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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998 COMMISSION FILE NO.: 1-4814
ARIS INDUSTRIES, INC.
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(Exact name of registrant as specified in its charter)
NEW YORK 22-1715274
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(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
475 FIFTH AVENUE, NEW YORK, NY 10017
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(Address of principal executive offices) (Zip code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: 212-686-5050
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SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
COMMON STOCK, PAR VALUE ONE ($.01) CENT PER SHARE
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 then preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirement for the past 90 days.
Yes X No
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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 be
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 the Form 10-K.
Yes No
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As of March 22, 1999, 46,021,036 shares of the Registrant's Common Stock
and 2,605,903 shares of the Registrant's Series A Preferred Stock, convertible
into 26,059,030 shares of Common Stock, were outstanding. The aggregate market
value of the 6,335,615 shares of voting stock of the Registrant held by
non-affiliates of the Registrant at March 22, 1999 was $18,563,352.
Documents incorporated by reference: NONE
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ARIS INDUSTRIES, INC.
TABLE OF CONTENTS
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PART I ...................................................................................................... 1
Item 1. Business..................................................................................... 1
Item 2. Properties................................................................................... 4
Item 3. Legal Proceedings............................................................................ 4
Item 4. Submission of Matters to a Vote of Security Holders.......................................... 4
PART II ...................................................................................................... 5
Item 5. Market for Registrant's Common Equity
and Related Security Holder Matters.......................................................... 5
Item 6. Selected Financial Data...................................................................... 6
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations........ 6
Item 7A. Quantitative and Qualitative Disclosures about Market Risk .................................. 12
Item 8. Financial Statements and Supplementary Data.................................................. 12
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure......... 13
Part III ...................................................................................................... 13
Item 10. Directors and Executive Officers of the Registrant........................................... 13
Item 11. Executive Compensation....................................................................... 15
Item 12. Security Ownership of Certain Beneficial Owners and Management............................... 21
Item 13. Certain Relationships and Related Transactions............................................... 22
PART IV ...................................................................................................... 25
Item 14. Exhibits, Financial Statements, Schedules and Reports on Form 8-K............................ 25
SIGNATURES..................................................................................................... 30
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PART I
ITEM 1. BUSINESS.
Aris Industries, Inc. (the "Company", the "Registrant" or "Aris"), through
its wholly owned subsidiaries, Europe Craft Imports, Inc. ("ECI"), and ECI
Sportswear, Inc. ("ECI Sportswear"), designs, imports and licenses men's and
boys' outerwear and sportswear. The Company was incorporated in the State of New
York in 1947. Reference to the Company includes ECI and ECI Sportswear, where
applicable.
The Company designs and imports various lines of men's and boy's outerwear,
activewear, swimwear, loungewear and sportswear under the Members Only
trademark, which it owns, and the following licensed names: Perry Ellis, Perry
Ellis America, John Henry and FUBU. It also licenses the Members Only name to
others. The Company's products are marketed nationally in department stores,
specialty stores and national retail chains, and through licensees in North
America and South America. ECI also operates three stores located in factory
outlet malls.
On June 30, 1998, the Company entered into a sublicense agreement with
Salant Corporation ("Salant"), a licensee of the "Perry Ellis America" name,
whereby the Company was granted the right to manufacture and sell, among other
things, men's jeans and other denim products under the "Perry Ellis America"
name. Sales of such products were not material in 1998.
SIMON TRANSACTION
On February 26, 1999, pursuant to a Securities Purchase Agreement (the
"Purchase Agreement") among the Company, The Simon Group, L.L.C., a New York
limited liability company ("The Simon Group"), Apollo Aris Partners, L.P., a
Delaware limited partnership ("AAP"), AIF-II, L.P., a Delaware limited
partnership ("AIF"), and Arnold Simon, the Company entered into the following
transactions (the "Simon Purchase Transaction"): (i) The Simon Group acquired
24,107,145 shares of Common Stock of the Company and 2,093,790 shares of Series
A Preferred Stock of the Company (which shares shall be convertible into
20,937,900 shares of Common Stock), for $20,000,000 and (ii) the Company
redeemed from AIF the Series B Junior Secured Note (which represented a total
indebtedness of $10,658,000) in exchange for $4,000,000 in cash and
approximately 5,892,856 shares of Common Stock and 512,113 shares of Series A
Preferred Stock (which shares shall be convertible into 5,121,130 shares of
Common Stock). AIF and AAP are collectively referred to as "Apollo."
Upon the closing of the Simon Purchase Transaction, The Simon Group became
the beneficial owner of approximately 63.4% of the Common Stock. The Company's
directors other than Charles S. Ramat and Robert A. Katz, resigned and the Board
was increased from five directors to six directors. Arnold Simon, David Fidlon,
Debra Simon and Howard Schneider, designees of The Simon Group, were elected to
the Board. Arnold Simon is the Managing Member of The Simon Group and has the
sole voting and investment power with respect to the shares of the Company owned
by The Simon Group. Upon the closing, Mr. Simon became the Chairman and Chief
Executive Officer of the Company, ECI and ECI Sportswear. Effective March 29,
1999, the Company terminated the employment of Charles Ramat, the Chairman and
Chief Executive Officer of the Company through the Closing of the Simon Purchase
Transaction. See, "Executive Compensation - Employment Agreements."
Arnold Simon, the new Chairman and Chief Executive Officer of the Company,
formerly held those positions with Designer Holdings, Ltd. ("Designer Holdings")
a manufacturer of, among other products, a variety of brand name jeans. Upon the
sale of Designer Holdings to the Warnaco Group, Inc. ("Warnaco"), Mr. Simon
agreed to certain non-competition restrictions. In connection with the Simon
Purchase Transaction, Warnaco agreed to permit the Company and Mr. Simon (in his
capacity with the Company) to compete with Warnaco in exchange for 700,000
shares of Common Stock and the Company's agreement to take over Warnaco's New
Bedford, Massachusetts warehouse and workforce effective June 1, 1999.
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LICENSING
The Company has registered the trademark "Members Only" in the United
States and 47 other countries principally for use in connection with apparel and
other men's clothing. In addition to selling products under the "Members Only"
name, the Company licenses it to others. The Company also licenses the use of
various "Perry Ellis" names, "FUBU" and "John Henry."
MEMBERS ONLY LICENSING PROGRAM
The Company has granted licenses of the "Members Only" trademark for the
manufacture and sale of men's woven shirts, men's tailored suits and sportcoats,
eyeglasses, hosiery, luggage and cold weather accessories for distribution in
the United States and for men's outerwear for distribution in Canada.
LICENSE EXPIRATIONS
The Company's licenses to use trademarks owned by other parties have terms
expiring in the years 1999 to 2001 with renewal terms through the years 2005 -
2009, contingent on achieving certain sales volumes and otherwise complying with
the applicable license agreements. In November 1998, ECI's license of "MTV
Sports" and related trademarks was discontinued by mutual agreement with the
licensor. On February 26, 1999, the Company entered into an agreement with Perry
Ellis International, Inc. ("PEI") and Supreme International, Inc. ("Supreme"),
the proposed purchaser of PEI, whereby the Company agreed that if Supreme
acquires PEI prior to June 30, 1999, all of the Company's licenses to use
trademarks owned by PEI would terminate on December 31, 2000 and be renewable
only upon mutual agreement with PEI. On December 29, 1998, Salant, which is the
sublicensor to the Company of PEI trademarks for certain apparel lines, filed
for protection under Chapter 11 of the U.S. Bankruptcy Code. Salant's proposed
plan of reorganization recommends maintaining its PEI apparel business, but
there are no assurances that such plan will be approved or that the Salant
sublicenses to the Company will not be rejected.
DESIGN, MANUFACTURING AND IMPORTATION
All of the Company's products are manufactured overseas by independent
factories, each of which must satisfy the Company's quality and delivery
standards, pursuant to design samples and specifications provided by the
Company. The Company presently imports products from Hong Kong, Korea, China,
Guatemala, the Philippines, Bangladesh, Sri Lanka, Indonesia, India, Taiwan, and
the Dominican Republic.
CUSTOMERS, MARKETING AND DISTRIBUTION
The Company's products are sold primarily to department and specialty
stores and national retail chains. During 1998, J.C. Penney accounted for
approximately 13% of the Company's total consolidated revenues. Although the
Company has traditionally had a strong relationship with J.C. Penney, the loss
of J.C. Penney as a customer or a substantial reduction of revenues from sales
to J.C. Penney could have a material adverse effect on the Company. J.C. Penney
has informed the Company that it anticipates reducing the volume of outerwear in
both its private label and branded business as well as reducing the number of
outerwear vendors with which it deals. The Company cannot predict whether and to
what extent reductions by J.C. Penney will affect the Company.
COMPETITION
The Company's products are sold in markets which place a premium on
identifiable brand names. The Company competes with other apparel manufacturers
based on style, quality, value and brand recognition. Although the Company sells
its products to retail customers, it also competes with the "private label"
apparel lines of its retail customers. The Company's apparel products, which are
sold on the main selling floors of their retail store customers, are facing
increasing competition from the expanded dedication of retail floor space to
"designer collections".
THE APPAREL INDUSTRY
The apparel industry is volatile and unpredictable due to cyclical and
seasonal swings caused by consumer buying patterns, weather conditions and other
factors. In addition, due to the lead time necessary for fabric delivery,
product design, manufacture and distribution, apparel importers such as the
Company must make commitments prior
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to the related selling season to purchase inventory sufficient to cover the
volume of apparel expected to be sold. Increasingly, retail customers of the
Company are ordering their products closer to the actual delivery date and
selling season. In order for the Company to deliver its products on time, it
must often commit to production in advance of obtaining firm orders from its
retail customers.
SEASONALITY
The Company's outerwear business is particularly impacted by unusually warm
weather or the late arrival of cold weather.
MATERIALS AND SUPPLIES
The principal raw materials used by the Company's apparel manufacturing
contractors are fabrics made from natural fibers, leather, synthetics and
blends. In addition, such manufacturers use yarn, thread and accessories such as
buttons, snaps, elastic and zippers which are purchased from many suppliers. The
Company believes the raw materials currently used in its products are readily
available at comparable prices and quality from sources other than those now
being used.
TRADEMARKS
The Company has registered a variety of trade names, service marks and
trademarks ("Trademarks") with the United States Patent and Trademark Office
including "Members Only" Trademarks. Registration of the Trademarks is renewable
for as long as the use thereof continues. The Company considers certain of its
Trademarks to be of material importance to its business and actively defends and
enforces those Trademarks.
The Company also holds licenses to manufacture and distribute certain
apparel products under the "Perry Ellis", "Perry Ellis America" and "FUBU"
Trademarks which are of material importance to its business.
EMPLOYEES
As of December 31, 1998, the Company and its subsidiaries had approximately
163 full and part-time employees, none of whom are covered by collective
bargaining agreements except for approximately five employees at ECI's New
Jersey warehouse. The Company regards its employee relations as satisfactory.
Pursuant to the Warnaco Agreement, the Company has agreed to negotiate in good
faith with the union representing Warnaco's employees in New Bedford,
Massachusetts. See "Certain Relationships and Related Transactions - Agreement
with Warnaco."
FOREIGN SALES
Although the Company sells products in Canada, Mexico and South America,
such sales do not comprise a significant portion of the Company's sales.
BUSINESS SEGMENT DATA
The Company is engaged in one business, the design and import of men's and
boys' outerwear, activewear, swimwear, loungewear and sportswear. The Company is
organized and managed as one business segment that offers distinct men's and
boys' apparel products to its customers. The Company's business is conducted
domestically, with substantially all of its net sales derived from domestic
customers.
DAVCO ACQUISITION
Effective July 15, 1997, ECI Sportswear acquired substantially all of the
assets of Davco Industries, Inc. ("Davco"), a maker of men's and boys'
activewear, swimwear, loungewear and some sportswear products sold under the
"Perry Ellis America" and/or "Perry Ellis" labels and men's sportswear under the
"Jeffrey Banks" label. The purchase price paid consisted of (a) 3,000,000 shares
of the Company's Common Stock then valued at $720,000 and (b) a contingent cash
purchase price to Davco based on the pre-tax net income of the Davco apparel
business as owned by ECI Sportswear from the closing date through December 31,
1997 (subject to certain adjustments), which was $3,483,000. On April 10, 1998,
the Company completed payment of the contingent purchase price.
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The acquisition was accounted for as a purchase and, accordingly, operating
results of this business subsequent to the date of acquisition were included in
the Company's consolidated financial statements. The purchase price was
allocated based on estimated fair values at the date of acquisition. This
resulted in an excess of purchase price over net assets acquired of $3,219,000,
which has been recognized as goodwill and is being amortized on a straight-line
basis over 20 years. As a result of the amendments to PEI licenses entered into
in February 1999 (see "License Expirations"), the amortizations of this goodwill
may be accelerated.
All 3,000,000 shares of the Company's Common Stock delivered to Davco are
subject to the terms, conditions and restrictions of a Shareholders Agreement
entered into on July 15, 1997 between Davco, the Company, Steven Arnold and
Christopher Healy (Davco's sole shareholders) and certain other shareholders of
the Company. (See "Certain Relationships and Related Transactions - Davco
Shareholders Agreement".)
ITEM 2. PROPERTIES.
The Company currently has approximately 40,000 square feet of leased space
for its executive and sales offices and showrooms in New York in two locations,
and also leases approximately 29,600 square feet of space in New Jersey which
serves as its general business, accounting and management information service
headquarters; 120,000 square feet of warehouse space adjacent to its New Jersey
offices; and approximately 22,000 square feet of warehouse space in Stamford,
Connecticut. ECI has three retail outlet stores in South Carolina, Tennessee and
Virginia with an aggregate of approximately 7,500 square feet. The leases for
the premises in New Jersey terminate on June 30, 1999 and March 31, 2000.
On March 16, 1999, the Company entered into a new lease for approximately
33,000 square feet at 1411 Broadway, New York, N.Y. In April, 1999, the Company
entered into a sublease for the third floor at 475 Fifth Avenue, New York, NY.
The Company intends to sublease the balance of its space at such location and to
consolidate all of its executive, finance, sales and administrative offices and
showroom into its new premises.
As part of the Simon Purchase Transaction, commencing on June 1, 1999, the
Company will take over Warnaco's New Bedford, Massachusetts warehouse
facilities, which consist of approximately 300,000 square feet. The Company is
currently in negotiations for a new lease for the New Bedford facility. The
Company intends to consolidate substantially all of its warehousing in the New
Bedford facility.
ITEM 3. LEGAL PROCEEDINGS.
The Company, in the ordinary course of its business, is party to various
legal actions the outcome of which the Company believes will not have a material
adverse effect on its consolidated financial statements at December 31, 1998.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matters were submitted to a vote of security holders during the fourth
quarter ended December 31, 1998.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SECURITY HOLDER
MATTERS.
The Company's Common Stock is traded in the over-the-counter (OTC) market
under the symbol AISI (formerly ARIN). Set forth below are the high and low bid
prices for a share of the Common Stock for the first quarter of 1999 and for
each fiscal quarter during the prior two fiscal years, as reported in published
financial sources. Pursuant to the terms of the Company's loan agreements, the
Company has agreed not to declare or pay any dividends (other than stock
dividends) on the Common Stock without the prior written consent of its lenders.
The Company has not paid any dividends during the last two fiscal years and does
not intend to pay any cash dividends in the foreseeable future. The price
quotations set forth below reflect inter-dealer prices, without retail markup,
markdown or commission and may not necessarily represent actual transactions.
High Low
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1997 First Quarter .3437 .3125
Second Quarter .6400 .3750
Third Quarter 1.6562 .4800
Fourth Quarter 2.1250 .9375
1998 First Quarter 2.0625 1.3125
Second Quarter 2.125 .875
Third Quarter 1.0625 .625
Fourth Quarter .875 .125
1999 First Quarter 3.6875 .625
(through date of
March 22, 1999)
There were approximately 4,020 shareholders of record as of March 22, 1999
and the closing bid price of a share of the Common Stock was $2.94 on March 22,
1999.
RECENT SALES OF UNREGISTERED SECURITIES
At the closing of the Simon Purchase Transaction on February 26, 1999, (i)
The Simon Group acquired 24,107,145 shares of Common Stock and 2,093,790 shares
of Series A Preferred Stock (convertible into 20,937,790 shares of Common Stock)
for $20,000,000 and (ii) the Company redeemed from AIF the Series B Junior
Secured Note of the Company including all accrued interest thereon (representing
a total indebtedness of $10,700,000) in exchange for $4,000,000 in cash plus
5,892,856 shares of common stock and 512,113 shares of Series A Preferred Stock
(convertible into 5,121,130 shares of Common Stock). All such shares were sold
to The Simon Group and AIF in a private, negotiated transaction, exempt from
registration pursuant to Section 4(2) of the Securities Act of 1933, as amended
(the "Securities Act"), as a transaction not involving any public offering.
In March 1999, the Company issued 700,000 shares of Common Stock to
Warnaco, Inc. in consideration for Warnaco's consent to the Simon Purchase
Transaction (See "Certain Relationships and Related Transactions --Agreements
with Warnaco). In March 1999, the Company issued 250,000 shares of Common Stock
to Shapiro Forman & Allen LLP, in partial payment for services rendered by such
law firm to The Simon Group in connection with the Simon Purchase Transaction,
which services, under the terms of the Purchase Agreement, were to be paid for
by the Company. These share issuances are exempt from registration pursuant to
Section 4(2) of the Securities Act as transactions not involving any public
offering.
The shares of Series A Preferred Stock of the Company are not publicly
traded. Each share of Series A Preferred Stock is automatically convertible into
ten shares of Common Stock upon the filing of a Certificate of Amendment to the
Certificate of Incorporation of the Company increasing the authorized shares of
Common Stock of the Company to an amount sufficient to permit conversion of all
shares of outstanding Series A Preferred Stock. Pursuant to the Purchase
Agreement the Company has agreed to call and hold a Shareholders Meeting as
promptly as practical following the filing of this Annual Report for the purpose
of seeking shareholder approval of such amendment to the Company's Certificate
of Incorporation.
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ITEM 6. SELECTED FINANCIAL DATA
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(In thousands except for per share data)
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11 Months
Year Ended Year Ended Ended 52-53 Weeks Ended
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12/31/98 12/31/97 12/31/96 (1) 2/3/96 1/28/95
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Net sales $127,680 $94,539 $130,155 $171,963 $186,091
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Income (loss) from continuing
operations before extraordinary
items (4,250) 2,333 2,104 (8,057) 2,216
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Net income (loss) (3,728) 2,333 12,966 (2) (8,057) 2,216
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Earnings per share before
extraordinary items - basic (.29) .18 .18 (.68) .19
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Earnings per share before
extraordinary items - diluted (.29) .16 .17 (.68) .19
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Earnings per share - basic (.25) .18 1.09 (.68) .19
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Earnings per share - diluted (.25) .16 1.07 (.68) .19
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Total assets 81,655 73,837 44,855 93,928 98,932
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Long-term obligations 16,438 16,930 16,702 66,505 64,239
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Working capital 9,098 11,738 12,370 29,809 34,248
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Stockholders' equity 14,092 17,814 14,755 564 8,611
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1. On December 10, 1996, the Company determined to change its fiscal year to
the calendar year ending December 31st, rather than a 52-53 week year
ending on the Saturday closest to January 31st. The period ended December
31, 1996 is a transitional period of approximately eleven months from
February 4, 1996 to December 31, 1996.
2. For the eleven months ended December 31, 1996, the Company had net income
of $12,966,000 or $1.09 per share, inclusive of (i) a gain of $7,786,000
on the sale of the stock of its wholly owned subsidiary, Perry
Manufacturing Company, on September 30, 1996 (reduced by the write off of
the cumulative effect of foreign currency translation adjustments of
$1,108,000 arising from the Perry Sale), and (ii) an extraordinary gain of
$10,862,000 associated with the reduction in the Company's debt to its
then senior secured lender, Heller Financial, Inc., from $53,384,000 to
$1,665,000, including principal of $1,000,000 and capitalized interest of
$665,000.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
INTRODUCTION
The following discussion and analysis of the Company's financial condition
and results of operations should be read in conjunction with the consolidated
financial statements, including the notes thereto, and the "Selected Financial
Data" included on pages F-1 through F-29 and Page 6, respectively, of this
Annual Report.
FORWARD LOOKING STATEMENTS
Statements included in Management's Discussion and Analysis of Financial
Condition and Results of Operations which are not historical in nature, are
intended to be, and are hereby identified as, "forward looking statements" for
purposes of the safe harbor provided by Section 21E of the Securities Exchange
Act of 1934, as amended by Public Law 104-67. The Company cautions readers that
forward looking statements, including without limitation, those relating to the
Company's future business prospects, revenues, working capital, liquidity,
capital needs, interest
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costs, and income, are subject to certain risks and uncertainties that could
cause actual results to differ materially from those indicated in the forward
looking statements, due to factors discussed in this Report, and other risks and
factors identified from time to time in the Company's reports filed with the
Securities and Exchange Commission ("SEC").
During 1999, the Company expects to incur substantial restructuring charges
in connection with the consolidation of its operations and facilities. See
"Properties." Included in these restructuring charges are severance payments to
Charles Ramat. See "Executive Compensation - Employment Agreements." In
addition, the Company expects to enter into new licensing arrangements which may
result in startup expenses during 1999 without any related revenues during the
year.
YEAR 2000 COMPLIANCE
The inability of computers, software and other equipment utilizing
microprocessors to recognize and properly process data fields containing a 2
digit year is commonly referred to as the Year 2000 ("Y2K") Compliance issue. As
the year 2000 approaches, such systems may be unable to accurately process
certain date-based information. The Company's Year 2000 Project ("Project") is
addressing the issue of computer programs and embedded computer chips being
unable to distinguish between the year 1900 and the year 2000.
The Project has been divided into three major areas: 1) IBM AS400; 2)
Application Software, and 3) PC Hardware and software. The general phases common
to all sections are: 1) inventorying Year 2000 items; 2) assigning priorities to
inventoried items; 3) assessing the Year 2000 compliance of items determined to
be material to the Company; 4) repairing or replacing material items that are
determined not be Year 2000 compliant; 5) testing material items; and 6)
designing and implementing contingency and business continuation plans. Internal
resources are being used to make required modifications and test Year 2000
Compliance. The Company's target date for completion is June 30, 1999.
The IBM AS400 (Model 620) is the backbone of the Company's computer system.
The Company currently maintains 100% of its inventory valuation and tracking,
order processing and picking/shipping functions on the AS400. In addition, the
Company also maintains the bulk of its accounting records on the AS400. The IBM
AS400 (hardware) is Year 2000 compliant. The only modification to the AS400 will
be a change in the operating system from a "CISC" (Commercial Instruction Set
Computer) based system to a "RISC" (Reduced Instruction Set Computer) based
system. This change will be necessary to support the Y2K upgrades to the
Company's "PKMS" (Pick Ticket Management System) and "RLM" (Ron Lynn Management
Accounting Software System) application software packages which are based on the
"RISC" operating system. The Company contracted with a third party supplier for
installing the new system which was completed in February 1999.
The Applications Software section includes both the conversion of
applications software that is not Y2K compliant and, where available from the
supplier, the replacement of such software. The Company has contracted with the
suppliers of the "PKMS" and the "RLM" for Y2K compliant upgrades of these
packages and the upgrades were installed by December 31, 1998 with the testing
commencing in the first quarter of 1999. The remaining two applications, the
"ACS" Apparel Computer System which is used to process all customer orders,
invoices and inventory controls and the "Premenos" Electronic Document
Interchange Software system, which processes document interchanges between the
Company and retailers, will be upgraded using internal resources. The Company
has identified 100% of the programs/sub-system routines in these two
applications that require modification. These upgrades will be tested and
finished during the third quarter of 1999.
The final section of the Project is to determine if all of the Company's
personal computer (PC) hardware and software systems are Y2K compliant. Each PC
will be certified to be Y2K compliant. Any PC that is found to be noncompliant
will be replaced. The Company intends to use internal resources to do the
certification. All software needed to assure Y2K compliance will be completed
after all of the Company's PC's have been certified Y2K compliant. The Company
does not anticipate many Y2K issue in this area since approximately 90% of the
software in use is off the shelf retail software (spreadsheet, word processing
packages etc.) that is already Y2K compliant.
The total cost to the Company of these Y2K Compliance activities is
estimated to be approximately $100,000 which includes the cost of a programmer
as well as costs for software upgrades and third party contractors/suppliers,
and will be funded internally through operating cash flows. These costs and the
date on which the Company plans to complete the Y2K modification and testing
processes are based on management's best estimates, which were derived utilizing
continued availability of certain third party modification plans and other
factors. However, there can be no guarantee that these objectives will be
achieved; actual results could differ from those plans.
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The failure to correct a material Y2K problem could result in an
interruption in, or a failure of, certain normal business activities or
operations. Such failures could materially and adversely affect the Company's
results of operations, liquidity and financial condition. Due to the general
uncertainty inherent in the Y2K problem, resulting in part from the uncertainty
of the Year 2000 readiness of third-party suppliers and customers, the Company
is unable to determine at this time whether the consequences of Y2K failures
will have a material impact on the Company's results of operations, liquidity or
financial condition. The Y2K Project is expected to significantly reduce the
Company's level of uncertainty about the Year 2000. The Company believes that
with the completion of the Project as scheduled the possibility of significant
interruptions of normal operations should be reduced.
FINANCIAL CONDITION
WORKING CAPITAL AND LIQUIDITY
As of December 31, 1998, the Company had working capital of approximately
$9,098,000 compared to $11,738,000 at December 31, 1997. The decrease in working
capital from December 31, 1997 to December 31, 1998 is due to funding the
Company's operating loss during the year, offset by the extraordinary gain of
$522,000 recorded by the Company in connection with the early extinguishment of
the Company's debt obligations to Heller. During the year ended December 31,
1998, the Company financed its capital expenditures principally through
internally generated funds and credit facilities. The Company's interest
payments to its secured lenders scheduled for payment: (i) on January 31, 1998
were paid in kind pursuant to amendments to the Company's loan agreements; (ii)
on May 4, 1998 and August 3, 1998 were paid in cash on their due dates; and
(iii) on November 3, 1998 were paid on February 26, 1999 by agreement with the
lenders.
On January 29, 1998, the Company repaid in full all principal and interest
of the Company's debt obligations to Heller Financial, Inc. ("Heller"). Such
payment amounted to $1,128,000, which included accrued interest through the date
of repayment. In addition, the Company recorded an extraordinary gain on the
early extinguishment of the Heller debt in the amount of $522,000. On February
26, 1999, simultaneous with the closing of the Simon Purchase Transaction, the
Company redeemed from AIF the Series B Junior Secured Note of the Company (which
represented a total indebtedness of $10,657,999 as of January 31, 1999). The
Company remains obligated under its Series A Junior Secured Note to BNY (See
"Debt Service and Capital Needs" below). On February 26, 1999, the Company
brought current and paid in full all scheduled principal and interest
obligations due to BNY on or prior to that date.
Also on February 26, 1999, simultaneous with the closing of the Simon
Purchase Transaction, the Company, ECI, ECI Sportswear, and certain ECI
subsidiaries entered into a Financing Agreement with CIT Commercial Services
Group, Inc. ("CIT") and certain other financial institution lenders, whereby
such lenders agreed to provide a revolving credit facility of up to $65,000,000
for working capital loans and letter of credit financing, with a final maturity
date of February 26, 2002. The obligations under the Financing Agreement are
secured by a lien on all of the Subsidiaries' assets and are guaranteed by the
Company on an unsecured basis. The revolving credit facility provided by such
Financing Agreement replaced ECI and ECI Sportswear's prior working capital
facilities. The Financing Agreement is filed herewith as Exhibit 10.115.
Cash used in operating activities for the year ended December 31, 1998
("fiscal 1998") was $11,236,000 as compared to $21,918,000 during the year ended
December 31, 1997 ("fiscal 1997"). The decrease in funds used in operating
activities in fiscal 1998 was due to the timing of collection of receivables
offset by an increase in other current liabilities due to higher levels of
markdowns and allowances.
Cash used in investing activities during fiscal 1998 was $2,892,000 as
compared to $1,300,000 during fiscal 1997. The increase in cash used in
investing activities was due to the payment of the Davco contingent cash
purchase price offset by a decrease in capital expenditures.
Cash provided by financing activities during fiscal 1998 was $13,868,000 as
compared to $18,312,000 during fiscal 1997. The decrease in cash provided by
financing activities in fiscal 1998 was the result of lower borrowings on the
Company's line of credit along with the repayment of the Heller Note.
DEBT SERVICE AND CAPITAL NEEDS
As of February 26, 1999, the Company's remaining long-term indebtedness
consisted of its obligations to BNY under the Series A Junior Secured Note
Agreement dated June 30, 1993, pursuant to which BNY was owed $7,442,000, plus
interest at the rate of 7% per annum, with a final maturity date of November 3,
2002. On September 12, 1997, the
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<PAGE>
Company and BNY entered into an amendment of the BNY Note Agreement
providing that (1) scheduled interest accruing under the BNY Note Agreement for
the period February 1, 1996 through January 31, 1998 would not be paid in cash
and instead would be added to principal and shall be payable on November 3,
2002, (2) scheduled interest under the BNY Note Agreement accruing for the
periods commencing February 1, 1998 will be made in cash on quarterly payment
dates commencing May 4, 1998 and (3) the principal payment of $300,000 otherwise
due November 3, 1997 would be paid quarterly in installments of $15,000 each on
the last day of each calendar quarter commencing on December 31, 1997, with any
remaining balance due on November 3, 2002. As a condition of BNY's consent to
the Simon Purchase Transaction, the remaining balance of $240,000 of such
quarterly principal was paid on February 26, 1999. In addition, the Company paid
$580,000 representing scheduled payments of principal of $300,000 and interest
of $280,000 otherwise due on February 1, 1999. The remaining principal of BNY's
Note, aggregating $6.4 million, is payable on November 3 of each year as
follows:
YEAR AMOUNT
---- ------
1999 500,000
2000 600,000
2001 1,100,000
2002 4,200,000
In addition, on November 3, 2002, the Company is obligated to pay BNY
$1,042,000, representing the quarterly interest payments for the period February
1, 1996 through January 31, 1998, that were deferred under the September 1997
amendment. BNY is also entitled to receive mandatory prepayments based upon 50%
of certain "excess cash flows" of the Company as defined in the Company's note
agreements with BNY.
As a result of the Simon Purchase Transaction and the CIT Financing
Agreement, the Company believes it has adequate liquidity and capital resources
to meet its requirements for at least the next twelve months.
CAPITAL EXPENDITURES
Capital expenditures were $233,000 for the year ended December 31, 1998
compared to $461,000 in the year ended December 31, 1997.
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<PAGE>
RESULTS OF OPERATIONS
1998 Compared to 1997
NET INCOME. The Company reported a net loss of $3,728,000 (after taxes and
an extraordinary gain on debt forgiveness of $522,000) for the twelve months
ended December 31, 1998 compared to net income (after taxes) of $2,333,000 for
the twelve months ended December 31, 1997. The loss was primarily due to a
reduction in consumer demand for "Perry Ellis America" outerwear products which
resulted in a reduction of sales of $12,180,000 and related reduction of gross
profit of $6,947,000. This was partially offset by the Company's successful
introduction of its "Fubu" boys' licensed products which were introduced during
1998. In addition, the Company's business in general was impacted by the
unseasonably warm weather throughout the United States which adversely affected
the market for outerwear products. As a result of the Company's decreased net
income, borrowings against the lines of credit were necessary in order to source
and ship the Fubu licensed products which were in demand during 1998.
Additionally, increased borrowings were required to support the Davco operations
for the entire 1998 fiscal year compared to the five and a half months in 1997.
These increased borrowings resulted in increased interest and debt expense.
These factors were partially offset by an extraordinary gain of $522,000
recorded in connection with the early extinguishment of the Company's debt to
Heller.
NET SALES. The Company's net sales increased from $94,539,000, in 1997 to
$127,680,000 in 1998, an increase of $33,141,000. This increase was a result of
the inclusion for a full calendar year, of sales from product lines acquired
from Davco and the new "FUBU" license which amounted to $40,039,000. In
addition, net sales increased by $6,099,000 to private label customers. These
increases were offset by a decrease of $12,997,000 resulting from reduced sales
of the "Perry Ellis America" brand.
GROSS PROFIT. Gross Profit was $29,540,000 or 23.1% for the twelve months
ended December 31, 1998, as compared to $27,042,000 or 28.6% for the twelve
months ended December 31, 1997. Gross Profit was negatively impacted by several
factors, primarily the weak performance of the Company's "Perry Ellis America"
brand which suffered from markdowns necessary to sell off excess inventory and
unseasonably warm weather throughout the United States which adversely affected
outerwear companies resulting in lower gross profits.
COMMISSION AND LICENSING INCOME. Commission and Licensing Income decreased
from $1,732,000 for the twelve months ended December 31, 1997 to $1,570,000 for
the twelve months ended December 31, 1998. This decrease resulted from a
reduction in commissions from private label customers who are now using the
Company as a direct merchandise supplier.
SELLING AND ADMINISTRATIVE EXPENSES. Selling and Administrative expenses
were $29,950,000 or 23.5% for the twelve months ended December 31, 1998 as
compared to $23,474,000 or 24.8% for the twelve months ended December 31, 1997,
an increase of $6,476,000 or 27.6%. The increase in Selling and Administrative
expenses were primarily due to the inclusion for the entire 1998 fiscal year of
Selling and Administrative expenses of Davco, whose assets were acquired by the
Company on July 15, 1997 and the addition of the new "FUBU" license during 1998.
INTEREST AND DEBT EXPENSE. The Company's interest and debt expense for 1998
increased by $2,115,000 or 68.1% compared to 1997. As a result of the Company's
decreased net income, increased borrowings against the Company's lines of credit
were necessary in order to source and ship the Fubu licensed products which were
in demand in 1998. Additionally, increased borrowings were required to support
the Davco operation for the entire 1998 fiscal year as compared to only five and
a half months in 1997. These increased borrowings resulted in an increase in
interest and debt expense.
1997 Compared to Fiscal 1996
On December 10, 1996, the Company determined to change its fiscal year to
the calendar year ending December 31st rather than a 52-53 week year ending on
the Saturday closest to January 31st. The Company determined to change its
fiscal year end to the calendar year ending December 31st so that its tax and
financial accounting years would end on the same date, and to better reflect the
seasonal nature of the Company's apparel business by having the Spring, Holiday
and Fall seasons all included in the same calendar year. In the past, the Spring
season overlapped two fiscal years. The operating results for the year ended
December 31, 1997 are compared to the fiscal period ended December 31, 1996,
which was a transition period consisting of the eleven months ended December 31,
1996. The operating results for the year ended December 31, 1997 include the
operating results of ECI Sportswear from and after its July 15, 1997 acquisition
of the Davco business. The operating results for the eleven month period ending
December
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<PAGE>
31, 1996 include Perry's operating results through September 30, 1996, a gain of
$7,786,000 resulting from the sale of Perry (reduced by the write-off of the
cumulative effect of foreign currency translation adjustments of $1,108,000
arising from the Perry Sale) and an extraordinary gain of $10,862,000 on the
reduction of indebtedness to Heller.
The Company has not restated its operating results for the eleven month
period ended December 31, 1996, to a twelve month calendar reporting period due
to: (i) the inability to obtain operating results from Perry on a calendar month
basis, since Perry is no longer owned by Aris; and (ii) the difficulty in
restating the Company's 1996 results to a monthly basis since all monthly
closings were computed based on thirteen week quarters, except the last quarter
which was based on nine weeks.
NET INCOME. The Company reported net income of $2,333,000 for the year
ended December 31, 1997, compared to net income of $12,966,000 for the eleven
months ended December 31, 1996, inclusive of the gain on the Perry sale and
reduction of indebtedness to Heller implemented on September 30, 1996.
The Company reported income before the sale of subsidiary, taxes and
extraordinary item of $2,195,000 for the year ended December 31, 1997 compared
to a loss of $5,090,000 for the eleven months ended December 31, 1996. The
increase in profitability was due to increased margins at ECI, the inclusion of
the profitable operating results of ECI Sportswear, which acquired the assets of
Davco on July 15, 1997, a reduction of interest expense by $3,716,000 due to the
Perry Sale on September 30, 1996 which significantly reduced the Heller debt,
the exclusion of interest expense attributable to Perry's debt after September
30, 1996, offset by interest on ECI Sportswear debt, and the exclusion of
Perry's operating loss for the period through September 30, 1996.
NET SALES
The Company's net sales decreased from $130,155,000 during the eleven month
period ended December 31, 1996 to $94,539,000 during the year ended December 31,
1997. The net sales decrease of $35,616,000 for the year ended December 31, 1997
compared to the same period in the prior year was due to the exclusion of Perry,
which had net sales of $64,639,000 in 1996. The net sales decrease was offset by
the inclusion of ECI Sportswear's net sales of $26,027,000 from and after the
July 15, 1997 date of the acquisition of the Davco business. In addition, ECI's
net sales increased by $2,996,000 due to the month of January 1997 being
included in the year ended December 31, 1997 as compared to the prior years
comparable period ended December 31, 1996 not including the month of January
1996. This was a result of the change from a fiscal year to a calendar year.
GROSS PROFIT
Gross Profit was $27,042,000 or 28.6% for the twelve months ended December
31, 1997, as compared to $25,506,000 or 19.6% for the eleven months ended
December 31, 1996. The favorable increase is due to improved gross margins at
ECI due to a better product mix for the year ended December 31, 1997 as compared
to the eleven months ended December 31, 1996. During the eleven months ended
December 31, 1996, due to the adverse retail environment, ECI sold excess
inventory at lower gross margins in order to maintain a clean inventory
position. In addition, the gross margin for fiscal year 1997 reflects the
inclusion of the Davco business, acquired by ECI Sportswear, which includes
sales at higher branded margins, similar to ECI's. Gross margins for the year
ended December 31, 1996 were also affected by the lower margins at Perry, which
historically as a private label manufacturer, had substantially lower gross
margins than ECI.
SELLING AND ADMINISTRATIVE EXPENSES
Selling and Administrative expenses as a percentage of net sales for the
year ended December 31, 1997 were 24.8% compared to 19.5% for the eleven months
ended December 31, 1996. The percentage increase for the year ended December 31,
1997 from the comparable period in the prior year was due primarily to the
exclusion of Perry (after the Perry Sale on September 30, 1996), which
historically had a much lower Selling and Administrative expense structure. In
addition, ECI's sales commissions expense increased in 1997, the result of
selling a branded product at higher commission rates, while comparable periods,
during the eleven months ended December 31, 1996, reflected lower sales
commissions expense which resulted from the selling of excess inventory at lower
prices in order to maintain an optimum inventory level. There was an increase in
depreciation expense in 1997 due to the purchase of product data management
equipment and other computer equipment allowing ECI to more efficiently control
its merchandising, production, sourcing and shipping.
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<PAGE>
Selling and Administrative expenses for the year ended December 31, 1997
were $23,474,000 compared to $25,422,000 for the eleven months ended December
31, 1996, a decrease of $1,948,000 or 7.6%. Selling and Administrative expenses
decreased for the year ended December 31, 1997 over the comparable period in the
prior year due to the exclusion of Perry's Selling and Administrative expenses
of $6,965,000 offset by the inclusion of ECI Sportswear's Selling and
Administrative expenses of $3,319,000 since its acquisition of Davco on July 15,
1997. This reduction was further offset by increases at ECI relating to
depreciation expense (as explained above) along with a new print advertising
program and increase in expenses for trade shows.
INTEREST AND DEBT EXPENSE
Interest and debt expense for the year ended December 31, 1997 decreased by
$3,716,000 or 54.5% compared to the eleven month period ended December 31, 1996.
This decrease is primarily due to the sale of Perry on September 30, 1996 which
reduced the Heller debt and corresponding interest after such date, as well as
the exclusion of Perry debt expense after September 30, 1996. In addition, ECI
had a reduction of interest expense due to lower borrowings against its line of
credit, offset by new borrowings of ECI Sportswear against its line of credit.
AVAILABILITY OF NET OPERATING LOSS CARRYFORWARDS
The Company had approximately $76,000,000 of net operating loss
carryforwards ("NOL") at December 31, 1998, after offset against federal taxable
income for the year ended December 31, 1998. The Company believes the NOL will
be available to offset federal taxable income for the period from January 1,
1999 through February 26, 1999(the date of closing of the Simon Purchase
Transaction), including any taxable income due to cancellation of indebtedness
in connection with the redemption by the Company from AIF of the Series B Junior
Secured Note on February 26, 1999. However, due to the change of ownership
resulting from the Simon Purchase Transaction, the Company's use of any
remaining net operating loss carryforwards from and after February 27, 1999 will
be severely limited.
Any significant disallowance of the use of the Company's net operating loss
carryforwards in periods on or prior to February 26, 1999 could have a material
adverse effect upon the Company. The conclusions drawn by the Company in
monitoring and calculating the requirements of Section 382 of the Internal
Revenue Code for activity subsequent to the Company's 1986 restructuring involve
many complex and technical issues. The Internal Revenue Service could disagree
with the Company's position and should such a dispute arise, it would be
difficult to predict the outcome. The Company's 1993 Plan of Reorganization
should qualify under Section 382(l)(5) of the Internal Revenue Code and
therefore should preserve a substantial portion of the net operating loss
carryforwards of the Company for use in periods on and prior to February 26,
1999.
EFFECT OF INFLATION
The Company does not believe that inflation has had any material impact on
its operating results for any of the fiscal periods discussed in the
management's discussion and analysis.
NEW ACCOUNTING PRONOUNCEMENTS
In June 1998, the FASB issued SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities. This Statement establishes accounting and
reporting standards for derivative instruments and requires recognition of all
derivatives as assets or liabilities in the statement of position and
measurement of these instruments at fair value. The Statement is effective for
fiscal years beginning after June 15, 1999. Management believes that adopting
this Statement will not have a material impact on the financial position,
results of operations or cash flows of the Company.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The financial statements listed in the accompanying Index at Part IV, Item
14(a)1 are filed as a part of this report.
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<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
Not applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
Set forth below are the name, age and principal occupation of the current
members of the Board of Directors and the executive officers of the Company,
their positions with the Company, their business experience during the last five
years and the year each was first elected a director of the Company. Directors
hold office until the next Annual Meeting of Shareholders and until their
respective successors are elected and qualify, provided that vacancies occurring
in the Board of Directors may be filled by vote of the Directors. Officers of
the Company serve at the pleasure of the Board of Directors of the Company.
<TABLE>
<CAPTION>
NAME AGE POSITION
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Arnold H. Simon 52 Director, Chairman and Chief Executive Officer of the Company
since February 26, 1999.
- ------------------------------------------------------------------------------------------------------------
David Fidlon 56 Director of the Company and Executive Vice President and Chief
Operating Officer of the Company and its subsidiaries since
February 26, 1999. President of the Company since April 12, 1999.
- ------------------------------------------------------------------------------------------------------------
Robert A. Katz 32 Director
- ------------------------------------------------------------------------------------------------------------
Debra Simon 42 Director since March 18, 1999.
- ------------------------------------------------------------------------------------------------------------
Howard Schneider 70 Director since March 18, 1999.
- ------------------------------------------------------------------------------------------------------------
Paul Spector 56 Senior Vice President, Chief Financial Officer, Treasurer and
Secretary
- ------------------------------------------------------------------------------------------------------------
Vincent F. Caputo 44 Vice President, Assistant Treasurer and Assistant Secretary
- ------------------------------------------------------------------------------------------------------------
</TABLE>
ARNOLD H. SIMON, 52, became Chairman of the Board of Directors and Chief
Executive Officer of the Company, ECI and ECI Sportswear on February 26, 1999.
From 1985 until December 1997, Mr. Simon was president of Rio Sportswear, Inc.,
and from 1994 until December 1997, he was President, Chief Executive Officer and
a Director of Designer Holdings Ltd., which he founded. Mr. Simon has an
aggregate of 30 years of experience in the apparel industry. Mr. Simon is the
Managing Member of The Simon Group and has sole voting and investment power with
respect to the shares of the Company owned by The Simon Group. Mr. Simon
currently owns a majority of the membership interests in The Simon Group.
Mr. Simon is married to Debra Simon.
DAVID FIDLON, 56, became a Director of the Company and Executive Vice
President and Chief Operating Officer of the Company and its subsidiaries on
February 26, 1999. On April 12, 1999, he was appointed President of the Company.
From January 1998 until February 26, 1999, he was a consultant to A.S.
Enterprises, Inc., a private company owned by Mr. Simon. Mr. Fidlon was Senior
Vice-President and Controller of Designer Holdings Ltd. from June 1995 until
December 1997, and was Chief Accounting Officer from January 22, 1996 until
December 1997. From June 1994 until June 1995, Mr. Fidlon was Director of
Compliance and Financial Reporting for Ellen Tracy, Inc. From 1989 until 1994,
Mr. Fidlon was Senior Manager and Audit Compliance Manager at Weidenbaum Ryder
and Co., Accountants and Auditors. Mr. Fidlon owns approximately 1.7% of the
membership interests of The Simon Group.
ROBERT A. KATZ, 32, has been a Director of the Company since June 1993. Mr.
Katz is an officer of Apollo Advisors, L.P. and of Lion Advisors, L.P., with
which he has been associated with since 1990. Mr. Katz is also a director of
Vail Resorts, Inc., Alliance Imaging, Inc. and MTL, Inc.
DEBRA SIMON, 42, became a Director of the Company on March 18, 1999. Ms.
Simon was Executive Vice- President and a Director of Designer Holdings Ltd.
from March 1994 until December 1997, and was Vice-President of Rio Sportswear,
Inc. from 1985 until 1997. Ms. Simon is the wife of Arnold H. Simon.
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<PAGE>
HOWARD SCHNEIDER, 70, became a Director of the Company on March 18, 1999.
Mr. Schneider has been engaged as a Certified Public Accountant with the firm
Schneider, Schechter & Yoss, an accounting firm based in Lake Success, New York,
for the past 30 years. Mr. Schneider performs accounting services for The Simon
Group and Mr. and Ms. Simon personally.
PAUL SPECTOR, 56, has been Senior Vice President and Chief Financial
Officer of the Company since May 1992 and Treasurer and Secretary of the Company
since August 1991. From 1986 until May 1992, Mr. Spector was Vice President of
the Company and from 1983 until August 1991 Mr. Spector was Controller of the
Company.
VINCENT F. CAPUTO, 44, has been Vice President, Assistant Treasurer and
Assistant Secretary of the Company since May 1992. From April 1988 until May
1992, Mr. Caputo was Director of Taxes for the Company. From January 1986 until
March 1988, Mr. Caputo was the Corporate Tax Manager for Automatic Data
Processing, Inc.
John J. Hannan, Edward M. Yorke and David N. Schreiber were Directors of
the Company until February 26, 1999, when they resigned effective on the closing
of the Simon Purchase Transaction. Effective March 29, 1999, the Company
terminated the employment of Charles Ramat. Therefore, Mr. Ramat resigned as a
director of the Company.
SHAREHOLDERS AGREEMENTS
At the closing of the Simon Purchase Transaction, the Company, The Simon
Group, Apollo and Charles S. Ramat entered into a Shareholder Agreement (the
"1999 Shareholders Agreement") pursuant to which, among other things, the
parties agreed to vote their shares of the Company for the designees as
Directors of the Company nominated by The Simon Group, provided that such
nominations must include one individual nominated by Apollo (so long as Apollo
beneficially owns at least 50% of the shares of Common Stock beneficially owned
by it on such closing). Pursuant to the 1999 Shareholders Agreement, Arnold
Simon, David Fidlon, Debra Simon and Howard Schneider were designated by The
Simon Group as additional and replacement Directors of the Company. Prior to the
closing of the Simon Purchase Transaction on February 26, 1999, none of Arnold
Simon, Debra Simon, David Fidlon or Howard Schneider was a Director of, or held
any position, with the Company or any of its subsidiaries.
The Shareholders Agreement entered into June 30, 1993 between the Company,
Apollo, Charles S. Ramat and certain other non-Apollo subject shareholders,
which had provided for certain agreements as to election of directors of the
Company, terminated by its terms upon the closing of the Simon Purchase
Transaction.
BOARD MEETINGS AND COMMITTEES
The Board held four meetings during the fiscal year ended December 31,
1998.
The Board's Audit Committee during the fiscal year ended December 31, 1998
consisted of Messrs. Katz and Schreiber. The Audit Committee is charged with
reviewing matters relating to the annual consolidated financial statements
prepared by the Company's management and audited by the independent auditors,
reviewing interim financial statements and evaluating internal controls and
systems established by the Company. The Audit Committee met once during the 1998
fiscal year.
The Board's Compensation and Stock Option Committee during the fiscal year
ended December 31, 1998 consisted of Messrs. Hannan, Yorke and Katz. The
Compensation and Stock Option Committee is charged with reviewing and making
determinations with respect to compensation to be paid to officers and other
employees of the Company and with administering and making determinations under
the Company's stock option plan. The Compensation and Stock Option Committee met
twice during the 1998 fiscal year.
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<PAGE>
ITEM 11. EXECUTIVE COMPENSATION.
The following table presents the compensation paid, on a cash basis, to the
Chief Executive Officer of the Company and the one other executive officer of
the Company as of December 31, 1998 who received compensation in excess of
$100,000.
<TABLE>
<CAPTION>
Long-Term All Other
Annual Compensation Compensation Compensation
----------------------------------- -------------------- ----------------------
Securities
Fiscal Underlying Stock
Name and Principal Position Year (1) Salary ($) Bonus ($) Options (#)
- ------------------------------- ------------- ------------ ------------------- -------------------- ----------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Charles S. Ramat, President (10) 1998 $579,842 $250,636 (2) -0- $155,914 (3)
1997 $562,754 $227,871 (4) 750,000 (5) $ 46,649 (6)
1996 $500,207 $759,949 (7) 152,500 (8) 1,500 (9)
- ------------------------------- ------------- ------------ ----------- ------- ----------- ------- ------------- --------
Paul Spector, Senior Vice 1998 $140,000 $20,775 -0- -0-
President and Chief 1997 $140,000 $30,500 15,000 (5) -0-
Financial Officer 1996 $125,000 -0- 15,000 (8) 1,500 (9)
- ------------------------------- ------------- ------------ ----------- ------- ----------- ------- ------------- --------
</TABLE>
(1) In this Summary Compensation Table, the 1998 fiscal year consists of the
twelve months ended December 31, 1998; the 1997 fiscal year consists of
the twelve months ended December 31, 1997; and the 1996 fiscal year
consists of the eleven months ended December 31, 1996.
(2) Includes (i) payments during 1998 of (i) the one-time non-recurring
success bonus earned for the 1996 fiscal year with respect to the sale of
the Company's Perry Manufacturing Company subsidiary ("Perry") on
September 30, 1996; and (ii) bonus is based upon achievement of
performance targets of the Company and its subsidiaries in 1997. See
"Employment Agreements."
(3) Includes portion of bonus (50%) earned for the 1995 fiscal year, which
pursuant to Mr. Ramat's Employment Agent with the Company, was paid three
years after completion of such fiscal year (that is, during 1998)
contingent on the market value of the Common Stock at such later time. See
"Employment Agreements."
(4) Includes monthly installments paid during fiscal 1997 of the one-time
non-recurring success bonus earned for the 1996 fiscal year with respect
to the sale of Perry on September 30, 1996. Also includes Mr. Ramat's
bonus for services on behalf of ECI for the [1997] fiscal year.
(5) These options were granted on August 28, 1997 under the Company's 1993
Incentive Stock Option Plan and were to have vested eight years from the
date of grant, subject to accelerated vesting in the event of certain
refinancings of the Company's secured indebtedness. In accordance with the
terms of such Plan, these options vested on the closing date of the Simon
Purchase Transaction due to the change in control of the Company.
(6) Includes portion of bonus (50%) earned for the 1994 fiscal year, which
pursuant to Mr. Ramat's Executive Employment Agreement with the Company,
was paid three years after completion of such fiscal year (that is, during
1997) contingent on the market value of the Common Stock at such later
time. See "Employment Agreements".
(7) Includes one-time non-recurring success bonus earned for the 1996 fiscal
year with respect to the sale of Perry on September 30, 1996, 50% of which
is to be paid in cash upon completion of such fiscal year, with the other
50% to be paid in 36 equal monthly installments, commencing after
completion of the 1996 fiscal year. Also includes Mr. Ramat's bonus for
services on behalf of ECI for the twelve month period February 4, 1996
through January 31, 1997.
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<PAGE>
(8) These options were granted in December, 1996 under the Company's 1993
Stock Incentive Plan with respect to shares of the Common Stock and were
to have vested in three equal annual installments. In accordance with the
terms of the Plan, these options, to the extent not already vested, vested
on the closing date of the Simon Purchase Transaction due to the change in
control of the Company.
(9) Includes amounts paid as matching contributions by the Company under its
401(k) plan.
(10) Effective with the closing of the Simon Purchase Transaction, Mr. Ramat
relinquished the positions and Chairman and Chief Executive Officer.
Effective March 29, 1999, the Company terminated Mr. Ramat's employment.
As a result, he received a severance payment of $2,400,716.
STOCK OPTION PLAN AND STOCK OPTIONS
1993 Stock Incentive Plan
On June 30, 1993, the Company's 1993 Stock Incentive Plan was adopted (the
"1993 Stock Incentive Plan"). The 1993 Stock Incentive Plan authorizes the
Company's Board of Directors (or a committee thereof), to award to employees and
directors of, and consultants to, the Company and its subsidiaries (i) options
to acquire Common Stock of the Company at prices determined when the options are
granted, (ii) stock appreciation rights (entitling the holder to a payment equal
to the appreciation in market value of a specified number of shares of Common
Stock over a specified period), (iii) restricted shares of Common Stock whose
vesting is subject to terms and conditions specified at the time of grant, and
(iv) performance shares of Common Stock that are granted upon achievement of
specified performance goals. Options granted pursuant to the 1993 Stock
Incentive Plan may be either "incentive stock options" within the meaning of
Section 422A of the United States Internal Revenue Code of 1986, as amended (the
"Code"), or non-qualified options. As originally adopted on June 30, 1993, a
maximum of 1,200,000 shares of Common Stock can be covered by awards under the
1993 Stock Incentive Plan. On August 28, 1997, the Board of Directors of the
Company approved an amendment to the 1993 Stock Incentive Plan to increase to
2,500,000 the maximum number of shares of Common Stock which can be covered by
awards under the Plan; on April 6, 1998, the Board approved a further amendment
to the 1993 Stock Incentive Plan to increase to 3,500,000 the maximum number of
shares of Common Stock which can be covered by awards under the Plan. The
amendment increasing such maximum to 3,500,000 shares was approved by the
shareholders of the Company at the Annual Meeting of Stockholders held on July
9, 1998.
The 1993 Stock Incentive Plan provides that any shares subject to an option
under the Plan which terminate, are canceled or expire without being exercised
may again be subjected to an option under that plan, subject to the earlier
termination of that plan.
As at December 31, 1998, options to purchase 1,803,000 shares of Common
Stock were outstanding under the 1993 Stock Incentive Plan. In accordance with
the terms of the Plan, all outstanding options, to the extent not already
vested, vested and become exercisable on February 26, 1999, the closing date of
the Simon Purchase Transaction.
Option Grants
There were no grants of stock options to the Chief Executive Officer or any
other executive officer of the Company during Fiscal Year 1998. The Company has
not granted any stock appreciation rights.
-16-
<PAGE>
Exercised/Unexercised Stock Options
The following table sets forth, with respect to the named Executive
Officers of the Company, the fiscal year-end value as at December 31, 1998 of
unexercised options, as well as options exercised by such executive officers
during the 1998 Fiscal Year. All options referred to below were granted under
the 1993 Stock Incentive Plan.
<TABLE>
<CAPTION>
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
AND FY-END OPTION VALUES
-----------------------------------------------
Shares Number of Securities
Acquired Underlying Unexercised Value of Unexercised
on Exercise Value Realized Options at FY-End (#) In-the-Money Options at FY-End ($)
Name (#) ($) Exercisable/Unexercisable Exercisable/Unexercisable(1)
- -------- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Charles S. Ramat -0- -0- 450,833/800,834 $220,391/42,892
Paul Spector 10,000 $8,400 50,000/ 20,000 $ 22,188/4,219
Vincent Caputo 1,667 $1,400 5,000 / 1,666 $ 2,219/1,405
</TABLE>
- -----------
(1) The value of unexercised in-the-money options was calculated by
determining the difference between the closing price of the Company's
common stock on December 31, 1998 and the exercise price of the options.
Compensation of Directors
During the twelve months ended December 31, 1998, each Director (other than
Mr. Ramat) received director's fees at the rate of $18,000 per annum. Each of
these directors was also entitled to receive reimbursement for expenses incurred
in attending meetings of the Board or committees thereof on which they serve. In
addition, outside directors (Mr. Schreiber) were entitled to receive $500 per
meeting of the Committees of the Board to which they are assigned (Mr. Schreiber
was a member of the Audit Committee). Mr. Ramat received no additional
compensation for service as a Director.
Employment Agreements
Charles S. Ramat was employed pursuant to an Executive Employment Agreement
dated as of February 1, 1988, as amended ("Ramat Agreement"). The term of the
Ramat Agreement was scheduled to expire on December 31, 2001.
Mr. Ramat was entitled to receive a base salary of $500,000 per year
(subject to an annual increase in an amount equal to the proportionate annual
increase in the Consumer Price Index - All Items), which annual increases
resulted in a base salary of $579,842 for 1998.
The Ramat Agreement was amended on August 28, 1997 to provide that for the
fiscal year commencing January 1, 1998, and each subsequent fiscal year during
the term of the Ramat Agreement, Mr. Ramat would be entitled to a cash bonus
based upon achievement of performance targets of the Company and its
subsidiaries set annually in advance of each such fiscal year by mutual
agreement. For the fiscal year commencing January 1, 1998, Mr. Ramat's cash
bonus was computed as the sum of the following percentages of the combined net
income of ECI and ECI Sportswear, computed prior to the provisions for taxes,
for payment of management fees to the Company, or for payment of any bonuses to
executives: 10% of such income in excess of $4,500,000 and up to $6,000,000 and
20% of such income in excess of $6,000,000 and up to $8,000,000.
Mr. Ramat was also entitled to participate, at the Company's expense, in
all insurance and medical plans of the Company available to its most senior
employees, is entitled to reimbursement for business and entertainment expenses
and is entitled to an allowance of $500 per month towards a leased automobile,
and was entitled to receive, upon his death or total disability, 150% of his
annual base salary.
-17-
<PAGE>
The Ramat Agreement was subject, at the Company's option, to termination
only for cause upon 90 days' written notice if Mr. Ramat has been convicted of
any material act of fraud, misappropriation, embezzlement, disloyalty,
dishonesty or breach of trust against the Company or any of its subsidiaries or
affiliated companies.
The Ramat Agreement provides for indemnification by the Company for all
claims relating to Mr. Ramat's service as an officer and director of the
Company, and for advancement of expenses, except in those circumstances where
indemnification would be precluded by Section 721 of the New York Business
Corporation Law ("BCL") and requires that during the term of his employment
thereunder, (a) the Company's Certificate of Incorporation and/or ByLaws (as
required by law) must contain the provisions required by the BCL to provide for
indemnification of officers and directors to the fullest extent set forth in BCL
Section 721 and to provide for the limitation of liability of directors to the
fullest extent set forth in Section 402(b) of the BCL, and (b) the Company must
maintain in full force and effect directors and officers liability insurance, to
the extent available, providing coverage comparable to the insurance policy the
Company had in effect on August 2, 1991.
The Ramat Agreement provided for payments equal to 299% of Mr. Ramat's
average cash compensation for the prior five years if his employment was
terminated without cause, or if he terminated his employment for Good Reason (as
defined in the Ramat Agreement).
In connection with the Simon Purchase Transaction, the Company and Mr.
Ramat entered into a Retention Agreement dated February 18, 1999 (the "Retention
Agreement") which further amended the Ramat Agreement by, among other things,
(i) fixing the dollar amount of the severance payment to be provided to Mr.
Ramat upon termination of employment at $2,400,716 (the "Severance Payment"),
(ii) providing for the Severance Payment in the event Mr. Ramat's employment
with the Company terminates for any reason whatsoever, during the period
commencing on the date the Retention Agreement was executed and ending 13 months
following the closing date of the Simon Purchase Transaction, (iii) providing
that the Company grant to Mr. Ramat additional options under the 1993 Stock
Incentive Plan for 1,000,000 shares of Common Stock at an exercise price of
$0.48 per share, (iv) providing, consistent with the 1993 Stock Incentive Plan,
that all prior options granted to Mr. Ramat under the 1993 Stock Incentive Plan,
to the extent not already vested, shall vest and become exercisable on the
closing of the Simon Purchase Transaction, and (v) all new and prior options
granted to Mr. Ramat under the 1993 Stock Incentive Plan will survive and remain
exercisable for a period of two (2) years following termination of employment
(except that this period shall be one-year in the event of death, total
disability or termination by Mr. Ramat without Good Reason and this period shall
be three (3) months in the event of termination by the Company for Cause, or in
the case of the new options only, expiration and non-renewal of the term of the
Ramat Agreement), but in no event in excess of the original term of the option.
Effective March 29, 1999, the Company terminated Mr. Ramat's employment and
made the Severance Payment required by the Retention Agreement.
Mr. Paul Spector, the Company's Senior Vice President and Chief Financial
Officer, is contractually entitled to a severance payment if he is terminated by
the Company for reasons other than cause. The severance payment will equal
one-half of Mr. Spector's annual salary at the time of termination.
In March, 1999, the Company's Board of Directors authorized the Company and
its principal subsidiaries to enter into three-year employment agreements with
Arnold Simon and David Fidlon to serve as Chairman and Chief Executive Officer,
and Executive Vice President and Chief Operating Officer, respectively, at an
annual base salary of $750,000 and $375,000, respectively, subject to annual
review, and an annual bonus equal to 2% and 1%, respectively, of adjusted EBITDA
if adjusted EBITDA is between $5 million and $10 million, and 3% and 1.5%,
respectively, of adjusted EBITDA if adjusted EBITDA is in excess of $10 million.
401(k) Plan
The Company has no pension plan but affords its executive officers the
opportunity to participate in a 401(k) Plan established for all of the Company's
employees, for which the Company may make a discretionary matching contribution
of up to 25% of a maximum of four percent (4%) of salary (up to $150,000)
contributed by the employee.
-18-
<PAGE>
Compensation Committee Interlocks and Insider Participation
The members of the Company's Compensation and Stock Option Committee (the
"Committee") during the fiscal year ended December 31, 1998 were Messrs. Hannan,
Yorke and Katz, none of whom were (i) during the twelve months ended December
31, 1998, an officer of the Company or any of its subsidiaries or (ii) formerly
an officer of the Company or any of its subsidiaries. Messrs. Hannan and Katz
may be considered executive officers of Apollo Advisors, L.P., the general
partner of AIF, which until February 26, 1999, was a holder of secured
indebtedness of the Company. Effective February 26, 1999, Messrs. Hannan and
Yorke resigned from the Company's board of directors.
Report of the Committee on Executive Compensation
The compensation of Charles S. Ramat, who was Chairman, President and Chief
Executive Officer of Aris and Chairman and Chief Executive Officer of ECI and
ECI Sportswear through February 26, 1999, is specified by the Ramat Agreement.
See "Executive Compensation--Employment Agreements." This Agreement, which has
been in effect for more than ten years, provided for a base salary (with annual
cost of living increases) and an Aris-level excess cash flow annual bonus.
On August 28, 1997, upon the recommendation of the Committee and approval
by the Board of Directors, the Company entered into the Eighth Amendment(the
"Eighth Amendment") to the Ramat Agreement. The Eighth Amendment, in summary,
provides for the extension of Mr. Ramat's term of employment from June 30, 1998
to June 30, 2001; for the elimination of the existing provisions for any level
excess cash flow annual bonus earned for fiscal year 1997 and thereafter; for
the provision of annual cash bonuses based on achievement of performance targets
of the Company and its subsidiaries to be set annually in advance of each fiscal
year by mutual agreement; and for the grant (subject to achievement of vesting
requirements) on the date of the Eighth Amendment of 750,000 options under Aris'
1993 Stock Incentive Plan to Mr. Ramat at an exercise price of $1.00 per share
and vesting eight years from the date of grant, provided that Mr. Ramat has been
continuously employed by the Company or its subsidiaries during such period. All
or a portion of the options granted pursuant to the Eighth Amendment shall
obtain accelerated vesting on the occurrence of the refinancing of the Company's
debt obligations to Heller Financial, Inc., BNY Financial Corporation, and
AIF-II, L.P. on or prior to December 31, 2000, and were granted in consideration
for, among other things, Mr. Ramat's consent to the extension of the term of the
Ramat Agreement for three (3) additional years through June 30, 2001, and his
agreement to eliminate the Company-level excess cash flow annual bonus which he
otherwise would have earned for fiscal years commencing January 1, 1997. The
grant of such options to Mr. Ramat was ratified by the shareholders of the
Company at the Annual Meeting of Shareholders held on July 9, 1998. (See
"Executive Compensation - Employment Agreements" and "Executive Compensation -
Stock Option Plan and Stock Options".)
On December 5, 1995, Mr. Ramat assumed the duties of Chairman and Chief
Executive Officer of ECI, in addition to his duties in such positions at the
Company and on July 15, 1997, upon ECI Sportswear's acquisition of the business
of Davco Industries, Inc., Mr. Ramat also assumed the position of Chairman and
Chief Executive Officer of ECI Sportswear. No increases in base salary or other
salaried compensation were provided to Mr. Ramat for services on behalf of these
operating subsidiaries of the Company. The bonuses provided to Mr. Ramat based
on achievement of performance targets, were for the fiscal years ending December
31, 1997 and 1998 established by the Stock Option and Compensation Committee at
the commencement of such fiscal years as a percentage of the projected targets
of net income of the operating subsidiaries prepared at the commencement of such
fiscal years. The Stock Option and Compensation Committee selected the use of
such performance-based bonuses to enable a direct tie to the net income of such
operating subsidiaries during each such fiscal year of Mr. Ramat's employment.
Since Mr. Ramat's Company-level excess cash flow bonuses have been eliminated
for the 1997, 1998 and all subsequent fiscal years, there is no duplication of
bonuses by reason of the performance bonuses based on net income of the
operating subsidiaries of the Company.
The grant of such options to Mr. Ramat was ratified by the shareholders of
the Company at the Annual Meeting of Shareholders held on July 9, 1998. (See
"Executive Compensation - Employment Agreements; and "Executive
Compensation--Stock Option Plan and Stock Options").
The bonuses provided to Mr. Ramat based on achievement of performance
targets were, for the fiscal years ending December 31, 1997 and 1998,
established by the Committee at the commencement of such fiscal years as a
percentage of the projected targets of net income of the operating subsidiaries
of the Company in existence at such time, computed prior to provision for taxes,
for payment of management fees to the Company or for payment of any bonuses to
executives, under the business plans of such subsidiaries prepared at the
commencement of such fiscal years. The Committee selected the use of such
performance-based bonuses to enable a direct tie to the net income of such
operating
-19-
<PAGE>
subsidiaries during each such fiscal year of Mr. Ramat's employment. On February
18, 1999, the Company and Ramat entered into the Retention Agreement which
further amended his employment agreement. See "Executive Compensation -
Employment Agreements."
Compensation of other Executive Officers of the Company
The Committee's compensation policy with regard to other executive officers
has reflected an annual evaluation, with the input of the Company's Chief
Executive Officer, of their performance in relation to the overall operating
results of the Company and its operating subsidiaries. For the fiscal year ended
December 31, 1997, Paul Spector, Senior Vice President, Chief Financial Officer
and Secretary, was granted an increase in base salary and a performance bonus to
reflect the improved operating results of the Company for such fiscal year and
his efforts in the implementation of the Company's acquisition of the business
of Davco Industries, Inc. completed July 15, 1997. For the fiscal year ended
December 31, 1997, Vincent Caputo, Vice President, Assistant Treasurer, and
Assistant Secretary received a salary increase to reflect the improved operating
results of the Company for such fiscal year.
John Hannan
Robert A. Katz
Edward M. Yorke
PERFORMANCE GRAPH
The following table compares the cumulative total shareholder return on the
Aris Common Stock with the cumulative total shareholder returns of (x) the S&P
500 Textile-apparel Manufacturers index and (y) Wilshire 5000 index from
December, 1993 to December, 1998. The return on the indices is calculated
assuming the investment of $100 on December 31, 1993 and the reinvestment of
dividends.
<TABLE>
<CAPTION>
CUMULATIVE TOTAL SHAREHOLDER RETURN DECEMBER, 1993 TO DECEMBER, 1998
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Dec-93 Dec-94 Dec-95 Dec-96 Dec-97 Dec-98
- --------------------- ------- ------ ------- ------- ------- --------
Aris Common Stock $100.00 $60.74 $ 4.07 $ 23.15 $ 94.81 $ 71.85
- --------------------- ------- ------ ------- ------- ------- --------
Wilshire 5000 Index $100.00 $97.50 $130.06 $154.51 $199.63 $242.95
- --------------------- ------- ------ ------- ------- ------- --------
S&P 500 Textile $100.00 $95.70 $105.27 $138.43 $148.95 $126.31
- --------------------- ------- ------ ------- ------- ------- --------
</TABLE>
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Exchange Act requires the Company's executive
officers, directors and persons who beneficially own more than 10% of a
registered class of the Company's equity securities to file with the Commission
initial reports of ownership and reports of changes in ownership of Common Stock
and other equity securities of the Company. Such persons are required by
Commission regulations to furnish the Company with copies of all Section 16(a)
forms they filed.
To the Company's knowledge, based solely on the Company's review of Forms 3
(Initial Statement of Beneficial Ownership of Securities), Forms 4 (Statement of
Changes in Beneficial Ownership) and Forms 5 (Annual Statement of Changes in
Beneficial Ownership) furnished to the Company with respect to the fiscal year
ended December 31, 1998, no persons failed to file any such form in a timely
manner.
-20-
<PAGE>
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The table below sets forth the beneficial ownership by certain holders of
the Common Stock on March 19, 1999 and gives effect to the consummation of the
Simon Purchase Transaction on February 26, 1999. Those holders are persons who
are either (i) be beneficial owners of 5% or more of the Common Stock or (ii)
current officers or directors of the Company.
<TABLE>
<CAPTION>
Name and Address Percent
of Beneficial Owner (1) Shares of Common Stock of Class
----------------------- -------------------------- --------
<S> <C> <C> <C>
Arnold Simon ....................................................... 45,045,045 (2)(3) 62.5%
The Simon Group, L.L.C.
1385 Broadway
New York, New York 10018
David Fidlon ....................................................... -- (4) *
The Simon Group, L.L.C.
1385 Broadway
New York, New York 10018
Apollo Aris Partners, L.P. ......................................... 16,818,806 (3)(5)(6) 23.4%
AIF, L.P.
c/o Apollo Advisors, L.P.
Two Manhattanville Road
Purchase, New York 10577
Paul Spector ....................................................... 80,000 (7) *
475 Fifth Avenue
New York, New York 10017
Vincent Caputo ..................................................... 8,333 (7) *
475 Fifth Avenue
New York, New York 10017
All persons who are officers or directors of the Company, .......... 45,133,378 (7)(8) 63.7%
as a group (eight persons)
</TABLE>
- ------------
* Less than 1%
(1) Except as noted in these footnotes or as otherwise stated above, each
person has sole voting and investment power.
(2) Includes 2,093,790 shares of Series A Preferred Stock which are
automatically convertible into 20,937,900 shares of Common Stock upon the
filing of an amendment to the Company's Certificate of Incorporation
authorizing a sufficient number of shares of Common Stock for such
conversion. Arnold Simon, the Managing Member of The Simon Group, has sole
voting and investment power with respect to the shares of the Company held
of record by The Simon Group.
(3) These shares are subject to the 1999 Shareholders Agreement and 1999
Equity Registration Rights Agreement described below, containing certain
voting and other arrangements as to shares covered thereby.
(4) Excludes shares owned by The Simon Group, in which Mr. Fidlon holds a 1.7%
membership interest. Mr. Fidlon does not directly own any shares of Common
Stock and, because he has no power or authority to vote or dispose of any
shares held by The Simon Group, he disclaims beneficial ownership of all
such shares.
-21-
<PAGE>
(5) Includes 512,113 shares of Series A Preferred Stock which are
automatically convertible to 5,121,130 shares of Common Stock upon the
filing of an amendment to the Company's Certificate of Incorporation
authorizing a sufficient number of shares of Common Stock for such
conversion. See "Certain Relationships and Related Transactions -- AIF
Note."
(6) This table does not reflect any beneficial ownership by Mr. Katz, a
Director of the Company, associated with Apollo. Mr. Katz does not
directly own any shares of Common Stock, and disclaims beneficial
ownership of all shares held by Apollo Aris Partners, L.P and AIF, L.P.
(7) Includes options to purchase the following numbers of shares of Common
Stock of the Company under the 1993 Stock Incentive Plan which are
exercisable or will become exercisable within 60 days: Paul Spector
(70,000) and Vincent Caputo (8,333).
(8) These shares are attributed to Messrs. Simon, Fidlon, Spector and Caputo.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Simon Purchase Transaction; Redemption of AIF Note
At the closing of the Simon Purchase Transaction on February 26, 1999, (i)
The Simon Group acquired 24,107,145 shares of Common Stock and 2,093,790 shares
of Series A Preferred Stock (which shares shall be convertible into 20,937,900
shares of Common Stock) for $20,000,000 in cash, and (ii) the Company redeemed
from AIF the Series B Junior Secured Note of the Company including all accrued
interest thereon (representing total indebtedness as of January 31, 1999 of
$10,657,999), in exchange for $4,000,000 in cash plus 5,892,856 shares of Common
Stock and 512,113 shares of Series A Preferred Stock (which are convertible into
5,121,130 shares of Common Stock).
Upon the closing of the Simon Purchase Transaction, The Simon Group became
the beneficial owner of approximately 63.4% of the Common Stock; the current
directors of the Company, other than Charles S. Ramat and Robert A. Katz,
resigned; the size of the Board was increased from five to six Directors; and
Arnold Simon, David Fidlon, Debra Simon and Howard Schneider were elected to the
Board. Arnold Simon is the Managing Member of The Simon Group and has the sole
voting and investment power with respect to the shares of the Company owned by
The Simon Group.
1999 Shareholders Agreement
At the Closing of the Simon Purchase Transaction, the Company, The Simon
Group, Apollo and Charles S. Ramat entered into a Shareholder Agreement (the
"1999 Shareholders Agreement") pursuant to which, among other things, the
parties agreed to certain limitations on sales of their shares of Common Stock
and Series A Preferred Stock in the manner set forth therein and to vote their
shares of the Company for the designees nominated by The Simon Group, provided
that such nominations must include one individual nominated by Apollo (so long
as Apollo beneficially owns at least 50% of the shares of Common Stock
beneficially owned by it on such closing date).
The 1999 Shareholders Agreement provides that Apollo and Ramat and their
permitted transferees ("Non-Simon Subject Shareholders") are required to give
The Simon Group a right of first offer to match the proposed sale price on any
transfers of shares of Common Stock owned by such Non-Simon Subject
Shareholders, other than transfer of shares issued or issuable pursuant to an
employee stock option or employee purchase plan; transfers to family group
members (as defined in the 1999 Shareholders Agreement) or other affiliates of
such Non-Simon Subject Shareholders; transfers by a Non-Simon Subject
Shareholder's estate; transfers pursuant to offerings registered under the
Securities Act; transfers in compliance with Rule 144 of the Securities Act; and
transfers not exceeding an annual aggregate of 10% of the shares of Common Stock
owned by such Non-Simon Subject Shareholder on the closing of the Simon Purchase
Transaction.
The 1999 Shareholders Agreement provides that, subject to certain
limitations, the Non-Simon Subject Shareholders have the right to "tag along"
proportionately in accordance with their beneficial ownership of shares of
Common Stock with certain non-public transfers by The Simon Group of its shares
of Common Stock, at the same
-22-
<PAGE>
consideration per share of Common Stock to be received by The Simon Group in
such transfers. Such tag-along rights will also apply to certain transfers by
Arnold Simon or his affiliates of their beneficial ownership in The Simon Group
after six months from the closing of the Simon Purchase Transaction.
The 1999 Shareholders Agreement also grants The Simon Group the right to
"bring along" the Non-Simon Subject Shareholders which are parties thereto in a
non-public transfer by The Simon Group of 100% of its ownership of Common Stock,
at the same consideration per share of Common Stock to be received by The Simon
Group in such transfer, provided that such consideration is entirely in cash or
in "Marketable Securities" (of issuers listed on the New York Stock Exchange,
American Stock Exchange or NASDAQ National Market with a market capitalization
for such marketable securities of more than $500,000,000), or a combination
thereof.
The Shareholders Agreement entered into June 30, 1993 between the Company,
Apollo, Charles S. Ramat and certain other non-Apollo subject shareholders
terminated by its terms as a result of the Simon Purchase Transaction.
1999 Equity Registration Rights Agreement
At the Closing of the Simon Purchase Transaction, the Company entered into
an agreement with The Simon Group, Apollo and Charles S. Ramat pursuant to which
the Company granted registration rights with respect to the Common Stock held by
The Simon Group, Apollo, Charles Ramat and their respective permitted
transferees (the "1999 Equity Registration Rights Agreement"). Each of such
shareholders will have unlimited "piggyback" registration rights with respect to
their shares of Common Stock, and The Simon Group and Apollo will each have the
right, on three occasions, to demand that the Company register their Common
Stock for sale under the Securities Act of 1933, as amended (the "Securities
Act"). This Agreement supercedes the demand registration rights afforded Apollo
pursuant to the 1993 Registration Rights Agreement, but does not eliminate the
"piggyback registration rights" of the other parties thereto who are no longer
affiliates of the Company.
Director's Indemnification Agreements
On the closing of the Simon Purchase Transaction, the Company entered into
an indemnification agreement with each of Arnold Simon, David Fidlon, Debra
Simon and Howard Schneider, and on June 30, 1993, the Company entered into an
indemnification agreement with each of Charles S. Ramat and Robert A. Katz,
pursuant to which the Company has agreed to indemnify each such Director to the
fullest extent permitted by law, and for the advancement of legal fees and other
expenses and to use its best efforts to maintain designated directors' and
officers' liability insurance coverage.
Agreement with Warnaco
Arnold Simon is party to various non-competition agreements with The
Warnaco Group, Inc. and Designer Holdings, Ltd. (collectively, "Warnaco") which
could be deemed to have been violated by the consummation of Simon Purchase
Transaction. Warnaco consented to the Simon Purchase Transaction and to the
inapplicability of the restrictions to Arnold Simon in his various capacities
with the Company effective February 26, 1999 with respect to the Company's
current lines of business after June 1, 1999 in all respects pursuant to a
letter agreement in which the Company (i) issued 700,000 shares of Common Stock
to Warnaco and agreed to (ii) assume Warnaco's lease for certain premises in New
Bedford, Massachusetts on June 1, 1999, and (iii) offer employment to Warnaco's
workforce in New Bedford, Massachusetts and thereafter recognize the union
currently representing such workers as the representative of such employees and
negotiate in good faith with such union for a new collective bargaining
agreement with respect to respect to such employees.
Davco Shareholders Agreement
The 3,000,000 shares of the Company's Common Stock which were issued to
Davco in connection with the Davco Acquisition are subject to a Shareholders
Agreement (the "Davco Shareholders Agreement") between Davco, the shareholders
of Davco (Steven Arnold and Christopher Healy), the Company, Apollo and Charles
S. Ramat, providing that in each of the second, third and fourth year following
the Closing Date, each of Steven Arnold and Christopher Healy may sell up to
300,000 shares per year in Rule 144 Brokers Transactions, and commencing in the
fifth year following the closing date, each of Steven Arnold and Christopher
Healy may sell up to 600,000 shares per year in Rule 144 Brokers Transactions.
The Davco Shareholders Agreement further provides that (i) during the first four
years following the closing date, neither Davco, Steven Arnold nor Christopher
Healy is permitted to engage in any privately negotiated or block or bulk sales,
regardless of amount, without the Company's consent, and each is limited
-23-
<PAGE>
to the Rule 144 Brokers Transaction sales in the amounts set forth above; (ii)
commencing in the fifth year following the closing date, Davco, Steven Arnold
and Christopher Healy may engage in sales which are not Rule 144 Brokers
Transactions, for an all-cash purchase price, subject to successive rights of
first refusal, first to the Company, and second to Apollo and Charles S. Ramat
(on an equal basis); (iii) restricts Davco, Messrs. Arnold and Healy from
acquiring any additional shares of the Company without the consent of the
Company; and (iv) requires that for so long as Mr. Ramat is Chairman, Chief
Executive Officer or President of the Company, Davco, Steven Arnold and
Christopher Healy agree to vote all of their shares for the recommendations,
proposals and nominations of the Company's Board of Directors. The Agreement
affords Davco, Messrs. Arnold and Healy certain "piggyback" registration rights
as to the Acquired Shares. These "piggyback" registration rights will enable
Davco, Messrs. Arnold and Healy to include their shares in a registration by the
Company to the same proportionate extent as if they were parties to the 1993
Equity Registration Rights Agreement referred to above when, as and if the
shares of the Company held by the parties to such 1993 Equity Registration
Rights Agreement are eligible for inclusion in such registration statement on a
"piggyback" basis. These "piggyback" registration rights shall remain in
existence in accordance with the 1999 Equity Registration Rights Agreement
entered into upon the closing of the Simon Purchase Transaction.
In connection with the Simon Purchase Transaction, Apollo and Charles S.
Ramat agreed that The Simon Group could participate pro rata in any exercise of
their secondary rights of first refusal as to sales of the Acquired Shares by
Messrs. Arnold and Healy.
On the July 15, 1997 closing date of the Davco acquisition, each of Steven
Arnold and Christopher Healy entered into employment agreements with ECI
Sportswear for a term through September 30, 2000 to manage the Davco business as
owned by ECI Sportswear.
Vesting of Stock Options on Change in Control
At the closing of the Simon Purchase Transaction, all outstanding stock
options under the 1993 Stock Incentive Plan (include without limitation, those
held by executive officers of the Company), by the terms of the Plan, vested and
become immediately exercisable due to the change of control in ownership in the
Company resulting from the purchase of shares by The Simon Group. See "Executive
Compensation -- Stock Option Plan and Stock Options."
-24-
<PAGE>
<TABLE>
<CAPTION>
PART IV
<S> <C>
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES AND REPORTS ON FORM 8-K.
(a) The following documents are filed as part of this report:
1. Financial Statements and Independent Auditors' Report Page
----
Independent Auditors' Report...................................................F-l
Financial Statements:
Consolidated Balance Sheets as of
December 31, 1998 and 1997.....................................................F-2
Consolidated Statements of Operations for the Years Ended
December 31, 1998 and 1997 and for
the Period from February 4, 1996 through December 31, 1996.....................F-3
Consolidated Statements of Stockholders' Equity for the Years
Ended December 31, 1998 and 1997
and for the Period from February 4, 1996 through December 31, 1996.............F-4
Consolidated Statements of Cash Flows for the Year Ended
December 31, 1998, the Year Ended December 31, 1997
and for the Period from February 4, 1996 through December 31, 1996.............F-5
Notes to Consolidated Financial Statements.....................................F-6
2. Financial Statement Schedules
The following financial statement schedules should be read in
conjunction with the consolidated financial statements in Item
8 of this Annual Report on Form 10-K:
Schedule I - Condensed Financial Information
of Registrant.......................................F-25
Schedule II - Valuation and Qualifying
Accounts............................................F-29
All other schedules are omitted because they are not
applicable or because the required information is included in
the financial statements or notes thereto.
</TABLE>
-25-
<PAGE>
3. Exhibits
Incorporated herein by reference is a list of the Exhibits contained
in the Exhibit Index included in Item 14(c) below, numbered in
accordance with Item 601 of Regulation S-K.
(b) Reports on Form 8-K
None during the fourth calendar quarter ended December 31, 1998.
However, a Report on Form 8-K dated February 26, 1999 was filed to
report the closing of the Simon Purchase Transaction (See "Business").
(c) INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Filed as Indicated Exhibit to
Document Referenced in
Exhibit No. Description Footnote No.
----------- ----------- -----------------------------
<S> <C> <C>
2. Second Amended Joint Plan of Reorganization dated March (3)
26, 1993, as amended May 11 and June 9, 1993
(Note: Annexes omitted)
3.3 Restated Certificate of Incorporation filed on June 30, 1993 (3)
3.4 Amended and Restated By-Laws effective June 30, 1993 (3)
4.1 Specimen Certificate Evidencing Common Stock. (1)
10.67 Series A Junior Secured Note Agreement dated as of June 30, (3)
1993 between Registrant and BNY Financial Corporation.
10.68 Series A Junior Secured Note dated as of June 30, 1993 (3)
issued by Registrant to BNY Financial Corporation.
10.72 Secondary Pledge Agreement dated as of June 30, 1993 (3)
between Registrant, BNY Financial Corporation and AIF II,
L.P.
10.75 Shareholders Agreement dated as of June 30, 1993 among (3)
Registrant and the Subject Shareholders Referred to Therein.
10.76 Equity Registration Rights Agreement dated as of June 30, (3)
1993 among Registrant and the Holders of Registrable Shares
Referred to Therein.
10.79 Severance Agreement dated April 3, 1991 between Registrant (3)
and Paul Spector.
10.80 1993 Stock Incentive Plan of Registrant, as amended by (3)
Amendment No. 1 thereto dated June 24, 1993.
10.81 Form of Indemnification Agreement dated as of June 30, (3)
1993 between Registrant and each member of Registrant's
Board of Directors.
10.82 Letter Agreement dated February 8, 1993 among James G. (3)
Goren, Alexander M. Goren, Charles S. Ramat, and David
Schreiber and Ora Ramat as Trustees for the Benefit of Hana
Leah Ramat and Abraham Ramat.
10.84 Stipulated Entry Liquidating Claims dated March 10, 1993 (3)
among The Marcade Group Inc., Robert K. Lifton, Howard
L. Weingrow, and JAG Consulting Co. Ltd.
</TABLE>
-26-
<PAGE>
<TABLE>
<CAPTION>
Filed as Indicated Exhibit to
Document Referenced in
Exhibit No. Description Footnote No.
----------- ----------- -----------------------------
<S> <C> <C>
10.86 Letter Agreement dated October 29, 1992 among The (3)
Marcade Group Inc., Above The Belt, Inc., Europe Craft
Imports, Inc., Perry Manufacturing Company, Apollo
Investment Fund, L.P., AIF II, L.P., and Altus Finance.
10.93 Consent dated May 1, 1996 to Series A Junior Secured Note (9)
Agreement dated as of June 30, 1993 between Registrant and
BNY Financial Corporation.
10.95 Stock Purchase Agreement dated as of September 19, 1996 (10)
between Aris Industries, Inc., as Seller, Page Holding
Company, as Buyer, and Perry Manufacturing Company, with
respect to the stock of Perry Manufacturing Company.
10.99 Warrant dated September 30, 1996 issued by Aris Industries, (10)
Inc. to Heller Financial, Inc.
10.100 Letter dated December 18, 1996 from the Registrant to (11)
Charles S. Ramat.
10.101 Amendment dated May 5, 1997 to Series A Junior Secured (11)
Note Agreement dated as of June 30, 1993 between
Registrant and BNY Financial Corporation.
10.103 Amendment dated June 18, 1997 to Series A Junior Secured (13)
Note Agreement dated as of June 30, 1993 between
Registrant and BNY Financial Corporation.
10.105 Asset Purchase Agreement dated as of July 15, 1997 among (14)
Davco Industries, Inc., as Seller, Steven Arnold and
Christopher Healy as Shareholders of Seller, and Aris
Management Corp. (n/k/a ECI Sportswear, Inc.) , as
Purchaser.
10.106 Shareholders Agreement dated as of July 15, 1997 among (14)
Davco Industries, Inc., Steven Arnold, Christopher Healy,
Aris Management Corp. (n/k/a ECI Sportswear, Inc.), the
Registrant, Apollo Aris Partners, L.P. and Charles S. Ramat.
10.107 Amendment dated July 18, 1997 to Series A Junior Secured (14)
Note Agreement dated as of June 30, 1993 between
Registrant and BNY Financial Corporation.
10.109 Amendment executed September 12, 1997 to Series A and (15)
Series B Junior Secured Note Agreements dated as of June
30, 1993 between Registrant, BNY Financial Corporation and
AIF, L.P.
10.111 Securities Purchase Agreement, dated as of February 26, (17)
1999, between Aris Industries, Inc., Apollo Aris Partners,
L.P., AIF, L.P., The Simon Group, L.L.C. and Arnold Simon.
10.112 Shareholders Agreement, dated as of February 26, 1999, (17)
between Aris Industries, Inc., Apollo Aris Partners, L.P., AIF,
L.P., The Simon Group, L.L.C. and Charles S. Ramat.
10.113 Equity Registration Rights Agreement, dated as of February (17)
26, 1999, between Aris Industries, Inc., Apollo Aris Partners,
L.P., AIF, L.P., The Simon Group, L.L.C. and Charles S.
Ramat.
</TABLE>
-27-
<PAGE>
<TABLE>
<CAPTION>
Filed as Indicated Exhibit to
Document Referenced in
Exhibit No. Description Footnote No.
----------- ----------- -----------------------------
<S> <C> <C>
10.114 Retention Agreement dated as of February 18, 1999 by and (17)
between Aris Industries, Inc. and Charles S. Ramat.
10.115 Financing Agreement dated February 26, 1999 by and among (18)
the Company and its Subsidiaries and CIT Commercial
Group, Inc. and the other Financial Industries named therein.
21. List of Subsidiaries (18)
23. Consent of Deloitte & Touche LLP (18)
27. Financial Disclosure Schedule (18)
</TABLE>
- -------------
(1) Filed as the indicated Exhibit to the Annual Report of the Company on Form
10-K for the fiscal year ended February 2, 1991 and incorporated herein by
reference.
(2) Omitted.
(3) Filed as the indicated Exhibit to the Report on Form 8-K dated June 30,
1993 and incorporated herein by reference.
(4) Omitted.
(5) Filed as the indicated Exhibit to the Report on Form 8-K dated June 12,
1995 and incorporated herein by reference.
(6) Filed as the indicated Exhibit to the Report on Form 8-K dated October 27,
1995 and incorporated herein by reference.
(7) Filed as the indicated Exhibit to the Report on Form 8-K dated February 2,
1996 and incorporated herein by reference.
(8) Omitted.
(9) Filed as the indicated Exhibit to the Report on Form 8-K dated May 1, 1996
and incorporated herein by reference.
(10) Filed as the indicated Exhibit to the Report on Form 8-K dated September
30, 1996 and incorporated herein by reference.
(11) Filed as the indicated Exhibit to the Annual Report of the Company on Form
10-K for the fiscal year ended December 31, 1996 and incorporated herein
by reference.
(12) Omitted.
(13) Filed as the indicated Exhibit to the Report on Form 8-K dated June 18,
1997 and incorporated herein by reference.
(14) Filed as the indicated Exhibit to the Report on Form 8-K dated July 15,
1997 and incorporated herein by reference.
(15) Filed as the indicated Exhibit to the Report on Form 8-K dated September
12, 1997 and incorporated herein by reference.
(16) Omitted.
-28-
<PAGE>
(17) Filed as the indicated Exhibit to the Report on Form 8-K dated February
26, 1999 and incorporated herein by reference.
(18) Filed herewith.
-29-
<PAGE>
SIGNATURES
Pursuant to the requirements of Sections 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
ARIS INDUSTRIES, INC.
By:/s/ ARNOLD H. SIMON
--------------------------------------
Arnold H. Simon
Chairman and
Chief Executive Officer
By: /s/ PAUL SPECTOR
---------------------------------------
Paul Spector
Senior Vice President
Chief Financial Officer
By: /s/ VINCENT F. CAPUTO
---------------------------------------
Vincent F. Caputo
Principal Accounting Officer
Date: April 12, 1999
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the date indicated.
/s/ ARNOLD SIMON April 12, 1999
- -----------------------------
Arnold Simon, Chairman of the
Board and Chief Executive
Officer; Director
/s/ DAVID FIDLON April 12, 1999
- -----------------------------
David Fidlon, Director
/s/ ROBERT KATZ April 12, 1999
- -----------------------------
Robert Katz, Director
/s/ DEBRA SIMON April 12, 1999
- -----------------------------
Debra Simon, Director
/s/ HOWARD SCHNEIDER April 12, 1999
- -----------------------------
Howard Schneider, Director
30
<PAGE>
INDEPENDENT AUDITORS' REPORT
Board of Directors and Stockholders of
Aris Industries, Inc.
New York, New York
We have audited the accompanying consolidated balance sheets of Aris Industries,
Inc. and Subsidiaries as of December 31, 1998 and 1997, and the related
consolidated statements of operations, stockholders' equity and cash flows for
the years ended December 31, 1998 and 1997 and for the period from February 4,
1996 through December 31, 1996. Our audits also included the financial statement
schedules listed in the Index at Item 14(a)2. These financial statements and
financial statement schedules are the responsibility of the Company's
management. Our responsibility is to express an opinion on the financial
statements and financial statement schedules based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of Aris Industries, Inc. and
Subsidiaries as of December 31, 1998 and 1997, and the results of their
operations and cash flows for the years ended December 31, 1998 and 1997 and for
the period from February 4, 1996 through December 31, 1996 in conformity with
generally accepted accounting principles. Also, in our opinion, such financial
statement schedules, when considered in relation to the basic consolidated
financial statements taken as a whole, present fairly in all material respects
the information set forth therein.
/s/ Deloitte & Touche LLP
Parsippany, New Jersey
March 31, 1999
F-1
<PAGE>
<TABLE>
<CAPTION>
ARIS INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1998 AND 1997
- ---------------------------------------------------------------------------------------------------
1998 1997
ASSETS
CURRENT ASSETS:
<S> <C> <C>
Cash and cash equivalents $ 1,112,000 $ 1,372,000
Receivables, net 29,905,000 26,274,000
Inventories, net 26,371,000 19,498,000
Prepaid expenses and other current assets 1,753,000 2,215,000
------------ ------------
Total current assets 59,141,000 49,359,000
FURNITURE, FIXTURES AND EQUIPMENT - NET 1,094,000 1,463,000
OTHER ASSETS 2,095,000 2,718,000
GOODWILL 19,325,000 20,297,000
------------ ------------
TOTAL ASSETS $ 81,655,000 $ 73,837,000
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Trade acceptances payable $ 5,178,000 $ 6,292,000
Accounts payable - trade 1,512,000 3,024,000
Accrued expenses and other current liabilities 8,370,000 7,528,000
Current portion of long-term debt 1,083,000 2,172,000
Line of credit payable 33,900,000 18,605,000
------------ ------------
Total current liabilities 50,043,000 37,621,000
OTHER LIABILITIES 1,082,000 1,472,000
LONG-TERM DEBT (net of unamortized original issue discount of
$506,000 and $630,000, respectively) 16,438,000 16,930,000
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Common stock, par value $.01: 50,000,000 shares authorized;
issued and outstanding 14,956,377 and 14,905,044 shares,
respectively 151,000 150,000
Preferred stock, par value $.01: 10,000,000 shares authorized;
none issued or outstanding -- --
Additional paid-in capital 44,757,000 44,752,000
Accumulated deficit (30,816,000) (27,088,000)
------------ ------------
Total stockholders' equity 14,092,000 17,814,000
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 81,655,000 $ 73,837,000
============ ============
</TABLE>
See notes to consolidated financial statements.
F-2
<PAGE>
<TABLE>
<CAPTION>
ARIS INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
- ------------------------------------------------------------------------------------------------------------------------
Period From
February 4, 1996
Years Ended Through
December 31, December 31,
1998 1997 1996
<S> <C> <C> <C>
NET SALES $ 127,680,000 $ 94,539,000 $ 130,155,000
COST OF SALES 98,140,000 67,497,000 104,649,000
------------- ------------- -------------
GROSS PROFIT 29,540,000 27,042,000 25,506,000
COMMISSION AND LICENSING INCOME 1,570,000 1,732,000 1,647,000
------------- ------------- -------------
INCOME BEFORE SELLING AND ADMINISTRATIVE
EXPENSES, INTEREST AND DEBT EXPENSE, SALE
OF SUBSIDIARY, INCOME TAXES AND
EXTRAORDINARY ITEM 31,110,000 28,774,000 27,153,000
SELLING AND ADMINISTRATIVE EXPENSES (29,950,000) (23,474,000) (25,422,000)
------------- ------------- -------------
INCOME BEFORE INTEREST AND DEBT
EXPENSE, SALE OF SUBSIDIARY, INCOME
TAXES AND EXTRAORDINARY ITEM 1,160,000 5,300,000 1,731,000
INTEREST AND DEBT EXPENSE (5,220,000) (3,105,000) (6,821,000)
------------- ------------- -------------
(LOSS) INCOME BEFORE SALE OF SUBSIDIARY,
INCOME TAXES AND EXTRAORDINARY ITEM (4,060,000) 2,195,000 (5,090,000)
SALE OF SUBSIDIARY:
Gain on sale of Perry Manufacturing Company -- -- 7,786,000
Realization of cumulative foreign currency translation -- -- (1,108,000)
------------- ------------- -------------
(LOSS) INCOME BEFORE INCOME
TAXES AND EXTRAORDINARY ITEM (4,060,000) 2,195,000 1,588,000
INCOME TAX EXPENSE (BENEFIT) 190,000 (138,000) (516,000)
------------- ------------- -------------
(LOSS) INCOME BEFORE EXTRAORDINARY ITEM (4,250,000) 2,333,000 2,104,000
EXTRAORDINARY ITEM:
Gain on extinguishment of debt 522,000 -- --
Gain on debt forgiveness -- -- 10,862,000
------------- ------------- -------------
NET (LOSS) INCOME $ (3,728,000) $ 2,333,000 $ 12,966,000
============= ============= =============
PER SHARE DATA:
Weighted average shares outstanding - Basic 14,912,000 13,245,000 11,905,000
Weighted average shares outstanding - Diluted 14,912,000 14,338,000 12,045,000
Basic earnings per share:
(Loss) income before extraordinary item $ (0.29) $ 0.18 $ 0.18
Extraordinary item 0.04 -- 0.91
------------- ------------- -------------
Net (loss) income $ (0.25) $ 0.18 $ 1.09
============= ============= =============
Diluted earnings per share:
(Loss) income before extraordinary item $ (0.29) $ 0.16 $ 0.17
Extraordinary item 0.04 -- 0.90
------------- ------------- -------------
Net (loss) income $ (0.25) $ 0.16 $ 1.07
============= ============= =============
</TABLE>
See notes to consolidated financial statements.
F-3
<PAGE>
<TABLE>
<CAPTION>
ARIS INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
- ------------------------------------------------------------------------------------------------------------------------------------
Accumulated
Additional Other
Common Common Preferred Paid-in Accumulated Comprehensive
Shares Stock Stock Capital Deficit Income Total
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE, FEBRUARY 3, 1996 11,925,400 $119,000 $-- $ 44,061,000 $(42,387,000) $(1,229,000) $ 564,000
Comprehensive Income:
Net income -- -- -- -- 12,966,000 -- 12,966,000
Foreign currency translation adjustment -- -- -- -- -- 121,000 121,000
Realization of cumulative foreign
currency translation -- -- -- -- -- 1,108,000 1,108,000
---------- -------- --- ------------ ------------ ----------- ------------
Total comprehensive income -- -- -- -- -- -- 14,195,000
---------- -------- --- ------------ ------------ ----------- ------------
Retirement of stock (72,856) -- -- (4,000) -- -- (4,000)
---------- -------- --- ------------ ------------ ----------- ------------
BALANCE, DECEMBER 31, 1996 11,852,544 119,000 -- 44,057,000 (29,421,000) -- 14,755,000
Net income -- -- -- -- 2,333,000 -- 2,333,000
Issuance of new shares of common stock 3,000,000 30,000 -- 690,000 -- -- 720,000
Exercise of stock options 52,500 1,000 -- 5,000 -- -- 6,000
---------- -------- --- ------------ ------------ ----------- ------------
BALANCE, DECEMBER 31, 1997 14,905,044 150,000 -- 44,752,000 (27,088,000) -- 17,814,000
Net loss -- -- -- -- (3,728,000) -- (3,728,000)
Exercise of stock options 51,333 1,000 -- 5,000 -- -- 6,000
---------- -------- --- ------------ ------------ ----------- ------------
BALANCE, DECEMBER 31, 1998 14,956,377 $151,000 $-- $ 44,757,000 $(30,816,000) $ -- $ 14,092,000
========== ======== === ============ ============ =========== ============
</TABLE>
See notes to consolidated financial statements.
F-4
<PAGE>
<TABLE>
<CAPTION>
ARIS INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
- ----------------------------------------------------------------------------------------------------------------------------------
Period From
Years February 4, 1996
Ended Through
December 31, December 31,
1998 1997 1996
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C> <C>
Net (loss) income $ (3,728,000) $ 2,333,000 $ 12,966,000
Adjustments to reconcile net (loss) income to net
cash (used in) provided by operating activities:
Loss on sale of property -- -- 39,000
Depreciation and amortization 1,711,000 1,346,000 2,594,000
Gain on sale of Perry -- -- (7,786,000)
Gain on debt forgiveness and extinguishments (522,000) -- (10,862,000)
Deferred income tax expense (benefit) 151,000 (212,000) (580,000)
Cumulative translation adjustment -- -- 1,108,000
Capitalized interest 276,000 1,830,000 1,424,000
Changes in assets and liabilities:
(Increase) decrease in receivables (3,631,000) (18,860,000) 8,120,000
(Increase) decrease in inventories (6,873,000) (6,693,000) 36,000
Decrease (increase) in prepaid expenses and
other current assets 390,000 445,000 (942,000)
Decrease (increase) in other assets 443,000 (3,000) (8,000)
(Decrease) increase in trade acceptances payable (1,114,000) 690,000 3,595,000
(Decrease) increase in accounts payable - trade (1,512,000) (1,726,000) 2,084,000
Increase (decrease) in accrued expenses and other
current liabilities 3,532,000 (935,000) (2,230,000)
Decrease in other liabilities (359,000) (133,000) (2,000)
------------ ------------ ------------
Net cash (used in) provided by operating
activities (11,236,000) (21,918,000) 9,556,000
------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Payments for acquisition (2,659,000) (839,000) --
Proceeds from sale of assets -- -- 66,000
Net proceeds from sale of Perry -- -- 40,145,000
Capital expenditures (233,000) (461,000) (1,409,000)
------------ ------------ ------------
Net cash (used in) provided by investing
activities (2,892,000) (1,300,000) 38,802,000
------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payment of Heller debt (1,128,000) (15,000) (40,857,000)
Net proceeds (payments) from bank line of credit 15,295,000 18,605,000 (6,000,000)
Proceeds from issuance of long-term debt -- -- 3,528,000
Principal payments of long-term debt, including
capital leases (305,000) (284,000) (1,073,000)
Purchase of common stock -- -- (4,000)
Proceeds from exercise of stock options 6,000 6,000 --
Proceeds from equipment financing agreement -- -- 12,000
------------ ------------ ------------
Net cash provided by (used in) financing
activities 13,868,000 18,312,000 (44,394,000)
------------ ------------ ------------
EFFECT OF EXCHANGE RATE CHANGES ON
CASH -- -- (4,000)
NET (DECREASE) INCREASE IN CASH AND
CASH EQUIVALENTS (260,000) (4,906,000) 3,960,000
CASH AND CASH EQUIVALENTS,
BEGINNING OF PERIOD 1,372,000 6,278,000 2,318,000
------------ ------------ ------------
CASH AND CASH EQUIVALENTS, END OF
PERIOD $ 1,112,000 $ 1,372,000 $ 6,278,000
============ ============ ============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION:
Cash paid during the year for:
Interest $ 4,229,999 $ 1,284,000 $ 3,307,000
============ ============ ============
Income taxes $ 63,000 $ 49,000 $ 226,000
============ ============ ============
</TABLE>
See notes to consolidated financial statements.
F-5
<PAGE>
ARIS INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Operations - Aris Industries, Inc., (the "Company"), is a
publicly held company that was incorporated in 1947 in the State of New
York. The Company is engaged in the design, manufacture, importing and
distribution of men's and young men's sportswear, outerwear, activewear,
swimwear and loungewear. The Company's operations are conducted primarily
through its wholly-owned subsidiary, Europe Craft Imports, Inc. ("ECI"),
which was acquired by Aris in 1987 and ECI's wholly-owned subsidiary ECI
Sportswear, Inc. ("ECI Sportswear"), which acquired the Davco apparel
business (See Note 4) on July 15, 1997.
ECI designs, imports and distributes men's outerwear, including cloth and
leather jackets under the "Members Only" and other trade names. ECI has
been granted licenses to manufacture and distribute men's outerwear under
the "Perry Ellis" name and men's and boy's outerwear under the "Perry
Ellis America" name; and men's outerwear under the "John Henry" name. ECI
Sportswear has been granted licenses to manufacture and distribute men's
and boys' sportswear, activewear and swimwear under the "Perry Ellis
America" name, men's and boys' loungewear under the "Perry Ellis" name,
men's and boys' sportswear under the "Jeffrey Banks" name, and boys'
sportswear, activewear and outerwear under the "FUBU" name. The Company
also designs, develops, sources and imports men's and boys' outerwear and
sportswear product lines as an agent for national retail store chains. The
Company has granted licenses to use the "Members Only" trademark to
licensees for men's woven shirts, tailored suits and sportcoats,
eyeglasses, hosiery, luggage and cold weather accessories.
The Company purchases a majority of its products from independent
manufacturers located in Hong Kong, China, Korea, India, Taiwan, Dominican
Republic, Guatemala, Philippines, Bangladesh, Sri Lanka and Indonesia. The
Company's products are marketed nationally in department stores, specialty
stores and national retail chains and through distributorships in other
parts of North America and South America. The Company has also begun to
sell some of its products in Europe. The Company also operates three
stores located in factory outlet malls.
As described in Note 5, effective September 30, 1996, the Company sold
100% of the stock of Perry Manufacturing Company ("Perry") for a total
consideration of approximately $54,719,000 and reduced its indebtedness to
Heller Financial, Inc. ("Heller") from approximately $53,384,000 to
$1,665,000. Perry's operating results are included in the consolidated
statements of operations through September 30, 1996. Perry, primarily a
supplier of private label goods to national chain stores, designed,
manufactured and distributed ladies' and men's sportswear. Perry's
manufacturing operations consisted of designing, cutting, sewing and
packaging with locations in North Carolina, Virginia, El Salvador, Costa
Rica and Honduras. The Company also employed independent factories and
contractors in the United States, Latin America and South America.
The apparel industry is volatile and unpredictable due to cyclical and
seasonal swings caused by consumer buying patterns, weather conditions and
other factors. In addition, due to the lead time necessary for fabric
delivery, product design, manufacture and distribution, apparel importers
such as the Company must make commitments prior to the related selling
season to purchase inventory sufficient to cover the volume of apparel
expected to be sold. Increasingly, retail customers of the Company are
ordering their products closer to the actual delivery date and selling
season. In order for the Company to deliver its products on time, it must
often commit to production in advance of obtaining firm orders from its
retail customers. The Company's outerwear business is particularly
impacted by unusually warm weather or the late arrival of cold weather.
F-6
<PAGE>
Use of Estimates - The preparation of the Company's financial statements
in conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities, disclosures relating to contingent
assets and liabilities at the date of the financial statements, and the
reported amounts of revenues and expenses for the reporting period. Actual
results could differ from those estimates.
Principles of Consolidation - The consolidated financial statements of the
Company include the accounts of its subsidiaries, all of which are wholly
owned. All material intercompany transactions and balances have been
eliminated.
Cash Equivalents - The Company considers all investments with an original
maturity of three months or less at the date of acquisition to be cash
equivalents.
Inventories - Inventories consist exclusively of finished goods.
Inventories are stated at the lower of cost (weighted average basis) or
market.
Furniture, Fixtures and Equipment - Furniture, fixtures and equipment are
stated at cost. Depreciation and amortization are computed using the
straight-line method over the following estimated useful lives of the
assets, the terms of the leases or the lives of the improvements,
whichever are less:
Furniture and fixtures 3 to 5 years
Leasehold improvements 5 to 10 years
Income Taxes - The provision for income taxes includes Federal and state
taxes currently payable and deferred taxes arising from temporary
differences in determining income for financial statement and tax
purposes. The Company and its subsidiaries file a consolidated Federal
income tax return on a calendar year basis.
Goodwill and Other Assets - Goodwill represents the unamortized excess of
the cost of acquiring a business over the fair values of the net assets
received at the date of acquisition. Acquired intangible assets, which
include primarily licenses, are recorded in other assets and are carried
at cost less accumulated amortization. Amortization expense is computed by
use of the straight-line method over the assets' estimated useful lives.
Goodwill is being amortized over 20 to 40 years, and licenses are being
amortized over 8 years. The Company continuously evaluates goodwill and
other intangible assets for any potential impairment. The Company assesses
the recoverability of goodwill and other intangible assets by determining
whether the amortization of the goodwill and other intangible asset
balances over their remaining lives can be recovered through expected
undiscounted future results.
F-7
<PAGE>
Accumulated amortization at December 31, 1998 and 1997 for goodwill and
other intangible assets was $9,323,000 and $8,213,000, respectively.
Comprehensive Income - During 1998, the Company adopted SFAS No. 130,
Reporting Comprehensive Income. Comprehensive income, which is reported in
the Consolidated Statements of Stockholders' Equity, is defined as the
total change in stockholders' equity during the period other than from
transactions with stockholders. For the Company, comprehensive income
consists of net income and the change in the accumulated foreign currency
translation adjustment account. Accumulated other comprehensive income
consists of the accumulated foreign currency translation adjustment
account.
Fiscal Year - On December 10, 1996, the Company changed its fiscal year to
the calendar year ending December 31 rather than a fiscal year ending on
the Saturday closest to January 31, effective for the period from February
4, 1996 through December 31, 1996.
New Accounting Pronouncements - In June 1998, the FASB issued SFAS No.
133, Accounting for Derivative Instruments and Hedging Activities. This
Statement establishes accounting and reporting standards for derivative
instruments and requires recognition of all derivatives as assets or
liabilities in the statement of position and measurement of these
instruments at fair value. The Statement is effective for fiscal years
beginning after June 15, 1999. Management believes that adopting this
Statement will not have a material impact on the financial position,
results of operations or cash flows of the Company.
2. RECEIVABLES
December 31,
1998 1997
Due from factor $29,318,000 $25,849,000
Other receivables 1,569,000 1,607,000
----------- -----------
30,887,000 27,456,000
Less allowance for chargebacks 982,000 1,182,000
----------- -----------
$29,905,000 $26,274,000
=========== ===========
The Company has agreements with three commercial financial companies which
provide for the factoring of certain trade receivables. The receivables
are factored without recourse as to credit risk but with recourse for any
claims by the customer for adjustments in the normal course of business
relating to pricing errors, shortages, damaged goods, etc. All factored
receivables and related proceeds of sales are the property of the
respective commercial financial companies. ECI is charged a factoring
commission ranging from .70% to 1% of factored sales. The Company receives
payment based upon the actual maturity dates of the receivables.
On February 26, 1999, the Company terminated its current factoring
agreements and opened a new factoring agreement with The CIT Group. ECI
will be charged a factoring fee of .45% of factored sales with a minimum
guaranteed factoring fee of $450,000.
F-8
<PAGE>
3. FURNITURE, FIXTURES AND EQUIPMENT
December 31,
1998 1997
Furniture, fixtures and equipment $5,222,000 $5,046,000
Leasehold improvements 1,058,000 1,058,000
---------- ----------
6,280,000 6,104,000
Less accumulated depreciation and amortization 5,186,000 4,641,000
---------- ----------
$1,094,000 $1,463,000
========== ==========
As of December 31, 1998 and 1997, furniture, fixtures and equipment
include amounts associated with assets leased under capital leases with an
original cost of $343,000. As of December 31, 1998 and 1997, accumulated
depreciation and amortization include $223,000 and $122,000, respectively,
associated with the leased assets. Related amortization expense of
$68,000, $107,000 and $84,000 is included within depreciation expense for
the years ended December 31, 1998 and 1997 and for the period from
February 4, 1996 through December 31, 1996, respectively.
4. BUSINESS ACQUISITION
On July 15, 1997, ECI Sportswear acquired substantially all of the assets
of Davco Industries, Inc. ("Davco") for a final aggregate purchase price
of $4,234,000, including acquisition costs. At that time, Davco has been
granted licenses to manufacture and distribute men's and boys' activewear,
swimwear, loungewear and some sportswear products under the "Perry Ellis
America" and/or "Perry Ellis" labels and men's sportswear under the
"Jeffrey Banks" label. The purchase price is comprised of 3 million
restricted shares of the Company's common stock, valued at $720,000, and a
contingent cash purchase price based upon the pre-tax earnings of the
Davco business for the period from July 16, 1997 through December 31,
1997. In accordance with the terms of the agreement, ECI Sportswear made
cash advances of $581,000 and recorded additional consideration payable of
$2,814,000 as of December 31, 1997, which is recorded in accrued expenses
and other current liabilities. Final consideration paid in 1998 amounted
to $2,659,000.
The acquisition was accounted for as a purchase and, accordingly,
operating results of this business subsequent to the date of acquisition
are included in the Company's consolidated financial statements. The
purchase price was allocated based on estimated fair values at the date of
acquisition, including the allocation of $840,000 to the licenses
acquired. The excess of the purchase price paid over the net assets
acquired of $3,219,000 has been recognized as goodwill and is being
amortized on a straight-line basis over 20 years.
The following pro forma information is presented assuming the acquisition
of the Davco business had been completed at the beginning of the Company's
1997 fiscal year. Pro forma adjustments have been made to include the
effects of amortization of goodwill and intangible assets. This unaudited
pro forma information is not necessarily indicative of the results of
operations that might have occurred had the acquisition of the Davco
business occurred at the beginning of the Company's 1997 fiscal year or of
future results of operations.
F-9
<PAGE>
1997
(Unaudited)
Net revenues $ 113,309,000
Gross profit 33,619,000
Income before income taxes and extraordinary item 2,059,000
Income tax benefit (129,000)
Net income 2,188,000
Basic earnings per share 0.17
Diluted earnings per share 0.15
5. SALE OF PERRY MANUFACTURING COMPANY
The Company completed a transaction effective September 30, 1996 in which
it sold 100% of the stock of its wholly-owned subsidiary, Perry
Manufacturing Company, to Page Holding Company (the "Buyer"). The Company
received cash proceeds of $40,857,000 and the Buyer assumed $3,000,000 of
Perry debt. The cash proceeds were used as final satisfaction of principal
and accrued interest of approximately $53,384,000 due to Heller Financial,
Inc. ("Heller"). The Company and Heller then entered into a new note
agreement for the principal amount of $1,000,000 plus capitalized interest
of $665,000, and the Company granted Heller warrants to purchase 584,345
shares of the Company's common stock at an exercise price of $.01 per
share. See Note 6 for additional information on the new Heller agreement.
Such transactions resulted in a gain on the sale of Perry of $7,786,000,
the realization of $1,108,000 of a cumulative foreign currency translation
loss and an extraordinary gain on debt forgiveness of $10,862,000.
6. LONG-TERM DEBT
Long-term debt is comprised of:
<TABLE>
<CAPTION>
December 31,
1998 1997
<S> <C> <C>
Heller Note, interest at 10%, including capitalized
interest of $665,000 $ -- $ 1,650,000
BNY Financial Corporation Note, interest at 7% 7,982,000 7,981,000
Apollo Note, interest at 13%. Net of unamortized original
issue discount of $506,000 and $630,000 at December 31,
1998 and 1997, respectively 9,496,000 9,266,000
Other 43,000 205,000
----------- -----------
17,521,000 19,102,000
Less current portion 1,083,000 2,172,000
----------- -----------
$16,438,000 $16,930,000
=========== ===========
</TABLE>
F-10
<PAGE>
Heller Note - On June 30, 1993, the Company entered into a Senior Secured
Note Agreement with Heller Financial, Inc. ("Heller") pursuant to which
Heller received a note in the original principal amount of $50,857,000 to
be repaid over seven years, with interest at 2% over prime. Heller
retained a pledge of the Company's stock (but not the assets) in ECI and
Perry.
Effective September 30, 1996, the Company entered into an amendment and
restatement of its Senior Secured Note Agreement ("Amended Heller
Agreement"). Pursuant to the Amended Heller Agreement, Heller accepted the
cash proceeds of $40,857,000 received from the Perry sale and a warrant to
purchase 584,345 shares of the Company's common stock at an exercise price
of $.01 per share. In addition, Heller received a new note in the
principal amount of $1,000,000 ("Heller Note"), with a maturity date of
November 3, 2001. Such transaction has been accounted for as a
modification of terms to the original Heller debt and resulted in an
extraordinary gain on debt forgiveness of $10,862,000. The Company
recorded the new Heller Note at the total future cash payments to be made
in accordance with the Amended Heller Agreement which is principal of
$1,000,000 and accrued interest of $665,000. Heller retained a pledge of
the stock (but not the assets) of ECI, the Company's remaining operating
subsidiary. The Heller Note provides certain restrictions on the payment
of principal and interest to Apollo and BNY (as defined below).
On January 29, 1998, the Company repaid in full its remaining obligation
on the Heller Note of $1,128,000. The difference between the net carrying
amount of the Heller Note and the remaining obligation amounted to
$522,000 and was accounted for as an extraordinary gain during the first
quarter of 1998. As a result of the repayment, Heller released its first
lien on the stock of ECI.
Apollo Note - On June 30, 1993, the Company entered into a Series B Junior
Secured Note Agreement with Apollo Aris Partners, L.P. and its affiliate
AIF-II, L.P. ("Apollo") pursuant to which Apollo received a $7.5 million
note bearing interest at 13% per annum (the "Apollo Note"). Apollo shared
with BNY Financial Corporation ("BNY") a second lien on the stock of ECI.
The Apollo Note is required to be paid in two equal installments payable
on November 3, 2001 and 2002. The Apollo Note contains certain affirmative
and negative covenants on the operation of the Company. Pursuant to the
Debt Registration Rights Agreement entered into on June 30, 1993 between
the Company and Apollo, Apollo and one transferee are entitled to require
the Company twice to register the offer and sale of the Apollo Note under
Federal and applicable state securities laws, and at the request of Apollo
or such transferee, to negotiate with such party in good faith to convert
the Apollo Notes into registered notes issued pursuant to a trust
indenture.
On September 12, 1997, the Company and Apollo entered into an amendment of
the Apollo Note providing that: (1) scheduled interest accruing under the
Apollo Note for the period November 1, 1995 through January 31, 1998 was
not and will not be paid in cash and instead shall be added to principal
and shall be payable on November 3, 2002 and (2) scheduled interest under
the Apollo Note accruing for periods commencing February 1, 1998 will be
made in cash on quarterly payment dates commencing May 4, 1998. The
principal balance of the Apollo Note is required to be paid in two equal
installments payable on November 3 in each of 2001 and 2002.
On October 21, 1998, the Company obtained a consent pursuant to the Apollo
Note to defer, until February 1, 1999, the required payments of the
quarterly interest under the Apollo Note otherwise due November 3, 1998.
The nonpayment of such quarterly interest prior to February 1, 1999 shall
not be a Default or Event of Default under the Apollo Note.
F-11
<PAGE>
BNY Note - On June 30, 1993, the Company entered into a Series A Junior
Secured Note Agreement with BNY pursuant to which BNY received a
nine-year, $7 million note, bearing interest at a rate of 7% per annum
(the "BNY Note"). BNY shared with Apollo a second lien on the stock of
ECI. On September 12, 1997, the Company and BNY entered into an amendment
of the BNY Note providing that: (1) scheduled interest accruing under the
BNY Note for the period February 1, 1996 through January 31, 1998 was not
and will not be paid in cash and instead shall be added to principal and
shall be payable on November 3, 2002, (2) scheduled interest under the BNY
Note accruing for periods commencing February 1, 1998 will be made in cash
on quarterly payment dates commencing May 4, 1998 and (3) the principal on
the BNY Note of $300,000 otherwise due November 3, 1997 shall be
rescheduled and paid quarterly in installments of $15,000 each on the last
day of each calendar quarter commencing on December 31, 1998, with any
remaining balance due on November 3, 2002.
In addition, on November 3, 2002, the Company is obligated to pay BNY
$1,042,000 representing the quarterly interest payments accruing for the
period February 1, 1996 through January 31, 1998, which were not and will
not be paid in cash and instead added to the principal of the BNY Note.
The BNY Note contains certain affirmative and negative covenants on the
operations of the Company. The Company was in compliance with these
covenants at December 31, 1998.
BNY and Apollo's shared second lien on the stock of ECI became a shared
first lien upon the repayment of the Heller Note on January 29, 1998. BNY
and Apollo will also share in mandatory prepayments based upon 50% of
certain "excess cash flows" as defined in the Company's note agreements
with BNY and Apollo.
On October 21, 1998, the Company obtained a consent pursuant to the BNY
Note to defer, until February 1, 1999, the required payments of: (a) the
quarterly interest under the BNY Note otherwise due November 3, 1998 and
(b) the principal payment of $300,000 under the Note otherwise due
November 3, 1998. The nonpayment of such quarterly interest and principal
payments prior to February 1, 1999 shall not be a Default or Event of
Default under the BNY Note.
The remaining principal of the BNY Note is required to be paid in four
annual installments, payable on November 3 of each year commencing in 1999
as follows:
Calendar Year Amount
1999 $ 1,040,000
2000 600,000
2001 1,100,000
2002 5,242,000
-----------
$ 7,982,000
===========
F-12
<PAGE>
Maturities - Future maturities of long-term debt are as follows:
Year Ending December 31,
1999 $ 1,083,000
2000 600,000
2001 4,850,000
2002 11,494,000
------------
$ 18,027,000
============
Subsequent Event - In connection with the Simon Purchase Transaction (as
defined in Note 17, Subsequent Events), on February 26, 1999, the Company
redeemed in full its outstanding obligation of $10,658,000 under the
Apollo Note. The redemption was effected through the payment of $4,000,000
in cash and the issuance of 5,892,856 shares of Common Stock and 512,113
shares of Series A Preferred Stock which is manditorily convertible to
5,121,130 shares of Common Stock. The transaction resulted in a gain on
debt forgiveness of $1,768,000 which the Company will record as a capital
contribution in the first quarter of 1999. As a result of the repayment,
Apollo released its second lien on the stock of ECI.
In addition, the Company amended the BNY Note where BNY waives a Default
or an Event of Default and further confirms that it has no objection to
the completion of the Simon Purchase Transaction. On February 26, 1999,
BNY was paid the sum of $820,000 consisting of: (a) the remaining balance
of $240,000 of the principal payment on the BNY Note originally due
November 3, 1997 (and previously deferred) and (b) $580,000 which is the
total of the scheduled payments due on February 1, 1999 (which include the
scheduled payments of principal of $300,000 and interest of $280,000
deferred from November 3, 1998).
Restricted Net Assets - In accordance with ECI and ECI Sportswear's credit
facility agreement, as of December 31, 1998 and 1997, the maximum amount
of upstream payments in the form of management fees from ECI and ECI
Sportswear to Aris have been made. Under this agreement, net assets
restricted to ECI and ECI Sportswear's use at December 31, 1998 and 1997
were $17,087,000 and $20,078,000, respectively.
At this time, the Company believes that based on current business plans
and financial arrangements that management fee revenues from ECI and ECI
Sportswear, after taking into account all restrictions contained in the
relevant subsidiary lending agreements, will be sufficient to cover debt
service requirements and corporate cash requirements for the year ending
December 31, 1999.
7. LINE OF CREDIT PAYABLE
ECI and ECI Sportswear have available a $75,000,000 line of credit which
is secured by liens on certain assets of the subsidiaries. As of December
31, 1998, there was an outstanding balance payable of $33,900,000.
Interest is accrued at the bank's prime rate plus 1/4% for ECI and at the
bank's prime rate plus 1% for ECI Sportswear. As of December 31, 1998, the
bank's prime rate was 8%. The line of credit contains various clauses
which, among other things, limits payment of management fees to the
Company and requires the maintenance of certain levels of net worth (as
defined) during the year.
F-13
<PAGE>
In connection with the Simon Purchase Transaction (as defined in Note 17,
Subsequent Events), the Company repaid in full on February 26, 1999 its
remaining obligation under its existing line of credit and subsequently
terminated the agreement. Immediately thereafter, the Company entered into
a new line of credit with The CIT Group. The new line of credit allows for
aggregate borrowings not to exceed $65,000,000 at any time outstanding.
The new line of credit is secured by liens on certain assets of the
Company. For revolving credit loans, interest will accrue at the bank's
prime rate. For Eurodollar loans, interest will accrue at a rate per annum
equal to the Eurodollar Rate (as defined) plus 2.5%. The line of credit
contains various covenants as defined that the Company must adhere to
during the year.
8. 1993 STOCK INCENTIVE PLAN
The 1993 Stock Incentive Plan (the "Plan"), as amended through April 6,
1998, authorizes the Company's Board of Directors (or a committee
thereof), to award to employees and directors of, and consultants to, the
Company and its subsidiaries: (i) options to acquire Common Stock at
prices determined when the options are granted, (ii) stock appreciation
rights (entitling the holder to a payment equal to the appreciation in
market value of a specified number of shares of Common Stock over a
specified period), (iii) restricted shares of Common Stock whose vesting
is subject to terms and conditions specified at the time of grant, and
(iv) performance shares of Common Stock that are granted upon achievement
of specified performance goals. Options granted pursuant to the Plan may
be either "incentive stock options" within the meaning of Section 422A of
the United States Internal Revenue Code of 1986, as amended, or
non-qualified options. A maximum of 3.5 million shares of Common Stock
(subject to anti-dilution adjustments) can be covered by awards under the
Plan.
The Plan provides that any shares subject to an option under such plan
which terminate, are canceled or expire without being exercised may again
be subjected to an option under the Plan, subject to the earlier
termination of the Plan. In general, options granted provide for vesting
in three equal annual installments from the date of grant and are
exercisable for a period of 10 years from the grant date.
During August 1997, the Company's Board of Directors approved an amendment
to the Plan to increase to 2,500,000 the maximum number of shares of
Common Stock which can be covered by awards under the Plan. On April 6,
1998, the Board approved a further amendment to the Plan to increase to
3,500,000 the maximum number of shares of Common Stock which can be
covered by awards under the Plan. The amendment increasing the number of
shares to 3,500,000 was approved by the stockholders of the Company at the
Annual Meeting of Stockholders held on July 9, 1998.
During 1998, the Company granted to employees of ECI and ECI Sportswear
280,000 options under the Plan. The exercise price of the options ranged
from $.92 to $1.50 per share and equaled the market price on the date of
grant.
In July 1997, the Company granted to employees of ECI Sportswear 50,000
options under the Plan. The exercise price of the options is $.50 per
share (the market price on such date). In August 1997, the Company granted
to officers and employees of the Company and its subsidiaries 860,000
options under the Plan. The exercise price of the options is $1.00 per
share (the market price on such date). All options granted on this date
shall vest 8 years from the date of grant, but a portion of such options
shall obtain accelerated vesting on the occurrence of certain events as
defined in the amendment to the Plan.
In December 1996, the Company granted to employees of the Company and ECI
305,000 options under the Plan. The exercise price of the options is $.10
per share (the market price on such date). For the
F-14
<PAGE>
year ended December 31, 1998, there were no stock options granted to
Officers of the Company. For the year ended December 31, 1997, a total of
765,000 stock options were granted to Officers of the Company. At December
31, 1998, there were 22 eligible participants with options outstanding
under the Plan.
<TABLE>
<CAPTION>
1998 1997 1996
----------------------- --------------------- ----------------------
Weighted Weighted Weighted
Average Average Average
Number Exercise Number Exercise Number Exercise
of Options Price of Options Price of Options Price
<S> <C> <C> <C> <C> <C> <C>
OUTSTANDING, JANUARY 1 1,695,000 $ 0.70 962,500 $ 0.37 965,000 $ 0.50
Granted 280,000 0.96 910,000 0.97 305,000 0.10
Exercised (51,333) 0.13 (52,500) 0.10 -- --
Expired/Surrendered (120,667) 0.66 (125,000) 0.48 (307,500) 0.50
--------- -------- ------- -------- ------- --------
OUTSTANDING, DECEMBER 31 1,803,000 $ 0.76 1,695,000 $ 0.70 962,500 $ 0.37
========= ======== ========= ======== ======= ========
OPTIONS EXERCISABLE,
DECEMBER 31 622,666 $ 0.45 584,997 $ 0.47 657,500 $ 0.50
========= ======== ========= ======== ======= ========
</TABLE>
At December 31, 1998, 1997 and 1996, there were 1,593,167 options, 752,500
options and 237,500 options available for grant, respectively. The
outstanding stock options at December 31, 1998 have a weighted average
contractual life of 8.1 years and the exercise price ranges from $.10 to
$1.50.
The Company accounts for its stock compensation arrangements using the
intrinsic value method. If the fair value method of accounting was applied
as defined by SFAS No. 123, Accounting for Stock-Based Compensation, the
Company's pro forma net income (loss) would have been $(3,956,000),
$2,249,000 and $12,963,000 for 1998, 1997 and 1996, respectively. Pro
forma basic earnings (loss) per share would have been $(.27), $.17 and
$1.09 for 1998, 1997 and 1996, respectively, and pro forma diluted
earnings (loss) per share would have been $(.27), $.16 and $1.08 for 1998,
1997 and 1996, respectively.
The weighted-average fair value per option granted in 1998, 1997 and 1996
was $.89, $.89 and $.09, respectively. The fair value was estimated using
the Black-Scholes option pricing model based on the following assumptions:
1998 1997 1996
Volatility 150% 150% 150%
Risk-free interest rate 5.5% 6.2% 5.8%
Expected term of options (in years) 5 5 5
No dividends are assumed to be paid during the expected life of any
option.
In connection with the Simon Purchase Transaction (as defined in Note 17,
Subsequent Events), all options issued and outstanding shall immediately
vest and become exercisable upon a change of control. Immediately
following the close of the Simon Purchase Transaction on February 26,
1999,
F-15
<PAGE>
1,803,000 options are fully vested and exercisable. Also on February 26,
1999, an Officer of the Company was granted an option to purchase
1,000,000 shares of Common Stock of the Company at an exercise price of
$.48 per share. The option shall vest within twelve months of the date of
grant; however, the option shall obtain accelerated vesting on the
occurrence of certain events as defined in the agreement. The option shall
expire on the tenth anniversary of the Simon Purchase Transaction.
9. EARNINGS PER SHARE
The Company computes earnings per share in accordance with the provisions
of SFAS No. 128, Earnings per Share. SFAS No. 128 requires the dual
presentation of basic and diluted earnings per share ("EPS"). Basic EPS
excludes dilution and is computed by dividing net income available to
common stockholders by the weighted average number of common shares
outstanding for the period. Diluted EPS reflects the potential dilution
that could occur if stock options or other contracts to issue common stock
were exercised and resulted in the issuance of common stock that then
shared in the earnings of the Company. Diluted EPS is computed using the
treasury stock method when the effect of common stock equivalents would be
dilutive. All prior periods have been restated to comply with the
provisions of SFAS No. 128. The dilutive effect of stock options and
warrants on weighted average shares outstanding was 0 shares, 1,093,000
shares and 140,000 shares for the years ended December 31, 1998 and 1997,
and for the period from February 3, 1996 through December 31, 1996,
respectively. Antidilutive stock options and warrants of 1,140,000 shares,
1,407,500 shares and 657,500 shares for the year ended December 31, 1998
and 1997 and for the period from February 3, 1996 through December 31,
1996 have been excluded from the calculation of diluted EPS.
10. TRANSACTIONS WITH RELATED PARTIES
During the years ended December 31, 1998 and 1997 and for the period from
February 4, 1996 through December 31, 1996, rent payments of $1,045,000,
$1,045,000 and $888,000, respectively, were made by ECI to a general
partnership controlled by then current and former officers of ECI during
1996 only. These officers of ECI were never officers or directors of the
Company.
11. RETIREMENT PLANS
The Company participates in a defined contribution plan with ECI and ECI
Sportswear pursuant to Section 401(k) of the Internal Revenue Code. All
employees are eligible to participate. Employer contributions are
discretionary. Participants immediately vest in their own contributions
and in employer contributions after seven years of service. During the
years ended December 31, 1998 and 1997 and for the period from February 4,
1996 through December 31, 1996, total matching contributions of $0, $0 and
$4,000, respectively, were made.
In May 1991, a discontinued operating subsidiary of the Company terminated
all of its remaining employees who participated in its pension plan. There
was no net periodic pension benefit/cost for the years ended December 31,
1998 and 1997 and for the period from February 4, 1996 through December
31, 1996. Assets of the plan are invested in a U.S. government securities
fund.
F-16
<PAGE>
The following table sets forth the funded status of the pension plan:
<TABLE>
<CAPTION>
December 31,
1998 1997
<S> <C> <C>
Actuarial present value of accumulated benefit obligation (all vested) $ 73,000 $ 61,000
======== ========
Plan assets at fair value $164,000 $163,000
Actuarial present value of projected benefit obligation 73,000 61,000
-------- --------
Plan assets in excess of projected benefit obligation 91,000 102,000
Contingent liability 91,000 102,000
-------- --------
Prepaid pension cost $ -- $ --
======== ========
</TABLE>
The benefits paid are non-earnings related; thus the projected and
accumulated benefit obligations are equal. The expected long-term rate of
return on assets was 7.5% as of December 31, 1998 and 1997.
12. INCOME TAXES
The following tables present the components of the provision (benefit) for
income taxes, a reconciliation of the expected statutory Federal income
tax expense (benefit) to the actual expense (benefit) and the principal
items of deferred taxes.
The provision (benefit) for income taxes is as follows:
Period From
Years February 4, 1996
Ended Through
December 31, December 31,
1998 1997 1996
Current:
Federal $ -- $ 46,000 $ --
State 39,000 28,000 64,000
Deferred:
Federal 75,000 (34,000) (665,000)
State 76,000 (178,000) 85,000
--------- --------- ---------
$ 190,000 $(138,000) $(516,000)
========= ========= =========
F-17
<PAGE>
A reconciliation of the expected statutory Federal income tax expense
(benefit) and the actual expense (benefit) is summarized as follows:
Period From
Years February 4, 1996
Ended Through
December 31, December 31,
1998 1997 1996
Expected income tax (benefit) expense (34)% 34% 34%
Increase (decrease) in taxes resulting from:
Non-deductible goodwill 7 10 2
State and local income tax, net 1 1 --
Losses from foreign subsidiaries -- -- 4
Change in valuation allowance -- (16) --
Non-taxable gain on debt forgiveness -- -- (32)
Recognition of NOL benefit -- (36) (31)
Non-recognition of NOL benefit 28
Non-deductible interest -- -- 10
Other 3 1 9
--- --- ---
Actual income tax expense (benefit) 5% (6)% (4)%
=== === ===
F-18
<PAGE>
Deferred income taxes reflect the net tax effects of: (a) temporary
differences between the carrying amounts of assets and liabilities for
financial reporting purposes and the amounts used for income tax purposes
and (b) operating loss and tax credit carryforwards. The tax effects of
significant items comprising the Company's deferred tax assets and
liabilities are as follows:
<TABLE>
<CAPTION>
December 31,
1998 1997
Deferred tax assets:
Current:
<S> <C> <C>
Book/tax inventory basis differences $ 371,000 $ 270,000
Customer allowances 1,979,000 456,000
Other 310,000 403,000
------------ ------------
2,660,000 1,129,000
------------ ------------
Noncurrent:
Operating loss carryforwards 30,719,000 30,529,000
Tax credit carryforwards 37,000 122,000
Alternative minimum tax credit carryforward 846,000 833,000
Non-deductible interest 1,205,000 1,154,000
------------ ------------
32,807,000 32,638,000
------------ ------------
35,467,000 33,767,000
Valuation allowance (34,573,000) (32,711,000)
------------ ------------
Net deferred tax assets $ 894,000 $ 1,056,000
============ ============
Deferred tax liabilities:
Intangible assets $ 694,000 $ 721,000
Book/tax fixed asset basis differences 63,000 47,000
------------ ------------
Total noncurrent deferred tax liabilities $ 757,000 $ 768,000
============ ============
</TABLE>
A valuation allowance is recognized for those deferred tax assets that may
not be realized. At this time, the Company has determined that such
valuation allowance be equal to the net deferred tax assets except for a
portion of the alternative minimum tax credit carryforwards and state net
operating loss carryforwards at ECI and ECI Sportswear. The alternative
minimum tax credit carryforwards do not expire, and in the Company's
opinion, it is more likely than not that this credit carryforward will be
realized.
Net current deferred tax assets of $150,000 and $269,000 are included in
prepaid expenses and other current assets, net noncurrent deferred tax
assets of $744,000 and $787,000 are included in other assets, and
noncurrent deferred tax liabilities of $757,000 and $768,000 are included
in other liabilities as of December 31, 1998 and 1997, respectively.
The Company has taken the position that consummation of a prior
restructuring in 1986 did not materially eliminate or reduce any portion
of the net operating loss carryforwards. It is possible, however, that on
audit the Internal Revenue Service could disagree with the positions taken
by the Company, and should such a dispute arise, it would be difficult to
predict the ultimate outcome since
F-19
<PAGE>
these issues involve many complex and technical questions under Section
382 of the Internal Revenue Code, as in effect prior to the Tax Reform Act
of 1986, and other provisions of Federal tax law. Accordingly, no
assurance can be given as to whether all or any part of such carryforwards
from the 1986 restructuring will be available to the Company to offset
future income. The Company's 1993 Chapter 11 Plan of Reorganization
qualifies under New Section 382 (l)(5) and, therefore, its ability to
utilize a substantial portion of the net operating loss carryforwards of
the Company should be preserved. The Internal Revenue Service could
disagree with the Company's position and, should such a dispute arise, it
would be difficult to predict the outcome.
In connection with the Simon Purchase Transaction (as defined in Note 17,
Subsequent Events), the purchase by Simon of approximately 63.4% of the
stock of the Company will limit the Company's use of its net operating
loss carryforwards and other tax credits. Section 382, as amended by the
Tax Reform Act of 1986 ("New Section 382"), limits a corporation's use of
carryforwards in the event of a "Change of Ownership", which is defined
generally as a 50 percentage point change in stock ownership at any time
during the relevant testing period. The anticipated Section 382 limitation
will severely limit the remaining Federal tax net operating loss
carryforwards disclosed below.
The amounts and expiration dates, if accepted, of the remaining Federal
tax net operating loss carryforwards are as follows:
1999 $ 7,000,000
2000 9,000,000
2001 6,000,000
2005 39,000,000
2006 11,000,000
2007 3,000,000
2008 1,000,000
-----------
$76,000,000
===========
Approximately $37,000 of investment tax and job credits, expiring from
1999 to 2000, are available as a carryforward to reduce future Federal
income tax payments.
F-20
<PAGE>
13. COMMITMENTS AND CONTINGENCIES
Lease Commitments - Future minimum rental payments under capital leases
and noncancellable operating leases that have initial or remaining lease
terms in excess of one year as of December 31, 1998 are as follows:
Operating Capital
Year Ending Leases Leases
1999 $ 2,153,000 $ 76,000
2000 1,222,000 32,000
2001 1,064,000 26,000
2002 1,047,000 26,000
2003 1,048,000 --
Thereafter 6,098,000 --
------------ ---------
Total minimum lease payments $ 12,632,000 160,000
============
Less amount representing interest (19,000)
---------
Present value of minimum lease payments $ 141,000
=========
The Company has various operating leases in effect primarily for outlet
stores, automobiles, selling and administrative facilities and warehouse
facilities. The outlet store leases expire over the next three to ten
years, the selling and administrative facility leases expire over the next
six years and the warehouse leases expire over the next two years. The
outlet store leases contain a clause whereby the stores are assessed
additional rent based on a percentage of sales. For the years ended
December 31, 1998 and 1997 and for the period from February 4, 1996
through December 31, 1996, the outlet stores were not charged rent as a
percentage of sales. Most of the operating leases contain a renewal option
to extend the lease terms. Total rental expense under all operating leases
was approximately $2,282,000, $1,769,000 and $1,885,000 for the years
ended December 31, 1998 and 1997 and for the period from February 4, 1996
through December 31, 1996, respectively.
The Company is involved in certain warehousing arrangements where charges
are assessed based upon the number of units received into and shipped out
of the warehouse. Total warehouse charges paid by the Company for the
years ended December 31, 1998 and 1997 and for the period from February 4,
1996 through December 31, 1996 were $1,606,000, $445,000 and $261,000,
respectively.
The Company leases various office equipment under capital leases expiring
over the next two to five years. As of December 31, 1998 and 1997, the
current obligation payable is $67,000 and $98,000, respectively, and is
included in accrued expenses and other current liabilities. The noncurrent
obligation payable is $73,000 and $140,000, respectively, and is included
in other liabilities.
Equipment Financing Agreement - The Company has entered into a financing
agreement with a third party for the purpose of acquiring various computer
hardware and software and additional services. The terms of the agreement
require the Company to make specified monthly payments over a 3-year
period with payments commencing on April 2, 1996. The third party is
secured by an interest in the computer hardware and software. As of
December 31, 1998 and 1997, the current obligation payable is
F-21
<PAGE>
$43,000 and $162,000, respectively, and is included in the current portion
of long-term debt. The noncurrent obligation payable is $0 and $43,000,
respectively, and is included in long-term debt.
License Agreements - The Company has been granted several licensing
agreements to manufacture and distribute men, women and boys' outerwear,
sportswear and activewear products bearing the licensors' labels. The
agreements expire at various dates through 2000. The Company is required
to make minimum royalty payments, along with additional royalty payments
in the range of 2.5% to 9% based on a percentage of defined sales. Royalty
expenses under these licensing agreements totaled $5,600,000, $2,480,000
and $1,629,000 for the years ended December 31, 1998 and 1997 and for the
period from February 3, 1996 through December 31, 1996, respectively.
The following is a schedule by year of future minimum royalty payments
required under the license agreements with initial or remaining terms in
excess of one year as of December 31, 1998:
1999 $ 1,862,000
2000 769,000
-----------
$ 2,631,000
===========
The Company has the option to renew the license agreements for an
additional period based on the terms of each agreement. The following is a
schedule by year of additional future minimum royalty payments required
over the renewal period if the Company were to exercise its option to
renew all of its license agreements:
1999 $ 0
2000 780,000
2001 970,000
2002 1,060,000
2003 1,100,000
Thereafter 1,690,000
----------
$5,600,000
==========
Employment Contracts - The Company has entered into employment contracts
with certain senior executives for a period of three to four years,
expiring no later than December 31, 2001. Under the agreements, the
covered individuals are entitled to a specified salary over the contract
period. In addition, bonuses are payable contingent upon profitability and
cash flows of the Company for each period. The estimated future minimum
obligation under these contracts as of December 31, 1998 is $2,425,000.
In connection with the Simon Purchase Transaction (as defined in Note 17,
Subsequent Events), the Company entered into a retention agreement with
the former Chairman and Chief Executive Officer of the Company providing
for severance dependent on certain events occurring as defined. In March
1999, the Company paid $2,401,000 to this former Officer as severance
under the agreement.
Contingencies - The Company, in the ordinary course of its business, is
the subject of, or a party to, various pending or threatened legal actions
involving private interests. While the Company cannot quantify the outcome
of any litigation, the Company is vigorously defending these claims and
believes
F-22
<PAGE>
that any ultimate liability arising from these actions will not have a
material adverse effect on its consolidated financial statements.
14. BUSINESS SEGMENT DATA
The Company is engaged in one business, the design and import of men's and
boy's outerwear, activewear, swimwear, loungewear and sportswear. The
Company is organized and managed as one business segment that offers
distinct men's and boy's apparel products to its customers. The Company's
business is conducted domestically, with substantially all of its net
sales derived from domestic customers. The Company had sales to one
customer that represent 13%, 10% and 34% of net sales for the years ended
December 31, 1998 and 1997 and for the period from February 4, 1996
through December 31, 1996, respectively. For the period from February 4,
1996 through December 31, 1996, the Company had sales to another customer
that represented 15% of net sales.
15. DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
In the opinion of management, the carrying value of floating rate notes
payable and other floating rate borrowings approximates estimated fair
value. Further, in the opinion of management, it is not practicable to
reasonably estimate the fair value of the Company's fixed rate
subordinated long-term debt since there are no quoted market prices for
such financial instruments with similar risk, including those associated
with the Company's emergence from bankruptcy proceedings in June 1993.
Additionally, the cost of obtaining independent valuations or otherwise
determining the fair value of the Company's fixed rate subordinated
long-term debt in the circumstances, is considered excessive.
16. SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND FINANCING TRANSACTIONS
In connection with the acquisition described in Note 4, the Company
acquired the following net assets:
Receivables $ 90,000
Inventories 3,571,000
Prepaid expenses and other current assets 1,170,000
Furniture, fixtures and equipment 327,000
Other assets 924,000
Accounts payable (3,828,000)
Accrued expenses and other current liabilities (1,183,000)
Other liabilities (56,000)
-----------
Fair value of net assets acquired $ 1,015,000
===========
Total consideration $ 4,234,000
===========
17. SUBSEQUENT EVENTS
On February 26, 1999, the Company entered into a Securities Purchase
Agreement ("Purchase Agreement") with The Simon Group L.L.C. ("Simon") and
Apollo (as defined in Note 6) providing for the purchase by Simon of
24,107,145 newly issued shares of Common Stock of the Company and
2,093,790 newly issued shares of Series A Preferred Stock of the Company
for $20,000,000 cash ("Simon Purchase Transaction"). Immediately
thereafter, the Company redeemed in full the outstanding balance of the
Apollo Note (as defined in Note 6) as of the date of the transaction which
F-23
<PAGE>
amounted to $10,658,000 of remaining principal and accrued interest. The
redemption was satisfied through the exchange of $4,000,000 in cash and
the issuance of 5,892,856 shares of Common Stock and 512,113 shares of
Series A Preferred Stock of the Company. The redemption of the Apollo Note
resulted in a gain on debt forgiveness of $1,768,000 which has been
accounted for as a capital contribution to the Company. As a result of the
completion of the Simon Purchase Transaction, Simon effectively became the
beneficial owner of approximately 63.4% of the Company, while Apollo
retains approximately 23.7% ownership of the Company.
The shares of Series A Preferred Stock issued to both Simon and Apollo are
manditorily convertible upon the filing of an amendment to the Certificate
of Incorporation of the Company authorizing a sufficient number of shares
of Common Stock into which the Series A Preferred Stock are convertible.
The conversion shall occur at a ratio of 10 shares of Common Stock for
every 1 share of Series A Preferred Stock. The newly issued Common Stock
and Series A Preferred Stock has not been registered under the Securities
Act of 1933 and may not be offered or sold absent a registration or an
applicable exemption from registration requirements.
Also in connection with the Simon Purchase Transaction, the Company was
required to issue 700,000 shares of Common Stock to the Warnaco Group,
Inc. ("Warnaco") to satisfy a non-competition agreement the new Chairman
and Chief Executive Officer of the Company had with Warnaco. In addition,
the former Chairman and Chief Executive Officer of the Company has been
granted an option to purchase 1,000,000 shares of Common Stock of the
Company at an exercise price of $.48 per share. The option shall vest
within twelve months of the date of grant; however, the option shall
obtain accelerated vesting on the occurrence of certain events as defined
in the agreement. All 1,803,000 options issued and outstanding to Officers
and employees of the Company as of December 31, 1998 have immediately
vested and become exercisable on the date of the Simon Purchase
Transaction.
As a result of the change in control, the Company was required to obtain
consents from the licensors of its Perry Ellis licenses upon the closing
of the transaction. In obtaining the appropriate consents, the Company's
Perry Ellis licenses have been severely restricted. In the opinion of
management and based upon future forecasted results of the Perry Ellis
product line, the remaining value of the associated goodwill and licenses
of $3,726,000 acquired in connection with the Davco acquisition (as
discussed in Note 4, Business Acquisition) will not be recoverable. The
Company will record this nonrecurring charge to operations in the first
quarter of 1999.
The pro forma effect on the consolidated balance sheet assuming the Simon
Purchase Transaction had been completed at the end of the Company's 1998
fiscal year includes an increase in cash and cash equivalents of
$16,000,000, a reduction in accrued expenses and other current liabilities
of $542,000 representing accrued interest on the Apollo Note, a reduction
in long-term debt for the principal amount of the Apollo Note of
$9,496,000, and an increase in stockholders' equity of $26,038,000
reflecting the newly issued shares of Common Stock and Series A Preferred
Stock and the increase to paid-in-capital for the gain on debt
forgiveness. The pro forma effect on the consolidated statement of
operations assuming the Simon Purchase Transaction had been completed at
the beginning of the Company's 1998 fiscal year includes a reduction in
net loss of $1,272,000 representing the net effect of a reduction in
interest and debt expense. The pro forma basic and diluted loss per share
before extraordinary item would have been ($.04), and the pro forma basic
and diluted net loss per share would have been ($.03). The corresponding
weighted-average shares outstanding for purposes of these computations
would have been 71,671,000. This unaudited pro forma information is not
necessarily indicative of the results that might have occurred had the
Simon Purchase Transaction occurred at the beginning of the Company's 1998
fiscal year or of future results.
F-24
<PAGE>
<TABLE>
<CAPTION>
ARIS INDUSTRIES, INC. AND SUBSIDIARIES
SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT
CONDENSED BALANCE SHEETS
- ---------------------------------------------------------------------------------------
December 31,
1998 1997
ASSETS
CURRENT ASSETS:
<S> <C> <C>
Cash and cash equivalents $ 109,000 $ 670,000
Prepaid expenses and other current assets 19,000 54,000
------------ ------------
Total current assets 128,000 724,000
INVESTMENTS IN/ADVANCES TO SUBSIDIARIES 32,550,000 36,742,000
PROPERTY AND EQUIPMENT - NET 2,000 5,000
OTHER ASSETS 1,024,000 795,000
------------ ------------
TOTAL ASSETS $ 33,704,000 $ 38,266,000
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accrued expenses and other current liabilities $ 1,351,000 $ 654,000
Current portion of long-term debt 1,040,000 2,010,000
------------ ------------
Total current liabilities 2,391,000 2,664,000
OTHER LIABILITIES 783,000 901,000
LONG-TERM DEBT (net of unamortized discount of $506,000
and $630,000, respectively) 16,438,000 16,887,000
STOCKHOLDERS' EQUITY:
Common stock, par value $.01 151,000 150,000
Preferred stock, par value $.01 -- --
Additional paid-in capital 44,757,000 44,752,000
Accumulated deficit (30,816,000) (27,088,000)
------------ ------------
Total stockholders' equity 14,092,000 17,814,000
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 33,704,000 $ 38,266,000
============ ============
</TABLE>
See notes to condensed financial statements
F-25
<PAGE>
<TABLE>
<CAPTION>
ARIS INDUSTRIES, INC. AND SUBSIDIARIES
SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT
CONDENSED STATEMENTS OF OPERATIONS
- -----------------------------------------------------------------------------------------------------------------------------------
Period From
Years February 4, 1996
Ended Through
December 31, December 31,
1998 1997 1996
REVENUES:
<S> <C> <C> <C>
Management fees from subsidiaries $ 2,595,000 $ 2,600,000 $ 1,818,000
Equity in (losses) earnings of subsidiaries (3,271,000) 3,413,000 32,000
------------ ------------ ------------
(676,000) 6,013,000 1,850,000
------------ ------------ ------------
OPERATING COSTS:
Selling and administrative expenses 886,000 1,134,000 827,000
Amortization and depreciation expenses 673,000 676,000 1,058,000
------------ ------------ ------------
1,559,000 1,810,000 1,885,000
------------ ------------ ------------
(LOSS) INCOME BEFORE INTEREST
EXPENSE, GAIN ON SALE OF
SUBSIDIARY, INCOME TAXES AND
EXTRAORDINARY ITEM (2,235,000) 4,203,000 (35,000)
INTEREST EXPENSE (1,975,000) (1,821,000) (4,991,000)
SALE OF SUBSIDIARY:
Gain on sale of Perry Manufacturing Company -- -- 7,786,000
Realization of cumulative foreign currency
translation loss -- -- (1,108,000)
------------ ------------ ------------
(LOSS) INCOME BEFORE INCOME TAXES
AND EXTRAORDINARY ITEM (4,210,000) 2,382,000 1,652,000
INCOME TAX EXPENSE(BENEFIT) 40,000 49,000 (452,000)
------------ ------------ ------------
(LOSS) INCOME BEFORE
EXTRAORDINARY ITEM (4,250,000) 2,333,000 2,104,000
EXTRAORDINARY ITEM:
Gain on extinguishment of debt 522,000 -- --
Gain on debt forgiveness -- -- 10,862,000
------------ ------------ ------------
NET (LOSS) INCOME $ (3,728,000) $ 2,333,000 $ 12,966,000
============ ============ ============
</TABLE>
See notes to condensed financial statements.
F-26
<PAGE>
<TABLE>
<CAPTION>
ARIS INDUSTRIES, INC. AND SUBSIDIARIES
SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT
CONDENSED STATEMENTS OF CASH FLOWS
- ------------------------------------------------------------------------------------------------------------------------------------
Period From
Years February 4, 1996
Ended Through
December 31, December 31,
1998 1997 1996
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C> <C>
Net (loss) income $ (3,728,000) $ 2,333,000 $ 12,966,000
Adjustments to reconcile net (loss) income to net
cash provided by (used in) operating activities:
Depreciation and amortization 673,000 676,000 1,058,000
Interest in undistributed equity losses (earnings)
of subsidiaries 3,271,000 (3,413,000) (32,000)
Gain on sale of Perry -- -- (7,786,000)
Gain on debt forgiveness and extinguishments (522,000) -- (10,862,000)
Cumulative translation adjustment -- -- 1,108,000
Capitalized interest 276,000 1,830,000 1,424,000
Deferred income tax expense (benefit) 79,000 (26,000) (544,000)
Change in assets and liabilities 557,000 (795,000) (1,741,000)
------------ ------------ ------------
Net cash provided by (used in) operating activities 606,000 605,000 (4,409,000)
------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures -- -- (4,000)
Net proceeds from sale of Perry -- -- 40,145,000
------------ ------------ ------------
Net cash provided by investing activities -- -- 40,141,000
------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payment of Heller debt (1,128,000) (15,000) (40,857,000)
Principal payments of long-term debt (45,000) (15,000) --
Proceeds from issuance of long-term debt -- -- 3,528,000
Purchase of common stock -- -- (4,000)
Proceeds from exercise of stock options 6,000 6,000 --
------------ ------------ ------------
Net cash used in financing activities (1,167,000) (24,000) (37,333,000)
------------ ------------ ------------
NET (DECREASE) INCREASE IN CASH AND
CASH EQUIVALENTS (561,000) 581,000 (1,601,000)
CASH AND CASH EQUIVALENTS,
BEGINNING OF PERIOD 670,000 89,000 1,690,000
------------ ------------ ------------
CASH AND CASH EQUIVALENTS,
END OF PERIOD $ 109,000 $ 670,000 $ 89,000
============ ============ ============
CASH PAID DURING THE YEAR FOR:
Interest $ 1,081,000 $ -- $ 1,477,000
============ ============ ============
Income taxes $ 37,000 $ 24,000 $ 30,000
============ ============ ============
</TABLE>
See notes to condensed financial statements.
F-27
<PAGE>
ARIS INDUSTRIES, INC. AND SUBSIDIARIES
SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT
NOTES TO CONDENSED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
1. SIGNIFICANT ACCOUNTING POLICIES
Investment in Subsidiaries - Investments in subsidiaries are accounted for
using the equity method under which Aris' 100% share of earnings or losses
of these subsidiaries are reflected in operations as earned. Dividends, if
any, are credited against the investment in subsidiaries when received.
2. DEBT MATURITIES
Maturities - Future maturities of long-term debt are as follows:
Year Ending December 31,
1999 $ 1,040,000
2000 600,000
2001 4,850,000
2002 11,494,000
------------
$ 17,984,000
============
3. SUPPLEMENTAL DISCLOSURE OF NONCASH FINANCING TRANSACTIONS
On July 15, 1997, the Company contributed 3 million restricted shares of
its Common Stock, par value $.01, to its wholly-owned subsidiary, ECI
Sportswear, Inc. The value assigned to these shares was $720,000. The
effect of this transaction was an increase to investments in/advances to
subsidiaries of $720,000, Common Stock of $30,000 and additional paid-in
capital of $690,000.
F-28
<PAGE>
<TABLE>
<CAPTION>
ARIS INDUSTRIES, INC. AND SUBSIDIARIES
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
- ------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------
Column A Column B Column C Column D Column E
- ------------------------------------------------------------------------------------------------------------------------------
Additions -
Balance at Charged to Balance
Beginning Costs and at End of
Classification of Period Expenses Deductions Period
<S> <C> <C> <C> <C>
Year ended December 31, 1998:
Allowance for sales
returns and discounts $ 1,832,000 $ 9,738,000 $ 7,711,000(1) $ 3,859,000
Inventory reserve for obsolescence 268,000 1,240,000 -- 1,508,000
Reserve for price allowances 880,000 1,075,000 905,000(1) 1,050,000
----------- ----------- ----------- -----------
$ 2,980,000 $12,053,000 $ 8,616,000 $ 6,417,000
=========== =========== =========== ===========
Year ended December 31, 1997:
Allowance for sales
returns and discounts $ 1,803,000 $ 2,738,000 $ 2,709,000(1) $ 1,832,000
Inventory reserve for obsolescence -- 268,000 -- 268,000
Reserve for price allowances 961,000 732,000 813,000(1) 880,000
----------- ----------- ----------- -----------
$ 2,764,000 $ 3,738,000 $ 3,522,000 $ 2,980,000
=========== =========== =========== ===========
Period from February 4, 1996 through
December 31, 1996:
Allowance for sales
returns and discounts $ 2,273,000 $ 3,930,000 $ 4,400,000(1)(3) $ 1,803,000
Inventory reserve for obsolescence 939,000 -- 939,000(2)(3) --
Reserve for price allowances 886,000 964,000 889,000(1) 961,000
----------- ----------- ----------- -----------
$ 4,098,000 $ 4,894,000 $ 6,228,000 $ 2,764,000
=========== =========== =========== ===========
(1) Returns, discounts and allowances taken.
(2) Inventory written off.
(3) Sale of Perry Manufacturing Company.
</TABLE>
F-29
EXHIBIT 10.115
FINANCING AGREEMENT
FINANCING AGREEMENT, dated as of February 26, 1999, by and
among Aris Industries, Inc., a New York corporation (the "Company"), Europe
Craft Imports, Inc., a New Jersey corporation ("ECI"), ECI Sportswear, Inc., a
New York corporation ("Sportswear"), Stetson Clothing Company, Inc., a Delaware
corporation ("Stetson" and, together with ECI and Sportswear, each a "Borrower"
and collectively, the "Borrowers"), the financial institutions from time to time
party hereto (each a "Lender" and collectively, the "Lenders") and The CIT
Group/Commercial Services, Inc., as agent for the Lenders (in such capacity, the
"Agent").
RECITALS
The Company and the Borrowers have asked the Lenders to extend
credit to the Borrowers consisting of a revolving credit facility to the
Borrowers in an aggregate principal amount not in excess of $65,000,000 at any
time outstanding, a portion of which may be utilized for letters of credit. The
proceeds of the loans under the revolving credit facility shall be used to
refinance existing indebtedness of the Borrowers and for general working capital
purposes of the Borrowers. The letters of credit will be used to finance the
purchase by the Borrowers of inventory in the ordinary course of the Borrowers'
businesses or for other general working capital purposes. The Lenders are
severally, and not jointly, willing to extend such credit to the Borrowers
subject to the terms and conditions hereinafter set forth. Accordingly, the
Company, the Borrowers, the Lenders, the Administrative Agent and the Agent
hereby agree as follows:
ARTICLE I
DEFINITIONS; CERTAIN TERMS
SECTION 1.01. Definitions. As used in this Agreement, the following
terms shall have the respective meanings indicated below, such meanings to be
applicable equally to both the singular and plural forms of such terms:
"Account Debtor" means each debtor, customer or obligor in any
way obligated on or in connection with any Account Receivable.
"Accounts Receivable" means any and all rights of a Borrower
to payment for goods sold or services rendered, including accounts, contract
rights, general intangibles and any and all such rights evidenced by chattel
paper, instruments or documents, whether due or to become due and whether or not
earned by performance, and whether now or hereafter acquired or arising in the
future and any proceeds arising therefrom or relating thereto.
"Action" has the meaning specified therefor in Section 12.14.
1
<PAGE>
"Adjusted Consolidated Net Income (Loss)" means for any Person
and its Consolidated Subsidiaries, for any period, the Consolidated Net Income
(or Loss) of such Person and its Consolidated Subsidiaries for such period, plus
(i) prior to March 31, 2000, the sum of (A) extraordinary, unusual or
non-recurring non-cash losses or expenses (provided that, in the case of this
subclause (A), such extraordinary, unusual or non-recurring losses or expenses
do not at any time result in a cash outlay by such Person) and (B)
extraordinary, unusual or non-recurring cash losses or expenses resulting from
(1) severance payments to employees in an aggregate amount not to exceed
$5,500,000, (2) amounts paid in connection with leases for excess real property
of the Loan Parties in an aggregate amount not to exceed $1,500,000, and (3)
costs and expenses paid by the Loan Parties in connection with the consummation
of the transactions contemplated by this Agreement and the other Loan Documents
and by Section 5.01(h) of this Agreement in an aggregate amount not to exceed
$2,000,000, (ii) on and after March 31, 2000, the sum of (A) extraordinary,
unusual or non-recurring non-cash losses or expenses (provided that, in the case
of this subclause (ii)(A), such extraordinary, unusual or non-recurring losses
or expenses do not at any time result in a cash outlay by such Person) and (B)
extraordinary, unusual or non-recurring cash losses or expenses incurred by Loan
Parties in connection with the early retirement of Indebtedness, and (iii) prior
to December 31, 1999, start-up costs and expenses incurred in connection with
the Stetson business in an aggregate amount not in excess of $6,000,000.
"Administrative Borrower" means ECI or any Borrower hereafter
designated as such by the Borrowers in a written notice to the Agent.
"Affiliate" means, as to any Person, any other Person that
directly or indirectly through one or more intermediaries, controls, is
controlled by, or is under common control with, such Person. For purposes of
this definition, "control" of a Person means the power, directly or indirectly,
either to (i) vote 10% or more of the Capital Stock having ordinary voting power
for the election of directors (or other Persons performing a similar function)
of such Person or (ii) direct or cause the direction of the management and
policies of such Person whether by contract or otherwise.
"Agent" has the meaning specified therefor in the preamble
hereto.
"Agent Advances" has the meaning specified therefor in Section
9.08.
"Assignment and Acceptance" means an assignment and acceptance
entered into by an assigning Lender and an assignee and accepted by the Agent,
in accordance with Section 12.09 hereof and substantially in the form of Exhibit
H hereto.
"Assignment of Factoring Proceeds Agreement" means the
Intercreditor Agreement and Assignment of Factoring Proceeds dated the date
hereof among the Factor, the Agent, ECI and Sportswear, as the same may be
amended or otherwise modified from time to time.
"Availability" shall mean, at any time, the difference between
(i) the lesser of (A) the Borrowing Base Before Overadvance Amount and (B) the
Total Commitment and (ii) the sum of (A) the aggregate outstanding principal
amount of all Revolving Credit Loans and (B) all Letter of Credit Obligations.
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"Bank" shall mean The Chase Manhattan Bank, its successors or
any other bank designated by the Agent to the Company from time to time.
"Base Rate" means, for any day, the Prime Rate for such day.
"Base Rate Loan" means a Loan bearing interest at the Base
Rate.
"Board" means the Board of Governors of the Federal Reserve
System of the United States.
"BONY" means The Bank of New York.
"BONY Indebtedness" means the indebtedness of the Company to
BONY arising pursuant to the BONY Loan Documents.
"BONY Loan Documents" means (i) the Series A Junior Secured
Note Agreement dated as of June 30, 1993, between the Company and BONY, (ii) the
Series A Junior Secured Note dated as of June 30, 1993, made by the Company in
favor of BONY, and (iii) the Secondary Pledge Agreement dated as of June 30,
1993, between the Company and BONY, each as amended prior to the date hereof.
"Borrower" and "Borrowers" each has the meaning specified
therefor in the preamble hereto.
"Borrowing Base" means, as of any date, the sum of (i) the
Borrowing Base Before Overadvance Amount and (ii) the Overadvance Amount.
"Borrowing Base Before Overadvance Amount" means, as of any
date, the difference between (i) the sum of (A) 90% of the Net Amount of
Eligible Accounts Receivable and (B) the lesser of (x) 60% of the value,
determined at the lower of cost or market value in accordance with GAAP, of
Eligible Inventory and (y) the Inventory Amount and (ii) such reserves as the
Agent may deem appropriate in the exercise of its reasonable business judgment
based upon the lending practices of the Agent, consistent with the practices
customary in the commercial finance industry generally, provided, that, in the
absence of a continuing Event of Default, no such reserve will be effective
until 60 days after the Agent shall have provided notice to the Administrative
Borrower of its election to implement such reserve.
"Borrowing Base Certificate" means the certification of the
Borrowing Base in compliance with Section 7.01(a)(v) hereof, substantially in
the form of Exhibit J hereto, setting forth the calculation of the Borrowing
Base and Availability.
"Business Day" means any day other than a Saturday, Sunday or
other day on which commercial banks in New York City are required or authorized
to close, provided, that with respect to the borrowing, payment, conversion to
or continuation of, or determination of
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interest rate on, Eurodollar Loans, Business Day shall mean any Business Day on
which dealings in Dollars may be carried on in the interbank eurodollar markets
in New York City and London.
"Capital Guideline" means any law, rule, regulation, policy,
guideline or directive (whether or not having the force of law and whether or
not the failure to comply therewith would be unlawful), (i) regarding capital
adequacy, capital ratios, capital requirements, the calculation of a bank's
capital or similar matters, or (ii) affecting the amount of capital required to
be obtained or maintained by the Lenders, Affiliates of the Lenders or the L/C
Issuer or the manner in which the Lenders, Affiliates of the Lenders or the L/C
Issuer allocate capital to any of their contingent liabilities (including
letters of credit), advances, acceptances, commitments, assets or liabilities.
"Capital Stock" means any and all shares, interests,
participations, warrants, options or other equivalents (however designated) of
capital stock of a corporation or any and all equivalent ownership interests in
a Person (other than a corporation).
"Capitalized Lease" means any lease which is required under
GAAP to be capitalized on the balance sheet of the lessee.
"Capitalized Lease Obligations" means obligations for the
payment of rent for any real or personal property under leases or agreements to
lease that, in accordance with GAAP, have been or should be capitalized on the
books of the lessee and, for purposes hereof, the amount of any such obligation
shall be the capitalized amount thereof determined in accordance with such
principles.
"Change of Control" means (i) prior to a public equity
offering by the Company after the Effective Date, (A) Arnold Simon shall cease
to be the sole managing member of The Simon Group, LLC with direct control and
full and unrestricted power to vote all of the Capital Stock of the Company
owned by The Simon Group, LLC, or (B) The Simon Group, LLC shall cease to
directly control and have full and unrestricted power to vote at least 51% of
the then outstanding Capital Stock of the Company free and clear of all Liens,
(ii) after a public equity offering by the Company after the Effective Date, (A)
Arnold Simon shall cease to be the sole managing member of The Simon Group, LLC
with direct control and full and unrestricted power to vote all of the Capital
Stock of the Company owned by The Simon Group, LLP or (B) a majority of the
board of directors of the Company shall not be Persons nominated for election to
the board of directors of the Company by The Simon Group, LLC or by Arnold Simon
in his capacity as the sole managing member of The Simon Group, LLC, (iii) the
Company shall cease to directly own and control, of record and beneficially,
100% of the then outstanding Capital Stock of ECI free and clear of all Liens,
except the Lien in favor of BONY pursuant to the BONY Loan Documents, (iv) ECI
shall cease to directly own and control, of record and beneficially, 100% of the
then outstanding Capital Stock of Sportswear and Stetson free and clear of all
Liens, except the Lien in favor of the Agent for the benefit of the Lenders, or
(v) Arnold Simon shall cease to be involved in the day-to-day operations and
management of the businesses of the Company and the Borrowers and a successor,
reasonably acceptable to the Agent, is not appointed, on terms reasonably
acceptable to the Required Lenders, within three months of such cessation of
involvement.
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<PAGE>
"Chase Termination Agreement" means the termination agreement,
in form and substance satisfactory to the Agent, among The Chase Manhattan Bank,
the Company, ECI and Sportswear.
"CIT" means The CIT Group/Commercial Services, Inc., a New
York corporation.
"Collateral" means all of the property (tangible and
intangible) purported to be subject to the Lien purported to be created by any
mortgage, deed of trust, security agreement, pledge agreement, assignment or
other security document heretofore or hereafter executed by any Person as
security for all or any part of the Obligations.
"Commitment" means, with respect to each Lender, such Lender's
Revolving Credit Commitment.
"Company" has the meaning specified therefor in the preamble
hereto.
"Consolidated EBITDA" means for any Person and its
Consolidated Subsidiaries, for any period, the Consolidated Net Income (or Net
Loss) of such Person and its Consolidated Subsidiaries for such period, plus (i)
the sum, without duplication, of (A) gross interest expense for such period
minus gross interest income for such period, (B) income tax expense, (C)
depreciation expense, (D) amortization expense net of negative goodwill
amortization, and (E) (x) prior to March 31, 2000 the sum of (1) extraordinary,
unusual or non-recurring non-cash losses or expenses (provided that, in the case
of this subclause (E)(x)(1), such extraordinary, unusual or non-recurring losses
or expenses do not at any time result in a cash outlay by such Person) and (2)
extraordinary, unusual or non-recurring cash losses or expenses resulting from
(AA) severance payments to employees in an aggregate amount not to exceed
$5,500,000, (BB) amounts paid in connection with leases for excess real property
of the Loan Parties in an aggregate amount not to exceed $1,500,000, and (CC)
costs and expenses paid by the Loan Parties in connection with the consummation
of the transactions contemplated by this Agreement and the other Loan Documents
and by Section 5.01(h) of this Agreement in an aggregate amount not to exceed
$2,000,000, and (y) on and after March 31, 2000, the sum of (1) extraordinary,
unusual or non-recurring non-cash losses or expenses (provided that, in the case
of this subclause (E)(y)(1), such extraordinary, unusual or non-recurring losses
or expenses do not at any time result in a cash outlay by such Person) and (2)
extraordinary, unusual or nonrecurring cash losses or expenses incurred by the
Loan Parties in connection with the early retirement of Indebtedness, and (z)
prior to December 31, 1999, start-up costs and expenses incurred in connection
with the Stetson business in an aggregate amount not in excess of $6,000,000,
less (ii) extraordinary, unusual or non-recurring gains, each determined on a
consolidated basis in accordance with GAAP for such Person and its Consolidated
Subsidiaries.
"Consolidated Net Income (Loss)" means for any Person and its
Consolidated Subsidiaries, for any period, the net income (or loss) of such
Person and its Consolidated
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<PAGE>
Subsidiaries after income taxes for such period, but excluding any extraordinary
gains, all computed and consolidated in accordance with GAAP applied on a
consistent basis.
"Consolidated Net Worth" means, at any date, with respect to
any Person and its Consolidated Subsidiaries, the excess of the Consolidated
Total Assets of such Person and its Consolidated Subsidiaries at such date over
the Consolidated Total Liabilities of such Person and its Consolidated
Subsidiaries at such date.
"Consolidated Subsidiary" of a Person at any time shall mean
those Subsidiaries of such Person whose accounts are or should in accordance
with GAAP be consolidated with those of such Person.
"Consolidated Total Assets" means, at any date, with respect
to any Person and its Consolidated Subsidiaries, the total assets of such Person
and its Consolidated Subsidiaries determined in conformity with GAAP.
"Consolidated Total Liabilities" means, for a Person and its
Consolidated Subsidiaries, at any date, without duplication, all obligations
which in conformity with GAAP would be included in determining total liabilities
as shown on the liabilities side of a balance sheet of such Person and its
Consolidated Subsidiaries including, without limitation, in any event, all
Indebtedness of such Person and its Consolidated Subsidiaries at such date
whether or not the same would be shown.
"Default" means an event which, with the giving of notice or
the lapse of time or both, would constitute an Event of Default.
"Dollar", "Dollars" and the symbol "$" means lawful money of
the United States of America.
"Early Termination Fee" means a fee equal to (i) the sum of
(A) the average daily unpaid principal amount of the Loans and (B) the average
daily Letter of Credit Obligations, in each case during the term of the Total
Commitment, multiplied by (ii) (x) 2.5%, if the Total Commitment is terminated
on or before February 25, 2000 and (y) 1.5%, if the Total Commitment is
terminated after February 25, 2000 and before February 26, 2001.
"ECI" has the meaning specified in the preamble hereto.
"Effective Date" has the meaning specified therefor in Article
V hereof.
"Eligible Accounts Receivable" means, with respect to any
Borrower, the Accounts Receivable of such Borrower which are and at all times
continue to be, reasonably acceptable to the Agent in all respects. Criteria for
eligibility may be established and revised from time to time solely by the Agent
in its exclusive judgment exercised reasonably. Notwithstanding the foregoing,
Accounts Receivable of a Borrower shall be deemed to be eligible if such
Accounts Receivable are generated in the ordinary course of business of such
Borrower and are purchased and credit approved and continue to be credit
approved, in each case
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<PAGE>
by the Factor under the relevant Factoring Agreement or by an Existing Factor
under its factoring agreement with a Borrower and are and continue to be subject
to the Assignment of Factoring Proceeds Agreement or an Existing Factor
Assignment Agreement. In addition, Accounts Receivable that are not purchased
and credit approved (including as a result of withdrawal of credit approval)
under the relevant Factoring Agreement or a factoring agreement between an
Existing Factor and a Borrower may, in the sole and absolute discretion of the
Agent exercised reasonably, be deemed to be eligible if: (i) delivery of the
merchandise has been completed; (ii) no return, rejection or repossession has
occurred; (iii) the merchandise has been accepted by the Account Debtor without
dispute, set-off, defense or counterclaim; (iv) such Account Receivable is (A)
owned by a Borrower free and clear of any Lien, other than in favor of the Agent
or (B) if purchased by the Factor under the relevant Factoring Agreement or by
an Existing Factor under its factoring agreement with a Borrower, is subject to
the Assignment of Factoring Proceeds Agreement, an Existing Factor Assignment
Agreement or another assignment and intercreditor agreement satisfying the
conditions of Section 7.02(o) hereof, and in each such case otherwise continues
to be in full conformity with any and all representations and warranties made by
such Borrower to the Agent and the Lenders with respect thereto in the Loan
Documents; (v) such Account Receivable is unconditionally payable in Dollars
within 90 days from the invoice date and is not evidenced by a promissory note,
chattel paper or any other instrument or document; (vi) no more than 60 days
have elapsed from the invoice due date and no more than 90 days have elapsed
from the invoice date; (vii) the Account Debtor with respect thereto is not an
Affiliate of any Borrower or any Guarantor; (viii) such Account Receivable does
not constitute an obligation of the United States or any other Governmental
Authority other than a post exchange or any other Governmental Authority with
respect to which the Borrowers have provided to the Agent evidence, reasonably
satisfactory to Agent, that the Accounts Receivable of such Governmental
Authority are not subject to the Federal Assignment of Claims Act or any state
counterpart to the Federal Assignment of Claims Act; (ix) the Account Debtor (or
the applicable office of the Account Debtor) with respect thereto is located in
the continental United States, unless the Account Receivable is supported by a
letter of credit or other similar obligation satisfactory to the Agent; (x) the
Account Debtor with respect thereto is not also a supplier to or creditor of a
Borrower or Guarantor, unless such supplier or creditor has executed a no-offset
letter satisfactory to the Agent; (xi) not more than 50% of the aggregate amount
of all Accounts Receivable of the Account Debtor with respect to such Account
Receivable have remained unpaid 60 days past the invoice due date or 90 days
past the invoice date; (xii) the Account Debtor is not the subject of a
"Bankruptcy Proceeding"; for purposes hereof an Account Debtor is subject to a
"Bankruptcy Proceeding" if such Account Debtor has filed a petition for
bankruptcy or any other relief under the United States Bankruptcy Code or any
other law relating to bankruptcy, insolvency, reorganization or relief of
debtors, made an assignment for the benefit of creditors, had filed against it
any petition or other application for relief under the United States Bankruptcy
Code or any such other law, has failed, suspended business operations, become
insolvent, called a meeting of its creditors for the purpose of obtaining any
financial concession or accommodation, or had or suffered to be appointed a
receiver or a trustee for all or a significant portion of its assets or affairs;
and (xiii) the Agent is, and continues to be, satisfied with the credit standing
of the Account Debtor in relation to the amount of credit extended.
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<PAGE>
"Eligible Inventory" means, with respect to any Borrower, all
finished goods Inventory of such Borrower which meets all of the following
specifications: (i) the Inventory is owned by such Borrower free and clear of
any existing Lien, other than that of the Agent and the Lenders under the Loan
Documents, it is not held on consignment or any other similar arrangement (other
than consignment sales of Inventory to a Subsidiary Retailer, provided that such
Subsidiary Retailer has executed a consignment letter in form and substance
satisfactory to the Agent) and may be lawfully sold and it continues to be in
full conformity with any representations and warranties made in this Agreement
by such Borrower to the Agent and the Lenders with respect thereto; (ii) such
Borrower has the right to assignment thereof and the power to grant Liens
thereon and security interests therein; (iii) the Inventory arose or was
acquired in the ordinary course of the business of such Borrower and does not
represent damaged goods; (iv) no Account Receivable or, except as permitted by
clause (vi)(B) below, document of title has been created or issued with respect
to such Inventory; (v) the Inventory is readily marketable for sale by such
Borrower; (vi) the Inventory is (A) located in one of the locations in one of
the United States listed on Part A of Schedule 6.01(e) hereto or such other
locations in the continental United States as the Agent shall approve in writing
from time to time or (B) "in transit", provided, that such "in-transit"
Inventory is or will be finished goods Inventory that is or will be shipped as
finished goods under a Letter of Credit issued by the L/C Issuer pursuant to
this Agreement to a location in the United States described in clause (vi)(A)
above or (C) "intransit" finished goods Inventory being shipped to a location in
the United States described in clause (vi)(A) above, provided that the aggregate
value of the "in-transit" Inventory included in this clause (vi)(C) shall not at
any time exceed $3,000,000; (vii) the Inventory does not represent raw
materials, trim, work in process, supplies or samples; (viii) after May 26,
1999, if the Inventory is sold under a licensed trademark (A) the Agent shall
have entered into a licensor waiver letter, in form and substance satisfactory
to the Agent, with the licensor with respect to the rights of the Agent to use
the trademark to sell or otherwise dispose of such Inventory or (B) the Agent
shall otherwise be satisfied, in its sole discretion exercised reasonably, that
the Agent has the right to sell or dispose of such Inventory after an Event of
Default; and (ix) the Inventory is not otherwise regarded by the Agent, in its
sole and absolute discretion exercised reasonably, as unsuitable Collateral for
the Obligations, and is and at all times shall continue to be reasonably
acceptable to the Agent in all respects, provided, that, in the absence of a
continuing Event of Default, the Agent shall provide written notice to the
Administrative Borrower 60 days prior to the Agent causing any change in the
Borrowing Base as a result of any determination by the Agent pursuant to this
clause (ix) that any Eligible Inventory no longer qualifies as Eligible
Inventory. Notwithstanding the above, the Inventory set forth on Schedule
1.01(D) hereto shall not be Eligible Inventory unless such Inventory is
supported by valid purchase orders.
"Employee Plan" means an employee benefit plan (other than a
Multiemployer Plan) covered by Title IV of ERISA and maintained (or was
maintained at any time during the six (6) calendar years preceding the date of
any borrowing hereunder) for employees of a Borrower or any of their ERISA
Affiliates.
"Environmental Actions" refers to any complaint, summons,
citation, notice, directive, order, claim, litigation, investigation, judicial
or administrative proceeding, judgment,
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letter or other written communication from any governmental agency, department,
bureau, office or other authority, or any third party involving violations of
Environmental Laws or Releases of Hazardous Materials (i) from any assets,
properties or businesses of any Loan Party or any predecessor in interest; or
(ii) from or onto any adjoining properties or businesses; or (iii) from or onto
any facilities which received Hazardous Materials generated by any Loan Party or
any predecessor in interest.
"Environmental Law" means the Comprehensive Environmental
Response, Compensation, and Liability Act (42 U.S.C. ss. 9601, et seq.), the
Hazardous Materials Transportation Act (49 U.S.C. ss. 1801, et seq.), the
Resource Conservation and Recovery Act (42 U.S.C. ss. 6901, et seq.), the
Federal Water Pollution Control Act (33 U.S.C. ss. 1251 et seq.), the Clean Air
Act (42 U.S.C. ss. 7401 et seq.), the Toxic Substances Control Act (15 U.S.C.
ss. 2601 et seq.) and the Occupational Safety and Health Act (29 U.S.C. ss. 651
et seq.), as such laws may be amended or supplemented from time to time, and any
other present or future federal, state, local or foreign statute, ordinance,
rule, regulation, order, judgment, decree, permit, license or other binding
determination of any Governmental Authority imposing liability or establishing
standards of conduct for protection of the environment.
"ERISA" means the Employee Retirement Income Security Act of
1974, as amended from time to time, and, unless the context otherwise requires,
the rules and regulations promulgated thereunder from time to time.
"ERISA Affiliate" means, with respect to any Person, any trade
or business (whether or not incorporated) which is a member of a group of which
such Person is a member and which would be deemed to be a "controlled group"
within the meaning of Sections 414(b), (c), (m) and (o) of the Internal Revenue
Code.
"Eurodollar Base Rate" means, with respect to each day during
each Interest Period pertaining to a Eurodollar Loan, the rate of interest
published in The Wall Street Journal, Eastern Edition, two Business Days prior
to such Interest Period as the "London Interbank Offered Rate" applicable to
one, two, three or six months, as selected by a Borrower. In the event that The
Wall Street Journal, Eastern Edition is not published or such rate does not
appear in The Wall Street Journal, Eastern Edition, the Eurodollar Base Rate
shall be the rate determined by the Agent to be the rate at which deposits in
Dollars are offered by the Bank to first class banks in the interbank eurodollar
market where the eurodollar and foreign currency and exchange operations in
respect of its eurodollar loans are then being conducted at approximately 11:00
A.M., New York City time, two Business Days prior to the beginning of such
Interest Period, in an amount approximately equal to the principal amount of the
Eurodollar Loan to which such Interest Period is to apply and for a period of
time comparable to such Interest Period.
"Eurodollar Loan" means a Loan bearing interest based on the
Eurodollar Rate.
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<PAGE>
"Eurodollar Rate" means with respect to each day during each
Interest Period pertaining to a Eurodollar Loan, a rate per annum determined for
such day in accordance with the following formula (rounded upward to the nearest
1/100 of 1%):
Eurodollar Base Rate 1.00 - Reserve Requirements
"Event of Default" means any of the events set forth in
Section 10.01 hereof.
"Excess Insurance Proceeds" has the meaning specified therefor
in Section 2.07(g).
"Existing Factors" means Century Business Credit Corporation,
Milberg Factors Inc. and NationsBanc Commercial Corporation.
"Existing Factor Assignment Agreements" means each
intercreditor agreement and assignment of factoring proceeds, in form and
substance satisfactory to the Agent, by and among an Existing Factor, ECI or
Sportswear and the Agent.
"Existing Letters of Credit" has the meaning assigned to such
term in Section 3.03(c) hereof.
"Factor" means CIT, or such other factor designated by the
Borrowers and approved in writing by the Required Lenders pursuant to Section
7.02(o) of this Agreement.
"Factoring Agreements" means (i) (A) the Factoring Agreement
dated the date hereof between the Factor and ECI, (B) the Factoring Agreement
dated the date hereof between the Factor and Sportswear and (C) any Factoring
Agreement entered into between the Factor and Stetson or (ii) such other
factoring agreements as are entered into by the Borrowers pursuant to the terms
of Section 7.02(o) of this Agreement.
"Factor Termination Agreements" means the termination
agreements, in form and substance satisfactory to the Agent, between each of the
Existing Factors, the Factor and ECI and/or Sportswear.
"Federal Funds Rate" means, for any period, a fluctuating
interest rate per annum equal for each day during such period of the weighted
average of the rates on overnight Federal funds transactions with members of the
Federal Reserve System arranged by Federal funds brokers, as published on the
next succeeding Business Day by the Federal Reserve Bank of New York, or, if
such rate is not so published for any day which is a Business Day, the average
of the quotations for such day on such transactions received by the Agent from
three Federal funds brokers of recognized standing selected by it.
"Fee Letter" means the letter agreement, dated as of the date
hereof, among the Company, the Borrowers and the Agent obligating the Borrowers
to jointly and severally pay certain fees to the Agent for its account in
connection with this Agreement, as such letter
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agreement may be modified, supplemented or amended from time to time.
"Final Maturity Date" means the date this Agreement is
terminated pursuant to Section 12.01 hereof.
"Financial Statements" means the unaudited consolidated
financial statements of the Company and its Consolidated Subsidiaries for the
twelve months ending December 31, 1998.
"Fiscal Month" means the fiscal months of the Company and its
Consolidated Subsidiaries as set forth on Part B of Schedule 1.01B hereto.
"Fiscal Quarter" means the fiscal quarters of the Company and
its Consolidated Subsidiaries as set forth on Part C of Schedule 1.01B hereto.
"Fiscal Year" means the fiscal year of the Company and its
Consolidated Subsidiaries as set forth on Part A of Schedule 1.01B hereto.
"GAAP" means generally accepted accounting principles in
effect from time to time in the United States, applied on a consistent basis,
provided that for the purposes of Section 7.02(p) and the definitions used
therein, "GAAP" shall mean generally accepted accounting principles in effect on
the date hereof and consistent with those used in the preparation of the
Financial Statements.
"Governmental Authority" means any nation or government, any
state or other political subdivision thereof and any department, commission,
board, bureau, instrumentality, agency or other entity exercising executive,
legislative, judicial, regulatory or administrative functions of or pertaining
to government.
"Guaranties" means (i) the guaranty made by the Company
contained in Article XI hereof and (ii) each guaranty, substantially in the form
of Exhibits B-1 and B-2 hereto, made by a Guarantor (other than the Company) in
favor of the Agent and the Lenders guaranteeing the Obligations, as the same may
be amended, modified or supplemented from time to time.
"Guarantors" means the Company, ECI, Stetson, Sportswear, each
Subsidiary Retailer and all Persons which hereafter guarantee, pursuant to
Section 7.01(b) hereof or otherwise, all or any part of the Obligations.
"Hazardous Materials" shall include (i) any element, compound,
or chemical that is defined, listed or otherwise classified as a contaminant,
pollutant, toxic pollutant, toxic or hazardous substances, extremely hazardous
substance or chemical, hazardous waste, special waste, or solid waste under
Environmental Laws; (ii) petroleum and its refined products; (iii)
polychlorinated biphenyls; (iv) any substance exhibiting a hazardous waste
characteristic including but not limited to corrosivity, ignitability, toxicity
or reactivity as well as any radioactive or explosive materials; and (v) any raw
materials, building components, including but
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<PAGE>
not limited to asbestos-containing materials and manufactured products
containing Hazardous Materials.
"Hedging Agreement" means any interest rate swap, collar, cap,
floor or a forward rate agreement with a Lender or with another financial
institution acceptable to the Required Lenders or other agreement with a Lender
or with another financial institution acceptable to the Required Lenders
regarding the hedging of interest rate or currency risk exposure executed in
connection with hedging the interest rate or currency exposure of the Borrowers,
and any confirming letter executed pursuant to such agreement, all as amended or
supplemented from time to time.
"Inactive Subsidiaries" means each of the following
Subsidiaries of the Company: Above the Belt, Inc., Davco Accessories, Inc., ECI
Jeffersonville, Inc., Marcade Management Corp., Sport-U-Pex International, Inc.,
The Marcade Group Realty Corp., Unishops of Clarkin's, Inc., and Young Men's
Sportswear, Inc.
"Indebtedness" means as to any Person, without duplication,
(i) indebtedness for borrowed money; (ii) indebtedness for the deferred purchase
price of property or services (other than current trade payables incurred in the
ordinary course of business and payable in accordance with customary practices);
(iii) indebtedness evidenced by bonds, debentures, notes or other similar
instruments (other than performance, surety and appeal or other similar bonds
arising in the ordinary course of business); (iv) obligations and liabilities
secured by a Lien upon property owned by such Person, whether or not owing by
such Person and even though such Person has not assumed or become liable for the
payment thereof; (v) obligations and liabilities directly or indirectly
guaranteed by such Person; (vi) obligations or liabilities created or arising
under any conditional sales contract or other title retention agreement with
respect to property used and/or acquired by such Person, even though the rights
and remedies of the lessor, seller and/or lender thereunder are limited to
repossession of such property; (vii) Capitalized Lease Obligations; (viii) all
liabilities in respect of letters of credit, acceptances and similar obligations
created for the account of such Person, and (ix) net liabilities of such Person
under: (A) Hedging Agreements and (B) foreign currency exchange agreements, each
calculated on a basis reasonably satisfactory to the Agent and in accordance
with accepted practice.
"Indemnitees" has the meaning specified therefor in Section
12.17.
"Interest Period" means with respect to any Eurodollar Loan,
the period commencing on the borrowing date or the date of any continuation of
or conversion into such Eurodollar Loan, as the case may be, and ending one,
two, three or six months thereafter, in each case as selected by the
Administrative Borrower in the applicable notice given to the Agent pursuant to
Sections 2.03 or 2.11 hereof; provided that (i) each Interest Period shall begin
on the first Business Day of a month, (ii) any Interest Period that would
otherwise end on a day that is not a Business Day shall be extended to the next
succeeding Business Day, unless such Business Day falls in another calendar
month, in which case such Interest Period shall end on the next preceding
Business Day, (iii) no Interest Period for any Eurodollar Loan shall end after
the Final Maturity Date, and (iv) no more than three (3) Interest Periods in the
aggregate for the Borrowers may exist at any one time.
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"Internal Revenue Code" means the Internal Revenue Code of
1986, as amended from time to time.
"Inventory" means all goods and merchandise of a Borrower
including, but not limited to, all raw materials, work in process, piece goods,
trim, finished goods, materials and supplies of every nature used or usable in
connection with the manufacture, shipping, storing, advertising or sale of such
goods and merchandise, whether now owned or hereafter acquired and all such
property the sale or other disposition of which would give rise to Accounts
Receivable.
"Inventory Amount" means $35,000,000.
"L/C Issuer" means the Bank or such other bank as the Agent
may select in its sole and absolute discretion.
"L/C Subfacility" means that portion of the Total Commitment
equal to $35,000,000, or such other amount as shall be agreed to in writing by
the Agent, the Lenders and the Borrowers.
"Lender" has the meaning specified therefor in the preamble
hereto.
"Letter of Credit" has the meaning specified therefor in
Section 3.01(a) hereof.
"Letter of Credit Guaranty" means one or more guaranties by
CIT in favor of the L/C Issuer guaranteeing the Borrowers' obligations to the
L/C Issuer under a reimbursement agreement, Letter of Credit Application or
other like document in respect of any Letters of Credit.
"Letter of Credit Application" has the meaning specified
therefor in Section 3.01(a) hereof.
"Letter of Credit Obligations" means, at any time and without
duplication, the sum of (i) the Reimbursement Obligations at such time, plus
(ii) the aggregate maximum amount available for drawing under the Letters of
Credit outstanding at such time, plus (iii) all amounts for which CIT may be
liable to the L/C Issuer pursuant to the Letter of Credit Guaranty in connection
with any steamship guaranty, airway release, indemnity or delivery order issued
by the L/C Issuer at the request of or for the benefit of a Borrower, in each
case as calculated by the L/C Issuer.
"License Agreements" means the trademark license agreements
set forth on Schedule 1.01C hereto to which a Borrower is a party, as licensee.
"Lien" shall mean any mortgage, deed of trust, pledge, lien,
security interest, charge or other encumbrance or security arrangement of any
nature whatsoever, including but not limited to any conditional sale or title
retention arrangement, and any assignment, deposit
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arrangement or lease intended as, or having the effect of, security.
"Loan" means any Revolving Credit Loan made by a Lender or the
Agent to a Borrower pursuant to Article II hereof.
"Loan Account" means one or more accounts maintained at the
Payment Office of the Agent in the joint name of the Borrowers in which the
Borrowers will be charged with all Loans made to, and all other Obligations
incurred by, the Borrowers or such other accounts as the Agent shall designate
from time to time.
"Loan Documents" means this Agreement, the Notes, the
Guarantees, the Security Agreements, the Pledge Agreements, the Assignment of
Factoring Proceeds Agreement, the Existing Factor Assignment Agreements, the Fee
Letter, the Letter of Credit Applications and all other instruments, agreements
and other documents executed and delivered pursuant hereto or thereto.
"Loan Parties" means each of the Company, the Borrowers and
the other Guarantors.
"Material Adverse Effect" means a material adverse effect upon
(i) the business, properties, operations or condition (financial or otherwise)
of a Loan Party, (ii) the ability of a Loan Party to perform its obligations
hereunder or under any other Loan Document to which it is a party, (iii) a Lien
arising under the Loan Documents on any Collateral, (iv) the rights, powers and
remedies of the Agent and the Lenders under this Agreement or any other Loan
Document or the legality, validity or enforceability of this Agreement or any
other Loan Document or (v) the aggregate value of the property included in the
calculation of the Borrowing Base.
"Material Contract" means, with respect to any Person, each
contract to which such Person is a party involving aggregate consideration
payable to or by such Person of $500,000 or more in any calendar year (other
than contracts that by their terms may be terminated by any party thereto in the
ordinary course of its business upon less than 60 days' notice) or otherwise
material to the business, condition (financial or otherwise), operations,
performance, properties or prospects of such Person.
"Material License Agreement" means each of the License
Agreements pursuant to which a Borrower has obtained the right to use a
trademark which is used, directly or indirectly, to sell Inventory that
represented more than 10% of the aggregate net sales of Inventory by the
Borrowers on a combined basis during the immediately preceding Fiscal Year or
shorter period that such License Agreement has been in effect.
"Multiemployer Plan" means a "multiemployer plan" as defined
in Section 4001(a)(3) of ERISA for which a Borrower or any ERISA Affiliate has
contributed to, or has been obligated to contribute to, at any time during the
six (6) years preceding the date hereof.
"Net Amount of Eligible Accounts Receivable" means the
aggregate unpaid invoice amount of Eligible Accounts Receivable less, without
duplication (i) in the case of
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Accounts Receivable not purchased by the Factor under a Factoring Agreement or
by an Existing Factor under its factoring agreement with a Borrower, sales,
excise or similar taxes, returns, discounts, chargebacks, claims, advance
payments, credits and allowances of any nature at any time issued, owing,
granted, outstanding, available or claimed, and (ii) in the case of Accounts
Receivable purchased by the Factor under a Factoring Agreement or by an Existing
Factor under its factoring agreement with a Borrower and sums due thereunder,
less deductions for factoring charges, interest, discounts, estimated
anticipation, chargebacks based upon disputes and returns, chargebacks of
department risk accounts purchased with recourse, and all other charges, offsets
and reserves under the Factoring Agreements or the factoring agreements between
an Existing Factor and a Borrower.
"Net Proceeds" means (a) with respect to the sale or other
disposition of any asset by the Company or any of its Subsidiaries (including in
connection with any sale-leaseback), the excess, if any, of (i) the aggregate
amount received in cash (including any cash received by way of deferred payment
pursuant to a note receivable, other non-cash consideration or otherwise, but
only as and when such cash is so received) in connection with such sale or other
disposition, over (ii) the sum of (A) the principal amount of any Indebtedness
which is secured by any such asset (other than Indebtedness assumed by the
purchaser of such asset) or which is required to be, and is, repaid in
connection with the sale or other disposition thereof (other than Indebtedness
hereunder), (B) the reasonable out-of-pocket expenses and fees incurred by the
Company or its Subsidiaries in connection with such sale or other disposition
(but only to the extent that such out-of-pocket expenses and fees, if paid to an
Affiliate of the Company, are approved by the Agent in its sole discretion
exercised reasonably), provided, that all such expenses and fees are set forth
on a certificate provided to the Agent, and (C) federal and state taxes incurred
in connection with such sale or other disposition, whether payable at such time
or thereafter and (b) with respect to the sale or other disposition of any
Capital Stock or debt security by the Company or any of its Subsidiaries, the
excess of (i) the aggregate amount received in cash (including any cash received
by way of deferred payment pursuant to a note receivable, other non-cash
consideration or otherwise, but only as and when such cash is so received) in
connection with such sale or other disposition, over (ii) the sum of (A) the
reasonable fees, commissions, discounts and other out-of-pocket expenses
incurred by the Company or its Subsidiaries in connection with such sale or
other disposition (but only to the extent such fees, commissions and expenses,
if paid to an Affiliate of the Company, are approved by the Agent in its sole
discretion exercised reasonably, provided, that all such fees, commissions and
expenses are set forth on a certificate provided to the Agent) and (B) federal
and state taxes incurred in connection with such sale or other disposition,
whether payable at such time or thereafter.
"Notes" means the Revolving Credit Notes.
"Notice of Borrowing" has the meaning specified therefor in
Section 2.03 hereof.
"Obligations" means (i) the obligations of each Borrower to
pay, as and when due and payable (by scheduled maturity or otherwise), all
amounts from time to time owing by it in respect of any Loan Document to which
it is a party, whether for principal, interest (including, without limitation,
all interest that accrues after the commencement of any case, proceeding or
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other action relating to bankruptcy, insolvency or reorganization of any
Borrower, whether or not a claim for post-filing interest is allowed in such
proceeding), Letter of Credit Obligations, fees, commissions, expense
reimbursements, indemnifications or otherwise, and (ii) the obligations of each
Borrower to perform or observe all of its other obligations from time to time
existing under any Loan Document to which it is a party.
"Operating Lease Obligations" means all obligations for the
payment of rent for any real or personal property under leases or agreements to
lease, other than Capitalized Lease Obligations.
"Other Taxes" shall have the meaning specified therefor in
Section 2.12 hereto.
"Overadvance Amount" means the sum of (i) (A) $6,000,000, from
the day immediately following the Effective Date through and including April 30,
1999, (B) $10,000,000, from May 1, 1999 through and including August 31, 1999,
(C) $5,000,000, from September 1, 1999 through and including September 30, 1999,
(D) $3,000,000, from October 1, 1999 through and including October 31, 1999, and
(E) zero thereafter and (ii) the lesser of (A) $3,000,000 and (B) the amount of
severance payments actually made by the Loan Parties to employees prior to March
31, 2000, provided, that, upon receipt of the financial projections required to
be delivered to the Lenders pursuant to Section 7.01(a)(vi) hereof for each
Fiscal Year, the Company and the Agent shall negotiate in good faith to
determine the Overadvance Amount for the Fiscal Year covered by such financial
projections and, in the event that the Company and the Required Lenders are
unable to agree upon such Overadvance Amount on or before the date that is 30
days after the date that the Lenders have received such projections, the
Overadvance Amount for the Fiscal Year covered by such financial projections
shall remain at zero.
"Payment Office" means the Agent's offices located at 1211
Avenue of the Americas, New York, NY 10036, or such other offices as the Agent
may designate and, when used in connection with any payments made to the Agent,
shall mean an account in the name of the Agent designated to the Borrowers and
the Lenders from time to time into which the Borrowers and the Lenders shall
make all payments to the Agent under this Agreement.
"Permitted Investments" means (i) marketable direct
obligations issued or unconditionally guaranteed by the United States Government
or issued by any agency thereof and backed by the full faith and credit of the
United States or marketable direct obligations issued or unconditionally
guaranteed by any State or agency thereof and backed by the full faith and
credit of such State, in each case maturing within one year from the date of
acquisition thereof; (ii) commercial paper, maturing not more than 270 days
after the date of issue rated P-1 by Moody's Investors Service, Inc. or A-1 by
Standard & Poor's Ratings Group, (iii) overnight bank deposits, certificates of
deposit and bankers' acceptances in each case maturing not more than 270 days
after the date of issue, issued by any Lender or issued by commercial banking
institutions, and money market or time or demand deposit accounts maintained at
any Lender or commercial banking institutions, each commercial banking
institutions (other than any Lender) of which is a member of the Federal Reserve
System and has a combined capital and surplus and
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undivided profits of not less than $500,000,000, and (iv) repurchase agreements
having maturities of not more than 90 days from the date of acquisition which
are entered into with the commercial banking institutions described in clause
(iii) above and which are secured by readily marketable direct obligations of
the Government of the United States of America or any agency thereof.
"Person" means an individual, corporation, limited liability
company, partnership, association, joint-stock company, trust, unincorporated
organization, joint venture or Governmental Authority.
"Pledge Agreements" means the Pledge and Security Agreements
made by each of the Borrowers in favor of the Agent, each substantially in the
form of Exhibit D hereto, as the same may be amended or otherwise modified from
time to time.
"Post-Default Rate" means a rate of interest per annum equal
to the rate of interest otherwise in effect plus 2% or, if no other rate of
interest is in effect, the Base Rate plus 2%.
"Prime Rate" means the rate of interest publicly announced by
the Bank in New York, New York from time to time as its prime rate. The prime
rate is determined from time to time by the Bank as a means of pricing some
loans to its borrowers and neither is tied to any external rate of interest or
index, nor necessarily reflects the lowest rate of interest actually charged by
the Bank to any particular class or category of customers. Each change in the
Prime Rate shall be effective on the first day of the month following the date
such change is announced.
"Pro Rata Share" means, with respect to any Lender, a fraction
(expressed as a percentage), the numerator of which shall be the amount of such
Lender's Commitment and the denominator of which shall be the Total Commitment,
provided, that, if the Commitments have been reduced to zero, the numerator
shall be the aggregate unpaid principal amount of such Lender's Loans (including
Agent Advances) and its interest in the Letter of Credit Obligations and the
denominator shall be the aggregate unpaid principal amount of all of the Loans
(including Agent Advances) and Letter of Credit Obligations.
"Reimbursement Obligations" means the aggregate joint and
several obligations of the Borrowers to reimburse CIT and the Lenders for
amounts payable by CIT or the Lenders under a Letter of Credit Guaranty in
respect of any drawing made under any Letter of Credit, together with interest
thereon as provided in Section 2.06.
"Refund" shall have the meaning specified therefor in Section
2.12(b).
"Release" means any spilling, leaking, pumping, pouring,
emitting, emptying, discharging, injecting, escaping, leaching, seeping,
migrating, dumping, or disposing of any Hazardous Material (including the
abandonment or discarding of barrels, containers, and other closed receptacles
containing any Hazardous Material) into the indoor or outdoor environment,
including ambient air, soil, surface or ground water.
"Reportable Event" means an event described in Section 4043 of
ERISA (other
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than an event not subject to the provision for 30-day notice to the Pension
Benefit Guaranty Corporation under the regulations promulgated under such
Section).
"Required Lenders" means Lenders whose Pro Rata Shares
aggregate at least 60%.
"Reserve Requirements" means, for any day as applied to a
Eurodollar Loan, the aggregate (without duplication) of the rates (expressed as
a decimal fraction) of reserve requirements in effect on such day (including,
without limitation, basic, supplemental, marginal and emergency reserves under
any regulations of the Board or other Governmental Authority having jurisdiction
with respect thereto) dealing with reserve requirements prescribed for
eurocurrency funding (currently referred to as "Eurocurrency Liabilities" in
Regulation D of the Board) maintained by a member bank of the Federal Reserve
System. Eurodollar Loans shall be deemed to constitute Eurocurrency Liabilities
and to be subject to such reserve requirements without benefit of or credit for
proration, exceptions or offsets which may be available from time to time to any
Lender or the Affiliate of any Lender under Regulation D.
"Revolving Credit Commitment" means, with respect to each
Lender the revolving credit commitment of such Lender as set forth in Schedule
1.01A hereto, as the same may be adjusted from time to time pursuant to the
terms of this Agreement.
"Revolving Credit Loan" means a Loan made by a Lender or the
Agent to a Borrower pursuant to Section 2.01(a) hereof.
"Revolving Credit Note" means a joint and several promissory
note of the Borrowers, substantially in the form of Exhibit A hereto, made
payable to the order of a Lender and evidencing the Indebtedness resulting from
the making by such Lender of Revolving Credit Loans and delivered to the Agent
pursuant to Article V hereof, as such promissory note may be modified or
extended from time to time, and any promissory note or notes issued in exchange
or replacement therefor.
"Security Agreements" means the Security Agreements made by
each of the Borrowers and Guarantors (other than the Company) in favor of the
Agent, each in the form of Exhibits C-1 or C-2 hereto, as applicable, as the
same may be amended or otherwise modified from time to time.
"Security Documents" means collectively, each Security
Agreement and each Pledge Agreement executed and delivered by a Loan Party, and
all Uniform Commercial Code financing statements required by this Agreement and
the Security Agreements to be filed with respect to the security interests in
personal property and fixtures created pursuant to such agreements, and all
other documents and agreements executed and delivered by the Loan Parties in
connection with any of the foregoing documents.
"Settlement Period" has the meaning specified therefor in
Section 2.05(b)(i).
"Solvent" means, with respect to any Person on a particular
date, that on such date
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(a) the fair value of the property of such Person is not less than the total
amount of its liabilities (including, without limitation, liabilities on all
claims, whether or not reduced to judgment, liquidated, unliquidated, fixed,
contingent, matured, unmatured, disputed, undisputed, legal, equitable, secured
or unsecured) of such Person, (b) the present fair salable value of the assets
of such Person is not less than the amount that will be required to pay the
probable liability of such Person on its existing debts as they become absolute
and matured, (c) such Person is able to realize upon its assets and pay its
debts and other liabilities, contingent obligations and other commitments as
they mature in the normal course of business, (d) such Person does not intend
to, and does not believe that it will, incur debts or liabilities beyond such
Person's ability to pay as such debts and liabilities mature, and (e) such
Person is not engaged in business or a transaction, and is not about to engage
in business or a transaction, for which such Person's property would constitute
unreasonably small capital.
"Specified Cash Losses/Expenses" means the cash losses and
expenses described in subclauses (B)(1) through (3) of clause (i) and clause
(iii) of the definition of Adjusted Consolidated Net Income (Loss).
"Sportswear" has the meaning specified therefor in the
preamble hereto.
"Stetson" has the meaning specified therefor in the preamble
hereto.
"Subsidiary" means, as to any Person, any corporation of which
more than 50% of the outstanding Capital Stock having (in the absence of
contingencies) ordinary voting power to elect directors (or Persons performing
similar functions) of such corporation is, at the time of determination, owned
directly, or indirectly through one or more intermediaries, by such Person.
"Subsidiary Financing" has the meaning specified therefor in
Section 2.08(b) hereof.
"Subsidiary Retailers" means each of the following
Subsidiaries of the Company: ECI Berkeley Commons Corp. and ECI Myrtle Beach,
Inc.
"Syndication Date" shall mean the earlier of (i) the date
which is 60 days after the date of the initial Loan and (ii) the date on which
the Agent determines in its sole discretion (and notifies the Administrative
Borrower and the Lenders) that the primary syndication (and the resulting
addition of institutions as Lenders pursuant to Section 12.09) has been
completed.
"Taxes" shall have the meaning given to that term in Section
2.12.
"Termination Anniversary Date" means February 26, 2002 and,
thereafter, February 26 of each succeeding calendar year.
"Termination Event" means (i) a Reportable Event with respect
to any Employee Plan, (ii) any event that causes a Borrower or any of its ERISA
Affiliates to incur liability under Section 409, 502(i), 502(l), 515, 4062,
4063, 4064, 4069, 4201, 4204 or 4212 of ERISA or Section 4971 or 4975 of the
Internal Revenue Code, (iii) the filing of a notice of intent to
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terminate an Employee Plan under Section 4041(c) of ERISA, (iv) the institution
of proceedings by the Pension Benefit Guaranty Corporation to terminate an
Employee Plan, or (v) any other event or condition that would constitute grounds
under Section 4042 of ERISA for the termination of, or the appointment of a
trustee to administer, any Employee Plan.
"Third-Party Financing Proposal" has the meaning specified
therefor in Section 2.08(b) hereof.
"Total Commitment" means the sum of the amounts of the
Lenders' Revolving Credit Commitments.
"Unused Line Fee" has the meaning specified therefor in
Section 2.08(a) hereof.
"WARN" has the meaning specified therefor in Section 6.01(j)
hereof.
SECTION 1.02. Accounting and Other Terms. Unless otherwise expressly
provided herein, each accounting term used herein shall have the meaning given
it under GAAP applied on a basis consistent with those used in preparing the
Financial Statements. All terms used in this Agreement which are defined in
Article 9 of the Uniform Commercial Code in effect in the State of New York on
the date hereof and which are not otherwise defined herein shall have the same
meanings herein as set forth therein.
SECTION 1.03. Time References. Unless otherwise indicated herein, all
references to time of day refer to Eastern standard time or Eastern daylight
saving time, as in effect in New York City on such day. For purposes of the
computation of a period of time from a specified date to a later specified date,
the word "from" means "from and including" and the words "to" and "until" each
means "to but excluding", provided, however, that with respect to a computation
of fees or interest payable to the Agent, the Lenders or the L/C Issuer, such
period shall in any event consist of at least one full day.
ARTICLE II
THE LOANS
SECTION 2.01. Commitments. (a) Subject to the terms and conditions and
relying upon the representations and warranties set forth herein, each Lender
severally agrees to make Revolving Credit Loans to the Borrowers at any time and
from time to time from the Effective Date to the Final Maturity Date, or until
the earlier reduction of its Revolving Credit Commitment to zero in accordance
with the terms hereof, in an aggregate principal amount of Revolving Credit
Loans at any time outstanding not to exceed the amount of such Lender's
Revolving Credit Commitment.
(b) Notwithstanding the foregoing, the aggregate principal
amount of Revolving Credit Loans outstanding at any time to the Borrowers shall
not exceed the lower of (i) the difference between (A) the Total Commitment and
(B) the aggregate Letter of Credit Obligations and (ii) the difference between
(A) the then current Borrowing Base and (B) the aggregate Letter of Credit
Obligations.
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(c) Within the foregoing limits, the Borrowers may borrow,
repay and reborrow Revolving Credit Loans, on or after the Effective Date and
prior to the Final Maturity Date, subject to the terms, provisions and
limitations set forth herein.
SECTION 2.02. Loans. Except as otherwise provided in Section 2.05,
Loans shall be made ratably by the Lenders in accordance with their respective
Revolving Credit Commitments. The initial Revolving Credit Loans shall be on or
after the Effective Date against delivery hereunder of the Revolving Credit
Notes.
SECTION 2.03. Making the Loans. The Administrative Borrower, on behalf
of itself and the other Borrower, shall give the Agent prior telephone notice
(which notice, if requested by the Agent, must be promptly confirmed in writing
in substantially the form of Exhibit I hereto (a "Notice of Borrowing")) (i) not
later than 12:00 noon (New York City time) on the date of the proposed
borrowing, in the case of a borrowing consisting of Base Rate Loans, or (ii) not
later than 12:00 noon (New York City time) three Business Days prior to such
proposed borrowing in the case of a borrowing consisting of Eurodollar Loans,
provided that Eurodollar Loans will only be made on the first Business Day of a
month. Such Notice of Borrowing shall be irrevocable and shall specify the
principal amount of the proposed borrowing (which, in the case of a Eurodollar
Loan, must be in a minimum amount of $5,000,000 and in multiples of $1,000,000
in excess thereof), whether such Loan is requested to be a Base Rate Loan or a
Eurodollar Loan and, in the case of a Eurodollar Loan, the Initial Interest
Period for such Eurodollar Loan, the use of the proceeds of such proposed Loan,
and the proposed borrowing date, which must be a Business Day and, in the case
of a Eurodollar Loan, the first Business Day of a month, and the Borrowers shall
be bound to make a borrowing in accordance therewith. Notwithstanding anything
to the contrary contained herein, prior to the Syndication Date, all Loans shall
be incurred and maintained as Base Rate Loans. The Agent may act without
liability upon the basis of written, telecopy or telephone notice believed by
the Agent in good faith to be from the Administrative Borrower (or from any
officer thereof designated in writing to the Agent), and the Borrowers hereby
waive the right to dispute the Agent's record of the terms of any such
telephonic Notice of Borrowing.
SECTION 2.04. Notes; Repayment of Loans. (a) All Revolving Credit
Loans made by a Lender shall be evidenced by a single Revolving Credit Note,
duly executed by the Borrowers, dated the Effective Date, and delivered to and
made jointly and severally payable to the order of such Lender in a principal
amount equal to its Revolving Credit Commitment on such date.
(b) The outstanding principal balance of each Revolving Credit
Loan shall be due and payable on the Final Maturity Date.
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SECTION 2.05. Funding and Settlement Procedures.
(a) (i) Except as otherwise provided in this subsection
2.05(a), all Loans under this Agreement shall be made by the Lenders
simultaneously and proportionately according to their Pro Rata Shares of the
Total Commitment, it being understood that no Lender shall be responsible for
any default by any other Lender in such other Lender's obligation to make a Loan
requested hereunder nor shall the Commitment of any Lender to make the Loan
requested be increased or decreased as a result of the default by any other
Lender in such other Lender's obligation to make a Loan requested hereunder.
(ii) Notwithstanding any other provision of this Agreement, in
order to reduce the number of fund transfers among the Borrowers, the Lenders
and the Agent, the Borrowers, the Lenders and the Agent agree that the Agent
may, but shall not be obligated to, and the Borrowers and the Lenders hereby
irrevocably authorize the Agent to, fund, on behalf of the Lenders, Revolving
Credit Loans pursuant to Sections 2.02 and 2.03, subject to the procedures for
settlement set forth in subsection 2.05(b); provided, however, that (A) the
Agent shall in no event fund such Revolving Credit Loan if the Agent shall have
received written notice from the Required Lenders on the Business Day prior to
the date of the proposed Revolving Credit Loan that one or more of the
conditions precedent contained in Section 5.02 hereof will not be satisfied on
the date of the proposed Revolving Credit Loan and (B) the Agent shall not
otherwise be required to determine that, or take notice whether, the conditions
precedent in Section 5.02 have been satisfied. If either (1) the Administrative
Borrower gives a Notice of Borrowing requesting a Eurodollar Loan or (2) the
Agent elects not to fund a requested Base Rate Loan on behalf of the Lenders,
then promptly after receipt of the Notice of Borrowing requesting such Loan, the
Agent shall notify each Lender of the specifics of the requested Loan and that
it will not fund the requested Loan on behalf of the Lenders. If the Agent
notifies the Lenders that it will not fund a requested Loan on behalf of the
Lenders, each Lender shall make its Pro Rata Share of the Loan available to the
Agent, in immediately available funds, at the Payment Office no later than 2:00
p.m. (New York City time) on the date of the proposed Loan. The Agent will make
the proceeds of such Loans available to the Borrowers on the day of the proposed
Loan by causing an amount, in immediately available funds, equal to the proceeds
of all such Loans received by the Agent at the Payment Office or the amount
funded by the Agent on behalf of the Lenders to be deposited in an account
designated by the Administrative Borrower.
(iii) If the Agent has notified the Lenders that the Agent
will not fund a particular Loan pursuant to subsection 2.05(a)(ii) on behalf of
the Lenders, the Agent may assume that such Lender has made such amount
available to the Agent on such day and the Agent, in its sole and absolute
discretion, may, but shall not be obligated to, cause a corresponding amount to
be made available to the Borrowers on such day. If, in such case, the Agent
makes such corresponding amount available to the Borrowers and such
corresponding amount is not in fact made available to the Agent by such Lender,
such Lender and each of the Borrowers, severally agree to repay to the Agent
forthwith on demand such corresponding amount together with interest thereon for
each day from the date such amount is made available to the Borrowers until the
date such amount is repaid to the Agent, at (A) in the case of the
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Borrowers, a rate per annum equal to the higher of the Federal Funds Rate and
the interest rate applicable thereto pursuant to Section 2.06 and (B) in the
case of such Lender, at the Federal Funds Rate for three Business Days and
thereafter at the Prime Rate. If such Lender shall repay to the Agent such
corresponding amount, such amount so repaid shall constitute such Lender's Pro
Rata Share of such Revolving Credit Loan.
(iv) Nothing in this Section 2.05(a) shall be deemed to
relieve any Lender from its obligation to fulfill its Revolving Credit
Commitment hereunder or to prejudice any rights that the Agent or the Borrowers
may have against any Lender as a result of any default by such Lender hereunder.
(b) (i) With respect to each Eurodollar Loan, on the first and
the last date of each Interest Period, and with respect to all periods for which
the Agent, on behalf of the Lenders, has funded Base Rate Loans pursuant to
subsection 2.05(a), on the first Business Day after the last day of each week,
or such shorter period as the Agent may from time to time select (any such week
or shorter period being herein called a "Settlement Period"), the Agent shall
notify each Lender of the unpaid principal amount of the Revolving Credit Loans
outstanding as of the last day of the Settlement Period. In the event that such
amount is greater than the unpaid principal amount of the Revolving Credit Loans
outstanding as of the last day of the immediately preceding Settlement Period
(or, if there has been no preceding Settlement Period, the amount of the
Revolving Credit Loans made on the date of such Lender's initial funding), each
Lender shall promptly make available to the Agent such Lender's Pro Rata Share
of the difference in immediately available funds. In the event that such amount
is less than such unpaid principal amount, the Agent shall promptly pay over to
each other Lender such Lender's Pro Rata Share of the difference in immediately
available funds. In addition, if the Agent shall so request at any time when a
Default or an Event of Default shall have occurred and be continuing, or any
other event shall have occurred as a result of which the Agent shall determine
that it is desirable to present claims against the Borrowers for repayment, each
Lender shall promptly remit to the Agent or, as the case may be, the Agent shall
promptly remit to each Lender, sufficient funds to adjust the interests of the
Lenders in the then outstanding Revolving Credit Loans to such an extent that,
after giving effect to such adjustment, each Lender's interest in the then
outstanding Revolving Credit Loans will be equal to its Pro Rata Share thereof.
The obligations of the Agent and each Lender under this subsection 2.05(b) shall
be absolute and unconditional. Each Lender shall only be entitled to receive
interest on its Pro Rata Share of the Revolving Credit Loans which have been
funded by such Lender.
(ii) In the event that any Lender fails to make any payment
required to be made by it pursuant to subsection 2.05(b)(i), the Agent shall be
entitled to recover such corresponding amount on demand from such Lender
together with interest thereon, for each day from the date such payment was due
until the date such amount is paid to the Agent, at the Federal Funds Rate for
three Business Days and thereafter at the Prime Rate. During the period in which
such Lender has not paid such corresponding amount to the Agent, notwithstanding
anything to the contrary contained in this Agreement or any other Loan Document,
the amount so advanced by the Agent to the Borrowers shall, for all purposes
hereof, be a Loan made by the Agent for its own account. Upon any such failure
by a Lender to pay the Agent, the Agent shall
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promptly thereafter notify the Administrative Borrower of such failure and the
Borrowers shall immediately pay such corresponding amount to the Agent for its
own account.
SECTION 2.06. Interest.
(a) Revolving Credit Loans. Each Revolving Credit Loan which
is a Eurodollar Loan shall bear interest on the principal amount thereof from
time to time outstanding from the date of such Loan until such principal amount
becomes due, at a rate per annum equal to the Eurodollar Rate for the Interest
Period in effect for such Loan plus 2.50%. Each Revolving Credit Loan which is a
Base Rate Loan shall bear interest on the principal amount thereof from time to
time outstanding from the date of such Loan, until such principal amount becomes
due, at a rate per annum equal to the Base Rate.
(b) Default Interest. Upon the occurrence and during the
continuance of an Event of Default, the Agent may and, upon the direction of the
Required Lenders shall, by notice to the Administrative Borrower elect that all
outstanding principal of the Loans and all outstanding Reimbursement Obligations
and (to the extent permitted by law) interest which is not paid when due, shall
bear interest until such amount is paid in full at a fluctuating interest rate
per annum equal at all times to the Post-Default Rate.
(c) Interest Payment. Interest on each Eurodollar Loan shall
be payable in arrears on the last day of each Interest Period of such Eurodollar
Loan and, in the case of any Eurodollar Loan of six month duration, the day that
interest would have been paid if such Eurodollar Loan had an interest period of
three months. Interest on each Base Rate Loan shall be payable monthly, in
arrears, on the first day of each month, commencing on the first day of the
month following the month in which such Loan is made, and at maturity (whether
upon demand, by acceleration or otherwise). Interest at the Post-Default Rate
shall be payable on demand. The Borrowers hereby authorize the Agent to, and the
Agent may, from time to time, charge the Loan Account pursuant to Section 4.02
hereof with the amount of any interest payment due hereunder.
(d) General. All interest shall be computed on the basis of a
year of 360 days for the actual number of days, including the first day but
excluding the last day, elapsed.
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SECTION 2.07. Reduction of Commitment; Prepayment of Loans.
(a) The Borrowers may at any time or from time to time and
without penalty or premium reduce the Total Commitment to an amount (which may
be zero) not less than the sum of the unpaid principal amount of all Revolving
Credit Loans then outstanding plus the principal amount of all Revolving Credit
Loans not yet made as to which notice has been given by the Administrative
Borrower under Section 2.03 hereof plus the Letter of Credit Obligations at such
time plus the stated amount of all Letters of Credit not yet issued as to which
a request has been made and not withdrawn. Any reduction shall be in an amount
which is an integral multiple of $5,000,000. Reduction of the Total Commitment
shall be made by providing not less than two Business Days' written notice
(which notice shall be irrevocable) to such effect to the Agent (which notice
the Agent shall promptly transmit to each Lender). Reductions of the Total
Commitment are irrevocable and may not be reinstated. Each such reduction shall
reduce the Revolving Credit Commitment of each Lender proportionately in
accordance with its Pro Rata Share.
(b) Subject to the terms and conditions contained in this
Section 2.07, Section 2.10 hereof and elsewhere in this Agreement, the Borrowers
shall have the right to prepay, in whole or in part, the Revolving Credit Loans;
provided, that, pursuant to the terms of Section 2.08(b) hereof, the Borrowers
shall be obligated to pay the Early Termination Fee with respect to any Loans
prepaid in connection with a termination of the Total Commitment prior to
February 26, 2001.
(c) If at any time the Borrowing Base is less than the sum of
the outstanding principal on all Revolving Credit Loans outstanding plus the
outstanding amount of all Letter of Credit Obligations, the Borrowers will (i)
immediately give notice of such occurrence to the Agent and (ii) prepay the
Revolving Credit Loans in an amount which will reduce the sum of the outstanding
principal on all Revolving Credit Loans to an amount less than or equal to the
then current Borrowing Base. If at any time after the Borrowers have complied
with the first sentence of this Section 2.07(c), the aggregate Letter of Credit
Obligations is greater than the then current Borrowing Base, the Borrowers shall
provide cash collateral to the Agent in the amount of such excess, which cash
collateral shall be deposited in an interest bearing account maintained by the
Agent and, provided that no Event of Default shall have occurred and be
continuing, returned to the Administrative Borrower, at such time as the
aggregate Letter of Credit Obligations plus the aggregate principal amount of
all outstanding Revolving Credit Loans no longer exceeds the then current
Borrowing Base.
(d) The Borrowers shall immediately prepay the Loans and
provide cash collateral to the Agent in the amount of all Letter of Credit
Obligations (which cash collateral shall be deposited in a joint non-interest
bearing account maintained at the Payment Office) if CIT has been replaced as
the Factor and the Borrowers have not complied with the provisions of Section
7.02(o) of this Agreement.
(e) Immediately upon the receipt by any Loan Party or any of
its Subsidiaries of any Net Proceeds from the issuance, sale, assignment,
transfer or other
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disposition of any Capital Stock, debt securities or assets of the Company or
any of its Subsidiaries, the Borrowers shall make a prepayment of the Revolving
Credit Loans in an amount equal to the amount of such Net Proceeds, provided
that the Borrowers shall not be required to prepay the Revolving Credit Loans
(i) in the case of intercompany Indebtedness between the Loan Parties permitted
by Sections 7.02(b)(iii) and 7.02(f)(iii) and (v) hereof, and (ii) in the case
of the Net Proceeds of any Indebtedness of the Company permitted by Section
7.02(b)(viii) of this Agreement and the Net Proceeds from the issuance of
Capital Stock of the Company consisting of common equity, in each case to the
extent that such Net Proceeds are used to prepay, purchase, redeem, retire,
defease or otherwise acquire the Borrower's Indebtedness in accordance with
Section 7.02(t)(ii) of this Agreement. In addition, upon receipt of aggregate
Net Proceeds from any such issuance, sale, assignment, transfer or other
disposition by the Company or any of its Subsidiaries of any Capital Stock, debt
securities or assets of the Company or any of its Subsidiaries, other than any
Net Proceeds from the events described in clause (i) of the proviso of the
immediately preceding sentence, the current Overadvance Amount limits (as such
amounts are set forth in clause (i) of the definition of "Overadvance Amount" in
Section 1.01 hereof) shall each be reduced on a dollar for dollar basis by the
aggregate amount of Net Proceeds received from any such issuance, sale,
assignment, transfer or other disposition, with such reduction to be effective
upon receipt of such Net Proceeds, provided, further that, if the Net Proceeds
from the issuance of Capital Stock of the Company consisting of common equity
are used to prepay, purchase, redeem, retire, defease or otherwise acquire the
BONY Indebtedness in accordance with Section 7.02(t)(ii) hereof, such
Overadvance Amount limits shall be reduced only to the extent that, at the time
of receipt of such Net Proceeds, the Loans and Letter of Credit Obligations
exceed the Borrowing Base Before Overadvance Amount.
(f) Subject to paragraph (b) of Section 2.10 of this
Agreement, the Agent shall on each Business Day apply (i) all funds received
from the Factor pursuant to the Assignment of Factoring Proceeds Agreement, from
an Existing Factor pursuant to an Existing Factor Assignment Agreement or
pursuant to any other assignment agreement entered into by the Agent in
connection with a change of factors by Borrowers and (ii) all funds representing
other proceeds of Collateral, to the payment, in whole or in part, of the
Obligations outstanding.
(g) If the insurance proceeds received by the Loan Parties in
connection with any loss or casualty are in excess of $50,000 (such amount in
excess of $50,000 being hereinafter referred to as the "Excess Insurance
Proceeds"), immediately upon the receipt by any Loan Party of any such Excess
Insurance Proceeds, the Borrowers shall prepay the Revolving Credit Loans in an
amount equal to such Excess Insurance Proceeds.
(h) Notwithstanding anything to the contrary contained in this
Agreement, the Borrowers shall repay the Loans in an amount sufficient to cause
the Availability of the Borrowers, after giving effect to all Loans and Letter
of Credit Obligations, to be not less than $7,500,000 on the last day of
November and December of each year.
(i) Any prepayment made pursuant to this Section 2.07 shall be
accompanied by accrued interest on the principal amount being prepaid to the
date of prepayment.
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(j) Except as otherwise expressly provided in this Section
2.07, payments with respect to any paragraph of this Section 2.07 are in
addition to payments made or required to be made under any other paragraph of
this Section 2.07. Prepayments of the Revolving Credit Loans pursuant to this
Section 2.07 shall be applied by the Agent, based upon such factors as the Agent
deem appropriate in the exercise of its reasonable business judgment (which
factors may include the minimization or reduction of the payments required by
Section 2.10(a) hereof).
SECTION 2.08. Fees.
(a) Unused Line Fee. From and after the Effective Date until
the Final Maturity Date, the Borrowers shall jointly and severally pay to the
Agent for the account of the Lenders in accordance with the Lenders' respective
Pro Rata Shares, an unused line fee (the "Unused Line Fee") accruing at the rate
of three-eighths of one percent (0.375%) per annum, on the excess, if any, of
the Total Commitment over the sum of the average amount of Revolving Credit
Loans and Letter of Credit Obligations outstanding from time to time. The Unused
Line Fees shall be payable quarterly in arrears on the first day of each
January, April, July and October, commencing April 1, 1999.
(b) Early Termination Fee. If the Total Commitment is
terminated prior to February 26, 2001, the Borrowers shall jointly and severally
pay to the Agent for the Pro Rata Share of the Lenders, on the date of such
termination, the Early Termination Fee, provided, that the Early Termination Fee
shall not be payable if (i) the Loans are prepaid from the proceeds generated by
the public sale of Capital Stock of the Company or any of its Subsidiaries, or
(ii) the Loans are prepaid in connection with a transaction resulting in a
Change in Control caused by the sale of the Capital Stock of the Company or any
of the Borrowers, or (iii) the Loans are prepaid after the occurrence of each of
the following events: (A) the Company or any of its Subsidiaries establishes or
acquires a Subsidiary not existing on the Effective Date, which Subsidiary is
not a Subsidiary of ECI and requires working capital financing in an amount in
excess of $5,000,000 (the "Subsidiary Financing"), (B) the Company provides the
Lenders with a good faith right of first offer to provide the Subsidiary
Financing, and (C) (1) the Lenders fail to deliver a financing proposal to the
Company within twenty (20) Business Days of the receipt by the Lenders of all
information necessary or reasonably requested to make a financing proposal for
the Subsidiary Financing or (2) the Lenders deliver a financing proposal to the
Company to provide the Subsidiary Financing and the Company rejects such
financing proposal from the Lenders and accepts a financing proposal from
another lender or lenders to both refinance the financing provided pursuant to
this Agreement and the Loan Documents and to provide the Subsidiary Financing (a
"Third-Party Financing Proposal"), which Third-Party Financing Proposal contains
in each such case, economic terms (including, without limitation interest rates,
fees, factoring commissions, commitment amounts and maturities) that are in all
material respects more favorable to the Company and its Subsidiaries than the
economic terms contained in this Agreement and the Loan Documents and the
economic terms offered by the Lenders in their financing proposal for such
Subsidiary Financing.
(c) Other Fees. The Borrowers shall jointly and severally pay
to the
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Agent the fees set forth in the Fee Letter at the times set forth in the Fee
Letter. All fees required to be paid to the Agent pursuant to the Fee Letter and
this Agreement shall be paid to the Agent for its own account. All fees under
this Agreement and the Fee Letter are non-refundable under all circumstances.
SECTION 2.09. Eurodollar Rate Not Determinable; Illegality or
Impropriety.
(a) In the event, and on each occasion, that on or before the
day on which the Eurodollar Rate is to be determined for a borrowing that is to
include Eurodollar Loans, the Agent has determined in good faith that, or has
been advised by the Required Lenders that, (i) the Eurodollar Rate cannot be
determined for any reason, (ii) the Eurodollar Rate will not adequately and
fairly reflect the cost of maintaining Eurodollar Loans or (iii) Dollar deposits
in the principal amount of the applicable Eurodollar Loans are not available in
the interbank eurodollar market where the eurodollar and foreign currency and
exchange operations in respect of the Lenders' Eurodollar Loans are then being
conducted, the Agent shall, as soon as practicable thereafter, give written
notice of such determination to the Administrative Borrower and the other
Lenders. In the event of any such determination, any request by the
Administrative Borrower for a Eurodollar Loan pursuant to Section 2.03 shall,
until, in the case of such a determination by the Required Lenders, the Agent
has been advised by the Required Lenders and the Agent has so advised the
Administrative Borrower that, or in the case of a determination by the Agent,
the Agent has advised the Administrative Borrower and the other Lenders that,
the circumstances giving rise to such notice no longer exist, be deemed to be a
request for a Base Rate Loan. Each determination by the Agent and/or the
Required Lenders hereunder shall be conclusive and binding absent manifest
error.
(b) In the event that it shall be unlawful or improper for any
Lender to make, maintain or fund any Eurodollar Loan as contemplated by this
Agreement, then such Lender shall forthwith give notice thereof to the Agent and
the Administrative Borrower describing such illegality or impropriety in
reasonable detail. Effective immediately upon the giving of such notice, the
obligation of such Lender to make Eurodollar Loans shall be suspended for the
duration of such illegality or impropriety and, if and when such illegality or
impropriety ceases to exist, such suspension shall cease, and such Lender shall
notify the Agent and the Administrative Borrower. If any such change shall make
it unlawful or improper for any Lender to maintain any outstanding Eurodollar
Loan as a Eurodollar Loan, such Lender shall, upon the happening of such event,
notify the Agent and the Administrative Borrower, and the Administrative
Borrower shall immediately, or if permitted by applicable law, rule, regulation,
order, decree, interpretation, request or directive, at the end of the then
current Interest Period for such Eurodollar Loan, convert each such Eurodollar
Loan into a Base Rate Loan.
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SECTION 2.10. Indemnity.
(a) The Borrowers hereby jointly and severally indemnify each
Lender against any loss or expense that such Lender actually sustains or incurs
(including, without limitation, any loss or expense incurred by reason of the
liquidation or reemployment of deposits or other funds acquired by such Lender
to fund or maintain any Eurodollar Loan, and including loss of anticipated
profits) as a consequence of (i) any failure by the Borrowers to fulfill on the
date of any borrowing hereunder the applicable conditions set forth in Article
V, (ii) any failure by the Borrowers to borrow any Eurodollar Loan hereunder, to
convert any Base Rate Loan into a Eurodollar Loan or to continue a Eurodollar
Loan as such after notice of such borrowing, conversion or continuation has been
given pursuant to Section 2.03 or Section 2.11 hereof, (iii) any payment,
prepayment (mandatory or optional) or conversion of a Eurodollar Loan required
by any provision of this Agreement or otherwise made on a date other than the
last day of the Interest Period applicable thereto, (iv) any default in payment
or prepayment of the principal amount of any Eurodollar Loan or any part thereof
or interest accrued thereon, as and when due and payable (at the due date
thereof, by notice of prepayment or otherwise), or (v) the occurrence of any
Event of Default, including, in each such case, any loss (including, without
limitation, loss of anticipated profits) or reasonable expense sustained or
incurred in liquidating or employing deposits from third parties acquired to
effect or maintain such Loan or any part thereof as a Eurodollar Loan. Such loss
or reasonable expense shall include but not be limited to an amount equal to the
excess, if any, as reasonably determined by such Lender, of (i) its cost of
obtaining the funds for the Loan being paid or prepaid or converted or continued
or not borrowed or converted or continued (based on the Eurodollar Rate
applicable thereto) for the period from the date of such payment, prepayment,
conversion, continuation or failure to borrow, convert or continue on the last
day of the Interest Period for such Loan (or, in the case of a failure to
borrow, convert or continue, the last day of the Interest Period for such Loan
that would have commenced on the date of such failure to borrow, convert or
continue) over (ii) the amount of interest (as reasonably determined by such
Lender) that would be realized by such Lender in reemploying the funds so paid,
prepaid, converted or continued or not borrowed, converted or continued for such
Interest Period. A certificate of any Lender setting forth in reasonable detail
any amount or amounts that such Lender is entitled to receive pursuant to this
Section 2.10 and the basis for the determination of such amount or amounts shall
be delivered to the Administrative Borrower and shall be conclusive and binding
absent manifest error.
(b) Notwithstanding paragraph (a) of this Section 2.10, the
Agent will use reasonable efforts to minimize or reduce any such loss or expense
resulting from the mandatory prepayments required by Section 2.07 (other than
paragraph (d) thereof) of this Agreement by (i) applying all payments and
prepayments to Loans bearing interest at the Base Rate prior to any application
of payments to Loans bearing interest at the Eurodollar Rate and (ii) after all
Base Rate Loans have been paid in full, calculating any such loss or expense
based upon the net decrease in Eurodollar Loans on a day after giving effect to
all prepayments and all Loans made on such day.
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SECTION 2.11. Continuation and Conversion of Loans.
(a) Subject to Section 2.09 hereof, the Borrowers shall have
the right, at any time, on three (3) Business Days' prior irrevocable written or
telecopy notice to the Agent, to continue any Eurodollar Loan, or any portion
thereof, into a subsequent Interest Period or, after the Syndication Date, to
convert any Base Rate Loan or portion thereof into a Eurodollar Loan, or on one
(1) Business Day's prior irrevocable written or telecopy notice to the Agent, to
convert any Eurodollar Loan or portion thereof into a Base Rate Loan, subject to
the following:
(i) no Eurodollar Loan may be continued as such and no Base
Rate Loan may be converted into a Eurodollar Loan, when any Event of Default or
Default shall have occurred and be continuing at such time;
(ii) in the case of a continuation of a Eurodollar Loan as
such or a conversion of a Base Rate Loan into a Eurodollar Loan, the aggregate
principal amount of such Eurodollar Loan shall not be less than $5,000,000 and
in multiples of $1,000,000 if in excess thereof;
(iii) in the case of a conversion from a Eurodollar Loan to a
Base Rate Loan accrued interest on the Loan (or portion thereof) being converted
shall be jointly and severally paid by the Borrowers at the time of conversion;
(iv) a Base Rate Loan may be converted into a Eurodollar Loan
only on the first Business Day of a month;
(v) any portion of a Loan maturing or required to be repaid in
less than one month may not be converted into or continued as a Eurodollar Loan;
and
(vi) if any conversion of a Eurodollar Loan shall be effected
on a day other than the last day of an Interest Period, the Borrowers shall
jointly and severally reimburse each Lender on demand for any loss incurred or
to be incurred by it in the reemployment of the funds released by such
conversion as provided in Section 2.10 hereof. In the event that the
Administrative Borrower shall not give notice to continue any Eurodollar Loan
into a subsequent Interest Period, such Loan shall automatically become a Base
Rate Loan at the expiration of the then current Interest Period.
SECTION 2.12. Taxes. (a) All such payments shall be made free and
clear of and without deduction for any present or future taxes, levies, imposts,
deductions, charges, fees, withholdings, restrictions or conditions of any
nature now or hereafter imposed, levied, collected, withheld or assessed by any
Governmental Authority (whether pursuant to United States Federal, state, local
or foreign law) or by any political subdivision or taxing authority thereof, and
all interest, penalties or similar liabilities in the nature of taxes, excluding
taxes on the net income of (or franchise taxes imposed in lieu thereof), and
branch profit taxes of, any Lender, the Agent or the L/C Issuer imposed by the
jurisdiction in which such Lender, the Agent or the L/C Issuer is
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organized or by any political subdivision thereof or taxing authority thereof or
by any jurisdiction in which such Person's principal office or relevant lending
office is located or any political subdivision thereof or taxing authority
thereof (such nonexcluded taxes being hereinafter collectively referred to as
"Taxes"). If the Borrowers shall be required by law to deduct or to withhold any
Taxes from or in respect of any amount payable hereunder, (i) the amount so
payable shall be increased to the extent necessary so that after making all
required deductions and withholdings (including Taxes on amounts payable to the
Lenders or the L/C Issuer pursuant to this sentence) the Lenders or the L/C
Issuer receive an amount equal to the sum they would have received had no such
deductions or withholdings been made, (ii) the Borrowers shall make such
deductions or withholdings, and (iii) the Borrowers shall pay the full amount
deducted or withheld to the relevant taxing authority in accordance with
applicable law, provided, however, that if a Lender assigns its rights pursuant
to Section 12.09 hereof and such assignment would (but for this proviso) cause
the assignee Lender, immediately after such assignment, to be entitled to
receive any greater payments under this Section 2.12 in respect of United States
Federal withholding taxes than would have been made but for such assignment,
then such assignee Lender shall not be entitled to receive any such greater
payments than such assigning Lender would have been entitled to receive with
respect to the rights assigned if such assignment had not taken place unless (A)
such assignment had been at the request of, or consented to by, the
Administrative Borrower or (B) an Event of Default has occurred and is
continuing at the time of such assignment. Whenever any Taxes are payable by the
Borrowers, as promptly as possible thereafter, the Borrowers shall send the
Lenders, the L/C Issuer and the Agent an official receipt (or, if an official
receipt is not available, such other documentation as shall be reasonably
satisfactory to the Lenders, L/C Issuer or the Agent, as the case may be)
showing payment. In addition, the Borrowers jointly and severally agree to pay
any present or future stamp, document, transfer, recording or filing taxes or
fees (including, without limitation, mortgage recording taxes) and similar
impositions, charges or levies now or hereafter reasonably determined by the
Agent or any of the Lenders to be payable in connection with any payment made
hereunder or in connection with the execution, delivery, performance,
recordation or filing of, or otherwise with respect to, this Agreement, the
Notes, the Letters of Credit or any other Loan Document (hereinafter referred to
as "Other Taxes").
(b) The Borrowers will jointly and severally indemnify the
Lenders and the L/C Issuer for the amount of Taxes or Other Taxes (including,
without limitation, any Taxes or Other Taxes imposed by any jurisdiction on
amounts payable under this Section 2.12) paid by any Lender or the L/C Issuer
(including penalties, interest and expenses for nonpayment, late payment or
otherwise), whether or not such Taxes or Other Taxes were correctly or legally
asserted. This indemnification shall be paid within 30 days from the date on
which such Lender or such L/C Issuer makes written demand which demand shall
identify the nature and amount of Taxes or Other Taxes for which indemnification
is being sought and the basis of the claim, such written notice shall include
either a copy of any assessment thereof from the relevant taxing authority or
proof of payment of a tax for which the Borrowers are liable hereunder. If any
of the Lenders, the L/C Issuer or the Agent receives a refund ("Refund") of
Taxes paid by the Borrowers pursuant to Sections 2.12(a) or 2.12(b) (whether
paid to any taxing authority or to any Lender) such Persons shall pay such
Refund, including any interest with respect thereto received
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by such Persons from any taxing authority to the Borrowers within thirty (30)
days of receipt.
(c) Each Lender and the L/C Issuer, to the extent that it is
organized in a jurisdiction other than the United States, a State thereof or the
District of Columbia hereby agrees that:
(i) it shall, no later than the Effective Date (or, in the
case of a Lender which becomes a party hereto pursuant to Section 12.09 hereof
after the Effective Date, the date upon which such Lender becomes a party
hereto) deliver to the Administrative Borrower and the Agent:
(A) two accurate, complete and signed originals of U.S.
Internal Revenue Service Form 4224 and Form W-8 or successor forms prescribed by
the Internal Revenue Service, or
(B) two accurate, complete and signed originals of U.S.
Internal Revenue Service Form 1001 and Form W-8 or successor forms prescribed by
the Internal Revenue Service, in each case certifying that such Lender is on the
date of delivery thereof entitled to receive payments of principal, interest and
fees for the account of its lending office under this Agreement free from
withholding of United States Federal income tax;
(ii) if at any time such Lender changes its lending office or
offices or selects an additional lending office it shall, at the same time or
reasonably promptly thereafter, deliver to the Administrative Borrower through
the Agent in replacement for, or in addition to, the forms previously delivered
by it hereunder:
(A) if such changed or additional lending office is located in
the United States, two accurate, complete and signed originals of such Form 4224
and Form W-8 or successor forms prescribed by the Internal Revenue Service, or
(B) two accurate, complete and signed originals of such Form
1001 and Form W-8 or successor forms prescribed by the Internal Revenue Service,
in each case certifying that such Lender is on the date of delivery thereof
entitled to receive payments of principal, interest and fees for the account of
such changed or additional lending office under this Agreement free from
withholding of United States Federal income tax; and
(iii) it shall, promptly upon the Administrative Borrower's
reasonable request to that effect, deliver to the Administrative Borrower such
other forms or similar documentation as may be required from time to time by any
applicable law, treaty, rule or regulation in order to establish such Lender's
tax status for withholding purposes.
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(d) For any period with respect to which a Lender has failed
to provide the Administrative Borrower with the appropriate forms described in
Section 2.12(c) (other than in the case where such Lender is not, or is no
longer, legally entitled to deliver such form), such Lender shall not be
entitled to payment without deduction pursuant to Section 2.12(a) or
indemnification pursuant to Section 2.12(b); provided, however, that should such
Lender become subject to Taxes because of its failure to deliver a form required
hereunder, the Administrative Borrower shall take such steps as the Lender shall
reasonably request to assist such Lender to recover such Taxes.
(e) If either of the Borrowers fails to perform its
obligations under this Section 2.12, the Borrowers shall jointly and severally
indemnify the Lenders and the L/C Issuer for any taxes, interest or penalties
that may become payable as a result of any such failure.
(f) Any Lender that is organized in a jurisdiction other than
the United States, a State thereof or the District of Columbia claiming any
indemnity payment or additional amounts payable pursuant to this Section 2.12
shall use reasonable efforts (consistent with legal, regulatory and policy
considerations of such Lender) to file any certificate or document reasonably
requested in writing by the Administrative Borrower or to change the
jurisdiction of its applicable lending office if the making of such a filing or
change would avoid the need for or reduce the amount of any such indemnity
payment or additional amounts which may thereafter accrue and would not, in the
sole and absolute determination of such Lender, be otherwise disadvantageous to
such Lender.
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SECTION 2.13. Joint and Several Liability of the Borrowers.
(a) Notwithstanding anything in this Agreement or any other
Loan Document to the contrary, each of the Borrowers hereby accepts joint and
several liability hereunder and under the other Loan Documents in consideration
of the financial accommodations to be provided by the Agent and the Lenders
under this Agreement and the other Loan Documents, for the mutual benefit,
directly and indirectly, of each of the Borrowers and in consideration of the
undertakings of the other Borrower to accept joint and several liability for the
Obligations. Each of the Borrowers, jointly and severally, hereby irrevocably
and unconditionally accepts, not merely as a surety but also as a co-debtor,
joint and several liability with the other Borrower, with respect to the payment
and performance of all of the Obligations (including, without limitation, any
Obligations arising under this Section 2.13), it being the intention of the
parties hereto that all the Obligations shall be the joint and several
obligations of each of the Borrowers without preferences or distinction among
them. If and to the extent that any of the Borrowers shall fail to make any
payment with respect to any of the Obligations as and when due or to perform any
of the Obligations in accordance with the terms thereof, then in each such event
the other Borrowers will make such payment with respect to, or perform, such
Obligation. Subject to the terms and conditions hereof, the Obligations of each
of the Borrowers under the provisions of this Section 2.13 constitute the
absolute and unconditional, full recourse Obligations of each of the Borrowers
enforceable against each such Person to the full extent of its properties and
assets, irrespective of the validity, regularity or enforceability of this
Agreement, the other Loan Documents or any other circumstances whatsoever.
(b) The provisions of this Section 2.13 are made for the
benefit of the Agent, the Lenders and their successors and assigns, and may be
enforced by them from time to time against any or all of the Borrowers as often
as occasion therefor may arise and without requirement on the part of the Agent,
the Lenders or such successors or assigns first to marshall any of its or their
claims or to exercise any of its or their rights against any of the other
Borrowers or to exhaust any remedies available to it or them against any of the
other Borrowers or to resort to any other source or means of obtaining payment
of any of the Obligations hereunder or to elect any other remedy. The provisions
of this Section 2.13 shall remain in effect until all of the Obligations shall
have been paid in full or otherwise fully satisfied.
(c) Each of the Borrowers hereby agrees that it will not
enforce any of its rights of contribution or subrogation against the other
Borrowers with respect to any liability incurred by it hereunder or under any of
the other Loan Documents, any payments made by it to the Agent or the Lenders
with respect to any of the Obligations or any Collateral until such time as all
of the Obligations have been paid in full in cash. Any claim which any Borrower
may have against any other Borrower with respect to any payments to the Agent or
the Lenders hereunder or under any other Loan Documents are hereby expressly
made subordinate and junior in right of payment, without limitation as to any
increases in the Obligations arising hereunder or thereunder, to the prior
payment in full in cash of the Obligations and, in the event of any insolvency,
bankruptcy, receivership, liquidation, reorganization or other similar
proceeding under the laws of any jurisdiction relating to any Borrower, its
debts or its assets, whether voluntary or involuntary, all such Obligations
shall be paid in full in cash before any payment or
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distribution of any character, whether in cash, securities or other property,
shall be made to any other Borrower therefor.
ARTICLE III
LETTERS OF CREDIT
SECTION 3.01. Letter of Credit Guaranty.
(a) In order to assist the Borrowers in establishing or
opening documentary and standby letters of credit, which shall not have
expiration dates that exceed 365 days (or such longer period as may be approved
by the Required Lenders) from the date of issuance (the "Letters of Credit"),
with the L/C Issuer, the Borrowers have requested CIT to join in the
applications for such Letters of Credit, and/or guarantee payment or performance
of such Letters of Credit and any drafts thereunder through the issuance of a
Letter of Credit Guaranty, thereby lending CIT's credit to that of the
Borrowers, and CIT has agreed to do so. These arrangements shall be coordinated
by CIT subject to the terms and conditions set forth below. CIT shall not be
required to be the issuer of any Letter of Credit. The Borrowers will be the
account party for each application for a Letter of Credit, which shall be
substantially in the form of Exhibit E hereto or on a computer transmission
system approved by CIT and the L/C Issuer or such other written form or written
transmission system as may from time to time be approved by the L/C Issuer and
CIT, and shall be duly completed in a manner reasonably acceptable to CIT,
together with such other certificates, agreements, documents and other papers
and information as the L/C Issuer or CIT may reasonably request (the "Letter of
Credit Application"). In the event of any conflict between the terms of the
Letter of Credit Application and this Agreement, for purposes of this Agreement,
the terms of this Agreement shall control.
(b) The aggregate Letter of Credit Obligations shall not
exceed the lowest of (i) the difference between (A) the Total Commitment and (B)
the aggregate principal amount of Revolving Credit Loans then outstanding, (ii)
the difference between (A) the Borrowing Base and (B) the aggregate principal
amount of the Revolving Credit Loans then outstanding and (iii) the L/C
Subfacility. Not more than $4,000,000 of such Letter of Credit Obligations shall
be Letter of Credit Obligations with respect to standby Letters of Credit. In
addition, the terms and conditions of all Letters of Credit and all changes or
modifications thereof by the Borrowers and/or the L/C Issuer shall in all
respects be subject to the prior approval of CIT in the reasonable exercise of
its sole and absolute discretion; provided, however, that (i) the expiry date of
all Letters of Credit shall be no later than fifteen days prior to the Final
Maturity Date unless, on or prior to fifteen days prior to the Final Maturity
Date either such Letters of Credit shall be cash collateralized in an amount
equal to 105% of the face amount of such Letters of Credit or the Borrowers
shall provide the Agent and the Lenders with an indemnification, in form and
substance reasonably satisfactory to the Agent, from a commercial bank or other
financial institution acceptable to the Agent for any Letter of Credit
Obligations with respect to such Letters of Credit and (ii) the Letters of
Credit and all documentation in connection therewith shall be in form and
substance reasonably satisfactory to CIT and the L/C Issuer.
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(c) The Agent shall have the right, without notice to the
Borrowers, to charge the Loan Account with the amount of any and all
indebtedness, liabilities and obligations of any kind (including indemnification
for breakage costs, capital adequacy and reserve requirement charges) incurred
by the Agent, CIT or the Lenders under the Letter of Credit Guaranty or incurred
by an L/C Issuer with respect to a Letter of Credit at the earlier of (i)
payment by CIT or the Lenders under the Letter of Credit Guaranty or (ii) the
occurrence of an Event of Default. Any amount charged to the Loan Account shall
be deemed a Revolving Credit Loan hereunder made by the Lenders to the
Borrowers, funded by the Agent on behalf of the Lenders and subject to Section
2.05 of this Agreement. Any charges, fees, commissions, costs and expenses
charged to CIT for the Borrowers' account by the L/C Issuer in connection with
or arising out of Letters of Credit or transactions relating thereto will be
charged to the Loan Account in full when charged to or paid by CIT and, when
charged, shall be conclusive on the Borrowers absent manifest error. Each of the
Lenders and the Borrowers agrees that the Agent shall have the right to make
such charges regardless of whether any Event of Default or Default shall have
occurred and be continuing or whether any of the conditions precedent in Section
5.02 have been satisfied.
(d) The Borrowers unconditionally and jointly and severally
indemnify the Agent, CIT and each Lender and hold the Agent, CIT and each Lender
harmless from any and all loss, claim or liability incurred by the Agent, CIT or
any Lender arising from any transactions or occurrences relating to Letters of
Credit, any drafts or acceptances thereunder, the Collateral relating thereto,
and all Obligations in respect thereof, including any such loss or claim due to
any action taken by the L/C Issuer, other than for any such loss, claim or
liability arising out of the gross negligence or willful misconduct of the
Agent, CIT or any Lender as determined by a final judgment of a court of
competent jurisdiction. The Borrowers further agree to jointly and severally
hold the Agent, CIT and each Lender harmless from any errors or omission,
negligence or misconduct by the L/C Issuer. The Borrowers' unconditional, joint
and several obligations to the Agent, CIT, the L/C Issuer and each Lender with
respect to the Letters of Credit hereunder shall not be modified or diminished
for any reason or in any manner whatsoever, other than as a result of the
Agent's, CIT's, the L/C Issuer's or such Lender's gross negligence or willful
misconduct as determined by a final judgment of a court of competent
jurisdiction. The Borrowers agree that any charges incurred by CIT or the L/C
Issuer for the Borrowers' account hereunder may be charged to the Loan Account.
(e) None of the Agent, CIT, the Lenders and the L/C Issuer
shall be responsible for the existence, character, quality, quantity, condition,
packing, value or delivery of the goods purporting to be represented by any
documents; any difference or variation in the character, quality, quantity,
condition, packing, value or delivery of the goods from that expressed in the
documents; the validity, sufficiency or genuineness of any documents or of any
endorsements thereof even if such documents should in fact prove to be in any or
all respects invalid, insufficient, fraudulent or forged; the time, place,
manner or order in which shipment is made; partial or incomplete shipments, or
failure or omission to ship any or all of the goods referred to in the Letters
of Credit or documents; any deviation from instructions, delay, default, or
fraud by the shipper and/or anyone else in connection with the Collateral or the
shipping thereof; or any breach of contract between the shipper or vendors and
the Borrowers.
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Furthermore, without limiting any of the foregoing, none of the Agent, CIT and
the Lenders shall be responsible for any act or omission with respect to or in
connection with any goods covered by any Letter of Credit.
(f) The Borrowers jointly and severally agree that any action
taken by the Agent, CIT or any Lender, if taken in good faith, or any action
taken by the L/C Issuer, under or in connection with the Letters of Credit, the
drafts or acceptances, the guarantees or the Collateral, shall be binding on the
Borrowers and shall not put the Agent, CIT or the Lenders in any resulting
liability to the Borrowers. In furtherance of the foregoing, CIT shall have the
full right and authority to clear and resolve any questions of non-compliance of
documents; to give any instructions as to acceptance or rejection of any
documents or goods; to execute any and all steamship or airways guaranties (and
applications therefore), indemnities or delivery orders; to grant any extensions
of the maturity of, time of payment for, or time of presentation of, any drafts,
acceptances or documents; and to agree to any amendments, renewals, extensions,
modifications, changes or cancellations of any of the terms or conditions of any
of the applications, Letters of Credit, drafts or acceptances, all in CIT's sole
name, and the L/C Issuer shall be entitled to comply with and honor any and all
such documents or instruments executed by or received solely from CIT, all
without any notice to or any consent from the Borrowers. CIT shall use
reasonable efforts to consult with the Borrowers before taking any action
pursuant to this Section 3.01(f).
(g) Without CIT's express consent, the Borrowers jointly and
severally agree: (i) not to execute any and all applications for steamship or
airway guaranties, indemnities or delivery orders; to grant any extensions of
the maturity of, time of payment for, or time of presentation of, any drafts,
acceptances or documents; or to agree to any amendments, renewals, extensions,
modifications, changes or cancellations of any of the terms or conditions of any
of the applications, Letters of Credit, drafts or Letter of Credit Applications;
and (ii) after the occurrence of an Event of Default which is not cured within
any applicable grace period, if any, or waived pursuant to the terms of this
Agreement, not to (A) clear and resolve any questions of non-compliance of
documents, or (B) give any instructions as to acceptances or rejection of any
documents or goods.
(h) The Borrowers jointly and severally agree that any
necessary and material import, export or other license or certificate for the
import or handling of Inventory will have been promptly procured; all foreign
and domestic material governmental laws and regulations in regard to the
shipment and importation of Inventory or the financing thereof will have been
promptly and fully complied with, in each case, where the failure to obtain such
certificate or license or the failure to comply with such laws would have a
Material Adverse Effect; and any certificates in that regard that CIT may at any
time reasonably request will be promptly furnished. In this connection, the
Borrowers warrant and represent that all shipments made under any Letters of
Credit are in accordance with the laws and regulations of the countries in which
the shipments originate and terminate, and are not prohibited by any such laws
and regulations. As between the Borrowers, on the one hand, and the Agent, CIT,
the Lenders and the L/C Issuer, on the other hand, the Borrowers jointly and
severally assume all risk, liability and responsibility for, and agree to pay
and discharge, all present and future local, state, federal
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or foreign taxes, duties, or levies. As between the Borrowers, on the one hand,
and the Agent, CIT, the Lenders and the L/C Issuer, on the other hand, any
embargo, restriction, laws, customs or regulations of any country, state, city,
or other political subdivision, where such Inventory is or may be located, or
wherein payments are to be made, or wherein drafts may be drawn, negotiated,
accepted, or paid, shall be solely the Borrowers' joint and several risk,
liability and responsibility.
(i) Upon any payments made to the L/C Issuer under the Letter
of Credit Guaranty, CIT, the Agent or the Lenders, as the case may be, shall,
without prejudice to its rights under this Agreement (including that such
unreimbursed amounts shall constitute Loans hereunder), acquire by subrogation,
any rights, remedies, duties or obligations granted or undertaken by the
Borrowers in favor of the L/C Issuer in any application for Letters of Credit,
any standing agreement relating to Letters of Credit or otherwise, all of which
shall be deemed to have been granted to CIT, the Agent and the Lenders and apply
in all respects to CIT, the Agent and the Lenders and shall be in addition to
any rights, remedies, duties or obligations contained herein.
SECTION 3.02. Participations.
(a) Purchase of Participations. Immediately upon issuance by
the L/C Issuer of any Letter of Credit pursuant to this Agreement (and for each
Existing Letter of Credit, on the Effective Date), each Lender (other than CIT)
shall be deemed to have irrevocably and unconditionally purchased and received
from CIT, without recourse or warranty, an undivided interest and participation,
to the extent of such Lender's Pro Rata Share, in all obligations of CIT in such
Letter of Credit (including, without limitation, all Reimbursement Obligations
of the Borrowers with respect thereto pursuant to the Letter of Credit Guaranty
or otherwise).
(b) Sharing of Payments. In the event that CIT makes any
payment in respect of the Letter of Credit Guaranty and the Borrowers shall not
have repaid such amount to the Agent for the account of CIT, the Agent shall
charge the Loan Account in the amount of the Reimbursement Obligation, in
accordance with Sections 3.01(c) and 4.02.
(c) Obligations Irrevocable. The obligations of a Lender to
make payments to the Agent for the account of the Agent, CIT or the L/C Issuer
with respect to a Letter of Credit shall be irrevocable, without any
qualification or exception whatsoever and shall be made in accordance with the
terms and conditions of this Agreement under all circumstances, including,
without limitation, any of the following circumstances:
(i) any lack of validity or enforceability of this Agreement
or any of the other Loan Documents;
(ii) the existence of any claim, setoff, defense or other
right which a Borrower may have at any time against a beneficiary named in such
Letter of Credit or any transferee of such Letter of Credit (or any Person for
whom any such transferee may be acting), the Agent, L/C Issuer, any Lender, or
any other Person,
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whether in connection with this Agreement, such Letter of Credit, the
transactions contemplated herein or any unrelated transactions (including any
underlying transactions between any Borrower or any other party and the
beneficiary named in such Letter of Credit);
(iii) any draft, certificate or any other document presented
under such Letter of Credit proving to be forged, fraudulent, invalid or
insufficient in any respect or any statement therein being untrue or inaccurate
in any respect;
(iv) the surrender or impairment of any security for the
performance or observance of any of the terms of any of the Loan Documents;
(v) any failure by CIT or the Agent to provide any notices
required pursuant to this Agreement relating to such Letter of Credit;
(vi) any payment by the L/C Issuer under any of the Letters of
Credit against presentation of a draft or certificate which does not comply with
the terms of such Letter of Credit; or
(vii) the occurrence of any Default or Event of Default.
SECTION 3.03. Letters of Credit.
(a) Request for Issuance. The Administrative Borrower may from
time to time, upon notice not later than 12:00 noon, New York City time, at
least two Business Days in advance, request CIT to assist the Borrowers in
establishing or opening a Letter of Credit by delivering to the Agent, with a
copy to the L/C Issuer, a Letter of Credit Application, together with any
necessary related documents. CIT shall not provide support, pursuant to the
Letter of Credit Guaranty, if the Agent shall have received written notice from
the Required Lenders on the Business Day immediately preceding the proposed
issuance date for such Letter of Credit that one or more of the conditions
precedent in Section 5.02 will not have been satisfied on such date, and neither
CIT nor the Agent shall otherwise be required to determine that, or take notice
whether, the conditions precedent set forth in Section 5.02 have been satisfied.
(b) Letters of Credit Fees. (i) The Borrowers shall jointly
and severally pay to the Agent for the account of the Lenders in accordance with
such Lender's Pro Rata Share a nonrefundable fee for each documentary Letter of
Credit issued hereunder (including each Existing Letter of Credit which is a
documentary Letter of Credit) and for each amendment to a documentary Letter of
Credit that increases the stated amount of such Letter of Credit, such fee to be
equal to 1/8 of 1% of the initial stated amount of such documentary Letter of
Credit or the increase in the stated amount of such existing documentary Letter
of Credit, as the case may be. This fee shall be payable, in the case of the
issuance of a documentary Letter of Credit, in advance on or prior to the
issuance of such documentary Letter of Credit (or, in the case of an Existing
Letter of Credit, on the Effective Date) and, in the case of an amendment of an
existing documentary Letter of Credit, in advance on or prior to the amendment
of such
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existing documentary Letter of Credit. The Borrowers shall also jointly and
severally pay to the Agent for the benefit of the Lenders in accordance with
such Lender's Pro Rata Share a nonrefundable fee on the average undrawn amount
of each documentary Letter of Credit equal to 1/8 of 1% of the average daily
undrawn amount, payable monthly in arrears, on the first day of each month
commencing on March 1, 1999. In addition, the Borrowers shall jointly and
severally pay to the Agent for the account of the Lenders, in accordance with
the Lenders' Pro Rata Shares (x) for each standby Letter of Credit issued
hereunder (including each Existing Letter of Credit which is a standby Letter of
Credit), a nonrefundable fee equal to 2% per annum of the stated amount of such
standby Letter of Credit, payable quarterly in advance commencing on the date
such standby Letter of Credit is issued (or, in the case of an Existing Letter
of Credit, on the Effective Date) and on the first day of each January, April,
July and October thereafter and (y) for any amendment to an existing standby
Letter of Credit that increases the stated amount of such standby Letter of
Credit, a nonrefundable fee equal to 2% per annum of the increase in the stated
amount of such standby Letter of Credit for the period from the date of such
increase to the beginning of the next calendar quarter thereafter, payable on
the date of such increase.
(ii) L/C Issuer Charges. The Borrowers shall pay to CIT the
standard charges assessed by the L/C Issuer in connection with the issuance,
administration, amendment, payment or cancellation of Letters of Credit and the
Letter of Credit Guaranty, which charges are set forth in Schedule 3.03(b)(ii)
hereto.
(iii) Charges to the Loan Account. The Borrowers hereby
authorize the Agent to, and the Agent may, from time to time, charge the Loan
Account pursuant to Sections 3.01(c) and 4.02 of this Agreement with the amount
of any Letter of Credit fees or charges due under this Section 3.03.
(c) Existing Letters of Credit. Schedule 3.03(c) hereto
contains a description of all letters of credit for which the Agent has assumed
liability from The Chase Manhattan Bank on the Effective Date. Each such letter
of credit, including any extension or renewal thereof (each, as amended from
time to time in accordance with the terms thereof and hereof, an "Existing
Letter of Credit") shall constitute a "Letter of Credit" for all purposes of
this Agreement, issued on the Effective Date.
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ARTICLE IV
FEES, PAYMENTS AND OTHER COMPENSATION
SECTION 4.01. Audit and Collateral Monitoring Fees. The Borrowers
acknowledge that the Agent may upon reasonable notice to the Administrative
Borrower conduct audits and/or field examinations of the Borrowers and the
Guarantors at any reasonable time and from time to time in a manner so as to not
unduly disrupt the business of the Borrowers and the Guarantors, provided that
such notice shall not be required if an Event of Default has occurred and is
continuing. The Borrowers jointly and severally agree to pay, for the account of
the Agent, $750 per day per examiner plus the examiner's out-of-pocket costs and
expenses incurred in connection with all such visits, inspections, audits and
examinations; provided, however, if no Event of Default shall have occurred and
be continuing, the Borrowers shall not be obligated to pay the fees, costs and
expenses for more than two (2) such visits, audits and/or examinations during
any fiscal year.
SECTION 4.02. Payments; Computations and Statements. (a) The Borrowers
will make each payment under the Notes not later than 1:00 p.m. (New York City
time) on the day when due, in lawful money of the United States of America and
in immediately available funds, to the Agent at the Payment Office. All payments
received by the Agent after 1:00 p.m. (New York City time) on any Business Day
will be credited to the Loan Account on the next succeeding Business Day. All
payments made by the Borrowers hereunder, under the Notes or under any other
Loan Document shall be made without defense, set-off, counterclaim or deduction
to the Agent and the Lenders. Except as provided in Section 2.05, after receipt,
the Agent will promptly thereafter cause to be distributed like funds relating
to the payment of principal ratably to the Lenders and like funds relating to
the payment of any other amount payable to any Lender to such Lender in each
case to be applied in accordance with the terms of this Agreement, provided that
the Agent will cause to be distributed all interest and fees received from or
for the account of the Borrowers not less than once each month and in any event
promptly after receipt thereof. The Lenders and the Borrowers hereby authorize
the Agent to, and the Agent may, from time to time, charge the Loan Account with
any amount due and payable under any Loan Document. Each of the Lenders and the
Borrowers agree that the Agent shall have the right to make such charges whether
or not any Event of Default or Default shall have occurred and be continuing or
whether any of the conditions precedent in Section 5.02 have been satisfied. Any
amount charged to the Loan Account shall be deemed a Revolving Credit Loan
hereunder made by the Lenders to the Borrowers, funded by the Agent on behalf of
the Lenders and subject to Section 2.05 of this Agreement). The Lenders and the
Borrowers confirm that any charges which the Agent may so make to the Loan
Account as herein provided will be made as an accommodation to the Borrowers and
solely at the Agent's discretion. The Agent shall use reasonable good faith
efforts to notify the Administrative Borrower promptly after the Agent makes any
material charge to the Loan Account, provided that the failure of the Agent to
provide any such notice shall not relieve the Borrowers from any obligations
pursuant to this Agreement with respect to such charges. It is expressly
understood and agreed by the Borrowers that the Agent and the Lenders shall have
no responsibility to inquire into the correctness of the apportionment,
allocation or disposition of Loans or Letters of Credit made to or for the
benefit
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of the Borrowers or any fees, costs, expenses or other amounts for which the
Borrowers are jointly and severally obligated under this Agreement. Except with
respect to charges made by the Agent to the Loan Account, whenever any payment
to be made under any such Loan Document shall be stated to be due on a day other
than a Business Day, such payment shall be made on the next succeeding Business
Day and such extension of time shall in such case be included in the computation
of interest or fees, as the case may be. All computations of fees shall be made
by the Agent on the basis of a year of 360 days for the actual number of days
(including the first day but excluding the last day) occurring in the period for
which such fees are payable. Each determination by the Agent of an interest rate
or fees hereunder shall be conclusive and binding for all purposes in the
absence of manifest error.
(b) The Agent shall use its good faith efforts to provide to
the Administrative Borrower on each Business Day a copy of the daily position
report in the form from time to time prepared by the Agent. The Agent shall
provide each Borrower, promptly after the end of each calendar month, a summary
statement (in the form from time to time used by Agent) of the opening and
closing daily balances in the Loan Account during such month, the amounts and
dates on all Loans and Agent Advances made during such month, the amounts and
dates of all payments on account of the Loans to the Borrowers during such month
and the Loans to which such payments were applied, the amount of interest
accrued on the Loans to the Borrowers during such month, any Letters of Credit
issued by the L/C Issuer during such month, specifying the face amount thereof,
the amount of charges to the Loan Account and/or Loans made to the Borrowers
during such month to reimburse the Lenders for drawings made under Letters of
Credit, and the amount and nature of any charges to the Loan Account made during
such month on account of fees, commissions, expenses and other Obligations. All
entries on any such statement shall, 60 days after the same is sent, be presumed
to be correct and shall constitute presumptive evidence of the information
contained in such statement and shall be final and conclusive absent manifest
error.
SECTION 4.03. Sharing of Payments, Etc. Except as provided in Section
2.05 hereof, if any Lender shall obtain any payment (whether voluntary,
involuntary, through the exercise of any right of set-off, or otherwise) on
account of any Obligation in excess of its ratable share of payments on account
of similar obligations obtained by all the Lenders, such Lender shall forthwith
purchase from the other Lenders such participations in such similar obligations
held by them as shall be necessary to cause such purchasing Lender to share the
excess payment ratably with each of them; provided, however, that if all or any
portion of such excess payment is thereafter recovered from such purchasing
Lender, such purchase from each Lender shall be rescinded and each such Lender
shall repay to the purchasing Lender the purchase price to the extent of such
recovery together with an amount equal to such Lender's ratable share (according
to the proportion of (i) the amount of such Lender's required repayment to (ii)
the total amount so recovered from the purchasing Lender of any interest or
other amount paid by the purchasing Lender in respect of the total amount so
recovered). The Borrowers agree that any Lender so purchasing a participation
from another Lender pursuant to this Section 4.03 may, to the fullest extent
permitted by law, exercise all its rights (including the Lender's right of
set-off) with respect to such participation as fully as if such Lender were the
direct creditor of the Borrowers in the amount of such participation.
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SECTION 4.04. Apportionment of Payments. (a) Subject to Sections 2.05
and 12.01 hereof, all payments of principal and interest in respect of
outstanding Loans, all payments in respect of the Reimbursement Obligations, all
payments of fees (other than the fees set forth in the Fee Letter, fees with
respect to Letters of Credit provided for in Section 3.03(b)(ii) and the audit
and collateral monitoring fees provided for in Section 4.01) and all other
payments in respect of any other Obligations, shall be allocated by the Agent
among such of the Lenders as are entitled thereto, in proportion to their
respective Pro Rata Shares or otherwise as provided herein or, in respect of
payments not made on account of Loans or Letter of Credit Obligations, as
designated by the Person making payment when the payment is made.
(b) After the occurrence and during the continuance of an
Event of Default, the Agent may, and upon the direction of the Required Lenders
shall, apply all payments in respect of any Obligations and all proceeds of the
Collateral, subject to the provisions of this Agreement (i) first, to pay the
Obligations in respect of any fees, expense reimbursements or indemnities then
due to the Agent or the L/C Issuer; (ii) second, to pay the Obligations in
respect of any fees and indemnities then due to the Lenders; (iii) third,
ratably to pay interest due in respect of the Loans and Reimbursement
Obligations; (iv) fourth, ratably to pay or prepay principal of the Loans and
Letter of Credit Obligations (or, to the extent such Obligations are contingent,
to prepay or provide cash collateral in respect of such Obligations); and (v)
fifth, to the ratable payment of all other Obligations then due and payable.
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SECTION 4.05. Increased Costs and Reduced Return.
(a) If any Lender or the L/C Issuer shall have determined that
the adoption or implementation of, or any change in, any law, rule, treaty or
regulation, or any policy, guideline or directive of, or any change in the
interpretation or administration thereof by, any court, central bank or other
administrative or Governmental Authority, or compliance by the L/C Issuer or any
Lender or any Person controlling any such Lender or the L/C Issuer with any
directive of or guideline from any central bank or other Governmental Authority
or the introduction of or change in any accounting principles applicable to the
L/C Issuer or any Lender or any Person controlling any such Lender or the L/C
Issuer (in each case, whether or not having the force of law), shall (i) change
the basis of taxation of payments to the L/C Issuer or any Lender or any Person
controlling any such Lender or the L/C Issuer of any amounts payable hereunder
(except for taxes on the overall net income of the L/C Issuer or any Lender or
any Person controlling any such Lender or the L/C Issuer), (ii) impose, modify
or deem applicable any reserve, special deposit or similar requirement against
any Loan, Letter of Credit or against assets of or held by, or deposits with or
for the account of, or credit extended by, the L/C Issuer or any Lender, or any
Person controlling any such Lender or the L/C Issuer or (iii) impose on the L/C
Issuer or any Lender or any Person controlling any such Lender or the L/C Issuer
any other condition regarding this Agreement or any Loan or Letter of Credit,
and the result of any event referred to in clauses (i), (ii) or (iii) above
shall be to increase the cost to the L/C Issuer or any Lender of making any
Loan, issuing, guaranteeing or participating in any Letter of Credit, or
agreeing to make any Loan or issue, guaranty or participate in any Letter of
Credit, or to reduce any amount received or receivable by the L/C Issuer or any
Lender hereunder, then, upon demand by the L/C Issuer or such Lender, the
Borrowers shall pay to the L/C Issuer or such Lender such additional amounts as
will compensate the L/C Issuer or such Lender for such increased costs or
reductions in amount, together with interest on such additional amounts.
(b) If any Lender or the L/C Issuer shall have determined that
any Capital Guideline or adoption or implementation of, or any change in, any
Capital Guideline by the Governmental Authority charged with the interpretation
or administration thereof, or compliance by the L/C Issuer, any Lender or any
Person controlling such L/C Issuer or any Lender with any Capital Guideline or
with any request or directive of any such Governmental Authority with respect to
any Capital Guideline, or the implementation of, or any change in, any
applicable accounting principles (in each case, whether or not having the force
of law), either (i) affects or would affect the amount of capital required or
expected to be maintained by the L/C Issuer, any Lender or any Person
controlling such L/C Issuer or any Lender, and the L/C Issuer or any Lender
determines that the amount of such capital is increased as a direct or indirect
consequence of any Loans made or maintained, Letters of Credit issued or any
guaranty or participation with respect thereto, or the L/C Issuer's, any
Lender's or any such other controlling Person's other obligations hereunder, or
(ii) has or would have the effect of reducing the rate of return on the L/C
Issuer's, any Lender's, any such other controlling Person's capital to a level
below that which such L/C Issuer, such Lender or such controlling Person could
have achieved but for such circumstances as a consequence of any Loans made or
maintained, Letters of Credit issued, or any guaranty or participation with
respect thereto or any agreement to make Loans, to issue Letters of Credit or
such L/C Issuer's, such Lender's, such other controlling Person's other
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obligations hereunder (in each case, taking into consideration such L/C
Issuer's, such Lender's or such other controlling Person's policies with respect
to capital adequacy), then, upon demand by the L/C Issuer or any Lender, the
Borrowers shall pay to the L/C Issuer or such Lender from time to time such
additional amounts as will compensate the L/C Issuer or such Lender for such
cost of maintaining such increased capital or such reduction in the rate of
return on such L/C Issuer's, such Lender's or such other controlling Person's
capital.
(c) All amounts payable under this Section 4.05 shall bear
interest from the date that is three Business Days after the date of demand by
the L/C Issuer or a Lender until payment in full to the L/C Issuer or such
Lender at the Post-Default Rate. A certificate of the L/C Issuer or any Lender
claiming compensation under this Section 4.05 specifying the event herein above
described and the nature of such event shall be submitted by the L/C Issuer or
such Lender to the Administrative Borrower, setting forth the additional amount
due and an explanation of the calculation thereof, the L/C Issuer's or such
Lender's reasons for invoking the provisions of this Section 4.05, and shall be
final and conclusive absent manifest error.
SECTION 4.06 Calculation of Borrowing Base
(a) At the election of the Agent, in its reasonable business
judgment based upon such factors as the Agent may deem appropriate and whether
or not an Event of Default has occurred and is continuing, the Agent may require
the Borrowers to (i) identify in each Notice of Borrowing or request for
issuance of a Letter of Credit the Borrower obtaining the proceeds of such Loan
or for whose account such Letter of Credit will be issued, and (ii) report the
Borrowing Base separately for each Borrower and require that such Loans and
Letters of Credit requested by a Borrower be subject to the individual Borrowing
Base of such Borrower. If the Agent makes such election (x) no Borrower shall be
permitted to obtain a Revolving Credit Loan or a Letter of Credit in an amount
in excess of such Borrower's individual Availability, if and to the extent that,
at such time, the other Borrower has positive individual Availability, (y)
except as provided in clause (x) above, the Overadvance Amount shall be
allocated between the Borrowers by the Agent in the exercise of its reasonable
business judgment based upon such factors as the Agent may deem appropriate, and
(z) the Borrowers shall be permitted to make intercompany loans permitted by
Section 7.02(b)(iii) and 7.02(f)(iii) hereof.
(b) The Loan Parties agree to execute and deliver to the Agent
such amendments to this Agreement as the Agent shall reasonably request to
effect any election made pursuant to the terms of this Section 4.06.
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ARTICLE V
CONDITIONS OF EFFECTIVENESS, LETTER OF CREDIT
ISSUANCE AND LENDING
SECTION 5.01. Conditions Precedent to Effectiveness. This Agreement
shall become effective as of the Business Day (the "Effective Date") when each
of the following conditions precedent shall have been satisfied:
(a) Payment of Fees, Etc. The Borrowers shall have paid on or
before the date of this Agreement, all fees, costs, expenses and taxes then
payable by the Borrowers pursuant to Sections 2.08 and 12.05 hereof.
(b) Representations and Warranties; No Event of Default. The
representations and warranties contained in Section 6.01 of this Agreement and
in each other Loan Document and certificate or other writing delivered to the
Agent, the Lenders or the L/C Issuer pursuant hereto on or prior to the
Effective Date shall be correct on and as of the Effective Date as though made
on and as of such date; and no Default or Event of Default shall have occurred
and be continuing on the Effective Date or would result from this Agreement
becoming effective in accordance with its terms.
(c) Legality. The making of the initial Loans or the issuance
of the initial Letter of Credit shall not contravene any law, rule or regulation
applicable to the Lenders or the L/C Issuer.
(d) Delivery of Documents. The Agent shall have received on or
before the Effective Date the following, each in form and substance satisfactory
to the Agent and, unless indicated otherwise, dated the Effective Date:
(i) a Revolving Credit Note payable to the order of each
Lender, duly executed by each Borrower;
(ii) a Guaranty, duly executed by each Borrower and each
Subsidiary Retailer;
(iii) a Security Agreement, duly executed by each Borrower and
each Subsidiary Retailer;
(iv) a Pledge Agreement, duly executed by each Borrower,
together with the original stock certificates representing all of the common
stock of Stetson and Sportswear and all inter-company promissory notes of the
Borrowers, accompanied by undated stock powers executed in blank and other
instruments of transfer;
(v) Intentionally Omitted.
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(vi) appropriate financing statements on Form UCC-1, duly
executed by each Borrower and Guarantor (other than the Company) and duly filed
in such office or offices as may be necessary or, in the reasonable opinion of
the Agent, desirable to perfect the security interests purported to be created
by the Security Agreements;
(vii) tax and judgment lien search reports in all relevant
jurisdictions, together with certified copies of requests for copies of
information on Form UCC-11, listing all effective financing statements which
name as debtor any Borrower or Guarantor and which are filed in the offices
referred to in paragraph (vi) above, together with copies of such financing
statements, none of which, except as otherwise agreed to in writing by the
Agent, shall cover any of the Collateral;
(viii) a copy of the resolutions adopted by the Board of
Directors of each Borrower and Guarantor, certified as of the Effective Date by
authorized officers thereof, authorizing (A) the borrowings hereunder and the
transactions contemplated by the Loan Documents and the Factoring Agreements to
which such Borrower or Guarantor is or will be a party, and (B) the execution,
delivery and performance by each Borrower and Guarantor of each Loan Document
and Factoring Agreements and the execution and delivery of the other documents
to be delivered by each Borrower and Guarantor in connection herewith;
(ix) a certificate of an authorized officer of each Borrower
and Guarantor, certifying the names and true signatures of the officers of such
Borrower or Guarantor authorized to sign each Loan Document and Factoring
Agreements to which such Borrower or Guarantor is or will be a party and the
other documents to be executed and delivered by such Borrower or Guarantor in
connection herewith, together with evidence of the incumbency of such authorized
officers;
(x) a certificate dated a recent date of the appropriate
official(s) of the states of incorporation and each state of foreign
qualification of each Borrower and Guarantor, certifying as to the subsistence
in good standing of, and the payment of taxes by, such Borrower or Guarantor in
such states and listing all charter documents of such Borrower and Guarantor on
file with such official(s), together with confirmation by telephone or telegram
(where available) on the Effective Date from such official(s) as to such
matters;
(xi) a copy of the charter of each Borrower and Guarantor
certified by the appropriate official(s) of the state of organization of such
Borrower or Guarantor and as of the Effective Date by an authorized officer of
the Borrower or Guarantor;
(xii) a copy of the by-laws of each Borrower and Guarantor,
certified as of the Effective Date by an authorized officer of such Borrower or
Guarantor;
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(xiii) Intentionally Omitted;
(xiv) an opinion of Herrick Feinstein LLP Connecticut, New
Jersey and New York counsel to the Borrowers and the Guarantors, substantially
in the form of Exhibit F hereto, and as to such other matters as the Agent may
reasonably request;
(xv) a certificate of the chief financial officer of the
Company and each Borrower, certifying as to the matters set forth in subsection
(b) of this Section 5.01;
(xvi) (A) projections of the Borrowers, in form and substance
satisfactory to the Lenders, including monthly profit and loss statements,
balance sheets and cash flow projections, for the twelve-month period ending
December 31, 1999 and (B) a copy of the Financial Statements, together with a
certificate of the chief financial officer of the Company and each Borrower
setting forth (x) all existing Indebtedness, including guarantees, pending or,
to the best of the Company's and each Borrower's knowledge, threatened
litigation or claims and other contingent liabilities of the Borrowers and
Guarantors not shown on such Financial Statements, and (y) all dividends
declared or paid since the date of such Financial Statements and all
inter-company payments made or obligations incurred to Affiliates outside the
ordinary course of the Company's and the Borrowers' businesses since the date of
such Financial Statements;
(xvii) a breakdown of Inventory by Borrower and by location in
the form specified in Section 7.01(a)(v)(B) hereof dated as of January 31, 1999,
certified by the chief financial officer of each Borrower;
(xviii) the Assignment of Factoring Proceeds Agreement duly
executed by the Borrowers and the Factor, and a copy, certified by the chief
financial officer of each Borrower, of each executed Factoring Agreement and
related documents;
(xix) copies of the insurance policies and certificates of
insurance evidencing such insurance on the property of the Borrowers and the
Guarantors as is required by Section 7.01(h) hereof naming the Agent as
additional insured and loss payee, using a long form loss payee endorsement, for
all insurance maintained by the Borrowers and the Guarantors;
(xx) a certificate of an authorized officer of each Borrower
and Guarantor certifying the names and true signatures of those officers of each
Borrower and Guarantor that are authorized to provide Notices of Borrowings,
Letter of Credit Applications and all other notices under this Agreement and the
Loan Documents;
(xxi) a Borrowing Base Certificate current as of the Business
Day prior to the Effective Date;
(xxii) a copy of each of the License Agreements as in effect
on
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the date hereof and each other trademark license agreement pursuant to which a
Loan Party is a licensor, certified as a true and correct copy thereof by the
chief financial officer of each of the Borrowers together with a certification
that such license agreements remain in full force and effect and that the
Borrowers have not breached or defaulted in any of the obligations under any
such license agreements;
(xxiii) a copy of the BONY Loan Documents (including an
amendment thereto dated on or about the Effective Date in form and substance
satisfactory to the Agent), certified as of the Effective Date by an authorized
officer of the Company;
(xxiv) a copy of the most recent annual report (Form 5500
Series) for each Employee Plan, including Schedule B attached thereto;
(xxv) the Termination Agreement duly executed by The Chase
Manhattan Bank and the Borrowers, together with UCC termination statements and
other documentation evidencing the termination by The Chase Manhattan Bank of
its Liens in and to the properties and assets of the Borrowers;
(xxvi) the Factor Termination Agreements duly executed by each
of the Existing Factors and the Borrowers, together with UCC termination
statements and other documentation evidencing the termination by the Existing
Factors of their factoring arrangements with the Borrowers;
(xxvii) (A) an Existing Factor Assignment Agreement duly
executed by each of the Existing Factors and the Borrowers and (B) evidence of
the termination of the existing assignment of factor proceeds agreement between
each of the Existing Factors and The Chase Manhattan Bank;
(xxviii) a pro-forma consolidated balance sheet of the Company
and its Consolidated Subsidiaries as of December 31, 1998 after giving effect to
the consummation of the transactions contemplated in Section 5.01(h) of this
Agreement;
(xxix) for each Subsidiary Retailer, a consignment letter, in
form and substance satisfactory to the Agent, executed by such Subsidiary
Retailer, and ECI and Sportswear; and
(xxx) such other agreements, instruments, approvals, opinions
and other documents as the Agent may reasonably request including, without
limitation, all inter-company management services agreements among the Borrowers
and the Guarantors.
(e) Proceedings; Receipt of Documents. All proceedings in
connection with the transactions contemplated by this Agreement, and all
documents incidental thereto, shall be satisfactory to the Agent and its special
counsel, and the Agent and such special counsel shall have received all such
information and such counterpart originals or certified or
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other copies of such documents as the Agent or such special counsel may
reasonably request.
(f) Field Exam. The Agent may, at its option, obtain an update
of the field exam of the Accounts Receivable and Inventory of the Borrowers and
the Agent shall be satisfied (in its sole discretion) with the results of such
updated field exam.
(g) Material Adverse Effect. The Lenders shall have
determined, in their sole judgment, that no Material Adverse Effect shall have
occurred after December 31, 1998.
(h) Restructuring. The Agent shall have received evidence
satisfactory to it that each of the following has occurred (i) The Simon Group,
LLC shall have made a cash investment in or for the benefit of the Company of
not less than $20 million, $4 million of which shall have been used to prepay
the existing indebtedness of the Company to AIF-II, L.P. and the remaining $16
million of which shall have been contributed as equity to the Borrowers to be
used for working capital purposes, including the repayment of existing
Indebtedness owing to The Chase Manhattan Bank, (ii) AIF-II, L.P. shall have
converted the remainder of its indebtedness owed by the Company into common
equity of the Company, and (iii) The Simon Group, LLC shall own and control not
less than 60% of the voting stock of the Company.
(i) Additional Availability. After giving effect to all Loans
made on the Effective Date, the Letters of Credit issued on such date and all
Existing Letters of Credit, (i) the Availability shall not be less than
$5,000,000 and (ii) all liabilities of the Borrowers shall be current. The
Borrowers shall deliver to the Agent a certificate of the chief financial
officer and the chief operating officer of each of the Borrowers certifying as
to the matters set forth in clauses (i) and (ii) above and containing the
calculations thereof.
SECTION 5.02. Conditions Precedent to Loans and Letters of Credit. As
a condition precedent to the Agent or any Lender making any Loan (including the
initial Loans on the Effective Date), or CIT assisting the Borrowers in
establishing, or opening any Letter of Credit (including the initial Letters of
Credit on the Effective Date), each of the following conditions precedent shall
be fulfilled in a manner satisfactory to the Agent and the Required Lenders;
(a) Payment of Fees, Etc. The Borrowers shall have paid all
fees, costs, expenses and taxes then payable by the Borrowers pursuant to
Sections 2.08 and 12.05 hereof.
(b) Representations and Warranties; No Event of Default. The
following statements shall be true, and the submission by the Administrative
Borrower to the Agent of a Notice of Borrowing with respect to a Loan and a
Borrower's acceptance of the proceeds of such Loan, or the submission by the
Administrative Borrower of a Letter of Credit Application with respect to a
Letter of Credit and the issuance of such Letter of Credit shall be deemed to be
a representation and warranty by the Borrowers on the date of such Loan and the
date of the issuance of such Letter of Credit that (i) the representations and
warranties contained
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in Section 6.01 of this Agreement and in each other Loan Document and
certificate or other writing delivered to the Lenders pursuant hereto on or
prior to the date of such Loan or Letter of Credit are correct on and as of such
date as though made on and as of such date (other than those representations and
warranties which expressly speak only as of a different date); and (ii) no Event
of Default or Default has occurred and is continuing or would result from the
making of the Loan to be made on such date or the issuance of the Letter of
Credit to be issued on such date.
(c) Legality. The making of such Loan or the issuance of such
Letter of Credit shall not contravene any law, rule or regulation applicable to
the Agent, the Lenders or the L/C Issuer, as the case may be.
(d) Notices. Except in the case of a borrowing of a Loan
pursuant to Sections 3.01(c), the Agent shall have received (i) a Notice of
Borrowing pursuant to Section 2.03 hereof no later than 12:00 noon (New York
City time) (A) on the date of the proposed borrowing with respect to a Base Rate
Loan and (B) three Business Days prior to the date of the proposed borrowing in
the case of a Eurodollar Loan and (ii) a Letter of Credit Application pursuant
to Section 3.03 hereof not later than 12:00 noon (New York City time) two
Business Days prior to the proposed date of issuance of a Letter of Credit.
(e) Delivery of Documents. The Agent shall have received such
other agreements, instruments, approvals, opinions and other documents, each in
form and substance reasonably satisfactory to the Agent, as the Agent may
reasonably request.
(f) Proceedings; Receipt of Documents. All proceedings in
connection with the making of such Loan or the issuance of such Letter of Credit
and the other transactions contemplated by this Agreement, and all documents
incidental thereto, shall be reasonably satisfactory to the Agent and its
special counsel, and the Agent and such special counsel shall have received all
such information and such counterpart originals or certified or other copies of
such documents as the Agent or such special counsel may reasonably request.
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ARTICLE VI
REPRESENTATIONS AND WARRANTIES
SECTION 6.01. Representations and Warranties. The Company and each
Borrower represents and warrants as follows:
(a) Organization, Good Standing, Etc. Each Loan Party (i) is a
corporation duly organized, validly existing and in good standing under the laws
of the state of its organization as set forth in Schedule 6.01(f) hereto, (ii)
has all requisite power and authority to conduct its business as now conducted
and as presently contemplated and to make the borrowings hereunder (in the case
of the Borrowers) and to consummate the transactions contemplated by the Loan
Documents to which it is a party, and (iii) is duly qualified to do business and
is in good standing in each jurisdiction as set forth in Schedule 6.01(f)
hereto, which are all jurisdictions in which the character of the properties
owned or leased by it or in which the transaction of its business makes such
qualification necessary, except where the failure to so qualify individually or
in the aggregate is not reasonably likely to have a Material Adverse Effect.
(b) Authorization, Etc. The execution, delivery and
performance by each Loan Party of each Loan Document to which it is a party (i)
have been duly authorized by all necessary corporate action, (ii) do not and
will not contravene the charter, by-laws or any applicable law or any material
contractual restriction binding on or otherwise affecting it or any of its
properties, (iii) do not and will not result in or require the creation of any
Lien, (other than pursuant to any such Loan Document) upon or with respect to
any of its properties, and (iv) do not and will not result in any suspension,
revocation, impairment, forfeiture or nonrenewal of any permit, license,
authorization or approval applicable to its operations or any of its properties
except where such suspension, revocation, impairment, forfeiture or nonrenewal
is not reasonably likely to have a Material Adverse Effect.
(c) Governmental Approvals. No authorization or approval or
other action by, and no notice to or filing with, any Governmental Authority or
other regulatory body is required in connection with the due execution, delivery
and performance by each Loan Party of any Loan Document to which it is or will
be a party.
(d) Enforceability of Loan Documents. This Agreement is, and
each other Loan Document to which each Loan Party is or will be a party, when
delivered hereunder, will be, a legal, valid and binding obligation of such Loan
Party, enforceable against such Loan Party in accordance with its terms except
to the extent that the enforceability thereof may be limited by any applicable
bankruptcy, insolvency, reorganization, moratorium or similar laws from time to
time in effect affecting generally, the enforcement of creditors' rights and
remedies and by general principles of equity.
(e) Inventory Locations; Places of Business; Chief Executive
Office. There is no location at which any Borrower has any Inventory (except for
Inventory in transit)
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other than (i) those locations listed on Part A of Schedule 6.01(e) hereto and
(ii) any other locations approved in writing by the Agent pursuant to the
definition of "Eligible Inventory". Part B of Schedule 6.01(e) hereto contains a
true, correct and complete list, as of the Effective Date, of the legal names
and addresses of each warehouse at which Inventory of any Borrower is stored.
None of the receipts received by a Borrower from any warehouse states that the
goods covered thereby are to be delivered to bearer or to the order of a named
Person or to a named Person and such named Person's assigns. Part C of Schedule
6.01(e) sets forth a complete and accurate list as of the date hereof of (A)
each place of business of each Loan Party; and (B) the chief executive office of
each Loan Party. Part D of Schedule 6.01(e) sets forth a complete and accurate
description and list as of the date hereof of the location, by state and street
address, of all real property owned and leased by the Company and its
Subsidiaries.
(f) Subsidiaries. (i) Schedule 6.01(f) hereto is a complete
and correct description of the name, jurisdiction of incorporation and ownership
of the outstanding Capital Stock of each Subsidiary of the Company in existence
on the date hereof. Except as provided in Schedule 6.01(f) hereto, all shares of
such stock owned by the Company or one or more of its Subsidiaries, as indicated
in such Schedule, are owned free and clear of all Liens other than Liens created
by the Loan Documents.
(ii) Each Inactive Subsidiary conducts no business and does
not have any assets or liabilities except that (A) Unishops of Clarkin's, Inc.
owns two vacant parcels of real property in Akron, Ohio and Youngstown, Ohio and
has the customary liabilities associated with owning real property, (B)
Sport-U-Pex International, Inc. engages in certain production and quality
control activities, (C) Davco Accessories, Inc. is the tenant on a lease for the
premises located at 350 Fifth Avenue, New York, New York and has the customary
liability associated with being a tenant, and (D) The Marcade Group Realty Corp.
owns the Capital Stock of the Subsidiary Retailers and ECI Jeffersonville, Inc.
(g) Litigation. Except as set forth on Schedule 6.01(g)
hereto, on the Effective Date there is no pending or, to the best of the Loan
Parties' knowledge, threatened action, suit or proceeding affecting the Company
or any of its Subsidiaries before any court or other Governmental Authority or
any arbitrator. There is no pending or, to the best of the Loan Parties'
knowledge, threatened action, suit or proceeding affecting the Company or any of
its Subsidiaries before any court or other Governmental Authority or any
arbitrator which may have a Material Adverse Effect.
(h) Financial Condition. (i) The Financial Statements, copies
of which have been delivered to the Lenders, fairly present the financial
condition of the Company and its Subsidiaries as at the respective dates thereof
and the results of operations of the Company and its Subsidiaries for the fiscal
periods ended on such respective dates, all in accordance with GAAP, and since
December 31, 1998 and after giving effect to the financing contemplated by this
Agreement and the transactions described in Section 5.01(h) there has been no
Material Adverse Effect.
(ii) The Company has heretofore furnished to the Agent and the
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Lenders projected balance sheets, income statements and statements of cash flow
prepared on a monthly basis for the period from January 1, 1999 to December 31,
1999 and such projections were believed at the time furnished to be reasonable,
have been prepared on a reasonable basis and in good faith by the Company, and
have been based on assumptions believed by the Company to be reasonable at the
time made and upon the best information then reasonably available to the
Company.
(iii) The Company has heretofore furnished to the Agent and
the Lenders a pro forma consolidated balance sheet of the Company and its
Consolidated Subsidiaries as of December 31, 1998. Such pro forma consolidated
balance sheet is unaudited and is adjusted to give effect to the transactions
described in Section 5.01(h). Such pro forma consolidated balance sheet
(including any related schedules and notes) has been prepared on the basis of
the statements and assumptions set forth therein and the projections and the
assumptions expressed therein were reasonably based on the information available
to the Company at the time so furnished.
(i) Compliance with Law, Etc. Neither the Company nor any
other Loan Party is in violation of its charter or by-laws, any law or any
material term of any agreement or instrument binding on or otherwise affecting
it or any of its properties, except where such violation of an instrument or
agreement is not reasonably likely to result in a Material Adverse Effect.
(j) ERISA. Schedule 6.01(j) hereto sets forth each Employee
Plan and Multiemployer Plan. Except as set forth on Schedule 6.01(j) hereto (i)
each Employee Plan is in substantial compliance with the applicable provisions
of ERISA and the Internal Revenue Code, (ii) no Termination Event has occurred
nor is reasonably expected to occur with respect to any Employee Plan, (iii) the
most recent annual report (Form 5500 Series) with respect to each Employee Plan,
including Schedule B (Actuarial Information) thereto, copies of which have been
filed with the Internal Revenue Service and delivered to the Agent, is complete
and correct and fairly presents the funding status of such Employee Plan, and
since the date of such report there has been no material adverse change in such
funding status, (iv) no Employee Plan had an accumulated or waived funding
deficiency or permitted decreases or has applied for an extension of any
amortization period within the meaning of Section 412 of the Internal Revenue
Code at any time during the previous 60 months, and (v) no Lien imposed under
the Internal Revenue Code or ERISA exists or is likely to arise on account of
any Employee Plan within the meaning of Section 412 of the Internal Revenue Code
at any time during the previous 60 months. Except as set forth on Schedule
6.01(j) hereto, neither the Company nor any other Loan Party nor any of their
respective ERISA Affiliates have incurred any withdrawal liability under ERISA
with respect to any Multiemployer Plan, except for such withdrawal liability
that could not have a Material Adverse Effect, and neither the Company nor any
other Loan Party is aware of any facts indicating that the Company or any other
Loan Party or any of their respective ERISA Affiliates may in the future incur
any such withdrawal liability. Except as required by Section 4980B of the
Internal Revenue Code, neither the Company nor any other Loan Party nor any of
their respective ERISA Affiliates maintains an employee welfare benefit plan (as
defined in Section 3(1) of ERISA) which provides health or welfare benefits
(through the purchase of insurance or
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otherwise) for any retired or former employee of the Company or any other Loan
Party or any of their respective ERISA Affiliates or coverage after a
participant's termination of employment. Neither the Company nor any other Loan
Party nor any of their respective ERISA Affiliates has incurred any liability or
obligation under the Worker Adjustment and Retraining Notification Act ("WARN")
or similar state law, which remains unpaid or unsatisfied, except for such
liability or obligation which could not have a Material Adverse Effect.
(k) Taxes, Etc. Except as set forth in Schedule 6.01(k)
hereto, all Federal, state and local tax returns and other reports required by
applicable law to be filed by the Company and each Loan Party have been filed,
and all taxes, assessments and other governmental charges imposed upon the
Company or any other Loan Party or any property of the Company or such other
Loan Party and which have become due and payable on or prior to the date hereof
have been paid, except to the extent contested in good faith by proper
proceedings which stay the imposition of any penalty, fine or Lien resulting
from the non-payment thereof and with respect to which adequate reserves have
been set aside for the payment thereof.
(l) Regulations T, U and X. Neither the Company nor any other
Loan Party is or will be engaged in the business of extending credit for the
purpose of purchasing or carrying margin stock (within the meaning of
Regulations T, U and X issued by the Board of Governors of the Federal Reserve
System), and no proceeds of any Loan will be used to purchase or carry any
margin stock or to extend credit to others for the purpose of purchasing or
carrying any margin stock.
(m) Nature of Business. Neither the Company nor any other Loan
Party is engaged in any business other than the importation, distribution and
sales of men's, women's and children's sportswear and outerwear, and other
businesses incidental thereto.
(n) Adverse Agreements, Etc. Neither the Company nor any other
Loan Party nor any of their respective Subsidiaries is a party to any agreement
or instrument, or subject to any charter or other corporate restriction or any
judgment, order, regulation, ruling or other requirement of a court or other
Governmental Authority or regulatory body, which has or, to the best knowledge
of the Company and the other Loan Parties, in the future is reasonably likely to
result in, a Material Adverse Effect.
(o) Holding Company and Investment Company Acts. Neither the
Company nor any other Loan Party is (i) a "holding company" or a "subsidiary
company" of a "holding company" or an "affiliate" of a "holding company", as
such terms are defined in the Public Utility Holding Company Act of 1935, as
amended, or (ii) an "investment company" or an "affiliated person" or "promoter"
of, or "principal underwriter" of or for, an "investment company", as such terms
are defined in the Investment Company Act of 1940, as amended.
(p) Permits, Etc. Each Loan Party has all material permits,
licenses, consents, authorizations and approvals required for them lawfully to
own and operate their business.
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(q) Title to Properties. Each Loan Party has good and
marketable title to all of their properties and assets, free and clear of all
Liens, and other types of preferential arrangements except such as are permitted
by Section 7.02(a) hereof.
(r) Full Disclosure. No Loan Document or schedule or exhibit
thereto and no certificate, report, statement or other document or information
furnished in writing by or on behalf of the Loan Parties to the Lenders in
connection herewith or with the consummation of the transactions contemplated
hereby, contains any material misstatement of fact or omits to state a material
fact or any fact necessary to make the statements contained herein or therein
not misleading in any material respect. There is no fact reasonably likely to
result in a Material Adverse Effect which has not been set forth in a footnote
included in the Financial Statements or a Schedule hereto.
(s) Operating Lease Obligations. The Company and the other
Loan Parties do not have any obligations as lessee for the payment of rent for
any real or personal property other than the Operating Lease Obligations set
forth in Schedule 6.01(s) hereto.
(t) Environmental Matters. (i) The operations of the Loan
Parties are in material compliance with all Environmental Laws; (ii) there has
been no Release at any of the properties owned or operated by any Loan Party or
a predecessor in interest, or at any disposal or treatment facility which
received Hazardous Materials generated by any Loan Party or any predecessor in
interest except, in each case, where the Release would not reasonably be
expected to have a Material Adverse Effect; (iii) no Environmental Actions have
been asserted against any Loan Party or any predecessor in interest nor does any
Loan Party have knowledge or notice of any threatened or pending Environmental
Action against any Loan Party or any predecessor in interest which is reasonably
likely to have a Material Adverse Effect; and (iv) no Environmental Actions have
been asserted against any facilities that may have received Hazardous Materials
generated by any Loan Party or any predecessor in interest which are reasonably
likely to result in a Material Adverse Effect.
(u) Schedules. All of the information which is required to be
scheduled to this Agreement is set forth on the Schedules attached hereto, is
correct and accurate and does not omit to state any information material
thereto.
(v) Insurance. The Loan Parties keep their properties
adequately insured and maintain (i) insurance to such extent and against such
risks, including fire, as is customary with companies in the same or similar
businesses, (ii) workmen's compensation insurance in the amount required by
applicable law, (iii) public liability insurance, which shall include product
liability insurance, in the amount customary with companies in the same or
similar business against claims for personal injury or death on properties
owned, occupied or controlled by them, and (iv) such other insurance as may be
required by law or as may be reasonably required in writing by the Agent.
Schedule 6.01(v) sets forth a summary of the insurance of the Loan Parties as
existing on the Effective Date.
(w) Use of Proceeds. The proceeds of the Loans shall be used
to
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refinance existing Indebtedness of the Borrowers, for general working capital
purposes of the Borrowers and to make intercompany loans and advances permitted
by Sections 7.02(b)(iii) and 7.02(f)(iii) and (iv) hereof. The Letters of Credit
will be used to finance the purchase by the Borrowers of Inventory and for other
general working capital purposes.
(x) Security Interests. The Security Documents create in favor
of the Agent, for the benefit of the Lenders, a legal, valid and enforceable
security interest in the Collateral. Upon the filing of the UCC-1 financing
statements described in Section 5.01(d)(vi), the recording of the Collateral
Assignment for Security (Trademarks), referred to in the Security Agreement, in
the United States Patent and Trademark Office, and the delivery to the Agent of
the Pledged Collateral (as defined in the Pledge Agreements) such security
interests in and Liens on the Collateral granted thereby shall be perfected,
first priority security interests (except as permitted by Section 7.02(a)
hereof), and no further recordings or filings are or will be required in
connection with the creation, perfection or enforcement of such security
interests and Liens, other than (i) the filing of continuation statements in
accordance with applicable law, (ii) the recording of the Collateral Assignment
for Security (Trademarks) pursuant to the Security Agreement in the United
States Patent and Trademark Office, with respect to after-acquired U.S. patent
and trademark applications and registrations, (iii) the recordation of
appropriate evidence of the security interest in the appropriate foreign
registry with respect to all foreign intellectual property, and (iv) the
registration of all U.S. copyrights and the recordation of the Collateral
Assignment for Security (Copyrights) in the United States Copyright Office.
(y) Tradenames. Schedule 6.01(y) hereto sets forth a complete
and accurate list as of the Effective Date of all tradenames used by the Company
and its Subsidiaries.
(z) Solvency. After giving effect to the transactions
contemplated or required to occur by the terms of this Agreement, each Loan
Party is, individually and together with its Subsidiaries, Solvent.
(aa) Material Contracts. Set forth on Schedule 6.01(aa) hereto
is a complete and accurate list as of the Effective Date of all Material
Contracts of the Company and its Subsidiaries, showing the parties thereto and
amendments and modifications thereto. Each such Material Contract (i) is in full
force and effect and is binding upon and enforceable against each Loan Party
that is a party thereto and, to the best of such Loan Party's knowledge, all
other parties thereto in accordance with its terms, (ii) has not been otherwise
amended or modified, and (iii) there exists no default under any Material
Contract by any Loan Party thereto or, to the Loan Parties' knowledge, any other
party thereto.
(bb) Representations and Warranties in Documents; No Default.
All representations and warranties set forth in the Loan Documents are true and
correct in all respects at the time as of which such representations were made
and on the Effective Date. No Event of Default has occurred and is continuing
and no condition exists which constitutes a Default or an Event of Default.
(cc) Location of Bank Accounts. Schedule 6.01(cc) hereto sets
forth a
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complete and accurate list as of the Effective Date of all deposit and other
accounts maintained by the Company and its Subsidiaries together with a
description thereof (i.e. the bank at which such deposit or other account is
maintained and the account number and the purpose thereof).
(dd) Year 2000 Compliance. Any reprogramming or other remedial
action required to permit the proper functioning, in and following the year
2000, of (A) the Borrowers' and the Guarantors' computer systems and (B)
equipment containing embedded microchips (including, to the knowledge of
Borrowers and Guarantors, systems and equipment supplied by others or with which
Borrowers' and the Guarantors' systems interface) and the testing of all such
systems and equipment, as so reprogrammed, will be completed by July 1, 1999.
The cost to the Borrowers and the Guarantors of such reprogramming and testing
and of the reasonably foreseeable consequences of year 2000 to the Borrowers and
the Guarantors (including, without limitation, reprogramming errors and the
failure of others' systems or equipment) is not reasonably likely to result in
an Event of Default or have a Material Adverse Effect. Except for such of the
reprogramming and other remedial action referred to in the preceding sentences
of this Section 6.01(dd) as may be necessary, the computer and management
information systems of the Borrowers and the Guarantors are and, with ordinary
course upgrading and maintenance, will continue to be, sufficient to permit the
Borrowers and the Guarantors to conduct their business without a Material
Adverse Effect.
(ee) License Agreements. Set forth on Schedule 1.01C hereto is
a complete and accurate list of all trademark license agreements to which a
Borrower is a party as licensee, showing the parties thereto and amendments and
modifications thereto. Each such License Agreement (i) is in full force and
effect and is binding upon and enforceable against each Borrower that is a party
thereto and, to the best of such Borrower's knowledge, all other parties thereto
in accordance with its terms, and (ii) has not been otherwise amended or
modified, and there exists no default under any such License Agreement by any
Borrower thereto or, to the Borrower's knowledge, any other party thereto.
ARTICLE VII
COVENANTS OF THE BORROWER
SECTION 7.01. Affirmative Covenants. So long as any principal of or
interest on the Loans or the Reimbursement Obligations or any other Letter of
Credit Obligations (whether or not due) shall remain unpaid or any Lender shall
have any Commitment hereunder, the Company and the Borrowers will unless the
Required Lenders shall otherwise consent in writing:
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(a) Reporting Requirements. Furnish to the Lenders:
(i) as soon as available and in any event within 60 days after
the end of each Fiscal Quarter of the Company, consolidated and, with respect to
the Borrowers, consolidating balance sheets, consolidated and, with respect to
the Borrowers, consolidating statements of income and retained earnings and
consolidated and, with respect to the Borrowers, consolidating statements of
cash flow of the Company and its Consolidated Subsidiaries as at the end of such
Fiscal Quarter; and for the period commencing at the end of the immediately
preceding Fiscal Year and ending with the end of such Fiscal Quarter, setting
forth in each case in comparative form the figures for the corresponding date or
period of the immediately preceding Fiscal Year, all in reasonable detail and
certified by the chief financial officer and the chief operating officer of the
Company as fairly presenting, in all material respects, the financial position
of the Company and its Consolidated Subsidiaries as of the end of such Fiscal
Quarter and the results of operations and changes in financial position of the
Company and its Consolidated Subsidiaries for such Fiscal Quarter, in accordance
with GAAP applied in a manner consistent with that of the most recent audited
financial statements furnished to the Lender, subject to year end adjustments
and the lack of footnote disclosure;
(ii) as soon as available, and in any event within 90 days
after the end of each Fiscal Year of the Company, consolidated and, with respect
to the Borrowers, consolidating balance sheets, consolidated and, with respect
to the Borrowers, consolidating statements of income and retained earnings and
consolidated and, with respect to the Borrowers, consolidating statements of
cash flow of the Company and its Consolidated Subsidiaries as at the end of such
Fiscal Year, setting forth in comparative form the corresponding figures for the
immediately preceding Fiscal Year, all in reasonable detail and prepared in
accordance with GAAP, and (in the case of the consolidated balance sheets and
statements of income, retained earnings and cash flow) accompanied by a report
and an unqualified opinion, prepared in accordance with generally accepted
auditing standards, of a "Big Five" public accounting firm or other independent
certified public accountants of recognized standing selected by the Company and
satisfactory to the Agent, together with a written statement of such accountants
(1) to the effect that, in performing their audit, nothing came to their
attention that caused them to believe that the Company failed to comply with the
terms, covenants, provisions or conditions of Sections 7.02(a) through (j), (m),
(p), (q) and (s) through (v) of this Agreement in so far as they relate to
accounting matters and (2) if such accountants shall have obtained any knowledge
of non-compliance with the terms, covenants, provisions or conditions of
Sections 7.02(a) through (j), (m), (p), (q), (s), (t) and (v), describing the
nature thereof;
(iii) as soon as available and in any event within 45 days of
the end of each Fiscal Month commencing in January 2000, an internally prepared
consolidated and, with respect to the Borrowers, consolidating balance sheets,
consolidated and, with respect to the Borrowers, consolidating statements of
income and retained earnings and consolidated and, with respect to the
Borrowers, consolidating
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statements of cash flow for such Fiscal Month of the Company and its
Consolidated Subsidiaries for such Fiscal Month and for the period from the
beginning of such Fiscal Year to the end of such Fiscal Month all in reasonable
detail and certified by the chief financial officer and the chief operating
officer of the Company as fairly presenting, in all material respects, the
financial position of the Company and its Consolidated Subsidiaries as of the
end of such Fiscal Month and the results of operations and changes in financial
position of the Company and its Consolidated Subsidiaries for such Fiscal Month,
in accordance with GAAP applied in a manner consistent with that of the most
recent audited financial statements furnished to the Lender, subject to year end
adjustments and lack of footnote disclosure;
(iv) simultaneously with the delivery of the financial
statements required by clauses (i), (ii) and (iii) of this Section 7.01(a), a
certificate of the chief financial officer and the chief operating officer of
the Company, stating (a) that such officer has reviewed the provisions of this
Agreement and the other Loan Documents and has made or caused to be made under
his supervision a review of the condition and operations of the Company and its
Subsidiaries during the period covered by such financial statements with a view
to determining whether the Company and its Subsidiaries were in compliance with
all of the provisions of such Loan Documents at the times such compliance is
required by the Loan Documents, and that such review has not disclosed, and such
officer has no knowledge of, the existence during such period of an Event of
Default or Default or, if an Event of Default or such Default existed,
describing the nature and period of existence thereof and the action which the
Company and its Subsidiaries propose to take or took with respect thereto and
(b) a schedule showing the calculations specified in Section 7.02(p) of this
Agreement;
(v) (A) within 2 Business Days after the end of each two-week
period, a report, current as of the close of business on the last Business Day
of such two-week period, containing an internal breakdown of each Borrower's
Inventory, appropriately completed with information reasonably satisfactory to
the Agent, subject to the month-end adjustments and current as of the close of
business on the last day of such two week period immediately prior to such date,
(B) within 15 days after the end of each month, a schedule, in form and
substance reasonably satisfactory to the Agent, current as of the close of
business on the last day of such month, certified by the chief financial officer
and the chief operating officer of each Borrower, containing a breakdown of each
Borrower's Inventory by amount and valued at cost (which shall include dollar
valuation by location) and warehouse and production facility location,
appropriately completed with information reasonably satisfactory to the Agent,
incorporating all appropriate month-end adjustments and current as of the close
of business on the last day of such month immediately prior to such date, and
(C) within 2 Business Days after the end of each two-week period, a Borrowing
Base Certificate, current as of the close of business on the Friday of the
immediately preceding week, setting forth the calculation of the Borrowing Base
and Availability for the Borrowers;
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(vi) (x) on or before November 1 of each calendar year,
financial projections, in form and substance reasonably satisfactory to the
Agent, for the succeeding calendar year for the Company and its Subsidiaries and
(y) on or before June 1, 1999 and thereafter on or before June 1 of each
calendar year if a material change has occurred in the projections delivered on
or before the preceding November 1, or any of the assumptions contained therein,
updated financial projections, in form and substance reasonably satisfactory to
the Agent, for the remaining six month period in such year for the Company and
its Subsidiaries, all such financial projections to be reasonable, to be
prepared on a reasonable basis and in good faith, and to be based on assumptions
believed by the Company to be reasonable at the time made and from the best
information then available to the Company;
(vii) promptly upon their becoming available, a copy of (i)
all consultants' reports, investment bankers' reports (other than reports
prepared by such consultants or investment banks in connection with the proposed
acquisition of any Person), accountants' management letters, business plans and
similar documents, (ii) all reports, financial statements or other information
delivered by the Company or any other Loan Party to its shareholders, (iii) all
reports, proxy statements, financial statements and other information generally
distributed by the Company or any other Loan Party to its creditors or the
financial community in general (other than the customary financial reports given
by the Loan Parties to the licensor under any License Agreement), and (iv) any
audit or other reports submitted to the Company or any other Loan Party by
independent accountants in connection with any annual, interim or special audit;
(viii) promptly after submission to any Government Authority
all documents and information furnished to such Government Authority in
connection with any investigation of any Borrower or Guarantor other than
routine inquiries by such Governmental Authority;
(ix) as soon as possible, and in any event within five days
after the occurrence of an Event of Default or Default, or an event having a
Material Adverse Effect, the written statement of the chief operating officer
and the chief financial officer of each Borrower, setting forth the details of
such Event of Default, Default or event and the action which the Company and its
Subsidiaries propose to take with respect thereto;
(x) (A) as soon as possible and in any event (1) within 30
days after the Borrowers, the Guarantors or any of their respective ERISA
Affiliates knows or has reason to know that any Termination Event described in
clause (i) of the definition of Termination Event with respect to any Employee
Plan has occurred, (2) within 10 days after the Borrowers, the Guarantors or any
of their respective ERISA Affiliates knows or has reason to know that any other
Termination Event with respect to any Employee Plan has occurred, (3) within 10
days after any of the Borrowers, any of the Guarantors or any of their
respective ERISA Affiliates knows or has reason to know that an accumulated
funding deficiency has been incurred or an application has been made to the
Secretary of the Treasury for a waiver or modification of the minimum funding
standard (including installment payments) or an extension of any amortization
period under Section 412 of
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the Internal Revenue Code with respect to an Employee Plan, a statement of the
chief financial officer and the chief operating officer of the Company setting
forth the details of such occurrence and the action, if any, which the
Borrowers, the Guarantors or any of their respective ERISA Affiliates proposes
to take with respect thereto, or (4) within ten (10) days after any of the
Borrowers, any of the Guarantors or any of their respective ERISA Affiliates
knows or has reason to know that a required installment under Section 412 of the
Internal Revenue Code will not or has not been made to any Employee Plan by its
due date, a statement of the chief financial officer and the chief operating
officer of the Company setting forth the details of such occurrence and the
action, if any, which the Borrowers, the Guarantors, or any of their respective
ERISA Affiliates proposes to take with respect thereto, (B) promptly and in any
event within two Business Days after receipt thereof by the Borrowers, the
Guarantors or any of their respective ERISA Affiliates from the Pension Benefit
Guaranty Corporation, copies of the notice received by the Borrowers, the
Guarantors or any of their respective ERISA Affiliates of the Pension Benefit
Guaranty Corporation's intention to terminate any Plan or to have a trustee
appointed to administer any Plan, (C) promptly and in any event within 30 days
after the filing thereof with the Internal Revenue Service, copies of each
Schedule B (Actuarial Information) to the annual report (Form 5500 Series) with
respect to each Employee Plan and Multiemployer Plan, (D) promptly and in any
event within ten days after receipt thereof by the Borrowers, the Guarantors or
any of their respective ERISA Affiliates from a sponsor of a Multiemployer Plan
or from the Pension Benefit Guaranty Corporation, a copy of the notice received
by the Borrowers, the Guarantors or any of their respective ERISA Affiliates
concerning the imposition or amount of withdrawal liability under Section 4202
of ERISA or indicating that such Multiemployer Plan may enter reorganization
status under Section 4241 of ERISA, and (E) promptly and in any event within 10
Business Days after any of the Borrowers, any of the Guarantors or any of their
respective ERISA Affiliates sends notice of a plant closing or mass layoff (as
defined in WARN) to employees, copies of each such notice sent by the Borrowers,
the Guarantors or any of their respective ERISA Affiliates;
(xi) as soon as available and in any event (A) within 5 days
after receipt or delivery thereof, copies of any material notices that the
Borrowers receive from or send to any of their licensors in connection with the
License Agreements or that the Company receives or sends in respect of the BONY
Indebtedness, and (B) within 2 days prior to the effective date thereof, copies
of any new trademark license agreements entered into by any Subsidiary of the
Company or any material amendments, modifications, waivers or other changes to
any of the License Agreements or any BONY Loan Documents;
(xii) promptly after the commencement thereof but in any event
not later than five days after service of process with respect thereto on, or
the obtaining of knowledge thereof by, the Company or any other Loan Party,
notice of each action, suit or proceeding before any court or other Governmental
Authority or other regulatory body or any arbitrator which may have a Material
Adverse Effect;
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(xiii) as soon as available and in any event within ten (10)
days after the occurrence of any termination of any employee of the Loan Parties
that has a severance agreement with the Loan Parties and is entitled to a
severance payment from the Loan Parties, a report, in form and substance
reasonably satisfactory to the Agent, describing in reasonable detail such
severance payments including the dates and amounts of such payments and the
identity of the employee receiving such payments;
(xiv) as soon as possible and in any event on or prior to
March 26, 1999, a business plan for Stetson in form and substance reasonably
acceptable to the Required Lenders; and
(xv) promptly upon request, such other information concerning
the condition or operations, financial or otherwise, of the Company or any other
Loan Party that the Agent from time to time may reasonably request.
(b) Guaranties, Etc. Cause each of their respective
Subsidiaries not existing on the Effective Date to execute and deliver to the
Agent promptly, and in any event within 15 days after the formation or
acquisition thereof (i) a guaranty, substantially in the form of Exhibit B-1
hereto, guaranteeing the Obligations, and (ii) a security agreement,
substantially in the form of Exhibit C-2 hereto, securing such guaranty, and, in
connection with each such delivery, cause to be delivered to the Agent, in form
and substance satisfactory to the Agent, a favorable written opinion of counsel
reasonably satisfactory to the Agent as to such matters relating thereto as the
Agent may reasonably request, together with such other agreements, instruments,
approvals or other documents as the Agent may reasonably request. Within 15 days
after the earlier of (i) such date on which the BONY Indebtedness is paid in
full, and (ii) such date on which BONY releases its lien and security interest
in the issued and outstanding capital stock of ECI, cause the Company to deliver
a pledge agreement to the Agent, substantially in the form of Exhibit D hereto,
securing the obligations of the Company hereunder, together with original stock
certificates representing all of the outstanding common stock of ECI, and in
connection with such delivery cause to be delivered to the Agent, in form and
substance satisfactory to the Agent, a written favorable opinion of counsel
reasonably satisfactory to the Agent as to such matters relating thereto as the
Agent may reasonably request, together with such agreements, instruments,
approvals or other documents as the Agent may reasonably request. In addition,
within 15 days after the formation or acquisition of any Subsidiary not existing
on the Effective Date, the parent of such Subsidiary shall pledge all of the
Capital Stock of such Subsidiary to the Agent pursuant to the terms of the
Pledge Agreement to which such parent is a party or pursuant to a pledge
agreement substantially in the form of Exhibit D hereto.
(c) Compliance with Laws, Etc. Comply, and cause each of their
respective Subsidiaries to comply, in all material respects with all applicable
laws, rules, regulations and orders (including, without limitation, ERISA and
Environmental Laws), such compliance to include, without limitation, (i) paying
before the same become delinquent all taxes, assessments and governmental
charges or levies imposed upon it or upon its income or profits or upon any of
its properties, (ii) paying before the same become delinquent all required
contributions to any Employee Plan or Multiemployee Plan, and (iii) paying all
lawful claims
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which if unpaid might become a Lien upon any of its properties, except to the
extent contested in good faith by proper proceedings which stay the imposition
of any penalty, fine or Lien resulting from the non-payment thereof and with
respect to which adequate reserves have been set aside for the payment thereof.
(d) Preservation of Existence, Etc. Maintain and preserve, and
cause each of their Subsidiaries to maintain and preserve, its existence, rights
and privileges, and become or remain duly qualified and in good standing in each
jurisdiction in which the character of the properties owned or leased by them or
in which the transaction of their business makes such qualification necessary
except (i) where such failure to qualify is not reasonably likely to result in a
Material Adverse Effect or (ii) to the extent permitted under Section 7.02(d)
hereof.
(e) Keeping of Records and Books of Account. Keep, and cause
each of their Subsidiaries to keep, adequate records and books of account, with
complete entries made in accordance with GAAP.
(f) Inspection Rights. Permit, and cause each of their
Subsidiaries to permit, the Agent, or any agents or representatives thereof at
any time and from time to time upon reasonable notice to the Administrative
Borrower, during normal business hours to examine and make copies of and
abstracts from their records and books of account, to visit and inspect their
properties, to conduct audits, physical counts, valuations or examinations and
to discuss their affairs, finances and accounts with any of the directors,
officers, managerial employees, independent accountants or other representatives
thereof, provided that (i) the foregoing shall be in a manner so as to not
unduly disrupt the business of the Borrowers and (ii) such notice shall not be
required if an Event of Default has occurred and is continuing.
(g) Maintenance of Properties, Etc. Except as may be permitted
by Section 7.01(d) hereof, maintain and preserve, and cause each of their
Subsidiaries to maintain and preserve, all of their properties which are
necessary or useful in the proper conduct of their business in good working
order and condition, ordinary wear and tear excepted, and comply, in all
material respects, and cause each of their Subsidiaries to comply, in all
material respects, at all times with the provisions of all leases to which each
of them is a party as lessee or under which each of them occupies property, so
as to prevent any loss or forfeiture thereof or thereunder.
(h) Maintenance of Insurance. Maintain for the Company and its
Subsidiaries, with responsible and reputable insurance companies or associations
insurance (including, without limitation, comprehensive general liability and
property and casualty insurance) with respect to their properties and business,
in such amounts and covering such risks, as is required by any Governmental
Authority or other regulatory body having jurisdiction with respect thereto and
as is carried generally in accordance with sound business practice by companies
in similar businesses similarly situated.
(i) Environmental. Cause each Loan Party to (i) keep any
property either owned or operated by it free of any Liens arising under any
Environmental Laws;
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(ii) comply in all material respects with Environmental Laws and shall provide
to the Agent documentation of such compliance which the Agent reasonably
requests; (iii) immediately notify the Agent of any Release of a Hazardous
Material in excess of any reportable quantity and take any Remedial Actions
required to abate said Release; and (iv) promptly provide the Agent with written
notice within ten (10) days of the receipt of any Environmental Action or notice
that an Environmental Action will be filed against either of the Borrowers.
(j) Further Assurances. Shall, and shall cause each Subsidiary
to, do, execute, acknowledge and deliver, at the sole cost and expense of the
Borrowers all such further acts, deeds, conveyances, mortgages, assignments,
estoppel certificates, financing statements, notices of assignment, transfers
and assurances as the Agent may reasonably require from time to time in order to
(i) carry out more effectively the purposes of this Agreement and the other Loan
Documents, (ii) subject to valid and perfected first priority Liens, all the
Collateral, (iii) perfect and maintain the validity, effectiveness and priority
of any of the Loan Documents and the Liens intended to be created thereby, and
(iv) better assure, convey, grant, assign, transfer and confirm unto the Agent,
the Lenders and the L/C Issuer the rights now or hereafter intended to be
granted to the Agent, the Lenders and the L/C Issuer under this Agreement, any
Loan Document or any other instrument under which the Borrowers, the Guarantors
or any of their respective Subsidiaries may be or may hereafter become bound for
carrying out the intention or facilitating the performance of the terms of the
Agreement.
(k) Key Man Life Insurance. (i) No later than sixty (60) days
after the Effective Date, furnish to the Agent a copy of the key man life
insurance policy on the life of Arnold Simon in the amount of $5,000,000, from a
responsible and reputable life insurance company, together with a collateral
assignment of such life insurance policy to the Agent for the benefit of the
Lenders, duly executed by each of the Borrowers, and acknowledged by the home
office of the insurance company, in form and substance reasonably satisfactory
to the Agent.
(ii) Maintain at all times on and after the date which is
sixty (60) days after the Effective Date, key man or other life insurance
policies on the life of Arnold Simon from a responsible and reputable life
insurance company in an amount of not less than $5,000,000, together with an
assignment of such life insurance policies to the Agent for the benefit of the
Lenders.
(l) Real Estate. If at any time any Loan Party or any of its
Subsidiaries acquires any fee interest in real property, such Loan Party shall
promptly execute, deliver and record, or cause such Subsidiary to execute,
deliver and record, a first priority mortgage and/or deed of trust in favor of
the Agent covering such real property interest, in form and substance reasonably
satisfactory to the Agent, and provide the Agent with a title insurance policy
covering such real property interest in an amount reasonably acceptable to the
Agent, a current ALTA survey thereof, a surveyor's certificate, a satisfactory
legal description of such property and an opinion from special counsel to such
Loan Party, each in form and substance reasonably satisfactory to the Agent and
as to such matters as the Agent may reasonably request together with a report of
title on forms of and issued by a title company reasonably satisfactory to the
Agent ("Title Company"), subject to such exceptions as are reasonably
satisfactory to the
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Agent, and, to the extent necessary under applicable law, Uniform Commercial
Code financing statements covering fixtures, in each case appropriately
completed and duly executed, for filing in the appropriate county land office
and evidence that such Loan Party shall have paid to the Title Companies all
expenses of the Title Companies in connection with the issuance of such reports
and in addition shall have paid to the Title Companies an amount equal to the
recording and stamp taxes (including mortgage recording taxes), if any, payable
in connection with recording such mortgages in the appropriate county land
offices, each in form and substance reasonably satisfactory to the Agent. In
addition, each such Loan Party delivering a mortgage and/or deed of trust
pursuant to this paragraph (l) shall, within 30 days after a request by the
Agent, cause to be performed, at the Borrowers' cost and expense, a Phase I
environmental audit (and, if reasonably requested by the Agent based upon the
results of such Phase I Audit, a Phase II Audit), in form and substance and by
an independent firm reasonably satisfactory to the Agent.
(m) Change in Collateral; Collateral Records. Give the Agent
not less than thirty days' prior written notice of any change in the location of
any Collateral, other than to locations, that as of the date hereof are known to
the Agent and at which the Agent has filed financing statements and otherwise
fully perfected its Liens thereon. The Borrowers shall also advise the Agent
promptly, in sufficient detail, of any material adverse change relating to the
type, quantity or quality of the Collateral or the Lien granted thereon. The
Borrowers agree to execute and deliver to the Agent for the benefit of the
Lenders from time to time, solely for the Agent's convenience in maintaining a
record of Collateral, such written statements and schedules as the Agent may
reasonably require, designating, identifying or describing the Collateral. The
Borrowers' failure, however, to promptly give the Agent such statements or
schedules shall not effect, diminish or modify or otherwise limit the Agent's
security interest in the Collateral.
(n) Borrowing Base. Maintain all Revolving Credit Loans and
Letter of Credit Obligations in compliance with the then current Borrowing Base.
(o) Inventory and Intellectual Property Appraisals. Furnish to
the Lenders within one hundred twenty (120) days of the Effective Date,
appraisals, by an appraiser satisfactory to the Agent, at the sole cost and
expense of the Borrowers, satisfactory to the Agent, of all inventory and
trademarks of the Borrowers, such appraisals to be performed on an "orderly
liquidation value" basis.
(p) Landlord and Licensor Waivers. Use its best efforts to
furnish to the Agent as soon as possible and in any event (i) prior to June 1,
1999, (A) a landlord waiver in form and substance satisfactory to the Agent from
each of the Borrowers' and the Guarantors' landlords, and (B) a warehouse access
agreement in form and substance satisfactory to the Agent with respect to ECI's
warehouse located in Secaucus, New Jersey, and (ii) within 60 days of the
Effective Date, a licensor waiver letter, in form and substance satisfactory to
the Agent, for each License Agreement, executed by each licensor.
(q) Year 2000 Compatibility. Each of the Borrowers and the
Guarantors shall take all reasonable action necessary to assure that the
Borrowers' and the
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Guarantors' computer-based systems are to operate and effectively process data
including data fields requiring references to dates on and after January 1,
2000. At the request of the Agent, the Borrowers and the Guarantors shall
provide to the Agent written assurances and other evidence acceptable to the
Agent and the Lenders of the Borrowers' and the Guarantors' compliance with this
Section 7.01(q).
SECTION 7.02. Negative Covenants. So long as any principal of or
interest on the Loans or any Letter of Credit Obligations (whether or not due)
shall remain unpaid or any Lender shall have any Commitment hereunder, the
Company and the Borrowers will not without the prior written consent of the
Required Lenders:
(a) Liens, Etc. Create or suffer to exist, or permit any of
their Subsidiaries to create or suffer to exist, any Lien upon or with respect
to any of their properties, rights or other assets, whether now owned or
hereafter acquired, or assign or otherwise transfer, or permit any of its
Subsidiaries to assign or otherwise transfer, any right to receive income, other
than:
(i) Liens created pursuant to the Loan Documents;
(ii) Liens existing on the date hereof, as set forth in
Schedule 7.02(a)(ii) hereto, and the renewal and replacement of such Liens,
provided that any such renewal or replacement Lien shall be limited to the
property or assets covered by the Lien renewed or replaced and the Indebtedness
secured by any such renewal or replacement Lien shall be in an amount not
greater than the amount of Indebtedness secured by the Lien renewed or replaced;
(iii) Liens for taxes, assessments or governmental charges or
levies to the extent that the payment thereof shall not be required by Section
7.01(c) hereof;
(iv) Liens created by operation of law (other than Liens
created under ERISA or Environmental Laws), such as materialmen's liens,
mechanics' liens and other similar Liens, arising in the ordinary course of
business and securing claims the payment of which shall not be required by
Section 7.01(c) hereof;
(v) deposits, pledges or Liens (other than Liens arising under
ERISA or the Internal Revenue Code) securing (A) obligations incurred in respect
of workers' compensation, unemployment insurance or other forms of governmental
insurance or benefits, (B) the performance of bids, tenders, leases, contracts
(other than for the payment of money) and statutory obligations, or (C)
obligations on surety or appeal bonds, but only to the extent such deposits,
pledges or Liens are incurred or otherwise arise in the ordinary course of
business and secure obligations which are not past due;
(vi) easements, rights-of-way, zoning and similar restrictions
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and other similar charges and encumbrances on the use of real property and minor
irregularities in the title thereto which do not (A) secure obligations for the
payment of money or (B) materially impair the value of such property or
materially impair the use thereof by the Borrowers, the Guarantors or any of
their Subsidiaries in the normal conduct of such Person's business;
(vii) Liens created under the Factoring Agreements;
(viii) to the extent permitted by Section 7.02(g), purchase
money liens on or purchase money security interests in equipment acquired or
held in the ordinary course of business of the Borrowers, the Guarantors and
their Subsidiaries securing Indebtedness not exceeding in any Fiscal Year of the
Company the aggregate principal amount of $3,000,000 for the Borrowers, the
Guarantors and their Subsidiaries.
(b) Indebtedness. Create, incur or suffer to exist, or permit
any of their Subsidiaries to create, incur or suffer to exist, any Indebtedness,
other than:
(i) Indebtedness created hereunder or under the Notes or any
Letter of Credit;
(ii) Indebtedness existing on the date hereof, as set forth in
Schedule 7.02(b)(ii) hereto, and any extensions of maturity, refinancing or
modification of the terms thereof, provided that such extension, refinancing or
modification (A) is pursuant to terms that are not less favorable to the
Borrowers or the Guarantors than the terms of the Indebtedness being extended,
refinanced or modified, (B) after giving effect to the extension, refinancing or
modification, such Indebtedness is not greater than the amount of the
Indebtedness outstanding immediately prior to such extension, refinancing or
modification, and (C) the extension, refinancing or modification does not change
the Persons liable for such Indebtedness;
(iii) intercompany Indebtedness permitted by (A) Section
7.02(f)(iii) owing to any Borrower by the other Borrower provided that (x) the
repayment of such Indebtedness shall be subordinated to the payment of the
Obligations pursuant to the terms of and evidenced by one or more promissory
notes substantially in the form of Exhibit K hereto, and (y) such notes shall be
pledged to the Agent for the benefit of the Lenders and (B) Section 7.02(f)(v)
owing to any Borrower by the Company;
(iv) Indebtedness permitted by subsection (c) of this Section
7.02;
(v) Indebtedness secured by Liens or security interests
permitted by clause (viii) of section (a) of this Section 7.02 and any extension
of maturity, refinancing or other modification of the terms thereof, provided,
however, that such extension, refinancing or modification (A) is pursuant to
terms that are not less favorable to the Loan Parties than the terms of the
Indebtedness being extended,
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refinanced or modified, (B) after giving effect to the extension, refinancing or
modification of such Indebtedness, the amount of such Indebtedness outstanding
is not greater than the amount of such Indebtedness outstanding immediately
prior to such extension, refinancing or modification and (C) the extension,
refinancing or modification does not change the Persons liable for such
Indebtedness;
(vi) Indebtedness under Hedging Agreements;
(vii) Indebtedness under Capitalized Leases permitted by
Section 7.02(g);
(viii) unsecured Indebtedness of the Company, the Net Proceeds
of which are applied to prepay the Revolving Credit Loans pursuant to Section
2.07(e) of this Agreement to the extent required to be so prepaid or used to
prepay, purchase, redeem, retire, defease or otherwise acquire the Borrower's
Indebtedness in accordance with Section 7.02(t)(ii) of this Agreement; and
(ix) unsecured Indebtedness of a Loan Party to the City of New
Bedford in an aggregate principal amount of up to $500,000 pursuant to terms
acceptable to the Required Lenders.
(c) Guaranties, Etc. Assume, guarantee, indorse or otherwise
become directly or contingently liable (including, without limitation, liable by
way of agreement, contingent or otherwise, to purchase, to provide funds for
payment, to supply funds to or otherwise invest in the debtor or otherwise to
assure the creditor against loss), in connection with any Indebtedness of any
other Person or permit any of their Subsidiaries to do so, other than:
(i) guaranties in favor of the Agent and the Lenders;
(ii) guaranties by indorsement of negotiable instruments for
deposit or collection in the ordinary course of business;
(iii) guaranties existing on the date hereof, as set forth in
Schedule 7.02(c)(iii) hereto but not any renewal or other modification thereof,
provided that if the Indebtedness guaranteed by such guaranty may be refinanced
pursuant to the terms of this Agreement, such guaranty may be renewed; and
(iv) guaranties for the benefit of and advances in favor of
suppliers of the Loan Parties incurred in the ordinary course of the Loan
Parties business, in an aggregate amount not to exceed $1,000,000 at any one
time outstanding.
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(d) Merger, Consolidation, Sale of Assets, Etc.
(i) Merge or consolidate with any Person, or permit any of
their Subsidiaries to merge or consolidate with, any Person; provided, however,
that the Borrowers may merge and any Loan Party (other than the Borrowers) may
be merged into a Borrower or a Guarantor or another such Subsidiary, or may
consolidate with another such Subsidiary, so long as (A) no other provision of
this Agreement would be violated thereby, (B) the Company gives the Agent at
least 60 days' prior written notice of such merger or consolidation and (C) no
Default or Event of Default shall have occurred and be continuing either before
or after giving effect to such transactions.
(ii) Sell, assign, lease or otherwise transfer or dispose of,
or permit any of its Subsidiaries to sell, assign, lease or otherwise transfer
or dispose of, whether in one transaction or in a series of related
transactions, any of its properties, rights or other assets whether now owned or
hereafter acquired to any Person, provided that subject to the terms of Section
2.07 hereof, (A) the Borrowers may sell Inventory in the ordinary course of
business, (B) the Company and its Subsidiaries may dispose of obsolete or
worn-out property in the ordinary course of business, (C) the Loan Parties may
sell or otherwise dispose of assets, other than Inventory, for fair market
value, provided that the aggregate Net Proceeds of such dispositions do not
exceed $200,000, (D) the Borrowers may sell Accounts Receivable to the Factor
pursuant to the Factoring Agreements, and (E) the Borrowers may enter into
trademark licensing agreements as a licensor, provided, that such trademark
licensing agreements are reasonably satisfactory to the Agent.
(e) Change in Nature of Business. Make, or permit any of their
Subsidiaries to make, any material change in the nature of its business as
carried on at the date hereof.
(f) Investments, Etc. Make, or permit any of its Subsidiaries
to make, any loan or advance to any Person or purchase, hold or otherwise
acquire, or permit any of its Subsidiaries to purchase, hold or otherwise
acquire, any Capital Stock, other securities, properties, assets or obligations
of, or any interest in, any Person, other than:
(i) Permitted Investments;
(ii) investments existing on the date hereof, as set forth in
Schedule 7.02(f)(ii);
(iii) loans or advances made by any Borrower to the other
Borrower, provided that (A) the repayment of all such loans and advances is
subordinated to the payment of the Obligations pursuant to the terms of and
evidenced by one or more promissory notes substantially in the form of Exhibit K
hereto, and (B) such Notes shall be pledged to the Agent for the benefit of the
Lenders;
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(iv) loans or advances to employees in the ordinary course in
an amount not to exceed $250,000, at any time outstanding to any individual
Person and $1,000,000 in the aggregate;
(v) loans and advances by any Borrower to the Company in the
ordinary course of business (A) in amounts necessary to pay customary expenses
of the Company in the ordinary course of its business as a public holding
company (including salaries and related reasonable and customary expenses
incurred by employees of the Company), (B) in amounts necessary to pay taxes
when due and owing by the Company, (C) in amounts necessary to pay principal and
interest when due and payable by the Company to BONY pursuant to the BONY Loan
Documents; (D) in amounts necessary to pay severance payment due to Charles S.
Ramat pursuant to the Retention Agreement dated as of February , 1999 by and
among the Company, the Borrowers and Charles S. Ramat, provided, that, the
aggregate amount of such severance payment shall not exceed $2,500,000; (E) in
an additional amount which, when added to the dividends permitted to be made by
the Borrowers to the Company pursuant to Section 7.02(i)(i)(E) of this Agreement
does not exceed the aggregate amount of $1,000,000 for any Fiscal Year, and (F)
for the purchase of Capital Stock of the Company permitted by Section
7.02(i)(iv) of this Agreement, provided that, (x) the loans and advances
permitted to be made in this Section 7.02(f)(v) and the dividends permitted to
be made in Section 7.02(i)(i) of this Agreement are intended to permit payments
solely for the uses described in such Sections without duplication of payments
for any such uses and (y) at the election of the Agent which the Agent may and,
upon the direction of the Required Lenders, shall make by notice to the Company,
no such loans or advances shall be made if an Event of Default shall have
occurred and be continuing or would result from the making of any such Loan or
advance or, in the case of clause (F) above, if immediately before or after
giving effect to any such loan or advance, the Loans and Letter of Credit
Obligations exceed the Borrowing Base Before Overadvance Amount;
(vi) investments after the date of this Agreement in
Subsidiaries not existing on the Effective Date, provided that (A) each such
Subsidiary complies with the requirements of Section 7.01(b) of this Agreement,
and (B) the Required Lenders consent in writing to such investment; and
(vii) guaranties for the benefit of and advances in favor of
suppliers of the Loan Parties incurred in the ordinary course of the Loan
Parties business, in an aggregate amount not to exceed $1,000,000 at any one
time outstanding.
(g) Lease Obligations. Create, incur or suffer to exist, or
permit any of their Subsidiaries to create, incur or suffer to exist, any
obligations as lessee (i) for the payment of rent for any real or personal
property in connection with any sale and leaseback transaction, or (ii) for the
payment of rent for any real or personal property under leases or agreements to
lease other than (A) obligations under Capitalized Leases (other than the
existing Capitalized Leases set forth on Schedule 7.02(g) hereto) which would
not cause the aggregate amount of all obligations under Capitalized Leases
entered into after the Effective Date owing by the Loan Parties in any Fiscal
Year to exceed the amounts set forth in subsection (h) of this Section 7.02,
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and (B) Operating Lease Obligations which would not cause the aggregate amount
of all Operating Lease Obligations (other than pursuant to Operating Leases set
forth on Schedule 7.02(g) hereto) owing by the Loan Parties in any Fiscal Year
to exceed $2,000,000 or such greater amount as shall be approved by the Required
Lenders.
(h) Capital Expenditures. Make or be committed to make, or
permit any of its Subsidiaries to make or be committed to make, any expenditure
(by purchase or Capitalized Lease) for fixed or capital assets other than
expenditures (including obligations under Capitalized Leases) which would not
cause the aggregate amount of all such expenditures to exceed $3,000,000 for any
Fiscal Year, provided that for any Fiscal Year an amount equal to the carryover
amount for such Fiscal Year may be carried over to the next succeeding Fiscal
Year (but no further succeeding fiscal year). As used herein, "carryover amount"
means for any Fiscal Year the excess of the amount of Capital Expenditures
permitted for such Fiscal Year as set forth above over the amount of Capital
Expenditures actually made during such Fiscal Year. For the purpose of this
Section, the purchase price of equipment which is purchased with insurance
proceeds or condemnation awards shall be considered expenditures for fixed or
capital assets only to the extent of the gross purchase price less the amount of
such insurance proceeds or condemnation awards.
(i) Dividends, Prepayments, Etc. Declare or pay any dividends,
purchase or otherwise acquire for value any of its Capital Stock now or
hereafter outstanding, return any capital to its stockholders as such, or make
any other payment or distribution of assets to its stockholders as such, or
permit any of its Subsidiaries to do any of the foregoing or to purchase or
otherwise acquire for value any stock of any Loan Party or make any payment or
prepayment of principal of, premium, if any, or interest on, or redeem, defease
or otherwise retire, any Indebtedness of any Loan Party (other than Indebtedness
under the Loan Documents) before its scheduled due date; provided, however, that
(i) the Borrowers may pay dividends to the Company (A) in amounts necessary to
pay customary expenses of the Company in the ordinary course of its business as
a public holding company (including salaries and related reasonable and
customary expenses incurred by employees of the Company), (B) in amounts
necessary to pay taxes when due and owing by the Company, (C) in amounts
necessary to pay principal and interest when due and payable by the Company to
BONY pursuant to the BONY Loan Documents, (D) in amounts necessary to pay
severance payment due to Charles S. Ramat pursuant to the Retention Agreement
dated as of February 1999 by and among the Company, the Borrowers and Charles S.
Ramat, provided, that, the aggregate amount of such severance payment shall not
exceed $2,500,000; (E) in an additional amount which, when added to the loans
and advances permitted to be made by the Borrowers to the Company pursuant to
Section 7.02(f)(v) of this Agreement, does not exceed the aggregate amount of
$1,000,000 for any Fiscal Year, and (F) in amounts necessary to permit the
Company to make the repurchases of its shares of Capital Stock to the extent
permitted by clause (iv) below, (ii) any Subsidiaries of the Borrowers may pay
dividends to the Borrowers, (iii) the Company may pay dividends in the form of
common Capital Stock, and (iv) the Company may repurchase shares of its Capital
Stock, provided that the aggregate consideration paid for all such purchases
does not exceed $1,000,000 in any Fiscal Year, provided, that, (x) the dividends
permitted to be made in clause (i) of this Section 7.02(i) and the loans and
advances permitted to be made in Section 7.02(f)(v)
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of this Agreement are intended to permit payments solely for the uses described
in such Sections without duplication of payments for any such uses and (y) at
the election of the Agent which the Agent may and, upon the direction of the
Required Lenders, shall make by notice to the Company, no such payment shall be
made if an Event of Default shall have occurred and be continuing or would
result from the making of any such payment or, in the case of clause (iv) above,
if either immediately before or after giving effect to any such payment the
Loans and Letter of Credit Obligations exceed the Borrowing Base Before
Overadvance Amount.
(j) Sale of Notes, Etc. Sell, discount or otherwise dispose of
notes, Accounts Receivable (other than sales of Accounts Receivable to the
Factor pursuant to the Factoring Agreements) or other obligations owing to a
Loan Party or permit any of their Subsidiaries to do so.
(k) Compromise of Receivable. Compromise or adjust any of the
Accounts Receivable (or extend the time for payment thereof) or grant any
discounts, allowance or credits thereon or permit any of their Subsidiaries to
do so, in each case other than as permitted by the Factoring Agreements and
Section 8.01(a) of this Agreement.
(l) Federal Reserve Regulations. Permit any Loan or the
proceeds of any Loan under this Agreement to be used for any purpose which
violates or is inconsistent with the provisions of Regulations T, U or X of the
Board of Governors of the Federal Reserve System.
(m) Transactions with Affiliates. Except as set forth in
Schedule 7.02(m), enter into or be a party to, or permit any Subsidiary to enter
into or be a party to any transaction with any Affiliate of the Company except
as otherwise expressly provided in this Agreement and in the ordinary course of
business in a manner and to an extent consistent with past practice and
necessary or desirable for the prudent operation of its business for fair
consideration and on terms no less favorable to the Company or such Subsidiary
as are available from unaffiliated third parties.
(n) Environmental. The Loan Parties shall not allow the use,
handling, generation, storage, treatment, release or disposal of Hazardous
Materials at any property owned or leased by the Loan Parties except in
compliance with Environmental Laws and so long as such use, handling,
generation, storage, treatment, release or disposal of Hazardous Materials does
not result in a Material Adverse Effect.
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(o) Factoring Agreements. (i) Permit or cause any Factoring
Agreement to terminate unless each of the following conditions has been
satisfied:
(A) the Borrowers shall give the Lenders not less than thirty
(30) days prior written notice of any such termination, which notice shall
include the identity of the new factor selected by the Borrowers and a copy of
the factoring agreements and other documentation proposed to be entered into
with the new factor, provided that the Borrowers shall continue to be required
to comply with any additional notice requirements contained in any Factoring
Agreement;
(B) the Required Lenders shall have approved in writing the
identity of the new factor designated by the Borrowers and the form and
substance of the factoring agreements and other documentation proposed to be
entered into with such new factor;
(C) the Borrowers shall have satisfied in full all of their
obligations under the existing Factoring Agreements including, without
limitation, providing any indemnities required under such Factoring Agreements;
and
(D) the Agent shall have entered into an intercreditor
agreement and assignment of factoring proceeds with such new factor, which
intercreditor and assignment of factoring proceeds shall be in form and
substance reasonably satisfactory to the Required Lenders.
(ii) In the case of Stetson, sell any Inventory prior to
entering into a Factoring Agreement with the Factor.
(p) Financial Covenants.
(i) Net Worth. Permit Consolidated Net Worth of the Company
and its Consolidated Subsidiaries at the end of each Fiscal Quarter to be less
than the sum of (i) $22,000,000 and (ii) 50% of the cumulative Consolidated Net
Income, if any, of the Company and its Consolidated Subsidiaries for each Fiscal
Quarter commencing with the Fiscal Quarter ending as of June 30, 1999, provided,
that such amount shall not be reduced by the Consolidated Net Loss of the
Company and its Consolidated Subsidiaries for any Fiscal Quarter. In addition,
on March 31, 1999, the minimum Consolidated Net Worth of the Company and its
Consolidated Subsidiaries required by this Section 7.02(p)(i) shall be increased
by the portion of the Specified Cash Losses/Expenses that have not been incurred
by the Loan Parties prior to such date.
(ii) Debt Service Coverage Ratio. For each period of four (4)
consecutive Fiscal Quarters for which the last Fiscal Quarter ends on a date set
forth below, permit the ratio of (A) Consolidated EBITDA of the Company and its
Consolidated Subsidiaries for such period to (B) the sum of (x) gross interest
expense of the Company and its Consolidated Subsidiaries for such for such
period plus (y) all principal of Indebtedness for borrowed money
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of the Company and its Consolidated Subsidiaries having a scheduled payment or
due date in such period plus (z) all amounts payable by the Company and its
Consolidated Subsidiaries on Capitalized Lease Obligations having a scheduled
due date in such period to be less than the amount set forth below opposite such
date:
Debt Service
Fiscal Quarter Coverage Ratio
------------------ --------------
September 30, 1999 0.75:1.0
December 31, 1999 0.75:1.0
March 31, 2000 1.00:1.0
June 30, 2000 1.00:1.0
September 30, 2000 1.25:1.0
and thereafter
(iii) Net Loss. Incur an Adjusted Consolidated Net Loss for
any Fiscal Quarter commencing with the Fiscal Quarter ending September 30, 1999
of more than ($1,500,000).
(q) Fiscal Periods. Change the Fiscal Months, Fiscal Years and
Fiscal Quarters as set forth on Schedule 1.01B, except as otherwise agreed to in
writing by the Required Lenders.
(r) [INTENTIONALLY OMITTED.]
(s) Availability. Permit Availability, after giving effect to
all Loans and Letter of Credit Obligations outstanding, to be less than
$7,500,000 on the last day of November and December of each year.
(t) Amendment or Waiver of BONY Loan Documents; Prepayment of
BONY Indebtedness. (i) Agree, to any amendment or other change to (or make any
payment consistent with any amendment or other change to), or waive any of its
rights under, any BONY Loan Document or refinance any of the BONY Indebtedness
evidenced by the BONY Loan Documents without obtaining the prior written consent
of the Required Lenders to such amendment, modification, payment, waiver, change
or refinancing, provided that such consent shall not be required if such
amendment, modification, waiver, change or refinancing does not increase the
amount of any BONY Indebtedness or obligations of the Company thereunder or
shorten the maturity or accelerate any payments provided for in the BONY Loan
Documents existing on the Effective Date, is not adverse to the interests of the
Lenders and does not provide for terms more restrictive to the Company than
those terms in effect prior to such amendment, modification, waiver, change or
refinancing.
(ii) Directly or indirectly, by deposit of monies or
otherwise, prepay, purchase,
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redeem, retire, defease or otherwise acquire, or make any payment on account of
any principal of, premium or interest payable in connection with the payment,
prepayment, redemption, defeasance or retirement of any BONY Indebtedness;
provided, however, that, (A) notwithstanding the provisions of this clause (ii),
the Company may make regularly scheduled payments of principal and interest on
the BONY Indebtedness in accordance with the terms of the BONY Loan Documents as
in effect on the date of this Agreement, provided, further, that, at the
election of the Agent which the Agent may and, upon the direction of the
Required Lenders, shall make by notice to the Company, no such payment shall be
made if an Event of Default shall have occurred and be continuing or would
result from the making of any such payment and (B) the Company may prepay,
redeem, defease, retire or otherwise acquire the BONY Indebtedness with the Net
Proceeds of any unsecured Indebtedness of the Company permitted by Section
7.02(b)(viii) of this Agreement or any Net Proceeds of the issuance by the
Company of its Capital Stock consisting of common equity so long as (A) no Event
of Default shall have occurred and be continuing or would result therefrom and
(B) both immediately before and after giving effect thereto the Loans and Letter
of Credit Obligations do not exceed the Borrowing Base Before Overadvance
Amount.
(u) License Agreements. Agree to any material amendment or
other material change to, or waive any of its material rights under, any License
Agreement without the prior written consent of all the Lenders, which consent
shall not be unreasonably withheld.
(v) Inactive Subsidiaries. Except as provided in Section
6.01(f)(ii), permit any Inactive Subsidiary to own any asset, incur any
liabilities or engage in any business.
ARTICLE VIII
MANAGEMENT, COLLECTION AND STATUS OF
ACCOUNTS RECEIVABLE AND OTHER COLLATERAL
SECTION 8.01. Management of Collateral. (a) After the occurrence and
during the continuance of an Event of Default and subject to the rights of the
Factor under the Factoring Agreements and the Assignment of Factoring Proceeds
Agreement, the Agent may for the benefit of the Lenders send a notice of
assignment and/or notice of the Agent's security interest to any and all Account
Debtors or any third party holding or otherwise concerned with any of the
Collateral, and thereafter the Agent on behalf of the Lenders shall have the
sole right to collect the Accounts Receivable and/or take possession of the
Collateral and the books and records relating thereto. The Borrowers shall not
and shall not permit their Subsidiaries, without prior written consent of the
Agent, to grant any extension of time of payment of any Account Receivable,
compromise or settle any Account Receivable for less than the full amount
thereof, release, in whole or in part, any Person or property liable for the
payment thereof, or allow any credit or discount whatsoever thereon, except,
prior to the occurrence and during the continuance of an Event of Default, (i)
in the ordinary course of business or (ii) as permitted by the Factoring
Agreements.
(b) (i) Subject to the rights of the Factor under the
Factoring
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Agreements and the Assignment of Factoring Proceeds Agreement, the Borrowers
hereby appoint the Agent or its designee on behalf of the Agent as the
Borrowers' attorney-in-fact with power, after the occurrence and during the
continuance of an Event of Default, to endorse the Borrowers' names upon any
notes, acceptances, checks, drafts, money orders or other evidences of payment
or Collateral that may come into its possession, to sign the Borrowers' names on
any invoice or bill of lading relating to any of the Accounts Receivable, drafts
against Account Debtors, assignments and verifications of Accounts Receivable
and notices to Account Debtors, to send verification of Accounts Receivable, to
notify the Postal Service authorities to change the address for delivery of mail
addressed to the Borrowers to such address as the Agent may designate and to do
all other acts and things necessary to carry out this Agreement. All acts of
said attorney or designee are hereby ratified and approved, and said attorney or
designate shall not be liable for any acts of omission or commission (other than
acts or omissions constituting gross negligence or willful misconduct as
determined by a final judgment of a court of competent jurisdiction), nor for
any error of judgment or mistake of fact or law; this power being coupled with
an interest is irrevocable until all of the Loans and any other Obligations
under the Loan Documents are paid in full and all of the Commitments are
terminated.
(ii) Subject to the rights of the Factor under the Factoring
Agreements and the Assignment of Factoring Proceeds Agreement, the Agent,
without notice to or consent of any Borrower or any Guarantor upon the
occurrence and during the continuance of an Event of Default (A) may sue upon or
otherwise collect, extend the time of payment of, or compromise or settle for
cash, credit or otherwise upon any terms, any of the Accounts Receivable or any
securities, instruments or insurance applicable thereto and/or release the
Account Debtor thereon; (B) is authorized and empowered to accept the return of
the goods represented by any of the Accounts Receivable, and (C) shall have the
right to receive, endorse, assign and/or deliver in its name or the name of any
Borrower or any Guarantor any and all checks, drafts, and other instruments for
the payment of money relating to the Accounts Receivable. Each Borrower and
Guarantor hereby waive notice of presentment, protest and non-payment of any
instrument so endorsed, all in a commercially reasonable manner and without
discharging or in any way affecting liability hereunder.
(c) Nothing herein contained shall be construed to constitute
any Borrower or any Guarantor as agent of the Agent or the Lenders for any
purpose whatsoever, and the Agent and the Lenders shall not be responsible or
liable for any shortage, discrepancy, damage, loss or destruction of any part of
the Collateral wherever the same may be located and regardless of the cause
thereof (other than from acts or omissions of the Agent and the Lenders
constituting gross negligence or willful misconduct as determined by a final
judgment of a court of competent jurisdiction). The Agent or the Lenders shall
not, under any circumstances or in any event whatsoever, have any liability for
any error or omission or delay of any kind occurring in the settlement,
collection or payment of any of the Accounts Receivable or any instrument
received in payment thereof or for any damage resulting therefrom (other than
acts or omissions of the Agent or the Lenders constituting gross negligence or
willful misconduct as determined by a final judgment of a court of competent
jurisdiction). The Agent and the Lenders, by anything herein or in any
assignment or otherwise, do not assume any of the Borrowers' or any Guarantor's
obligations under any contract or agreement assigned to the Agent and the Agent
or the Lenders
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shall not be responsible in any way for the performance by the Borrowers of any
of the terms and conditions thereof.
(d) If any of the Accounts Receivable includes a charge for
any tax payable to any Governmental Authority, subject to the rights of the
Factor under the Factoring Agreement and the Assignment of Factoring Proceeds
Agreement, the Agent is hereby authorized (but in no event obligated) in its
discretion to pay the amount thereof to the proper taxing authority for any
Borrower's or any Guarantor's account and to charge such Borrower or Guarantor
therefor. Such Borrower or Guarantor shall notify the Agent if any Accounts
Receivable include any taxes due to any such authority and, in the absence of
such notice, the Agent shall have the right to retain the full proceeds of such
Accounts Receivable and shall not be liable for any taxes that may be due from
such Borrower or Guarantor by reason of the sale and delivery creating such
Accounts Receivable.
SECTION 8.02. Accounts Receivable Documentation. Subject to the rights
of the Factor under the Factoring Agreements and the Assignment of Factoring
Proceeds Agreement, each Borrower will at such intervals as the Agent may
reasonably require, execute and deliver confirmatory written assignments of the
Accounts Receivable to the Agent and furnish such further schedules and/or
information as the Agent may reasonably require relating to the Accounts
Receivable, including, without limitation, sales invoices or the equivalent,
credit memos issued, remittance advises, reports and copies of deposit slips and
copies of original shipping or delivery receipts for all merchandise sold. In
addition, each Borrower shall notify the Agent of any non-compliance in respect
of the representations, warranties and covenants contained in Section 8.03
below. The items to be provided under this Section 8.02 are to be in form
reasonably satisfactory to the Agent and are to be executed and delivered to the
Agent from time to time solely for its convenience in maintaining records of the
Collateral. Any Borrower's failure to give any of such items to the Agent shall
not affect, terminate, modify or otherwise limit the Agent's Lien in the
Collateral. Subject to the provisions of the Factoring Agreements, each Borrower
shall not re-date any invoice or sale or make sales on extended dating beyond
that customary in such Borrower's industry, and shall not re-bill any Accounts
Receivable without promptly disclosing the same to the Factor and the Agent and
providing the Factor and the Agent with copy of such re-billing, identifying the
same as such. If any Borrower becomes aware of anything materially detrimental
to any of the Borrowers' customers' credit, such Borrower will promptly advise
the Agent thereof.
SECTION 8.03. Status of Accounts Receivable and Other Collateral. With
respect to Collateral of any Borrower at the time the Collateral becomes subject
to the Agent's security interests, each Borrower covenants, represents and
warrants: (a) a Borrower shall be the sole owner, free and clear of all Liens
except, in the case of Accounts Receivable, the Lien of the Factor, the Lien of
the Existing Factors and the Lien in the favor of the Agent for the benefit of
the Lenders or except as otherwise permitted hereunder, fully authorized to
sell, transfer, pledge and/or grant a security interest in each and every item
of said Collateral; (b) to the knowledge of the Borrowers, at the time created,
each Account Receivable shall be a good and valid account representing an
undisputed bona fide indebtedness incurred or an amount indisputably owed by the
Account Debtor therein named, for a fixed sum as set forth in the invoice
relating thereto
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with respect to an absolute sale and delivery upon the specified terms of goods
sold by a Borrower or work, labor and/or services theretofore rendered by a
Borrower; (c) to the best knowledge of the Borrowers and except as otherwise
disclosed to the Factor and the Agent, no Account Receivable is subject to any
defense, offset, counterclaim, discount or allowance except as may be stated in
the invoice relating thereto or discounts and allowances as may be customary in
the Borrower's business, and, each of such Accounts Receivable will be paid when
due; (d) none of the transactions underlying or giving rise to any Accounts
Receivable shall violate any applicable state or federal laws or regulations,
and all documents relating thereto shall be legally sufficient under such laws
or regulations and shall be legally enforceable in accordance with their terms;
(e) except as disclosed to the Factor and the Agent, no agreement under which
any deduction or offset of any kind, other than normal trade discounts, may be
granted or shall have been made by the Borrowers at or before the time such
Accounts Receivable is created; (f) all documents and agreements relating to
Accounts Receivable shall be true and correct and in all respects what they
purport to be; (g) to the best knowledge of the Borrowers, all signatures and
endorsements that appear on all documents and agreements relating to Accounts
Receivable shall be genuine and all signatories and endorsers shall have full
capacity to contract; (h) the Borrowers shall maintain books and records
pertaining to said Collateral in such detail, form and scope as the Agent shall
reasonably require; (i) the Borrowers will immediately notify the Agent if any
of their Accounts Receivable arise out of contracts with the United States or
any department, agency, or instrumentality thereof and, subject to the rights of
the Factor under the Factoring Agreement and the Assignment of Factoring
Proceeds Agreement, will execute any instruments and take any steps required by
the Agent in order that all monies due or to become due under any such contract
shall be assigned to the Agent and notice thereof given to the United States
Government under the Federal Assignment of Claims Act; (j) the Borrowers will,
immediately upon learning thereof, report to the Agent any material loss or
destruction of, or substantial damage to, any of the Collateral, and any other
matters affecting the value, enforceability or collectibility of any of the
Collateral; (k) if any amount payable under or in connection with any Account
Receivable is evidenced by a promissory note or other instrument, as such term
is defined in the Uniform Commercial Code, such promissory note or instrument
shall be immediately pledged, endorsed, assigned and delivered to the Agent as
additional Collateral; (l) the Borrowers shall not redate any invoice or sale or
make sales on extended dating beyond that which is customary in the ordinary
course of their business and in the industry; (m) the Borrowers shall conduct a
physical count of their Inventory at such intervals as the Agent may reasonably
request and the Borrowers shall promptly supply the Agent with a copy of such
count accompanied by a report of the value (based on the lower of cost (on a
FIFO basis) or market value) of such Inventory; provided, however, if no Event
of Default shall have occurred and be continuing, the Borrower shall have no
obligation to conduct such physical counts of Inventory more than two times per
calendar year; and (n) the Borrowers are not and shall not be entitled to pledge
the Agent's or the Lenders' credit on any purchases for or any purpose
whatsoever.
SECTION 8.04. Collateral Custodian. Upon the occurrence and during the
continuance of an Event of Default, the Agent may at any time and from time to
time employ and maintain in the premises of the Borrowers a custodian selected
by the Agent who shall have full
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authority to do all acts necessary to protect the Agent's and Lenders'
interests. The Borrowers hereby agree to cooperate with any such custodian and
to do whatever the Agent may reasonably request to preserve the Collateral. All
costs and expenses incurred by the Agent, by reason of the employment of the
custodian, shall be charged to the Loan Account.
ARTICLE IX
THE AGENT
SECTION 9.01. Authorization and Action. Each Lender (and each
subsequent holder of any Note by its acceptance thereof) hereby irrevocably
appoints and authorizes CIT, in its capacity as the Agent, (i) to receive on
behalf of each Lender any payment of principal of or interest on the Notes
outstanding hereunder and all other amounts accrued hereunder paid to the Agent,
and, subject to Section 2.05 of this Agreement and the other provisions of this
Agreement, to distribute promptly to each Lender its Pro Rata Share of all
payments so received, (ii) to distribute to each Lender copies of all material
notices and agreements received by the Agent and not required to be delivered to
each Lender pursuant to the terms of this Agreement, provided that the Agent
shall not have any liability to the Lenders for the Agent's inadvertent failure
to distribute any such notice or agreements to the Lenders, and (iii) subject to
Section 12.03 of this Agreement, to take such action as the Agent deems
appropriate on its behalf to administer the Loans, Letters of Credit and the
Loan Documents and to exercise such other powers delegated to the Agent by the
terms hereof or the Loan Documents (including, without limitation, the power to
give or to refuse to give notices, waivers, consents, approvals and instructions
and the power to make or to refuse to make determinations and calculations),
together with such powers as are reasonably incidental thereto to carry out the
purposes hereof and thereof. As to any matters not expressly provided for by
this Agreement and the other Loan Documents (including, without limitation,
enforcement or collection of the Notes), the Agent shall not be required to
exercise any discretion or take any action, but shall be required to act or to
refrain from acting (and shall be fully protected in so acting or refraining
from acting) upon the instructions of the Required Lenders, and such
instructions of the Required Lenders shall be binding upon all Lenders and all
holders of Notes; provided, however, that the L/C Issuer shall not be required
to refuse to honor a drawing under any Letter of Credit and the Agent shall not
be required to take any action which, in the reasonable opinion of the Agent,
exposes the Agent to liability or which is contrary to this Agreement or any
Loan Document or applicable law. Except as expressly set forth in Section 12.17
of this Agreement, the Administrative Agent shall not have any authority, duties
or responsibilities solely by virtue of its status as Administrative Agent.
SECTION 9.02. Borrower's Default. In the event that (i) any Borrowers
fail to pay when due the principal of or interest on any Note or any
Reimbursement Obligation or any amount payable hereunder, or (ii) the Agent
receives written notice of the occurrence of an Event of Default, the Agent
shall promptly give written notice thereof to the Lenders, and shall take such
action with respect to such Event of Default as it shall be directed to take by
the Required Lenders; provided, however, that, unless and until the Agent shall
have received such directions and except as otherwise expressly provided in this
Agreement, the Agent may take such action or
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refrain from taking such action hereunder or under the other Loan Documents with
respect to an Event of Default or Default, as it shall deem advisable in the
best interest of the Lenders.
SECTION 9.03. Agent's Reliance, Etc. The Agent or any of its
directors, officers, agents or employees shall not be liable for any action
taken or omitted to be taken by them under or in connection with this Agreement
or the other Loan Documents, except for its own gross negligence or willful
misconduct as determined by a final judgment of a court of competent
jurisdiction. Without limiting the generality of the foregoing, the Agent (i)
may treat the payee of any Note as the holder thereof until the Agent receives
written notice of the assignment or transfer thereof, pursuant to Section 12.09
hereof, signed by such payee and in form satisfactory to the Agent; (ii) may
consult with legal counsel (including, without limitation, counsel to the Agent
or counsel to the Borrowers), independent public accountants, and other experts
selected by it and shall not be liable for any action taken or omitted to be
taken in good faith by it in accordance with the advice of such counsel,
accountants or experts; (iii) makes no warranty or representation to any Lender
and shall not be responsible to any Lender for any statements, certificates,
warranties or representations made in or in connection with this Agreement or
the other Loan Documents; (iv) shall not have any duty to ascertain or to
inquire as to the performance or observance of any of the terms, covenants or
conditions of this Agreement or the other Loan Documents on the part of any
Person or to inspect the Collateral or other property (including, without
limitation, the books and records) of any Person; (v) shall not be responsible
to any Lender for the due execution, legality, validity, enforceability,
genuineness, sufficiency or value of this Agreement or the other Loan Documents
or any other instrument or document furnished pursuant hereto or thereto; (vi)
shall not be deemed to have made any representation or warranty regarding the
existence, value or collectibility of the Collateral, the existence, priority or
perfection of the Agent's Lien thereon, or the Borrowing Base or Availability or
any certificate prepared by any Borrower in connection therewith, nor shall the
Agent be responsible or liable to the Lenders for any failure to monitor or
maintain the Borrowing Base or Availability or any portion of the Collateral;
and (vii) shall incur no liability under or in respect of this Agreement or the
other Loan Documents by acting upon any notice, consent, certificate or other
instrument or writing (which may be by telegram, telecopy, cable or telex)
believed by it to be genuine and signed or sent by the proper party or parties.
SECTION 9.04. CIT. With respect to the Loans made by it and the Notes
issued to it and the Letters of Credit, CIT and its Affiliates shall have the
same rights and powers under this Agreement as any other Lender and may exercise
the same as though it were not the Agent; and the term "Lender" or "any Lenders"
shall, unless otherwise expressly indicated, include CIT in its individual
capacity. CIT and its Affiliates may accept deposits from, lend money to, act as
trustee or paying agent under indentures of, and generally engage in any kind of
business with, any Borrower or any Guarantor, any of their Affiliates, or any
Person who may do business with or own securities of any Borrower or Guarantor,
or any of their Affiliates, all as if CIT were not the Agent and without any
duty to account therefor to any Lenders. The Lenders acknowledge and agree that
CIT, as factor under the Factoring Agreements, and the L/C Issuer, which may be
a Lender or may be an Affiliate of the Agent, may take actions which are not in
the interests of, or may have an adverse effect on, the Lenders, or may omit to
take actions which would be in the interests of, or would have a favorable
effect on, the Lenders, and the Lenders
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will not assert any claim against the Agent based on actions or omissions by
CIT, as factor under the Factoring Agreements, or the L/C Issuer and will not
assert any such actions or omissions as a defense or offset to the Lenders'
obligations hereunder.
SECTION 9.05. Lender Credit Decision. Each Lender acknowledges that it
has, independently and without reliance upon the Agent or any other Lender, made
its own credit analysis and decision to enter into this Agreement. Each Lender
also acknowledges that it will, independently and without reliance upon the
Agent or any other Lender and based on such documents and information as it
shall deem appropriate at the time, continue to make its own credit decisions in
taking or not taking action under this Agreement and the other Loan Documents.
SECTION 9.06. Indemnification. Each Lender agrees to indemnify and
hold harmless (to the extent not reimbursed by any Borrower or any Guarantor)
the Agent and the L/C Issuer, ratably according to the Pro Rata Shares of each
Lender, from and against any and all liabilities, obligations, losses, damages,
penalties, actions, judgments, suits, costs, expenses or disbursements of any
kind or nature whatsoever which may be imposed on, incurred by, or asserted
against the Agent or the L/C Issuer in any way relating to or arising out of
this Agreement or the other Loan Documents or any action taken or omitted by the
Agent or the L/C Issuer under this Agreement or the other Loan Documents;
provided, however, that no Lender shall be liable to the Agent or the L/C Issuer
for any portion of such liabilities, obligations, losses, damages, penalties,
actions, judgments, suits, costs, expenses or disbursements for which there has
been a final judicial determination of a court of competent jurisdiction that
such resulted from the Agent's or the L/C Issuer's gross negligence or willful
misconduct. Without limiting the foregoing, each Lender agrees to reimburse the
Agent and the L/C Issuer promptly upon demand for its ratable share of any
out-of-pocket expenses (including reasonable counsel fees, disbursements and
other charges) incurred by the Agent and the L/C Issuer in connection with the
preparation, execution, delivery, administration, modification, amendment or
enforcement (whether through negotiation, legal proceedings or otherwise) of, or
legal advice in respect of rights or responsibilities under, this Agreement or
the other Loan Documents, to the extent that the Agent or the L/C Issuer is not
reimbursed in full for such expenses by the Borrowers. The obligations of each
Lender under this Section 9.06 shall survive the termination of this Agreement
and the other Loan Documents and the payment of all other obligations of the
Agent, the L/C Issuer and the Lenders under this Agreement and the other Loan
Documents.
SECTION 9.07. Successor Agent. The Agent may resign at any time by
giving written notice thereof to the Lenders and the Administrative Borrower.
Upon any such resignation by the Agent, the Required Lenders shall have the
right to appoint a successor Agent (in the absence of a continuing Event of
Default such successor Agent shall be reasonably acceptable to the
Administrative Borrower), with such rights and obligations hereunder as those
previously held by the retiring Agent, provided, the successor Agent may be
appointed by the Required Lenders without any consultation with or consent of
the Administrative Borrower or any other Loan Party if an Event of Default or
Default has occurred and is continuing. If no successor Agent shall have been so
appointed by the Required Lenders, been accepted by the
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Administrative Borrower, and shall have accepted such appointment, within 30
days after the retiring Agent's giving of notice of resignation, then the
retiring Agent may, on behalf of the Lenders, appoint a successor Agent, which
shall be a Lender or a commercial bank or other financial institution organized
under the laws of the United States of America or any State thereof and having a
combined capital and surplus of at least $500,000,000. Upon the acceptance of
any appointment as Agent hereunder by a successor Agent, such successor Agent
shall thereupon succeed to and become vested with all the rights, powers,
privileges and duties of the retiring Agent, and the retiring Agent shall be
discharged from its duties and obligations under this Agreement and the other
Loan Documents. After any retiring Agent's resignation hereunder as the Agent,
the provisions of this Article IX shall inure to its benefit as to any actions
taken or omitted to be taken by it while it was the Agent under this Agreement
and the other Loan Documents.
SECTION 9.08. Collateral Matters.
(a) The Agent may from time to time, make such disbursements
and advances ("Agent Advances") which the Agent, in its sole discretion, deems
necessary or desirable to preserve or protect the Collateral or any portion
thereof, to enhance the likelihood or maximize the amount of repayment by any
Borrower, any Guarantor or other Person of the Loans, Reimbursement Obligations
or Letters of Credit and other Obligations or to pay any other amount chargeable
to such Borrower or Guarantor pursuant to the terms of this Agreement,
including, without limitation, costs, fees and expenses as described in Section
12.05. The Agent Advances shall be repayable on demand and be secured by the
Collateral. The Agent Advances shall not constitute Loans but shall otherwise
constitute Obligations hereunder. Without limitation to its obligations pursuant
to Section 9.06, each Lender agrees that it shall make available to the Agent,
upon the Agent's demand, in Dollars in immediately available funds, the amount
equal to such Lender's Pro Rata Share of each such Agent Advance. If such funds
are not made available to the Agent by such Lender the Agent shall be entitled
to recover such funds, on demand from such Lender together with interest
thereon, for each day from the date such payment was due until the date such
amount is paid to the Agent, at the Federal Funds Rate for three Business Days
and thereafter at the Base Rate.
(b) The Agent shall have no obligation whatsoever to any
Lenders to assure that the Collateral exists or is owned by any Borrower or any
Guarantor or is cared for, protected or insured or has been encumbered or that
the Liens granted to the Agent herein or pursuant hereto have been properly or
sufficiently or lawfully created, perfected, protected or enforced or are
entitled to any particular priority, or to exercise at all or in any particular
manner or under any duty of care, disclosure or fidelity, or to continue
exercising, any of the rights, authorities and powers granted or available to
the Agent in this Section 9.08 or in any of the Loan Documents, it being
understood and agreed that in respect of the Collateral, or any act, omission or
event related thereto, the Agent may act in any manner it may deem appropriate,
in its sole discretion, given the Agent's own interest in the Collateral as one
of the Lenders and that the Agent shall have no duty or liability whatsoever to
any other Lender other than for acts or omissions constituting gross negligence
or willful misconduct as determined by a final judgment of a court of competent
jurisdiction.
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(c) The Lenders hereby irrevocably authorize the Agent, at its
option and in its discretion, to release any Lien granted to or held by the
Agent upon any Collateral upon termination of the Total Commitments and payment
and satisfaction of all Loans and Letter of Credit Obligations, (whether or not
due) and all other Obligations which have matured and which the Agent has been
notified in writing are then due and payable; or constituting property being
sold or disposed of if a Loan Party certifies to the Agent that the sale or
disposition is made in compliance with Section 7.02(d)(ii) hereof (and the Agent
may rely conclusively on any such certificate, without further inquiry); or
constituting property in which the Loan Parties owned no interest at the time
the Lien was granted or at any time thereafter; or (except as otherwise provided
in Section 12.03 of this Agreement) if approved, authorized or ratified in
writing by the Required Lenders. Without in any manner limiting the Agent's
authority to act without any specific or further authorization or consent by the
Required Lenders, upon request by the Agent at any time, the Lenders shall
confirm in writing the Agent's authority to release particular types or items of
Collateral pursuant to this Section 9.08(c).
ARTICLE X
EVENTS OF DEFAULT
SECTION 10.01. Events of Default. If any of the following Events of
Default shall occur and be continuing:
(a) Any Loan Party shall fail to pay any principal of or
interest on any Loan, any Agent Advance, any Reimbursement Obligation, or any
fee or other amount when due (whether by scheduled maturity, required
prepayment, acceleration, demand or otherwise);
(b) Any representation or warranty made by any Loan Party or
any officer of such Loan Party under or in connection with any Loan Document
shall have been incorrect in any material respect when made;
(c) Any Loan Party shall fail to perform or observe any
covenant contained in Article VII or Article VIII hereof or Section 5 of the
Security Agreements or Section 4(a) or 6 of the Pledge Agreements;
(d) Any Loan Party shall fail to perform or observe any other
term, covenant or agreement contained in any Loan Document to be performed or
observed by such Loan Party and such failure, if capable of being remedied,
shall remain unremedied for 15 days;
(e) Any Loan Party shall fail to pay any principal of or
interest on any of its Indebtedness (excluding Indebtedness evidenced by the
Loan Documents) in excess of $250,000, or any interest or premium thereon, when
due (whether by scheduled maturity, required prepayment, acceleration, demand or
otherwise) and such failure shall continue after the applicable grace period, if
any, specified in the agreement or instrument relating to such Indebtedness, or
any other default under any agreement or instrument relating to any such
Indebtedness, or any other event, shall occur and shall continue after the
applicable grace period,
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if any, specified in such agreement or instrument, if the effect of such default
or event is to accelerate, or to permit the acceleration of, the maturity of
such Indebtedness; or any such Indebtedness in excess of such amount shall be
declared to be due and payable, or required to be prepaid (other than by a
regularly scheduled required prepayment), prior to the stated maturity thereof;
(f) Any Loan Party (i) shall institute any proceeding or
voluntary case seeking to adjudicate it a bankrupt or insolvent, or seeking
dissolution, liquidation, winding up, reorganization, arrangement, adjustment,
protection, relief or composition of it or its debts under any law relating to
bankruptcy, insolvency, reorganization or relief of debtors, or seeking the
entry of an order for relief or the appointment of a receiver, trustee,
custodian or other similar official for such Loan Party or for any substantial
part of its property, (ii) shall be generally not paying its debts as such debts
become due, or shall admit in writing its inability to pay its debts generally,
(iii) shall make a general assignment for the benefit of creditors, or (iv)
shall take any action to authorize or effect any of the actions set forth above
in this subsection (f);
(g) Any proceeding shall be instituted against any Loan Party
seeking to adjudicate it a bankrupt or insolvent, or seeking dissolution,
liquidation, winding up, reorganization, arrangement, adjustment, protection,
relief of debtors, or seeking the entry of an order for relief or the
appointment of a receiver, trustee, custodian or other similar official for such
Loan Party or for any substantial part of its property, and either such
proceeding shall remain undismissed or unstayed for a period of 45 days or any
of the actions sought in such proceeding (including, without limitation, the
entry of an order for relief against it or the appointment of a receiver,
trustee, custodian or other similar official for it or for any substantial part
of its property) shall occur;
(h) Any material provision of any Loan Document shall at any
time for any reason be declared by a court of competent jurisdiction to be null
and void, or the validity or enforceability thereof shall be contested by any
Loan Party, or a proceeding shall be commenced by any Loan Party or any
Governmental Authority or other regulatory body having jurisdiction over such
Loan Party, seeking to establish the invalidity or unenforceability thereof, or
any Loan Party shall deny in writing that such Loan Party has any liability or
obligation purported to be created under any Loan Document;
(i) Any Security Agreement, Pledge Agreement, or any other
security document, after delivery thereof pursuant hereto, shall for any reason
fail or cease to create a valid and perfected and, except to the extent
permitted by the terms hereof or thereof, first priority Lien on or security
interest in any Collateral purported to be covered thereby with an aggregate
fair market value in excess of $100,000;
(j) One or more judgments or orders (other than a judgment or
award described in subsections (f) or (g) of this Section 10.01) for the payment
of money exceeding any applicable insurance or bond coverage by more than
$500,000 in the aggregate for the Loan Parties shall be rendered against any
Loan Party and either (i) enforcement proceedings shall have been commenced by
any creditor upon any such judgment or order, or (ii) there shall be any
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period of 30 consecutive days during which a stay of enforcement of any such
judgment or order, by reason of a pending appeal or otherwise, shall not be in
effect;
(k) Any Loan Party or any of its ERISA Affiliates shall have
made a complete or partial withdrawal from a Multiemployer Plan, and, as a
result of such complete or partial withdrawal, such Loan Party or such ERISA
Affiliate incurs a withdrawal liability in an annual amount exceeding $100,000;
or a Multiemployer Plan enters reorganization status under Section 4241 of
ERISA, and, as a result thereof, such Loan Party's or such ERISA Affiliate's
annual contribution requirement with respect to such Multiemployer Plan
increases in an annual amount exceeding $100,000;
(l) Any Termination Event with respect to any Employee Plan
shall have occurred, and, 30 days after notice thereof shall have been given to
any Loan Party by the Agent, (i) such Termination Event (if correctable) shall
not have been corrected, and (ii) the then current value of such Employee Plan's
vested benefits exceeds the then current value of assets allocable to such
benefits in such Employee Plan by more than $100,000 (or, in the case of a
Termination Event involving liability under Section 409, 502(i), 502(l), 515,
4062, 4063, 4064, 4069, 4201, 4204 or 4212 of ERISA or Section 4971 or 4975 of
the Internal Revenue Code, the liability is in excess of such amount);
(m) A breach, default, event of default shall occur under any
Factoring Agreement, if the effect of such breach, default or event of default
is to permit the Factor to terminate such Factoring Agreement;
(n) A Change of Control shall have occurred; or
(p) (i) A breach, default or event of default shall occur
under any Material License Agreement if (A) the effect of such breach, default
or event of default is to permit the licensor thereunder to terminate such
Material License Agreement and (B) the Agent believes in good faith and has
notified the Administrative Borrower in writing that such breach, default or
event of default is reasonably likely to result in a termination of such
Material License Agreement, (ii) any Material License Agreement shall terminate
for any reason (other than by expiration of its scheduled term) or (iii) any
licensor shall exercise any remedies under any Material License Agreement which
exercise of remedies could reasonably be expected to adversely affect the
ability of the Borrowers to repay or otherwise perform their Obligations under
this Agreement; then, and in any such event, the Agent may and, upon the
direction of the Required Lenders, shall by notice to the Company, (i) declare
the Total Commitment to be reduced to zero, whereupon the Total Commitment shall
forthwith be reduced to zero, (ii) declare all Loans and all Reimbursement
Obligations, all interest thereon and all other amounts payable under this
Agreement to be forthwith due and payable, whereupon the Loans, all
Reimbursement Obligations, all such interest and all such amounts shall become
and be forthwith due and payable, without presentment, demand, protest or
further notice of any kind, all of which are hereby expressly waived by each
Loan Party; provided, however, that upon the occurrence of any
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Event of Default described in subsections (f) or (g) of this Section 10.01, the
Loans, all Reimbursement Obligations, all such interest and all such amounts
shall become and be forthwith due and payable, without presentment, demand,
protest or further notice of any kind, all of which are expressly waived by each
Loan Party, and (iii) exercise any and all of its other rights under applicable
law, hereunder and under the other Loan Documents.
SECTION 10.02. Deposit for Letters of Credit. Upon demand by the Agent
after the occurrence and during the continuation of any Event of Default, the
Borrowers shall deposit with the Agent with respect to each Letter of Credit
then outstanding cash in an amount equal to the greatest amount for which such
Letter of Credit may be drawn. Such deposits shall be held by the Agent in a
joint non-interest bearing account maintained at the Payment Office of the Agent
as security for, and to provide for the payment of, the Letter of Credit
Obligations.
ARTICLE XI
GUARANTY
SECTION 11.01. Guaranty. The Company hereby (i) irrevocably,
absolutely and unconditionally guarantees the prompt payment, as and when due
and payable (whether by scheduled maturity, required prepayment, acceleration,
demand or otherwise), of (A) all the Obligations, including, without limitation,
all amounts now or hereafter owing in respect of the Loan Documents, whether for
principal, interest (including interest accruing on or after the filing of any
petition in bankruptcy or for reorganization relating to a Borrower whether or
not a claim for post-filing interest is allowed in such proceeding), fees,
expenses, indemnifications or otherwise, and (B) all indebtedness, obligations
and other liabilities, direct or indirect, absolute or contingent, now existing
or hereafter arising of any Borrower to the Agent, the Lenders, the L/C Issuer
or CIT under the Loan Documents and (ii) agrees to pay any and all reasonable
expenses (including reasonable counsel fees and expenses) incurred by the Agent,
the Lenders, the L/C Issuer or CIT in enforcing its rights under this Article
XI.
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SECTION 11.02. Obligations Unconditional.
(i) The Company hereby guarantees that the Obligations will be
paid strictly in accordance with the terms of the Loan Documents, regardless of
any law, regulation or order now or hereafter in effect in any jurisdiction
affecting any of such terms or the rights of the Agent, the Lenders, the L/C
Issuer or CIT with respect thereto. The Company agrees that its guarantee
constitutes a guaranty of payment when due and not of collection, and waives any
right to require that any resort be had by the Agent, the Lenders, the L/C
Issuer or CIT to any Collateral. The obligations of the Company under this
Article XI are independent of the obligations of the Borrowers under this
Agreement and the other Loan Documents and a separate action or actions may be
brought and prosecuted against the Company to enforce this Article XI
irrespective of whether any action is brought against the Borrowers or whether
the Borrowers are joined in any such action. The liability of the Company
hereunder shall be absolute and unconditional, irrespective of: (i) any lack of
validity or enforceability of any Loan Document or any agreement or instrument
relating thereto; (ii) any extension or change in the time, manner or place of
payment of, or in any other term in respect of, all or any of the Obligations
(including, without limitation, any extension for longer than the original
period), or any other amendment or waiver of or consent to any departure from
any provision of any Loan Document (including the creation or existence of any
Obligations in excess of the amounts permitted by any lending formulas contained
in this Agreement); (iii) any exchange or release of, or non-perfection of any
Lien on, any Collateral, or any release or amendment or waiver of or consent to
any departure from any other guaranty, for all or any of the Obligations; or
(iv) the existence of any claim, set-off, defense or other right that the
Company may have against any Person, including the Agent or the Lenders; (v) any
other circumstance which might otherwise constitute a defense available to, or a
discharge of, any Borrower or any other Guarantor in respect of the Obligations
of the Company in respect hereof.
(ii) This Guaranty (i) is a continuing guaranty and shall
remain in full force and effect until such date on which all of the Obligations
and all other expenses to be paid by the Company pursuant hereto shall have been
satisfied in full after the Total Commitment shall have been terminated, (ii)
shall continue to be effective or shall be reinstated, as the case may be, if at
any time any payment of any of the Obligations is rescinded or must otherwise be
returned by the Agent, the Lenders, the L/C Issuer or CIT upon the insolvency,
bankruptcy or reorganization of any Borrower or any Guarantor or otherwise, all
as though such payment had not been made, and (iii) shall be binding upon the
Company, its successors and assigns.
SECTION 11.03. Waivers. The Company hereby waives, to the extent
permitted by applicable law, (i) promptness and diligence, (ii) notice of
acceptance and notice of the incurrence of any Obligation, (iii) notice of any
action taken by the Agent, the Lenders, the L/C Issuer, CIT or any Borrower or
any other agreement or instrument relating thereto, (iv) all other notices,
demands and protests, and all other formalities of every kind in connection with
the enforcement of the Obligations or of the obligations of the Company
hereunder, the omission of or delay in which, but for the provisions of this
Section 11.03, might constitute grounds for relieving the Company of its
obligations hereunder, (v) any requirement that the Agent, the
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Lenders, the L/C Issuer or CIT protect, secure, perfect or insure any Lien or
any property subject thereto or exhaust any right or take any action against any
Person or any Collateral, and (vi) any other defenses available to the Borrowers
or the Company. All such waivers by the Company shall be effective only to the
extent permitted by applicable law.
SECTION 11.04. Subrogation. Until such time as the Obligations shall
have been paid in full and the Total Commitment is terminated, the Company
hereby irrevocably agrees that it will not exercise any and all rights which it
has or may have at any time or from time to time (whether arising directly or
indirectly by operation of law or contract) to assert any claim against any
Borrower or any other Guarantor on account of any payments made under this
Agreement, including, without limitation, all existing and future rights of
subrogation, reimbursement, exoneration, contribution and/or indemnity. If any
amount shall be paid to the Company on account of such rights at any time when
all of such Obligations and all other Obligations shall not have been paid in
full, such amount shall be held in trust for the benefit of the Agent or the
Lenders, shall be segregated from the other funds of the Company and shall
forthwith be paid over to the Agent to be applied in whole or in part by the
Agent against the Obligations, whether matured or unmatured, in accordance with
the terms of this Agreement.
SECTION 11.05. No Waiver; Remedies. No failure on the part of the
Agent, the Lenders, the L/C Issuer or CIT to exercise, and no delay in
exercising, any right hereunder shall operate as a waiver thereof; nor shall any
single or partial exercise of any right hereunder preclude any other or further
exercise thereof or the exercise of any other right. The remedies herein
provided are cumulative and not exclusive of any remedy provided by law.
SECTION 11.06. Stay of Acceleration. If acceleration of the time for
payment of any amount payable by any Borrower in respect of the Obligations is
stayed upon the insolvency, bankruptcy or reorganization of such Borrower, all
such amounts otherwise subject to acceleration under the terms of this Agreement
shall nonetheless be payable by the Company hereunder forthwith on demand by the
Agent, Lenders, the L/C Issuer or CIT.
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ARTICLE XII
MISCELLANEOUS
SECTION 12.01. Termination. (a) Except as otherwise permitted herein,
the Administrative Borrower may terminate the Total Commitment and this
Agreement only by giving the Agent not less than sixty (60) days prior written
notice of termination. Notwithstanding the foregoing, the Agent may terminate
the Total Commitment and this Agreement immediately by notice to the
Administrative Borrower upon the occurrence and during the continuance of an
Event of Default, provided, however, that if the Event of Default is an event
listed in Sections 10.01(f) or (g) of this Agreement, the Agent may regard the
Total Commitment and the Agreement as terminated and notice to that effect is
not required. The Total Commitment and this Agreement, unless terminated as
herein provided, shall automatically continue to the next Termination
Anniversary Date. All Obligations shall become due and payable as of the date of
any termination under this Section 12.01 and, pending a final accounting, the
Agent may withhold any balances in the Loan Account (unless supplied with an
indemnity satisfactory to the Agent) to cover all of the Obligations, whether
absolute or contingent. All of the Agent's and the Lenders' rights and Liens and
security interests shall continue after any termination until all Obligations
for the payment of money have been paid in cash and satisfied in full and all
Letters of Credit have been canceled and returned to the L/C Issuer or cash
collateralized to the reasonable satisfaction of the Agent. After such payment
and satisfaction, the Agent and the Lenders will, upon the reasonable request of
the Administrative Borrower, execute all documents necessary to release, without
recourse, representation and warranty and at the expense of the Borrowers, its
Liens granted pursuant to the terms of this Agreement and the other Loan
Documents.
(b) Any Lender may elect not to renew its Commitment by giving
the Agent and the Administrative Borrower written notice of its intention to not
renew its Commitment not less than 60 days prior to a Termination Anniversary
Date. The Agent agrees to use reasonable efforts to notify the Lenders of each
Termination Anniversary Date, provided that the failure of the Agent to notify a
Lender of a Termination Anniversary Date shall not in any way limit or alter the
obligations of such Lender under this Agreement. If such Lender gives notice of
its intention not to renew its Commitment as provided in this paragraph (b) and
does not assign its rights, interests and obligations under this Agreement
pursuant to Section 12.09 hereof, then the Commitment of such Lender shall be
terminated as of such Termination Anniversary Date. The Borrowers hereby,
jointly and severally, agree to pay to the Agent on such Termination Anniversary
Date, for the account of such non-renewing Lender, the principal amount of, and
all accrued interest on, such Lender's Pro Rata Share of all funded Loans and
Reimbursement Obligations, together with any amounts payable to such Lender
pursuant to Section 12.17 and any fees or other amounts owing to such Lender
under this Agreement and such Lender's Note. If the Agent makes any Loan or
Agent Advance or assists a Borrower in opening or establishing any Letter of
Credit, during the period between a Lender giving notice of its intention to not
renew its Commitment and such Termination Anniversary Date, the obligations of
such non-renewing Lender pursuant to Sections 2.05, 3.01, 3.02, 4.02 and 9.08 of
this Agreement shall be irrevocable, absolute and unconditional with respect to
such Loan, Agent
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Advance or Letter of Credit. Notwithstanding such termination and repayment, the
non-renewing Lender shall remain obligated to the Agent under Sections 3.02 and
3.03(b) for its Pro Rata Share (calculated immediately prior to the Termination
Anniversary Date on which such termination became effective) of the aggregate
maximum amount available for drawing under all outstanding Letters of Credit on
such Termination Anniversary Date (the "Retained Obligations") until all
Retained Obligations have been paid in full and the Letters of Credit giving
rise to such Retained Obligations have been canceled and returned to the L/C
Issuer. After the effective date of any such termination and repayment pursuant
to this Section 12.01(b), for purposes of Sections 3.02 and 3.03(b) of this
Agreement such non-renewing Lender's Pro Rata Share shall be a fraction
(expressed as a percentage) the numerator of which shall be the Retained
Obligations and the denominator of which shall be the aggregate amount of all
unpaid Loans, Agent Advances and Letter of Credit Obligations.
SECTION 12.02. Notices, Etc. All notices and other communications
provided for hereunder shall be in writing and shall be mailed, sent by
overnight courier, telecopied or delivered, if to any Lender, at its address
specified under its signature on the signature pages hereof; if to any Borrower
or the Company, at the following address:
Aris Industries, Inc.
475 Fifth Avenue
New York, New York 10017
Attention: Arnold Simon and David Fidlon
Telephone: (212) 686-5050
Telecopier: (212) 685-8281
with a copy to:
Shapiro Forman & Allen LLP
380 Madison Avenue
New York, New York 10017
Attention: Robert W. Forman, Esq.
Telephone: (212) 972-4900
Telecopier: (212) 551-1275
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and
Skadden, Arps, Slate, Meagher & Flom LLP
919 Third Avenue
New York, New York 10022
Attention: Mark N. Kaplan, Esq.
Telephone: (212) 735-3000
Telecopier: (212) 735-2000
if to the Agent, to it at the following address:
The CIT Group/Commercial Services, Inc.
1211 Avenue of the Americas
New York, New York 10036
Attention: Kenneth H. Wendler
Telephone: (212) 382-7253
Telecopier: (212) 382-9036
with a copy to
Schulte Roth & Zabel LLP
900 Third Avenue
New York, New York 10022
Attention: Frederic L. Ragucci, Esq.
Telephone: (212) 756-2000
Telecopier: (212) 593-5955
or, as to each party, at such other address as shall be designated by such party
in a written notice to the other party complying as to delivery with the terms
of this Section 12.02. All such notices and other communications shall be
effective (i) if mailed (by certified mail, postage prepaid and return receipt
requested), upon receipt or three Business Days after mailing whichever occurs
first, (ii) if telecopied, when transmitted and a confirmation is received,
provided the same is on a Business Day and, if not, on the next Business Day,
(iii) if sent by overnight courier, upon receipt or two Business Days after
delivered to such overnight courier, whichever occurs first or (iv) if
delivered, upon delivery, provided the same is on a Business Day and, if not, on
the next Business Day, except that notices to the Agent or the L/C Issuer
pursuant to Articles II and III hereof shall not be effective until received by
the Agent or the L/C Issuer, as the case may be.
SECTION 12.03. Amendments, Etc. No amendment or waiver of any
provision of this Agreement or the other Loan Documents, and no consent to any
departure by any Loan Party therefrom, shall in any event be effective unless
the same shall be in writing and signed by
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such Loan Party and the Required Lenders, and then such waiver or consent shall
be effective only in the specific instance and for the specific purpose for
which given; provided, however, that no amendment, waiver or consent shall (i)
increase the Commitment of any Lender, reduce the principal of, or interest on,
the Loans or the Reimbursement Obligations payable to any Lender, reduce the
amount of any fee payable for the account of any Lender, or postpone or extend
any date fixed for any payment of principal of, or interest or fees on, the
Loans or Letter of Credit Obligations payable to any Lender, in each case
without the written consent of any Lender affected thereby, (ii) increase the
Total Commitment without the written consent of each Lender, (iii) change the
percentage of the Commitments or of the aggregate unpaid principal amount of the
Notes, (iv) amend the definition of "Required Lenders", (v) release all or a
substantial portion of the Collateral (except as otherwise provided in this
Agreement and the other Loan Documents) or any of the Guarantors (other than
inactive Guarantors), (vi) amend, modify or waive Section 12.01 or this Section
12.03 of this Agreement, or (vii) amend the definition of "Eligible Inventory",
"Eligible Receivables", "Overadvance Amount", "Borrowing Base", "Borrowing Base
Before Overadvance Amount" or "Availability" if the effect of such amendment is
to increase the amount of the Availability, in each case without the written
consent of each Lender. Notwithstanding the foregoing, no amendment, waiver or
consent shall, unless in writing and signed by the Agent, affect the rights or
duties of the Agent or CIT with respect to the Letter of Credit Guaranty (but
not in its capacity as a Lender) under this Agreement or the other Loan
Documents.
SECTION 12.04. No Waiver; Remedies, Etc. No failure on the part of the
L/C Issuer, any Lender or the Agent to exercise, and no delay in exercising, any
right hereunder or under any other Loan Document shall operate as a waiver
thereof; nor shall any single or partial exercise of any right under any Loan
Document preclude any other or further exercise thereof or the exercise of any
other right. The rights and remedies of the L/C Issuer, the Lenders and the
Agent provided herein and in the other Loan Documents are cumulative and are in
addition to, and not exclusive of, any rights or remedies provided by law. The
rights of the Lenders, the L/C Issuer and the Agent under any Loan Document
against any party thereto are not conditional or contingent on any attempt by
the Lenders, the L/C Issuer and the Agent to exercise any of their rights under
any other Loan Document against such party or against any other Person.
SECTION 12.05. Expenses; Taxes; Attorneys' Fees. The Borrowers agree
to jointly and severally pay or cause to be paid, on demand, and to save the
Agent (and, in the case of clauses (c) through (m) below, the Lenders) harmless
against liability for the payment of, all reasonable out-of-pocket expenses,
regardless of whether the transactions contemplated hereby are consummated,
including but not limited to reasonable fees and expenses of counsel for the
Agent (and, in the case of clauses (c) through (m) below, the Lenders),
accounting, due diligence, periodic field audits, investigation, searches and
filings, monitoring of assets, syndication, miscellaneous disbursements,
examination, travel, lodging and meals, incurred by the Agent (and, in the case
of clauses (c) through (m) below, the Lenders) from time to time arising from or
relating to: (a) the negotiation, preparation, execution, delivery, performance
and administration of this Agreement and the other Loan Documents, (b) any
requested amendments, waivers or consents to this Agreement or the other Loan
Documents whether or not such documents become effective or are given, (c) the
preservation and protection of any of the Agent's and the Lenders'
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rights under this Agreement or the other Loan Documents, (d) the defense of any
claim or action asserted or brought against the Agent or the Lenders by any
Person that arises from or relates to this Agreement, any other Loan Document,
the Agent's or the Lenders' claims against the Borrowers or the other Loan
Parties, or any and all matters in connection therewith, (e) the commencement or
defense of, or intervention in, any court proceeding arising from or related to
this Agreement or any other Loan Document, (f) the filing of any petition,
complaint, answer, motion or other pleading by the Agent or the Lenders, or the
taking of any action in respect of the Collateral or other security, in
connection with this Agreement or any other Loan Document, (g) the protection,
collection, lease, sale, taking possession of or liquidation of, any Collateral
or other security in connection with this Agreement or any other Loan Document,
(h) any attempt to enforce any Lien on any Collateral or other security in
connection with this Agreement or any other Loan Document, (i) any attempt to
collect from the Borrowers or any other Loan Party, (j) the receipt of any
advice with respect to any of the foregoing, (k) all liabilities and reasonable
costs arising from or in connection with the past, present or future operations
of the Loan Parties involving any damage to real or personal property or natural
resources or harm or injury alleged to have resulted from any Release of
Hazardous Materials on, upon or into such property, (l) any reasonable costs or
liabilities incurred in connection with the investigation, removal, cleanup
and/or remediation of any Hazardous Materials present or arising out of the
operations of any facility of the Loan Parties, or (m) any liabilities or
reasonable costs incurred in connection with any Lien arising under any
Environmental Law. Without limitation of the foregoing or any other provision of
any Loan Document, if the Borrowers or any Loan Party fail to perform any
covenant or agreement contained herein or in any other Loan Document, the Agent
may itself perform or cause performance of such covenant or agreement, and the
expenses of the Agent incurred in connection therewith shall be reimbursed on
demand by the Borrowers.
SECTION 12.06. The Administrative Borrower as Agent for Borrowers.
Each Borrower hereby irrevocably appoints ECI as the Administrative Borrower,
agent and attorney-in-fact for the Borrowers which appointment shall remain in
full force and effect unless and until the Agent shall have received prior
written notice signed by both of the Borrowers that such appointment has been
revoked and that another Borrower has been appointed Administrative Borrower.
Each Borrower hereby irrevocably appoints and authorizes the Administrative
Borrower (i) to provide the Agent with all notices with respect to Loans and
Letters of Credit obtained for the benefit of any Borrower and all other notices
and instructions under this Agreement and (ii) to take such action as the
Administrative Borrower deems appropriate on its behalf to obtain Loans and
Letters of Credit and to exercise such other powers as are reasonably incidental
thereto to carry out the purposes of this Agreement. Each Borrower hereby
irrevocably appoints and authorizes the Administrative Borrower to provide the
Agent with all notices and to take all action as the Administrative Borrower
deems appropriate with respect to all Letters of Credit and Letter of Credit
Applications under this Agreement. It is understood that the handling of the
Loan Account and Collateral of the Borrowers in a combined fashion, as more
fully set forth in this Agreement, is done solely as an accommodation to the
Borrowers in order to utilize the collective borrowing powers of the Borrowers
in the most efficient and economical manner and at their request, and that
neither the Agent, the L/C Issuer nor the Lenders shall incur liability to the
Borrowers as a result hereof. Each of the Borrowers expects
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to derive benefit, directly or indirectly, from the handling of the Loan Account
and the Collateral in a combined fashion since the successful operation of each
Borrower is dependent on the continued successful performance of the integrated
group. To induce the Agent, the L/C Issuer and the Lenders to do so, and in
consideration thereof, each of the Borrowers hereby jointly and severally agrees
to indemnify the Indemnitees and hold the Indemnitees harmless against any and
all liability, expense, loss or claim of damage or injury, made against such
Indemnitee by either of the Borrowers or by any third party whosoever, arising
from or incurred by reason of (a) the handling of the Loan Account and
Collateral of the Borrowers as herein provided, (b) the Agent, the Lenders and
the L/C Issuer relying on any instructions of the Administrative Borrower, or
(c) any other action taken by the Agent, the L/C Issuer or any Lender hereunder
or under the other Loan Documents.
SECTION 12.07. Right of Set Off. Upon the occurrence and during the
continuance of any Event of Default, each Lender may, and is hereby authorized
to, at any time and from time to time, without notice to any Borrower or
Guarantor (any such notice being expressly waived by the Borrowers and
Guarantors) and to the fullest extent permitted by law, set off and apply any
and all deposits (general or special, time or demand, provisional or final) at
any time held and other indebtedness at any time owing by such Lender to or for
the credit or the account of any Borrower or Guarantor against any and all joint
and several obligations of the Borrowers now or hereafter existing under any
Loan Document, irrespective of whether or not such Lender shall have made any
demand hereunder or thereunder and although such obligations may be contingent
or unmatured. Such set-off shall be subject to the provisions of Section 4.03.
Such Lender agrees to notify the Administrative Borrower promptly after any such
set-off and application made by such Lender provided that the failure to give
such notice shall not affect the validity of such set-off and application. The
rights of the Agent under this Section 12.07 are in addition to the other rights
and remedies (including, without limitation, other rights of set-off) which such
Lender may have.
SECTION 12.08. Severability. Any provision of this Agreement, or of
any other Loan Document to which any Borrower or any Guarantor is a party, which
is prohibited or unenforceable in any jurisdiction shall, as to such
jurisdiction, be ineffective to the extent of such prohibition or
unenforceability without invalidating the remaining portions hereof or thereof
or affecting the validity or enforceability of such provision in any other
jurisdiction.
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SECTION 12.09. Assignments and Participations.
(a) Each Lender may, with the written consent of the Agent,
and in the absence of an Event of Default, with the written consent of the
Administrative Borrower, which consents will not be unreasonably withheld or
delayed, assign to one or more other lenders or other financial institutions all
or a portion of its rights and obligations under this Agreement (including,
without limitation, all or a portion of its Commitment, the Loans made by it,
the Notes held by it and its Pro Rata Share of Letter of Credit Obligations);
provided, however, that (1) such assignment is in an amount which is at least
$10,000,000 or a multiple of $1,000,000 in excess thereof (or the remainder of
such Lender's Commitment), (2) each such assignment shall be of a constant, and
not a varying, percentage of all of the assigning Lender's rights and
obligations under this Agreement, (3) such assignee shall enter into an
agreement among Lenders, in form and substance satisfactory to the Agent and
each Lender, and (4) the parties to each such assignment shall execute and
deliver to the Agent, for its acceptance, an Assignment and Acceptance, together
with any Note subject to such assignment and such parties shall deliver to the
Agent a processing and recordation fee of $3,500. Upon such execution, delivery
and acceptance, from and after the effective date specified in each Assignment
and Acceptance, which effective date shall be at least three Business Days after
the delivery thereof to the Agent (or such shorter period as shall be agreed to
by the Agent and the parties to such assignment), (A) the assignee thereunder
shall become a "Lender" hereunder and, in addition to the rights and obligations
hereunder held by it immediately prior to such effective date, have the rights
and obligations hereunder that have been assigned to it pursuant to such
Assignment and Acceptance and (B) the assigning Lender thereunder shall, to the
extent that rights and obligations hereunder have been assigned by it pursuant
to such Assignment and Acceptance, relinquish its rights and be released from
its obligations under this Agreement (and, in the case of an Assignment and
Acceptance covering all or the remaining portion of an assigning Lender's rights
and obligations under this Agreement, such Lender shall cease to be a party
hereto). Any such assignment shall not adversely affect the Borrowers' rights
under this Agreement except that the assigning Lender shall not be responsible
for the obligations assigned.
(b) By executing and delivering an Assignment and Acceptance,
the assigning Lender thereunder and the assignee thereunder confirm to and agree
with each other and the other parties hereto that: (i) other than as provided in
such Assignment and Acceptance, such assigning Lender makes no representation or
warranty and assumes no responsibility with respect to any statements,
warranties or representations made in or in connection with this Agreement or
the execution, legality, validity, enforceability, genuineness, sufficiency or
value of this Agreement of any other instrument or document furnished pursuant
hereto, and (ii) such assigning Lender makes no representation or warranty and
assumes no responsibility with respect to the financial condition of any
Borrower or any Guarantor or any of their Subsidiaries or the performance or
observance by such Borrower or such Guarantor or any of their Subsidiaries of
any of their obligations under this Agreement, any other Loan Document or any
other instrument or document furnished pursuant hereto.
(c) The Agent shall maintain at its address referred to in
Section 12.02 hereof a copy of each Assignment and Acceptance delivered to and
accepted by it. Such copies
96
<PAGE>
shall be available for inspection by any Borrower or any Guarantor or any Lender
at any reasonable time and from time to time upon reasonable prior notice.
(d) Upon its receipt of an Assignment and Acceptance executed
by an assigning Lender and an assignee Lender, together with the Notes subject
to such assignment and the processing and recordation fee, if the Agent
consents, which consent will not be unreasonably withheld, to the proposed
Assignment, the Agent shall, if such Assignment and Acceptance has been
completed and is in substantially the form of Exhibit H hereto, (i) accept such
Assignment and Acceptance, and (ii) give prompt notice thereof to the
Administrative Borrower. Within three Business Days after its receipt of such
notice, any Borrower or any Guarantor, at its own expense, shall execute and
deliver to the Agent in exchange for the surrendered Note a new Note to the
order of such assignee Lender in an aggregate principal amount equal to the
Loans and Revolving Credit Commitment assumed by it pursuant to such Assignment
and Acceptance, and if the assigning Lender has retained any Loans and Revolving
Credit Commitment hereunder, a new Note to the order of the assigning Lender in
an aggregate principal amount equal to the Loans and Revolving Credit Commitment
retained by it hereunder. Such new Note or Notes shall be in an aggregate
principal amount equal to the aggregate principal amount of such surrendered
Note or Notes, shall be dated the date of the Agent's acceptance of such
Assignment and Acceptance and shall otherwise be in substantially the form of
Exhibit A hereto. Promptly after each such Assignment and Acceptance becomes
effective, the Agent shall prepare and distribute to each Lender and the
Borrowers a revised Schedule 1.01A hereto after giving effect to such
assignment, which revised Schedule 1.01A shall replace the prior Schedule 1.01A
and become part of this Agreement.
(e) Each Lender shall not sell participations in or to all or
a portion of its rights and obligations under this Agreement (including, without
limitation, all or a portion of its Commitment, the Loans made by it and the
Notes held by it and the Letter of Credit Obligations).
(f) Nothing contained in this Section 12.09 shall prohibit (i)
any Lender from pledging its Loans hereunder to a Federal Reserve Bank in
support of borrowings made by such Lender from such Federal Reserve Bank or (ii)
any Lender from selling participations in its rights and obligations under this
Agreement to any Affiliate of such Lender, provided that such Lender shall
remain obligated for all of its obligations under this Agreement and shall
retain all voting rights under this Agreement.
SECTION 12.10. Counterparts. This Agreement may be executed in any
number of counterparts and by different parties hereto in separate counterparts,
each of which shall be deemed to be an original, but all of which taken together
shall constitute one and the same agreement.
SECTION 12.11. Headings. Section headings herein are included for
convenience of reference only and shall not constitute a part of this Agreement
for any other purpose.
97
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SECTION 12.12. Governing Law. This Agreement, the Notes and the other
Loan Documents shall be governed by, and construed in accordance with, the law
of the State of New York applicable to contracts made and to be performed in the
State of New York without regard to conflicts of law principles. Any legal
action or proceeding with respect to this Agreement or any other Loan Document
may be brought in the courts of the State of New York or of the United States
for the Southern District of New York, and, by execution and delivery of this
Agreement, the Company and each Borrower hereby irrevocably accept in respect of
its property, generally and unconditionally, the jurisdiction of the aforesaid
courts. The Company and each Borrower further irrevocably consent to the service
of process out of any of the aforementioned courts and in any such action or
proceeding by the mailing of copies thereof by registered or certified mail,
postage prepaid, to the Administrative Borrower or the Company at its address
for notices contained in Section 12.02, such service to become effective ten
(10) days after such mailing. Each Borrower and the Company hereby irrevocably
appoint the Secretary of State of the State of New York as its agent for service
of process in respect of any such action or proceeding. Nothing herein shall
affect the right of the Agent to service of process in any other manner
permitted by law or to commence legal proceedings or otherwise proceed against
the Borrowers and/or the Company in any other jurisdiction. The Company and each
Borrower hereby expressly and irrevocably waive, to the fullest extent permitted
by law, any objection which it may now or hereafter have to the laying of venue
of any such litigation brought in any such court referred to above and any claim
that any such litigation has been brought in an inconvenient forum. To the
extent that the Company or any Borrower has or hereafter may acquire any
immunity from jurisdiction of any court or from any legal process (whether
through service or notice, attachment prior to judgment, attachment in aid of
execution or otherwise) with respect to itself or its property, such Person
hereby irrevocably waives such immunity in respect of its obligations under this
Agreement and the other Loan Documents.
SECTION 12.13. WAIVER OF JURY TRIAL, ETC. THE COMPANY AND EACH
-------------------------
BORROWER, THE LENDERS AND THE AGENT HEREBY WAIVE ANY RIGHT TO A TRIAL BY JURY IN
ANY ACTION, PROCEEDING OR COUNTERCLAIM CONCERNING ANY RIGHTS UNDER THIS
AGREEMENT, THE NOTES OR OTHER LOAN DOCUMENTS, OR UNDER ANY AMENDMENT, WAIVER,
CONSENT, INSTRUMENT, DOCUMENT OR OTHER AGREEMENT DELIVERED OR WHICH IN THE
FUTURE MAY BE DELIVERED IN CONNECTION THEREWITH, OR ARISING FROM ANY BANKING
RELATIONSHIP EXISTING IN CONNECTION WITH THIS AGREEMENT, AND AGREE THAT ANY SUCH
ACTION, PROCEEDINGS OR COUNTERCLAIM SHALL BE TRIED BEFORE A COURT AND NOT BEFORE
A JURY. THE COMPANY AND EACH BORROWER CERTIFY THAT NO OFFICER, REPRESENTATIVE,
AGENT OR ATTORNEY OF THE AGENT OR ANY LENDER HAS REPRESENTED, EXPRESSLY OR
OTHERWISE, THAT THE AGENT OR ANY LENDER WOULD NOT, IN THE EVENT OF ANY ACTION,
PROCEEDING OR COUNTERCLAIM, SEEK TO ENFORCE THE FOREGOING WAIVERS. THE COMPANY
AND EACH BORROWER HEREBY ACKNOWLEDGE THAT THIS PROVISION IS A MATERIAL
INDUCEMENT FOR THE AGENT AND THE LENDERS ENTERING INTO THIS AGREEMENT.
98
<PAGE>
SECTION 12.14. Consent by the Agent, Lenders. Except as otherwise
expressly set forth herein to the contrary, if the consent, approval,
satisfaction, determination, judgment, acceptance or similar action (an
"Action") of the Agent, or the Lenders shall be permitted or required pursuant
to any provision of this Agreement or any provision of any other Loan Document,
such Action shall be required to be in writing and may be withheld or denied by
the Agent, or any Lender, as the case may be, with or without any reason, and
without being subject to question or challenge on the grounds that such Action
was not taken in good faith.
SECTION 12.15. No Party Deemed Drafter. The Company, each of the
Borrowers, the Lenders and the Agent agrees that no party hereto shall be deemed
to be the drafter of this Agreement, and each of the Borrowers, the Company, the
Lenders and the Agent further agrees that, in the event this Agreement is ever
construed by a court of law, such court shall not construe this Agreement or any
provision of this Agreement against any party hereto as the drafter of this
Agreement.
SECTION 12.16. Reinstatement; Certain Payments. If claim is ever made
upon the Agent, the Lenders or the L/C Issuer for repayment or recovery of any
amount or amounts received by the Agent, the Lenders or the L/C Issuer in
payment or on account of any of the Obligations under this Agreement, the Agent,
the Lenders or the L/C Issuer shall give prompt notice of such claim to each
other Lender and the L/C Issuer, the Administrative Borrower, and if the Agent,
the Lenders or the L/C Issuer repays all or part of said amount by reason of (i)
any judgment, decree or order of any court or administrative body having
jurisdiction over the Agent, the Lenders or the L/C Issuer or any of their
property, or (ii) any good faith settlement or compromise of any such claim
effected by the Agent with any such claimant, then and in such event the Company
and each Borrower agrees that (A) any such judgment, decree, order, settlement
or compromise shall be binding upon the Company and the Borrowers
notwithstanding the cancellation of any Note or other instrument evidencing the
Obligations under this Agreement or the other Loan Documents or the termination
of this Agreement or the other Loan Documents, and (B) it shall be and remain
liable to the Agent, the Lenders or the L/C Issuer hereunder for the amount so
repaid or recovered to the same extent as if such amount had never originally
been received by the Agent, the Lenders or the L/C Issuer.
SECTION 12.17 Indemnification. In addition to all of the Company's or
any Borrowers' other Obligations under this Agreement, each of the Company and
the Borrowers agree to, jointly and severally, defend, protect, indemnify and
hold harmless the Agent, the Administrative Agent, the L/C Issuer, each Lender,
and all of the respective officers, directors, employees, attorneys, consultants
and agents of the Agent, the Administrative Agent, the L/C Issuer and each
Lender (collectively called the "Indemnitees") from and against any and all
losses, damages, liabilities, obligations, penalties, fees, reasonable costs and
expenses (including, without limitation, reasonable attorneys' fees, costs and
expenses) incurred by such Indemnitees, whether prior to or from and after the
Effective Date, whether direct, indirect or consequential, as a result of or
arising from or relating to or in connection with any of the following: (i) the
negotiation, preparation, execution or performance or enforcement of this
Agreement, any Loan Document or of any other document executed in connection
with the transactions contemplated by this Agreement, (ii) the Lender's
furnishing of funds to the Borrowers or the L/C Issuer's
99
<PAGE>
issuing Letters of Credit for the account of the Borrowers under this Agreement,
including, without limitation, the apportionment, allocation, disposition or
management of any such Loans or the Reimbursement Obligations, (iii) any matter
relating to the financing transactions contemplated by this Agreement or by any
document executed in connection with the transactions contemplated by this
Agreement, or (iv) any claim, litigation, investigation or proceeding relating
to any of the foregoing, whether or not any Indemnitee is a party thereto
(collectively, the "Indemnified Matters"); provided, however, that the Company
and the Borrowers shall have no obligation to any Indemnitee hereunder for any
Indemnified Matter caused by or resulting from the gross negligence or willful
misconduct of such Indemnitee, as determined by a final judgment of a court of
competent jurisdiction. Such indemnification for all of the foregoing losses,
damages, fees, costs and expenses of the Indemnitees are chargeable against the
Loan Account. To the extent that the undertaking to indemnify, pay and hold
harmless set forth in this Section 12.17 may be unenforceable because it is
violative of any law or public policy, the Company and the Borrowers shall
contribute the maximum portion which they are permitted to pay and satisfy under
applicable law, to the payment and satisfaction of all Indemnified Matters
incurred by the Indemnitees. The Indemnity shall survive the repayment of the
Obligations and the discharge of the Liens granted under the Loan Documents.
SECTION 12.18. Binding Effect. This Agreement shall become effective
when it shall have been executed by the Company, the Borrowers, the Agent, the
Administrative Agent and the Lenders and when the conditions precedent set forth
in Section 5.01 hereof have been satisfied or waived by the Agent, and
thereafter shall be binding upon and inure to the benefit of the Company, each
Borrower, the Agent and each Lender, and their respective successors and
assigns, except that the Company and the Borrowers shall not have the right to
assign their rights hereunder or any interest herein without the prior written
consent of all the Lenders, and the assignment by any Lender shall be governed
by Section 12.09 hereof.
100
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this
Agreement to be executed by their respective officers thereunto duly authorized,
as of the date first above written.
ARIS INDUSTRIES, INC.
By: _________________________
Title: _______________________
EUROPE CRAFT IMPORTS, INC.
By: _________________________
Title: _______________________
ECI SPORTSWEAR, INC.
By: _________________________
Title: _______________________
STETSON CLOTHING COMPANY, INC.
By: _________________________
Title: _______________________
AGENT AND LENDER
THE CIT GROUP/COMMERCIAL
SERVICES, INC.
By: _________________________
Title: _______________________
101
<PAGE>
LENDERS
ISRAEL DISCOUNT BANK OF NEW YORK
By: _________________________
Title: _______________________
By: _________________________
Title: _______________________
102
<PAGE>
FINANCING AGREEMENT
Dated as of February 26, 1999
by and among
ARIS INDUSTRIES, INC.,
EUROPE CRAFT IMPORTS, INC.,
ECI SPORTSWEAR, INC.,
STETSON CLOTHING COMPANY, INC.,
THE FINANCIAL INSTITUTIONS
FROM TIME TO TIME PARTY HERETO,
and
THE CIT GROUP/COMMERCIAL SERVICES, INC.,
as Agent
<PAGE>
TABLE OF CONTENTS
PAGE
ARTICLE I DEFINITIONS; CERTAIN TERMS 1
SECTION 1.01.Definitions 1
SECTION 1.02.Accounting and Other Terms 20
SECTION 1.03.Time References 20
ARTICLE II THE LOANS 20
SECTION 2.01.Commitments 20
SECTION 2.02.Loans 20
SECTION 2.03.Making the Loans 20
SECTION 2.04.Notes; Repayment of Loans 21
SECTION 2.05.Funding and Settlement Procedures 21
SECTION 2.06.Interest 23
SECTION 2.07.Reduction of Commitment; Prepayment of Loans 24
SECTION 2.08.Fees 26
SECTION 2.09.Eurodollar Rate Not Determinable; Illegality or
Impropriety 27
SECTION 2.10.Indemnity 28
SECTION 2.11.Continuation and Conversion of Loans 29
SECTION 2.12.Taxes 29
SECTION 2.13.Joint and Several Liability of the Borrowers 32
ARTICLE III LETTERS OF CREDIT 33
SECTION 3.01.Letter of Credit Guaranty 33
SECTION 3.02.Participations 36
SECTION 3.03.Letters of Credit 38
ARTICLE IV FEES, PAYMENTS AND OTHER COMPENSATION 39
SECTION 4.01.Audit and Collateral Monitoring Fees 39
SECTION 4.02.Payments; Computations and Statements 39
SECTION 4.03.Sharing of Payments, Etc. 40
SECTION 4.04.Apportionment of Payments 41
SECTION 4.05.Increased Costs and Reduced Return 41
SECTION 4.06 Calculation of Borrowing Base 43
ARTICLE V CONDITIONS OF EFFECTIVENESS, LETTER OF CREDIT
ISSUANCE AND LENDING 43
SECTION 5.01.Conditions Precedent to Effectiveness 43
SECTION 5.02.Conditions Precedent to Loans and Letters of Credit 48
ARTICLE VI REPRESENTATIONS AND WARRANTIES 49
SECTION 6.01.Representations and Warranties 49
(1)
<PAGE>
ARTICLE VII COVENANTS OF THE BORROWER 55
SECTION 7.01.Affirmative Covenants 55
SECTION 7.02.Negative Covenants 64
ARTICLE VIII MANAGEMENT, COLLECTION AND STATUS OF
ACCOUNTS RECEIVABLE AND OTHER COLLATERAL 73
SECTION 8.01.Management of Collateral 73
SECTION 8.02.Accounts Receivable Documentation 74
SECTION 8.03.Status of Accounts Receivable and Other Collateral 75
SECTION 8.04.Collateral Custodian 76
ARTICLE IX THE AGENT 76
SECTION 9.01.Authorization and Action 76
SECTION 9.02.Borrower's Default 77
SECTION 9.03.Agent's Reliance, Etc. 77
SECTION 9.04.CIT. 78
SECTION 9.05.Lender Credit Decision 78
SECTION 9.06.Indemnification 78
SECTION 9.07.Successor Agent 79
SECTION 9.08.Collateral Matters 79
ARTICLE X EVENTS OF DEFAULT 81
SECTION 10.01.Events of Default 81
SECTION 10.02.Deposit for Letters of Credit 83
ARTICLE XI GUARANTY 84
SECTION 11.01.Guaranty 84
SECTION 11.02.Obligations Unconditional 84
SECTION 11.03.Waivers 85
SECTION 11.04.Subrogation 85
SECTION 11.05.No Waiver; Remedies 85
SECTION 11.06.Stay of Acceleration 86
ARTICLE XII MISCELLANEOUS 86
SECTION 12.01.Termination 86
SECTION 12.02.Notices, Etc. 87
SECTION 12.03.Amendments, Etc. 88
SECTION 12.04.No Waiver; Remedies, Etc. 89
SECTION 12.05.Expenses; Taxes; Attorneys' Fees 89
SECTION 12.06.The Administrative Borrower as Agent for Borrowers 90
SECTION 12.07.Right of Set Off 91
SECTION 12.08.Severability 91
SECTION 12.09.Assignments and Participations 91
SECTION 12.10.Counterparts 93
SECTION 12.11.Headings 93
(2)
<PAGE>
SECTION 12.12.Governing Law 93
SECTION 12.13.WAIVER OF JURY TRIAL, ETC. 94
SECTION 12.14.Consent by the Agent, Lenders 94
SECTION 12.15.No Party Deemed Drafter 94
SECTION 12.16.Reinstatement; Certain Payments 95
SECTION 12.17Indemnification 95
SECTION 12.18.Binding Effect 96
SCHEDULE 1.01A Lenders and Lenders' Commitments
SCHEDULE 1.01B Fiscal Year, Fiscal Month and Fiscal Quarter
SCHEDULE 1.01C License Agreements
SCHEDULE 1.01D Inventory to be Liquidated
SCHEDULE 3.03(b)(ii) L/C Charges
SCHEDULE 3.03(c) Existing Letters of Credit
SCHEDULE 6.01(e) Inventory Locations
SCHEDULE 6.01(f) Subsidiaries
SCHEDULE 6.01(g) Litigation
SCHEDULE 6.01(j) ERISA
SCHEDULE 6.01(k) Tax Matters
SCHEDULE 6.01(s) Operating Lease Obligations
SCHEDULE 6.01(v) Insurance
SCHEDULE 6.01(y) Tradenames
SCHEDULE 6.01(aa) Material Contracts
SCHEDULE 6.01(cc) Bank Accounts
SCHEDULE 7.02(a)(ii) Liens
SCHEDULE 7.02(b)(ii) Indebtedness
SCHEDULE 7.02(c)(iii) Guaranties
SCHEDULE 7.02(f)(ii) Investments
SCHEDULE 7.02(g) Capitalized Lease Obligations
SCHEDULE 7.02(m) Transactions with Affiliates
EXHIBIT A Form of Revolving Credit Note
EXHIBIT B-1 Form of Subsidiary Guaranty
EXHIBIT B-2 Form of Borrower Guaranty
EXHIBIT C-1 Form of Borrower Security Agreement
EXHIBIT C-2 Form of Guarantor Security Agreement
EXHIBIT D Form of Borrower Pledge Agreement
EXHIBIT E Form of Letter of Credit Application
EXHIBIT F Form of Counsel Opinion
EXHIBIT G Intentionally Omitted
EXHIBIT H Form of Assignment and Acceptance
EXHIBIT I Form of Notice of Borrowing
(3)
<PAGE>
EXHIBIT J Form of Borrowing Base Certificate
EXHIBIT K Form of Intercompany Note
(4)
<PAGE>
Schedule 1.01A
Lenders and Lenders' Commitments
Revolving
Lender Credit Commitment Percentage
The CIT Group/ $55,000,000 84.6154%
Commercial Services, Inc.
Israel Discount Bank of New York $10,000,000 15.3846%
----------- --------
$65,000,000 100%
<PAGE>
Schedule 1.01B
Fiscal Year
Fiscal Month
Fiscal Quarter
EXHIBIT 21
LIST OF SUBSIDIARIES
Name of Subsidiary Jurisdiction of Incorporation
- ------------------ -----------------------------
Europe Craft Imports, Inc. New Jersey
ECI Sportswear, Inc. New York
All other subsidiaries of the Registrant, considered in the aggregate as a
single subsidiary, do not constitute a significant subsidiary as of the end of
the year covered by this Annual Report, and, therefore, their names have been
omitted.
EXHIBIT 23
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in Registration Statement
No. 333-63411 of Aris Industries, Inc. and Subsidiaries on Form S-8 of our
report dated March 31, 1999, appearing in this Annual Report on Form 10-K of
Aris Industries, Inc. and Subsidiaries for the fiscal year ended December 31,
1998.
/S/ Deloitte & Touche LLP
Parsippany, New Jersey
April 12, 1999
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
EXHIBIT 27
<ARTICLE> 5
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> DEC-31-1998
<CASH> 1,112,000
<SECURITIES> 0
<RECEIVABLES> 29,905,000
<ALLOWANCES> 0
<INVENTORY> 26,371,000
<CURRENT-ASSETS> 59,141,000
<PP&E> 6,280,000
<DEPRECIATION> 5,186,000
<TOTAL-ASSETS> 81,655,000
<CURRENT-LIABILITIES> 50,043,000
<BONDS> 16,438,000
<COMMON> 151,000
0
0
<OTHER-SE> 13,941,000
<TOTAL-LIABILITY-AND-EQUITY> 81,655,000
<SALES> 127,680,000
<TOTAL-REVENUES> 129,250,000
<CGS> 98,140,000
<TOTAL-COSTS> 98,140,000
<OTHER-EXPENSES> 29,950,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 5,220,000
<INCOME-PRETAX> (4,060,000)
<INCOME-TAX> 190,000
<INCOME-CONTINUING> (4,250,000)
<DISCONTINUED> 0
<EXTRAORDINARY> 522,000
<CHANGES> 0
<NET-INCOME> (3,728,000)
<EPS-PRIMARY> (0.25)
<EPS-DILUTED> (0.25)
</TABLE>
