq Small Cap Market under the symbol "MKSP." The following table sets forth the high and low closing sale prices for each full quarterly period for the Common Stock for the years ended December 31, 2000 and 1999:
DATE HIGH LOW - ---- -------- -------- First Quarter 1999.......................................... 15.50 10.25 Second Quarter 1999......................................... 11.88 8.63 Third Quarter 1999.......................................... 10.81 5.25 Fourth Quarter 1999......................................... 5.63 2.00 First Quarter 2000.......................................... 3.75 2.00 Second Quarter 2000......................................... 2.84 0.88 Third Quarter 2000.......................................... 1.84 1.25 Fourth Quarter 2000......................................... 1.38 0.19
As of March 15, 2001, there were approximately 826 holders of record of the Company's single class of Common Stock, including 819 holders of record of the Company's unrestricted Common Stock and 7 holders of record of the Company's restricted Common Stock. As of March 15, 2001, there were 25,985,545 shares of the Company's single class of Common Stock outstanding, including 25,912,809 shares of the Company's unrestricted Common Stock and 72,736 shares of the Company's restricted Common Stock, and 39,707 shares of the Company's issued Common Stock is held in treasury by the Company. DIVIDEND POLICY. The Company has not paid any dividends in the last two fiscal years. The Company intends to retain earnings, if any, to finance the growth and development of its business and does not anticipate paying cash dividends in the foreseeable future. Under the Amended Credit Agreement and the First Union Amended Credit Agreement, the Company and its subsidiaries are prohibited from declaring or paying any dividend or other distribution on account of any shares, except the Company's subsidiaries may pay dividends to the extent necessary to pay the Company's obligation under the Amended Credit Agreement and expenses and taxes incurred in the ordinary course of business. The Company and its subsidiaries may also declare common stock dividends on their Common Stock. COMMON STOCK TRANSACTIONS. On January 7, 2000, the Company issued 1,577,287 shares of Common Stock to MS Acquisition for an aggregate purchase price of $5.0 million ($3.17 per share) pursuant to the terms of a stock purchase agreement. On March 30, 2000, MS Acquisition purchased an additional 4,000,000 shares of Common Stock for an aggregate purchase price of $10.0 million ($2.50 per share) pursuant to the terms of a stock purchase agreement. The Company used the funds as an additional source of capital for operations and additional short-term and long-term liquidity. The offering, sale and issuance of these shares was exempt from registration under the Securities Act pursuant to a private offering exemption under Section 4(2) promulgated thereunder. REDEEMABLE CONVERTIBLE PREFERRED STOCK TRANSACTIONS UNDESIGNATED PREFERRED STOCK As of December 31,2000, there were no shares of undesignated preferred stock outstanding. Holders of undesignated preferred stock would have priority over the holders of Common Stock with respect to dividends and to other distributions, including the distribution of assets upon liquidation. The Board of Directors has the authority, without stockholder authorization, to issue shares of 22 undesignated preferred stock in one or more series and to fix the terms, limitations, relative rights and preferences and variations. PREFERRED STOCK On June 23, 2000, the Board of Directors of the Company authorized and provided for the issuance of up to 10,000 shares of 8.0% Convertible Paid-In-Kind Preferred Stock, par value $0.01 per share, with a stated value of $1,000 per share (the "Preferred Stock"). Each share of the Preferred Stock is convertible into that number of shares of Common Stock equal to the result obtained by dividing the stated value of the Preferred Stock by the conversion price in effect at the conversion date. All dividends on issued shares of the Preferred Stock are cumulative, whether or not the dividends are earned or declared, on a daily basis from the issue date and payable quarterly in arrears on each dividend payment date. Even if not declared, all unpaid dividends will compound quarterly at an annual dividend rate equal to 8.0%, or the applicable dividend rate. On June 22, 2010, the Company will be obligated to redeem, to the extend of funds legally available, all outstanding shares of the Preferred Stock at a redemption price equal to 100% of the liquidation preference per share. The liquidation preference per share will be equal to the greater of $1,000 per share or the amount that the equivalent number of shares of Common Stock (based on the conversion rate applicable at the liquidation date) would be entitled to receive, plus any unpaid dividends. On June 23, 2000, the Company issued 5,000 shares of Preferred Stock to MS Acquisition for an aggregate purchase price of $5.0 million pursuant to the terms of a preferred stock purchase agreement. On August 8, 2000, the Company issued 4,500 additional shares of Preferred Stock to MS Acquisition for an aggregate purchase price of $4.5 million pursuant to the terms of a preferred stock purchase agreement. On July 27, 2000, the Company received early termination of the waiting period in connection with its Hart-Scott-Rodino Antitrust Improvement Act filing thereafter allowing the conversion of the Preferred Stock to Common Stock of the Company. On August 21, 2000, the 9,500 shares of Preferred Stock previously issued to MS Acquisition were converted into 6,234,414 shares of Common Stock. Per the terms of the preferred stock purchase agreements, each share of Preferred Stock was converted into approximately 656.25 shares of Common Stock (i.e., the Preferred Stock's stated value of $1,000 divided by the conversion price of $1.5238). On August 17, 2000, the Company issued a $4.75 million promissory note to MS Acquisition. On August 30, 2000, the Company issued a $5.0 million promissory note to MS Acquisition. The Registered Notes and the New Senior Credit Facility are senior to these notes. The Company used the proceeds from both promissory notes for general corporate purposes. SERIES B PREFERRED STOCK On November 1, 2000, the Company's Board of Directors authorized the issuance of up to 20,000 shares of Series B 8.0% Convertible Paid-In-Kind Preferred Stock, $0.01 par value per share (the "Series B Preferred Stock"). The Series B Preferred Stock has a stated value of $1,000 per share. The Series B Preferred Stock is of equal class with the Preferred Stock previously authorized and any future designated series of preferred stock unless specifically noted in future preferred stock agreements. The Series B Preferred Stock has the same characteristics (i.e., dividend terms, conversion features) as the Preferred Stock. On November 1, 2000, the Company issued 12,397 shares of the Series B 8.0% to MS Acquisition for an aggregate purchase price of approximately $12.4 million pursuant to the terms of a preferred stock purchase agreement. The purchase price consisted of the cancellation of the $4.75 million promissory note and the $5.0 million promissory note, including all accrued and unpaid interest, plus an 23 additional cash payment of approximately $2.5 million to the Company. The incremental proceeds from the issuance of the Series B Preferred Stock were used for general corporate purposes. On November 9, 2000, the Company issued a $2.5 million promissory note to MS Acquisition. This promissory note is subordinate to the senior debt of the Company. The proceeds were used for general corporate purposes. The $2.5 million promissory note bears interest at a rate equal to the sum of an interest margin of 2.75% plus the applicable prime rate on the last business day of the quarter for which interest is payable. Interest is payable quarterly in arrears, commencing on December 31, 2000, and will continue through the maturity date. The $2.5 million promissory note and any unpaid and accrued interest will be payable on November 9, 2002, or on demand, under specified conditions. The Company is not permitted to repay the principal and unpaid and accrued interest on the $2.5 million promissory note on demand if the Company's borrowing base 30 days prior to a payment date is not at least $10.0 million, or 25% of the sum of the Company's payroll for the last four consecutive pay periods, whichever is greater. In the first quarter of 2001, the $2.5 million promissory note was converted into redeemable convertible preferred stock. See Note 20 of the Company's Notes to Consolidated Financial Statements for additional information. On January 26, 2001, the Company issued 7,568 shares of the Series B Preferred Stock to MS Acquisition for an aggregate purchase price of approximately $7.6 million pursuant to the terms of a preferred stock purchase agreement. The purchase price consisted of the cancellation of the $2.5 million promissory note and, including all accrued and unpaid interest, plus an additional cash payment of approximately $5.0 million to the Company. A total of $4.0 million of the cash proceeds were received in December 2000 and appeared as a component of Other Liabilities in the consolidated balance sheet as of December 31, 2000. The incremental proceeds from the issuance of the Series B Preferred Stock were used for general corporate purposes. SERIES C PREFERRED STOCK On March 26, 2001, the Company's Board of Directors authorized the issuance of up to 20,000 shares of Series C 8.0% Convertible Paid-In-Kind Preferred Stock, $0.01 par value per share (the "Series C Preferred Stock"). The Series C Preferred Stock has a stated value of $1,000 per share. The Series C Preferred Stock is of equal class with the Preferred Stock and the Series B Preferred Stock previously authorized and any future designated series of preferred stock unless specifically noted in future preferred stock agreements. Each share of the Series C Preferred Stock is convertible into that number of shares of Common Stock equal to the result obtained by dividing the stated value of the Series C Preferred Stock by the conversion price in effect at the conversion date. All dividends on issued shares of the Series C Preferred Stock are cumulative, whether or not the dividends are earned or declared, on a daily basis from the issue date and payable quarterly in arrears on each dividend payment date. Even if not declared, all unpaid dividends will compound quarterly at an annual dividend rate equal to 8.0%, or the applicable dividend rate. On June 22, 2010, the Company will be obligated to redeem, to the extend of funds legally available, all outstanding shares of the Series C Preferred Stock at a redemption price equal to 100% of the liquidation preference per share. The liquidation preference per share will be equal to the greater of $1,000 per share or the amount that the equivalent number of shares of Common Stock (based on the conversion rate applicable at the liquidation date) would be entitled to receive, plus any unpaid dividends. On March 28, 2001, the Company issued 9,000 shares of the Series C Preferred Stock to MS Acquisition for an aggregate purchase price of $9.0 million in cash pursuant to the terms of a preferred stock purchase agreement. The proceeds from the issuance of the Series C Preferred Stock were used for general corporate purposes. On March 30, 2001, the Company issued 2,000 shares of the Series C Preferred Stock to MS Acquisition for an aggregate purchase price of $2.0 million in cash pursuant to the terms of a preferred stock purchase agreement. The proceeds from the issuance of the Series C Preferred Stock were used for general corporate purposes. 24 ITEM 6. SELECTED FINANCIAL DATA SELECTED CONSOLIDATED FINANCIAL DATA FOR MARKETING SPECIALISTS CORPORATION The following selected consolidated financial data sets forth, for the periods and the dates indicated, summary consolidated financial data of the Company and its subsidiaries. The consolidated statement of operations data for each of the years ended December 31, 1996 and 1997, and for the period ended December 18, 1998 are derived from audited consolidated financial statements of each of Merkert and Rogers. The consolidated statement of operations data for the period from the Company's inception (March 4, 1998) through December 31, 1998 and for the year ended December 31, 1999, and the consolidated balance sheet data at December 31, 1998, 1999, and 2000, are derived from audited consolidated financial statements of the Company. The financial data presented below is qualified by reference to the consolidated financial statements included herein and in the Company's public filings with the SEC and should be read in conjunction with such financial statements and notes thereto and "Management's Discussion and Analysis of Financial Condition and Results of Operations."
ENDED YEARS ENDED DECEMBER 31, PERIOD ENDED INCEPTION TO DECEMBER 31, ------------------- DECEMBER 18, DECEMBER 31, --------------------- 1996 1997 1998 1998 1999 2000 -------- -------- ------------- ------------- -------- ---------- (DOLLARS IN THOUSANDS) MERKERT:(3) Statement of Operations Data: Revenues................................ $80,661 $104,274 $ 90,254 $ -- $ -- $ -- Operating loss(1)....................... (2,393) (2,705) (9,754) -- -- -- Loss from continuing operations......... (5,100) (7,527) (14,464) -- -- -- Income from discontinued operations..... 3,026 4,078 3,476 -- -- -- Net loss................................ (2,074) (3,449) (10,988) -- -- -- Other Financial Data: EBITDA(2)............................... 54 1,779 4,352 -- -- -- ROGERS:(3) Statement of Operations Data: Revenues................................ $63,311 $ 82,985 $ 79,558 $ -- $ -- $ -- Operating income (loss)(1).............. 107 4,085 (15,949) -- -- -- Net income (loss)....................... (1,089) 745 (17,889) -- -- -- Other Financial Data: EBITDA(2)............................... 1,753 6,601 (12,562) -- -- -- MARKETING SPECIALISTS CORPORATION: Statement of Operations Data: Revenues................................ $ -- $ -- $ -- $ 5,975 $246,612 $ 380,830 Operating loss(1)....................... -- -- -- (1,239) (8,395) (332,534) Loss from continuing operations......... -- -- -- (1,518) (22,002) (364,830) Income (loss) from discontinued operations............................ -- -- -- 52 435 (638) Net loss(1)............................. -- -- -- (1,466) (21,567) (365,468) Other Financial Data: EBITDA(2)............................... -- -- -- (1,060) 18,399 23,495 BALANCE SHEET DATA--MARKETING SPECIALISTS CORPORATION (END OF PERIOD): Working capital (deficit)............... $ -- $ -- $ -- $ (2,108) $(29,908) $ (58,737) Total assets............................ -- -- -- 188,410 449,616 144,747 Long-term obligations, less current maturities............................ -- -- -- 74,673 227,831 230,523 Redeemable convertible preferred stock, at stated value....................... -- -- -- -- -- 12,397 Stockholders' equity (deficit).......... -- -- -- 72,595 118,242 (221,021)
- -------------------------- (1) Includes restructuring charges of approximately $6.0 million for Merkert and $0.9 million for Rogers for the period ended December 18, 1998, and approximately $13.3 million and $2.5 million for the Company for the years ended December 31, 1999 and 2000, respectively. Includes other nonrecurring charges of approximately $19.5 million and a goodwill impairment loss of approximately $307.0 million for the year ended December 31, 2000. 25 (2) EBITDA represents earnings before interest, taxes, depreciation, amortization, the impairment loss and restructuring and other nonrecurring charges. The Company believes that EBITDA may be useful to investors for measuring the Company's ability to service debt, to make new investments and to meet working capital requirements. EBITDA as calculated by the Company may not be consistent with calculations of EBITDA by other companies. EBITDA should not be considered in isolation from or as a substitute for net income (loss), cash flows from operating activities or other statements of operations or cash flows prepared in accordance with generally accepted accounting principles or as a measure of profitability or liquidity. (3) Represents predecessor financial statements. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS This Annual Report on Form 10-K contains, in addition to historical information, forward-looking statements that involve risks and uncertainties. The Company's actual results could differ significantly from the results discussed in the forward-looking statements. Factors that could cause or contribute to such differences include those discussed in "Risk Factors" as well as those discussed elsewhere herein. The following discussion and analysis should be read in conjunction with the Company's consolidated financial statements and related notes thereto presented elsewhere in this Annual Report on Form 10-K. INTRODUCTION The Company was incorporated on March 4, 1998, to create a leading national food brokerage firm providing outsourced sales, merchandising and marketing services to Manufacturers. The Company acts as an independent sales and marketing representative, selling grocery and consumer products on behalf of Manufacturers and coordinating the execution of Manufacturers' marketing programs with Retailers. The Company's principal source of revenue is commissions it receives from Manufacturers. On December 18, 1998, the Company consummated the Offering of 4,400,000 shares of Common Stock at an offering price of $15.00 per share. Simultaneously with the Offering, the Company purchased in separate transactions all of the issued and outstanding capital stock of Merkert and Rogers. As a result, each of Merkert and Rogers became a wholly-owned subsidiary of the Company. Prior to December 18, 1998, the Company conducted operations only in connection with the Combination and the Offering. In January 1999, the Company issued 290,000 shares of Common Stock in connection with the exercise of a portion of the over-allotment option by the underwriters of the Offering, raising net proceeds of approximately $4.0 million. ACQUISITION AND DIVESTITURE HISTORY GENERAL The Merger and other acquisitions noted below were accounted for using the purchase method of accounting. The intangible assets resulting from each acquisition are being amortized over their estimated useful lives. THE MERGER On August 18, 1999, the Company completed the Merger with RMSI for an aggregate discounted purchase price of approximately $236.8 million, which included approximately $3.4 million in cash payments for closing costs, $170.0 million in assumed debt and $63.4 million in Common Stock and options. Under the terms of the Merger, RMSI stockholders received 6,705,551 shares of the Company's Common Stock. The Company also granted certain RMSI stockholders and employees options to purchase 800,000 in additional shares of the Company's Common Stock at a price equal to $13.50 per share. For financial reporting purposes, the Company is presented as the acquiring entity, since the Company's stockholders own the largest portion of the Common Stock of the combined Company. Immediately following the Merger, the Company amended its certificate of incorporation to 26 change its corporate name to "Marketing Specialists Corporation." The operating results of RMSI have been included in the Company's operating results for all periods subsequent to the Merger. OTHER ACQUISITIONS AND DIVESTITURES In January 1999, the Company acquired Sell, a brokerage firm operating in the Midwest region of the United States. The Company completed the acquisition of Sell for an aggregate discounted purchase price of approximately $8.5 million, which included approximately $3.1 million in cash payments, $3.8 million in new debt, and $1.6 million in assumed debt. The operating results of Sell have been included in the Company's operating results for all periods subsequent to the acquisition date. In April 1999, the Company acquired UBC, a brokerage firm operating in the Midwest region of the United States. The Company acquired UBC for an aggregate discounted purchase price of approximately $6.6 million, which included approximately $0.9 million in cash payments, $3.3 million in new debt, and $2.4 million in assumed debt. The operating results of UBC have been included in the Company's operating results for all periods subsequent to the acquisition date. In July 1999, the Company acquired Buckeye, a brokerage firm operating in the Cleveland, Ohio; Pittsburgh, Pennsylvania; and upstate New York markets. The Company acquired Buckeye for an aggregate discounted purchase price of approximately $5.0 million, which included approximately $0.1 million in cash payments, $3.4 million in new debt, and $1.5 million in assumed debt. The operating results of Buckeye have been included in the Company's operating results for all periods subsequent to the acquisition date. In October 1999, the Company acquired Inman, a brokerage firm operating in the Midwest region of the United States. The Company completed the acquisition of Inman for an aggregate discounted purchase price of approximately $14.0 million, which included approximately $9.8 million in cash payments, $1.0 million in new debt, and $3.2 million in assumed debt. The operating results of Inman have been included in the Company's operating results for all periods subsequent to the acquisition date. In January 2000, the Company acquired Johnson-Leiber, a brokerage firm operating in the Seattle, Washington; Spokane, Washington; Portland, Oregon; Billings, Montana; and Anchorage, Alaska markets. The Company acquired Johnson-Leiber for an aggregate discounted purchase price of approximately $10.2 million, which included approximately $3.2 million in cash payments and $7.0 million in new debt and other incentives. The operating results of Johnson-Leiber have been included in the Company's operating results for all periods subsequent to the acquisition date. In April 2000, the Company acquired Sales Force, a full service brokerage firm operating in the Central Region of the United States. The Company acquired Sales Force for an aggregate discounted purchase price of approximately $18.8 million, which included approximately $6.1 million cash payments, $7.8 million in new debt, and $4.9 million in assumed debt. The operating results of Sales Force have been included in the Company's operating results for all periods subsequent to the acquisition date. In July 2000, the Company signed a letter of intent to sell its Private Label business, known as Buy Sell, to Woodland Partners. On January 19, 2001, the Company completed the sale of Buy Sell to Woodland Partners. For reporting purposes, Buy Sell qualified as a segment, as it represented a separate major line of business for the Company. For purposes of calculating the loss from discontinued operations, the measurement date was November 30, 2000, and the disposal date was January 19, 2001. See Note 20 of the Company's Notes to Consolidated Financial Statements for additional information. 27 RESULTS OF OPERATIONS The following defined terms are used in conjunction with the Company's discussion of operating results. REVENUES. Revenues are derived mainly from commissions earned from Manufacturers based on the Manufacturers' invoices to Retailers for products sold. Commissions are usually expressed as a percentage of the invoice as agreed by contract between the Manufacturer and broker. Commission rates typically range from 3% for full brokerage services to 1% for retail-only services. Revenues are presented net of allowances and deductions taken by Manufacturers. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling expenses consist predominately of salaries, fringe benefits and incentives for personnel directly involved in providing services to Manufacturers and Retailers. Other selling expenses include, among other things, automobiles utilized by the sales personnel, promotional expenses, and travel and entertainment. General and administrative expenses consist primarily of salaries and fringe benefits for administrative and corporate personnel, occupancy and other office expenses, information technology, communications and insurance. DEPRECIATION AND AMORTIZATION EXPENSES. Depreciation and amortization expenses relate to property, plant and equipment and intangible assets, including goodwill and non-compete agreements. IMPAIRMENT LOSS. Impairment loss relates to the impairment of the Company's Goodwill. See Note 3 to the accompanying Consolidated Financial Statements for more information. NONRECURRING CHARGES. Nonrecurring charges relate to the Company's ongoing integration of business processes and the change in estimate relating to the collectibility of trade accounts receivable. RESTRUCTURING CHARGES. Restructuring charges relate to severance costs associated with the reduction in redundant employee positions and the closure of redundant facilities in connection with the Merger and completed acquisitions. INCOME (LOSS) FROM DISCONTINUED OPERATIONS. Income (loss) from discontinued operations relates to the operations of segments of the business that the Company sold or disposed of and the associated gain or loss on disposal. The following table sets forth the results of operations of the Company for the periods indicated.
YEAR ENDED PERIOD ENDED YEAR ENDED DECEMBER 31, DECEMBER 18, DECEMBER 31, 2000 1999 1998* ------------------- ---------------- ---------------- Revenues...................................... $ 380,830 100.0% $246,612 100.0% $169,812 100.0% Selling expenses.............................. 287,255 75.4 174,109 70.6 136,672 80.5 General and administrative.................... 70,080 18.4 54,104 21.9 45,032 26.5 Depreciation.................................. 7,533 2.0 3,834 1.6 2,322 1.4 Amortization.................................. 19,572 5.1 9,670 3.9 4,554 2.7 Impairment loss............................... 306,953 80.6 -- 0.0 -- 0.0 Nonrecurring charges.......................... 19,451 5.1 -- 0.0 -- 0.0 Restructuring charge.......................... 2,520 0.7 13,290 5.4 6,935 4.1 --------- ----- -------- ----- -------- ----- Operating loss................................ (332,534) (87.3) (8,395) (3.4) (25,703) (15.2) Interest expense, net......................... (32,647) (8.6) (13,854) (5.6) (6,797) (4.0) Other income (expense), net................... 351 0.1 247 0.1 (530) (0.3) --------- ----- -------- ----- -------- ----- Loss before income tax expense and discontinued operations..................... (364,830) (95.8) (22,002) (8.9) (33,030) (19.5) Income tax expense (benefit).................. -- 0.0 -- 0.0 (677) 0.4 --------- ----- -------- ----- -------- ----- Loss from continuing operations............... (364,830) (95.8) (22,002) (8.9) (32,353) (19.1) Income (loss) from discontinued operations, net of tax.................................. (638) (0.2) 435 0.2 3,476 2.1 --------- ----- -------- ----- -------- ----- Net loss...................................... $(365,468) (96.0)% $(21,567) (8.7)% $(28,877) (17.0)% ========= ===== ======== ===== ======== =====
* Rogers and Merkert only (See ITEM 6) 28 The reader should note references to "pro forma" results for the year ended December 31, 1999, and "annualized" results for the period ended December 18, 1998 throughout the following discussion, since such information is more meaningful to a discussion of the changes between years. References to "pro forma" results only give effect to the Merger. YEAR ENDED DECEMBER 31, 2000 COMPARED TO YEAR ENDED DECEMBER 31, 1999 REVENUES. Revenues increased approximately $134.2 million (or 54.4%) to approximately $380.8 million for the year ended December 31, 2000, as compared to $246.6 million for the same period in 1999. On a pro forma basis, the Company's revenues increased approximately $1.2 million (or 0.3%). SELLING EXPENSES. Selling expenses increased approximately $113.1 million (or 65.0%) to approximately $287.3 million for the year ended December 31, 2000, as compared to $174.1 million for the same period in 1999. On a pro forma basis, the Company's selling expenses increased approximately $17.6 million (or 6.5%) from last year. The increase is associated in part with the Company's ongoing integration and consolidation strategy. Subsequent to the Merger, the Company spent the first half of 2000 evaluating its resources, integrating all offices onto one common sales and order entry system, rolling out common administrative and sales practices, and implementing a new organization structure. As a result, the Company incurred additional travel, salary and integration costs during that period. GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses increased approximately $16.0 million (or 29.5%) to approximately $70.1 million for the year ended December 31, 2000, as compared to $54.1 million for the same period in 1999. On a pro forma basis, the Company's general and administrative expenses decreased approximately ($15.2) million. This overall decline was the result of the full-year effect of cost saving measures implemented to eliminate redundancies in leased facilities as a result of the Combination and the Merger. As a percentage of total revenues, selling, general and administrative expenses increased to 93.8% for 2000 from 92.5% in 1999 due to the factors discussed above. On a pro forma basis, the Company's selling, general and administrative expenses, as a percentage of total revenues, remained relatively flat. Earnings before interest, taxes, depreciation, amortization, the impairment loss and restructuring and nonrecurring charges increased approximately $5.1 million to approximately $23.5 million for the year ended December 31, 2000, as compared to $18.4 million for the same period in 1999, as a result of the factors noted above. On a pro forma basis, the Company's earnings before interest, taxes, depreciation, amortization and restructuring and nonrecurring charges decreased approximately $1.2 million, as a result of the factors noted above. DEPRECIATION AND AMORTIZATION. Depreciation and amortization expenses increased approximately $13.6 million (or 100.7%) to approximately $27.1 million for the year ended December 31, 2000, as compared to $13.5 million for the same period in 1999. This increase was the result of the full-year effect of the incremental fixed assets and intangible assets associated with the Merger and, to a smaller degree, the acquisitions of Johnson-Leiber and Sales Force, which generated goodwill that carried a shorter, 20-year estimated useful life. On a pro forma basis, the Company's depreciation and amortization expenses increased approximately $3.2 million. IMPAIRMENT LOSS. The results for the year ended December 31, 2000, included an impairment loss of approximately ($307.0) million related to the Company's recorded goodwill. The Company's continued operating losses, negative operating cash flows and frequent cash infusions from a related party for working capital purposes indicated that long-lived assets may be impaired. A goodwill impairment analysis performed at the end of 2000 indicated that the Company's recorded goodwill exceeded the Company's estimated future cash flows, undiscounted and excluding interest charges. 29 Accordingly, an impairment loss was measured using discounted cash flows compared to recorded goodwill. See "Liquidity and Capital Resources" and Note 7 to the Company's Notes to Consolidated Financial Statements for additional discussion of the impairment. NONRECURRING CHARGES. The results for the year ended December 31, 2000, included nonrecurring charges of approximately $19.5 million, as compared to none for the same period in 1999. During the third quarter of 2000, the Company provided additional reserves for certain trade receivables related to the continuing integration of business processes into its corporate headquarters and changed its estimate related to the collectibility of its trade receivables outstanding in excess of 120 days. RESTRUCTURING CHARGE. The results for the year ended December 31, 2000 included a restructuring charge of approximately $2.5 million related to severance and other termination benefits given to approximately 180 former employees. The results for the year ended December 31, 1999 included a restructuring charge of approximately $13.3 million, which consisted of approximately $8.6 million related to obligations under vacated leased facilities and $4.7 million related to severance and other termination benefits given to former employees, resulting from the Merger. INTEREST EXPENSE. Interest expense increased approximately $18.8 million (or 135.6%) to approximately $32.6 million for the year ended December 31, 2000, as compared to $13.9 million for the same period in 1999. On a pro forma basis, the Company's interest expense increased approximately $8.7 million. The overall increase was attributable to increased short-term borrowing and a full year of interest on the Registered Notes. LOSS BEFORE INCOME TAX EXPENSE AND DISCONTINUED OPERATIONS. The loss before income taxes and discontinued operations increased approximately ($342.8) million to approximately ($364.8) million for the year ended December 31, 2000, from ($22.0) million for the same period in 1999, as a result of the factors noted above. PROVISION FOR INCOME TAXES. The Company has not recorded any tax benefits associated with the losses for the years ended December 31, 2000 and 1999, since it is more likely than not that the Company will not realize such benefits. INCOME (LOSS) FROM DISCONTINUED OPERATIONS. The results for the year ended December 31, 2000 included a loss from discontinued operations of approximately ($0.6) million, which included approximately $1.3 million of income from Buy Sell operations through the measurement date and a ($1.9) million loss on the sale of Buy Sell. The results for the year ended December 31, 1999 included income of approximately $0.4 million from Buy Sell operations. NET LOSS. Net loss increased approximately ($343.9) million to approximately ($365.5) million for the year ended December 31, 2000, from ($21.6) million in the year ended December 31, 1999, as a result of the factors noted above. YEAR ENDED DECEMBER 31, 1999 COMPARED TO PERIOD ENDED DECEMBER 18, 1998 REVENUES. Revenues increased approximately $76.8 million (or 45.2%) to approximately $246.6 million for the year ended December 31, 1999, as compared to $169.8 million for the period ended December 18, 1998. Revenues for 1999 included approximately $79.8 million related to RMSI. The Company's revenues (without RMSI) for the year ended December 31, 1999, decreased approximately ($8.8) million to approximately $166.8 million, as compared to $175.6 million for the annualized period ended December 18, 1998. The overall decline in revenue on an annualized basis was the result of the full-year effect of Manufacturer conflicts resulting from the Combination and, to a lesser extent, the Merger. In addition, the continued consolidation of Manufacturer representation by food brokers has negatively affected the Company's results. 30 SELLING EXPENSES. Selling expenses increased approximately $37.4 million (or 27.4%) to approximately $174.1 million for the year ended December 31, 1999, as compared to $136.7 million for the period ended December 18, 1998. Selling expenses for 1999 included approximately $51.6 million related to RMSI. The Company's selling expenses (without RMSI) for the year ended December 31, 1999, decreased approximately ($18.8) million to approximately $122.5 million, as compared to $141.3 million for the annualized period ended December 18, 1998. The decline in selling expenses on an annualized basis was a result of the reductions in the sales force associated with Manufacturer conflicts resulting from the Combination and, to a lesser extent, the Merger. GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses increased approximately $9.1 million (or 20.1%) to approximately $54.1 million for the year ended December 31, 1999, as compared to $45.0 million for the period ended December 18, 1998. General and administrative expenses for 1999 included approximately $18.8 million related to RMSI. The Company's general and administrative expenses (without RMSI) for the year ended December 31, 1999, decreased approximately ($11.3) million to approximately $35.3 million, as compared to $46.6 million for the annualized period ended December 18, 1998. The overall decrease in general and administrative expenses on an annualized basis was the result of the full-year effect of cost saving measures implemented to eliminate redundancies in leased facilities resulting from the Combination. As a percentage of total revenues, selling, general and administrative expenses decreased to 92.5% for 1999 from 107.0% for the period ended December 18, 1998, due to the factors discussed above. As a percentage of total revenues, the Company's selling, general and administrative expenses (without RMSI) for the year ended December 31, 1999, decreased to 94.6% from 107.0% for the annualized period ended December 18, 1998, due to the factors noted above. Earnings before interest, taxes, depreciation, amortization and restructuring charges increased to approximately $18.4 million for the year ended December 31, 1999, as compared to ($11.9) million for the period ended December 18, 1998, as a result of the factors noted above. Earnings before interest, taxes, depreciation, amortization and restructuring charges (without RMSI) increased to approximately $9.0 million for the year ended December 31, 1999, as compared to ($12.3) million for the annualized period ended December 18, 1998, as a result of the factors noted above. DEPRECIATION AND AMORTIZATION. Depreciation and amortization expenses increased approximately $6.6 million (or 96.4%) to approximately $13.5 million for the year ended December 31, 1999, as compared to $6.9 million for the period ended December 18, 1998. Depreciation and amortization expenses for 1999 included approximately $2.9 million related to the Merger. The Company's depreciation and amortization expenses (without amounts related to the Merger) increased approximately $3.7 million to approximately $10.6 million for the year ended December 31, 1999, as compared to $6.9 million for the period ended December 18, 1998. The overall increase was the result of the full-year effect of the goodwill and other intangible assets associated with the Combination and the Merger. RESTRUCTURING CHARGE. The results for the year ended December 31, 1999, included a restructuring charge of approximately $13.3 million, which consisted of approximately $8.6 million related to obligations under vacated leased facilities and $4.7 million related to severance and other termination benefits given to former employees. The results for the period ended December 18, 1998, included a restructuring charge of approximately $6.9 million related to the elimination of redundant personnel and facilities costs. INTEREST EXPENSE. Interest expense increased approximately $7.1 million (or 103.8%) to approximately $13.9 million for the year ended December 31, 1999, as compared to $6.8 million for the period ended December 18, 1998. The Company's interest expense for 1999 included approximately $6.3 million related to RMSI. The Company's interest expense (without RMSI) for the year ended 31 December 31, 1999, increased approximately $0.8 million to approximately $7.6 million, as compared to $6.8 million for the period ended December 18, 1998. The overall increase was attributable to increased short-term borrowing and interest on the Registered Notes. LOSS BEFORE INCOME TAX EXPENSE AND DISCONTINUED OPERATIONS. The loss before income taxes and discontinued operations decreased to approximately ($22.0) million for the year ended December 31, 1999, from ($33.0) million for the same period in 1999, as a result of the factors noted above. PROVISION FOR INCOME TAXES. The Company has not recorded any tax benefits associated with its operating losses, since it is more likely than not that the Company will not realize such benefits. INCOME FROM DISCONTINUED OPERATIONS. The results for the year ended December 31, 1999, and the period ended December 18, 1998, included income of approximately $0.4 million and $3.5 million from Buy Sell operations for these periods, respectively. NET LOSS. Net loss decreased to approximately ($21.6) million for the year ended December 31, 1999, from ($28.9) million for the period ended December 18, 1998, as a result of the factors noted above. COMBINED INTEGRATION ACTIVITIES Since the beginning of 1999, the Company completed seven acquisitions, resulting in the coverage of new geographic markets and expanding representation of Manufacturers' product offerings within existing markets. The Company's strategic acquisition plan included the selection, acquisition and management of businesses in various brokerage markets, including the retail food, food service and private label markets. As part of the Merger, the Company further integrated many of its sales offices and most of its administrative operations (including accounting, treasury, payroll, human resources, and information technology). This process resulted in the integration and consolidation of 37 facilities throughout the Southeast and Mid-Atlantic regions of the country. As a result of its ongoing integration activities, the Company recorded a restructuring charge during the year ended December 31, 1999 of approximately $13.3 million. The charge consisted of approximately $8.6 million relating to non-cancelable lease obligations on vacated facilities and $4.7 million relating to severance and other personnel-related amounts. During the third quarter of 2000, the Company recorded an additional restructuring charge of approximately $2.5 million relating to severance and other termination costs. During the same quarter, the Company also provided additional reserves for certain trade receivables related to the continuing integration of business processes into its corporate headquarters and changed its estimate related to the collectibility of its trade receivables outstanding in excess of 120 days. See Note 18 of the Company's Notes to Consolidated Financial Statements for additional information. As set forth in the following table, the Company's unaudited pro forma EBITDA (giving effect to the Merger only) for the year ended December 31, 1999 was approximately $24.7 million compared to 32 actual EBITDA of approximately $23.5 million and $18.4 million for the year ended December 31, 2000 and 1999, respectively.
PRO FORMA YEAR YEAR ENDED ENDED YEAR ENDED DECEMBER 31, DECEMBER 31, DECEMBER 31, 2000 1999 1999 ------------------- ---------------- ---------------- (UNAUDITED) Revenues...................................... $ 380,830 100.0% $246,612 100.0% $379,596 100.0% Selling expenses.............................. 287,255 75.4 174,109 70.6 269,662 71.0 General and administrative.................... 70,080 18.4 54,104 21.9 85,254 22.5 Depreciation.................................. 7,533 2.0 3,834 1.6 7,412 2.0 Amortization.................................. 19,572 5.1 9,670 3.9 16,512 4.3 Impairment loss............................... 306,953 80.6 -- 0.0 -- 0.0 Nonrecurring charges.......................... 19,451 5.1 -- 0.0 -- 0.0 Restructuring charge.......................... 2,520 0.7 13,290 5.4 -- 0.0 --------- ----- -------- ----- -------- ----- Operating income (loss)....................... (332,534) (87.3) (8,395) (3.4) 756 0.2 EBITDA........................................ 23,495 6.2 18,399 7.5 24,680 6.5 Interest expense, net......................... (32,647) (8.6) (13,854) (5.6) (23,944) (6.3) Other income (expense), net................... 351 0.1 247 0.1 127 0.0 --------- ----- -------- ----- -------- ----- Loss before income tax expense and discontinued operations..................... (364,830) (95.8) (22,002) (8.9) (23,061) (6.1) Income tax expense (benefit).................. -- 0.0 -- 0.0 (1,338) 0.4 --------- ----- -------- ----- -------- ----- Loss before discontinued operations........... (364,830) (95.8) (22,002) (8.9) (21,723) (5.7) Income (loss) from discontinued operations, net of tax.................................. (638) (0.2) 435 0.2 435 0.1 --------- ----- -------- ----- -------- ----- Loss before extraordinary item................ (365,468) (96.0) (21,567) (8.7) (21,288) (5.6) Extraordinary loss, net of tax................ -- 0.0 -- 0.0 (1,038) (0.3) --------- ----- -------- ----- -------- ----- Net loss...................................... $(365,468) (96.0)% $(21,567) (8.7)% $(22,326) (5.9)% ========= ===== ======== ===== ======== =====
EBITDA represents earnings before interest, taxes, depreciation, amortization, the impairment loss and restructuring and nonrecurring charges. The Company believes that EBITDA may be useful for measuring the Company's ability to service debt, to make new investments and to meet working capital requirements. EBITDA as calculated by the Company may not be consistent with calculations of EBITDA by other companies. EBITDA should not be considered in isolation from or as a substitute for net income (loss), cash flows from operating activities or other statements of operations or cash flows prepared in accordance with generally accepted accounting principles or as a measure of profitability or liquidity. None of the unaudited pro forma financial data, as adjusted, purports to represent what the Company's combined results of operations would have been or may be for any future period and all such information should be read only in conjunction with the Company's Consolidated Financial Statements and the Notes thereto included elsewhere in this Annual Report on Form 10-K. LIQUIDITY AND CAPITAL RESOURCES The operating environment confronting the Company raises uncertainty about the Company's ability to continue as a going concern. The principal conditions giving rise to that uncertainty include the following: - The Company has incurred losses and negative operating cash flows in every fiscal period since its inception. For the year ended December 31, 2000, the Company incurred a loss from continuing operations of approximately ($364.8) million, which included a goodwill impairment loss of approximately ($307.0) million, and negative operating cash flows of approximately ($26.0) million. 33 - As of December 31, 2000, the Company had negative working capital of approximately ($58.7) million, which included ($29.9) million related to the Amended Credit Agreement (as defined) and ($19.0) million related to the First Union Amended Credit Agreement (as defined). Both Agreements expire in March 2002. - During 2000, the Company's primary stockholder provided approximately $43.3 million of funds to the Company and participated in the First Union Amended Credit Agreement, both of which provided liquidity to meet the current obligations under the Company's various debt agreements. During the quarter ended March 31, 2001, the primary stockholder provided approximately $12.0 million of funds to the Company. - The share price of the Company's Common Stock has decreased from $15.50 in the first quarter of 1999 to a low of $0.19 in the fourth quarter of 2000. - The rating of Company's public debt, the Registered Notes, was downgraded to a CCC- in December 2000. Based on recent trading, the Registered Notes have an aggregate fair value of approximately $11.3 million. During the latter part of 2000, the Company implemented an aggressive initiative designed to improve efficiency and reduce costs. The Company reduced its workforces by approximately 6%, providing $11.5 million in annual savings, and consolidated 15 offices (17% of the occupied facilities). The Company also made changes to its organizational structure to focus on the key components of the business, improve financial reporting systems and controls, and develop a more effective sales and marketing strategy. Management believes that the successful implementation of the initiatives will enable the Company to achieve profitability. Management believes that the cost reductions, improved financial and operating controls, and a focused sales and marketing effort should provide positive results from operations and cash flows in the near term. Management also believes that the long-term benefits of the plan will stabilize the Company and improve its financial ratios. Achievement of projected cash flows from operations, however, will be dependent upon the Company's attainment of forecasted revenues, improved operating costs and trade support levels that are consistent with its financial plans. Such operating performance will be subject to financial, economic and other factors affecting the industry and operations of the Company, including factors beyond its control, and there can be no assurance that the Company's plans will be achieved. In addition, the Company borrows funds on a variable rate basis, and continued compliance with loan covenants is partially dependent on relative interest rate stability. If projected cash flows from operations are not realized, or if there are significant increases in interest rates, then the Company may have to explore various available alternatives, including obtaining further modifications of its existing lending arrangements, renegotiating debt payments associated with acquired companies, seeking additional contributions of equity or loans from MS Acquisition or attempting to locate additional sources of financing, all of which are beyond the Company's control and provide no certainty of success. CASH FLOWS ACTIVITY FOR THE YEAR ENDED DECEMBER 31, 2000 COMPARED TO THE YEAR ENDED DECEMBER 31, 1999 Net cash used in operating activities was approximately ($26.0) million for 2000, as compared to ($3.7) million for the same period in 1999. The Company's net loss of approximately ($365.5) million for 2000 included approximately $7.5 million in non-cash depreciation expense, a goodwill impairment loss of approximately $307.0 million, $22.0 million in nonrecurring charges related to trade receivables and severance and other benefits given to former employees, and a $1.9 million noncash loss related to the sale of Buy Sell. Operating cash flows for 2000 also included approximately ($23.0) million in net increases to accounts receivable and approximately ($3.1) million in net decreases related to accounts 34 payable and accrued expenses. The Company's net loss of approximately ($21.6) million for 1999 included approximately $3.8 million in noncash depreciation expense and a $13.3 million restructuring charge related to vacated leased facilities and terminated employees. Operating cash flows for the 1999 period also included approximately ($24.8) million in decreases related to accounts payable and accrued expenses. The Company has utilized proceeds from the sale of improved properties, additional funds available as a result of the credit facility refinancings completed in the first quarter and fourth quarter of 2000, and funds provided by MS Acquisition throughout the year to cover working capital needs. Net cash used in investing activities was approximately ($4.8) million for 2000, as compared to approximately ($15.3) million for the same period in 1999. Investing cash flows for the 2000 period included approximately $8.6 million in cash proceeds related to the sale of the Company's Orange County, California and Phoenix, Arizona properties in February 2000 and the sale of its Mecklenberg, North Carolina property in December 2000. Investing cash flows for this period also included approximately ($12.0) million in cash payments primarily related to the purchases of Johnson-Leiber in January 2000 and Sales Force in April 2000. Investing cash flows for 1999 included approximately ($13.7) million in net cash payments primarily related to the purchases of Sell, Inc. in January 1999, United Brokerage Company in April 1999, RMSI in August 1999, and Inman in October 1999. Net cash provided by financing activities was approximately $33.7 million for 2000, as compared to approximately $17.8 million for 1999. Financing cash flows for 2000 included approximately $39.3 million in cash proceeds received from MS Acquisition, which involved the issuance of Common Stock, $15.0 million and convertible securities, $24.3 million throughout the year. A total of $9.5 million of the convertible securities were converted into Common Stock in the third quarter of 2000. A total of approximately $9.8 million of the convertible securities existed as convertible debt at one point during the year and was later converted into the Series B Preferred Stock in the fourth quarter of 2000. In December 2000, the Company also received $4.0 million in proceeds related to convertible securities that were issued in the first quarter of 2001. Financing cash flows for 2000 also included approximately $28.6 million in net short-term borrowings. These proceeds were offset by approximately ($5.7) million in cash payments primarily related to the refinancing of these short-term borrowings throughout the year and approximately ($29.5) million in principal payments in long-term obligations, of which approximately ($8.8) million related to the Initial Term Loan. Financing cash flows for 1999 included approximately $3.8 million in net proceeds from the issuance of Common Stock and $20.3 million in net short-term borrowings. Financing cash flows for 1999 also included approximately ($21.2) million in principal payments on long-term obligations. SENIOR SUBORDINATED NOTES In December 1997, concurrently with the sale by RMSI of $100.0 million of the Issued Notes, RMSI entered into an Exchange and Registration Rights Agreement with the initial purchaser of the Issued Notes. Under the terms of that agreement, RMSI agreed to file a registration statement regarding the exchange of the Issued Notes for new notes registered under the Securities Act of 1933, and to offer the holders of the Issued Notes an opportunity to exchange their unregistered notes for registered notes. On June 21, 1999, RMSI filed a Registration Statement on Form S-4 with the Securities and Exchange Commission to register $100.0 million of the Registered Notes. Subsequently, RMSI completed an exchange of the Issued Notes for the Registered Notes. The Registered Notes are identical in all material respects to the Issued Notes, except for transfer restrictions and registration rights. The Company assumed this outstanding indebtedness in connection with the Merger. The Registered Notes are unsecured and are subordinated in right of payment to all existing and future senior indebtedness of the Company. The Registered Notes are fully and unconditionally guaranteed on an unsecured, senior subordinated, joint and several basis by certain guarantor wholly- 35 owned subsidiaries of the Company as defined in the Registration Statement, which comprise substantially all the direct and indirect subsidiaries of the Company. The Company is a holding company with no assets, liabilities or operations other than its interests in its subsidiaries. Separate financial statements and other disclosures for such subsidiaries have not been presented due to management's determination that such information is not material to investors. Interest on the Registered Notes is payable semiannually on June 15 and December 15 of each year, commencing June 15, 1998. The principal on the Registered Notes is payable on December 15, 2007, the maturity date. The Company may not redeem the Registered Notes prior to December 15, 2002, except as described below. On or after such date, the Company may redeem the Registered Notes, in whole or in part, at the following redemption prices: 2002-105.063%; 2003-103.375%; 2004-101.688%; 2005 or thereafter-100.000%, together with accrued and unpaid interest, if any, to the date of redemption. The Registered Notes are not subject to any sinking fund requirement. Upon a change of control, as defined (not triggered by the Merger), each holder of the Registered Notes will have the right to require the Company to make an offer to repurchase such holder's Registered Notes at a price equal to 101% of the principal amount thereof, together with accrued and unpaid interest, if any, to the date of repurchase. The Registered Notes subject the Company to certain limitations and restrictions primarily related to obtaining additional indebtedness, payment of dividends, and sales of assets and subsidiary stock, which may require the consent of the holders of the Registered Notes. In December 2000, the rating of the Registered Notes was lowered to CCC-. Based on recent trading information, the fair value of the Registered Notes is approximately $11.3 million, as compared to a carrying value of $100.0 million. REFINANCING OF COMPANY'S EXISTING CREDIT FACILITY INITIAL CREDIT FACILITY In connection with the Offering and Combination, the Company obtained a $75.0 million Initial Credit Facility (as amended on August 18, 1999) from a bank. The Initial Credit Facility consisted of a five-year, secured, fully amortizing $50.0 million Initial Term Loan and a three-year, secured $25.0 million Initial Revolving Credit. The balance outstanding under the Initial Credit Facility was $64.1 million as of December 31, 1999 ($20.3 million under the revolver and $43.8 million under the term loan). Amounts outstanding under this facility were collateralized by substantially all of the Company's assets. Interest was payable on the Initial Term Loan and the Initial Revolving Credit at the base rate, as defined in the amended Initial Credit Facility. The rate on the outstanding balance of the Revolver and the Initial Term Loan was 9.16% and 10.50%, respectively, as of December 31, 1999. The Initial Credit Facility required the Company to make certain mandatory prepayments of amounts outstanding under the Initial Credit Facility with the use of certain proceeds from asset sales and debt and equity financing. The amended Initial Credit Facility required the Company to comply with various affirmative and negative covenants, including the following, among others: - the maintenance of certain financial ratios - restrictions on certain additional indebtedness - restrictions on liens, guarantees, dividends and the disposition of assets 36 - obtaining the lenders' consent to acquisitions involving cash consideration in excess of a specified amount AMENDED TERM LOAN On March 30, 2000, the Company became a party to the Amended Term Loan. The Amended Term Loan consisted of a two-year, secured $35.0 million term loan. The Company paid commitment and other fees of approximately $0.9 million in connection with obtaining the Amended Term Loan. Under the Amended Term Loan, the principal amount of the term loan was reduced from $43.8 million to $35.0 million. The Amended Term Loan was secured by a lien on substantially all of the Company's and its subsidiaries' tangible and intangible property. In addition, the Amended Term Loan was jointly and severally guaranteed by all current and future subsidiaries of the Company. Interest was payable on the Amended Term Loan at a rate based on one of two customary interest rates plus an additional interest margin of 375 or 500 basis points, as applicable. The Amended Term Loan contained customary events of default, including cross-default provisions relating to the Registered Notes. In connection with the Amended Term Loan, the Company issued to an affiliate of First Union National Bank, N.A. detachable warrants to purchase up to 4.0% of the Company's Common Stock on a diluted basis. The exercise price of the warrants will be nominal, and the warrants will be exercisable at any time after the second anniversary of the issuance of the warrants. The proceeds of the Amended Term Loan were allocated between debt and warrants based on their respective fair market values. The estimated fair value of the warrants appears as a component of Additional Paid-In Capital in the accompanying Consolidated Balance Sheet as of December 31, 2000. The letter of credit outstanding under the Initial Credit Facility was replaced by a $1.1 million letter of credit issued for the account of RCPI, which is an affiliate of MS Acquisition, the Company's largest shareholder. The Company issued to RCPI a reimbursement note subordinated in right of payment to the Registered Notes in the amount of the letter of credit. The promissory note will become payable if the letter of credit is drawn. NEW REVOLVER On March 30, 2000, the Company also became a party to New Revolver. The New Revolver consisted of a two-year, senior secured $50.0 million revolving line of credit, subject to a borrowing base equal to a specified percentage of eligible receivables. The Company paid commitment and other fees of approximately $0.6 million in connection with obtaining the New Revolver. Funds advanced under the New Revolver were used by the Company to repay a portion of outstanding amounts under the Initial Credit Facility, to partially finance the acquisition of Sales Force, to finance the Company's working capital and capital expenditure requirements in the ordinary course of business, and to pay fees and expenses relating to the closing of the New Senior Credit Facility. The New Revolver contained customary events of default, including cross-default provisions relating to the Registered Notes. The New Revolver was secured by a first priority security interest in cash, cash equivalents, accounts receivable and inventory of the Company and its subsidiaries and proceeds thereof but not in assets that are the proceeds of equipment, fixtures, real estate, intellectual property or the stock of subsidiaries. In addition, Inman, MSSC and Bromar were co-borrowers under the New Revolver, jointly and severally liable for all borrowings and other related obligations thereunder. Interest was payable on the New Revolver at a rate based on one of two customary interest rates plus an additional interest 37 margin ranging from 150 to 350 basis points. The applicable margin was determined based on certain financial ratios of the Company. The New Senior Credit Facility required the Company to comply with various affirmative and negative covenants, including, among others: - the maintenance of certain financial ratios - restrictions on additional indebtedness - restrictions on liens, guarantees, dividends and the disposition of assets - restrictions on certain mergers, consolidations, and acquisitions During 2000, the Company incurred approximately $5.3 million in costs primarily related to the New Senior Credit Facility. FIRST UNION AMENDED CREDIT AGREEMENT On November 17, 2000, the Company also became party to the First Union Amended Credit Agreement. The First Union Amended Credit Agreement amends the Amended Term Loan and provides for the consent of First Union National Bank, N.A. to the Increase, the Borrowing Base Amendment, and the repayment of the $2.5 million promissory note to MS Acquisition. The First Union Amended Credit Agreement also amends the Amended Term Loan to reflect the terms of the Amended Credit Agreement. As of December 31, 2000, the discounted carrying amount under the First Union Amended Credit Agreement was approximately $33.9 million. At December 31, 2000, the Company was not in compliance with certain covenants related to this agreement. See "Amended Senior Credit Facility Amendments" below for discussion of these violations and related waivers and amendments. AMENDED CREDIT AGREEMENT On November 17, 2000, the Company became party to the Amended Credit Agreement. The Amended Credit Agreement provides for the Increase, which is comprised of the Tranche A Note and the Tranche B Note. MS Acquisition purchased a 100% participation interest in the Tranche B Note. The Tranche A Note provides for the Amended Revolver, which accrues interest at a rate equal to the Base Rate (a reference rate based on the prime rate) plus 2.25%. The Amended Revolver will revolve up to the lesser of $41.0 million or the Borrowing Base, which is a function of the Company's eligible receivables and the Advance Percent determined by the Agent. As part of the Amended Credit Agreement, the Agent has decreased the Advance Percent, thereby decreasing the Borrowing Base (the "Borrowing Base Amendment"). The Company must fulfill all payment obligations under the Amended Revolver before making any interest payments on the Tranche B Note. The Tranche A Note and any accrued and unpaid interest will mature on March 30, 2002. As of December 31, 2000, the outstanding amount under the Amended Revolver was approximately $29.9 million, and approximately $0.9 million was available. The Tranche B Note bears interest at a rate equal to the Base Rate plus 2.25%. The Tranche B Note and any accrued and unpaid interest will mature on March 30, 2002. The fixed commitment under the Tranche B Note is not subject to the Borrowing Base. As discussed in Note 9 of the Company's Notes to Consolidated Financial Statements, MS Acquisition funded the $19.0 million balance of the Tranche B Note, subject to the terms of a master participation agreement. As of December 31, 2000, the outstanding amount under the Tranche B Note was $19.0 million. At December 31, 2000, the Company was not in compliance with certain covenants related to this agreement. See "Amended Senior Credit Facility Amendments" below for discussion of these violations and related waivers and amendments. 38 AMENDED SENIOR CREDIT FACILITY AMENDMENTS As of March 30, 2001, the Company was in violation of certain covenants under the Amended Credit Agreement and the First Union Amended Credit Agreement (collectively referred as the "Amended Senior Credit Facility") in connection with (i) its failure to provide annual financial statements within ninety (90) days of its fiscal year end, (ii) the certifying accountant's qualification of the Company's annual financial statements on a going concern basis, and (iii) the Company's failure to deliver certain items to the Agent by March 15, 2001 as required by the Amended Credit Agreement. On April 19, 2001, the Company entered into (a) a Waiver and Third Amendment to Credit Agreement amending the Amended Credit Agreement and (b) Second Amendment to Credit Agreement amending the First Union Amended Credit Agreement ((a) and (b) collectively defined as the "Amended Senior Credit Facility Amendments"). Under the Amended Senior Credit Facility Amendments, the Company (i) received a waiver for its current defaults under the Amended Senior Credit Facility and (ii) paid a fee of approximately $0.2 million as consideration in obtaining the amendments and waiver of the defaults under the Amended Credit Agreement. The Amended Senior Credit Facility Amendments provide, among other things, that (i) the Agent may increase the Advance Percent as of March 31, 2001, but before June 1, 2001, thereby increasing the Borrowing Base under the Amended Senior Credit Facility, (ii) amends the definition of "EBITDA" in the Amended Senior Credit Facility to include certain write-offs in the amortization and depreciation expense deducted in determining Net Income, and (iii) amends the baseline amounts for determining Minimum EBITDA. Under the Amended Senior Credit Facility Amendments, the Company must meet certain post-closing covenants, including, among other things, the delivery of its annual financial statements by April 27, 2001 and the delivery of certain other items by May 31, 2001. OTHER NOTES PAYABLE INVOLVING RELATED PARTIES The Company also has a mortgage note with RCPI., an affiliate of MS Acquisition, that is secured by certain land, a building and fixtures. It bears interest at 8.5% with monthly payments of approximately $34,000 (including interest) and a balloon payment of approximately $3.6 million due in 2001. The balance outstanding under this mortgage was approximately $3.6 million as of December 31, 2000. On November 9, 2000, the Company issued a $2.5 million promissory note to MS Acquisition. This promissory note is subordinate to the senior debt of the Company. The proceeds were used for general corporate purposes. The $2.5 million promissory note bears interest at a rate equal to the sum of an interest margin of 2.75% plus the applicable prime rate on the last business day of the quarter for which interest is payable. Interest is payable quarterly in arrears, commencing on December 31, 2000, and will continue through the maturity date. The $2.5 million promissory note and any unpaid and accrued interest will be payable on November 9, 2002, or on demand, under specified conditions. The Company is not permitted to repay the principal and unpaid and accrued interest on the $2.5 million promissory note on demand if the Company's borrowing base 30 days prior to a payment date is not at least $10.0 million, or 25% of the sum of the Company's payroll for the last four consecutive pay periods, whichever is greater. In the first quarter of 2001, the $2.5 million promissory note was converted into redeemable convertible preferred stock. See Note 20 of the Company's Notes to Consolidated Financial Statements for additional information. The Company had other notes payable to former employees of various acquired entities of approximately $8.5 million as of December 31, 2000. The total estimated payments have been discounted at rates ranging from 8% to 10%. The amounts due under the acquisition agreements are unsecured and extend through 2011. These amounts are payable in either monthly or quarterly installments. The fair value of these obligations approximates their carrying value. 39 COMMON STOCK TRANSACTIONS On January 7, 2000, the Company issued 1,577,287 shares of Common Stock to MS Acquisition for an aggregate purchase price of $5.0 million ($3.17 per share) pursuant to the terms of a stock purchase agreement. On March 30, 2000, MS Acquisition purchased an additional 4,000,000 shares of Common Stock for an aggregate purchase price of $10.0 million ($2.50 per share) pursuant to the terms of a stock purchase agreement. The Company used the funds as an additional source of capital for operations and additional short-term and long-term liquidity. The offering, sale and issuance of these shares was exempt from registration under the Securities Act pursuant to a private offering exemption under Section 4(2) promulgated thereunder. As indicated in Note 14 of the Company's Notes to Consolidated Financial Statements, the 9,500 outstanding shares of the Preferred Stock held by MS Acquisition were converted into 6,234,414 shares of Common Stock. REDEEMABLE CONVERTIBLE PREFERRED STOCK TRANSACTIONS UNDESIGNATED PREFERRED STOCK As of December 31, 2000, there were no shares of undesignated preferred stock outstanding. Holders of undesignated preferred stock would have priority over the holders of Common Stock with respect to dividends and to other distributions, including the distribution of assets upon liquidation. The Board of Directors has the authority, without stockholder authorization, to issue shares of undesignated preferred stock in one or more series and to fix the terms, limitations, relative rights and preferences and variations. PREFERRED STOCK On June 23, 2000, the Board of Directors of the Company authorized and provided for the issuance of up to 10,000 shares of 8.0% Convertible Paid-In-Kind Preferred Stock, par value $0.01 per share, with a stated value of $1,000 per share (the "Preferred Stock"). Each share of the Preferred Stock is convertible into that number of shares of Common Stock equal to the result obtained by dividing the stated value of the Preferred Stock by the conversion price in effect at the conversion date. All dividends on issued shares of the Preferred Stock are cumulative, whether or not the dividends are earned or declared, on a daily basis from the issue date and payable quarterly in arrears on each dividend payment date. Even if not declared, all unpaid dividends will compound quarterly at an annual dividend rate equal to 8.0%, or the applicable dividend rate. On June 22, 2010, the Company will be obligated to redeem, to the extent of funds legally available, all outstanding shares of the Preferred Stock at a redemption price equal to 100% of the liquidation preference per share. The liquidation preference per share will be equal to the greater of $1,000 per share or the amount that the equivalent number of shares of Common Stock (based on the conversion rate applicable at the liquidation date) would be entitled to receive, plus any unpaid dividends. On June 23, 2000, the Company issued 5,000 shares of Preferred Stock to MS Acquisition for an aggregate purchase price of $5.0 million pursuant to the terms of a preferred stock purchase agreement. On August 8, 2000, the Company issued 4,500 additional shares of Preferred Stock to MS Acquisition for an aggregate purchase price of $4.5 million pursuant to the terms of a preferred stock purchase agreement. On July 27, 2000, the Company received early termination of the waiting period in connection with its Hart-Scott-Rodino Antitrust Improvement Act filing thereafter allowing the conversion of the Preferred Stock to Common Stock of the Company. On August 21, 2000, the 9,500 shares of Preferred 40 Stock, previously issued to MS Acquisition, were converted into 6,234,414 shares of Common Stock. Per the terms of the preferred stock purchase agreements, each share of Preferred Stock was converted into approximately 656.25 shares of Common Stock (i.e., the Preferred Stock's stated value of $1,000 divided by the conversion price of $1.5238). On August 17, 2000, the Company issued a $4.75 million promissory note to MS Acquisition. On August 30, 2000, the Company issued a $5.0 million promissory note to MS Acquisition. The Registered Notes and the New Senior Credit Facility are senior to these notes. The Company used the proceeds from both promissory notes for general corporate purposes. On November 1, 2000, the Company's Board of Directors authorized the issuance of up to 20,000 shares of the Series B Preferred Stock. The Series B Preferred Stock has a stated value of $1,000 per share. The Series B Preferred Stock is of equal class with the Preferred Stock previously authorized and any future designated series of preferred stock unless specifically noted in future preferred stock agreements. The Series B Preferred Stock has the same characteristics (i.e., dividend terms, conversion features) as the Preferred Stock. SERIES B PREFERRED STOCK On November 1, 2000, the Company issued 12,397 shares of the Series B Preferred Stock to MS Acquisition for an aggregate purchase price of approximately $12.4 million pursuant to the terms of a preferred stock purchase agreement. The purchase price consisted of the cancellation of the $4.75 million promissory note and the $5.0 million promissory note, including all accrued and unpaid interest, plus an additional cash payment of approximately $2.5 million to the Company. The incremental proceeds from the issuance of the Series B Preferred Stock were used for general corporate purposes. On November 9, 2000, the Company issued a $2.5 million promissory note to MS Acquisition. This promissory note is subordinate to the senior debt of the Company. The proceeds were used for general corporate purposes. The $2.5 million promissory note bears interest at a rate equal to the sum of an interest margin of 2.75% plus the applicable prime rate on the last business day of the quarter for which interest is payable. Interest is payable quarterly in arrears, commencing on December 31, 2000, and will continue through the maturity date. The $2.5 million promissory note and any unpaid and accrued interest will be payable on November 9, 2002, or on demand, under specified conditions. The Company is not permitted to repay the principal and unpaid and accrued interest on the $2.5 million promissory note on demand if the Company's borrowing base 30 days prior to a payment date is not at least $10.0 million, or 25% of the sum of the Company's payroll for the last four consecutive pay periods, whichever is greater. In the first quarter of 2001, the $2.5 million promissory note was converted into redeemable convertible preferred stock. See Note 20 of the Company's Notes to Consolidated Financial Statements for additional information. On January 26, 2001, the Company issued 7,568 shares of the Series B Preferred Stock to MS Acquisition for an aggregate purchase price of approximately $7.6 million pursuant to the terms of a preferred stock purchase agreement. The purchase price consisted of the cancellation of the $2.5 million promissory note, including all accrued and unpaid interest, plus an additional cash payment of approximately $5.0 million to the Company. A total of $4.0 million of the cash proceeds were received in December 2000 and appeared as a component of Other Liabilities in the consolidated balance sheet as of December 31, 2000. The incremental proceeds from the issuance of the Series B Preferred Stock were used for general corporate purposes. SERIES C PREFERRED STOCK On March 26, 2001, the Company's Board of Directors authorized the issuance of up to 20,000 shares of the Series C Preferred Stock. The Series C Preferred Stock has a stated value of $1,000 per 41 share. The Series C Preferred Stock is of equal class with the Preferred Stock and the Series B Preferred Stock previously authorized and any future designated series of preferred stock unless specifically noted in future preferred stock agreements. Each share of the Series C Preferred Stock is convertible into that number of shares of Common Stock equal to the result obtained by dividing the stated value of the Series C Preferred Stock by the conversion price in effect at the conversion date. All dividends on issued shares of the Series C Preferred Stock are cumulative, whether or not the dividends are earned or declared, on a daily basis from the issue date and payable quarterly in arrears on each dividend payment date. Even if not declared, all unpaid dividends will compound quarterly at an annual dividend rate equal to 8.0%, or the applicable dividend rate. On June 22, 2010, the Company will be obligated to redeem, to the extent of funds legally available, all outstanding shares of the Series C Preferred Stock at a redemption price equal to 100% of the liquidation preference per share. The liquidation preference per share will be equal to the greater of $1,000 per share or the amount that the equivalent number of shares of Common Stock (based on the conversion rate applicable at the liquidation date) would be entitled to receive, plus any unpaid dividends. On March 28, 2001, the Company issued 9,000 shares of the Series C Preferred Stock to MS Acquisition for an aggregate purchase price of $9.0 million in cash pursuant to the terms of a preferred stock purchase agreement. The proceeds from the issuance of the Series C Preferred Stock were used for general corporate purposes. On March 30, 2001, the Company issued 2,000 shares of the Series C Preferred Stock to MS Acquisition for an aggregate purchase price of $2.0 million in cash pursuant to the terms of a preferred stock purchase agreement. The proceeds from the issuance of the Series C Preferred Stock were used for general corporate purposes. SEASONALITY; FLUCTUATIONS IN QUARTERLY OPERATING RESULTS The Company has experienced and expects to continue to experience fluctuations in quarterly revenues and operating results as a result of seasonal patterns. The revenues of the Company have been stronger in the third and fourth calendar quarters as a result of the historically strong sales associated with consumer consumption during the holiday season and weaker in the first quarter following such season. Results of operations for any particular quarter therefore are not necessarily indicative of the results of operations for any future period. Future seasonal and quarterly fluctuations could have a material adverse effect on the Company's business, financial condition and results of operations. INFLATION The Company does not believe that its revenues have been materially affected by inflation. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Company is exposed to market risk related to its credit facility as discussed in the accompanying Notes to the Consolidated Financial Statements. The interest on the credit facility is subject to fluctuations in the market. A 1% increase in the interest rates applicable to the credit facility would result in a $0.5 million reduction of the Company's financial position, results of operations, and cash flows. The Company does not engage in trading market risk sensitive instruments and does not purchase as investments, as hedges, or for purposes "other than trading", instruments that are likely to expose 42 the Company to certain types of market risk, including interest rate, commodity price or equity price risk. The Company has not entered into any forward or futures contracts, purchased any options or entered into any swaps. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The Financial Statements and Financial Statement Schedule filed as a part of this Annual Report on Form 10-K are listed on the Index to Consolidated Financial Statements and Consolidated Financial Statement Schedule on page F-1. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE As reported in the Company's Current Report on Form 8-K dated December 1, 2000 (the "December 2000 8-K"), following the consummation of the Merger, the Company continued its engagement of its certifying accountant, Arthur Andersen, LLP ("Andersen"). The Company then determined that it was in its best interests to change auditors. Therefore, effective December 1, 2000, Andersen was dismissed and PricewaterhouseCoopers LLP ("PwC") replaced Andersen as the ongoing certifying accountant for the Company. This change was recommended and approved by the Company's Audit Committee-(as defined in Item 10) and Board of Directors effective as of December 1, 2000. The reports of Andersen for the past two fiscal years contained no adverse opinion or disclaimer of opinion and were not qualified or modified as to uncertainty, audit scope, or accounting principles. During the Company's two most recent fiscal years, subsequent interim periods preceding the date of the December 2000 8-K, or since there were no: (i) Disagreements between the Company and Andersen on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure which, if not resolved to the satisfaction of Andersen, would have caused them to make reference to the subject matter of the disagreement or disagreements in their reports on the financial statements for such years. (ii) Reportable events involving Andersen that would have required disclosure under Item 304(a)(1)(v) of Regulation S-K. The Company requested, and Andersen furnished, a letter addressed to the SEC (as of December 1, 2000) stating that Andersen agreed with the above statements that pertain to Andersen. A copy of such letter, dated December 1, 2000, was filed as Exhibit 16.1 to the December 2000 8-K. 43 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY The following table sets forth information concerning the Company's directors and executive officers and the offices held by each on March 15, 2001:
NAME AGE POSITION - ---- -------- ----------------------------------------------- Ronald D. Pedersen......................... 61 Chairman of the Board, Director Gerald R. Leonard.......................... 54 President, Chief Executive Officer and Director Timothy M. Byrd............................ 46 Chief Financial Officer and Director John P. Rochon............................. 49 Director Nick G. Bouras............................. 48 Director Michael J. Merriman(1)..................... 44 Director James A. Schlindwein(1)(2)................. 72 Director Glenn F. Gillam............................ 49 Chief Operations Officer Jay DiNucci................................ 37 Vice President, Controller Shannon Tvrdik............................. 32 Treasurer Bruce A. Butler............................ 52 President of Brand Development
- ------------------------ (1) Audit Committee Member (2) Compensation Committee Member RONALD D. PEDERSEN has served as Chairman of the Board of Directors of the Company since the consummation of the Merger. His current term as Director expires in 2002. He formerly served as President, Chief Executive Officer and as a Director of RMSI. Mr. Pedersen has also served during 1999 as President, Chief Executive Officer of MSSC and currently serves as a director of MSSC. Mr. Pedersen has been in the food industry for over 30 years, including three years with Anderson Clayton foods and seven years with Colgate Palmolive. He is past Chairman and current member of the Board of the Association of Sales and Marketing Companies. Mr. Pedersen is the father-in-law of Mr. DiNucci. GERALD R. LEONARD has been Chief Executive Officer and President of the Company since the consummation of the Combination. His current term as Director expires in 2002. Effective March 2, 2000, Mr. Leonard became President and Chief Executive Officer of MSSC. Mr. Leonard was previously Chief Executive Officer of Merkert from September 1994 until December 1998, and served as the President of Merkert from September 1994 until June 1998. From May 1992 to September 1994, Mr. Leonard served Merkert as President of the Food Enterprises, New England Division, and has been with Merkert in various executive capacities since 1983. TIMOTHY M. BYRD has been a Director of the Company since the consummation of the Merger. He has served as the Chief Financial Officer of the Company from September 1999 to August 2000, and from December 2000 to present. His current term as Director expires in 2001. He was previously the Chief Administrative Officer, Assistant Treasurer and a Director of RMSI. Mr. Byrd served as a Director of RMSI from 1997 until the Merger. Mr. Byrd has also served as Chief Administrative Officer of MSSC since September 1998 and as a Director of MSSC since 1996. Since 1990, Mr. Byrd has been the Chief Financial Officer of Mary Kay Holding Corporation as well as the Chief Financial Officer of Richmont Corporation. From 1980 to 1990, Mr. Byrd served in various accounting and 44 finance positions at Mary Kay, Inc., including Chief Financial Officer, Vice President and Controller. He is also a member of the Office of the Chairman of Mary Kay Holding Corporation. JOHN P. ROCHON has been a Director of the Company since the consummation of the Merger. His current term as Director expires in 2003. He was previously the Chairman of the Board of Directors of RMSI and served in that capacity and as a Director from 1997 until the closing of the Merger. Mr. Rochon has served on the Board of Directors of MSSC since 1996 and is currently Chairman of the Board of Directors of Richmont Corporation, a merchant banking, investment holding and trading company, and Chief Executive Officer of Mary Kay Holding Corporation, a role he has had since 1991. Formerly, Mr. Rochon held several executive positions with Mary Kay, Inc., including Vice Chairman, Chief Financial Officer, Controller and Director of Manufacturing. Mr. Rochon currently serves as Chairman of the Board of Directors of Nu-kote Holding, Inc. and Director of Royal Appliance Mfg. Co. NICK G. BOURAS has been a Director of the Company since consummation of the Merger. He formerly served as Vice President, Assistant Secretary and as a Director of RMSI. His current term as Director expires in 2002. He is Vice President, Assistant Secretary and a Director of MSSC. Mr. Bouras has been President and Chief Executive Officer of Richmont Corporation since 1989. Prior to his role at RMSI, Mr. Bouras was Vice President, Investments of Mary Kay, Inc. Mr. Bouras also spent several years as a tax accountant with Ernst & Young and Touche Ross & Company. MICHAEL J. MERRIMAN has served as Director of the Company since the consummation of the Merger. His current term as Director expires in 2003. He has also served as a Director of Royal Appliance Mfg. Co., the parent company of Dirt Devil, Inc., since 1993. Mr. Merriman was appointed Chief Executive Officer of Royal Appliance in July 1995 and President and Chief Operating Officer in January 1995. From May 1992 until his appointment as President, he had been Vice President--Finance, Treasurer and Secretary of Royal Appliance. RCPI owns approximately 21.6% of the common stock of Royal Appliance. JAMES A. SCHLINDWEIN has been a Director of the Company since the consummation of the Combination. His current term as Director expires in 2001. Prior to his retirement in September 1994, Mr. Schlindwein served as Executive Vice President and a director of Sysco Corporation, a national institutional food service distributor, where he had served since 1980. He is also a director of EMMPAK Foods, Inc., Alaska Seafood International, Agra Quest, Inc., Chilay Corporation, Thompson's Pet Pasta Products, Inc. and Egg Innovations, Inc. GLENN F. GILLAM recently became Chief Operating Officer for the Company. Previously, Mr. Gillam served as the President of Broker Operations and as the President of the Northern Division. He joined Merkert in 1983 and has held numerous sales and management positions. From 1994 until 1998, Mr. Gillam served as President of the Food Enterprises, New England Division, of Merkert. JAY DINUCCI has served as Vice President and Corporate Controller of the Company since the Merger, and held such title with RMSI from January 1996. From 1993 to 1995, Mr. DiNucci served in various financial, accounting and administrative positions at MSSC. Mr. DiNucci has been in the food industry for over eight years. Prior to joining MSSC, he worked in various financial and accounting positions with Fortune 500, international and start-up companies. Mr. DiNucci is the son-in-law of Mr. Pedersen. SHANNON F. TVRDIK has served as Treasurer of the Company since March 13, 2000. She served as the Controller for the Northern Division and Director of Financial Planning and Acquisitions within the Company since the Merger, and held such title with RMSI from August 1997. From 1994 to 1997, Ms. Tvrdik served in various finance positions at Richmont Corporation. She is also a member of the Office of the Chairman of Mary Kay Holding Corporation. Ms. Tvrdik has over nine years of financial 45 experience and prior to joining Richmont Corporation, she worked in the special services consulting group of Ernst & Young LLP. BRUCE A. BUTLER has served as President of Brand Development since January 2000. He formerly served as Chief Operating Officer of the Company from the consummation of the Merger until his appointment as President of Brand Development. He was formerly the Executive Vice President and a Director of RMSI. He served as a Director of RMSI from 1997 until the Merger. Mr. Butler has held several positions since 1991, including Vice President-Branch Manager, Tampa Operations and Director of Confection, and currently serves as MSSC's Executive Vice President. Mr. Butler is responsible for all operating units in MSSC and is a member of the Board of Directors of MSSC. Mr. Butler began his career with MSSC when his former employer, the Trigg Company, Inc., was acquired by MSSC in 1991. Prior to that time, Mr. Butler held management positions with the Kroger Company and Inman. BOARD OF DIRECTORS The business is managed under the direction of the Board of Directors and is fixed by resolution duly adopted from time to time by the Board of Directors. The Company's Second Amended and Restated Certificate of Incorporation provided that the Board shall be divided into two classes until a third class is elected at the annual meeting of stockholders in 2000. From and after such date, the Board shall be divided into three classes, as nearly equal as possible. The Class I directors who were elected at the annual meeting of stockholders in 1999 were elected to hold office for a term expiring at the annual meeting of stockholders held in 2001. The initial Class II directors were elected to hold office for a term expiring at the annual meeting of stockholders to be held in 2000. Under the direction of the Board, it was approved instead that all Class I, II and III directors would be elected at the annual meeting of stockholders meeting in 2000. The Company's stockholders thereupon elected three successor Class I directors, three successor Class II directors and two Class III directors. The successor Class I directors who were elected are to serve as Class I directors until the 2001 annual meeting of stockholders and until their successors are duly elected and qualified. These individuals are Timothy M. Byrd, Ronald D. Pedersen and James A. Schlindwein. Also, the successor Class II directors who were elected are to serve as Class II directors until the 2002 annual meeting of stockholders and until their successors are duly elected and qualified. These individuals are Nick G. Bouras, Gerald R. Leonard and Edward P. Grace, III. Mr. Grace resigned subsequent to the 2000 annual meeting of the stockholders. In addition, two Class III directors were elected as Class III directors until the 2003 annual meeting of stockholders and until their successors are duly elected and qualified. These individuals are John P. Rochon and Michael J. Merriman. MEETINGS OF BOARD OF DIRECTORS AND COMMITTEES The Board of Directors has established an audit committee (the "Audit Committee") and a compensation committee (the "Compensation Committee"). The Audit Committee, currently consists of Messrs. Merriman and Schlindwein, after the resignation of Mr. Grace from the Board. The Audit Committee generally meets on a quarterly basis, but met two times in 2000. The Audit Committee recommends to the Board of Directors the firm to be appointed as independent accountants to audit financial statements and to perform services related to the audit. The Audit Committee also reviews the scope and results of the audit with the independent accountants, reviews with management and the independent accountants the Company's year-end operating results and the accounting issues facing the Company, considers the adequacy of the internal accounting procedures and considers the effect of such procedures on the accountants' independence. The Compensation Committee, which consists of Mr. Schlindwein as its sole member, met once during 2000. The Compensation Committee reviews and recommends to the Board of Directors the compensation arrangements for all directors and officers, approves such arrangements for other senior level employees and administers and takes such other action as may be required in connection with 46 certain compensation and incentive plans of the Company. The Compensation Committee also determines the number of options to be granted or shares of Common Stock to be issued to eligible persons under the Company's stock option plans and prescribes the terms and provisions of each grant made under the stock option plans. In addition, the Compensation Committee interprets the stock option plans and grants thereunder, and establishes, amends and revokes rules and regulations for administration of such plans. All Directors are reimbursed for travel expenses incurred in attending meetings of the Board of Directors and its committees. COMPLIANCE WITH SECTION 16(a) OF THE SECURITIES EXCHANGE ACT OF 1934 Section 16(a) of the Exchange Act, and related rules of the Securities and Exchange Commission (the "SEC") require the Company's directors and executive officers and persons who own more than 10% of a registered class of the Company's equity securities to file with the SEC initial reports of ownership and reports of changes in ownership of Common Stock and other equity securities of the Company. Related rules of the SEC also require such persons to furnish the Company with copies of all reports filed pursuant to Section 16(a). It appears that the following individuals did not timely file their reports on Form 3 during the fiscal year ended December 31, 2000: Ms. Shannon Tvrdik (March 2000) and Mr. Jay DiNucci (March 2000). It further appears that during the fiscal year ended December 31, 2000, the following individuals or, where applicable, entities did not timely file statements of changes in beneficial ownership on Form 4: MS Acquisition (5 statements), Mr. Timothy Byrd (6 statements), Mr. Nick Bouras (6 statements), Mr. John Rochon (6 statements), Mr. Gerald Leonard (1 statement), Mr. James Schlindwein (1 statement) and Mr. Glenn Gillam (1 statement). ITEM 11. EXECUTIVE COMPENSATION The following sections of this Annual Report on Form 10-K set forth and discuss the compensation paid or awarded to the Company's Chief Executive Officer and the four most highly compensated executive officers. Since the Company paid no compensation prior to the consummation of the Offering on December 18, 1998, most of the compensation reported for 1998 for those former Merkert and Rogers employees was paid by Merkert and Rogers prior to the Combination on December 18, 1998. Certain former RMSI employees did not serve as executive officers until after the consummation of the Merger on August 18, 1999. Since the Company paid no compensation prior to such date for these individuals, 1998 compensation is not listed below and most of the compensation reported for 1999 in these sections was paid by RMSI. 2000 compensation is listed for all of the employees referenced below. SUMMARY COMPENSATION TABLE The following table shows the compensation paid to the following executive officers for the last three years. For former Merkert and Rogers employees, the 1998 results include amounts paid prior to 47 December 18, 1998. For former RMSI employees, the 1999 results include amounts paid prior to August 18, 1999:
ANNUAL COMPENSATION LONG TERM COMPENSATION -------------------- ------------------------------ AWARDS SECURITIES UNDERLYING PAYOUTS OPTIONS/SARS ALL OTHER NAME AND PRINCIPAL POSITION YEAR SALARY($) BONUS($) OTHER (#) COMPENSATION($) - --------------------------- -------- --------- -------- ---------- ------------ --------------- Gerald R. Leonard(**) ......... 1998 $370,820 -- $11,208(C) 40,000 -- Chief Executive Officer 1999 $433,910 -- $ 6,958(B) 60,000 $10,267(1) 2000 $446,250 $ 50,000 $12,877(A) 100,000 $ 5,250(1) Bruce A. Butler(*) ............ 1999 $343,076 $145,000 -- -- $69,805(2) President of Brand 2000 $350,000 $104,166 -- -- $29,214(1) Development Glenn F. Gillam(**) ........... 1998 $268,333 $100,000 $10,927(C) 100,000 -- Chief Operations Officer 1999 $304,166 $100,000 $ 3,378(C) -- $ 5,542(1) 2000 $339,634 $100,000 -- 150,000 $ 5,250(1) Darrell Delong(**) ............ 1998 $250,000 $ 50,000 -- 3,000 -- Division President 1999 $294,618 -- -- -- -- 2000 $251,766 $ 75,000 $ 1,500(A) 3,000 $ 5,298(1) Ronald D. Pedersen(***) ....... 1999 $441,000 -- -- -- $ 4,800(1) Director 2000 $441,000 -- -- -- $ 5,250(1)
- ------------------------ (*) Former RMSI employee who did not serve as an executive officer until the Merger. (**) Former Merkert or Rogers employees who commenced employment with the Company upon the Combination. (***) Former Chief Executive Officer and Chairman of the Board of RMSI until the Merger. Currently, serves as a Director of the Company. (A) Amount represents car allowance paid by the Company on behalf of the executive officer. (B) Amount represents country club dues paid by the Company on behalf of the executive officer. (C) Amount represents the total paid by the Company in connection with the executive officer's car allowance, excess group life insurance and other miscellaneous perquisites. (1) Consists of amounts contributed by the Company to the Company's 401(k) Plan in which all employees of the Company are eligible to participate. (2) Consists of amounts contributed by the Company to the Company's 401(k) Plan in which all employees of the Company are eligible to participate and $65,005 and $23,964 for moving and relocation expenses in each of 1999 and 2000, respectively. 48 OPTION GRANTS IN LAST FISCAL YEAR The following table sets forth the options granted in 2000 to the named executive officers:
NUMBER OF PERCENT OF POTENTIAL REALIZABLE VALUE AT SHARES TOTAL OPTIONS EXERCISE ASSUMED RATES OF SHARE PRICE UNDERLYING GRANTED TO OR BASE APPRECIATION FOR OPTION TERM OPTIONS EMPLOYEES IN PRICE EXPIRATION -------------------------------- NAME GRANTED FISCAL YEAR ($/SHARE) DATE 0% 5% 10% - ---- ---------- ------------- --------- ---------- -------- -------- ---------- Gerald R. Leonard...... 100,000 8.21% $3.00 (1) $ 75,000 $310,835 $ 672,653 Bruce A. Butler........ -- -- -- -- -- -- -- Glenn F. Gillam........ 150,000 12.32% $3.00 (2) $112,500 $466,253 $1,008,980 Darrell Delong......... 3,000 0.24% $3.00 Dec. 2008 $ 2,250 $ 9,325 $ 20,179 Ronald D. Pedersen..... -- -- -- -- -- -- --
- ------------------------ (1) 40,000 options expire in 12/08 and 60,000 options expire in 8/09 (2) 25,000 options expire in 12/08, 75,000 options expire in 11/08 and 50,000 options expire in 1/10 AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR END OPTION VALUES The following table sets forth information concerning the number and value of unexercised options to purchase shares of the Common Stock held by each of the named executive officers who held such options at December 31, 2000. None of the named persons exercised any stock options during 2000.
NUMBER OF SECURITIES UNDERLYING UNEXERCISED VALUE OF UNEXERCISED OPTIONS AT IN-THE-MONEY OPTIONS AT SHARES DECEMBER 31, 2000 DECEMBER 31, 2000(1) ACQUIRED ON VALUE --------------------------- --------------------------- NAME EXERCISE REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE - ---- ----------- -------- ----------- ------------- ----------- ------------- Gerald R. Leonard........... -- -- 33,333 66,667 -- -- Glenn F. Gillam............. -- -- 49,999 100,001 -- -- Darrell DeLong.............. -- -- 1,000 2,000 -- -- Bruce A. Butler............. -- -- -- -- -- -- Ronald D. Pedersen.......... -- -- -- -- -- --
- ------------------------ (1) Since the exercise price of the options for these individuals (i.e. $3.00) was greater than the closing sale price of the Common Stock, as reported by Nasdaq, on December 31, 2000 ($0.25), none of the options were "in-the-money". See Note 16 of the Company's Notes to Consolidated Financial Statements for more information related to the Company's options. COMPENSATION OF DIRECTORS Employee Directors do not receive compensation for their services on the Board of Directors or committees thereof. Each Director who is not an employee of the Company (an "Independent Director") receives annual compensation in the amount of $25,000. Under the Company's stock option plan, each Independent Director elected following the Offering is entitled to receive an initial option to purchase approximately 20,000 shares of Common Stock upon his or her election to the Board of Directors, and each Independent Director who is serving as a Director on the fifth business day after each annual meeting of stockholders will receive an option to purchase approximately 5,000 additional shares of Common Stock. The Independent Director who serves as chairman of the Audit Committee may receive options to purchase an additional 5,000 shares of Common Stock on the fifth business day after each annual 49 meeting of stockholders. All options granted to Independent Directors under the Company's stock option plan vest 50% upon the first anniversary of the grant date and the remaining 50% vests in equal annual installments over the number of years remaining in each Director's term as of the first anniversary of the grant date. Such options terminate upon the tenth anniversary of the grant date and have an exercise price per share equal to the fair market value of the Common Stock on the grant date. EMPLOYMENT AND NONCOMPETE AGREEMENTS WITH EXECUTIVE OFFICERS On April 27, 1999, Mr. Leonard entered into an employment and noncompetition agreement with the Company providing for a base salary, which is currently $455,000. The term of employment is for five years, and will continue from month to month thereafter unless terminated by either party. If the Company terminates Mr. Leonard's employment without cause, Mr. Leonard is entitled to receive his then current base salary until expiration of the initial term or the extension period. Mr. Leonard would also receive a continuation of group health and automobile benefits during such time period. Pursuant to the agreement, Mr. Leonard is subject to noncompetition and nonsolicitation provisions for one year after the termination of his employment. In conjunction with a previous employment and noncompetition agreement by and between the Company and Mr. Leonard (the "First Leonard Employment Agreement"), Mr. Leonard executed a promissory note in favor of the Company for $1,500,000 (the "Leonard Note"). Pursuant to the terms of the Leonard Note, Mr. Leonard purchased 300 shares of Common Stock, which stock was pledged to the Company as security, pursuant to the terms of a stock pledge agreement between the Company and Leonard (the "Leonard Pledge Agreement"). On July 7, 1998 and January 11, 1999, the Company released 60 and 121,817 (after giving effect to the share recapitalization in connection with the Company's initial public offering) shares of Common Stock, respectively, from the pledge. On April 27, 1999, under the terms of the current employment agreement (see above for more detail on this agreement), the Leonard Note became due and payable on April 8, 2004 and certain shares of the Common Stock were released from the pledge such that shares having a fair market value of $1,500,000 (as of January 11, 1999) would remain subject to the pledge. After giving effect to the releases and share recapitalization, 98,361 shares of Common Stock were pledged pursuant to the Leonard Pledge Agreement (the "Leonard Pledged Shares"). The Company has now deemed it is in its best interests to no longer issue promissory notes and require a pledge of the Company's Common Stock as security. Rather, the Company now achieves the same economic benefits for its employees through the issuance of employee stock options to purchase shares of Common Stock at a stated exercise price. To make the Leonard Note, Leonard Pledge Agreement, Leonard Pledged Shares and related provisions of the First Leonard Employment Agreement consistent with the Company's current practice, Mr. Leonard surrendered any and all rights and obligations he had under the Leonard Note, Leonard Pledge Agreement, and Leonard Pledged Shares in exchange for issuance of employee stock options pursuant to which Leonard will have an option to purchase 98,361 shares of Common Stock at an aggregate exercise price of $1,500,000, or $15.25 per share all in accordance with the Exchange Agreement entered into on February 12, 2001, by and between the Company and Mr. Leonard (the "Exhchange Agreement"). On April 2, 1996, Mr. Pedersen entered into an employment agreement with MSSC providing for a base salary, which was in the amount of $441,000. On January 8, 2001, the Company and Mr. Pedersen entered into an agreement to modify the employment agreement. According to the modification, Mr. Pedersen shall be paid an annual salary of $18,000, plus a discretionary bonus at the Company's option. His initial employment agreement will otherwise remain in effect. According to his original agreement, if the Company terminates Mr. Pedersen's employment, Mr. Pedersen is entitled to receive his then current base salary for a period of two years after termination. Also, Mr. Pedersen is subject to noncompetition provisions for a period of two years following his termination. The Company and 50 Mr. Pedersen also amended his deferred compensation plan in the agreement reached on January 8, 2001. Pursuant to the agreement, the Company will commence distribution of Mr. Pedersen's deferred compensation plan that provides the payment of up to $2,750,000. Distribution of the payments commenced in January 2001 and will continue over a period of 120 consecutive months. On December 18, 1998, Mr. Gillam entered into an employment and noncompetition agreement with the Company providing for an initial base salary of $300,000, subject to periodic increases. The term of employment was initially for a period of three years, and was to continue from month to month thereafter unless terminated by either party. If the Company terminates employment without cause, Mr. Gillam is entitled to receive his then current salary until expiration of the initial term or the extension period. Mr. Gillam would also receive a continuation of group and health and automobile benefits during such time period. Pursuant to the agreement, Mr. Gillam is subject to noncompetition and nonsolicitation provisions for one year after the termination of his employment. In January 2001, the Company and Mr. Gillam entered into an amendment to his agreement. Under the terms of the amendment, the term of his agreement was extended three years from the date of the amendment, his county clubs dues would be reimbursed by the Company, and he received a $25,000 bonus. COMPENSATION COMMITTEE AND INSIDER PARTICIPATION In 2000, James A. Schlindwein served as the sole member of the Compensation Committee of the Company. He is an outside Independent Director and is not a current or former officer or employee of the Company or any of its affiliates. 51 STOCKHOLDER RETURN PERFORMANCE GRAPH The following graph compares, during the period commencing December 15, 1998 (the first day that the Common Stock was traded on Nasdaq) and ending for each of the periods December 31, 1998, December 31, 1999 and December 29, 2000, respectively, the cumulative total stockholder return on the Common Stock, based on the market price of the Common Stock and assuming reinvestment of dividends, with the total return assuming a $100 investment in the Common Stock, the Wilshire Small Cap Index and the S&P Small Cap Distributor (Food and Health) Index. The comparisons in this graph are historical and are not intended to forecast or be indicative of possible future performance of the Common Stock. EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
MSC WILSHIRE SMALL CAP INDEX S&P SMALL CAP DISTRIBUTOR Value at 12/15/98 (1) $100.00 $100.00 $100.00 Value at 12/31 /98 $100.00 $106.92 $107.63 Value at 12/31/99 $25.00 $147.88 $84.28 Value at 12/29/00 $1.65 $139.24 $163.61
WILSHIRE SMALL CAP S&P SMALL CAP MSC INDEX DISTRIBUTOR -------- --------- ------------- Value at 12/15/98(1)....................... $100.00 $100.00 $100.00 Value at 12/31/98.......................... $100.00 $106.92 $107.63 Value at 12/31/99.......................... $ 25.00 $147.88 $ 84.28 Value at 12/29/00.......................... $ 1.65 $139.24 $163.61
- ------------------------ (1) The beginning measurement point is established by the market close on December 15, 1998, the first day on which the Common Stock was traded on Nasdaq. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The following table sets forth certain information with respect to the beneficial ownership of the Company's Common Stock as of March 28, 2001, by (i) each person known by the Company to beneficially own five percent or more of the outstanding shares of the Common Stock, (ii) each director and named executive officers of the Company, and (iii) all directors and executive officers of the Company as a group. As of March 28, 2001, the Company had 25,986,421 shares of Common Stock outstanding, including 25,919,280 shares of unrestricted Common Stock and 67,141 shares of restricted Common Stock outstanding. Except as otherwise indicated, the Company believes that the beneficial owners of the Common Stock listed below, based on information furnished by such owners, have sole 52 investment and voting power with respect to such shares, subject to community property laws where applicable.
SHARES PERCENTAGE BENEFICIALLY OF SHARES NAME OF BENEFICIAL OWNER(1) OWNED(2) BENEFICIALLY OWNED - --------------------------- ------------ ------------------ MS Acquisition Ltd.(3) ................................ 37,546,533(4) 81.9% 17855 N. Dallas Parkway, Suite 200 Dallas, Texas 75287 James L. Monroe ....................................... 17,707,490(5) 68.1% 8 Cedar Street, Suite 54A Woburn, Massachusetts 01801 John P. Rochon(3)...................................... 37,609,032(4)and(17) 82.0% Timothy M. Byrd(3)..................................... 37,571,810(4)and(18) 81.9% Nick G. Bouras(3)...................................... 37,571,810(4)and(19) 81.9% Gerald R. Leonard...................................... 259,334(6) 1.0% James A. Schlindwein................................... 388,283(7) 1.5% Glenn F. Gillam........................................ 53,924(8) * Michael J. Merriman.................................... 4,000(9) * Bruce A. Butler........................................ 17,707,490(10) 68.1% Gary R. Guffey......................................... 17,707,490(11) 68.1% Jeffrey A. Watt........................................ 0(12) * Ronald D. Pedersen..................................... 17,707,490(13) 68.1% Goldman Sachs Asset Management(15) .................... 0(14) * One New York Plaza New York, NY 10004 Jay DiNucci............................................ 6,666(15) * Shannon Tvrdik......................................... 3,205(16) * All directors and executive officers as a group 38,374,998 83.3% (11 persons).........................................
- ------------------------ * less than 1% (1) Unless otherwise indicated, the mailing address for each stockholder and director is c/o the Company, 17855 North Dallas Parkway, Suite 200, Dallas, Texas 75287. (2) Beneficial ownership information is determined in accordance with the rules of the SEC. In computing the number of shares of Common Stock beneficially owned by a person, shares of Common Stock subject to options held by that person that are currently exercisable or exercisable within 60 days of this report are deemed outstanding, but are not deemed to be outstanding for the purpose of computing the percentage ownership of any other person. (3) Beneficial ownership information is based on a report on Schedule 13D/A filed with the SEC, dated April 2, 2001, and the Transfer Agent's Security Owner List Report as of March 28, 2001. Because of their direct or indirect ownership interests in, or control of, MS Acquisition, each of MSSC Acquisition Corporation, RCPI, J.R. Investments Corp., John P. Rochon, Timothy M. Byrd and Nick G. Bouras may be deemed to beneficially own such shares. (4) Beneficial ownership information is based on a report on Schedule 13D/A filed with the SEC, dated April 2, 2001 and the Transfer Agent's Security Owner List Report as of March 28, 2001. Such shares include 15,835,031 shares of the Company's Common Stock directly owned by MS Acquisition, which may be the subject of the Pre-Merger Voting Agreement, referenced below. Such shares also include 19,965 shares of Series B Preferred Stock, which are directly owned by MS Acquisition and convertible into 13,674,657 shares of Common Stock, and 9,000 shares of Series C Preferred Stock, which are directly owned by MS Acquisition and convertible into 53 6,164,386 shares of Common Stock. In addition, such shares include 1,872,459 shares of Common Stock that are the subject of that certain Pre-Merger Voting Agreement, dated as of August 18, 1999 by and among MS Acquisition, Ronald D. Pedersen, Bruce A. Butler, Gary R. Guffey, Jeffrey A. Watt, JLM Management Company, LLC and Monroe & Company, LLC (the "Pre-Merger Voting Agreement"). Each of MS Acquisition, MSSC Acquisition Corporation, RCPI, J.R. Investments Corp., John P. Rochon, Nick G. Bouras and Timothy M. Byrd disclaims beneficial ownership of these shares. (5) Beneficial ownership information is based on the Transfer Agent's Security Owner List Report as of March 28, 2001. Such shares include (i) 10,000 shares of Common Stock that are held by JLM Management Company, LLC, of which Mr. Monroe is a sole manager, and (ii) 17,697,490 shares of Common Stock which may be the subject of the Pre-Merger Voting Agreement. Mr. Monroe disclaims beneficial ownership of such 17,697,490 shares of Common Stock. See footnote (4). (6) Beneficial ownership information is based on the Transfer Agent's Security Owner List Report as of March 28, 2001 and the optionee statements. Such shares include (i) 4,275 shares of Common Stock held by Merkert Enterprises, Inc. Employee Stock Ownership Trust and allocable to Mr. Leonard, (ii) 176,966 shares of Common Stock directly owned by Mr. Leonard, (iii) 44,760 shares of restricted Common Stock, directly owned by Mr. Leonard, which shares are convertible into shares of Common Stock in certain circumstances, and (iv) options to purchase 33,333 shares of the Company's Common Stock exercisable within 60 days of March 28, 2001. Such shares do not include an aggregate of 55,044 shares held by The Corrie E. Leonard Irrevocable Trust and The Kevin M. Leonard Irrevocable Trust, for which Mr. Leonard serves as a trustee. Mr. Leonard disclaims beneficial ownership of the shares of Common Stock held by such trusts. (7) Beneficial ownership information is based on the Transfer Agent's Security Owner List Report as of March 28, 2001 and the optionee statements. Such shares include 291,283 shares held by the Merkert Enterprises, Inc. Employee Stock Ownership Trust, of which Mr. Schlindwein is the trustee. Mr. Schlindwein disclaims beneficial ownership of these shares. Such shares also include (i) options to purchase 12,500 shares of the Company's Common Stock exercisable within 60 days of March 28, 2001, (ii) 57,500 shares of Common Stock directly owned by Mr. Schlindwein, (iii) 22,000 shares held in JSS Management Company, for which Mr. Schlindwein serves as a trustee, and (iv) 5,000 shares of Common Stock owned by Suzanne Schlindwein, Mr. Schlindwein's spouse, and for which Mr. Schlindwein disclaims beneficial ownership. (8) Beneficial ownership information is based on the Transfer Agent's Security Owner List Report as of March 28, 2001 and on the optionee statements. Such shares include (i) 3,925 shares held by the Merkert Enterprises, Inc. Employee Stock Ownership Trust and allocable to Mr. Gillam, and (ii) options to purchase 49,999 shares of the Company's Common Stock exercisable within 60 days of March 28, 2001. (9) Beneficial ownership information is based on the Transfer Agent's Security Owner List Report as of March 28, 2001 and the optionee statements. Such shares include options to purchase 4,000 shares of the Company's Common Stock exercisable within 60 days of March 28, 2001. (10) Beneficial ownership information is based on the Transfer Agent's Security Owner List Report as of March 28, 2001. Such shares include (i) 301,721 shares of Common Stock that Mr. Butler directly owns, (ii) and 17,405,769 shares of Common Stock that may be the subject of the Pre-Merger Voting Agreement. Mr. Butler disclaims beneficial ownership of such 17,405,769 shares of Common Stock. See footnote (4). (11) Beneficial ownership information is based on the Transfer Agent's Security Owner List Report as of March 28, 2001. Such shares include (i) 301,721 shares of Common Stock that Mr. Guffey directly owns, (ii) and 17,405,769 shares of Common Stock that may be the subject of the 54 Pre-Merger Voting Agreement. Mr. Guffey disclaims beneficial ownership of such 17,405,769 shares of Common Stock. See footnote (4). (12) Beneficial ownership information is based on the Transfer Agent's Security Owner List Report as of March 28, 2001. (13) Beneficial ownership information is based on the Transfer Agent's Security Owner List Report as of March 28, 2001. Such shares include (i) 959,017 shares of Common Stock that Mr. Pedersen directly owns, (ii) 300,000 shares of Common Stock held by R.D. Pedersen Ltd., and (iii) 16,448,473 shares of Common Stock that may be the subject of the Pre-Merger Voting Agreement. Mr. Pedersen disclaims beneficial ownership of such 16,448,473 shares of Common Stock. See footnote (4). (14) Beneficial ownership information is based on the Schedule 13G/A filed by Goldman Sachs Asset Management, a separate operating division of Goldman, Sachs & Co., on February 13, 2001. (15) Beneficial ownership information is based on the Transfer Agent's Security Owner List Report as of March 28, 2001 and the optionee statements. Such shares include options to purchase 6,666 shares of the Company's Common Stock exercisable by Mr. DiNucci within 60 days of March 28, 2001. (16) Beneficial ownership information is based on the Transfer Agent's Security Owner List Report as of March 28, 2001 and the optionee statements. Such shares include options to purchase 3,205 shares of the Company's Common Stock exercisable by Ms. Tvrdik within 60 days of March 28, 2001. (17) According to the optionee statements, such shares also include options to purchase 62,499 shares of the Company's Common Stock exercisable by Mr. Rochon within 60 days of March 28, 2001. (18) According to the optionee statements, such shares also include options to purchase 25,277 shares of the Company's Common Stock exercisable by Mr. Byrd within 60 days of March 28, 2001. (19) According to the optionee statements, such shares also include options to purchase 25,277 shares of the Company's Common Stock exercisable by Mr. Bouras within 60 days of March 28, 2001. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS MONROE SETTLEMENT AGREEMENT As reported in the Company's Current Report on Form 8-K dated July 6, 2000 and in the Company's Quarterly Report on Form 10-Q for the period ended June 30, 2000, the Company entered into a Settlement Agreement and Mutual Release (the "Settlement Agreement") with Monroe & Company, LLC ("Monroe LLC") on June 13, 2000. Monroe LLC filed an action entitled MONROE & COMPANY, LLC V. MARKETING SPECIALISTS CORPORATION, Civil Action No. 99-4745, in Middlesex Superior Court, Commonwealth of Massachusetts, asserting, among other things, that it was due advisory fees arising out of letter agreements. The terms of the Settlement Agreement remain confidential. LEONARD STOCK NOTE On April 27, 1999, Mr. Leonard entered into an employment and noncompetition agreement with the Company providing for a base salary, which is currently $455,000. The term of employment is for five years, and will continue from month to month thereafter unless terminated by either party. If the Company terminates Mr. Leonard's employment without cause, Mr. Leonard is entitled to receive his then current base salary until expiration of the initial term or the extension period. Mr. Leonard would also receive a continuation of group health and automobile benefits during such time period. Pursuant to the agreement, Mr. Leonard is subject to noncompetition and nonsolicitation provisions for one year after the termination of his employment. 55 In conjunction with the First Leonard Employment Agreement, Mr. Leonard executed the Leonard Note. Pursuant to the terms of the Leonard Note, Mr. Leonard purchased 300 shares of Common Stock, which stock was pledged to the Company as security, pursuant to the terms of the Leonard Pledge Agreement. On July 7, 1998 and January 11, 1999, the Company released 60 and 121,817 (after giving effect to the share recapitalization in connection with the Company's initial public offering) shares of Common Stock, respectively, from the pledge. On April 27, 1999, under the terms of the current employment agreement (see above for more detail on this agreement), the Leonard Note became due and payable on April 8, 2004 and certain shares of the Common Stock were released from the pledge such that shares having a fair market value of $1,500,000 (as of January 11, 1999) would remain subject to the pledge. After giving effect to the releases and share recapitalization, the Leonard Pledged Shares were pledged pursuant to the Leonard Pledge Agreement. The Company has now deemed it is in its best interests that it should no longer issue promissory notes requiring a pledge of the Company's Common Stock as security. Rather, the Company now achieves the same economic benefits for its employees through the issuance of employee stock options to purchase shares of Common Stock at a stated exercise price. To make the Leonard Note, Leonard Pledge Agreement, Leonard Pledged Shares and related provisions of the First Leonard Employment Agreement consistent with the Company's current practice, Mr Leonard surrendered any and all rights and obligations he had under the Leonard Note, Leonard Pledge Agreement, and Leonard Pledged Shares in exchange for issuance of employee stock options pursuant to which Leonard will have an option to purchase 98,361 shares of Common Stock at an aggregate exercise price of $1,500,000, or $15.25 per share all in accordance with the Exchange Agreement. PROPERTY SALES On February 17, 2000, the Company sold certain improved real properties containing general office and warehouse space situated in Arizona and California to RCPI Office Properties, LLC, a company affiliated with MS Acquisition, the principal stockholder of the Company, for approximately $7.3 million before related costs. In May 2000, RCPI Office Properties LLC sold the Arizona and California properties to unrelated third parties. PARTICIPATION IN AMENDED CREDIT AGREEMENT On November 17, 2000, the Company became party to an amendment to the Amended Credit Agreement. The Amended Credit Agreement provides for an increase in the maximum amount available under the New Revolver from $50.0 million to a maximum commitment of $60.0 million, which is comprised of a $41.0 million Tranche A Note and a subordinated $19.0 million Tranche B Note. MS Acquisition, the Company's principal stockholder, purchased a 100% participation interest in the Tranche B Note. The Company must fulfill all payment obligations under the Amended Revolver before making any interest payments on the Tranche B Note. The Tranche B Note bears interest at a rate equal to the Base Rate plus 2.25%. The Tranche B Note and any accrued and unpaid interest will mature on March 30, 2002. The fixed commitment under the Tranche B Note is not subject to the Borrowing Base. OTHER NOTES PAYABLE INVOLVING RELATED PARTIES The Company has a mortgage note with RCPI, an affiliate of MS Acquisition, that is secured by certain land, a building and fixtures. It bears interest at 8.5% with monthly payments of approximately $34,000 (including interest) and a balloon payment of approximately $3.6 million due in 2001. The balance outstanding under this mortgage was approximately $3.6 million as of December 31, 2000. 56 On November 9, 2000, the Company issued a $2.5 million promissory note to MS Acquisition. This promissory note is subordinate to the senior debt of the Company. The proceeds were used for general corporate purposes. The $2.5 million promissory note bears interest at a rate equal to the sum of an interest margin of 2.75% plus the applicable prime rate on the last business day of the quarter for which interest is payable. Interest is payable quarterly in arrears, commencing on December 31, 2000, and will continue through the maturity date. The $2.5 million promissory note and any unpaid and accrued interest will be payable on November 9, 2002, or on demand, under specified conditions. The Company is not permitted to repay the principal and unpaid and accrued interest on the $2.5 million promissory note on demand if the Company's borrowing base 30 days prior to a payment date is not at least $10.0 million, or 25% of the sum of the Company's payroll for the last four consecutive pay periods, whichever is greater. In the first quarter of 2001, the $2.5 million promissory note was converted into redeemable convertible preferred stock. See Note 20 of the Notes to Consolidated Financial Statements for additional information. The Company had other notes payable to former employees of various acquired entities of approximately $8.5 million as of December 31, 2000. The total estimated payments have been discounted at rates ranging from 8% to 10%. The amounts due under the acquisition agreements are unsecured and extend through 2011. These amounts are payable in either monthly or quarterly installments. COMMON STOCK TRANSACTIONS On January 7, 2000, the Company issued 1,577,287 shares of Common Stock to MS Acquisition for an aggregate purchase price of $5.0 million ($3.17 per share) pursuant to the terms of a stock purchase agreement. On March 30, 2000, MS Acquisition purchased an additional 4,000,000 shares of Common Stock for an aggregate purchase price of $10.0 million ($2.50 per share) pursuant to the terms of a stock purchase agreement. The Company used the funds as an additional source of capital for operations and additional short-term and long-term liquidity. The offering, sale and issuance of these shares was exempt from registration under the Securities Act of 1933, as amended, pursuant to a private offering exemption under Section 4(2) promulgated thereunder. As indicated in Note 14, the 9,500 outstanding shares of the Preferred Stock held by MS Acquisition were converted into 6,234,414 shares of Common Stock. REDEEMABLE CONVERTIBLE PREFERRED STOCK TRANSACTIONS UNDESIGNATED PREFERRED STOCK As of December 31, 2000, there were no shares of undesignated preferred stock outstanding. Holders of undesignated preferred stock would have priority over the holders of Common Stock with respect to dividends and to other distributions, including the distribution of assets upon liquidation. The Board of Directors has the authority, without stockholder authorization, to issue shares of undesignated preferred stock in one or more series and to fix the terms, limitations, relative rights and preferences and variations. PREFERRED STOCK On June 23, 2000, the Board of Directors of the Company authorized and provided for the issuance of up to 10,000 shares of the Preferred Stock. Each share of the Preferred Stock is convertible into that number of shares of Common Stock equal to the result obtained by dividing the stated value of the Preferred Stock by the conversion price in effect at the conversion date. All dividends on issued shares of the Preferred Stock are cumulative, whether or not the dividends are earned or declared, on a daily basis from the issue date and payable quarterly in arrears on each 57 dividend payment date. Even if not declared, all unpaid dividends will compound quarterly at an annual dividend rate equal to 8.0%, or the applicable dividend rate. On June 22, 2010, the Company will be obligated to redeem, to the extent of funds legally available, all outstanding shares of the Preferred Stock at a redemption price equal to 100% of the liquidation preference per share. The liquidation preference per share will be equal to the greater of $1,000 per share or the amount that the equivalent number of shares of Common Stock (based on the conversion rate applicable at the liquidation date) would be entitled to receive, plus any unpaid dividends. On June 23, 2000, the Company issued 5,000 shares of Preferred Stock to MS Acquisition for an aggregate purchase price of $5.0 million pursuant to the terms of a preferred stock purchase agreement. On August 8, 2000, the Company issued 4,500 additional shares of Preferred Stock to MS Acquisition for an aggregate purchase price of $4.5 million pursuant to the terms of a preferred stock purchase agreement. On July 27, 2000, the Company received early termination of the waiting period in connection with its Hart-Scott-Rodino Antitrust Improvement Act filing thereafter allowing the conversion of the Preferred Stock to Common Stock of the Company. On August 21, 2000, the 9,500 shares of Preferred Stock, previously issued to MS Acquisition, were converted into 6,234,414 shares of Common Stock. Per the terms of the preferred stock purchase agreements, each share of Preferred Stock was converted into approximately 656.25 shares of Common Stock (i.e., the Preferred Stock's stated value of $1,000 divided by the conversion price of $1.5238). On August 17, 2000, the Company issued a $4.75 million promissory note to MS Acquisition. On August 30, 2000, the Company issued a $5.0 million promissory note to MS Acquisition. The Registered Notes and the New Senior Credit Facility are senior to these notes. The Company used the proceeds from both promissory notes for general corporate purposes. SERIES B PREFERRED STOCK On November 1, 2000, the Company's Board of Directors authorized the issuance of up to 20,000 shares of the Series B Preferred Stock. The Series B Preferred Stock has a stated value of $1,000 per share. The Series B Preferred Stock is of equal class with the Preferred Stock previously authorized and any future designated series of preferred stock unless specifically noted in future preferred stock agreements. The Series B Preferred Stock has the same characteristics (i.e., dividend terms, conversion features) as the Preferred Stock. On November 1, 2000, the Company issued 12,397 shares of the Series B Preferred Stock to MS Acquisition for an aggregate purchase price of approximately $12.4 million pursuant to the terms of a preferred stock purchase agreement. The purchase price consisted of the cancellation of the $4.75 million promissory note and the $5.0 million promissory note, including all accrued and unpaid interest, plus an additional cash payment of approximately $2.5 million to the Company. The incremental proceeds from the issuance of the Series B Preferred Stock were used for general corporate purposes. On November 9, 2000, the Company issued a $2.5 million promissory note to MS Acquisition. This promissory note is subordinate to the senior debt of the Company. The proceeds were used for general corporate purposes. The $2.5 million promissory note bears interest at a rate equal to the sum of an interest margin of 2.75% plus the applicable prime rate on the last business day of the quarter for which interest is payable. Interest is payable quarterly in arrears, commencing on December 31, 2000, and will continue through the maturity date. The $2.5 million promissory note and any unpaid and accrued interest will be payable on November 9, 2002, or on demand, under specified conditions. The Company is not permitted to repay the principal and unpaid and accrued interest on the $2.5 million promissory note on demand if the Company's borrowing base 30 days prior to a payment date is not at 58 least $10.0 million, or 25% of the sum of the Company's payroll for the last four consecutive pay periods, whichever is greater. In the first quarter of 2001, the $2.5 million promissory note was converted into redeemable convertible preferred stock. See Note 20 of the Notes to Consolidated Financial Statements for additional information. On January 26, 2001, the Company issued 7,568 shares of the Series B Preferred Stock to MS Acquisition for an aggregate purchase price of approximately $7.6 million pursuant to the terms of a preferred stock purchase agreement. The purchase price consisted of the cancellation of the $2.5 million promissory note, including all accrued and unpaid interest, plus an additional cash payment of approximately $5.0 million to the Company. A total of $4.0 million of the cash proceeds were received in December 2000 and appeared as a component of Other Liabilities in the consolidated balance sheet as of December 31, 2000. The incremental proceeds from the issuance of the Series B Preferred Stock were used for general corporate purposes. SERIES C PREFERRED STOCK On March 26, 2001, the Company's Board of Directors authorized the issuance of up to 20,000 shares of the Series C Preferred Stock. The Series C Preferred Stock has a stated value of $1,000 per share. The Series C Preferred Stock is of equal class with the Preferred Stock and the Series B Preferred Stock previously authorized and any future designated series of preferred stock unless specifically noted in future preferred stock agreements. Each share of the Series C Preferred Stock is convertible into that number of shares of Common Stock equal to the result obtained by dividing the stated value of the Series C Preferred Stock by the conversion price in effect at the conversion date. All dividends on issued shares of the Series C Preferred Stock are cumulative, whether or not the dividends are earned or declared, on a daily basis from the issue date and payable quarterly in arrears on each dividend payment date. Even if not declared, all unpaid dividends will compound quarterly at an annual dividend rate equal to 8.0%, or the applicable dividend rate. On June 22, 2010, the Company will be obligated to redeem, to the extent of funds legally available, all outstanding shares of the Series C Preferred Stock at a redemption price equal to 100% of the liquidation preference per share. The liquidation preference per share will be equal to the greater of $1,000 per share or the amount that the equivalent number of shares of Common Stock (based on the conversion rate applicable at the liquidation date) would be entitled to receive, plus any unpaid dividends. On March 28, 2001, the Company issued 9,000 shares of the Series C Preferred Stock to MS Acquisition for an aggregate purchase price of $9.0 million in cash pursuant to the terms of a preferred stock purchase agreement. The proceeds from the issuance of the Series C Preferred Stock were used for general corporate purposes. On March 30, 2001, the Company issued 2,000 shares of the Series C Preferred Stock to MS Acquisition for an aggregate purchase price of $2.0 million in cash pursuant to the terms of a preferred stock purchase agreement. The proceeds from the issuance of the Series C Preferred Stock were used for general corporate purposes. COMPANY POLICY The Company's policy is that any future transactions with directors, officers, employees or affiliates of the Company be approved in advance by a majority of the Company's Board of Directors, including a majority of the disinterested members of the Board of Directors, and be on terms no less favorable to the Company than the Company could obtain from unaffiliated parties. 59 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULE AND REPORTS ON FORM 8-K (a) Documents filed as a part of this Annual Report on Form 10-K. 1. Financial Statements. The Financial Statements filed as a part of this Annual Report on Form 10-K are listed on the Index to Consolidated Financial Statements and Consolidated Financial Statement Schedule on page F-1. 2. Exhibits. The Exhibits filed as a part of this Form 10-K are listed on the Index to Exhibits immediately following the Company's Financial Statements. (b) Reports on Form 8-K. 1. Current report on Form 8-K dated November 22, 2000, reporting third quarter financials and the completion of negotiations to amend certain provisions of the Company's senior credit facility. 2. Current report on Form 8-K dated December 1, 2000, reporting a change in the Company's certifying accountant from Arthur Andersen, L.L.P. to PricewaterhouseCoopers L.L.P. 3. Current report on Form 8-K dated February 7, 2001, reporting the expansion of the Company's services to include a new Retail Drug Division. 4. Current report on Form 8-K dated March 2, 2001 reporting that the Company is adding a new In-Source Specialists Division, which will serve as an arm of its existing Retail Division. 5. Current report on Form 8-K dated March 13, 2001, reporting that effective the opening of business on March 14, 2001, the Company's stock will no longer be listed on the Nasdaq SmallCap Market, but will be eligible for trading on the OTC Bulletin Board instead. 60 INDEX TO EXHIBITS The following is a list of exhibits filed or incorporated by reference as a part of this Annual Report on Form 10-K:
EXHIBIT NO. DESCRIPTION - ----------- ------------------------------------------------------------ 2.1 Amendment No. 1, dated July 8, 1999, to the Agreement and Plan of Merger, dated as of April 28, 1999, between Merkert American Corporation and Richmont Marketing Specialists Inc., attached as Annex A to Merkert American Corporation's Proxy Statement dated July 12, 1999 and incorporated herein by reference. 2.2 Agreement and Plan of Merger, dated as of April 28, 1999, between Merkert American Corporation and Richmont Marketing Specialists Inc., incorporated by reference to Exhibit 2.1 to Merkert American Corporation's Current Report on Form 8-K dated April 30, 1999. 3.1 Second Amended and Restated Certificate of Incorporation of Merkert American Corporation, incorporated by reference to Exhibit 3.1 to Merkert American Corporation's Amendment No. 7 to Registration Statement on Form S-1 filed December 15, 1998 (No. 333-53419). 3.2 Certificate of Amendment to the Second Amended and Restated Certificate of Incorporation of Merkert American Corporation, dated August 18, 1999, incorporated by reference to Exhibit 4.2 of the Company's Current Report on Form 8-K dated September 2, 1999. 3.3 Amended and Restated By-laws of Merkert American Corporation, incorporated by reference to Exhibit 3.2 of the Company's Annual Report on Form 10-K dated March 31, 1999. 4.1 Indenture, dated as of December 19, 1997, among Richmont Marketing Specialists Inc. and Texas Commerce Bank National Association, as Trustee, incorporated by reference to Exhibit 4.1 of Richmont Marketing Specialists Inc. Registration Statement on Form S-4 dated June 16, 1999. 4.2 First Supplemental Indenture, dated as of August 18, 1999, among the Company, Merkert American Co., Inc., United Brokerage Company, Buckeye Sales & Marketing, Inc., Marketing Specialists Sales Company, Bromar, Inc., Brokerage Services, Inc., Atlas Marketing Company, Inc., Meatmaster Brokerage, Inc., and Chase Bank of Texas, National Association, incorporated by reference to Exhibit 4.3 to the Quarterly Report on Form 10-Q dated September 30, 1999. 4.3 Second Supplemental Indenture, dated as of October 13, 1999, among the Company, its subsidiaries and Chase Bank of Texas, National Association, incorporated by reference to Exhibit 4.3 to the Company's Annual Report on Form 10-K filed April 15, 2000. 4.4 Third Supplemental Indenture, dated as of March 30, 2000, among the Company, certain Guarantor Subsidiaries and Chase Bank of Texas, National Association, incorporated by reference to Exhibit 4.4 to the Company's Annual Report on Form 10-K filed April 15, 2000. 4.5 Certificate of Merger, dated August 18, 1999, incorporated by reference to Exhibit 4.1 to the Company's Current Report on Form 8-K dated September 2, 1999.
61
EXHIBIT NO. DESCRIPTION - ----------- ------------------------------------------------------------ 4.6 Specimen Certificate for shares of Common Stock of the Company, incorporated by reference to Exhibit 4.1 to the Company's Amendment No. 6 to Registration Statement on Form S-1 dated November 19, 1998 (No. 333-53419). 10.1 Warrant Agreement, dated as of March 30, 2000, among the Company and First Union Investors, Inc., incorporated by reference to Exhibit 10.3 to the Company's Annual Report on Form 10-K filed April 15, 2000. 10.2 Registration Rights Agreement, dated as of March 30, 2000, by and between the Company and First Union Investors, Inc., incorporated by reference to Exhibit 10.4 to the Company's Annual Report on Form 10-K filed April 15, 2000. 10.3 Stockholders Agreement, dated as of March 30, 2000, by and among the Company, First Union Investors, Inc., MS Acquisition Limited and Richmont Capital Partners I, L.P., incorporated by reference to Exhibit 10.5 to the Company's Annual Report on Form 10-K filed April 15, 2000. 10.4 Credit Agreement, dated March 30, 2000, among the Company and certain of its subsidiaries, as Borrowers, Chase Manhattan Bank, as agent, and the banks named therein, incorporated by reference to Exhibit 10.6 to the Company's Annual Report on Form 10-K filed April 15, 2000. 10.5 Second Amended and Restated Credit Agreement, dated March 30, 2000, among First Union National Bank, for itself and as agent, the other Lenders described therein and the Company and the Guarantors described therein, incorporated by reference to Exhibit 10.7 to the Company's Annual Report on Form 10-K filed April 15, 2000. 10.6 Second Amended and Restated Security Agreement, dated March 30, 2000, by and among the Company and its subsidiaries, in favor of First Union National Bank, as agent, incorporated by reference to Exhibit 10.8 to the Company's Annual Report on Form 10-K filed April 15, 2000. 10.7 Second Amended and Restated Pledge Agreement, dated March 30, 2000, by and among the Company and its subsidiaries, in favor of First Union National Bank, as agent, incorporated by reference to Exhibit 10.9 to the Company's Annual Report on Form 10-K filed April 15, 2000. 10.8 Second Amended and Restated Guaranty Agreement, dated March 30, 2000, by and among Marketing Specialists Sales Company, Bromar, Inc., and Paul Inman Associates, Inc., in favor of First Union National Bank, incorporated by reference to Exhibit 10.10 to the Company's Annual Report on Form 10-K filed April 15, 2000. 10.9 First Amendment to Credit Agreement, dated April 13, 2000, among the Company, Marketing Specialists Sales Company, Paul Inman Associates, Inc., Bromar, Inc. and The Chase Manhattan Bank, incorporated by reference to Exhibit 10.2 to the Company's Quarterly Report on Form 10-Q filed August 14, 2000. 10.10 Joinder Agreement, dated April 14, 2000, by The Sales Force Companies, Inc., the Company, Marketing Specialists Sales Company, Paul Inman Associates, Inc., Bromar, Inc. and The Chase Manhattan Bank, incorporated by reference to Exhibit 10.3 to the Company's Quarterly Report on Form 10-Q filed August 14, 2000.
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EXHIBIT NO. DESCRIPTION - ----------- ------------------------------------------------------------ 10.11 Intercreditor Agreement, dated March 30, 2000, between and among the Company, Paul Inman Associates, Inc., Marketing Specialists Sales Company, and Bromar, Inc., as Debtors, and The Chase Manhattan Bank and First Union National Bank, as Agents, incorporated by reference to Exhibit 10.4 to the Company's Quarterly Report on Form 10-Q filed August 14, 2000. 10.12 Guaranty Agreement, dated March 30, 2000, of Richmont Capital Partners I, L.P., incorporated by reference to Exhibit 10.5 to the Company's Quarterly Report on Form 10-Q filed August 14, 2000. 10.13 Security Agreement, dated March 30, 2000, by and among the Company, Marketing Specialists Sales Company, Paul Inman Associates, Inc., and Bromar, Inc., and The Chase Manhattan Bank, incorporated by reference to Exhibit 10.6 to the Company's Quarterly Report on Form 10-Q filed August 14, 2000. 10.14 Promissory Note, dated March 30, 2000, of the Company, Paul Inman Associates, Inc., Marketing Specialists Sales Company, and Bromar, Inc. issued to The Chase Manhattan Bank, incorporated by reference to Exhibit 10.7 to the Company's Quarterly Report on Form 10-Q filed August 14, 2000. 10.15 Promissory Note, dated April 14, 2000, of the Company, Paul Inman Associates, Inc., Marketing Specialists Sales Company, Bromar, Inc., and The Sales Force Companies, Inc. issued to The Chase Manhattan Bank, incorporated by reference to Exhibit 10.8 to the Company's Quarterly Report on Form 10-Q filed August 14, 2000. 10.16 Promissory Note, dated March 30, 2000, of the Company, Paul Inman Associates, Inc., Marketing Specialists Sales Company, and Bromar, Inc. issued to Credit Suisse/First Boston, incorporated by reference to Exhibit 10.9 to the Company's Quarterly Report on Form 10-Q filed August 14, 2000. 10.17 Promissory Note, dated April 14, 2000, of the Company, Paul Inman Associates, Inc., Marketing Specialists Sales Company, Bromar, Inc., and The Sales Force Companies, Inc. issued to Credit Suisse/First Boston, incorporated by reference to Exhibit 10.10 to the Company's Quarterly Report on Form 10-Q filed August 14, 2000. 10.18 Promissory Note, dated March 30, 2000, of the Company, Paul Inman Associates, Inc., Marketing Specialists Sales Company, and Bromar, Inc. issued to Fleet Capital Bank, incorporated by reference to Exhibit 10.11 to the Company's Quarterly Report on Form 10-Q filed August 14, 2000. 10.19 Promissory Note, dated April 14, 2000, of the Company, Paul Inman Associates, Inc., Marketing Specialists Sales Company, Bromar, Inc., and The Sales Force Companies, Inc. issued to Fleet Capital Bank, incorporated by reference to Exhibit 10.12 to the Company's Quarterly Report on Form 10-Q filed August 14, 2000. 10.20 Second Amended and Restated Term Note, as amended and restated March 30, 2000, of the Company issued to First Union National Bank, incorporated by reference to Exhibit 10.14 to the Company's Quarterly Report on Form 10-Q filed August 14, 2000. 10.21 Promissory Note, dated August 17, 2000, of the Company issued to Richmont Capital Partners I, L.P. in the principal amount of $4,750,000, incorporated by reference to Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q filed November 21, 2000.
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EXHIBIT NO. DESCRIPTION - ----------- ------------------------------------------------------------ 10.22 Promissory Note, dated August 30, 2000, of the Company issued to Richmont Capital Partners I, L.P. in the principal amount of $4,999,999, incorporated by reference to Exhibit 10.2 to the Company's Quarterly Report on Form 10-Q filed November 21, 2000. 10.23 Deposit Security Agreement, dated as of October 5, 2000, by and between MS Acquisition Limited, a Delaware limited partnership, and The Chase Manhattan Bank, as agent for the Banks (as defined therein) in connection with the pledge by MS Acquisition Limited of cash and cash equivalents to increase the Company's borrowing availability, incorporated by reference to Exhibit 10.3 to the Company's Quarterly Report on Form 10-Q filed November 21, 2000. 10.24 Promissory Note, dated November 8, 2000, of the Company issued to Richmont Capital Partners I, L.P. in the principal amount of $2,500,000, incorporated by reference to Exhibit 10.5 to the Company's Quarterly Report on Form 10-Q filed November 21, 2000. 10.25 First Amendment to Credit Agreement, dated November 17, 2000, by and among the Company, certain lenders described therein, and First Union National Bank, as Agent and as sole Lender, incorporated by reference to Exhibit 10.6 to the Company's Quarterly Report on Form 10-Q filed November 21, 2000. 10.26 Amended and Restated Intercreditor Agreement, dated November 17, 2000, between and among the Company, certain of its subsidiaries, The Chase Manhattan Bank, as agent for the Revolver Lenders (as defined therein), First Union National Bank, as agent for the Term Lenders (as defined therein), MS Acquisition Limited, and Richmont Capital Partners I, L.P., incorporated by reference to Exhibit 10.7 to the Company's Quarterly Report on Form 10-Q filed November 21, 2000. 10.27 Second Amendment to Credit Agreement dated November 17, 2000, among the Company, Marketing Specialists Sales Company, Paul Inman Associates, Inc., and The Sales Force Companies, Inc., certain banks or other lending institutions named therein, and The Chase Manhattan Bank, individually as a bank and as agent for itself and the other banks or lending institutions named therein, incorporated by reference to Exhibit 10.8 to the Company's Quarterly Report on Form 10-Q filed November 21, 2000. 10.28 Master Participation Agreement, dated November 17, 2000, by and among MS Acquisition Limited and various banks or other lending institutions named therein, incorporated by reference to Exhibit 10.9 to the Company's Quarterly Report on Form 10-Q filed November 21, 2000. 10.29 Common Stock Purchase Agreement, dated as of January 7, 2000, by and between the Company and MS Acquisition Limited, incorporated by reference to Exhibit 10.1 to the Company's Annual Report on Form 10-K filed April 15, 2000. 10.30 Common Stock Purchase Agreement, dated as of March 30, 2000, by and between the Company and MS Acquisition Limited, incorporated by reference to Exhibit 10.2 to the Company's Annual Report on Form 10-K filed April 15, 2000. 10.31 Stock Purchase Agreement, dated March 2, 2000, by and among Marketing Specialists Sales Company, as Buyer, The Sales Force Companies, Inc., as the Seller, and the Stockholders of the Company, incorporated by reference to Exhibit 10.11 to the Company's Annual Report on Form 10-K filed April 15, 2000.
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EXHIBIT NO. DESCRIPTION - ----------- ------------------------------------------------------------ 10.32 Asset Purchase Agreement, dated as of November 18, 1999, by and among Marketing Specialists Sales Company and Johnson-Lieber, Inc., as amended by that certain First Amendment to Asset Purchase Agreement dated as of January 27, 2000, incorporated by reference to Exhibit 10.16 to the Company's Annual Report on Form 10-K filed April 15, 2000. 10.33 Stock Purchase Agreement, dated July 7, 1999, by and among Merkert American Corporation, as Buyer, Buckeye Sales & Marketing, Inc., d/b/a The Sell Group-Cleveland, as the Company, JF & JF Limited Partnership, as the Stockholder of the Company, and the Primary Parties, incorporated by reference to Exhibit 10.17 to the Company's Annual Report on Form 10-K filed April 15, 2000. 10.34 Stock Purchase Agreement, dated as of May 14, 1999, by and among Richmont Marketing Specialists Inc., Paul Inman Associates, Inc. and the Shareholders of Paul Inman Associates, Inc., as amended by that certain First Amendment to Stock Purchase Agreement dated as of August 13, 1999 and that certain Second Amendment to Stock Purchase Agreement dated as of August 18, 1999, incorporated by reference to Exhibit 10.18 to the Company's Annual Report on Form 10-K filed April 15, 2000. 10.35 Stock Purchase Agreement, dated April 26, 1999, by and among Merkert American Corporation, as Buyer, United Brokerage Company d/b/a The Sell Group-Grand Rapids, Toledo, Detroit, Indianapolis and Fort Wayne, as the Company, and the Stockholders of the Company, incorporated by reference to Exhibit 10.19 to the Company's Annual Report on Form 10-K filed April 15, 2000. 10.36 Stock Purchase Agreement, dated January 20, 1999, among Merkert American Corporation, Sell, Inc. and the stockholders of Sell, Inc., incorporated by reference to Exhibit 10.36 to the Company's Annual Report on Form 10-K dated March 31, 1999. 10.37 Stock Purchase Agreement, closing date April 14, 2000, by and among Marketing Specialists Sales Company, as Buyer, The Sales Force Companies, Inc., as the Seller, and the Stockholders of the Company, incorporated by reference to Exhibit 10.18 to the Company's Quarterly Report on Form 10-Q filed August 14, 2000. 10.38 Management Agreement, dated as of June 30, 2000, by and among Marketing Specialists Sales Company, Mancini & Groesbeck, Inc., Mancini & Groesbeck, Inc. Montana, Tad Mancini and Chris Mancini, incorporated by reference to Exhibit 10.19 to the Company's Quarterly Report on Form 10-Q filed August 14, 2000. 10.39 Preferred Stock Purchase Agreement, dated June 23, 2000, by and between the Company and MS Acquisition Limited in connection with the sale by the Company of 5,000 shares of convertible paid-in-kind preferred stock, incorporated by reference to Exhibit 10.20 to the Company's Quarterly Report on Form 10-Q filed August 14, 2000. 10.40 Preferred Stock Purchase Agreement, dated August 8, 2000, by and between the Company and MS Acquisition Limited in connection with the sale by the Company of 4,500 shares of convertible paid-in-kind preferred stock, incorporated by reference to Exhibit 10.21 to the Company's Quarterly Report on Form 10-Q filed August 14, 2000. 10.41 Preferred Stock Purchase Agreement, dated November 1, 2000, by and between the Company and MS Acquisition Limited in connection with the issuance by the Company of 12,397 shares of Series B Convertible Paid-In-Kind Preferred Stock, incorporated by reference to Exhibit 10.4 to the Company's Quarterly Report on Form 10-Q filed November 21, 2000.
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EXHIBIT NO. DESCRIPTION - ----------- ------------------------------------------------------------ 10.42 Registration Rights Agreement, dated as of August 18, 1999, by and among Merkert American Corporation, Gerald R. Leonard, Monroe & Company, LLC, JLM Management, LLC, Robert Doehler, Joseph T. Casey, Edward P. Grace, III, James Philopkosky, Sandra Monroe, Sean P. Spaulding and Jo-Anne Collins incorporated by reference to Exhibit 10.8 to the Quarterly Report on Form 10-Q dated November 15, 1999. 10.43 Post-Merger Voting Agreement, dated as of August 18, 1999, by and among MS Acquisition Limited, Ronald D. Pedersen, Bruce A. Butler, Gary R. Guffey, Jeffery A. Watt, Monroe & Company, LLC and JLM Management Company, LLC incorporated by reference to Exhibit 10.9 to the Quarterly Report on Form 10-Q dated November 15, 1999. 10.44 Advisory Agreement, dated as of August 18, 1999, by and among the Company, Monroe & Company, LLC and Richmont Capital Partners I, L.P. incorporated by reference to Exhibit 10.10 to the Quarterly Report on Form 10-Q dated November 15, 1999. 10.45* Asset Purchase and Sale Agreement for the acquisition of substantially all of the assets of the Dorann Foods, Merco Packaging, Merco Price Marking, and Merkert Laboratories Divisions of the Company and Marketing Specialists Sales Company by Woodland Partners, LLC, dated as of January 19, 2001. (filed herewith) 10.46* Memorandum of Agreement by and among the Company, William F. Lee on behalf of the former stockholders of The Sales Force Companies, Inc. ("Sales Force") other than the Employee Stock Ownership Trust established by Sales Force ("ESOT") and the ESOT dated December 28, 2000. (filed herewith) 10.47* Preferred Stock Purchase Agreement, dated January 26, 2001, by and between the Company and MS Acquisition Limited in connection with the sale by the Company of 7,568 shares of convertible paid-in-kind preferred stock. (filed herewith) 10.48* Preferred Stock Purchase Agreement, dated March 28, 2001, by and between the Company and MS Acquisition Limited in connection with the sale by the Company of 9,000 shares of convertible paid-in-kind preferred stock. (filed herewith) 10.49* Exchange Agreement, dated as of February 12, 2001, by and between the Company and Gerald R. Leonard. (filed herewith) 10.50 Contract of Sale of Improved Property, dated February 17, 2000, by and between Bromar, Inc. and RCPI Office Properties, LLC ("Arizona Property"), incorporated by reference to Exhibit 10.12 to the Company's Annual Report on Form 10-K filed April 15, 2000. 10.51 Lease, dated February 17, 2000, between RCPI Office Properties, LLC and Marketing Specialists Sales Company ("Arizona Property"), incorporated by reference to Exhibit 10.13 to the Company's Annual Report on Form 10-K filed April 15, 2000. 10.52 Contract of Sale of Improved Property, dated February 17, 2000, by and between Bromar, Inc. and RCPI Office Properties, LLC ("California Property"), incorporated by reference to Exhibit 10.14 to the Company's Annual Report on Form 10-K filed April 15, 2000. 10.53* Agreement for Purchase and Sale of Real Property, dated December 15, 2000, by and between Steve Farnic and Marketing Specialists Sales Company, for the sale of 4.851 acres in Mecklenberg, County, North Carolina. (filed herewith) 10.54* Lease, dated May 15, 2000, between LaSalle Company, LLC and Marketing Specialists Sales Company for the Arizona Property. (filed herewith)
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EXHIBIT NO. DESCRIPTION - ----------- ------------------------------------------------------------ 10.55* Lease, dated May 2, 2000, between IPT Partners, LLC and Marketing Specialists Sales Company for the California Property. (filed herewith) 10.56 Employment Agreement, dated April 2, 1996, between Marketing Specialists Sales Company and Ronald D. Pedersen, incorporated by reference to Exhibit 10.8 of Richmont Marketing Specialists Inc. Registration Statement on Form S-4 dated June 16, 1999. 10.57 Employment Agreement, dated April 2, 1996, between Marketing Specialists Sales Company and Bruce A. Butler, incorporated by reference to Exhibit 10.9 of Richmont Marketing Specialists Inc. Registration Statement on Form S-4 dated June 16, 1999. 10.58* Amendment to Employment Agreement, dated January 8, 2001, between the Company and Ronald D. Pedersen. (filed herewith) 10.59* First Amendment to Employment and Noncompetition Agreement, dated February 9, 2001, between the Company and Glenn F. Gillam. (filed herewith) 10.60 First Amendment to Amended and Restated Merkert American Corporation 1998 Stock Option and Incentive Plan, incorporated by reference to Exhibit 10.5 to the Company's Current Report on Form 8-K dated September 2, 1999. 10.61 Amendment to the Company's 1998 Stock Option Plan, filed as Appendix A to the Company's Definitive Proxy Statement filed June 16, 2000. 10.62* Waiver and Third Amendment to Credit Agreement, dated as of March 30, 2001, among the Company, certain of its subsidiaries, the Agent (named therein) and the lenders parties thereto. (filed herewith) 10.63* Second Amendment to Credit Agreement, made as of April 19, 2001, by and among the Company and First Union National Bank, as Agent and sole Lender. (filed herewith) 21.1* Subsidiaries of the Company. 23* Consent of PricewaterhouseCoopers LLP. 24* Power of Attorney (included on signature page of this Form 10-K). 25* Consent of Arthur Andersen LLP.
- ------------------------ * Indicates that document is filed herewith. 67 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Exchange Act, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. MARKETING SPECIALISTS CORPORATION By: /s/ TIMOTHY M. BYRD ----------------------------------------- Timothy M. Byrd, CHIEF FINANCIAL OFFICER, DIRECTOR DATED: APRIL 23, 2001
Pursuant to the requirements of the Exchange Act, this report has been signed by the following persons on behalf of the Registrant and in the capacities indicated on APRIL 23, 2001. Each person whose signature appears below hereby constitutes and appoints Timothy M. Byrd his true and lawful attorney-in-fact, for him and in his name, place and stead, to sign any and all amendments to this report and to cause the same to be filed with the SEC, hereby granting to said attorney-in-fact full power and authority to do and perform all and every act and thing whatsoever requisite or desirable to be done in and about the premises as fully to all intents and purposes as the undersigned might or could do in person hereby ratifying and confirming all acts and things that said attorney-in-fact may do or cause to be done by virtue of these presents.
SIGNATURE TITLE --------- ----- /s/ RONALD D. PEDERSEN Chairman of the Board, Director ------------------------------------------- Ronald D. Pedersen /s/ GERALD R. LEONARD Chief Executive Officer, President, Director ------------------------------------------- (Principal Executive Officer) Gerald R. Leonard /s/ TIMOTHY M. BYRD Chief Financial Officer, Director ------------------------------------------- (Principal Financial Officer) Timothy M. Byrd /s/ JAY DINUCCI Vice President, Corporate Controller ------------------------------------------- (Principal Accounting Officer) Jay DiNucci /s/ NICK G. BOURAS Director ------------------------------------------- Nick G. Bouras /s/ MICHAEL J. MERRIMAN Director ------------------------------------------- Michael J. Merriman /s/ JOHN P. ROCHON Director ------------------------------------------- John P. Rochon /s/ JAMES A. SCHLINDWEIN Director ------------------------------------------- James A. Schlindwein
68 ITEM 14A. INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE -------- CONSOLIDATED FINANCIAL STATEMENTS: MARKETING SPECIALISTS CORPORATION AND SUBSIDIARIES: Report of Independent Accountants......................... F-2 Report of Independent Accountants......................... F-2A Consolidated Balance Sheets............................... F-3 Consolidated Statements of Operations..................... F-4 Consolidated Statements of Stockholders' Equity........... F-5 Consolidated Statements of Cash Flows..................... F-6 Notes to Consolidated Financial Statements................ F-8
F-1 REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors and Shareholders of Marketing Specialists Corporation and Subsidiaries: In our opinion, the consolidated financial statements listed in the index appearing under Item 14A on page F-1, present fairly, in all material respects, the financial position of Marketing Specialists Corporation and its Subsidiaries at December 31, 2000, and the results of their operations and their cash flows for the year ended December 31, 2000 in conformity with accounting principles generally accepted in the United States of America. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit of these statements in accordance with auditing standards generally accepted in the United States of America, which 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, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. The financial statements of the Company as of December 31, 1999 and 1998, and for the year ended December 31, 1999 and the period from inception (March 4, 1998) to December 31, 1998, were audited by other independent accountants, whose report dated March 3, 2000, except with respect to the matter discussed in Note 17, as to which the date was March 30, 2000, expressed an unqualified opinion on those statements. The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 2 to the consolidated financial statements, the Company has suffered recurring losses from operations and negative operating cash flows and had negative working capital at December 31, 2000. Additionally, during the year ended December 31, 2000, and the quarter ended March 31, 2001, the Company received cash infusions totaling approximately $43.3 million and $12.0 million, respectively, from a related party for working capital purposes. These matters raise substantial doubt about the Company's ability to continue as a going concern. Management's plans in regard to these matters are also described in Note 2. The financial statements do not include any adjustments that might result from the outcome of this uncertainty. PricewaterhouseCoopers LLP Dallas, Texas April 9, 2001, except as to the "Amended Senior Credit Facility Amendments" Section of Note 9, which is as of April 19, 2001 F-2 REPORT OF INDEPENDENT ACCOUNTANTS To Marketing Specialists Corporation and Subsidiaries: We have audited the accompanying consolidated balance sheets of Marketing Specialists Corporation and Subsidiaries (formerly Merkert American Corporation and Subsidiaries--the "Company") as of December 31, 1999 and 1998, and the related consolidated statements of operations, stockholders' equity and cash flows for the year ended December 31, 1999, and for the period from inception (March 4, 1998) through December 31, 1998. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States. 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. As discussed in Note 2, the Company incurred significant operating losses in 2000, and the auditors' report covering its 2000 financial statements expresses substantial doubt about its ability to continue as a going concern. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Marketing Specialists Corporation and Subsidiaries as of December 31, 1999 and 1998, and the results of their operations and their cash flows for the year ended December 31, 1999, and for the period from inception (March 4, 1998) through December 31, 1998, in conformity with accounting principles generally accepted in the United States. ARTHUR ANDERSEN LLP Boston, Massachusetts March 3, 2000 (except with respect to the matters discussed in Notes 2 and 9, as to which the dates are April 9, 2001, and March 30, 2000) F-2A MARKETING SPECIALISTS CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT SHARE AMOUNTS)
DECEMBER 31, DECEMBER 31, 2000 1999 ------------- ------------- ASSETS Current assets: Cash...................................................... $ 2,905 $ -- Restricted cash........................................... 1,676 1,200 Accounts receivable, less allowances for doubtful accounts of $9,510 and $5,730, respectively...................... 50,671 53,579 Inventories............................................... 196 1,221 Properties held for sale.................................. -- 7,312 Prepaid expenses and other current assets................. 609 2,895 --------- -------- Total current assets........................................ 56,057 66,207 Property, plant and equipment, net (Note 6)................. 25,119 35,204 Intangible assets, net (Note 7)............................. 52,133 338,540 Other assets................................................ 11,438 9,665 --------- -------- Total assets............................................ $ 144,747 $449,616 ========= ======== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Current portion of long-term obligations.................. $ 68,407 $ 48,055 Accounts payable.......................................... 17,160 8,518 Book overdrafts........................................... 2,905 5,878 Accrued expenses (Note 8)................................. 26,322 33,664 --------- -------- Total current liabilities................................... 114,794 96,115 Long-term obligations, net of current portion (Note 9): Long-term debt and notes payable.......................... 183,588 170,065 Acquisition related deferred compensation liabilities..... 30,636 35,921 Covenants not to compete.................................. 15,737 21,041 Obligations under capital lease........................... 562 804 --------- -------- Total long-term obligations, net of current portion......... 230,523 227,831 Other liabilities, net of current portion (Notes 14 and 18)....................................................... 8,054 7,428 Commitments and contingent liabilities (Note 13) Series B 8.0% redeemable convertible preferred stock, at stated value Authorized shares--20,000; issued and outstanding shares--12,397 and 0, respectively (Note 14)............ 12,397 -- Stockholders' equity (Note 15): Common stock, $0.01 par value; authorized shares--54,000,000 Issued shares--26,025,252 and 14,213,551, respectively Outstanding shares--25,985,545 and 14,173,844, respectively.......................................... 260 142 Additional paid-in capital................................ 169,346 143,080 Note for sale of common stock (Note 12)................... (1,500) (1,500) Accumulated deficit....................................... (388,680) (23,033) Treasury stock, at cost--39,707 shares.................... (447) (447) --------- -------- Total stockholders' equity (deficit)........................ (221,021) 118,242 --------- -------- Total liabilities and stockholders' equity.................. $ 144,747 $449,616 ========= ========
The accompanying notes are an integral part of these consolidated financial statements. F-3 MARKETING SPECIALISTS CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
YEAR ENDED DECEMBER 31, PERIOD FROM INCEPTION ------------------------ (MARCH 4, 1998) TO 2000 1999 DECEMBER 31, 1998 ----------- ---------- --------------------- Revenues, net..................................... $ 380,830 $ 246,612 $ 5,975 Expenses: Selling expenses................................ 287,255 174,109 4,293 General and administrative expenses............. 70,080 54,104 2,742 Depreciation.................................... 7,533 3,834 53 Amortization.................................... 19,572 9,670 126 Impairment loss (Note 7)........................ 306,953 -- -- Nonrecurring charges (Note 18).................. 19,451 -- -- Restructuring charges (Note 18)................. 2,520 13,290 -- ----------- ---------- ---------- Total operating expenses.......................... 713,364 255,007 7,214 ----------- ---------- ---------- Operating loss.................................... (332,534) (8,395) (1,239) Other income (expenses): Interest expense, net........................... (32,647) (13,854) (273) Other income (expense).......................... 351 247 (6) ----------- ---------- ---------- Loss before income tax expense and discontinued operations...................................... (364,830) (22,002) (1,518) Income tax expense................................ -- -- -- ----------- ---------- ---------- Loss from continuing operations................... (364,830) (22,002) (1,518) Discontinued operations (Note 20): Income from operations, net of tax.............. 1,298 435 52 Loss on disposal, net of tax.................... (1,936) -- -- ----------- ---------- ---------- Income (loss) from discontinued operations........ (638) 435 52 ----------- ---------- ---------- Net loss.......................................... $ (365,468) $ (21,567) $ (1,466) Cumulative preferred dividends not declared....... (179) -- -- ----------- ---------- ---------- Net loss available to common...................... $ (365,647) $ -- $ -- =========== ========== ========== Loss from continuing operations per share......... $ (17.38) $ (2.20) $ (0.81) =========== ========== ========== Loss from discontinued operations per share....... $ (0.03) $ 0.04 $ 0.03 =========== ========== ========== Net loss per share--basic and diluted............. $ (17.41) $ (2.16) $ (0.78) =========== ========== ========== Weighted average shares outstanding--basic and diluted......................................... 20,998,381 9,973,759 1,891,000 =========== ========== ==========
The accompanying notes are an integral part of these consolidated financial statements. F-4 MARKETING SPECIALISTS CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (IN THOUSANDS, EXCEPT SHARE AMOUNTS)
NOTE FOR COMMON STOCK, ADDITIONAL SALE OF TREASURY $0.01 PAR VALUE PAID-IN COMMON ACCUMULATED STOCK, SHARES AMOUNT CAPITAL STOCK DEFICIT AT COST TOTAL ---------- -------- ---------- --------- ----------- -------- --------- BALANCE, MARCH 4, 1998.......... -- $ -- $ -- $ -- $ -- $ -- $ -- Shares issued upon founding the organization.................. 1,376,111 14 (14) -- -- -- -- Shares issued to employee....... 275,222 2 2,769 (1,500) -- -- 1,271 Shares issued in connection with the Combination............... 1,166,667 12 14,863 -- -- -- 14,875 Shares issued in connection with the Offering, net of expenses...................... 4,400,000 44 57,871 -- -- -- 57,915 Net loss........................ -- -- -- -- (1,466) -- (1,466) ---------- ---- -------- ------- --------- ----- --------- BALANCE, DECEMBER 31, 1998...... 7,218,000 $ 72 $ 75,489 $(1,500) $ (1,466) $ -- $ 72,595 Shares issued upon exercise of over-allotment option......... 290,000 3 4,043 -- -- -- 4,046 Shares issued in connection with the Merger.................... 6,705,551 67 63,364 -- -- -- 63,431 Deferred compensation--option plans......................... -- -- 184 -- -- -- 184 Treasury stock purchases........ (39,707) -- -- -- -- (447) (447) Net loss........................ -- -- -- -- (21,567) -- (21,567) ---------- ---- -------- ------- --------- ----- --------- BALANCE, DECEMBER 31, 1999...... 14,173,844 $142 $143,080 $(1,500) $ (23,033) $(447) $ 118,242 Shares issued to MS Acquisition................... 5,577,287 56 14,944 -- -- -- 15,000 Conversion of preferred shares to common..................... 6,234,414 62 9,438 -- -- -- 9,500 Fair value of detachable stock warrants...................... -- -- 1,700 -- -- -- 1,700 Deferred compensation--option plans......................... -- -- 184 -- -- -- 184 Net loss........................ -- -- -- -- (365,468) -- (365,468) Cumulative preferred dividends not declared.................. -- -- -- -- (179) -- (179) ---------- ---- -------- ------- --------- ----- --------- BALANCE, DECEMBER 31, 2000...... 25,985,545 $260 $169,346 $(1,500) $(388,680) $(447) $(221,021) ========== ==== ======== ======= ========= ===== =========
The accompanying notes are an integral part of these consolidated financial statements. F-5 MARKETING SPECIALISTS CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS)
INCEPTION YEAR ENDED DECEMBER 31, (MARCH 4, 1998) TO 2000 1999 DECEMBER 31, 1998 ----------- ---------- ------------------- CASH FLOWS FROM OPERATING ACTIVITIES: Net loss.............................................. $(365,468) $(21,567) $(1,466) Adjustments to reconcile net loss to net cash provided by (used in) operating activities-- Depreciation.......................................... 7,533 3,834 52 Amortization.......................................... 19,572 9,670 127 Impairment loss....................................... 306,953 -- -- Nonrecurring charges related to trade receivables..... 19,451 -- -- Restructuring charge related to leases and personnel........................................... 2,520 13,290 -- Expense related to capitalized financing costs........ 3,813 210 -- Disposal loss related to sale of Buy Sell............. 1,936 -- -- Other................................................. 1,365 720 -- Changes in operating assets and liabilities-- Restricted cash..................................... 275 1,587 (28) Accounts receivable................................. (22,996) 8,531 950 Income taxes receivable............................. -- 2,452 -- Inventories......................................... (271) 402 (277) Prepaid expenses and other current assets........... 2,068 (32) -- Other assets........................................ 356 2,031 -- Accounts payable.................................... 12,100 (7,507) (3,141) Accrued expenses.................................... (15,183) (17,344) 1,700 --------- -------- ------- Net cash provided by (used in) operating activities..... (25,976) (3,723) (2,083) CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of property and equipment................... (1,489) (1,583) -- Proceeds from the disposal of fixed assets............ 8,628 -- -- Cash paid, net of cash assumed, in purchase of businesses.......................................... (11,981) (13,711) (96,147) --------- -------- ------- Net cash used in investing activities................... (4,842) (15,294) (96,147) CASH FLOWS FROM FINANCING ACTIVITIES: Book overdrafts....................................... (2,973) 5,878 -- Restricted cash....................................... -- 9,015 (9,000) Net borrowings under credit facility.................. 28,567 20,300 50,000 Proceeds from issuance of note to MS Acquisition...... 2,500 -- -- Principal payments on notes payable and other long-term obligations............................... (20,287) (18,951) -- Principal payments on acquisition related deferred compensation liabilities............................ (4,762) (1,304) -- Principal payments on covenants not to compete........ (4,403) (898) -- Capitalized financing costs........................... (5,669) -- -- Proceeds related to stock issuance, net of expenses... 36,750 3,792 57,915 Proceeds related to issuable preferred stock.......... 4,000 -- -- --------- -------- ------- Net cash provided by financing activities............... 33,723 17,832 98,915 --------- -------- -------
F-6 MARKETING SPECIALISTS CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED) (IN THOUSANDS)
INCEPTION YEAR ENDED DECEMBER 31, (MARCH 4, 1998) TO 2000 1999 DECEMBER 31, 1998 ----------- ---------- ------------------- Net change in cash...................................... 2,905 (1,185) 685 Cash at beginning of period............................. -- 1,185 500 --------- -------- ------- Cash at end of period................................... $ 2,905 $ -- $ 1,185 ========= ======== ======= SUPPLEMENTAL DISCLOSURES OF: Cash flow information-- Cash payments for interest.......................... $ 26,672 $ 12,558 $ 7 ========= ======== ======= Cash payments for income taxes...................... $ 475 $ 54 $ -- ========= ======== ======= Non-cash flow information-- Common stock issued in the Merger................... $ -- $ 63,431 $ -- ========= ======== ======= Common stock issued in the Combination.............. $ -- $ -- $14,875 ========= ======== ======= Acquisition cost financed with debt................. $ 14,778 $ 11,513 $ -- ========= ======== ======= Net liabilities assumed from acquisitions........... $ 4,638 $125,190 $ -- ========= ======== ======= Conversion of preferred stock to common stock....... $ 9,500 $ -- $ -- ========= ======== ======= Conversion of debt to preferred stock............... $ 9,750 $ -- $ -- ========= ======== ======= Allocation of term loan value to stock warrants..... $ 1,700 $ -- $ -- ========= ======== ======= Note for sale of common stock....................... $ -- $ -- $ 1,500 ========= ======== =======
The accompanying notes are an integral part of these consolidated financial statements. F-7 1. BUSINESS AND ORGANIZATION Marketing Specialists Corporation (formerly Merkert American Corporation--the "Company") was incorporated on March 4, 1998, to create a leading national food brokerage firm providing outsourced sales, merchandising and marketing services to manufacturers, suppliers and producers of food products and consumer goods ("Manufacturers"). On December 18, 1998, simultaneously with the consummation of the Company's Initial Public Offering (the "Offering"), the Company purchased, in separate transactions (collectively, the "Combination") all of the issued and outstanding capital stock of Merkert Enterprises, Inc., a Massachusetts corporation ("Merkert") and Rogers-American Company, Inc., a North Carolina corporation ("Rogers"). From March 4, 1998 through December 18, 1998, the Company's only operations related to the Offering and Combination. On August 18, 1999, the Company completed a merger with Dallas, Texas-based Richmont Marketing Specialists Inc. ("RMSI") and changed its name to Marketing Specialists Corporation (the "Merger"--see Note 5). The Company acts as an independent sales and marketing representative, selling grocery and consumer products on behalf of Manufacturers and coordinating the execution of Manufacturers' marketing programs with retailers, mass merchandisers, supercenters, membership warehouses, drug stores, speciality food outlets, and wholesalers ("Retailers"). The Company's principal source of revenue is commissions it receives from Manufacturers. Historically, the Company's other activities included managing private label programs on behalf of selected Retailers. On July 31, 2000, the Company decided to sell its private label business, and on January 19, 2001, the Company completed the sale. See Note 20 for additional information. 2. MANAGEMENT'S PLANS, LIQUIDITY AND CAPITAL RESOURCES The operating environment confronting the Company raises uncertainty about the Company's ability to continue as a going concern. The principal conditions giving rise to that uncertainty include the following: - The Company has incurred losses and negative operating cash flows in every fiscal period since its inception. For the year ended December 31, 2000, the Company incurred a loss from continuing operations of approximately ($364.8) million, which included a goodwill impairment loss of approximately ($307.0) million, and negative operating cash flows of approximately ($26.0) million. - As of December 31, 2000, the Company had negative working capital of approximately ($58.7) million, which included ($29.9) million related to the Amended Credit Agreement (as defined) and ($19.0) million related to the First Union Amended Credit Agreement (as defined). Both Agreements expire in March 2002. - During 2000, the Company's primary stockholder provided approximately $43.3 million of funds to the Company and participated in the First Union Amended Credit Agreement, both of which provided liquidity to meet the current obligations under the Company's various debt agreements. During the quarter ended March 31, 2001, the primary stockholder provided approximately $12.0 million of funds to the Company. - The share price of the Company's Common Stock has decreased from $15.50 in the first quarter of 1999 to a low of $0.19 in the fourth quarter of 2000. - The rating of Company's public debt, the Registered Notes, was downgraded to a CCC- in December 2000. Based on recent trading, the Registered Notes have an aggregate fair value of approximately $11.3 million. F-8 During the latter part of 2000, the Company implemented an aggressive initiative designed to improve efficiency and reduce costs. The Company reduced its workforces by approximately 6%, providing $11.5 million in annual savings, and consolidated 15 offices (17% of the occupied facilities). The Company also made changes to its organizational structure to focus on the key components of the business, improve financial reporting systems and controls, and develop a more effective sales and marketing strategy. Management believes that the successful implementation of the initiatives will enable the Company to achieve profitability. Management believes that the cost reductions, improved financial and operating controls, and a focused sales and marketing effort should provide positive results from operations and cash flows in the near term. Management also believes that the long-term benefits of the plan will stabilize the Company and improve its financial ratios. Achievement of projected cash flows from operations, however, will be dependent upon the Company's attainment of forecasted revenues, improved operating costs and trade support levels that are consistent with its financial plans. Such operating performance will be subject to financial, economic and other factors affecting the industry and operations of the Company, including factors beyond its control, and there can be no assurance that the Company's plans will be achieved. In addition, the Company borrows funds on a variable rate basis, and continued compliance with loan covenants is partially dependent on relative interest rate stability. If projected cash flows from operations are not realized, or if there are significant increases in interest rates, then the Company may have to explore various available alternatives, including obtaining further modifications of its existing lending arrangements, renegotiating debt payments associated with acquired companies, seeking additional contributions of equity or loans from MS Acquisition or attempting to locate additional sources of financing, all of which are beyond the Company's control and provide no certainty of success. 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The following is a summary of significant accounting policies followed in the preparation of these financial statements. PRINCIPLES OF CONSOLIDATION The consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation. USE OF ESTIMATES The preparation of consolidated financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Actual results could differ from those estimates. REVENUE RECOGNITION Revenue is earned from commissions on sales of food products and consumer goods on behalf of Manufacturers. Commission revenue is recorded as income when product shipment has occurred and notification of such shipment is received from the Manufacturers. The Company recognizes product sales revenue upon shipment. Revenues are presented net of allowances and deductions taken by Manufacturers. F-9 FAIR VALUE OF FINANCIAL INSTRUMENTS The estimated fair value of financial instruments has been determined by the Company using available market information and appropriate methodologies; however, considerable judgment is required in interpreting market data to develop these estimates. The fair values of cash and cash equivalents, accounts receivable, trade payables and long-term debt, excluding the Registered Notes, approximated carrying value at December 31, 2000, due to the short period of time to maturity of the current assets and liabilities and the nature of the long-term debt. Valuations for short-term debt are determined using borrowing rates available to the Company for loans with similar terms and similar maturities. Based on recent trading information, the fair value of the Registered Notes is approximately $11.3 million, as compared to a carrying value of $100.0 million. NET LOSS PER SHARE The basic and diluted net loss per share is computed based upon the weighted average number of shares outstanding of 20,998,381 and 9,973,759 for the years ended December 31, 2000 and 1999, respectively, and 1,891,000 for the period ended December 31, 1998. The effect of outstanding options as of December 31, 2000 and 1999 (1,549,099 and 1,411,209, respectively) and warrants as of December 31, 2000 (687,136) is anti-dilutive. STATEMENTS OF CASH FLOWS The Company considers all highly liquid investments, which are not restricted, with maturities of three months or less when purchased to be cash equivalents. CONCENTRATION OF CREDIT RISK Financial instruments that potentially subject the Company to concentrations of credit risk principally consist of accounts receivable and notes receivable. As of December 31, 2000 and 1999, no individual Manufacturer represents a significant concentration of accounts receivable. The Company generally does not require collateral on accounts receivable and notes receivable, as the Company's Manufacturers are generally large, well-established companies. The Company periodically performs credit evaluations of its Manufacturers and maintains reserves for potential losses. The established reserves and the credit losses have historically been within Company estimates. PROPERTY AND EQUIPMENT Property and equipment are stated at cost. Depreciation and amortization are computed using straight-line or accelerated methods over the estimated useful lives. Gains or losses resulting from fixed asset disposals are reported as a component of Other Income in the Consolidated Statements of Operations. See Note 6. INTANGIBLE ASSETS Intangible assets include goodwill, covenants not to compete, Manufacturer relationships, and trained workforce. Goodwill represents the excess of the purchase price over the fair value of the net assets of various businesses acquired. The recorded goodwill is amortized over its estimated useful life, which ranges from 20 to 40 years. Non-compete assets are recorded at fair value and are amortized over the term of the related agreement, generally 1 to 10 years. Manufacturer relationships and trained workforce are recorded at estimated fair value based on independent appraisals and are amortized over periods ranging from 1 to 10 years. See "Impairment of Long-Lived Assets" below. See Note 7. F-10 INCOME TAXES The Company provides for income taxes in accordance with Statement of Financial Accounting Standards ("SFAS") 109, Accounting for Income Taxes. SFAS 109 recognizes tax assets and liabilities for the cumulative effect of all temporary differences between the financial statement carrying amounts and the tax basis of assets and liabilities and are measured using the enacted tax rates which will be in effect when these differences are expected to reverse. The Company has recognized a valuation allowance equal to its deferred tax assets, as it is more likely than not that the benefits will not be realized. See Note 10. COMPREHENSIVE INCOME In 1998, the Company adopted SFAS 130, Reporting Comprehensive Income, which establishes standards for the reporting and display of comprehensive income and other comprehensive income items. In general, comprehensive income combines net income and other changes in equity during the year from non-owner sources. There were no other components of comprehensive income for the periods presented. NEW ACCOUNTING PRONOUNCEMENTS In June 1998, the Financial Accounting Standards Board ("FASB") issued SFAS 133, Accounting for Derivative Instruments and Hedging Activities. This statement established accounting and reporting standards requiring that every derivative instrument (including certain derivative instruments embedded in other contracts and for hedging activities) be recorded in the balance sheet as either an asset or liability measured at its fair value. SFAS 133 requires that changes in the derivative's fair value be recognized currently in earnings unless specific hedging 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 must formally document, designate and assess the effectiveness of transactions that receive hedge accounting. SFAS 133 is effective for fiscal years beginning after June 15, 2000. A company may also implement SFAS 133 as of the beginning of any fiscal quarter after issuance (that is, fiscal quarters beginning June 16, 1998 and thereafter). SFAS 133 cannot be applied retroactively. The Company does not anticipate that the adoption of this new standard will have a material impact on the Company's fiscal position or results of operations. RESTRUCTURING In accordance with the SEC's Staff Accounting Bulletin Number 67, the Company expenses restructuring charges and presents them as part of the calculation of income from continuing operations. The Company recognizes such items as noncancelable lease commitments, employee termination benefits and other costs related to a restructuring pursuant to EITF Issue Number 94-3. See Note 18. IMPAIRMENT OF LONG-LIVED ASSETS The Company evaluates the carrying value of its long-lived assets in accordance with SFAS 121, Accounting for the Impairment of Long-Lived Assets and Long-Lived Assets to Be Disposed Of. Accordingly, the Company evaluates long-lived assets including property and equipment and intangible assets whenever events or changes in circumstances indicate that the carrying value may not be recoverable. Under SFAS 121, an assessment is made to determine whether the sum of the expected future undiscounted cash flows from the use of the assets and eventual disposition is less than the carrying value. If the sum of the expected undiscounted cash flows is less than the carrying value, an impairment loss is recognized by measuring the excess of carrying value over fair value (generally F-11 estimated by projected future discounted cash flows for the applicable operation, or by independent appraisal). See Note 7 for a discussion of the goodwill impairment loss recognized in 2000. STOCK-BASED COMPENSATION PLANS The Company accounts for its stock-based compensation plans under Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees. The Company has adopted the disclosure-only provisions of SFAS 123, Accounting for Stock-Based Compensation. See Note 16. PROMOTIONAL ADVANCES Promotional advances represent amounts received from Manufacturers for the future promotion of their products. Such amounts are recorded as liabilities until they are spent on behalf of and under the direction of the Manufacturers. PRIOR YEAR RECLASSIFICATIONS Certain prior-year balances have been reclassified to conform to the current-year presentation. 4. THE OFFERING On December 18, 1998, the Company completed the Offering and sold 4,400,000 shares of its Common Stock at a price of $15.00 per share and received net proceeds of approximately $57.9 million used primarily to fund the Combination. The Common Stock sold in the Offering does not include an additional 1,651,333 shares issued to related parties in connection with the organization and initial capitalization of the Company nor 1,166,667 shares issued in connection with the Combination (see Note 5). In January 1999, the Company issued 290,000 shares of its Common Stock in connection with the exercise of a portion of the over-allotment option by the underwriters of the Offering, raising net proceeds of approximately $4.0 million, which the Company used to fund certain acquisitions and for other corporate purposes (see Note 5). The Company and certain executives and directors are parties to a Registration Rights Agreement, as amended, pursuant to which the individuals have certain "piggy-back" registration rights in the event the Company registers any of its securities for either itself or for security holders exercising their registration rights. In connection with the Combination, the Company entered into Registration Rights Agreements with the former stockholders of Merkert and Rogers. Subject to certain restrictions, former stockholders have the right to include their shares of Common Stock received in the Combination in a registration statement filed by the Company under the Securities Act of 1933, as amended (the "Securities Act"). 5. BUSINESS COMBINATIONS THE COMBINATION In December 1998, concurrently with and as a condition to the consummation of the Offering, the Company purchased all of the outstanding capital stock of Merkert and Rogers. The Company was designated as the accounting acquirer pursuant to Staff Accounting Bulletin 97, because the then current stockholders of the Company owned the largest portion of Common Stock after the consummation of the Offering and the Combination. The aggregate consideration paid by the Company for Merkert and Rogers was approximately $74.1 million, consisting of approximately $56.6 million in cash and 1,166,667 shares of Common Stock. In connection with the Combination, the Company repaid approximately $34.0 million of indebtedness F-12 and certain then existing acquisition obligations of Merkert and Rogers from a portion of the net proceeds of the Offering and from net available borrowings under the Company's $75.0 million Credit Facility. In addition, on behalf of Merkert, the Company funded approximately $1.5 million of buyouts of certain employment agreements with two former Merkert employees. The Combination was accounted for using the purchase method of accounting; accordingly, the results of operations of Merkert and Rogers have been included in the accompanying consolidated financial statements from December 18, 1998. The Company recorded the excess of the purchase price over the estimated fair value of the businesses acquired, approximately $124.6 million (net of approximately $2.0 million in value assigned to certain noncompete agreements) as "goodwill" in the accompanying consolidated balance sheets. The goodwill was being amortized over a 40-year period. THE MERGER On August 18, 1999, the Company completed a merger with Dallas, Texas-based RMSI, one of the largest food brokers in the United States (the "Merger"). The Company completed the Merger for an aggregate purchase price of approximately $236.8 million, which included approximately $3.4 million in cash payments (i.e., for closing costs), no new debt, $170.0 million in assumed debt and $63.4 million in Common Stock and options. Under the terms of the Merger, RMSI stockholders received 6,705,551 shares of the Company's Common Stock. The Company also granted certain RMSI stockholders and employees options to purchase 800,000 in additional shares of the Company's Common Stock at a price equal to $13.50 per share. For financial reporting purposes, the Company is presented as the acquiring entity, since the Company's stockholders own the largest portion of the Common Stock of the combined Company. Immediately following the Merger, the Company amended its certificate of incorporation to change its corporate name to "Marketing Specialists Corporation." The purchase price was allocated to the net assets of RMSI based on their estimated fair values. The Company recorded the excess of the purchase price over the estimated fair value of the net assets acquired, approximately $133.2 million (net of approximately $11.1 million, $20.0 million, and $32.0 million assigned to non-competes, trained workforce, and Manufacturer relationships, respectively) as goodwill in the accompanying consolidated balance sheets and was amortizing it over a period of 40 years. See Note 3 for a discussion of the estimated useful life of each category of intangible assets. The operating results of RMSI have been included in the Company's operating results for all periods subsequent to the Merger. The following table presents unaudited pro forma operating results (excluding restructuring charges) as if RMSI merged with the Company at January 1, 1999 (unaudited and amounts in thousands except share and per share information):
YEAR ENDED 12/31/99 ----------- Revenues.................................................... $ 379,596 Net loss.................................................... (22,326) Net loss per share--basic and diluted....................... $ (1.57) Weighted averages shares outstanding--basic and diluted..... 14,198,648
OTHER ACQUISITIONS In January 1999, the Company completed the acquisition of Sell, Inc. ("Sell"), a brokerage firm operating in the Midwest region of the United States. The Company completed the acquisition of Sell for an aggregate discounted purchase price of approximately $8.5 million, which included approximately $3.1 million in cash payments, $3.8 million in new debt, and $1.6 million in assumed debt. The operating results of Sell have been included in the Company's operating results for all periods subsequent to the acquisition date. F-13 In April 1999, the Company completed the acquisition of United Brokerage Company ("UBC"), a brokerage firm that has operated in the Midwest region of the United States under an alliance known as "The Sell Group" since 1998. The Company completed the acquisition of UBC for an aggregate discounted purchase price of approximately $6.7 million, which included approximately $1.0 million in cash payments, $3.3 million in new debt, and $2.4 million in assumed debt. The operating results of UBC have been included in the Company's operating results for all periods subsequent to the acquisition date. In July 1999, the Company completed the acquisition of Buckeye Sales and Marketing ("Buckeye"), a brokerage firm with operations in Cleveland, Ohio; Pittsburgh, Pennsylvania; and upstate New York markets. The Company completed the acquisition of Buckeye for an aggregate discounted purchase price of approximately $5.0 million, which included approximately $0.1 million in cash payments, $3.4 million in new debt, and $1.5 million in assumed debt. The operating results of Buckeye have been included in the Company's operating results for all periods subsequent to the acquisition date. In October 1999, the Company completed the acquisition of Paul Inman Associates, Inc. ("Inman"), a brokerage firm operating in the Midwest region of the United States. The Company completed the acquisition of Inman for an aggregate discounted purchase price of approximately $14.0 million, which included approximately $9.8 million in cash payments, $1.0 million in new debt, and $3.2 million in assumed debt. The operating results of Inman have been included in the Company's operating results for all periods subsequent to the acquisition date. In January 2000, the Company acquired Johnson-Leiber, Inc. ("Johnson-Leiber"), a brokerage firm operating in the Seattle, Washington; Spokane, Washington; Portland, Oregon; Billings, Montana; and Anchorage, Alaska markets. The Company acquired Johnson-Leiber for an aggregate discounted purchase price of approximately $10.2 million, which included approximately $3.2 million in cash payments and $7.0 million in new debt and other incentives. The Company recorded the excess of the purchase price over the estimated fair value of the net assets acquired, approximately $10.2, as goodwill. In April 2000, the Company acquired the Sales Force Companies, Inc. ("Sales Force"), a full service brokerage firm operating in the Central Region of the United States. The Company acquired Sales Force for an aggregate discounted purchase price of approximately $18.8 million, which included approximately $6.1 million cash payments, $7.8 million in new debt, and $4.9 million in assumed debt. The Company recorded the excess of the purchase price over the estimated fair value of the net assets acquired, approximately $23.0 million (net of approximately $0.5 million assigned to non-competes), as goodwill. Each of the above acquisitions was accounted for as a purchase, and the purchase price was allocated to the net assets based on their estimated fair values. The resulting goodwill was being amortized over 20 years. The pro forma impact of each of the above acquisitions was not material. F-14 6. PROPERTY AND EQUIPMENT Property and equipment consists of the following (amounts in thousands):
DECEMBER 31, ------------------- USEFUL LIVES 2000 1999 (YEARS) -------- -------- ------------ Land........................................... $ 1,081 $ 5,233 -- Buildings and improvements..................... 13,127 14,139 40 Leasehold improvements......................... 2,939 1,699 5 Furniture, fixtures and equipment.............. 14,617 14,362 3-5 Purchased software............................. 4,109 3,398 3 -------- ------- 35,873 38,831 Less--accumulated depreciation................. (10,754) (3,627) -------- ------- $ 25,119 $35,204 ======== =======
Depreciation expense was approximately $7.5 million and $3.8 million for the years ended December 31, 2000 and 1999, respectively, of which approximately $1.9 million and $0.3 million related to purchased software. Depreciation expense for the period ended December 31, 1998, was not material. As of December 31, 1999, current assets in the accompanying consolidated balance sheet included approximately $7.3 million of properties held for sale. In February 2000, the Company sold certain improved real properties containing general office and warehouse space situated in Arizona and California to a related party for approximately $6.5 million after related costs. In December 2000, the Company sold improved real property containing general office space situated in Charlotte, North Carolina for approximately $2.1 million after related costs. 7. INTANGIBLE ASSETS Intangible assets consist of the following (amounts in thousands):
DECEMBER 31, ------------------- 2000 1999 -------- -------- Goodwill................................................ $ -- $282,464 Manufacturer relationships.............................. 32,000 32,000 Trained workforce....................................... 20,000 20,000 Covenants not to compete................................ 13,570 13,095 -------- -------- 65,570 347,559 Less--accumulated amortization.......................... (13,437) (9,019) -------- -------- $ 52,133 $338,540 ======== ========
Amortization expense related to intangible assets was approximately $18.8 million and $8.9 million for the years ended December 31, 2000 and 1999, respectively, and $0.1 million for the period ended December 31, 1998. The Company recorded approximately $38.9 million of additional goodwill in 2000, which was primarily related to Johnson-Leiber, Sales Force, and the Merger. The Company's continued operating losses, negative operating cash flows and frequent cash infusions from a related party for working capital purposes indicated that long-lived assets may be impaired. A goodwill impairment analysis performed at the end of 2000 indicated that the Company's recorded goodwill exceeded the Company's estimated future cash flows, undiscounted and excluding interest charges. Accordingly, an impairment loss was measured using discounted cash flows compared to recorded goodwill. During the fourth quarter of 2000, the Company recognized an impairment loss of approximately ($307.0) million, or ($14.62) per share, which equaled the Company's net goodwill balance as of December 31, 2000. The impairment loss appears as a component of the Company's loss from continuing operations. F-15 8. ACCRUED EXPENSES Accrued expenses consist of the following (amounts in thousands):
DECEMBER 31, ------------------- 2000 1999 -------- -------- Compensation and related.................................. $10,464 $11,733 Restructuring--current portion............................ 4,136 8,189 Commission splits......................................... 2,175 1,138 Other accruals............................................ 9,547 12,604 ------- ------- $26,322 $33,664 ======= =======
9. LONG-TERM OBLIGATIONS DEBT Debt consists of the following (amounts in thousands):
DECEMBER 31, ------------------- 2000 1999 -------- -------- $100,000, 10.125% Senior Subordinated Notes, due December 15, 2007..................................... $100,000 $100,000 Initial Term Loan....................................... -- 43,750 Initial Revolving Credit................................ -- 20,300 First Union Amended Credit Agreement.................... 33,938 -- Amended Revolver........................................ 29,866 -- Notes payable........................................... 37,698 26,113 Bank--mortgage loans.................................... 8,938 12,781 Tranche B Note.......................................... 19,000 -- Other notes payable involving related parties........... 14,635 6,266 -------- -------- 244,075 209,210 Less current maturities................................. (60,487) (39,145) -------- -------- Net long-term term-debt............................... $183,588 $170,065 ======== ========
The aggregate maturities of debt as of December 31, 2000 are the following: 2001........................................................ $ 60,487 2002........................................................ 44,266 2003........................................................ 7,623 2004........................................................ 6,714 2005........................................................ 6,158 Thereafter.................................................. 118,827 -------- $244,075 ========
SENIOR SUBORDINATED NOTES In December 1997, concurrently with the sale by RMSI of $100.0 million of 10 1/8% Senior Subordinated Notes due 2007 (the "Issued Notes"), RMSI entered into an Exchange and Registration Rights Agreement with the initial purchaser of the Issued Notes. Under the terms of that agreement, RMSI agreed to file a registration statement regarding the exchange of the Issued Notes for new notes F-16 registered under the Securities Act of 1933, and to offer the holders of the Issued Notes an opportunity to exchange their unregistered notes for registered notes. On June 21, 1999, RMSI filed a Registration Statement on Form S-4 with the Securities and Exchange Commission to register $100.0 million of new notes (the "Registered Notes"). Subsequently, RMSI completed an exchange of the Issued Notes for the Registered Notes. The Registered Notes are identical in all material respects to the Issued Notes, except for transfer restrictions and registration rights. The Company assumed this outstanding indebtedness in connection with the Merger. The Registered Notes are unsecured and are subordinated in right of payment to all existing and future senior indebtedness of the Company. The Registered Notes are fully and unconditionally guaranteed on an unsecured, senior subordinated, joint and several basis by certain guarantor wholly-owned subsidiaries of the Company as defined in the Registration Statement, which comprise substantially all the direct and indirect subsidiaries of the Company. The Company is a holding company with no assets, liabilities or operations other than its interests in its subsidiaries. Separate financial statements and other disclosures for such subsidiaries have not been presented due to management's determination that such information is not material to investors. Interest on the Registered Notes is payable semiannually on June 15 and December 15 of each year, commencing June 15, 1998. The principal on the Registered Notes is payable on December 15, 2007, the maturity date. The Company may not redeem the Registered Notes prior to December 15, 2002, except as described below. On or after such date, the Company may redeem the Registered Notes, in whole or in part, at the following redemption prices: 2002-105.063%; 2003-103.375%; 2004-101.688%; 2005 or thereafter-100.000%, together with accrued and unpaid interest, if any, to the date of redemption. The Registered Notes are not subject to any sinking fund requirement. Upon a change of control, as defined (not triggered by the Merger), each holder of the Registered Notes will have the right to require the Company to make an offer to repurchase such holder's Registered Notes at a price equal to 101% of the principal amount thereof, together with accrued and unpaid interest, if any, to the date of repurchase. The Registered Notes subject the Company to certain limitations and restrictions primarily related to obtaining additional indebtedness, payment of dividends, and sales of assets and subsidiary stock, which may require the consent of the holders of the Registered Notes. In December 2000, the rating of the Registered Notes was lowered to CCC-. Based on recent trading information, the fair value of the Registered Notes is approximately $11.3 million, as compared to a carrying value of $100.0 million. INITIAL CREDIT FACILITY In connection with the Offering and Combination, the Company obtained a $75.0 million Credit Facility (as amended on August 18, 1999) from a bank (the "Initial Credit Facility"). The Initial Credit Facility consisted of a five-year, secured, fully amortizing $50.0 million term loan (the "Initial Term Loan") and a three-year, secured $25.0 million revolving line of credit (the "Initial Revolving Credit"). The balance outstanding under the Initial Credit Facility was $64.1 million as of December 31, 1999 ($20.3 million under the Initial Revolving Credit and $43.8 million under the Initial Term Loan). Amounts outstanding under this facility were collateralized by substantially all of the Company's assets. Interest was payable on the Initial Term Loan and the Initial Revolving Credit at the base rate, as defined in the amended Initial Credit Facility. The rate on the outstanding balance of the Revolver and the Initial Term Loan was 9.16% and 10.50%, respectively, as of December 31, 1999. The Initial Credit Facility required the Company to make certain mandatory prepayments of amounts outstanding under the Initial Credit Facility with the use of certain proceeds from asset sales and debt and equity financing. F-17 The amended Initial Credit Facility required the Company to comply with various affirmative and negative covenants, including the following, among others: - the maintenance of certain financial ratios - restrictions on certain additional indebtedness - restrictions on liens, guarantees, dividends and the disposition of assets - obtaining the lenders' consent to acquisitions involving cash consideration in excess of a specified amount AMENDED TERM LOAN On March 30, 2000, the Company became a party to a Second Amended and Restated Credit Agreement among the Company and First Union National Bank, N.A. as agent and the lenders named therein (the "Amended Term Loan"). The Amended Term Loan consisted of a two-year, secured $35.0 million term loan. The Company paid commitment and other fees of approximately $0.9 million in connection with obtaining the Amended Term Loan. Under the Amended Term Loan, the principal amount of the term loan was reduced from $43.8 million to $35.0 million. The Amended Term Loan was secured by a lien on substantially all of the Company's and its subsidiaries' tangible and intangible property. In addition, the Amended Term Loan was jointly and severally guaranteed by all current and future subsidiaries of the Company. Interest was payable on the Amended Term Loan at a rate based on one of two customary interest rates plus an additional interest margin of 375 or 500 basis points, as applicable. The Amended Term Loan contained customary events of default, including cross-default provisions related to the Registered Notes. In connection with the Amended Term Loan, the Company issued to an affiliate of First Union National Bank, N.A. detachable warrants to purchase up to 4.0% of the Company's Common Stock on a diluted basis. The exercise price of the warrants will be nominal, and the warrants will be exercisable at any time after the second anniversary of the issuance of the warrants. The proceeds of the Amended Term Loan were allocated between debt and warrants based on their respective fair market values. The estimated fair value of the warrants appears as a component of Additional Paid-In Capital in the accompanying Consolidated Balance Sheet as of December 31, 2000. The letter of credit outstanding under the Initial Credit Facility was replaced by a $1.1 million letter of credit issued for the account of RCPI, which is an affiliate of MS Acquisition, the Company's largest shareholder. The Company issued to RCPI a reimbursement note subordinated in right of payment to the Registered Notes in the amount of the letter of credit. The promissory note will become payable if the letter of credit is drawn. NEW REVOLVER On March 30, 2000, the Company also became a party to a Credit Agreement among the Company, certain of its subsidiaries, and The Chase Manhattan Bank, N.A. as agent and the lenders named therein (the "New Revolver," and together with the Amended Term Loan, the "New Senior Credit Facility"). The New Revolver consisted of a two-year, senior secured $50.0 million revolving line of credit, subject to a borrowing base equal to a specified percentage of eligible receivables. The Company paid commitment and other fees of approximately $0.6 million in connection with obtaining the New Revolver. Funds advanced under the New Revolver were used by the Company to repay a portion of outstanding amounts under the Initial Credit Facility, to partially finance the acquisition of Sales Force, to finance the Company's working capital and capital expenditure requirements in the ordinary course of business, and to pay fees and expenses relating to the closing of the New Senior F-18 Credit Facility. The New Revolver contained customary events of default, including cross-default provisions related to the Registered Notes. The New Revolver was secured by a first priority security interest in cash, cash equivalents, accounts receivable and inventory of the Company and its subsidiaries and proceeds thereof but not in assets that are the proceeds of equipment, fixtures, real estate, intellectual property or the stock of subsidiaries. In addition, Inman, Marketing Specialists Sales Company ("MSSC") and Bromar, Inc. ("Bromar" a California corporation and a wholly owned subsidiary of MSSC) were co-borrowers under the New Revolver, jointly and severally liable for all borrowings and other related obligations thereunder. Interest was payable on the New Revolver at a rate based on one of two customary interest rates plus an additional interest margin ranging from 150 to 350 basis points. The applicable margin was determined based on certain financial ratios of the Company. The New Senior Credit Facility required the Company to comply with various affirmative and negative covenants, including, among others: - the maintenance of certain financial ratios - restrictions on additional indebtedness - restrictions on liens, guarantees, dividends and the disposition of assets - restrictions on certain mergers, consolidations and acquisitions During 2000, the Company incurred approximately $5.3 million in costs primarily related to the New Senior Credit Facility. FIRST UNION AMENDED CREDIT AGREEMENT On November 17, 2000, the Company became party to a First Amendment to the Credit Agreement among the Company, certain of its subsidiaries as guarantors, and First Union National Bank, N.A. as agent (the "First Union Amended Credit Agreement"). The First Union Amended Credit Agreement amends the Amended Term Loan and provides for the consent of First Union National Bank, N.A. to the Increase (as defined below), the Borrowing Base Amendment (as discussed below), and the repayment of the $2.5 million promissory note (as discussed below) to MS Acquisition. The First Union Amended Credit Agreement also amends the Amended Term Loan to reflect the terms of the Amended Credit Agreement. The Company was in violation of certain covenants at December 31, 2000. See "Amended Senior Credit Facility Amendments" discussion for more information. AMENDED CREDIT AGREEMENT On November 17, 2000, the Company became party to an amendment to the Credit Agreement among the Company, certain of its subsidiaries, The Chase Manhattan Bank, N.A. as the agent (the "Agent") and the lenders parties thereto (the "Amended Credit Agreement"). The Amended Credit Agreement provides for an increase in the maximum amount available under the New Revolver from $50.0 million to a maximum commitment of $60.0 million (the "Increase"), which is comprised of a $41.0 million variable commitment (the "Tranche A Note") and a subordinated $19.0 million fixed commitment (the "Tranche B Note"). MS Acquisition purchased a 100% participation interest in the Tranche B Note. The Tranche A Note provides for a $41.0 million revolving line of credit (the "Amended Revolver"), which accrues interest at rate equal to the Base Rate (a reference rate based on the prime rate, which equaled 9.5% at December 31, 2000) plus 2.25%. The Amended Revolver will revolve up to the lesser of $41.0 million or the Borrowing Base, which is a function of the Company's eligible receivables and the Advance Percent determined by the Agent. As part of the Amended Credit F-19 Agreement, the Agent has decreased the Advance Percent, thereby decreasing the Borrowing Base (the "Borrowing Base Amendment"). The Company must fulfill all payment obligations under the Amended Revolver before making any interest payments on the Tranche B Note. The Tranche A Note and any accrued and unpaid interest will mature on March 30, 2002. As of December 31, 2000, approximately $29.9 million was outstanding and $0.9 million was available under the Amended Revolver. The Tranche B Note bears interest at a rate equal to the Base Rate plus 2.25%. The Tranche B Note and any accrued and unpaid interest will mature on March 30, 2002. The fixed commitment under the Tranche B Note is not subject to the Borrowing Base. MS Acquisition funded the $19.0 million balance of the Tranche B Note, subject to the terms of a master participation agreement. As of December 31, 2000, $19.0 million was outstanding under the Tranche B Note. The Company was in violation of certain covenants at December 31, 2000. See Note 20 for discussion of these violations and related amendments and waivers. AMENDED SENIOR CREDIT FACILITY AMENDMENTS As of March 30, 2001, the Company was in violation of certain covenants under the Amended Credit Agreement and the First Union Amended Credit Agreement (collectively referred as the "Amended Senior Credit Facility") in connection with (i) its failure to provide annual financial statements within ninety (90) days of its fiscal year end, (ii) the certifying accountant's qualification of the Company's annual financial statements on a going concern basis, and (iii) the Company's failure to deliver certain items to the Agent by March 15, 2001 as required by the Amended Credit Agreement. On April 19, 2001, the Company entered into (a) a Waiver and Third Amendment to Credit Agreement amending the Amended Credit Agreement and (b) Second Amendment to Credit Agreement amending the First Union Amended Credit Agreement ((a) and (b) collectively defined as the "Amended Senior Credit Facility Amendments"). Under the Amended Senior Credit Facility Amendments, the Company (i) received a waiver for its current defaults under the Amended Senior Credit Facility and (ii) paid a fee of approximately $0.2 million as consideration in obtaining the amendments and waiver of the defaults under the Amended Credit Agreement. The Amended Senior Credit Facility Amendments provide, among other things, that (i) the Agent may increase the Advance Percent as of March 31, 2001, but before June 1, 2001, thereby increasing the Borrowing Base under the Amended Senior Credit Facility, (ii) amends the definition of "EBITDA" in the Amended Senior Credit Facility to include certain write-offs in the amortization and depreciation expense deducted in determining Net Income, and (iii) amends the baseline amounts for determining Minimum EBITDA. Under the Amended Senior Credit Facility Amendments, the Company must meet certain post-closing covenants, including, among other things, the delivery of its annual financial statements by April 27, 2001 and the delivery of certain other items by May 31, 2001. NOTES PAYABLE The notes payable amounts generally consist of the total estimated payments to be made pursuant to acquisition agreements. The total estimated payments have been discounted at rates ranging from 8% to 10%. The amounts due under the acquisition agreements are unsecured and extend through 2011. These amounts are payable in either monthly or quarterly installments. BANKS--MORTGAGE LOANS Certain of the Company's office space in Canton, Massachusetts is secured by a mortgage with a real estate lender. It bears interest at 8.56%, requires monthly payments of approximately $83,000 (including interest) and matures on March 1, 2018. The balance outstanding under the mortgage note was approximately $8.9 million as of December 31, 2000. F-20 OTHER NOTES PAYABLE INVOLVING RELATED PARTIES The Company also has a mortgage note with RCPI, an affiliate of MS Acquisition Limited, that is secured by certain land, a building and fixtures. It bears interest at 8.5% with monthly payments of approximately $34,000 (including interest) and a balloon payment of approximately $3.6 million due in 2001. The balance outstanding under this mortgage was approximately $3.6 million as of December 31, 2000. On November 9, 2000, the Company issued a $2.5 million promissory note to MS Acquisition. This promissory note is subordinate to the senior debt of the Company. The proceeds were used for general corporate purposes. The $2.5 million promissory note bears interest at a rate equal to the sum of an interest margin of 2.75% plus the applicable prime rate on the last business day of the quarter for which interest is payable. Interest is payable quarterly in arrears, commencing on December 31, 2000, and will continue through the maturity date. The $2.5 million promissory note and any unpaid and accrued interest will be payable on November 9, 2002, or on demand, under specified conditions. The Company is not permitted to repay the principal and unpaid and accrued interest on the $2.5 million promissory note on demand if the Company's borrowing base 30 days prior to a payment date is not at least $10.0 million, or 25% of the sum of the Company's payroll for the last four consecutive pay periods, whichever is greater. In the first quarter of 2001, the $2.5 million promissory note was converted into redeemable convertible preferred stock. See Note 20 for additional information. The Company had other notes payable to former employees of various acquired entities of approximately $8.5 million as of December 31, 2000. The total estimated payments have been discounted at rates ranging from 8% to 10%. The amounts due under the acquisition agreements are unsecured and extend through 2011. These amounts are payable in either monthly or quarterly installments. CAPITAL LEASES The Company leases its office facilities and certain office equipment under long-term capital lease agreements, which expire in various years through 2005. Some of the Company's leases provide for escalating minimum rent. Rent expense is recognized on a straight-line basis over the life of such lease. The annual future minimum lease payments under all noncancelable capital leases, including leases for facilities that are no longer in use, as of December 31, 2000, are as follows (amounts in thousands): 2001........................................................ $ 409 2002........................................................ 359 2003........................................................ 105 2004........................................................ 105 2005........................................................ 45 Thereafter.................................................. -- ------ Total payments.............................................. 1,023 Amount representing interest................................ (104) ------ 919 Less--current portion....................................... (357) ------ $ 562 ======
ACQUISITION RELATED DEFERRED COMPENSATION LIABILITIES In conjunction with acquisitions of other brokerage companies, deferred compensation agreements are generally executed or assumed with the former owners and certain key employees of the acquired F-21 companies. Under these agreements, the Company agrees to pay certain amounts upon either termination or retirement for such executive, or, in the event of death, to their designated beneficiary. Terms vary; however, most payments are monthly and continue for a period of up to ten years. The amounts to be paid under most of these agreements are not based upon length of service but are a fixed amount. The present value of these payments, discounted at rates ranging from 7.5% to 10%, was capitalized as an intangible asset at the date of the acquisition as a component of the purchase price. In connection with the Merger, the Company assumed RMSI's deferred compensation liabilities, whereby RMSI agreed to pay certain employees a certain sum monthly for ten years upon the earlier of their retirement, termination, or death. Compensation and interest expense are accrued ratably over the employees' expected service period such that the liability, at the anticipated vesting date, equals the then present value of the future benefits. The deferred compensation liabilities have been recorded at their net present value using imputed interest rates ranging from 7.5% to 10%. Deferred compensation expense for the years ended December 31, 2000 and 1999 was not material. The future aggregate minimum payments for deferred compensation liabilities as of December 31, 2000 are as follows (amounts in thousands): 2001........................................................ $ 6,045 2002........................................................ 5,938 2003........................................................ 5,778 2004........................................................ 5,664 2005........................................................ 5,497 Thereafter.................................................. 21,868 -------- Total payments.............................................. 50,790 Amount representing interest................................ (16,922) -------- 33,868 Less--current portion....................................... (3,232) -------- $ 30,636 ========
COVENANTS NOT TO COMPETE The Company is obligated to make payments under agreements with former owners of acquired companies and various other individuals for consulting services and covenants not to compete. The costs associated with such agreements are recognized on a straight-line basis over the term of the consulting services, which typically ranges from two to ten years. The future aggregate minimum payments under these agreements at December 31, 2000 are as follows (amounts in thousands): 2001........................................................ $ 5,842 2002........................................................ 4,374 2003........................................................ 4,364 2004........................................................ 4,232 2005........................................................ 2,883 Thereafter.................................................. 4,022 ------- Total payments.............................................. 25,717 Amount representing interest................................ (5,649) ------- 20,068 Less--current portion....................................... (4,331) ------- $15,737 =======
F-22 10. INCOME TAXES The Company's provision (benefit) for income taxes reconciles to the amount computed by applying the federal statutory income tax rate to income before income taxes as follows (amounts in thousands):
YEAR ENDED DECEMBER 31, -------------------- 2000 1999 --------- -------- Benefit at U.S. statutory rates......................... $(127,663) $(7,560) State income tax, net of federal tax benefit............ (2,718) (483) Nondeductible amortization of intangibles............... 97,187 1,761 Nondeductible expenses.................................. 1,207 839 Increase in valuation allowance on deferred tax assets................................................ 32,174 5,443 Other................................................... (187) -- --------- ------- Income tax (benefit)................................ $ -- $ -- ========= =======
Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax reporting purposes. Significant components of the Company's deferred tax assets are as follows (amounts in thousands):
DECEMBER 31, ------------------- 2000 1999 -------- -------- Accrued severance and compensation........................ -- 2,468 Accrued commissions....................................... 856 1,142 Allowance for doubtful accounts........................... 7,895 3,263 Accrued liabilities....................................... 2,363 2,287 Other..................................................... 1,571 -- ------- ------- Total current deferred tax asset...................... 12,685 9,160 Bonds repurchased......................................... 6,885 -- Net operating loss carryforwards.......................... 23,624 7,432 Other carryforwards....................................... 395 296 Deferred compensation agreements.......................... 10,469 11,938 Fixed assets.............................................. (1,136) (513) Intangible assets......................................... 8,750 (8,315) Operating lease reserve................................... 2,788 3,295 Other..................................................... (1,562) (1,523) ------- ------- Total noncurrent deferred tax asset................... 50,213 12,610 ------- ------- Total deferred tax assets................................. 62,898 21,770 Valuation allowance....................................... (62,898) (21,770) ------- ------- Total deferred tax assets, net of valuation allowance..... -- -- ======= =======
The valuation allowance was increased during 2000 primarily due to uncertainty concerning the realizability of such assets. At December 31, 2000, the Company had approximately $61.8 million in net operating loss carryforwards available to offset future taxable income that expire in varying amounts through 2020. Section 382 of the Internal Revenue Code provides for a limitation on the annual utilization of net operating losses and other losses when certain changes in ownership occur. The Company may have experienced an ownership change as defined by Section 382 during 2000. The Company will be required to compute the limitation, if necessary, prior to utilizing any net operating loss carryforward or F-23 any built-in loss. It is possible that the limitation could significantly limit the Company's ability to fully utilize its built-in losses, net operating losses, and related carryforwards. The Company has filed federal income tax refund claims challenging Internal Revenue Service assessments previously paid. Management is unable to reasonably ascertain the timing or amount of any potential refund resulting from these claims. Accordingly, any benefit associated with these refund claims has not been recorded. 11. EMPLOYEE BENEFIT PLANS The Company sponsors contributory plans for employees under the provisions of Section 401(k) of the Internal Revenue Code (the "401(k) Plans"). Merkert established the Merkert Advantage Plan, a 401(k) Plan, on January 1, 1997 to provide a plan for contributions by employees. On July 1, 1999, the Merkert 401(k) was amended to become the 401(k) plan of the Company (the "Company 401(k) Plan"). Rogers, Sell and UBC sponsored 401(k) Plans which on August 1, 1999 were merged into the Company 401(k) Plan. RMSI sponsored a 401(k) savings plan for all employees who had been employed by RMSI for at least one year. Effective on January 1, 2000, this plan was merged into the Company 401(k) Plan. Eligible employees of the Company can make voluntary contributions to the Company 401(k) Plan. Under the provisions of the Company 401(k) Plan, the Company currently matches varying percentages of an eligible employee's contribution up to certain limits of the employee's salary, as determined by the Company. For the years ended December 31, 2000 and 1999, the Company's expense with regard to the Company 401(k) Plan was approximately $4.1 million and $2.0 million, respectively. The expense for the period ended December 31, 1998 was not material. The Company also sponsors a noncontributory Employee Stock Ownership Plan ("ESOP") available to former Merkert employees. The Company made no contributions to the ESOP during 2000 or 1999. 12. RELATED PARTY TRANSACTIONS On April 27, 1999, Gerald R. Leonard, President, Chief Executive Officer and Director of the Company, entered into an employment and noncompetition agreement with the Company providing for a base salary, which is currently $455,000. The term of employment is for five years and will continue from month to month thereafter unless terminated by either party. If the Company terminates Mr. Leonard's employment without cause, Mr. Leonard is entitled to receive his then current base salary until expiration of the initial term or the extension period. Mr. Leonard would also receive a continuation of group health and automobile benefits during such time period. Pursuant to the agreement, Mr. Leonard is subject to noncompetition and nonsolicitation provisions for one year after the termination of his employment. In conjunction with a previous employment and noncompetition agreement by and between the Company and Mr. Leonard (the "First Leonard Employment Agreement"), Mr. Leonard executed a promissory note in favor of the Company for $1.5 million (the "Leonard Note"). Pursuant to the terms of the Leonard Note, Mr. Leonard purchased 300 shares of Common Stock, which stock was pledged to the Company as security, pursuant to the terms of a stock pledge agreement between the Company and Leonard (the "Leonard Pledge Agreement"). On July 7, 1998 and January 11, 1999, the Company released 60 and 121,817 (after giving effect to the share recapitalization in connection with the Company's initial public offering) shares of Common Stock, respectively, from the pledge. F-24 On April 27, 1999, under the terms of the current employment, the Leonard Note became due and payable on April 8, 2004 and certain shares of the Common Stock were released from the pledge such that shares having a fair market value of $1.5 million (as of January 11, 1999) would remain subject to the pledge. After giving effect to the releases and share recapitalization, 98,361 shares of Common Stock were pledged pursuant to the Leonard Pledge Agreement (the "Leonard Pledged Shares"). The Company has now deemed it is in its best interests that it should no longer issue promissory notes requiring a pledge of the Company's Common Stock as security. Rather, the Company now achieves the same economic benefits for its employees through the issuance of employee stock options to purchase shares of Common Stock at a stated exercise price. To make the Leonard Note, Leonard Pledge Agreement, Leonard Pledged Shares and related provisions of the First Leonard Employment Agreement consistent with the Company's current practice, Mr. Leonard surrendered any and all rights and obligations he had under the Leonard Note, Leonard Pledge Agreement, and Leonard Pledged Shares in exchange for issuance of employee stock options pursuant to which Leonard will have an option to purchase 98,361 shares of Common Stock at an aggregate exercise price of $1.5 million, or $15.25 per share, all in accordance with the Exchange Agreement entered into on February 12, 2001, by and between the Company and Mr. Leonard (the "Exchange Agreement"). See Note 6 for the sale of properties to related parties. The Company has unsecured long-term obligations to related parties of approximately $44.7 million as of December 31, 2000. These obligations bear interest at rates ranging from 6.00% to 10.125%. Principal and interest payments are due under various arrangements over terms ranging from one to 13 years. A total of approximately $25.1 million of these obligations represents amounts due to either MS Acquisition or an affiliate of MS Acquisition. As discussed in Note 8, MS Acquisition funded the $19.0 million balance of the Tranche B Chase Note, subject to the terms of a master participation agreement. As of December 31, 2000, the Company received $4.0 million in cash from MS Acquisition for shares of the Series B Preferred Stock (as defined below) not issued until 2001. See Note 20 for additional information. The impact of these transactions appears in Other Liabilities in the accompanying consolidated balance sheet as of December 31, 2000. During the year, the Company issued 11,811,701 shares of Common Stock to MS Acquisition for an aggregate purchase price of $24.5 million. See Note 15 for additional information. As of December 31, 2000, the Company has issued 12,397 shares of the Series B Preferred Stock (as defined below) to MS Acquisition, which are still outstanding. See Note 14 for additional information. See Note 16 for option grants to related parties. See Note 20 for subsequent event transactions with related parties. 13. COMMITMENTS AND CONTINGENCIES PROMOTIONAL FUNDS Certain Manufacturers provide the Company with funds to be used solely for advertising and other promotional activities. The Company had cash of $0.9 million and $1.2 million as of December 31, 2000 and 1999, respectively, which was restricted to payment for promotional activities on behalf of its Manufacturers. The offsetting liability is included in Accrued Expenses in the accompanying consolidated balance sheets at December 31, 2000 and 1999. F-25 OPERATING LEASES The Company leases certain office and warehouse facilities under operating leases expiring on various dates through 2005. Many of leases contain escalation clauses, which have been reflected in the corresponding years' rent expense. During 1999 and 1998, the Company completed an assessment of its office facilities requirements in an effort to streamline its operations and improve its cost structure. In connection with this assessment, management approved a plan to consolidate redundant offices that had resulted from prior business acquisitions and to vacate the offices. The employees and related assets were consolidated into other offices in the same geographic area. As a result, the Company recorded a restructuring charge of approximately $13.3 million during the third quarter of 1999 including approximately $8.6 million related to noncancelable lease obligations on 29 abandoned facilities. Rental costs, including real estate taxes, were approximately $25.0 million and $14.4 million for the years ended December 31, 2000 and 1999, respectively, and $0.2 million for the period ended December 31, 1998. Estimated future minimum annual rental payments, exclusive of real estate taxes, required under all operating leases (excluding those considered redundant in the consolidation plan) that have initial or remaining noncancelable lease terms in excess of one year are approximately $23.2 million for 2001; $16.4 million for 2002; $12.5 million for 2003; $10.9 million for 2004; and $10.7 for 2005. LEGAL PROCEEDINGS As reported in the Company's Current Report on Form 8-K dated July 6, 2000 and in the Company's Quarterly Report for the period ended June 30, 2000, a lawsuit was filed on June 8, 2000 in the Delaware Court of Chancery by William Brown, III, on behalf of the public stockholders, alleging that the offer price made in the proposal by the majority stockholder, Richmont Capital Partners I, L.P. ("RCPI"), to purchase all outstanding shares of the Company is inadequate. The plaintiff class asserts that the Board of Directors has violated its fiduciary duties to the Company stockholders, including the duty of fair dealing. The plaintiff class seeks the enjoinder of the tender offer by RCPI or the rescission of the contract if the offer is consummated and the awarding of rescission damages. The suit has been consolidated with two other identical suits. All parties have been served, but there has been secured an indefinite extension to answer. Although discovery requests have been served by the plaintiff class's counsel, a response will not be due until 30 days after an agreement on the tender offer has been reached. No such agreement has currently been reached. As reported in the Company's Current Report on Form 8-K dated July 6, 2000 and in the Company's Quarterly Report on Form 10-Q for the period ended June 30, 2000, the Company entered into a Settlement Agreement and Mutual Release (the "Settlement Agreement") with Monroe & Company, LLC ("Monroe LLC") on June 13, 2000. Monroe LLC filed an action entitled MONROE & COMPANY, LLC V. MARKETING SPECIALISTS CORPORATION, Civil Action No. 99-4745, in Middlesex Superior Court, Commonwealth of Massachusetts, asserting, among other things, that it was due advisory fees arising out of letter agreements. The terms of the Settlement Agreement remain confidential. The Company is involved in various other legal proceedings that arise in the ordinary course of business. Management believes that the outcome of such legal proceedings will not have a material adverse impact on the Company's consolidated financial position or results of operations. 14. REDEEMABLE CONVERTIBLE PREFERRED STOCK UNDESIGNATED PREFERRED STOCK As of December 31, 2000, there were no shares of undesignated preferred stock outstanding. Holders of undesignated preferred stock would have priority over the holders of Common Stock with F-26 respect to dividends and to other distributions, including the distribution of assets upon liquidation. The Board of Directors has the authority, without stockholder authorization, to issue shares of undesignated preferred stock in one or more series and to fix the terms, limitations, relative rights and preferences and variations. PREFERRED STOCK On June 23, 2000, the Board of Directors of the Company authorized and provided for the issuance of up to 10,000 shares of 8.0% Convertible Paid-In-Kind Preferred Stock, par value $0.01 per share, with a stated value of $1,000 per share (the "Preferred Stock"). Each share of the Preferred Stock is convertible into that number of shares of Common Stock equal to the result obtained by dividing the stated value of the Preferred Stock by the conversion price in effect at the conversion date. All dividends on issued shares of the Preferred Stock are cumulative, whether or not the dividends are earned or declared, on a daily basis from the issue date and payable quarterly in arrears on each dividend payment date. Even if not declared, all unpaid dividends will compound quarterly at an annual dividend rate equal to 8.0%, or the applicable dividend rate. On June 22, 2010, the Company will be obligated to redeem, to the extend of funds legally available, all outstanding shares of the Preferred Stock at a redemption price equal to 100% of the liquidation preference per share. The liquidation preference per share will be equal to the greater of $1,000 per share or the amount that the equivalent number of shares of Common Stock (based on the conversion rate applicable at the liquidation date) would be entitled to receive, plus any unpaid dividends. On June 23, 2000, the Company issued 5,000 shares of Preferred Stock to MS Acquisition for an aggregate purchase price of $5.0 million pursuant to the terms of a preferred stock purchase agreement. On August 8, 2000, the Company issued 4,500 additional shares of Preferred Stock to MS Acquisition for an aggregate purchase price of $4.5 million pursuant to the terms of a preferred stock purchase agreement. On July 27, 2000, the Company received early termination of the waiting period in connection with its Hart-Scott-Rodino Antitrust Improvement Act filing thereafter allowing the conversion of the Preferred Stock to Common Stock of the Company. On August 21, 2000, the 9,500 shares of Preferred Stock previously issued to MS Acquisition were converted into 6,234,414 shares of Common Stock. Per the terms of the preferred stock purchase agreements, each share of Preferred Stock was converted into approximately 656.25 shares of Common Stock (i.e., the Preferred Stock's stated value of $1,000 divided by the conversion price of $1.5238). On August 17, 2000, the Company issued a $4.75 million promissory note to MS Acquisition. On August 30, 2000, the Company issued a $5.0 million promissory note to MS Acquisition. The Registered Notes and the New Senior Credit Facility are senior to these notes. The Company used the proceeds from both promissory notes for general corporate purposes. SERIES B PREFERRED STOCK On November 1, 2000, the Company's Board of Directors authorized the issuance of up to 20,000 shares of Series B 8.0% Convertible Paid-In-Kind Preferred Stock, $0.01 par value per share (the "Series B Preferred Stock"). The Series B Preferred Stock has a stated value of $1,000 per share. The Series B Preferred Stock is of equal class with the Preferred Stock previously authorized and any future designated series of preferred stock unless specifically noted in future preferred stock agreements. The Series B Preferred Stock has the same characteristics (i.e., dividend terms, conversion features) as the Preferred Stock. F-27 On November 1, 2000, the Company issued 12,397 shares of Series B 8.0% Convertible Paid-In-Kind Preferred Stock, $0.01 par value per share (the "Series B Preferred Stock) to MS Acquisition for an aggregate purchase price of approximately $12.4 million pursuant to the terms of a preferred stock purchase agreement. The purchase price consisted of the cancellation of the $4.75 million promissory note and the $5.0 million promissory note, including all accrued and unpaid interest, plus an additional cash payment of approximately $2.5 million to the Company. The incremental proceeds from the issuance of the Series B Preferred Stock were used for general corporate purposes. On November 9, 2000, the Company issued a $2.5 million promissory note to MS Acquisition. This promissory note is subordinate to the senior debt of the Company. The proceeds were used for general corporate purposes. The $2.5 million promissory note bears interest at a rate equal to the sum of an interest margin of 2.75% plus the applicable prime rate on the last business day of the quarter for which interest is payable. Interest is payable quarterly in arrears, commencing on December 31, 2000, and will continue through the maturity date. The $2.5 million promissory note and any unpaid and accrued interest will be payable on November 9, 2002, or on demand, under specified conditions. The Company is not permitted to repay the principal and unpaid and accrued interest on the $2.5 million promissory note on demand if the Company's borrowing base 30 days prior to a payment date is not at least $10.0 million, or 25% of the sum of the Company's payroll for the last four consecutive pay periods, whichever is greater. In the first quarter of 2001, the $2.5 million promissory note was converted into redeemable convertible preferred stock. See Note 20 for additional information. 15. STOCKHOLDERS' EQUITY Upon amendment and restatement of the Company's Certificate of Incorporation, the Company's authorized capital stock consists of 54,000,000 shares of Common Stock, $0.01 par value per share, of which 4,000,000 are designated as Restricted Common Stock and 1,000,000 shares of undesignated preferred stock. The holders of Common Stock are entitled to one vote per share for each share held of record on all matters to be voted on by stockholders. The holders of restricted Common Stock are entitled to 1/10th of one vote for each share held on all matters on which they are entitled to vote. Holders of restricted Common Stock are entitled to vote on all matters on which the holders of Common Stock are entitled to vote. Each share of restricted Common Stock will automatically convert into Common Stock on a share for share basis upon a disposition of such shares of restricted Common Stock which occurs after the later of the first day after the second anniversary of the consummation of the Offering and the Combination and the first day after the first election of Class II Directors occurring after the consummation of the Offering and the Combination. In the event of any liquidation, dissolution or winding-up of the affairs of the Company, holders of Common Stock will be entitled to share ratably in the Company's remaining assets after the payment, or provision for payment, of all of the Company's debts and obligations and after liquidation payments to holders of the outstanding shares of undesignated preferred stock, if any. On January 7, 2000, the Company issued 1,577,287 shares of Common Stock to MS Acquisition for an aggregate purchase price of $5.0 million ($3.17 per share) pursuant to the terms of a stock purchase agreement. On March 30, 2000, MS Acquisition purchased an additional 4,000,000 shares of Common Stock for an aggregate purchase price of $10.0 million ($2.50 per share) pursuant to the terms of a stock purchase agreement. The Company used the funds as an additional source of capital for operations and additional short-term and long-term liquidity. The offering, sale and issuance of these shares was exempt from registration under the Securities Act of 1933, as amended, pursuant to a private offering exemption under Section 4(2) promulgated thereunder. F-28 As indicated in Note 14, in 2000, the 9,500 outstanding shares of the Preferred Stock held by MS Acquisition were converted into 6,234,414 shares of Common Stock. As indicated in Note 9, $1.7 million of the Amended Term Loan value was allocated to detachable warrants issued as part of the March 30, 2000 refinancing. The estimated fair value of the warrants at the issuance date appears as a component of Additional Paid-In Capital in the accompanying Consolidated Balance Sheet as of December 31, 2000. 16. STOCK OPTION PLAN The Company maintains the Merkert American Corporation 1998 Stock Option and Incentive Plan (the "1998 Stock Plan", as amended). The 1998 Stock Plan provides for the award of incentive stock options ("ISOs"), non-qualified stock options ("NQSOs"), stock appreciation rights, deferred stock awards, restricted and unrestricted stock awards, performance share awards and dividend equivalent rights to all directors and employees of and consultants to the Company. In general, the terms of the awards granted are established by either the Board of Directors or a committee established by the Board of Directors. OPTION REPRICING In January 2000, the Company granted options to purchase approximately 1,300,000 shares of Common Stock to certain board members, executives and key employees under the 1998 Stock Plan, as amended. The options vest over 3 years from the grant date and are exercisable at $3.00 per share, which exceeded the quoted market price, over a period not to exceed ten years from the date of original grant in the case of an incentive stock option (five years in the case of an incentive stock option granted to the holder of more than 10% of the combined voting power of all classes of the Company's capital stock on the date of grant). Simultaneously, the Company (with the consent of the affected individuals) cancelled options to purchase 1,217,107 shares of Common Stock at exercise prices ranging from $3.00 to $15.00 per share. The newly issued stock options will be treated as variable options for accounting purposes, and the Company will record compensation expense over the vesting period to the extent that the quoted market price of the Common Stock exceeds the option exercise price. At the annual meeting of stockholders held in June 2000, the Company's stockholders approved an increase of the maximum number of shares of Common Stock available under the Company's 1998 Stock Plan, as amended, from 1,847,762 to 2,587,855. The Company had 298,663 options available for grant under the 1998 Stock Plan at December 31, 2000. F-29 Information with respect to all stock options is summarized below:
WEIGHTED AVG. ISOS NQSOS TOTAL EXERCISE PRICE -------- -------- ---------- -------------- OUTSTANDING AS OF MARCH 4, 1998.................. -- -- -- -- Granted.......................................... 347,000 310,000 657,000 $13.60 Exercised........................................ -- -- -- -- Cancelled........................................ -- -- -- -- -------- -------- ---------- ------ OUTSTANDING AS OF DECEMBER 31, 1998.............. 347,000 310,000 657,000 $13.60 Granted.......................................... 547,069 437,937 985,006 12.68 Exercised........................................ -- -- -- -- Cancelled........................................ (162,859) (67,938) (230,797) 12.59 -------- -------- ---------- ------ OUTSTANDING AS OF DECEMBER 31, 1999.............. 731,210 679,999 1,411,209 $13.12 Granted.......................................... 847,866 507,131 1,354,997 3.00 Exercised........................................ -- -- -- -- Cancelled........................................ (699,976) (517,131) (1,217,107) 12.61 -------- -------- ---------- ------ OUTSTANDING AS OF DECEMBER 31, 2000.............. 879,100 669,999 1,549,099 $ 4.67 ======== ======== ========== ====== EXERCISABLE AS OF DECEMBER 31, 2000.............. 307,043 213,707 520,750 ======== ======== ==========
The Company has adopted the disclosure-only provisions of SFAS 123. Had compensation expense for the Company's 1998 Stock Plan been determined using the fair value at the grant dates, the Company's pro forma net loss would have been approximately ($368.5) million and ($24.0) million for the years ended December 31, 2000 and 1999, respectively. Net loss available to common would have been approximately ($368.7) million and ($23.1) million for the years ended December 31, 2000 and 1999, respectively. Basic (and diluted) pro forma net loss per share would have been approximately ($17.56) and ($2.32) for the years ended December 31, 2000 and 1999, respectively. Pro forma compensation expense for options granted is reflected over the vesting period; therefore, future compensation expense may be greater as additional options are granted. The fair value of stock options granted was estimated on the date of grant using the Black-Scholes option-pricing model. The weighted average fair value of options granted was $2.55 and $3.11 per share during 2000 and 1999, respectively, assuming the following parameters:
2000 1999 -------- -------- Expected volatility......................................... 99.2% 50.0% Risk-free interest rates.................................... 6.63% 6.15% Expected term (years)....................................... 7.0 7.0 Dividend yield.............................................. -- --
F-30 17. EARNINGS PER SHARE The following table sets forth the computation of basic and diluted earnings per share:
PERIOD YEARS ENDED DECEMBER 31, ENDED -------------------------- DECEMBER 31, 2000 1999 1998 ------------ ----------- ------------- Numerator: Loss from continuing operations....... $ (364,830) $ (22,002) $ (1,518) =========== ========== ========== Income (loss) from discontinued operations.......................... $ (638) $ 435 $ 52 =========== ========== ========== Net loss available to common*......... $ (365,647) $ (21,567) $ (1,466) =========== ========== ========== Denominator: Weighted average shares--basic........ 20,998,381 9,973,759 1,891,000 Dilutive stock options................ -- -- -- Dilutive stock warrants............... -- -- -- ----------- ---------- ---------- Weighted average shares--diluted...... 20,998,381 9,973,759 1,891,000 =========== ========== ========== Number of options excluded as they would be antidilutive............... 1,549,099 1,411,209 657,000 =========== ========== ========== Number of warrants excluded as they would be antidilutive............... 687,136 -- -- =========== ========== ========== Per common share information--basic and diluted: Loss from continuing operations....... $ (17.38) $ (2.20) $ (0.81) =========== ========== ========== Income (loss) from discontinued operations.......................... $ (0.03) $ 0.04 $ 0.03 =========== ========== ========== Net loss available to common.......... $ (17.41) $ (2.16) $ (0.78) =========== ========== ==========
- ------------------------ (*) The 2000 amount represents the 2000 net loss less cumulative preferred dividends. 18. RESTRUCTURING AND OTHER NONRECURRING CHARGES RESTRUCTURING CHARGES RELATED FOR FORMER PERSONNEL In 1998, restructuring reserves of approximately $6.9 million were established for severance prior to the Combination. As of December 31, 1999, approximately $1.7 million of these reserves remained outstanding. Following the Merger, a decision was made to eliminate redundant personnel and facilities costs. This resulted in the recognition of a $13.3 million restructuring charge in the third quarter of 1999. The charge consisted of approximately $8.6 million relating to non-cancelable lease obligations on vacated facilities and $4.7 million related to severance and other personnel amounts in connection with the elimination of approximately 400 jobs. In 2000, the Company continued the integration of its business operations and the centralization of its corporate headquarters. In the third quarter of 2000, the Company recognized an additional restructuring charge of approximately $2.5 million, which consisted of severance and other termination benefits, in connection with the termination of approximately 180 employees. Except for the 1998 charges, which were part of the operating results of Rogers and Merkert prior to December 18, 1998, all charges appear as a reduction in the calculation of the Company's income from continuing F-31 operations. As of December 31, 2000, approximately $5.5 million of all established restructuring reserves remained outstanding, and the Company expects to complete these estimated obligations by the end of 2005. As the Company continues its integration plans, additional restructuring charges may be required. The estimated current portion of the restructuring reserves appears in Accrued Expenses in the consolidated balance sheets as of December 2000 and 1999, and the noncurrent portion appears in Other Liabilities. NONRECURRING CHARGES RELATED TO TRADE RECEIVABLES During the third quarter of 2000, the Company provided additional reserves for certain trade receivables related to the continuing integration of business processes into its corporate headquarters and changed its estimate related to the collectibility of its trade receivables outstanding in excess of 120 days. Management's change in the estimated realizable value of its receivables resulted in the recognition of approximately $19.5 million in nonrecurring charges, which appear as a reduction in the calculation of the Company's income from continuing operations. The provision for doubtful accounts for 2000 and 1999 was approximately $13.3 million and $6.1 million, respectively. 19. UNAUDITED QUARTERLY RESULTS Summarize quarterly results for 2000 and 1999 are as follows (amounts in thousands, except share and per share information):
2000 QUARTER ENDED -------------------------------------------- DEC. 31 SEP. 30(1) JUN. 30 MAR. 31 -------- ----------- -------- -------- Revenues................................. 97,372 89,563 99,451 94,444 Impairment loss.......................... 306,953 -- -- -- Nonrecurring charges..................... -- 19,451 -- -- Restructuring charge..................... -- 2,520 -- -- Loss from continuing operations.......... (314,666) (38,271) (5,356) (6,537) Income (loss) from discontinued operations............................. (1,623) 389 132 464 Net loss................................. (316,289) (37,882) (5,224) (6,073) Net loss available to common............. (316,468) (37,882) (5,224) (6,073) Net loss per share--basic and diluted.... (12.18) (1.68) (0.26) (0.39)
1999 QUARTER ENDED ----------------------------------------- DEC. 31 SEP. 30 JUN. 30 MAR. 31 -------- -------- -------- -------- Revenues.................................. 95,447 66,158 41,131 43,876 Restructuring charge...................... -- 13,290 -- -- Income (loss) from continuing operations.............................. (3,180) (17,331) (3,059) 1,568 Income (loss) from discontinued operations.............................. (215) 241 145 264 Net income (loss)......................... (3,395) (17,090) (2,914) 1,832 Net loss per share--basic and diluted..... (0.24) (1.61) (0.39) 0.25
- ------------------------ (1) The measurement date of the discontinued Private Label operations was November 30, 2000. The amounts in this table have been updated to reflect the results of discontinued operations for all periods presented. F-32 20. SUBSEQUENT EVENTS DISCONTINUED PRIVATE LABEL OPERATIONS On July 31, 2000, the Company signed a letter of intent to sell its Private Label operations, known as Buy Sell, to Woodland Partners. On January 19, 2001, the Company completed the sale of Buy Sell to Woodland Partners. For reporting purposes, Buy Sell qualified as a segment, as it represented a separate major line of business for the Company. For purposes of calculating the loss from discontinued operations, the measurement date was November 30, 2000, and the disposal date was January 19, 2001. The estimated ($0.6) million loss from the discontinued operations (as reported in the consolidated statement of operations for the year ended December 31, 2000) includes approximately $40.0 million of Buy Sell revenues for 2000 and no revenues for 2001. It includes a ($0.2) million provision for losses incurred, net of applicable taxes, during the phaseout period. Total estimated net assets transferred to Woodland Partners were approximately $1.7 million, which included approximately $1.8 million in trade receivables, $0.8 million in inventory and other current assets, and ($0.9) million in current liabilities. Accrued expenses in the consolidated balance sheet as of December 31, 2000, includes approximately $1.7 million of accrued losses related to Buy Sell activity that occurred after December 31, 2000. REMOVAL FROM NASDAQ SMALL CAP ISSUES LISTING Effective March 14, 2001, the Company's Common Stock will no longer be listed on the Nasdaq SmallCap Market. The Company is eligible for trading on the OTC Bulletin Board. ISSUANCE OF SERIES B PREFERRED STOCK On January 26, 2001, the Company issued 7,568 shares of the Series B Preferred Stock to MS Acquisition for an aggregate purchase price of approximately $7.6 million pursuant to the terms of a preferred stock purchase agreement. The purchase price consisted of the cancellation of the $2.5 million promissory note and, including all accrued and unpaid interest, plus an additional cash payment of approximately $5.0 million to the Company. A total of $4.0 million of the cash proceeds were received in December 2000 and appeared as a component of Other Liabilities in the consolidated balance sheet as of December 31, 2000. The incremental proceeds from the issuance of the Series B Preferred Stock were used for general corporate purposes. AUTHORIZATION AND ISSUANCE OF SERIES C PREFERRED STOCK On March 26, 2001, the Company's Board of Directors authorized the issuance of up to 20,000 shares of Series C 8.0% Convertible Paid-In-Kind Preferred Stock, $0.01 par value per share (the "Series C Preferred Stock"). The Series C Preferred Stock has a stated value of $1,000 per share. The Series C Preferred Stock is of equal class with the Preferred Stock and the Series B Preferred Stock previously authorized and any future designated series of preferred stock unless specifically noted in future preferred stock agreements. Each share of the Series C Preferred Stock is convertible into that number of shares of Common Stock equal to the result obtained by dividing the stated value of the Series C Preferred Stock by the conversion price in effect at the conversion date. All dividends on issued shares of the Series C Preferred Stock are cumulative, whether or not the dividends are earned or declared, on a daily basis from the issue date and payable quarterly in arrears on each dividend payment date. Even if not declared, all unpaid dividends will compound quarterly at an annual dividend rate equal to 8.0%, or the applicable dividend rate. F-33 On June 22, 2010, the Company will be obligated to redeem, to the extend of funds legally available, all outstanding shares of the Series C Preferred Stock at a redemption price equal to 100% of the liquidation preference per share. The liquidation preference per share will be equal to the greater of $1,000 per share or the amount that the equivalent number of shares of Common Stock (based on the conversion rate applicable at the liquidation date) would be entitled to receive, plus any unpaid dividends. On March 28, 2001, the Company issued 9,000 shares of the Series C Preferred Stock to MS Acquisition for an aggregate purchase price of $9.0 million in cash pursuant to the terms of a preferred stock purchase agreement. The proceeds from the issuance of the Series C Preferred Stock were used for general corporate purposes. On March 30, 2001, the Company issued 2,000 shares of the Series C Preferred Stock to MS Acquisition for an aggregate purchase price of $2.0 million in cash pursuant to the terms of a preferred stock purchase agreement. The proceeds from the issuance of the Series C Preferred Stock were used for general corporate purposes. F-34 INDEX TO EXHIBITS The following is a list of exhibits filed or incorporated by reference as a part of this Annual Report on Form 10-K:
EXHIBIT NO. DESCRIPTION - --------------------- ------------------------------------------------------------ 2.1 Amendment No. 1, dated July 8, 1999, to the Agreement and Plan of Merger, dated as of April 28, 1999, between Merkert American Corporation and Richmont Marketing Specialists Inc., attached as Annex A to Merkert American Corporation's Proxy Statement dated July 12, 1999 and incorporated herein by reference. 2.2 Agreement and Plan of Merger, dated as of April 28, 1999, between Merkert American Corporation and Richmont Marketing Specialists Inc., incorporated by reference to Exhibit 2.1 to Merkert American Corporation's Current Report on Form 8-K dated April 30, 1999. 3.1 Second Amended and Restated Certificate of Incorporation of Merkert American Corporation, incorporated by reference to Exhibit 3.1 to Merkert American Corporation's Amendment No. 7 to Registration Statement on Form S-1 filed December 15, 1998 (No. 333-53419). 3.2 Certificate of Amendment to the Second Amended and Restated Certificate of Incorporation of Merkert American Corporation, dated August 18, 1999, incorporated by reference to Exhibit 4.2 of the Company's Current Report on Form 8-K dated September 2, 1999. 3.3 Amended and Restated By-laws of Merkert American Corporation, incorporated by reference to Exhibit 3.2 of the Company's Annual Report on Form 10-K dated March 31, 1999. 4.1 Indenture, dated as of December 19, 1997, among Richmont Marketing Specialists Inc. and Texas Commerce Bank National Association, as Trustee, incorporated by reference to Exhibit 4.1 of Richmont Marketing Specialists Inc. Registration Statement on Form S-4 dated June 16, 1999. 4.2 First Supplemental Indenture, dated as of August 18, 1999, among the Company, Merkert American Co., Inc., United Brokerage Company, Buckeye Sales & Marketing, Inc., Marketing Specialists Sales Company, Bromar, Inc., Brokerage Services, Inc., Atlas Marketing Company, Inc., Meatmaster Brokerage, Inc., and Chase Bank of Texas, National Association, incorporated by reference to Exhibit 4.3 to the Quarterly Report on Form 10-Q dated September 30, 1999. 4.3 Second Supplemental Indenture, dated as of October 13, 1999, among the Company, its subsidiaries and Chase Bank of Texas, National Association, incorporated by reference to Exhibit 4.3 to the Company's Annual Report on Form 10-K filed April 15, 2000. 4.4 Third Supplemental Indenture, dated as of March 30, 2000, among the Company, certain Guarantor Subsidiaries and Chase Bank of Texas, National Association, incorporated by reference to Exhibit 4.4 to the Company's Annual Report on Form 10-K filed April 15, 2000. 4.5 Certificate of Merger, dated August 18, 1999, incorporated by reference to Exhibit 4.1 to the Company's Current Report on Form 8-K dated September 2, 1999. 4.6 Specimen Certificate for shares of Common Stock of the Company, incorporated by reference to Exhibit 4.1 to the Company's Amendment No. 6 to Registration Statement on Form S-1 dated November 19, 1998 (No. 333-53419).
EXHIBIT NO. DESCRIPTION - --------------------- ------------------------------------------------------------ 10.1 Warrant Agreement, dated as of March 30, 2000, among the Company and First Union Investors, Inc., incorporated by reference to Exhibit 10.3 to the Company's Annual Report on Form 10-K filed April 15, 2000. 10.2 Registration Rights Agreement, dated as of March 30, 2000, by and between the Company and First Union Investors, Inc., incorporated by reference to Exhibit 10.4 to the Company's Annual Report on Form 10-K filed April 15, 2000. 10.3 Stockholders Agreement, dated as of March 30, 2000, by and among the Company, First Union Investors, Inc., MS Acquisition Limited and Richmont Capital Partners I, L.P., incorporated by reference to Exhibit 10.5 to the Company's Annual Report on Form 10-K filed April 15, 2000. 10.4 Credit Agreement, dated March 30, 2000, among the Company and certain of its subsidiaries, as Borrowers, Chase Manhattan Bank, as agent, and the banks named therein, incorporated by reference to Exhibit 10.6 to the Company's Annual Report on Form 10-K filed April 15, 2000. 10.5 Second Amended and Restated Credit Agreement, dated March 30, 2000, among First Union National Bank, for itself and as agent, the other Lenders described therein and the Company and the Guarantors described therein, incorporated by reference to Exhibit 10.7 to the Company's Annual Report on Form 10-K filed April 15, 2000. 10.6 Second Amended and Restated Security Agreement, dated March 30, 2000, by and among the Company and its subsidiaries, in favor of First Union National Bank, as agent, incorporated by reference to Exhibit 10.8 to the Company's Annual Report on Form 10-K filed April 15, 2000. 10.7 Second Amended and Restated Pledge Agreement, dated March 30, 2000, by and among the Company and its subsidiaries, in favor of First Union National Bank, as agent, incorporated by reference to Exhibit 10.9 to the Company's Annual Report on Form 10-K filed April 15, 2000. 10.8 Second Amended and Restated Guaranty Agreement, dated March 30, 2000, by and among Marketing Specialists Sales Company, Bromar, Inc., and Paul Inman Associates, Inc., in favor of First Union National Bank, incorporated by reference to Exhibit 10.10 to the Company's Annual Report on Form 10-K filed April 15, 2000. 10.9 First Amendment to Credit Agreement, dated April 13, 2000, among the Company, Marketing Specialists Sales Company, Paul Inman Associates, Inc., Bromar, Inc. and The Chase Manhattan Bank, incorporated by reference to Exhibit 10.2 to the Company's Quarterly Report on Form 10-Q filed August 14, 2000. 10.10 Joinder Agreement, dated April 14, 2000, by The Sales Force Companies, Inc., the Company, Marketing Specialists Sales Company, Paul Inman Associates, Inc., Bromar, Inc. and The Chase Manhattan Bank, incorporated by reference to Exhibit 10.3 to the Company's Quarterly Report on Form 10-Q filed August 14, 2000. 10.11 Intercreditor Agreement, dated March 30, 2000, between and among the Company, Paul Inman Associates, Inc., Marketing Specialists Sales Company, and Bromar, Inc., as Debtors, and The Chase Manhattan Bank and First Union National Bank, as Agents, incorporated by reference to Exhibit 10.4 to the Company's Quarterly Report on Form 10-Q filed August 14, 2000. 10.12 Guaranty Agreement, dated March 30, 2000, of Richmont Capital Partners I, L.P., incorporated by reference to Exhibit 10.5 to the Company's Quarterly Report on Form 10-Q filed August 14, 2000.
EXHIBIT NO. DESCRIPTION - --------------------- ------------------------------------------------------------ 10.13 Security Agreement, dated March 30, 2000, by and among the Company, Marketing Specialists Sales Company, Paul Inman Associates, Inc., and Bromar, Inc., and The Chase Manhattan Bank, incorporated by reference to Exhibit 10.6 to the Company's Quarterly Report on Form 10-Q filed August 14, 2000. 10.14 Promissory Note, dated March 30, 2000, of the Company, Paul Inman Associates, Inc., Marketing Specialists Sales Company, and Bromar, Inc. issued to The Chase Manhattan Bank, incorporated by reference to Exhibit 10.7 to the Company's Quarterly Report on Form 10-Q filed August 14, 2000. 10.15 Promissory Note, dated April 14, 2000, of the Company, Paul Inman Associates, Inc., Marketing Specialists Sales Company, Bromar, Inc., and The Sales Force Companies, Inc. issued to The Chase Manhattan Bank, incorporated by reference to Exhibit 10.8 to the Company's Quarterly Report on Form 10-Q filed August 14, 2000. 10.16 Promissory Note, dated March 30, 2000, of the Company, Paul Inman Associates, Inc., Marketing Specialists Sales Company, and Bromar, Inc. issued to Credit Suisse/First Boston, incorporated by reference to Exhibit 10.9 to the Company's Quarterly Report on Form 10-Q filed August 14, 2000. 10.17 Promissory Note, dated April 14, 2000, of the Company, Paul Inman Associates, Inc., Marketing Specialists Sales Company, Bromar, Inc., and The Sales Force Companies, Inc. issued to Credit Suisse/First Boston, incorporated by reference to Exhibit 10.10 to the Company's Quarterly Report on Form 10-Q filed August 14, 2000. 10.18 Promissory Note, dated March 30, 2000, of the Company, Paul Inman Associates, Inc., Marketing Specialists Sales Company, and Bromar, Inc. issued to Fleet Capital Bank, incorporated by reference to Exhibit 10.11 to the Company's Quarterly Report on Form 10-Q filed August 14, 2000. 10.19 Promissory Note, dated April 14, 2000, of the Company, Paul Inman Associates, Inc., Marketing Specialists Sales Company, Bromar, Inc., and The Sales Force Companies, Inc. issued to Fleet Capital Bank, incorporated by reference to Exhibit 10.12 to the Company's Quarterly Report on Form 10-Q filed August 14, 2000. 10.20 Second Amended and Restated Term Note, as amended and restated March 30, 2000, of the Company issued to First Union National Bank, incorporated by reference to Exhibit 10.14 to the Company's Quarterly Report on Form 10-Q filed August 14, 2000. 10.21 Promissory Note, dated August 17, 2000, of the Company issued to Richmont Capital Partners I, L.P. in the principal amount of $4,750,000, incorporated by reference to Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q filed November 21, 2000. 10.22 Promissory Note, dated August 30, 2000, of the Company issued to Richmont Capital Partners I, L.P. in the principal amount of $4,999,999, incorporated by reference to Exhibit 10.2 to the Company's Quarterly Report on Form 10-Q filed November 21, 2000. 10.23 Deposit Security Agreement, dated as of October 5, 2000, by and between MS Acquisition Limited, a Delaware limited partnership, and The Chase Manhattan Bank, as agent for the Banks (as defined therein) in connection with the pledge by MS Acquisition Limited of cash and cash equivalents to increase the Company's borrowing availability, incorporated by reference to Exhibit 10.3 to the Company's Quarterly Report on Form 10-Q filed November 21, 2000. 10.24 Promissory Note, dated November 8, 2000, of the Company issued to Richmont Capital Partners I, L.P. in the principal amount of $2,500,000, incorporated by reference to Exhibit 10.5 to the Company's Quarterly Report on Form 10-Q filed November 21, 2000.
EXHIBIT NO. DESCRIPTION - --------------------- ------------------------------------------------------------ 10.25 First Amendment to Credit Agreement, dated November 17, 2000, by and among the Company, certain lenders described therein, and First Union National Bank, as Agent and as sole Lender, incorporated by reference to Exhibit 10.6 to the Company's Quarterly Report on Form 10-Q filed November 21, 2000. 10.26 Amended and Restated Intercreditor Agreement, dated November 17, 2000, between and among the Company, certain of its subsidiaries, The Chase Manhattan Bank, as agent for the Revolver Lenders (as defined therein), First Union National Bank, as agent for the Term Lenders (as defined therein), MS Acquisition Limited, and Richmont Capital Partners I, L.P., incorporated by reference to Exhibit 10.7 to the Company's Quarterly Report on Form 10-Q filed November 21, 2000. 10.27 Second Amendment to Credit Agreement dated November 17, 2000, among the Company, Marketing Specialists Sales Company, Paul Inman Associates, Inc., and The Sales Force Companies, Inc., certain banks or other lending institutions named therein, and The Chase Manhattan Bank, individually as a bank and as agent for itself and the other banks or lending institutions named therein, incorporated by reference to Exhibit 10.8 to the Company's Quarterly Report on Form 10-Q filed November 21, 2000. 10.28 Master Participation Agreement, dated November 17, 2000, by and among MS Acquisition Limited and various banks or other lending institutions named therein, incorporated by reference to Exhibit 10.9 to the Company's Quarterly Report on Form 10-Q filed November 21, 2000. 10.29 Common Stock Purchase Agreement, dated as of January 7, 2000, by and between the Company and MS Acquisition Limited, incorporated by reference to Exhibit 10.1 to the Company's Annual Report on Form 10-K filed April 15, 2000. 10.30 Common Stock Purchase Agreement, dated as of March 30, 2000, by and between the Company and MS Acquisition Limited, incorporated by reference to Exhibit 10.2 to the Company's Annual Report on Form 10-K filed April 15, 2000. 10.31 Stock Purchase Agreement, dated March 2, 2000, by and among Marketing Specialists Sales Company, as Buyer, The Sales Force Companies, Inc., as the Seller, and the Stockholders of the Company, incorporated by reference to Exhibit 10.11 to the Company's Annual Report on Form 10-K filed April 15, 2000. 10.32 Asset Purchase Agreement, dated as of November 18, 1999, by and among Marketing Specialists Sales Company and Johnson-Lieber, Inc., as amended by that certain First Amendment to Asset Purchase Agreement dated as of January 27, 2000, incorporated by reference to Exhibit 10.16 to the Company's Annual Report on Form 10-K filed April 15, 2000. 10.33 Stock Purchase Agreement, dated July 7, 1999, by and among Merkert American Corporation, as Buyer, Buckeye Sales & Marketing, Inc., d/b/a The Sell Group-Cleveland, as the Company, JF & JF Limited Partnership, as the Stockholder of the Company, and the Primary Parties, incorporated by reference to Exhibit 10.17 to the Company's Annual Report on Form 10-K filed April 15, 2000. 10.34 Stock Purchase Agreement, dated as of May 14, 1999, by and among Richmont Marketing Specialists Inc., Paul Inman Associates, Inc. and the Shareholders of Paul Inman Associates, Inc., as amended by that certain First Amendment to Stock Purchase Agreement dated as of August 13, 1999 and that certain Second Amendment to Stock Purchase Agreement dated as of August 18, 1999, incorporated by reference to Exhibit 10.18 to the Company's Annual Report on Form 10-K filed April 15, 2000.
EXHIBIT NO. DESCRIPTION - --------------------- ------------------------------------------------------------ 10.35 Stock Purchase Agreement, dated April 26, 1999, by and among Merkert American Corporation, as Buyer, United Brokerage Company d/b/a The Sell Group-Grand Rapids, Toledo, Detroit, Indianapolis and Fort Wayne, as the Company, and the Stockholders of the Company, incorporated by reference to Exhibit 10.19 to the Company's Annual Report on Form 10-K filed April 15, 2000. 10.36 Stock Purchase Agreement, dated January 20, 1999, among Merkert American Corporation, Sell, Inc. and the stockholders of Sell, Inc., incorporated by reference to Exhibit 10.36 to the Company's Annual Report on Form 10-K dated March 31, 1999. 10.37 Stock Purchase Agreement, closing date April 14, 2000, by and among Marketing Specialists Sales Company, as Buyer, The Sales Force Companies, Inc., as the Seller, and the Stockholders of the Company, incorporated by reference to Exhibit 10.18 to the Company's Quarterly Report on Form 10-Q filed August 14, 2000. 10.38 Management Agreement, dated as of June 30, 2000, by and among Marketing Specialists Sales Company, Mancini & Groesbeck, Inc., Mancini & Groesbeck, Inc. Montana, Tad Mancini and Chris Mancini, incorporated by reference to Exhibit 10.19 to the Company's Quarterly Report on Form 10-Q filed August 14, 2000. 10.39 Preferred Stock Purchase Agreement, dated June 23, 2000, by and between the Company and MS Acquisition Limited in connection with the sale by the Company of 5,000 shares of convertible paid-in-kind preferred stock, incorporated by reference to Exhibit 10.20 to the Company's Quarterly Report on Form 10-Q filed August 14, 2000. 10.40 Preferred Stock Purchase Agreement, dated August 8, 2000, by and between the Company and MS Acquisition Limited in connection with the sale by the Company of 4,500 shares of convertible paid-in-kind preferred stock, incorporated by reference to Exhibit 10.21 to the Company's Quarterly Report on Form 10-Q filed August 14, 2000. 10.41 Preferred Stock Purchase Agreement, dated November 1, 2000, by and between the Company and MS Acquisition Limited in connection with the issuance by the Company of 12,397 shares of Series B Convertible Paid-In-Kind Preferred Stock, incorporated by reference to Exhibit 10.4 to the Company's Quarterly Report on Form 10-Q filed November 21, 2000. 10.42 Registration Rights Agreement, dated as of August 18, 1999, by and among Merkert American Corporation, Gerald R. Leonard, Monroe & Company, LLC, JLM Management, LLC, Robert Doehler, Joseph T. Casey, Edward P. Grace, III, James Philopkosky, Sandra Monroe, Sean P. Spaulding and Jo-Anne Collins incorporated by reference to Exhibit 10.8 to the Quarterly Report on Form 10-Q dated November 15, 1999. 10.43 Post-Merger Voting Agreement, dated as of August 18, 1999, by and among MS Acquisition Limited, Ronald D. Pedersen, Bruce A. Butler, Gary R. Guffey, Jeffery A. Watt, Monroe & Company, LLC and JLM Management Company, LLC incorporated by reference to Exhibit 10.9 to the Quarterly Report on Form 10-Q dated November 15, 1999. 10.44 Advisory Agreement, dated as of August 18, 1999, by and among the Company, Monroe & Company, LLC and Richmont Capital Partners I, L.P. incorporated by reference to Exhibit 10.10 to the Quarterly Report on Form 10-Q dated November 15, 1999. 10.45* Asset Purchase and Sale Agreement for the acquisition of substantially all of the assets of the Dorann Foods, Merco Packaging, Merco Price Marking, and Merkert Laboratories Divisions of the Company and Marketing Specialists Sales Company by Woodland Partners, LLC, dated as of January 19, 2001. (filed herewith)
EXHIBIT NO. DESCRIPTION - --------------------- ------------------------------------------------------------ 10.46* Memorandum of Agreement by and among the Company, William F. Lee on behalf of the former stockholders of The Sales Force Companies, Inc. ("Sales Force") other than the Employee Stock Ownership Trust established by Sales Force ("ESOT") and the ESOT dated December 28, 2000. (filed herewith) 10.47* Preferred Stock Purchase Agreement, dated January 26, 2001, by and between the Company and MS Acquisition Limited in connection with the sale by the Company of 7,568 shares of convertible paid-in-kind preferred stock. (filed herewith) 10.48* Preferred Stock Purchase Agreement, dated March 28, 2001, by and between the Company and MS Acquisition Limited in connection with the sale by the Company of 9,000 shares of convertible paid-in-kind preferred stock. (filed herewith) 10.49* Exchange Agreement, dated as of February 12, 2001, by and between the Company and Gerald R. Leonard. (filed herewith) 10.50 Contract of Sale of Improved Property, dated February 17, 2000, by and between Bromar, Inc. and RCPI Office Properties, LLC ("Arizona Property"), incorporated by reference to Exhibit 10.12 to the Company's Annual Report on Form 10-K filed April 15, 2000. 10.51 Lease, dated February 17, 2000, between RCPI Office Properties, LLC and Marketing Specialists Sales Company ("Arizona Property"), incorporated by reference to Exhibit 10.13 to the Company's Annual Report on Form 10-K filed April 15, 2000. 10.52 Contract of Sale of Improved Property, dated February 17, 2000, by and between Bromar, Inc. and RCPI Office Properties, LLC ("California Property"), incorporated by reference to Exhibit 10.14 to the Company's Annual Report on Form 10-K filed April 15, 2000. 10.53* Agreement for Purchase and Sale of Real Property, dated December 15, 2000, by and between Steve Farnic and Marketing Specialists Sales Company, for the sale of 4.851 acres in Mecklenberg, County, North Carolina. (filed herewith) 10.54* Lease, dated May 15, 2000, between LaSalle Company, LLC and Marketing Specialists Sales Company for the Arizona Property. (filed herewith) 10.55* Lease, dated May 2, 2000, between IPT Partners, LLC and Marketing Specialists Sales Company for the California Property. (filed herewith) 10.56 Employment Agreement, dated April 2, 1996, between Marketing Specialists Sales Company and Ronald D. Pedersen, incorporated by reference to Exhibit 10.8 of Richmont Marketing Specialists Inc. Registration Statement on Form S-4 dated June 16, 1999. 10.57 Employment Agreement, dated April 2, 1996, between Marketing Specialists Sales Company and Bruce A. Butler, incorporated by reference to Exhibit 10.9 of Richmont Marketing Specialists Inc. Registration Statement on Form S-4 dated June 16, 1999. 10.58* Amendment to Employment Agreement, dated January 8, 2001, between the Company and Ronald D. Pedersen. (filed herewith) 10.59* First Amendment to Employment and Noncompetition Agreement, dated February 9, 2001, between the Company and Glenn F. Gillam. (filed herewith) 10.60 First Amendment to Amended and Restated Merkert American Corporation 1998 Stock Option and Incentive Plan, incorporated by reference to Exhibit 10.5 to the Company's Current Report on Form 8-K dated September 2, 1999. 10.61 Amendment to the Company's 1998 Stock Option Plan, filed as Appendix A to the Company's Definitive Proxy Statement filed June 16, 2000.
EXHIBIT NO. DESCRIPTION - --------------------- ------------------------------------------------------------ 10.62* Waiver and Third Amendment to Credit Agreement, dated as of March 30, 2001, among the Company, certain of its subsidiaries, the Agent (named therein) and the lenders parties thereto. (filed herewith) 10.63* Second Amendment to Credit Agreement, made as of April 19, 2001, by and among the Company and First Union National Bank, as Agent and sole Lender. (filed herewith) 21.1* Subsidiaries of the Company. 23* Consent of PricewaterhouseCoopers LLP. (included in Report of Independent Accountants). 24* Power of Attorney (included on signature page of this Form 10-K). 25* Consent of Arthur Andersen LLP.
- ------------------------ * Indicates that document is filed herewith. EX-10.45 2 a2045432zex-10_45.txt EXHIBIT 10.45 Exhibit 10.45 ASSET PURCHASE AND SALE AGREEMENT For the Acquisition of Substantially All of the Assets of the DORANN FOODS, MERCO PACKAGING, MERCO PRICE MARKING, and MERKERT LABORATORIES DIVISIONS of MARKETING SPECIALISTS CORPORATION and MARKETING SPECIALISTS SALES COMPANY by WOODLAND PARTNERS, LLC January 19, 2001 TABLE OF CONTENTS PAGE ---- ARTICLE I PURCHASE AND SALE OF ASSETS.........................................1 SECTION 1.01 PURCHASE AND SALE OF ASSETS...................................1 SECTION 1.02 PURCHASE PRICE................................................2 SECTION 1.03 ASSUMPTION OF LIABILITIES.....................................2 SECTION 1.04 CLOSING.......................................................3 SECTION 1.05 ADJUSTMENT TO PURCHASE PRICE..................................5 SECTION 1.06 FURTHER ASSURANCES............................................6 ARTICLE II REPRESENTATIONS AND WARRANTIES OF THE SELLER AND PRINCIPAL OWNERS.....................................6 SECTION 2.01 ORGANIZATION AND QUALIFICATION................................6 SECTION 2.05 TITLE.........................................................6 SECTION 2.07 LITIGATION....................................................6 SECTION 2.08 TAXES.........................................................7 SECTION 2.10 ASSUMED CONTRACTS.............................................7 SECTION 2.13 NO BROKER OR FINDER...........................................7 SECTION 2.15 INVENTORIES...................................................7 SECTION 2.09 CONSENTS AND APPROVALS........................................7 ARTICLE III REPRESENTATIONS AND WARRANTIES OF THE BUYER.......................7 SECTION 3.01 ORGANIZATION; AUTHORITY.......................................7 SECTION 3.02 NO CONFLICT...................................................8 SECTION 3.03 CONSENTS AND APPROVALS........................................8 SECTION 3.04 LITIGATION....................................................8 SECTION 3.05 NO BROKER OR FINDER...........................................8 ARTICLE IV COVENANTS OF THE SELLER............................................8 SECTION 4.01 ACCESS........................................................8 SECTION 4.02 COLLECTION OF ASSIGNED COMMISSIONS............................8 SECTION 4.03 ASSIGNMENT OF ASSUMED CONTRACTS...............................9 SECTION 4.04 CONDUCT OF BUSINESS...........................................9 SECTION 4.05 EMPLOYEES.....................................................9 ARTICLE V COVENANTS OF THE BUYER.............................................10 5.01 EMPLOYEES............................................................10 ARTICLE VI CONDITIONS PRECEDENT...............................................10 6.01 CONDITIONS TO EACH PARTY'S OBLIGATIONS............................10 6.02 CONDITIONS TO OBLIGATIONS OF THE BUYER............................10 6.03 CONDITIONS TO OBLIGATIONS OF THE SELLER...........................11 ARTICLE VII INDEMNIFICATION..................................................12 SECTION 7.01 SURVIVAL.....................................................12 SECTION 7.02 INDEMNIFICATION BY THE SELLER................................12 SECTION 7.03 INDEMNIFICATION BY THE BUYER.................................12 SECTION 7.04 NOTICE OF CLAIMS.............................................12 SECTION 7.05 LIMITATIONS ON INDEMNIFICATION...............................13 SECTION 7.06 OFFSET.......................................................13 ARTICLE VII MISCELLANEOUS....................................................13 -i- TABLE OF CONTENTS (CONTINUED) PAGE ---- SECTION 8.01 NOTICES......................................................13 SECTION 8.02 ENTIRE AGREEMENT.............................................14 SECTION 8.03 MODIFICATIONS AND AMENDMENTS.................................14 SECTION 8.04 WAIVERS AND CONSENTS.........................................14 SECTION 8.05 ASSIGNMENT...................................................15 SECTION 8.06 PARTIES IN INTEREST..........................................15 SECTION 8.07 GOVERNING LAW................................................15 SECTION 8.08 ARBITRATION..................................................15 SECTION 8.10 SEVERABILITY.................................................15 SECTION 8.11 INTERPRETATION...............................................15 SECTION 8.12 HEADINGS AND CAPTIONS........................................16 SECTION 8.13 ENFORCEMENT..................................................16 SECTION 8.15 EXPENSES.....................................................16 SECTION 8.16 CONFIDENTIALITY..............................................16 SECTION 8.17 COUNTERPARTS.................................................17 ii This Asset Purchase and Sale Agreement (the "Agreement") entered into as of this 19th day of January, 2001 by and among Woodland Partners, LLC, a Massachusetts limited liability company (the "Buyer"), Marketing Specialists Sales Company, a Delaware corporation ("MSSC") and Marketing Specialists Corporation, a Delaware corporation ("MSC", and collectively with MSSC, the "Seller"). W I T N E S E T H : WHEREAS the Seller is in the food and consumer products brokerage business and the following four operating divisions of Seller are involved in certain aspects of such business: Dorann Foods, Merco Packaging, Merco Price Marking and Merkert Laboratories (each a "Division" and collectively the "Divisions"); WHEREAS the Seller desires to sell, and the Buyer desires to purchase, substantially all of assets of the Divisions upon the terms and conditions set forth herein; WHEREAS in full and complete consideration for the transfer of such assets, Buyer shall assume and pay or otherwise satisfy certain accounts payable of the Divisions and shall assume certain contracts and liabilities associated with the business of the Divisions; and WHEREAS the Buyer and the Seller desire to enter into certain other agreements for their mutual benefit; NOW THEREFORE, in consideration of the premises and of the mutual covenants and agreements contained herein, and for other good and valuable consideration, the receipt and sufficiency of which are hereby mutually acknowledged, intending to be legally bound the parties hereby agree as follows: ARTICLE I PURCHASE AND SALE OF ASSETS SECTION 1.01 PURCHASE AND SALE OF ASSETS. Upon the terms and subject to the conditions set forth in this Agreement, at the Closing, the Seller shall transfer to the Buyer free and clear of all claims, charges, liens, contracts, rights, options, security interests, mortgages, encumbrances and restrictions whatsoever, except for the statutory trust or other rights of third parties created by the Perishable Agricultural Commodities Act ("PACA") (collectively, "Claims"), all right, title and interest of the Seller, in and to all of the tangible and intangible assets (collectively, the "Transferred Assets") owned by the Seller and reflected on the December 31 Balance Sheet and the Closing Balance Sheet (each as defined below) and used in connection with the of the operation of the businesses of the Divisions (collectively, the "Business"), including the following: (a) the inventory located at the sites set forth on SCHEDULE 1.01(a) as of the date hereof (the "Inventory"); (b) all pending sales orders of the Seller derived from operation of the Business; (c) any and all rights to represent principals set forth on SCHEDULE 1.01(c) hereto (the "Principals") for the customers and products set forth on SCHEDULE 1.01(c); (d) any and all rights under the Assumed Contracts (as defined in Section 1.03); (e) all accounts receivable set forth on SCHEDULE 1.01(e) hereto (the "Accounts Receivable"); (f) all right, title and interest of the Seller in and to the tradenames and/or assumed names listed on SCHEDULE 1.01(f) hereto (the "Tradenames"), including, without limitation, goodwill associated with the Tradenames; (g) any and all artwork, printing plates, vignettes and films utilized in the operation of the Seller's Merco Packaging division; (h) the originals or copies of any and all books and records, electronic or otherwise, relating to operation of the Business, including information that may be stored on the Seller's computer systems relating to the Divisions; and (i) all equipment set forth on SCHEDULE 1.01(i) hereto. Notwithstanding the foregoing, the Transferred Assets shall not include any assets associated with the "It Makes Cents(TM)" program and the Seller's BDS Marketing Division (other than a non-exclusive license to use the "BDS Marketing" name). The Seller shall transfer the Transferred Assets to the Buyer pursuant to a Bill of Sale in substantially the form attached hereto as EXHIBIT A (the "Bill of Sale") and such other documents and instruments as the Buyer or its counsel may reasonably request. SECTION 1.02 PURCHASE PRICE. As full and complete consideration for the transfer of the Transferred Assets, the Buyer shall assume and pay or otherwise satisfy the accounts payable set forth on SCHEDULE 1.02 hereto (collectively, the "Accounts Payable"), shall assume the Assumed Contracts, including, without limitation, the rights and liabilities thereunder, and shall assume those liabilities of the Seller as set forth in Section 1.03 below. SECTION 1.03 ASSUMPTION OF LIABILITIES. The Buyer shall assume and, subject to all rights against third parties of offset, defenses, causes of action, counterclaims and claims of any nature that may be available to the Buyer in respect thereto, shall agree to satisfy and discharge, as the same shall become due, (a) the Accounts Payable, and (b) the liabilities and obligations of the Seller solely with respect to the leases and contracts and other liabilities described in SCHEDULE 1.01(d) hereto to which the Seller is a party (the "Assumed Contracts"), but only with respect to obligations arising under such Assumed Contracts that constitute Accounts Payable or that relate to the period of time after or arise after the effective date of assignment, the obligations described above, collectively the "Assumed Obligations"; provided, however, that the Buyer expressly assumes any and all liabilities of the Divisions arising from the statutory trust or other rights of third parties created under PACA and relating to the Transferred Assets ("PACA Liabilities"). Except as specifically set forth in the foregoing sentence, the Buyer does not and shall not assume any debts, liabilities, claims or other obligations (collectively, "Liabilities") of the Seller regardless of when the same may arise or may have arisen, including without limitation, (i) any amounts owed to any 2 employees of the Seller for obligations including salary, benefits, earned but unpaid vacation time, profit sharing contributions and bonuses, (ii) Liabilities arising under any employee benefit plan of the Seller, (iii) liabilities which arise or are asserted by operation of any law, other than PACA liabilities, including but not limited to any liability which may be sought to be imposed on the Buyer as successor to any part of the Business or any other part of Seller's business, or otherwise, by reason of any event (including but not limited to the provision of services by the Seller prior to the date hereof), act or omission, injury or transaction which shall have occurred or failed to have occurred, whether by reason of the operation of the Business or otherwise, prior to the date hereof, (iv) any liability in respect of the Seller's operations of the Business on and prior to the date hereof, (v) in respect of any express or implied representation, warranty or guarantee made in connection with any of the Seller's services or operations or which are or may be imposed by operation of law in respect of any operations prior to the date hereof, or (vi) any liabilities associated with the "It Make Cents(TM)" program and Seller's BDS Marketing Division except for any liabilities related to the Buyer's use of the "BDS Marketing" Name under the non-exclusive license. With respect to the Assumed Contracts, the Buyer shall have no liability or obligation to perform thereunder unless all of the Seller's rights thereunder have been fully and effectively assigned to the Buyer and, the Buyer shall be entitled to receive all of the benefits thereunder. The Seller shall use its best efforts to obtain, where required, the consents of the appropriate parties to the assignment and transfer of the Assumed Contracts to the Buyer hereunder. SECTION 1.04 CLOSING. Subject to the satisfaction or waiver of each of the conditions set forth in Articles VI and VII of this Agreement, the closing of the transactions contemplated by this Agreement (the "Closing") shall take place at the offices of Mintz, Levin, Cohn, Ferris, Glovsky and Popeo, P.C., One Financial Center, Boston, Massachusetts at 10 o'clock a.m., on the date hereof, or such other location, date and time as may be agreed upon by the parties (such date and time being called the "Closing Date"). At the Closing: A. The Seller shall execute or cause to be executed and deliver or cause to be delivered to the Buyer the following: (i) The Bill of Sale in the form of EXHIBIT A hereto (the "Bill of Sale"); (ii) copy of the resolutions of the Seller, certified by its Secretary, authorizing and approving the execution, delivery and performance of this Agreement and the transactions contemplated hereby and the acts of the officers and employees of the Seller in carrying out the terms and provisions hereof; (iii) (a) the Articles of Incorporation, as amended (or similar organizational document), of each of MSC and MSSC, certified by the Secretary of State of the State of Delaware, as of a date not earlier than thirty (30) business days prior to the date hereof and accompanied by a certificate of the Secretary 3 or Assistant Secretary of each of MSC and MSSC, respectively, dated as of the date hereof, stating that no amendments have been made to such Articles of Incorporation since such date; (b) the By-laws (or similar organizational documents) of each of MSC and MSSC certified by the Secretary or Assistant Secretary of each of MSC and MSSC, respectively, stating that no amendments have been made to such By-laws; and (c) such other closing documents as the Buyer may reasonably require; (iv) A good standing certificate for each of MSC and MSSC from the Secretary of State of the State of Delaware dated not earlier than thirty (30) business days prior to the date hereof; and (v) A Non-Competition Agreement in the form of EXHIBIT C hereto. B. The Buyer shall execute or cause to be executed and deliver or cause to be delivered to the Seller the following: (i) A copy of the resolutions of the Buyer certified by its Secretary, authorizing and approving the execution, delivery and performance of this Agreement and the transactions contemplated hereby and the acts of the officers and employees of the Buyer in carrying out the terms and provisions hereof. (ii) (a) the Certificate of Limited Liability Company of the Buyer, certified by the Secretary of State of the Commonwealth of Massachusetts, as of a date not earlier than fifteen (15) business days prior to the date hereof and accompanied by a certificate of the Secretary or Assistant Secretary of the Buyer dated as of the date hereof, stating that no amendments have been made to such Certificate since such date; (b) the Operating Agreement (or similar organizational documents) of the Buyer certified by the Secretary or Assistant Secretary of the Buyer stating that no amendments have been made to such Operating Agreement; and (c) such other closing documents as the Seller may reasonably require; and (iii) A certificate of full force and effect for the Buyer from the Secretary of State of the Commonwealth of Massachusetts dated not earlier than fifteen (15) business days prior to the date hereof. 4 C. The appropriate parties shall execute and deliver: (i) Release and Separation Agreements ("Separation Agreements") substantially in the form of EXHIBIT E attached hereto by and between the Seller and each of the individuals set forth on SCHEDULE 1.04(C)(i), other than Rogers (as defined below); (ii) An Artwork and Layout Services Agreement in the form of EXHIBIT F hereto (the "Artwork Agreement"); (iii) An Assignment and Assumption Agreement in the form of EXHIBIT G hereto (the "Assignment"); (iv) Occupancy Agreements in the form of EXHIBIT H-1 and EXHIBIT H-2 hereto and a side letter in the form of EXHIBIT H-3 hereto (collectively, the "Occupancy Agreements"); (v) An Amendment of Employment Separation Agreement and Release in the form of EXHIBIT J hereto (the "Amendment"); (vi) Release and Assumption Agreements substantially in the form of EXHIBIT K hereto ("Release Agreements", and together with the Separation Agreements, the Artwork Agreement, the Bill of Sale, the Assignment, the Occupancy Agreements and the Amendment, the "Ancillary Agreements") by and among the Buyer, the Seller and each of the entities set forth on SCHEDULE 1.04(C)(vi) hereto; (vii) A Transfer Agreement by and among the Buyer, the Seller and the CIT Group/Equipment Financing, Inc. (the "Transfer Agreement") relating to the transfer from the Seller to the Buyer of the purchase contract for the NISSAN PE30 Forklift more fully described on SCHEDULE 1.01(i); and (viii) Such further documents, resolutions, certificates and instruments as any party or his, her or its counsel reasonably requests to facilitate the consummation of the transactions contemplated hereby. D. The Seller shall deliver or cause to be delivered via Federal Express, to Sidney D. Rogers, Jr. ("Rogers") a check in the amount of $34,834, less appropriate withholding, as consideration for Rogers' entering into the Amendment of Employment Separation Agreement and Release. SECTION 1.05 BALANCE SHEETS/POST-CLOSING ADJUSTMENT. The Buyer and the Seller hereby each agree and acknowledge that the consummation of the transactions contemplated hereby have 5 been predicated, subject to the potential adjustment below, on a consolidated balance sheet for the Divisions dated as of December 31, 2000, a copy of which is attached hereto as EXHIBIT I (the "December 31 Balance Sheet"). Within fifteen (15) business days following the Closing Date, the Buyer and the Seller shall jointly prepare a consolidated balance sheet for the Divisions as of the Closing Date (the "Closing Balance Sheet"), substantially on the same basis as the December 31 Balance Sheet. On the Closing Balance Sheet, Total Liabilities of the Divisions, as described on the December 31 Balance Sheet and the Closing Balance Sheet ("Total Liabilities"), shall not exceed Total Assets of the Divisions, as described on the December 31 Balance Sheet and the Closing Balance Sheet ("Total Assets"), by MORE than $100,000. If on the Closing Balance Sheet Total Assets exceed Total Liabilities, the Buyer shall immediately, after receiving and having an opportunity to review and verify the Closing Balance Sheet, pay the Seller, by wire transfer, or other means satisfactory to the Seller, the amount of such excess. SECTION 1.06 FURTHER ASSURANCES. At any time and from the time to time after the Closing Date, at the request of the other party and without further consideration, the Seller or the Buyer, as applicable, will execute and deliver such other instruments of sale, transfer, conveyance, assignment and confirmation as may be reasonably requested in order to more effectively transfer, convey and assign to the Buyer the Transferred Assets. ARTICLE II REPRESENTATIONS AND WARRANTIES OF THE SELLER As an inducement to the Buyer to enter into this Agreement and to consummate the transactions contemplated hereby, the Seller hereby represents and warrants to the Buyer as follows: SECTION 2.01 ORGANIZATION; AUTHORITY. MSC and MSSC are each duly incorporated, validly existing and in good standing under the laws of State of Delaware and each has corporate power and authority to enter into this Agreement and the Ancillary Agreements contemplated hereby and thereby. The execution and delivery by each of MSC and MSSC of this Agreement and the Ancillary Agreements to which each is a party, and the consummation of the transactions contemplated hereby and thereby have been duly authorized and no other proceedings on the part of either MSC or MSSC are necessary with respect thereto. This Agreement and the Ancillary Agreements to which either MSC and/or MSSC is a party have been duly executed and delivered by each of MSC and MSSC, as applicable, and constitute valid obligations of the Seller enforceable against each of MSC and MSSC, as applicable, in accordance with their terms except as their terms may be limited by (i) bankruptcy, insolvency or similar laws affecting the creditors' rights generally or (ii) general principles of equity, whether considered in a proceeding in equity or at law. SECTION 2.02 TITLE. Except as set forth on SCHEDULE 2.02, the Seller will have, as of the Closing Date, good, valid and marketable title to the Transferred Assets free and clear of all liens, and there exist no restrictions on the transfer of the Transferred Assets. SECTION 2.03 LITIGATION. Except as set forth on SCHEDULE 2.02, no action, suit, claim, investigation or proceeding is pending or, to the knowledge of Seller, threatened, which (i) may have a materially adverse effect on the Transferred Assets, the Assumed Contracts, or the Business, or (ii) seeks to prevent, restrict or delay consummation of the transactions contemplated by this Agreement or the Ancillary Agreements. There are no outstanding orders, writs, judgments, 6 injunctions or decrees of any court, governmental agency or arbitration tribunal against, involving or affecting the Business or the Transferred Assets. The Seller is not in default with respect to any order, writ, injunction or decree known to or served upon it from any court or of any federal, state, municipal or other governmental department, commission, board, bureau, agency or instrumentality, domestic or foreign relating to the Business. There is no action or suit by the Seller pending or threatened against others relating to the Business or the Transferred Assets. SECTION 2.04 TAXES. The Seller has not taken or failed to take any action which could create any tax lien on any of the Transferred Assets. Except as so reflected and provided for on SCHEDULE 2.02, no tax liabilities, disallowances, or assessments have been assessed or proposed which remain unpaid and, to the best knowledge of the Seller, no fact or state of facts exists or has existed which would constitute the grounds for the assessment of any tax liability relating to the Transferred Assets. SECTION 2.05 ASSUMED CONTRACTS. SCHEDULE 1.01(d) lists all of the Assumed Contracts, whether oral or written. The Seller has delivered to the Buyer true, correct and complete copies of all of the Assumed Contracts, or, with respect to any oral Assumed Contracts, has provided to the Buyer a complete and accurate written description thereof. SECTION 2.06 NO BROKER OR FINDER. No broker, finder or other financial consultant has acted on behalf of the Seller in connection with this Agreement or the transactions contemplated hereby in such a way as to create any liability affecting the Buyer. SECTION 2.07 BALANCE SHEET. The December 31 Balance Sheet does not contain any untrue statement of a material fact nor does it omit to state a material fact necessary in order to make the statements contained therein, in the light of the circumstances under which they were made, not misleading, except to the extent that such statement or omission, as the case may be, would not, either singly or in the aggregate, have a material adverse effect on the Business or the Transferred Assets. SECTION 2.08 CONSENTS AND APPROVALS. Except as to consents already obtained or as set forth on SCHEDULE 2.08, the execution, delivery and performance of this Agreement and the Ancillary Agreements by the Seller do not require any other consent, approval, authorization or other action by or filing with or notification to, any governmental body or agency or other person. ARTICLE III REPRESENTATIONS AND WARRANTIES OF THE BUYER The Buyer represents and warrants to the Seller as follows: SECTION 3.01 ORGANIZATION; AUTHORITY. The Buyer is duly organized, validly existing and in full force and effect under the laws of the Commonwealth of Massachusetts and has all necessary power and authority to enter into this Agreement and the Ancillary Agreements contemplated hereby and thereby. The execution and delivery by the Buyer of this Agreement and the Ancillary Agreements to which it is a party, and the consummation of the transactions contemplated hereby and thereby have been duly authorized and no other proceedings on the part of the Buyer are necessary with respect thereto. This Agreement and the Ancillary Agreements to which the Buyer 7 is a party have been duly executed and delivered by the Buyer and constitute valid obligations of the Buyer enforceable against the Buyer in accordance with their terms except as their terms may be limited by (i) bankruptcy, insolvency or similar laws affecting the creditors' rights generally or (ii) general principles of equity, whether considered in a proceeding in equity or at law. SECTION 3.02 NO CONFLICT. The execution and delivery by the Buyer of this Agreement and the Ancillary Agreements to which it is a party do not, and the consummation of the transactions contemplated hereby and thereby will not violate or result in a breach of any provision of its Certificate of Incorporation or of any agreement entered into by the Buyer since the date of its incorporation. SECTION 3.03 CONSENTS AND APPROVALS. There is no requirement applicable to the Buyer to make any filings with or to obtain the consent or approval of any person or entity as a condition to the consummation of the transactions contemplated by this Agreement and the Ancillary Agreements. SECTION 3.04 LITIGATION. No action, suit, claim, investigation or proceeding is pending or, to the knowledge of the Buyer, threatened against the Buyer, which seeks to prevent, restrict or delay consummation of the transactions contemplated by this Agreement or the Ancillary Agreements. SECTION 3.05 NO BROKER OR FINDER. No broker, finder or financial consultant has acted on behalf of the Buyer in connection with this Agreement or the transactions contemplated hereby in such a way as to create any liability affecting the Seller. SECTION 3.06 PACA. The Buyer is aware of PACA and that the Transferred Assets may be subject to PACA Liabilities. SECTION 3.07 ASSUMED CONTRACTS. The Buyer has received complete and accurate copies or written descriptions of all Assumed Contracts. ARTICLE IV COVENANTS OF THE SELLER The Seller covenants and agrees with the Buyer as follows: SECTION 4.01 ACCESS. Following the Closing, the Seller shall provide the Buyer with access, during normal working hours, to any and all records relating to the Transferred Assets or the Business which remain in the possession of the Seller or its accountants, attorneys and other third parties in order to allow Buyer (i) to verify the December 31 Balance Sheet or prepare or verify the Closing Balance Sheet, (ii) to respond to any claim, action or proceeding arising out of the transactions contemplated by this Agreement, or (iii) to conduct the Business. SECTION 4.02 COLLECTION OF ACCOUNTS RECEIVABLE. The Seller shall use all reasonable efforts to ensure that the proceeds of all Accounts Receivable acquired by the Buyer pursuant to this Agreement, shall be paid to the Buyer. To the extent that proceeds of any such Accounts 8 Receivable are received by the Seller subsequent to the Closing Date, the Seller shall promptly deliver such proceeds to the Buyer within 2 business days of receipt by the Seller. SECTION 4.03 ASSIGNMENT OF ASSUMED CONTRACTS. The Seller shall use its best efforts to cause to be fully and effectively assigned to the Buyer the Assumed Contracts listed on SCHEDULE 1.01(d), to the extent not assigned prior to the Closing Date, within thirty (30) days after the Closing Date. SECTION 4.04 CONDUCT OF BUSINESS. From the date hereof through the Closing Date, Seller shall continue to carry on the Business in the usual and ordinary course and in substantially the same manner as conducted prior to the date hereof. Without limiting the generality of the foregoing sentence, Seller shall maintain and keep all tangible Transferred Assets and any other tangible properties of the Business in good condition and repair (ordinary wear and tear excepted), keep in full force and effect all insurance coverage covering the Business and/or the Transferred Assets, maintain in effect all of the Business' leases (except those leases, if any, that may expire in accordance with their respective terms and the Brandon, Florida lease), use all reasonable efforts to attempt to maintain the Business' present employees and the Business' relationships with the Business' suppliers and customers, including without limitation, the Principals, so that such relationships will be preserved for the Buyer after the Closing Date, maintain the Inventory at levels consistent with past practice, and continue to collect the Business' Accounts Receivable in the same manner as it has prior to the date hereof; provided, however, that notwithstanding the foregoing to the contrary, (i) Seller shall use its best efforts to apply proceeds of accounts receivable of the Divisions to accounts payable of the Divisions on a weekly basis (the determination of which accounts payable to be paid may take into account the recommendation of management of the Divisions and such other factors as Seller deems advisable), and (ii) Seller shall take such action as it deems necessary or appropriate to ensure that the Total Liabilities are no more than $100,000 greater than the Total Assets on the Closing Date. SECTION 4.05 EMPLOYEES. To the extent required by applicable law, Seller shall afford Seller's employees who accept employment with Buyer, as described in Section 5.01, all applicable COBRA rights. Seller hereby acknowledges that Buyer shall not be responsible for (i) any costs incurred by Seller in connection with the cessation (by resignation or otherwise) of employment of any Seller employee who chooses to accept employment with Buyer, or (ii) for any costs incurred in respect of Seller employees who choose not to accept employment with Buyer. SECTION 4.06 FORKLIFT TITLE. Within 30 days after the Closing Date, the Seller will attempt to locate and deliver to the Buyer title to the NISSAN 2500 forklift more fully described on SCHEDULE 1.01(i), or, if such title is not located, the Seller will attempt to obtain a replacement title and forward such replacement to the Buyer. SECTION 4.07 VANS. The Seller shall sublease (the "Sublease") to the Buyer four (4) insured Chevrolet cargo vans (the "Vans") used by the Divisions in connection with the Business in return for receipt of the Monthly Payment (as defined below) from Buyer as described in Section 5.02 below. The Sublease shall continue for the duration of the Seller's lease (the 9 "Lease") for the Vans with the Vans' original lessor (the "Lessor"). The Seller and Buyer will mutually use best efforts to attempt to obtain consent for the Sublease from the Lessor within two (2) weeks following the Closing Date, provided that if such consent in not obtained with such time frame, the Seller and the Buyer agree that the Sublease shall immediately terminate. The Seller agrees to maintain insurance for the Vans in the same amounts as before the Closing Date for so long as the Sublease continues and the Buyer remains in compliance with the provisions of Section 5.02. ARTICLE V COVENANTS OF THE BUYER SECTION 5.01 EMPLOYEES. Subject to its usual and customary hiring policies and procedures, the Buyer shall offer all current employees of the Divisions employment, at-will or otherwise at the Buyer's discretion, at salary levels comparable to or higher than their then respective salary levels with Seller. SECTION 5.02 VANS. The Buyer shall Sublease the Vans from the Seller. For so long as the Sublease is in effect, the Buyer shall pay to the Seller an aggregate payment of $2904 per month (the "Monthly Payment") on or before the date each month that Seller's lease payments for the Vans are due to the Lessor. The Monthly Payment shall be for use of the Vans and for insurance coverage for the Vans. The cost of maintenance, except as may be otherwise provided in the Lease, and of fuel for the Vans shall be borne by the Buyer. The Sublease shall continue for the duration of the Seller's lease for the Vans with the Lessor. The Seller and Buyer will mutually use best efforts to attempt to obtain consent for the Sublease from the Lessor within two (2) weeks following the Closing Date, provided that if such consent in not obtained with such time frame, the Seller and the Buyer agree that the Sublease shall immediately terminate. ARTICLE VI CONDITIONS PRECEDENT SECTION 6.01 CONDITIONS TO EACH PARTY'S OBLIGATIONS. The obligations of each party to perform this Agreement are subject to the satisfaction of the following conditions, at or prior to the Closing unless waived (to the extent such conditions can be waived) by each party hereto: (a) APPROVAL. This Agreement shall have been duly and validly approved by the Members of the Buyer and the Board of Directors of the Seller. All authorizations, consents, orders or approvals of, or declarations or filings with or expiration of waiting periods imposed by any governmental agency, authority or other entity necessary for the consummation of the transactions contemplated hereby shall have been obtained or made or shall have occurred. Approval of the transaction by all creditors, and other persons contractually bound to Seller shall have been obtained or made to the extent any such approvals are required. (b) ANCILLARY DOCUMENTS. Each of the Ancillary Documents shall have been executed and delivered. SECTION 6.02 CONDITIONS TO OBLIGATIONS OF THE BUYER. The obligations of the Buyer to perform this Agreement at or prior to the Closing are subject to the satisfaction of the following conditions unless waived (to the extent such conditions can be waived) by the Buyer: 10 (a) REPRESENTATIONS AND WARRANTIES OF THE SELLER. The representations and warranties of the Seller set forth in Article II hereof shall be true and correct in all material respects (except for any representation or warranty that by its term is qualified by materiality, in which case it shall be true and correct in all respects) as of the Closing Date (excluding any representation or warranty that refers specifically to the date of this Agreement, "the date hereof" or any other date other than the Closing Date) as though made on and as of the Closing Date, and the Buyer shall have received certificates from each of MSC and MSSC signed by an authorized officer of MSC and MSSC, respectively, to that effect. (b) PERFORMANCE OF OBLIGATIONS OF THE SELLER. The Seller shall have performed in all material respects the obligations required to be performed by it under this Agreement prior to or as of the Closing Date and the Buyer shall have received a certificate signed by an authorized officer of each MSC and MSSC on behalf of each of MSC and MSSC, respectively, to that effect. (c) BUYER'S REVIEW. A review of the assets, contractual commitments, obligations and books and records of Seller relating to the Transferred Assets or the Business by Buyer's personnel and professional advisors shall have been completed and the results of such review shall have been deemed satisfactory by Buyer in its sole discretion. (d) UCC-3S. Chase and First Union (as defined herein) shall have executed and delivered to Fleet National Bank UCC-3s in the form attached hereto as SCHEDULE 6.02(d). SECTION 6.03 CONDITIONS TO OBLIGATIONS OF THE SELLER. The obligations of the Seller to perform this Agreement at or prior to the Closing are subject to the satisfaction of the following conditions unless waived (to the extent such conditions can be waived) by the Seller: (a) REPRESENTATIONS AND WARRANTIES OF THE BUYER. The representations and warranties of the Buyer set forth in Article II hereof shall be true and correct in all material respects (except for any representation or warranty that by its term is qualified by materiality, in which case it shall be true and correct in all respects) as of the Closing Date (excluding any representation or warranty that refers specifically to the date of this Agreement, "the date hereof" or any other date other than the Closing Date) as though made on and as of the Closing Date, and the Seller shall have received certificates signed by the the Managing Member or President of the Buyer to that effect. (b) PERFORMANCE OF OBLIGATIONS OF THE BUYER. The Buyer shall have performed in all material respects the obligations required to be performed by it under this Agreement prior to or as of the Closing Date, and the Seller shall have received a certificate signed by the President or Executive Vice President of the Buyer on behalf of the Buyer to that effect. ARTICLE VII INDEMNIFICATION SECTION 7.01 SURVIVAL. All representations and warranties in this Agreement, or in any instrument or document furnished in connection with this Agreement or the transactions contemplated hereby, shall survive (i) the closing of the transactions contemplated hereby and (ii) 11 any investigations at any time made by or on behalf of any party and shall continue for twelve (12) months following Closing Date (the "Survival Date") except for those representations and warranties set forth in Sections 2.04, which shall survive the closing and continue for the full period of the applicable statute of limitations and until finally resolved and satisfied in full if asserted on or prior to the expiration of the applicable statute of limitations. All representations or warranties in respect of which indemnification may be sought under this Article VII shall survive the applicable survival date if written notice, given in good faith, of the specific breach thereof is given to the other party prior to the applicable survival date, whether or not liability has actually been incurred. SECTION 7.02 INDEMNIFICATION BY THE SELLER. Except in any case or proceeding that may be brought against the Buyer regarding PACA Liabilities, the Seller agrees to indemnify, defend and hold harmless the Buyer and any of its subsidiaries, officers, directors, employees, agents, stockholders, successors and assigns (collectively, "Buyer Indemnified Parties"), from and against any and all claims, liabilities, expenses, losses, damages, actions, suits and judgments (including, without limitation, reasonable attorney's fees and costs of litigation) of any kind or nature whatsoever, whether known or unknown, fixed or contingent, absolute, threatened or otherwise (collectively, "Damages") to the extent such Damages arise out of or result from, directly or indirectly, (i) the assertion of claims made against any of the Buyer Indemnified Parties relating to the Transferred Assets, the Business or the consummation of the transactions contemplated hereby, (ii) any inaccuracy in any representation or breach of any agreement, covenant, warranty, representation or other obligation of the Seller made or incurred in connection with the transactions contemplated hereby that affects the value of the Transferred Assets or the Business, or (iii) any liability or obligation of the Seller not expressly assumed by the Buyer under the terms of this Agreement. SECTION 7.03 INDEMNIFICATION BY THE BUYER. The Buyer agrees to indemnify, defend and hold harmless the Seller from and against any and all Damages to the extent such Damages arise out of or result from, directly or indirectly, (i) any inaccuracy in any representation or breach of any agreement, covenant, warranty, representation or other obligation of the Buyer made or incurred in connection with the transactions contemplated hereby, (ii) the Buyer's operation of the Business or its ownership of the Transferred Assets or representation of the Principals after the Closing Date, (iii) PACA Liabilities, or (iv) any liability under the Transfer Agreement in the event the Buyer fails to make any payment thereunder when due or violates any of the other terms or conditions thereunder. SECTION 7.04 NOTICE OF CLAIMS. A party entitled to indemnification hereunder shall give prompt written notice to the other party or parties, specifying the amount and nature of the indemnifiable claim and permitting the indemnifying party to assume the defense of such claim. The party to be indemnified shall also notify the other party in writing of any matter which is likely to give rise to an indemnifiable claim. Failure of the party to be indemnified to give such notice shall not relieve the other party or parties of its or their obligations under this Section 7 except to the extent, if at all, that such other party or parties shall have been materially prejudiced thereby. Payment of indemnifiable claims shall be promptly made by the indemnifying party after such written notice is provided, except with respect to third party claims, in which event, such claims shall be promptly made by the indemnifying party upon settlement or judicial resolution of the indemnifiable claim. The party to be indemnified shall have the right to participate in the defense of an indemnifiable claim but shall have no obligation to do so. The indemnifying party shall not 12 consent to the entry of any judgment, without the prior written consent of the party to be indemnified, or enter into any settlement agreement which does not include as an unconditional term thereof the release of the party to be indemnified from all liability in respect of such claim or obligation. SECTION 7.05 LIMITATIONS ON INDEMNIFICATION. Notwithstanding the foregoing provisions of this Article VII, (i) the Seller shall not be liable under Section 7.02 unless and until the aggregate amount of liability thereunder exceeds $50,000, in which event the Buyer shall be entitled to indemnification thereunder for the full amount thereof up to an aggregate total of $200,000, (ii) the Buyer shall not be liable under Section 7.03 unless and until the aggregate amount of liability thereunder exceeds $50,000, in which event the Seller shall be entitled to indemnification thereunder for the full amount thereof up to an aggregate total of $400,000, provided, however, that the Buyer shall indemnify the Seller for all liability under Section 7.03(iii), and (iii) all damages to which the indemnified party may be entitled pursuant to the provisions of this Section shall be net of any insurance coverage with respect thereto that is paid to the indemnified party. SECTION 7.06 OFFSET. If payment of an indemnifiable claim is not paid when due hereunder, the party entitled to payment with respect to such claim or its affiliates shall have the right to offset the amount of such payment against any amounts owed by such party. ARTICLE VIII MISCELLANEOUS SECTION 8.01 NOTICES. All notices, requests, consents and other communications hereunder shall be in writing, shall be addressed to the receiving party's address set forth below or to such other address as a party may designate by notice hereunder, and shall be either (i) delivered by hand, (ii) made by telex, telecopy or facsimile transmission, (iii) sent by recognized overnight courier, or (iv) sent by registered mail, return receipt requested, postage prepaid. If to the Buyer: Woodland Partners, LLC c/o Sidney D. Rogers, Jr. 11 Day Street (for hand delivery or overnight courier) P.O. Box 332 (for other mail) Norfolk, MA 02056 Attn: Sidney D. Rogers, Jr. Telephone: (518) 528-7617 With a copy to: Mintz, Levin, Cohn, Ferris, Glovsky and Popeo, P.C. One Financial Center Boston, MA 02111 Attn: Stanley A. Twarog, Esq. Telephone: (617) 542-6000 Fax No.: (617) 542-2241 If to the Seller: Marketing Specialists 16251 Dallas Parkway, 11th Floor 13 Dallas, TX 75001 Telephone: (972) 349-6200 Fax: (972) 687-1693 Attn: Nancy J. Jagielski, Esq. With a copy to: Akin Gump Strauss Hauer & Feld, LLP 1700 Pacific Avenue, Suite 4100 Dallas, TX 75201 Attn: Alan Utay, Esq. Telephone: (214) 969-2800 Fax: (214) 969-4343 All notices, requests, consents and other communications hereunder shall be deemed to have been (i) if by hand, at the time of the delivery thereof to the receiving party at the address of such party set forth above, (ii) if made by telex, telecopy or facsimile transmission, at the time that receipt thereof has been acknowledged by electronic confirmation or otherwise, (iii) if sent by overnight courier, on the next business day following the day such notice is delivered to the courier service, or (iv) if sent by certified mail, on the 5th business day following the day such mailing is made. SECTION 8.02 ENTIRE AGREEMENT. This Agreement together with the Exhibits and Schedules hereto and the other documents executed in connection herewith (together, the "Documents") embodies the entire agreement and understanding between the parties hereto with respect to the subject matter hereof and supersedes all prior oral or written agreements and understandings relating to the subject matter hereof, including, without limitation, the letter agreements between the Seller and the Buyer dated each of July 31, 2000 and November 29, 2000. No statement, representation, warranty, covenant or agreement of any kind not expressly set forth in the Documents shall affect, or be used to interpret, change or restrict, the express terms and provisions of this Agreement. Disclosure on one Schedule shall be deemed disclosure on all Schedules for purposes of this Agreement. SECTION 8.03 MODIFICATIONS AND AMENDMENTS. The terms and provisions of this Agreement may be modified or amended only by written agreement executed by all parties hereto. SECTION 8.04 WAIVERS AND CONSENTS. No failure or delay by a party hereto in exercising any right, power or remedy under this Agreement, and no course of dealing between the parties hereto, shall operate as a waiver of any such right, power or remedy of the party. No single or partial exercise of any right, power or remedy under this Agreement by a party hereto, nor any abandonment or discontinuance of steps to enforce any such right, power or remedy, shall preclude such party from any other or further exercise thereof or the exercise of any other right, power or remedy hereunder. The election of any remedy by a party hereto shall not constitute a waiver of the right of such party to pursue other available remedies. No notice to or demand on a party not expressly required under this Agreement shall entitle the party receiving such notice or demand to any other or further notice or demand in similar or other circumstances or constitute a waiver of the rights of the party giving such notice or demand to any other or further action in any circumstances without such notice or demand. The terms and provisions of this Agreement may be waived, or consent for the departure therefrom granted, only by written document executed by the party 14 entitled to the benefits of such terms or provisions. No such waiver or consent shall be deemed to be or shall constitute a waiver or consent with respect to any other terms or provisions of this Agreement, whether or not similar. Each such waiver or consent shall be effective only in the specific instance and for the purpose for which it was given, and shall not constitute a continuing waiver or consent. SECTION 8.05 ASSIGNMENT. Neither this Agreement, nor any right hereunder, may be assigned by any of the parties hereto without the prior written consent of the other parties, except that the Buyer may assign all or part of its rights and obligations under this Agreement to one or more direct or indirect subsidiaries or affiliates. SECTION 8.06 PARTIES IN INTEREST. This Agreement shall be binding upon and inure solely to the benefit of each party hereto and their permitted assigns, and nothing in this Agreement, express or implied, is intended to confer upon any other person any rights or remedies of any nature whatsoever under or by reason of this Agreement. Nothing in this Agreement shall be construed to create any rights or obligations except among the parties hereto, and no person or entity shall be regarded as a third-party beneficiary of this Agreement. SECTION 8.07 GOVERNING LAW. This Agreement and the rights and obligations of the parties hereunder shall be construed in accordance with and governed by the internal laws of the State of Delaware, without giving effect to the conflict of law principles thereof. SECTION 8.08 ARBITRATION. Any claim, dispute or controversy arising out of or relating to this Agreement or any breach hereof shall be settled by final and binding arbitration in Boston, Massachusetts in accordance with the Commercial Rules of the American Arbitration Association then in effect. Judgment upon such decision or award may be entered in any competent court or application may be made to any competent court for judicial acceptance of such decision or award and an order of enforcement. The costs and expenses, including reasonable attorney's fees, of such arbitration shall be borne by the losing party as determined by such arbitration. SECTION 8.09 [intentionally omitted] SECTION 8.10 SEVERABILITY. In the event that any court of competent jurisdiction shall finally determine that any provision, or any portion thereof, contained in this Agreement shall be void or unenforceable in any respect, then such provision shall be deemed limited to the extent that such court determines it enforceable, and as so limited shall remain in full force and effect. In the event that such court shall determine any such provision, or portion thereof, wholly unenforceable, the remaining provisions of this Agreement shall nevertheless remain in full force and effect. SECTION 8.11 INTERPRETATION. The parties hereto acknowledge and agree that: (i) each party and its counsel reviewed and negotiated the terms and provisions of this Agreement (except with respect to the disclosure Schedules regarding the Business which are the sole responsibility of the Seller) and have contributed to its revision; (ii) the rule of construction to the effect that any ambiguities are resolved against the drafting party shall not be employed in the interpretation of this Agreement; and (iii) the terms and provisions of this Agreement shall be construed fairly as to all parties hereto and not in favor of or against any party, regardless of which party was generally responsible for the preparation of this Agreement. 15 SECTION 8.12 HEADINGS AND CAPTIONS. The headings and captions of the various subdivisions of this Agreement are for convenience of reference only and shall in no way modify, or affect, or be considered in construing or interpreting the meaning or construction of any of the terms or provisions hereof. SECTION 8.13 ENFORCEMENT. Each of the parties hereto acknowledges and agrees that the rights acquired by each party hereunder are unique and that irreparable damage would occur in the event that any of the provisions of this Agreement to be performed by the other party were not performed in accordance with their specific terms or were otherwise breached. Accordingly, in addition to any other remedy to which the parties hereto are entitled at law or in equity, each party hereto shall be entitled to an injunction or injunctions to prevent breaches of this Agreement by the other party and to enforce specifically the terms and provisions hereof in any federal or state court to which the parties have agreed hereunder to submit to jurisdiction. SECTION 8.14 [intentionally omitted] SECTION 8.15 EXPENSES. Each of the parties hereto shall pay its own fees and expenses (including the fees of any attorneys, accountants, appraisers or others engaged by such party) in connection with this Agreement and the transactions contemplated hereby whether or not the transactions contemplated hereby are consummated. SECTION 8.16 CONFIDENTIALITY. Each party acknowledges and agrees that any information or data it has acquired from the other party, not otherwise properly in the public domain, was received in confidence. Each party hereto agrees not to divulge, communicate or disclose, except as may be required by law or for the performance of this Agreement (including obtaining financing and conducting due diligence), or use to the detriment of the disclosing party or for the benefit of any other person or persons, or misuse in any way, any confidential information of the disclosing party concerning the subject matter hereof, including any trade or business secrets of the disclosing party and any technical or business materials that are treated by the disclosing party as confidential or proprietary, including without limitation information (whether in written, oral or machine-readable form) concerning: general business operations; methods of doing business, servicing clients, client relations, and of pricing and making charge for services and products; financial information, including costs, profits and sales; marketing strategies; business forms developed by or for the disclosing party; names of suppliers, personnel, customers, clients and potential clients; negotiations or other business contacts with suppliers, personnel, customers, clients and potential clients; form and content of bids, proposals and contracts; the disclosing party's internal reporting methods; technical and business data, documentation and drawings; software programs, however embodied; manufacturing processes; inventions; diagnostic techniques; and information obtained by or given to the disclosing party about or belonging to third parties. SECTION 8.17 COUNTERPARTS. This Agreement may be executed in one or more counterparts, and by different parties hereto on separate counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. 16 [BALANCE OF PAGE INTENTIONALLY BLANK] 17 IN WITNESS WHEREOF, the Buyer and the Seller have executed this Asset Purchase and Sale Agreement as of the day and year first above written. MARKETING SPECIALISTS CORPORATION By: ____________________________________ Name:___________________________________ Title:__________________________________ MARKETING SPECIALISTS SALES COMPANY By: ____________________________________ Name:___________________________________ Title:__________________________________ WOODLAND PARTNERS, LLC By: ____________________________________ Name: __________________________________ Title: _________________________________ 18 LIST OF SCHEDULES Schedule 1.01(a) Inventory Schedule 1.01(c) Principals Schedule 1.01(d) Assumed Contracts Schedule 1.01(e) Accounts Receivable Schedule 1.01(f) Tradenames Schedule 1.01(i) Equipment Schedule 1.02 Accounts Payable Schedule 1.04(C)(i) Individuals Signing Separation Agreements Schedule 1.04(C)(vi) Entities Signing Release Agreements Schedule 2.02 Title Exceptions Schedule 2.08 Consents and Approvals Schedule 6.02(d) UCC-3s 19 LIST OF EXHIBITS Exhibit A Form of Bill of Sale Exhibit B [intentionally omitted] Exhibit C Form of Mutual Non-Competition Agreement Exhibit D [intentionally omitted] Exhibit E Form of Release and Separation Agreements Exhibit F Form of Artwork and Layout Services Agreement Exhibit G Form of Assignment and Assumption Agreement Exhibit H-1 and H-2 Form of Occupancy Agreements Exhibit H-3 Form of Occupancy Agreements Side Letter Exhibit I December 31 Balance Sheet Exhibit J Form of Amendment of Employment Separation Agreement and Release Exhibit K Form of Release and Assumption Agreements 20 SCHEDULE 1.01(a) INVENTORY MERCO PACKAGING INVENTORY WHSE CODE LOCATION --------- -------- HY CHOWCHILLA, CA KN KENT, WA MA MADISON, WI ME PRESQUE ISLE, ME ML JACKSONVILLE, FL MP AUBURN, WA PR PROVIDENCE, RI WS NORWALK, CA YK YORK, PA MERCO PRICE MARKING WHSE CODE LOCATION --------- -------- A STOUGHTON, MA MERKERT LABORATORIES WHSE CODE LOCATION --------- -------- B STOUGHTON, MA F RUTLAND, VT H BRIDGETON, NJ K WHITE PLAINS, NY S BROOKLYN, NY 21 SCHEDULE 1.01(c) PRINCIPALS
PRINCIPAL CUSTOMER BRAND PRODUCT CATEGORY - --------- -------- ----- ---------------- Agrifrozen Publix Publix Frozen Vegetables Agrilink (Canned) Krasdale Krasdale Microwave Popcorn Pathmark Pathmark Poly Popcorn Microwave Popcorn Applesauce Wakefern Shoprite Poly Popcorn Microwave Popcorn Pie Fillings Agrilink (Frozen) A&P America's Choice Frozen Vegetables Associated Foods Super A Frozen Vegetables Foodtown Foodtown Frozen Vegetables Publix Publix Frozen Vegetables Wakefern Shoprite Frozen Vegetables White Rose White Rose Frozen Vegetables Rosa Blanca Frozen Vegetables King Kullen Frozen Vegetables Big Valley Publix Publix Frozen Fruits & Vegetables Cleugh's Rhubarb Publix Publix Frozen Fruit Wakefern Shoprite Frozen Fruit PRINCIPAL CUSTOMER BRAND PRODUCT CATEGORY - --------- -------- ----- ---------------- Consolidated Biscuit Pathmark Fireside Cookies Gold Kist Ahold Stop & Shop Frozen Chicken Grace Kennedy A&P Grace Imported Jamaican Products G&T Grace Imported Jamaican Products Pathmark Grace Imported Jamaican Products
22 Wakefern Grace Imported Jamaican Products Great Lakes Kraut Foodtown Foodtown Refrigerated Sauerkraut Krasdale Krasdale, C-Town Refrigerated Sauerkraut Pathmark Pathmark Refrigerated Sauerkraut Canned Sauerkraut Wakefern Shoprite Refrigerated Sauerkraut Lakeside Foods A&P America's Choice Frozen Vegetables Lamb Weston Publix Publix Frozen Potatoes Frozen Vegetables
23
PRINCIPAL CUSTOMER BRAND PRODUCT CATEGORY - --------- -------- ----- ---------------- Marbran USA Ahold Stop & Shop Frozen Vegetables Tops Frozen Vegetables Bi Lo Frozen Vegetables Finast Frozen Vegetables Super G Frozen Vegetables Maui Pineapple Ahold Stop & Shop Canned Pineapple National Frozen Foods A&P America's Choice Frozen Vegetables New West Foods A&P America's Choice Frozen Fruit Ahold Stop & Shop Frozen Fruit Norpac Publix Publix Frozen Vegetables Patterson Frozen Foods Publix Publix Frozen Vegetables Pictsweet Publix Publix Frozen Vegetables
24
PRINCIPAL CUSTOMER BRAND PRODUCT CATEGORY - --------- -------- ----- ---------------- Seabrook Brothers & Sons A&P America's Choice Frozen Vegetables Publix Publix Frozen Vegetables Seabrook Farms Frozen Vegetables Strathroy Foods Ahold Stop & Shop Frozen Vegetables Townsend Farms Publix Publix Frozen Fruit Twin City Foods Publix Publix Frozen Vegetables Wortz Company Krasdale Krasdale Cookies/Crackers Wakefern Shoprite Cookies/Crackers
25 SCHEDULE 1.01(d) ASSUMED CONTRACTS All outstanding and unfilled purchase orders as of the date hereof either (a) received by or placed with the Divisions, or (b) issued by the Divisions. All amounts unbilled for existing Inventory. All agreements with Principals creating or authorizing escrow accounts relating to the Divisions, together with such escrow accounts. All accounts payable relating to the Divisions (billed and accrued). All agreements with Principals for the customers and products set forth on SCHEDULE 1.01(c). Letter Agreement dated as of August 20, 1999 from Private Label Divisions of Merkert American Co., Inc. (now known as Marketing Specialists Sales Company, a Delaware corporation) to Wakefern Food Corporation regarding Private Label Frozen Fruit and Vegetable Packaging Program Distributor Agreement dated as of January 1, 1982 by and between Monarch Marking Systems, Inc., a Delaware corporation, and Merco Price Marking, a division of Merkert Enterprises, Inc., a Massachusetts corporation (now known as Marketing Specialists Sales Company, a Delaware corporation) Agreement dated as of December 3, 1993 by and between Berger Sales Incorporated, a New Jersey corporation, and Merkert Laboratories, Inc., a Massachusetts corporation (now known as Marketing Specialists Sales Company, a Delaware corporation). 26 SCHEDULE 1.01(e) ACCOUNTS RECEIVABLE 27 SCHEDULE 1.01(f) TRADENAMES Dorann Foods Store Brand Specialists Merco Packaging Merco Price Marking MPM Enterprises Merkert Laboratories Store Supply Specialists 28 SCHEDULE 1.01(i) EQUIPMENT One NISSAN 2500 Forklift, Model # MA01L13S, Serial Number #MA01-001828, Type ES, located at 1053 Turnpike Street, Stoughton, Massachusetts, USA. One NISSAN PE30 Forklift, Serial Number 9A0349 located at 1053 Turnpike Street, Stoughton, Massachusetts, USA. 29 SCHEDULE 1.02 ACCOUNTS PAYABLE 30 SCHEDULE 1.04(C)(i) INDIVIDUALS SIGNING NON-COMPETITION, RELEASE AND EMPLOYMENT SEPARATION AGREEMENTS Kenneth D. Chipman Stanley J. Pallieko Joseph P. Robertson Lewis Whiffen, Jr. Christine M. Haley William Day Frank Carlson, Jr. INDIVIDUAL SIGNING AMENDMENT TO EMPLOYMENT SEPARATION AND RELEASE AGREEMENT Sidney D. Rogers, Jr. 31 SCHEDULE 1.04(C)(vi) ENTITIES SIGNING RELEASE AGREEMENTS Seabrook Brothers & Sons, Inc. Norpac Services, Inc. Patterson Frozen Foods, Inc. Townsend Farms, Inc. New West Foods Agrifrozen Foods Pictsweet Frozen Foods, a division of United Foods, Inc. Agrilink Foods Twin City Foods, Inc. MarBran USA Cleugh's Rhubarb Company Lamb Weston, Inc. Big Valley 32 SCHEDULE 2.02 TITLE EXCEPTIONS 1. PACA Liabilities. 2. Any Merco Price Marking Division sales tax liability that may arise as a result of a sales tax audit currently being conducted on Merkert Enterprises in the State of New York. 33 SCHEDULE 2.08 CONSENTS AND APPROVALS 1. Landlord for the Stoughton, MA lease. 2. Berger Sales Incorporated in order to assign that certain Agreement dated as of December 3, 1993 by and between Berger Sales Incorporated, a New Jersey corporation, and Merkert Laboratories, Inc., a Massachusetts corporation (now known as Marketing Specialists Sales Company, a Delaware corporation). 3. Consent of the Lessor for the Sublease of the Vans by the Seller to the Buyer. 4. Execution of the Transfer Agreement by CIT Group/Equipment Financing, Inc. 34 SCHEDULE 6.02(d) UCC-3s 35 EX-10.46 3 a2045432zex-10_46.txt EXHIBIT 10.46 EXHIBIT 10.46 MEMORANDUM OF AGREEMENT THIS MEMORANDUM OF AGREEMENT (the "Agreement") entered into this 28th day of December, 2000 by and among Marketing Specialists Sales Company, a Texas corporation ("Marketing Specialists"), William F. Lee on behalf of the former stockholders of The Sales Force Companies, Inc. ("Sales Force") other than the Employee Stock Ownership Trust ("ESOT") established by Sales Force (William F. Lee being referred to herein as the "Non-ESOT Stockholders Representative" and the stockholders other than the ESOT being referred to herein as the "Non-ESOT Stockholders") and the ESOT. This Agreement amends that certain Stock Purchase Agreement, dated March 2, 2000, by and among Marketing Specialists, Sales Force, and all the stockholders of Sales Force, including the ESOT (the "Purchase Agreement"), which agreement is otherwise unchanged except as modified herein. RECITALS. Pursuant to Section 1.2(b) of the Purchase Agreement, the Purchase Price (as defined in the Purchase Agreement) was to be adjusted. Any upward Purchase Price adjustment was to be paid as provided in Section 1.2(b). Computations as to the adjusted Purchase Price were submitted to Marketing Specialists. Marketing Specialists retained PricewaterhouseCoopers ("PwC") to review the computations and submit its unaudited version of the adjusted Purchase Price. After further negotiations, PwC submitted a letter and final version of its reports, schedules and calculations dated November 29, 2000, copies of which are attached as Exhibit A. The parties are still in disagreement as to various components of the Purchase Price adjustment as well as to the amount of the adjustment. Also, since any adjustment paid to the ESOT is to be paid in cash, Marketing Specialists has negotiated separately with the ESOT over the amount of cash to be paid. In order to resolve all disagreements and disputes relating to the matters covered by the Purchase Price adjustment, and in order to provide for the special handling of the income tax component of the adjustment, the parties have made and entered into the agreement set forth below. 1. PURCHASE PRICE ADJUSTMENT; PAYMENT. (a) The ESOT shall receive an adjustment to the Purchase Price of One Million Nine Hundred Thousand Dollars ($1,900,000.00), payable in cash by wire transfer to a designated account of the ESOT on or before December 29, 2000. (b) The Non-ESOT Stockholders shall receive an adjustment to the Purchase Price of Two Million Three Hundred Sixty-four Thousand Two Hundred Thirty-six Dollars ($2,364,236.00), payable by delivery of replacement Notes in exchange for the Notes then held by such Non-ESOT Stockholders pursuant to the terms of Section 1.2(b). Such replacement Notes will be delivered to the Non-ESOT Stockholders on or before January 31, 2001. Notwithstanding the foregoing, the amount set forth in this subparagraph (b) shall be deemed a debt and obligation of Marketing Specialists as of the date hereof, whether or not the replacement Notes are issued and the April 1, 2001 payment and all subsequent payments due to the Non-ESOT Stockholders shall include such increased amounts. 2. ADJUSTMENT FOR TAXES/PAYMENT. In addition to the payment set forth above, if there is a difference between the estimated tax liability assumed by Marketing Specialists in the amount of $2,607,697 as shown in Exhibit A and the actual aggregate tax liability associated with Sales Force for the portion of the tax period prior to April 15, 2000, as reflected in the federal and state income tax returns as and when filed (the "Tax Adjustment"), then Marketing Specialists shall pay an additional amount to the ESOT and the Non-ESOT Stockholders equal to such difference. The Tax Adjustment, if any, will be allocated 51.1% to the ESOT and 48.9% to the Non-ESOT Stockholders. The ESOT's portion of the Tax Adjustment, if any, will be paid in cash to the ESOT within thirty (30) days after the filing of the applicable returns or within thirty (30) days after a tax refund is received, whichever is later. The balance of the Tax Adjustment will be paid to the Non-ESOT Stockholders in additional replacement notes dated within thirty (30) days after the filing of the applicable returns. In the event that due to audit adjustments by any tax jurisdiction or otherwise, the amount of aggregate tax liability is changed from the amount indicated on the final tax returns, the Tax Adjustment will be recalculated, but the ESOT will not receive any additional amounts from the audit adjustment nor will it be liable to repay amounts previously received. If the amount of the Tax Adjustment increases as a result of any tax audit, forty-eight and nine-tenths percent (48.9%) of any additional amounts will be paid by Marketing Specialists to the Non-ESOT Stockholders in the same manner as the Tax Adjustment is to be paid as provided above. In the event the Tax Adjustment is reduced as a result of any tax audit, Marketing Specialists shall be entitled to deduct (without further action or consent from the Non-ESOT Stockholders) 48.9% of the reduced amount from the replacement Notes issued to the Non-ESOT Stockholders. 3. MATTERS RESOLVED BY PURCHASE PRICE ADJUSTMENT. The matters resolved by the Purchase Price adjustment and this Agreement are set forth in Exhibit A prepared by PwC and reviewed by all parties hereto. Neither party shall have any further claim against the other for any matter covered by the adjustments proposed by PwC, except that Marketing Specialists shall retain all of the indemnification protections available to it under the Purchase Agreement, including, without limitation, the indemnification for understated taxes as provided in the Purchase Agreement, subject to the limitation on claims against the ESOT. [SIGNATURE PAGE FOLLOWS] MARKETING SPECIALISTS SALES COMPANY, a Texas corporation By: ___________________________________ Nancy Jagielski Secretary and General Counsel ________________________________________ William F. Lee the Non-ESOT Stockholders Representative for and on behalf of the Stockholders other than the ESOT ESOT By: FIRST BANKERS TRUST COMPANY, N.A., not in its corporate capacity but solely as Trustee of the ESOT By: ___________________________________ Name:___________________________________ Title:__________________________________ ADJUSTED PURCHASE PRICE AND PAYMENT SCHEDULE 1.2.b 4/13/2001
Increase (Decrease) to Consideration ------------------- UNRESTRICTED CASH Unrestricted 1,708,485 Required Minimum 2,400,000 Additional Consideration (691,515) (691,515) WORKING CAPITAL Current Assets 5,621,720 Current Liabilities (7,427,781) ---------- Calculated Working Capital (1,806,061) Required Minimum 1,500,000 ---------- Additional Consideration (3,306,061) (3,306,061) ========== LONG TERM DEBT AND DISCOUNTED OFF BALANCE SHEET LIABILITIES Required Maximum 12,800,000 Long Term Debt (3,003,941) Off Balance Sheet - Adjustment Addition (176,370) Off Balance Sheet - Liabilities Discounted at 8% (1,688,717) ========== Additional Consideration 7,930, 972 7,930, 972 ========== Pending Adjustment (225,000) ---------- Total Additional Consideration due 90 days after close 3,708,397 ========== Total Additional Cash Consideration due 90 days after close 51% 1,894,991 Total Additional Notes Consideration due 90 days after close 48.9% 1,813,406 ---------- 3,708,397 ==========
PRIVILEGED & CONFIDENTIAL ATTORNEY-CLIENT COMMUNICATION THE SALES FORCE COMPANIES, INC. ADJUSTMENTS TO SCHEDULE 1.2(B) OF THE PURCHASE PRICE AGREEMENT DATED 4/14/2000
---------------- ----------------- -------------------- 4/7/2000 ADJUSTED BALANCE ADJUSTMENT BALANCE ---------------- ----------------- -------------------- UNRESTRICTED CASH Unrestricted Cash 5,455,808 (3,747,323) 1,708,485 Required Minimum 2,400,000 -- 2,400,000 --------------- ---------------- ------------------- Additional Consideration (691,515) =================== WORKING CAPITAL Current Assets 8,920,285 (3,298,565) 5,621,720 Current Liabilities (7,368,987) (58,794) (7,427,781) --------------- ---------------- ------------------- Calculated Working Capital 1,551,298 (3,357,359) (1,806,061) Required Minimum 1,500,000 -- 1,500,000 --------------- ---------------- ------------------- Additional Consideration 51,298 (3,357,359) (3,306,061) =============== ================ =================== LONG TERM DEBT AND DISCOUNTED OFF BALANCE SHEET LIABILITIES Required Maximum 12,800,000 -- 12,800,000 Long Term Debt (3,090,661) 86,720 (3,003,941) Off Balance Sheet Liabilities Discounted at 8% (1,688,717) (176,370) (1,865,087) --------------- ---------------- ------------------- Additional Consideration 8,020,622 (89,650) 7,930,972 =============== ================ =================== Pending Adjustment (225,000) =================== TOTAL ADDITIONAL CONSIDERATION Total Additional Consideration due 90 days after close 8,071,920 (4,138,524) 3,708,397 =============== ================ =================== Total Additional Cash Consideration due 90 days after close 51.1% 4,124,751 (2,114,786) 1,894,991 =============== ================ =================== Total Additional Notes Consideration due 90 days after close 48.9% 3,947,169 (2,023,738) 1,813,406 =============== ================ ===================
PRIVILEGED & CONFIDENTIAL ATTORNEY-CLIENT COMMUNICATION
ORIGINAL 4/7/00 BALANCE SHEET DETAIL -------------------------------------------------------------------- Stub Effect of Sale Adjusted for 3/31/2000 Adjustments 4/7/2000 of Prism Prism 4/7/2000 --------------------------------------------------------------------- ASSETS Current Assets: Cash 1,441,188 (18,750) 1,422,438 1,220,744 2,643,182 Marketable Securities 2,812,627 -- 2,812,627 -- 2,812,627 Less: Restricted Cash and Cash Equivalents (See Note A) -- -- -- -- -- ----------- ----------- ----------- Sub Total: Unrestricted Cash and Cash Equivalents 4,253,814 (18,750) 4,235,064 1,220,744 5,455,808 Accounts Receivable: Brokerage Commissions 3,277,566 -- 3,277,566 -- 3,277,566 Principal's (net of allowance for doubtful receivables $50,000) (98,325) -- (98,325) -- (98,325) Other 215,510 -- 215,510 -- 215,510 ----------- ----------- ----------- Total 7,648,565 (18,750) 7,629,815 1,220,744 8,850,559 ----------- ----------- ----------- Notes Receivables 9,988 -- 9,988 -- 9,988 Prepaid Income Taxes -- -- -- -- -- Deferred Income Taxes -- -- -- -- 338,640 Prepaid Expenses 59,738 -- 59,738 -- 59,738 ----------- ----------- ----------- TOTAL CURRENT ASSETS 7,718,291 (18,750) 7,699,541 1,220,744 8,920,285 =========== =========== =========== Notes Receivable Long Term 1,984 -- 1,984 -- 1,984 Property and Equipment -- -- -- -- -- Furniture & Equipment 2,324,229 -- 2,324,229 -- 2,324,229 Computer & Related Equipment 2,222,630 -- 2,222,630 -- 2,222,630 Leasehold Improvements 145,764 -- 145,764 -- 145,764 ----------- ----------- ----------- Total Property and Equipment 4,692,623 -- 4,692,623 -- 4,692,623 Less: Accumulated Depreciation (3,106,075) -- (3,106,075) -- (3,106,075) ----------- ----------- ----------- Net Property and Equipment 1,586,548 -- 1,586,548 -- 1,586,548 Investment in Affiliate 2,515,887 -- 2,515,887 (2,515,887) -- Other Assets: Intangibles (Net of Amortization) 909,194 -- 909,194 -- 909,194 Deferred Income Tax 225,307 -- 225,307 -- 225,307 CSV of Life Insurance (Net of O/S Loans) 147,704 -- 147,704 -- 147,704 Other 4,138 -- 4,138 -- 4,138 ----------- ----------- ----------- Total Other Assets 1,286,343 -- 1,286,343 1,286,343 ----------- ----------- ----------- TOTAL ASSETS 13,109,053 (18,750) 13,090,303 (1,295,143) 11,795,160 =========== =========== ===========
NOTE A - Restricted cash and cash equivalents is comprised of Advances from Principals (related to Marketing Development Funds), Employee Flexible Spending and Accrued Income Taxes. The Accrued Income Taxes are considered restricted as they were required to be paid by April 14, 2000 according to Section 2.9 on the Purchase Agreement between Marketing Specialist Sales Company and The Sales Force Companies, Inc. PRIVILEGED & CONFIDENTIAL ATTORNEY-CLIENT COMMUNICATION
ADJUSTMENTS DIRECTED GRANT THORTON ADJUSTMENTS DUE DILIGENCE ADJUSTMENTS IN PURCHASE AGREEMENT ---------------------------- --------------------------- ----------------------------- Due Due Diligence Tax Reclas- Due Diligence Adjusted for sification Adjusted for Diligence Adjusted Remove Prism Prism Tax Adjustments Tax Reclasses Adjustments 4/7/2000 Tax Reserve 04/07/2000 ---------------------------- ------------- -------------- ----------------------------- ASSETS Current Assets: Cash -- 2,643,182 (106,072) 2,537,109 (2,238,303) 298,807 Marketable Securities -- 2,812,627 27,379 2,840,006 -- 2,840,006 Less: Restricted Cash and Cash Equivalents (See Note A) -- -- (3,668,630) (3,668,630) 2,238,303 (1,430,327) ----------- ----------- ---------- Sub Total: Unrestricted Cash and Cash Equivalents 5,455,808 1,708,485 1,708,485 Accounts Receivable: Brokerage Commissions -- 3,277,566 (1,221,597) 2,055,969 -- 2,055,969 Principal's (net of allowance for doubtful receivables $50,000) -- (98,325) 3,714 (94,611) -- (94,611) Other -- 215,510 (176,683) 38,827 -- 38,827 ----------- ----------- ---------- Total -- 8,850,559 (1,473,259) 7,377,300 (2,238,303) 5,138,997 ----------- ----------- ---------- Notes Receivables -- 9,988 -- 9,988 9,988 Prepaid Income Taxes -- -- -- -- Deferred Income Taxes 338,640 338,640 -- 338,640 Prepaid Expenses -- 59,738 74,356 134,094 -- 134,094 ----------- ----------- ---------- TOTAL CURRENT ASSETS 338,640 9,258,925 (1,398,902) 7,860,023 (2,238,303) 5,621,720 ========== =========== ========== Notes Receivable Long Term -- 1,984 -- 1,984 -- 1,984 Property and Equipment -- -- -- -- -- -- Furniture & Equipment -- 2,324,229 -- 2,324,229 -- 2,324,229 Computer & Related Equipment -- 2,222,630 -- 2,222,630 -- 2,222,630 Leasehold Improvements -- 145,764 -- 145,764 -- 145,764 ----------- ----------- ---------- Total Property and Equipment -- 4,692,623 -- 4,692,623 -- 4,692,623 Less: Accumulated Depreciation -- (3,106,075) -- (3,106,075) -- (3,106,075) ----------- ----------- ---------- Net Property and Equipment -- 1,586,548 -- 1,586,548 -- 1,586,548 Investment in Affiliate -- -- -- -- Other Assets: Intangibles (Net of Amortization) -- 909,194 -- 909,194 -- 909,194 Deferred Income Tax -- 225,307 -- 225,307 -- 225,307 CSV of Life Insurance (Net of O/S Loans) -- 147,704 -- 147,704 -- 147,704 Other -- 4,138 -- 4,138 -- 4,138 Total Other Assets -- 1,286,343 -- 1,286,343 -- 1,286,343 ----------- ----------- ---------- TOTAL ASSETS 338,640 12,133,800 (1,398,902) 10,734,898 (2,238,303) 8,496,595 =========== =========== ==========
NOTE A - Restricted cash and cash equivalents is comprised of Advances from Principals (related to Marketing Development Funds), Employee Flexible Spending and Accrued Income Taxes. The Accrued Income Taxes are considered restricted as they were required to be paid by April 14, 2000 according to Section 2.9 on the Purchase Agreement between Marketing Specialist Sales Company and The Sales Force Companies, Inc. PRIVILEGED & CONFIDENTIAL ATTORNEY-CLIENT COMMUNICATION
ORIGINAL 4/7/00 BALANCE SHEET DETAIL -------------------------------------------------------------------- Stub Effect of Sale Adjusted for 3/31/2000 Adjustments 4/7/2000 of Prism Prism 4/7/2000 --------------------------------------------------------------------- LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities Current Maturities of Long Term Obligations (1,444,841) -- (1,444,841) -- (1,444,841) Notes Payable - LSNB (1,543,000) -- (1,543,000) -- (1,543,000 Accounts Payable (410,331) -- (410,331) -- (410,331) Advances from Principals (includes Food Shows) (1,279,068) -- (1,279,068) -- (1,279,068) Accrued Liabilities: Salaries & Wages (349,718) -- (349,718) -- (349,718) Commissions (41,170) -- (41,170) -- (41,170) ESOP Contribution -- Insurance (286,581) -- (286,581) -- (286,581) Legal and Audit (177,692) -- (177,692) -- (177,692) (668,000) 354,676 Income Taxes 232,406 -- 232,406 (1,220,744) (1,301,662) Federal, State and Local Taxes Withheld & Accrued (1,449) -- (1,449) -- (1,449) Oklahoma City Contingent Liability (114,941) -- (114,941) -- (114,941) Interest & Other (418,534) -- (418,534) -- (418,534) ----------- ----------- ----------- Total Accrued Liabilities (1,157,678) -- (1,157,678) (1,534,068) (2,691,746) ----------- ----------- ----------- Investment In Affiliates (100,000) -- (100,000) 100,000 (0) -- -- -- 668,000 -- Deferred Income Tax (313,324) -- (313,324) (354,676) -- ----------- ----------- ----------- TOTAL CURRENT LIABILITIES (6,248,243) -- (6,248,243) (1,120,744) (7,368,987) =========== =========== =========== Long Term Obligations (3,090,661) -- (3,090,661) -- (3,090,661) Stockholders' Equity Common Stock (121,570) -- (121,570) -- (121,570) Additional Paid In Capital (4,304,242) -- (4,304,242) -- (4,304,242) Retained Earnings (8,714,917) -- (8,714,917) (4,185,369) (12,900,286) Unrealized Gain/(Loss) On Marketable Securities 38,915 -- 38,915 -- 38,915 Unearned Compensation 13,263 -- 13,263 -- 13,263 ----------- ----------- ----------- Total Stockholders' Equity (13,088,552) -- (13,088,552) (17,273,921) Less Treasury Stock 9,992,700 -- 9,992,700 6,601,256 16,593,956 ----------- ----------- ----------- TOTAL STOCKHOLDERS' EQUITY (3,095,852) -- (3,095,852) -- (679,965) =========== =========== =========== YTD Net (Income) / Loss (674,297) 18,750 (655,547) -- (655,547) ----------- ----------- ----------- TOTAL LIABILITIES, STOCKHOLDERS' EQUITY AND YTD INCOME / (LOSS) (13,109,053) -- (13,090,303) 1,295,143 (11,795,160) =========== =========== ===========
NOTE A - Restricted cash and cash equivalents is comprised of Advances from Principals (related to Marketing Development Funds), Employee Flexible Spending and Accrued Income Taxes. The Accrued Income Taxes are considered restricted as they were required to be paid by April 14, 2000 according to Section 2.9 on the Purchase Agreement between Marketing Specialist Sales Company and The Sales Force Companies, Inc. PRIVILEGED & CONFIDENTIAL ATTORNEY-CLIENT COMMUNICATION
ADJUSTMENTS DIRECTED GRANT THORTON ADJUSTMENTS DUE DILIGENCE ADJUSTMENTS IN PURCHASE AGREEMENT ---------------------------- --------------------------- ----------------------------- Due Due Diligence Tax Reclas- Due Diligence Adjusted for sification Adjusted for Diligence Adjusted Remove Prism Prism Tax Adjustments Tax Reclasses Adjustments 4/7/2000 Tax Reserve 04/07/2000 ---------------------------- ------------- -------------- ----------------------------- LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities Current Maturities of Long Term Obligations -- (1,444,841) (20,100) (1,464,940) (1,464,940) Notes Payable - LSNB -- (1,543,000) (1,543,000) (1,543,000) Accounts Payable -- (410,331) 170,638 (239,693) (239,693) Advances from Principals (includes Food Shows) -- (1,279,068) 41,861 (1,237,208) (1,237,208) Accrued Liabilities: Salaries & Wages -- (349,718) (1,049,715) (1,399,433) (1,399,433) Commissions -- (41,170) (41,170) (41,170) ESOP Contribution Insurance -- (286,581) 98,193 (188,388) (188,388) Legal and Audit -- (177,692) (486,629) (664,321) (664,321) Income Taxes (354,676) (1,656,338) (727,259) (2,383,597) 2,238,303 (145,294) Federal, State and Local Taxes Withheld & Accrued -- (1,449) (1,449) (1,449) Oklahoma City Contingent Liability -- (114,941) (114,941) (114,941) Interest & Other -- (418,534) 30,589 (387,945) (387,945) ----------- ----------- ----------- Total Accrued Liabilities (354,676) (3,046,422) (2,134,821) (5,181,243) 2,238,303 (2,942,940) ----------- ----------- ----------- Investment In Affiliates (0) (0) (0) -- Deferred Income Tax -- -- -- -- ----------- ----------- ----------- TOTAL CURRENT LIABILITIES (354,676) (7,723,663) (1,942,421) (9,666,084) 2,238,303 (7,427,781) =========== =========== =========== Long Term Obligations (3,090,661) 86,720 (3,003,941) (3,003,941) Stockholders' Equity Common Stock -- (121,570) (121,570) (121,570) Additional Paid In Capital -- (4,304,242) (4,304,242) (4,304,242) Retained Earnings 68,214 (12,832,072) 3,713,682 (9,118,390) (9,118,390) Unrealized Gain/(Loss) On Marketable Securities (38,915) (0) (0) (0) Unearned Compensation (13,263) (0) (0) (0) ----------- ----------- ----------- Total Stockholders' Equity 16,036 (17,257,885) (13,544,203) (13,544,203) Less Treasury Stock -- 16,593,956 (459,079) 16,134,877 16,134,877 ----------- ----------- ----------- TOTAL STOCKHOLDERS' EQUITY -- (663,929) 2,590,674 2,590,674 =========== =========== =========== YTD Net (Income) / Loss -- (655,547) (655,547) (655,547) ----------- ----------- ----------- TOTAL LIABILITIES, STOCKHOLDERS' EQUITY AND YTD INCOME / (LOSS) (709,352) (12,133,800) 1,398,902 (10,734,898) (8,496,595) =========== =========== ===========
NOTE A - Restricted cash and cash equivalents is comprised of Advances from Principals (related to Marketing Development Funds), Employee Flexible Spending and Accrued Income Taxes. The Accrued Income Taxes are considered restricted as they were required to be paid by April 14, 2000 according to Section 2.9 on the Purchase Agreement between Marketing Specialist Sales Company and The Sales Force Companies, Inc. PRIVILEGED & CONFIDENTIAL ATTORNEY-CLIENT COMMUNICATION
THE SALES FORCE COMPANIES, INC. ADJUSTMENTS TO 4/7/2000 BALANCE SHEET THAT SUPPORTS SCHEDULE 1.2(B) OF THE PURCHASE AGREEMENT DATED 4/14/2000 ADJUSTMENT NUMBER WP REFERENCE ACCOUNT DESCRIPTION DEBIT CREDIT - ---------------- ----------------- ------------------------------------------------------- ------------- ---------------- 12 Retained Earnings 1,221,597 Brokerage Commissions 1,221,597 TO ADJUST BROKERAGE COMMISSIONS WHICH WERE NOT UPDATED FROM FISCAL YEAR END 12 Accounts Receivable - Principals 3,714 Retained Earnings 3,714 TO ADJUST BEGINNING BALANCE FOR STUB PERIOD ACTIVITY AND CUT OFF ENTRY. 16 Advances to Principals (MDF Funds) 41,861 Retained Earnings 41,861 TO ADJUST FOR ACTIVITY IN STUB PERIOD 17 Retained Earnings 452,024 Accrued Salaries and Wages 452,024 TO ACCRUE FOR SALARY AND WAGES IN THE STUB PERIOD IN ADDITION TO THE VACATION ACCRUAL PREVIOUSLY BOOKED. 18-A(1) Retained Earnings 727,259 Income Taxes 727,259 INCREASE INCOME TAX ACCRUAL TO REFLECT ACTUAL PAYMENTS MADE SUBSEQUENT TO APRIL 7, 2000. 9A Cash 363,650 Retained Earnings 95,429 Treasury Stock 459,079 TO ADJUST PRISM SALE TRANSACTION ON THE 4/7/00 BALANCE SHEET 18-A(1) Income Tax Liability 2,238,303 Cash 2,238,303 TO REMOVE PRISM TAX RESERVE FROM WORKING CAPITAL OR UNRESTRICTED CASH AS DEFINED IN SECTION 1.2(B) OF THE PURCHASE AGREEMENT 13 Retained Earnings 5,165 Other Assets 5,165 TO ADJUST FOR A WRITE-OFF OF YEAR OLD CHECKS LOST IN THE MAIL AND A SMALL CALCULATION ADJUSTMENT. 14 Retained Earnings 3,341 Prepaid Expenses 3,341 TO ADJUST AMORTIZATION AND REVERSE 2 MISCODED JOURNAL ENTRIES. 17 Accrued Insurance 124,813 Retained Earnings 124,813 ESTIMATED REDUCTION IN ACCRUAL 20-C Long Term Debt 20,100 Current Portion Long Term Debt 20,100 TO ADJUST CURRENT PORTION OF LONG TERM DEBT TO REFLECT BALANCE AS OF 4/7/00 20-C Long Term Debt 30,496 Retained Earnings 2,710 Cash 33,206 TO ADJUST LONG TERM DEBT FOR PAYMENTS MADE DURING STUB PERIOD 10-A Prepaid Expenses 77,697 Accrued Legal & Audit 28,066 Long Term Debt 36,125 Retained Earnings 466,146 Cash 608,034 TO ADJUST CASH TO REFLECT ACTIVITY OF THE STUB PERIOD AS OF 4/7/00
PRIVILEGED & CONFIDENTIAL ATTORNEY-CLIENT COMMUNICATION
THE SALES FORCE COMPANIES, INC. ADJUSTMENTS TO 4/7/2000 BALANCE SHEET THAT SUPPORTS SCHEDULE 1.2(B) OF THE PURCHASE AGREEMENT DATED 4/14/2000 ADJUSTMENT NUMBER WP REFERENCE ACCOUNT DESCRIPTION DEBIT CREDIT - ---------------- ----------------- ---------------------------------------------------- ------------- ---------------- 17 Retained Earnings 597,691 Accrued Salaries & Wages 597,691 TO ADJUST ACCRUED VACATION BALANCE TO REFLECT OUTSTANDING LIABILITY AS OF 4/7/00 19 Accrued Interest & Other 30,589 Retained Earnings 30,589 TO ADJUST ACCRUED INTEREST TO RECORD PAYMENTS AND REFLECT BALANCE AS OF 4/7/00 15 Accounts Payable 170,638 Retained Earnings 170,638 TO ADJUST ACCOUNTS PAYABLE FOR STUB PERIOD ACTIVITY 17-H Retained Earnings 26,620 Accrued Insurance 26,620 TO ADJUST THE ACCRUED INSURANCE RELATED TO FLEX SPENDING FOR STUB PERIOD 11 Marketable Securities 27,379 Retained Earnings 27,379 TO ADJUST THE MARKETABLE SECURITIES BALANCE AS OF 4/7/00 17 Retained Earnings 80,000 Accrued Legal & Audit 80,000 TO ADJUST THE ACCRUAL FOR 10/31/99 AND STUB PERIOD TAX RETURN PREPARATION FEES 17 Retained Earnings 434,695 Accrued Legal & Audit 434,695 * TO ADJUST THE ACCRUAL FOR PENDING LITIGATION AS OF 4/7/00 Cash 171,518 Other Assets 171,518 TO ADJUST FOR THE RECEIPT OF GILLETTE CHECK BY MARKETING SPECIALISTS ITEMS NOT ON BALANCE SHEET BUT RELATED TO PPA AND EXHIBIT 1.29(b) OF THE PURCHASE AGREEMENT schd 1.2(b) Retained Earnings 123,532 Off Balance Sheet Liabilities 123,532 TO ADJUST OFF BALANCE SHEET LIABILITIES TO INCLUDE LEAKER AND BAKER schd 1.2(b) Retained Earnings 52,838 Off Balance Sheet Liabilities 52,838 TO ADJUST OFF BALANCE SHEET LIABILITIES TO INCLUDE MCCORMICK
* In accordance with Section 9.1 of the Purchase Price Agreement regarding stockholder indemnification. PRIVILEGED & CONFIDENTIAL ATTORNEY-CLIENT COMMUNICATION
THE SALES FORCE COMPANIES, INC. DUE DILIGENCE PROJECT A/R-BROKERAGE COMMISSIONS ANALYSIS A/R-Brokerage Commissions Balance as of 4/7/00 3,277,566 ADJUSTMENTS Adjustment to True-Up Balance to Actual Cash Receipts (1,221,597)(A) ---------- Adjusted A/R-Brokerage Commissions Balance as of 4/7/00 2,055,969 ========== (1) A/R-BROKERAGE COMMISSIONS ADJUSTMENT DETAIL: 75% of April Cash Receipts 1,495,774 25% of May Cash Receipts 560,195 ---------- Total Cash Receipts 2,055,969 (1) A/R-Brokerage Commissions Balance per SFCI 3,277,566 ---------- Calculated Adjustment (1,221,597) ==========
(1) $171,518 removed from this balance as a result of that amount being recorded as Other Assets: A/R from Marketing Specialists related to the Gillette Account. PRIVILEGED & CONFIDENTIAL ATTORNEY-CLIENT COMMUNICATION
THE SALES FORCE COMPANIES, INC. DUE DILIGENCE PROJECT CASH ADJUSTMENT ANALYSIS Cash Balance as of 4/7/00 2,643,182 Marketable Securities Balance as of 4/7/00 2,812,627 ---------- Total Cash & Cash Equivalents as of 4/7/00 5,455,808 ADJUSTMENTS Increase in Cash Due to Prism 363,650 (1) Decrease in Cash Due to Stub Period Activity (4/1/00 - 4/7/00) (641,240) (2) Increase in Cash Due to Gillette Check received by MSSC prior to 4/7/00 171,518 (3) Increase Due In Marketable Securities due to Liquidation Value 27,379 (4) ---------- Adjusted Cash Balance as of 4/7/00 2,537,109 Adjusted Marketable Securities Balance as of 4/7/00 2,840,006 ---------- Adjusted Cash & Cash Equivalents as of 4/7/00 5,377,115 ========== RESTRICTED CASH COMPONENTS Advances from Principals - Marketing Development Funds (1,237,208) (5) Employee Flexible Spending (47,826) (6) Income Taxes (2,383,597) (7) ---------- Total Restricted Cash (3,668,630) Total Unrestricted Cash & Cash Equivalents as of 4/7/00 1,708,485 ==========
(1) On 4/7/00 Balance Sheet, the Company made an adjustment to include Prism Cash and Taxes as opposed to removing the amounts as stated in the purchase agreement. This entry reflects a true up to actual entries booked on 4/14/00. (2) On the 4/7/00 Balance Sheet, the Cash Balance reflected the account activity as of March 31, 200 as opposed to the balance as of 4/7/00. This entry reflects the stub period cash activity occurring between 4/1/00 - 4/7/00. (3) Marketing Specialists received checks from Gillette amounting to $171,518 which related to Sales Force receivables. Based on the timing of these receipts the amount is being reflected as cash received by Sales Force. (4) On the 4/7/00 Balance Sheet, the Marketable Securities Balance did not reflect the actual liquidation value of the securities. This entry reflects the write-up to the liquidation amount which occurred on 4/11/00. (5) This amount represents marketing development funds (MDF) considered restricted on Marketing Specialists' 10K based upon their use being directed by the principal that advanced the funds. (6) This amounts represents cash deducted from employee paychecks for cafeteria plan flexible spending accounts. This money is controlled and maintained by a third party administrator and belongs to the employees. (7) The total accrued income taxes are considered restricted as they were required to be paid in full at the close of the acquisition according to Section 2.9 of the Purchase Agreement. PRIVILEGED & CONFIDENTIAL ATTORNEY-CLIENT COMMUNICATION
THE SALES FORCE COMPANIES, INC. DUE DILIGENCE PROJECT INCOME TAXES ADJUSTMENT ANALYSIS Income Taxes Payable Balance as of 4/7/00 1,301,662 ADJUSTMENTS Grant Thorton Tax Reclassification 354,676 Increase Income Tax Liability based on Actual Payments 727,259 --------- Adjusted Income Taxes Payable Balance as of 4/7/00 2,383,597 (1) ========= (1) INCOME TAX ADJUSTMENT DETAIL: 2nd Quarter Estimated State Payments 350,700 2nd Quarter Estimated Federal Payments 1,669,000 1st Quarter Estimated State Payments 24,100 1st Quarter Estimated Federal Payments 200,000 --------- Total Estimated 1st & 2nd Quarter Payments @ 90% 2,243,800 ========= Total Estimated 1st & 2nd Quarter Payments @100% 2,493,111 Increase State Income Taxes from 6% to 8% 114,586 Less: 1st Quarter Estimated Payments (224,100) --------- Total Calculated Income Tax Liability 2,383,597 Grant Thorton Tax Reclassification 354,676 Income Tax Payable Balance as of 4/7/00 1,301,662 --------- Income Tax Liability Adjustment 727,259 =========
PRIVILEGED & CONFIDENTIAL ATTORNEY-CLIENT COMMUNICATION
THE SALES FORCE COMPANIES, INC. DUE DILIGENCE PROJECT LEGAL & AUDIT ADJUSTMENT ANALYSIS Accrued Legal & Audit Balance as of 4/7/00 177,692 ADJUSTMENTS Adjustment to reflect stub period cash disbursements (28,066) (1) Adjustment to accrue for tax return preparation fees 80,000 (2) Adjustment to accrue for pending litigation 434,695 (3) ------- Total Adjustments 486,629 Adjusted Accrued Legal & Audit Balance as of 4/7/00 664,321 =======
(1) Amount represents payment of legal fees to Schwartz & Freeman on April 4, 2000. (2) Amount reflects estimated billing by Grant Thorton for preparation of 10/31/99 and stub period tax returns. (3) Amount reflects potential litagation settlement for breach of purchase agreement complaint filed against Sales Force. PRIVILEGED & CONFIDENTIAL ATTORNEY-CLIENT COMMUNICATION
THE SALES FORCE COMPANIES, INC. DUE DILIGENCE PROJECT OFF-BALANCE SHEET LIABILITIES ADJUSTMENT ANALYSIS Off-Balance Sheet Liabilities Balance as of 4/7/00 1,688,717 ADJUSTMENTS Off-Balance Sheet Liabilities True-Up 176,370 (1) --------- Adjusted Off-Balance Sheet Liabilities Balance as of 4/7/00 1,865,087 ========= (1) OFF-BALANCE SHEET LIABILITIES ADJUSTMENT DETAIL: Adjustment for Baker & Leeker Non-Compete Agreements 123,532 Adjustment for McCormick Life Insurance 52,838 --------- Total Off-Balance Sheet Liabilities Adjustment 176,370 =========
PRIVILEGED & CONFIDENTIAL ATTORNEY-CLIENT COMMUNICATION
THE SALES FORCE COMPANIES, INC. DUE DILIGENCE PROJECT PRISM TAX RESERVE ADJUSTMENT ANALYSIS Gain on Sale of Prism 4,089,940 State Income Tax Rate 7.18% ---------- Projected State Income Taxes 293,658 ========== Gain on Sale of Prism 4,089,940 Less: Projected State Income Taxes (293,658) ---------- Subtotal 3,796,282 Federal Income Tax Rate 34.0% ---------- Projected Federal Income Taxes 1,290,736 ========== 1999 Prism K-1 1,687,995 State Income Tax Rate 7.18% ---------- Projected State Income Taxes 121,198 ========== 1999 Prism K-1 1,687,995 Less: Projected State Income Taxes (121,198) ---------- Subtotal 1,566,797 Federal Income Tax Rate 34.0% ---------- Project Federal Income Taxes 532,711 ========== PRISM TAX RESERVE SUMMARY State Taxes Related to Gain on Sale 293,658 Federal Taxes Related to Gain on Sale 1,290,736 State Taxes Related to 1999 K-1 121,198 Federal Taxes Related to 1999 K-1 532,711 ---------- Total Prism Tax Reserve 2,238,303 ==========
PRIVILEGED & CONFIDENTIAL ATTORNEY-CLIENT COMMUNICATION
THE SALES FORCE COMPANIES, INC. 4/13/2001 DUE DILIGENCE PROJECT SALARIES & WAGES ADJUSTMENT ANALYSIS Salaries & Wages Balance as of 4/7/00 349,718 ADJUSTMENTS Salaries & Wages Accrual for Stub Period of 4/1/00-4/7/00 452,024 (A) Vacation Accrual Adjustment True-Up 597,691 (B) --------- Total Adjustments 1,049,715 Adjusted Accrued Salaries & Wages Balance as of 4/7/00 1,399,433 ========= (A) SALARIES & WAGES ADJUSTMENT DETAIL: 25 % Exempt Payroll for the month ending 4/30/00 292,209 75% Non-Exempt Payroll for the month ending 4/30/00 159,815 --------- Total Salaries & Wages Adjustment 452,024 ========= (B) VACATION ACCRUAL ADJUSTMENT DETAIL: Net SFCI Vacation Balance per MSSC as of 6/30/00 947,409 Vacation Accrual Balance as of 4/7/00 349,718 --------- Vacation Accrual True-Up Adjustment 597,691 =========
(1) Expempt Employees were paid through 3/31/00 on 3/31/00. Therefore, the accrual is calculated to represent the estimated salaries earned during the first week of April which were to be paid on 4/15/00. (2) Non-Exempt Employees were paid through 3/18/00 on 3/31/00. Therefore, the accrual is calculated to represent the estimated salaries earned during the last two weeks of March which were to be paid on 4/15/00 and the first week of April which were to be paid on 4/30/00. PRIVILEGED & CONFIDENTIAL ATTORNEY-CLIENT COMMUNICATION
THE SALES FORCE COMPANIES, INC. 4/13/2001 DETAIL OF ADJUSTMENTS TO SCHEDULE 1.2(B) OF THE PURCHASE PRICE AGREEMENT DATED 4/14/2000 UNRESTRICTED CASH CASH & CASH EQUIVALENTS BALANCE AS OF 4/7/00 5,455,808 ADJUSTMENTS Decrease in Cash & Cash Equivalents (106,072) Increase in Marketable Securities 27,379 Restricted Cash & Cash Equivalents (3,668,630) ---------- TOTAL ADJUSTMENTS (3,747,323) ---------- ADJUSTED CASH & CASH EQUIVALENTS BALANCE AS OF 4/7/00 1,708,485 ========== CURRENT ASSETS CURRENT ASSETS BALANCE AS OF 4/7/00 8,920,285 ADJUSTMENTS Grant Thorton Tax Reclassification 338,640 Decrease in Cash & Cash Equivalents (277,590) Increase in Marketable Securities 27,379 Decrease in A/R-Brokerage Commissions (1,221,597) Increase in A/R-Principal's 3,714 Decrease in Other Assets (5,165) Increase in Prepaid Expenses 74,356 Prism Tax Reserve Adjustment (2,238,303)* ---------- TOTAL ADJUSTMENTS (3,298,565) ---------- ADJUSTED CURRENT ASSETS BALANCE AS OF 4/7/00 5,621,720 ========== CURRENT LIABILITIES CURRENT LIABILITIES BALANCE AS OF 4/7/00 (7,368,987) ADJUSTMENTS Grant Thorton Tax Reclassification (354,676) Increase in Current Maturities of Long Term Obligations (20,100) Decrease in Accounts Payable 170,638 Decrease in Advances from Principals 41,861 Increase in Accrued Liabilities: Salaries and Wages (1,049,715) Decrease in Accrued Liabilities: Insurance 98,193 Increase in Accrued Liabilities: Legal & Audit (486,629) Increase in Income Taxes Payable (727,259) Decrease in Accrued Interest & Other 30,589 Prism Tax Reserve Adjustment 2,238,303 * ---------- TOTAL ADJUSTMENTS (58,794) ---------- ADJUSTED CURRENT LIABILITIES BALANCE AS OF 4/7/00 (7,427,781) ==========
* The Prism Tax Reserve shall not be included in the calculation of Working Capital or unrestricted cash in accordance with Section 1.2(b) of the Purchase Agreement. PRIVILEDGED & CONFIDENTIAL ATTORNEY-CLIENT COMMUNICATION EX-10.47 4 a2045432zex-10_47.txt EXHIBIT 10.47 Exhibit 10.47 EXHIBIT XVII ================================================================================ MARKETING SPECIALISTS CORPORATION PREFERRED STOCK PURCHASE AGREEMENT DATED AS OF JANUARY 26, 2001 7,568 SHARES OF SERIES B CONVERTIBLE PAID-IN-KIND PREFERRED STOCK ================================================================================ TABLE OF CONTENTS PAGE 1. PURCHASE AND SALE OF PREFERRED STOCK..................................1 1.1. Authorization of Preferred Stock....................1 1.2. Purchase Price and Closing..........................1 1.3. Use of Proceeds.....................................2 1.4. Notes...............................................2 2. REPRESENTATIONS AND WARRANTIES OF THE COMPANY.........................2 2.1. Organization, Standing and Power....................2 2.2. Authority...........................................2 2.3. Enforceability......................................3 2.4. Valid Issuance......................................3 2.5. Capitalization......................................3 2.6. No Violation........................................3 2.7. Reports and Financial Statements....................4 2.8. Litigation..........................................4 2.9. Registration Rights Agreement.......................4 3. REPRESENTATIONS AND WARRANTIES OF THE PURCHASER.......................4 3.1. Authorization.......................................4 3.2. Purchase for Own Account............................4 3.3. Disclosure of Information...........................5 3.4. Investment Experience...............................5 3.5. Accredited Investor Status..........................5 3.6. Restricted Securities...............................5 3.7. Governmental Consents...............................5 3.8. Further Limitations on Disposition..................5 3.9. Legends.............................................6 4. CONDITIONS PRECEDENT TO THE PURCHASER'S OBLIGATIONS...................6 4.1. Representations and Warranties......................6 4.2 Consents............................................6 5. DEFINITIONS...........................................................7 i 6. INDEMNIFICATION.......................................................8 6.1. General Indemnity...................................8 6.2. Indemnification Procedure...........................8 6.3. Indemnification Limitations.........................9 7. MISCELLANEOUS.........................................................9 7.1. No Waiver; Cumulative Remedies......................9 7.2. HSR.................................................9 7.3. Amendments, Waivers and Consents....................9 7.4. Notices............................................10 7.5. Binding Effect; Assignment.........................11 7.6. Survival of Representations and Warranties.........11 7.7. Severability.......................................11 7.8. Governing Law......................................11 7.9. Headings...........................................11 7.10. Counterparts.......................................11 7.11. Closing Condition Waivers..........................11 ii PREFERRED STOCK PURCHASE AGREEMENT THIS PREFERRED STOCK PURCHASE AGREEMENT (this "Agreement") is dated this 26th day of January 2001, by and between Marketing Specialists Corporation, a Delaware corporation (the "Company"), and MS Acquisition Limited, a Texas limited partnership (the "Purchaser"). PRELIMINARY STATEMENTS A. The Purchaser is a stockholder of the Company and is the holder of a certain promissory note, dated November 7, 2000, signed by the Company, in the amount of $2,500,000 (the "Promissory Note"). The Promissory Note has accrued interest as of the date hereof in the amount of $67,962.20. B. The Purchaser desires to return the Promissory Note to the Company in consideration of the purchase of shares of the Company's 8.0% Series B Convertible Paid-In-Kind Preferred Stock, $0.01 par value, (the "Preferred Stock"), directly from the Company, subject to the terms and conditions set forth herein. C. The Purchaser also desires to purchase additional shares of Preferred Stock for cash in the amount of $5,000,037.80, directly from the Company, subject to the terms and conditions set forth herein. D. The Company desires to sell shares of Preferred Stock to the Purchaser, subject to the terms and conditions set forth herein. NOW, THEREFORE, in consideration of the foregoing, the mutual promises and agreements herein contained and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto hereby agree as follows: STATEMENT OF AGREEMENT 1. PURCHASE AND SALE OF PREFERRED STOCK iii 1 1. AUTHORIZATION OF PREFERRED STOCK. The Company has authorized the issuance and sale of 7,568 shares (the "Shares") of its authorized but unissued shares of the Preferred Stock, having the rights set forth in the Certificate of Incorporation of the Company. 1.2. PURCHASE PRICE AND CLOSING. The Company agrees to issue and sell to the Purchaser, and in consideration of, and in express reliance upon, the representations, warranties, terms and conditions contained in this Agreement, the Purchaser agrees to purchase the Shares at a purchase price of $1,000 per share, for an aggregate purchase price of $7,568,000 (the "Purchase Price"). Subject to the terms and conditions contained herein, the closing of the purchase and sale of the Shares to be acquired by the Purchaser from the Company under this Agreement (the "Closing") shall take place promptly upon satisfaction of all the conditions contained in Section 4 of this Agreement shall have been satisfied or waived, or at such other time and date as the Purchaser and the Company may agree (the "Closing Date"), at the offices of Skadden, Arps, Slate, Meagher & Flom LLP, Four Times Square, New York, NY 10036, or such other location as the parties mutually agree. At the Closing, the Company will deliver to the Purchaser a certificate of the Secretary or an Assistant Secretary of the Company, dated the Closing Date, (a) attesting to corporate action taken by the Company, including resolutions of the Board of Directors authorizing (i) the execution, delivery and performance by the Company of this Agreement and (ii) the issuance of the Shares, and (b) verifying that the Certificate of Incorporation of the Company and the Bylaws of the Company currently on file with the Commission are true, correct and complete as of the Closing Date. As soon as practicable after the closing, but in any event not later than seven business days, the Company will deliver to the Purchaser certificates evidencing the Shares to be purchased by the Purchaser hereunder. At or before the Closing, in full satisfaction of the Purchase Price, Purchaser shall deliver to the Company (i) the Promissory Note and (ii) $5,000,037.80 by wire transfer of immediately available funds. 1.3. USE OF PROCEEDS. The Company shall use the cash proceeds from the sale of the Shares for general corporate purposes including, without limitation, working capital. 1.4. NOTES. Upon delivery to the Purchaser of the certificates evidencing the Shares, the Promissory Notes shall be fully paid and the Company shall have no further obligations thereunder. 2 2. REPRESENTATIONS AND WARRANTIES OF THE COMPANY The Company hereby represents and warrants to the Purchaser as follows: 2.1. ORGANIZATION, STANDING AND POWER. The Company is a corporation duly organized, validly existing and in good standing under the laws of the State of Delaware, and has the requisite power and authority to own or lease its properties and to carry on its business as presently conducted. There is no pending or, to the Company's knowledge, threatened proceeding for the dissolution, liquidation, insolvency or rehabilitation of the Company. The Company's operating subsidiaries are entities duly organized, validly existing and in good standing under the laws of each such subsidiary's state of organization, and each has the requisite power and authority to own or lease its properties and to carry on its business as presently conducted. There is no pending or, to the Company's knowledge, threatened proceeding for the dissolution, liquidation, insolvency or rehabilitation of any of the Company's operating subsidiaries. 2.2. AUTHORITY. The Company has all requisite corporate power and authority to enter into this Agreement, to issue and sell the Shares and to carry out its obligations hereunder. The issuance and sale of the Shares by the Company to the Purchaser has been unanimously approved by an independent committee of the Board of Directors of the Company. 2.3. ENFORCEABILITY. This Agreement has been duly executed and delivered by the Company and constitutes its legal, valid and binding obligation enforceable against it in accordance with its terms, except as the same may be limited by the terms of this Agreement or by applicable bankruptcy, insolvency, reorganization, moratorium or similar laws affecting the enforcement of creditors' rights generally and general equitable principles regardless of whether such enforceability is considered in a proceeding at law or in equity. 2.4. VALID ISSUANCE. Upon consummation of the transactions contemplated hereby and the issuance and delivery of certificates representing the Shares to the Purchaser, the Shares will be validly issued, fully paid, non-assessable and, except as created by Purchaser, free of preemptive rights or similar rights of stockholders of the Company and free and clear of any liens or other encumbrance. 3 2.5. CAPITALIZATION. As of the date hereof, the authorized capital stock of the Company consists of 50,000,000 shares of Common Stock, 4,000,000 shares of Restricted Common Stock and 1,000,000 shares of preferred stock. As of November 13, 2000, (i) 25,912,809 shares of Common Stock and 72,736 shares of Restricted Common Stock were validly issued and outstanding, fully paid and non-assessable, (ii) no shares of Series A 8.0% Convertible Paid-In-Kind Preferred Stock were issued and outstanding, and (iii) 12,397 shares of the Preferred Stock were issued and outstanding. 2.6. NO VIOLATION. The execution and delivery of this Agreement by the Company, the performance by the Company of its obligations hereunder and the consummation by the Company of the transactions contemplated by this Agreement will not (a) contravene any provision of the Certificate of Incorporation or Bylaws of the Company, (b) violate or conflict with any material law, statute, ordinance, rule, regulation, decree, writ, injunction, judgment, ruling or order of any governmental authority or of any arbitration award which is either applicable to, binding upon, or enforceable against the Company, (c) conflict with, result in any breach of, or constitute a default under, or give rise to a right to terminate, amend, modify, abandon or accelerate, any material agreement which is applicable to, binding upon or enforceable against the Company, (d) result in or require the creation or imposition of any lien or other encumbrance upon or with respect to any of the material property or assets of the Company, (e) give to any individual or entity a right or claim against the Company, which would have a Material Adverse Effect on the Company; or (f) require the consent, approval, authorization or permit of, or filing with or notification to, any governmental authority, any court or tribunal or any other person, except (i) to the extent necessary, consents under (A) the Second Amended and Restated Credit Agreement dated March 30, 2000, as amended, among the Company, the lenders set forth on Schedule 1 thereto and First Union National Bank as agent for the lenders, and (B) the Credit Agreement dated March 30, 2000 , as amended, among the Company and certain of its subsidiaries, as borrowers, the lenders named therein and The Chase Manhattan Bank, as Agent which such consents have been obtained, (ii) pursuant to the Exchange Act and the Securities Act and applicable inclusion requirements of any stock exchange on which the Common Stock is listed, (iii) filings required under the securities or blue sky laws of the various states or (iv) filings required under the HSR Act, if any (collectively, "Required Consents"). 4 2.7. REPORTS AND FINANCIAL STATEMENTS. From January 1, 1997 to the date hereof, except where failure to have done so did not and would not have a Material Adverse Effect on the Company, the Company (including any predecessor entities) has filed all reports, registrations and statements, together with any required amendments thereto, that it was required to file with the Commission, including, but not limited to, Forms 10-K, Forms 10-Q, Forms 8-K and proxy statements (collectively, the "Company Reports"), copies of all of which have been delivered to the Purchaser. As of their respective dates (but taking into account any amendments filed prior to the date of this Agreement), the Company Reports complied in all material respects with all the rules and regulations promulgated by the Commission and did not contain any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading. 2.8. LITIGATION. With the exception of BROWN V. PEDERSEN, C.A. No. 18099-NC, PARNES V. BYRD, C.A. No. 18103-NC, and KLUG V. PEDERSEN, C.A. No. 18135-NC, there is no action, suit or other legal or administrative proceeding or governmental investigation pending, or, to the knowledge of the Company, threatened, anticipated or contemplated against, by or affecting the Company which questions the validity or enforceability of this Agreement or the Registration Rights Agreement or the transactions contemplated hereby or thereby. 2.9. REGISTRATION RIGHTS AGREEMENT. The Company acknowledges and agrees that the Common Stock issuable upon conversion of the Shares will be eligible for registration pursuant to the terms of the Registration Rights Agreement by and among the Purchaser, the Company and certain other parties thereto. 3. REPRESENTATIONS AND WARRANTIES OF THE PURCHASER The Purchaser hereby represents and warrants to the Company as follows: 3.1. AUTHORIZATION. This Agreement constitutes the Purchaser's valid and legally binding obligation, enforceable in accordance with its terms except as may be limited by (a) applicable bankruptcy, insolvency, reorganization or other laws of general application relating to or affecting the enforcement of creditors' rights generally, and (b) the effect of rules of law governing the availability of equitable remedies. The Purchaser represents that the Purchaser has full power and authority to enter into this Agreement. 5 3.2. PURCHASE FOR OWN ACCOUNT. The Shares to be purchased by the Purchaser hereunder shall be acquired for investment for the Purchaser's own account, not as a nominee or agent, and not with a view to the public resale or distribution thereof, and the Purchaser has no present intention of selling, granting any participation in, or otherwise distributing the same. The Purchaser represents that the Purchaser has not been formed for the specific purpose of acquiring the Shares. 3.3. DISCLOSURE OF INFORMATION. The Purchaser has received or has had full access to all the information it considers necessary or appropriate to make an informed investment decision with respect to the Shares to be purchased under this Agreement. The Purchaser further has had an opportunity to ask questions and receive answers from the Company regarding the terms and conditions of the offering of the Shares and to obtain additional information (to the extent the Company possessed such information or could acquire it without unreasonable effort or expense) necessary to verify any information furnished to the Purchaser or to which the Purchaser had access. 3.4. INVESTMENT EXPERIENCE. The Purchaser understands that the purchase of the Shares involves substantial risk. The Purchaser acknowledges that the Purchaser is able to fend for itself, can bear the economic risk of the Purchaser's investment in the Shares and has such knowledge and experience in financial or business matters that the Purchaser is capable of evaluating the merits and risks of this investment in the Shares and protecting its own interests in connection with this investment. 3.5. ACCREDITED INVESTOR STATUS. The Purchaser is an "accredited investor" within the meaning of Regulation D promulgated under the Securities Act. 3.6. RESTRICTED SECURITIES. The Purchaser understands that the Shares are characterized as "restricted securities" under the Securities Act inasmuch as they are being acquired from the Company in a transaction not involving a public offering and that under the Securities Act and applicable regulations thereunder such securities may be resold without registration under the Securities Act only in certain limited circumstances. Further, the Purchaser represents that the Purchaser is familiar with Rule 144 of the Commission, as presently in effect, and understands the resale limitations imposed thereby and by the Securities Act. The Purchaser understands 6 that the Company is under no obligation to register any of the securities sold hereunder except as provided in the Registration Rights Agreement. 3.7. GOVERNMENTAL CONSENTS. No filings are required to be made, or consents to be obtained, from any governmental authority to consummate the transactions contemplated hereby, including the filing of any notification required under the HSR Act. 3.8. FURTHER LIMITATIONS ON DISPOSITION. Without in any way limiting the representations set forth above, the Purchaser further agrees not to make any disposition of all or any portion of the Shares unless and until: (a) there is then in effect a registration statement under the Securities Act covering such proposed disposition and such disposition is made in accordance with such registration statement; or (b) the Purchaser shall have furnished the Company at the expense of the Purchaser or its transferee, with an opinion of counsel, reasonably satisfactory to the Company, that such disposition will not require registration of such securities under the Securities Act or is in compliance with Rule 144 of the Securities Act. Notwithstanding the provisions of subparagraphs (a) and (b) above, no such registration statement or opinion of counsel shall be required for any transfer of Shares to (A) a partner of the Purchaser, (B) a retired partner of the Purchaser who retires after the date hereof, or (C) the estate of any such partner; provided that in each of the foregoing cases the transferee agrees in writing to be subject to the terms of this Section 3 to the same extent as if the transferee were an original purchaser hereunder. 3.9. LEGENDS. It is understood that the certificates evidencing the Shares will bear the legends set forth below: (a) THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), OR UNDER THE SECURITIES LAWS OF ANY STATE OF THE UNITED STATES, AND MAY NOT BE SOLD, TRANSFERRED, ASSIGNED, PLEDGED, HYPOTHECATED, OR OTHERWISE DISPOSED OF UNLESS REGISTERED UNDER THE SECURITIES ACT, OR THE COMPANY HAS RECEIVED AN OPINION 7 OF COUNSEL OR OTHER EVIDENCE, SATISFACTORY TO IT AND ITS COUNSEL, THAT AN EXEMPTION FROM SUCH REGISTRATION IS AVAILABLE. (b) Any legend imposed or required by the applicable state securities laws, the Registration Rights Agreement or any other ancillary agreement. 4. CONDITIONS PRECEDENT TO THE PURCHASER'S OBLIGATIONS The obligation of the Purchaser to purchase the Shares is subject to the satisfaction by the Company, or waiver by the Purchaser, on or prior to the Closing Date, of the following conditions: 4.1. REPRESENTATIONS AND WARRANTIES. Each of the representations and warranties of the Company set forth in this Agreement that is qualified as to Material Adverse Effect or materiality shall be true and correct, and each of the representations and warranties of the Company set forth in this Agreement not so qualified shall be true and correct in all material respects, in each case as of the date of this Agreement and as of the Closing Date as though made on and as of the Closing Date (except to the extent in either case that such representations and warranties speak as of another date). 4.2. CONSENTS. The Company shall have obtained all necessary consents to the transactions contemplated by this Agreement under each of (a) the Second Amended and Restated Credit Agreement dated March 30, 2000, among the Company, the lenders set forth on Schedule 1 thereto and First Union National Bank as agent for the lenders, and (b) the Credit Agreement dated March 30, 2000 among the Company and certain of its subsidiaries, as borrowers, the lenders named therein and The Chase Manhattan Bank, as Agent. 5. DEFINITIONS As used in this Agreement, the following terms shall have the following meanings: 8 "Agreement" means this Preferred Stock Purchase Agreement, including all amendments, modifications and supplements thereto. "Closing" shall have the meaning assigned to such term in Section 1.2. "Closing Date" shall have the meaning assigned to such term in Section 1.2. "Commission" means the Securities and Exchange Commission. "Common Stock" shall mean the common stock of the Company, par value $.01 per share. "Company" shall have the meaning assigned to such term in the introductory paragraph hereof. "Exchange Act" means the Securities Exchange Act of 1934, as amended. "HSR Act" means the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended. "Indemnified Party" shall have the meaning assigned to such term in Section 6.2. "Material Adverse Effect" means any material adverse effect on (a) the business, assets, operations or financial condition of the Company and its subsidiaries, taken as a whole, (b) the ability of the Company to perform its obligations under this Agreement or the Registration Rights Agreement or (c) the binding nature, validity or enforceability of this Agreement or the Registration Rights Agreement. "Purchaser" shall have the meaning assigned to such term in the introductory paragraph hereof. "Registration Rights Agreement" means the Registration Rights Agreement for the RMSI Stockholders, dated as of August 18, 1999, by and among the Company, the Purchaser and the other parties thereto. "Securities Act" means the Securities Act of 1933, as amended. 9 "Shares" shall have the meaning assigned to such term in Section 1.1. 6. INDEMNIFICATION 6.1. GENERAL INDEMNITY. The Company agrees to indemnify and save harmless the Purchaser and its directors, officers, affiliates, successors and assigns from and against any and all losses, liabilities, deficiencies, costs, damages and expenses (including, without limitation, reasonable attorneys' fees, charges and disbursements) incurred by the Purchaser as a result of any inaccuracy in or breach of the representations, warranties or covenants made by the Company in this Agreement. The Purchaser agrees to indemnify and save harmless the Company and its directors, officers, affiliates, successors and assigns from and against any and all losses, liabilities, deficiencies, costs, damages and expenses (including, without limitation, reasonable attorneys' fees, charges and disbursements) incurred by the Company as a result of any inaccuracy in or breach of the representations, warranties or covenants made by the Purchaser herein. 6.2. INDEMNIFICATION PROCEDURE. Any party entitled to indemnification under this Section 6 (an "Indemnified Party") will give written notice to the indemnifying party of any claim with respect to which it seeks indemnification promptly after the discovery by such party of any matters giving rise to a claim for indemnification; provided that the failure of any party entitled to indemnification hereunder to give notice as provided herein shall not relieve the indemnifying party of its obligations under this Section 6 except to the extent that the indemnifying party is actually prejudiced by such failure to give notice. In case any action, proceeding or claim is brought against an Indemnified Party in respect of which indemnification is sought hereunder, the indemnifying party shall be entitled to participate in and, unless in the reasonable judgment of the Indemnified Party a conflict of interest between it and the indemnifying party may exist in respect of such action, proceeding or claim, to assume the defense thereof, with counsel reasonably satisfactory to the Indemnified Party. In the event that the indemnifying party advises an Indemnified Party that it will contest such a claim for indemnification hereunder, or fails, within thirty (30) days of receipt of any indemnification notice to notify, in writing, such person of its election to defend, settle or compromise, at its sole cost and expense, any action, proceeding or claim (or discontinues its defense at any time after it commences such defense), then the Indemnified Party may, at its 10 option, defend, settle or otherwise compromise or pay such action, proceeding or claim. In any event, unless and until the indemnifying party elects in writing to assume and does so assume the defense of any such claim, proceeding or action, the Indemnified Party's costs and expenses arising out of the defense, settlement or compromise of any such action, proceeding, claim or proceeding shall be losses subject to indemnification hereunder. The Indemnified Party shall cooperate fully with the indemnifying party in connection with any negotiation or defense of any such action, proceeding or claim by the indemnifying party and shall furnish to the indemnifying party all information reasonably available to the Indemnified Party which relates to such action, proceeding or claim. The indemnifying party shall keep the Indemnified Party fully informed at all times as to the status of the defense or any settlement negotiations with respect thereto. If the indemnifying party elects to defend any such action, proceeding or claim, then the Indemnified Party shall be entitled to participate in such defense with counsel of its choice at its sole cost and expense. The indemnifying party shall not be liable for any settlement of any action, claim or proceeding effected without its written consent, provided, however, that the indemnifying party shall not unreasonably withhold, delay or condition its consent. Anything in this Section 6 to the contrary notwithstanding, the indemnifying party shall not, without the Indemnified Party's prior written consent, settle or compromise any claim or consent to entry of any judgment in respect thereof which imposes any future obligation on the Indemnified Party or which does not include, as an unconditional term thereof, the giving by the claimant or the plaintiff to the Indemnified Party, a release from all liability in respect of such claim, proceeding or action. The indemnification required by this Section 6 shall be made by periodic payments of the amount thereof during the course of the investigation or defense, as and when bills are received or expense, loss, damage or liability is incurred. The indemnity agreements contained herein shall be in addition to (a) any cause of action or similar right of the Indemnified Party against the indemnifying party or others, and (b) any liabilities the indemnifying party may be subject to pursuant to the law. 6.3. INDEMNIFICATION LIMITATIONS. Notwithstanding the foregoing, the Indemnified Party shall be entitled to make claims under Section 6.1 hereof only to the extent that the aggregate amount of losses arising from such claims does not exceed $7,568,000. Nothing contained in this Section 6.3 shall be construed to limit the indemnification obligations of the Company afforded to any holder of Shares under the Registration Rights Agreement afforded to any director or officer of the Company under its organizational documents, state law or otherwise. 11 70 MISCELLANEOUS 7.1. NO WAIVER; CUMULATIVE REMEDIES. No failure or delay on the part of any party to this Agreement in exercising any right, power or remedy hereunder shall operate as a waiver thereof; nor shall any single or partial exercise of any such right, power or remedy preclude any other or further exercise thereof or the exercise of any other right, power or remedy thereunder. The remedies therein provided are cumulative and not exclusive of any remedies provided by law. 7.2. HSR. If required by applicable law, each of the Purchaser and the Company agree to cooperate in the preparation of, and file, any required notification form pursuant to the HSR Act with respect to the acquisition by the Purchaser of shares of the Company's Common Stock issuable to the Purchaser upon conversion of the Preferred Stock. 7.3. AMENDMENTS, WAIVERS AND CONSENTS. Any provisions in this Agreement to the contrary notwithstanding, and except as hereinafter provided, changes in, termination or amendments of or additions to this Agreement may be made, and compliance with any provision set forth herein may be omitted or waived, if the Company shall obtain consent thereto in writing from the Purchaser. Any waiver or consent may be given subject to satisfaction of conditions stated therein and any waiver or consent shall be effective only in the specific instance and for the specific purpose for which given. 7.4. NOTICES. All notices, requests and other communications hereunder must be in writing and will be deemed to have been duly given only if delivered personally against written receipt or by facsimile transmission or mailed by prepaid first class mail, return receipt requested, or mailed by overnight courier prepaid to the parties at the following addresses or facsimile numbers. To the Company: Marketing Specialists Corporation 17855 N. Dallas Parkway, Suite 200 Dallas, Texas 75287 Attention: Nancy K. Jagielski Facsimile Number: 972-687-1693 With a copy to: Akin, Gump, Strauss, Hauer & Feld, LLP 1700 Pacific Avenue, Suite 4100 12 Dallas, Texas 75201 Attention: Alan M. Utay Facsimile Number: 214-969-4343 To the Purchaser: MS Acquisition Limited 17855 North Dallas Parkway Suite 200 Dallas, Texas 75287 Attention: Nick Bouras Fax: (972) 860-7584 With a copy to: Skadden, Arps, Slate, Meagher & Flom LLP 4 Times Square New York, New York 10036 Attention: Eileen T. Nugent Fax: (212) 735-2000 All such notices, requests and other communications will (i) if delivered personally to the address as provided in this Section 7.4 be deemed given upon delivery, (ii) if delivered by facsimile transmission to the facsimile number as provided in this Section 7.4 be deemed given upon successful transmission, (iii) if delivered by mail in the manner described above to the address as provided in this Section 7.4 be deemed given upon the earlier of the third business day following mailing or upon receipt and (iv) if delivered by overnight courier to the address as provided in this Section 7.4 be deemed given on the earlier of the first business day following the date sent by such overnight courier or upon receipt. Any party from time to time may change its address, facsimile number or other information for the purpose of notices to that party by giving notice specifying such change to the other parties hereto. 7.5. BINDING EFFECT; ASSIGNMENT. This Agreement shall be binding upon and inure to the benefit of each of the Company and the Purchaser and their respective heirs, successors and assigns, except that the Company shall not have the right to delegate its obligations hereunder. 7.6. SURVIVAL OF REPRESENTATIONS AND WARRANTIES. All representations and warranties made in this Agreement, or any other instrument or document delivered in 13 connection herewith, shall survive the execution and delivery hereof or thereof for a period of 12 months after the date hereof. 7.7. SEVERABILITY. The provisions of this Agreement and the terms of the Shares are severable and, in the event that any court of competent jurisdiction shall determine that any one or more of the provisions or part of a provision contained in this Agreement or the terms of the Shares shall, for any reason, be held to be invalid, illegal or unenforceable in any respect, such invalidity, illegality or unenforceability shall not affect any other provision or part of a provision of this Agreement or the terms of the Shares, but this Agreement and the terms of the Shares shall be reformed and construed as if such invalid or illegal or unenforceable provision, or part of a provision, had never been contained herein, and such provisions or part reformed so that it would be valid, legal and enforceable to the maximum extent possible. 7.8. GOVERNING LAW. THIS AGREEMENT SHALL BE GOVERNED AND CONSTRUED IN ACCORDANCE WITH THE DOMESTIC LAWS OF THE STATE OF DELAWARE WITHOUT GIVING EFFECT TO ANY CHOICE OF LAW OR CONFLICT OF LAW PROVISION OR RULE (WHETHER OF THE STATE OF DELAWARE OR ANY OTHER JURISDICTION) THAT WOULD CAUSE THE APPLICATION OF THE LAWS OF ANY JURISDICTION OTHER THAN THE STATE OF DELAWARE. 7.9. HEADINGS. The headings used in this Agreement have been inserted for convenience of reference only and do not define or limit the provisions hereof. 7.10. COUNTERPARTS. This Agreement may be executed in any number of counterparts, each or which will be deemed an original, but all of which together will constitute one and the same instrument. 7.11. CLOSING CONDITION WAIVERS. At any time prior to the Closing Date, any party hereto may (a) extend the time for the performance of any of the obligations or other acts of any other party hereto, (b) waive any inaccuracies in the representations and warranties contained herein or in any document delivered pursuant hereto, and (c) waive compliance with any of the agreements or conditions contained herein. Any agreement on the part of a party hereto to any such extension or waiver shall be valid only if set forth in an instrument in writing signed by the party granting such waiver but such waiver or failure to insist upon strict compliance 14 with such obligation, covenant, agreement or condition shall not operate as a waiver of, or estoppel with respect to, any subsequent or future failure. 15 IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed as of the date and year first above written. MARKETING SPECIALISTS CORPORATION By: ----------------------------------------- Name: Title: MS ACQUISITION LIMITED By: MSSC Acquisition Corp., its General Partner By: /S/ NICK G. BOURAS -------------------------------- Name: Nick G. Bouras Title: Vice President [SIGNATURE PAGE TO PREFERRED STOCK PURCHASE AGREEMENT] EX-10.48 5 a2045432zex-10_48.txt EXHIBIT 10.48 Exhibit 10.48 ================================================================================ MARKETING SPECIALISTS CORPORATION PREFERRED STOCK PURCHASE AGREEMENT DATED AS OF MARCH 28, 2001 9, 000 SHARES OF CONVERTIBLE PAID-IN-KIND PREFERRED STOCK ================================================================================ TABLE OF CONTENTS PAGE 1. PURCHASE AND SALE OF PREFERRED STOCK.....................................1 1.1. Authorization of Preferred Stock.......................1 1.2. Purchase Price and Closing.............................1 1.3. Use of Proceeds........................................2 2. REPRESENTATIONS AND WARRANTIES OF THE COMPANY............................2 2.1. Organization, Standing and Power.......................2 2.2. Authority..............................................2 2.3. Enforceability.........................................2 2.4. Valid Issuance.........................................2 2.5. Capitalization.........................................3 2.6. No Violation...........................................3 2.7. Reports and Financial Statements.......................3 2.8. Litigation.............................................3 2.9. Registration Rights Agreement..........................4 3. REPRESENTATIONS AND WARRANTIES OF THE PURCHASER..........................4 3.1. Authorization..........................................4 3.2. Purchase for Own Account...............................4 3.3. Disclosure of Information..............................4 3.4. Investment Experience..................................4 3.5. Accredited Investor Status.............................5 3.6. Restricted Securities..................................5 3.7. Governmental Consents..................................5 3.8. Further Limitations on Disposition.....................5 3.9. Legends................................................5 4. CONDITIONS PRECEDENT TO THE PURCHASER'S OBLIGATIONS......................6 4.1. Representations and Warranties.........................6 5. DEFINITIONS..............................................................6 6. INDEMNIFICATION..........................................................7 6.1. General Indemnity......................................7 6.2. Indemnification Procedure..............................8 6.3. Indemnification Limitations............................8 7. MISCELLANEOUS............................................................9 i 7.1. No Waiver; Cumulative Remedies.........................9 7.2. HSR....................................................9 7.3. Amendments, Waivers and Consents.......................9 7.4. Notices................................................9 7.5. Binding Effect; Assignment............................10 7.6. Survival of Representations and Warranties............10 7.7. Severability..........................................10 7.8. Governing Law.........................................11 7.9. Headings..............................................11 7.10. Counterparts..........................................11 7.11. Closing Condition Waivers.............................11 ii PREFERRED STOCK PURCHASE AGREEMENT THIS PREFERRED STOCK PURCHASE AGREEMENT (this "Agreement") is dated this 28th day of March, 2001, by and between Marketing Specialists Corporation, a Delaware corporation (the "Company"), and MS Acquisition Limited, a Texas limited partnership (the "Purchaser"). PRELIMINARY STATEMENTS A. The Purchaser is a stockholder of the Company and desires to purchase of shares of the Company's Series C Convertible Paid-In-Kind Preferred Stock, $0.01 par value per share (the "Preferred Stock"), directly from the Company, subject to the terms and conditions set forth herein. B. The Company desires to sell shares of Preferred Stock to the Purchaser, subject to the terms and conditions set forth herein. NOW, THEREFORE, in consideration of the foregoing, the mutual promises and agreements herein contained and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto hereby agree as follows: STATEMENT OF AGREEMENT 1. PURCHASE AND SALE OF PREFERRED STOCK 1.1. AUTHORIZATION OF PREFERRED STOCK. The Company has authorized the issuance and sale of 9,000 shares (the "Shares") of its authorized but unissued shares of Preferred Stock, having the rights set forth in the Certificate of Incorporation of the Company. 1.2. PURCHASE PRICE AND CLOSING. The Company agrees to issue and sell to the Purchaser, and in consideration of, and in express reliance upon, the representations, warranties, terms and conditions contained in, this Agreement, the Purchaser agrees to purchase the Shares at a purchase price of $1,000 per share, for an aggregate purchase price of $9,000,000. Subject to the terms and conditions contained herein, the closing of the purchase and sale of the Shares to be acquired by the Purchaser from the Company under this Agreement (the "Closing") shall take place promptly upon satisfaction of all the conditions contained in Section 4 of this Agreement shall have been satisfied or waived, or at such other time and date as the Purchaser and the Company may agree (the "Closing Date"), at the offices of Skadden, Arps, Slate, Meagher & Flom LLP, Four Times Square, New York, NY 10036, or such other location as the parties mutually agree. At the Closing, the Company will deliver to the Purchaser a certificate of the Secretary or an Assistant Secretary of the Company, dated the Closing Date, (a) attesting to corporate action taken by the Company, including resolutions of the Board of Directors authoriz- ing (i) the execution, delivery and performance by the Company of this Agreement and (ii) the issuance of the Shares, and (b) verifying that the Certificate of Incorporation of the Company and the Bylaws of the Company currently on file with the Commission are true, correct and complete as of the Closing Date. As soon as practicable after the closing, but in any event not later than seven business days, the Company will deliver to the Purchaser certificates evidencing the Shares to be purchased by the Purchaser hereunder. At the Closing, Purchaser shall deliver $9,000,000 to the Company by wire transfer of immediately available funds. 1.3. USE OF PROCEEDS. The Company shall use the cash proceeds from the sale of the Shares for general corporate purposes including, without limitation, working capital and the financing of acquisitions. 2. REPRESENTATIONS AND WARRANTIES OF THE COMPANY The Company hereby represents and warrants to the Purchaser as follows: 2.1. ORGANIZATION, STANDING AND POWER. The Company is a corporation duly organized, validly existing and in good standing under the laws of the State of Delaware, and has the requisite power and authority to own or lease its properties and to carry on its business as presently conducted. There is no pending or, to the Company's knowledge, threatened proceeding for the dissolution, liquidation, insolvency or rehabilitation of the Company. The Company's operating subsidiaries are entities duly organized, validly existing and in good standing under the laws of each such subsidiary's state of organization, and each has the requisite power and authority to own or lease its properties and to carry on its business as presently conducted. There is no pending or, to the Company's knowledge, threatened proceeding for the dissolution, liquidation, insolvency or rehabilitation of any of the Company's operating subsidiaries. 2.2. AUTHORITY. The Company has all requisite corporate power and authority to enter into this Agreement, to issue and sell the Shares and to carry out its obligations hereunder. The issuance and sale of the Shares by the Company to the Purchaser has been unanimously approved by an independent committee of the Board of Directors of the Company. 2.3. ENFORCEABILITY. This Agreement has been duly executed and delivered by the Company and each constitutes its legal, valid and binding obligation enforceable against it in accordance with its terms, except as the same may be limited by the terms of this Agreement or by applicable bankruptcy, insolvency, reorganization, moratorium or similar laws affecting the enforcement of creditors' rights generally and general equitable principles regardless of whether such enforceability is considered in a proceeding at law or in equity. 2.4. VALID ISSUANCE. Upon consummation of the transactions contemplated hereby and the issuance and delivery of certificates representing the Shares to the Purchaser, the Shares will be validly issued, fully paid, non-assessable and, except as created by Purchaser, free of 3 preemptive rights or similar rights of stockholders of the Company and free and clear of any liens or other encumbrance. 2.5. CAPITALIZATION. As of the date hereof, the authorized capital stock of the Company consists of 50,000,000 shares of Common Stock, 4,000,000 shares of Restricted Common Stock and 1,000,000 shares of preferred stock. As of March 15, 2001, (i) 25,572,472 shares of Common Stock and 72,736 shares of Restricted Common Stock were validly issued and outstanding, fully paid and non-assessable, (ii) no shares of 8.0% Convertible Paid-In-Kind Preferred Stock were issued and outstanding, (iii) 19, 965 shares of Series B 8.0% Convertible Paid-In-Kind Preferred Stock, and (iv) no shares of Series C 8.0% Convertible Paid-In-Kind Preferred Stock. 2.6. NO VIOLATION. The execution and delivery of this Agreement by the Company, the performance by the Company of its obligations hereunder and the consummation by the Company of the transactions contemplated by this Agreement will not (a) contravene any provision of the Certificate of Incorporation or Bylaws of the Company, (b) violate or conflict with any material law, statute, ordinance, rule, regulation, decree, writ, injunction, judgment, ruling or order of any governmental authority or of any arbitration award which is either applicable to, binding upon, or enforceable against the Company, (c) conflict with, result in any breach of, or constitute a default under, or give rise to a right to terminate, amend, modify, abandon or accelerate, any material agreement which is applicable to, binding upon or enforceable against the Company, (d) result in or require the creation or imposition of any lien or other encumbrance upon or with respect to any of the material property or assets of the Company, (e) give to any individual or entity a right or claim against the Company, which would have a Material Adverse Effect on the Company; or (f) require the consent, approval, authorization or permit of, or filing with or notification to, any governmental authority, any court or tribunal or any other person, except (i) to the extent necessary, consents under (A) the Second Amended and Restated Credit Agreement dated March 30, 2000, among the Company, the lenders set forth on Schedule 1 thereto and First Union National Bank as agent for the lenders, and (B) the Credit Agreement dated March 30, 2000 among the Company and certain of its subsidiaries, as borrowers, the lenders named therein and The Chase Manhattan Bank, as Agent which such consents have been obtained, (ii) pursuant to the Exchange Act and the Securities Act and applicable inclusion requirements of any stock exchange on which the Common Stock is listed, (iii) filings required under the securities or blue sky laws of the various states or (iv) filings required under the HSR Act, if any (collectively, "Required Consents"). 2.7. REPORTS AND FINANCIAL STATEMENTS. From January 1, 1997 to the date hereof, except where failure to have done so did not and would not have a Material Adverse Effect on the Company, the Company (including any predecessor entities) has filed all reports, registrations and statements, together with any required amendments thereto, that it was required to file with the Commission, including, but not limited to, Forms 10-K, Forms 10-Q, Forms 8-K and proxy statements (collectively, the "Company Reports"), copies of all of which have been 4 delivered to the Purchaser. As of their respective dates (but taking into account any amendments filed prior to the date of this Agreement), the Company Reports complied in all material respects with all the rules and regulations promulgated by the Commission and did not contain any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading. 2.8. LITIGATION. With the exception of BROWN V. PEDERSEN, C.A. No. 18099-NC and PARNES V. BYRD, C.A. No. 1810-NC, there is no action, suit or other legal or administrative proceeding or governmental investigation pending, or, to the knowledge of the Company, threatened, anticipated or contemplated against, by or affecting the Company which questions the validity or enforceability of this Agreement or the Registration Rights Agreement or the transactions contemplated hereby or thereby. 2.9. REGISTRATION RIGHTS AGREEMENT. The Company acknowledges and agrees that the Common Stock issuable upon conversion of the Shares will be eligible for registration pursuant to the terms of the Registration Rights Agreement by and among the Purchaser, the Company and certain other parties thereto. 3. REPRESENTATIONS AND WARRANTIES OF THE PURCHASER The Purchaser hereby represents and warrants to the Company as follows: 3.1. AUTHORIZATION. This Agreement constitutes the Purchaser's valid and legally binding obligation, enforceable in accordance with its terms except as may be limited by (a) applicable bankruptcy, insolvency, reorganization or other laws of general application relating to or affecting the enforcement of creditors' rights generally, and (b) the effect of rules of law governing the availability of equitable remedies. The Purchaser represents that the Purchaser has full power and authority to enter into this Agreement. 3.2. PURCHASE FOR OWN ACCOUNT. The Shares to be purchased by the Purchaser hereunder shall be acquired for investment for the Purchaser's own account, not as a nominee or agent, and not with a view to the public resale or distribution thereof, and the Purchaser has no present intention of selling, granting any participation in, or otherwise distributing the same. The Purchaser represents that the Purchaser has not been formed for the specific purpose of acquiring the Shares. 3.3. DISCLOSURE OF INFORMATION. The Purchaser has received or has had full access to all the information it considers necessary or appropriate to make an informed investment decision with respect to the Shares to be purchased under this Agreement. The Purchaser further has had an opportunity to ask questions and receive answers from the Company regarding the terms and conditions of the offering of the Shares and to obtain additional information (to the 5 extent the Company possessed such information or could acquire it without unreasonable effort or expense) necessary to verify any information furnished to the Purchaser or to which the Purchaser had access. 3.4. INVESTMENT EXPERIENCE. The Purchaser understands that the purchase of the Shares involves substantial risk. The Purchaser acknowledges that the Purchaser is able to fend for itself, can bear the economic risk of the Purchaser's investment in the Shares and has such knowledge and experience in financial or business matters that the Purchaser is capable of evaluating the merits and risks of this investment in the Shares and protecting its own interests in connection with this investment. 3.5. ACCREDITED INVESTOR STATUS. The Purchaser is an "accredited investor" within the meaning of Regulation D promulgated under the Securities Act. 3.6. RESTRICTED SECURITIES. The Purchaser understands that the Shares are characterized as "restricted securities" under the Securities Act inasmuch as they are being acquired from the Company in a transaction not involving a public offering and that under the Securities Act and applicable regulations thereunder such securities may be resold without registration under the Securities Act only in certain limited circumstances. Further, the Purchaser represents that the Purchaser is familiar with Rule 144 of the Commission, as presently in effect, and understands the resale limitations imposed thereby and by the Securities Act. The Purchaser understands that the Company is under no obligation to register any of the securities sold hereunder except as provided in the Registration Rights Agreement. 3.7. GOVERNMENTAL CONSENTS. No filings are required to be made, or consents to be obtained, from any governmental authority to consummate the transactions contemplated hereby except that a filing under the HSR Act will be necessary for Purchaser to convert the Shares into Common Stock. 3.8. FURTHER LIMITATIONS ON DISPOSITION. Without in any way limiting the representations set forth above, the Purchaser further agrees not to make any disposition of all or any portion of the Shares unless and until: (a) there is then in effect a registration statement under the Securities Act covering such proposed disposition and such disposition is made in accordance with such registration statement; or (b) the Purchaser shall have furnished the Company at the expense of the Purchaser or its transferee, with an opinion of counsel, reasonably satisfactory to the Company, that such disposition will not require registration of such securities under the Securities Act or is in compliance with Rule 144 of the Securities Act. 6 Notwithstanding the provisions of subparagraphs (a) and (b) above, no such registration statement or opinion of counsel shall be required for any transfer of Shares to (A) a partner of the Purchaser, (B) a retired partner of the Purchaser who retires after the date hereof, or (C) the estate of any such partner; PROVIDED that in each of the foregoing cases the transferee agrees in writing to be subject to the terms of this Section 3 to the same extent as if the transferee were an original purchaser hereunder. 3.9. LEGENDS. It is understood that the certificates evidencing the Shares will bear the legends set forth below: (a) THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), OR UNDER THE SECURITIES LAWS OF ANY STATE OF THE UNITED STATES, AND MAY NOT BE SOLD, TRANSFERRED, ASSIGNED, PLEDGED, HYPOTHECATED, OR OTHERWISE DISPOSED OF UNLESS REGISTERED UNDER THE SECURITIES ACT, OR THE COMPANY HAS RECEIVED AN OPINION OF COUNSEL OR OTHER EVIDENCE, SATISFACTORY TO IT AND ITS COUNSEL, THAT AN EXEMPTION FROM SUCH REGISTRATION IS AVAILABLE. (b) Any legend imposed or required by the applicable state securities laws, the Registration Rights Agreement or any other ancillary agreement. 4. CONDITIONS PRECEDENT TO THE PURCHASER'S OBLIGATIONS The obligation of the Purchaser to purchase the Shares is subject to the satisfaction by the Company, or waiver by the Purchaser, on or prior to the Closing Date, of the following conditions: 4.1. REPRESENTATIONS AND WARRANTIES. Each of the representations and warranties of the Company set forth in this Agreement that is qualified as to Material Adverse Effect or materiality shall be true and correct, and each of the representations and warranties of the Company set forth in this Agreement not so qualified shall be true and correct in all material respects, in each case as of the date of this Agreement and as of the Closing Date as though made on and as of the Closing Date (except to the extent in either case that such representations and warranties speak as of another date). 4.2. CONSENTS. The Company shall have obtained all necessary consent to the transactions contemplated by this Agreement under each of (a) the Second Amended and Restated Credit Agreement dated March 30, 2000, among the Company, the lenders set forth on Schedule 1 thereto and First Union National Bank as agent for the lenders, and (b) the Credit Agreement dated March 30, 2000 among the Company and certain of its subsidiaries, as borrowers, the lenders named therein and The Chase Manhattan Bank, as Agent. 7 5. DEFINITIONS As used in this Agreement, the following terms shall have the following meanings: "Agreement" means this Preferred Stock Purchase Agreement, including all amendments, modifications and supplements thereto. "Closing" shall have the meaning assigned to such term in Section 1.2. "Closing Date" shall have the meaning assigned to such term in Section 1.2. "Commission" means the Securities and Exchange Commission. "Common Stock" shall mean the common stock of the Company, par value $.01 per share. "Company" shall have the meaning assigned to such term in the introductory paragraph hereof. "Exchange Act" means the Securities Exchange Act of 1934, as amended. "HSR Act" means the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended. "Indemnified Party" shall have the meaning assigned to such term in Section 5.2. "Material Adverse Effect" means any material adverse effect on (a) the business, assets, operations or financial condition of the Company and its subsidiaries, taken as a whole, (b) the ability of the Company to perform its obligations under this Agreement or the Registration Rights Agreement or (c) the binding nature, validity or enforceability of this Agreement or the Registration Rights Agreement. "Purchaser" shall have the meaning assigned to such term in the introductory paragraph hereof. "Registration Rights Agreement" means the Registration Rights Agreement for the RMSI Stockholders, dated as of August 18, 1999, by and among the Company, the Purchaser and the other parties thereto. "Securities Act" means the Securities Act of 1933, as amended. "Shares" shall have the meaning assigned to such term in Section 1.1. 8 6. INDEMNIFICATION 6.1. GENERAL INDEMNITY. The Company agrees to indemnify and save harmless the Purchaser and its directors, officers, affiliates, successors and assigns from and against any and all losses, liabilities, deficiencies, costs, damages and expenses (including, without limitation, reasonable attorneys' fees, charges and disbursements) incurred by the Purchaser as a result of any inaccuracy in or breach of the representations, warranties or covenants made by the Company in this Agreement. The Purchaser agrees to indemnify and save harmless the Company and its directors, officers, affiliates, successors and assigns from and against any and all losses, liabilities, deficiencies, costs, damages and expenses (including, without limitation, reasonable attorneys' fees, charges and disbursements) incurred by the Company as a result of any inaccuracy in or breach of the representations, warranties or covenants made by the Purchaser herein. 6.2. INDEMNIFICATION PROCEDURE. Any party entitled to indemnification under this Section 6 (an "Indemnified Party") will give written notice to the indemnifying party of any claim with respect to which it seeks indemnification promptly after the discovery by such party of any matters giving rise to a claim for indemnification; provided that the failure of any party entitled to indemnification hereunder to give notice as provided herein shall not relieve the indemnifying party of its obligations under this Section 6 except to the extent that the indemnifying party is actually prejudiced by such failure to give notice. In case any action, proceeding or claim is brought against an Indemnified Party in respect of which indemnification is sought hereunder, the indemnifying party shall be entitled to participate in and, unless in the reasonable judgment of the Indemnified Party a conflict of interest between it and the indemnifying party may exist in respect of such action, proceeding or claim, to assume the defense thereof, with counsel reasonably satisfactory to the Indemnified Party. In the event that the indemnifying party advises an Indemnified Party that it will contest such a claim for indemnification hereunder, or fails, within thirty (30) days of receipt of any indemnification notice to notify, in writing, such person of its election to defend, settle or compromise, at its sole cost and expense, any action, proceeding or claim (or discontinues its defense at any time after it commences such defense), then the Indemnified Party may, at its option, defend, settle or otherwise compromise or pay such action, proceeding or claim. In any event, unless and until the indemnifying party elects in writing to assume and does so assume the defense of any such claim, proceeding or action, the Indemnified Party's costs and expenses arising out of the defense, settlement or compromise of any such action, proceeding, claim or proceeding shall be losses subject to indemnification hereunder. The Indemnified Party shall cooperate fully with the indemnifying party in connection with any negotiation or defense of any such action, proceeding or claim by the indemnifying party and shall furnish to the indemnifying party all information reasonably available to the Indemnified Party which relates to such action, proceeding or claim. The indemnifying party shall keep the Indemnified Party fully informed at all times as to the status of the defense or any settlement negotiations with respect thereto. If the indemnifying 9 party elects to defend any such action, proceeding or claim, then the Indemnified Party shall be entitled to participate in such defense with counsel of its choice at its sole cost and expense. The indemnifying party shall not be liable for any settlement of any action, claim or proceeding effected without its written consent, provided, however, that the indemnifying party shall not unreasonably withhold, delay or condition its consent. Anything in this Section 6 to the contrary notwithstanding, the indemnifying party shall not, without the Indemnified Party's prior written consent, settle or compromise any claim or consent to entry of any judgment in respect thereof which imposes any future obligation on the Indemnified Party or which does not include, as an unconditional term thereof, the giving by the claimant or the plaintiff to the Indemnified Party, a release from all liability in respect of such claim, proceeding or action. The indemnification required by this Section 6 shall be made by periodic payments of the amount thereof during the course of the investigation or defense, as and when bills are received or expense, loss, damage or liability is incurred. The indemnity agreements contained herein shall be in addition to (a) any cause of action or similar right of the Indemnified Party against the indemnifying party or others, and (b) any liabilities the indemnifying party may be subject to pursuant to the law. 6.3. INDEMNIFICATION LIMITATIONS. Notwithstanding the foregoing, the Indemnified Party shall be entitled to make claims under Section 6.1 hereof only to the extent that the aggregate amount of losses arising from such claims does not exceed $9,000,000. Nothing contained in this Section 6.3 shall be construed to limit the indemnification obligations afforded to any director or officer of the Company under its organizational documents, state law or otherwise. 7. MISCELLANEOUS 7.1. NO WAIVER; CUMULATIVE REMEDIES. No failure or delay on the part of any party to this Agreement in exercising any right, power or remedy hereunder shall operate as a waiver thereof; nor shall any single or partial exercise of any such right, power or remedy preclude any other or further exercise thereof or the exercise of any other right, power or remedy thereunder. The remedies therein provided are cumulative and not exclusive of any remedies provided by law. 7.2. HSR. If required by applicable law, each of the Purchaser and the Company agree to cooperate in the preparation of, and file, any required notification form pursuant to the HSR Act with respect to the acquisition by the Purchaser of shares of the Company's Common Stock issuable to the Purchaser upon conversion of the Preferred Stock. 7.3. AMENDMENTS, WAIVERS AND CONSENTS. Any provisions in this Agreement to the contrary notwithstanding, and except as hereinafter provided, changes in, termination or amendments of or additions to this Agreement may be made, and compliance with any provision set forth herein may be omitted or waived, if the Company shall obtain consent thereto in writing from the Purchaser. Any waiver or consent may be given subject to satisfaction of conditions 10 stated therein and any waiver or consent shall be effective only in the specific instance and for the specific purpose for which given. 7.4. NOTICES. All notices, requests and other communications hereunder must be in writing and will be deemed to have been duly given only if delivered personally against written receipt or by facsimile transmission or mailed by prepaid first class mail, return receipt requested, or mailed by overnight courier prepaid to the parties at the following addresses or facsimile numbers. To the Company: Marketing Specialists Corporation 17855 N. Dallas Parkway, Suite 200 Dallas, Texas 75287 Attention: Eric J. Golle Facsimile Number: 972-349-6448 With a copy to: Akin, Gump, Strauss, Hauer & Feld, LLP 1700 Pacific Avenue, Suite 4100 Dallas, Texas 75201 Attention: Alan M. Utay Facsimile Number: 214-969-4343 To the Purchaser: MS Acquisition Limited 17855 North Dallas Parkway Suite 200 Dallas, Texas 75287 Attention: Nick Bouras Fax: (972) 860-7584 With a copy to: Skadden, Arps, Slate, Meagher & Flom LLP 4 Times Square New York, New York 10036 Attention: Eileen T. Nugent Fax: (212) 735-2000 All such notices, requests and other communications will (i) if delivered personally to the address as provided in this Section 7.4 be deemed given upon delivery, (ii) if delivered by facsimile transmission to the facsimile number as provided in this Section 7.4 be deemed given upon successful transmission, (iii) if delivered by mail in the manner described above to the address as provided in this Section 7.4 be deemed given upon the earlier of the third business day following mailing or upon receipt and (iv) if delivered by overnight courier to the address as provided in this Section 7.4 be deemed given on the earlier of the first business day following the 11 date sent by such overnight courier or upon receipt. Any party from time to time may change its address, facsimile number or other information for the purpose of notices to that party by giving notice specifying such change to the other parties hereto. 7.5. BINDING EFFECT; ASSIGNMENT. This Agreement shall be binding upon and inure to the benefit of each of the Company and the Purchaser and their respective heirs, successors and assigns, except that the Company shall not have the right to delegate its obligations hereunder. 7.6. SURVIVAL OF REPRESENTATIONS AND WARRANTIES. All representations and warranties made in this Agreement, or any other instrument or document delivered in connection herewith, shall survive the execution and delivery hereof or thereof for a period of 12 months after the date hereof. 7.7. SEVERABILITY. The provisions of this Agreement and the terms of the Shares are severable and, in the event that any court of competent jurisdiction shall determine that any one or more of the provisions or part of a provision contained in this Agreement or the terms of the Shares shall, for any reason, be held to be invalid, illegal or unenforceable in any respect, such invalidity, illegality or unenforceability shall not affect any other provision or part of a provision of this Agreement or the terms of the Shares, but this Agreement and the terms of the Shares shall be reformed and construed as if such invalid or illegal or unenforceable provision, or part of a provision, had never been contained herein, and such provisions or part reformed so that it would be valid, legal and enforceable to the maximum extent possible. 7.8. GOVERNING LAW. THIS AGREEMENT SHALL BE GOVERNED AND CONSTRUED IN ACCORDANCE WITH THE DOMESTIC LAWS OF THE STATE OF DELAWARE WITHOUT GIVING EFFECT TO ANY CHOICE OF LAW OR CONFLICT OF LAW PROVISION OR RULE (WHETHER OF THE STATE OF DELAWARE OR ANY OTHER JURISDICTION) THAT WOULD CAUSE THE APPLICATION OF THE LAWS OF ANY JURISDICTION OTHER THAN THE STATE OF DELAWARE. 7.9. HEADINGS. The headings used in this Agreement have been inserted for convenience of reference only and do not define or limit the provisions hereof. 7.10. COUNTERPARTS. This Agreement may be executed in any number of counterparts, each or which will be deemed an original, but all of which together will constitute one and the same instrument. 7.11. CLOSING CONDITION WAIVERS. At any time prior to the Closing Date, any party hereto may (a) extend the time for the performance of any of the obligations or other acts of any other party hereto, (b) waive any inaccuracies in the representations and warranties contained herein or in any document delivered pursuant hereto, and (c) waive compliance with any of the agreements or conditions contained herein. Any agreement on the part of a party hereto to any 12 such extension or waiver shall be valid only if set forth in an instrument in writing signed by the party granting such waiver but such waiver or failure to insist upon strict compliance with such obligation, covenant, agreement or condition shall not operate as a waiver of, or estoppel with respect to, any subsequent or future failure. 14 IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed as of the date and year first above written. MARKETING SPECIALISTS CORPORATION By: /s/ TIMOTHY M. BYRD -------------------------------------------- Name: Timothy M. Byrd Title: Chief Financial Officer MS ACQUISITION LIMITED By: MSSC Acquisition Corp., its General Partner By: /s/ TIMOTHY M. BYRD -------------------------------------------- Name: Timothy M. Byrd Title: Chief Financial Officer [SIGNATURE PAGE TO PREFERRED STOCK PURCHASE AGREEMENT] EX-10.49 6 a2045432zex-10_49.txt EXHIBIT 10.49 Exhibit 10.49 EXCHANGE AGREEMENT THIS EXCHANGE AGREEMENT (this "AGREEMENT"), dated as of _______________, 200__ (the "EFFECTIVE DATE"), is made by and between Marketing Specialists Corporation, a Delaware corporation (the "COMPANY"), formerly known as Merkert American Corporation, which was formerly known as Monroe, Inc., and Gerald R. Leonard, an individual ("LEONARD") (together, the "PARTIES"). RECITALS A. In conjunction with that certain Employment and Noncompetition Agreement dated as of December 18, 1998 by and between the Company and Leonard (the "EMPLOYMENT AGREEMENT"), Leonard executed a Promissory Note in favor of the Company for $1,500,000.00, at 6% interest per annum, with the entire principal amount and accrued interest due and payable on April 8, 2003 (the "NOTE"). Pursuant to the terms of the Note, Leonard purchased 300 shares of common stock of the Company, which stock was pledged to the Company as security, pursuant to the terms of that certain Stock Pledge Agreement (the "PLEDGE AGREEMENT") between the Company and Leonard dated as of April 8, 1998. The Note is a recourse note with regard to $750,000.00 of the principal amount and a non-recourse note with regard to $750,000.00 of the principal amount. B. On July 7, 1998 and January 11, 1999, the Company released 60 and 121,817 (after giving effect to the share recapitalization in connection with the Company's IPO) shares of common stock, respectively, from the pledge. C. On April 27, 1999, the Employment Agreement was amended to provide, among other things, that the Note would be due and payable on April 8, 2004 and that shares of the common stock of the Company were released from the pledge such that shares having a fair market value of $1,500,000.00 as of January 11, 1999 would remain subject to the pledge. D. After giving effect to the releases and share recapitalization, 98,361 shares of common stock of the Company are currently pledged pursuant to the Pledge Agreement (the "PLEDGED SHARES"). E. It is no longer the practice of the Company to issue its employees promissory notes requiring a pledge of the Company's stock as security. Rather, the Company now achieves the same economic benefits for its employees through the issuance of employee stock options to purchase shares of Company common stock at a stated exercise price. F. In order to make the Note, Pledge Agreement, Pledged Shares and related provisions of the Employment Agreement consistent with current Company practice, Leonard wishes to surrender any and all rights and obligations he has or may have under the Note, Pledge Agreement, and Pledged Shares in exchange for the issuance of employee stock options pursuant to which Leonard will have an option to purchase 98,361 shares of the Company's common stock at an aggregate exercise price of $1,500,000.00, or $15.25 per share (the "OPTION"). G. Each of the Parties acknowledges that this Agreement is not intended to increase or decrease the economic benefit originally provided to Leonard, but is intended to more accurately achieve such benefit. STATEMENT OF AGREEMENT NOW, THEREFORE, in consideration of the premises and the mutual agreements, covenants, representations and warranties set forth in this Agreement and for other good, valid and binding consideration, the receipt and sufficiency of which are hereby acknowledged, the Parties, intending to be legally bound, hereby agree as follows: ARTICLE I. TERMS OF THE EXCHANGE Section 1.1 Pursuant to the terms and conditions set forth in this Agreement, on the Closing Date (as defined below), Leonard shall surrender any and all rights, and terminate any and all obligations, he has or may have under the Note, Pledge Agreement and Pledged Shares, and shall accept the Option in lieu thereof. Section 1.2 Pursuant to the terms and conditions set forth in this Agreement, on the Closing Date, and subject to the Company's ability to obtain all necessary and appropriate approvals under the Company's credit facilities and other material agreements, the Company shall surrender any and all rights, and terminate any and all obligations, it has or may have under the Note, Pledge Agreement, and Pledged Shares, and shall grant the Option in lieu thereof. ARTICLE II. THE CLOSING Section 2.1 THE CLOSING. The consummation of the transactions contemplated by this Agreement (the "CLOSING") will take place at the offices of the Company on the first business day following the date on which all of the conditions hereto, to the extent not waived, are satisfied, or such other time and place as is mutually agreed upon by the Parties. The date on which the Closing actually occurs is hereinafter referred to as the "CLOSING DATE." Section 2.2 DELIVERIES BY LEONARD. At the Closing, Leonard shall deliver the following to the Company: (a) an original executed Pledge Agreement, if in Leonard's possession; and (b) the certificates representing the Pledged Shares, together with an executed stock power in favor of the Company. Section 2.3 DELIVERIES BY COMPANY. At the Closing, the Company shall deliver the following to Leonard: (a) the Option, in substantially the form attached hereto as EXHIBIT A; (b) the original executed Note, to be marked cancelled; and 2 (c) an original executed Pledge Agreement, if in the Company's possession. Section 2.4 EFFECT OF CLOSING. Upon consummation of the Closing, the Option shall for all purposes replace the Note, Pledge Agreement, Pledged Shares and the provisions of the Employment Agreement relating thereto, which shall be terminated and of no further force or effect. ARTICLE III. MISCELLANEOUS Section 3.1 AMENDMENT. No amendment of this Agreement will be effective unless in a writing signed by the Parties. Section 3.2 COUNTERPARTS; FAX SIGNATURES. This Agreement may be executed in any number of counterparts, each of which will be deemed to be an original agreement, but all of which will constitute one and the same agreement. Either Party may execute and deliver this Agreement by an executed signature page transmitted by a facsimile machine. If a Party transmits its signature page by a facsimile machine, such Party will promptly thereafter deliver an originally executed signature page to the other Party, provided that any failure to deliver such an originally executed signature page will not affect the validity, legality, or enforceability of this Agreement. Section 3.3 ENTIRE AGREEMENT. This Agreement constitutes the entire agreement and understanding between the Parties and supersedes all prior agreements and understandings, both written and oral, and all contemporaneous oral agreements and understandings with respect to the subject matter of this Agreement. Section 3.4 GOVERNING LAW. THIS AGREEMENT WILL BE GOVERNED BY THE LAWS OF THE STATE OF TEXAS REGARDLESS OF THE LAWS THAT MIGHT OTHERWISE GOVERN UNDER THE CONFLICTS OF LAWS PRINCIPLES OF SUCH STATE. Section 3.5 NO THIRD PARTY BENEFICIARIES. This Agreement is solely for the benefit of the Parties and no other person will have any right, interest, or claim under this Agreement. Section 3.6 NOTICES. Unless otherwise provided elsewhere in this Agreement, all notices, waivers, and other communications in connection with this Agreement shall be in writing. Such notices, waivers, and other communications shall be transmitted by hand delivery, by facsimile with written confirmation of such transmittal, by a nationally recognized overnight courier, or by certified or registered United States mail, postage prepaid, return receipt requested to a Party at its address or location set forth below (or to such other address to which such Party has notified the other Party in accordance with this Section to send such notices, waivers, and other communications). 3 Company: Marketing Specialists Corporation 17855 Dallas Parkway, Suite 200 Dallas, TX 75287 Attn: Nancy K. Jagielski, General Counsel Telephone: (972) 687-4205 Facsimile: (972) 687-1693 Leonard: Gerald R. Leonard 339 Far Reach Road Westwood, MA 02090 Telephone: Facsimile: Section 3.7 SEVERABILITY. Any provision of this Agreement that is prohibited or unenforceable in any jurisdiction will not invalidate the remaining provisions of this Agreement or affect the validity or enforceability of such provision in any other jurisdiction. In addition, any such prohibited or unenforceable provision will be given effect to the extent possible in the jurisdiction where such provision is prohibited or unenforceable. Section 3.8 SUCCESSORS. This Agreement will be binding upon and will inure to the benefit of each Party and its heirs, legal representatives and successors. Section 3.9 TAXATION. It is the intent and belief of the Parties that the transactions contemplated hereby shall be accomplished as a tax free restructuring of the obligations of the Parties, and the Parties shall report the transactions in a manner consistent therewith on their respective Federal, State and local income tax returns. [SIGNATURE PAGE FOLLOWS] 4 IN WITNESS WHEREOF, each Party executed, or caused a duly authorized officer to execute, this Agreement as of the Effective Date. MARKETING SPECIALISTS CORPORATION By:______________________________ Name:____________________________ Title:___________________________ _________________________________ Gerald R. Leonard 5 EXHIBIT A 6 Exhibit A NON-QUALIFIED STOCK OPTION AGREEMENT UNDER THE MARKETING SPECIALISTS CORPORATION (F/K/A MERKERT AMERICAN CORPORATION) 1998 STOCK OPTION AND INCENTIVE PLAN Name of Optionee: Gerald R. Leonard No. of Option Shares: 98,361 Option Exercise Price per Share: $15.25 Grant Date: [_________________], 2000 Expiration Date: [_________________], 2010 Pursuant to the Marketing Specialists Corporation (f/k/a Merkert American Corporation) 1998 Stock Option and Incentive Plan (the "PLAN") as amended through the date hereof and pursuant to the exchange agreement by and between Marketing Specialists Corporation (the "COMPANY") and Optionee dated as of [ ], 2000 (the "EXCHANGE AGREEMENT"), the Company hereby grants to the Optionee named above an option (the "STOCK OPTION") to purchase on or prior to the Expiration Date specified above all or part of the number of shares of Common Stock, par value $.01 per share (the "STOCK") of the Company specified above at the Option Exercise Price per Share specified above subject to the terms and conditions set forth herein and in the Plan and the Exchange Agreement. 1. MANNER OF EXERCISE. (a) The Optionee may exercise this Option only in the following manner: from time to time on or prior to the Expiration Date of this Option, the Optionee may give written notice to the Committee (as defined in Section 2 of the Plan) of his or her election to purchase some or all of the Option Shares purchasable at the time of such notice. This notice shall specify the number of Option Shares to be purchased. Payment of the purchase price for the Option Shares may be made (i) in cash, by certified or bank check or other instrument acceptable to the Committee or (ii) by the Optionee delivering to the Company a properly executed exercise notice together with irrevocable instructions to a broker to promptly deliver to the Company cash or a check payable and acceptable to the Company to pay the option purchase price, provided that in the event the Optionee chooses to pay the option purchase price as so provided, the Optionee and the broker shall comply with such procedures and enter into such agreements of indemnity and other agreements as the Committee shall prescribe as a condition of such payment procedure. Payment instruments will be received subject to collection. The delivery of certificates representing the Option Shares will be contingent upon the Company's receipt from the Optionee of full payment for the Option Shares, as set forth above and any agreement, statement or other evidence that the Company may require to satisfy itself that the issuance of Stock to be purchased pursuant to the exercise of Options under the Plan and any subsequent resale of the shares of Stock will be in compliance with applicable laws and regulations. (b) Certificates for the shares of Stock purchased upon exercise of this Stock Option shall be issued and delivered to the Optionee upon compliance to the satisfaction of the Committee with all requirements under applicable laws or regulations in connection with such issuance and with the requirements hereof and of the Plan. The determination of the Committee as to such compliance shall be final and binding on the Optionee. The Optionee shall not be deemed to be the holder of, or to have any of the rights of a holder with respect to, any shares of Stock subject to this Stock Option unless and until this Stock Option shall have been exercised pursuant to the terms hereof, the Company shall have issued and delivered the shares to the Optionee, and the Optionee's name shall have been entered as the stockholder of record on the books of the Company. Thereupon, the Optionee shall have full voting, dividend and other ownership rights with respect to such shares of Stock. (c) The minimum number of shares with respect to which this Stock Option may be exercised at any one time shall be 100 shares, unless the number of shares with respect to which this Stock Option is being exercised is the total number of shares subject to exercise under this Stock Option at the time. (d) Notwithstanding any other provision hereof or of the Plan, no portion of this Stock Option shall be exercisable after the Expiration Date hereof. 2. TERMINATION OF EMPLOYMENT. If the Optionee's employment by the Company or a Subsidiary (as defined in the Plan) is terminated, the period within which to exercise the Option may be subject to earlier termination as set forth below. (a) TERMINATION DUE TO DEATH. If the Optionee's employment terminates by reason of death, any Option held by the Optionee shall become fully exercisable and may thereafter be exercised by the Optionee's legal representative or legatee for a period of 12 months from the date of death or until the Expiration Date, if earlier. (b) TERMINATION DUE TO DISABILITY. If the Optionee's employment terminates by reason of Disability (as defined in the Plan), any Option held by the Optionee shall become fully exercisable and may thereafter be exercised by the Optionee for a period of 12 months from the date of termination or until the Expiration Date, if earlier. The death of the Optionee during the 12-month period provided in this Section 3(b) shall extend such period for another 12 months from the date of death or until the Expiration Date, if earlier. 2 (c) TERMINATION FOR CAUSE. If the Optionee's employment terminates for Cause (as defined in the Plan), any Option held by the Optionee shall terminate immediately and be of no further force and effect. (d) OTHER TERMINATION. If the Optionee's employment terminates for any reason other than death, Disability, or Cause, and unless otherwise determined by the Committee, any Option held by the Optionee may be exercised, to the extent exercisable on the date of termination, for a period of three months from the date of termination or until the Expiration Date, if earlier. Any Option that is not exercisable at such time shall terminate immediately and be of no further force or effect. The Committee's determination of the reason for termination of the Optionee's employment shall be conclusive and binding on the Optionee and his or her representatives or legatees. 3. INCORPORATION OF PLAN. Notwithstanding anything herein to the contrary, this Stock Option shall be subject to and governed by all the terms and conditions of the Plan. Capitalized terms in this Agreement shall have the meaning specified in the Plan, unless a different meaning is specified herein. 4. TRANSFERABILITY. This Agreement is personal to the Optionee, is non-assignable and is not transferable in any manner, by operation of law or otherwise, other than by will or the laws of descent and distribution. This Stock Option is exercisable, during the Optionee's lifetime, only by the Optionee, and thereafter, only by the Optionee's legal representative or legatee. 5. MISCELLANEOUS. (a) Notice hereunder shall be given to the Company at its principal place of business, and shall be given to the Optionee at the address set forth below, or in either case at such other address as one party may subsequently furnish to the other party in writing. (b) This Stock Option does not confer upon the Optionee any rights with respect to continuance of employment by the Company or any Subsidiary. (c) Pursuant to Section 15 of the Plan, the Committee may at any time amend or cancel any outstanding portion of this Stock Option, but no such action may be taken which adversely affects the Optionee's rights under this Agreement without the Optionee's consent. [Signature Page to Follow] 3 MARKETING SPECIALISTS CORPORATION By: ___________________________________ Name: _________________________________ Title: ________________________________ The foregoing Agreement is hereby accepted and the terms and conditions thereof hereby agreed to by the undersigned. Dated: ________________________ _______________________________________ Optionee's Signature Social Security No. [___ __ ___] Gerald R. Leonard 339 Far Reach Road Westwood, MA 02090 4 EX-10.53 7 a2045432zex-10_53.txt EXHIBIT 10.53 Exhibit 10.53 AGREEMENT FOR PURCHASE AND SALE OF REAL PROPERTY THIS AGREEMENT (this "Agreement") is dated as of the Effective Date (hereinafter defined), by and between Steve Farnie ("Buyer") and Marketing Specialists Sales Company, a Texas corporation (f.k.a. Marketing Specialists Companies, Inc.) ("Seller"). FOR AND IN CONSIDERATION OF THE MUTUAL PROMISES SET FORTH HEREIN AND OTHER GOOD AND VALUABLE CONSIDERATION, THE RECEIPT AND SUFFICIENCY OF WHICH ARE HEREBY ACKNOWLEDGED, THE PARTIES HERETO AGREE AS FOLLOWS: SECTION 1. TERMS AND DEFINITIONS: The terms listed below shall have the respective meaning given to them as set forth adjacent to each term. (a) "PROPERTY" shall mean that real property commonly known as 8501 Tower Point Road, Charlotte, Mecklenburg County, North Carolina, being more particularly described on EXHIBIT A attached hereto and incorporated herewith by reference (the "Real Property"), together with all buildings and improvements thereon and all fixtures and appurtenances thereto (the "Improvements") (the Real Property and the Improvements are collectively referred to herein as the "Property"). (b) "PURCHASE PRICE" shall mean the sum of TWO MILLION SIX HUNDRED THOUSAND AND NO/100 DOLLARS ($2,600,000.00), payable on the following terms: (i) "EARNEST MONEY": Within two (2) days after the Effective Date, Buyer shall deliver to _________________________________ Attention: _____________, phone: ________________, fax: ______________ ("Title Insurer") (i) a nonrefundable wire transfer or cashier's or certified check in the sum of Fifty Dollars ($50.00) payable to the order of Seller representing the independent consideration for Seller's execution of this Agreement and agreement to provide Buyer with the Examination Period (hereafter defined) (which check or the proceeds of which wire transfer shall thereafter be delivered by Title Insurer to Seller and shall not be a part of the Earnest Money), and (ii) a wire transfer or cashier's or certified check in the sum of FIFTY THOUSAND AND NO/100 DOLLARS ($50,000.00). The Earnest Money shall be invested by Title Insurer in a commercial bank or banks acceptable to Seller and Buyer at money market rates, or in such other investments as shall be approved in writing by Seller and Buyer. The Earnest Money shall be held and disbursed by Title Insurer in strict accordance with the terms and provisions of this Agreement. All accrued interest or other earnings on the Earnest Money shall become part of the Earnest Money. The Earnest Money shall be returned to Buyer if Buyer, prior to the end of the Examination Period, notifies Seller in writing, pursuant to SECTION 7 hereof, that Buyer is electing to terminate this Agreement. The Earnest Money shall be either 1 (a) applied at the Closing against the Purchase Price, (b) returned to Buyer pursuant hereto, or (c) paid to Seller pursuant hereto. (ii) "CASH" at Closing in the amount of TWO MILLION FIVE HUNDRED FIFTY THOUSAND AND NO/100 DOLLARS ($2,550,000.00), the balance of the Purchase Price, subject to the adjustments and prorations described in SECTION 2 of this Agreement. (c) "CLOSING" shall occur on the date that is fifteen (15) days after the expiration of the Examination Period (the "Closing Date"). Time is of the essence with respect to the Closing Date. (d) "BUYER'S BROKER" shall mean The Staubach Company who is acting on behalf of both Seller and Buyer. "SELLER'S BROKER" shall mean The Staubach Company who is the listing agent for the Property and is acting on behalf of both Seller and Buyer. (e) "EXAMINATION PERIOD" shall mean the period beginning on the Effective Date and expiring on the date that is fifteen (15) calendar days thereafter. (f) "INTENDED USE" shall mean the use of the Property for the following reasons: general office use in accordance with the zoning requirements of the Property, which is I-1 Industrial. (g) "SELLER'S NOTICE ADDRESS" shall be as follows: (i) Mr. Gage Hunt Marketing Specialist Companies, Inc. 16251 Dallas Parkway, 8th Floor Dallas, Texas 75248 (972)687-5863 Office Telephone With a copy to: (ii) Mr. George Johnson The Staubach Company 121 W. Trade Street, Suite 2800 Charlotte, North Carolina 28202 (704)341-1171 Office Telephone (h) "BUYER'S NOTICE ADDRESS" shall be as follows: (i) Steve Farnie 9110 Hood Road Charlotte, North Carolina 28215 (704) 563-0431 Office Telephone 2 With a copy to: (ii) Ms. Patricia W. Nystrom Harkey, Lambeth, Nystrom, Fiorella & Morrison, L.L.P. Morehead Corporate Plaza, Suite 300 1043 East Morehead Street Charlotte, North Carolina 28204-2800 SECTION 2. PRORATION OF EXPENSES AND PAYMENT OF COSTS: All revenues and expenses with respect to the Property and which are applicable to the period of time before and after the Closing Date, determined in accordance with sound accounting principles consistently applied, shall be prorated between Seller and Buyer as provided herein. Except as otherwise provided to the contrary in this Agreement, Seller shall be entitled to all revenue and shall be responsible for all expenses for the period of time up to but not including the Closing Date, and Buyer shall be entitled to all revenue and shall be responsible for all expenses for the period of time from, after and including the Closing Date. Such prorations shall be shown on the closing statement(s) executed by the parties hereto and shall increase or decrease (as the case may be) the cash amount payable by Buyer at Closing pursuant to this Agreement. Seller and Buyer agree that all property taxes, assessments and utilities shall be prorated as of the date of Closing. Seller shall pay for the deed preparation, deed stamps and other conveyance fees or taxes, Seller's attorneys' fees, Seller's Broker Fee (hereinafter defined), no more than a 2% Buyer's Brokers Fee (hereafter defined), and fifty percent (50%) of any escrow and closing charges and fees by Title Insurer. Buyer shall pay recording costs, costs of any title search, the premium for title insurance, any portion of the Buyer's Broker Fee not paid by Seller, the cost of the Survey, Buyer's attorneys' fees, and fifty percent (50%) of any escrow and closing charges and fees by Title Insurer. Notwithstanding anything herein to the contrary, Buyer shall be responsible for all costs incurred in connection with that certain lease agreement (the "PERFECT FIT LEASE") executed as of June 22, 2000 by and between Seller, as landlord, and Perfect Fit Industries, Inc., as tenant ("TENANT"), for space in the Improvements, including, without limitation, providing the $3.00/square foot tenant improvement allowance as described in the Perfect Fit Lease, and all other costs to prepare the premises for Tenant's occupancy as set forth in the Perfect Fit Lease, including the construction of the demising wall described in the Perfect Fit Lease; provided, Seller shall pay all commissions payable on account of the Perfect Fit Lease, and such commission amount shall be paid by Seller at Closing. In consideration of the foregoing, Seller shall pay to Buyer's escrow agent at Closing an amount equal to $95,000.00 (in addition to the Buyer's Broker Fee provided herein). SECTION 3. SALE OF THE PROPERTY: Seller agrees to sell the Property to Buyer for the Purchase Price, subject to all of the terms and conditions contained in this Agreement. SECTION 4. PAYMENT OF THE PURCHASE PRICE: At Closing, Buyer shall pay the Purchase Price in accordance with all the terms and conditions of this Agreement. SECTION 5. TITLE: 3 (a) TITLE EXAMINATION. Seller agrees to convey fee simple marketable title to the Property by special warranty deed, subject only to the Permitted Exceptions (hereinafter defined). Seller represents and warrants that Seller is the fee simple owner of the Property, and at Closing, Seller shall deliver to Buyer good and marketable fee simple title to said Property, free and clear of all liens, encumbrances and defects of title other than zoning ordinances affecting the Property, utility easements of record serving the Property, taxes not yet due and payable, road rights of way of record and all Permitted Exceptions (as defined below). Within three (3) business days after the Effective Date, Buyer shall, at Buyer's expense, commence a title examination of the Property and order a survey of the Property from a surveyor licensed in North Carolina (the "Survey") (the results of Buyer's title examination is referred to herein as the "Commitment"). In the event that the Commitment and Survey shall show that Seller's title is not good, marketable, and fee simple, then the Buyer shall notify the Seller in writing no later than 5:00 p.m., Charlotte, North Carolina local time on the expiration date of the Examination Period of all such title defects and exceptions ("Title Objections"). Buyer shall not object to the Perfect Fit Lease, which shall be a Permitted Exception hereunder. (b) FAILURE TO CORRECT TITLE OBJECTIONS. Except as hereinafter expressly provided in this SECTION 5(b), Seller shall have no obligation whatsoever to remove, satisfy, or otherwise cure, or to incur any expense in connection with the curing of, any valid Title Objections of which Seller is notified by Buyer in accordance with SECTION 5(a). Seller shall notify Buyer within five (5) days after Seller's receipt of written notice from Buyer of any Title Objections whether or not Seller agrees to cause such Title Objections to be cured on or before the Closing Date; although Seller shall not otherwise have any obligation to cure any Title Objections other than any judgment, mortgages, deeds of trust, liens, financing statements, security interests and similar security instruments created by Seller (such instruments are collectively referred to herein as the "Security Encumbrances"). Seller may use any portion of the Purchase Price due to Seller to cure such Security Encumbrances at the Closing. If Seller expressly agrees in writing to cure any Title Objections (other than Security Encumbrances which Seller shall be required to cure) pursuant to such notice, then Seller shall diligently endeavor to cure such Title Objections on or before the Closing Date. If Seller does not notify Buyer in such five (5) day period that it has agreed in writing to cure Buyer's Title Objections, or if Seller thereafter fails to satisfy or cure on or before the Closing Date any Security Encumbrances or any Title Objections made by Buyer pursuant to SECTION 5(A) that Seller has expressly agreed in writing to cure, Buyer may, as its sole remedy, elect one of the following by written notice to Seller on or before the earlier of the Closing Date or the fifth (5th) day after the end of such five (5) day period (or on the Closing Date with respect to any Security Encumbrance or other Title Objection that Seller has agreed to cure and fails to satisfy or cure on or before the Closing Date): (i) to waive any such Title Objection (thereby making such Title Objection and all other title matters not objected to by Buyer a "Permitted 4 Exception") and to close the transaction in accordance with the terms of this Agreement; provided, however, that with respect to any Security Encumbrance or any Title Objection arising in breach of Seller's covenant under SECTION 6(c) hereunder, which Title Objection may be cured by the payment of money, Seller shall be required to deposit in escrow with the Title Insurer such amount as the Title Insurer shall reasonably estimate to be necessary to satisfy or to remove such Title Objection to permit the Title Insurer to issue its policy of title insurance with respect to Buyer's title to the Property without exception thereto, and Seller shall thereafter diligently endeavor to have such Security Encumbrances and Title Objections so satisfied or removed; or (ii) to terminate this Agreement by written notice thereof to Seller, and in the event of such termination, Title Insurer shall deliver to Buyer the Earnest Money and thereafter, neither Seller nor Buyer shall have any further obligation or liability under this Agreement except for those which survive a termination of this Agreement. In the event any Title Objection arises in breach of Seller's covenant under SECTION 6(c) hereunder and such Title Objection is not waived by Buyer or cured at Closing as provided in clause (i) above, Buyer shall be entitled to terminate this Agreement upon written notice thereof to Seller, in which event the Earnest Money shall be returned to Buyer and the parties hereto shall have no further liabilities or obligations to the other except those which survive a termination of this Agreement. In the event Buyer fails to timely elect either of the remedies set forth in clauses (i) and (ii) above, Buyer shall be deemed to waive such Title Objections pursuant to clause (i) above. SECTION 6. CONDITIONS AND COVENANTS: (a) BUYER'S CONDITIONS. Subject to SECTION 9(b) hereof, the obligation of Buyer to close pursuant to this Agreement is hereby made expressly conditioned upon the fulfillment (or waiver by the Buyer) of the following conditions: (1) DELIVERY OF DOCUMENTS: On or before the Closing Date, Seller shall have delivered to the Title Insurer all of the documents, information and other things required of Seller pursuant to SECTION 10(a) of this Agreement; (2) SELLER'S PERFORMANCE: On or before the Closing Date, Seller shall have performed in all material respects all of the covenants and other obligations of Seller under this Agreement to be performed by Seller on or before the Closing Date; (3) REPRESENTATIONS AND WARRANTIES. The representations and Warranties of Seller set forth in SECTION 8(b) hereof shall be true and correct in all material respects as of the Closing Date, except for such untruths or 5 inaccuracies disclosed to Buyer by Seller or which Buyer otherwise obtains actual knowledge prior to the expiration of the Examination Period. (b) SELLER'S CONDITIONS. Subject to SECTION 9(a) hereof, the obligation of Seller to close pursuant to this Agreement is hereby made expressly conditioned upon the fulfillment (or waiver by Seller) of the following conditions: (1) DELIVERY OF DOCUMENTS: On or before the Closing Date, Buyer shall have delivered to the Title Insurer all of the documents, information and other things required of Buyer pursuant to SECTION 10(b) of this Agreement; (2) BUYER'S PERFORMANCE: On or before the Closing Date, Buyer shall have performed in all material respects all of the covenants and other obligations of Buyer under this Agreement to be performed by Buyer on or before the Closing Date; (3) REPRESENTATIONS AND WARRANTIES. The representations and Warranties of Buyer set forth in SECTION 8(d) hereof shall be true and correct in all material respects as of the Closing Date. (c) SELLER'S COVENANT. Unless otherwise contemplated by this Agreement, Seller hereby covenants and agrees with Buyer that, between the Effective Date and the Closing, Seller will not voluntarily, without the prior written consent of Buyer, convey any portion of the Property or any interest therein or enter into any encumbrance or lease with respect to all or any portion of the Property which would, after the consummation of a sale of the Property to Buyer, encumber the Property. SECTION 7. EXAMINATION PERIOD. From and after the Effective Date, Buyer, its agents or representatives, at Buyer's expense and at reasonable times during normal business hours, shall have the right to enter upon the Property for the purpose of inspecting, examining, performing soil boring and other testing, and surveying the Property. Buyer shall not alter the physical condition of the Property (including, without limitation, soil or groundwater testing) without (i) notifying Seller, to the extent possible, of the exact location, nature and extent of Buyer's requested tests, and (ii) obtaining the prior written consent of Seller to any physical alteration of the Property, which Seller may refuse in its sole and absolute discretion. Buyer assumes all responsibility for the acts of itself, its agents or representatives in exercising its rights under this SECTION 7 and agrees to indemnify and hold Seller harmless from any damages resulting therefrom. Except as provided in SECTION 5 above, Buyer shall have from the Effective Date through the end of the Examination Period to perform the above inspections, examinations and testing and any other investigations or inquiries as Buyer may elect in order to determine if the Property is acceptable to Buyer as an investment, in Buyer's sole and absolute discretion. If, prior to the expiration of the Examination Period, Buyer determines that the Property is unsuitable, in Buyer's sole discretion, for any reason or no reason, and provides written notice to Seller thereof, then this Agreement shall terminate, and Buyer shall receive a return of the Earnest Money and the parties hereto shall have no further liabilities or obligations to the other 6 except those which survive a termination of this Agreement. The provisions of this Section 7 shall survive any termination of this Agreement. SECTION 8. REPRESENTATIONS AND WARRANTIES: (a) SURVIVAL AND LIMITATION OF GENERAL REPRESENTATIONS AND WARRANTIES. The representations and warranties set forth in SECTION 8(b) below shall survive Closing for a period of six (6) months; provided, however, Buyer shall have no claim against Seller for any untruth or inaccuracy in any such representation or warranty in which Seller has provided Buyer written notice or Buyer otherwise obtain actual knowledge thereof on or before the Closing, and Buyer nevertheless elects to close the transactions contemplated herein, (b) BY SELLER. Seller represents and warrants to Buyer as of the Effective Date that, except as otherwise disclosed in any of the materials delivered to Buyer prior to the Effective Date, to the best of Seller's knowledge the following is true: (i) Seller is a corporation duly organized, validly existing and in good standing under the laws of the State of Texas. Seller has, or on the Closing Date will have, the power and authority to carry out Seller's obligations hereunder. All requisite action necessary to authorize Seller to enter into this Agreement and to carry out Seller's obligations hereunder has been, or on the Closing Date will have been, taken. The individual executing this Agreement on behalf of Seller has the full right, power and authority to do so. After the discharge by Seller of all Security Encumbrances at or before the Closing, Seller will have the power and authority to sell and convey the Property in accordance with the terms of this Agreement. (ii) Seller has not received any written notice of and does not otherwise have knowledge of any pending or contemplated proceedings of any of the applicable governmental entities to (i) impose any special assessment against the Property; or (ii) condemn any portion of the Property. (iii) There is no litigation, suit, action, claim, condemnation proceeding, arbitration, investigation (including any investigation concerning valuation of the Property for tax purposes) by the United States of America, State of North Carolina, Mecklenburg County, North Carolina, City of Charlotte, North Carolina, or any department, board, agency, office, commission or other subdivision thereof or any official thereof ("Applicable Governmental Authorities") or administrative proceeding or other form of governmental enforcement or executive or legislative proceeding pending or threatened against or affecting Seller or the Property. (iv) All service and maintenance contracts affecting the Property and being assigned to Buyer (each, a "Contract") are in full force and effect in all material respects and Seller is not in material default under any Contract 7 and no other party to any Contract is in material default under such Contract. Seller has received no notice of any material default thereunder and has no knowledge of any fact or facts which, with the delivery of notice or with the passage of time, or both, would be a material default under the terms thereof. (v) No entity or any other person (other than Buyer) has any right or option to purchase all or any portion of the Property, except for any back-up contracts for the sale of the Property permitted by the terms of this Agreement. (vi) Seller has received no notice from any public or private utility currently serving the Property of its inability to provide the service necessary for the Intended Use of the Property. (vii) There are not (i) any changes contemplated in any applicable laws, ordinances or restrictions affecting the Property; or (iv) any governmental special assessments, either pending or confirmed, for sidewalk, paving, water, sewer, or other improvements on or adjoining the Property, and owners' association special assessments. (viii) The building located on the Real Property, in its current configuration, contains approximately 34,412 usable square feet. (ix) There are no Hazardous Substances present upon and no Hazardous Substances have been disposed within the buildings or the Property in violation of any applicable environmental laws, including as a result of the migration of Hazardous Substances from neighboring tracts. "Hazardous Substances" is defined as those substances, materials, and wastes, including but not limited to, those substances, materials and wastes listed in the United States Department of Transportation Hazardous Materials Table (49 CFR 172.101) or by the Environmental Protection Agency as hazardous substances (40 CFR Part 302) and amendments thereto, or such substances, materials and wastes, which are or become regulated under any applicable local, state or federal law, including, without limitation, any material, waste or substance which is (i) petroleum, (ii) asbestos, (iii) polychlorinated biphenyls, (iv) designated as a Hazardous Substance pursuant to Section 331 of the Clean Water Act, 33 U.S.C. Sec. 1251, et. Seq. (33 U.S.C. 1321) or listed pursuant to Section 307 of the Clean Water Act (33 U.S.C. Sec. 1371) (v) defined as a hazardous waste pursuant to Section 1004 of the Resource Conservation and Recovery Act, 42 U.S.C. Sec. 6901, et. Seq. (42 U.S.C. Sec. 6903) or (vi) defined as a hazardous substance pursuant to Section 101 of the Comprehensive Environmental Response, Compensation and Liability Act, 42 U.S.C. Sec. 9601, et. Seq. (42 U.S.C. 9601). 8 (c) SELLER'S KNOWLEDGE. For purposes of this Agreement, the phrase "to the best of Seller's knowledge" or similar references to "knowledge" shall mean the current actual (as distinguished from implied, constructive or imputed knowledge) knowledge of Gage Hunt who is the Vice-President of Seller with responsibility for the Property ("Seller's Representative"), without independent investigation by Seller's Representative of any files, records, documents or writings of any kind and without inquiry by Seller's Representative or any other person. (d) BY BUYER. Buyer represents and warrants to Seller that in the event Buyer assigns this Agreement as permitted herein to a corporation or other entity, Buyer shall be an entity duly organized, validly existing and in good standing under the laws of the State of its formation and shall be authorized to do business in the State of North Carolina, and shall have duly authorized the execution, performance and closing of this Agreement. (e) BROKERAGE COMMISSIONS. Each of Seller and Buyer represents to the other that it has had no dealings, negotiations or consultations with any broker, representative, employee, agent or other intermediary except the Seller's Broker who will be compensated by Seller, and Buyer's Broker who will be compensated by Buyer and Seller as described in SECTION 2 hereto, pursuant to separate written agreements in connection with the sale of the Property (the compensation due to the Seller's Broker, the "SELLER'S BROKER FEE", and the compensation due to the Buyer's Broker, the "BUYER'S BROKER FEE"). Seller will indemnify, defend and hold Buyer free and harmless from the Seller's Broker Fee and the claims of any other broker(s), representative(s), employee(s), agent(s) or other intermediary(ies) claiming by, through or under Seller, which are entitled to compensation in connection with this Agreement or in connection with the sale of the Property. Buyer will indemnify, defend and hold Seller free and harmless from the Buyer's Broker Fee and the claims of any broker(s), representative(s), employee(s), agent(s) or other intermediary(ies) claiming by, through or under Buyer, which are entitled to compensation in connection with this Agreement or in connection with the sale of the Property. The provisions of this SECTION 8(e) shall survive Closing or any termination of this Agreement. (f) AS IS. Buyer acknowledges that Seller is selling, and Buyer shall accept, the Property in an "AS IS" condition without any representation or warranty whatsoever by Seller relating to the Property, with the exception of the express representations and warranties set forth in this Agreement or any of the Closing Documents (hereinafter defined). SECTION 9. EVENTS OF DEFAULT: (a) REMEDIES OF SELLER. If any condition to Seller's obligations at the Closing set forth in SECTION 6(b) of this Agreement cannot or will not be satisfied on or before the Closing Date due to a misrepresentation by Buyer or default by Buyer of any of Buyer's obligations under this Agreement and Buyer fails to satisfy that 9 condition within seven (7) days after Buyer's receipt of written notice of the foregoing from Seller, Seller shall have the right to (i) terminate this Agreement, and (ii) the Earnest Money shall be delivered to Seller within two (2) business days after such termination as liquidated damages and not as a penalty. Notwithstanding the preceding sentence, Seller may, on or before the expiration of the applicable cure period, notify Buyer and the Title Insurer in writing of its election to waive its right to terminate this Agreement as a result of such failed condition in which case the parties hereto shall proceed to Closing. Buyer and Seller agree that actual damages resulting from Buyer's failure to satisfy any such condition or conditions precedent would be difficult or impossible to ascertain and that the amount of the Earnest Money is a reasonable estimate of the damages for such breach or failure. After any termination of this Agreement by Seller pursuant to this subparagraph, the parties hereto shall be released from all further liabilities and obligations hereunder except those that expressly survive a termination of this Agreement. (b) REMEDIES OF BUYER. If any condition to Buyer's obligations at the Closing set forth in SECTION 6(a) above cannot or will not be satisfied on or before the Closing Date due to a misrepresentation by Seller (as limited in Section 6(a)(4)) or default by Seller of any of Seller's obligations under this Agreement and Seller fails to satisfy that condition within seven (7) days after Seller's receipt of written notice of the foregoing from Buyer, Buyer, as Buyer's sole and exclusive remedy, may elect one of the following remedies: (i) to terminate this Agreement by delivering written notice thereof to the Seller and the Title Insurer within five (5) business days after the expiration of such seven (7) day period, in which case (1) the Earnest Money shall be returned to Buyer within two (2) business days after such termination, and (2) all other rights and obligations of Seller and Buyer hereunder (except those set forth in this Agreement which expressly survive a termination of this Agreement) shall terminate immediately, and (3) if the failure of such condition or conditions is caused by the failure of Seller to perform any of Seller's obligations set forth in Section 10 (a) below, Seller shall reimburse Buyer for all out-of-pocket expenses actually incurred by Buyer in connection with this Agreement, provided such reimbursement shall in no event exceed $25,000.00; (ii) to notify Seller and the Title Insurer in writing within five (5) business days after the expiration of such seven (7) day period that Buyer has waived Buyer's right to terminate this Agreement as a result of Seller's failure to satisfy such condition or conditions and the parties shall thereafter proceed to the Closing with no reduction in the Purchase Price (failing which, Buyer shall be deemed to have elected option (i) above so long as Buyer does not elect option (iii) within the time limits specified therein); or (iii) if the failure of such condition or conditions is caused by a failure of Seller to perform any of Seller's obligations set forth in SECTION 10(a) below, to commence legal proceedings within thirty (30) days after the expiration of such seven (7) day period solely to enforce all rights of specific performance of Seller's obligations set forth in SECTION 10(a) below; provided, however, if Buyer enforces specific performance of such obligations of Seller, Buyer agrees that Buyer shall accept whatever title Seller has to the Property, if 10 any, subject to all liens, encumbrances and other matters affecting title to the Property (all of which shall be deemed Permitted Exceptions) other than any (i) Security Encumbrances and (ii) matters created after the Effective Date by the willful action of Seller which are not otherwise permitted by this Agreement, with no reduction in the Purchase Price, and in no event shall Seller be obligated to cure or remove or bond against any title defects, liens, encumbrances or other matters affecting title to the Property other than (i) Security Encumbrances and (ii) matters created after the Effective Date by the willful action of Seller which are not otherwise permitted by this Agreement, and provided further, however, if, within such thirty (30) day period, Buyer fails to commence legal proceedings seeking specific performance, this Agreement shall automatically terminate pursuant to option (i) above. After any termination of this Agreement by Buyer pursuant to this subparagraph or any automatic termination as provided above, the parties hereto shall be released from all further liabilities and obligations hereunder except those that expressly survive a termination of this Agreement. SECTION 10. CLOSING: At Closing, the Earnest Money shall be applied as part of the Purchase Price or as otherwise provided in Section 1(b)(i). The Closing shall be held at the office of Buyer's attorney or such other place as the parties hereto may mutually agree. Possession shall be delivered at closing, unless otherwise agreed herein. (a) SELLER'S OBLIGATIONS AT CLOSING. At the Closing, Seller shall execute, acknowledge (if appropriate) and deliver to Title Insurer, at Seller's sole cost and expense, the following (the "Closing Documents"): (1) A special warranty deed to the Property, subject to the Permitted Exceptions and other matters subsequently approved by Buyer or Buyer's counsel, which deed shall be in form sufficient for recording in the real property records of the jurisdiction in which the Real Property is located. (2) A Bill of Sale conveying to Buyer any personal property located in the Improvements not retained by Seller. (3) An Assignment and Assumption Agreement of the Perfect Fit Lease and the Contracts (the "Assignment") whereby (i) Seller assigns and Buyer assumes all obligations accruing under the Perfect Fit Lease and the Contracts from and after the Closing Date, and (ii) Seller indemnifies, defends and holds Buyer harmless with respect to all liabilities, claims, costs and expenses (including, without limitation, reasonable attorneys' fees) relating to acts or omissions accruing under the Perfect Fit Lease and the Contracts before the Closing Date; and (iii) Buyer indemnifies, defends and holds Seller harmless with respect to all liabilities, claims, costs and expenses (including, without limitation, reasonable attorneys' fees) relating to acts or omissions accruing under the Perfect Fit Lease and the Contracts from and after the Closing Date. 11 (4) An affidavit pursuant to the Foreign Investment in Real Property Tax Act. (5) A closing statement and acknowledgments setting forth all prorations and credits and other matters handled outside of Closing. (6) Four (4) original counterparts of a lease agreement between Buyer, as Landlord, and Seller or its affiliate, as Tenant, for the Improvements now and hereafter located on the Real Property, in form and substance to be mutually agreed upon by Buyer and Seller prior to the Closing (the "Lease"). (7) Such other documents as are customary for real estate closings in the Charlotte, North Carolina area or as may be reasonably required to close this transaction, duly executed and acknowledged in recorded form (if to be recorded); provided, however, any other conveyance documents reasonably requested by Buyer shall be without recourse or warranty and without any representations with respect to the subject matter thereof. (b) BUYER'S OBLIGATIONS AT CLOSING. At the Closing, Buyer shall execute, acknowledge (if appropriate) and deliver to Title Insurer, at Buyer's sole cost and expense, the following: (1) the Purchase Price in immediately available funds, reduced by the amount of the Earnest Money applied for that purpose, and increased or reduced by the net amount of adjustments and prorations owed by or to Buyer, as appropriate; (2) Buyer's counterpart to the Assignment. (3) A closing statement and acknowledgments setting forth all prorations and credits and other matters handled outside of Closing. (4) Four (4) original counterparts of the Lease. (5) Such other documents as are customary for real estate closings in the Charlotte, North Carolina area or as may be reasonably required to close this transaction, duly executed and acknowledged in recorded form (if to be recorded) SECTION 11. RISK OF LOSS/DAMAGE/REPAIR: Until the Closing, the risk of loss or damage to the Property, except as otherwise provided herein, shall be borne by Seller. If, prior to the Closing Date, a casualty or condemnation by any public authority under its power of eminent domain damages or destroys a Material Portion of the Improvements (as hereinafter defined), then this Agreement may be terminated by either party upon written notice to the other delivered within fifteen (15) days after such casualty or condemnation and the Earnest Money shall be returned to Buyer. A "MATERIAL PORTION OF THE IMPROVEMENTS" as used herein shall mean damage 12 or destruction to a portion of the Property reasonably requiring at least $250,000.00 to repair or restore as determined in Seller's good faith estimate. In the event either party does not terminate this Agreement as provided above in this SECTION 11 or the casualty or condemnation damages or destroys less than a Material Portion of the Improvements, then the parties hereto shall proceed to the Closing and Seller shall assign to Buyer all of the insurance proceeds (with a credit for any deductible) or awards received on account of such casualty or condemnation, with no reduction in the Purchase Price. SECTION 12. NOTICES: Unless otherwise provided herein, all notices and other communications which may be or are required to be given or made by any party to the other in connection herewith shall be in writing and shall be deemed to have been properly given and received on the date delivered in person, deposited in the United States mail, registered or certified, return receipt requested, or deposited with a nationally recognized overnight express carrier for next day delivery (e.g. Federal Express), to the addresses set out in Section 1(g) as to Seller and in section 1(h) as to Buyer, or at such other addresses as specified by written notice delivered in accordance herewith. SECTION 13. ENTIRE AGREEMENT: This agreement constitutes the sole and entire agreement among the parties hereto and no modification of this Agreement shall be binding unless in writing and signed by all parties hereto. SECTION 14. TIME OF ESSENCE: Time is of the essence with respect to the performance of the provisions this Agreement including all dates and time periods established herein. SECTION 15. OTHER COVENANTS: (a) FORM OF LEASE. Seller and Buyer shall work together in good faith prior to the expiration of the Examination Period to agree in all material respects to the form of the Lease to be executed by the parties hereto at Closing. In the event the form of the Lease is not agreed to in writing by the parties hereto in all material respects on or before the Examination Period, either party may thereafter terminate this Agreement by providing written notice thereof to the other party; provided, unless and until such notice of termination is given to the other party, the parties hereto shall continue to work together in good faith to agree to the form of the Lease in all material respects prior to the Closing. The foregoing right to terminate this Agreement shall expire at such time as the parties hereto agree in writing to the form of the Lease in all material respects on or before the Closing. The parties hereto agree that the term of the Lease shall commence on the Closing Date and shall expire on the earlier of (i) the date Perfect Fit occupies the premises pursuant to the Perfect Fit Lease, and (ii) January 15, 2001. Rent shall be paid monthly and shall be an amount equal to $43,937.50 per month. If the commencement date of the Lease shall occur on a date that is not the first day of a calendar month, or the expiration date of the Lease shall occur on a date that is not the last day of a calendar month, the rent payable for such partial month shall be prorated based on the number of days within such month that are within the Lease term. The first month's rent (as prorated if applicable) shall be paid on the 13 Closing Date. During the term of the Lease, Seller shall provide for its own services to the building, including, but not limited to, janitorial, utilities, and landscaping services. Buyer shall be responsible for maintaining the roof, all structural elements of the Improvements, and major repairs and replacements to the HVAC system in the Improvements. (b) MAINTENANCE OF PROPERTY. Seller shall operate and maintain the Property in substantially the same manner in which it operated and maintained the Property prior to the execution of this Agreement, reasonable wear and tear excepted. (c) BUYER'S FINANCING. If Buyer fails to obtain a commitment letter for Buyer's intended financing prior to the expiration of the Examination Period, Buyer shall be entitled to terminate this Agreement on or before the expiration date of the Examination Period by written notice to Seller, in which event, this Agreement shall terminate, the Earnest Money shall be returned to Buyer, and the parties shall have no further obligations to the other except for those which expressly survive a termination of this Agreement. After the expiration of the Examination Period, Buyer shall have no right to terminate this Agreement for any failure to obtain all or any portion of Buyer's intended financing. SECTION 16. LITIGATION AND PREVAILING PARTY: If any litigation arises as a result of this Agreement, then the prevailing party shall be entitled to reimbursement of all reasonable attorneys fees. SECTION 17. APPLICABLE LAW: This Agreement shall be construed under the laws of the state in which the Property is located. SECTION 18. LIMITATION OF LIABILITY: Notwithstanding anything herein to the contrary, the liability of each party hereto resulting from the breach or default by such party shall be limited to direct actual damages incurred by the injured party and each party hereto hereby waives its rights to recover from the other party consequential, punitive, exemplary, and speculative damages. The provisions of this SECTION 18 shall survive the termination of this Agreement. SECTION 19. ASSIGNMENT: Buyer may not assign its rights hereunder without the prior consent of Seller which consent may be withheld in Seller's sole and unreviewable discretion; provided, Buyer may assign its rights hereunder to an entity in which Buyer holds at least a 10% equity, partnership, or membership interest (an "Affiliate"). Any assignment consented to be Seller (including an assignment to an Affiliate) shall not relieve Buyer of its obligations under this Agreement. SECTION 20. SUCCESSORS AND ASSIGNS: This Agreement shall bind and inure to the benefit of the parties hereto and their respective successors and permitted assigns. SECTION 21. DAYS: If any action is required to be performed, or if any notice, consent or other communication is given, on a day that is a Saturday or Sunday or a legal holiday in the jurisdiction in which the action is required to be performed or in which is located the intended 14 recipient of such notice, consent or other communication, such performance shall be deemed to be required, and such notice, consent or other communication shall be deemed to be given, on the first business day following such Saturday, Sunday or legal holiday. Unless otherwise specified herein, all references herein to a "day" or "days" shall refer to calendar days and not business days. SECTION 22. COUNTERPARTS: To facilitate execution, this Agreement may be executed in as many counterparts as may be required. It shall not be necessary that the signature on behalf of both parties hereto appear on each counterpart hereof. All counterparts hereof shall collectively constitute a single agreement. Telecopies of counterparts, the receipt of which is confirmed, shall have the same valid and binding effect as originals. SECTION 23. SEVERABILITY: If any term, covenant or condition of this Agreement, or the application thereof to any person or circumstance, shall to any extent be invalid or unenforceable, the remainder of this Agreement, or the application of such term, covenant or condition to other persons or circumstances, shall not be affected thereby, and each term, covenant or condition of this Agreement shall be valid and enforceable to the fullest extent permitted by law. SECTION 24. COSTS: Regardless of whether Closing occurs hereunder, and except as otherwise expressly provided herein, each party hereto shall be responsible for its own costs in connection with this Agreement and the transactions contemplated hereby, including, without limitation, fees of attorneys, engineers and accountants. SECTION 25. INCORPORATION BY REFERENCE: All of the exhibits and schedules attached hereto are by this reference incorporated herein and made a part hereof. SECTION 26. BACK-UP CONTRACTS. Seller may market the Property and execute back-up contracts for the sale of the Property prior to the Closing. 15 IN WITNESS WHEREOF, Seller and Buyer have executed this Agreement as of the later of the dates shown below (the "Effective Date"). SELLER: MARKETING SPECIALISTS SALES COMPANY, a Texas corporation By: _________________________________ Name: _________________________________ Title: _________________________________ Date: __________________________, 2000. BUYER: __________________________________________ Steve Farnie Date: __________________________, 2000. The undersigned hereby acknowledges receipt of the Earnest Money set forth herein and agrees to hold said Earnest Money in accordance with the terms hereof. By:_________________________________ Name:_______________________________ Date:_______________________________ 16 Exhibit A Legal Description 17 EXHIBIT A TRACT I: BEING in the City of Charlotte, County of Mecklenburg, State of North Carolina and being more particularly described as follows: BEGINNING at a point marking the intersection of the centerlines of the right-of-way of Tower Point Drive (60' R/W) and running thence with the centerline of the right-of-way of Crown Centre Drive three (3) calls and distances as follows: (1) N. 52-37-52 E. 177.23 feet to a point; (2) in a northeasterly direction with the arc of a circular curve to the right, having a radius of 300.00 feet, an arc distance of 140.88 feet to a point; and (3) N. 79-32-09 E. 84.87 feet to a point; thence leaving the centerline of said right-of-way S. 37-22-08 E. 261.23 feet to a point in the northernmost corner of Crown Centre Executive Park, Phase I, Block 1 as same is shown on map thereof recorded in Map Book 21 at Page 622 in the Mecklenburg County Public Registry; thence with the northwesterly margin of the property of said Crown Centre Executive Park S. 52-32-57 W. 388.67 feet to a point in the centerline of the right-of-way of Tower Point Drive; thence with the centerline of said right-of-way N. 37-22-07 W. 332.66 feet to a point, the point of place of beginning, containing 2,843 acres, all as shown on survey for Atlas Marketing Co., Inc. as prepared by Jack R. Christian, N.C.R.L.S., dated October 1, 1991, reference to which survey is hereby made for a more particular description of the property. TRACT II: BEING that certain 2.50 acre tract known as Lot 3, Block 1 of Crown Centre Executive Park as shown on a map recorded in Map Book 21 at Page 622 of the Mecklenburg County Public Registry. TRACT III: Together with all non-exclusive easements granted in that certain Declaration of Covenants, Conditions and Restrictions recorded in Book 5206 at Page 893, as amended in Book 5832 at Page 734 all in the Mecklenburg County Public Registry. EX-10.54 8 a2045432zex-10_54.txt EXHIBIT 10.54 Exbibit 10.54 AMERICAN INDUSTRIAL REAL ESTATE ASSOCIATION STANDARD INDUSTRIAL/COMMERCIAL SINGLE TENANT LEASE - NET 1. BASIC PROVISIONS ("BASIC PROVISIONS") 1.1 PARTIES: This Lease ("LEASE"), dated for reference purposes only, May 15, 2000, is made by and between LASALLE COMPANY, LLC, an Arizona Limited Liability Company, whose address is c/o Hannay Investment Properties, 4651 E. Palomino Road, Phoenix, Arizona 85018 ("LESSOR") and MARKETING SPECIALISTS SALES COMPANY, a Texas corporation, whose address is 17855 Dallas Parkway, Dallas, Texas, 75287, Attn: Gage Hunt ("LESSEE"), (collectively the "PARTIES," or individually a "PARTY"). 1.2 PREMISES: That certain real property, including all improvements therein or to be provided by Lessor under the terms of this Lease, and commonly known by the street address of 2801 South 35th Street, Phoenix, located in the County of Maricopa, State of Arizona, and legally described on EXHIBIT "A" attached hereto and made a part hereof ("PREMISES"). (See Paragraph 2 for further provisions.) 1.3 TERM: One (1) year and zero (-0-) months ("ORIGINAL TERM") commencing as of the date of close of Lessor's purchase of the property from Lessee ("COMMENCEMENT DATE") and ending on the last day of the twelfth month following the Commencement Date ("EXPIRATION DATE"). (See Paragraph 3 for further provisions.) 1.5 BASE RENT: $21,757 per month ("BASE RENT"), payable on the first day of each month during the term of this Lease. Rent for any partial month shall be pro-rated based on the actual number of days in the month. (See Paragraph 4 for further provisions.) 1.7 SECURITY DEPOSIT: None. 1.8 PERMITTED USE: General Office Use. (See Paragraph 6 for further provisions.) 1.9 INSURING PARTY: Lessor is the "INSURING PARTY" unless otherwise stated herein. (See Paragraph 8 for further provisions.) 1.12 ADDENDA. Attached hereto is a Lease Addendum consisting of Paragraphs 49 through 55 and EXHIBIT A, all of which constitute a part of this Lease. 2. PREMISES. 2.1 LETTING. Lessor hereby leases to Lessee, and Lessee hereby leases from Lessor, the Premises, for the term, at the rental, and upon all of the terms, covenants and conditions set forth in this Lease. Unless otherwise provided herein, any statement of square footage set forth in this Lease, or that may have been used in calculating rental, is an approximation which Lessor NET PAGE 1 Initials _____ and Lessee agree is reasonable and the rental based thereon is not subject to revision whether or not the actual square footage is more or less. 2.2 CONDITION. Lessor shall deliver the Premises to Lessee clean and free of debris on the Commencement Date and warrants to Lessee that the existing plumbing, fire sprinkler system, lighting, air conditioning, heating, and loading doors, if any, in the Premises, other than those constructed by Lessee, shall be in good operating condition on the Commencement Date. If a non-compliance with said warranty exists as of the Commencement Date, Lessor shall, except as otherwise provided in this Lease, promptly after receipt of written notice from Lessee setting forth with specificity the nature and extent of such non-compliance, rectify same at Lessor's expense. If Lessee does not give Lessor written notice of a non-compliance with this warranty within thirty (30) days after the Commencement Date, correction of that non-compliance shall be the obligation of Lessee at Lessee's sole cost and expense. 2.3 COMPLIANCE WITH COVENANTS, RESTRICTIONS AND BUILDING CODE. Lessor warrants to Lessee that the improvements on the Premises comply with all applicable covenants or restrictions of record and applicable building codes, regulations and ordinances in effect on the Commencement Date. Said warranty does not apply to the use to which Lessee will put the Premises or to any Alterations or Utility Installations (as defined in Paragraph 7.3(a)) made or to be made by Lessee. If the Premises do not comply with said warranty, Lessor shall, except as otherwise provided in this Lease, promptly after receipt of written notice from Lessee setting forth with specificity the nature and extent of such non-compliance, rectify the same at Lessor's expense. If Lessee does not give Lessor written notice of a non-compliance with this warranty within six (6) months following the Commencement Date, correction of that non-compliance shall be the obligation of Lessee at Lessee's sole cost and expense. 2.4 ACCEPTANCE OF PREMISES. Lessee hereby acknowledges: that it has been advised by the Brokers to satisfy itself with respect to the condition of the Premises (including but not limited to the electrical and fire sprinkler systems, security, environmental aspects, compliance with Applicable Law, as defined in Paragraph 6.3, and the present and future suitability of the Premises for Lessee's intended use, that Lessee has made such investigation as it deems necessary with reference to such matters and assumes all responsibility therefor as the same relate to Lessee's occupancy of the Premises and/or the term of this Lease, and that neither Lessor nor any of Lessor's agents, has made any oral or written representations or warranties with respect to the said matters other than as set forth in this Lease. 2.5 LESSEE PRIOR OWNER/OCCUPANT. The warranties made by Lessor in this Paragraph 2 shall be of no force or effect if immediately prior to the date set forth in Paragraph 1.1 Lessee was the owner or occupant of the Premises. In such event, Lessee shall, at Lessee's sole cost and expense, correct any non-compliance of the Premises with said warranties. 3. TERM. 3.1 TERM. The Commencement Date, Expiration Date and Original Term of this Lease are as specified in Paragraph 1.3. NET PAGE 2 Initials _____ 4. RENT. 4.1 BASE RENT. Lessee shall cause payment of Base Rent and other rent or charges, as the same may be adjusted from time to time, to be received by Lessor in lawful money of the United States, without offset or deduction, on or before the day on which it is due under the terms of this Lease. Base Rent and all other rent and charges for any period during the term hereof which is for less than one (1) full calendar month shall be prorated based upon the actual number of days of the calendar month involved. Payment of Base Rent and other charges shall be made to Lessor at its address stated herein or to such other persons or at such other addresses as Lessor may from time to time designate in writing to Lessee. 5. SECURITY DEPOSIT. Lessee shall deposit with Lessor upon execution hereof the Security Deposit set forth in Paragraph 1.7 as security for Lessee's faithful performance of Lessee's obligations under this Lease. If Lessee fails to pay Base Rent or other rent or charges due hereunder, or otherwise Defaults under this Lease (as defined in Paragraph 13.1), Lessor may use, apply or retain all or any portion of said Security Deposit for the payment of any amount due Lessor or to reimburse or compensate Lessor for any liability, cost, expense, loss or damage (including attorneys' fees) which Lessor may suffer or incur by reason thereof. If Lessor uses or applies all or any portion of said Security Deposit, Lessee shall within ten (10) days after written request therefor deposit moneys with Lessor sufficient to restore said Security Deposit to the full amount required by this Lease. Any time the Base Rent increases during the term of this Lease, Lessee shall, upon written request from Lessor, deposit additional moneys with Lessor sufficient to maintain the same ratio between the Security Deposit and the Base Rent as those amounts are specified in the Basic Provisions. Lessor shall not be required to keep all or any part of the Security Deposit separate from its general accounts. Lessor shall, at the expiration or earlier termination of the term hereof and after Lessee has vacated the Premises, return to Lessee (or at Lessor's option, to the last assignee, if any, of Lessee's interest herein), that portion of the Security Deposit not used or applied by Lessor. Unless otherwise expressly agreed in writing by Lessor, no part of the Security Deposit shall be considered to be held in trust, to bear interest or other increment for its use, or to be prepayment for any moneys to be paid by Lessee under this Lease. 6. USE. 6.1 USE. Lessee shall use and occupy the Premises only for the purposes set forth in Paragraph 1.8, and for no other purpose. Lessee shall not use or permit the use of the Premises in a manner that creates waste or nuisance, or that disturbs owners and/or occupants of, or causes damage to neighboring premises or properties. 6.2 HAZARDOUS SUBSTANCES. (a) REPORTABLE USES REQUIRE CONSENT. The term "HAZARDOUS SUBSTANCES" as used in this Lease shall mean any product, substance, chemical, material or waste whose presence, nature, quantity and/or intensity of existence, use, manufacture, disposal, transportation, spill, release or effect, either by itself or in combination with other materials, is either (i) potentially injurious to the public health, safety or welfare, the environment or the Premises, (ii) regulated or monitored by any governmental authority, or (iii) a basis for liability NET PAGE 3 Initials _____ of Lessor to any governmental agency or third party under any applicable statute or common law theory. Hazardous Substance shall include but not be limited to, hydrocarbons, petroleum, gasoline, crude oil or any products, by-products or fractions thereof. Lessee shall not engage in any activity in, on or about the Premises which constitutes a Reportable Use (as hereinafter defined) of Hazardous Substances without the express prior written consent of Lessor and compliance in a timely manner (at Lessee's sole cost and expense) with all Applicable Law (as defined in Paragraph 6.3). "REPORTABLE USE" shall mean (i) the installation or use of any above or below ground storage tank, (ii) the generation, possession, storage, use, transportation, or disposal of a Hazardous Substance that requires a permit from, or with respect to which a report, notice, registration or business plan is required to be filed with, any governmental authority. Reportable Use shall also include Lessee's being responsible for the presence in, on or about the Premises of a Hazardous Substance with respect to which any Applicable Law requires that a notice be given to persons entering or occupying the Premises or neighboring properties. Notwithstanding the foregoing, Lessee may, without Lessor's prior consent, but in compliance with all Applicable Law, use any ordinary and customary materials reasonably required to be used by Lessee in the normal course of Lessee's business permitted on the Premises, so long as such use is not a Reportable Use and does not expose the Premises or neighboring properties to any meaningful risk of contamination or damage or expose Lessor to any liability therefor. In addition, Lessor may (but without any obligation to do so) condition its consent to the use or presence of any Hazardous Substance, activity or storage tank by Lessee upon Lessee's giving Lessor such additional assurances as Lessor, in its reasonable discretion, deems necessary to protect itself, the public, the Premises and the environment against damage, contamination or injury and/or liability therefrom or therefor, including, but not limited to, the installation (and removal on or before Lease expiration or earlier termination) of reasonably necessary protective modifications to the Premises (such as concrete encasement) and or the deposit of an additional Security Deposit under Paragraph 5 hereof. (b) DUTY TO INFORM LESSOR. If Lessee knows, or has reasonable cause to believe that a Hazardous Substance, or a condition involving or resulting from same, has come to be located in, on, under or about the Premises, other than as previously consented to by Lessor, Lessee shall immediately give written notice of such fact to Lessor. Lessee shall also immediately give Lessor a copy of any statement, report, notice, registration, application, permit, business plan, license, claim, action or proceeding given to, or received from, any governmental authority or private party, or persons entering or occupying the Premises, concerning the presence, spill, release, discharge of, or exposure to, any Hazardous Substance or contamination in, on, or about the Premises, including but not limited to all such documents as may be involved in any Reportable Uses involving the Premises. (c) INDEMNIFICATION. Lessee shall indemnify, protect, defend and hold Lessor, its agents, employees, lenders and ground lessor, if any, and the Premises, harmless for, from and against any and all loss of rents and/or damages, liabilities, judgments, costs, claims, liens, expenses, penalties, permits and attorney's and consultant's fees arising out of or involving any Hazardous Substance or storage tank brought onto the Premises by or for Lessee or under Lessee's control. Lessee's obligations under this Paragraph 6 shall include, but not be limited to, the effects of any contamination or injury to person, property or the environment created or suffered by Lessee and the cost of investigation (including consultant's and attorney's fees and testing), removal, remediation, restoration and/or abatement thereof, or of any contamination NET PAGE 4 Initials _____ therein involved, and shall survive the expiration or earlier termination of this Lease. No termination, cancellation or release agreement entered into by Lessor and Lessee shall release Lessee from its obligations under this Lease with respect to Hazardous Substances or storage tanks, unless specifically so agreed by Lessor in writing at the time of such agreement. 6.3 LESSEE'S COMPLIANCE WITH LAW. Except as otherwise provided in this Lease, Lessee shall, at Lessee's sole cost and expense, fully, diligently and in a timely manner, comply with all "APPLICABLE LAW," which term is used in this Lease to include all laws, rules, regulations, ordinances, directives, covenants, easements and restrictions of record, permits, the requirements of any applicable fire insurance underwriter or rating bureau, and the recommendations of Lessor's engineers and/or consultants, relating in any manner to the Premises (including but not limited to matters pertaining to (i) industrial hygiene, (ii) environmental conditions on, in, under or about the Premises, including soil and groundwater conditions, and (iii) the use, generation, manufacture, production, installation, maintenance, removal, transportation, storage, spill or release of any Hazardous Substance or storage tank), now in effect or which may hereafter come into effect, and whether or not reflecting a change in policy from any previously existing policy. Lessee shall, within five (5) days after receipt of Lessor's written request, provide Lessor with copies of all documents and information, including, but not limited to, permits, registrations, manifests, applications, reports and certificates, evidencing Lessee's compliance with any Applicable Law specified by Lessor, and shall immediately upon receipt, notify Lessor in writing (with copies of any documents involved) of any threatened or actual claim, notice, citation, warning, complaint or report pertaining to or involving failure by Lessee or the Premises to comply with any Applicable Law. 6.4 INSPECTION; COMPLIANCE. Lessor and Lessor's Lender(s) (as defined in Paragraph 8.3(a)) shall have the right to enter the Premises at any time, in the case of an emergency, and otherwise at reasonable times, for the purpose of inspecting the condition of the Premises and for verifying compliance by Lessee with this Lease and all Applicable Laws (as defined in Paragraph 6.3), and to employ experts and/or consultants in connection therewith and/or to advise Lessor with respect to Lessee's activities, including but not limited to the installation, operation, use, monitoring, maintenance, or removal of any Hazardous Substance or storage tank on or from the Premises. The costs and expenses of any such inspections shall be paid by the party requesting same, unless a Default or Breach of this Lease, violation of Applicable Law, or a contamination, caused or materially contributed to by Lessee is found to exist or be imminent, or unless the inspection is requested or ordered by a governmental authority as the result of any such existing or imminent violation or contamination. In any such case, Lessee shall upon request reimburse Lessor or Lessor's Lender, as the case may be, for the costs and expenses of such inspections. 7. MAINTENANCE; REPAIRS; UTILITY INSTALLATIONS; TRADE FIXTURES AND ALTERATIONS. 7.1 LESSEE'S OBLIGATIONS. (a) Subject to the provisions of Paragraphs 7.2 (Lessor's obligations to repair), 9 (damage and destruction), and 14 (condemnation), Lessee shall, at Lessee's sole cost and expense and at all times, keep the Premises and every part thereof in good order, condition and repair, structural and non-structural (whether or not such portion of the Premises requiring NET PAGE 5 Initials _____ repair, or the means of repairing the same, are reasonably or readily accessible to Lessee, and whether or not the need for such repairs occurs as a result of Lessee's use, any prior use, the elements or the age of such portion of the Premises), including, without limiting the generality of the foregoing, all equipment or facilities serving the Premises, such as plumbing, heating, air conditioning, ventilating, electrical, lighting facilities, boilers, fired or unfired pressure vessels, fire sprinkler and/or standpipe and hose or other automatic fire extinguishing system, including fire alarm and/or smoke detection systems and equipment, fire hydrants, fixtures, walls (interior and exterior), foundations, ceilings, roofs, floors, windows, doors, plate glass, skylights, landscaping, driveways, parking lots, fences, retaining walls, signs, sidewalks and parkways located in, on, about, or adjacent to the Premises. Lessee shall not cause or permit any Hazardous Substance to be spilled or released in, on, under or about the Premises (including through the plumbing or sanitary sewer system) and shall promptly, at Lessee's expense, take all investigatory and/or remedial action reasonably recommended, whether or not formally ordered or required, for the cleanup of any contamination of, and for the maintenance, security and/or monitoring of, the Premises, the elements surrounding same, or neighboring properties, that was caused or materially contributed to by Lessee, or pertaining to or involving any Hazardous Substance and/or storage tank brought onto the Premises by or for Lessee or under its control. Lessee in keeping the Premises in good order, condition, and repair, shall exercise and perform good maintenance practices. Lessee's obligations shall include restorations, replacements or renewals when necessary to keep the Premises and all improvements thereon or a part thereof in good order, condition and state of repair. If Lessee occupies the Premises for seven (7) years or more, Lessor may require Lessee to repaint the exterior of the buildings on the Premises as reasonably required, but not more frequently than once every seven (7) years. (b) Lessee shall, at Lessee's sole cost and expense, procure and maintain contracts, with copies to Lessor, in customary form and substance for, and with contractors specializing and experienced in, the inspection, maintenance and service of the following equipment and improvements, if any, located on the Premises: (i) heating, air conditioning and ventilation equipment, (ii) boiler, fired or unfired pressure vessels, (iii) fire sprinkler and/or standpipe and hose or other automatic fire extinguishing systems, including fire alarm and/or smoke detection, (iv) landscaping and irrigation systems, (v) roof covering and drain maintenance and (vi) asphalt and parking lot maintenance. 7.2 LESSOR'S OBLIGATIONS. Except for the warranties and agreements of Lessor contained in Paragraphs 9 (relating to destruction of the Premises), 14 (relating to condemnation of the Premises), and as expressly provided in this Section 7.2, it is intended by the Parties hereto that Lessor have no obligation, in any manner whatsoever, to repair and maintain the Premises, the improvements located thereon, or the equipment therein, whether structural or non structural, all of which obligations are intended to be that of the Lessee under Paragraph 7.1 hereof. It is the intention of the Parties that the terms of this Lease govern the respective obligations of the Parties as to maintenance and repair of the Premises. Lessee and Lessor expressly waive the benefit of any statute now or hereafter in effect to the extent it is inconsistent with the terms of this Lease with respect to, or which affords Lessee the right to make repairs at the expense of Lessor or to terminate this Lease by reason of, any needed repairs. Notwithstanding anything to the contrary contained in this Lease, Lessee shall have no obligation to perform any obligation set forth herein with respect to the maintenance and repair of the Premises if the performance NET PAGE 6 Initials _____ thereof would require that Lessee incur expenses for capital repairs, replacements or improvements. 7.3 UTILITY INSTALLATIONS; TRADE FIXTURES; ALTERATIONS. (a) DEFINITIONS; CONSENT REQUIRED. The term "UTILITY INSTALLATIONS" is used in this Lease to refer to all carpeting, window coverings, air lines, power panels, electrical distribution, security, fire protection systems, communication systems, lighting fixtures, heating, ventilating, and air conditioning equipment, plumbing, and fencing in, on or about the Premises. The term "TRADE FIXTURES" shall mean Lessee's machinery and equipment that can be removed without doing material damage to the Premises. The term "ALTERATIONS" shall mean any modification of the improvements on the Premises from that which are provided by Lessor under the terms of this Lease, other than Utility Installations or Trade Fixtures, whether by addition or deletion. "LESSEE OWNED ALTERATIONS AND/OR UTILITY INSTALLATIONS" are defined as Alterations and/or Utility Installations made by Lessee that are not yet owned by Lessor as defined in Paragraph 74(a). Lessee shall not make any Alterations or Utility Installations in, on, under or about the Premises without Lessor's prior written consent. Lessee may, however, make non-structural Utility Installations to the interior of the Premises (excluding the roof) as long as they are not visible from the outside, do not involve puncturing, relocating or removing the roof or any existing walls, and the cumulative cost thereof during the term of this Lease as extended does not exceed $25,000. (b) CONSENT. Any Alterations or Utility Installations that Lessee shall desire to make and which require the consent of the Lessor shall be presented to Lessor in written form with proposed detailed plans. All consents given by Lessor, whether by virtue of Paragraph 7.3(a) or by subsequent specific consent, shall be deemed conditioned upon: (i) Lessee's acquiring all applicable permits required by governmental authorities, (ii) the furnishing of copies of such permits together with a copy of the plans and specifications for the Alteration or Utility Installation to Lessor prior to commencement of the work thereon, and (iii) the compliance by Lessee with all conditions of said permits in a prompt and expeditious manner. Any Alterations or Utility Installations by Lessee during the term of this Lease shall be done in a good and workmanlike manner, with good and sufficient materials, and in compliance with all Applicable Law. Lessee shall promptly upon completion thereof furnish Lessor with as-built plans and specifications therefor. Lessor may (but without obligation to do so) condition its consent to any requested Alteration or Utility Installation that costs $10,000 or more upon Lessee's providing Lessor with a lien and completion bond in an amount equal to one and one-half times the estimated cost of such Alteration or Utility Installation and/or upon Lessee's posting an additional Security Deposit with Lessor under Paragraph 36 hereof. (c) INDEMNIFICATION. Lessee shall pay, when due, all claims for labor or materials furnished or alleged to have been furnished to or for Lessee at or for use on the Premises, which claims are or may be secured by any mechanics' or materialmen's lien against the Premises or any interest therein. Lessee shall give Lessor not less than ten (10) days' notice prior to the commencement of any work in, on or about the Premises, and Lessor shall have the right to post notices of non-responsibility in or on the Premises as provided by law. If Lessee shall, in good faith, contest the validity of any such lien, claim or demand, then Lessee shall, at its sole expense defend and protect itself, Lessor and the Premises against the same and shall pay NET PAGE 7 Initials _____ and satisfy any such adverse judgment that may be rendered thereon before the enforcement thereof against the Lessor or the Premises. If Lessor shall require, Lessee shall furnish to Lessor a surety bond satisfactory to Lessor in an amount equal to one and one-half times the amount of such contested lien claim or demand, indemnifying Lessor against liability for the same, as required by law for the holding of the Premises free from the effect of such lien or claim. In addition, Lessor may require Lessee to pay Lessor's attorney's fees and costs in participating in such action if Lessor shall decide it is to its best interest to do so. 7.4 OWNERSHIP; REMOVAL; SURRENDER; AND RESTORATION. (a) OWNERSHIP. Subject to Lessor's right to require the removal or become the owner thereof as hereinafter provided in this Paragraph 7.4, all Alterations and Utility Additions made to the Premises by Lessee shall be the property of and owned by Lessee, but considered a part of the Premises. Lessor may, at any time and at its option, elect in writing to Lessee to be the owner of all or any specified part of the Lessee Owned Alterations, without cost or expense to Lessor, and Utility Installations. Unless otherwise instructed per subparagraph 7.4(b) hereof, all Lessee Owned Alterations and Utility Installations shall, at the expiration or earlier termination of this Lease, become the property of Lessor and remain upon and be surrendered by Lessee with the Premises. (b) REMOVAL. Unless otherwise agreed in writing, Lessor may require that any or all Lessee Owned Alterations or Utility Installations be removed by the expiration or earlier termination of this Lease, notwithstanding their installation may have been consented to by Lessor. Lessor may require the removal at any time of all or any part of any Lessee Owned Alterations or Utility Installations made without the required consent of Lessor. (c) SURRENDER/RESTORATION. Lessee shall surrender the Premises by the end of the last day of the Lease term or any earlier termination date, with all of the improvements, parts and surfaces thereof clean and free of debris and in good operating order, condition and state of repair, ordinary wear and tear excepted. "ORDINARY WEAR AND TEAR" shall not include any damage or deterioration that would have been prevented by good maintenance practice or by Lessee performing all of its obligations under this Lease. Except as otherwise agreed or specified in writing by Lessor, the Premises, as surrendered, shall include the Utility Installations. The obligation of Lessee shall include the repair of any damage occasioned by the installation, maintenance or removal of Lessee's Trade Fixtures, furnishings, equipment, and Alterations and/or Utility Installations, as well as the removal of any storage tank installed by or for Lessee, and the removal, replacement, or remediation of any soil, material or ground water contaminated by Lessee, all as may then be required by Applicable Law and/or good practice. Lessee's Trade Fixtures shall remain the property of Lessee and shall be removed by Lessee subject to its obligation to repair and restore the Premises per this Lease. 8. INSURANCE; INDEMNITY. 8.1 PAYMENT FOR INSURANCE. Regardless of whether the Lessor or Lessee is the Insuring Party, Lessee shall pay for all insurance required under this Paragraph 8 except to the extent of the cost attributable to liability insurance carried by Lessor in excess of $2,000,000 per occurrence. Premiums for policy periods commencing prior to or extending beyond the Lease NET PAGE 8 Initials _____ term shall be prorated to correspond to the Lease term. Payment shall be made by Lessee to Lessor within ten (10) days following receipt of an invoice for any amount due. 8.2 LIABILITY INSURANCE. (a) CARRIED BY LESSEE. Lessee shall obtain and keep in force during the term of this Lease a Commercial General Liability policy of insurance protecting Lessee and Lessor (as an additional insured) against claims for bodily injury, personal injury and property damage based upon, involving or arising out of the ownership, use, occupancy or maintenance of the Premises and all areas appurtenant thereto. Such insurance shall be on an occurrence basis providing single limit coverage in an amount not less than $1,000,000 per occurrence and $2,000,000 in the aggregate, with an "Additional Insured-Managers or Lessors of Premises" Endorsement and contain the "Amendment of the Pollution Exclusion" for damage caused by heat, smoke or fumes from a hostile fire. The policy shall not contain any intra-insured exclusions as between insured persons or organizations, but shall include coverage for liability assumed under this Lease as an "insured contract" for the performance of Lessee's indemnity obligations under this Lease. The limits of said insurance required by this Lease or as carried by Lessee shall not, however, limit the liability of Lessee nor relieve Lessee of any obligation hereunder. All insurance to be carried by Lessee shall be primary to and not contributory with any similar insurance carried by Lessor, whose insurance shall be considered excess insurance only. (b) CARRIED BY LESSOR. In the event Lessor is the Insuring Party, Lessor shall also maintain liability insurance described in Paragraph 8.2(a), above, in addition to, and not in lieu of, the insurance required to be maintained by Lessee. Lessee shall not be named as an additional insured therein. 8.3 PROPERTY INSURANCE--BUILDING, IMPROVEMENTS AND RENTAL VALUE. (a) BUILDING AND IMPROVEMENTS. The Insuring Party shall obtain and keep in force during the term of this Lease a policy or policies in the name of Lessor, with loss payable to Lessor and to the holders of any mortgages, deeds of trust or ground leases on the Premises ("LENDER(S)"), insuring loss or damage to the Premises. The amount of such insurance shall be equal to the full replacement cost of the Premises, as the same shall exist from time to time, or the amount required by Lenders, but in no event more than the commercially reasonable and available insurable value thereof if, by reason of the unique nature or age of the improvements involved, such latter amount is less than full replacement cost. If Lessor is the Insuring Party, however, Lessee Owned Alterations and Utility Installations shall be insured by Lessee under Paragraph 8.4 rather than by Lessor. If the coverage is available and commercially appropriate, such policy or policies shall insure against all risks of direct physical loss or damage (except the perils of flood and/or earthquake unless required by a Lender), including coverage for any additional costs resulting from debris removal and reasonable amounts of coverage for the enforcement of any ordinance or law regulating the reconstruction or replacement of any undamaged sections of the Premises required to be demolished or removed by reason of the enforcement of any building, zoning, safety or land use laws as the result of a covered cause of loss. Said policy or policies shall also contain an agreed valuation provision in lieu of any coinsurance clause, waiver of subrogation, and inflation guard protection causing an increase in NET PAGE 9 Initials _____ the annual property insurance coverage amount by a factor of not less than the adjusted U.S. Department of Labor Consumer Price Index for All Urban Consumers for the city nearest to where the Premises are located. If such insurance coverage has a deductible clause, the deductible amount shall not exceed $10,000 per occurrence, and Lessee shall be liable for such deductible amount in the event of an Insured Loss, as defined in Paragraph 9.1(c). (b) RENTAL VALUE. The Insuring Party shall, in addition, obtain and keep in force during the term of this Lease a policy or policies in the name of Lessor, with loss payable to Lessor and Lender(s), insuring the loss of the full rental and other charges payable by Lessee to Lessor under this Lease for one (1) year (including all real estate taxes, insurance costs, and any scheduled rental increases). Said insurance shall provide that in the event the Lease is terminated by reason of an insured loss, the period of indemnity for such coverage shall be extended beyond the date of the completion of repairs or replacement of the Premises, to provide for one full year's loss of rental revenues from the date of any such loss. Said insurance shall contain an agreed valuation provision in lieu of any coinsurance clause, and the amount of coverage shall be adjusted annually to reflect the projected rental income, property taxes, insurance premium costs and other expenses, if any, otherwise payable by Lessee, for the next twelve (12) month period. Lessee shall be liable for any deductible amount in the event of such loss. (c) ADJACENT PREMISES. If the Premises are part of a larger building, or if the Premises are part of a group of buildings owned by Lessor which are adjacent to the Premises, the Lessee shall pay for any increase in the premiums for the property insurance of such building or buildings if said increase is caused by Lessee's acts, omissions, use or occupancy of the Premises. (d) TENANT'S IMPROVEMENTS. If the Lessor is the Insuring Party, the Lessor shall not be required to insure Lessee Owned Alterations and Utility Installations unless the item in question has become the property of Lessor under the terms of this Lease. If Lessee is the Insuring Party, the policy carried by Lessee under this Paragraph 8.3 shall insure Lessee Owned Alterations and Utility installations. 8.4 LESSEE'S PROPERTY INSURANCE. Subject to the requirements of Paragraph 8.5, Lessee at its cost shall either by separate policy or, at Lessor's option, by endorsement to a policy already carried, maintain insurance coverage on all of Lessee's personal property, Lessee Owned Alterations and Utility Installations in, on, or about the Premises similar in coverage to that carried by the Insuring Party under Paragraph 8.3. Such insurance shall be full replacement cost coverage with a deductible of not to exceed $10,000 per occurrence. The proceeds from any such insurance shall be used by Lessee for the replacement of personal property or the restoration of Lessee Owned Alterations and Utility Installations. Lessee shall be the Insuring Party with respect to the insurance required by this Paragraph 8.4 and shall provide Lessor with written evidence that such insurance is in force. 8.5 INSURANCE POLICIES. Insurance required hereunder shall be in companies duly licensed to transact business in the state where the Premises are located, and maintaining during the policy term a "General Policyholders Rating" of at least B+, V, or such other rating as may be required by Lender having a lien on the Premises, as set forth in the most current issue of NET PAGE 10 Initials _____ "Best's Insurance Guide," Lessee shall not do or permit to be done anything which shall invalidate the insurance policies referred to in this Paragraph 8. If Lessee is the Insuring Party, Lessee shall cause to be delivered to Lessor certified copies of policies of such insurance or certificates evidencing the existence and amounts of such insurance with the insureds and loss payable clauses as required by this Lease. No such policy shall be cancellable or subject to modification except after thirty (30) days prior written notice to Lessor. Lessee shall at least thirty (30) days prior to the expiration of such policies, furnish Lessor with evidence of renewals or "insurance binders" evidencing renewal thereof, or Lessor may order such insurance and charge the cost thereof to Lessee, which amount shall be payable by Lessee to Lessor upon demand. If the Insuring Party shall fail to procure and maintain the insurance required to be carried by the Insuring Party under this Paragraph 8, the other Party may, but shall not be required to, procure and maintain the same, but at Lessee's expense. 8.6 WAIVER OF SUBROGATION. Without affecting any other rights or remedies, Lessee and Lessor ("WAIVING PARTY") each hereby release and relieve the other, and waive their entire right to recover damages (whether in contract or in tort) against the other, for loss of or damage to the Waiving Party's property arising out of or incident to the perils required to be insured against under Paragraph 8. The effect of such releases and waivers of the right to recover damages shall not be limited by the amount of insurance carried or required, or by any deductibles applicable thereto. 8.7 INDEMNITY. Except for Lessor's negligence and/or breach of express warranties, Lessee shall indemnify, protect, defend and hold harmless the Premises, Lessor and its agents, Lessor's master or ground lessor, partners and Lenders, for, from and against any and all claims, loss of rents and/or damages, costs, liens, judgments, penalties, permits, attorney's and consultant's fees, expenses and/or liabilities arising out of, involving, or in dealing with, the occupancy of the Premises by Lessee, the conduct of Lessee's business, any act, omission or neglect of Lessee, its agents, contractors, employees or invitees, and out of any Default or Breach by Lessee in the performance in a timely manner of any obligation on Lessee's part to be performed under this Lease. The foregoing shall include, but not be limited to, the defense or pursuit of any claim or any action or proceeding involved therein, and whether or not (in the case of claims made against Lessor) litigated and/or reduced to judgment, and whether well founded or not. In case any action or proceeding be brought against Lessor by reason of any of the foregoing matters, Lessee upon notice from Lessor shall defend the same at Lessee's expense by counsel reasonably satisfactory to Lessor and Lessor shall cooperate with Lessee in such defense. Lessor need not have first paid any such claim in order to be so indemnified. 8.8 EXEMPTION OF LESSOR FROM LIABILITY. Lessor shall not be liable for injury or damage to the person or goods, wares, merchandise or other property of Lessee, Lessee's employees, contractors, invitees, customers, or any other person in or about the Premises, whether such damage or injury is caused by or results from fire, steam, electricity, gas, water or rain, or from the breakage, leakage, obstruction or other defects of pipes, fire sprinklers, wires, appliances, plumbing, air conditioning or lighting fixtures, or from any other cause, whether the said injury or damage results from conditions arising upon the Premises or upon other portions of the building of which the Premises are a part, or from other sources or places, and regardless of whether the cause of such damage or injury or the means of repairing the same is accessible or not. Lessor shall not be liable for any damages arising from any act or neglect of any other NET PAGE 11 Initials _____ tenant of Lessor. Notwithstanding Lessor's negligence or breach of this Lease, Lessor shall under no circumstances be liable for injury to Lessee's business or for any loss of income or profit therefrom. 9. DAMAGE OR DESTRUCTION. 9.1 DEFINITIONS. (a) "PREMISES PARTIAL DAMAGE" shall mean damage or destruction to the improvements on the Premises, other than Lessee Owned Alterations and Utility Installations, the repair cost of which damage or destruction is less than 50% of the then Replacement Cost of the Premises immediately prior to such damage or destruction, excluding from such calculation the value of the land and Lessee Owned Alterations and Utility Installations. (b) "PREMISES TOTAL DESTRUCTION" shall mean damage or destruction to the Premises, other than Lessee Owned Alterations and Utility Installations the repair cost of which damage or destruction is 50% or more of the then Replacement Cost of the Premises immediately prior to such damage or destruction, excluding from such calculation the value of the land and Lessee Owned Alterations and Utility Installations. (c) "INSURED LOSS" shall mean damage or destruction to improvements on the Premises, other than Lessee Owned Alterations and Utility Installations, which was caused by an event required to be covered by the Insurance described in Paragraph 8.3(a), irrespective of any deductible amounts or coverage limits involved. (d) "REPLACEMENT COST" shall mean the cost to repair or rebuild the improvements owned by Lessor at the time of the occurrence to their condition existing immediately prior thereto, including demolition, debris removal and upgrading required by the operation of applicable building codes, ordinances or laws, and without deduction for depreciation. (e) "HAZARDOUS SUBSTANCE CONDITION" shall mean the occurrence or discovery of a condition involving the presence of, or a contamination by, a Hazardous Substance as defined in Paragraph 6.2(a), in, on, or under the Premises. 9.2 PARTIAL DAMAGE-INSURED LOSS. If a Premises Partial Damage that is an Insured Loss occurs, then Lessor shall, at Lessor's expense, repair such damage (but not Lessee's Trade Fixtures or Lessee Owned Alterations and Utility Installations) as soon as reasonably possible and this Lease shall continue in full force and effect; provided, however, that Lessee shall, at Lessor's election, make the repair of any damage or destruction the total cost to repair of which is $10,000 or less, and, in such event, Lessor shall make the insurance proceeds available to Lessee on a reasonable basis for that purpose. Notwithstanding the foregoing, if the required insurance was not in force or the insurance proceeds are not sufficient to effect such repair, the Insuring Party shall promptly contribute the shortage in proceeds (except as to the deductible which is Lessee's responsibility) as and when required to complete said repairs. In the event, however, the shortage in proceeds was due to the fact that, by reason of the unique nature of the improvements, full replacement cost insurance coverage was not commercially reasonable and available, Lessor shall have no obligation to pay for the shortage in insurance proceeds or to NET PAGE 12 Initials _____ fully restore the unique aspects of the Premises unless Lessee provides Lessor with the funds to cover same, or adequate assurance thereof, within ten (10) days following receipt of written notice of such shortage and request therefor. If Lessor receives said funds or adequate assurance thereof within said ten (10) day period, the party responsible for making the repairs shall complete them as soon as reasonably possible and this Lease shall remain in full force and effect. If Lessor does not receive such funds or assurance within said period, Lessor may nevertheless elect by written notice to Lessee within ten (10) days thereafter to make such restoration and repair as is commercially reasonable with Lessor paying any shortage in proceeds, in which case this Lease shall remain in full force and effect. If in such case Lessor does not so elect, then this Lease shall terminate as of the date of occurrence of the damage or destruction. Unless otherwise agreed, Lessee shall in no event have any right to reimbursement from Lessor for any funds contributed by Lessee to repair any such damage or destruction. Premises Partial Damage due to flood or earthquake shall be subject to Paragraph 9.3 rather than Paragraph 9.2, notwithstanding that there may be some insurance coverage, but the net proceeds of any such insurance shall be made available for the repairs if made by either Party. 9.3 PARTIAL DAMAGE-UNINSURED LOSS. If a Premises Partial Damage that is not an Insured Loss occurs, unless caused by the sole negligence or willful misconduct of Lessee (in which event Lessee shall make the repairs at Lessee's expense and this Lease shall continue in full force and effect, but subject to Lessor's rights under Paragraph 13), Lessor may at Lessor's option, either: (i) repair such damage as soon as reasonably possible at Lessor's expense, in which event this Lease shall continue in full force and effect, or (ii) give written notice to Lessee within thirty (30) days after receipt by Lessor of knowledge of the occurrence of such damage of Lessor's desire to terminate this Lease as of the date of the occurrence of such damage. In the event Lessor elects to give such notice of Lessor's intention to terminate this Lease, Lessee shall have the right within ten (10) days after the receipt of such notice to give written notice to Lessor of Lessee's commitment to pay for the repair of such damage totally at Lessee's expense and without reimbursement from Lessor. Lessee shall provide Lessor with the required funds or satisfactory assurance thereof within thirty (30) days following Lessee's said commitment. In such event this Lease shall continue in full force and effect, and Lessor shall proceed to make such repairs as soon as reasonably possible and the required funds are available. If Lessee does not give such notice and provide the funds or assurance thereof within the times specified above, this Lease shall terminate as of the date specified in Lessor's notice of termination. 9.4 TOTAL DESTRUCTION. Notwithstanding any other provision hereof, if a Premises Total Destruction occurs (including any destruction required by any authorized public authority), this Lease shall terminate as of the date of such Premises Total Destruction, whether or not the damage or destruction is an Insured Loss or was caused by a negligent or willful act of Lessee. In the event, however, that the damage or destruction was caused by Lessee, Lessor shall have the right to recover Lessor's damages from Lessee except as released and waived in Paragraph 8.6. 9.5 DAMAGE NEAR END OF TERM. If at any time during the last six (6) months of the term of this Lease there is damage for which the cost to repair exceeds one (1) month's Base Rent, whether or not an Insured Loss, Lessor may, at Lessor's option, terminate this Lease effective as of the date of the occurrence of such damage by giving written notice to Lessee of Lessor's election to do so within thirty (30) days after the date of occurrence of such damage. NET PAGE 13 Initials _____ Provided, however, if Lessee at that time has an exercisable option to extend this Lease or to purchase the Premises, then Lessee may preserve this Lease by, within twenty (20) days following the occurrence of the damage, or before the expiration of the time provided in such option for its exercise, whichever is earlier ("EXERCISE PERIOD"), (i) exercising such option and (ii) providing Lessor with any shortage in insurance proceeds (or adequate assurance thereof) needed to make the repairs. If Lessee duly exercises such option during said Exercise Period and provides Lessor with funds (or adequate assurance thereof) to cover any shortage in insurance proceeds, Lessor shall, at Lessor's expense repair such damage as soon as reasonably possible and this Lease shall continue in full force and effect. If Lessee fails to exercise such option and provide such funds or assurance during said Exercise Period, then Lessor may at Lessor's option terminate this Lease as of the date of the occurrence of such damage by giving written notice to Lessee of Lessor's election to do so within ten (10) days after the expiration of the Exercise Period, notwithstanding any term or provision in the grant of option to the contrary. 9.6 ABATEMENT OF RENT; LESSEE'S REMEDIES. (a) In the event of damage described in Paragraph 9.2 (Partial Damage-Insured), Paragraph 9.3 and Paragraph 9.5, whether or not Lessor or Lessee repairs or restores the Premises, the Base Rent, Real Property Taxes, insurance premiums, and other charges, if any, payable by Lessee hereunder for the period during which such damage, its repair or the restoration continues (not to exceed the period for which rental value insurance is required under Paragraph 8.3(b)), shall be abated in proportion to the degree to which Lessee's use of the Premises is impaired. Except for abatement of Base Rent, Real Property Taxes, insurance premiums, and other charges, if any, as aforesaid, all other obligations of Lessee hereunder shall be performed by Lessee, and Lessee shall have no claim against Lessor for any damage suffered by reason of any such repair or restoration. (b) If Lessor shall be obligated to repair or restore the Premises under the provisions of this Paragraph 9 and shall not commence, in a substantial and meaningful way, the repair or restoration of the Premises within ninety (90) days after such obligation shall accrue, Lessee may, at any time prior to the commencement of such repair or restoration, give written notice to Lessor and to any Lenders of which Lessee has actual notice of Lessee's election to terminate this Lease on a date not less than sixty (60) days following the giving of such notice. If Lessee gives such notice to Lessor and such Lenders and such repair or restoration is not commenced within thirty (30) days after receipt of such notice, this Lease shall terminate as of the thirty-first (31st) day after said notice. If Lessor or a Lender commences the repair or restoration of the Premises within thirty (30) days after receipt of such notice, this Lease shall continue in full force and effect. "COMMENCE" as used in this Paragraph shall mean either the unconditional authorization of the preparation of the required plans, or the beginning of the actual work on the Premises, whichever first occurs. 9.7 HAZARDOUS SUBSTANCE CONDITIONS. If a Hazardous Substance Condition occurs, unless Lessee is legally responsible therefor (in which case Lessee shall make the investigation and remediation thereof required by Applicable Law and this Lease shall continue in full force and effect, but subject to Lessor's rights under Paragraph 13), Lessor may at Lessor's option either (i) investigate and remediate such Hazardous Substance Condition, if required, as soon as reasonably possible at Lessor's expense, in which event this Lease shall continue in full force NET PAGE 14 Initials _____ and effect, or (ii) if the estimated cost to investigate and remediate such condition exceeds twelve (12) times the then monthly Base Rent or $100,000, whichever is greater, give written notice to Lessee within thirty (30) days after receipt by Lessor of knowledge of the occurrence of such Hazardous Substance Condition of Lessor's desire to terminate this Lease as of the date sixty (60) days following the giving of such notice. In the event Lessor elects to give such notice of Lessor's intention to terminate this Lease, Lessee shall have the right within ten (10) days after the receipt of such notice to give written notice to Lessor of Lessee's commitment to pay for the investigation and remediation of such Hazardous Substance Condition totally at Lessee's, expense and without reimbursement from Lessor except to the extent of an amount equal to twelve (12) times the then monthly Base Rent or $100,000, whichever is greater, Lessee shall provide Lessor with the funds required of Lessee or satisfactory assurance thereof within thirty (30) days following Lessee's said commitment. In such event this Lease shall continue in full force and effect, and Lessor shall proceed to make such investigation and remediation as soon as reasonably possible and the required funds are available. If Lessee does not give such notice and provide the required funds or assurance thereof within the times specified above, this Lease shall terminate as of the date specified in Lessor's notice of termination. If a Hazardous Substance Condition occurs for which Lessee is not legally responsible, there shall be abatement of Lessee's obligations under this Lease to the same extent as provided in Paragraph 9.6(a) for a period of not to exceed twelve months. 9.8 TERMINATION-ADVANCE PAYMENTS. Upon termination of this Lease pursuant to this Paragraph 9, an equitable adjustment shall be made concerning advance Base Rent and any other advance payments made by Lessee to Lessor. Lessor shall, in addition, return to Lessee so much of Lessee's Security Deposit as has not been or is not then required to be, used by Lessor under the terms of this Lease. 9.9 WAIVE STATUTES. Lessor and Lessee agree that the terms of this Lease shall govern the effect of any damage to or destruction of the Premises with respect to the termination of this Lease and hereby waive the provisions of any present or future statute to the extent inconsistent herewith. 10. REAL PROPERTY TAXES. 10.1 (a) PAYMENT OF TAXES. Lessee shall pay the Real Property Taxes, as defined in Paragraph 10.2, applicable to the Premises during the term of this Lease. Subject to Paragraph 10.1(b), all such payments shall be made at least ten (10) days prior to the delinquency date of the applicable installment. Lessee shall promptly furnish Lessor with satisfactory evidence that such taxes have been paid. If any such taxes to be paid by Lessee shall cover any period of time prior to or after the expiration or earlier termination of the term hereof, Lessee's share of such taxes shall be equitably prorated to cover only the period of time within the tax fiscal year this Lease is in effect and Lessor shall reimburse Lessee for any overpayment after such proration. If Lessee shall fail to pay any Real Property Taxes required by this Lease to be paid by Lessee, Lessor shall have the right to pay the same, and Lessee shall reimburse Lessor therefor upon demand. (b) ADVANCE PAYMENT. In order to insure payment when due and before delinquency of any or all Real Property Taxes, Lessor reserves the right, at Lessor's option, to NET PAGE 15 Initials _____ estimate the current Real Property Taxes applicable to the Premises, and to require such current year's Real Property Taxes to be paid in advance to Lessor by Lessee, either: in a lump sum amount equal to the installment due, at least twenty (20) days prior to the applicable delinquency date, or monthly in advance with the payment of the Base Rent. If Lessor elects to require payment monthly in advance, the monthly payment shall be that equal monthly amount which, over the number of months remaining before the month in which the applicable tax installment would become delinquent (and without interest thereon), would provide a fund large enough to fully discharge before delinquency the estimated installment of taxes to be paid. When the actual amount of the applicable tax bill is known, the amount of such equal monthly advance payment shall be adjusted as required to provide the fund needed to pay the applicable taxes before delinquency. If the amounts paid to Lessor by Lessee under the provisions of this Paragraph are insufficient to discharge the obligations of Lessee to pay such Real Property Taxes as the same become due, Lessee shall pay to Lessor, upon Lessor's demand, such additional sums as are necessary to pay such obligations. All moneys paid to Lessor under this Paragraph may be intermingled with other moneys of Lessor and shall not bear interest. In the event of a Breach by Lessee in the performance of the obligations of Lessee under this Lease, then any balance of funds paid to Lessor under the provisions of this Paragraph may, subject to proration as provided in Paragraph 10.1(a), at the option of Lessor, be treated as an additional Security Deposit under Paragraph 5. 10.2 DEFINITION OF "REAL PROPERTY TAXES." As used herein, the term "REAL PROPERTY TAXES" shall include any form of real estate tax or assessment, general, special, ordinary or extraordinary, and any license fee, commercial rental tax, improvement bond or bonds, levy or tax (other than inheritance, personal income or estate taxes) imposed upon the Premises by any authority having the direct or indirect power to tax, including any city, state or federal government, or any school, agricultural, sanitary, fire, street, drainage or other improvement district thereof, levied against any legal or equitable interest of Lessor in the Premises or in the real property of which the Premises are a part, Lessor's right to rent or other income therefrom, and/or Lessor's business of leasing the Premises. The term "REAL PROPERTY TAXES" shall also include any tax, fee, levy, assessment or charge, or any increase therein, imposed by reason of events occurring, or changes in applicable law taking effect, during the term of this Lease, including but not limited to a change in the ownership of the Premises or in the improvements thereon, the execution of this Lease, or any modification, amendment or transfer thereof, and whether or not contemplated by the Parties. 10.3 JOINT ASSESSMENT. If the Premises are not separately assessed, Lessee's liability shall be an equitable proportion of the Real Property Taxes for all of the land and improvements included within the tax parcel assessed, such proportion to be determined by Lessor from the respective valuations assigned in the assessor's work sheets or such other information as may be reasonably available. Lessor's reasonable determination thereof, in good faith, shall be conclusive. 10.4 PERSONAL PROPERTY TAXES. Lessee shall pay prior to delinquency all taxes assessed against and levied upon Lessee Owned Alterations, Utility Installations, Trade Fixtures, furnishings, equipment and all personal property of Lessee contained in the Premises or elsewhere. When possible, Lessee shall cause its Trade Fixtures, furnishings, equipment and all other personal property to be assessed and billed separately from the real property of Lessor. If NET PAGE 16 Initials _____ any of Lessee's said personal property shall be assessed with Lessor's real property, Lessee shall pay Lessor the taxes attributable to Lessee within ten (10) days after receipt of a written statement setting forth the taxes applicable to Lessee's property or, at Lessor's option, as provided in Paragraph 10.1(b). 11. UTILITIES. Lessee shall pay for all water, gas, heat, light, power, telephone, trash disposal and other utilities and services supplied to the Premises, together with any taxes thereon. If any such services are not separately metered to Lessee, Lessee shall pay a reasonable proportion, to be determined by Lessor, of all charges jointly metered with other premises. 12. ASSIGNMENT AND SUBLETTING. 12.1 LESSOR'S CONSENT REQUIRED. (a) Lessee shall not voluntarily or by operation of law assign, transfer, mortgage or otherwise transfer or encumber (collectively, "ASSIGNMENT") or sublet all or any part of Lessee's interest in this Lease or in the Premises without Lessor's prior written consent given under and subject to the terms of Paragraph 36. (b) Intentionally Omitted. (c) Notwithstanding anything to the contrary set forth above, Lessee may assign this Lease in its entirety or sublease all or any portion of the Premises without the prior written consent of Lessor to (1) an Affiliate (as defined below) of Lessee, (2) any partnership, corporation or other business entity into or with which Lessee shall be merged, converted or consolidated or to which substantially all of Lessee's assets may be transferred, or (3) a partnership, corporation or other business entity which is a direct successor to Lessee owning substantially all of Lessee's business and assets provided that, in connection with any assignment or subletting described in clauses (1), (2) and (3) of this Section, (a) Lessee shall have notified Lessor in writing prior to such assignment or subletting, (b) at the time thereof no Breach (as defined in Section 13.1 below) has occurred and is continuing, (c) the proposed transferee shall deliver to Lessor a written agreement whereby it expressly assumes all of the Lessee's obligations under this Lease; provided, however, that any sublessee of less than all of the space in the Premises shall be liable only for obligations under this Lease that are properly allocable to the space subject to the applicable assignment or subletting (excluding, however, any obligation to pay rent due hereunder), and (d) in case of an assignment or subletting in connection with a transaction such as those described in clauses (2) and (3) of this Section, Lessee shall have provided Lessor with evidence reasonably acceptable to Lessor that the proposed assignee/sublessee has a demonstrable net worth not less than the net worth of Lessee as of the date of such assignment of subletting. Any assignment or subletting permitted without Lessor's prior written consent as provided above shall not release Lessee from any of its obligations (including, without limitation, its obligation to pay Rent) under this Lease. For the purposes of this Section, the term "LESSEE" shall also mean a permitted assignee or sublessee or the initial Lessee named in this Lease. As used herein, the term "AFFILIATE" shall mean a person or entity directly or indirectly, through one or more intermediaries, controlling, controlled by or under common control with the party in question. The term "CONTROL", as used in this Section, means, with respect to an entity that is a corporation, the right to the exercise, directly or indirectly, of NET PAGE 17 Initials _____ more than 50% of the voting rights attributable to the shares of the controlled corporation and, with respect to an entity that is not a corporation, the possession, directly or indirectly, of the power to direct or cause the direction of the management or policies of the controlled entity. (d) An assignment or subletting of Lessee's interest in this Lease without Lessor's specific prior written consent shall be a Default curable after notice per Paragraph 13.1(c). If Lessee fails to cure such Default, Lessor shall have the right to either: (i) terminate this Lease within five (5) days after such failure, or (ii) upon thirty (30) days written notice ("LESSOR'S NOTICE"), increase the monthly Base Rent to fair market rental value or one hundred ten percent (110%) of the Base Rent then in effect, whichever is greater. Pending determination of the new fair market rental value, if disputed by Lessee, Lessee shall pay the amount set forth in Lessor's Notice, with any overpayment credited against the next installment of Base Rent coming due, and any underpayment for the period retroactively to the effective date of the adjustment being due and payable immediately upon the determination thereof. 12.2 TERMS AND CONDITIONS APPLICABLE TO ASSIGNMENT AND SUBLETTING. (a) Regardless of Lessor's consent, any assignment or subletting shall not: (i) be effective without the express written assumption by such assignee or sublessee of the obligations of Lessee under this Lease, (ii) release Lessee of any obligations hereunder, or (iii) alter the primary liability of Lessee for the payment of Base Rent and other sums due Lessor hereunder or for the performance of any other obligations to be performed by Lessee under this Lease. (b) Lessor may accept any rent or performance of Lessee's obligations from any person other than Lessee pending approval or disapproval of an assignment. Neither a delay in the approval or disapproval of such assignment nor the acceptance of any rent or performance shall constitute a waiver or estoppel of Lessor's right to exercise its remedies for the Default or Breach by Lessee of any of the terms, covenants or conditions of this Lease. (c) The consent of Lessor to any assignment or subletting shall not constitute a consent to any subsequent assignment or subletting by Lessee or to any subsequent or successive assignment or subletting by the sublessee. However, Lessor may consent to subsequent sublettings and assignments of the sublease or any amendments or meditations thereto without notifying Lessee or anyone else liable on the Lease or sublease and without obtaining their consent and such action shall not relieve such persons from liability under this Lease or sublease. (d) In the event of any Default or Breach of Lessee's obligations under this Lease, Lessor may proceed directly against Lessee, any Guarantors or any one else responsible for the performance of the Lessee's obligations under this Lease, including the sublessee, without first exhausting Lessor's remedies against any other person or entity responsible therefor to Lessor, or any security held by Lessor or Lessee. (e) Each request for consent to an assignment or subletting shall be in writing, accompanied by information relevant to Lessor's determination as to the financial and operational responsibility and appropriateness of the proposed assignee or sublessee, including NET PAGE 18 Initials _____ but not limited to the intended use and/or required modification of the Premises, if any, together with a non-refundable deposit of $1,000 or ten percent (10%) of the current monthly Base Rent, whichever is greater, as reasonable consideration for Lessor's considering and processing the request for consent. Lessee agrees to provide Lessor with such other or additional information and/or documentation as may be reasonably requested by Lessor. (f) Any assignee of, or sublessee under, this Lease shall, by reason of accepting such assignment or entering into such sublease, be deemed, for the benefit of Lessor, to have assumed and agreed to conform and comply with each and every term, covenant, condition and obligation herein to be observed or performed by Lessee during the term of said assignment or sublease, other than such obligations as are contrary to or inconsistent with provisions of an assignment or sublease to which Lessor has specifically consented in writing. (g) Intentionally Omitted. (h) Intentionally Omitted. 12.3 ADDITIONAL TERMS AND CONDITIONS APPLICABLE TO SUBLETTING. The following terms and conditions shall apply to any subletting by Lessee of all or any part of the Premises and shall be deemed included in all subleases under this Lease whether or not expressly incorporated therein: (a) Lessee hereby assigns and transfers to Lessor all of Lessee's interest in all rentals and income arising from any sublease of all or a portion of the Premises heretofore or hereafter made by Lessee, and Lessor may collect such rent and income and apply same toward Lessee's obligations under this Lease; provided, however, that until a Breach (as defined in Paragraph 13.1) shall occur in the performance of Lessee's obligations under this Lease, Lessee may, except as otherwise provided in this Lease, receive, collect and enjoy the rents accruing under such sublease. Lessor shall not, by reason of this or any other assignment of such sublease to Lessor, nor by reason of the collection of the rents from a sublessee, be deemed liable to the sublessee for any failure of Lessee to perform and comply with any of Lessee's obligations to such sublessee under such sublease. Lessee hereby irrevocably authorizes and directs any such sublessee, upon receipt of a written notice from Lessor stating that a Breach exists in the performance of Lessee's obligations under this Lease, to pay to Lessor the rents and other charges due and to become due under the sublease. Sublessee shall rely upon any such statement and request from Lessor and shall pay such rents and other charges to Lessor without any obligation or right to inquire as to whether such Breach exists and notwithstanding any notice from or claim from Lessee to the contrary. Lessee shall have no right or claim against said sublessee, or, until the Breach has been cured, against Lessor, for any such rents and other charges so paid by said sublessee to Lessor. (b) In the event of a Breach by Lessee in the performance of its obligations under this Lease, Lessor at its option and without any obligation to do so, may require any sublessee to attorn to Lessor, in which event Lessor shall undertake the obligations of the sublessor under such sublease from the time of the exercise of said option to the expiration of such sublease; provided, however, Lessor shall not be liable for any prepaid rents or security NET PAGE 19 Initials _____ deposit paid by such sublessee to such sublessor or for any other prior Defaults or Breaches of such sublessor under such sublease. (c) Any matter or thing requiring the consent of the sublessor under a sublease shall also require the consent of Lessor herein. (d) No sublessee shall further assign or sublet all or any part of the Premises without Lessor's prior written consent. (e) Lessor shall deliver a copy of any notice of Default or Breach by Lessee to the sublessee, who shall have the right to cure the Default of Lessee within the grace period, if any, specified in such notice. The sublessee shall have a right of reimbursement and offset from and against Lessee for any such Defaults cured by the sublessee. 13. DEFAULT; BREACH; REMEDIES. 13.1 DEFAULT; BREACH. Lessor and Lessee agree that if an attorney is consulted by Lessor in connection with a Lessee Default or Breach (as hereinafter defined), Lessor may include the cost of such services and costs in said notice as rent due and payable to cure said Default. A "DEFAULT" is defined as a failure by the Lessee to observe, comply with or perform any of the terms, covenants, conditions or rules applicable to Lessee under this Lease. A "BREACH" is defined as the occurrence of any one or more of the following Defaults, and, where a grace period for cure after notice is specified herein, the failure by Lessee to cure such Default prior to the expiration of the applicable grace period, and shall entitle Lessor to pursue the remedies set forth in Paragraphs 13.2 and/or 13.3: (a) The vacating of all of the Premises without the intention to reoccupy same, or the abandonment of all of the Premises. (b) Except as expressly otherwise provided in this Lease, the failure by Lessee to make any payment of Base Rent or any other monetary payment required to be made by Lessee hereunder, whether to Lessor or to a third party, as and when due, the failure by Lessee to provide Lessor with reasonable evidence of insurance or surety bond required under this Lease, or the failure of Lessee to fulfill any obligation under this Lease which endangers or threatens life or property, where such failure continues for a period of three (3) days following written notice thereof by or on behalf of Lessor to Lessee. (c) Except as expressly otherwise provided in this Lease, the failure by Lessee to provide Lessor with reasonable written evidence (in duly executed original form, if applicable) of (i) compliance with applicable law per Paragraph 6.3, (ii) the inspection, maintenance and service contracts required under Paragraph 7.1(b), (iii) the recession of an unauthorized assignment or subletting per Paragraph 12.1(b), (iv) a Tenancy Statement per Paragraphs 16 or 37, (v) the subordination or non-subordination of this Lease per Paragraph 30, (vi) the guaranty of the performance of Lessee's obligations under this Lease if required under Paragraphs 1.11 and 37, (vii) the execution of any document requested under Paragraph 42 (easements), or (viii) any other documentation or information which Lessor may reasonably require of Lessee under the terms of this Lease, where any such failure continues for a period of ten (10) days following written notice by or on behalf of Lessor to Lessee. NET PAGE 20 Initials _____ (d) A Default by Lessee as to the terms, covenants, conditions or provisions of this Lease, or of the rules adopted under Paragraph 40 hereof, that are to be observed, complied with or performed by Lessee, other than those described in subparagraphs (a), (b) or (c), above, where such Default continues for a period of thirty (30) days after written notice thereof by or on behalf of Lessor to Lessee; provided, however, that if the nature of Lessee's Default is such that more than thirty (30) days are reasonably required for its cure, then it shall not be deemed to be a Breach of this Lease by Lessee if Lessee commences such cure within said thirty (30) day period and thereafter diligently prosecutes such cure to completion. (e) The occurrence of any of the following events: (e) The making by Lessee of any general arrangement or assignment for the benefit of creditors; (f) Lessee's becoming "debtor" as defined in 11 U.S.C. ss. 101 or any successor statute thereto (unless, in the case of a petition filed against Lessee, the same is dismissed within ninety (90) days); (g) the appointment of a trustee or receiver to take possession of substantially all of Lessee's assets located at the premises or of Lessee's interest in this Lease, where possession is not restored to Lessee within ninety (90) days; or (h) the attachment, execution or other judicial seizure of substantially all of Lessee's assets located at the Premises or of Lessee's interest in this Lease, where such seizure is not discharged within ninety (90) days; provided, however, in the event that any provision of this subparagraph (e) is contrary to any applicable law, such provision shall be of no force or effect, and not affect the validity of the remaining provisions. (f) The discovery by Lessor that any financial statement given to Lessor by Lessee or any Guarantor of Lessee's obligations hereunder was materially false. (g) If the performance of Lessee's obligations under this Lease is guaranteed: (i) the death of a guarantor, (j) the termination of a guarantor's liability with respect to this Lease other than in accordance with the terms of such guaranty (k) a guarantor's becoming insolvent or the subject of a bankruptcy filing, (l) a guarantor's breach of its guaranty obligation on an anticipatory breach basis, and Lessee's failure, within sixty (60) days following written notice by or on behalf of Lessor to Lessee of any such event to provide Lessor with written alternative assurance or security, which, when coupled with the then existing resources of Lessee, equals or exceeds the combined financial resources of Lessee and the guarantors that existed at the time of execution of this Lease. 13.2 REMEDIES. If Lessee fails to perform any affirmative duty or obligation of Lessee under this Lease, within ten (10) days after written notice to Lessee (or in case of an emergency, without notice), Lessor may at its option (but without obligation to do so), perform such duty or obligation on Lessee's behalf, including but not limited to the obtaining of reasonably required bond, insurance policies, or governmental licenses, permits or approvals. The costs and expenses of any such performance by Lessor shall be due and payable by Lessee to Lessor upon invoice therefor. If any check given to Lessor by Lessee shall not be honored by the bank upon which it is drawn, Lessor, at its option, may require all future payments to be made under this Lease by Lessee to be made only by cashier's check. Upon the occurrence and during the continuance of a Breach of this Lease by Lessee, as defined in Paragraph 13.1, with or without further notice or demand, and without limiting Lessor in the exercise of any right or remedy which Lessor may have by reason of such Breach, Lessor may: NET PAGE 21 Initials _____ (a) Terminate Lessee's right to possession of the Premises by any lawful means, in which case this Lease and the term hereof shall terminate and Lessee shall immediately surrender possession of the Premises to Lessor. In such event Lessor shall be entitled to recover from Lessee: (m) the worth at the time of the award of the unpaid rent which had been earned at the time of termination; (n) the worth at the time of award of the amount by which the unpaid rent which would have been earned after termination until the time of award exceeds the amount of such rental loss that the Lessee proves could have been reasonably avoided; (o) the worth at the time of award of the amount by which the unpaid rent for the balance of the term after the time of award exceeds the amount of such rental loss that the Lessee proves could be reasonably avoided; and (p) any other amount necessary to compensate Lessor for all the detriment proximately caused by the Lessee's failure to perform its obligations under this Lease or which in the ordinary course of things would be likely to result therefrom, including but not limited to the cost of recovering possession of the Premises, expenses of reletting, including necessary renovation and alteration of the premises, reasonable attorneys' fees, and that portion of the leasing commission paid by Lessor applicable to the unexpired term of this Lease. The worth at the time of award of the amount referred to in provision (iii) of the prior sentence shall be computed by discounting such amount at the discount rate of the Federal Reserve Bank of San Francisco at the time of award plus one percent. Efforts by Lessor to mitigate damages caused by Lessee's Default or Breach of this Lease shall not waive Lessor's right to recover damages under this Paragraph. If termination of this Lease is obtained through the provisional remedy of unlawful detainer, Lessor shall have the right to recover in such proceeding the unpaid rent and damages as are recoverable therein, or Lessor may reserve therein the right to recover all or any part thereof in a separate suit for such rent and/or damages. If a notice and grace period required under subparagraphs 13.1(b), (c) or (d) was not previously given, a notice to pay rent or quit, or to perform or quit, as the case may be, given to Lessee under any statute authorizing the forfeiture of leases for unlawful detainer shall also constitute the applicable notice for grace period purposes required by subparagraphs 13.1 (b), (e) or (d). In such case the applicable grace period under subparagraphs 13.1(b), (c) or (d) and under the unlawful detainer statute shall run concurrently after the one such statutory notice, and the failure of Lessee to cure the Default within the greater of the two such grace periods shall constitute both an unlawful detainer and a Breach of this Lease entitling Lessor to the remedies provided for in this Lease and/or by said statute. (b) Continue the Lease and Lessee's right to possession in effect (in California under California Civil Code Section 1951.4) after Lessee's Breach and abandonment and recover the rent as it becomes due, provided Lessee has the right to sublet or assign, subject only to reasonable limitations. See Paragraphs 12 and 36 for the limitations on assignment and subletting which limitations Lessee and Lessor agree are reasonable. Acts of maintenance or preservations, efforts to relet the premises, or the appointment of a receiver to protect the Lessor's interest under the Lease, shall not constitute a termination of the Lessee's right to possession. (c) Pursue any other remedy now or hereafter available to Lessor under the laws or judicial decisions of the state wherein the Premises are located. (d) The expiration or termination of this Lease and/or the termination of Lessee's right to possession shall not relieve Lessee from liability under any indemnity NET PAGE 22 Initials _____ provisions of this Lease as to matters occurring or accruing during the term hereof or by reason of Lessee's occupancy of the Premises. 13.3 INDUCEMENT RECAPTURE IN EVENT OF BREACH. Any agreement by Lessor for free or abated rent or other charges applicable to the Premises, or for the giving or paying by Lessor to or for Lessee of any cash or other bonus, inducement or consideration for Lessee's entering into this Lease, all of which concessions are hereinafter referred to as "INDUCEMENT PROVISIONS," shall be deemed conditioned upon Lessee's full and faithful performance of all of the terms, covenants and conditions of this Lease to be performed or observed by Lessee during the term hereof as the same may be extended. Upon the occurrence of a Breach of this Lease by Lessee, as defined in Paragraph 13.1, any such Inducement Provision shall automatically be deemed deleted from this Lease and of no further force or effect, and any rent, other charge, bonus, inducement or consideration theretofore abated, given or paid by Lessor under such an Inducement Provision shall be immediately due and payable by Lessee to Lessor, and recoverable by Lessor as additional rent due under this Lease, notwithstanding any subsequent cure of said Breach by Lessee. The acceptance by Lessor of rent or the cure of the Breach which initiated the operation of this Paragraph shall not be deemed a waiver by Lessor of the provisions of this Paragraph unless specifically so stated in writing by Lessor at the time of such acceptance. 13.4 LATE CHARGES. Lessee hereby acknowledges that late payment by Lessee to Lessor of rent and other sums due hereunder will cause Lessor to incur costs not contemplated by this Lease, the exact amount of which will be extremely difficult to ascertain. Such costs include, but are not limited to, processing and accounting charges, and late charges which may be imposed upon Lessor by the terms of any ground lease, mortgage or trust deed covering the Premises. Accordingly, if any installment of rent or any other sum due from Lessee shall not be received by Lessor or Lessor's designee within five (5) days after such amount shall be due, then, without any requirement for notice to Lessee, Lessee shall pay to Lessor a late charge equal to five percent (5%) of such overdue amount. The parties hereby agree that such late charge represents a fair and reasonable estimate of the costs Lessor will incur by reason of late payment by Lessee. Acceptance of such late charge by Lessor shall in no event constitute a waiver of Lessee's Default or Breach with respect to such overdue amount, nor prevent Lessor from exercising any of the other rights and remedies granted hereunder. In the event that a late charge is payable hereunder, whether or not collected, for three (3) consecutive installments of Base Rent, then notwithstanding Paragraph 4.1 or any other provision of this Lease to the contrary, Base Rent shall, at Lessor's option, become due and payable quarterly in advance. 13.5 BREACH BY LESSOR. Lessor shall not be deemed in breach of this Lease unless Lessor fails within a reasonable time to perform an obligation required to be performed by Lessor. For purposes of this Paragraph 13.5, a reasonable time shall in no event be less than thirty (30) days after receipt by Lessor, and by the holders of any ground lease, mortgage or deed of trust covering the Premises whose name and address shall have been furnished Lessee in writing for such purpose, of written notice specifying wherein such obligation of Lessor has not been performed; provided, however, that if the nature of Lessor's obligation is such that more than thirty (30) days after such notice are reasonably required for its performance, then Lessor shall not be in `breach of this Lease if performance is commenced within such thirty (30) day period and thereafter diligently pursued to completion. NET PAGE 23 Initials _____ 14. CONDEMNATION. If the Premises or any portion thereof are taken under the power of eminent domain or sold under the threat of the exercise of said power (all of which are herein called "condemnation"), this Lease shall terminate as to the part so taken as of the date the condemning authority takes title or possession, whichever first occurs. If more than ten percent (10%) of the floor area of the Premises, or more than twenty-five percent (25%) of the land area not occupied by any building, is taken by condemnation Lessee may, at Lessee's option, to be exercised in writing within ten (10) days after (Lessor shall have given Lessee written notice of such taking (or in the absence of such notice, within ten (10) days after the condemning authority shall have taken possession) terminate this Lease as of the date the condemning authority takes such possession. If Lessee does not terminate this Lease in accordance with the foregoing, this Lease shall remain in full force and effect as to the portion of the Premises remaining, except that the Base Rent shall be reduced in the same proportion as the rentable floor area of the Premises taken bears to the total rentable floor area of the building located on the Premises. No reduction of Base Rent shall occur if the only portion of the Premises taken is land on which there is no building. Any award for the taking of all or any part of the Premises under the power of eminent domain or any payment made under threat of the exercise of such power shall be the property of Lessor, whether such award shall be made as compensation for diminution in value of the leasehold or for the taking of the fee, or as severance damages; provided, however, that Lessee shall be entitled to any compensation, separately awarded to Lessee for Lessee's relocation expenses and/or loss of Lessee's Trade Fixtures. In the event that this Lease is not terminated by reason of such condemnation, Lessor shall to the extent of its net severance damages received, over and above the legal and other expenses incurred by Lessor in the condemnation matter, repair any damage to the Premises caused by such condemnation, except to the extent that Lessee has been reimbursed therefor by the condemning authority. Lessee shall be responsible for the payment of any amount in excess of such net severance damages required to complete such repair. 16. TENANCY STATEMENT. 16.1 Each Party (as "RESPONDING PARTY") shall within ten (10) days after written notice from the other Party (the "REQUESTING PARTY") execute, acknowledge and deliver to the Requesting Party a statement in writing in form similar to the then most current "TENANCY STATEMENT" form published by the American Industrial Real Estate Association, plus such additional information, confirmation and/or statements as may be reasonably requested by the Requesting Party. 16.2 If Lessor desires to finance, refinance, or sell the Premises, any part thereof, or the building of which the Premises are a part, Lessee and all Guarantors of Lessee's performance hereunder shall deliver to any potential lender or purchaser designated by Lessor such financial statements of Lessee and such Guarantors as may be reasonably required by such lender or purchaser, including but not limited to Lessee's financial statements for the past three (3) years. All such financial statements shall be received by Lessor and such lender or purchaser in confidence and shall be used only for the purposes herein set forth. 17. LESSOR'S LIABILITY. The term "LESSOR" as used herein shall mean the owner or owners at the time in question of the fee title to the Premises, or, if this is a sublease, of the lessee's interest in the prior lease. In the event of a transfer of Lessor's title or interest in the Premises or in this NET PAGE 24 Initials _____ Lease, Lessor shall deliver to the transferee or assignee (in cash or by credit) any unused Security Deposit held by Lessor at the time of such transfer or assignment. Except as provided in Paragraph 15, upon such transfer or assignment and delivery of the Security Deposit, as aforesaid, the prior Lessor shall be relieved of all liability with respect to the obligations and/or covenants under this Lease thereafter to be performed by the Lessor. Subject to the foregoing, the obligations and/or covenants in this Lease to be performed by the Lessor shall be binding only upon the Lessor as hereinabove defined. 18. SEVERABILITY. The invalidity of any provision of this Lease, as determined by a court of competent jurisdiction, shall in no way affect the validity of any other provision hereof. 19. INTEREST ON PAST-DUE OBLIGATIONS. Any monetary payment due Lessor hereunder, other than late charges, not received by Lessor within thirty (30) days following the date on which it was due, shall bear interest from the thirty-first (31st) day after it was due at the rate of 12% per annum, but not exceeding the maximum rate allowed by law, in addition to the late charge provided for in Paragraph 13.4. 20. TIME OF ESSENCE. Time is of the essence with respect to the performance of all obligations to be performed or observed by the Parties under this Lease. 21. RENT DEFINED. All monetary obligations of Lessee to Lessor under the terms of this Lease are deemed to be rent. 22. NO PRIOR OR OTHER AGREEMENTS; BROKER DISCLAIMER. This Lease contains all agreements between the Parties with respect to any matter mentioned herein,, and no other prior or contemporaneous agreement or understanding shall be effective. Lessor and Lessee each represents and warrants to the Brokers that it has made, and is relying solely upon, its own investigation as to the nature, quality, character and financial responsibility of the other Party to this Lease and as to the nature, quality and character of the Premises. Brokers have no responsibility with respect thereto or with respect to any default or breach hereof by either Party. 23. NOTICES. 23.1 All notices required or permitted by this Lease shall be in writing and may be delivered in person (by hand or by messenger or courier service) or may be sent by regular, certified or registered mail or U.S. Postal Service Express Mail, with postage prepaid, or by facsimile transmission, and shall be deemed sufficiently given if served in a manner specified in this Paragraph 23. The addresses noted adjacent to a Party's signature on this Lease shall be that Party's address for delivery or mailing of notice purposes. Either Party may by written notice to the other specify a different address for notice purposes, except that upon Lessee's taking possession of the Premises, the Premises shall constitute Lessee's address for the purpose of mailing or delivering notices to Lessee. A copy of all notices required or permitted to be given to Lessor hereunder shall be concurrently transmitted to such party or parties at such addresses as Lessor may from time to time hereafter designate by written notice to Lessee. 23.2 Any notice sent by registered or certified mail, return receipt requested, shall be deemed given on the date of delivery shown on the receipt card, or if no delivery date is shown, the postmark thereon. If sent by regular mail the notice shall be deemed given forty-eight (48) NET PAGE 25 Initials _____ hours after the same is addressed as required herein and mailed with postage prepaid. Notices delivered by United States Express Mail or overnight courier that guarantees next day delivery shall be deemed given twenty-four (24) hours after delivery of the same to the United States Postal Service or courier. If any notice is transmitted by facsimile transmission or similar means, the same shall be deemed served or delivered upon telephone confirmation of receipt of the transmission thereof, provided a copy is also delivered via delivery or mail. If notice is received on a Sunday or legal holiday, it shall be deemed received on the next business day. 24. WAIVERS. No waiver by Lessor of the Default or Breach of any term, covenant or condition hereof by Lessee, shall be deemed a waiver of any other term, covenant or condition hereof, or of any subsequent Default or Breach by Lessee of the same or of any other term, covenant or condition hereof. Lessor's consent to, or approval of, any act shall not be deemed to render unnecessary the obtaining of Lessor's consent to, or approval of, any subsequent or similar act by Lessee, or be construed as the basis of an estoppel to enforce the provision or provisions of this Lease requiring such consent. Regardless of Lessor's knowledge of a Default or Breach at the time of accepting rent the acceptance of rent by Lessor shall not be a waiver of any preceding Default or Breach by Lessee of any provision hereof, other than the failure of Lessee to pay the particular rent so accepted. Any payment given Lessor by Lessee may be accepted by Lessor on account of moneys or damages due Lessor, notwithstanding any qualifying statements or conditions made by Lessee in connection therewith, which such statements and/or conditions shall be of no force or effect whatsoever unless specifically agreed to in writing by Lessor at or before the time of deposit of such payment. 25. RECORDING. Either Lessor or Lessee shall, upon request of the other, execute, acknowledge and deliver to the other a short form memorandum of this Lease for recording purposes. The Party requesting recordation shall be responsible for payment of any fees or taxes applicable thereto. 26. NO RIGHT TO HOLDOVER. Lessee has no right to retain possession of the Premises or any part thereof beyond the expiration or earlier termination of this Lease 27. CUMULATIVE REMEDIES. No remedy or election hereunder shall be deemed exclusive but shall, wherever possible, be cumulative with all other remedies at law or in equity. 28. COVENANTS AND CONDITIONS. All provisions of this Lease to be observed or performed by Lessee are both covenants and conditions. 29. BINDING EFFECT; CHOICE OF LAW. This Lease shall be binding upon the parties, their personal representatives, successors and assigns and be governed by the laws of the State in which the Premises are located. Any litigation between the Parties hereto concerning this Lease shall be initiated in the county in which the Premises are located. 30. SUBORDINATION; ATTORNMENT; NON-DISTURBANCE. 30.1 SUBORDINATION. This Lease and any Option granted hereby shall be subject and subordinate to any ground lease, mortgage, deed of trust, or other hypothecation or security device (collectively, "SECURITY DEVICE"), raw or hereafter placed by Lessor upon the real property of which the Premises are a part, to any and all advances made on the security thereof, NET PAGE 26 Initials _____ and to all renewals, modifications, consolidations, replacements and extensions thereof. Lessee agrees that the Lenders holding any such Security Device shall have no duty, liability or obligation to perform any of the obligations of Lessor under this Lease, but that in the event of Lessor's default with respect to any such obligation, Lessee will give any Lender whose name and address have been furnished Lessee in writing for such purpose notice of Lessor's default and allow such Lender thirty (30) days following receipt of such notice for the cure of said default before invoking any remedies Lessee may have by reason thereof. If any Lender shall elect to have this Lease and/or any Option granted hereby superior to the lien of its Security Device and shall give written notice thereof to Lessee, this Lease and such Options shall be deemed prior to such Security Device, notwithstanding the relative dates of the documentation or recordation thereof. 30.2 ATTORNMENT. Subject to the non-disturbance provisions of Paragraph 30.3, Lessee agrees to attorn to a Lender or any other party who acquires ownership of the Premises by reason of a foreclosure of a Security Device, and that in the event of such foreclosure, such new owner shall not: (i) be liable for any act or omission of any prior lessor or with respect to events occurring prior to acquisition of ownership, (ii) be subject to any offsets or defenses which Lessee might have against any prior lessor, or (iii) be bound by Repayment of more than one month's rent. 30.3 NON-DISTURBANCE. With respect to Security Devices entered into by Lessor after the execution of this Lease, Lessee's subordination of this Lease shall be subject to receiving assurance (a "NON-DISTURBANCE AGREEMENT") from the Lender that Lessee's possession and this Lease, including any options to extend the term hereof, will not be disturbed so long as Lessee is not in Breach hereof and attorns to the record owner of the Premises. 30.4 SELF-EXECUTING. The agreements contained in this Paragraph 30 shall be effective without the execution of any further documents; provided, however, that, upon written request from Lessor or a Lender in connection with a sale, financing or refinancing of the Premises, Lessee and Lessor shall execute such further writings as may be reasonably required to separately document any such subordination or non-subordination, adornment and/or non-disturbance agreement as is provided for herein. NET PAGE 27 Initials _____ 31. ATTORNEY'S FEES. If any Party or Broker brings an action or proceeding to enforce the terms hereof or declare rights hereunder, the Prevailing Party (as hereafter defined) or Broker in any such proceeding, action, or appeal thereon, shall be entitled to reasonable attorney's fees. Such fees may be awarded in the same suit or recovered in a separate suit, whether or not such action or proceeding is pursued to decision or judgment. The term "PREVAILING PARTY" shall include, without limitation, a Party or Broker who substantially obtains or defeats the relief sought, as the case may be, whether by compromise, settlement, judgment, or the abandonment by the other Party or Broker of its claim or defense. The attorney's fee award shall not be computed in accordance with any court fee schedule, but shall be such as to fully reimburse all attorney's fees reasonably incurred. Lessor shall be entitled to attorney's fees, costs and expenses incurred in the preparation and service of notices of Default and consultations in connection therewith, whether or not a legal action is subsequently commenced in connection with such Default or resulting Breach. 32. LESSOR'S ACCESS; SHOWING PREMISES; REPAIRS. Lessor and Lessor's agents shall have the right to enter the Premises at any time, in the case of an emergency, and otherwise at reasonable times for the purpose of showing the same to prospective purchasers, lenders, or lessees, and making such alterations, repairs, improvements or additions to the Premises or to the building of which they are a part as Lessor may reasonably deem necessary. Lessor may at any time place on or about the Premises or building any ordinary "For Sale" signs and Lessor may at any time during the last one hundred twenty (120) days of the term hereof place on or about the Premises any ordinary "For Lease" signs. All such activities of Lessor shall be without abatement of rent or liability to Lessee. 33. AUCTIONS. Lessee shall not conduct, nor permit to be conducted, either voluntarily or involuntarily, any auction upon the Premises without first having obtained Lessor's prior written consent. Notwithstanding anything to the contrary in this Lease, Lessor shall not be obligated to, exercise any standard of reasonableness in determining whether to grant such consent. 34. SIGNS. Lessee shall not place any sign upon the Premises, except that Lessee may, with Lessor's prior written consent, install (but not on the roof) such signs as are reasonably required to advertise Lessee's own business. The installation of any sign on the Premises by or for Lessee shall be subject to the provisions of Paragraph 7 (Maintenance, Repairs, Utility Installations, Trade Fixtures and Alterations). Unless otherwise expressly agreed herein, Lessor reserves all rights to the use of the roof and the right to install, and all revenues from the installation of, such advertising signs on the Premises, including the roof, as do not unreasonably interfere with the conduct of Lessee's business. 35. TERMINATION; MERGER. Unless specifically stated otherwise in writing by Lessor, the voluntary or other surrender of this Lease by Lessee, the mutual termination or cancellation hereof, or a termination hereof by Lessor for Breach by Lessee, shall automatically terminate any sublease or lesser estate in the Premises; provided, however, Lessor shall, in the event of any such surrender, termination or cancellation, have the option to continue any one or all of any existing subtenancies. Lessor's failure within ten (10) days following any such event to make a written election to the contrary by written notice to the holder of any such lesser interest, shall constitute Lessor's election to have such event constitute the termination of such interest. NET PAGE 28 Initials _____ 36. CONSENTS. (a) Except for Paragraph 33 hereof (Auctions) or as otherwise provided herein, wherever in this Lease the consent of a Party is required to an act by or for the other Party, such consent shall not be unreasonably withheld or delayed. Lessor's actual reasonable costs and expenses (including but not limited to architects, attorneys, engineers' or other consultants' fees) incurred in the consideration of, or response to, a request by Lessee for any Lessor consent pertaining to this Lease or the Premises, including but not limited to consents to an assignment, a subletting or the presence or use of a Hazardous Substance, practice or storage tank, shall be paid by Lessee to Lessor upon receipt of an invoice and supporting documentation therefor. Subject to Paragraph 12.2(e) (applicable to assignment or subletting), Lessor may, as a condition to considering any such request by Lessee, require that Lessee deposit with Lessor an amount of money (in addition to the Security Deposit held under Paragraph 5) reasonably calculated by Lessor to represent the cost Lessor will incur in considering and responding to Lessee's request. Except as otherwise provided, any unused portion of said deposit shall be refunded to Lessee without interest. Lessor's consent to any act, assignment of this Lease or subletting of the Premises by Lessee shall not constitute an acknowledgment that no Default or Breach by Lessee of this Lease exists, nor shall such consent be deemed a waiver of any then existing Default or Breach, except as may be otherwise specifically stated in writing by Lessor at the time of such consent. (b) All conditions to Lessor's consent authorized by this Lease are acknowledged by Lessee as being reasonable. The failure to specify herein any particular condition to Lessor's consent shall not preclude the imposition by Lessor at the time of consent of such further or other conditions as are then reasonable with reference to the particular matter for which consent is being given. 37. GUARANTOR. 37.1 If there are to be any Guarantors of this Lease per Paragraph 1.11, the form of the guaranty to be executed by each such Guarantor shall be in the form most recently published by the American Industrial Real Estate Association, and each said Guarantor shall have the same obligations as Lessee under this Lease, including but not limited to the obligation to provide the Tenancy Statement and information called for by Paragraph 16. 37.2 It shall constitute a Default of the Lessee under this Lease if any such Guarantor fails or refuses, upon reasonable request by Lessor to give: (q) evidence of the due execution of the guaranty called for by this Lease, including the authority of the Guarantor (and of the party signing on Guarantor's behalf to obligate such Guarantor on said guaranty, and including in the case of a corporate Guarantor, a certified copy of a resolution of its board of directors authorizing the making of such guaranty, together with a certificate of incumbency showing the signatures of the persons authorized to sign on its behalf, (r) current financial statements of Guarantor as may from time to time be requested by Lessor, (s) a Tenancy Statement, or (t) written confirmation that the guaranty is still in effect. 38. QUIET POSSESSION. Upon payment by Lessee of the rent for the Premises and the observance and performance of all of the covenants, conditions and provisions on Lessee's part NET PAGE 29 Initials _____ to be observed and performed under this Lease, Lessee shall have quiet possession of the Premises for the entire term hereof subject to all of the provisions of this Lease. 40. MULTIPLE BUILDINGS. If the Premises are part of a group of buildings controlled by Lessor, Lessee agrees that it will abide by, keep and observe all reasonable rules and regulations which Lessor may make from time to time for the management, safety, care, and cleanliness of the grounds, the parking and unloading of vehicles and the preservation of good order, as well as for the convenience of other occupants or tenants of such other buildings and their invitees, and that Lessee will pay its fair share of common expenses incurred in connection therewith. 41. SECURITY MEASURES. Lessee hereby acknowledges that the rental payable to Lessor hereunder does not include the cost of guard service or other security measures, and that Lessor shall have no obligation whatsoever to provide same. Lessee assumes all responsibility for the protection of the Premises, Lessee, its agents and invitees and their property from the acts of third parties. 42. RESERVATIONS. Lessor reserves to itself the right, from time to time, to grant, without the consent or joinder of Lessee, such easements, rights and dedications that Lessor deems necessary, and to cause the recordation of parcel maps and restrictions, so long as such easements, rights, dedications, maps and restrictions do not unreasonably interfere with the use of the Premises by Lessee. Lessee agrees to sign any documents reasonably requested by Lessor to effectuate any such easement rights, dedication, map or restrictions. 43. PERFORMANCE UNDER PROTEST. If at any time a dispute shall arise as to any amount or sum of money to be paid by one Party to the other under the provisions hereof, the Party against whom the obligation to pay the money is asserted shall have the right to make payment "under protest" and such payment shall not be regarded as a voluntary payment and there shall survive the right on the part of said Party to institute suit for recovery of such sum. If it shall be adjudged that there was no legal obligation on the part of said Party to pay such sum or any part thereof, said Party shall be entitled to recover such sum or so much thereof as it was not legally required to pay under the provisions of this Lease. 44. AUTHORITY. If either Party hereto is a corporation, trust or general or limited partnership, each individual executing this Lease on behalf of such entity represents and warrants that he or she is duly authorized to execute and deliver this Lease on its behalf. If Lessee is a corporation, trust or partnership, Lessee shall, within thirty (30) days after request by Lessor, deliver to Lessor evidence satisfactory to Lessor of such authority. 45. CONFLICT. Any conflict between the printed provisions of this Lease and the typewritten or handwritten provisions shall be controlled by the typewritten or handwritten provisions. 46. OFFER. Preparation of this Lease by Lessor or Lessor's agent and submission of same to Lessee shall not be deemed an offer to lease to Lessee. This Lease is not intended to be binding until executed by all Parties hereto. 47. AMENDMENTS. This Lease may be modified only in writing, signed by the parties in interest at the time of the modification. The parties shall amend this Lease from time to time to reflect any adjustments that are made to the Base Rent or other rent payable under this Lease. As NET PAGE 30 Initials _____ long as they do not materially change Lessee's obligations hereunder, Lessee agrees to make such reasonable non-monetary modifications to this Lease as may be reasonably required by an institutional, insurance company, or pension plan Lender in connection with the obtaining of normal financing or refinancing of the property of which the Premises are a part. 48. MULTIPLE PARTIES. Except as otherwise expressly provided herein, if more than one person or entity is named herein as either Lessor or Lessee, the obligations of such multiple parties shall be the joint and several responsibility of all persons or entities named herein as such Lessor or Lessee. LESSOR AND LESSEE HAVE CAREFULLY READ AND REVIEWED THIS LEASE AND EACH TERM AND PROVISION CONTAINED HEREIN, AND BY THE EXECUTION OF THIS LEASE SHOW THEIR INFORMED AND VOLUNTARY CONSENT THERETO. THE PARTIES HEREBY AGREE THAT, AT THE TIME THIS LEASE IS EXECUTED, THE TERMS OF THIS LEASE ARE COMMERCIALLY REASONABLE AND EFFECTUATE THE INTENT AND PURPOSE OF LESSOR AND LESSEE WITH RESPECT TO THE PREMISES. IF THIS LEASE HAS BEEN FILLED IN, IT HAS BEEN PREPARED FOR SUBMISSION TO YOUR ATTORNEY FOR HIS APPROVAL, FURTHER, EXPERTS SHOULD BE CONSULTED TO EVALUATE THE CONDITION OF THE PROPERTY AS TO THE POSSIBLE PRESENCE OF ASBESTOS, STORAGE TANKS OR HAZARDOUS SUBSTANCES. NO REPRESENTATION OR RECOMMENDATION IS MADE BY THE AMERICAN INDUSTRIAL REAL ESTATE ASSOCIATION OR BY THE REAL ESTATE BROKERS) OR THEIR AGENTS OR EMPLOYEES AS TO THE LEGAL SUFFICIENCY, LEGAL EFFECT, OR TAX CONSEQUENCES OF THIS LEASE OR THE TRANSACTION TO WHICH IT RELATES; THE PARTIES SHALL RELY SOLELY UPON THE ADVICE OF THEIR OWN COUNSEL AS TO THE LEGAL AND TAX CONSEQUENCES OF THIS LEASE. IF THE SUBJECT PROPERTY IS LOCATED IN A STATE OTHER THAN CALIFORNIA, AN ATTORNEY FROM THE STATE WHERE THE PROPERTY IS LOCATED SHOULD BE CONSULTED. The parties hereto have executed this Lease at the place on the dates specified above to their respective signatures. NET PAGE 31 Initials _____ Executed at PHOENIX, ARIZONA --------------------------------------- on MAY 15, 2000 ------------------------------------------------ by LESSOR: LASALLE COMPANY, LLC, an Arizona Limited Liability Company By: ------------------------------------------------ Name Printed: R. CRAIG HANNAY -------------------------------------- Title: MEMBER --------------------------------------------- Address: C/O HANNAY INVESTMENT PROPERTIES ------------------------------------------- 4651 E. PALOMINO ROAD, PHOENIX, ARIZONA 85018 - --------------------------------------------------- Tel. No. (602) 840-1851 Fax No. (602) 952-8512 -------------- -------------- Executed at --------------------------------------- on MAY 11, 2000 ------------------------------------------------ by LESSEE: MARKETING SPECIALISTS SALES COMPANY, a Texas corporation By: ------------------------------------------------ Name Printed: -------------------------------------- Title: --------------------------------------------- Address: 17855 DALLAS PARKWAY, DALLAS, TEXAS 75287 ------------------------------------------- ATTENTION: GAGE HUNT - --------------------------------------------------- Tel. No. (972) Fax No. (972) -------------- -------------- NET PAGE 32 Initials _____ EX-10.55 9 a2045432zex-10_55.txt EXHIBIT 10.55 Exhibit 10.55 LEASE AGREEMENT BETWEEN IPT PARTNERS, LLC, a California limited liability company Landlord AND MARKETING SPECIALISTS SALES COMPANY, a Texas corporation Tenant Dated: May 2, 2000 Premises: 744 and 746 Eckhoff Street Orange, California 92868 - -------------------------------------------------------------------------------- INDEX ARTICLE HEADING PAGE - ------- ------- ---- ARTICLE A CERTAIN LEASE PROVISIONS.........................................1 ARTICLE B CERTAIN DEFINITIONS..............................................4 ARTICLE 1 PREMISES AND TERM................................................6 ARTICLE 2 FIXED RENT AND ADDITIONAL RENT...................................7 ARTICLE 3 IMPOSITIONS......................................................7 ARTICLE 4 USE AND OPERATION OF PREMISES....................................9 ARTICLE 5 CONDITION OF PREMISES, ALTERATIONS AND REPAIRS..................10 ARTICLE 6 INSURANCE.......................................................12 ARTICLE 7 DAMAGE OR DESTRUCTION...........................................13 ARTICLE 8 CONDEMNATION....................................................15 ARTICLE 9 ASSIGNMENT AND SUBLETTING.......................................15 ARTICLE 10 SUBORDINATION...................................................18 ARTICLE 11 OBLIGATIONS OF TENANT...........................................20 ARTICLE 12 DEFAULT BY TENANT; REMEDIES.....................................22 ARTICLE 13 NO WAIVER.......................................................25 ARTICLE 14 ESTOPPEL CERTIFICATE............................................26 ARTICLE 15 QUIET ENJOYMENT.................................................26 ARTICLE 16 SURRENDER.......................................................27 ARTICLE 17 ACCESS..........................................................27 ARTICLE 18 ENVIRONMENTAL MATTERS...........................................28 ARTICLE 19 MISCELLANEOUS PROVISIONS........................................31 ARTICLE 20 RENEWAL OPTIONS.................................................33 i EXHIBITS Exhibit "A" - Description of the Land Exhibit "B" - Memorandum of Lease Exhibit "C" - Renewal Options Exhibit "D" - Depiction of Tenant's Warehouse Space and Landlord's Storage Area ii LEASE AGREEMENT THIS LEASE AGREEMENT (this "LEASE") is made as of the Commencement Date identified in ARTICLE A, Section 2(b) below by and between IPT PARTNERS, LLC, a California limited liability company ("Landlord"), and MARKETING SPECIALISTS SALES COMPANY, a Texas corporation ("TENANT"). W I T N E S S E T H: - - - - - - - - - - The parties hereto, for themselves, their heirs, distributees, executors, administrators, legal representatives, successors and assigns, hereby covenant as follows: ARTICLE A CERTAIN LEASE PROVISIONS 1. Address for 744 and 746 Eckoff Street the Premises: Orange, California 92868 2. (a) Initial Term: Approximately four (4) years, beginning on the Commencement Date and ending on the Expiration Date. As used in this Lease, the term "TERM" shall mean the Initial Term together with any renewal thereof. (b) Commencement Date: May 2, 2000. (c) Expiration Date: May 2, 2004, unless sooner terminated pursuant to this Lease. (d) Renewal Options: Two (2) options. The First Renewal Term (as defined in the EXHIBIT "C" attached to this Lease) will be 12 months. The Second Renewal Term (as defined in EXHIBIT "C") will be 60 months. 3. Fixed Rent: Tenant agrees to pay to Landlord as monthly rental for the Premises (as defined in ARTICLE B below) (such monthly rental is herein referred to as "FIXED RENT") in lawful money of the United States of America, at 1852 North Windes Drive, Orange, California 92869, or to such other person or entity and at such other place as Landlord may from time to time designate in writing, as follows: From the Commencement Date through the last day of the thirtieth (30th) full calendar month of the Initial Term, Tenant shall pay Fixed Rent in the amount of $42,428.00 in advance on the first day of each and every successive calendar month during such period of time. From the first day of the thirty-first (31st) full calendar month of Initial Term through the Expiration Date, Tenant shall pay Fixed Rent in the amount of $44,581.00 in advance on the first day of each and every successive calendar month during such period of time. 4. Tenant's Use of Premises: For general office and warehouse use and uses incidental thereto and for no other purpose without the prior written consent of Landlord. 1 5. Landlord's Use of Storage Area: For storage purposes of Landlord's vehicles and other items, including occasional engine and auto body rebuilding activities, and for no other purpose without the prior written consent of Tenant. This use will be permitted throughout the Term provided that Landlord, at Landlord's sole cost and expense, constructs the Demising Wall and Related Improvements (as defined in ARTICLE B below) within sixty (60) days after the Commencement Date. Tenant shall also permit Landlord (a) to saw-cut the concrete floor slab (the "FLOOR SLAB") leading from Tenant's existing restroom facilities within Tenant's Warehouse Space to Landlord's new restroom facilities to be constructed in Landlord's Storage Area, (b) to install new water and sewer lines (the "WATER AND SEWER LINES") by directly tapping into Tenant's utility lines, and (c) to restore all portions of the Premises affected by the construction of the Demising Wall and Related Improvements to their condition existing prior to the commencement of such construction (the "RESTORATION WORK"). If either (i) the installation of the Water and Sewer Lines impairs the ability of Tenant to obtain water and/or sewer service to Tenant's Warehouse Space, or (ii) Landlord does not substantially complete (A) the Demising Wall and Related Improvements within such 60-day period, and/or (B) the Restoration Work as soon as practicable but (1) in no event more than sixty (60) days after the Commencement Date with respect to the Restoration Work not related to the Floor Slab, and (2) with respect to the Restoration Work related to the Floor Slab, in no event more than ten (10) days after the date on which the Floor Slab has been saw-cut (all subject to extension if the construction and/or restoration is delayed by any Force Majeure Delays [as defined in Section 19.16 below]), Tenant shall have the right to complete the construction of the Demising Wall and Related Improvements and/or the Restoration Work and Landlord shall reimburse Tenant upon Landlord's receipt of a written demand for all costs and expenses incurred by Tenant in connection therewith. If Landlord fails to pay the amount of such costs and expenses within five (5) days after Landlord's receipt of any such written demand, Tenant shall have the right to offset against the next due installments of Rent the amount of such costs and expenses until such time as Tenant has been fully reimbursed for the same. Landlord covenants and agrees that, in connection with the construction of the Demising Wall and Related Improvements and the Restoration Work, (y) Landlord will use its best efforts to minimize the disruption to Tenant's business being conducted in Tenant's Warehouse Space, and (z) in no event will Tenant be required to move any of the racks, refrigerators or freezers located in the Tenant's Warehouse Space as of the Commencement Date. Notwithstanding anything to the contrary contained in this Lease, during the period of time that Landlord has a right pursuant to this Lease to use the Landlord's Storage Area, Tenant shall have no obligation to maintain or repair the Landlord's Storage Area. 2 6. Address for Notices: For Landlord: IPT Partners, LLC c/o Peter Swayne 1852 North Windes Drive Orange, California 92869 For Tenant: Marketing Specialists Sales Company 17855 Dallas Parkway Dallas, Texas 75287 Attention: Gage W. Hunt and Nancy K. Jagielski 3 ARTICLE B CERTAIN DEFINITIONS "ADDITIONAL RENT" is defined in SECTION 2.2. "ALTERATIONS" is defined in SECTION 5.4. "BANKRUPTCY CODE" means the provisions of 11 U.S.C. Section 101 et seq. or any statute of similar purpose or nature as more particularly set forth in SECTION 9.10. "BASE BUILDING COMPONENTS" means the foundation, the roof and the structural walls of the Building. "BUILDING" means the buildings, building equipment and improvements now or hereinafter erected on the Land. "BUSINESS DAY" is every day which most commercial banks based in New York, New York are open for the ordinary conduct of business. "CASUALTY REPAIR DELIVERY PERIOD" is defined in SECTION 7.2. "CLAIMS" is defined in SECTION 11.3. "CONTRACT OF SALE" is defined in SECTION 21.1. "COMMENCEMENT DATE" is set forth in ARTICLE A, SECTION 2(b). "DEFAULT RATE" means three percent (3%) over the prime reference rate announced from time to time by Citibank, N.A. in New York, New York, as such prime reference rate may be adjusted and announced from time to time, or if unavailable, the parties shall use the prime reference rate of any New York regional bank selected by Landlord. "DEMISING WALL AND RELATED IMPROVEMENTS" shall mean the double-sided wall to separate the Landlord's Storage Area and the Tenant's Warehouse Space, which wall shall be constructed at the location shown on the EXHIBIT "D" attached hereto, together with adequate, in-floor water and sewer utility lines to be constructed within Tenant's Warehouse Space and meters for the measurement of the usage of such utilities, as is also depicted and shall be in all respects acceptable to Tenant as evidenced by Tenant's written approval of the plans and specifications therefor prior to the commencement of the construction of the Demising Wall and Related Improvements (Tenant agrees to deliver to Landlord written notice of its approval or disapproval of such plans and specifications within three (3) business days after Tenant's receipt of a complete set of the same, and Tenant's failure to deliver such written notice within such period of time shall be deemed an approval of the same). "ENVIRONMENTAL LAWS" is defined in SECTION 18.9. "EVENT OF DEFAULT" is defined in SECTION 12.1. "EXPIRATION DATE" is defined in ARTICLE A, SECTION 2(c). "FIRST UNION CREDIT AGREEMENT" is defined in SECTION 21.2. "FIXED RENT" is defined in ARTICLE A, SECTION 3. "FORCE MAJEURE DELAYS" is defined in SECTION 19.16. 4 "HAZARDOUS SUBSTANCES" is defined in SECTION 18.10. "IMPOSITIONS" is defined in SECTION 3.1. "INDEMNIFIED PARTIES" is defined in SECTION 11.3. "INSURANCE COSTS" is defined in SECTION 7.3. "LAND" means that certain real property described on EXHIBIT "A" attached hereto and incorporated herein by this reference. "LANDLORD" is defined in the introductory paragraph to this Lease. "LANDLORD PARTIES" is defined in SECTION 6.2. "LANDLORD'S AWARD" is defined in SECTION 8.1. "LANDLORD'S REPAIR OBLIGATIONS" is defined in SECTION 5.2. "LANDLORD'S STORAGE AREA" shall mean the westerly portion of the Warehouse Building containing approximately 3,880 net rentable square feet of space, which space is located within the Warehouse Building as shown on the EXHIBIT "D" attached hereto and incorporated herein by this reference. "LEASE" means this lease made between Landlord, as landlord, and Tenant, as tenant. "MORTGAGE" is defined in SECTION 3.2. "MORTGAGEE" is defined in SECTION 3.2. "NON-DISTURBANCE AGREEMENT" is defined in SECTION 10.1. "OFFICE SPACE" shall mean the office space portion of the Building containing 37,350 net rentable square feet of space. "PERMITTED TRANSFER" shall mean either (i) a Transfer after Tenant's receipt of Landlord's prior written consent thereto, or (ii) a Permitted Transfer Without Landlord Consent. "PERMITTED TRANSFER WITHOUT LANDLORD CONSENT" is defined in SECTION 9.1 below. "PREMISES" means the Land and the Building. "PREMISES DELIVERY DATE" is defined in ARTICLE A, SECTION 2(b) above. "PROJECT EXPENSES is defined in SECTION 5.7. "REMEDIAL WORK" is defined in SECTION 18.7. "RENT" is defined in SECTION 2.3. "REQUIREMENTS" is defined in SECTION 11.1. "RESTORATION WORK" is defined in ARTICLE A, SECTION 5 above. "SUBTENANT" is defined in SECTION 9.5. 5 "TENANT" is defined in the introductory paragraph to this Lease. "TENANT'S EXPENSE PAYMENT" is defined in SECTION 5.6. "TENANT'S WAREHOUSE SPACE" shall mean the easterly portion of the Warehouse Building containing 6,540 net rentable square feet of space, which space is located within the Warehouse Building as shown on the EXHIBIT "D" attached hereto and incorporated herein by this reference. "TERM" is defined in ARTICLE A, SECTION 2(a). "TRANSFER" is defined in SECTION 9.1. "TRANSFEREE" means any assignee or purchaser of Tenant's interest in this Lease or any sublessee of all or any portion of the Premises. "UTILITIES" is defined in SECTION 5.2. "WAREHOUSE BUILDING" shall mean the warehouse building located on the Land as of the Commencement Date containing approximately 10,420 net rentable square feet of space. "WATER AND SEWER LINES" is defined in ARTICLE A, SECTION 5 above. ARTICLE 1 PREMISES AND TERM Section 1.1. During the Term, Landlord, in consideration of the rents herein reserved and of the terms, provisions, covenants and agreements on the part of Tenant to be kept, observed and performed, does hereby lease and demise the Premises unto Tenant, and Tenant does hereby hire and take the Premises from Landlord, subject to each and every matter affecting title to the Premises including, without limitation, all of the following which are in effect as of the Commencement Date: all easements, rights of way, covenants, conditions and restrictions, liens, encumbrances, encroachments, licenses, notices of pendency, charges, zoning laws, ordinances, regulations, building codes and other governmental laws, rules and orders affecting the Premises, and other exceptions to Landlord's title, whether or not the same are of public record. Tenant shall allow Landlord to use during the Term the Landlord's Storage Area for the purpose set forth in ARTICLE A, SECTION 5 above at such time as (a) the installation of the Water and Sewer Lines has been completed such that such lines do not impair the ability of Tenant to obtain water and/or sewer service to Tenant's Warehouse Space, and (b) Landlord has substantially completed the construction of (i) the Demising Wall and Related Improvements (or Tenant has completed such construction in the event Landlord fails to complete the same within 60 days after the Commencement Date), and (ii) the Restoration Work as soon as practicable but (1) in no event more than sixty (60) days after the Commencement Date with respect to the Restoration Work not related to the Floor Slab, and (2) with respect to the Restoration Work related to the Floor Slab, in no event more than ten (10) days after the date on which the Floor Slab has been saw-cut (or Tenant has completed such construction in the event Landlord fails to complete the same within 60-day or 10-day periods of time, as applicable). The parties hereto acknowledge and agree that the deadline for the satisfaction of Landlord's obligations with respect to the construction of the Demising Wall and Related Improvements and the completion of the Restoration Work is subject to a potential extension in the event of the occurrence of any Force Majeure Delays (as defined in SECTION 19.16 below). Section 1.2. Tenant shall lease the Premises for the Term, unless sooner terminated as hereinafter provided or pursuant to law. Section 1.3. Provided that Landlord substantially completes the construction of the Demising Wall within thirty (30) days after the Commencement Date, Landlord shall have access across the Land to the Landlord's Storage Area at all times during the Term. Landlord's entrance to the Landlord's Storage Area shall 6 be through the door of the Warehouse Building leading to the Landlord's Storage Area (which door is identified on the EXHIBIT "D" attached hereto) and not through the Tenant's Warehouse Space. ARTICLE 2 FIXED RENT AND ADDITIONAL RENT Section 2.1. Tenant shall pay to Landlord as Fixed Rent for the Premises during the Term the amounts stated in ARTICLE A, SECTION 3. Fixed Rent shall be payable in equal monthly installments in advance on the first day of each and every month during the Term, without previous demand therefor and without offset or deduction of any kind whatsoever. Notwithstanding the foregoing, Tenant shall pay the partial month's installment of Fixed Rent (with respect to the remaining days of the month in which this Lease is executed) upon the execution of this Lease. Section 2.2. Tenant shall also pay and discharge, as additional rent, all other amounts, liabilities and obligations of whatsoever nature relating to the Premises, including, without limitation, all Impositions (as defined in SECTION 3.1 below), all Project Expenses (as defined in SECTION 5.7 below) those arising under any common area maintenance agreements however denominated, easements, declarations, restrictions, or other similar agreements affecting the Premises or any adjoining property thereto, and all interest and penalties that may accrue thereon in the event of Tenant's failure to pay such amounts when due, and all damages, costs and expenses which Landlord may incur by reason of any default of Tenant or failure on Tenant's part to comply with the terms of this Lease, all of which Tenant hereby agrees to pay upon demand or as is otherwise provided herein (all of the foregoing together with any other amounts and charges payable by Tenant under this Lease in addition to Fixed Rent are herein collectively called "ADDITIONAL RENT"). Notwithstanding the foregoing or anything else to the contrary contained in this Lease, (i) Tenant shall have no obligation to pay for the cost of any utility services used by Landlord at the Landlord's Storage Area (the "STORAGE AREA UTILITIES") that are separately metered and billed directly to Landlord, and (ii) with respect to Storage Area Utilities that are not separately metered and are billed to Tenant together with such utility service used by Tenant at the Tenant's Warehouse Space, Landlord shall reimburse Tenant for Landlord's Proportionate Share (as hereinafter defined) of the cost of each such utility service billed to Tenant, which reimbursement shall be made within fifteen (15) days after Landlord's receipt of a bill therefor (which bill shall identify the total cost billed to Tenant for the applicable reimbursement period). As used herein, the term "LANDLORD'S PROPORTIONATE SHARE" shall mean 37.24%. If Landlord fails to reimburse Tenant for shared utility service as required by this Section, Tenant shall have the right to offset against the Fixed Rent due hereunder the amount of each such reimbursement payment not made by Landlord to Tenant as required hereunder. Upon any failure by Tenant to pay any of the Additional Rent, Landlord shall have all legal, equitable and contractual rights, powers and remedies provided either in this Lease or by statute or otherwise in the case of non-payment of the Fixed Rent. The term Additional Rent shall be deemed rent for all purposes hereunder other than with respect to Tenant's internal accounting procedures. Section 2.3. All Fixed Rent and Additional Rent payable hereunder (collectively, "RENT") shall be payable when due by wire transfer of immediately available funds to an account designated from time to time by Landlord. At Landlord's option upon Landlord's request, Rent shall be made in United States currency which shall be legal tender for all debts, public and private, payable to Landlord and sent to Landlord's address set forth in ARTICLE A, or to such other person or persons or at such other place as may be designated by notice from Landlord to Tenant, from time to time. Notwithstanding the foregoing, Impositions shall be payable to the parties to whom they are due, except as otherwise provided herein. ARTICLE 3 IMPOSITIONS Section 3.1. Except as provided to the contrary in SECTION 3.5 below, from and after the Commencement Date and throughout the Term, Tenant shall pay and discharge not later than twenty (20) days 7 before any fine, penalty, interest or cost may be added thereto for the non-payment thereof, all taxes, assessments, water rents, sewer rents and charges, duties, impositions, license and permit fees, charges for public utilities of any kind, payments and other charges of every kind and nature whatsoever, ordinary or extraordinary, foreseen or unforeseen, general or special, in said categories, together with any interest or penalties imposed upon the late payment thereof, which, pursuant to past, present or future law, during, prior to or after (but attributable to a period within) the Term, shall have been or shall be levied, charged, assessed, imposed upon or grow or become due and payable out of or for or have become a lien on the Premises or any part thereof, any improvements or personal property in or on the Premises, the Rent and income payable by Tenant or on account of any use of the Premises and such franchises as may be appurtenant to the use and occupation of the Premises (all of the foregoing being hereinafter referred to as "IMPOSITIONS"). Tenant, upon request from Landlord, shall submit to Landlord the proper and sufficient receipts or other evidence of payment and discharge of the same. If any Impositions are not paid when due under this Lease, Landlord shall have the right but shall not be obligated to pay the same following written notice to Tenant of such payment, provided Tenant does not contest the same as herein provided. If Landlord shall make such payment, Landlord shall thereupon be entitled to repayment by Tenant on demand as Additional Rent hereunder. Section 3.2. Tenant shall have the right to protest and contest any Impositions imposed against the Premises or any part thereof, provided (i) the same is done at Tenant's sole cost and expense, (ii) nonpayment will not subject the Premises or any part thereof to sale or other liability by reason of such nonpayment, (iii) such contest shall not subject Landlord or the holder (the "MORTGAGEE") of any mortgage or deed of trust (a "MORTGAGE") encumbering all or any part of the Premises to the risk of any criminal or civil liability, and (iv) Tenant shall provide such security as may reasonably be required by Landlord or any Mortgagee or under the terms of any Mortgage to ensure payment of such contested Imposition. Landlord agrees to execute and deliver to Tenant any and all documents reasonably required for such purpose and to cooperate with Tenant in every reasonable respect in such contest, but without any cost or expense to Landlord. Section 3.3. To the extent permitted by law, Tenant shall have the right to apply for the conversion of any Impositions to make the same payable in annual installments over a period of years, and upon such conversion Tenant shall pay and discharge said annual installments as they shall become due and payable. Tenant shall pay all such deferred installments prior to the expiration or sooner termination of the Term, notwithstanding that such installments shall not then be due and payable; PROVIDED, HOWEVER, that any Impositions (other than one converted by Tenant so as to be payable in annual installments as aforesaid) relating to a fiscal period of the taxing authority, a part of which is included in a period of time after the Expiration Date, shall (whether or not such Impositions shall be assessed, levied, confirmed, imposed or become payable, during the Term) be adjusted between Landlord and Tenant as of the Expiration Date, so that Landlord shall pay that portion of such Impositions which relate to that part of such fiscal period included in the period of time after the Expiration Date, and Tenant shall pay the remainder thereof. Section 3.4. If at any time during the Term, a tax or excise on Rent or other tax, however described, is levied or assessed with respect to the Rent or any part thereof (as opposed to the income of Landlord) or against Landlord as a substitute in whole or in part for any Impositions theretofore payable by Tenant, Tenant shall pay and discharge such tax or excise on Rent or other tax before it becomes delinquent, and the same shall be deemed to be an Imposition levied against the Premises. Section 3.5. Except as set forth in SECTION 3.4 above, Tenant shall not be obligated to pay any franchise, excise, corporate, estate, inheritance, succession, capital, levy or transfer tax of Landlord or any income, profits or revenue tax upon the income of Landlord. Notwithstanding anything to the contrary contained in this Lease, (a) Tenant shall not be obligated to pay either (i) documentary transfer taxes which shall be payable by Landlord or its successors or assigns, or (ii) any increase in real property taxes on the Premises caused by a reassessment of the value of the Premises due to a change of ownership in, or refinancing of, the Premises by Landlord or its successors or assigns (other than any increase resulting from Landlord's acquisition of the Premises), and any such increase shall be paid by Landlord or its successors or assigns prior to delinquency, and (b) special assessments levied for improvements with a useful life which extends beyond the Term shall be amortized over the useful life of the improvements and prorated based upon the remaining years 8 of the Term. All ad valorem tax incentives granted by the City of Orange, California or Orange County applicable to the Premises shall be applied as a credit to the amount of Impositions payable by Tenant pursuant to Section 3.1 above. Section 3.6. In the event that Landlord is required pursuant to the terms of any Mortgage to make monthly or other tax escrow payments to any Mortgagee or if an Event of Default shall occur and be continuing, Tenant agrees that, on demand made by Landlord, it shall: (i) deposit with Landlord or Mortgagee, on the day of demand and on the same day of each month thereafter until thirty (30) days prior to the date when the next installment of Impositions is due to the authority or other person to whom the same is paid, an amount equal to said next installment of Impositions divided by the number of months over which such deposits are to be made; and (ii) thereafter during the Term deposit with Landlord or Mortgagee an amount each month estimated by Landlord or Mortgagee to be adequate to create a fund which, as each succeeding installment of Impositions becomes due, will be sufficient, thirty (30) days prior to such due date, to pay such installment in full. Landlord or Mortgagee shall use reasonable efforts to cause the monthly deposits to be equal in amount, but neither of them shall be liable in the event that such required deposits are unequal. If at any time the amount of any Imposition is increased or Landlord or Mortgagee believes that it will be, said monthly deposits shall be increased upon demand by Landlord or Mortgagee so that, thirty (30) days prior to the due date for each installment of Impositions, there will be deposits on hand with Landlord or Mortgagee sufficient to pay such installments in full. To the extent permitted by applicable law, Landlord or Mortgagee shall not be required to deposit any such amounts in an interest bearing account. For the purpose of determining whether Landlord or Mortgagee has on hand sufficient moneys to pay any particular Imposition at least thirty (30) days prior to the due date therefor, deposits for each category of Imposition shall be treated separately, it being the intention that Landlord shall not be obligated to use moneys deposited for the payment of an item not yet due and payable to the payment of an item that is due and payable. Notwithstanding the foregoing, it is understood and agreed that (a) to the extent permitted by applicable law, deposits provided for hereunder may be held by Landlord or Mortgagee in a single bank account and commingled with other funds of Landlord or Mortgagee, and (b) Landlord or Mortgagee, may, if Tenant fails to make any deposit required hereunder, use deposits made for any one item for the payment of the same or any other item of Rent. If this Lease shall be terminated by reason of any Event of Default, all deposits then held by Landlord shall be applied by Landlord on account of any and all sums due under this Lease; if there is a resulting deficiency, Tenant shall pay the same, and if there is a surplus, Tenant shall be entitled to a refund of the surplus and Landlord shall pay the same to Tenant promptly upon any determination of such a surplus. Section 3.7. If Landlord ceases to have any interest in the Premises, Landlord shall transfer to the person or entity who owns or acquires such interest in the Premises from Landlord and is the transferee of this Lease, the deposits made pursuant to SECTION 3.6 hereof, subject, however, to the provisions thereof. Upon such transfer of the Premises, the transferor shall be deemed to be released from all liability with respect thereto and Tenant agrees to look to the transferee solely with respect thereto, and the provisions hereof shall apply to each successive transfer of the said deposits; PROVIDED, HOWEVER, that transferor shall not be released from liability unless Tenant either receives said deposits or said deposits continue to be held by Mortgagee for the benefit of transferee and Tenant. Section 3.8. The provisions of this ARTICLE 3 shall survive the expiration or earlier termination of this Lease. ARTICLE 4 USE AND OPERATION OF PREMISES Section 4.1. The Premises may be used and occupied only for the purposes set forth in ARTICLE A, SECTION 4. Landlord's Storage Area may be used by Landlord only for the purpose set forth in ARTICLE A, SECTION 5. Tenant shall not create or suffer to exist any public or private nuisance, hazardous or illegal condition or waste on or with respect to the Premises (other than the Landlord's Storage Area if such area is being used by Landlord). 9 Section 4.2. Except as expressly provided in this Lease, in no event shall Tenant use any area outside the Building other than for pedestrian and vehicular ingress and egress to and from the Building, other than for parking in the areas currently designated for parking, and other than to perform any of Tenant's obligations under this Lease requiring the use of such area. Tenant and its employees shall have access to the Premises (other than the Landlord's Storage Area if Landlord has a right pursuant to this Lease to use this area) 24 hours per day, 7 days per week throughout the Term. ARTICLE 5 CONDITION OF PREMISES, ALTERATIONS AND REPAIRS Section 5.1. Tenant has examined the Premises, is familiar with the physical condition, expenses, operation and maintenance, zoning, status of title and use that may be made of the Premises and every other matter or thing affecting or related to the Premises, and is leasing the same in its "AS IS" condition. Except as expressly provided to the contrary in this Lease, Landlord has not made and does not make any representations or warranties whatsoever with respect to the Premises or otherwise with respect to this Lease. Tenant assumes all risks resulting from any defects (patent or latent) in the Premises or from any failure of the same to comply with any governmental law or regulation applicable to the Premises or the uses or purposes for which the same may be occupied. Section 5.2. Tenant shall be solely responsible for obtaining any services and/or utilities used, consumed or provided in, furnished to or attributable to the Premises that Landlord has not expressly agreed to provide to Tenant pursuant to this Lease (all such services and/or utilities are collectively referred to as "UTILITIES"). Landlord shall, at Landlord's sole cost and expense, perform as soon as practicable all repairs needed to be performed to the structural elements and roof of the Building which are not required as a result of Tenant's actions ("LANDLORD'S REPAIR OBLIGATIONS"). With the exception of Landlord's Repair Obligations, Tenant shall be responsible for keeping the Premises clean and in good condition and repair and Tenant shall make all repairs and replacements, structural and non-structural, ordinary and extraordinary, foreseen and unforeseen, and shall perform all maintenance, necessary to maintain the Premises in good condition and repair, ordinary wear and tear and damage due to fire or other casualty excepted. Section 5.3. To the extent not prohibited by law, Tenant hereby waives and releases all rights now or hereinafter conferred by statute or otherwise which would have the effect of limiting or modifying any of the provisions of this ARTICLE 5. Section 5.4. Tenant shall have the right at any time and from time to time during the Term to make, at its sole cost and expense, changes, alterations, additions or improvements (collectively, "ALTERATIONS") in or to the Premises provided that Tenant first obtains Landlord's written consent thereto, which consent shall not be unreasonably withheld or delayed. Landlord will be able to withhold its consent, in its sole and absolute discretion, with respect to any Alterations in or to the Premises which (i) are made to or affect (A) the structural components of the Building, or (B) the systems of the Building, (ii) are visible from the exterior of the Building, or (iii) adversely affect the value of the Building. Section 5.5. All fixtures, structures and other improvements installed in or upon the Premises at any time during the Term (excluding, in any event, Tenant's trade fixtures, furniture, equipment and other movable personal property) shall become the property of Landlord and shall remain upon and be surrendered with the Premises unless Landlord, by notice to Tenant no later than ninety (90) days prior to the Expiration Date (or if this Lease is terminated earlier, then within thirty (30) days after the effective date of such termination), elects to have the same removed or demolished by Tenant, in which event, the same shall be removed from the Premises by Tenant by the Expiration Date (or if this Lease is terminated earlier, then within thirty (30) days after the effective date of such termination) at Tenant's expense. Prior to the commencement of any Alterations, Landlord will, upon written request by Tenant, notify Tenant in writing whether Landlord will require such Alterations to be removed from the Premises prior to the Expiration Date or earlier termination of this Lease. All property permitted or required to be removed by Tenant at the end of the Term remaining in the 10 Premises after Tenant's removal shall be deemed abandoned and may, at the election of Landlord, either be retained as Landlord's property or may be removed from the Premises by Landlord at Tenant's expense. Tenant shall be responsible for, and shall reimburse Landlord immediately after written demand therefor, any damage to the Premises caused in whole or in part by the removal or demolition of Tenant's fixtures, structures or other improvements which Tenant is required to remove pursuant to this SECTION 5.5 or which Tenant elects under the provisions of this Lease to remove. The provisions of this SECTION 5.5 shall survive the expiration or earlier termination of the Term. Section 5.6. In addition to Fixed Rent, Tenant shall pay as Additional Rent, all Project Expenses (as defined in SECTION 5.7 below) incurred by Landlord during the Term. Such payment shall hereafter be referred to as "TENANT'S EXPENSE PAYMENT". Landlord may, if it elects, either deliver to Tenant periodic statements of Tenant's Expense Payment or Landlord may estimate the amount of Tenant's Expense Payment payable by Tenant for any calendar year or any portion thereof. In the event Landlord elects to estimate Tenant's Expense Payment for any calendar year, Landlord shall provide written notice of the estimate of Tenant's Expense Payment for the applicable calendar year and the monthly installment due for each month during such calendar year at least thirty (30) days prior to the date such installments become due and payable. Tenant shall pay to Landlord, on the first day of each calendar month during any calendar year Landlord elects to estimate Tenant's Expense Payment, the amount of the applicable monthly installments, without demand. Landlord shall, on or before the first day of July of each calendar year, determine the actual Tenant's Expense Payment for the preceding calendar year and provide Tenant with written notice thereof. If Tenant's actual payments of estimated Tenant's Expense Payment are less than the actual Project Expenses for such year, then Tenant shall pay to Landlord the amount of the deficiency within thirty (30) days from the date of Landlord's notice of deficiency. Alternatively, if Tenant's actual payments of estimated Tenant's Expense Payments are greater than the actual Project Expenses for such year, then Landlord shall credit the amount of the surplus against the next accruing installments of Tenant's Expense Payment. Section 5.7. As used in this Lease, the term "PROJECT EXPENSES" shall mean all direct costs and expenses of ownership (excluding, however, any Impositions which are payable by Tenant as provided in ARTICLE 3 above), operation, security, protection, replacement, repair and maintenance of the Premises incurred by Landlord, as determined by sound, accrual basis, accounting principles consistently applied, and shall include all Insurance Costs (as defined in SECTION 7.3 below), accounting and legal fees, but shall not include costs and expenses that Landlord has specifically agreed to bear with no reimbursement from Tenant and the costs and expenses described in the immediately following sentence. Project Expenses shall not include any of the following: (a) interest and principal payments on loans secured by mortgages or deeds of trust covering all or any portion of the Premises, and other debt costs, if any, and rental under any ground lease or other underlying lease, if any, covering all or any portion of the Premises; (b) real estate broker's commissions payable in connection with this Lease; (c) any cost or expenditure (or portion thereof) for which Landlord is reimbursed, whether by insurance proceeds or otherwise (Tenant's Expense Payments are not reimbursements); (d) all costs incurred by Landlord in connection with the satisfaction of Landlord's Repair Obligations; (e) costs and expenses incurred in the management of the Premises and/or the administration of Landlord's rights and obligations under this Lease; (f) costs of improvements to, or alterations of, the Premises; (g) depreciation; (h) that portion of any cost or expense which is allocated by Landlord to, or is performed solely for the benefit of, any property owned or operated by Landlord other than the Premises; (i) legal, accounting and similar or related costs paid or incurred in connection with any sale, syndication, financing or refinancing involving the Building and/or the Premises or any of Landlord's interest therein; (j) any fees, fines, penalties and/or interest incurred by Landlord as a result of Landlord's noncompliance with any applicable laws; (k) any costs (including, without limitation, legal fees and expenses), fees, fines, penalties and/or interest incurred by Landlord as a result of Landlord's failure to pay any obligations of Landlord; (l) costs of disputes between Landlord and any third party regarding matters not related to the Premises; (m) costs of defending any lawsuits with Mortgagees or ground lessors of Landlord; (n) any debt losses, rent losses or reserves for bad debt; (o) costs related to Landlord's use and/or maintenance of the Landlord's Storage Area; and (p) costs or expenses related to Landlord's cleaning, removal, remediation or compliance required due to the existence of any hazardous or toxic materials in, on or affecting the Building and/or Land (including, without limitation, Hazardous Substances) unless such existence is caused by Tenant or its employees, sublessees or contractors. 11 ARTICLE 6 INSURANCE Section 6.1. Throughout the Term, Tenant shall, at its own cost and expense, provide and keep in force, for the benefit of Landlord, Tenant and any Mortgagee: (a) broad form commercial general liability insurance (including protective liability coverage on operations of independent contractors engaged in construction and blanket contractual liability insurance) protecting and indemnifying Landlord, Tenant and any Mortgagee against all claims for damages to person or property or for loss of life or of property occurring upon, in, or about the Premises, if any, written on a per-occurrence basis with an aggregate limit of not less than $2,000,000 and a per-occurrence limit of not less than $1,000,000, or such greater limits as may be required from time to time by any Mortgagee or as may be reasonably required from time to time by Landlord consistent with insurance coverage on properties similarly constructed, occupied and maintained. Such coverage shall contain endorsements: (i) including employees of Tenant as additional insureds; (ii) including cross-liability; and (iii) waiving the insurer's rights of subrogation against Landlord for events of which Landlord is not, but Tenant is, covered; (b) property insurance in respect of Tenant's property located at the Premises, insuring against loss or damage by fire and such other risks as are now or hereafter embraced by "extended coverage" policy in an amount sufficient to prevent Landlord and Tenant from becoming co-insurers and in any event in an amount not less than one hundred percent (100%) of the actual replacement value thereof as reasonably determined by Tenant from time to time. (c) worker's compensation insurance (including employers' liability insurance) covering all persons employed at the Premises by Tenant to the extent required by the laws of the State in which the Premises are located; and (d) such other or further insurance, in such amounts and in such form, as is customarily obtained by tenants at properties similarly constructed, occupied and maintained and that is available at commercially reasonable rates, or as otherwise reasonably required by any Mortgagee. Section 6.2. Whenever under the terms of this Lease Tenant is required to maintain insurance for the benefit of Landlord, (i) all Landlord Parties (as defined below) shall be an additional insured in all such liability insurance policies, and (ii) either Landlord or Mortgagee, as specified in SECTION 6.3, shall be named as loss payee in all such casualty insurance policies. In the event that the Premises shall be subject to a Mortgage, the commercial general liability insurance shall name the Mortgagee (together with any trustee or servicer therefor) as an additional insured and all other insurance provided hereunder shall name the Mortgagee as an additional insured or, as provided in SECTION 6.3, loss payee under a standard "non-contributory mortgagee" endorsement or its equivalent. All policies of insurance shall provide that such coverage shall be primary and that any insurance maintained separately by Landlord or the Mortgagee shall be excess insurance only. The original certificates and legible copies of the original policies (or binders therefor if the policies have not yet been prepared) shall be delivered to Landlord and any Mortgagee. All insurance shall contain endorsements to the effect that the act or omission of Tenant or Mortgagee, any occupancy or use of the Premises for purposes more hazardous than permitted by such policy, any foreclosure or other proceedings relating to the Premises or any change in title to or ownership of the Premises will not invalidate the policy as to Landlord or such Mortgagee. As used in this Lease, the term "LANDLORD PARTIES" shall mean (i) Landlord, (ii) any Mortgagee that has been identified to Tenant in a writing sent by Landlord or its agent or property manager, (iii) their respective shareholders, members, partners, affiliates and subsidiaries, and (iv) any directors, officers, employees, agents or contractors of such persons or entities. Section 6.3. All of the above-mentioned insurance policies and/or certificates shall be obtained by Tenant and delivered to Landlord on or prior to the date hereof, and thereafter as provided for herein, and shall be written by insurance companies: (i) rated B+/X or better in "Best's Insurance Guide" (or 12 any substitute guide acceptable to Landlord); (ii) authorized to do business in the state where the Premises are located; and (iii) of recognized responsibility and which are satisfactory to Landlord and any Mortgagee. Any deductible amounts under any casualty insurance policy hereunder shall not exceed $25,000.00 per occurrence. Section 6.4. At least thirty (30) days prior to the expiration of any policy or policies of such insurance, Tenant shall renew such insurance, by delivering to Landlord or Mortgagee, within the said period of time, the original policies or certificates of insurance, endorsed in accordance with SECTION 6.2 hereof, together with insurance binders evidencing the coverage described in this ARTICLE 6. All coverage described in this ARTICLE 6 shall be endorsed to provide Landlord and Mortgagee with at least thirty (30) days' notice of change in terms and at least ten (10) days' notice of cancellation or termination. If Tenant shall fail to procure the insurance required under this ARTICLE 6 in a timely fashion or to deliver such policies or certificates to Landlord, Landlord may, at its option, upon written notice to Tenant, procure the same for the account of Tenant, and the cost thereof shall be paid to Landlord as Additional Rent. Section 6.5. Tenant shall not violate, or permit to be violated, any of the conditions of any of the said policies of insurance, and Tenant shall perform and satisfy the requirements of the companies writing such policies so that companies of good standing, reasonably satisfactory to Landlord, shall be willing to write and/or continue such insurance. Section 6.6. Tenant shall not carry separate or additional insurance affecting the coverage described in this ARTICLE 6, concurrent in form and contributing in the event of any loss or damage to the Premises with any insurance required to be obtained by Tenant under this Lease, unless such separate or additional insurance shall comply with and conform to all of the provisions and conditions of this Article. Tenant shall promptly give notice to Landlord of such separate or additional insurance. Section 6.7. The insurance required by this Lease, at the option of Tenant, may be effected by blanket and/or umbrella policies issued to Tenant covering the Premises and other properties owned or leased by Tenant, provided that the policies otherwise comply with the provisions of this Lease and allocate to the Premises the specified coverage, without possibility of reduction or coinsurance by reason of, or damage to, any other premises named therein, and if the insurance required by this Lease shall be effected by any such blanket or umbrella policies, Tenant shall furnish to Landlord or Mortgagee certified copies or duplicate originals of such policies in place of the originals, with schedules thereto attached showing the amount of insurance afforded by such policies applicable to the Premises. ARTICLE 7 DAMAGE OR DESTRUCTION Section 7.1. In the event the Building is damaged by fire or other insured casualty and the insurance proceeds have been made available therefor by the holder or holders of any Mortgages covering the Building, the damage shall be repaired by and at the expense of Landlord to the extent of such insurance proceeds available therefor, provided such repairs can, in Landlord's sole opinion be made within one hundred eighty (180) days after the occurrence of such damage without the payment of overtime or other premiums. Until such repairs are completed, Fixed Rent shall be abated effective as of the date of such fire or other casualty in proportion to the part of the Building which is unusable by Tenant in the conduct of its business; provided, however, if the damage is due to the fault or neglect of Tenant or its employees, agents or invitees, there shall be no abatement of Fixed Rent unless Landlord has received loss of rental insurance proceeds intended to replace the Fixed Rent due hereunder. If repairs cannot, in Landlord's sole opinion reasonably exercised, be made within one hundred eighty (180) days after the occurrence of such damage, Landlord may, at its option, make them within a reasonable time, and in such event, this Lease shall continue in effect and Fixed Rent shall be abated in the manner provided in the immediately preceding sentence. In the case of repairs which, in Landlord's opinion reasonably exercised, cannot be made within such one hundred eighty (180) day period, Landlord shall notify Tenant within sixty (60) days of the date of occurrence of such damage as to whether or not Landlord will make such repairs. If (a) Landlord elects not to make such repairs which cannot be made 13 within such one hundred eighty (180) day period, (b) Landlord fails to give Tenant written notice of Landlord's intention to make or not to make such repairs and such failure continues for ten (10) days after Landlord's receipt of written notice of such failure, or (c) such damage occurs during the last eighteen (18) months of the Term, then either party may, by written notice to the other, terminate this Lease as of the date of the occurrence of such damage, and Landlord shall have no liability to Tenant for failure to make such repairs except for abatement of Fixed Rent. Except as provided in this SECTION 7.1, there shall be no abatement of Fixed Rent and no liability of Landlord by reason of any injury to or interference with Tenant's business or property arising from the making of any repairs, alterations or improvements in or to any portion of the Building, or in or to fixtures, appurtenances and equipment located therein, and, in any event, there shall be no liability of Landlord should repairs require more than one hundred eighty (180) days for completion. Tenant acknowledges and agrees that (i) Landlord will not carry insurance of any kind on (1) Tenant's furnishings or furniture, or (2) any fixtures or equipment removable by Tenant under the provisions of this Lease, and (ii) Landlord shall not be required to repair any injury or damage caused by fire or other cause, or to make any repairs or replacements to or of improvements installed in the Building by or for Tenant, all of which shall be the sole responsibility of Tenant. Section 7.2. If Landlord is obligated to repair damage to the Building pursuant to SECTION 7.1, Landlord shall use reasonable efforts to complete or cause the completion of the repairs to the same on or before the expiration of the Casualty Repair Delivery Period (as defined below in this paragraph). Notwithstanding anything else to the contrary contained in this Lease, if Landlord, for any reason whatsoever, cannot complete or cause the completion of the repair of the applicable damage to the Building such that the Building is usable by Tenant for the purposes identified in ARTICLE A, SECTION 4 above on or before the last day of the Casualty Repair Delivery Period, then Landlord shall not be liable to Tenant for any loss or damage resulting therefrom, but Tenant shall, as its sole and exclusive remedy, have the right to terminate this Lease by giving Landlord written notice thereof within thirty (30) days after the expiration of the Casualty Repair Delivery Period and in any event prior to Landlord's delivery of possession of the Building to Tenant in such a usable condition. As used herein, the term "CASUALTY REPAIR DELIVERY PERIOD" shall mean the period of time beginning on the date the Building has been damaged by fire or other insured casualty and ending on the last day of the ninth (9th) calendar month following the date of such damage. Section 7.3. Landlord covenants and agrees that throughout the Term it will insure the Building (excluding excavation, foundation, footings and underground flues and drains) and the machinery, boilers and equipment contained therein owned by Landlord (excluding any property with respect to which Tenant is obligated to insure pursuant to the provisions of ARTICLE 6 above) against damage by fire and extended perils coverage in an amount equal to the full replacement value of such insured portions of the Building. Tenant shall reimburse Landlord for the costs of such insurance (herein referred to as "INSURANCE COSTS") within thirty (30) days after Tenant's receipt of written evidence of the amount of such costs paid by Landlord. Notwithstanding Tenant's payment of the cost of insurance premiums as provided herein, Tenant acknowledges that it has no right to receive any proceeds from any such insurance policies carried by Landlord and that such insurance will be for the sole benefit of Landlord with no coverage for Tenant for any risk against which insurance has been obtained. Section 7.4. All fire, extended coverage and/or damage insurance which must be carried by Landlord and Tenant shall be endorsed with a subrogation clause substantially as follows: "This insurance shall not be invalidated should the insured waive in writing, prior to a loss, any or all right of recovery against any party for loss occurring to the property described herein." Landlord and Tenant each hereby waives any rights it may have against the other (including, but not limited to, a direct action for damages) on account of any loss or damage occasioned to Landlord or Tenant, as the case may be (WHETHER OR NOT SUCH LOSS OR DAMAGE IS CAUSED BY THE FAULT, NEGLIGENCE OR OTHER TORTIOUS CONDUCT, ACTS OR OMISSIONS OF LANDLORD OR TENANT OR THEIR RESPECTIVE OFFICERS, PARTNERS, DIRECTORS, EMPLOYEES, SERVANTS AGENTS OR INVITEES), to their respective property, the Premises or its contents arising from any risk covered by any insurance required to be carried by Tenant and Landlord, respectively, pursuant to this Lease. Without in any way limiting the foregoing waivers and to the extent permitted by applicable law, the parties hereto each, on behalf of their respective insurance companies 14 insuring the property of either Landlord or Tenant against any such loss, waive any right of subrogation that Landlord or Tenant or their respective insurers may have against the other party or their respective officers, directors, employees, agents or invitees and all rights of their respective insurance companies based upon an assignment from its insured. Each party to this Lease agrees immediately to give to each such insurance company written notification of the terms of the mutual waivers contained in this Section and to have said insurance policies properly endorsed, if necessary, to prevent the invalidation of said insurance coverage by reason of said waivers. The foregoing waivers shall be effective whether or not the parties maintain the required insurance. ARTICLE 8 CONDEMNATION Section 8.1. If the Premises, or a substantial part thereof, shall be lawfully taken or condemned (or conveyed under threat of such taking or condemnation) for any public or quasi-public use or purpose, then (i) the term of this Lease shall terminate on, and not before, the date of the taking of possession by the condemning authority, and without apportionment of the award, and (ii) current Rent due hereunder shall be apportioned as of the date of such termination. In the event a taking or condemnation results in a permanent loss of adequate parking on the Land or a permanent deprivation of access to the Premises, then this Lease may be terminated at the election of Tenant, which election shall be made by Tenant's delivery of written notice thereof to Landlord within thirty (30) days after the date of such taking or condemnation. No money or other consideration shall be payable by Landlord to Tenant for the right of termination, and Tenant hereby waives any right Tenant may have to share in, and assigns to Landlord Tenant's interest, if any, in, any (1) condemnation award as a result of such taking or condemnation, (2) judgment for damages based on such taking or condemnation, or (3) proceeds of any sale made under any threat of condemnation or taking (the award, damages or proceeds described in subparts (1) through (3) of this paragraph are herein collectively referred to as "LANDLORD'S AWARD"). Section 8.2. If any part of the Premises not constituting a substantial part of the Premises shall be so taken or condemned (or conveyed under threat of such taking or condemnation), or if the grade of any street adjacent to the Building is changed by any competent authority and such taking or change of grade makes it necessary or desirable to substantially remodel or restore the Building, Landlord shall have the right to terminate this Lease upon not less than ninety (90) days notice prior to the date of termination designated in the notice. In the event this Lease is not terminated by Landlord pursuant to the preceding sentence, then (a) this Lease shall continue in full force and effect without abatement or reduction of rental due hereunder except in the event a portion of the Premises has been taken or condemned, in which case Fixed Rent shall be equitably adjusted, and (b) Landlord shall, within a reasonable time and at the sole cost and expense of Landlord to the extent of the applicable Landlord's Award, restore or remodel the Building and, if applicable, the Premises. Section 8.3. Except as provided in this ARTICLE 8, there shall be no reduction of Fixed Rent and no liability of Landlord by reason of any injury to, or interference with, Tenant's business or property arising from the making of any repairs, alterations or improvements in or to any portion of the Premises following a taking or condemnation of the same, or in or to fixtures, appurtenances and equipment located therein. Notwithstanding anything to the contrary contained herein, Tenant shall have the right to recover from any condemning authority, through a separate award which does not reduce Landlord's Award, any compensation as may be awarded to Tenant on account of moving and relocation expenses and depreciation to and removal of Tenant's physical property from the Premises. ARTICLE 9 ASSIGNMENT AND SUBLETTING Section 9.1. Except in strict accordance with the provisions of this Article 9, Tenant shall not sell, assign, sublease or otherwise transfer, directly or indirectly (each a "TRANSFER"), all or any portion of 15 Tenant's interest in this Lease or the Premises without Landlord's prior written consent, which written consent shall not be unreasonably withheld or delayed. Landlord and Tenant agree that no corporate reorganization of Tenant, or any merger, consolidation, take-over, buy-out or other change in the corporate structure or effective voting control of Tenant shall be deemed a prohibited Transfer under this SECTION 9.1 so long as (y) Tenant has at least the amount of net worth immediately after the transaction as Tenant has immediately prior to the transaction and (z) Tenant provides written notice to Landlord describing in reasonable detail the nature of such transaction, the name, address and state of formation of the surviving entity and the ownership of Tenant. Any assignment or subletting permitted without Landlord's prior written consent as provided above (a "PERMITTED TRANSFER WITHOUT LANDLORD CONSENT") shall not release Tenant from any of its obligations under this Lease. If the common stock of Tenant or of any corporation which controls Tenant ever becomes the subject of a public offering, such issuance of shares and/or subsequent trading of stock in Tenant shall not be deemed a prohibited transfer under this SECTION 9.1. For purposes of this ARTICLE 9, the terms "CONTROL" or "CONTROLS" shall mean possession, direct or indirect, of the power to direct or to cause the direction of, the management and policies of any person or entity, whether through the ownership of voting securities, or partnership interest, by contract or otherwise. Without limiting in any way Landlord's right to withhold its consent on any reasonable grounds, it is agreed that Landlord will not be acting unreasonably in refusing to consent to an assignment or sublease if, (a) the proposed assignment or sublease involves a change of use of the Premises from that specified herein, (b) the proposed assignee or subtenant is not, in Landlord's reasonable opinion, of reputable or good character (for the purposes of this Lease, Landlord shall be conclusively deemed to have reasonably exercised its discretion to withhold its consent to an assignment or subletting to a person or entity that is not of the character, quality or financial strength of a tenant to whom Landlord would generally lease space of a comparable size and quality as the Premises), (c) a Mortgagee does not approve such assignment or sublease after being requested to approve the same, or (d) in the case of a subletting, the subletting shall not be expressly subject to all of the provisions of this Lease and the obligations of Tenant hereunder and shall not further provide that if Landlord shall recover or come into possession of the Premises before the expiration of this Lease, Landlord shall have the right to take over the sublease and to have it become a direct lease with Landlord, in which case Landlord shall succeed to all of the rights of Tenant, as sublessor, thereunder and that in such case subtenant shall be bound to Landlord for the balance of the term of the sublease and shall attorn to and recognize Landlord as its landlord under the sublease under all of the then executory terms of the sublease, except that Landlord will not (i) be liable for any previous acts or omissions of Tenant, as sublessor, (ii) be subject to any claims of subtenant not expressly set forth in the sublease, (iii) be bound by any modification of the sublease for which Landlord shall have not expressly consented, or (iv) be obligated to perform any repairs or other work beyond Landlord's obligations under this Lease. Tenant acknowledges and agrees (again without in any way limiting Landlord's right to withhold its consent on reasonable grounds) that Landlord may also withhold its consent to a Transfer based on any one or more of the following: (1) Tenant's failure to satisfy its obligations in SECTION 9.3 below; (2) at the time thereof an Event of Default has occurred and is continuing; or (3) the fact that the instrument effecting the proposed Transfer is not in form and content reasonably satisfactory to Landlord. Section 9.2. Notwithstanding the provisions of SECTION 9.1 above, Tenant shall not be required to obtain the prior consent of Landlord for any sublease of a part (but not all) of the Premises, which sublease is ordinary and incidental to Tenant's business as such business has been run prior to the inception of this Lease. In the event of a proposed sublease which is either inconsistent with the ordinary and incidental operations of Tenant's business, or which does not fall within the foregoing parameters of this SECTION 9.2, such shall not be allowed without Landlord's prior written consent in each instance, which consent shall not be unreasonably withheld or delayed. Section 9.3. If Tenant shall desire Landlord's consent to a Transfer, Landlord shall be given not less than thirty (30) days' advance written notice of the proposed effective date of such Transfer, which notice shall be delivered to Landlord together with (i) either an executed counterpart or, if unavailable, a copy of the proposed instrument(s) of the Transfer and (ii) such other documents and information as Landlord may reasonably request. Section 9.4. Any consent by Landlord under this ARTICLE 9 shall apply only to the specific transaction thereby authorized and shall not relieve Tenant from the requirement of obtaining the prior written 16 consent of Landlord to any further Transfer of this Lease. No Transfer of all or a portion of this Lease shall release or relieve the transferor from any obligations of Tenant hereunder, and the transferor shall remain liable for the performance of all obligations of Tenant hereunder. Section 9.5. Tenant shall cause each subtenant permitted pursuant to this Article 9 (a "SUBTENANT") to comply with its obligations under its respective sublease, and Tenant shall diligently enforce all of its rights as the landlord thereunder in accordance with the terms of such sublease and this Lease. Section 9.6. The fact that a violation or breach of any of the terms, provisions or conditions of this Lease results from or is caused by an act or omission by any of the Subtenants shall not relieve Tenant of Tenant's obligation to cure the same. Tenant shall take all necessary steps to prevent any such violation or breach. Section 9.7. If this Lease is assigned, or if the Premises or any part thereof is subleased or occupied by anybody other than Tenant, Landlord may, after the occurrence and during the continuance of an Event of Default by Tenant, collect Rent from the assignee or Subtenants, and apply the net amount collected to the Rent herein reserved, but no such assignment, sublease, occupancy or collection shall be deemed a waiver of this covenant, or the acceptance of the assignee or Subtenant as tenant, or a release of Tenant from the further performance by Tenant of the terms, covenants, and conditions on the part of Tenant to be observed or performed hereunder. After any assignment or subletting, Tenant's liability hereunder shall continue notwithstanding any subsequent modification or amendment hereof or the release of any subsequent tenant hereunder from any liability, to all of which Tenant hereby consents in advance. The consent by Landlord to any Transfer shall not in any way be construed to relieve Tenant from obtaining the express written consent of Landlord to any further Transfer. Section 9.8. To secure the prompt and full payment by Tenant of the Rent and the faithful performance by Tenant of all the other terms and conditions herein contained on its part to be kept and performed, Tenant hereby assigns, transfers and sets over unto Landlord, subject to the conditions hereinafter set forth, all of Tenant's right, title and interest in and to all Subleases and hereby confers upon Landlord, its agents and representatives, a right of entry in, and sufficient possession of, the Premises to permit and insure the collection by Landlord of the rentals and other sums payable under the Subleases, and further agrees that the exercise of said right of entry and qualified possession by Landlord shall not constitute an eviction of Tenant from the Premises or any portion thereof and that should said right of entry and possession be denied Landlord, its agent or representative, Landlord, in the exercise of said right, may use all requisite force to gain and enjoy the same without responsibility or liability to Tenant, its servants, employees, guests or invitees, or any Person whomsoever; provided, however that such assignment shall become operative and effective only if (a) an Event of Default shall occur or (b) this Lease and the Term shall be canceled or terminated pursuant to the terms, covenants and conditions hereof or (c) there occurs repossession under a dispossess warrant or other re-entry or repossession by Landlord under the provisions hereof or (d) a receiver for the Premises is appointed, and then only as to such of the subleases that Landlord may elect to take over and assume. At any time and from time to time upon Landlord's demand, Tenant promptly shall deliver to Landlord a schedule of all subleases, setting forth the names of all Subtenants, with a photostatic copy of each of the subleases. Upon reasonable request of Landlord, Tenant shall permit Landlord and its agents and representatives to inspect all subleases affecting the Premises. Tenant covenants that each sublease shall provide that the Subtenant thereunder shall be required from time to time, upon request of Landlord or Tenant, to execute, acknowledge and deliver, to and for the benefit of Landlord, an estoppel certificate confirming with respect to such sublease the information set forth in SECTION 14.1 hereof. Section 9.9. Tenant covenants and agrees that all subleases hereafter entered into affecting the Premises shall provide that (a) they are subject to this Lease, (b) the term thereof should end not less than one (1) day prior to the Expiration Date hereof, unless Landlord shall consent otherwise, which consent may be withheld in Landlord's sole discretion, (c) the Subtenants will not do, authorize or execute any act, deed or thing whatsoever or fail to take any such action which will or may cause Tenant to be in violation of any of its obligations under this Lease, (d) the Subtenants will not pay rent or other sums under the subleases with Tenant 17 for more than one (1) month in advance, (e) the Subtenants shall give to Landlord at the address and otherwise in the manner specified in SECTION 19.8 hereof, a copy of any notice of default by Tenant as the landlord under the subleases at the same time as, and whenever, any such notice of default shall be given by the Subtenants to Tenant, and (f) in the event of the termination or expiration of this Lease prior to the Expiration Date hereof, any such Subtenant, at Landlord's election, shall be obligated to attorn to and recognize Landlord as the lessor under such Sublease, in which event such Sublease shall continue in full force and effect as a direct lease between Landlord and the Subtenant upon all the terms and conditions of such Sublease, except as hereinafter provided. Any attornment required by Landlord of such Subtenant shall be effective and self-operative as of the date of any such termination or expiration of this Lease without the execution of any further instrument; PROVIDED, HOWEVER, that such Subtenant shall agree, upon the request of Landlord, to execute and deliver any such instruments in recordable form and otherwise in form and substance satisfactory to Landlord to evidence such attornment. With respect to any attornment required by Landlord of any Subtenant hereunder, (i) at the option of Landlord, Landlord shall recognize all rights of Tenant as the lessor under such sublease and the Subtenant thereunder shall be obligated to Landlord to perform all of the obligations of the Subtenant under such sublease and (ii) Landlord shall have no liability, prior to its becoming lessor under such Sublease, to such Subtenant nor shall the performance by such Subtenant of its obligations under the sublease, whether prior to or after any such attornment, be subject to any defense, counterclaim or setoff by reason of any default by Tenant in the performance of any obligation to be performed by Tenant as lessor under such sublease, nor shall Landlord be bound by any prepayment of more than one (1) month's rent unless such prepayment shall have been expressly approved in writing by Landlord. The provisions of this SECTION 9.9 shall survive the expiration or earlier termination of the Term. Section 9.10. If Tenant assumes this Lease and proposes to assign the same pursuant to the provisions of Title 11 of the United States Code or any statute of similar purpose or nature (the "BANKRUPTCY CODE") to any person or entity who shall have made a BONA FIDE offer to accept an assignment of this Lease on terms acceptable to Tenant, then notice of such proposed assignment shall be given to Landlord by Tenant no later than twenty (20) days after receipt of such offer by Tenant, but in any event no later than ten (10) days prior to the date that Tenant shall file any application or motion with a court of competent jurisdiction for authority and approval to enter into such assumption and assignment. Such notice shall set forth (a) the name and address of the assignee, (b) all of the terms and conditions of such offer, and (c) the proposal for providing adequate assurance of future performance by such person under the Lease, including, without limitation, the assurance referred to in Section 365 of the Bankruptcy Code. Any person or entity to which this Lease is assigned pursuant to the provisions of the Bankruptcy Code shall be deemed without further act or deed to have assumed all of the obligations arising under this Lease from and after the date of such assignment. Any such assignee shall execute and deliver to Landlord upon demand an instrument confirming such assumption. Section 9.11. The provisions of SECTIONS 9.8, 9.9 and 9.10 hereof shall survive the expiration or earlier termination of this Lease. Section 9.12. In no event shall Tenant mortgage, encumber, pledge, grant a security interest in, collaterally assign or conditionally transfer this Lease or removable trade fixtures incorporated in or used in connection with the Premises or any Subleases or any of the rents, issues and profits therefrom, other than the grant of a security interest in Tenant's leasehold interest. ARTICLE 10 SUBORDINATION Section 10.1. This Lease shall be subject and subordinate to all Mortgages now or hereinafter in effect and to all renewals, modifications, consolidations, replacements and extensions of any such Mortgages; PROVIDED, HOWEVER, that the Mortgagee of such Mortgage shall execute and deliver to Tenant an agreement to the effect that, if there shall be a foreclosure of its Mortgage, such Mortgagee will not make Tenant a party defendant to such foreclosure, unless necessary under applicable law for the Mortgagee to foreclose, or if there shall be a foreclosure of such Mortgage, such Mortgagee shall not evict Tenant, disturb Tenant's leasehold 18 estate or rights hereunder, in all events provided that no Event of Default then exists (any such agreement, or any agreement of similar import, from a Mortgagee being hereinafter called a "NON-DISTURBANCE AGREEMENT"), and Tenant shall attorn to the Mortgagee or any successor-in-interest to Landlord or the Mortgagee. This SECTION 10.1 shall be self-operative and no further instrument of subordination other than a Non-Disturbance Agreement shall be required to make the interest of any Mortgagee superior to the interest of Tenant hereunder. Notwithstanding the previous sentence, however, Tenant shall, together with the Mortgagee, execute and deliver promptly each Non-Disturbance Agreement that Landlord may request to effect such subordination. If Tenant fails to execute and deliver to Landlord any Non-Disturbance Agreement delivered to Tenant for Tenant's execution within ten (10) days after Tenant's receipt of the same, (1) such failure shall constitute an Event of Default hereunder until such time as it has been delivered to Landlord, (2) Tenant shall be deemed to have agreed to all of the terms and provisions of such Non-Disturbance Agreement, and (3) Tenant shall thereafter be estopped from disclaiming any of the obligations, benefits and burdens set forth therein including, without limitation, (i) the subordination of this Lease to any deed of trust, mortgage, ground lease or similar instruments, (ii) any non-disturbance rights provided to Tenant therein, and (iii) any attornment agreements of Tenant set forth therein. If, in connection with the financing of the Premises, any lending institution or Landlord shall request reasonable modifications of this Lease that do not increase the monetary obligations of Tenant under this Lease or materially increase the other obligations of Tenant under this Lease or materially and adversely affect the rights of Tenant under this Lease, Tenant shall make such modifications. The standards (i.e., time and manner of giving such consent and standard of reasonableness, if applicable) of a Mortgagee's consent with respect to this Lease shall be materially consistent with those to which Landlord is subject under this Lease. Any Non-Disturbance Agreement may be made on the condition that neither the Mortgagee nor anyone claiming by, through or under such Mortgagee shall be: (a) liable for any act or omission of any prior Landlord (including, without limitation, the then defaulting Landlord); (b) bound by any payment of Rent which Tenant might have paid for more than the current month to any prior Landlord (including, without limitation, the then defaulting Landlord); (c) bound by any obligation to make any payment to Tenant which was required to be made prior to the time such Landlord succeeded to any prior Landlord's interest other than the reimbursement payments required to made to Tenant in ARTICLE 2 above; (d) bound by any obligation to perform any work or to make improvements to the Premises other than the obligations of the Landlord set forth in this Lease; (e) bound by any modification, amendment or supplement to this Lease made without the prior written consent of the Mortgagee; or (f) bound by any security deposit for Tenant's obligations under this Lease unless such deposit is actually received by Mortgagee. If required by any Mortgagee, Tenant promptly shall join in any Non-Disturbance Agreement to indicate its concurrence with the provisions thereof and its agreement, in the event of a foreclosure of any Mortgage to attorn to such Mortgagee, as Tenant's landlord hereunder. Tenant shall promptly so accept, execute and deliver any Non-Disturbance Agreement proposed by any Mortgagee which conforms with the provisions of this SECTION 10.1. Any Non-Disturbance Agreement may also contain other terms and conditions as may otherwise be required by any Mortgagee which do not increase Tenant's monetary obligations or materially and adversely affect the rights or obligations of Tenant under this Lease. Section 10.2. Provided Tenant has received written notice of the name and address for notices of a Mortgagee, Tenant agrees to give to such Mortgagee copies of all notices given by Tenant of default by Landlord under this Lease at the same time and in the same manner as, and whenever, Tenant shall give any such notice of default to Landlord. Such Mortgagee shall have the right to remedy any default under this Lease, 19 or to cause any default of Landlord under this Lease to be remedied, and for such purpose Tenant hereby grants such Mortgagee such period of time as may be reasonable to enable such Mortgagee to remedy, or cause to be remedied, any such default in addition to the period given to Landlord for remedying, or causing to be remedied, any such default which is a default. Tenant shall accept performance by such Mortgagee of any term, covenant, condition or agreement to be performed by Landlord under the Lease with the same force and effect as though performed by Landlord. No default under the Lease shall exist or shall be deemed to exist (i) as long as such Mortgagee, in good faith, shall have commenced to cure such default and shall be prosecuting the same to completion with reasonable diligence, subject to Force Majeure Delays (as defined in SECTION 19.16 below), or (ii) if possession of the Premises is required in order to cure such default, or if such default is not susceptible of being cured by such Mortgagee, as long as such Mortgagee, in good faith, shall have notified Tenant that such Mortgagee intends to institute proceedings under the Mortgage and, thereafter, as long as such proceedings shall have been instituted and shall prosecute the same with reasonable diligence and, after having obtained possession, prosecutes the cure to completion with reasonable diligence. The Lease shall not be assigned (subject to the provisions of ARTICLE 9) by Tenant or modified, amended or terminated without such Mortgagee's prior written consent in each instance. In the event of the termination of the Lease by reason of any default thereunder or for any other reason whatsoever except the expiration thereof, upon such Mortgagee's written request, given within thirty (30) days after any such termination, Tenant, within fifteen (15) days after receipt of such request, shall execute and deliver to such Mortgagee or its designee or nominee a new lease of the Premises for the remainder of the Term of the Lease upon all of the terms, covenants and conditions of this Lease. Neither such Mortgagee nor its designee or nominee shall become liable under the Lease unless and until such Mortgagee or its designee or nominee becomes, and then only for so long as such Mortgagee or its designee or nominee remains, the fee owner of the Premises. Such Mortgagee shall have the right, without Tenant's consent, to foreclose the Mortgage or to accept a deed in lieu of foreclosure of such Mortgage. ARTICLE 11 OBLIGATIONS OF TENANT Section 11.1. Tenant shall promptly comply with all laws, ordinances, orders, rules, regulations, and requirements of all Federal, state, municipal or other governmental or quasi-governmental authorities or bodies then having jurisdiction over the Premises (or any part thereof) and/or the use and occupation thereof by Tenant which relate to Tenant's use and/or occupancy of the Premises, whether any of the same relate to or require (i) structural changes to or in and about the Premises, or (ii) changes or requirements incident to or as the result of any use or occupation thereof or otherwise (collectively, the "REQUIREMENTS"), and subject to ARTICLE 7, Tenant shall so perform and comply, whether or not such laws, ordinances, orders, rules, regulations or requirements shall now exist or shall hereafter be enacted or promulgated and whether or not the same may be said to be within the present contemplation of the parties hereto provided that the same relate to Tenant's use and/or occupancy of the Premises. Notwithstanding anything to the contrary contained in this Lease, during the period of time, if any, in which Landlord has a right pursuant to this Lease to use the Landlord's Storage Area, Tenant shall have no obligations or liabilities with respect to violations and/or noncompliance with any Requirements which result from either (1) the condition of the Landlord's Storage Area, or (2) the use or occupancy of the Landlord's Storage Area. Section 11.2. Tenant agrees to give Landlord notice of any law, ordinance, rule, regulation or requirement enacted, passed, promulgated, made, issued or adopted by any of the governmental departments or agencies or authorities hereinbefore mentioned affecting in a material adverse manner (i) the Premises, (ii) Tenant's use thereof, or (iii) the financial condition of Tenant, a copy of which is served upon or received by Tenant, or a copy of which is posted on, or fastened or attached to the Premises, or otherwise brought to the attention of Tenant, by mailing within five (5) business days after such service, receipt, posting, fastening or attaching or after the same otherwise comes to the attention of Tenant, a copy of each and every one thereof to Landlord. At the same time, Tenant will inform Landlord as to the work which Tenant proposes to do or take in order to comply therewith (excluding, however, any work required with respect to the Landlord's Storage Area if Landlord then has a right pursuant to this Lease to use such area). Notwithstanding the foregoing, however, if such work would require any Alterations which would, in Landlord's opinion, reduce the value of the Premises 20 or change the general character, design or use of the Building or other improvements thereon, and if Tenant does not desire to contest the same, Tenant shall, if Landlord so requests, defer compliance therewith in order that Landlord may, if Landlord wishes, contest or seek modification of or other relief with respect to such Requirements, so long as Tenant is not put in violation of any law, ordinance, rule, regulation or requirement enacted, passed, promulgated, made, issued or adopted by any such governmental departments or agencies or authorities, but nothing herein shall relieve Tenant of the duty and obligation, at Tenant's expense, to comply with such Requirements, or such Requirements as modified, whenever Landlord shall so direct. Section 11.3. Except in the case of the gross negligence or willful misconduct of Landlord or its agents, BUT SPECIFICALLY INCLUDING SUCH PARTY'S NEGLIGENCE OTHER THAN GROSS NEGLIGENCE, Tenant shall defend, indemnify and save harmless Landlord, any partners of Landlord, any partners of any partners of Landlord and any officers, stockholders, directors or employees of any of the foregoing (collectively, "INDEMNIFIED PARTIES"), from (a) any and all liabilities, claims, causes of actions, suits, damages and expenses (collectively, "CLAIMS") arising from or under this Lease or Tenant's use, occupancy and operations of, in or about the Premises prior to or during the Term; and (b) all costs, expenses and liabilities incurred, including actual and customary attorney's fees and disbursements through and including appellate proceedings, in or in connection with any of such Claims. If any action or proceeding shall be brought against any of the Indemnified Parties by reason of any such Claims, Tenant, upon notice from any of the Indemnified Parties, shall resist and defend such action or proceeding, at its sole cost and expense by counsel to be selected by Tenant but otherwise satisfactory to such Indemnified Party in its reasonable discretion. Tenant or its counsel shall keep each Indemnified Party fully informed at all times of the status of such defense. Notwithstanding the foregoing, an Indemnified Party may retain its own attorneys to defend or assist in defending any claim, action or proceeding involving potential liability in excess of Five Million Dollars ($5,000,000), and Tenant shall pay the actual and customary fees and disbursements of such attorneys. The provisions of this SECTION 11.3 shall survive the expiration or earlier termination of this Lease. Section 11.4. If at any time prior to or during the Term (or within the statutory period thereafter if attributable to Tenant), any mechanic's or other lien or order for payment of money, which shall have been either created by, caused (directly or indirectly) by, or suffered against Tenant, shall be filed against the Premises or any part thereof, Tenant, at its sole cost and expense, shall cause the same to be discharged by payment, bonding or otherwise, within ten (10) days after the filing thereof unless such lien or order is contested by Tenant in good faith and Tenant provides sufficient security or evidence of financial ability, in each case to the reasonable satisfaction of Landlord, to pay the amount of such lien or order. Tenant shall, upon notice and request in writing by Landlord, defend for Landlord, at Tenant's sole cost and expense, any action or proceeding which may be brought on or for the enforcement of any such lien or order for payment of money, and will pay any damages and satisfy and discharge any judgment entered in such action or proceeding and save harmless Landlord from any liability, claim or damage resulting therefrom. In default of Tenant's procuring the discharge of any such lien as aforesaid Landlord may, without notice, and without prejudice to its other remedies hereunder, procure the discharge thereof by bonding or payment or otherwise, and all cost and expense which Landlord shall incur shall be paid by Tenant to Landlord as Additional Rent forthwith. Section 11.5. Landlord shall not under any circumstances be liable to pay for any work, labor or services rendered or materials furnished to or for the account of Tenant upon or in connection with the Premises, and no mechanic's or other lien for such work, labor or services or material furnished shall, under any circumstances, attach to or affect the reversionary interest of Landlord in and to the Premises or any alterations, repairs, or improvements to be erected or made thereon. Nothing contained in this Lease shall be deemed or construed in any way as constituting the request or consent of Landlord, either express or implied, to any contractor, subcontractor, laborer or materialman for the performance of any labor or the furnishing of any materials for any specific improvement, alteration to or repair of the Premises or any part thereof, nor as giving Tenant any right, power or authority to contract for or permit the rendering of any services or the furnishing of any materials on behalf of Landlord that would give rise to the filing of any lien against the Premises. Section 11.6. Neither Landlord nor its agents shall be liable for any loss of or damage to the property of Tenant or others by reason of casualty, theft or otherwise, or for any injury or damage to persons or 21 property resulting from any cause of whatsoever nature, INCLUDING THAT WHICH IS CAUSED BY OR ARISES BY THE NEGLIGENCE OF LANDLORD OR ITS AGENTS OTHER THAN THEIR GROSS NEGLIGENCE, unless caused by or due to the gross negligence or willful misconduct of Landlord, its agents, servants or employees. Section 11.7. Landlord shall not be required to furnish to Tenant any facilities or services of any kind whatsoever, including, but not limited to, water, steam, heat, gas, oil, hot water, and/or electricity, all of which Tenant represents and warrants that Tenant has obtained from the public utility supplying the same, at Tenant's sole cost and expense. Upon Tenant's written request, however, Landlord agrees to cooperate with Tenant (at no cost to Landlord) with respect to such services. Section 11.8. Landlord shall defend, indemnify and save harmless Tenant, any partners of Tenant, any partners of any partners of Tenant and any officers, stockholders, directors or employees of any of the foregoing, from (a) any and all Claims arising from or in connection with (i) the construction of the Demising Wall and Related Improvements and the completion of the Restoration Work, and (ii) Landlord's access to, or the use or occupancy of, the Landlord's Storage Area during the Term, and (b) all costs, expenses and liabilities incurred, including actual and customary attorneys' fees and disbursements through and including appellate proceedings, in or in connection with any of such Claims. ARTICLE 12 DEFAULT BY TENANT; REMEDIES Section 12.1. Each of the following shall be deemed an event of default (an "EVENT OF DEFAULT") and a breach of this Lease by Tenant: (a) If Tenant shall fail to pay the Fixed Rent or any Tenant's Expense Payment as and when due hereunder and such failure continues for a period of five (5) days after written notice of such failure has been delivered to Tenant (provided, however, that Landlord shall not be required to send more than two (2) such notices to Tenant during any consecutive twelve (12) month period, and thereafter it shall be an Event of Default if Tenant shall fail to pay the Fixed Rent or any Tenant Expense Payment when due). (b) If Tenant shall fail to pay any Additional Rent required to be paid by Tenant hereunder and such failure continues for a period of twenty (20) days after written notice of such failure has been delivered to Tenant (provided, however, that Landlord shall not be required to send more than two (2) such notices to Tenant during any consecutive twelve (12) month period, and thereafter it shall be an Event of Default if Tenant shall fail to pay any Additional Rent when due). (c) If Tenant shall default in the performance or observance of any of the other agreements, conditions, covenants or terms herein contained, or if such default is of such a nature that it can be remedied, then if such default shall continue for thirty (30) days after written notice by Landlord to Tenant (or if such default is of such a nature that it cannot be completely remedied within said thirty (30) day period, then if Tenant does not agree in writing within such thirty (30) day period to cure the same, commence and thereafter diligently prosecute the cure and complete the cure within a reasonable period of time under the circumstances after such original written notice of default by Landlord to Tenant, but in any event prior to the time such failure would result in a violation of applicable laws or a default by Landlord under any Mortgage). (d) The occurrence and continuance of a Vacation of the Premises (as hereinafter defined) or a Material Abandonment of the Premises (as hereinafter defined). (e) If Tenant shall transfer all or any of its interest in this Lease without compliance with the provisions of this Lease applicable thereto. 22 (f) Tenant fails or refuses to execute any subordination agreement required pursuant to ARTICLE 10 or estoppel certificate required pursuant to ARTICLE 14 within ten (10) business days after Tenant's receipt thereof. (g) Tenant shall fail to maintain any insurance that this Lease requires Tenant to maintain. (h) Tenant shall do or permit to be done any act which results in a lien being filed against the Premises or any improvements of part thereof if such lien is not released, bonded or otherwise provided for by indemnification satisfactory to Landlord within thirty (30) days after Tenant first obtains actual knowledge of such lien. As used in this Lease, the phrase "VACATION OF THE PREMISES" shall mean vacating the Premises without providing a reasonable level of security to minimize the potential for vandalism, or where the coverage of the property insurance under either or both of SECTIONS 6.1(A) OR 7.3 above is jeopardized as a result thereof, and the phrase "MATERIAL ABANDONMENT OF THE PREMISES" shall mean the abandonment by Tenant of the Premises for ten (10) business days during any period of time in which an Event of Default has occurred and is continuing. Section 12.2. Upon the occurrence and during the continuance of an Event of Default, Landlord may, with or without further notice or demand, and without limiting Landlord in the exercise of any right or remedy which Landlord may have by reason of such Event of Default: (a) Terminate Tenant's right to possession of the Premises by any lawful means, in which case this Lease shall terminate and Tenant shall immediately surrender possession to Landlord. In such event, Landlord shall be entitled to recover from Tenant: (i) the unpaid Rent which had been earned at the time of termination; (ii) the worth at the time of award of the amount by which the unpaid Rent which would have been earned after termination until the time of award exceeds the amount of such rental loss that the Tenant proves could have been reasonably avoided; (iii) the worth at the time of award of the amount by which the unpaid Rent for the balance of the term after the time of award exceeds the amount of such rental loss that the Tenant proves could be reasonably avoided; and (iv) any other amount necessary to compensate Landlord for all the detriment proximately caused by the Tenant's failure to perform its obligations under this Lease or which in the ordinary course of things would be likely to result therefrom, including but not limited to the cost of recovering possession of the Premises, expenses of reletting, including necessary renovation and alteration of the Premises, reasonable attorneys' fees, and that portion of any leasing commission paid by Landlord in connection with this Lease applicable to the unexpired term of this Lease. The worth at the time of award of the amount referred to in provision (ii) of the immediately preceding sentence shall be computed by allowing interest at the rate of ten percent (10%) per annum, and the worth at time of award of the amount referred to in provision (iii) of the immediately preceding sentence shall be computed by discounting such amount at the discount rate of the Federal Reserve Bank of San Francisco plus one percent (1%). Efforts by Landlord to mitigate damages caused by Tenant's Breach of this Lease shall not waive Landlord's right to recover damages under this Article 12. If termination of this Lease is obtained through the provisional remedy of unlawful detainer, Landlord shall have the right to recover in such proceeding any unpaid Rent and damages as are recoverable therein, or Landlord may reserve the right to recover all or any part thereof in a separate suit. If a notice and grace period required under Section 12.1 was not previously given, a notice to pay rent or quit, or to perform or quit given to Tenant under the unlawful detainer statute shall also constitute the notice required by Section 12.1. In such case, the applicable grace period required by Section 12.1 and the unlawful detainer statute shall run concurrently, and the failure of Tenant to cure the Event of Default within the greater of the two such grace periods shall constitute both an unlawful detainer and a breach of this Lease entitling Landlord to the remedies provided for in this Lease and/or by said statute. (b) Continue the Lease and Tenant's right to possession and recover the Rent as it becomes due, in which event Tenant may sublet or assign, subject only to reasonable limitations. Acts of maintenance, efforts to relet, and/or the appointment of a receiver to protect the Landlord's interests, shall not constitute a termination of the Tenant's right to possession. 23 (c) Pursue any other remedy now or hereafter available under the laws or judicial decisions of the state wherein the Premises are located. The expiration or termination of this Lease and/or the termination of Tenant's right to possession shall not relieve Tenant from liability under any indemnity provisions of this Lease as to matters occurring or accruing during the term hereof or by reason of Tenant's occupancy of the Premises. Section 12.3. To the extent not prohibited by law, Tenant hereby waives and releases all rights now or hereafter conferred by statute or otherwise which would have the effect of limiting or modifying any of the provisions of this ARTICLE 12. Tenant shall execute, acknowledge and deliver any instruments which Landlord may request, whether before or after the occurrence of an Event of Default, evidencing such waiver or release. Section 12.4. The Rent payable by Tenant hereunder and each and every installment thereof, and all costs, actual and customary attorneys' fees and disbursements and other expenses which may be incurred by Landlord in enforcing the provisions of this Lease on account of any delinquency of Tenant in carrying out the provisions of this Lease shall be and they hereby are declared to constitute a valid lien upon the interest of Tenant in this Lease and in the Premises. Section 12.5. Suit or suits for the recovery of damages, or for a sum equal to any installment or installments of Rent payable hereunder or any other sums payable by Tenant to Landlord pursuant to this ARTICLE 12, may be brought by Landlord from time to time at Landlord's election, and nothing herein contained shall be deemed to require Landlord to await the date whereon this Lease or the Term would have expired by limitation had there been no Event of Default by Tenant and termination. Section 12.6. Nothing contained in this ARTICLE 12 shall limit or prejudice the right of Landlord to prove and obtain as liquidated damages in any bankruptcy, insolvency, receivership, reorganization or dissolution proceeding an amount equal to the maximum allowed by a statute or rule of law governing such proceeding and in effect at the time when such damages are to be proved, whether or not such amount shall be greater than, equal to or less than the amount of the damages referred to in any of the preceding Sections of this ARTICLE 12. Section 12.7. No receipt of moneys by Landlord from Tenant after termination of this Lease, or after the giving of any notice of the termination of this Lease shall reinstate, continue or extend the Term or affect any of the right of Landlord to enforce the payment of Rent payable by Tenant hereunder or thereafter falling due, or operate as a waiver of the right of Landlord to recover possession of the Premises by proper remedy, except as herein otherwise expressly provided, it being agreed that after the service of notice to terminate this Lease or the commencement of any suit or summary proceedings, or after a final order or judgment for the possession of the Premises, Landlord may demand, receive and collect any monies due or thereafter falling due without in any manner affecting such notice, proceedings, order, suit or judgment, all such monies collected being deemed payments on account of tenant's liability hereunder. Section 12.8. Except as otherwise expressly provided herein or as prohibited by applicable law, Tenant hereby expressly waives the service of any notice of intention to re-enter provided for in any statute, or of the institution of legal proceedings to that end, and Tenant, for and on behalf of itself and all persons claiming through or under Tenant, also waives any and all right of redemption provided by any law or statute now in force or hereafter enacted or otherwise, or re-entry or repossession or to restore the operation of this Lease in case Tenant shall be dispossessed by a judgment or by warrant of any court or judge or in case of re-entry or repossession by Landlord or in case of any expiration or termination of this Lease, and Landlord and Tenant waive and shall waive trial by jury in any action, proceeding or counterclaim brought by either of the parties hereto against the other on any matter whatsoever arising out of or in any way connected with this Lease, the relationship of Landlord and Tenant, Tenant's use or occupancy of the Premises, or any claim of injury or damage. 24 Section 12.9. No failure by Landlord to insist upon the strict performance of any covenant, agreement, term or condition of this Lease or to exercise any right or remedy consequent upon a breach thereof, and no acceptance of full or partial Rent during the continuance of any such breach, shall constitute a waiver of any such breach or of such covenant, agreement, term or condition. No covenant, agreement, term or condition of this Lease to be performed or complied with by Tenant, and no breach thereof, shall be waived, altered or modified except by a written instrument executed by Landlord. No waiver of any breach shall affect or alter this Lease, but each and every covenant, agreement, term and condition of this Lease shall continue in full force and effect with respect to any other then existing or subsequent breach thereof. Section 12.10. In the event of any breach or threatened breach by Tenant of any of the covenants, agreements, terms or conditions contained in this Lease, Landlord shall be entitled to a decree compelling performance of any of the provisions hereof, and shall have the right to invoke any rights and remedies allowed at law or in equity or by statute or otherwise as though re-entry, summary proceedings, and other remedies were not provided for in this Lease. Section 12.11. Tenant shall pay to Landlord all costs and expenses, including, without limitation, attorneys' fees and disbursements, incurred by Landlord in any action or proceeding to which Landlord may be made a party by reason of any act or omission of Tenant. Tenant also shall pay to Landlord all costs and expenses, including, without limitation, actual and customary attorneys' fees and disbursements, incurred by Landlord in enforcing any of the covenants and provisions of this Lease and incurred in any action brought by Landlord against Tenant on account of the provisions hereof, and all such costs, expenses and attorneys' fees and disbursements may be included in and form a part of any judgment entered in any proceeding brought by Landlord against Tenant on or under this Lease. All of the sums paid or obligations incurred by Landlord as aforesaid, with interest and costs, shall be paid by Tenant to Landlord on demand. Section 12.12. If an Event of Default shall occur under this Lease and Tenant shall fail to cure the same, Landlord may (a) perform the same for the account of Tenant and/or (b) make any expenditure or incur any obligation for the payment of money in connection with any obligation owed to Landlord, including, but not limited to, reasonable attorneys' fees and disbursements in instituting, prosecuting or defending any action or proceeding, with interest thereon at the Default Rate and such amounts shall be deemed to be Additional Rent hereunder and shall be paid by Tenant to Landlord immediately upon demand therefor. Default Rate shall have the meaning ascribed to it in ARTICLE B of this Lease; PROVIDED, HOWEVER, that for purposes of this ARTICLE 12, such Default Rate shall never exceed the maximum non-usurious rate permitted by applicable law. Section 12.13. If Tenant shall fail to pay any installment of Fixed Rent when due or any Additional Rent within ten (10) days after the date when such payment is due, Tenant shall pay to Landlord, in addition to such installment of Fixed rent or such Additional Rent, as the case may be, interest on the amount unpaid at the Default Rate, computed from the date such payment was due to and including the date of payment. If an Event of Default shall occur, Tenant agrees that Landlord shall not be liable for any damages suffered by Tenant as a result of Landlord's exercising its remedies under Section 12.2 CAUSED BY THE NEGLIGENCE OF LANDLORD OR OTHERWISE. ARTICLE 13 NO WAIVER Section 13.1. No receipt of moneys by Landlord from Tenant after the termination or cancellation of this Lease shall reinstate, continue or extend the term, or affect any notice theretofore given to Tenant, or operate as a waiver of the right of Landlord to enforce the payment of Fixed Rent or Additional Rent then due, or thereafter falling due, or operate as a waiver of the right of Landlord to recover possession of the Premises by proper suit, action, proceeding or remedy; it being agreed that, after the service of notice to terminate or cancel this Lease, or the commencement of suit, action or summary proceedings, or any other remedy, or after a final order or judgment for the possession of the Premises, Landlord may demand, receive and collect any moneys due, or thereafter falling due, without, in any manner whatsoever, affecting such notice, 25 proceeding, suit, action, order or judgment; and any and all such moneys collected shall be deemed to be payments on account of the use and occupation of the Premises or, at the election of Landlord, on account of Tenant's liability hereunder. Section 13.2. The failure of Landlord or Tenant to enforce any agreement, condition, covenant or term, by reason of its breach by Tenant or Landlord, as the case may be, shall not be deemed to void, waive or affect the right of Landlord or Tenant to enforce the same agreement, condition, covenant or term on the occasion of a subsequent default or breach. Section 13.3. The specific remedies to which Landlord may resort under the terms of this Lease are cumulative and are not intended to be exclusive of any other remedies or means of redress to which Landlord may be lawfully entitled in case of any breach or threatened breach by Tenant of any of the terms, covenants and conditions of this Lease. The failure of Landlord or Tenant to insist in any one or more cases upon the strict performance of any of the terms, covenants and conditions of this Lease, or to exercise any right or remedy herein contained, shall not be construed as a waiver or relinquishment for the future performance of such terms, covenants and conditions. The receipt by Landlord, or payment by Tenant, of Rent with knowledge of the breach of any of such terms, covenants and conditions shall not be deemed a waiver of such breach. The acceptance of any check or payment bearing or accompanied by any endorsement, legend or statements shall not, of itself, constitute any change in or termination of this Lease. No surrender of the Premises by Tenant (prior to any termination of this Lease) shall be valid unless consented to in writing by Landlord. In addition to the other remedies in this Lease provided, Landlord or Tenant shall be entitled to the restraint by injunction of the violation or attempted or threatened violation of any of the terms, covenants and conditions of this Lease or to a decree compelling performance of any of such terms, covenants and conditions. ARTICLE 14 ESTOPPEL CERTIFICATE Section 14.1. Tenant agrees that it shall, at any time and from time to time upon not less than ten (10) days' prior notice by Landlord execute, acknowledge and deliver to Landlord a statement in writing certifying that this Lease is unmodified and in full force and effect (or if there have been any modifications, that the Lease is in full force and effect as modified and stating the modifications), the dates to which the Fixed Rent and Additional Rent have been paid, and stating whether or not Landlord is in default in keeping, observing or performing any term, covenant, agreement, provision, condition or limitation contained in this Lease and, if in default, specifying each such default, the Commencement Date and Expiration Date for the current Term and any other matters reasonably requested by Landlord; it being intended that any such statement delivered pursuant to this ARTICLE 14 may be relied upon by Landlord or any prospective purchaser of the Premises or any Mortgagee thereof or any assignee of any Mortgage upon the Premises. ARTICLE 15 QUIET ENJOYMENT Section 15.1. Tenant, upon payment of the Rent herein reserved and upon the due performance and observance of all the covenants, conditions and agreements herein contained on Tenant's part to be performed and observed, shall and may at all times during the Term peaceably and quietly have, hold and enjoy the Premises without any manner of suit, trouble or hindrance of and from any person claiming by, through or under Landlord, subject, nevertheless, to the terms and provisions of this Lease. No failure by Landlord to comply with the foregoing covenant shall give Tenant any right to cancel or terminate this Lease or to abate, reduce or make a deduction from or offset against the Fixed Rent or any Additional Rent, or to fail to perform any other obligation of Tenant hereunder. 26 ARTICLE 16 SURRENDER Section 16.1. Tenant shall, on the last day of the Term, or upon the sooner termination of the Term, quit and surrender to Landlord the Premises vacant, free of all equipment, furniture and other movable personal property of Tenant, and in the same good order and condition as on the Commencement Date, and Tenant shall remove or demolish all of the fixtures, structures and other improvements which Landlord shall have elected to cause Tenant to remove pursuant to and in accordance with SECTION 5.7 hereof. Tenant's obligation to observe and perform this covenant shall survive the expiration or earlier termination of the Term. Notwithstanding the foregoing, if, on the last day of the Term, Landlord then has a right pursuant to this Lease to use the Landlord's Storage Area, Tenant shall only have an obligation to quit and surrender the Landlord's Storage Area to Landlord in its condition existing on such day. Section 16.2. Upon the expiration of the Term, all Fixed Rent and Additional Rent and other items payable by Tenant under this Lease shall be apportioned to the date of termination. Section 16.3. Tenant acknowledges that possession of the Premises must be surrendered to Landlord at the expiration or sooner termination of the term of this Lease. Tenant agrees to indemnify Landlord against and save Landlord harmless from all costs, claims, loss or liability excluding consequential damages) resulting from the failure or delay by Tenant in so surrendering the Premises, including, without limitation, any claims made by any succeeding tenant founded on such failure or delay. The parties recognize and agree that the damage to Landlord resulting from any failure by Tenant to timely surrender possession of the Premises as aforesaid will be extremely substantial, will exceed the amount of the Fixed Rent theretofore payable hereunder, and will be impossible to accurately measure. Tenant therefore agrees that if possession of the Premises is not surrendered to Landlord upon the expiration or sooner termination of the Term, then Tenant shall pay to Landlord, as liquidated damages for each month and for each portion of any month during which Tenant holds over in the Premises after the expiration or sooner termination of the Term, in addition to any sums payable pursuant to the foregoing indemnity, a sum equal to the higher of the then fair market rental value of the Premises, taking into account the effect of all material factors reasonably relevant to such determination, or one and one-half (1 1/2) times the aggregate of the Fixed Rent which was payable under this Lease with respect to the last month of the Term hereof. Nothing herein contained shall be deemed to permit Tenant to retain possession of the Premises after the expiration or sooner termination of the Term. If Tenant holds over in possession after the expiration or termination of the Term, such holding over shall not be deemed to extend the Term or renew this Lease, but the tenancy thereafter shall continue as a tenancy from month to month upon the terms and conditions of this Lease at the Fixed Rent as herein increased. Tenant hereby waives the benefit of any law or statute in effect in the state where the Premises is located which would contravene or limit the provisions set forth in this SECTION 16.3. This provision shall survive the expiration or earlier termination of this Lease. ARTICLE 17 ACCESS Section 17.1. In addition to Landlord's rights, if any, with respect to the Landlord's Storage Area as provided in this Lease (including, without limitation, SECTION 1.3 above), Landlord shall at all times during the Term have the right and privilege to enter the Premises at reasonable times during business hours for the purpose of inspecting the same or for the purpose of showing the same to prospective purchasers or Mortgagees thereof. Landlord shall also have the right and privilege at all times during the Term to post notices of nonresponsibility for work performed by or on behalf of Tenant. Section 17.2. In addition to Landlord's rights, if any, with respect to the Landlord's Storage Area as provided in this Lease (including, without limitation, SECTION 1.3 above), Landlord shall at all times during the Term have the right to enter the Premises or any part thereof, following reasonable notice from Landlord and so long as Landlord uses its reasonable best efforts to not unduly interfere with Tenant's normal 27 business operations, for the purpose of making such repairs or Alterations therein as Landlord deems necessary or advisable, but such right of access shall not be construed as obligating Landlord to make any repairs to or replacements to the Premises or as obligating Landlord to make any inspection or examination of the Building. Notwithstanding the foregoing, in the event of an emergency, Landlord shall have the right to enter the Premises or any part thereof without prior notice to Tenant. ARTICLE 18 ENVIRONMENTAL MATTERS Section 18.1. Except for ordinary and general office supplies, such as copier toner, liquid paper, glue, ink and common household and/or office cleaning materials, Tenant will not use, generate, manufacture, produce, store, release, discharge or dispose of on, under, from or about the Premises or transport to or from the Premises any Hazardous Substance and will use its best efforts not to allow or suffer any other person or entity (other than Landlord) to do so. Section 18.2. Tenant shall keep and maintain the Premises (other than the Landlord's Storage Area if Landlord then has a right pursuant to this Lease to use such area) in compliance with, and shall use its best efforts not to cause, permit or suffer the Premises (other than the Landlord's Storage Area if Landlord then has a right pursuant to this Lease to use such area) to be in violation of any Environmental Law (as defined below). Section 18.3. Tenant shall give prompt written notice to Landlord of: (a) becoming aware of any use, generation, manufacture, production, storage, release, discharge or disposal of any Hazardous Substance on, under, from or about the Premises or the migration thereof to or from other property; (b) the commencement, institution or threat of any proceeding, inquiry or action by or notice from any local, state or federal governmental authority with respect to the use or presence of any Hazardous Substance on the Premises or the migration thereof from or to other property; (c) all claims made or threatened by any third party against Tenant or the Premises relating to any damage, contribution, cost recovery, compensation, loss or injury resulting from any Hazardous Substance; (d) Tenant's discovery of any occurrence or condition on any real property adjoining or in the vicinity of the Premises that could cause the Premises or any part thereof to be subject to any restrictions on the ownership, occupancy, transferability or use of the Premises under any Environmental Law, or any regulation adopted in accordance therewith, or to be otherwise subject to any restrictions on the ownership, occupancy, transferability or use of the Premises under any Environmental Law; and (e) obtaining knowledge of any incurrence of expense by any governmental authority or others in connection with the assessment, containment or removal of any Hazardous Substance located on, under, from or about the Premises or any property adjoining or in the vicinity of the Premises. Section 18.4. Landlord shall have the right, but not the obligation, to join and participate in, as a party if it so elects, any legal proceedings or actions initiated with respect to the Premises in connection with any Environmental Law and have its actual and customary attorneys' fees in connection therewith paid by Tenant or be defended by Tenant from and against any such proceedings or actions with counsel chosen by Landlord (provided that Landlord and Tenant shall attempt, in good faith, to agree on one counsel to represent both Landlord and Tenant, if in Landlord's good faith determination such joint representation is feasible or appropriate under the circumstances), and shall have the right to make inquiry of and disclose all information to appropriate governmental authorities when advised by counsel that such disclosure may be required under 28 applicable law; provided, however, that the foregoing obligations of Tenant shall not apply to any legal proceedings or actions initiated with respect to the Premises that result from any actions or inaction of Landlord with respect to the Landlord's Storage Area. Section 18.5. Without Landlord's prior written consent, which consent shall not be unreasonably withheld or delayed, Tenant shall not take any remedial action in response to the presence of any Hazardous Substance on, under, from or about the Premises, nor enter into any settlement, consent or compromise which might, in Landlord's reasonable judgment, impair the value of Landlord's interest in the Premises under this Lease; PROVIDED, HOWEVER, that Landlord's prior consent shall not be necessary if the presence of Hazardous Substance on, under, from or about the Premises either poses an immediate threat to the health, safety or welfare of any individual or is of such a nature that an immediate remedial response is necessary and it is not practical or possible to obtain Landlord's consent before taking such action. In such event Tenant shall notify Landlord as soon as practicable of any action so taken. Landlord agrees not to withhold its consent, where such consent is required hereunder, if either (i) a particular remedial action is ordered by a court or any agency of competent jurisdiction, or (ii) Tenant establishes to the reasonable satisfaction of Landlord that there is no reasonable alternative to such remedial action which would result in less impairment of Landlord's security hereunder. Section 18.6. Tenant shall protect, indemnify and hold harmless Landlord and each Mortgagee, their respective directors, officers, partners employees, agents, successors and assigns from and against any and all claim, loss, damage, cost, expense, liability, fines, penalties, charges, administrative and judicial proceedings and orders, judgments, remedial action requirements, enforcement actions of any kind (including, without limitation, attorneys' fees and costs) directly or indirectly arising out of or attributable to, in whole or in part, the breach of any of the covenants, representations and warranties of this ARTICLE 18 or the use, generation, manufacture, production, storage, release, threatened release, discharge, disposal, or presence of a Hazardous Substance on, under, from or about the Premises caused by Tenant or any employees, agents, licensees, sublessees, contractors or subcontractors of Tenant during the Term, or any other activity carried on or undertaken on or off the Premises during the Term by Tenant, any employees, agents, licensees, sublessees, contractors or subcontractors of Tenant, in connection with the handling, treatment, removal, storage, decontamination, clean-up, transport or disposal of any Hazardous Substance at any time located or present on, under, from or about the Premises, including, without limitation: (i) all consequential damages; (ii) the costs of any required or necessary repair, cleanup or detoxification of the Premises and the preparation and implementation of any closure, remedial or other required plans including, without limitation: (A) the costs of removal or remedial action incurred by the United States Government or the state in which the Premises are located, or response costs incurred by any other person, or damages from injury to, destruction of, or loss of natural resources, including the costs of assessing such injury, destruction or loss, incurred pursuant any Environmental Law; (B) the clean-up costs, fines, damages or penalties incurred pursuant to the provisions of applicable state law; and (C) the cost and expenses of abatement, correction or clean-up, fines, damages, response costs or penalties which arise from the provisions of any other statute, state or federal; and (iii) liability for personal injury or property damage, including damages assessed for the maintenance of the public or private nuisance, response costs or for the carrying on of an abnormally dangerous activity; provided, however, the foregoing indemnity shall not cover any matter arising as a result of, or in connection with, the use, generation, manufacture, production, storage, release, threatened release, discharge, disposal, or presence of a Hazardous Substance on, under, from or about the Premises caused by Landlord or any employees, agents, licensees, sublessees, contractors or subcontractors of Landlord during the Term, or any other activity carried on or undertaken on or off the Premises during the Term by Landlord, any employees, agents, licensees, sublessees, contractors or subcontractors of Landlord, in connection with the handling, treatment, removal, storage, decontamination, clean-up, transport or disposal of any Hazardous Substance at any time located or present on, under, from or about the Premises. Except as expressly limited above, the foregoing indemnity shall further apply to any residual contamination on, under, from or about the Premises, or affecting any natural resources arising in connection with the use, generation, manufacturing, production, handling, storage, transport, discharge or disposal of any such Hazardous Substance, and irrespective of whether any of such activities were or will be undertaken in 29 accordance with Environmental Law or other applicable laws, regulations, codes and ordinances. This indemnity is intended to be operable under 42 U.S.C. Section 9607(e)(1), and any successor section thereof and shall survive expiration or earlier termination of this Lease and any transfer of all or a portion of the Premises by Tenant. The foregoing indemnity shall in no manner be construed to limit or adversely affect Landlord's rights under this ARTICLE 18, including, without limitation, Landlord's rights to approve any Remedial Work (as defined below) or the contractors and consulting engineers retained in connection therewith. Notwithstanding anything to the contrary contained in this Lease, in no event will Tenant have any liability or obligation under this Lease or with respect to the Premises for Hazardous Substances existing in, on, under or about the Premises on the Commencement Date or any violation of Environmental Laws prior to or existing on the Commencement Date. Section 18.7. In the event that any investigation, site monitoring, containment, cleanup, removal, restoration or other remedial work of any kind or nature (the "REMEDIAL WORK") is required by any applicable local, state or federal law or regulation, any judicial order, or by any governmental entity or person because of, or in connection with, the current or future presence, suspected presence, release or suspected release of a Hazardous Substance in or into the air, soil, groundwater, surface water or soil vapor at, on, about, under or within the Premises (or any portion thereof other than the Landlord's Storage Area if Landlord then has a right pursuant to this Lease to use such area), Tenant shall within thirty (30) days after written demand for performance thereof by Landlord (or such shorter period of time as may be required under any applicable law, regulation, order or agreement), commence to perform, or cause to be commenced, and thereafter diligently prosecute to completion within such period of time as may be required under any applicable law, regulation, order or agreement, all such Remedial Work at Tenant's sole expense in accordance with the requirements of any applicable governmental authority or Environmental Law. All Remedial Work shall be performed by one or more contractors, approved in advance in writing by Landlord, and under the supervision of a consulting engineer approved in advance in writing by Landlord. All costs and expenses of such Remedial Work shall be paid by Tenant, including, without limitation, the charges of such contractor(s) and/or the consulting engineer, and Landlord's actual and customary attorneys' fees and costs incurred in connection with monitoring or review of such Remedial Work. In the event Tenant shall fail to timely commence, or cause to be commenced, or fail to complete the Remedial Work within the time required above, Landlord may, but shall not be required to, cause such Remedial Work to be performed and all costs and expenses thereof, or incurred in connection therewith shall become part of the indebtedness secured hereby. Section 18.8. All costs and expenses incurred by Landlord under this Article 18 shall be immediately due and payable as Additional Rent upon demand and shall bear interest at the Default Rate from the date of notice of such payment by Landlord and the expiration of any grace period provided herein until repaid. Section 18.9. "ENVIRONMENTAL LAWS" shall mean any federal, state or local law, statute, ordinance or regulation pertaining to health, industrial hygiene, hazardous waste or the environmental conditions on, under, from or about the Premises, including, without limitation, the laws listed in the definition of Hazardous Substances below. Section 18.10. "HAZARDOUS SUBSTANCES" shall mean any element, compound, chemical mixture, contaminant, pollutant, material, waste or other substance which is defined, determined or identified as a "hazardous substance", "hazardous waste" or "hazardous material" under any federal, state or local statute, regulation or ordinance applicable to a Real Property, as well as any amendments and successors to such statutes and regulations, as may be enacted and promulgated from time to time, including, without limitation, the following: (i) the Comprehensive Environmental Response, Compensation and Liability Act of 1980 (codified in scattered sections of 26 U.S.C., 33 U.S.C., 42 U.S.C. and 42 U.S.C. ss. 9601 ET SEQ.); (ii) the Resource Conservation and Recovery Act of 1976 (42 U.S.C. ss. 6901 ET. SEQ.); (iii) the Hazardous Materials Transportation Act (49 U.S.C. ss. 1801 ET. SEQ.); (vi) the Toxic Substances Control Act (15 U.S.C. ss. 2601 ET. SEQ.); (v) the Clean Air Act (33 U.S.C. ss. 1251 ET. SEQ.); (vi) the Clean Air Act (42 U.S.C. ss. 7401 ET. SEQ.); 30 (vii) the Safe Drinking Water Act (21 U.S.C. ss. 349; 42 U.S.C. ss. 201 and ss. 300f ET. SEQ.); (viii) the National Environmental Policy Act of 1969 (42 U.S.C. ss. 3421); (ix) the Superfund Amendment and Reauthorization Act of 1986 (codified in scattered sections of 10 U.S.C., 29 U.S.C., 33 U.S.C. and 42 U.S.C.); and (x) Title III of the Superfund Amendment and Reauthorization Act (40 U.S.C. ss. 1101 ET. SEQ.). Section 18.11. All representations, warranties, covenants and indemnities of Tenant in this ARTICLE 18 shall continue to be binding upon Tenant, and its successors and assigns, after the expiration or earlier termination of this Lease. ARTICLE 19 MISCELLANEOUS PROVISIONS Section 19.1. It is mutually agreed by and between Landlord and Tenant that the respective parties shall and they hereby do waive trial by jury in any action, proceeding or counterclaim brought by either of the parties hereto against the other on any matters whatsoever arising out of or in any way connected with this Lease, Tenant's use or occupancy of the Premises, and/or any claim of injury or damage excluding any claim for personal injury or property damage. Section 19.2. Tenant and the other parties occupying a part of the Premises pursuant to a lease or license arrangement with Tenant may place a sign on the Premises to indicate the nature of the business of Tenant and such parties. The sign shall be lawful under applicable sign codes and subdivision covenants. Section 19.3. (a) The term "LANDLORD" as used herein shall mean only the owner or the mortgagee in possession for the time being of the Premises, so that in the event of any sale, transfer or conveyance of the Premises Landlord shall be and hereby is entirely freed and relieved of all agreements, covenants and obligations of Landlord thereafter accruing hereunder, and it shall be deemed and construed without further agreement between the parties or their successors in interest or between the parties and the purchaser, transferee or grantee at any such sale, transfer or conveyance that such purchaser, transferee or grantee has assumed and agreed to carry out any and all agreements, covenants and obligations of Landlord hereunder. (b) The term "TENANT" as used herein shall mean the tenant named herein, and from and after any valid assignment or transfer in whole of said Tenant's interest under this Lease pursuant to the provisions of ARTICLE 9, shall mean only the assignee or transferee thereof; but the foregoing shall not release the assignor or transferor from liability under this Lease. (c) The words "ENTER", "RE-ENTER", "ENTRY" and "RE-ENTRY" as used in this Lease shall not be restricted to their technical legal meaning. (d) The use herein of the neuter pronoun in any reference to Landlord or Tenant shall be deemed to include any individual Landlord or Tenant, and the use herein of the words "SUCCESSOR AND ASSIGNS" or "SUCCESSORS OR ASSIGNS" of Landlord or Tenant shall be deemed to include the heirs, executors, administrators, representatives and assigns of any individual Landlord or Tenant. Section 19.4. The headings herein are inserted only as a matter of convenience and for reference and in no way define, limit or describe the scope or intent of this Lease nor in any way affect this Lease. Section 19.5. This Lease shall be governed by and construed in accordance with the laws of the state in which the Premises are located. 31 Section 19.6. This Lease contains the entire agreement between the parties and may not be extended, renewed, terminated or otherwise modified in any manner except by an instrument in writing executed by the party against whom enforcement of any such modification is sought. All prior understandings and agreements between the parties and all prior working drafts of this Lease are merged in this Lease, which alone expresses the agreement of the parties. The parties agree that no inferences shall be drawn from matters deleted from any working drafts of this Lease. Section 19.7. The agreements, terms, covenants and conditions herein shall bind and inure to the benefit of Landlord and Tenant and their respective heirs, personal representatives, successors and, except as is otherwise provided herein, their assigns. Section 19.8. Notice whenever provided for herein shall be in writing and shall be given either by personal delivery, overnight express mail or by certified or registered mail, return receipt requested, to Landlord and Tenant at their respective addresses set forth in Article A above, or to such other persons or at such other addresses as may be designated from time to time by written notice from either party to the other. Notices shall be deemed given (i) when delivered personally if delivered on a business day (or if the same is not a business day, then the next business day after delivery), (ii) three (3) business days after being sent by United States mail, registered or certified mail, postage prepaid, return receipt requested or (iii) if delivery is made by Federal Express or a similar, nationally recognized overnight courier service for 9:00 a.m. delivery, then on the date of delivery (or if the same is not a business day, then the next business day after delivery), if properly sent and addressed in accordance with the terms of this SECTION 19.8. Section 19.9. If any provision of this Lease shall be invalid or unenforceable, the remainder of the provisions of this Lease shall not be affected thereby and each and every provision of this Lease shall be enforceable to the fullest extent permitted by law. Section 19.10. Tenant represents and warrants to Landlord that Tenant has not dealt with any real estate broker in connection with this Lease. Tenant agrees to indemnify Landlord and save Landlord harmless from any and all claims for brokerage commissions by any other person, firm, corporation or other entity claiming to have brought about this Lease transaction. Landlord represents and warrants to Tenant that Landlord has not dealt with any real estate broker in connection with this Lease. Landlord agrees to indemnify Tenant and save Tenant harmless from any and all claims for brokerage commissions by any other person, firm, corporation or other entity claiming to have brought about this Lease transaction. The provisions of this SECTION 19.10 shall survive the expiration or earlier termination of this Lease. Section 19.11. Tenant is and shall be in exclusive control and possession of the Premises, and Landlord shall not, in any event whatsoever, be liable for any injury or damage to any property or to any person happening in, on or about the Premises, nor for any injury or damage to any property of Tenant, or of any other person or persons contained therein unless the same is caused by Landlord's negligent acts or omissions. The provisions hereof, including without limitation ARTICLE 17, permitting Landlord to enter and inspect the Premises are made for the purpose of enabling Landlord to be informed as to whether Tenant is complying with the agreements, terms, covenants and conditions hereof, and if Landlord so desires, to do such acts as Tenant shall fail to do. Section 19.12. A memorandum of this Lease as set forth on EXHIBIT "B" attached hereto and incorporated herein by this reference shall be recorded by Tenant at its sole cost and expense. Tenant shall also execute and deliver to Landlord, in recordable form, a properly acknowledged quitclaim deed with Landlord as the transferee, which quitclaim deed shall (i) extinguish all of the Tenant's rights and interest in and to the Premises, and (ii) be held in trust by Landlord on the condition that it may only be recorded by Landlord after the expiration or any earlier termination of this Lease (but not prior thereto). Landlord covenants and agrees to so hold such quitclaim deed and not to record the same prior to the expiration or earlier termination of this Lease. 32 Section 19.13. The parties took equal part in drafting this Lease and no rule of construction that would cause any of the terms hereof to be construed against the drafter shall be applicable to the interpretation of this Lease. Section 19.14. In the event of a default by Tenant, following the expiration of the applicable cure period, if any, Tenant shall and hereby does appoint Landlord the attorney-in-fact of Tenant, irrevocably, to execute and deliver any documents provided for in SECTION 14.1 for and in the name of Tenant, such power, being coupled with an interest, being irrevocable. Section 19.15. Time is strictly of the essence with respect to each and every term and provision of this Lease. Section 19.16. The time within which either party hereto shall be required to perform any act under this Lease, other than the payment of money, shall be extended by a period of time equal to the number of days during which performance of such act is delayed by strikes, lockouts, acts of God, governmental restrictions, failure or inability to secure materials or labor by reason of priority or similar regulation or order of any governmental or regulatory body, enemy action, civil disturbance, fire, unavoidable causalities or any other cause beyond the reasonable control of either party hereto (but excluding delays due to financial inability) (all of the foregoing are herein collectively called "FORCE MAJEURE DELAYS"). Section 19.17. The provisions of this Section shall not apply to nor operate to excuse Tenant from the payment of Rent strictly in accordance with this Lease. If Landlord shall be in default under this Lease and, if as a consequence of such default, Tenant shall recover a money judgement against Landlord, such judgment shall be satisfied only out of right, title and interest of Landlord in the Premises as the same may then be encumbered and neither Landlord nor any person or entity comprising Landlord shall be liable for any deficiency. In no event shall Tenant have the right to levy execution against any property of Landlord nor any person or entity comprising Landlord other than its interests in the Premises as herein expressly provided. Notwithstanding anything to the contrary contained herein, in no event shall Landlord be liable for consequential or special damages for a breach of or default under this Lease. ARTICLE 20 RENEWAL OPTIONS Section 20.1. Section 20.1. Subject to and upon terms and conditions set forth herein, Landlord hereby grants to Tenant two (2) consecutive options (the "RENEWAL OPTIONS") to extend the Initial Term and the Expiration Date for a period of one year for the First Renewal Term (as defined in the EXHIBIT "C" attached hereto) and five years for the Second Renewal Term (as defined in EXHIBIT "C"), each such period commencing upon the then current Expiration Date upon the same terms and conditions set forth in this Lease except for the amount of Fixed Rent payable under this Lease (which amount shall be computed based on the applicable provisions of EXHIBIT "C"). The terms and conditions of the Renewal Options are more particularly set forth in the EXHIBIT "C" attached hereto. LANDLORD AND TENANT EXPRESSLY DISCLAIM ANY IMPLIED WARRANTY THAT THE PREMISES ARE SUITABLE FOR TENANT'S INTENDED COMMERCIAL PURPOSE AND, EXCEPT AS OTHERWISE EXPRESSLY PROVIDED IN THIS LEASE, TENANT'S OBLIGATION TO PAY RENT HEREUNDER IS NOT DEPENDENT UPON THE CONDITION OF THE PREMISES OR THE PERFORMANCE BY LANDLORD OF ITS OBLIGATIONS HEREUNDER, AND, EXCEPT AS OTHERWISE EXPRESSLY PROVIDED IN THIS LEASE, TENANT SHALL CONTINUE TO PAY FIXED RENT AND ALL ADDITIONAL RENT, WITHOUT ABATEMENT, SETOFF OR DEDUCTION NOTWITHSTANDING ANY BREACH BY LANDLORD OF ITS DUTIES OR OBLIGATIONS HEREUNDER, WHETHER EXPRESS OR IMPLIED. [THE REMAINDER OF THIS PAGE IS LEFT INTENTIONALLY BLANK] 33 The parties hereto have executed this Lease as of the day and year first above set forth. TENANT: MARKETING SPECIALISTS SALES COMPANY, a Texas corporation By: ____________________________________________________ Name: ____________________________________________ Title: ____________________________________________ LANDLORD: IPT PARTNERS, LLC, a California limited liability company By: PETER SCOTT SWAYNE, Trustee of the Peter Scott Swayne Trust Est. 6/25/92, its managing member By: _______________________________________________ Name: Peter Scott Swayne Title: Trustee 34 EXHIBIT "A" DESCRIPTION OF THE LAND PARCEL A: PARCEL 1, IN THE CITY OF ORANGE, COUNTY OF ORANGE, STATE OF CALIFORNIA, AS SHOWN ON EXHIBIT "B" ATTACHED TO THAT CERTAIN LOT LINE ADJUSTMENT NO. LL-98-6, RECORDED JUNE 2, 1989 AS INSTRUMENT NO. 89-291942 OF OFFICIAL RECORDS OF ORANGE COUNTY, CALIFORNIA. PARCEL B: AN EASEMENT FOR INGRESS AND EGRESS, AND FOR THE PURPOSE OF CONSTRUCTING AND MAINTAINING SEWER MAIN, WATER MAINS, GAS MAINS, AND/OR ELECTRIC OR TELEPHONE CONDUITS, OVER THE SOUTHERLY 7.00 FEETOF: THAT PORTION OF LOTS 6 AND 7 OF THE GLASSELL AND CHAPMAN TRACT, AS SHOWN ON A MAP RECORDED IN BOOK 5, PAGE 408 OF MISCELLANEOUS RECORDS IN THE OFFICE OF THE COUNTY RECORDER OF LOS ANGELES COUNTY, CALIFORNIA, DESCRIBED AS FOLLOWS: BEGINNING AT A POINT ON THE NORTH LINE OF SAID TRACT, SAID LINE ALSO BEING THE SOUTH LINE OF THE TRAVIS TRACT, AS PER MAP RECORDED IN BOOK 5, PAGE 120 OF MISCELLANEOUS RECORDS IN THE OFFICE OF THE COUNTY RECORDER OF LOS ANGELES COUNTY, CALIFORNIA, NORTH 89 (degree) 45' 00" WEST 935.22 FEET FROM THE NORTHEAST CENTER OF LOT 5 OF SAID GLASSELL AND CHAPMAN TRACT; THENCE NORTH 89 (degree) 45' 00" WEST 192.72 FEET TO A POINT ON THE EAST BANK OF SANTA ANA RIVER, SAID POINT BEING THE NORTHEASTERLY CORNER OF THE LAND DESCRIBED IN A DECREE OF PARTIAL DISTRIBUTION, RECORDED NOVEMBER 2, 1909 IN BOOK 176, PAGE 24 OF DEEDS, RECORDS OF ORANGE COUNTY; THENCE ALONG SAID DISTRIBUTION LINE, SOUTH 38 (degree) 45' 00" WEST 309.54 FEET TO THE NORTHEASTERLY LINE OF THE LAND DESCRIBED IN A DEED TO THE CALIFORNIA CENTRAL RAILWAY CO., RECORDED SEPTEMBER 13, 1889 IN BOOK 2, PAGE 108 OF DEEDS; THENCE CONTINUING ALONG SAID DISTRIBUTION LINE, SOUTH 22 (degree) 00' 00" WEST 309.54 FEET TO THE NORTHEASTERLY LINE OF THE LAND DESCRIBED IN A DEED TO THE CALIFORNIA CENTRAL RAILWAY CO., RECORDED SEPTEMBER 13, 1889 IN BOOK 2, PAGE 105 OF DEEDS; THENCE CONTINUING ALONG SAID DISTRIBUTION LINE, SOUTH 22 (degree) 00' 00" WEST 179.52 FEET; THENCE SOUTH 0 (degree) 30' 00" WEST 708.18 FEET TO THE INTERSECTION OF SAID DISTRIBUTION LINE WITH A LINE PARALLEL WITH AND NORTHERLY 12.00 FEET FROM THE SOUTHERLY LINE OF SAID TRACT; THENCE ALONG SAID PARALLEL LINE, SOUTH 89 (degree) 45' 00" EAST 448.80 FEET TO A POINT WHICH IS DISTANT NORTH 12.00 FEET AND WEST 99.00 FEET FROM THE NORTHEAST CORNER OF THE MARY C. THOMAS TRACT, AS PER MAP RECORDED IN BOOK 5, PAGE 168 OF MISCELLANEOUS RECORDS IN THE OFFICE OF THE COUNTY RECORDER OF LOS ANGELES COUNTY, CALIFORNIA; THENCE NORTH 0 (degree) 30' 00" EAST 1120.02 FEET TO THE POINT OF BEGINNING. EXCEPT THAT PORTION THEREOF LYING WITHIN ICKHOFF STREET, AS DESCRIBED IN THE FINAL ORDER OF CONDEMNATION RECORDED MARCH 20, 1967 IN BOOK 8203, PAGE 278 OF OFFICIAL RECORDS. ALSO EXCEPTING THEREFROM THAT PORTION DESCRIBED IN DEEDS TO THE CITY OF ORANGE RECORDED MARCH 23, 1973 IN BOOK 10609, PAGE 249 OF OFFICIAL RECORDS, AND RECORDED AUGUST 21, 1975 IN BOOK 10862, PAGE 054 OF OFFICIAL RECORDS. PARCEL C: AN EASEMENT FOR INGRESS AND EGRESS AND FOR THE PURPOSE OF CONSTRUCTING AND MAINTAINING SEWER MAIN, WATER MAINS, GAS MAINS AND/OR ELECTRIC OR TELEPHONE A-1 CONDUITS OVER THAT PORTION OF LOT 6 OF THE GLASSELL AND CHAPMAN TRACT AS SHOWN ON A MAP RECORDED IN BOOK 5, PAGE 408 OF MISCELLANEOUS RECORDS IN THE OFFICE OF THE COUNTY RECORDER OF LOS ANGELES COUNTY, CALIFORNIA, DESCRIBED AS FOLLOWS: BEGINNING AT A POINT ON THE SOUTHERLY LINE OF SAID LOT 6, SAID POINT BEING DISTANT SOUTH 89 (degree) 45' 00" EAST 1242.78 FEET (18.83 CHAINS) FROM THE SOUTHEASTERLY CORNER OF LOT 8 IN SAID GLASSELL AND CHAPMAN TRACT; THENCE NORTH 0 (degree) 30' 00" EAST 12.00 FEET TO THE SOUTHERLY LINE OF THE LAND DESCRIBED IN DEED TO HENRY HINRICHS, RECORDED APRIL 14, 1900 IN BOOK 48, PAGE 145 OF DEEDS, RECORDS OF ORANGE COUNTY, CALIFORNIA; THENCE SOUTH 89 (degree) 45' 00" EAST ALONG SAID SOUTHERLY LINE OF THE LAND OF HINRICHS, 316.80 FEET (4.80 CHAINS) TO THE SOUTHEASTERLY CORNER OF SAID LAND OF HINRICHS; THENCE SOUTH 0 (degree) 30' 00" EAST 12.00 FEET TO THE SOUTHERLY LINE OF SAID LOT 6; THENCE SOUTH 89 (degree) 45" 00" WEST ALONG SAID SOUTHERLY LINE OF LOT 6, A DISTANCE OF 316.80 FEET TO THE POINT OF BEGINNING. EXCEPTING THEREFROM THAT PORTION INCLUDED WITHIN THE LAND DESCRIBED IN DEED TO THE COUNTY OF ORANGE RECORDED AUGUST 31, 1966 IN BOOK 8035, PAGE 546 OF OFFICIAL RECORDS. ALSO EXCEPTING THEREFROM THAT PORTION DESCRIBED IN DEED TO THE CITY OF ORANGE RECORDED DECEMBER 28, 1973 IN BOOK 11044, PAGE 682 OF OFFICIAL RECORDS. PARCEL D: AN EASEMENT FOR INGRESS AND EGRESS, AND FOR THE PURPOSE OF CONSTRUCTING AND MAINTAINING SEWER DRAIN, WATER MAINS, GAS MAINS, AND/OR ELECTRIC OR TELEPHONE CONDUITS OVER THAT PORTION OF LOTS 6 AND 7 OF THE GLASSELL AND CHAPMAN TRACT, AS SHOWN ON A MAP RECORDED IN BOOK 5, PAGE 408 OF MISCELLANEOUS RECORDS IN THE OFFICE OF THE COUNTY RECORDER OF LOS ANGELES COUNTY, CALIFORNIA, DESCRIBED AS FOLLOWS: BEGINNING AT A POINT OF THE SOUTHERLY LINE OF SAID LOT 6, SAID POINT BEING DISTANT SOUTH 89 (degree) 48' 00" EAST 1242.78 FEET (18.83 CHAINS) FROM THE SOUTHEASTERLY CORNER OF LOT 8 IN SAID GLASSELL AND CHAPMAN TRACT; THENCE NORTH 0 (degree) 30' 00" EAST 12.00 FEET TO THE SOUTHERLY LINE OF THE LAND DESCRIBED IN DEED TO HENRY HINRICHS, RECORDED APRIL 14, 1900 IN BOOK 48, PAGE 145 OF DEEDS, RECORDS OF ORANGE COUNTY, CALIFORNIA; THENCE NORTH 89 (degree) 45' 00" WEST 132.00 FEET; THENCE SOUTH 0 (degree) 30' 00" WEST 12.00 FEET TO THE SOUTHERLY LINE OF SAID LOT 7; THENCE SOUTH 89 (degree) 45' 00" EAST 132.00 FEET ALONG SAID SOUTHERLY LINE OF LOTS 7 AND 6 TO THE POINT OF BEGINNING. EXCEPTING THEREFROM THAT PORTION, IF ANY, LYING WESTERLY OF THE SOUTHERLY PROLONGATION OF THE WESTERLY LINE OF SAID LAND OF HENRY HINRICHS. A-2 EXHIBIT "B" IPT PARTNERS, LLC, a California limited liability company ("LANDLORD"), and MARKETING SPECIALISTS SALES COMPANY, a Texas corporation ("TENANT"), have entered into that certain Lease Agreement (the "LEASE") dated as of May 2, 2000, for the lease of property located at 744 and 746 Eckhoff Street, Orange, California 92868. This Exhibit "B" (this "EXHIBIT") is attached to the Lease. Except to the extent otherwise indicated herein, the initially capitalized terms used in this Exhibit shall have the meanings assigned to them in the Lease. MEMORANDUM OF LEASE The Lease is for a term of forty-eight (48) months and will commence on May 2, 2000, and end on May 2, 2004. The Lease provides that Tenant may, under certain circumstances, have a right to extend the Initial Term of the Lease for up to two (2) additional periods, for one (1) year and for five (5) years, respectively. The Premises includes the real property located in Orange County, California and more particularly described in the EXHIBIT A attached hereto. IN WITNESS WHEREOF, the parties hereto have executed this Memorandum of Lease effective as of the 2nd day of May, 2000. TENANT: MARKETING SPECIALISTS SALES COMPANY, a Texas corporation By: ____________________________________________________ Name: ____________________________________________ Title: ____________________________________________ LANDLORD: IPT PARTNERS, LLC, a California limited liability company By: PETER SCOTT SWAYNE, Trustee of the Peter Scott Swayne Trust Est. 6/25/92, its managing member By: _______________________________________________ Name: Peter Scott Swayne Title: Trustee [ACKNOWLEDGMENTS TO COME] B-1 EXHIBIT "C" IPT PARTNERS, LLC, a California limited liability company ("LANDLORD"), and MARKETING SPECIALISTS SALES COMPANY, a Texas corporation ("TENANT"), have entered into that certain Lease Agreement (the "LEASE") dated as of May 2, 2000, for the lease of property located at 744 and 746 Eckhoff Street, Orange, California 92868. This Exhibit "C" (this "EXHIBIT") is attached to the Lease. Except to the extent otherwise indicated herein, the initially capitalized terms used in this Exhibit shall have the meanings assigned to them in the Lease. RENEWAL OPTIONS 1. Tenant shall have the right to renew and extend the Initial Term with respect to the Premises upon and subject to the terms and conditions set forth below. 2. Provided that, at such time, no Event of Default has occurred and is continuing, Tenant may renew the term of the Lease for two (2) additional periods of time (each renewal term is herein referred to as a "RENEWAL TERM") on the same terms provided in the Lease (except as set forth below) by delivering written notice of the exercise thereof to Landlord ("TENANT'S NOTICE OF EXERCISE") not later than nine (9) months prior to the expiration of the Initial Term or, if applicable, the First Renewal Term (as defined below). If Tenant fails to deliver Tenant's Notice of Exercise at least nine (9) months prior to the expiration of the Initial Term, Tenant's rights under this Exhibit shall terminate. The first Renewal Term (the "FIRST RENEWAL TERM") shall commence immediately upon the scheduled expiration of the Initial Term and shall expire (if not thereafter renewed) on the last day of the twelfth (12th) full calendar month thereafter, and upon Tenant's exercise of the second renewal option set forth in this Exhibit, the second Renewal Term (the "SECOND RENEWAL TERM") shall commence immediately upon the expiration of the First Renewal Term and expire on the last day of the sixtieth (60th) full calendar month thereafter. 3. The exercise by Tenant of either of the renewal options set forth herein must be made, if at all, by Tenant's timely delivery to Landlord of Tenant's Notice of Exercise during the time period required by the preceding paragraph. Once Tenant exercises either renewal option, Tenant may not thereafter revoke such exercise. Tenant's failure, for any reason whatsoever, to timely exercise either of the renewal options set forth herein shall conclusively be deemed a waiver of the applicable renewal option, time being of the essence with respect to Tenant's exercise of the same. 4. If Tenant timely exercises the first renewal option provided in this Exhibit, Landlord and Tenant shall, on or before the commencement date of the First Renewal Term, execute an amendment to the Lease extending the Initial Term on the same terms provided in the Lease, except as follows: (a) The Fixed Rent payable for each month during the First Renewal Term shall be $44,581.00 per month; and (b) Landlord shall not provide to Tenant any allowances (e.g., moving allowance, tenant improvement allowance, construction allowance, and the like) or other tenant inducements in connection with the First Renewal Term. 5. If Tenant timely exercises the second renewal option provided in this Exhibit, Landlord and Tenant shall, on or before the commencement date of the Second Renewal Term, execute an amendment to the Lease extending the First Renewal Term on the same terms provided in the Lease, except as follows: (a) The Fixed Rent payable for each month during the Second Renewal Term shall be equal to the prevailing fair market rental rate for leases at comparable buildings in the Orange Area (as hereinafter defined) at the commencement of the Second Renewal Term (such rate is herein referred to as the "FMV RENEWAL RATE") for space of equivalent quality, size, utility and location, with the length of the Second Renewal Term and the credit standing and financial condition of Tenant to be taken into account; and (b) Landlord shall not provide to Tenant any allowances (e.g., moving allowance, construction allowance, tenant improvement allowance, and the like) or other tenant inducements in connection with the Second Renewal Term. C-1 6. As used herein, the term "ORANGE AREA" shall mean the area within a ten (10) mile radius of the Building. 7. Within thirty (30) days after Landlord's receipt of Tenant's Notice of Exercise for the Second Renewal Term, Landlord shall deliver to Tenant Landlord's determination of the FMV Renewal Rate (such determination by Landlord of the FMV Renewal Rate is herein referred to as "LANDLORD'S ASSESSMENT"). Tenant shall, within thirty (30) days after Tenant's receipt of Landlord's Assessment, notify Landlord in writing whether Tenant accepts or rejects Landlord's Assessment. The failure of Tenant to so notify Landlord shall be deemed to be an acceptance by Tenant of Landlord's Assessment and the same shall be the FMV Renewal Rate. If Tenant timely delivers to Landlord written notice that Tenant does not accept Landlord's Assessment ("TENANT'S OBJECTION NOTICE"), the FMV Renewal Rate shall be determined as provided in the following paragraph. Tenant's Objection Notice must identify Tenant's determination of the FMV Renewal Rate ("TENANT'S ASSESSMENT") to trigger the following appraisal process. 8. If Tenant timely delivers to Landlord Tenant's Objection Notice in which Tenant's Assessment has been identified, Landlord shall have the right to accept Tenant's Assessment by giving Tenant written notice thereof within five (5) days after Landlord's receipt of Tenant's Objection Notice. If Landlord does not so accept Tenant's Assessment, then Landlord and Tenant shall, within ten (10) business days after the expiration of such five (5) day period, jointly appoint an independent real estate broker or other person with at least ten (10) years' commercial real estate experience in Orange County, California (an "APPRAISER") to determine the FMV Renewal Rate. If the parties are unable to agree upon an Appraiser within such ten (10) business day period, either party may request that the Orange County, California office of the American Arbitration Association designate, within five (5) business days of such request, a broker with at least ten (10) years' commercial real estate experience in Orange County, California to be the Appraiser for the purposes of this paragraph; provided, however, in no event shall such designated Appraiser be employed, or have been employed, by either Landlord or Tenant. Such designation shall be binding on Landlord and Tenant. Within five (5) business days after the selection of an Appraiser, each of Landlord and Tenant shall submit to the Appraiser such party's determination of the FMV Renewal Rate (revised, if applicable, from any earlier determination), together with such supporting data used to make such determination. Within ten (10) business days after the selection of the Appraiser, the Appraiser shall select the determination of the FMV Renewal Rate for the Second Renewal Term which is closest to such Appraiser's determination of the FMV Renewal Rate, and such determination shall be averaged with such Appraiser's determination of the FMV Renewal Rate for the purpose of determining the Fixed Rent for the Second Renewal Term. The entire cost for the Appraiser's services shall be borne equally by Landlord and Tenant. 9. Tenant's rights under this Exhibit shall terminate following the occurrence of the following events: (a) a termination of Tenant's right to possess all or any portion of the Premises; (b) the failure of Tenant to timely exercise its right to renew the Initial Term as provided in this Exhibit, time being of the essence with respect to Tenant's exercise thereof; (c) Tenant assigns all or any of its interest in the Lease or sublets all or any portion of the Premises (other than to a transferee following a Permitted Transfer); and/or (d) a termination of the Lease. C-2 EXHIBIT "D" DEPICTION OF TENANT'S WAREHOUSE SPACE AND LANDLORD'S STORAGE AREA [See the attached] D-1 EX-10.58 10 a2045432zex-10_58.txt EXHIBIT 10.58 Exhibit 10.58 MARKETING SPECIALISTS - -------------------------------------------------------------------------------- PARTNERING FOR MARKET LEADERSHIP January 8, 2001 Mr. Gerald R. Leonard President & CEO Marketing Specialists Corporation 17855 N. Dallas Parkway, Suite 200 Dallas, Texas 75287 Dear Jerry: We have gone over the Company from top to bottom in attempt to "right the ship." The captain of the ship must do whatever he thinks is necessary to save the ship and its crew. With this in mind, I propose to alter my relationship with the Company by modifying my Employment Agreement (as defined below) as follows: 1. Section 3 of the Employment Agreement between Marketing Specialists Sales Company, a Texas Corporation, ("Company") and Ronald D. Pedersen ("Executive") dated April 2, 1996 ("Employment Agreement") is amended as follows: "3. Positions and Duties. Executive shall be employed as chairman, and stationed in Dallas, Texas. Executive shall report and be responsible to the Board. Executive shall, from time to time, as requested by Company provide services and advice relating to Company matters including without limitation developing and maintaining principal, customer and employee relationships; reviewing and commenting on marketing and sales strategies and proposals; and enhancing the overall reputation and goodwill of Company. Executives obligation to provided services and advice shall be limited to such times and dates as maybe mutually agreed upon by Company and Executive." 2. Section 4 of the Employment Agreement shall be amended as follows: "4. Compensation and Related Matters. (i) Salary, During the term of this Agreement, Company shall pay to Executive an annual base salary of $18,000. (ii) Bonus. At the discretion of the Compensation Committee, Executive shall be considered for a discretionary bonus based on Company's overall performance as well as Executive's individual contributions, and such bonus amount, if any, shall be paid at the same time Company pays its annual bonus to its senior executives. (iv) Company will convert Bent Tree Country Club corporate membership used by Executive to a personal membership for Executive's exclusive use at its sole expense and Executive shall be responsible for the dues and other charges other than those related to Company business. (v) If Company and Executive mutually agree to have Executive establish a home office, Company will transfer and convey to Executive a computer (including a CPU, monitor, keyboard and printer) comparable to the computer currently used by Executive, his executive desk chair, grandfather clock in Executive's office, and the ball and claw dining room table currently used as Company's 2nd floor conference room table (when it is economically feasible for Company to do so)." My Employment Agreement, except to the extent modified herein shall remain in effect. In addition, Company will amend that certain Deferred Compensation Plan adopted January 1, 1991 by Adams, Beckman, Pedersen, Inc. d/b/a ABP/Watt, Inc., as amended, ("Deferred Compensation Agreement"), substantially in the form as the attached Exhibit "A", and will initiate payments thereunder commencing January 1, 2001. Such payments shall be subject to all withholding requirements imposed by applicable federal, state, and local law, but no contributions to any profit sharing, 401(k) plan, or other benefit or deferred compensation plan or arrangement will be made from in respect of this amount. If this is agreeable, please take whatever corporate action is necessary to effectuate these changes to my Employment Agreement and Deferred Compensation Agreement and sign and date below. Sincerely, Ronald D. Pedersen Agreed and approved this ____ day of January, 2001. MARKETING SPECIALIST SALES COMPANY By: ------------------------------ Gerald R. Leonard, President EX-10.59 11 a2045432zex-10_59.txt EXHIBIT 10.59 Exhibit 10.59 FIRST AMENDMENT TO EMPLOYMENT AND NONCOMPETITION AGREEMENT This First Amendment to Employment and Noncompetition Agreement (this "AMENDMENT") is entered into as of the __ day of February, 2001 ("EFFECTIVE DATE") by and between Marketing Specialists Sales Company, a Delaware corporation and successor-in-interest by merger to Merkert Enterprises, Inc., a Massachusetts corporation ("EMPLOYER") and Glenn Gillam, an individual residing in the State of Massachusetts ("EXECUTIVE"). PRELIMINARY STATEMENTS A. Executive and Employer entered into that certain Employment and Noncompetition Agreement ("AGREEMENT"), dated as of December 18, 1998. B. Subject to the terms and conditions below, Employer and Executive desire to amend the Agreement to expand Executive's covenant not to compete to include manufacturers and customers of Employer and to extend the term of the Agreement. NOW THEREFORE, in consideration of the mutual covenants and agreements herein set forth, and other good and valuable consideration, the adequacy and receipt thereof being hereby acknowledged, Executive and Employer have agreed to amend the Agreement as hereafter provided. STATEMENT OF AGREEMENT 1. AMENDMENT TO NONCOMPETITION PROVISIONS. The Agreement is hereby amended by adding a new provision to Section 7(d) of the Agreement to expand the definition of the term "Restricted Business" to include "Principals" and "Customers" as defined in Section 7(e) of the Agreement. As of the Effective Date, the term "Restricted Business" shall mean: (A) any business which is competitive with any business conducted by Employer on the date of the termination of Executive's employment with Employer, and (B) any business which is competitive with any business conducted by the Employer within the twelve (12) month period immediately preceding the termination of Executive's employment with Employer, and (C) any business which is competitive with any business Employer actively considered entering within twelve(12) months preceding the date of the termination of Executive's Page 1 of 3 employment with Employer if the Executive has knowledge of such consideration and Employer in fact commences conducting such business during the Restricted Period. Notwithstanding the foregoing, Executive may own up to one percent (1%) of the outstanding stock of a publicly held corporation which constitutes or is affiliated with a Restricted Business, and (D) any business of a Principal or Customer (as defined in subsection 7(e) of the Agreement) that as of the date of Executive's termination for any reason (i) had a relationship with Employer at any time during the twelve (12) months immediately preceding Executive's termination, (ii) has a relationship with Employer at the time of Executive's termination, or (iii) has a relationship with Employer that is terminated within twelve (12) months immediately following the date of Executive's termination from Employer. 2. CONSIDERATION FOR AMENDMENT. As consideration for the execution and compliance with the terms of this Amendment, Employer shall pay to Executive a one (1) time, lump sum, bonus payment of Twenty Five Thousand Dollars ($25,000) ("Bonus"). Such Bonus shall be paid to the Executive within ten (10) days of the Effective Date of this Amendment and shall be subject to all applicable taxes and withholding requirements 3. EXTENSION OF TERM. The Agreement is amended by deleting Section 3 in its entirety, and in lieu thereof, inserting the following new Section 3: Subject to the provisions of Section 6, the term of employment pursuant to the Agreement and this Amendment shall be three (3) years from the Effective Date of this Amendment ("Initial Term")and shall continue month to month thereafter ("Extended Term"), subject to either party's thirty (30) day advance notice of non-renewal ("Non-renewal Notice"). 3. BENEFITS AND PERQUISITES. The Agreement is amended by adding the following new provision to Section 4(d): (iv) COUNTRY CLUB DUES. During the Initial Term and any Extended Term, Employer shall reimburse Executive for his membership dues to a country club selected by Executive and approved by Employer. Executive shall be responsible for submitting this expense to Employer in accordance with Employer's reimbursement policies. Page 2 of 3 5. OTHER TERMS. Except as stated herein, all other terms, conditions and provisions of the Agreement shall remain in full force and effect. 6. COUNTERPARTS. This Amendment may be executed in multiple counterparts each of which shall be an original, but all of which taken together shall constitute one instrument. IN WITNESS WHEREOF, this Amendment has been executed and delivered by the undersigned effective as of the date first set forth above. EXECUTIVE: ____________________________________ Glenn Gillam ____________________________________ Date MARKETING SPECIALISTS SALES COMPANY: By:_________________________________ Name:_______________________________ Title:______________________________ Page 3 of 3 EX-10.62 12 a2045432zex-10_62.txt EXHIBIT 10.62 WAIVER AND THIRD AMENDMENT TO CREDIT AGREEMENT THIS WAIVER AND THIRD AMENDMENT TO CREDIT AGREEMENT (the "AMENDMENT"), dated as of March 30, 2001, is among MARKETING SPECIALISTS CORPORATION, MARKETING SPECIALISTS SALES COMPANY, PAUL INMAN ASSOCIATES, INC., and THE SALES FORCE COMPANIES, INC. (the "BORROWERS"), each of the banks or other lending institutions which is a party hereto (individually a "BANK" and collectively the "BANKS") and THE CHASE MANHATTAN BANK, individually as a Bank and as agent for itself and the other Banks (in its capacity as agent, the "AGENT"). RECITALS: A. The Borrowers (other than The Sales Force Companies, Inc.), Bromar, Inc., the Agent, and the Banks have entered into that certain Credit Agreement dated as of March 30, 2000 (the "ORIGINAL CREDIT AGREEMENT"). The Original Credit Agreement has been modified pursuant to the following (and the Original Credit Agreement as modified by the following, herein the "AGREEMENT"): 1. That certain First Amendment to Credit Agreement dated April 13, 2000 among the Borrowers (other than The Sales Force Companies, Inc.), the Agent and the Banks; 2. That certain Joinder Agreement dated April 14, 2000 executed by the Borrowers, the Agent and the Banks to join The Sales Force Companies, Inc. into the Agreement as a "Borrower" thereunder; and 3. That certain Second Amendment to Credit Agreement dated November 17, 2000 among the Borrowers, the Agent and the Banks (the "SECOND AMENDMENT"). B. The Borrowers have advised the Agent and the Banks that Events of Default have occurred under (i) Section 11.1(d) of the Agreement as a result of the Borrowers' failure to comply with the covenant set forth in Section 8.1(a) of the Agreement for the Fiscal Year ended December 31, 2000; (ii) Section 11.1(e) of the Agreement as a result of the Borrowers' failure to deliver certain items to the Agent by March 15, 2001 as required by Section 4.6 of the Second Amendment and (iii) Section 11.1(j) of the Agreement as a result of the events of default that have occurred under the terms of the First Union Loan Agreement as a result of the Events of Default described herein (the "EXISTING DEFAULTS"). C. The Agent and the Banks are willing to waive the Existing Defaults and amend the Agreement as herein set forth. NOW, THEREFORE, in consideration of the premises herein contained and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows effective as of the date hereof unless otherwise indicated: ARTICLE I. DEFINITIONS Section 1.1. DEFINITIONS. Capitalized terms used in this Amendment, to the extent not otherwise defined herein, shall have the same meanings as in the Agreement, as amended hereby. WAIVER AND THIRD AMENDMENT TO CREDIT AGREEMENT-Page 1 ARTICLE II. AMENDMENTS Section 2.1. AMENDMENT TO SECTION 1.1. Section 1.1 of the Agreement is amended as follows: (a) The last paragraph in the definition of the term "Borrowing Base" is amended in its entirety to read as follows: As used in this definition, the term "ADVANCE PERCENT" means either: (i) as of March 31, 2001 and as of any date of determination of the Borrowing Base after March 31, 2001, but before June 1, 2001, seventy-five percent (75%), except as provided in clause (iii) below; (ii) as of June 1, 2001, and at all times thereafter except as provided in clause (iii) below, seventy percent (70%); or (iii) at any time, such lesser percent as the Agent may, at any time hereafter, determine is necessary to protect its interests, such determination to be made in the Agent's sole judgment, in good faith and based on information which, in its judgment, supports such determination. Any change in the Advance Percent and any establishment of reserves shall be effective on the date Parent receives Agent's written notice of such. In calculating the aggregate Borrowing Base of all of the Borrowers, no more than Four Million Dollars ($4,000,000) of the Non-System Receivables of all the Borrowers shall be included as Eligible Accounts. (b) The definition of the term "Borrowing Availability" is amended in its entirety to read as follows: "BORROWING AVAILABILITY" means, at any date of determination, the amount by which the lesser of the Commitments or the Borrowing Base exceed the Outstanding Revolving Credit or, when determined with respect to a Borrower, the amount that such Borrower's Borrowing Base exceeds the Outstanding Revolving Credit applicable to such Borrower; provided however, when calculating the Borrowing Availability for the purposes of Section 11.1(p) herein, the Advance Percent utilized to determine the amount of the Borrowing Base shall equal the lesser of seventy percent (70%) or the percentage otherwise established pursuant to the definition thereof. (c) The definition of the term "EBITDA" is amended in its entirety to read as follows: "EBITDA" means, for any period and any Person, the total of the following, each calculated without duplication for such Person on a consolidated basis for such period: (a) Net Income; PLUS (b) any provision for (or less any benefit from) income or franchise taxes included in determining Net Income; PLUS (c) interest expense deducted in determining Net Income; PLUS (d) amortization and depreciation expense deducted in determining Net Income, including, with respect to the Parent for any period which includes the Fiscal Quarter ended December 31, 2001, amortization consisting of the impairment write-off of approximately $307,000,000 recorded in such Fiscal Quarter. Section 2.2. AMENDMENT TO SECTION 8.1. Clause (a) of Section 8.1 of the Agreement is amended to read in its entirety as follows: WAIVER AND THIRD AMENDMENT TO CREDIT AGREEMENT-Page 2 (a) ANNUAL FINANCIAL STATEMENTS. As soon as available, and in any event within ninety (90) days after the end of each Fiscal Year of Parent, beginning with the Fiscal Year ending December 31, 1999, a copy of the annual audit report of Parent and the Subsidiaries for such Fiscal Year containing, on a consolidated and consolidating basis, balance sheets and statements of income, retained earnings, and cash flow as at the end of such Fiscal Year and for the Fiscal Year then ended, in each case setting forth in comparative form the figures for the preceding Fiscal Year, all in reasonable detail and audited and certified by independent certified public accountants of recognized standing acceptable to the Agent on an unqualified basis (and without comment as to the accountant's opinion whether the Parent is a going concern or can in the future continue to be a going concern), to the effect that such report has been prepared in accordance with GAAP; provided that the annual audit report delivered for the Fiscal Year ended December 31, 2000 may contain the accountant's comment that there is substantial doubt about the Parent's ability to continue as a going concern; Section 2.3. AMENDMENT TO SECTION 10.1. Section 10.1 of the Agreement is amended to add a new sentence immediately after the table contained therein to read in its entirety as follows: If the EBITDA of Parent for the two (2) Fiscal Quarters ended March 31, 2001 is equal to or greater than $14,250,000, then compliance with this covenant for the Fiscal Quarter ended March 31, 2001 is not required but shall be required with respect to all other Fiscal Quarters. Section 2.4. AMENDMENT TO SECTION 10.4. Section 10.4 of the Agreement is amended to add a new sentence immediately after the table contained therein to read in its entirety as follows: If the EBITDA of Parent for the two (2) Fiscal Quarters ended March 31, 2001 is equal to or greater than $14,250,000, then compliance with this covenant for the Fiscal Quarter ended March 31, 2001 is not required but shall be required with respect to all other Fiscal Quarters. Section 2.5. AMENDMENT TO SECTION 10.5. Section 10.5 of the Agreement is amended in its entirety to read as follows: Section 10.5 MINIMUM EBITDA. As of the dates set forth in the table below, Parent shall cause its EBITDA calculated for the four (4) Fiscal Quarters then ended (or, if as of such date less than four (4) Fiscal Quarters have elapsed since September 30, 2000, then for the Fiscal Quarters that have completely elapsed since September 30, 2000) to be not less than the amount set forth below opposite the applicable period:
=================================================== Date Amount =================================================== December 31, 2000 $ 9,000,000 --------------------------------------------------- March 31, 2001 $14,250,000 --------------------------------------------------- June 30, 2001 $25,400,000 --------------------------------------------------- September 30, 2001 $34,000,000 --------------------------------------------------- December 31, 2001 $39,000,000 ===================================================
WAIVER AND THIRD AMENDMENT TO CREDIT AGREEMENT-Page 3 ARTICLE III. CONDITIONS PRECEDENT Section 3.1. CONDITIONS. The effectiveness of Article II and Section 4.1 of this Amendment are subject to the conditions precedent that no Default (other than the Existing Defaults) and no event or condition that would have a Material Adverse Effect shall exist as of the effective date hereof and the Agent shall have received all of the following, all in form and substance acceptable to the Agent and the Banks and dated (unless other indicated or not applicable) the date hereof, all on or before April 18, 2001: (a) ACKNOWLEDGMENT. This Amendment executed by all of the Borrowers and Richmont Capital Partners I, L.P.; (b) FIRST UNION CONSENT. A fully executed copy of a consent to the terms of this Amendment executed by First Union National Bank; (c) WAIVER FEE. A non-refundable fee in an amount equal to $153,750 in consideration for the waivers and amendments provided in this Amendment, payable to the Agent for the benefit of each Bank that executes this Amendment, with each such Bank entitled to its pro rata portion of such $153,750 calculated based on the Commitment of a Bank as compared to the Commitments of all the Banks that executed this Amendment; and (e) COUNSEL REVIEW. Evidence that all proceedings taken in connection with the transactions contemplated by this Amendment and all documentation and other legal matters incident thereto are satisfactory to the Agent and its legal counsel, Jenkens & Gilchrist, a Professional Corporation. Section 3.2. POST-CLOSING COVENANTS. By April 27, 2001, the Borrowers shall deliver an annual audit report for Marketing Specialists Corporation for the Fiscal Year ended December 31, 2000 in the form required by Section 8.1(a) of the Agreement. By May 31, 2001, each Borrower shall deliver to the Agent the following, all in form and substance acceptable to the Agent: (a) a landlord or mortgage waiver duly completed and executed for each location where any of its Collateral is located; (b) lien acknowledgements from each third-party in possession of Collateral and any other documents or instruments necessary to create, preserve, protect and perfect the Liens of the Agent for the benefit of the Banks in the Collateral; (c) a letter executed by the Borrower and Richmont Capital Partners I, L.P. requesting the Banks' consent to the issuance of Series C Preferred Stock by Marketing Specialists Corporation; (d) certificates of the appropriate government officials for the states of Massachusetts, Oregon and Washington as to the authority of Marketing Specialists Sales Company to conduct business in such states; and (e) amendments or other modifications to the promissory notes originally executed by Richmont Marketing Specialist, Inc. and otherwise described below changing the subordination provisions thereof to reflect that all the Obligations and all the Term Loan Obligations (as defined in the First Union Loan Agreement) are senior debt under the subordination provisions thereof:
================================================= Payee Original Principal Amount ================================================= Clark Brinkley $174,116.02 ------------------------------------------------- Barney Deal $148,061.35 ------------------------------------------------- Donald Olin $ 28,554.82 ------------------------------------------------- Doug Heyel $ 5,808.29 ------------------------------------------------- Fred Manning $ 87,057.78 ------------------------------------------------- Joel Linebarger $174,116.02 =================================================
WAIVER AND THIRD AMENDMENT TO CREDIT AGREEMENT-Page 4 ARTICLE IV. WAIVERS, RATIFICATIONS, REPRESENTATIONS AND WARRANTIES Section 4.1. WAIVER OF THE EXISTING DEFAULTS. Each Bank waives the Existing Defaults and agrees not to exercise any rights or remedies available as a result of the occurrence thereof. To induce the Banks to agree to the waiver of the Existing Defaults, the Borrowers agree that this waiver shall not constitute and shall not be deemed a waiver of any other Default, further Events of Default under Sections 11.1(e) and 11.1(j) of the Agreement or otherwise, or a waiver of any rights or remedies arising as a result of such other Defaults. The failure to comply with any covenant in any Loan Document for any date, or any period ending on any date, other than as described above in the definition of Existing Defaults shall constitute an Event of Default. Section 4.2. RATIFICATIONS. The terms and provisions set forth in this Amendment shall modify and supersede all inconsistent terms and provisions set forth in the Agreement and, except as expressly modified and superseded by this Amendment, the terms and provisions of the Agreement and the other Loan Documents are ratified and confirmed and shall continue in full force and effect. The Borrowers, the Agent and the Banks party hereto agree that the Agreement as amended hereby and the other Loan Documents shall continue to be legal, valid, binding and enforceable in accordance with their respective terms. Section 4.3. REPRESENTATIONS AND WARRANTIES. The Borrowers hereby represent and warrant to the Agent and the Banks as follows: (a) after giving effect to this Amendment, no Default has occurred and is continuing; (b) after giving effect to this Amendment, the representations and warranties set forth in the Loan Documents are true and correct in all material respects on and as of the date hereof with the same effect as though made on and as of such date except with respect to any representations and warranties limited by their terms to a specific date; (c) the execution, delivery and performance of this Amendment has been duly authorized by all necessary action on the part of the Borrowers and does not and will not: (1) violate any provision of law applicable to any Borrower, the certificate of incorporation, bylaws, partnership agreement, membership agreement, or other applicable governing document of any Borrower or any order, judgment, or decree of any court or agency of government binding upon any Borrower, (2) conflict with, result in a breach of or constitute (with due notice or lapse of time or both) a default under any material contractual obligation of any Borrower, including without limitation, the Indenture, the First Union Loan Agreement and each agreement evidencing and governing the Debt of any Borrower that is subordinate to the Obligations; (3) result in or require the creation or imposition of any material lien upon any asset of any Borrower; or (4) require any approval or consent of any Person under any material contractual obligation of any Borrower; (d) the articles of incorporation, bylaws, partnership agreement, certificate of limited partnership, membership agreement, articles of organization or other applicable governing document of any Borrower, and the resolutions of the Borrowers attached as exhibits to the Certificate of Secretary of Borrowers dated March 30, 2000 delivered to the Agent, have not been modified or rescinded and remain in full force and effect; and (e) AS OF THE DATE HEREOF THERE ARE NO CLAIMS OR OFFSETS AGAINST OR DEFENSES OR COUNTERCLAIMS TO THEIR OBLIGATIONS UNDER THE LOAN DOCUMENTS AND IN ACCORDANCE THEREWITH THE BORROWERS: (I) WAIVER. WAIVE ANY AND ALL SUCH CLAIMS, OFFSETS, DEFENSES OR COUNTERCLAIMS, WHETHER KNOWN OR UNKNOWN, ARISING PRIOR TO THE DATE OF THEIR EXECUTION OF THIS AMENDMENT, AND WAIVER AND THIRD AMENDMENT TO CREDIT AGREEMENT-Page 5 (II) RELEASE. RELEASE AND DISCHARGE THE AGENT AND THE BANKS, AND THEIR RESPECTIVE OFFICERS, DIRECTORS, EMPLOYEES, AGENTS, SHAREHOLDERS, AFFILIATES AND ATTORNEYS (COLLECTIVELY THE "RELEASED PARTIES") FROM ANY AND ALL OBLIGATIONS, INDEBTEDNESS, LIABILITIES, CLAIMS, RIGHTS, CAUSES OF ACTION OR DEMANDS WHATSOEVER, WHETHER KNOWN OR UNKNOWN, SUSPECTED OR UNSUSPECTED, IN LAW OR EQUITY, WHICH ANY BORROWER EVER HAD, NOW HAS, CLAIMS TO HAVE OR MAY HAVE AGAINST ANY RELEASED PARTY ARISING PRIOR TO THE DATE HEREOF AND FROM OR IN CONNECTION WITH THE LOAN DOCUMENTS OR THE TRANSACTIONS CONTEMPLATED THEREBY. ARTICLE V. MISCELLANEOUS Section 5.1. SURVIVAL OF REPRESENTATIONS AND WARRANTIES. All representations and warranties made in this Amendment or any other Loan Document including any Loan Document furnished in connection with this Amendment shall survive the execution and delivery of this Amendment and no investigation by the Agent or any Bank or any closing shall affect the representations and warranties or the right of the Agent or any Bank to rely upon them. Section 5.2. REFERENCE TO AGREEMENT. Each of the Loan Documents, including the Agreement and any and all other agreements, documents, or instruments now or hereafter executed and delivered pursuant to the terms hereof or pursuant to the terms of the Agreement as amended hereby, are hereby amended so that any reference in such Loan Documents to the Agreement shall mean a reference to the Agreement as amended hereby. Section 5.3. EXPENSES OF BANK. As provided in the Agreement, the Borrowers agree to pay on demand all costs and expenses incurred by the Agent or any Bank in connection with the preparation, negotiation, and execution of this Amendment, including without limitation, the costs and fees of the Agent's and each Banks' legal counsel. Section 5.4. SEVERABILITY. Any provision of this Amendment held by a court of competent jurisdiction to be invalid or unenforceable shall not impair or invalidate the remainder of this Amendment and the effect thereof shall be confined to the provision so held to be invalid or unenforceable. Section 5.5. APPLICABLE LAW. This Amendment and all other Loan Documents executed pursuant hereto shall be governed by and construed in accordance with the laws of the State of New York and the applicable laws of the United States of America. Section 5.6. SUCCESSORS AND ASSIGNS. This Amendment is binding upon and shall inure to the benefit of the Agent, each Bank and each Borrower and its respective successors and assigns, except the Borrowers may not assign or transfer any of their rights or obligations hereunder without the prior written consent of the Banks. Section 5.7. SECTION COUNTERPARTS. This Amendment may be executed in one or more counterparts and on telecopy counterparts, each of which when so executed shall be deemed to be an original, but all of which when taken together shall constitute one and the same agreement. WAIVER AND THIRD AMENDMENT TO CREDIT AGREEMENT-Page 6 Section 5.8. EFFECT OF WAIVER. No consent or waiver, express or implied, by the Agent or any Bank to or for any breach of or deviation from any covenant, condition or duty by the Borrowers shall be deemed a consent or waiver to or of any other breach of the same or any other covenant, condition or duty. Section 5.9. HEADINGS. The headings, captions, and arrangements used in this Amendment are for convenience only and shall not affect the interpretation of this Amendment. Section 5.10. ENTIRE AGREEMENT. THIS AMENDMENT AND ALL OTHER INSTRUMENTS, DOCUMENTS AND AGREEMENTS EXECUTED AND DELIVERED IN CONNECTION WITH THIS AMENDMENT EMBODY THE FINAL, ENTIRE AGREEMENT AMONG THE PARTIES HERETO AND SUPERSEDE ANY AND ALL PRIOR COMMITMENTS, AGREEMENTS, REPRESENTATIONS AND UNDERSTANDINGS, WHETHER WRITTEN OR ORAL, RELATING TO THIS AMENDMENT, AND MAY NOT BE CONTRADICTED OR VARIED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS OR SUBSEQUENT ORAL AGREEMENTS OR DISCUSSIONS OF THE PARTIES HERETO. THERE ARE NO ORAL AGREEMENTS AMONG THE PARTIES HERETO. Section 5.11. REQUIRED BANKS. Pursuant to Section 13.11 of the Agreement, the Agreement may be modified as provided in this Amendment with the agreement of the Required Banks which means Banks having (a) sixty-six and two-thirds percent (66 2/3%) or more of the Commitments or (b) if the Commitments have been terminated, sixty-six and two-thirds percent (66 2/3%) or more of the outstanding principal amount of the Loans and participations in the Letters of Credit (such percentage applicable to a Bank, such Bank's "REQUIRED BANK PERCENTAGE"). For purposes of determining the effectiveness of this Amendment, each Bank's Required Bank Percentage is set forth on the SCHEDULE 5.11 hereto. Executed as of the date first written above. BORROWERS: MARKETING SPECIALISTS CORPORATION MARKETING SPECIALISTS SALES COMPANY PAUL INMAN ASSOCIATES, INC. THE SALES FORCE COMPANIES, INC. By: __________________________________________ Name: ____________________________________ Authorized Officer for all Borrowers AGENT AND BANKS: THE CHASE MANHATTAN BANK, individually as a Bank and as the Agent By: __________________________________________ Jim L. Holloway, Senior Vice President WAIVER AND THIRD AMENDMENT TO CREDIT AGREEMENT-Page 7 CREDIT SUISSE FIRST BOSTON By: __________________________________________ Name: ____________________________________ Title: ___________________________________ By: __________________________________________ Name: ____________________________________ Title: ___________________________________ FLEET CAPITAL CORPORATION By: __________________________________________ Name: ____________________________________ Title: ___________________________________ WAIVER AND THIRD AMENDMENT TO CREDIT AGREEMENT-Page 8 CONSENT AND REAFFIRMATION OF GUARANTY The undersigned: (i) consents and agrees to this Amendment; (ii) agrees that the Loan Documents to which it is a party shall remain in full force and effect and shall continue to be its legal, valid and binding obligation enforceable against it in accordance with their respective terms and (iii) reaffirms that it is obligated on the Guaranty Agreement dated March 30, 2000 executed by the undersigned in favor of the Agent and the Banks for the "Guaranteed Indebtedness" defined therein in an amount up to $10,000,000. RICHMONT CAPITAL PARTNERS I, L.P. By: J.R. Investments Corp., its Managing General Partner By: __________________________________________ Name: ____________________________________ Title: ___________________________________ WAIVER AND THIRD AMENDMENT TO CREDIT AGREEMENT-Page 9 Schedule 5.11 to Waiver and Third Amendment to Credit Agreement REQUIRED BANK PERCENTAGE
======================================================================================== Banks Agreeing to Amendment (insert % from prior column if Bank Required Bank signs this Amendment then total Bank Percentage Held percentages in this column) ======================================================================================== The Chase Manhattan Bank 33.3333% - ---------------------------------------------------------------------------------------- Credit Suisse First Boston 33.3333% - ---------------------------------------------------------------------------------------- Fleet Capital Corporation 33.3333% ======================================================================================== TOTAL 100.00% ========================================================================================
Schedule 5.11-Solo Page EX-10.63 13 a2045432zex-10_63.txt EXHIBIT 10.63 SECOND AMENDMENT TO CREDIT AGREEMENT THIS SECOND AMENDMENT TO CREDIT AGREEMENT (this "Second Amendment") is made as of April 19th, 2001, by and among MARKETING SPECIALISTS CORPORATION ("Borrower") and FIRST UNION NATIONAL BANK, as Agent ("Agent") and as sole Lender thereunder ("First Union"). BACKGROUND A. Pursuant to a Second Amended and Restated Credit Agreement dated as of March 30, 2000 (as the same may be modified and amended from time to time, including by the First Amendment dated as of November 17, 2000, and by this Second Amendment, the "Credit Agreement"), First Union amended and restated credit previously extended to Borrower in the form of a $35,000,000 term loan. B. On January 26, 2001, February 1, 2001, March 5, 2001 and March 30, 2001, MS Acquisition Limited (the "Purchaser") contributed, respectively, $3,000,000, $3,500,000, $2,500,000 and $2,000,000 in equity to the Borrower (the "Capital Contributions"). C. In consideration of the Capital Contributions, Borrower has agreed to issue (the "Issuance") eleven thousand (11,000) shares of its Series C Convertible Paid-In-Kind Preferred Stock (the "Equity Interests") to the Purchaser pursuant to a Preferred Stock Purchase Agreement to be dated no later than May 31, 2001 between the Borrower and the Purchaser (the "Preferred Stock Agreement"). D. Borrower has requested modifications to certain terms and provisions of the Credit Agreement and waiver of certain Events of Default, to which First Union is willing to agree on the terms and subject to the condition set forth herein. E. The Borrower and the Guarantors signatory hereto (each a "Company," and collectively, the "Companies") are party to that certain Credit Agreement dated March 30, 2000 (as amended from time to time, the "Revolver") with the lenders identified therein ("Revolver Lenders") and The Chase Manhattan Bank, as agent (the "Revolver Agent"). F. The Companies have advised the Revolver Agent and the Revolver Lenders that "Events of Default" have occurred under: (i) Section 11.1(d) of the Revolver as a result of the Companies' failure to comply with the covenant set forth in Section 8.1(a) of the Revolver for the Fiscal Year ended December 31, 2000; (ii) Section 11.1(e) of the Revolver as a result of the Companies' failure to deliver certain items to the Revolver Agent by March 15, 2001 as required by Section 4.6 of the Second Amendment to the Revolver; and (iii) Section 11.1(j) of the Revolver as a result of the "Term Defaults" described below (collectively the "Revolver Covenant Defaults" and the covenants described in this clause F., herein the "Violated Revolver Covenants"). In accordance with the Revolver, the Companies have requested that the Revolver Agent and the Revolver Lenders waive the Revolver Covenant Defaults. G. The Revolver Covenant Defaults constitute an existing Event of Default under Paragraph 7.1(c) of the Credit Agreement. The Revolver Covenant Defaults, together with any cross defaults under the Revolver arising out of Defaults under the Credit Agreement, are herein referred to as the "Existing Revolver Defaults." H. The Borrower has advised the Agent that "Events of Default" have occurred under Paragraph 2.7(b)(i)(C) of the Credit Agreement as a result of the Borrower's failure to pay the net cash proceeds of the Capital Contributions to the Agent for the benefit of the Lenders (the "Violated Term Covenant") which Event of Default, together with the existing Event of Default under Section 7.1(c) of the Credit Agreement, are herein referred to as the "Term Defaults." I. The Companies have requested that the Revolver Lenders (a) waive the Existing Revolver Defaults, (b) decrease the Minimum EBITDA amount required as of March 31, 2001 (the "Minimum EBITDA Amendment"); (c) amend the method of calculating the Borrowing Base and the advance percentage under the Revolver (the "Borrowing Base Amendment"); and (d) make certain other amendments to the Revolver (together with the Minimum EBITDA Amendment and the Borrowing Base Amendment, the "Revolver Amendments"), all pursuant to a Third Amendment to Credit Agreement dated as of the date hereof (the "Third Revolver Amendment"), in order that the Companies will be in compliance with the terms and covenants of the Revolver. J. Pursuant to Section 2.20(a) of the Intercreditor Agreement dated as of March 30, 2000 (the "Intercreditor Agreement"), among the Companies, the Revolver Agent and the Agent, the approval of the Required Lenders (as defined in the Intercreditor Agreement) is required to adopt the Borrowing Base Amendment. K. The Borrower has requested that First Union: (a) consent to the Minimum EBITDA Amendment and the Borrowing Base Amendment; (b) amend the Credit Agreement to reflect the terms of the Revolver Amendments; and (c) waive the Term Defaults. NOW, THEREFORE, in consideration of the foregoing premises and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, and intending to be legally bound hereby, the parties hereto agree as follows. 1. DEFINITIONS (a) GENERAL RULE. Unless otherwise defined herein, terms used herein which are defined in the Credit Agreement shall have the respective meanings assigned to them in the Credit Agreement. (b) AMENDED DEFINITION. The following definition contained in Section 1.1 of the Credit Agreement is hereby amended and restated to read in its entirety as follows: "EBITDA" means, for any period and any Person, the total of the following, each calculated without duplication for such Person on a consolidated basis for such period: (a) Net Income; plus (b) any provision for (or less any benefit from) income or franchise taxes included in determining Net Income; plus (c) interest expense deducted in determining Net Income; plus (d) amortization and depreciation expense deducted in determining Net Income; provided that, with respect to the Borrower, such amortization includes the impairment write-off of approximately $307,000,000 recorded in the Fiscal Quarter ended December 31, 2001. 2. AMENDMENT TO PARAGRAPH 5.3. Paragraph 5.3 of the Credit Agreement is amended to read in its entirety as follows: 5.3 ANNUAL FINANCIAL STATEMENTS. Furnish to each Lender within ninety (90) days after the close of each Fiscal Year audited consolidated and consolidating annual financial statements, including the information required under Paragraph 5.2 hereof, which financial statements shall be prepared in accordance with GAAP and shall be certified without -2- qualification (and without comment as to the accountant's opinion whether the Borrower is a going concern or can in the future continue to be a going concern; provided, however, that qualifications with respect to changes in GAAP as to which Borrower's independent certified public accountants have concurred shall be permitted) by an independent certified public accounting firm reasonably satisfactory to Agent; and cause Agent to be furnished, at the time of the completion of the annual audit, with copies of any management letters prepared by such accountants and with a certificate signed by such accountants to the effect that to the best of their knowledge there exists no Event of Default or Default hereunder; provided that the annual audit report delivered for the Fiscal Year ended December 31, 2000 may contain the accountant's comment that there is substantial doubt about the Borrower's ability to continue as a going concern. 3. AMENDMENT TO PARAGRAPH 5.16. Paragraph 5.16 of the Credit Agreement is amended to read in its entirety as follows: 5.16 MINIMUM EBITDA. As of each date set forth in the table below, Borrower shall cause its EBITDA calculated for the four (4) Fiscal Quarters then ended (or, if as of such date less than four (4) Fiscal Quarters have elapsed since September 30, 2000, then for the Fiscal Quarters that have completely elapsed since September 30, 2000), to be not less than the amount set forth below opposite the applicable date:
=========================================================== Date Amount =========================================================== December 31, 2000 $ 9,000,000 ----------------------------------------------------------- March 31, 2001 $14,250,000 ----------------------------------------------------------- June 30, 2001 $25,400,000 ----------------------------------------------------------- September 30, 2001 $34,000,000 ----------------------------------------------------------- December 31, 2001 $39,000,000 ===========================================================
4. AMENDMENTS TO PARAGRAPHS 5.17 AND 5.18. Each of Paragraphs 5.17 and 5.18 of the Credit Agreement are amended to add a new sentence immediately after the table contained therein to read in its entirety as follows: If the EBITDA of Borrower for the two (2) Fiscal Quarters ended March 31, 2001 is equal to or greater than $14,250,000, then compliance with this covenant for the Fiscal Quarter ended March 31, 2001 is not required but shall be required with respect to all other Fiscal Quarters. 5. CONDITIONS. The effectiveness of this Second Amendment is subject to the conditions precedent that no Default or Event of Default (other than the Term Defaults) and no event or condition that would have a Material Adverse Effect shall exist as of the effective date hereof and the Agent shall have received all of the following, all in form and substance acceptable to the Agent and its legal counsel, Pepper Hamilton LLP, and dated (unless other indicated or not applicable) the date hereof: (a) on or before April 27, 2001, (i) AUDIT REPORT. An annual audit report for the Borrower for the Fiscal Year ended December 31, 2000 in the form required by Section 8.1(a) of the Revolver; and -3- (ii) THIRD REVOLVER AMENDMENT. The Third Revolver Amendment executed by all parties thereto; and (b) on or before May 31, 2001: (i) a landlord or mortgage waiver duly completed and executed for each location where any of its Collateral is located; (i) lien acknowledgments from each third-party in possession of Collateral and any other documents or instruments necessary to create, preserve, protect and perfect the Liens of the Agent for the benefit of the Lenders in the Collateral; (ii) true and correct copies of the Preferred Stock Agreement and any other documents evidencing the Issuance, in form and substance satisfactory to the Lenders, including, without limitation, provisions subordinating any amounts due by the Borrower in connection with the Equity Interests and any related documents to amounts due by the Borrower under the Credit Agreement and the Loan Documents; (iii) A certificate of an Authorized Officer of Borrower dated the date of consummation of the Issuance to the effect that: (A) all conditions to the Issuance have been satisfied, and the Issuance is being consummated in accordance with its terms, as stated in the Preferred Stock Agreement, without waiver of any material term or provision thereof by Borrower; (B) all conditions to the Issuance set forth herein or in the Credit Agreement (as modified hereby) have been satisfied; and (C) there is no Event of Default or Default under the Credit Agreement (as modified hereby) in existence or which would be caused by the Issuance; (iv) certificates of the appropriate government officials for the states of Massachusetts, Oregon and Washington as to the authority of Marketing Specialists Sales Company to conduct business in such states; (v) amendments or other modifications to the promissory notes originally executed by Richmont Marketing Specialist, Inc. and otherwise described below changing the subordination provisions thereof to reflect that all the "Obligations" (as defined in the Revolver) and all the Term Loan Obligations are senior debt under the subordination provisions thereof; and
========================================= Payee Original Principal Amount ========================================= Clark Brinkley $174,116.02 ----------------------------------------- Barney Deal $148,061.35 ----------------------------------------- Donald Olin $ 28,554.82 ----------------------------------------- Doug Heyel $ 5,808.29 ----------------------------------------- Fred Manning $ 87,057.78 ----------------------------------------- Joel Linebarger $174,116.02 -----------------------------------------
(vi) ATTORNEYS' FEES AND EXPENSES. Evidence that the costs and expenses (including attorneys' fees) referred to in Paragraph 5.11 of the Credit Agreement, to the extent incurred and invoiced, have been paid in full. -4- 6. CONSENTS; WAIVERS OF THE TERM DEFAULTS. The Lender hereby consents to the Revolver Amendments and waives the Term Defaults and agrees not to exercise any rights or remedies available as a result of the occurrence thereof. To induce the Lender to agree to the foregoing, the Borrower agrees that this consent and waiver shall not constitute and shall not be deemed a consent of any other amendment to the Revolver or a waiver of any other Default or Event of Default, whether arising as a result of any further violation of the Violated Term Covenants or otherwise, or a waiver of any rights or remedies arising as a result of other Default or Event of Default. The failure to comply with the Violated Term Covenants for any date, or any period ending on any date, other than as described above in the definition of Term Defaults shall constitute an Event of Default. 7. RATIFICATIONS. Except as expressly modified and superseded by this Second Amendment, the terms and provisions of the Credit Agreement and the other Loan Documents are ratified and confirmed and shall continue in full force and effect. Borrower, the Agent and the Companies party hereto agree that the Credit Agreement as amended hereby and the other Loan Documents shall continue to be legal, valid, binding and enforceable in accordance with their respective terms, subject to the terms and conditions of the Amended and Restated Intercreditor Agreement. 8. REPRESENTATIONS AND WARRANTIES. Each Company represents and warrants to Lenders and Agent that: (a) The information supplied to Lenders and Agent with respect to the Revolver Amendments, the Existing Revolver Defaults and the Term Defaults is true and correct in all material respects, and does not contain any untrue statement of material fact or omit to state a material fact necessary in order to make the statements contained in such information not misleading. (b) Except to the extent such violation, Default or Event of Default is expressly waived or consented to by this Second Amendment, the entering into of the Third Revolver Amendment and the Amended and Restated Intercreditor Agreement, on the terms set forth herein have not and will not violate any term or provision of the Credit Agreement or result in any Default or Event of Default thereunder. (c) The representations and warranties set forth in the Credit Agreement, the Amended and Restated Intercreditor Agreement, and each of the Loan Documents are true and correct in all material respects as of the date hereof, after giving effect to the Third Revolver Amendment, the Amended and Restated Intercreditor Agreement, and this Second Amendment. (d) No term or provision of the Indenture will be violated by, and no redemption or other rights of the holders of the Richmont Subordinated Notes will be triggered by, the entering into of the Third Revolver Amendment, the Amended and Restated Intercreditor Agreement or any related transactions, including the incurrence of Indebtedness (as defined in the Indenture) pursuant thereto. (e) Except as effectively consented to or waived in writing by the Revolver Lenders and/or Revolver Agent, no term or provision of the Revolver will be violated by the entering into of the Third Revolver Amendment, the Amended and Restated Intercreditor Agreement or any related transactions. -5- 9. REFERENCE TO CREDIT AGREEMENT. Each of the Loan Documents, including the Credit Agreement and any and all other agreements, documents, or instruments now or hereafter executed and delivered pursuant to the terms hereof or pursuant to the terms of the Credit Agreement as amended hereby, are hereby amended so that any reference in such Loan Documents to the Credit Agreement shall mean a reference to the Credit Agreement as amended hereby. 10. EXPENSES OF AGENT. Borrower agrees to pay on demand all costs and expenses incurred by Agent in connection with the preparation, negotiation, and execution of this Second Amendment and the other Loan Documents executed pursuant hereto, including without limitation, the costs and fees of Agent's legal counsel. 11. SEVERABILITY. Any provision of this Second Amendment held by a court of competent jurisdiction to be invalid or unenforceable shall not impair or invalidate the remainder of this Second Amendment and the effect thereof shall be confined to the provision so held to be invalid or unenforceable. 12. APPLICABLE LAW. This Second Amendment and all other Loan Documents executed pursuant hereto shall be governed by and construed in accordance with the laws of the Commonwealth of Pennsylvania and the applicable laws of the United States of America. 13. SUCCESSORS AND ASSIGNS. This Second Amendment is binding upon and shall inure to the benefit of Agent, each Lender and the Borrower and its respective successors and assigns, except Borrower may not assign or transfer any of its rights or obligations hereunder without the prior written consent of the Agent. 14. SECTION COUNTERPARTS. This Second Amendment may be executed in one or more counterparts and on telecopy counterparts, each of which when so executed shall be deemed to be an original, but all of which when taken together shall constitute one and the same agreement. 15. EFFECT OF WAIVER. No consent or waiver, express or implied, by Agent or any Lender to or for any breach of or deviation from any covenant, condition or duty by Borrower shall be deemed a consent or waiver to or of any other breach of the same or any other covenant, condition or duty. 16. HEADINGS. The headings, captions, and arrangements used in this Second Amendment are for convenience only and shall not affect the interpretation of this Second Amendment. 17. WAIVER AND RELEASE. IN ADDITION, TO INDUCE THE AGENT AND THE LENDERS TO AGREE TO THE TERMS OF THIS SECOND AMENDMENT, THE BORROWER AND EACH GUARANTOR REPRESENTS AND WARRANTS THAT AS OF THE DATE OF ITS EXECUTION OF THIS SECOND AMENDMENT THERE ARE NO CLAIMS OR OFFSETS AGAINST OR DEFENSES OR COUNTERCLAIMS TO ITS OBLIGATIONS UNDER THE LOAN DOCUMENTS AND IN ACCORDANCE THEREWITH IT: (i) WAIVER. WAIVES ANY AND ALL SUCH CLAIMS, OFFSETS, DEFENSES OR COUNTERCLAIMS, WHETHER KNOWN OR UNKNOWN, ARISING PRIOR TO THE DATE OF ITS EXECUTION OF THIS SECOND AMENDMENT AND -6- (ii) RELEASE. RELEASES AND DISCHARGES THE AGENT AND THE LENDERS, AND THEIR RESPECTIVE OFFICERS, DIRECTORS, EMPLOYEES, AGENTS, SHAREHOLDERS, AFFILIATES AND ATTORNEYS (COLLECTIVELY THE "RELEASED PARTIES") FROM ANY AND ALL OBLIGATIONS, INDEBTEDNESS, LIABILITIES, CLAIMS, RIGHTS, CAUSES OF ACTION OR DEMANDS WHATSOEVER, WHETHER KNOWN OR UNKNOWN, SUSPECTED OR UNSUSPECTED, IN LAW OR EQUITY, WHICH THE BORROWER OR ANY GUARANTOR EVER HAD, NOW HAS, CLAIMS TO HAVE OR MAY HAVE AGAINST ANY RELEASED PARTY ARISING PRIOR TO THE DATE HEREOF AND FROM OR IN CONNECTION WITH THE LOAN DOCUMENTS OR THE TRANSACTIONS CONTEMPLATED THEREBY. 18. ENTIRE AGREEMENT. THIS SECOND AMENDMENT AND ALL OTHER INSTRUMENTS, DOCUMENTS AND AGREEMENTS EXECUTED AND DELIVERED IN CONNECTION WITH THIS SECOND AMENDMENT EMBODY THE FINAL, ENTIRE AGREEMENT AMONG THE PARTIES HERETO AND SUPERSEDE ANY AND ALL PRIOR COMMITMENTS, AGREEMENTS, REPRESENTATIONS AND UNDERSTANDINGS, WHETHER WRITTEN OR ORAL, RELATING TO THIS SECOND AMENDMENT, AND MAY NOT BE CONTRADICTED OR VARIED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS OR SUBSEQUENT ORAL AGREEMENTS OR DISCUSSIONS OF THE PARTIES HERETO. THERE ARE NO ORAL AGREEMENTS AMONG THE PARTIES HERETO. -7- IN WITNESS WHEREOF, the undersigned have executed this Second Amendment to Credit Agreement the day and year first above written. Attest: MARKETING SPECIALISTS CORPORATION By:_________________________ By:____________________________ Name: Name: Title: Title: FIRST UNION NATIONAL BANK, as sole Lender and as Agent By:____________________________ Name: Title: Each of the undersigned Guarantors, intending to be legally bound hereby, does hereby acknowledge and agree (i) to the terms of the foregoing Second Amendment to Credit Agreement (the "Second Amendment"); (ii) that the Second Amendment shall not in any way adversely affect or impair the obligations of the undersigned to Lenders under that certain Second Amended and Restated Guaranty Agreement from the Guarantors to First Union National Bank dated as of March 30, 2000, as amended (the "Guaranty"), or under any documents in connection therewith or collateral thereto; (iii) all sums advanced under the Notes referenced in the Credit Agreement and all accrued and unpaid interest thereon constitute "Guaranteed Obligations" under the Guaranty; and (iv) the Guaranty and all such other Loan Documents are hereby ratified, confirmed and continued, all as of this 19th day of April, 2001. Attest: MARKETING SPECIALISTS SALES COMPANY By:_________________________ By:_________________________ Name: Name: Title: Title: Attest: PAUL INMAN ASSOCIATES, INC. By:_________________________ By: _________________________ Name: Name: Title: Title: Attest: THE SALES FORCE COMPANIES, INC. By:_________________________ By:_________________________ Name: Name: Title: Title: -8- EX-21.1 14 a2045432zex-21_1.txt EXHIBIT 21.1 Exhibit 21.1 SUBSIDIARIES OF REGISTRANT
Place of Percentage of Voting Name of Subsidiary Organization Securities Owned - ------------------ ------------ -------------------- Marketing Specialists Sales Delaware 100% Corporation Paul Inman Associates, Inc. Michigan 100% Bromar, Inc. California 100%
EX-23 15 a2045432zex-23.txt EXHIBIT 23 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS We hereby consent to the incorporation by reference in this Registration Statement on Form S-8 (No. 333-85523) of Marketing Specialists Corporation of our report dated April 9, 2001, except as to the "Amended Senior Credit Facility Amendments" section of Note 9 which is as of April 19, 2001 relating to the financial statements, which appears in the Form 10-K. PricewaterhouseCoopers LLP Dallas, Texas April 19, 2001 EX-25 16 a2045432zex-25.txt EXHIBIT 25 [LETTERHEAD FOR MARKETING SPECIALISTS] CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS As independent public accountants, we hereby consent to the incorporation by reference of our report dated March 3, 2000, except for notes 2 and 9 as to which the dates are April 9, 2001 and March 30, 2000, respectively, included in Marketing Specialist Corporation's Annual Report on Form 10-K for the year ended December 31, 2000, into Marketing Specialists Corporation's previously filed registration statement No. 333-85523 on Form S-8. It should be noted that we have performed no audit procedures subsequent to March 3, 2000, the date of our report, except with respect to the notes 2 and 9 as to which the dates are April 9, 2001 and March 30, 2000, respectively. Furthermore, we have not audited any financial statements of Marketing Specialists Corporation as of any date or for any period subsequent to December 31, 1999. Arthur Andersen LLP Boston, Massachusetts April 20, 2001 -----END PRIVACY-ENHANCED MESSAGE-----