<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JULY 3, 1996
REGISTRATION NO. 333-
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
GARGOYLES, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C> <C>
WASHINGTON 3851 91-1247269
(STATE OF INCORPORATION) (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
CLASSIFICATION CODE NUMBER) IDENTIFICATION NUMBER)
</TABLE>
5866 SOUTH 194TH STREET
KENT, WASHINGTON 98032
(206) 872-6100
(ADDRESS AND TELEPHONE NUMBER OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
------------------------
STEVEN R. KINGMA
VICE PRESIDENT, CHIEF FINANCIAL OFFICER,
SECRETARY AND TREASURER
GARGOYLES, INC.
5866 SOUTH 194TH STREET
KENT, WASHINGTON 98032
(206) 872-6100
(NAME, ADDRESS AND TELEPHONE NUMBER OF AGENT FOR SERVICE)
------------------------
COPIES TO:
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STEWART M. LANDEFELD CYNTHIA L. POPE MICHAEL J. ERICKSON
L. MICHELLE WILSON 114 W. Magnolia Street LAURA A. BERTIN
Perkins Coie 4th Floor JONATHAN K. WRIGHT
1201 Third Avenue, 40th Floor Bellingham, Washington 98225 Heller, Ehrman, White & McAuliffe
Seattle, Washington 98101-3099 (360) 671-5939 6100 Columbia Center
(206) 583-8888 701 Fifth Avenue
Seattle, Washington 98104
(206) 447-0900
</TABLE>
-----------------------
Approximate date of commencement of proposed sale to the public: AS SOON AS
PRACTICABLE AFTER THIS REGISTRATION STATEMENT BECOMES EFFECTIVE.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. / /
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act of 1933, check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. / / __________________
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act of 1933, check the following box and list the
Securities Act registration statement number of the earlier effective
registration statement for the same offering. / / ___________________________
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. / /
-----------------------
CALCULATION OF REGISTRATION FEE
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<S> <C> <C> <C> <C>
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PROPOSED MAXIMUM PROPOSED MAXIMUM
TITLE OF EACH CLASS OF AMOUNT TO BE OFFERING PRICE AGGREGATE OFFERING AMOUNT OF
SECURITIES TO BE REGISTERED REGISTERED(1) PER SHARE(2) PRICE(2) REGISTRATION FEE
- -----------------------------------------------------------------------------------------------------------------
Common Stock, no par value........ 3,066,667 shares $15.00 $46,000,005 $15,863
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</TABLE>
(1) Includes 400,000 shares that the Underwriters have the option to purchase to
cover over-allotments, if any.
(2) Estimated solely for the purpose of calculating the registration fee in
accordance with Rule 457(c).
------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
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- --------------------------------------------------------------------------------
<PAGE> 2
GARGOYLES, INC.
CROSS-REFERENCE SHEET
PURSUANT TO ITEM 501(B) OF REGULATION S-K
<TABLE>
<CAPTION>
ITEMS OF FORM S-1 LOCATION IN PROSPECTUS
- --------------------------------------------------- ----------------------------------------
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Item 1. Forepart of the Registration Statement
and Outside Front Cover Page of
Prospectus............................ Outside Front Cover Page
Item 2. Inside Front and Outside Back Cover
Pages of Prospectus................... Inside Front and Outside Back Cover
Pages
Item 3. Summary Information, Risk Factors and
Ratio of Earnings to Fixed Charges.... Prospectus Summary; Risk Factors
Item 4. Use of Proceeds......................... Use of Proceeds
Item 5. Determination of Offering Price......... Outside Front Cover Page; Risk Factors;
Underwriting
Item 6. Dilution................................ Risk Factors; Dilution
Item 7. Selling Security Holders................ Principal and Selling Shareholders
Item 8. Plan of Distribution.................... Outside and Inside Front Cover Pages;
Underwriting
Item 9. Description of Securities to Be
Registered............................ Description of Capital Stock
Item 10. Interests of Named Experts and
Counsel............................... Not Applicable
Item 11. Information With Respect to the
Registrant............................ Outside and Inside Front Cover Pages;
Prospectus Summary; Risk Factors; The
Company; Dividend Policy;
Capitalization; Selected Financial
Data; Pro Forma Financial Information;
Management's Discussion and Analysis
of Financial Condition and Results of
Operations; Business; Management;
Certain Transactions; Principal and
Selling Shareholders; Shares Eligible
for Future Sale; Legal Matters;
Experts; Additional Information;
Consolidated Financial Statements
Item 12. Disclosure of Commission Position on
Indemnification for Securities Act
Liabilities........................... Not Applicable
</TABLE>
<PAGE> 3
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR
MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT
BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR
THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE
SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE
UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS
OF ANY SUCH STATE.
SUBJECT TO COMPLETION, DATED JULY 3, 1996
PROSPECTUS
2,666,667 SHARES
GARGOYLES
COMMON STOCK
------------------
Of the 2,666,667 shares of Common Stock offered hereby (the "Offering"),
1,666,667 shares are being sold by Gargoyles, Inc. (the "Company" or
"Gargoyles") and 1,000,000 shares are being sold by certain shareholders (the
"Selling Shareholders"). See "Principal and Selling Shareholders." The Company
will not receive any of the proceeds from the sale of shares by the Selling
Shareholders.
Prior to the Offering, there has not been a public market for the Common
Stock of the Company. It is currently estimated that the initial public offering
price will be between $ and $ per share. See "Underwriting"
for information relating to the factors to be considered in determining the
initial public offering price. Application has been made to have the Common
Stock listed on the Nasdaq National Market under the symbol "GOYL."
------------------------
SEE "RISK FACTORS" BEGINNING ON PAGE 7 FOR A DISCUSSION OF CERTAIN FACTORS
THAT SHOULD BE CONSIDERED BY PROSPECTIVE PURCHASERS OF THE COMMON STOCK OFFERED
HEREBY.
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
- --------------------------------------------------------------------------------
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UNDERWRITING PROCEEDS TO
PRICE TO DISCOUNTS AND PROCEEDS TO SELLING
PUBLIC COMMISSIONS(1) COMPANY(2) SHAREHOLDERS(2)
- -----------------------------------------------------------------------------------------------------
Per Share................... $ $ $ $
- -----------------------------------------------------------------------------------------------------
Total(3).................... $ $ $ $
- -----------------------------------------------------------------------------------------------------
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</TABLE>
(1) For information regarding indemnification of the Underwriters, see
"Underwriting."
(2) Before deducting expenses estimated at $850,000, of which $800,000 are
payable by the Company and $50,000 are payable by the Selling Shareholders.
(3) The Company and the Selling Shareholders have granted the Underwriters a
30-day option to purchase up to 400,000 additional shares of Common Stock
solely to cover over-allotments, if any. See "Underwriting." If such option
is exercised in full, the total Price to Public, Underwriting Discounts and
Commissions, Proceeds to Company and Proceeds to Selling Shareholders will
be $ , $ , $ and $ , respectively.
------------------------
The shares of Common Stock are being offered by the several Underwriters
named herein, subject to prior sale, when, as and if accepted by them and
subject to certain conditions. It is expected that certificates for the shares
of Common Stock offered hereby will be available for delivery on or
about , 1996, at the office of Smith Barney Inc., 333 West 34th
Street, New York, New York 10001.
------------------------
SMITH BARNEY INC. ROBERTSON, STEPHENS & COMPANY
, 1996
<PAGE> 4
[gatefold cover with three pages of photographs depicting Gargoyles
products and athletic endorsements]
------------------------
Gargoyles is a federally registered trademark of the Company. The Company
has applied for federal registration of the marks Legends, Helios, Paladin,
Vortex, Octane and the G design featured on the cover of this Prospectus. The
Company has common-law trademark rights in the marks Classic, 85s, Legends II
and Griffey Wrap. Timberland and the tree logo are registered trademarks of The
Timberland Company. All other trademarks or registered trademarks appearing in
this Prospectus are trademarks or registered trademarks of the respective
companies that utilize them.
IN CONNECTION WITH THE OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE
COMMON STOCK OFFERED HEREBY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL
IN THE OPEN MARKET. SUCH TRANSACTIONS MAY BE EFFECTED ON THE NASDAQ NATIONAL
MARKET, IN THE OVER-THE-COUNTER MARKET OR OTHERWISE. SUCH STABILIZING, IF
COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
2
<PAGE> 5
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and consolidated financial statements, including the notes thereto,
appearing elsewhere in this Prospectus. Prospective investors should carefully
consider the information set forth under "Risk Factors." Unless otherwise
indicated, the information contained in this Prospectus assumes (i) a 5.86-to-1
split of the Common Stock to be effective prior to the closing of the Offering,
subject to certain conditions (see "Description of Capital Stock"), and (ii)
that the Underwriters' over-allotment option is not exercised. References herein
to Gargoyles and the Company include certain predecessors and subsidiaries. See
"The Company."
THE COMPANY
Gargoyles designs, manufactures and markets a broad line of performance and
lifestyle-oriented sunglasses. The Company competes in the rapidly growing
premium sunglass market by offering a diverse line of products at suggested
retail prices of $80 to $190. The Company seeks to distinguish Gargoyles brand
products in the marketplace by combining innovative styling with its patented
dual lens toric curve technology, which the Company believes is the most
advanced lens design currently available in wrap sunglasses. The Company
believes these features appeal not only to active sports enthusiasts who favor
the performance and comfort features of its products, but also to consumers who
appreciate Gargoyles' distinctive styling and innovative designs. In addition,
the Company recently acquired the Hobie sunglass line, a leading line of
polarized sunglasses, which is one of the fastest emerging categories within the
premium sunglass market. The Company also offers a popular line of protective
eyewear focused primarily on the medical and dental market segments. The Company
believes that the diversity of its product lines, combined with increasing
awareness among consumers of the Gargoyles and Hobie brands and their unique
attributes, has positioned it to capitalize on the strong growth potential in
the domestic and international premium sunglass markets. The Company's net sales
have increased at a compounded annual growth rate of 40% from 1992 through 1995.
For the first quarter of 1996, the Company achieved growth in net sales of 112%
compared to the same period in the prior year.
The Company was founded in 1979 to develop a sunglass style that not only
would cover and protect the eyes more effectively than traditional "flat" lens
designs, but also would minimize distortion. In 1983, the Company completed the
development of its patented dual lens toric curve technology. The complex
geometry of the proprietary toric curve lens minimizes distortion associated
with other wrap lens designs by allowing the transmission of light directly to
the eye with little refraction. The dual lens design provides each eye with its
own optical center of focus, resulting in greater overall optical clarity and
less peripheral distortion. The Company believes this proprietary technology
offers the most advanced and optically correct sunglass lens design available in
wrap sunglasses and provides a significant differential competitive advantage.
In 1983, the Company introduced its first product based on this proprietary
technology, the Gargoyles Classic. Until 1992, the Company was a successful
single-product company with relatively few resources devoted to expanding its
product line, and was dependent on independent manufacturers' representatives to
sell its products. In May 1992, the Company began installing a new management
team which has developed and implemented new operating and growth strategies
designed to exploit the patented dual lens toric curve technology and to
capitalize on the growth trends within the premium sunglass market. These
strategies included an aggressive, innovative new product development program
resulting in the introduction of numerous models, including 85s in 1993, Legends
in 1994, Helios and Legends II in 1995, and Paladin, Octane and Vortex in 1996.
In addition, the Company began investing in its own direct sales force in 1994
to expand distribution and gain more control over the sales process. The Company
also initiated a strategy to enhance the Gargoyles brand image and promote the
performance characteristics of its products by aggressively pursuing strategic
endorsements from professional athletes such as Dale Earnhardt, Ken Griffey,
Jr., Alexi Lalas and Scottie Pippen. The Company believes that these strategies
have contributed to its rapid sales growth and have created a platform for the
continued success of the Gargoyles brand.
3
<PAGE> 6
The Company has leveraged its infrastructure and direct sales force by
adding new brands through acquisitions and licensing arrangements that can
increase sales without commensurate increases in operating expenses. In
particular, the Company acquired Hobie's sunglass business in February 1996 (the
"Hobie Acquisition"), which broadened the Company's technology base to include
polarized sunglasses. Further, in May 1996, the Company, together with the
former president of Revo, Inc. ("Revo"), entered into a worldwide license
agreement with The Timberland Company ("Timberland") to design, manufacture and
market sunglasses under the Timberland brand name. The Company believes the
worldwide appeal of the Timberland brand name will assist the Company in further
penetrating the outdoor-lifestyle market segment. Management believes that the
addition of these brands to the Company's portfolio of products will provide
incremental synergies in sales, marketing, distribution, manufacturing and
general and administrative expenses.
Growth Strategies
The Company's goal is to be the premier designer, manufacturer and marketer
of performance and lifestyle-oriented premium sunglasses and protective eyewear.
Management believes that its strategies have positioned the Company to achieve
continued growth in revenues and earnings. Key elements of the Company's growth
strategies include the following:
- - Capitalize on growth in premium sunglass market. The Company will continue to
focus on increasing its penetration within the premium sunglass segment, which
has grown approximately 82% from 1989 to 1995. Management believes that this
segment will continue to experience rapid growth. The Company also expects to
benefit from increasing penetration of the premium sunglass market by the
Company's existing customers, including its largest customer, Sunglass Hut
International, Inc. ("Sunglass Hut"). The Company believes that as large
sunglass specialty retailers continue to grow, they will increasingly require
well-capitalized vendors which are able to provide adequate product supply on
a reliable basis.
- - Develop and introduce new products. The Company is committed to capitalizing
on its existing market position and proprietary technology by developing new
products and product line extensions that incorporate superior performance and
unique styling. To support its new product initiatives, the Company maintains
an active research and development effort, which has resulted in the
introduction of eight product lines since 1993, including the Paladin, Octane
and Vortex models in 1996. In 1997, the Company anticipates introducing a
number of new products, including its lifestyle-oriented Timberland brand
product line and several new Hobie brand polarized sunglass models.
- - Expand customer base. The Company is focused on expanding its customer base
both domestically and internationally. The strategies of adding a direct sales
force dedicated to selling the Company's products and adding manufacturers'
representatives and distributors to supplement service to the sporting goods
and optical store markets have resulted in significant growth in the number of
its accounts. Since the addition of a direct sales force in 1994, the Company
has added over 1,000 new accounts, and believes there are still significant
opportunities to expand its customer base.
- - Focus on international expansion. The Company believes that international
expansion represents a significant growth opportunity. International sales
accounted for approximately 6% of the Company's net sales in 1995, a
significantly lower penetration than that of the Company's primary
competitors. The Company's international growth plans are based on developing
international distribution networks and investing in overseas operations.
- - Selectively pursue acquisition and licensing opportunities. The Company seeks
to acquire businesses or to create licensing arrangements with companies
having high-quality products, strong brand names and growth potential. The
focus of the Company's acquisition and licensing efforts is to (i) augment the
Company's product lines, (ii) enhance the Company's distribution capabilities,
(iii) leverage the Company's operating infrastructure, and (iv) access new
technology. In particular, the Company's acquisition and integration of Hobie
and its license agreement with Timberland provide new brand names and a
broader customer base, and create distribution and operating synergies.
4
<PAGE> 7
THE OFFERING
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Common Stock Offered Hereby by:
The Company................................ 1,666,667 shares
The Selling Shareholders................... 1,000,000 shares
Common Stock to Be Outstanding After the
Offering................................... 7,542,304 shares(1)
Use of Proceeds.............................. To repay outstanding indebtedness; to fund
start-up costs for the Timberland product
line; and for working capital and other
general corporate purposes. See "Use of
Proceeds."
Proposed Nasdaq National Market Symbol....... "GOYL"
</TABLE>
- ---------------
(1) Excludes, as of June 30, 1996, 570,898 shares of Common Stock reserved for
issuance pursuant to the Company's benefit plan, of which options to
purchase 485,338 shares were outstanding with a weighted average exercise
price of $3.42 per share, and 41,020 shares of Common Stock reserved for
issuance pursuant to an outstanding warrant with an exercise price of $4.26
per share. See "Management -- Benefit Plan," "Description of Capital Stock"
and "Certain Transactions."
The Company was incorporated in 1983. The Company's headquarters are
located at 5866 South 194th Street, Kent, Washington 98032, and its telephone
number is (206) 872-6100.
This Prospectus contains certain forward-looking statements which involve
known and unknown risks, uncertainties and other factors which may cause actual
results, performance or achievements of the Company or industry trends to differ
materially from those expressed or implied by such forward-looking statements.
Such factors include, among others, those discussed in "Risk Factors" and
elsewhere in this Prospectus.
5
<PAGE> 8
SUMMARY FINANCIAL DATA
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
------------------------------------------------- THREE MONTHS
NOVEMBER 30, ENDED MARCH 31,
---------------------------------- DECEMBER 31, ---------------
1991 1992 1993 1994 1995 1995 1996
------ ------ ------ ------- ------------ ------ ------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net sales.................................. $6,371 $6,317 $8,242 $11,083 $ 17,138 $3,294 $6,994
Gross profit............................... 3,848 3,834 4,999 6,818 10,611 2,021 4,129
Total operating expenses(1)................ 3,119 3,360 4,314 6,333 10,281 2,332 3,775
------ ------ ------ ------- ------- ------ ------
Income (loss) from operations(2)........... 729 474 685 485 810 (66) 515
Interest expense, net...................... (60) (35) (55) (176) (1,043) (101) (529)
Other income (charges)(3).................. 5 87 2 -- (2,164) (569) (2)
------ ------ ------ ------- ------- ------ ------
Income (loss) before income taxes.......... 674 526 632 309 (2,397) (736) (16)
Income tax provision (benefit)............. 87 107 40 10 (100) (290) --
------ ------ ------ ------- ------- ------ ------
Net income (loss).......................... $ 587 $ 419 $ 592 $ 299 $ (2,297) $ (446) $ (16)
====== ====== ====== ======= ======= ====== ======
Pro forma net income (loss)(4)............. $ 424 $ 380 $ 415 $ 179 $ (2,343) $ (492) $ (16)
====== ====== ====== ======= ======= ====== ======
Pro forma net income (loss) per share(5)... $ 0.07 $ 0.06 $ 0.07 $ 0.03 $ (0.38) $(0.08) $(0.00)
Shares used in computing pro forma net
income (loss) per share(5)............... 6,138 6,138 6,138 6,138 6,138 6,138 6,141
SUPPLEMENTAL DATA:
Pro forma net sales(6)..................... $14,774 $ 21,182 $4,167 $7,305
Adjusted pro forma net income(7)........... 616 295
Adjusted pro forma net income per
share(8)................................. $ 0.08 $ 0.04
</TABLE>
<TABLE>
<CAPTION>
MARCH 31, 1996
--------------------------
BALANCE SHEET DATA: ACTUAL AS ADJUSTED(9)
------- --------------
<S> <C> <C>
Working capital.............................................................. $(6,096) $ 10,337
Total assets................................................................. 19,849 21,649
Total debt................................................................... 20,350 --
Shareholders' equity (deficit)............................................... (7,059) 15,091
</TABLE>
- ---------------
(1) Includes a $312,000 loss on a discontinued distribution agreement for the
year ended December 31, 1995. Also includes stock compensation expense of
$250,000, $105,000 and $25,000 for the year ended December 31, 1995 and the
three months ended March 31, 1995 and 1996, respectively.
(2) Includes license income of $480,000, $245,000 and $161,000 for the year
ended December 31, 1995 and the three months ended March 31, 1995 and 1996,
respectively.
(3) Includes nonrecurring charges for recapitalization expenses of $574,000 for
the year ended December 31, 1995 and the three months ended March 31, 1995
and provision for loss on affiliate of $1.6 million for the year ended
December 31, 1995.
(4) Antone Manufacturing, Inc., an affiliated company, had previously been taxed
as an S corporation. The pro forma net income amounts for all periods prior
to 1996 reflect adjustments for income taxes as if Antone Manufacturing,
Inc. had been taxed as a C corporation rather than an S corporation.
(5) See Note 1 of Notes to the Company's Consolidated Financial Statements for
an explanation of the number of shares used in computing pro forma net
income (loss) per share.
(6) Amounts give effect to the Hobie Acquisition as if such transaction had
occurred at the beginning of the respective periods.
(7) Amounts give effect to the Hobie Acquisition and the application of the
estimated net proceeds from the Offering as if such transactions had
occurred at the beginning of the respective periods (see "Pro Forma
Financial Information"), and reflect the elimination of certain nonrecurring
charges of $2.4 million for 1995 and $25,000 for 1996 (see footnote 4 to the
table in "Selected Financial Data").
(8) Adjusted pro forma net income per share amounts are computed based on the
number of shares determined in accordance with Note 1 to the Company's
Consolidated Financial Statements, adjusted for the number of shares issued
in connection with the Hobie Acquisition and the number of shares assumed to
be issued in connection with the Offering as if such transactions had
occurred at the beginning of the respective periods.
(9) Adjusted to reflect the application of the estimated net proceeds from the
Offering.
6
<PAGE> 9
RISK FACTORS
Prospective purchasers of the Common Stock offered hereby should consider
carefully the factors set forth below, as well as other information set forth in
this Prospectus, in evaluating an investment in the Common Stock.
ABILITY TO SUSTAIN AND MANAGE GROWTH
The Company has experienced significant growth in revenues in recent
periods. The continued growth of the Company's revenues and its ability to
generate profits will depend on, among other factors, the continued growth of
the premium sunglass market, the Company's ability to develop and introduce new
products, and the Company's efforts to broaden and increase sales through its
domestic and international sales and distribution channels.
If the Company continues to experience significant growth, its future
success will also depend on its ability to manage growth as it expands its
production and marketing capacities, which will place a significant strain on
the Company's employees and operations. To manage growth effectively, the
Company will be required to continue to implement changes in certain aspects of
its business, expand its operations and develop, train, manage and assimilate an
increasing number of management-level and other employees. The Company depends
on its management information systems to process orders, manage inventories and
receivables, track product through its expanding manufacturing operations and
otherwise maintain cost-efficient operations. As the Company grows, it will be
required to augment its management information systems from time to time, as a
result of which there can be no assurance that the Company will not experience
systems failures or interruptions. In addition, because the Company's existing
facilities will not be sufficient to support its growth plans, the Company
intends to relocate or expand its existing facilities in 1997, which could cause
delays or interruptions in the Company's operations. If management is unable to
manage growth effectively, the Company's business, prospects, financial
condition and operating results could be materially adversely affected.
DEPENDENCE ON NEW PRODUCT INTRODUCTIONS
The sustainability of the Company's growth will depend, in part, on its
continued ability to develop and introduce innovative products. Innovative
designs are often not successful, and successful product designs can be
displaced by other product designs introduced by competitors that shift market
preferences in their favor. The Company is introducing more lifestyle-oriented
sunglasses, which may have relatively short life cycles, thereby requiring the
Company to introduce new products more frequently. In addition, competitors may
follow the Company's introduction of successful products with similar product
offerings. The eyewear industry is subject to changing consumer preferences, and
the Company's sunglasses are likely to be susceptible to fashion trends. If the
Company misjudges the market for a particular product, the Company's sales may
be adversely affected and it may be faced with excess inventories and
underutilized manufacturing capacity. As a result of these and other factors,
there can be no assurance that the Company will successfully maintain or
increase its market share.
COMPETITION
The premium segment of the nonprescription sunglass market is highly
competitive. The Company competes with a number of established companies,
including Bausch & Lomb Incorporated ("Bausch & Lomb"), the marketer of the Ray
Ban, Killer Loop, Arnette and Revo brands, and Oakley, Inc. ("Oakley"), which
together control approximately 50% of the premium market segment, and with
several companies having smaller but significant market shares. Several of these
companies have substantially greater resources and better name recognition than
the Company and sell their products through broader and more diverse
distribution channels. The Company could also face competition from new
competitors, including established branded consumer products companies, such as
Nike, Inc., that also have greater financial and other resources than the
Company. In addition, as the Company expands internationally, it will face
substantial competition from companies that have already established their
products in international markets and consequently have
7
<PAGE> 10
significantly more experience in those markets than the Company. The major
competitive factors in the premium sunglass market include fashion trends, brand
recognition, method of distribution and the number and range of products
offered. In addition, to retain and increase its market share, the Company must
continue to be competitive in the areas of quality and performance, technology,
intellectual property protection and customer service. See
"Business -- Competition."
ABILITY TO SUCCESSFULLY INTEGRATE ACQUISITIONS AND LICENSED PRODUCTS
The integration and consolidation of the Hobie sunglass line, the
development of products under the Timberland brand and future acquisitions and
licensing arrangements will require substantial management, financial and other
resources and may pose risks with respect to the Company's business, prospects,
financial condition and operating results. There can be no assurance that the
Company's resources will be sufficient to accomplish the integration of the
Hobie and Timberland products and brands, or that the Company will not
experience difficulties with customers, personnel or others. In addition,
although the Company believes that its acquisitions and licensing arrangements
will enhance its competitive position and business prospects, there can be no
assurance that such benefits will be realized or that the combination of the
Company with other companies will be successful. The success of the Hobie
Acquisition will depend in part on the Company's ability to integrate the Hobie
manufacturing and inventory control systems with those used for the Company's
other products. The success of the Timberland license arrangement, the Company's
first effort to develop a new product line using a third-party brand, will
depend in part on the Company's ability to expand recognition and acceptance of
the Timberland brand into the sunglass market, and the Company's ability to
expand its products from a sports-oriented product line to include a
lifestyle-oriented line for Timberland. There can be no assurance that the
Company's efforts will result in significant sales or net income, if any. The
Company may, if opportunities arise, acquire or license other product lines or
businesses.
DEPENDENCE ON KEY PERSONNEL
The Company's operations depend to a significant extent on the efforts of
its senior management, particularly Douglas B. Hauff and G. Travis Worth. In
addition, the success of the Timberland license arrangement will depend in part
on the efforts of Douglas W. Lauer, who was hired to design and manage the
Timberland brand. Although the Company has entered into employment agreements
with Messrs. Hauff, Worth and Lauer, there can be no assurance that such
individuals will remain with the Company. The Company's operations could be
adversely affected if, for any reason, such key personnel do not continue to be
active in the Company's management. See "Management -- Employment and
Change-in-Control Agreements." In addition, if Mr. Lauer ceases to provide
active and full-time management services to the kindling company ("Kindling"),
the Company's majority-owned subsidiary formed to develop products under the
Timberland brand name, Timberland has the right to terminate the license
agreement. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Company History."
DEPENDENCE ON SUNGLASS HUT
Sales to Sunglass Hut, a sunglass specialty retail chain (including sales
to Sunsations, which was acquired by Sunglass Hut in July 1995), accounted for
approximately 33% and 41% of the Company's net sales for the year ended December
31, 1995 and the three months ended March 31, 1996, respectively. Historically,
Sunglass Hut has contributed significantly to the Company's overall growth. The
Company does not have a purchase agreement with Sunglass Hut and a substantial
decline in purchases of the Company's products by Sunglass Hut could have a
material adverse effect on the Company's business, prospects, financial
condition and operating results. In addition, the Company's ability to maintain
historical levels of gross profit will depend in part on its ability to continue
to sell sunglasses to Sunglass Hut at or near historical price levels.
RELIANCE ON LIMITED SOURCES OF SUPPLIES
The Company relies on a single source of supply for several of its
components, including several of its frames, although the Company is attempting
to establish multiple sources for more of its components. The effect on the
Company of the loss of any of such sources or of a disruption in their business
will depend
8
<PAGE> 11
primarily on the length of time necessary to find a suitable alternative source.
The loss of a source for a particular frame or any disruption in such source's
business or failure by it to meet the Company's product needs on a timely basis
could cause, at a minimum, temporary shortages in materials and could have a
material adverse effect on the Company's business, prospects, financial
condition and operating results. There can be no assurance that precautions
taken by the Company will be adequate or that alternative sources of supply can
be located or developed in a timely manner.
The Company's Classic lens, which is used in manufacturing most of the
other Gargoyles brand products, can be produced only from the Company's molds,
which are operated by the Company's suppliers. If a mold were to become damaged
or unavailable for an extended period, the Company could experience a shortage
of its Classic lens, which could adversely affect the Company's operating
results. Moreover, the Company currently depends on a complex array of multiple
vendors in geographically diverse areas to perform its lens molding,
hard-coating and mirroring processes. The Company generally places orders for
lens molding, hard-coating and mirroring three to nine months prior to
forecasted product sales. The loss of or a delay by any one of its vendors could
interrupt the Company's supply of lenses and could adversely affect the
Company's business, prospects, financial condition and operating results.
Polycarbonate, the material from which the Company's lenses are
constructed, is presently in limited supply in world markets and requires a long
lead time for orders by the Company's lens suppliers. If such shortage continues
beyond current expectations, or if the Company and its lens suppliers are unable
to accurately predict and order sufficient polycarbonate to support the
Company's needs, the Company's lens suppliers' ability to deliver sufficient
quantities of lenses to the Company could be adversely affected or the price of
such lenses to the Company could increase. See "Business -- Manufacturing."
RISKS ASSOCIATED WITH VERTICAL INTEGRATION STRATEGY
The Company, which currently assembles products manufactured primarily by a
network of outside suppliers, intends to vertically integrate and expand its
internal manufacturing capacity to centralize many of these processes. See
"Business -- Manufacturing." There can be no assurance that the Company's
efforts will be successful or will not entail some interruption in supply with
respect to certain products, which could have a material adverse effect on the
Company's business, prospects, financial condition and operating results.
Moreover, the Company's use of chemicals and other materials as it brings
certain manufacturing processes in-house will create some risk of environmental
liability and could lead to environmental compliance and cleanup costs by the
Company of a nature that the Company has not historically experienced.
PROTECTION OF PROPRIETARY RIGHTS
The Company relies, in part, on patent, trade secret, unfair competition,
trade dress, trademark and copyright laws to protect its rights to certain
aspects of its products and to protect its competitive position and its rights
to certain aspects of its products. There can be no assurance that any pending
trademark or patent application will result in the issuance of a registered
trademark or patent, that any trademark or patent granted will be effective in
discouraging competition or be held valid if subsequently challenged or that
others will not assert rights in, and ownership of, the patents and other
proprietary rights of the Company. In addition, there can be no assurance that
the actions taken by the Company to protect its proprietary rights will be
adequate to prevent imitation of its products, that the Company's proprietary
information will not become known to competitors, that the Company can
meaningfully protect its rights to unpatented proprietary information or that
others will not independently develop substantially equivalent or better
products that do not infringe on the Company's intellectual property rights. The
Company has in the past been, and is currently, involved in litigation
concerning its proprietary rights. In addition, the laws of certain foreign
countries do not protect proprietary rights to the same extent as do the laws of
the United States. See "Business -- Intellectual Property."
Consistent with the Company's strategy of vigorously defending its
intellectual property rights, the Company devotes substantial resources to the
enforcement of patents issued and trademarks granted to the Company, to the
protection of trade secrets, trade dress or other intellectual property rights
owned by the Company and to the determination of the scope or validity of the
proprietary rights of others that might be
9
<PAGE> 12
asserted against the Company. A substantial increase in the level of potentially
infringing activities by others could require the Company to increase
significantly the resources devoted to such efforts. In addition, an adverse
determination in litigation could subject the Company to the loss of its rights
to a particular patent, trademark, copyright or trade secret, could require the
Company to grant licenses to third parties, could prevent the Company from
manufacturing, selling or using certain aspects of its products or could subject
the Company to substantial liability, any of which could have a material adverse
effect on the Company's business, prospects, financial condition and operating
results.
RISKS RELATING TO INTERNATIONAL SUPPLIERS AND SALES
The Company imports many of its component parts and finished sunglasses
from international suppliers and, therefore, its prices for and supply of those
components or finished products may be adversely affected by changing economic
conditions in foreign countries and fluctuations in currency exchange rates. In
addition, the Company expects to increase its international sales, although
there can be no assurance that the Company will be able to do so. The Company's
international sales are subject to risks associated with economic conditions in
foreign countries, fluctuations in currency exchange rates, tariff regulations,
"local content" laws, political instability and trade restrictions. In addition,
there can be no assurance that the Company's brands and products will be as
popular internationally as they are in the United States, or that the Company
will be successful in preventing competitors from producing products using the
same or substantially similar technology for sale outside the United States.
ECONOMIC CONDITIONS; QUARTERLY FLUCTUATIONS; SEASONALITY
The success of the Company's business depends to a significant extent on a
number of factors relating to discretionary consumer spending, including general
economic conditions affecting disposable consumer income, such as employment,
business conditions, interest rates and taxation. The Company's business is also
affected by economic factors and seasonal consumer buying patterns. The
Company's quarterly results of operations have fluctuated in the past and may
continue to fluctuate as a result of a number of factors, including seasonal
cycles, the timing of new product introductions, the timing of orders by the
Company's customers, the mix of product sales and the effects of weather
conditions on consumer purchases. Historically, the Company's net sales, in the
aggregate, generally have been higher in the period from March to September. In
1994 and 1995, approximately 59% and 64%, respectively, of the Company's net
sales occurred during its second and third quarters. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations -- Seasonality."
PRODUCT LIABILITY
Although the Company has not been subject to a significant product
liability claim to date, it may from time to time be subject to such lawsuits,
which generally seek damages for personal injuries allegedly sustained as a
result of defects in the Company's products. In addition, the Company could be
named as a defendant in cases involving products produced by Conquest Sports,
Inc. (formerly Pro-Tec, Inc., "Conquest"), which has been subject to numerous
claims and lawsuits from time to time. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations -- Company History" and
"Certain Transactions." The Company maintains product liability, general
liability and excess liability insurance coverage, although there can be no
assurance that the Company's insurance will fully cover the damages and costs
associated with any particular claim.
SHARES ELIGIBLE FOR FUTURE SALE
The sale of a substantial number of shares of Common Stock in the public
market following the Offering could adversely affect the market price for the
Common Stock. Of the 7,542,304 shares to be outstanding following the Offering,
the 2,666,667 shares offered hereby will be freely tradable and the remaining
4,875,637 shares will be "restricted securities" under Rule 144 promulgated
under the Securities Act of 1933, as amended (the "Securities Act"). Of such
restricted securities, approximately 1,170,000 shares will be eligible for sale
beginning 180 days after the date of this Prospectus upon the expiration of
lock-up agreements with
10
<PAGE> 13
the Representatives and subject to the provisions of Rule 144 and up to an
additional 1,172,000 restricted shares will be eligible for sale in March 1997.
The Company intends to file a registration statement on Form S-8 following the
date of this Prospectus to register the shares of Common Stock reserved for
issuance upon the exercise of outstanding stock options. As of September 1,
1996, options to purchase approximately 107,000 shares will be vested, of which
approximately 43,000 such shares will be subject to the 180-day lock-up period
described above. See "Shares Eligible for Future Sale."
CONTROL BY MAJOR SHAREHOLDERS AND DIRECTORS AND EXECUTIVE OFFICERS
The Company's directors, executive officers, 5% shareholders and their
affiliates will, in the aggregate, beneficially own approximately 60% of the
outstanding shares of Common Stock after the Offering (approximately 55% if the
Underwriters' over-allotment option is exercised in full). As a result, the
Company's directors, executive officers, 5% shareholders and their affiliates,
acting together, would be able to significantly influence or control many
matters requiring approval by the shareholders of the Company, including the
election of directors. See "Management" and "Principal and Selling
Shareholders."
ABSENCE OF PUBLIC MARKET AND POSSIBLE VOLATILITY OF STOCK PRICE
Prior to the Offering, there has not been a public market for the Common
Stock, and there can be no assurance that an active trading market will develop
or be sustained. The initial public offering price for the Common Stock offered
hereby will be determined by negotiations among the Company, the Selling
Shareholders and the Representatives of the Underwriters, and may not be
indicative of the market price for the Common Stock after the Offering. The
market price for shares of Common Stock may be volatile and may fluctuate based
on a number of factors, including, without limitation, business performance,
news announcements or changes in general market conditions. See "Underwriting."
DILUTION
The initial public offering price is substantially higher than the book
value per share of Common Stock. Investors purchasing shares of Common Stock in
the Offering will therefore incur immediate and substantial dilution. See
"Dilution."
ANTITAKEOVER CONSIDERATIONS
The Company's Board of Directors has the authority, without shareholder
approval, to issue up to 10,000,000 shares of Preferred Stock and to fix the
rights, preferences, privileges and restrictions of such shares without any
further vote or action by the Company's shareholders. This authority, together
with certain provisions of the Company's Amended and Restated Articles of
Incorporation (the "Restated Articles"), may have the effect of making it more
difficult for a third party to acquire, or discouraging a third party from
attempting to acquire, control of the Company, even if shareholders purchasing
shares in the Offering may consider such a change in control to be in their best
interests. In addition, Washington law contains certain provisions that may have
the effect of delaying, deterring or preventing a hostile takeover of the
Company. See "Description of Capital Stock."
11
<PAGE> 14
THE COMPANY
References to Gargoyles and the Company in this Prospectus include the
Company and its subsidiaries. The Company succeeded to the sunglass business of
Conquest, an affiliated company that transferred its sunglass business to the
Company upon the Company's formation in 1983, and references to Gargoyles and
the Company herein include the sunglass business of Conquest prior to 1983.
Antone Manufacturing, Inc. ("Antone"), an affiliated S corporation that provided
assembly operations for Gargoyles, was merged into the Company in March 1995,
and references to Gargoyles and the Company herein include the combined
operations of the Company and Antone, unless the context requires otherwise. In
February 1996, the Company acquired H.S.I., a California corporation d/b/a Hobie
Sunglasses ("Hobie"). In May 1996, the Company acquired a 70% interest in
Kindling to develop products under the Timberland brand name.
USE OF PROCEEDS
The net proceeds to be received by the Company from the Offering, assuming
an initial public offering price of $15.00 per share and after deducting
underwriting discounts and commissions and estimated offering expenses, are
estimated to be approximately $22.4 million (approximately $24.6 million if the
Underwriters' over-allotment option is exercised in full). The Company intends
to use the net proceeds as follows: (i) to repay approximately $20 million of
indebtedness anticipated to be outstanding at the close of the Offering; (ii) to
fund start-up costs for the Timberland product line; and (iii) for working
capital and other general corporate purposes (including paying a bonus to an
executive officer as required by an employment agreement, paying obligations
with respect to the discontinued business of Conquest, increasing manufacturing
capacity and expanding international operations). See "Management's Discussion
and Analysis of Financial Condition and Results of Operations -- Liquidity and
Capital Resources" for information regarding interest rates, maturities and use
of proceeds of indebtedness, "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Company History" for information
concerning Timberland and payment of obligations of the discontinued business of
Conquest and "Management -- Employment and Change-in-Control Agreements" and
"Certain Transactions" for information regarding the bonus to the executive
officer. Pending such uses, the net proceeds will be invested in short-term,
interest-bearing investment grade securities. The Company will not receive any
proceeds from shares of Common Stock sold by the Selling Shareholders.
The Company may, when the opportunity arises, use an unspecified portion of
the net proceeds to acquire other businesses having product lines that are
compatible with the Company's business. In addition, any such acquisitions may
be financed with additional indebtedness and may involve the issuance of
significant amounts of the Company's capital stock. Such issuances of additional
capital stock could result in substantial dilution of ownership interests in the
Company. The Company has no specific arrangements with respect to any
acquisition at the present time, and there can be no assurance that any
acquisition will be made.
DIVIDEND POLICY
Except for distributions made prior to March 22, 1995 by Antone, which was
taxed as an S corporation, the Company has not declared or paid any cash
dividends on the Common Stock. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Liquidity and Capital
Resources." The Company expects to retain any future earnings to finance the
operation and expansion of its business. Future dividend payments will depend on
the results of operations, financial condition, capital expenditure plans and
other obligations of the Company and will be at the sole discretion of the
Company's Board of Directors. Under the Company's bank credit agreement, the
Company is prohibited from paying cash dividends without the bank's prior
written consent. The Company does not anticipate paying any cash dividends on
the Common Stock in the foreseeable future.
12
<PAGE> 15
CAPITALIZATION
The following table sets forth the Company's short-term indebtedness and
capitalization as of March 31, 1996, and as adjusted to give effect to the
Offering (after deducting underwriting discounts and commissions and estimated
offering expenses) and application of the estimated net proceeds therefrom.
<TABLE>
<CAPTION>
MARCH 31, 1996
------------------------
ACTUAL AS ADJUSTED
-------- -----------
(IN THOUSANDS)
<S> <C> <C>
Short-term debt:
Short-term notes payable............................................ $ 13,278 $ --
Current maturities of long-term debt................................ 1,355 --
-------- -----------
Total short-term debt............................................ $ 14,633 $ --
======== =========
Long-term debt, less current maturities............................... $ 5,717 $ --
-------- -----------
Shareholders' equity (deficit):
Preferred Stock, no par value; 10,000,000 shares authorized; no --
shares outstanding actual or as adjusted......................... --
Common Stock, no par value; 40,000,000 shares authorized; 5,875,637 5,924
shares issued and outstanding actual; 7,542,304 shares issued and
outstanding as adjusted(1)....................................... 28,374
Repurchased shares.................................................. (10,896) (10,896)
Retained earnings (deficit)(2)...................................... (1,962) (2,262)
Deferred compensation............................................... (125) (125)
-------- -----------
Total shareholders' equity (deficit)............................. (7,059) 15,091
-------- -----------
Total capitalization........................................... $ (1,342) $ 15,091
======== =========
</TABLE>
- ---------------
(1) Excludes, as of March 31, 1996, 570,898 shares of Common Stock reserved for
issuance pursuant to the Company's benefit plan, of which options to
purchase 485,338 shares were outstanding with a weighted average exercise
price of $3.42 per share, and 41,020 shares of Common Stock reserved for
issuance pursuant to an outstanding warrant with an exercise price of $4.26
per share. See "Management -- Benefit Plan," "Description of Capital Stock"
and "Certain Transactions."
(2) Reflects a nonrecurring bonus to an executive officer, in connection with an
employment agreement, to be paid upon the closing of the Offering, which
will be expensed concurrently with the closing of the Offering.
13
<PAGE> 16
DILUTION
As of March 31, 1996, the Company's net tangible book value was
approximately ($9.8) million, or ($1.67) per share of Common Stock. Net tangible
book value per share represents the Company's total assets less intangible
assets and total liabilities divided by the number of shares of Common Stock
outstanding. Without taking into account any other changes in net tangible book
value after March 31, 1996, other than to give effect to the Offering at an
assumed initial public offering price of $15.00 per share and the receipt by the
Company of the estimated net proceeds therefrom, the pro forma net tangible book
value of the Company as of March 31, 1996 would have been approximately $12.6
million, or $1.67 per share. This represents an immediate increase in net
tangible book value of $3.34 per share to existing shareholders and an immediate
dilution of $13.33 per share to purchasers of shares of Common Stock in the
Offering, as illustrated by the following:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share.................... $15.00
Net tangible book value per share as of March 31, 1996........... $(1.67)
Increase per share attributable to new investors................. 3.34
------
Pro forma net tangible book value per share after the Offering..... 1.67
------
Dilution per share to new investors................................ $13.33
======
</TABLE>
The following table summarizes as of March 31, 1996, after giving effect to
the Offering, the differences between existing shareholders and purchasers of
shares of Common Stock in the Offering with respect to the number of shares of
Common Stock purchased from the Company, the total consideration paid and the
average price per share paid:
<TABLE>
<CAPTION>
SHARES
PURCHASED(1)(2) TOTAL CONSIDERATION
--------------------- ----------------------- AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
--------- ------- ----------- ------- -------------
<S> <C> <C> <C> <C> <C>
Existing shareholders............... 5,875,637 77.9% $ 5,924,110 19.2% $ 1.01
New investors....................... 1,666,667 22.1 25,000,000 80.8 $ 15.00
--------- ----- ----------- -----
Total............................. 7,542,304 100.0% $30,924,110 100.0%
========= ===== =========== =====
</TABLE>
- ------------------------
(1) Excludes, as of March 31, 1996, 570,898 shares of Common Stock reserved for
issuance pursuant to the Company's benefit plan, of which options to
purchase 485,338 shares were outstanding, and 41,020 shares of Common Stock
reserved for issuance pursuant to an outstanding warrant. See "Management --
Benefit Plan," "Description of Capital Stock" and "Certain Transactions."
(2) The above table is based on ownership as of March 31, 1996. Sales by the
Selling Shareholders in the Offering will reduce the number of shares held
by existing shareholders to 4,875,637 shares, or 64.6% (60.2% if the
Underwriters' over-allotment option is exercised in full) of the total
number of shares of Common Stock outstanding after the Offering, and will
increase the number of shares held by new investors to 2,666,667 shares, or
35.4% (39.8% if the Underwriters' over-allotment option is exercised in
full) of the total number of shares of Common Stock outstanding after the
Offering. See "Principal and Selling Shareholders."
14
<PAGE> 17
SELECTED FINANCIAL DATA
The following selected financial data as of November 30, 1994 and December
31, 1995 and for the years ended November 30, 1993 and 1994 and December 31,
1995 are derived from the consolidated financial statements of Gargoyles, Inc.,
which have been audited by Ernst & Young LLP, independent auditors, and are
included elsewhere in this Prospectus. The selected financial data as of
November 30, 1991, 1992 and 1993 and March 31, 1996, and for the years ended
November 30, 1991 and 1992 and for the three months ended March 31, 1995 and
1996 are derived from unaudited consolidated financial statements. In the
Company's opinion, the unaudited consolidated financial statements include all
adjustments, consisting of normal recurring accruals, which the Company
considers necessary for a fair presentation of the financial position and
results of operations for these periods. Operating results for the three months
ended March 31, 1996 are not necessarily indicative of the results that may be
expected for the entire year ending December 31, 1996. This data should be read
in conjunction with the consolidated financial statements, related notes and
other financial information included in this Prospectus. The results of
operations for the one-month period ended December 31, 1994 are presented in the
Company's consolidated financial statements and the related notes thereto, which
are included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
------------------------------------------------- THREE MONTHS
ENDED
NOVEMBER 30, MARCH 31,
---------------------------------- DECEMBER 31, ---------------
1991 1992 1993 1994 1995 1995 1996
------ ------ ------ ------- ------------ ------ ------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net sales........................................... $6,371 $6,317 $8,242 $11,083 $ 17,138 $3,294 $6,994
Cost of sales....................................... 2,523 2,483 3,243 4,265 6,527 1,273 2,865
------ ------ ------ ------- ------- ------ ------
Gross profit........................................ 3,848 3,834 4,999 6,818 10,611 2,021 4,129
License income...................................... -- -- -- -- 480 245 161
Operating expenses:
Sales and marketing............................... 1,485 1,583 2,210 3,041 5,354 1,278 2,368
General and administrative........................ 1,238 1,256 1,453 2,558 3,030 723 969
Shipping and warehousing.......................... 293 310 436 607 1,030 177 278
Research and development.......................... 103 211 215 127 305 49 135
Loss on discontinued distribution agreement....... -- -- -- -- 312 -- --
Stock compensation................................ -- -- -- -- 250 105 25
------ ------ ------ ------- ------- ------ ------
Total operating expenses........................ 3,119 3,360 4,314 6,333 10,281 2,332 3,775
------ ------ ------ ------- ------- ------ ------
Income (loss) from operations......................... 729 474 685 485 810 (66) 515
Other income (expense):
Interest expense, net............................. (60) (35) (55) (176) (1,043) (101) (529)
Recapitalization expenses......................... -- -- -- -- (574) (574) --
Provision for loss on affiliate................... -- -- -- -- (1,597) -- --
Other............................................. 5 87 2 -- 7 5 (2)
------ ------ ------ ------- ------- ------ ------
Total other income (expense).................... (55) 52 (53) (176) (3,207) (670) (531)
------ ------ ------ ------- ------- ------ ------
Income (loss) before income taxes................... 674 526 632 309 (2,397) (736) (16)
Income tax provision (benefit)...................... 87 107 40 10 (100) (290) --
------ ------ ------ ------- ------- ------ ------
Net income (loss)................................... $ 587 $ 419 $ 592 $ 299 $ (2,297) $ (446) $ (16)
====== ====== ====== ======= ======= ====== ======
Pro forma net income (loss)(1)...................... $ 424 $ 380 $ 415 $ 179 $ (2,343) $ (492) $ (16)
====== ====== ====== ======= ======= ====== ======
Pro forma net income (loss) per share(2)............ $ 0.07 $ 0.06 $ 0.07 $ 0.03 $ (0.38) $(0.08) $(0.00)
Shares used in computing pro forma net income (loss)
per share(2)...................................... 6,138 6,138 6,138 6,138 6,138 6,138 6,141
SUPPLEMENTAL DATA (UNAUDITED):
Pro forma net sales(3).............................. $14,774 $ 21,182 $4,167 $7,305
Adjusted pro forma net income(4).................... 616 295
Adjusted pro forma net income per share(5).......... $ 0.08 $ 0.04
</TABLE>
15
<PAGE> 18
<TABLE>
<CAPTION>
NOVEMBER 30,
--------------------------------- DECEMBER 31, MARCH 31,
1991 1992 1993 1994 1995 1996
------ ------ ------ ------ ------------ ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital....................................... $1,314 $1,053 $1,042 $ (146) $ (2,872) $(6,096)
Total assets.......................................... 2,772 2,422 3,776 6,673 11,266 19,849
Total debt............................................ 903 306 1,062 2,557 12,780 20,350
Shareholders' equity (deficit)........................ 1,221 1,097 1,101 776 (7,204) (7,059)
</TABLE>
- ---------------
(1) Antone, an affiliated company, had previously been taxed as an S
corporation. The pro forma net income amounts for all periods prior to 1996
reflect adjustments for income taxes as if Antone had been taxed as a C
corporation rather than an S corporation.
(2) See Note 1 of Notes to the Company's Consolidated Financial Statements for
an explanation of the number of shares used in computing pro forma net
income (loss) per share.
(3) Amounts give effect to the Hobie Acquisition as if such transaction had
occurred at the beginning of the respective periods.
(4) Amounts give effect to the Hobie Acquisition and the application of the
estimated net proceeds from the Offering as if such transactions had
occurred at the beginning of the respective periods (see "Pro Forma
Financial Information"), and reflect the elimination of certain nonrecurring
charges as follows:
<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED ENDED
DECEMBER 31, MARCH 31,
1995 1996
------------ ------------
(IN THOUSANDS)
<S> <C> <C>
Pro forma net income (loss) as adjusted........................................ $ (1,397) $270
-------- ----
Add back:
Recapitalization expenses.................................................... 574 --
Provision for loss on affiliate.............................................. 1,597 --
Stock compensation........................................................... 250 25
-------- ----
Total adjustments........................................................ 2,421 25
Tax effect of adjustments...................................................... 408 --
-------- ----
Net adjustments.......................................................... 2,013 25
-------- ----
Adjusted pro forma net income.................................................. $ 616 $295
======== ====
</TABLE>
(5) Adjusted pro forma net income per share amounts are computed based on the
number of shares determined in accordance with Note 1 to the Company's
Consolidated Financial Statements, adjusted for the number of shares issued
in connection with the Hobie Acquisition and the number of shares assumed to
be issued in connection with the Offering as if such transactions had
occurred at the beginning of the respective periods.
16
<PAGE> 19
PRO FORMA FINANCIAL INFORMATION
The following Pro Forma Consolidated Statements of Operations for the year
ended December 31, 1995 and the three months ended March 31, 1996 are unaudited
and were prepared as if the Hobie Acquisition was effective as of January 1,
1995 and January 1, 1996, respectively. The Pro Forma Consolidated Statements of
Operations do not purport to represent what the Company's results of operations
would actually have been if the Hobie Acquisition had in fact occurred on such
dates or to project the Company's results of operations for any future period.
The Pro Forma Consolidated Statements of Operations are based on the historical
financial statements of the Company and Hobie and give effect to the Hobie
Acquisition under the purchase method of accounting. The Pro Forma Consolidated
Statements of Operations as adjusted for the year ended December 31, 1995 and
for the three months ended March 31, 1996 reflect the application of the
estimated net proceeds from the Offering as if it had occurred on January 1,
1995 and January 1, 1996, respectively. The Pro Forma Consolidated Statements of
Operations should be read in conjunction with the financial statements and the
related notes thereto of Gargoyles and of Hobie, which are included elsewhere
herein.
PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1995
(IN THOUSANDS)
<TABLE>
<CAPTION>
PRO FORMA ADJUSTMENTS PRO FORMA
GARGOYLES HOBIE ADJUSTMENTS PRO FORMA FOR OFFERING(4) AS ADJUSTED
--------- ------ ----------- --------- --------------- -----------
<S> <C> <C> <C> <C> <C> <C>
Net sales........................ $17,138 $4,044 $ -- $21,182 $ -- $21,182
Cost of sales.................... 6,527 1,992 -- 8,519 -- 8,519
--------- ------ ----------- --------- ------- -----------
Gross profit..................... 10,611 2,052 -- 12,663 -- 12,663
--------- ------ ----------- --------- ------- -----------
License income................... 480 -- -- 480 -- 480
--------- ------ ----------- --------- ------- -----------
Operating expenses:
Sales and marketing............ 5,354 1,176 -- 6,530 -- 6,530
General and administrative..... 3,030 679 233(1) 3,942 -- 3,942
Shipping and warehousing....... 1,030 35 -- 1,065 -- 1,065
Research and development....... 305 -- -- 305 -- 305
Loss on discontinued 312 -- -- 312 -- 312
distribution agreement.......
Stock compensation............. 250 -- -- 250 -- 250
--------- ------ ----------- --------- ------- -----------
Total operating expenses..... 10,281 1,890 233 12,404 -- 12,404
--------- ------ ----------- --------- ------- -----------
Income (loss) from operations.... 810 162 (233) 739 -- 739
--------- ------ ----------- --------- ------- -----------
Other income (expense):
Interest expense, net.......... (1,043) (131) (450)(2) (1,624) 1,624(5) --
Recapitalization expenses...... (574) -- -- (574) -- (574)
Provision for loss on (1,597) -- -- (1,597) -- (1,597)
affiliate....................
Other.......................... 7 (15) -- (8) -- (8)
--------- ------ ----------- --------- ------- -----------
Total other income (3,207) (146) (450) (3,803) 1,624 (2,179)
(expense)..................
--------- ------ ----------- --------- ------- -----------
Income (loss) before income (2,397) 16 (683) (3,064) 1,624 (1,440)
taxes..........................
Income tax provision (benefit)... (100) 11 46(3) (43) -- (43)
--------- ------ ----------- --------- ------- -----------
Net income (loss)................ $(2,297) $ 5 $(729) $(3,021) $ 1,624 $(1,397)
========== ====== ============ ========== =============== ===========
</TABLE>
17
<PAGE> 20
PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
ADJUSTMENTS
PRO FORMA FOR PRO FORMA
GARGOYLES HOBIE(6) ADJUSTMENTS PRO FORMA OFFERING(4) AS ADJUSTED
--------- -------- ----------- --------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Net sales........................ $ 6,994 $311 $ -- $ 7,305 $ -- $ 7,305
Cost of sales.................... 2,865 167 -- 3,032 -- 3,032
--------- -------- ----- --------- ----- -----------
Gross profit..................... 4,129 144 -- 4,273 -- 4,273
--------- -------- ----- --------- ----- -----------
License income................... 161 -- -- 161 -- 161
--------- -------- ----- --------- ----- -----------
Operating expenses:
Sales and marketing............ 2,368 77 -- 2,445 -- 2,445
General and administrative..... 969 122 29(1) 1,120 -- 1,120
Shipping and warehousing....... 278 4 -- 282 -- 282
Research and development....... 135 -- -- 135 -- 135
Stock compensation............. 25 -- -- 25 -- 25
--------- -------- ----- --------- ----- -----------
Total operating expenses... 3,775 203 29 4,007 -- 4,007
--------- -------- ----- --------- ----- -----------
Income (loss) from operations.... 515 (59) (29) 427 -- 427
--------- -------- ----- --------- ----- -----------
Other income (expense):
Interest expense, net.......... (529) (13) (57)(2) (599) 599(5) --
Other.......................... (2) 1 -- (1) -- (1)
--------- -------- ----- --------- ----- -----------
Total other income (531) (12) (57) (600) 599 (1)
(expense)...............
--------- -------- ----- --------- ----- -----------
Income (loss) before income (16) (71) (86) (173) 599 426
taxes..........................
Income tax provision (benefit)... -- (24) -- (24) 180(7) 156
--------- -------- ----- --------- ----- -----------
Net income (loss)................ $ (16) $(47) $ (86) $ (149) $ 419 $ 270
========== ========= ============ ========== ============ ===========
</TABLE>
NOTES TO PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS
(1) To record the amortization of intangibles associated with the Hobie
Acquisition. For purposes of calculating goodwill and related amortization,
the allocation of the purchase price using the purchase method of accounting
is based on the fair value of the assets and liabilities of Hobie that were
acquired. The most significant component of intangibles is goodwill that is
being amortized over the remaining 27-year license period of the Hobie brand
name.
(2) To record interest expense for the period prior to the acquisition of debt
incurred in the Hobie Acquisition.
(3) Reflects adjustments for income taxes as if Antone had been taxed as a C
corporation rather than an S corporation.
(4) The adjustments for the Offering do not reflect a nonrecurring $300,000
bonus to be paid to an executive officer in connection with an employment
agreement, which will be expensed concurrently with the closing of the
Offering. See "Management -- Employment and Change-in-Control Agreements."
(5) Reflects the estimated reduction in interest expense on indebtedness
expected to be repaid from the estimated net proceeds of the Offering.
(6) Includes the results of operations for Hobie for the period January 1, 1996
through February 13, 1996, the date of acquisition.
(7) Reflects the additional taxes as a result of the adjustments for the
Offering.
18
<PAGE> 21
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This discussion and analysis should be read in conjunction with "Selected
Financial Data," "Pro Forma Financial Information" and the Company's and Hobie's
financial statements and the related notes thereto, which are included elsewhere
in this Prospectus.
In 1995, the Company changed its reporting period from a fiscal year ending
November 30 to a calendar year-end. In the following discussion, references to
1993, 1994 and 1995 are to the 12-month fiscal years ended November 30, 1993 and
1994 and December 31, 1995, respectively. The results of operations for the one-
month period ended December 31, 1994 are presented in the Company's consolidated
financial statements and the related notes thereto, which are included elsewhere
in this Prospectus.
COMPANY HISTORY
Background. The Company was founded in 1979 by Dennis L. Burns (the
"Founder") to develop a sunglass style that not only would cover and protect the
eyes more effectively than traditional "flat" lens designs, but also would
minimize distortion. In 1983, the Company completed its development of the
patented dual lens toric curve technology and introduced its first product, the
Gargoyles Classic. Until 1992, the Company was a successful single-product
company with relatively few resources devoted to expanding its product line, and
was dependent on independent manufacturers' representatives to sell its
products. In May 1992, the Company began installing a new management team. The
new management team (i) hired a number of experienced senior executives and
mid-level managers; (ii) focused on developing new products designed to exploit
the patented dual lens toric curve technology; (iii) pursued a growth strategy
centered around aggressive new product introductions; (iv) invested in its own
direct sales force to expand distribution; and (v) implemented a more focused
and aggressive marketing and advertising strategy to enhance the Gargoyles'
brand image. Primarily as a result of these initiatives, the Company has
achieved significant increases in sales.
Recapitalization. In a March 22, 1995 recapitalization (the
"Recapitalization"), an investor group (the "Investors") led by Trillium
Corporation ("Trillium") acquired a controlling interest in the Company. See
"Certain Transactions." In the Recapitalization, the Company (i) borrowed $6.0
million pursuant to a bank loan guaranteed by Trillium; (ii) sold approximately
3.5 million shares of its Common Stock to the Investors in exchange for $5.4
million, of which $900,000 was paid in cash and $4.5 million was paid in the
form of a promissory note from Trillium; and (iii) redeemed approximately 3.5
million shares of Common Stock from the Founder for $10.9 million, of which $6.4
million was paid in cash and $4.5 million was paid in the form of a promissory
note to the Founder. The $4.5 million note receivable and the $4.5 million note
payable and related interest have been offset for financial reporting purposes.
In January 1996, the obligations evidenced by the Company's note to the Founder
and Trillium's note to the Company were satisfied in full. In connection with
the Recapitalization, the Company recorded a charge of $574,000 relating to
severance, legal and other costs and recorded noncash deferred compensation of
$400,000 related to the amendment of an option agreement, which is being
amortized over the vesting period. See "-- General" and "Certain Transactions --
Recapitalization Transaction."
Hobie Acquisition. In February 1996, the Company acquired the Hobie
sunglass business for $3.4 million. Hobie manufactures polarized sunglasses
under the Hobie brand name pursuant to a long-term license agreement from Hobie
Designs, Inc. In addition, as consideration for certain noncompetition
covenants, the Company agreed to pay an aggregate of $200,000 in 12 monthly
installments and issued an aggregate of 15,634 shares of its Common Stock to two
of Hobie's former shareholders. The Company also agreed to pay consulting
service fees of up to an aggregate of $300,000 to these two shareholders,
contingent upon the achievement by Hobie of certain sales objectives in 1996 and
1997. In addition, during 1998 these shareholders may require the Company to
repurchase their shares for an aggregate of $200,000 if the Company has not
completed a public offering by December 31, 1997. The Hobie Acquisition was
funded by proceeds of a bank loan, which Trillium guaranteed. See "Certain
Transactions -- Other Transactions." Following the Hobie Acquisition, the
Company relocated Hobie's operations to the Company's facility in Kent,
Washington.
19
<PAGE> 22
Timberland Transaction. In May 1996, the Company, together with Douglas W.
Lauer, former president of Revo, a subsidiary of Bausch & Lomb, formed Kindling,
a majority-owned subsidiary, to design, develop, manufacture and distribute
sunglasses and, with Timberland's consent, ophthalmic frames under the
Timberland brand name. Concurrently with Kindling's formation, the Company and
Kindling, jointly and severally, acquired an exclusive, worldwide (except for
Benelux, Cyprus, Israel and Scandinavia) license from Timberland to use the
Timberland trademark and tree logo on sunglasses, eyewear accessories and, with
Timberland's consent, ophthalmic frames. The Company contributed $1.2 million
for its 70% interest in Kindling. Of that amount, $100,000 was paid in cash and
$1.1 million by means of a non-interest-bearing promissory note that is payable
in installments through January 1997, a portion of which will be paid with the
net proceeds of the Offering. The license agreement with Timberland expires on
December 31, 2000 with options to renew by the Company assuming certain
conditions are met and subject to provisions for earlier termination. Under
certain circumstances, Timberland may require Kindling to repurchase all of
Timberland's 10% interest in Kindling. In addition, upon the achievement of
certain operating objectives, Mr. Lauer and certain other key employees of
Kindling may be granted up to an additional 10% of Kindling's common stock owned
by the Company. Trillium has agreed to make advances of up to $400,000 to fund
the Company's 1996 capital obligations to Kindling. To date, Trillium has
advanced $100,000 in each of June and July 1996, which are due, with interest at
12% per annum, on September 30, 1996 (the "Kindling Loan"). See "Certain
Transactions -- Other Transactions." The Company and Mr. Lauer are currently
formulating the strategy with respect to the Timberland product line; the
Company anticipates that sales of Timberland branded products will begin in
1997.
Conquest Asset Sale and Liquidation. Prior to the Recapitalization, both
the Company and Conquest were majority-owned by the Founder. Conquest's core
business has been the design, manufacture, distribution and sale of sports
helmets. At the time of the Recapitalization, shares of Conquest's common stock
were sold by the Founder to substantially the same investor group that purchased
Common Stock in the Recapitalization. See "Certain Transactions -- Conquest
Transactions." The Company has advanced funds to Conquest and has guaranteed
certain liabilities of Conquest. Management has concluded that it is likely that
Conquest will be unable to meet its obligations and, therefore, the Company has
recorded a provision in the fourth quarter of 1995 of $1.6 million representing
the write-off of the Company's receivable from Conquest and other potential
payments of Conquest liabilities, including Conquest indebtedness which
Gargoyles has guaranteed. In June 1996, Conquest sold certain of its assets for
a purchase price of approximately $600,000 plus the assumption of certain
liabilities. Conquest is in the process of liquidating its remaining assets.
GENERAL
The Company introduced its first product in December 1983. Since the
Company's new management was put in place in 1992, the Company's net sales have
grown significantly, from $6.3 million in 1992 to $17.1 million in 1995. For the
first three months of 1996, net sales increased 112% to $7.0 million compared to
the same period for 1995. The Company attributes its net sales growth primarily
to the introduction of new products, growth of sunglass specialty retailers
(principally Sunglass Hut), sales efforts focused on opening new accounts and
increased brand recognition. The Company's number of active accounts increased
from in excess of 1,800 in 1993 to approximately 2,800 in 1995. The Company's
annual net sales per active account increased at a compounded annual growth rate
of approximately 17% from $4,519 in 1993 to $6,160 in 1995.
In April 1995, the Company entered into a license agreement (the "License
Agreement") whereby it, as licensor, receives quarterly cash payments based on
the portion of the licensee's income from the sale of certain products. The
Company also received a $1.0 million payment at the inception of the License
Agreement. After deducting expenses associated with the License Agreement, the
$720,000 balance was recorded as deferred license income, and is being amortized
over a four-year term. The quarterly cash payments, and the amortization of
deferred license income, are reported as license income on the Company's
consolidated financial statements.
Hobie was acquired by the Company on February 13, 1996 and was accounted
for as a purchase. Results of Hobie are therefore included in the Company's
consolidated financial statements for the quarter ended March 31, 1996 only for
the period from February 14, 1996 to March 31, 1996. Results for the period
20
<PAGE> 23
from January 1, 1996 until the date of the Hobie Acquisition and results for
Hobie for 1995 and 1994 are also included in the financial statements contained
in this Prospectus.
Pursuant to an agreement dated January 5, 1994, among Gargoyles, the
Founder and Mr. Hauff, the Founder granted Mr. Hauff a nonqualified option to
purchase 10% of the Common Stock from the Founder. In connection with the
Recapitalization, the provisions of the option agreement were amended to
eliminate the option's expiration date, unless the Company closed an initial
public offering, in which case the option would immediately vest and expire. The
amended option was subsequently assumed by the Investors. See "Certain
Transactions--Other Transactions." As a result of the amendment, the Company was
required to recognize deferred compensation of $400,000, which is being expensed
over the option vesting period. Also in connection with the Recapitalization,
the Investors granted Mr. Hauff an additional nonqualified option to purchase
146,500 shares of the Common Stock owned by the Investors at an exercise price
of $4.26 per share. In June 1996, in contemplation of the Offering, the
Investors further amended Mr. Hauff's option agreements to accelerate the
vesting and to extend the expiration date to June 28, 2006. As a result,
Gargoyles will recognize a one-time, noncash stock compensation charge in the
second quarter of 1996.
Antone provided assembly operations for Gargoyles prior to the
Recapitalization and was merged into Gargoyles in connection with the
Recapitalization. The merger was accounted for as a pooling-of-interests due to
common ownership. Prior to the Recapitalization, Antone was taxed as an S
corporation. Accordingly, Antone's taxable income included in the Company's
consolidated financial statements is treated as if it were distributed to the
Founder, who is responsible for payment of taxes thereon. The Company did not,
therefore, pay taxes on Antone's taxable income prior to the Recapitalization.
RESULTS OF OPERATIONS
The following table sets forth results of operations, as a percentage of
net sales, for the periods indicated:
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
-------------------------------- THREE MONTHS
ENDED
NOVEMBER 30, MARCH 31,
--------------- DECEMBER 31, ---------------
1993 1994 1995 1995 1996
----- ----- ------------ ----- -----
<S> <C> <C> <C> <C> <C>
Net sales..................................... 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of sales................................. 39.4 38.5 38.1 38.6 41.0
----- ----- ----- ----- -----
Gross profit.................................. 60.6 61.5 61.9 61.4 59.0
License income................................ -- -- 2.8 7.4 2.3
Operating expenses:
Sales and marketing......................... 26.8 27.4 31.2 38.8 33.9
General and administrative.................. 17.6 23.1 17.7 21.9 13.8
Shipping and warehousing.................... 5.3 5.5 6.0 5.4 4.0
Research and development.................... 2.6 1.1 1.8 1.5 1.9
Loss on discontinued distribution
agreement................................ -- -- 1.8 -- --
Stock compensation.......................... -- -- 1.5 3.2 0.3
----- ----- ----- ----- -----
Total operating expenses................. 52.3 57.1 60.0 70.8 53.9
----- ----- ----- ----- -----
Income (loss) from operations................. 8.3% 4.4% 4.7% (2.0)% 7.4%
===== ===== ===== ===== =====
</TABLE>
Quarter Ended March 31, 1996 Compared to Quarter Ended March 31, 1995
Net sales. Net sales increased to $7.0 million for the quarter ended March
31, 1996 from $3.3 million for the quarter ended March 31, 1995. This increase
was primarily the result of (i) new product introductions, including the Helios
models in March 1995, (ii) sales increases in existing product lines, (iii) an
increase in the number of active accounts resulting from the Company's sales
efforts, and (iv) sale of Hobie products in the 1996 period, subsequent to the
Hobie Acquisition, totaling approximately $500,000. The change in the
21
<PAGE> 24
Company's product mix associated with new product introductions and the
inclusion of the Hobie product lines contributed to a 24% increase in the total
average selling price in the 1996 period on unit growth of 75%.
Gross profit. Gross profit increased to $4.1 million for the quarter ended
March 31, 1996 from $2.0 million for the quarter ended March 31, 1995. Gross
margin decreased to 59.0% in the 1996 period from 61.4% in the 1995 period. The
decline in gross margin in 1996 was attributable, in part, to large purchases by
Sunglass Hut and growth in sales to new distributors, both of which receive
higher volume discounts than the Company's other accounts. The Company's sales
to Sunglass Hut totaled approximately 41% of the Company's net sales compared to
a historical level of approximately 33%. The Company anticipates that its sales
to Sunglass Hut for the remaining quarters of 1996 will more closely approximate
historical levels. Additionally, the decrease in gross margin in 1996 resulted
from unanticipated cost increases from one frame supplier, which led to a
decrease in gross margin of approximately 1.5%. The Company is replacing this
supplier with a new, lower-cost supplier.
License income. License income decreased to $161,000 for the quarter ended
March 31, 1996 from $245,000 for the quarter ended March 31, 1995. License
income for the 1995 period included a payment for license activity prior to the
License Agreement.
Operating expenses. Operating expenses increased to $3.8 million for the
quarter ended March 31, 1996 from $2.3 million for the quarter ended March 31,
1995. As a percentage of net sales, operating expenses decreased to 53.9% in the
1996 period from 70.8% in the 1995 period. Sales and marketing expenses
increased $1.1 million in the 1996 period, primarily as a result of salaries and
commissions associated with higher sales levels and increases in marketing and
warranty expenditures. As a percentage of net sales, sales and marketing
expenses decreased to 33.9% in the 1996 period from 38.8% in the 1995 period due
to the slower growth of these expenses compared to net sales. General and
administrative expenses increased $246,000 in the 1996 period, as the Company
continued to add personnel and the infrastructure necessary to support its
growth. As a percentage of net sales, general and administrative expenses
decreased to 13.8% in the 1996 period from 21.9% in the 1995 period, due to
greater leverage of the Company's overhead. Stock compensation decreased to
$25,000, or 0.3% of net sales, in the 1996 period from $105,000, or 3.2% of net
sales, in the 1995 period.
Income (loss) from operations. The Company's income from operations
increased to $515,000 for the quarter ended March 31, 1996 compared to a loss of
$66,000 for the quarter ended March 31, 1995. This improvement resulted from the
Company's net sales growth, partially offset by the decrease in gross margin and
the increase in operating expenses.
Interest expense, net. Net interest expense increased to $529,000 for the
quarter ended March 31, 1996 from $101,000 for the quarter ended March 31, 1995.
This increase resulted from substantially higher debt incurred in the
Recapitalization in March 1995 and the Hobie Acquisition in February 1996, and
increased borrowings to support operations.
Recapitalization expenses. In March 1995, the Company incurred $574,000 in
expenses relating to the Recapitalization for severance, legal and other costs.
See "-- Company History."
Income tax provision (benefit). The Company's income tax benefit decreased
to zero for the quarter ended March 31, 1996 from ($290,000) for the quarter
ended March 31, 1995.
Net loss. The Company's net loss decreased to $16,000 for the quarter
ended March 31, 1996 from a net loss of $446,000 for the quarter ended March 31,
1995.
Hobie. Net sales of Hobie sunglasses were $840,000 for the quarter ended
March 31, 1996 compared to $873,000 for the quarter ended March 31, 1995.
Hobie's loss from operations was $32,000 for each of the quarters ended March
31, 1996 and 1995. Hobie's operating expenses in the 1996 period included
amortization of goodwill and noncompete agreement costs totaling $18,000.
Hobie's net loss for the period from January 1 to February 13, 1996 was $47,000.
This loss resulted primarily from the seasonality of Hobie's business.
22
<PAGE> 25
Year Ended December 31, 1995 Compared to Year Ended November 30, 1994
Change in fiscal year-end. In 1995, the Company changed its reporting
period from a fiscal year ending November 30 to a calendar year. The results of
operations for the one-month period ended December 31, 1994 are presented in the
Company's consolidated financial statements and the related notes. Because the
Company's business is seasonal, the results of operations for December are not
indicative of results for other months in the year.
Net sales. Net sales increased to $17.1 million for the year ended
December 31, 1995 from $11.1 million for the year ended November 30, 1994. This
increase was primarily the result of (i) new product introductions, including
the Helios models, (ii) sales increases in existing product lines, and (iii) an
increase in the number of active accounts resulting from the Company's sales
efforts. The change in the Company's product mix contributed to a 15% increase
in the total average selling price of eyewear in 1995 on unit growth of 38%.
Gross profit. Gross profit increased to $10.6 million for the year ended
December 31, 1995 from $6.8 million for the year ended November 30, 1994. Gross
margin increased to 61.9% in 1995 from 61.5% in 1994. This slight margin
improvement resulted from a reduction in the cost for certain key components,
partially offset by unanticipated cost increases from one frame supplier, which
led to a decrease in gross margin of approximately 1.5%. The Company is
replacing this supplier with a new, lower-cost supplier.
License income. The License Agreement was entered into in February 1995,
resulting in license income of $480,000 for 1995.
Operating expenses. Operating expenses increased to $10.3 million for the
year ended December 31, 1995 from $6.3 million for the year ended November 30,
1994. As a percentage of net sales, operating expenses increased to 60.0% in
1995 from 57.1% in 1994. Sales and marketing expenses increased $2.3 million in
1995, primarily as a result of salaries and commissions associated with higher
sales levels and increases in marketing and warranty expenditures. As a
percentage of net sales, sales and marketing expenses increased to 31.2% in 1995
from 27.4% in 1994, reflecting the Company's increased investment in its direct
sales force. General and administrative expenses increased $472,000 in 1995, as
the Company continued to add personnel and the infrastructure necessary to
support its growth. As a percentage of net sales, general and administrative
expenses decreased to 17.7% in 1995 from 23.1% in 1994. General and
administrative expenses in 1994 were impacted by several investments the Company
made, including the expenses associated with moving into a new facility and
investments in personnel and the infrastructure necessary to support its
anticipated growth. Additionally, during 1995 the Company incurred net expenses
of $312,000 associated with the discontinuance of a distribution agreement for
the sale of sunglasses produced by another manufacturer. Stock compensation
totaled $250,000 for 1995.
Income from operations. The Company's income from operations increased to
$810,000 for the year ended December 31, 1995 from $485,000 for the year ended
November 30, 1994. As a percentage of net sales, income from operations
increased to 4.7% in 1995 from 4.4% in 1994. This increase was the result of the
Company's net sales growth, gross margin improvement and license income,
partially offset by the increase in operating expenses.
Interest expense, net. Net interest expense increased to $1.0 million for
the year ended December 31, 1995 from $176,000 for the year ended November 30,
1994. This increase resulted from debt incurred in the Recapitalization and
increased borrowings to support operations.
Recapitalization expenses. In March 1995, the Company incurred $574,000 in
expenses relating to the Recapitalization for severance, legal and other costs.
See "-- Company History."
Provision for loss on affiliate. During 1995, the Company recorded a $1.6
million provision for the loss on Conquest. Gargoyles has advanced funds to, and
guaranteed certain liabilities of, Conquest. This provision included the
write-off of the funds advanced, and the establishment of a liability for the
Company's potential payment of certain Conquest liabilities. See "-- Company
History" and "Certain Transactions -- Conquest Transactions."
23
<PAGE> 26
Income tax provision (benefit). The Company's income tax benefit was
($100,000) for the year ended December 31, 1995, compared to an income tax
provision of $10,000 for the year ended November 30, 1994. Differences from the
federal statutory income tax rate of 34% resulted primarily from increases in
the reserve against certain tax assets and the inclusion of Antone's earnings in
income (loss) before income taxes. The Company was not subject to income tax on
Antone's earnings because Antone was an S corporation.
Net income (loss). The Company's net loss was $2.3 million for the year
ended December 31, 1995, compared to net income of $299,000 for the year ended
November 30, 1994. This decrease resulted principally from increased interest
expense and nonrecurring recapitalization expenses and nonrecurring provision
for loss on affiliate, partially offset by the increased income from operations.
Hobie. Net sales of Hobie sunglasses increased to $4.0 million for the
year ended December 31, 1995 from $3.7 million for the year ended December 31,
1994. Hobie's income from operations increased to $162,000 for the year ended
December 31, 1995 from $84,000 for the year ended December 31, 1994. This
increase was primarily the result of Hobie's net sales growth and gross margin
improvement partially offset by an increase in operating expenses.
Year Ended November 30, 1994 Compared to Year Ended November 30, 1993
Net sales. Net sales increased to $11.1 million for the year ended
November 30, 1994 from $8.2 million for the year ended November 30, 1993. This
increase was primarily the result of (i) new product introductions, including
the Legends model, (ii) sales increases in existing product lines, and (iii) an
increase in the number of active accounts resulting from the Company's sales
efforts. The change in the Company's product mix contributed to a 14% increase
in the total average selling price of eyewear in 1994 on unit growth of 18%.
Gross profit. Gross profit increased to $6.8 million for the year ended
November 30, 1994 from $5.0 million for the year ended November 30, 1993. Gross
margin increased to 61.5% in 1994 from 60.6% in 1993. This increase was
primarily the result of cost reductions obtained for certain key components.
Operating expenses. Operating expenses increased to $6.3 million for the
year ended November 30, 1994 from $4.3 million for the year ended November 30,
1993. Operating expenses as a percentage of net sales increased to 57.1% in 1994
from 52.3% in 1993. Sales and marketing expenses increased $831,000 in 1994,
primarily as a result of salaries and commissions associated with higher sales
levels and the establishment of the Company's direct sales force. As a
percentage of net sales, sales and marketing expenses increased to 27.4% in 1994
from 26.8% in 1993. General and administrative expenses increased $1.1 million
in 1994, as the Company moved into a new facility and invested in personnel and
the infrastructure necessary to support its growth. As a result, general and
administrative expenses, as a percentage of net sales, increased to 23.1% in
1994 from 17.6% in 1993.
Income from operations. The Company's income from operations decreased to
$485,000 for the year ended November 30, 1994 from $685,000 for the year ended
November 30, 1993. As a percentage of net sales, income from operations
decreased to 4.4% in 1994 from 8.3% in 1993. This decrease was the result of the
Company's increase in operating expenses, partially offset by the net sales
growth and gross margin improvement.
Interest expense, net. Net interest expense increased to $176,000 for the
year ended November 30, 1994 from $55,000 for the year ended November 30, 1993.
This increase resulted primarily from increased borrowings to support
operations.
Income tax provision. The Company's income tax provision decreased to
$10,000 for the year ended November 30, 1994 from $40,000 for the year ended
November 30, 1993. Differences from the federal statutory income tax rate of 34%
primarily resulted from the inclusion of Antone's earnings in income (loss)
before income taxes. The Company was not subject to income tax on Antone's
earnings because Antone was an S corporation.
24
<PAGE> 27
Net income. Net income decreased to $299,000 for the year ended November
30, 1994 from $592,000 for the year ended November 30, 1993. This decrease
resulted from the decreased income from operations and increased interest
expense.
LIQUIDITY AND CAPITAL RESOURCES
Historically, the Company has relied primarily on cash from operations and
borrowings to finance its operations. In addition, prior to the
Recapitalization, Antone, which was merged into the Company, made S corporation
distributions to the Founder from Antone's earnings. Cash provided by (used in)
the Company's operating activities, primarily to fund the growth in accounts
receivable and inventories, totaled $300,000 and ($400,000) for the years ended
November 30, 1993 and 1994, respectively, ($3.1) million for the year ended
December 31, 1995 and ($3.5) million for the quarter ended March 31, 1996. Cash
provided by (used in) the Company's investing activities, primarily to fund
capital expenditures, and, in the quarter ended March 31, 1996, to fund the
Hobie Acquisition, totaled ($200,000) and ($700,000) for the years ended
November 30, 1993 and 1994, respectively, ($1.3) million for the year ended
December 31, 1995 and ($4.1) million for the quarter ended March 31, 1996. Cash
provided by (used in) the Company's financing activities, primarily proceeds
from bank debt and, in the year ended December 31, 1995, proceeds from the stock
issuance in the Recapitalization, totaled ($400,000) and $1.0 million for the
years ended November 30, 1993 and 1994, respectively, $4.3 million for the year
ended December 31, 1995 and $7.6 million for the quarter ended March 31, 1996.
As of March 31, 1996, the Company had a working capital deficit of $6.1 million,
including $14.6 million of indebtedness to be repaid with a portion of the net
proceeds of the Offering.
Gargoyles has a revolving line of credit with a bank (the "Credit
Facility") that matures on March 22, 1997. Effective June 25, 1996, the Company
could borrow under the Credit Facility up to the lesser of (i) an amount that,
together with outstanding interest, does not exceed the total of 80% of eligible
accounts receivable and 50% of eligible inventories and (ii) $11.0 million.
Borrowings under the Credit Facility bear interest at the bank's prime rate plus
1.0% per annum (9.25% at March 31, 1996), payable monthly. Amounts borrowed
under the Credit Facility are secured by all tangible and intangible personal
property of the Company. Proceeds from borrowings under the Credit Facility were
used by the Company to support operations. As of June 30, 1996, the Company had
borrowings of $7.7 million under the Credit Facility. The Credit Facility
requires, among other things, that the Company maintain a minimum tangible net
worth and working capital and meet certain ratios relating to debt coverage. As
of March 31, 1996, the Company was in compliance with the covenants, with the
exception of the minimum working capital covenant. The bank has provided a
waiver to the Company for this lack of compliance.
In connection with the Recapitalization, the Company borrowed $6.0 million
in an acquisition loan (the "Recapitalization Loan") from a bank. These funds
were used, along with the proceeds from the sale of Common Stock to the
Investors, to repurchase stock from the Founder. The Recapitalization Loan bears
interest at the bank's prime rate plus 1.50% per annum (9.75% at March 31,
1996), payable monthly. Principal payments are payable quarterly in the amount
of $230,769 through March 2002. The Recapitalization Loan is guaranteed by
Trillium. As of June 30, 1996, the Company had borrowings of $5.3 million under
the Recapitalization Loan. Additionally, a note payable of $283,100 was issued
to the Founder, bearing interest at 10% per annum. Gargoyles paid interest only
on a monthly basis through September 1995. Beginning in October 1995, the note
became payable in monthly installments of principal and interest of $10,704
through March 1998.
In connection with the Hobie Acquisition, the Company borrowed $4.0 million
in an acquisition loan (the "Hobie Acquisition Loan") from a bank. These funds
were primarily used to purchase all the outstanding stock of Hobie. On June 26,
1996, the Company borrowed an additional $1.0 million under the Hobie
Acquisition Loan, the proceeds of which were used for general working capital.
The Hobie Acquisition Loan bears interest at the bank's prime rate plus 3.0% per
annum (11.25% at March 31, 1996), payable monthly. A $700,000 principal payment
is due September 30, 1996 and the $4.3 million balance is due December 31, 1996.
In addition, loan fees of (i) 1.0% of the then-outstanding principal balance are
due on each of June 30 and September 30, 1996 and (ii) $212,000 is due on
December 31, 1996. The Hobie Acquisition Loan is guaranteed by Trillium. As of
June 30, 1996, the Company had borrowings of $5.0 million under the Hobie
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<PAGE> 28
Acquisition Loan. If the Company does not repay the Hobie Acquisition Loan on or
before December 31, 1996, it must pay an additional loan fee of $5.0 million or
issue a warrant to purchase that number of shares of the Company's Common Stock
that would constitute 25% of the Common Stock on a fully diluted basis at a
purchase price of $.01 per share (subject to certain antidilution adjustments).
If issued, the warrant would be exercisable by the bank at any time after March
31, 1997 and, until June 30, 1997, the Company would have the right to redeem
the warrant for an aggregate redemption price of $5.0 million. If the bank were
to exercise the warrant, the bank would have the right, subject to certain
limitations, to require the Company to register its shares of Common Stock.
The Company has also borrowed a total of $1.2 million from a bank, bearing
interest at the bank's prime rate plus 1.25% per annum, with interest payable
monthly and principal payable quarterly through 2000 (the "Equipment Loan"). The
Equipment Loan was used to finance the purchase of equipment and is secured by
such equipment. As of June 30, 1996, a total of $1.2 million was outstanding
under the Equipment Loan.
The Company intends to repay the Credit Facility, the Recapitalization
Loan, the Hobie Acquisition Loan, the Kindling Loan, the Equipment Loan, the
Settlement Note (see "Certain Transactions -- Recapitalization Transaction") and
certain other indebtedness with a portion of the net proceeds of the Offering.
See "Use of Proceeds" and Note 5 to the Company's Consolidated Financial
Statements.
Antone historically made distributions to the Founder to pay income taxes
on Antone's earnings included in the Founder's taxable income and as a return on
his investment. Antone paid distributions to the Founder of $587,000, $625,000
and $261,000 for the years ended November 30, 1993 and 1994 and December 31,
1995, respectively.
Capital expenditures totaled $1.3 million for the year ended December 31,
1995. The Company anticipates that capital expenditures will total approximately
$1.0 million for the year ending December 31, 1996. Capital expenditures during
1995 and 1996 are primarily for optical molds and production and office
equipment.
The Company believes that cash flow from operations, the net proceeds of
the Offering and available borrowings will be sufficient to meet its operating
needs and capital expenditures for the foreseeable future.
SEASONALITY
The following table sets forth certain unaudited quarterly data for the
periods shown:
<TABLE>
<CAPTION>
QUARTER
1994 QUARTER ENDED 1995 QUARTER ENDED ENDED
------------------------------------ -------------------------------------- MARCH 31,
FEB. 28 MAY 31 AUG. 31 NOV. 30 MAR. 31 JUNE 30 SEPT. 30 DEC. 31 1996
------- ------ ------- ------- ------- ------- -------- ------- ---------
(IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net sales............ $ 1.5 $3.3 $ 3.2 $ 3.1 $ 3.3 $ 5.8 $5.2 $ 2.8 $ 7.0
Gross profit......... 0.9 2.0 2.0 1.9 2.0 3.6 3.3 1.7 4.1
</TABLE>
The Company's net sales generally have been higher in the period from March
to September, the period during which sunglass purchases are highest. As a
result, operating income is typically lower in the first and fourth quarters as
fixed operating costs are spread over lower sales volume. In anticipation of
seasonal increases in demand, the Company typically builds inventories in the
fourth quarter, when net sales have historically been lower. The Company's
quarterly results of operations have fluctuated in the past and may continue to
fluctuate as a result of a number of factors, including seasonal cycles, the
timing of new product introductions, the timing of orders by the Company's
customers, the mix of product sales and the effects of weather conditions on
consumer purchases. See "Risk Factors -- Economic Conditions; Quarterly
Fluctuations; Seasonality."
BACKLOG AND BACKORDERS
Since mid-1994, the Company has experienced a significant increase in
backlog (which represents all unshipped orders, regardless of the scheduled
shipping date) and occasional increases in backorders (which
26
<PAGE> 29
represent orders for merchandise remaining unshipped beyond its scheduled
shipping date). As of March 31, 1996, the Company's backlog was approximately
$1.6 million, approximately $600,000 of which represented backorders.
The occasional increases in backorders have been due to increases in the
market demand for Gargoyles products, which have temporarily exceeded either the
capacity of the Company's lens and frame suppliers or the Company's internal
production capacity. Prior to the Recapitalization, the Company did not have
sufficient capital to maintain an adequate supply of certain key components,
which resulted in an increase in backorders in the months preceding and
immediately following the Recapitalization. The Recapitalization increased the
Company's access to capital, thereby allowing it to reduce backorders and
further develop adequate inventory levels. The Company has been taking actions
since the Recapitalization to reduce the potential of future backorders. In
particular, Gargoyles has worked with its suppliers to increase the level of
production of Gargoyles products, has added new suppliers and has increased its
own production capacity through the addition of personnel and equipment. In
addition, in late 1995 the Company refocused its product offerings on the most
popular frame and lens color combinations, allowing the Company to narrow the
stock-keeping units offered, thereby reducing the potential for future
backorders. See "-- Liquidity and Capital Resources," "Risk Factors -- Ability
to Sustain and Manage Growth" and "-- Reliance on Limited Sources of Supplies,"
"Business -- Manufacturing" and "Use of Proceeds."
27
<PAGE> 30
BUSINESS
INTRODUCTION
Gargoyles designs, manufactures and markets a broad line of performance and
lifestyle-oriented sunglasses. The Company competes in the rapidly growing
premium sunglass market by offering a diverse line of products at suggested
retail prices of $80 to $190. The Company seeks to distinguish Gargoyles brand
products in the marketplace by combining innovative styling with its patented
dual lens toric curve technology, which the Company believes is the most
advanced lens design currently available in wrap sunglasses. The Company
believes these features appeal not only to active sports enthusiasts who favor
the performance and comfort features of its products, but also to consumers who
appreciate Gargoyles' distinctive styling and innovative designs. In addition,
the Company recently acquired the Hobie sunglass line, a leading line of
polarized sunglasses, which is one of the fastest emerging categories within the
premium sunglass market. The Company also offers a popular line of protective
eyewear focused primarily on the medical and dental market segments. The Company
believes that the diversity of its product lines, combined with increasing
awareness among consumers of the Gargoyles and Hobie brands and their unique
attributes, has positioned it to capitalize on the strong growth potential in
the domestic and international premium sunglass markets. The Company's net sales
have increased at a compounded annual growth rate of 40% from 1992 through 1995.
For the first quarter of 1996, the Company achieved growth in net sales of 112%
compared to the same period in the prior year.
The Company was founded in 1979 to develop a sunglass style that not only
would cover and protect the eyes more effectively than traditional "flat" lens
designs, but also would minimize distortion. In 1983, the Company completed the
development of its patented dual lens toric curve technology. The complex
geometry of the proprietary toric curve lens minimizes distortion associated
with other wrap lens designs by allowing the transmission of light directly to
the eye with little refraction. The dual lens design provides each eye with its
own optical center of focus, resulting in greater overall optical clarity and
less peripheral distortion. The Company believes this proprietary technology
offers the most advanced and optically correct sunglass lens design available in
wrap sunglasses and provides a significant differential competitive advantage.
In 1983, the Company introduced its first product based on this proprietary
technology, the Gargoyles Classic. Until 1992, the Company was a successful
single-product company with relatively few resources devoted to expanding its
product line, and was dependent on independent manufacturers' representatives to
sell its products. In May 1992, the Company began installing a new management
team which has developed and implemented new operating and growth strategies
designed to exploit the patented dual lens toric curve technology and to
capitalize on the growth trends within the premium sunglass market. These
strategies included an aggressive, innovative new product development program
resulting in the introduction of numerous models, including 85s in 1993, Legends
in 1994, Helios and Legends II in 1995, and Paladin, Octane and Vortex in 1996.
In addition, the Company began investing in its own direct sales force in 1994
to expand distribution and gain more control over the sales process. The Company
also initiated a strategy to enhance the Gargoyles brand image and promote the
performance characteristics of its products by aggressively pursuing strategic
endorsements from professional athletes such as Dale Earnhardt, Ken Griffey,
Jr., Alexi Lalas and Scottie Pippen. The Company believes that these strategies
have contributed to its rapid sales growth and have created a platform for the
continued success of the Gargoyles brand.
The Company has also leveraged its infrastructure and direct sales force by
adding new brands through acquisitions and licensing arrangements that can
increase sales without commensurate increases in operating expenses. In
particular, the Company acquired Hobie's sunglass business in February 1996,
which broadened the Company's technology base to include polarized sunglasses.
Further, in May 1996, the Company, together with the former president of Revo,
entered into a worldwide license agreement with Timberland to design,
manufacture and market sunglasses under the Timberland brand name. The Company
believes the worldwide appeal of the Timberland brand name will assist the
Company in further penetrating the outdoor-lifestyle market segment. Management
believes that the addition of these brands to the Company's portfolio of
products will provide incremental synergies in sales, marketing, distribution,
manufacturing and general and administrative expenses.
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<PAGE> 31
INDUSTRY OVERVIEW
According to industry sources, total retail sunglass sales in the domestic
sunglass market grew approximately 64% from $1.4 billion in 1989 to $2.3 billion
in 1995. The industry is generally divided into two principal segments: the
under $30 market and the over $30 premium market. The premium sunglass market,
the category in which the Company competes, showed an increase in total retail
sales of approximately 82% from $824 million in 1989 to $1.5 billion in 1995.
The average retail price per unit for premium sunglasses has increased during
this period, contributing significantly to the overall growth of the segment.
The Company believes that the key factors driving the historical growth in
the premium sunglass market include increased consumer awareness of the need for
quality eye protection in response to heightened health concerns, increased
demand for technologically advanced, yet stylish products, increased demand for
specialized sunglasses for different sports and activities, growing brand
awareness among eyewear consumers and continuous product replacement.
The Company believes that an additional factor affecting the growth of the
premium sunglass market is the growth of sunglass specialty retailers, primarily
Sunglass Hut, the industry's largest sunglass specialty retailer. Sunglass Hut
has grown rapidly through internal expansion and acquisitions, increasing from
156 stores at February 1, 1988 to 1,726 locations at February 3, 1996. In
addition to growing its store base, Sunglass Hut's comparable store net sales
increased 10.3% and 13.5% for its 1995 and 1994 fiscal years, respectively. The
Company also believes that the percentage of sales through the sunglass
specialty channel, its primary channel, is increasing relative to other
channels. Based on information provided by Sunglass Hut, the Company believes
that sales of sunglasses through sunglass specialty retailers increased from
approximately 31% of total domestic sunglasses sales in 1994 to approximately
37% in 1995.
The Company believes that Oakley and Bausch & Lomb comprised approximately
50% of the domestic premium sunglass market in 1995, with several companies,
including Gargoyles, having smaller but significant market shares. The remainder
of the industry is highly fragmented and comprised of numerous smaller
companies. The Company expects that as the sunglass industry continues to grow,
a certain amount of consolidation will occur. The Company believes such
consolidation will enable certain companies to achieve sufficient scale to
invest increased amounts in research and development, develop direct sales
forces, market products effectively in an increasingly competitive environment
and maintain adequate inventory levels to deliver products on a reliable basis
to rapidly growing specialty retailers. Consolidation of smaller manufacturers
by larger, well-capitalized vendors is consistent with the desire of large
retail customers, notably Sunglass Hut, to do business with vendors who provide
dependable, timely delivery and adequate supply of products.
BUSINESS STRATEGIES
The Company's goal is to be the premier designer, manufacturer and marketer
of performance and lifestyle-oriented premium sunglasses and protective eyewear.
To achieve this goal, the Company has developed and is implementing business
strategies to capitalize on growth opportunities within the premium sunglass
market. Key elements of the Company's business strategies are as follows:
Offer technologically superior products. The Company's products are
designed to capitalize on several unique technological features that
differentiate Gargoyles' products from those of its competitors. The
sophisticated geometry of the Company's patented lens design directs light rays
to converge properly on the retina. The Company's dual lens toric curve
technology provides each eye with its own optical center of focus, resulting in
greater overall optical clarity and less peripheral distortion. The Company's
primary lens material is polycarbonate, which is significantly stronger than
safety glass, yet lightweight and able to provide protection from damaging
ultraviolet light. The Company also offers Hobie polarized sunglasses, which are
designed to block glare more effectively than regular sunglasses. Additionally,
the Company's patented interchangeable lens system used in its Legends products
allows the consumer to adopt multiple styles and functions through the use of
different lenses in the same frame.
Design innovative products. The Company continuously strives to
differentiate its products from those of competitors through new product
introductions. The Company positions its products to appeal to both
29
<PAGE> 32
active sports enthusiasts who favor the performance features of its products and
consumers who appreciate Gargoyles' distinctive styling and innovative designs.
The Company has recently added the Vortex and Octane models for the sports
market segment, which the Company believes is currently one of the fastest
growing segments in the premium sunglass market. In addition, the recent
introduction of the Paladin model has augmented the Company's strength in the
broader style-conscious market.
Increase brand name recognition. The Company seeks to heighten awareness
of its brands as high-quality, technology-based performance sunglasses. The
Company's unique styles and designs, featuring its dual lens toric curve
technology, differentiate its products from rival brands. To further strengthen
its brand image, the Company maintains strict control over the distribution of
its products and has implemented a marketing strategy focused on enhancing the
retail presentation of its products. This strategy includes training retail
salespersons to fully understand the benefits and features of the Company's
products and in-store education highlighting the style and technical features of
its products. In addition, the Company creates broad exposure for its products
through the endorsements by well-known professional athletes such as Dale
Earnhardt, Ken Griffey Jr., Alexi Lalas and Scottie Pippen and through the use
of its protective eyewear products by, and tie-in promotions with, the actors on
the popular television series ER.
Expand distribution network. In 1994, the Company began investing in a
direct sales force to expand distribution and gain more control over the sales
process. The Company has recently augmented its distribution capabilities with
the addition of a number of optical distributors and sporting goods
manufacturers' representatives to supplement the Company's efforts to access the
underpenetrated sporting goods and optical stores markets. The Company believes
that the strategic expansion of its distribution network permits its direct
sales force to focus on the Company's existing customer base and add new
accounts. The Company anticipates that the addition of the Hobie and Timberland
product lines will allow for broadened distribution to new and existing
customers who desire these new products.
Implement vertical integration strategy. The Company currently depends on
multiple vendors in geographically diverse areas to perform its molding,
hard-coating and mirroring processes for its lenses. The Company anticipates
centralizing many of these processes by implementing a vertical integration
strategy. The Company's goals in implementing this strategy include more
efficient manufacturing, improvement in gross margins, manufacturing products in
accordance with its strict quality-control standards and increasing control over
the timing and delivery of its products. Processes for which vertical
integration is not effective will continue to be contracted out to vendors.
GROWTH STRATEGIES
Management believes that its strategies have positioned the Company to
achieve continued growth in revenues and earnings. Key elements of the Company's
growth strategies include the following:
Capitalize on growth in premium sunglass market. The Company will continue
to focus on increasing its penetration within the premium sunglass segment,
which has grown approximately 82% from 1989 to 1995. Management believes that
this segment will continue to experience rapid growth. The Company also expects
to benefit from increasing penetration of the premium sunglass market by the
Company's existing customers, including its largest customer, Sunglass Hut. The
Company believes that as large sunglass specialty retailers continue to grow,
they will increasingly require well-capitalized vendors which are able to
provide adequate product supply on a reliable basis.
Develop and introduce new products. The Company is committed to
capitalizing on its existing market position and proprietary technology by
developing new products and product line extensions that incorporate superior
performance and unique styling. To support its new product initiatives, the
Company maintains an active research and development effort, which has resulted
in the introduction of eight product lines since 1993. In 1996, new product
introductions included the Paladin titanium frame for the style-conscious market
and the Octane and Vortex plastic frames for the sports market. In 1997, the
Company anticipates introducing a number of new models of polarized sunglasses
under the Hobie brand name to capitalize on the growing awareness among
consumers of the performance features of polarized lenses. Further, in 1997 the
Company anticipates introducing its lifestyle-oriented Timberland brand product
line.
30
<PAGE> 33
Expand customer base. The Company is focused on expanding its customer
base both domestically and internationally. The strategies of adding a direct
sales force dedicated to selling the Company's products and adding additional
manufacturers' representatives and distributors have resulted in significant
growth in the number of accounts, including sunglass specialty, sporting goods,
department and optical stores. Since the addition of a direct sales force in
1994, the Company has added over 1,000 new accounts. The Company now has
approximately 3,100 accounts representing over 7,000 retail locations or
outlets. The Company believes there is still significant opportunity to expand
its customer base both in the United States and internationally.
Focus on international expansion. The Company believes that international
expansion represents a significant growth opportunity. International sales
accounted for approximately 6% of the Company's net sales in 1995, a
significantly lower penetration than that of the Company's primary competitors.
The Company's international growth plans are based on developing international
distribution networks and investing in overseas operations, where appropriate.
In addition, the Company believes the worldwide appeal of the Timberland brand
name will facilitate introduction of the Company's products internationally.
Management also expects the international expansion of Sunglass Hut will assist
in increasing the Company's international presence.
Selectively pursue acquisition and licensing opportunities. The Company
seeks to acquire businesses or to create licensing arrangements with companies
having high-quality products, strong brand names and growth potential. The focus
of the Company's acquisition licensing efforts is to (i) augment the Company's
product lines, (ii) enhance the Company's distribution capabilities, (iii)
leverage the Company's operating infrastructure, and (iv) access new technology.
In particular, the Company's acquisition and integration of Hobie and its
license agreement with Timberland provide new brand names and a broader customer
base, and create distribution and operating synergies.
DUAL LENS TORIC CURVE TECHNOLOGY
The key technological feature of the Company's eyewear is its patented dual
lens toric curve design. This proprietary design offers a foundation for product
innovation that overcomes the optical deficiencies in competitive wrap
sunglasses and provides superior optics and less distortion compared to
competitive wrap designs. The Company's toric curve lens design is achieved
through the use of complex lens geometry that incorporates different horizontal
and vertical curvatures, as well as variable material thickness throughout the
lens surface. The lens geometry directs light rays to converge properly on the
retina, minimizing distortion as well as eye fatigue and eye stress. Competitive
spherical or unitary wrap lens designs, which do not use the sophisticated
geometry of the Company's dual toric curve lens, may cause light rays to
converge improperly on the retina, causing distortion, eye fatigue and eye
stress.
<TABLE>
<CAPTION>
LIGHT CONVERGENCE LIGHT CONVERGENCE
OF GARGOYLES' OF STANDARD WRAP
TORIC CURVE LENS SUNGLASS LENS
----------------------------------- -----------------------------------
<S> <C>
[Diagram of light convergence on [Diagram of light convergence on
human eye through Gargoyles lens] human eye through competitive lens]
</TABLE>
In addition, the Company's dual lens design provides separate optical
centers of focus for each eye, resulting in greater overall optical clarity and
less peripheral distortion. Competitive unitary wrap sunglasses have an optical
center near the physical center of the lens, which is located between the eyes,
which may result in greater eye fatigue as the eye muscles attempt to adjust the
shape of the eye to focus properly.
<TABLE>
<CAPTION>
LIGHT TRANSMISSION OF LIGHT TRANSMISSION
GARGOYLES' DUAL LENS OF COMPETITIVE
TORIC CURVE DESIGN UNITARY LENS DESIGN
----------------------------------- -----------------------------------
<S> <C>
[Diagram depicting light [Diagram depicting light
transmission through dual toric transmission through competitive
curve lens] lens]
Dual optical center Single optical center
</TABLE>
31
<PAGE> 34
The Company believes that its dual lens toric curve technology provides the
most advanced and optically correct lens design available in wrap sunglasses.
PRODUCTS
The Company markets its sunglass models under the Gargoyles and Hobie
brands, and is developing products to market under the Timberland brand
beginning in 1997 pursuant to the license agreement with Timberland. The Company
offers an extensive selection of high-quality sunglasses in the middle to upper
price points of the premium market ($80 to $190 retail), thereby allowing the
Company to market to a broad customer base.
GARGOYLES BRAND SUNGLASSES
The Company currently offers nine product lines under the Gargoyles brand
name, all of which are available in a variety of colors and with mirrored and
nonmirrored lenses. Each Gargoyles product line, except for the Legends lines,
utilizes the Company's patented dual lens toric curve technology.
<TABLE>
<CAPTION>
SUGGESTED
RETAIL
PRODUCT LINE INTRODUCTION DESCRIPTION PRICE POINTS
- --------------------- --------------- -------------------------------------------- ------------
<S> <C> <C> <C>
Classic December 1983 Original dual lens toric curve design. $80-$175
85s May 1993 Same design as the Classic design but 15% $80-$175
smaller.
Legends March 1994 Utilizes a patented interchangeable lens $125-$165
system with 14 lens options.
Helios Full Frame March 1995 Contemporary performance sunglass combining $120-$140
the optically correct oval toric curve lens
with a sleek wrapback design.
Helios Anti-Frame March 1995 Sleek, lightweight frameless design $90-$100
utilizing dual lens toric curve wrap.
Legends II August 1995 Smaller, sleeker version of the Legends with $125-$145
six lens options.
Paladin March 1996 Lightweight, fashion/performance design $170-$190
featuring titanium frames.
Vortex April 1996 Lightweight, aerodynamic nylon frame $80-$95
designed for "extreme" sport use.
Octane May 1996 Lightweight, aerodynamic nylon composite $85-$95
frame designed for "mainstream" sport use.
</TABLE>
[additional column containing diagrams of sunglasses]
Classic. Introduced in December 1983, the Classic was the Company's first
sunglass. The uniqueness of the Classic style is based on several features,
including its polycarbonate dual lens toric curve and its wrap design, which
provide superior eye protection and optical clarity. The Classic was popularized
through its use by Arnold Schwarzenegger in The Terminator and Clint Eastwood in
Sudden Impact.
85s. Introduced in May 1993, the 85s were designed to respond to increased
consumer demand for a smaller version of the Classic. The 85s style is 15%
smaller and is designed to fit a slimmer face.
Legends. Introduced in March 1994, the Legends line combines a classic
shape with the sports performance wrap sunglass of the 1990s. The Legends'
patented interchangeable lens system allows the wearer to adjust to changing
light and to adopt multiple styles and functions through the use of 14 different
lens combinations.
Helios Full Frame. Introduced in March 1995, the Helios Full Frame is
designed to meet the increasing market demand for high-quality, style-conscious
performance eyewear. This model, along with the Helios Anti-Frame line, is the
industry's first oval wrap sunglass designed with a dual lens toric curve. The
Helios Full Frame products also feature spring hinges and adjustable nose pads,
which produce a superior level of fit and comfort.
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<PAGE> 35
Helios Anti-Frame. Introduced in March 1995, the Helios Anti-Frame is a
contemporary performance sunglass featuring a sleek, lightweight frameless
design utilizing the dual lens toric curve.
Legends II. Introduced in August 1995, the Legends II line offers the same
interchangeable lens system and classic design of the Legends line in a smaller,
sleeker style. The Legends II line includes six combinations of interchangeable
lenses.
Paladin. Introduced in March 1996, the Paladin is a high-end,
style-conscious sunglass with a sports influence that features a titanium frame,
providing durability in a lightweight frame weighing only four-tenths of an
ounce. The Paladin line incorporates the dual lens toric curve and an
antireflective lens coating to reduce glare.
Vortex. Introduced in April 1996, the Vortex line features a lightweight,
aerodynamic design targeted for "extreme" sport use by the youth market. The
Vortex incorporates the polycarbonate dual lens toric curve with lightweight
nylon frames.
Octane. Introduced in May 1996 as a mainstream sports sunglass, the Octane
line features the dual lens toric curve and lightweight nylon composite frames.
As a part of the Company's endorsement strategy, the Company uses the names
of athletes to broaden brand name recognition by creating "signature" series of
products. These products currently include The Griffey Wrap and Dale Earnhardt's
signature models. In addition, a number of the Company's models are available
with customized nosebridge decals and/or temples that can tailor a product for
specific corporate promotions.
HOBIE BRAND SUNGLASSES
In February 1996, the Company acquired Hobie, a leading manufacturer and
distributor of polarized sunglasses. Polarized lenses are designed to block
glare more effectively than regular lenses, thereby providing a technological
differentiation from other sunglasses. The Hobie Acquisition provides the
Company with access to the growing market for polarized sunglasses. The Company
believes this market growth is based on greater consumer recognition of the
benefits of polarized sunglasses, the relative ease of demonstrating the
technological differentiation of the lens and the increasing market acceptance
of the higher-priced polarized sunglasses. The Company also believes that its
strategy to aggressively market prescription polarized products will capitalize
on the demographics of aging consumers with active outdoor lifestyles.
The Hobie sunglass collection is divided into three product lines, Sport,
Lites and Elites, each designed to appeal to a different user group.
Substantially all Hobie sunglasses are available with prescription lenses.
<TABLE>
<CAPTION>
SUGGESTED
PRODUCT RETAIL
LINE DESCRIPTION PRICE POINTS
- ------- ------------------------------------------------------------------------------ ------------
<S> <C> <C>
Sport Classic polarized glass lens sunglass line for sport use, including fishing. $100-$150
Lites Contemporary polarized sunglass line for active sports. $80-$130
Elites Polarized glass lens sunglass line with lifestyle-orientation. $150-$185
</TABLE>
Sport. The Sport line consists of 12 models with nylon frames and polarized
glass lenses designed for sport use. The Sport line also includes a line of
products designed specifically for fishing. Selected styles in the fishing
series are available with plastic lenses.
Lites. The Lites line consists of 11 models designed for active sport use.
The Lites products feature plastic polarized lenses. These sunglasses utilize
lightweight, sturdy nylon, metal or carbon frames.
Elite. The Elite line consists of eight models designed as a durable,
lifestyle-oriented sunglass featuring high-quality nylon or metal frames and
polarized glass lenses.
PROTECTIVE EYEWEAR
The Company established its Protective Eyewear division in 1994 to
capitalize on the growing demand for the Company's Arctic Clear product line, a
clear lens version of the Classic and 85s models. The Company's
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initial efforts have focused on the medical and dental market segments, where
the features and benefits of Arctic Clear eyewear provide superior optical
quality and comfort to the healthcare professional. The Company believes that
protective eyewear is growing in importance as a market segment due primarily to
increasing health concerns in the medical and dental markets. Management
believes that the Company's Arctic Clear products appeal to users who regularly
wear protective eyewear for extended periods, therefore demanding glasses that
are more fashionable and comfortable.
The Company currently distributes its protective eyewear line through its
existing retail channels and through a number of medical and dental
distributors. The Company promotes retail sales of its Arctic Clear products
through product use by, and tie-in promotions with, the actors on the television
series ER. The Company expects to benefit from the introduction of a
prescription insert for its Classic and 85s models that will expand the market
potential for the Company's Arctic Clear protective eyewear.
TIMBERLAND
In May 1996, the Company, together with the former president of Revo,
formed Kindling, a majority-owned subsidiary, to design, manufacture and market
sunglasses and, with Timberland's consent, ophthalmic frames under the
Timberland brand name. The Company, together with Kindling, acquired an
exclusive license from Timberland to use the Timberland and tree logo trademarks
on sunglasses, eyewear accessories and, with Timberland's consent, ophthalmic
frames. The Company and Mr. Lauer are currently formulating the strategy with
respect to the Timberland product line; the Company anticipates that sales of
Timberland branded products will begin in 1997.
ACCESSORIES
The Company's accessory line includes a variety of products, including hard
cases, replacement lenses and eyeglass retainers. This line is distributed in
conjunction with the Company's sunglass product lines.
PRODUCT DESIGN AND DEVELOPMENT
The Company strives to be an innovator in the development of new product
styles that incorporate the Company's patented technologies. The Company's
products are designed by internal research and development personnel with input
from the Company's sales and marketing departments and from consumer focus
groups. The development process commences with the conceptual design of
potential products, including design sketches, drawings and models. The design
team then uses state-of-the-art CAD/CAM equipment to develop three-dimensional
prototypes of new designs. In formulating its design concepts, the Company
strives to develop unique styles based on its patented dual lens toric curve
technology and focuses its efforts on producing performance eyewear products
that are among the most functional, fashionable and durable in the industry. As
a part of this strategy, the Company has successfully developed new products by
cutting different lens shapes and sizes from the Classic lens. These initiatives
have shortened the time associated with the concept, prototype and production
stages of the product development cycle.
The Company is now focused on the introduction of one to three new product
models per year. The Company expands its model lines by adding certain product
extensions, such as new lens and frame colors, new mirrors, interchangeable
lenses and soft nose pieces. The Company's strategy is to delay its line
extension until it is confident of consumer acceptance of the new model, which
has enabled the Company to avoid excess inventory and to manufacture and
assemble its products more effectively.
MANUFACTURING
The Company currently sources its lenses, optical frames and components
from a diverse group of suppliers in the United States, Japan and Europe. Lenses
for Gargoyles products are molded, hard-coated and mirrored by a network of
suppliers in the United States and Japan. Frames for Gargoyles' products are
currently produced by a network of suppliers in Italy and Japan. Lenses and
frames for the Company's Hobie product line are sourced from Asia and Europe and
are assembled in the United States. Related components are generally purchased
from vendors in the United States. The Company has established strong
relationships
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<PAGE> 37
with its major suppliers. The Company intends to vertically integrate certain
aspects of its manufacturing processes. Management believes that such vertical
integration will result in more efficient manufacturing and improved gross
margins, and will provide the Company with more control over the timing and
delivery of its products. Processes that are unlikely to add these benefits
through vertical manufacturing will continue to be contracted out to vendors.
See "-- Business Strategies -- Implement Vertical Integration Strategy" and
"Risk Factors -- Reliance on Limited Sources of Supplies" and "-- Risks
Associated With Vertical Integration Strategy."
Gargoyles assembles the majority of its products at the Company's facility
located in Kent, Washington. Performing assembly functions in-house enables the
Company to control the production process and to maintain its strict
quality-control standards to reduce spoilage and improve product performance.
The Company owns and maintains most of its assembly equipment. With respect to
products assembled by the Company's suppliers, the products are delivered to the
Company for quality control, packaging and shipping.
The Company strives to maintain dual or multiple sources of supply for all
components and services for its sunglass product lines. The Company has also
established contingency plans and identified alternative sources of supply for
many of its components. However, the Company relies on a single source of supply
for several of its components, including its frames. The major raw material used
to produce the majority of the Company's lenses, custom lexan polycarbonate, is
in limited supply in world markets and is purchased on the Company's behalf by
its lens molders. See "Risk Factors -- Reliance on Limited Sources of Supplies."
The optical molds used to develop the Company's toric curve-based lenses
are difficult to manufacture. Due to the precise optical geometry involved,
requiring unique curvatures of both the horizontal and vertical radii, as well
as the front and rear lens surfaces, the mold-polishing function is a
time-consuming, iterative process that must be finished by hand. The process
provides a degree of competitive protection to the Company because the design is
extremely difficult and costly to replicate. All optical molds used to
manufacture Gargoyles brand lenses are owned by the Company, contributing to a
consistent, dependable source of supply.
The Company manages its inventory for its Gargoyles products using an
automated inventory management system that assists in controlling reorder points
and minimum and maximum stock levels, thereby ensuring better in-stock
availability and a higher level of salable product. Other benefits of this
system include lowering average inventories and reducing associated carrying
costs. The Company is in the process of integrating its Hobie products into the
automated inventory management system.
For information concerning backlog and backorders, see "Management's
Discussion and Analysis of Financial Condition and Results of
Operations -- Backlog and Backorders."
DISTRIBUTION
To preserve the integrity of the Company's brand names, the Company
selectively limits its distribution to retailers that market products consistent
with the Company's image and pricing strategy and that provide a high level of
customer service and technical expertise. Individual accounts are selected based
on their potential ability to positively represent the Company's brands and
technological benefits, reputation for advertising prices at or near the
manufacturer's suggested retail price, expected ability to display a wide
assortment of the Company's product selections and demonstrated commitment to
merchandising and product knowledge that will support the Company's brand image.
The Company believes that sunglass specialty retailers represent the largest and
fastest growing distribution channel for sunglasses, and expects significant
growth in sunglass sales by sunglass specialty stores. The Company currently
sells Gargoyles and Hobie eyewear through approximately 3,100 accounts
representing over 7,000 locations or outlets comprised primarily of sunglass
specialty stores, optical stores, department stores and sporting goods stores.
The Company believes that international distribution represents a
significant opportunity for increased product sales. Although the Company has
not historically focused on the international marketplace, it has achieved
recent international sales growth as a result of targeting existing distributors
for increased sales volume and developing new distributor relationships selling
into previously untapped international markets.
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<PAGE> 38
The Company intends to focus its expansion efforts in Europe through the
establishment of an international distribution network, and to leverage
potential distribution synergies with the Company's international manufacturing
suppliers. Future plans potentially involve a direct sales force in selected
countries and the investment in marketing and overseas operations where
appropriate. The Company also expects the worldwide growth of Sunglass Hut to
assist in its international expansion.
SALES
Prior to March 1994, Gargoyles' selling efforts were conducted principally
by manufacturers' representatives who were responsible for product lines from
multiple companies. In March 1994, the Company invested in a direct sales force,
which had an immediate impact on revenue growth and has played a significant
role in positioning the Company for long-term sustainable revenue growth. The
direct sales force has grown from ten individuals in April 1994 to 30
individuals as of May 1, 1996. The sales force currently includes territory
sales managers, national accounts sales managers and sales associates, as well
as international and protective eyewear sales teams. The Company believes that
the benefits of its direct sales force include greater focus and more effective
control, direction, responsiveness and motivation throughout the entire sales
management process. Furthermore, the Company views its direct sales force as a
key asset and continuously seeks to add new products to leverage its investment
in its sales force. Examples of this strategy include the Hobie Acquisition and
the license agreement with Timberland, both of which allow the Company to
provide new products to its growing customer base through its established sales
force.
The Company's direct sales force is responsible for managing all sales
activities and executing the Company's sales, marketing and promotional
strategies. Sales personnel directly call on sunglass specialty retailers,
department stores and large optical chains. Sales force functions include daily
sales calls focused on increasing business with existing accounts and opening
new accounts. This includes educating and training retailers and their employees
to effectively communicate the key features and benefits of the Company's
products and to execute strategic merchandising programs. Sales personnel are
compensated based on a combination of base salary and bonus.
In January 1996, the Company made the strategic decision to expand its
distribution network to include key optical distributors and sporting goods
manufacturers' representatives to supplement the Company's efforts to access the
underpenetrated optical stores and sporting goods markets. These distributors
and manufacturers' representatives represent both Gargoyles and Hobie product
lines. The Company believes that the strategic expansion of its distribution
network will provide its direct sales force with greater ability to increase its
focus on the Company's existing customer base and to achieve greater account
penetration.
MARKETING AND PROMOTION
Prior to the Recapitalization, the Company devoted few resources to
marketing and promotion. Over the past year, the Company has significantly
increased its marketing efforts, with increased marketing expenditures, new
personnel and new promotional programs. The Company's marketing department
develops all aspects of advertising, marketing and promoting the Company's
products. In addition, the marketing team participates in the new product
development process.
The Company believes that marketing programs developed in cooperation with
its key customers, including Sunglass Hut, are a critical part of the Company's
success. The Company's marketing professionals work with these customers to
design distinctive retail presentations and promotions and to develop marketing
materials to educate store employees as to the features and benefits of the
Company's products. In addition, the Company provides its customers with product
and video presentations that feature the Company's latest products.
The Company uses endorsements by professional athletes to promote its
products and brand image by highlighting the sports efficacy of its designs. The
Company's athlete endorsement strategy focuses on selecting athletes who are
highly acclaimed in their respective sports to wear and promote the Company's
sunglasses. Athletes work in partnership with the Company to contribute to the
successful development and marketing of the Company's products. Athletes
currently under contract include such well-known names as
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<PAGE> 39
seven-time NASCAR champion Dale Earnhardt, baseball superstar and "presidential
candidate" Ken Griffey, Jr., international soccer superstar Alexi Lalas, Olympic
gold-medalist skier Tommy Moe, NBA superstar Scottie Pippen and world champion
snowboarders Michael Jacoby and Michele Taggart. In key situations, the Company
uses the names of athletes to increase brand recognition by creating a
"signature" series of products. These products currently include The Griffey
Wrap and Dale Earnhardt's signature models. The Company's strategy also includes
the use of the Company's protective eyewear on the popular television series ER,
which it promotes through an endorsement contract providing for tie-in
promotions with the ER actors.
CUSTOMER SERVICE
The Company's management is committed to achieving customer satisfaction
and encouraging repeat business by providing a high level of knowledgeable,
attentive and personalized customer service. The Company has implemented
extensive employee training designed to ensure that its customer service
representatives, and other key personnel who interface with the Company's
customers, are thoroughly familiar with the technical, lifestyle and functional
elements of the Company's product offerings. Management believes that the
Company's responsive customer service effort has created significant goodwill
and loyalty among its customers and, as a result, is a leading contributor to
the strength of Gargoyles' excellent reputation in the marketplace.
PRINCIPAL CUSTOMERS
Net sales to the Company's 10 largest customers during the year ended
December 31, 1995 and the three months ended March 31, 1996 accounted for
approximately 57% and 64% of net sales, respectively. Sunglass Hut, the
Company's largest customer, accounted for approximately 33% and 41% of the
Company's net sales for the same periods (including sales to Sunsations, which
was acquired by Sunglass Hut in July 1995). As of May 31, 1996, the Company's
products are sold in more than 1,650 Sunglass Hut locations throughout the
United States. While the Company does not have a purchase agreement with
Sunglass Hut, the Company believes that its relations with this customer are
good. Each year the Company and Sunglass Hut develop a joint plan for
promotional, marketing and sales objectives.
INTELLECTUAL PROPERTY
The Company aggressively asserts its rights under patent, trade secret,
unfair competition, trade dress, trademark and copyright laws to protect its
intellectual property, including product designs, proprietary manufacturing
processes and technologies, product research and concepts and recognized
trademarks. These rights are protected through the acquisition of patents and
trademark registrations, the maintenance of trade secrets, the development of
trade dress and, where appropriate, litigation against those who are, in the
Company's opinion, infringing its rights.
Patents and Trademarks. As of May 15, 1996, the Company had been issued
three U.S. utility patents and one U.S. design patent relating to eyewear,
including patents directed to the dual lens toric curve technology. As of May
15, 1996, the Company had three utility patent applications and three design
patent application pending in the United States and one utility patent
application pending internationally. The Company intends to file additional
patent applications, when appropriate, relating to improvements in its
technology and other specific products and processes developed by the Company.
As of May 15, 1996, the Company had registered four U.S. trademarks and
three international trademarks relating primarily to the name Gargoyles. In
addition, the Company has licensed the right to use the Hobie and the Timberland
and tree logo trademarks for use on eyewear products pursuant to the terms of
the license agreements with Hobie and Timberland. Due to the Company's strict
quality-control standards and the desire to protect its proprietary technology
and prevent overexposure of its trademarks, the Company has not licensed its
trademarks for use by other parties for the manufacture and sale of sunglass
products.
While there can be no assurance that the Company's patents or trademarks
protect its proprietary information and technologies, the Company intends to
continue to assert its intellectual property rights against
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any infringer. Although the Company's assertion of its rights could result in
substantial cost to, and diversion of effort by, the Company, management
believes that protection of the Company's intellectual property rights is a key
component of the Company's business strategy. The Company is currently a party
in litigation matters concerning certain of its intellectual property rights.
See "-- Litigation" and "Risk Factors -- Protection of Proprietary Rights."
Trade Secrets. The Company also relies on unpatented trade secrets for the
protection of certain intellectual property rights. The Company protects its
trade secrets by requiring its employees, consultants and other agents and
advisors to execute confidentiality agreements upon the commencement of
employment or other relationship with the Company. There can be no assurance,
however, that these agreements will provide meaningful protection for the
Company's proprietary information or adequate remedies in the event of
unauthorized use or disclosure of such information. In addition, there can be no
assurance that others will not independently develop substantially equivalent
proprietary information and technologies, or otherwise gain access to the
Company's trade secrets or disclose such technology, or that the Company can
meaningfully protect its rights to unpatented trade secrets.
COMPETITION
The Company competes primarily in the premium segment of the
nonprescription sunglass market, which is fragmented and highly competitive. The
Company competes with a number of established companies, including Bausch &
Lomb, the marketer of the Ray Ban, Killer Loop, Arnette and Revo brands, and
Oakley, which together control approximately 50% of the premium market segment,
as well as Luxottica Group S.P.A., Safilo USA Inc. and Bolle America, Inc. In
the polarized sunglass segment, the Company competes against Maui Jim and Costa
del Mar brands, as well as the polarized products sold by other sunglass
manufacturers. The Company also competes in the market for premium protective
eyewear, primarily against Bolle America, Inc., and against lower-priced
products produced by Uvex Safety, Inc. and Titmus Optical, Inc. Several of these
companies in the premium sunglass and protective eyewear markets have
substantially greater resources and better name recognition than the Company and
sell their products through broader and more diverse distribution channels. The
Company could also face competition from new competitors, including established
branded consumer products companies that also have greater financial and other
resources than the Company. In addition, as the Company expands internationally,
it will face substantial competition from companies that have already
established their products in international markets and consequently have
significantly more experience in those markets than the Company.
The premium sunglass market is susceptible to rapid changes in consumer
preferences that could affect acceptance and sales of the Company's products.
The major competitive factors include fashion trends, brand recognition, methods
of distribution and the number and range of products offered. In addition, to
retain its market share, the Company must continue to be competitive in the
areas of quality, performance, technology, intellectual property protection and
customer service. See "Risk Factors -- Competition."
EMPLOYEES
As of May 31, 1996, the Company had 221 employees, of which 71 were
full-time salaried, 103 were full-time hourly and 47 were part-time hourly. The
Company is not a party to any labor agreement and none of its employees is
represented by a labor union. The Company considers its relationship with its
employees to be excellent, and has never experienced a work stoppage.
PROPERTIES
The Company's corporate headquarters and its production, warehousing and
distribution facilities are located in Kent, Washington and consist of two
leased buildings totaling approximately 31,000 square feet of space. See
"Certain Transactions."
Management believes that the Company's facilities are currently operating
near maximum capacity and that such facilities will not be sufficient to meet
the Company's future operating needs. The Company anticipates that all or a
portion of its operations will be relocated in 1997 to a larger facility. As a
result, any
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delays or interruptions in the Company's manufacturing processes or other
operations could have a material adverse effect on the Company. See "Risk
Factors -- Ability to Sustain and Manage Growth."
LITIGATION
In February 1996, the Company filed an action in the United States District
Court for the Western District of Washington against Peter and Jane Doe LaHaye,
LaHaye Laboratories, Inc. and NEOPTX, Inc. relating to the potential
infringement of the Company's patent for an adhesive magnification insert to
eyewear products. In April 1996, the defendants counterclaimed seeking a
declaration that the patent is not valid and not infringed. While it is too
early to determine the outcome of this litigation, the Company believes that
such litigation will not have a material adverse effect on its operations or
financial position.
In May 1996, a notice of opposition was filed against the Company in the
United States Patent and Trademark Office by Mobil Oil Corporation seeking the
denial of the Company's trademark application to use the Gargoyles mark for
souvenir products. While it is too early to determine the outcome of this
action, the Company believes that this notice of opposition would not affect the
Company's existing trademark registration for the Gargoyles mark.
The Company also is a party to various other claims, complaints and legal
actions that have arisen in the ordinary course of business from time to time.
The Company believes that the outcome of all such pending legal proceedings, in
the aggregate, will not have a material adverse effect on its operations or
financial position.
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MANAGEMENT
DIRECTORS, EXECUTIVE OFFICERS AND KEY EMPLOYEES
The directors, executive officers and key employees of the Company, and
their ages as of June 30, 1996, are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
- --------------------------- --- -----------------------------------------------------------
<S> <C> <C>
Executive Officers and
Directors
Douglas B. Hauff(1)........ 43 President, Chief Executive Officer and Director
G. Travis Worth............ 50 Chief Operating Officer
David W. Jobe.............. 36 Senior Vice President, Sales
Steven R. Kingma........... 39 Vice President, Chief Financial Officer, Secretary and
Treasurer
Douglas W. Lauer........... 42 President and Chief Executive Officer, Kindling
Erik J. Anderson(1)(2)..... 37 Chairman of the Board
Timothy C. Potts(1)(2)..... 47 Director
Paul S. Shipman............ 43 Director
Walter F. Walker(2)........ 41 Director
Key Employees
Charles A. Bernheiser...... 57 Vice President, Design, Research and Development
Janice D. Gaub............. 34 Vice President, Marketing
</TABLE>
- ---------------
(1) Member of the Compensation Committee of the Board of Directors.
(2) Member of the Audit Committee of the Board of Directors.
All the current directors of the Company, except Messrs. Shipman and
Walker, were elected to the Board of Directors pursuant to a shareholders
agreement entered into in connection with the Recapitalization. See "Certain
Transactions." Upon the effective date of the Offering, the shareholders
agreement will automatically terminate.
The Company's Board of Directors will be divided into three classes at the
first annual meeting of shareholders following the Offering. After a
transitional period, each director will serve for a three-year term and one
class will be elected each year by the Company's shareholders. Directors hold
office until their terms expire and their successors are elected and qualified.
Executive officers of the Company are appointed by, and serve at the direction
of, the Board of Directors. There are no family relationships between any of the
directors or executive officers of the Company.
Douglas B. Hauff has been President, Chief Executive Officer and a Director
of the Company since June 1996. Between his joining the Company in May 1992 and
June 1996, Mr. Hauff was the Company's President and a Director. Mr. Hauff has
also been President and a director of Conquest since May 1992. From September
1990 to April 1992, Mr. Hauff was Senior Vice President of Frederick & Nelson
Inc. ("Frederick & Nelson"), a department store chain operator. Mr. Hauff was a
Senior Vice President and Division President of McCaw Cellular Communications, a
telecommunications company, between August 1986 and July 1988, President of
Interstate Mobile Phone d/b/a Cellular One, a telecommunications company,
between October 1984 and July 1986 and President of Executone, a Northwest
telecommunications firm, between September 1981 and September 1984.
G. Travis Worth has been Chief Operating Officer of the Company since June
1996. From October 1995 until June 1996, Mr. Worth was the Company's Senior Vice
President. From August 1989 to October 1995, Mr. Worth was the Vice President,
Sales for the Ray-Ban Eyewear Division of Bausch & Lomb. From 1981 to 1989, Mr.
Worth was Vice President, Sales and Marketing of Technica USA Ski Boot Company,
a manufacturer of ski equipment.
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David W. Jobe, Senior Vice President, Sales, joined the Company in February
1994. From May 1988 to January 1994, Mr. Jobe was employed by MEDI-TECH, Inc., a
subsidiary of Boston Scientific Corporation, a medical device company, initially
as Denver territory manager, then as a regional manager from June 1990 to
December 1992 and as Western Division Manager from January 1993 to January 1994.
From January 1985 through April 1988, Mr. Jobe was employed by The Procter &
Gamble Company in a number of sales management capacities.
Steven R. Kingma, Vice President, Chief Financial Officer, Secretary and
Treasurer, joined the Company in September 1994. From September 1993 to
September 1994, Mr. Kingma was employed at Jay Jacobs, Inc., the operator of a
chain of specialty retail apparel stores, in various financial positions, most
recently as its Senior Vice President, Chief Financial Officer and Treasurer
from May 1994 to September 1994. From August 1992 to September 1993, Mr. Kingma
owned and operated Pacific Financial Management, a financial and professional
consulting services business. From January 1990 to July 1992, Mr. Kingma was
employed by Frederick & Nelson as Director of Finance. From September 1979 to
January 1990, Mr. Kingma was employed by Price Waterhouse, a public accounting
firm.
Douglas W. Lauer, President and Chief Executive Officer of Kindling, joined
the Company in June 1996 in connection with the license agreement with
Timberland. Previously, Mr. Lauer was President of Revo, a subsidiary of Bausch
& Lomb, from July 1989 to May 1996. Mr. Lauer formerly served in a number of
management capacities for Polo Ralph Lauren Corporation.
Erik J. Anderson has been a Director of the Company since March 1995 and
was named Chairman of the Board in July 1995. Mr. Anderson has been Chief
Executive Officer of Trillium, a corporation with investments primarily in
timber and real estate, since January 1996, was its Co-President from January
1995 to January 1996 and its Executive Vice President from February 1994 to
January 1995. From March 1992 to January 1994, Mr. Anderson was a partner of
Frazier & Company, a merchant bank. From October 1990 to March 1992, Mr.
Anderson was a Vice President of Service Group of America, a food distribution
and insurance company. Mr. Anderson is also a director of Smart Modular
Technologies, Inc.
Timothy C. Potts has been a Director of the Company since March 1995. Mr.
Potts has been Senior Vice President -- Finance of Trillium since July 1994.
From April 1987 to July 1994, Mr. Potts was the Chief Financial Officer of
Trillium.
Paul S. Shipman has been a Director of the Company since June 1996. Mr.
Shipman has been President since September 1981, Chairman of the Board since
November 1992 and Chief Executive Officer since June 1993 of Redhook Ale
Brewery, Incorporated ("Redhook"), a brewer of craft beers.
Walter F. Walker has been a Director of the Company since December 1995.
Since September 1994, Mr. Walker has been the President of the Seattle
Supersonics National Basketball Association basketball team, owned by a
subsidiary of Ackerley Communications, Inc. From March to September 1994, he was
President of Walker Capital, Inc., a money management firm. From July 1987 to
March 1994, Mr. Walker was a Vice President of Goldman, Sachs & Co., a
registered broker-dealer. From 1976 to 1985, Mr. Walker was a professional
basketball player in the National Basketball Association. Mr. Walker is also a
director of Redhook and Interpoint Corporation.
Charles A. Bernheiser, Vice President, Design, Research and Development,
joined the Company in April 1992. Mr. Bernheiser has been associated with the
optical industry for more than 30 years in many capacities, including extensive
experience with Corning Incorporated, American Optical Corp. and Liberty
Optical. Mr. Bernheiser also designed, established and managed the initial
Gargoyles production facility as an independent contractor prior to joining the
Company in 1992.
Janice D. Gaub, Vice President, Marketing, joined the Company in September
1995. From October 1993 to May 1995, Ms. Gaub was Director of Marketing and
Customer Service for Nile Spice Foods, Inc., a manufacturer of spices and food
products. From August 1989 to October 1993, she was a Product Manager at Paragon
Trade Brands, Inc., a manufacturer of private label disposable diapers.
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Frederick & Nelson, a company for which Mr. Hauff served as Senior Vice
President and Mr. Kingma served as Director of Finance and Director of Finance
and Accounting, filed a voluntary petition for Chapter 11 bankruptcy in
September 1991 and was liquidated by order of the bankruptcy court in 1992. Jay
Jacobs, Inc., a company for which Mr. Kingma was employed in various financial
positions, filed a voluntary petition for Chapter 11 bankruptcy protection in
May 1994 and emerged therefrom in November 1995.
BOARD COMMITTEES AND DIRECTOR COMPENSATION
The Company has two standing committees of the Board of Directors: an Audit
Committee and a Compensation Committee. The Audit Committee reviews the
functions of the Company's management and independent auditors pertaining to the
Company's financial statements and performs such other related duties and
functions as are deemed appropriate by the Audit Committee and the Board of
Directors. The Compensation Committee determines officer and director
compensation and administers the Company's stock option plans.
Each nonemployee director of the Company who does not beneficially own 5%
or more of the Company's outstanding voting securities and who is not an
officer, director or employee of any corporation that beneficially owns 5% or
more of the Company's outstanding voting securities receives an annual retainer
of $4,000 and $250 for attending each committee meeting of the Board. For
information concerning a warrant to purchase shares of Common Stock granted to
Walter F. Walker in December 1995, see "Certain Transactions." In January 1996,
Mr. Walker also received a stock option to purchase 2,344 shares of Common Stock
at an exercise price of $4.26 per share. In the future, the Company intends to
grant stock options on an annual basis to its outside directors in compensation
for their services.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Mr. Hauff, the Company's President and Chief Executive Officer, is a member
of the Compensation Committee of the Company's Board of Directors. Mr. Hauff
also served as a director, President and a member of the Compensation Committee
of Conquest during fiscal 1995. For information concerning certain transactions
between Mr. Hauff and the Company, see "Certain Transactions."
EXECUTIVE COMPENSATION
Summary Compensation Table
The following table sets forth certain information with respect to
compensation paid by the Company in the fiscal year ended December 31, 1995 to
the Company's Chief Executive Officer and the other executive officers who
earned in excess of $100,000 in salary and bonus during fiscal 1995 (the "Named
Executive Officers").
<TABLE>
<CAPTION>
LONG-TERM
ANNUAL COMPENSATION AWARDS
COMPENSATION -------------------
------------------ SECURITIES ALL OTHER
NAME AND PRINCIPAL POSITION SALARY BONUS UNDERLYING OPTIONS COMPENSATION
- --------------------------------------------- -------- ------- ------------------- ------------
<S> <C> <C> <C> <C>
Douglas B. Hauff, President and Chief
Executive Officer(1)....................... $225,000 $50,000 0 $ 14,229(2)
David W. Jobe, Senior Vice President,
Sales...................................... 83,750 32,500 107,952 8,504(3)
Steven R. Kingma, Vice President and Chief
Financial Officer.......................... 93,750 25,000 46,264 7,871(4)
</TABLE>
- ---------------
(1) Mr. Hauff was named Chief Executive Officer in June 1996. During 1995, no
executive officer of the Company held the title of Chief Executive Officer.
(2) Represents (i) $5,171 in matching 401(k) plan contributions by the Company,
(ii) $3,696 for life insurance and disability premiums, and (iii) $5,362
for dependent health insurance premiums.
(3) Represents (i) $2,993 in matching 401(k) plan contributions by the Company,
(ii) $149 for disability insurance premiums, and (iii) $5,362 for dependent
health insurance premiums.
(4) Represents (i) $2,369 in matching 401(k) plan contributions by the Company,
(ii) $162 for disability insurance premiums, and (iii) $5,340 for dependent
health insurance premiums.
42
<PAGE> 45
Option Grants in Last Fiscal Year
The following table sets forth certain information regarding stock options
granted to the Named Executive Officers during the fiscal year ended December
31, 1995. No stock options were granted by the Company to Mr. Hauff during
fiscal 1995.
<TABLE>
<CAPTION>
POTENTIAL
REALIZABLE
INDIVIDUAL GRANTS VALUE AT ASSUMED
------------------------------------------------------ ANNUAL RATES OF
NUMBER OF PERCENT OF STOCK PRICE
SECURITIES TOTAL OPTIONS APPRECIATION
UNDERLYING GRANTED TO FOR OPTION TERM(3)
OPTIONS EMPLOYEES IN EXERCISE EXPIRATION -------------------
NAME GRANTED(1) FISCAL YEAR(2) PRICE DATE 5% 10%
- ------------------------------ ---------- -------------- -------- ---------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
David W. Jobe................. 61,682(4) 12.8% $ 3.24 03/22/05 $125,684 $318,509
46,270(5) 9.6 3.24 12/08/05 94,281 238,926
Steven R. Kingma.............. 30,841(4) 6.4 3.24 03/22/05 62,842 159,254
15,423(4) 3.2 3.24 12/08/05 31,426 79,640
</TABLE>
- ---------------
(1) All options were granted at fair market value at the date of grant.
(2) Based on a total of 481,013 options granted to employees in fiscal 1995.
(3) The assumed rates of appreciation are prescribed by the Securities and
Exchange Commission (the "Commission") for illustrative purposes only and
are not intended to forecast or predict future stock prices.
(4) These options vest monthly over a four-year period.
(5) These options vest monthly over a four-year period upon the achievement of
certain operating objectives or at the end of five years.
1995 Year-End Option Values
No stock options were exercised by the Named Executive Officers during the
fiscal year ended December 31, 1995. The following table sets forth certain
information regarding unexercised stock options held by each of the Named
Executive Officers as of December 31, 1995. Mr. Hauff held no stock options
granted by the Company as of December 31, 1995. For a discussion of certain
options granted to Mr. Hauff by certain shareholders of the Company, see
"Certain Transactions."
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS AT
OPTIONS AT FISCAL YEAR-END FISCAL YEAR-END(1)
--------------------------- ---------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ------------------------------------------------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
David W. Jobe.................................... 11,565 96,387 $ 136,005 $ 1,133,511
Steven R. Kingma................................. 5,782 40,482 67,996 476,068
</TABLE>
- ---------------
(1) Calculated on the basis of the assumed initial public offering price of
$15.00 per share, less the exercise price.
BENEFIT PLAN
The purpose of the 1995 Amended and Restated Stock Incentive Compensation
Plan (the "1995 Plan") is to enhance the long-term shareholder value of the
Company by offering opportunities to employees, directors, officers,
consultants, agents, advisors and independent contractors of the Company and its
subsidiaries to participate in the Company's growth and success, and to
encourage them to remain in the service of the Company and its subsidiaries and
acquire and maintain stock ownership in the Company. The 1995 Plan includes
stock option, stock appreciation right ("SAR"), stock award (including
restricted stock), performance award, other stock-based award and dividend
equivalent right features. The 1995 Plan is a long-
43
<PAGE> 46
term incentive compensation plan and is designed to provide a competitive and
balanced incentive reward program for participants. A maximum of
shares of Common Stock will be available for issuance under the 1995 Plan. A
maximum of shares may be granted under the 1995 Plan as stock awards
and performance awards and a maximum of shares may be granted under
the 1995 Plan to any individual in any one fiscal year of the Company, except
that the Company may make additional one-time grants to newly hired employees of
up to shares per each such employee. As of June 30, 1996, options for
485,338 shares were outstanding under the 1995 Plan.
Stock Option Grants. Each of the Board of Directors and the Compensation
Committee of the Board of Directors (the "Plan Administrator") has the authority
to select individuals who are to receive options under the 1995 Plan and to
specify the terms and conditions of each option so granted (incentive or
nonqualified), the exercise price (which must be at least equal to the fair
market value of the Common Stock on the date of grant with respect to incentive
stock options), the vesting provisions and the option term. Following the
Offering, for purposes of the 1995 Plan, fair market value means the closing
price as reported by the Nasdaq National Market on the date of grant. Unless
otherwise provided by the Plan Administrator, an option granted under the 1995
Plan expires 10 years from the date of grant or, if earlier, three months after
the optionee's termination of service, other than termination for cause, or one
year after the optionee's death or disability.
Stock Appreciation Rights. The Plan Administrator may grant SARs
separately or in tandem with a stock option award. A SAR is an incentive award
that permits the holder to receive, for each share covered by the SAR, the
amount by which the fair market value of a share of Common Stock on the date of
exercise exceeds the exercise price of such share (the "base price"). A SAR
granted in tandem with a related option will generally have the same terms and
provisions as the related option with respect to exercisability, and the base
price of such SAR will generally be equal to the option price under the related
option. A SAR granted separately will have such terms as the Plan Administrator
may determine, except that, unless otherwise established by the Plan
Administrator, a stand-alone SAR will have a 10-year term and will be subject to
the same provisions relating to termination of employment as options.
Stock Awards. The Plan Administrator is authorized under the 1995 Plan to
issue shares of Common Stock to eligible participants on such terms and
conditions and subject to such restrictions, if any, as the Plan Administrator
may determine. Such restrictions may be based on continuous service with the
Company or the achievement of performance goals relating to sales, gross
margins, operating profits or profit, growth in sales, gross margins, operating
profits or profit, return ratios related to sales, gross margins, operating
profits or profit, cash flow, asset management (including inventory management)
or total shareholder return (together, the "Performance Goals"), where such
goals may be stated in absolute terms or relative to comparison companies, as
the Plan Administrator may determine.
Performance Awards. The Plan Administrator is authorized under the 1995
Plan to grant performance awards that may be denominated in cash, shares of
Common Stock, or any combination thereof, to eligible participants on such terms
and conditions as the Plan Administrator may determine. Performance objectives
may vary among participants and may be based on the Performance Goals, where
such goals may be stated in absolute terms or relative to comparison companies,
as the Plan Administrator may determine. No performance awards denominated in
cash having an aggregate value in excess of $ may be granted to any
individual in any one fiscal year of the Company.
Other Stock-Based Awards. The Plan Administrator may grant other
stock-based awards under the 1995 Plan pursuant to which shares of Common Stock
are or may in the future be acquired, or awards denominated in stock units,
including awards valued using measures other than market value. Such other
stock-based awards may be granted alone or in addition to or in tandem with any
award of any type granted under the 1995 Plan and must be consistent with the
1995 Plan's purpose.
Dividend Equivalent Rights. Any awards under the 1995 Plan may, in the
Plan Administrator's discretion, earn dividend equivalent rights that entitle
the holder to be credited with an amount equal to the cash or stock dividends or
other distributions that would have been paid on the shares of Common Stock
covered by such award had such covered shares been issued and outstanding on
such dividend record date. The Plan Administrator may establish such rules and
procedures governing the crediting of dividend
44
<PAGE> 47
equivalent rights, including the timing, form of payment and payment
contingencies, as it deems appropriate or necessary.
EMPLOYMENT AND CHANGE-IN-CONTROL AGREEMENTS
Employment Agreements. In March 1995, the Company entered into a four-year
employment agreement with Douglas B. Hauff and two-year employment agreements
with each of Steven R. Kingma and David W. Jobe and, in November 1995, a
two-year employment agreement with G. Travis Worth. After expiration of the
initial term, each such employment agreement continues on a quarterly basis
until terminated by either party on 90 days' notice. Pursuant to these
agreements, the Company agreed to pay Messrs. Hauff, Kingma, Jobe and Worth
annual base salaries of $225,000, $95,000, $85,000 and $135,000, respectively,
subject to such annual increases as may be determined by the Company's Board of
Directors. Mr. Hauff and Mr. Kingma are eligible to receive an annual incentive
bonus of up to $60,000 and up to $30,000, respectively, subject to and based on
the achievement by the Company of specified annual operating income objectives.
Mr. Jobe is eligible to receive annual incentive bonuses of (i) up to $22,500,
subject to and based on the achievement by the Company of specified annual
operating income objectives, (ii) up to $20,000, subject to and based on the
achievement by the Company of specified annual sales objectives, and (iii) up to
$15,000, subject to and based on the achievement by the Company of specified
annual sales objectives for its Protective Eyewear division. If the Company does
not achieve specified minimum annual operating, sales or Protective Eyewear
division sales objectives, as applicable, no annual incentive bonus based on the
applicable objective is payable under the employment agreements of such
executives. The agreement with Mr. Hauff also provides that Mr. Hauff will
receive a $300,000 bonus if the Company sells substantially all of its assets or
stock or raises operating capital through an initial public offering of its
securities. This bonus will be paid in connection with the closing of the
Offering. Beginning in 1996, Mr. Worth is entitled to participate in incentive
compensation programs established for management, under which bonus amounts will
range between 25% and 50% of Mr. Worth's base salary. In addition, Messrs.
Kingma, Jobe and Worth were granted incentive stock options to purchase 30,841,
61,682 and 123,365 shares of Common Stock, respectively. The employment
agreements provide the executives with certain fringe benefits relating to
benefit plans, as well as benefits upon termination due to disability. The
employment agreements also provide that if the executive is terminated other
than for cause or resigns for good reason, such executive is entitled to receive
an amount equal to the lesser of (i) two years' base salary in the case of Mr.
Hauff and six months' base salary in the case of Messrs. Kingma, Jobe and Worth
and (ii) the executive's base salary payable for the remaining period of the
initial term, less any amounts received under disability insurance policies
provided by the Company or as compensation or benefits from employment during
such time, together with certain other benefits. Each of the employment
agreements with Messrs. Hauff, Kingma and Jobe contains a noncompetition
provision effective for (i) a period equal to the longer of five years from the
date of termination of employment and the end of the employment period if the
executive is terminated for cause or voluntarily resigns or (ii) a period of one
year from the date of termination of employment in the case of any other
termination. The employment agreement with Mr. Worth contains a noncompetition
provision effective for (i) a period of three years from the date of termination
of employment if Mr. Worth is terminated for cause or voluntarily resigns or
(ii) a period of six months from the date of termination of employment in the
case of any other termination.
1995 Plan. In the event of certain mergers, consolidations, acquisitions
of property or stock, separations, reorganizations or liquidations of the
Company, outstanding options, SARs and restricted stock under the 1995 Plan will
become fully exercisable, subject to certain exceptions. In addition, the
Compensation Committee of the Board of Directors may take such further action as
it deems necessary or advisable, and fair to participants, with respect to
outstanding awards under the 1995 Plan.
45
<PAGE> 48
CERTAIN TRANSACTIONS
RECAPITALIZATION TRANSACTION
In March 1995, the Company implemented the Recapitalization, in which (i)
Antone merged into the Company, (ii) the Common Stock was split 13,888.89-for-1,
(iii) approximately 3.5 million shares of Common Stock were redeemed from the
Founder (who was until then the majority shareholder) for $10.9 million (paid as
described below), and (iv) the Investors purchased approximately 3.5 million
shares, or 60% of the outstanding Common Stock, for $5.4 million. Of the shares
sold to the Investors, 2,930,000 shares were sold to Trillium for a $4.5 million
promissory note; 87,900 shares were sold to Mr. Hauff, then President and a
director of the Company, for $134,687; 58,600 shares were sold to Mr. Kingma,
Vice President, Chief Financial Officer, Secretary and Treasurer of the Company,
for $89,791; 58,600 shares were sold to Mr. Jobe, Senior Vice President, Sales
of the Company, for $89,791; 111,340 shares were sold to Gary Waterman, a
Manager of Workshops L.L.C., an affiliate of Trillium, for $170,605; and 14,650
shares were sold to Robert Manne, President of Savia International Inc., an
affiliate of Trillium, for $22,448. Trillium made interest payments of $250,555
to the Company for 1995.
The $10.9 million payment to the Founder was made in part pursuant to a 7%,
$4.5 million promissory note. The Company made interest payments of $250,555 to
the Founder for 1995. The note to the Founder was backed by an irrevocable
standby letter of credit issued on behalf of Trillium; the obligations evidenced
by the Company's note to the Founder and Trillium's note to the Company were
satisfied in full on January 2, 1996. An additional $6.0 million of the
redemption price was paid out of the proceeds of the Recapitalization Loan and
the balance from cash on hand. Trillium guaranteed the payment of all amounts
due under the Recapitalization Loan and pledged its shares of the Company's
Common Stock to secure its guaranty. The Company agreed to pay Trillium an
annual guaranty fee equal to 1% of the outstanding principal amount of the
Recapitalization Loan, and has subsequently paid Trillium fees of $60,000 and
$55,000 for 1995 and 1996, respectively. As of June 30, 1996, $5.3 million was
outstanding under the Recapitalization Loan.
In connection with the Recapitalization, in addition to agreeing to redeem
shares of the Founder's Common Stock, the Company made certain other
distributions to and agreements with the Founder, including:
(a) As severance expenses and settlement of certain claims and obligations
among the Company, the Founder and Supreme Corq Inc. ("Supreme Corq"), which is
majority-owned by the Founder, the Company issued to the Founder, and Conquest
guaranteed, a 10%, $283,100 promissory note (the "Settlement Note") requiring
monthly payments of $10,704 until maturity on March 15, 1998. During the year
ended December 31, 1995, and the quarter ended March 31, 1996, the Company paid
$46,152 and $32,113, respectively, for principal and interest on the Settlement
Note. As of March 31, 1996, $231,943 was outstanding under the Settlement Note.
(b) Supreme Corq agreed to assume (and the Founder agreed to guarantee its
performance of) all lessee obligations under the Company's lease of commercial
space used by Supreme Corq since February 1994 (the "Previously Leased Space").
Supreme Corq, which makes rental payments to the Company equal to the Company's
lease payments, paid the Company, $83,781 and $31,602 in 1995 and the quarter
ended March 31, 1996, respectively. The Company received the benefit of $92,000
in lease payments owed for 1994 in the calculation of the Settlement Note.
(c) The Company, Trillium, the Founder, Mr. Hauff and all other
shareholders of the Company entered into a shareholders agreement (which will
automatically terminate upon the effective date of the Offering) relating to the
election of directors, preemptive rights and certain other matters, including
assisting Trillium in effecting the Offering. The Company, Conquest and Antone
agreed, in a Nondisclosure, Noncompetition and Indemnity Agreement, to indemnify
the Founder for all losses that he incurs from his involvement with the Company,
Conquest and Antone, including losses arising out of acts or omissions that
occur at any time, either before or after the date of the agreement. The Founder
agreed to maintain the confidentiality of the indemnitor companies' proprietary
information and not to compete with any of them, directly or indirectly, through
March 22, 2000.
46
<PAGE> 49
CONQUEST TRANSACTIONS
The Founder founded both Conquest and the Company, and the two entities
have been closely related, sharing the following officers and directors: the
Founder (who, from Conquest's founding in 1973 until 1995, was the sole or
majority shareholder of both Conquest and the Company); Mr. Hauff (who, since
1992, has been President, Chief Executive Officer, a director and a shareholder
of the Company, as well as President and a director and, since January 1994, a
shareholder of Conquest); Mr. Kingma (who is the Vice President, Chief Financial
Officer, Secretary and Treasurer of both Conquest and the Company); and Messrs.
Anderson and Potts (who, since March 22, 1995, have been directors of the
Company and of Conquest).
Concurrently with the Recapitalization, Conquest, in its own
recapitalization, issued shares of its common stock to the Investors, and
formalized previously undocumented loans from the Founder by issuing a 10%,
$133,400 promissory note to the Founder due March 15, 1998 and guaranteed by the
Company. Conquest made payments to the Founder under this note of $21,747 in
fiscal 1995 and $15,132 in the quarter ended March 31, 1996. As of March 31,
1996, $109,294 was outstanding under the note.
Prior to February 1994, Conquest, Antone and the Company shared space in
the Previously Leased Space now occupied by Supreme Corq, and the Company made
all required lease payments. From February 1994 through July 1996, Conquest used
what the Company estimates to be less than 5% of the Company's current leased
premises and certain Company employees performed services for Conquest without
reimbursement to the Company, which together had an estimated cost to the
Company during the year ended December 31, 1995 of $210,000. Reimbursement for
the use of facilities will be made by the Purchaser of Conquest's assets for the
period from June 1996 until such use terminates on July 31, 1996.
The Company, which has guaranteed obligations of Conquest from time to
time, guaranteed repayment of a March 1995 10%, $75,000 Trillium loan to
Conquest. As of March 31, 1996, the outstanding balance owed by Conquest to
Trillium was $82,500. In July 1995, as amended in June 1996, the Company
guaranteed Conquest's indebtedness to a commercial bank (the "Bank") and agreed
to subordinate its Conquest indebtedness and present and future indebtedness of
Conquest to the Bank. As of June 17, 1996, the outstanding balance owed by
Conquest to the Bank was $769,785. In January 1996, the Company guaranteed
payment of all of Conquest's obligations under a promissory note in the
principal amount of $129,661 to a former distributor of Conquest. In January
1996, the Company and Conquest reached a severance understanding with a former
officer of both companies. In connection with the severance understanding,
Conquest agreed to make severance payments of $8,333.33 per month for six
months, the Company agreed to make a single payment of $50,000 and the former
officer's right to exercise vested stock options granted by each company was
extended until January 31, 1998.
On June 17, 1996, substantially all the assets of Conquest were sold for a
$598,259 promissory note bearing interest at the prime rate plus 1%, with an
initial principal payment of $168,922 due in July 1996 and maturing in June
1998, to an entity formed by Conquest's former general manager. Pursuant to a
series of advances between the Company and Conquest, the Company, in fiscal
1993, made advances to Conquest that exceeded repayments by Conquest to the
Company by $563,988. Subsequently, the Company made advances to Conquest of
$442,331, $1,007,580 and $68,000 during the fiscal years ended November 30, 1994
and December 31, 1995 and the quarter ended March 31, 1996, respectively, and
Conquest made repayments of $612,400 and $562,583, during the fiscal years ended
November 30, 1994 and December 31, 1995, respectively. As of March 31, 1996, the
Company's outstanding receivable from Conquest was $908,891. The Company
recorded a provision in the fourth quarter of 1995 of $1.6 million, representing
the write-off of the receivable from Conquest and a reserve for other potential
Conquest obligations, including the Conquest indebtedness which Gargoyles has
guaranteed. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Company History."
OTHER TRANSACTIONS
From the time it was founded in July 1987 until March 22, 1995, when it was
merged into the Company, Antone, a corporation of which the Founder was the sole
shareholder, assembled the Company's eyewear
47
<PAGE> 50
products. Antone derived revenues from the Company of $1,115,120, $896,279 and
$284,027 during the fiscal years ended November 30, 1993, November 30, 1994 and
December 31, 1995, respectively.
In December 1993, the Company entered into a lease with DB&D Partnership,
of which the Founder and Mr. Hauff were then the sole partners, for the
Company's principal facility in Kent, Washington. In March 1995, Mr. Hauff's
interest in the partnership was transferred to the Founder. The lease, as
amended in March 1995, currently provides for lease payments by the Company of
$18,746 per month (increasing on April 1 of 1997, 1998 and 1999 to $19,496,
$20,276 and $21,087 per month, respectively). The Company paid DB&D Partnership
lease payments of $210,000, $214,725 and $56,238 for the fiscal years ended
November 30, 1994 and December 31, 1995, and the quarter ended March 31, 1996,
respectively.
In January 1996, in exchange for a cash payment of $56,000, the Company
issued to Walter F. Walker, a director of the Company, a warrant to purchase
41,020 shares of the Company's Common Stock at an exercise price of $4.26 per
share. The warrant is also convertible by Mr. Walker in certain circumstances
into shares of Common Stock. The warrant was immediately exercisable in full and
expires in December 2005.
In January 1994, the Company, the Founder and Mr. Hauff entered into an
employment agreement pursuant to which the Founder, then the sole shareholder of
the Company, granted Mr. Hauff an initial option to purchase 5% of the Company's
Common Stock for $250,000, subject to a reduction of $40,000 in certain
circumstances, and a further option to purchase an additional 10% of such shares
owned by the Founder. Mr. Hauff exercised the initial option in February 1994.
In connection with the Recapitalization, (i) the 1994 employment agreement was
terminated and the parties thereto entered into an option agreement pursuant to
which the Founder granted Mr. Hauff an option to purchase 586,000 shares of the
Company's Common Stock then owned by the Founder at an exercise price of $0.85
per share, (ii) the Founder sold to the Investors the shares subject to the
option, and (iii) the Founder assigned to the Investors, and the Investors
assumed, the option agreement. In addition, the Investors granted Mr. Hauff an
additional option to purchase 146,500 shares of Common Stock owned by them at an
exercise price of $4.26 per share. Both options were to fully vest on the
closing of the Offering and, if not then exercised, to terminate. On June 28,
1996, the option agreements were amended to cause all options to fully vest on
June 28, 1996, and to terminate, if unexercised, on June 28, 2006.
On June 9, 1988, the Company and Conquest, as plaintiffs, filed a lawsuit
against the U.S. government for infringement of certain patent rights jointly
owned by the Company and Conquest. The Company and Conquest entered into an
agreement with the Founder regarding management of the lawsuit, the Founder's
right to certain proceeds, if any, arising from the claim prior to a final
judgment and the Founder's responsibility for costs and fees for the lawsuit for
periods after March 24, 1995. The agreement provided a value of the rights and
obligations received by the Founder of $100,000. The Company and Conquest
prevailed on liability, and have appealed the court's determination with respect
to the amount of damages. The government has cross appealed as to liability and
damages. The Company incurred legal expenses associated with the damage hearing
totaling $171,000 through the quarter ended March 31, 1995, which the Company
recorded as an expense of the Recapitalization.
In February 1995, Mr. Hauff made a 9.25%, $50,000 loan to the Company which
was repaid in full with interest in March 1995. In January 1996, Mr. Hauff made
a 12%, $50,000 loan to the Company which was repaid in full with interest in
April 1996. In February 1995, Mr. Kingma made a 9.25%, $50,000 loan to the
Company which was repaid in full with interest in March 1995. In January 1996,
Mr. Kingma made a 12%, $40,000 loan to the Company which was repaid in full with
interest in April 1996. In January 1996, Trillium made two loans to the Company,
each in the principal amount of $100,000, with interest accruing at the rate of
12% per annum. The first loan was repaid in full with interest in February 1996
and the second loan was repaid in full with interest in March 1996.
In February 1996, Trillium guaranteed payment of all amounts due under the
Hobie Acquisition Loan in the principal amount of $4.0 million. The Hobie
Acquisition Loan was increased to $5.0 million on June 26, 1996. To secure the
guaranty, Trillium Investors II, L.L.C, an affiliate of Trillium to which
Trillium transferred most of its shares of Common Stock in February 1996,
pledged its shares of Common Stock. In consideration of the guaranty, the
Company paid Trillium a guarantee fee of $50,000 and agreed to indemnify
48
<PAGE> 51
Trillium for any losses relating to the guaranty. In January 1996, Mr. Hauff
guaranteed the Company's obligation to pay liquidated damages of $100,000 in the
event that the Hobie Acquisition was not consummated; the transaction was
consummated without cost to Mr. Hauff.
In May 1996, the Company, together with Douglas W. Lauer and Timberland,
formed Kindling, a majority-owned subsidiary of the Company. The Company
contributed $1.2 million for its 70% interest in Kindling, while Mr. Lauer owns
a 20% interest in Kindling and Timberland owns the remaining 10% interest. Of
the $1.2 million, $100,000 was paid in cash and $1.1 million by means of a
non-interest-bearing promissory note (the "Kindling Note") payable in
installments of $100,000 each on June 3, July 3, September 3, October 3 and
December 3, 1996 and $600,000 on January 3, 1997. Between January 3, 1997 and
January 1, 2000, Kindling, Mr. Lauer or Timberland may require the Company to
contribute an additional $300,000 to Kindling. From 1999 to 2003, Timberland may
require Kindling to repurchase all of Timberland's 10% interest in Kindling
under certain circumstances. The Company further agreed that Mr. Lauer, and
certain key employees of Kindling, may be granted up to an aggregate of 10%
(2.5% for each year, 1997 to 2000) of Kindling's common stock owned by the
Company upon the achievement of certain operating objectives. Trillium has
agreed to make advances that aggregate up to $400,000 to fund the Company's
installments under the Kindling Note. To date, Trillium has advanced $100,000 in
each of June and July 1996, which are due, with interest at 12% per annum, on
September 30, 1996.
49
<PAGE> 52
PRINCIPAL AND SELLING SHAREHOLDERS
The following table sets forth as of July 3, 1996, certain information with
respect to the beneficial ownership of the Common Stock by (i) each person known
by the Company to beneficially own more than 5% of the Common Stock, (ii) each
director of the Company, (iii) each of the Named Executive Officers, (iv) each
of the Selling Shareholders, and (v) all of the Company's directors and
executive officers as a group. Except as otherwise indicated, the Company
believes that the beneficial owners of the Common Stock listed below, based on
information furnished by such owners, have sole voting and investment power with
respect to such shares.
<TABLE>
<CAPTION>
BENEFICIAL OWNERSHIP NUMBER OF BENEFICIAL OWNERSHIP
PRIOR TO THE OFFERING SHARES AFTER THE OFFERING(1)
------------------------ OFFERED ------------------------
NAME AND ADDRESS SHARES PERCENTAGE HEREBY SHARES PERCENTAGE
- ------------------------------------ --------- ---------- --------- --------- ----------
<S> <C> <C> <C> <C> <C>
Erik J. Anderson(2)(3).............. 3,418,330 58.2% 409,000 3,009,330 39.9%
c/o Trillium Corporation
4350 Cordata Parkway
Bellingham, Washington 98226
Douglas B. Hauff(4)................. 1,109,731 16.8% 0 1,109,731 13.4%
c/o Gargoyles, Inc.
5866 South 194th Street
Kent, Washington 98032
David W. Jobe(5).................... 90,213 1.5% 0 90,213 1.2%
Steven R. Kingma(6)................. 81,860 1.4% 0 81,860 1.1%
Timothy C. Potts(3)(7).............. 3,418,330 58.2% 409,000 3,009,330 39.9%
c/o Trillium Corporation
4350 Cordata Parkway
Bellingham, Washington 98226
Paul S. Shipman..................... 0 -- 0 0 --
Walter F. Walker(8)................. 43,364 * 0 43,364 *
Dennis L. Burns(9).................. 1,465,000 24.9% 591,000 874,000 11.6%
c/o Supreme Corq Inc.
19039 62nd Avenue S.
Kent, Washington 98032
Trillium Corporation(3)(10)......... 3,418,330 58.2% 409,000 3,009,330 39.9%
4350 Cordata Parkway
Bellingham, Washington 98226
All directors and executive officers
as a group(11) (9 persons)........ 4,113,804 68.1% 409,000 3,704,804 48.1%
</TABLE>
- ---------------
* Less than 1%.
(1) If the Underwriters' over-allotment option is exercised in full, Trillium
Investors II, L.L.C. ("Trillium Investors") and Dennis L. Burns will sell
an additional 101,000 and 141,500 shares, respectively, which will reduce
the number of shares beneficially owned by such persons to 2,908,330 (or
37.8%) and 732,500 (or 9.5%), respectively.
(2) Consists of 610,412 shares held by Trillium and 2,807,918 shares held by
Trillium Investors. Mr. Anderson is Chief Executive Officer of Trillium. In
addition, Trillium owns an 80.0% interest and Mr. Anderson owns a 10.0%
interest in Trillium Investors. Mr. Anderson is Chairman of the Board of
the Company.
(3) Of these shares, 610,412 are subject to an option granted by Trillium to
Douglas B. Hauff.
50
<PAGE> 53
(4) Includes 714,181 shares subject to an option granted to Mr. Hauff by
certain shareholders of the Company, including Steven R. Kingma (with
respect to 12,211 shares), David W. Jobe (with respect to 12,211 shares)
and Trillium (with respect to 610,412 shares).
(5) Of these shares, 12,211 are subject to an option granted by Mr. Jobe to
Douglas B. Hauff. Also includes 21,845 shares subject to an option
exercisable within 60 days.
(6) Of these shares, 12,211 are subject to an option granted by Mr. Kingma to
Douglas B. Hauff. Also includes 13,492 shares subject to an option
exercisable within 60 days and 2,344 shares held by Mr. Kingma's minor
daughter.
(7) Consists of 610,412 shares held by Trillium and 2,807,918 shares held by
Trillium Investors. Mr. Potts is Senior Vice President -- Finance of
Trillium. In addition, Trillium owns an 80.0% interest and Mr. Potts owns a
3.4% interest in Trillium Investors. Mr. Potts is a director of the
Company.
(8) Consists of 41,020 shares subject to a warrant and 2,344 shares subject to
an option, both of which are currently exercisable.
(9) For additional information describing Mr. Burns' historical relationships
with the Company, see "Certain Transactions."
(10) Includes 2,807,918 shares held by Trillium Investors. Trillium owns an
80.0% interest in Trillium Investors and may be deemed the beneficial
owner of such shares as a result of such ownership. In connection with the
Company's credit facility, Trillium and Trillium Investors pledged these
shares in support of Trillium's guarantee of certain of the Company's
obligations under the Hobie Acquisition Loan. In the event of a default by
the Company of its obligations under the Hobie Acquisition Loan and a
failure by Trillium to otherwise satisfy the guaranty, such shares would
be transferred to the bank.
(11) See footnotes (1), (2), (3), (4), (5), (6), (7) and (8). Also includes
5,140 shares subject to an option exercisable within 60 days.
51
<PAGE> 54
DESCRIPTION OF CAPITAL STOCK
The authorized capital stock of the Company consists of 40,000,000 shares
of Common Stock, no par value, and 10,000,000 shares of Preferred Stock, no par
value. The following summary description of the Company's capital stock is
qualified in its entirety by reference to the Restated Articles and the Bylaws
of the Company, copies of which are filed as exhibits to the Registration
Statement of which this Prospectus forms a part.
COMMON STOCK
On June 30, 1996, there were 5,875,637 shares of Common Stock outstanding,
held of record by 21 shareholders. Holders of Common Stock are entitled to one
vote per share on all matters submitted to a vote of shareholders. There are no
cumulative voting rights for the election of directors. Holders of Common Stock
are entitled to receive ratably such dividends as may be declared by the Board
of Directors out of funds legally available therefor, subject to preferences
that may be applicable to any outstanding Preferred Stock. In the event of the
liquidation, dissolution or winding up of the Company, holders of Common Stock
are entitled to share ratably in all assets remaining after payment of
liabilities and the liquidation preference of any outstanding Preferred Stock.
Holders of Common Stock have no preemptive, subscription, redemption or
conversion rights. All outstanding shares of Common Stock are, and all shares of
Common Stock to be outstanding upon completion of the Offering will be, fully
paid and nonassessable.
PREFERRED STOCK
The Company's Board of Directors has the authority to issue 10,000,000
shares of Preferred Stock in one or more series and to fix the powers,
designations, rights, preferences and restrictions thereof, including dividend
rights, conversion rights, voting rights, redemption terms, liquidation
preferences and the number of shares constituting each such series, without any
further vote or action by the Company's shareholders. Upon the closing of the
Offering, no shares of Preferred Stock will be outstanding. The issuance of
Preferred Stock in certain circumstances may delay, deter or prevent a change in
control of the Company, may discourage bids for the Company's Common Stock at a
premium over the market price of the Common Stock and may adversely affect the
market price of, and the voting and other rights of the holders of, the Common
Stock. The Company currently has no plans to issue any Preferred Stock.
STOCK DIVIDEND; AMENDMENTS TO RESTATED ARTICLES OF INCORPORATION
On June 28, 1996, the Company's Board of Directors approved a stock
dividend in the amount of 4.86 shares for every one share of Common Stock
outstanding, thereby giving effect to a 5.86-to-1 stock split to be payable on
or before the closing of the Offering. The payment of such dividend is subject
to approval by the Company's Board of Directors and shareholders of the Restated
Articles of Incorporation to increase the number of authorized shares. The
information in this Prospectus assumes that such dividend has been paid and such
amendments have been made.
WARRANT
On June 30, 1996, there was one warrant outstanding to purchase 41,020
shares of Common Stock at an exercise price of $4.26 per share.
WASHINGTON ANTITAKEOVER STATUTE
Washington law contains certain provisions that may have the effect of
delaying or discouraging a hostile takeover of the Company. In addition, Chapter
23B.19 of the Washington Business Corporations Act prohibits a corporation, with
certain exceptions, from engaging in certain significant business transactions
with an "Acquiring Entity" (defined as a person who acquires 10% or more of the
corporation's voting securities without the prior approval of the corporation's
board of directors) for a period of five years after such acquisition. The
prohibited transactions include, among others, a merger with, disposition of
assets to, or issuance or redemption of stock to or from, the Acquiring Entity,
or allowing the Acquiring Entity to receive
52
<PAGE> 55
any disproportionate benefit as a shareholder. An Acquiring Entity is further
prohibited from engaging in significant business transactions with the target
corporation unless the per share consideration paid to holders of outstanding
shares of Common Stock and other classes of stock of the target corporation meet
certain minimum criteria. These provisions may have the effect of delaying,
deterring or preventing a change in control of the Company.
CERTAIN PROVISIONS IN RESTATED ARTICLES
Effective with the first annual meeting of shareholders following the
Offering, the Restated Articles provide for the division of the Company's Board
of Directors into three classes, as nearly equal in number as possible, each for
a three-year term, with one class being elected each year by the Company's
shareholders. See "Management -- Directors, Executive Officers and Key
Employees." Directors may be removed only for cause and only by a vote of not
less than two-thirds of the shares of the Company's capital stock entitled to
vote on an election of the director whose removal is sought.
The Restated Articles require that certain business combinations (including
a merger, share exchange or the sale, lease, exchange, mortgage, pledge,
transfer or other disposition of a substantial part of the Company's assets) be
approved by the holders of not less than two-thirds of the outstanding shares,
unless such business combination shall have been approved by a majority of
Continuing Directors (defined as those individuals who were members of the Board
of Directors on July 1, 1996 or were elected thereafter on the recommendation of
a majority of the Continuing Directors), in which case the affirmative vote
required shall be a majority of the outstanding shares.
Under the Restated Articles, the shareholders may call a special meeting
only upon the request of holders of at least 25% of the outstanding shares. The
Restated Articles also provide that changes to certain provisions of the
Articles of Incorporation, including those regarding amendment of certain
provisions of the Bylaws or Restated Articles, the classified Board of
Directors, special voting provisions for business combinations and special
meetings of shareholders, must be approved by the holders of not less than
two-thirds of the outstanding shares.
It is possible that the provisions discussed above may delay, deter or
prevent a change in control of the Company.
DIRECTOR AND OFFICER INDEMNIFICATION AND LIABILITY
The Restated Articles include a provision permitted by Washington law that
limits the liability of the Company's directors. Under the provision, no
director shall be personally liable to the Company or its shareholders for
monetary damages for conduct as a director, excluding, however, liability for
acts or omissions involving intentional misconduct or knowing violations of law,
illegal distributions or transactions from which the director receives benefits
to which the director is not legally entitled. In addition, Washington law
provides for broad indemnification by the Company of its officers and directors.
The Company's Bylaws and indemnification agreements entered into between the
Company and its directors implement this indemnification to the fullest extent
permitted by law. Insofar as the indemnity for liabilities arising under the
Securities Act may be permitted to directors or officers of the Company pursuant
to the foregoing provisions, the Company has been informed that in the opinion
of the Commission such indemnification is against public policy as expressed in
the Securities Act and is therefore unenforceable.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the Company's Common Stock is First
National Bank of Boston.
53
<PAGE> 56
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of the Offering, the Company will have 7,542,304 shares of
Common Stock outstanding (7,699,804 shares if the Underwriters' over-allotment
option is exercised in full), assuming no exercise of outstanding options under
the Company's benefit plan. The shares sold in the Offering will be freely
tradable without restriction or limitation under the Securities Act, except for
any such shares held by "affiliates" of the Company, as such term is defined
under Rule 144 of the Securities Act, which shares will be subject to the resale
limitations under Rule 144. The remaining 4,875,637 shares are "restricted
securities" within the meaning of Rule 144 and were issued and sold by the
Company in private transactions and may be publicly sold only if registered
under the Securities Act or sold in accordance with an applicable exemption from
registration, such as Rule 144. The Company, all executive officers, directors
and shareholders of the Company have agreed with the Representatives not to
sell, directly or indirectly, any shares owned by them for a period of 180 days
after the date of this Prospectus without the prior written consent of Smith
Barney Inc. Upon the expiration of this 180-day lock-up period (or earlier upon
the consent of Smith Barney Inc.), approximately 1,170,000 of these restricted
shares (plus shares issuable upon exercise of then-vested outstanding options
and warrants) will become eligible for sale subject to the restrictions of Rule
144, none of which will be freely tradable in reliance on Rule 144(k). In March
1997, approximately an additional 458,000 restricted shares will become eligible
for sale subject to the restrictions of Rule 144. In addition, approximately an
additional 715,000 shares are subject to an option granted by certain
shareholders of the Company to Douglas B. Hauff and have been placed in escrow.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations -- General." If this escrow arrangement were to terminate for any
reason, these shares would become eligible for sale beginning in March 1997. If
Mr. Hauff should exercise this option, approximately 80,000 of such shares would
be eligible for sale beginning in March 1997.
In general, under Rule 144, as currently in effect, a person (or persons
whose shares are aggregated) who has beneficially owned shares for at least two
years, including an affiliate of the Company, would be entitled to sell, within
any three-month period, that number of shares that does not exceed the greater
of 1% of the then outstanding shares of Common Stock (approximately 75,400
shares) and the average weekly trading volume in the Common Stock during the
four calendar weeks immediately preceding the date on which the notice of sale
is filed with the Commission, provided certain manner of sale and notice
requirements and requirements as to the availability of current public
information about the Company are satisfied. In addition, affiliates of the
Company must comply with the restrictions and requirements of Rule 144, other
than the two-year holding period requirement, in order to sell shares of Common
Stock. As defined in Rule 144, an "affiliate" of an issuer is a person who
directly or indirectly through the use of one or more intermediaries controls,
or is controlled by, or is under common control with, such issuer. Under Rule
144(k), a holder of "restricted securities" who is not deemed an affiliate of
the issuer and who has beneficially owned shares for at least three years would
be entitled to sell shares under Rule 144(k) without regard to the limitations
described above.
The Company intends to file a registration statement under the Securities
Act following the date of this Prospectus to register the future issuance of up
to shares of Common Stock under the 1995 Plan. Shares issued under
the 1995 Plan after the effective date of such registration statement will be
freely tradable in the open market, subject to the lock-up agreements with the
Representatives described above and, in the case of sales by affiliates, to
certain requirements of Rule 144. As of September 1, 1996, options to purchase
approximately 107,000 shares of Common Stock will be vested, of which
approximately 43,000 such shares will be subject to the 180-day lock-up period
described above. See "Management -- Benefit Plan." In addition, a warrant to
purchase 41,020 shares of Common Stock is currently outstanding and subject to
the lock-up agreement described above.
The Company is unable to estimate the number of shares that may be sold in
the future by its existing shareholders or the effect, if any, that sales of
shares by such shareholders will have on the market price of the Common Stock
prevailing from time to time. Sales of substantial amounts of Common Stock, or
the prospect of such sales, could adversely affect the market price of the
Common Stock.
54
<PAGE> 57
UNDERWRITING
Upon the terms and subject to the conditions contained in the Underwriting
Agreement dated the date hereof, each Underwriter named below has severally
agreed to purchase, and the Company and the Selling Shareholders have agreed to
sell to such Underwriter, the number of shares of Common Stock set forth
opposite the name of such Underwriter.
<TABLE>
<CAPTION>
NUMBER OF
SHARES OF
NAME COMMON STOCK
- ------------------------------------------------------------------------------- ------------
<S> <C>
Smith Barney Inc...............................................................
Robertson, Stephens & Company, LLC.............................................
---------
Total................................................................ 2,666,667
=========
</TABLE>
The Underwriting Agreement provides that the obligations of the several
Underwriters to pay for and accept delivery of the shares are subject to
approval of certain legal matters by counsel and to certain other conditions.
The Underwriters are obligated to take and pay for all shares of Common Stock
offered hereby (other than those covered by the over-allotment option described
below) if any such shares are taken.
The Underwriters, for whom Smith Barney Inc. and Robertson, Stephens &
Company, LLC are acting as Representatives, propose to offer part of the shares
directly to the public at the initial public offering price set forth on the
cover page of this Prospectus and part of the shares to certain dealers at a
price that represents a concession not in excess of $ per share under
the initial public offering price. The Underwriters may allow, and such dealers
may reallow, a concession not in excess of $ per share to certain other
dealers. The Representatives of the Underwriters have advised the Company that
the Underwriters do not intend to confirm any sales to any accounts over which
they exercise discretionary authority.
The Company and the Selling Shareholders have granted the Underwriters an
option, exercisable for 30 days from the date of this Prospectus, to purchase up
to 400,000 additional shares of Common Stock at the initial public offering
price set forth on the cover page of this Prospectus, minus the underwriting
discounts and commissions. The Underwriters may exercise such option solely for
the purpose of covering over-allotments, if any, in connection with the
Offering. To the extent such option is exercised, each Underwriter will be
obligated, subject to certain conditions, to purchase approximately the same
percentage of such additional shares as the number of shares set forth opposite
each Underwriter's name above bears to the total number of shares listed above.
The Company, as well as its executive officers and directors, the Selling
Shareholders and all other shareholders of the Company have agreed that, for a
period of 180 days from the date of this Prospectus, they will not, without the
prior written consent of Smith Barney Inc., offer, sell, contract to sell or
otherwise dispose of any shares of Common Stock or any securities convertible
into, or exercisable or exchangeable for, Common Stock, other than in a
transaction in which the transferee pays no value and agrees to be subject to
the same restrictions on transfer.
Prior to the Offering, there has not been a public market for the Common
Stock. Consequently, the initial public offering price for the shares included
in the Offering will be determined by negotiations among the Company, the
Selling Shareholders and the Representatives. Among the factors considered in
determining such price will be the history of and prospects for the Company's
business and the industry in which it competes, an assessment of the Company's
management and the present state of the Company's development, the Company's
past and present revenues and earnings, the prospects for growth of the
Company's revenues and earnings, the current state of the U.S. economy and the
current level of economic activity in the industry
55
<PAGE> 58
in which the Company competes and in related or comparable industries, and
currently prevailing conditions in the securities markets, including current
valuations of publicly traded companies which are comparable to the Company.
The Company, the Selling Shareholders and the Underwriters have agreed to
indemnify each other against certain liabilities, including liabilities under
the Securities Act.
LEGAL MATTERS
Certain legal matters will be passed on for the Company and one of the
Selling Shareholders by Perkins Coie, Seattle, Washington. Certain legal matters
will be passed on for the Underwriters by Heller, Ehrman, White & McAuliffe,
Seattle, Washington. Certain legal matters will be passed on for one of the
Selling Shareholders by Bogle & Gates P.L.L.C.
EXPERTS
The consolidated financial statements of Gargoyles, Inc. at November 30,
1994 and December 31, 1995 and for each of the years ended November 30, 1993,
November 30, 1994 and December 31, 1995, and the one month ended December 31,
1994 appearing in this Prospectus and the Registration Statement have been
audited by Ernst & Young LLP, independent auditors, as set forth in their report
thereon appearing elsewhere herein, and are included in reliance upon such
report given upon the authority of such firm as experts in accounting and
auditing.
Effective July 13, 1995, the Company's Board of Directors retained Ernst &
Young LLP as the independent accountants for the Company. There were no
disagreements with McClinton, Workman & Associates, P.S., the Company's former
independent accountants, regarding accounting principles or practices, financial
statement disclosure, or auditing scope or procedure. The former accountants'
reports for the fiscal years ended November 30, 1991, 1992, 1993 and 1994, which
reports are not included herein, did not contain an adverse opinion or a
disclaimer of an opinion or qualifications as to uncertainty, audit scope or
accounting principles. Prior to retaining Ernst & Young LLP, the Company had not
consulted with Ernst & Young LLP regarding the application of accounting
principles, the type of audit opinion that might be rendered on the Company's
consolidated financial statements, or any event that was either a reportable
event or the subject of a disagreement.
ADDITIONAL INFORMATION
The Company has filed with the Commission a Registration Statement on Form
S-1 under the Securities Act with respect to the Common Stock offered hereby
(the "Registration Statement"). This Prospectus, which constitutes part of the
Registration Statement, omits certain information contained in the Registration
Statement and the exhibits thereto on file with the Commission pursuant to the
Securities Act and the rules and regulations of the Commission thereunder. The
Registration Statement, including the exhibits thereto, may be inspected and
copied at the public reference facilities maintained by the Commission at 450
Fifth Street, N.W., Room 1024, Washington, D.C. 20549, and at the Commission's
Regional Offices at 7 World Trade Center, Suite 1300, New York, New York 10048,
and 500 West Madison Street, Suite 1400, Chicago, Illinois 60661, and copies may
be obtained at the prescribed rates from the Public Reference Section of the
Commission at its principal office in Washington, D.C.
Statements contained in this Prospectus as to the contents of any contract,
agreement or other document referred to are not necessarily complete, and in
each instance reference is made to the copy of such contract, agreement or other
document filed as an exhibit to the Registration Statement, each such statement
being qualified in all respects by such reference.
The Company intends to furnish its shareholders with annual reports
containing audited consolidated financial statements and an opinion thereon
expressed by independent auditors and may furnish its shareholders with
quarterly reports for the first three quarters of each fiscal year containing
unaudited summary financial information.
56
<PAGE> 59
GARGOYLES, INC.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Gargoyles, Inc. Consolidated Financial Statements
Report of Ernst & Young LLP, Independent Auditors................................... F-2
Consolidated Balance Sheets......................................................... F-3
Consolidated Statements of Operations............................................... F-4
Consolidated Statements of Shareholders' Equity..................................... F-5
Consolidated Statements of Cash Flows............................................... F-6
Notes to Consolidated Financial Statements.......................................... F-7
H.S.I. d/b/a Hobie Sunglasses
Report of Ernst & Young LLP, Independent Auditors................................... F-17
Balance Sheets...................................................................... F-18
Statements of Operations and Retained Earnings...................................... F-19
Statements of Cash Flows............................................................ F-20
Notes to Financial Statements....................................................... F-21
</TABLE>
F-1
<PAGE> 60
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors and Shareholders
Gargoyles, Inc.
We have audited the accompanying consolidated balance sheets of Gargoyles,
Inc. as of November 30, 1994 and December 31, 1995, and the related consolidated
statements of operations, shareholders' equity, and cash flows for the years
ended November 30, 1993 and 1994, the one month ended December 31, 1994, and the
year ended December 31, 1995. These financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Gargoyles, Inc.
at November 30, 1994 and December 31, 1995, and the related consolidated results
of its operations and its cash flows for the years ended November 30, 1993 and
1994, the one month ended December 31, 1994, and the year ended December 31,
1995, in conformity with generally accepted accounting principles.
ERNST & YOUNG LLP
Seattle, Washington
June 14, 1996, except for the second
paragraph of Note 13,
as to which the date is , 1996
- --------------------------------------------------------------------------------
The foregoing report is in the form that will be signed upon the completion
of the stock dividend described in Note 13 to the consolidated financial
statements.
ERNST & YOUNG LLP
Seattle, Washington
July 3, 1996
F-2
<PAGE> 61
GARGOYLES, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
MARCH 31,
1996
NOVEMBER 30, DECEMBER 31, ------------
1994 1995
------------ ------------ (UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents....................... $ 2,282 $ 900 $ 950
Trade receivables, less allowances for doubtful
accounts of $10,000, $10,355 and $32,469..... 2,231,539 2,514,489 6,816,384
Inventories..................................... 2,613,084 5,473,692 6,266,414
Trade credits................................... 305,015 497,587 497,587
Other current assets and prepaid expenses....... 249,420 732,984 1,199,227
------------ ------------- -------------
Total current assets.............................. 5,401,340 9,219,652 14,780,562
Receivable from affiliate......................... 418,845 -- --
Property and equipment, net....................... 853,225 1,900,603 2,054,367
Intangibles....................................... -- -- 2,780,565
Other assets...................................... -- 145,979 233,862
------------ ------------- -------------
Total assets...................................... $6,673,410 $ 11,266,234 $ 19,849,356
============ ============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Note payable to bank under revolving line of
credit....................................... $2,067,841 $ 5,412,916 $ 9,278,112
Note payable to bank............................ -- -- 4,000,000
Accounts payable................................ 2,908,204 3,572,739 3,388,966
Accrued expenses and other current
liabilities.................................. 432,255 1,757,048 2,854,532
Current maturities of long-term debt............ 138,900 1,349,333 1,354,921
------------ ------------- -------------
Total current liabilities......................... 5,547,200 12,092,036 20,876,531
------------ ------------- -------------
Deferred license income........................... -- 360,000 315,000
------------ ------------- -------------
Long-term debt.................................... 350,593 6,017,812 5,716,823
------------ ------------- -------------
Commitments and contingencies
Shareholders' equity:
Preferred stock, no par value................... -- -- --
Common stock, no par value...................... 572 5,788,070 5,924,110
Repurchased shares.............................. -- (10,895,500) (10,895,500)
Retained earnings (deficit)..................... 775,045 (1,946,184) (1,962,108)
Deferred compensation........................... -- (150,000) (125,500)
------------ ------------- -------------
Total shareholders' equity........................ 775,617 (7,203,614) (7,058,998)
------------ ------------- -------------
Total liabilities and shareholders' equity........ $6,673,410 $ 11,266,234 $ 19,849,356
============ ============= =============
</TABLE>
See accompanying notes.
F-3
<PAGE> 62
GARGOYLES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED ONE MONTH YEAR ENDED
NOVEMBER 30, ENDED DECEMBER MARCH 31,
------------------------ DECEMBER 31, 31, -----------------------
1993 1994 1994 1995 1995 1996
---------- ----------- ----------------- ----------- ---------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
Net sales.................... $8,242,051 $11,082,986 $ 574,831 $17,137,902 $3,294,031 $6,994,293
Cost of sales................ 3,243,525 4,265,002 237,785 6,526,804 1,272,731 2,865,395
---------- ----------- --------- ----------- ---------- ----------
Gross profit................. 4,998,526 6,817,984 337,046 10,611,098 2,021,300 4,128,898
License income............... -- -- -- 480,000 245,000 160,946
---------- ----------- --------- ----------- ---------- ----------
4,998,526 6,817,984 337,046 11,091,098 2,266,300 4,289,844
---------- ----------- --------- ----------- ---------- ----------
Operating expenses:
Sales and marketing........ 2,210,271 3,041,008 208,849 5,354,241 1,277,725 2,367,583
General and
administrative.......... 1,452,815 2,558,002 235,639 3,029,638 723,328 968,934
Shipping and warehousing... 436,329 607,058 42,619 1,030,070 177,128 278,457
Research and development... 214,676 127,226 6,639 305,592 48,977 135,056
Loss on discontinued
distribution
agreement............... -- -- -- 311,917 -- --
Stock compensation......... -- -- -- 250,000 105,000 24,500
---------- ----------- --------- ----------- ---------- ----------
Total operating expenses..... 4,314,091 6,333,294 493,746 10,281,458 2,332,158 3,774,530
---------- ----------- --------- ----------- ---------- ----------
Income (loss) from
operations................. 684,435 484,690 (156,700) 809,640 (65,858) 515,314
---------- ----------- --------- ----------- ---------- ----------
Other income (expense):
Interest expense, net...... (55,140) (175,486) (20,975) (1,042,523) (101,358) (529,372)
Recapitalization
expenses................ -- -- -- (573,710) (573,710) --
Provision for loss on
affiliate............... -- -- -- (1,597,051) -- --
Other...................... 2,423 158 1,194 6,829 5,385 (1,866)
---------- ----------- --------- ----------- ---------- ----------
Total other income
(expense).................. (52,717) (175,328) (19,781) (3,206,455) (669,683) (531,238)
---------- ----------- --------- ----------- ---------- ----------
Income (loss) before income
taxes...................... 631,718 309,362 (176,481) (2,396,815) (735,541) (15,924)
Income tax provision
(benefit).................. 40,000 10,500 (65,000) (100,000) (290,000) --
---------- ----------- --------- ----------- ---------- ----------
Net income (loss)............ $ 591,718 $ 298,862 $ (111,481) $(2,296,815) $ (445,541) $ (15,924)
========== =========== ========= =========== ========== ==========
Pro forma data (unaudited):
Historical income (loss)
before income tax
provision (benefit)..... $ 631,718 $ 309,362 $ (176,481) $(2,396,815) $ (735,541) $ (15,924)
Pro forma income tax
provision (benefit)..... 216,400 130,800 (59,300) (54,300) (244,300) --
---------- ----------- --------- ----------- ---------- ----------
Pro forma net income
(loss).................. $ 415,318 $ 178,562 $ (117,181) $(2,342,515) $ (491,241) $ (15,924)
========== =========== ========= =========== ========== ==========
Pro forma net income (loss)
per share............... $ 0.07 $ 0.03 $ (0.02) $ (0.38) $ (0.08) $ (0.00)
========== =========== ========= =========== ========== ==========
Weighted average common
shares used in the
calculation of pro forma
net income (loss) per
share................... 6,138,260 6,138,260 6,138,260 6,138,260 6,138,260 6,141,075
========== =========== ========= =========== ========== ==========
</TABLE>
See accompanying notes.
F-4
<PAGE> 63
GARGOYLES, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON STOCK RETAINED
----------------------- REPURCHASED EARNINGS DEFERRED
SHARES AMOUNT STOCK (DEFICIT) COMPENSATION TOTAL
---------- ---------- ------------ ----------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Balance at November 30, 1992...... 5,860,000 $ 572 $ -- $ 1,095,965 $ -- $ 1,096,537
Net income for the year ended
November 30, 1993............. -- -- -- 591,718 -- 591,718
Distributions to former majority
shareholder................... -- -- -- (587,000) -- (587,000)
----------- ---------- ------------ ----------- --------- ------------
Balance at November 30, 1993...... 5,860,000 572 0 1,100,683 0 1,101,255
Net income for the year ended
November 30, 1994............. -- -- -- 298,862 -- 298,862
Distributions to former majority
shareholder................... -- -- -- (624,500) -- (624,500)
----------- ---------- ------------ ----------- --------- ------------
Balance at November 30, 1994...... 5,860,000 572 0 775,045 0 775,617
Net loss for the month ended
December 31, 1994............. -- -- -- (111,481) -- (111,481)
Distributions to former majority
shareholder................... -- -- -- (51,786) -- (51,786)
----------- ---------- ------------ ----------- --------- ------------
Balance at December 31, 1994...... 5,860,000 572 0 611,778 0 612,350
Stock redemption from former
majority shareholder.......... (3,516,000) -- (10,895,500) -- -- (10,895,500)
Stock issued for cash........... 3,516,003 5,387,498 -- -- 5,387,498
Deferred compensation related to
amendment of stock options.... -- 400,000 -- -- (400,000) 0
Stock compensation.............. -- -- -- -- 250,000 250,000
Distributions to former majority
shareholder................... -- -- -- (261,147) -- (261,147)
Net loss for the year ended
December 31, 1995............. -- -- -- (2,296,815) -- (2,296,815)
----------- ---------- ------------ ----------- --------- ------------
Balance at December 31, 1995...... 5,860,003 5,788,070 (10,895,500) (1,946,184) (150,000) (7,203,614)
Sale of warrant (unaudited)..... -- 56,000 -- -- -- 56,000
Stock issued in connection with
acquisition (unaudited)....... 15,634 80,040 -- -- -- 80,040
Stock compensation
(unaudited)................... -- -- -- -- 24,500 24,500
Net loss for the three months
ended March 31, 1996
(unaudited)................... -- -- -- (15,924) -- (15,924)
----------- ---------- ------------ ----------- --------- ------------
Balance at March 31, 1996
(unaudited)..................... 5,875,637 $5,924,110 $(10,895,500) $(1,962,108) $ (125,500) $ (7,058,998)
=========== ========== ============ =========== ========= ============
Authorized shares................. 40,000,000
===========
</TABLE>
See accompanying notes.
F-5
<PAGE> 64
GARGOYLES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED ONE MONTH THREE MONTHS ENDED
NOVEMBER 30, ENDED YEAR ENDED MARCH 31,
---------------------- DECEMBER 31, DECEMBER 31, ---------------------------
1993 1994 1994 1995 1995 1996
--------- ---------- ------------ ------------ ------------ ------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
OPERATING ACTIVITIES
Net income (loss)................. $ 591,718 $ 298,862 $ (111,481) $ (2,296,815) $ (445,541) $ (15,924)
Adjustments to reconcile net
income (loss) to net cash
provided by (used in) operating
activities:
Depreciation and amortization... 49,876 127,827 7,266 234,054 38,167 103,434
Stock compensation.............. -- -- -- 250,000 105,000 24,500
Deferred license income......... -- -- -- 540,000 675,000 (45,000)
Changes in assets and
liabilities net of effects
from purchase of Hobie:
Accounts receivable........... (525,180) (795,403) 163,486 (446,436) (299,872) (4,007,275)
Inventories................... (328,541) (1,288,041) (10,219) (2,850,389) 129,195 305,622
Other current assets and other
assets...................... (73,207) (458,655) (41,364) (780,751) (1,255,202) (401,610)
Accounts payable, accrued
expenses and other current
liabilities................. 592,831 1,728,069 (469,565) 2,278,893 356,657 542,822
--------- ---------- --------- ------------ ------------ ------------
Net cash provided by (used in)
operating activities............ 307,497 (387,341) (461,877) (3,071,444) (696,596) (3,493,431)
--------- ---------- --------- ------------ ------------ ------------
INVESTING ACTIVITIES
Acquisition of property and
equipment....................... (157,198) (659,020) (19,097) (1,269,601) (87,849) (157,414)
Purchase of Hobie................. -- -- -- -- -- (3,974,900)
--------- ---------- --------- ------------ ------------ ------------
Net cash used in investing
activities...................... (157,198) (659,020) (19,097) (1,269,601) (87,849) (4,132,314)
--------- ---------- --------- ------------ ------------ ------------
FINANCING ACTIVITIES
Net proceeds from revolving line
of credit....................... 664,534 1,256,801 598,631 2,746,444 334,598 3,865,196
Proceeds from issuance of note
payable to bank and long-term
debt............................ 162,876 371,339 -- 7,283,100 6,400,000 4,000,000
Principal payments on long-term
debt............................ (71,541) (133,036) (15,074) (390,374) (44,222) (295,401)
Payments for stock repurchase..... -- -- -- (6,405,920) (6,405,920) --
Proceeds from stock issuance...... -- -- -- 897,918 897,918 --
Proceeds from warrant issuance.... -- -- -- -- -- 56,000
Distributions to shareholder...... (587,000) (624,500) (51,786) (261,147) (261,147) --
Net (payments) proceeds on
affiliate accounts.............. (563,988) 170,069 (45,049) 463,894 (134,607) --
--------- ---------- --------- ------------ ------------ ------------
Net cash provided by (used in)
financing activities............ (395,119) 1,040,673 486,722 4,333,915 786,620 7,625,795
--------- ---------- --------- ------------ ------------ ------------
Net increase (decrease) in cash
and cash equivalents............ (244,820) (5,688) 5,748 (7,130) 2,175 50
Cash and cash equivalents,
beginning of period............. 252,790 7,970 2,282 8,030 8,030 900
--------- ---------- --------- ------------ ------------ ------------
Cash and cash equivalents, end of
period.......................... $ 7,970 $ 2,282 $ 8,030 $ 900 $ 10,205 $ 950
========= ========== ========= ============ ============ ============
</TABLE>
See accompanying notes.
F-6
<PAGE> 65
GARGOYLES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION AS OF MARCH 31, 1996 AND FOR THE THREE MONTHS
ENDED MARCH 31, 1995 AND 1996 IS UNAUDITED)
1. SIGNIFICANT ACCOUNTING POLICIES
Principal Industry
Gargoyles, Inc. ("Gargoyles" or the "Company") designs, manufactures and
markets a broad line of technology-based performance and lifestyle-oriented
sunglasses. The Company's products are mainly sold through sunglass specialty,
sporting goods, department and optical stores. The Company subcontracts certain
of its manufacturing processes. Management believes there are adequate
alternative sources for these services should an existing subcontractor be
unable to perform. Its headquarters and main warehouse are located in Kent,
Washington.
Fiscal Year
In 1995, the Company changed its reporting period from a fiscal year ending
November 30 to a calendar year. Accordingly, results of operations for the one
month ended December 31, 1994 are separately presented herein.
Interim Financial Information
The financial information at March 31, 1996 and for the three months ended
March 31, 1995 and 1996 is unaudited, but includes all adjustments (consisting
only of normal recurring adjustments) that the Company considers necessary for a
fair presentation of the financial position at such date and the operating
results and cash flows for those periods. The Company's net sales are subject to
seasonal variations. Accordingly, operating results for the March 31, 1996
period are not necessarily indicative of the results that may be expected for
the entire year.
Recapitalization
In connection with a change in control of the Company, on March 22, 1995,
the Company sold 3,516,003 shares to a group of new investors, including certain
members of the Company's senior management. Proceeds from the sale were
$5,387,498. On the same date, 3,516,000 previously issued and outstanding shares
were repurchased by the Company from the former majority shareholder for
$10,895,500. The redemption was funded with the proceeds from the stock issuance
and bank financing of $6,000,000. Proceeds in excess of redemption requirements
provided additional working capital. In connection with this recapitalization,
the Company recorded a charge of $573,710 relating primarily to severance, legal
and other costs.
In connection with the recapitalization of Gargoyles, Antone Manufacturing,
Inc. ("Antone") was merged into Gargoyles. Antone was wholly owned by the former
majority owner of Gargoyles. Antone provided assembly operations for Gargoyles.
The merger has been accounted for as a pooling of interests due to common
ownership, and financial statements for all periods prior to the
recapitalization have been restated to reflect the pooling.
Cash and Cash Equivalents
The Company considers all highly liquid investments with original
maturities of three months or less when purchased to be cash equivalents.
Revenue Recognition
Revenue is recognized when merchandise is shipped to a customer. The
Company records sales net of volume and cash discounts.
F-7
<PAGE> 66
GARGOYLES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Inventories
Inventories are stated at the lower of cost (first-in, first-out method) or
market.
Property and Equipment
Property and equipment are stated at cost, net of accumulated depreciation
and amortization. Significant additions and improvements are capitalized.
Maintenance and repairs are expensed as incurred. The Company provides for
depreciation and amortization using the straight-line method which recognizes
the cost over the estimated useful lives of the respective assets or, as to
leasehold improvements, the term of the related lease, if less than the
estimated useful life.
Advertising Expense
The cost of advertising is expensed as incurred. The Company incurred
$264,330, $407,422, $258,419 and $80,007 in advertising costs during the years
ended November 30, 1993 and 1994 and December 31, 1995 and the three months
ended March 31, 1996, respectively.
Income Taxes
The Company accounts for income taxes under the liability method, whereby
deferred taxes are provided for the temporary differences between the financial
reporting basis and the tax basis of the Company's assets and liabilities. These
deferred tax assets and liabilities are measured under the provisions of
currently enacted tax laws.
Prior to the recapitalization in March 1995, Antone had elected to be taxed
as an S corporation under the provisions of the Internal Revenue Code.
Accordingly, Antone's taxable income included in the financial statements,
through the date of the recapitalization, is treated as if it were distributed
to the shareholder, who was responsible for payment of taxes thereon.
Pro Forma Data
Pro forma income tax provision (benefit) and net income (loss) data is
included to present the results of operations as if Antone's earnings had been
taxed as a C corporation rather than an S corporation. The difference between
the pro forma income tax rate and the federal statutory rate of 34% relates
primarily to net operating loss carryforwards and other deferred tax assets
which have been reserved due to the uncertainty of the Company's ability to
recover such amounts.
Pro forma net income (loss) per share is computed based on the weighted
average number of common and common equivalent shares outstanding using the
treasury stock method. In accordance with the Securities and Exchange Commission
requirements, common and common equivalent shares issued during the 12-month
period prior to the filing of the Company's proposed initial public offering
have been included in the calculation as if they were outstanding for all
periods presented using the treasury stock method and an assumed initial public
offering price of $15 per share.
License Agreement
During the first quarter of 1995, the Company entered into an agreement to
license the name "Gargoyles" for use on certain nonsunglass products, whereby
the Company, as licensor, receives quarterly cash payments based on a portion of
the licensee's income from the sale of certain products.
The Company received a payment of $1,000,000 at the inception of the
agreement. After deducting expenses associated with the license agreement, the
$720,000 balance was recorded as deferred license income and is being amortized
over the four-year estimated term of the license agreement.
F-8
<PAGE> 67
GARGOYLES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Concentration of Credit Risk and Financial Instruments
The Company sells its products to local and national companies throughout
the United States. Net sales to the Company's largest customer represented
33.7%, 33.8%, 33.3% and 41.2% of net sales for the years ended November 30, 1993
and 1994 and December 31, 1995 and the three months ended March 31, 1996,
respectively. The Company performs ongoing credit evaluations of its customers
and generally does not require collateral. The Company maintains an allowance
for doubtful accounts at a level which management believes is sufficient to
cover potential credit losses.
The carrying value of financial instruments, which include cash,
receivables, payables and debt, approximates market value at December 31, 1995
and March 31, 1996.
Stock-Based Compensation
In October 1995, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation." Statement No. 123 is effective for fiscal years beginning after
December 15, 1995. Under Statement No. 123, stock-based compensation expense is
measured using either the intrinsic value method, as prescribed by Accounting
Principles Board Opinion No. 25, or the fair value method described in Statement
No. 123. Companies choosing the intrinsic value method will be required to
disclose the pro forma impact of the fair value method on net income and
earnings per share. The Company implemented Statement No. 123 in 1996 using the
intrinsic value method. Accordingly, the adoption of Statement No. 123 had no
impact on the Company's financial statements.
Impairment of Long-Lived Assets
In March 1995, the FASB issued Statement No. 121 regarding accounting for
the impairment of long-lived assets. The Company adopted Statement No. 121 in
1995. The effect of the adoption had no material impact on the Company's
financial condition or results of operations.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
2. INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
NOVEMBER 30, DECEMBER 31, MARCH 31,
1994 1995 1996
------------ ------------ ----------
<S> <C> <C> <C>
Raw materials................................. $1,327,453 $4,804,323 $5,562,047
Finished goods................................ 1,285,631 669,369 704,367
------------ ------------ ------------
$2,613,084 $5,473,692 $6,266,414
============ ============ ============
</TABLE>
F-9
<PAGE> 68
GARGOYLES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
3. OTHER CURRENT ASSETS AND PREPAID EXPENSES
Other current assets and prepaid expenses consist of the following:
<TABLE>
<CAPTION>
NOVEMBER 30, DECEMBER 31, MARCH 31,
1994 1995 1996
------------ ------------ ----------
<S> <C> <C> <C>
Income tax refund receivable.................. $ -- $191,742 $ 191,742
Receivable on discontinued distribution
agreement................................... -- 126,913 97,416
Other receivables............................. 119,454 188,640 194,415
Prepaid expenses.............................. 73,592 117,332 490,538
Deposits...................................... -- 56,466 92,717
Other......................................... 56,374 51,891 132,399
----------- ---------- - ------------
$249,420 $732,984 $1,199,227
=========== =========== ============
</TABLE>
4. PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
<TABLE>
<CAPTION>
NOVEMBER 30, DECEMBER 31, MARCH 31,
1994 1995 1996
------------ ------------ ----------
<S> <C> <C> <C>
Molds and production equipment................ $ 442,023 $1,037,936 $1,227,116
Office furniture and equipment................ 549,317 1,024,908 1,124,466
Exhibit and marketing equipment............... 118,017 308,418 329,848
Transportation equipment...................... 76,537 24,718 24,718
Leasehold improvements........................ 143,092 179,570 193,074
---------- ---------- ----------
1,328,986 2,575,550 2,899,222
Less accumulated depreciation and
amortization................................ (475,761) (674,947) (844,855)
---------- ---------- ----------
Furniture and equipment, net.................. $ 853,225 $1,900,603 $2,054,367
========== ========== ==========
</TABLE>
5. DEBT
Gargoyles has a revolving line of credit with a bank which matures on March
22, 1997. At December 31, 1995, the Company could borrow up to the lesser of 80%
of eligible accounts receivable and 50% of eligible inventories or $6,000,000.
Effective February 13, 1996, the limit on borrowings under this line of credit
was increased to $10,000,000. Borrowings under the line of credit bear interest
at the bank's prime rate plus 1% per annum (9.50% at December 31, 1995), payable
monthly. Amounts borrowed under the line of credit are secured by all tangible
and intangible personal property of the Company.
F-10
<PAGE> 69
GARGOYLES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Long-term debt consists of the following:
<TABLE>
<CAPTION>
NOVEMBER 30, DECEMBER 31, MARCH 31,
1994 1995 1996
------------ ------------ -----------
<S> <C> <C> <C>
Note payable to bank, bearing interest at prime
rate plus 1.5% (10% at December 31, 1995),
interest payable monthly, principal payable
quarterly at $230,769 through March 2002...... $ -- $ 5,769,231 $ 5,538,462
Notes payable to bank, bearing interest at prime
rate plus 1.25%, interest payable monthly,
principal payable quarterly through 2000,
secured by equipment with a net book value of
approximately $1,125,000...................... -- 996,750 981,750
Note payable to shareholder, bearing interest at
10%, payable in $10,704 monthly installments
of principal and interest through March
1998.......................................... -- 257,836 231,943
Other notes payable at various interest rates,
secured by equipment and other assets, with
maturities through 2000....................... 489,493 343,328 319,589
--------- ----------- -----------
Total long-term debt............................ 489,493 7,367,145 7,071,744
Less current maturities......................... (138,900) (1,349,333) (1,354,921)
--------- ----------- -----------
Long-term debt, less current maturities......... $ 350,593 $ 6,017,812 $ 5,716,823
========= =========== ===========
</TABLE>
Annual principal payments required on long-term debt are as follows:
<TABLE>
<CAPTION>
YEAR ENDING
DECEMBER 31,
---------------------------------
<S> <C>
1996........................... $1,349,333
1997........................... 1,372,725
1998........................... 1,248,920
1999........................... 1,188,321
2000........................... 1,053,995
Thereafter..................... 1,153,851
----------
$7,367,145
==========
</TABLE>
The note payable to bank of $5,769,231 at December 31, 1995 was incurred in
connection with the recapitalization of Gargoyles in March 1995 and is
guaranteed by the majority shareholder. Included in other assets are capitalized
loan fees with a net unamortized balance of $133,935 at December 31, 1995, which
is being amortized over the life of the related loan.
In connection with the recapitalization of Gargoyles in March 1995, a
redemption note payable was incurred in the amount of $4,489,580 payable to the
previous majority owner. This note required interest-only payments at a rate of
7% per annum, payable monthly through January 2, 1996. The Company had an
offsetting note receivable from the current majority shareholder in the same
principal amount with the same interest terms. The note payable and note
receivable, which were secured by a letter of credit, and associated interest
have been offset for financial reporting purposes. On January 2, 1996, the
obligations evidenced by the note receivable and the note payable were satisfied
in full.
The credit agreements require, among other things, that the Company
maintain a minimum tangible net worth and working capital and meet certain
ratios relating to debt coverage, and place restrictions on the payment of
dividends. At December 31, 1995, the Company was not in compliance with certain
of the covenants, for which the bank has provided a waiver.
F-11
<PAGE> 70
GARGOYLES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
In connection with the acquisition, Gargoyles borrowed $4,000,000 from an
existing lender. The loan bears interest at the bank's prime rate plus 3% per
annum (11.25% at March 31, 1996), payable monthly. A principal payment of
$700,000 is due on September 30, 1996, with the balance due on December 31,
1996. If this loan is not repaid by December 31, 1996, the Company must pay an
additional loan fee of $5.0 million or issue a warrant to purchase that number
of shares of common stock that would constitute 25% of the Company's common
stock on a fully diluted basis at a purchase price of $0.01 per share. Such
warrant would be exercisable any time after March 31, 1997 through June 30,
1997. The new agreement contains interest requirements and covenants similar to
those in existing debt agreements. The net proceeds from this acquisition loan
in excess of the stock purchase price were used to provide working capital for
Gargoyles and its subsidiaries.
In February 1995, two of the Company's officers made loans to the Company
totalling $100,000 and bearing interest at an average rate of 9.25%. The loans
were repaid in full with interest in March 1995.
In January 1996, the Company borrowed $290,000 at 12% per annum from
officers and shareholders. The loans were repaid in full with interest as of
April 1996.
The Company made interest payments totaling $46,975, $164,802, $1,014,565
and $509,224 during the years ended November 30, 1993 and 1994 and December 31,
1995 and the three months ended March 31, 1996, respectively.
6. INCOME TAXES
The difference between the income tax provision (benefit), all of which is
current, based upon the federal statutory income tax rate and the income tax
provision (benefit) recorded in the financial statements is attributable to the
following:
<TABLE>
<CAPTION>
YEAR ENDED
NOVEMBER 30, YEAR ENDED
--------------------- DECEMBER 31,
1993 1994 1995
--------- --------- ------------
<S> <C> <C> <C>
Income tax provision (benefit) at federal statutory
rate (34%)....................................... $ 215,000 $ 105,000 $ (815,000)
Change in deferred tax valuation allowance......... -- 19,500 737,900
Antone S corporation earnings...................... (176,400) (120,300) (45,700)
Other.............................................. 1,400 6,300 22,800
--------- --------- ---------
$ 40,000 $ 10,500 $ (100,000)
========= ========= =========
</TABLE>
F-12
<PAGE> 71
GARGOYLES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Deferred income taxes reflect the net tax effects of temporary differences
between the bases of assets and liabilities for financial reporting purposes and
the bases used for income tax return purposes. Significant components of the
Company's deferred tax liabilities and assets are as follows:
<TABLE>
<CAPTION>
NOVEMBER 30, DECEMBER 31,
1994 1995
------------ ------------
<S> <C> <C>
Deferred tax liabilities:
Tax over book depreciation................................. $ (28,800) $ (54,300)
--------- ---------
Deferred tax assets:
Deferred license income.................................... -- 251,000
Accrued liabilities of affiliate........................... -- 225,100
Deferred compensation...................................... 151,300
---
Net operating loss carryforwards........................... -- 112,200
Sales return allowance..................................... 47,600 71,400
Inventory valuation allowance.............................. 34,000 34,000
Warranty reserves.......................................... 34,000 34,000
Accrued vacation........................................... 16,000 16,000
--------- ---------
Total deferred tax assets.................................... 131,600 895,000
--------- ---------
Net deferred taxes........................................... $ 102,800 $ 840,700
========= =========
Valuation allowance.......................................... $ (102,800) $ (840,700)
========= =========
</TABLE>
At December 31, 1995, the Company had net operating loss carryforwards of
approximately $300,000. These carryforwards expire in 2010.
The Company made income tax payments totaling $44,120 and $65,122 during
the years ended November 30, 1993 and 1994, respectively. No income tax payments
were made during the year ended December 31, 1995 and the three months ended
March 31, 1996.
7. COMMITMENTS AND CONTINGENCIES
Since 1994, the Company has been leasing its primary operating and office
premises under a noncancelable operating lease, expiring in March 2000. Terms of
this lease include 4% annual rental payment increases. The owner of these
premises is a current shareholder and the former majority owner of Gargoyles.
Rent expense under this lease totaled $210,000 and $214,725 for the years ended
November 30, 1994 and December 31, 1995, respectively.
Late in 1995, the Company leased additional office space under a
noncancelable operating lease, expiring in October 1997. Terms of this lease
include monthly rental payments of $3,066.
Minimum future lease payments under noncancelable operating leases as of
December 31, 1995 are as follows:
<TABLE>
<CAPTION>
YEAR ENDING
DECEMBER 31,
-------------------------------------------------
<S> <C>
1996........................................... $ 259,585
1997........................................... 262,362
1998........................................... 240,972
1999........................................... 250,611
2000........................................... 63,261
-----------
$1,076,791
===========
</TABLE>
F-13
<PAGE> 72
GARGOYLES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Company enters into endorsement contracts from time to time with
certain athletes and others to promote the Company's products. Minimum annual
payments under these agreements are as follows:
<TABLE>
<CAPTION>
YEAR ENDING
DECEMBER 31,
-------------------------------------------------
<S> <C>
1996........................................... $ 178,500
1997........................................... 138,500
1998........................................... 113,500
------
$ 430,500
======
</TABLE>
The Company is currently involved in litigation incidental to the Company's
business. In the opinion of management, the ultimate resolution of such
litigation will not have a significant effect on the accompanying financial
statements.
8. EMPLOYEE BENEFIT PLAN
In March 1995, the Company introduced a 401(k) savings plan for all
full-time employees age 21 or older with one year of service. The maximum
employee contribution is 15% of the participant's compensation. The Company
matches 50% of each dollar contributed by a participant, with a maximum matching
contribution of 3% of a participant's earnings. The Company's contributions to
the plan vest over six years and totaled $37,949 and $16,686 for the year ended
December 31, 1995 and the three months ended March 31, 1996, respectively.
9. SHAREHOLDERS' EQUITY
The Company has 10,000,000 authorized shares of preferred stock.
In March 1995, the Company established the 1995 Stock Option Plan that
provided for the granting of incentive and nonqualified options to purchase up
to 308,423 shares of common stock. In December 1995, the Company amended the
plan to provide for the granting of options to purchase up to 570,898 shares of
common stock. Generally, options granted vest over a four-year period. Certain
options require acceleration of vesting if specific operational goals are
achieved. Options under this plan have been granted at estimated fair value on
the date of grant and expire after ten years. The plan expires in 2005.
Stock option activity and option price information for the year ended
December 31, 1995 are as follows:
<TABLE>
<CAPTION>
NUMBER OF OPTION PRICE
SHARES PER SHARE
--------- ------------
<S> <C> <C>
Granted................................................... 516,173 $3.24-$5.11
Canceled.................................................. (30,835 ) $ 3.24
------
Balance, December 31, 1995 and March 31, 1996............. 485,338 $3.24-$5.11
======
</TABLE>
In January 1996, an outside member of the Company's Board of Directors
purchased a warrant for $56,000. The warrant provides for the issuance of 41,020
shares of common stock at a price of $4.26 per share. The warrant can be
exercised any time prior to December 2005.
At December 31, 1995, 34,175 options were exercisable and 85,560 shares
were available for future grant. At March 31, 1996, 54,744 options were
exercisable and 85,560 shares were available for future grant.
Prior to the recapitalization of the Company, the President held an option
to purchase up to 10% of the outstanding shares of Gargoyles stock from the
former majority shareholder. In connection with the recapitalization, the new
shareholders of the Company assumed the option and amended certain provisions of
the option agreement. As a result of the amendments, the Company recorded
deferred compensation of
F-14
<PAGE> 73
GARGOYLES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
$400,000, equal to the difference between the estimated fair market value of the
stock at the date of the recapitalization, and the option price of $0.85 per
share. The amount is being amortized over the option vesting period.
10. RECEIVABLE FROM AFFILIATE
The Company has advanced funds to Conquest Sports, Inc. ("Conquest,"
formerly Pro-Tec, Inc.), an affiliate with similar shareholders as the Company.
In addition, the Company has guaranteed certain liabilities of Conquest.
Conquest has incurred losses in its last two fiscal years and Company management
has concluded that it is likely Conquest will be unable to meet its unsecured
obligations. Accordingly, in the fourth quarter of 1995, the Company recorded a
provision related to Conquest in the amount of $1,597,051.
11. DISCONTINUED DISTRIBUTION AGREEMENT
During late 1994, Gargoyles entered into a nonexclusive agreement (the
"Agreement") to distribute a line of sunglasses produced by another
manufacturer. These sunglasses were produced with the name of a major
manufacturer of athletic shoes and apparel under a license agreement. Gargoyles
had no significant sales under the Agreement prior to 1995.
During the fourth quarter of 1995, both parties agreed to terminate the
Agreement. In connection with the termination of the Agreement, the sales, cost
of sales, and operating expenses associated with this distribution agreement
have been eliminated from the results of operations for Gargoyles. The net
financial results have been reported as a loss on discontinued distribution
agreement for the year ended December 31, 1995.
12. ACQUISITION OF HOBIE
On February 13, 1996, Gargoyles purchased all of the issued and outstanding
stock of H.S.I. ("Hobie"). Hobie was the manufacturer of Hobie Polarized
Sunglasses under an exclusive license agreement for use of the name Hobie on
sunglasses.
The acquisition has been accounted for using the purchase method of
accounting. Accordingly, the allocation of the purchase price of $3,974,900, of
which $3,380,014 was paid in cash, has been based on the fair value of the
assets acquired and liabilities assumed. Included in the purchase price are
consulting service fees of up to an aggregate of $300,000 to two of Hobie's
former shareholders. As consideration for certain noncompetition covenants, the
Company agreed to pay an aggregate of $200,000 in 12 monthly installments and
issue an aggregate of 15,634 shares of its common stock to two of Hobie's former
shareholders.
Pro forma information, assuming the acquisition had occurred at the
beginning of the periods presented, is as follows:
<TABLE>
<CAPTION>
THREE
MONTHS
YEAR ENDED ENDED
DECEMBER 31, MARCH 31,
1995 1996
------------ ----------
<S> <C> <C>
Sales.................................................... $21,182,000 $7,305,000
Gross profit............................................. 12,663,000 4,273,000
Net income (loss)........................................ (3,021,000 ) (149,000)
</TABLE>
F-15
<PAGE> 74
GARGOYLES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
13. SUBSEQUENT EVENTS
Investment in the kindling company
In May 1996, the Company formed a majority-owned subsidiary, the kindling
company ("Kindling"), to design, develop, manufacture and distribute sunglasses
and, with The Timberland Company's consent, ophthalmic frames under the
Timberland brand name. The Company contributed $1,200,000 for its 70% interest
in Kindling. Of that amount, $100,000 was paid in cash and $1,100,000 by means
of a non-interest-bearing promissory note that is due in installments through
January 1997. Between January 3, 1997 and January 1, 2000, the Company may also
be required to contribute an additional $300,000 to Kindling's capital if
Kindling deems such additional amount necessary and makes a demand.
Stock Dividend
On June 28, 1996, the Company's Board of Directors approved a stock
dividend in the amount of 4.86 shares for every one share of common stock
outstanding, thereby giving effect to a 5.86-to-1 stock split to be payable on
or before the closing of the Company's initial public offering. The payment of
such dividend is subject to approval by the Board of Directors and shareholders
of the Restated Articles of Incorporation to increase the number of authorized
shares. The accompanying financial statements have been restated to give effect
to the stock dividend.
F-16
<PAGE> 75
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors and Shareholders
Gargoyles, Inc.
We have audited the accompanying balance sheets of H.S.I. d/b/a Hobie
Sunglasses as of December 31, 1994 and 1995, and the related statements of
operations and retained earnings and cash flows for the years then ended. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of H.S.I. d/b/a Hobie
Sunglasses at December 31, 1994 and 1995, and the results of its operations and
its cash flows for the years then ended, in conformity with generally accepted
accounting principles.
ERNST & YOUNG LLP
Seattle, Washington
June 14, 1996
F-17
<PAGE> 76
H.S.I.
D/B/A HOBIE SUNGLASSES
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, FEBRUARY
------------------------- 13,
1994 1995 1996
---------- ---------- ----------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents............................ $ 83,229 $ 30,972 $ 556
Trade receivables, less allowances for doubtful
accounts
of $50,000........................................ 352,056 346,445 356,217
Inventories.......................................... 771,252 1,199,632 1,249,466
Other current assets and prepaid expenses............ 1,310 10,879 38,636
------- ------- -------
Total current assets................................... 1,207,847 1,587,928 1,644,875
Property and equipment, net............................ 77,471 86,983 94,879
Other assets........................................... 14,250 28,250 18,200
------- ------- -------
Total assets........................................... $1,299,568 $1,703,161 $1,757,954
======= ======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Note payable to bank................................. $ 424,317 $ 630,000 $ 580,000
Note payable to shareholder.......................... 285,000 470,000 540,000
Convertible note payable to shareholder.............. 200,000 200,000 200,000
Accounts payable..................................... 30,027 49,191 126,393
Accrued expenses..................................... 34,687 23,615 27,829
------- ------- -------
Total current liabilities.............................. 974,031 1,372,806 1,474,222
------- ------- -------
Shareholders' equity:
Common stock, no par value
Authorized shares -- 10,000,000
Issued and outstanding shares -- 365,000.......... 322,330 322,330 322,330
Retained earnings (deficit).......................... 3,207 8,025 (38,598)
------- ------- -------
Total shareholders' equity............................. 325,537 330,355 283,732
------- ------- -------
Total liabilities and shareholders' equity............. $1,299,568 $1,703,161 $1,757,954
======= ======= =======
</TABLE>
See accompanying notes.
F-18
<PAGE> 77
H.S.I.
D/B/A HOBIE SUNGLASSES
STATEMENTS OF OPERATIONS AND RETAINED EARNINGS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, PERIOD FROM
------------------------- JANUARY 1 TO
1994 1995 FEBRUARY 13,
---------- ---------- 1996
------------
(UNAUDITED)
<S> <C> <C> <C>
Net sales.............................................. $3,690,701 $4,043,617 $310,953
Cost of sales.......................................... 1,906,805 1,992,181 166,904
---------- ---------- --------
Gross profit........................................... 1,783,896 2,051,436 144,049
---------- ---------- --------
Operating expenses:
Sales and marketing.................................. 984,217 1,175,825 77,486
General and administrative........................... 672,745 679,036 121,816
Shipping and warehousing............................. 43,068 35,066 3,500
---------- ---------- --------
Total operating expenses............................... 1,700,030 1,889,927 202,802
---------- ---------- --------
Income (loss) from operations.......................... 83,866 161,509 (58,753)
---------- ---------- --------
Other income (expense):
Interest expense, net................................ (85,630) (131,090) (12,517)
Other................................................ 13,385 (14,902) 629
---------- ---------- --------
Total other income (expense)........................... (72,245) (145,992) (11,888)
---------- ---------- --------
Income (loss) before income taxes...................... 11,621 15,517 (70,641)
Income tax provision (benefit)......................... 4,087 10,699 (24,018)
---------- ---------- --------
Net income (loss)...................................... 7,534 4,818 (46,623)
Retained earnings (deficit), beginning of period....... (4,327) 3,207 8,025
---------- ---------- --------
Retained earnings (deficit), end of period............. $ 3,207 $ 8,025 $(38,598)
========== ========== ========
</TABLE>
See accompanying notes.
F-19
<PAGE> 78
H.S.I.
D/B/A HOBIE SUNGLASSES
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, PERIOD FROM
----------------------- JANUARY 1 TO
1994 1995 FEBRUARY 13,
--------- --------- 1996
------------
(UNAUDITED)
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income (loss)......................................... $ 7,534 $ 4,818 $ (46,623)
Adjustments to reconcile net income (loss) to net cash
used in operating activities:
Depreciation and amortization........................... 20,796 24,566 3,247
Changes in assets and liabilities:
Accounts receivable.................................. (89,475) 5,611 (9,772)
Inventories.......................................... (269,904) (428,380) (49,834)
Other current assets and other assets................ 20,965 (24,569) (17,707)
Accounts payable..................................... (7,383) 19,164 77,202
Accrued expenses..................................... 20,049 (11,072) 4,214
------ ------ ------
Net cash used in operating activities..................... (297,418) (409,862) (39,273)
------ ------ ------
INVESTING ACTIVITY -- acquisition of property and
equipment............................................... (39,550) (33,078) (11,143)
------ ------ ------
FINANCING ACTIVITIES
Net proceeds (repayments) under bank note payable......... 303,291 205,683 (50,000)
Proceeds from issuance of shareholder note................ 345,000 385,000 270,000
Payments of shareholder note.............................. (260,000) (200,000) (200,000)
------ ------ ------
Net cash provided by financing activities................. 388,291 390,683 20,000
------ ------ ------
Net increase (decrease) in cash and cash equivalents...... 51,323 (52,257) (30,416)
Cash and cash equivalents, beginning of period............ 31,906 83,229 30,972
------ ------ ------
Cash and cash equivalents, end of period.................. $ 83,229 $ 30,972 $ 556
====== ====== ======
</TABLE>
See accompanying notes.
F-20
<PAGE> 79
H.S.I.
D/B/A HOBIE SUNGLASSES
NOTES TO FINANCIAL STATEMENTS
(INFORMATION AS OF FEBRUARY 13, 1996 AND FOR THE PERIOD
JANUARY 1, 1996 TO FEBRUARY 13, 1996 IS UNAUDITED)
1. SIGNIFICANT ACCOUNTING POLICIES
Principal Industry and Sale of Company to Gargoyles
H.S.I. d/b/a Hobie Sunglasses ("Hobie" or "the Company"), a California
corporation formed in March 1989, is primarily involved in the manufacture and
wholesale distribution of Hobie eyewear products. The Company's products are
primarily sold through independent manufacturers' representatives. The Company
subcontracts several of its manufacturing processes. Management believes there
are adequate alternative sources for these services should an existing
subcontractor be unable to perform.
On February 13, 1996, the Company was sold to, and became a wholly owned
subsidiary of, Gargoyles, Inc., another manufacturer of sunglasses. In
connection with the sale, all vested stock options were exercised and all notes
payable were paid. Unaudited information as of February 13, 1996 and for the
period January 1, 1996 to February 13, 1996 reflects the Company's financial
position and results of operations and cash flows up to the date of the sale and
includes all adjustments that the Company considers necessary for a fair
presentation of the financial position at such date and the operating results
and cash flows for that period.
Cash and Cash Equivalents
The Company considers all highly liquid investments with original
maturities of three months or less when purchased to be cash equivalents.
Revenue Recognition
Revenue is recognized when merchandise is shipped to a customer.
Inventories
Inventories are stated at the lower of weighted-average cost or market.
Property and Equipment
Property and equipment are stated at cost, net of accumulated depreciation
and amortization. Significant additions and improvements are capitalized.
Maintenance and repairs are expensed as incurred. The Company provides for
depreciation and amortization using the straight-line method which recognizes
the cost over the estimated useful lives of the respective assets or, as to
leasehold improvements, the term of the related lease if less than the estimated
useful life.
Advertising Expense
The cost of advertising is expensed as incurred. The Company incurred
$84,718 and $107,730 in advertising costs during 1994 and 1995, respectively.
Income Taxes
The Company accounts for income taxes under the liability method, whereby
deferred taxes are provided for the temporary differences between the financial
reporting basis and the tax basis of the Company's assets and liabilities. These
deferred tax assets and liabilities are measured under the provisions of
currently enacted tax laws.
F-21
<PAGE> 80
H.S.I.
D/B/A HOBIE SUNGLASSES
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
License Agreement
The Company purchased the exclusive right to manufacture and sell
sunglasses and related accessories bearing the "Hobie" trademark. The original
term of the license expires December 31, 2008; however, the Company has three
five-year extension options available. The Company is amortizing the cost of the
license agreement on a straight-line basis over the original term. At December
31, 1994 and 1995, the balance was $14,250 and $13,250, respectively, net of
accumulated amortization of $5,750 and $6,750, respectively. Amortization
expense was $1,000 during 1994 and 1995.
Royalties under the agreement accrue at 2% of net sales, subject to a
minimum annual royalty of $15,000. The Company incurred royalty expense of
$66,065 and $75,146 in 1994 and 1995, respectively.
Concentration of Credit Risk and Financial Instruments
The Company sells its products to local and national companies throughout
the United States. The Company performs ongoing credit evaluations of its
customers and generally does not require collateral. The Company maintains an
allowance for doubtful accounts at a level which management believes is
sufficient to cover potential credit losses.
The carrying value of financial instruments, which include cash,
receivables, payables and debt, approximates market value at December 31, 1995.
Stock-Based Compensation
The Company granted stock options for a fixed number of shares to employees
with an exercise price equal to the fair value of the shares at the date of
grant. The Company accounts for stock option grants in accordance with the
intrinsic value method of accounting, and, accordingly, recognizes no
compensation expense for the stock option grants.
Impact of Recently Issued Accounting Standards
In March 1995, the Financial Accounting Standards Board issued Statement
No. 121 regarding accounting for the impairment of long-lived assets. The
Company adopted Statement No. 121, and the effect of the adoption had no
material impact on the Company's financial condition or results of operations.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
2. INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31, FEBRUARY
----------------------- 13,
1994 1995 1996
-------- ---------- ----------
<S> <C> <C> <C>
Raw materials................................... $610,437 $ 717,958 $ 776,239
Finished goods.................................. 160,815 481,674 473,227
------ ------- -------
$771,252 $1,199,632 $1,249,466
====== ======= =======
</TABLE>
F-22
<PAGE> 81
H.S.I.
D/B/A HOBIE SUNGLASSES
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
3. PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------- FEBRUARY 13,
1994 1995 1996
-------- --------- ------------
<S> <C> <C> <C>
Molds and production equipment................ $ 14,913 $ 45,163 $ 56,306
Office and computer equipment................. 81,566 84,394 84,394
Leasehold improvements........................ 33,577 33,577 33,577
------ ------ ------
130,056 163,134 174,277
Less accumulated depreciation and
amortization................................ (52,585) (76,151) (79,398)
------ ------ ------
Furniture and equipment, net.................. $ 77,471 $ 86,983 $ 94,879
====== ====== ======
</TABLE>
4. DEBT
Note Payable to Bank Under Revolving Line of Credit
Under line of credit arrangements for short-term debt with a bank, the
Company may borrow up to $650,000. These arrangements expire August 31, 1996. At
December 31, 1995, the unused portion of the credit line was $20,000. Borrowings
under the arrangements bear interest at the bank's reference rate plus 2% (10.5%
at December 31, 1995), payable monthly. Amounts borrowed under the arrangements
are secured by substantially all accounts receivable, inventories, and
equipment. The arrangements are guaranteed by the majority shareholder.
The credit arrangements require, among other things, that the Company
maintain a minimum tangible net worth and working capital. At December 31, 1995,
the Company was not in compliance with certain of the covenants. The related
balances were fully paid in February 1996 after the acquisition by Gargoyles.
Note Payable to Shareholder
The note payable to shareholder represents working capital advances from
the majority shareholder and from affiliates of this shareholder. These advances
mature on December 31, 1996. Borrowings under the advances bear interest of
11.5%, payable monthly.
Convertible Note Payable to Shareholder
Shareholders and an affiliate of the majority shareholder hold subordinated
convertible notes payable. These notes may be converted into common stock, at
the option of the holder, through maturity at December 1, 1996. The notes
convert at the rate of one common share for each $1.25 in principal and accrued
interest outstanding. Borrowings bear interest at 8%, payable quarterly. At
December 31, 1995, 160,000 shares of common stock were restricted for these
notes.
The Company made interest payments totaling $78,003 and $122,130 during the
years ended December 31, 1994 and 1995, respectively.
F-23
<PAGE> 82
H.S.I.
D/B/A HOBIE SUNGLASSES
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
5. INCOME TAXES
The income tax provision consists of the following:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
------------------
1994 1995
------ -------
<S> <C> <C>
Current:
Federal......................................................... $2,740 $ 5,160
State........................................................... 800 2,940
---- -----
3,540 8,100
Deferred:
Federal......................................................... 1,287 1,135
State........................................................... (740) 1,464
---- -----
547 2,599
---- -----
Income tax provision.............................................. $4,087 $10,699
==== =====
</TABLE>
The difference between the income tax provision based upon the federal
statutory income tax rate and the income tax provision recorded in the financial
statements is attributable to graduated income tax rates and certain expenses
not deductible for tax purposes.
The Company made income tax payments totaling $800 and $0 during the years
ended December 31, 1994 and 1995, respectively.
6. SHAREHOLDERS' EQUITY
The Company has stock option agreements with certain key employees and
consultants. Stock option activity and price information for these agreements
are as follows:
<TABLE>
<CAPTION>
NUMBER OF OPTION PRICE
SHARES PER SHARE
--------- ------------
<S> <C> <C>
Balance, January 1, 1994.................................. 70,000 $1.00-$1.25
Granted................................................. 35,000 $1.50
------
Balance, December 31, 1994 and 1995....................... 105,000 $1.00-$1.50
======
</TABLE>
At December 31, 1995, 85,000 options were exercisable under these
agreements.
7. COMMITMENTS AND CONTINGENCIES
The Company leases its primary operating and office premises under a
noncancelable operating lease expiring March 1996. Terms of this agreement
include fixed annual rental payment increases. Rent expense under this lease
totaled $30,000 and $52,300 for the years ended December 31, 1994 and 1995,
respectively.
Minimum future lease payments due under noncancelable operating leases are
$11,100 for the year ending December 31, 1996.
F-24
<PAGE> 83
[Photographs of products and store displays]
<PAGE> 84
- ------------------------------------------------------
- ------------------------------------------------------
NO DEALER, SALESPERSON OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS IN CONNECTION WITH THE OFFER CONTAINED HEREIN, AND, IF GIVEN OR MADE,
SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY THE COMPANY, ANY OF THE SELLING SHAREHOLDERS OR ANY OF THE
UNDERWRITERS. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER OF ANY SECURITIES
OTHER THAN THOSE TO WHICH IT RELATES OR AN OFFER TO SELL, OR A SOLICITATION OF
AN OFFER TO BUY, THOSE TO WHICH IT RELATES IN ANY STATE TO ANY PERSON TO WHOM IT
IS NOT LAWFUL TO MAKE SUCH OFFER IN SUCH STATE. THE DELIVERY OF THIS PROSPECTUS
AT ANY TIME DOES NOT IMPLY THAT THE INFORMATION HEREIN IS CORRECT AS OF ANY TIME
SUBSEQUENT TO ITS DATE.
------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary.................... 3
Risk Factors.......................... 7
The Company........................... 12
Use of Proceeds....................... 12
Dividend Policy....................... 12
Capitalization........................ 13
Dilution.............................. 14
Selected Financial Data............... 15
Pro Forma Financial Information....... 17
Management's Discussion and Analysis
of Financial Condition and Results
of Operations....................... 19
Business.............................. 28
Management............................ 40
Certain Transactions.................. 46
Principal and Selling Shareholders.... 50
Description of Capital Stock.......... 52
Shares Eligible for Future Sale....... 54
Underwriting.......................... 55
Legal Matters......................... 56
Experts............................... 56
Additional Information................ 56
Index to Consolidated Financial
Statements.......................... F-1
</TABLE>
------------------
UNTIL , 1996 (25 DAYS AFTER THE DATE OF THE OFFERING), ALL
DEALERS EFFECTING TRANSACTIONS IN THE COMMON STOCK, WHETHER OR NOT PARTICIPATING
IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS IS IN
ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN ACTING AS
UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
- ------------------------------------------------------
- ------------------------------------------------------
- ------------------------------------------------------
- ------------------------------------------------------
2,666,667 SHARES
[LOGO]
GARGOYLES, INC.
COMMON STOCK
------------
PROSPECTUS
, 1996
------------
SMITH BARNEY INC.
ROBERTSON, STEPHENS & COMPANY
- ------------------------------------------------------
- ------------------------------------------------------
<PAGE> 85
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the costs and expenses, other than
underwriting discounts and commissions, payable by the registrant and the
selling shareholders in connection with the sale of the Common Stock being
registered hereby. All amounts shown are estimates, except the Securities and
Exchange Commission registration fee, the NASD filing fee and the Nasdaq
National Market listing fee.
<TABLE>
<S> <C>
Securities and Exchange Commission registration fee....................... $ 15,863
NASD filing fee........................................................... 5,100
Nasdaq National Market listing fee........................................ 36,356
Blue Sky fees and expenses................................................ 10,000
Printing and engraving expenses........................................... 75,000
Legal fees and expenses................................................... 320,000
Accounting fees and expenses.............................................. 250,000
Directors and officers insurance.......................................... 122,682
Transfer Agent and Registrar fees......................................... 10,000
Miscellaneous expenses.................................................... 4,999
--------
Total........................................................... $850,000
========
</TABLE>
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Sections 23B.08.500 through 23B.08.600 of the Washington Business
Corporations Act authorize a court to award, or a corporation's board of
directors to grant, indemnification to directors and officers on terms
sufficiently broad to permit indemnification under certain circumstances for
liabilities arising under the Securities Act of 1933, as amended (the
"Securities Act"). Section 10 of the registrant's Bylaws (Exhibit 3.2 hereto)
provides for indemnification of the registrant's directors, officers, employees
and agents to the maximum extent permitted by Washington law. Certain of the
directors of the registrant, who are affiliated with principal shareholders of
the registrant, also may be indemnified by such shareholders against liability
they may incur in their capacities as directors of the registrant, including
pursuant to a liability insurance policy maintained by the registrant for such
purpose.
Section 23B.08.320 of the Washington Business Corporations Act authorizes a
corporation to limit a director's liability to the corporation or its
shareholders for monetary damages for acts or omissions as a director, except in
certain circumstances involving intentional misconduct, knowing violations of
law or illegal corporate loans or distributions, or any transaction from which
the director personally receives a benefit in money, property or services to
which the director is not legally entitled. Article 8 of the registrant's
Amended and Restated Articles of Incorporation (Exhibit 3.1 hereto) contains
provisions implementing, to the fullest extent permitted by Washington law, such
limitations on a director's liability to the registrant and its shareholders.
The registrant has entered into an indemnification agreement with each of
its directors in which the registrant agrees to hold harmless and indemnify the
director to the fullest extent permitted by Washington law. The registrant
agrees to indemnify the director against any and all losses, claims, damages,
liabilities or expenses incurred in connection with any actual, pending or
threatened action, suit, claim or proceeding, whether civil, criminal,
administrative or investigative and whether formal or informal, in which the
director is, was or becomes involved by reason of the fact that the director is
or was a director, officer, employee, trustee or agent of the registrant or any
related company, partnership, joint venture, trust or enterprise, including
service with respect to an employee benefit plan, whether the basis of such
proceeding is alleged action (or inaction) by the director in an official
capacity or in any other capacity while serving as a director, officer,
II-1
<PAGE> 86
employee, trustee or agent, other than an action, suit, claim or proceeding
instituted by or at the direction of the officer or director unless such action,
suit, claim or proceeding is or was authorized by the registrant's Board of
Directors. No indemnity pursuant to the indemnification agreements shall be
provided by the registrant on account of any suit in which a final, unappealable
judgment is rendered against the officer or director for an accounting of
profits made from the purchase or sale by the officer or director of securities
of the registrant in violation of the provisions of Section 16(b) of the
Securities Exchange Act of 1934, as amended, and amendments thereto, or for
damages that have been paid directly to the officer or director by an insurance
carrier under a policy of directors' and officers' liability insurance
maintained by the registrant.
The Underwriting Agreement (Exhibit 1.1 hereto) provides for
indemnification by the Underwriters of the registrant and its executive officers
and directors, and by the registrant of the Underwriters, for certain
liabilities, including liabilities arising under the Securities Act, in
connection with matters specifically provided in writing by the Underwriters for
inclusion in this Registration Statement.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
Since June 15, 1993, the registrant has issued and sold the following
unregistered securities:
1. On March 22, 1995, the registrant issued an aggregate of 3,516,003
shares of Common Stock to 15 investors for a consideration of $1.53 per
share or an aggregate of $5,387,498.
2. On January 12, 1996, in exchange for $56,000, the registrant issued
a warrant to purchase 41,020 shares of Common Stock exercisable at $4.26
per share to one investor. The expiration date for the warrant is December
8, 2005.
3. On February 13, 1996, the registrant issued an aggregate of 15,634
shares of Common Stock to two investors in consideration for certain
confidentiality and noncompetition convenants.
The sales and issuances of securities in the transactions described above
were deemed to be exempt from registration under the Securities Act principally
by virtue of Sections 3(b) and 4(2) thereof as transactions not involving any
public offering.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibits
<TABLE>
<S> <C>
1.1* Form of Underwriting Agreement
3.1(a) Amended and Restated Articles of Incorporation of the registrant currently
in effect
3.1(b) Form of Amended and Restated Articles of Incorporation of the registrant
to become effective prior to the closing of the Offering
3.2(a) Bylaws of the registrant currently in effect
3.2(b) Form of Bylaws of the registrant to become effective prior to the closing
of the Offering
5.1* Opinion of Perkins Coie regarding legality of shares
10.1+ Stock Purchase Agreement, dated as of March 14, 1995, among Gargoyles and
certain other parties
10.2 Indemnity Agreement, dated as of March 22, 1995, by Gargoyles, Inc., in
favor of Trillium Corporation
10.3 Amended and Restated Promissory Note, dated as of March 17, 1995, made by
Gargoyles, Inc. to Dennis Burns (the "Founder")
10.4 Guaranty, dated March 17, 1995, by Conquest Sports, Inc. (formerly
Pro-Tec, Inc.) for the benefit of the Founder
10.5 Guaranty by Gargoyles, Inc. for the benefit of the Founder
10.6 Nondisclosure, Noncompetition and Indemnity Agreement, dated as of March
22, 1995, among Gargoyles, Inc., Conquest Sports, Inc., Antone
Manufacturing, Inc. and the Founder
10.7 Credit Agreement, dated as of March 22, 1995, between U.S. Bank of
Washington, National Association and Gargoyles, Inc.
</TABLE>
II-2
<PAGE> 87
<TABLE>
<S> <C>
10.8 Revolving Note, dated March 22, 1995, made by Gargoyles, Inc. to U.S. Bank
of Washington, National Association
10.9 Term Note, dated March 22, 1995, made by Gargoyles, Inc. to U.S. Bank of
Washington, National Association
10.10 Security Agreement, dated March 22, 1995, between U.S. Bank of Washington,
National Association and Gargoyles, Inc.
10.11 Limited Guaranty, dated March 22, 1995, by Trillium Corporation for the
benefit of U.S. Bank of Washington, National Association
10.12 Third Party Pledge Agreement, dated March 22, 1995, by Trillium
Corporation for the benefit of U.S. Bank of Washington, National
Association
10.13 First Amendment to Credit Agreement, dated as of August 17, 1995, between
U.S. Bank of Washington, National Association and Gargoyles, Inc.
10.14 Renewal Revolving Note, dated August 17, 1995, made by Gargoyles, Inc. to
U.S. Bank of Washington, National Association
10.15 Second Amendment to Credit Agreement, dated as of December 15, 1995,
between U.S. Bank of Washington, National Association and Gargoyles, Inc.
10.16 Renewal Revolving Note, dated December 15, 1995, made by Gargoyles, Inc.
to U.S. Bank of Washington, National Association
10.17 Third Amendment to Credit Agreement, dated as of February 13, 1996,
between U.S. Bank of Washington, National Association and Gargoyles, Inc.
10.18 Renewal Revolving Note, dated February 13, 1996, made by Gargoyles, Inc.
to U.S. Bank of Washington, National Association
10.19 Acquisition Note, dated February 13, 1996, made by Gargoyles, Inc. to U.S.
Bank of Washington, National Association
10.20 Amended and Restated Limited Guaranty, dated as of February 13, 1996, by
Trillium Corporation for the benefit of U.S. Bank of Washington, National
Association
10.21 Pledge Agreement, dated as of February 13, 1996, by Gargoyles, Inc. for
the benefit of U.S. Bank of Washington, National Association
10.22 Third Party Pledge Agreement, dated as of February 13, 1996, by Trillium
Investors II, L.L.C. for the benefit of U.S. Bank of Washington, National
Association
10.23 Indemnity Agreement, dated as of February 13, 1996, by Gargoyles, Inc. and
Trillium Corporation
10.24 Stock Purchase Agreement, dated as of January 25, 1996, among Gargoyles,
Inc., H.S.C., Inc., Douglas B. Hauff, H.S.I., a California corporation,
dba Hobie Sunglasses and the Sellers listed therein
10.25 Industrial Real Estate Lease (Multi-Tenant Facility), dated October 12,
1995, between Gargoyles, Inc. and Cascade Investors
10.26 Industrial Real Estate Lease (Single Tenant Facility), dated December 16,
1993, between Gargoyles, Inc. and DB&D Partnership
10.27 Lease Amendment, dated as of March 17, 1995, between Gargoyles, Inc. and
DB&D Partnership
10.28 Agreement, dated April 5, 1996, between Gargoyles, Inc. and Master Sports
Equipment GmbH
10.29 Shareholders Agreement, dated as of March 22, 1995, among Gargoyles, Inc.,
Trillium Corporation, the Founder, Douglas Hauff and the other
Shareholders listed therein
10.30 Amendment to Shareholders Agreement, dated as of December 8, 1995, among
Gargoyles, Inc. and the Shareholders listed therein
10.31 Amendment to Shareholders Agreement, dated as of December 8, 1995, among
Gargoyles, Inc. and the Shareholders listed therein
10.32 Gargoyles, Inc. Common Stock Purchase Warrant, dated January 1996, between
Gargoyles, Inc. and Wally Walker
10.33 Amended and Restated Option Agreement, dated as of March 17, 1995, among
Gargoyles, Inc., the Founder and Douglas B. Hauff
10.34 Assignment and Assumption of Amended and Restated Option Agreement, dated
as of March 22, 1995, between the Founder and the Investors listed therein
</TABLE>
II-3
<PAGE> 88
<TABLE>
<S> <C>
10.35 Option Agreement, dated as of March 22, 1995, between Douglas Hauff and
the Investors listed therein
10.36+ Agreement, dated as of July 14, 1994, as amended by Amendment No. 1 dated
as of November 3, 1995, between Gargoyles, Inc. and Dale Earnhardt
10.37+ License Agreement, dated as of October 1995, as amended as of October 18,
1995, between Gargoyles, Inc. and Ken Griffey, Jr.
10.38 Employment Agreement, dated as of March 22, 1995, between Gargoyles, Inc.
and Douglas B. Hauff
10.39 Employment Agreement, dated as of March 22, 1995, between Gargoyles, Inc.
and Steven R. Kingma
10.40 Employment Agreement, dated as of November 1, 1995, between Gargoyles,
Inc. and G. Travis Worth
10.41 Employment Agreement, dated as of March 22, 1995, between Gargoyles, Inc.
and David W. Jobe
10.42 Form of Indemnity Agreement between Gargoyles, Inc. and each of its
directors
10.43* 1995 Amended and Restated Stock Incentive Compensation Plan
10.44 Form of Equipment Note made by Gargoyles, Inc. to U.S. Bank of Washington,
National Association
10.45 Guaranty, dated as of March 7, 1995, by Gargoyles, Inc. to and for the
benefit of Trillium Corporation
10.46 Retail License Agreement, dated August 7, 1995, between Warner Bros.
Division of Time Warner Entertainment Company L.P. and Gargoyles, Inc., as
amended
10.47 Amended and Restated Agreement Regarding Claim Rights, dated July 3, 1996,
by and between the Founder, Gargoyles, Inc. and Conquest Sports, Inc.
10.48+ Settlement Agreement and General Release, dated as of April 12, 1995
10.49+ Trademark License Agreement dated as of April 12, 1995
10.50 Agreement for Purchase of Common Stock, dated as of May 17, 1996, among
Gargoyles, Inc., The Timberland Company, Douglas W. Lauer and the kindling
company (formerly The D.W. Lauer Company)
10.51 Promissory Note, dated May 17, 1996, made by Gargoyles, Inc. to the
kindling company
10.52 Contingent Demand Note, dated May 17, 1996, made by Gargoyles, Inc. to the
kindling company
10.53 Employment Agreement, effective as of May 17, 1996, between Douglas W.
Lauer and the kindling company
10.54 Investor Rights Agreement, dated as of May 17, 1996, among The D.W. Lauer
Company, Douglas W. Lauer, Gargoyles, Inc. and The Timberland Company
10.55+ License Agreement, dated as of May 17, 1996, among The Timberland Company,
Gargoyles, Inc. and the kindling company
10.56 Incentive Pool Agreement, effective as of May 17, 1996, between Gargoyles,
Inc. and Douglas W. Lauer
10.57 License Agreement, effective January 1, 1989, between Hobie Designs, Inc.
and H.S.I.
10.58+ License Agreement, dated as of June 1996, between Scottie Pippen and
Gargoyles, Inc.
10.59+ License Agreement, dated as of May 31, 1996, among Ixela, Inc., Alexi
Lalas and Gargoyles, Inc.
10.60 Fourth Amendment to Credit Agreement, dated as of March 15, 1996, between
U.S. Bank of Washington, National Association and Gargoyles, Inc.
10.61 Promissory Note, dated June 5, 1996, made by Gargoyles, Inc. to Trillium
Corporation
10.62 Fifth Amendment to Credit Agreement, dated as of June 25, 1996, between
U.S. Bank of Washington, National Association and Gargoyles, Inc.
10.63 Renewal Revolving Note, dated June 25, 1996, made by Gargoyles, Inc. to
U.S. Bank of Washington, National Association
10.64 Renewal Acquisition Note, dated June 25, 1996, made by Gargoyles, Inc. to
U.S. Bank of Washington, National Association
11.1 Computation of pro forma net income (loss) per share
</TABLE>
II-4
<PAGE> 89
<TABLE>
<S> <C>
16.1 Letter regarding change in accountants
21.1 Subsidiaries of the registrant
23.1 Consent of Ernst & Young LLP, Independent Accountants (contained on page
II-8)
23.2* Consent of Perkins Coie (contained in the opinion filed as Exhibit 5.1
hereto)
24.1 Power of Attorney (contained on signature page)
27.1 Financial Data Schedule
</TABLE>
- ---------------
+ Confidential Treatment Requested.
* To be filed by Amendment.
(b) Financial Statement Schedules
All schedules are omitted because they are inapplicable or the requested
information is shown in the consolidated financial statements of the registrant
or related notes thereto.
ITEM 17. UNDERTAKINGS
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
registrant pursuant to the provisions described in Item 14, or otherwise, the
registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the
Securities Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a director, officer or controlling
person of the registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question of whether such
indemnification by it is against public policy as expressed in the Securities
Act and will be governed by the final adjudication of such issue.
The undersigned registrant hereby undertakes to provide to the Underwriters
at the closing specified in the Underwriting Agreement, certificates in such
denominations and registered in such names as required by the Underwriters to
permit prompt delivery to each purchaser.
The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act, the
information omitted from the form of prospectus filed as part of this
Registration Statement in reliance upon Rule 430A and contained in a form of
prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or 497(h)
under the Securities Act shall be deemed to be part of this Registration
Statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities Act,
each post-effective amendment that contains a form of prospectus shall be deemed
to be a new registration statement relating to the securities offered therein,
and the offering of such securities at that time shall be deemed to be the
initial bona fide offering thereof.
II-5
<PAGE> 90
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
registrant has duly caused this Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of Seattle,
State of Washington, on the 2nd day of July, 1996.
GARGOYLES, INC.
By: /s/ DOUGLAS B. HAUFF
------------------------------------
Douglas B. Hauff, President
and Chief Executive Officer
POWER OF ATTORNEY
Each person whose individual signature appears below hereby authorizes and
appoints Douglas B. Hauff and Steven R. Kingma, and each of them, with full
power of substitution and resubstitution and full power to act without the
other, as his true and lawful attorney-in-fact and agent to act in his name,
place and stead and to execute in the name and on behalf of each person,
individually and in each capacity stated below, and to file, any and all
amendments to this Registration Statement, including any and all post-effective
amendments and amendments thereto and any registration statement relating to the
same offering as this Registration Statement that is to be effective upon filing
pursuant to Rule 462(b) under the Securities Act of 1933, and to file the same,
with all exhibits thereto, and other documents in connection therewith, with the
Securities and Exchange Commission, granting unto said attorneys-in-fact and
agents, and each of them, full power and authority to do and perform each and
every act and thing, ratifying and confirming all that said attorneys-in-fact
and agents or any of them or their and his substitute or substitutes, may
lawfully do or cause to be done by virtue thereof.
Pursuant to the requirements of the Securities Act of 1933, as amended,
this Registration Statement has been signed by the following persons in the
capacities indicated below on the 2nd day of July, 1996.
<TABLE>
<CAPTION>
SIGNATURE TITLE
- --------------------------------------------- ----------------------------------------------
<C> <S>
/s/ DOUGLAS B. HAUFF President, Chief Executive Officer and
- --------------------------------------------- Director (Principal Executive Officer)
Douglas B. Hauff
/s/ STEVEN R. KINGMA Vice President, Chief Financial Officer,
- --------------------------------------------- Secretary and Treasurer (Principal Financial
Steven R. Kingma and Accounting Officer)
/s/ ERIK J. ANDERSON Chairman of the Board
- ---------------------------------------------
Erik J. Anderson
</TABLE>
II-6
<PAGE> 91
<TABLE>
<CAPTION>
SIGNATURE TITLE
- --------------------------------------------- ----------------------------------------------
<C> <S>
/s/ TIMOTHY C. POTTS Director
- ---------------------------------------------
Timothy C. Potts
/s/ PAUL S. SHIPMAN Director
- ---------------------------------------------
Paul S. Shipman
/s/ WALTER F. WALKER Director
- ---------------------------------------------
Walter F. Walker
</TABLE>
II-7
<PAGE> 92
EXHIBIT 23.1
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the references to our firm under the captions "Selected
Financial Data" and "Experts" and to the use of our reports dated June 14, 1996,
except for the second paragraph of Note 13, as to which the date is
, 1996 with respect to Gargoyles, Inc. and June 14, 1996 with
respect to H.S.I. d/b/a Hobie Sunglasses in the Registration Statement (Form
S-1) and related Prospectus of Gargoyles, Inc. for the registration of 3,066,667
shares of its Common Stock.
ERNST & YOUNG LLP
Seattle, Washington
, 1996
- --------------------------------------------------------------------------------
The foregoing consent is in the form that will be signed upon the
completion of the stock dividend described in Note 13 to the consolidated
financial statements.
ERNST & YOUNG LLP
Seattle, Washington
July 3, 1996
II-8
<PAGE> 93
EXHIBIT INDEX
<TABLE>
<CAPTION>
SEQUENTIALLY
NUMBERED
EXHIBITS DESCRIPTION PAGE
- -------- ------------------------------------------------------------------------ ------------
<C> <S> <C>
1.1* Form of Underwriting Agreement
3.1(a) Amended and Restated Articles of Incorporation of the registrant
currently in effect.....................................................
3.1(b) Form of Amended and Restated Articles of Incorporation of the registrant
to become effective prior to the closing of the Offering................
3.2(a) Bylaws of the registrant currently in effect............................
3.2(b) Form of Bylaws of the registrant to become effective prior to the
closing of the Offering.................................................
5.1* Opinion of Perkins Coie regarding legality of shares....................
10.1+ Stock Purchase Agreement, dated as of March 14, 1995, among Gargoyles
and certain other parties...............................................
10.2 Indemnity Agreement, dated as of March 22, 1995, by Gargoyles, Inc., in
favor of Trillium Corporation...........................................
10.3 Amended and Restated Promissory Note, dated as of March 17, 1995, made
by Gargoyles, Inc. to Dennis Burns (the "Founder")......................
10.4 Guaranty, dated March 17, 1995, by Conquest Sports, Inc. (formerly
Pro-Tec, Inc.) for the benefit of the Founder...........................
10.5 Guaranty by Gargoyles, Inc. for the benefit of the Founder..............
10.6 Nondisclosure, Noncompetition and Indemnity Agreement, dated as of March
22, 1995, among Gargoyles, Inc., Conquest Sports, Inc., Antone
Manufacturing, Inc. and the Founder.....................................
10.7 Credit Agreement, dated as of March 22, 1995, between U.S. Bank of
Washington, National Association and Gargoyles, Inc.....................
10.8 Revolving Note, dated March 22, 1995, made by Gargoyles, Inc. to U.S.
Bank of Washington, National Association................................
10.9 Term Note, dated March 22, 1995, made by Gargoyles, Inc. to U.S. Bank of
Washington, National Association........................................
10.10 Security Agreement, dated March 22, 1995, between U.S. Bank of
Washington, National Association and Gargoyles, Inc.....................
10.11 Limited Guaranty, dated March 22, 1995, by Trillium Corporation for the
benefit of U.S. Bank of Washington, National Association................
10.12 Third Party Pledge Agreement, dated March 22, 1995, by Trillium
Corporation for the benefit of U.S. Bank of Washington, National
Association.............................................................
10.13 First Amendment to Credit Agreement, dated as of August 17, 1995,
between U.S. Bank of Washington, National Association and Gargoyles,
Inc.....................................................................
10.14 Renewal Revolving Note, dated August 17, 1995, made by Gargoyles, Inc.
to U.S. Bank of Washington, National Association........................
10.15 Second Amendment to Credit Agreement, dated as of December 15, 1995,
between U.S. Bank of Washington, National Association and Gargoyles,
Inc.....................................................................
10.16 Renewal Revolving Note, dated December 15, 1995, made by Gargoyles, Inc.
to U.S. Bank of Washington, National Association........................
10.17 Third Amendment to Credit Agreement, dated as of February 13, 1996,
between U.S. Bank of Washington, National Association and Gargoyles,
Inc.....................................................................
</TABLE>
<PAGE> 94
<TABLE>
<CAPTION>
SEQUENTIALLY
NUMBERED
EXHIBITS DESCRIPTION PAGE
- -------- ------------------------------------------------------------------------ ------------
<C> <S> <C>
10.18 Renewal Revolving Note, dated February 13, 1996, made by Gargoyles, Inc.
to U.S. Bank of Washington, National Association........................
10.19 Acquisition Note, dated February 13, 1996, made by Gargoyles, Inc. to
U.S. Bank of Washington, National Association...........................
10.20 Amended and Restated Limited Guaranty, dated as of February 13, 1996, by
Trillium Corporation for the benefit of U.S. Bank of Washington,
National Association....................................................
10.21 Pledge Agreement, dated as of February 13, 1996, by Gargoyles, Inc. for
the benefit of U.S. Bank of Washington, National Association............
10.22 Third Party Pledge Agreement, dated as of February 13, 1996, by Trillium
Investors II, L.L.C. for the benefit of U.S. Bank of Washington,
National Association....................................................
10.23 Indemnity Agreement, dated as of February 13, 1996, by Gargoyles, Inc.
and Trillium Corporation................................................
10.24 Stock Purchase Agreement, dated as of January 25, 1996, among Gargoyles,
Inc., H.S.C., Inc., Douglas B. Hauff, H.S.I., a California corporation,
dba Hobie Sunglasses and the Sellers listed therein.....................
10.25 Industrial Real Estate Lease (Multi-Tenant Facility), dated October 12,
1995, between Gargoyles, Inc. and Cascade Investors.....................
10.26 Industrial Real Estate Lease (Single Tenant Facility), dated December
16, 1993, between Gargoyles, Inc. and DB&D Partnership..................
10.27 Lease Amendment, dated as of March 17, 1995, between Gargoyles, Inc. and
DB&D Partnership........................................................
10.28 Agreement, dated April 5, 1996, between Gargoyles, Inc. and Master
Sports Equipment GmbH...................................................
10.29 Shareholders Agreement, dated as of March 22, 1995, among Gargoyles,
Inc., Trillium Corporation, the Founder, Douglas Hauff and the other
Shareholders listed therein.............................................
10.30 Amendment to Shareholders Agreement, dated as of December 8, 1995, among
Gargoyles, Inc. and the Shareholders listed therein.....................
10.31 Amendment to Shareholders Agreement, dated as of December 8, 1995, among
Gargoyles, Inc. and the Shareholders listed therein.....................
10.32 Gargoyles, Inc. Common Stock Purchase Warrant, dated January 1996,
between Gargoyles, Inc. and Wally Walker................................
10.33 Amended and Restated Option Agreement, dated as of March 17, 1995, among
Gargoyles, Inc., the Founder and Douglas B. Hauff.......................
10.34 Assignment and Assumption of Amended and Restated Option Agreement,
dated as of March 22, 1995, between the Founder and the Investors listed
therein.................................................................
10.35 Option Agreement, dated as of March 22, 1995, between Douglas Hauff and
the Investors listed therein............................................
10.36+ Agreement, dated as of July 14, 1994, as amended by Amendment No. 1
dated as of November 3, 1995, between Gargoyles, Inc. and Dale
Earnhardt...............................................................
10.37+ License Agreement, dated as of October 1995, as amended as of October
18, 1995, between Gargoyles, Inc. and Ken Griffey, Jr...................
</TABLE>
<PAGE> 95
<TABLE>
<CAPTION>
SEQUENTIALLY
NUMBERED
EXHIBITS DESCRIPTION PAGE
- -------- ------------------------------------------------------------------------ ------------
<C> <S> <C>
10.38 Employment Agreement, dated as of March 22, 1995, between Gargoyles,
Inc. and Douglas B. Hauff...............................................
10.39 Employment Agreement, dated as of March 22, 1995, between Gargoyles,
Inc. and Steven R. Kingma...............................................
10.40 Employment Agreement, dated as of November 1, 1995, between Gargoyles,
Inc. and G. Travis Worth................................................
10.41 Employment Agreement, dated as of March 22, 1995, between Gargoyles,
Inc. and David W. Jobe..................................................
10.42 Form of Indemnity Agreement between Gargoyles, Inc. and each of its
directors...............................................................
10.43* 1995 Amended and Restated Stock Incentive Compensation Plan.............
10.44 Form of Equipment Note made by Gargoyles, Inc. to U.S. Bank of
Washington, National Association........................................
10.45 Guaranty, dated as of March 7, 1995, by Gargoyles, Inc. to and for the
benefit of Trillium Corporation.........................................
10.46 Retail License Agreement, dated August 7, 1995, between Warner Bros.
Division of Time Warner Entertainment Company L.P. and Gargoyles, Inc.,
as amended..............................................................
10.47 Amended and Restated Agreement Regarding Claim Rights, dated July 3,
1996, by and between the Founder, Gargoyles, Inc. and Conquest Sports,
Inc.....................................................................
10.48+ Settlement Agreement and General Release, dated as of April 12, 1995....
10.49+ Trademark License Agreement dated as of April 12, 1995..................
10.50 Agreement for Purchase of Common Stock, dated as of May 17, 1996, among
Gargoyles, Inc., The Timberland Company, Douglas W. Lauer and the
kindling company (formerly The D.W. Lauer Company)......................
10.51 Promissory Note, dated May 17, 1996, made by Gargoyles, Inc. to the
kindling company........................................................
10.52 Contingent Demand Note, dated May 17, 1996, made by Gargoyles, Inc. to
the kindling company....................................................
10.53 Employment Agreement, effective as of May 17, 1996, between Douglas W.
Lauer and the kindling company..........................................
10.54 Investor Rights Agreement, dated as of May 17, 1996, among The D.W.
Lauer Company, Douglas W. Lauer, Gargoyles, Inc. and The Timberland
Company.................................................................
10.55+ License Agreement, dated as of May 17, 1996, among The Timberland
Company, Gargoyles, Inc. and the kindling company.......................
10.56 Incentive Pool Agreement, effective as of May 17, 1996, between
Gargoyles, Inc. and Douglas W. Lauer....................................
10.57 License Agreement, effective January 1, 1989, between Hobie Designs,
Inc. and H.S.I..........................................................
10.58+ License Agreement, dated as of June 1996, between Scottie Pippen and
Gargoyles, Inc..........................................................
10.59+ License Agreement, dated as of May 31, 1996, among Ixela, Inc., Alexi
Lalas and Gargoyles, Inc................................................
10.60 Fourth Amendment to Credit Agreement, dated as of March 15, 1996,
between U.S. Bank of Washington, National Association and Gargoyles,
Inc.....................................................................
</TABLE>
<PAGE> 96
<TABLE>
<CAPTION>
SEQUENTIALLY
NUMBERED
EXHIBITS DESCRIPTION PAGE
- -------- ------------------------------------------------------------------------ ------------
<C> <S> <C>
10.61 Promissory Note, dated June 5, 1996, made by Gargoyles, Inc. to Trillium
Corporation.............................................................
10.62 Fifth Amendment to Credit Agreement, dated as of June 25, 1996, between
U.S. Bank of Washington, National Association and Gargoyles, Inc........
10.63 Renewal Revolving Note, dated June 25, 1996, made by Gargoyles, Inc. to
U.S. Bank of Washington, National Association...........................
10.64 Renewal Acquisition Note, dated June 25, 1996, made by Gargoyles, Inc.
to U.S. Bank of Washington, National Association........................
11.1 Computation of pro forma net income (loss) per share....................
16.1 Letter regarding change in accountants..................................
21.1 Subsidiaries of the registrant..........................................
23.1 Consent of Ernst & Young LLP, Independent Accountants (contained on page
II-8)...................................................................
23.2* Consent of Perkins Coie (contained in the opinion filed as Exhibit 5.1
hereto).................................................................
24.1 Power of Attorney (contained on signature page).........................
27.1 Financial Data Schedule.................................................
</TABLE>
- ---------------
+ Confidential Treatment Requested.
* To be filed by Amendment.
<PAGE> 1
Exhibit 3.1(a)
RESTATED ARTICLES OF INCORPORATION
OF
GARGOYLES, INC.
ARTICLE 1. NAME
The name of this corporation is Gargoyles, Inc.
ARTICLE 2. SHARES
The total number of shares which the corporation is authorized to issue
is 4,000,000, consisting of 2,000,000 shares of Common Stock without par value
and 2,000,000 shares of Preferred Stock without par value.
ARTICLE 3. PREEMPTIVE RIGHTS
No preemptive rights shall exist with respect to shares of stock or
securities convertible into shares of stock of this corporation.
ARTICLE 4. CUMULATIVE VOTING
The right to cumulate votes in the election of Directors shall not
exist with respect to shares of stock of this corporation.
ARTICLE 5. BYLAWS
The Board of Directors shall have the power to adopt, amend or repeal
the Bylaws of this corporation, subject to the power of the shareholders to
amend or repeal such Bylaws. The shareholders shall also have the power to amend
or repeal the Bylaws of this corporation and to adopt new Bylaws.
ARTICLE 6. DIRECTORS
The number of Directors of this corporation shall be determined in the
manner provided by the Bylaws and may be increased or decreased from time to
time in the manner provided therein.
ARTICLE 7. LIMITATION OF DIRECTOR LIABILITY
To the full extent that the Washington Business Corporation Act, as it
exists on the date hereof or may hereafter be amended, permits the limitation or
elimination of
<PAGE> 2
the liability of Directors, a Director of this corporation shall not be liable
to this corporation or its shareholders for monetary damages for conduct as a
Director. Any amendments to or repeal of this Article 7 shall not adversely
affect any right or protection of a Director of this corporation for or with
respect to any acts or omissions of such Director occurring prior to such
amendment of repeal.
ARTICLE 8. AMENDMENTS TO ARTICLES OF INCORPORATION
This corporation reserves the right to amend or repeal any of the
provisions contained in these Articles of Incorporation in any manner now or
hereafter permitted by law, and the rights of the shareholders of this
corporation are granted subject to this reservation. The Articles of
Incorporation may also be amended by unanimous written consent of the
shareholders of the corporation.
Dated: July 26, 1995
GARGOYLES, INC.
By: /s/ Douglas B. Hauff
---------------------------
Douglas B. Hauff, President
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<PAGE> 1
Exhibit 3.1(b)
RESTATED ARTICLES OF INCORPORATION
OF
GARGOYLES, INC.
Pursuant to RCW 23B.10.070, the following constitutes Restated Articles
of Incorporation of the undersigned, a Washington corporation.
ARTICLE 1. NAME
The name of this corporation is Gargoyles, Inc.
ARTICLE 2. SHARES
2.1 AUTHORIZED CAPITAL
The total number of shares which this corporation is authorized to
issue is Fifty Million (50,000,000), consisting of Forty Million (40,000,000)
shares of Common Stock without par value and Ten Million (10,000,000) shares of
Preferred Stock without par value. The Common Stock is subject to the rights and
preferences of the Preferred Stock as hereinafter set forth.
2.2 ISSUANCE OF PREFERRED STOCK IN SERIES
The Preferred Stock may be issued from time to time in one or more
series in any manner permitted by law and the provisions of these Articles of
Incorporation of this corporation, as determined from time to time by the Board
of Directors and stated in the resolution or resolutions providing for the
issuance thereof, prior to the issuance of any shares thereof. The Board of
Directors shall have the authority to fix and determine and to amend, subject to
the provisions hereof, the designation, preferences, limitations and relative
rights of the shares of any series that is wholly unissued or to be established.
Unless otherwise specifically provided in the resolution establishing any
series, the Board of Directors shall further have the authority, after the
issuance of shares of a series whose number it has designated, to amend the
resolution establishing such series to decrease the number of shares of that
series, but not below the number of shares of such series then outstanding.
2.3 DIVIDENDS
The holders of shares of the Preferred Stock shall be entitled to
receive dividends, out of the funds of this corporation legally available
therefor, at the rate and at the time or times, whether cumulative or
noncumulative, as may be provided by the Board of Directors in designating a
particular series of Preferred Stock. If such dividends on the Preferred Stock
shall be cumulative, then if dividends shall not have
<PAGE> 2
been paid, the deficiency shall be fully paid or the dividends declared and set
apart for payment at such rate, but without interest on cumulative dividends,
before any dividends on the Common Stock shall be paid or declared and set apart
for payment. The holders of the Preferred Stock shall not be entitled to receive
any dividends thereon other than the dividends referred to in this section.
2.4 REDEMPTION
The Preferred Stock may be redeemable at such price, in such amount,
and at such time or times as may be provided by the Board of Directors in
designating a particular series of Preferred Stock. In any event, such Preferred
Stock may be repurchased by this corporation to the extent legally permissible.
2.5 LIQUIDATION
In the event of any liquidation, dissolution, or winding up of the
affairs of this corporation, whether voluntary or involuntary, then, before any
distribution shall be made to the holders of the Common Stock, the holders of
the Preferred Stock at the time outstanding shall be entitled to be paid the
preferential amount or amounts per share as may be provided by the Board of
Directors in designating a particular series of Preferred Stock and dividends
accrued thereon to the date of such payment. The holders of the Preferred Stock
shall not be entitled to receive any distributive amounts upon the liquidation,
dissolution, or winding up of the affairs of this corporation other than the
distributive amounts referred to in this section, unless otherwise provided by
the Board of Directors in designating a particular series of Preferred Stock.
2.6 CONVERSION
Shares of Preferred Stock may be convertible into Common Stock of this
corporation upon such terms and conditions, at such rate and subject to such
adjustments as may be provided by the Board of Directors in designating a
particular series of Preferred Stock.
2.7 VOTING RIGHTS
Holders of Preferred Stock shall have such voting rights as may be
provided by the Board of Directors in designating a particular series of
Preferred Stock.
ARTICLE 3. PREEMPTIVE RIGHTS
No preemptive rights shall exist with respect to shares of stock or
securities convertible into shares of stock of this corporation.
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<PAGE> 3
ARTICLE 4. CUMULATIVE VOTING
The right to cumulate votes in the election of Directors shall not
exist with respect to shares of stock of this corporation.
ARTICLE 5. DIRECTORS
At the first election of Directors following the first primary, public
offering of equity securities by this corporation pursuant to a registration
statement filed with the Securities and Exchange Commission under the Securities
Act of 1933, as amended, the Board of Directors shall be divided into three
classes, with said classes to be as equal in number as may be possible. At the
first election of Directors to such classified Board of Directors, each Class 1
Director shall be elected to serve until the next ensuing annual meeting of
shareholders, each Class 2 Director shall be elected to serve until the second
ensuing annual meeting of shareholders and each Class 3 Director shall be
elected to serve until the third ensuing annual meeting of shareholders. At each
annual meeting of shareholders following the meeting at which the Board of
Directors is initially classified, the number of Directors equal to the number
of Directors in the class whose term expires at the time of such meeting shall
be elected to serve until the third ensuing annual meeting of shareholders;
provided, however, that, if necessary to maintain relative equality among the
classes of Directors created due to vacancies or removals of Directors,
Directors may be elected to a class whose term expires prior to such third
ensuing annual meeting of shareholders. Notwithstanding any of the foregoing
provisions of this Article, Directors shall serve until their successors are
elected and qualified or until their earlier death, resignation or removal from
office, or until there is a decrease in the number of Directors.
The Directors of this corporation may be removed only for cause by the
holders of not less than two-thirds of the shares entitled to elect the Director
or Directors whose removal is sought in the manner provided by the Bylaws.
ARTICLE 6. BYLAWS
The Board of Directors shall have the power to adopt, amend or repeal
the Bylaws of this corporation, subject to approval by a majority of the
Continuing Directors (as defined in Article 10); provided, however, that the
Board of Directors may not repeal or amend any bylaw that the shareholders have
expressly provided may not be amended or repealed by the Board of Directors. The
shareholders shall also have the power to adopt, amend or repeal the Bylaws of
this corporation by the affirmative vote of the holders of not less than
two-thirds of the outstanding shares and, to the extent, if any, provided by
resolution or resolutions of the Board of
-3-
<PAGE> 4
Directors providing for the issuance of a series of Common or Preferred Stock,
not less than two-thirds of the outstanding shares entitled to vote thereon,
voting as a class.
ARTICLE 7. AMENDMENTS TO ARTICLES OF INCORPORATION
This corporation reserves the right to amend or repeal, by the
affirmative vote of the holders of a majority of the outstanding shares and, to
the extent, if any, provided by resolution or resolutions of the Board of
Directors providing for the issuance of a series of Common or Preferred stock,
majority of the outstanding shares entitled to vote thereon, voting as a class,
any of the provisions contained in these Articles of Incorporation; provided,
however, that amendment or repeal of Article 5, Article 6, Article 7, Article 9,
or Article 10 shall require the affirmative vote of the holders of two-thirds of
the outstanding shares. The rights of the shareholders of this corporation are
granted subject to this reservation.
ARTICLE 8. LIMITATION OF DIRECTOR LIABILITY
To the full extent that the Washington Business Corporation Act, as it
exists on the date hereof or may hereafter be amended, permits the limitation or
elimination of the liability of Directors, a Director of this corporation shall
not be liable to this corporation or its shareholders for monetary damages for
conduct as a Director. Any amendments to or repeal of this Article 8 shall not
adversely affect any right or protection of a Director of this corporation for
or with respect to any acts or omissions of such Director occurring prior to
such amendment or repeal.
ARTICLE 9. SPECIAL MEETINGS OF SHAREHOLDERS
Special meetings of the shareholders may be called in the manner
provided by the Bylaws of this corporation; provided, however, that upon
qualification of the corporation as a "public company" under Title 23B RCW the
percentage of votes required to call a special meeting shall be twenty-five
percent (25%).
ARTICLE 10. SPECIAL VOTING REQUIREMENTS
In addition to any affirmative vote required by law, by these Restated
Articles of Incorporation or otherwise, any "Business Combination" (as
hereinafter defined) involving this corporation shall be subject to approval in
the manner set forth in this Article 10.
10.1 DEFINITIONS
For the purposes of this Article 10:
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<PAGE> 5
(a) "Business Combination" means (i) a merger, share exchange or
consolidation of this corporation or any of its Subsidiaries
with any other corporation; (ii) the sale, lease, exchange,
mortgage, pledge, transfer or other disposition or
encumbrance, whether in one transaction or a series of
transactions, by this corporation or any of its Subsidiaries
of all or a substantial part of this corporation's assets
otherwise than in the usual and regular course of business; or
(iii) any agreement, contract or other arrangement providing
for any of the foregoing transactions.
(b) "Continuing Director" means any member of the Board of
Directors who was a member of the Board of Directors on July
1, 1996 or who is elected to the Board of Directors after July
1, 1996 upon the recommendation of a majority of the
Continuing Directors voting separately and as a subclass of
Directors on such recommendation.
(c) "Subsidiary" means a domestic or foreign corporation, a
majority of the outstanding voting shares of which are owned,
directly or indirectly, by this corporation.
10.2 VOTE REQUIRED FOR BUSINESS COMBINATIONS
10.2.1 SUPERMAJORITY VOTE
Except as provided in subsections 10.2.2 and 10.2.3 hereof,
the affirmative vote of the holders of not less than two-thirds of the
outstanding shares entitled to vote thereon and, to the extent, if any, provided
by resolution adopted by the Board of Directors authorizing the issuance of a
class or series of Common Stock or Preferred Stock, the affirmative vote of the
holders of not less than two-thirds of the outstanding shares of such class or
series, voting as a separate voting group, shall be required for the adoption or
authorization of a Business Combination.
10.2.2 MAJORITY VOTE
Notwithstanding subsection 10.2.1 hereof, if a Business
Combination shall have been approved by a majority of the Continuing Directors,
voting separately and as a subclass of Directors, and if such Business
Combination is otherwise required to be approved by this corporation's
shareholders pursuant to the provisions of the Washington Business Corporation
Act or of these Restated Articles of Incorporation other than this Article 10,
then the affirmative vote of the holders of not less than a majority of the
outstanding shares entitled to vote thereon and, to the extent, if any, provided
by resolution adopted by the Board of Directors authorizing the issuance of a
class or series of Common Stock or Preferred Stock, the affirmative vote of the
holders of not less than a majority of the outstanding shares of such class
-5-
<PAGE> 6
or series, voting as a separate voting group, shall be required for the adoption
or authorization of such Business Combination.
10.2.3 NO SHAREHOLDER VOTE
Notwithstanding subsection 10.2.1 or 10.2.2 hereof, if a
Business Combination shall have been approved by a majority of the Continuing
Directors, voting separately and as a subclass of Directors, and if such
Business Combination is not otherwise required to be approved by this
corporation's shareholders pursuant to the provisions of the Washington Business
Corporation Act or of these Restated Articles of Incorporation other than this
Article 10, then no vote of the shareholders of this corporation shall be
required for approval of such Business Combination.
These Restated Articles of Incorporation are executed by said
corporation by its duly authorized officer.
DATED: , 1996
--------------
GARGOYLES, INC.
By:
-----------------------------
Douglas B. Hauff, President
-6-
<PAGE> 1
Exhibit 3.2(a)
AMENDED AND RESTATED BYLAWS
OF
GARGOYLES, INC.
SECTION 1. OFFICES
The principal office of the corporation shall be located at the
principal place of business or such other place as the Board of Directors (the
"Board") may designate. The corporation may have such other offices, either
within or without the State of Washington, as the Board may designate or as the
business of the corporation may require from time to time.
SECTION 2. SHAREHOLDERS
2.1 ANNUAL MEETING
The annual meeting of the shareholders shall be held the second Tuesday
in April of each year at the registered office of the corporation, or at such
other place as may be designated in the notice of meeting, for the purpose of
electing Directors and transacting such other business as may properly come
before the meeting. If the day fixed for the annual meeting is a legal holiday
at the place of the meeting, the meeting shall be held on the next succeeding
business day.
2.2 SPECIAL MEETINGS
The Chairman of the Board, the President or the Board may call special
meetings of the shareholders for any purpose. Further, a special meeting of the
shareholders shall be held if the holders of not less than 20% of all the votes
entitled to be cast on any issue proposed to be considered at such special
meeting have dated, signed and delivered to the Secretary one or more written
demands for such meeting, describing the purpose or purposes for which it is to
be held.
2.3 MEETINGS BY COMMUNICATION EQUIPMENT
Shareholders may participate in any meeting of the shareholders by any
means of communication by which all persons participating in the meeting can
hear each other during the meeting. Participation by such means shall constitute
presence in person at a meeting.
2.4 DATE, TIME AND PLACE OF MEETING
Except as otherwise provided herein, all meetings of shareholders,
including those held pursuant to demand by shareholders as provided herein,
shall be held on such date and at such
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<PAGE> 2
time and place, within or without the State of Washington, designated by or at
the direction of the Board.
2.5 NOTICE OF MEETING
Written notice stating the place, day and hour of the meeting and, in
the case of a special meeting, the purpose or purposes for which the meeting is
called shall be given by or at the direction of the Board, the Chairman of the
Board, the President or the Secretary to each shareholder entitled to notice of
or to vote at the meeting not less than 10 nor more than 60 days before the
meeting, except that notice of a meeting to act on an amendment to the Articles
of Incorporation, as at any time amended, a plan of merger or share exchange,
the sale, lease, exchange or other disposition of all or substantially all of
the corporation's assets other than in the regular course of business or the
dissolution of the corporation shall be given not less than 20 nor more than 60
days before such meeting. Such notice may be transmitted by mail, private
carrier, personal delivery, telegraph, teletype or communications equipment
which transmits a facsimile of the notice to like equipment which receives and
reproduces such notice. If these forms of written notice are impractical in the
view of the Board, the Chairman of the Board, the President or the Secretary,
written notice may be transmitted by an advertisement in a newspaper of general
circulation in the area of the corporation's principal office. If such notice is
mailed, it shall be deemed effective when deposited in the official government
mail, first-class postage prepaid, properly addressed to the shareholder at such
shareholder's address as it appears in the corporation's current record of
shareholders. Notice given in any other manner shall be deemed effective when
dispatched to the shareholder's address, telephone number or other number
appearing on the records of the corporation. Any notice given by publication as
herein provided shall be deemed effective five days after first publication.
2.6 WAIVER OF NOTICE
Whenever any notice is required to be given to any shareholder under
the provisions of these Amended and Restated Bylaws, the Articles of
Incorporation, as at any time amended, or the Washington Business Corporation
Act, a waiver thereof in writing, signed by the person or persons entitled to
such notice and delivered to the corporation, whether before or after the date
and time of the meeting, shall be deemed equivalent to the giving of such
notice. Further, notice of the time, place and purpose of any meeting will be
deemed to be waived by any shareholder by attendance thereat in person or by
proxy, unless such shareholder at the beginning of the meeting objects to
holding the meeting or transacting business at the meeting.
2.7 FIXING OF RECORD DATE FOR DETERMINING SHAREHOLDERS
For the purpose of determining shareholders entitled (a) to notice of
or to vote at any meeting of shareholders or any adjournment thereof, (b) to
demand a special meeting, or (c) to receive payment of any dividend, or in order
to make a determination of shareholders for any other purpose, the Board may fix
a future date as the record date for any such
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<PAGE> 3
determination. Such record date shall be not more than 70 days, and in case of a
meeting of shareholders not less than 10 days prior to the date on which the
particular action requiring such determination is to be taken. If no record date
is fixed for the determination of shareholders entitled to notice of or to vote
at a meeting, the record date shall be the day immediately preceding the date on
which notice of the meeting is first given to shareholders. Such a determination
shall apply to any adjournment of the meeting unless the Board fixes a new
record date, which it shall do if the meeting is adjourned to a date more than
120 days after the date fixed for the original meeting. If no record date is set
for the determination of shareholders entitled to receive payment of any stock
dividend or distribution (other than one involving a purchase, redemption, or
other acquisition of the corporation's shares) the record date shall be the date
the Board authorizes the stock dividend or distribution.
2.8 VOTING RECORD
At least 10 days before each meeting of shareholders, an alphabetical
list of the shareholders entitled to notice of such meeting shall be made,
arranged by voting group and by each class or series of shares therein, with the
address of and number of shares held by each shareholder. This record shall be
kept at the principal office of the corporation for 10 days prior to such
meeting, and shall be kept open at such meeting, for the inspection of any
shareholder or any shareholder's agent.
2.9 QUORUM
A majority of the votes entitled to be cast on a matter by the holders
of shares that, pursuant to the Articles of Incorporation, as at any time
amended, or the Washington Business Corporation Act, are entitled to vote and be
counted collectively upon such matter, represented in person or by proxy, shall
constitute a quorum of such shares at a meeting of shareholders. If less than a
majority of such votes are represented at a meeting, a majority of the votes so
represented may adjourn the meeting from time to time without further notice if
the new date, time or place is announced at the meeting before adjournment. Any
business may be transacted at a reconvened meeting that might have been
transacted at the meeting as originally called, provided a quorum is present or
represented thereat. Once a share is represented for any purpose at a meeting
other than solely to object to holding the meeting or transacting business
thereat, it is deemed present for quorum purposes for the remainder of the
meeting and any adjournment thereof (unless a new record date is or must be set
for the adjourned meeting) notwithstanding the withdrawal of enough shareholders
to leave less than a quorum.
2.10 MANNER OF ACTING
If a quorum is present, action on a matter other than the election of
Directors shall be approved if the votes cast in favor of the action by the
shares entitled to vote and be counted collectively upon such matter exceed the
votes cast against such action by the shares entitled to vote and be counted
collectively thereon, unless the Articles of Incorporation, as at any
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<PAGE> 4
time amended, or the Washington Business Corporation Act requires a greater
number of affirmative votes.
2.11 PROXIES
A shareholder may vote by proxy executed in writing by the
shareholder or by his or her attorney-in-fact or agent. Such proxy shall be
effective when received by the Secretary or other officer or agent authorized to
tabulate votes. A proxy shall become invalid 11 months after the date of its
execution, unless otherwise provided in the proxy. A proxy with respect to a
specified meeting shall entitle the holder thereof to vote at any reconvened
meeting following adjournment of such meeting but shall not be valid after the
final adjournment thereof.
2.12 VOTING OF SHARES
Except as provided in the Articles of Incorporation, as at any time
amended, or in Section 2.13 hereof, each outstanding share entitled to vote with
respect to a matter submitted to a meeting of shareholders shall be entitled to
one vote upon such matter.
2.13 VOTING FOR DIRECTORS
Each shareholder entitled to vote at an election of Directors may
vote, in person or by proxy, the number of shares owned by such shareholder for
as many persons as there are Directors to be elected and for whose election such
shareholder has a right to vote, or (unless otherwise provided in the Articles
of Incorporation, as at any time amended) each such shareholder may cumulate
such shareholder's votes by distributing among one or more candidates as many
votes as are equal to the number of such Directors multiplied by the number of
such shareholder's shares. Unless otherwise provided in the Articles of
Incorporation, as at any time amended, the candidates elected shall be those
receiving the largest number of votes cast, up to the number of Directors to be
elected.
2.14 ACTION BY SHAREHOLDERS WITHOUT A MEETING
Any action which could be taken at a meeting of the shareholders may
be taken without a meeting if one or more written consents setting forth the
action so taken are signed by all shareholders entitled to vote on the action
and are delivered to the corporation. If not otherwise fixed by the Board, the
record date for determining shareholders entitled to take action without a
meeting is the date the first shareholder signs the consent. A shareholder may
withdraw a consent only by delivering a written notice of withdrawal to the
corporation prior to the time that all consents are in the possession of the
corporation. Action taken by written consent of shareholders without a meeting
is effective when all consents are in the possession of the corporation, unless
the consent specifies a later effective date. Any such consent shall be inserted
in the minute book as if it were the minutes of a meeting of the shareholders.
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SECTION 3. BOARD OF DIRECTORS
3.1 GENERAL POWERS
All corporate powers shall be exercised by or under the authority of,
and the business and affairs of the corporation shall be managed under the
direction of, the Board, except as may be otherwise provided in these Amended
and Restated Bylaws, the Articles of Incorporation, as at any time amended, or
the Washington Business Corporation Act.
3.2 NUMBER AND TENURE
The Board shall be composed of not less than three (3) nor more than
nine (9) Directors, the specific number to be set by resolution of the Board.
The number of Directors may be changed from time to time by amendment to these
Amended and Restated Bylaws, but no decrease in the number of Directors shall
have the effect of shortening the term of any incumbent Director. Unless a
Director dies, resigns, or is removed, his or her term of office shall expire at
the next annual meeting of shareholders; provided, however, that a Director
shall continue to serve until his or her successor is elected or until there is
a decrease in the authorized number of Directors. Directors must be at least
eighteen (18) years old, but need not be shareholders of the corporation or
residents of the State of Washington and need not meet any other qualifications.
3.3 ANNUAL AND REGULAR MEETINGS
An annual Board meeting shall be held without notice immediately
after and at the same place as the annual meeting of shareholders. By resolution
the Board, or any committee thereof, may specify the time and place either
within or without the State of Washington for holding regular meetings thereof
without notice other than such resolution.
3.4 SPECIAL MEETINGS
Special meetings of the Board or any committee designated by the
Board may be called by or at the request of the Chairman of the Board or the
President or, in the case of special Board meetings, any two (2) Directors and,
in the case of any special meeting of any committee designated by the Board, by
the Chairman thereof. The person or persons authorized to call special meetings
may fix any place either within or without the State of Washington as the place
for holding any special Board or committee meeting called by them.
3.5 MEETINGS BY COMMUNICATIONS EQUIPMENT
Members of the Board or any committee designated by the Board may
participate in a meeting of such Board or committee by, or conduct the meeting
through the use of, any means of communication by which all Directors
participating in the meeting can hear each other during the meeting.
Participation by such means shall constitute presence in person at a meeting.
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3.6 NOTICE OF SPECIAL MEETINGS
Notice of a special Board or committee meeting stating the place, day
and hour of the meeting shall be given to a Director in writing or orally.
Neither the business to be transacted at, nor the purpose of, any special
meeting need be specified in the notice of such meeting.
3.6.1 PERSONAL DELIVERY
If notice is given by personal delivery, the notice shall be
effective if delivered to a Director at least two days before the meeting.
3.6.2 DELIVERY BY MAIL
If notice is delivered by mail, the notice shall be deemed effective
if deposited in the official government mail at least five days before the
meeting, properly addressed to a Director at his or her address shown on the
records of the corporation, with postage thereon prepaid.
3.6.3 DELIVERY BY PRIVATE CARRIER
If notice is given by private carrier, the notice shall be deemed
effective when dispatched to a Director at his or her address shown on the
records of the corporation at least three days before the meeting.
3.6.4 FACSIMILE NOTICE
If notice is delivered by wire or wireless equipment which transmits
a facsimile of the notice, the notice shall be deemed effective when dispatched
at least two days before the meeting to a Director at his or her telephone
number or other number appearing on the records of the corporation.
3.6.5 DELIVERY BY TELEGRAPH
If notice is delivered by telegraph, the notice shall be deemed
effective if the content thereof is delivered to the telegraph company for
delivery to a Director at his or her address shown on the records of the
corporation at least three days before the meeting.
3.6.6 ORAL NOTICE
If notice is delivered orally, by telephone or in person, the notice
shall be deemed effective if personally given to the Director at least two days
before the meeting.
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3.7 WAIVER OF NOTICE
3.7.1 IN WRITING
Whenever any notice is required to be given to any Director under the
provisions of these Amended and Restated Bylaws, the Articles of Incorporation,
as at any time amended, or the Washington Business Corporation Act, a waiver
thereof in writing, signed by the person or persons entitled to such notice and
delivered to the corporation, whether before or after the date and time of the
meeting, shall be deemed equivalent to the giving of such notice. Neither the
business to be transacted at, nor the purpose of, any regular or special meeting
of the Board or any committee designated by the Board need be specified in the
waiver of notice of such meeting.
3.7.2 BY ATTENDANCE
A Director's attendance at or participation in a Board or committee
meeting shall constitute a waiver of notice of such meeting, unless the Director
at the beginning of the meeting, or promptly upon his or her arrival, objects to
holding the meeting or transacting business thereat and does not thereafter vote
for or assent to action taken at the meeting.
3.8 QUORUM
Subject to the provisions of any agreement concerning special Board
approval or manner of action provisions which may be entered into by the
shareholders of the corporation, a majority of the number of Directors fixed by
or in the manner provided in these Amended and Restated Bylaws shall constitute
a quorum for the transaction of business at any Board meeting but, if less than
a majority are present at a meeting, a majority of the Directors present may
adjourn the meeting from time to time without further notice.
3.9 MANNER OF ACTING
If a quorum is present when the vote is taken, subject to the
provisions of any arrangement concerning special Board approval or manner of
action provisions which may be entered into by the shareholders of the
corporation, the act of the majority of the Directors present at a Board meeting
shall be the act of the Board, unless the vote of a greater number is required
by these Amended and Restated Bylaws, the Articles of Incorporation, as at any
time amended, or the Washington Business Corporation Act.
3.10 PRESUMPTION OF ASSENT
A Director of the corporation who is present at a Board or committee
meeting at which any action is taken shall be deemed to have assented to the
action taken unless (a) the Director objects at the beginning of the meeting, or
promptly upon the Director's arrival, to holding the meeting or transacting any
business thereat, (b) the Director's dissent or abstention from the action taken
is entered in the minutes of the meeting, or (c) the Director delivers
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written notice of the Director's dissent or abstention to the presiding officer
of the meeting before its adjournment or to the corporation within a reasonable
time after adjournment of the meeting. The right of dissent or abstention is not
available to a Director who votes in favor of the action taken.
3.11 ACTION BY BOARD OR COMMITTEES WITHOUT A MEETING
Any action which could be taken at a meeting of the Board or of any
committee created by the Board may be taken without a meeting if one or more
written consents setting forth the action so taken are signed by each of the
Directors or by each committee member either before or after the action is taken
and delivered to the corporation. Action taken by written consent of Directors
without a meeting is effective when the last Director signs the consent, unless
the consent specifies a later effective date. Any such written consent shall be
inserted in the minute book as if it were the minutes of a Board or a committee
meeting.
3.12 RESIGNATION
Any Director may resign at any time by delivering written notice to
the Chairman of the Board, the President, the Secretary or the Board. Any such
resignation is effective upon delivery thereof unless the notice of resignation
specifies a later effective date and, unless otherwise specified therein, the
acceptance of such resignation shall not be necessary to make it effective.
3.13 REMOVAL
Subject to the provisions of any agreement concerning special Board
approval or manner of action provisions which may be entered into by the
shareholders of the corporation, one or more members of the Board, including the
entire Board, may be removed with or without cause (unless the Articles of
Incorporation, as at any time amended, permit removal for cause only), at a
meeting of shareholders called expressly for that purpose, by the holders of the
shares entitled to elect the Director or Directors whose removal is sought if
the number of votes cast to remove the Director exceeds the number of votes cast
not to remove the Director. If the Articles of Incorporation, as at any time
amended, permit cumulative voting in the election of Directors, then a Director
may not be removed if the number of votes sufficient to elect such Director if
then cumulatively voted at an election of the entire Board or, if there are
classes of Directors, at an election of the class of Directors of which such
Director is a part, is voted against the Director's removal.
3.14 VACANCIES
Unless the Articles of Incorporation, as at any time amended, provide
otherwise, any vacancy occurring on the Board may be filled by the shareholders,
the Board or, if the Directors in office constitute fewer than a quorum, by the
affirmative vote of a majority of the remaining Directors. Any vacant office
held by a Director elected by the holders of one or more classes or series of
shares entitled to vote and be counted collectively thereon shall be
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filled only by the vote of the holders of such class or series of shares. A
Director elected to fill a vacancy shall serve only until the next election of
Directors by the shareholders.
3.15 EXECUTIVE AND OTHER COMMITTEES
3.15.1 CREATION OF COMMITTEES
The Board, by resolution adopted by the greater of a majority of the
Directors then in office and the number of Directors required to take action in
accordance with these Amended and Restated Bylaws, may create standing or
temporary committees, including an Executive Committee, and appoint members
thereto from its own number and invest such committees with such powers as it
may see fit, subject to such conditions as may be prescribed by the Board, these
Amended and Restated Bylaws and applicable law. Each committee must have two or
more members, who shall serve at the pleasure of the Board.
3.15.2 AUTHORITY OF COMMITTEES
Each committee shall have and may exercise all of the authority of
the Board to the extent provided in the resolution of the Board creating the
committee and any subsequent resolutions pertaining thereto and adopted in like
manner, except that no such committee shall have the authority to: (1) authorize
or approve a distribution except according to a general formula or method
prescribed by the Board, (2) approve or propose to shareholders actions or
proposals required by the Washington Business Corporation Act to be approved by
shareholders, (3) fill vacancies on the Board or any committee thereof, (4)
adopt, amend or repeal Bylaws, (5) amend the Articles of Incorporation, as at
any time amended, pursuant to RCW 23B.10.020, (6) approve a plan of merger not
requiring shareholder approval, or (7) authorize or approve the issuance or sale
or contract for sale of shares, or determine the designation and relative
rights, preferences and limitations of a class or series of shares except that
the Board may authorize a committee or a senior executive officer of the
corporation to do so within limits specifically prescribed by the Board.
3.15.3 QUORUM AND MANNER OF ACTING
Subject to the provisions of any agreement concerning special Board
approval or manner of action provisions which may be entered into by the
shareholders of the corporation, a majority of the number of Directors composing
any committee of the Board, as established and fixed by resolution of the Board,
shall constitute a quorum for the transaction of business at any meeting of such
committee but, if less than a majority are present at a meeting, a majority of
such Directors present may adjourn the meeting from time to time without further
notice. Except as may be otherwise provided in the Washington Business
Corporation Act, if a quorum is present when the vote is taken the act of a
majority of the members present shall be the act of the committee.
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3.15.4 MINUTES OF MEETINGS
All committees shall keep regular minutes of their meetings and shall
cause them to be recorded in books kept for that purpose.
3.15.5 RESIGNATION
Any member of any committee may resign at any time by delivering
written notice thereof to the Chairman of the Board, the President, the
Secretary or the Board. Any such resignation is effective upon delivery thereof,
unless the notice of resignation specifies a later effective date, and the
acceptance of such resignation shall not be necessary to make it effective.
3.15.6 REMOVAL
Subject to the provisions of any agreement concerning special Board
approval or manner of action provisions which may be entered into by the
shareholders of the corporation, the Board may remove any member of any
committee elected or appointed by it but only by the affirmative vote of the
greater of a majority of the Directors then in office and the number of
Directors required to take action in accordance with these Amended and Restated
Bylaws.
3.16 COMPENSATION
By Board resolution, Directors and committee members may be paid
their expenses, if any, of attendance at each Board or committee meeting, or a
fixed sum for attendance at each Board or committee meeting, or a stated salary
as Director or a committee member, or a combination of the foregoing. No such
payment shall preclude any Director or committee member from serving the
corporation in any other capacity and receiving compensation therefor.
SECTION 4. OFFICERS
4.1 APPOINTMENT AND TERM
The officers of the corporation shall be those officers appointed
from time to time by the Board or by any other officer empowered to do so. The
Board shall have sole power and authority to appoint executive officers. As used
herein, the term "executive officer" shall mean the President, any Vice
President in charge of a principal business unit, division or function or any
other officer who performs a policy-making function. The Board or the President
may appoint such other officers and assistant officers to hold office for such
period, have such authority and perform such duties as may be prescribed. The
Board may delegate to any other officer the power to appoint any subordinate
officers and to prescribe their respective terms of office, authority and
duties. Any two or more offices may be held by the same person. Unless an
officer dies, resigns or is removed from office, he or she shall hold office
until his or her successor is appointed.
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4.2 RESIGNATION
Any officer may resign at any time by delivering written notice
thereof to the corporation. Any such resignation is effective upon delivery
thereof, unless the notice of resignation specifies a later effective date, and,
unless otherwise specified therein, the acceptance of such resignation shall not
be necessary to make it effective.
4.3 REMOVAL
Any officer may be removed by the Board at any time, with or without
cause. An officer or assistant officer, if appointed by another officer, may be
removed by any officer authorized to appoint officers or assistant officers.
4.4 CONTRACT RIGHTS OF OFFICERS
The appointment of an officer does not itself create contract rights.
4.5 CHAIRMAN OF THE BOARD
If appointed, the Chairman of the Board shall perform such duties as
shall be assigned to him or her by the Board from time to time and shall preside
over meetings of the Board and shareholders unless another officer is appointed
or designated by the Board as Chairman of such meetings.
4.6 PRESIDENT
If appointed, the President shall be the chief executive officer of
the corporation unless some other officer is so designated by the Board, shall
preside over meetings of the Board and shareholders in the absence of a Chairman
of the Board, and, subject to the Board's control, shall supervise and control
all of the assets, business and affairs of the corporation. In general, the
President shall perform all duties incident to the office of President and such
other duties as are prescribed by the Board from time to time. If no Secretary
has been appointed, the President shall have responsibility for the preparation
of minutes of meetings of the Board and shareholders and for authentication of
the records of the corporation.
4.7 VICE PRESIDENT
In the event of the death of the President or his or her inability to
act, the Vice President (or if there is more than one Vice President, the Vice
President who was designated by the Board as the successor to the President, or
if no Vice President is so designated, the Vice President first elected to such
office) shall perform the duties of the President, except as may be limited by
resolution of the Board, with all the powers of and subject to all the
restrictions upon the President. Vice Presidents shall perform such other duties
as from time to time may be assigned to them by the President or by or at the
direction of the Board.
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4.8 SECRETARY
If appointed, the Secretary shall be responsible for preparation of
minutes of the meetings of the Board and shareholders, maintenance of the
corporation records and stock registers, and authentication of the corporation's
records and shall in general perform all duties incident to the office of
Secretary and such other duties as from time to time may be assigned to him or
her by the President or by or at the direction of the Board. In the absence of
the Secretary, an Assistant Secretary may perform the duties of the Secretary.
4.9 TREASURER
If appointed, the Treasurer shall have charge and custody of and be
responsible for all funds and securities of the corporation, receive and give
receipts for moneys due and payable to the corporation from any source
whatsoever, and deposit all such moneys in the name of the corporation in banks,
trust companies or other depositories selected in accordance with the provisions
of these Amended and Restated Bylaws, and in general perform all of the duties
incident to the office of Treasurer and such other duties as from time to time
may be assigned to him or her by the President or by or at the direction of the
Board. In the absence of the Treasurer, an Assistant Treasurer may perform the
duties of the Treasurer. If required by the Board, the Treasurer or any
Assistant Treasurer shall give a bond for the faithful discharge of his or her
duties in such amount and with such surety or sureties as the Board shall
determine.
4.10 SALARIES
The salaries of the officers shall be fixed from time to time by the
Board or by any person or persons to whom the Board has delegated such
authority. No officer shall be prevented from receiving such salary by reason of
the fact that he or she is also a Director of the corporation.
SECTION 5. CONTRACTS, LOANS, CHECKS AND DEPOSITS
5.1 CONTRACTS
The Board may authorize any officer or officers, or agent or agents,
to enter into any contract or execute and deliver any instrument in the name of
and on behalf of the corporation. Such authority may be general or confined to
specific instances.
5.2 LOANS TO THE CORPORATION
No loans shall be contracted on behalf of the corporation and no
evidences of indebtedness shall be issued in its name unless authorized by a
resolution of the Board. Such authority may be general or confined to specific
instances.
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5.3 CHECKS, DRAFTS, ETC.
All checks, drafts or other orders for the payment of money, notes or
other evidences of indebtedness issued in the name of the corporation shall be
signed by such officer or officers, or agent or agents, of the corporation and
in such manner as is from time to time determined by resolution of the Board.
5.4 DEPOSITS
All funds of the corporation not otherwise employed shall be
deposited from time to time to the credit of the corporation in such banks,
trust companies or other depositories as the Board may select.
SECTION 6. CERTIFICATES FOR SHARES AND THEIR TRANSFER
6.1 ISSUANCE OF SHARES
No shares of the corporation shall be issued unless authorized by the
Board, or by a committee designated by the Board to the extent such committee is
empowered to do so.
6.2 CERTIFICATES FOR SHARES
Certificates representing shares of the corporation shall be signed,
either manually or in facsimile, by the President or any Vice President and by
the Treasurer or any Assistant Treasurer or the Secretary or any Assistant
Secretary and shall include on their face written notice of any restrictions
which may be imposed on the transferability of such shares. All certificates
shall be consecutively numbered or otherwise identified.
6.3 STOCK RECORDS
The stock transfer books shall be kept at the principal office of the
corporation or at the office of the corporation's transfer agent or registrar.
The name and address of each person to whom certificates for shares are issued,
together with the class and number of shares represented by each such
certificate and the date of issue thereof, shall be entered on the stock
transfer books of the corporation. The person in whose name shares stand on the
books of the corporation shall be deemed by the corporation to be the owner
thereof for all purposes.
6.4 RESTRICTION ON TRANSFER
Except to the extent that the corporation has obtained an opinion of
counsel acceptable to the corporation that transfer restrictions are not
required under applicable securities laws, or has otherwise satisfied itself
that such transfer restrictions are not required, all certificates representing
shares of the corporation shall, in addition to any legends required
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by any agreement concerning special Board approval or manner of action
provisions which may be entered into by the shareholders of the corporation,
bear a legend on the face of the certificate, or on the reverse of the
certificate if a reference to the legend is contained on the face, which reads
substantially as follows in addition to any legends required by any shareholder
agreement:
"The securities evidenced by this certificate have not
been registered under the Securities Act of l933, as
amended, or any applicable state law, and no interest
therein may be sold, distributed, assigned, offered,
pledged or otherwise transferred unless (a) there is an
effective registration statement under such Act and
applicable state securities laws covering any such
transaction involving said securities or (b) this
corporation receives an opinion of legal counsel for the
holder of these securities (concurred in by legal counsel
for this corporation) stating that such transaction is
exempt from registration or this corporation otherwise
satisfies itself that such transaction is exempt from
registration. Neither the offering of the securities nor
any offering materials have been reviewed by any
administrator under the Securities Act of 1933, as
amended, or any applicable state law."
6.5 TRANSFER OF SHARES
The transfer of shares of the corporation shall be made only on the
stock transfer books of the corporation pursuant to authorization or document of
transfer made by the holder of record thereof or by his or her legal
representative, who shall furnish proper evidence of authority to transfer, or
by his or her attorney-in-fact authorized by power of attorney duly executed and
filed with the Secretary of the corporation. All certificates surrendered to the
corporation for transfer shall be cancelled and no new certificate shall be
issued until the former certificates for a like number of shares shall have been
surrendered and cancelled.
6.6 LOST OR DESTROYED CERTIFICATES
In the case of a lost, destroyed or mutilated certificate, a new
certificate may be issued therefor upon such terms and indemnity to the
corporation as the Board may prescribe.
SECTION 7. BOOKS AND RECORDS
The corporation shall:
(a) Keep as permanent records minutes of all meetings of its
shareholders and the Board, a record of all actions taken by the shareholders or
the Board without a meeting, and a record of all actions taken by a committee of
the Board exercising the authority of the Board on behalf of the corporation.
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(b) Maintain appropriate accounting records.
(c) Maintain a record of its shareholders, in a form that permits
preparation of a list of the names and addresses of all shareholders, in
alphabetical order by class of shares showing the number and class of shares
held by each; provided, however, such record may be maintained by an agent of
the corporation.
(d) Maintain its records in written form or in another form capable
of conversion into written form within a reasonable time.
(e) Keep a copy of the following records at its principal office:
1. the Amended and Restated Articles of Incorporation and all
amendments thereto as currently in effect;
2. the Amended and Restated Bylaws and all amendments thereto as
currently in effect;
3. the minutes of all meetings of shareholders and records of all
action taken by shareholders without a meeting, for the past three years;
4. the financial statements described in Section 23B.16.200(1) of
the Washington Business Corporation Act, for the past three years;
5. all written communications to shareholders generally within
the past three years;
6. a list of the names and business addresses of the current
Directors and officers; and
7. the most recent annual report delivered to the Washington
Secretary of State.
SECTION 8. ACCOUNTING YEAR
The accounting year of the corporation shall be the calendar year,
provided that if a different accounting year is at any time selected by the
Board for purposes of federal income taxes, or any other purpose, the accounting
year shall be the year so selected.
SECTION 9. SEAL
The Board may provide for a corporate seal which shall consist of the
name of the corporation, the state of its incorporation and the year of its
incorporation.
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SECTION 10. INDEMNIFICATION
10.1 RIGHT TO INDEMNIFICATION
Each person who was, is or is threatened to be made a named party to
or is otherwise involved (including, without limitation, as a witness) in any
threatened, pending or completed action, suit or proceeding, whether civil,
criminal, administrative or investigative and whether formal or informal
(hereinafter a "proceeding"), by reason of the fact that he or she is or was a
Director or officer of the corporation or, that being or having been such a
Director or officer or an employee of the corporation, he or she is or was
serving at the request of the corporation as a Director, officer, partner,
trustee, employee or agent of another corporation or of a partnership, joint
venture, trust, employee benefit plan or other enterprise (hereinafter an
"indemnitee"), whether the basis of a proceeding is alleged action in an
official capacity as such a Director, officer, partner, trustee, employee or
agent or in any other capacity while serving as such a Director, officer,
partner, trustee, employee or agent, shall be indemnified and held harmless by
the corporation against all expense, liability and loss (including counsel fees,
judgments, fines, ERISA excise taxes or penalties and amounts to be paid in
settlement) actually and reasonably incurred or suffered by such indemnitee in
connection therewith, and such indemnification shall continue as to an
indemnitee who has ceased to be a Director, officer, partner, trustee, employee
or agent and shall inure to the benefit of the indemnitee's heirs, executors and
administrators. Except as provided in subsection 10.2 of this Section with
respect to proceedings seeking to enforce rights to indemnification, the
corporation shall indemnify any such indemnitee in connection with a proceeding
(or part thereof) initiated by such indemnitee only if a proceeding (or part
thereof) was authorized or ratified by the Board. The right to indemnification
conferred in this Section shall be a contract right.
10.2 RESTRICTIONS ON INDEMNIFICATION
No indemnification shall be provided to any such indemnitee for acts
or omissions of the indemnitee finally adjudged to be intentional misconduct or
a knowing violation of law, for conduct of the indemnitee finally adjudged to be
in violation of Section 23B.08.310 of the Washington Business Corporation Act,
for any transaction with respect to which it was finally adjudged that such
indemnitee personally received a benefit in money, property or services to which
the indemnitee was not legally entitled or if the corporation is otherwise
prohibited by applicable law from paying such indemnification, except that if
Section 23B.08.560 or any successor provision of the Washington Business
Corporation Act is hereafter amended, the restrictions on indemnification set
forth in this subsection 10.2 shall be as set forth in such amended statutory
provision.
10.3 ADVANCEMENT OF EXPENSES
The right to indemnification conferred in this Section shall include
the right to be paid by the corporation the expenses incurred in defending any
proceeding in advance of its final disposition (hereinafter an "advancement of
expenses"). An advancement of expenses shall be
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made upon delivery to the corporation of an undertaking (hereinafter an
"undertaking"), by or on behalf of such indemnitee, to repay all amounts so
advanced if it shall ultimately be determined by final judicial decision from
which there is no further right to appeal that such indemnitee is not entitled
to be indemnified for such expenses under this subsection 10.3.
10.4 RIGHT OF INDEMNITEE TO BRING SUIT
If a claim under subsection 10.1 or 10.3 of this Section is not paid
in full by the corporation within 60 days after a written claim has been
received by the corporation, except in the case of a claim for an advancement of
expenses, in which case the applicable period shall be 20 days, the indemnitee
may at any time thereafter bring suit against the corporation to recover the
unpaid amount of the claim. If successful in whole or in part, in any such suit
or in a suit brought by the corporation to recover an advancement of expenses
pursuant to the terms of an undertaking, the indemnitee shall be entitled to be
paid also the expense of prosecuting or defending such suit. The indemnitee
shall be presumed to be entitled to indemnification under this Section upon
submission of a written claim (and, in an action brought to enforce a claim for
an advancement of expenses, where the required undertaking has been tendered to
the corporation) and thereafter the corporation shall have the burden of proof
to overcome the presumption that the indemnitee is so entitled.
10.5 PROCEDURES EXCLUSIVE
Pursuant to Section 23B.08.560(2) or any successor provision of the
Washington Business Corporation Act, the procedures for indemnification and
advancement of expenses set forth in this Section are in lieu of the procedures
required by Section 23B.08.550 or any successor provision of the Washington
Business Corporation Act.
10.6 NONEXCLUSIVITY OF RIGHTS
The right to indemnification and the advancement of expenses
conferred in this Section shall not be exclusive of any other right which any
person may have or hereafter acquire under any statute, provision of the
Articles of Incorporation, as at any time amended, or the Amended and Restated
Bylaws of the corporation, or any general or specific action of the Board,
contract or otherwise.
10.7 INSURANCE, CONTRACTS AND FUNDING
The corporation may maintain insurance, at its expense, to protect
itself and any Director, officer, partner, trustee, employee or agent of the
corporation or another corporation, partnership, joint venture, trust or other
enterprise against any expense, liability or loss, whether or not the
corporation would have the power to indemnify such person against such expense,
liability or loss under the Washington Business Corporation Act. The corporation
may enter into contracts with any Director, officer, partner, trustee, employee
or agent of the corporation in furtherance of the provisions of this Section and
may create a trust fund, grant a security interest or use other means
(including, without limitation, a letter of
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credit) to ensure the payment of such amounts as may be necessary to effect
indemnification as provided in this Section.
10.8 INDEMNIFICATION OF EMPLOYEES AND AGENTS OF THE CORPORATION
The corporation may, by action of the Board, grant rights to
indemnification and advancement of expenses to employees and agents or any class
or group of employees and agents of the corporation (i) with the same scope and
effect as the provisions of this Section with respect to the indemnification and
advancement of expenses of Directors and officers of the corporation; (ii)
pursuant to rights granted pursuant to, or provided by, the Washington Business
Corporation Act; or (iii) as are otherwise consistent with law.
10.9 PERSONS SERVING OTHER ENTITIES
Any person who, while a Director, officer or employee of the
corporation, is or was serving (a) as a Director or officer of another foreign
or domestic corporation of which a majority of the shares entitled to vote in
the election of its Directors is held by the corporation (b) as a partner,
trustee or otherwise in an executive or management capacity in a partnership,
joint venture, trust or other enterprise of which the corporation or a wholly
owned subsidiary of the corporation is a general partner or has a majority
ownership shall be deemed to be so serving at the request of the corporation and
entitled to indemnification and advancement of expenses under subsections 10.1
and 10.3 of this Section.
SECTION 11. AMENDMENTS
Subject to the provisions of any agreement concerning special Board
approval or manner of action provisions which may be entered into by the
shareholders of the corporation, these Amended and Restated Bylaws may be
altered, amended or repealed and new Bylaws may be adopted by the Board, except
that the Board may not repeal or amend any Bylaw that the shareholders have
expressly provided, in amending or repealing such Bylaw, may not be amended or
repealed by the Board. The shareholders may also alter, amend and repeal these
Amended and Restated Bylaws or adopt new Bylaws. All Bylaws made by the Board
may be amended, repealed, altered or modified by the shareholders.
The foregoing Amended and Restated Bylaws were adopted by the Board
of Directors on July 13, 1995.
/s/ Steven R. Kingma
--------------------
Secretary
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Exhibit 3.2(b)
AMENDED AND RESTATED BYLAWS
OF
GARGOYLES, INC.
SECTION 1. OFFICES
The principal office of the corporation shall be located at the
principal place of business or such other place as the Board of Directors (the
"Board") may designate. The corporation may have such other offices, either
within or without the State of Washington, as the Board may designate or as the
business of the corporation may require from time to time.
SECTION 2. SHAREHOLDERS
2.1 ANNUAL MEETING
The annual meeting of the shareholders shall be held each year within
90 to 180 days after the fiscal year end of the corporation at a date, time and
location determined by resolution of the Board of Directors, for the purpose of
electing Directors and transacting such other business as may properly come
before the meeting. At any time prior to the commencement of the annual meeting,
the Board may postpone the annual meeting for a period of up to one hundred
twenty (120) days from the date fixed for such meeting in accordance with this
Subsection 2.1.
2.2 SPECIAL MEETINGS
The Chairman of the Board, the President or the Board may call special
meetings of the shareholders for any purpose. Further, a special meeting of the
shareholders shall be held if the holders of not less than 25% of all the votes
entitled to be cast on any issue proposed to be considered at such special
meeting have dated, signed and delivered to the Secretary one or more written
demands for such meeting, describing the purpose or purposes for which it is to
be held.
2.3 MEETINGS BY COMMUNICATION EQUIPMENT
Shareholders may participate in any meeting of the shareholders by any
means of communication by which all persons participating in the meeting can
hear each other during the meeting. Participation by such means shall constitute
presence in person at a meeting.
Amended and Restated Bylaws of Gargoyles, Inc. Page 1
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2.4 DATE, TIME AND PLACE OF MEETING
Except as otherwise provided herein, all meetings of shareholders,
including those held pursuant to demand by shareholders as provided herein,
shall be held on such date and at such time and place, within or without the
State of Washington, designated by or at the direction of the Board.
2.5 BUSINESS FOR SHAREHOLDERS' MEETINGS
2.5.1 BUSINESS AT ANNUAL MEETINGS
In addition to the election of directors, other proper business may be
transacted at an annual meeting of shareholders, provided that such business is
properly brought before such meeting. To be properly brought before an annual
meeting, business must be (a) brought by or at the direction of the Board or (b)
brought before the meeting by a shareholder pursuant to written notice thereof,
in accordance with subsection 2.5.3 hereof, and received by the Secretary not
fewer than 60 nor more than 90 days prior to the anniversary of the previous
year's annual meeting; provided, however, that in the event that the date of the
annual meeting is more than 30 days earlier or more than 60 days later than such
anniversary date, notice by the stockholder to be timely must be so given not
earlier than the 90th day prior to such annual meeting and not later than the
close of business on the later of the 60th day prior to such annual meeting or
the 10th day following the day on which public announcement of the date of such
meeting is first made. Any such shareholder notice shall set forth (i) the name
and address of the shareholder proposing such business; (ii) a representation
that the shareholder is entitled to vote at such meeting and a statement of the
number of shares of the corporation which are beneficially owned by the
shareholder; (iii) a representation that the shareholder intends to appear in
person or by proxy at the meeting to propose such business; and (iv) as to each
matter the shareholder proposes to bring before the meeting, a brief description
of the business desired to be brought before the meeting, the reasons for
conducting such business at the meeting, the language of the proposal (if
appropriate), and any material interest of the shareholder in such business. No
business shall be conducted at any annual meeting of shareholders except in
accordance with this subsection 2.5.1. If the facts warrant, the Board, or the
chairman of an annual meeting of shareholders, may determine and declare (a)
that a proposal does not constitute proper business to be transacted at the
meeting or (b) that business was not properly brought before the meeting in
accordance with the provisions of this subsection 2.5.1 and, if, in either case,
it is so determined, any such business shall not be transacted. The procedures
set forth in this subsection 2.5.1 for business to be properly brought before an
annual meeting by a shareholder are in addition to, and not in lieu of, the
requirements set forth in
Amended and Restated Bylaws of Gargoyles, Inc. Page 2
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Rule 14a-8 under Section 14 of the Securities Exchange Act of 1934, as amended,
or any successor provision.
2.5.2 BUSINESS AT SPECIAL MEETINGS
At any special meeting of the shareholders, only such business as is
specified in the notice of such special meeting given by or at the direction of
the person or persons calling such meeting, in accordance with subsection 2.4
hereof, shall come before such meeting.
2.5.3 NOTICE TO CORPORATION
Any written notice required to be delivered by a shareholder to the
corporation pursuant to subsection 2.5.1 or subsection 3.3.1 hereof must be
given, either by personal delivery or by registered or certified mail, postage
prepaid, to the Secretary at the corporation's executive offices.
2.6 NOTICE OF MEETING
Written notice stating the place, day and hour of the meeting and, in
the case of a special meeting, the purpose or purposes for which the meeting is
called shall be given by or at the direction of the Board, the Chairman of the
Board, the President or the Secretary to each shareholder entitled to notice of
or to vote at the meeting not less than 10 nor more than 60 days before the
meeting, except that notice of a meeting to act on an amendment to the Articles
of Incorporation, as at any time amended, a plan of merger or share exchange,
the sale, lease, exchange or other disposition of all or substantially all of
the corporation's assets other than in the regular course of business or the
dissolution of the corporation shall be given not less than 20 nor more than 60
days before such meeting. Such notice may be transmitted by mail, private
carrier, personal delivery, telegraph, teletype or communications equipment
which transmits a facsimile of the notice to like equipment which receives and
reproduces such notice. If these forms of written notice are impractical in the
view of the Board, the Chairman of the Board, the President or the Secretary,
written notice may be transmitted by an advertisement in a newspaper of general
circulation in the area of the corporation's principal office. If such notice is
mailed, it shall be deemed effective when deposited in the official government
mail, first-class postage prepaid, properly addressed to the shareholder at such
shareholder's address as it appears in the corporation's current record of
shareholders. Notice given in any other manner shall be deemed effective when
dispatched to the shareholder's address, telephone number or other number
appearing on the records of the corporation. Any notice given by publication as
herein provided shall be deemed effective five days after first publication.
Amended and Restated Bylaws of Gargoyles, Inc. Page 3
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2.7 WAIVER OF NOTICE
Whenever any notice is required to be given to any shareholder under
the provisions of these Amended and Restated Bylaws, the Articles of
Incorporation, as at any time amended, or the Washington Business Corporation
Act, a waiver thereof in writing, signed by the person or persons entitled to
such notice and delivered to the corporation, whether before or after the date
and time of the meeting, shall be deemed equivalent to the giving of such
notice. Further, notice of the time, place and purpose of any meeting will be
deemed to be waived by any shareholder by attendance thereat in person or by
proxy, unless such shareholder at the beginning of the meeting objects to
holding the meeting or transacting business at the meeting.
2.8 FIXING OF RECORD DATE FOR DETERMINING SHAREHOLDERS
For the purpose of determining shareholders entitled (a) to notice of
or to vote at any meeting of shareholders or any adjournment thereof, (b) to
demand a special meeting, or (c) to receive payment of any dividend, or in order
to make a determination of shareholders for any other purpose, the Board may fix
a future date as the record date for any such determination. Such record date
shall be not more than 70 days, and in case of a meeting of shareholders not
less than 10 days prior to the date on which the particular action requiring
such determination is to be taken. If no record date is fixed for the
determination of shareholders entitled to notice of or to vote at a meeting, the
record date shall be the day immediately preceding the date on which notice of
the meeting is first given to shareholders. Such a determination shall apply to
any adjournment of the meeting unless the Board fixes a new record date, which
it shall do if the meeting is adjourned to a date more than 120 days after the
date fixed for the original meeting. If no record date is set for the
determination of shareholders entitled to receive payment of any stock dividend
or distribution (other than one involving a purchase, redemption, or other
acquisition of the corporation's shares) the record date shall be the date the
Board authorizes the stock dividend or distribution.
2.9 VOTING RECORD
At least 10 days before each meeting of shareholders, an alphabetical
list of the shareholders entitled to notice of such meeting shall be made,
arranged by voting group and by each class or series of shares therein, with the
address of and number of shares held by each shareholder. This record shall be
kept at the principal office of the corporation for 10 days prior to such
meeting, and shall be kept open at such meeting, for the inspection of any
shareholder or any shareholder's agent.
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2.10 QUORUM
A majority of the votes entitled to be cast on a matter by the holders
of shares that, pursuant to the Articles of Incorporation, as at any time
amended, or the Washington Business Corporation Act, are entitled to vote and be
counted collectively upon such matter, represented in person or by proxy, shall
constitute a quorum of such shares at a meeting of shareholders. If less than a
majority of such votes are represented at a meeting, a majority of the votes so
represented may adjourn the meeting from time to time without further notice if
the new date, time or place is announced at the meeting before adjournment. Any
business may be transacted at a reconvened meeting that might have been
transacted at the meeting as originally called, provided a quorum is present or
represented thereat. Once a share is represented for any purpose at a meeting
other than solely to object to holding the meeting or transacting business
thereat, it is deemed present for quorum purposes for the remainder of the
meeting and any adjournment thereof (unless a new record date is or must be set
for the adjourned meeting) notwithstanding the withdrawal of enough shareholders
to leave less than a quorum.
2.11 MANNER OF ACTING
If a quorum is present, action on a matter other than the election of
Directors shall be approved if the votes cast in favor of the action by the
shares entitled to vote and be counted collectively upon such matter exceed the
votes cast against such action by the shares entitled to vote and be counted
collectively thereon, unless the Articles of Incorporation, as at any time
amended, or the Washington Business Corporation Act requires a greater number of
affirmative votes.
2.12 PROXIES
A shareholder may vote by proxy executed in writing by the shareholder
or by his or her attorney-in-fact or agent. Such proxy shall be effective when
received by the Secretary or other officer or agent authorized to tabulate
votes. A proxy shall become invalid 11 months after the date of its execution,
unless otherwise provided in the proxy. A proxy with respect to a specified
meeting shall entitle the holder thereof to vote at any reconvened meeting
following adjournment of such meeting but shall not be valid after the final
adjournment thereof.
2.13 VOTING OF SHARES
Except as provided in the Articles of Incorporation, as at any time
amended, or in Section 2.13 hereof, each outstanding share entitled to vote with
respect to a matter submitted to a meeting of shareholders shall be entitled to
one vote upon such matter.
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2.14 VOTING FOR DIRECTORS
Each shareholder entitled to vote at an election of Directors may vote,
in person or by proxy, the number of shares owned by such shareholder for as
many persons as there are Directors to be elected and for whose election such
shareholder has a right to vote, or (unless otherwise provided in the Articles
of Incorporation, as at any time amended) each such shareholder may cumulate
such shareholder's votes by distributing among one or more candidates as many
votes as are equal to the number of such Directors multiplied by the number of
such shareholder's shares. Unless otherwise provided in the Articles of
Incorporation, as at any time amended, the candidates elected shall be those
receiving the largest number of votes cast, up to the number of Directors to be
elected.
2.15 ACTION BY SHAREHOLDERS WITHOUT A MEETING
Any action which could be taken at a meeting of the shareholders may be
taken without a meeting if one or more written consents setting forth the action
so taken are signed by all shareholders entitled to vote on the action and are
delivered to the corporation. If not otherwise fixed by the Board, the record
date for determining shareholders entitled to take action without a meeting is
the date the first shareholder signs the consent. A shareholder may withdraw a
consent only by delivering a written notice of withdrawal to the corporation
prior to the time that all consents are in the possession of the corporation.
Action taken by written consent of shareholders without a meeting is effective
when all consents are in the possession of the corporation, unless the consent
specifies a later effective date. Any such consent shall be inserted in the
minute book as if it were the minutes of a meeting of the shareholders.
SECTION 3. BOARD OF DIRECTORS
3.1 GENERAL POWERS
All corporate powers shall be exercised by or under the authority of,
and the business and affairs of the corporation shall be managed under the
direction of, the Board, except as may be otherwise provided in these Amended
and Restated Bylaws, the Articles of Incorporation, as at any time amended, or
the Washington Business Corporation Act.
3.2 NUMBER AND TENURE
The Board shall be composed of not less than three (3) nor more than
nine (9) Directors, the specific number to be set by resolution of the Board.
The number of Directors may be changed from time to time by amendment to these
Amended and
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Restated Bylaws, but no decrease in the number of Directors shall have the
effect of shortening the term of any incumbent Director.
Prior to the 1996 annual election of Directors, unless a Director
earlier dies, resigns or is removed, his or her term of office shall expire at
the next annual meeting of shareholders. At the 1996 annual election of
Directors, the Board of Directors shall be divided into three classes, with said
classes to be as equal in number as may be possible. At the first election of
Directors to such classified Board of Directors, each Class 1 Director shall be
elected to serve until the next ensuing annual meeting of shareholders, each
Class 2 Director shall be elected to serve until the second ensuing annual
meeting of shareholders and each Class 3 Director shall be elected to serve
until the third ensuing annual meeting of shareholders. At each annual meeting
of shareholders following the meeting at which the Board of Directors is
initially classified, the number of Directors equal to the number of Directors
in the class whose term expires at the time of such meeting shall be elected to
serve until the third ensuing annual meeting of shareholders. Notwithstanding
any of the foregoing provisions of this Section 3.2, Directors shall serve until
their successors are elected and qualified or until their earlier death,
resignation or removal from office or until there is a decrease in the number of
Directors. Directors need not be shareholders of the corporation or residents of
the State of Washington and need not meet any other qualifications.
3.3 NOMINATION AND ELECTION
3.3.1 NOMINATION
Only persons who are nominated in accordance with the following
procedures shall be eligible for election as Directors. Nominations for the
election of Directors may be made (a) by or at the direction of the Board or (b)
by any shareholder of record entitled to vote for the election of Directors at
such meeting; provided, however, that a shareholder may nominate persons for
election as Directors only if written notice (in accordance with subsection
2.5.3 hereof) of such shareholder's intention to make such nominations is
received by the Secretary not later than (i) with respect to an election to be
held at an annual meeting of the shareholders, not fewer than 60 nor more than
90 days prior to the anniversary of the previous year's annual meeting
(provided, however, that in the event that the date of the annual meeting is
more than 30 days earlier or more than 60 days later than such anniversary date,
notice by the stockholder to be timely must be so given not earlier than the
90th day prior to such annual meeting and not later than the close of business
on the later of the 60th day prior to such annual meeting or the 10th day
following the day on which public announcement of the date of such meeting is
first made) and (ii) with respect to an election to be held at a special meeting
of the shareholders for the election of
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Directors, the close of business on the seventh business day following the date
on which notice of such meeting is first given to shareholders. Any such
shareholder's notice shall set forth (a) the name and address of the shareholder
who intends to make a nomination; (b) a representation that the shareholder is
entitled to vote at such meeting and a statement of the number of shares of the
corporation which are beneficially owned by the shareholder; (c) a
representation that the shareholder intends to appear in person or by proxy at
the meeting to nominate the person or persons specified in the notice; (d) as to
each person the shareholder proposes to nominate for election or re-election as
a Director, the name and address of such person and such other information
regarding such nominee as would be required in a proxy statement filed pursuant
to the proxy rules of the Securities and Exchange Commission had such nominee
been nominated by the Board, and a description of any arrangements or
understandings, between the shareholder and such nominee and any other persons
(including their names), pursuant to which the nomination is to be made; and (e)
the consent of each such nominee to serve as a Director if elected. If the facts
warrant, the Board, or the chair of a shareholders' meeting at which Directors
are to be elected, shall determine and declare that a nomination was not made in
accordance with the foregoing procedure and, if it is so determined, the
defective nomination shall be disregarded. The right of shareholders to make
nominations pursuant to the foregoing procedure is subject to the rights of the
holders of any class or series of stock having a preference over the Common
Stock as to dividends or upon liquidation. The procedures set forth in this
subsection 3.3 for nomination for the election of Directors by shareholders are
in addition to, and not in limitation of, any procedures now in effect or
hereafter adopted by or at the direction of the Board or any committee thereof.
3.3.2 ELECTION
At each election of Directors, the persons receiving the greatest
number of votes shall be the Directors.
3.4 ANNUAL AND REGULAR MEETINGS
An annual Board meeting shall be held without notice immediately after
and at the same place as the annual meeting of shareholders. By resolution the
Board, or any committee thereof, may specify the time and place either within or
without the State of Washington for holding regular meetings thereof without
notice other than such resolution.
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3.5 SPECIAL MEETINGS
Special meetings of the Board or any committee designated by the Board
may be called by or at the request of the Chairman of the Board or the President
or, in the case of special Board meetings, any two (2) Directors and, in the
case of any special meeting of any committee designated by the Board, by the
Chairman thereof. The person or persons authorized to call special meetings may
fix any place either within or without the State of Washington as the place for
holding any special Board or committee meeting called by them.
3.6 MEETINGS BY COMMUNICATIONS EQUIPMENT
Members of the Board or any committee designated by the Board may
participate in a meeting of such Board or committee by, or conduct the meeting
through the use of, any means of communication by which all Directors
participating in the meeting can hear each other during the meeting.
Participation by such means shall constitute presence in person at a meeting.
3.7 NOTICE OF SPECIAL MEETINGS
Notice of a special Board or committee meeting stating the place, day
and hour of the meeting shall be given to a Director in writing or orally.
Neither the business to be transacted at, nor the purpose of, any special
meeting need be specified in the notice of such meeting.
3.7.1 PERSONAL DELIVERY
If notice is given by personal delivery, the notice shall be effective
if delivered to a Director at least two days before the meeting.
3.7.2 DELIVERY BY MAIL
If notice is delivered by mail, the notice shall be deemed effective if
deposited in the official government mail at least five days before the meeting,
properly addressed to a Director at his or her address shown on the records of
the corporation, with postage thereon prepaid.
3.7.3 DELIVERY BY PRIVATE CARRIER
If notice is given by private carrier, the notice shall be deemed
effective when dispatched to a Director at his or her address shown on the
records of the corporation at least three days before the meeting.
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3.7.4 FACSIMILE NOTICE
If notice is delivered by wire or wireless equipment which transmits a
facsimile of the notice, the notice shall be deemed effective when dispatched at
least two days before the meeting to a Director at his or her telephone number
or other number appearing on the records of the corporation.
3.7.5 DELIVERY BY TELEGRAPH
If notice is delivered by telegraph, the notice shall be deemed
effective if the content thereof is delivered to the telegraph company for
delivery to a Director at his or her address shown on the records of the
corporation at least three days before the meeting.
3.7.6 ORAL NOTICE
If notice is delivered orally, by telephone or in person, the notice
shall be deemed effective if personally given to the Director at least two days
before the meeting.
3.8 WAIVER OF NOTICE
3.8.1 IN WRITING
Whenever any notice is required to be given to any Director under the
provisions of these Amended and Restated Bylaws, the Articles of Incorporation,
as at any time amended, or the Washington Business Corporation Act, a waiver
thereof in writing, signed by the person or persons entitled to such notice and
delivered to the corporation, whether before or after the date and time of the
meeting, shall be deemed equivalent to the giving of such notice. Neither the
business to be transacted at, nor the purpose of, any regular or special meeting
of the Board or any committee designated by the Board need be specified in the
waiver of notice of such meeting.
3.8.2 BY ATTENDANCE
A Director's attendance at or participation in a Board or committee
meeting shall constitute a waiver of notice of such meeting, unless the Director
at the beginning of the meeting, or promptly upon his or her arrival, objects to
holding the meeting or transacting business thereat and does not thereafter vote
for or assent to action taken at the meeting.
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3.9 QUORUM
Subject to the provisions of any agreement concerning special Board
approval or manner of action provisions which may be entered into by the
shareholders of the corporation, a majority of the number of Directors fixed by
or in the manner provided in these Amended and Restated Bylaws shall constitute
a quorum for the transaction of business at any Board meeting but, if less than
a majority are present at a meeting, a majority of the Directors present may
adjourn the meeting from time to time without further notice.
3.10 MANNER OF ACTING
If a quorum is present when the vote is taken, subject to the
provisions of any arrangement concerning special Board approval or manner of
action provisions which may be entered into by the shareholders of the
corporation, the act of the majority of the Directors present at a Board meeting
shall be the act of the Board, unless the vote of a greater number is required
by these Amended and Restated Bylaws, the Articles of Incorporation, as at any
time amended, or the Washington Business Corporation Act.
3.11 PRESUMPTION OF ASSENT
A Director of the corporation who is present at a Board or committee
meeting at which any action is taken shall be deemed to have assented to the
action taken unless (a) the Director objects at the beginning of the meeting, or
promptly upon the Director's arrival, to holding the meeting or transacting any
business thereat, (b) the Director's dissent or abstention from the action taken
is entered in the minutes of the meeting, or (c) the Director delivers written
notice of the Director's dissent or abstention to the presiding officer of the
meeting before its adjournment or to the corporation within a reasonable time
after adjournment of the meeting. The right of dissent or abstention is not
available to a Director who votes in favor of the action taken.
3.12 ACTION BY BOARD OR COMMITTEES WITHOUT A MEETING
Any action which could be taken at a meeting of the Board or of any
committee created by the Board may be taken without a meeting if one or more
written consents setting forth the action so taken are signed by each of the
Directors or by each committee member either before or after the action is taken
and delivered to the corporation. Action taken by written consent of Directors
without a meeting is effective when the last Director signs the consent, unless
the consent specifies a later effective date. Any such written consent shall be
inserted in the minute book as if it were the minutes of a Board or a committee
meeting.
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3.13 RESIGNATION
Any Director may resign at any time by delivering written notice to the
Chairman of the Board, the President, the Secretary or the Board. Any such
resignation is effective upon delivery thereof unless the notice of resignation
specifies a later effective date and, unless otherwise specified therein, the
acceptance of such resignation shall not be necessary to make it effective.
3.14 REMOVAL
Subject to the provisions of any agreement concerning special Board
approval or manner of action provisions which may be entered into by the
shareholders of the corporation, one or more members of the Board, including the
entire Board, may be removed with or without cause (unless the Articles of
Incorporation, as at any time amended, permit removal for cause only), at a
meeting of shareholders called expressly for that purpose, by the holders of the
shares entitled to elect the Director or Directors whose removal is sought if
the number of votes cast to remove the Director exceeds the number of votes cast
not to remove the Director. If the Articles of Incorporation, as at any time
amended, permit cumulative voting in the election of Directors, then a Director
may not be removed if the number of votes sufficient to elect such Director if
then cumulatively voted at an election of the entire Board or, if there are
classes of Directors, at an election of the class of Directors of which such
Director is a part, is voted against the Director's removal.
3.15 VACANCIES
Unless the Articles of Incorporation, as at any time amended, provide
otherwise, any vacancy occurring on the Board may be filled by the shareholders,
the Board or, if the Directors in office constitute fewer than a quorum, by the
affirmative vote of a majority of the remaining Directors. Any vacant office
held by a Director elected by the holders of one or more classes or series of
shares entitled to vote and be counted collectively thereon shall be filled only
by the vote of the holders of such class or series of shares. A Director elected
to fill a vacancy shall serve only until the next election of Directors by the
shareholders.
3.16 EXECUTIVE AND OTHER COMMITTEES
3.16.1 CREATION OF COMMITTEES
The Board, by resolution adopted by the greater of a majority of the
Directors then in office and the number of Directors required to take action in
accordance with these Amended and Restated Bylaws, may create standing or
temporary committees, including an Executive Committee, and appoint members
thereto from its own number
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and invest such committees with such powers as it may see fit, subject to such
conditions as may be prescribed by the Board, these Amended and Restated Bylaws
and applicable law. Each committee must have two or more members, who shall
serve at the pleasure of the Board.
3.16.2 AUTHORITY OF COMMITTEES
Each committee shall have and may exercise all of the authority of the
Board to the extent provided in the resolution of the Board creating the
committee and any subsequent resolutions pertaining thereto and adopted in like
manner, except that no such committee shall have the authority to: (1) authorize
or approve a distribution except according to a general formula or method
prescribed by the Board, (2) approve or propose to shareholders actions or
proposals required by the Washington Business Corporation Act to be approved by
shareholders, (3) fill vacancies on the Board or any committee thereof, (4)
adopt, amend or repeal Bylaws, (5) amend the Articles of Incorporation, as at
any time amended, pursuant to RCW 23B.10.020, (6) approve a plan of merger not
requiring shareholder approval, or (7) authorize or approve the issuance or sale
or contract for sale of shares, or determine the designation and relative
rights, preferences and limitations of a class or series of shares except that
the Board may authorize a committee or a senior executive officer of the
corporation to do so within limits specifically prescribed by the Board.
3.16.3 AUDIT COMMITTEE
In addition to any committees appointed pursuant to this Section
3.16.2, there shall be an Audit Committee, appointed annually by the Board,
consisting of at least two Directors who are not members of management. It shall
be the responsibility of the Audit Committee to review the scope and results of
the annual independent audit of books and records of the corporation, to review
compliance with all corporate policies which have been approved by the Board and
to discharge such other responsibilities as may from time to time be assigned to
it by the Board. The Audit Committee shall meet at such times and places as the
members deem advisable, and shall make such recommendations to the Board as they
consider appropriate.
3.16.4 COMPENSATION COMMITTEE
The Board may, in its discretion, designate a Compensation Committee
consisting of not less than two Directors as it may from time to time determine.
The duties of the Compensation Committee shall consist of the following: (a) to
establish and review periodically, but not less than annually, the compensation
of the officers of the corporation and to make recommendations concerning such
compensation to the Board; (b) to consider incentive compensation plans for the
employees of the
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corporation; (c) to carry out the duties assigned to the Compensation Committee
under any stock option plan or other plan approved by the corporation; (d) to
consult with the President concerning any compensation matters deemed
appropriate by the President or the Compensation Committee; and (e) to perform
such other duties as shall be assigned to the Compensation Committee by the
Board.
3.16.5 NOMINATING AND ORGANIZATION COMMITTEE
The Board may, in its discretion, designate a Nominating and
Organization Committee consisting of not less than two Directors as it may from
time to time determine. The duties of the Nominating and Organization Committee
shall consist of the following: (a) to report and make recommendations to the
Board on the size and composition of the Board and nominees for Directors; (b)
to evaluate the performance of the officers of the corporation and together with
management, select and recommend to the Board appropriate individuals for
election, appointment and promotion as officers of the corporation and ensure
the continuity of capable management; (c) to report and make recommendations to
the Board on the organization of the corporation; and (d) to perform such other
duties as shall be assigned to the Nominating and Organization Committee by the
Board.
3.16.6 QUORUM AND MANNER OF ACTING
Subject to the provisions of any agreement concerning special Board
approval or manner of action provisions which may be entered into by the
shareholders of the corporation, a majority of the number of Directors composing
any committee of the Board, as established and fixed by resolution of the Board,
shall constitute a quorum for the transaction of business at any meeting of such
committee but, if less than a majority are present at a meeting, a majority of
such Directors present may adjourn the meeting from time to time without further
notice. Except as may be otherwise provided in the Washington Business
Corporation Act, if a quorum is present when the vote is taken the act of a
majority of the members present shall be the act of the committee.
3.16.7 MINUTES OF MEETINGS
All committees shall keep regular minutes of their meetings and shall
cause them to be recorded in books kept for that purpose.
3.16.8 RESIGNATION
Any member of any committee may resign at any time by delivering
written notice thereof to the Chairman of the Board, the President, the
Secretary or the Board. Any such resignation is effective upon delivery thereof,
unless the notice of
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resignation specifies a later effective date, and the acceptance of such
resignation shall not be necessary to make it effective.
3.16.9 REMOVAL
Subject to the provisions of any agreement concerning special Board
approval or manner of action provisions which may be entered into by the
shareholders of the corporation, the Board may remove any member of any
committee elected or appointed by it but only by the affirmative vote of the
greater of a majority of the Directors then in office and the number of
Directors required to take action in accordance with these Amended and Restated
Bylaws.
3.17 COMPENSATION
By Board resolution, Directors and committee members may be paid their
expenses, if any, of attendance at each Board or committee meeting, or a fixed
sum for attendance at each Board or committee meeting, or a stated salary as
Director or a committee member, or a combination of the foregoing. No such
payment shall preclude any Director or committee member from serving the
corporation in any other capacity and receiving compensation therefor.
SECTION 4. OFFICERS
4.1 APPOINTMENT AND TERM
The officers of the corporation shall be those officers appointed from
time to time by the Board or by any other officer empowered to do so. The Board
shall have sole power and authority to appoint executive officers. As used
herein, the term "executive officer" shall mean the President, any Vice
President in charge of a principal business unit, division or function or any
other officer who performs a policy-making function. The Board or the President
may appoint such other officers and assistant officers to hold office for such
period, have such authority and perform such duties as may be prescribed. The
Board may delegate to any other officer the power to appoint any subordinate
officers and to prescribe their respective terms of office, authority and
duties. Any two or more offices may be held by the same person. Unless an
officer dies, resigns or is removed from office, he or she shall hold office
until his or her successor is appointed.
4.2 RESIGNATION
Any officer may resign at any time by delivering written notice thereof
to the corporation. Any such resignation is effective upon delivery thereof,
unless the notice
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of resignation specifies a later effective date, and, unless otherwise specified
therein, the acceptance of such resignation shall not be necessary to make it
effective.
4.3 REMOVAL
Any officer may be removed by the Board at any time, with or without
cause. An officer or assistant officer, if appointed by another officer, may be
removed by any officer authorized to appoint officers or assistant officers.
4.4 CONTRACT RIGHTS OF OFFICERS
The appointment of an officer does not itself create contract rights.
4.5 CHAIRMAN OF THE BOARD
If appointed, the Chairman of the Board shall perform such duties as
shall be assigned to him or her by the Board from time to time and shall preside
over meetings of the Board and shareholders unless another officer is appointed
or designated by the Board as Chairman of such meetings.
4.6 PRESIDENT
If appointed, the President shall be the chief executive officer of the
corporation unless some other officer is so designated by the Board, shall
preside over meetings of the Board and shareholders in the absence of a Chairman
of the Board, and, subject to the Board's control, shall supervise and control
all of the assets, business and affairs of the corporation. In general, the
President shall perform all duties incident to the office of President and such
other duties as are prescribed by the Board from time to time. If no Secretary
has been appointed, the President shall have responsibility for the preparation
of minutes of meetings of the Board and shareholders and for authentication of
the records of the corporation.
4.7 VICE PRESIDENT
In the event of the death of the President or his or her inability to
act, the Vice President (or if there is more than one Vice President, the Vice
President who was designated by the Board as the successor to the President, or
if no Vice President is so designated, the Vice President first elected to such
office) shall perform the duties of the President, except as may be limited by
resolution of the Board, with all the powers of and subject to all the
restrictions upon the President. Vice Presidents shall perform such other duties
as from time to time may be assigned to them by the President or by or at the
direction of the Board.
Amended and Restated Bylaws of Gargoyles, Inc. Page 16
<PAGE> 17
4.8 SECRETARY
If appointed, the Secretary shall be responsible for preparation of
minutes of the meetings of the Board and shareholders, maintenance of the
corporation records and stock registers, and authentication of the corporation's
records and shall in general perform all duties incident to the office of
Secretary and such other duties as from time to time may be assigned to him or
her by the President or by or at the direction of the Board. In the absence of
the Secretary, an Assistant Secretary may perform the duties of the Secretary.
4.9 TREASURER
If appointed, the Treasurer shall have charge and custody of and be
responsible for all funds and securities of the corporation, receive and give
receipts for moneys due and payable to the corporation from any source
whatsoever, and deposit all such moneys in the name of the corporation in banks,
trust companies or other depositories selected in accordance with the provisions
of these Amended and Restated Bylaws, and in general perform all of the duties
incident to the office of Treasurer and such other duties as from time to time
may be assigned to him or her by the President or by or at the direction of the
Board. In the absence of the Treasurer, an Assistant Treasurer may perform the
duties of the Treasurer. If required by the Board, the Treasurer or any
Assistant Treasurer shall give a bond for the faithful discharge of his or her
duties in such amount and with such surety or sureties as the Board shall
determine.
4.10 SALARIES
The salaries of the officers shall be fixed from time to time by the
Board or by any person or persons to whom the Board has delegated such
authority. No officer shall be prevented from receiving such salary by reason of
the fact that he or she is also a Director of the corporation.
SECTION 5. CONTRACTS, LOANS, CHECKS AND DEPOSITS
5.1 CONTRACTS
The Board may authorize any officer or officers, or agent or agents, to
enter into any contract or execute and deliver any instrument in the name of and
on behalf of the corporation. Such authority may be general or confined to
specific instances.
Amended and Restated Bylaws of Gargoyles, Inc. Page 17
<PAGE> 18
5.2 LOANS TO THE CORPORATION
No loans shall be contracted on behalf of the corporation and no
evidences of indebtedness shall be issued in its name unless authorized by a
resolution of the Board. Such authority may be general or confined to specific
instances.
5.3 CHECKS, DRAFTS, ETC.
All checks, drafts or other orders for the payment of money, notes or
other evidences of indebtedness issued in the name of the corporation shall be
signed by such officer or officers, or agent or agents, of the corporation and
in such manner as is from time to time determined by resolution of the Board.
5.4 DEPOSITS
All funds of the corporation not otherwise employed shall be deposited
from time to time to the credit of the corporation in such banks, trust
companies or other depositories as the Board may select.
SECTION 6. CERTIFICATES FOR SHARES AND THEIR TRANSFER
6.1 ISSUANCE OF SHARES
No shares of the corporation shall be issued unless authorized by the
Board, or by a committee designated by the Board to the extent such committee is
empowered to do so.
6.2 CERTIFICATES FOR SHARES
Certificates representing shares of the corporation shall be signed,
either manually or in facsimile, by the President or any Vice President and by
the Treasurer or any Assistant Treasurer or the Secretary or any Assistant
Secretary and shall include on their face written notice of any restrictions
which may be imposed on the transferability of such shares. All certificates
shall be consecutively numbered or otherwise identified.
6.3 STOCK RECORDS
The stock transfer books shall be kept at the principal office of the
corporation or at the office of the corporation's transfer agent or registrar.
The name and address of each person to whom certificates for shares are issued,
together with the class and number of shares represented by each such
certificate and the date of issue thereof, shall be entered on the stock
transfer books of the corporation. The person in whose
Amended and Restated Bylaws of Gargoyles, Inc. Page 18
<PAGE> 19
name shares stand on the books of the corporation shall be deemed by the
corporation to be the owner thereof for all purposes.
6.4 RESTRICTION ON TRANSFER
Except to the extent that the corporation has obtained an opinion of
counsel acceptable to the corporation that transfer restrictions are not
required under applicable securities laws, or has otherwise satisfied itself
that such transfer restrictions are not required, all certificates representing
shares of the corporation shall, in addition to any legends required by any
agreement concerning special Board approval or manner of action provisions which
may be entered into by the shareholders of the corporation, bear a legend on the
face of the certificate, or on the reverse of the certificate if a reference to
the legend is contained on the face, which reads substantially as follows in
addition to any legends required by any shareholder agreement:
"The securities evidenced by this certificate have not been
registered under the Securities Act of l933, as amended, or
any applicable state law, and no interest therein may be sold,
distributed, assigned, offered, pledged or otherwise
transferred unless (a) there is an effective registration
statement under such Act and applicable state securities laws
covering any such transaction involving said securities or (b)
this corporation receives an opinion of legal counsel for the
holder of these securities (concurred in by legal counsel for
this corporation) stating that such transaction is exempt from
registration or this corporation otherwise satisfies itself
that such transaction is exempt from registration. Neither the
offering of the securities nor any offering materials have
been reviewed by any administrator under the Securities Act of
1933, as amended, or any applicable state law."
6.5 TRANSFER OF SHARES
The transfer of shares of the corporation shall be made only on the
stock transfer books of the corporation pursuant to authorization or document of
transfer made by the holder of record thereof or by his or her legal
representative, who shall furnish proper evidence of authority to transfer, or
by his or her attorney-in-fact authorized by power of attorney duly executed and
filed with the Secretary of the corporation. All certificates surrendered to the
corporation for transfer shall be cancelled and no new certificate shall be
issued until the former certificates for a like number of shares shall have been
surrendered and cancelled.
Amended and Restated Bylaws of Gargoyles, Inc. Page 19
<PAGE> 20
6.6 LOST OR DESTROYED CERTIFICATES
In the case of a lost, destroyed or mutilated certificate, a new
certificate may be issued therefor upon such terms and indemnity to the
corporation as the Board may prescribe.
SECTION 7. BOOKS AND RECORDS
The corporation shall:
(a) Keep as permanent records minutes of all meetings of its
shareholders and the Board, a record of all actions taken by the shareholders or
the Board without a meeting, and a record of all actions taken by a committee of
the Board exercising the authority of the Board on behalf of the corporation.
(b) Maintain appropriate accounting records.
(c) Maintain a record of its shareholders, in a form that permits
preparation of a list of the names and addresses of all shareholders, in
alphabetical order by class of shares showing the number and class of shares
held by each; provided, however, such record may be maintained by an agent of
the corporation.
(d) Maintain its records in written form or in another form capable of
conversion into written form within a reasonable time.
(e) Keep a copy of the following records at its principal office:
1. the Amended and Restated Articles of Incorporation and
all amendments thereto as currently in effect;
2. the Amended and Restated Bylaws and all amendments
thereto as currently in effect;
3. the minutes of all meetings of shareholders and records
of all action taken by shareholders without a meeting,
for the past three years;
4. the financial statements described in Section
23B.16.200(1) of the Washington Business Corporation Act,
for the past three years;
5. all written communications to shareholders generally
within the past three years;
Amended and Restated Bylaws of Gargoyles, Inc. Page 20
<PAGE> 21
6. a list of the names and business addresses of the current
Directors and officers; and
7. the most recent annual report delivered to the Washington
Secretary of State.
SECTION 8. ACCOUNTING YEAR
The accounting year of the corporation shall be the calendar year,
provided that if a different accounting year is at any time selected by the
Board for purposes of federal income taxes, or any other purpose, the accounting
year shall be the year so selected.
SECTION 9. SEAL
The Board may provide for a corporate seal which shall consist of the
name of the corporation, the state of its incorporation and the year of its
incorporation.
SECTION 10. INDEMNIFICATION
10.1 RIGHT TO INDEMNIFICATION
Each person who was, is or is threatened to be made a named party to or
is otherwise involved (including, without limitation, as a witness) in any
threatened, pending or completed action, suit or proceeding, whether civil,
criminal, administrative or investigative and whether formal or informal
(hereinafter a "proceeding"), by reason of the fact that he or she is or was a
Director or officer of the corporation or, that being or having been such a
Director or officer or an employee of the corporation, he or she is or was
serving at the request of an executive officer of the corporation as a Director,
officer, partner, trustee, employee or agent of another corporation or of a
partnership, joint venture, trust, employee benefit plan or other enterprise
(hereinafter an "indemnitee"), whether the basis of a proceeding is alleged
action in an official capacity as such a Director, officer, partner, trustee,
employee or agent or in any other capacity while serving as such a Director,
officer, partner, trustee, employee or agent, shall be indemnified and held
harmless by the corporation against all expense, liability and loss (including
counsel fees, judgments, fines, ERISA excise taxes or penalties and amounts to
be paid in settlement) actually and reasonably incurred or suffered by such
indemnitee in connection therewith, and such indemnification shall continue as
to an indemnitee who has ceased to be a Director, officer, partner, trustee,
employee or agent and shall inure to the benefit of the indemnitee's heirs,
executors and administrators. Except as provided in subsection 10.2 of this
Section with respect to proceedings seeking to enforce rights to
indemnification, the corporation shall indemnify any such indemnitee in
connection
Amended and Restated Bylaws of Gargoyles, Inc. Page 21
<PAGE> 22
with a proceeding (or part thereof) initiated by such indemnitee only if a
proceeding (or part thereof) was authorized or ratified by the Board. The right
to indemnification conferred in this Section shall be a contract right.
10.2 RESTRICTIONS ON INDEMNIFICATION
No indemnification shall be provided to any such indemnitee for acts or
omissions of the indemnitee finally adjudged to be intentional misconduct or a
knowing violation of law, for conduct of the indemnitee finally adjudged to be
in violation of Section 23B.08.310 of the Washington Business Corporation Act,
for any transaction with respect to which it was finally adjudged that such
indemnitee personally received a benefit in money, property or services to which
the indemnitee was not legally entitled or if the corporation is otherwise
prohibited by applicable law from paying such indemnification, except that if
Section 23B.08.560 or any successor provision of the Washington Business
Corporation Act is hereafter amended, the restrictions on indemnification set
forth in this subsection 10.2 shall be as set forth in such amended statutory
provision.
10.3 ADVANCEMENT OF EXPENSES
The right to indemnification conferred in this Section shall include
the right to be paid by the corporation the expenses incurred in defending any
proceeding in advance of its final disposition (hereinafter an "advancement of
expenses"). An advancement of expenses shall be made upon delivery to the
corporation of an undertaking (hereinafter an "undertaking"), by or on behalf of
such indemnitee, to repay all amounts so advanced if it shall ultimately be
determined by final judicial decision from which there is no further right to
appeal that such indemnitee is not entitled to be indemnified for such expenses
under this subsection 10.3.
10.4 RIGHT OF INDEMNITEE TO BRING SUIT
If a claim under subsection 10.1 or 10.3 of this Section is not paid in
full by the corporation within 60 days after a written claim has been received
by the corporation, except in the case of a claim for an advancement of
expenses, in which case the applicable period shall be 20 days, the indemnitee
may at any time thereafter bring suit against the corporation to recover the
unpaid amount of the claim. If successful in whole or in part, in any such suit
or in a suit brought by the corporation to recover an advancement of expenses
pursuant to the terms of an undertaking, the indemnitee shall be entitled to be
paid also the expense of prosecuting or defending such suit. The indemnitee
shall be presumed to be entitled to indemnification under this Section upon
submission of a written claim (and, in an action brought to enforce a claim for
an advancement of expenses, where the required undertaking has been tendered to
the
Amended and Restated Bylaws of Gargoyles, Inc. Page 22
<PAGE> 23
corporation) and thereafter the corporation shall have the burden of proof to
overcome the presumption that the indemnitee is so entitled.
10.5 PROCEDURES EXCLUSIVE
Pursuant to Section 23B.08.560(2) or any successor provision of the
Washington Business Corporation Act, the procedures for indemnification and
advancement of expenses set forth in this Section are in lieu of the procedures
required by Section 23B.08.550 or any successor provision of the Washington
Business Corporation Act.
10.6 NONEXCLUSIVITY OF RIGHTS
The right to indemnification and the advancement of expenses conferred
in this Section shall not be exclusive of any other right which any person may
have or hereafter acquire under any statute, provision of the Articles of
Incorporation, as at any time amended, or the Amended and Restated Bylaws of the
corporation, or any general or specific action of the Board, contract or
otherwise.
10.7 INSURANCE, CONTRACTS AND FUNDING
The corporation may maintain insurance, at its expense, to protect
itself and any Director, officer, partner, trustee, employee or agent of the
corporation or another corporation, partnership, joint venture, trust or other
enterprise against any expense, liability or loss, whether or not the
corporation would have the power to indemnify such person against such expense,
liability or loss under the Washington Business Corporation Act. The corporation
may enter into contracts with any Director, officer, partner, trustee, employee
or agent of the corporation in furtherance of the provisions of this Section and
may create a trust fund, grant a security interest or use other means
(including, without limitation, a letter of credit) to ensure the payment of
such amounts as may be necessary to effect indemnification as provided in this
Section.
10.8 INDEMNIFICATION OF EMPLOYEES AND AGENTS OF THE CORPORATION
The corporation may, by action of the Board, grant rights to
indemnification and advancement of expenses to employees and agents or any class
or group of employees and agents of the corporation (i) with the same scope and
effect as the provisions of this Section with respect to the indemnification and
advancement of expenses of Directors and officers of the corporation; (ii)
pursuant to rights granted pursuant to, or provided by, the Washington Business
Corporation Act; or (iii) as are otherwise consistent with law.
Amended and Restated Bylaws of Gargoyles, Inc. Page 23
<PAGE> 24
10.9 PERSONS SERVING OTHER ENTITIES
Any person who, while a Director, officer or employee of the
corporation, is or was serving (a) as a Director or officer of another foreign
or domestic corporation of which a majority of the shares entitled to vote in
the election of its Directors is held by the corporation or (b) as a partner,
trustee or otherwise in an executive or management capacity in a partnership,
joint venture, trust or other enterprise of which the corporation or a wholly
owned subsidiary of the corporation is a general partner or has a majority
ownership shall be deemed to be so serving at the request of an executive
officer of the corporation and entitled to indemnification and advancement of
expenses under subsections 10.1 and 10.3 of this Section.
SECTION 11. AMENDMENTS
Subject to the provisions of any agreement concerning special Board
approval or manner of action provisions which may be entered into by the
shareholders of the corporation, these Amended and Restated Bylaws may be
altered, amended or repealed and new Bylaws may be adopted by the Board, except
that the Board may not repeal or amend any Bylaw that the shareholders have
expressly provided, in amending or repealing such Bylaw, may not be amended or
repealed by the Board. The shareholders may also alter, amend and repeal these
Amended and Restated Bylaws or adopt new Bylaws. All Bylaws made by the Board
may be amended, repealed, altered or modified by the shareholders.
The foregoing Amended and Restated Bylaws were adopted by the Board of
Directors on __________________, 1996.
-------------------------
Secretary
Amended and Restated Bylaws of Gargoyles, Inc. Page 24
<PAGE> 1
EXHIBIT 10.1
TO
GARGOYLES, INC.
FORM S-1
"[*]" = confidential information omitted and filed separately with the
Securities and Exchange Commission pursuant to a request for confidential
treatment.
<PAGE> 2
STOCK PURCHASE AGREEMENT
THIS STOCK PURCHASE AGREEMENT (this "Agreement") is made as of this
14th day of March, 1995, by and between GARGOYLES, INC., a Washington
corporation ("Gargoyles"), PRO-TEC, INC., a Washington corporation ("Pro-Tec"),
ANTONE MANUFACTURING, INC., a Washington corporation ("Antone"), CAROL AND
DENNIS BURNS, husband and wife (collectively "Burns"), DOUGLAS HAUFF ("Hauff"),
JOHN STECKLER ("Steckler"), TRILLIUM CORPORATION, a Washington corporation
("Trillium"), DAVID R. SYRE ("Syre"), and the other investors listed on Exhibit
2. Gargoyles, Pro-Tec and Antone shall sometimes collectively be referred to
herein as the "Companies." Trillium, Syre, and those persons listed on the
attached Exhibit 2 shall sometimes collectively be referred to herein as the
"Investors" and each as an "Investor".
RECITALS
A. Burns owns 68.4 shares, representing ninety-five percent (95%) of
the issued and outstanding shares, of capital stock of Gargoyles; 50,400 shares,
representing ninety percent (90%) of the issued and outstanding shares, of
capital stock of Pro-Tec; and 1000 shares, representing one hundred percent
(100%) of the issued and outstanding capital stock of Antone.
B. Hauff is the President of Gargoyles and Pro-Tec, and owns 3.6
shares, representing five percent (5%) of the issued and outstanding shares, of
the Gargoyles Common Stock; and 5,600 shares, representing ten percent (10%) of
the issued and outstanding shares, of the Pro-Tec Common Stock. In addition,
Hauff has an option to acquire an additional ten percent interest in Gargoyles
and five percent interest in Pro-Tec under Employment Agreements between the
corporations, Burns and Hauff dated January 5, 1994 (the "Hauff-Gargoyles
Employment Agreement and the Hauff-Pro-Tec Employment Agreement", respectively).
C. Gargoyles and Antone design, develop, manufacture, market and
distribute performance eyewear and sun glasses under the Gargoyles trade name
and mark. Pro-Tec designs, markets and distributes sports helmets and other
sports products. The three Companies are operated out of premises located at
5866 South 194th Street, Kent, Washington (the "Premises").
D. Subject to the terms and conditions set forth in this Agreement,
Burns and Hauff desire to reorganize and recapitalize Gargoyles, Pro-Tec and
Antone and to
<PAGE> 3
sell shares in Gargoyles and Pro-Tec to the Investors, and the Investors desire
to purchase such shares.
E. Capitalized terms shall have the meanings ascribed to them herein.
AGREEMENT
NOW, THEREFORE, in consideration of the premises and the mutual
covenants and conditions set forth herein, the parties hereto hereby agree as
follows:
1. REORGANIZATION; RECAPITALIZATION
1.1 MERGER OF ANTONE INTO GARGOYLES; RECAPITALIZATION
Prior to the Closing Date, Burns and Hauff shall cause to be properly
performed all corporate action required to merge Antone into Gargoyles and to
recapitalize the surviving entity, Gargoyles. On or before the Closing Date,
Antone shall be merged into Gargoyles and Gargoyles shall be recapitalized in
accordance with the Merger and Recapitalization Agreement and Articles of Merger
attached as Exhibit 1 hereto (the "Merger and Recapitalization"). As part of the
Merger and Recapitalization, the Articles of Incorporation of Gargoyles shall be
amended and restated substantially in the form attached hereto as Exhibit 6.1 in
which Gargoyles shall authorize the issuance of two million shares of common
stock of Gargoyles (the "Gargoyles Common Stock"). The Gargoyles Common Stock
will have the rights, restrictions, privileges and preferences set forth in the
Gargoyles Amended and Restated Articles of Incorporation. Following the closing
of the Merger and Recapitalization, there shall be one million (1,000,000)
shares of Gargoyles Common Stock issued and outstanding; Burns shall hold
950,000 shares of Gargoyles Common Stock and Hauff shall hold 50,000 shares of
Gargoyles Common Stock. Of those shares held by Burns, one hundred thousand
(100,000) shares of the Gargoyles Common Stock (the "Optioned Shares") will be
subject to the option to purchase granted by Burns to Hauff under the Gargoyles
- - Hauff Employment Agreement (the "Hauff Option").
1.2 RECAPITALIZATION OF PRO-TEC
Prior to the Closing Date, Burns and Hauff shall cause to be properly
performed all corporate action required to amend and restate the Articles of
Incorporation for Pro-Tec in the form of the attached Exhibit 6.1 and to
recapitalize Pro-Tec as set forth in such Amended and Restated Articles. Upon
filing the Amended and Restated Articles of Incorporation for Pro-Tec, Pro-Tec
shall be authorized to issue two million (2,000,000) shares of common stock (the
"Pro-Tec Common
-2-
<PAGE> 4
Stock"). The Pro-Tec Common Stock will have the rights, restrictions, privileges
and preferences set forth in the Pro-Tec Amended and Restated Articles of
Incorporation. Following the recapitalization of Pro-Tec, there shall be one
million (1,000,000) shares of Pro-Tec Common Stock issued and outstanding of
which 900,000 shares shall be held by Burns and 100,000 shares shall be held by
Hauff.
2. REDEMPTION AND SALE OF COMMON STOCK OF GARGOYLES AND PRO-TEC
2.1 PURCHASE AND SALE OF PRO-TEC COMMON STOCK
(a) Investors. Subject to the terms and conditions of this
Agreement, on the Closing Date, Burns shall sell to the Investors and, and each
Investor and shall purchase from Burns, severally and not jointly, the total
number of shares of Pro-Tec Common Stock set opposite such Investor's name on
the attached Exhibit 2 for a purchase price of $.05416 per share. The total
number of shares of Pro-Tec Common Stock to be purchased by the Investors and
shall be six hundred thousand (600,000) shares. The purchase price for the
Pro-Tec Common Stock shall be paid by each of the Investors other than Trillium
by wire transfer made on the Closing Date into an account or accounts specified
by Burns. Trillium will pay the purchase price for its shares of Pro-Tec Common
Stock by delivering to Burns a Promissory Note in the principal amount scheduled
for Trillium on Exhibit 2 (the "First Trillium Note"). Interest on the First
Trillium Note shall accrue at the rate of seven percent (7%) per annum. Only
accrued interest on the First Trillium Note shall be payable beginning with the
first payment of interest due April 1, 1995 and continuing on the first day of
each month thereafter so long as any principal amount shall remain unpaid. The
principal amount of the First Trillium Note shall be due in full on January 2,
1996. The First Trillium Note shall be secured in full by an irrevocable
stand-by letter of credit on terms reasonably acceptable to Trillium and Burns.
The First Trillium Note shall carry a prepayment prohibition. All payments to
Burns under the terms of the First Trillium Note shall be paid to Burns free and
clear of any restrictions, conditions, claims, counterclaims, or defenses, and
free and clear of and without deductions, set-offs, or withholdings of any
nature, present or future.
(b) Steckler. Subject to the terms and conditions of this
Agreement, Burns shall sell to Steckler and Steckler shall purchase from Burns
fifty thousand 50,000 shares of Pro-Tec Common Stock for a purchase price of
$.05416 per share. The purchase price for the Pro-Tec Common Stock shall be paid
by Steckler by wire transfer made on the Closing Date into an account or
accounts specified by Burns.
-3-
<PAGE> 5
2.2 PURCHASE AND SALE OF OPTIONED SHARES
Subject to the terms and conditions of this Agreement, on the Closing
Date, Burns shall sell to the Investors, and each Investor shall purchase from
Burns, severally and not jointly, the total number of Optioned Shares set
opposite such Investor's name on the attached Exhibit 2 for a purchase price of
five dollars ($5.00) per share, plus the assumption of the obligations to Burns
under the terms of the Hauff Option. The total number of Optioned Shares to be
purchased by the Investors shall be one hundred thousand (100,000) shares. The
purchase price for the Optioned Shares shall be paid by each of the Investors
other than Trillium by wire transfer made on the Closing Date into an account or
accounts specified by Burns. Trillium will pay the purchase price for its shares
of Optioned Shares by delivering to Burns a Promissory Note in the principal
amount scheduled for Trillium on Exhibit 2 (the "Second Trillium Note").
Interest on the Second Trillium Note shall accrue at the rate of seven percent
(7%) per annum. Only accrued interest on the Second Trillium Note shall be
payable beginning with the first payment of interest due April 1, 1995 and
continuing on the first day of each month thereafter so long as any principal
amount shall remain unpaid. The principal amount of the Second Trillium Note
shall be due in full on January 2, 1996. The Second Trillium Note shall be
secured in full by an irrevocable stand-by letter of credit on terms reasonably
acceptable to Trillium and Burns. The Second Trillium Note shall carry a
prepayment prohibition. All payments to Burns under the terms of the Second
Trillium Note shall be paid to Burns free and clear of any restrictions,
conditions, claims, counterclaims, or defenses, and free and clear of and
without deductions, set-offs, or withholdings of any nature, present or future.
2.3 PURCHASE OF GARGOYLES COMMON STOCK FROM GARGOYLES
Subject to the terms and conditions of this Agreement, on the Closing
Date, Gargoyles shall sell to the Investors, and each Investor shall purchase
from Gargoyles, severally and not jointly, the total number of shares of
Gargoyles Common Stock set opposite such Investor's name on the attached Exhibit
2 for a purchase price of eight and 97916/100 dollars ($8.97916) per share. The
total number of shares of Gargoyles Common Stock to be purchased by the
Investors shall be six hundred thousand (600,000) shares. The purchase price for
the Gargoyles Common Stock shall be paid by each of the Investors as follows:
(a) Investors other than Trillium. Each of the Investors other than
Trillium shall pay the purchase price for their Gargoyles Common Stock by wire
transfer made on the Closing Date into an account specified by Gargoyles.
-4-
<PAGE> 6
(b) Trillium. Trillium shall pay the purchase price for its
Gargoyles Common Stock by executing and delivering to Gargoyles on the Closing
Date a promissory note in the principal amount of the purchase price set
opposite Trillium's name on the attached Exhibit 2 (the "Third Trillium Note").
Interest on the Third Trillium Note shall accrue at the rate of seven percent
(7%) per annum. Only accrued interest on the Third Trillium Note shall be
payable beginning with the first payment of interest due April 1, 1995 and
continuing on the first day of each month thereafter so long as any principal
amount shall remain unpaid. The principal amount of the Third Trillium Note
shall be due in full on January 2, 1996. The Third Trillium Note shall carry a
prepayment prohibition. All payments to Burns under the terms of the Third
Trillium Note shall be paid to Burns free and clear of any restrictions,
conditions, claims, counterclaims, or defenses, and free and clear of and
without deductions, set-offs, or withholdings of any nature, present or future.
2.4 REDEMPTION
Subject to the terms and conditions of this Agreement, on the Closing
Date Gargoyles shall redeem from Burns six hundred thousand (600,000) shares
(the "Redemption") of his Gargoyles Common Stock (the "Redeemed Shares") for a
redemption price of Ten Million Eight Hundred Ninety Five Thousand Five Hundred
Dollars ($10,895,500) plus the agreed value of all Gargoyles personal property
which will be distributed to Burns at Closing as listed on Exhibit 8.9 hereto
(the "Redemption Price"). The Redemption Price shall be paid by (i) delivery by
Gargoyles to Burns of a promissory note in principal amount of Four Million Four
Hundred Eighty-Nine Thousand Five Hundred Eighty and 00/100 Dollars
($4,489,580.00) (the Burns Note"), and (ii) wire transfer of the balance of the
purchase price made on the Closing Date into an account or accounts specified by
Burns. Interest on the Burns Note shall accrue at the rate of seven percent (7%)
per annum. Only accrued interest on the Burns Note shall be payable beginning
with the first payment of interest due April 1, 1995 and continuing on the first
day of each month thereafter so long as any principal amount shall remain
unpaid. The principal amount of the Burns Note shall be due in full on January
2, 1996. The Burns Note shall carry a prepayment prohibition. The Burns Note
shall be secured in full by an irrevocable stand-by letter of credit on terms
reasonably acceptable to Gargoyles and Burns. All payments to Burns under the
terms of the Burns Note shall be paid to Burns free and clear of any
restrictions, conditions, claims, counterclaims, or defenses, and free and clear
of and without deductions, set-offs, or withholdings of any nature, present or
future.
-5-
<PAGE> 7
The Redeemed Shares, the Optioned Shares, the Pro-Tec Common Stock and
the Gargoyles Common Stock to be purchased and sold under this Agreement shall
hereinafter be referred to collectively as the "Stock."
3. CLOSING
3.1 DATE; LOCATION
The Closing of the transactions contemplated by this Agreement (the
"Closing") shall take place at the offices of Trillium, 1313 North Commercial,
Bellingham, Washington at 10:00 AM local time on or before March 24, 1995 or
such other date as the parties hereto may agree (the "Closing Date").
3.2 DELIVERIES
Subject to satisfaction or waiver of the conditions to Closing set
forth herein, on the Closing Date:
(a) Burns shall deliver to each of the Investors in accordance with
stock certificates representing the Pro-Tec Stock held by Burns to be purchased
by the Investors, duly endorsed in blank or accompanied by stock powers duly
executed by Burns and the Investors shall wire transfer the purchase price for
such shares into the account specified by Burns;
(b) Burns shall deliver to each of the Investors stock certificates
representing the Optioned Shares, duly endorsed in blank or accompanied by stock
powers duly executed by Burns, and the Investors shall wire transfer the
purchase price for such shares into the account specified by Burns. In addition,
Burns and the Investors, shall execute and deliver the Assignment and Assumption
of Amended and Restated Option Agreement substantially in the form of the
attached Exhibit 3.2;
(c) Gargoyles shall deliver to the Investors stock certificates
representing the Gargoyles Common Stock to be newly issued to the Investors.
Trillium shall execute and deliver to Gargoyles the Trillium Note, and the other
Investors shall wire transfer the purchase price for such newly issued shares
into the account specified by Gargoyles;
(d) Burns shall deliver to Gargoyles stock certificates
representing the Redeemed Shares, duly endorsed in blank or accompanied by stock
powers duly executed by Burns, and Gargoyles shall execute and deliver to Burns
the Burns Note and shall wire transfer the balance of the Redemption Price into
the account specified by Burns. Gargoyles shall also execute and deliver to
Burns a bill of sale for the personal property to be distributed to Burns at
closing;
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(e) Burns, Hauff and the Companies shall each deliver to the
Investors a certificate dated as of the Closing Date stating that all the
representations and warranties made by them hereunder are true as of the Closing
Date; and
(f) the parties hereto shall deliver each of the other instruments
or documents required to be delivered at Closing under the terms of this
Agreement (the "Related Documents").
4. REPRESENTATIONS AND WARRANTIES OF BURNS; CERTAIN TAX REPRESENTATIONS BY
BURNS AND THE COMPANIES
4.1 REPRESENTATIONS AND WARRANTIES OF BURNS
Burns represents and warrants to the Investors, the Companies and Hauff
that the following statements are true and correct as of the date of this
Agreement and will be true and correct as of the Closing Date:
(a) Authority of Burns. Burns has full right, power, capacity and
authority to execute and deliver this Agreement and the Related Documents to be
executed and delivered by Burns hereunder. This Agreement has been, and each of
the Related Documents to be executed by Burns will be, duly executed and
delivered by Burns and will constitute a valid and binding obligation of Burns
enforceable against Burns in accordance with their terms.
(b) Ownership of Stock. As of the date hereof with respect to the
Companies, and immediately prior to the Closing with respect to Gargoyles and
Pro-Tec, the issued and outstanding Stock is owned as set forth on the attached
Schedule 4.1(b). Except for the Hauff Option, the Stock is validly issued, fully
paid and non-assessable shares of common stock owned of record and beneficially
by parties listed on Schedule 4.1(b), free and clear of all liens, charges,
encumbrances, agreements, claims or restrictions of any kind ("Liens"), by or on
the part of any person, firm, corporation or other entity ("Person"), and upon
delivery of the certificates representing the Stock duly endorsed in blank or
accompanied by a duly executed stock power, good and marketable title to the
Stock will be sold, assigned, conveyed, transferred and delivered to the
Investors or Hauff, as the case may be, free and clear of all Liens by or on the
part of any Person.
(c) No Broker or Finder. Burns has retained no broker in connection
with the transactions contemplated by this Agreement nor has he dealt with a
broker or finder in connection with the transactions contemplated by this
Agreement which would create an entitlement by any Person to a finders' or
brokers' fee.
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(d) Accuracy of Statements. Neither this Agreement nor any of the
exhibits, schedules, written statements, documents, certificates or other items
furnished to the Investors by or on behalf of Burns with respect to this
Agreement and the transactions contemplated hereby contains any untrue statement
of a material fact or omits a material fact necessary to make each statement
contained herein or therein not misleading.
4.2 REPRESENTATION AND WARRANTIES OF BURNS AND THE COMPANIES REGARDING
TAXES
Burns and the Companies jointly and severally represent and warranty to
the Investors that each of the Companies has prepared and filed in a timely
manner all tax returns and reports required to be filed by law. Such returns and
reports are true, correct and complete in all material respects. Each of the
Companies has timely paid, or made adequate provisions for the payment in full
of, all taxes and other assessments which are due or that will become due
pursuant to such returns, except those presently being contested by them in good
faith. The provision, if any, for taxes of the Companies in respect of taxes as
shown in the Financial Statements or the Review Statements, as defined below, of
the Companies is adequate for taxes due or accrued as of the date thereof.
Except as set forth on Schedule 4.2, no deficiencies for taxes, fees or other
charges have been proposed or assessed by any taxing authority against the
Companies. The Companies have no knowledge of any ongoing or pending
examinations or audits with respect to taxes owed by the Companies by any taxing
authority, and the Companies have no knowledge of any facts that, if known to
any taxing authority, would be likely to result in the issuance of a notice of
proposed deficiency or similar notice of intention to assess any taxes against
the Companies. None of the Companies has executed any waiver of any statute of
limitations on the assessment or collection of any tax or governmental charge.
Except as set forth on Schedule 4.2, none of the Companies' tax returns or tax
compliance filings have ever been audited by governmental authorities. Any
taxes, fees or other charges imposed upon any of the Companies under any
applicable law payable in connection with the execution and delivery of, or the
consummation of, the transactions contemplated by this Agreement shall be paid
by the Companies on a timely basis (including any penalties or interest payable
in respect of such taxes, fees or other charges).
5. REPRESENTATIONS AND WARRANTIES OF HAUFF
5.1 TO INVESTORS
Hauff represents and warrants to the Investors that the following
statements are true and correct as of the date of this Agreement and will be
true and correct as of the Closing Date:
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(a) Authority. Hauff has full right, power, capacity and authority
to execute and deliver this Agreement and the Related Documents to be executed
and delivered by Hauff hereunder. This Agreement has been, and each of the
Related Documents to be executed by Hauff will be, duly executed and delivered
by Hauff and will constitute a valid and binding obligation of Hauff enforceable
against Hauff in accordance with their terms.
(b) No Broker or Finder. Hauff has retained no broker in connection
with the transactions contemplated by this Agreement nor has he dealt with a
broker or finder in connection with the transactions contemplated by this
Agreement which would create an entitlement by any Person to a finders' or
brokers' fee.
(c) Accuracy of Statements. Neither this Agreement nor any of the
exhibits, schedules, written statements, documents, certificates or other items
furnished to the Investors by or on behalf of Hauff with respect to this
Agreement and the transactions contemplated hereby contains any untrue statement
of a material fact or omits a material fact necessary to make each statement
contained herein or therein not misleading.
5.2 TO BURNS
Hauff represents and warrants to Burns that the following statements
are true and correct as of the date of this Agreement and will be true and
correct as of the Closing Date:
(a) Disclosure of Third Party Inquiries. Except as set forth on
Schedule 5.2(a), Hauff has not received within the last three years any third
party serious inquiries with follow-up discussions or offers, whether written or
oral, to purchase all or part of the stock or assets of the Companies nor any
inquiries or offers to purchase or license or transfer any of the Companies'
patents, trademarks, intellectual property rights, discoveries, inventions,
designs, experimental work, or trade secrets.
(b) Disclosure of Contract Expectancies and Business Opportunities.
Except as disclosed on Schedule 5.2(b), Hauff has disclosed to Burns all
material contract expectancies and business opportunities of the Companies
arising within the last two years. A contract expectancy or business opportunity
includes: any solicitation, negotiation, or discussion, whether written or oral,
with a prospective customer of any of the Companies involving a transaction,
potential transaction, or series of transactions in an amount greater than
$500,000; any solicitation, negotiation, or discussion, whether written or oral
with a current customer of any of the Companies in an amount greater than
$500,000. For purposes of this
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representation, a contract expectancy or business opportunity shall only exist
if the Companies have entered into negotiations with that prospective customer
or current customer and there is a reasonable expectation by the Companies that
the expectancy opportunity will occur.
(c) Gargoyles Common Stock. All Gargoyles Common Stock issued to
Hauff was validly issued, fully paid, and non-assessable, and was issued in
compliance with any applicable federal or state securities laws.
(d) Pro-Tec Common Stock. All Pro-Tec Common Stock issues to Hauff
was validly issued, fully paid, and non-assessable, and was issued in compliance
with any applicable federal or state securities laws.
6. REPRESENTATIONS AND WARRANTIES OF THE COMPANIES, BURNS AND HAUFF
The Companies, Burns and Hauff jointly and severally represent and
warrant to the Investors that the following statements are true and correct as
of the date of this Agreement and will be true and correct as of the Closing
Date:
6.1 ORGANIZATION AND GOOD STANDING
Each of the Companies is a corporation duly organized, validly existing
and in good standing under the laws of the state of Washington. Each of the
Companies has all requisite corporate power and authority to own and operate its
properties and assets and to carry on its business as currently conducted in the
state of Washington. The Companies have sales representatives and/or
distributors outside the state of Washington but do not have offices or own or
operate properties in any state other than Washington. None of the Companies is
duly qualified to do business as a foreign corporation in any state in the USA.
As of the Closing, the Amended and Restated Articles of Incorporation and the
Amended and Restated Bylaws of Gargoyles and Pro-Tec will be in the forms
attached to Exhibit 6.1, and, in such form, will be true, correct and complete
and contain all amendments through the Closing Date. None of the Companies have
any subsidiaries.
6.2 CORPORATE POWER AND AUTHORITY
Each of the Companies has all requisite corporate power and authority
to execute and deliver this Agreement and all the Related Documents to be
executed and delivered by the Companies hereunder and to carry out and perform
its obligations under the terms of this Agreement and the Related Documents. The
execution, delivery and performance of this Agreement and the Related Documents
have been duly authorized by all requisite action on the part of the officers,
directors and
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shareholders of the Companies. This Agreement and each of the Related Documents
to which the Companies are a party have been, and at closing will be, duly
executed and delivered by each of the Companies and will constitute, a valid and
binding obligation of each of the Companies enforceable against the Companies in
accordance with their terms.
6.3 CAPITALIZATION OF GARGOYLES
As of the date of this Agreement, the authorized capital stock of
Gargoyles consists solely of shares of Gargoyles Common Stock, of which 72
shares are issued and outstanding, and held of record by Burns, who owns 68.4
shares, and Hauff, who owns 3.6 shares. All of the Gargoyles Common Stock is
validly issued, fully paid and non-assessable, and was issued without violation
of any applicable federal or state securities laws or any preemptive or similar
rights. Other than as contemplated by this Agreement and the Hauff-Gargoyles
Employment Agreement or as disclosed on Schedule 6.3, there are no agreements,
arrangements, options, warrants, calls, rights or other commitments of any kind
whatsoever relating to the issuance, sale, purchase, retirement or redemption of
any shares of capital stock of Gargoyles, including the Gargoyles Common Stock.
6.4 CAPITALIZATION OF PRO-TEC
The authorized capital stock of Pro-Tec consists solely of the Pro-Tec
Common Stock, of which 56,000 shares are issued and outstanding, and held of
record by Burns, who owns 50,400 shares, and Hauff, who owns 5,600 shares. All
of the Pro-Tec Common Stock is validly issued, fully paid and non-assessable,
and was issued without violation of any applicable federal or state securities
laws or any preemptive or similar rights. Other than as contemplated by this
Agreement and the Hauff-Pro-Tec Employment Agreement or disclosed on Schedule
6.4, there are no agreements, arrangements, options, warrants, calls, rights or
other commitments of any kind whatsoever relating to the issuance, sale,
purchase, retirement or redemption of any shares of capital stock of Pro-Tec,
including the Pro-Tec Common Stock.
6.5 FINANCIALS
Gargoyles has delivered to the Investors audited financial statements
for the period ending November 30, 1994, and the interim statements of income
prepared by Gargoyles for the months of December 1994 and January 1995 (the
"Financial Statements") together with the reports thereon of McClinton, Workman
and Associates, P.S., an independent certified public accounting firm
("McClinton, Workman"). Pro-Tec and Antone have delivered to the Investors
reviewed and compiled, respectively, financial statements for the period ending
November 30,
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1994, for Pro-Tec and December 31, 1994, for Antone (the "Reviewed and Compiled
Statements") together with reports thereon of McClinton, Workman. The Financial
Statements and Reviewed and Compiled Statements, together with the notes related
thereto, are complete and correct in all material respects and fairly present
the financial condition of the Companies as of the dates indicated therein, all
in accordance with generally accepted accounting principles applied on a
consistent basis throughout the periods involved. Investors acknowledge they
have received and have had the opportunity to review Gargoyles statements of
income for the months of December 1994 and January 1995.
6.6 OPERATIONS SINCE BALANCE SHEET DATES
(a) Except as set forth in Schedule 6.6(a), since the date of the
audited or reviewed, as the case may be, balance sheets dated as of the last day
of the accounting year ending in 1994 for each of the Companies (the "Balance
Sheet Dates"), there has been no material adverse change in the assets,
properties, liabilities, business, prospects or condition (financial or
otherwise) of the Companies and no fact or condition exists or is contemplated
or threatened which might reasonably be expected to cause such a change in the
future.
(b) Except as set forth in Schedule 6.6(b), since the Balance Sheet
Dates, the Companies have conducted their businesses in the usual, regular and
ordinary course and consistent with past practice. Without limiting the
generality of the foregoing, since the Balance Sheet Dates (except as
contemplated by this Agreement), the Companies have not:
(i) issued, delivered, or agreed to issue or deliver, or
granted any option, warrant or other right to purchase or otherwise acquire any
capital stock or security convertible into or exchangeable for capital stock, or
issued or agreed to issue any bonds, notes or other securities or evidences of
indebtedness, or borrowed or agreed to borrow any funds;
(ii) sold, leased, transferred or otherwise disposed of or
mortgaged or pledged, or imposed or suffered to be imposed any Lien on any of
their assets, other than in the ordinary course of business;
(iii) increased the rate of compensation or commission payable
or made any accrual or arrangement for or payment of any bonus or special
compensation of any kind or any severance or termination pay to any officer or
employee or commissioned salesperson or similar agent;
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(iv) made or declared, or agreed to make or declare, any
payment of dividends or distributions to stockholders;
(v) entered into any material contract or other agreement of
any amendment or termination thereof;
(vi) made any change in the accounting policies, methods or
practices followed by the Companies; or
(vii) entered into or become committed to enter into any other
transaction except in the ordinary course of business.
6.7 UNDISCLOSED LIABILITIES
Except as reflected in the Financial Statements or as disclosed on
Schedule 6.7, the Companies have no material liabilities, contingent or
otherwise, or obligations other than (i) liabilities incurred in the ordinary
course of business and (ii) obligations under contracts and commitments duly
entered into by the Companies in the ordinary course of business, which, in both
cases, individually or in the aggregate, are not material to the condition
(financial or otherwise) or operating results of the Companies. For purposes of
this Section 6.7, undisclosed liabilities shall not be financially material
unless they exceed in the aggregate One Hundred Thousand Dollars ($100,000).
6.8 OUTSTANDING INDEBTEDNESS
Except as reflected in the Financial Statements or as disclosed on
Schedule 6.8, the Companies have no indebtedness for borrowed money which the
Companies have directly or indirectly created, incurred, assumed or guaranteed,
or with respect to which the Companies have become directly or indirectly
liable.
6.9 ACCOUNTS RECEIVABLE
Except to the extent reflected in Schedule 6.9 hereto, the accounts
receivable of the Companies, as reflected in the Financial Statements and
thereafter arising, are (i) owned by the Companies and are not subject to any
Lien, (ii) not subject to any offset, deduction, defense, dispute or
counterclaim, (iii) not subject to any discounts or allowances, and (iv) legal,
valid and binding obligations of the account debtors in respect of such accounts
receivable. The Companies cannot warrant the financial viability of any of the
account debtors, but to the best of the Companies' knowledge the accounts
receivable are collectible.
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6.10 INVENTORY
Except as set forth on Schedule 6.10, the inventory of the Companies as
reflected in the Financial Statements and thereafter acquired, is (i) owned by
the Companies and not subject to any Lien, (ii) in good and salable condition,
(iii) not obsolete or unmerchantable and (iv) valued on the Companies' books,
records and reports at the lower of cost or fair market value (assuming an
orderly disposition).
6.11 COMPLIANCE WITH LAWS
The Companies have complied in all material respects and are in
compliance in all material respects with all federal, state, local and foreign
laws, rules, regulations, ordinances, orders, decrees and similar requirements
applicable to them, their businesses, their properties or their employees. None
of the Companies has received written notice of any asserted present or past
unremedied failure by the Companies to comply with any of the foregoing.
6.12. LITIGATION
Except as set forth on Schedule 6.12, there are no actions, suits,
proceedings or investigations pending or, to the knowledge of Burns, Hauff or
the Companies, threatened against any of the Companies, or any of their
properties, including intellectual properties, before any court or governmental
agency. Except as set forth on Schedule 6.12, none of the Companies is a party
or subject to the provisions of any order, writ, injunction, judgment or decree
of any court or governmental agency or instrumentality and there is no action,
suit, proceeding or investigation by any of the Companies currently pending or
that and of the Companies intend to initiate.
6.13 INTENTIONALLY LEFT BLANK
6.14 EMPLOYEE MATTERS
(a) Schedule 6.14(a) sets forth a list of all employees of the
Companies and sets forth the following information with respect to each
employee: employee name, title, current salary, commissions, bonuses, fringe
benefits, hire date, and whether any employment agreement exists between the
Companies and any employee.
(b) None of the Companies is a party to any collective bargaining
agreement, and there currently exists no demand for collective bargaining by any
union or labor organization.
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(c) None of the Companies is aware that any of their employees or
agents or any other person working on behalf of any of the Companies is
obligated under any contract (including licenses, covenants or commitments of
any nature) or other agreement, or subject to any judgment, decree or order of
any court or administrative agency, that would interfere materially with the use
of the employee's best efforts to promote the interests of the Companies or that
would materially conflict with the Companies' businesses. To the best knowledge
of the Companies, no employee of any of the Companies is in violation of any
material term of any employment contract, proprietary information agreement or
other contract or agreement relating to the relationship of such employee with
any of the Companies or any other party because of the nature of the business
conducted by the Companies.
(d) With respect to all employees and former employees, except as
set forth on Schedule 6.14(d), none of the Companies presently maintains,
contributes to, or has any liability (including current or potential
multi-employer plan withdrawal liability) under any (i) non-qualified deferred
compensation or retirement plan or arrangement which is an "employee pension
benefit plan" as such term is defined in Section 3(2) of the Employee Retirement
Income Security Act of 1974, as amended ("ERISA"), (ii) qualified defined
contribution retirement plan, (iii) qualified defined benefit pension plan, (iv)
funded or unfunded medical, health or life insurance plan or arrangement for
present or future retirees or present or future terminated employees which is an
employee welfare benefit plan as defined in Section 3(1) of ERISA, or (v) any
other employee welfare benefit plan.
6.15 THIRD PARTY CONSENTS
Except as set forth on Schedule 6.15, neither the execution of this
Agreement nor the consummation of the transactions contemplated hereunder
requires the approval or consent of any Person, governmental authority, or any
party to any contract with Burns, Hauff, or any of the Companies.
6.16 TITLE TO ASSETS
Except as set forth on Schedule 6.16, each of the Companies has good
and marketable title to its properties and assets as reflected in the Financial
Statements, and has good title to all their leasehold interests, in each case
subject to no Liens except (i) Liens in respect of current taxes not yet due and
payable and (ii) Liens reflected in the Financial Statements. With respect to
properties and assets which are leased by the Companies, the Companies are in
compliance with such leases in all material respects and hold valid leasehold
interests free of any material Liens, claims or encumbrances. The assets,
whether owned, licensed or leased by the Companies,
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constitute all the assets necessary or appropriate to conduct the Companies'
businesses. None of the Companies own any real property.
6.17 PERMITS
Except as set forth on Schedule 6.17, the Companies own, hold or
possess all governmental and regulatory licenses, registrations, franchises,
permits, privileges, immunities, approvals and other authorizations which are
necessary to entitle them to carry on and conduct their businesses substantially
as currently conducted (the "Permits"). The Companies have fulfilled and
performed their obligations under each of the Permits which, if failed to be
performed, could have a material adverse effect on the Companies.
6.18 INTELLECTUAL PROPERTY
(a) Except as set forth on Schedule 6.18(a), each of the Companies
owns or otherwise has rights or licenses to use or possess the patents,
trademarks, service marks, tradenames, copyrights, licenses, applications for
patents, inventions, trade secrets, know-how, proprietary processes and
formulae, and other intellectual property rights used in or necessary to the
operation of the businesses of the Companies (the "Intellectual Property").
(b) Schedule 6.18(b) contains a list of the Intellectual Property
of each of the Companies which has been duly registered in, filed in, or issued
by the United States Patent and Trademark Office, the United States Register of
Copyrights or the corresponding offices of other countries, states or other
jurisdictions (the "Registers"). Neither Burns, Hauff or the Companies have any
knowledge (i) of an adverse claim of ownership by any third party of any of the
Companies' Intellectual Property, (ii) of any invalidity or unenforceability of
any of the Companies' Intellectual Property, or (iii) of any act of fraud or
inequitable conduct committed on the Registers.
(c) Except as set forth on Schedule 6.18(c), use of the Companies'
Intellectual Property does not require the consent of any third party, and the
same are freely transferable and are owned exclusively by the Companies free and
clear of any attachments, security interests, Liens, royalties, encumbrances,
adverse claims, licenses or any other ownership interest whatsoever.
(d) Except as set forth on Schedule 6.18(d), to the best knowledge
of the Companies there are no claims, actions, or proceedings pending by or
against the Companies with respect to its Intellectual Property. In addition, to
the best knowledge of Burns, Hauff and the Companies, the use by the Companies
of any of the
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Intellectual Property in any of the Companies' businesses as currently conducted
or as proposed to be conducted will not infringe any trademarks, service marks,
trade names, copyrights patents or other rights of another Person.
(e) Schedule 6.18(e) contains a list of license agreements and
other contracts currently being negotiated for and on behalf of the Companies
with any third parties related to any of the Intellectual Property.
(f) Investors acknowledge that the Companies have actively pursued
intellectual property rights that may give rise to future litigation not
presently pending. Investors have had the opportunity to inquire with the
Companies' legal counsel on Patents and Intellectual Property regarding the
Intellectual Property of the Companies, pending application for patents,
inventions, trade secrets, proprietary processes and formulae, as well as all
pending claims, actions, or proceedings regarding Intellectual property.
6.19 CUSTOMERS; SALES
Schedule 6.19 hereto contains a list of the top ten (10) customers of
Gargoyles (measured by dollar amount) and the sales figures for such customers
for the years ended 1993 and 1994 and projections for sales in 1995. Except as
set forth in Schedule 6.19, neither Burns, nor Hauff nor Gargoyles knows of any
fact which would lead any of them to believe that any of such listed customers
will change materially their business relationship with Gargoyles.
6.20 SUPPLIERS OF GOODS AND SERVICES
Schedule 6.20 hereto contains a list of the top ten (10) suppliers of
goods and/or services to the Companies (measured by dollar amount) and the total
cost of goods or services purchased from such suppliers for the years ended 1993
and 1994 and projections for purchases in 1995. Except as set forth in Schedule
6.20, neither Burns, nor Hauff nor any of the Companies knows of any fact which
would lead any of them to believe that any of such listed suppliers will change
materially their business relationship with the Companies.
6.21 INSURANCE
The Companies currently have insurance contracts or policies in full
force and effect, and have had in full force and effect during the past two
years, which provide for coverages that are usual and customary as to amount and
scope in respect to the Companies' businesses. Schedule 6.21 contains a list of
all such insurance policies and a summary of coverages under each such policy.
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6.22 ENVIRONMENTAL MATTERS
The operations of the Companies comply and have at all times complied
in all material respects with all applicable laws, rules and regulations
concerning environmental health and safety. The Companies have obtained all
environmental, health and safety permits necessary for their operations and all
such permits are in good standing. The Companies are, in all material respects,
in compliance with all terms and conditions of such permits. None of the
Companies has been notified that any of their present or past operations is the
subject of any investigation by any governmental authority evaluating whether
any remedial action is required nor has it needed to respond to or file any
notice with respect to a release or threatened release of a hazardous or
dangerous substance or other contaminant into the environment. None of the
Companies, nor to the best knowledge of Burns, Hauff or the Companies, has any
agent or subcontractor of the Companies, disposed of any hazardous or dangerous
substance or other contaminants in violation of any requirement of law.
6.23 PRODUCTS LIABILITY
Except as set forth in Schedule 6.23 hereto, there are no claims by or
before any court or governmental or other regulatory or administrative agency,
commission or other authority against or involving the Companies concerning any
product manufactured, repaired, shipped, sold or delivered by or on behalf of
any of the Companies which is pending or, to the best knowledge of the
Companies, threatened, and there has been no happening or event which has
occurred as a result of a defect in a product manufactured, repaired, shipped,
sold or delivered by or on behalf of any of the Companies and which might give
rise to liability on the part of any of the Companies. Investors acknowledge
that the Companies have placed consumer products in the stream of commerce in
the U.S.A. and throughout the world which may give rise to future product
liability claims. Consumer products include but are not limited to: eyewear,
face guards, protective helmets, sunglasses, protective eyeglasses, and shin
guards.
6.24 RELATED PARTY TRANSACTIONS
Except as disclosed on Schedule 6.24, no current or former shareholder,
director, officer, or employee, or any of their affiliates (as defined in Rule
144 of the Securities Act of 1933, as amended (the "Securities Act")) is, or
since January 1, 1990, has been (i) a party to any transaction with any of the
Companies, (ii) the direct or indirect owner of any interest in any business
organization which is a present or potential competitor of, customer of, or
supplier of products and/or services to the Companies, or (iii) the recipient of
income from any source other than the Companies which relates to the business
of, or should properly accrue to, the Companies. For any
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natural person, the term "affiliate" shall include but not be limited to any of
such person's immediate family members and their affiliates.
6.25 NO BROKER OR FINDER
None of the Companies has retained a broker in connection with the
transactions contemplated by this Agreement or has dealt with a broker or finder
in connection with the transactions contemplated by this Agreement which would
create an entitlement by any Person to a finders' or brokers' fee.
6.26 ACCURACY OF STATEMENTS
Neither this Agreement nor any of the exhibits, schedules, written
statements, documents, certificates or other items furnished to the Investors by
or on behalf of the Companies with respect to this Agreement and the
transactions contemplated hereby contains any untrue statement of a material
fact or omits a material fact necessary to make each statement contained herein
or therein not misleading.
7. REPRESENTATIONS AND WARRANTIES OF INVESTORS
In the case of the Investors, each such Investor severally represents
and warrants to Burns, Hauff and the Companies that the following statements are
true and correct as of the date of this Agreement and will be true and correct
as of the Closing Date:
7.1 AUTHORITY
Each individual Investor represents and warrants that such Investor has
full right, power, capacity and authority to execute and deliver this Agreement
and the Related Documents to be executed and delivered by such Investor
hereunder. With respect to Trillium, Trillium represents it is a corporation
duly organized, validly existing and in good standing under the laws of the
state of Washington and that it has all requisite corporate power and authority
to execute and deliver this Agreement and all the Related Documents to be
executed and delivered by Trillium hereunder and to carry out and perform its
obligations under the terms of this Agreement and the Related Documents. This
Agreement has been, and each of the Related Documents to be executed by such
Investor will be, duly executed and delivered by such Investor and will
constitute a valid and binding obligation of such Investor enforceable against
such Investor in accordance with their terms.
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7.2 SOPHISTICATION OF THE INVESTORS
In connection with the purchase of the Gargoyles Common Stock and the
Pro-Tec Common Stock hereunder, each such Investor acknowledges, represents and
warrants to the Companies, Burns and Hauff as follows:
(a) That such Investor has the financial ability to bear the
economic risk of an investment in the Gargoyles Common Stock and the Pro-Tec
Common Stock, has adequate means of providing for such Investor's current needs
and personal contingencies, has no need for liquidity in such investment and can
afford a complete loss of such investment;
(b) That such Investor is aware that an investment in the
Gargoyles Common Stock and the Pro-Tec Common Stock involves certain risks, that
such Investor has sufficient knowledge and experience in financial and business
matters to be able to evaluate the merits and risks of an investment in the
Gargoyles Common Stock and the Pro-Tec Common Stock and that such Investor has
reviewed the merits of such an investment in the Gargoyles Common Stock and the
Pro-Tec Common Stock with tax and legal counsel and with an investment adviser
to the extent such Investors has deemed advisable;
(c) That such Investor has been given a full opportunity to ask
questions and to receive answers from the control persons of the Companies,
including Burns and Hauff, concerning the business of each of the Companies and
to obtain additional information necessary to verify the accuracy of the
information delivered them pursuant to this Agreement and such other information
as such Investor desired in order to evaluate an investment in the Gargoyles
Common Stock and the Pro-Tec Common Stock, and all such questions have been
answered to the full satisfaction of such Investor;
(d) That such Investor acknowledges that the Gargoyles Common
Stock and the Pro-Tec Common Stock have not been registered under the Securities
Act or the securities laws of certain states and that the Companies are relying
on specific exemptions from registration thereunder, and such Investor agrees
that such Investor's Gargoyles Common Stock and Pro-Tec Common Stock may not be
sold, offered for sale, transferred, pledged, hypothecated or otherwise disposed
of except in compliance with the Securities Act and applicable state securities
laws and the restrictions imposed by this Agreement and the Related Documents,
which restrictions require the approval of the Companies and/or other
shareholders for the transfer of any Gargoyles Common Stock or Pro-Tec Common
Stock, as the case may be. Such Investor has been advised that neither Gargoyles
nor Pro-Tec has an obligation to cause the Gargoyles Common Stock or the Pro-Tec
Common Stock to be registered
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under the Securities Act or to comply with any exemption under the Securities
Act. Such Investor understands that it is not anticipated that there will be any
market for resale of the Gargoyles Common Stock or the Pro-Tec Common Stock, and
that it may not be possible for such Investor to liquidate the investment on an
emergency basis. Such Investor understands the legal consequences of the
foregoing to mean that such Investor must bear the economic risk of such
Investor's investment in the Gargoyles Common Stock and the Pro-Tec Common Stock
for an indefinite period of time;
(e) Such Investor understands that no federal or state agency has
made any finding or determination as to the fairness of an investment in, or any
recommendation or endorsement of, the Gargoyles Common Stock or the Pro-Tec
Common Stock; and
(f) Such Investor is acquiring the Gargoyles Common Stock and the
Pro-Tec Common Stock in good faith solely for such Investor's own account, for
investment purposes and not with a view to, or for, subdivision, distribution,
fractionalization or resale, or for the account, in whole or in part, to others.
Further, such Investor will hold the Gargoyles Common Stock and the Pro-Tec
Common Stock as an investment and has no reason to anticipate any change in
circumstances or other particular occasion or event which would cause such
Investor to attempt to sell any of the Gargoyles Common Stock and Pro-Tec Common
Stock purchased hereunder.
7.3 NO BROKER OR FINDER
Such Investor has retained no broker in connection with the
transactions contemplated by this Agreement and has dealt with no broker or
finder in connection with the transactions contemplated by this Agreement which
would create an entitlement by any Person to a finders' or brokers' fee.
7.4 FUTURE SALE
Such Investor does not intent to sell in whole or in part before the
first anniversary of the Closing the Companies' assets or stock to undisclosed
third Persons for profit. Except as set forth in Schedule 7.4, such Investor has
not received or initiated any third-party inquiries or offers, whether written
or oral, to purchase all or part of the stock or assets of the Companies; nor
any inquiries or offers to purchase or license any of the Companies'
Intellectual Property. Such Investor has not had discussions with Oakley
regarding the sale or future sale of all or part of the Companies' stock, assets
or Intellectual Property to Oakley or any affiliate or subsidiary company of
Oakley. If there is a sale or transfer of the Companies' stock or assets or
Intellectual Property to Oakley on or before the first anniversary of the
Closing, such Investor agrees to pay to Burns thirty-three percent (33%) of the
net
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gain of such Investor on the sale to Oakley. For purposes of this Subsection
7.4, "net gain" shall be the selling price to Oakley reduced by the costs of the
sale and further reduced by the Investors' cost basis in the stock sold to
Oakley.
8. COVENANTS OF BURNS, HAUFF AND THE COMPANIES
Burns, Hauff, and the Companies covenant to and agree with the
Investors as follows:
8.1 CONDUCT OF BUSINESSES PENDING THE CLOSING
From the date of this Agreement to the Closing Date, the Companies
shall operate their businesses in the ordinary and usual course and shall
maintain their records and books of account in a manner that fairly and
accurately reflects its transactions, assets and liabilities and otherwise in
accordance with standard accounting practices applied on a basis consistent with
prior periods. The Companies shall pay and discharge all obligations and
indebtedness as they come due in a manner consistent with past practice. Burns,
Hauff and the Companies shall exercise their best efforts to preserve intact the
present business organization and personnel of the Companies, preserve the
present goodwill of the Companies with all persons having business dealings with
them, and comply with all laws applicable to the conduct of the Companies'
businesses.
8.2 REPRESENTATIONS AND WARRANTIES; INTERFERENCE
Burns, Hauff, and the Companies shall each conduct their businesses in
such a manner that the representations and warranties of each of them contained
in this Agreement shall continue to be true and correct on and as of the Closing
Date as if made on and as of the Closing Date, and none of the parties hereto
shall take any action which would interfere with or prevent performance of this
Agreement.
8.3 ACCESS TO RECORDS AND ASSETS OF THE COMPANIES
From the date of this Agreement to the Closing Date, Burns, Hauff and
the Companies agree to give to the Investors and their counsel, accountants and
other authorized representatives, reasonable access during business hours to the
offices, warehouse, properties, books and records of the Companies in order that
the Investors may have full opportunity to make such reasonable investigations
of the Companies as the Investors shall desire; provided, however, such
investigation shall be conducted in a manner as not to interfere unreasonably
with the operation of the Companies. The Investors agree that they shall be
subject to all obligations of the Investors contained
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in the Confidentiality Agreement dated ____________, 1995, with respect to any
confidential information disclosed by Burns, Hauff or the Companies to the
Investors.
8.4 PRO-TEC-HAUFF EMPLOYMENT AGREEMENT
At Closing, Pro-Tec and Hauff shall terminate the Hauff-Pro-Tec
Employment Agreement.
8.5 NON-DISCLOSURE, NON-COMPETITION AND INDEMNITY AGREEMENT
At Closing, Pro-Tec, Gargoyles and Burns shall execute and deliver a
Non-Disclosure, Non-competition and Indemnity Agreement substantially in the
form of the attached Exhibit 8.5.
8.6 AMENDED LEASE FOR PREMISES
At Closing, Burns, as landlord, and Gargoyles, as tenant, shall execute
and deliver an Amendment to Lease Agreement for the Premises substantially in
the form of the attached Exhibit 8.6.
8.7 EMPLOYMENT AGREEMENTS; RESIGNATION OF BURNS
At Closing, Gargoyles shall enter into employment agreements with
Hauff, John Steckler (for both Gargoyles and Pro-Tec), Charles Bernheiser, Steve
Kingma, and David W. Jobe substantially in the forms of the agreements attached
hereto as Exhibits 8.7(a) through (f), respectively. At Closing, Burns shall
resign as an employee of each of the Companies.
8.8 INTELLECTUAL PROPERTY
On or before the Closing Date, the Companies shall cause the following
actions to be taken with respect to the Intellectual Property:
(a) Deliver to the Investors the following documents: For each
patent or copyright or application therefore set forth in Schedule 6.18(b)
hereto, and including at least PCT applications corresponding to U.S. patent
application serial number 08/198,183 and 08/216,528, (i) copies of recorded
assignments or an abstract of title or similar documentation showing a chain of
title from the inventors or authors to the Companies and (b) copies of official
filing receipts, postcard receipts or acknowledgments by a foreign associate
attorney showing the filing date;
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(b) Adopt and authorize the implementation of an Intellectual
Property Security Policy for each of Pro-Tec and Gargoyles substantially in the
form of the attached Exhibit 8.8(b);
(c) Adopt and authorize to be distributed to all employees of the
Companies a Confidentiality Undertaking and Memorandum of Understanding in the
form of the attached Exhibit 8.8(c); and
(d) Gargoyles and Pro-Tec shall execute and deliver a Technologies
Sharing Agreement substantially in the form of the attached Exhibit 8.8(d).
8.9 PROPERTY TO BE TRANSFERRED TO BURNS
Before the Closing Date, the personal property listed on Exhibit 8.9
owned by Antone and Pro-Tec shall be transferred to Burns. On the Closing Date,
the personal property listed on Exhibit 8.9 owned by Gargoyles shall be
transferred from Gargoyles to Burns. Burns shall pay when due all sales or use
taxes payable upon transfer of such personal property.
8.10 INVESTORS' GRANT OF OPTION TO HAUFF
On the Closing Date, the Investors and Hauff shall execute and deliver
an Option Agreement in form satisfactory to them under which the Investors,
prorata, shall grant to Hauff the option to purchase Twenty-Five Thousand
(25,000) of the Investors' shares of Gargoyles Common Stock to be purchased
pursuant to the terms of Section 2.3 hereof.
9. CONDITIONS OF BURNS AND HAUFF TO CLOSE
The obligation of Burns to sell Stock to the Investors and for Burns
and Hauff to consummate the transactions contemplated by this Agreement are
subject to fulfillment of the following conditions at or prior to the Closing
Date (unless waived in writing by Burns and/or Hauff, as the case may be):
9.1 REPRESENTATIONS AND PERFORMANCE
The representations and warranties made by the Investors hereunder
shall be true and correct in all material respects at and as of Closing, and the
Investors shall have performed and complied in all material respects with all
agreements, covenants and conditions contained in this Agreement required to be
performed or complied with by the Investors prior to or at Closing;
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9.2 FINANCING
The Redemption Loan shall have closed and funds shall be available on
or before the Closing Date to fund the Redemption; and
9.3 SHAREHOLDERS AGREEMENT
The Investors shall have executed and delivered at Closing Shareholders
Agreements related to their shareholdings in each of Gargoyles and Pro-Tec
substantially in the forms of the Shareholders Agreements attached hereto as
Exhibit 9.3.
10. CONDITIONS OF THE INVESTORS TO CLOSE
The obligation of the Investors to purchase Stock from Burns and
Gargoyles and to consummate the transactions contemplated by this Agreement are
subject to fulfillment of the following conditions at or prior to the Closing
Date (unless waived in writing by the Investors):
10.1 REPRESENTATIONS AND PERFORMANCE
The representations and warranties made by Burns, Hauff and the
Companies hereunder shall be true and correct in all material respects at and as
of Closing, and Burns, Hauff and the Companies shall have performed and complied
in all material respects with all agreements, covenants and conditions contained
in this Agreement required to be performed or complied with by them prior to or
at Closing;
10.2 NO ADVERSE CHANGE
Except as contemplated by this Agreement, there shall have been no
material adverse change in the condition, business or operations, financial or
otherwise, of the Companies from the date of this Agreement to the Closing Date;
10.3 REVIEW OF FINANCIALS
The Investors shall be satisfied with their review of the Financial
Statements.
10.4 FINANCING
The Redemption Loan shall have closed and funds shall be available on
or before the Closing Date to fund the Redemption, and the Investors shall have
obtained financing, including the letter of credit, for the purchase of shares
of Stock and funds
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shall be available on or before the Closing Date to the Investors to fund the
purchase of the Stock from Burns; and
10.5 SHAREHOLDERS AGREEMENT
Hauff, Burns, Gargoyles and Pro-Tec shall have executed and delivered
at Closing Shareholders Agreements related to their shareholdings in each of
Gargoyles and Pro-Tec substantially in the forms of the Shareholders Agreements
attached hereto as Exhibit 9.3(a) and (b), respectively.
11. MEDICAL BENEFITS FOR BURNS AND FAMILY
From and after the Closing Date, Burns and the members of his immediate
family who are his dependents shall receive the medical and dental benefits
provided by Gargoyles from time to time to its employees. The cost of such
benefits shall be deemed self-employment compensation to Burns in consideration
of services rendered as a director of Gargoyles. Burns shall pay all taxes
related to such benefit.
12. RIGHT TO PURCHASE PRODUCTS
From and after the Closing Date so long as Burns is a shareholder of
Gargoyles, the owners and employees of Deer Creek Ranch, a ranch owned by Burns
and located in Oregon, shall have the right to purchase all products
manufactured by the Companies, for personal use and not for resale, at the same
price and for the same purpose offered to Gargoyles and Pro-Tec employees. In
addition, so long as Burns is a director of Gargoyles, Burns and his immediate
family shall be entitled to receive or purchase at a discount Gargoyles eyewear
under the program established from time to time by Gargoyles for its Board of
Directors. In addition, Burns shall receive at no cost to him Gargoyles eyewear
for personal and promotional use; provided Burns shall receive no more than
twenty-four (24) pairs of Gargoyles eyewear per year.
13. PRO-TEC NOTE TO BURNS
At Closing, Pro-Tec shall execute and deliver to Burns that certain
Promissory Note, substantially in the form of the attached Exhibit 13. Gargoyles
shall unconditionally guarantee the Pro-Tec Note with no right of set off.
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14. GARGOYLES NOTE TO BURNS; [*] SETTLEMENT
At Closing, Gargoyles shall execute and deliver to Burns that certain
Promissory Note, substantially in the form of the attached Exhibit 14. Pro-Tec
shall unconditionally guarantee the Gargoyles Note with no right of set off.
Burns and Gargoyles acknowledge and agree that Gargoyles has been negotiating a
settlement with the [*] Company of a trademark infringement case filed by
Gargoyles against the [*] Company in the United States District Court for the
Western District of Washington (the "[*] Litigation"). By agreement in principal
dated January 30, 1995, Gargoyles and the [*] Company reached a settlement of
the [*] Litigation. If for any reason, settlement negotiations break down and
the [*] Litigation is not settled and prosecution of the [*] Litigation is
continued, then on the date Gargoyles resumes prosecution of such litigation the
Gargoyles Note shall be reduced by the sum of [*] and all interest accrued
thereon. If Gargoyles is successful and is awarded damages from the [*] Company
in the [*] Litigation, then Burns shall receive Twenty-Five percent (25%) of the
net damage award actually received by Gargoyles from the [*] Company.
15. LOAN FROM US BANK FOR REDEMPTION
To finance the Redemption, on or before the Closing Date, Gargoyles
shall execute and deliver to US Bank the loan agreements and related instruments
in a form acceptable to Gargoyles and Trillium (the "Redemption Loan"). Trillium
shall guarantee the outstanding indebtedness under the Redemption Loan. As
consideration for the guaranty, on the Closing Date, and annually thereafter so
long as Trillium is the guarantor of the Redemption Loan, Gargoyles shall pay to
Trillium a guaranty fee equal to one percent (1%) of the outstanding principal
amount of the Redemption Loan.
16. AMENDED AND RESTATED OPTION AGREEMENT BETWEEN HAUFF AND THE INVESTORS
On the Closing Date, Hauff and the Investors shall execute and deliver
an Amended and Restated Option Agreement with respect to Hauff's Option
substantially in the form of the attached Exhibit 16.
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[*] Confidential Treatment Requested
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17. COVENANT NOT TO COMPETE
(a) Burns covenants and agrees with the Investors that Burns, or
any company or entity affiliated with Burns, will not directly or indirectly, in
any of the states of the United States, and any foreign countries in which the
Companies' products are now sold or are hereafter sold (the "Territory"), during
the period commencing on the Closing Date and expiring on the fifth (5th)
anniversary thereof (the "Restricted Period") (i) form, acquire, own (other than
the ownership of stock in a publicly traded company), finance, assist, support,
or become associated in any capacity or to any extent, directly or indirectly
with, an enterprise which manufactures, sells, distributes or represents sports
helmets, sunglasses, protective eyewear, protective eyewear used in the
medical/dental field or otherwise, goggles, sports glasses, or other products in
the optical industry (the "Competing Business"), (ii) interfere with or attempt
to interfere with any officers, employees, representatives or agents of the
Companies or their affiliates, or induce or attempt to induce any of them to
leave the employ of the Companies or their affiliates, or violate the terms of
the employees' contracts with any of the Companies, or (iii) for the purpose of
engaging in a Competing Business, call upon, solicit, advise, or otherwise do,
or attempt to do, business with any clients, suppliers, customers or accounts of
the Companies.
(b) In the event of a breach or a threatened breach by Burns or
one of his affiliates of any of the restrictive covenants set forth in this
Section 17, the Investors shall be entitled to an injunction restraining such
breach, but nothing herein shall be construed to prohibit the Investors from
pursuing any remedy available to them for such breach or such threatened breach.
(c) Burns agrees that as to the Territory and Restricted Period
set forth above for the purpose of the covenant not to compete, each state,
province, country or other jurisdiction within the Territory and periods within
the Restricted Period are divisible and separate so that if the covenant not to
compete made by Burns hereunder is held by a court to be invalid or
unenforceable as to any geographic area or for any time period described, his
covenant not to compete shall remain valid and enforceable in all remaining
geographic areas and time periods. Burns agrees that it is his express intention
that, if a court reforms this Agreement, the Companies be given the broadest
protection allowed by law as respects this Agreement and the covenant not to
compete.
18. INDEMNITY OF BURNS, HAUFF AND THE INVESTORS
(a) Indemnity of Burns to the Investors. From and after the
Closing Date, Burns shall indemnify, defend and hold harmless the Investors from
and against
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and shall reimburse the Investors, and each of them, for any and all losses,
liabilities, deficiencies, claims and expenses (including, but not limited to,
costs of defense and reasonable attorneys' fees) incurred by the Investors
arising from or in connection with any misrepresentation or breach of any of the
representations and warranties of Burns contained in this Agreement. Burns shall
not be obligated to indemnify the Investors under this Section 18, however,
except and to the extent that claims for indemnification exceed in the aggregate
the sum of Two Hundred Fifty Thousand Dollars ($250,000) (the "Burns Basket").
(b) Indemnity of Hauff to the Investors. From and after the
Closing Date, Hauff shall indemnify, defend and hold harmless the Investors from
and against and shall reimburse the Investors, and each of them, for any and all
losses, liabilities, deficiencies, claims and expenses (including, but not
limited to, costs of defense and reasonable attorneys' fees) incurred by the
Investors arising from or in connection with any misrepresentation or breach of
any of the representations and warranties of Hauff contained in this Agreement.
Hauff shall not be obligated to indemnify the Investors under this Section 18,
however, except and to the extent that claims for indemnification exceed in the
aggregate the sum of Three Hundred Seventy-Five Thousand Dollars ($375,000) (the
"Hauff Basket").
(c) Liability Cap on Indemnity of Burns and Hauff to the
Investors. Except as provided in Subsections 18(d) and (e), the indemnity
obligation of Burns and Hauff to the Investors shall be shared and shall not
exceed the amounts as follows (the "Liability Cap"):
Indemnified Amounts
-------------------
First $250,000 Investors bear total loss
Next $125,000 Burns is severally liable
Next $150,000 Hauff is severally liable
Next $225,000 Burns and Hauff are jointly and severally liable
Additional Losses Investors bear total loss
Notwithstanding the above schedule, as between Burns and Hauff, Burns
shall pay all obligations to the Investors for breaches of any representations
and warranties related to federal income tax matters and Washington state B&O
taxes, and any resulting liability that would otherwise be allocated to and
payable by Hauff in accordance with the above schedule, shall be paid by Burns.
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(d) Notwithstanding the disclosures set forth in Sections 4.2 and
6.1 or on Schedules 4.2 and 6.1 hereof, Burns, the Companies and Hauff, jointly
and severally, agree, subject to the liability cap set forth in Subsection 18(c)
hereof, to indemnity and hold harmless the Investors from and against any loss,
cost, or expenses, including taxes and penalties, resulting from the failure of
any of the Companies to qualify to do business in any state other than the state
of Washington.
(e) Exception to Liability Cap for Burns. Notwithstanding the
foregoing, there shall be no Basket or Liability Cap, and the Investors shall be
entitled to complete indemnification from Burns for any and all loss, cost,
damage, liability, or obligation, expense or deficiency, including reasonable
attorneys' fees and costs, related to the representations and warranties of
Burns set forth in Sections 4.1(a), 4.1.(b), 6.3, and 6.4 hereof.
(f) Exception to Liability Cap for Hauff. Notwithstanding the
foregoing, there shall be no Basket or Liability Cap, and the Investors shall be
entitled to complete indemnification from Hauff for any and all loss, cost,
damage, liability, or obligation, expense or deficiency, including reasonable
attorneys' fees and costs, related to the representations and warranties of
Hauff set forth in Sections 6.3 and 6.4 and Subsection 5.1(a).
(g) Reservation of Rights. Burns and Hauff reserve all rights to
dispute any alleged indemnity obligations owned under this Section 18 and under
the Liability Cap. Resolution of any such dispute shall be pursuant to the
Dispute Resolution provision at Section 25.5 of this Agreement. Burns and Hauff
reserve the right to seek contribution against each other for all obligations
under the Liability Cap for which they are jointly and severally liable.
(h) Hauff Indemnity to Burns. From and after the Closing Date,
Hauff shall indemnify, defend and hold harmless Burns from and against and shall
reimburse Burns for any and all losses, liabilities, deficiencies, claims and
expenses (including, but not limited to, costs of defense and reasonable
attorneys' fees) incurred by Burns arising from or in connection with any
misrepresentation or breach of any of the representations and warranties of
Hauff to Burns contained in this Agreement.
(i) Indemnity of Investors. From and after the Closing Date, each
Investor, severally and not jointly, shall indemnify, defend and hold harmless
Burns, Hauff and the Companies from and against and shall reimburse Burns, for
any and all losses, liabilities, deficiencies, claims and expenses (including,
but not limited to, costs of defense and reasonable attorneys' fees) incurred by
Burns, Hauff or any of the Companies arising from or in connection with any
misrepresentation or breach of any of the representations and warranties of such
Investor contained in this Agreement.
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19. BURNS' RIGHT TO REQUIRE TRILLIUM TO PURCHASE STOCK
At any time during the period from the date of this Agreement until the
fifth (5th) anniversary hereof, Burns shall have the right to require to
purchase all, but not less than all, of his then equity interest in Gargoyles
and Pro-Tec, including his shares of Gargoyles Common Stock and Pro-Tec Common
Stock (the "Put") for an aggregate sale price of Six Dollars ($6.00) per share
for each share of Gargoyles Common Stock then owned by Burns and Five Cents
($.05) per share for each share of Pro-Tec Common Stock then owned by Burns (the
"Put Price"). The number of shares of stock subject to the Put and the per share
Put Price shall be proportionately adjusted for any increase or decrease in the
number of issued shares of Common Stock of Gargoyles or Pro-Tec resulting from a
split-up or consolidation of shares or any like capital adjustment, or the
payment of any stock dividend. The Put is a special accommodation made to Burns
by Trillium in connection with the transactions contemplated by this Agreement,
is personal to Burns, and is not assignable by Burns to any Person. The
obligation of Trillium to Burns under the Put shall be unconditionally
guaranteed by Gargoyles and Pro-Tec and their corporate successors and
affiliates. Closing of the purchase and sale transaction contemplated by the Put
shall occur on or before the 60th day following notice from Burns to Trillium
that Burns is exercising his rights under this Section 19. At the closing of the
Put transaction, the Put Price shall be paid at Trillium's election either (i)
in cash, or (ii) by delivery of a term promissory note. The terms of the
promissory note shall include a maturity date of the second anniversary of the
Put closing, with simple interest at the then US Treasury two-year rate plus 300
basis points, with no prepayment penalty, interest annually, and otherwise on
commercially reasonable terms. Any such note will be secured by the securities
being transferred pursuant to the Put.
20. TIGER MOUNTAIN LEASE
Gargoyles shall cause that certain lease between Gargoyles and Tiger
Mountain to be terminated as of the Closing Date. At Closing, Gargoyles shall
pay to lessor the outstanding balance due as of November 30, 1994 on the lease
in an amount not to exceed $15,835.
21. EMPLOYEE INCENTIVE STOCK OPTION PLAN
At Closing, Burns and Hauff shall cause Gargoyles and Pro-Tec each to
establish an employee incentive stock option plan substantially in the form of
the attached Exhibit 21. The Gargoyles plan shall allow an additional five
percent (5%) of common stock of Gargoyles, on a fully-diluted basis, to be
issued pursuant to the plan. The Pro-Tec plan shall also allow the issuance of
an additional five percent
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(5%) of common stock of Pro-Tec, on a fully-diluted basis, to be issued pursuant
to the plan.
22. RELEASE OF BURNS FROM GUARANTEES
Trillium, Hauff and the Companies shall obtain a full release of Burns
from any personal guaranty to U.S. Bank of any indebtedness of any of the
Companies existing as of the Closing Date. Trillium, Hauff and the Companies
shall use their best efforts to obtain release of Burns from any personal
guarantees of any other indebtedness of any of the Companies provided that no
Investors or Hauff shall be required to substitute themselves for Burns.
23. INSURANCE FOR BURNS
From and after the Closing Date and at the expense of the Companies,
the Companies and their successors and affiliates shall until the sixth (6th)
anniversary of the Closing Date, procure and keep in full force and effect
liability insurance, including products liability coverage, naming Burns as an
additional named insured. Such insurance shall have minimum limits of Two
Million Dollars ($2,000,000) per occurrence and Three Million Dollars
($3,000,000) in the aggregate.
24. TERMINATION
24.1 BY MUTUAL CONSENT
At any time this Agreement may be terminated by the written consent of
all the parties hereto without liability on the part of any party or their
respective directors, officers or shareholders. If this Agreement is terminated
under this Section 24.1, the Agreement shall have no further force or effect as
of the termination date agreed by the parties.
24.2 TERMINATION UPON DEFAULT OR BREACH
If any party to this Agreement defaults in the performance of any of
the covenants contained in this Agreement, or if there shall have been a breach
by any party of any of such party's representations or warranties set forth in
this Agreement, any other party may terminate this Agreement without prejudice
to its rights and remedies available under law by delivering written notice of
termination to all other parties to this Agreement. Termination shall be
effective upon the termination date specified in the notice.
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24.3 TERMINATION BASED UPON FAILURE OF CONDITIONS
If any of the conditions of this Agreement to be complied with or
performed on or before the Closing Date shall not have been complied with or
performed by such date and such noncompliance or nonperformance shall not have
been waived in writing by the party to whom the benefit of such condition runs,
such party may terminate this Agreement without prejudice to his\its rights and
remedies available under law.
25. MISCELLANEOUS PROVISIONS
25.1 AMENDMENT AND MODIFICATION
Subject to applicable law, prior to the Closing Date this Agreement may
be amended, modified and supplemented or any provision waived only by written
agreement, executed by all the parties hereto.
25.2 WAIVER OF COMPLIANCE; CONSENTS
Any failure of a party to comply with any obligation, covenant,
agreement or condition herein, may be waived in writing, but such waiver or
failure to insist upon strict compliance with such obligation, covenant,
agreement or condition shall not operate as a waiver of, or estoppel with
respect to, any subsequent or other failure. Whenever this Agreement requires or
permits consent by or on behalf of any party hereto, such consent shall be given
in writing.
25.3 EXPENSES
Each party to this Agreement shall bear his/its own expenses related to
the preparation of documents, due diligence investigations, or other matters
related to the transactions contemplated by this Agreement, provided, however,
Gargoyles shall reimburse Trillium in an amount not to exceed Twelve Thousand
Five Hundred Dollars ($12,500) for tasks which benefit the Companies as a whole
and not just Trillium, including but not limited to preparation of (i) the
merger documents for Antone, (ii) the Amended and Restated Articles of
Incorporation and Bylaws for Gargoyles and Pro-Tec, (iii) certain intellectual
property agreements between the Companies and various parties, (iv) employee
stock option agreements for Gargoyles and Pro-Tec and (v) the employment
agreements between Gargoyles and Hauff, Bernheiser, Steckler and Jobe.
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<PAGE> 35
25.4 ATTORNEYS' FEES
If it shall be necessary for any party to this Agreement to employ an
attorney to enforce their rights pursuant to this Agreement because of the
default of another party(s), the defaulting party(s) shall reimburse the
non-defaulting party(s) for reasonable attorneys' fees and expenses.
25.5. DISPUTE RESOLUTION
Any controversy, claim, or dispute arising out of or relating to this
Agreement, or the alleged breach hereof shall be resolved by binding arbitration
by one arbitrator subject to the sole jurisdiction of the Judicial Arbitration
and Mediation Service of King County, Washington (J.A.M.S.). If the parties
hereto fail to agree on selection of an arbitrator, any party may petition the
presiding judge of the Superior Court of King County, Washington to appoint a
member of J.A.M.S. as an arbitrator. Thereafter, the arbitrator shall permit a
period of open and free discovery, including the taking of depositions and will
promptly conduct an arbitration hearing. It is the intent of the parties hereto
that an arbitration hearing be concluded within 90 days of the appointment of
the arbitrator. The arbitrator shall have broad authority to fashion any legal
or equitable remedy including the authority to award specific performance. The
arbitrator will render a final and binding decision within ten days of the
conclusion of the arbitration hearing.
After the arbitration award being rendered, it may be entered in any
court of competent jurisdiction and shall constitute a final adjudication of all
matters submitted to arbitration. If any party at any time subsequent to
execution of this Agreement refuses to comply with the arbitration provisions of
this Section 25.5, any party may make specific application to the Superior court
of King County, Washington to compel the party to submit to arbitration in
accordance with the terms of this Section.
Nothing in this Section 25.5, however, shall deprive a court of
competent jurisdiction of the authority to apply a temporary restraining order
or preliminary injunction prohibiting a violation of this Agreement prior to any
arbitration proceeding.
25.6 FURTHER ASSURANCES
From time to time after the Closing and without further consideration,
the parties hereto will execute and deliver, or arrange for the execution and
delivery of such other instruments and take such other action or arrange for
such other actions as may reasonably be requested to more effectively complete
any of the transactions contemplated by this Agreement or the Related Documents.
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<PAGE> 36
25.7 SURVIVAL OF REPRESENTATIONS AND WARRANTIES
The representations and warranties of the parties hereto shall survive
the Closing and shall continue in full force and effect until the third (3rd)
anniversary of the Closing Date.
25.8 NOTICES
All notices, requests, demands and other communications required or
permitted hereunder shall be in writing and shall be given by: (a) hand
delivery; (b) first-class registered or certified mail with postage prepaid, (c)
overnight receipted courier service, or (d) telephonically confirmed facsimile
transmission, which notice is addressed to the party at the address set forth
below, or such other address as may hereafter be designated in writing by the
party. Notices given in accordance with this Section shall be effective upon
receipt or when receipt is refused.
If to Burns, to:
Dennis Burns
Star Route
Long Creek, Oregon 97856
With a copy to:
Richard Padden
Carney Badley Smith & Apellmen
701 Fifth Avenue #2200
Seattle, WA 98104
Tel: (206) 622-8020
Fax: (206) 467-8215
If to Hauff, to:
Douglas B. Hauff
The Highlands
Seattle, WA 98177
Tel: (206) 364-5898
Fax: (206) 364-5998
If to Trillium, to:
Trillium Corporation
1313 Commercial Street
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<PAGE> 37
Bellingham, WA 98225
Attn: General Counsel
Tel: (360) 676-9402
Fax: (360) 676-7736
With a Copy to:
Cynthia L. Pope
Brett & Daugert
300 North Commercial
Bellingham, WA 98225
Tel: (360) 733-0212
Fax: (360) 647-1902
If to any of the other Investors, to the addresses listed for each of
them on the signature pages hereto.
25.9 ASSIGNMENT; FORM OF TRANSACTION
This Agreement and all of the provisions hereof shall be binding upon
and inure to the benefit of the parties hereto and their respective successors
and permitted assigns, but neither this Agreement nor any of the rights,
interests or obligations hereunder shall be assigned by any party hereto without
the prior written consent of all the other parties hereto.
25.10 GOVERNING LAW
This Agreement and the Related Documents shall be governed by the
internal law of the state of Washington as to all matters, including but not
limited to matters of validity, construction, effect and performance.
25.11 COUNTERPARTS
This Agreement may be executed in two or more counterparts, each of
which shall be deemed an original, but all of which together shall constitute
one and the same instrument.
25.12 HEADINGS
The section headings contained in this Agreement are for reference
purposes only and shall not affect in any way the meaning or interpretation of
this Agreement.
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<PAGE> 38
25.13 EXHIBITS AND SCHEDULES
The exhibits and schedules attached hereto are incorporated herein by
reference as if fully set forth herein.
25.14 ENTIRE AGREEMENT
This Agreement, including the exhibits and schedules hereto and the
Related Documents, embodies the entire agreement and understanding of the
parties hereto in respect of the transactions contemplated by this Agreement and
supersedes all prior agreements, including the Hauff-Gargoyles Employment
Agreement and the Hauff-Pro-Tec Employment Agreement, representations,
warranties, promises, covenants, arrangements, communications and
understandings, oral or written, express or implied, between the parties with
respect to such transactions. There are no agreements, representations,
warranties, promises, covenants, arrangements or understandings between the
parties with respect to such transactions, other than those expressly set forth
or referred to herein.
25.15 SEVERABILITY
Unless otherwise provided herein, if any provision of this Agreement
shall be invalid, illegal or unenforceable, the validity, legality and
enforceability of the remaining provisions shall not in any way be affected or
impaired thereby.
25.16 NO PUBLIC ANNOUNCEMENT
Neither Burns, Hauff nor the Companies nor any of the Investors shall
make any press release or other public announcement concerning the transactions
contemplated by this Agreement without the prior written approval of the other
parties except as required by law, in which case the parties shall use their
best efforts to cause a mutually agreeable release or announcement to be issued.
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<PAGE> 39
IN WITNESS WHEREOF, the parties hereto have executed this Stock
Purchase Agreement as of the date first above written.
GARGOYLES, INC.,
a Washington corporation
By /s/ Douglas B. Hauff
-----------------------------
Its President
-----------------------------
PRO-TEC, INC., a
Washington corporation
By /s/ Douglas B. Hauff
-----------------------------
Its President
-----------------------------
ANTONE MANUFACTURING, Inc.,
a Washington corporation
By /s/ Dennis Burns
-----------------------------
Its President
-----------------------------
/s/ Dennis Burns
---------------------------------
DENNIS BURNS
/s/ Carol Burns
---------------------------------
CAROL BURNS
/s/ Douglas B. Hauff
---------------------------------
DOUGLAS HAUFF
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<PAGE> 40
/s/ Gary Waterman
---------------------------------
GARY WATERMAN
/s/ John Steckler
---------------------------------
JOHN STECKLER
THE ARTHUR KERN REVOCABLE TRUST
U/A DATED DECEMBER 7, 1992
By: /s/ Arthur H. Kern
-----------------------------
Its: ARTHUR H. KERN, Trustee
-----------------------------
/s/ John Stanton
---------------------------------
JOHN STANTON
/s/ John Rudolf`
---------------------------------
JOHN RUDOLF
/s/ Steven R. Kingma
---------------------------------
STEVE KINGMA
/s/ David Jobe
---------------------------------
DAVID JOBE
/s/ Tom Johnson
---------------------------------
TOM JOHNSON
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<PAGE> 41
/s/ Bruce Hosford
---------------------------------
BRUCE HOSFORD
/s/ Tim Buckley
---------------------------------
TIM BUCKLEY
/s/ Allen Shoup
---------------------------------
ALLEN SHOUP
/s/ Stan Walderhaug
---------------------------------
STAN WALDERHAUG
/s/ Peter von Reichbauer
---------------------------------
PETER VON REICHBAUER
/s/ Gary Gigot
---------------------------------
Gary Gigot
/s/ Robert E. Manne
---------------------------------
Robert E. Manne
TRILLIUM CORPORATION,
a Washington corporation
By /s/ Erik J. Anderson
---------------------------------
Erik Anderson, Co President
/s/ David R. Syre
---------------------------------
DAVID R. SYRE
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<PAGE> 1
EXHIBIT 10.2
INDEMNITY AGREEMENT
THIS INDEMNITY AGREEMENT (this "Agreement") is made as of March 22,
1995, by GARGOYLES, INC., a Washington corporation ("Gargoyles"), in favor of
TRILLIUM CORPORATION, a Washington corporation ("Trillium").
RECITALS
A. Gargoyles and Trillium, among others are parties to that certain
Stock Purchase Agreement dated March 14, 1995 (the "Purchase Agreement").
B. In consideration of the transactions contemplated by the Stock
Purchase Agreement, Gargoyles has asked Trillium to guarantee $6,000,000 of
indebtedness of Gargoyles to U.S. Bank of Washington N.A., pursuant to the terms
of that certain Limited Guaranty dated March 22, 1995 (the "Guaranty") and
Trillium has agreed to guarantee such indebtedness provided Gargoyles agrees to
indemnify Trillium for any losses related to such guaranty.
AGREEMENT
NOW THEREFORE, in consideration of the premises and other good and
valuable consideration the receipt and sufficiency of which are hereby
acknowledged, the Gargoyles hereby agrees as follows:
1. INDEMNITY
Gargoyles hereby agrees to reimburse Trillium for any and all payments
made by Trillium under the terms of the Guaranty as a result of the failure of
Gargoyles to pay or perform its obligations guarantied by Trillium under the
terms of the Guaranty, and hereby agrees to indemnity, defend, and hold harmless
Trillium from and against all losses, liabilities, deficiencies, claims and
expenses (including, but not limited to, costs of defense and reasonable
attorneys' fees) incurred by Trillium arising from the failure of Gargoyles to
pay or perform its obligations guarantied by Trillium under the terms of the
Guaranty.
2. ATTORNEYS' FEES
If it shall be necessary for Trillium to employ an attorney to enforce
its rights pursuant to this Agreement because of the default of Gargoyles,
Gargoyles shall reimburse Trillium for reasonable attorneys' fees and expenses.
<PAGE> 2
3. GOVERNING LAW
This Agreement shall be governed by the internal law of the state of
Washington as to all matters, including but not limited to matters of validity,
construction, effect and performance.
IN WITNESS WHEREOF, Gargoyles has executed this Indemnity Agreement as
of the date first above written:
GARGOYLES, INC., a
Washington corporation
By /s/ Douglas B. Hauff
--------------------------------
Douglas B. Hauff, President
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<PAGE> 1
Exhibit 10.3
AMENDED AND RESTATED PROMISSORY NOTE
(GARGOYLES, INC.)
$283,100.00 Seattle, Washington
March 17, 1995
FOR VALUE RECEIVED, the undersigned ("Maker") hereby promises to pay to
the order of DENNIS BURNS ("Payee"), at 13804 - 252nd Pl. S.E., Issaquah,
Washington 98027, or at such other place as the holder hereof may designate, the
principal sum of two hundred eighty-three thousand one hundred and no/100
Dollars ($283,100.00), together with interest on the outstanding principal
balance as set forth herein.
1. INTEREST
1.1 RATE
Maker agrees to pay interest on the unpaid principal balance hereunder
from the date of this Note at the rate of ten and no/100 percent (10.00%) per
annum (the "Interest Rate").
1.2 CALCULATION OF INTEREST
Interest hereunder shall accrue from day to day and shall be calculated
on the basis of actual days elapsed in a 365-day year.
2. PAYMENTS
2.1 INTEREST ONLY
Maker shall pay all accrued interest hereunder on April 15, 1995, and
thereafter, in arrears, on the 15th day of each succeeding month through and
including September 15, 1995.
2.2 PRINCIPAL AND INTEREST
Beginning on October 15, 1995, and thereafter on the 15th day of each
succeeding month, Maker shall repay the principal sum of this Note, together
with interest as aforesaid, in equal monthly installments, of ten thousand seven
hundred four and forty-one/100 Dollars ($10,704.41), until this Note is paid in
full. In any
<PAGE> 2
event, the outstanding principal of this Note and all accrued and unpaid
interest hereunder shall be paid in full not later than March 15, 1998 (the
"Maturity Date").
2.3 IMMEDIATELY AVAILABLE FUNDS
All payments under this Note shall be paid in immediately available
funds, free and clear of any restrictions, conditions, claims, counterclaims, or
defenses, and free and clear of and without deductions, set-offs, or
withholdings of any nature, present or future.
3. LATE FEE
If any payment due under this Note is not received by Payee within ten
(10) days after such payment was due, Maker shall pay a late fee in the amount
of five and no/100 percent of such payment (5.00%), or Fifty and no/100 Dollars
($50.00), whichever is greater. Such late fee is intended as liquidated damages
to compensate Payee for his additional administrative costs and overhead
incurred in connection with the late payment.
4. DEFAULT RATE
If Maker fails to make any payment when due hereunder, interest shall
accrue on the overdue amount from the due date until the date that payment is
received at the per annum rate equal to three and no/100 percent (3.00%) above
the Interest Rate (the "Default Rate"). Interest at the Default Rate shall be in
addition to and not in lieu of any late fee or other charges due under this
Note.
5. APPLICATION OF PAYMENTS
Any payment that is received from Maker shall be first applied to the
payment of fees, costs and expenses, if any, for which Maker is liable
hereunder, next to payment of accrued interest, and last to the reduction of
principal.
6. DEFAULT
If Maker defaults in the payment of any amount when due hereunder and
such default is not cured within ten (10) calendar days after written notice is
received by Maker, then at any time after such cure period, Payee may, at
Payee's option, by notice in writing to Maker, declare that the outstanding
principal balance of this Note, together with all interest accrued thereon and
all costs and expenses due hereunder, is immediately due and payable. Failure to
exercise this option, or any other right that Payee may in such event be
entitled to, shall not constitute a waiver of the right to exercise such option
or any other right in the event of any subsequent default. In such
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<PAGE> 3
event of default, Maker agrees to pay to Payee all expenses which Payee may
incur by reason thereof, including but not limited to reasonable attorneys' fees
and disbursements, whether with respect to the investigation of such default of
the determination of the application or the pursuit of remedies with respect
thereto, or in legal proceedings, or otherwise, and all such expenses of Payee
shall become a part of the indebtedness evidenced by this Note, to bear interest
at the Default Rate as set forth above. For purposes of this Note, the term
"legal proceedings" shall mean and include all litigation, arbitration,
bankruptcy, administrative, or similar proceedings, and all appeals therefrom.
7. WAIVER OF NOTICES
Except as provided otherwise in this Note, Maker, all endorsers and all
persons liable or to become liable on this Note, waive demand, protest and
notice of demand, protest and nonpayment and consent to any and all renewals and
extensions in the time of payment hereof.
8. ADEQUACY; SUCCESSORS
In any action or proceeding to recover any sum herein provided for, no
defense of adequacy of security or that resort must first be had to security or
to any other person shall be asserted. All of the covenants, provisions and
conditions herein contained are made on behalf of, and shall apply to and bind
the respective successors and assigns of, the parties hereto, jointly and
severally. Each and every party signing or endorsing the Note binds himself as
principal and not as surety.
9. GOVERNING LAW
This Note shall be governed by and construed in accordance with the
laws of the State of Washington.
10. NOTICES AND CORRESPONDENCE
All notices, requests, demands or other communications in connection
with this Note shall be in writing and shall be deemed to have been given or
made when hand-delivered, or three (3) days after the same is placed in the
United States Mails, certified or registered, return receipt requested, to the
addresses given below or to such other addresses as the parties may from time to
time specify to each other in writing:
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<PAGE> 4
Maker: Gargoyles, Inc.
Attn: Douglas Hauff
5866 South 194th Street
Kent, Washington 98032
Payee: Mr. Dennis Burns
13804 - 252nd Pl. S.E.
Issaquah, Washington 98027
11. DUE ON SALE
If Maker should sell, assign, alienate, or transfer, or contract to
sell, assign, alienate or transfer, title or possession of any part of Maker's
property (excluding Maker's stock) other than in the usual and regular course of
its business, Payee may, in his sole discretion, declare that the outstanding
principal balance of this Note, together with all interest accrued thereon and
all costs and expenses due hereunder, is immediately due and payable.
12. TIME IS OF THE ESSENCE
Time is of the essence in this Note.
ORAL AGREEMENTS OR ORAL COMMITMENTS TO LOAN MONEY, TO EXTEND CREDIT, OR
TO FORBEAR FROM ENFORCING REPAYMENT OF A DEBT ARE NOT ENFORCEABLE UNDER
WASHINGTON LAW.
EXECUTED as of the day and year set forth above.
MAKER:
GARGOYLES, INC.
By /s/ Douglas B. Hauff
--------------------------------------
Its President
--------------------------------------
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<PAGE> 1
Exhibit 10.4
GUARANTY
(GARGOYLES, INC. NOTE)
THIS GUARANTY is given this ______ day of March, 1995, by PRO-TEC,
INC., a Washington corporation ("Guarantor"), to and for the benefit of DENNIS
BURNS, a married individual ("Lender"), with respect to the following facts:
A. Gargoyles, Inc., a Washington corporation ("Borrower"), is indebted
to Lender in the amount of $283,100.00 (the "Loan"). The Loan is evidenced by
that certain Amended and Restated Promissory Note of even date herewith (as the
same may be renewed, extended, modified and replaced from time to time, the
"Note") in the amount of the Loan.
B. Guarantor, Borrower, Lender and others (the "Investors") are parties
to that certain Stock Purchase Agreement (the "Agreement") dated March ___,
1995, pursuant to which, among other things, the Investors and Borrower have
agreed to purchase shares of stock of Guarantor and Borrower held by Lender.
C. A condition to closing the transactions contemplated by the
Agreement is the execution and delivery of the Note by the Borrower and this
Guaranty by the Guarantor.
NOW, THEREFORE, in consideration of the foregoing, and for other
valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, Guarantor undertakes and agrees as follows:
1. GUARANTY
Guarantor hereby unconditionally and irrevocably guarantees to Lender
the due performance and prompt payment when due, whether at maturity or by
acceleration or otherwise, of Borrower's Obligations, as that term is defined
below. "Borrower's Obligations" is used herein in its most comprehensive sense
and means all present and future obligations of Borrower pursuant to the Note,
including without limitation the
<PAGE> 2
obligation to repay all principal and to pay all interest, expenses, attorneys'
fees, or other debts, obligations, and liabilities of Borrower relating to the
Loan and the Note.
2. PAYMENT UPON DEMAND; ACCRUAL OF INTEREST
Guarantor agrees to pay to Lender all or any portion of the Borrower's
Obligations guaranteed herein upon demand when such obligations are due under
the Note. If such payment is not made by Guarantor within ten (10) days after
such demand, interest shall accrue from the date of demand on the amount
demanded at the Default Rate set forth in the Note and Guarantor hereby agrees
to pay all such accrued interest.
3. TERM
This Guaranty and the Obligations of Guarantor hereunder shall continue
in full force and effect until all of Borrower's Obligations shall have been
paid and performed in full.
4. INDEPENDENT OBLIGATION
This Guaranty constitutes a separate and independent obligation to
Lender, and Guarantor intends that this Guaranty shall be a separate source of
payment and performance of Borrower's Obligations.
Accordingly, Guarantor represents and warrants that:
4.1 Lender may obtain recourse against Guarantor for the
payment and performance of all or any portion of Borrower's Obligations prior
to, concurrently with, or after any action, proceeding, settlement or other
means by which Lender may from time to time elect to enforce such obligations.
4.2 In no event shall Lender be deemed to have elected any
remedy which precludes or impairs their ability to proceed against Guarantor
hereunder.
4.3 This Guaranty may be enforced prior to, concurrently with
or after any action against Borrower and shall survive any foreclosure, private
or public
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<PAGE> 3
sale, sheriff's sale, or trustee's sale, of any personal or real property.
Specifically, this Guaranty shall survive, as an independent contractual
obligation, any such sale despite any statutory provision which otherwise
prohibits any deficiency judgment, extinguishes or satisfies Borrower's
Obligations, or otherwise relieves Borrower from further liability. Guarantor
recognizes and agrees that its liability hereunder is not conditioned in any
manner upon the existence of such liability of Borrower or the ability of
Guarantor to obtain any redress against Borrower through indemnification,
subrogation or otherwise.
4.4 Guarantor's obligations under this Guaranty is not
dependent upon the existence or validity of the obligations of any other
guarantor.
4.5 In the event of default hereunder, Lender may maintain an
action upon this Guaranty whether or not Borrower is a party thereto. Lender may
maintain successive actions for each default under this Guaranty.
5. WAIVER BY GUARANTOR
Guarantor hereby waives protest, presentment, demand for payment
(except as specified in Section 2 above), notice of default or non-payment and
notice of dishonor.
6. OTHER GUARANTIES
Guarantor agrees that this Guaranty is in addition to and not in
substitution for any other guaranties which may hereafter be held by Lender and
shall not be affected by any release or discharge granted to any other
guarantor.
7. DELEGATION; CHANGE OF OWNERSHIP; COVENANTS
Guarantor may not delegate any of its obligations or liabilities,
contingent or otherwise, hereunder. This Guaranty shall not be discharged or in
any way affected by any change in the ownership or control of Guarantor.
Guarantor shall keep Lender informed of any change in its financial condition
which might have a material adverse effect on its capability to fulfill its
obligations hereunder. Guarantor shall permit no change in its ownership without
the prior written consent of Lender.
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<PAGE> 4
8. CONSENT TO AMENDMENTS AND MODIFICATIONS
Guarantor agrees that Lender may, without obtaining the consent of and
without giving notice to Guarantor, and without releasing or reducing
Guarantor's liability under this Guaranty, do any one or more of the following
at any time:
8.1 Amend the Note or agree with Borrower to change the
manner, place or terms of payment, or change or extend the terms of any of
Borrower's Obligations;
8.2 Increase the amount of loans made pursuant to the Note, or
enter into any new loan agreement with Borrower, or increase the interest rate
or expenses owed by Borrower to Lender;
8.3 Discharge or release any other party (including any other
guarantor) who is or may be liable for Borrower's Obligations; or
8.4 Refrain from enforcing any security, or release any
present or future security or guarantee which Lender holds from Borrower or any
other person.
Guarantor agrees that no course of dealing between Lender and Borrower,
nor any failure or delay by Lender to exercise any one or more of its rights or
remedies, or any other agreement between Lender and Borrower, shall impair or
release Guarantor's obligations under this Guaranty.
9. PRESERVATION AND PRIORITY OF LENDER'S CLAIMS
Guarantor agrees that until all of Borrower's Obligations have been
paid and performed in full:
9.1 Any rights that Guarantor may have to be reimbursed by
Borrower, whether such right may arise by way of subrogation to Lender's rights
or otherwise, shall in all respects be subordinate and inferior to Lender's
rights to collect and enforce payment, performance, and satisfaction of
Borrower's Obligations;
-4-
<PAGE> 5
9.2 Guarantor shall not assert priority over Lender or make
any claim against Borrower or make any claim in any bankruptcy or insolvency
proceeding or take or enforce any security from or against Borrower.
Notwithstanding the foregoing, Guarantor shall be entitled to make a claim so
long as such claim is subordinate to all claims of Lender;
9.3 Guarantor agrees to refrain from attempting to collect or
enforce any rights against Borrower (whether such rights occur by subrogation or
otherwise) until all of Borrower's obligations have been paid and performed in
full; and
9.4 If for any reason Guarantor takes any security from
Borrower, or if Guarantor receives any payment from Borrower, Guarantor hereby
agrees that such security or payment shall be held by Guarantor in trust for
Lender as continuing security for Guarantor's liability to Lender under this
Guaranty.
10. APPLICATION OF PAYMENTS
Lender may apply any payments received in connection with Borrower's
obligations (regardless of whether such payment is made by Borrower, any
Guarantor, or any other party) to any of Borrower's obligations in any order or
in any manner as determined by Lender in its sole discretion.
11. REPRESENTATIONS AND WARRANTIES
Guarantor represents and warrants to Lender that:
11.1 Guarantor is a corporation, duly organized, existing and
in good standing under and by virtue of the laws of Washington, and until all of
Borrower's liability (including without limitation contingent liability) to
Lender under the Loan Agreement and the Note shall be extinguished and the Loan,
interest thereon and other sums payable by Borrower to Lender under the Note or
any other document or instrument contemplated therein have been fully paid to
Lender, Guarantor will maintain its existence and good standing as a corporation
under the laws of Washington.
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<PAGE> 6
11.2 Guarantor has full power and authority to incur the
indebtedness and other obligations provided for in this Guaranty, to execute and
deliver this Guaranty and to perform and observe the terms and conditions
hereof.
11.3 Guarantor has taken all appropriate and necessary action
under the laws governing corporations in Washington to authorize the execution
and delivery of this Guaranty.
11.4 This Guaranty constitute the legal, valid, and binding
obligation of Guarantor enforceable in accordance with their terms. The
execution, delivery and performance of this Guaranty and the payment of all
amounts due on the dates provided for herein (i) will not conflict with Articles
of Incorporation or Bylaws or other foundational documents of Guarantor, (ii)
will not conflict with or result in the breach of any provision of any agreement
to which Guarantor is a party or by which it or any of its properties or assets
is bound, and (iii) will not constitute a default or an event which with the
passage of time or giving of notice, or both, would constitute a default under
any such agreement.
11.5 Guarantor is not in default under any agreement or
document to which it is a party or by which it is bound.
11.6 Guarantor's obligations hereunder will rank at least pari
passu in priority of payment and in all other respects with other unsecured
indebtedness of Guarantor except for certain obligations in respect of federal,
state and local taxes and other statutory obligations.
12. GOVERNING LAW
This Guaranty shall be governed by and construed in accordance with the
laws of Washington. Guarantor hereby irrevocably submits to the non-exclusive
jurisdiction of the state and federal courts situated in Washington in any
proceeding related to this Agreement and agrees that any process or summons in
any such action may be served by mailing to Guarantor a copy thereof to
Guarantor at the address of Borrower set forth in the Note.
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<PAGE> 7
13. SUCCESSORS AND ASSIGNS
This Guaranty is for the benefit of Lender, its trustees, successors
and assigns, and in the event of any assignment by Lender of Borrower's
Obligations hereby guaranteed or any part thereof, the rights and benefits
hereunder, to the extent applicable to Borrower's Obligations so assigned, shall
be transferred with such obligations and inure to the benefit of the assignee.
This Guaranty is binding upon Guarantor and on its successors, receivers, heirs,
administrators and personal representatives. Guarantor pledges and agrees not to
transfer by gift or without adequate consideration any assets owned individually
or jointly with any person at any time this Guaranty remains in effect.
14. SAVINGS PROVISION
Invalidity or unenforceability of any one or more of the provisions of
this Guaranty for any reason shall not affect any of the other provisions
hereof, and such other provisions shall remain in full force and effect.
15. LITIGATION EXPENSES
In any controversy, claim or dispute arising out of, or relating to,
this Guaranty or the method and manner of performance thereof or the breach
thereof, the prevailing party shall be entitled and awarded, in addition to any
other relief, to a reasonable sum as litigation expenses. In determining what is
a reasonable sum for litigation expenses, the actual amount of attorney's fees
the party is obligated to pay its attorney or attorneys and the actual expenses
incurred in proceeding shall be presumed to be reasonable, which presumption is
rebuttable. For the purposes of this provision, the term "litigation" shall
include arbitration, administrative, bankruptcy, and judicial proceedings,
including appeals therefrom.
16. NO ORAL MODIFICATION
No alterations or modifications of the terms set forth herein shall be
binding on Lender unless set forth in a document duly executed by Lender.
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<PAGE> 8
ORAL AGREEMENTS OR ORAL COMMITMENTS TO LOAN MONEY, TO EXTEND
CREDIT, OR TO FORBEAR FROM ENFORCING REPAYMENT OF A DEBT ARE
NOT ENFORCEABLE UNDER WASHINGTON LAW.
EXECUTED as of the date first set forth above.
GUARANTOR:
PRO-TEC, INC.
By /s/ Douglas B. Hauff
-------------------------------
Its President
-------------------------------
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<PAGE> 1
Exhibit 10.5
GUARANTY
(PRO-TEC, INC. NOTE)
THIS GUARANTY is given this 17th day of March, 1995, by GARGOYLES,
INC., a Washington corporation ("Guarantor"), to and for the benefit of DENNIS
BURNS, a married individual ("Lender"), with respect to the following facts:
A. Pro-Tec, Inc., a Washington corporation ("Borrower"), is indebted to
Lender in the amount of $133,400.00 (the "Loan"). The Loan is evidenced by that
certain Amended and Restated Promissory Note of even date herewith (as the same
may be renewed, extended, modified and replaced from time to time, the "Note")
in the amount of the Loan.
B. Guarantor, Borrower, Lender and others (the "Investors") are parties
to that certain Stock Purchase Agreement (the "Agreement") dated March ___,
1995, pursuant to which, among other things, the Investors and Guarantor have
agreed to purchase shares of stock of Guarantor and Borrower held by Lender.
C. A condition to closing the transactions contemplated by the
Agreement is the execution and delivery of the Note by the Borrower and this
Guaranty by the Guarantor.
NOW, THEREFORE, in consideration of the foregoing, and for other
valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, Guarantor undertakes and agrees as follows:
1. GUARANTY
Guarantor hereby unconditionally and irrevocably guarantees to Lender
the due performance and prompt payment when due, whether at maturity or by
acceleration or otherwise, of Borrower's Obligations, as that term is defined
below. "Borrower's Obligations" is used herein in its most comprehensive sense
and means all present and future obligations of Borrower pursuant to the Note,
including without limitation the
<PAGE> 2
obligation to repay all principal and to pay all interest, expenses, attorneys'
fees, or other debts, obligations, and liabilities of Borrower relating to the
Loan and the Note.
2. PAYMENT UPON DEMAND; ACCRUAL OF INTEREST
Guarantor agrees to pay to Lender all or any portion of the Borrower's
Obligations guaranteed herein upon demand when such obligations are due under
the Note. If such payment is not made by Guarantor within ten (10) days after
such demand, interest shall accrue from the date of demand on the amount
demanded at the Default Rate set forth in the Note and Guarantor hereby agrees
to pay all such accrued interest.
3. TERM
This Guaranty and the obligations of Guarantor hereunder shall continue
in full force and effect until all of Borrower's Obligations shall have been
paid and performed in full.
4. INDEPENDENT OBLIGATION
This Guaranty constitutes a separate and independent obligation to
Lender, and Guarantor intends that this Guaranty shall be a separate source of
payment and performance of Borrower's Obligations.
Accordingly, Guarantor represents and warrants that:
4.1 Lender may obtain recourse against Guarantor for the
payment and performance of all or any portion of Borrower's Obligations prior
to, concurrently with, or after any action, proceeding, settlement or other
means by which Lender may from time to time elect to enforce such Obligations.
4.2 In no event shall Lender be deemed to have elected any
remedy which precludes or impairs their ability to proceed against Guarantor
hereunder.
4.3 This Guaranty may be enforced prior to, concurrently with
or after any action against Borrower and shall survive any foreclosure, private
or public
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<PAGE> 3
sale, sheriff's sale, or trustee's sale, of any personal or real property.
Specifically, this Guaranty shall survive, as an independent contractual
obligation, any such sale despite any statutory provision which otherwise
prohibits any deficiency judgment, extinguishes or satisfies Borrower's
Obligations, or otherwise relieves Borrower from further liability. Guarantor
recognizes and agrees that its liability hereunder is not conditioned in any
manner upon the existence of such liability of Borrower or the ability of
Guarantor to obtain any redress against Borrower through indemnification,
subrogation or otherwise.
4.4 Guarantor's obligations under this Guaranty is not
dependent upon the existence or validity of the obligations of any other
guarantor.
4.5 In the event of default hereunder, Lender may maintain an
action upon this Guaranty whether or not Borrower is a party thereto. Lender may
maintain successive actions for each default under this Guaranty.
5. WAIVER BY GUARANTOR
Guarantor hereby waives protest, presentment, demand for payment
(except as specified in Section 2 above), notice of default or non-payment and
notice of dishonor.
6. OTHER GUARANTIES
Guarantor agrees that this Guaranty is in addition to and not in
substitution for any other guaranties which may hereafter be held by Lender and
shall not be affected by any release or discharge granted to any other
guarantor.
7. DELEGATION; CHANGE OF OWNERSHIP; COVENANTS
Guarantor may not delegate any of its obligations or liabilities,
contingent or otherwise, hereunder. This Guaranty shall not be discharged or in
any way affected by any change in the ownership or control of Guarantor.
Guarantor shall keep Lender informed of any change in its financial condition
which might have a material adverse effect on its capability to fulfill its
obligations hereunder. Guarantor shall permit no change in its ownership without
the prior written consent of Lender.
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<PAGE> 4
8. CONSENT TO AMENDMENTS AND MODIFICATIONS
Guarantor agrees that Lender may, without obtaining the consent of and
without giving notice to Guarantor, and without releasing or reducing
Guarantor's liability under this Guaranty, do any one or more of the following
at any time:
8.1 Amend the Note or agree with Borrower to change the
manner, place or terms of payment, or change or extend the terms of any of
Borrower's obligations;
8.2 Increase the amount of loans made pursuant to the Note, or
enter into any new loan agreement with Borrower, or increase the interest rate
or expenses owed by Borrower to Lender;
8.3 Discharge or release any other party (including any other
guarantor) who is or may be liable for Borrower's Obligations; or
8.4 Refrain from enforcing any security, or release any
present or future security or guarantee which Lender holds from Borrower or any
other person.
Guarantor agrees that no course of dealing between Lender and Borrower,
nor any failure or delay by Lender to exercise any one or more of its rights or
remedies, or any other agreement between Lender and Borrower, shall impair or
release Guarantor's obligations under this Guaranty.
9. PRESERVATION AND PRIORITY OF LENDER'S CLAIMS
Guarantor agrees that until all of Borrower's Obligations have been
paid and performed in full:
9.1 Any rights that Guarantor may have to be reimbursed by
Borrower, whether such right may arise by way of subrogation to Lender's rights
or otherwise, shall in all respects be subordinate and inferior to Lender's
rights to collect and enforce payment, performance, and satisfaction of
Borrower's Obligations;
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<PAGE> 5
9.2 Guarantor shall not assert priority over Lender or make
any claim against Borrower or make any claim in any bankruptcy or insolvency
proceeding or take or enforce any security from or against Borrower.
Notwithstanding the foregoing, Guarantor shall be entitled to make a claim so
long as such claim is subordinate to all claims of Lender;
9.3 Guarantor agrees to refrain from attempting to collect or
enforce any rights against Borrower (whether such rights occur by subrogation or
otherwise) until all of Borrower's Obligations have been paid and performed in
full; and
9.4 If for any reason Guarantor takes any security from
Borrower, or if Guarantor receives any payment from Borrower, Guarantor hereby
agrees that such security or payment shall be held by Guarantor in trust for
Lender as continuing security for Guarantor's liability to Lender under this
Guaranty.
10. APPLICATION OF PAYMENTS
Lender may apply any payments received in connection with Borrower's
obligations (regardless of whether such payment is made by Borrower, any
Guarantor, or any other party) to any of Borrower's Obligations in any order or
in any manner as determined by Lender in its sole discretion.
11. REPRESENTATIONS AND WARRANTIES
Guarantor represents and warrants to Lender that:
11.1 Guarantor is a corporation, duly organized, existing and
in good standing under and by virtue of the laws of Washington, and until all of
Borrower's liability (including without limitation contingent liability) to
Lender under the Loan Agreement and the Note shall be extinguished and the Loan,
interest thereon and other sums payable by Borrower to Lender under the Note or
any other document or instrument contemplated therein have been fully paid to
Lender, Guarantor will maintain its existence and good standing as a corporation
under the laws of Washington.
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<PAGE> 6
11.2 Guarantor has full power and authority to incur the
indebtedness and other obligations provided for in this Guaranty, to execute and
deliver this Guaranty and to perform and observe the terms and conditions
hereof.
11.3 Guarantor has taken all appropriate and necessary action
under the laws governing corporations in Washington to authorize the execution
and delivery of this Guaranty.
11.4 This Guaranty constitute the legal, valid, and binding
obligation of Guarantor enforceable in accordance with their terms. The
execution, delivery and performance of this Guaranty and the payment of all
amounts due on the dates provided for herein (i) will not conflict with Articles
of Incorporation or Bylaws or other foundational documents of Guarantor, (ii)
will not conflict with or result in the breach of any provision of any agreement
to which Guarantor is a party or by which it or any of its properties or assets
is bound, and (iii) will not constitute a default or an event which with the
passage of time or giving of notice, or both, would constitute a default under
any such agreement.
11.5 Guarantor is not in default under any agreement or
document to which it is a party or by which it is bound.
11.6 Guarantor's obligations hereunder will rank at least pari
passu in priority of payment and in all other respects with other unsecured
indebtedness of Guarantor except for certain obligations in respect of federal,
state and local taxes and other statutory obligations.
12. GOVERNING LAW
This Guaranty shall be governed by and construed in accordance with the
laws of Washington. Guarantor hereby irrevocably submits to the non-exclusive
jurisdiction of the state and federal courts situated in Washington in any
proceeding related to this Agreement and agrees that any process or summons in
any such action may be served by mailing to Guarantor a copy thereof to
Guarantor at the address of Borrower set forth in the Note.
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<PAGE> 7
13. SUCCESSORS AND ASSIGNS
This Guaranty is for the benefit of Lender, its trustees, successors
and assigns, and in the event of any assignment by Lender of Borrower's
Obligations hereby guaranteed or any part thereof, the rights and benefits
hereunder, to the extent applicable to Borrower's obligations so assigned, shall
be transferred with such Obligations and inure to the benefit of the assignee.
This Guaranty is binding upon Guarantor and on its successors, receivers, heirs,
administrators and personal representatives. Guarantor pledges and agrees not to
transfer by gift or without adequate consideration any assets owned individually
or jointly with any person at any time this Guaranty remains in effect.
14. SAVINGS PROVISION
Invalidity or unenforceability of any one or more of the provisions of
this Guaranty for any reason shall not affect any of the other provisions
hereof, and such other provisions shall remain in full force and effect.
15. LITIGATION EXPENSES
In any controversy, claim or dispute arising out of, or relating to,
this Guaranty or the method and manner of performance thereof or the breach
thereof, the prevailing party shall be entitled and awarded, in addition to any
other relief, to a reasonable sum as litigation expenses. In determining what is
a reasonable sum for litigation expenses, the actual amount of attorney's fees
the party is obligated to pay its attorney or attorneys and the actual expenses
incurred in proceeding shall be presumed to be reasonable, which presumption is
rebuttable. For the purposes of this provision, the term "litigation" shall
include arbitration, administrative, bankruptcy, and judicial proceedings,
including appeals therefrom.
16. NO ORAL MODIFICATION
No alterations or modifications of the terms set forth herein shall be
binding on Lender unless set forth in a document duly executed by Lender.
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<PAGE> 8
ORAL AGREEMENTS OR ORAL COMMITMENTS TO LOAN MONEY, TO EXTEND
CREDIT, OR TO FORBEAR FROM ENFORCING REPAYMENT OF A DEBT ARE
NOT ENFORCEABLE UNDER WASHINGTON LAW.
EXECUTED as of the date first set forth above.
GUARANTOR:
GARGOYLES, INC.
By /s/ Douglas B. Hauff
-------------------------------
Its President
-------------------------------
-8-
<PAGE> 1
EXHIBIT 10.6
NONDISCLOSURE, NONCOMPETITION AND INDEMNITY AGREEMENT
THIS NONDISCLOSURE, NONCOMPETITION AND INDEMNITY AGREEMENT (this
"Agreement") is dated as of the 22nd day of March 1995, by and between
GARGOYLES, INC., a Washington corporation, PRO-TEC, INC., a Washington
corporation and ANTONE MANUFACTURING, INC., a Washington corporation
(collectively, the "Companies") and DENNIS BURNS ("Burns").
RECITALS
A. Burns and the Companies and certain other Investors are parties to
that certain Stock Purchase Agreement dated March 14, 1995 (the "Stock Purchase
Agreement").
B. Subject to the terms and conditions of this Agreement, Burns desires
the Companies to indemnify him against certain liabilities and the Companies are
willing to provide such an indemnity in consideration of Burns agreeing to keep
certain information regarding the Companies confidential and agreeing not to
compete with the Companies after the closing of the transactions contemplated by
the Stock Purchase Agreement.
C. Capitalized terms used but not otherwise defined herein shall have
the meanings ascribed to them in the Stock Purchase Agreement.
AGREEMENT
1. INDEMNITY OF COMPANIES TO BURNS
1.1 INDEMNIFICATION BY THE COMPANIES
From and after the Closing Date, the Companies and any subsequent
subsidiary or affiliate company shall indemnify, defend and hold harmless Burns,
from and against, and shall reimburse Burns for any and all losses, liabilities,
damages, deficiencies and expenses (including but not limited to cost of defense
and reasonable attorney fees) incurred by or suffered by Burns, arising from or
in connection with any third party claims, demands, lawsuits, judgments,
settlements or arbitration awards, pertaining in any way to Burns' involvement
with the Companies, whether as an owner, shareholder, officer, director, lessor
or employee and whether arising out of any acts or nonactions occurring before
or after execution of this Agreement. This indemnity shall cover third party
claims of any nature and type including but not
<PAGE> 2
limited to products liability claims, patent claims, employee claims, negligence
claims, hazardous waste claims, breach of contract claims and any other claims
or cause of action naming Burns individually. Such indemnity and hold harmless
shall include the right of Burns to retain an attorney of his own choosing, to
participate in the defense of such claims or legal proceedings at Burns' own
expense. Notwithstanding the foregoing, the provisions of this Section 1.1 shall
not apply (i) where indemnification of Burns by the Companies is prohibited by
law, (ii) to liabilities which Burns has specifically agreed to assume in the
Stock Purchase Agreement, and (iii) to liabilities, damages and other losses
arising from acts by Burns that are willful, intentional or fraudulent.
1.2 INVOLVEMENT OF BURNS IN LEGAL PROCEEDINGS
In any legal proceeding involving the Companies and/or Burns (other
than legal proceedings pertaining to enforcement of the terms of the Agreement),
Burns shall not be required to take any action in such litigation other than to
cooperate in the formalities instant to the proceeding unless ordered by a court
with jurisdiction to do so. The Companies and their agents and representative
will make every good faith effort to insulate and wall off Burns from
involvement in any third party claims or action brought against any of the
Companies or Burns, other than to obtain essential facts to which Burns and only
Burns has specific testimonial knowledge and only to the extent such facts
cannot be derived from other persons. Burns acknowledges, however, that as the
inventor of the adherent lens invention and the toric lens invention, the
testimony of Burns may be essential to the Companies' prosecution and
enforcement of the patent and tradesecret rights in both inventions. Prior to
listing or referencing Burns in any answer to any written discovery request in
any litigation against the Companies or Burns, the Companies will contact
Richard J. Padden as the agent for Burns to resolve the necessity of listing or
referencing Burns' name.
2. CONFIDENTIALITY
2.1 DEFINITIONS
For purposes of this Section 2:
"Confidential Information" wherever used shall mean all the Companies'
proprietary information which derives independent economic value from its
secrecy from other persons, companies, or business entities who could obtain
economic value from its disclosure to them or use by them. Confidential
Information also includes, without limitation, research data, trade or business
know-how or business plans, inventions, devices, patterns, compilations,
programs, methods, techniques, or processes which are disclosed or made
available by the Companies to you, or devised
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<PAGE> 3
by you during your employ by the Companies. Examples of Confidential Information
include, without limitation: all information specifically identified as
Confidential Information by the Companies; and all information regarding the
Companies' existing or proposed installations, products or product lines,
information systems, or other projects, the Companies' supplier and customer
lists and all customer information, and the Companies' existing and proposed
business and marketing plans and policies, whether written or oral, and whether
designated individually as Confidential Information or not. Confidential
Information does not include information that:
(a) is a matter of public knowledge at the time Burns first
learns of the information; or
(b) later becomes a matter of public knowledge Burns learns of
the information, other than becoming public knowledge by reason of a breach by
Burns of the obligation of confidentiality set out in this Agreement.
"Invention" as used in the Agreement means all new inventions,
discoveries, creations and works of authorship, and any improvements to existing
inventions, whether patentable or not, and all software relating to any
inventions, discoveries or improvements, which Burns conceived, made, developed,
or reduced to practice, whether alone or with any other person, company or
business entity, (a) while Burns was working for the Companies in any capacity
which relates to any questions or problems for which the Companies have
requested Burns' services, (b) that are based in any way on Confidential
Information received by Burns from the Companies or developed or made by Burns
during his employ at the Companies, or (c) with the aid of any equipment,
supplies, facilities or employees of the Companies or on the Companies' time.
2.2 CONFIDENTIALITY AGREEMENT
Burns agrees not to disclose to any third and to keep confidential all
Confidential Information of the Companies including all Confidential Information
regarding any Invention.
3. COVENANT NOT TO COMPETE
3.1 COVENANT OF BURNS
Burns covenants and agrees with the Companies that Burns, or any
company or entity affiliated with Burns, will not directly or indirectly, in any
of the states of the United States, and any foreign countries in which the
Companies' products are now sold or are hereafter sold (the "Territory"), during
the period commencing on the
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<PAGE> 4
Closing Date and expiring on the fifth (5th) anniversary thereof (the
"Restricted Period") (i) form, acquire, own (other than the ownership of stock
in a publicly traded company), finance, assist, support, or become associated in
any capacity or to any extent, directly or indirectly with, an enterprise which
manufactures, sells, distributes or represents sports helmets, sunglasses,
protective eyewear, protective eyewear used in the medical/dental field or
otherwise, goggles, sports glasses, or other products in the optical industry
(the "Competing Business"), (ii) interfere with or attempt to interfere with any
officers, employees, representatives or agents of the Companies or their
affiliates, or induce or attempt to induce any of them to leave the employ of
the Companies or their affiliates, or violate the terms of the employees'
contracts with any of the Companies, or (iii) for the purpose of engaging in a
Competing Business, call upon, solicit, advise, or otherwise do, or attempt to
do, business with any clients, suppliers, customers or accounts of the
Companies.
3.2 INJUNCTIVE RELIEF
In the event of a breach or a threatened breach by Burns or one of his
affiliates of any of the restrictive covenants set forth in this Section 3, the
Investors shall be entitled to an injunction restraining such breach, but
nothing herein shall be construed to prohibit the Investors from pursuing any
remedy available to them for such breach or such threatened breach.
3.3 ENFORCEMENT
Burns agrees that as to the Territory and Restricted Period set forth
above for the purpose of the covenant not to compete, each state, province,
country or other jurisdiction within the Territory and periods within the
Restricted Period are divisible and separate so that if the covenant not to
compete made by Burns hereunder is held by a court to be invalid or
unenforceable as to any geographic area or for any time period described, his
covenant not to compete shall remain valid and enforceable in all remaining
geographic areas and time periods. Burns agrees that it is his express intention
that, if a court reforms this Agreement, the Companies be given the broadest
protection allowed by law as respects this Agreement and the covenant not to
compete.
4. MISCELLANEOUS
4.1 INVALID PROVISIONS
This Agreement is intended to be severable. Should any part or
provision of this Agreement be found to be unenforceable or invalid for any
reason, the remaining parts and provisions will remain in effect.
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<PAGE> 5
4.2 NON WAIVER
No waiver by any party hereto of any breach or default by another party
shall constitute a waiver with respect to any future breach or default.
4.3 ATTORNEYS FEES
If it shall be necessary for any party to this Agreement to employ an
attorney to enforce their rights pursuant to this Agreement because of the
default of another party(s), the defaulting party(s) shall reimburse the
non-defaulting party(s) for reasonable attorneys' fees and expenses.
4.4 GOVERNING LAW
This Agreement is made in, and shall be enforced in accordance with,
the laws of the state of Washington. Burns and the Companies agree that either
the King County Superior Court, or the United States District Court for the
Western District of Washington, shall be the proper venue for, and shall have
jurisdiction over, any litigation arising from or related to this Agreement.
4.5 COUNTERPARTS
This Agreement may be signed in one or more counterparts, each of which
may be termed an original, but all of which together shall constitute one
Agreement.
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<PAGE> 6
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the date first above mentioned.
GARGOYLES, INC.,
a Washington corporation
/s/ Dennis Burns
- -----------------------------
Dennis Burns
By: /s/ Douglas B. Hauff
-------------------------------
Its: President
-------------------------------
PRO-TEC, INC.,
a Washington corporation
By: /s/ Douglas B. Hauff
-------------------------------
Its: President
-------------------------------
ANTONE MANUFACTURING, INC.,
a Washington corporation
By: /s/ Dennis Burns
-------------------------------
Its: President
-------------------------------
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<PAGE> 1
EXHIBIT 10.7
CREDIT AGREEMENT
This credit agreement is made and entered into as of the 22nd day of
March, 1995, by and between U. S. BANK OF WASHINGTON, NATIONAL ASSOCIATION, a
national banking association ("U. S. Bank") and GARGOYLES, INC., a Washington
corporation ("Borrower"). Words and phrases with initial capitalized letters
have the meanings assigned in Article I of this Agreement.
R E C I T A L S :
U. S. Bank is a national banking association with its principal place
of business in Seattle, Washington. Borrower is a corporation formed and
existing under the laws of the state of Washington and is engaged in the
business of designing, manufacturing, and marketing premium sunglasses and
related products.
Borrower has requested U. S. Bank to extend to Borrower a revolving
line of credit in the amount of $4,000,000, a term loan in the amount of
$6,000,000, and an equipment line of credit in the amount of $1,000,000.
U. S. Bank is ready, able, and willing to extend such credit facilities
to Borrower on the terms and conditions of this Agreement.
NOW, THEREFORE, in consideration of the mutual covenants and conditions
set forth herein, the parties agree as follows:
DEFINITIONS
TERMS DEFINED
As used herein, the following terms have the meanings set forth below:
"Affiliate" means a Person that now or hereafter, directly or
indirectly through one or more intermediaries, controls, is controlled by, or is
under common control with Borrower. A Person shall be deemed to control a
corporation or partnership if such Person possesses, directly or indirectly, the
power to direct or cause the direction of the management of such corporation or
partnership, whether through the ownership of voting securities, by contract, or
otherwise.
<PAGE> 2
"Agreement" means this credit agreement and includes all modifications
of this Agreement.
"Applicable Law" means all applicable provisions and requirements of
all (a) constitutions, statutes, ordinances, rules, regulations, standards,
orders, and directives of any Governmental Bodies, (b) Governmental Approvals,
and (c) orders, decisions, decrees, judgments, injunctions, and writs of all
courts and arbitrators, whether such Applicable Laws presently exist, or are
modified, promulgated, or implemented after the date hereof.
"Borrower" means Gargoyles, Inc., a Washington corporation, and its
successors.
"Borrowing Base" has the meaning set forth in Section 2.9 herein.
"Borrowing Notice" has the meaning set forth in Section 2.6(a) herein.
"Business Day" means any day except a Saturday, Sunday, or other day on
which national banks in the state of Washington are authorized or required by
law to close.
"Capital Expenditures" means the aggregate amount of capital
expenditures of Borrower as determined in accordance with generally accepted
accounting principles, including leases that are or should be capitalized
pursuant to generally accepted accounting principles.
"Cash Flow" means Borrower's net income (before taxes) for the relevant
period, subject to the following adjustments:
There shall be added to net income: (i) charges against income
consisting of depreciation of real and personal property, amortization,
write-off of goodwill, and other intangibles, (ii) increases in deferred tax
accounts, and (iii) interest expense;
There shall be deducted from net income: (i) revenues derived from
sources other than continuing operations, such as net gains from sales of
capital assets, restoration to contingency reserves, collection of proceeds of
life insurance policies, write-up of assets, or gains from the sale,
acquisition, or retirement of securities, (ii) cash paid by Borrower during the
relevant period for Capital Expenditures, which cash does not constitute
proceeds of loans made to Borrower, and (iii) dividends and distributions paid
to Borrower's shareholders; and
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<PAGE> 3
For purposes of calculating Cash Flow for Borrower's fiscal quarter
ended November 30, 1994, only, there shall be added thereto any cash received by
Borrower during the time period from March 1, 1995, through April, 1995, from
the settlement of litigation involving the licensing of Borrower's products or,
if no such cash is received, the amount of cash received during such period by
Borrower from Guarantor pursuant to the terms of the Guaranty in the form of a
contribution to Borrower's equity or debt that is subordinated to the
Indebtedness of Borrower to U. S. Bank pursuant to a subordination agreement in
a form acceptable to U. S. Bank.
"Claims" has the meaning set forth in Section 11.13 herein.
"Collateral" means all the property, real or personal, tangible or
intangible, now owned or hereafter acquired, in which U. S. Bank has been or is
to be granted a security interest by Borrower or any other Person, to secure the
Indebtedness of Borrower to U. S. Bank.
"Commitment Period" has the meaning set forth in Section 2.1 herein.
"Debt Service Historical" means principal paid on Funded Debt plus
interest expense during the relevant period.
"Debt Service Proforma" means, as of the last day of the relevant
period, the current portion of long-term debt, plus proforma interest expense
for the four quarters following the relevant period.
"Default" means any condition or event that constitutes an Event of
Default or with the giving of notice or lapse of time or both would, unless
cured or waived, become an Event of Default.
"Eligible Accounts Receivable" means the accounts receivable of
Borrower excluding the following: (a) accounts receivable that have been
outstanding in excess of 60 days past due, (b) all accounts receivable from any
single customer of Borrower if 10 percent or more of such customer's accounts
owed to Borrower are ineligible for any reason, (c) accounts receivable due from
officers, employees, or Affiliates of Borrower, (d) accounts receivable that are
partially or wholly subject to the right of setoff, (e) accounts receivable
resulting from COD sales, finance charges, and consignments, (f) accounts
receivable due from Persons not residents of the United States, except as
otherwise approved in writing by U. S. Bank, (g) accounts receivable due from
the federal government, (h) accounts receivable that constitute any retainage,
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(i) accounts receivable that constitute dated billings other than approved by
U.S. Bank in writing, and (j) accounts receivable in which any Person other than
U. S. Bank has a security interest. Notwithstanding the foregoing, "Eligible
Accounts Receivable" shall not include any accounts receivable unless and until
U. S. Bank holds a first, valid, binding, and perfected security interest in any
such accounts receivable.
"Eligible Inventory" means inventory of Borrower, including raw
materials and finished goods, valued at the lower of cost or market. "Eligible
Inventory" shall exclude inventory that is obsolete, consigned inventory,
inventory that is not in saleable condition, work-in-process, and inventory in
which any Person other than U. S. Bank has a security interest. Notwithstanding
the foregoing, "Eligible Inventory" shall not include any inventory unless and
until U. S. Bank holds a first, valid, binding, and perfected security interest
in that inventory.
"ERISA" means the Employee Retirement Income Security Act of 1974, as
amended from time to time.
"Equipment Line" has the meaning set forth in Section 4.1 herein and
includes all renewals, replacements, and amendments to the Equipment Line.
"Equipment Loan" has the meaning set forth in Section 4.1 herein and
includes all renewals, replacements, and amendments to the respective Equipment
Loan.
"Equipment Note" has the meaning set forth in Section 4.3 herein and
includes all renewals, replacements, and amendments to the respective Equipment
Note.
"Event of Default" has the meaning set forth in Section 10.1 herein.
"Funded Debt" means, as of the last day of the relevant period, (a) all
of Borrower's long-term Indebtedness (including the current portion thereof and
including capitalized leases), less (b) amounts outstanding on the Revolving
Loan, and less (c) the outstanding principal amount of subordinated debt that
(i) has been approved in writing by U. S. Bank, and (ii) is subordinate to
Borrower's Indebtedness to U. S. Bank pursuant to a subordination agreement
approved in writing by U. S. Bank.
"Funded Debt Coverage Ratio" means the ratio of Funded Debt to Cash
Flow.
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"Funding" means any disbursement of the proceeds of the Revolving Loan,
the Term Loan, any Equipment Loan, or the issuance or renewal of any Letter of
Credit.
"Governmental Approval" means any authorization, consent, approval,
certificate of compliance, license, permit, or exemption from, contract with,
registration or filing with, or report or notice to, any Governmental Body
required or permitted by Applicable Law.
"Governmental Body" means the government of the United States, any
state or any foreign country, or any governmental or regulatory official, body,
department, bureau, subdivision, agency, commission, court, arbitrator, or
authority, or any instrumentality thereof, whether federal, state, or local.
"Guarantor" means Trillium Corporation, which is required to execute
and deliver to U. S. Bank a Guaranty pursuant to the terms of this Agreement.
"Guaranty" has the meaning set forth in Section 6.1(d) herein and
includes all renewals, replacements, and amendments of the Guaranty.
"Hazardous Materials" means oil or petrochemical products, PCB's,
asbestos, urea formaldehyde, flammable explosives, radioactive materials,
hazardous wastes, toxic substances, or related materials including but not
limited to substances defined as or included in the definition of "hazardous
substances," "hazardous wastes," "hazardous materials," or "toxic substances"
under any Hazardous Materials Laws.
"Hazardous Materials Claims" means (a) enforcement, cleanup, removal,
or other regulatory actions instituted, completed, or threatened by any
Governmental Body pursuant to any applicable Hazardous Materials Laws; and (b)
claims made or threatened by any third party against Borrower or its property
relating to damage, contribution, cost recovery, compensation, loss, or injury
resulting from Hazardous Materials.
"Hazardous Materials Laws" means all Applicable Laws pertaining to
Hazardous Materials.
"Indebtedness" means all items that in accordance with generally
accepted accounting principles would be included in determining total
liabilities as shown on the liabilities side of the balance sheet as of the date
that "Indebtedness" is to be determined and in any event includes liabilities
secured by any mortgage, deed of trust, pledge, lien, or security interest on
property owned or acquired, whether or not
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such a liability has been assumed, and the guaranties, endorsements (other than
for collection in the ordinary course of business), and other contingent
obligations with regard to the obligations of other Persons.
"Letters of Credit" has the meaning set forth in Section 2.10 herein
and includes all renewals, replacements, and amendments to the Letters of
Credit.
"Loans" means the Revolving Loan, the Term Loan, and the Equipment
Loans as well as all renewals, replacements, and modifications thereof.
"Loan Documents" means this Agreement, the Notes, the Security
Agreement, and the Guaranty, together with all other agreements, instruments,
and documents arising out of or relating to this Agreement or the Loans, and
includes all renewals, replacements, and amendments thereof.
"Notes" means the Revolving Note, the Term Note, and the Equipment
Notes, as well as all renewals, replacements, and amendments thereof.
"Participant" means any financial institution to which U. S. Bank sells
a participation in any of the Loans.
"Permitted Liens" has the meaning set forth in Section 8.5 herein.
"Person" means any individual, partnership, joint venture, firm,
corporation, association, limited liability company, trust, or other enterprise
or any Governmental Body.
"Plan" means an employee pension benefit plan that is covered by ERISA
or subject to the minimum funding standards under Section 412 of the Internal
Revenue Code of 1986 and is either (a) maintained by Borrower or any Affiliate
for employees of Borrower or any Affiliate or (b) maintained pursuant to a
collective bargaining agreement or any other arrangement under which more than
one employer makes contributions and to which Borrower or any Affiliate is then
making or accruing an obligation to make contributions or has within the
preceding five plan years made contributions.
"Pledge Agreement" has the meaning set forth in Section 6.1(r) herein
and includes all renewals, replacements, and amendments of the Pledge Agreement.
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"Prime Rate" means that rate of interest announced by U. S. Bank from
time to time as its prime rate. The Prime Rate is not the lowest rate of
interest charged by U. S. Bank to any classification of U. S. Bank customers.
For purposes of this Agreement, each time the Prime Rate changes, a
contemporaneous change shall occur in the interest rate charged to Borrower on
any Loans then bearing interest at a rate indexed to the Prime Rate, effective
upon the announcement or publication of any such change in rate. U. S. Bank
shall not be obligated to notify Borrower of any change in the Prime Rate;
however, the Prime Rate is available upon inquiry of U. S. Bank.
"Revolving Loan" has the meaning set forth in Section 2.1 herein and
includes all renewals, replacements, and amendments of the Revolving Loan.
"Revolving Note" has the meaning set forth in Section 2.3 herein and
includes all renewals, replacements, and amendments of the Revolving Note.
"Security Agreement" has the meaning set forth in Section 6.1(b) herein
and includes all renewals, replacements, and amendments of the Security
Agreement.
"Tangible Net Worth" means Borrower's net worth determined in
accordance with generally accepted accounting principles, less (a) the amount of
all deferred charges; (b) all intangible assets including but not limited to
goodwill, licenses, franchises, trademarks, trade names, service marks, patents,
and copyrights; (c) unamortized debt discount and expense; (d) the cost of
capital stock of an Affiliate; (e) any Indebtedness owing to Borrower by an
Affiliate thereof, unless such Indebtedness arose in connection with the sale or
lease of goods or property in the ordinary course of business or the performance
of services in the ordinary course of business and would otherwise constitute
current assets in accordance with generally accepted accounting principles; and
(f) the amount of any write-up in book value of the assets of Borrower resulting
from any revaluation of assets.
"Term Loan" has the meaning set forth in Section 3.1 herein and
includes all renewals, replacements, and amendments of the Term Loan.
"Term Note" has the meaning set forth in Section 3.3 herein and
includes all renewals, replacements, and amendments of the Term Note.
"U. S. Bank" means U. S. Bank of Washington, National Association, a
national banking association, and its successors and assigns.
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"Working Capital" means Borrower's current assets, less Borrower's
current liabilities including all amounts outstanding under the Revolving Loan.
ACCOUNTING TERMS
Unless otherwise specified herein, all accounting terms used herein
shall be interpreted, all accounting determinations hereunder shall be made, and
all financial statements required to be delivered hereunder shall be prepared in
accordance with generally accepted accounting principles consistently applied.
RULES OF CONSTRUCTION
Unless the context otherwise requires, the following rules of
construction apply to the Loan Documents:
Words in the singular include the plural and in the plural include the
singular.
Provisions of the Loan Documents apply to successive events and
transactions.
In the event of any inconsistency between the provisions of this
Agreement and the provisions of any of the other Loan Documents, the provisions
of this Agreement govern.
INCORPORATION OF RECITALS AND EXHIBITS
The foregoing recitals are incorporated into this Agreement by
reference. All references to "Exhibits" contained herein are references to
exhibits attached hereto, the terms and conditions of which are made a part
hereof for all purposes.
REVOLVING LOAN
LOAN COMMITMENT
Subject to and upon the terms and conditions set forth herein and in
reliance upon the representations, warranties, and covenants of Borrower
contained herein or made pursuant hereto, U. S. Bank will make Fundings to
Borrower from time to time during the period ending March 22, 1997 ("Commitment
Period"), but such Fundings (together with any outstanding Letters of Credit)
shall not exceed, in the aggregate principal amount at any one time outstanding,
$4,000,000 (the "Revolving Loan").
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Borrower may borrow, repay, and reborrow hereunder either the full amount of the
Revolving Loan or any lesser sum.
USE OF PROCEEDS
The proceeds of the Revolving Loan shall be used by Borrower in order
to renew and refinance an existing line of credit from U. S. Bank and for
operating cash.
REVOLVING NOTE
The Revolving Loan shall be evidenced by a promissory note in the form
attached hereto as Exhibit A (the "Revolving Note").
INTEREST RATE
The Revolving Loan shall bear interest on the principal amount thereof
remaining unpaid from time to time, at a rate of interest equal to the Prime
Rate plus 1 percent per annum.
REPAYMENT
Commencing on the first day of the first month following the initial
Funding under the Revolving Loan and on the first day of each month thereafter,
Borrower shall pay U. S. Bank an amount equal to all accrued interest on the
Revolving Loan.
Borrower shall pay U. S. Bank all outstanding principal, accrued
interest, and other charges with respect to the Revolving Loan on the last day
of the Commitment Period.
FUNDINGS
U. S. Bank is hereby authorized by Borrower to make Fundings under the
Revolving Loan upon receipt for each Funding of an oral or a written request
therefor (including written requests communicated by facsimile) ("Borrowing
Notice") from Douglas Hauff, Steven Kingma, and Michele Anderson, each of whom
is authorized to request Fundings and direct the disposition of any such
Fundings until written notice by Borrower of the revocation of such authority is
received by U. S. Bank. Any such Funding shall be conclusively presumed to have
been made to or for the benefit of Borrower when made in accordance with such a
request and direction for disposition or when such Funding is deposited to the
credit of the account of
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Borrower with U. S. Bank or is transmitted to any other bank with directions to
credit the same to the account of Borrower at such bank, regardless of whether
persons other than those authorized hereunder to make requests for Fundings have
authority to draw against any such account.
Borrower acknowledges that U. S. Bank cannot effectively determine
whether a particular request for a Funding is valid, authorized, or authentic.
It is nevertheless important to Borrower that it has the privilege of making
requests for Fundings in accordance with Section 2.6(a) hereof. Therefore, to
induce U. S. Bank to lend funds in response to such requests and in
consideration for U. S. Bank's agreement to receive and consider such requests,
Borrower assumes all risk of the validity, authenticity, and authorization of
such requests, whether or not the individual making such requests has authority
to request Fundings and whether or not the aggregate sum owing exceeds the
maximum principal amount referred to above. U. S. Bank shall not be responsible
under principles of contract, tort, or otherwise for the amount of an
unauthorized or invalid Funding; rather, Borrower agrees to repay any sums with
interest as provided herein.
LOAN FEE
On demand, but not later than November 30, 1995, Borrower shall pay
U.S. Bank a nonrefundable fee for the Revolving Loan and the Term Loan in the
aggregate amount of $150,000, less any portion of such fee previously paid by
Borrower.
UNUSED PORTION FEE
Borrower agrees to pay U. S. Bank a fee for the Revolving Loan in an
amount equal to .375 percent per annum of the average unused portion of the
Revolving Loan. Such fee shall accrue from and include the date of this
Agreement throughout the term of the Revolving Loan and shall be payable
quarterly in arrears on the last day of February, May, August, and November, and
on any day that the Revolving Loan is paid in full and U. S. Bank's commitment
to make further Fundings under the Revolving Loan has expired or terminated.
Computations of such fee shall be based on an 360-day year for the actual number
of days elapsed.
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BORROWING BASE
The outstanding balance of principal and interest on the Revolving Loan
(including outstanding Letters of Credit) shall at no time exceed an amount
equal to:
80 percent of Eligible Accounts Receivable, plus
50 percent of Eligible Inventory
("Borrowing Base").
Borrower shall submit to U. S. Bank a Borrowing Notice in a form
acceptable to U. S. Bank calculating the Borrowing Base and executed by Borrower
(i) on the second Business Day of each week as of the last Business Day of the
previous week, (ii) on the second Business Day of each calendar month for the
previous fiscal month of Borrower, and (iii) promptly upon U. S. Bank's request.
If at any time the aggregate principal amount of the Revolving Loan
(including outstanding Letters of Credit) shall exceed the Borrowing Base,
Borrower shall immediately repay such outstanding portion of the Revolving Loan
in an amount equal to such excess within one Business Day. Borrower's failure to
do so shall constitute an Event of Default.
LETTERS OF CREDIT
Subject to and upon the terms and conditions set forth herein and in
reliance upon the representations, warranties, and covenants of Borrower
contained herein or made pursuant hereto, U. S. Bank will issue standby and
commercial letters of credit (the "Letters of Credit") for the benefit of
Borrower in forms acceptable to U. S. Bank from time to time during the
Commitment Period. The expiration date of any Letter of Credit shall not extend
beyond the Commitment Period. The maximum aggregate amount of outstanding
Letters of Credit shall not exceed, at any one time, $1,500,000. The maximum
aggregate amount of outstanding Letters of Credit plus the aggregate outstanding
amount of principal and interest on the Revolving Loan shall not exceed, at any
one time, $4,000,000.
Prior to issuing any Letter of Credit, Borrower shall execute and
deliver to U. S. Bank a letter of credit application in U. S. Bank's then
customary form, and such other documents as U. S. Bank customarily requests in
connection with the issuance of letters of credit at that time.
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Borrower shall pay to U. S. Bank a fee for the issuance of each Letter
of Credit in an amount equal to U. S. Bank's standard fee at the time of
issuance, plus U. S. Bank's customary fees and handling charges. Such fees may
be paid to U. S. Bank by U. S. Bank's making a Funding under the Revolving Loan.
Any draws on Letters of Credit issued by U. S. Bank pursuant to the
terms of this Agreement shall be paid by Borrower immediately upon receipt of
notice from U. S. Bank of such draw. So long as Borrower meets the conditions to
Fundings under the Loans, draws on Letters of Credit may be paid from Fundings
under the Revolving Loan. In the event Borrower fails to make such immediate
repayment, U. S. Bank shall be authorized to consider any such draws as Fundings
under the Revolving Loan. In the event Borrower is in Default under the terms of
this Agreement on the date of any such draw, such draw will nevertheless
constitute a Funding on the Revolving Loan and shall not constitute a waiver of
any of U. S. Bank's rights hereunder or under any of the other Loan Documents.
In the event that any Letters of Credit are outstanding upon the expiration of
the Commitment Period for the Revolving Loan, Borrower shall, upon U. S. Bank's
request, deposit with U. S. Bank in a special demand deposit account set up by
Borrower, an amount of cash necessary to cover all outstanding Letters of
Credit. Borrower hereby grants U. S. Bank a security interest in any such demand
deposit account and gives U. S. Bank the authority to debit such account upon a
draw on outstanding Letters of Credit in an amount equal to the amount paid by
U. S. Bank to the beneficiaries of such Letters of Credit. In the event Borrower
does not establish such an account, or in the event the amount of funds in such
account are insufficient to satisfy the obligations of U. S. Bank under all
outstanding Letters of Credit, then all payments made by U. S. Bank under such
Letters of Credit shall automatically constitute Fundings under the Revolving
Loan, notwithstanding the fact that the Commitment Period for the Revolving Loan
has expired. U. S. Bank shall maintain possession of the Revolving Note until
all Letters of Credit have either expired, been canceled, or been paid by U. S.
Bank and U. S. Bank has been reimbursed in full.
TERM LOAN
LOAN COMMITMENT
Subject to and upon the terms and conditions set forth herein and in
reliance upon the representations, warranties, and covenants of Borrower
contained herein or made pursuant hereto, U. S. Bank will lend to Borrower
$6,000,000 on a term-loan basis (the "Term Loan").
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USE OF PROCEEDS
The proceeds of the Term Loan shall be used solely for Borrower's
redemption of issued and outstanding common stock of Borrower from Dennis Burns
and Carol Burns.
TERM NOTE
The Term Loan shall be evidenced by a promissory note in the form
attached hereto as Exhibit B (the "Term Note").
INTEREST RATE
The Term Loan shall bear interest on the principal amount thereof
remaining unpaid from time to time, at a rate equal to the Prime Rate plus 1.5
percent per annum.
REPAYMENT
Commencing on the first day of the first month following the Funding
under the Term Loan and on the first day of each month thereafter, Borrower
shall pay U. S. Bank an amount equal to all accrued interest on the Term Loan.
Borrower shall make 26 equal, consecutive, quarterly principal payments
on the Term Loan to U. S. Bank, each in the amount of $230,769.23. Such payments
shall be made on February 28, May 31, August 31, and November 30 of each year,
commencing November 30, 1995.
Borrower shall pay U. S. Bank all outstanding principal, accrued
interest, and other charges with respect to the Term Loan seven years from the
date of this Agreement.
EQUIPMENT LINE
LOAN COMMITMENT
Subject to and upon the terms and conditions set forth herein and in
reliance upon the representations, warranties, and covenants of Borrower
contained herein or made pursuant hereto, U. S. Bank will make available to
Borrower a $1,000,000 equipment revolving line of credit during the period
ending one year from the date of
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this Agreement (the "Equipment Line"). Each individual Funding under the
Equipment Line shall constitute a separate loan ("Equipment Loan"). The
aggregate principal amount of all Equipment Loans shall not exceed at any one
time outstanding $1,000,000. Borrower may borrow, repay, and reborrow hereunder
either the full amount of the Equipment Line or any lesser sum.
USE OF PROCEEDS
The proceeds of the Equipment Line shall be used by Borrower solely to
provide financing for equipment acquisitions and to refinance existing equipment
term loans from U. S. Bank, as well as up to $250,000 of equipment acquisitions
by Borrower during Borrower's fiscal year ended November 30, 1994.
EQUIPMENT NOTE
Each Equipment Loan shall be evidenced by a promissory note in the form
attached hereto as Exhibit C (the "Equipment Note").
INTEREST RATE
Each Equipment Loan shall bear interest on the principal amount thereof
remaining unpaid from time to time at a rate of interest equal to the Prime Rate
plus 1.25 percent per annum.
REPAYMENT
Commencing on the first day of the first month following the Funding of
each Equipment Loan and on the first day of each month thereafter, Borrower
shall pay U. S. Bank an amount equal to all accrued interest on such Equipment
Loan.
On February 28, May 31, August 31, and November 30 of each year during
the term of each Equipment Loan, Borrower shall pay to U. S. Bank an amount
equal to one twentieth of the initial principal amount of each Equipment Loan,
commencing on the first such date subsequent to the Funding of such Equipment
Loan.
Borrower shall pay U. S. Bank all outstanding principal, accrued
interest, and other charges with respect to each Equipment Loan five years from
the date of each respective Equipment Note, but in any case, no later than the
date that is six years from the date of this Agreement.
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EQUIPMENT LINE FEES
Concurrently with the Funding of each Equipment Loan, Borrower shall
pay U. S. Bank a loan fee in an amount equal to 0.50 percent of such Equipment
Loan.
LIMITATIONS ON ADVANCES
The initial principal amount of each Equipment Loan shall not exceed an
amount equal to 80 percent of the cost of equipment financed by the proceeds of
such Equipment Loan.
If at any time the aggregate amount of outstanding principal on all
Equipment Loans exceeds an amount equal to 90 percent of the net book value of
the equipment purchased with the proceeds of the Equipment Loans, then Borrower
shall repay such outstanding portion of the Equipment Loans in an amount equal
to such excess within one Business Day. In such event, Borrower may specify
which Equipment Loan or Equipment Loans are to be paid down or paid off. Any
such payment shall be applied to the applicable Equipment Loans in the inverse
order of maturity. Borrower's failure to make such payment shall constitute an
Event of Default.
GENERAL PROVISIONS APPLICABLE TO THE LOANS
MANNER OF PAYMENT
All sums payable to U. S. Bank pursuant to this Agreement shall be paid
directly to U. S. Bank in immediately available United States funds. Whenever
any payment to be made hereunder or on any of the Notes becomes due and payable
on a day that is not a Business Day, such payment may be made on the next
succeeding Business Day and such extension of time shall in such case be
included in computing interest on such payment.
STATEMENTS
U. S. Bank shall send Borrower statements of all amounts due hereunder;
the statements shall be considered correct and conclusively binding, absent
manifest error, on Borrower unless Borrower notifies U. S. Bank to the contrary
within 30 days of receipt of any statement that Borrower claims to be incorrect.
Borrower agrees that accounting entries made by U. S. Bank with respect to
Borrower's loan accounts shall constitute evidence of all Fundings made under
and payments made on any of the Loans. Without limiting the methods by which
U.S. Bank may otherwise be entitled
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by Applicable Law to make demand for payment of the Loans upon Borrower,
Borrower agrees that any statement, invoice, or payment notice from U. S. Bank
to Borrower with respect to any principal or interest obligation of Borrower to
U. S. Bank shall be deemed to be a demand for payment in accordance with the
terms of such statement, invoice, or payment notice. Under no circumstances
shall a demand by U. S. Bank for partial payment of principal or interest or
both be construed as a waiver by U. S. Bank of its right thereafter to demand
and receive payment (in part or in full) of any remaining principal or interest
obligation.
BOOK ENTRY LOAN ACCOUNT
U. S. Bank shall establish a book entry loan account for each of the
Loans in which U. S. Bank will make debit entries of all Fundings pursuant to
the terms of this Agreement. U. S. Bank will also record in the applicable loan
account, in accordance with customary banking practices, all interest and other
charges, expenses, and other items properly chargeable to Borrower, if any,
together with all payments made by Borrower on account of the Indebtedness
evidenced by Borrower's respective loan accounts and all other sums credited to
the respective loan accounts. The debit balance of Borrower's respective loan
accounts shall reflect the amount of Borrower's Indebtedness to U. S. Bank from
time to time by reason of advances, charges, payments, or credits.
BANK CONTROL ACCOUNT
So long as any amounts remain outstanding under any of the Loans, there
shall be established for Borrower a bank control account at U. S. Bank into
which all funds obtained by Borrower from the collection of accounts receivable,
from the sale of inventory or services, or otherwise during the terms of the
Loans shall be deposited. U. S. Bank and Borrower hereby agree that U. S. Bank
may credit the bank control account in order to make any payments under the
Loans that Borrower is required to make pursuant to the terms of this Agreement.
COMPUTATIONS OF INTEREST
All computations of interest shall be based on a 360-day year for the
actual number of days elapsed.
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DEFAULT INTEREST
Upon the occurrence and during the continuance of any Event of Default,
U. S. Bank may, at its option, raise the interest rate charged on the Loans to a
rate of up to the applicable Loan rate plus 4 percent per annum from the date of
the occurrence of the Event of Default until the Event of Default is cured or
waived by U. S. Bank or, absent cure or waiver, until the Loans are repaid in
full.
MAXIMUM INTEREST RATE
Notwithstanding any provision contained herein or in the Notes, the
total liability of Borrower for payment of interest pursuant hereto, including
late charges, shall not exceed the maximum amount of interest permitted by
Applicable Law to be charged, collected, or received from Borrower; and if any
payments by Borrower include interest in excess of that maximum amount, U. S.
Bank shall apply the excess first to reduce the unpaid balance of the Loans,
then to reduce the balance of any other Indebtedness of Borrower to U. S. Bank.
If there is no such Indebtedness, the excess shall be returned to Borrower.
LATE CHARGE
If any payment of principal or interest required under any of the Loans
is 15 days or more past due, Borrower will be charged a late charge of 5 percent
of the delinquent payment or $5, whichever is greater, for each such late
payment. The 15 day period provided for herein shall not be construed as a
waiver of any Default or Event of Default resulting from any late payment under
any of the Loans.
PREPAYMENTS
Prepayments of all or any portion of the Loans shall not be subject to
a prepayment charge. All prepayments shall be applied to the Loans being prepaid
in the inverse order of maturity.
EXTENSIONS, RENEWALS, AND MODIFICATIONS
Any extensions, renewals, and modifications of the Loans shall be
governed by the terms and conditions of this Agreement and the other Loan
Documents unless otherwise agreed to in writing by U. S. Bank and Borrower.
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CONDITIONS PRECEDENT FOR FUNDINGS UNDER THE LOANS
CONDITIONS PRECEDENT FOR INITIAL FUNDING
U. S. Bank shall not be required to make the initial Funding under any
of the Loans unless or until the following conditions have been fulfilled to the
satisfaction of U. S. Bank:
U. S. Bank shall have received this Agreement, the Revolving Note, and
the Term Note, duly executed and delivered by the respective parties thereto.
U. S. Bank shall have received, duly executed and delivered by
Borrower, triplicate originals of a security agreement in the form attached
hereto as Exhibit D ("Security Agreement"), granting to U. S. Bank a first
priority and exclusive security interest in all of the personal property of
Borrower, whether tangible or intangible, now owned or hereafter acquired. Two
of the triplicate originals shall be filed by U. S. Bank with the United States
Patent and Trademark Office.
U. S. Bank shall have received, duly executed and delivered by
Borrower, such financing statements and other documents deemed necessary by U.
S. Bank to perfect the security interest granted to U. S. Bank.
U. S. Bank has received a guaranty from Guarantor, duly executed and
delivered, in the form attached hereto as Exhibit E ("Guaranty").
U. S. Bank shall have received from counsel for Borrower, an opinion
addressed to U. S. Bank and dated as of the date of this Agreement, in the form
attached hereto as Exhibit F.
U. S. Bank has received an independent appraisal of all of Borrower's
assets, in form and substance satisfactory to U. S. Bank.
No Default or Event of Default hereunder shall exist, and after having
given effect to the requested Funding, no Default or Event of Default shall
exist.
All representations and warranties of Borrower contained herein or
otherwise made in writing in connection herewith shall be true and correct in
all material respects with the same effect as though such representations and
warranties had been made on and as of the date of the initial Funding.
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All corporate proceedings of Borrower shall be satisfactory in form and
substance to U. S. Bank, and U. S. Bank shall have received all information and
copies of all documents, including records of all corporate proceedings, that
U.S. Bank has requested in connection therewith, such documents where
appropriate to be certified by proper corporate authorities or Governmental
Bodies. Borrower shall provide U. S. Bank with the following documents prior to
or upon the execution of this Agreement:
Copies of the articles of incorporation of Borrower, together with all
amendments thereto, certified by Borrower to be true and complete;
A certificate of authority for Borrower in the state of Washington,
dated within 30 days of the date of the execution of this Agreement; and
A certified resolution of the directors of Borrower and incumbency
certificate in the form attached hereto as Exhibit G.
U. S. Bank shall have received such evidence deemed necessary by U. S.
Bank that U. S. Bank's security interests in the Collateral constitute first
priority and exclusive security interests, except as otherwise provided herein.
U. S. Bank shall have received, reviewed, and approved Borrower's 1994
fiscal year end audit, Borrower's interim financial statements since Borrower's
1994 fiscal year end, as well as a proforma balance sheet of Borrower dated as
of the date of the initial Funding, reflecting Borrower's actual results of
operations through February 28, 1995, as well as the acquisition contemplated by
this Agreement, and certified by Borrower's chief financial officer to true and
correct in all material respects.
U. S. Bank shall have received verification that it finds acceptable of
a $600,000 equity contribution to Borrower from Guarantor and other shareholders
of Borrower, as well as a $5,400,000 acquisition of the common stock of Borrower
directly from Dennis Burns and Carol Burns.
U. S. Bank shall have received, reviewed, and approved a Collateral and
financial status examination as performed by U. S. Bank's internal audit staff.
U. S. Bank shall have received a Borrowing Notice from Borrower for the
initial Funding requested under the Revolving Loan.
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U. S. Bank shall have received insurance certificates and lender loss
payable endorsements on casualty/property loss insurance in forms satisfactory
to U. S. Bank to the effect set forth in Section 7.5 hereof.
U. S. Bank shall have received, reviewed, and approved all of
Borrower's manufacturing, employment, licensing, and distribution agreements.
U. S. Bank shall have received, reviewed, and approved all documents in
connection with the acquisition by Guarantor of stock of Borrower, as well as
the redemption by Borrower of stock from Dennis Burns and Carol Burns. In
addition, U. S. Bank shall have received evidence satisfactory to U. S. Bank
that the acquisition and redemption of stock will close in accordance with the
documents approved by U. S. Bank concurrently with the initial Funding of the
Term Loan.
U. S. Bank shall have received a pledge agreement from Guarantor, duly
executed and delivered, in the form attached hereto as Exhibit H ("Pledge
Agreement"), together with all stock certificates representing Guarantor's
ownership interest in Borrower, as well as an assignment separate from
certificate signed in blank by Borrower for each such certificate.
U. S. Bank shall have received from Guarantor a certified resolution of
the directors of Guarantor and incumbency certificate in the form attached
hereto as Exhibit I.
Working Capital must equal or exceed $1,000,000.
CONDITIONS PRECEDENT TO EACH FUNDING UNDER THE EQUIPMENT LINE
The obligation of U. S. Bank to make any Funding (including the initial
Funding) under the Equipment Line is subject to the fulfillment, to the
satisfaction of U. S. Bank, of the following:
U. S. Bank shall have received an Equipment Note and Borrowing Notice
with respect to the requested Funding, duly executed and delivered by Borrower.
U. S. Bank shall have received evidence deemed satisfactory to U. S.
Bank reflecting that the amount of the requested Funding does not exceed 80
percent of the purchase price of the equipment to be purchased with the
requested Funding.
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CONDITIONS PRECEDENT TO EACH SUBSEQUENT FUNDING
The obligation of U. S. Bank to make any Funding subsequent to the
initial Funding hereunder is subject to the fulfillment, to the satisfaction of
U. S. Bank, of the following:
The conditions set forth in Section 6.1 shall have been previously
satisfied, and U. S. Bank shall have received evidence satisfactory to U. S.
Bank of satisfaction thereof;
U. S. Bank shall have received a Borrowing Notice for each requested
Funding under the Revolving Loan;
There shall be executed and delivered to U. S. Bank such further
instruments, agreements, and documents, as may be reasonably necessary or proper
in the opinion of U. S. Bank to confirm the obligations of Borrower to U. S.
Bank hereunder, the grant of security therefor, and the proper use of the
proceeds of all Fundings;
The representations and warranties of Borrower in Article IX herein
shall be true on the date of each Funding with the same force and effect as if
made on and as of that date;
No Default or Event of Default shall exist, and after having given
effect to the requested Funding, no Default or Event of Default shall exist; and
To the extent not previously delivered, all other documents,
agreements, and instruments from or with respect to Borrower or any other Person
that may be called for hereunder shall be duly executed and delivered to U. S.
Bank, including but not limited to all documents, agreements, and instruments
deemed necessary by U. S. Bank to perfect its security interest in Collateral
acquired after the date of this Agreement. For the purposes of this Agreement,
the waiver of delivery of any document, agreement, or instrument from or with
respect to Borrower or any other Person does not constitute a continuing waiver
with respect to the obligation to fulfill the conditions precedent to each
Funding hereunder.
AFFIRMATIVE COVENANTS
Borrower hereby covenants and agrees that so long as this Agreement is
in effect, and until the Loans, together with interest thereon, and all other
obligations incurred hereunder are paid or satisfied in full, Borrower shall:
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FINANCIAL DATA
Keep its books of account in accordance with generally accepted
accounting principles, consistently applied, and furnish to U. S. Bank:
As soon as practicable and in any event within 25 days after the close
of each month, the following unaudited financial statements of Borrower for each
such month, all in reasonable detail, in comparative form to historical and
budgeted financial statements, and certified by Borrower to be true and correct:
balance sheet, statement of income, and statement of cash flows. There shall be
included in such financial statements a calculation of the financial covenants
provided for in Article VIII herein.
As soon as practicable and in any event within 120 days after the close
of each fiscal year of Borrower, the following financial statements of Borrower,
setting forth the corresponding figures for the previous fiscal year in
comparative form where appropriate, all in reasonable detail and audited
(without any qualification or exception deemed material by U. S. Bank) by
Borrower's current independent certified public accountant or such other
independent certified public accountants selected by Borrower and satisfactory
to U. S. Bank: balance sheet, statement of income, and statement of cash flows.
Borrower shall provide U. S. Bank with a copy of its independent certified
public accountants' management letter or other similar report or correspondence
to Borrower.
The financial statements of Guarantor as required by the Guaranty.
As soon as practicable and in any event within 25 days after the close
of each month, certificates signed by Borrower, stating that during such period
no Default or Event of Default existed or if any such Default or Event of
Default existed, specifying the nature thereof, the period of existence thereof,
and what action Borrower proposes to take or has taken with respect thereto, and
that during such period Borrower was in compliance with all of the financial
covenants set forth in Article VIII herein; and promptly upon the occurrence of
any Default or Event of Default, a certificate signed by Borrower, specifying
the nature thereof, the period of existence thereof, and what action Borrower
proposes to take or has taken with respect thereto.
As soon as practicable and in any event within 25 days after the close
of each month, accounts receivable and accounts payable agings for each such
month in a form and in such detail as is acceptable to U. S. Bank.
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Upon request by U. S. Bank, copies of all reports relative to the
operations of Borrower and its Affiliates filed with any Governmental Body.
As soon as practicable and in any event within 30 days of the end of
each fiscal year, a statement projecting all capital expenditures to be made or
committed to during the following fiscal year of Borrower.
As soon as practicable and in any event within 30 days of the end of
each fiscal year, a five-year projection of the financial operations of Borrower
in a form and in such detail as is acceptable to U. S. Bank.
With reasonable promptness, such other information regarding the
business, operations, and financial condition of Borrower and Guarantor as U. S.
Bank may from time to time reasonably request.
LICENSES AND PERMITS
Maintain all Governmental Approvals and all related or other material
agreements necessary for Borrower to operate its business, as it now exists or
as it may be modified or expanded. Borrower will at all times comply with all
Applicable Laws relating to the operations, facilities, or activities of
Borrower.
MAINTENANCE OF PROPERTIES
Keep Borrower's properties in good repair and in good working order and
condition, in a manner consistent with past practices and comparable to industry
standards; from time to time make all appropriate and proper repairs, renewals,
replacements, additions, and improvements thereto; and keep all equipment that
may now or in the future be subject to compliance with any Applicable Laws in
full compliance with such Applicable Laws.
PAYMENT OF CHARGES
Duly pay and discharge all material (a) taxes, assessments, levies, and
any other charges of Governmental Bodies imposed on or against Borrower or its
property or assets, or upon any property leased by Borrower, prior to the date
on which penalties attached thereto, unless and to the extent only that such
taxes, assessments, levies, and any other charges of Governmental Bodies, after
written notice thereof having been given to U. S. Bank, are being contested in
good faith and by appropriate proceedings, (b) claims allowed by Applicable
Laws, whether for labor, materials,
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rentals, or anything else, which could, if unpaid, become a lien or charge upon
Borrower's property or assets or the outstanding capital stock of Borrower or
adversely affect the facilities or operations of Borrower, (unless and to the
extent only that the validity thereof is being contested in good faith and by
appropriate proceedings after written notice thereof has been given to U. S.
Bank); (c) trade bills in accordance with the terms thereof or generally
prevailing industry standards; and (d) other Indebtedness heretofore or
hereafter incurred or assumed by Borrower, unless such Indebtedness be renewed
or extended. In the event any charge is being contested by Borrower as allowed
above, Borrower shall establish adequate reserves against possible liability
therefor.
INSURANCE.
Maintain insurance upon Borrower's properties and business insuring
against such risks as U. S. Bank shall reasonably determine from time to time.
Borrower shall cause each insurance policy issued in connection therewith to
provide and shall cause the insurer issuing such policy to certify to U. S. Bank
that (i) if such insurance is proposed to be canceled or materially changed for
any reason whatsoever, such insurer will promptly notify U. S. Bank, and such
cancellation or change shall not be effective as to U. S. Bank for 30 days after
receipt by U. S. Bank of such notice, unless the effect of the change is to
extend or increase coverage under the policy; (ii) U. S. Bank will have the
right at its election to remedy any default in the payment of premiums within 30
days of notice from the insurer of the default; and (iii) loss payments from
casualty/property loss insurance in excess of $50,000 in each instance will be
payable jointly to the Borrower and U. S. Bank as secured party or otherwise as
its interest may appear.
From time to time upon request by U. S. Bank, promptly furnish or cause
to be furnished to U. S. Bank evidence, in form and substance satisfactory to U.
S. Bank, of the maintenance of all insurance, indemnities, or bonds required by
this Section 7.5 or by any license, lease, or other agreement to be maintained,
including but not limited to such originals or copies as U. S. Bank may request
of policies, certificates of insurance, riders, assignments, and endorsements
relating to the insurance and proof of premium payments.
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MAINTENANCE OF RECORDS
Keep at all times books of account and other records in which full,
true, and correct entries will be made of all dealings or transactions in
relation to the business and affairs of Borrower.
INSPECTION
Allow any representative of U. S. Bank to visit and inspect any of the
properties of Borrower, to examine the books of account and other records and
files of Borrower, to make copies thereof, and to discuss the affairs, business,
finances, and accounts of Borrower with its officers, employees, and
accountants, all at such reasonable times and as often as U. S. Bank may desire.
This right of inspection shall specifically include U. S. Bank's collateral and
financial examinations.
HAZARDOUS SUBSTANCES
Borrower hereby covenants and agrees that so long as any Indebtedness
of Borrower to U. S. Bank is outstanding:
Borrower will not permit its property or any portion thereof to be a
site for the storage, use, generation, manufacture, disposal or transportation
of Hazardous Materials in violation of Hazardous Materials Laws;
Borrower will not permit any Hazardous Materials to be disposed of off
its property other than in properly licensed disposal sites;
Borrower, at Borrower's sole cost and expense, will keep and maintain
its property and each portion thereof in compliance with and shall not cause or
permit its property or any portion thereof to be in violation of any Hazardous
Materials Laws; and
Borrower will immediately advise U. S. Bank in writing of any Hazardous
Material Claim.
Borrower agrees to indemnify U. S. Bank and hold U. S. Bank harmless
from and against any and all claims, demands, damages, losses, liens,
liabilities, penalties, fines, lawsuits, and other proceedings and costs and
expenses (including attorney fees), arising directly or indirectly from or out
of or in any way connected with (i) the accuracy of the representations
contained in Section 9.19 herein; (ii) any activities on
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its property during Borrower's ownership, possession, or control of its property
which directly or indirectly results in its property or any other property
becoming contaminated with Hazardous Materials; (iii) the discovery of Hazardous
Materials on its property; (iv) the cleanup of Hazardous Materials from its
property; and (v) the discovery of Hazardous Materials or the cleanup of
Hazardous Materials from adjacent or other property that has become contaminated
as a result of any activity on Borrower's property. As between Borrower and U.
S. Bank, Borrower acknowledges that it will be solely responsible for all costs
and expenses relating to the cleanup of Hazardous Materials from its property or
from any other properties that become contaminated with Hazardous Materials as a
result of activities on or the contamination of its property.
Borrower's obligations under this Section 7.8 are unconditional and
shall not be limited by any nonrecourse or other limitations of liability
provided for in the Loan Documents. The representations, warranties, and
covenants of Borrower set forth in this Section 7.8 and Section 9.19 herein
(including but not limited to the indemnity provided for in Section 7.8(b)
above) shall survive the closing and repayment of the Loans to U. S. Bank; and,
to the extent permitted by Applicable Laws and Hazardous Materials Laws, shall
survive the transfer of its property by foreclosure proceedings (whether
judicial or nonjudicial), deed in lieu of foreclosure, or otherwise. Borrower
acknowledges and agrees that its covenants and obligations hereunder are
separate and distinct from its obligations under the Loans and the Loan
Documents.
CORPORATE EXISTENCE
Maintain and preserve the corporate existence of Borrower.
NOTICE OF DISPUTES AND OTHER MATTERS
Promptly give written notice to U. S. Bank of:
Any citation, order to show cause, or other legal process or order that
could have a material adverse effect on Borrower, directing Borrower to become a
party to or to appear at any proceeding or hearing by or before any Governmental
Body that has granted to Borrower any Governmental Approval, and include with
such notice a copy of any such citation, order to show cause, or other legal
process or order;
Any (i) refusal, denial, threatened denial, or failure by any
Governmental Body to grant, issue, renew, or extend any material Governmental
Approval; (ii) proposed
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or actual revocation, termination, or modification (whether favorable or
adverse) of any Governmental Approval by any Governmental Body; (iii) dispute or
other action with regard to any Governmental Approval by any Governmental Body;
(iv) notice from any Governmental Body of the imposition of any material fines
or penalties or forfeitures; or (v) threats or notice with respect to any of the
foregoing or with respect to any proceeding or hearing that might result in any
of the foregoing;
Any dispute concerning or any threatened nonrenewal or modification of
any material lease for real or personal property to which Borrower is a party;
or
Any actions, proceedings, or claims of which Borrower may have notice
that may be commenced or asserted against Borrower in which the amount involved
is $200,000 or more and is not fully covered by insurance or which, if not
solely a claim for monetary damages, could, if adversely determined, have a
material adverse effect on Borrower.
EXCHANGE OF NOTE
Upon receipt of a written notice of loss, theft, destruction, or
mutilation of a Note, and upon surrendering such Note for cancellation if
mutilated, execute and deliver a new Note or a Note of like tenor in lieu of
such lost, stolen, destroyed, or mutilated Note. Any Note issued pursuant to
this Section 7.11 shall be dated so that neither gain nor loss of interest shall
result therefrom.
MAINTENANCE OF LIENS
At all times maintain the liens and security interests provided under
or pursuant to this Agreement as valid and perfected first liens and security
interests on the property and assets intended to be covered thereby. Except as
contemplated under Section 8.6, Borrower shall take all action requested by U.
S. Bank necessary to assure that U. S. Bank has valid and exclusive liens and
security interests in all Collateral.
OTHER AGREEMENTS
Comply with all covenants and agreements set forth in or required
pursuant to any of the other Loan Documents.
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AFTER-ACQUIRED COLLATERAL
Without the need for any request by U. S. Bank, execute and deliver to
U. S. Bank appropriate instruments in order to effectuate the proper granting
and perfection of a first priority security interest in or assignment of all
property to U. S. Bank, whether personal, real, or mixed, hereafter acquired by
Borrower, concurrently with the acquisition thereof.
FURTHER ASSURANCES
Within ten days of request by U. S. Bank, duly execute and deliver or
cause to be duly executed and delivered to U. S. Bank such further instruments,
agreements, and documents and do or cause to be done such further acts as may be
necessary or proper in the opinion of U. S. Bank to carry out more effectively
the provisions and purpose of this Agreement and the other Loan Documents.
MAINTENANCE OF BANK ACCOUNTS
As security for repayment of the Loans, maintain its principal
depository accounts with U. S. Bank and effectuate the transfer of such accounts
within a reasonable period of time after execution of this Agreement. Borrower
hereby grants to U. S. Bank a security interest in all such accounts in order to
secure the obligations of Borrower hereunder.
NEGATIVE COVENANTS
Borrower covenants and agrees that until all the Loans, together with
interest thereon, and all other obligations incurred hereunder are paid or
satisfied in full, Borrower shall not, without the prior written consent of
U.S. Bank:
DIVIDENDS AND DISTRIBUTIONS
Declare or pay any cash distributions or dividends or return any
capital to any of Borrower's shareholders; authorize or make any distribution,
payment, or delivery of property or cash to any of Borrower's shareholders;
redeem, retire, purchase, or otherwise acquire, directly or indirectly, for
consideration, any shares or other interests of Borrower now or hereafter
outstanding; or set aside any funds for any of the foregoing purposes.
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RESTRICTION ON SALARIES
Increase the aggregate compensation of Borrower's senior management in
excess of 10 percent in any 12 month period.
TRANSACTIONS WITH AFFILIATES
Except as provided in Section 8.7 herein, enter into any transaction,
other than an arm's length transaction, in which an Affiliate of Borrower shall
have any interest; or make any payment or agree to make any payment to any such
Affiliate; or transfer or agree to transfer ownership or possession of any of
its business or assets, tangible or intangible, real, personal, or mixed, to any
Affiliate.
OTHER INDEBTEDNESS
Create, incur, assume, or suffer to exist, contingently or otherwise,
any Indebtedness except (a) Indebtedness represented by the Notes; (b) accounts
and other current payables arising from the ordinary course of business; (c)
additional Indebtedness outstanding or committed to at any time (including but
not limited to indebtedness evidenced by notes, bonds, debentures, leases,
purchase agreements, and other contractual obligations) not in excess of an
aggregate amount at any one time outstanding of $400,000. Notwithstanding clause
(c) above, Borrower may not guarantee or become contingently liable for the
obligation of any Person except Indebtedness of Pro-Tec, Inc. to U. S. Bank. In
computing the additional indebtedness permitted by clause (c) hereof, all
capital lease payments due from Borrower within 12 months shall be included if
the amounts of such rental payments are not otherwise included as Indebtedness
in accordance with generally accepted accounting principles. Except as set forth
in Section 8.6 herein, none of the additional indebtedness permitted by this
Section 8.4 shall be secured by the Collateral.
LEASES AND LEASEBACKS
Except for arrangements entered into prior to the date hereof, enter
into any new agreement to rent or lease any material real or personal property
or enter into any arrangement with any bank, insurance company, or other lender
or investor providing for the leasing of any real or personal property or
equipment (a) that at the time has been or is sold or transferred by Borrower to
such lender or investor or (b) that has been or is being acquired from another
Person by such lender or investor or on which one or more buildings have been or
are to be constructed by such lender or investor,
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for the purpose of leasing such property to Borrower. Borrower may, however,
enter into such leases in the ordinary course of business provided that there is
compliance with Section 8.4(c) hereof.
LIENS
Contract, create, incur, assume, or suffer to exist any mortgage,
pledge, lien, or other charge or encumbrance of any kind (including but not
limited to the charge upon property purchased under conditional sales or other
title retention agreements) upon or grant any interest in any of its property or
assets whether now owned or hereafter acquired, except (a) liens granted
pursuant to this Agreement; (b) liens in connection with worker's compensation,
unemployment insurance, or other social security obligations; (c) good faith
deposits in connection with bids, tenders, contracts, or leases or deposits to
secure public statutory obligations; (d) mechanic's, carrier's, repairmen's, or
other like liens in the ordinary course of business with respect to obligations
that are not overdue or that are being contested in good faith and for which
appropriate reserves have been established or for which deposits to obtain the
release of such liens have been made; (e) liens for taxes, assessments, levies,
or charges of Governmental Bodies imposed upon Borrower or its property,
operations, income, products, or profits that are not at the time due or payable
or for which, if the validity thereof is being contested in good faith by legal
or administrative proceedings, appropriate reserves have been established; (f)
encumbrances consisting of zoning regulations, easements, rights-of-way, survey
exceptions, and other similar restrictions on the use of real property or minor
irregularities in title thereto that do not materially impair the use of such
property in the operation of the business of Borrower; (g) liens arising out of
judgments or awards with regard to which Borrower shall be prosecuting an appeal
in good faith and for which a stay of execution has been issued and appropriate
reserves established; and (h) the currently existing liens listed on Exhibit J
hereto. The liens described in clauses (a) through (h) herein are called the
"Permitted Liens."
ADVANCES AND LOANS
Subsequent to the date of this Agreement, lend money, make credit
available (other than in the ordinary course of business to customers), or lend
property or the use thereof to any Person; purchase or repurchase the stock or
Indebtedness or all or a substantial part of the assets or properties of any
Person; guarantee, assume, endorse, or otherwise become responsible for
(directly or indirectly or by any instrument having the effect of assuring any
Person's payment, performance, or capability) the
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Indebtedness, performance, obligations, stock, or dividends of any Person; or
agree to do any of the foregoing; but Borrower may endorse negotiable
instruments for deposit or collection in the ordinary course of business.
Notwithstanding the foregoing, Borrower may make short-term advances and loans
to Affiliates not to exceed $100,000 in the aggregated at any time outstanding.
INVESTMENTS
Invest in (by capital contribution or otherwise), acquire, purchase, or
make any commitment to purchase the obligations, stock, or equity of any Person
except (a) direct obligations of the government of the United States of America
or any agency or instrumentality thereof, (b) interest-bearing certificates of
deposit or repurchase agreements issued by any commercial banking institution
satisfactory to U. S. Bank, (c) stock or obligations issued in settlement of
claims of Borrower against others by reason of bankruptcy or a composition or
readjustment of debt or reorganization of any debtor of Borrower.
CONSOLIDATION, MERGER, AND SALE OF ASSETS
Wind up, liquidate, or dissolve Borrower's affairs or enter into any
transaction of merger or consolidation with any Person; convey, sell, lease, or
otherwise dispose of (or agree to do any of the foregoing at any time) any of
its material licenses, contracts, or permits; sell all or a substantial part of
its property or assets or sell any part of its property or assets necessary or
desirable for the conduct of its business as now generally conducted or as
proposed to be conducted; sell any of its notes receivable, installment or
conditional sales agreements, or accounts receivable; purchase, lease, or
otherwise acquire all or a substantial part of the property or assets of any
other Person.
SUBSIDIARIES
Form or acquire any Person or any portion thereof.
TYPE OF BUSINESS
Enter into any business which is substantially different from or not
connected with the business in which Borrower is presently engaged or make any
substantial change in the nature of its business or operations.
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CHANGE OF CHIEF EXECUTIVE OFFICE OR NAME
Change (a) the chief executive office of Borrower, (b) Borrower's name,
or (c) the location of any of the Collateral; or adopt or use any trade name
without (x) prior written notice to U. S. Bank and (y) the execution, delivery,
and filing (and payment of filing fees and taxes) of all such documents as may
be necessary or advisable in the opinion of U. S. Bank to continue to perfect
and protect the liens and security interests in the Collateral.
CHANGE IN DOCUMENTS
Amend, supplement, terminate, or otherwise modify in any way Borrower's
articles of incorporation, contracts, or other documents delivered to U. S. Bank
hereunder or executed in connection herewith.
CONTROL
Enter into any agreement (other than employment agreements) with any
Person that confers upon such Person the right or authority to control or direct
a major portion of the business or assets of Borrower.
PENSION PLAN
Terminate or partially terminate any Plan now existing or hereafter
established for Borrower or its Affiliates or withdraw from participation
therein under circumstances that result or could result in liability to the
Pension Benefit Guaranty Corporation, to the fund by which the Plan is funded,
or to the employees (or their beneficiaries) for whom the Plan is or shall be
maintained; or permit any other event or circumstance to occur that results or
could result in liability to the Pension Benefit Guaranty Corporation or a
violation of ERISA.
TANGIBLE NET WORTH
Permit Tangible Net Worth plus the principal amount guaranteed by
Guarantor under the Guaranty to be less than $-0- at any time during the terms
of the Loans.
WORKING CAPITAL
As of the last day of each fiscal quarter of Borrower, permit Working
Capital to be less than the greater of (a) $1,000,000, or (b) an amount equal to
two times
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Borrower's average monthly sales, general, administrative, and interest expenses
for the trailing four quarters then ended.
DEBT SERVICE COVERAGE
Permit the ratio of Cash Flow to Debt Service Proforma to be less than
1.25:1.00 as of the last day of each fiscal quarter of Borrower for the trailing
four quarters then ended.
Permit the ratio of Cash Flow to Debt Service Historical to be less
than 1.50:1.00 as of the last day of each fiscal quarter of Borrower for the
trailing four quarters then ended.
FUNDED DEBT COVERAGE RATIO
Permit the Funded Debt Coverage Ratio to be greater than (a) 3.85:1.00
as of the last day of each fiscal quarter of Borrower through the fiscal quarter
ending August 31, 1996, for the trailing four quarters then ended, and (b)
2.50:1.00 as of the last day of each fiscal quarter thereafter for the trailing
four quarters then ended.
REPRESENTATIONS AND WARRANTIES
In order to induce U. S. Bank to enter into this Agreement and to make
the Loans as herein provided, Borrower hereby makes the following
representations, covenants, and warranties, all of which shall survive the
execution and delivery of this Agreement and shall not be affected or waived by
any inspection or examination made by or on behalf of U. S. Bank:
CORPORATE STATUS
Borrower is a corporation organized and validly existing under the laws
of the state of Washington. Borrower has the power and authority to own its
property and assets and to transact the business in which it is engaged or
presently proposes to engage. Borrower is qualified to do business in all states
except where the failure to be qualified could not have a material adverse
effect on Borrower.
POWER AND AUTHORITY
Borrower has the power to execute, deliver, and carry out the terms and
provisions of this Agreement and each of the Loan Documents and has taken all
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necessary action to authorize the execution, delivery, and performance of this
Agreement and the other Loan Documents, the borrowings hereunder, and the making
and delivery of the Notes and all Loan Documents delivered hereunder. This
Agreement constitutes and the Notes and other Loan Documents and instruments
issued or to be issued hereunder, when executed and delivered pursuant hereto,
constitute or will constitute the authorized, valid, and legally binding
obligations of Borrower enforceable in accordance with their respective terms.
NO VIOLATION OF AGREEMENTS
Borrower is not in default under any material provision of any
agreement to which it is a party or in violation of any Applicable Laws. The
execution and delivery of this Agreement, the Notes, the other Loan Documents,
and the instruments incidental hereto; the consummation of the transactions
herein or therein contemplated; and compliance with the terms and provisions
hereof or thereof (a) will not violate any material Applicable Law and (b) will
not conflict or be inconsistent with; result in any breach of any of the
material terms, covenants, conditions, or provisions of; constitute a default
under; or result in the creation or imposition of (or the obligation to impose)
any lien, charge, or encumbrance upon any of the property or assets of Borrower
pursuant to the terms of: any material Governmental Approval, mortgage, deed of
trust, lease, agreement, or other instrument to which Borrower is a party, by
which Borrower may be bound, or to which Borrower may be subject, and (c) will
not violate any of the provisions of the articles of incorporation of Borrower.
No Governmental Approval is necessary (x) for the execution of this Agreement,
the making of the Notes, or the assumption and performance of this Agreement or
the Notes by Borrower or (y) for the consummation by Borrower of the
transactions contemplated by this Agreement including but not limited to the
grant of the security interests to U. S. Bank.
RECORDING AND ENFORCEABILITY
Neither the articles of incorporation, bylaws, or other applicable
corporate documents of Borrower nor other agreements require recording, filing,
registration, notice, or other similar action in order to insure the legality,
validity, binding effect, or enforceability against all Persons of this
Agreement, the Notes, or other Loan Documents executed or to be executed
hereunder, other than filings or recordings that may be required under the
Uniform Commercial Code or in connection with the perfection of the security
interests of U. S. Bank in patents, trademarks, and similar types of Collateral.
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LITIGATION
There are no actions, suits, or proceedings pending or threatened
against or affecting Borrower before any Governmental Body that could have a
material adverse effect on Borrower or the Collateral. Borrower is not in
default under any material provision of any Applicable Law or Governmental
Approval of any Governmental Body which could have a material adverse effect on
Borrower or on the Collateral.
GOOD TITLE TO PROPERTIES
Borrower has good and marketable title to, or a valid leasehold
interest in, its property and assets, subject to no liens, mortgages, pledges,
encumbrances, or charges of any kind, except those permitted under the
provisions of Section 8.6 of this Agreement.
LICENSES AND PERMITS
All Governmental Approvals with respect to the business of Borrower
were to Borrower's knowledge duly and validly issued by the respective
Governmental Bodies, are in full force and effect, and are to Borrower's
knowledge valid and enforceable in accordance with their terms. With regard to
such Governmental Approvals, no fact or circumstance exists that constitutes or,
with the passage of time or the giving of notice or both, would constitute a
material default under any thereof, or permit the grantor thereof to cancel or
terminate the rights thereunder, except upon the expiration of the full term
thereof. Borrower presently holds all material Governmental Approvals as are
necessary or advisable in connection with the conduct of its business as now
conducted and as presently proposed to be conducted.
NO BURDENSOME AGREEMENTS
Borrower is not a party to any agreement or instrument or subject to
any restrictions that now have or, as far as can be foreseen, could have a
material adverse effect on Borrower.
PROPERTIES IN GOOD CONDITION
All the material properties of Borrower are, and all material
properties to be added in connection with any contemplated expansion will be in
good repair and good working order and condition in a manner consistent with
past practices of Borrower,
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and comparable to industry standards and are and will be in compliance with all
Applicable Laws.
FINANCIAL STATEMENTS
The (a) audited financial statements of Borrower dated November 30,
1994, and all schedules and notes included in such financial statements and (b)
unaudited financial statements of Borrower that have heretofore been delivered
to U. S. Bank are true and correct in all material respects and present fairly
(i) the financial position of Borrower as of the date of said statements and
(ii) the results of operations of Borrower for the periods covered thereby; and
there are not any significant liabilities that should have been reflected in the
financial statements or the notes thereto under generally accepted accounting
principles, contingent or otherwise, including liabilities for taxes or any
unusual forward or long-term commitments, that are not disclosed or reserved
against in the statements referred to above or in the notes thereto or that are
not disclosed herein. All such financial statements have been prepared in
accordance with generally accepted accounting principles consistently applied.
There has been no material adverse change (including but not limited to any such
change occasioned by accident, act of God, war, fire, flood, explosion, strike
or other labor dispute, or orders or action by any Governmental Body or public
utility) in the operations, business, property, assets, or condition (financial
or otherwise) of Borrower since February 28, 1995.
OUTSTANDING INDEBTEDNESS
Other than current trade payables, Borrower has no Indebtedness,
including but not limited to Indebtedness to Affiliates, that is not listed on
Borrower's unaudited financial statements dated February 28, 1995.
TAXES
Borrower has duly filed all tax returns and reports required by
Applicable Law to be filed; and all taxes, assessments, levies, fees, and other
charges of Governmental Bodies upon Borrower or upon its assets that are due and
payable have been paid (except as otherwise permitted in this Agreement).
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<PAGE> 37
LICENSE FEES
Borrower has paid all fees and charges that have become due for any
Governmental Approval for its business or has made adequate provisions for any
such fees and charges that have accrued.
TRADEMARKS, PATENTS, ETC
Attached hereto as Exhibit K is a schedule of all trademarks, trade
names, service marks, patents, and applications therefor currently held by
Borrower or in which it has an interest, e.g., a license. Borrower possesses all
necessary trademarks, trade names, service marks, copyrights, patents, patent
rights, and licenses to conduct its businesses as now and as proposed to be
conducted, without conflict with the rights or claimed rights of others.
GOVERNMENTAL APPROVALS
Attached hereto as Exhibit L is a schedule of all material Governmental
Approvals necessary for the operation of Borrower's business.
DISCLOSURE
To the best of Borrower's knowledge, the exhibits hereto, the financial
information and statements referred to in Section 9.10 herein, any certificate,
statement, report or other document furnished to U. S. Bank by Borrower or any
other Person in connection herewith or in connection with any transaction
contemplated hereby, and this Agreement, do not contain any untrue statements of
material fact or omit to state any material fact necessary in order to make the
statements contained therein or herein not misleading.
REGULATIONS U AND X
Borrower does not own and no part of the proceeds hereof will be used
to purchase or carry any margin stock (within the meaning of Regulation U of the
Board of Governors of the Federal Reserve System) or to extend credit to others
for the purpose of purchasing or carrying any margin stock. Borrower is not
engaged principally or as one of its important activities in the business of
extending credit for the purpose of purchasing or carrying any margin stock. If
requested by U. S. Bank, Borrower will furnish to U. S. Bank a statement in
conformity with the requirements of Federal Reserve Form U-1 referred to in said
Regulation. No part of the proceeds
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of the Loans will be used for any purpose that violates or is inconsistent with
the provisions of Regulation X of said Board of Governors.
NAMES
Neither Borrower nor any of its predecessors operate or do business or
during the past five years have operated or done business under a fictitious,
trade, or assumed name.
CONDITION OF PROPERTY
Except as otherwise disclosed to U. S. Bank, Borrower hereby represents
and warrants to U. S. Bank that as of the date hereof and continuing hereafter,
Borrower's property (both owned and leased) and each portion thereof (a) are not
and to the best knowledge of Borrower after due investigation have not been a
site for the use, generation, manufacture, storage, disposal, or transportation
of any Hazardous Material; (b) are presently in compliance with all Hazardous
Materials Laws; and (c) are not being used and to the best knowledge of Borrower
after due investigation have not been used in any manner that has resulted in or
will result in Hazardous Materials being spilled or disposed of on any adjacent
or other property.
PENSION PLANS
No "reportable event" as defined in Section 4043(b) of Title IV of
ERISA has occurred and is continuing with respect to any plan maintained for
employees of Borrower or any Affiliate. In addition, each of the plans
maintained for the employees of Borrower and its Affiliates are in compliance
with the requirements of ERISA, including the minimum funding requirements.
EVENTS OF DEFAULT; REMEDIES
EVENTS OF DEFAULT
"Event of Default," wherever used herein, means any one of the
following events (whatever the reason for the Event of Default, whether it shall
relate to one or more of the parties hereto, and whether it shall be voluntary
or involuntary or be pursuant to or affected by operation of Applicable Law):
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If Borrower fails to pay the principal of or any installment of
interest on any of the Notes, when and as the same becomes due and payable,
whether at scheduled maturity, by acceleration, or otherwise; or
If any Indebtedness of Borrower for money borrowed or credit extended
becomes or is declared due and payable (after any applicable grace period) prior
to the stated maturity thereof or is not paid as and when it becomes due and
payable, or if any event occurs which constitutes an event of default under any
instrument, agreement, or evidence of Indebtedness relating to any such
obligation of Borrower; or
If Borrower fails to pay or perform (after any applicable grace period)
any obligation or Indebtedness to others in excess of $25,000 (other than as set
forth in Section 10.1(b) herein), whether now or hereafter incurred; or
If any representation or warranty (i) made by Borrower in this
Agreement or (ii) made by Borrower, Guarantor, or any other Person in any
document, certificate, or statement furnished pursuant to this Agreement or in
connection herewith, is false or misleading in any material respect; or
If Borrower fails to observe or perform any term, covenant, or
agreement to be performed or observed pursuant to Article VII and VIII herein;
or
If Borrower fails to observe or perform (not otherwise specified in
this Article X) any term, covenant, or agreement to be performed or observed
pursuant to the provisions of this Agreement, the other Loan Documents, or any
other agreement incidental hereto and such default is not cured within 30 days;
or
If Borrower fails to perform any of its obligations under any of the
Loan Documents not otherwise specified in this Article X, or if the validity of
any of such documents has been disaffirmed by or on behalf of any of the parties
thereto other than U. S. Bank and such default is not cured within 30 days; or
If custody or control of any substantial part of the property of
Borrower or Guarantor is assumed by any Governmental Body or if any Governmental
Body takes any final action, the effect of which would be to have a material
adverse effect on Borrower; or
If Borrower or Guarantor suspends or discontinues its business, or if
Borrower or Guarantor makes an assignment for the benefit of creditors or a
composition with
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creditors, is unable or admits in writing its inability to pay
its debts as they mature, files a petition in bankruptcy, becomes insolvent
(howsoever such insolvency may be evidenced), is adjudicated insolvent or
bankrupt, petitions or applies to any tribunal for the appointment of any
receiver, liquidator, or trustee of or for it or any substantial part of its
property or assets, commences any proceeding relating to it under any Applicable
Law of any jurisdiction whether now or hereafter in effect relating to
bankruptcy, reorganization, arrangement, readjustment of debt, receivership,
dissolution, or liquidation; or if there is commenced against Borrower or
Guarantor any such proceeding that remains undismissed for a period of 60 days
or more, or an order, judgment, or decree approving the petition in any such
proceeding is entered; or if Borrower or Guarantor by any act or failure to act
indicates its consent to, approval of, or acquiescence in, any such proceeding
or any appointment of any receiver, liquidator, or trustee of or for it or for
any substantial part of its property or assets, suffers any such appointment to
continue undischarged or unstayed for a period of 60 days or more, or takes any
corporate action for the purpose of effecting any of the foregoing; or if any
court of competent jurisdiction assumes jurisdiction with respect to any such
proceeding, or if a receiver or a trustee or other officer or representative of
a court or of creditors, or if any Governmental Body, under color of legal
authority, takes and holds possession of any substantial part of the property or
assets of Borrower or Guarantor; or
If there is any refusal or failure by any Governmental Body to issue,
renew, or extend any lease or Governmental Approval with respect to the
operation of the business of Borrower, or any denial, forfeiture or revocation
by any Governmental Body of any Governmental Approval that could have a material
adverse effect on Borrower; or
If any of the events described in Section 7.10 herein occur or are
threatened and, in U. S. Bank's reasonable judgment, such event jeopardizes or
could reasonably be expected to jeopardize repayment of any of the Notes; or
If any Person or Persons during the terms of the Loans acquire an
aggregate 10 percent or more of the outstanding shares of voting stock of
Borrower; or
If any material adverse change in the business or financial condition
of Borrower or Guarantor occurs, or if any event that materially increases U. S.
Bank's risk or materially impairs the Collateral occurs.
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ACCELERATION; REMEDIES
Upon the occurrence of any Event of Default or at any time thereafter,
if any Event of Default is then continuing, U. S. Bank may, by written notice to
Borrower, declare the entire unpaid principal balance or any portion of the
principal balance of all or any of the Notes and interest accrued thereon to be
immediately due and payable by the maker thereof; and such principal and
interest shall thereupon become and be immediately due and payable, without
presentation, demand, protest, notice of protest, or other notice of dishonor of
any kind, all of which are hereby expressly waived by Borrower. U. S. Bank may
proceed to protect and enforce its rights hereunder or realize on any or all
security granted pursuant hereto in any manner or order it deems expedient
without regard to any equitable principles of marshaling or otherwise. All
rights and remedies given by this Agreement, the Notes, and the other Loan
Documents are cumulative and not exclusive of any thereof or of any other rights
or remedies available to U. S. Bank; no course of dealing between Borrower and
U. S. Bank or any delay or omission in exercising any right or remedy; shall
operate as a waiver of any right or remedy; and every right and remedy may be
exercised from time to time and as often as deemed appropriate by U. S. Bank.
MISCELLANEOUS
NOTICES
All notices, requests, consents, demands, approvals, and other
communications hereunder shall be deemed to have been duly given, made, or
served if made in writing and delivered personally, sent via facsimile, or
mailed by first class mail, postage prepaid, to the respective parties to this
Agreement as follows:
If to Borrower:
Gargoyles, Inc.
5866 S. 194th Street
Kent, Washington 98032
Attention: Steven R. Kingma
Facsimile No.: (206) 872-3267
If to U. S. Bank:
U. S. Bank of Washington, National Association
1420 Fifth Avenue, Eleventh Floor
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<PAGE> 42
Seattle, Washington 98101
Attention: Gerald L. Sorensen
Facsimile No.: (206) 344-2887
The designation of the persons to be so notified or the address of such
persons for the purposes of such notice may be changed from time to time by
similar notice in writing, except that any communication with respect to a
change of address shall be deemed to be given or made when received by the party
to whom such communication was sent.
PAYMENT OF EXPENSES
Whether or not the transactions hereby contemplated are consummated,
Borrower shall pay on demand all costs and expenses of U. S. Bank incurred in
connection with the preparation, negotiation, execution, and delivery of the
Loan Documents, as well as any amendments, modifications, consents, or waivers
relating thereto, including, without limitation, reasonable attorney fees,
appraisal fees, title insurance fees, and recording fees. In addition, if there
shall occur any Default or Event of Default, U. S. Bank shall be entitled to
recover any costs and expenses incurred in connection with the preservation of
rights under, and enforcement of, the Loan Documents, whether or not any lawsuit
or arbitration proceeding is commenced, in all such cases, including, without
limitation, reasonable attorney fees and costs (including the allocated fees of
internal counsel). Costs and expenses as referred to above, shall include,
without limitation, a reasonable hourly rate for collection personnel, whether
employed in-house or otherwise, overhead costs as reasonably allocated to the
collection effort, and all other expenses actually incurred. Reasonable attorney
fees shall include, without limitation, attorney fees and costs incurred in
connection with any bankruptcy case or other insolvency proceeding commenced by
or against Borrower or any Person granting a security interest in any item of
Collateral, including all fees incurred in connection with (a) moving from
relief from the automatic stay, to convert or dismiss the case or proceeding, or
to appoint a trustee or examiner, or (b) proposing or opposing confirmation of a
plan of reorganization or liquidation, in any case without regarding to the
identity of the prevailing party.
SETOFF
Borrower hereby pledges and gives to U. S. Bank, and any Participant, a
lien and security interest in for the amount of all past, present, and future
Indebtedness of Borrower to U. S. Bank the balance of any deposit account
maintained by Borrower at
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<PAGE> 43
U. S. Bank or any Participant. In the case of Borrower's Default hereunder,
Borrower hereby authorizes U. S. Bank or any such Participant at U. S. Bank's
sole option, at any time and from time to time, to apply to the payment of all
or any portion of the Loans or other Indebtedness of Borrower to U. S. Bank, any
deposit balance or balances now or hereafter in the possession of U. S. Bank or
such Participant that belong to or are owed to Borrower.
WAIVER OF SETOFF
In the event that U. S. Bank sells all or any portion of the Loans to
any Participant, Borrower hereby waives the right to interpose any setoff,
counterclaim, or cross-claim (other than compulsory counterclaims or
cross-claims) in connection with any litigation or dispute under this Agreement,
regardless of the nature of such setoff, counterclaim, or cross-claim.
FEES AND COMMISSIONS
Borrower agrees to indemnify U. S. Bank and hold it harmless with
regard to any commissions, fees, judgments, or expenses of any nature and kind
that U. S. Bank may become liable to pay by reason of any claims by or on behalf
of brokers, finders, or agents in connection with any act or failure to act by
Borrower or any litigation or similar proceeding arising from such claims.
Borrower states that it is aware of no valid basis for any such claims.
NO WAIVER
No failure or delay on the part of U. S. Bank or the holder of any of
the Notes in exercising any right, power, or privilege hereunder and no course
of dealing between Borrower and U. S. Bank or the holder of any of the Notes
shall operate as a waiver thereof; nor shall any single or partial exercise of
any right, power, or privilege hereunder preclude any other or further exercise
thereof or the exercise of any right, power, or privilege. The rights and
remedies herein expressly provided are cumulative and not exclusive of any
rights or remedies that U. S. Bank or any subsequent holder of any of the Notes
would otherwise have. No notice to or demand on Borrower in any case shall
entitle Borrower to any other or further notice or demand in similar or other
circumstances or shall constitute a waiver of the right of U. S. Bank to any
other or further action in any circumstances without notice or demand.
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<PAGE> 44
ENTIRE AGREEMENT AND AMENDMENTS
This Agreement represents the entire agreement between the parties
hereto with respect to the Loans and the transactions contemplated hereunder
and, except as expressly provided herein, shall not be affected by reference to
any other documents. This Agreement, or any provision hereof, may not be
changed, waived, discharged, or terminated orally, but only by an instrument in
writing, signed by the party against whom enforcement of the change, waiver,
discharge, or termination is sought.
BENEFIT OF AGREEMENT
This Agreement is binding upon and inures to the benefit of Borrower
and U. S. Bank and their successors and assigns and all subsequent holders of
any of the Notes or any portion thereof. Borrower expressly acknowledges that U.
S. Bank is not prohibited or restricted from assigning rights or participations
hereunder or any portion thereof to another Person. Borrower, however, is
precluded from assigning any of its respective rights or delegating any of its
obligations hereunder or under any of the other agreements between Borrower and
U. S. Bank without the prior written consent of U. S. Bank.
SEVERABILITY
If any provision of this Agreement or any of the Loan Documents is held
invalid under any Applicable Laws, such invalidity shall not affect any other
provision of this Agreement that can be given an effect without the invalid
provision, and, to this end, the provisions hereof are severable.
DESCRIPTIVE HEADINGS
The descriptive headings of the several sections of this Agreement are
inserted for convenience only and do not affect the meaning or construction of
any of the provisions hereof.
GOVERNING LAW
This Agreement and the rights and obligations of the parties hereunder
and under the other Loan Documents shall be construed in accordance with and
shall be governed by the laws of the state of Washington without regard to the
choice of law rules thereof.
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<PAGE> 45
CONSENT TO JURISDICTION, SERVICE, AND VENUE
For the purpose of enforcing payment of any of the Notes, performance
of the obligations under any of the Notes, any arbitration award under the other
Loan Documents, or otherwise in connection herewith, Borrower hereby consents to
the jurisdiction and venue of the courts of the state of Washington or of any
federal court located in such state including but not limited to the Superior
Court of Washington for King County and the United States District Court for the
Western District of Washington. Borrower hereby waives the right to contest the
jurisdiction and venue of courts located in King County, Washington, on the
ground of inconvenience or otherwise and waives any right to bring any action or
proceeding against U. S. Bank in any court outside King County, Washington. The
provisions of this section do not limit or otherwise affect the right of U. S.
Bank to institute and conduct action in any other appropriate manner,
jurisdiction, or court.
ARBITRATION
Either Borrower or U. S. Bank may require that all disputes, claims,
counterclaims, and defenses, including those based on or arising from any
alleged tort ("Claims") relating in any way to the Loans be settled by binding
arbitration in accordance with the Commercial Arbitration Rules of the American
Arbitration Association and Title 9 of the U.S. Code. All Claims will be subject
to the statutes of limitations that would be applicable if they were litigated.
This provision is void if the Loans, at the time of the proposed
submission to arbitration, are secured by real property located outside of
Oregon or Washington or if the effect of the arbitration procedure (as opposed
to any Claims of Borrower) would be to materially impair U. S. Bank's ability to
realize on any Collateral pursuant to an arbitration ruling favorable to U. S.
Bank.
If arbitration occurs and each party's Claim is less than $100,000, one
neutral arbitrator will decide all issues; if either party's Claim is more than
$100,000, three neutral arbitrators will decide all issues. All arbitrators will
be active Washington State Bar members in good standing. All arbitration
hearings will be held in Seattle, Washington. In addition to all other powers,
the arbitrator or arbitrators shall have the exclusive right to determine all
issues of arbitrability and shall have the authority to issue subpoenas.
Judgment on any arbitration award may be entered in any court with jurisdiction.
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If either party institutes any judicial proceeding relating to the
Loans, that action shall not be a waiver of the right to submit any Claim to
arbitration. In addition, each has the right before, during, and after any
arbitration to exercise any number of the following remedies, in any order or
concurrently: (i) setoff, (ii) self-help repossession, (iii) judicial or
nonjudicial foreclosure against real or personal collateral, (iv) provisional
remedies, including injunction, appointment of a receiver, attachment, claim and
delivery, and replevin.
This arbitration clause cannot be modified or waived by either party
except in writing, which writing must refer to this arbitration clause and be
signed by Borrower and U. S. Bank.
COUNTERPARTS
This Agreement and each of the Loan Documents may be executed in one or
more counterparts, each of which shall constitute an original agreement, but all
of which together shall constitute one and the same instrument.
STATUTORY NOTICE
ORAL AGREEMENTS OR ORAL COMMITMENTS TO LOAN MONEY, EXTEND CREDIT, OR
FORBEAR FROM ENFORCING REPAYMENT OF A DEBT ARE NOT ENFORCEABLE UNDER WASHINGTON
LAW.
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<PAGE> 47
IN WITNESS WHEREOF, Borrower and U. S. Bank have caused this Agreement
to be duly executed by the respective, duly authorized signatories as of the
date first above written.
GARGOYLES, INC.
By /s/ Steven R. Kingma
--------------------------------------
Title Chief Financial Officer and Treasurer
--------------------------------------
U. S. BANK OF WASHINGTON,
NATIONAL ASSOCIATION
By /s/ Gerald L. Sorensen
--------------------------------------
Title Senior Vice President
--------------------------------------
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<PAGE> 1
EXHIBIT 10.8
REVOLVING NOTE
$4,000,000 March 22, 1995
For value received, the undersigned, GARGOYLES, INC., ("Borrower"),
promises to pay to the order of U. S. BANK OF WASHINGTON, NATIONAL ASSOCIATION
("U. S. Bank"), at its principal place of business, 1420 Fifth Avenue, Seattle,
Washington 98101, or such other place or places as the holder hereof may
designate in writing, the principal sum of FOUR MILLION Dollars ($4,000,000) or
so much thereof as advanced by U. S. Bank in lawful, immediately available money
of the United States of America, in accordance with the terms and conditions of
that certain credit agreement of even date herewith by and between Borrower and
U. S. Bank (together with all supplements, exhibits, amendments and
modifications thereto, the "Credit Agreement"). Borrower also promises to pay
interest on the unpaid principal balance hereof, commencing as of the first date
of an advance hereunder, in like money in accordance with the terms and
conditions, and at the rate or rates provided for in the Credit Agreement. All
principal, interest, and other charges are due and payable in full on March 22,
1997.
Borrower and all endorsers, sureties, and guarantors hereof jointly and
severally waive presentment for payment, demand, notice of nonpayment, notice of
protest, and protest of this Note, and all other notices in connection with the
delivery, acceptance, performance, default, dishonor, or enforcement of the
payment of this Note except such notices as are specifically required by this
Note or by the Credit Agreement, and they agree that the liability of each of
them shall be unconditional without regard to the liability of any other party
and shall not be in any manner affected by any indulgence, extension of time,
renewal, waiver, or modification granted or consented to by U. S. Bank. Borrower
and all endorsers, sureties, and guarantors hereof (1) consent to any and all
extensions of time, renewals, waivers, or modifications that may be granted by
U. S. Bank with respect to the payment or other provisions of this Note and the
Credit Agreement; (2) consent to the release of any property now or hereafter
securing this Note with or without substitution; and (3) agree that additional
makers, endorsers, guarantors, or sureties may become parties hereto without
notice to them and without affecting their liability hereunder.
<PAGE> 2
This Note is the Revolving Note referred to in the Credit Agreement and
as such is entitled to all of the benefits and obligations specified in the
Credit Agreement, including but not limited to any Collateral and any conditions
to making advances hereunder. Terms defined in the Credit Agreement are used
herein with the same meanings. Reference is made to the Credit Agreement for
provisions for the repayment of this Note and the acceleration of the maturity
hereof.
GARGOYLES, INC.,
a Washington corporation
By /s/ Steven R. Kingma
----------------------------------------------
Title Chief Financial Officer and Treasurer
----------------------------------------
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<PAGE> 1
EXHIBIT 10.9
TERM NOTE
$6,000,000 March 22, 1995
For value received, the undersigned, GARGOYLES, INC., ("Borrower"),
promises to pay to the order of U. S. BANK OF WASHINGTON, NATIONAL ASSOCIATION
("U. S. Bank"), at its principal place of business, 1420 Fifth Avenue, Seattle,
Washington 98101, or such other place or places as the holder hereof may
designate in writing, the principal sum of SIX MILLION Dollars ($6,000,000) in
lawful immediately available money of the United States of America, in
accordance with the terms and conditions of that certain credit agreement of
even date herewith by and between Borrower and U. S. Bank (together with all
supplements, exhibits, amendments and modifications thereto, the "Credit
Agreement"). Borrower also promises to pay interest on the unpaid principal
balance hereof, commencing as of the date hereof, in like money in accordance
with the terms and conditions and at the rate or rates provided for in the
Credit Agreement. All principal, interest, and other charges are due and payable
in full on March 22, 2002.
Borrower and all endorsers, sureties, and guarantors hereof jointly and
severally waive presentment for payment, demand, notice of nonpayment, notice of
protest, and protest of this Note, and all other notices in connection with the
delivery, acceptance, performance, default, dishonor, or enforcement of the
payment of this Note except such notices as are specifically required by this
Note or by the Credit Agreement, and they agree that the liability of each of
them shall be unconditional without regard to the liability of any other party
and shall not be in any manner affected by any indulgence, extension of time,
renewal, waiver, or modification granted or consented to by U. S. Bank. Borrower
and all endorsers, sureties, and guarantors hereof (1) consent to any and all
extensions of time, renewals, waivers, or modifications that may be granted by
U. S. Bank with respect to the payment or other provisions of this Note and the
Credit Agreement; (2) consent to the release of any property now or hereafter
securing this Note with or without substitution; and (3) agree that additional
makers, endorsers, guarantors, or sureties may become parties hereto without
notice to them and without affecting their liability hereunder.
<PAGE> 2
This Note is the Term Note referred to in the Credit Agreement and as
such is entitled to all of the benefits and obligations specified in the Credit
Agreement, including but not limited to any Collateral and any conditions to
making advances hereunder. Terms defined in the Credit Agreement are used herein
with the same meanings. Reference is made to the Credit Agreement for provisions
for the repayment of this Note and the acceleration of the maturity hereof.
GARGOYLES, INC.,
a Washington corporation
By /s/ Steven R. Kingma
------------------------------------------
Title Chief Financial Officer and Treasurer
---------------------------------------
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<PAGE> 1
EXHIBIT 10.10
SECURITY AGREEMENT
This security agreement ("Agreement") is made and entered into as of
March 22, 1995, by GARGOYLES, INC., a Washington corporation, ("Borrower"), for
the benefit of U. S. BANK OF WASHINGTON, NATIONAL ASSOCIATION, a national
banking association ("U. S. Bank").
R E C I T A L S :
Concurrently with the execution hereof, U. S. Bank and Borrower entered
into a credit agreement (together with all supplements, exhibits, and amendments
thereto, referred to as the "Credit Agreement"), pursuant to which U. S. Bank
agreed to extend to Borrower credit facilities as more fully described therein
(the "Loans").
Borrower wishes to grant to U. S. Bank a security interest in all its
assets as security for all the Secured Obligations.
NOW, THEREFORE, in order for U. S. Bank to make the Loans, Borrower
agrees as follows:
DEFINITIONS
Unless otherwise defined herein, terms defined in the Credit Agreement
shall have the same meanings when used herein. For the purposes of this
Agreement, the following terms shall have the following meanings:
"Account" means any right to payment for goods sold or leased or for
services rendered that is not evidenced by an Instrument or Chattel Paper,
whether or not it has been earned by performance.
"Account Debtor" means the party who is obligated on or under any
Account, Chattel Paper, or General Intangible.
"Assignee Deposit Account" shall have the meaning set forth in Section
5.7 hereof.
"Chattel Paper" means all interest of Borrower in writings that
evidence both a monetary obligation and a security interest in or a lease of
specific goods, including any group of writings consisting of both a security
agreement or a lease and an Instrument or series of Instruments.
<PAGE> 2
"Collateral" means all property, real, personal, and mixed, tangible
and intangible, wherever located, now owned or hereafter acquired by Borrower,
or in which Borrower has or later obtains an interest, and all products,
profits, rents, and proceeds of such property, including but not limited to
Accounts, Chattel Paper, Deposit Accounts, Documents, Equipment, General
Intangibles, Goods, Instruments, Inventory, Patents, Trademarks, and Vehicles.
"Deposit Account" means a demand, time, savings, passbook, or like
account maintained with a bank, savings and loan association, credit union, or
like organization, other than an account evidenced by a certificate of deposit.
"Document" means all of Borrower's right, title, and interest in or to
any document of title as defined in RCW 62A.1-201 and any receipt of the kind
described in RCW 62A.7-201(2).
"Equipment" means all of Borrower's right, title, and interest in and
to Goods that are used or bought for use primarily in business and that are not
included within the definition of Inventory, including but not limited to all
machinery, equipment, furnishings, fixtures, vehicles, tools, supplies, and
other equipment of any kind and nature and all additions, substitutions, and
replacements of any of the foregoing, together with all attachments, components,
parts, accessories, improvements, upgrades, and accessories installed thereon or
affixed thereto.
"Event of Default" means an occurrence of an Event of Default as
defined in the Credit Agreement.
"General Intangibles" means all personal property (including things in
action) other than Goods, Accounts, Chattel Paper, Documents, Instruments, and
money, and shall include, but not limited to all Patents, Trademarks, insurance
proceeds, patents, copyrights, trade names, trade secrets, goodwill,
registrations, license rights, licenses, royalty rights, royalties, permits,
corporate and other business records, rights to refunds or indemnification, and
all other intangible personal property of Borrower of every kind and nature.
"Goods" means all things that are movable or that are fixtures, not
including money, Documents, Instruments, Accounts, Chattel Paper, or General
Intangibles.
"Instrument" means any negotiable instrument or security or other
writing that evidences a right to the payment of money and is not itself a
security agreement or lease and is of a type that is in the ordinary course of
business transferred by delivery with any necessary endorsement or assignment.
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<PAGE> 3
"Inventory" means all Goods held by Borrower for sale or lease,
furnished or to be furnished by Borrower under any contract of service, or held
by Borrower as raw materials, work in progress, or materials used or consumed in
Borrower's business.
"Patents" means (a) any patents and the goodwill associated therewith
and all rights arising out of or related thereto, now existing or hereafter
adopted or acquired, any registration or recording thereof, and any application
in connection with any of the foregoing, whether in the United States Patent and
Trademark Office or in any similar office or agency of the United States or of
any state thereof, or any other country or any political subdivision thereof, or
otherwise, including but not limited to any thereof referred to in Schedule I
hereto, and (b) all renewals thereof.
"Secured Obligations" means any past, present, or future Indebtedness
of Borrower to U. S. Bank, and includes but is not limited to (a) any
indebtedness, obligation, or liability of any kind arising in any way of
Borrower to U. S. Bank, now existing or hereafter created, under the Credit
Agreement, the Notes, or the other Loan Documents, including any refinancing,
renewal, replacement, extension, amendment, or substitution of such
indebtedness, (b) any liability or obligation of Borrower hereunder, (c) the
obligations of Borrower under any guaranty executed by Borrower and delivered to
U. S. Bank, whereby Borrower guarantees the indebtedness of any Person other
than Borrower to U. S. Bank, and (d) any cost, expense, or liability, including
but not limited to reasonable attorney fees, that may be incurred and advances
that may be made by U. S. Bank in any way in connection with any of the
foregoing or any security therefor.
"Trademark" means (a) any trademark, trade name, corporate name,
company name, business name, fictitious business name, trade style, service
mark, logo or other source or business identifier, and the goodwill associated
therewith and all rights arising out of or related thereto, now existing or
hereafter adopted or acquired, any registration or recording thereof, and any
application in connection with any of the foregoing, whether in the United
States Patent and Trademark Office or in any similar office or agency of the
United States or of any state thereof, or any other country or any political
subdivision thereof, or otherwise, including but not limited to any thereof
referred to in Schedule I hereto, and (b) all renewals thereof.
"Vehicle" means any car, truck, trailer, construction or earth-moving
equipment, or other vehicle covered by a certificate of title of any state,
including but not limited to any tires or other appurtenances to any of the
foregoing.
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<PAGE> 4
GRANT OF SECURITY INTEREST
As security for the payment and satisfaction of the Secured
Obligations, Borrower hereby grants to U. S. Bank a continuing security interest
in and assigns to U. S. Bank all of Borrower's right, title, and interest in the
Collateral and all products, profits, rents, and proceeds thereof.
COVENANTS OF BORROWER
Borrower shall fully perform each of the covenants set forth below.
OBLIGATIONS TO PAY
Borrower shall pay to U. S. Bank, in timely fashion and in full, all
amounts payable by Borrower to U. S. Bank, pursuant to the Credit Agreement, the
Notes, and the other Loan Documents; and
Borrower shall pay and reimburse U. S. Bank for all expenditures
including reasonable attorney fees and legal expenses in connection with the
exercise by U. S. Bank of any of its rights or remedies under the Credit
Agreement or the other Loan Documents.
PERFORMANCE
Borrower shall fully perform in a timely fashion every covenant,
agreement, and obligation set forth in the Credit Agreement and the other Loan
Documents.
FURTHER DOCUMENTATION
At its own expense, Borrower shall execute and deliver any financing
statement, any renewal, substitution, or correction thereof, or any other
document; shall procure any document; and shall take such further action as U.
S. Bank may require in obtaining the full benefits of this Agreement.
FILING FEES
Borrower shall pay all costs of filing any financing, continuation, or
termination statement with respect to the security interests granted herein,
including the of filing this Agreement with the United States Patent and
Trademark Office.
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<PAGE> 5
PLEDGES
Borrower shall deliver and pledge to U. S. Bank, endorsed or
accompanied by instruments of assignment or transfer satisfactory to U. S. Bank,
any Instruments, Documents, General Intangibles, or Chattel Paper that U. S.
Bank may specify from time to time.
MAINTENANCE OF RECORDS
Borrower shall keep and maintain at its own cost and expense
satisfactory and complete records of the Collateral including but not limited to
a record of all payments received and all credits granted with respect to the
Collateral and all other dealings with the Collateral. Borrower shall mark its
books and records pertaining to the Collateral to evidence this Agreement and
the security interests granted herein. Borrower shall deliver and turn over to
U. S. Bank all books and records pertaining to the Collateral at any time after
the occurrence and during the continuation of an Event of Default, if so
demanded by U. S. Bank.
DISPOSITION OF COLLATERAL
Except as allowed in the Credit Agreement, Borrower shall not sell or
transfer any of the Collateral or release, compromise, or settle any obligation
or receivable due to Borrower.
INDEMNIFICATION
Borrower agrees to pay, and to indemnify U. S. Bank and hold U. S. Bank
harmless from, all liabilities, costs, and expenses including but not limited to
legal fees and expenses with respect to or resulting from (a) any delay in
paying any excise, sales, or other taxes that may be payable or determined to be
payable with respect to any of the Collateral, (b) any delay by Borrower in
complying with any requirement of law applicable to any of the Collateral, or
(c) any of the transactions contemplated by this Agreement. In any suit,
proceeding, or action brought by U. S. Bank under any Account to enforce payment
of any sum owing thereunder or to enforce any provisions of any Account,
Borrower will indemnify U. S. Bank and hold U. S. Bank harmless from all
expense, loss, or damage suffered by reason of any defense, setoff,
counterclaim, recoupment, reduction, or liability whatsoever of the Account
Debtor thereunder arising out of a breach by Borrower of any obligation
thereunder or arising out of any other agreement, indebtedness, or liability at
any time owing to or in favor of such Account Debtor or its successors from
Borrower.
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<PAGE> 6
LIMITATIONS ON AMENDMENTS, MODIFICATIONS, TERMINATIONS, WAIVERS, AND EXTENSIONS
OF CONTRACTS AND AGREEMENTS GIVING RISE TO ACCOUNTS
Borrower will not (a) amend, modify, terminate, waive, or extend any
provision of any agreement giving rise to an Account in any manner that could
reasonably be expected to have a material adverse effect on the value of such
Account as Collateral unless deemed necessary by Borrower in the reasonable
exercise of its business judgment, or (b) fail to exercise promptly and
diligently every material right that it may have under each agreement giving
rise to an Account, other than any right of termination unless deemed necessary
by Borrower in the reasonable exercise of its business judgment.
LIMITATIONS ON DISCOUNTS, COMPROMISES, AND EXTENSIONS OF ACCOUNTS
Borrower will not grant any extension of the time of payment of any of
the Accounts; compromise, compound, or settle the same for less than the full
amount thereof; release, wholly or partially, any Person liable for the payment
thereof; or allow any credit or discount whatsoever thereon unless deemed
necessary by Borrower in the reasonable exercise of its business judgment.
FURTHER IDENTIFICATION OF COLLATERAL
Borrower will furnish to U. S. Bank from time to time statements and
schedules further identifying and describing the Collateral and such other
reports in connection with the Collateral as U. S. Bank may request, all in
reasonable detail.
NOTICES
Borrower will advise U. S. Bank promptly in reasonable detail at its
address set forth in Section 7.9 (a) of any lien (other than liens created
hereby or permitted under the Credit Agreement) on or claim asserted against any
of the Collateral and (b) of the occurrence of any other event that could
reasonably be expected to have a material adverse effect on the Collateral or on
the liens created hereunder.
CHANGES IN LOCATIONS, NAME, ETC
Borrower will not (a) change the location of its chief executive
office/chief place of business from that specified in Section 4.10 or remove its
books and records from the location specified in Section 4.7, (b) permit any of
the Inventory or Equipment (excluding Vehicles) to be kept at locations other
than those listed on Schedule II hereto, or (c) change its name, identity, or
structure to such an extent that any financing statement filed by U. S. Bank in
connection with this Agreement would
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<PAGE> 7
become seriously misleading, unless it shall have given U. S. Bank at least ten
days' prior written notice thereof.
PATENTS AND TRADEMARKS
Borrower (either itself or through licensees) will (i) continue to use
all Trademarks on each and every trademark class of goods applicable to its
current line as reflected in its current catalogs, brochures, and price lists in
order to maintain such Trademarks in full force free from any claim of
abandonment for nonuse, (ii) maintain as in the past the quality of products and
services offered under all Patents and Trademarks, (iii) employ all Patents and
Trademarks with the appropriate notice of registration, (iv) not adopt or use
any mark that is confusingly similar to or a colorable imitation of any
Trademarks unless U. S. Bank shall obtain a perfected security interest in such
mark pursuant to this Agreement, and (v) not (and not permit any licensee or
sublicensee thereof to) do any act or knowingly omit to do any act whereby any
Patent or Trademark may become invalidated.
Borrower will notify U. S. Bank immediately if it knows, or has reason
to know, of (i) any application or registration relating to any Patent or
Trademark material to its business that may become abandoned or dedicated, or
(ii) any adverse determination or development (including but not limited to the
institution of, or any adverse determination or development in, any proceeding
in the United States Patent and Trademark Office or any court or tribunal in any
country) regarding Borrower's ownership of any Patent or Trademark or its right
to register, keep, or maintain the same.
Whenever Borrower, either by itself or through any agent, employee,
licensee, or designee, shall file an application for the registration of any
Patent or Trademark with the United States Patent and Trademark Office or any
similar office or agency in any state or other country or any political
subdivision thereof, Borrower shall report such filing to U. S. Bank within five
Business Days after the last day of the calendar month in which such filing
occurs. Borrower shall execute and deliver to U. S. Bank all agreements,
instruments, powers of attorney, documents, and papers that U. S. Bank may
request to evidence U. S. Bank's security interest in any such Patent and
Trademark and in the goodwill and general intangibles of Borrower relating to or
represented thereby; provided that Borrower acknowledges that it is Borrower's
intent that this Agreement grant to U. S. Bank a valid, perfected, and
enforceable security interest in all Patents and Trademarks now owned or
hereafter adopted or acquired, without the necessity of further documentation.
Borrower hereby constitutes U. S. Bank its attorney-in-fact to execute and file
all such writings for the foregoing
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<PAGE> 8
purposes, with all acts of such attorney being hereby ratified and confirmed;
and such power, being coupled with an interest, is irrevocable until all Secured
Obligations are paid in full.
Borrower will take all reasonable and necessary steps, including but
not limited to all reasonable and necessary steps in any proceeding before the
United States Patent and Trademark Office or any similar office or agency in any
other country or any political subdivision thereof, to maintain and pursue each
application, to obtain the relevant registration, and to maintain each
registration of all Patents and Trademarks, including but not limited to filing
applications for renewal, affidavits of use, and affidavits of incontestability.
If any Patent or Trademark that is included in the Collateral is
infringed, misappropriated, or diluted by a third party, Borrower shall promptly
notify U. S. Bank after it learns thereof and shall take such action as Borrower
reasonably deems appropriate under the circumstances to protect such Patent or
Trademark.
VEHICLES
Within 30 days after the date of acquisition of any Vehicle
constituting Collateral, the application for certificate of title thereto
indicating U. S. Bank's first priority lien on such Vehicle, and any other
necessary documentation, shall be filed in each office in each jurisdiction that
U. S. Bank deems advisable to perfect its lien on any Vehicle constituting
Collateral.
INSURANCE
Borrower agrees to insure the Collateral against all hazards in form
and amount satisfactory to U. S. Bank. If Borrower fails to obtain such
insurance, U. S. Bank shall have the right, but not the obligation, to obtain
either insurance covering both Borrower's and U. S. Bank's interest in the
Collateral, or insurance covering only U. S. Bank's interest in the Collateral.
Borrower agrees to pay any premium charged for such insurance. This amount may
be added to the outstanding balance of the Loans, and interest thereon shall be
charged at the rate specified in any applicable loan document, or U. S. Bank may
demand immediate payment. Any unpaid insurance premium advanced by U. S. Bank
shall be secured under the terms of this Agreement. U. S. Bank will have no
liability whatsoever for any loss which may occur by reason of the omission or
lack of coverage of any such insurance. Borrower hereby assigns to U. S. Bank
the right to receive proceeds of such insurance to the full amount of the
Secured Obligations and hereby directs any insurer to pay all proceeds directly
to U. S. Bank, and authorizes U. S. Bank to endorse any draft. In
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<PAGE> 9
U. S. Bank's sole discretion, U. S. Bank may apply any insurance proceeds either
toward repair of the property or reduction of the balance of the Secured
Obligations.
FINANCING STATEMENTS
Borrower agrees that a carbon, photographic, or other reproduction of a
financing statement or this Agreement is sufficient as a financing statement.
Borrower also acknowledges and agrees that all security agreements and financing
statements previously executed by Borrower and delivered to U. S. Bank shall
remain in full force and effect, and shall secure all Indebtedness of Borrower
to U. S. Bank, including, without limitation, repayment of the Loans.
REPRESENTATIONS AND WARRANTIES
Borrower hereby makes the following representations and warranties:
TITLE TO COLLATERAL
Borrower has good and marketable title to all the Collateral, free and
clear of all liens excepting only the security interests created pursuant to
this Agreement or permitted pursuant to the Credit Agreement.
NO IMPAIRMENT OF COLLATERAL
None of the Collateral shall be impaired or jeopardized because of the
security interest herein granted.
OTHER AGREEMENTS
The execution and delivery of this Agreement, the consummation of the
transactions provided for herein, and the fulfillment of the terms hereof will
not result in the breach of any of the terms, conditions, or provisions of, or
constitute a default under, or conflict with, or cause any acceleration of any
obligation under any (a) agreement or other instrument to which Borrower is a
party or by which Borrower is bound or (b) Applicable Law.
NO APPROVALS
No Governmental Approvals of any nature are required in connection with
the security interests herein granted.
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<PAGE> 10
AUTHORITY
Borrower has full power and authority to assign to U. S. Bank and to
grant to U. S. Bank a security interest in the Collateral.
LOCATION OF RECORDS
The address of the office where the books and records of Borrower are
kept concerning the Collateral is set forth on Schedule II.
LOCATION OF COLLATERAL
The locations of all Inventory and Equipment of Borrower are described
on Schedule II.
NAME
Borrower conducts its business only under the names "Gargoyles, Inc."
ACCOUNTS
The amount represented by Borrower to U. S. Bank from time to time as
owing by each Account Debtor or by all Account Debtors in respect of the
Accounts will at such time be the correct amount actually owing by such Account
Debtor or Debtors thereunder. No material amount payable to Borrower under or in
connection with any Account is evidenced by any Instrument or Chattel Paper that
has not been delivered to U. S. Bank.
CHIEF EXECUTIVE OFFICE
Borrower's chief executive office and chief place of business is
located at the address set forth on Schedule II.
PATENTS AND TRADEMARKS
Schedule I hereto includes all Patents and Trademarks owned by Borrower
in its own name as of the date hereof. To the best of Borrower's knowledge, each
such Patent and Trademark is valid, subsisting, unexpired, and enforceable and
has not been abandoned. Except as set forth in Schedule I, none of such Patents
or Trademarks is the subject of any licensing or franchise agreement except as
otherwise disclosed to U. S. Bank in writing prior to the execution of this
Agreement. No holding, decision, or judgment that would limit, cancel, or
question the validity of any such Patent or Trademark has been rendered by any
Governmental Body. No action
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<PAGE> 11
or proceeding is pending that (a) seeks to limit, cancel, or question the
validity of any such Patent or Trademark or (b) would, if adversely determined,
have a material adverse effect on the value of any Patent or Trademark.
VEHICLES
Schedule III is a complete and correct list of all Vehicles owned by
Borrower on the date hereof that constitute Collateral hereunder. Borrower shall
deliver to U. S. Bank the original certificate of title for each Vehicle on the
date hereof. Each certificate of title shall thereafter indicate U. S. Bank's
first priority lien on the Vehicle covered by such certificate. Borrower shall
execute and deliver to U. S. Bank any and all agreements, instruments,
documents, powers of attorney, and papers that U. S. Bank may request to
evidence and perfect U. S. Bank's security interest in any Vehicle. Borrower
hereby constitutes U. S. Bank its attorney-in-fact to execute and file all such
writings for the foregoing purposes, with all acts of such attorney being hereby
ratified and confirmed; and such power, being coupled with an interest, is
irrevocable until all Secured Obligations are paid in full.
U. S. BANK'S RIGHTS WITH RESPECT
TO THE COLLATERAL
NO DUTY ON U. S. BANK'S PART
U. S. Bank shall not be required (except at its option upon the
occurrence and during the continuation of any Event of Default) to realize upon
any Accounts, Instruments, Chattel Paper, or General Intangibles; collect the
principal, interest, or payment due thereon, exercise any rights or options of
Borrower pertaining thereto; make presentment, demand, or protest; give notice
of protest, nonacceptance, or nonpayment; or do any other thing for the
protection, enforcement, or collection of such Collateral. The powers conferred
on U. S. Bank hereunder are solely to protect U. S. Bank's interests in the
Collateral and shall not impose any duty upon U. S. Bank to exercise any such
powers. U. S. Bank shall be accountable only for amounts that U. S. Bank
actually receives as a result of the exercise of such powers; and neither U. S.
Bank nor any of its officers, directors, employees, or agents shall be
responsible to Borrower for any act or failure to act hereunder.
NEGOTIATIONS WITH ACCOUNT DEBTORS
Upon the occurrence and during the continuation of any Event of
Default, U. S. Bank may, in its sole discretion, extend or consent to the
extension of the time of payment or maturity of any Instruments, Accounts,
Chattel Paper, or General Intangibles.
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<PAGE> 12
RIGHT TO ASSIGN
Except as otherwise provided in the Credit Agreement, U. S. Bank may
assign or transfer the whole or any part of the Secured Obligations and may
transfer therewith as collateral security the whole or any part of the
Collateral; and all obligations, rights, powers, and privileges herein provided
shall inure to the benefit of the assignee and shall bind the successors and
assigns of the parties hereto.
DUTIES REGARDING COLLATERAL
Beyond the safe custody thereof, U. S. Bank shall not have any duty as
to any Collateral in its possession or control, or as to any preservation of any
rights of or against other parties.
COLLECTION FROM ACCOUNT DEBTORS
Upon the occurrence and during the continuation of any Event of
Default, Borrower shall, upon demand by U. S. Bank (and without any grace or
cure period), notify all Account Debtors to make payment to U. S. Bank of any
amounts due or to become due. Borrower authorizes U. S. Bank to contact the
Account Debtors for the purpose of having all or any of them pay their
obligations directly to U. S. Bank. Upon demand by U. S. Bank, Borrower shall
enforce collection of any indebtedness owed to it by Account Debtors.
INSPECTION
U. S. Bank and its designees, from time to time at reasonable times and
intervals, may inspect the Equipment and Inventory and inspect, audit, and make
copies of and extracts from all records and all other papers in the possession
of Borrower.
ASSIGNEE DEPOSIT ACCOUNT
Upon demand by U. S. Bank, Borrower will transmit and deliver to U. S.
Bank, in the form received, immediately after receipt, all cash, checks, drafts,
Chattel Paper, Instruments, or other writings for the payment of money (properly
endorsed, where required, so that the items may be collected by U. S. Bank) that
may be received by Borrower at any time. All items or amounts that are delivered
by Borrower to U. S. Bank, or collected by U. S. Bank from the Account Debtors,
shall be deposited to the credit of a Deposit Account ("Assignee Deposit
Account") of Borrower with U. S. Bank, as security for the payment of the
Secured Obligations. Borrower shall have no right to withdraw any funds
deposited in the Assignee Deposit Account.
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<PAGE> 13
U. S. Bank may, from time to time in its discretion, and shall, upon the request
of Borrower made not more than twice in any week, apply all or any of the
balance, representing collected funds, in the Assignee Deposit Account, to
payment of the Secured Obligations, whether or not then due, in such order of
application, not inconsistent with the terms of the Credit Agreement and this
Agreement, as U. S. Bank may determine; and U. S. Bank may, from time to time in
its discretion, release all or any of such balance to Borrower.
U. S. BANK'S RIGHTS AND REMEDIES
GENERAL
Upon the occurrence of any Event of Default, U. S. Bank may exercise
its rights and remedies in the Credit Agreement and in any other Loan Documents
and any other rights and remedies at law and in equity, simultaneously or
consecutively, all of which rights and remedies shall be cumulative. The choice
of one or more rights or remedies shall not be construed as a waiver or election
barring other rights and remedies. Borrower hereby acknowledges and agrees that
U. S. Bank is not required to exercise all rights and remedies available to it
equally with respect to all the Collateral and that U. S. Bank may select less
than all the Collateral with respect to which the rights and remedies as
determined by U. S. Bank may be exercised.
NOTICE OF SALE; DUTY TO ASSEMBLE COLLATERAL
In addition to or in conjunction with the rights and remedies referred
to in Section 6.1 hereof:
Written notice mailed to Borrower at the address designated herein ten
days or more prior to the date of public or private sale of any of the
Collateral shall constitute reasonable notice.
If U. S. Bank requests, Borrower will assemble the Collateral and make
it available to U. S. Bank at places that U. S. Bank shall reasonably select,
whether on Borrower's premises or elsewhere.
GENERAL PROVISIONS
ENTIRE AGREEMENT
This Agreement, together with the Credit Agreement and the other Loan
Documents, sets forth all the promises, covenants, agreements, conditions, and
understandings between the parties hereto with respect to the subject matter
hereof, and supersedes all prior and contemporaneous agreements and
understandings,
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<PAGE> 14
inducements, or conditions, express or implied, oral or written, with respect
thereto, except as contained or referred to herein. This Agreement may not be
amended, waived, discharged, or terminated orally, but only by an instrument in
writing signed by the party against whom enforcement of such amendment, waiver,
discharge, or termination is sought.
INVALIDITY
If any provision of this Agreement shall for any reason be held to be
invalid or unenforceable, such invalidity or unenforceability shall not affect
any other provision hereunder, but this Agreement shall be construed as if such
invalid or unenforceable provision had never been contained herein.
NONWAIVER AND NONEXCLUSIVE RIGHTS AND REMEDIES
No right or remedy herein conferred upon or reserved to U. S. Bank is
intended to be to the exclusion of any other right or remedy, but each and every
such right or remedy shall be cumulative and shall be in addition to every other
right or remedy given hereunder and now or hereafter existing at law or in
equity.
No delay or omission by U. S. Bank in exercising any right or remedy
accruing upon an Event of Default shall impair any such right or remedy, or
shall be construed to be a waiver of any such Event of Default, or an
acquiescence therein, nor shall it affect any subsequent Event of Default of the
same or of a different nature.
TERMINATION OF SECURITY INTEREST
When all the Secured Obligations have been paid in full, the security
interest provided herein shall terminate and U. S. Bank shall return to Borrower
all Collateral then held by U. S. Bank, if any, and upon written request of
Borrower, shall execute, in form for filing, termination statements of the
security interests herein granted. Thereafter, no party hereto shall have any
further rights or obligations hereunder.
SUCCESSORS AND ASSIGNS
All rights of U. S. Bank hereunder shall inure to the benefit of its
successors and assigns, and all obligations of Borrower shall be binding upon
its successors and assigns.
U. S. BANK'S APPOINTMENT AS ATTORNEY-IN-FACT
Borrower hereby irrevocably constitutes and appoints U. S. Bank and any
officer or agent thereof, with full power of substitution, as its true and
lawful
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attorney-in-fact with full irrevocable power and authority in the place and
stead of Borrower and in the name of Borrower or in its own name, from time to
time in U. S. Bank's discretion, for the purpose of carrying out the terms of
this Agreement, to take any and all appropriate action, and to execute any and
all documents and instruments that may be necessary or desirable to accomplish
the purposes of this Agreement; and without limiting the generality of the
foregoing, Borrower hereby gives U. S. Bank the power and right, on behalf of
Borrower, without consent by or notice to Borrower, to do the following:
to transfer to U. S. Bank or to any other person all or any of said
Collateral, to endorse any Instruments pledged to U. S. Bank, and to fill in
blanks in any transfers of Collateral, powers of attorney, or other documents
delivered to U. S. Bank;
to pay or discharge taxes and liens levied or placed on or threatened
against the Collateral, to effect any repairs or any insurance called for by the
terms of this Agreement, and to pay all or any part of the premiums therefor and
the costs thereof;
upon the occurrence and during the continuation of any Event of Default
(A) to take possession of, endorse, and collect any checks, drafts, notes,
acceptances, or other instruments for the payment of moneys due under any
Account, Instrument, or General Intangible or with respect to any other
Collateral and (B) to file any claim or to take any other action or proceeding
in any court of law or equity or otherwise deemed appropriate by U.S. Bank for
the purpose of collecting all such moneys due under any Account, Instrument, or
General Intangible or with respect to any other Collateral whenever payable; and
upon the occurrence and during the continuation of any Event of Default
(A) to direct any party liable for any payment under any of the Collateral to
make payment of all moneys due or to become due thereunder directly to U. S.
Bank or as U. S. Bank shall direct; (B) to ask for, demand, collect, and receive
payment of and receipt for, any and all moneys, claims and other amounts due or
to become due at any time in respect of or arising out of any Collateral; (C) to
sign and endorse any invoices, freight or express bills, bills of lading,
storage or warehouse receipts, drafts against debtors, assignments,
verifications, notices, and other documents in connection with any of the
Collateral; (D) to commence and prosecute any suits, actions, or proceedings at
law or in equity in any court of competent jurisdiction to collect the
Collateral or any thereof and to enforce any other right in respect of any
Collateral; (E) to defend any suit, action, or proceeding brought against
Borrower with respect to any Collateral; (F) to settle, compromise, or adjust
any suit, action, or proceeding described in clause (E) above and, in connection
therewith, to give such discharge or releases as U. S. Bank may deem
appropriate; (G) to assign any Patent and Trademark (along with the goodwill of
the business to which any such Patent and Trademark
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pertains) throughout the world for such terms or terms, on such conditions, and
in such manner as U. S. Bank shall in its sole discretion determine; and (H)
generally, to sell, transfer, pledge, and make any agreement with respect to or
otherwise deal with any of the Collateral as fully and completely as though U.
S. Bank were the absolute owner thereof for all purposes; and to do, at U. S.
Bank's option and Borrower's expense, at any time or from time to time, all acts
and things that U. S. Bank deems necessary to protect, preserve or realize upon
the Collateral and U. S. Bank's liens thereon and to effect the intent of this
Agreement, all as fully and effectively as Borrower might do.
Borrower hereby ratifies all that said attorneys shall lawfully do or
cause to be done by virtue hereof. This power of attorney is a power coupled
with an interest and shall be irrevocable.
Borrower also authorizes U. S. Bank, at any time and from time to time,
to execute, in connection with the sale provided for in Article VI hereof, any
endorsements, assignments, or other instruments of conveyance or transfer with
respect to the Collateral.
The powers conferred on U. S. Bank hereunder are solely to protect U.
S. Bank's interests in the Collateral and shall not impose any duty upon U. S.
Bank to exercise any such powers. U. S. Bank shall be accountable only for
amounts that it actually receives as a result of the exercise of such powers,
and neither it nor any of its officers, directors, employees, or agents shall be
responsible to Borrower for any act or failure to act hereunder.
PERFORMANCE BY U. S. BANK OF BORROWER'S OBLIGATIONS
If Borrower fails to perform or comply with any of its agreements
contained herein and U. S. Bank, as provided for by the terms of this Agreement,
shall itself perform or comply, or otherwise cause performance or compliance,
with such agreement, the expense of U. S. Bank incurred in connection with such
performance or compliance, together with interest thereon at the rate provided
for in the Credit Agreement upon the occurrence of an Event of Default, shall be
payable by Borrower to U. S. Bank on demand and shall constitute Secured
Obligations.
GOVERNING LAW
This Agreement and the rights and obligations of the parties hereunder
shall be construed and enforced in accordance with and shall be governed by the
laws of the state of Washington, without regard to the choice of law rules
thereof.
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NOTICES
All notices, requests, consents, demands, approvals, and other
communications hereunder shall be deemed to have been duly given, made, or
served if in writing and when delivered personally, or sent via facsimile, or
mailed by first class mail, postage prepaid, to the respective parties to this
Agreement as follows:
If to U. S. Bank:
U. S. Bank of Washington,
National Association
1420 Fifth Avenue
Seattle, Washington 98101
Attn: Gerald L. Sorensen
Facsimile number (206) 344-2887
If to Borrower:
Gargoyles, Inc.
5866 S. 194th Street
Kent, Washington 98032
Attn: Steven R. Kingma
Facsimile number (206) 872-3267
The designation of the person to be so notified or the address of such
person for the purposes of such notice may be changed from time to time by
similar notice in writing, except that any communication with respect to a
change of address shall be deemed to be given or made when received by the party
to whom such communication was sent.
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COUNTERPARTS
This Agreement may be executed in one or more counterparts, each of
which shall constitute an original Agreement, but all of which together shall
constitute one and the same instrument.
IN WITNESS WHEREOF, Borrower and U. S. Bank have caused these presents
to be duly executed by their respective duly authorized signatories as of the
day and year first above written.
GARGOYLES, INC.,
a Washington corporation
By /s/ Steven R. Kingma
---------------------------------------------
Title Chief Financial Officer and Treasurer
------------------------------------------
ACCEPTED BY: U. S. BANK OF WASHINGTON,
NATIONAL ASSOCIATION
By /s/ Gerald L. Sorensen
---------------------------------------------
Title Senior Vice President
-----------------------------------------
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EXHIBIT 10.11
LIMITED GUARANTY
This limited guaranty is made as of the 22nd day of March, 1995, by
TRILLIUM CORPORATION ("Guarantor"), to and for the benefit of U. S. BANK OF
WASHINGTON, NATIONAL ASSOCIATION, and its successors, participants, and assigns
("U. S. Bank").
R E C I T A L S :
GARGOYLES, INC., a Washington corporation ("Borrower") and U. S. Bank
have entered into that certain credit agreement (collectively referred to,
together with all supplements, exhibits and amendments, as the "Credit
Agreement") whereby U. S. Bank has agreed to make such loans and advances of
credit to Borrower as set forth therein (herein collectively referred to as the
"Loans"). Terms defined in the Credit Agreement are used herein with the same
meanings, unless otherwise defined.
Guarantor acknowledges that Guarantor has had an opportunity to review
the Credit Agreement and the other Loan Documents and is fully familiar with the
terms of the Loans. Guarantor is financially interested in Borrower and will
receive certain benefits as a result of Guarantor's promise. Guarantor
acknowledges that this Guaranty is a condition to U. S. Bank's consent to make
the Loans to Borrower. Guarantor agrees that this Guaranty is made for the
benefit of Guarantor.
NOW, THEREFORE, in order to induce U. S. Bank to consent to making the
Loans to Borrower on the terms and conditions of the Credit Agreement, Guarantor
agrees as follows:
UNCONDITIONAL GUARANTY
Except as provided in Article II herein, Guarantor jointly, severally,
unconditionally, absolutely, and irrevocably guarantees the due and punctual
payment of the principal and interest on the Term Loan and the Term Note and all
money due or that may become due thereunder, whether (a) according to the
present terms thereof or at any earlier or accelerated date or dates as provided
therein, (b) pursuant to any extension of time, or (c) pursuant to any
amendment, modification, or replacement thereof (collectively, "Obligations").
<PAGE> 2
LIMITATION AND TERMINATION OF GUARANTY
NOTICE
Notwithstanding any provisions of this Guaranty to the contrary, the
following conditions precedent shall exist prior to the enforcement by U. S.
Bank of any of its rights under this Guaranty:
There shall have occurred an Event of Default, and U. S. Bank shall
have given Borrower and Guarantor written notice of acceleration of the Term
Loan (the "Notice of Acceleration").
There shall exist an Event of Default 60 days after the date of the
Notice of Acceleration, which date (60 days after the date of the Notice of
Acceleration) shall hereinafter be referred to as the "Guaranty Obligation
Date."
LIMITATION
Notwithstanding the provisions of Article I herein, Guarantor's
liability under this Guaranty is limited to an amount equal to:
The outstanding balance of the Term Loan on the Guaranty Obligation
Date, less an amount equal to Borrower's Tangible Net Worth on the Guaranty
Obligation Date; provided that in the event that Borrower's Tangible Net Worth
on the Guaranty Obligation Date is less than $-0-, for purposes of the
calculation set in this Section 2.1(a), Borrower's Tangible Net Worth shall be
deemed to be $-0-; plus
Accrued interest on the amount of principal guaranteed pursuant to
Section 2.1(a); plus
An amount equal to all costs incurred (including reasonable attorney
fees) by U. S. Bank in connection with the enforcement by U. S. Bank of this
Guaranty, as provided for in Section 14.7 herein.
APPLICATION OF PAYMENTS
Guarantor acknowledges and agrees that during the continuance of any
Event of Default, U. S. Bank may apply any payments received from Borrower and
any amounts received from U. S. Bank's realization on the Collateral to any
outstanding Indebtedness of Borrower to U. S. Bank in the order of priority
determined in U. S. Bank's sole discretion, and that U. S. Bank shall not be
obligated to such monies received first to the Term Loan.
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TERMINATION
This Guaranty shall terminate and all collateral provided to U. S. Bank
by Guarantor to secure this Guaranty shall be released and returned to Guarantor
if and when Borrower's Tangible Net Worth less the outstanding principal balance
of the Term Loan is equal to or greater than $-0- as of the end of any fiscal
year of Borrower subsequent to the date of this Guaranty; provided that (i) at
the time of termination, there exists no Event of Default, and (ii) U. S. Bank
shall have received audited financial statements of Borrower confirming that as
of the end of Borrower's fiscal year, Borrower's Tangible Net Worth less the
outstanding balance of the Term Loan is equal to or greater than $-0-.
WAIVERS BY GUARANTOR
AND RIGHTS OF U. S. BANK
Guarantor intends that it shall remain unconditionally liable for
payment of all the Obligations regardless of any act or omission which might
otherwise operate as a legal or equitable defense to discharge Borrower,
Guarantor, or any other guarantor in whole or part. Therefore, Guarantor hereby
waives any defense Guarantor may have to the enforceability of its obligations
hereunder by virtue of any of the following and U. S. Bank may do any of the
following things as many times as U. S. Bank wishes, without Guarantor's
permission and without notifying Guarantor, and this will not affect Guarantor's
promise to pay U. S. Bank the amount of the Obligations:
U. S. Bank does not have to notify Guarantor of U. S. Bank's acceptance
of this Guaranty;
U. S. Bank does not have to notify Guarantor when U. S. Bank makes
Fundings under the Credit Agreement, extends credit to Borrower, or pays the
obligations of Borrower;
Except as provided in Section 2.1 herein, U. S. Bank does not have to
notify Guarantor of (i) Borrower's failure to pay Borrower's obligations when
due or (ii) Borrower's failure to perform any other obligation under the Loan
Documents;
U. S. Bank may extend, renew, accelerate, or otherwise change the time
for payment of any of Borrower's obligations to U. S. Bank;
U. S. Bank may make any other changes in the Loan Documents pursuant to
the terms of the Loan Documents;
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<PAGE> 4
U. S. Bank may release Borrower, any other guarantor, or anyone else
against whom U. S. Bank may have the right to collect amounts that may become
due under the Loan Documents;
U. S. Bank may apply Collateral and direct the order or manner of sale
thereof as U. S. Bank in its discretion may determine;
U. S. Bank may apply any money or Collateral received from or on behalf
of the Borrower to the repayment of any Indebtedness due to U. S. Bank in any
order U. S. Bank determines;
U. S. Bank may release, surrender, substitute, take additional, or
exchange, any Collateral U. S. Bank now holds or may later acquire as security
for Borrower's Indebtedness to U. S. Bank or Guarantor's obligations hereunder;
U. S. Bank may forbear from pursuing Borrower or from foreclosing or
otherwise realizing upon any security interest, letter of credit, or other
guaranty;
U. S. Bank may impair any Collateral or Guarantor's obligations
hereunder by its acts or omissions, including but not limited to failing to
perfect a security interest in any Collateral;
Except as otherwise provided herein and unless otherwise agreed to by
U. S. Bank in writing, Guarantor hereby waives any defense arising out of the
absence, impairment, or loss of (i) any or all rights of recourse,
reimbursement, contribution, or subrogation or (ii) any other right or remedy of
Guarantor against Borrower or any other party or Collateral to collect amounts
that Guarantor is obligated to pay under this Guaranty;
Guarantor waives diligence, demand for performance, notice of
nonperformance, presentment, protest, notice of dishonor, and indulgences and
notices of every other kind;
Guarantor agrees that U. S. Bank may in its sole discretion proceed
against all or any portion of the Collateral by way of either judicial or
nonjudicial foreclosure.
Guarantor understands that a nonjudicial foreclosure of any deed of
trust securing the indebtedness of Borrower to U. S. Bank could impair or
eliminate any subrogation, reimbursement, or contribution rights Guarantor may
have against the grantor of the deed of trust; nevertheless, Guarantor waives
and relinquishes any defense based upon the loss of such rights or any other
defense that may otherwise arise out of RCW 61.24.100 or any other applicable
anti-deficiency statute of another state. Guarantor understands and agrees that
U. S. Bank may in its discretion
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<PAGE> 5
nonjudicially foreclose one or more deeds of trust granted to it by Borrower,
then collect from Guarantor a sum equal to the difference between the total
amount of the Obligations and the amount of the successful bid at each trustee
sale.
U. S. BANK'S RIGHT NOT TO PROCEED
AGAINST BORROWER, OTHER GUARANTORS OR
COLLATERAL
Provided that the conditions of Section 2.1 herein are satisfied, if an
Event of Default occurs under the Credit Agreement, U. S. Bank may enforce this
guaranty against Guarantor (a) without attempting to collect or without
exhausting U. S. Bank's efforts to collect from Borrower, any other guarantor,
or anyone else who is liable for the Obligations or (b) without attempting to
enforce U. S. Bank's rights in any Collateral. Without limiting the foregoing,
U. S. Bank may sue on any Note or Notes or may take any other action authorized
under the Loan Documents or by law. In each case, U. S. Bank shall have the
right to exercise its remedies in whatever order it elects and may join
Guarantor in any suit on the Loan Documents or can proceed against Guarantor in
a separate proceeding. In case of suit, sale, or foreclosure, only the net
proceeds therefrom, after deducting all charges and expenses of any kind and
nature whatsoever, shall be applied to the reduction of the amount due on the
Loan Documents, and U. S. Bank shall not be required to institute or prosecute
proceedings to recover any deficiency as a condition of payment under or
enforcement of this Guaranty. At any sale of the Collateral, U. S. Bank may at
its discretion purchase all or any part of the Collateral and may apply against
the amount bid therefor all or any portion of the balance due it pursuant to the
terms of any Note; provided, however, that the proceeds from the sale of stock
pledged to U. S. Bank by Guarantor shall only be applied to the Obligations
hereunder. Guarantor hereby waives the right to object to the amount that may be
bid by U. S. Bank at such foreclosure sale.
BANKRUPTCY AND ASSIGNMENT OF RIGHTS
Guarantor agrees that its obligation to make payment under the terms of
this Guaranty shall not be impaired, modified, changed, released, or limited in
any manner by any impairment, modification, change, release, defense, or
limitation of the liability of Borrower or of a receiver, trustee,
debtor-in-possession, or estate under any bankruptcy or receivership proceeding.
If any payment made by Borrower is reclaimed in a bankruptcy or receivership
proceeding, Guarantor shall pay to U. S. Bank the dollar amount of the amount
reclaimed. Guarantor further assigns to U. S. Bank all rights Guarantor may have
in any proceeding under the U. S. Bankruptcy Code or any receivership or
insolvency proceeding until all of the Obligations have been paid in full. This
assignment includes all rights of Guarantor to
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<PAGE> 6
be paid by Borrower even if those rights have nothing to do with this Guaranty.
This assignment does not prevent U. S. Bank from enforcing Guarantor's
obligations under this Guaranty in any way.
GUARANTOR'S DUTY TO KEEP INFORMED OF
BORROWER'S AND THE OTHER GUARANTOR'S FINANCIAL
CONDITION
Guarantor is now adequately informed of Borrower's financial condition,
and Guarantor agrees to keep so informed. U. S. Bank need not provide Guarantor
with any present or future information concerning the financial condition of
Borrower or any other guarantor, and changes in Borrower's or Guarantor's
financial condition shall not affect Guarantor's obligations under this
Guaranty. Guarantor has not relied on financial information furnished by U. S.
Bank, nor will Guarantor do so in the future.
REPRESENTATIONS AND WARRANTIES OF GUARANTOR
Guarantor represents and warrants to U. S. Bank as follows:
The execution, delivery, and performance by Guarantor of this Guaranty
do not and will not (i) conflict with or contravene any law, rule, regulation,
judgment, order, or decree of any government, governmental instrumentality, or
court having jurisdiction over Guarantor or Guarantor's activities or
properties, (ii) conflict with, or result in any default under, any agreement or
instrument of any kind to which Guarantor is a party or by which Guarantor or
any of Guarantor's properties may be bound or affected, or (iii) require the
consent, approval, order, or authorization of, or registration with, or the
giving of notice to any United States or other governmental authority or any
person or entity not a party to the Loan Documents. By acceptance of this
Guaranty, U. S. Bank agrees that the execution and delivery of this Guaranty
does not constitute a violation of any credit agreement or other loan document
evidencing a credit relationship between U. S. Bank and Guarantor.
This Guaranty constitutes a legal, valid, and binding obligation of
Guarantor, enforceable against Guarantor in accordance with its terms;
There is no action, litigation, or other proceeding pending or to
Guarantor's knowledge threatened against Guarantor before any court, arbitrator,
or administrative agency that may have a material adverse effect on the assets
or the business or financial condition of Guarantor or that would prevent,
hinder, or jeopardize the performance by Guarantor of Guarantor's obligations
under this Guaranty;
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<PAGE> 7
Guarantor is fully familiar with all the covenants, terms, and
conditions of the Loan Documents; and
Guarantor is not party to any contract, agreement, indenture, or
instrument or subject to any restriction individually or in the aggregate that
would have a material adverse affect on Guarantor's financial condition or
business or that would in any way jeopardize the ability of Guarantor to perform
under this Guaranty.
SUBORDINATION OF INDEBTEDNESS OF BORROWER TO GUARANTOR
Any Indebtedness of Borrower now or hereafter held by Guarantor
(including, without limitation, any guaranty fees) is hereby subordinated to the
Indebtedness of Borrower to U. S. Bank, and during the continuance of any Event
of Default, such Indebtedness of Borrower to Guarantor, if U. S. Bank so
requests, shall be collected, enforced, and received by Guarantor as trustee for
U. S. Bank and be paid over to U. S. Bank on account of the Obligations, but
without reducing or affecting in any manner the liability of Guarantor under the
other provisions of this Guaranty.
WAIVER OF RIGHT OF SUBROGATION
Until all Indebtedness of Borrower to U. S. Bank is paid in full or as
otherwise agreed to by U. S. Bank in writing, Guarantor agrees that Guarantor
shall not have, and hereby expressly waives, any claim, right, or remedy that
Guarantor may now have or hereafter acquire against Borrower including, without
limitation, any claim, remedy, or right of subrogation, reimbursement,
exoneration, indemnification, or participation in any claim, right, or remedy
that U. S. Bank has or may hereafter have against Borrower or any Collateral
that U. S. Bank now has or hereafter acquires, whether or not such claim, right,
or remedy arises in equity, under contract, by statute, under common law, or
otherwise. Guarantor hereby acknowledges and agrees that this waiver is intended
to benefit Borrower and U. S. Bank and shall not limit or otherwise affect
Guarantor's liability under this Guaranty.
PAYMENT OF OBLIGATIONS; EFFECT OF BANKRUPTCY
This Guaranty shall terminate as provided in Section 2.4 herein or, if
earlier, upon payment in full of the Obligations; but this Guaranty shall be
automatically reinstated if any payment made on the Term Note is reclaimed in a
bankruptcy or receivership proceeding, until Guarantor pays U. S. Bank the
amount reclaimed or the amount is otherwise paid to U. S. Bank and is not
subject to further reclamation.
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EVENTS OF DEFAULT; REMEDIES
EVENTS OF DEFAULT
"Event of Default," whenever used herein, means any one of the
following events (whatever the reason for the Event of Default, whether it shall
relate to one or more of the parties hereto, and whether it shall be voluntary
or involuntary or be pursuant to or effected by operation of Applicable Law):
If there shall occur an Event of Default under the Credit Agreement; or
If Guarantor fails to observe or perform any term, covenant, or
agreement to be performed or observed pursuant to this Guaranty.
REMEDIES
Upon the occurrence of any Event of Default hereunder, the Obligations
shall then or at any time thereafter, at the option of U. S. Bank become
immediately due and payable without notice or demand, and U. S. Bank shall have
an immediate right to pursue the remedies provided herein.
If an Event of Default occurs hereunder, U. S. Bank shall have all
remedies provided by law. Guarantor hereby waives any notice of the occurrence
of any Event of Default hereunder.
FINANCIAL STATEMENTS
REPRESENTATION AND WARRANTY
Guarantor represents and warrants to U. S. Bank that the financial
statements of Guarantor and all schedules and notes included in such financial
statements that have been delivered to U. S. Bank are true and correct in all
material respects, and present fairly the financial position of Guarantor as of
the dates of such statements.
FINANCIAL DATA
Guarantor agrees that so long as this Guaranty is in effect, Guarantor
shall furnish to U. S. Bank:
As soon as practicable and in any event within 150 days after the close
of each fiscal year of Guarantor, the following financial statements of
Guarantor, setting forth the corresponding figures for the previous fiscal year
in comparative form where appropriate, all in reasonable detail and audited
(without any qualification or
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exception deemed material by U. S. Bank) by Guarantor's current independent
certified public accountant or such other independent certified public
accountant selected by Borrower and satisfactory to U. S. Bank: balance sheet,
statement of income, and statement of cash flows; and
As soon as practicable and in any event within 30 days after the close
of each fiscal quarter of Guarantor, in-house financial statements of Guarantor
for each such quarter, all in reasonable detail and certified by Guarantor to be
true and correct.
CAPITAL CONTRIBUTION
OBLIGATION
Borrower and Guarantor have informed U. S. Bank that Borrower expects
to receive approximately $730,000 in cash between the date hereof and April 30,
1995, in connection with the settlement of litigation involving the licensing of
Borrower's products (the "Settlement Payment"). Such payment may be made in the
form of repayment of debt owed to Borrower by Pro-Tec, Inc. after Pro-Tec, Inc.
receives the Settlement Payment, provided that such payment is made on or before
April 30, 1995. In the event that Borrower does not receive the Settlement
Payment on or before April 30, 1995, then Guarantor shall contribute to
Borrower's capital or loan to Borrower on a subordinated basis (pursuant to a
subordination agreement in form acceptable to U. S. Bank) $730,000 in cash on or
before April 30, 1995. The obligation of Guarantor set forth in this Article
XIII is in addition to all other obligations of Guarantor set forth in this
Guaranty. Guarantor's obligations under this Section 13.1 may be satisfied by
Borrower issuing additional shares of stock at no less than 90 percent of the
per share price paid by Guarantor to acquire Borrower's stock.
REPAYMENT
In the event Borrower receives the Settlement Payment after Guarantor
satisfies its obligation under Section 13.1 herein, Borrower may return the
capital contribution (whether or not for additional shares issued pursuant to
Section 13.1 herein) or repay the subordinated debt referred to in Section 13.1
herein, provided that there exists no Event of Default at the time of the return
or repayment and that the return or repayment does not result in the existence
of an Event of Default.
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GENERAL PROVISIONS
BENEFITS OF AGREEMENT
Guarantor agrees that (a) this Guaranty shall inure to the benefit of
and may be enforced by U. S. Bank and any subsequent holder of any of the Note
and related Loan Documents and (b) this Guaranty shall be binding upon and
enforceable against Guarantor and its successors and assigns.
NO ASSIGNMENT
Guarantor agrees that no assignment of Guarantor's obligations under
this Guaranty may be made to any Person without the prior written consent of U.
S. Bank.
RULES OF CONSTRUCTION
Unless some other meaning and intent is apparent from the context, the
plural shall include the singular and vice versa, and masculine, feminine, and
neuter words shall be used interchangeably.
GOVERNING LAW
This Guaranty shall be construed according to the laws of the state of
Washington, without giving effect to its principles of conflicts of law.
ENTIRE AGREEMENT; MERGER
This Agreement constitutes the entire understanding between U. S. Bank
and Guarantor with respect to the subject matter hereof; no course of prior
dealing between the parties, no usage of trade, and no parole or extrinsic
evidence of any nature shall be used to supplement or modify any terms; and
there are no conditions to the full effectiveness of this Guaranty. All prior,
and contemporaneous negotiations, understandings, and agreements between
Guarantor and U. S. Bank with respect to the subject matter hereof are merged in
this Guaranty.
INVALID PROVISIONS
If any provision of this Guaranty is invalid, illegal, or
unenforceable, such provision shall be considered severed from the rest of this
Guaranty and the remaining provisions shall continue in full force and effect as
if the invalid provision had not been included. This Guaranty may be changed,
modified, or supplemented only through a writing signed by Guarantor and U. S.
Bank.
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ATTORNEY FEES AND COLLECTION EXPENSES
If there shall occur any Default or Event of Default, U. S. Bank shall
be entitled to recover from Guarantor, upon demand, any costs and expenses
incurred in connection with the preservation of rights under, and enforcement
of, this Guaranty whether or not any lawsuit or arbitration proceeding is
commenced, in all such cases including, without limitation, reasonable attorney
fees and costs (including the allocated fees of internal counsel). Costs and
expenses as referred to above shall include, without limitation, a reasonable
hourly rate for collection personnel, whether employed in-house or otherwise,
overhead costs as reasonably allocated to the collection effort, and all other
expenses actually incurred. Reasonable attorney fees and costs shall include,
without limitation, attorney fees and costs incurred in connection with any
bankruptcy case or other insolvency proceeding commenced by or against Borrower
or any Person granting a security interest in any item of Collateral, including
all fees incurred in connection with (a) moving for relief from the automatic
stay, to convert or dismiss the case or proceeding, or to appoint a trustee or
examiner or (b) proposing or opposing confirmation of a plan of reorganization
or liquidation, in any case without regard to the identity of the prevailing
party.
CONSENT TO JURISDICTION AND VENUE
Guarantor hereby (a) irrevocably submits to the jurisdiction of any
state or federal court sitting in Seattle, King County, Washington, in any
action or proceeding brought to enforce, or otherwise arising out of or relating
to, this Guaranty; (b) irrevocably waives to the fullest extent permitted by law
any objection that Guarantor may now or hereafter have to the laying of venue in
any such action or proceeding in any such forum; and (c) further irrevocably
waives any claim that any such forum is an inconvenient forum. Guarantor agrees
that a final judgment in any such action or proceeding shall be conclusive and
may be enforced in any other jurisdiction by suit on the judgment or in any
other manner provided by law. Nothing herein shall impair the right of U. S.
Bank to bring any action or proceeding against Guarantor in any court of any
other jurisdiction.
ARBITRATION
Either Guarantor or U. S. Bank may require that all disputes, claims,
counterclaims, and defenses, including those based on or arising from any
alleged tort ("Claims") relating in any way to this Guaranty, the Loan, or the
Credit Agreement be settled by binding arbitration in accordance with the
Commercial Arbitration Rules of the American Arbitration Association and Title 9
of the U. S. Code. All Claims will be subject to the statutes of limitations
that would be applicable if the claims were litigated. This provision is void if
the Loan, at the time of the proposed submission to
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arbitration, is secured by real property located outside of Oregon or
Washington, or if the effect of the arbitration procedure (as opposed to any
Claims of Guarantor) would be to materially impair U. S. Bank's ability to
realize on any Collateral pursuant to an arbitration ruling favorable to U. S.
Bank.
If arbitration occurs and each party's Claim is less than $100,000, one
neutral arbitrator will decide all issues. If any party's Claim is more than
$100,000, three neutral arbitrators will decide all issues. All arbitrators will
be active Washington State Bar members in good standing. All arbitration
hearings will be held in Seattle, Washington. In addition to all other powers,
the arbitrator or arbitrators shall have the exclusive right to determine all
issues of arbitrability and shall have the authority to issue subpoenas.
Judgment on any arbitration award may be entered in any court with jurisdiction.
If either party institutes any judicial proceeding relating to this
Guaranty, the Loan, or the Credit Agreement, such action shall not be a waiver
of the right to submit any Claim to arbitration. In addition, whether or not the
parties arbitrate any Claim, each has the right before, during, and after any
arbitration to exercise any number of the following remedies, in any order or
concurrently: (i) setoff, (ii) self-help repossession, (iii) judicial or
nonjudicial foreclosure against real or personal collateral, (iv) provisional
remedies including injunction, appointment of receiver, attachment, claim and
delivery, and replevin.
This arbitration clause can only be modified or waived by either party
in writing, which writing must refer to this arbitration clause and be signed by
Guarantor and U. S. Bank.
COUNTERPARTS
This Guaranty can be executed in counterpart originals. This Guaranty
shall be binding on each person who signs a counterpart of this Guaranty even if
everyone listed in the Guaranty does not agree to the Guaranty.
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THE UNDERSIGNED CLEARLY UNDERSTANDS THAT U. S. BANK DOES NOT HAVE TO
PURSUE BORROWER OR PURSUE ANY OTHER REMEDIES BEFORE DEMANDING PAYMENT FROM
GUARANTOR. GUARANTOR FURTHER UNDERSTANDS THAT IT WILL HAVE TO PAY AMOUNTS THEN
DUE EVEN IF BORROWER OR ANY OF THE OTHER GUARANTORS DO NOT MAKE THE PAYMENTS OR
ARE OTHERWISE RELIEVED OF THE OBLIGATION TO MAKE PAYMENTS.
TRILLIUM CORPORATION,
a Washington corporation
By /s/ Timothy C. Potts
-------------------------------
Title Sr. Vice President
-----------------------------
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EXHIBIT 10.12
THIRD PARTY PLEDGE AGREEMENT
THIS AGREEMENT is made and entered into this 22nd day of March, 1995,
by TRILLIUM CORPORATION ("Pledgor") for the benefit of U. S. BANK OF WASHINGTON,
NATIONAL ASSOCIATION, a national banking association ("U. S. Bank").
RECITALS:
Concurrently with the execution of this Agreement, GARGOYLES, INC., a
Washington corporation ("Borrower") and U. S. Bank have entered into that
certain credit agreement (collectively referred to, together with all
supplements, exhibits and amendments thereto, as the "Credit Agreement") whereby
U. S. Bank has agreed to make such loans and advances of credit to Borrower as
set forth therein, including a term loan in the amount of $6,000,000 (the "Term
Loan"). The obligations to repay the Term Loan is evidenced by a promissory note
(the "Term Note") executed and delivered or to be executed and delivered by
Borrower to U.S. Bank.
Pledgor is a shareholder of Borrower, and has executed and delivered a
guaranty of one of the Loans (the "Guaranty").
To induce U. S. Bank to enter into the Credit Agreement and to make the
Term Loan to Borrower, Pledgor desires to assign and pledge to U. S. Bank and to
grant to U. S. Bank a security interest in and to the Pledged Stock (hereafter
defined) to secure the Secured Obligations (hereafter defined).
NOW, THEREFORE, in consideration of the promises and to induce U. S.
Bank to make the loans, Pledgor agrees as follows:
DEFINITIONS, ETC.
TERMS DEFINED
Unless otherwise defined herein, terms defined in the Credit Agreement
shall have such meanings when used herein. For the purposes of this Agreement,
the following terms shall have the following meanings:
"Pledged Stock" means all of the shares of the issued and outstanding
stock of Borrower, together with all certificates, options, rights, dividends
and other distributions issued as an addition to, in substitution or in exchange
for, or on account of, any such shares and all property at any time pledged with
U. S. Bank hereunder (whether described herein or not) and all income therefrom
and proceeds thereof.
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"Secured Obligations" means (a) all of Pledgor's obligations under the
Guaranty, and (b) all liabilities and obligations of Pledgor hereunder.
INCORPORATION OF RECITALS AND EXHIBITS
The foregoing recitals are incorporated into this Agreement by
reference. All references to "Exhibits" contained herein are references to
exhibits attached hereto, the terms of which are made a part hereof for all
purposes.
PLEDGE AND CREATION OF SECURITY INTEREST
PLEDGE AND GRANT OF SECURITY INTEREST
As security for the full, prompt and complete payment and performance
by Borrower of each of the Secured Obligations, Pledgor hereby pledges, assigns,
hypothecates, transfers, and delivers to U. S. Bank the Pledged Stock and grants
to U. S. Bank a security interest under the Uniform Commercial Code of the state
of Washington, as amended, in and to the Pledged Stock.
CASH DIVIDENDS; VOTING RIGHTS
Unless and until an Event of Default shall have occurred, Pledgor shall
be permitted to receive all cash dividends paid in the normal course of business
of Borrower and consistent with past practice in respect of the Pledged Stock
and to exercise all voting, corporate, consensual and other rights with respect
to the Pledged Stock, provided, however, that no vote shall be cast or corporate
right exercised or other action taken which, in U. S. Bank's reasonable
judgment, would impair the Collateral or which would be inconsistent with or
result in any violation of any provision of this Agreement, the Credit Agreement
or the other Loan Documents.
TERMINATION OF PLEDGE
Upon termination of the Guaranty and the satisfaction of Pledgor's
obligations under the Guaranty, this Agreement shall terminate, and U. S. Bank
shall return the Pledged Stock to Pledgor, together with any assignments
separate from certificate executed by Pledgor in connection with this Agreement.
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<PAGE> 3
REPRESENTATIONS AND WARRANTIES
Pledgor hereby represents and warrants that:
NO APPROVALS
No consent, license, permit, approval or authorization of, or filing
with, or notice or report to, or registration, filing or declaration with, any
Person (including, without limitation, any governmental authority or creditors
of Pledgor), is required in connection with the execution, delivery,
performance, validity, or enforceability by or against Pledgor of this
Agreement.
ENFORCEABILITY
This Agreement has been duly executed and delivered by Pledgor and
constitutes a legal, valid, and binding obligation of the Pledgor enforceable
against Pledgor in accordance with its terms.
OTHER AGREEMENTS
The execution, delivery, and performance of this Agreement does not and
will not violate any requirement of law or any contractual obligation applicable
to or binding upon the Pledgor.
LITIGATION
No litigation, arbitration, investigation, or proceeding of or before
any arbitrator or governmental authority is pending or to the best knowledge of
Pledgor, threatened (a) with respect to this Agreement or any of the
transactions contemplated hereby or (b) against or affecting Pledgor, or any of
its property or assets.
RECORD OWNER
Pledgor is the record, legal and beneficial owner of the Pledged Stock
and the shares of Pledged Stock described on Exhibit A constitute all of the
issued and outstanding shares of Borrower. Pledgor has good and marketable title
to the Pledged Stock and will, at its own expense, defend U. S. Bank's right,
title and security interest in and to the Pledged Stock against the claims of
any Person.
NO ENCUMBRANCES
Pledgor represents that all of the shares of the Pledged Stock have
been validly issued, are fully paid and nonassessable, and are owned by the
Pledgor free of any
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<PAGE> 4
pledge, mortgage, hypothecation, lien, charge, encumbrance or security interest
in such shares or the proceeds thereof, except for that granted hereunder. By
acceptance of this Agreement, U. S. Bank acknowledges that 104,166 shares of the
Pledged Stock are subject to a purchase option held by Douglas Hauff.
FIRST PRIORITY LIEN
Upon delivery to U. S. Bank of the stock certificates evidencing the
Pledged Stock, the lien granted pursuant to this Agreement will constitute a
valid, perfected first priority lien on the Pledged Stock, enforceable as such
against all creditors of the Pledgor and any Persons purporting to purchase any
Pledged Stock from Pledgor.
INVESTMENT COMPANY
Pledgor is not an "investment company" or a company "controlled" by an
"invested company" (as each of the quoted terms is defined or used in the
Investment Company Act of 1940, as amended.
CONTINUING REPRESENTATIONS
Pledgor agrees that the foregoing representations and warranties shall
be deemed to have been made by Pledgor on the date of each borrowing by Borrower
under the Credit Agreement on and as of such date as though made hereunder on
and as of such date.
COVENANTS
Pledgor covenants and agrees with U. S. Bank that, from and after the
date of this Agreement until the Secured Obligations are paid in full:
ENDORSEMENT AND DELIVERY
Concurrently with the execution hereof, Pledgor shall deliver physical
possession of the Pledged Stock to U. S. Bank so that U. S. Bank's security
interest may be properly perfected by possession, and shall deliver with each
share certificate of the Pledged Stock an executed assignment separate from
certificate with respect to each share certificate so delivered.
NO OTHER LIENS
Pledgor will not create or permit the existence of any lien or security
interest other than that hereby created on the Pledged Stock without the written
consent of U. S. Bank.
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<PAGE> 5
DUTY WITH RESPECT TO DISTRIBUTIONS
If Pledgor shall, as a result of Pledgor's ownership of the Pledged
Stock, become entitled to receive or shall receive any stock certificate
(including, without limitation, any certificate representing a stock dividend or
a distribution in connection with any reclassification, increase or reduction of
capital or any certificate issued in connection with any reorganization), option
or rights, whether in addition to, in substitution of, as a conversion of, or in
exchange for any shares of the Pledged Stock, or otherwise in respect thereof,
Pledgor shall accept the same as U. S. Bank's agent, hold the same in trust for
U. S. Bank and deliver the same forthwith to U. S. Bank in the exact form
received, duly endorsed by Pledgor to U. S. Bank, if required, together with an
undated assignment from certificate covering such certificate duly executed in
blank and with, if U. S. Bank so requests, signature guaranteed, to be held by
U. S. Bank hereunder as additional collateral security for the Secured
Obligations. Any sums paid upon or in respect of the Pledged Stock upon the
liquidation or dissolution of Borrower shall be paid over to U. S. Bank to be
held by it hereunder as additional collateral security for the Secured
Obligations, and in case any distribution of capital shall be made on or in
respect of the Pledged Stock or any property shall be distributed upon or with
respect to the Pledged Stock pursuant to the recapitalization or
reclassification of the capital of Borrower or pursuant to the reorganization
thereof, the property so distributed shall be delivered to U. S. Bank to be held
by it, subject to the terms hereof, as additional collateral security for the
Secured Obligations. If any sums of money or property so paid or distributed in
respect of the Pledged Stock shall be received by Pledgor, Pledgor shall, until
such money or property is paid or delivered to U. S. Bank, hold such money or
property in trust for U. S. Bank, segregated from other funds of Pledgor, as
additional collateral security for the Secured Obligations.
VOTING RIGHTS
Except as otherwise permitted by Section 13.1 or 13.2 of the Guaranty,
and without the prior written consent of U. S. Bank, Pledgor will not (a) vote
to enable, or take any other action to permit, Borrower to issue any additional
stock or other equity securities of any nature or to issue any other securities
convertible into or granting the right to purchase or exchange for any stock or
other equity securities of Borrower with the exception of (i) stock or
securities issued to Pledgor and delivered to U. S. Bank as Pledged Stock, and
(ii) stock of Borrower (or options for the issuance of stock) in an amount not
to exceed 10 percent of Borrower's aggregated outstanding stock at any time,
issued as incentive compensation to Borrower's management employees, or (b)
sell, assign, transfer, exchange or otherwise dispose of, or grant any option
with respect to, the Pledged Stock, or (c) create, incur or permit to exist any
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<PAGE> 6
lien or option in favor of, or any claim of any Person with respect to, any of
the Pledged Stock, or any interest therein, except for the lien provided for by
this Agreement. Pledgor will defend the right, title and interest of U. S. Bank
in and to the Pledged Stock against the claims and demands of all Persons
whomsoever.
FURTHER ASSURANCES
At any time and from time to time, upon the written request of U. S.
Bank, and at the sole expense of Pledgor, Pledgor will promptly and duly execute
and deliver such further instruments and documents and take such further actions
as U. S. Bank may reasonably request for the purposes of obtaining or preserving
the full benefits of this Agreement and of the rights and powers herein granted.
Subject to Section 2.2 herein, if any amount payable under or in connection with
the Pledged Stock shall be or become evidenced by any promissory note, other
instrument or chattel paper, such note, instrument or chattel paper shall, be
immediately delivered to U. S. Bank duly endorsed in a manner satisfactory to U.
S. Bank to be held as collateral pursuant to this Agreement.
INDEMNIFICATION
Pledgor agrees to pay, and to save U. S. Bank harmless from, any and
all liabilities with respect to, or resulting from any delay in paying, any and
all stamp, excise, sales or other taxes (except for the tax imposed on the
overall net income of U. S. Bank) which may be payable or determined to be
payable with respect to any of the Pledged Stock or in connection with any of
the transactions contemplated by this Agreement.
REGISTRATION RIGHTS
If U. S. Bank shall determine to exercise its right to sell any or all
of the Pledged Stock pursuant to Article V hereof, and if in the opinion of U.
S. Bank it is necessary or advisable to have the Pledged Stock, or that portion
thereof to be sold, registered under the provisions of the Securities Act of
1933, as amended (the "Securities Act"), Pledgor will use its best efforts to
cause Borrower to (a) execute and deliver, and cause the directors and officers
of Borrower to execute and deliver, all such instruments and documents, and do
or cause to be done all such other acts, as may be, in the opinion of U. S.
Bank, necessary or advisable to register the Pledged Stock, or that portion
thereof to be sold, under the provisions of the Securities Act, (b) use its best
efforts to cause the registration statement relating thereto to become effective
and to remain effective for a period of six months from the effective date of
such registration statement, and (c) make all amendments thereto and/or to the
related prospectus which, in the opinion of the U. S. Bank, are necessary or
advisable, all in
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conformity with the requirements of the Securities Act and the rules and
regulations of the Securities and Exchange Commission applicable thereto.
Pledgor agrees to cause Borrower to comply with the provisions of the securities
or "Blue Sky" laws of any and all jurisdictions which U. S. Bank shall designate
and to make available to its security holders, as soon as practicable, an
earnings statement (which need not be audited) which will satisfy the provisions
of section 11(a) of the Securities Act.
PRIVATE SALE
Pledgor recognizes that U. S. Bank may be unable to effect a public
sale of any or all of the Pledged Stock, by reason of certain prohibitions
contained in the Securities Act and applicable state securities laws or
otherwise, and may be compelled to resort to one or more private sales thereof
to a restricted group of purchasers which will be obliged to agree, among other
things, to acquire such securities for their own account for investment and not
with a view to the distribution or resale thereof. Pledgor acknowledges and
agrees that any such private sale may result in prices and other terms less
favorable to U. S. Bank than if such sale were a public sale and,
notwithstanding such circumstances, agrees that any such private sale shall not
be deemed to have been made in a commercially unreasonable manner merely because
it was a private sale. U. S. Bank shall be under no obligation to delay a sale
of any of the Pledged Stock for the period of time necessary to permit Borrower
to register such securities for public sale under the Securities Act, or under
applicable state securities laws, even if Borrower would agree to do so.
SPECIFIC PERFORMANCE
Pledgor further agrees to use its best efforts to do or cause to be
done all such other acts as may be necessary to make any sale or sales of all or
any portion of the Pledged Stock pursuant to Sections 4.7 and 4.8 herein, valid
and binding and in compliance with any and all applicable requirements of law.
Pledgor further agrees that a breach of any of the covenants contained in
Sections 4.7 and 4.8 herein, will cause irreparable injury to U. S. Bank, that
U. S. Bank has no adequate remedy at law in respect of such breach and, as a
consequence, agrees that each and every covenant contained in Sections 4.7 and
4.8 herein, shall be specifically enforceable against Pledgor, and Pledgor
hereby waives and agrees not to assert any defense against an action for
specific performance of such covenants, except for a defense that no default of
the covenants, terms, or conditions of the Credit Agreement has occurred.
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<PAGE> 8
RIGHTS AND REMEDIES
REMEDIES
U. S. Bank may exercise, in addition to all other rights and remedies
granted in this Agreement and in any other instrument or agreement securing,
evidencing or relating to the Secured Obligations, all rights and remedies of a
secured party under the Uniform Commercial Code of the state of Washington.
Without limiting the generality of the foregoing, U. S. Bank without demand of
performance or other demand, presentment, protest, advertisement or notice of
any kind (except any notice required by law or referred to below) to or upon the
Pledgor, Borrower or any other Person (all and each of which demands, defenses,
advertisements and notices are hereby waived to the extent not prohibited by
law), may in such circumstances forthwith collect, receive, appropriate and
realize upon the Pledged Stock, or any part thereof, and/or may forthwith sell,
assign, give option or options to purchase or otherwise dispose of and deliver
the Pledged Stock or any part thereof (or contract to do any of the foregoing),
in one or more parcels at public or private sale or sales, in the
over-the-counter market, at any exchange broker's board or at U. S. Bank's
offices or elsewhere upon such terms and conditions as it may deem advisable and
at such prices as it may deem best, for cash or on credit or for future delivery
without assumption of any credit risk. U. S. Bank shall have the right upon any
such public sale or sales and, to the extent permitted by law, upon any such
private sale or sales to purchase the whole or any part of the Pledged Stock so
sold, free and clear of any right or equity of redemption in Pledgor, which
right or equity is hereby waived or released to the extent not prohibited by
law. U. S. Bank shall apply the net proceeds of any such collection, recovery,
receipt, appropriation, realization or sale, after deducting all reasonable
costs and expenses of every kind incurred therein or incidental to the care or
safekeeping of any of the Pledged Stock or in any way relating to the Pledged
Stock or the rights of U. S. Bank hereunder, including, without limitation,
reasonable attorney fees and disbursements to the payment in whole or in part of
the Secured Obligations in such order as U. S. Bank may elect, and only after
such application and after the payment by U. S. Bank of any other amount
required by any provision of law, including, without limitation, RCW
62A.9-504(1)(c), need U. S. Bank account for the surplus, if any, to Pledgor.
RIGHTS RE PLEDGE STOCK
If an Event of Default shall occur: (a) U. S. Bank shall have the right
to receive any and all cash dividends paid in respect of the Pledged Stock and
make application thereof to the Secured Obligations in such order as it may
determine, and (b) all shares of the Pledged Stock shall be registered in the
name of U. S. Bank or its nominee, and U. S. Bank or its
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nominee may thereafter exercise (i) all voting, corporate, consensual and other
rights pertaining to such shares of the Pledged Stock at any meeting of Borrower
or otherwise and (ii) any and all rights of conversion, exchange, subscription
and any other rights, privileges or options pertaining to such shares of the
Pledged Stock as if it were the absolute owner thereof (including, without
limitation, the right to exchange at its discretion any and all of the Pledged
Stock upon the merger, consolidation, reorganization, recapitalization or other
fundamental change in the corporate structure of Borrower, or upon the exercise
by Pledgor or U. S. Bank of any right, privilege or option pertaining to such
shares of the Pledged Stock, and in connection therewith, the right to deposit
and deliver any and all of the Pledged Stock with any committee, depositary,
transfer agent, registrar or other designated agency upon such terms and
conditions as it may determine), all without liability except to account for
property actually received by it, but U. S. Bank shall have no duty to exercise
any such right, privilege or option and shall not be responsible for any failure
to do so or delay in so doing.
RIGHT TO PROCEED AGAINST PLEDGED STOCK
The rights of U. S. Bank hereunder shall not be conditioned or
contingent upon the pursuit by U. S. Bank of any right or remedy against
Borrower or against any other Person which may be or become liable in respect of
all or any part of the Secured Obligations or against any other Collateral
therefor, guarantee thereof or right of offset with respect thereto. U. S. Bank
shall not be liable for any failure to demand, collect or realize upon all or
any part of the Pledged Stock or for any delay in doing so, nor shall it be
under any obligation to sell or otherwise dispose of any Pledged Stock upon the
request of the Pledgor or any other Person or to take any other action
whatsoever with regard to the Pledged Stock or any part thereof except that U.
S. Bank shall be required to exercise reasonable care with respect to the safe
keeping of collateral in its possession.
NOTICE OF SALE, ETC
To the extent permitted by applicable law, Pledgor waives all claims,
damages and demands it may acquire against U. S. Bank arising out of the
exercise by U. S. Bank of any of its rights hereunder. If any notice of a
proposed sale or other disposition of Pledged Stock shall be required by law,
such notice shall be deemed reasonable and proper if given at least ten days
before such sale or other disposition. To the extent not prohibited by
applicable law, Pledgor further waives and agrees not to assert any rights or
privileges which it may acquire under RCW 62A.9-112.
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GENERAL PROVISIONS
LIMITATION ON DUTIES REGARDING PLEDGED STOCK
U. S. Bank's sole duty with respect to the custody, safekeeping and
physical preservation of the Pledged Stock in its possession, under RCW 62A.
9-207 or otherwise, shall be to deal with it in the same manner as the U. S.
Bank deals with similar securities and property for its own account. Neither U.
S. Bank nor any of its respective directors, officers, employees or agents shall
be liable for failure to demand, collect or realize upon any of the Pledged
Stock or for any delay in doing so or shall be under any obligation to sell or
otherwise dispose of any Pledged Stock upon the request of Pledgor or otherwise.
WAIVERS BY PLEDGORS
Except as otherwise provided in the Guaranty (including Article II
thereof), Pledgor hereby (a) waives notice of any advances made by U. S. Bank
pursuant to the Credit Agreement or pursuant to any extension, renewal or
modification thereof; (b) waives, with respect to the Secured Obligations,
grace, demand, presentment, notice of dishonor and protest; (c) agrees that U.
S. Bank, before proceeding against Pledgor under this Agreement, shall not be
bound to exhaust its recourse or take any action against Borrower or against any
other person or entity, or to proceed against any Collateral or against any
particular Collateral, but U. S. Bank may make such demands and take such
actions as it deems advisable; (d) agrees that U. S. Bank, without affecting the
liability of Pledgor under this Agreement, may with or without notice or
consideration release Borrower or any other Person or entity liable for the
Secured Obligations or any Collateral for the Secured Obligations; and (e)
waives, with respect to the Secured Obligations, any defense based upon any
change in the name, location, composition or structure of Borrower, or any
change in the type of business conducted by Borrower, or any other change in the
identity of legal status of Borrower.
WAIVER OF SUBROGATION; SUBORDINATION
Except as otherwise provided in the Guaranty (including Article II
thereof), and unless otherwise consented to by U. S. Bank in writing, until the
earlier of the Termination of the Guaranty or full and final payment of all of
the Secured Obligations, Pledgor (a) agrees not to exercise any right it may
acquire against Borrower or any security for the Secured Obligations by reason
of payments to U. S. Bank hereunder (whether by subrogation, reimbursement, or
otherwise), (b) assigns to U. S. Bank all rights against Borrower Pledgor may
have (whether or not relating to the Secured Obligations) in any proceeding
under the United States
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U. S. Bankruptcy Code or in any receivership or insolvency proceeding, and (c)
appoints U. S. Bank attorney-in-fact to appear in any such proceeding, file
claims, receive payments, and do any other act which Pledgor could do
personally. If any amount shall be paid to Pledgor on account of such
subrogation rights at any time when all of the Secured Obligations are not paid
in full, such amount shall be held by Pledgor in trust for U. S. Bank,
segregated from other funds of Pledgor, and shall, forthwith upon receipt by
Pledgor, be turned over to U. S. Bank in the exact form received by Pledgor
(duly endorsed by Pledgor to U. S. Bank, if required), to be applied against the
Secured Obligations, whether matured or unmatured, in such order as U. S. Bank
may determine.
EXPENSES INCURRED BY U. S. BANK
U. S. Bank is not required to, but may at its option, pay any tax or
other charge or expense payable by Pledgor and any filing or recording fees, and
any amounts so paid shall be repayable by Pledgor upon demand. Pledgor will also
repay upon demand all of U. S. Bank's reasonable expenses incurred in
collecting, conserving, or protecting the Pledged Stock. All such sums shall
bear interest at the default rate as provided in the Credit Agreement from the
date of U. S. Bank's payment until Pledgor's repayment. All such sums and
interest thereon shall be secured by the security interest granted herein. The
rights granted by this Section 6.4 are not a waiver of any other rights of U. S.
Bank arising from breach of any of Pledgor's covenants.
NONWAIVERS
This Agreement shall not be qualified or supplemented by course of
dealing. No waiver or modification by U. S. Bank of any of the terms or
conditions hereof shall be effective unless in writing signed by U. S. Bank. No
waiver or indulgence by U. S. Bank as to any required performance by Pledgor
shall constitute a waiver as to any subsequent required performance or other
obligations of Pledgor hereunder.
ATTORNEY FEES, COSTS
Pledgor agrees to pay to U. S. Bank any and all costs and expenses,
including attorney fees, incurred by U. S. Bank in protecting or enforcing its
rights under the terms of this Agreement, including challenges or claims by
Pledgor or any other person, whether or not a lawsuit is commenced. Attorney
fees shall include services rendered at arbitration, trial, and any appeal
therefrom as well as services rendered subsequent to judgment and obtaining
execution thereon. The fees, costs, and expenses shall bear interest at the then
applicable rate as provided in the Credit
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<PAGE> 12
Agreement until paid in full. Payment of costs and expenses, including attorney
fees, shall be secured by the security interest herein granted.
SALE AND ASSIGNMENT BY U. S. BANK
To the extent permitted by the Credit Agreement, U. S. Bank may assign
or transfer the whole or any part of the Secured Obligations, and may transfer
therewith as collateral security the whole or any part of the Pledged Stock; and
all obligations, rights, powers and privileges herein provided shall inure to
the benefit of the assignee and shall bind the heirs, executors, administrators,
successors or assigns of the parties hereto.
GOVERNING LAW
This Agreement and the Secured Obligations are subject to the laws of
the state of Washington and are to be construed in accordance therewith.
IRREVOCABLE AUTHORIZATION AND INSTRUCTION TO BORROWER
Pledgor hereby authorizes and instructs Borrower to comply with any
instruction received by it from U. S. Bank in writing that (a) states that all
or any portion of the Secured Obligations has been declared or has become due
and payable in accordance with the terms of the Credit Agreement and remains
unpaid and (b) is otherwise in accordance with the terms of this Pledge
Agreement, without any other or further instructions from Pledgor.
CONSENT TO JURISDICTION, SERVICE, AND VENUE
For the purpose of performance of the obligations under or otherwise in
connection herewith, Pledgor hereby consents to the jurisdiction and venue of
the courts of the state of Washington or of any federal court located in such
state including but not limited to the Superior Court of Washington for King
County and the United States District Court for the Western District of
Washington. Pledgor hereby waives the right to contest the jurisdiction and
venue of courts located in King County, Washington, on the ground of
inconvenience or otherwise and waives any right to bring any action or
proceeding against U. S. Bank in any court outside King County, Washington. The
provisions of this section do not limit or otherwise affect the right of U. S.
Bank to institute and conduct action in any other appropriate manner,
jurisdiction, or court.
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<PAGE> 13
ARBITRATION
Either Pledgor or U. S. Bank may require that all disputes, claims,
counterclaims, and defenses, including those based on or arising from any
alleged tort ("Claims") relating in any way to this Agreement be settled by
binding arbitration in accordance with the Commercial Arbitration Rules of the
American Arbitration Association and Title 9 of the U.S. Code. All Claims will
be subject to the statutes of limitations that would be applicable if they were
litigated.
This provision is void if the Loans, at the time of the proposed
submission to arbitration, are secured by real property located outside of
Oregon or Washington or if the effect of the arbitration procedure (as opposed
to any Claims of Borrower) would be to materially impair U. S. Bank's ability to
realize on any Collateral pursuant to an arbitration ruling favorable to U. S.
Bank.
If arbitration occurs and each party's Claim is less than $100,000, one
neutral arbitrator will decide all issues; if either party's Claim is more than
$100,000, three neutral arbitrators will decide all issues. All arbitrators will
be active Washington State Bar members in good standing. All arbitration
hearings will be held in Seattle, Washington. In addition to all other powers,
the arbitrator or arbitrators shall have the exclusive right to determine all
issues of arbitrability and shall have the authority to issue subpoenas.
Judgment on any arbitration award may be entered in any court with jurisdiction.
If either party institutes any judicial proceeding relating to the
Loans, that action shall not be a waiver of the right to submit any Claim to
arbitration. In addition, each has the right before, during, and after any
arbitration to exercise any number of the following remedies, in any order or
concurrently: (i) setoff, (ii) self-help repossession, (iii) judicial or
nonjudicial foreclosure against real or personal collateral, (iv) provisional
remedies, including injunction, appointment of a receiver, attachment, claim and
delivery, and replevin.
This arbitration clause cannot be modified or waived by either party
except in writing, which writing must refer to this arbitration clause and be
signed by Pledgor and U. S. Bank.
POWERS COUPLED WITH AN INTEREST
All authorizations and agencies herein contained with respect to the
Pledged Stock are irrevocable and powers coupled with an interest.
-13-
<PAGE> 14
SEVERABILITY
Any provision of this Agreement which is prohibited or unenforceable in
any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of
such prohibition or unenforceability without invalidating the remaining
provisions hereof, and any such prohibition or unenforceability in any
jurisdiction shall not invalidate or render unenforceable such provision in any
other jurisdiction.
COUNTERPARTS
This Agreement may be executed in one or more counterparts, each of
which shall constitute an original Agreement, but all of which together shall
constitute one and the same instrument.
TRILLIUM CORPORATION
By /s/ Timothy C. Potts
---------------------------------
Title Sr. Vice President
------------------------------
Accepted By: U. S. BANK OF WASHINGTON,
NATIONAL ASSOCIATION
By /s/ Gerald L. Sorensen
---------------------------------
Title Sr. Vice President
------------------------------
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<PAGE> 15
ACKNOWLEDGMENT AND CONSENT
GARGOYLES, INC., ("Borrower") hereby acknowledges receipt of a copy of
the Pledge Agreement and agrees to be bound thereby and to comply with the terms
of Sections 4.7 and 4.8 thereof. Borrower agrees to notify U. S. Bank promptly
in writing of the occurrence of any of the events described in Article IV of the
Pledge Agreement. Borrower further agrees that the terms of Section 4.9 of the
Pledge Agreement shall apply to it, mutatis mutandis, with respect to all
actions that may be required of it under or pursuant to or arising out of
Sections 4.7 and 4.8 of the Pledge Agreement.
GARGOYLES, INC.
By /s/ Steven R. Kingma
------------------------------------------
Title Chief Financial Officer and Treasurer
--------------------------------------
-15-
<PAGE> 1
EXHIBIT 10.13
FIRST AMENDMENT TO CREDIT AGREEMENT
This first amendment to credit agreement ("Amendment") is made and
entered into as of August 17, 1995, by and between U. S. BANK OF WASHINGTON,
NATIONAL ASSOCIATION, a national banking association ("U. S. Bank"), and
GARGOYLES, INC., a Washington corporation ("Borrower").
R E C I T A L S :
A. On or about March 22, 1995, U. S. Bank and Borrower entered into
that certain credit agreement (together with all amendments, supplements,
exhibits, and modifications thereto, the "Credit Agreement") whereby U. S. Bank
agreed to provide a revolving line of credit in the amount of $4,000,000, a term
loan in the amount of $6,000,000, and an equipment line of credit in the amount
of $1,000,000.
B. Borrower has requested U. S. Bank to increase the commitment of the
revolving line of credit by $1,000,000 and to make certain other changes to the
Credit Agreement. The purpose of this Amendment is to set forth the terms and
conditions upon which U. S. Bank will grant Borrower's request.
DEFINITIONS
As used herein, capitalized terms shall have the meanings given to them
in the Credit Agreement, except as otherwise defined herein, or as the context
otherwise requires. Article I of the Credit Agreement is modified to amend the
definition of the term set forth below:
"Eligible Accounts Receivable" means the accounts receivable of
Borrower excluding the following: (a) accounts receivable that have been
outstanding in excess of 90 days past due, (b) all accounts receivable from any
single customer of Borrower if 10 percent or more of such customer's accounts
owed to Borrower are ineligible for any reason, (c) accounts receivable due from
officers, employees, or Affiliates of Borrower, (d) accounts receivable that are
partially or wholly subject to the right of setoff, (e) accounts receivable
resulting from COD sales, finance charges, and consignments, (f) accounts
receivable due from Persons not residents of the United States, except as
otherwise approved in writing by U. S. Bank, (g) accounts receivable that
constitute any retainage, (h) accounts receivable in which any Person other than
U. S. Bank has a security interest, and (i) except as otherwise approved by U.
S. Bank in writing, accounts receivable from any single customer of Borrower in
excess of 10 percent of Borrower's total Eligible Accounts Receivable.
Notwithstanding the foregoing, there shall be included in "Eligible Accounts
Receivable" accounts
<PAGE> 2
receivable from Sunglass Hut International up to the lesser of (x) $1,000,000,
or (y) an amount equal to 25 percent of Borrower's total Eligible Accounts
Receivable. "Eligible Accounts Receivable" shall not include any accounts
receivable unless and until U. S. Bank holds a first, valid, binding, and
perfected security interest in any such accounts receivable.
AMENDMENT
The Credit Agreement, as well as all of the other Loan Documents are
hereby amended as set forth herein. Except as specifically provided for herein,
all of the terms and conditions of the Credit Agreement and each of the other
loan documents shall remain in full force and effect throughout the terms of the
Loans, as well as any extensions or renewals thereof.
REVOLVING LOAN
Sections 2.1 and 2.10 of the Credit Agreement are hereby deleted in
their entirety and replaced with the following:
SECTION 2.1 LOAN COMMITMENT
Subject to and upon the terms and conditions set forth herein and in
reliance upon the representations, warranties, and covenants of Borrower
contained herein or made pursuant hereto, U. S. Bank will make Fundings to
Borrower from time to time during the period ending March 22, 1997 ("Commitment
Period"), but such Fundings (together with any outstanding Letters of Credit)
shall not exceed, in the aggregate principal amount at any one time outstanding,
$5,000,000 (the "Revolving Loan").
SECTION 2.10 LETTERS OF CREDIT
Subject to and upon the terms and conditions set forth herein and in
reliance upon the representations, warranties, and covenants of Borrower
contained herein or made pursuant hereto, U. S. Bank will issue standby and
commercial letters of credit (the "Letters of Credit") for the benefit of
Borrower in forms acceptable to U. S. Bank from time to time during the
Commitment Period. The expiration date of any Letter of Credit shall not extend
beyond the Commitment Period. The maximum aggregate amount of outstanding
Letters of Credit shall not exceed, at any one time, $1,500,000. The maximum
aggregate amount of outstanding Letters of Credit plus the aggregate outstanding
amount of principal and interest on the Revolving Loan shall not exceed, at any
one time, $5,000,000.
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<PAGE> 3
RENEWAL REVOLVING NOTE
Concurrently with the execution of this Amendment, Borrower shall
execute and deliver to U. S. Bank a renewal promissory note reflecting the
increased commitment under the Revolving Loan in the form attached hereto as
Exhibit A ("Renewal Revolving Note"), which shall be in substitution for, but
not in payment of the revolving note dated March 22, 1995. The existing
revolving note shall be marked "renewed" and retained by U. S. Bank until the
Revolving Loan is repaid in full.
CONDITIONS PRECEDENT
This Amendment shall not be effective unless and until the following
conditions have been fulfilled to the satisfaction of U. S. Bank.
U. S. Bank shall have received, duly executed and delivered by
Borrower, this Amendment and the Renewal Revolving Note.
There shall not exist any Default or Event of Default under the Credit
Agreement or any other Loan Documents.
GENERAL PROVISIONS
REPRESENTATIONS AND WARRANTIES
Borrower hereby represents and warrants to U. S. Bank that as of the
date of this Amendment, there exists no Default or Event of Default. All
representations and warranties of Borrower contained in the Credit Agreement and
the Loan Documents, or otherwise made in writing in connection therewith, are
true and correct as of the date of this Amendment. Borrower acknowledges and
agrees that all of Borrower's indebtedness to U. S. Bank is payable without
offset, defense, or counterclaim.
SECURITY
All Loan Documents evidencing U. S. Bank's security interest in the
Collateral shall remain in full force and effect, and shall secure the payment
and performance of the Loans, as amended herein, and any other Indebtedness
owing from Borrower to U. S. Bank.
GUARANTY
The parties hereto agree that the Guaranty shall remain in full force
and effect.
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<PAGE> 4
PLEDGE AGREEMENT
The parties hereto agree that the Pledge Agreement shall remain in full
force and effect.
COUNTERPARTS
This Amendment may be executed in one or more counterparts, each of
which shall constitute an original agreement, but all of which together shall
constitute one and the same agreement.
STATUTORY NOTICE
ORAL AGREEMENTS OR ORAL COMMITMENTS TO LOAN MONEY, EXTEND CREDIT, OR TO
FORBEAR FROM ENFORCING REPAYMENT OF A DEBT ARE NOT ENFORCEABLE UNDER WASHINGTON
LAW.
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<PAGE> 5
IN WITNESS WHEREOF, U. S. Bank and Borrower have caused this Amendment
to be duly executed by their respective duly authorized signatories as of the
date first above written.
GARGOYLES, INC.,
a Washington corporation
By /s/ Steven R. Kingma
-----------------------------
Title Chief Financial Officer
-----------------------------
U. S. BANK OF WASHINGTON,
NATIONAL ASSOCIATION
By /s/ Gerald L. Sorensen
-----------------------------
Title SVP
-----------------------------
By execution of this Amendment, Trillium Corporation hereby: (i)
reaffirms the Guaranty and the Pledge Agreement, and (ii) acknowledges that its
obligations under the Guaranty and the Pledge Agreement are enforceable without
defense, offset, or counterclaim.
TRILLIUM CORPORATION,
a Washington corporation
By /s/ Erik J. Anderson
-----------------------------
Title Co-President
-----------------------------
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<PAGE> 1
EXHIBIT 10.14
RENEWAL REVOLVING NOTE
$5,000,000 August 17, 1995
For value received, the undersigned, GARGOYLES, INC., ("Borrower"),
promises to pay to the order of U. S. BANK OF WASHINGTON, NATIONAL ASSOCIATION
("U. S. Bank"), at its principal place of business, 1420 Fifth Avenue, Seattle,
Washington 98101, or such other place or places as the holder hereof may
designate in writing, the principal sum of Five Million Dollars ($5,000,000) or
so much thereof as advanced by U. S. Bank in lawful, immediately available money
of the United States of America, in accordance with the terms and conditions of
that certain credit agreement dated March 22, 1995, as amended by that certain
first amendment to credit agreement of even date herewith ("First Amendment") by
and between Borrower and U. S. Bank (together with all supplements, exhibits,
amendments and modifications thereto, the "Credit Agreement"). Borrower also
promises to pay interest on the unpaid principal balance hereof, commencing as
of the first date of an advance hereunder, in like money in accordance with the
terms and conditions, and at the rate or rates provided for in the Credit
Agreement. All principal, interest, and other charges are due and payable in
full on March 22, 1997.
Borrower and all endorsers, sureties, and guarantors hereof jointly
and severally waive presentment for payment, demand, notice of nonpayment,
notice of protest, and protest of this Note, and all other notices in connection
with the delivery, acceptance, performance, default, dishonor, or enforcement of
the payment of this Note except such notices as are specifically required by
this Note or by the Credit Agreement, and they agree that the liability of each
of them shall be unconditional without regard to the liability of any other
party and shall not be in any manner affected by any indulgence, extension of
time, renewal, waiver, or modification granted or consented to by U. S. Bank.
Borrower and all endorsers, sureties, and guarantors hereof (1) consent to any
and all extensions of time, renewals, waivers, or modifications that may be
granted by U. S. Bank with respect to the payment or other provisions of this
Note and the Credit Agreement; (2) consent to the release of any property now or
hereafter securing this Note with or without substitution; and (3) agree that
additional makers, endorsers, guarantors, or sureties may become parties hereto
without notice to them and without affecting their liability hereunder.
-1-
<PAGE> 2
This Note is the Renewal Revolving Note referred to in the First
Amendment to Credit Agreement and as such is entitled to all of the benefits and
obligations specified in the Credit Agreement, including but not limited to any
Collateral and any conditions to making advances hereunder. Terms defined in the
Credit Agreement are used herein with the same meanings. Reference is made to
the Credit Agreement for provisions for the repayment of this Note and the
acceleration of the maturity hereof.
GARGOYLES, INC.,
a Washington corporation
By /s/ Steven R. Kingma
---------------------------------
Title Chief Financial Officer
------------------------------
-2-
<PAGE> 1
EXHIBIT 10.15
SECOND AMENDMENT TO CREDIT AGREEMENT
This second amendment to credit agreement ("Amendment") is made and
entered into as of December 15, 1995, by and between U. S. BANK OF WASHINGTON,
NATIONAL ASSOCIATION, a national banking association ("U. S. Bank"), and
GARGOYLES, INC., a Washington corporation ("Borrower").
R E C I T A L S :
A. On or about March 22, 1995, U. S. Bank and Borrower entered into
that certain credit agreement (together with all amendments, supplements,
exhibits, and modifications thereto, the "Credit Agreement") whereby U. S. Bank
agreed to provide a revolving line of credit in the amount of $4,000,000, a term
loan in the amount of $6,000,000, and an equipment line of credit in the amount
of $1,000,000. On or about August 17, 1995, U. S. Bank and Borrower entered into
that certain first amendment to credit agreement ("First Amendment") whereby U.
S. Bank agreed to increase the commitment under the revolving line of credit by
$1,000,000 and to make certain other changes to the Credit Agreement.
B. Borrower has requested U. S. Bank to again increase the commitment
under the revolving line of credit by an additional $1,000,000 and to make
certain other changes to the Credit Agreement. The purpose of this Amendment is
to set forth the terms and conditions upon which U. S. Bank will grant
Borrower's request.
DEFINITIONS
As used herein, capitalized terms shall have the meanings given to them
in the Credit Agreement, except as otherwise defined herein, or as the context
otherwise requires.
AMENDMENT
The Credit Agreement, as well as all of the other Loan Documents are
hereby amended as set forth herein. Except as specifically provided for herein,
all of the terms and conditions of the Credit Agreement and each of the other
loan documents shall remain in full force and effect throughout the terms of the
Loans, as well as any extensions or renewals thereof.
REVOLVING LOAN
Sections 2.1 and 2.10(a) of the Credit Agreement are hereby deleted in
their entirety and replaced with the following:
-1-
<PAGE> 2
SECTION 2.1 LOAN COMMITMENT
Subject to and upon the terms and conditions set forth herein and in
reliance upon the representations, warranties, and covenants of Borrower
contained herein or made pursuant hereto, U. S. Bank will make Fundings to
Borrower from time to time during the period ending March 22, 1997 ("Commitment
Period"), but such Fundings (together with any outstanding Letters of Credit)
shall not exceed, in the aggregate principal amount at any one time outstanding,
$6,000,000 (the "Revolving Loan").
SECTION 2.10 LETTERS OF CREDIT
Subject to and upon the terms and conditions set forth herein and in
reliance upon the representations, warranties, and covenants of Borrower
contained herein or made pursuant hereto, U. S. Bank will issue standby and
commercial letters of credit (the "Letters of Credit") for the benefit of
Borrower in forms acceptable to U. S. Bank from time to time during the
Commitment Period. The expiration date of any Letter of Credit shall not extend
beyond the Commitment Period. The maximum aggregate amount of outstanding
Letters of Credit shall not exceed, at any one time, $1,500,000. The maximum
aggregate amount of outstanding Letters of Credit plus the aggregate outstanding
amount of principal and interest on the Revolving Loan shall not exceed, at any
one time, $6,000,000.
RENEWAL REVOLVING NOTE
Concurrently with the execution of this Amendment, Borrower shall
execute and deliver to U. S. Bank a renewal promissory note reflecting the
increased commitment under the Revolving Loan in the form attached hereto as
Exhibit A ("Renewal Revolving Note"), which shall be in substitution for, but
not in payment of the revolving note dated August 17, 1995. The existing
revolving note and all previous renewals thereof shall be marked "renewed" and
retained by U. S. Bank until the Revolving Loan is repaid in full.
Section 2.9(a) of the Credit Agreement is hereby deleted in its
entirety and replaced with the following:
The outstanding balance of principal and interest on the
Revolving Loan (including outstanding Letters of Credit) shall
at no time exceed an amount equal to:
a) 80 percent of Eligible Accounts Receivable, plus
b) 50 percent of Eligible Inventory; provided, however that
Fundings based upon Eligible Inventory shall be limited
to an
-2-
<PAGE> 3
amount equal to 50 percent of Borrower's projected cost
of goods sold for the four-month period beginning with
the first day of the month during which U. S. Bank
receives Borrower's most recent Borrowing Notice in
accordance with Section 2.9(b). The calculation of the
projected cost of goods sold shall be based upon the most
recent projected financial statements of Borrower
provided by Borrower to U. S. Bank.
LOAN FEE
Borrower shall pay a loan fee in the amount of $10,000 to U. S. Bank
upon demand by U. S. Bank.
EQUIPMENT LINE
Section 4.1 of the Credit Agreement is hereby amended to reflect that
the Equipment Line is not a revolving line and that the aggregate amount of
Fundings under the Equipment Line subsequent to the date of this Amendment shall
not exceed $103,249.
CONDITIONS PRECEDENT
This Amendment shall not be effective unless and until the following
conditions have been fulfilled to the satisfaction of U. S. Bank.
a) U. S. Bank shall have received, duly executed and
delivered by Borrower, this Amendment and the Renewal
Revolving Note.
b) There shall not exist any Default or Event of Default
under the Credit Agreement or any other Loan Documents.
GENERAL PROVISIONS
REPRESENTATIONS AND WARRANTIES
Borrower hereby represents and warrants to U. S. Bank that as of the
date of this Amendment, there exists no Default or Event of Default. All
representations and warranties of Borrower contained in the Credit Agreement and
the Loan Documents,
-3-
<PAGE> 4
or otherwise made in writing in connection therewith, are true and correct as of
the date of this Amendment. Borrower acknowledges and agrees that all of
Borrower's indebtedness to U. S. Bank is payable without offset, defense, or
counterclaim.
SECURITY
All Loan Documents evidencing U. S. Bank's security interest in the
Collateral shall remain in full force and effect, and shall secure the payment
and performance of the Loans, as amended herein, and any other Indebtedness
owing from Borrower to U. S. Bank.
GUARANTY
The parties hereto agree that the Guaranty shall remain in full force
and effect.
PLEDGE AGREEMENT
The parties hereto agree that the Pledge Agreement shall remain in full
force and effect.
COUNTERPARTS
This Amendment may be executed in one or more counterparts, each of
which shall constitute an original agreement, but all of which together shall
constitute one and the same agreement.
STATUTORY NOTICE
ORAL AGREEMENTS OR ORAL COMMITMENTS TO LOAN MONEY, EXTEND CREDIT, OR TO
FORBEAR FROM ENFORCING REPAYMENT OF A DEBT ARE NOT ENFORCEABLE UNDER WASHINGTON
LAW.
IN WITNESS WHEREOF, U. S. Bank and Borrower have caused this Amendment
to be duly executed by their respective duly authorized signatories as of the
date first above written.
GARGOYLES, INC., a Washington
corporation
By /s/ Steven R. Kingma
-------------------------------------
Title Chief Financial Officer
----------------------------------
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<PAGE> 5
U. S. BANK OF WASHINGTON,
NATIONAL ASSOCIATION
By /s/ Byron L. Richards
-------------------------------------
Title Vice President
----------------------------------
By execution of this Amendment, Trillium Corporation hereby: (i)
reaffirms the Guaranty and the Pledge Agreement, and (ii) acknowledges that its
obligations under the Guaranty and the Pledge Agreement are enforceable without
defense, offset, or counterclaim.
TRILLIUM CORPORATION,
a Washington corporation
By /s/ Erik J. Anderson
-------------------------------------
Title Co-President
----------------------------------
-5-
<PAGE> 1
RENEWAL REVOLVING NOTE
$6,000,000 December 15, 1995
For value received, the undersigned, GARGOYLES, INC., ("Borrower"),
promises to pay to the order of U. S. BANK OF WASHINGTON, NATIONAL ASSOCIATION
("U. S. Bank"), at its principal place of business, 1420 Fifth Avenue, Seattle,
Washington 98101, or such other place or places as the holder hereof may
designate in writing, the principal sum of Six Million Dollars ($6,000,000) or
so much thereof as advanced by U. S. Bank in lawful, immediately available money
of the United States of America, in accordance with the terms and conditions of
that certain credit agreement dated March 22, 1995, as amended by that certain
second amendment to credit agreement of even date herewith ("Second Amendment")
by and between Borrower and U. S. Bank (together with all supplements, exhibits,
amendments and modifications thereto, the "Credit Agreement"). Borrower also
promises to pay interest on the unpaid principal balance hereof, commencing as
of the first date of an advance hereunder, in like money in accordance with the
terms and conditions, and at the rate or rates provided for in the Credit
Agreement. All principal, interest, and other charges are due and payable in
full on March 22, 1997.
Borrower and all endorsers, sureties, and guarantors hereof jointly and
severally waive presentment for payment, demand, notice of nonpayment, notice of
protest, and protest of this Note, and all other notices in connection with the
delivery, acceptance, performance, default, dishonor, or enforcement of the
payment of this Note except such notices as are specifically required by this
Note or by the Credit Agreement, and they agree that the liability of each of
them shall be unconditional without regard to the liability of any other party
and shall not be in any manner affected by any indulgence, extension of time,
renewal, waiver, or modification granted or consented to by U. S. Bank. Borrower
and all endorsers, sureties, and guarantors hereof (1) consent to any and all
extensions of time, renewals, waivers, or modifications that may be granted by
U. S. Bank with respect to the payment or other provisions of this Note and the
Credit Agreement; (2) consent to the release of any property now or hereafter
securing this Note with or without substitution; and (3) agree that additional
makers, endorsers, guarantors, or sureties may become parties hereto without
notice to them and without affecting their liability hereunder.
This Note is the Renewal Revolving Note referred to in the Second
Amendment to Credit Agreement and as such is entitled to all of the benefits and
obligations specified in the Credit Agreement, including but not limited to any
<PAGE> 2
Collateral and any conditions to making advances hereunder. Terms defined in the
Credit Agreement are used herein with the same meanings. Reference is made to
the Credit Agreement for provisions for the repayment of this Note and the
acceleration of the maturity hereof.
GARGOYLES, INC., a Washington corporation
By: /s/ Steven R. Kingma
-----------------------------------
Title: Chief Financial Officer
--------------------------------
-2-
<PAGE> 1
10.17
THIRD AMENDMENT TO CREDIT AGREEMENT
This third amendment to credit agreement ("Amendment") is made and
entered into as of February 13, 1996, by and between U. S. BANK OF WASHINGTON,
NATIONAL ASSOCIATION, a national banking association ("U. S.
Bank"), and GARGOYLES, INC., a Washington corporation ("Borrower").
RECITALS:
A. On or about March 22, 1995, U. S. Bank and Borrower entered into
that certain credit agreement (together with all amendments, supplements,
exhibits, and modifications thereto, the "Credit Agreement"), whereby U. S. Bank
agreed to extend certain credit facilities to Borrower on the terms and
conditions set forth therein. On or about August 17, 1995, U. S. Bank and
Borrower entered into that certain first amendment to credit agreement. On or
about December 15, 1995, U. S. Bank and Borrower entered into that certain
second amendment to credit agreement.
B. Borrower has requested U. S. Bank to (1) increase the commitment
under the revolving loan advanced to Borrower, (2) extend to Borrower a new term
loan for the acquisition of all of the issued and outstanding stock of H.S.I., a
California corporation, dba Hobie Sunglasses ("HSI"), (3) consent to Borrower's
formation of a wholly owned subsidiary and the merger of HSI into such
subsidiary, (4) waive Borrower's default under the working capital covenant set
forth in the Credit Agreement, and (5) make certain other modifications to the
financial covenants set forth in the Credit Agreement. The purpose of this
Amendment is to set forth the terms and conditions upon which U. S. Bank will
make the new loan to Borrower.
NOW, THEREFORE, in consideration of the mutual covenants and agreements
contained herein, the parties hereto agree as follows:
ARTICLE I. DEFINITIONS
1.1 Definitions. As used herein, capitalized terms shall have the
meanings given to them in the Credit Agreement, except as otherwise defined
herein or as the context otherwise requires.
1.2 Modified and Additional Defined Terms. Section 1.1 of the Credit
Agreement is hereby modified to add or amend (as the case may be) the
definitions of the terms set forth below:
<PAGE> 2
"Acquisition Loan" has the meaning set forth in Section 4.1 of this
Amendment, as well as all renewals, replacements, and amendments of the
Acquisition Loan.
"Acquisition Note" has the meaning set forth in Section 4.3 of this
Amendment, as well as all renewals and modifications of the Acquisition Note.
"Eligible Accounts Receivable" means the accounts receivable of
Borrower, HSC, and HSI, excluding the following: (a) accounts receivable that
have been outstanding in excess of 90 days past due, (b) all accounts receivable
from any single customer if 10 percent or more of such customer's accounts owed
to Borrower, HSC, or HSI are ineligible for any reason, (c) accounts receivable
due from officers, employees, or Affiliates of Borrower, HSC, and HSI, (d)
accounts receivable that are partially or wholly subject to the right of setoff,
(e) accounts receivable resulting from COD sales, finance charges, and
consignments, (f) accounts receivable due from Persons not residents of the
United States, except as otherwise approved in writing by U. S. Bank, (g)
accounts receivable due from the federal government, (h) accounts receivable
that constitute any retainage, (i) accounts receivable that constitute dated
billings other than approved by U. S. Bank in writing, (j) accounts receivable
in which any Person other than U. S. Bank has a security interest, and (k)
except as otherwise approved by U. S. Bank in writing, accounts receivable from
any single customer of Borrower, HSC, or HSI in excess of 10 percent of such
entity's total Eligible Accounts Receivable. Notwithstanding the foregoing,
there shall be included in "Eligible Accounts Receivable" accounts receivable
from Sunglass Hut International up to the lesser of (x) $1,000,000, or (y) an
amount equal to 25 percent of total Eligible Accounts Receivable. "Eligible
Accounts Receivable" shall not include any accounts receivable unless and until
U. S. Bank holds a first, valid, binding, and perfected security interest in any
such accounts receivable.
"Eligible Inventory" means inventory of Borrower, HSC, and HSI,
including raw materials and finished goods, valued at the lower of cost or
market. "Eligible Inventory" shall exclude inventory that is obsolete, consigned
inventory, inventory that is not in saleable condition, work-in-process, and
inventory in which any Person other than U. S. Bank has a security interest.
Notwithstanding the foregoing, "Eligible Inventory" shall not include any
inventory unless and until U. S. Bank holds a first, valid, binding, and
perfected security interest in that inventory.
"Funded Debt" means, as of the last day of the relevant period, (a) all
of Borrower's long-term Indebtedness (excluding amounts outstanding on the
Revolving Loan and the Acquisition Loan) including the current portion thereof
and including capitalized leases, less (b) the outstanding principal amount of
subordinated debt that (i) has been approved in writing by U. S. Bank, and (ii)
is subordinate to Borrower's
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<PAGE> 3
Indebtedness to U. S. Bank pursuant to a subordination agreement approved in
writing by U. S. Bank.
"Funded Debt Coverage Ratio" means the ratio of Funded Debt to an
amount equal to Cash Flow plus (a) cash paid during the relevant period for
Capital Expenditures, which cash does not constitute proceeds of the loans made
to Borrower, and (b) dividends and distributions paid to Borrower's shareholders
during the relevant period.
"Funding" means any disbursement of the proceeds of the Revolving Loan,
the Term Loan, any Equipment Loan, the Acquisition Loan, or the issuance or
renewal of any Letter of Credit.
"HSC" means H.S.C., Inc., a Washington corporation, and its successors.
"HSI" means H.S.I., a California corporation, dba Hobie Sunglasses, and
its successors.
"Loans" means the Revolving Loan, the Term Loan, the Equipment Loans,
and the Acquisition Loan, as well as all renewals, replacements, and
modifications thereof.
"Notes" means the Revolving Note, the Term Note, the Equipment Notes,
and the Acquisition Note, as well as all renewals, replacements, and amendments
thereof.
1.3 Accounting on Consolidated Basis. Section 1.2 of the Credit
Agreement is hereby deleted in its entirety and replaced with the following:
1.2 Accounting Terms. Unless otherwise specified herein, all
accounting terms used herein shall be interpreted, all accounting
determinations hereunder shall be made, and all financial statements
required to be delivered hereunder shall be prepared in accordance with
generally accepted accounting principles consistently applied. All
calculations required to be made hereunder and all financial numbers
used herein shall be on a consolidated basis in accordance with
generally accepted accounting principles.
ARTICLE II. AMENDMENT
The Credit Agreement, as well as all of the other Loan Documents, are
hereby amended as set forth herein. Except as specifically provided for herein,
all of the terms and conditions of the Credit Agreement and each of the other
Loan Documents
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<PAGE> 4
shall remain in full force and effect throughout the terms of the Loans, as
well as any extensions or renewals thereof.
ARTICLE III. REVOLVING LOAN
3.1 Increase in Revolving Loan Commitment. Sections 2.1 and 2.10(a) of
the Credit Agreement are hereby deleted in their entirety and replaced with the
following:
2.1 Loan Commitment. Subject to and upon the terms and
conditions set forth herein and in reliance upon the representations,
warranties, and covenants of Borrower contained herein or made pursuant
hereto, U. S. Bank will make Fundings to Borrower from time to time
during the period ending March 22, 1997 ("Commitment Period"), but such
Fundings (together with any outstanding Letters of Credit) shall not
exceed, in the aggregate principal amount at any one time outstanding,
$10,000,000 (the "Revolving Loan").
2.10 Letters of Credit.
(a) Subject to and upon the terms and conditions set forth
herein and in reliance upon the representations, warranties, and
covenants of Borrower contained herein or made pursuant hereto, U. S.
Bank will issue standby and commercial letters of credit (the "Letters
of Credit") for the benefit of Borrower, HSC, and HSI in forms
acceptable to U. S. Bank from time to time during the Commitment
Period. The expiration date of any Letter of Credit shall not extend
beyond the Commitment Period. The maximum aggregate amount of
outstanding Letters of Credit shall not exceed, at any one time,
$1,500,000. The maximum aggregate amount of outstanding Letters of
Credit plus the aggregate outstanding amount of principal and interest
on the Revolving Loan shall not exceed, at any one time, $10,000,000.
3.2 Use of Proceeds. The proceeds of the Revolving Loan shall be used
by Borrower for operating cash. The proceeds of the Revolving Loan may be loaned
by Borrower to HSC and to HSI, provided that the aggregate principal amount of
any such loans shall at no time exceed an amount equal to the Borrowing Base,
calculated on the basis of the Eligible Accounts Receivable and Eligible
Inventory of HSC and HSI only.
3.3 Renewal Revolving Note. Concurrently with the execution of this
Amendment, Borrower shall execute and deliver to U. S. Bank a renewal promissory
note in the form attached hereto as Exhibit A ("Renewal Revolving Note"), which
shall be in substitution for, but not in payment of, the renewal revolving note
dated
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<PAGE> 5
December 15, 1995, which shall be marked "renewed" and retained by U. S.
Bank until the Revolving Loan is repaid in full.
3.4 Loan Fee. Concurrently with the execution of this Amendment,
Borrower shall pay U. S. Bank a nonrefundable fee for the increase of the
Revolving Loan commitment in the amount of $40,000.
ARTICLE IV. ACQUISITION LOAN
4.1 Commitment. Subject to and upon the terms and conditions set forth
herein, and in reliance upon the representations, warranties, and covenants of
Borrower contained herein or in the Credit Agreement or made pursuant hereto or
pursuant to the Credit Agreement, U. S. Bank will lend to Borrower $4,000,000 on
a term loan basis ("Acquisition Loan").
4.2 Use of Proceeds. The proceeds of the Acquisition Loan shall be used
by Borrower as follows: $3,380,014 for the acquisition of all of the issued and
outstanding stock of HSI and $619,986 for working capital.
4.3 Acquisition Note. The Acquisition Loan shall be evidenced by a
promissory note in the form attached hereto as Exhibit B ("Acquisition Note").
4.4 Interest Rates. The Acquisition Loan shall bear interest on the
principal amount thereof remaining unpaid from time to time, at a rate equal to
the Prime Rate plus 3 percent per annum.
4.5 Repayment.
(a) Commencing on the first day of the first month following the
initial Funding under the Acquisition Loan and on the first day of each month
thereafter, Borrower shall pay U. S. Bank an amount equal to all accrued
interest on the Acquisition Loan.
(b) On May 31, 1996, Borrower shall make an Acquisition Loan principal
reduction payment to U. S. Bank in the amount of $700,000; provided, however,
that such principal payment must be from (i) a capital contribution to Borrower,
or (ii) debt subordinate to Borrower's Indebtedness to U. S. Bank pursuant to a
subordination agreement approved in writing by U. S. Bank.
(c) Subject to Section 4.6 herein, Borrower shall pay U. S. Bank all
outstanding principal, accrued interest, and other charges with respect to the
Acquisition Loan on or before December 31, 1996.
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<PAGE> 6
4.6 Extension of Maturity.
(a) Unless a Default or Event of Default has occurred and is
continuing, Borrower may elect to extend the maturity date of the Acquisition
Loan to March 31, 1997, if before November 30, 1996, Borrower (i) gives written
notice of such election to U. S. Bank, (ii) pays to U. S. Bank an extension fee
in an amount equal to 1 percent of the balance of the Acquisition Loan to be
extended, and (iii) issues to U. S. Bank a warrant in the form attached hereto
as Exhibit C (the "Warrant"). In the event that the Acquisition Loan is not paid
in full on or before December 31, 1996, and Borrower cannot extend the maturity
date of the Acquisition Loan as a result of the existence of a Default or an
Event of Default or Borrower's failure to meet one or more of the requirements
for the extension of the Acquisition Loan set forth in this Section 4.6(a), in
order to compensate U. S. Bank for the risk of making the Acquisition Loan and
Borrower's failure to repay the Acquisition Loan in a timely manner, Borrower
shall, on or before December 31, 1996, either issue the Warrant to U. S. Bank
or, at Borrower's option, pay U. S. Bank a loan fee in the amount of $5,000,000.
Neither the issuance of the Warrant nor the payment of the $5,000,000 shall
constitute a cure of the Event of Default resulting from Borrower's failure to
repay the Acquisition Loan on or before December 31, 1996, or any other Events
of Default that exist at that time.
(b) In the event Borrower elects to extend the maturity date of the
Acquisition Loan in accordance with Section 4.6(a) herein and complies with the
conditions thereof, Borrower shall pay U. S. Bank all outstanding principal,
accrued interest, and other charges with respect to the Acquisition Loan on or
before March 31, 1997.
4.7 Acquisition Loan Fee. Borrower shall pay U. S. Bank nonrefundable
fees for the Acquisition Loan as follows: (a) $40,000 concurrently with the
execution of this Amendment, (b) on June 30, 1996, an amount equal to 1 percent
of the principal balance of the Acquisition Loan on such date, (c) on September
30, 1996, an amount equal to 1 percent of the principal balance on the
Acquisition Loan on such date, and (d) $200,000 on or before December 31, 1996.
ARTICLE V. COVENANTS
5.1 Consent to Acquisition, Subsidiary, and Merger. U. S. Bank hereby
consents to Borrower's acquisition of HSI, Borrower's formation of HSC as a
wholly-owned subsidiary of Borrower, and the merger of HSI into HSC, and agrees
that such actions shall not constitute violations of the negative covenants set
forth in Article VIII of the Credit Agreement.
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<PAGE> 7
5.2 Waiver of Defaults. Borrower's prior violations of the Working
Capital covenant set forth in Section 8.17 of the Credit Agreement and the Cash
Flow to Debt Service Proforma covenant set forth in Section 8.18(a) of the
Credit Agreement are hereby waived through the date of this Agreement. U. S.
Bank's waiver is expressly limited to Borrower's violation specified in this
Section 5.2 and is not applicable to any other covenants contained in the Credit
Agreement or any other Loan Documents.
5.3 Modification of Debt Service Coverage Ratio. Section 8.18(a) of the
Credit Agreement is hereby deleted in its entirety and replaced with the
following:
(a) Permit the ratio of Cash Flow to Debt Service Proforma to
be less than 1.00:1.00 as of the last day of each fiscal year of
Borrower for the fiscal year then ended.
5.4 Modification of Funded Debt Coverage Ratio. Section 8.19 of the
Credit Agreement is hereby deleted in its entirety and replaced with the
following:
8.19 Funded Debt Coverage Ratio. Permit the Funded debt
Coverage Ratio to be greater than 3.15:1.00 as of the last day of each
fiscal quarter of Borrower for the training four quarters then ended.
ARTICLE VI. CONDITIONS PRECEDENT
U. S. Bank shall not be required to advance the initial Funding under
the Revolving Loan following the date of this Amendment or the initial Funding
under the Acquisition Loan unless and until the following conditions have been
fulfilled to the satisfaction of U.S. Bank:
(a) U. S. Bank shall have received this Amendment, the Renewal
Revolving Note, and the Acquisition Note, duly executed and delivered by the
parties thereto.
(b) U. S. Bank shall have received, duly executed and delivered by HSC
and HSI, guaranties in the forms attached hereto as Exhibits D-1 and D-2.
(c) U. S. Bank shall have received, duly executed and delivered by HSC
and HSI, security agreements in the forms attached hereto as Exhibits E-1 and
E-2, granting to U. S. Bank a first priority and exclusive security interest in
all of the personal property of HSC and HSI, whether tangible or intangible, now
owned or hereafter acquired.
(d) U. S. Bank shall have received, duly executed and delivered by HSC
and HSI, such financing statements and other documents deemed necessary by U. S.
Bank to perfect the security interests granted to U. S. Bank.
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<PAGE> 8
(e) U. S. Bank shall have received, duly executed and delivered by
Guarantor, an amended and restated limited guaranty in the form attached hereto
as Exhibit F.
(f) U. S. Bank shall have received, duly executed and delivered by
Borrower, a pledge agreement in the form attached hereto as Exhibit G, pledging
to U. S. Bank all of Borrower's stock in HSC and HSI, together with all stock
certificates representing Borrower's ownership interests in HSC and HSI and an
assignment separate from certificate signed in blank by Borrower for each such
certificate.
(g) Borrower shall have paid U. S. Bank the loan fees required under
Sections 3.4 and 4.7(a) of this Amendment.
(h) All corporate proceedings of HSC and HSI shall be satisfactory in
form and substance to U. S. Bank, and U. S. Bank shall have received all
information and copies of all documents, including records of all corporate
proceedings, that U. S. Bank has requested in connection therewith, such
documents where appropriate to be certified by proper corporate authorities or
Governmental Bodies. Borrower shall provide U. S. Bank with the following
documents prior to or upon the execution of this Amendment:
(i) Copies of the articles of incorporation of HSC and HSI,
together with all amendments thereto, certified by HSC and HSI to be
true and complete;
(ii) Certificates of authority for HSC and HSI in the states
of California and Washington, respectively, dated within 30 days of the
date of the execution of this Amendment; and
(iii) Certified resolutions of the directors of HSC and HSI
and incumbency certificates in form and content satisfactory to U. S.
Bank.
(i) U. S. Bank shall have received, reviewed, and approved all
documents in connection with the acquisition by Borrower of all of the issued
and outstanding stock of HSI. In addition, U. S. Bank shall have received
evidence satisfactory to U. S. Bank that the acquisition of HSI's stock will
close in accordance with the documents approved by U. S. Bank concurrently with
the initial Funding under the Acquisition Loan.
(j) U. S. Bank shall have received evidence satisfactory to U. S. Bank
that HSI's indebtedness to Union Bank has been repaid in full and that Union
Bank's security interests in HSI's assets have been terminated.
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<PAGE> 9
(k) U. S. Bank shall have received, reviewed, and approved copies of
the following financial statements of HSI for the most recent fiscal year of
HSI, balance sheet, statement of income, and statement of cash flows.
(l) U. S. Bank shall have received from counsel to Borrower an opinion
addressed to U. S. Bank and dated as of the date of this Amendment, in the form
attached hereto as Exhibit H.
(m) No Default or Event of Default shall exist under the Credit
Agreement, and after having given effect to the requested Funding, no Default or
Event of Default shall exist.
ARTICLE VII. GENERAL PROVISIONS
7.1 Representations and Warranties. Borrower hereby represents and
warrants to U. S. Bank that as of the date of this Amendment, there exists no
Default or Event of Default. All representations and warranties of Borrower
contained in the Credit Agreement and the other Loan Documents, or otherwise
made in writing in connection therewith, are true and correct as of the date of
this Amendment. Borrower acknowledges and agrees that all of Borrower's
Indebtedness to U. S. Bank is payable without offset, defense, or counterclaim.
7.2 Security. The Security Agreement, the Pledge Agreement, the
financing statements, and all other Loan Documents, whether creating,
evidencing, or perfecting U. S. Bank's security interest in the Collateral,
remain in full force and effect, secure the payment and performance of the
Loans, including without limitation the Acquisition Loan, and are enforceable
without defense, offset, or counterclaim.
7.3 Counterparts. This Amendment may be executed in one or more
counterparts, each of which shall constitute an original agreement, but all of
which together shall constitute one and the same agreement.
7.4 Statutory Notice. ORAL AGREEMENTS OR ORAL COMMITMENTS TO LOAN
MONEY, EXTEND CREDIT, OR TO FORBEAR FROM ENFORCING REPAYMENT OF A DEBT ARE NOT
ENFORCEABLE UNDER WASHINGTON LAW.
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<PAGE> 10
IN WITNESS WHEREOF, U. S. Bank and Borrower have caused this Amendment
to be duly executed by their respective duly authorized signatories as of the
date first above written.
GARGOYLES, INC., a Washington corporation
By: /s/ Steven R. Kingma
--------------------------------
Title: VP - CFO
-----------------------------
U. S. BANK OF WASHINGTON, NATIONAL
ASSOCIATION
By: /s/ Gerald L. Sorensen
--------------------------------
Title: SVP
-----------------------------
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Exhibit 10.18
RENEWAL REVOLVING NOTE
$10,000,000 February 13, 1996
For value received, the undersigned, GARGOYLES, INC., a Washington
corporation ("Borrower"), promises to pay to the order of U. S. BANK OF
WASHINGTON, NATIONAL ASSOCIATION ("U. S. Bank"), at its principal place of
business, 1420 Fifth Avenue, Seattle, Washington 98101, or such other place or
places as the holder hereof may designate in writing, the principal sum of Ten
Million Dollars ($10,000,000) or so much thereof as advanced by U. S. Bank in
lawful, immediately available money of the United States of America, in
accordance with the terms and conditions of that certain credit agreement dated
as of March 22, 1995, as amended by that certain first amendment to credit
agreement dated as of August 17, 1995, that certain second amendment to credit
agreement dated as of December 15, 1995, and that certain third amendment to
credit agreement of even date herewith ("Third Amendment") by and between
Borrower and U. S. Bank (together with all supplements, exhibits, amendments and
modifications thereto, the "Credit Agreement"). Borrower also promises to pay
interest on the unpaid principal balance hereof, commencing as of the first date
of an advance hereunder, in like money in accordance with the terms and
conditions, and at the rate or rates provided for in the Credit Agreement. All
principal, interest, and other charges are due and payable in full on March 22,
1997.
Borrower and all endorsers, sureties, and guarantors hereof jointly and
severally waive presentment for payment, demand, notice of nonpayment, notice of
protest, and protest of this Note, and all other notices in connection with the
delivery, acceptance, performance, default, dishonor, or enforcement of the
payment of this Note except such notices as are specifically required by this
Note or by the Credit Agreement, and they agree that the liability of each of
them shall be unconditional without regard to the liability of any other party
and shall not be in any manner affected by any indulgence, extension of time,
renewal, waiver, or modification granted or consented to by U. S. Bank. Borrower
and all endorsers, sureties, and guarantors hereof (1) consent to any and all
extensions of time, renewals, waivers, or modifications that may be granted by
U. S. Bank with respect to the payment or other provisions of this Note and the
Credit Agreement; (2) consent to the release of any property now or hereafter
securing this Note with or without substitution; and (3) agree that additional
makers, endorsers, guarantors, or sureties may become parties hereto without
notice to them and without affecting their liability hereunder.
<PAGE> 2
This Note is the Renewal Revolving Note referred to in the Third
Amendment and as such is entitled to all of the benefits and obligations
specified in the Credit Agreement, including but not limited to any Collateral
and any conditions to making advances hereunder. Terms defined in the Credit
Agreement are used herein with the same meanings. Reference is made to the
Credit Agreement for provisions for the repayment of this Note and the
acceleration of the maturity hereof.
GARGOYLES, INC., a Washington
corporation
By: /s/ Steven R. Kingma
----------------------
Title: VP - CFO
----------------------
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EXHIBIT 10.19
ACQUISITION NOTE
$4,000,000 February 13, 1996
For value received, the undersigned, GARGOYLES, INC., a Washington
corporation ("Borrower"), promises to pay to the order of U. S. BANK OF
WASHINGTON, NATIONAL ASSOCIATION ("U. S. Bank"), at its principal place of
business, 1420 Fifth Avenue, Seattle, Washington 98101, or such other place or
places as the holder hereof may designate in writing, the principal sum of Four
Million Dollars ($4,000,000) or so much thereof as advanced by U. S. Bank in
lawful, immediately available money of the United States of America, in
accordance with the terms and conditions of that certain credit agreement dated
as of March 22, 1995, as amended by that certain first amendment to credit
agreement dated as of August 17, 1995, that certain second amendment to credit
agreement dated as of December 15, 1995, that certain third amendment to credit
agreement dated as of February 13, 1996, and by that certain fourth amendment to
credit agreement of even date herewith ("Fourth Amendment") by and between
Borrower and U. S. Bank (together with all supplements, exhibits, amendments and
modifications thereto, the "Credit Agreement"). Borrower also promises to pay
interest on the unpaid principal balance hereof, commencing as of the first date
of an advance hereunder, in like money in accordance with the terms and
conditions, and at the rate or rates provided for in the Credit Agreement. All
principal, interest, and other charges are due and payable in full on December
31, 1996, subject to extension until March 31, 1997, on the terms set forth in
the Fourth Amendment.
Borrower and all endorsers, sureties, and guarantors hereof jointly and
severally waive presentment for payment, demand, notice of nonpayment, notice of
protest, and protest of this Note, and all other notices in connection with the
delivery, acceptance, performance, default, dishonor, or enforcement of the
payment of this Note except such notices as are specifically required by this
Note or by the Credit Agreement, and they agree that the liability of each of
them shall be unconditional without regard to the liability of any other party
and shall not be in any manner affected by any indulgence, extension of time,
renewal, waiver, or modification granted or consented to by U. S. Bank. Borrower
and all endorsers, sureties, and guarantors hereof (1) consent to any and all
extensions of time, renewals, waivers, or modifications that may be granted by
U. S. Bank with respect to the payment or other provisions of this Note and the
Credit Agreement; (2) consent to the release of any property now or hereafter
securing this Note with or without substitution; and (3) agree that additional
makers, endorsers, guarantors,
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<PAGE> 2
or sureties may become parties hereto without notice to them and without
affecting their liability hereunder.
This Note is the Renewal Acquisition Note referred to in the Fourth
Amendment and as such is entitled to all of the benefits and obligations
specified in the Credit Agreement, including but not limited to any Collateral
and any conditions to making advances hereunder. Terms defined in the Credit
Agreement are used herein with the same meanings. Reference is made to the
Credit Agreement for provisions for the repayment of this Note and the
acceleration of the maturity hereof.
GARGOYLES, INC.,
a Washington corporation
By /s/ Steven R. Kingma
---------------------------------
Title Vice President - CFO
------------------------------
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<PAGE> 1
EXHIBIT 10.20
AMENDED AND RESTATED LIMITED GUARANTY
This amended and restated limited guaranty is made as of the 13th day
of February, 1996, by TRILLIUM CORPORATION, a Washington corporation
("Guarantor"), to and for the benefit of U. S. BANK OF WASHINGTON, NATIONAL
ASSOCIATION, and its successors, participants, and assigns ("U. S. Bank").
R E C I T A L S :
Gargoyles, Inc., a Washington corporation ("Borrower"), and U. S. Bank
entered into that certain credit agreement dated as of March 22, 1995, as
amended by that certain first amendment to credit agreement dated as of August
17, 1995, and that certain second amendment to credit agreement dated as of
December 15, 1995 (together with all supplements, exhibits and amendments, as
the "Credit Agreement"), whereby U. S. Bank agreed to make such loans and
advances of credit to Borrower as set forth therein ("Loans"). Terms defined in
the Credit Agreement are used herein with the same meanings, unless otherwise
defined. Guarantor guaranteed the repayment of the Term Loan pursuant to that
certain limited guaranty dated March 22, 1995 ("Original Guaranty").
Borrower and U. S. Bank have entered into that certain third amendment
to credit agreement of even date herewith, whereby U. S. Bank agreed to extend
to Borrower an additional term loan ("Acquisition Loan") on the terms and
conditions set forth therein. U. S. Bank and Guarantor now wish to amend and
restate the Original Guaranty in its entirety to reflect that it guarantees the
repayment of the Acquisition Loan as well as the Term Loan.
Guarantor acknowledges that Guarantor has had an opportunity to review
the Credit Agreement and the other Loan Documents and is fully familiar with the
terms of the Loans. Guarantor is financially interested in Borrower and will
receive certain benefits as a result of Guarantor's promise. Guarantor
acknowledges that this Guaranty is a condition to U. S. Bank's consent to make
the Loans to Borrower. Guarantor agrees that this Guaranty is made for the
benefit of Guarantor.
NOW, THEREFORE, in order to induce U. S. Bank to consent to making the
Acquisition Loan to Borrower on the terms and conditions of the Credit
Agreement, the Original Guaranty shall be amended and restated in its entirety
as follows:
<PAGE> 2
UNCONDITIONAL GUARANTY
Except as provided in Article II, Guarantor jointly, severally,
unconditionally, absolutely, and irrevocably guarantees the due and punctual
payment of the principal and interest on the Term Loan, the Term Note, the
Acquisition Loan, and the Acquisition Note, and all money due or that may become
due thereunder, whether (a) according to the present terms thereof or at any
earlier or accelerated date or dates as provided therein, (b) pursuant to any
extension of time, or (c) pursuant to any amendment, modification, or
replacement thereof (collectively, "Obligations").
LIMITATION OF GUARANTY
NOTICE
Notwithstanding any provisions of this Guaranty to the contrary, the
following conditions precedent shall exist prior to the enforcement by U. S.
Bank of any of its rights under this Guaranty:
There shall have occurred an Event of Default, and U. S. Bank shall
have given Borrower and Guarantor written notice of acceleration of the Term
Loan or the Acquisition Loan (the "Notice of Acceleration").
There shall exist an Event of Default 60 days after the date of the
Notice of Acceleration, which date (60 days after the date of the Notice of
Acceleration) shall hereinafter be referred to as the "Guaranty Obligation
Date."
LIMITATION
Notwithstanding the provisions of Article I herein, Guarantor's
liability under this Guaranty is limited to an amount equal to:
The outstanding balance of the Term Loan on the Guaranty Obligation
Date, less an amount equal to Borrower's Tangible Net Worth on the Guaranty
Obligation Date; provided that in the event that Borrower's Tangible Net Worth
on the Guaranty Obligation Date is less than $-0-, for purposes of the
calculation set in this Section 2.2(a), Borrower's Tangible Net Worth shall be
deemed to be $-0-; plus
The outstanding balance of the Acquisition Loan on the Guaranty
Obligation Date; plus
Accrued interest on the amount of principal guaranteed pursuant to
Sections 2.2(a) and (b); plus
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<PAGE> 3
An amount equal to all costs incurred (including reasonable attorney
fees) by U. S. Bank in connection with the enforcement by U. S. Bank of this
Guaranty, as provided for in Section 14.7 herein.
APPLICATION OF PAYMENTS
Guarantor acknowledges and agrees that during the continuance of any
Event of Default, U. S. Bank may apply any payments received from Borrower and
any amounts received from U. S. Bank's realization on the Collateral to any
outstanding Indebtedness of Borrower to U. S. Bank in the order of priority
determined in U. S. Bank's sole discretion, and that U. S. Bank shall not be
obligated to apply such monies received first to the Term Loan or the
Acquisition Loan.
TERMINATION OF GUARANTY OF TERM LOAN
Guarantor's obligation to guarantee the repayment of the principal and
interest on the Term Loan only shall terminate if and when Borrower's Tangible
Net Worth less the outstanding principal balance of the Term Loan is equal to or
greater than $-0- as of the end of any fiscal year of Borrower subsequent to the
date of this Guaranty; provided that (i) at the time of termination, there
exists no Event of Default, and (ii) U. S. Bank shall have received audited
financial statements of Borrower confirming that as of the end of Borrower's
fiscal year, Borrower's Tangible Net Worth less the outstanding balance of the
Term Loan is equal to or greater than $-0-. This Section 2.4 shall in no way
affect Guarantor's obligation to guarantee the repayment of the principal and
interest on the Acquisition Loan.
WAIVERS BY GUARANTOR
AND RIGHTS OF U. S. BANK
Guarantor intends that it shall remain unconditionally liable for
payment of all the Obligations regardless of any act or omission which might
otherwise operate as a legal or equitable defense to discharge Borrower,
Guarantor, or any other guarantor in whole or part. Therefore, Guarantor hereby
waives any defense Guarantor may have to the enforceability of its obligations
hereunder by virtue of any of the following and U. S. Bank may do any of the
following things as many times as U. S. Bank wishes, without Guarantor's
permission and without notifying Guarantor, and this will not affect Guarantor's
promise to pay U. S. Bank the amount of the Obligations:
U. S. Bank does not have to notify Guarantor of U. S. Bank's acceptance
of this Guaranty;
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U. S. Bank does not have to notify Guarantor when U. S. Bank makes
Fundings under the Credit Agreement, extends credit to Borrower, or pays the
obligations of Borrower;
Except as provided in Section 2.1 herein, U. S. Bank does not have to
notify Guarantor of (i) Borrower's failure to pay Borrower's obligations when
due or (ii) Borrower's failure to perform any other obligation under the Loan
Documents;
U. S. Bank may extend, renew, accelerate, or otherwise change the time
for payment of any of Borrower's obligations to U. S. Bank;
U. S. Bank may make any other changes in the Loan Documents pursuant to
the terms of the Loan Documents;
U. S. Bank may release Borrower, any other guarantor, or anyone else
against whom U. S. Bank may have the right to collect amounts that may become
due under the Loan Documents;
U. S. Bank may apply Collateral and direct the order or manner of sale
thereof as U. S. Bank in its discretion may determine;
U. S. Bank may apply any money or Collateral received from or on behalf
of the Borrower to the repayment of any Indebtedness due to U. S. Bank in any
order U. S. Bank determines;
U. S. Bank may release, surrender, substitute, take additional, or
exchange, any Collateral U. S. Bank now holds or may later acquire as security
for Borrower's Indebtedness to U. S. Bank or Guarantor's obligations hereunder;
U. S. Bank may forbear from pursuing Borrower or from foreclosing or
otherwise realizing upon any security interest, letter of credit, or other
guaranty;
U. S. Bank may impair any Collateral or Guarantor's obligations
hereunder by its acts or omissions, including but not limited to failing to
perfect a security interest in any Collateral;
Except as otherwise provided herein and unless otherwise agreed to by
U. S. Bank in writing, Guarantor hereby waives any defense arising out of the
absence, impairment, or loss of (i) any or all rights of recourse,
reimbursement, contribution, or subrogation or (ii) any other right or remedy of
Guarantor against Borrower or any other party or Collateral to collect amounts
that Guarantor is obligated to pay under this Guaranty;
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Guarantor waives diligence, demand for performance, notice of
nonperformance, presentment, protest, notice of dishonor, and indulgences and
notices of every other kind;
Guarantor agrees that U. S. Bank may in its sole discretion proceed
against all or any portion of the Collateral by way of either judicial or
nonjudicial foreclosure.
Guarantor understands that a nonjudicial foreclosure of any deed of
trust securing the indebtedness of Borrower to U. S. Bank could impair or
eliminate any subrogation, reimbursement, or contribution rights Guarantor may
have against the grantor of the deed of trust; nevertheless, Guarantor waives
and relinquishes any defense based upon the loss of such rights or any other
defense that may otherwise arise out of RCW 61.24.100 or any other applicable
anti-deficiency statute of another state. Guarantor understands and agrees that
U. S. Bank may in its discretion nonjudicially foreclose one or more deeds of
trust granted to it by Borrower, then collect from Guarantor a sum equal to the
difference between the total amount of the Obligations and the amount of the
successful bid at each trustee sale.
U. S. BANK'S RIGHT NOT TO PROCEED
AGAINST BORROWER, OTHER GUARANTORS OR
COLLATERAL
Provided that the conditions of Section 2.1 herein are satisfied, if an
Event of Default occurs under the Credit Agreement, U. S. Bank may enforce this
guaranty against Guarantor (a) without attempting to collect or without
exhausting U. S. Bank's efforts to collect from Borrower, any other guarantor,
or anyone else who is liable for the Obligations or (b) without attempting to
enforce U. S. Bank's rights in any Collateral. Without limiting the foregoing,
U. S. Bank may sue on any Note or Notes or may take any other action authorized
under the Loan Documents or by law. In each case, U. S. Bank shall have the
right to exercise its remedies in whatever order it elects and may join
Guarantor in any suit on the Loan Documents or can proceed against Guarantor in
a separate proceeding. In case of suit, sale, or foreclosure, only the net
proceeds therefrom, after deducting all charges and expenses of any kind and
nature whatsoever, shall be applied to the reduction of the amount due on the
Loan Documents, and U. S. Bank shall not be required to institute or prosecute
proceedings to recover any deficiency as a condition of payment under or
enforcement of this Guaranty. At any sale of the Collateral, U. S. Bank may at
its discretion purchase all or any part of the Collateral and may apply against
the amount bid therefor all or any portion of the balance due it pursuant to the
terms of any Note; provided, however, that the proceeds from the sale of stock
pledged to U. S. Bank by Guarantor shall only
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be applied to the Obligations hereunder. Guarantor hereby waives the right to
object to the amount that may be bid by U. S. Bank at such foreclosure sale.
BANKRUPTCY AND ASSIGNMENT OF RIGHTS
Guarantor agrees that its obligation to make payment under the terms of
this Guaranty shall not be impaired, modified, changed, released, or limited in
any manner by any impairment, modification, change, release, defense, or
limitation of the liability of Borrower or of a receiver, trustee,
debtor-in-possession, or estate under any bankruptcy or receivership proceeding.
If any payment made by Borrower is reclaimed in a bankruptcy or receivership
proceeding, Guarantor shall pay to U. S. Bank the dollar amount of the amount
reclaimed. Guarantor further assigns to U. S. Bank all rights Guarantor may have
in any proceeding under the U. S. Bankruptcy Code or any receivership or
insolvency proceeding until all of the Obligations have been paid in full. This
assignment includes all rights of Guarantor to be paid by Borrower even if those
rights have nothing to do with this Guaranty. This assignment does not prevent
U. S. Bank from enforcing Guarantor's obligations under this Guaranty in any
way.
GUARANTOR'S DUTY TO KEEP INFORMED OF
BORROWER'S AND THE OTHER GUARANTOR'S FINANCIAL
CONDITION
Guarantor is now adequately informed of Borrower's financial condition,
and Guarantor agrees to keep so informed. U. S. Bank need not provide Guarantor
with any present or future information concerning the financial condition of
Borrower or any other guarantor, and changes in Borrower's or Guarantor's
financial condition shall not affect Guarantor's obligations under this
Guaranty. Guarantor has not relied on financial information furnished by U. S.
Bank, nor will Guarantor do so in the future.
REPRESENTATIONS AND WARRANTIES OF GUARANTOR
Guarantor represents and warrants to U. S. Bank as follows:
The execution, delivery, and performance by Guarantor of this Guaranty
do not and will not (i) conflict with or contravene any law, rule, regulation,
judgment, order, or decree of any government, governmental instrumentality, or
court having jurisdiction over Guarantor or Guarantor's activities or
properties, (ii) conflict with, or result in any default under, any agreement or
instrument of any kind to which Guarantor is a party or by which Guarantor or
any of Guarantor's properties may be bound or affected, or (iii) require the
consent, approval, order, or authorization of, or
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registration with, or the giving of notice to any United States or other
governmental authority or any person or entity not a party to the Loan
Documents. By acceptance of this Guaranty, U. S. Bank agrees that the execution
and delivery of this Guaranty does not constitute a violation of any credit
agreement or other loan document evidencing a credit relationship between U. S.
Bank and Guarantor.
This Guaranty constitutes a legal, valid, and binding obligation of
Guarantor, enforceable against Guarantor in accordance with its terms;
There is no action, litigation, or other proceeding pending or to
Guarantor's knowledge threatened against Guarantor before any court, arbitrator,
or administrative agency that may have a material adverse effect on the assets
or the business or financial condition of Guarantor or that would prevent,
hinder, or jeopardize the performance by Guarantor of Guarantor's obligations
under this Guaranty;
Guarantor is fully familiar with all the covenants, terms, and
conditions of the Loan Documents; and
Guarantor is not party to any contract, agreement, indenture, or
instrument or subject to any restriction individually or in the aggregate that
would have a material adverse affect on Guarantor's financial condition or
business or that would in any way jeopardize the ability of Guarantor to perform
under this Guaranty.
SUBORDINATION OF INDEBTEDNESS
OF BORROWER TO GUARANTOR
Any Indebtedness of Borrower now or hereafter held by Guarantor
(including, without limitation, any guaranty fees) is hereby subordinated to the
Indebtedness of Borrower to U. S. Bank, and during the continuance of any Event
of Default, such Indebtedness of Borrower to Guarantor, if U. S. Bank so
requests, shall be collected, enforced, and received by Guarantor as trustee for
U. S. Bank and be paid over to U. S. Bank on account of the Obligations, but
without reducing or affecting in any manner the liability of Guarantor under the
other provisions of this Guaranty.
WAIVER OF RIGHT OF SUBROGATION
Until all Indebtedness of Borrower to U. S. Bank is paid in full or as
otherwise agreed to by U. S. Bank in writing, Guarantor agrees that Guarantor
shall not have, and hereby expressly waives, any claim, right, or remedy that
Guarantor may now have or hereafter acquire against Borrower including, without
limitation, any claim, remedy, or right of subrogation, reimbursement,
exoneration, indemnification, or participation in any claim, right, or remedy
that U. S. Bank has or may hereafter have
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against Borrower or any Collateral that U. S. Bank now has or hereafter
acquires, whether or not such claim, right, or remedy arises in equity, under
contract, by statute, under common law, or otherwise. Guarantor hereby
acknowledges and agrees that this waiver is intended to benefit Borrower and U.
S. Bank and shall not limit or otherwise affect Guarantor's liability under this
Guaranty.
PAYMENT OF OBLIGATIONS; EFFECT OF BANKRUPTCY
This Guaranty shall terminate upon payment in full of the Obligations
(except that Guarantor's obligation to guarantee the repayment of the principal
and interest on the Term Loan may be terminated earlier as provided in Section
2.4 herein); but this Guaranty shall be automatically reinstated if any payment
made on the Term Note or the Acquisition Loan is reclaimed in a bankruptcy or
receivership proceeding, until Guarantor pays U. S. Bank the amount reclaimed or
the amount is otherwise paid to U. S. Bank and is not subject to further
reclamation.
EVENTS OF DEFAULT; REMEDIES
EVENTS OF DEFAULT
"Event of Default," whenever used herein, means any one of the
following events (whatever the reason for the Event of Default, whether it shall
relate to one or more of the parties hereto, and whether it shall be voluntary
or involuntary or be pursuant to or effected by operation of Applicable Law):
If there shall occur an Event of Default under the Credit Agreement; or
If Guarantor fails to observe or perform any term, covenant, or
agreement to be performed or observed pursuant to this Guaranty.
REMEDIES
Upon the occurrence of any Event of Default hereunder, the Obligations
shall then or at any time thereafter, at the option of U. S. Bank become
immediately due and payable without notice or demand, and U. S. Bank shall have
an immediate right to pursue the remedies provided herein.
If an Event of Default occurs hereunder, U. S. Bank shall have all
remedies provided by law. Guarantor hereby waives any notice of the occurrence
of any Event of Default hereunder.
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FINANCIAL STATEMENTS
REPRESENTATION AND WARRANTY
Guarantor represents and warrants to U. S. Bank that the financial
statements of Guarantor and all schedules and notes included in such financial
statements that have been delivered to U. S. Bank are true and correct in all
material respects, and present fairly the financial position of Guarantor as of
the dates of such statements.
FINANCIAL DATA
Guarantor agrees that so long as this Guaranty is in effect, Guarantor
shall furnish to U. S. Bank:
As soon as practicable and in any event within 150 days after the close
of each fiscal year of Guarantor, the following financial statements of
Guarantor, setting forth the corresponding figures for the previous fiscal year
in comparative form where appropriate, all in reasonable detail and audited
(without any qualification or exception deemed material by U. S. Bank) by
Guarantor's current independent certified public accountant or such other
independent certified public accountant selected by Borrower and satisfactory to
U. S. Bank: balance sheet, statement of income, and statement of cash flows; and
As soon as practicable and in any event within 30 days after the close
of each fiscal quarter of Guarantor, in-house financial statements of Guarantor
for each such quarter, all in reasonable detail and certified by Guarantor to be
true and correct.
CAPITAL CONTRIBUTION
OBLIGATION
Borrower and Guarantor have informed U. S. Bank that Borrower expects
to receive approximately $730,000 in cash between the date hereof and April 30,
1995, in connection with the settlement of litigation involving the licensing of
Borrower's products (the "Settlement Payment"). Such payment may be made in the
form of repayment of debt owed to Borrower by Pro-Tec, Inc. after Pro-Tec, Inc.
receives the Settlement Payment, provided that such payment is made on or before
April 30, 1995. In the event that Borrower does not receive the Settlement
Payment on or before April 30, 1995, then Guarantor shall contribute to
Borrower's capital or loan to Borrower on a subordinated basis (pursuant to a
subordination agreement in form acceptable to U. S. Bank) $730,000 in cash on or
before April 30, 1995. The obligation of Guarantor set forth in this Article
XIII is in addition to all other obligations of
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Guarantor set forth in this Guaranty. Guarantor's obligations under this
Section 13.1 may be satisfied by Borrower issuing additional shares of stock
at no less than 90 percent of the per share price paid by Guarantor to acquire
Borrower's stock.
REPAYMENT
In the event Borrower receives the Settlement Payment after Guarantor
satisfies its obligation under Section 13.1 herein, Borrower may return the
capital contribution (whether or not for additional shares issued pursuant to
Section 13.1 herein) or repay the subordinated debt referred to in Section 13.1
herein, provided that there exists no Event of Default at the time of the return
or repayment and that the return or repayment does not result in the existence
of an Event of Default.
GENERAL PROVISIONS
BENEFITS OF AGREEMENT
Guarantor agrees that (a) this Guaranty shall inure to the benefit of
and may be enforced by U. S. Bank and any subsequent holder of any of the Note
and related Loan Documents and (b) this Guaranty shall be binding upon and
enforceable against Guarantor and its successors and assigns.
NO ASSIGNMENT
Guarantor agrees that no assignment of Guarantor's obligations under
this Guaranty may be made to any Person without the prior written consent of
U.S. Bank.
RULES OF CONSTRUCTION
Unless some other meaning and intent is apparent from the context, the
plural shall include the singular and vice versa, and masculine, feminine, and
neuter words shall be used interchangeably.
GOVERNING LAW
This Guaranty shall be construed according to the laws of the state of
Washington, without giving effect to its principles of conflicts of law.
ENTIRE AGREEMENT; MERGER
This Agreement constitutes the entire understanding between U. S. Bank
and Guarantor with respect to the subject matter hereof; no course of prior
dealing between the parties, no usage of trade, and no parole or extrinsic
evidence of any
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nature shall be used to supplement or modify any terms; and there are no
conditions to the full effectiveness of this Guaranty. All prior, and
contemporaneous negotiations, understandings, and agreements between Guarantor
and U. S. Bank with respect to the subject matter hereof are merged in this
Guaranty.
INVALID PROVISIONS
If any provision of this Guaranty is invalid, illegal, or
unenforceable, such provision shall be considered severed from the rest of this
Guaranty and the remaining provisions shall continue in full force and effect as
if the invalid provision had not been included. This Guaranty may be changed,
modified, or supplemented only through a writing signed by Guarantor and U. S.
Bank.
ATTORNEY FEES AND COLLECTION EXPENSES
If there shall occur any Default or Event of Default, U. S. Bank shall
be entitled to recover from Guarantor, upon demand, any costs and expenses
incurred in connection with the preservation of rights under, and enforcement
of, this Guaranty whether or not any lawsuit or arbitration proceeding is
commenced, in all such cases including, without limitation, reasonable attorney
fees and costs (including the allocated fees of internal counsel). Costs and
expenses as referred to above shall include, without limitation, a reasonable
hourly rate for collection personnel, whether employed in-house or otherwise,
overhead costs as reasonably allocated to the collection effort, and all other
expenses actually incurred. Reasonable attorney fees and costs shall include,
without limitation, attorney fees and costs incurred in connection with any
bankruptcy case or other insolvency proceeding commenced by or against Borrower
or any Person granting a security interest in any item of Collateral, including
all fees incurred in connection with (a) moving for relief from the automatic
stay, to convert or dismiss the case or proceeding, or to appoint a trustee or
examiner or (b) proposing or opposing confirmation of a plan of reorganization
or liquidation, in any case without regard to the identity of the prevailing
party.
CONSENT TO JURISDICTION AND VENUE
Guarantor hereby (a) irrevocably submits to the jurisdiction of any
state or federal court sitting in Seattle, King County, Washington, in any
action or proceeding brought to enforce, or otherwise arising out of or relating
to, this Guaranty; (b) irrevocably waives to the fullest extent permitted by law
any objection that Guarantor may now or hereafter have to the laying of venue in
any such action or proceeding in any such forum; and (c) further irrevocably
waives any claim that any such forum is an inconvenient forum. Guarantor agrees
that a final judgment in any such action or proceeding shall be conclusive and
may be enforced in any other
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jurisdiction by suit on the judgment or in any other manner provided by law.
Nothing herein shall impair the right of U. S. Bank to bring any action or
proceeding against Guarantor in any court of any other jurisdiction.
ARBITRATION
Either Guarantor or U. S. Bank may require that all disputes, claims,
counterclaims, and defenses, including those based on or arising from any
alleged tort ("Claims") relating in any way to this Guaranty, the Loan, or the
Credit Agreement be settled by binding arbitration in accordance with the
Commercial Arbitration Rules of the American Arbitration Association and Title 9
of the U. S. Code. All Claims will be subject to the statutes of limitations
that would be applicable if the claims were litigated. This provision is void if
the Loan, at the time of the proposed submission to arbitration, is secured by
real property located outside of Oregon or Washington, or if the effect of the
arbitration procedure (as opposed to any Claims of Guarantor) would be to
materially impair U. S. Bank's ability to realize on any Collateral pursuant to
an arbitration ruling favorable to U. S. Bank.
If arbitration occurs and each party's Claim is less than $100,000, one
neutral arbitrator will decide all issues. If any party's Claim is more than
$100,000, three neutral arbitrators will decide all issues. All arbitrators will
be active Washington State Bar members in good standing. All arbitration
hearings will be held in Seattle, Washington. In addition to all other powers,
the arbitrator or arbitrators shall have the exclusive right to determine all
issues of arbitrability and shall have the authority to issue subpoenas.
Judgment on any arbitration award may be entered in any court with jurisdiction.
If either party institutes any judicial proceeding relating to this
Guaranty, the Loan, or the Credit Agreement, such action shall not be a waiver
of the right to submit any Claim to arbitration. In addition, whether or not the
parties arbitrate any Claim, each has the right before, during, and after any
arbitration to exercise any number of the following remedies, in any order or
concurrently: (i) setoff, (ii) self-help repossession, (iii) judicial or
nonjudicial foreclosure against real or personal collateral, (iv) provisional
remedies including injunction, appointment of receiver, attachment, claim and
delivery, and replevin.
This arbitration clause can only be modified or waived by either party
in writing, which writing must refer to this arbitration clause and be signed by
Guarantor and U. S. Bank.
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COUNTERPARTS
This Guaranty can be executed in counterpart originals. This Guaranty
shall be binding on each person who signs a counterpart of this Guaranty even if
everyone listed in the Guaranty does not agree to the Guaranty.
THE UNDERSIGNED CLEARLY UNDERSTANDS THAT U. S. BANK DOES NOT HAVE TO
PURSUE BORROWER OR PURSUE ANY OTHER REMEDIES BEFORE DEMANDING PAYMENT FROM
GUARANTOR. GUARANTOR FURTHER UNDERSTANDS THAT IT WILL HAVE TO PAY AMOUNTS THEN
DUE EVEN IF BORROWER OR ANY OF THE OTHER GUARANTORS DO NOT MAKE THE PAYMENTS OR
ARE OTHERWISE RELIEVED OF THE OBLIGATION TO MAKE PAYMENTS.
TRILLIUM CORPORATION,
a Washington corporation
By /s/ Timothy C. Potts
---------------------------------
Title Sr. Vice President - Finance
---------------------------------
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EXHIBIT 10.21
PLEDGE AGREEMENT
THIS AGREEMENT is made and entered into this 13th day of February,
1996, by GARGOYLES, INC., a Washington corporation ("Borrower"), for the benefit
of U. S. BANK OF WASHINGTON, NATIONAL ASSOCIATION, a national banking
association ("U. S. Bank").
RECITALS:
Borrower and U. S. Bank entered into that certain credit agreement
dated as of March 22, 1995, as amended by that certain first amendment to credit
agreement dated as of August 17, 1995, and that certain second amendment to
credit agreement dated as of December 15, 1995 (together with all supplements,
exhibits, and amendments thereto, the "Credit Agreement"), pursuant to which
Borrower has received, or will receive, advances of credit from U. S. Bank (the
"Loans").
Concurrently with the execution of this Agreement, Borrower and U. S.
Bank have entered into that certain third amendment to credit agreement of even
date herewith ("Third Amendment"), whereby U. S. Bank agreed to extend to
Borrower an additional loan ("Acquisition Loan").
To induce U. S. Bank to enter into the Third Amendment and to extend
the Acquisition Loan to Borrower, Borrower desires to assign and pledge to U. S.
Bank and to grant to U. S. Bank a security interest in and to the Pledged Stock
(hereafter defined) to secure the Secured Obligations (hereafter defined).
NOW, THEREFORE, in consideration of the promises and to induce U. S.
Bank to extend the Acquisition Loan, Borrower agrees as follows:
DEFINITIONS, ETC.
TERMS DEFINED
Unless otherwise defined herein, terms defined in the Credit Agreement
shall have such meanings when used herein. For the purposes of this Agreement,
the following terms shall have the following meanings:
"HSC" means H.S.C., Inc., a Washington corporation.
"HSI" means H.S.I., a California corporation, dba Hobie Sunglasses.
<PAGE> 2
"Pledged Stock" means all of the shares of the issued and outstanding
stock of HSC and HSI, together with all certificates, options, rights, dividends
and other distributions issued as an addition to, in substitution or in exchange
for, or on account of, any such shares and all property at any time pledged with
U. S. Bank hereunder (whether described herein or not) and all income therefrom
and proceeds thereof.
"Secured Obligations" means (a) all of Borrower's liabilities and
obligations under the Credit Agreement and the other Loan Documents, and (b) all
liabilities and obligations of Borrower hereunder.
INCORPORATION OF RECITALS AND EXHIBITS
The foregoing recitals are incorporated into this Agreement by
reference. All references to "Exhibits" contained herein are references to
exhibits attached hereto, the terms of which are made a part hereof for all
purposes.
PLEDGE AND CREATION OF SECURITY INTEREST
PLEDGE AND GRANT OF SECURITY INTEREST
As security for the full, prompt and complete payment and performance
by Borrower of each of the Secured Obligations, Borrower hereby pledges,
assigns, hypothecates, transfers, and delivers to U. S. Bank the Pledged Stock
and grants to U. S. Bank a security interest under the Uniform Commercial Code
of the state of Washington, as amended, in and to the Pledged Stock.
CASH DIVIDENDS; VOTING RIGHTS
Unless and until an Event of Default shall have occurred, Borrower
shall be permitted to receive all cash dividends paid in the normal course of
business of HSC and HSI and consistent with past practice in respect of the
Pledged Stock and to exercise all voting, corporate, consensual and other rights
with respect to the Pledged Stock, provided, however, that no vote shall be cast
or corporate right exercised or other action taken which, in U. S. Bank's
reasonable judgment, would impair the Collateral or which would be inconsistent
with or result in any violation of any provision of this Agreement, the Credit
Agreement or the other Loan Documents.
TERMINATION OF PLEDGE
Upon satisfaction of Borrower's obligations under the Credit Agreement
and the other Loan Documents, this Agreement shall terminate, and U. S. Bank
shall return the Pledged Stock to Borrower, together with any assignments
separate from certificate executed by Borrower in connection with this
Agreement.
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REPRESENTATIONS AND WARRANTIES
Borrower hereby represents and warrants that:
NO APPROVALS
No consent, license, permit, approval or authorization of, or filing
with, or notice or report to, or registration, filing or declaration with, any
Person (including, without limitation, any governmental authority or creditors
of Borrower), is required in connection with the execution, delivery,
performance, validity, or enforceability by or against Borrower of this
Agreement.
ENFORCEABILITY
This Agreement has been duly executed and delivered by Borrower and
constitutes a legal, valid, and binding obligation of Borrower enforceable
against Borrower in accordance with its terms.
OTHER AGREEMENTS
The execution, delivery, and performance of this Agreement does not and
will not violate any requirement of law or any contractual obligation applicable
to or binding upon Borrower.
LITIGATION
No litigation, arbitration, investigation, or proceeding of or before
any arbitrator or governmental authority is pending or to the best knowledge of
Borrower, threatened (a) with respect to this Agreement or any of the
transactions contemplated hereby or (b) against or affecting Borrower, or any of
its property or assets.
RECORD OWNER
Borrower is the record, legal and beneficial owner of the Pledged Stock
and the shares of Pledged Stock described on Exhibit A constitute all of the
issued and outstanding shares of HSC and HSI. Borrower has good and marketable
title to the Pledged Stock and will, at its own expense, defend U. S. Bank's
right, title and security interest in and to the Pledged Stock against the
claims of any Person.
NO ENCUMBRANCES
Borrower represents that all of the shares of the Pledged Stock have
been validly issued, are fully paid and nonassessable, and are owned by Borrower
free of
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any pledge, mortgage, hypothecation, lien, charge, encumbrance or security
interest in such shares or the proceeds thereof, except for that granted
hereunder.
FIRST PRIORITY LIEN
Upon delivery to U. S. Bank of the stock certificates evidencing the
Pledged Stock, the lien granted pursuant to this Agreement will constitute a
valid, perfected first priority lien on the Pledged Stock, enforceable as such
against all creditors of Borrower and any Persons purporting to purchase any
Pledged Stock from Borrower.
INVESTMENT COMPANY
Borrower is not an "investment company" or a company "controlled" by an
"invested company" (as each of the quoted terms is defined or used in the
Investment Company Act of 1940, as amended.
CONTINUING REPRESENTATIONS
Borrower agrees that the foregoing representations and warranties shall
be deemed to have been made by Borrower on the date of each borrowing by
Borrower under the Credit Agreement on and as of such date as though made
hereunder on and as of such date.
COVENANTS
Borrower covenants and agrees with U. S. Bank that, from and after the
date of this Agreement until the Secured Obligations are paid in full:
ENDORSEMENT AND DELIVERY
Concurrently with the execution hereof, Borrower shall deliver physical
possession of the Pledged Stock to U. S. Bank so that U. S. Bank's security
interest may be properly perfected by possession, and shall deliver with each
share certificate of the Pledged Stock an executed assignment separate from
certificate with respect to each share certificate so delivered.
NO OTHER LIENS
Borrower will not create or permit the existence of any lien or
security interest other than that hereby created on the Pledged Stock without
the written consent of U. S. Bank.
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DUTY WITH RESPECT TO DISTRIBUTIONS
If Borrower shall, as a result of Borrower's ownership of the Pledged
Stock, become entitled to receive or shall receive any stock certificate
(including, without limitation, any certificate representing a stock dividend or
a distribution in connection with any reclassification, increase or reduction of
capital or any certificate issued in connection with any reorganization), option
or rights, whether in addition to, in substitution of, as a conversion of, or in
exchange for any shares of the Pledged Stock, or otherwise in respect thereof,
Borrower shall accept the same as U. S. Bank's agent, hold the same in trust for
U. S. Bank and deliver the same forthwith to U. S. Bank in the exact form
received, duly endorsed by Borrower to U. S. Bank, if required, together with an
undated assignment from certificate covering such certificate duly executed in
blank and with, if U. S. Bank so requests, signature guaranteed, to be held by
U. S. Bank hereunder as additional collateral security for the Secured
Obligations. Any sums paid upon or in respect of the Pledged Stock upon the
liquidation or dissolution of HSC or HSI shall be paid over to U. S. Bank to be
held by it hereunder as additional collateral security for the Secured
Obligations, and in case any distribution of capital shall be made on or in
respect of the Pledged Stock or any property shall be distributed upon or with
respect to the Pledged Stock pursuant to the recapitalization or
reclassification of the capital of HSC or HSI or pursuant to the reorganization
thereof, the property so distributed shall be delivered to U. S. Bank to be held
by it, subject to the terms hereof, as additional collateral security for the
Secured Obligations. If any sums of money or property so paid or distributed in
respect of the Pledged Stock shall be received by Borrower, Borrower shall,
until such money or property is paid or delivered to U. S. Bank, hold such money
or property in trust for U. S. Bank, segregated from other funds of Borrower, as
additional collateral security for the Secured Obligations.
VOTING RIGHTS
Without the prior written consent of U. S. Bank, Borrower will not (a)
vote to enable, or take any other action to permit, HSC or HSI to issue any
additional stock or other equity securities of any nature or to issue any other
securities convertible into or granting the right to purchase or exchange for
any stock or other equity securities of HSC or HSI with the exception of (i)
stock or securities issued to Borrower and delivered to U. S. Bank as Pledged
Stock, and (ii) stock of HSC or HSI (or options for the issuance of stock) in an
amount not to exceed 10 percent of HSC's or HSI's, as the case may be,
aggregated outstanding stock at any time, issued as incentive compensation to
HSC's or HSI's management employees, or (b) sell, assign, transfer, exchange or
otherwise dispose of, or grant any option with respect to, the Pledged Stock, or
(c) create, incur or permit to exist any lien or option in favor of, or any
claim
-5-
<PAGE> 6
of any Person with respect to, any of the Pledged Stock, or any interest
therein, except for the lien provided for by this Agreement. Borrower will
defend the right, title and interest of U. S. Bank in and to the Pledged Stock
against the claims and demands of all Persons whomsoever.
FURTHER ASSURANCES
At any time and from time to time, upon the written request of U. S.
Bank, and at the sole expense of Borrower, Borrower will promptly and duly
execute and deliver such further instruments and documents and take such further
actions as U. S. Bank may reasonably request for the purposes of obtaining or
preserving the full benefits of this Agreement and of the rights and powers
herein granted. Subject to Section 2.2 herein, if any amount payable under or in
connection with the Pledged Stock shall be or become evidenced by any promissory
note, other instrument or chattel paper, such note, instrument or chattel paper
shall, be immediately delivered to U. S. Bank duly endorsed in a manner
satisfactory to U. S. Bank to be held as collateral pursuant to this Agreement.
INDEMNIFICATION
Borrower agrees to pay, and to save U. S. Bank harmless from, any and
all liabilities with respect to, or resulting from any delay in paying, any and
all stamp, excise, sales or other taxes (except for the tax imposed on the
overall net income of U. S. Bank) which may be payable or determined to be
payable with respect to any of the Pledged Stock or in connection with any of
the transactions contemplated by this Agreement.
REGISTRATION RIGHTS
If U. S. Bank shall determine to exercise its right to sell any or all
of the Pledged Stock pursuant to Article V hereof, and if in the opinion of U.
S. Bank it is necessary or advisable to have the Pledged Stock, or that portion
thereof to be sold, registered under the provisions of the Securities Act of
1933, as amended (the "Securities Act"), Borrower will use its best efforts to
cause HSC and HSI to (a) execute and deliver, and cause the directors and
officers of HSC and HSI to execute and deliver, all such instruments and
documents, and do or cause to be done all such other acts, as may be, in the
opinion of U. S. Bank, necessary or advisable to register the Pledged Stock, or
that portion thereof to be sold, under the provisions of the Securities Act, (b)
use its best efforts to cause the registration statement relating thereto to
become effective and to remain effective for a period of six months from the
effective date of such registration statement, and (c) make all amendments
thereto and/or to the related prospectus which, in the opinion of the U. S.
Bank, are necessary
-6-
<PAGE> 7
or advisable, all in conformity with the requirements of the Securities Act and
the rules and regulations of the Securities and Exchange Commission applicable
thereto. Borrower agrees to cause HSC and HSI to comply with the provisions of
the securities or "Blue Sky" laws of any and all jurisdictions which U. S. Bank
shall designate and to make available to its security holders, as soon as
practicable, an earnings statement (which need not be audited) which will
satisfy the provisions of section 11(a) of the Securities Act.
PRIVATE SALE
Borrower recognizes that U. S. Bank may be unable to effect a public
sale of any or all of the Pledged Stock, by reason of certain prohibitions
contained in the Securities Act and applicable state securities laws or
otherwise, and may be compelled to resort to one or more private sales thereof
to a restricted group of purchasers which will be obliged to agree, among other
things, to acquire such securities for their own account for investment and not
with a view to the distribution or resale thereof. Borrower acknowledges and
agrees that any such private sale may result in prices and other terms less
favorable to U. S. Bank than if such sale were a public sale and,
notwithstanding such circumstances, agrees that any such private sale shall not
be deemed to have been made in a commercially unreasonable manner merely because
it was a private sale. U. S. Bank shall be under no obligation to delay a sale
of any of the Pledged Stock for the period of time necessary to permit HSC and
HSI to register such securities for public sale under the Securities Act, or
under applicable state securities laws, even if HSC and HSI would agree to do
so.
SPECIFIC PERFORMANCE
Borrower further agrees to use its best efforts to do or cause to be
done all such other acts as may be necessary to make any sale or sales of all or
any portion of the Pledged Stock pursuant to Sections 4.7 and 4.8 herein, valid
and binding and in compliance with any and all applicable requirements of law.
Borrower further agrees that a breach of any of the covenants contained in
Sections 4.7 and 4.8 herein, will cause irreparable injury to U. S. Bank, that
U. S. Bank has no adequate remedy at law in respect of such breach and, as a
consequence, agrees that each and every covenant contained in Sections 4.7 and
4.8 herein, shall be specifically enforceable against Borrower, and Borrower
hereby waives and agrees not to assert any defense against an action for
specific performance of such covenants, except for a defense that no default of
the covenants, terms, or conditions of the Credit Agreement has occurred.
-7-
<PAGE> 8
RIGHTS AND REMEDIES
REMEDIES
U. S. Bank may exercise, in addition to all other rights and remedies
granted in this Agreement and in any other instrument or agreement securing,
evidencing or relating to the Secured Obligations, all rights and remedies of a
secured party under the Uniform Commercial Code of the state of Washington.
Without limiting the generality of the foregoing, U. S. Bank without demand of
performance or other demand, presentment, protest, advertisement or notice of
any kind (except any notice required by law or referred to below) to or upon
Borrower, HSC, HSI, or any other Person (all and each of which demands,
defenses, advertisements and notices are hereby waived to the extent not
prohibited by law), may in such circumstances forthwith collect, receive,
appropriate and realize upon the Pledged Stock, or any part thereof, and/or may
forthwith sell, assign, give option or options to purchase or otherwise dispose
of and deliver the Pledged Stock or any part thereof (or contract to do any of
the foregoing), in one or more parcels at public or private sale or sales, in
the over-the-counter market, at any exchange broker's board or at U. S. Bank's
offices or elsewhere upon such terms and conditions as it may deem advisable and
at such prices as it may deem best, for cash or on credit or for future delivery
without assumption of any credit risk. U. S. Bank shall have the right upon any
such public sale or sales and, to the extent permitted by law, upon any such
private sale or sales to purchase the whole or any part of the Pledged Stock so
sold, free and clear of any right or equity of redemption in Borrower, which
right or equity is hereby waived or released to the extent not prohibited by
law. U. S. Bank shall apply the net proceeds of any such collection, recovery,
receipt, appropriation, realization or sale, after deducting all reasonable
costs and expenses of every kind incurred therein or incidental to the care or
safekeeping of any of the Pledged Stock or in any way relating to the Pledged
Stock or the rights of U. S. Bank hereunder, including, without limitation,
reasonable attorney fees and disbursements to the payment in whole or in part of
the Secured Obligations in such order as U. S. Bank may elect, and only after
such application and after the payment by U. S. Bank of any other amount
required by any provision of law, including, without limitation, RCW
62A.9-504(1)(c), need U. S. Bank account for the surplus, if any, to Borrower.
RIGHTS REGARDING PLEDGED STOCK
If an Event of Default shall occur: (a) U. S. Bank shall have the right
to receive any and all cash dividends paid in respect of the Pledged Stock and
make application thereof to the Secured Obligations in such order as it may
determine, and (b) all shares of the Pledged Stock shall be registered in the
name of U. S. Bank or its
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<PAGE> 9
nominee, and U. S. Bank or its nominee may thereafter exercise (i) all voting,
corporate, consensual and other rights pertaining to such shares of the Pledged
Stock at any meeting of HSC and HSI or otherwise and (ii) any and all rights of
conversion, exchange, subscription and any other rights, privileges or options
pertaining to such shares of the Pledged Stock as if it were the absolute owner
thereof (including, without limitation, the right to exchange at its discretion
any and all of the Pledged Stock upon the merger, consolidation, reorganization,
recapitalization or other fundamental change in the corporate structure of HSC
or HSI, or upon the exercise by Borrower or U. S. Bank of any right, privilege
or option pertaining to such shares of the Pledged Stock, and in connection
therewith, the right to deposit and deliver any and all of the Pledged Stock
with any committee, depositary, transfer agent, registrar or other designated
agency upon such terms and conditions as it may determine), all without
liability except to account for property actually received by it, but U. S. Bank
shall have no duty to exercise any such right, privilege or option and shall not
be responsible for any failure to do so or delay in so doing.
RIGHT TO PROCEED AGAINST PLEDGED STOCK
The rights of U. S. Bank hereunder shall not be conditioned or
contingent upon the pursuit by U. S. Bank of any right or remedy against HSC or
HSI or against any other Person which may be or become liable in respect of all
or any part of the Secured Obligations or against any other Collateral therefor,
guarantee thereof or right of offset with respect thereto. U. S. Bank shall not
be liable for any failure to demand, collect or realize upon all or any part of
the Pledged Stock or for any delay in doing so, nor shall it be under any
obligation to sell or otherwise dispose of any Pledged Stock upon the request of
Borrower or any other Person or to take any other action whatsoever with regard
to the Pledged Stock or any part thereof except that U. S. Bank shall be
required to exercise reasonable care with respect to the safe keeping of
collateral in its possession.
NOTICE OF SALE, ETC
To the extent permitted by applicable law, Borrower waives all claims,
damages and demands it may acquire against U. S. Bank arising out of the
exercise by U. S. Bank of any of its rights hereunder. If any notice of a
proposed sale or other disposition of Pledged Stock shall be required by law,
such notice shall be deemed reasonable and proper if given at least ten days
before such sale or other disposition. To the extent not prohibited by
applicable law, Borrower further waives and agrees not to assert any rights or
privileges which it may acquire under RCW 62A.9-112.
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<PAGE> 10
GENERAL PROVISIONS
LIMITATION ON DUTIES REGARDING PLEDGED STOCK
U. S. Bank's sole duty with respect to the custody, safekeeping and
physical preservation of the Pledged Stock in its possession, under RCW 62A.
9-207 or otherwise, shall be to deal with it in the same manner as the U. S.
Bank deals with similar securities and property for its own account. Neither U.
S. Bank nor any of its respective directors, officers, employees or agents shall
be liable for failure to demand, collect or realize upon any of the Pledged
Stock or for any delay in doing so or shall be under any obligation to sell or
otherwise dispose of any Pledged Stock upon the request of Borrower or
otherwise.
EXPENSES INCURRED BY U. S. BANK
U. S. Bank is not required to, but may at its option, pay any tax or
other charge or expense payable by Borrower and any filing or recording fees,
and any amounts so paid shall be repayable by Borrower upon demand. Borrower
will also repay upon demand all of U. S. Bank's reasonable expenses incurred in
collecting, conserving, or protecting the Pledged Stock. All such sums shall
bear interest at the default rate as provided in the Credit Agreement from the
date of U. S. Bank's payment until Borrower's repayment. All such sums and
interest thereon shall be secured by the security interest granted herein. The
rights granted by this Section 6.2 are not a waiver of any other rights of U. S.
Bank arising from breach of any of Borrower's covenants.
NONWAIVERS
This Agreement shall not be qualified or supplemented by course of
dealing. No waiver or modification by U. S. Bank of any of the terms or
conditions hereof shall be effective unless in writing signed by U. S. Bank. No
waiver or indulgence by U. S. Bank as to any required performance by Borrower
shall constitute a waiver as to any subsequent required performance or other
obligations of Borrower hereunder.
ATTORNEY FEES, COSTS
Borrower agrees to pay to U. S. Bank any and all costs and expenses,
including attorney fees, incurred by U. S. Bank in protecting or enforcing its
rights under the terms of this Agreement, including challenges or claims by
Borrower or any other person, whether or not a lawsuit is commenced. Attorney
fees shall include services rendered at arbitration, trial, and any appeal
therefrom as well as services rendered subsequent to judgment and obtaining
execution thereon. The fees, costs, and
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<PAGE> 11
expenses shall bear interest at the then applicable rate as provided in the
Credit Agreement until paid in full. Payment of costs and expenses, including
attorney fees, shall be secured by the security interest herein granted.
SALE AND ASSIGNMENT BY U. S. BANK
To the extent permitted by the Credit Agreement, U. S. Bank may assign
or transfer the whole or any part of the Secured Obligations, and may transfer
therewith as collateral security the whole or any part of the Pledged Stock; and
all obligations, rights, powers and privileges herein provided shall inure to
the benefit of the assignee and shall bind the heirs, executors, administrators,
successors or assigns of the parties hereto.
GOVERNING LAW
This Agreement and the Secured Obligations are subject to the laws of
the state of Washington and are to be construed in accordance therewith.
IRREVOCABLE AUTHORIZATION AND INSTRUCTION TO HSC AND HSI
Borrower hereby authorizes and instructs HSC and HSI to comply with any
instruction received by it from U. S. Bank in writing that (a) states that all
or any portion of the Secured Obligations has been declared or has become due
and payable in accordance with the terms of the Credit Agreement and remains
unpaid and (b) is otherwise in accordance with the terms of this Pledge
Agreement, without any other or further instructions from Borrower.
CONSENT TO JURISDICTION, SERVICE, AND VENUE
For the purpose of performance of the obligations under or otherwise in
connection herewith, Borrower hereby consents to the jurisdiction and venue of
the courts of the state of Washington or of any federal court located in such
state including but not limited to the Superior Court of Washington for King
County and the United States District Court for the Western District of
Washington. Borrower hereby waives the right to contest the jurisdiction and
venue of courts located in King County, Washington, on the ground of
inconvenience or otherwise and waives any right to bring any action or
proceeding against U. S. Bank in any court outside King County, Washington. The
provisions of this section do not limit or otherwise affect the right of U. S.
Bank to institute and conduct action in any other appropriate manner,
jurisdiction, or court.
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<PAGE> 12
ARBITRATION
Either Borrower or U. S. Bank may require that all disputes, claims,
counterclaims, and defenses, including those based on or arising from any
alleged tort ("Claims") relating in any way to this Agreement be settled by
binding arbitration in accordance with the Commercial Arbitration Rules of the
American Arbitration Association and Title 9 of the U.S. Code. All Claims will
be subject to the statutes of limitations that would be applicable if they were
litigated.
This provision is void if the Loans, at the time of the proposed
submission to arbitration, are secured by real property located outside of
Oregon or Washington or if the effect of the arbitration procedure (as opposed
to any Claims of Borrower) would be to materially impair U. S. Bank's ability to
realize on any Collateral pursuant to an arbitration ruling favorable to U. S.
Bank.
If arbitration occurs and each party's Claim is less than $100,000, one
neutral arbitrator will decide all issues; if either party's Claim is more than
$100,000, three neutral arbitrators will decide all issues. All arbitrators will
be active Washington State Bar members in good standing. All arbitration
hearings will be held in Seattle, Washington. In addition to all other powers,
the arbitrator or arbitrators shall have the exclusive right to determine all
issues of arbitrability and shall have the authority to issue subpoenas.
Judgment on any arbitration award may be entered in any court with jurisdiction.
If either party institutes any judicial proceeding relating to the
Loans, that action shall not be a waiver of the right to submit any Claim to
arbitration. In addition, each has the right before, during, and after any
arbitration to exercise any number of the following remedies, in any order or
concurrently: (i) setoff, (ii) self-help repossession, (iii) judicial or
nonjudicial foreclosure against real or personal collateral, (iv) provisional
remedies, including injunction, appointment of a receiver, attachment, claim and
delivery, and replevin.
This arbitration clause cannot be modified or waived by either party
except in writing, which writing must refer to this arbitration clause and be
signed by Borrower and U. S. Bank.
POWERS COUPLED WITH AN INTEREST
All authorizations and agencies herein contained with respect to the
Pledged Stock are irrevocable and powers coupled with an interest.
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<PAGE> 13
SEVERABILITY
Any provision of this Agreement which is prohibited or unenforceable in
any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of
such prohibition or unenforceability without invalidating the remaining
provisions hereof, and any such prohibition or unenforceability in any
jurisdiction shall not invalidate or render unenforceable such provision in any
other jurisdiction.
COUNTERPARTS
This Agreement may be executed in one or more counterparts, each of
which shall constitute an original Agreement, but all of which together shall
constitute one and the same instrument.
GARGOYLES, INC.,
a Washington corporation
By /s/ Steven R. Kingma
-------------------------
Title VP - CFO
-------------------------
Accepted By: U. S. BANK OF
WASHINGTON, NATIONAL
ASSOCIATION
By /s/ Gerald L. Sorensen
-------------------------
Title S.V.P.
-------------------------
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<PAGE> 14
ACKNOWLEDGMENT AND CONSENT OF HSC
H.S.C., INC., a Washington corporation ("HSC"), hereby acknowledges
receipt of a copy of the Pledge Agreement and agrees to be bound thereby and to
comply with the terms of Sections 4.7 and 4.8 thereof. HSC agrees to notify U.
S. Bank promptly in writing of the occurrence of any of the events described in
Article IV of the Pledge Agreement. HSC further agrees that the terms of Section
4.9 of the Pledge Agreement shall apply to it, mutatis mutandis, with respect to
all actions that may be required of it under or pursuant to or arising out of
Sections 4.7 and 4.8 of the Pledge Agreement.
H.S.C., INC., a Washington corporation
By /s/ Steven R. Kingma
----------------------------
Title VP - CFO
----------------------------
ACKNOWLEDGMENT AND CONSENT OF HSI
H.S.I., a California corporation, dba Hobie Sunglasses ("HSI"), hereby
acknowledges receipt of a copy of the Pledge Agreement and agrees to be bound
thereby and to comply with the terms of Sections 4.7 and 4.8 thereof. HSI agrees
to notify U. S. Bank promptly in writing of the occurrence of any of the events
described in Article IV of the Pledge Agreement. HSI further agrees that the
terms of Section 4.9 of the Pledge Agreement shall apply to it, mutatis
mutandis, with respect to all actions that may be required of it under or
pursuant to or arising out of Sections 4.7 and 4.8 of the Pledge Agreement.
H.S.I., a California corporation,
dba Hobie Sunglasses
By /s/ William W. Blackburn
----------------------------
Title President
----------------------------
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<PAGE> 15
EXHIBIT A
TO PLEDGE AGREEMENT
DESCRIPTION OF STOCK OF HSC
<TABLE>
<CAPTION>
================================================================================
OWNER CERTIFICATE NO. NUMBER OF
SHARES
- --------------------------------------------------------------------------------
<S> <C> <C>
Gargoyles, Inc. 1 1,000
================================================================================
</TABLE>
DESCRIPTION OF STOCK OF HSI
<TABLE>
<CAPTION>
================================================================================
OWNER CERTIFICATE NO. NUMBER OF
SHARES
- --------------------------------------------------------------------------------
<S> <C> <C>
Gargoyles, Inc. 23 605,000
================================================================================
</TABLE>
-15-
<PAGE> 1
EXHIBIT 10.22
THIRD PARTY PLEDGE AGREEMENT
THIS AGREEMENT is made and entered into this 13th day of February,
1996, by TRILLIUM INVESTORS II, L.L.C., a Washington limited liability company
("Pledgor"), for the benefit of U. S. BANK OF WASHINGTON, NATIONAL ASSOCIATION,
a national banking association ("U. S. Bank").
RECITALS:
A. Gargoyles, Inc., a Washington corporation ("Borrower"), and U. S.
Bank entered into that certain credit agreement dated as of March 22, 1995, as
amended by that certain first amendment to credit agreement dated as of August
17, 1995, that certain second amendment to credit agreement dated as of December
15, 1995, and that certain third amendment to credit agreement of even date
herewith (together with all supplements, exhibits and amendments thereto, as the
"Credit Agreement"), whereby U. S. Bank has agreed to make such loans and
advances of credit to Borrower as set forth therein ("Loans").
B. Trillium Corporation, a Washington corporation ("Guarantor"),
guaranteed the repayment of the Term Loan (as defined in the Credit Agreement)
pursuant to that certain limited guaranty dated March 22, 1995, and the
repayment of the Acquisition Loan (as defined in the Credit Agreement) pursuant
to that certain amended and restated limited guaranty of even date herewith
(collectively, the "Guaranty"). Guarantor's obligations under the Guaranty are
secured by that certain third party pledge agreement dated March 22, 1995,
whereby Guarantor pledged to U. S. Bank the Pledged Stock (hereafter defined).
C. Guarantor has transferred the Pledged Stock to Pledgor in connection
with a deferred compensation program for Guarantor's senior management.
Guarantor and Borrower have requested U. S. Bank to consent to such transfer.
D. As a condition to its consent to such transfer, U. S. Bank requires
Pledgor to assign and pledge to U. S. Bank and to grant to U. S. Bank a security
interest in and to the Pledged Stock to secure the Secured Obligations
(hereafter defined).
NOW, THEREFORE, in consideration of the promises and to induce U. S.
Bank to consent to Guarantor's transfer of the Pledged Stock to Pledgor, Pledgor
agrees as follows:
<PAGE> 2
ARTICLE I. DEFINITIONS, ETC.
1.1 TERMS DEFINED
Unless otherwise defined herein, terms defined in the Credit Agreement
shall have such meanings when used herein. For the purposes of this Agreement,
the following terms shall have the following meanings:
"Pledged Stock" means all of the shares of the issued and outstanding
stock of Borrower owned by Pledgor, together with all certificates, options,
rights, dividends and other distributions issued as an addition to, in
substitution or in exchange for, or on account of, any such shares and all
property at any time pledged with U. S. Bank hereunder (whether described herein
or not) and all income therefrom and proceeds thereof.
"Secured Obligations" means (a) all of Pledgor's obligations under the
Guaranty, and (b) all liabilities and obligations of Pledgor hereunder.
1.2 INCORPORATION OF RECITALS AND EXHIBITS
The foregoing recitals are incorporated into this Agreement by
reference. All references to "Exhibits" contained herein are references to
exhibits attached hereto, the terms of which are made a part hereof for all
purposes.
ARTICLE II. PLEDGE AND CREATION OF SECURITY
INTEREST
2.1 PLEDGE AND GRANT OF SECURITY INTEREST
As security for the full, prompt and complete payment and performance
by Borrower of each of the Secured Obligations, Pledgor hereby pledges, assigns,
hypothecates, transfers, and delivers to U. S. Bank the Pledged Stock and grants
to U. S. Bank a security interest under the Uniform Commercial Code of the state
of Washington, as amended, in and to the Pledged Stock.
2.2 CASH DIVIDENDS; VOTING RIGHTS
Unless and until an Event of Default shall have occurred, Pledgor shall
be permitted to receive all cash dividends paid in the normal course of business
of Borrower and consistent with past practice in respect of the Pledged Stock
and to exercise all voting, corporate, consensual and other rights with respect
to the Pledged Stock, provided, however, that no vote shall be cast or corporate
right exercised or other action taken which, in U. S. Bank's reasonable
judgment, would impair the
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<PAGE> 3
Collateral or which would be inconsistent with or result in any violation of any
provision of this Agreement, the Credit Agreement or the other Loan Documents.
2.3 TERMINATION OF PLEDGE
Upon termination of the Guaranty and the satisfaction of Pledgor's
obligations under the Guaranty, this Agreement shall terminate, and U. S. Bank
shall return the Pledged Stock to Pledgor, together with any assignments
separate from certificate executed by Pledgor in connection with this Agreement.
ARTICLE III. REPRESENTATIONS AND WARRANTIES
Pledgor hereby represents and warrants that:
3.1 NO APPROVALS
No consent, license, permit, approval or authorization of, or filing
with, or notice or report to, or registration, filing or declaration with, any
Person (including, without limitation, any governmental authority or creditors
of Pledgor), is required in connection with the execution, delivery,
performance, validity, or enforceability by or against Pledgor of this
Agreement.
3.2 ENFORCEABILITY
This Agreement has been duly executed and delivered by Pledgor and
constitutes a legal, valid, and binding obligation of Pledgor enforceable
against Pledgor in accordance with its terms.
3.3 OTHER AGREEMENTS
The execution, delivery, and performance of this Agreement does not and
will not violate any requirement of law or any contractual obligation applicable
to or binding upon Pledgor.
3.4 LITIGATION
No litigation, arbitration, investigation, or proceeding of or before
any arbitrator or governmental authority is pending or to the best knowledge of
Pledgor, threatened (a) with respect to this Agreement or any of the
transactions contemplated hereby or (b) against or affecting Pledgor, or any of
its property or assets.
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<PAGE> 4
3.5 RECORD OWNER
Pledgor is the record, legal and beneficial owner of the Pledged Stock
and the shares of Pledged Stock described on Exhibit A constitute all of the
issued and outstanding shares of Borrower. Pledgor has good and marketable title
to the Pledged Stock and will, at its own expense, defend U. S. Bank's right,
title and security interest in and to the Pledged Stock against the claims of
any Person.
3.6 NO ENCUMBRANCES
Pledgor represents that all of the shares of the Pledged Stock have
been validly issued, are fully paid and nonassessable, and are owned by Pledgor
free of any pledge, mortgage, hypothecation, lien, charge, encumbrance or
security interest in such shares or the proceeds thereof, except for that
granted hereunder. By acceptance of this Agreement, U. S. Bank acknowledges that
20,833 shares of the Pledged Stock are subject to a purchase option held by
Douglas Hauff.
3.7 FIRST PRIORITY LIEN
Upon delivery to U. S. Bank of the stock certificates evidencing the
Pledged Stock, the lien granted pursuant to this Agreement will constitute a
valid, perfected first priority lien on the Pledged Stock, enforceable as such
against all creditors of Pledgor and any Persons purporting to purchase any
Pledged Stock from Pledgor.
3.8 INVESTMENT COMPANY
Pledgor is not an "investment company" or a company "controlled" by an
"invested company" (as each of the quoted terms is defined or used in the
Investment Company Act of 1940, as amended.)
3.9 CONTINUING REPRESENTATIONS
Pledgor agrees that the foregoing representations and warranties shall
be deemed to have been made by Pledgor on the date of each borrowing by Borrower
under the Credit Agreement on and as of such date as though made hereunder on
and as of such date.
ARTICLE IV. COVENANTS
Pledgor covenants and agrees with U. S. Bank that, from and after the
date of this Agreement until the Secured Obligations are paid in full:
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<PAGE> 5
4.1 ENDORSEMENT AND DELIVERY
Concurrently with the execution hereof, Pledgor shall deliver physical
possession of the Pledged Stock to U. S. Bank so that U. S. Bank's security
interest may be properly perfected by possession, and shall deliver with each
share certificate of the Pledged Stock an executed assignment separate from
certificate with respect to each share certificate so delivered.
4.2 NO OTHER LIENS
Pledgor will not create or permit the existence of any lien or security
interest other than that hereby created on the Pledged Stock without the written
consent of U. S. Bank.
4.3 DUTY WITH RESPECT TO DISTRIBUTIONS
If Pledgor shall, as a result of Pledgor's ownership of the Pledged
Stock, become entitled to receive or shall receive any stock certificate
(including, without limitation, any certificate representing a stock dividend or
a distribution in connection with any reclassification, increase or reduction of
capital or any certificate issued in connection with any reorganization), option
or rights, whether in addition to, in substitution of, as a conversion of, or in
exchange for any shares of the Pledged Stock, or otherwise in respect thereof,
Pledgor shall accept the same as U. S. Bank's agent, hold the same in trust for
U. S. Bank and deliver the same forthwith to U. S. Bank in the exact form
received, duly endorsed by Pledgor to U. S. Bank, if required, together with an
undated assignment separate from certificate covering such certificate duly
executed in blank and with, if U. S. Bank so requests, signature guaranteed, to
be held by U. S. Bank hereunder as additional collateral security for the
Secured Obligations. Any sums paid upon or in respect of the Pledged Stock upon
the liquidation or dissolution of Borrower shall be paid over to U. S. Bank to
be held by it hereunder as additional collateral security for the Secured
Obligations, and in case any distribution of capital shall be made on or in
respect of the Pledged Stock or any property shall be distributed upon or with
respect to the Pledged Stock pursuant to the recapitalization or
reclassification of the capital of Borrower or pursuant to the reorganization
thereof, the property so distributed shall be delivered to U. S. Bank to be held
by it, subject to the terms hereof, as additional collateral security for the
Secured Obligations. If any sums of money or property so paid or distributed in
respect of the Pledged Stock shall be received by Pledgor, Pledgor shall, until
such money or property is paid or delivered to U. S. Bank, hold such money or
property in trust for U. S. Bank, segregated from other funds of Pledgor, as
additional collateral security for the Secured Obligations.
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<PAGE> 6
4.4 VOTING RIGHTS
Without the prior written consent of U. S. Bank, Pledgor will not (a)
vote to enable, or take any other action to permit, Borrower to issue any
additional stock or other equity securities of any nature or to issue any other
securities convertible into or granting the right to purchase or exchange for
any stock or other equity securities of Borrower with the exception of (i) stock
or securities issued to Pledgor and delivered to U. S. Bank as Pledged Stock,
and (ii) stock of Borrower (or options for the issuance of stock) in an amount
not to exceed 10 percent of Borrower's aggregated outstanding stock at any time,
issued as incentive compensation to Borrower's management employees, or (b)
sell, assign, transfer, exchange or otherwise dispose of, or grant any option
with respect to, the Pledged Stock, or (c) create, incur or permit to exist any
lien or option in favor of, or any claim of any Person with respect to, any of
the Pledged Stock, or any interest therein, except for the lien provided for by
this Agreement. Pledgor will defend the right, title and interest of U. S. Bank
in and to the Pledged Stock against the claims and demands of all Persons
whomsoever.
4.5 FURTHER ASSURANCES
At any time and from time to time, upon the written request of U. S.
Bank, and at the sole expense of Pledgor, Pledgor will promptly and duly execute
and deliver such further instruments and documents and take such further actions
as U. S. Bank may reasonably request for the purposes of obtaining or preserving
the full benefits of this Agreement and of the rights and powers herein granted.
Subject to Section 2.2 herein, if any amount payable under or in connection with
the Pledged Stock shall be or become evidenced by any promissory note, other
instrument or chattel paper, such note, instrument or chattel paper shall, be
immediately delivered to U. S. Bank duly endorsed in a manner satisfactory to U.
S. Bank to be held as collateral pursuant to this Agreement.
4.6 INDEMNIFICATION
Pledgor agrees to pay, and to save U. S. Bank harmless from, any and
all liabilities with respect to, or resulting from any delay in paying, any and
all stamp, excise, sales or other taxes (except for the tax imposed on the
overall net income of U. S. Bank) which may be payable or determined to be
payable with respect to any of the Pledged Stock or in connection with any of
the transactions contemplated by this Agreement.
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<PAGE> 7
4.7 REGISTRATION RIGHTS
If U. S. Bank shall determine to exercise its right to sell any or all
of the Pledged Stock pursuant to Article V hereof, and if in the opinion of U.
S. Bank it is necessary or advisable to have the Pledged Stock, or that portion
thereof to be sold, registered under the provisions of the Securities Act of
1933, as amended (the "Securities Act"), Pledgor will use its best efforts to
cause Borrower to (a) execute and deliver, and cause the directors and officers
of Borrower to execute and deliver, all such instruments and documents, and do
or cause to be done all such other acts, as may be, in the opinion of U. S.
Bank, necessary or advisable to register the Pledged Stock, or that portion
thereof to be sold, under the provisions of the Securities Act, (b) use its best
efforts to cause the registration statement relating thereto to become effective
and to remain effective for a period of six months from the effective date of
such registration statement, and (c) make all amendments thereto and/or to the
related prospectus which, in the opinion of the U. S. Bank, are necessary or
advisable, all in conformity with the requirements of the Securities Act and the
rules and regulations of the Securities and Exchange Commission applicable
thereto. Pledgor agrees to cause Borrower to comply with the provisions of the
securities or "Blue Sky" laws of any and all jurisdictions which U. S. Bank
shall designate and to make available to its security holders, as soon as
practicable, an earnings statement (which need not be audited) which will
satisfy the provisions of section 11(a) of the Securities Act.
4.8 PRIVATE SALE
Pledgor recognizes that U. S. Bank may be unable to effect a public
sale of any or all of the Pledged Stock, by reason of certain prohibitions
contained in the Securities Act and applicable state securities laws or
otherwise, and may be compelled to resort to one or more private sales thereof
to a restricted group of purchasers which will be obliged to agree, among other
things, to acquire such securities for their own account for investment and not
with a view to the distribution or resale thereof. Pledgor acknowledges and
agrees that any such private sale may result in prices and other terms less
favorable to U. S. Bank than if such sale were a public sale and,
notwithstanding such circumstances, agrees that any such private sale shall not
be deemed to have been made in a commercially unreasonable manner merely because
it was a private sale. U. S. Bank shall be under no obligation to delay a sale
of any of the Pledged Stock for the period of time necessary to permit Borrower
to register such securities for public sale under the Securities Act, or under
applicable state securities laws, even if Borrower would agree to do so.
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<PAGE> 8
4.9 SPECIFIC PERFORMANCE
Pledgor further agrees to use its best efforts to do or cause to be
done all such other acts as may be necessary to make any sale or sales of all or
any portion of the Pledged Stock pursuant to Sections 4.7 and 4.8 herein, valid
and binding and in compliance with any and all applicable requirements of law.
Pledgor further agrees that a breach of any of the covenants contained in
Sections 4.7 and 4.8 herein, will cause irreparable injury to U. S. Bank, that
U. S. Bank has no adequate remedy at law in respect of such breach and, as a
consequence, agrees that each and every covenant contained in Sections 4.7 and
4.8 herein, shall be specifically enforceable against Pledgor, and Pledgor
hereby waives and agrees not to assert any defense against an action for
specific performance of such covenants, except for a defense that no default of
the covenants, terms, or conditions of the Credit Agreement has occurred.
ARTICLE V. RIGHTS AND REMEDIES
5.1 REMEDIES
U. S. Bank may exercise, in addition to all other rights and remedies
granted in this Agreement and in any other instrument or agreement securing,
evidencing or relating to the Secured Obligations, all rights and remedies of a
secured party under the Uniform Commercial Code of the state of Washington.
Without limiting the generality of the foregoing, U. S. Bank without demand of
performance or other demand, presentment, protest, advertisement or notice of
any kind (except any notice required by law or referred to below) to or upon
Pledgor, Borrower or any other Person (all and each of which demands, defenses,
advertisements and notices are hereby waived to the extent not prohibited by
law), may in such circumstances forthwith collect, receive, appropriate and
realize upon the Pledged Stock, or any part thereof, and/or may forthwith sell,
assign, give option or options to purchase or otherwise dispose of and deliver
the Pledged Stock or any part thereof (or contract to do any of the foregoing),
in one or more parcels at public or private sale or sales, in the
over-the-counter market, at any exchange broker's board or at U. S. Bank's
offices or elsewhere upon such terms and conditions as it may deem advisable and
at such prices as it may deem best, for cash or on credit or for future delivery
without assumption of any credit risk. U. S. Bank shall have the right upon any
such public sale or sales and, to the extent permitted by law, upon any such
private sale or sales to purchase the whole or any part of the Pledged Stock so
sold, free and clear of any right or equity of redemption in Pledgor, which
right or equity is hereby waived or released to the extent not prohibited by
law. U. S. Bank shall apply the net proceeds of any such collection, recovery,
receipt, appropriation, realization or sale, after deducting all reasonable
costs and expenses of every kind incurred therein or
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<PAGE> 9
incidental to the care or safekeeping of any of the Pledged Stock or in any way
relating to the Pledged Stock or the rights of U. S. Bank hereunder, including,
without limitation, reasonable attorney fees and disbursements to the payment in
whole or in part of the Secured Obligations in such order as U. S. Bank may
elect, and only after such application and after the payment by U. S. Bank of
any other amount required by any provision of law, including, without
limitation, RCW 62A.9-504(1)(c), need U. S. Bank account for the surplus, if
any, to Pledgor.
5.2 RIGHTS REGARDING PLEDGED STOCK
If an Event of Default shall occur: (a) U. S. Bank shall have the right
to receive any and all cash dividends paid in respect of the Pledged Stock and
make application thereof to the Secured Obligations in such order as it may
determine, and (b) all shares of the Pledged Stock shall be registered in the
name of U. S. Bank or its nominee, and U. S. Bank or its nominee may thereafter
exercise (i) all voting, corporate, consensual and other rights pertaining to
such shares of the Pledged Stock at any meeting of Borrower or otherwise and
(ii) any and all rights of conversion, exchange, subscription and any other
rights, privileges or options pertaining to such shares of the Pledged Stock as
if it were the absolute owner thereof (including, without limitation, the right
to exchange at its discretion any and all of the Pledged Stock upon the merger,
consolidation, reorganization, recapitalization or other fundamental change in
the corporate structure of Borrower, or upon the exercise by Pledgor or U. S.
Bank of any right, privilege or option pertaining to such shares of the Pledged
Stock, and in connection therewith, the right to deposit and deliver any and all
of the Pledged Stock with any committee, depositary, transfer agent, registrar
or other designated agency upon such terms and conditions as it may determine),
all without liability except to account for property actually received by it,
but U. S. Bank shall have no duty to exercise any such right, privilege or
option and shall not be responsible for any failure to do so or delay in so
doing.
5.3 RIGHT TO PROCEED AGAINST PLEDGED STOCK
The rights of U. S. Bank hereunder shall not be conditioned or
contingent upon the pursuit by U. S. Bank of any right or remedy against
Borrower or against any other Person which may be or become liable in respect of
all or any part of the Secured Obligations or against any other Collateral
therefor, guarantee thereof or right of offset with respect thereto. U. S. Bank
shall not be liable for any failure to demand, collect or realize upon all or
any part of the Pledged Stock or for any delay in doing so, nor shall it be
under any obligation to sell or otherwise dispose of any Pledged Stock upon the
request of Pledgor or any other Person or to take any other action whatsoever
with regard to the Pledged Stock or any part thereof except that
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<PAGE> 10
U. S. Bank shall be required to exercise reasonable care with respect to the
safe keeping of collateral in its possession.
5.4 NOTICE OF SALE, ETC.
To the extent permitted by applicable law, Pledgor waives all claims,
damages and demands it may acquire against U. S. Bank arising out of the
exercise by U. S. Bank of any of its rights hereunder. If any notice of a
proposed sale or other disposition of Pledged Stock shall be required by law,
such notice shall be deemed reasonable and proper if given at least ten days
before such sale or other disposition. To the extent not prohibited by
applicable law, Pledgor further waives and agrees not to assert any rights or
privileges which it may acquire under RCW 62A.9-112.
ARTICLE VI. GENERAL PROVISIONS
6.1 LIMITATION ON DUTIES REGARDING PLEDGED STOCK
U. S. Bank's sole duty with respect to the custody, safekeeping and
physical preservation of the Pledged Stock in its possession, under RCW
62A.9-207 or otherwise, shall be to deal with it in the same manner as the U. S.
Bank deals with similar securities and property for its own account. Neither U.
S. Bank nor any of its respective directors, officers, employees or agents shall
be liable for failure to demand, collect or realize upon any of the Pledged
Stock or for any delay in doing so or shall be under any obligation to sell or
otherwise dispose of any Pledged Stock upon the request of Pledgor or otherwise.
6.2 WAIVERS BY PLEDGOR
Pledgor hereby (a) waives notice of any advances made by U. S. Bank
pursuant to the Credit Agreement or pursuant to any extension, renewal or
modification thereof; (b) waives, with respect to the Secured Obligations,
grace, demand, presentment, notice of dishonor and protest; (c) agrees that U.
S. Bank, before proceeding against Pledgor under this Agreement, shall not be
bound to exhaust its recourse or take any action against Borrower or against any
other person or entity, or to proceed against any Collateral or against any
particular Collateral, but U. S. Bank may make such demands and take such
actions as it deems advisable; (d) agrees that U. S. Bank, without affecting the
liability of Pledgor under this Agreement, may with or without notice or
consideration release Borrower or any other Person or entity liable for the
Secured Obligations or any Collateral for the Secured Obligations; and (e)
waives, with respect to the Secured Obligations, any defense based upon any
change in the name, location, composition or structure of Borrower, or any
change in
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<PAGE> 11
the type of business conducted by Borrower, or any other change in the identity
of legal status of Borrower.
6.3 WAIVER OF SUBROGATION; SUBORDINATION
Unless otherwise consented to by U. S. Bank in writing, until the
earlier of the termination of the Guaranty or the full and final payment of all
of the Secured Obligations, Pledgor (a) agrees not to exercise any right it may
acquire against Borrower or any security for the Secured Obligations by reason
of payments to U. S. Bank hereunder (whether by subrogation, reimbursement, or
otherwise), (b) assigns to U. S. Bank all rights against Borrower Pledgor may
have (whether or not relating to the Secured Obligations) in any proceeding
under the United States U. S. Bankruptcy Code or in any receivership or
insolvency proceeding, and (c) appoints U. S. Bank attorney-in-fact to appear in
any such proceeding, file claims, receive payments, and do any other act which
Pledgor could do personally. If any amount shall be paid to Pledgor on account
of such subrogation rights at any time when all of the Secured Obligations are
not paid in full, such amount shall be held by Pledgor in trust for U. S. Bank,
segregated from other funds of Pledgor, and shall, forthwith upon receipt by
Pledgor, be turned over to U. S. Bank in the exact form received by Pledgor
(duly endorsed by Pledgor to U. S. Bank, if required), to be applied against the
Secured Obligations, whether matured or unmatured, in such order as U. S. Bank
may determine.
6.4 EXPENSES INCURRED BY U. S. BANK
U. S. Bank is not required to, but may at its option, pay any tax or
other charge or expense payable by Pledgor and any filing or recording fees, and
any amounts so paid shall be repayable by Pledgor upon demand. Pledgor will also
repay upon demand all of U. S. Bank's reasonable expenses incurred in
collecting, conserving, or protecting the Pledged Stock. All such sums shall
bear interest at the default rate as provided in the Credit Agreement from the
date of U. S. Bank's payment until Pledgor's repayment. All such sums and
interest thereon shall be secured by the security interest granted herein. The
rights granted by this Section 6.4 are not a waiver of any other rights of U. S.
Bank arising from breach of any of Pledgor's covenants.
6.5 NONWAIVERS
This Agreement shall not be qualified or supplemented by course of
dealing. No waiver or modification by U. S. Bank of any of the terms or
conditions hereof shall be effective unless in writing signed by U. S. Bank. No
waiver or indulgence by
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U. S. Bank as to any required performance by Pledgor shall constitute a waiver
as to any subsequent required performance or other obligations of Pledgor
hereunder.
6.6 ATTORNEY FEES, COSTS
Pledgor agrees to pay to U. S. Bank any and all costs and expenses,
including attorney fees, incurred by U. S. Bank in protecting or enforcing its
rights under the terms of this Agreement, including challenges or claims by
Pledgor or any other person, whether or not a lawsuit is commenced. Attorney
fees shall include services rendered at arbitration, trial, and any appeal
therefrom as well as services rendered subsequent to judgment and obtaining
execution thereon. The fees, costs, and expenses shall bear interest at the then
applicable rate as provided in the Credit Agreement until paid in full. Payment
of costs and expenses, including attorney fees, shall be secured by the security
interest herein granted.
6.7 SALE AND ASSIGNMENT BY U. S. BANK
To the extent permitted by the Credit Agreement, U. S. Bank may assign
or transfer the whole or any part of the Secured Obligations, and may transfer
therewith as collateral security the whole or any part of the Pledged Stock; and
all obligations, rights, powers and privileges herein provided shall inure to
the benefit of the assignee and shall bind the heirs, executors, administrators,
successors or assigns of the parties hereto.
6.8 GOVERNING LAW
This Agreement and the Secured Obligations are subject to the laws of
the state of Washington and are to be construed in accordance therewith.
6.9 IRREVOCABLE AUTHORIZATION AND INSTRUCTION TO BORROWER
Pledgor hereby authorizes and instructs Borrower to comply with any
instruction received by it from U. S. Bank in writing that (a) states that all
or any portion of the Secured Obligations has been declared or has become due
and payable in accordance with the terms of the Credit Agreement and remains
unpaid and (b) is otherwise in accordance with the terms of this Pledge
Agreement, without any other or further instructions from Pledgor.
6.10 CONSENT TO JURISDICTION, SERVICE, AND VENUE
For the purpose of performance of the obligations under or otherwise in
connection herewith, Pledgor hereby consents to the jurisdiction and venue of
the courts of the state of Washington or of any federal court located in such
state
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including but not limited to the Superior Court of Washington for King County
and the United States District Court for the Western District of Washington.
Pledgor hereby waives the right to contest the jurisdiction and venue of courts
located in King County, Washington, on the ground of inconvenience or otherwise
and waives any right to bring any action or proceeding against U. S. Bank in any
court outside King County, Washington. The provisions of this section do not
limit or otherwise affect the right of U. S. Bank to institute and conduct
action in any other appropriate manner, jurisdiction, or court.
6.11 ARBITRATION
(a) Either Pledgor or U. S. Bank may require that all disputes, claims,
counterclaims, and defenses, including those based on or arising from any
alleged tort ("Claims") relating in any way to this Agreement be settled by
binding arbitration in accordance with the Commercial Arbitration Rules of the
American Arbitration Association and Title 9 of the U.S. Code. All Claims will
be subject to the statutes of limitations that would be applicable if they were
litigated.
(b) This provision is void if the Loans, at the time of the proposed
submission to arbitration, are secured by real property located outside of
Oregon or Washington or if the effect of the arbitration procedure (as opposed
to any Claims of Borrower) would be to materially impair U. S. Bank's ability to
realize on any Collateral pursuant to an arbitration ruling favorable to U. S.
Bank.
(c) If arbitration occurs and each party's Claim is less than $100,000,
one neutral arbitrator will decide all issues; if either party's Claim is more
than $100,000, three neutral arbitrators will decide all issues. All arbitrators
will be active Washington State Bar members in good standing. All arbitration
hearings will be held in Seattle, Washington. In addition to all other powers,
the arbitrator or arbitrators shall have the exclusive right to determine all
issues of arbitrability and shall have the authority to issue subpoenas.
Judgment on any arbitration award may be entered in any court with jurisdiction.
(d) If either party institutes any judicial proceeding relating to the
Loans, that action shall not be a waiver of the right to submit any Claim to
arbitration. In addition, each has the right before, during, and after any
arbitration to exercise any number of the following remedies, in any order or
concurrently: (i) setoff, (ii) self-help repossession, (iii) judicial or
nonjudicial foreclosure against real or personal collateral, (iv) provisional
remedies, including injunction, appointment of a receiver, attachment, claim and
delivery, and replevin.
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(e) This arbitration clause cannot be modified or waived by either
party except in writing, which writing must refer to this arbitration clause and
be signed by Pledgor and U. S. Bank.
6.12 POWERS COUPLED WITH AN INTEREST
All authorizations and agencies herein contained with respect to the
Pledged Stock are irrevocable and powers coupled with an interest.
6.13 SEVERABILITY
Any provision of this Agreement which is prohibited or unenforceable in
any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of
such prohibition or unenforceability without invalidating the remaining
provisions hereof, and any such prohibition or unenforceability in any
jurisdiction shall not invalidate or render unenforceable such provision in any
other jurisdiction.
6.14 COUNTERPARTS
This Agreement may be executed in one or more counterparts, each of
which shall constitute an original Agreement, but all of which together shall
constitute one and the same instrument.
TRILLIUM INVESTORS II, L.L.C., a
Washington limited liability company
By: /s/ Steven R. Brinn
------------------------------
Title: Manager
------------------------------
Accepted By: U. S. BANK OF WASHINGTON,
NATIONAL ASSOCIATION
By: /s/ Gerald L. Sorensen
------------------------------
Title: Sr. V. P.
------------------------------
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<PAGE> 15
ACKNOWLEDGMENT AND CONSENT
GARGOYLES, INC., a Washington corporation ("Borrower"), hereby
acknowledges receipt of a copy of the Pledge Agreement and agrees to be bound
thereby and to comply with the terms of Sections 4.7 and 4.8 thereof. Borrower
agrees to notify U. S. Bank promptly in writing of the occurrence of any of the
events described in Article IV of the Pledge Agreement. Borrower further agrees
that the terms of Section 4.9 of the Pledge Agreement shall apply to it, mutatis
mutandis, with respect to all actions that may be required of it under or
pursuant to or arising out of Sections 4.7 and 4.8 of the Pledge Agreement.
GARGOYLES, INC., a Washington
corporation
By: /s/ Douglas B. Hauff
-------------------------
Title: President
-------------------------
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<PAGE> 16
EXHIBIT A
TO PLEDGE AGREEMENT
DESCRIPTION OF STOCK OF GARGOYLES, INC.
<TABLE>
<CAPTION>
================================================================================
OWNER CERTIFICATE NO. NUMBER OF SHARES
- --------------------------------------------------------------------------------
<S> <C> <C>
Trillium Investors II, 58 479,167
L.L.C.
================================================================================
</TABLE>
<PAGE> 1
EXHIBIT 10.23
INDEMNITY AGREEMENT
THIS INDEMNITY AGREEMENT (this "Agreement") is made as of February 13,
1996, by GARGOYLES, INC., a Washington corporation ("Gargoyles"), in favor of
TRILLIUM CORPORATION, a Washington corporation ("Trillium").
RECITALS
A. Gargoyles and Trillium, among others are parties to that certain
Stock Purchase Agreement dated as of January 26, 1996, with respect to the
purchase of all the issued and outstanding stock of H.S.I., a California
corporation d/b/a Hobie Sunglasses (the "Purchase Agreement").
B. In consideration of the transactions contemplated by the Purchase
Agreement, Gargoyles has asked Trillium to guarantee $4,000,000 of indebtedness
of Gargoyles and/or its wholly-owned subsidiaries to U.S. Bank of Washington
N.A., pursuant to the terms of that certain Amended and Restated Limited
Guaranty dated February 13, 1996 (the "Guaranty"), and Trillium has agreed to
guarantee such indebtedness provided Gargoyles agrees to indemnify Trillium for
any losses related to such guaranty.
AGREEMENT
NOW THEREFORE, in consideration of the premises and other good and
valuable consideration the receipt and sufficiency of which are hereby
acknowledged, Gargoyles hereby agrees as follows:
1. INDEMNITY
Gargoyles hereby agrees to reimburse Trillium for any and all payments
made by Trillium under the terms of the Guaranty as a result of the failure of
Gargoyles to pay or perform its obligations guaranteed by Trillium under the
terms of the Guaranty, and hereby agrees to indemnify, defend, and hold harmless
Trillium from and against all losses, liabilities, deficiencies, claims and
expenses (including, but not limited to, costs of defense and reasonable
attorneys' fees) incurred by Trillium arising from the failure of Gargoyles to
pay or perform its obligations guaranteed by Trillium under the terms of the
Guaranty.
<PAGE> 2
2. ATTORNEYS' FEES
If it shall be necessary for Trillium to employ an attorney to enforce
its rights pursuant to this Agreement because of the default of Gargoyles,
Gargoyles shall reimburse Trillium for reasonable attorneys' fees and expenses.
3. GOVERNING LAW
This Agreement shall be governed by the internal law of the state of
Washington as to all matters, including but not limited to matters of validity,
construction, effect and performance.
4. GUARANTY FEE
Upon the closing of the transactions contemplated by the Purchase
Agreement, Gargoyles shall pay to Trillium in cash or other immediately
available funds a guarantee fee of Forty-Thousand Dollars ($40,000).
IN WITNESS WHEREOF, Gargoyles has executed this Indemnity Agreement as
of the date first above written:
GARGOYLES, INC., a
Washington corporation
By /s/ Douglas B. Hauff
----------------------------------
Douglas B. Hauff, President
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EXHIBIT 10.24
STOCK PURCHASE AGREEMENT
THIS STOCK PURCHASE AGREEMENT (this "Agreement") is made as of this
26th day of January, 1996, by and among GARGOYLES, INC., a Washington
corporation and/or its wholly-owned subsidiary H.S.C., Inc., a Washington
corporation ("Purchaser"), DOUGLAS B. HAUFF ("Hauff"), H.S.I., a California
corporation d/b/a Hobie Sunglasses ("Hobie"), and the WILLIAM AND KATHLEEN
BLACKBURN FAMILY TRUST U/D/T/ DATED MARCH 20, 1992 (the "Blackburn Trust"),
PACIFIC EQUIPMENT CO., a California general partnership comprised of William W.
Blackburn ("Blackburn"), Robert S. Blackburn, James D. Blackburn, and Velma M.
Blackburn as general partners, VELMA M. BLACKBURN, THOMAS M. LINDEN, HOBART P.
ALTER, HOBART L. ALTER, CHARLES A. FRENCH, KENT S. COLBERG, PAUL ARENTSEN,
DENNIS S. BUSH ("Bush"), AND CHARLES P. LARSON ("Larson") (who collectively
shall be referred to herein as "Sellers").
RECITALS
A. Hobie designs, develops, manufactures, markets and distributes
polarized sunglasses and eyewear under the Hobie tradename and mark.
B. Sellers (except for Larson) own one hundred percent of the issued
and outstanding shares of common stock of Hobie. The Blackburn Trust, Bush and
Larson hold options to acquire additional shares of common stock of Hobie, and
the Blackburn Trust, Bush and Pacific Equipment Co. hold a note convertible into
shares of common stock of Hobie.
C. For purposes of this Agreement, the Blackburn Trust and Bush are
sometimes referred to herein as "Active Sellers" and all other Sellers are
sometimes referred to herein as "Passive Sellers".
D. Subject to the terms and conditions set forth in this Agreement,
Purchaser desires to purchase all the stock of Hobie and Sellers desire to sell
such stock to Purchaser.
E. Capitalized terms shall have the meanings ascribed to them herein.
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AGREEMENT
NOW, THEREFORE, in consideration of the premises and the mutual
covenants, agreements, representations and warranties and conditions set forth
herein, the parties hereto hereby agree as follows:
1. EXERCISE OF OPTIONS AND CONVERSION OF NOTE
Hobie, the Blackburn Trust, Pacific Equipment Co., Bush and Larson
agree to take all legal steps and corporate actions required with respect to any
options or convertible notes held by the Blackburn Trust, Pacific Equipment Co.,
Bush and Larson to acquire common stock of Hobie so that as of Closing all the
issued and outstanding stock of Hobie (the "Stock") shall be owned by Sellers as
set forth on the attached Exhibit 1.
2. PURCHASE AND SALE OF STOCK
Subject to the terms and conditions of this Agreement, at Closing
Purchaser will purchase the Stock from each of the Sellers, and each of the
Sellers will sell the total number of shares of Stock set opposite such Seller's
name on the attached Exhibit 1.
3. PURCHASE PRICE; PAYMENT TERMS
The purchase price for the Stock shall be $5.5868 per share (the
"Purchase Price) payable in cash at Closing.
4. CLOSING
4.1 DATE; LOCATION
The closing of the transactions contemplated by this Agreement (the
"Closing") shall take place at the offices of Purchaser, 5866 South 194th
Street, Kent, Washington at 10:00 AM local time on or before February 15, 1996
or such other date as the parties hereto may agree (the "Closing Date").
4.2 DELIVERIES
Subject to satisfaction or waiver of the conditions to Closing set
forth herein, on the Closing Date:
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(a) Each of the Sellers shall deliver or cause to be delivered
to Purchaser stock certificates representing the Stock held by each of them,
duly endorsed in blank or accompanied by stock powers duly executed by each such
Seller;
(b) Purchaser shall wire transfer the total Purchase Price for
the Stock into the trust account of the firm of Hobie's attorney, Obegi &
Brewer, who is acting as the escrow for disbursement of the Purchase Price. The
Purchase Price shall be disbursed from Escrow in accordance with the
instructions of Sellers and Purchaser and in accordance with Section 8.6 (c)
hereof;
(c) Sellers and Hobie shall each deliver to the Purchaser a
certificate dated as of the Closing Date stating that all the representations
and warranties made by them hereunder are true as of the Closing Date; and
(d) the parties hereto shall deliver each of the other
instruments or documents required to be delivered at Closing under the terms of
this Agreement (the "Related Documents").
5. REPRESENTATIONS AND WARRANTIES OF SELLERS
Each Seller severally represents and warrants to Purchaser that the
following statements are true and correct as of the date of this Agreement
(unless expressly limited to the Closing Date) and will be true and correct as
of the Closing Date:
5.1 AUTHORITY OF SELLERS
Each of the Sellers has full right, power, capacity and authority to
execute and deliver this Agreement and the Related Documents to be executed and
delivered by each of the Sellers hereunder. This Agreement has been, and each of
the Related Documents to be executed by each of the Sellers will be, duly
executed and delivered by each of the Sellers and will constitute a valid and
binding obligation of each of the Sellers enforceable against each of the
Sellers in accordance with their terms. Each of the Sellers who executes this
Agreement on behalf of a marital community does hereby represent that such
Seller has full authority to bind his or her marital community to all the terms
and conditions applicable to such marital community Seller under the terms of
this Agreement.
5.2 OWNERSHIP OF STOCK
Each Seller represents and warrants that as of the Closing Date, the
number of shares of Stock listed opposite each such Seller's name on the
attached Exhibit 1 is owned of record and beneficially by each such Seller free
and clear of all liens, charges, encumbrances, agreements, claims or
restrictions of any kind ("Liens"), by or
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on the part of any person, firm, corporation or other entity ("Person"), and
upon delivery of the certificates representing the Stock duly endorsed in blank
or accompanied by a duly executed stock power, good and marketable title to the
Stock owned by each such Seller will be sold, assigned, conveyed, transferred
and delivered by each such Seller to Purchaser free and clear of all Liens by or
on the part of any Person.
The Active Sellers jointly and severally represent and warrant to
Purchaser, and the Passive Sellers severally represent and warrant to Purchaser
that to the best of each Seller's knowledge, the following statements are true
and correct as of the date of this Agreement (unless expressly limited to the
Closing Date) and will be true and correct as of the Closing Date:
5.3 ORGANIZATION OF HOBIE
Hobie is a corporation duly organized, validly existing and in good
standing under the laws of the state of California. Hobie has all requisite
corporate power and authority to own and operate its properties and assets and
to carry on its business as currently conducted. Hobie is not qualified to do
business in any state other than the state of California. A true and correct
copy of the Articles of Incorporation and Bylaws of Hobie are attached to
Schedule 5.3 hereto. Hobie has no subsidiaries.
5.4 CORPORATE POWER AND AUTHORITY
Hobie has all requisite corporate power and authority to execute and
deliver this Agreement and all the Related Documents to be executed and
delivered by Hobie hereunder and to carry out and perform its obligations under
the terms of this Agreement and the Related Documents. The execution, delivery
and performance of this Agreement and the Related Documents have been duly
authorized by all requisite action on the part of the officers, directors and
shareholders of Hobie. This Agreement and each of the Related Documents to which
Hobie is a party has been, and at closing will be, duly executed and delivered
by Hobie and will constitute, a valid and binding obligation of Hobie
enforceable against Hobie in accordance with their terms.
5.5 CAPITALIZATION OF HOBIE
As of the date of this Agreement, the authorized capital stock of Hobie
consists solely of shares of Hobie common stock, of which 365,000 shares are
issued and outstanding and held of record as set forth on the attached Schedule
5.5. All of such stock is validly issued, fully paid and non-assessable, and was
issued without violation of any applicable federal or state securities laws or
any preemptive or similar
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rights. Other than as disclosed on the attached Schedule 5.5, there are no
agreements, arrangements, options, warrants, calls, rights or other commitments
of any kind whatsoever relating to the issuance, sale, purchase, retirement or
redemption of any shares of capital stock of Hobie, including the Stock.
Immediately prior to the Closing, the issued and outstanding Stock of Hobie will
be and is owned as set forth on the attached Exhibit 1, which Stock is validly
issued, fully paid and non-assessable shares of common stock of Hobie
5.6 FINANCIALS
Hobie has delivered to Purchaser unaudited, compiled financial
statements for the periods ending December 31, 1993 and 1994 and the interim,
internally prepared statements of income prepared by Hobie for the year ending
December 31, 1995 (the "Financial Statements"). The Financial Statements,
together with the notes related thereto and anticipated adjustments at December
31, 1995, for depreciation, amortization, inventory, accounts receivable and
provisions for income taxes, are complete and correct in all material respects
and fairly present the financial condition of Hobie as of the dates indicated
therein.
5.7 OPERATION SINCE BALANCE SHEET DATE
(a) Except as set forth in Schedule 5.7, since the date of
the balance sheet dated as of November 30, 1995 (the "Balance Sheet Date"),
there has been no material adverse change in the assets, properties,
liabilities, business, prospects or condition (financial or otherwise) of Hobie,
and no fact or condition exists or is contemplated or to the knowledge of Hobie
or Sellers threatened which might reasonably be expected to cause such a change
in the future.
(b) Except as set forth in Schedule 5.7, since the Balance
Sheet Date, Hobie has conducted its business in the usual, regular and ordinary
course and consistent with past practice. Without limiting the generality of the
foregoing, since the Balance Sheet Date (except as contemplated by this
Agreement), Hobie has not:
(i) issued, delivered, or agreed to issue or deliver, or
granted any option, warrant or other right to purchase or otherwise acquire any
capital stock or security convertible into or exchangeable for capital stock, or
issued or agreed to issue any bonds, notes or other securities or evidences of
indebtedness, or borrowed or agreed to borrow any funds;
(ii) sold, leased, transferred or otherwise disposed of or
mortgaged or pledged, or imposed or suffered to be imposed any Lien on any of
their assets, other than in the ordinary course of business;
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(iii) increased the rate of compensation or commission payable
or made any accrual or arrangement for or payment of any bonus or special
compensation of any kind or any severance or termination pay to any officer or
employee or commissioned salesperson or similar agent;
(iv) made or declared, or agreed to make or declare, any
payment of dividends or distributions to stockholders;
(v) entered into any material contract or other agreement of
any amendment or termination thereof;
(vi) made any change in the accounting policies, methods or
practices followed by Hobie; or
(vii) entered into or become committed to enter into any other
transaction except in the ordinary course of business.
5.8 UNDISCLOSED LIABILITIES
Except as reflected in the Financial Statements or as disclosed on the
attached Schedule 5.8, Hobie has no material liabilities, contingent or
otherwise, or obligations other than (i) liabilities incurred in the ordinary
course of business and (ii) obligations under contracts and commitments duly
entered into by Hobie in the ordinary course of business, which, in both cases,
individually or in the aggregate, are not material to the condition (financial
or otherwise) or operating results of the Companies. For purposes of this
Section 5.8, undisclosed liabilities shall not be financially material unless
they exceed in the aggregate Ten Thousand Dollars ($10,000).
5.9 OUTSTANDING INDEBTEDNESS
Except as reflected in the Financial Statements or as disclosed on the
attached Schedule 5.9, Hobie has no indebtedness for borrowed money which Hobie
has directly or indirectly created, incurred, assumed or guaranteed, or with
respect to which Hobie has become directly or indirectly liable.
5.10 ACCOUNTS RECEIVABLE
Except to the extent disclosed on the attached Schedule 5.10, the
accounts receivable of Hobie, as reflected in the Financial Statements and
thereafter arising, are (i) owned by Hobie and are not subject to any Lien, (ii)
not subject to any offset, deduction, defense, dispute or counterclaim, (iii)
not subject to any discounts or allowances, and (iv) legal, valid and binding
obligations of the account debtors in respect of such accounts receivable.
Sellers cannot warrant the financial viability of
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any of the account debtors, but to the best of Sellers' knowledge the accounts
receivable are collectible.
5.11 INVENTORY
Except as set forth on Schedule 5.11, the inventory of Hobie as
reflected in the Financial Statements and thereafter acquired, is (i) owned by
Hobie and not subject to any Lien, (ii) in good and salable condition, (iii) not
obsolete or unmerchantable and (iv) valued on Hobie's books, records and reports
at the lower of cost or fair market value (assuming an orderly disposition).
5.12 COMPLIANCE WITH LAWS
Except as set forth on Schedule 5.12, Hobie has complied in all
material respects and is in compliance in all material respects with all
federal, state, local and foreign laws, rules, regulations, ordinances, orders,
decrees and similar requirements applicable to it, its businesses, its
properties or its employees. Hobie has received no written notice of any
asserted present or past unremedied failure by Hobie to comply with any of the
foregoing.
5.13. LITIGATION
Except as set forth on Schedule 5.13, there are no actions, suits,
proceedings or investigations pending or, to the knowledge of any of the
Sellers, threatened against Hobie, or any of its properties, including
intellectual properties, before any court or governmental or other regulatory or
administrative agency, commission or other authority. Except as set forth on
Schedule 5.13, Hobie is not a party to or subject to the provisions of any
order, writ, injunction, judgment or decree of any court or governmental or
other regulatory or administrative agency or instrumentality and there is no
action, suit, proceeding or investigation by Hobie currently pending or
contemplated or that Hobie intends to initiate.
5.14 TAXES
Hobie has prepared and filed in a timely manner all tax returns and
reports required to be filed by law. Such returns and reports are true, correct
and complete in all material respects. Hobie has timely paid, or made adequate
provisions for the payment in full of, all taxes and other assessments which are
due or that will become due pursuant to such returns, except those presently
being contested by them in good faith. The provision, if any, for taxes of Hobie
in respect of taxes as shown in the Financial Statements of Hobie is adequate
for taxes due or accrued as of the date thereof. Except as set forth on the
attached Schedule 5.14, no deficiencies for taxes,
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fees or other charges have been proposed or assessed by any taxing authority
against Hobie. Except as set forth on Schedule 5.14, neither Hobie nor any of
the Sellers has any knowledge of any ongoing or pending examinations or audits
with respect to taxes owed by Hobie to any taxing authority, and Hobie has no
knowledge of any facts that, if known to any taxing authority, would be likely
to result in the issuance of a notice of audit or proposed deficiency or similar
notice of intention to assess any taxes against Hobie. Except as set forth on
Schedule 5.14, none of Hobie's tax returns or tax compliance filings have ever
been audited by governmental authorities.
5.15 EMPLOYEE MATTERS
(a) Schedule 5.15 attached hereto sets forth a list of all
employees of Hobie and sets forth the following information with respect to each
employee: employee name, 1995 gross earnings, whether salaried or hourly, the
hourly rate for each hourly employee, and hire date. No employment agreement
exists between Hobie and any employee, and all employees are terminable at will.
(b) Hobie is not a party to any collective bargaining
agreement, and there currently exists no demand for collective bargaining by any
union or labor organization.
(c) With respect to all employees and former employees of
Hobie, Hobie does not and never has maintained, contributed to, or has had any
liability (including current or potential multi-employer plan withdrawal
liability) under any (i) non-qualified deferred compensation or retirement plan
or arrangement which is an "employee pension benefit plan" as such term is
defined in Section 3(2) of the Employee Retirement Income Security Act of 1974,
as amended ("ERISA"), (ii) qualified defined contribution retirement plan, (iii)
qualified defined benefit pension plan, (iv) funded or unfunded medical, health
or life insurance plan or arrangement for present or future retirees or present
or future terminated employees which is an employee welfare benefit plan as
defined in Section 3(1) of ERISA, or (v) any other employee welfare benefit
plan.
5.16 THIRD PARTY CONSENTS
Except as set forth on Schedule 5.16, neither the execution of this
Agreement nor the consummation of the transactions contemplated hereunder
requires the approval or consent of any Person, governmental authority, or any
party to any contract with Hobie.
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5.17 TITLE TO ASSETS
Except as set forth on Schedule 5.17, Hobie has good and marketable
title to its properties and assets as reflected in the Financial Statements, and
has good title to all its leasehold interests, in each case subject to no Liens
except (i) Liens in respect of current taxes not yet due and payable and (ii)
Liens reflected in the Financial Statements. With respect to properties and
assets which are leased by Hobie, Hobie is in compliance with such leases in all
material respects and holds valid leasehold interests free of any material
Liens, claims or encumbrances. The assets, whether owned, licensed or leased by
Hobie, constitute all the assets reasonably necessary or appropriate to conduct
the business of Hobie. Hobie owns no real property.
5.18 PERMITS
Except as set forth on Schedule 5.18, to the best knowledge of the
Sellers, Hobie owns, holds or possesses all governmental and regulatory
licenses, registrations, franchises, permits, privileges, immunities, approvals
and other authorizations which are necessary to entitle Hobie to carry on and
conduct its businesses substantially as currently conducted (the "Permits"), and
Hobie has fulfilled and performed its obligations under each of the Permits
which, if failed to be performed, could have a material adverse effect on Hobie.
5.19 INTELLECTUAL PROPERTY
(a) Except as set forth on Schedule 5.19, Hobie owns or
otherwise has rights or licenses to use or possess the patents, trademarks,
service marks, tradenames, copyrights, licenses, applications for patents,
inventions, trade secrets, know-how, proprietary processes and formulae, and
other intellectual property rights used in or necessary to the operation of the
businesses of Hobie (the "Intellectual Property"). True and complete copies of
any license agreements between Hobie, as licensee, and third parties for the use
of Hobie Intellectual Property are attached to Schedule 5.19;
(b) Schedule 5.19 contains a list of the Intellectual Property
of Hobie and indicates whether such items of Intellectual Property have been
duly registered in, filed in, or issued by the United States Patent and
Trademark Office, the United States Register of Copyrights or the corresponding
offices of other countries, states or other jurisdictions (the "Registers");
(c) Except as set forth on Schedule 5.19, use of Hobie's
Intellectual Property does not require the consent of any third party, and the
same are freely transferable and are owned exclusively by Hobie free and clear
of any attachments,
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security interests, Liens, royalties, encumbrances, adverse claims, licenses or
any other ownership interest whatsoever; and
(d) Except as set forth on Schedule 5.19, to the best
knowledge of Hobie and Sellers there are no claims, actions, or proceedings
pending by or against Hobie with respect to its Intellectual Property.
5.20 CUSTOMERS; SALES
Schedule 5.20 attached hereto contains a list of the top ten (10)
customers of Hobie (measured by dollar amount) and the sales figures of Hobie
sales to such customers for the years ended 1994 and 1995 and projections for
sales in 1996. Except as set forth in Schedule 5.20, neither Hobie nor Sellers
knows of any fact which would lead any of them to believe that any of such
listed customers will change materially their business relationship with Hobie.
5.21 SUPPLIERS OF GOODS AND SERVICES
Schedule 5.21 attached hereto contains a list of the top ten (10)
suppliers of goods and/or services to Hobie (measured by dollar amount) and the
total cost of goods or services purchased by Hobie from such suppliers for the
years ended 1994 and 1995 and projections for such purchases in 1996. Except as
set forth in Schedule 5.21, neither Hobie nor the Sellers knows of any fact
which would lead any of them to believe that any of such listed suppliers will
change materially their business relationship with the Hobie.
5.22 INSURANCE
Hobie currently has insurance contracts or policies in full force and
effect, and has had in full force and effect during the past two years, which
provide for coverages that are usual and customary as to amounts and scope in
respect to Hobie's businesses. Schedule 5.22 contains a list of all such
insurance policies and a summary of coverages under each such policy.
5.23 ENVIRONMENTAL MATTERS
To the best knowledge of Sellers, the operations of Hobie comply and
have at all times complied in all material respects with all applicable laws,
rules and regulations concerning environmental health and safety, and Hobie has
obtained all environmental, health and safety permits necessary for its
operations and all such permits are in good standing. To the best knowledge of
Sellers, Hobie is, in all material respects, in compliance with all terms and
conditions of such permits, and
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Hobie has not been notified that any of its present or past operations is the
subject of any investigation by any governmental authority evaluating whether
any remedial action is required nor has it needed to respond to or file any
notice with respect to a release or threatened release of a hazardous or
dangerous substance or other contaminant into the environment. To the best
knowledge of Sellers, neither Hobie nor any agent or subcontractor of Hobie has
disposed of any hazardous or dangerous substance or other contaminants in
violation of any requirement of law.
5.24 PRODUCTS LIABILITY
Except as set forth on the attached Schedule 5.24, there are no claims
by or before any court or governmental or other regulatory or administrative
agency, commission or other authority against or involving Hobie or its
concerning any product, including Specialized Eyewear products, manufactured,
repaired, shipped, sold or delivered by or on behalf of Hobie which is pending
or, to the best knowledge of Hobie or the Sellers, threatened, and to the best
knowledge of Hobie or the Sellers there has been no happening or event which has
occurred as a result of a defect in a product manufactured, repaired, shipped,
sold or delivered by or on behalf of Hobie which might give rise to liability on
the part of Hobie.
5.25 CONTRACTS
Schedule 5.25 sets forth a list of the leases, promotional, and other
contracts to which Hobie is a party (the "Contracts"). The Contracts are in full
force and effect and neither Hobie nor any other party to any of the Contracts
is in material default of any of the terms of any such contract. True and
correct copies of the Contracts are attached to Schedule 5.25.
5.26 NO BROKER OR FINDER
Hobie and Sellers have retained Price Waterhouse as a broker in
connection with the transactions contemplated by this Agreement. Except for
Price Waterhouse, neither Hobie nor any Seller has dealt with a broker or finder
in connection with the transactions contemplated by this Agreement which would
create an entitlement by any Person to a finders' or brokers' fee.
5.27 ACCURACY OF STATEMENTS
Neither this Agreement nor any of the exhibits, schedules, written
statements, documents, certificates or other items furnished to Purchaser by or
on behalf of the Sellers with respect to this Agreement and the transactions
contemplated hereby
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contains any untrue statement of a material fact or omits a material fact
necessary to make each statement contained herein or therein not misleading.
6. REPRESENTATIONS AND WARRANTIES OF PURCHASER
Purchaser represents and warrants to Sellers that the following
statements are true and correct as of the date of this Agreement (unless
expressly limited to the Closing Date) and will be true and correct as of the
Closing Date:
6.1 ORGANIZATION OF PURCHASER
Purchaser is a corporation duly organized, validly existing and in good
standing under the laws of the state of Washington. Purchaser has all requisite
corporate power and authority to own and operate its properties and assets and
to carry on its business as currently conducted. Purchaser is not qualified to
do business in any state other than the state of Washington. A true and correct
copy of the Articles of Incorporation and Bylaws of Purchaser are attached to
Schedule 6.1 hereto. As of Closing, Purchaser will have one subsidiary, H.S.C.,
Inc., a Washington corporation ("H.S.C."). H.S.C. is a corporation duly
organized, validly existing and in good standing under the laws of the state of
Washington. H.S.C. has all requisite corporate power and authority to own and
operate its properties and assets and to carry on its business as currently
conducted. A true and correct copy of the Articles of Incorporation and Bylaws
of H.S.C. are attached to Schedule 6.1 hereto.
6.2 CORPORATE POWER AND AUTHORITY
Purchaser has all requisite corporate power and authority to execute
and deliver this Agreement and all the Related Documents to be executed and
delivered by Purchaser hereunder and to carry out and perform its obligations
under the terms of this Agreement and the Related Documents. The execution,
delivery and performance of this Agreement and the Related Documents have been
duly authorized by all requisite action on the part of the officers, directors
and shareholders of Purchaser. This Agreement and each of the Related Documents
to which Purchaser is a party has been, and at closing will be, duly executed
and delivered by Purchaser and will constitute, a valid and binding obligation
of Purchaser enforceable against Purchaser in accordance with their terms.
6.3 NO BROKER OR FINDER
Purchaser has retained no broker in connection with the transactions
contemplated by this Agreement and has dealt with no broker or finder other than
Sellers' Agent, Price Waterhouse, in connection with the transactions
contemplated by
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this Agreement which would create an entitlement by any Person to a finders' or
brokers' fee.
7. COVENANTS OF HOBIE AND SELLERS
Hobie and Sellers covenant to and agree with Purchaser as follows:
7.1 CONDUCT OF BUSINESS OF HOBIE PENDING THE CLOSING
From the date of this Agreement to the Closing Date, Hobie shall
operate its businesses in the ordinary and usual course and shall maintain its
records and books of account in a manner that fairly and accurately reflects its
transactions, assets and liabilities and otherwise in accordance with standard
accounting practices applied on a basis consistent with prior periods. Hobie
shall pay and discharge all obligations and indebtedness as they come due in a
manner consistent with past practice. Hobie shall exercise its best efforts to
preserve intact the present business organization and manufacturer's
representatives of Hobie, preserve the present goodwill of Hobie with all
persons having business dealings with them, and comply with all laws applicable
to the conduct of Hobie's businesses.
7.2 REPRESENTATIONS AND WARRANTIES; INTERFERENCE
Hobie and each of the Sellers shall conduct their businesses in such a
manner that the representations and warranties of Sellers contained in this
Agreement shall continue to be true and correct on and as of the Closing Date as
if made on and as of the Closing Date, and neither Hobie nor any Seller shall
take any action which would interfere with or prevent performance of this
Agreement.
7.3 ACCESS TO RECORDS AND ASSETS OF HOBIE
From the date of this Agreement to the Closing Date, Sellers agree to
cause Hobie and its representatives to give Purchaser and its counsel,
accountants and other authorized representatives, reasonable access during
business hours to the offices, warehouse, properties, books and records of Hobie
in order that the Purchaser may have full opportunity to make such reasonable
investigations of Hobie as Purchaser shall desire; provided, however, such
investigation shall be conducted in a manner as not to interfere unreasonably
with the operation of Hobie.
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8. FURTHER AGREEMENTS OF THE PARTIES
8.1 PAY-OFF OF BANK DEBT AND OTHER LOANS
As of Closing, Hobie's obligations to Union Bank, Vernon Tool Co., and
the Blackburn Trust, and any other similar lender (except for trade payables
incurred in the ordinary course of Hobie's business consistent with Hobie's past
practices), will be satisfied in full, and all Liens on Hobie assets or stock
pledged as collateral for the repayment of such obligations shall be released.
Purchaser acknowledges that it is the intent of Sellers to use a portion of the
Purchase Price to pay such obligations at Closing. Hobie shall deliver evidence
of such payoffs and Lien releases to Purchaser at Closing.
8.2 NONDISCLOSURE AND NONCOMPETITION AGREEMENT
At Closing, Gargoyles, Inc. shall enter into a Nondisclosure and
Noncompetition Agreement with each of Blackburn and Bush in the forms of the
attached Exhibits 8.2(a) and (b) (the "Non-Competition Agreements").
8.3 CONSULTING AGREEMENT
At Closing, Purchaser shall enter into a Consulting Agreement with each
of Blackburn and Bush in the forms of the attached Exhibits 8.3 (a) and (b) (the
"Consulting Agreements").
8.4 ASSETS AND LIABILITIES AS OF THE CLOSING DATE
Purchaser acknowledges and agrees with Hobie and Sellers that prior to
the Closing Date Hobie will acquire certain additional assets and retire or
reduce certain liabilities as set forth on the attached Exhibit 8.4. Sellers
will promptly notify Purchaser if Sellers anticipate that as of the Closing Date
the balance sheet of Hobie will show amounts for such assets and liabilities
materially different from those items set forth on Exhibit 8.4.
8.5 MERGER OF HOBIE INTO H.S.C.
At or after Closing, all documentation required to merge Hobie into
H.S.C., a Washington corporation, will be executed and filed in the proper
recording offices of the states of California and Washington.
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8.6 INDEMNIFICATION
(a) Indemnity by Sellers. From and after the Closing Date,
Sellers jointly and severally shall indemnify, defend and hold harmless
Purchaser, its successors and assigns, from and against and shall reimburse
Purchaser for any and all losses, liabilities, deficiencies, claims and expenses
(including, but not limited to, costs of defense and reasonable attorneys' fees)
incurred by Purchaser and arising from or in connection with any
misrepresentation or breach of any of the representations and warranties or
obligations of Sellers or Hobie under the terms of this Agreement. Sellers shall
not be obligated to indemnify Purchaser under this Subsection 8.6(a), however,
except and to the extent that claims for indemnification exceed in the aggregate
the sum of Fifty Thousand Dollars ($50,000). The indemnification obligations of
each of the Passive Sellers shall be limited pro rata, on the basis of each such
Seller's percentage ownership interest in Hobie as of the Closing in relation to
all other Sellers. Under no circumstances shall the total indemnity obligation
hereunder of the Passive Sellers exceed their pro-rata share of the total
Purchase Price. Notwithstanding the foregoing, Active Sellers shall remain
jointly and severally liable as described in Section 5 hereof in an amount not
to exceed the total Purchase Price.
(b) Indemnity by Purchaser. From and after the Closing Date,
Purchaser shall indemnify, defend and hold harmless Sellers, their successors,
heirs and assigns, from and against and shall reimburse Sellers for any and all
losses, liabilities, deficiencies, claims and expenses (including, but not
limited to, costs of defense and reasonable attorneys' fees) incurred by Sellers
and arising from or in connection with any misrepresentation or breach of any of
the representations and warranties or obligations of Purchaser under the terms
of this Agreement.
(c) Survival of Representations and Warranties; Escrowed
Funds. The representations and warranties of the parties hereto shall survive
the Closing and shall continue in full force and effect until the second
anniversary of the Closing Date except for representations and warranties
related to Hobie's, taxes and tax returns, and employee-related matters which
are not limited as to time. Fifty Thousand Dollars of the Purchase Price shall
be held in Escrow until the second anniversary of the Closing Date (the
"Escrowed Funds") in accordance with the Escrow Instructions substantially in
the form of the attached Exhibit 8.6. The Escrowed Funds shall be used as
required to reimburse Purchaser for amounts due to Purchaser resulting from
Sellers' indemnity under Section 8.6 (a) hereof.
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<PAGE> 16
8.7 TRANSITION AGREEMENTS
At or as soon as practicable after Closing, Purchaser will offer
short-term employment agreements with those persons listed on the attached
Exhibit 8.7 to help with the transition of Hobie's business following the
transactions contemplated by this Agreement.
9. CONDITIONS OF PURCHASER TO CLOSE
The obligations of Purchaser to purchase the Stock from Sellers and to
consummate the transactions contemplated by this Agreement are subject to
fulfillment of the following conditions at or prior to the Closing Date (unless
waived in writing by Purchaser):
9.1 REPRESENTATIONS AND PERFORMANCE
The representations and warranties made by Sellers hereunder shall be
true and correct in all material respects at and as of Closing, and Hobie and
Sellers shall have performed and complied in all material respects with all
agreements, covenants and conditions contained in this Agreement required to be
performed or complied with by Hobie and Sellers prior to or at Closing;
9.2 CONSULTING AND NON-COMPETITION AGREEMENTS
Blackburn and Bush shall have executed the Consulting and
Non-competition Agreements and complied with all agreements required to be
performed or complied with by Blackburn and Bush at or as of Closing; and
9.3 NO ADVERSE CHANGE
Except as contemplated by this Agreement, there shall have been no
material adverse change in the condition, business or operations, financial or
otherwise, of Hobie or the Stock from the date of this Agreement to the Closing
Date, and there shall not have been a material adverse change in the assets or
liabilities of Hobie as set forth on Exhibit 8.4 hereof.
10. CONDITIONS OF SELLERS TO CLOSE
The obligations of Sellers to sell the Stock to Purchaser and to
consummate the transactions contemplated by this Agreement are subject to
fulfillment of the following conditions at or prior to the Closing Date (unless
waived in writing by Purchaser):
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<PAGE> 17
10.1 REPRESENTATIONS AND PERFORMANCE
The representations and warranties made by Purchaser hereunder shall be
true and correct in all material respects at and as of Closing, and Purchaser
shall have performed and complied in all material respects with all agreements,
covenants and conditions contained in this Agreement required to be performed or
complied with by Purchaser prior to or at Closing;
10.2 CONSULTING AND NON-COMPETITION AGREEMENTS
Purchaser shall have executed the Consulting and Non-competition
Agreements and complied with all agreements required to be performed or complied
with by Purchaser at or as of Closing.
11 TERMINATION
11.1 BY MUTUAL CONSENT
At any time this Agreement may be terminated by the written consent of
all the parties hereto without liability on the part of any party or their
respective directors, officers or shareholders. If this Agreement is terminated
under this Section 11.1, the Agreement shall have no further force or effect as
of the termination date agreed by the parties.
11.2 TERMINATION UPON DEFAULT OR BREACH
If any party to this Agreement materially defaults in the performance
of any of the covenants contained in this Agreement, or if there shall have been
a material breach by any party of any of such party's representations or
warranties set forth in this Agreement, any other party may terminate this
Agreement without prejudice to its rights and remedies available under law by
delivering written notice of termination to all other parties to this Agreement.
Termination shall be effective upon the termination date specified in the
notice.
11.3 TERMINATION BASED UPON FAILURE OF CONDITIONS
If any of the conditions of this Agreement to be complied with or
performed on or before the Closing Date shall not have been complied with or
performed by such date and such noncompliance or nonperformance shall not have
been waived in writing by the party to whom the benefit of such condition runs,
such party may terminate this Agreement without prejudice to their\its rights
and remedies available under law.
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<PAGE> 18
11.4 LIQUIDATED DAMAGES
If this Agreement is terminated as a result of a default by Purchaser
resulting from Purchaser's failure to obtain financing for the Purchase Price,
then Purchaser promptly shall pay Sellers as liquidated damages the sum of One
Hundred Thousand Dollars ($100,000) which obligation is hereby guaranteed by
Hauff.
12. MISCELLANEOUS PROVISIONS
12.1 AMENDMENT AND MODIFICATION
Subject to applicable law, prior to the Closing Date this Agreement may
be amended, modified and supplemented or any provision waived only by written
agreement, executed by all the parties hereto.
12.2 WAIVER OF COMPLIANCE; CONSENTS
Any failure of a party to comply with any obligation, covenant,
agreement or condition herein, may be waived in writing, but such waiver or
failure to insist upon strict compliance with such obligation, covenant,
agreement or condition shall not operate as a waiver of, or estoppel with
respect to, any subsequent or other failure. Whenever this Agreement requires or
permits consent by or on behalf of any party hereto, such consent shall be given
in writing.
12.3 EXPENSES
Sellers and Purchaser each shall bear their/its own expenses related to
the preparation of documents, due diligence investigations, or other matters
related to the transactions contemplated by this Agreement. Without limiting the
generality of the foregoing, Sellers shall pay all brokers or finders fees,
costs and expenses of Price Waterhouse related to the transactions contemplated
by this Agreement.
12.4 ATTORNEYS' FEES
If it shall be necessary for any party to this Agreement to employ an
attorney to enforce their rights pursuant to this Agreement because of the
default of another party(s), including the breach of any representations or
warranties made hereunder, the defaulting party(s) shall reimburse the
non-defaulting party(s) for reasonable attorneys' fees and expenses.
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<PAGE> 19
12.5 FURTHER ASSURANCES
From time to time after the Closing and without further consideration,
the parties hereto will execute and deliver, or arrange for the execution and
delivery of such other instruments and take such other action or arrange for
such other actions as may reasonably be requested to more effectively complete
any of the transactions contemplated by this Agreement or the Related Documents.
12.6 NOTICES
All notices, requests, demands and other communications required or
permitted hereunder shall be in writing and shall be given by: (a) hand
delivery; (b) first-class registered or certified mail with postage prepaid, (c)
overnight receipted courier service, or (d) telephonically confirmed facsimile
transmission, which notice is addressed to the party at the address set forth
below, or such other address as may hereafter be designated in writing by the
party. Notices given in accordance with this Section shall be effective upon
receipt or when receipt is refused.
If to Sellers, to:
William A. Blackburn
Hobie Sunglasses
#5 South Vista De La Luna
Laguna Beach, CA 92677
Tel: (714) 499-4672
Fax: (714) 499-4672
Notice delivered to Blackburn shall be deemed effective notice to each
and every one of the Sellers as of the effective date of such notice to
Blackburn.
With a copy to:
Burleigh Brewer
Obegi & Brewer
4041 MacArthur Blvd., Ste. 350
Newport Beach, CA 92660
Tel: (714) 833-7824
Fax: (714) 833-3133
If to Purchaser, to:
Gargoyles, Inc.
5866 South 194th Street
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<PAGE> 20
Kent, WA 98032
Attn: Douglas B. Hauff, President
Tel: (206) 872-6100 Ext. 3400
Fax: (206) 872-3317
With a copy to:
Cynthia L. Pope, Esq.
114 W. Magnolia Street
Fourth Floor
Bellingham, WA 98226
Tel: (360) 671-5939
Fax: (360) 671-5931
12.7 ASSIGNMENT; FORM OF TRANSACTION
This Agreement and all of the provisions hereof shall be binding upon
and inure to the benefit of the parties hereto and their respective successors
and permitted assigns, but neither this Agreement nor any of the rights,
interests or obligations hereunder shall be assigned by any party hereto without
the prior written consent of all the other parties hereto.
12.8 GOVERNING LAW
This Agreement and the Related Documents shall be governed by the
internal law of the state of Washington as to all matters, including but not
limited to matters of validity, construction, effect and performance.
12.9 COUNTERPARTS
This Agreement may be executed in two or more counterparts, each of
which shall be deemed an original, but all of which together shall constitute
one and the same instrument.
12.10 HEADINGS
The section headings contained in this Agreement are for reference
purposes only and shall not affect in any way the meaning or interpretation of
this Agreement.
12.11 EXHIBITS AND SCHEDULES
The exhibits and schedules attached hereto are incorporated herein by
reference as if fully set forth herein.
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<PAGE> 21
12.12 ENTIRE AGREEMENT
This Agreement, including the exhibits and schedules hereto and the
Related Documents, embodies the entire agreement and understanding of the
parties hereto in respect of the transactions contemplated by this Agreement and
supersedes all prior agreements, representations, warranties, promises,
covenants, arrangements, communications and understandings, oral or written,
express or implied, between the parties with respect to such transactions. There
are no agreements, representations, warranties, promises, covenants,
arrangements or understandings between the parties with respect to such
transactions, other than those expressly set forth or referred to herein.
12.13 NO PUBLIC ANNOUNCEMENT
Neither Hobie, Sellers, nor Purchaser shall make any press release or
other public announcement concerning the transactions contemplated by this
Agreement without the prior written approval of the other parties except as
required by law, in which case the parties shall use their best efforts to cause
a mutually agreeable release or announcement to be issued.
IN WITNESS WHEREOF, the parties hereto have executed thi Stock Purchase
Agreement as of the date first above written.
GARGOYLES, INC.,
a Washington corporation
By /s/ Douglas B. Hauff
-------------------------------
Douglas B. Hauff, President
H.S.C., INC.,
a Washington corporation
By /s/ Douglas B. Hauff
--------------------------------
Douglas B. Hauff, President
/s/ Douglas B. Hauff
- -----------------------------------
Douglas B. Hauff
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<PAGE> 22
H.S.I.,
a California corporation
d/b/a/ Hobie Sunglasses
By /s/ William W. Blackburn
--------------------------------
William W. Blackburn, President
THE WILLIAM AND KATHLEEN
BLACKBURN FAMILY TRUST
U/D/T DATED MARCH 20, 1992
By /s/ William W. Blackburn
--------------------------------
William W. Blackburn, Trustee
By /s/ Kathleen Blackburn
--------------------------------
Kathleen Blackburn, Trustee
PACIFIC EQUIPMENT CO.,
a California general partnership
By /s/ William W. Blackburn
--------------------------------
William W. Blackburn, Partner
By /s/ Robert S. Blackburn
--------------------------------
Robert S. Blackburn, Partner
By /s/ James D. Blackburn
--------------------------------
James D. Blackburn, Partner
By /s/ Velma M. Blackburn
--------------------------------
Velma M. Blackburn, Partner
/s/ Velma M. Blackburn
- -----------------------------------
VELMA M. BLACKBURN,
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<PAGE> 23
/s/ Hobart P. Alter
- -----------------------------------
HOBART P. ALTER
/s/ Hobart L. Alter
- -----------------------------------
HOBART L. ALTER
/s/ Charles A. French
- -----------------------------------
CHARLES A. FRENCH
/s/ Paul Arentsen
- -----------------------------------
PAUL ARENTSEN
/s/ Thomas M. Linden
- -----------------------------------
THOMAS M. LINDEN
/s/ Kent S. Colberg
- -----------------------------------
KENT S. COLBERG
/s/ Dennis S. Bush
- -----------------------------------
DENNIS S. BUSH
/s/ Charles P. Larson
- -----------------------------------
CHARLES P. LARSON
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<PAGE> 1
EXHIBIT 10.25
[Letterhead of CB Commercial] INDUSTRIAL REAL ESTATE LEASE
(MULTI-TENANT FACILITY)
CB COMMERCIAL REAL ESTATE GROUP, INC.
BROKERAGE AND MANAGEMENT
LICENSED REAL ESTATE BROKER
ARTICLE ONE: BASIC TERMS
This Article One contains the Basic Terms of this Lease between the
Landlord and Tenant named below. Other Articles, Sections and Paragraphs of the
Lease referred to in this Article One explain and define the Basic Terms and are
to be read in conjunction with the Basic Terms.
Section 1.01. Date of Lease: October 12, 1995
Section 1.02. Landlord (include legal entity): Cascade Investors, a
California partnership
Address of Landlord: 9912 South Pioneer Blvd., Santa Fe Springs, CA 90670
Section 1.03. Tenant (include legal entity): Gargoyles, Inc., a
Washington corporation
Address of Tenant: 5866 South 194th Street, Kent, WA 98032
Section 1.04. Property: The Property is part of Landlord's multi-tenant
real property development known as 5870 South 194th Street, Kent, WA and
described or depicted in Exhibit "A" (the "Project"). The Project includes the
land, the buildings and all other improvements located on the land, and the
common areas described in Paragraph 4.05(a). The Property is (include street
address, approximate square footage and description) 5870 South 194th Street,
Kent, Washington, consisting of approximately 3,407 square feet.
Section 1.05. Lease Term: -2- years -0- months beginning on November 1,
1995 or such other date as is specified in this Lease, and ending on October 31,
1997
Section 1.06. Permitted Uses: (See Article Five) Administrative and
general office use.
Section 1.07. Tenant's Guarantor: (If none, so state) None
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(Multi-Tenant Gross Form)
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Section 1.08. Brokers: (See Article Fourteen) (If none, so state)
Landlord's Broker: Ed Hogan - CB Commercial Real Estate Group, Inc.
Tenant's Broker: Milt Reimers - CB Commercial Real Estate Group, Inc.
Section 1.09. Commission Payable to Landlord's Broker: (See Article
Fourteen) $3,679.00
Section 1.10. Initial Security Deposit: (See Section 3.03) $3,066.30
Section 1.11. Vehicle Parking Spaces Allocated to Tenant: (See Section
4.05) Twelve (12)
Section 1.12. Rent and Other Charges Payable by Tenant:
(a) BASE RENT: Three Thousand Sixty-Six and 30/100 Dollars ($3,066.30)
per month, for the first 24 months, as provided in Section 3.01.
Section 1.13. Costs and Charges Payable by Landlord: (a) Base Real
Property Taxes (See Section 4.02); (b) Base Insurance Premiums (see Section
4.04(c)); (c) Maintenance and Repair (See Article Six).
Section 1.14. Landlord's Share of Profit on Assignment or Sublease:
(See Section 9.05) One Hundred percent (100%) of the Profit (the "Landlord's
Share").
Section 1.15. Riders: The following Riders are attached to and made a
part of this Lease: (if none, so state) Addendum I - Cancellation by Tenant
ARTICLE TWO: LEASE TERM
Section 2.01. Lease of Property For Lease Term. Landlord leases the
Property to Tenant and Tenant leases the Property from Landlord for the Lease
Term. The Lease Term is for the period stated in Section 1.05 above and shall
begin and end on the dates specified in Section 1.05 above, unless the beginning
or end of the Lease Term is changed under any provision of this Lease. The
"Commencement Date" shall be the date specified in Section 1.05 above for the
beginning of the Lease Term, unless advanced or delayed under any provision of
this Lease.
Section 2.02. Delay In Commencement. Landlord shall not be liable to
Tenant if Landlord does not deliver possession of the Property to Tenant on the
Commencement Date. Landlord's non-delivery of the Property to Tenant on that
date shall not affect this Lease or the obligations of Tenant under this Lease
except that the Commencement Date shall be delayed until Landlord delivers
possession of the Property to Tenant and the Lease Term shall be extended for a
period equal to the delay in delivery of possession of
3
(Multi-Tenant Gross Form)
<PAGE> 3
the Property to Tenant, plus the number of days necessary to end the Lease Term
on the last day of a month. If Landlord does not deliver possession of the
Property to Tenant within sixty (60) days after the Commencement Date, Tenant
may elect to cancel this Lease by giving written notice to Landlord within ten
(10) days after the sixty (60)-day period ends. If Tenant gives such notice, the
Lease shall be cancelled and neither Landlord nor Tenant shall have any further
obligations to the other. If Tenant does not give such notice, Tenant's right to
cancel the Lease shall expire and the Lease Term shall commence upon the
delivery of possession of the Property to Tenant. If delivery of possession of
the Property to Tenant is delayed, Landlord and Tenant shall, upon such
delivery, execute an amendment to this Lease setting forth the actual
Commencement Date and expiration date of the Lease. Failure to execute such
amendment shall not affect the actual Commencement Date and expiration date of
the Lease.
Section 2.03. Early Occupancy. If Tenant occupies the Property prior to
the Commencement Date, Tenant's occupancy of the Property shall be subject to
all of the provisions of this Lease. Early occupancy of the Property shall not
advance the expiration date of this Lease. Tenant shall pay Base Rent and all
other charges specified in this Lease for the early occupancy period.
Section 2.04. Holding Over. Tenant shall vacate the Property upon the
expiration or earlier termination of this Lease. Tenant shall reimburse Landlord
for and indemnify Landlord against all damages which Landlord incurs from
Tenant's delay in vacating the Properly. If Tenant does not vacate the Property
upon the expiration or earlier termination of the Lease and Landlord thereafter
accepts rent from Tenant, Tenant's occupancy of the Property shall be a
"month-to-month" tenancy, subject to all of the terms of this Lease applicable
to a month-to-month tenancy, except that the Base Rent then in effect shall be
increased by twenty-five percent (25%).
ARTICLE THREE: BASE RENT
Section 3.01. Time and Manner of Payment. Upon execution of this Lease,
Tenant shall pay Landlord the Base Rent in the amount stated in Paragraph
1.12(a) above for the first month of the Lease Term. On the first day of the
second month of the Lease Term and each month thereafter, Tenant shall pay
Landlord the Base Rent, in advance, without offset, deduction or prior demand.
The Base Rent shall be payable at Landlord's address or at such other place as
Landlord may designate in writing.
Section 3.03. Security Deposit; Increases. (a) Upon the execution of
this Lease, Tenant shall deposit with Landlord a cash Security Deposit in the
amount set forth in Section 1.10 above. Landlord may apply all or part of the
Security Deposit to any unpaid rent or other charges due from Tenant or to cure
any other defaults of Tenant. If Landlord uses any part of the Security Deposit,
Tenant shall restore the Security Deposit
3
(Multi-Tenant Gross Form)
<PAGE> 4
to its full amount within ten (10) days after Landlord's written request.
Tenant's failure to do so shall be a material default under this Lease. No
interest shall be paid on the Security Deposit. Landlord shall not be required
to keep the Security Deposit separate from its other accounts and no trust
relationship is created with respect to the Security Deposit.
(b) Each Time the Base Rent is increased, Tenant shall deposit
additional funds with Landlord sufficient to increase the Security Deposit to an
amount which bears the same relationship to the adjusted Base Rent as the
initial Security Deposit bore to the initial Base Rent.
Section 3.04. Termination; Advance Payments. Upon termination of this
Lease under Article Seven (Damage or Destruction), Article Eight (Condemnation)
or any other termination not resulting from Tenant's default, and after Tenant
has vacated the Property in the manner required by this Lease, Landlord shall
refund or credit to Tenant (or Tenant's successor) the unused portion of the
Security Deposit, any advance rent or other advance payments made by Tenant to
Landlord, and any amounts paid for real property taxes and other reserves which
apply to any time periods after termination of the Lease.
ARTICLE FOUR: OTHER CHARGES PAYABLE BY TENANT
Section 4.01. Additional Rent. All charges payable by Tenant other than
Base Rent are called "Additional Rent." Unless this Lease provides otherwise,
Tenant shall pay all Additional Rent then due with the next monthly installment
of Base Rent. The term "rent" shall mean Base Rent and Additional Rent.
Section 4.02. Property Taxes.
(a) Real Property Taxes. Landlord shall pay the "Base Real Property
Taxes" on the Property during the Lease Term. Base Real Property Taxes are real
property taxes applicable to the Property as shown on the tax bill for the most
recent tax fiscal year ending prior to the Commencement Date.
(b) Definition of "Real Property Tax." "Real property tax" means: (i)
any fee, license fee, license tax, business license fee, commercial rental tax,
levy, charge, assessment, penalty or tax imposed by any taxing authority against
the Property; (ii) any tax on the Landlord's right to receive, or the receipt
of, rent or income from the Property or against Landlord's business of leasing
the Property; (iii) any tax or charge for fire protection, streets, sidewalks,
road maintenance, refuse or other services provided to the Property by any
governmental agency; (iv) any tax imposed upon this transaction or based upon a
re-assessment of the Property due to a change of ownership, as defined by
applicable law, or other transfer of all or part of Landlord's interest in the
Property; and
4
(Multi-Tenant Gross Form)
<PAGE> 5
(v) any charge or fee replacing any tax previously included within
the definition of real property tax. "Real property tax" does not, however,
include Landlord's federal or state income, franchise, inheritance or estate
taxes.
(c) Joint Assessment. If the Property is not separately assessed,
Landlord shall reasonably determine Tenant's share of the real property tax
payable by Tenant under Paragraph 4.02(a) from the assessor's worksheets or
other reasonably available information. Tenant shall pay such share to Landlord
within fifteen (15) days after receipt of Landlord's written statement.
(d) Personal Property Taxes.
(i) Tenant shall pay all taxes charged against trade fixtures,
furnishings, equipment or any other personal property belonging to Tenant.
Tenant shall try to have personal property taxed separately from the Property.
(ii) If any of Tenant's personal property is taxed with the
Property, Tenant shall pay Landlord the taxes for the personal property within
fifteen (15) days after Tenant receives a written statement from Landlord for
such personal property taxes.
Section 4.03. Utilities. Tenant shall pay, directly to the appropriate
supplier, the cost of all light, power, telephone, refuse disposal and other
utilities and services supplied to the Property. However, if any services or
utilities are jointly metered with other property it is agreed and understood
that all HVAC charges are not separately metered and shall be part of the Base
Rent, Landlord shall make a reasonable determination of Tenant's proportionate
share of the cost of such utilities and services and Tenant shall pay such share
to Landlord within fifteen (15) days after receipt of Landlord's written
statement.
Section 4.04. Insurance Policies.
(a) Liability Insurance. During the Lease Term, Tenant shall maintain a
policy of commercial general liability insurance (sometimes known as broad form
comprehensive general liability insurance) insuring Tenant against liability for
bodily injury, property damage (including loss of use of property) and personal
injury arising out of the operation, use or occupancy of the Property. Tenant
shall name Landlord as an additional insured under such policy. The initial
amount of such insurance shall be One Million Dollars ($1,000,000) per
occurrence and shall be subject to periodic increase based upon inflation,
increased liability awards, recommendation of Landlord's professional insurance
advisers and other relevant factors. The liability insurance obtained by Tenant
under this Paragraph 4.04(a) shall (i) be primary and non-contributing; (ii)
contain cross-liability endorsements; and (iii) insure Landlord against
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(Multi-Tenant Gross Form)
<PAGE> 6
Tenant's performance under Section 5.05, if the matters giving rise to the
indemnity under Section 5.05 result from the negligence of Tenant. The amount
and coverage of such insurance shall not limit Tenant's liability nor relieve
Tenant of any other obligation under this Lease. Landlord may also obtain
comprehensive public liability insurance in an amount and with coverage
determined by Landlord insuring Landlord against liability arising out of
ownership, operation, use or occupancy of the Property. The policy obtained by
Landlord shall not be contributory and shall not provide primary insurance.
(b) Property and Rental Income Insurance. During the Lease Term,
Landlord shall maintain policies of insurance covering loss of or damage to the
Property in the full amount of its replacement value. Such policy shall contain
an Inflation Guard Endorsement and shall provide protection against all perils
included within the classification of fire, extended coverage, vandalism,
malicious mischief, special extended perils (all risk), sprinkler leakage and
any other perils which Landlord deems reasonably necessary. Landlord shall have
the right to obtain flood and earthquake insurance if required by any lender
holding a security interest in the Property. Landlord shall not obtain insurance
for Tenant's fixtures or equipment or building improvements installed by Tenant
on the Property. During the Lease Term, Landlord shall also maintain a rental
income insurance policy, with loss payable to Landlord, in an amount equal to
one year's Base Rent, plus estimated real property taxes and insurance premiums.
Tenant shall be liable for the payment of any deductible amount under Landlord's
or Tenant's insurance policies maintained pursuant to this Section 4.04, in an
amount not to exceed Ten Thousand Dollars ($10,000). Tenant shall not do or
permit anything to be done which invalidates any such insurance policies.
(c) Payment of Premiums. (i) Landlord shall pay the "Base Premiums" for
the insurance policies maintained by Landlord under Paragraph 4.04(b). If the
Property has been previously fully occupied, the "Base Premiums" are the
insurance premiums paid during or applicable to the last twelve (12) months of
such prior occupancy. If the Property has not been previously fully occupied or
has been occupied for less than twelve (12) months, the Base Premiums are the
lowest annual premiums reasonably obtainable for the required Insurance for the
Property as of the Commencement Date.
(d) General Insurance Provisions.
(i) Any insurance which Tenant is required to maintain under this
Lease shall include a provision which requires the insurance carrier to give
Landlord not less than thirty (30) days' written notice prior to any
cancellation or modification of such coverage.
(ii) If Tenant fails to deliver any policy, certificate or renewal
to Landlord required under this Lease within the prescribed time period or if
any such
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(Multi-Tenant Gross Form)
<PAGE> 7
policy is cancelled or modified during the Lease Term without Landlord's
consent, Landlord may obtain such insurance, in which case Tenant shall
reimburse Landlord for the cost of such insurance within fifteen (15) days after
receipt of a statement that indicates the cost of such insurance.
(iii) Tenant shall maintain all insurance required under this Lease
with companies holding a "General Policy Rating" of A-12 or better, as set forth
in the most current issue of "Best Key Rating Guide". Landlord and Tenant
acknowledge the insurance markets are rapidly changing and that insurance in the
form and amounts described in this Section 4.04 may not be available in the
future. Tenant acknowledges that the insurance described in this Section 4.04 is
for the primary benefit of Landlord. If at any time during the Lease Term,
Tenant is unable to maintain the insurance required under the Lease, Tenant
shall nevertheless maintain insurance coverage which is customary and
commercially reasonable in the insurance industry for Tenant's type of business,
as that coverage may change from time to time. Landlord makes no representation
as to the adequacy of such insurance to protect Landlord's or Tenant's
interests. Therefore, Tenant shall obtain any such additional property or
liability insurance which Tenant deems necessary to protect Landlord and Tenant.
(iv) Unless prohibited under any applicable insurance policies
maintained, Landlord and Tenant each hereby waive any and all rights of recovery
against the other, or against the officers, employees, agents or representatives
of the other, for loss of or damage to its property or the property of others
under its control, if such loss or damage is covered by any insurance policy in
force (whether or not described in this Lease) at the time of such loss or
damage. Upon obtaining the required policies of insurance, Landlord and Tenant
shall give notice to the insurance carriers of this mutual waiver of
subrogation.
Section 4.05. Common Areas; Use, Maintenance and Costs.
(a) Common Areas. As used in this Lease, "Common Areas" shall mean all
areas within the Project which are available for the common use of tenants of
the Project and which are not leased or held for the exclusive use of Tenant or
other tenants, including, but not limited to, parking areas, driveways,
sidewalks, loading areas, access roads, corridors, landscaping and planted
areas. Landlord, from time to time, may change the size, location, nature and
use of any of the Common Areas, convert Common Areas into leaseable areas,
construct additional parking facilities (including parking structures) in the
Common Areas, and increase or decrease Common Area land and/or facilities.
Tenant acknowledges that such activities may result in inconvenience to Tenant.
Such activities and changes are permitted if they do not materially affect
Tenant's use of the Property.
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(b) Use of Common Areas. Tenant shall have the nonexclusive right (in
common with other tenants and all others to whom Landlord has granted or may
grant such rights) to use the Common Areas for the purposes intended, subject to
such reasonable rules and regulations as Landlord may establish from time to
time. Tenant shall abide by such rules and regulations and shall use its best
effort to cause others who use the Common Areas with Tenant's express or implied
permission to abide by Landlord's rules and regulations. At any time, Landlord
may close any Common Areas to perform any acts in the Common Areas as, in
Landlord's judgment, are desirable to improve the Project. Tenant shall not
interfere with the rights of Landlord, other tenants or any other person
entitled to use the Common Areas.
(c) Specific Provision re: Vehicle Parking. Tenant shall be entitled to
use the number of vehicle parking spaces in the Project allocated to Tenant in
Section 1.11 of the Lease without paying any additional rent. Tenant's parking
shall not be reserved and shall be limited to vehicles no larger than standard
size automobiles or pickup utility vehicles. Tenant shall not cause large trucks
or other large vehicles to be parked within the Project or on the adjacent
public streets. Temporary parking of large delivery vehicles in the Project may
be permitted by the rules and regulations established by Landlord. Vehicles
shall be parked only in striped parking spaces and not in driveways, loading
areas or other locations not specifically designated for parking. Handicapped
spaces shall only be used by those legally permitted to use them. If Tenant
parks more vehicles in the parking area than the number set forth In Section
1.11 of this Lease, such conduct shall be a material breach of this Lease. In
addition to Landlord's other remedies under the Lease, Tenant shall pay a daily
charge determined by Landlord for each such additional vehicle.
(d) Maintenance of Common Areas. Landlord shall maintain the Common
Areas in good order, condition and repair and shall operate the Project, in
Landlord's sole discretion, as a first-class industrial/commercial real property
development.
Section 4.06. Late Charges. Tenant's failure to pay rent promptly may
cause Landlord to incur unanticipated costs. The exact amount of such costs are
impractical or extremely difficult to ascertain. Such costs may include, but are
not limited to, processing and accounting charges and late charges which may be
imposed on Landlord by any ground lease, mortgage or trust deed encumbering the
Property. Therefore, if Landlord does not receive any rent payment within ten
(10) days after it becomes due, Tenant shall pay Landlord a late charge equal to
ten percent (10%) of the overdue amount. The parties agree that such late charge
represents a fair and reasonable estimate of the costs Landlord will incur by
reason of such late payment.
Section 4.07. Interest on Past Due Obligations. Any amount owed by
Tenant to Landlord which is not paid when due shall bear interest at the rate of
fifteen percent
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(15%) per annum from the due date of such amount. However, interest shall not be
payable on late charges to be paid by Tenant under this Lease. The payment of
interest on such amounts shall not excuse or cure any default by Tenant under
this Lease. If the interest rate specified in this Lease is higher than the rate
permitted by law, the interest rate is hereby decreased to the maximum legal
interest rate permitted by law.
Section 4.08. Impounds for Insurance Premiums and Real Property Taxes.
If requested by any ground lessor or lender to whom Landlord has granted a
security Interest in the Property, or if Tenant is more than ten (10) days late
in the payment of rent more than once in any consecutive twelve (12)-month
period, Tenant shall pay Landlord a sum equal to one-twelfth (1/12) of the
annual real property taxes and insurance premiums payable by Tenant under this
Lease, together with each payment of Base Rent. Landlord shall hold such
payments in a non-interest bearing impound account. If unknown, Landlord shall
reasonably estimate the amount of real property taxes and insurance premiums
when due. Tenant shall pay any deficiency of funds in the impound account to
Landlord upon written request. If Tenant defaults under this Lease, Landlord may
apply any funds in the impound account to any obligation then due under this
Lease.
ARTICLE FIVE: USE OF PROPERTY
Section 5.01. Permitted Uses. Tenant may use the Property only for the
Permitted Uses set forth in Section 1.06 above.
Section 5.02. Manner of Use. Tenant shall not cause or permit the
Property to be used in any way which constitutes a violation of any law,
ordinance, or governmental regulation or order, which annoys or interferes with
the rights of other tenants of the Project, or which constitutes a nuisance or
waste. Tenant shall obtain and pay for all permits, including a Certificate of
Occupancy, required for Tenant's occupancy of the Property and shall promptly
take all actions necessary to comply with all applicable statutes, ordinances,
rules, regulations, orders and requirements regulating the use by Tenant of the
Property, including the Occupational Safety and Health Act.
Section 5.03. Hazardous Materials. As used in this Lease, the term
"Hazardous Material" means any flammable items, explosives, radioactive
materials, hazardous or toxic substances, material or waste or related
materials, including any substances defined as or included in the definition of
"hazardous substances", "hazardous wastes", "hazardous materials" or "toxic
substances" now or subsequently regulated under any applicable federal, state or
local laws or regulations, including without limitation petroleum-based
products, paints, solvents, lead, cyanide, DDT, printing inks, acids,
pesticides, ammonia compounds and other chemical products, asbestos, PCBs and
similar compounds, and including any different products and materials which are
subsequently found to have adverse effects on the environment or the health and
safety of persons.
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Tenant shall not cause or permit any Hazardous Material to be generated,
produced, brought upon, used, stored, treated or disposed of in or about the
Property by Tenant, its agents, employees, contractors, sublessees or invitees
without the prior written consent of Landlord. Landlord shall be entitled to
take into account such other factors or facts as Landlord may reasonably
determine to be relevant in determining whether to grant or withhold consent to
Tenant's proposed activity with respect to Hazardous Material. In no event,
however, shall Landlord be required to consent to the installation or use of any
storage tanks on the Property.
Section 5.04. Signs and Auctions. Tenant shall not place any signs on
the Property without Landlord's prior written consent. Tenant shall not conduct
or permit any auctions or sheriff's sales at the Property.
Section 5.05. Indemnity. Tenant shall indemnify Landlord against and
hold Landlord harmless from any and all costs, claims or liability arising from:
(a) Tenant's use of the Property; (b) the conduct of Tenant's business or
anything else done or permitted by Tenant to be done in or about the Property,
including any contamination of the Property or any other property resulting from
the presence or use of Hazardous Material caused or permitted by Tenant; (c) any
breach or default in the performance of Tenant's obligations under this Lease;
(d) any misrepresentation or breach of warranty by Tenant under this Lease; or
(e) other acts or omissions of Tenant. Tenant shall defend Landlord against any
such cost, claim or liability at Tenant's expense with counsel reasonably
acceptable to Landlord or, at Landlord's election, Tenant shall reimburse
Landlord for any legal fees or costs incurred by Landlord in connection with any
such claim. As a material part of the consideration to Landlord, Tenant assumes
all risk of damage to property or injury to persons in or about the Property
arising from any cause, and Tenant hereby waives all claims in respect thereof
against Landlord, except for any claim arising out of Landlord's gross
negligence or willful misconduct. As used in this Section, the term "Tenant"
shall include Tenant's employees, agents, contractors and invitees, if
applicable.
Section 5.06. Landlord's Access. Landlord or its agents may enter the
Property at all reasonable times to show the Property to potential buyers,
investors or tenants or other parties; to do any other act or to inspect and
conduct tests in order to monitor Tenant's compliance with all applicable
environmental laws and all laws governing the presence and use of Hazardous
Material; or for any other purpose Landlord deems necessary. Landlord shall give
Tenant prior notice of such entry, except in the case of an emergency. Landlord
may place customary "For Sale" or "For Lease" signs on the Property.
Section 5.07. Quiet Possession. If Tenant pays the rent and complies
with all other terms of this Lease, Tenant may occupy and enjoy the Property for
the full Lease Term, subject to the provisions of this Lease.
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ARTICLE SIX: CONDITION OF PROPERTY; MAINTENANCE, REPAIRS AND ALTERATIONS
Section 6.01. Existing Conditions. Tenant accepts the Property in its
condition as of the execution of the Lease, subject to all recorded matters,
laws, ordinances, and governmental regulations and orders. Except as provided
herein, Tenant acknowledges that neither Landlord nor any agent of Landlord has
made any representation as to the condition of the Property or the suitability
of the Property for Tenant's intended use. Tenant represents and warrants that
Tenant has made its own inspection of and inquiry regarding the condition of the
Property and is not relying on any representations of Landlord or any Broker
with respect thereto. If Landlord or Landlord's Broker has provided a Property
Information Sheet or other Disclosure Statement regarding the Property, a copy
is attached as an exhibit to the Lease.
Section 6.02. Exemption of Landlord from Liability. Landlord shall not
be liable for any damage or injury to the person, business (or any loss of
income therefrom), goods, wares, merchandise or other property of Tenant,
Tenant's employees, invitees, customers or any other person in or about the
Property, whether such damage or injury is caused by or results from: (a) fire,
steam, electricity, water, gas or rain; (b) the breakage, leakage, obstruction
or other defects of pipes, sprinklers, wires, appliances, plumbing, air
conditioning or lighting fixtures or any other cause; (c) conditions arising in
or about the Property or upon other portions of the Project, or from other
sources or places; or (d) any act or omission of any other tenant of the
Project. Landlord shall not be liable for any such damage or injury even though
the cause of or the means of repairing such damage or injury are not accessible
to Tenant. The provisions of this Section 6.02 shall not, however, exempt
Landlord from liability for Landlord's gross negligence or willful misconduct.
Section 6.03. Landlord's Obligations. Subject to the provisions of
Article Seven (Damage or Destruction) and Article Eight (Condemnation), and
except for damage caused by any act or omission of Tenant, or Tenant's
employees, agents, contractors or invitees, Landlord shall keep the foundation,
roof and structural portions of exterior walls of the improvements on the
Property in good order, condition and repair. However, Landlord shall not be
obligated to maintain or repair windows, doors, plate glass or the surfaces of
walls. Landlord shall not be obligated to make any repairs under this Section
6.03 until a reasonable time after receipt of a written notice from Tenant of
the need for such repairs. Tenant waives the benefit of any present or future
law which might give Tenant the right to repair the Property at Landlord's
expense or to terminate the Lease because of the condition of the Property.
Section 6.04. Tenant's Obligations. (a) Except as provided in Section
6.03, Article Seven (Damage or Destruction) and Article Eight (Condemnation),
Tenant shall
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keep all portions of the Property (including structural, nonstructural,
interior, exterior, systems and equipment) in good order, condition and repair
(including interior repainting and refinishing, as needed). If any portion of
the Property or any system or equipment in the Property which Tenant is
obligated to repair cannot be fully repaired or restored, Tenant shall promptly
replace such portion of the Property or system or equipment in the Property,
regardless of whether the benefit of such replacement extends beyond the Lease
Term; but if the benefit or useful life of such replacement extends beyond the
Lease Term (as such term may be extended by exercise of any options), the useful
life of such replacement shall be prorated over the remaining portion of the
Lease Term (as extended), and Tenant shall be liable only for that portion of
the cost which is applicable to the Lease Term (as extended). Tenant shall
maintain a preventive maintenance contract providing for the regular inspection
and maintenance of the heating and air conditioning system by a licensed heating
and air conditioning contractor. Landlord shall have the right, upon written
notice to Tenant, to undertake the responsibility for preventive maintenance of
the heating and air conditioning system at Tenant's expense. In addition, Tenant
shall, at Tenant's expense, repair any damage to the roof, foundation or
structural portions of walls caused by Tenant's acts or omissions. It is the
intention of Landlord and Tenant that, at all times during the Lease Term,
Tenant shall maintain the Property in an attractive, first-class and fully
operative condition.
(b) Tenant shall fulfill all of Tenant's obligations under this Section
6.04 at Tenant's sole expense. If Tenant fails to maintain, repair or replace
the Property as required by this Section 6.04, Landlord may, upon ten (10) days'
prior notice to Tenant (except that no notice shall be required in the case of
an emergency), enter the Property and perform such maintenance or repair
(including replacement, as needed) on behalf of Tenant. In such case, Tenant
shall reimburse Landlord for all costs incurred in performing such maintenance
or repair immediately upon demand.
Section 6.05. Alterations, Additions, and Improvements.
(a) Tenant shall not make any alterations, additions, or improvements
to the Property without Landlord's prior written consent, except for
non-structural alterations which do not exceed Ten Thousand Dollars ($10,000) in
cost cumulatively over the Lease Term and which are not visible from the outside
of any building of which the Property is part. Landlord may require Tenant to
provide demolition and/or lien and completion bonds in form and amount
satisfactory to Landlord. Tenant shall promptly remove any alterations,
additions, or improvements constructed in violation of this Paragraph 6.05(a)
upon Landlord's written request. All alterations, additions, and improvements
shall be done in a good and workmanlike manner, in conformity with all
applicable laws and regulations, and by a contractor approved by Landlord. Upon
completion of any such
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work, Tenant shall provide Landlord with "as built" plans, copies of all
construction contracts, and proof of payment for all labor and materials.
(b) Tenant shall pay when due all claims for labor and material
furnished to the Property. Tenant shall give Landlord at least twenty (20) days'
prior written notice of the commencement of any work on the Property, regardless
of whether Landlord's consent to such work is required. Landlord may elect to
record and post notices of non-responsibility on the Property.
Section 6.06. Condition upon Termination. Upon the termination of the
Lease, Tenant shall surrender the Property to Landlord, broom clean and in the
same condition as received except for ordinary wear and tear which Tenant was
not otherwise obligated to remedy under any provision of this Lease. However,
Tenant shall not be obligated to repair any damage which Landlord is required to
repair under Article Seven (Damage or Destruction). In addition, Landlord may
require Tenant to remove any alterations, additions or improvements (whether or
not made with Landlord's consent) prior to the expiration of the Lease and to
restore the Property to its prior condition, all at Tenant's expense. All
alterations, additions and improvements which Landlord has not required Tenant
to remove shall become Landlord's property and shall be surrendered to Landlord
upon the expiration or earlier termination of the Lease, except that Tenant may
remove any of Tenant's machinery or equipment which can be removed without
material damage to the Property. Tenant shall repair, at Tenant's expense, any
damage to the Property caused by the removal of any such machinery or equipment.
In no event, however, shall Tenant remove any of the following materials or
equipment (which shall be deemed Landlord's property) without Landlord's prior
written consent: any power wiring or power panels; lighting or lighting
fixtures; wall coverings; drapes, blinds or other window coverings; carpets or
other floor coverings; heaters, air conditioners or any other heating or air
conditioning equipment; fencing or security gates; or other similar building
operating equipment and decorations.
ARTICLE SEVEN: DAMAGE OR DESTRUCTION
Section 7.01. Partial Damage to Property.
(a) Tenant shall notify Landlord in writing immediately upon the
occurrence of any damage to the Property. If the Property is only partially
damaged (i.e., less than fifty percent (50%) of the Property is untenantable as
a result of such damage or less than fifty percent (50%) of Tenant's operations
are materially impaired) and if the proceeds received by Landlord from the
insurance policies described in Paragraph 4.04(b) are sufficient to pay for the
necessary repairs, this Lease shall remain in effect and Landlord shall repair
the damage as soon as reasonably possible. Landlord may elect (but is not
required) to repair any damage to Tenant's fixtures, equipment, or improvements.
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(b) If the insurance proceeds received by Landlord are not sufficient
to pay the entire cost of repair, or if the cause of the damage is not covered
by the insurance policies which Landlord maintains under Paragraph 4.04(b),
Landlord may elect either to (i) repair the damage as soon as reasonably
possible, in which case this Lease shall remain in full force and effect, or
(ii) terminate this Lease as of the date the damage occurred. Landlord shall
notify Tenant within thirty (30) days after receipt of notice of the occurrence
of the damage whether Landlord elects to repair the damage or terminate the
Lease. If Landlord elects to repair the damage, Tenant shall pay Landlord the
"deductible amount" (if any) under Landlord's insurance policies and, if the
damage was due to an act or omission of Tenant, or Tenant's employees, agents,
contractors or invitees, the difference between the actual cost of repair and
any insurance proceeds received by Landlord. If Landlord elects to terminate the
Lease, Tenant may elect to continue this Lease in full force and effect, in
which case Tenant shall repair any damage to the Property and any building in
which the Property is located. Tenant shall pay the cost of such repairs, except
that upon satisfactory completion of such repairs, Landlord shall deliver to
Tenant any insurance proceeds received by Landlord for the damage repaired by
Tenant. Tenant shall give Landlord written notice of such election within ten
(10) days after receiving Landlord's termination notice.
(c) If the damage to the Property occurs during the last six (6) months
of the Lease Term and such damage will require more than thirty (30) days to
repair, either Landlord or Tenant may elect to terminate this Lease as of the
date the damage occurred, regardless of the sufficiency of any insurance
proceeds. The party electing to terminate this Lease shall give written
notification to the other party of such election within thirty (30) days after
Tenant's notice to Landlord of the occurrence of the damage.
Section 7.02. Substantial or Total Destruction. If the Property is
substantially or totally destroyed by any cause whatsoever (i.e., the damage to
the Property is greater than partial damage as described in Section 7.01), and
regardless of whether Landlord receives any insurance proceeds, this Lease shall
terminate as of the date the destruction occurred. Notwithstanding the preceding
sentence, if the Property can be rebuilt within six (6) months after the date of
destruction, Landlord may elect to rebuild the Property at Landlord's own
expense, in which case this Lease shall remain in full force and effect.
Landlord shall notify Tenant of such election within thirty (30) days after
Tenant's notice of the occurrence of total or substantial destruction. If
Landlord so elects, Landlord shall rebuild the Property at Landlord's sole
expense, except that if the destruction was caused by an act or omission of
Tenant, Tenant shall pay Landlord the difference between the actual cost of
rebuilding and any insurance proceeds received by Landlord.
Section 7.03. Temporary Reduction of Rent. If the Property is destroyed
or damaged and Landlord or Tenant repairs or restores the Property pursuant to
the
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provisions of this Article Seven, any rent payable during the period of such
damage, repair and/or restoration shall be reduced according to the degree, if
any, to which Tenant's use of the Property is impaired. However, the reduction
shall not exceed the sum of one year's payment of Base Rent, insurance premiums
and real property taxes. Except for such possible reduction in Base Rent,
insurance premiums and real property taxes, Tenant shall not be entitled to any
compensation, reduction, or reimbursement from Landlord as a result of any
damage, destruction, repair, or restoration of or to the Property.
Section 7.04. Waiver. Tenant waives the protection of any statute, code
or judicial decision which grants a tenant the right to terminate a lease in the
event of the substantial or total destruction of the leased property. Tenant
agrees that the provisions of Section 7.02 above shall govern the rights and
obligations of Landlord and Tenant in the event of any substantial or total
destruction to the Property.
ARTICLE EIGHT: CONDEMNATION
If all or any portion of the Property is taken under the power of
eminent domain or sold under the threat of that power (all of which are called
"Condemnation"), this Lease shall terminate as to the part taken or sold on the
date the condemning authority takes title or possession, whichever occurs first.
If more than twenty percent (20%) of the floor area of the building in which the
Property is located, or which is located on the Property, is taken, either
Landlord or Tenant may terminate this Lease as of the date the condemning
authority takes title or possession, by delivering written notice to the other
within ten (10) days after receipt of written notice of such taking (or in the
absence of such notice, within ten (10) days after the condemning authority
takes title or possession). If neither Landlord nor Tenant terminates this
Lease, this Lease shall remain in effect as to the portion of the Property not
taken, except that the Base Rent and Additional Rent shall be reduced in
proportion to the reduction in the floor area of the Property. Any Condemnation
award or payment shall be distributed in the following order: (a) first, to any
ground lessor, mortgagee or beneficiary under a deed of trust encumbering the
Property, the amount of its interest in the Property; (b) second, to Tenant,
only the amount of any award specifically designated for loss of or damage to
Tenant's trade fixtures or removable personal property; and (c) third, to
Landlord, the remainder of such award, whether as compensation for reduction in
the value of the leasehold, the taking of the fee, or otherwise. If this Lease
is not terminated, Landlord shall repair any damage to the Property caused by
the Condemnation, except that Landlord shall not be obligated to repair any
damage for which Tenant has been reimbursed by the condemning authority. If the
severance damages received by Landlord are not sufficient to pay for such
repair, Landlord shall have the right to either terminate this Lease or make
such repair at Landlord's expense.
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ARTICLE NINE: ASSIGNMENT AND SUBLETTING
Section 9.01. Landlord's Consent Required. No portion of the Property
or of Tenant's interest in this Lease may be acquired by any other person or
entity, whether by sale, assignment, mortgage, sublease, transfer, operation of
law, or act of Tenant, without Landlord's prior written consent, except as
provided in Section 9.02 below. Landlord has the right to grant or withhold its
consent as provided in Section 9.05 below. Any attempted transfer without
consent shall be void and shall constitute a non-curable breach of this Lease.
If Tenant is a partnership, any cumulative transfer of more than twenty percent
(20%) of the partnership interests shall require Landlord's consent. If Tenant
is a corporation, any change in the ownership of a controlling interest of the
voting stock of the corporation shall require Landlord's consent.
Section 9.02. Tenant Affiliate. Tenant may assign this Lease or
sublease the Property, without Landlord's consent, to any corporation which
controls, is controlled by or is under common control with Tenant, or to any
corporation resulting from the merger of or consolidation with Tenant ("Tenant's
Affiliate"). In such case , any Tenant's Affiliate shall assume in writing all
of Tenant's obligations under this Lease.
Section 9.03. No Release of Tenant. No transfer permitted by this
Article Nine, whether with or without Landlord's consent, shall release Tenant
or change Tenant's primary liability to pay the rent and to perform all other
obligations of Tenant under this Lease. Landlord's acceptance of rent from any
other person is not a waiver of any provision of this Article Nine. Consent to
one transfer is not a consent to any subsequent transfer. If Tenant's transferee
defaults under this Lease, Landlord may proceed directly against Tenant without
pursuing remedies against the transferee. Landlord may consent to subsequent
assignments or modifications of this Lease by Tenant's transferee, without
notifying Tenant or obtaining its consent. Such action shall not relieve
Tenant's liability under this Lease.
Section 9.04. Offer to Terminate. If Tenant desires to assign the Lease
or sublease the Property, Tenant shall have the right to offer, in writing, to
terminate the Lease as of a date specified in the offer. If Landlord elects in
writing to accept the offer to terminate within twenty (20) days after notice of
the offer, the Lease shall terminate as of the date specified and all the terms
and provisions of the Lease governing termination shall apply. If Landlord does
not so elect, the Lease shall continue in effect until otherwise terminated and
the provisions of Section 9.05 with respect to any proposed transfer shall
continue to apply.
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Section 9.05. Landlord's Consent.
(a) Tenant's request for consent to any transfer described in Section
9.01 shall set forth in writing the details of the proposed transfer, including
the name, business and financial condition of the prospective transferee,
financial details of the proposed transfer (e.g., the term of and the rent and
security deposit payable under any proposed assignment or sublease), and any
other information Landlord deems relevant. Landlord shall have the right to
withhold consent, if reasonable, or to grant consent, based on the following
factors: (i) the business of the proposed assignee or subtenant and the proposed
use of the Property, (ii) the net worth and financial reputation of the proposed
assignee or subtenant; (iii) Tenant's compliance with all of its obligations
under the Lease; and (iv) such other factors as Landlord may reasonably deem
relevant. If Landlord objects to a proposed assignment solely because of the net
worth and/or financial reputation of the proposed assignee, Tenant may
nonetheless sublease (but not assign), all or a portion of the Property to the
proposed transferee, but only on the other terms of the proposed transfer.
(b) If Tenant assigns or subleases, the following shall apply:
(i) Tenant shall pay to Landlord as Additional Rent under the Lease
the Landlord's Share (stated in Section 1.14) of the Profit (defined below) on
such transaction as and when received by Tenant, unless Landlord gives written
notice to Tenant and the assignee or subtenant that Landlord's Share shall be
paid by the assignee or subtenant to Landlord directly. The "Profit" means (A)
all amounts paid to Tenant for such assignment or sublease, including "key"
money, monthly rent in excess of the monthly rent payable under the Lease, and
all fees and other consideration paid for the assignment or sublease, including
fees under any collateral agreements, less (B) costs and expenses directly
incurred by Tenant in connection with the execution and performance of such
assignment or sublease for real estate broker's commissions and costs of
renovation or construction of tenant improvements required under such assignment
or sublease. Tenant is entitled to recover such costs and expenses before Tenant
is obligated to pay the Landlord's Share to Landlord. The Profit in the case of
a sublease of less than all the Property is the rent allocable to the subleased
space as a percentage on a square footage basis.
(ii) Tenant shall provide Landlord a written statement certifying
all amounts to be paid from any assignment or sublease of the Property within
thirty (30) days after the transaction documentation is signed, and Landlord may
inspect Tenant's books and records to verify the accuracy of such statement. On
written request, Tenant shall promptly furnish to Landlord copies of all the
transaction documentation, all of which shall be certified by Tenant to be
complete, true and correct. Landlord's receipt of Landlord's Share shall not be
a consent to any further assignment or subletting. The
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breach of Tenant's obligation under this Paragraph 9.05(b) shall be a material
default of the Lease.
Section 9.06. No Merger. No merger shall result from Tenant's sublease
of the Property under this Article Nine, Tenant's surrender of this Lease or the
termination of this Lease in any other manner. In any such event, Landlord may
terminate any or all subtenancies or succeed to the interest of Tenant as
sublandlord under any or all subtenancies.
ARTICLE TEN: DEFAULTS; REMEDIES
Section 10.01. Covenants and Conditions. Tenant's performance of each
of Tenant's obligations under this Lease is a condition as well as a covenant.
Tenant's right to continue in possession of the Property is conditioned upon
such performance. Time is of the essence in the performance of all covenants and
conditions.
Section 10.02. Defaults. Tenant shall be in material default under this
Lease:
(a) If Tenant abandons the Property or if Tenant's vacation of the
Property results in the cancellation of any insurance described in Section 4.04;
(b) If Tenant fails to pay rent or any other charge when due;
(c) If Tenant fails to perform any of Tenant's non-monetary obligations
under this Lease for a period of thirty (30) days after written notice from
Landlord; provided that if more than thirty (30) days are required to complete
such performance, Tenant shall not be in default if Tenant commences such
performance within the thirty (30)-day period and thereafter diligently pursues
its completion. However, Landlord shall not be required to give such notice if
Tenant's failure to perform constitutes a non-curable breach of this Lease. The
notice required by this Paragraph is intended to satisfy any and all notice
requirements imposed by law on Landlord and is not in addition to any such
requirement.
(d) (i) If Tenant makes a general assignment or general arrangement for
the benefit of creditors; (ii) if a petition for adjudication of bankruptcy or
for reorganization or rearrangement is filed by or against Tenant and is not
dismissed within thirty (30) days; (iii) if a trustee or receiver is appointed
to take possession of substantially all of Tenant's assets located at the
Property or of Tenant's interest in this Lease and possession is not restored to
Tenant within thirty (30) days; or (iv) if substantially all of Tenant's assets
located at the Property or of Tenant's interest in this Lease is subjected to
attachment, execution or other judicial seizure which is not discharged within
thirty (30) days. If a court of competent jurisdiction determines that any of
the acts described in this subparagraph (d) is not a default under this Lease,
and a trustee is appointed to
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take possession (or if Tenant remains a debtor in possession) and such trustee
or Tenant transfers Tenant's interest hereunder, then Landlord shall receive, as
Additional Rent, the excess, if any, of the rent (or any other consideration)
paid in connection with such assignment or sublease over the rent payable by
Tenant under this Lease.
(e) If any guarantor of the Lease revokes or otherwise terminates, or
purports to revoke or otherwise terminate, any guaranty of all or any portion of
Tenant's obligations under the Lease. Unless otherwise expressly provided, no
guaranty of the Lease is revocable.
Section 10.03. Remedies. On the occurrence of any material default by
Tenant, Landlord may, at any time thereafter, with or without notice or demand
and without limiting Landlord in the exercise of any right or remedy which
Landlord may have:
(a) Terminate Tenant's right to possession of the Property by any
lawful means, in which case this Lease shall terminate and Tenant shall
immediately surrender possession of the Property to Landlord. In such event,
Landlord shall be entitled to recover from Tenant all damages incurred by
Landlord by reason of Tenant's default, including (i) the worth at the time of
the award of the unpaid Base Rent, Additional Rent and other charges which
Landlord had earned at the time of the termination; (ii) the worth at the time
of the award of the amount by which the unpaid Base Rent, Additional Rent and
other charges which Landlord would have earned after termination until the time
of the award exceeds the amount of such rental loss that Tenant proves Landlord
could have reasonably avoided; (iii) the worth at the time of the award of the
amount by which the unpaid Base Rent, Additional Rent and other charges which
Tenant would have paid for the balance of the Lease Term after the time of award
exceeds the amount of such rental loss that Tenant proves Landlord could have
reasonably avoided; and (iv) any other amount necessary to compensate Landlord
for all the detriment proximately caused by Tenant's failure to perform its
obligations under the Lease or which in the ordinary course of things would be
likely to result therefrom, including, but not limited to, any costs or expenses
Landlord incurs in maintaining or preserving the Property after such default,
the cost of recovering possession of the Property, expenses of reletting,
including necessary renovation or altering of the Property, Landlord's
reasonable attorneys fees incurred in connection therewith, and any real estate
commission paid or payable. As used in subparts (i) and (ii) above, the "worth
at the time of the award" is computed by allowing interest on unpaid amounts at
the rate of fifteen percent (15%) per annum, or such lesser amount as may then
be the maximum lawful rate. As used in subpart (iii) above, the "worth at the
time of the award" is computed by discounting such amount at the discount rate
of the Federal Reserve Bank of San Francisco at the time of the award, plus one
percent (1%). If Tenant has abandoned the Property, Landlord shall have the
option of
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(i) retaking possession of the Property and recovering from Tenant the amount
specified in this Paragraph 10.03(a), or (ii) proceeding under Paragraph
10.03(b);
(b) Maintain Tenant's right to possession, in which case this Lease
shall continue in effect whether or not Tenant has abandoned the Property. In
such event, Landlord shall be entitled to enforce all of Landlord's rights and
remedies under this Lease, including the right to recover the rent as it becomes
due;
(c) Pursue any other remedy now or hereafter available to Landlord
under the laws or judicial decisions of the state in which the Property is
located.
Section 10.05. Automatic Termination. Notwithstanding any other term or
provision hereof to the contrary, the Lease shall terminate on the occurrence of
any act which affirms the Landlord's intention to terminate the Lease as
provided in Section 10.03 hereof, including the filing of an unlawful detainer
action against Tenant. On such termination, Landlord's damages for default shall
include all costs and fees, including reasonable attorneys' fees that Landlord
incurs in connection with the filing, commencement, pursuing and/or defending of
any action in any bankruptcy court or other court with respect to the Lease; the
obtaining of relief from any stay in bankruptcy restraining any action to evict
Tenant; or the pursuing of any action with respect to Landlord's right to
possession of the Property. All such damages suffered (apart from Base Rent and
other rent payable hereunder) shall constitute pecuniary damages which must be
reimbursed to Landlord prior to assumption of the Lease by Tenant or any
successor to Tenant in any bankruptcy or other proceeding.
Section 10.06. Cumulative Remedies. Landlord's exercise of any right or
remedy shall not prevent it from exercising any other right or remedy.
ARTICLE ELEVEN: PROTECTION OF LENDERS
Section 11.01. Subordination. Landlord shall have the right to
subordinate this Lease to any ground lease, deed of trust or mortgage
encumbering the Property, any advances made on the security thereof and any
renewals, modifications, consolidations, replacements or extensions thereof,
whenever made or recorded. Tenant shall cooperate with Landlord and any lender
which is acquiring a security interest in the Property or the Lease. Tenant
shall execute such further documents and assurances as such lender may require,
provided that Tenant's obligations under this Lease shall not be increased in
any material way (the performance of ministerial acts shall not be deemed
material), and Tenant shall not be deprived of its rights under this Lease.
Tenant's right to quiet possession of the Property during the Lease Term shall
not be disturbed if Tenant pays the rent and performs all of Tenant's
obligations under this Lease and is not otherwise in default. If any ground
lessor, beneficiary or mortgagee elects to have this Lease prior to
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the lien of its ground lease, deed of trust or mortgage and gives written notice
thereof to Tenant, this Lease shall be deemed prior to such ground lease, deed
of trust or mortgage whether this Lease is dated prior or subsequent to the date
of said ground lease, deed of trust or mortgage or the date of recording
thereof.
Section 11.02. Attornment. If Landlord's interest in the Property is
acquired by any ground lessor, beneficiary under a deed of trust, mortgagee, or
purchaser at a foreclosure sale, Tenant shall attorn to the transferee of or
successor to Landlord's interest in the Property and recognize such transferee
or successor as Landlord under this Lease. Tenant waives the protection of any
statute or rule of law which gives or purports to give Tenant any right to
terminate this Lease or surrender possession of the Property upon the transfer
of Landlord's interest.
Section 11.03. Signing of Documents. Tenant shall sign and deliver any
instrument or documents necessary or appropriate to evidence any such attornment
or subordination or agreement to do so. If Tenant falls to do so within ten (10)
days after written request, Tenant hereby makes, constitutes and irrevocably
appoints Landlord, or any transferee or successor of Landlord, the
attorney-in-fact of Tenant to execute and deliver any such instrument or
document.
Section 11.04. Estoppel Certificates.
(a) Upon Landlord's written request, Tenant shall execute, acknowledge
and deliver to Landlord a written statement certifying: (i) that none of the
terms or provisions of this Lease have been changed (or if they have been
changed, stating how they have been changed); (ii) that this Lease has not been
cancelled or terminated; (iii) the last date of payment of the Base Rent and
other charges and the time period covered by such payment; (iv) that Landlord is
not in default under this Lease (or, if Landlord is claimed to be in default,
stating why); and (v) such other representations or information with respect to
Tenant or the Lease as Landlord may reasonably request or which any prospective
purchaser or encumbrancer of the Property may require. Tenant shall deliver such
statement to Landlord within ten (10) days after Landlord's request. Landlord
may give any such statement by Tenant to any prospective purchaser or
encumbrancer of the Property. Such purchaser or encumbrancer may rely
conclusively upon such statement as true and correct.
(b) If Tenant does not deliver such statement to Landlord within such
ten (10)-day period, Landlord, and any prospective purchaser or encumbrancer,
may conclusively presume and rely upon the following facts: (i) that the terms
and provisions of this Lease have not been changed except as otherwise
represented by Landlord; (ii) that this Lease has not been canceled or
terminated except as otherwise represented by Landlord; (iii) that not more than
one month's Base Rent or other charges have been paid in
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<PAGE> 22
advance; and (iv) that Landlord is not in default under the Lease. In such
event, Tenant shall be estopped from denying the truth of such facts.
Section 11.05. Tenant's Financial Condition. Within ten (10) days after
written request from Landlord, Tenant shall deliver to Landlord such financial
statements as Landlord reasonably requires to verify the net worth of Tenant or
any assignee, subtenant, or guarantor of Tenant. In addition, Tenant shall
deliver to any lender designated by Landlord any financial statements required
by such lender to facilitate the financing or refinancing of the Property.
Tenant represents and warrants to Landlord that each such financial statement is
a true and accurate statement as of the date of such statement. All financial
statements shall be confidential and shall be used only for the purposes set
forth in this Lease.
ARTICLE TWELVE: LEGAL COSTS
Section 12.01. Legal Proceedings. If Tenant or Landlord shall be in
breach or default under this Lease, such party (the "Defaulting Party") shall
reimburse the other party (the "Nondefaulting Party") upon demand for any costs
or expenses that the Nondefaulting Party incurs in connection with any breach or
default of the Defaulting Party under this Lease, whether or not suit is
commenced or judgment entered. Such costs shall include legal fees and costs
incurred for the negotiation of a settlement, enforcement of rights or
otherwise. Furthermore, if any action for breach of or to enforce the provisions
of this Lease is commenced, the court in such action shall award to the party in
whose favor a judgment is entered, a reasonable sum as attorneys' fees and
costs. The losing party in such action shall pay such attorneys' fees and costs.
Tenant shall also indemnify Landlord against and hold Landlord harmless from all
costs, expenses, demands and liability Landlord may incur if Landlord becomes or
is made a party to any claim or action (a) instituted by Tenant against any
third party, or by any third party against Tenant, or by or against any person
holding any interest under or using the Property by license of or agreement with
Tenant; (b) for foreclosure of any lien for labor or material furnished to or
for Tenant or such other person; (c) otherwise arising out of or resulting from
any act or transaction of Tenant or such other person; or (d) necessary to
protect Landlord's interest under this Lease in a bankruptcy proceeding, or
other proceeding under Title 11 of the United States Code, as amended. Tenant
shall defend Landlord against any such claim or action at Tenant's expense with
counsel reasonably acceptable to Landlord or, at Landlord's election, Tenant
shall reimburse Landlord for any legal fees or costs Landlord incurs in any such
claim or action.
Section 12.02. Landlord's Consent. Tenant shall pay Landlord's
reasonable attorneys' fees incurred in connection with Tenant's request for
Landlord's consent under Article Nine (Assignment and Subletting), or in
connection with any other act which Tenant proposes to do and which requires
Landlord's consent.
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ARTICLE THIRTEEN: MISCELLANEOUS PROVISIONS
Section 13.01. Non-Discrimination. Tenant promises, and it is a
condition to the continuance of this Lease, that there will be no discrimination
against, or segregation of, any person or group of persons on the basis of race,
color, sex, creed, national origin or ancestry in the leasing, subleasing,
transferring, occupancy, tenure or use of the Property or any portion thereof.
Section 13.02. Landlord's Liability; Certain Duties.
(a) As used in this Lease, the term "Landlord" means only the current
owner or owners of the fee title to the Property or Project or the leasehold
estate under a ground lease of the Property or Project at the time in question.
Each Landlord is obligated to perform the obligations of Landlord under this
Lease only during the time such Landlord owns such interest or title. Any
Landlord who transfers its title or interest is relieved of all liability with
respect to the obligations of Landlord under this Lease to be performed on or
after the date of transfer. However, each Landlord shall deliver to its
transferee all funds that Tenant previously paid if such funds have not yet been
applied under the terms of this Lease.
(b) Tenant shall give written notice of any failure by Landlord to
perform any of its obligations under this Lease to Landlord and to any ground
lessor, mortgagee or beneficiary under any deed of trust encumbering the
Property whose name and address have been furnished to Tenant in writing.
Landlord shall not be in default under this Lease unless Landlord (or such
ground lessor, mortgagee or beneficiary) fails to cure such non-performance
within thirty (30) days after receipt of Tenant's notice. However, if such
non-performance reasonably requires more than thirty (30) days to cure, Landlord
shall not be in default if such cure is commenced within such thirty (30)-day
period and thereafter diligently pursued to completion.
(c) Notwithstanding any term or provision herein to the contrary, the
liability of Landlord for the performance of its duties and obligations under
this Lease is limited to Landlord's interest in the Property and the Project,
and neither the Landlord nor its partners, shareholders, officers or other
principals shall have any personal liability under this Lease.
Section 13.03. Severability. A determination by a court of competent
jurisdiction that any provision of this Lease or any part thereof is illegal or
unenforceable shall not cancel or invalidate the remainder of such provision or
this Lease, which shall remain in full force and effect.
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Section 13.04. Interpretation. The captions of the Articles or Sections
of this Lease are to assist the parties in reading this Lease and are not a part
of the terms or provisions of this Lease. Whenever required by the context of
this Lease, the singular shall include the plural and the plural shall include
the singular. The masculine, feminine and neuter genders shall each include the
other. In any provision relating to the conduct, acts or omissions of Tenant,
the term "Tenant" shall include Tenant's agents, employees, contractors,
invitees, successors or others using the Property with Tenant's expressed or
implied permission.
Section 13.05. Incorporation of Prior Agreements; Modifications. This
Lease is the only agreement between the parties pertaining to the lease of the
Property and no other agreements are effective. All amendments to this Lease
shall be in writing and signed by all parties. Any other attempted amendment
shall be void.
Section 13.06. Notices. All notices required or permitted under this
Lease shall be in writing and shall be personally delivered or sent by certified
mail, return receipt requested, postage prepaid. Notices to Tenant shall be
delivered to the address specified in Section 1.03 above, except that upon
Tenant's taking possession of the Property, the Property shall be Tenant's
address for notice purposes. Notices to Landlord shall be delivered to the
address specified in Section 1.02 above. All notices shall be effective upon
delivery. Either party may change its notice address upon written notice to the
other party.
Section 13.07. Waivers. All waivers must be in writing and signed by
the waiving party. Landlord's failure to enforce any provision of this Lease or
its acceptance of rent shall not be a waiver and shall not prevent Landlord from
enforcing that provision or any other provision of this Lease in the future. No
statement on a payment check from Tenant or in a letter accompanying a payment
check shall be binding on Landlord. Landlord may, with or without notice to
Tenant, negotiate such check without being bound to the conditions of such
statement.
Section 13.08. No Recordation. Tenant shall not record this Lease
without prior written consent from Landlord. However, either Landlord or Tenant
may require that a "Short Form" memorandum of this Lease executed by both
parties be recorded. The party requiring such recording shall pay all transfer
taxes and recording fees.
Section 13.09. Binding Effect; Choice of Law. This Lease binds any
party who legally acquires any rights or interest in this Lease from Landlord or
Tenant. However, Landlord shall have no obligation to Tenant's successor unless
the rights or interests of Tenant's successor are acquired in accordance with
the terms of this Lease. The laws of the state in which the Property is located
shall govern this Lease.
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Section 13.10. Corporate Authority; Partnership Authority. If Tenant is
a corporation, each person signing this Lease on behalf of Tenant represents and
warrants that he has full authority to do so and that this Lease binds the
corporation. Within thirty (30) days after this Lease is signed, Tenant shall
deliver to Landlord a certified copy of a resolution of Tenant's Board of
Directors authorizing the execution of this Lease or other evidence of such
authority reasonably acceptable to Landlord. If Tenant is a partnership, each
person or entity signing this Lease for Tenant represents and warrants that he
or it is a general partner of the partnership, that he or it has full authority
to sign for the partnership and that this Lease binds the partnership and all
general partners of the partnership. Tenant shall give written notice to
Landlord of any general partner's withdrawal or addition. Within thirty (30)
days after this Lease is signed, Tenant shall deliver to Landlord a copy of
Tenant's recorded statement of partnership or certificate of limited
partnership.
Section 13.11. Joint and Several Liability. All parties signing this
Lease as Tenant shall be jointly and severally liable for all obligations of
Tenant.
Section 13.12. Force Majeure. If Landlord cannot perform any of its
obligations due to events beyond Landlord's control, the time provided for
performing such obligations shall be extended by a period of time equal to the
duration of such events. Events beyond Landlord's control include, but are not
limited to, acts of God, war, civil commotion, labor disputes, strikes, fire,
flood or other casualty, shortages of labor or material, government regulation
or restriction and weather conditions.
Section 13.13. Execution of Lease. This Lease may be executed in
counterparts and, when all counterpart documents are executed, the counterparts
shall constitute a single binding instrument. Landlord's delivery of this Lease
to Tenant shall not be deemed to be an offer to lease and shall not be binding
upon either party until executed and delivered by both parties.
Section 13.14. Survival. All representations and warranties of Landlord
and Tenant shall survive the termination of this Lease.
ARTICLE FOURTEEN: BROKERS
Section 14.01. Broker's Fee. When this Lease is signed by and delivered
to both Landlord and Tenant, Landlord shall pay a real estate commission to
Landlord's Broker named in Section 1.08 above, if any, as provided in the
written agreement between Landlord and Landlord's Broker, or the sum stated in
Section 1.09 above for services rendered to Landlord by Landlord's Broker in
this transaction. If a Tenant's Broker is named in Section 1.08 above,
Landlord's Broker shall pay an appropriate portion of its commission to Tenant's
Broker if so provided in any agreement between Landlord's
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<PAGE> 26
Broker and Tenant's Broker. Nothing contained in this Lease shall impose any
obligation on Landlord to pay a commission or fee to any party other than
Landlord's Broker.
Section 14.02. Protection of Brokers. If Landlord sells the Property,
or assigns Landlord's interest in this Lease, the buyer or assignee shall, by
accepting such conveyance of the Property or assignment of the Lease, be
conclusively deemed to have agreed to make all payments to Landlord's Broker
thereafter required of Landlord under this Article Fourteen. Landlord's Broker
shall have the right to bring a legal action to enforce or declare rights under
this provision. The prevailing party in such action shall be entitled to
reasonable attorneys' fees to be paid by the losing party. Such attorneys' fees
shall be fixed by the court in such action. This Paragraph is included in this
Lease for the benefit of Landlord's Broker.
Section 14.03. Agency Disclosure; No Other Brokers. Landlord and Tenant
each warrant that they have dealt with no other real estate broker(s) in
connection with this transaction except: CB Commercial Real Estate Group, Inc.,
who represents Ed Hogan, who represents landlord, and Milt Reimers of CB
Commercial Real Estate Group, Inc., who represents Tenant.
In the event that CB Commercial represents both Landlord and Tenant,
Landlord and Tenant hereby confirm that they were timely advised of the dual
representation and that they consent to the same, and that they do not expect
said broker to disclose to either of them the confidential information of the
other party.
ARTICLE FIFTEEN: COMPLIANCE
The parties hereto agree to comply with all applicable federal, state
and local laws, regulations, codes, ordinances and administrative orders having
jurisdiction over the parties, property or the subject matter of this Agreement,
including, but not limited to, the 1964 Civil Rights Act and all amendments
thereto, the Foreign Investment in Real Property Tax Act, the Comprehensive
Environmental Response Compensation and Liability Act, and The Americans With
Disabilities Act.
ADDITIONAL PROVISIONS MAY BE SET FORTH IN A RIDER OR RIDERS ATTACHED
HERETO OR IN THE BLANK SPACE BELOW. IF NO ADDITIONAL PROVISIONS ARE INSERTED,
PLEASE DRAW A LINE THROUGH THE SPACE BELOW.
Landlord and Tenant have signed this Lease at the place and on the
dates specified adjacent to their signatures below and have initialed all Riders
which are attached to or incorporated by reference in this Lease.
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<PAGE> 27
"LANDLORD"
Signed on October 30, 1995 CASCADE INVESTORS
at Sante Fe Springs, CA 90670. a California partnership
By: /s/ Donald A. Bendix
------------------------
Its: Partner
------------------------
By:
------------------------
Its:
------------------------
"TENANT"
Signed on October 25, 1995 GARGOYLES, INC.
at Kent, Washington. a Washington corporation
By: /s/ Douglas B. Hauff
------------------------
Its: President
------------------------
By:
------------------------
Its:
------------------------
IN ANY REAL ESTATE TRANSACTION, IT IS RECOMMENDED THAT YOU CONSULT WITH
A PROFESSIONAL, SUCH AS A CIVIL ENGINEER, INDUSTRIAL HYGIENIST OR OTHER PERSON
WITH EXPERIENCE IN EVALUATING THE CONDITION OF THE PROPERTY, INCLUDING THE
POSSIBLE PRESENCE OF ASBESTOS, HAZARDOUS MATERIALS AND UNDERGROUND STORAGE
TANKS.
THIS PRINTED FORM LEASE HAS BEEN DRAFTED BY LEGAL COUNSEL AT THE
DIRECTION OF THE SOUTHERN CALIFORNIA CHAPTER OF THE SOCIETY OF INDUSTRIAL AND
OFFICE REALTORS,(R) INC. NO REPRESENTATION OR RECOMMENDATION IS MADE BY THE
SOUTHERN CALIFORNIA CHARTER OF THE SOCIETY OF INDUSTRIAL AND OFFICE REALTORS,(R)
INC., ITS LEGAL COUNSEL, THE REAL ESTATE BROKERS NAMED HEREIN, OR THEIR
EMPLOYEES OR AGENTS, AS TO THE LEGAL SUFFICIENCY, LEGAL EFFECT OR TAX
CONSEQUENCES OF THIS LEASE OR OF THIS TRANSACTION. LANDLORD AND TENANT SHOULD
RETAIN LEGAL COUNSEL TO ADVISE THEM ON SUCH MATTERS AND SHOULD RELY UPON THE
ADVICE OF SUCH LEGAL COUNSEL.
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<PAGE> 28
ADDENDUM I
TO THE INDUSTRIAL REAL ESTATE LEASE DATED OCTOBER 12, 1995 BY AND BETWEEN
CASCADE INVESTORS, A CALIFORNIA PARTNERSHIP (LANDLORD) AND GARGOYLES, INC., A
WASHINGTON CORPORATION (TENANT) FOR PROPERTY KNOWN AS 5870 SOUTH 194TH STREET,
KENT, WASHINGTON.
CANCELLATION BY TENANT:
Provided the Tenant shall not be in default in any of the terms,
covenants and agreements contained herein, it is hereby agreed that the Tenant
may terminate this lease effective November 1, 1996, and further provided that
at least ninety (90) days previous to the date of the intended termination the
Tenant shall have served upon the Landlord written notice of Tenant's intention
to so terminate this lease.
In the event this lease is terminated as above provided and in the
event the Tenant shall not be in default in any of the covenants, agreements,
terms, and conditions of this lease and shall vacate said premises on or before
the date this lease is so terminated, the Landlord shall be entitled to receive
from the party giving such notice, and by the giving of such notice such party
shall be deemed to have agreed to pay the Landlord at the time of vacating,
aforementioned payment of Three Thousand Sixty-Six and 30/100 Dollars
($3,066.30) receipted as security for the full performance of all provisions of
this lease.
"LANDLORD" "TENANT"
CASCADE INVESTORS GARGOYLES, INC.
A CALIFORNIA PARTNERSHIP A WASHINGTON CORPORATION
By: /s/ Donald A. Bendix By: /s/ Douglas B. Hauff
------------------------ ------------------------
Its: Partner Its: President
------------------------ ------------------------
Date: October 30, 1995 Date: 10/25/95
----------------------- -----------------------
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<PAGE> 1
EXHIBIT 10.26
[Letterhead of CB Commercial] INDUSTRIAL REAL ESTATE LEASE
(SINGLE-TENANT FACILITY)
CB COMMERCIAL REAL ESTATE GROUP, INC.
BROKERAGE AND MANAGEMENT
LICENSED REAL ESTATE BROKER
ARTICLE ONE: BASIC TERMS
This Article One contains the Basic Terms of this Lease between the
Landlord and Tenant named below. Other Articles, Sections and Paragraphs of the
Lease referred to in this Article One explain and define the Basic Terms and are
to be read in conjunction with the Basic Terms.
Section 1.01. Date of Lease: December 16, 1993
Section 1.02. Landlord (include legal entity): D B & D Partnership
Address of Landlord: 19039 62nd Ave. S., Kent, Wa 98032
Section 1.03. Tenant (include legal entity): Gargoyles, Inc.
Address of Tenant: 5866 S. 194th, Kent, Wa 98032
Section 1.04. Property: (include street address, approximate square
footage and description) 5866 South 194th, Kent, Wa 98032
25,841 square feet: office and storage
Section 1.05. Lease Term: Ten (10) years ________ months beginning on
January 1, 1994 or such other date as is specified in this Lease, and ending on
December 31, 2004
Section 1.06. Permitted Uses: (See Article Five) Office, Assembly Work,
Warehousing, Distribution
Section 1.07. Tenant's Guarantor: (If none, so state) None
Section 1.08. Brokers: (See Article Fourteen) (If none, so state)
Landlord's Broker: None
Tenant's Broker: None
Section 1.09. Commission Payable to Landlord's Broker: (See Article
Fourteen) $ None
1
<PAGE> 2
Section 1.10. Initial Security Deposit: (See Section 3.03) $ None
Section 1.11. Vehicle Parking Spaces Allocated to Tenant: All
Section 1.12. Rent and Other Charges Payable by Tenant:
(a) BASE RENT: Seventeen Thousand Five Hundred and 0/100 Dollars
($17,500.00) per month, for the first 12 months, as provided in Section 3.01,
and shall be increased on the first day of the 13th month after the Commencement
Date as provided in Section 3.02, and on each anniversary date of the
commencement date thereafter, however, the minimum annual increase shall be 3%.
(b) OTHER PERIODIC PAYMENTS: (i) Real Property Taxes (See Section
4.02); (ii) Utilities (See Section 4.03); (iii) Insurance Premiums (See Section
4.04); (iv) Impounds for Insurance Premiums and Property Taxes (See Section
4.07); (v) Maintenance, Repairs and Alterations (See Article Six).
Section 1.13. Landlord's Share of Profit on Assignment or Sublease:
(See Section 9.05) N/A percent ( %) of the Profit (the "Landlord's Share").
Section 1.14. Riders: The following Riders are attached to and made a
part of this Lease: (If none, so state) Exhibit A
ARTICLE TWO: LEASE TERM
Section 2.01. Lease of Property For Lease Term. Landlord leases the
Property to Tenant and Tenant leases the Property from Landlord for the Lease
Term. The Lease Term is for the period stated in Section 1.05 above and shall
begin and end on the dates specified in Section 1.05 above, unless the beginning
or end of the Lease Term is changed under any provision of this Lease. The
"Commencement Date" shall be the date specified in Section 1.05 above for the
beginning of the Lease Term, unless advanced or delayed under any provision of
this Lease.
Section 2.02. Delay in Commencement. Landlord shall not be liable to
Tenant if Landlord does not deliver possession of the Property to Tenant on the
Commencement Date. Landlord's non-delivery of the Property to Tenant on that
date shall not affect this Lease or the obligations of Tenant under this Lease
except that the Commencement Date shall be delayed until Landlord delivers
possession of the Property to Tenant and the Lease Term shall be extended for a
period equal to the delay in delivery of possession of the Property to Tenant,
plus the number of days necessary to end the Lease Term on the last day of a
month. If Landlord does not deliver possession of the Property to Tenant within
sixty (60) days after the Commencement Date, Tenant may elect to cancel this
Lease by giving written notice to Landlord within ten (10) days after the sixty
(60)-day
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period ends. If Tenant gives such notice, the Lease shall be cancelled
and neither Landlord nor Tenant shall have any further obligations to the other.
If Tenant does not give such notice, Tenant's right to cancel the Lease shall
expire and the Lease Term shall commence upon the delivery of possession of the
Property to Tenant. If delivery of possession of the Property to Tenant is
delayed, Landlord and Tenant shall, upon such delivery, execute an amendment to
this Lease setting forth the actual Commencement Date and expiration date of the
Lease. Failure to execute such amendment shall not affect the actual
Commencement Date and expiration date of the Lease.
Section 2.03. Early Occupancy. If Tenant occupies the Property prior to
the Commencement Date, Tenant's occupancy of the Property shall be subject to
all of the provisions of this Lease. Early occupancy of the Property shall not
advance the expiration date of this Lease. Tenant shall pay Base Rent and all
other charges specified in this Lease for the early occupancy period.
Section 2.04. Holding Over. Tenant shall vacate the Property upon the
expiration or earlier termination of this Lease. Tenant shall reimburse Landlord
for and indemnify Landlord against all damages which Landlord incurs from
Tenant's delay in vacating the Property. If Tenant does not vacate the Property
upon the expiration or earlier termination of the Lease and Landlord thereafter
accepts rent from Tenant, Tenant's occupancy of the Property shall be a
"month-to-month" tenancy, subject to all of the terms of this Lease applicable
to a month-to-month tenancy, except that the Base Rent then in effect shall be
increased by twenty-five percent (25%).
ARTICLE THREE: BASE RENT
Section 3.01. Time and Manner of Payment. Upon execution of this Lease,
Tenant shall pay Landlord the Base Rent in the amount stated in Paragraph
1.12(a) above for the first month of the Lease Term. On the first day of the
second month of the Lease Term and each month thereafter, Tenant shall pay
Landlord the Base Rent, in advance, without offset, deduction or prior demand.
The Base Rent shall be payable at Landlord's address or at such other place as
Landlord may designate in writing.
Section 3.02. Cost of Living Increases. The Base Rent shall be
increased on each date (the "Rental Adjustment Date") stated in Paragraph
1.12(a) above in accordance with the increase in the United States Department of
Labor, Bureau of Labor Statistics, Consumer Price Index for All Urban Consumers
(all items for the geographical Statistical Area in which the Property is
located on the basis of 1982-1984 = 100) (the "Index") as follows:
(a) The Base Rent (the "Comparison Base Rent") in effect immediately
before each Rental Adjustment Date shall be increased by the percentage that the
Index has
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increased from the date (the "Comparison Date") on which payment of
the Comparison Base Rent began through the month in which the applicable Rental
Adjustment Date occurs. The Base Rent shall not be reduced by reason of such
computation. Landlord shall notify Tenant of each increase by a written
statement which shall include the Index for the applicable Comparison Date, the
Index for the applicable Rental Adjustment Date, the percentage increase between
those two indices, and the new Base Rent. Any increase in the Base Rent provided
for in this Section 3.02 shall be subject to any minimum or maximum increase, if
provided for in Paragraph 1.12(a).
(b) Tenant shall pay the new Base Rent from the applicable Rental
Adjustment Date until the next Rental Adjustment Date. Landlord's notice may be
given after the applicable Rental Adjustment Date of the increase, and Tenant
shall pay Landlord the accrued rental adjustment for the months elapsed between
the effective date of the increase and Landlord's notice of such increase within
ten (10) days after Landlord's notice. If the format or components of the Index
are materially changed after the Commencement Date, Landlord shall substitute an
index which is published by the Bureau of Labor Statistics or similar agency and
which is most nearly equivalent to the Index in effect on the Commencement Date.
The substitute Index shall be used to calculate the increase in the Base Rent
unless Tenant objects to such index in writing within fifteen (15) days after
receipt of Landlord's notice. If Tenant objects, Landlord and Tenant shall
submit the selection of the substitute index for binding arbitration in
accordance with the rules and regulations of the American Arbitration
Association at its office closest to the Property. The costs of arbitration
shall be borne equally by Landlord and Tenant.
Section 3.03. Security Deposit; Increases. (a) Upon the execution of
this Lease, Tenant shall deposit with Landlord a cash Security Deposit in the
amount set forth in Section 1.10 above. Landlord may apply all or part of the
Security Deposit to any unpaid rent or other charges due from Tenant or to cure
any other defaults of Tenant. If Landlord uses any part of the Security Deposit,
Tenant shall restore the Security Deposit to its full amount within ten (10)
days after Landlord's written request. Tenant's failure to do so shall be a
material default under this Lease. No interest shall be paid on the Security
Deposit. Landlord shall not be required to keep the Security Deposit separate
from its other accounts and no trust relationship is created with respect to the
Security Deposit.
(b) Each Time the Base Rent is increased, Tenant shall deposit
additional funds with Landlord sufficient to increase the Security Deposit to an
amount which bears the same relationship to the adjusted Base Rent as the
initial Security Deposit bore to the initial Base Rent.
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Section 3.04. Termination; Advance Payments. Upon termination of this
Lease under Article Seven (Damage or Destruction), Article Eight (Condemnation)
or any other termination not resulting from Tenant's default, and after Tenant
has vacated the Property in the manner required by this Lease, Landlord shall
refund or credit to Tenant (or Tenant's successor) the unused portion of the
Security Deposit, any advance rent or other advance payments made by Tenant to
Landlord, and any amounts paid for real property taxes and other reserves which
apply to any time periods after termination of the Lease.
ARTICLE FOUR: OTHER CHARGES PAYABLE BY TENANT
Section 4.01. Additional Rent. All charges payable by Tenant other than
Base Rent are called "Additional Rent." Unless this Lease provides otherwise,
Tenant shall pay all Additional Rent then due with the next monthly installment
of Base Rent. The term "rent" shall mean Base Rent and Additional Rent.
Section 4.02. Property Taxes.
(a) Real Property Taxes. Tenant shall pay all real property taxes on
the Property (including any fees, taxes or assessments against, or as a result
of, any tenant improvements installed on the Property by or for the benefit of
Tenant) during the Lease Term. Subject to Paragraph 4.02(c) and Section 4.07
below, such payment shall be made at least ten (10) days prior to the
delinquency date of the taxes. Within such ten (10)-day period, Tenant shall
furnish Landlord with satisfactory evidence that the real property taxes have
been paid. Landlord shall reimburse Tenant for any real property taxes paid by
Tenant covering any period of time prior to or after the Lease Term. If Tenant
fails to pay the real property taxes when due, Landlord may pay the taxes and
Tenant shall reimburse Landlord for the amount of such tax payment as Additional
Rent.
(b) Definition of "Real Property Tax." "Real property tax" means: (i)
any fee, license fee, license tax, business license fee, commercial rental tax,
levy, charge, assessment, penalty or tax imposed by any taxing authority against
the Property; (ii) any tax on the Landlord's right to receive, or the receipt
of, rent or income from the Property or against Landlord's business of leasing
the Property; (iii) any tax or charge for fire protection, streets, sidewalks,
road maintenance, refuse or other services provided to the Property by any
governmental agency; (iv) any tax imposed upon this transaction or based upon a
re-assessment of the Property due to a change of ownership, as defined by
applicable law, or other transfer of all or part of Landlord's interest in the
Property; and (v) any charge or fee replacing any tax previously included within
the definition of real property tax. "Real property tax" does not, however,
include Landlord's federal or state income, franchise, inheritance or estate
taxes.
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(c) Joint Assessment. If the Property is not separately assessed,
Landlord shall reasonably determine Tenant's share of the real property tax
payable by Tenant under Paragraph 4.02(a) from the assessor's worksheets or
other reasonably available information. Tenant shall pay such share to Landlord
within fifteen (15) days after receipt of Landlord's written statement.
(d) Personal Property Taxes.
(i) Tenant shall pay all taxes charged against trade fixtures,
furnishings, equipment or any other personal property belonging to Tenant.
Tenant shall try to have personal property taxed separately from the Property.
(ii) If any of Tenant's personal property is taxed with the
Property, Tenant shall pay Landlord the taxes for the personal property within
fifteen (15) days after Tenant receives a written statement from Landlord for
such personal property taxes.
(e) Tenant's Right to Contest Taxes. Tenant may attempt to have the
assessed valuation of the Property reduced or may initiate proceedings to
contest the real property taxes. If required by law, Landlord shall join in the
proceedings brought by Tenant. However, Tenant shall pay all costs of the
proceedings, including any costs or fees incurred by Landlord. Upon the final
determination of any proceeding or contest, Tenant shall immediately pay the
real property taxes due, together with all costs, charges, interest and
penalties incidental to the proceedings. If Tenant does not pay the real
property taxes when due and contests such taxes, Tenant shall not be in default
under this Lease for nonpayment of such taxes if Tenant deposits funds with
Landlord or opens an interest-bearing account reasonably acceptable to Landlord
in the joint names of Landlord and Tenant. The amount of such deposit shall be
sufficient to pay the real property taxes plus a reasonable estimate of the
interest, costs, charges and penalties which may accrue if Tenant's action is
unsuccessful, less any applicable tax impounds previously paid by Tenant to
Landlord. The deposit shall be applied to the real property taxes due, as
determined at such proceedings. The real property taxes shall be paid under
protest from such deposit if such payment under protest is necessary to prevent
the Property from being sold under a "tax sale" or similar enforcement
proceeding.
Section 4.03. Utilities. Tenant shall pay, directly to the appropriate
supplier, the cost of all natural gas, heat, light, power, sewer service,
telephone, water, refuse disposal and other utilities and services supplied to
the Property. However, if any services or utilities are jointly metered with
other property, Landlord shall make a reasonable determination of Tenant's
proportionate share of the cost of such utilities and services and Tenant shall
pay such share to Landlord within fifteen (15) days after receipt of Landlord's
written statement.
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Section 4.04. Insurance Policies.
(a) Liability Insurance. During the Lease Term, Tenant shall maintain a
policy of commercial general liability insurance (sometimes known as broad form
comprehensive general liability insurance) insuring Tenant against liability for
bodily injury, property damage (including loss of use of property) and personal
injury arising out of the operation, use or occupancy of the Property. Tenant
shall name Landlord as an additional insured under such policy. The initial
amount of such insurance shall be One Million Dollars ($1,000,000) per
occurrence and shall be subject to periodic increase based upon inflation,
increased liability awards, recommendation of Landlord's professional insurance
advisers and other relevant factors. The liability insurance obtained by Tenant
under this Paragraph 4.04(a) shall (i) be primary and non-contributing; (ii)
contain cross-liability endorsements; and (iii) insure Landlord against Tenant's
performance under Section 5.05, if the matters giving rise to the indemnity
under Section 5.05 result from the negligence of Tenant. The amount and coverage
of such insurance shall not limit Tenant's liability nor relieve Tenant of any
other obligation under this Lease. Landlord may also obtain comprehensive public
liability insurance in an amount and with coverage determined by Landlord
insuring Landlord against liability arising out of ownership, operation, use or
occupancy of the Property. The policy obtained by Landlord shall not be
contributory and shall not provide primary insurance.
(b) Property and Rental Income Insurance. During the Lease Term,
Landlord shall maintain policies of insurance covering loss of or damage to the
Property in the full amount of its replacement value. Such policy shall contain
an Inflation Guard Endorsement and shall provide protection against all perils
included within the classification of fire, extended coverage, vandalism,
malicious mischief, special extended perils (all risk), sprinkler leakage and
any other perils which Landlord deems reasonably necessary. Landlord shall have
the right to obtain flood and earthquake insurance if required by any lender
holding a security interest in the Property. Landlord shall not obtain insurance
for Tenant's fixtures or equipment or building improvements installed by Tenant
on the Property. During the Lease Term, Landlord shall also maintain a rental
income insurance policy, with loss payable to Landlord, in an amount equal to
one year's Base Rent, plus estimated real property taxes and insurance premiums.
Tenant shall be liable for the payment of any deductible amount under Landlord's
or Tenant's insurance policies maintained pursuant to this Section 4.04, in an
amount not to exceed Ten Thousand Dollars ($10,000). Tenant shall not do or
permit anything to be done which invalidates any such insurance policies.
(c) Payment of Premiums. Subject to Section 4.07, Tenant shall pay all
premiums for the insurance policies described in Paragraphs 4.04(a) and (b)
(whether obtained by Landlord or Tenant) within fifteen (15) days after Tenant's
receipt of a copy
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of the premium statement or other evidence of the amount due,
except Landlord shall pay all premiums for non-primary comprehensive public
liability insurance which Landlord elects to obtain as provided in Paragraph
4.04(a). If insurance policies maintained by Landlord cover improvements on real
property other than the Property, Landlord shall deliver to Tenant a statement
of the premium applicable to the Property showing in reasonable detail how
Tenant's share of the premium was computed. If the Lease Term expires before the
expiration of an insurance policy maintained by Landlord, Tenant shall be liable
for Tenant's prorated share of the insurance premiums. Before the Commencement
Date, Tenant shall deliver to Landlord a copy of any policy of insurance which
Tenant is required to maintain under this Section 4.04. At least thirty (30)
days prior to the expiration of any such policy, Tenant shall deliver to
Landlord a renewal of such policy. As an alternative to providing a policy of
insurance, Tenant shall have the right to provide Landlord a certificate of
insurance, executed by an authorized officer of the insurance company, showing
that the insurance which Tenant is required to maintain under this Section 4.04
is in full force and effect and containing such other information which Landlord
reasonably requires.
(d) General Insurance Provisions.
(i) Any insurance which Tenant is required to maintain under
this Lease shall include a provision which requires the insurance carrier to
give Landlord not less than thirty (30) days' written notice prior to any
cancellation or modification of such coverage.
(ii) If Tenant fails to deliver any policy, certificate or
renewal to Landlord required under this Lease within the prescribed time period
or if any such policy is cancelled or modified during the Lease Term without
Landlord's consent, Landlord may obtain such insurance, in which case Tenant
shall reimburse Landlord for the cost of such insurance within fifteen (15) days
after receipt of a statement that indicates the cost of such insurance.
(iii) Tenant shall maintain all insurance required under this
Lease with companies holding a "General Policy Rating" of A-12 or better, as set
forth in the most current issue of "Best Key Rating Guide". Landlord and Tenant
acknowledge the insurance markets are rapidly changing and that insurance in the
form and amounts described in this Section 4.04 may not be available in the
future. Tenant acknowledges that the insurance described in this Section 4.04 is
for the primary benefit of Landlord. If at any time during the Lease Term,
Tenant is unable to maintain the insurance required under the Lease, Tenant
shall nevertheless maintain insurance coverage which is customary and
commercially reasonable in the insurance industry for Tenant's type of business,
as that coverage may change from time to time. Landlord makes no representation
as to the adequacy of such insurance to protect Landlord's or Tenant's
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interests. Therefore, Tenant shall obtain any such additional property or
liability insurance which Tenant deems necessary to protect Landlord and Tenant.
(iv) Unless prohibited under any applicable insurance policies
maintained, Landlord and Tenant each hereby waive any and all rights of recovery
against the other, or against the officers, employees, agents or representatives
of the other, for loss of or damage to its property or the property of others
under its control, if such loss or damage is covered by any insurance policy in
force (whether or not described in this Lease) at the time of such loss or
damage. Upon obtaining the required policies of insurance, Landlord and Tenant
shall give notice to the insurance carriers of this mutual waiver of
subrogation.
Section 4.05. Late Charges. Tenant's failure to pay rent promptly may
cause Landlord to incur unanticipated costs. The exact amount of such costs are
impractical or extremely difficult to ascertain. Such costs may include, but are
not limited to, processing and accounting charges and late charges which may be
imposed on Landlord by any ground lease, mortgage or trust deed encumbering the
Property. Therefore, if Landlord does not receive any rent payment within ten
(10) days after it becomes due, Tenant shall pay Landlord a late charge equal to
ten percent (10%) of the overdue amount. The parties agree that such late charge
represents a fair and reasonable estimate of the costs Landlord will incur by
reason of such late payment.
Section 4.06. Interest on Past Due Obligations. Any amount owed by
Tenant to Landlord which is not paid when due shall bear interest at the rate of
fifteen percent (15%) per annum from the due date of such amount. However,
interest shall not be payable on late charges to be paid by Tenant under this
Lease. The payment of interest on such amounts shall not excuse or cure any
default by Tenant under this Lease. If the interest rate specified in this Lease
is higher than the rate permitted by law, the interest rate is hereby decreased
to the maximum legal interest rate permitted by law.
Section 4.07. Impounds for Insurance Premiums and Real Property Taxes.
If requested by any ground lessor or lender to whom Landlord has granted a
security interest in the Property, or if Tenant is more than ten (10) days late
in the payment of rent more than once in any consecutive twelve (12)-month
period, Tenant shall pay Landlord a sum equal to one-twelfth (1/12) of the
annual real property taxes and insurance premiums payable by Tenant under this
Lease, together with each payment of Base Rent. Landlord shall hold such
payments in a non-interest bearing impound account. If unknown, Landlord shall
reasonably estimate the amount of real property taxes and insurance premiums
when due. Tenant shall pay any deficiency of funds in the impound account to
Landlord upon written request. If Tenant defaults under this Lease, Landlord may
apply any funds in the impound account to any obligation then due under this
Lease.
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ARTICLE FIVE: USE OF PROPERTY
Section 5.01. Permitted Uses. Tenant may use the Property only for the
Permitted Uses set forth in Section 1.06 above.
Section 5.02. Manner of Use. Tenant shall not cause or permit the
Property to be used in any way which constitutes a violation of any law,
ordinance, or governmental regulation or order, which annoys or interferes with
the rights of other tenants of Landlord, or which constitutes a nuisance or
waste. Tenant shall obtain and pay for all permits, including a Certificate of
Occupancy, required for Tenant's occupancy of the Property and shall promptly
take all actions necessary to comply with all applicable statutes, ordinances,
rules, regulations, orders and requirements regulating the use by Tenant of the
Property, including the Occupational Safety and Health Act.
Section 5.03. Hazardous Materials. As used in this Lease, the term
"Hazardous Material" means any flammable items, explosives, radioactive
materials, hazardous or toxic substances, material or waste or related
materials, including any substances defined as or included in the definition of
"hazardous substances", "hazardous wastes", "hazardous materials" or "toxic
substances" now or subsequently regulated under any applicable federal, state or
local laws or regulations, including without limitation petroleum-based
products, paints, solvents, lead, cyanide, DDT, printing inks, acids,
pesticides, ammonia compounds and other chemical products, asbestos, PCBs and
similar compounds, and including any different products and materials which are
subsequently found to have adverse effects on the environment or the health and
safety of persons. Tenant shall not cause or permit any Hazardous Material to be
generated, produced, brought upon, used, stored, treated or disposed of in or
about the Property by Tenant, its agents, employees, contractors, sublessees or
invitees without the prior written consent of Landlord. Landlord shall be
entitled to take into account such other factors or facts as Landlord may
reasonably determine to be relevant in determining whether to grant or withhold
consent to Tenant's proposed activity with respect to Hazardous Material. In no
event, however, shall Landlord be required to consent to the installation or use
of any storage tanks on the Property.
Section 5.04. Signs and Auctions. Tenant shall not place any signs on
the Property without Landlord's prior written consent. Tenant shall not conduct
or permit any auctions or sheriff's sales at the Property.
Section 5.05. Indemnity. Tenant shall indemnify Landlord against and
hold Landlord harmless from any and all costs, claims or liability arising from:
(a) Tenant's use of the Property; (b) the conduct of Tenant's business or
anything else done or permitted by Tenant to be done in or about the Property,
including any contamination of the Property or any other property resulting from
the presence or use of Hazardous Material
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caused or permitted by Tenant; (c) any breach or default in the performance of
Tenant's obligations under this Lease; (d) any misrepresentation or breach of
warranty by Tenant under this Lease; or (e) other acts or omissions of Tenant.
Tenant shall defend Landlord against any such cost, claim or liability at
Tenant's expense with counsel reasonably acceptable to Landlord or, at
Landlord's election, Tenant shall reimburse Landlord for any legal fees or costs
incurred by Landlord in connection with any such claim. As a material part of
the consideration to Landlord, Tenant assumes all risk of damage to property or
injury to persons in or about the Property arising from any cause, and Tenant
hereby waives all claims in respect thereof against Landlord, except for any
claim arising out of Landlord's gross negligence or willful misconduct. As used
in this Section, the term "Tenant" shall include Tenant's employees, agents,
contractors and invitees, if applicable.
Section 5.06. Landlord's Access. Landlord or its agents may enter the
Property at all reasonable times to show the Property to potential buyers,
investors or tenants or other parties; to do any other act or to inspect and
conduct tests in order to monitor Tenant's compliance with all applicable
environmental laws and all laws governing the presence and use of Hazardous
Material; or for any other purpose Landlord deems necessary. Landlord shall give
Tenant prior notice of such entry, except in the case of an emergency. Landlord
may place customary "For Sale" or "For Lease" signs on the Property.
Section 5.07. Quiet Possession. If Tenant pays the rent and complies
with all other terms of this Lease, Tenant may occupy and enjoy the Property for
the full Lease Term, subject to the provisions of this Lease.
ARTICLE SIX: CONDITION OF PROPERTY; MAINTENANCE,
REPAIRS AND ALTERATIONS
Section 6.01. Existing Conditions. Tenant accepts the Property in its
condition as of the execution of the Lease, subject to all recorded matters,
laws, ordinances, and governmental regulations and orders. Except as provided
herein, Tenant acknowledges that neither Landlord nor any agent of Landlord has
made any representation as to the condition of the Property or the suitability
of the Property for Tenant's intended use. Tenant represents and warrants that
Tenant has made its own inspection of and inquiry regarding the condition of the
Property and is not relying on any representations of Landlord or any Broker
with respect thereto. If Landlord or Landlord's Broker has provided a Property
Information Sheet or other Disclosure Statement regarding the Property, a copy
is attached as an exhibit to the Lease.
Section 6.02. Exemption of Landlord from Liability. Landlord shall not
be liable for any damage or injury to the person, business (or any loss of
income therefrom), goods, wares, merchandise or other property of Tenant,
Tenant's employees, invitees, customers or any other person in or about the
Property, whether such damage or injury is
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caused by or results from: (a) fire, steam, electricity, water, gas or rain; (b)
the breakage, leakage, obstruction or other defects of pipes, sprinklers, wires,
appliances, plumbing, air conditioning or lighting fixtures or any other cause;
(c) conditions arising in or about the Property or upon other portions of the
Project, or from other sources or places; or (d) any act or omission of any
other tenant of the Project. Landlord shall not be liable for any such damage or
injury even though the cause of or the means of repairing such damage or injury
are not accessible to Tenant. The provisions of this Section 6.02 shall not,
however, exempt Landlord from liability for Landlord's gross negligence or
willful misconduct.
Section 6.03. Landlord's Obligations. Subject to the provisions of
Article Seven (Damage or Destruction) and Article Eight (Condemnation), Landlord
shall have absolutely no responsibility to repair, maintain or replace any
portion of the Property at any time. Tenant waives the benefit of any present or
future law which might give Tenant the right to repair the Property at
Landlord's expense or to terminate the Lease due to the condition of the
Property.
Section 6.04. Tenant's Obligations.
(a) Except as provided in Article Seven (Damage or Destruction) and
Article Eight (Condemnation), Tenant shall keep all portions of the Property
(including structural, nonstructural, interior, exterior, and landscaped areas,
portions, systems and equipment) in good order, condition and repair (including
interior repainting and refinishing, as needed). If any portion of the Property
or any system or equipment in the Property which Tenant is obligated to repair
cannot be fully repaired or restored, Tenant shall promptly replace such portion
of the Property or system or equipment in the Property, regardless of whether
the benefit of such replacement extends beyond the Lease Term; but if the
benefit or useful life of such replacement extends beyond the Lease Term (as
such term may be extended by exercise of any options), the useful life of such
replacement shall be prorated over the remaining portion of the Lease Term (as
extended), and Tenant shall be liable only for that portion of the cost which is
applicable to the Lease Term (as extended). Tenant shall maintain a preventive
maintenance contract providing for the regular inspection and maintenance of the
heating and air conditioning system by a licensed heating and air conditioning
contractor. If any part of the Property is damaged by any act or omission of
Tenant, Tenant shall pay Landlord the cost of repairing or replacing such
damaged property, whether or not Landlord would otherwise be obligated to pay
the cost of maintaining or repairing such property. It is the intention of
Landlord and Tenant that at all times Tenant shall maintain the portions of the
Property which Tenant is obligated to maintain in an attractive, first-class and
fully operative condition.
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(b) Tenant shall fulfill all of Tenant's obligations under this Section
6.04 at Tenant's sole expense. If Tenant fails to maintain, repair or replace
the Property as required by this Section 6.04, Landlord may, upon ten (10) days'
prior notice to Tenant (except that no notice shall be required in the case of
an emergency), enter the Property and perform such maintenance or repair
(including replacement, as needed) on behalf of Tenant. In such case, Tenant
shall reimburse Landlord for all costs incurred in performing such maintenance
or repair immediately upon demand.
Section 6.05. Alterations, Additions, and Improvements.
(a) Tenant shall not make any alterations, additions, or improvements
to the Property without Landlord's prior written consent, except for
non-structural alterations which do not exceed Ten Thousand Dollars ($10,000) in
cost cumulatively over the Lease Term and which are not visible from the outside
of any building of which the Property is part. Landlord may require Tenant to
provide demolition and/or lien and completion bonds in form and amount
satisfactory to Landlord. Tenant shall promptly remove any alterations,
additions, or improvements constructed in violation of this Paragraph 6.05(a)
upon Landlord's written request. All alterations, additions, and improvements
shall be done in a good and workmanlike manner, in conformity with all
applicable laws and regulations, and by a contractor approved by Landlord. Upon
completion of any such work, Tenant shall provide Landlord with "as built"
plans, copies of all construction contracts, and proof of payment for all labor
and materials.
(b) Tenant shall pay when due all claims for labor and material
furnished to the Property. Tenant shall give Landlord at least twenty (20) days'
prior written notice of the commencement of any work on the Property, regardless
of whether Landlord's consent to such work is required. Landlord may elect to
record and post notices of non-responsibility on the Property.
Section 6.06. Condition upon Termination. Upon the termination of the
Lease, Tenant shall surrender the Property to Landlord, broom clean and in the
same condition as received except for ordinary wear and tear which Tenant was
not otherwise obligated to remedy under any provision of this Lease. However,
Tenant shall not be obligated to repair any damage which Landlord is required to
repair under Article Seven (Damage or Destruction). In addition, Landlord may
require Tenant to remove any alterations, additions or improvements (whether or
not made with Landlord's consent) prior to the expiration of the Lease and to
restore the Property to its prior condition, all at Tenant's expense. All
alterations, additions and improvements which Landlord has not required Tenant
to remove shall become Landlord's property and shall be surrendered to Landlord
upon the expiration or earlier termination of the Lease, except that Tenant may
remove any of Tenant's machinery or equipment which can be removed without
material damage to the Property. Tenant shall repair, at Tenant's expense, any
damage to the Property
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caused by the removal of any such machinery or equipment. In no event, however,
shall Tenant remove any of the following materials or equipment (which shall be
deemed Landlord's property) without Landlord's prior written consent: any power
wiring or power panels; lighting or lighting fixtures; wall coverings; drapes,
blinds or other window coverings; carpets or other floor coverings; heaters, air
conditioners or any other heating or air conditioning equipment; fencing or
security gates; or other similar building operating equipment and decorations.
ARTICLE SEVEN: DAMAGE OR DESTRUCTION
Section 7.01. Partial Damage to Property.
(a) Tenant shall notify Landlord in writing immediately upon the
occurrence of any damage to the Property. If the Property is only partially
damaged (i.e., less than fifty percent (50%) of the Property is untenantable as
a result of such damage or less than fifty percent (50%) of Tenant's operations
are materially impaired) and if the proceeds received by Landlord from the
insurance policies described in Paragraph 4.04(b) are sufficient to pay for the
necessary repairs, this Lease shall remain in effect and Landlord shall repair
the damage as soon as reasonably possible. Landlord may elect (but is not
required) to repair any damage to Tenant's fixtures, equipment, or improvements.
(b) If the insurance proceeds received by Landlord are not sufficient
to pay the entire cost of repair, or if the cause of the damage is not covered
by the insurance policies which Landlord maintains under Paragraph 4.04(b),
Landlord may elect either to (i) repair the damage as soon as reasonably
possible, in which case this Lease shall remain in full force and effect, or
(ii) terminate this Lease as of the date the damage occurred. Landlord shall
notify Tenant within thirty (30) days after receipt of notice of the occurrence
of the damage whether Landlord elects to repair the damage or terminate the
Lease. If Landlord elects to repair the damage, Tenant shall pay Landlord the
"deductible amount" (if any) under Landlord's insurance policies and, if the
damage was due to an act or omission of Tenant, or Tenant's employees, agents,
contractors or invitees, the difference between the actual cost of repair and
any insurance proceeds received by Landlord. If Landlord elects to terminate the
Lease, Tenant may elect to continue this Lease in full force and effect, in
which case Tenant shall repair any damage to the Property and any building in
which the Property is located. Tenant shall pay the cost of such repairs, except
that upon satisfactory completion of such repairs, Landlord shall deliver to
Tenant any insurance proceeds received by Landlord for the damage repaired by
Tenant. Tenant shall give Landlord written notice of such election within ten
(10) days after receiving Landlord's termination notice.
(c) If the damage to the Property occurs during the last six (6) months
of the Lease Term and such damage will require more than thirty (30) days to
repair, either
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Landlord or Tenant may elect to terminate this Lease as of the date the damage
occurred, regardless of the sufficiency of any insurance proceeds. The party
electing to terminate this Lease shall give written notification to the other
party of such election within thirty (30) days after Tenant's notice to Landlord
of the occurrence of the damage.
Section 7.02. Substantial or Total Destruction. If the Property is
substantially or totally destroyed by any cause whatsoever (i.e., the damage to
the Property is greater than partial damage as described in Section 7.01), and
regardless of whether Landlord receives any insurance proceeds, this Lease shall
terminate as of the date the destruction occurred. Notwithstanding the preceding
sentence, if the Property can be rebuilt within six (6) months after the date of
destruction, Landlord may elect to rebuild the Property at Landlord's own
expense, in which case this Lease shall remain in full force and effect.
Landlord shall notify Tenant of such election within thirty (30) days after
Tenant's notice of the occurrence of total or substantial destruction. If
Landlord so elects, Landlord shall rebuild the Property at Landlord's sole
expense, except that if the destruction was caused by an act or omission of
Tenant, Tenant shall pay Landlord the difference between the actual cost of
rebuilding and any insurance proceeds received by Landlord.
Section 7.03. Temporary Reduction of Rent. If the Property is destroyed
or damaged and Landlord or Tenant repairs or restores the Property pursuant to
the provisions of this Article Seven, any rent payable during the period of such
damage, repair and/or restoration shall be reduced according to the degree, if
any, to which Tenant's use of the Property is impaired. However, the reduction
shall not exceed the sum of one year's payment of Base Rent, insurance premiums
and real property taxes. Except for such possible reduction in Base Rent,
insurance premiums and real property taxes, Tenant shall not be entitled to any
compensation, reduction, or reimbursement from Landlord as a result of any
damage, destruction, repair, or restoration of or to the Property.
Section 7.04. Waiver. Tenant waives the protection of any statute, code
or judicial decision which grants a tenant the right to terminate a lease in the
event of the substantial or total destruction of the leased property. Tenant
agrees that the provisions of Section 7.02 above shall govern the rights and
obligations of Landlord and Tenant in the event of any substantial or total
destruction to the Property.
ARTICLE EIGHT: CONDEMNATION
If all or any portion of the Property is taken under the power of
eminent domain or sold under the threat of that power (all of which are called
"Condemnation"), this Lease shall terminate as to the part taken or sold on the
date the condemning authority takes title or possession, whichever occurs first.
If more than twenty percent (20%) of the floor area of the building in which the
Property is located, or which is located on the Property,
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is taken, either Landlord or Tenant may terminate this Lease as of the date the
condemning authority takes title or possession, by delivering written notice to
the other within ten (10) days after receipt of written notice of such taking
(or in the absence of such notice, within ten (10) days after the condemning
authority takes title or possession). If neither Landlord nor Tenant terminates
this Lease, this Lease shall remain in effect as to the portion of the Property
not taken, except that the Base Rent and Additional Rent shall be reduced in
proportion to the reduction in the floor area of the Property. Any Condemnation
award or payment shall be distributed in the following order: (a) first, to any
ground lessor, mortgagee or beneficiary under a deed of trust encumbering the
Property, the amount of its interest in the Property; (b) second, to Tenant,
only the amount of any award specifically designated for loss of or damage to
Tenant's trade fixtures or removable personal property; and (c) third, to
Landlord, the remainder of such award, whether as compensation for reduction in
the value of the leasehold, the taking of the fee, or otherwise. If this Lease
is not terminated, Landlord shall repair any damage to the Property caused by
the Condemnation, except that Landlord shall not be obligated to repair any
damage for which Tenant has been reimbursed by the condemning authority. If the
severance damages received by Landlord are not sufficient to pay for such
repair, Landlord shall have the right to either terminate this Lease or make
such repair at Landlord's expense.
ARTICLE NINE: ASSIGNMENT AND SUBLETTING
Section 9.01. Landlord's Consent Required. No portion of the Property
or of Tenant's interest in this Lease may be acquired by any other person or
entity, whether by sale, assignment, mortgage, sublease, transfer, operation of
law, or act of Tenant, without Landlord's prior written consent, except as
provided in Section 9.02 below. Landlord has the right to grant or withhold its
consent as provided in Section 9.05 below. Any attempted transfer without
consent shall be void and shall constitute a non-curable breach of this Lease.
If Tenant is a partnership, any cumulative transfer of more than twenty percent
(20%) of the partnership interests shall require Landlord's consent. If Tenant
is a corporation, any change in the ownership of a controlling interest of the
voting stock of the corporation shall require Landlord's consent.
Section 9.02. Tenant Affiliate. Tenant may assign this Lease or
sublease the Property, without Landlord's consent, to any corporation which
controls, is controlled by or is under common control with Tenant, or to any
corporation resulting from the merger of or consolidation with Tenant ("Tenant's
Affiliate"). In such case, any Tenant's Affiliate shall assume in writing all of
Tenant's obligations under this Lease.
Section 9.03. No Release of Tenant. No transfer permitted by this
Article Nine, whether with or without Landlord's consent, shall release Tenant
or change Tenant's primary liability to pay the rent and to perform all other
obligations of Tenant under this
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Lease. Landlord's acceptance of rent from any other person is not a waiver of
any provision of this Article Nine. Consent to one transfer is not a consent to
any subsequent transfer. If Tenant's transferee defaults under this Lease,
Landlord may proceed directly against Tenant without pursuing remedies against
the transferee. Landlord may consent to subsequent assignments or modifications
of this Lease by Tenant's transferee, without notifying Tenant or obtaining its
consent. Such action shall not relieve Tenant's liability under this Lease.
Section 9.04. Offer to Terminate. If Tenant desires to assign the Lease
or sublease the Property, Tenant shall have the right to offer, in writing, to
terminate the Lease as of a date specified in the offer. If Landlord elects in
writing to accept the offer to terminate within twenty (20) days after notice of
the offer, the Lease shall terminate as of the date specified and all the terms
and provisions of the Lease governing termination shall apply. If Landlord does
not so elect, the Lease shall continue in effect until otherwise terminated and
the provisions of Section 9.05 with respect to any proposed transfer shall
continue to apply.
Section 9.05. Landlord's Consent. (a) Tenant's request for consent to
any transfer described in Section 9.01 shall set forth in writing the details of
the proposed transfer, including the name, business and financial condition of
the prospective transferee, financial details of the proposed transfer (e.g.,
the term of and the rent and security deposit payable under any proposed
assignment or sublease), and any other information Landlord deems relevant.
Landlord shall have the right to withhold consent, if reasonable, or to grant
consent, based on the following factors: (i) the business of the proposed
assignee or subtenant and the proposed use of the Property, (ii) the net worth
and financial reputation of the proposed assignee or subtenant; (iii) Tenant's
compliance with all of its obligations under the Lease; and (iv) such other
factors as Landlord may reasonably deem relevant. If Landlord objects to a
proposed assignment solely because of the net worth and/or financial reputation
of the proposed assignee, Tenant may nonetheless sublease (but not assign), all
or a portion of the Property to the proposed transferee, but only on the other
terms of the proposed transfer.
(b) If Tenant assigns or subleases, the following shall apply:
(i) Tenant shall pay to Landlord as Additional Rent under the
Lease the Landlord's Share (stated in Section 1.13) of the Profit (defined
below) on such transaction as and when received by Tenant, unless Landlord gives
written notice to Tenant and the assignee or subtenant that Landlord's Share
shall be paid by the assignee or subtenant to Landlord directly. The "Profit"
means (A) all amounts paid to Tenant for such assignment or sublease, including
"key" money, monthly rent in excess of the monthly rent payable under the Lease,
and all fees and other consideration paid for the assignment or sublease,
including fees under any collateral agreements, less (B) costs and expenses
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directly incurred by Tenant in connection with the execution and performance of
such assignment or sublease for real estate broker's commissions and costs of
renovation or construction of tenant improvements required under such assignment
or sublease. Tenant is entitled to recover such costs and expenses before Tenant
is obligated to pay the Landlord's Share to Landlord. The Profit in the case of
a sublease of less than all the Property is the rent allocable to the subleased
space as a percentage on a square footage basis.
(ii) Tenant shall provide Landlord a written statement
certifying all amounts to be paid from any assignment or sublease of the
Property within thirty (30) days after the transaction documentation is signed,
and Landlord may inspect Tenant's books and records to verify the accuracy of
such statement. On written request, Tenant shall promptly furnish to Landlord
copies of all the transaction documentation, all of which shall be certified by
Tenant to be complete, true and correct. Landlord's receipt of Landlord's Share
shall not be a consent to any further assignment or subletting. The breach of
Tenant's obligation under this Paragraph 9.05(b) shall be a material default of
the Lease.
Section 9.06. No Merger. No merger shall result from Tenant's sublease
of the Property under this Article Nine, Tenant's surrender of this Lease or the
termination of this Lease in any other manner. In any such event, Landlord may
terminate any or all subtenancies or succeed to the interest of Tenant as
sublandlord under any or all subtenancies.
ARTICLE TEN: DEFAULTS; REMEDIES
Section 10.01. Covenants and Conditions. Tenant's performance of each
of Tenant's obligations under this Lease is a condition as well as a covenant.
Tenant's right to continue in possession of the Property is conditioned upon
such performance. Time is of the essence in the performance of all covenants and
conditions.
Section 10.02. Defaults. Tenant shall be in material default under this
Lease:
(a) If Tenant abandons the Property or if Tenant's vacation of the
Property results in the cancellation of any insurance described in Section 4.04;
(b) If Tenant fails to pay rent or any other charge when due;
(c) If Tenant fails to perform any of Tenant's non-monetary obligations
under this Lease for a period of thirty (30) days after written notice from
Landlord; provided that if more than thirty (30) days are required to complete
such performance, Tenant shall not be in default if Tenant commences such
performance within the thirty (30)-day period
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and thereafter diligently pursues its completion. However, Landlord shall not be
required to give such notice if Tenant's failure to perform constitutes a
non-curable breach of this Lease. The notice required by this Paragraph is
intended to satisfy any and all notice requirements imposed by law on Landlord
and is not in addition to any such requirement.
(d) (i) If Tenant makes a general assignment or general arrangement for
the benefit of creditors; (ii) if a petition for adjudication of bankruptcy or
for reorganization or rearrangement is filed by or against Tenant and is not
dismissed within thirty (30) days; (iii) if a trustee or receiver is appointed
to take possession of substantially all of Tenant's assets located at the
Property or of Tenant's interest in this Lease and possession is not restored to
Tenant within thirty (30) days; or (iv) if substantially all of Tenant's assets
located at the Property or of Tenant's interest in this Lease is subjected to
attachment, execution or other judicial seizure which is not discharged within
thirty (30) days. If a court of competent jurisdiction determines that any of
the acts described in this subparagraph (d) is not a default under this Lease,
and a trustee is appointed to take possession (or if Tenant remains a debtor in
possession) and such trustee or Tenant transfers Tenant's interest hereunder,
then Landlord shall receive, as Additional Rent, the excess, if any, of the rent
(or any other consideration) paid in connection with such assignment or sublease
over the rent payable by Tenant under this Lease.
(e) If any guarantor of the Lease revokes or otherwise terminates, or
purports to revoke or otherwise terminate, any guaranty of all or any portion of
Tenant's obligations under the Lease. Unless otherwise expressly provided, no
guaranty of the Lease is revocable.
Section 10.03. Remedies. On the occurrence of any material default by
Tenant, Landlord may, at any time thereafter, with or without notice or demand
and without limiting Landlord in the exercise of any right or remedy which
Landlord may have:
(a) Terminate Tenant's right to possession of the Property by any
lawful means, in which case this Lease shall terminate and Tenant shall
immediately surrender possession of the Property to Landlord. In such event,
Landlord shall be entitled to recover from Tenant all damages incurred by
Landlord by reason of Tenant's default, including (i) the worth at the time of
the award of the unpaid Base Rent, Additional Rent and other charges which
Landlord had earned at the time of the termination; (ii) the worth at the time
of the award of the amount by which the unpaid Base Rent, Additional Rent and
other charges which Landlord would have earned after termination until the time
of the award exceeds the amount of such rental loss that Tenant proves Landlord
could have reasonably avoided; (iii) the worth at the time of the award of the
amount by which the unpaid Base Rent, Additional Rent and other charges which
Tenant would have paid for the balance of the Lease Term after the time of award
exceeds the amount of such rental loss that Tenant proves Landlord could have
reasonably avoided; and (iv) any other
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amount necessary to compensate Landlord for all the detriment proximately caused
by Tenant's failure to perform its obligations under the Lease or which in the
ordinary course of things would be likely to result therefrom, including, but
not limited to, any costs or expenses Landlord incurs in maintaining or
preserving the Property after such default, the cost of Landlord's reasonable
attorneys' fees incurred in connection therewith, and any real estate commission
paid or payable. As used in subparts (i) and (ii) above, the "worth at the time
of the award" is computed by allowing interest on unpaid amounts at the rate of
fifteen percent (15%) per annum, or such lesser amount as may then be the
maximum lawful rate. As used in subpart (iii) above, the "worth at the time of
the award" is computed by discounting such amount at the discount rate of the
Federal Reserve Bank of San Francisco at the time of the award, plus one percent
(1%). If Tenant has abandoned the Property, Landlord shall have the option of
(i) retaking possession of the Property and recovering from Tenant the amount
specified in this Paragraph 10.03(a), or (ii) proceeding under Paragraph
10.03(b);
(b) Maintain Tenant's right to possession, in which case this Lease
shall continue in effect whether or not Tenant has abandoned the Property. In
such event, Landlord shall be entitled to enforce all of Landlord's rights and
remedies under this Lease, including the right to recover the rent as it becomes
due;
(c) Pursue any other remedy now or hereafter available to Landlord
under the laws or judicial decisions of the state in which the Property is
located.
Section 10.04. Repayment of "Free" Rent. If this Lease provides for a
postponement of any monthly rental payments, a period of "free" rent or other
rent concession, such postponed rent or "free" rent is called the "Abated Rent".
Tenant shall be credited with having paid all of the Abated Rent on the
expiration of the Lease Term only if Tenant has fully, faithfully, and
punctually performed all of Tenant's obligations hereunder, including the
payment of all rent (other than the Abated Rent) and all other monetary
obligations and the surrender of the Property in the physical condition required
by this Lease. Tenant acknowledges that its right to receive credit for the
Abated Rent is absolutely conditioned upon Tenant's full, faithful and punctual
performance of its obligations under this Lease. If Tenant defaults and does not
cure within any applicable grace period, the Abated Rent shall immediately
become due and payable in full and this Lease shall be enforced as if there were
no such rent abatement or other rent concession. In such case Abated Rent shall
be calculated based on the full initial rent payable under this Lease.
Section 10.05. Automatic Termination. Notwithstanding any other term or
provision hereof to the contrary, the Lease shall terminate on the occurrence of
any act which affirms the Landlord's intention to terminate the Lease as
provided in Section 10.03 hereof, including the filing of an unlawful detainer
action against Tenant.
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On such termination, Landlord's damages for default shall include all costs and
fees, including reasonable attorneys' fees that Landlord incurs in connection
with the filing, commencement, pursuing and/or defending of any action) in any
bankruptcy court or other court with respect to the Lease; the obtaining of
relief from any stay in bankruptcy restraining any action to evict Tenant; or
the pursuing of any action with respect to Landlord's right to possession of the
Property. All such damages suffered (apart from Base Rent and other rent payable
hereunder) shall constitute pecuniary damages which must be reimbursed to
Landlord prior to assumption of the Lease by Tenant or any successor to Tenant
in any bankruptcy or other proceeding.
Section 10.06. Cumulative Remedies. Landlord's exercise of any right or
remedy shall not prevent it from exercising any other right or remedy.
ARTICLE ELEVEN: PROTECTION OF LENDERS
Section 11.01. Subordination. Landlord shall have the right to
subordinate this Lease to any ground lease, deed of trust or mortgage
encumbering the Property, any advances made on the security thereof and any
renewals, modifications, consolidations, replacements or extensions thereof,
whenever made or recorded. Tenant shall cooperate with Landlord and any lender
which is acquiring a security interest in the Property or the Lease. Tenant
shall execute such further documents and assurances as such lender may require,
provided that Tenant's obligations under this Lease shall not be increased in
any material way (the performance of ministerial acts shall not be deemed
material), and Tenant shall not be deprived of its rights under this Lease.
Tenant's right to quiet possession of the Property during the Lease Term shall
not be disturbed if Tenant pays the rent and performs all of Tenant's
obligations under this Lease and is not otherwise in default. If any ground
lessor, beneficiary or mortgagee elects to have this Lease prior to the lien of
its ground lease, deed of trust or mortgage and gives written notice thereof to
Tenant, this Lease shall be deemed prior to such ground lease, deed of trust or
mortgage whether this Lease is dated prior or subsequent to the date of said
ground lease, deed of trust or mortgage or the date of recording thereof.
Section 11.02. Attornment. If Landlord's interest in the Property is
acquired by any ground lessor, beneficiary under a deed of trust, mortgagee, or
purchaser at a foreclosure sale, Tenant shall attorn to the transferee of or
successor to Landlord's interest in the Property and recognize such transferee
or successor as Landlord under this Lease. Tenant waives the protection of any
statute or rule of law which gives or purports to give Tenant any right to
terminate this Lease or surrender possession of the Property upon the transfer
of Landlord's interest.
Section 11.03. Signing of Documents. Tenant shall sign and deliver any
instrument or documents necessary or appropriate to evidence any such attornment
or
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subordination or agreement to do so. If Tenant fails to do so within ten (10)
days after written request, Tenant hereby makes, constitutes and irrevocably
appoints Landlord, or any transferee or successor of Landlord, the
attorney-in-fact of Tenant to execute and deliver any such instrument or
document.
Section 11.04. Estoppel Certificates. (a) Upon Landlord's written
request, Tenant shall execute, acknowledge and deliver to Landlord a written
statement certifying: (i) that none of the terms or provisions of this Lease
have been changed (or if they have been changed, stating how they have been
changed); (ii) that this Lease has not been cancelled or terminated; (iii) the
last date of payment of the Base Rent and other charges and the time period
covered by such payment; (iv) that Landlord is not in default under this Lease
(or, if Landlord is claimed to be in default, stating why); and (v) such other
representations or information with respect to Tenant or the Lease as Landlord
may reasonably request or which any prospective purchaser or encumbrancer of the
Property may require. Tenant shall deliver such statement to Landlord within ten
(10) days after Landlord's request. Landlord may give any such statement by
Tenant to any prospective purchaser or encumbrancer of the Property. Such
purchaser or encumbrancer may rely conclusively upon such statement as true and
correct.
(b) If Tenant does not deliver such statement to Landlord within such
ten (10)- day period, Landlord, and any prospective purchaser or encumbrancer,
may conclusively presume and rely upon the following facts: (i) that the terms
and provisions of this Lease have not been changed except as otherwise
represented by Landlord; (ii) that this Lease has not been cancelled or
terminated except as otherwise represented by Landlord; (iii) that not more than
one month's Base Rent or other charges have been paid in advance; and (iv) that
Landlord is not in default under the Lease. In such event, Tenant shall be
estopped from denying the truth of such facts.
Section 11.05. Tenant's Financial Condition. Within ten (10) days after
written request from Landlord, Tenant shall deliver to Landlord such financial
statements as Landlord reasonably requires to verify the net worth of Tenant or
any assignee, subtenant, or guarantor of Tenant. In addition, Tenant shall
deliver to any lender designated by Landlord any financial statements required
by such lender to facilitate the financing or refinancing of the Property.
Tenant represents and warrants to Landlord that each such financial statement is
a true and accurate statement as of the date of such statement. All financial
statements shall be confidential and shall be used only for the purposes set
forth In this Lease.
ARTICLE TWELVE: LEGAL COSTS
Section 12.01. Legal Proceedings. If Tenant or Landlord shall be in
breach or default under this Lease, such party (the "Defaulting Party") shall
reimburse the other
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party (the "Nondefaulting Party") upon demand for any costs or expenses that the
Nondefaulting Party incurs in connection with any breach or default of the
Defaulting Party under this Lease, whether or not suit is commenced or judgment
entered. Such costs shall include legal fees and costs incurred for the
negotiation of a settlement, enforcement of rights or otherwise. Furthermore, if
any action for breach of or to enforce the provisions of this Lease is
commenced, the court in such action shall award to the party in whose favor a
judgment is entered, a reasonable sum as attorneys' fees and costs. The losing
party in such action shall pay such attorneys' fees and costs. Tenant shall also
indemnify Landlord against and hold Landlord harmless from all costs, expenses,
demands and liability Landlord may incur if Landlord becomes or is made a party
to any claim or action (a) instituted by Tenant against any third party, or by
any third party against Tenant, or by or against any person holding any interest
under or using the Property by license of or agreement with Tenant; (b) for
foreclosure of any lien for labor or material furnished to or for Tenant or such
other person; (c) otherwise arising out of or resulting from any act or
transaction of Tenant or such other person; or (d) necessary to protect
Landlord's interest under this Lease in a bankruptcy proceeding, or other
proceeding under Title 11 of the United States Code, as amended. Tenant shall
defend Landlord against any such claim or action at Tenant's expense with
counsel reasonably acceptable to Landlord or, at Landlord's election, Tenant
shall reimburse Landlord for any legal fees or costs Landlord incurs in any such
claim or action.
Section 12.02. Landlord's Consent. Tenant shall pay Landlord's
reasonable attorneys' fees incurred in connection with Tenant's request for
Landlord's consent under Article Nine (Assignment and Subletting), or in
connection with any other act which Tenant proposes to do and which requires
Landlord's consent.
ARTICLE THIRTEEN: MISCELLANEOUS PROVISIONS
Section 13.01. Non-Discrimination. Tenant promises, and it is a
condition to the continuance of this Lease, that there will be no discrimination
against, or segregation of, any person or group of persons on the basis of race,
color, sex, creed, national origin or ancestry in the leasing, subleasing,
transferring, occupancy, tenure or use of the Property or any portion thereof.
Section 13.02. Landlord's Liability; Certain Duties.
(a) As used in this Lease, the term "Landlord" means only the current
owner or owners of the fee title to the Property or the leasehold estate under a
ground lease of the Property at the time in question. Each Landlord is obligated
to perform the obligations of Landlord under this Lease only during the time
such Landlord owns such interest or title. Any Landlord who transfers its title
or interest is relieved of all liability with respect to the obligations of
Landlord under this Lease to be performed on or after the date of
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transfer. However, each Landlord shall deliver to its transferee all funds that
Tenant previously paid if such funds have not yet been applied under the terms
of this Lease.
(b) Tenant shall give written notice of any failure by Landlord to
perform any of its obligations under this Lease to Landlord and to any ground
lessor, mortgagee or beneficiary under any deed of trust encumbering the
Property whose name and address have been furnished to Tenant in writing.
Landlord shall not be in default under this Lease unless Landlord (or such
ground lessor, mortgagee or beneficiary) fails to cure such non-performance
within thrity (30) days after receipt of Tenant's notice. However, if such
non-performance reasonably requires more than thirty (30) days to cure, Landlord
shall not be in default if such cure is commenced within such thirty (30)-day
period and thereafter diligently pursued to completion.
(c) Notwithstanding any term or provision herein to the contrary, the
liability of Landlord for the performance of its duties and obligations under
this Lease is limited to Landlord's interest in the Property, and neither the
Landlord nor its partners, shareholders, officers or other principals shall have
any personal liability under this Lease.
Section 13.03. Severability. A determination by a court of competent
jurisdiction that any provision of this Lease or any part thereof is illegal or
unenforceable shall not cancel or invalidate the remainder of such provision or
this Lease, which shall remain in full force and effect.
Section 13.04. Interpretation. The captions of the Articles or Sections
of this Lease are to assist the parties in reading this Lease and are not a part
of the terms or provisions of this Lease. Whenever required by the context of
this Lease, the singular shall include the plural and the plural shall include
the singular. The masculine, feminine and neuter genders shall each include the
other. In any provision relating to the conduct, acts or omissions of Tenant,
the term "Tenant" shall include Tenant's agents, employees, contractors,
invitees, successors or others using the Property with Tenant's expressed or
implied permission.
Section 13.05. Incorporation of Prior Agreements; Modifications. This
Lease is the only agreement between the parties pertaining to the lease of the
Property and no other agreements are effective. All amendments to this Lease
shall be in writing and signed by all parties. Any other attempted amendment
shall be void.
Section 13.06. Notices. All notices required or permitted under this
Lease shall be in writing and shall be personally delivered or sent by certified
mail, return receipt requested, postage prepaid. Notices to Tenant shall be
delivered to the address specified in Section 1.03 above, except that upon
Tenant's taking possession of the Property, the
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<PAGE> 25
Property shall be Tenant's address for notice purposes. Notices to Landlord
shall be delivered to the address specified in Section 1.02 above. All notices
shall be effective upon delivery. Either party may change its notice address
upon written notice to the other party.
Section 13.07. Waivers. All waivers must be in writing and signed by
the waiving party. Landlord's failure to enforce any provision of this Lease or
its acceptance of rent shall not be a waiver and shall not prevent Landlord from
enforcing that provision or any other provision of this Lease in the future. No
statement on a payment check from Tenant or in a letter accompanying a payment
check shall be binding on Landlord. Landlord may, with or without notice to
Tenant, negotiate such check without being bound to the conditions of such
statement.
Section 13.08. No Recordation. Tenant shall not record this Lease
without prior written consent from Landlord. However, either Landlord or Tenant
may require that a "Short Form" memorandum of this Lease executed by both
parties be recorded. The party requiring such recording shall pay all transfer
taxes and recording fees.
Section 13.09. Binding Effect; Choice of Law. This Lease binds any
party who legally acquires any rights or interest in this Lease from Landlord or
Tenant. However, Landlord shall have no obligation to Tenant's successor unless
the rights or interests of Tenant's successor are acquired in accordance with
the terms of this Lease. The laws of the state in which the Property is located
shall govern this Lease.
Section 13.10. Corporate Authority; Partnership Authority. If Tenant is
a corporation, each person signing this Lease on behalf of Tenant represents and
warrants that he has full authority to do so and that this Lease binds the
corporation. Within thirty (30) days after this Lease is signed, Tenant shall
deliver to Landlord a certified copy of a resolution of Tenant's Board of
Directors authorizing the execution of this Lease or other evidence of such
authority reasonably acceptable to Landlord. If Tenant is a partnership, each
person or entity signing this Lease for Tenant represents and warrants that he
or it is a general partner of the partnership, that he or it has full authority
to sign for the partnership and that this Lease binds the partnership and all
general partners of the partnership. Tenant shall give written notice to
Landlord of any general partner's withdrawal or addition. Within thirty (30)
days after this Lease is signed, Tenant shall deliver to Landlord a copy of
Tenant's recorded statement of partnership or certificate of limited
partnership.
Section 13.11. Joint and Several Liability. All parties signing this
Lease as Tenant shall be jointly and severally liable for all obligations of
Tenant.
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<PAGE> 26
Section 13.12. Force Majeure. If Landlord cannot perform any of its
obligations due to events beyond Landlord's control, the time provided for
performing such obligations shall be extended by a period of time equal to the
duration of such events. Events beyond Landlord's control include, but are not
limited to, acts of God, war, civil commotion, labor disputes, strikes, fire,
flood or other casualty, shortages of labor or material, government regulation
or restriction and weather conditions.
Section 13.13. Execution of Lease. This Lease may be executed in
counterparts and, when all counterpart documents are executed, the counterparts
shall constitute a single binding instrument. Landlord's delivery of this Lease
to Tenant shall not be deemed to be an offer to lease and shall not be binding
upon either party until executed and delivered by both parties.
Section 13.14. Survival. All representations and warranties of Landlord
and Tenant shall survive the termination of this Lease.
ARTICLE FOURTEEN: BROKERS
Section 14.01. Broker's Fee. When this Lease is signed by and delivered
to both Landlord and Tenant, Landlord shall pay a real estate commission to
Landlord's Broker named in Section 1.08 above, if any, as provided in the
written agreement between Landlord and Landlord's Broker, or the sum stated in
Section 1.09 above for services rendered to Landlord by Landlord's Broker in
this transaction. Landlord shall pay Landlord's Broker a commission if Tenant
exercises any option to extend the Lease Term or to buy the Property, or any
similar option or right which Landlord may grant to Tenant, or if Landlord's
Broker is the procuring cause of any other lease or sale entered into between
Landlord and Tenant covering the Property. Such commission shall be the amount
set forth in Landlord's Broker's commission schedule in effect as of the
execution of this Lease. If a Tenant's Broker is named in Section 1.08 above,
Landlord's Broker shall pay an appropriate portion of its commission to Tenant's
Broker if so provided in any agreement between Landlord's Broker and Tenant's
Broker. Nothing contained in this Lease shall impose any obligation on Landlord
to pay a commission or fee to any party other than Landlord's Broker.
Section 14.02. Protection of Brokers. If Landlord sells the Property,
or assigns Landlord's interest in this Lease, the buyer or assignee shall, by
accepting such conveyance of the Property or assignment of the Lease, be
conclusively deemed to have agreed to make all payments to Landlord's Broker
thereafter required of Landlord under this Article Fourteen. Landlord's Broker
shall have the right to bring a legal action to enforce or declare rights under
this provision. The prevailing party in such action shall be entitled to
reasonable attorneys' fees to be paid by the losing party. Such attorneys'
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<PAGE> 27
fees shall be fixed by the court in such action. This Paragraph is included in
this Lease for the benefit of Landlord's Broker.
Section 14.03. Agency Disclosure; No Other Brokers. Landlord and Tenant
each warrant that they have dealt with no other real estate broker(s) in
connection with this transaction except: CB Commercial Real Estate Group, Inc.,
who represents ______________________________ and
______________________________, who represents ______________________________.
In the event that CB Commercial represents both Landlord and Tenant,
Landlord and Tenant hereby confirm that they were timely advised of the dual
representation and that they consent to the same, and that they do not expect
said broker to disclose to either of them the confidential information of the
other party.
ARTICLE FIFTEEN: COMPLIANCE
The parties hereto agree to comply with all applicable federal, state
and local laws, regulations, codes, ordinances and administrative orders having
jurisdiction over the parties, property or the subject matter of this Agreement,
including, but not limited to, the 1964 Civil Rights Act and all amendments
thereto, the Foreign Investment in Real Property Tax Act, the Comprehensive
Environmental Response Compensation and Liability Act, and The Americans With
Disabilities Act.
ADDITIONAL PROVISIONS MAY BE SET FORTH IN A RIDER OR RIDERS ATTACHED
HERETO OR IN THE BLANK SPACE BELOW. IF NO ADDITIONAL PROVISIONS ARE INSERTED,
PLEASE DRAW A LINE THROUGH THE SPACE BELOW.
[diagonal line]
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<PAGE> 28
Landlord and Tenant have signed this Lease at the place and on the dates
specified adjacent to their signatures below and have initialed all Riders which
are attached to or incorporated by reference in this Lease.
"LANDLORD"
Signed on December 16, 1993 D B & D Partnership
at Kent, Washington /s/ Dennis Burns
----------------------------------
By: Dennis Burns
-----------------------------
Its:
-----------------------------
By:
-----------------------------
Its:
-----------------------------
"TENANT"
Signed on December 16, 1993 Gargoyles, Inc.
at Kent, Washington /s/ Rodney P. Colton
----------------------------------
By: Rodney P. Colton
-----------------------------
Its: Vice President Finance
-----------------------------
By:
-----------------------------
Its:
-----------------------------
IN ANY REAL ESTATE TRANSACTION, IT IS RECOMMENDED THAT YOU CONSULT WITH
A PROFESSIONAL, SUCH AS A CIVIL ENGINEER, INDUSTRIAL HYGIENIST OR OTHER PERSON
WITH EXPERIENCE IN EVALUATING THE CONDITION OF THE PROPERTY, INCLUDING THE
POSSIBLE PRESENCE OF ASBESTOS, HAZARDOUS MATERIALS AND UNDERGROUND STORAGE
TANKS.
THIS PRINTED FORM LEASE HAS BEEN DRAFTED BY LEGAL COUNSEL AT THE
DIRECTION OF THE SOUTHERN CALIFORNIA CHAPTER OF THE SOCIETY OF INDUSTRIAL AND
OFFICE REALTORS(R), INC. NO REPRESENTATION OR RECOMMENDATION IS MADE BY THE
SOUTHERN CALIFORNIA CHAPTER OF THE SOCIETY OF INDUSTRIAL AND OFFICE REALTORS(R),
INC., ITS LEGAL COUNSEL, THE REAL ESTATE BROKERS NAMED HEREIN, OR THEIR
EMPLOYEES OR AGENTS, AS TO THE LEGAL SUFFICIENCY, LEGAL EFFECT OR TAX
CONSEQUENCES OF THIS LEASE OR OF THIS TRANSACTION. LANDLORD AND TENANT SHOULD
RETAIN LEGAL COUNSEL TO ADVISE THEM ON SUCH MATTERS AND SHOULD RELY UPON THE
ADVICE OF SUCH LEGAL COUNSEL.
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<PAGE> 29
SIGNED this 16th day of December, 1993.
Individual name here: Dennis Burns Individual name here: Rodney P. Colton
Firm name here: D B & D Partnership Firm name here: Gargoyles, Inc.
Address: 19039 62nd Ave. S. Address: 19039 62nd Ave. S.
Kent, Wa 98032 Kent, Wa 98032
SUBSCRIBED AND SWORN to before me this 16th day of December, 1993.
/s/ Patricia D. Nichols
-------------------------
NOTARY PUBLIC
My Commission Expires:
6/25/94
- -----------------------------------
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<PAGE> 1
Exhibit 10.27
LEASE AMENDMENT
THIS AGREEMENT made and entered into as of the 17th day of March, 1995
by and between DB&D PARTNERSHIP, a Washington general partnership ("Landlord"),
and GARGOYLES, INC. , a Washington corporation ("Tenant").
WITNESSETH
A. Landlord or its predecessor in interest, and Tenant or its
predecessor in interest, have heretofore entered into that certain lease dated
December 16, 1993, for premises (the "Premises") described as 5866 S. 194th,
Kent, WA 98032, initially containing approximately 25,841 square feet, which
lease has not heretofore been amended or assigned (the "Lease"), a copy of which
is attached hereto and incorporated herein.
B. The parties mutually desire to amend the Lease according to the
terms and conditions hereof.
NOW, THEREFORE, in consideration of the mutual terms and conditions
herein contained, the parties hereby agree as follows:
1. AMENDMENT. The parties agree that the Lease shall be amended in
accordance with the following terms and conditions:
1.1 Section 1.04 entitled Property is amended to add the
following legal description, to wit:
Lot A, City of Kent Short Plat Number SP-93-10, recorded under
Recording Number 9312292721, said short plat being a portion
of Lots 15 and 16, Block 1, Southcenter Corporate Park,
according to the plat thereof recorded in Volume 114 of Plats,
pages 36 through 42, inclusive, in King County, Washington.
1.2 Section 1.05 entitled Lease Term is amended to provide
that the Lease term shall be for a shortened term ending on March 31, 2000.
1.3 Section 1.12 entitled Rent and Other Charges Payable by
Tenant is amended to provide that effective April 1, 1995 base rent shall be
Eighteen Thousand Twenty-Five and 00/00 Dollars ($18,025) per month, payable as
provided in Section 3.01, and shall be increased during the remaining term as
follows:
<PAGE> 2
Effective April 1, 1996, the monthly base rent shall be
increased to $18,746.
Effective April 1, 1997, the monthly base rent shall be increased to
$19,496.
Effective April 1, 1998, the monthly base rent shall be increased to
$20,276.
Effective April 1, 1999, the monthly base rent shall be increased to
$21,087.
1.4 Section 3.04 entitled Termination: Advance Payments is
amended by adding the following at the end of the section:
Upon the expiration of the Lease term or other termination of
this Lease not resulting from Tenant's default, and so long as
Tenant is not in default under any term, condition or covenant
of this Lease, Tenant shall have the right to purchase the
following described furniture, fixtures and equipment for a
cash compensation paid to Landlord in an amount upon which
Landlord and Tenant shall reasonably agree. In the event
Landlord and Tenant are unable to reach an agreement as to
value of furniture, fixture, or equipment, the purchase price
shall be the Fair Market Value, as determined by an
independent licensed and certified appraiser. Tenant shall
give notice to Landlord not less than ninety (90) days prior
to the expiration or termination of the Lease of its intent to
purchase the furniture, fixtures and equipment. In any event,
Tenant shall restore and repair the Property upon its removal
of any of the following from the Property:
(a) All built-in furniture and fixtures --
principally secretarial work stations, main sales conference
room, and built-in cabinets.
(b) Phone system and 30 phones.
(c) Conference room table, chairs and cabinets.
1.5 Section 4.04(c) entitled Payment of Premiums is amended by
striking Tenant's obligation to pay for Landlord's rental income insurance
policy. Except as amended, the remaining terms and conditions of this Section
4.04(c) shall remain in full force and effect.
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<PAGE> 3
1.6 Section 6.03 entitled Landlord's Obligations is amended to
impose upon Landlord the responsibility to maintain in good order, condition and
repair all structural components of the building including foundations, walls
and the roof at Landlord's expense. Except as amended, the remaining terms and
conditions of this Section 6.03 shall remain in full force and effect.
1.7 Section 6.04(a) is amended to conform with the amendment
to Section 6.03. Except as amended, the remaining terms and conditions of
Section 6.04(a) shall remain in full force and effect.
2. EFFECTIVE DATE. This Agreement shall become effective as an
amendment to the Lease as of, on and after March 17, 1995 (herein referred to as
the "Effective Date"), and shall continue in effect until and unless otherwise
amended by the parties in writing.
3. WHOLE AGREEMENT. This Agreement sets forth the entire agreement
between the parties with respect to the matters set forth herein. There have
been no additional oral or written representations or agreements. As amended
herein, the Lease between the parties shall remain in full force and effect. In
case of any inconsistency between the provisions of the Lease and this
Agreement, the latter provisions shall govern and control.
4. NO OFFER. This Agreement shall not be binding until executed and
delivered by both parties.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
date first above written.
Landlord: TENANT:
DB&D GARGOYLES, INC. GARGOYLES, INC.
By /s/ Dennis Burns By /s/ Douglas B. Hauff
----------------------- -----------------------
Its Managing Partner Its President
------------------ -----------------------
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<PAGE> 4
STATE OF WASHINGTON )
) ss.
COUNTY OF KING )
On this 17th day of March, 1995, before me personally appeared Dennis
Burns, to me known to be the Managing Partner of DB&D PARTNERSHIP, who executed
the within and foregoing instrument, and acknowledged said instrument to be the
free and voluntary act and deed of said partnership for the uses and purposes
therein mentioned, and on oath stated that he was authorized to execute said
instrument.
IN WITNESS WHEREOF, I have hereunto set my hand and affixed my official
seal the day and year first above written.
/s/ Richard J. Padden
-------------------------------------------
Richard J. Padden (Print Name)
-----------------
Notary Public in and for the State
of Washington, residing at Seattle
----------------
My Commission Expires: 9/1/96
-------------------
STATE OF WASHINGTON )
) ss.
COUNTY OF KING )
On this 17th day of March, 1995, before me personally appeared Doug
Hauff, to me known to be the President of GARGOYLES, INC., who executed the
within and foregoing instrument, and acknowledged said instrument to be the free
and voluntary act and deed of said corporation, for the uses and purposes
therein mentioned, and on oath stated that he was authorized to execute said
instrument.
IN WITNESS WHEREOF, I have hereunto set my hand and affixed my official
seal the day and year first above written.
/s/ Richard J. Padden
-------------------------------------------
Richard J. Padden (Print Name)
-----------------
Notary Public in and for the State
of Washington, residing at Seattle
----------------
My Commission Expires: 9/1/96
-------------------
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<PAGE> 1
EXHIBIT 10.28
AGREEMENT
THIS AGREEMENT (the "Agreement") is made and entered into as of this
5th day of April, 1996, by and between MASTERS SPORT EQUIPMENT GmbH, with its
principal place of business at Ellbognarstrasse 24, 4021 Linz, Austria
("Masters") and GARGOYLES, INC., d/b/a GARGOYLES PERFORMANCE EYEWEAR, a
Washington corporation, with its principal place of business at 15039 62nd
Avenue South, Kent, Washington 98032, U.S.A. ("Gargoyles").
WHEREAS, Masters and Gargoyles are parties to that certain Distribution
Agreement, dated as of October 6, 1994 (the "Distribution Agreement"); and
WHEREAS, Masters and Gargoyles desire to terminate the Distribution
Agreement, effective immediately, on the terms set forth herein;
NOW, THEREFORE, in consideration of the conditions contained herein,
Masters and Gargoyles agree as follows:
ARTICLE I
TERMINATION
TERMINATION OF DISTRIBUTION AGREEMENT. The Distribution Agreement shall
terminate, effective immediately, except with respect to the obligation of each
of the parties hereto to make certain payments as described below.
ARTICLE II
PAYMENTS; CREDITS
2.1 PAYMENTS
Gargoyles agrees that, as of this date, it is indebted to Masters in
the sum of Austrian Shillings TEN MILLION FOUR HUNDRED SEVENTY FIVE THOUSAND
FIVE HUNDRED SIXTY SEVEN AND 30/100 (AS 10,475,567.30) for open inventory
purchased by Gargoyles from Masters, together with the sum of Austrian Shillings
FOUR HUNDRED TWENTY THOUSAND NINETY ONE AND 60/100 (AS 420,091.60) representing
interest thereon, which in the aggregate is equal to Austrian Shillings TEN
MILLION EIGHT HUNDRED NINETY FIVE THOUSAND SIX HUNDRED FIFTY EIGHT AND 90/100
(AS 10,895,658.90) (the "Distribution Payment").
<PAGE> 2
2.2 CREDITS
Gargoyles shall not be required to repay to Masters the Distribution
Payment, and the entire amount of the Distribution Payment shall be credited to
Gargoyles, if the Inventory Buy-Back Calculation (as defined below), including
the duty and freight as calculated pursuant to Section 3.2 below, is equal to or
in excess of Austrian Shillings Nine Million Seven Hundred Thirty Seven Thousand
(AS 9,737,000) (such amount being referred to herein as the "Threshold").
2.3 PAYMENT BY MASTERS
If the Inventory Buy-Back Calculation, as increased by the duty and
freight, as calculated in accordance with Section 3.2 below, is equal to or in
excess of the Threshold, upon removal of the inventory in accordance with
Section 3.7 below (and provided that Gargoyles has satisfied its obligations in
accordance with Section 3.7), Masters shall pay to Gargoyles the sum of Two
Hundred Thousand Dollars ($200,000) representing certain advertising and
promotional expenses incurred by Gargoyles with respect to the Adidas line.
2.4 SHORTFALL IN INVENTORY
If the amount of the Inventory Buy-Back Calculation, as increased by
the duty and freight, as calculated in accordance with Section 3.2 below, is
less than the Threshold, then Gargoyles shall pay to Masters the difference
between the Inventory Buy-Back Calculation and the actual value of such
inventory, both such amounts to be calculated in accordance with Article III
below.
ARTICLE III
INVENTORY BUY-BACK
3.1 CALCULATION
Subject to completion of an acceptable physical inspection of the
Adidas inventory purchased by Gargoyles from Masters, Masters (or its designee)
shall purchase from Gargoyles, immediately upon the execution and delivery of
this Agreement, all Restockable (as defined below) sunglass and accessory stock
(which will be determined in the sole discretion of Masters), which stock shall
be valued at One Hundred Percent (100%) of its original purchase price, together
with duty and freight charges, as described in Section 3.2 (collectively, the
"Inventory Buy-Back Calculation"). For purposes of the preceding, the term
"Restockable" shall mean Adidas sunglass and accessory stock which is either in
the original packaging thereof, or which is replaced in the original packaging
at the cost and expense of Gargoyles, in
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<PAGE> 3
good condition and which is not damaged in any manner whatsoever, and which does
not have any stickers, labeling or markings other than the original packaging at
the time such items were supplied to Gargoyles by Masters. If and to the extent
requested by Gargoyles, Masters will promptly provide to Gargoyles an amount of
packaging (but not in excess of five thousand (5,000) items of packaging) in
order that Gargoyles may satisfy its obligation under the preceding provision.
It is understood that a certain portion of the inventory was repackaged by
Gargoyles in "protective cases" (black cordura) which bears the trademark of
Adidas (but not any other trademark) and the parties hereto agree that any
inventory in such protective cases shall be accepted by Masters as if such
protective cases constituted the original packaging thereof by Masters and
Gargoyles shall not be obligated to repackage any of such inventory items.
3.2 DUTY AND FREIGHT
Masters shall pay to Gargoyles duty and freight charges on its Adidas
inventory at an agreed rate of seven percent (7%) of the physical inventory
value irrespective of the actual cost thereof.
3.3. CUSTOMER INFORMATION
Gargoyles shall provide to Masters, at the request of Masters, all
information in the possession of Gargoyles with respect to the Adidas line
including, but not limited to, customer names and addresses (together with
contact information), prior purchase and return history, any sales agreements
with such customers, pricing information, discount policies and such other
pertinent information as may be requested by Masters (or its designee) with
respect to sale and servicing of the Adidas line.
3.4 BILL OF SALE
Upon payment for the inventory, Gargoyles shall deliver to Masters (or
its designee) a bill of sale duly executed in proper form.
3.5 OBLIGATION FOR RETURNS
The following provisions shall apply with respect to the obligation of
Gargoyles and Masters with respect to acceptance and credit to be issued to
customers of Gargoyles with respect to the Adidas line:
(a) Gargoyles represents and warrants that Gargoyles has had in effect
and has followed a returns policy whereby its customers have been
allowed to return Adidas merchandise purchased from Gargoyles only if
they purchase
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<PAGE> 4
and pay for new Adidas merchandise equal to two (2) times the original
purchase price of Adidas merchandise which is being returned. Such
policy has been applied by Gargoyles with respect to Restockable (as
defined in Section 3.1) merchandise.
(b) Gargoyles will not give any general notice to its customers that
the return policy has been changed or altered or that Gargoyles will
cease to accept returns from customers who previously purchased Adidas
merchandise.
(c) After the date of purchase of inventory by Masters, if any customer
of Gargoyles contacts Gargoyles to return Adidas merchandise, Gargoyles
will inform such customer to contact Masters for adjustments and
returns.
(d) If any such customer of Gargoyles contacts Masters with respect to
an adjustment relating to Adidas merchandise, Masters will implement
the same policy as had been followed by Gargoyles -- namely, the return
policy described in Section 3.5(a) above with respect to Restockable
merchandise provided that the customer purchase from Masters an amount
of Adidas merchandise equal to two (2) times the value of the returned
Adidas merchandise.
(e) Masters may, in its sole discretion, change the return or
adjustment policy with respect to any inventory (including any
inventory acquired from Gargoyles) which is sold by Masters after the
date of this Agreement and Masters shall have no obligation to continue
the same return policy with respect to sales made after the date
hereof.
(f) The parties acknowledge that certain customers of Gargoyles have
not paid Gargoyles for their original purchases and would not be
eligible for returns at this time until they make payment for the
original purchases. Gargoyles will provide to Masters a list of such
customers and the amounts owed by each such customer. Masters will
endeavor, in good faith, to avoid accepting returns from such customers
until such time as such customer has made payment to Gargoyles for its
original purchase it being understood, however, that Masters may in its
sole discretion accept returns from such customers who have business
relations with Masters (or its affiliates and subsidiaries) which would
be injured by enforcing payment obligations between Gargoyles and such
customers.
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<PAGE> 5
3.6 INFORMATION TO BE PROVIDED TO CUSTOMERS
Immediately upon the execution and deliver of this Agreement, Masters
and Gargoyles shall inform all existing Gargoyles customers for the Adidas line
that Masters or its designees shall be responsible for the distribution of the
Adidas line. Such information shall be provided pursuant to the text of a letter
which is mutually acceptable to Gargoyles and Masters.
3.7 REMOVAL OF INVENTORY
Gargoyles shall provide reasonable assistance in connection with the
packaging and loading of the inventory for proper shipment and shall provide,
without charge, storage of the said inventory for up to fifteen (15) days
pending removal of the inventory sold pursuant to this Agreement. Masters shall
be responsible for making arrangements to remove the inventory from the
warehouse where the same is maintained by Gargoyles. Shipping costs from the
warehouse of Gargoyles to the ultimate destination designated by Masters shall
be borne by Masters. Such shipment will only be released by Gargoyles upon
payment of the amount set forth in Section 2.3 hereof.
3.8 DESTRUCTION OF NONSALABLE INVENTORY
Any Adidas line inventory which is not purchased by Masters or its
designee from Gargoyles shall, immediately upon the execution and delivery of
this Agreement, be destroyed at the cost of Gargoyles and shall not, in any
manner whatsoever, be sold anywhere.
ARTICLE IV
HELMET LICENSE
4.1 HELMET LICENSE
Prior to the date hereof, Adidas granted to Masters the right to
manufacture and sell Adidas' helmets anywhere in the world (the "License").
Masters hereby relinquishes all of its rights under the License with respect to
the United States (excluding its possessions) only (the "Territory") and
Gargoyles shall have the right to enter into a separate agreement with Adidas to
manufacture and sell Adidas' helmets in the Territory. Masters shall confirm its
relinquishment of the license to Adidas provided that the grant or denial of a
license extension to Gargoyles shall have no effect on this Agreement or the
obligations of the parties.
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<PAGE> 6
4.2 ALLOCATION OF PROFITS AND LIABILITIES
As of the date hereof, Gargoyles shall: (i) have all rights to, and
receive from any third party monies or other consideration payable or
attributable to the manufacture, distribution or sale of, the Adidas helmets in
the Territory; and (ii) assume all liabilities, accounts payable and obligations
with respect to the manufacture, distribution and sale of the Adidas helmets in
the Territory, regardless of when such helmets were manufactured or distributed.
4.3 INDEMNIFICATION
Masters shall promptly notify Gargoyles of any warranty, product
liability or infringement claim arising from the sale, on or after the date
hereof, in the Territory of Adidas helmets manufactured by Masters, and
Gargoyles shall defend, indemnify and hold Masters harmless from and against any
and all liability, cost or expense, including reasonable attorneys' fees,
imposed on Masters by reason of any such claims, whether covered by warranty or
not. Masters shall provide such assistance as Gargoyles may reasonably request
for purposes of the defense or settlement of such claims; provided, however,
Masters shall not be responsible or liable for any costs, damages or expenses in
connection with such assistance.
4.4 PRODUCT LIABILITY INSURANCE
Gargoyles shall maintain product liability insurance covering all
Adidas helmets purchased by ultimate consumers in the Territory, whether
manufactured or sold by Gargoyles, in the amount of at least Two Million Dollars
($2,000,000), and designate Masters as an additional insured with respect to
claims of customers asserted against Masters.
ARTICLE V
5.1 RELEASE BY GARGOYLES
Gargoyles, on behalf of itself and its administrators, successors,
legal representatives and assigns, and all persons claiming by, through or under
Gargoyles, and each of its affiliates, directors, officers, partners,
shareholders, employees, agents, heirs, executors, administrators, successors
and assigns (collectively, the "Gargoyles Releasors"), hereby releases, remises,
acquits and forever discharges and holds harmless Masters and its affiliates,
and their respective assignees, successors, directors, officers, shareholders,
partners, employees, agents, heirs, executors, administrators and legal
representatives (collectively, the "Masters Released Parties") of, from and
against any and all claims, suits, debts, costs, expenses, dues, sums of
-6-
<PAGE> 7
money, accounts, reckonings, bonds, bills, covenants, contracts, controversies,
agreements, promises, variances, trespasses, damages, judgments, recoveries,
deficiencies, executions, demands, obligations, losses, liabilities, actions,
and causes of action of any kind, in law or equity, known or unknown, including,
without limitation, attorneys' fees, court costs and any costs related thereto
(collectively, all of the foregoing are referred to as "Claims") or other
obligations that each of the Gargoyles Releasors ever had, now have, can, shall
or may in the future ever have, against the Masters Released Parties, or any of
them, singly or in any combination, from the beginning of the world to the date
of this Agreement, except any obligation which is created pursuant to this
Agreement.
5.2 RELEASE BY MASTERS
Masters, on behalf of itself and its administrators, successors, legal
representatives and assigns, and all persons claiming by, through or under
Masters, and each of its affiliates, directors, officers, partners,
shareholders, employees, agents, heirs, executors, administrators, successors
and assigns (collectively, the "Masters Releasors"), hereby releases, remises,
acquits and forever discharges and holds harmless Gargoyles and its affiliates,
and their respective assignees, successors, directors, officers, shareholders,
partners, employees, agents, heirs, executors, administrators and legal
representatives (collectively, the "Gargoyles Released Parties") of, from and
against any and all claims, or other obligations that each of the Masters
Releasors ever had, now have, can, shall or may in the future ever have, against
the Gargoyles Released Parties, or any of them, singly or in any combination,
from the beginning of the world to the date of this Agreement, except any
obligation which is created pursuant to this Agreement.
ARTICLE VI
MISCELLANEOUS
6.1 CONFIDENTIALITY
Masters and Gargoyles will, in their respective capacities, receive and
at all times, both before and after the consummation of the transactions
contemplated by this Agreement, treat in confidence, any information of the
disclosing party which is disclosed to the receiving party, pertaining to the
finances, general business operations, existing agreements or prices, practices
or policies with respect to exploitation of rights relating to either Masters or
Gargoyles, pending negotiations or litigation, or any other confidential aspect
(collectively, the "Confidential Matters") of the disclosing party, except for
any such information which:
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(i) at the time of disclosure is publicly available or becomes
publicly available through no act or omission of the receiving party;
(ii) was in the receiving party's possession, otherwise than
as a result of a confidential or fiduciary relationship, prior to the disclosure
thereof by the disclosing party, or
(iii) is thereafter disclosed to the receiving party by a
third party which did not acquire the information under an obligation of
confidentiality.
6.2 DISPUTE RESOLUTION
Any controversy or claim arising out of or relating to this Agreement,
or the breach thereof, shall be referred to and finally determined by
arbitration in Vienna, Austria, in accordance with the then applicable
International Chamber of Commerce Rules by one arbitrator appointed in
accordance with such rules. All such proceedings and all communications (written
or oral) shall be in the English language or shall be accompanied by a certified
English translation. Each party shall bear its own costs, including attorneys'
fees, for the arbitration.
6.3 SEVERABILITY
The terms, conditions, and provisions of this Agreement are fully
severable, and the decision or judgment of any court of competent jurisdiction
or arbitration tribunal rendering void or unenforceable any one or more of such
terms, conditions or provisions shall not render void or unenforceable any of
the other terms, conditions or provisions hereof and such void or unenforceable
terms shall be replaced with a valid and enforceable term which would to the
greatest degree possible reflect the original economic intentions of the parties
hereunder.
6.4 NOTICES
All notices and other communications hereunder shall be in writing and
shall be given and delivered by personal delivery or by certified mail, or
telefax, provided that as to any telefax transmission, the original of such
notice or other communication shall be sent, within twenty-four (24) hours after
telefax transmission, by certified mail. Such notices or other communication
shall be addressed to the parties at the addresses first stated above (or such
other address as shall be specified by such party by like notice).
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6.5 CAPTIONS
The captions at the heading of each article or section of this
Agreement are for convenience of reference only, and are not to be deemed a part
of the Agreement itself.
6.6 ENTIRE AGREEMENT
This Agreement, including the exhibits hereto and the other agreements
and documents referenced herein or contemplated hereby, constitutes the entire
agreement and understanding of the parties hereto with respect to the matters
herein set forth, and all prior negotiations and understandings relating to the
subject matter of this Agreement are merged herein and are superseded and
canceled by this Agreement.
6.7 COUNTERPARTS
This Agreement may be executed and delivered in one or more
counterparts, each of which shall be deemed an original, and all of which shall
be deemed to constitute one and the same agreement.
6.8 NO IMPLIED WAIVER
No consent to, or waiver, discharge or release (each, a "Waiver") of,
any provision of or breach under this Agreement shall be valid or effective
unless in writing and signed by the party giving such Waiver, and no specific
Waiver shall constitute a Waiver with respect to any other provision or breach,
whether or not of similar nature. Failure on the part of any party hereto to
insist in any instance upon strict, complete and timely performance by another
party hereto of any provision of or obligation under this Agreement shall not
constitute a Waiver by such party of any of its rights under this Agreement or
otherwise.
6.9 EXPENSES
The parties agree that the parties shall each pay all of their
respective fees and expenses incurred in connection with this Agreement, the
transactions contemplated hereby, the negotiations leading to the same and the
preparations made for carrying the same into effect.
6.10 FURTHER ASSURANCES
Each party shall perform all other acts and execute and deliver all
other documents as may be necessary or appropriate to carry out the purposes and
intent of this Agreement.
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6.11 GOVERNING LAW
This Agreement shall in all respects be governed by and construed in
accordance with the substantive and procedural laws of Austria, without giving
effect to the United Nations Convention on Contracts for the International Sale
of Goods.
6.12 THIRD PARTY BENEFICIARY
Nothing set forth in the Agreement shall be construed to confer any
benefit to any third party who is not a party to this Agreement.
6.13 ASSIGNMENT
This Agreement is personal to the parties hereto and neither party may
(except as set forth herein) assign or transfer the rights accruing hereunder
nor may performance of any duties by either party hereunder be delegated or
assumed by any other person or legal entity without the prior written consent of
the other parties hereto provided that Masters may assign its right to purchase
inventory under this Agreement to an affiliate of Masters without the prior
written consent of Gargoyles.
6.14 SUCCESSORS AND ASSIGNS
This Agreement shall be binding upon and inure to the benefit of the
respective successors and permitted assigns of each party hereto.
6.15 RELATIONSHIP
This Agreement does not constitute either party hereto or any employee
or agent of either party as the agent or legal manager of the other party for
any purpose whatsoever and neither party nor any employee or agent of such party
is granted hereby any right or authority to assume or to create any obligation
or responsibility, express or implied, on behalf of or in the name of the other
party or to bind the other party in any manner or thing whatsoever.
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IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed as of the date first above written.
MASTERS SPORT EQUIPMENT GmbH
By:/s/ Masters Sport Equipment GmbH
------------------------------
GARGOYLES, INC.,
d/b/a GARGOYLES PERFORMANCE
EYEWEAR
By:/s/ Gargoyles, Inc.
------------------------------
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Exhibit 10.29
SHAREHOLDERS AGREEMENT
THIS SHAREHOLDERS AGREEMENT (this "Agreement") is made as of March 22,
1995, among GARGOYLES, INC., a Washington corporation (the "Corporation"),
Trillium Corporation, a Washington corporation ("Trillium"), Dennis Burns
("Burns"), Douglas Hauff ("Hauff"), and the other shareholders listed on the
attached Exhibit A (the "Shareholders"). The shareholders are hereinafter each
sometimes referred to individually as a "Shareholder," and collectively as
"Shareholders."
A. The Corporation and the Shareholders are parties to that certain
Stock Purchase Agreement dated as of March 14, 1995 (the "Purchase Agreement").
B. Upon closing of the Purchase Agreement, the Shareholders will own
Stock in the Corporation as set forth in the attached Exhibit A.
C. Subject to the terms and conditions of this Agreement, the
Corporation and the Shareholders desire to define certain rights and to provide
for certain circumstances under which shares of Stock of the Corporation may be
transferred by the Shareholders.
NOW, THEREFORE, in consideration of the premises and of their mutual
promises, the parties hereto agree as follows:
1. Definitions.
1.1 Stock. Unless otherwise specified, the term "Stock" shall
include all of the shares of common stock of the Corporation issued to the
Shareholders including, without limitation, shares that may be issued by reason
of stock option agreements, stock splits, reverse stock splits, stock dividends
or other recapitalization of the Corporation.
1.2 Transfer. The term "Transfer" or derivatives thereof shall
mean any voluntary or involuntary disposition of any interest in Stock
including, without limitation, sale, exchange, transfer, assignment,
hypothecation, pledge or gift or by operation of law, resulting from death or
otherwise. Such term shall also include the establishment of ownership in joint
tenancies of any description and a change in control of any entity which owns
Stock. The term Transfer shall not include the transfer of Stock for no
consideration to a trust, family partnership, or limited liability company,
established solely for the benefit of the transferring shareholder or the spouse
or any direct lineal descendant of the transferor, or to a
<PAGE> 2
corporation owned eighty percent (80%) or more by the transferor or his or her
spouse or lineal descendants. The term Transfer also shall not include the
transfer of Stock to Burns pursuant to an action to foreclose on Stock subject
to that certain Pledge Agreement of even date herewith executed by Hauff in
favor of Burns, and any pledge of stock in connection with the consummation of
the transactions contemplated by the Purchase Agreement.
1.3 Shareholder. The terms "Shareholder" and "Shareholders"
shall include the undersigned shareholders and any person who has acquired Stock
in the Corporation and has agreed in writing to be bound by the terms of this
Agreement.
2. Term of Agreement. This Agreement shall be effective as of the date
hereof and shall remain in force so long as there remain at least two (2)
Shareholders subject to this Agreement or shall sooner terminate upon (a) the
written agreement of all of the Shareholders, (b) the bankruptcy, receivership
or dissolution of the Corporation, or (c) the effective date of a primary, firm
commitment underwritten public offering by the Corporation of shares of common
stock.
3. Restrictions on Transfers. Except as otherwise provided in this
Agreement or as agreed upon in writing by all the Shareholders, no Shareholder
shall Transfer or permit to be Transferred any or all of the shares of Stock now
owned or hereafter acquired by such Shareholder, and any attempted Transfer in
violation of this Agreement shall be void.
4. Voluntary Transfers.
4.1 Bona Fide Offer. If at any time a Shareholder (the
"Transferor Shareholder") wishes to make an offer to Transfer all or part of
such Shareholder's Stock to another Shareholder or to a third person, or has
received an offer with respect thereto, which offer such Shareholder wishes to
accept (in either case, the "Offer"), such Shareholder shall deliver a written
notice to the Corporation and to the other Shareholders containing the proposed
terms and conditions of the Offer, including, without limitation, the number of
shares of Stock to be Transferred, the price for the shares, the terms of
payment, and the name and address of the proposed Transferee. At the request of
the Corporation and/or the remaining Shareholders, as the case may be, the
Transferor Shareholder shall demonstrate to the reasonable satisfaction of the
Board of Directors of the Corporation that the Offer is bona fide.
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4.2 Corporation's First Right to Purchase. If the proposed
Transfer is other than a Pledge, the Corporation shall have the right, for
forty-five (45) days after receipt of a notice of proposed Transfer, to purchase
or acquire the Stock referred to in the notice on the same terms and conditions
as stated in the Offer. For example, without limiting the generality of the
foregoing, if the Offer is an "all or nothing" offer for all of the Stock held
by the Transferor Shareholder, or for a stated lesser number of shares, the
Corporation (or the other Shareholders, as provided below) must similarly
acquire either all or none of the Stock subject to the Offer. If and to the
extent that the Corporation does not exercise its right to purchase such Stock,
the other Shareholders shall have the right to purchase the Stock referred to in
the notice for a period of fifteen (15) days after the Corporation's right to
purchase is waived or expires.
4.3 Pledge. If the proposed Transfer is a pledge or
hypothecation, the Corporation shall have the right for thirty (30) days after
receipt of a notice of the proposed Transfer to receive such Transfer upon
granting a loan to the pledgor Shareholder on the same terms and conditions as
stated in the loan described in the notice of proposed Transfer. If and to the
extent that the Corporation does not exercise its right to receive such
Transfer, the other Shareholders shall have the right to receive such Transfer
referred to in the notice for a period of thirty (30) days after the
Corporation's right to receive such Transfer is waived or expires, upon granting
a loan to the pledgor Shareholder on such terms and conditions as stated in the
loan described in the notice of proposed Transfer. Upon the sale, assignment, or
foreclosure of Stock that has been pledged the Stock shall be treated as if such
Stock were the subject of an Offer, and shall be subject to the rights of the
Corporation and the Shareholders under this Agreement, treating the pledgor
Shareholder and not the pledgee as the Transferor Shareholder.
4.4 Shareholders' Next Right to Purchase. If more than one
Shareholder wishes to exercise the right to purchase or receive a pledge, each
Shareholder shall have the right to purchase or acquire, or receive a pledge of
an amount of the Stock to be Transferred in the proportion that such
Shareholder's Stock bears to the total Stock then owned by all of the
Shareholders, excluding Stock owned by the Transferor Shareholder and excluding
Stock owned by any person who has waived the right to purchase or receive a
pledge of the Transferor Shareholder's Stock or has permitted such right to
expire.
4.5 Transferor Free to Sell. The foregoing rights to purchase
or receive a pledge shall be exercised, if at all, by written notice of exercise
to the Transferor Shareholder, within the period specified above. If the
Corporation and
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the Shareholders allow to expire, or waive, their respective rights to purchase
or receive a pledge of all or part of any Stock to be Transferred, the
Transferor Shareholder may proceed with the proposed Transfer (to the extent
such rights are not exercised) in accordance with the terms and conditions and
to the person described in the notice to the Corporation and Shareholders, but
not otherwise; provided, however, that if the proposed Transfer does not occur
within one hundred eighty (180) days after all rights to purchase or receive a
pledge have been waived or expire, or if any change is made in the terms of the
Offer, the proposed Transfer may not be made unless the Transferor Shareholder
first again notifies the Corporation and Shareholders and permits the
Corporation and Shareholders to exercise their rights to purchase or receive a
pledge as provided above.
4.6 Closing. Each purchase by, or pledge of Stock to, the
Corporation or a Shareholder under the terms of this Section 4 shall be closed
within thirty (30) days after the notice of exercise by the Corporation or
Shareholder hereunder, or, if later, when specified in the Offer, unless the
purchase price has not yet been determined pursuant to Section 7, in which case
the purchase shall close within ten (10) days after the final determination of
the purchase price.
4.7 Transferee to be Bound. Despite the waiver or expiration
of the rights of the Corporation or the Shareholders to purchase or receive a
pledge hereunder in any instance, any Transferee of such shares of Stock shall
agree, or shall have agreed, in writing to be bound by the terms of this
Agreement as a Shareholder, unless and to the extent each other remaining
Shareholder waives in writing all or a portion hereof.
5. Involuntary Transfers. Upon involuntary Transfer of all or any
portion of a Shareholder's Stock to anyone other than a Shareholder including,
but not limited to, Transfer by court proceedings on attachment, garnishment,
bankruptcy, receivership or under any other debtor relief law, or by execution
on a judgment; Transfer because of insolvency or the making of any general
assignment for the benefit of creditors; marital dissolution (including consent
decrees); the death of a Shareholder's spouse (except when a will, trust, or
laws of intestate succession would apply to pass all of the spouse's rights and
title in the Stock to the Shareholder who is the surviving spouse); or any court
order or private divestiture not otherwise covered herein, such Shareholder
shall immediately give written notice to the Corporation. Such Stock shall
thereupon (or upon the Corporation's otherwise receiving notice and confirmation
of any such involuntary Transfer) be deemed to be subject to an Offer, and the
Corporation and the other Shareholders
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may elect to purchase all or part of such Stock in the manner and during the
time periods specified in Section 4 above as if the Stock were proposed to be
sold. The purchase price for the Stock shall be the Price (as defined in Section
7 below) and the terms of any such sale shall be as set forth in Section 8
below. If the Corporation and the other Shareholders allow to expire or waive
their rights to purchase as to all or part of such Stock, the involuntary
Transfer of such remaining Stock may be effected to the extent such rights are
not exercised, provided that any Transferee of such shares of Stock shall agree,
or shall have agreed, in writing to be bound by the terms of this Agreement as a
Shareholder.
6. Transfers Upon Death. Upon the death of a Shareholder, none of such
Shareholder's Stock may be Transferred by will, trust, or other document, or by
the law of intestate succession, except as provided herein, and the
Shareholder's heirs, executor, administrator or personal representative (as the
case may be) shall give written notice of such event to the Corporation within
ninety (90) days of the date of death. Upon receipt of such notice (or upon the
Corporation's otherwise receiving notice and confirmation of any such event),
the Stock of such Shareholder shall be deemed to be subject to an Offer, and the
Corporation and the other Shareholders may elect to purchase all or part of such
Stock in the manner and during the time periods specified in Section 4 above as
if the Stock were proposed to be sold. The purchase price for the Stock shall be
the Price (as defined in Section 7 below) and the terms for any such sale shall
be as set forth in Section 8 below. If the Corporation and the other
Shareholders allow to expire or waive their rights to purchase as to all or part
of such Stock, the Stock (or the part subject to the expiration or waiver) may
be Transferred by will, trust, or other document, or by the laws of intestate
succession, provided that all Transferees of such Stock shall agree, or shall
have agreed, in writing to be bound by the terms of this Agreement as
Shareholders.
7. Valuation.
7.1. Fair Market Value. The purchase price to be paid for the
Stock pursuant to Sections of this Agreement referencing this Section 7 shall be
equal to the per share fair market value on the date a purchase obligation
becomes effective, determined as provided herein (the "Price"). The Price shall
be determined without regard to the minority or majority ownership interest
involved, and to the status of the Corporation after the event triggering the
purchase of such Stock.
7.2 Agreement on Price. If the transferring Shareholder (or,
if applicable, such Shareholder's executor or administrator or personal
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representative) (the "Seller") and the Corporation (and/or, if applicable, the
purchasing Shareholder(s)) (the "Purchasers") are able to reach mutual agreement
as to the Price, such agreed Price shall govern. If some but not all of the
Purchasers and the Seller so agree, their agreement shall be binding upon them,
and the following appraisal provisions shall apply only to those who do not so
agree. If the Seller and the Purchasers cannot agree on a Price within sixty
(60) days after the giving of the last of the effective notices of exercise by
the Purchasers (the "Notice Date"), the Price shall be determined by an
independent appraiser appointed by the Seller and the Purchasers within thirty
(30) days after the Notice Date.
7.3 Appraiser Costs. Seller and the Purchasers shall share
equally the cost and expenses of the appraiser they appoint. Any Seller(s) and
Purchaser(s) who reached agreement as to the Price at any stage of the
pre-appraisal or appraisal process shall not bear any appraisal expenses
incurred following notice of such agreement to the other Sellers and Purchasers.
If, in any instance, there are more than one Seller or more than one Purchaser,
decisions hereunder for the Sellers and the Purchasers, respectively, shall be
made by a majority in interest, determined on a per-capita basis; provided,
however, that no person shall be obligated to buy or sell Stock at an agreed
Price unless such person has agreed to such Price.
8. Terms of Purchase. The purchase price of Stock purchased pursuant to
Sections of this Agreement referencing this Section 8 shall be paid in cash at
closing. The date and place of closing for each such purchase and sale shall be
established by agreement of the Purchasers and Seller, but closing shall occur
not later than one-hundred twenty (120) days after the date of a timely election
given or received, as applicable, for purchase of the Stock.
9. Liens, Encumbrances, Taxes. All Stock sold under any of the
provisions of this Agreement shall be duly endorsed and delivered at closing to
the Purchasers free and clear of all taxes, debts, claims, judgments, liens or
encumbrances whatsoever.
10. Trillium's Right to Require Sale of the Corporation. If Trillium
seeks to take the Corporation public or to effect a transaction involving a bona
fide sale of the Corporation to an unrelated third party or parties, the
Corporation and other Shareholders shall take all actions required to assist
Trillium in effecting such sale transaction, including without limitation
Transferring or agreeing to Transfer their Stock to persons designated by
Trillium at a per share price equal to that at which Trillium is Transferring
its Stock.
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11. Carry Along Rights. If at any time Trillium desires to Transfer any
of its Stock to a third party, Trillium may not effect such a Transfer unless it
complies with the conditions set forth in Section 4 above and the following
conditions, which allow other Shareholders to Transfer their Stock to Trillium's
proposed transferor on the same terms and conditions as the proposed Trillium
Transfer:
(a) Trillium shall deliver a written notice (the "Carry-Along
Notice") to all the other Shareholders who are parties hereto which shall
contain the terms of the proposed sale, including but not limited to, (i)
Trillium's intention to enter into such a transaction, (ii) the names and
addresses of the other prospective parties, (iii) the number of shares of Stock
to be transferred by Trillium, (iv) the terms and conditions of the contemplated
Transfer, including the consideration to be received by Trillium, and (v) the
expected closing date of the Transfer.
(b) Upon receipt of the Carry-Along Notice, each Shareholder
may elect to participate in the Transfer by delivering a written notice to
Trillium within twenty (20) days of receipt of the Carry-Along Notice. Each
Shareholder may elect to Transfer all or part of their Stock then held or which
such Shareholder may acquire under then outstanding options; provided, however,
the maximum number of shares of Stock which a Shareholder may elect to Transfer
in the proposed Trillium transaction shall be the product of the following: (i)
the total number of shares of Stock then owned by the Shareholder (ii)
multiplied by a fraction the numerator of which is the number of Shares of Stock
to be Transferred by Trillium and the denominator of which is the total number
of shares of Stock then owned by Trillium. Notwithstanding the preceding
sentence, in any transaction where the Transfer of Stock by Trillium will result
in the transfer of control of the Corporation, a Shareholder may elect to sell
any or all of such Shareholder's Stock in such transaction.
12. Preemptive Rights.
12.1 Right to Acquire Pro Rata Share. If the Corporation
proposes to issue equity securities (including securities convertible into or
exchangeable or exercisable for equity securities) to any person or entity, or
proposes to issue options, warrants or other rights to acquire equity securities
of the Corporation, each Shareholder shall have the right, at the same price and
on the same terms as those offered to such person or entity, to acquire up to
such Shareholder's pro rata share of such offered equity securities, which shall
be equal to the number of equity securities to be offered by the Corporation
multiplied by a fraction, the numerator of which is the number of shares of
voting capital stock of the
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Corporation held by such Shareholder and the denominator of which is the number
of shares of voting capital stock of the Corporation then outstanding.
12.2 Notice of Proposed Issuance of Equity Securities. At
least twenty (20) days prior to any proposed issuance of equity securities, the
Corporation shall notify each Shareholder of such proposed issuance. Such notice
shall include the name and address of the proposed purchaser, the number and
type of equity securities to be issued, the terms and conditions of the proposed
issuance, including the purchase price, and the expected closing date of the
issuance, and an offer to each Shareholder to purchase such Shareholder's pro
rata share of the equity securities so offered. Each Shareholder shall have
fifteen (15) days within which to notify the Corporation and each other
Shareholder that it desires to purchase its pro rata share of such offered
equity securities.
12.3 Exceptions. Provided the Corporation shall not be
required to offer securities to any Shareholder who shall not at the time be an
accredited investor, as defined in Regulation D of the Securities Act of 1933,
as amended, the provisions of this Section 12 shall not apply to issuances of
equity securities (i) in connection with the grant or exercise of stock options
under any stock option plan approved by the Corporation's Board of Directors so
long as such plan does not authorize the issuance of stock constituting more
than ten percent (10%) of the issued and outstanding Stock of the Corporation,
(ii) in connection with the exercise by Hauff of stock options granted pursuant
to that certain Amended and Restated Option Agreement by and between Hauff and
the Investors of even date herewith, (iii) in a public offering, or (iv) in
connection with the bona fide acquisition by the Corporation of a business or
property.
12.4 Waiver. The preemptive rights of all the Shareholders may
be waived by the affirmative vote of holders of ninety-five percent (95%) of the
shares of the Shareholders then entitled to vote.
13. Composition of the Board of Directors.
13.1 Size; Membership. The Board of Directors of the
Corporation shall consist of five members. Three members of the Board of
Directors shall be designated by Trillium, one by Burns, and one by Hauff.
13.2 Replacement of Directors. Each of Trillium, Burns and
Hauff shall have the right to designate any replacement for a director
designated by them in accordance with Section 12.1 at the termination of such
director's term or upon death, resignation, retirement, disqualification,
removal from office or other
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cause. Pursuant to the provisions of Section 23B.07.320 of the Washington
Business Corporations Act, Burns may also designate either David McClinton or
Richard Padden to act in his stead through a director proxy.
14. Remedies. The parties agree that they will not have an adequate
remedy at law for the breach of this Agreement because, among other reasons, the
Stock cannot readily be purchased or sold on the open market. The parties shall
have available for any breach of this Agreement the remedies of specific
performance and injunctive relief, together with all other remedies at law and
in equity. No waiver of or forbearance to enforce any right or provision hereof
shall be binding unless in writing and signed by the party to be bound, and no
such waiver or forbearance in any instance shall apply to any other instance or
any other right or provision.
15. Information Rights. As soon as practicable after the end of each
fiscal year beginning with the fiscal year ending December 31, 1994, and as soon
as practicable after the end of each fiscal quarter beginning with the first
fiscal quarter to end after the date hereof, the Corporation shall provide each
Shareholder with consolidated balance sheets of the Corporation and of its
sister corporation PRO-TEC, Inc., a Washington Corporation, as of the end of
such fiscal period, and consolidated statements of operations, stockholders'
equity and cash flows of such corporations for such period, prepared in
accordance with U.S. generally accepted accounting principles consistently
applied and setting forth in each case in comparative form the figures for the
previous fiscal year or quarter, as the case may be, all in reasonable detail
and, in the case of the annual fiscal year end financial statements only,
audited by independent auditors of national standing selected by the
Corporation. The Corporation shall also send to all Shareholders all shareholder
communications and press releases upon issuance by the Corporation.
16. Shareholder Loans. If a Shareholder makes a loan to the
Corporation, such loan may contain commercially reasonable terms and conditions
including the pledge of Corporation collateral to secure repayment of the loan;
provided such loan transaction is approved by a majority of the members of the
Board of Directors of the Corporation who were not designated by the Shareholder
making the loan.. If the Corporation defaults on its obligation to repay the
loan, the lending Shareholder shall be entitled to declare the entire unpaid
principal balance and all accrued and unpaid interest thereon immediately due
and payable and may proceed to protect and enforce its rights either by suit in
equity and/or law or any other appropriate proceedings, whether for the specific
performance of
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any covenant or agreement contained in any of the loan documents, or for
foreclosure against the collateral.
17. Modification or Termination. This Agreement may not be modified or
terminated orally, and no modification, termination, amendment, or attempted
waiver shall be valid unless in writing signed by all the parties hereto.
18. Endorsement on Stock Certificates. Upon signing this Agreement, the
Shareholders shall temporarily surrender their Stock certificates to the
Corporation, and the Corporation shall cause the following endorsement to be
placed thereupon before returning such certificates:
THE RIGHT OF SALE, ASSIGNMENT, TRANSFER, ENCUMBRANCE, PLEDGE, OR ANY OTHER
DISPOSITION OF THE SHARES OF STOCK REPRESENTED BY THIS CERTIFICATE IS RESTRICTED
BY, AND SUBJECT TO, THE TERMS AND PROVISIONS OF AN AGREEMENT DATED
__________________, 199__. A COPY OF THIS AGREEMENT IS ON FILE WITH THE
SECRETARY OF THE CORPORATION AND AVAILABLE FOR INSPECTION ON REQUEST.
All certificates representing shares of Stock issued or Transferred subsequent
to the date hereof shall, if the recipient thereof is or shall be bound by the
terms of this Agreement as a Shareholder, bear the above legend.
19. Notices. All notices, offers, acceptances, requests, or other
communications hereunder to the Shareholders or the Corporation shall be in
writing and shall be deemed to have been duly given if delivered in person or
mailed certified or registered to the parties at the addresses designated in the
stock records of the Corporation, or to such other addresses as any party hereto
shall designate to the Corporation in writing. Any such communication to the
Corporation shall be delivered or mailed as described above to it at the address
on the signature page, or to such other address as shall be designated by the
Board of Directors and notice of which is personally delivered or sent by
certified or registered mail to the Shareholders. Notices and other
communications shall be deemed received and effective upon receipt or when
receipt is refused.
20. Termination of Interest. Upon the sale of all of a Shareholder's
Stock pursuant to the terms of this Agreement, all rights conferred upon that
Shareholder under this Agreement shall immediately terminate.
21. Successors and Assigns. The terms and conditions of this Agreement
shall inure to the benefit of and shall be binding upon the heirs,
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personal representatives, successors, and assigns of the parties hereto, and no
signature or other indication of assent by any such person shall be required as
a prerequisite to enforceability.
22. Implementation of Agreement. Each Shareholder agrees at all times
to vote such Shareholder's Stock (or, if applicable, to direct the trustee of
such Shareholder's respective grantor trust to vote its Stock) and to otherwise
exercise any authority or control now or hereafter enjoyed as an officer,
director, or participant in the Corporation so as to ensure the complete
performance and execution of each and every provision of this Agreement
according to its terms.
23. Costs and Expenses of Enforcement. If suit is brought to interpret
or enforce any term or provision of this Agreement, or if any dispute among the
parties is settled by agreement of the parties, the prevailing party or parties
in either case shall, in addition to any other relief to which such party or
parties may be entitled, be awarded against the other party or parties such
prevailing party or parties' attorneys fees and costs reasonably and actually
incurred.
24. Governing Law. This Agreement shall be governed for all purposes by
the laws of the State of Washington. Venue for any action shall lie in King
County, Washington.
25. Severability. Each term and provision of this Agreement is intended
to be enforced to the maximum extent permitted by applicable law. If any term or
provision of this Agreement, or the applicability thereof to any person or
circumstances, shall to any extent be invalid or unenforceable, the remainder of
this Agreement, or the application of such term or provision to persons or
circumstances other than those as to which it is held invalid or unenforceable,
shall not be affected thereby and shall continue in full force and effect.
26. Entire Agreement. This Agreement constitutes the entire agreement
among the parties with respect to the disposition of shares of Stock of the
Corporation and supersedes all prior or contemporaneous written or oral
agreements with respect thereto.
27. Counterparts. This Agreement may be signed in one or more
counterparts, each of which may be termed an original, but all of which together
shall constitute one Agreement.
Page 11
<PAGE> 12
28. Dispute Resolution. Any controversy, claim, or dispute arising out
of or relating to this Agreement, or the alleged breach hereof shall be resolved
by binding arbitration by one arbitrator subject to the sole jurisdiction of the
Judicial Arbitration and Mediation Service of King County, Washington or another
arbitration service mutually acceptable to the parties (J.A.M.S.). If the
parties hereto fail to agree on selection of an arbitrator, any party may
petition the presiding judge of the Superior Court of King County, Washington to
appoint a member of J.A.M.S. as an arbitrator. Thereafter, the arbitrator shall
permit a period of open and free discovery, including the taking of depositions
and will promptly conduct an arbitration hearing. It is the intent of the
parties hereto that an arbitration hearing be concluded within 90 days of the
appointment of the arbitrator. The arbitrator shall have broad authority to
fashion any legal or equitable remedy including the authority to award specific
performance. The arbitrator will render a final and binding decision within ten
days of the conclusion of the arbitration hearing.
After the arbitration award being rendered, it may be entered
in any court of competent jurisdiction and shall constitute a final adjudication
of all matters submitted to arbitration. If any party at any time subsequent to
execution of this Agreement refuses to comply with the arbitration provisions of
this Section, any party may make specific application to the Superior court of
King County, Washington to compel the party to submit to arbitration in
accordance with the terms of this Section.
Nothing in this Section 28, however, shall deprive a court of
competent jurisdiction of the authority to apply a temporary restraining order
or preliminary injunction prohibiting a violation of this Agreement prior to any
arbitration proceeding.
Page 12
<PAGE> 13
IN WITNESS WHEREOF, the undersigned have executed this Shareholders
Agreement as of the day and year first above written.
The Corporation: GARGOYLES, INC.,
a Washington corporation
Address: 5866 South 194th Street
Kent, WA 98032
By: /s/ Douglas B. Hauff
--------------------------------
Its: President
-------------------------------
Shareholders: TRILLIUM CORPORATION,
a Washington corporation
Address: 1313 Commercial Street
Bellingham, WA 98225
By: /s/ Erik J. Anderson
--------------------------------
Its: Erik Anderson, Co-President
-------------------------------
/s/ Dennis Burns
-----------------------------------
Dennis Burns
Address: Star Route
Long Creek, Oregon 97856
/s/ Douglas B. Hauff
-----------------------------------
Douglas Hauff
Address: The Highlands
Seattle, WA 98177
<PAGE> 14
/s/ Gary Waterman
-----------------------------------
Gary Waterman
Address: 1191 2nd Avenue, Suite 2100
Seattle, WA 98101
THE ARTHUR KERN REVOCABLE TRUST
U/A DATED DECEMBER 7, 1992
By: /s/ Arthur H. Kern
--------------------------------
Its: Arthur H. Kern, Trustee
-------------------------------
Address: 50 Francisco Street, Suite 490
San Francisco, CA 94133
/s/ Bruce Hosford
-----------------------------------
Bruce Hosford
Address: The Highlands
Seattle, WA 98177
/s/ Tim Buckley
-----------------------------------
Tim Buckley
Address: The Highlands
Seattle, WA 98177
/s/ Allen Shoup
-----------------------------------
Allen Shoup
Address: The Highlands
Seattle, WA 98177
<PAGE> 15
/s/ John C. Rudolf
-----------------------------------
John C. Rudolf
Address: The Highlands
Seattle, WA 98177
/s/ Stan Walderhaug
-----------------------------------
Stan Walderhaug
Address: 21623 35th SE
Bothell, WA 98021-7834
/s/ Peter von Reichbauer
-----------------------------------
Peter von Reichbauer
Address: King County Council
516 Third Avenue, 12th Floor
Seattle, WA 98104
/s/ Steve Kingma
-----------------------------------
Steve Kingma
Address: 5866 S. 194th Street
Kent, WA 98032
/s/ David Jobe
-----------------------------------
David Jobe
Address: 5866 S. 194th Street
Kent, WA 98032
<PAGE> 16
/s/ Tom Johnson
-----------------------------------
Tom Johnson
Address: 5866 S. 194th Street
Kent, WA 98032
/s/ Gary Gigot
-----------------------------------
Gary Gigot
Address: 19965 NE 129th Street
Woodinville, WA 98072
/s/ Robert E. Manne
-----------------------------------
Robert E. Manne
Address: 8814 N. Mercer Way
Seattle, WA 98040
<PAGE> 17
[Consents of the Shareholders spouses have been omitted and will be filed
upon request of the Securities and Exchange Commission]
<PAGE> 18
EXHIBIT A
SHAREHOLDERS LIST
GARGOYLES COMMON STOCK
AT $8.97916 PER SHARE
<TABLE>
<CAPTION>
Investor No. of Total Purchase
-------- Shares Price
------ -----
<S> <C> <C>
Trillium Corporation 479,167 $4,302,514
Gary Waterman 18,208 163,496
Peter Von Reichbauer 4,313 38,723
Arthur H. Kern, Trustee of the Art 7,188 64,538
Kern Revocable Trust u/a dated
December 7, 1992
John Rudolf 6,229 55,933
Doug Hauff 14,375 129,075
Steve Kingma 9,583 86,050
David Jobe 9,583 86,050
Tom Johnson 4,792 43,025
Stan Walderhaug 2,396 21,513
Gary Gigot 3,354 30,118
Robert Manne 2,396 21,513
Bruce Hosford 6,229 55,933
Tim Buckley 4,792 43,025
Allen Shoup 2,396 21,513
</TABLE>
<PAGE> 1
EXHIBIT 10.30
GARGOYLES, INC.
AMENDMENT TO SHAREHOLDERS AGREEMENT
This Amendment to Shareholders Agreement (this "Agreement") is made as
of December 8, 1995, among Gargoyles, Inc., a Washington corporation (the
"Company"), and the shareholders of the Company listed on the attached Exhibit A
(the "Shareholders").
RECITALS
A. The Shareholders own stock in the Company as set forth in the
Shareholder List attached hereto as Exhibit A.
B. The Company and the Shareholders previously entered into that
certain Shareholders Agreement dated as of March 22, 1995 (the "Prior
Agreement").
C. On the terms and subject to conditions of this Agreement, the
Company and the Shareholders desire to amend the Prior Agreement as set forth
herein.
AGREEMENT
In consideration of the foregoing premises and of their mutual promises
as set forth herein, the parties hereto agree as follows:
1. DEFINITION OF "TRANSFER"
The definition of the term "Transfer" in Section 1.2 of the Prior
Agreement is hereby amended and restated in its entirety as set forth below in
this Section 1:
The term "Transfer" or derivatives thereof shall mean any voluntary or
involuntary disposition of any interest in Stock, including, without limitation,
sale, exchange, transfer, assignment, hypothecation, pledge or gift or by
operation of law, resulting from death or otherwise. Such term shall also
include the establishment of ownership in joint tenancies of any description and
a change in control of any entity which owns Stock. The term "Transfer" shall
not include any "Permitted Transfer" (as defined in Section 1.4 hereof) or any
transfer to Burns pursuant to an action to foreclose on Stock subject to that
certain Pledge Agreement dated as of March 22, 1995 executed by Hauff in favor
of Burns, and any pledge of Stock in connection with the consummation of the
transactions contemplated by the Stock Purchase Agreement dated as of March 22,
1995.
<PAGE> 2
2. DEFINITION OF "PERMITTED TRANSFER"
The following definition of "Permitted Transfer" is hereby added to the
Prior Agreement as a new Section 1.4 thereof:
The term "Permitted Transfer" and "Permitted Transfers" shall mean (i)
any transfer of Stock by a Shareholder or Permitted Transferee to such
Shareholder's or Permitted Transferee's Affiliates (as defined in Section 1.5
below), among such Shareholder's or Permitted Transferee's Affiliates or from
such Shareholder's or Permitted Transferee's Affiliate to such Shareholder or
Permitted Transferee, provided, however, in the case of any transfer to an
Affiliate of a Shareholder or Permitted Transferee, the transferee shall
retransfer the Stock received in such Permitted Transfer to the transferor
immediately prior to the time the Affiliate ceases to be an Affiliate of the
transferor, provided, further, that no such retransfer shall be required so long
as all the persons owning the voting securities of such Affiliate are Permitted
Transferees (as defined below) otherwise than by virtue of this clause (i); (ii)
any transfer to any other Shareholder, or to a party that would be a Permitted
Transferee of another Shareholder, in which a majority of the consideration to
be received for the Stock proposed to be transferred consists of unique assets,
including without limitation intellectual property or real property; (iii) any
transfer of Stock to a trust, family partnership or limited liability company
the beneficiaries of which include only such Shareholder or Permitted Transferee
or such Shareholder's or Permitted Transferee's spouse, parents, siblings,
lineal descendants, adopted children, employees or charitable foundations
established by such Shareholder or Permitted Transferee; (iv) any transfer by
gift to any of the persons referred to in (iii) above; (v) any pledge to secure
a bona fide obligation for borrowed money, provided that the pledgee agrees to
be bound by this Agreement; (vi) any transfer upon the dissolution or
liquidation of a Shareholder or Permitted Transferee or involving the
distribution without consideration to such Shareholder's or Permitted
Transferee's shareholders, partners, retired partners or estates on their
behalf; (vii) any transfer of Stock pursuant to Section 10 or 11 hereof; and
(viii) any transfer by any Shareholder or Permitted Transferee to directors,
executive officers and bona fide full time employees of any Shareholder or
Permitted Transferee or Affiliates thereof or to a plan, trust, partnership,
limited liability company or other entity established for their benefit (any
such transferee described in clauses (i) - (viii) being hereafter referred to as
a "Permitted Transferee").
3. DEFINITION OF "AFFILIATE"
The following definition of "Affiliate" is hereby added to the Prior
Agreement as a new Section 1.5 thereof:
-2-
<PAGE> 3
The term "Affiliate" shall mean any party controlling, controlled by or
under common control with such party, whether by ownership of voting securities,
by contract or otherwise.
4. EXCEPTIONS TO PREEMPTIVE RIGHTS
The following two additional exceptions are hereby added to the end of
Section 12.3 of the Prior Agreement (with appropriate changes to punctuation in
the Prior Agreement):
(v) in connection with the grant of restricted securities to the
management or employees of the Corporation pursuant to an incentive compensation
program, or (vi) in connection with licensing, endorsement or similar
transactions not entered into primarily for financing purposes, provided, such
shares granted under subsections (v) and (vi) hereof do not exceed 97,423
shares.
5. BOARD SIZE
Section 13.1 of the Prior Agreement relating to the size of the Board
of Directors is hereby amended and restated in its entirety as set forth below:
The Board of Directors of the Corporation shall consist of five
members, or such larger number of members as may be set by the Board of
Directors consistent with the Bylaws of the Corporation. Three members of the
Board of Directors shall be designated by Trillium (so long as Trillium or its
Permitted Transferees are shareholders of the Corporation), one by Burns (so
long as Burns or his Permitted Transferees are shareholders of the Corporation),
and one by Hauff (so long as Hauff or his Permitted Transferees are shareholders
of the Corporation).
6. WAIVER
The parties hereby consent in all respects to the previous transfer by
Trillium of shares of Stock to Trillium Investors, LLC, an Affiliate of
Trillium, a transfer which is otherwise permitted under Section 1.4, as amended
by this Amendment, and waive any noncompliance with the Prior Agreement which
such transfer may have involved.
7. AMENDMENT AND TERMINATION
No modification, termination or amendment of this Agreement shall be
valid unless in writing signed by all the parties hereto, and no waiver of any
provision of this Agreement shall be effective unless in writing and signed by
the party against whom the waiver is sought to be enforced.
-3-
<PAGE> 4
8. SUCCESSORS AND ASSIGNS
The terms and conditions of this Agreement shall inure to the benefit
of and shall be binding upon the heirs, personal representatives, successors,
and assigns of the parties hereto, and no signature or other indication of
assent by any such person shall be required or as a prerequisite to
enforceability. References to Trillium, Hauff and Burns in the Prior Agreement
and in this Amendment shall be deemed to include any Permitted Transferees or
other successors to such parties.
9. GOVERNING LAW
This Agreement shall be governed for all purposes by the laws of the
State of Washington. Venue for any action shall lie in King County, Washington.
10. ENTIRE AGREEMENT
This Agreement and the Prior Agreement constitute the entire agreement
among the parties with respect to the disposition of shares of Stock of the
Company and supersede all prior or contemporaneous written or oral agreements
with respect thereto.
11. COUNTERPARTS
This Agreement may be signed in one or more counterparts, each of which
may be termed an original, but all of which together shall constitute one
Agreement.
-4-
<PAGE> 5
IN WITNESS WHEREOF, the undersigned have executed this Agreement as of
the date and year first above written.
GARGOYLES, INC.
By: /s/ Douglas B. Hauff
------------------------------------------
Its: President
------------------------------------
Address: 5866 S. 194th St.
Kent, WA 98032
SHAREHOLDERS:
TRILLIUM CORPORATION
By: /s/ Erik J. Anderson
------------------------------------------
Its: Co-President
-----------------------------------
Address: 1313 Commercial Street
Bellingham, WA 98225
TRILLIUM INVESTORS, LLC II
By: Trillium Corporation, its Managing Member
By: /s/ Timothy Potts
------------------------------------------
Its: Sr. Vice President
----------------------------------
Address: c/o Trillium Corporation
1313 Commercial Street
Bellingham, WA 98225
-5-
<PAGE> 6
/s/ Dennis Burns
------------------------------------------
Dennis Burns
Address: Supreme Corq
19039 62nd Ave. S.
Kent, WA 98032
<PAGE> 7
EXHIBIT A
SHAREHOLDER LIST
<TABLE>
<CAPTION>
SHAREHOLDER NO. OF SHARES % OWNERSHIP
- ---------------------------------- ------------- -----------
<S> <C> <C>
Trillium Corporation 104,166 10.4%
Trillium Investors, LLC 479,167 47.8%
Gary Waterman 22,167 2.2%
Peter Von Reichbauer 5,251 0.5%
Arthur H. Kern, Trustee of the Art 8,751 0.9%
Kern Revocable Trust u/a dated
December 7, 1992
John Rudolf 7,583 0.8%
Doug Hauff 67,500 6.7%
Steve Kingma 11,667 1.2%
David Jobe 11,667 1.2%
Tom Johnson 5,833 0.6%
Stan Walderhaug 2,917 0.3%
Gary Gigot 4,083 0.4%
Robert Manne 2,917 0.3%
Bruce Hosford 7,583 0.8%
Tim Buckley 5,833 0.6%
Allen Shoup 2,917 0.3%
Dennis Burns 250,000 24.9%
Dennis Bush 1,334 0.1%
William W. Blackburn 1,334 0.1%
------------
TOTAL 1,002,670
</TABLE>
<PAGE> 1
EXHIBIT 10.31
GARGOYLES, INC.
AMENDMENT TO SHAREHOLDERS AGREEMENT
This Amendment to Shareholders Agreement (this "Agreement") is made as
of December 8, 1995, among Gargoyles, Inc., a Washington corporation (the
"Company"), and the shareholders of the Company listed on the attached Exhibit A
(the "Shareholders").
RECITALS
A. The Shareholders own stock in the Company as set forth in the
Shareholder List attached hereto as Exhibit A.
B. The Company and the Shareholders previously entered into that
certain Shareholders Agreement dated as of March 22, 1995 (the "Prior
Agreement").
C. On the terms and subject to conditions of this Agreement, the
Company and the Shareholders desire to amend the Prior Agreement as set forth
herein.
AGREEMENT
In consideration of the foregoing premises and of their mutual promises
as set forth herein, the parties hereto agree as follows:
1. DEFINITION OF "TRANSFER"
The definition of the term "Transfer" in Section 1.2 of the Prior
Agreement is hereby amended and restated in its entirety as set forth below in
this Section 1:
The term "Transfer" or derivatives thereof shall mean any voluntary or
involuntary disposition of any interest in Stock, including, without limitation,
sale, exchange, transfer, assignment, hypothecation, pledge or gift or by
operation of law, resulting from death or otherwise. Such term shall also
include the establishment of ownership in joint tenancies of any description and
a change in control of any entity which owns Stock. The term "Transfer" shall
not include any "Permitted Transfer" (as defined in Section 1.4 hereof) or any
transfer to Burns pursuant to an action to foreclose on Stock subject to that
certain Pledge Agreement dated as of March 22, 1995 executed by Hauff in favor
of Burns, and any pledge of Stock in connection with the consummation of the
transactions contemplated by the Stock Purchase Agreement dated as of March 22,
1995.
<PAGE> 2
2. DEFINITION OF "PERMITTED TRANSFER"
The following definition of "Permitted Transfer" is hereby added to the
Prior Agreement as a new Section 1.4 thereof:
The term "Permitted Transfer" and "Permitted Transfers" shall mean (i)
any transfer of Stock by a Shareholder or Permitted Transferee to such
Shareholder's or Permitted Transferee's Affiliates (as defined in Section 1.5
below), among such Shareholder's or Permitted Transferee's Affiliates or from
such Shareholder's or Permitted Transferee's Affiliate to such Shareholder or
Permitted Transferee, provided, however, in the case of any transfer to an
Affiliate of a Shareholder or Permitted Transferee, the transferee shall
retransfer the Stock received in such Permitted Transfer to the transferor
immediately prior to the time the Affiliate ceases to be an Affiliate of the
transferor, provided, further, that no such retransfer shall be required so long
as all the persons owning the voting securities of such Affiliate are Permitted
Transferees (as defined below) otherwise than by virtue of this clause (i); (ii)
any transfer to any other Shareholder, or to a party that would be a Permitted
Transferee of another Shareholder, in which a majority of the consideration to
be received for the Stock proposed to be transferred consists of unique assets,
including without limitation intellectual property or real property; (iii) any
transfer of Stock to a trust, family partnership or limited liability company
the beneficiaries of which include only such Shareholder or Permitted Transferee
or such Shareholder's or Permitted Transferee's spouse, parents, siblings,
lineal descendants, adopted children, employees or charitable foundations
established by such Shareholder or Permitted Transferee; (iv) any transfer by
gift to any of the persons referred to in (iii) above; (v) any pledge to secure
a bona fide obligation for borrowed money, provided that the pledgee agrees to
be bound by this Agreement; (vi) any transfer upon the dissolution or
liquidation of a Shareholder or Permitted Transferee or involving the
distribution without consideration to such Shareholder's or Permitted
Transferee's shareholders, partners, retired partners or estates on their
behalf; (vii) any transfer of Stock pursuant to Section 10 or 11 hereof; and
(viii) any transfer by any Shareholder or Permitted Transferee to directors,
executive officers and bona fide full time employees of any Shareholder or
Permitted Transferee or Affiliates thereof or to a plan, trust, partnership,
limited liability company or other entity established for their benefit (any
such transferee described in clauses (i) - (viii) being hereafter referred to as
a "Permitted Transferee").
3. DEFINITION OF "AFFILIATE"
The following definition of "Affiliate" is hereby added to the Prior
Agreement as a new Section 1.5 thereof:
<PAGE> 3
The term "Affiliate" shall mean any party controlling, controlled by or
under common control with such party, whether by ownership of voting securities,
by contract or otherwise.
4. EXCEPTIONS TO PREEMPTIVE RIGHTS
The following two additional exceptions are hereby added to the end of
Section 12.3 of the Prior Agreement (with appropriate changes to punctuation in
the Prior Agreement):
(v) in connection with the grant of restricted securities to the
management or employees of the Corporation pursuant to an incentive compensation
program, or (vi) in connection with licensing, endorsement or similar
transactions not entered into primarily for financing purposes.
5. BOARD SIZE
Section 13.1 of the Prior Agreement relating to the size of the Board
of Directors is hereby amended and restated in its entirety as set forth below:
The Board of Directors of the Corporation shall consist of five
members, or such larger number of members as may be set by the Board of
Directors consistent with the Bylaws of the Corporation. Three members of the
Board of Directors shall be designated by Trillium (so long as Trillium or its
Permitted Transferees are shareholders of the Corporation), one by Burns (so
long as Burns or his Permitted Transferees are shareholders of the Corporation),
and one by Hauff (so long as Hauff or his Permitted Transferees are shareholders
of the Corporation).
6. WAIVER
The parties hereby consent in all respects to the previous transfer by
Trillium of shares of Stock to Trillium Investors, LLC II, an Affiliate of
Trillium, a transfer which is otherwise permitted under Section 1.4, as amended
by this Amendment, and waive any noncompliance with the Prior Agreement which
such transfer may have involved.
7. AMENDMENT AND TERMINATION
No modification, termination or amendment of this Agreement shall be
valid unless in writing signed by all the parties hereto, and no waiver of any
provision of this Agreement shall be effective unless in writing and signed by
the party against whom the waiver is sought to be enforced.
<PAGE> 4
8. SUCCESSORS AND ASSIGNS
The terms and conditions of this Agreement shall inure to the benefit
of and shall be binding upon the heirs, personal representatives, successors,
and assigns of the parties hereto, and no signature or other indication of
assent by any such person shall be required or as a prerequisite to
enforceability. References to Trillium, Hauff and Burns in the Prior Agreement
and in this Amendment shall be deemed to include any Permitted Transferees or
other successors to such parties.
9. GOVERNING LAW
This Agreement shall be governed for all purposes by the laws of the
State of Washington. Venue for any action shall lie in King County, Washington.
10. ENTIRE AGREEMENT
This Agreement and the Prior Agreement constitute the entire agreement
among the parties with respect to the disposition of shares of Stock of the
Company and supersede all prior or contemporaneous written or oral agreements
with respect thereto.
11. COUNTERPARTS
This Agreement may be signed in one or more counterparts, each of which
may be termed an original, but all of which together shall constitute one
Agreement.
<PAGE> 5
IN WITNESS WHEREOF, the undersigned have executed this Agreement as of
the date and year first above written.
GARGOYLES, INC.
By: /s/ Douglas B. Hauff
------------------------------------------
Its: President
-----------------------------------
Address: 5866 S. 194th St.
Kent, WA 98032
SHAREHOLDERS:
TRILLIUM CORPORATION
By: /s/ Erik J. Anderson
------------------------------------------
Its: Co-President
-----------------------------------
Address: 1313 Commercial Street
Bellingham, WA 98225
TRILLIUM INVESTORS, LLC II
By: Trillium Corporation, its Managing
Member
By: /s/ Timothy C. Potts
------------------------------------------
Its: Sr. Vice President
-----------------------------------
Address: c/o Trillium Corporation
1313 Commercial Street
Bellingham, WA 98225
/s/ Douglas B. Hauff
------------------------------------------
Douglas B. Hauff
Address: The Highlands
Seattle, WA 98177
<PAGE> 6
/s/ Tim Buckley
------------------------------------------
Tim Buckley
Address: The Highlands
Seattle, WA 98177
/s/ Gary Gigot
------------------------------------------
Gary Gigot
Address: 19965 NE 129th St.
Woodinville, WA 98072
/s/ Bruce Hosford
------------------------------------------
Bruce Hosford
Address: The Highlands
Seattle, WA 98177
/s/ David Jobe
------------------------------------------
David Jobe
Address: 5866 S. 194th St.
Kent, WA 98032
/s/ Thomas Johnson
------------------------------------------
Thomas Johnson
Address: 5866 S. 194th St.
Kent, WA 98032
<PAGE> 7
THE ARTHUR KERN REVOCABLE
TRUST U/A DATED DECEMBER 7, 1992
By: /s/ Arthur H. Kern
------------------------------------------
Arthur H. Kern, Trustee
Address: 1940 Webster St.
San Francisco, CA 94115
/s/ Steve Kingma
------------------------------------------
Steve Kingma
Address: 5866 S. 194th St.
Kent, WA 98032
/s/ Robert Manne
------------------------------------------
Robert Manne
Address: 701 Fifth Ave., Suite 6600
Seattle, WA 98104
/s/ John Rudolf
------------------------------------------
John Rudolf
Address: The Highlands
Seattle, WA 98177
/s/ Allen Shoup
------------------------------------------
Allen Shoup
Address: The Highlands
Seattle, WA 98177
<PAGE> 8
/s/ Peter von Reichbauer
------------------------------------------
Peter von Reichbauer
Address: King County Council
516 Third Ave., 12th Floor
Seattle, WA 98104
/s/ Stan Walderhaug
------------------------------------------
Stan Walderhaug
Address: 21623 - 35th SE
Bothell, WA 98021
/s/ Gary Waterman
------------------------------------------
Gary Waterman
Address: Waterman Limited
1191 2nd Avenue, Suite 2100
Seattle, WA 98101
/s/ Dennis Bush
------------------------------------------
Dennis Bush
Address: 527 Via Presa
San Clemente, CA 92672
/s/ William W. Blackburn
------------------------------------------
William W. Blackburn
Address: #5 S. Vista de la Luna
Laguna Beach, CA 92677
<PAGE> 9
EXHIBIT A
SHAREHOLDER LIST
<TABLE>
<CAPTION>
SHAREHOLDER NO. OF SHARES % OWNERSHIP
- ---------------------------------- ------------- -----------
<S> <C> <C>
Trillium Corporation 104,166 10.4%
Trillium Investors, LLC 479,167 47.8%
Gary Waterman 22,167 2.2%
Peter Von Reichbauer 5,251 0.5%
Arthur H. Kern, Trustee of the Art 8,751 0.9%
Kern Revocable Trust u/a dated
December 7, 1992
John Rudolf 7,583 0.8%
Doug Hauff 67,500 6.7%
Steve Kingma 11,667 1.2%
David Jobe 11,667 1.2%
Tom Johnson 5,833 0.6%
Stan Walderhaug 2,917 0.3%
Gary Gigot 4,083 0.4%
Robert Manne 2,917 0.3%
Bruce Hosford 7,583 0.8%
Tim Buckley 5,833 0.6%
Allen Shoup 2,917 0.3%
Dennis Burns 250,000 24.9%
Dennis Bush 1,334 0.1%
William W. Blackburn 1,334 0.1%
------------
TOTAL 1,002,670
</TABLE>
<PAGE> 1
10.32
THIS WARRANT AND THE SECURITIES ISSUABLE UPON EXERCISE OR CONVERSION HEREOF HAVE
NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR ANY
APPLICABLE STATE LAWS, AND NO INTEREST THEREIN MAY BE SOLD, DISTRIBUTED,
ASSIGNED, OFFERED, PLEDGED OR OTHERWISE TRANSFERRED UNLESS THERE IS AN EFFECTIVE
REGISTRATION STATEMENT UNDER SUCH ACT AND APPLICABLE STATE SECURITIES LAWS
COVERING ANY SUCH TRANSACTION OR SUCH TRANSACTION IS EXEMPT FROM THE
REGISTRATION REQUIREMENTS OF SUCH ACT AND LAWS.
GARGOYLES, INC.
COMMON STOCK PURCHASE WARRANT
This certifies that, in exchange for $56,000 payable to Gargoyles,
Inc., a Washington corporation (the "Company"), upon issuance hereof, Wally
Walker, or any permitted assignee in accordance with the terms hereof, is
entitled, upon the terms and subject to the conditions hereinafter set forth, at
any time on or after the date hereof and at or prior to 11:59 p.m., Pacific
time, on December 8, 2005 (the "Expiration Time"), but not thereafter, to
acquire from the Company, in whole or from time to time in part, up to 7,000
fully paid and nonassessable shares of Common Stock of the Company ("Warrant
Stock") at a purchase price per share (the "Exercise Price") of $25.00. Such
number of shares, type of security and Exercise Price are subject to adjustment
as provided herein, and all references to "Warrant Stock" and "Exercise Price"
herein shall be deemed to include any such adjustment.
1. EXERCISE OF WARRANT
The purchase rights represented by this Warrant are exercisable by the
registered holder hereof, in whole or in part, at or prior to the Expiration
Time by the surrender of this Warrant and the Notice of Exercise form attached
hereto duly executed to the office of the Company at 5866 South 194th Street,
Kent, Washington 98032 (or such other office or agency of the Company as it may
designate by notice in writing to the registered holder hereof at the address of
such holder appearing on the books of the Company), and upon payment of the
Exercise Price for the shares thereby purchased (by cash or by check or bank
draft payable to the order of the Company or by cancellation of indebtedness of
the Company to the holder hereof, if any, at the time of exercise in an amount
equal to the purchase price of the shares thereby purchased); whereupon the
holder of this Warrant shall be entitled to receive from the Company a stock
certificate in proper form representing the number of shares of Warrant Stock so
purchased.
<PAGE> 2
2. CONVERSION OF WARRANT
The registered holder hereof shall have the right to convert this
Warrant, in whole or in part, at or prior to the Expiration Time, by the
surrender of this Warrant and the Notice of Conversion form attached hereto duly
executed to the office of the Company at the address set forth in Section 1
hereof (or such other office or agency of the Company as it may designate by
notice in writing to the registered holder hereof at the address of such holder
appearing on the books of the Company), into shares of Warrant Stock as provided
in this Section 2. Upon exercise of this conversion right, the holder hereof
shall be entitled to receive that number of shares of Warrant Stock of the
Company equal to the quotient obtained by dividing [(A - B)(X)] by (A), where:
A = the Fair Market Value (as defined below) of one
share of Warrant Stock on the date of conversion of
this Warrant.
B = the Exercise Price for one share of Warrant Stock under
this Warrant.
X = the number of shares of Warrant Stock as to which this
Warrant is being converted.
If the above calculation results in a negative number, then no shares
of Warrant Stock shall be issued or issuable upon conversion of this Warrant.
"Fair Market Value" of a share of Warrant Stock shall mean:
(a) if the conversion right is being exercised in connection with
a transaction specified in Section 9 hereof, the value of the
consideration (determined, in the case of noncash
consideration, in good faith by the Board of Directors of the
Company) to be received pursuant to such transaction by the
holder of one share of Warrant Stock;
(b) if the conversion right is being exercised after the
occurrence of an initial public offering of Common Stock of
the Company, the average of the high and low trading prices
per share of Common Stock as reported by the Nasdaq National
Market (or equivalent recognized source of quotations) for the
five trading days immediately preceding the date the
conversion notice is received by the Company; or
(c) in all other cases, the fair value as determined in good faith
by the Company's Board of Directors.
-2-
<PAGE> 3
Upon conversion of this Warrant in accordance with this Section 2, the
registered holder hereof shall be entitled to receive a certificate for the
number of shares of Warrant Stock determined in accordance with the foregoing.
3. ISSUANCE OF SHARES; NO FRACTIONAL SHARES OR SCRIP
Certificates for shares purchased hereunder or issuable upon conversion
hereof shall be delivered to the holder hereof within a reasonable time after
the date on which this Warrant shall have been exercised or converted in
accordance with the terms hereof. The Company hereby represents and warrants
that all shares of Warrant Stock which may be issued upon the exercise or
conversion of this Warrant will, upon such exercise or conversion, be duly and
validly authorized and issued, fully paid and nonassessable and free from all
taxes, liens and charges in respect of the issuance thereof (other than liens or
charges created by or imposed upon the holder of the Warrant Stock). The Company
agrees that the shares so issued shall be and be deemed to be issued to such
holder as the record owner of such shares as of the close of business on the
date on which this Warrant shall have been exercised or converted in accordance
with the terms hereof. No fractional shares or scrip representing fractional
shares shall be issued upon the exercise or conversion of this Warrant. With
respect to any fraction of a share called for upon the exercise or conversion of
this Warrant, an amount equal to such fraction multiplied by the then current
price at which each share may be purchased hereunder shall be paid in cash to
the holder of this Warrant.
4. CHARGES, TAXES AND EXPENSES
Issuance of certificates for shares of Warrant Stock upon the exercise
or conversion of this Warrant shall be made without charge to the holder hereof
for any issue or transfer tax or other incidental expense in respect of the
issuance of such certificate, all of which taxes and expenses shall be paid by
the Company, and such certificates shall be issued in the name of the holder of
this Warrant or in such name or names as may be directed by the holder of this
Warrant; provided, however, that in the event certificates for shares of Warrant
Stock are to be issued in a name other than the name of the holder of this
Warrant, this Warrant when surrendered for exercise or conversion shall be
accompanied by the Assignment Form attached hereto duly executed by the holder
hereof.
5. NO RIGHTS AS SHAREHOLDERS
This Warrant does not entitle the holder hereof to any voting rights or
other rights as shareholder of the Company prior to the exercise or conversion
hereof.
-3-
<PAGE> 4
6. EXCHANGE AND REGISTRY OF WARRANT
This Warrant is exchangeable, upon the surrender hereof by the
registered holder at the above-mentioned office or agency of the Company, for a
new Warrant of like tenor and dated as of such exchange. The Company shall
maintain at the above-mentioned office or agency a registry showing the name and
address of the registered holder of this Warrant. This Warrant may be
surrendered for exchange, transfer, exercise or conversion, in accordance with
its terms, at such office or agency of the Company, and the Company shall be
entitled to rely in all respects, prior to written notice to the contrary, upon
such registry.
7. LOSS, THEFT, DESTRUCTION OR MUTILATION OF WARRANT
Upon receipt by the Company of evidence reasonably satisfactory to it
of the loss, theft, destruction or mutilation of this Warrant, and in case of
loss, theft or destruction of indemnity or security reasonably satisfactory to
it, and upon reimbursement to the Company of all reasonable expenses incidental
thereto, and upon surrender and cancellation of this Warrant, if mutilated, the
Company will make and deliver a new Warrant of like tenor and dated as of such
cancellation, in lieu of this Warrant.
8. SATURDAYS, SUNDAYS AND HOLIDAYS
If the last or appointed day for the taking of any action or the
expiration of any right required or granted herein shall be a Saturday or a
Sunday or shall be a legal holiday, then such action may be taken or such right
may be exercised on the next succeeding day not a legal holiday.
9. CHANGE OF CONTROL
If at any time the Company proposes to merge or consolidate with or
into any other corporation, effect any reorganization, or sell or convey all or
substantially all of its assets to any other entity, in a transaction in which
the shareholders of the Company immediately before the transaction will own
immediately after the transaction less than a majority of the outstanding voting
securities of the entity (or its parent) succeeding to the business of the
Company, then the Company shall give the holder of this Warrant 20 days' prior
written notice of the proposed effective date of such transaction, and if this
Warrant has not been exercised or converted by or on the effective date of such
transaction, it shall terminate.
-4-
<PAGE> 5
10. RECLASSIFICATION, CONVERSION, ETC.
If the Company at any time shall, by reclassification of securities or
otherwise, change the Warrant Stock into the same or a different number of
securities of any class or classes, this Warrant shall thereafter entitle the
holder to acquire such number and kind of securities as would have been issuable
in respect of the Warrant Stock (or other securities which were subject to the
purchase rights under this Warrant immediately prior to such subdivision,
combination, reclassification or other change) as the result of such change if
this Warrant had been exercised in full for cash immediately prior to such
change. The Exercise Price hereunder shall be adjusted if and to the extent
necessary to reflect such change. If the Warrant Stock or other securities
issuable upon exercise or conversion hereof are subdivided or combined into a
greater or smaller number of shares of such security, the number of shares
issuable hereunder shall be proportionately increased or decreased, as the case
may be, and the Exercise Price shall be proportionately reduced or increased, as
the case may be, in both cases according to the ratio which the total number of
shares of such security to be outstanding immediately after such event bears to
the total number of shares of such security outstanding immediately prior to
such event. The Company shall give the holder prompt written notice of any
change in the type of securities issuable hereunder, any adjustment of the
Exercise Price for the securities issuable hereunder, and any increase or
decrease in the number of shares issuable hereunder.
11. TRANSFERABILITY; SHAREHOLDERS AGREEMENT
Prior to the Expiration Time, neither this Warrant nor any rights
hereunder or interest herein may be transferred by the holder hereof without the
approval of the Company's Board of Directors. As a condition to any future
exercise of this Warrant, in whole or in part, the holder hereof agrees to
become a party to the Shareholders Agreement of the Company dated as of March
22, 1995, as amended, or any successor shareholders agreement or similar
agreement to which shareholders owning at least a majority of the then
outstanding shares of voting stock of the Company may then be parties.
12. REPRESENTATIONS AND WARRANTIES
The Company hereby represents and warrants to the holder hereof that:
(a) during the period this Warrant is outstanding, the Company
will reserve from its authorized and unissued Common Stock a sufficient number
of shares to provide for the issuance of Warrant Stock upon the exercise or
conversion of this Warrant;
-5-
<PAGE> 6
(b) the issuance of this Warrant shall constitute full
authority to the Company's officers who are charged with the duty of executing
stock certificates to execute and issue the necessary certificates for the
shares of Warrant Stock issuable upon exercise or conversion of this Warrant;
(c) the Company has all requisite legal and corporate power to
execute and deliver this Warrant, to sell and issue the Warrant Stock hereunder
and to carry out and perform its obligations under the terms of this Warrant;
(d) all corporate action on the part of the Company, its
directors and shareholders necessary for the authorization, execution, delivery
and performance of this Warrant by the Company, the authorization, sale,
issuance and delivery of the Warrant Stock and the performance of the Company's
obligations hereunder has been taken; and
(e) the Warrant Stock, when issued in compliance with the
provisions of this Warrant and the Company's Articles of Incorporation, will be
validly issued, fully paid and nonassessable, and will be issued in compliance
with all applicable federal and state securities laws.
13. COOPERATION
The Company will not, by amendment of its Articles of Incorporation or
through any reorganization, recapitalization, transfer of assets, consolidation,
merger, dissolution, issue or sale of securities or any other action, avoid or
seek to avoid the observance or performance of any of the terms to be observed
or performed hereunder by the Company, but will at all times in good faith
assist in the carrying out of all the provisions of this Warrant and in the
taking of all such action as may be necessary or appropriate in order to protect
the rights of the holder of the Warrant against impairment.
14. GOVERNING LAW
This Warrant shall be governed by and construed in accordance with the
laws of the State of Washington.
-6-
<PAGE> 7
IN WITNESS WHEREOF, the Company has caused this Warrant to be executed
by its duly authorized officers.
Dated: January 12, 1996
GARGOYLES, INC.
By: /s/ Douglas B. Hauff
----------------------------
Title: President
-------------------------
ACCEPTED:
WALLY WALKER
/s/ Wally Walker
- -----------------------------
-7-
<PAGE> 1
EXHIBIT 10.33
AMENDED AND RESTATED OPTION AGREEMENT
THIS AMENDED AND RESTATED OPTION AGREEMENT (this "Agreement") is made
as of this 17th day of March, 1995, by and between GARGOYLES, INC., a Washington
corporation (the "Corporation"), DENNIS BURNS, the controlling shareholder of
the Corporation ("Burns"), and DOUGLAS B. HAUFF, the President of the
Corporation ("Hauff").
RECITALS
A. The Corporation, Burns and Hauff, are parties to that certain
Employment Agreement dated as of the Fifth day of January, 1994, in which Burns
has granted Hauff an option to purchase ten percent of his shares of common
stock in the Corporation (the "Option Agreement").
B. The Corporation, Burns and Hauff, together with others, are parties
to that certain Stock Purchase Agreement dated March 14, 1995 (the "Stock
Purchase Agreement"). It is a condition to closing the transactions contemplated
by the Stock Purchase Agreement that the provisions of the Option Agreement be
amended.
C. Subject to the terms and conditions of this Agreement, the parties
hereto desire to amend and restate the Option Agreement.
AGREEMENT
NOW, THEREFORE, in consideration of the premises and the mutual
agreements set forth herein, the parties hereto hereby agree as follows:
1. GRANT OF OPTION
Subject to the terms and conditions of this Agreement, Burns hereby
grants to Hauff the option to purchase 100,000 shares of the common stock of the
Corporation owned by Burns at an exercise price of Five Dollars ($5.00) per
share (the "Option").
2. VESTING SCHEDULE
Burns acknowledges and agrees with Hauff that Hauff is vested in
twenty-five percent of the Option as of November 30, 1994, and such portion of
the Option is now exercisable by Hauff. The balance of the Option shall vest and
shall become exercisable according to the following schedule:
<PAGE> 2
<TABLE>
<CAPTION>
DATE ON AND AFTER WHICH PORTION OF TOTAL OPTION
OPTION IS EXERCISABLE WHICH IS EXERCISABLE
----------------------- -----------------------
<S> <C>
November 30, 1995 45%
November 30, 1996 65%
November 30, 1997 85%
November 30, 1998 100%
</TABLE>
3. EXERCISE
Subject to the vesting schedule set forth above, the Option may be
exercised in whole or in part at any time and from time to time; provided,
however, that no fewer than 1000 shares may be purchased upon any exercise
hereunder. An Option shall be exercised by delivery to Burns of written notice
of the number of shares with respect to which the Option is exercised, together
with payment of the exercise price. The exercise price shall be paid in cash, by
wire transfer into an account specified by Burns, or by bank certified or
cashier's check. Upon receipt of the exercise price, Burns shall deliver to
Hauff stock certificates representing the shares exercised, duly endorsed in
blank or accompanied by stock powers duly executed by Burns. During his
lifetime, only Hauff can exercise the Option. Upon his death, his personal
representative may exercise the Option.
4. RIGHTS NOT TRANSFERABLE
The Option and the other rights and privileges conferred hereby many
not be transferred, assigned, pledged or hypothecated in any manner (whether by
operation of law or otherwise) other than by will or by the applicable laws of
descent and distribution and shall not be subject to execution, attachment or
similar process. Any attempt to transfer the Option contrary to the provisions
of this Section 4 shall be void.
5. EFFECT OF TERMINATION OF EMPLOYMENT UPON OPTION
5.1 CORPORATION TERMINATES WITHOUT CAUSE; HAUFF RESIGNS WITH GOOD
REASON; CORPORATION IS SOLD
If the Corporation terminates the employment of Hauff for reasons other
than for Cause, if Hauff resigns his employment with the Corporation for Good
Reason, if substantially all the assets or stock of the Corporation is sold,
including a merger or exchange of securities, or if the Corporation issues
securities through an underwritten public offering at a price per share of at
least US $30.00, then on the date of termination of Hauff's employment or on the
date of closing the sale transaction or
-2-
<PAGE> 3
public offering, as the case may be, the Option shall become fully vested and
exercisable as of such date. For purposes of this Section 5, the terms "Cause"
and "Good Reason" shall have the meanings given to them in Hauff's employment
agreement with the Corporation in effect on the termination date in question.
5.2 HAUFF RESIGNS FOR NO GOOD REASON; TERMINATED FOR CAUSE
If Hauff resigns his employment with the Corporation for no Good Reason
or his employment is terminated by the Corporation for Cause, then Hauff's right
to exercise any portion of the Option not yet vested and exercisable shall
terminate as of Hauff's employment termination date.
5.3 DEATH OR DISABILITY
If Hauff's employment with the Corporation is terminated due to death
or disability and Hauff is not yet vested in at least 50% of the Option, then
Hauff's right to exercise 50% of the Option shall become fully vested and
exercisable as of the date of Hauff's death or disability. For purposes of this
Section 5, the term "disability" shall mean that Hauff is unable to perform his
duties as proscribed by the Corporation by reason of any medically determinable
physical or mental impairment which can be expected to result in death or which
has lasted or can be expected to last for a period of not less than 90 days.
Determination of whether Hauff is disabled shall be made in good faith by the
Board of Directors of the Corporation on the basis of medical evidence provided
by Hauff's physician and, if the Corporation and Hauff disagree, a physician
chosen by the Board of Directors.
6. EXERCISE UPON TERMINATION OR SALE
Hauff's right to exercise that portion of the Option vested and
exercisable as of any employment termination date or sale date shall be as
follows:
6.1 EXERCISE UPON TERMINATION FOR REASONS OTHER THAN DEATH OR
DISABILITY
If Hauff's employment with the Corporation ceases for any reason other
than his death or disability, Hauff may exercise that portion of the Option
which is exercisable as of his termination date at any time during the three
month period following such termination date. If Hauff fails to exercise the
vested portion of the Option during this three-month period, the Option and his
rights hereunder shall terminate.
-3-
<PAGE> 4
6.2 EXERCISE UPON TERMINATION FOR DEATH OR DISABILITY
If Hauff's employment with the Corporation ceases for reason of his
death or disability, Hauff or his personal representative, as the case may be,
may exercise the portion of the Option which is exercisable as of his
termination date at any time during the twelve month period following such
termination. If either Hauff or his personal representative fails to exercise
the vested portion of the Option during the twelve-month period, the Option and
his rights hereunder shall terminate.
6.3 UPON SALE OF CORPORATION OR IPO
If substantially all the assets or stock of the Corporation is sold or
the Corporation issues securities through an underwritten public offering, Hauff
may exercise his option no later than the date of the closing of the sale or of
the public offering. If Hauff fails to exercise the vested portion of the Option
on or before such dates, the Option and his rights hereunder shall terminate.
7. WITHHOLDING TAX REQUIREMENT
Burns shall have the right to retain and withhold from any transfer of
stock under this Agreement shares of stock equal in value to the amount of taxes
required by any governmental authority to be withheld or otherwise deducted and
paid with respect to such transfer. At its discretion, Burns may require Hauff
to reimburse Burns for any such taxes required to be withheld by Burns and may
withhold any stock transfer in whole or in part until Burns is so reimbursed.
8. ADJUSTMENTS UPON CHANGES IN CAPITALIZATION
The aggregate number and class of shares subject to the Option and the
exercise price per share thereof shall be proportionately adjusted for any
increase or decrease in the number of issued shares of common stock of the
Corporation resulting from a split-up or consolidation of shares or any like
capital adjustment, or the payment of any stock dividend.
9. SECURITIES REGULATION; ENDORSEMENT ON STOCK CERTIFICATES
As a condition to the exercise of the Option, Burns may require Hauff
to represent and warrant at the time of any such exercise that the shares are
being purchased by Hauff only for investment and without any present intention
to sell or distribute such shares. Hauff acknowledges that all certificates
representing the common stock purchased pursuant to the Option will contain an
endorsement which will state: THESE SECURITIES HAVE NOT BEEN REGISTERED UNDER
THE
-4-
<PAGE> 5
SECURITIES ACT OF 1933, AS AMENDED, THE SECURITIES ACT OF WASHINGTON, OR THE
SECURITIES ACT OF ANY OTHER STATE. THEY MAY NOT BE SOLD OR OFFERED FOR SALE IN
THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT UNDER THE APPROPRIATE ACT, OR
AN OPINION OF COUNSEL SATISFACTORY TO THE ISSUER OF SECURITIES THAT AN EXEMPTION
UNDER THE ACT IS AVAILABLE AND THAT SUCH REGISTRATION IS NOT REQUIRED.
10. NO STATUS AS SHAREHOLDER
Neither Hauff nor any party to which Hauff's rights and privileges
under the Option may pass shall be, or shall have any of the rights or
privileges of, a shareholder of the Corporation with respect to any of the
shares transferable upon the exercise of the Option unless and until such Option
has been exercised.
11. CONTINUATION OF EMPLOYMENT
Nothing in this Agreement shall confer upon Hauff any right to continue
in the employ of the Corporation, or to interfere in any way with the right of
the Corporation to terminate his employment at any time.
12. ADJUSTMENTS UPON CHANGES IN CAPITALIZATION
The aggregate number and class of shares for which the Option is
granted under this Agreement and the exercise price per share thereof (but not
the total price), and each such option, shall all be proportionately adjusted
for any increase or decrease in the number of issued shares of common stock of
the Corporation subject to the Option resulting from a split-up or consolidation
of shares or any like capital adjustment, or the payment of any stock dividend.
13. GOVERNING LAW
This Agreement shall be governed by the internal law of the state of
Washington as to all matters, including but not limited to matters of validity,
construction, effect and performance.
14. TERMS OF ORIGINAL OPTION AGREEMENT
This Agreement amends and restates all agreements of the parties
related to the Option, and all provisions of the Option Agreement related to the
Option shall be of no further force or effect.
-5-
<PAGE> 6
15. COUNTERPARTS
This Agreement may be executed in two or more counterparts, each of
which shall be deemed an original, but all of which together shall constitute
one and the same instrument.
IN WITNESS WHEREOF, the parties hereto have executed this Amended and
Restated Option Agreement as the date first above written.
GARGOYLES, Inc., a
Washington corporation
/s/ Dennis Burns
----------------------------------------
By /s/ Douglas B. Hauff DENNIS BURNS
- -----------------------------------
Its President
-------------------------------
/s/ Douglas B. Hauff
----------------------------------------
DOUGLAS B. HAUFF
-6-
<PAGE> 1
EXHIBIT 10.34
ASSIGNMENT AND ASSUMPTION
OF
AMENDED AND RESTATED OPTION AGREEMENT
THIS ASSIGNMENT AND ASSUMPTION OF AMENDED AND RESTATED OPTION AGREEMENT
(this "Assignment") is made as of this 22 day of March, 1995, by and between
DENNIS BURNS ("Burns") and the undersigned INVESTORS (the "Investors").
RECITALS
A. Burns is a party to that certain Amended and Restated Option
Agreement dated March 22, 1995 (the "Option Agreement"), under which Burns has
granted to Douglas B. Hauff ("Hauff") the option to acquire up to 100,000 shares
of common stock of Gargoyles, Inc. held by Burns (the "Optioned Shares").
B. Burns, Hauff and the Investors, among other parties, are parties to
that certain Stock Purchase Agreement dated March 14, 1995 under which Burns has
agreed to sell the Optioned Shares to the Investors.
C. Subject to the terms and conditions of this Assignment and as a
condition to closing the Stock Purchase Agreement, Burns desires to assign his
rights and obligations under the Option Agreement to the Investors and the
Investors desire to accept such assignment and assume such obligations.
AGREEMENT
1. ASSIGNMENT
In consideration of the premises and other good and valuable
consideration the receipt and sufficiency of which are hereby acknowledged,
Burns hereby assigns to the Investors all of his rights and obligations under
the Option Agreement, and the Investors hereby accept the assignment of rights
and assume and agree to perform when due all duties and obligations to be
performed by Burns under the Option Agreement from and after the date hereof to
the same extent as if the Investors had been an original party to the Option
Agreement.
2. INDEMNITY
Each of the Investors, severally and not jointly, hereby agrees to
indemnify, defend and hold harmless Burns from and against and shall reimburse
Burns for any
<PAGE> 2
and all losses, liabilities, deficiencies, claims and expenses (including, but
not limited to, costs of defense and reasonable attorneys' fees) incurred by
Burns arising from such Investor's failure to perform any obligation under the
Option Agreement assumed hereunder.
3. COUNTERPARTS
This Assignment may be executed in two or more counterparts, each of
which shall be deemed an original, but all of which together shall constitute
one and the same instrument.
-2-
<PAGE> 3
IN WITNESS WHEREOF, the parties hereto have executed this Assignment
and Assumption of Amended and Restated Option Agreement as of the date first
above written.
ASSIGNOR:
/s/ Dennis Burns
--------------------------------------------
Dennis Burns
INVESTORS:
TRILLIUM CORPORATION, a
Washington corporation
By: /s/ Erik Anderson
--------------------------------------------
Its: Erik Anderson, Co-President
/s/ Douglas Hauff
--------------------------------------------
Douglas Hauff
/s/ David R. Syre
--------------------------------------------
David R. Syre
/s/ Gary Waterman
--------------------------------------------
Gary Waterman
-3-
<PAGE> 4
THE ART KERN REVOCABLE TRUST
U/A DATED DECEMBER 7, 1992
By: /s/ Arthur H. Kern
--------------------------------------------
Its: Arthur H. Kern, Trustee
/s/ Bruce Hosford
--------------------------------------------
Bruce Hosford
/s/ Tim Buckley
--------------------------------------------
Tim Buckley
/s/ Allen Shoup
--------------------------------------------
Allen Shoup
/s/ Stan Walderhaug
--------------------------------------------
Stan Walderhaug
/s/ Peter von Reichbauer
--------------------------------------------
Peter von Reichbauer
/s/ Steve Kingma
--------------------------------------------
Steve Kingma
/s/ David Jobe
--------------------------------------------
David Jobe
-4-
<PAGE> 5
/s/ Tom Johnson
--------------------------------------------
Tom Johnson
/s/ Robert E. Manne
--------------------------------------------
Robert E. Manne
/s/ Gary Gigot
--------------------------------------------
Gary Gigot
/s/ John Rudolf
--------------------------------------------
John Rudolf
-5-
<PAGE> 1
EXHIBIT 10.35
OPTION AGREEMENT
THIS OPTION AGREEMENT (this "Agreement") is made as of this 22nd day of
March, 1995, by and between the Investors listed on the attached Exhibit A (the
"Investors") and DOUGLAS B. HAUFF, the President of the Corporation ("Hauff").
RECITALS
A. The Investors and Hauff are parties to that certain Stock Purchase
Agreement dated March 14, 1994 (the "Stock Purchase Agreement") pursuant to
which the Investors are purchasing from Gargoyles, Inc., a Washington
corporation (the "Corporation") 600,000 shares of the Corporation's Common
Stock.
B. Hauff is the President of the Corporation, and in connection with
the transactions contemplated by the Stock Purchase Agreement and subject to the
terms and conditions set forth herein, the Investors desire to grant to Hauff an
option to purchase 25,000 shares of the common stock purchased by the Investors
from the Corporation.
AGREEMENT
NOW, THEREFORE, in consideration of the premises and the mutual
agreements set forth herein, the parties hereto hereby agree as follows:
1. GRANT OF OPTION
Subject to the terms and conditions of this Agreement, each Investor
grants to Hauff the option to purchase the number of shares of common stock of
the Corporation owned by such Investor set opposite such Investor's name on the
attached Exhibit A for a purchase price of Twenty-Five Dollars ($25.00) per
share (the "Option").
2. VESTING; MATURITY
The Option shall vest and shall be exercisable in full by Hauff on the
third (3rd) anniversary of the date of this Agreement, and the Option must be
exercised by Hauff, if at all, on or before the seventh (7th) anniversary of the
date of this Agreement. Unless terminated earlier under the provisions of
Section 5 hereof, the Option and all rights of Hauff in any unexercised shares
shall terminate as of the seventh (7th ) anniversary of the date of this
Agreement.
<PAGE> 2
3. EXERCISE
Subject to the vesting date set forth above, the Option may be
exercised in whole or in part at any time and from time to time; provided,
however, that no fewer than 1000 shares may be purchased upon any exercise
hereunder. An Option shall be exercised by delivery to the Investors of written
notice of the number of shares with respect to which the Option is exercised,
together with payment of the exercise price. The exercise price shall be paid in
cash, by wire transfer into an account specified by Burns, or by bank certified
or cashier's check. Upon receipt of the exercise price, each of the Investors
shall deliver to Hauff stock certificates representing the shares exercised,
duly endorsed in blank or accompanied by stock powers duly executed by each such
Investor. If Hauff exercises less than all of the shares subject to the Option
at any one time, then each Investor shall deliver to Hauff shares equal in
number to the total shares owned by such Investor multiplied by a fraction, the
numerator of which is the total number of shares exercised by Hauff at any one
time and the denominator of which is the total number of shares owned by all the
Investors which are then subject to the Option.
4. RIGHTS NOT TRANSFERABLE
The Option and the other rights and privileges conferred hereby many
not be transferred, assigned, pledged or hypothecated in any manner (whether by
operation of law or otherwise) and shall not be subject to execution, attachment
or similar process. Any attempt to transfer the Option contrary to the
provisions of this Section 4 shall be void.
5. EFFECT OF SALE OF CORPORATION OR TERMINATION OF EMPLOYMENT UPON OPTION
5.1 SALE OF CORPORATION; IPO
If substantially all the assets or stock of the Corporation is sold,
including through a merger or exchange of securities, at a price equivalent to
at least US $25.00 per share, or if the Corporation issues securities through an
underwritten public offering at a price per share of at least US $30.00, then on
the date of such sale transaction or on the date of the closing of the public
offering, as the case may be, the Option shall become fully vested and
exercisable as of such date.
5.2 TERMINATION OF HAUFF'S EMPLOYMENT
If Hauff's employment with the Corporation is terminated for any
reason, including Hauff's voluntary resignation, Hauff's resignation for good
reason,
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<PAGE> 3
termination by the Corporation with or without cause, or by reason of the death
or disability of Hauff, then Hauff's right to exercise any portion of the Option
not yet vested and exercisable shall automatically terminate as of the
termination date of Hauff's employment. For purposes of this Section, the term
"disability" shall mean that Hauff is unable to perform his duties as proscribed
by the Corporation by reason of any medically determinable physical or mental
impairment which can be expected to result in death or which has lasted or can
be expected to last for a period of not less than 90 days. Determination of
whether Hauff is disabled shall be made in good faith by the Board of Directors
of the Corporation on the basis of medical evidence provided by Hauff's
physician and, if the Corporation and Hauff disagree, a physician chosen by the
Board of Directors.
6. EXERCISE UPON TERMINATION OR SALE
Hauff's right to exercise that portion of the Option vested and
exercisable as of any employment termination date or sale date shall be as
follows:
6.1 EXERCISE UPON SALE OR IPO
If substantially all the assets or stock of the Corporation is sold or
if the Corporation's securities are issued in an underwritten public offering,
Hauff may exercise his option no later than the date of the closing of the sale
or of the closing of the public offering. If Hauff fails to exercise the vested
portion of the Option on or before such date, the Option and his rights
hereunder shall terminate.
6.2 EXERCISE UPON TERMINATION FOR REASONS OTHER THAN DEATH OR
DISABILITY
If Hauff's employment with the Corporation ceases for any reason other
than his death or disability, Hauff may exercise that portion of the Option
which is exercisable as of his termination date at any time during the three
month period following such termination date. If Hauff fails to exercise the
vested portion of the Option during such three-month period, the Option and his
rights hereunder shall terminate.
6.3 EXERCISE UPON TERMINATION FOR DEATH OR DISABILITY
If Hauff's employment with the Corporation ceases for reason of his
death or disability, Hauff or his personal representative, as the case may be,
may exercise the portion of the Option which is exercisable as of his
termination date at any time during the twelve month period following such
termination. If either Hauff or his
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<PAGE> 4
personal representative fails to exercise the vested portion of the Option
during the twelve-month period, the Option and his rights hereunder shall
terminate.
7. WITHHOLDING TAX REQUIREMENT
The Investors shall have the right to retain and withhold from any
transfer of stock under this Agreement shares of stock equal in value to the
amount of taxes required by any governmental authority to be withheld or
otherwise deducted and paid with respect to such transfer. At their discretion,
each Investor may require Hauff to reimburse such Investor for any such taxes
required to be withheld by such Investor and may withhold any stock transfer in
whole or in part until such Investor is so reimbursed.
8. ADJUSTMENTS UPON CHANGES IN CAPITALIZATION
The aggregate number and class of shares subject to the Option and the
exercise price per share thereof shall be proportionately adjusted for any
increase or decrease in the number of issued shares of common stock of the
Corporation resulting from a split-up or consolidation of shares or any like
capital adjustment, or the payment of any stock dividend.
9. SECURITIES REGULATION; ENDORSEMENT ON STOCK CERTIFICATES
As a condition to the exercise of the Option, an Investor may require
Hauff to represent and warrant at the time of any such exercise that the shares
are being purchased by Hauff only for investment and without any present
intention to sell or distribute such shares. Hauff acknowledges that all
certificates representing the common stock purchased pursuant to the Option will
contain an endorsement which will state: THESE SECURITIES HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, THE SECURITIES ACT OF
WASHINGTON, OR THE SECURITIES ACT OF ANY OTHER STATE. THEY MAY NOT BE SOLD OR
OFFERED FOR SALE IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT UNDER THE
APPROPRIATE ACT, OR AN OPINION OF COUNSEL SATISFACTORY TO THE ISSUER OF
SECURITIES THAT AN EXEMPTION UNDER THE ACT IS AVAILABLE AND THAT SUCH
REGISTRATION IS NOT REQUIRED.
10. NO STATUS AS SHAREHOLDER
Hauff shall have no rights or privileges of a shareholder of the
Corporation with respect to any of the shares transferable upon the exercise of
the Option unless and until such Option has been exercised.
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11. CONTINUATION OF EMPLOYMENT
Nothing in this Agreement shall confer upon Hauff any right to continue
in the employ of the Corporation, or to interfere in any way with the right of
the Corporation to terminate his employment at any time.
12. ADJUSTMENTS UPON CHANGES IN CAPITALIZATION
The aggregate number and class of shares for which the Option is
granted under this Agreement and the exercise price per share thereof (but not
the total price), and each such option, shall all be proportionately adjusted
for any increase or decrease in the number of issued shares of common stock of
the Corporation subject to the Option resulting from a split-up or consolidation
of shares or any like capital adjustment, or the payment of any stock dividend.
13. GOVERNING LAW
This Agreement shall be governed by the internal law of the state of
Washington as to all matters, including but not limited to matters of validity,
construction, effect and performance.
14. TERMS OF ORIGINAL OPTION AGREEMENT
This Agreement amends and restates all agreements of the parties
related to the Option, and all provisions of the Option Agreement related to the
Option shall be of no further force or effect.
15. COUNTERPARTS
This Agreement may be executed in two or more counterparts, each of
which shall be deemed an original, but all of which together shall constitute
one and the same instrument.
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IN WITNESS WHEREOF, the parties hereto have executed this Option
Agreement as the date first above written.
/s/ Douglas B. Hauff
------------------------------------
Douglas B. Hauff
TRILLIUM CORPORATION
By: /s/ Erik J. Anderson
--------------------------------
Its: Erik Anderson, Co-President
/s/ Gary Waterman
------------------------------------
Gary Waterman
THE ART KERN REVOCABLE TRUST
U/A DATED DECEMBER 7, 1992
By: /s/ Arthur H. Kern
--------------------------------
Its: Arthur H. Kern, Trustee
/s/ Bruce Hosford
------------------------------------
Bruce Hosford
/s/ Tim Buckley
------------------------------------
Tim Buckley
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/s/ Allen Shoup
------------------------------------
Allen Shoup
/s/ Robert E. Manne
------------------------------------
Robert E. Manne
/s/ Stan Walderhaug
------------------------------------
Stan Walderhaug
/s/ Peter von Reichbauer
------------------------------------
Peter von Reichbauer
/s/ Steve Kingma
------------------------------------
Steve Kingma
/s/ David Jobe
------------------------------------
David Jobe
/s/ Tom Johnson
------------------------------------
Tom Johnson
/s/ Gary Gigot
------------------------------------
Gary Gigot
/s/ John C. Rudolf
------------------------------------
John C. Rudolf
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EXHIBIT A
INVESTORS
Trillium Corporation
Gary Waterman
Arthur Kern, Trustee of the Art Kern Revocable Trust u/a dated December 7, 1992
John Rudolf
Bruce Hosford
Tim Buckley
Allen Shoup
Stan Walderhaug
Peter von Reichbauer
Steve Kingma
David Jobe
Tom Johnson
Robert E. Manne
Gary Gigot
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<PAGE> 1
EXHIBIT 10.36
TO
GARGOYLES, INC.
FORM S-1
"[*]" = confidential information omitted and filed separately with the
Securities and Exchange Commission pursuant to a request for confidential
treatment.
<PAGE> 2
AMENDMENT NO. 1
THIS AMENDMENT NO. 1 (the "Amendment"), dated as of 11-3-95, 1995 is
made and entered into by and between Dale Earnhardt, an individual,
("Earnhardt") and Gargoyles, Inc., a Washington corporation, ("Gargoyles").
RECITALS
A. On or about July 13, 1994, Earnhardt and Gargoyles entered into an
agreement (the "Original Agreement") under which Earnhardt endorsed and promoted
certain Gargoyles' sunglasses as described therein.
B. The term of the Original Agreement expires on July 31, 1995.
Earnhardt and Gargoyles want to extend the term of the Original Agreement to
July 31, 1996.
AGREEMENT
NOW, THEREFORE, in consideration of the premises and covenants
contained herein, and other valuable consideration, the sufficiency and receipt
of which are hereby acknowledged, Earnhardt and Gargoyles agree as follows:
1. EXTENSION
The expiration date of the term of the Original Agreement is hereby
extended from July 31,1995 to July 31, 1996.
2. TERMS OF THE EXTENSION
The terms and conditions set forth in the Original Agreement for the
initial term shall also apply to the August 1, 1995 through July 31, 1996
period, except that the initial [*] installment of the [*] guarantee against
royalties under Section 6 of the Original Agreement for the August 1, 1995
through July 31, 1996 period shall be made by Gargoyles to Earnhardt on or
before August 1, 1995 and the subsequent installments shall be made on the first
day of each quarter thereafter.
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3. SURVIVAL
The terms and conditions of the Original Agreement, as amended in this
Amendment, remain in full force and effect.
IN WITNESS WHEREOF, the parties have caused this Amendment to be
executed and delivered as of the date and year first above written.
Gargoyles, Inc.
/s/ Dale Earnhardt By /s/ Douglas B. Hauff
------------------ --------------------------------
Dale Earnhardt Douglas B. Hauff, President
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<PAGE> 4
AGREEMENT
THIS AGREEMENT ("Agreement"), dated as of 7-13-, 1994 is made and
entered into by and between Dale Earnhardt, an individual (Earnhardt) and
Gargoyles, Inc., a Washington corporation ("Gargoyles").
RECITALS
WHEREAS, Gargoyles wishes to obtain the exclusive services of Earnhardt
for marketing of sunglasses; and
WHEREAS, Earnhardt wishes to assist Gargoyles in the marketing of its
products;
NOW, THEREFORE, in consideration of the premises and covenants
contained herein, and other valuable consideration, the sufficiency and receipt
of which are hereby acknowledged, the parties hereto agree as follows;
1. TERRITORY
This Agreement shall cover the marketing, sales and distribution of the
products which are the subject of this Agreement worldwide.
2. TERM
This Agreement shall commence upon execution and expire July 31st,
1995.
3. REPRODUCTION AND DISTRIBUTION APPROVAL OF ADVERTISING
Gargoyles shall produce advertising materials using Earnhardt and the
glasses developed under this Agreement. Prior to commercial production and
distribution of any such advertising materials (defined as printads, posters,
counter cards, catalogs, and promotional material) Gargoyles shall submit to
Earnhardt for his review and written approval each piece of advertising material
containing his image and/or name.
4. DALE EARNHARDT GLASSES
Gargoyles will create two special Dale Earnhardt glasses for sale at
retail. The first glass will be a customized Premier Gargoyle and the second
glass will be a special Dale Earnhardt Gold Medalist. Earnhardt will have final
approval on any glass developed.
<PAGE> 5
5. ROYALTY PAYMENT
Gargoyles agrees to pay to Earnhardt royalty payments in an amount
equal to [*] of the net wholesale selling price of all Dale Earnhardt glasses
sold. Gargoyles, in its sole discretion, shall set the price for the Dale
Earnhardt glasses sold. The parties acknowledge that a substantial quantity of
the glasses (not to exceed [*] of total production) will be given away at no
charge to customers as samples, for promotional and display purposes and
salesman samples. No royalties shall be payable on such promotional glasses.
Gargoyles shall begin paying royalties no later than 60 days after approval of
the Dale Earnhardt glasses by Earnhardt.
6. GUARANTEE TO EARNHARDT
Gargoyles agrees that Earnhardt will be paid a minimum of [*]. Payments
shall be made quarterly as follows:
[*] upon execution of the Agreement
[*] beginning the second quarter
[*] beginning the third quarter
[*] beginning the fourth quarter
Agreement to commence no later than July 30, 1994.
7. PAYMENTS OF ROYALTIES AND ACCOUNTING
(a) Gargoyles agrees to furnish Earnhardt no later than the fifteenth
(15th) day of each month a full and accurate statement showing by glass the
quantities, net billings and the royalty rate of glasses invoiced during the
preceding month for all Products covered by this Agreement. Gargoyles shall pay
to Earnhardt the Royalty Payments shown as due and owning on such statement
within ten days of the issuance of each such statement.
(b) Any Royalty Payments received more than ten days after the due date
(the 15th day of each month) shall bear interest at the lesser of (i) [*] ([*])
per annum, or (ii) the highest rate permitted by law.
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8. PERSONAL APPEARANCES
(a) Earnhardt shall be available for a photographic session session
time and location upon mutual agreement of both parties as may be reasonably
necessary to produce advertising material acceptable to Gargoyles. The
photographic session for the purposes of obtaining photographs to be utilized in
the promotion of the Products which are the subject of this Agreement. No
pictures or images of Earnhardt shall be used unless approved by Earnhardt, such
decision to be made within ten business days after they are submitted to
Earnhardt for approval. Gargoyles acknowledges that such photographs or images
of Earnhardt may only be utilized for the purposes outlined herein and during
the term of this Agreement.
9. PROMOTIONAL EFFORTS OF EARNHARDT
Throughout the term of this Agreement, Earnhardt agrees that he shall
exert his best efforts to promote and publicize the eyewear products which are
the subject of this Agreement; that he shall never disparage or criticize said
products; that he shall wear Gargoyles eyewear products at all times when it is
convenient and appropriate for him to do so; and that he shall not publicly wear
any eyewear products that have not been manufactured by Gargoyles. In addition,
Earnhardt will use his best efforts to use Gargoyles products in his advertising
and commercials where such eyewear products are appropriate.
10. PERSONAL GLASSES FOR EARNHARDT
Gargoyles will make available to Earnhardt at no charge a reasonable
number of glasses for his personal use during the term of this Agreement.
11. PRESS RELEASE
The parties agree that upon signing of this Agreement, Gargoyles will
issue a press release announcing Gargoyles and Earnhardt's new relationship.
Gargoyles will provide Earnhardt the press release for review and approval
before it is issued.
12. REMEDIES UPON AN EVENT OF DEFAULT
Upon the occurrence of any default by either party and at any time
thereafter, both parties, in their discretion, do any one or more of the
following: (a) terminate this Agreement, at which time neither party shall have
any further obligation, both in terms of payments or performance, whatsoever
under this Agreement or (b) exercise any other right or remedy available to it
under applicable law, including, without limitation, the right to recover
damages for breach hereof.
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13. RIGHT OF FIRST APPROVAL
Sixty days prior to the termination of this contract, Earnhardt and
Gargoyles shall begin discussions for an option year to begin August 1st, 1995.
In the event Earnhardt and Gargoyles cannot come to a mutually agreeable
contract, Earnhardt will be free to negotiate with other sunglass manufacturers.
However, Gargoyles shall retain the right to match any offer given to Earnhardt
for a period of one year after the termination of this Agreement.
14. NOTICES
All notices required or permitted hereunder shall be deemed effective
upon receipt and shall be given in writing and personally delivered or sent by
registered or certified mail, postage prepaid, to the following addresses or at
such other places as either party shall designate in writing:
If to Earnhardt Dale Earnhardt Inc. c/o Don Hawk
Rt 10 Box 595 B
Mooresville, N.C. 28115
If to Gargoyles 5866 South 194th
Kent, Wa 98032
Attn: Doug Hauff
15. ENTIRE AGREEMENT
This Agreement contains the entire Agreement between the parties with
respect to the subject matter hereof and shall supersede all prior
understandings, agreements or arrangements, oral or written, between the
parties.
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IN WITNESS WHEREOF, the parties have caused this Agreement to be
executed and delivered as of the date and year first above written.
DATED this 7-13 day of 7-13 1994.
by /s/ Dale Earnhardt
------------------------
Dale Earnhardt
GARGOYLES, INC.
by /s/ Douglas B. Hauff
------------------------
Douglas B. Hauff, President
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<PAGE> 1
EXHIBIT 10.37
TO
GARGOYLES, INC.
FORM S-1
"[*]" = confidential information omitted and filed separately with the
Securities and Exchange Commission pursuant to a request for confidential
treatment.
<PAGE> 2
LICENSE AGREEMENT
This Agreement ("Agreement"), dated as of Oct. 30th, 1995, is made and
entered into by and between Ken Griffey, Jr., an individual ("Griffey"), and
Gargoyles, Inc., a Washington corporation ("Gargoyles").
RECITALS
A. Gargoyles wishes to obtain the exclusive services of Griffey for the
marketing and sales of sunglasses; and
B. Griffey wishes to assist Gargoyles in the marketing of its Griffey-
sponsored sunglasses products.
AGREEMENT
NOW, THEREFORE, in consideration of the premises and covenants
contained herein, and other valuable consideration, the sufficiency and receipt
of which are hereby acknowledged, Gargoyles and Griffey agree as follows:
1. PRODUCT DESCRIPTION
The products that are the subject of this Agreement (each a "Product")
are Gargoyles' Performance Eyewear "GriffeyWrap" brand sunglasses which will be
based on the Gargoyles' Legends SportsWrap Lens and will include stylish,
interchangeable wraparound lens and spring hinges. Commencing with the 1996
edition of the Product, Gargoyles will give Griffey the opportunity to provide
for Gargoyle's consideration design input regarding future Product editions.
2. LICENSE
Subject to Griffey's approval rights as described elsewhere in this
Agreement, Griffey hereby grants Gargoyles an exclusive license to adapt,
distribute, perform, reproduce and use Griffey's autograph, likeness, name and
voice on the Products and/or in advertisement, commercials, packaging, signs and
other advertising and other promotional formats, materials or media to
advertise, market, promote and sell the Products throughout the world. Griffey
will not endorse or support, or authorize or permit any third party to use his
autograph, likeness, name or voice in connection with, any other sunglasses
anywhere in the world during the term of this Agreement.
<PAGE> 3
3. TERM
The term of this Agreement shall commence upon the date of this
Agreement, and subject to earlier termination as provided elsewhere in this
Agreement, will expire on December 31, 1998.
4. ADVERTISING MATERIALS
As between the parties, Gargoyles shall be responsible for producing
the advertising and promotional materials in any form or medium (e.g., publicity
photographs, advertisements, commercials, contests and film or other video
footage) deemed necessary for the Products by Gargoyle. Prior to commercial
production and distribution of any such materials using the autograph, likeness,
name or voice of Griffey, Gargoyles shall submit to Griffey or his
representative for his review and written approval the form of each item
containing any autograph, likeness, name or voice of Griffey. Griffey shall not
withhold his approval unreasonably and will notify Gargoyles of his approval or
objections in a prompt and timely manner. Gargoyles will not knowingly display
or promote the Product with branded products that would conflict with other
branded products endorsed by Griffey.
5. PAYMENT TERMS
5.1 PERSONAL SERVICES
Gargoyles will pay Griffey a personal service fee of [*] ([*]) per Year
with the payment for the first Year being due one-half (1/2) by June 15, 1995
and one-half (1/2) by December 1, 1995 and payment for each subsequent Year
shall be due one-half (1/2) by March 1 of that Year and one-half (1/2) by
December 1 of that Year. Just for 1995, a [*] fee due Nov 1995.
5.2 ROYALTIES
Gargoyles will pay royalties for the sale of Products to Griffey within
thirty (30) days after the end of each Quarter (as defined below), as follows:
(a) For the first Year (as defined below): [*]% of the net wholesale
selling price received by Gargoyles for the first [*] Product units sold in such
Year, [*]% of the net wholesale selling price received by Gargoyles for the [*]
through [*] Product
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units sold in such Year, and [*] % of the net wholesale selling price received
by Gargoyles for the Product units sold in such Year in excess of [*] units;
(b) For the second Year (as defined below): [*]% of the net wholesale
selling price received by Gargoyles for the first [*] Product units sold in such
Year, [*]% of the net wholesale selling price received by Gargoyles for the [*]
through [*] Product units sold in such Year, and [*]% of the net wholesale
selling price received by Gargoyles for the Product units sold in such Year in
excess of [*] units; and
(c) For the third and fourth Years (as defined below): [*]% of the net
wholesale selling price received by Gargoyles for the first [*] Product units
sold in such Year, [*]% of the net wholesale selling price received by Gargoyles
for the [*] through [*] Product units sold in such Year, and [*]% of the net
wholesale selling price received by Gargoyles for the Product units sold in such
Year in excess of [*] units.
For purposes of this Agreement, the first "Year" means the period from
the date of this Agreement through December 31, 1995 and the second, third and
fourth Years mean the 1996, 1997 and 1998 calendar years, respectively.
"Quarter" means the three (3) calendar month period commencing at the beginning
of the first Year and each calendar quarter thereafter. Each Year, Gargoyles may
distribute for promotional and display purposes or as samples up to three ([*]%)
of the total quantity of Product units manufactured that Year and there shall be
no royalty payable under this Agreement on such Product units.
5.3 MINIMUM ROYALTY GUARANTEE
Subject to early termination as provided in Section 13 below, Gargoyles
guarantees that Griffey will receive at least [*] ([*]) per Year under paragraph
5.2. If at the end of a Year the royalties payable to Griffey under paragraph
5.2 for such Year are less than [*] ([*]), Gargoyles will pay the difference
between such royalties and the [*] ([*]) to Griffey within thirty (30) days
after the end of such Year. For 1995 only the royalty guarantee shall be [*].
5.4 ROYALTY STATEMENT
Gargoyles will furnish to Griffey with each royalty payment made under
paragraph 5.2 above a full and accurate statement showing by Product the
quantities, net wholesale billings and royalty rate of all Products sold during
such Quarter. Any
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payments under this Agreement made more than ten (10) days after
the due date shall bear interest at the lesser of (a) [*] ([*]%) per annum or
(b) the highest rate permitted by law.
5.5 MAINTENANCE OF RECORDS
Gargoyles will maintain and preserve, for at least one (1) year
following the expiration or termination of this Agreement, accurate and complete
records of all Product sale transactions. Upon not less than five (5) business
days' advance written notice from Griffey and not more frequently than once each
Year, Gargoyle will provide Griffey and/or his authorized agents access to such
records during Gargoyles' business hours for the purpose of verifying the
accuracy of the royalty payments hereunder. Griffey and its agent shall maintain
the confidentiality of such records and the Product information including in the
royalty statements provided under paragraph 5.4.
6. PERSONAL APPEARANCES
Griffey shall be made available at least two (2) days each Year as
mutually scheduled by the parties for filming, photographic or recording
sessions as may be reasonably necessary to produce packaging and radio,
television, printed and other advertising and promotional materials for the
Products in any form or medium (e.g., publicity photographs, advertisements,
commercials, contests and film or other video footage) desired by and acceptable
to Gargoyles. In addition, Griffey will make a personal appearance
(approximately four hours) each Year in a limited, controlled access, secure
area at such promotional event mutually agreed upon by Griffey and Gargoyles to
assist Gargoyles in promoting the Products at such event. Finally, each Year
Griffey will provide to Gargoyles upon request six dozen baseballs autographed
by Griffey. Gargoyles acknowledges that such baseballs and the photographs,
video and other results of such sessions may only be used for the purposes set
forth in this Agreement.
7. PROMOTIONAL EFFORTS OF GRIFFEY
Throughout the term of this Agreement, Griffey agrees that he will
exert his best efforts to promote and publicize the Products; that he will not
disparage or criticize the Products; that he will wear the Products at all times
when it is convenient
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<PAGE> 6
and appropriate for him to do so; and that he shall not publicly wear any
sunglasses products that have not been manufactured by Gargoyles.
8. PERSONAL GLASSES
Gargoyles will make available to Griffey and his immediate family at no
charge a reasonable number of Products for their personal use during the term of
this Agreement.
9. PRESS RELEASE
Upon the signing of this Agreement, Gargoyles will issue a press
release announcing Gargoyles' and Griffey's new relationship. Gargoyles will
provide Griffey the press release for review and approval before it is issued.
10. REPRESENTATIONS AND WARRANTIES
Griffey represents to Gargoyles that: (a) he has full capacity, right
and authority to enter into this Agreement and to be legally bound hereby; and
(b) there are no other agreements that he is a party to or bound by that
conflict with this Agreement or his ability to perform under the terms of this
Agreement. Gargoyles represents that it has the: (a) staff knowledge, experience
and financial ability to market the Products in a suitable commercial manner;
and (b) the right and authority to enter into this Agreement and to be legally
bound hereby.
11. CONFIRMATION OF AUTHORITY
In the event that any manufacturer, advertiser or other person or
entity questions the authority of Gargoyles to use Griffey's autograph,
likeness, name or voice as authorized under this Agreement, Griffey shall
promptly upon Gargoyles' request, execute such additional documents or make such
communications as may be reasonably necessary to confirm Gargoyles' authority.
12. OWNERSHIP
Griffey acknowledges that the Products are being developed and
customized from Gargoyles' existing eyewear products. Except for Griffey's
rights in and to Griffey's autograph, likeness, name and voice as used in a
Product or related materials, Gargoyles retains ownership of and Griffey has no
rights in and to, all copyright, trademark, trade secret or other intellectual
property rights in or used in connection with the manufacture, sale or use of
the Products or any related materials. Any contribution provided by Griffey with
respect to any Product or related materials shall to the extent permitted by law
constitute "work made for hire". Griffey will
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assign, and does hereby assign, any and all right, title and interest he
may have should his contribution to the Products and such materials not be work
made for hire. Griffey will cooperate with Gargoyles in the transferring to
Gargoyle and registering all such right, title and interest and to execute and
delivery any necessary documents to effect the same.
13. DEFAULT AND TERMINATION
13.1 EVENTS OF DEFAULT
Either party may, in its discretion, terminate this Agreement and/or
exercise any other right or remedy available to it under applicable law,
including, without limitation, the right to recover damages if the other party
breaches or is in default under any provision of this Agreement, and such breach
or default is not cured within ten (10) days after written notice thereof shall
have been given to such defaulting party by the other party, which notice shall
specify the event or events constituting the default or breach hereof.
13.2 DEATH; DISABILITY
Gargoyles may terminate this Agreement by written notice to Griffey
upon the occurrence of any of the following events: (a) the death of Griffey,
(b) Griffey does not play major league baseball in the United States for a
period of one (1) year or more, or (c) Griffey becomes the subject of any major
adverse publicity, including, but not limited to, publicity relating to alleged
felony criminal activity or moral turpitude, such that Griffey's name and
persona are no longer conducive to the promotion of the Products in the
reasonable discretion of Gargoyles.
13.3 POST TERMINATION
Upon the expiration or termination of this Agreement, the license set
forth in Section 1 shall automatically terminate and, except as expressly
provided herein, neither party shall have any further obligation, both in terms
of payments (other than amounts earned hereunder before such termination) or
performance, whatsoever under this Agreement. Notwithstanding the foregoing, if
this Agreement expires or is terminated for any reason other than an breach or
default of this Agreement by Gargoyles, Gargoyles and its resellers may for a
period not to exceed six (6) months continue to promote, distribute, use and
sell any Products and Product promotional material prepared before such
expiration or termination provided Gargoyles continues to pay Griffey royalties
for such Product sales as provided in paragraph 4.2. Paragraphs 5.5 and 13.3 and
Sections 10, 11, 12, 14 and 15 shall survive the expiration or termination of
this Agreement.
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<PAGE> 8
14. RIGHT OF FIRST APPROVAL
At least sixty (60) days before the expiration of the term of this
Agreement, Gargoyles and Griffey shall begin discussions for a renewal of this
Agreement for a fifth Year. In the event the parties are unable to reach
agreement, Griffey may negotiate an endorsement agreement with other sunglasses
manufacturers but shall not enter into such agreement during the six (6) month
period after the expiration of the term without first providing Gargoyles the
right to match the terms of such agreement. If Gargoyles elects to match such
terms, Gargoyles and Griffey shall promptly enter into such agreement in lieu of
Griffey entering into the agreement with such other manufacturer.
15. OTHER PROMOTIONS
Gargoyles will, and will use its reasonable best efforts to cause its
parent corporation to, consider the use of Griffey in the promotion and
endorsement of the other consumer products they offer for sale. Further,
Gargoyles will consider, based upon the reasonableness of both parties, entering
into an agreement with Melissa Griffey to promote women's eyewear, Trey Griffey
to promote children's eyewear, and Ken Griffey, Sr. to promote the "Griffey
Eyewear" in general.
16. MISCELLANEOUS
16.1 RELATIONSHIP OF THE PARTIES
The relationship of Griffey to Gargoyles shall be that of an
independent contractor, and all acts performed by Griffey pursuant to this
Agreement during the term shall be deemed to be performed in his capacity as an
independent contractor.
16.2 NOTICES
All notices required or permitted hereunder shall be deemed effective
upon receipt and shall be given in writing and personally delivered or sent by
registered or certified mail, postage prepaid, to the following addresses or at
such other places as either party shall designate in writing:
If to Griffey: c/o Brian M. Goldberg, Esq.
4300 Carew Tower
441 Vine Street
Cincinnati, Ohio 45202
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<PAGE> 9
If to Gargoyles: 5866 S. 194th
Kent, WA 98032
Attn: Douglas B. Hauff
16.3 NO WAIVER
The failure of either party hereto to insist at any time upon the
strict observance or performance of any of the provisions of this Agreement or
to exercise any right or remedy as provided in this Agreement shall not impair
any such right or remedy or be construed as a waiver or relinquishment thereof
with respect to subsequent defaults. Every right and remedy given by this
Agreement to the parties hereto may be exercised from time to time and as often
as may be deemed expedient by the parties hereto, as the case may be.
16.4 ENTIRE AGREEMENT
This Agreement contains the entire agreement between the parties, and
supersedes all prior understandings, agreements or arrangements, oral or
written, between the parties, with respect to the subject matter hereof. This
Agreement shall not be modified or amended except by written instrument signed
by both parties. This Agreement shall be binding upon and inure to the benefit
of the heirs, personal representative, estate, successors and assigns of the
parties.
16.5 GOVERNING LAW
This Agreement shall be governed by the laws of the State of Washington
without reference to its choice of law rules.
16.6 ATTORNEYS' FEES
In the event either party brings an action to enforce this Agreement,
the prevailing party in such action shall be entitled to recover from the other
all costs and disbursements incurred in connection therewith, including
reasonable attorneys' fees
16.7 APPROVALS
All approvals and consents required under this Agreement shall not be
unreasonably withheld and must be requested and responded to in writing. Any
requests for approval or consent which remain unanswered for a ten (10) day
period following a party's receipt of an approval request shall be deemed an
approval or acceptance of the terms set forth in such notice.
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16.8 COUNTERPARTS
This Agreement may be executed in counterparts, each of which shall be
an original, but all of which together shall constitute but one and the same
instrument.
IN WITNESS WHEREOF, the parties have caused this Agreement to be
executed and delivered as of the date and year first above written.
Griffey: Gargoyles:
- -------- ----------
Gargoyles, Inc.:
/s/ Brian M. Goldberg for Ken Griffey Jr. By /s/ Douglas B. Hauff
- ----------------------------------------- ---------------------------
Ken Griffey, Jr. Douglas B. Hauff, President
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<PAGE> 11
AMENDMENT TO LICENSE AGREEMENT
THIS AMENDMENT TO LICENSE AGREEMENT (this "Amendment"), dated as of
October 18, 1995, is made and entered into by and between KEN GRIFFEY, JR., an
individual ("Griffey"), and GARGOYLES, INC., a Washington corporation
("Gargoyles").
RECITALS
A. Griffey and Gargoyles are parties to that certain License Agreement
dated October 16, 1995 (the "License Agreement").
B. Subject to the terms and conditions of this Amendment, Griffey and
Gargoyles desire to amend the License Agreement to provide for use of the
trademark GRIFFEYWRAP during the term of the License Agreement.
AGREEMENT
NOW THEREFORE, in consideration of the premises and covenants contained
herein, and other valuable consideration, Griffey and Gargoyles hereby agree as
follows:
1. TRADEMARKS
Griffey consents to Gargoyles' use and registration of the trademark
GRIFFEYWRAP throughout the world for the term of the License Agreement as
amended. Japan is subject to their trademark rights. Griffey agrees to execute
any consents or other documents necessary to perfect such trademark
registrations, and will cooperate in any enforcement actions related thereto.
Griffey will not endorse or support, or authorize or permit any third party to
use a mark identical or confusingly similar to GRIFFEYWRAP for any product or
service. Upon termination of the License Agreement, Gargoyles will cease using
the GRIFFEYWRAP mark on any new products or marketing materials and will allow
any applications or registrations to be administratively abandoned or canceled.
2. NO OTHER AMENDMENTS
Griffey and Gargoyles hereby reaffirm all other terms of the Agreement,
and except as amended herein, all other terms of the Agreement remain in full
force and effect.
<PAGE> 12
IN WITNESS WHEREOF, the parties hereto have executed this Amendment to
License Agreement as of the date first above written.
GARGOYLES, INC.,
a Washington corporation
/s/ Brian M. Goldberg for Ken Griffey Jr. By /s/ Douglas B. Hauff
- ----------------------------------------- ---------------------------
Ken Griffey, Jr. Douglas B. Hauff, President
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<PAGE> 1
EXHIBIT 10.38
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT (this "Agreement") is dated as of the 22nd
day of March, 1995, by and between GARGOYLES, INC., a Washington corporation
(the "Corporation") and DOUGLAS B. HAUFF ("Employee"). In consideration of the
mutual covenants and conditions set forth herein, the parties agree as follows:
1. EMPLOYMENT
Subject to the terms and conditions contained in this Agreement, the
Corporation hereby employs Employee and Employee hereby accepts employment with
the Corporation.
2. DUTIES AND REPORTING RELATIONSHIP
During the Term of Employment, as defined below, Employee shall be
employed in the capacity of President of the Corporation. In such capacity,
Employee shall devote his working time and attention to manage and direct all
policy-making aspects of the business and affairs of the Corporation, subject to
the supervision and approval of the Board of Directors of the Corporation.
Employee acknowledges and agrees that as President, the hours which he is
required to work will vary considerably and will sometimes be more than 40 hours
per week. Employee further acknowledges and agrees that such work in excess of
40 hours per week is a regular and normal part of his responsibilities for which
he is compensated, and does not in any way constitute overtime for which he is
entitled to receive additional compensation. Employee also shall perform such
duties as may be specified for companies which are controlled by or are under
common control with the Corporation, including without limitation PRO-TEC, Inc.,
a Washington corporation.
3. TERM
Unless sooner terminated in accordance with this Agreement, the
Employee's term of employment shall become effective as of the date first above
written and shall continue until the fourth (4th) anniversary thereof (the "Term
of Employment"). Thereafter, the Term of Employment shall continue on a
quarter-to-quarter basis until either party hereto gives at least ninety (90)
days notice to the other of its decision to end the term hereof. Any notice
under this paragraph shall not be considered a termination pursuant to the other
provisions of this Agreement.
<PAGE> 2
4. BASE SALARY
For all services rendered by Employee under this Agreement, Corporation
shall pay Employee a Base Salary at an annual rate of $225,000, payable in twice
monthly installments in accordance with the Corporation's usual payroll policies
and procedures. This Base Salary is subject to annual increases by the Board of
Directors of the Corporation, considering all factors relevant to such a
decision, but shall not be decreased.
5. BENEFITS
5.1 EXPENSES
The Corporation shall reimburse Employee for all reasonable and
necessary business expenses incurred and advanced by him in carrying out his
duties under this Agreement promptly following presentation of receipts and
other supporting information.
5.2 BONUS
(a) Annual Incentive Bonus. If the Corporation exceeds its
annual operating income objectives by the percentages scheduled below, the
Corporation shall pay to Employee the corresponding bonus scheduled below:
<TABLE>
<S> <C>
105.0% to 110.0% of annual operating income objective $30,000
110.1% to 120.0% of annual operating income objective $35,000
120.1% to 130.0% of annual operating income objective $45,000
130.1% to 140.0% of annual operating income objective $50,000
140.1% or more of annual operating income objective $60,000
</TABLE>
The annual operating income objective bonus shall be paid to Employee
in cash within fifteen days of the date the Corporation's performance as
compared to its annual operating income objective is determined. Employee may
borrow against his expected annual bonus in a principal amount not to exceed
$40,000. Such borrowed amount shall accrue interest at a rate of 10% per annum
and shall be repaid on the date a bonus is paid to Employee.
(b) IPO Bonus. If the Corporation sells substantially all of
its assets or stock or if the Corporation raises operating capital through an
initial public offering
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<PAGE> 3
of its securities, then on the closing of the sale of the Corporation or the
closing of the initial public offering, as the case may be, the Corporation
shall pay to Employee a bonus in cash of Three Hundred Thousand Dollars
($300,000).
5.3 COMPANY BENEFITS
Employee shall be entitled to participate fully in all the
Corporation's employee benefits plans established for full-time employees of the
Corporation, including without limitation all health, medical, retirement, life
and disability insurance plans established by the Corporation in accordance with
the terms of such plans. Employee shall be entitled to participate in any
pension and retirement plans, stock option or ownership plans, and other fringe
benefit plans, perquisites and programs as are or may be made available from
time to time to executive or other salaried employees of the Corporation to the
extent eligible under the terms of such plans.
5.4 ADDITIONAL BENEFITS
If the employee benefit plans available to Employee do not already so
provide, the Corporation shall reimburse Employee for the cost of the premiums
for his dependent's medical and dental benefits, and the cost of the premium for
Employee's disability insurance policy currently in effect. The Corporation
shall also pay one-half the cost of Employee's whole life insurance policy
issued by Northwestern Mutual, and the cost of Employee's life insurance policy
issued by Phoenix Life for coverages not to exceed One Million Dollars.
5.5 VACATION
Employee will be entitled to four (4) weeks of paid vacation each year.
Unused vacation will be treated (e.g., carried over, compensated) in accordance
with policies of the Corporation, as amended from time to time, generally
applicable to executive employees of the Corporation.
6. TERMINATION
6.1 TERMINATION FOR CAUSE
Except as set forth below, this Agreement and Employee's employment by
the Corporation may only be terminated for Cause. For purposes of this
Agreement, "Cause" shall mean: (i) Employee shall be found by the Board of
Directors of the Corporation to be guilty of fraud or other acts of willful
misconduct in connection with his employment hereunder which have a material
adverse effect on the Corporation (ii) any failure by Employee to follow the
directives of the Corporation's
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<PAGE> 4
Board of Directors (iii) conviction of Employee for commitment of a felony; (iv)
any violation of law by Employee which has a material adverse effect on the
Corporation; (v) habitual use of narcotics or alcohol which impairs Employee's
performance of his duties under this Agreement; (vi) theft or embezzlement by
Employee from the Corporation; (vii) a material breach of Employee's obligations
under paragraphs 7 and 8 hereof, (viii) unexcused habitual absence from work for
reasons unrelated to illness, family crisis or disability, or (ix) failure of
the Corporation to meet at least sixty percent 60% of the operating income
projected during any one year in accordance with the following schedule:
<TABLE>
<CAPTION>
YEAR OPERATING INCOME
---- ----------------
<S> <C>
1995 $ 3,170,000
1996 4,766,000
1997 6,564,000
1998 8,206,000
1999 10,731,000
</TABLE>
Employee may not be terminated for Cause under Subsection 6.1(ix) above
if the failure to meet sixty percent of the operating income as scheduled is due
to acts of God, floods, fire, extended interruption of utility services to the
Premises, riots, insurrection, the Corporation's inability to obtain materials
or supplies essential to the manufacture of the Corporation's products from a
supplier for an unreasonably long period of time or other reason of a like
nature not the fault of Employee.
Employee may not be terminated for Cause unless and until he shall have
been given written notice which sets forth in reasonable detail the facts and
circumstances claimed to provide a basis for termination for Cause pursuant to
this paragraph 6 (the "Termination Notice"). Employee shall be deemed terminated
on the 30th day following his receipt of the Termination Notice (the
"Termination Date") if he shall have failed to cure or correct the circumstances
constituting Cause, or if such circumstances cannot reasonably be cured within a
thirty (30) day period, if Employee shall have failed to actively and diligently
pursue cure of such circumstances.
6.2 DEATH OR DISABILITY
(a) This Agreement and the Employee's employment hereunder
shall terminate upon the death of Employee. The date of Employee's death also is
referred to herein as the "Termination Date."
(b) If Employee is Disabled, the Corporation shall have the
right and may elect to terminate the services of the Employee by written notice.
The day after
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<PAGE> 5
such written notice has been delivered to the Employee is also referred to
herein as the "Termination Date." For purposes of this Agreement, "Disabled"
shall mean that the Employee is unable to perform his duties under this
Agreement as President of the Corporation by reason of any medically
determinable physical or mental impairment which can be expected to result in
death or which has lasted or can be expected to last for a period of not less
than 90 days. Determination of whether Employee is Disabled shall be made in
good faith by the Board of Directors of the Corporation on the basis of medical
evidence provided by Employee's physician and, if the parties disagree, a
physician chosen by the Board of Directors.
6.3 RESIGNATION WITH GOOD REASON
Should Employee wish to resign from his position with the Corporation
during the Employment Period with Good Reason, he shall give thirty (30) days
written notice to the Corporation specifying the date as of which his
resignation is to become effective. The date specified in such written notice is
also referred to herein as the "Termination Date". Failure to provide such
notice shall entitle the Corporation to fix the Termination Date as of the last
business day on which Employee reported for work at the principal offices of the
Corporation. "Good Reason" shall mean (i) material breach by the Corporation of
its obligations hereunder or; (ii) a significant adverse change in the nature
and scope of Employee's position of employment.
6.4 EMPLOYEE'S VOLUNTARY RESIGNATION
Should Employee wish to resign from his position with the Corporation
during the Employment Period without Good Reason (his "Voluntary Resignation"),
he shall give thirty (30) days written notice to the Corporation and specify the
date as of which his resignation is to become effective. The date specified in
such written notice is also referred to herein as the "Termination Date."
Failure to provide such notice shall entitle the Corporation to fix the
Termination Date as of the last business day on which Employee reported for work
at the principal offices of the Corporation.
6.5 COMPENSATION AND BENEFITS UPON TERMINATION
(a) If the employment of the Employee is terminated for Cause
or by his Voluntary Resignation, the Employee shall not be entitled to any
compensation or other benefits hereunder for any period after the Termination
Date.
(b) If the employment of the Employee is terminated because
Employee becomes Disabled, the Employee shall be entitled to receive (i) an
amount equal to the lesser of two years Base Salary or Base Salary payable for
the remaining period of the Term of Employment, less any amounts received by
Employee from
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<PAGE> 6
disability policies provided to Employee by the Corporation and (ii) such
employee benefits as are provided from time to time by the Corporation for the
benefit of its employees which continue during periods of disability.
(c) If the employment of Employee is terminated for reasons
other than Cause or due to Employee's voluntary resignation, Employee shall be
entitled to receive (i) an amount equal to the lesser of two years Base Salary
or Base Salary payable for the remaining period of the Term of Employment, less
any amounts received by Employee as compensation or benefits from employment
during such time and (ii) all benefits under employee benefit plans in which
Employee was participating immediately prior to the Termination Date which would
have been available to Employee during the Term of Employment, provided that
Employee's continued participation is permitted under the terms and provisions
of such employee benefit plans. If Employee's participation in any employee
benefit plan is not permitted, the Corporation shall arrange to provide Employee
with benefits substantially similar to those which Employee otherwise would be
entitled to receive.
7. INTELLECTUAL PROPERTY; NONDISCLOSURE OF CONFIDENTIAL
INFORMATION; COVENANT NOT TO COMPETE
7.1 DEFINITIONS
(a) Confidential Information. For purposes of this Agreement,
Confidential Information shall mean all the Corporation's proprietary
information which derives independent economic value from its secrecy from other
persons, companies, or business entities who could obtain economic value from
its disclosure to them or use by them. Confidential Information also includes,
without limitation, research data, trade or business know-how or business plans,
inventions, devices, patterns, compilations, programs, methods, techniques, or
processes which are disclosed or made available by the Corporation to Employee,
or devised by Employee during his employ by the Corporation. Examples of
Confidential Information include, without limitation: all information
specifically identified as proposed installations, products or product lines,
information systems, or other projects, the Corporations' supplier and customer
lists and all customer information and the Corporation's existing and proposed
business and marketing plans and policies, whether written or oral, and whether
designated individually as Confidential Information or not. Confidential
Information does not include information that: (i) is a matter of public
knowledge at the time Employee first learned of the information; or (ii) later
becomes a matter of public knowledge after Employee learns of it, other than
becoming public knowledge by reason of a breach by Employee of the obligations
of confidentiality set out in this Agreement.
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<PAGE> 7
(b) Conflicting Services. For purposes of this Agreement,
Conflicting Services shall mean product development or marketing of any eyewear,
or other products which compete with products then in production and marketing,
or reasonably anticipated to be in production and marketing, by the Corporation
or by Pro-Tec, Inc., or by any of their respective exclusive licensees, and
shall in addition mean all services of any type which involve, directly or
indirectly, the use or disclosure of Confidential Information. Conflicting
Services specifically do not include: (i) general product development, marketing
and promotional services, (ii) product development, marketing and promotion of
sportswear and sporting goods in general, and (iii) product development,
marketing and promotion of eyewear and sporting goods (except for product
development, marketing and promotion by methods which include, or make use of,
Confidential Information) that are not competitive with products then in
production and marketing, or reasonably anticipated to be in production and
marketing by the Corporation or by Pro-Tec, Inc., or by any of their respective
exclusive licensees.
(c) Conflicting Territories. For purposes of this Agreement,
Conflicting Territories shall mean, severally or together, each of the states of
the United States, and all foreign countries in which the Corporation and
Pro-Tec products are now sold or are hereafter sold.
(d) Invention. For purposes of this Agreement, Invention shall
mean all new inventions, discoveries, creations and works of authorship, and any
improvements to existing inventions, whether patentable or not, and all software
relating to any inventions, discoveries or improvements, which Employee
conceives, makes, develops, or reduces to practice, whether alone or with any
other person, company or business entity, (i) while Employee is working for the
Corporation in any capacity under this Agreement which relates to any questions
or problems for which the Corporation has requested Employee's services, (ii)
that are based in any way on Confidential Information received by Employee from
the Corporation or developed or made by Employee during his employ at the
Corporation, or (iii) with the aid of any equipment, supplies, facilities or
employees of the Corporation or on the Corporation's time.
7.2 NON DISCLOSURE OF CONFIDENTIAL INFORMATION
Employee agrees not to disclose or to use any Confidential Information,
either during or after employment by the Corporation, except as required by the
performance of duties within the scope of Employee's employment. Employee agrees
to apply his best efforts to otherwise prevent unauthorized disclosure or use of
any Confidential Information, and to immediately inform an officer of the
Corporation if any improper disclosure or use does occur.
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<PAGE> 8
7.3 ADHERENCE TO CONFIDENTIALITY
Employee acknowledges his understanding and recollection that his
employment with the Corporation has always been under terms of the strictest
confidentiality which were at least the equivalent of the confidentiality terms
of this Agreement, and acknowledges and states that at no time during his
employment with the Corporation has he departed in any substantial way from
adherence to those terms.
7.4 CONFLICTING SERVICES
Although certain provisions of this Agreement allow Employee to engage
in Conflicting Services subject to certain terms and conditions, Employee's
common law and contractual duties to maintain and preserve the secrecy of the
Corporation's Confidential Information continue in perpetuity unabated and
unchanged by those provisions.
7.5 COVENANT NOT TO COMPETE
(a) Representation of Employee. Employee represents that, and
the Corporation offers this employment in reliance upon Employee's
representation that, in the event of termination or expiration of Employee's
employment for any cause whatsoever, Employee's experience, education, training
and capabilities are such that he can obtain employment performing activities
which are not Conflicting Services, or which are to be performed outside of
Conflicting Territories, and that the enforcement of this Agreement by way of
injunction will not present Employee from earning a living.
(b) Covenant of Employee; Term. Employee agrees that he will
not directly or indirectly, whether as principal, agent, officer, director,
employee, salesman, or otherwise, alone or in associate with any other person,
firm, corporation or other business corporation, enter into, participate in, or
engage in any Conflicting Services within any Conflicting Territory. Employee
also agrees not to either directly or indirectly solicit for employment or
employ any employee of the Corporation for any party other than the Corporation.
Employee further agrees that he shall not directly or indirectly acquire or own
any shares or other interest in the business of any person, firm, corporation or
other business organization which is engaged in or proposes to become engaged in
any Conflicting Services within any Conflicting Territory (other than for bona
fide non-controlling investment purposes). If Employee's employment with the
Corporation terminates for Cause or because of his Voluntary Resignation, and
provided the Corporation is not in default of its payment and other obligations
to Employee arising under this Agreement, Employee's Covenant Not To Compete
shall be effective for a period equal to the longer of (i)
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<PAGE> 9
Five years from the Termination Date or (ii) the end of the Employment Period
and shall be effective and enforceable in and throughout all Conflicting
Territories. If Employee is terminated for any reason other than for Cause or
because of his Voluntary Resignation, Employee's Covenant Not To Compete shall
be effective for a period of one year from the Termination Date and shall be
effective and enforceable in and throughout all Conflicting Territories.
(c) Enforcement. Employee agrees that as to the geographic
areas and the time periods set forth above for the purpose of the Covenant Not
To Compete, each Conflicting Territory and each time period are divisible and
separate so that in the event the Covenant Not To Compete is held by a court to
be invalid or unenforceable as to any geographic area or for any time period
described, the Covenant Not To Compete shall remain valid and enforceable in all
remaining geographic areas and time periods. Employee agrees that it is his
express intention that, in the event a court reforms this Agreement, the
Corporation be given the broadest protection allowed by law as respects this
Agreement and the Covenant Not To Compete.
7.6 EMPLOYEE INVENTION MATERIALS AND INVENTION DISCLOSURE
(a) Employee shall, at all times of employment and/or
thereafter, immediately and fully disclose to the Corporation all information
regarding each Invention conceived, made, developed, or perfected during
Employee's employment by the Corporation, for the purpose of determining the
Corporation's and Employee's rights to each Invention. Employee's duty of
immediate and complete disclosure under this section continues throughout
Employee's employment with the Corporation. Each Invention which Employee is
required to disclose to the Corporation under this section becomes confidential
information at the moment the Employee's duty to disclose under this section
arises, regardless of whether or not Employee actually discloses the Invention
to the Corporation.
(b) Employee agrees to keep, preserve in good condition and
make available to the Corporation complete and up-to-date records, including
sketches, drawings, notebooks and other documents relating to the Invention,
including documents stored in electronically readable form, and documented
source code where applicable, as well as prototypes, and other evidence of the
reduction to practice of the Invention or the conception and occurrence and
dates of the Invention ("Invention Materials"). Employee acknowledges that all
such Invention Materials are the property of the Corporation.
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7.7 EMPLOYEE INVENTION ASSIGNMENT AND CONTINUED EMPLOYEE
ASSISTANCE
(a) Employee hereby assigns to the Corporation all of
Employee's rights in each Invention which (i) is developed using the
Corporation's equipment, supplies, facilities, or information supplied by the
Corporation to Employee; or (ii) which relates directly to the business of the
Corporation, or to the Corporation's actual or demonstrably anticipated research
or development; or (iii) which has resulted from any work performed by the
Employee for the Corporation, whether or not on the Corporation's time. See
attached Exhibit A for a description of Employee Inventions which by law are not
subject to the assignment requirement of this section.
(b) Without limiting the generality of the assignment
provisions in the preceding paragraph, all creative works authored by Employee
during Employee's employment with the Corporation, at the request of the
Corporation, are "works for hire" as that term is defined by the federal
Copyright Act, as enacted or hereafter amended. The copyright to such works is
owned exclusively by the Corporation, and Employee has no ownership rights in,
or control over, such works. Employee shall be entitled to request and receive
authorship credit in such works, and to have it displayed as is typical in the
industry to which the work applies.
7.8 EMPLOYEE COOPERATION
Employee further agrees that Employee will, at no charge to the
Corporation, and at no expense to Employee, during and after Employee's
employment, cooperate with the Corporation in any or all of the following: (i)
prosecution of US and foreign copyright registration applications for any works
of authorship by Employee which the Corporation chooses to file; (ii)
prosecution of US and foreign patent applications, including all continuation,
divisional, continuation-in-part, reissue, reexamination, patent term extension
applications and the like and related petitions, and including all foreign,
regional or international counterparts of such applications for each assignable
Invention and improvements thereon which the Corporation chooses to file; and
(iii) enforcement of any patents or copyright registrations issuing from such
applications, or trade secret rights therein, including executing, verifying,
acknowledging and delivering to the Corporation all such papers, and performing
all such actions, as the Corporation shall from time to time reasonably request
related to such enforcement or prosecution or recordation actions by the
Corporation, such papers including without limitation patent and copyright
registrations applications and assignment documents therefor, declarations,
petitions, and instruments of transfer.
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<PAGE> 11
7.9 CORPORATION'S RIGHT TO FILE
In addition, it is understood that the Corporation, or any the
Corporation nominee, shall have the right to file for patents, copyrights, or
any other state or federal statutory intellectual property rights in assignable
Inventions, in Employee's name, or the Corporation's name, or in the name of the
Corporation's nominee, at the Corporation's sole option.
7.10 WARRANTY OF ORIGINALITY AND PRESERVATION OF THIRD PARTY
CONFIDENCES
(a) Employee undertakes not to disclose to the Corporation or
its other employees any information which Employee is under an obligation to any
third party to keep confidential. Employee represents and warrants that any
information disclosed by Employee to the Corporation is not confidential and/or
proprietary to Employee and/or to any third party.
(b) Employee warrants that, to the best of Employee's
knowledge, all works of authorship or Inventions created by Employee under this
Agreement are original, created by Employee, and will not infringe any trade
secret, patent, copyright, or other proprietary rights of third parties.
Employee represents and warrants that he is under no obligation or restriction,
and further, that Employee will not assume any such obligation or restriction,
which would in any way interfere or be inconsistent with, or present a conflict
of interest concerning, the services furnished by Employee under this Agreement.
8. DISPUTE RESOLUTION
Any dispute related to the parties' employment relationship shall be
resolved exclusively through binding arbitration in Seattle, Washington, under
the American Arbitration Association's Commercial Arbitration Rules (the
"Arbitration Rules"), except as otherwise provided herein. The aggrieved party
must deliver to the other party a written notice of his intention to seek
arbitration no later than one hundred eighty (180) days after the event that
first gives rise to the dispute. If such notice is not delivered within such
time period, the aggrieved party's rights shall be irrevocably waived. The
dispute shall be decided by one arbitrator selected by mutual agreement of the
parties, or absent agreement, in accordance with the Arbitration Rules. The
arbitrator's fees and other expenses of the arbitrator shall be shared equally.
The parties shall bear their own respective costs and attorney's fees.
Washington State law shall govern all substantive aspects of the dispute, and
all procedural issues not covered by the Arbitration Rules. Nothing in this
Section 8, however, shall deprive a court of competent jurisdiction of the
authority to apply a temporary restraining order
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or preliminary injunction prohibiting a violation of this Agreement prior to any
arbitration proceeding.
9. ENFORCEMENT
Employee agrees that damages for breach of his obligations under or
related to paragraph 7 of this Agreement may be difficult to determine and may
be inadequate to remedy the harm that may be caused thereby, and therefore
consents that such obligations may be enforced by injunctive relief and other
appropriate remedies without necessity of bond or other security. Such
injunctive relief shall be in addition to and not in place of any other remedies
available at law or equity. Employee acknowledges that the restraints imposed by
this Agreement are necessary for the protection of the business and goodwill of
the Corporation, are not greater than are necessary to protect said business and
goodwill and that he is capable of gainful employment without breaching this
Agreement. However, should any court or tribunal decline to enforce any
provision of this Agreement as written, the parties hereby agree that this
Agreement shall, to the extent applicable to that circumstance before such
court, be deemed to be modified to restrict Employee's competition with the
Corporation to the maximum extent of time, scope and geography which the courts
shall find enforceable, and such provisions shall be so enforced.
10. ENTIRE AGREEMENT; TERMINATION OF PRIOR EMPLOYMENT AGREEMENTS
The provisions contained herein constitute the entire agreement between
the parties with respect to the subject matter hereof and supersede any and all
prior agreements, understandings and communications between the parties, oral or
written, with respect to such subject matter including but not limited to that
certain Employment Agreement dated January 5, 1994 by and among the Corporation,
Employee and Dennis Burns and that certain Employment Agreement dated January 5,
1994 by and among PRO-TEC, Inc., the Employee and Dennis Burns; such employment
agreements are hereby terminated and are of no further force or effect.
11. MODIFICATION
Any waiver, alteration, amendment or modification of any provisions of
this Agreement shall not be valid unless in writing and signed by all the
parties hereto.
12. ASSIGNMENT
This Agreement is personal to Employee and Employee may not assign any
of his rights or delegate any of his duties hereunder.
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13. NOTICES
All notices and other communications called for or required by this
Agreement shall be in writing and shall be addressed to the parties at their
respective addresses stated below or to such other address as a party may
subsequently specify in writing and shall be given by (i) hand delivery, (ii) US
certified or first-class registered mail, return receipt requested and postage
prepaid, (iii) overnight receipted courier, or (iv) telephonically confirmed
facsimile transmission. Notices given in accordance with this paragraph shall be
effective upon receipt or when receipt is refused.
To the Corporation: Gargoyles, Inc.
5866 S. 194th Street
Kent, WA 98032
Tel: (206) 872-6100
Fax: (206) 872-3267
To Employee: Douglas B. Hauff
The Highlands
Sattle, WA 98177
Tel: (206) 364-5898
Fax: (206) 364-5898
14. GOVERNING LAW
This Agreement, including all matters of construction, validity and
performance, shall be governed by and construed and enforced in accordance with
the laws of the state of Washington without regard to its conflict of law
provisions which might otherwise require the application of the law of any other
jurisdiction. The Corporation expressly consents to jurisdiction of the courts
of the State of Washington and to venue in King County, Washington.
15. HEADINGS
The headings in this Agreement are inserted for convenience of
reference only and shall not be a part of or control or affect the meaning of
this Agreement.
16. COUNTERPARTS
This Agreement may be executed in several counterparts, each of which
shall be deemed an original, and as so executed shall constitute one agreement.
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17. SEVERABILITY
Unless otherwise provided herein, if any provision of this Agreement
shall be invalid, illegal or unenforceable, the validity, legality and
enforceability of the remaining provisions shall not in any way be affected or
impaired thereby.
IN WITNESS WHEREOF, the parties hereto have executed this Employment
Agreement as of the date first above mentioned.
GARGOYLES, INC.,
a Washington corporation
By: /s/ Douglas B. Hauff /s/ Douglas B. Hauff
------------------------------ ------------------------------------
Its: President Douglas B. Hauff
------------------------------
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<PAGE> 1
EXHIBIT 10.39
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT (this "Agreement") is dated as of the 22nd
day of March, 1995, by and between GARGOYLES, INC., a Washington corporation
(the "Corporation") and STEVE KINGMA ("Employee"). In consideration of the
mutual covenants and conditions set forth herein, the parties agree as follows:
1. EMPLOYMENT
Subject to the terms and conditions contained in this Agreement, the
Corporation hereby employs Employee and Employee hereby accepts employment with
the Corporation.
2. DUTIES AND REPORTING RELATIONSHIP
During the Term of Employment, as defined below, Employee shall be
employed in the capacity of Vice President/Chief Financial Officer of the
Corporation, or in such other office or capacity as the Corporation shall
direct, from time to time, during the term hereof. In such capacity, Employee
shall devote his working time and attention to manage the financial and
operation activities of the business and affairs of the Corporation, subject to
the supervision and approval of the President and Board of Directors of the
Corporation. Employee acknowledges and agrees that as Vice-President/Chief
Financial Officer, the hours which he is required to work will vary considerably
and will sometimes be more than 40 hours per week. Employee further acknowledges
and agrees that such work in excess of 40 hours per week is a regular and normal
part of his responsibilities for which he is compensated, and does not in any
way constitute overtime for which he is entitled to receive additional
compensation. Employee also shall perform such duties as may be specified for
companies which are controlled by or are under common control with the
Corporation, including without limitation PRO-TEC, Inc., a Washington
corporation.
3. TERM
Unless sooner terminated in accordance with this Agreement, the
Employee's term of employment shall become effective as of the date first above
written and shall continue until the second (2nd) anniversary thereof (the "Term
of Employment"). Thereafter, the Term of Employment shall continue on a
quarter-to-quarter basis until either party hereto gives at least ninety (90)
days notice to the other of its decision to
<PAGE> 2
end the term hereof. Any notice under this paragraph shall not be considered a
termination pursuant to the other provisions of this Agreement.
4. BASE SALARY
For all services rendered by Employee under this Agreement, Corporation
shall pay Employee a Base Salary at an annual rate of $95,000, payable in twice
monthly installments in accordance with the Corporation's usual payroll policies
and procedures. This Base Salary is subject to annual increases by the Board of
Directors of the Corporation, considering all factors relevant to such a
decision, but shall not be decreased.
5. BENEFITS
5.1 EXPENSES
The Corporation shall reimburse Employee for all reasonable and
necessary business expenses incurred and advanced by him in carrying out his
duties under this Agreement promptly following presentation of receipts and
other supporting information.
5.2 BONUS
(a) Annual Incentive Bonuses. If the Corporation exceeds its
annual operating income objectives by the percentages scheduled below, the
Corporation shall pay to Employee the corresponding bonus scheduled below:
<TABLE>
<S> <C>
100.0% to 110.0% of annual operating income objective $15,000
110.1% to 120.0% of annual operating income objective $17,500
120.1% to 130.0% of annual operating income objective $22,500
130.1% to 140.0% of annual operating income objective $25,000
140.1% or more of annual operating income objective $30,000
</TABLE>
The annual operating income objective bonus shall be paid to Employee
in cash within fifteen days of the date the Corporation's performance as
compared to its annual operating income objectives is determined.
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<PAGE> 3
5.3 COMPANY INCENTIVE STOCK OPTION
Employee will be granted an incentive stock option under the
Corporation's 1995 Stock Option Plan, a copy of which is attached hereto as
Exhibit A, under which you will have the opportunity, in accordance with the
terms of the plan to purchase 5,263 shares of the Corporation's Common Stock at
an exercise price of Nineteen Dollars ($19.00) per share, which is equal to the
current fair market value per share, vesting monthly at the rate of twenty five
percent (25%) per year. Grant of Employee's Stock Option is subject to approval
by the Corporation's Board of Directors.
5.4 COMPANY BENEFITS
Employee shall be entitled to participate fully in all the
Corporation's employee benefits plans established for full-time employees of the
Corporation, including without limitation all health, medical, retirement, life
and disability insurance plans established by the Corporation in accordance with
the terms of such plans. Employee shall be entitled to participate in any
pension and retirement plans, stock option or ownership plans, and other fringe
benefit plans, perquisites and programs as are or may be made available from
time to time to executives or other salaried employees of the Corporation to the
extent eligible under the terms of such plans.
5.5 VACATION; SICK LEAVE
Employee will be entitled to vacation and sick leave in accordance with
policies of the Corporation, as amended from time to time, generally applicable
to executive employees of the Corporation.
6. TERMINATION
6.1 TERMINATION FOR CAUSE
Except as set forth below, this Agreement and Employee's employment by
the Corporation may only be terminated for Cause. For purposes of this
Agreement, "Cause" shall mean: (i) Employee shall be found by the Board of
Directors of the Corporation to be guilty of fraud or other acts of willful
misconduct in connection with his employment hereunder which have a material
adverse effect on the Corporation (ii) any failure by Employee to follow the
directives of the Corporation's President or Board of Directors (iii) conviction
of Employee for commitment of a felony; (iv) any violation of law by Employee
which has a material adverse effect on the Corporation; (v) habitual use of
narcotics or alcohol which impairs Employee's performance of his duties under
this Agreement; (vi) theft or embezzlement by
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<PAGE> 4
Employee from the Corporation; (vii) a material breach of Employee's obligations
under paragraph 7 hereof; (viii) unexcused habitual absence from work for
reasons unrelated to illness, family crisis or disability; or (ix) failure by
Employee to meet annual performance standards and expectations established by
the Corporation.
Employee may not be terminated for Cause unless and until he shall have
been given written notice which sets forth in reasonable detail the facts and
circumstances claimed to provide a basis for termination for Cause pursuant to
this paragraph 6 (the "Termination Notice"). Employee shall be deemed terminated
on the 30th day following his receipt of the Termination Notice (the
"Termination Date") if he shall have failed to cure or correct the circumstances
constituting Cause, or if such circumstances cannot reasonably be cured within a
thirty (30) day period, if Employee shall have failed to actively and diligently
pursue cure of such circumstances.
6.2 DEATH OR DISABILITY
(a) This Agreement and the Employee's employment hereunder
shall terminate upon the death of Employee. The date of Employee's death also is
referred to herein as the "Termination Date."
(b) If Employee is Disabled, the Corporation shall have the
right and may elect to terminate the services of the Employee by written notice.
The day after such written notice has been delivered to the Employee is also
referred to herein as the "Termination Date." For purposes of this Agreement,
"Disabled" shall mean that the Employee is unable to perform his duties under
this Agreement as Vice President/Chief Financial Officer of the Corporation by
reason of any medically determinable physical or mental impairment which can be
expected to result in death or which has lasted or can be expected to last for a
period of not less than 90 days. Determination of whether Employee is Disabled
shall be made in good faith by the Board of Directors of the Corporation on the
basis of medical evidence provided by Employee's physician and, if the parties
disagree, a physician chosen by the Board of Directors.
6.3 RESIGNATION WITH GOOD REASON
Should Employee wish to resign from his position with the Corporation
during the Employment Period with Good Reason, he shall give thirty (30) days
written notice to the Corporation specifying the date as of which his
resignation is to become effective. The date specified in such written notice is
also referred to herein as the "Termination Date". Failure to provide such
notice shall entitle the Corporation to fix the Termination Date as of the last
business day on which Employee reported for work at the principal offices of the
Corporation. "Good Reason" shall mean
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<PAGE> 5
(i) material breach by the Corporation of its obligations hereunder or; (ii) a
significant adverse change in the nature and scope of Employee's position of
employment.
6.4 EMPLOYEE'S VOLUNTARY RESIGNATION
Should Employee wish to resign from his position with the Corporation
during the Employment Period without Good Reason (his "Voluntary Resignation"),
he shall give thirty (30) days written notice to the Corporation and specify the
date as of which his resignation is to become effective. The date specified in
such written notice is also referred to herein as the "Termination Date."
Failure to provide such notice shall entitle the Corporation to fix the
Termination Date as of the last business day on which Employee reported for work
at the principal offices of the Corporation.
6.5 COMPENSATION AND BENEFITS UPON TERMINATION
(a) If the employment of the Employee is terminated for Cause
or by his Voluntary Resignation, the Employee shall not be entitled to any
compensation or other benefits hereunder for any period after the Termination
Date.
(b) If the employment of Employee is terminated other than for
Cause or due to Employee's Voluntary Resignation, Employee shall be entitled to
receive (i) an amount equal to the lesser of six months Base Salary or Base
Salary payable for the remaining period of the Term of Employment, less any
amounts received by Employee under disability insurance policies provided by the
Corporation or as compensation or benefits from employment during such time and
(ii) all benefits under employee benefit plans in which Employee was
participating immediately prior to the Termination Date which would have been
available to Employee during the Term of Employment, provided that Employee's
continued participation is permitted under the terms and provisions of such
employee benefit plans. If Employee's participation in any employee benefit plan
is not permitted, the Corporation shall arrange to provide Employee with
benefits substantially similar to those which Employee otherwise would be
entitled to receive.
7. INTELLECTUAL PROPERTY; NONDISCLOSURE OF CONFIDENTIAL INFORMATION;
COVENANT NOT TO COMPETE
7.1 DEFINITIONS
(a) Confidential Information. For purposes of this Agreement,
Confidential Information shall mean all the Corporation's proprietary
information which derives independent economic value from its secrecy from other
persons, companies, or business entities who could obtain economic value from
its disclosure
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<PAGE> 6
to them or use by them. Confidential Information also includes, without
limitation, research data, trade or business know-how or business plans,
inventions, devices, patterns, compilations, programs, methods, techniques, or
processes which are disclosed or made available by the Corporation to Employee,
or devised by Employee during his employ by the Corporation. Examples of
Confidential Information include, without limitation: all information
specifically identified as proposed installations, products or product lines,
information systems, or other projects, the Corporations' supplier and customer
lists and all customer information and the Corporation's existing and proposed
business and marketing plans and policies, whether written or oral, and whether
designated individually as Confidential Information or not. Confidential
Information does not include information that: (i) is a matter of public
knowledge at the time Employee first learned of the information; or (ii) later
becomes a matter of public knowledge after Employee learns of it, other than
becoming public knowledge by reason of a breach by Employee of the obligations
of confidentiality set out in this Agreement.
(b) Conflicting Services. For purposes of this Agreement,
Conflicting Services shall mean product development or marketing of any eyewear,
or other products which compete with products then in production and marketing,
or reasonably anticipated to be in production and marketing, by the Corporation
or by Pro-Tec, Inc., or by any of their respective exclusive licensees, and
shall in addition mean all services of any type which involve, directly or
indirectly, the use or disclosure of Confidential Information. Conflicting
Services specifically do not include: (i) general product development, marketing
and promotional services, (ii) product development, marketing and promotion of
sportswear and sporting goods in general, and (iii) product development,
marketing and promotion of eyewear and sporting goods (except for product
development, marketing and promotion by methods which include, or make use of,
Confidential Information) that are not competitive with products then in
production and marketing, or reasonably anticipated to be in production and
marketing by the Corporation or by Pro-Tec, Inc., or by any of their respective
exclusive licensees.
(c) Conflicting Territories. For purposes of this Agreement,
Conflicting Territories shall mean, severally or together, each of the states of
the United States, and all foreign countries in which the Corporation and
Pro-Tec products are now sold or are hereafter sold.
(d) Invention. For purposes of this Agreement, Invention shall
mean all new inventions, discoveries, creations and works of authorship, and any
improvements to existing inventions, whether patentable or not, and all software
relating to any inventions, discoveries or improvements, which Employee
conceives,
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<PAGE> 7
makes, develops, or reduces to practice, whether alone or with any other person,
company or business entity, (i) while Employee is working for the Corporation in
any capacity under this Agreement which relates to any questions or problems for
which the Corporation has requested Employee's services, (ii) that are based in
any way on Confidential Information received by Employee from the Corporation or
developed or made by Employee during his employ at the Corporation, or (iii)
with the aid of any equipment, supplies, facilities or employees of the
Corporation or on the Corporation's time.
7.2 NON DISCLOSURE OF CONFIDENTIAL INFORMATION
Employee agrees not to disclose or to use any Confidential Information,
either during or after employment by the Corporation, except as required by the
performance of duties within the scope of Employee's employment. Employee agrees
to apply his best efforts to otherwise prevent unauthorized disclosure or use of
any Confidential Information, and to immediately inform an officer of the
Corporation if any improper disclosure or use does occur.
7.3 ADHERENCE TO CONFIDENTIALITY
Employee acknowledges his understanding and recollection that his
employment with the Corporation has always been under terms of the strictest
confidentiality which were at least the equivalent of the confidentiality terms
of this Agreement, and acknowledges and states that at no time during his
employment with the Corporation has he departed in any substantial way from
adherence to those terms.
7.4 CONFLICTING SERVICES
Although certain provisions of this Agreement allow Employee to engage
in Conflicting Services subject to certain terms and conditions, Employee's
common law and contractual duties to maintain and preserve the secrecy of the
Corporation's Confidential Information continue in perpetuity unabated and
unchanged by those provisions.
7.5 COVENANT NOT TO COMPETE
(a) Representation of Employee. Employee represents that, and
the Corporation offers this employment in reliance upon Employee's
representation that, in the event of termination or expiration of Employee's
employment for any cause whatsoever, Employee's experience, education, training
and capabilities are such that he can obtain employment performing activities
which are not Conflicting Services, or which are to be performed outside of
Conflicting Territories, and that the enforcement
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<PAGE> 8
of this Agreement by way of injunction will not present Employee from earning a
living.
(b) Covenant of Employee; Term. Employee agrees that he will
not directly or indirectly, whether as principal, agent, officer, director,
employee, salesman, or otherwise, alone or in associate with any other person,
firm, corporation or other business corporation, enter into, participate in, or
engage in any Conflicting Services within any Conflicting Territory. Employee
also agrees not to either directly or indirectly solicit for employment or
employ any employee of the Corporation for any party other than the Corporation.
Employee further agrees that he shall not directly or indirectly acquire or own
any shares or other interest in the business of any person, firm, corporation or
other business organization which is engaged in or proposes to become engaged in
any Conflicting Services within any Conflicting Territory (other than for bona
fide non-controlling investment purposes). If Employee's employment with the
Corporation terminates for Cause or because of his Voluntary Resignation, and
provided the Corporation is not in default of its payment and other obligations
to Employee arising under this Agreement, Employee's Covenant Not To Compete
shall be effective for a period equal to the longer of (i) Five years from the
Termination Date or (ii) the end of the Employment Period and shall be effective
and enforceable in and throughout all Conflicting Territories. If Employee is
terminated for any reason other than for Cause or because of his Voluntary
Resignation, Employee's Covenant Not To Compete shall be effective for a period
of one year from the Termination Date and shall be effective and enforceable in
and throughout all Conflicting Territories.
(c) Enforcement. Employee agrees that as to the geographic
areas and the time periods set forth above for the purpose of the Covenant Not
To Compete, each Conflicting Territory and each time period are divisible and
separate so that in the event the Covenant Not To Compete is held by a court to
be invalid or unenforceable as to any geographic area or for any time period
described, the Covenant Not To Compete shall remain valid and enforceable in all
remaining geographic areas and time periods. Employee agrees that it is his
express intention that, in the event a court reforms this Agreement, the
Corporation be given the broadest protection allowed by law as respects this
Agreement and the Covenant Not To Compete.
7.6 EMPLOYEE INVENTION MATERIALS AND INVENTION DISCLOSURE
(a) Employee shall, at all times of employment and/or
thereafter, immediately and fully disclose to the Corporation all information
regarding each Invention conceived, made, developed, or perfected during
Employee's employment by the Corporation, for the purpose of determining the
Corporation's and Employee's
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<PAGE> 9
rights to each Invention. Employee's duty of immediate and complete disclosure
under this section continues throughout Employee's employment with the
Corporation. Each Invention which Employee is required to disclose to the
Corporation under this section becomes confidential information at the moment
the Employee's duty to disclose under this section arises, regardless of whether
or not Employee actually discloses the Invention to the Corporation.
(b) Employee agrees to keep, preserve in good condition and
make available to the Corporation complete and up-to-date records, including
sketches, drawings, notebooks and other documents relating to the Invention,
including documents stored in electronically readable form, and documented
source code where applicable, as well as prototypes, and other evidence of the
reduction to practice of the Invention or the conception and occurrence and
dates of the Invention ("Invention Materials"). Employee acknowledges that all
such Invention Materials are the property of the Corporation.
7.7 EMPLOYEE INVENTION ASSIGNMENT AND CONTINUED EMPLOYEE
ASSISTANCE
(a) Employee hereby assigns to the Corporation all of
Employee's rights in each Invention which (i) is developed using the
Corporation's equipment, supplies, facilities, or information supplied by the
Corporation to Employee; or (ii) which relates directly to the business of the
Corporation, or to the Corporation's actual or demonstrably anticipated research
or development; or (iii) which has resulted from any work performed by the
Employee for the Corporation, whether or not on the Corporation's time. See
attached Exhibit B for a description of Employee Inventions which by law are not
subject to the assignment requirement of this section.
(b) Without limiting the generality of the assignment
provisions in the preceding paragraph, all creative works authored by Employee
during Employee's employment with the Corporation, at the request of the
Corporation, are "works for hire" as that term is defined by the federal
Copyright Act, as enacted or hereafter amended. The copyright to such works is
owned exclusively by the Corporation, and Employee has no ownership rights in,
or control over, such works. Employee shall be entitled to request and receive
authorship credit in such works, and to have it displayed as is typical in the
industry to which the work applies.
7.8 EMPLOYEE COOPERATION
Employee further agrees that Employee will, at no charge to the
Corporation, and at no expense to Employee, during and after Employee's
employment, cooperate with the Corporation in any or all of the following: (i)
prosecution of US and foreign
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<PAGE> 10
copyright registration applications for any works of authorship by Employee
which the Corporation chooses to file; (ii) prosecution of US and foreign patent
applications, including all continuation, divisional, continuation-in-part,
reissue, reexamination, patent term extension applications and the like and
related petitions, and including all foreign, regional or international
counterparts of such applications for each assignable Invention and improvements
thereon which the Corporation chooses to file; and (iii) enforcement of any
patents or copyright registrations issuing from such applications, or trade
secret rights therein, including executing, verifying, acknowledging and
delivering to the Corporation all such papers, and performing all such actions,
as the Corporation shall from time to time reasonably request related to such
enforcement or prosecution or recordation actions by the Corporation, such
papers including without limitation patent and copyright registrations
applications and assignment documents therefor, declarations, petitions, and
instruments of transfer.
7.9 CORPORATION'S RIGHT TO FILE
In addition, it is understood that the Corporation shall have the right
to file for patents, copyrights, or any other state or federal statutory
intellectual property rights in assignable Inventions, in Employee's name, or
the Corporation's name, or in the name of the Corporation's nominee, at the
Corporation's sole option.
7.10 WARRANTY OF ORIGINALITY AND PRESERVATION OF THIRD PARTY
CONFIDENCES
(a) Employee undertakes not to disclose to the Corporation or
its other employees any information which Employee is under an obligation to any
third party to keep confidential. Employee represents and warrants that any
information disclosed by Employee to the Corporation is not confidential and/or
proprietary to Employee and/or to any third party.
(b) Employee warrants that, to the best of Employee's
knowledge, all works of authorship or Inventions created by Employee under this
Agreement are original, created by Employee, and will not infringe any trade
secret, patent, copyright, or other proprietary rights of third parties.
Employee represents and warrants that he is under no obligation or restriction,
and further, that Employee will not assume any such obligation or restriction,
which would in any way interfere or be inconsistent with, or present a conflict
of interest concerning, the services furnished by Employee under this Agreement.
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<PAGE> 11
8. DISPUTE RESOLUTION
Any dispute related to the parties' employment relationship shall be
resolved exclusively through binding arbitration in Seattle, Washington, under
the American Arbitration Association's Commercial Arbitration Rules (the
"Arbitration Rules"), except as otherwise provided herein. The aggrieved party
must deliver to the other party a written notice of his intention to seek
arbitration no later than one hundred eighty (180) days after the event that
first gives rise to the dispute. If such notice is not delivered within such
time period, the aggrieved party's rights shall be irrevocably waived. The
dispute shall be decided by one arbitrator selected by mutual agreement of the
parties, or absent agreement, in accordance with the Arbitration Rules. The
arbitrator's fees and other expenses of the arbitrator shall be shared equally.
The parties shall bear their own respective costs and attorney's fees.
Washington State law shall govern all substantive aspects of the dispute, and
all procedural issues not covered by the Arbitration Rules. Nothing in this
Section 8, however, shall deprive a court of competent jurisdiction of the
authority to apply a temporary restraining order or preliminary injunction
prohibiting a violation of this Agreement prior to any arbitration proceeding.
9. ENFORCEMENT
Employee agrees that damages for breach of his obligations under or
related to paragraph 7 of this Agreement may be difficult to determine and may
be inadequate to remedy the harm that may be caused thereby, and therefore
consents that such obligations may be enforced by injunctive relief and other
appropriate remedies without necessity of bond or other security. Such
injunctive relief shall be in addition to and not in place of any other remedies
available at law or equity. Employee acknowledges that the restraints imposed by
this Agreement are necessary for the protection of the business and goodwill of
the Corporation, are not greater than are necessary to protect said business and
goodwill and that he is capable of gainful employment without breaching this
Agreement. However, should any court or tribunal decline to enforce any
provision of this Agreement as written, the parties hereby agree that this
Agreement shall, to the extent applicable to that circumstance before such
court, be deemed to be modified to restrict Employee's competition with the
Corporation to the maximum extent of time, scope and geography which the courts
shall find enforceable, and such provisions shall be so enforced.
10. ENTIRE AGREEMENT
The provisions contained herein constitute the entire agreement between
the parties with respect to the subject matter hereof and supersede any and all
prior
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<PAGE> 12
agreements, understandings and communications between the parties, oral or
written, with respect to such subject matter.
11. MODIFICATION
Any waiver, alteration, amendment or modification of any provisions of
this Agreement shall not be valid unless in writing and signed by all the
parties hereto.
12. ASSIGNMENT
This Agreement is personal to Employee and Employee may not assign any
of his rights or delegate any of his duties hereunder.
13. NOTICES
All notices and other communications called for or required by this
Agreement shall be in writing and shall be addressed to the parties at their
respective addresses stated below or to such other address as a party may
subsequently specify in writing and shall be given by (i) hand delivery, (ii) US
certified or first-class registered mail, return receipt requested and postage
prepaid, (iii) overnight receipted courier, or (iv) telephonically confirmed
facsimile transmission. Notices given in accordance with this paragraph shall be
effective upon receipt or when receipt is refused.
To the Corporation: Gargoyles, Inc.
5866 S. 194th Street
Kent, WA 98032
Tel: (206) 872-6100
Fax: (206) 872-3267
To Employee: Steve Kingma
5866 S. 194th Street
Kent, WA 98032
Tel: (206) 872-6100
Fax: (206) 872-3317
14. GOVERNING LAW
This Agreement, including all matters of construction, validity and
performance, shall be governed by and construed and enforced in accordance with
the laws of the state of Washington without regard to its conflict of law
provisions which might otherwise require the application of the law of any other
jurisdiction. The Corporation expressly consents to jurisdiction of the courts
of the State of Washington and to venue in King County, Washington.
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15. HEADINGS
The headings in this Agreement are inserted for convenience of
reference only and shall not be a part of or control or affect the meaning of
this Agreement.
16. COUNTERPARTS
This Agreement may be executed in several counterparts, each of which
shall be deemed an original, and as so executed shall constitute one agreement.
17. SEVERABILITY
Unless otherwise provided herein, if any provision of this Agreement
shall be invalid, illegal or unenforceable, the validity, legality and
enforceability of the remaining provisions shall not in any way be affected or
impaired thereby.
IN WITNESS WHEREOF, the parties hereto have executed this Employment
Agreement as of the date first above mentioned.
GARGOYLES, INC.,
a Washington corporation
By: /s/ Douglas B. Hauff /s/ Steven R. Kingma
------------------------------ ------------------------------------
Its: President STEVE KINGMA
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EXHIBIT 10.40
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT (this "Agreement") is dated as of the 1st day
of November, 1995, by and between GARGOYLES, INC., a Washington corporation (the
"Corporation") and TRAVIS WORTH ("Employee"). In consideration of the mutual
covenants and conditions set forth herein, the parties agree as follows:
1. EMPLOYMENT
Subject to the terms and conditions contained in this Agreement, the
Corporation hereby employs Employee and Employee hereby accepts employment with
the Corporation.
2. DUTIES AND REPORTING RELATIONSHIP
During the Term of Employment, as defined below, Employee shall be
employed in the capacity of Senior Vice President of the Corporation, or in such
other office or capacity as the Corporation shall direct, from time to time,
during the term hereof. In such capacity, Employee shall devote his working time
and attention to manage and direct all activities of the business and affairs of
the Corporation, subject to the supervision and approval of the President and
the Board of Directors of the Corporation. Employee acknowledges and agrees that
as Senior Vice President the hours which he is required to work will vary
considerably and will sometimes be more than 40 hours per week. Employee further
acknowledges and agrees that such work in excess of 40 hours per week is a
regular and normal part of the responsibilities for which he is compensated, and
does not in any way constitute overtime for which he is entitled to receive
additional compensation. Employee also shall perform such duties as may be
specified for companies which are controlled by or are under common control with
the Corporation, including without limitation PRO-TEC, Inc., a Washington
corporation.
3. TERM
Unless sooner terminated in accordance with this Agreement, the
Employee's term of employment shall become effective as of the date first above
written and shall continue until the second anniversary hereof (the "Term of
Employment"). Thereafter, the Term of Employment shall continue on a
quarter-to-quarter basis until either party hereto gives at least ninety (90)
days notice to the other of its decision to
<PAGE> 2
end the term hereof. Any notice under this paragraph shall not be considered a
termination pursuant to the other provisions of this Agreement.
4. BASE SALARY
For all services rendered by Employee under this Agreement, the
Corporation shall pay Employee a Base Salary at an annual rate of $135,000,
payable in twice monthly installments in accordance with the Corporation's usual
payroll policies and procedures. This Base Salary is subject to annual increases
by the Board of Directors of the Corporation, considering all factors relevant
to such a decision, but shall not be decreased.
5. BENEFITS
5.1 EXPENSES
The Corporation shall reimburse Employee for all reasonable and
necessary business expenses incurred and advanced by him in carrying out his
duties under this Agreement promptly following presentation of receipts and
other supporting information.
5.2 CLOSING COSTS; MOVING EXPENSES
The Corporation shall reimburse Employee for a maximum of $10,000 of
the closing costs related to the sale of Employee's primary residence in New
York. In addition, the Corporation shall reimburse Employee for Employee's
reasonable moving expenses in an amount to be agreed by the Corporation's
President and Employee.
5.3 SIGNING BONUS
On the first day of Employee's employment with the Corporation, the
Corporation shall pay Employee a bonus of $25,000.
5.4 INCENTIVE BONUS
Beginning January 1, 1996, for calendar year 1996 and thereafter during
the Term of Employment, Employee shall be entitled to participate in incentive
compensation programs established by the Corporation for management. Specific
objectives and bonus amounts will be established by the Corporation for Employee
prior to 1996. Bonus amounts established will range between twenty-five and
fifty percent of Employee's base salary.
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5.5 COMPANY INCENTIVE STOCK OPTION
Employee will be granted an incentive stock option under the
Corporation's 1995 Stock Option Plan (the "Plan"), a copy of which is attached
hereto as Exhibit A, under which Employee will have the opportunity, in
accordance with the terms of the plan to purchase 21,052 shares of the
Corporation's Common Stock at an exercise price of Nineteen Dollars ($19.00) per
share, which is equal to the current fair market value per share, vesting
monthly at the rate of twenty five percent (25%) per year, provided, however,
that vesting of 15,789 of such shares is also subject to the Corporation
achieving the sales volume goals described as follows:
5263 shares vest only if Corporation achieves/has achieved $50 Million
in sales or the Corporation is sold for more than $75 Million;
5263 shares vest only if Corporation achieves/has achieved $75 Million
in sales or the Corporation is sold for more than $100 Million;
5263 shares vest only if Corporation achieves/has achieved $100 Million
in sales or the Corporation is sold for more than $150 Million.
In addition, the provisions of Section 7.1 of the Plan shall not apply
to the 15,789 shares also subject to the sales volume goals unless at the time
Employee desires to exercise his early purchase rights under Section 7.1 of the
Plan such sales volume goals and/or sale price levels have been met.
Grant of Employee's Stock Option is subject to approval by the
Corporation's Board of Directors.
5.6 COMPANY BENEFITS
Employee shall be entitled to participate fully in all the
Corporation's employee benefits plans established for full-time employees of the
Corporation, including without limitation all health, medical, retirement, life
and disability insurance plans established by the Corporation in accordance with
the terms of such plans. Employee shall be entitled to participate in any
pension and retirement plans, stock option or ownership plans, and other fringe
benefit plans, perquisites and programs as are or may be made available from
time to time to executives or other salaried employees of the Corporation to the
extent eligible under the terms of such plans.
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5.7 VACATION; SICK LEAVE
Employee will be entitled to vacation and sick leave in accordance with
policies of the Corporation, as amended from time to time, generally applicable
to executive employees of the Corporation.
6. TERMINATION
6.1 TERMINATION FOR CAUSE
Except as set forth below, this Agreement and Employee's employment by
the Corporation may only be terminated for Cause. For purposes of this
Agreement, "Cause" shall mean: (i) Employee shall be found by the Board of
Directors of the Corporation to be guilty of fraud or other acts of willful
misconduct in connection with his employment hereunder which have a material
adverse effect on the Corporation (ii) any failure by Employee to follow the
directives of the Corporation's President, or other supervisor, or the Board of
Directors (iii) conviction of Employee for commitment of a felony; (iv) any
violation of law by Employee which has a material adverse effect on the
Corporation; (v) habitual use of narcotics or alcohol which impairs Employee's
performance of his duties under this Agreement; (vi) theft or embezzlement by
Employee from the Corporation; (vii) a material breach of Employee's obligations
under paragraph 7 hereof; (viii) unexcused habitual absence from work for
reasons unrelated to illness, family crisis or disability; or (ix) failure by
Employee to meet annual performance standards and expectations established by
the Corporation.
Employee may not be terminated for Cause unless and until he shall have
been given written notice which sets forth in reasonable detail the facts and
circumstances claimed to provide a basis for termination for Cause pursuant to
this paragraph 6 (the "Termination Notice"). Employee shall be deemed terminated
on the 30th day following his receipt of the Termination Notice (the
"Termination Date") if he shall have failed to cure or correct the circumstances
constituting Cause, or if such circumstances cannot reasonably be cured within a
thirty (30) day period, if Employee shall have failed to actively and diligently
pursue cure of such circumstances.
6.2 DEATH OR DISABILITY
(a) This Agreement and the Employee's employment hereunder
shall terminate upon the death of Employee. The date of Employee's death also is
referred to herein as the "Termination Date."
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(b) If Employee is Disabled, the Corporation shall have the
right and may elect to terminate the services of the Employee by written notice.
The day after such written notice has been delivered to the Employee is also
referred to herein as the "Termination Date." For purposes of this Agreement,
"Disabled" shall mean that the Employee is unable to perform his duties under
this Agreement as Senior Vice President of the Corporation by reason of any
medically determinable physical or mental impairment which can be expected to
result in death or which has lasted or can be expected to last for a period of
not less than 90 days. Determination of whether Employee is Disabled shall be
made in good faith by the Board of Directors of the Corporation on the basis of
medical evidence provided by Employee's physician and, if the parties disagree,
a physician chosen by the Board of Directors.
6.3 RESIGNATION WITH GOOD REASON
Should Employee wish to resign from his position with the Corporation
during the Employment Period with Good Reason, he shall give thirty (30) days
written notice to the Corporation specifying the date as of which his
resignation is to become effective. The date specified in such written notice is
also referred to herein as the "Termination Date". Failure to provide such
notice shall entitle the Corporation to fix the Termination Date as of the last
business day on which Employee reported for work at the principal offices of the
Corporation. "Good Reason" shall mean (i) material breach by the Corporation of
its obligations hereunder or; (ii) a significant adverse change in the nature
and scope of Employee's position of employment.
6.4 EMPLOYEE'S VOLUNTARY RESIGNATION
Should Employee wish to resign from his position with the Corporation
during the Employment Period without Good Reason (his "Voluntary Resignation"),
he shall give thirty (30) days written notice to the Corporation and specify the
date as of which his resignation is to become effective. The date specified in
such written notice is also referred to herein as the "Termination Date."
Failure to provide such notice shall entitle the Corporation to fix the
Termination Date as of the last business day on which Employee reported for work
at the principal offices of the Corporation.
6.5 COMPENSATION AND BENEFITS UPON TERMINATION
(a) If the employment of the Employee is terminated for Cause
or by his Voluntary Resignation, the Employee shall not be entitled to any
compensation or other benefits hereunder for any period after the Termination
Date.
(b) If the employment of Employee is terminated other than for
Cause or due to Employee's Voluntary Resignation, Employee shall be entitled to
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receive (i) an amount equal to the lesser of six months Base Salary or Base
Salary payable for the remaining period of the Term of Employment, less any
amounts received by Employee under disability insurance policies provided by the
Corporation or as compensation or benefits from employment during such time and
(ii) all benefits under employee benefit plans in which Employee was
participating immediately prior to the Termination Date which would have been
available to Employee during the Term of Employment, provided that Employee's
continued participation is permitted under the terms and provisions of such
employee benefit plans. If Employee's participation in any employee benefit plan
is not permitted, the Corporation shall arrange to provide Employee with
benefits substantially similar to those which Employee otherwise would be
entitled to receive.
7. INTELLECTUAL PROPERTY; NONDISCLOSURE OF CONFIDENTIAL INFORMATION;
COVENANT NOT TO COMPETE
7.1 DEFINITIONS
(a) Confidential Information. For purposes of this Agreement,
Confidential Information shall mean all the Corporation's proprietary
information which derives independent economic value from its secrecy from other
persons, companies, or business entities who could obtain economic value from
its disclosure to them or use by them. Confidential Information also includes,
without limitation, research data, trade or business know-how or business plans,
inventions, devices, patterns, compilations, programs, methods, techniques, or
processes which are disclosed or made available by the Corporation to Employee,
or devised by Employee during his employ by the Corporation. Examples of
Confidential Information include, without limitation: all information
specifically identified as proposed installations, products or product lines,
information systems, or other projects, the Corporations' supplier and customer
lists and all customer information and the Corporation's existing and proposed
business and marketing plans and policies, whether written or oral, and whether
designated individually as Confidential Information or not. Confidential
Information does not include information that: (i) is a matter of public
knowledge at the time Employee first learned of the information; or (ii) later
becomes a matter of public knowledge after Employee learns of it, other than
becoming public knowledge by reason of a breach by Employee of the obligations
of confidentiality set out in this Agreement.
(b) Conflicting Services. For purposes of this Agreement,
Conflicting Services shall mean product development or marketing of any eyewear,
or other products which compete with products then in production and marketing,
or reasonably anticipated to be in production and marketing, by the Corporation
or by
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<PAGE> 7
Pro-Tec, Inc., or by any of their respective exclusive licensees, and shall in
addition mean all services of any type which involve, directly or indirectly,
the use or disclosure of Confidential Information. Conflicting Services
specifically do not include: (i) general product development, marketing and
promotional services, (ii) product development, marketing and promotion of
sportswear and sporting goods in general, and (iii) product development,
marketing and promotion of eyewear and sporting goods (except for product
development, marketing and promotion by methods which include, or make use of,
Confidential Information) that are not competitive with products then in
production and marketing, or reasonably anticipated to be in production and
marketing by the Corporation or by Pro-Tec, Inc., or by any of their respective
exclusive licensees.
(c) Conflicting Territories. For purposes of this Agreement,
Conflicting Territories shall mean, severally or together, each of the states of
the United States, and all foreign countries in which the Corporation and
Pro-Tec products are now sold or are hereafter sold.
(d) Invention. For purposes of this Agreement, Invention shall
mean all new inventions, discoveries, creations and works of authorship, and any
improvements to existing inventions, whether patentable or not, and all software
relating to any inventions, discoveries or improvements, which Employee
conceives, makes, develops, or reduces to practice, whether alone or with any
other person, company or business entity, (i) while Employee is working for the
Corporation in any capacity under this Agreement which relates to any questions
or problems for which the Corporation has requested Employee's services, (ii)
that are based in any way on Confidential Information received by Employee from
the Corporation or developed or made by Employee during his employ at the
Corporation, or (iii) with the aid of any equipment, supplies, facilities or
employees of the Corporation or on the Corporation's time.
7.2 NON DISCLOSURE OF CONFIDENTIAL INFORMATION
Employee agrees not to disclose or to use any Confidential Information,
either during or after employment by the Corporation, except as required by the
performance of duties within the scope of Employee's employment. Employee agrees
to apply his best efforts to otherwise prevent unauthorized disclosure or use of
any Confidential Information, and to immediately inform an officer of the
Corporation if any improper disclosure or use does occur.
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7.3 ADHERENCE TO CONFIDENTIALITY
Employee acknowledges his understanding and recollection that his
employment with the Corporation has always been under terms of the strictest
confidentiality which were at least the equivalent of the confidentiality terms
of this Agreement, and acknowledges and states that at no time during his
employment with the Corporation has he departed in any substantial way from
adherence to those terms.
7.4 CONFLICTING SERVICES
Although certain provisions of this Agreement allow Employee to engage
in Conflicting Services subject to certain terms and conditions, Employee's
common law and contractual duties to maintain and preserve the secrecy of the
Corporation's Confidential Information continue in perpetuity unabated and
unchanged by those provisions.
7.5 COVENANT NOT TO COMPETE
(a) Representation of Employee. Employee represents that, and
the Corporation offers this employment in reliance upon Employee's
representation that, in the event of termination or expiration of Employee's
employment for any cause whatsoever, Employee's experience, education, training
and capabilities are such that he can obtain employment performing activities
which are not Conflicting Services, or which are to be performed outside of
Conflicting Territories, and that the enforcement of this Agreement by way of
injunction will not present Employee from earning a living.
(b) Covenant of Employee; Term. Employee agrees that he will
not directly or indirectly, whether as principal, agent, officer, director,
employee, salesman, or otherwise, alone or in associate with any other person,
firm, corporation or other business corporation, enter into, participate in, or
engage in any Conflicting Services within any Conflicting Territory. Employee
also agrees not to either directly or indirectly solicit for employment or
employ any employee of the Corporation for any party other than the Corporation.
Employee further agrees that he shall not directly or indirectly acquire or own
any shares or other interest in the business of any person, firm, corporation or
other business organization which is engaged in or proposes to become engaged in
any Conflicting Services within any Conflicting Territory (other than for bona
fide non-controlling investment purposes). If Employee's employment with the
Corporation terminates for Cause or because of his Voluntary Resignation, and
provided the Corporation is not in default of its payment and other obligations
to Employee arising under this Agreement, Employee's Covenant Not To Compete
shall be effective for a period of three years from the
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Termination Date and shall be effective and enforceable in and throughout all
Conflicting Territories. If Employee is terminated for any reason other than for
Cause or because of his Voluntary Resignation, Employee's Covenant Not To
Compete shall be effective for a period of six months from the Termination Date
and shall be effective and enforceable in and throughout all Conflicting
Territories.
(c) Enforcement. Employee agrees that as to the geographic
areas and the time periods set forth above for the purpose of the Covenant Not
To Compete, each Conflicting Territory and each time period are divisible and
separate so that in the event the Covenant Not To Compete is held by a court to
be invalid or unenforceable as to any geographic area or for any time period
described, the Covenant Not To Compete shall remain valid and enforceable in all
remaining geographic areas and time periods. Employee agrees that it is his
express intention that, in the event a court reforms this Agreement, the
Corporation be given the broadest protection allowed by law as respects this
Agreement and the Covenant Not To Compete.
7.6 EMPLOYEE INVENTION MATERIALS AND INVENTION DISCLOSURE
(a) Employee shall, at all times of employment and/or
thereafter, immediately and fully disclose to the Corporation all information
regarding each Invention conceived, made, developed, or perfected during
Employee's employment by the Corporation, for the purpose of determining the
Corporation's and Employee's rights to each Invention. Employee's duty of
immediate and complete disclosure under this section continues throughout
Employee's employment with the Corporation. Each Invention which Employee is
required to disclose to the Corporation under this section becomes confidential
information at the moment the Employee's duty to disclose under this section
arises, regardless of whether or not Employee actually discloses the Invention
to the Corporation.
(b) Employee agrees to keep, preserve in good condition and
make available to the Corporation complete and up-to-date records, including
sketches, drawings, notebooks and other documents relating to the Invention,
including documents stored in electronically readable form, and documented
source code where applicable, as well as prototypes, and other evidence of the
reduction to practice of the Invention or the conception and occurrence and
dates of the Invention ("Invention Materials"). Employee acknowledges that all
such Invention Materials are the property of the Corporation.
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7.7 EMPLOYEE INVENTION ASSIGNMENT AND CONTINUED EMPLOYEE
ASSISTANCE
(a) Employee hereby assigns to the Corporation all of
Employee's rights in each Invention which (i) is developed using the
Corporation's equipment, supplies, facilities, or information supplied by the
Corporation to Employee; or (ii) which relates directly to the business of the
Corporation, or to the Corporation's actual or demonstrably anticipated research
or development; or (iii) which has resulted from any work performed by the
Employee for the Corporation, whether or not on the Corporation's time. See
attached Exhibit B for a description of Employee Inventions which by law are not
subject to the assignment requirement of this section.
(b) Without limiting the generality of the assignment
provisions in the preceding paragraph, all creative works authored by Employee
during Employee's employment with the Corporation, at the request of the
Corporation, are "works for hire" as that term is defined by the federal
Copyright Act, as enacted or hereafter amended. The copyright to such works is
owned exclusively by the Corporation, and Employee has no ownership rights in,
or control over, such works. Employee shall be entitled to request and receive
authorship credit in such works, and to have it displayed as is typical in the
industry to which the work applies.
7.8 EMPLOYEE COOPERATION
Employee further agrees that Employee will, at no charge to the
Corporation, and at no expense to Employee, during and after Employee's
employment, cooperate with the Corporation in any or all of the following: (i)
prosecution of US and foreign copyright registration applications for any works
of authorship by Employee which the Corporation chooses to file; (ii)
prosecution of US and foreign patent applications, including all continuation,
divisional, continuation-in-part, reissue, reexamination, patent term extension
applications and the like and related petitions, and including all foreign,
regional or international counterparts of such applications for each assignable
Invention and improvements thereon which the Corporation chooses to file; and
(iii) enforcement of any patents or copyright registrations issuing from such
applications, or trade secret rights therein, including executing, verifying,
acknowledging and delivering to the Corporation all such papers, and performing
all such actions, as the Corporation shall from time to time reasonably request
related to such enforcement or prosecution or recordation actions by the
Corporation, such papers including without limitation patent and copyright
registrations applications and assignment documents therefor, declarations,
petitions, and instruments of transfer.
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7.9 CORPORATION'S RIGHT TO FILE
In addition, it is understood that the Corporation shall have the right
to file for patents, copyrights, or any other state or federal statutory
intellectual property rights in assignable Inventions, in Employee's name, or
the Corporation's name, or in the name of the Corporation's nominee, at the
Corporation's sole option.
7.10 WARRANTY OF ORIGINALITY AND PRESERVATION OF THIRD PARTY
CONFIDENCES
(a) Employee undertakes not to disclose to the Corporation or
its other employees any information which Employee is under an obligation to any
third party to keep confidential. Employee represents and warrants that any
information disclosed by Employee to the Corporation is not confidential and/or
proprietary to Employee and/or to any third party.
(b) Employee warrants that, to the best of Employee's
knowledge, all works of authorship or Inventions created by Employee under this
Agreement are original, created by Employee, and will not infringe any trade
secret, patent, copyright, or other proprietary rights of third parties.
Employee represents and warrants that he is under no obligation or restriction,
and further, that Employee will not assume any such obligation or restriction,
which would in any way interfere or be inconsistent with, or present a conflict
of interest concerning, the services furnished by Employee under this Agreement.
8. DISPUTE RESOLUTION
Any dispute related to the parties' employment relationship shall be
resolved exclusively through binding arbitration in Seattle, Washington, under
the American Arbitration Association's Commercial Arbitration Rules (the
"Arbitration Rules"), except as otherwise provided herein. The aggrieved party
must deliver to the other party a written notice of his intention to seek
arbitration no later than one hundred eighty (180) days after the event that
first gives rise to the dispute. If such notice is not delivered within such
time period, the aggrieved party's rights shall be irrevocably waived. The
dispute shall be decided by one arbitrator selected by mutual agreement of the
parties, or absent agreement, in accordance with the Arbitration Rules. The
arbitrator's fees and other expenses of the arbitrator shall be shared equally.
The parties shall bear their own respective costs and attorney's fees.
Washington State law shall govern all substantive aspects of the dispute, and
all procedural issues not covered by the Arbitration Rules. Nothing in this
Section 8, however, shall deprive a court of competent jurisdiction of the
authority to apply a temporary restraining order
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or preliminary injunction prohibiting a violation of this Agreement prior to any
arbitration proceeding.
9. ENFORCEMENT
Employee agrees that damages for breach of his obligations under or
related to paragraph 7 of this Agreement may be difficult to determine and may
be inadequate to remedy the harm that may be caused thereby, and therefore
consents that such obligations may be enforced by injunctive relief and other
appropriate remedies without necessity of bond or other security. Such
injunctive relief shall be in addition to and not in place of any other remedies
available at law or equity. Employee acknowledges that the restraints imposed by
this Agreement are necessary for the protection of the business and goodwill of
the Corporation, are not greater than are necessary to protect said business and
goodwill and that he is capable of gainful employment without breaching this
Agreement. However, should any court or tribunal decline to enforce any
provision of this Agreement as written, the parties hereby agree that this
Agreement shall, to the extent applicable to that circumstance before such
court, be deemed to be modified to restrict Employee's competition with the
Corporation to the maximum extent of time, scope and geography which the courts
shall find enforceable, and such provisions shall be so enforced.
10. ENTIRE AGREEMENT
The provisions contained herein constitute the entire agreement between
the parties with respect to the subject matter hereof and supersede any and all
prior agreements, understandings and communications between the parties, oral or
written, with respect to such subject matter, including but not limited to that
certain letter agreement between Employee, the Corporation and Dennis Burns, a
copy of which is attached hereto. Employee hereby waives all right to receive
any benefits under such letter agreement, and such agreement is hereby
terminated and is of no further force or effect.
11. MODIFICATION
Any waiver, alteration, amendment or modification of any provisions of
this Agreement shall not be valid unless in writing and signed by all the
parties hereto.
12. ASSIGNMENT
This Agreement is personal to Employee and Employee may not assign any
of his rights or delegate any of his duties hereunder.
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13. NOTICES
All notices and other communications called for or required by this
Agreement shall be in writing and shall be addressed to the parties at their
respective addresses stated below or to such other address as a party may
subsequently specify in writing and shall be given by (i) hand delivery, (ii) US
certified or first-class registered mail, return receipt requested and postage
prepaid, (iii) overnight receipted courier, or (iv) telephonically confirmed
facsimile transmission. Notices given in accordance with this paragraph shall be
effective upon receipt or when receipt is refused.
To the Corporation: Gargoyles, Inc.
5866 S. 194th Street
Kent, WA 98032
Tel: (206) 872-6100
Fax: (206) 872-3267
To Employee: Travis Worth
Tel:
Fax:
14. GOVERNING LAW
This Agreement, including all matters of construction, validity and
performance, shall be governed by and construed and enforced in accordance with
the laws of the state of Washington without regard to its conflict of law
provisions which might otherwise require the application of the law of any other
jurisdiction. The Corporation expressly consents to jurisdiction of the courts
of the State of Washington and to venue in King County, Washington.
15. HEADINGS
The headings in this Agreement are inserted for convenience of
reference only and shall not be a part of or control or affect the meaning of
this Agreement.
16. COUNTERPARTS
This Agreement may be executed in several counterparts, each of which
shall be deemed an original, and as so executed shall constitute one agreement.
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17. SEVERABILITY
Unless otherwise provided herein, if any provision of this Agreement
shall be invalid, illegal or unenforceable, the validity, legality and
enforceability of the remaining provisions shall not in any way be affected or
impaired thereby.
IN WITNESS WHEREOF, the parties hereto have executed this Employment
Agreement as of the date first above mentioned.
GARGOYLES, INC.,
a Washington corporation
By: /s/ Douglas B. Hauff /s/ Travis Worth
------------------------------- ------------------------------------
Douglas B. Hauff, President Travis Worth
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EXHIBIT 10.41
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT (this "Agreement") is dated as of the 22nd
day of March, 1995, by and between GARGOYLES, INC., a Washington corporation
(the "Corporation") and DAVID JOBE ("Employee"). In consideration of the mutual
covenants and conditions set forth herein, the parties agree as follows:
1. EMPLOYMENT
Subject to the terms and conditions contained in this Agreement, the
Corporation hereby employs Employee and Employee hereby accepts employment with
the Corporation.
2. DUTIES AND REPORTING RELATIONSHIP
During the Term of Employment, as defined below, Employee shall be
employed in the capacity of Vice-President, Sales, and Vice-President,
Protective Eyewear Division of the Corporation, or in such other office or
capacity as the Corporation shall direct, from time to time, during the term
hereof. In such capacity, Employee shall devote his working time and attention
to manage and direct all sales activities of the business and affairs of the
Corporation, subject to the supervision and approval of the President and Board
of Directors of the Corporation. Employee acknowledges and agrees that as
Vice-President, Sales, and Vice-President, Protective Eyewear Division, the
hours which he is required to work will vary considerably and will sometimes be
more than 40 hours per week. Employee further acknowledges and agrees that such
work in excess of 40 hours per week is a regular and normal part of his
responsibilities for which he is compensated, and does not in any way constitute
overtime for which he is entitled to receive additional compensation. Employee
also shall perform such duties as may be specified for companies which are
controlled by or are under common control with the Corporation, including
without limitation PRO-TEC, Inc., a Washington corporation.
3. TERM
Unless sooner terminated in accordance with this Agreement, the
Employee's term of employment shall become effective as of the date first above
written and shall continue until the second (2nd) anniversary thereof (the "Term
of Employment"). Thereafter, the Term of Employment shall continue on a
quarter-to-quarter basis until either party hereto gives at least ninety (90)
days notice to the other of its decision to
<PAGE> 2
end the term hereof. Any notice under this paragraph shall not be considered a
termination pursuant to the other provisions of this Agreement.
4. BASE SALARY
For all services rendered by Employee under this Agreement, Corporation
shall pay Employee a Base Salary at an annual rate of $85,000, payable in twice
monthly installments in accordance with the Corporation's usual payroll policies
and procedures. This Base Salary is subject to annual increases by the Board of
Directors of the Corporation, considering all factors relevant to such a
decision, but shall not be decreased.
5. BENEFITS
5.1 EXPENSES
The Corporation shall reimburse Employee for all reasonable and
necessary business expenses incurred and advanced by him in carrying out his
duties under this Agreement promptly following presentation of receipts and
other supporting information.
5.2 BONUS
(a) Annual Incentive Bonuses. If the Corporation exceeds its
annual operating income objectives by the percentages scheduled below, the
Corporation shall pay to Employee the corresponding bonus scheduled below:
<TABLE>
<S> <C>
100.0% to 110.0% of annual operating income objective $10,000
110.1% to 120.0% of annual operating income objective $12,500
120.1% to 130.0% of annual operating income objective $17,500
130.1% to 140.0% of annual operating income objective $20,000
140.1% or more of annual operating income objective $22,500
</TABLE>
If the Corporation exceeds its annual sales objectives by the
percentages scheduled below, the Corporation shall pay to Employee the
corresponding bonus scheduled below:
<TABLE>
<S> <C>
100.0% to 105.0 % of annual sales objective $12,500
</TABLE>
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<TABLE>
<S> <C>
105.1% to 110.0% of annual sales objective $15,000
110.1% to 115.0% of annual sales objective $17,500
115.1% of more of annual sales objective $20,000
</TABLE>
If the Corporation exceeds its annual sales objectives for the
Corporation's Protective Eyewear Division by the percentages scheduled below,
the Corporation shall pay to Employee the corresponding bonus scheduled below:
<TABLE>
<S> <C>
100.0% to 110.0% of annual sales objective $ 7,500
110.1% to 120.0% of annual sales objective $10,000
120.1% to 130.0% of annual sales objective $12,500
130.1% or more of annual sales objective $15,000
</TABLE>
The annual operating income objective bonus and the annual sales
opjective bonuses shall be paid to Employee in cash within fifteen days of the
date the Corporation's performance as compared to its annual operating income
and sales objectives is determined.
5.3 COMPANY INCENTIVE STOCK OPTION
Employee will be granted an incentive stock option under the
Corporation's 1995 Stock Option Plan, a copy of which is attached hereto as
Exhibit A, under which you will have the opportunity, in accordance with the
terms of the plan to purchase 10,526 shares of the Corporation's Common Stock at
an exercise price of Nineteen Dollars ($19.00) per share, which is equal to the
current fair market value per share, vesting monthly at the rate of twenty five
percent (25%) per year. Grant of Employee's Stock Option is subject to approval
by the Corporation's Board of Directors.
5.4 COMPANY BENEFITS
Employee shall be entitled to participate fully in all the
Corporation's employee benefits plans established for full-time employees of the
Corporation, including without limitation all health, medical, retirement, life
and disability insurance plans established by the Corporation in accordance with
the terms of such plans. Employee shall be entitled to participate in any
pension and retirement plans, stock option or ownership plans, and other fringe
benefit plans, perquisites and programs as are or
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may be made available from time to time to executives or other salaried
employees of the Corporation to the extent eligible under the terms of such
plans.
5.5 VACATION; SICK LEAVE
Employee will be entitled to vacation and sick leave in accordance with
policies of the Corporation, as amended from time to time, generally applicable
to executive employees of the Corporation.
6. TERMINATION
6.1 TERMINATION FOR CAUSE
Except as set forth below, this Agreement and Employee's employment by
the Corporation may only be terminated for Cause. For purposes of this
Agreement, "Cause" shall mean: (i) Employee shall be found by the Board of
Directors of the Corporation to be guilty of fraud or other acts of willful
misconduct in connection with his employment hereunder which have a material
adverse effect on the Corporation (ii) any failure by Employee to follow the
directives of the Corporation's President or Board of Directors (iii) conviction
of Employee for commitment of a felony; (iv) any violation of law by Employee
which has a material adverse effect on the Corporation; (v) habitual use of
narcotics or alcohol which impairs Employee's performance of his duties under
this Agreement; (vi) theft or embezzlement by Employee from the Corporation;
(vii) a material breach of Employee's obligations under paragraph 7 hereof;
(viii) unexcused habitual absence from work for reasons unrelated to illness,
family crisis or disability; or (ix) failure by Employee to meet annual
performance standards and expectations established by the Corporation.
Employee may not be terminated for Cause unless and until he shall have
been given written notice which sets forth in reasonable detail the facts and
circumstances claimed to provide a basis for termination for Cause pursuant to
this paragraph 6 (the "Termination Notice"). Employee shall be deemed terminated
on the 30th day following his receipt of the Termination Notice (the
"Termination Date") if he shall have failed to cure or correct the circumstances
constituting Cause, or if such circumstances cannot reasonably be cured within a
thirty (30) day period, if Employee shall have failed to actively and diligently
pursue cure of such circumstances.
6.2 DEATH OR DISABILITY
(a) This Agreement and the Employee's employment hereunder
shall terminate upon the death of Employee. The date of Employee's death also is
referred to herein as the "Termination Date."
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(b) If Employee is Disabled, the Corporation shall have the
right and may elect to terminate the services of the Employee by written notice.
The day after such written notice has been delivered to the Employee is also
referred to herein as the "Termination Date." For purposes of this Agreement,
"Disabled" shall mean that the Employee is unable to perform his duties under
this Agreement as Vice-President, Sales, and Vice-President, Protective Eyewear
Division of the Corporation by reason of any medically determinable physical or
mental impairment which can be expected to result in death or which has lasted
or can be expected to last for a period of not less than 90 days. Determination
of whether Employee is Disabled shall be made in good faith by the Board of
Directors of the Corporation on the basis of medical evidence provided by
Employee's physician and, if the parties disagree, a physician chosen by the
Board of Directors.
6.3 RESIGNATION WITH GOOD REASON
Should Employee wish to resign from his position with the Corporation
during the Employment Period with Good Reason, he shall give thirty (30) days
written notice to the Corporation specifying the date as of which his
resignation is to become effective. The date specified in such written notice is
also referred to herein as the "Termination Date". Failure to provide such
notice shall entitle the Corporation to fix the Termination Date as of the last
business day on which Employee reported for work at the principal offices of the
Corporation. "Good Reason" shall mean (i) material breach by the Corporation of
its obligations hereunder or; (ii) a significant adverse change in the nature
and scope of Employee's position of employment.
6.4 EMPLOYEE'S VOLUNTARY RESIGNATION
Should Employee wish to resign from his position with the Corporation
during the Employment Period without Good Reason (his "Voluntary Resignation"),
he shall give thirty (30) days written notice to the Corporation and specify the
date as of which his resignation is to become effective. The date specified in
such written notice is also referred to herein as the "Termination Date."
Failure to provide such notice shall entitle the Corporation to fix the
Termination Date as of the last business day on which Employee reported for work
at the principal offices of the Corporation.
6.5 COMPENSATION AND BENEFITS UPON TERMINATION
(a) If the employment of the Employee is terminated for Cause
or by his Voluntary Resignation, the Employee shall not be entitled to any
compensation or other benefits hereunder for any period after the Termination
Date.
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(b) If the employment of Employee is terminated other than for
Cause or due to Employee's Voluntary Resignation, Employee shall be entitled to
receive (i) an amount equal to the lesser of six months Base Salary or Base
Salary payable for the remaining period of the Term of Employment, less any
amounts received by Employee under disability insurance policies provided by the
Corporation or as compensation or benefits from employment during such time and
(ii) all benefits under employee benefit plans in which Employee was
participating immediately prior to the Termination Date which would have been
available to Employee during the Term of Employment, provided that Employee's
continued participation is permitted under the terms and provisions of such
employee benefit plans. If Employee's participation in any employee benefit plan
is not permitted, the Corporation shall arrange to provide Employee with
benefits substantially similar to those which Employee otherwise would be
entitled to receive.
7. INTELLECTUAL PROPERTY; NONDISCLOSURE OF CONFIDENTIAL INFORMATION;
COVENANT NOT TO COMPETE
7.1 DEFINITIONS
(a) Confidential Information. For purposes of this Agreement,
Confidential Information shall mean all the Corporation's proprietary
information which derives independent economic value from its secrecy from other
persons, companies, or business entities who could obtain economic value from
its disclosure to them or use by them. Confidential Information also includes,
without limitation, research data, trade or business know-how or business plans,
inventions, devices, patterns, compilations, programs, methods, techniques, or
processes which are disclosed or made available by the Corporation to Employee,
or devised by Employee during his employ by the Corporation. Examples of
Confidential Information include, without limitation: all information
specifically identified as proposed installations, products or product lines,
information systems, or other projects, the Corporations' supplier and customer
lists and all customer information and the Corporation's existing and proposed
business and marketing plans and policies, whether written or oral, and whether
designated individually as Confidential Information or not. Confidential
Information does not include information that: (i) is a matter of public
knowledge at the time Employee first learned of the information; or (ii) later
becomes a matter of public knowledge after Employee learns of it, other than
becoming public knowledge by reason of a breach by Employee of the obligations
of confidentiality set out in this Agreement.
(b) Conflicting Services. For purposes of this Agreement,
Conflicting Services shall mean product development or marketing of any eyewear,
or
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<PAGE> 7
other products which compete with products then in production and marketing, or
reasonably anticipated to be in production and marketing, by the Corporation or
by Pro-Tec, Inc., or by any of their respective exclusive licensees, and shall
in addition mean all services of any type which involve, directly or indirectly,
the use or disclosure of Confidential Information. Conflicting Services
specifically do not include: (i) general product development, marketing and
promotional services, (ii) product development, marketing and promotion of
sportswear and sporting goods in general, and (iii) product development,
marketing and promotion of eyewear and sporting goods (except for product
development, marketing and promotion by methods which include, or make use of,
Confidential Information) that are not competitive with products then in
production and marketing, or reasonably anticipated to be in production and
marketing by the Corporation or by Pro-Tec, Inc., or by any of their respective
exclusive licensees.
(c) Conflicting Territories. For purposes of this Agreement,
Conflicting Territories shall mean, severally or together, each of the states of
the United States, and all foreign countries in which the Corporation and
Pro-Tec products are now sold or are hereafter sold.
(d) Invention. For purposes of this Agreement, Invention shall
mean all new inventions, discoveries, creations and works of authorship, and any
improvements to existing inventions, whether patentable or not, and all software
relating to any inventions, discoveries or improvements, which Employee
conceives, makes, develops, or reduces to practice, whether alone or with any
other person, company or business entity, (i) while Employee is working for the
Corporation in any capacity under this Agreement which relates to any questions
or problems for which the Corporation has requested Employee's services, (ii)
that are based in any way on Confidential Information received by Employee from
the Corporation or developed or made by Employee during his employ at the
Corporation, or (iii) with the aid of any equipment, supplies, facilities or
employees of the Corporation or on the Corporation's time.
7.2 NON DISCLOSURE OF CONFIDENTIAL INFORMATION
Employee agrees not to disclose or to use any Confidential Information,
either during or after employment by the Corporation, except as required by the
performance of duties within the scope of Employee's employment. Employee agrees
to apply his best efforts to otherwise prevent unauthorized disclosure or use of
any Confidential Information, and to immediately inform an officer of the
Corporation if any improper disclosure or use does occur.
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<PAGE> 8
7.3 ADHERENCE TO CONFIDENTIALITY
Employee acknowledges his understanding and recollection that his
employment with the Corporation has always been under terms of the strictest
confidentiality which were at least the equivalent of the confidentiality terms
of this Agreement, and acknowledges and states that at no time during his
employment with the Corporation has he departed in any substantial way from
adherence to those terms.
7.4 CONFLICTING SERVICES
Although certain provisions of this Agreement allow Employee to engage
in Conflicting Services subject to certain terms and conditions, Employee's
common law and contractual duties to maintain and preserve the secrecy of the
Corporation's Confidential Information continue in perpetuity unabated and
unchanged by those provisions.
7.5 COVENANT NOT TO COMPETE
(a) Representation of Employee. Employee represents that, and
the Corporation offers this employment in reliance upon Employee's
representation that, in the event of termination or expiration of Employee's
employment for any cause whatsoever, Employee's experience, education, training
and capabilities are such that he can obtain employment performing activities
which are not Conflicting Services, or which are to be performed outside of
Conflicting Territories, and that the enforcement of this Agreement by way of
injunction will not present Employee from earning a living.
(b) Covenant of Employee; Term. Employee agrees that he will
not directly or indirectly, whether as principal, agent, officer, director,
employee, salesman, or otherwise, alone or in associate with any other person,
firm, corporation or other business corporation, enter into, participate in, or
engage in any Conflicting Services within any Conflicting Territory. Employee
also agrees not to either directly or indirectly solicit for employment or
employ any employee of the Corporation for any party other than the Corporation.
Employee further agrees that he shall not directly or indirectly acquire or own
any shares or other interest in the business of any person, firm, corporation or
other business organization which is engaged in or proposes to become engaged in
any Conflicting Services within any Conflicting Territory (other than for bona
fide non-controlling investment purposes). If Employee's employment with the
Corporation terminates for Cause or because of his Voluntary Resignation, and
provided the Corporation is not in default of its payment and other obligations
to Employee arising under this Agreement, Employee's Covenant Not To Compete
shall be effective for a period of five years from the
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<PAGE> 9
Termination Date or (ii) the end of the Employment Period and shall be effective
and enforceable in and throughout all Conflicting Territories. If Employee is
terminated for any reason other than for Cause or because of his Voluntary
Resignation, Employee's Covenant Not To Compete shall be effective for a period
of one year from the Termination Date and shall be effective and enforceable in
and throughout all Conflicting Territories.
(c) Enforcement. Employee agrees that as to the geographic
areas and the time periods set forth above for the purpose of the Covenant Not
To Compete, each Conflicting Territory and each time period are divisible and
separate so that in the event the Covenant Not To Compete is held by a court to
be invalid or unenforceable as to any geographic area or for any time period
described, the Covenant Not To Compete shall remain valid and enforceable in all
remaining geographic areas and time periods. Employee agrees that it is his
express intention that, in the event a court reforms this Agreement, the
Corporation be given the broadest protection allowed by law as respects this
Agreement and the Covenant Not To Compete.
7.6 EMPLOYEE INVENTION MATERIALS AND INVENTION DISCLOSURE
(a) Employee shall, at all times of employment and/or
thereafter, immediately and fully disclose to the Corporation all information
regarding each Invention conceived, made, developed, or perfected during
Employee's employment by the Corporation, for the purpose of determining the
Corporation's and Employee's rights to each Invention. Employee's duty of
immediate and complete disclosure under this section continues throughout
Employee's employment with the Corporation. Each Invention which Employee is
required to disclose to the Corporation under this section becomes confidential
information at the moment the Employee's duty to disclose under this section
arises, regardless of whether or not Employee actually discloses the Invention
to the Corporation.
(b) Employee agrees to keep, preserve in good condition and
make available to the Corporation complete and up-to-date records, including
sketches, drawings, notebooks and other documents relating to the Invention,
including documents stored in electronically readable form, and documented
source code where applicable, as well as prototypes, and other evidence of the
reduction to practice of the Invention or the conception and occurrence and
dates of the Invention ("Invention Materials"). Employee acknowledges that all
such Invention Materials are the property of the Corporation.
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7.7 EMPLOYEE INVENTION ASSIGNMENT AND CONTINUED EMPLOYEE
ASSISTANCE
(a) Employee hereby assigns to the Corporation all of
Employee's rights in each Invention which (i) is developed using the
Corporation's equipment, supplies, facilities, or information supplied by the
Corporation to Employee; or (ii) which relates directly to the business of the
Corporation, or to the Corporation's actual or demonstrably anticipated research
or development; or (iii) which has resulted from any work performed by the
Employee for the Corporation, whether or not on the Corporation's time. See
attached Exhibit B for a description of Employee Inventions which by law are not
subject to the assignment requirement of this section.
(b) Without limiting the generality of the assignment
provisions in the preceding paragraph, all creative works authored by Employee
during Employee's employment with the Corporation, at the request of the
Corporation, are "works for hire" as that term is defined by the federal
Copyright Act, as enacted or hereafter amended. The copyright to such works is
owned exclusively by the Corporation, and Employee has no ownership rights in,
or control over, such works. Employee shall be entitled to request and receive
authorship credit in such works, and to have it displayed as is typical in the
industry to which the work applies.
7.8 EMPLOYEE COOPERATION
Employee further agrees that Employee will, at no charge to the
Corporation, and at no expense to Employee, during and after Employee's
employment, cooperate with the Corporation in any or all of the following: (i)
prosecution of US and foreign copyright registration applications for any works
of authorship by Employee which the Corporation chooses to file; (ii)
prosecution of US and foreign patent applications, including all continuation,
divisional, continuation-in-part, reissue, reexamination, patent term extension
applications and the like and related petitions, and including all foreign,
regional or international counterparts of such applications for each assignable
Invention and improvements thereon which the Corporation chooses to file; and
(iii) enforcement of any patents or copyright registrations issuing from such
applications, or trade secret rights therein, including executing, verifying,
acknowledging and delivering to the Corporation all such papers, and performing
all such actions, as the Corporation shall from time to time reasonably request
related to such enforcement or prosecution or recordation actions by the
Corporation, such papers including without limitation patent and copyright
registrations applications and assignment documents therefor, declarations,
petitions, and instruments of transfer.
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7.9 CORPORATION'S RIGHT TO FILE
In addition, it is understood that the Corporation shall have the right
to file for patents, copyrights, or any other state or federal statutory
intellectual property rights in assignable Inventions, in Employee's name, or
the Corporation's name, or in the name of the Corporation's nominee, at the
Corporation's sole option.
7.10 WARRANTY OF ORIGINALITY AND PRESERVATION OF THIRD PARTY
CONFIDENCES
(a) Employee undertakes not to disclose to the Corporation or
its other employees any information which Employee is under an obligation to any
third party to keep confidential. Employee represents and warrants that any
information disclosed by Employee to the Corporation is not confidential and/or
proprietary to Employee and/or to any third party.
(b) Employee warrants that, to the best of Employee's
knowledge, all works of authorship or Inventions created by Employee under this
Agreement are original, created by Employee, and will not infringe any trade
secret, patent, copyright, or other proprietary rights of third parties.
Employee represents and warrants that he is under no obligation or restriction,
and further, that Employee will not assume any such obligation or restriction,
which would in any way interfere or be inconsistent with, or present a conflict
of interest concerning, the services furnished by Employee under this Agreement.
8. DISPUTE RESOLUTION
Any dispute related to the parties' employment relationship shall be
resolved exclusively through binding arbitration in Seattle, Washington, under
the American Arbitration Association's Commercial Arbitration Rules (the
"Arbitration Rules"), except as otherwise provided herein. The aggrieved party
must deliver to the other party a written notice of his intention to seek
arbitration no later than one hundred eighty (180) days after the event that
first gives rise to the dispute. If such notice is not delivered within such
time period, the aggrieved party's rights shall be irrevocably waived. The
dispute shall be decided by one arbitrator selected by mutual agreement of the
parties, or absent agreement, in accordance with the Arbitration Rules. The
arbitrator's fees and other expenses of the arbitrator shall be shared equally.
The parties shall bear their own respective costs and attorney's fees.
Washington State law shall govern all substantive aspects of the dispute, and
all procedural issues not covered by the Arbitration Rules. Nothing in this
Section 8, however, shall deprive a court of competent jurisdiction of the
authority to apply a temporary restraining order
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or preliminary injunction prohibiting a violation of this Agreement prior to any
arbitration proceeding.
9. ENFORCEMENT
Employee agrees that damages for breach of his obligations under or
related to paragraph 7 of this Agreement may be difficult to determine and may
be inadequate to remedy the harm that may be caused thereby, and therefore
consents that such obligations may be enforced by injunctive relief and other
appropriate remedies without necessity of bond or other security. Such
injunctive relief shall be in addition to and not in place of any other remedies
available at law or equity. Employee acknowledges that the restraints imposed by
this Agreement are necessary for the protection of the business and goodwill of
the Corporation, are not greater than are necessary to protect said business and
goodwill and that he is capable of gainful employment without breaching this
Agreement. However, should any court or tribunal decline to enforce any
provision of this Agreement as written, the parties hereby agree that this
Agreement shall, to the extent applicable to that circumstance before such
court, be deemed to be modified to restrict Employee's competition with the
Corporation to the maximum extent of time, scope and geography which the courts
shall find enforceable, and such provisions shall be so enforced.
10. ENTIRE AGREEMENT
The provisions contained herein constitute the entire agreement between
the parties with respect to the subject matter hereof and supersede any and all
prior agreements, understandings and communications between the parties, oral or
written, with respect to such subject matter.
11. MODIFICATION
Any waiver, alteration, amendment or modification of any provisions of
this Agreement shall not be valid unless in writing and signed by all the
parties hereto.
12. ASSIGNMENT
This Agreement is personal to Employee and Employee may not assign any
of his rights or delegate any of his duties hereunder.
13. NOTICES
All notices and other communications called for or required by this
Agreement shall be in writing and shall be addressed to the parties at their
respective addresses stated below or to such other address as a party may
subsequently specify in writing
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and shall be given by (i) hand delivery, (ii) US certified or first-class
registered mail, return receipt requested and postage prepaid, (iii) overnight
receipted courier, or (iv) telephonically confirmed facsimile transmission.
Notices given in accordance with this paragraph shall be effective upon receipt
or when receipt is refused.
To the Corporation: Gargoyles, Inc.
5866 S. 194th Street
Kent, WA 98032
Tel: (206) 872-6100
Fax: (206) 872-3267
To Employee: David Jobe
5866 S. 194th Street
Kent, WA 98032
Tel: (206) 872-6100
Fax: (206) 872-3317
14. GOVERNING LAW
This Agreement, including all matters of construction, validity and
performance, shall be governed by and construed and enforced in accordance with
the laws of the state of Washington without regard to its conflict of law
provisions which might otherwise require the application of the law of any other
jurisdiction. The Corporation expressly consents to jurisdiction of the courts
of the State of Washington and to venue in King County, Washington.
15. HEADINGS
The headings in this Agreement are inserted for convenience of
reference only and shall not be a part of or control or affect the meaning of
this Agreement.
16. COUNTERPARTS
This Agreement may be executed in several counterparts, each of which
shall be deemed an original, and as so executed shall constitute one agreement.
17. SEVERABILITY
Unless otherwise provided herein, if any provision of this Agreement
shall be invalid, illegal or unenforceable, the validity, legality and
enforceability of the remaining provisions shall not in any way be affected or
impaired thereby.
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IN WITNESS WHEREOF, the parties hereto have executed this Employment
Agreement as of the date first above mentioned.
GARGOYLES, INC.,
a Washington corporation
By: /s/ Douglas B. Hauff /s/ David Jobe
------------------------------- ------------------------------------
DAVID JOBE
Its: President
------------------------------
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EXHIBIT 10.42
GARGOYLES, INC.
INDEMNIFICATION AGREEMENT
This Indemnification Agreement (this "Agreement") dated as of
_________________, is made between Gargoyles, Inc., a Washington corporation
(the "Company"), and ____________ ("Indemnitee").
RECITALS
A. Indemnitee is an officer or director of the Company and in such
capacity is performing valuable services for the Company.
B. The Company and Indemnitee recognize the difficulty in obtaining
directors' and officers' liability insurance, the significant cost of such
insurance and the general reduction in the coverage of such insurance.
C. The Company and Indemnitee further recognize the substantial
increase in litigation subjecting officers and directors to expensive litigation
risks at the same time that such liability insurance has been severely limited.
D. The shareholders of the Company have adopted bylaws (the "Bylaws")
providing for indemnification of the officers, directors, agents and employees
of the Company to the full extent permitted by the Washington Business
Corporation Act (the "Statute").
E. The Bylaws and the Statute specifically provide that they are not
exclusive, and thereby contemplate that contracts may be entered into between
the Company and the members of its Board of Directors and its officers with
respect to indemnification of such directors and officers.
F. In order to induce Indemnitee to continue to serve as an officer
and/or director, as the case may be, of the Company, the Company has agreed to
enter into this Agreement with Indemnitee.
AGREEMENT
In consideration of the recitals above, the mutual covenants and
agreements herein contained, and Indemnitee's continued service as an officer
and/or director, as the case may be, of the Company after the date hereof, the
parties to this Agreement agree as follows:
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<PAGE> 2
1. INDEMNITY OF INDEMNITEE
1.1 SCOPE
The Company agrees to hold harmless and indemnify Indemnitee to the
full extent permitted by law, notwithstanding that such indemnification is not
specifically authorized by this Agreement, the Company's Articles of
Incorporation, the Bylaws, the Statute or otherwise. In the event of any change,
after the date of this Agreement, in any applicable law, statute or rule
regarding the right of a Washington corporation to indemnify a member of its
board of directors or an officer, such changes, to the extent that they would
expand Indemnitee's rights hereunder, shall be within the purview of
Indemnitee's rights and the Company's obligations hereunder, and, to the extent
that they would narrow Indemnitee's rights hereunder, shall be excluded from
this Agreement; provided, however, that any change that is required by
applicable laws, statutes or rules to be applied to this Agreement shall be so
applied regardless of whether the effect of such change is to narrow
Indemnitee's rights hereunder.
1.2 NONEXCLUSIVITY
The indemnification provided by this Agreement shall not be deemed
exclusive of any rights to which Indemnitee may be entitled under the Company's
Articles of Incorporation, the Bylaws, any agreement, any vote of shareholders
or disinterested directors, the Statute, or otherwise, whether as to action in
Indemnitee's official capacity or otherwise.
1.3 ADDITIONAL INDEMNITY
If Indemnitee was or is made a party, or is threatened to be made a
party, to or is otherwise involved (including, without limitation, as a witness)
in any Proceeding (as defined below), the Company shall hold harmless and
indemnify Indemnitee from and against any and all losses, claims, damages,
liabilities or expenses (including attorneys' fees, judgments, fines, ERISA
excise taxes or penalties, amounts paid in settlement and other expenses
incurred in connection with such Proceeding) (collectively, "Damages").
1.4 DEFINITION OF PROCEEDING
For purposes of this Agreement, "Proceeding" shall mean any actual,
pending or threatened action, suit, claim or proceeding, whether civil,
criminal, administrative or investigative and whether formal or informal, in
which Indemnitee is, was or becomes involved by reason of the fact that
Indemnitee is or was a director, officer, employee or agent of the Company or
that, being or having been such a director, officer, employee or agent,
Indemnitee is or was serving at the request of the Company as a director,
officer, employee, trustee or agent of another corporation or of a partnership,
joint venture, trust or other enterprise (collectively a "Related Company"),
including service with respect to an employee benefit plan, whether the basis of
such proceeding is alleged action (or inaction) by Indemnitee
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<PAGE> 3
in an official capacity as a director, officer, employee, trustee or agent or in
any other capacity while serving as a director, officer, employee, trustee or
agent; provided, however, that, except with respect to an action to enforce the
provisions of this Agreement, "Proceeding" shall not include any action, suit,
claim or proceeding instituted by or at the direction of Indemnitee unless such
action, suit, claim or proceeding is or was authorized by the Company's Board of
Directors.
1.5 DETERMINATION OF ENTITLEMENT
In the event that a determination of Indemnitee's entitlement to
indemnification is required pursuant to Section 23B.08.550 of the Statute or any
successor thereto or pursuant to other applicable law, the appropriate
decision-maker shall make such determination; provided, however, that Indemnitee
shall initially be presumed in all cases to be entitled to indemnification, that
Indemnitee may establish a conclusive presumption of any fact necessary to such
a determination by delivering to the Company a declaration made under penalty of
perjury that such fact is true and that, unless the Company shall deliver to
Indemnitee written notice of a determination that Indemnitee is not entitled to
indemnification within twenty (20) days of the Company's receipt of Indemnitee's
initial written request for indemnification, such determination shall
conclusively be deemed to have been made in favor of the Company's provision of
indemnification and Company hereby agrees not to assert otherwise.
1.6 SURVIVAL
The indemnification provided under this Agreement shall apply to any
and all Proceedings, notwithstanding that Indemnitee has ceased to be a
director, officer, employee, trustee or agent of the Company or a Related
Company.
2. EXPENSE ADVANCES
2.1 GENERALLY
The right to indemnification of Damages conferred by Section 1 shall
include the right to have the Company pay Indemnitee's expenses in any
Proceeding as such expenses are incurred and in advance of such Proceeding's
final disposition (such right is referred to hereinafter as an "Expense
Advance").
2.2 CONDITIONS TO EXPENSE ADVANCE
The Company's obligation to provide an Expense Advance is subject to
the following conditions:
2.2.1 UNDERTAKING
If the Proceeding arose in connection with Indemnitee's service as a
director or officer of the Company (and not in any other capacity in which
Indemnitee rendered service,
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<PAGE> 4
including service to any Related Company), then Indemnitee or his or her
representative shall have executed and delivered to the Company an undertaking,
which need not be secured and shall be accepted without reference to
Indemnitee's financial ability to make repayment, by or on behalf of Indemnitee
to repay all Expense Advances if and to the extent that it shall ultimately be
determined by a final, unappealable decision rendered by a court having
jurisdiction over the parties and the question that Indemnitee is not entitled
to be indemnified for such Expense Advance under this Agreement or otherwise.
2.2.2 COOPERATION
Indemnitee shall give the Company such information and cooperation as
it may reasonably request and as shall be within Indemnitee's power.
2.2.3 AFFIRMATION
Indemnitee shall furnish, upon request by the Company and if required
under applicable law, a written affirmation of Indemnitee's good faith belief
that any applicable standards of conduct have been met by Indemnitee.
3. PROCEDURES FOR ENFORCEMENT
3.1 ENFORCEMENT
In the event that a claim for indemnity, an Expense Advance or
otherwise is made hereunder and is not paid in full within sixty days (twenty
days for an Expense Advance) after written notice of such claim is delivered to
the Company, Indemnitee may, but need not, at any time thereafter bring suit
against the Company to recover the unpaid amount of the claim (an "Enforcement
Action").
3.2 PRESUMPTIONS IN ENFORCEMENT ACTION
In any Enforcement Action the following presumptions (and limitation on
presumptions) shall apply:
(a) The Company shall conclusively be presumed to have entered into
this Agreement and assumed the obligations imposed on it hereunder in order to
induce Indemnitee to continue as an officer and/or director, as the case may be,
of the Company;
(b) Neither (i) the failure of the Company (including the Company's
Board of Directors, independent or special legal counsel or the Company's
shareholders) to have made a determination prior to the commencement of the
Enforcement Action that indemnification of Indemnitee is proper in the
circumstances nor (ii) an actual determination by the Company, its Board of
Directors, independent or special legal counsel or shareholders that Indemnitee
is not entitled to indemnification shall be a defense to the Enforcement Action
or create a presumption that Indemnitee is not entitled to indemnification
hereunder; and
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<PAGE> 5
(c) If Indemnitee is or was serving as a director, officer, employee,
trustee or agent of a corporation of which a majority of the shares entitled to
vote in the election of its directors is held by the Company or in an executive
or management capacity in a partnership, joint venture, trust or other
enterprise of which the Company or a wholly owned subsidiary of the Company is a
general partner or has a majority ownership, then such corporation, partnership,
joint venture, trust or enterprise shall conclusively be deemed a Related
Company and Indemnitee shall conclusively be deemed to be serving such Related
Company at the request of the Company.
3.3 ATTORNEYS' FEES AND EXPENSES FOR ENFORCEMENT ACTION
In the event Indemnitee is required to bring an Enforcement Action, the
Company shall indemnify and hold harmless Indemnitee against all of Indemnitee's
fees and expenses in bringing and pursuing the Enforcement Action (including
attorneys' fees at any stage, including on appeal); provided, however, that the
Company shall not be required to provide such indemnity for such attorneys' fees
or expenses if a court of competent jurisdiction determines that each of the
material assertions made by Indemnitee in such Enforcement Action was not made
in good faith or was frivolous.
4. LIMITATIONS ON INDEMNITY; MUTUAL ACKNOWLEDGEMENT
4.1 LIMITATION ON INDEMNITY
No indemnity pursuant to this Agreement shall be provided by the
Company:
(a) On account of any suit in which a final, unappealable judgment is
rendered against Indemnitee for an accounting of profits made from the purchase
or sale by Indemnitee of securities of the Company in violation of the
provisions of Section 16(b) of the Securities Exchange Act of 1934 and
amendments thereto;
(b) For Damages that have been paid directly to Indemnitee by an
insurance carrier under a policy of officers' and directors' liability insurance
maintained by the Company;
(c) On account of Indemnitee's conduct which is finally adjudged to
have been intentional misconduct, a knowing violation of law or the RCW
23B.08.310 or any successor provision of the Statute, or a transaction from
which Indemnittee derived benefit in money, property or services to which
Indemnittee is not legally entitled; or
(d) If a final decision by a court having jurisdiction in the matter
shall determine that such indemnification is not lawful.
4.2 MUTUAL ACKNOWLEDGEMENT
The Company and Indemnitee acknowledge that, in certain instances,
federal law or public policy may override applicable state law and prohibit the
Company from indemnifying
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<PAGE> 6
Indemnitee under this Agreement or otherwise. For example, the Company and
Indemnitee acknowledge that the Securities and Exchange Commission (the "SEC")
has taken the position that indemnification is not permissible for liabilities
arising under certain federal securities laws, and federal legislation prohibits
indemnification for certain ERISA violations. Furthermore, Indemnitee
understands and acknowledges that the Company has undertaken or may be required
in the future to undertake with the SEC to submit the question of
indemnification to a court in certain circumstances for a determination of the
Company's right under public policy to indemnify Indemnitee.
5. NOTIFICATION AND DEFENSE OF CLAIM
5.1 NOTIFICATION
Promptly after receipt by Indemnitee of notice of the commencement of
any Proceeding, Indemnitee will, if a claim in respect thereof is to be made
against the Company under this Agreement, notify the Company of the commencement
thereof; but the omission so to notify the Company will not relieve the Company
from any liability which it may have to Indemnitee under this Agreement unless
and only to the extent that such omission can be shown to have prejudiced the
Company's ability to defend the Proceeding.
5.2 DEFENSE OF CLAIM
With respect to any such Proceeding as to which Indemnitee notifies the
Company of the commencement thereof:
(a) The Company may participate therein at its own expense;
(b) The Company, jointly with any other indemnifying party similarly
notified, may assume the defense thereof, with counsel satisfactory to
Indemnitee. After notice from the Company to Indemnitee of its election so to
assume the defense thereof, the Company shall not be liable to Indemnitee under
this Agreement for any legal or other expenses (other than reasonable costs of
investigation) subsequently incurred by Indemnitee in connection with the
defense thereof unless (i) the employment of counsel by Indemnitee has been
authorized by the Company, (ii) Indemnitee shall have reasonably concluded that
there may be a conflict of interest between the Company and Indemnitee in the
conduct of the defense of such action, or (iii) the Company shall not in fact
have employed counsel to assume the defense of such action, in each of which
cases the fees and expenses of counsel shall be at the expense of the Company.
The Company shall not be entitled to assume the defense of any action, suit or
proceeding brought by or on behalf of the Company or as to which Indemnitee
shall have made the conclusion provided for in (ii) above;
(c) The Company shall not be liable to indemnify Indemnitee under this
Agreement for any amounts paid in settlement of any Proceeding effected without
its written consent;
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<PAGE> 7
(d) The Company shall not settle any action or claim in any manner
which would impose any penalty or limitation on Indemnitee without Indemnitee's
written consent; and
(e) Neither the Company nor Indemnitee will unreasonably withhold its,
his or her consent to any proposed settlement.
6. SEVERABILITY
Nothing in this Agreement is intended to require or shall be construed
as requiring the Company to do or fail to do any act in violation of applicable
law. The Company's inability, pursuant to court order, to perform its
obligations under this Agreement shall not constitute a breach of this
Agreement. The provisions of this Agreement shall be severable, as provided in
this Section 6. If this Agreement or any portion hereof shall be invalidated on
any ground by any court of competent jurisdiction, then the Company shall
nevertheless indemnify Indemnitee to the full extent permitted by any applicable
portion of this Agreement that shall not have been invalidated, and the balance
of this Agreement not so invalidated shall be enforceable in accordance with its
terms.
7. GOVERNING LAW; BINDING EFFECT; AMENDMENT AND TERMINATION
(a) This Agreement shall be interpreted and enforced in accordance with
the laws of the State of Washington.
(b) This Agreement shall be binding upon Indemnitee and upon the
Company, its successors and assigns, and shall inure to the benefit of
Indemnitee, Indemnitee's heirs, personal representatives and assigns and to the
benefit of the Company, its successors and assigns.
(c) No amendment, modification, termination or cancellation of this
Agreement shall be effective unless in writing signed by both parties hereto.
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<PAGE> 8
IN WITNESS WHEREOF, the parties hereto have executed this Agreement on
and as of the day and year first above written.
COMPANY:
GARGOYLES, INC.
By
-------------------------------------
Its
---------------------------------
INDEMNITEE:
-------------------------------------
---------------------------------
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<PAGE> 1
EXHIBIT 10.44
EQUIPMENT NOTE
$260,000.00 June 25, 1996
FOR VALUE RECEIVED, the undersigned, GARGOYLES, INC., a Washington
corporation, promises to pay to the order of U.S. BANK OF WASHINGTON, NATIONAL
ASSOCIATION ("U.S. Bank"), at its principal place of business, 1420 Fifth
Avenue, Seattle, Washington 98101, or such other place or places as the holder
hereof may designate in writing, the sum of Two Hundred Sixty Thousand Dollars
($260,000.00) in lawful immediately available money of the United States of
America, in accordance with the terms and conditions of that certain credit
agreement dated March 22, 1995, by and between Gargoyles, Inc., and U.S. Bank
(together with all supplements, exhibits, amendments, and modifications thereto,
the "Credit Agreement"). Gargoyles, Inc. also promises to pay interest on the
unpaid principal balance hereof, commencing on the date of Funding hereunder, in
like money in accordance with the terms and conditions, and at the rate or rates
provided for in the Credit Agreement. All principal, interest, and other charges
are due and payable in full on or before five years from the date hereof.
Gargoyles, Inc., and all endorsers, sureties, and guarantors hereof
jointly and severally waive presentment for payment, demand, notice of
nonpayment, notice of protest, and protest of this Note, and all other notices
in connection with the delivery, acceptance, performance, default, dishonor, or
enforcement of the payment of this Note except such notices as are specifically
required by this Note or by the Credit Agreement, and they agree that the
liability of each of them shall be unconditional without regard to the liability
of any other party and shall not be in any manner affected by any indulgence,
extension of time, renewal, waiver, or modification granted or consented to by
U.S. Bank. Gargoyles, Inc., and all endorsers, sureties, and guarantors hereof
consent to any and all extensions of time, renewals, waivers, or modifications
that may be granted by U.S. Bank with respect to the payment or other provisions
of this Note and the Credit Agreement, and to the release of any property now or
hereafter securing this Note with or without substitution and agree that
additional makers, endorsers, guarantors, or sureties may become parties hereto
without notice to them or affecting their liability hereunder.
This Note is one of the Equipment Notes referred to in the Credit
Agreement and as such is entitled to all of the benefits and obligations
specified in the Credit Agreement, including but not limited to any Collateral
and any conditions to making Fundings hereunder. Terms defined in the Credit
Agreement are used herein with the same meanings. Reference is made to the
Credit Agreement for provisions for the repayment of this Note and the
acceleration of the maturity hereof.
GARGOYLES, INC., a Washington corporation
By /s/ Steven R. Kingma
--------------------------
Title VP - CFO
------------------------
<PAGE> 1
Exhibit 10.45
GUARANTY
This Agreement of Guaranty (this "Guaranty") is dated as of March 7,
1995 by GARGOYLES, INC. ("Guarantor") to and for the benefit of TRILLIUM
CORPORATION ("Lender").
RECITALS
A. Pursuant to a Promissory Note ("Note") made by Pro-tec, Inc.
("Borrower") and dated and delivered to Lender on a date even herewith, Lender
has loaned to Borrow the amount of Seventy-Five Thousand Dollars ($75,000) (the
"Loan").
B. This Guaranty is entered into for the benefit of Lender and is made
as a condition precedent to Lender's making the Loan to Borrower.
AGREEMENT
1. GUARANTY.
For good and valuable consideration, the receipt of which is hereby
acknowledged and to induce the Lender to make the Loan to Borrower, and in
consideration thereof, Guarantor (if there be more than one, then Guarantors
jointly and severally) UNCONDITIONALLY GUARANTEES AND PROMISES TO PAY TO LENDER,
or order, in lawful money of the United States of America, all sums (the
"Indebtedness") owing or to become owing with respect to the Loan as the same
become due and payable, including without limitation, principal and interest and
all other sums which may be or become payable under or by virtue of the Note.
2. NO RELEASE OR DISCHARGE.
Guarantor authorizes Lender, without notice or demand and without
affecting the liability of Guarantor hereunder, from time to time to renew,
extend, accelerate or otherwise change the time for payment of, or otherwise
change the terms of the Indebtedness or any part thereof, including increase or
decrease of the rate of interest thereon.
3. WAIVER OF SURETYSHIP DEFENSES.
Guarantor waives any right to require Lender to proceed against
Borrower; proceed against or exhaust any security held from Borrower; or pursue
any other remedy in Lender's power whatsoever. Guarantor waives any defense
arising by reason of any disability or other defense of Borrower or by reason of
the cessation
<PAGE> 2
from any cause whatsoever of the liability of Borrower. Until all Indebtedness
of Borrower to lender shall have been paid in full, even though such
Indebtedness is in excess of Guarantor's liability hereunder, Guarantor shall
have no right of subrogation, and waives any right to enforce any remedy which
Guarantor now has or may hereafter have against Borrower, and waives any benefit
of and any right to participate in any security now or hereafter held by Lender.
Guarantor hereby waives (a) presentment, demand and protest and notice of
acceptance, demand, protest and nonpayment, (b) any and all claims or defenses
relating to lack of diligence or delays in collection or enforcement, of any
other indulgence or forbearance with respect to any obligations relating to the
Loan, and (c) in any action or proceeding to recover payment of the Indebtedness
or realization of any security therefor, waives any defense or right that resort
must first be had to other security or to any other person or entity.
4. SUBORDINATION OF INDEBTEDNESS.
Any indebtedness of Borrower now or hereafter held by Guarantor is
hereby subordinated to the Indebtedness of Borrower to Lender, and if Lender so
requests, Guarantor shall collect, enforce and receive, as trustees for Lender,
such indebtedness of Borrower to Guarantor and pay the same over to Lender on
account of the indebtedness of Borrower to Lender, but without reducing or
affecting in any manner the liability of Guarantor under the other provisions of
this Guaranty.
5. AUTHORITY OF BORROWER'S OFFICERS OR AGENTS.
If Borrower is a corporation or partnership it is not necessary for
Lender to inquire into the powers of Borrower or of the officers, directors,
partners or agents acting or purporting to act on behalf, and any indebtedness
made or created in reliance upon the professed exercise of such powers shall be
guaranteed hereunder.
6. EVENTS OF DEFAULT.
Upon any event of default, Guarantor agrees to pay all costs and
expenses which may be incurred by Lender with respect thereto. Guarantor shall
reimburse Lender upon demand for all such costs and expenses incurred.
7. STATUTES OF LIMITATIONS.
Guarantor shall remain liable under this Guaranty even if a recovery
under the Note or this Guaranty may have been barred by any statute of
limitations.
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<PAGE> 3
8. BANKRUPTCY.
Guarantor's obligations, agreements, covenants, representations and
warranties under this Guaranty shall not be affected by the voluntary or
involuntary bankruptcy, reorganization, assignment for the benefit of creditors
or any other similar proceeding affecting Borrower or any of its assets in any
federal or state proceeding.
9. INDEPENDENT INVESTIGATION.
Guarantor is fully aware of the financial condition of Borrower.
Guarantor delivers this Guaranty based solely upon its own independent
investigation of such financial condition and not upon any representation or
statement of Lender with respect thereto. Guarantor is in a position to and
hereby assumes full responsibility for obtaining any additional information
concerning the financial condition of Borrower as Guarantor considers material.
Guarantor hereby knowingly accepts the full range of risk encompassed within a
contract of "continuing guaranty", which risk includes, without limitation, the
possibility that Borrower will contract additional indebtedness for which
Guarantor may be liable hereunder.
10. NOTICES.
All notices, requests, demands and other communications required or
permitted hereunder shall be in writing and shall be given by: (a) hand
delivery, (b) first-class registered or certified mail with postage prepaid, (c)
overnight receipted courier service, or (d) telephonically confirmed facsimile
transmission, which notice is addressed to the party at the address set forth
below, or such other address as may hereafter be designated in writing by the
party. Notices given in accordance with this Section shall be effective upon
receipt or when receipt is refused.
If to Lender, to: Trillium Corporation
1313 Commercial Street
Bellingham, WA 98225
Attn: General Counsel
If to Guarantor, to: Gargoyles, Inc.
5866 South 194th Street
Kent, WA 98032
Attn:
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11. SUCCESSORS AND ASSIGNS.
All liabilities, duties and obligations hereunder shall bind Guarantor
and Guarantor's successors, assigns, heirs, administrators and personal
representatives, and shall inure to the benefit of Lender, and its successors
and assigns.
13. WASHINGTON LAW.
This Guaranty shall be construed and enforced pursuant to the laws of
Washington State, and Guarantor agrees that the Whatcom County Superior Court of
Washington State shall have sole and exclusive jurisdiction over any suit or
proceeding brought with respect to this Guaranty.
NOTICE: THIS GUARANTY AGREEMENT RESULTS IN YOUR WAIVER OF CERTAIN LEGAL
RIGHTS AND DEFENSES. IT IS RECOMMENDED THAT YOU CONSULT YOUR OWN ATTORNEY BEFORE
ENTERING INTO THIS AGREEMENT.
IN WITNESS WHEREOF, the undersigned Guarantor(s) have executed this
guaranty as of this 7th day of March, 1995.
GUARANTOR:
Gargoyles, Inc.
By: /s/ Douglas B. Hauff
--------------------------
Its: President
--------------------------
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<PAGE> 1
EXHIBIT 10.46
WARNER BROS.
CONSUMER PRODUCTS
Contracts Department
November 21, 1995
GARGOYLES
5866 South 194 Street
Kent, WA 98032
Attention: David Jobe
Re: WARNER BROS. LICENSE AGREEMENT #5692-ER
Gentlemen:
This letter when fully executed shall formally amend that certain
License Agreement made August 7, 1995, relative to certain rights owned and
controlled by our client, Warner Bros.
By our mutual execution hereof, it is agreed as follows:
1. Paragraph 1(a) Licensed Property: is hereby by amended by adding the
following:
Excluding likeness or reference to George Clooney.
2. Paragraph 1(h) "Guaranteed Consideration": is hereby deleted and
replaced with the following:
<TABLE>
<CAPTION>
DATE AMOUNT
- ---- ------
<S> <C>
Upon full execution of this Agreement of which Licensor $30,000.00
acknowledges has been paid by Licensee
On or before December 1, 1995 $25,000.00
On or before March 1, 1996 $20,000.00
</TABLE>
In all other respects, other than as noted above, the subject License
Agreement and all of its terms and conditions shall continue to govern our
relationship.
<PAGE> 2
GARGOYLES
November 21, 1995
Page 2
Please show your concurrence with the above by signing all copies and
returning same to Warner Bros. Consumer Products. Upon final execution, one copy
will be sent to you for your files.
Sincerely, AGREED AND ACCEPTED:
WARNER BROS. CONSUMER PRODUCTS GARGOYLES
By: /s/ Gary R. Simon By: /s/ David Jobe
------------------------------ -----------------------
Gary R. Simon
Vice President, Legal Affairs
Date: 1/4/96 Date: 12-14-95
------------------------------ -----------------------
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<PAGE> 3
RETAIL LICENSE
WARNER BROS. CONSUMER PRODUCTS
#5692-ER
LICENSE AGREEMENT made August 7, 1995 by and between WARNER BROS.
DIVISION OF TIME WARNER ENTERTAINMENT COMPANY L.P. c/o WARNER BROS. CONSUMER
PRODUCTS, at 4000 Warner Boulevard, Burbank, CA 91522 (hereinafter referred to
as "LICENSOR") and GARGOYLES, whose address is 5866 S. 194th Street, Kent, WA
98032, Attn: David Jobe (hereinafter referred to as "LICENSEE").
WITNESSETH:
The parties hereto mutually agree as follows:
1. DEFINITIONS:
As used in the Agreement, the following terms shall have the following
respective meanings:
(a) LICENSED PROPERTY: Those certain elements depicted in the live
action television series, "ER" (herein the "Television
Series"), including trademarks, copyrights, plots and
environmental settings associated therewith, as well as the
right to reproduce the likenesses of the performers but only
to the extent such performers have granted merchandising
rights to Licensor, and then only after specifically approved
in writing by Licensor.
(b) LICENSED PRODUCT(S):
Licensee's "Arctic Clear(TM)" protective eyewear with side
shields (to be affixed with a sticker to read "As seen on the
hit series ER")
(c) PROMOTIONAL ADVERTISING: To advertise and promote the Licensed
Product(s), Licensee shall have the right to utilize, at any
point in time, up to three approved images from the Television
Series to produce counter cards/duratrans for a maximum of
2500 accounts, posters/duratrans for approximately 30 trade
shows per year (limited to U.S. only), photo inserts for
advertisements in healthcare publications and direct mail
items to healthcare industry professionals, and videos for
training and tradeshow purposes.
<PAGE> 4
(d) TERRITORY: United States
(e) MARKETING DATE: September 1, 1995
(f) TERM: July 1, 1995 to May 31, 1997
(g) ROYALTY RATE: Five Percent (10%)
(h) GUARANTEED CONSIDERATION: The sum of $100,000.00, payable as
follows:
$30,000 payable simultaneously upon the execution hereof;
$40,000 payable on or before September 1, 1995; and
$30,000 payable on or before December 1, 1995.
(i) CHANNELS OF DISTRIBUTION: Licensee may see the Licensed
Product(s) through the following channels of distribution
only: High-end Specialty Sunglass Stores, Sporting Goods
Stores, Department Stores, Optical Stores, University
Bookstores and Military Stores and their respective direct
mail marketing and catalogs.
Notwithstanding the foregoing, nothing contained herein shall
prohibit Licensee from continuing to sell a generic version of
its "Arctic Clear(TM)" protective eyewear (the "Generic
Product") through any channels of distribution it desires,
provided such eyewear in no way utilizes the Licensed Property
(either directly thereon or in any packaging or
promotional/display materials related thereto). Licensee shall
not be required to pay any royalties to Licensor as a result
of any such sales of the Generic Product.
2. GRANT OF LICENSE:
(a) Upon the terms and conditions set forth in this Agreement,
Licensor hereby grants to Licensee and Licensee hereby accepts
for the Term of this Agreement, a license to utilize the
Licensed Property solely on or in connection with the
manufacture, distribution and sale of the Licensed Product(s)
as specific above for the ultimate retail sale to the public
throughout the Territory on a non-exclusive basis.
(b) For purposes of interpretation throughout this Agreement,
every application and utilization of each component of the
Licensed Property
-2-
<PAGE> 5
set forth above as to any given Licensed Product set forth
above shall be considered as a separate grant, and as a
separate Licensed Product.
(c) Licensee specifically understands and agrees that no rights
are granted herein with respect to the Warner Bros. "shield"
logo or trademark, or any other trademark(s), log(s) or
copyrights owned by Licensor other than those specifically set
forth above in the Licensed Property, it being understood that
all rights in and to said properties are reserved exclusively
to Licensor for use and/or licensing as it deems appropriate
to third party(s) of its choice.
(d) No television commercials may be utilized under this License
without the specific prior written approval of Licensor.
3. CONSIDERATION:
(a) The Guaranteed Consideration paid by Licensee as set forth
above shall be applied against such royalties as are, or have
become, due to Licensor. No part of such Guaranteed
Consideration shall be repayable to Licensee. Royalties earned
in excess of the Guaranteed Consideration applicable to the
Term hereof shall not offset any Guaranteed Consideration
required in respect of the succeeding renewal term (if any);
likewise, royalties earned in excess of the Guaranteed
Consideration applicable to the renewal term shall not offset
any Guaranteed Consideration applicable to any prior term.
(b) Royalty Payments: Licensee shall pay to Licensor a sum equal
to the Royalty Rate as set forth above of all net sales by
Licensee of the Licensed Product(s) covered by this Agreement.
The term "net sales" herein shall mean the gross invoice price
billed customers, less actual quantity discounts and actual
returns, but no deductions shall be made for uncollectible
accounts. No costs incurred in the manufacture, sale,
distribution, advertisement, or exploitation of the Licensed
Product(s) shall be deducted from any royalties payable by
Licensee.
(c) Royalties shall be payable concurrently with the periodic
statements required in Paragraph 5 hereof, except to the
extent offset by Guaranteed Consideration theretofore
remitted.
-3-
<PAGE> 6
4. RESERVATION OF RIGHTS; PREMIUMS:
(a) Licensor reserves all rights not expressly conveyed to
Licensee hereunder, and Licensor may grant licenses to others
to use the Licensed Property, art work and textual matter in
connection with other products. Notwithstanding anything to
the contrary in the foregoing paragraph or elsewhere set forth
in this Agreement, Licensor specifically reserves the right
without limitation throughout the world to itself use, or
license any third party(s) of its choice for the manufacture,
distribution and sale of products similar or identical to
those licensed herein in Paragraph 1(b) above for sale through
any catalogue(s) produced or distributed by or on behalf of
Licensor or its affiliated companies, or for sale of
distribution in any motion picture theaters, or for sale or
distribution in any retail stores operated by or on behalf of
Licensor or its affiliated companies, or for sale or
distribution in any theme/amusement parks operated by or on
behalf of Licensor and its affiliated companies. In addition,
Licensor reserves the right to allow Six Flags Corporation to
manufacture (or have manufactured by a third party) products
similar or identical to those licensed herein for distribution
or sale in theme and/or amusement parks owned or operated by
Six Flags Corporation. Further, Licensor reserves the right to
use, or license others to use, and/or manufacture products
similar or identical to those licensed herein for use as
premiums. Notwithstanding anything contained herein, however,
Licensee grants no right, title or license to Licensor to use,
exploit or distribute any intellectual property rights in and
to Licensee's "Arctic Clear(TM)" protective eyewear product.
(b) Licensee agrees that it will not use, or knowingly permit the
use of, and will exercise due care that its customers likewise
will refrain from the use of, the Licensed Product(s) as a
premium, except with the prior written consent of Licensor.
Subject to Licensor's prior written approval as aforesaid,
Licensee shall pay to Licensor a sum equal to TEN PERCENT
(10%) of all premium sales. For purposes of this paragraph,
the term "premium" shall be defined as including, but not
necessarily limited to, combination sales, free of
self-liquidating items offered to the public in conjunction
with the sale or promotion of a product or service, including
traffic building or continuity visits by the
consumer/customer, or any similar scheme or device, the prime
intent of which is to use the Licensed Products in such a way
as to promote, publicize and or sell the products, services or
business image of the user of such item.
-4-
<PAGE> 7
5. PERIODIC STATEMENTS:
(a) Within TWENTY-FIVE (25) days after the end of the month which
includes the initial shipment of the Licensed Product(s) and
within TWENTY-FIVE (25) days after the end of every month
thereafter during the term of this Agreement, Licensee shall
furnish to Licensor complete and accurate statements certified
to be accurate by Licensee, or if a corporation, by an officer
of Licensee, showing with respect to all Licensed Product(s)
distributed and sold by Licensee during the preceding calendar
month the: (i) number of units; (ii) country in which
manufactured, sold and/or to which shipped; (iii) description
of items sold; (iv) gross sales price; and (v) itemized
deductions from gross sales price, and net sales price
together with any returns made during the preceding calendar
month. Such statements shall be furnished to Licensor whether
or not any of the Licensed Product(s) have been sold during
calendar months to which such statements refer. Receipt or
acceptance by Licensor of any of the statements furnished
pursuant to this Agreement or of any sums paid hereunder shall
not preclude Licensor from questioning the correctness thereof
at any time, and in the event that any inconsistencies or
mistakes are discovered in such statements or payments, they
shall immediately be rectified and the appropriate payments
made by Licensee. Upon demand of Licensor, Licensee shall at
its own expense, but not more than once in any TWELVE (12)
month period, furnish to Licensor a detailed statement
certified to be accurate by an officer of Licensee showing:
(i) the number of units; (ii) country in which manufactured,
sold and/or to which shipped; (iii) description of items sold
specifying the components of the Licensed Property utilized
and nature of Licensed Product(s); (iv) gross sales price; and
(v) itemized deductions from gross sales price and net sales
price of the Licensed Product(s) covered by this Agreement
distributed and/or sold by Licensee up to and including the
date upon which Licensor has made such demand.
(b) The statements and payments required hereunder shall be
delivered to:
WARNER BROS. CONSUMER PRODUCTS
4000 Warner Boulevard
Bridge Building - 4th Floor
Burbank, CA 91522
Attn: Assistant Controller, Domestic Accounting
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<PAGE> 8
(c) Any payments which are made to Licensor hereunder after the
due date required therefore, shall bear interest at the then
current prime rate (or the maximum rate permissible by law, if
less than the current prime rate) from the date such payments
are due to the date of payment. Licensor's right hereunder to
interest on late payments shall not preclude Licensor from
exercising any of its other rights or remedies pursuant to
this Agreement or otherwise with regard to Licensee's failure
to make timely remittances.
(d) Licensee agrees to provide, at Licensor's request: (i) a grant
to Licensor of a second-priority lien and security interest in
Licensee's inventory, contract rights and accounts receivable,
and all proceeds thereof, with respect to the Licensed
Product(s); and/or (ii) such other form of security acceptance
to Licensor. Licensee agrees to execute all documentation as
Licensor may require in connection with perfecting such
security interests.
6. BOOKS AND RECORDS:
(a) Licensee shall keep, maintain and preserve (in Licensee's
principal place of business) for at least two (2) years
following termination or expiration of the term of this
Agreement or any renewal(s) hereof, complete and accurate
records of accounts including, without limitation, purchase
orders, inventory records, invoices, correspondence, banking
and financial and other records pertaining to the various
items required to be submitted by Licensee. Such records and
accounts shall be available for inspection and audit at any
time or times during or after the term of this Agreement or
any renewal(s) hereof during reasonable business hours and
upon reasonable notice by Licensor or its nominees. Licensee
agrees not to cause or permit any interference with Licensor
or nominees of Licensor in the performance of their duties.
During such inspections and audits, Licensor shall have the
right to take extracts and/or make copies of Licensee's
records which relate to this Agreement as it deems necessary.
(b) The exercise by Licensor in whole or in part, at any time of
the right to audit records and accounts or of any other right
herein granted, or the acceptance by Licensor of any statement
or statements or the receipt and/or deposit by Licensor, of
any payment tendered by or on behalf of Licensee shall be
without prejudice to any rights or remedies of Licensor and
such acceptance, receipt and/or deposit shall not preclude
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<PAGE> 9
or prevent Licensor from thereafter disputing the accuracy of
any such statement or payment.
(c) If pursuant to its right hereunder Licensor causes an audit
and inspection to be instituted which thereafter discloses a
deficiency between the amount found to be due to Licensor and
the amount actually received or credited to Licensor, then
Licensee shall be responsible for payment of the deficiency,
together with interest thereon at the then current prime rate
from the date such amount became due until the date of
payment, and, if the deficiency is more than three percent
(3%), then Licensee shall pay the reasonable costs and
expenses of such audit and inspection.
7. INDEMNIFICATIONS:
(a) During the Term, and continuing after the expiration or
termination of this Agreement, Licensor shall indemnify
Licensee and shall hold it harmless from any loss, liability,
damage, cost or expense arising out of any claims or suits
which may be brought or made against Licensee by reason of the
breach by Licensor of the warranties or representations as set
forth in Paragraph 12 hereof, provided that Licensee shall
give prompt written notice, and full cooperation and
assistance to Licensor relative to any such claim or sit and
provided, further, that Licensor shall have the option to
undertake and conduct the defense of any suit so brought.
Licensee shall not, however, be entitled to recover for lost
profits. Licensee shall cooperate fully in all respects with
Licensor in the conduct and defense of said suit and/or
proceedings related thereto.
(b) During the Term, and continuing after the expiration or
termination of this Agreement, Licensee shall indemnify
Licensor, Amblin Television, Steve Spielberg, Constant c
Productions, Michael Crichton and John Wells and shall hold
them harmless from any loss, liability, damage, cost or
expense arising out of any claims or suits which may be
brought or made against any of them by reasons of: (i) any
breach of Licensee's covenants and undertakings hereunder;
(ii) any unauthorized use of the Licensed Property by
Licensee; (iii) any use of any trademark, copyright, design,
patent, process, method or device, except for those uses of
the Licensed Property that are specifically approved by
Licensor pursuant to the terms of this Agreement; (iv)
Licensee's non-compliance with any applicable federal, state
or local laws or with any other applicable regulations; and
(v) any alleged defects and/or inherent
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<PAGE> 10
dangers (whether obvious or hidden) in the Licensed Product(s)
or the use thereof.
(c) With regard to 7(b)(v) above, Licensee agrees to obtain, at
its own expense, product liability insurance providing
adequate protection for Licensor, Licensee, Amblin Television,
Steven Speilberg, Constant c Productions, Michael Crichton
and John Wells against any such claims or suits in amounts no
less than two million dollars ($2,000,000) per occurrence,
combined single limits. Simultaneously with the execution of
this Agreement, Licensee undertakes to submit to Licensor a
fully paid policy or certificate of insurance naming Licensor
as an additional insured party and, requiring that the insurer
shall not terminate or materially modify such without written
notice to Licensor at least twenty (20) days in advance
thereof.
8. ARTWORK; COPYRIGHT AND TRADEMARK NOTICES:
(a) The Licensed Property shall be displayed or used only in such
form and in such manner as has been specifically approved in
writing by Licensor in advance and Licensee undertakes to
ensure usage of the Trademark(s) and Character(s) solely as
approved hereunder. Licensee further agrees and acknowledges
that any and all artwork authorized for use hereunder by
Licensor in connection with the Licensed Product(s) or which
otherwise features or includes the Licensed Property shall be
owned in its entirety exclusively by Licensor. Licensor
reserves for itself or its designees all rights to use any and
all artwork created, utilized and/or approved hereunder
without limitation.
(b) Licensee acknowledges that, as between Licensor and Licensee,
the Licensed Property and all copyrights, trademarks and other
proprietary rights in and to the Licensed Property are owned
exclusively by Licensor. Licensee acknowledges that Licensor
shall have the right to terminate this Agreement in the event
Licensee asserts any rights (other than those granted pursuant
to the Agreement) in or to the Licensed Property. Licensee
further agrees and acknowledges that Licensor shall own the
copyright and other proprietary rights in any and all artwork
authorized for use hereunder that incorporates the Licensed
Property. At the request of Licensor, Licensee shall execute
such form(s) of assignment of copyright in any amendments or
derivative works based in whole or part on the Licensed
Property as Licensor may reasonably request. If any third
party makes or has made any contribution to the creation of
artwork authorized for use hereunder, Licensee agrees to
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<PAGE> 11
obtain from such party a full assignment of rights so that the
foregoing assignment by Licensee shall vest full rights in
Licensor.
(c) Licensee shall, within thirty (30) days of receiving an
invoice, pay Licensor for artwork executed by Licensor (or by
third parties under contract to Licensor) at Licensee's
request for use in the development of the Licensed Product(s)
and any related packaging, display and promotional materials
at Licensor's prevailing commercial art rates. The foregoing
shall include any artwork that, in Licensor's opinion, is
necessary to modify artwork initially prepared by Licensee and
submitted for approval. Estimates of artwork charges are
available upon request.
(d) Licensee shall cause to be imprinted, irremovable and legibly
on each Licensed Product(s) manufactured, distributed or sold
under this Agreement, and all advertising , promotional,
packaging and wrapping material wherein the Licensed Property
appears, the following as directed by Licensor:
(i) The appropriate Copyright Notices, as directed and in
each instance specified by Licensor, including an
encircled c, the name of Licensor, and the year date
of first publication of the art and/or textual
material, generally in the following form:
TM AND (C) WARNER BROS. (C) 19__.
The year date shall be as instructed by Licensor.
(ii) The appropriate Trademark Notices with respect to the
Trademark(s) and Character(s) (and any component
thereof) as specified in each instance by Licensor,
including the initials "TM", or the letter "R"
encircled or "*" (asterisk), and/or such legend(s)
as may be required by Licensor, including but not
limited to a legend indicating that the Licensed
Property (and any component thereof) are trademarks
of Licensor used under license by Licensee.
(e) In no event shall Licensee use, in respect to the Licensed
Product(s) and/or in relation to any advertising, promotional,
packaging or wrapping material, any copyright or trademark
notices which shall conflict with, be confusing with, or
negate, any notices required hereunder by Licensor in respect
to the Licensed Property.
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<PAGE> 12
(f) Licensee agrees to deliver to Licensor free of cost twelve
(12) of each of the Licensed Product(s) together with their
packaging and wrapping material for trademark registration
purposes in compliance with applicable laws, simultaneously
upon distribution to the public. Any copyrights or trademarks
with respect to the Licensed Product(s) shall be procured by
and for the benefit of Licensor and at Licensor's expense.
Licensee further agrees to provide Licensor with the date of
the first use of the Licensed Product(s) in interstate and
intrastate commerce.
(g) Licensee shall assist Licensor, at Licensor's expense, in the
procurement, protection, and maintenance of Licensor's rights
to the Licensed Property. Licensor may, in its sole
discretion, commence or prosecute and effect the disposition
of any claims or suits relative to the imitation, infringement
and/or unauthorized use of the Licensed Property either in its
own name, or in the name of Licensee, or join Licensee as a
party in the prosecution of such claims or suits. Licensee
agrees to cooperate fully with Licensor in connection with any
such claims or suits and undertakes to furnish full assistance
to Licensor in the conduct of all proceedings in regard
thereto. Licensee shall promptly notify Licensor in writing of
any infringements or imitations or unauthorized uses by others
of the Licensed Property, on or in relation to products
identical to similar to or related to the Licensed Product(s).
Licensor shall in its sole discretion have the right to settle
or effect compromises in respect thereof. Licensee shall not
institute any suit or take any action on account of such
infringements, imitations or unauthorized uses.
9. APPROVALS AND QUALITY CONTROLS:
(a) Licensee agrees to comply and maintain compliance with the
quality standards and specifications of Licensor in respect to
all usage of the Licensed Property on or in relation to the
Licensed Product(s) throughout the Term of this Agreement and
any renewals or extensions thereof. Licensee agrees to furnish
to Licensor free of cost for its written approval as to
quality and style, samples or each of the Licensed Product(s),
together with their packaging, hangtags, and wrapping
material, as follows in the successive stages indicated: (i)
rough sketches/layout concepts; (ii) finished artwork or final
proofs; (iii) pre-production samples or strike-offs; (iv)
finished products, including packaged samples.
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(b) No Licensed Product(s) and no material whatever utilizing the
Licensed Property shall be manufactured, sold, distributed or
promoted by Licensee without prior written approval. Licensee
may, subject to Licensor's prior written approval, use textual
and/or pictorial matter pertaining to the Licensed Property on
such promotional, display and advertising material as may, in
its reasonable judgment, promote the sale of the Licensed
Product(s). All advertising and promotional material relating
to the Licensed Product(s) must be submitted to Licensor for
its written approval at the following stages appropriate to
the medium used: (i) rough concepts; (ii) layout, storyboard,
script; and (iii) finished materials.
(c) Approval or disapproval shall lie in Licensor's sole
discretion. Any Licensed Product(s) not so approved in writing
shall be deemed unlicensed and shall not be manufactured or
sold. If any unapproved Licensed Product(s) are being sold,
Licensor may, together with other remedies available to it
including, but not limited to, immediate termination of this
Agreement, require such Licensed Product(s) to be immediately
withdrawn from the market and to be destroyed, such
destruction to be attested to in a certificate signed by an
officer of Licensee.
(d) Any material modification of a Licensed Product must be
submitted in advance for Licensor's written approval as if it
were a new Licensed Product. Approval of a Licensed Product
which uses particular artwork does not imply approval of such
artwork for use with a different Licensed Product.
(e) Licensed Product(s) must conform in all material respects to
the final production samples approved by Licensor. If in
Licensor's reasonable judgment, the quality of a Licensed
Product originally approved has deteriorated in later
production runs, or if a Licensed Product has otherwise been
altered, Licensor may, in addition to other remedies available
to it, require that such Licensed Product be immediately
withdrawn from the market.
(f) Licensee shall permit Licensor, upon reasonable notice, to
inspect Licensee's manufacturing operations and testing
records (including those operations and records of any
supplier or manufacturer approved pursuant to Paragraph 10
below) with respect to the Licensed Product(s).
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<PAGE> 14
(g) If any changes or modifications are required to be made to any
material submitted to Licensor for its written approval in
order to ensure compliance with Licensor's specifications or
standards of quality, Licensee agrees promptly to make such
changes or modifications. Subsequent to final approval, no
fewer than twenty-four (24) production samples of Licensed
Product(s) will be sent to Licensor, to ensure quality control
simultaneously upon distribution to the public. In addition,
Licensor shall have the right to purchase any and all Licensed
Product(s) in any quantity at the price Licensee charges its
best customer at the maximum discount price.
(h) To avoid confusion of the public, Licensee agrees not to
associate other characters or licensed properties with the
Licensed Property on the Licensed Product(s) or in any
packaging, promotional or display materials unless Licensee
receives Licensor's prior written approval. Furthermore,
Licensee agrees not to use the Licensed Property (or any
component thereof) on any business sign, business cards,
stationery or forms, nor to use the Licensed Property as part
of the name of Licensee's business or any division thereof.
(i) Licensee shall use its best efforts to notify its customers of
the requirement that Licensor has the right to approve all
promotional, display and advertising material pursuant to this
Agreement.
(j) It is understood and agreed that any animation used in
electronic media, including but not limited to animation for
television commercials and character voices for radio
commercials, shall be produced by Warner Bros. Animation
pursuant to a separate agreement between Licensee and Warner
Bros. Animation, subject to Warner Bros. Animation customary
rates. Any payment made to Warner Bros. Animation for such
animation shall be in addition to and shall not offset the
Consideration set forth in Paragraph 1(h).
(k) Licensor's approval of Licensed Product(s) (including, without
limitation, the Licensed Product(s) themselves as well as
promotional, display and advertising materials) shall in no
way constitute or be construed as an approval by Licensor of
Licensee's use of any trademark, copyright and/or other
proprietary materials not owned by Licensor.
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<PAGE> 15
10. DISTRIBUTION; SUB-LICENSE MANUFACTURE:
(a) Licensee shall sell the Licensed Product(s) through the
Channels of Distribution as set forth in Paragraph 1(i)
hereinabove. If Licensee sells or distributes the Licensed
Product(s) at a special price, directly or indirectly, to
itself, including without limitation, any subsidiary of
Licensee or to any other person, firm, or corporation
affiliated with Licensee or its officers, directors or major
stockholders, for ultimate sale to unrelated third parties,
Licensee shall pay royalties with respect such sales or
distribution, based upon the price generally charged the trade
by Licensee.
(b) Licensee shall not be entitled to sub-license any of its
rights under this Agreement. In the event Licensee is not the
manufacturer of the Licensed Product(s), Licensee shall,
subject to the prior written approval of Licensor (which
approval shall not be unreasonably withheld), be entitled to
utilize a third party manufacturer in connection with the
manufacture and production of the Licensed Product(s) provided
that such manufacturer shall execute a letter in the form of
Exhibit 1 attached hereto and by this reference made a part
hereof. In such event, Licensee shall remain primarily
obligated under all of the provisions of this Agreement. In no
event shall any such sublicense agreement include the right to
grant any further sublicenses.
11. GOOD WILL:
Licensee recognizes the great value of the publicity and good will
associated with the Licensed Property and, acknowledges: (i) such good
will is exclusively that of Licensor; and (ii) that the Licensed
Property have acquired a secondary meaning as Licensor's trademarks
and/or identifications in the mind of the purchasing public. Licensee
further recognizes and acknowledges that a breach by Licensee of any of
its covenants, agreements or undertakings hereunder will cause Licensor
irreparable damage, which cannot be readily remedied in damages in an
action at law, and may, in addition thereto, constitute an infringement
of Licensor's copyrights, trademarks and/other proprietary rights in,
and to the Licensed Property, thereby entitling Licensor to equitable
remedies and costs.
12. LICENSOR'S WARRANTIES AND REPRESENTATIONS:
Licensor represents and warrants to Licensee that:
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<PAGE> 16
(a) It has, and will have throughout the term of this Agreement,
the right to license the Licensed Property to Licensee in
accordance with the terms and provisions of this Agreement;
(b) The making of this Agreement by Licensor does not violate any
agreements, rights or obligations existing between Licensor
and any other person, firm or corporation; and
(c) The Licensed Property does not infringe upon any copyright,
trademark or other intellectual property right of any third
party.
13. LICENSEE'S WARRANTIES AND REPRESENTATIONS:
Licensee represents and warrants to Licensor that, during the Term and
thereafter:
(a) It will not attack the title of Licensor or its Grantors in
and to the Licensed Property or any copyright or trademark
pertaining thereto, nor will it attack the validity of the
license granted hereunder;
(b) It will not harm, misuse or bring into disrepute the Licensed
Property, but on the contrary, will maintain the value and
reputation thereof to the best of its ability;
(c) It will manufacture, sell, promote and distribute the Licensed
Product(s) in an ethical manner and in accordance with the
terms and intent of this Agreement, and in compliance with all
applicable government regulations and industry standards;
(d) It will not create any expenses chargeable to Licensor without
the prior written approval of Licensor;
(e) It will protect to the best of its ability its right to
manufacture, sell, promote, and distribute the Licensed
Product(s) hereunder;
(f) It will at all times comply with all government laws and
regulations, including but not limited to product safety,
food, health, drug, cosmetic, sanitary or other similar laws,
and all voluntary industry standards relating or pertaining to
the manufacture, sale, advertising or use of the Licensed
Product(s), and shall maintain its appropriate customary high
quality standards. It shall comply with any regulatory
agencies which shall have jurisdiction over the Licensed
Product(s) and shall procure and maintain in force any and all
permissions, certifications and/or other
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<PAGE> 17
authorizations from governmental and/or other official
authorities that may be required in relation thereto. Each
Licensed Product and component thereof distributed hereunder
shall comply with all applicable laws, regulations and
voluntary industry standards. Licensee shall follow reasonable
and proper procedures for testing that all Licensed Product(s)
comply with such laws, regulations and standards. Upon
reasonable notice, Licensee shall permit Licensor or its
designees to inspect testing records and procedures with
respect to the Licensed Product(s) for compliance. Licensed
Product(s) that do not comply with all applicable laws,
regulations and standards shall automatically be deemed
unapproved;
(g) It shall, upon Licensor's request, provide credit information
to Licensor;
(h) It will provide Licensor with date(s) of first use of the
Licensed Product(s) in interstate and intrastate commerce,
where appropriate;
(i) It will, pursuant to Licensor's instructions, duly take any
and all necessary steps to secure execution of all necessary
documentation for the recordation of itself as user of the
Licensed Property in any jurisdiction where this required or
where Licensor reasonably requests that such recordation shall
be effected. Licensee further agrees that it will at its own
expense cooperate with Licensor in cancellation of any such
recordation at the expiration of this Agreement or upon
termination of Licensee's right to use the Licensed Property.
Licensee hereby appoints Licensor its Attorney-in-fact for
such purpose;
(j) It will not deliver or sell Licensed Products outside the
Territory or knowingly sell Licensed Products to a third party
for delivery outside the Territory; and
14. TERMINATION BY LICENSOR:
(a) Licensor shall have the right to terminate this Agreement
without prejudice to any other rights which it may have in the
premises, whether pursuant to the provisions of this
Agreement, or otherwise in law, or in equity, upon the
occurrence of any one or more of the following events (herein
called "defaults"):
(i) If Licensee defaults in the performance of any of its
obligations provided for in this Agreement; or
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(ii) Licensee shall have failed to deliver to Licensor or
to maintain in full force and effect the insurance
referred to in Paragraph 7(c) hereof; or
(iii) If Licensee shall fail to make any payments due
hereunder on the date due; or
(iv) If Licensee shall fail to deliver any of the
statements hereinabove referred to or to give access
to the premises and/or license records pursuant to
the provisions hereof to Licensor's authorized
representatives for the purposes permitted hereunder;
or
(v) If Licensee shall fail to comply with any laws,
regulations or voluntary industry standards as
provided in Paragraph 13(f) or if any governmental
agency or other body, office or official vested with
appropriate authority finds that the Licensed
Product(s) are harmful or defective in any way,
manner or form, or are being manufactured, sold or
distributed in contravention of applicable laws,
regulations or standards, or in a manner likely to
cause harm; or
(vi) If Licensee shall be unable to pay its debts when
due, or shall make any assignment for the benefit of
creditors, or shall file any petition under the
bankruptcy or insolvency laws of any jurisdiction,
county or place, or shall have or suffer a receiver
or trustee to be appointed for its business or
property, or be adjudicated a bankrupt or an
insolvent; or
(vii) In the event that Licensee does not commence in good
faith to manufacture, distribute and sell each
Licensed Property and utilize each Character set
forth in the Licensed Product throughout the
Territory on or before the Marketing Date and
thereafter fails to diligently and continuously
manufacture, distribute and sell each of the Licensed
Products and utilize each Character throughout the
Territory. Such default and Licensor's resultant
right of termination (or recapture) shall only apply
to the specific Character(s) and/or the specific
Licensed Product(s), which or wherein Licensee fails
to meet said Marketing Date requirement; or
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<PAGE> 19
(viii) If Licensee shall manufacture, sell or distribute,
whichever first occurs, any of the Licensed
Product(s) without the prior written approval of
Licensor's as provided in Paragraph 9 hereof; or
(ix) If Licensee undergoes a substantial change of
control; or
(x) If a manufacturer approved pursuant to Paragraph
10(b) hereof shall engage in conduct, which conduct
if engaged in by Licensee would entitle Licensor to
terminate this Agreement; or
(xi) If Licensee delivers or sells Licensed Product(s)
outside the Territory or knowingly sells Licensed
Product(s) to a third party for delivery outside the
Territory; or
(xii) If Licensee has made a material misrepresentation or
has omitted to state a material fact necessary to
make the statements not misleading; or
(xiii) If Licensee shall breach any other agreement in
effect between Licensee and Licensor.
(b) In the event any of these defaults occur, Licensor shall give
notice of termination in writing to Licensee by certified
mail. Licensee shall have ten (10) days from the date of
giving notice in which to correct any of these defaults
(except subdivisions (vii), (viii), (ix) and (xii) above which
are not curable), and failing such, this Agreement shall
thereupon immediately terminate, and any and all payments then
or later due from Licensee hereunder (including Guaranteed
Consideration) shall then be promptly due and payable and no
portion of prior payments shall be repayable to Licensee.
15. FINAL STATEMENT UPON TERMINATION OR EXPIRATION:
Licensee shall deliver, as soon as practicable, but not later than
thirty (30) days following expiration or termination, a statement
indicating the number and description of Licensed Product(s) on hand
together with a description of all advertising and promotional
materials relating thereto. Following expiration or termination,
Licensee shall not continue to manufacture the Licensed Product(s).
However, if Licensee has complied with all the terms of this Agreement
including, but not limited to, complete and timely payment of the
Guaranteed Consideration, then Licensee may continue to distribute and
sell its remaining inventory for a period not to exceed SIXTY (60) days
following
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such termination or expiration, subject to payment of applicable
royalties thereto. In no event, however, may Licensee distribute and
sell during such period an amount of Licensed Product(s) that exceeds
the average amount of Licensed product(s) sold during a consecutive
sixty (60) day period during the Term. In the event this Agreement is
terminated by Licensor for cause, Licensee shall be deemed to have
forfeited its sell-off rights hereunder. If Licensee has any remaining
inventory of the Licensed Product(s) following such sixty (60) day
period, Licensee shall, at Licensor's option, make available such
inventory to Licensor for purchase at or below cost, deliver up to
Licensor for destruction said remaining inventory or furnish to
Licensor an affidavit attesting to the destruction of said remaining
inventory. Licensor shall have the right to conduct a physical
inventory in order to ascertain or verify such inventory and/or
statement. In the event that Licensee refuses to permit Licensor to
conduct such physical inventory, Licensee shall forfeit its right
hereunder to dispose of such inventory. In addition to the forfeiture,
Licensor shall have recourse to all other legal remedies available to
it. Notwithstanding the foregoing, nothing contained herein shall
prevent Licensee from continuing to sell the Generic Product at any
time during the term of this Agreement or following termination or
expiration hereof.
16. NOTICES:
Except as otherwise specifically provided herein, all notices which
either party hereto is required or may desire to give to the other
shall be given by addressing the same to the other at the address set
forth above, or at such other address as may be designated in writing
by any such party in a notice to the other given in the manner
prescribed in this paragraph. All such notices shall be sufficiently
given when the same shall be deposited so addressed, postage prepaid,
in the United States mail and/or transmitted via facsimile with receipt
of a confirming copy, and the date of said mailing or said facsimile
transmission shall be the date of the giving of such notice.
17. NO PARTNERSHIP, ETC.:
This Agreement does not constitute and shall not be construed as
constitution of a partnership or joint venture between Licensor and
Licensee. Neither party shall have any right to obligated or bind the
other party in any manner whatsoever, and nothing herein contained
shall give, or is intended to give, any rights of any kind to any third
persons.
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18. NON-ASSIGNABILITY:
This Agreement shall bind and inure to the benefit of Licensor, its
successors and assigns. This Agreement is personal to Licensee, and
Licensee shall not sublicense nor franchise its rights hereunder, and
neither this Agreement nor any of the rights of Licensee hereunder
shall be sold, transferred or assigned by Licensee and no rights
hereunder shall devolve by operation of law or otherwise upon any
receiver, liquidator, trustee or other party.
19. CONSTRUCTION:
This Agreement shall be construed in accordance with the laws of the
State of California of the United States of America without regard to
its conflicts of laws or provisions.
20. WAIVER, MODIFICATION ETC.:
No waiver, modification or cancellation of any term or condition of
this Agreement shall be effective unless executed in writing by the
party charged therewith. No written waiver shall execute the
performance of any acts other than those specifically referred to
therein. The fact that Licensor has not previously insisted upon
Licensee expressly complying with any provision of this Agreement shall
not be deemed to be a waiver of Licensor's future right to require
compliance in respect thereof and Licensee specifically acknowledges
and agrees that the prior forbearance in respect of any act, term or
condition shall not prevent Licensor from subsequently requiring full
and complete compliance thereafter. If any term or provision of this
Agreement is held to be invalid or unenforceable by any court of
competent jurisdiction or any other authority vested with jurisdiction,
such holding shall not affect the validity or enforceability of any
other term or provision hereto and this Agreement shall be interpreted
and construed as if such term or provision, to the extent the same
shall have been held to be invalid, illegal or unenforceable, had never
been contained herein. Headings of paragraphs herein are for
convenience only and are without substantive significance.
21. ACCEPTANCE BY LICENSOR:
This instrument, when signed by Licensee shall be deemed an application
for license and not a binding agreement unless and until accepted by
Warner Bros. Consumer Products by signature of a duly authorized
officer and the delivery of such a signed copy to Licensee. The receipt
and/or deposit by Warner Bros. Consumer Products of any check or other
consideration given by Licensee
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<PAGE> 22
and/or delivery of any material by Warner Bros. Consumer Products to
Licensee shall not be deemed an acceptance by Warner Bros. Consumer
Products of this application. The foregoing shall apply to any
documents relating to renewals or modifications hereof.
This Agreement shall be of no force or effect unless and until it is signed by
all of the parties listed below:
LICENSOR: LICENSEE:
WARNER BROS. CONSUMER GARGOYLES
PRODUCTS, a Time Warner
Entertainment Company
By: /s/ Gary R.Simon By: /s/ David Jobe
------------------------------- -------------------------
Gary R. Simon
Vice President, Legal Affairs
Date: 8/7/95 Date: 8-4-95
------------------------------- -------------------------
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EXHIBIT 10.47
AMENDED AND RESTATED AGREEMENT REGARDING CLAIM RIGHTS
THIS AMENDED AND RESTATED AGREEMENT REGARDING CLAIM RIGHTS (this
"Agreement")is entered into as of July 3, 1996, and is by and between DENNIS
BURNS ("Employee") and GARGOYLES, INC., a Washington corporation, and CONQUEST
SPORTS, INC., (formerly "PRO-TEC")a Washington corporation, which are together
referred to herein as "Employer",and amends and restates the Agreement
Regarding Claim Rights entered into as of February 1, 1995, between Employee
and Employer (the "Original Agreement").
RECITALS
A. WHEREAS, Employee was employed by Employer for many years in
numerous capacities, including President and Chief Executive Officer; and
B. WHEREAS, Employer agreed to reward Employee for services
performed for Employer and to encourage Employee to continue to perform
services for Employer, including but not limited to management of that certain
pending action against the U.S. Army for patent infringement brought in the
United States Court of Federal Claims, Cause Number 342-88C, filed September
30, 1994, hereinafter referred to as the "Army Claim"; and
C. WHEREAS, Employee has a personal interest in the claim due to
his involvement in the development of the patents and his long-standing
affiliation with Employer;
D. WHEREAS, Employee and Employer entered into the Original
Agreement and now wish to amend and restate it in its entirety to read as set
forth in this Agreement.
Now, therefore, in consideration of the premises and the mutual
covenants and conditions set forth herein, the parties hereto agree as follows:
1. LEGAL TITLE TO ARMY CLAIM. The Army Claim shall continue to
be pursued in the name of Employer as the party in interest thereto, although
Employee will be identified, along with Employer, as a real party in interest
to that litigation.
2. BENEFICIAL INTEREST WITH RESPECT TO ARMY CLAIM PROCEEDS.
Proceeds, if any, received as a result of the Army Claim shall be paid as
follows:
2.1 Any award or settlement amount payable as a result of
the Army Claim shall be the property of Employee effective upon payment of a
final judgment, subject to paragraph 2.2 below. Although such amounts may be
made payable to Employer as the party in interest in the lawsuit, it is the
understanding of the
<PAGE> 2
parties to this Agreement that any and all such amounts received by Employer
shall be in its capacity as agent for Employee. Employer shall pay over any
such amounts so received to Employee, or his assigns, immediately upon receipt
thereof, in the manner directed by Employee or his assigns under this
Agreement. Under no circumstances shall Employer be entitled to the benefit of
such amounts.
2.2 In the event that the Army is required or agrees to
pay additional amounts over and above any lump sum for patent infringement as a
royalty for the use of the patents in issue after the date of a final judicial
decision or settlement as to patent infringement, Employer shall be entitled to
and shall receive such amounts in its own name and not as an agent for
Employee.
3. CHARACTER AND VALUE OF RECEIPT OF RIGHTS. It is the intent of
the parties to this Agreement that the receipt of rights hereunder shall
constitute current compensation to Employee as of the date hereof. The parties
agree that based on all the outstanding evidence at the time of execution of
the Original Agreement, the net current fair market value of the rights is One
Hundred Thousand Dollars ($100,000). Employee agrees to include this amount in
his income for federal income tax purposes consistent with provisions of the
Internal Revenue Code.
4. CLAIM MANAGEMENT/CONSULTANT. Employee shall have the right
and obligation to act as consultant and manager on pursuit of the Army Claim;
provided that Employer shall be liable for all legal fees and costs related to
the Army Claim incurred through March 24, 1995, and Employee shall be liable
for legal fees and costs incurred after March 24, 1995. The decisions related
to the Army claim, including the terms of any settlement, shall be made by
Employee subject to the approval of Employer, which approval shall not
unreasonably be withheld.
5. EMPLOYER COOPERATION. Employer agrees to make such
information and personnel available to Employee as may be reasonably necessary
in Employee's judgment to adequately pursue and manage the Army Claim.
6. ASSIGNMENT. The right to receive proceeds by Employee
hereunder shall not be assignable until payment of a final judgment. At that
time, and at any time thereafter, Employee may assign the right to payment
under this contract subject to the approval of Employer, which approval shall
not be unreasonably withheld.
7. CONFIDENTIALITY. It is the intent of the parties that this
agreement and all of the terms hereof remain confidential. Accordingly, the
parties agree that the terms of this Agreement
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shall not be disclosed or communicated to any other person, entity or
governmental authority without the prior written agreement of all of the
parties hereto except as required by law. Without limiting the foregoing, the
parties agree that copies of this Agreement shall not be released or disclosed
to any person, entity or governmental authority without the prior written
consent of all of the parties hereto except as required by law and that the
parties shall each take all reasonable steps to ensure the continuing
confidentiality of this Agreement.
10. ARBITRATION AND ATTORNEYS FEES. Any disputes arising from or
relating to this Agreement shall be submitted to binding arbitration with
Judicial Arbitration and Mediation Services ("JAMS") in Seattle, Washington.
In the event the parties cannot agree upon an arbitrator at JAMS, the parties
shall each select one arbitrator at JAMS, who shall then jointly select a third
JAMS arbitrator to serve as the sole arbitrator. The prevailing party in any
such arbitration shall be entitled to recover their reasonable attorneys fees
and costs incurred in the arbitration proceeding.
11. MISCELLANEOUS.
11.1 Governing Law. This Agreement shall be governed by
the internal law of the State of Washington as to all matters, including but
not limited to matters of validity, construction, effect and performance.
11.2 Counterparts. This Agreement may be executed in two
or more counterparts, each of which shall be deemed an original, but all of
which together shall constitute one and the same instrument.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the date first written above.
GARGOYLES, INC.,
a Washington corporation
By /s/ STEVEN R. KINGMA /s/ DENNIS BURNS
----------------------------- ---------------------------
Steven R. Kingma Dennis Burns
-----------------------------
Its VP-CFO
--------------------------
CONQUEST SPORTS, INC.,
a Washington corporation
(formerly PRO-TEC, INC.)
By /s/ STEVEN R. KINGMA
-----------------------------
Steven R. Kingma
-----------------------------
Its VP-CFO
--------------------------
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<PAGE> 1
EXHIBIT 10.48
TO
GARGOYLES, INC.
FORM S-1
"[*]" = confidential information omitted and filed separately with the
Securities and Exchange Commission pursuant to a request for confidential
treatment.
<PAGE> 2
SETTLEMENT AGREEMENT AND GENERAL RELEASE
THIS SETTLEMENT AGREEMENT AND GENERAL RELEASE (the "Agreement") is
entered into as of April 12, 1995, between Gargoyles, Inc. ("G.I.") and [*]
("[*]").
WHEREAS G.I. has filed Civil Action No. [*] against [*] in the [*]Court
[*] (the "Lawsuit") alleging inter alia, that [*] use of the mark "GARGOYLES" is
an infringement of G.I.'s rights; and
WHEREAS [*] has denied and continues to deny all claims made by G.I. in
the Lawsuit but is nevertheless prepared to compromise the matter; and
WHEREAS G.I. and [*] desire to resolve any and all disputes between
them, including but not limited to those raised in the Lawsuit;
NOW, THEREFORE, in consideration of the promises and conditions set
forth below and other good and valuable consideration, the receipt of which is
hereby acknowledged, G.I. and [*] agree as follows:
1.0 COMPROMISE AND STIPULATION OF DISMISSAL
1.1 G.I. acknowledges and agrees that this Agreement is the result of a
compromise of disputed claims and shall not be construed as an admission by [*]
of any liability to or wrongful acts against G.I. or any other person. [*]
expressly disclaims any liability to or wrongful conduct against G.I. or any
other person, on the part of itself, its affiliated or related companies, or any
of their respective officers, employees or agents.
1.2 G.I. and [*] agree to enter into a Stipulation of Dismissal with
prejudice pursuant to Rule 41 of the Federal Rules of Civil Procedure in the
form annexed hereto as Attachment D, which may be filed by either party hereto
upon execution of this Agreement and payment of the amount referred to in
paragraph 4.l hereof.
2.0 ASSIGNMENT OF RIGHTS TO G.I.
2.l [*] hereby assigns to G.I. all its right, title and interest
in the United States and Canada in and to the mark "[*]," the mark "[*]," any
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composite terms including the term "[*]" or "[*]" but not to the extent such
terms include other [*] marks (hereinafter collectively "the Mark"),
U.S. trademark application Serial No. [*] and U.S. Trademark
Registration No. [*], and all goodwill associated with the Mark, such
application and such registration. [*] agrees to execute the Trademark
Assignments attached hereto as Attachment A and, at G.I.'s request, any other
documents, including an amendment to allege use, reasonably required to perfect,
establish or record the transfer of all its right, title and interest in the
Mark.
2.2 [*] agrees not to directly or indirectly challenge, oppose, or
contest G.I.'s ownership of or rights in the Mark, or G.I.'s efforts to register
or maintain registrations for the Mark anywhere in the world. [*] and G.I. agree
not to directly or indirectly challenge, oppose, or contest the use by the other
of the Mark anywhere in the world.
3.0 TRADEMARK LICENSE TO [*]
3.1 Upon execution of this Agreement, G.I. agrees to execute and
deliver to [*] the Trademark License Agreement in the form attached to this
Agreement as Attachment B. [*] agrees not to challenge or contest the validity
of the license granted under this Agreement.
4.0 PAYMENT TO G.I.
4.1 Promptly upon execution of this Agreement by both parties, [*] will
pay or cause to be paid to G.I. one million dollars ($l,000,000).
4.2 As a material inducement to [*] to enter into this Agreement, G.I.
agrees that it is not entitled to the payment of any royalties or any other
payment of any kind whatsoever with respect to the use, exhibition, performance,
display, exploitation, delivery, transmission, sale or sublicense of [*], works,
or any element thereof in any form or by any method whether now or hereafter
known or devised other than as set forth in paragraph 4.l hereof and in the
Trademark License Agreement referred to in paragraph 3.1 hereof. G.I. agrees
that it does not and shall not have any ownership interest in [*], works, or any
element thereof.
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5.0 [*] PURCHASE OF G.I. PERFORMANCE EYEWEAR
5.1 [*] will arrange for representatives of G.I. to meet with
merchandise buyers responsible for purchases of goods for sale at [*]
retail sales locations within [*]. The parties will engage in
meaningful, substantive and good faith discussions concerning the possible
purchase of Gargoyles sunglasses and related products for resale at such stores
and locations. [*], Vice President-Business Affairs of [*], will personally
recommend to the appropriate merchandise buyer executives that such purchase be
seriously considered.
6.0 G.I. PRODUCT
6.1 If in [*] discretion a [*] [*] by a [*] as a [*] requires the
use of sunglasses in G.I.'s product line, then as such opportunities arise over
the four year period April 1, 1995-April 1, 1999, [*] will accord to G.I. the
opportunity to [*] its products for that use, with no payment by G.I. to [*],
before giving such an opportunity to another party, up to a total of [*].
Products furnished for any specific [*] shall be furnished by G.I. at no
cost to [*]. [*] cannot commit to any given use or any use at all and will
retain all [*] over whether the use of G.I.'s products is
appropriate [*]. Within sixty days of the effective date of the
Agreement, appropriate representatives of [*] and G.I. will meet on this
subject. In addition, [*] will accord G.I. the opportunity to discuss what, if
any, other promotional uses, including [*], may be available at no cost to G.I.
in the instance of a specific [*].
7.0 LICENSE OF [*] FOR USE ON BICYCLE HELMETS
7.1 [*] agrees to execute a [*]License Agreement for bicycle helmets in
the form annexed to this Agreement as Attachment D.
8.0 GENERAL RELEASE
8.1 As a material inducement to [*] to enter into this Agreement, G.I.
hereby irrevocably and unconditionally releases, acquits and forever discharges
[*] and each of its owners, stockholders, predecessors, successors, assigns,
agents, directors, officers, employees, representatives, insurers, attorneys,
divisions, subsidiaries, affiliates (and agents, directors, officers, employees,
representatives, insurers and attorneys of such divisions, subsidiaries and
affiliates), and all persons acting by, through, under or in concert with any of
them, all such persons other than
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<PAGE> 5
[*] in their capacities as such relative to [*] and not as private individuals
(collectively, "Releasees"), or any of them, from any and all charges,
complaints, claims, liabilities, obligations, promises, agreements,
controversies, damages, actions, causes of action, suits, rights, demands,
costs, losses, debts and expenses (including attorneys' fees and costs actually
incurred) of any nature whatsoever, known or unknown, suspected or unsuspected,
which G.I. now has or claims to have, or which G.I. at any time hereafter may
have or claim to have against [*] or any of the Releasees based upon any act,
event, fact or omission which occurred on or before the date of this Agreement
("Claims"). G.I. expressly waives and relinquishes all rights and benefits
afforded by California Civil Code Section 1542 and does so understanding and
acknowledging the significance of such specific waiver of Section 1542. Section
1542 states as follows:
A GENERAL RELEASE DOES NOT EXTEND TO CLAIMS WHICH THE CREDITOR DOES NOT
KNOW OR SUSPECT TO EXIST IN HIS FAVOR AT THE TIME OF EXECUTING THE RELEASE,
WHICH IF KNOWN BY HIM MUST HAVE MATERIALLY AFFECTED HIS SETTLEMENT WITH THE
DEBTOR.
Thus, notwithstanding the provisions of Section 1542, and for the
purpose of implementing a full and complete release and discharge of the
Releasees, G.I. expressly acknowledges that this Agreement is intended to
include in its effect, without limitation, all Claims that G.I. does not know or
suspect to exist in Releasees' favor at the time of execution hereof, and that
this Agreement contemplates the extinguishment of any such Claims.
8.2 As a material inducement to G.I. to enter into this Agreement, [*]
hereby irrevocably and unconditionally releases, acquits and forever discharges
G.I. and each of its owners, stockholders, predecessors, successors, assigns,
agents, directors, officers, employees, representatives, insurers, attorneys,
divisions, subsidiaries, affiliates (and agents, directors, officers, employees,
representatives, insurers and attorneys of such divisions, subsidiaries and
affiliates), and all persons acting by, through, under or in concert with any of
them, all such persons other than G.I. in their capacities as such relative to
G.I. and not as private individuals (collectively, "Releasees"), or any of them,
from any and all charges, complaints, claims, liabilities, obligations,
promises, agreements, controversies, damages, actions, causes of action, suits,
rights, demands, costs, losses, debts and expenses (including attorneys' fees
and costs actually incurred) of any nature whatsoever, known or
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<PAGE> 6
suspected, which G.I. now has or claims to have, or which [*] at any time
hereafter may have or claim to have against G.I. or any of the Releasees based
upon any act, event, fact or omission which occurred on or before the date of
this Agreement ("Claims").
9.0 INDEMNIFICATION
9.1 G.I. agrees that if any shareholder of G.I. makes any claim or
brings any litigation against G.I. or [*] on account of this settlement or
arising out of any of the terms of the Agreement, G.I. shall indemnify and
defend [*] (including the payment of reasonable attorneys' fees) against any
such claims or in any such litigation.
9.2 G.I. and [*] each represent that, except for the Lawsuit, it has
neither filed or commenced any charge, claim, complaint or grievance of any kind
against the other or Releasees with any agency or tribunal nor filed or
commenced any proceeding at law or otherwise with respect to any Claims. If G.I.
or [*] violates its promise in paragraph 8.1 or 8.2, respectively, and initiates
any charge, claim, complaint or grievance based upon any claim that it has
released in this Agreement, such violating party will pay for all loss, damages,
costs and expenses, including reasonable attorneys' fees, incurred by the other
party or the Releasees, or any of them in defending against such claim.
9.3 G.I. represents that it has not heretofore assigned or transferred,
or purported to assign or transfer, to any person or entity, any of the Claims
or portion thereof or interest therein.
10.0 CONFIDENTIALITY
10.1 G.I. represents and agrees that it will keep the existence, fact,
terms, and amount of this Agreement completely confidential, except (a) as
necessary for the purpose of its enforcement, (b) in response to a court order
or an authorized request from a duly constituted governmental body, or (c) as to
its financial and tax advisors, or prospective investors in G.I. in the course
of their due diligence, provided that any such prospective investor shall first
agree in writing to preserve and maintain the confidentiality pursuant to its
own confidentiality provisions and shall not be used to circumvent the
obligation of confidentiality in this paragraph. Should either party be required
to disclose this Agreement or any term or condition thereof in any court or
administrative proceeding, it will promptly notify the other with reasonable
expedition once the possibility that disclosure may be ordered is known, and in
any event prior to
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<PAGE> 7
such disclosure, and will use reasonable efforts to preserve the confidentiality
of such disclosure under a suitable protective order. In the event of a media
inquiry made directly to G.I. concerning the Lawsuit, the following may be
disclosed: "The parties have resolved their differences and the Lawsuit has been
terminated." In the event of a customer inquiry made directly to G.I. concerning
the use by [*] of the trademark "GARGOYLES," the following may be disclosed: "We
have a license agreement with [*] for use of the GARGOYLES' trademark." Neither
G.I. nor any of its representatives will make any statement or comment of any
kind about any matters related hereto except for the preceding ones. Other than
those two statements, G.I. and all of its representatives will answer all
inquiries or questions with the words, "No comment." G.I. will not initiate,
invite, or encourage any media, press or other attention to the fact of this
Agreement or any dispute between G.I. and [*], nor shall it disclose any
confidential information acquired pursuant to this Agreement to anyone. G.I.
understands and agrees that any disclosure of information contrary to the terms
of this confidentiality provision by it or its representatives or by any person
with whom it is in privity or acting in concert would be damaging to [*], and
G.I. further agrees that [*] would be irreparably harmed by a violation of this
confidentiality provision and therefore shall be entitled to an injunction
prohibiting G.I. or its representatives or any person with whom it is in privity
or acting in concert from any violation or threatened violation of this
confidentiality provision.
11.0 GENERAL PROVISIONS
11.1 Headings. Section headings are used in this Agreement for
convenience and reference only and shall not affect the meaning of any provision
of this Agreement.
11.2 Entire Agreement; Amendments. The parties represent and
acknowledge in executing this Agreement that they do not rely and have not
relied upon any representation or statement not expressly contained herein made
by either party to the other with respect to the subject matter, basis or effect
of this Agreement or otherwise. This Agreement (including its attachments) sets
forth the entire agreement between the parties hereto and fully supersedes any
and all prior agreements or understandings between the parties hereto pertaining
to the subject matter hereof. This Agreement shall not be amended except by a
written agreement subsequent to the date of this Agreement and signed on behalf
of the parties by their respective authorized representatives.
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11.3 Binding Effect. This Agreement shall be binding upon G.I., [*],
and their respective predecessors, successors, affiliates, subsidiaries, related
companies, and in the case of G.I., all companies owned or controlled by the
owner, chairman, or president of G.I. This Agreement shall inure to the benefit
of [*], the Releasees and G.I., and to their predecessors, successors,
affiliates, subsidiaries, related companies, divisions, officers, directors,
employees, assigns, heirs, administrators, representatives, and executors.
11.4 Severability. Should any provision in this Agreement be declared
or determined by any court to be illegal or invalid, the validity of the
remaining parts, terms or provisions shall not be affected thereby and said
illegal or invalid part, term or provision shall be deemed not to be a part of
this Agreement.
11.5 Governing Law. This Agreement is made and entered into in the
State of California and shall in all respects be construed, enforced and
governed under the laws of the State of California, excluding choice of law
rules.
11.6 Agreement Jointly Drafted. The parties acknowledge that they both
have participated in the drafting of this Agreement, and the language of all
parts of this Agreement shall in all cases be construed as a whole, according to
its fair meaning, and not strictly for or against any of the parties.
11.7 Signers Authorized. The undersigned persons hereby represent that
they are vested with the authority to execute and enter into this Agreement on
behalf of the respective parties.
11.8 No Partnership. Neither this Agreement, nor any terms and
conditions contained herein, shall be construed as creating a partnership, joint
venture or agency relationship or as granting a franchise.
11.9 No Waiver. Failure of either party to enforce any provision of
this Agreement shall not constitute a waiver of any prior, concurrent or
subsequent breach of the same or any other provision hereof, and no waiver shall
be effective unless made in writing and signed by an authorized representative
of the waiving party.
11.10 Signed in Counterparts. This Agreement may be signed in two
counterparts, each of which shall (when the Agreement is or counterparts have
been signed by all parties) be an original, to the same effect as if all
signatures were on the same instrument.
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11.11 Attachments. This Agreement includes the following attachments
which are hereby incorporated by reference:
Attachment A - Trademark Assignments (2)
Attachment B - Trademark License Agreement
Attachment C - [*]License Agreement for Helmets
Attachment D - Stipulation for Dismissal
This Agreement is effective as of April 12, 1995.
GARGOYLES, INC.
Date: April 12, 1995 By /s/ Douglas B. Hauff
------------------ ------------------------
President
------------------------
(Print or type name and title)
[*]
Date: April 11, 1995 By /s/ [*]
------------------------
[*]
------------------------
(Print or type name and title)
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<PAGE> 1
EXHIBIT 10.49
TO
GARGOYLES, INC.
FORM S-1
"[*]" = confidential information omitted and filed separately with the
Securities and Exchange Commission pursuant to a request for confidential
treatment.
<PAGE> 2
TRADEMARK LICENSE AGREEMENT
This Trademark License Agreement (hereinafter "Agreement") is made and
entered into as of the last date signed by one of the parties, below
(hereinafter "Effective Date"), by and between Gargoyles, Inc., a Washington
corporation having a place of business in Kent, Washington (hereinafter "G.I."),
and [*], a Delaware corporation having a place of business in [*], [*]
(hereinafter "[*]").
The parties hereby agree as follows:
1.0 LICENSE GRANT
1.1 Subject to the terms and conditions of this Agreement, including
payment of the royalties due hereunder, G.I. hereby grants to [*] an exclusive
right to use and/or to license the use of the mark GARGOYLES (hereinafter the
"Mark") on and in connection with [*] Products, [*] Services, Licensed Products
and Licensed Promotions, as defined herein.
1.2 "[*] Services" as used in this Agreement means services performed
by or for [*] in connection with the production, distribution, promotion or
[*] of [*] (together, "[*]").
1.3 "[*] Products" as used in this Agreement means products bearing the
Mark or marketed in conjunction with the Mark that are sold either by [*] only
or by [*] and others but as to any of which [*] receives no License Revenue, as
defined herein. By way of example, [*] Products include, but are not limited to,
[*], artwork and art editions, and certain products distributed in electronic
form.
1.4 "Licensed Products" as used in this Agreement means products
manufactured, marketed, distributed or licensed by [*]'s licensees which are
associated with "[*]" and bear the Mark or are marketed in conjunction with the
Mark as to the sale of which by the licensees [*] receives License Revenue, as
defined herein. By way of example, Licensed Products include, but are not
limited, to, certain T-shirts, caps, shoes, and products distributed in
electronic form.
1.5 "Licensed Promotions" as used in this Agreement means promotional
uses of the Mark by [*] itself or under arrangements between [*] and third
parties
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intended by [*] primarily to increase the market exposure of "[*]" (by way of
example, [*]'s present agreements with [*] and [*] to promote "[*]"). Licensed
Promotions may include the distribution of promotional items bearing the Mark or
marketed in conjunction with the Mark.
1.6 [*]'s exclusive rights under this Agreement are limited to products
and services associated with "[*]" licensed hereunder. Nothing in this Agreement
shall limit or restrict G.I.'s rights with respect to uses of the Mark in
connection with the sale or promotion of GARGOYLES Performance Eyewear or other
products or services not associated with "[*]."
1.7 Any rights not expressly granted to [*] hereunder are reserved by
G.I.
2.0 ROYALTY OBLIGATIONS AND PAYMENTS
2.1 [*] agrees to pay G.I. a royalty of [*] percent ([*]) of its
License Revenue (as defined below) for the first [*] dollars ([*]) of License
Revenue.
2.2 [*] agrees to pay G.I. a royalty of [*] percent ([*]) of its
License Revenue (as defined below) on all License Revenue in excess of [*]
dollars ([*]) of License Revenue.
2.3 [*] shall have no obligation to pay G.I. royalties on revenue it
receives in conjunction with [*] Services, [*] Products or Licensed Promotions.
2.4 "License Revenue" as used in this Section 2.0 means all past,
present and future money due and received by [*] from third-party licensees for
Licensed Products manufactured or sold in the United States or Canada (including
all money due and received from licensees identified in Appendix 2, hereto).
3.0 ACKNOWLEDGMENT OF RIGHTS
3.1 [*] acknowledges that the Mark is a valid and enforceable trademark
of G.I., and agrees not to challenge or contest G.I.'s ownership of the Mark or
to challenge or contest the validity of the license granted under this
Agreement.
3.2 All rights [*] has acquired or may acquire in the Mark, including
all associated goodwill, shall be the sole property of G.I. and are hereby
assigned to G.I. All use of the Mark by [*] and its licensees shall inure to the
benefit of G.I.
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4.0 QUALITY, INSPECTION AND LICENSE APPROVAL
4.l [*] agrees that the quality of the products sold and services
distributed under this Agreement shall meet or exceed industry standards. In the
case of [*] Services performed by [*], [*] agrees that such services shall be of
the same general quality as those services provided by it prior to the Effective
Date of this Agreement.
4.2 [*] further agrees that it shall monitor the quality and
performance of its licensees and their products under this Agreement in
accordance with its standard licensing procedures, including requiring its
licensees to enter into agreements having quality control and approval
provisions substantially as provided in the standard [*] license agreement
attached hereto as Appendix l. [*] agrees that its use and licensing of the Mark
shall be consistent with [*]'s practices, as they may evolve from time to time,
for [*] and products.
4.3 [*] shall cooperate with G.I. to facilitate periodic review of
products distributed and services performed under this license, as and when
reasonably requested by G.I.
4.4 [*] shall use its reasonable efforts to ensure that all products
distributed and services performed under this license comply with all applicable
laws, rules, and regulations and do not violate or infringe any right of any
third party.
4.5 Appendix 2 to this Agreement is a list of actual and prospective
(i.e., under negotiation) U.S. licensees for Licensed Products, as of the
Effective Date of this Agreement.
4.6 [*] agrees to consult with G.I. from time to time, at least
quarterly, concerning the nature of future Licensed Products and Licensed
Promotions and to afford G.I. a reasonable and timely opportunity to comment and
suggest modifications which may impact consumers' perception of the Mark with
respect to the nature of the Licensed Products and Licensed Promotions and the
manner in which the Mark is used in such promotions. [*] agrees to work with
G.I. to make such modifications, when and to the extent mutually reasonably
desirable.
5.0 IDENTIFICATION AND USE OF THE MARKS
5.1 [*] and its licensees shall use the Mark in a manner consistent
with proper trademark usage. Nothing in this paragraph shall obligate [*] or its
licensees to modify any advertisements or promotional material already released
or in production.
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6.0 WARRANTY
6.1 [*] represents and warrants that it will not use or authorize
others to use the Mark, or other trademark or service mark including "GARGOYLES"
or "GARGOYLE," except as expressly provided in this Agreement. This section
shall not limit or otherwise restrict [*]'s right to make descriptive uses of
the terms "gargoyle" or "gargoyles."
6.2 G.I. makes no warranty or representation concerning the
availability of the Mark for use in any jurisdiction.
7.0 ROYALTY PAYMENTS, REPORTS, AND AUDITS
7.1 Within forty-five (45) days of the close of each calendar quarter
after the Effective Date of this Agreement, [*] shall pay G.I. the royalties due
hereunder for the preceding calendar quarter.
7.2 Each royalty payment to G.I. hereunder shall be accompanied with a
report identifying the total sales by [*]'s licensees corresponding to the
payment period, the License Revenue received by [*] from each license and any
other information reasonably required to calculate the royalties due hereunder.
The report shall also identify any new licensees and the product(s) for which
such licensee is authorized to use the Mark. Any license terminations occurring
within the preceding calendar quarter shall also be identified in the report.
7.3 Payments made more than ten (10) days late shall be subject to a
late payment fee of [*] percent ([*]) per month, calculated daily, or the
maximum allowed by law, whichever is less. In no event, however shall [*] be
subject to late payment fees in any amount exceeding [*] per annum.
7.4 [*] agrees to keep accurate records of all transactions relating to
this Agreement and to preserve such records for the lesser of seven (7) years or
two (2) years after the termination of this Agreement. Upon reasonable request
and notice by G.I., G.I. shall have the right to audit [*]'s records relating to
this Agreement and all licenses entered hereunder by a mutually agreeable
independent auditor. In the event that such audit reveals a deficiency of [*]
percent ([*]) or more of any amount reported as owed to G.I. for any calendar
quarter, all reasonable costs of an outside accounting firm associated with such
audit shall be borne by [*]. Any audit conducted pursuant to this Section 7.4
shall be conducted confidentially in conformity with Section 11.
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8.0 INDEMNIFICATION
8.1 [*] agrees to indemnify, defend and hold G.I. and its employees,
officers, directors and agents harmless against any and all actual or asserted
claims, losses, costs and expenses (including reasonable attorneys' fees),
liabilities and damages of any kind arising out of or relating to use of the
mark by [*] or its licensees, including all third party claims concerning
Licensed Products and [*] Services under this Agreement but excluding trademark
or service mark infringement claims against G.I. In the event of such a claim,
G.I. shall promptly notify [*] and G.I. shall provide reasonable assistance to
[*] in the defense of any such claim.
9.0 ADDITIONAL TRADEMARK FILINGS, REGISTRATIONS
9.1 Should G.I. desire to obtain any additional registrations for the
Mark, it will do so at its own expense. Should [*] desire that G.I. seek or
obtain an additional registration for the Mark, it shall so notify G.I. Upon
receipt of such notice, G.I. shall proceed with filing such application at [*]'s
expense or, if G.I. has a reasonable basis for not filing an application for
such registration, so advise [*].
9.2 [*] agrees to provide G.I. with all information and documents
reasonably required by G.I. to file, prosecute or maintain registrations for the
Mark.
9.3 Nothing in this Agreement shall require G.I. to prosecute or
maintain any application or registration for the Mark in any jurisdiction.
10.0 POLICING, ENFORCEMENT
10.1 [*] agrees to investigate and police infringements of its own or
its licensees' use of the Mark in a manner comparable to its regular practices
for its own marks.
10.2 G.I. agrees to cooperate in such policing and enforcement efforts
at [*]'s request and expense. In the event G.I. is required to be named as a
party in any enforcement action by [*], it agrees to be so named at [*]'s
expense unless it has a legitimate business reason not to proceed with such
action, in which case it will so advise [*]. In the event that [*]'s overall
policing and enforcement of the Mark results in a net gain to [*] (i.e.,
settlements and recoveries on all enforcement activities relating to the Mark
exceed expenses on all such activities), such net gain shall be treated as
License Revenue under this Agreement.
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10.3 Nothing in this Agreement shall limit or restrict G.I.'s rights to
police infringement of the Mark or otherwise enforce its rights in the Mark. For
policing or enforcement actions involving use of the Mark that are associated
with "[*]," G.I. agrees to contact [*] prior to commencing such action and give
[*] the first opportunity to pursue such infringement.
11.0 CONFIDENTIALITY
11.1 The parties agree to keep this Agreement and its terms and
conditions confidential and not to disclose same without the prior written
consent of the other party, except (a) as necessary for the purpose of its
enforcement, (b) as necessary for purposes of sublicense or other execution of
the rights and obligations pursuant to it, (c) in response to a court order or
an authorized request from a duly constituted governmental body, or (d) as to
their financial and tax advisors or, as to G.I., prospective investors in the
course of their due diligence, provided that any such prospective investor shall
first agree in writing to preserve and maintain the confidentiality of such
information. Should either party be required to disclose this Agreement or any
term or condition thereof in any court or administrative proceeding, it will
promptly notify the other with reasonable expedition once the possibility that
disclosure may be ordered is known, and in any event, prior to such disclosure,
and will use reasonable efforts to preserve the confidentiality of such
disclosure under a suitable protective order.
11.2 In response to inquiries from third parties, nothing in this
Agreement shall restrict either party from disclosing the fact that they have
entered into a license for use of the Mark.
12.0 TERM AND TERMINATION
12.1 This Agreement shall remain in effect unless terminated as
provided herein.
12.2 G.I. may terminate this Agreement in the event that (i) [*] and
its licensees have stopped use of the Mark; or (ii) [*] is in material breach of
this Agreement or the accompanying Settlement Agreement and has not cured such
breach as provided in this section.
12.3 In the event of a material breach of this Agreement or the
accompanying Settlement Agreement, G.I. shall notify [*] of such breach. [*]
shall have sixty (60) days from the date of such notice to cure the breach, or
if cure is not possible within
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<PAGE> 8
the sixty (60) days, notify G.I. that it has taken action reasonably calculated
to cure such breach as soon as is reasonably possible. Upon [*]'s failure to
cure or, when applicable, to so notify G.I., this Agreement shall terminate.
12.4 Upon termination of this Agreement, [*] shall cease all use of the
Mark within sixty (60) days. Termination shall not affect the term of any
licenses granted by [*] under this Agreement, or [*]'s obligations to pay G.I.
royalties for revenue received from its licensees hereunder.
12.5 Termination shall not affect the confidentiality provisions of
this Agreement.
13.0 NOTICES
All notices and other communications under this Agreement shall be in
writing and shall be deemed given if delivered personally, mailed by registered
or certified mail, return receipt requested, by overnight courier, or sent by
facsimile with a receipt confirmed by telephone, to the parties at the following
addresses or to such other addresses as a party may from time to time notify the
other party in accordance with this provision.
GARGOYLES: Gargoyles, Inc.
5866 S. 194th
Kent, WA 98032
Attention: Doug Hauff, President
Fax: (206) 872-3267
With a copy to: Michael Goldfarb, Esq.
Rohan, Goldfarb & Shapiro
1601 One Union Square
600 University Street
Seattle, WA 98101-3112
Fax: (206) 467-0298
[*]: [*]
14.0 GENERAL PROVISIONS
14.1 Headings. Section headings are used in this Agreement for
convenience and reference only and shall not affect the meaning of any provision
of this Agreement.
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14.2 Agreement Worldwide. This Agreement and its provisions shall be
effective worldwide.
14.3 Signers Authorized. The undersigned represent and warrant that
they have the authority to execute this Agreement on behalf of the parties.
14.4 Binding Effect. The terms of this Agreement shall be binding on
the parties, their officers, employees, agents, successors, assigns, and related
companies.
14.5 Severability. If any provisions of this Agreement shall be held by
a court of competent jurisdiction to be illegal, invalid, or unenforceable, the
remaining provisions shall remain in full force and effect.
14.6 Governing Law. This Agreement shall be governed and construed in
accordance with the laws of the State of California, excluding choice of law
rules.
14.7 No Partnership. Neither this Agreement, nor any terms and
conditions contained herein, shall be construed as creating a partnership, joint
venture or agency relationship or as granting a franchise.
14.8 No Waiver. The failure of either party to enforce any provision of
this Agreement shall not constitute a waiver of any prior, concurrent or
subsequent breach of the same or any other provision hereof, and no waiver shall
be effective unless made in writing and signed by an authorized representative
of the waiving party.
14.9 Entire Agreement: Amendments. This Agreement contains the entire
agreement of the parties with respect to the subject matter hereof, and shall
supersede all prior and contemporaneous communications. This Agreement shall not
be amended except by a written agreement subsequent to the date of this
Agreement and signed on behalf of the parties by their respective authorized
representatives.
14.10 Sublicenses, Assignment. The parties agree that [*] may not
sublicense any right under this Agreement except as expressly provided herein
and shall not assign this Agreement except as part of the sale of its business
or substantially all of its assets relating to the Mark.
14.11 Signed in Counterparts. This Agreement may be signed in two
counterparts, each of which shall (when the Agreement is or counterparts have
been signed by all parties) be an original, to the same effect as if all
signatures were on the same instrument.
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14.12 Appendix. This Agreement includes the following attachments and
appendices which are hereby incorporated by reference:
Appendix 1 - Standard [*] License
Appendix 2 - Existing and Prospective [*] Licensees
IN WITNESS HEREOF, the parties hereto have executed this Agreement as
of the Effective Date.
GARGOYLES, INC.
Date April 12, 1995 By /s/ Douglas B. Hauff
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President
(Print or type name and title)
[*]
Date: April 11, 1995 By /s/ [*]
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[*]
(Print or type name and title)
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<PAGE> 1
EXHIBIT 10.50
AGREEMENT FOR PURCHASE OF COMMON STOCK
This Stock Purchase Agreement (this "Agreement") is made as of the 17th
day of May, 1996, between Gargoyles, Inc., a Washington corporation
("Gargoyles"), The Timberland Company, a Delaware corporation ("Timberland,"
together with Gargoyles, the "Investors"), Douglas W. Lauer ("Founder") and The
D.W. Lauer Company, a California corporation (the "Company" or "Seller").
Investors and Seller agree as follows:
I. PURCHASE OF COMMON STOCK
1.01 GARGOYLES AGREEMENT TO PURCHASE
Upon and subject to all of the terms and conditions set forth in this
Agreement, Gargoyles agrees to purchase from Seller, and Seller agrees to issue
to Gargoyles, 140,000 shares of common stock of the Company (the "Gargoyles
Common Stock"), which will be seventy percent (70%) of the Company's issued and
outstanding shares of common stock after their issuance, on a fully diluted
basis. The purchase price for the Gargoyles Common Stock shall be the aggregate
sum of One Million Two Hundred Thousand Dollars ($1,200,000). In addition, at
any time after January 3, 1997 and before January 1, 2000 Gargoyles may be
required to contribute Three Hundred Thousand Dollars ($300,000) to the capital
of the Company if the Company deems such additional amount necessary and makes a
demand or demands pursuant to the Contingent Demand Note (as defined below). The
Company shall make a demand upon the request of either Founder or Timberland. No
additional Common Stock shall be issued to Gargoyles in respect of the
Contingent Demand Note.
1.02 TIMBERLAND AGREEMENT TO PURCHASE
Upon and subject to all of the terms and conditions set forth in this
Agreement, Seller agrees to issue to Timberland 20,000 shares of common stock of
the Company (the "Timberland Common Stock," together with the Gargoyles Common
Stock, referred to hereafter as the "Common Stock") which will be ten percent
(10%) of the Company's issued and outstanding shares of common stock after their
issuance, on a fully diluted basis. The Timberland Common Stock shall be issued
in consideration of Timberland entering into a License Agreement, of even date
herewith, between Timberland, Gargoyles and the Company (the "License
Agreement").
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II. CLOSING
2.01 TIME AND PLACE
The transaction shall be closed on May 17, 1996 at 10:00 o'clock a.m.,
Pacific Daylight Time (the "Closing Date"), at the offices of Steinhart &
Falconer LLP, 333 Market Street, Suite 3200, San Francisco, California or at
such other time and/or place as the parties may mutually agree.
2.02 CLOSING PROCEDURE
The following shall occur at the closing:
(a) Gargoyles shall deliver to Seller (i) the sum of One
Hundred Thousand Dollars ($100,000), by wire transfer in accordance with
instructions from the Company, (ii) a promissory note in the form attached
hereto as Exhibit A in the amount of One Million One Hundred Thousand Dollars
($1,100,000) (the "Gargoyles Note"), and (iii) a contingent demand note in the
form attached hereto as Exhibit B in the amount of Three Hundred Thousand
Dollars ($300,000) (the "Contingent Demand Note"), as payment of the purchase
price of the Gargoyles Common Stock.
(b) Timberland shall deliver to Seller a fully executed
License Agreement as payment of the purchase price of the Timberland Common
Stock.
III. REPRESENTATIONS AND WARRANTIES OF SELLER
Seller represents and warrants to Investors as follows:
3.01 ORGANIZATION
The Company is a corporation duly organized, validly existing and in
good standing under the laws of the State of California, has full power and
authority, and all necessary licenses, permits and qualifications, to own its
properties and carry on its business as and where it is now being conducted and
as proposed to be conducted, to execute and deliver this Agreement, and any
other agreement to which the Company is a party and the execution and delivery
of which is contemplated hereby (the "Ancillary Agreements"), to issue and sell
the Common Stock, and to carry out the provisions of this Agreement and any
Ancillary Agreements. The copies of the Articles of Incorporation of the Company
(certified by the Secretary of State of California) and Bylaws of the Company
(certified by the Secretary of the Company) heretofore delivered to each
Investor include all amendments thereto and are full, true and correct of the
Articles of Incorporation and Bylaws of the Company as presently in effect.
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3.02 AUTHORIZATION
All corporate action on the part of the Company, its officers,
directors and stockholders necessary for the authorization, execution and
delivery of this Agreement and any Ancillary Agreements, the performance of all
obligations of the Company hereunder and thereunder at the closing and the
authorization, issuance, sale and delivery of the Common Stock being sold
hereunder has been taken or will be taken prior to closing, and this Agreement
and any Ancillary Agreements constitute valid and legally binding obligations of
the Company, enforceable in accordance with their respective terms. Seller has
full power and authority to execute and deliver this Agreement and carry out the
transactions contemplated hereby without the consent or approval of any other
person or authority. Neither the execution and delivery of this Agreement nor
the carrying out of the transactions contemplated hereby will: (i) violate or
conflict with any of the terms, conditions or provisions of the articles of
incorporation or bylaws of Seller; (ii) violate any legal requirements
applicable to Seller; (iii) violate, conflict with, result in a breach of,
constitute a default under (whether with or without notice or the lapse of time
or both), or accelerate or permit the acceleration of the performance required
by, or give any other party the right to terminate, any contract or permit
applicable to Seller; (iv) result in the creation of any lien, charge or other
encumbrance on the shares of capital stock or any asset of Seller; or (v)
require Seller to obtain or make any waiver, consent, action, approval or
authorization of, or registration, declaration, notice or filing with, any
private non-governmental third party or any governmental authority.
3.03 VALID ISSUANCE OF COMMON STOCK
The Common Stock being purchased by each Investor hereunder, when
issued, sold, and delivered in accordance with the terms of this Agreement for
the consideration expressed herein, will be duly and validly issued, fully paid,
and nonassessable (other than the Gargoyles Common Stock, which will not be
fully paid until the Gargoyles Note is paid in full) and will be free of
restrictions on transfer other than restrictions on transfer under this
Agreement or any Ancillary Agreements and under applicable state and federal
securities laws.
3.04 CAPITALIZATION
Other than pursuant to this Agreement and the Investor Rights Agreement
attached hereto as Exhibit E, there are no outstanding subscriptions, conversion
privileges, warrants, options, rights, calls or other commitments of any
character relating to any stock of the Company; and the Company is not a party
or subject to any agreement or understanding, and there is no agreement or
understanding between any persons that affects or relates to the voting or
giving of written consents with
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respect to any security or the voting by a director of the Company. The
authorized capital stock of the Company consists of 225,000 shares of common
stock, no par value, of which prior to closing 40,000 shares are issued to
Founder and outstanding.
3.05 SUBSIDIARIES AND AFFILIATES
The Company has no subsidiaries and no direct or indirect interest or
investment, by way of stock ownership, debt or otherwise, in any corporation,
association, or other entity or enterprise, and does not conduct any part of its
business operations through any other entity in which the Company has an equity
investment. The Company is not a participant in any joint venture, partnership,
or similar arrangement.
3.06 PROJECTIONS
The projections attached hereto as Exhibit C (the "Projections"),
disclose all assumptions made with respect to general economic, financial and
market conditions in formulating such Projections. To the knowledge of Seller,
no facts exist which would result in any material change in any of such
Projections. The Projections are based upon reasonable estimates and
assumptions, all of which are fair in light of current conditions, have been
prepared on the basis of the assumptions stated therein, and reflect the
reasonable estimate of Seller of the results of operations and other information
projected therein. Notwithstanding the foregoing provisions, the parties agree
that the representations and warranties set forth in this Section (i) relate
solely to conditions existing through the Closing Date (but not thereafter), and
(ii) do not constitute a guarantee of future performance of Seller or an
arrangement to adjust the consideration paid in respect of the Common Stock
based on future performance.
3.07 TRUTH AT CLOSING
All representations and warranties contained in this Article III will
be true at closing, as if made on and as of the date of closing, except to the
extent of any changes or events specifically authorized by this Agreement, or
beyond the control of the Company and disclosed to each Investor in writing at
or before closing.
IV. REPRESENTATIONS AND WARRANTIES OF EACH INVESTOR
Each Investor represents and warrants to Seller as follows:
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4.01 INVESTOR'S STATUS
Investor is a corporation duly organized, validly existing and in good
standing under the laws of the state of Washington or Delaware, as appropriate.
4.02 AUTHORITY
At closing, the execution of and delivery of this Agreement by Investor
and the execution of and delivery of the considerations and documents provided
for herein by Investor in accordance with the terms and provisions of this
Agreement will have been duly authorized by all necessary action.
4.03 PURCHASE ENTIRELY FOR OWN ACCOUNT
This Agreement is made with Investor in reliance upon Investor's
representation to the Company, confirmed by Investor's execution of this
Agreement, that the Common Stock to be purchased by Investor will be acquired
for investment for Investor's own account, not as a nominee or agent, and not
with a view to the resale or distribution of any part thereof, and that Investor
has no present intention of selling, granting any participation in, or otherwise
distributing the same. By executing this Agreement, Investor further represents
that Investor does not have any contract, undertaking, agreement or arrangement
with any person to sell, transfer or grant participations to such persons or to
any third person, with respect to the Common Stock.
4.04 RELIANCE UPON INVESTOR'S REPRESENTATIONS
Investor understands that the Common Stock is not registered under the
Securities Act on the ground that the sale provided for in this Agreement and
the issuance of securities hereunder is exempt from registration under the
Securities Act pursuant to Section 4(2) thereof, and that the Company's reliance
on such exemption is predicated on the Investor's representations set forth
herein. Investor realizes that the basis for the exemption may not be present
if, notwithstanding such representations, Investor has in mind merely acquiring
shares of Common Stock for a fixed or determinable period in the future, or for
a market rise, or for sale if the market does not rise. Investor has no such
intention.
4.05 ACCREDITED INVESTOR
Investor represents to the Company that except as otherwise disclosed
to the Company, in writing, prior to its execution hereof, Investor is an
accredited investor for purposes of exemption from registration under the
Securities Act.
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4.06 RESTRICTED SECURITIES
Investor understands that the Common Stock may not be sold,
transferred, or otherwise disposed of without registration under the 1933 Act or
an exemption therefrom, and that in the absence of an effective registration
statement covering the Securities or an available exemption from registration
under the 1933 Act, the Common Stock must be held indefinitely. In particular,
Investor is aware that the Common Stock may not be sold pursuant to Rule 144
promulgated under the Securities Act unless all of the conditions of that Rule
are met. Among the conditions for use of Rule 144 is the availability of current
information to the public about the Company. Such information is not now
available and the Company has no present plans to make such information
available.
4.07 LEGENDS
To the extent applicable, each certificate or other document evidencing
the Common Stock shall be endorsed with the legend set forth below:
THE SHARES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER THE
SECURITIES ACT OF 1933, AS AMENDED, AND MAY NOT BE SOLD, TRANSFERRED, ASSIGNED,
PLEDGED, OR HYPOTHECATED UNLESS AND UNTIL REGISTERED UNDER SUCH ACT, OR UNLESS
THE COMPANY HAS RECEIVED AN OPINION OF COUNSEL OR OTHER EVIDENCE, SATISFACTORY
TO THE COMPANY AND ITS COUNSEL, THAT SUCH REGISTRATION IS NOT REQUIRED.
THE SALE, PLEDGE, HYPOTHECATION OR TRANSFER OF THE SECURITIES
REPRESENTED BY THIS CERTIFICATE IS SUBJECT TO THE TERMS AND CONDITIONS OF A
CERTAIN INVESTOR RIGHTS AGREEMENT BY AND BETWEEN THE SHAREHOLDER, THE
CORPORATION AND CERTAIN HOLDERS OF STOCK OF THE CORPORATION. COPIES OF SUCH
AGREEMENT MAY BE OBTAINED UPON WRITTEN REQUEST TO THE SECRETARY OF THE
CORPORATION.
4.08 TRUTH AT CLOSING
All representations and warranties contained in this Article IV will be
true at closing, as if made at and as of the date of closing, except to the
extent of any changes or events specifically authorized by this Agreement, or
beyond the control of Investor and disclosed to Seller in writing at or before
closing.
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V. COVENANTS OF SELLER
Seller covenants that so long as an Investor owns Common Stock, unless
such Investor shall otherwise consent in writing:
5.01 USE OF PROCEEDS
The Company shall use the proceeds from the sale of the Common Stock
substantially in accordance with the uses specified in Schedule 5.1.
VI. COVENANTS OF INVESTORS
6.01 INFORMATION TO BE HELD IN CONFIDENCE
Unless and until the sale of the Common Stock has been consummated
hereunder, each Investor and its officers, directors, stockholders and other
representatives will hold in confidence, and will not use to the detriment of
the Company, all data and information obtained from the Company in connection
with this Agreement. If sale of the Common Stock is not consummated as herein
provided, each Investor shall return to the Company all writings respecting such
data and information as Seller may reasonably request and, together with their
respective officers, directors and stockholders, shall retain in confidence and
not use for its or their own benefit any data or information respecting the
Company obtained in connection with this Agreement.
VII. CONDITIONS PRECEDENT TO INVESTORS' PERFORMANCE
The obligations of each Investor to purchase the Common Stock under
this Agreement are subject to the satisfaction, at or before the time set for
closing, of all of the following conditions (any one or more of which may be
waived by Investors without prejudice to any right which it may have to damages
on account of any breach of Seller):
7.01 ACCURACY OF SELLER'S REPRESENTATIONS AND WARRANTIES
All representations and warranties made by Seller in this Agreement
shall have been true when made and shall be true at and as of the closing as
though made at that time except to the extent of events specifically authorized
by this Agreement but without exception for changes or events beyond the control
of the Company.
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7.02 PERFORMANCE BY SELLER
Seller shall have kept and performed all of its obligations under this
Agreement to be kept and performed prior to or at closing.
7.03 EMPLOYMENT AGREEMENT
The Company shall have entered into an Employment Agreement with
Founder substantially in the form of Exhibit D attached hereto.
7.04 INVESTOR RIGHTS AGREEMENT
Investors and Founder shall have entered into a Investor Rights
Agreement substantially in the form of Exhibit E attached hereto.
7.05 ABSENCE OF LITIGATION
No action, suit or proceeding before any court or governmental body or
authority pertaining to the sale of stock hereunder shall be pending or
threatened.
VIII. CONDITIONS PRECEDENT TO SELLER'S PERFORMANCE
The obligations of the Company to sell the Common Stock under this
Agreement are subject to the satisfaction, at or before the time set for
closing, of all of the following conditions (any one or more of which may be
waived by Seller without prejudice to any right it may have to damages on
account of any breach or default by Investors):
8.01 PERFORMANCE OF INVESTORS
Each Investor shall have kept and performed all of the obligations
under this Agreement to be kept and performed by such Investor prior to or at
closing.
8.02 ABSENCE OF LITIGATION
No action, suit or proceeding before any court or governmental body or
authority pertaining to the sale of the Common Stock hereunder shall be pending
or threatened.
8.03 ACCURACY OF REPRESENTATIONS AND WARRANTIES
The representations and warranties made by each Investor in connection
with the transactions contemplated hereby, contained in this Agreement or any
document
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delivered pursuant thereto, shall be substantially true and correct as of and at
the time of closing.
IX. INVESTOR RIGHTS
The terms and provisions of the Investor Rights Agreement attached
hereto as Exhibit E are hereby incorporated herein as if fully set forth.
X. MISCELLANEOUS
10.01 FINDERS OR BROKERS
Each of the parties represents and warrants that it has dealt with no
finder or broker in connection with the transactions contemplated by this
Agreement and agrees to indemnify, defend through counsel reasonably
satisfactory to the indemnified party, and hold harmless each other party
against any loss, liability, damage, cost, claim or expense, including (but not
limited to) attorneys' fees, interest or penalties, incurred by reason of any
broker's commission or finder's fee, or other compensation, alleged to be
payable because of any commitment made by the indemnifying party in reference to
the transactions referred to in this Agreement.
10.02 SURVIVAL OF REPRESENTATIONS, WARRANTIES AND AGREEMENTS
All covenants, representations, warranties and agreements made by
Investors or Seller in this Agreement shall survive the closing and remain
operative and in full force and effect thereafter, and shall not be deemed
merged in any document or instrument executed or delivered at closing.
10.03 EXHIBITS
The Schedules and Exhibits attached to this Agreement are a part of
this Agreement and incorporated herein by reference.
10.04 PUBLICITY
Except as otherwise required by law: pending closing, all notices to
third parties and all other publicity concerning the sale and purchase of the
stock to be sold hereunder shall be jointly planned and coordinated by and among
Seller and Investors; and neither Seller nor Investors shall act unilaterally in
this regard without the prior written approval of the other, which approval
shall not be unreasonably withheld.
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10.05 INTERPRETATION
The section titles used herein are for convenience of reference only
and shall not be considered as part of this Agreement nor limit or otherwise
affect the meaning of any provision hereof.
10.06 WAIVERS
No waiver or failure of enforcement by any of the parties hereto of any
term or condition of this Agreement shall be effective unless in writing, nor
shall it operate as a waiver of any other breach of such term and condition or
of any other term or condition.
10.07 BINDING EFFECT
The terms and conditions of this Agreement shall inure to the benefit
of, and be binding upon, the respective successors and assigns of the parties
but are not intended, nor shall this Agreement be construed, to confer any
enforceable rights on any person not a party hereto.
10.08 STATE LAWS
This Agreement shall be governed by and construed in accordance with
the laws of the State of California.
10.09 ENTIRE AGREEMENT
This instrument contains the entire agreement between the parties with
respect to the subject matter hereof, supersedes any and all prior negotiations,
correspondence, understandings and agreements between the parties with respect
to the subject matter hereof, and may be modified only by a written instrument
executed by all parties hereto.
10.10 NOTICES
All notices to be given pursuant to this Agreement, and all notices of
changed address given pursuant to this Section 10.10, shall be made in writing
and, in respect of each notice, all periods of time hereunder shall begin or end
on the day such notice is personally delivered to any recipient or on the third
day after any such notice is deposited in the United States mails, in registered
or certified form with return receipt requested, addressed to the recipient and
with a copy likewise mailed to the respective attorney, at the respective
addresses shown below or at such other addresses as any of the parties may
hereafter designate by like written notice to the other parties.
-10-
<PAGE> 11
<TABLE>
<CAPTION>
Party and Address With a Copy Addressed To:
----------------- ------------------------
<S> <C>
If to Investors:
Gargoyles, Inc. Cynthia Pope, Esq.
5866 S. 194th Street Gargoyles, Inc.
Kent, WA 98032 5866 S. 194th Street
Attention: Douglas B. Hauff, President Kent, WA 98032
The Timberland Company Hemmie Chang, Esq.
200 Domain Drive Ropes & Gray
Stratham, NH 03885 One International Place
Attention: Kenneth Pucker, Vice President Boston, MA 02110
If to Founder:
Douglas W. Lauer Robb A. Scott, Esq.
The D.W. Lauer Company Steinhart & Falconer LLP
120 Emerald Drive 333 Market Street, Suite 3200
Danville, California 94526 San Francisco, CA 94105
If to Seller:
Douglas W. Lauer Robb A. Scott, Esq.
The D.W. Lauer Company Steinhart & Falconer LLP
120 Emerald Drive 333 Market Street, Suite 3200
Danville, California 94526 San Francisco, CA 94105
</TABLE>
10.11 ATTORNEYS' FEES; INTEREST
(a) In any litigation between the parties to this Agreement,
or any of them, arising under or relating to this Agreement, or any of the
instruments, documents or agreements delivered at the closing, the prevailing
party shall be entitled to recover reasonably incurred attorneys' fees and
expenses of litigation incurred.
(b) If any damages or other amounts due from either party to
the other under this Agreement is not paid when due, the delinquent amount shall
bear interest at the reference rate established by Bank of America NT&SA as from
time to time in effect (but at no time at a rate of interest in excess of any
maximum rate of interest permitted by applicable law).
-11-
<PAGE> 12
10.12 FURTHER ASSURANCE
Each of the parties shall execute all such further documents and
perform all such further acts as any other party may reasonably request in order
to carry into effect the purposes of this Agreement, and the Company agrees to
use its best efforts (without being required to incur expense) to advance the
interests of the Company to the end that Investors may obtain the benefit of the
transactions contemplated hereunder.
EXECUTED AS OF THE DATE FIRST ABOVE WRITTEN:
SELLER:
The D.W. Lauer Company,
a California corporation
By: /s/ Douglas W. Lauer
------------------------------------
Name: Douglas W. Lauer
Title: President
INVESTORS:
GARGOYLES, Inc.,
a Washington corporation
By: /s/ Douglas B. Hauff
------------------------------------
Name: Douglas B. Hauff
----------------------------
Title: President
----------------------------
THE TIMBERLAND COMPANY,
a Delaware corporation
By: /s/ Jeffrey B. Swartz
------------------------------------
Name: Jeffrey B. Swartz
----------------------------
Title: Executive Vice President and
----------------------------
Chief Operating Officer
----------------------------
-12-
<PAGE> 13
FOUNDER
By: /s/ Douglas W. Lauer
-----------------------------
Douglas W. Lauer
-13-
<PAGE> 1
EXHIBIT 10.51
PROMISSORY NOTE
$1,100,000.00 May 17, 1996
FOR VALUE RECEIVED, GARGOYLES, INC., a Washington corporation
("Borrower"), whose address is 5866 South 194th Street, Kent, Washington 98032,
hereby promises to pay to the order of The D.W. Lauer Company, a California
corporation ("Holder"), at its office located at 120 Emerald Drive, Danville,
California 94526 or at such other place or places as Holder may designate in
writing, the principal sum of One Million One Hundred Thousand and No/100
Dollars ($1,100,000.00), without interest, in lawful money of the United States,
payable in installment payments of principal, as follows: $100,000 on June 3,
1996; $100,000 on July 3, 1996; $100,000 on September 3, 1996; $100,000 on
October 3, 1996; $100,000 on December 3, 1996; and $600,000 on January 3, 1997.
This Note may be prepaid in whole or in part, at any time, without
payment of any prepayment fee or penalty. Any partial prepayment shall be
applied against the principal amount outstanding hereunder, and any such
prepayment shall not extend or postpone the due date of any subsequent monthly
or other installment due hereunder or change the amount thereof.
Borrower agrees to pay all costs of collection, including reasonable
attorneys' fees, in case the principal of this Note or any interest thereon is
not paid when due or in case it becomes necessary to protect the security, if
any, for this Note, whether suit is brought or not. During any period this Note
is in default and after acceleration or maturity, the outstanding principal
amount hereof shall bear interest at a rate (the "Default Rate") which is equal
to ten percent (10%) per annum. In the event that any payment is not made within
ten (10) days of when due, Borrower shall pay to Holder a late charge equal to
five percent (5%) of the amount of such payment. Acceptance by Holder of any
payment hereunder in an amount less than the amount then due shall be deemed an
acceptance on account only, and the failure to pay the entire amount then due
shall be and continue to be an event of default hereunder. Upon any default,
neither the failure of Holder promptly to exercise its right to declare the
outstanding principal and accrued unpaid interest hereunder to be immediately
due and payable, nor the failure of Holder to demand strict performance of any
other obligation of Borrower or any other person who may be liable hereunder,
shall constitute a waiver of any such rights or a waiver of such rights in
connection with any future default on the part of Borrower or any other person
who may be liable hereunder.
<PAGE> 2
This Note shall be governed by and construed in accordance with the
laws of the State of California.
GARGOYLES, INC.
By: /s/ Douglas B. Hauff
-------------------------------
Douglas B. Hauff
-------------------------------
(type or print name)
Its President
-------------------------------
-2-
<PAGE> 1
EXHIBIT 10.52
CONTINGENT DEMAND NOTE
$300,000.00 May 17, 1996
FOR VALUE RECEIVED, GARGOYLES, INC., a Washington corporation
("Borrower"), whose address is 5866 South 194th Street, Kent, Washington 98032,
hereby promises to pay to the order of THE D.W. LAUER COMPANY, a California
corporation ("Holder"), at its office located at 120 Emerald Drive, Danville,
California 94526, or at such other place or places as Holder may designate in
writing, the principal sum of Three Hundred Thousand Dollars and No/100 Dollars
($300,000.00), without interest, in lawful money of the United States, payable
from time to time on and to the extent that demand is made after January 3, 1997
and prior to January 1, 2000 by the Company.
This Note may be prepaid in whole or in part, at any time, without
payment of any prepayment fee or penalty. Any partial prepayment shall be
applied against the principal amount outstanding hereunder, and any such
prepayment shall not extend or postpone the due date of any subsequent monthly
or other installment due hereunder or change the amount thereof.
Borrower agrees to pay all costs of collection, including reasonable
attorneys' fees, in case the principal of this Note or any interest thereon is
not paid when due or in case it becomes necessary to protect the security, if
any, for this Note, whether suit is brought or not. During any period this Note
is in default and after acceleration or maturity, the outstanding principal
amount hereof shall bear interest at a rate (the "Default Rate") which is equal
to ten percent (10%) per annum. In the event that any payment is not made within
ten (10) days of when due, Borrower shall pay to Holder a late charge equal to
five percent (5%) of the amount of such payment. Acceptance by Holder of any
payment hereunder in an amount less than the amount then due shall be deemed an
acceptance on account only, and the failure to pay the entire amount then due
shall be and continue to be an event of default hereunder. Upon any default,
neither the failure of Holder promptly to exercise its right to declare the
outstanding principal and accrued unpaid interest hereunder to be immediately
due and payable, nor the failure of Holder to demand strict performance of any
other obligation of Borrower or any other person who may be liable hereunder,
shall constitute a waiver of any such rights or a waiver of such rights in
connection with any future default on the part of Borrower or any other person
who may be liable hereunder.
<PAGE> 2
This Note shall be governed by and construed in accordance with the
laws of the State of California.
GARGOYLES, INC.
By: /s/ Douglas B. Hauff
-------------------------------
Douglas B. Hauff
-------------------------------
(type or print name)
Its President
-------------------------------
-2-
<PAGE> 1
EXHIBIT 10.53
EMPLOYMENT AGREEMENT
This Employment Agreement (the "Agreement") is effective as of May 17,
1996, by and between Douglas W. Lauer (the "Employee") and The D.W. Lauer
Company, a California corporation (the "Company").
R E C I T A L S
A. The Board of Directors of the Company (the "Board") has determined
that it is in the best interests of the Company and its stockholders to assure
that the Company will have the continued dedication and objectivity of the
Employee.
B. The Board believes that it is imperative to provide the Employee
with certain severance benefits upon the Employee's termination of employment,
other than upon termination for Cause (as defined below) or voluntary
termination by Employee, which provide the Employee with enhanced financial
security and provide sufficient incentive and encouragement to the Employee to
remain with the Company.
C. In order to accomplish the foregoing objectives, the Board of
Directors has directed the Company, upon execution of this Agreement by the
Employee, to agree to the terms provided herein.
D. Certain capitalized terms used in the Agreement are defined in \
Section 6 below.
In consideration of the mutual covenants herein contained, and in
consideration of the continuing employment of Employee by the Company, the
parties agree as follows:
1. DUTIES AND SCOPE OF EMPLOYMENT
(a) Position. The Company shall employ the Employee in the
position of President and Chief Executive Officer, as such position was defined
in terms of responsibilities and compensation as of the effective date of this
Agreement.
(b) Obligations. The Employee shall devote his full business
efforts and time to the Company and its subsidiaries, subject to the supervision
and approval of the Board of Directors of the Company. Employee acknowledges and
agrees that as President and Chief Executive Officer, the hours which he will be
required to work will vary considerably and will sometimes be more than 40 hours
per week. Employee further acknowledges and agrees that such work in excess of
40 hours per
<PAGE> 2
week is a regular and normal part of his responsibilities for which he is
compensated and does not in any way constitute overtime for which he is entitled
to receive additional compensation. The foregoing, however, shall not preclude
the Employee from engaging in such activities and services as do not interfere
or conflict with his responsibilities to the Company.
(c) Representation. Employee represents and warrants that the
execution and delivery of this Agreement by Employee and the performance by
Employee of his obligations hereunder will not violate any provision of law or
any judgment, award or decree addressed to Employee or any indenture, agreement
or other instrument to which Employee is a party, or by which Employee is bound
or affected, or conflict with, result in a breach of or constitute (with due
notice or lapse of time or both) a default under, any such indenture, agreement
or other instrument.
2. BASE COMPENSATION
The Company shall pay the Employee as compensation for his services a
base salary at the annualized rate of $150,000, along with such performance
bonus amounts as the Board shall authorize, in its discretion, from time to
time. Such salary shall be reviewed at least annually and may be increased from
time to time subject to accomplishment of such performance and contribution
goals and objectives as may be established from time to time by the Board of
Directors. Such salary shall be paid periodically in accordance with normal
Company payroll. The annual compensation (including bonus amounts) specified in
this Section 2, together with any increases in such compensation that the Board
of Directors may grant from time to time, is referred to in this Agreement as
"Base Compensation."
3. EMPLOYEE BENEFITS
The Employee shall be eligible to participate in the employee benefit
plans and executive compensation programs maintained by the Company applicable
to other key executives of the Company, including (without limitation)
retirement plans, savings or profit-sharing plans, deferred compensation plans,
supplemental retirement or excess-benefit plans, stock option, incentive or
other bonus plans, life, disability, health, accident and other insurance
programs, paid vacations, and similar plans or programs, subject in each case to
the generally applicable terms and conditions of the plan or program in question
and to the determination of any committee administering such plan or program.
-2-
<PAGE> 3
4. AT-WILL EMPLOYMENT
The Company and the Employee acknowledge that the Employee's employment
is at will, as defined under applicable law. If the Employee's employment
terminates for any reason, the Employee shall be entitled to payments, benefits,
damages, awards or compensation only as provided by this Agreement, or as may
otherwise be available in accordance with the Company's established employee
plans and policies at the time of termination. This Agreement shall terminate
upon the date that all obligations of the parties hereunder have been satisfied.
A termination of this Agreement shall be effective for all purposes, but shall
not affect the payment or provision of compensation or benefits on account of a
termination of employment occurring prior to the termination of this Agreement.
5. SEVERANCE BENEFITS
(a) Involuntary Termination; Disability. If the Employee's
employment is terminated as a result of Involuntary Termination other than for
Cause, then the Employee shall be entitled to receive severance pay in an amount
equal to the Employee's Base Compensation for the twelve-calendar month period
immediately preceding the Termination Date. Any severance payments to which the
Employee is entitled pursuant to this section shall be paid in a lump sum within
thirty (30) days of the Termination Date.
(b) Voluntary Resignation; Termination For Cause. If the
Employee's employment terminates by reason of the Employee's voluntary
resignation (and is not an Involuntary Termination), or if the Employee is
terminated for Cause, then the Employee shall not be entitled to receive
severance or other benefits except for those (if any) as may then be established
under the Company's then existing severance and benefits plans and policies at
the time of such termination.
6. DEFINITION OF TERMS
The following terms referred to in this Agreement shall have the
following meanings:
(a) Involuntary Termination. "Involuntary Termination" shall
mean (i) without the Employee's express written consent, the assignment to the
Employee of any duties or the reduction of the Employee's duties, either of
which results in a significant diminution in the Employee's position or
responsibilities with the Company in effect immediately prior to such
assignment, or the removal of the Employee from such position and
responsibilities; (ii) without the Employee's express written consent, a
substantial reduction, without good business reasons, of the
-3-
<PAGE> 4
facilities and perquisites (including office space and location) available to
the Employee immediately prior to such reduction; (iii) a reduction by the
Company in the Base Compensation of the Employee as in effect immediately prior
to such reduction, other than a bonus reduction resulting from application of a
bonus formula or plan on a basis that is consistent with prior practice; (iv) a
material reduction by the Company in the kind or level of employee benefits to
which the Employee is entitled immediately prior to such reduction with the
result that the Employee's overall benefits package is significantly reduced;
(v) the relocation of the Employee to a facility or a location more than 25
miles from the Employee's then present location, without the Employee's express
written consent; (vi) any purported termination of the Employee by the Company
which is not effected for Cause, or any purported termination for which the
grounds relied upon are not valid; (vii) the failure of the Company to obtain
the assumption of this agreement by any successors contemplated in Section 7
below; (viii) any purported termination of the Employee's employment by the
Company which is not effected pursuant to a notice of termination satisfying the
requirements of Section 8(b) below, and for purposes of this Agreement, no such
purported termination shall be effective; or (ix) any termination of Employee's
employment as a result of the Employees Disability.
(b) Cause. "Cause" shall mean (i) any act of personal
dishonesty taken by the Employee in connection with his responsibilities as an
employee and intended to result in substantial personal enrichment of the
Employee, (ii) the conviction of a felony, (iii) a willful act by the Employee
which constitutes gross misconduct and which is injurious to the Company, (iv)
continued violations by the Employee of the Employee's obligations under Section
1 of this Agreement which are demonstrably willful and deliberate on the
Employee's part after there has been delivered to the Employee a written demand
for performance from the Company which describes the basis for the Company's
belief that the Employee has not substantially performed his duties, (v)
termination or expiration of the License Agreement between the Company and The
Timberland Company if the Company is liquidated as a consequence thereof, (vi)
habitual use of narcotics or alcohol which impairs Employee's performance of his
duties under this Agreement, (vii) unexcused habitual absence from work for
reasons unrelated to illness, family crisis or disability, or (viii) failure of
the Company to achieve at least 60% of the operating income projected for any
fiscal year in the Company's business plan, as the same is in effect at the end
of such fiscal year, provided that a failure described in this subparagraph
(viii) shall constitute cause only during the 60 days following the end of such
fiscal year.
(c) Disability. "Disability" shall mean that the Employee has
been unable to perform his duties under this Agreement as the result of his
incapacity due
-4-
<PAGE> 5
to physical or mental illness, which has lasted or is expected to last not less
than ninety (90) days, as determined by a physician selected by the Company or
its insurers and acceptable to the Employee or the Employee's legal
representative (such Agreement as to acceptability not to be unreasonably
withheld). Termination resulting from Disability may only be effected after at
least 30 days' written notice by the Company of its intention to terminate the
Employee's employment.
(d) Termination Date. "Termination Date" shall mean (i) if
this Agreement is terminated by the Company for Disability, thirty (30) days
after notice of termination is given to the Employee, (ii) if the Employee's
employment is terminated by the Company for any other reason, the date on which
a notice of termination is given, provided that if within thirty (30) days after
the Company gives the Employee notice of termination, the Employee notifies the
Company that a dispute exists concerning the termination, the Termination Date
shall be the date on which the dispute is finally determined, either by mutual
written agreement of the parties, by final judgment, order or decree of a court
of competent jurisdiction (the time for appeal therefrom having expired and no
appeal having been perfected), or (iii) if the Agreement is terminated by the
Employee, the date on which the Employee delivers the notice of termination to
the Company.
7. SUCCESSORS
(a) Company's Successors. Any successor to the Company
(whether direct or indirect and whether by purchase, lease, merger,
consolidation, liquidation or otherwise) to all or substantially all of the
Company's business and/or assets shall assume the obligations under this
Agreement and agree expressly to perform the obligations under this Agreement in
the same manner and to the same extent as the Company would be required to
perform such obligations in the absence of a succession. For all purposes under
this Agreement, the term "Company" shall include any successor to the Company's
business and/or assets which executes and delivers the assumption agreement
described in this subsection (a) or which becomes bound by the terms of this
Agreement by operation of law.
(b) Employee's Successors. The terms of this Agreement and all
rights of the Employee hereunder shall inure to the benefit of, and be
enforceable by, the Employee's personal or legal representatives, executors,
administrators, successors, heirs, distributees, devisees and legatees.
8. NOTICE
(a) General. Notices and all other communications contemplated
by this Agreement shall be in writing and shall be deemed to have been duly
given when
-5-
<PAGE> 6
personally delivered or when mailed by U.S. registered or certified mail, return
receipt requested and postage prepaid. In the case of the Employee, mailed
notices shall be addressed to him at the home address which he most recently
communicated to the Company in writing. In the case of the Company, mailed
notices shall be addressed to its corporate headquarters, and all notices shall
be directed to the attention of its Board Chairman.
(b) Notice of Termination. Any termination by the Company for
Disability or Cause, or by the Employee as a result of a voluntary resignation
or an Involuntary Termination shall be communicated by a notice of termination
to the other party hereto given in accordance with Section 8 of this Agreement.
Such notice shall indicate the specific termination provision in this Agreement
relied upon, shall set forth in reasonable detail the facts and circumstances
claimed to provide a basis for termination under the provision so indicated, and
shall specify the termination date (which shall be not more than thirty (30)
days after the giving of such notice). The failure by the Employee to include in
the notice any fact or circumstance which contributes to a showing of
Involuntary Termination shall not waive any right of the Employee hereunder or
preclude the Employee from asserting such fact or circumstance in enforcing his
rights hereunder.
9. MISCELLANEOUS PROVISIONS
(a) No Duty to Mitigate. The Employee shall not be required to
mitigate the amount of any payment contemplated by this Agreement (whether by
seeking new employment or in any other manner), nor shall any such payment be
reduced by any earnings that the Employee may receive from any other source.
(b) Waiver. No provision of this Agreement shall be modified,
waived or discharged unless the modification, waiver or discharge is agreed to
in writing and signed by the Employee and by an authorized officer of the
Company (other than the Employee). No waiver by either party of any breach of,
or of compliance with, any condition or provision of this Agreement by the other
party shall be considered a waiver of any other condition or provision or of the
same condition or provision at another time.
(c) Whole Agreement. No agreements, representations or
understandings (whether oral or written and whether express or implied) which
are not expressly set forth in this Agreement have been made or entered into by
either party with respect to the subject matter hereof.
-6-
<PAGE> 7
(d) Choice of Law. The validity, interpretation, construction
and performance of this Agreement shall be governed by the laws of the State of
California.
(e) Severability. The invalidity or unenforceability of any
provision or provisions of this Agreement shall not affect the validity or
enforceability of any other provision hereof, which shall remain in full force
and effect.
(f) Arbitration. Any dispute or controversy arising under or
in connection with this Agreement shall be settled exclusively by arbitration in
San Francisco, California, in accordance with the rules of the American
Arbitration Association then in effect. Judgment may be entered on the
arbitrator's award in any court having jurisdiction. Punitive damages shall not
be awarded.
(g) No Assignment of Benefits. The rights of any person to
payments or benefits under this Agreement shall not be made subject to option or
assignment, either by voluntary or involuntary assignment or by operation of
law, including (without limitation) bankruptcy, garnishment, attachment or other
creditor's process, and any action in violation of this subsection (g) shall be
void.
(h) Employment Taxes. All payments made pursuant to this
Agreement will be subject to withholding of applicable taxes.
(i) Assignment by Company. The Company may assign its rights
under this Agreement to an affiliate, and an affiliate may assign its rights
under this Agreement to another affiliate of the Company or to the Company;
provided, however, that no assignment shall be made if the net worth of the
assignee is less than the net worth of the Company at the time of assignment. In
the case of any such assignment, the term "Company" when used in a section of
this Agreement shall mean the corporation that actually employs the Employee.
(j) Counterparts. This Agreement may be executed in
counterparts, each of which shall be deemed an original, but all of which
together will constitute one and the same instrument.
-7-
<PAGE> 8
IN WITNESS WHEREOF, each of the parties has executed this Agreement, in
the case of the Company by its duly authorized officer, as of the day and year
first above written.
COMPANY
The D.W. Lauer Company
By: /s/ Douglas W. Lauer
-------------------------------
Title: President and CEO
-----------------------------
EMPLOYEE
Douglas W. Lauer
/s/ Douglas W. Lauer
-------------------------------
-8-
<PAGE> 1
EXHIBIT 10.54
INVESTOR RIGHTS AGREEMENT
THIS INVESTOR RIGHTS AGREEMENT, is entered into as of this 17th day of
May, 1996, by and between The D.W. Lauer Company, a California corporation (the
"Company"), Douglas W. Lauer ("Founder"), Gargoyles, Inc., a Washington
corporation ("Gargoyles"), and The Timberland Company, a Delaware corporation
("Timberland," together with Gargoyles, the "Shareholders") and permitted
assigns, with reference to the following:
The Company, Founder and Shareholders are parties to an Agreement for
Purchase of Common Stock of even date herewith (the "Purchase Agreement").
The Company, Founder and Shareholders, for the benefit of the Holders
(as defined below) wish to enter into this Investor Rights Agreement.
NOW, THEREFORE, in consideration of the mutual covenants contained
herein and in the Purchase Agreement, the parties hereby agree as follows:
1. DEFINITIONS
As used herein, unless the context otherwise requires, the following
terms have the following respective meanings:
"Affiliate" of a Person shall mean any Person, directly or indirectly,
through one or more intermediaries, controlling, controlled by, or under common
control with such Person. The term "control" shall mean with respect to a
corporation the right to exercise, directly or indirectly, more than fifty
percent (50%) of the voting rights attributable to the controlled corporation
and, with respect to any individual, partnership, trust, other entity or
association, the possession, directly or indirectly, of the power to direct or
cause the direction of the management or policies of the controlled entity.
Affiliate of a Person also shall include any director, officer, shareholder,
executive or employee of such Person, or any member of any such Person's
immediate family, including the parents, spouse, children and other relatives of
any such Person.
"Closing Date" shall have the meaning ascribed to it in the Purchase
Agreement.
"Commission" means the Securities and Exchange Commission or any other
Federal agency at the time administering the Securities Act (as defined below).
<PAGE> 2
"Common Stock" means the shares of common stock, no par value, of the
Company and any shares of common stock into which such shares are converted in
connection with a recapitalization of the Company.
"Exchange Act" means the Securities Exchange Act of 1934, as amended,
or any similar Federal statute, and the rules and regulations of the Commission
thereunder, all as the same shall be in effect at the time. Reference to a
particular section of the Exchange Act shall include a reference to the
comparable section, if any, of any such similar Federal statute.
"Holder" shall mean Founder and Shareholders to the extent, if any,
that they retain rather than distribute to any Person Common Stock, and any
Person that receives a distribution of Common Stock therefrom and executes a
copy of this Agreement.
"Person" means a corporation, an association, a partnership, an
organization, a business, an individual, a governmental or political subdivision
or a governmental agency.
"Registrable Securities" means the shares of Common Stock (i) held by
Shareholders or (ii) held by Founder. As to any particular Registrable
Securities, once issued such securities shall cease to be Registrable Securities
when (a) a registration statement with respect to the sale of such securities
shall have become effective under the Securities Act and such securities shall
have been disposed of in accordance with such registration statement, (b) they
shall have been otherwise transferred, new certificates for them not bearing a
legend restricting further transfer shall have been delivered by the Company and
subsequent public distribution of them shall not require registration of them
under the Securities Act, or (c) they shall have ceased to be outstanding.
"Registration Expenses" means the out-of-pocket expenses incident to
the Company's performance of or compliance with Section 3 hereof, including,
without limitation, all registration, filing and applicable national securities
exchange fees, all fees and expenses of complying with securities laws,
including those of Nasdaq and the NASD, the fees and disbursements of counsel
for the Company and of its independent public accountants, printing and
reproduction expenses, and similar disbursements and charges; provided, however,
that Registration Expenses shall exclude, and the sellers of the Registrable
Securities shall pay, the fees and disbursements of counsel and accountants to
such sellers and commissions and transfer taxes in respect of the Registrable
Securities being registered (the "Excluded Expenses").
-2-
<PAGE> 3
"Securities Act" means the Securities Act of 1933, as amended, or any
similar Federal statute, and the rules and regulations of the Commission
thereunder, all as the same shall be in effect at the time. References to a
particular section of the Securities Act shall include a reference to the
comparable section, if any, of any such similar Federal statute.
2. COVENANTS OF THE COMPANY
The Company covenants that so long as Holders own Common Stock, unless
Shareholders shall otherwise consent in writing:
2.1 ACCOUNTING SYSTEM
The Company shall maintain a system of accounting established and
administered in accordance with generally accepted accounting principles
consistently applied.
2.2 PERIODIC REPORTS, BUDGETS
(a) The Company shall furnish to each Holder, as soon as
practicable, and in any event within 90 days after the end of each fiscal year
of the Company, an annual report of the Company, including an audited balance
sheet as of the end of such fiscal year and the related audited statements of
operations, shareholders' equity and cash flows for such fiscal year (or similar
statements if the foregoing statements change as the result of changes in
generally accepted accounting principles), all of which shall fairly present the
financial condition of the Company as of the dates shown and the results of its
operations for the periods then ended. Such financial statements shall be
accompanied by the unqualified report thereon of a nationally recognized
independent public accountant reasonably satisfactory to Shareholders to the
effect that such financial statements have been prepared in conformity with
generally accepted accounting principles applied on a basis consistent with
prior years (except as otherwise specified in such report). The Company shall
conduct its business so that such report of the independent public accountants
shall not contain any qualifications as to the scope of the audit or with
respect to the Company's compliance with generally accepted accounting
principles consistently applied, except for changes in methods of accounting in
which such accountants concur.
(b) The Company shall furnish to each Holder, as soon as
practicable and in any event within 30 days after the end of each fiscal quarter
and calendar month, a quarterly or monthly report, as applicable, of the Company
consisting of an unaudited balance sheet as of the end of such quarter or month
and the related
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unaudited statements of operations and cash flows for such quarter or month and
for the fiscal year to date, setting forth in each case in comparative form the
corresponding figures for (A) the preceding fiscal year and (B) the budget for
the current fiscal year. All such reports shall be certified by the chief
financial officer of the Company to fairly present the financial condition of
the Company as of the dates shown and the results of its operations for the
periods then ended and to have been prepared in conformity with generally
accepted accounting principles consistently applied except for normal, year-end
audit adjustments and except that footnotes may be omitted. The reports for each
quarter or calendar month shall include a narrative discussion prepared by the
Company describing the business operations of the Company during such quarter or
calendar month.
(c) The Company shall furnish to each Holder, as soon as
practicable and, for each year after 1996, at least thirty (30) days prior to
the end of each fiscal year of the Company an annual operating budget for the
Company for the succeeding fiscal year, containing projections of profit and
loss, cash flow and ending balance sheets for each month of such fiscal year.
2.3 OTHER REPORTS AND INSPECTION
The Company shall furnish promptly to each Holder copies of any
financial statements or reports prepared by the Company for or otherwise
furnished to or filed with its shareholders or any lender to the Company or the
Commission. The Company shall furnish promptly to any Holder such other
documents, reports, financial data and other information as such Holder may
reasonably request. The Company shall, upon reasonable prior notice, make
available to any Holder or its representatives or designees all properties,
assets and business records of the Company for inspection and, in the case of
business records, copying and shall use its best efforts to make available to
any Holder, the directors, officers and employees of the Company for interviews
concerning the business, properties and assets of the Company.
2.4 INSURANCE
The Company shall maintain valid policies of workers' compensation,
fire and casualty, liability and other forms of insurance with financially sound
insurers in such amounts, with such deductibles and against such risks and
losses as are reasonable for the business and assets of the Company. The
activities and operations of the Company shall be conducted in a manner so as to
conform in all material respects to all applicable provisions of such insurance
policies. The Company shall within thirty (30) days of the date hereof, use its
best efforts to obtain and maintain from financially sound and reputable insurer
term life insurance on the life of Founder in
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the amount of $4.0 million. Such policy shall name Timberland and Gargoyles
each as co-loss payees, each with a fifty percent (50%) interest in the
proceeds, and shall not be cancelable or amended by the Company without prior
approval of the Shareholders. The rights of Shareholders in the proceeds of such
insurance policy shall be assignable by any Shareholder to a permitted assignee
of such Shareholder's then current entire interest in the Company.
2.5 LICENSES
The Company shall obtain and keep in full force and effect all
licenses, permits and other authorizations from governmental authorities
utilized by the Company which shall be necessary in any material respect to the
conduct of its business, unless such licenses, permits and authorizations are
not in full force and effect and are contested diligently and in good faith by
the Company.
2.6 MATERIAL CHANGES
The Company shall promptly notify each Shareholder of: (a) any material
adverse change or anticipated changes in the condition (financial or otherwise),
of the properties, assets, liabilities, businesses, or prospects as contemplated
in the current Business Plan or operations of the Company; and (b) any lawsuit,
claim, proceeding or investigation, pending, or to the best knowledge of the
Company, threatened, or any judgment, order or decree.
2.7 COMPLIANCE WITH APPLICABLE LAWS
The Company shall comply in all material respects with all applicable
statutes, laws, ordinances, rules and regulations of any governmental authority
and any filing requirements relating thereto, such compliance to include,
without limitation, filing in a timely manner (within any applicable extension
periods) all tax returns, reports and forms required to be filed under the
Internal Revenue Code or under applicable state, local or foreign tax laws and
timely paying in full all taxes with respect to such returns, reports and forms,
except for immaterial local tax returns or immaterial foreign tax returns and
except to the extent such statutes, laws, ordinances, rules, regulations, filing
requirements or taxes are being contested diligently and in good faith by the
Company (and, in the case of taxes, adequate reserves for payment thereof have
been set up), and shall do all things necessary to preserve, renew and keep in
full force and effect and in good standing its corporate existence and authority
necessary to continue its business.
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2.8 AGREEMENTS WITH EMPLOYEES
(a) The Company shall cause all members of management and all
professional employees of the Company to enter into agreements, in form and
substance reasonably satisfactory to Shareholders, relating to nondisclosure of
confidential information, nonsolicitation of employees and customers of the
Company, and assignment of patents, trademarks and copyrights to the Company
(the "Protective Agreements").
(b) The Company shall require all future key employees of the
Company to enter into Protective Agreements substantially in form attached
hereto as Exhibit A.
2.9 VOTING AGREEMENT
(a) Election of Directors. Each Holder hereby agrees to cast
all votes to which such Holder is entitled in respect of the Common Stock now or
hereafter owned by such Holder, whether at any annual or special meeting of
stockholders, by written consent or otherwise, to:
(i) fix the number of directors constituting the board
of directors of the Company (the "Board") at five (5) members;
(ii) elect as a director of the Company one individual
(the "Timberland Designated Director") that may be designated by Timberland for
election;
(iii) elect as a director of the Company one individual
that may be designated by Founder for election (the "Founder Designated
Director"); and
(iv) elect as a director for the Company three
individuals that may be designated by Gargoyles for election (the "Gargoyles
Designated Directors").
(b) Removal. The Timberland Designated Director may not be
removed without the consent of Timberland, the Founder Designated Director may
not be removed without the consent of Founder, and the Gargoyles Designated
Directors may not be removed without the consent of Gargoyles.
(c) Successors. In the event a director shall cease to serve
for any reason then (i) in the case of the Timberland Designated Director,
Timberland shall have the right to nominate a successor Designated Director,
(ii) in the case of the Founder Designated Director, Founder shall have the
right to nominate a successor Founder Designated Director, and (iii) in the case
of any Gargoyles Designated
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Director, Gargoyles shall have the right to nominate a successor Gargoyles
Designated Director. Each Holder shall, upon receipt of notice identifying such
nominee, promptly take all action necessary to cause the appointment of such
nominee to the Board pursuant to the Company's By-laws and Certificate of
Incorporation, each as amended and in effect from time to time.
(d) For so long as Founder or Timberland has the right to
nominate a director, the director nominated by such party shall have the same
rights as other directors to vote, receive notice of and attend all meetings of
the executive committee or other committee of the Board of Directors; provided
further that the director nominated by Timberland shall have the right to serve
on any such committee. For so long as a party has the right to nominate a
director and such party has specified an individual to be such director or an
observer, the Company will promptly deliver to such party's director or observer
copies of all minutes and other records of action by, and all documents,
reports, financial data and other information prepared for or provided to, the
Board. The Company covenants that at all times its Articles of Incorporation or
Bylaws will contain provisions indemnifying its directors to the fullest extent
permitted under applicable law.
(e) If a party (the "Requesting Party") gives written notice
to the other parties (the "Requested Parties") that the Requesting Party desires
to remove a director nominated by it, the Requested Parties agree to vote all
their voting securities in favor of removing such director if a vote of holders
of voting securities shall be required to remove the director, and the Company
agrees to take any action necessary to facilitate such removal.
(f) If the any Holder fails or refuses to vote its shares as
required hereby, the Timberland, Founder, or Gargoyles, as the case may be,
shall have an irrevocable proxy pursuant to the provisions of Section 705(e) of
the California General Corporation Law, coupled with an interest, so to vote
those securities in accordance herewith, and each party hereby grants to the
other parties such irrevocable proxy.
2.10. NEGATIVE COVENANTS
(a) The Company will not, without first obtaining the consent
of Gargoyles and Founder or Gargoyles and Timberland:
(i) sell or transfer all or substantially all of any
asset of the Company, except sales of inventory in the ordinary course of
business;
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<PAGE> 8
(ii) issue, deliver or sell any of its capital stock, or
grant an option or rights to subscribe for, purchase or acquire any of its
capital stock, or to any Person (except as provided in this Agreement);
(iii) increase the salary or other compensation payable
or to become payable by the Company to any of its officers or executives, nor
pay, or commit or oblige the Company to pay any bonus (except in accordance with
past practice of the Company as heretofore disclosed in writing to Shareholders)
or any other additional compensation to any such Person, including (but not
limited to) any welfare, pension, retirement or similar payment or arrangement;
(iv) make any change in the business and activities of
the Company;
(v) extend credit by any method or in any form or manner
in excess of $50,000, other than open account credit extended to customers in
the ordinary course of business or loan money or act as guarantor, surety,
co-signor, endorser, co-maker, indemnitor or otherwise, in respect of the
obligation of any Person, organization or entity;
(vi) incur any indebtedness, other than trade debt
incurred in the ordinary course of business, to a Person which is not an
Affiliate of the Company or of any stockholder of the Company, provided,
however, that the Company may incur indebtedness of up to $100,000 to any such
unaffiliated Person; or
(vii) invest directly or indirectly, by way of stock
ownership, debt, asset acquisition or otherwise, in any corporation,
association, or other entity or enterprise; or
(b) The Company will not, without first obtaining the consent
of all of the outstanding shares of Common Stock held by Holders:
(i) amend, restate or otherwise alter the Company's
Articles of Incorporation or Bylaws;
(ii) engage in any loan, lease, contract or other
transaction, as lender, borrower, lessee, lessor or otherwise, with any
Affiliate of the Company or of any stockholder of the Company; provided that,
subject to such approval, a Shareholder may make a loan to the Company which (x)
bears no greater than a market rate of interest (not to exceed, subject to such
approval, such Shareholder's then current borrowing costs), (y) is secured by
assets of the Company (other than the
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License Agreement), and (z) permits foreclosure on such assets in case of
Company default; or
(iii) change the Company's fiscal year.
(c) The Company will not, without first obtaining the
unanimous consent of board of directors of the Company, including
representatives of each of Founder and Timberland:
(i) declare, set aside or pay a dividend or other
distribution with respect to the stock of the Company, or redeem such stock
directly or indirectly, or purchase or otherwise acquire any shares of capital
stock of the Company.
3. REGISTRATION UNDER SECURITIES ACT
3.1 REGISTRATION
If the Company determines in its sole discretion that it is in the
Company's best interest to do so, the Company will use its best efforts to
prepare and file a registration statement on Form S-1, S-3 or other applicable
form under the Securities Act as to all of the Registrable Securities; provided,
however, that the Company has no obligation to file such registration statement.
If it determines to file such registration statement, the Company shall provide
written notice to each Holder thirty (30) days prior to the filing of such
registration statement. The Company will use its best efforts to effect the
registration under the Securities Act. The Company may elect to include in the
registration statement shares of Common Stock held by the Company or other
stockholders of the Company.
3.2 REGISTRATION PROCEDURES
In connection with the registration of Registrable Securities pursuant
to Section 3.1, 3.3 or 3.4, the Company will, subject to the terms of this
Agreement, as expeditiously as practicable:
(a) prepare and file with the Commission such amendments and
supplements to such registration statement and the prospectus used in connection
therewith as may be necessary to cause such registration statement to become
effective and to keep such registration statement effective and to comply with
the provisions of the Securities Act with respect to the disposition of all
Registrable Securities covered by such registration statement for such period as
any Holder shall be subject to the volume limitations under Rule 144 of the
Securities Act;
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<PAGE> 10
(b) furnish each Holder such number of conformed copies of
such registration statement and of each such amendment and supplement thereto
(in each case including all exhibits), such number of copies of the prospectus
and of each such amendment or supplement thereto contained in such registration
statement (including each preliminary prospectus and any summary prospectus) and
any other prospectus filed under Rule 424 under the Securities Act, in
conformity with the requirements of the Securities Act, and such other
documents, as such Holder may reasonably request, but only while the Company is
required under the provisions hereof to cause the registration statement to
remain current;
(c) use reasonable diligence (i) to register or qualify all
Registrable Securities covered by such registration statement under such other
securities or blue sky laws of such States as Holder and Company may reasonably
agree upon, (ii) to keep such registration or qualification in effect for so
long as such registration statement remains in effect, and (iii) to take any
other action which may be reasonably necessary or advisable to enable such
sellers to consummate the disposition in such jurisdictions of the securities to
be sold by such sellers; provided, however, that the Company shall not for any
such purpose be required to qualify generally to do business as a foreign
corporation in any jurisdiction wherein it would not but for the requirements of
this subdivision (c) be obligated to be so qualified; to conform the composition
of its assets at the time to the securities or blue sky laws of any
jurisdiction; to execute or file any general consent to service of process under
the laws of any jurisdiction; to take any action that would subject it to
service of process in suits other than those arising out of the offer and sale
of the Registrable Securities covered by the registration statement; or to
subject itself to taxation in any jurisdiction where it has not theretofore done
so;
(d) notify each Holder at any time when a prospectus relating
thereto is required to be delivered under the Securities Act, upon discovery
that, or upon the happening of any event as a result of which, the prospectus
included in such registration statement, as then in effect, includes an untrue
statement of a material fact or omits to state any material fact required to be
stated therein or necessary to make the statements therein not misleading, in
the light of circumstances under which they were made, and to promptly prepare
and furnish to such Holder a reasonable number of such copies of a supplement to
or an amendment of such prospectus as may be necessary so that, as thereafter
delivered to the purchasers of such securities, such prospectus shall not
include an untrue statement of a material fact or omit to state a material fact
required to be stated therein or necessary to make statements therein not
misleading in the light of the circumstances under which they were made.
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<PAGE> 11
The Company may require any Holder to furnish the Company such
information regarding such Holder and the intended method of distribution of
such securities as the Company may from time to time reasonably request in
writing.
Each Holder of Registrable Securities agrees by acquisition of such
Registrable Securities that upon receipt of any notice from the Company of the
happening of any event of the kind described in subdivision (d) of this Section
3.2, such Holder will forthwith discontinue such Holder's disposition of
Registrable Securities pursuant to the registration statement relating to such
Registrable Securities until such Holder's receipt of the copies of the
supplemented or amended prospectus contemplated by subdivision (d) of this
Section 3.2
3.3 REGISTRATION ON FORM S-3
After its initial public offering, the Company shall use its best
efforts to qualify for registration on Form S-3 or any comparable or successor
form or forms. After the Company has qualified for the use of Form S-3, in
addition to the rights contained in the foregoing provisions of this Section 3,
the Holders of Registrable Securities shall have the right to request
registrations on Form S-3 (such requests shall be in writing and shall state the
number of shares of Registrable Securities to be disposed of and the intended
methods of disposition of such shares by such Holder or Holders), provided,
however, that the Company shall not be obligated to effect any such registration
if (i) the Holders, together with the holders of any other securities of the
Company entitled to inclusion in such registration, propose to sell Registrable
Securities and such other securities (if any) on Form S-3 at an aggregate price
to the public of less than $1,000,000, or (ii) in a given twelve-month period,
the Company has effected one (1) such registration in such period.
3.4 "PIGGY-BACK" REGISTRATIONS
If at any time the Company shall determine to register for its own
account or the account of others under the Securities Act any of its equity
securities, (including pursuant to a demand for registration of any stockholder
of the Company other than on Form S-4 or Form S-8 or their then equivalents
relating to shares of Common Stock to be issued solely in connection with any
acquisition of any entity or business or shares of Common Stock issuable in
connection with stock option or other employee benefit plans, it shall send to
each Holder of Registrable Shares, written notice of such determination and, if
within thirty (30) days after receipt of such notice, such Holder shall so
request in writing, the Company shall include in such registration statement all
or any part of the Registrable Securities such Holder requests to be registered.
Nothing herein shall be construed so as to require the Company, in connection
with any proposed offering, to engage the services of an underwriter under
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this Section 3.4 as, for example, if the Company shall file a registration
statement under Rule 415 of the Securities Act without the services or
engagement of any underwriter.
If, in connection with any offering involving an underwriting of Common
Stock to be issued by the Company, the managing underwriter shall in good faith
impose a limitation on the number of shares of such Common Stock which may be
included in the registration statement because, in its judgment, such limitation
is necessary to effect an orderly public distribution, then the Company shall be
obligated to include in such registration statement only such limited portion of
the Registrable Securities with respect to which such Holder has requested
inclusion hereunder; provided, however, that the Company shall not so exclude
any Registrable Securities unless it has first excluded any securities to be
offered and sold by officers and employees of the Company or by Holders who do
not have contractual, incidental rights to include such securities
(collectively, "Excludable Shares").
Any exclusion of Registrable Securities shall be made pro rata among
the Holders seeking to include such shares, in proportion to the number of such
shares sought to be included by such Holder.
3.5 INDEMNIFICATION
(a) Indemnification by the Company. In the event of any
registration of any securities of the Company under the Securities Act, the
Company will, and hereby agrees to, indemnify and hold harmless each Holder and
its Affiliates in the case of any registration statement filed pursuant to
Section 3.1, 3.3 or Section 3.4, hereof, insofar as such losses, claims, damages
or liabilities (or actions or proceedings, whether commenced or threatened, in
respect thereof) arising out of or based upon (i) any untrue statement or
alleged untrue statement of any material fact contained in any registration
statement under which such securities were registered under the Securities Act,
any preliminary prospectus, final prospectus or summary prospectus contained
therein, or any amendment or supplement thereto, (ii) any omission or alleged
omission to state therein a material fact required to be stated therein or
necessary to make the statements therein in light of the circumstances in which
they were made not misleading, or (iii) any violation by the Company of any
federal, state or common law rule or regulation relating to any action in
connection with any such registration statement and the offering made thereby,
and the Company will reimburse each Holder for any legal or any other expenses
reasonably incurred by it, from time to time as and when they are incurred, in
connection with investigating or defending any such loss, claim, damage,
liability, action or proceeding; provided, that the Company shall not be liable
in any such case to the extent that any such loss, claim, damage, liability (or
action or proceeding in respect thereof) or expense arises
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out of or is based upon an untrue statement or alleged untrue statement or
omission or alleged omission made in such registration statement, any such
preliminary prospectus, final prospectus, summary prospectus, amendment or
supplement in reliance upon and in conformity with written information furnished
to the Company through an instrument duly executed by or on behalf of such
Holder, specifically stating that it is for use in the preparation thereof.
(b) Indemnification by Holders. As a condition to including
any Registrable Securities in any registration statement, each Holder, severally
and not jointly, will, and hereby does, indemnify and hold harmless (in the same
manner and to the same extent as set forth in subdivision (a) of this Section
3.5) the Company, and each director of the Company, each officer of the Company
and each other Person, if any, who controls the Company within the meaning of
the Securities Act, with respect to any statement or alleged statement in or
omission or alleged omission from such registration statement, any preliminary
prospectus, final prospectus or summary prospectus contained therein, or any
amendment or supplement thereto, if such statement or alleged statement or
omission or alleged omission was made in reliance upon and in conformity with
written information furnished to the Company through an instrument duly executed
by such Holder specifically stating that it is for use in the preparation of
such registration statement, preliminary prospectus, final prospectus, summary
prospectus, amendment or supplement; provided that each Holder's liability under
this paragraph shall be limited to its proceeds from the offering made pursuant
to such registration statement, after underwriting discounts and commissions.
Such indemnity shall remain in full force and effect, regardless of any
investigation made by or on behalf of the Company or any such director, officer
or controlling Person and shall survive the transfer of such securities by such
Holder.
(c) Notices of Claims. etc. Promptly after receipt by an
indemnified party of notice of the commencement of any action or proceeding
involving a claim referred to in the preceding subdivisions of this Section 3.5,
such indemnified party will, if a claim in respect thereof is to be made against
an indemnifying party, give written notice to the latter of the commencement of
such action; provided, however, that the failure of any indemnified party to
give notice as provided herein shall not relieve the indemnifying party of its
obligations under the preceding subdivisions of this Section 3.5, except to the
extent that the indemnifying party is actually prejudiced by such failure to
give notice. In case any such action is brought against an indemnified party,
the indemnifying party shall be entitled to participate in and, unless in such
indemnified party's reasonable judgment a conflict of interest between such
indemnified and indemnifying parties may exist in respect of such claim, to
assume the defense thereof, jointly with any other indemnifying party similarly
notified to the extent that it may wish, with counsel reasonably satisfactory to
such indemnified
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<PAGE> 14
party, and after notice from the indemnifying party to such indemnified party of
its election so to assume the defense thereof, the indemnifying party shall not
be liable to such indemnified party for any legal or other expenses subsequently
incurred by the latter in connection with the defense thereof other than
reasonable costs of investigation. No indemnifying party shall (i) be liable for
any settlement of any action or proceeding effected without its written consent
(which consent shall not be unreasonably withheld); or (ii) consent to entry of
any judgment or enter into any settlement which does not include as an
unconditional term thereof the giving by the claimant or plaintiff to such
indemnified party of a release from all liability in respect to such claim or
litigation.
(d) Contribution. If the indemnification provided for in this
Section 3.5 shall for any reason be held by a court to be unavailable to an
indemnified party under subparagraph (a) or (b) hereof in respect of any loss,
claim, damage or liability, or any action or proceeding in respect thereof,
then, in lieu of the amount paid or payable under subparagraph (a) or (b)
hereof, the indemnified party and the indemnifying party under subparagraph (a)
or (b) hereof shall contribute to the aggregate losses, claims, damages and
liabilities (including legal or other expenses reasonably incurred in connection
with investigating the same), (i) in such proportion as is appropriate to
reflect the relative fault of the Company and such Holder covered by the
registration statement or underwritten sale which resulted in such loss, claim,
damage or liability, or action in respect thereof, with respect to the
statements or omissions which resulted in such loss, claim, damage or liability,
or action in respect thereof, as well as any other relevant equitable
considerations, or (ii) if the allocation provided by clause (i) above is not
permitted by applicable law, in such proportion as nearly as practicable as
shall be permitted by applicable law to effect the intent of parties as set
forth in clause (i). No Person guilty of fraudulent misrepresentation (within
the meaning of Section 11 (f) of the Securities Act) shall be entitled to
contribution from any Person who was not guilty of such fraudulent
misrepresentation. In addition, no Person shall be obligated to contribute
hereunder any amounts in payment for any settlement of any action or claim
effected without such Person's consent, which consent shall not be unreasonably
withheld.
(e) Other Indemnification. Indemnification and contribution
similar to that specified in the preceding subdivisions of this Section 3.5
(with appropriate modifications) shall be given by the Company and each Holder
with respect to any required registration or other qualification of securities
under any federal or state law or regulation of any governmental authority other
than the Securities Act.
(f) Indemnification Payments. The indemnification and
contribution required by this Section 3.5 shall be made by periodic payments of
the amount thereof
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during the course of the investigation or defense, as and when bills are
received or expense, loss, damage or liability is incurred.
(g) Additional Rights. Any indemnification agreements
contained herein shall be in addition to any other rights to indemnification or
contribution which any indemnified party may have pursuant to law or contract
and shall remain operative and in full force and effect regardless of any
investigation made or omitted by or on behalf of any indemnified party.
(h) Expenses. The Company shall pay on behalf of Holders, all
Registration Expenses but not including underwriting discounts in connection
with any registration pursuant to Section 3 hereof.
(i) Preparation. In connection with the preparation and filing
of a registration statement under the Securities Act pursuant to this Agreement,
the Company will give any Holder and its counsel and accountants the opportunity
to participate in the preparation of such registration statement, each
prospectus included therein or filed with the Commission, and, to the extent
practicable, each amendment thereof or supplement thereto.
4. PREEMPTIVE RIGHTS, RIGHTS OF FIRST REFUSAL AND CO-SALE RIGHTS
4.1 SALES OF COMMON STOCK
Except as provided below in this Section 4, neither the Company (other
than as a result of a transfer of Common Stock by a third party in accordance
with the terms of this Agreement) nor any Holder shall issue, deliver or sell
any equity securities or securities convertible or exercisable for equity of the
Company to any Person, or cause any common stock or other equity securities to
be issued, delivered or sold to any Person.
(a) Preemptive Rights. Each Holder of shares shall have full
preemptive or preferential rights, as these rights are defined by law, to
subscribe for or purchase that Holder's proportional part of any shares that may
be issued at any time by the Company to any third party which is not an
Affiliate of the Company or of any stockholder of the Company or in connection
with any Permitted Issuance to Affiliates (as defined below). Notwithstanding
the provisions of Section 2.10, the Company shall be entitled to offer such
equity securities to an Affiliate of the Company or of any stockholder of the
Company if all of the following conditions are met (a "Permitted Issuance to
Affiliates");
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(i) Gargoyles and Founder or Gargoyles and Timberland
consent that additional equity capital is required by the Company;
(ii) no unaffiliated third party is available to make
the required equity investment, despite the best efforts of the Company,
Gargoyles and Timberland, and Timberland's representative on the Company's Board
of Directors agrees that such is the case;
(iii) the Company has borrowed the maximum amount
possible, based on the fair value of the assets of the Company available as
collateral (which exclude the License Agreement);
(iv) the Company has on a cumulative basis, failed to
achieve 80% of the Minimum Net Sales set forth on Exhibit 18 to the License
Agreement for the period from the date of the License Agreement to the date of
the notice of the proposed investment; and
(v) the Timberland Put (defined in Section 5) has become
exercisable, and the price payable upon exercise of the Put is at least
$500,000.
(b) Rights of First Refusal. Prior to any delivery or sale to
any Person of any equity securities ("Offered Securities"), the Holder (the
"Offeror") shall first give the Company and/or the remaining Holders the
opportunity to purchase the Offered Securities (the "Right of First Refusal") in
the following manner:
(i) The Offeror shall give written notice (the
"Notification") of the proposed issuance, delivery or sale of Offered
Securities, setting forth in reasonable detail the proposed terms thereof,
including the identity of the proposed purchaser (the "Purchaser"), the amount
of Offered Securities to be sold, the cash price per share for the Offered
Securities offered by Purchaser (the "First Refusal Sale Price"), and the terms
of payment and other material provisions and conditions offered by Purchaser
(the "First Refusal Sale Terms"). The Notification shall include a
representation of the Offeror to the effect that such proposed terms are
contained in a bona fide offer by the Purchaser to the Offeror.
(ii) The Notification shall constitute an irrevocable
offer by the Offeror to sell all (but not less than all) of the Offered
Securities to the Company at the First Refusal Sale Price and on the First
Refusal Sale Terms. The Right of First Refusal shall be exercisable by written
notice (the "Exercise Notice") to the Offeror within 30 days after receipt of
the Notification.
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<PAGE> 17
(iii) If the Company exercises the Right of First
Refusal with respect to the Offered Securities, then the Offeror shall sell such
Offered Securities to the Company at the First Refusal Sale Price and on the
First Refusal Sale Terms. The closing of the purchase and sale of such Offered
Securities shall take place on such date, within 30 days after delivery to the
Offeror of the Exercise Notice, as shall be specified by the Company in the
Exercise Notice.
(iv) If the Company does not exercise the Right of First
Refusal with respect to the Offered Securities within such thirty (30) day
period, the Offeror shall give the remaining Holders an opportunity to exercise
the Right of First Refusal, on the same terms and in the same manner as offered
to the Company, pro rata in proportion to their relative holdings of Common
Stock of the Company. If the remaining Holders do not exercise the Right of
First Refusal with respect to all (but not less than all) of the Offered
Securities, the Offeror may, during the 180 days following the expiration of the
period for exercise of the Right of First Refusal, sell all (but not less than
all) of the Offered Securities to Purchaser upon terms and conditions no more
favorable to Purchaser than the First Refusal Sale Price and the First Refusal
Sale Terms.
(c) Co-Sale Rights. Notwithstanding the provisions of this
Section 4.1,
(i) If Gargoyles proposes to sell or transfer any shares
of the Common Stock now owned or subsequently acquired by Gargoyles ("Co-Sale
Shares") in one or more related transactions which will result in (1) the
transfer of 10,000 or more shares of Common Stock by Gargoyles or (2) the
transferee of such shares holding more than 50% of the Common Stock, then
Gargoyles shall promptly give written notice (the "Notice") to the Company,
Founder and Timberland at least 20 days prior to the closing of such sale or
transfer. The Notice shall describe in reasonable detail the proposed sale or
transfer including, without limitation, the number of Co-Sale Shares to be sold
or transferred, the nature of such sale or transfer, the consideration to be
paid, and the name and address of each prospective purchaser or transferee. In
the event that the sale or transfer is being made pursuant to the provisions of
Section 4.2 hereof, the Notice shall state under which paragraph and
subparagraph the sale or transfer is being made.
(ii) Founder and Timberland each shall have the right,
exercisable upon written notice to Gargoyles within thirty (30) days after
receipt of the Notice, to participate in such sale on the same terms and
conditions specified in the Notice. To the extent Founder or Timberland exercise
such right of participation in accordance with the terms and conditions set
forth below, the number of Co-Sale Shares that Gargoyles may sell in the
transaction shall be correspondingly reduced.
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<PAGE> 18
(iii) Founder and Timberland each shall be entitled to
sell all or any part of that number of shares of Common Stock equal to the
product obtained by multiplying (1) the aggregate number of Co-Sale Shares
covered by the Notice by (2) a fraction the numerator of which is the number of
shares of Common Stock owned by Founder or Timberland, as appropriate, at the
time of the sale or transfer and the denominator of which is the total number of
shares of Common Stock owned by Gargoyles, Founder and Timberland at the time of
the sale or transfer.
(iv) If either Founder or Timberland fails to elect to
fully participate in such sale pursuant to this paragraph, Gargoyles shall give
notice of such failure to the party who did so elect (the "Participant"). Such
notice may be made by telephone if confirmed in writing within two days. The
Participant shall have five days from the date such notice was given to agree to
sell its/his pro rata share of the unsold portion. For purposes of this
paragraph, a Participant's pro rata share shall be equal to the product obtained
by multiplying (1) the number of shares in the unsold portion by (2) a fraction
the numerator of which is the number of shares of Common Stock held by such
Participant and the denominator of which is the total number of shares of Common
Stock held by the Participant and Gargoyles.
(v) Each Participant shall effect its participation in
the sale by promptly delivering to Gargoyles for transfer to the prospective
purchaser one or more certificates, properly endorsed for transfer, which
represent the type and number of shares of Common Stock which such Participant
elects to sell, against payment of the purchase price.
(vi) The stock certificate or certificates that the
Participant delivers to Gargoyles pursuant to paragraph (v) above shall be
transferred to the prospective purchaser in consummation of the sale of the
Common Stock pursuant to the terms and conditions specified in the Notice, and
Gargoyles shall concurrently therewith remit to such Participant that portion of
the sale proceeds to which such Participant is entitled by reason of its
participation in such sale. To the extent that any prospective purchaser or
purchasers prohibits such assignment or otherwise refuses to purchase shares or
other securities from a Participant exercising its rights of co-sale hereunder,
Gargoyles shall not sell to such prospective purchaser or purchasers any Co-Sale
Shares unless and until, simultaneously with such sale, Gargoyles shall purchase
or cause to be purchased such shares or other securities from such Participant
upon the same terms and conditions as are applicable to the Co-Sale Shares.
(vii) The exercise or non-exercise of the rights of the
Participants hereunder to participate in one or more sales of Co-Sale Shares
made by
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<PAGE> 19
Gargoyles shall not adversely affect their rights to participate in subsequent
sales of Co-Sale Shares subject to Section 4.1.
(viii) If neither of Founder or Timberland elects to
participate in the sale of the Co-Sale Shares subject to the Notice, Gargoyles
may, not later than sixty (60) days following delivery to the Company and each
of Founder and Timberland of the Notice, enter into an agreement providing for
the closing of the transfer of the Co-Sale Shares covered by the Notice within
thirty (30) days of such agreement on terms and conditions not more favorable to
the transferor than those described in the Notice. Any proposed transfer on
terms and conditions more favorable than those described in the Notice, as well
as any subsequent proposed transfer of any of the Co-Sale Shares by Gargoyles,
shall again be subject to the co-sale rights of Founder and Timberland and shall
require compliance by Gargoyles with the procedures described in this Section
4.1.
4.2 EXEMPT TRANSFERS
(a) Notwithstanding the foregoing, the provisions of Section
4.1 shall not apply to (i) any transfer by a Holder to a party controlled or
under common control with such Holder; (ii) any transfer to the ancestors,
descendants or spouse or to trusts for the benefit of Founder; or (iii) any bona
fide gift; provided that (A) the transferor shall inform the Holders of such
transfer or gift prior to effecting it and (B) the transferee or donee shall
furnish the Holders with a written agreement to be bound by and comply with all
provisions of Section 4.1.
(b) Notwithstanding the foregoing, the provisions of Section
4.1 shall not apply to the sale of any shares (i) to the public in a widely
distributed underwritten public offering pursuant to a registration statement
filed with, and declared effective by, the Securities and Exchange Commission
under the Securities Act or, thereafter, in a broker's sale pursuant to Rule
144, or (ii) to any options issued, or to any shares issued upon their exercise,
pursuant to employee stock option plans adopted by the Board of Directors of the
Company.
4.3 LEGEND
(a) Each certificate representing shares of Common Stock now
or hereafter owned by Founder or issued to any Person in connection with a
transfer pursuant to Section 4.2(a) hereof shall be endorsed with the following
legend:
"THE SALE, PLEDGE, HYPOTHECATION OR TRANSFER OF THE SECURITIES
REPRESENTED BY THIS CERTIFICATE IS SUBJECT TO THE TERMS AND CONDITIONS OF A
CERTAIN INVESTOR RIGHTS AGREEMENT
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<PAGE> 20
BY AND BETWEEN THE STOCKHOLDER, THE CORPORATION AND CERTAIN HOLDERS OF STOCK OF
THE CORPORATION. COPIES OF SUCH AGREEMENT MAY BE OBTAINED UPON WRITTEN REQUEST
TO THE SECRETARY OF THE CORPORATION."
(b) The Holders agree that the Company may instruct its
transfer agent to impose transfer restrictions on the shares represented by
certificates bearing the legend referred to above to enforce the provisions of
this Agreement and the Company agrees to promptly do so. The legend shall be
removed upon termination of this Agreement.
4.4 CONDITIONS TO EXERCISE OF RIGHTS
Exercise of the rights under this Section 4 shall be subject to and
conditioned upon, and the Holders and the Company shall use their best efforts
to assist in, compliance with applicable laws.
4.5 TERM
This provisions of this Section 4 shall terminate upon the closing of a
firm commitment underwritten public offering pursuant to an effective
registration statement under the Securities Act covering the offer and sale of
the Company's Common Stock at a price per share of not less than $15.00 (as
adjusted for stock splits, reverse stock splits and the like effected after the
date of this Agreement) and an aggregate offering price of not less than $10.0
million.
5. TIMBERLAND PUT
5.1. PUT
During the period commencing on the third anniversary of the date
hereof and ending ninety (90) days after receipt by Timberland of audited
financial statements of the Company for the year ending December 31, 2002,
Timberland shall have the right (the "Timberland Put") to require the Company to
purchase all, but not less than all, of the Common Stock then beneficially owned
by Timberland (the "Put Shares"). The Timberland Put shall be exercisable by 30
days prior written notice (the "Put Notice") to the Company at a price per share
(the "Put Price") equal to 20 times the net after tax earnings of the Company
per share of Common Stock for the fiscal year ending immediately prior to
Timberland's delivery of the Put Notice, as determined in accordance with
generally accepted accounting principles applied in a manner consistent with the
financial statements of the Company.
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<PAGE> 21
5.2 CLOSING
If Timberland exercises the Timberland Put, then the Company shall
purchase the Put Shares from Timberland at the Put Price. The closing of the
purchase and sale of such Put Shares shall take place on such date, within 30
days after delivery to the Company of the Put Notice, as shall be specified by
Timberland in the Put Notice (the "Put Closing Date").
5.3 PAYMENT
The purchase price for the Put Shares shall be paid in eight (8) equal
payments of principal and interest from date of the put, at a rate per annum
equal to one percent (1%) above the prime rate charged from time to time by Bank
of America NTSA in San Francisco, California, each change in interest rate to
become effective on the effective date of each change in prime rate announced by
Bank of America NTSA, compounded annually, payable quarterly commencing ninety
(90) days after the Put Closing Date. Any remaining balance shall be paid on the
second anniversary of the Put Closing Date.
6. GARGOYLES MERGER
6.1 RIGHT TO MERGE
Notwithstanding the provisions of Section 2, at any time after the
exercise or expiration of the Timberland Put, Gargoyles shall have the right to
cause the merger of the Company with and into a wholly owned subsidiary of
Gargoyles by delivery to the Company a notice of election to merge (the "Notice
of Election"); provided, however, that all stockholders are offered their
proportional share of the merger price with no discount for minority interests
or rights and on the same terms and conditions.
6.2 VALUATION
The exchange ratio in connection with any such merger shall be based on
the relative "fair market value" of Gargoyles and the Company (each, a
"Constituent Corporation"). The "fair market value" of each Constituent
Corporation shall be determined: (i) if the shares are then publicly traded (as
defined below), as of the day of the delivery to the Constituent Corporation of
the Notice of Election (or, if such day is not a trading day in the United
States securities markets, on the nearest preceding trading day), on the basis
of the average closing prices therefor for the ten (10) immediately preceding
trading days, as reported with respect to the market (or the composite of the
markets, if more than one) in which such shares are then traded, or if no such
closing prices are reported, the lowest independent offer quotation
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<PAGE> 22
reported therefor in Level 2 of Nasdaq, or if no such quotations are reported,
on the basis of the most nearly comparable valuation method acceptable to
Gargoyles, Timberland and Founder, and (ii) if the shares of a Constituent
Corporation are not then publicly traded, as of the day of the delivery to the
Company of the Notice of Election, on the basis of the fair value thereof at the
time of such issue, as determined by appraisal.
6.3 APPRAISAL
Within thirty days after delivery of the Notice of Election, Gargoyles,
on the one hand, and Founder and Timberland, on the other, each shall designate
a qualified appraiser by written notice to the other. The two appraisers so
designated shall select a third qualified appraiser and the decision of any two
of the three qualified appraisers so selected shall be determinative of the fair
market value of the Constituent Corporation to be valued by appraisal (and if
none the of the three appraisers agree upon the fair market value, the high and
low appraisals shall be disregarded and the mid-point appraisal shall be
determinative). If one party shall fail so to designate an appraiser within said
thirty day period, the first appraiser shall proceed to determine such fair
market value. For purposes of this Agreement, a "qualified appraiser" shall mean
either (i) a brokerage firm which is a member of the National Association of
Securities Dealers, or (ii) an individual nominated by such a firm. Each party
shall pay the fees and expenses of the qualified appraiser appointed by it and
one-half of the fees and expenses of the third qualified appraiser. For purposes
of this paragraph, "publicly traded" shares are those which are listed or
admitted to unlisted trading privileges on a national securities exchange or as
to which sales or bid and offer quotations are reported in the automated
quotation system ("Nasdaq") operated by the National Association of Securities
Dealers, Inc. ("NASD").
7. AMENDMENTS AND WAIVERS
This Agreement may be amended only with the consent of the Company and
the Holders, except that the Company with the requisite consent required to take
any action prohibited by Section 2.10 may amend with such written consent such
provisions. Any amendment, consent and waiver shall be in writing. No waiver of
any default or breach of this Agreement shall be deemed a continuing waiver or a
waiver of any other breach or default.
8. NOTICES
All communications provided for hereunder shall be sent by
postage-prepaid first-class mail, shall be deemed to be received three days
after being sent, or, if earlier, the date of actual receipt, and shall be
addressed as follows:
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<PAGE> 23
(a) If to the Company, to:
The D.W. Lauer Company
120 Emerald Drive
Danville, California 94526
with a copy to:
Robb A. Scott, Esq.
Steinhart & Falconer LLP
333 Market Street, Suite 3200
San Francisco, California 94105-2150
(b) If to Founder:
Douglas W. Lauer
120 Emerald Drive
Danville, California 94526
with a copy to:
Robb A. Scott, Esq.
Steinhart & Falconer LLP
333 Market Street, Suite 3200
San Francisco, California 94105-2150
(c) If to Gargoyles:
Gargoyles, Inc.
5866 S. 194th Street
Kent, Washington 98032
Attention: Douglas B. Hauff
with a copy to:
Cynthia Pope, Esq.
5866 S. 194th Street
Kent, Washington 98032
(d) If to Timberland:
The Timberland Company
200 Domain Drive
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<PAGE> 24
Stratham, New Hampshire 03885
Attention: Kenneth Pucker, Vice President
with a copy to:
Hemmie Chang, Esq.
Ropes & Gray
One International Place
Boston, Massachusetts 02110
(e) If to a Holder, to:
Such Holder's address as supplied to the Company on
the signature page executed by such Holder
9. ASSIGNMENT
This Agreement shall be binding upon and inure to the benefit of and be
enforceable by the parties hereto and their respective successors and assigns,
except that Holders may not assign their rights hereunder separate from a
permitted transfer of their Common Stock.
10. HEADINGS
The headings of the sections of this Agreement are inserted for
convenience only and will not constitute a part hereof.
11. GOVERNING LAW
This Agreement will be governed by and construed in accordance with the
laws of the State of California without giving effect to the conflict of laws
provisions thereof.
12. ARBITRATION PROVISIONS
Any dispute or disagreement which arises under this Agreement shall be
resolved by expedited binding arbitration conducted by JAMS/Endispute, Inc.
("JAMS") as follows:
(a) The parties expressly recognize that time is of the
essence in any such arbitration, and it is the express intent of the parties
that any such arbitration process shall be concluded within thirty (30) days
following the initiation of arbitration by the submission of a written demand
for arbitration by any party.
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<PAGE> 25
(b) The parties may agree upon a retired judge from the JAMS
panel to conduct the expedited arbitration. If they are unable to agree, JAMS
will provide a list of three available judges. Each party may strike one and the
remaining judge will serve as the arbitrator.
(c) Any response to the demand for arbitration must be
submitted to the arbitrator and the other parties within seven (7) days after
service on the responding party of the demand for arbitration. The arbitration
will be held in the City of San Francisco, California within fifteen (15) days
after the date of the demand for arbitration and JAMS will provide each party
with five (5) days advance written notice of the hearing date. Should any party
hereto fail to appear or to be represented at the arbitration proceedings after
receiving due notice of the hearing date, the arbitrator shall, except for good
cause shown, render a decision in the absence of that party, which decision
shall have the same force and effect as if the absent party had been present.
The arbitrator shall render the arbitrator's decision within 30 days after the
date of the demand for arbitration, which decision shall be final and binding
upon the parties and not subject to appeal.
13. COUNTERPARTS
This Agreement may be executed in counterparts, each of which will be
an original, but all of which together will constitute one and the same
Agreement.
IN WITNESS WHEREOF, the parties have caused this Agreement to be
executed and delivered by their respective officers thereunto duly authorized as
of the date first above written.
THE D.W. LAUER COMPANY,
a California corporation
By: /s/ Douglas W. Lauer
-----------------------------------------
Douglas W. Lauer, President
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<PAGE> 26
GARGOYLES, INC.
a Washington corporation
By: /s/ Douglas B. Hauff
--------------------------------------
Name Douglas B. Hauff
----------------------------------
Title President
--------------------------------
THE TIMBERLAND COMPANY
a Delaware corporation
By: /s/ Jeffrey B. Swartz
--------------------------------------
Name Jeffrey B. Swartz
----------------------------------
Title Executive Vice President and
---------------------------------
Chief Operation Officer
---------------------------------
FOUNDER
By: /s/ Douglas W. Lauer
--------------------------------------
Douglas W. Lauer
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<PAGE> 1
EXHIBIT 10.55
TO
GARGOYLES, INC.
FORM S-1
"[*]" = confidential information omitted and filed separately with the
Securities and Exchange Commission pursuant to a request for confidential
treatment.
<PAGE> 2
LICENSE AGREEMENT
THIS LICENSE AGREEMENT dated as of May 17, 1996, is among THE
TIMBERLAND COMPANY, having its principal offices at 200 Domain Drive, Stratham,
New Hampshire 03845 ("Timberland") and GARGOYLES, INC., a Washington
corporation, having its principal offices at 5866 S. 194th Street, Kent,
Washington 98032 ("Gargoyles") and THE D.W. LAUER COMPANY, a California
corporation, having its principal place of business at 120 Emerald Drive,
Danville, California 94526 ("DLC") References to Licensee in this Agreement
means each of Gargoyles and DLC, jointly and severally.
WHEREAS, Timberland owns the TIMBERLAND name, the TIMBERLAND TREE
DESIGN logo and certain related trademarks, signs and symbols (collectively, the
"Timberland Trademarks") for use on and in connection with footwear, apparel and
accessories and certain other applications;
WHEREAS, Timberland engages in the business of designing,
manufacturing, sourcing, marketing, distributing and selling worldwide footwear,
apparel and accessories bearing the Timberland Trademarks;
WHEREAS, the Timberland Trademarks have acquired substantial goodwill,
reputation, fame and distinctiveness throughout the world as a result of the
exclusive and widespread use thereof by Timberland;
WHEREAS, Licensee desires to engage in the research, design,
development, manufacture, sourcing, marketing, advertising, promotion,
merchandising, shipment, distribution, sale and servicing of eyewear and certain
related accessories bearing one or more of the Timberland Trademarks; and
WHEREAS, Timberland desires to grant, and Licensee desires to obtain, a
license to use the Timberland Trademarks on and in connection with such eyewear
and related accessories;
WHEREAS, Timberland, Licensee and other stockholders of Licensee are on
the date hereof entering into (i) a Stock Purchase Agreement (the "Stock
Purchase Agreement") pursuant to which Licensee is issuing to Timberland DLC
common stock representing 10% of the total shares of common stock and (ii) an
Investor Rights Agreement (the "Investor Rights Agreement");
<PAGE> 3
NOW THEREFORE, in consideration of the above premises and the mutual
covenants and undertakings of the parties hereunder, Timberland and Licensee
agree as follows:
GENERAL
1. TERM
1.1 INITIAL TERM
The initial term of this Agreement and the License (as defined below in
Section 2.7) shall commence upon the date of this Agreement and shall expire on
December 31, 2000, or on such earlier date as either party may terminate this
Agreement in accordance with its terms (the "Initial Term").
1.2 RENEWAL TERM
Licensee shall have, on January 1, 2001, an option to renew this
Agreement and the License for an additional four (4) year term (the "First
Renewal Term"), provided that: (a) the Initial Term has not been terminated
before December 31, 2000; (b) Licensee has met all royalty payment requirements
established pursuant to Sections 16 and 17 below; (c) during both the period on
and before the notice date and the period between the notice date for exercising
such option (as described below) and the date of such renewal, Licensee shall
not be in default under this Agreement; and (d) Net Sales (as defined in Section
2.11 hereof) for the year ending December 31, 2000 for Sunglass Products and for
the most recently ended Product Year for Ophthalmic Products shall not be less
than the amounts provided in Section 18.
Such renewal option for the First Renewal Term shall be contingently
exercisable by Licensee by delivering written notice of exercise to Timberland
at least one hundred and twenty (120) days before the expiration of the Initial
Term. Such option shall be contingent upon the requirements set forth in clauses
(a), (c) and (d) above having been met at such renewal date and the requirements
in clause (b) and the reporting of Net Sales under clause (d) above having been
met at such renewal date or at least thirty (30) days after such renewal date,
in accordance with the respective due dates established for such payments and
for the provision of an Accounting under Section 16. If Licensee fails to meet
any of the requirements set forth in clauses (a) through (d) above, Timberland
shall have the right at any time thereafter to revoke such contingent option
and/or to terminate this Agreement. Notwithstanding the foregoing, however, the
option to renew for the First Renewal Term shall be deemed to be automatically
exercised if Timberland shall have exercised its put rights in accordance with
Section 5 of the Investor Rights Agreement.
2
<PAGE> 4
In addition, if during the First Renewal Term Timberland exercises its
put rights in accordance with section __ of the Stock Purchase Agreement, this
Agreement shall be deemed to have been renewed for an additional four (4) year
term (the "Second Renewal Term"; with the First Renewal Term, each a "Renewal
Term"). The Initial Term and any Renewal Term are herein collectively referred
to as the "Term".
2. DEFINITIONS
2.1 "Affiliate" shall have the meaning set forth in Regulation 12B
under the Securities Exchange Act of 1934, as amended.
2.2 "Confidential Information" shall mean any and all information
proprietary to one of the parties hereto, whether or not reduced to writing or
other tangible medium of expression, and whether or not patented, patentable,
capable of trade secret protection or protected as an unpublished or published
work under the United States Copyright Act of 1976, as amended. Confidential
Information includes, but is not limited to, information relating to
intellectual property and to business plans, financial matters, products,
services, manufacturing processes and methods, costs, sources of supply,
strategic marketing plans, customer lists, sales, profits, pricing methods,
personnel and business relationships. Confidential Information shall not include
any information that: (i) was already known to the receiving party prior to its
relationship with the disclosing party, as established by written records; (ii)
becomes generally available to the public other than as a result of the
receiving party's breach of this Agreement; (iii) is furnished to the receiving
party by a third party who is lawfully in possession of, and who lawfully
conveys, such information; or (iv) is subsequently developed by the receiving
party independently of the information received from the disclosing party, as
established by the receiving party's written records. For purposes of this
definition, the phrase "receiving party" shall be deemed to include each
Affiliate of the receiving party.
2.3 "Distributor" shall mean any distributor, or any sales
representative with which either DLC or Gargoyles has a contractual relationship
for the wholesale distribution of products.
2.4 "Intellectual Property" shall mean information relating to research
and development, inventions, discoveries, improvements, methods and processes,
know-how, algorithms, compositions, works, concepts, designs, ideas, prototypes,
writings, notes and patent applications.
2.5 "Introduction" shall mean, with respect to any Licensed Product,
both: (i) exhibition of such Licensed Product at a press conference, trade show
or similar
3
<PAGE> 5
event; and (ii) accepting orders for sale and actually shipping to customers
commercially reasonable quantities of such Licensed Product.
2.6 "Licensed Products" shall mean all Sunglass Products and Ophthalmic
Products.
2.7 "Licensed Trademarks" shall mean the Timberland Trademarks as set
forth in Exhibit 2.7.
2.8 "License" shall have the meaning provided in Section 8.
2.9 "Manufacturer" means a manufacturing entity which has been approved
in writing by Timberland as a manufacturer of some or all Licensed Products and
which has entered into a confidentiality and non-competition agreement [in the
form attached hereto as Exhibit 2.9].
2.10 "Net Sales" shall mean the aggregate for all Licensed Products
sold of Licensee's standard published price for each Licensed Product for
retailers in each respective territory or country multiplied by the number of
such Licensed Product sold in each such territory or country, less (i) quantity
discounts actually granted to the extent customarily granted to Licensee's
customers based on volume and (ii) customer returns actually credited.
No deductions in Net Sales shall be made for: (A) cash or other
discounts (except as stated above); (B) commissions; (C) uncollectible accounts;
(D) taxes, fees, assessments, impositions, payments or expenses of any kind
which may be incurred or paid by Licensee in connection with the royalty
payments due to Timberland hereunder or in connection with the transfer of funds
or royalties or with the conversion of any currency into United States dollars;
or (E) any costs incurred in the research, design, development, manufacture,
sourcing, offering for sale, sale, advertising, promotion, shipment,
distribution or exploitation of the Licensed Products.
In the event any Licensed Products shall be sold to any Affiliate of
Licensee, then the price thereof for purposes of calculating Net Sales shall be
deemed to be the then current price at which Licensee in the ordinary course
sells such products to unrelated third parties.
In the event any Licensed Products (other than Licensed Products
provided to Timberland pursuant to Sections 16.4, 24 or 25 hereof) are booked as
sales, shipped, distributed or billed by Licensee (or any Affiliate of Licensee)
and: (i) are not billed (such as introductory offers, samples, promotions and
the like), to the extent that the
4
<PAGE> 6
aggregate standard published price to retailers for such Licensed Products
exceeds [*]% of Licensee's Net Sales in the first Product Year or [*]% of
Licensee's Net Sales in each Product Year thereafter; or (ii) are billed at a
price which is less than the usual price for such Licensed Products in the
course of Licensee's (or such Affiliate's) normal distribution, shipment and
sales activities to unrelated third parties, then the price used for purposes of
the calculation of Net Sales shall be deemed to be such usual price for such
Licensed Products.
2.11 "Ophthalmic Products" shall mean ophthalmic frames (not to include
goggles) and related accessories such as cases for such frames, neck cords and
other accessories reasonably incidental to and consistent with the use of such
eyewear, and not otherwise included in Sunglass Products, in each instance which
bear one or more of the Licensed Trademarks.
2.12 "Person" shall mean any natural person, corporation, partnership,
firm or other entity.
2.13 "Product Year" shall mean (a) with respect to Sunglass Products,
the 1997 calendar year and each full calendar year thereafter and (b) with
respect to Ophthalmic Products, the twelve (12) month period beginning on the
first day of the fiscal quarter during which occurs the Introduction of
ophthalmic frames, and each twelve (12) month period thereafter.
2.14 "Sunglass Products" shall mean sunglasses (not to include goggles)
and related accessories such as cases for such eyewear, neck cords and other
accessories reasonably incidental to and consistent with the use of such
eyewear, in each case which bear one or more of the Licensed Trademarks.
2.15 "Timberland Competitor" shall mean any Person that is listed in
Exhibit 2.15 hereto. Timberland may, with Licensee's consent, amend Exhibit 2.15
from time to time.
2.16 "Timberland Distributor" shall mean any Distributor with which
Timberland has a contractual relationship for the wholesale distribution of
Timberland products, other than Licensed Products.
2.17 "Territory" shall mean all countries and territories in the world
except for countries listed in Exhibit 2.17 hereto.
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2.18 "Trademark" shall mean any trademark, trade name, trade dress,
service mark, logo or other similar identifying mark.
DEVELOPMENT
3. RESEARCH, DESIGN AND DEVELOPMENT
Timberland shall permit Licensee to develop the Licensed Products
according to Licensee's specifications for application in certain Licensed
Products, as designed by Licensee, subject to approval of Timberland. Timberland
shall, throughout the Term, make available to Licensee Timberland Confidential
Information which is necessary, in Timberland's sole opinion, to develop and
manufacture the Licensed Products. Notwithstanding the foregoing, in no event
shall new developments or improvements to Licensed Products be introduced in
other products produced by Gargoyles. None of the foregoing shall limit,
override or otherwise affect Licensee's non-compete obligations under Section 35
hereof.
4. DEVELOPMENT ASSISTANCE
Licensee shall provide a team of its employees, including a brand
manager and a designer, specifically dedicated to performing research, design
and development functions under this Agreement relating to the Licensed
Products. Such employees shall be required to execute agreements effecting
assignment of Assignable Intellectual Property (as defined in Section 5 below)
to Timberland and undertaking obligations of confidentiality and non-competition
similar to those agreed to by the parties to this Agreement.
5. OWNERSHIP OF DESIGNS AND OTHER INTELLECTUAL PROPERTY
Licensee agrees that with respect to any developments or innovations in
technology, used or useable in eyewear and eyewear related accessories, all
designs, inventions, discoveries, developments, improvements, methods,
processes, know-how, compositions, works, concepts and ideas (whether or not
patentable or capable of trade secret or copyright protection) (together,
referred to as "Technology Intellectual Property") created, developed or reduced
to practice by Timberland (whether alone or with others, not including
Licensee), shall be the sole property of Timberland. All Technology Intellectual
Property created, developed or reduced to practice by Licensee and Timberland
jointly, shall be owned jointly by DLC and Timberland. All Technology
Intellectual Property created, developed or reduced to practice by Gargoyles
(whether alone or with others, not including Timberland), shall be the sole
property of Gargoyles. Notwithstanding the foregoing, (a) all Technology
Intellectual Property created, developed or reduced to practice by Licensee
(with or without
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Timberland), in the course of researching designing, developing, manufacturing,
sourcing, modifying, improving or altering models of eyewear of related
accessories in an attempt to create Licensed Products shall be used exclusively
in the research, design, development, manufacture or sourcing of Licensed
Products during the Term; (b) following expiration of the Term, either Licensee
or Timberland may license to other Persons any Technology Intellectual Property
created, developed or reduced to practice by Licensee and Timberland jointly, so
long as Timberland or Licensee, as the case may be, approves of such proposed
licensee and Licensee and Timberland share equally any royalties paid by such
licensee; and (c) following expiration of the Term, Timberland shall have a
non-exclusive, royalty-free, perpetual license to use all Technology
Intellectual Property created, developed or reduced to practice by Licensee
(whether alone or with others, not including Timberland) in connection with the
Licensed Products.
Licensee agrees that, all designs, trade-dress, design patents, other
identifying marks, and design related concepts and ideas (whether or not
patentable or capable of trade secret or copyright protection) created,
developed or reduced to practice by Licensee or Timberland (whether alone,
jointly or with others) in the course of researching, designing, developing,
manufacturing, sourcing, modifying, improving or altering models of eyewear or
related accessories in an attempt to create Licensed Products (together,
referred to as the "Design Intellectual Property") shall be the sole property of
Timberland and shall be used by Licensee exclusively for the Licensed Products.
Licensee shall promptly and fully disclose any Technology Intellectual
Property or Design Intellectual Property created, developed or reduced to
practice by Licensee and hereby assigns and agrees to assign to Timberland, or
its designees, its full right, title and interest in and to all Design
Intellectual Property. Licensee agrees that, both during and after the Term,
Licensee shall, at Timberland's request and expense, execute any and all
applications for patents, copyrights or other rights and otherwise provide
assistance to assign the Design Intellectual Property to Timberland and to
permit Timberland to enforce any patents, copyrights or other rights in and to
both the Design Intellectual Property and the Technology Intellectual Property.
All copyrightable works of Design Intellectual Property that Licensee creates
shall be considered "works made for hire."
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6. DEVELOPMENT SCHEDULES
The parties agree that (i) Introduction of Sunglass Products shall
occur in the Territory between [*] and [*] and (ii) Introduction of Ophthalmic
Products shall occur within 12 months of Timberland's written consent, in each
case with respect to the Licensed Products scheduled for introduction on such
date as set forth in Exhibit 6. In addition to the foregoing, the parties agree
to use their best efforts to meet the interim deadlines set forth in the
development schedules attached hereto as Exhibit 6. As soon as possible after
execution of this Agreement, and from time to time throughout the Term, the
parties shall agree to appropriate development schedules for further Licensed
Products.
7. DEVELOPMENT EXPENSES
Licensee shall reimburse Timberland for all reasonable out-of-pocket
expenses which may be actually incurred by Timberland or its designees in
connection with Licensee's research, design and development of the Licensed
Products, including, but not limited to, round trip transportation costs, hotel
and meal charges and other reasonable expenses. Expenses such as production
tooling and molds, material and sample costs shall be borne solely by Licensee.
LICENSING RIGHTS
8. LICENSE
Subject to the terms and conditions of this Agreement, Timberland
hereby grants to Licensee an exclusive limited license to use the Licensed
Trademarks on Licensed Products during the Term for researching, designing,
developing, manufacturing, sourcing, marketing, advertising, promoting,
merchandising, shipping, distributing, selling and servicing in the Territory
(the "License"). Licensee shall not use the Licensed Trademarks except as
expressly stated in this Agreement. All rights in and to the Licensed Trademarks
not specifically granted to Licensee by this Agreement are reserved to
Timberland for Timberland's own use and benefit.
9. NO TRADEMARK SUBLICENSES
Licensee shall not have the right to sublicense any of the Licensed
Trademarks; provided, however, that (i) Timberland acknowledges the sublicense
granted by this Agreement from Gargoyles to DLC and (ii) Licensee may authorize
the use of the
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Licensed Trademarks during the Term by Manufacturers solely for purposes of the
manufacture of Licensed Products for or on behalf of Licensee.
10. NO LIMITATIONS ON TIMBERLAND
Except as expressly stated in Section 8.1, nothing contained in this
Agreement shall in any way restrict, impair, limit or affect Timberland's rights
to use, or to permit third parties to use, the Licensed Trademarks.
11. PROHIBITED USE OF LICENSED TRADEMARKS
During the Term and at all times thereafter, Licensee shall not use any
of the Licensed Trademarks: (a) as a portion of, or in combination with, any
other trademarks; (b) as all or part of a corporate name, trade name or other
designation used by Licensee to identify its products, services or business; or
(c) for any purpose other than as trademarks for the Licensed Products. At no
time shall Licensee use any name, trademark, service mark, trade name, trade
dress or logo in connection with the Licensed Products, which use, and the size,
placement and form of which, have not been approved in writing in advance by
Timberland, except as required by applicable law.
12. OWNERSHIP OF LICENSED TRADEMARKS
Licensee acknowledges that Timberland has sole and exclusive ownership
of all right, title and interest in and to the Licensed Trademarks (including,
without limitation, all registrations and applications therefor). Licensee
further acknowledges, represents and warrants that it has not acquired, and
shall not acquire (whether by operation of law, by this Agreement or otherwise),
any right, title, interest or ownership in or to the Licensed Trademarks or any
part thereof (collectively, "Ownership Rights"). Should any Ownership Rights
become vested in Licensee, Licensee agrees to assign, and hereby assigns, such
Ownership Rights to Timberland free of additional consideration. Licensee shall
provide and execute all documents necessary, in Timberland's sole opinion, to
effectuate and record each such assignment to Timberland. Licensee recognizes
the value of the goodwill associated with the Licensed Trademarks and
acknowledges that all rights therein belong exclusively to Timberland and
further acknowledges that the Licensed Trademarks have acquired secondary
meaning in the mind of the public. All use of the Licensed Trademarks and all
goodwill and benefit arising from such use shall inure to the sole and exclusive
benefit of Timberland. Licensee shall not, during the Term or at any time
thereafter, do anything which, in Timberland's sole judgment, could in any way
damage, injure or impair the validity and subsistence of the Licensed
Trademarks. Licensee shall not attack, dispute or challenge Timberland's
Ownership Rights in or to
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the Licensed Trademarks or the validity of this Agreement, nor shall Licensee
assist others in so doing. All trademarks, logos, designs, and/or slogans
appearing on or in connection with the Licensed Products shall be the sole and
exclusive property of Timberland.
13. REGISTRATION AND LICENSING FORMALITIES
Licensee shall cooperate with Timberland in the execution, filing and
prosecution of any trademark or Intellectual Property applications that
Timberland may desire to file. In addition, Timberland will file such trademark
applications as Licensee may reasonably request at Licensee's expense. For such
purpose, Licensee shall supply to Timberland, from time to time and without
charge, such samples, packaging, containers, labels, tags and similar materials
as Timberland may reasonably require. Licensee shall execute and deliver to
Timberland, at any time (whether during or after the Term) and without further
consideration, such instruments of transfer and other documents as Timberland
may reasonably request for Timberland's trademark or Intellectual Property
applications or to confirm Timberland's Ownership Rights. The License shall be
confirmed by a separate agreement for any country within the Territory which
requires such confirmation (including, without limitation, registered user
agreements) or where such separate agreement is otherwise deemed appropriate by
Timberland. At Timberland's request, Licensee shall execute whatever documents
or forms Timberland deems necessary to confirm the License or to record Licensee
as a registered user in any country in the Territory. The expiration or
termination of this Agreement for any reason shall terminate, or act to
terminate, all registered user and other license documents filed or recorded
pursuant hereto. The parties expressly agree that all documents or forms filed
or recorded with any trademark office or other authority relating to the License
may be canceled by Timberland in its sole discretion to comply with Timberland's
corporate policies and procedures, in the event such document or form is
challenged by a third party or in the event this Agreement is terminated for any
reason. Licensee hereby agrees and consents to such cancellation. If Licensee
fails to execute or deliver any document or form requested or required under
this Section 13 in timely fashion, Timberland may sign such document or form in
Licensee's name and make appropriate disposition thereof.
14. ALTERNATIVE MARKS
If Timberland adopts an alternative to any Licensed Trademark in any
country within the Territory for use on and in connection with the Licensed
Products, then Timberland shall make such alternative mark available to Licensee
pursuant to Section 8, and Licensee shall use such alternative mark (instead of
such Licensed
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Trademark) in connection with the Licensed Products in such country and such
alternative mark shall be deemed to be included in the definition of "Licensed
Trademarks" hereunder.
15. INFRINGEMENTS
Licensee shall inform Timberland forthwith if Licensee learns of any
goods or activities which infringe (or may infringe) the Licensed Products, or
learns of any other infringement of the Licensed Trademarks or of any other
intellectual property rights now or hereafter owned by Timberland. Licensee
shall provide, at Licensee's expense, complete information, cooperation and
assistance to Timberland concerning each such infringement (including, without
limitation, cooperation and assistance in any further investigation or legal
action). Upon learning of such infringement, Timberland shall have the right,
but not the obligation, at its sole discretion and expense, to take such action
as Timberland considers necessary or appropriate to enforce Timberland's rights,
including, without limitation, legal action to suppress or eliminate such
infringement or to settle any such dispute or action. Timberland shall also be
entitled to seek and recover all costs, expenses, and damages resulting from
such infringement, including, without limitation, sums which might otherwise be
due to Licensee by operation of law or otherwise, and Licensee shall have no
right to share in any amounts recovered by Timberland. In the event Timberland
decides to take no action to enforce its rights against certain goods or
activities which infringe or may infringe the Licensed Products during the term,
after six months of Timberland becoming aware of the potential infringement and
after written notice to the Licensee from Timberland, Licensee shall be
permitted, at its own expense, to enforce such rights of Timberland provided,
however, Licensee shall give Timberland at least 30 days after receipt of such
written notice of its intent to enforce Timberland's rights, employ counsel
which is satisfactory to Timberland, provide satisfactory periodic updates and
shall not settle any such claim without the consent of Timberland, and provided,
further, Timberland shall have the right to employ separate counsel and to
participate in such action. Licensee shall bear the reasonable fees, costs and
expenses of such separate counsel, if: (i) Timberland shall have reasonably
concluded that there may be causes of action available to it which are different
from or additional to those available to the Licensee (in which case the
Licensee shall not have the right to direct the enforcement of Timberland's
rights on behalf of Timberland); or (ii) in the exercise of Timberland's
reasonable judgment, the Licensee shall not have employed satisfactory counsel
to represent Timberland. In the event Licensee takes action to enforce
Timberland's rights pursuant to the previous sentence and as a result of such
action Licensee or Timberland recover any dollar amounts pursuant to a damage
award or settlement, such dollar amounts shall be treated as follows: (i) if
Timberland did not participate in such action, Licensee shall own 100% of such
dollar amounts;
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(ii) if Timberland participated in such action alongside Licensee, Timberland
and Licensee shall share such dollar amounts equally; and (iii) if Timberland
assumes control of such action, Timberland shall own 100% of such dollar
amounts.
ROYALTIES; FEES
16. LICENSING ADVANCE; ROYALTIES
16.1 ADVANCE AGAINST ROYALTIES
Licensee shall pay Timberland an advance of [*] upon execution
of this Agreement. Such payment shall be non-refundable, but shall be credited
against any royalties due under this Agreement with respect to sales made during
the first quarter of the first Product Year for Sunglass Products.
16.2 ROYALTIES
Licensee shall pay to Timberland a continuing royalty of [*]
of the Licensee's Net Sales (excluding sales or other dispositions to Timberland
under Sections 16.4, 24 or 25. Such royalties shall accrue when the Licensed
Products are booked as sales, shipped, distributed or billed, whichever occurs
earliest. Notwithstanding the foregoing, if this Agreement or any License, or
any of Licensee's rights or obligations under this Agreement or such License,
are assigned, transferred or delegated without Timberland's prior written
consent or by virtue of operation of law (collectively, an "Unauthorized
Assignment"), the royalty rate set forth above shall automatically increase to
[*] of such Net Sales, without derogation of any other rights, Timberland may
have with respect to such Unauthorized Assignment including, without limitation,
termination rights.
Licensee shall provide Timberland on a quarterly basis for
each Product Year included in the Term, commencing with the quarter ending [*],
a detailed written accounting of Licensed Products sold or otherwise disposed of
during such quarter in each country or other territory included in the
Territory, together with the amount of royalties due for such quarter to
Timberland hereunder (the "Accounting") in the form of Exhibit 16. Except as
otherwise provided in Section 21, the Accounting shall be due not later than
thirty (30) days after the end of each such quarter in accordance with the
provisions set forth in Section 16.3 below and shall be accompanied by payment
to Timberland of the amount of the actual royalties due for such quarter.
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16.3 BREACH OF ROYALTY OBLIGATION
The failure or refusal of Licensee to timely furnish any
Accounting or royalty payments within ten (10) days after receiving notice from
Timberland that such Accounting payment is late shall be deemed a breach of this
Agreement and shall entitle Timberland, to terminate this Agreement and the
License granted hereunder pursuant to Section 37. In the event that any
inconsistencies or mistakes are discovered in such statements or payments, they
shall immediately be made (a) if payment is due Timberland, by wire transfer or
immediately available funds to an account specified by Timberland or (b) if
payment is due Licensee, by reduction of royalties to be paid to Timberland for
the next quarter.
16.4 SALES TO TIMBERLAND
In the event of sales by Licensee to Timberland or any of
Timberland's Affiliates, of Licensed Products for distribution through
Timberland's catalog, specialty stores, factory outlets or otherwise
("Timberland Sales"), Timberland or any such Affiliate shall pay to Licensee the
off standard published price for retailers of such Licensed Products less a
discount of at least [*]. Payment for Timberland Sales shall be required within
60 days after the relevant invoice date. Licensed Products sold as Timberland
Sales shall be pre-ticketed for resale by Timberland or any such Affiliate and
shall be shipped to individual retail stores, warehouses or other distribution
points as instructed by Timberland. Notwithstanding the foregoing, Timberland
Sales shall always be made on pricing, payment, shipment and other terms at
least as favorable to Timberland as sales of Licensed Products made to any other
Person, and in allocating available Licensed Products for delivery, Licensee
shall fill all Timberland Sales orders prior to allocating Licensed Products to
fill orders from any other Person. Licensee shall not pay to Timberland a
royalty for any Timberland Sales.
16.5 SALES TO DISTRIBUTORS: SALES TO INCHCAPE
In the event of sales to Timberland Distributors, the
Distributors shall pay to Licensee the standard published price for retailers of
such Licensed Products, less a discount of [*].
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In the event of sales to Inchcape for resale in Timberland
retail stores, Inchcape shall pay to Licensee the standard published price to
retail customers, less a discount of [*].
17. MINIMUM ROYALTIES
Licensee shall pay to Timberland royalties on Licensed Products as set
forth in Section 16.2, but in no event shall the amount of such royalties
actually paid to Timberland during any Product Year included in the Term be less
than the minimum royalty amount agreed to by the parties under this Agreement
for such year (the "Minimum Royalties"). The Minimum Royalties for each such
year included in the Term shall be as set forth in Exhibit 17 hereto; provided,
however, that, if any Unauthorized Assignment shall occur, such Minimum
Royalties shall [*], without derogation of any other rights, Timberland may have
with respect to such Unauthorized Assignment, including, without limitation,
rights of termination. Licensee shall pay the Minimum Royalties according to the
payment schedule set forth in Exhibit 17. Such Minimum Royalties payment shall
be credited against actual royalty payments due for such year under Section 16.
Actual royalties paid in excess of Minimum Royalties which pertain to
any given Product Year included in the Term shall not accrue toward Minimum
Royalties which pertain to any subsequent Product Year. Annual Minimum Royalties
under this Section 17 shall be payable in full for each Product Year (or partial
Product Year) included in the Term and shall not be prorated or refunded with
respect to any partial Product Year remaining at the time of expiration or
termination of this Agreement.
18. MINIMUM NET SALES
Exhibit 18 sets forth, for purposes of renewal in Section 1.2 and for
purposes of calculating the average of applicable Minimum Net Sales in Section
41, the Minimum Net Sales of the Sunglass Products and the Ophthalmic Products.
Timberland Sales shall be included in the calculation of Licensee's Net Sales at
the price at which they were made pursuant to Section 16.4.
19. PAYMENTS
Unless otherwise specified in writing by Timberland, all payments by
Licensee under this Agreement shall be made in U.S. Dollars to Timberland or to
a bank or other organization designated by Timberland. Such payments shall be
made by bank
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check, certified funds, wire transfer or corporate check (subject to
collection), at the election of Timberland. When overdue, such payments shall
bear interest at an annual rate of [*] (or such lower rate as may then be the
highest rate legally available) from the time such payment is due until payment
is received by Timberland.
20. TAXES
Licensee shall withhold from any royalty payments pursuant to this
Agreement any sums required to be withheld on behalf of Timberland under the
applicable tax laws of the Territory. Licensee shall pay such sums to the
appropriate tax authorities and shall furnish Timberland with the official tax
receipt or other appropriate evidence of payment issued by such authorities.
21. PAYMENTS UPON TERMINATION
If this Agreement is terminated for any reason before all payments
hereunder have been made, Licensee shall immediately thereafter submit a report
and pay to Timberland any remaining unpaid royalties accrued during the period
prior to such termination. In addition to such accrued and unpaid royalties, in
the event this Agreement is terminated because of Licensee's breach under any of
Sections 36, 37 or 39 hereof, Licensee shall submit a report and pay to
Timberland all Minimum Royalties related to the first six months from and after
the date of such termination (whether or not the due date therefor has
occurred).
22. RECORDS AND RIGHT TO AUDIT: FINANCIAL STATEMENTS
22.1 RECORDS AND RIGHT TO AUDIT
Licensee shall keep accurate records of all operations
affecting royalty payments and marketing related expenditures hereunder, and
shall permit Timberland or its designee, upon reasonable notice, to inspect all
such records and to make copies of or extracts from such records throughout the
Term and for a period of two (2) years thereafter. As part of such inspection,
Timberland shall have the right to have Licensee's books of accounts and records
at Timberland's expense, provided, however, if any such audit reveals a payment
deficiency in the amount owed to Timberland under this Agreement of five percent
(5%) or more for any Product Quarter or Year included in the Term, then Licensee
shall pay, in addition to such deficiency, all costs of such audit.
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22.2 FINANCIAL STATEMENTS
Each of Gargoyles and DLC shall deliver to Timberland (a)
within 90 days after the end of each fiscal year, a copy of its audited balance
sheet as of the end of such year, together with consolidated and consolidating
statements of income and of cash flows of Licensee for such year and (b) within
45 days after the end of each of the first three fiscal quarters of each fiscal
year, a copy of the Licensee's unaudited consolidated balance sheet as of the
end of such quarter, and unaudited consolidated statements of income and cash
flows of the Licensee for the fiscal quarter and for the portion of the fiscal
year ending on the last day of such quarter. All such financial statements shall
be prepared in accordance with generally accepted accounting principles,
consistently applied, and shall be certified by the principal financial officers
of Licensee that they are true and correct in all material respects as of their
dates.
22.3 INSPECTION AND INFORMATION RIGHTS
Upon reasonable prior notice during Licensee's normal business
hours, Licensee shall permit Timberland or any of its employees, officers,
agents or representatives to visit and inspect the properties, books and records
of the Licensee relating to the License, Licensed Products, or the Licensee's
representations, warranties or covenants under this Agreement and to discuss the
foregoing with the officers, employees and accountants of the Licensee, all at
such reasonable times and as Timberland may reasonably request. In addition,
upon the request of Timberland, Licensee shall provide Timberland's officers,
employees or agents with complete and accurate information as Timberland may
reasonably request, including without limitation information relating to order
fill rates, defect rates, return rates, order backlog, sell-through data and
sell-in data.
MARKETING LICENSED PRODUCTS
23. MARKETING FUND
With respect to each Product Year included in the Term, and with
respect to each class of Licensed Products (i.e. Sunglass Products and
Ophthalmic Products), Licensee shall spend on marketing, advertising and
promotional activities and materials for such class of Licensed Products
("Marketing Fund Expenditures"), subject to Section 26 hereof, a dollar amount
(excluding, in each case, research, salary, overhead and other administrative
expenses and other indirect costs and expenses) which is at least equal to the
applicable amount set forth in the table below:
Product Year Marketing Fund Expenditures
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<TABLE>
<S> <C>
During any First Product Year [*] of the greater of Net Sales and
Minimum Net Sales for such Product
Year
Each Product Year thereafter the sum of:
(i) [*] of Minimum Net Sales for
such Product Year; plus
(ii) [*] of Net Sales in excess of
[*] but less than or equal to
[*] of Minimum Net Sales for such Product Year; plus
(iii) [*] of Net Sales in excess of
[*] of Minimum Net Sales
Each Product Year thereafter during a the sum of:
Renewal Term (i) [*] of Minimum Net Sales for such Product Year; plus
(ii) [*] of Net Sales in excess of
[*] but less than or equal to
[*] of Minimum Net Sales for such Product Year; plus
(iii) [*] of Net Sales in excess of
[*] but less than or equal to
[*] of such Minimum Net Sales; plus
(iv) [*] of Net Sales in excess of
[*] of such Minimum Net Sales
</TABLE>
In the event that Net Sales of a class of Licensed Products is greater
than the Minimum Net Sales of such class in any year and Licensee's Marketing
Fund Expenditures for such class for such year are insufficient by not more than
[*] of the required minimum amount, Licensee shall not be deemed to have
breached the requirements of this Section 23, if it increases its Marketing Fund
Expenditures above the minimum requirement by the dollar amount of such
insufficiency within the first six months of the following Product Year.
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Licensee shall provide satisfactory evidence of Licensee's fulfillment
of its spending obligations under this Section 23. Licensee agrees that at least
65 percent of Marketing Fund Expenditures shall represent consumer marketing,
subject to Section 26.
24. COMPLIMENTARY PRODUCTS
24.1 COMPLIMENTARY LICENSED PRODUCTS
During each Product Year included in the Term, Licensee shall
provide to Timberland, free of charge, (i) five (5) units of each model and
style of the Licensed Products for Timberland's advertising and promotional
purposes and (ii) one representative sample set of the Licensed Products for
each Timberland showroom. In addition, during each Product Year included in the
Term, Licensee shall provide free of charge directly to City Year one thousand
five hundred (1,500) units of performance eyewear bearing the City Year, Inc.
name and logo, which units shall not count towards Licensee's Net Sales for such
Product Year. License shall not pay to Timberland a royalty for such products
provided to City Year free of charge.
24.2 PROMOTIONAL PROGRAMS
Licensee has the right to purchase from Timberland available
products manufactured or sourced by Timberland, and Timberland has the right to
purchase from Licensee the Licensed Products, in each case, (i) at standard
manufacturing cost, (ii) only for award programs, (iii) the aggregate standard
published price to retailer for such Licensed Products purchased by either party
shall not exceed [*]% of Licensee's Net Sales for such year (or such other
amount that is mutually agreed), and (iv) not in any event for resale of such
products.
QUALITY CONTROL; DISTRIBUTION
25. QUALITY CONTROL OF LICENSED PRODUCTS
Licensee shall assure at all times that the quality of the Licensed
Products: (a) is of a high standard consistent with the quality of Timberland
products; (b) otherwise conforms to the specifications, performance standards
and quality standards of Timberland and of Licensee's other premium-positioned
products; and (c) is of a standard consistent with the prestige and reputation
which the Licensed Trademarks have developed heretofore. Licensee additionally
shall assure at all times that the Licensed Products: (i) are sourced,
manufactured, labeled, distributed,
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marketed, advertised, promoted and sold in accordance with all applicable laws
and regulations; and (ii) do not infringe any patents, industrial design rights,
copyrights or other intellectual property rights of others.
Before engaging in any sourcing or manufacture of the Licensed
Products, Licensee shall submit to Timberland two samples of each Licensed
Product proposed to be manufactured or sourced by Licensee for Timberland's
approval. Timberland shall have no more than twenty (20) days after actual
receipt to approve or disapprove such samples. Only approved samples shall serve
as the quality standards for the functioning of the components and the design
and visual appearance of such Licensed Products, and Licensee shall assure that
each marketed unit of such Licensed Products meets such standards. At least once
during each Product Year included in the Term (or more often, if requested by
Timberland), Licensee shall submit no less than five (5) then current production
samples of each model and style of the Licensed Products marketed under this
Agreement, so that Timberland may assure itself of the maintenance of such
quality standards. Such samples shall be submitted free of charge to Timberland,
and shall be delivered to Timberland no more than sixty (60) days after the
start of each Product Year included in the Term (or at such other times as may
be requested by Timberland). Such samples may be retained by Timberland free of
charge and shall not be counted against Timberland's allotment of complimentary
Licensed Products under this Section 25. Timberland shall have the right, upon
reasonable notice to Licensee, to visit and remain in the business offices and
sourcing and manufacturing plants of Licensee to: (A) inspect, examine and test
any merchandise, furnishings, fixtures, equipment, supplies, signs or other
items used by Licensee in connection with the sourcing, manufacturing or
merchandising of the Licensed Products, (B) observe the nature, quality,
quantity and value of the goods sold and of the customer service rendered by
Licensee pursuant to this Agreement and (C) observe the manner and method in
which Licensee operates. Timberland may require Licensee to remove any item of
inventory, equipment, furnishing, decor or merchandise used in connection with
any display of the Licensed Products which Timberland has not approved or is not
of substantially the same quality as approved. For purposes of this Section 25,
Timberland shall, from time to time, inform Licensee of the one or more persons
responsible for working with Licensee on these quality control matters.
Licensee agrees that no model of Licensed Products shall be confusingly
similar to other eyewear and related accessories which are then being, or have
been, sourced, manufactured, marketed, advertised, promoted, merchandised,
shipped, distributed or sold by Licensee.
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26. QUALITY CONTROL OF MARKETING AND DISTRIBUTION
26.1 APPROVAL OF MARKETING PLAN AND MATERIALS
(a) Licensee shall submit to Timberland, for its prior
approval, a written marketing plan and budget containing Licensee's proposed
advertising, promotional, marketing, distribution and sales strategies and
targets for the Licensed Products, substantially in the form of Exhibit 27.1
attached hereto. The first such marketing plan shall be submitted to Timberland
no later than [*], and shall cover from Introduction of the Licensed Products
through the end of the Initial Term. Thereafter, for each subsequent year
included in the Term, Licensee shall submit an updated marketing plan to
Timberland no later than the November 1 preceding the commencement of such year.
Each such marketing plan shall also state the intended distribution channels and
wholesale and retail accounts for each product category included in the Licensed
Products. For purposes of this Section 26, Timberland shall, from time to time,
inform Licensee of the one or more Persons responsible for working with Licensee
on these marketing matters.
(b) The Marketing Plan shall assign responsibility for
completing the actions set forth in the Marketing Plan. Timberland shall have
absolute control over the creation and production of advertising, promotional,
merchandising and other marketing materials for which Timberland is responsible.
Timberland shall approve in advance all advertising, promotional, merchandising
and other marketing materials for which Licensee is responsible, including
without limitation: (i) all containers, packaging, labels, tags and the like;
(ii) all advertising, promotional, merchandising and other marketing materials;
(iii) all stationery, business cards and invoices; and (iv) all other
transaction documents and business materials. Licensee shall submit such
materials in their proposed final form to Timberland at least twenty (20)
business days before the proposed publication or release of such materials.
Licensee may use, free of charge, any artwork or photography owned by Timberland
for purposes of marketing, advertising or promoting Licensed Products. Licensee
shall pay all costs associated with obtaining the rights to use any artwork or
photography in marketing materials which are not owned by Timberland.
(c) Licensee shall display Licensed Products at trade shows,
showrooms and the like, but only within booths or separate and distinct areas
displaying Timberland products and only in a manner consistent with the
presentation of Timberland products. Licensee shall not display Licensed
Products at trade shows, showrooms or the like at booths or in areas which
include in Timberland's
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showrooms, a display of Licensed Products, and the necessary requirements of
such space. Timberland will use its reasonable efforts to obtain such display
space at Licensee's expense, which expense shall be approved in advance by
Licensee, or to allocate such space in its showrooms.
26.2 APPROVAL OF DISTRIBUTION.
Each such Marketing Plan submitted by Licensee to Timberland
pursuant to Section 26.1 shall also state the intended distribution channels and
types of wholesale and retail accounts for Licensed Products based on
qualitative criteria. Licensee shall not sell the Licensed Products to anyone
other than those retailers and Distributors in the Territory based on
qualitative criteria approved in advance and in writing by Timberland. In no
event shall Licensee distribute (or permit the distribution of) any Licensed
Products to any close-out dealers, brokers, mass merchandisers, discount
department stores, wholesale clubs or other channels which do not specialize in
the merchandising of high-quality products, unless Timberland has given its
prior written consent to such distribution.
27. CUSTOMER AND MANUFACTURING STANDARDS
27.1 NO RESALE
Licensee and its Affiliates shall not sell Licensed Products
which it knows or has reason to know are destined for resale to or in any
countries or other jurisdictions outside the Territory (except in the case of
European Union countries in which Licensee and its Affiliates shall not solicit
sales of Licensed Products in any country or other jurisdiction outside the
Territory, except to Timberland's authorized Distributors). Licensee or its
Affiliate shall, to the extent not prohibited by applicable law, expressly
communicate to its customers that resale of Licensed Products outside the
Territory (or solicitation in the European Union countries) is prohibited and
shall discontinue all direct and indirect sales of Licensed Products to any
customer who violates such prohibition.
27.2 TIMBERLAND'S GUIDING PRINCIPLES FOR CHOOSING BUSINESS
PARTNERS
Licensee and its Affiliates shall support Timberland's Guiding
Principles for Choosing Business Partners attached hereto as Exhibit 27.2 in
manufacturing or sourcing the Licensed Products.
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28. REQUIRED AND OTHER MARKINGS
28.1 LICENSED TRADEMARKS
Licensee shall place and display the Licensed Trademarks on
and in connection with the Licensed Products only in such form and manner as are
specifically approved in writing in advance by Timberland. Without limiting the
foregoing, Timberland specifically requires Licensee to cause the Licensed
Trademarks to appear on, and in connection with, all Licensed Products in the
form set forth in the first section of Exhibit 28.1
28.2 OTHER MARKINGS
Licensee shall also cause to appear on the Licensed Products
and on (i) their containers, packaging, labels, tags, and the like, (ii) all
marketing, advertising and promotional materials and (iii) all stationery,
business cards, invoices and other transaction documents and business materials
which display any of the Licensed Trademarks, such other legends, markings and
notices as may be required by law or regulation in the Territory or as
Timberland may reasonably request.
29. SURPLUS, OUTMODED, DEFECTIVE OR DEFICIENT LICENSED PRODUCTS
Licensee agrees that surplus, outmoded or defective Licensed Products
or Licensed Products shall not exceed [*] of the annual production authorized by
Timberland for any Product Year of Licensed Products. To the extent such
products exceed [*] of annual production, Timberland, at its option, may (i)
purchase such excess Licensed Products at mutually agreed prices, or (ii) cause
Licensee to destroy such excess Licensed Products or to alter such excess
Licensed Products in order to remove the Licensed Trademarks from such Licensed
Products. Timberland shall have the right to approve or disapprove the manner by
which Licensee proposes to dispose of any such Licensed Products which are
surplus, outmoded or defective, regardless of whether they exceed such ten
percent limitation.
With respect to any inventory of Licensed Products remaining upon the
expiration or termination of this Agreement (collectively, the "Remaining
Inventory"), Licensee may sell-off to third parties all or any portion of the
Remaining Inventory up to an amount equal to actual sales, net of discounts, for
the most recently ended calendar quarter. The period for such sell-off (the
"Sell-Off Period") shall be the four (4)-month period following the expiration
or termination of this Agreement.
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Licensee's proposed sell-off arrangements shall be subject to Timberland's prior
written approval, shall be consistent with the reputation, prestige and goodwill
of the Licensed Trademarks and shall maintain Timberland's image and reputation.
Any such sell-off shall be subject to the following conditions: (i)
Licensee shall have fulfilled all of its financial obligations to Timberland
incurred prior to such expiration or termination date; (ii) the quantity of such
Licensed Products in inventory on such expiration or termination date shall not
be unreasonably excessive; (iii) Licensee shall furnish to Timberland, within
thirty (30) days after such expiration or termination date, a written accounting
(i.e., number and description) of such Licensed Products in inventory as of such
date; (iv) Licensee shall continue to pay royalties pursuant to Section 16.2
with respect to such sales, which royalties shall be payable within thirty (30)
days following the end of each month included in the Sell-Off Period and at the
end of the Sell-Off Period; (v) earned royalties payable on such sales shall not
be credited against Minimum Royalties due hereunder; and (vi) Licensee shall not
advertise such sell-off of Licensed Products.
Any Remaining Inventory which is not sold pursuant to this Section 29
shall, upon expiration of the Sell-Off Period, be, at Timberland's option,
either purchased by Timberland at mutually agreed prices or destroyed or altered
by Licensee in order to remove the Licensed Trademarks, and Licensee shall make
no claim against Timberland for indemnification or reimbursement with respect
thereto. Any destruction or alteration of Licensed Products required under this
Section 29 may, at Timberland's request, be observed or supervised by Timberland
and shall be certified in writing to Timberland's satisfaction. Licensee shall
use its best efforts to avoid having excessive quantities of Remaining Inventory
and, without limitation, shall refrain from ordering excessive quantities of
parts, components and other materials for, and from manufacturing excessive
quantities of, Licensed Products.
WARRANTY, DISCLAIMER, INDEMNITY AND INSURANCE
30. WARRANTY
30.1 TIMBERLAND WARRANTY
Timberland represents and warrants to Licensee that: (i) it is
able to enter into and perform under this Agreement; (ii) it is able to license
all of Timberland's rights to the Licensed Trademarks (or such alternative
marks, as applicable) in the Territory for purposes of this Agreement; and (iii)
it has not made, and will not make, any commitments to others inconsistent with,
or in derogation of, such rights.
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30.2 LICENSEE WARRANTY
Licensee represents and warrants to Timberland that: (i) it is
able to enter into and perform under this Agreement; (ii) it has the right to
use the Licensed Trademarks and any other trademarks it may use on or in
connection with the Licensed Products; (iii) it has not made, and will not make,
any commitments inconsistent with, or in derogation of, such rights; (iv) by
entering into and performing under this Agreement it is not, and shall not be,
in conflict with any prior obligations to third parties; (v) the Licensed
Products and all associated materials are, and shall be, free from any claims of
infringement of any third party's proprietary or other intellectual property
rights (including, without limitation, trade secret, patent, copyright and
trademark rights); (vi) the Licensed Products and all associated materials are,
and shall be, free from defects in design, material and workmanship and are, and
shall be, safe and suitable for their intended and foreseeable uses; (vii) the
Licensed Products and all associated materials are, and shall be, free from any
claim of product liability; and (viii) the Licensed Products and all associated
materials shall meet, the requirements of all applicable statutes, rules,
regulations, decrees, orders, standards and guidelines.
31. DISCLAIMER
Nothing in this Agreement shall be deemed to be a representation or
warranty by Timberland that the Licensed Products or Licensed Trademarks will be
free from claims of infringement of the patents, trademarks, trade dress,
copyrights or other intellectual property rights of any third party.
Notwithstanding any other provision of this Agreement, Timberland shall have no
liability whatsoever to Licensee or any other Person for, or on account of, any
injury, loss or damage, of any kind or nature, sustained by, or any damage
assessed or asserted against, or any other liability incurred by or imposed
upon, Licensee or any other Person, arising out of or in connection with or
resulting from: (a) the manufacture, use or sale of Licensed Products; (b) the
use of any Confidential Information disclosed by Timberland; or (c) any
advertising, promotional or merchandising activities in connection with the
Licensed Products. Licensee shall hold Timberland, and each of its directors,
officers, employees, agents and Affiliates, harmless in the event that
Timberland, or any of its directors, officers, employees, agents or Affiliates,
is held liable with respect thereto.
32. INDEMNITY
32.1 INDEMNIFICATION BY TIMBERLAND
Timberland shall indemnify and hold Licensee and each of its
directors, officers, employees, agents and Affiliates harmless from and against
any and all
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claims, actions, suits, proceedings, losses, damages and expenses (including,
without limitation, reasonable attorneys', consultants' and experts' fees)
(collectively, "Claims") arising out of or relating to any inaccuracy or breach
of Timberland's representations, warranties, covenants or other obligations
hereunder.
32.2 INDEMNIFICATION BY LICENSEE
Licensee shall indemnify and hold Timberland and each of its
directors, officers, employees, agents and Affiliates harmless from and against
any and all Claims arising out of or relating to: (i) any inaccuracy or breach
of Licensee's representations, warranties, covenants or other obligations
hereunder (including, without limitation, Licensee's representations and
warranties set forth in Section 30.2); (ii) the design, development,
manufacture, sourcing, marketing, advertising, promotion, merchandising,
shipment, distribution, sale, servicing or use of any Licensed Products
(including, without limitation, any (A) product liability claims, (B) claims of
personal injury, death or property damage, (C) claims made under any guaranties
made or warranties given (in each case, whether express or implied) with respect
to such Licensed Products or (D) any similar or other claim based on strict
liability, negligence or warranty (whether express or implied)); or (iii) any
use of the Licensed Trademarks by Licensee. Licensee's obligations under this
Section 32.2 shall not be in any way limited to or restricted by (a) Licensee's
available insurance coverage, notwithstanding Timberland's participation in
establishing the required levels of insurance coverage, or (b) any of
Timberland's prior approvals granted under this Agreement with respect to any
Licensed Products.
32.3 INDEMNIFICATION PROCEDURES
Licensee shall promptly notify Timberland of any Claims
against any Person arising out of or relating to any Licensed Products,
including but not limited to product liability claims or other Claims relating
to the research, design, development, manufacture, sourcing, marketing,
advertising, promotion, merchandising, shipment, distribution, sale, servicing
or use of any Licensed Product. In the event that any Claim is made as a result
of which a party or any of its directors, officers, employees, agents or
Affiliates (collectively, an "Indemnified Party") may become entitled to
indemnification by the other party (an "Indemnifying Party") pursuant to Section
32.1 or 32.2, the Indemnifying Party shall, at its expense, have the right to
participate in, and, at its option, to assume the defense of such Claim with
counsel reasonably satisfactory to the Indemnified Party. Promptly upon becoming
aware of such Claim, the Indemnified Party shall give the Indemnifying Party
notice thereof; provided, however, that the omission so to notify the
Indemnifying Party shall not relieve the Indemnifying Party from any liability
which it may have to the Indemnified Party,
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except to the extent that the Indemnifying Party is actually prejudiced by such
omission. If the Indemnifying Party elects so to assume the defense of such
Claim, following its notice of such election to the Indemnified Party, the
Indemnifying Party shall not be liable to the Indemnified Party pursuant to such
Section for any legal or other expenses subsequently incurred by the Indemnified
Party in connection with the defense of such Claim, except to the extent
otherwise provided below. Any settlement of any Claim shall require the mutual
consent of the Indemnifying Party and the Indemnified Party and shall include as
an unconditional term thereof the giving by the claimant or plaintiff to the
Indemnified Party of a release from all liability with respect to such Claim.
Notwithstanding the right of the Indemnifying Party to assume the defense of any
Claim to which the Indemnified Party may become a party or target, the
Indemnified Party shall have the right to employ separate counsel and to
participate in the defense of such action. The Indemnifying Party shall bear the
reasonable fees, costs and expenses of such separate counsel, if: (i) the use of
the counsel chosen by the Indemnifying Party to represent the Indemnified Party
would present such counsel with a conflict of interest; (ii) the defendants in,
or targets of, such Claim include both the Indemnified Party and the
Indemnifying Party and the Indemnified Party shall have reasonably concluded
that there may be legal defenses available to it which are different from or
additional to those available to the Indemnifying Party (in which case the
Indemnifying Party shall not have the right to direct the defense of such Claim
on behalf of the Indemnified Party); (iii) in the exercise of the Indemnified
Party's reasonable judgment, the Indemnifying Party shall not have employed
satisfactory counsel to represent the Indemnified Party within a reasonable time
after notice of the institution of such Claim; or (iv) the Indemnifying Party
shall not have assumed the defense of such Claim.
33. INSURANCE
DLC shall maintain, at its own expense, in full force and effect at all
times during which Licensed Products are sold and if written on a "claims made"
basis, for a period of six years thereafter with an insurer having a Best's
rating of A or better, a commercial general liability insurance policy providing
at least [*] ([*]) of coverage (including coverage for products liability), and
an excess liability insurance policy providing an annual aggregate of [*] ([*])
insuring exclusively against events involving the Licensed Products
(collectively, the "Required Policy"). The Required Policy must be written on
either an occurrence basis or on a claims-made basis and shall name Timberland
as an additional named insured. The Required Policy shall provide for at least
thirty (30) days' prior written notice to Timberland of the
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cancellation or any substantial modification thereof (including, without
limitation, any reduction of the aggregate limit of coverage). If Licensee
cancels or substantially modifies the Required Policy or fails to keep the
Required Policy in full force and effect, Timberland shall have the right, at
anytime thereafter, without prejudice to its other rights, to terminate this
Agreement and the Licenses, effective immediately upon notice to Licensee of
such termination. Timberland shall review annually the insurance requirements
pursuant to this Section 33 and, if Timberland, in its good faith business
judgment based upon past claims history of DLC, dollar volume of sales or
current market conditions, believes that such requirements do not adequately
protect Timberland, Timberland shall have the right to require, that Licensee
increase its insurance coverage to levels which Timberland, in exercising such
judgment, believes will adequately protect Timberland. In addition, Timberland
shall have the right, but not the obligation, to purchase such additional
coverage and to be reimbursed by Licensee for all costs related thereto.
Upon execution of this Agreement, and as Timberland may request from
time to time, Licensee shall provide Timberland with certificates of insurance
or copy of the policies evidencing the coverage outlined in this Section 33.
Renewal certificates for such policies shall be issued at least ten (10) days
prior to the policy expiration.
CONFIDENTIAL INFORMATION; NON-COMPETITION
34. CONFIDENTIAL INFORMATION
34.1 CONFIDENTIAL TREATMENT
The parties acknowledge that during the course of their
performance under this Agreement, each party may learn Confidential Information
of the other party. Each party agrees to take reasonable steps to protect such
Confidential Information and further agrees that it shall not: (a) use such
Confidential Information except as required in the normal and proper course of
performing under this Agreement; (b) disclose such Confidential Information to a
third party; or (c) allow a third party access to such Confidential Information
(except as may otherwise be required by law) without, in each case, obtaining
the prior written approval of the other party, provided, however, that such
restrictions shall not apply to Confidential Information which a party has
requested be subject to a confidentiality order but nonetheless is required to
be revealed to an adjudicating body in the course of litigation. The foregoing
restrictions shall continue to apply after the expiration or termination of this
Agreement, regardless of the reason for such expiration or termination, and
shall continue to apply for so long as the confidential nature of such
information is maintained. Except as provided in Section 5, all Confidential
Information is, and shall remain, the property of the party which supplied it.
Each
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party shall take reasonable steps to mark its Confidential Information which is
in written form with appropriate legends, provided, however, that the failure so
to mark such Confidential Information shall not relieve the other party of its
obligations hereunder.
34.2 FORBIDDEN USE OF TIMBERLAND'S CONFIDENTIAL
INFORMATION
Under no circumstances shall Licensee: (a) use Timberland
Confidential Information in connection with products which are not Licensed
Products; or (b) disclose Timberland Confidential Information to, or allow
access to Timberland Confidential Information by, anyone not associated with the
research, design, development or manufacture of Licensed Products.
34.3 PRIOR OBLIGATIONS
Neither party shall intentionally disclose to, or use on
behalf of, the other party any information which is proprietary to a third
party, unless written authorization from such third party is first obtained in
form and substance satisfactory to the other party.
35. NON-COMPETITION
DLC shall not, directly or indirectly, acting alone or with others, at
any time during the Term, research, design, develop, manufacture, source,
market, advertise, promote, merchandise, ship, distribute or sell any eyewear
and related accessories other than the Licensed Products.
Neither Licensee nor any Affiliate of Licensee shall, at any time
during the Term or for six months thereafter (a) research, design, develop,
manufacture, source, market, advertise, promote, merchandise, ship, distribute
or sell any eyewear or related accessories which, in Timberland's reasonable
opinion are based upon, are derived from or replicate any Licensed Product or
(b) market, advertise, promote, merchandise, ship, distribute or sell any
eyewear or related accessories for or on behalf of any Timberland Competitor,
except with Timberland's prior written consent.
The competition prohibited by this Section 35 includes, but is not
limited to, any direct or indirect, sole or joint, (i) ownership, management,
operation, control or investment in the securities of (except ownership of 1% or
less of the equity securities of any publicly traded company), (ii) loans or
advances to, (iii) subcontract or other business relationship with, or (iv) any
other connection or affiliation with, any person or entity that is engaged in,
or is about to become engaged in, research, design,
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development of, or manufacturing, sourcing, marketing, advertising, promoting,
distributing or selling, any eyewear or eyewear related accessories or any
process or services related thereto, except as permitted above.
TERMINATION
36. TERMINATION FOR FAILURE TO INTRODUCE PRODUCTS
If any Introduction of any Licensed Product pursuant to Section 6 does
not occur within the scheduled period, Timberland shall have the right, without
prejudice to any other rights it may have, at any time thereafter to terminate
this Agreement, effective immediately upon giving written notice thereof to
Licensee, either: (a) in its entirety and with respect to all Licensed Products;
or (b) in part and only to the extent that this Agreement applies to any
specific Licensed Product (if such timetable for such specific Licensed Product
has not been met).
37. TERMINATION FOR BREACH OR NON-COMPLIANCE
If Licensee breaches any of: (a) its trademark use obligations under
Section 11; (b) its royalty payment obligations under Sections 16 or 17; (c) its
Marketing Fund Expenditures obligations under Section 23; (d) its insurance
coverage obligations under Section 33; (e) its representations and warranties
under Section 30.2; or (f) a breach of its obligations under the Stock Purchase
Agreement or Investor Rights Agreement, Timberland shall have the right without
prejudice to any other rights it may have under law, in contract or in equity
for such breach, at any time thereafter to terminate this Agreement, effective
immediately upon giving notice to Licensee.
Additionally, if Licensee breaches any of its other representations,
warranties or obligations under this Agreement, Timberland shall have the right,
without prejudice to any other rights it may have, at any time thereafter to
terminate this Agreement upon at least ten (10) days' notice to the breaching
party in the case of a breach of a payment obligation, or upon at least thirty
(30) days' notice thereto in the case of any other breach, provided that such
breach is continuing at the end of the relevant notice period. Such termination
shall automatically become effective at the end of the applicable notice period,
unless Licensee has completely remedied such breach to Timberland's reasonable
satisfaction within such applicable notice period.
38. TERMINATION DUE TO INSOLVENCY
If Licensee: (a) commences or becomes the subject of any case or
proceeding under the bankruptcy, insolvency or equivalent laws of any country in
the Territory;
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(b) has appointed for it or for any substantial part of its property a
court-appointed receiver, liquidator, assignee, trustee, custodian, sequestrator
or other similar official; (c) makes an assignment for the benefit of its
creditors; (d) defaults on any obligation which is secured, in whole or in part,
by a security interest in the Licensed Products; (e) fails generally to pay its
debts as they become due; or (f) takes corporate action in furtherance of any of
the foregoing (collectively, herein referred to as "Events of Insolvency"),
then, in each case, Licensee shall immediately give notice of such event to
Timberland. Whether or not such notice is given, Timberland shall have the
right, to the fullest extent permitted under applicable law, following the
occurrence of any Event of Insolvency and without prejudice to any other rights
Timberland may have, at any time thereafter to terminate this Agreement and the
Licenses, effective immediately upon giving notice to Licensee.
39. TERMINATION UPON CHANGE OF BUSINESS
If (a) Licensee sells, or otherwise disposes of, all or substantially
all of Licensee's business or assets to a third party or parties, (b) effective
control of Licensee is transferred (and in the case of (a) or (b)) whether in a
single transaction or in a series of transactions, and whether directly or
indirectly, or (c) if there is a material adverse change in the business,
financial condition or prospects of Licensee, then Timberland shall have the
right, without prejudice to any other rights it may have, at any time thereafter
to terminate this Agreement, effective immediately upon giving notice to
Licensee.
40. TERMINATION UPON LOSS OF KEY PERSONNEL
It is understood and agreed that the active participation of Douglas W.
Lauer in Licensee's business affairs, and his active participation in the
performance of Licensee's obligations hereunder, are a vital part of this
Agreement. In the event of his death or incapacity or, in the event that he
shall engage, whether directly or indirectly, in any business activity other
than the active and full-time management and operations of DLC, Timberland shall
have the right, without prejudice to any other rights it may have, at any time
thereafter to terminate this Agreement, effective immediately upon giving notice
to Licensee; provided, however, that (a) after the calendar year 1996, in the
event of Mr. Lauer's death or incapacity, Timberland may approve of a
replacement of Mr. Lauer if it determines, in its reasonable judgment that the
proposed replacement is sufficiently skilled, experienced and compatible with
the Timberland culture and (b) after the first two years of the Initial Term,
Timberland may approve of a replacement of Mr. Lauer only with respect to his
active participation in the production of License Products (provided that Mr.
Lauer must continue throughout the Term to act as President and Chief Executive
Officer of DLC
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and to provide at least 20 hours of service per week to DLC in such capacity),
and provided, further, that throughout the Term, Mr. Lauer is permitted to
participate in senior management level strategic decisions of Gargoyles but not
to assume any line responsibility.
41. TERMINATION FOR FAILURE TO SELL SUFFICIENT QUANTITIES
If the average of Licensee's actual Net Sales for any two consecutive
Product Years is less than the average of the applicable Minimum Net Sales of
Licensed Products for such Product Years, as set forth on Exhibit 18 hereto,
Timberland shall have the right, without prejudice to any other rights it may
have, at any time thereafter to terminate this Agreement, either: (a) in its
entirety and with respect to all Licensed Products; or (b) in part and only to
the extent that this Agreement applies to certain Licensed Products or certain
countries or territories included in the Territory, as specified by Timberland.
Such termination shall be effective immediately upon giving notice to Licensee.
42. NO RIGHTS AFTER TERM
Licensee understands and acknowledges that, with the exception of its
surviving rights as described in Section 47, no rights under this Agreement
whatsoever shall extend to Licensee beyond the expiration or termination of this
Agreement. Licensee shall not be entitled to any compensatory payment in
connection with the expiration or termination of this Agreement or the License
granted hereunder for any reason.
43. AUTOMATIC EXPIRATION OR TERMINATION OF LICENSE
The License shall automatically expire or terminate upon the expiration
or termination of this Agreement for any reason; provided, however, that if
Timberland shall have terminated this Agreement only with respect to certain
Licensed Products or certain countries or territories within the Territory
pursuant to Section 37 or Section 42, then the License shall, accordingly,
automatically terminate only with respect to the same products or countries and
territories (as the case may be). Subject only to Section 29, upon such
expiration or termination, Licensee shall immediately cease all use of the
License and shall, at Timberland's request, take all steps and actions as
Timberland may deem necessary to reflect or confirm such expiration or
termination and surrender of Licensee's rights to use same.
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44. RETURN OF PROPERTY
Each party shall return to the other, promptly upon the expiration or
termination of this Agreement, or at any other time when requested, any and all
property of the other party (including, but not limited to, all Confidential
Information and copies thereof); provided, however, that Timberland shall have
the right to retain free of charge any samples supplied to it under Section 24
of this Agreement and any complimentary products supplied to it under Section 23
of this Agreement.
ADDITIONAL MISCELLANEOUS TERMS
45. APPROVALS, ETC.
All approvals required or given pursuant to this Agreement shall be in
writing. Timberland's approval of Licensed Product samples, artwork or
advertising, promotional or marketing materials shall not be construed to mean
that Timberland has determined that such items conform to the laws or
regulations of any jurisdiction or, in the case of Licensed Product samples,
that such samples are safe or fit for their intended purpose. Timberland may
revoke its approval of a Licensed Product sample at any time, if the Licensed
Product subsequently is determined by Timberland to be ineffective for its
intended purpose, unsafe or deficient in quality. Additionally, if, following
approval of any item for which approval is required under this Agreement, any
significantly unfavorable publicity or claim should arise or be made in relation
to such item, Timberland shall have the right to revoke its approval of such
item. In the event of any revocation of Timberland's approval hereunder,
Licensee shall immediately thereafter discontinue its manufacture, distribution,
sale, use and publication of such item. After Timberland has approved any item
for which approval is required under this Agreement, Licensee shall not make any
material change in or to such approved item without again obtaining Timberland's
prior written approval.
In the event that Licensee shall experience any Event of Insolvency (as
defined in Section 38) or in the event Timberland determines that Licensed
Products sold by Licensee are defective or unsafe, Timberland shall have the
right (but shall not be obligated) to require the recall of any Licensed Product
which is, or may be, defective or unsafe, provided, however, that such recall
(or failure so to recall) shall not relieve Licensee of its indemnification
obligations pursuant to Section 32.
46. INDEPENDENCE OF THE PARTIES
Neither Licensee nor Timberland shall be construed to be the agent of
the other in any respect. The parties have entered into this Agreement as
independent contractors only, and nothing herein shall be construed to place the
parties in the
32
<PAGE> 34
relationship of partners, joint venturers, agency or legal representation.
Neither Licensee nor Timberland shall have the authority to obligate or bind the
other in any manner as to any third party. Other than with Timberland, nothing
contained herein shall be construed to restrict Licensee's ability to set its
prices with respect to unaffiliated third parties.
47. SURVIVORSHIP
All rights and obligations of the parties which, by their express terms
or nature or those arising under Sections 5, 11, 12, 13, 15, 16, 17, 19, 20, 21,
22, 29, 30, 31, 32, 33, 34, 35, 42, 44, 46, 56, 57 and this Section 47 (together
with the defined terms or other references used in such sections) of this
Agreement, shall survive the expiration or termination of this Agreement and
shall continue until fully performed.
48. ENTIRE AGREEMENT
This Agreement constitutes the entire agreement between the parties
with respect to its subject matter and supersedes all prior agreements,
understandings, commitments, negotiations and discussions with respect thereto,
whether oral or written.
49. HEADINGS
Headings and subheadings in this Agreement are included solely for
convenience of reference and shall not affect the interpretation of, or be
considered a part of, this Agreement.
50. AMENDMENT
This Agreement may not be amended or modified in any respect, except in
writing signed by all parties.
51. WAIVER
The failure of any party to insist upon strict adherence to any
provision of this Agreement on any occasion shall not be considered a waiver of
such party's right to insist upon strict adherence to such provision thereafter
or to any other provision of this Agreement in any instance. Any waiver shall be
in writing signed by the party against whom such waiver is sought to be
enforced.
33
<PAGE> 35
52. ASSIGNABILITY; SUCCESSORS AND ASSIGNS
This Agreement and the Licenses are personal to Licensee. Licensee
shall not assign or transfer any of its rights or delegate any of its
obligations under this Agreement or the Licenses, without the prior written
consent of Timberland. Any attempted assignment, transfer or delegation in
violation of this Section 52 or by virtue of the operation of law shall be null
and void and of no effect. This Agreement shall be binding upon, and shall inure
to the benefit of, the parties' respective successors and permitted assigns.
For purposes of this Section 52, a "transfer" shall include, without
limitation, the following actions by Licensee (whether effected in a single
transaction or in a series of related transactions, and whether effected
directly or indirectly): (a) the sale or other disposition of all or
substantially all of Licensee's business or assets (except for "ordinary course"
inventory sales); and (b) the transfer of effective voting or other business
control of Licensee; provided, however, that Gargoyles may transfer its
sub-license from DLC to a wholly-owned subsidiary of Gargoyles into which DLC is
to merge in accordance with section 6 of the Investor Rights Agreement.
53. REFORMATION; SEVERABILITY
The provisions of this Agreement shall be severable. If a court of
competent jurisdiction shall declare any provision of this Agreement invalid,
illegally or unenforceable, the other provisions hereof shall remain in full
force and effect, and such court shall be empowered to modify, if possible, such
invalid, illegal or unenforceable provision to the extent necessary to make it
valid and enforceable to the maximum extent possible.
54. EQUITABLE RELIEF
Licensee acknowledges and agrees that: (a) its failure to perform its
obligations under this Agreement and its breach of any provision hereof, in any
instance, shall result in immediate and irreparable damage to Timberland; (b) no
adequate remedy at law exists for such damage; and (c) in the event of such
failure or breach, Timberland shall be entitled to equitable relief by way of
temporary, preliminary and permanent injunctions, and such other and further
relief as any court of competent jurisdiction may deem just and proper, in
addition to, and without prejudice to, any other relief whether in law or in
equity to which Timberland may be entitled.
34
<PAGE> 36
55. GOVERNING LAW AND JURISDICTION
This Agreement shall be governed by and construed in accordance with
the internal substantive laws of the State of New Hampshire applicable to
agreements made and to be performed entirely therein. Licensee hereby consents
to the non-exclusive jurisdiction of the courts of the State of New Hampshire
and of the United States District Court for the District of New Hampshire for
resolution of all claims, differences and disputes which the parties may have
regarding this Agreement. Any judgment or other decision of any such court shall
be enforceable, without further proceedings, against the named party anywhere in
the world where such party is located, does business or has assets.
56. DELIVERY OF MATERIALS; NOTICES, ETC.
Materials required to be delivered to any party hereunder shall be
delivered to the address given below for such party. Unless otherwise expressly
stated in this Agreement, any notice, accounting statement, consent, approval or
other communication under this Agreement shall be in writing and shall be
considered given: (a) upon personal delivery or delivery by telecopier (with
confirmation of receipt by receiver), (b) two (2) business days after being
deposited with an "overnight" courier or "express mail" service, or (c) seven
(7) business days after being mailed by registered or certified first class
mail, return receipt requested, in each case addressed to the notified party at
its address set forth below (or at such other address as such party may specify
by notice to the others delivered in accordance with this Section 58):
If to Timberland:
The Timberland Company
200 Domain Drive
Stratham, NH 03885
Attn: Kenneth Pucker, Vice President
Fax No.: (603) 773-1640
copy to: The Timberland Company
200 Domain Drive
Stratham, NH 03885
Attn: Jane Owens
Fax No.: (603) 773-1640
35
<PAGE> 37
If to Licensee: Gargoyles
5866 S. 194th Street
Kent, Washington 98032
Attn: Douglas B. Hauff
Fax No.: (206) 872-3468
The D.W. Lauer Company
120 Emerald Drive
Attn: Douglas W. Lauer
Danville, California 94526
Fax No.: (510) 831-9110
57. CONFIDENTIALITY OF AGREEMENT
Except as required by order of a court or government agency of
competent jurisdiction, this Agreement and its provisions shall be considered
Confidential Information. Timberland and Licensee shall jointly develop and
agree upon any press releases or other public statements to the media to be
released upon or after execution of this Agreement with respect to the financial
terms herein.
58. AUTHORIZATION AND ABILITY TO EXECUTE
Each party represents that its undersigned officer is duly authorized
to sign this Agreement on its behalf.
36
<PAGE> 38
LICENSE AGREEMENT
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed by their duly authorized officers as of the date first set forth above.
THE TIMBERLAND COMPANY
By: /s/ Jeffrey B. Swartz
---------------------------------
Name (Print): Jeffrey B. Swartz
----------------------------
Title: Executive Vice President and
---------------------------------
Chief Operating Officer
---------------------------------
GARGOYLES, INC.
By: /s/ Douglas B. Hauff
---------------------------------
Name (Print): Douglas B. Hauff
----------------------------
Title: President
---------------------------------
THE D.W. LAUER COMPANY
By: /s/ Douglas W. Lauer
---------------------------------
Name (Print): Douglas W. Lauer
----------------------------
Title: President & CEO
---------------------------------
37
<PAGE> 1
EXHIBIT 10.56
INCENTIVE POOL AGREEMENT
INCENTIVE AGREEMENT, effective as of May 17, 1996, by and between
Gargoyles, Inc., a Washington corporation ("Gargoyles"), and Douglas W. Lauer,
now residing at 120 Emerald Drive, Danville, California 94526 (the "Executive").
R E C I T A L S :
WHEREAS, Executive and Gargoyles are among the parties to a certain
Agreement for the Purchase of Common Stock dated May 17, 1996 (the "Purchase
Agreement"), pursuant to which Gargoyles purchased 140,000 shares of the common
stock of the Company. The D.W. Lauer Company, a California corporation (the
"Company"); and
WHEREAS, as contemplated under the Purchase Agreement, the Company
employed the Executive on the terms and subject to the conditions set forth in
an Employment Agreement of even date therewith; and
WHEREAS, Gargoyles has agreed to make available up to 14,000 shares of
the common stock of the Company issued to Gargoyles as additional incentive to
Executive and certain members of the Company's management team.
A G R E E M E N T :
The parties agree as follows:
Incentive Pool. Executive and certain other designated key employees of
the Company ("Participants") shall be entitled to a share, determined as
provided below, of an "Incentive Pool" (as hereinafter defined), calculated for
each of the twelve-month periods ending December 31, 1997, December 31, 1998,
December 31, 1999 and December 31, 2000 (each, a "Bonus Period"). Within sixty
(60) days prior to each Bonus Period, each Participant's share of the Incentive
Pool shall be established by the Executive Team, based upon a review of the
services performed by the Participant for the preceding twelve months subject to
final approval of the Company's Board of Directors. The "Executive Team" shall
consist of Executive, so long as he is employed by Company as an executive.
Additional individuals may be added to the Executive Team based upon majority
approval of the Executive Team members, subject to final approval by the Board.
"Incentive Pool" shall mean 3,500 (as adjusted for stock splits, stock dividends
or similar events) shares of the common
<PAGE> 2
stock of the Company for each Bonus Period in which the Company meets the
Operating Objectives for such Bonus Period, as set forth in Exhibit A.
Entire Agreement; No Amendment. No agreements or representations, oral
or otherwise, express or implied, have been made by either party, with respect
to Executive's employment by the Company, that are not set forth expressly
herein. No amendment or modification of this Agreement shall be valid or binding
unless made in writing and signed by the party against whom enforcement thereof
is sought.
Notices. All notices, demands and requests of any kind which either
party may be required or may desire to serve upon the other party hereto in
connection with this Agreement shall be delivered only by courier or other means
of personal service, which provides written verification of receipt, or by
registered or certified mail return receipt requested (the "Notice"). Any such
Notice delivered by registered or certified mail shall be deposited in the
United States mail with postage thereon fully prepaid, or if by courier then
deposited with the courier. All Notices shall be addressed to the parties to be
served as follows:
(a) If to the Company, at With a copy to:
Douglas W. Lauer Robb A. Scott, Esq.
120 Emerald Drive Steinhart & Falconer
Danville, CA 94526 333 Market Street, Suite 3200
San Francisco, CA 94105
(415) 777-3999
(b) If to the Executive, at
Douglas W. Lauer Robb A. Scott, Esq.
120 Emerald Drive Steinhart & Falconer
Danville, CA 94526 333 Market Street, Suite 3200
San Francisco, CA 94105
(415) 777-3999
(c) If to the Gargoyles, at
Gargoyles Performance Eyewear Cynthia Pope, Esq.
5866 South 194th Street Gargoyles Performance Eyewear
Kent, Washington 98032 5866 South 194th Street
Attention: Douglas B. Hauff Kent, Washington 98032
(206) 872-6100
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<PAGE> 3
Either of the parties hereto may at any time and from time to time
change the address to which notice shall be sent hereunder by notice to the
other party given under this Section. All such notices, requests, demands, and
other communications shall be effective when received at the respective address
set forth above or as then in effect pursuant to any such change.
Waivers. No waiver of any default or breach of this Agreement shall be
deemed a continuing waiver or a waiver of any other breach or default.
GOVERNING LAW. THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN
ACCORDANCE WITH THE LAWS OF THE STATE OF CALIFORNIA WITHOUT REGARD TO PRINCIPLES
OF CONFLICTS OF LAW.
Severability. If any clause, paragraph, section, or part of this
Agreement shall be held or declared to be void, invalid or illegal, for any
reason by any court of competent jurisdiction, such provision shall be
ineffective but shall not, in any way, invalidate or affect any other clause,
paragraph, section, or part of this Agreement.
Assignment. Neither party may assign (whether by operation of law or
otherwise) any rights (other than the right to receive income hereunder) under
this Agreement without the prior written consent of the other.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed as of the day and year first above written.
GARGOYLES, INC., a Washington corporation
By: /s/ Douglas B. Hauff
-------------------------------------
Name: Douglas B. Hauff
------------------------------------
Title: President
----------------------------------
/s/ Douglas W. Lauer
------------------------------------------
DOUGLAS W. LAUER
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<PAGE> 4
EXHIBIT A
OPERATING OBJECTIVES
The 1997 through 2000 operating objectives are as follows:
<TABLE>
<CAPTION>
1997 1998 1999 2000
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net Sales 2.5M 6M 13M 20M
Operating Income $250,000 $750,000 $2.5M $4.5M
</TABLE>
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<PAGE> 1
Exhibit 10.57
LICENSE AGREEMENT
THIS AGREEMENT ("Agreement") is made effective the lst day of January,
1989, by and between HOBIE DESIGNS, INC., a California corporation (hereinafter
referred to as "HOBIE"), and H.S.I., a California Corporation, (hereinafter
referred to as "LICENSEE").
A. HOBIE is the owner of the U.S. Trademark "Hobie" and has applied for
the U.S. Trademark registration of "Hobie" in the forms shown and described on
Exhibit "A" attached hereto, hereinafter collectively referred to as the
"Trademark", with respect to sunglasses and related items.
B. LICENSEE desires to secure the right and license to use the
Trademark in connection with the manufacture and sale of certain merchandise, as
more fully described hereafter, and HOBIE is willing to grant such license, all
upon the terms and conditions as hereinafter set forth.
NOW, THEREFORE, in consideration of the above recited facts and the
mutual covenants and promises herein contained, the parties hereto agree as
follows:
<PAGE> 2
1. GRANT OF LICENSE
1.1. LICENSE
Subject to the previous contract with SCG Sports, Inc., a California
corporation, as described below, and to the limitations provided in Paragraph
1.2 below, HOBIE hereby grants to LICENSEE the exclusive right and license
("License") to manufacture and sell eye glasses, sunglasses, glasses frames,
goggles, clip on sunglasses, glasses cases, glasses accessories and cleaning
devices and materials for glasses ("Licensed Merchandise"), bearing the
Trademark, in the Territory (as hereinafter defined). Except as otherwise
provided herein, the Trademark shall be displayed on all Licensed Merchandise.
In the event that LICENSEE desires at any time to use any altered or different
form of the Trademark on any Licensed Merchandise, LICENSEE shall first submit
the proposed form to HOBIE for approval and if approved by HOBIE, an application
for registration as a trademark shall be submitted, at LICENSEE's expense, and
thereafter the use of the altered or different form shall be subject to the
provisions of this Agreement. The parties acknowledge and agree that HOBIE has
previously entered into certain agreements with SCG Sports, Inc., which
generally permits HOBIE to license SCG Sports, Inc. to manufacture and sell
certain sunglass related accessory items bearing the name "Hobie" through their
retail establishments known as Hobie Sports. Except for the
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<PAGE> 3
right of HOBIE to license sunglass accessory items to SCG Sports as mentioned
above, (which does not and shall not include a license to manufacture sunglasses
bearing the HOBIE trademark), HOBIE shall not grant a license to the Licensed
Merchandise and with respect to the Territory to any other person or entity.
Nothing herein shall permit the sale of any prescription glasses in any manner
not permitted by any State or Federal law.
1.2. TERRITORY
The license hereby granted extends only to the United States
(hereinafter "Territory"). Any extension of this License to Jurisdictions
outside the United States (hereafter "Outside Jurisdiction") shall be subject to
the terms of Paragraph 1.4 and subject to the express written consent of HOBIE.
LICENSEE shall not sell, make any use of, or authorize any use, direct or
indirect, of the Trademark outside the Territory without the prior written
consent of HOBIE. With respect to any extension of this License to any Outside
Jurisdiction, this License shall be non exclusive, provided however, that except
for HOBIE'S right to License sunglass accessory items to SCG Sports, HOBIE has
not and will not expressly grant a License to any other person or entity with
respect to the Licensed Merchandise in any such Outside Jurisdiction.
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<PAGE> 4
1.3. OWNERSHIP OF TRADEMARK
LICENSEE agrees and hereby acknowledges that the Trademark, and all
rights, registrations and entitlements thereto, as well as any simulations or
variations thereof, together with all applications, registrations and filings
with respect to the Trademark and any renewals and extensions of any such
applications, registrations and filings are and shall remain the exclusive
property of HOBIE DESIGNS, INC., and LICENSEE agrees never to assert any claim
to or right to an interest in or title to the Trademark. LICENSEE acknowledges
that it is only acquiring the license to use the Trademark in connection with
the manufacture and sale of the Licensed Merchandise in the Territory
notwithstanding that the manufacture of such Licensed Merchandise, if
specifically authorized hereunder in writing, may be permitted to occur outside
the Territory for the limited purpose of importing into the Territory. Subject
to the limitations of Paragraph 7.1 herein, LICENSEE shall be permitted to use
the Name "Hobie" in a fictitious business name but only in conjunction with the
word "Sunglasses" and only in the form of the Trademark. If required, HOBIE
shall file a Registered User Agreement with reference to LICENSEE with the
proper governmental authorities with with respect to goods which are Licensed
Merchandise under this Agreement. LICENSEE shall execute any required form of
Registered User Agreement or similar required document which shall then be filed
by HOBIE.
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<PAGE> 5
1.4. RIGHT OF FIRST REFUSAL
Except as HOBIE may have the right to give SCG Sports the right to use
the Trademark on sunglass accessory items, HOBIE hereby grants to LICENSEE a
right of first refusal to be granted a license with respect to the Licensed
Merchandise in any other jurisdiction outside the Territory ("Outside
Jurisdiction"). HOBIE shall not grant a license with respect to the Licensed
Merchandise in any Outside Jurisdiction to any person or entity, other than the
LICENSEE, without first offering, by written notice, to grant such license to
LICENSEE upon substantially the same terms and conditions as provided herein, in
which case LICENSEE shall have thirty (30) days within which to exercise such
right of first refusal by written notice to HOBIE. If LICENSEE does not exercise
such right of first refusal and commence any required registration of the
Trademark within such thirty (30) day period, HOBIE shall thereafter be free to
grant such license to any third party with respect to such Outside Jurisdiction
in which case LICENSEE shall manage and coordinate such license, or, HOBIE shall
thereafter be free to sell, manufacture or distribute Licensed Merchandise
itself in such Outside Jurisdiction, and in either event LICENSEE and HOBIE
shall share equally in any fees, royalties, profits or other compensation
derived thereby.
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<PAGE> 6
1.5. REGISTRATION IN OUTSIDE JURISDICTIONS
LICENSEE shall not manufacture, sell, distribute or sublicense Licensed
Merchandise in any Outside Jurisdiction without the prior written consent of
HOBIE, which consent shall not be unreasonably withheld. In this connection, it
shall be presumed a reasonable withholding of such consent if HOBIE determines
that such consent might violate any law or might result in the characterization
of the relationship between HOBIE and LICENSEE as anything other than that of a
license to use a trademark. In the event LICENSEE desires to manufacture, sell,
distribute or sublicense Licensed Merchandise in any Outside Jurisdiction,
whether pursuant to the right of first refusal described in Paragraph 1.4 above,
or otherwise, and if HOBIE agrees and consents in writing LICENSEE shall be
permitted to do so, subject to the following:
(a) LICENSEE shall pay all costs, fees and charges for
registration of the Trademark on behalf of or in the name of and for the benefit
of HOBIE in the Outside Jurisdiction and all other costs related thereto
(collectively "Registration Costs").
(b) Before any Royalties are payable to HOBIE related to sales
in Outside Jurisdiction pursuant to Paragraphs 3.1 through 3.5, LICENSEE shall
be
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<PAGE> 7
entitled to offset its Registration Costs incurred in the Outside Jurisdiction,
against Royalties earned in said Outside Jurisdiction.
(c) Sales by an approved sublicensee in any Outside
Jurisdiction shall not be applied against Minimum Net Sales requirements
specified in Paragraph 8.1.
2. TERM
2.1. INITIAL TERM
The initial term of this Agreement shall be for a period of twenty (20)
years ("Initial Term"), commencing on January 1, 1989 ("Commencement Date"), and
ending on December 31, 2008 ("Termination Date"). Each year of this Agreement
shall be referred to as a "Contract Year" and shall begin on January 1 of each
year and end on December 31 of that same year.
(a) First Option. At the end of the Initial Term, if LICENSEE
is not in default under any of the terms hereof, LICENSEE shall have the option
to elect to extend the Termination Date for a period of five (5) years ("First
Option Period") under the same terms and conditions and subject to the schedule
of Minimum Net Sales for the option years as set forth in Paragraph 8.1(b). This
option ("First Option") may be exercised only by giving HOBIE written notice of
exercise of the First Option on or before November 30, 2008. If the First Option
is duly exercised, then the
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<PAGE> 8
Termination Date shall be extended to December 31, 2013. If the First Option is
not duly exercised as provided above, this Agreement shall terminate at the end
of the Initial Term.
(b) Second Option. At the end of the First Option Period, if
LICENSEE is not in default under any of the terms hereof, LICENSEE shall have
the option to elect to extend the Termination Date for a period of five (5)
additional years ("Second Option Period") under the same terms and conditions
and subject to the schedule of minimum Net Sales for the option years as set
forth in Paragraph 8.1(b). This option ("Second Option") may be exercised only
by giving HOBIE written notice of exercise of the Second Option on or before
November 30, 2013. If the Second Option is duly exercised, the Termination Date
shall be extended to December 31, 2018, at which time this Agreement shall be
terminated. If the Second Option is not duly exercised as provided above, then
this Agreement shall terminate at the end of the First Option Period.
(c) Third Option. At the end of the Second Option Period, if
LICENSEE is not in default under any of the terms hereof, LICENSEE shall have
the option to elect to extend the Termination Date for a period of five (5)
additional years ("Third Option Period") under the same terms and conditions
(but excluding the option clause) and subject to the schedule of minimum Net
Sales for the option years as set forth in Paragraph 8.1(b). This option ("Third
Option") may be exercised only
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<PAGE> 9
by giving HOBIE written notice of exercise of the Third Option on or before
November 30, 2018. If the Third Option is duly exercised, the Termination Date
shall be extended to December 31, 2023, at which time this Agreement shall be
terminated. If the Third Option is not duly exercised as provided above, then
this Agreement shall terminate at the end of the Second Option Period.
(d) Under no circumstances shall LICENSEE use the Trademark
after the Termination Date of this Agreement.
3. ROYALTY PAYMENTS
3.1. ROYALTY
Except as specified in Paragraph 3.5, LICENSEE shall pay to HOBIE as a
royalty a sum ("Royalty") equal to the greater of (i) two percent (2%) of the
Minimum Net Sales (as defined in Paragraph 8.1 herein) for each Contract Year,
as hereinafter set forth, or (ii) two percent (2%) of the Net Sales (as defined
in Paragraph 3.4 herein).
3.2. MANNER OF PAYMENT
The Royalty with respect to Net Sales in any quarter shall be payable
on the 20th day of the following quarter at the address designated by HOBIE from
time to
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<PAGE> 10
time. Unless otherwise specifically provided, all monetary calculations referred
to in this Agreement shall be in U.S. dollars.
3.3. ADDITIONAL ANNUAL PAYMENT
In the event the Net Sales of LICENSEE for any Contract Year do not
meet the Minimum Net Sales for that Contract Year, as set forth in Paragraph
8.1, LICENSEE may, subject to the limitation provided below, maintain the
License in effect by paying to HOBIE an amount equal to two percent (2%) of the
Minimum Net Sales for that Contract Year, such payment to be made on or before
March 1 of the year immediately following the Contract Year for which the
minimums were not met. If LICENSEE fails to make such payment on or before such
date, HOBIE shall have the right to terminate this Agreement pursuant to
Paragraph 8.l. Notwithstanding the above, LICENSEE shall, in good faith, exert
its best efforts to meet or exceed the Minimum Net Sales for each Contract Year,
and if LICENSEE does not meet or exceed the Minimum Net Sales for any two (2)
consecutive Contract Years, LICENSEE shall be presumed not to have exerted its
good faith best efforts, and HOBIE shall then have the right to terminate this
Agreement pursuant to Paragraph 8.1.
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<PAGE> 11
3.4. NET SALES
As used in this Agreement, "Net Sales" shall mean the gross U.S. dollar
value of all sales by LICENSEE of Licensed Merchandise whether it bears or is
identified by the Trademark and including, without limitation, Substandard
Merchandise (as defined in Paragraph 9 herein), when shipped, less returns,
discounts and allowances.
3.5. ROYALTIES FROM SUBLICENSE
In the event LICENSEE requests, and is granted, the written consent by
HOBIE to sublicense in any Outside Jurisdiction, LICENSEE shall pay to HOBIE
fifty percent (50%) of any license fees, charges or other compensation relating
to any such sublicense agreement within ten (10) days of receipt by LICENSEE.
4. ADVERTISING
4.1 SUPPLY OF ADVERTISING MATERIAL
To the extent reasonably possible, HOBIE shall request its U.S.
Licensees of other products to provide to LICENSEE copies of U.S. advertising
material to assist LICENSEE in the design of its advertising program.
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<PAGE> 12
4.2. NO PRESCRIBED MARKETING PLAN
LICENSEE agrees that any advertising or marketing plan of LICENSEE
employing the Trademark shall be distributed, published or conducted in a manner
that is not detrimental to any of the merchandise, trademarks or tradenames or
image of HOBIE. LICENSEE shall otherwise be entirely free to operate its
business and employ the Trademark according to LICENSEE's own marketing plan or
system. LICENSEE shall not be required to purchase any products or advertising
or promotional materials from HOBIE. HOBIE is not, and shall not, suggest or
mandate a marketing method, plan or system, since all such marketing decisions
are within the discretion of LICENSEE.
5. RECORDS AND BOOKS
5.1. MAINTENANCE OF RECORDS
LICENSEE shall keep true and accurate books of account and records in
accordance with generally accepted accounting principles, consistently applied,
covering all transactions relating to this Agreement and the License hereby
granted. Such books of account and records shall be maintained on LICENSEE's
fiscal year, and all books of account and records shall be kept available for at
least three (3) years after the termination of this Agreement. At any time with
twenty-four (24) hours
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<PAGE> 13
notice, and during regular business hours, HOBIE shall have the right to
inspect, audit and copy the books and records of LICENSEE as they relate to this
Agreement.
5.2. QUARTERLY REPORTS
At the time LICENSEE makes each Royalty payment to HOBIE, LICENSEE
shall submit to HOBIE a report, setting forth the number, description and sales
price of the regular priced Licensed Merchandise and Substandard Merchandise,
sold by LICENSEE for the preceding quarter, and a statement indicating how the
Royalty was computed. This report shall also include a detailed account, in
monetary figures, for the preceding quarter, of (i) all advertising and
promotion expenditures by LICENSEE relating to the Licensed Merchandise and (ii)
all returns of Licensed Merchandise to LICENSEE because of quality.
5.3. ANNUAL FINANCIAL STATEMENTS
No later than one hundred twenty (120) days after the LICENSEE's fiscal
year-end, LICENSEE shall furnish HOBIE with its annual financial statement with
respect to the fiscal year just concluded. These documents will be held in
strict confidence by HOBIE.
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<PAGE> 14
5.4. AUDIT
HOBIE and its duly authorized representatives, shall have the right
upon reasonable notice to audit and copy the quarterly reports and annual
financial statements and related documents referred to in Paragraphs 5.2 and 5.3
above, and all other documents and materials in the possession or under the
control of LICENSEE with respect to the subject matter and terms of this
Agreement, the cost of which shall be borne by HOBIE. If the audit discloses
that the Royalty actually due exceeds the Royalty paid by an amount greater than
three percent (3%) of the Royalty paid, LICENSEE shall pay, in addition to the
unpaid Royalty, the cost of the audit performed by HOBIE and interest on said
unpaid Royalty, computed from the date said Royalty accrued, at an annual rate
of twelve percent (12%) or the highest rate permitted by law, whichever is less.
If LICENSEE disagrees with the results of the audit performed by HOBIE, LICENSEE
and its duly authorized representatives shall have the right to examine the
audit papers prepared by or for HOBIE. After such examination, if LICENSEE still
disagrees with HOBIE with respect to the Royalty actually due to HOBIE from
LICENSEE, the representatives of both parties shall select an impartial,
independent accounting firm ("Independent Auditors"), who shall perform an audit
of the Royalty, at LICENSEE's expense, and shall determine the Royalty due to
HOBIE from LICENSEE, if any. In the event the Independent Auditors should
determine that the Royalty due exceeds the Royalty paid, by an
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amount not exceeding three percent (3%) of the Royalty actually paid, then
LICENSEE and HOBIE shall each pay one-half (1/2) of the cost of the audit
performed by the Independent Auditors; and LICENSEE shall not be responsible for
the HOBIE audit expenses as previously provided. In the event the Independent
Auditors should determine that the Royalty paid exceeds the Royalty due by an
amount exceeding three percent (3%) of the Royalty already paid, then HOBIE
shall pay the cost of the audit performed by the Independent Auditors and shall
pay LICENSEE the excess Royalty paid, plus interest at an annual rate of twelve
percent (12%) or the highest rate permitted by law, whichever is less, computed
from the date the excess Royalty was paid to HOBIE.
6. STANDARDS OF MERCHANDISE
6.1. PURPOSE
The provisions of this Paragraph 6, and any other Trademark control
under this License Agreement, are for the sole purpose of enabling HOBIE to
fulfill its obligations under the Lanham Act to exercise control over the
integrity and quality of the Licensed Merchandise.
6.2. AUTHORIZED REPRESENTATIVES OF HOBIE
HOBIE shall provide LICENSEE from time to time with the name of the
business or entity, individual or individuals, each of whom shall be deemed an
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"Authorized Representative" under the terms of this Agreement, for the purposes
set forth herein.
6.3. SAMPLES
(a) Prior to any sale by LICENSEE of any line or style of Licensed
Merchandise, LICENSEE shall submit no less than two (2) samples to HOBIE for
quality approval relating to all aspects of the Licensed Merchandise, including,
but not limited to, style, material and image, and all technical data and
reports relating to the frames, lenses or other parts of the Licensed
Merchandise. LICENSEE shall not sell or market any Licensed Merchandise without
the prior written approval of HOBIE of the samples of each line or style.
(b) At all times, LICENSEE shall work and cooperate with HOBIE or its
Authorized Representative in the coordination of the style, color, and material
so that they are consistent with the HOBIE image and other merchandise and items
licensed under the Trademark or other HOBIE trademarks.
(c) LICENSEE shall make no changes in any item of Licensed Merchandise
after it has been approved without submitting a sample with the intended change
to an Authorized Representative for approval.
(d) Nothing herein shall require HOBIE to provide or submit samples or
art work to LICENSEE; All designs, samples, styles or any combination thereof
sub-
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mitted by LICENSEE to HOBIE which are approved by HOBIE shall become the
property of HOBIE. Subject to the right of HOBIE to approve all designs and
styles of the Hobie Sunglasses logo, LICENSEE shall have the exclusive right to
use such logo designs and styles.
6.4. QUALITY CONTROL
During the Term of this Agreement, HOBIE, or its Authorized
Representative, shall notify LICENSEE in writing at any time that any or all of
the Licensed Merchandise being manufactured, sold or distributed by LICENSEE
under the Trademark does not meet the design or quality standards for that style
or line of Licensed Merchandise as represented by the original samples duly
approved, and HOBIE shall specify in what respect such Licensed Merchandise
fails to meet such standards. The judgment of an Authorized Representative
exercised in good faith shall be binding upon the parties as to whether or not
Licensed Merchandise meets the quality standards of the sample. LICENSEE agrees
that the Trademark shall not be placed on any Licensed Merchandise that is not
substantially the same as the sample. Upon receipt of notification that certain
Licensed Merchandise is not substantially the same as the sample, LICENSEE shall
cease manufacturing such nonconforming Licensed Merchandise. Thereafter,
LICENSEE shall have the right to sell the nonconforming Licensed Merchandise in
any manner and to any person, but the Trademark shall not be attached or affixed
to the Licensed Merchandise in any way.
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LICENSEE shall not manufacture, sell or distribute such nonconforming Licensed
Merchandise, or sell the same with the Trademark, until LICENSEE has resubmitted
samples and received written approval as required in Paragraph 6.3.
6.5 INSPECTION
LICENSEE agrees to permit HOBIE or its Authorized Representatives to
have access to LICENSEE's premises and place of manufacturing, storage,
distribution and sale, during normal business hours, with reasonable notice, to
evaluate matters relating to quality control and to perform inspections, which,
in HOBIE's discretion, are reasonably necessary to insure that the design and
quality standards required by HOBIE are being met.
7. ACKNOWLEDGMENTS AND PROTECTIONS OF TRADE NAME
7.1. LICENSEE makes the following acknowledgments and agrees:
(a) That great value is placed on the Trademark and goodwill
associated therewith in the Territory and elsewhere, and that the
Trademark and all rights therein and goodwill pertaining thereto belong
exclusively to HOBIE;
(b) That the consuming public and the industry associates the
Trademark with products of consistently high quality;
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(c) That the conditions, terms, restrictions, covenants and
limitations of this Agreement are necessary, equitable, reasonable and
essential to assure the consuming public that all goods sold under the
Trademark are of the same consistently high quality as sold by others
who are or may hereafter be licensed to sell any products by, under or
with the Trademark; and
(d) That outlets currently selling merchandise licensed under
the Trademark are of high repute and integrity and follow high
merchandising standards; and it is in the mutual interest of LICENSEE
and HOBIE to protect and foster the value and reputation of the
Trademark.
(e) That HOBIE may disapprove and request LICENSEE to
terminate any unfair methods of business or any business practice HOBIE
deems detrimental to the HOBIE name.
(f) That LICENSEE is expressly and specifically prohibited
from incorporating or re-incorporating under the name "Hobie
Sunglasses" or from changing LICENSEE's name to Hobie Sunglasses at any
future date without the express prior written consent of HOBIE.
7.2. TRADEMARK RESTRICTION
LICENSEE agrees that it will not use or permit the use of the Trademark
for any purposes or uses other than those connected with the advertising,
manufacture and
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sale of the Licensed Merchandise in the Territory. Upon termination of this
Agreement, LICENSEE itself shall not use, cause or permit to be used by any
other person the Trademark or any similar trademark in its business or the
business of any person, corporation or entity controlled by LICENSEE, or in
which LICENSEE has an interest. LICENSEE shall, upon termination of this
Agreement and at HOBIE's request, take such action or execute such documents as
may be necessary or appropriate to reflect its surrender of the right to use the
Trademark, as well as any and all other rights acquired by the LICENSEE under
this Agreement.
7.3. TRADEMARK PROTECTION
LICENSEE agrees to notify HOBIE in writing in the event LICENSEE
becomes aware of any infringement or illegal use by any third party of the
Trademark or any other trademark used by HOBIE, and LICENSEE shall cooperate
fully with HOBIE in stopping such infringement. In the event HOBIE takes legal
action with respect to any infringement, the cost and expense of any litigation
that ensues shall be borne entirely by HOBIE. Any monetary recovery shall belong
solely to HOBIE. If HOBIE declines to institute legal action to the extent
permitted by the law of any applicable jurisdiction, LICENSEE may institute
legal action at its sole expense and HOBIE shall fully cooperate with LICENSEE
in such action by granting LICENSEE Power of Attorney on behalf of HOBIE for the
purpose of said litigation only, subject to the provisions and limitations
below. Any monetary recovery in such litigation by
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LICENSEE shall be allocated to LICENSEE. LICENSEE agrees that any relief other
than such monetary relief, including without limitation, injunctive or equitable
relief, which is requested by LICENSEE to protect the Trademark shall be sought
for and on behalf of and shall be designated to the benefit of HOBIE alone.
"Legal action" as used herein shall include demand letters, negotiation and
settlement of disputes, as well as the filing of formal legal actions with a
court of proper jurisdiction. Under no circumstances shall LICENSEE have the
authority to settle or compromise a matter which in any way mitigates, lessens
or restricts HOBIE's ownership interest in the Trademark without HOBIE's prior
written approval and any action which purports to do so shall be null and void
and shall also be a breach of this Agreement.
8. TERMINATION
8.1. FAILURE TO MEET MINIMUM SALES
(a) Subject to the conditions and payments specified in
Paragraph 3.3 above, and notwithstanding any other provision of this
Agreement, HOBIE may terminate this Agreement during the Initial Term
or during the First Option Period, the Second Option Period or Third
Option Period, (i) upon written notice to LICENSEE on or before May 31
of the following year, if the LICENSEE's Net Sales for the previous one
(1) Contract Year do not meet the Minimum Net Sales for that Contract
Year and
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LICENSEE fails to timely pay an amount equal to two percent (2%) of the
Minimum Net Sales for that Contract Year, as provided in Paragraph 3.3
above; or, (ii) upon written notice to the LICENSEE on or before May 31
of the following year, if the LICENSEE's Net Sales for the previous two
(2) Contract Years do not meet the Minimum Net Sales for such Contract
Years. Failure to give notice by May 31 as required hereunder, shall
constitute a waiver of the right to terminate with respect to the
previous two (2) year period only; but shall not affect the right in
any subsequent period. For purposes of this Agreement, Minimum Net
Sales for the Contract Year ending December 31, 1989 shall be
$750,000.00. For each Contract Year after 1989, including any option
years, the Minimum Net Sales shall increase to reflect any increase in
the annual cost of living in accordance with the most recently
published Consumer Price Index, All Items, All Urban Consumers, Los
Angeles-Long-Beach-Anaheim Area, 1980-1984 = 100, published by the
United States Department of Labor. If at any time there shall cease to
exist the Consumer Price Index in the form described above, there shall
be substituted any official Index published by the Bureau of Labor
Statistics or its successor or similar governmental agency as may then
be in existence and shall be most nearly equivalent thereto.
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(b) This Agreement shall be deemed to have terminated and the
Disposal Period, as defined in Paragraph 8.4 hereof, shall begin on the
date HOBIE mails or delivers the notice of termination to LICENSEE, as
provided in Paragraph 8.1.
8.2. FAILURE TO ADEQUATELY PERFORM
(a) Notwithstanding any other provision of this Agreement,
HOBIE may terminate this Agreement if LICENSEE fails to deliver to its
customers by the Completion Date (as defined below) at least eighty
percent (80%) of confirmed, LICENSEE-accepted orders, or if in any
Contract Year, the amount of units of Licensed Merchandise returned to
LICENSEE because of defects or unacceptable quality, provided such
quality complaint is objectively substantiated, exceeds five percent
(5%) of the total units of Licensed Merchandise shipped by LICENSEE
during that Contract Year unless, LICENSEE demonstrates adequate
customer satisfaction for replacement of any defective merchandise or
merchandise of unacceptable quality. For purposes of the foregoing, a
confirmed LICENSEE-accepted order shall be deemed to exclude any order
not delivered by LICENSEE for credit reasons or for any reasons beyond
the control of LICENSEE (e.g., strikes, floods, natural disasters, acts
of God, or delays caused by foreign or single sourcing). The term
"Completion Date" shall mean the date after which the buyer need no
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longer accept the Licensed Merchandise according to such buyer's
purchase order. To exercise its right to terminate, HOBIE must give
LICENSEE written notice by June 1 of the year following the Contract
Year during which LICENSEE failed to meet the above stated delivery or
return standards.
(b) HOBIE shall notify LICENSEE upon the alleged breach by
LICENSEE of any material term of this Agreement not specifically
referred to in Paragraph 8.1, 8.2 or 8.3. Except for the payment of
Royalties as provided in Paragraph 8.2(c), LICENSEE shall then have
thirty (30) days to cure the breach alleged by HOBIE. If, at the end of
such thirty (30) day period, LICENSEE has not cured such breach to the
reasonable satisfaction of HOBIE, HOBIE shall have the right to
immediately terminate this Agreement by giving LICENSEE written notice
of such termination.
(c) If HOBIE has not received the Royalty in accordance with
Paragraphs 3.1 and 3.2 or the reimbursement in accordance with
Paragraph 4.1 within fifteen (15) days after HOBIE has notified
LICENSEE that the Royalty or the reimbursement is past due, HOBIE may
terminate this Agreement immediately by giving LICENSEE written notice
of such termination
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8.3. WITHOUT PRIOR NOTICE
(a) HOBIE shall have the right to terminate this Agreement
without prior notice if LICENSEE files a petition in bankruptcy; if a
petition in bankruptcy is filed against LICENSEE; or if LICENSEE makes
an assignment for the benefit of its creditors or an arrangement
pursuant to any bankruptcy law; if LICENSEE discontinues its business;
if a receiver is appointed for LICENSEE or its business; or if LICENSEE
becomes insolvent.
(b) LICENSEE shall have the right to terminate this Agreement
without prior notice if HOBIE files a petition in bankruptcy; if a
petition in bankruptcy is filed against HOBIE; if HOBIE makes an
assignment for the benefit of its creditors or an arrangement pursuant
to any bankruptcy law; if HOBIE discontinues its business; if a
receiver is appointed for HOBIE or its business; or if HOBIE becomes
insolvent.
8.4 LIQUIDATION OF GOODS
Upon the termination of this Agreement for any reason whatsoever,
LICENSEE shall immediately discontinue its use of the Trademark and the Hobie
Sunglasses name in connection with the design, manufacture or sale of the
Licensed Merchandise, and thereafter will no longer use or have the right to use
the Trademark or the Hobie Sunglasses name in any form or manner whatsoever.
HOBIE shall have
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<PAGE> 26
a right of first refusal to purchase all and only all finished goods and piece
goods of the Licensed Merchandise in LICENSEE's possession and those goods
ordered but not yet received but for which LICENSEE is obligated to pay at the
date this Agreement is terminated, at a price equal to the inventory cost from
vendors plus twenty percent (20%). If HOBIE declines to purchase all such goods
at that time, then LICENSEE shall have one hundred twenty (120) days from the
termination of this Agreement in which to sell its inventory of the Licensed
Merchandise manufactured or ordered and in production prior to the termination
date, through the regular channels of distribution. If any Licensed Merchandise
remains unsold after the expiration of the one hundred twenty (120) days,
LICENSEE shall have the right to dispose of the Licensed Merchandise in any
manner and to any person, but the Trademark and any identifying labels shall not
be attached or affixed in any way to such Licensed Merchandise. The Royalty
provisions in Paragraph 3 shall apply to all sales of Licensed Merchandise made
by LICENSEE after termination of this Agreement, whether sold with or without
the Trademark. "Disposal Period" shall mean a period of ninety (90) days
starting from the mailing of a notice of termination pursuant to Paragraphs 8.1
or 8.2 or upon termination without notice as set forth in Paragraph 8.3.
9. SUBSTANDARD MERCHANDISE
Substandard Merchandise shall be defined as Licensed Merchandise which
is damaged, scratched, or contains manufacturing irregularities. In order to
enable
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HOBIE to fulfill its obligations under the Lanham Act to exercise control over
the integrity and quality of the Licensed Merchandise, Substandard Merchandise
shall be sold without the attachment of the Trademark or any other label or
designation associated with HOBIE, provided however, that LICENSEE shall pay
HOBIE Royalties on all sales of Substandard Merchandise in accordance with
Paragraph 3.1.
10. ASSIGNMENT AND SUBCONTRACTS
10.1. NO ASSIGNMENT OR SUBLICENSE BY LICENSEE; RIGHT OF FIRST
REFUSAL
Under no circumstances may LICENSEE sublicense any rights under this
Agreement without prior written consent of HOBIE; and the rights under this
Agreement may only be assigned or transferred in total to any third party by
LICENSEE, either directly or indirectly, whether by sale of all or a controlling
interest in the stock of LICENSEE or otherwise, upon compliance with the
following: Prior to any such assignment or transfer, LICENSEE shall first offer
to sell and assign the License back to HOBIE upon the same terms and conditions
offered to the third party. After receipt by HOBIE of written notice from
LICENSEE of intent to assign or transfer stating the proposed terms, conditions
and parties to such assignment or transfer ("Assignment Notice"), HOBIE shall
have thirty (30) days to exercise HOBIE's right of first refusal to re-purchase
the License. If HOBIE does not exercise
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<PAGE> 28
its right of first refusal, then within the following ninety (90) days, LICENSEE
may assign or transfer its rights hereunder to the party specified in the
Assignment Notice and upon the terms and conditions specified in the Assignment
Notice. After the end of such ninety (90) days, LICENSEE may only assign or
transfer its rights hereunder by again giving HOBIE a right of first refusal and
complying with the above-described procedure. In addition, LICENSEE shall not
sublicense the manufacture of the Licensed Merchandise or the design, marketing
or sale of the Licensed Merchandise or any combination thereof either in the
Territory or in any Outside Jurisdiction without the prior written consent of
HOBIE, which consent shall not be unreasonably withheld. In this connection, it
shall be presumed to be a reasonable withholding of such consent if HOBIE
determines that such consent might violate any law or might result in the
characterization of the relationship between HOBIE and LICENSEE as anything
other than that of a license to use a trademark. Any assignee of LICENSEE's
rights under this Agreement shall assume all of LICENSEE's obligations hereunder
and, in addition, upon any such assignment, notwithstanding the provisions of
Paragraph 8.1, the Minimum Net Sales for the first Contract Year after the
effective date of the assignment shall be at least seventy-five percent (75%) of
the average of the actual Net Sales for the previous two (2) Contract Years, but
not less than the Minimum Net Sales set forth in Paragraph 8.1.
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<PAGE> 29
10.2. SUBCONTRACT
Subject to LICENSEE's adherence to the sampling and quality control
provisions herein contained, and all other terms of this Agreement, LICENSEE
shall specifically have the right to subcontract the manufacturing of the
Licensed Merchandise with other firms, whether in or out of the Territory, but
shall not have the right to subcontract the design, marketing or sale of the
Licensed Merchandise or any combination thereof without the express prior
written consent of HOBIE. LICENSEE shall specifically require any subcontracting
manufacturer to agree in writing: (1) not to ship or sell Licensed Merchandise
bearing the Trademark to any other person or entity except LICENSEE, and (ii)
not to sell any goods bearing the Trademark to any entity outside the Territory
without the express written consent of HOBIE.
10.3. ASSIGNMENT BY HOBIE
At any time, HOBIE may assign its rights hereunder to an entity of its
choice and LICENSEE shall cooperate with the documentation and cancellation of
and re-registration of all necessary licenses and registered user agreements, so
long as said actions do not materially affect LICENSEE's rights and duties.
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10.4. REFUSAL OF ORDER OR DEAL
In the event LICENSEE should refuse any order or refuse to deal with
any customer, HOBIE reserves the right to fill any order or service any such
customer. In the event that HOBIE elects to fill any such order or provide such
service to any customer, any products required to complete that order or service
must be purchased from LICENSEE if available at LICENSEE's published wholesale
price and terms.
11. INSURANCE
LICENSEE shall at all times maintain a policy or policies of product
liability and comprehensive liability insurance which shall provide for a total
coverage, between primary and umbrella, of at least Five Million Dollars
($5,000,000.00), provided that such amount shall increase each year in
accordance with the Consumer Price Index described in Paragraph 8.1 and provided
further that the annual premiums for such insurance shall not exceed two percent
(2%) of the Net Sales, as defined in Paragraph 3.4. If LICENSEE fails to
maintain such insurance or if such insurance becomes unavailable or cannot be
procured within the above annual premium limitation, and LICENSEE elects not to
procure such coverage, then HOBIE shall have the right to terminate this
Agreement upon thirty (30) days written notice to LICENSEE in the manner
provided in Paragraph 8.2(b) and HOBIE shall thereafter have the right to
manufacture and/or sell the Licensed Merchandise or authorize
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<PAGE> 31
others to do so, without any payment to or sharing of fees or compensation with
LICENSEE. At all times HOBIE and HOBART L. ALTER, individually, and any other
persons or entities they or any of them require, shall be named as additional
insureds on the policy or policies. LICENSEE shall provide HOBIE with a copy of
the policy or policies and all endorsements thereto, as well as all certificates
of insurance before any Licensed Merchandise is shipped. Failure to provide such
certificates shall be a material breach of this Agreement. If this Agreement is
terminated because such insurance cannot be procured within the above annual
premium limitation and LICENSEE elects not to procure such coverage, then the
provisions of Paragraph 8.4 shall apply, provided however, that if within one
(1) year after the date of termination HOBIE grants a license with respect to
the Licensed Merchandise to any third party, then HOBIE shall purchase or
require such third party to purchase from LICENSEE any remaining inventory of
Licensed Merchandise at the price specified in Paragraph 8.4, up to a maximum
inventory value equal to twenty-five percent (25%) of sales by LICENSEE in the
twelve (12) month period preceding the termination.
12. COOPERATION WITH U.S. LICENSEES
At all times LICENSEE shall cooperate with HOBIE's designated
Authorized Representative to oversee the administration of the rights and duties
of the parties set forth herein on behalf of HOBIE. Nothing herein, however,
shall constitute
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<PAGE> 32
a delegation of nondelegable duties and HOBIE retains the right at all times to
control the quality of the Licensed Merchandise and administer any portion of
the contract, or all of it, as it may from time to time notify LICENSEE in
writing.
13. DISCLAIMER OF AGENCY
Nothing in this Agreement shall create a joint venture or establish the
relationship of principal and agent or any other relationship of a similar
nature between the parties.
14. NO COMPETITIVE MERCHANDISE
For the purpose of enabling HOBIE to fulfill its obligations under the
Lanham Act to exercise control over the integrity and quality of the Licensed
Merchandise, during the term of this Agreement, LICENSEE agrees not to
manufacture or sell merchandise under its own marks that is competitive with the
Licensed Merchandise and LICENSEE shall not, under the name Hobie Sunglasses,
sell any merchandise that is not Licensed Merchandise.
15. GENERAL PROVISIONS
15.1. GOVERNMENTAL COMPLIANCE
LICENSEE agrees to comply, at its own expense, with all laws,
ordinances, rules, regulations, and other requirements of all governmental units
or agencies within
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the Territory having jurisdiction pertaining to this Agreement, and proof of
compliance therewith shall be furnished by LICENSEE to HOBIE upon request.
LICENSEE shall pay all applicable governmental fees, taxes, charges and the
like, shall secure all necessary governmental approvals, shall make all required
or desired governmental filings and shall comply with all governmental laws and
regulations in connection with this Agreement and the design, manufacture,
promotion, advertising and sale of the Licensed Merchandise, all without cost to
HOBIE.
15.2. NOTICES
All notices and other communications which are required or which may be
given under the provisions of this Agreement shall be in writing and may be
delivered to a party by personal service or by United States mail, first class
postage paid, at the indicated address, or shall be sent by telegram to the
parties as follows:
If to HOBIE:
HOBIE DESIGNS, INC.
P.O. Box 2205
Capistrano Beach, California 92624
With copy to:
Gary V. Spencer, Esq.
MESERVE, MUMPER & HUGHES
18500 Von Karman Avenue, Suite 600
Irvine, California 92715
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If to LICENSEE:
H.S.I., dba Hobie Sunglasses
P.O. Box 2516
Capistrano Beach, CA. 92624
Attn: William Blackburn
All notices and communications shall be deemed to have been received by
the party to whom it was addressed on the tenth (10th) business day following
the date of sending. Either party may change its address at any time by written
notice to the other party as set forth below.
15.3. ENTIRE UNDERSTANDING
The Agreement sets forth the entire agreement and understanding between
the parties and may not be orally changed, modified or amended in any respect.
To effect any change, modification, alteration or amendment, the same must be in
writing, signed by the parties hereto.
15.4. REMEDIES
In the event that either party should breach or violate any of the
covenants, representations or warranties contained in this Agreement, the other
party shall be entitled to exercise any right or remedy available to it either
at law or in equity. Such rights and remedies shall include, but shall not be
limited to, termination (as provided herein), damages and injunctive relief. The
exercise of any right or remedy available
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<PAGE> 35
to a party shall not preclude the concurrent or subsequent exercise by it of any
other right or remedy and all rights and remedies shall be cumulative.
15.5. CHOICE OF LAW
The validity, construction and enforcement of this Agreement insofar as
it pertains to the validity and enforcement of the Trademark shall be governed
by the law of the Territory. All other matters shall be governed by the laws of
the State of California, U.S.A. The only venue and jurisdiction in which an
action may be brought is in the Superior Court, for the County of Orange, State
of California or the Federal U.S. District Court, Central District, State of
California.
15.6. NO WAIVER
No waiver by either party, whether express or implied, of any
provisions of this Agreement or of any breach or default of any party, shall
constitute a continuing waiver of such provision or any other provisions of this
Agreement, and no such waiver by any party shall prevent such party from acting
upon the same or any subsequent breach or default of the other party of any
provisions of this Agreement.
15.7. LEGAL FEES
In the event either party hereto shall institute any action to enforce
any rights hereunder, the prevailing party in such action shall be entitled, in
addition to any other
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relief awarded by the court, to such attorneys' fees and litigation expenses as
the court may award.
15.8. BINDING ON SUCCESSORS
The provisions of this Agreement inure to the benefit of and shall be
binding on the parties hereto and their respective successors and permitted
assigns.
15.9. NUMBER, GENDER
The masculine, feminine and neuter and the singular and plural as used
in this Agreement shall each include the others as the case may be or the
context may require.
15.10. EFFECTIVENESS OF AGREEMENT
The effectiveness of this Agreement shall be contingent on the approval
of the appropriate governmental departments, including any department regulating
currency regulation; It shall be LICENSEE's obligation to obtain said approvals
and provide certified proof of compliance to LICENSOR.
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<PAGE> 37
IN WITNESS WHEREOF, the parties have executed this Agreement this 30th
day of March, 1989.
HOBIE DESIGNS, INC., Licensor
By: /s/ Jeffrey L. Alter
-------------------------------
Jeffery L. Alter, President
"HOBIE"
H.S.I., a California Corporation
By: /s/ William W. Blackburn
-------------------------------
William Blackburn, President
"LICENSEE"
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<PAGE> 1
EXHIBIT 10.58
TO
GARGOYLES, INC.
FORM S-1
"[*]" = confidential information omitted and filed separately with the
Securities and Exchange Commission pursuant to a request for confidential
treatment.
<PAGE> 2
LICENSE AGREEMENT
This Agreement ("Agreement"), dated as of June ______, 1996, is made
and entered into by and between Scottie Pippen ("Pippen"), an NBA professional,
and Gargoyles, Inc., a Washington corporation ("Gargoyles").
RECITALS
A. Subject to the terms and conditions of this Agreement, Gargoyles
wishes to obtain the exclusive services of Pippen for the marketing and sales of
sunglasses.
B. Pippen wishes to assist Gargoyles in the marketing of its sunglasses
products and of its Pippen sponsored sunglass products.
AGREEMENT
NOW, THEREFORE, in consideration of the premises and covenants
contained herein, and other valuable consideration, the sufficiency and receipt
of which are hereby acknowledged, Gargoyles and Pippen agree as follows:
1. PRODUCT DESCRIPTION
The products that are the subject of this Agreement (each a "Product")
are Gargoyles' Performance Eyewear brand sunglasses.
2. LICENSE
Subject to Pippen's approval rights as described in this Agreement,
Pippen hereby grants to Gargoyles an exclusive worldwide license to adapt,
distribute, perform, reproduce and use Pippen's autograph, likeness, name and
voice on the Products and/or in advertisement, commercials, packaging, signs and
other advertising and other promotional formats, materials or media to
advertise, market, promote and sell the Products throughout the world. Pippen
will not endorse or support, or authorize or permit any third party to use the
autograph, likeness, name or voice of Pippen in connection with any other
sunglasses anywhere in the world during the term of this Agreement. 3. TERM
The term of this Agreement shall commence upon the date of this
Agreement, and subject to earlier termination as provided elsewhere in the
Agreement, will expire on December 31, 1999.
<PAGE> 3
4. ADVERTISING MATERIALS
As between the parties, Gargoyles shall be responsible for producing
the advertising and promotional materials in any form or medium (e.g. publicity
photographs, advertisements, commercials, contests and film or other video
footage) deemed necessary for the Products by Gargoyles. Prior to commercial
production and distribution of any such materials using the autograph, likeness,
name or voice of Pippen, Gargoyles shall submit to Pippen for his review and
written approval the form of each item containing any autograph, likeness, name
or voice of Pippen. Pippen shall not withhold his approval unreasonably and will
notify Gargoyles of its approval or objections in a prompt and timely manner.
Gargoyles will not knowingly display or promote the Product with branded
products that would conflict with other branded products endorsed by Pippen. 5.
CONSIDERATION
As consideration for the grant of this license, Gargoyles shall pay to
Pippen the following annual license fee:
June 1, 1996 to May 31, 1997 [*]
June 1, 1997 to May 31, 1998 [*] guaranteed minimum
June 1, 1998 to May 31, 1999 [*] guaranteed minimum
June 1, 1999 to Dec. 31, 1999 [*] guaranteed minimum
The annual license fee paid during the first year of the term hereof
shall be paid on two installments; [*] shall be paid upon execution of this
Agreement, and [*] on December 15, 1996. Payments for remaining years will be
divided into four equal payments with payments due June 1st, September 1st,
January 1st and March 1st.
Gargoyles will develop and introduce a Pippen signature glass by May
31, 1997. A [*] royalty payment on the net wholesale price of the signature
glass will be paid against the guaranteed minimum consideration outlined above.
For purposes of this section, "net wholesale price" is defined as the Gargoyles
list wholesale price less dealer discounts.
- --------
[*] Confidential Treatment Requested
-2-
<PAGE> 4
6. PERSONAL APPEARANCES
Pippen will be available at least two (2) days each year (for no more
than 4 hours per day) as mutually scheduled by the parties for filming,
photographic or recording sessions as may be reasonably necessary to produce
packaging and radio, television, printed and other advertising and promotional
materials for the Products in any form or medium (e.g. publicity photographs,
advertisements, commercials, contests and film or other video footage) desired
by and acceptable to Gargoyles. In addition, Pippen agrees to make up to two (2)
personal appearances on behalf of Gargoyles (approximately two hours) each year
at promotional events mutually agreed upon by Pippen and Gargoyles to assist
Gargoyles in promoting the Products at such events. In addition, Gargoyles may
request Pippen to made one additional appearance, which Pippen will consider if
such appearance can reasonably be accommodated by Pippen's schedule. With
respect to all appearances by Pippen, Gargoyles agrees to pay all costs and
expenses of Pippen and one guest related to such appearances, including
first-class airfare, first class hotel accommodations, ground transportation and
meals, etc. Finally, each year Pippen will provide to Gargoyles no more than 100
items per year to be autographed by Pippen to use in promotions, including, but
not limited to, basketballs and posters. Gargoyles acknowledges that such
autographed items and other results of such sessions may be used for promotional
purposes only. Gargoyles agrees to use its best efforts to arrange for Pippen to
autograph such items in conjunction with requested personal appearances.
7. PROMOTIONAL EFFORTS OF GARGOYLES AND PIPPEN
Throughout the term of this Agreement, Gargoyles agrees to aggressively
promote and market Pippen and his image in connection with the marketing of its
Products. In addition, Gargoyles agrees to pursue and/or participate with other
Pippen licensees in cross-promotional efforts related to the Products.
Throughout the term of this Agreement, Pippen will exert his best efforts to
promote and publicize the Products; that Pippen will not disparage or criticize
the Products; that Pippen will wear the Products exclusively at all times when
it is convenient and appropriate for him to do so; and that Pippen shall not
publicly wear any sunglass products that have not been manufactured by
Gargoyles. At least once a year during the term hereof and at Gargoyles'
expense, Gargoyles representatives will meet with Pippen to discuss marketing
strategies and promotional plans related to this Agreement. Gargoyles agrees to
use its best efforts to arrange such meeting at a time in conjunction with
personal appearances described in Section 6 hereof.
-3-
<PAGE> 5
8. PERSONAL GLASSES
Gargoyles will make available to Pippen and his immediate family at no
charge a reasonable number of Products for their personal use during the term of
this Agreement.
9. PRESS RELEASE
Upon the signing of this Agreement, Gargoyles will issue a press
release announcing Gargoyles' and Pippen's new relationship. Gargoyles will
provide Pippen the press release for review and approval before it is issued.
10. REPRESENTATIONS AND WARRANTIES; INDEMNITY
Pippen represents to Gargoyles that: (a) he has full capacity, right
and authority to enter into this Agreement and is legally bound hereby; and (b)
there are no other agreements to which either Pippen is a party or bound that
conflict with this Agreement or the ability of Pippen to perform under the terms
of this Agreement. Gargoyles represents that it has the: (a) staff, knowledge,
experience and financial ability to market the Products in a suitable commercial
manner; and (b) the right and authority to enter into this Agreement and to be
legally bound hereby.
Gargoyles shall indemnify Pippen against any claims made by the NBA,
NBPA, USAB or any other entity as to the licensing rights of team and or league
copyrights and trademarks of the NBA, NBPA, USAB, or its members.
11. CONFIRMATION OF AUTHORITY
In the event that any manufacturer, advertiser or other person or
entity questions the authority of Gargoyles to use Pippen's autograph, likeness,
name or voice as authorized under this Agreement, Pippen shall promptly upon
Gargoyles' request, execute such additional documents or make such
communications as may be reasonably necessary to confirm Gargoyles' authority.
12. DEFAULT AND TERMINATION
12.1 EVENTS OF DEFAULT
Either party may, in its discretion, terminate this Agreement and/or
exercise any other right or remedy available to it under applicable law,
including, without limitation, the right to recover damages if the other party
breaches or is in default in a material manner under any provision of this
Agreement, and such material breach or default is not cured within ten (10) days
after written notice thereof shall have been
-4-
<PAGE> 6
given to such defaulting party by the other party, which notice shall specify
the event or events constituting the default or breach hereof.
12.2 DEATH; DISABILITY
Gargoyles may terminate this Agreement by written notice to Pippen upon
the occurrence of any of the following events: (a) the death of Pippen, (b)
Pippen becomes the subject of any adverse publicity relating to alleged felony
criminal activity or moral turpitude, such that Pippen's name and persona are no
longer conducive to the promotion of the Products in the reasonable discretion
of Gargoyles (c) Pippen does not play NBA basketball in the U.S. for a period of
one year or more.
12.3 POST TERMINATION
Upon the expiration or termination of this Agreement, the license set
forth in Section 1 shall automatically terminate and, except as expressly
provided herein, neither party shall have any further obligations both in terms
of payments (other than amounts earned hereunder before such termination) or
performance, whatsoever under this Agreement.
14. RIGHT OF FIRST APPROVAL
At least sixty (60) days before the expiration of the term of this
Agreement, Gargoyles and Pippen shall begin discussions for a renewal of this
Agreement. In the event the parties are unable to reach agreement, Pippen may
negotiate an endorsement agreement with other sunglasses manufacturers but shall
not enter into such agreement during the two (2) month period after the
expiration of the term without first providing Gargoyles the right to match the
terms of such agreement. If Gargoyles elects to match such terms, Gargoyles and
Pippen shall promptly enter into such agreement in lieu of Pippen entering into
the agreement with such other manufacturer.
15. MISCELLANEOUS
15.1 RELATIONSHIP OF THE PARTIES
The relationship of Pippen to Gargoyles shall be that of an independent
contractor, and all acts performed by Pippen pursuant to this Agreement during
the term shall be deemed to be performed in its capacity as an independent
contractor.
15.2 NOTICES
All notices or payments required or permitted hereunder shall be deemed
effective upon receipt and shall be given in writing and either (i) personally
delivered
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<PAGE> 7
(ii) sent by facsimile transmission, or (iii) sent by registered or certified
mail, postage prepaid, to the following fax numbers or addresses or at such
other places as either party shall designate in writing:
If to Pippen: The Marketing Arm
c/o Scottie Pippen
Attn: Ray Clark
2626 Cole Avenue
Suite 400
Dallas, TX 75204
Tel: 214-665-9559
Fax: 214-665-9569
If to Gargoyles: 5866 S. 194th St.
Kent, WA 98032
Attn: Michael E. Burkette/Janice D. Gaub
Fax: 206-872-3317
15.3 NO WAIVER
The failure of either party hereto to insist at any time upon the
strict observance or performance of any of the provisions of this Agreement or
to exercise any right or remedy as provided in this Agreement shall not impair
any such right or remedy or be construed as a waiver or relinquishment thereof
with respect to subsequent defaults. Every right and remedy given by this
Agreement to the parties hereto may be exercised from time to time and as often
as may be deemed expedient by the parties hereto, as the case may be.
15.4 ENTIRE AGREEMENT
This Agreement contains the entire agreement between the parties, and
supersedes all prior understandings, agreements or arrangements, oral or
written, between the parties, with respect to the subject matter hereof. This
Agreement shall not be modified or amended except by written instrument signed
by both parties. This Agreement shall be binding upon and inure to the benefit
of the heirs, personal representative, estate, successors and assigns of the
parties.
15.5 GOVERNING LAW
This Agreement shall be governed by the laws of the State of Washington
without reference to its choice of law rules.
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<PAGE> 8
15.6 ATTORNEYS' FEES
In the event either party brings an action to enforce this Agreement,
the prevailing party in such action shall be entitled to recover from the other
all costs and disbursements incurred in connection therewith, including
reasonable attorneys' fees.
15.7 APPROVALS
All approvals and consents required under this Agreement shall not be
unreasonable withheld and must be requested and responded to in writing. Any
requests for approval or consent which remain unanswered for a ten (10) day
period following a party's receipt of an approval request shall be deemed an
approval or acceptance of the terms set forth in such notice.
15.8 COUNTERPARTS
This Agreement may be executed in counterparts, each of which shall be
an original, but all of which together shall constitute but one and the same
instrument.
IN WITNESS WHEREOF, the parties have caused this Agreement to be
executed and delivered as of the date and year first above written.
Gargoyles:
Gargoyles, Inc.
By /s/ Scottie Pippen By /s/ Douglas B. Hauff
--------------------- --------------------------
Scottie Pippen Douglas Hauff, President
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<PAGE> 1
EXHIBIT 10.59
TO
GARGOYLES, INC.
FORM S-1
"[*]" = confidential information omitted and filed separately with the
Securities and Exchange Commission pursuant to a request for confidential
treatment.
<PAGE> 2
LICENSE AGREEMENT
This Agreement ("Agreement"), dated as of May 31st, 1996, is made and
entered into by and between Ixela, Inc., a California corporation ("Ixela"), and
Gargoyles, Inc., a Washington corporation ("Gargoyles"), and is joined in by
Alexi Lalas ("Lalas").
RECITALS
A. Lalas has granted to Ixela various intellectual property and
publicity rights of Lalas, including exclusive rights in his autograph,
likeness, name and voice, and has granted to Ixela the authority to manage such
rights and to enter into contracts with third parties for the use of such
rights.
B. Subject to the terms and conditions of this Agreement, Gargoyles
wishes to obtain the exclusive services of Lalas for the marketing and sales of
sunglasses and Ixela is willing to grant such rights to Gargoyles.
AGREEMENT
NOW, THEREFORE, in consideration of the premises and covenants
contained herein, and other valuable consideration, the sufficiency and receipt
of which are hereby acknowledged, Gargoyles and Ixela agree as follows:
1. PRODUCT DESCRIPTION
The products that are the subject of this Agreement (each a "Product")
are Gargoyles' Performance Eyewear brand sunglasses.
2. LICENSE
Subject to Ixela's approval rights as described in this Agreement,
Ixela hereby grants to Gargoyles an exclusive worldwide license to adapt,
distribute, perform, reproduce and use Lalas' autograph, likeness, name and
voice on the Products and/or in advertisement, commercials, packaging, signs and
other advertising and other promotional formats, materials or media to
advertise, market, promote and sell the Products throughout the world. Ixela
will not endorse or support, or authorize or permit any third party to use the
autograph, likeness, name or voice of Lalas in connection with any other
sunglasses anywhere in the world during the term of this Agreement.
<PAGE> 3
3. TERM
The term of this Agreement shall commence upon the date of this
Agreement, and subject to earlier termination as provided elsewhere in the
Agreement, will expire on May 31, 1999.
4. ADVERTISING MATERIALS
As between the parties, Gargoyles shall be responsible for producing
the advertising and promotional materials in any form or medium (e.g. publicity
photographs, advertisements, commercials, contests and film or other video
footage) deemed necessary for the Products by Gargoyles. Prior to commercial
production and distribution of any such materials using the autograph, likeness,
name or voice of Lalas, Gargoyles shall submit to Ixela for its review and
written approval the form of each item containing any autograph, likeness, name
or voice of Lalas. Ixela shall not withhold its approval unreasonably and will
notify Gargoyles of its approval or objections in a prompt and timely manner.
Gargoyles will not knowingly display or promote the Product with branded
products that would conflict with other branded products endorsed by Ixela or
Lalas.
5. CONSIDERATION
As consideration for the grant of this license, Gargoyles shall pay to
Ixela the following annual license fee:
June 1, 1996 to May 31, 1997- [*]
June 1, 1997 to May 31, 1998- [*]
June 1, 1998 to May 31, 1999- [*]
Payments for each year will be divided into two equal payments with
payments due June 1st and January 1st.
Should Gargoyles determine that a Lalas signature glass would be
successful, Gargoyles and Ixela will negotiate a royalty agreement similar to
existing Gargoyles athletes, including a fixed minimum royalty.
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[*] Confidential Treatment Requested
-2-
<PAGE> 4
6. PERSONAL APPEARANCES
Ixela shall cause Lalas to be available at least two (2) days each year
as mutually scheduled by the parties for filming, photographic or recording
sessions as may be reasonably necessary to produce packaging and radio,
television, printed and other advertising and promotional materials for the
Products in any form or medium (e.g., publicity photographs, advertisements,
commercials, contests and film or other video footage) desired by and acceptable
to Gargoyles. In addition, Lalas agrees to make up to three (3) personal
appearances on behalf of Gargoyles (approximately four hours) each year at
promotional events mutually agreed upon by Ixela and Gargoyles to assist
Gargoyles in promoting the Products at such events. In addition, Lalas agrees to
make no more than two (2) one-week European tours at events and locations
mutually agreed to by Ixela and Gargoyles for the purpose of promoting Gargoyles
Products. With respect to all appearances by Lalas, Gargoyles agrees to pay all
costs and expenses of Lalas related to such appearances, including first-class
airfare, room and board, etc. Finally, each year Ixela will provide to Gargoyles
a reasonable number of items autographed by Lalas to use in promotions.
Gargoyles acknowledges that such autographed items and other results of such
sessions may be used for promotional purposes only.
7. PROMOTIONAL EFFORTS OF GARGOYLES AND IXELA
Throughout the term of this Agreement, Gargoyles agrees to aggressively
promote and market Lalas and his image in connection with the marketing of its
Products. In addition, Gargoyles agrees to pursue and/or participate with other
Ixela licensees in cross-promotional efforts related to the Products and other
Ixela licensed products. Throughout the term of this Agreement, Ixela agrees
that it will cause Lalas to exert his best efforts to promote and publicize the
Products; that neither Ixela nor Lalas will disparage or criticize the Products;
that Lalas will wear the Products exclusively at all times when it is convenient
and appropriate for him to do so; and that Lalas shall not publicly wear any
sunglass products that have not been manufactured by Gargoyles. At least once a
year during the term hereof and at Gargoyles' expense, Gargoyles representatives
will meet with Lalas and his representative, Richard Motzkin, to discuss
marketing strategies and promotional plans related to this Agreement.
8. PERSONAL GLASSES
Gargoyles will make available to Lalas and his immediate family at no
charge a reasonable number of Products for their personal use during the term of
this Agreement. In addition, Gargoyles will make a reasonable number of Products
available to Ixela for promotional and charitable contribution purposes.
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<PAGE> 5
9. DESIGN INPUT
Lalas agrees to provide design input to Gargoyles for new sunglasses at
his sole discretion and availability. In addition, Lalas agrees to provide
Gargoyles with input on the soccer industry, trends, etc. at his sole discretion
and availability.
10. PRESS RELEASE
Upon the signing of this Agreement, Gargoyles will issue a press
release announcing Gargoyles' and Lalas's new relationship. Gargoyles will
provide Ixela the press release for review and approval before it is issued.
11. REPRESENTATIONS AND WARRANTIES
Ixela represents to Gargoyles that: (a) it has full capacity, right and
authority to enter into this Agreement and to be legally bound hereby; and (b)
there are no other agreements to which either it or Lalas is a party or bound
that conflict with this Agreement or the ability of Ixela or Lalas to perform
under the terms of this Agreement. Gargoyles represents that it has the: (a)
staff, knowledge, experience and financial ability to market the Products in a
suitable commercial manner; and (b) the right and authority to enter into this
Agreement and to be legally bound hereby.
12. CONFIRMATION OF AUTHORITY
In the event that any manufacturer, advertiser or other person or
entity questions the authority of Gargoyles to use Lalas' autograph, likeness,
name or voice as authorized under this Agreement, Ixela shall promptly upon
Gargoyles' request, execute such additional documents or make such
communications as may be reasonably necessary to confirm Gargoyles' authority.
13. DEFAULT AND TERMINATION
13.1 EVENTS OF DEFAULT
Either party may, in its discretion, terminate this Agreement and/or
exercise any other right or remedy available to it under applicable law,
including, without limitation, the right to recover damages if the other party
breaches or is in default in a material manner under any provision of this
Agreement, and such material breach or default is not cured within ten (10) days
after written notice thereof shall have been given to such defaulting party by
the other party, which notice shall specify the event or events constituting the
default or breach hereof.
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<PAGE> 6
13.2 DEATH; DISABILITY
Gargoyles may terminate this Agreement by written notice to Ixela upon
the occurrence of any of the following events: (a) the death of Lalas, (b)
either Ixela or Lalas becomes the subject of any major adverse publicity,
including, but not limited to, publicity relating to alleged felony criminal
activity or moral turpitude, such that Lalas' name and persona are no longer
conducive to the promotion of the Products in the reasonable discretion of
Gargoyles.
13.3 POST TERMINATION
Upon the expiration or termination of this Agreement, the license set
forth in Section 1 shall automatically terminate and, except as expressly
provided herein, neither party shall have any further obligation, both in terms
of payments (other than amounts earned hereunder before such termination) or
performance, whatsoever under this Agreement.
14. RIGHT OF FIRST APPROVAL
At least sixty (60) days before the expiration of the term of this
Agreement, Gargoyles and Ixela shall begin discussions for a renewal of this
Agreement. In the event the parties are unable to reach agreement, Ixela may
negotiate an endorsement agreement with other sunglasses manufacturers but shall
not enter into such agreement during the two (2) month period after the
expiration of the term without first providing Gargoyles the right to match the
terms of such agreement. If Gargoyles elects to match such terms, Gargoyles and
Ixela shall promptly enter into such agreement in lieu of Ixela entering into
the agreement with such other manufacturer.
15. MISCELLANEOUS
15.1 RELATIONSHIP OF THE PARTIES
The relationship of Ixela to Gargoyles shall be that of an independent
contractor, and all acts performed by Ixela pursuant to this Agreement during
the term shall be deemed to be performed in its capacity as an independent
contractor.
15.2 NOTICES
All notices required or permitted hereunder shall be deemed effective
upon receipt and shall be given in writing and either (i) personally delivered
(ii) sent by facsimile transmission, or (iii) sent by registered or certified
mail, postage prepaid, to the following fax numbers or addresses or at such
other places as either party shall designate in writing:
-5-
<PAGE> 7
If to Ixela: Richard Motzkin
501 Santa Monica Blvd, Ste 505
Santa Monica, CA 90401
fax: 310-656-3401
If to Gargoyles: 5866 S. 194th St.
Kent, WA 98032
Attn: Douglas B. Hauff
fax: 206-872-3317
15.3 NO WAIVER
The failure of either party hereto to insist at any time upon the
strict observance or performance of any of the provisions of this Agreement or
to exercise any right or remedy as provided in this Agreement shall not impair
any such right or remedy or be construed as a waiver or relinquishment thereof
with respect to subsequent defaults. Every right and remedy given by this
Agreement to the parties hereto may be exercised from time to time and as often
as may be deemed expedient by the parties hereto, as the case may be.
15.4 ENTIRE AGREEMENT
This Agreement contains the entire agreement between the parties, and
supersedes all prior understandings, agreements or arrangements, oral or
written, between the parties, with respect to the subject matter hereof. This
Agreement shall not be modified or amended except by written instrument signed
by both parties. This Agreement shall be binding upon and inure to the benefit
of the heirs, personal representative, estate, successors and assigns of the
parties.
15.5 GOVERNING LAW
This Agreement shall be governed by the laws of the State of Washington
without reference to its choice of law rules.
15.6 ATTORNEYS' FEES
In the event either party brings an action to enforce this Agreement,
the prevailing party in such action shall be entitled to recover from the other
all costs and disbursements incurred in connection therewith, including
reasonable attorneys' fees.
-6-
<PAGE> 8
15.7 APPROVALS
All approvals and consents required under this Agreement shall not be
unreasonable withheld and must be requested and responded to in writing. Any
requests for approval or consent which remain unanswered for a ten (10) day
period following a party's receipt of an approval request shall be deemed an
approval or acceptance of the terms set forth in such notice.
15.8 COUNTERPARTS
This Agreement may be executed in counterparts, each of which shall be
an original, but all of which together shall constitute but one and the same
instrument.
IN WITNESS WHEREOF, the parties have caused this Agreement to be
executed and delivered as of the date and year first above written.
IXELA: GARGOYLES:
------ ----------
Ixela, Inc. Gargoyles, Inc.
ID # 95-4543058
By /s/ Richard Motzkin POA for Alexi Lalas By /s/ Douglas B. Hauff
----------------------------------- -----------------------
Alexi Lalas, President Douglas B. Hauff, President
By /s/ Richard Motzkin POA for Alexi Lalas
-----------------------------------
Alexi Lalas
-7-
<PAGE> 1
EXHIBIT 10.60
FOURTH AMENDMENT TO CREDIT AGREEMENT
This fourth amendment to credit agreement ("Amendment") is made and
entered into as of March 15, 1996 by and between U. S. BANK OF WASHINGTON,
NATIONAL ASSOCIATION, a national banking association ("U. S. Bank"), and
GARGOYLES, INC., a Washington corporation ("Borrower").
R E C I T A L S :
A. On or about March 22, 1995, U. S. Bank and Borrower entered into
that certain credit agreement (together with all amendments, supplements,
exhibits, and modifications thereto, the "Credit Agreement") whereby U. S. Bank
agreed to extend certain credit facilities to Borrower on the terms and
conditions set forth therein. On or about August 17, 1995 U. S. Bank and
Borrower entered into that certain first amendment to credit agreement. On or
about December 15, 1995, U. S. Bank and Borrower entered into that certain
second amendment to credit agreement. On or about February 13, 1996, U. S. Bank
and Borrower entered into that certain third amendment to credit agreement.
B. Borrower has requested U. S. Bank to change the repayment dates of
the Term Loan and to correct an error in the Acquisition Note. The purpose of
this Amendment is to set forth the terms and conditions upon which U. S. Bank
will grant Borrower's request.
DEFINITIONS
As used herein, capitalized terms shall have the meanings given to them
in the Credit Agreement, except as otherwise defined herein, or as the context
otherwise requires.
AMENDMENT
The Credit Agreement, as well as all of the other Loan Documents are
hereby amended as set forth herein. Except as specifically provided for herein,
all of the terms and conditions of the Credit Agreement and each of the other
Loan Documents shall remain in full force and effect throughout the terms of the
Loans, as well as any extensions or renewals thereof.
TERM LOAN
Sections 3.5(b) of the Credit Agreement are hereby deleted in their
entirety and replaced with the following:
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<PAGE> 2
(b) Borrower shall make 26 equal, consecutive,
quarterly principal payments on the Term Loan to U. S. Bank,
each in the amount of $230,769.23. Such payments shall be
made on the last day of each fiscal quarter of Borrower.
ACQUISITION LOAN
Concurrently with the execution of this Amendment, Borrower shall
execute and deliver to U. S. Bank a renewal acquisition note in the form
attached hereto as Exhibit A ("Renewal Acquisition Note"), which shall be a
renewal of the existing Acquisition Note dated February 13, 1996, which shall be
marked "renewed" and retained by U. S. Bank until the Acquisition Loan is repaid
in full.
CONDITIONS PRECEDENT
This Amendment shall not be effective unless and until the following
conditions have been fulfilled to the satisfaction of U. S. Bank.
a) U S. Bank shall have received, duly executed and delivered
by Borrower, this Amendment and the Renewal Acquisition
Note.
b) There shall not exist any Default or Event of Default
under the Credit Agreement or any other Loan Documents.
GENERAL PROVISIONS
REPRESENTATIONS AND WARRANTIES
Borrower hereby represents and warrants to U. S. Bank that as of the
date of this Amendment, there exists no Default or Event of Default. All
representations and warranties of Borrower contained in the Credit Agreement and
the Loan Documents, or otherwise made in writing in connection therewith, are
true and correct as of the date of this Amendment. Borrower acknowledges and
agrees that all of Borrower's indebtedness to U. S. Bank is payable without
offset, defense, or counterclaim.
SECURITY
All Loan Documents evidencing U. S. Bank's security interest in the
Collateral shall remain in full force and effect, and shall secure the payment
and performance of the Loans, as amended herein, and any other Indebtedness
owing from Borrower to U. S. Bank.
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<PAGE> 3
GUARANTY
The parties hereto agree that the Guaranty shall remain in full force
and effect.
PLEDGE AGREEMENT
The parties hereto agree that the Pledge Agreement shall remain in full
force and effect.
COUNTERPARTS
This Amendment may be executed in one or more counterparts, each of
which shall constitute an original agreement, but all of which together shall
constitute one and the same agreement.
STATUTORY NOTICE
ORAL AGREEMENTS OR ORAL COMMITMENTS TO LOAN MONEY, EXTEND CREDIT, OR TO
FORBEAR FROM ENFORCING REPAYMENT OF A DEBT ARE NOT ENFORCEABLE UNDER WASHINGTON
LAW.
IN WITNESS WHEREOF, U. S. Bank and Borrower have caused this Amendment
to be duly executed by their respective duly authorized signatories as of the
date first above written.
GARGOYLES, INC.,
a Washington corporation
By /s/ Steven R. Kingma
-----------------------------
Title Vice President - CFO
-----------------------------
U. S. BANK OF WASHINGTON,
NATIONAL ASSOCIATION
By /s/ Gerald L. Sorensen
-----------------------------
Title Senior Vice President
-----------------------------
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<PAGE> 4
By execution of this Amendment, Trillium Corporation, Trillium
Investors II, L.L.C., H.S.C., Inc., and H.S.I., a California corporation, each
hereby consents to the provisions set forth in this Amendment and reaffirms its
respective obligations under all guaranties, pledge agreements, third party
pledge agreements, and security agreements signed by it in connection with the
Credit Agreement.
TRILLIUM CORPORATION,
a Washington corporation
By /s/ Erik J. Anderson
--------------------------------
Title Chief Executive Officer
--------------------------------
TRILLIUM INVESTORS II, L.L.C.
By /s/ Erik J. Anderson
--------------------------------
Title: Member
--------------------------------
H.S.C., INC.
By /s/ Steven R. Kingma
--------------------------------
Title Vice President - CFO
--------------------------------
H.S.I., a California corporation
By /s/ William W. Blackburn
--------------------------------
Title President
--------------------------------
-4-
<PAGE> 1
EXHIBIT 10.61
PROMISSORY NOTE
$100,000.00 Kent, Washington
June 5, 1996
FOR VALUE RECEIVED, the undersigned GARGOYLES, INC., a Washington
corporation ("Maker"), does hereby promise to pay to the order of TRILLIUM
CORPORATION, a Washington corporation ("Payee"), in lawful money of the United
States of America, the principal sum of One Hundred Thousand and No/100 Dollars
($100,000.00), together with interest thereon until paid in full as stated
herein.
1. Interest Rate. This Note shall bear interest at the rate of Twelve
Percent (12%) per annum from the date hereof on all outstanding balances.
2. Maturity. Unless sooner repaid by Maker, the entire principal
balance of this Note plus all accrued but unpaid interest shall be due and
payable in full on September 30, 1996.
3. Application of Payments; Prepayment. Each payment hereunder shall be
applied first to interest then to the reduction of principal. This Note may be
prepaid in whole or in part at any time or times with no prepayment penalty or
additional cost of any kind.
4. Default; Default Rate of Interest. If a Default occurs, the holder
of this Note shall, at its sole option and election, be entitled to declare the
entire unpaid principal balance and all accrued interest on this Note
immediately due and payable and may proceed to enforce the payment of this Note
or enforce any other legal or equitable rights of the holder of this Note. Upon
a default, this Note shall bear interest at a default rate of eighteen percent
(18%) per annum until such default is cured.
5. Attorneys' Fees and Costs. If this Note is placed in the hands of an
attorney as a result and suit is filed hereon, or proceedings are had in
bankruptcy, probate, receivership, reorganization, or any other judicial
proceedings for the establishment of collection of any amount called for herein,
or any amount payable or to be payable hereunder is collected through any such
proceeding, Maker shall be liable for all costs of collection, including, but
not limited to, reasonable attorneys' fees and all costs incurred by the holder
hereof on account of such collection.
6. Governing Law. This Note is made with reference to and is to be
construed in accordance with the laws of the state of Washington.
<PAGE> 2
ORAL AGREEMENTS OR ORAL COMMITMENTS TO LOAN MONEY, EXTEND CREDIT, OR TO
FORBEAR FROM ENFORCING REPAYMENT OF A DEBT ARE NOT ENFORCEABLE UNDER WASHINGTON
LAW.
IN WITNESS WHEREOF, the undersigned have caused this Note to be
executed as of the date first above written.
GARGOYLES, INC.
By /s/ Steven R. Kingma
-------------------------------
Its CFO
-------------------------------
-2-
<PAGE> 1
EXHIBIT 10.62
FIFTH AMENDMENT TO CREDIT AGREEMENT
This fifth amendment to credit agreement ("Amendment") is made and
entered into as of June 25, 1996, by and between U. S. BANK OF WASHINGTON,
NATIONAL ASSOCIATION, a national banking association ("U. S. Bank"), and
GARGOYLES, INC., a Washington corporation ("Borrower").
R E C I T A L S :
A. On or about March 22, 1995, U. S. Bank and Borrower entered
into that certain credit agreement (together with all amendments, supplements,
exhibits, and modifications thereto, the "Credit Agreement"), whereby U. S.
Bank agreed to extend certain credit facilities to Borrower on the terms and
conditions set forth therein. On or about August 17, 1995, U. S. Bank and
Borrower entered into that certain first amendment to credit agreement. On or
about December 15, 1995, U. S. Bank and Borrower entered into that certain
second amendment to credit agreement. On or about February 13, 1996, U. S.
Bank and Borrower entered into that certain third amendment to Credit
Agreement. On or about March 15, 1996, U. S. Bank and Borrower entered into
that certain fourth amendment to credit agreement.
B. Borrower has requested U.S. Bank to (1) increase the
commitment under the Revolving Loan, (2) increase the commitment under the
Acquisition Loan, (3) increase the commitment under the Equipment Line, (4)
waive Borrower's default under the working capital covenant set forth in the
Credit Agreement, (5) change the payment dates for the Term Loan and the
Equipment Loans, and (6) make certain other modifications to the financial
covenants set forth in the Credit Agreement. The purpose of this Amendment is
to set forth the terms and conditions upon which U. S. Bank will grant
Borrower's requests.
NOW, THEREFORE, in consideration of the mutual covenants and
agreements contained herein, the parties hereto agree as follows:
ARTICLE I. DEFINITIONS
1.1 Definitions. As used herein, capitalized terms shall
have the meanings given to them in the Credit Agreement, except as otherwise
defined herein or as the context otherwise requires. Article I of the Credit
Agreement is modified to add or amend the definition of the terms set forth
below:
"Third Amendment" has the meaning set forth in Section 5.1
hereof.
<PAGE> 2
"Working Capital" means Borrower's current assets, less
Borrower's current liabilities. For purposes of this definition, Borrower's
current liabilities include all amounts outstanding under the Revolving Loan,
but exclude all amounts outstanding under the Acquisition Loan and current
portion of long-term debt.
ARTICLE II. AMENDMENT
The Credit Agreement, as well as all of the other Loan Documents, are hereby
amended as set forth herein. Except as specifically provided for herein, all
of the terms and conditions of the Credit Agreement and each of the other Loan
Documents shall remain in full force and effect throughout the terms of the
Loans, as well as any extensions or renewals thereof.
ARTICLE III. REVOLVING LOAN
3.1 Increase in Revolving Loan Commitment. Sections 2.1
and 2.10(a) of the Credit Agreement are hereby deleted in their entirety and
replaced with the following:
2.1 Loan Commitment. Subject to and upon the terms and
conditions set forth herein and in reliance upon the representations,
warranties, and covenants of Borrower contained herein or made
pursuant hereto, U. S. Bank will make Fundings to Borrower from time
to time during the period ending March 22, 1997 ("Commitment Period"),
but such Fundings (together with any outstanding Letters of Credit)
shall not exceed, in the aggregate principal amount at any one time
outstanding, $11,000,000 (the "Revolving Loan").
2.10 Letters of Credit.
(a) Subject to and upon the terms and conditions set
forth herein and in reliance upon the representations, warranties, and
covenants of Borrower contained herein or made pursuant hereto, U. S.
Bank will issue standby and commercial letters of credit (the "Letters
of Credit") for the benefit of Borrower, HSC, and HSI in forms
acceptable to U. S. Bank from time to time during the Commitment
Period. The expiration date of any Letter of Credit shall not extend
beyond the Commitment Period. The maximum aggregate amount of
outstanding Letters of Credit shall not exceed, at any one time,
$1,500,000. The maximum aggregate amount of outstanding Letters of
Credit plus the aggregate outstanding amount of principal and interest
on the Revolving Loan shall not exceed, at any one time, $11,000,000.
-2-
<PAGE> 3
3.2 Renewal Revolving Note. Concurrently with the
execution of this Amendment, Borrower shall execute and deliver to U. S. Bank a
renewal promissory note in the form attached hereto as Exhibit A ("Renewal
Revolving Note"), which shall be in substitution for, but not in payment of,
the Revolving Note and all previous renewals thereof, which shall be marked
"renewed" and retained by U. S. Bank until the Revolving Loan is repaid in
full.
3.3 Borrowing Base. Section 2.9(a) of the Credit
Agreement is hereby deleted in its entirety and replaced with the following:
2.9 Borrowing Base.
(a) The outstanding balance of principal and interest on
the Revolving Loan (including outstanding Letters of Credit) shall at
no time exceed an amount equal to:
(i) 80 percent of Eligible Accounts Receivable, plus
(ii) 50 percent of Eligible Inventory; provided that the
maximum advance based upon Eligible Inventory shall
not exceed $3,500,000
("Borrowing Base").
3.4 Revolving Loan Fee. Concurrently with the execution
of this Amendment, Borrower shall pay U. S. Bank a nonrefundable fee for the
increase of the Revolving Loan commitment in the amount of $2,500.
ARTICLE IV. TERM LOAN
Section 3.5(b) of the Credit Agreement is hereby deleted in
its entirety and replaced with the following:
(b) Borrower shall make consecutive, quarterly principal
payments on the Term Loan to U. S. Bank, each in the amount of
$230,769.23. Commencing March 31, 1996, such payments shall be made
on the last day of each calendar quarter. The payment due February
28, 1996, shall be payable on March 31, 1996.
ARTICLE V. EQUIPMENT LINE
5.1 Increase in Equipment Line. Section 4.1 of the
Credit Agreement is hereby deleted in its entirety and replaced with the
following:
-3-
<PAGE> 4
4.1 Equipment Line Commitment. Subject to and upon the
terms and conditions set forth herein and in reliance upon the
representations, warranties, and covenants of Borrower contained
herein or made pursuant hereto, U. S. Bank will make available to
Borrower a $1,500,000 revolving equipment line of credit during the
period ending March 22, 1997 ("Equipment Line"). Each individual
Funding under the Equipment Line shall constitute a separate loan
("Equipment Loan"). The aggregate principal amount of all Equipment
Loans shall not exceed at any one time outstanding $1,500,000.
Borrower may borrower, repay, and reborrow hereunder either the full
amount of the Equipment Line or any lesser sum.
5.2 Repayment. Section 4.5(b) of the Credit Agreement is
hereby deleted in its entirety and replaced with the following:
(b) Borrower shall make consecutive, quarterly principal
payments on each of the Equipment Loans to U. S. Bank, each in an
amount equal to 1/20th of the initial principal amount of each such
Equipment Loan. Commencing March 31, 1996, such payments shall be
made on the last day of each calendar quarter. The payments due
February 28, 1996, shall be payable on March 31, 1996.
ARTICLE VI. ACQUISITION LOAN
6.1 Increase in Acquisition Loan Commitment. Section 4.1
of the third amendment to Credit Agreement dated February 13, 1996, entered
into between U. S. Bank and Borrower ("Third Amendment"), is hereby deleted in
its entirety and replaced with the following:
4.1 Commitment. Subject to and upon the terms and
conditions set forth herein, and in reliance upon the representations,
warranties, and covenants of Borrower contained herein or in the
Credit Agreement or made pursuant hereto or pursuant to the Credit
Agreement, U. S. Bank will lend to Borrower $5,000,000 on a term loan
basis ("Acquisition Loan"). The Acquisition Loan is not a revolving
loan.
6.2 Use of Proceeds. Section 4.2 of the Third Amendment
is amended to provide that Borrower may use the additional $1,000,000 of the
proceeds of the Acquisition Loan for working capital.
6.3 Renewal Acquisition Note. Concurrently with the
execution of this Amendment, Borrower shall execute and deliver to U. S. Bank a
renewal promissory note in the form attached hereto as Exhibit B ("Renewal
Acquisition
-4-
<PAGE> 5
Note"), which shall be in substitution for, but not in payment of the
Acquisition Note and all previous renewals thereof, which shall be marked
"renewed" and retained by U. S. Bank until the Acquisition Loan is repaid in
full.
6.4 Repayment. Section 4.5(b) of the Third Amendment is
hereby deleted in its entirety and replaced with the following, and
accordingly, the $700,000 Acquisition Loan principal reduction payment that was
due May 31, 1996, is deferred in accordance with the following:
(b) On the earlier of the date that is seven Business
Days after the closing of Borrower's initial public offering of stock
or September 30, 1996, Borrower shall make an Acquisition Loan
principal reduction payment to U. S. Bank in the amount of $700,000;
provided, however, that such principal payment must be from (i)
capital contributions to Borrower, or (ii) debt subordinate to
Borrower's Indebtedness to U. S. Bank pursuant to a subordination
agreement approved in writing my U. S. Bank.
6.5 Acquisition Loan Fees. Section 4.7 of the Third
Amendment is hereby deleted in its entirety and replaced with the following:
4.7 Acquisition Loan Fees.
(a) In connection with the original $4,000,000
Acquisition Loan, Borrower paid to U. S. Bank a fee in the amount of
$40,000, and shall pay U. S. Bank additional loan fees of (i) $40,000
on June 30, 1996, (ii) on September 30, 1996, an amount equal to 1
percent of the outstanding principal balance of the Acquisition Loan
(up to a maximum of $4,000,000) on such date, if any, and (iii)
$200,000 on December 31, 1996, irrespective of whether there is any
amount outstanding on the Acquisition Loan on such date.
(b) In connection with the $1,000,000 increase in the
Acquisition Loan provided for in this Amendment, Borrower shall pay to
U. S. Bank loan fees of (i) $10,000 concurrently with the execution of
this Amendment, (ii) $10,000 on September 30, 1996, irrespective of
whether there is any amount outstanding on the Acquisition Loan on
such date, and (iii) on December 31, 1996, an amount equal to (a)
$11,875 in the event that the outstanding principal balance of the
Acquisition Loan is reduced to $4,000,000 or less subsequent to the
date that U. S. Bank advances the $1,000,000 increase in the
Acquisition Loan, but prior to December 31, 1996, or (b) $23,750 in
the event that the outstanding principal balance of the Acquisition
Loan is greater than $4,000,000 as of the close of business on
December 30, 1996.
-5-
<PAGE> 6
(c) In connection with the $700,000 principal reduction
payment deferral provided for in Section 6.4 of this Amendment,
Borrower shall pay U. S. Bank an extension fee in the amount of $7,000
concurrently with the execution of this Amendment.
ARTICLE VII. COVENANTS
7.1 Waiver of Default. Borrower's prior violation of the
Working Capital covenant set forth in Section 8.17 of the Credit Agreement is
hereby waived through June 29, 1996. U. S. Bank's waiver is expressly limited
to Borrower's violation specified in this Section 6.1 and is not applicable to
any other covenants contained in the Credit Agreement or any other Loan
Documents.
7.2 Modification of Working Capital. Section 8.17 of the
Credit Agreement is hereby deleted in its entirety and replaced with the
following:
8.17 Working Capital. Effective as of June 30, 1996, as
of the last day of each fiscal quarter of Borrower, permit Working Capital to
be less than $2,000,000.
ARTICLE VIII. CONDITIONS PRECEDENT
U. S. Bank shall not be required to advance Funding under the Revolving Loan,
the Acquisition Loan, or any Equipment Loan unless and until the following
conditions have been fulfilled to the satisfaction of U. S. Bank:
(a) U. S. Bank shall have received this Amendment, the
Renewal Revolving Note, and the Renewal Acquisition Note, duly
executed and delivered by the parties thereto.
(b) Borrower shall have paid U. S. Bank the loan fees
required by the terms of this Amendment.
(c) No Default or Event of Default shall exist under the
Credit Agreement, and after having given effect to the requested
Funding, no Default or Event of Default shall exist.
ARTICLE IX. GENERAL PROVISIONS
9.1 Representations and Warranties. Borrower hereby
represents and warrants to U. S. Bank that as of the date of this Amendment,
there exists no Default or Event of Default. All representations and
warranties of Borrower contained in the Credit Agreement and the other Loan
Documents, or otherwise made in writing in
-6-
<PAGE> 7
connection therewith, are true and correct as of the date of this Amendment.
Borrower acknowledges and agrees that all of Borrower's Indebtedness to U. S.
Bank is payable without offset, defense, or counterclaim.
9.2 Security. The Security Agreement, the Pledge
Agreement, the financing statements, and all other Loan Documents, whether
creating, evidencing, or perfecting U. S. Bank's security interest in the
Collateral, remain in full force and effect, secure the payment and performance
of the Loans and are enforceable without defense, offset, or counterclaim.
9.3 Counterparts. This Amendment may be executed in one
or more counterparts, each of which shall constitute an original agreement, but
all of which together shall constitute one and the same agreement.
9.4 Statutory Notice. ORAL AGREEMENTS OR ORAL
COMMITMENTS TO LOAN MONEY, EXTEND CREDIT, OR TO FORBEAR FROM ENFORCING
REPAYMENT OF A DEBT ARE NOT ENFORCEABLE UNDER WASHINGTON LAW.
IN WITNESS WHEREOF, U. S. Bank and Borrower have caused this Amendment to be
duly executed by their respective duly authorized signatories as of the date
first above written.
GARGOYLES, INC., a Washington
corporation
By /s/ Steven R. Kingma
Title VP-CFO
U. S. BANK OF WASHINGTON,
NATIONAL ASSOCIATION
By /s/ Gerald L. Sorensen
Title SVP
-7-
<PAGE> 8
By execution of this Amendment, Trillium Corporation, Trillium Investors II,
L.L.C., H.S.C., Inc., and H.S.I., a California corporation, each hereby
consents to the provisions set forth in this Amendment and reaffirms its
respective obligations under all guaranties, pledge agreements, third-party
pledge agreements, and security agreements signed by it in connection with the
Credit Agreement.
TRILLIUM CORPORATION,
a Washington corporation
By /s/ Timothy C. Potts
--------------------------
Title Sr. VP Finance
-----------------------
TRILLIUM INVESTORS II, L.L.C.
By /s/ Timothy C. Potts
--------------------------
Title: Member
H.S.C., INC.
By /s/ Steven R. Kingma
--------------------------
Title Sec./Treas.
------------------------
H.S.I., a California corporation
By /s/ Steven R. Kingma
--------------------------
Title Sec./Treas.
------------------------
-8-
<PAGE> 1
EXHIBIT 10.63
RENEWAL REVOLVING NOTE
$11,000,000 June 25, 1996
For value received, the undersigned, GARGOYLES, INC., a Washington
corporation ("Borrower"), promises to pay to the order of U. S. BANK OF
WASHINGTON, NATIONAL ASSOCIATION ("U. S. Bank"), at its principal place of
business, 1420 Fifth Avenue, Seattle, Washington 98101, or such other place or
places as the holder hereof may designate in writing, the principal sum of
Eleven Million Dollars ($11,000,000) or so much thereof as advanced by U. S.
Bank in lawful, immediately available money of the United States of America, in
accordance with the terms and conditions of that certain credit agreement dated
as of March 22, 1995, as amended by that certain first amendment to credit
agreement dated as of August 17, 1995, that certain second amendment to credit
agreement dated as of December 15, 1995, that certain third amendment to credit
agreement dated February 13, 1996, that certain fourth amendment to credit
agreement dated March 15, 1996, and by that certain fifth amendment to credit
agreement of even date herewith ("Fifth Amendment") by and between Borrower and
U. S. Bank (together with all supplements, exhibits, amendments and
modifications thereto, the "Credit Agreement"). Borrower also promises to pay
interest on the unpaid principal balance hereof, commencing as of the first date
of an advance hereunder, in like money in accordance with the terms and
conditions, and at the rate or rates provided for in the Credit Agreement. All
principal, interest, and other charges are due and payable in full on March 22,
1997.
Borrower and all endorsers, sureties, and guarantors hereof jointly and
severally waive presentment for payment, demand, notice of nonpayment, notice of
protest, and protest of this Note, and all other notices in connection with the
delivery, acceptance, performance, default, dishonor, or enforcement of the
payment of this Note except such notices as are specifically required by this
Note or by the Credit Agreement, and they agree that the liability of each of
them shall be unconditional without regard to the liability of any other party
and shall not be in any manner affected by any indulgence, extension of time,
renewal, waiver, or modification granted or consented to by U. S. Bank. Borrower
and all endorsers, sureties, and guarantors hereof (1) consent to any and all
extensions of time, renewals, waivers, or modifications that may be granted by
U. S. Bank with respect to the payment or other provisions of this Note and the
Credit Agreement; (2) consent to the release of any property now or hereafter
securing this Note with or without substitution; and (3) agree that additional
makers, endorsers, guarantors, or sureties may become parties hereto without
notice to them and without affecting their liability hereunder.
<PAGE> 2
This Note is the Renewal Revolving Note referred to in the Fifth
Amendment and as such is entitled to all of the benefits and obligations
specified in the Credit Agreement, including but not limited to any Collateral
and any conditions to making advances hereunder. Terms defined in the Credit
Agreement are used herein with the same meanings. Reference is made to the
Credit Agreement for provisions for the repayment of this Note and the
acceleration of the maturity hereof.
GARGOYLES, INC., a Washington
corporation
By /s/ Stephen R. Kingma
-------------------------------
Title VP - CFO
----------------------------
-2-
<PAGE> 1
EXHIBIT 10.64
RENEWAL ACQUISITION NOTE
$5,000,000 June 25, 1996
For value received, the undersigned, GARGOYLES, INC., a Washington
corporation ("Borrower"), promises to pay to the order of U. S. BANK OF
WASHINGTON, NATIONAL ASSOCIATION ("U. S. Bank"), at its principal place of
business, 1420 Fifth Avenue, Seattle, Washington 98101, or such other place or
places as the holder hereof may designate in writing, the principal sum of Five
Million Dollars ($5,000,000) or so much thereof as advanced by U. S. Bank in
lawful, immediately available money of the United States of America, in
accordance with the terms and conditions of that certain credit agreement dated
as of March 22, 1995, as amended by that certain first amendment to credit
agreement dated as of August 17, 1995, that certain second amendment to credit
agreement dated as of December 15, 1995, that certain third amendment to credit
agreement dated as of February 13, 1996 ("Third Amendment"), that certain fourth
amendment to credit agreement dated March 15, 1996, and by that certain fifth
amendment to credit agreement of even date herewith ("Fifth Amendment"), by and
between Borrower and U. S. Bank (together with all supplements, exhibits,
amendments and modifications thereto, the "Credit Agreement"). Borrower also
promises to pay interest on the unpaid principal balance hereof, commencing as
of the first date of an advance hereunder, in like money in accordance with the
terms and conditions, and at the rate or rates provided for in the Credit
Agreement. All principal, interest, and other charges are due and payable in
full on December 31, 1996, subject to extension until March 31, 1997, on the
terms set forth in the Third Amendment.
Borrower and all endorsers, sureties, and guarantors hereof jointly and
severally waive presentment for payment, demand, notice of nonpayment, notice of
protest, and protest of this Note, and all other notices in connection with the
delivery, acceptance, performance, default, dishonor, or enforcement of the
payment of this Note except such notices as are specifically required by this
Note or by the Credit Agreement, and they agree that the liability of each of
them shall be unconditional without regard to the liability of any other party
and shall not be in any manner affected by any indulgence, extension of time,
renewal, waiver, or modification granted or consented to by U. S. Bank. Borrower
and all endorsers, sureties, and guarantors hereof (1) consent to any and all
extensions of time, renewals, waivers, or modifications that may be granted by
U. S. Bank with respect to the payment or other provisions of this Note and the
Credit Agreement; (2) consent to the release of any property now or hereafter
securing this Note with or without substitution; and
<PAGE> 2
(3) agree that additional makers, endorsers, guarantors, or sureties may become
parties hereto without notice to them and without affecting their liability
hereunder.
This Note is the Renewal Acquisition Note referred to in the Fifth
Amendment and as such is entitled to all of the benefits and obligations
specified in the Credit Agreement, including but not limited to any Collateral
and any conditions to making advances hereunder. Terms defined in the Credit
Agreement are used herein with the same meanings. Reference is made to the
Credit Agreement for provisions for the repayment of this Note and the
acceleration of the maturity hereof.
GARGOYLES, INC., a Washington
corporation
By /s/ Steven R. Kingma
-------------------------
Title VP - CFO
----------------------
-2-
<PAGE> 1
EXHIBIT 11.1
COMPUTATION OF PRO FORMA NET INCOME (LOSS) PER SHARE
<TABLE>
<CAPTION>
YEAR ENDED THREE MONTHS ENDED
DECEMBER 31, 1995(1) MARCH 31, 1996
-------------------- ------------------
<S> <C> <C>
Weighted average number of
common stock outstanding ................... 5,861,003 5,869,250
Common stock and common stock equivalents
issued during the twelve month period
prior to the filing of the Company's
initial public offering, using the
treasury stock method and an assumed
initial public offering price of $15.00..... 277,257 271,825
--------- ---------
6,138,260 6,141,075
========= =========
</TABLE>
- ------------------
(1) Number of shares apply to all periods prior to 1996.
<TABLE>
<CAPTION>
Pro Forma Pro Forma
Net Income Net Income
(Loss) (Loss) Per Share
----------- ----------------
<S> <C> <C>
Year Ended November 30, 1993 ................. $ 415,318 $ 0.07
Year Ended November 30, 1994 ................. 178,562 0.03
One Month Ended December 31, 1994 ............ (117,181) (0.02)
Year Ended December 31, 1995 ................. (2,342,515) (0.38)
Three Months Ended March 31, 1995 ............ (491,241) (0.08)
Three Months Ended March 31, 1996 ............ (15,924) (0.00)
</TABLE>
<PAGE> 1
16.1
[Letterhead of McClinton, Workman & Associates, P.S.]
June 17, 1996
Securities and Exchange Commission
450 Fifth Street, NW
Washington, DC 20549
Gentlemen:
We have read the statements made by Gargoyles, Inc. (the "Company"), in
the "Experts" Section of the Company's registration statement on Form S-1, which
we understand will be filed with the Commission. We agree with the statement in
such Form S-1 as long as the statement reads as follows concerning our firm and
our firm's prior reports on the Company's financial statements.
Effective July 13, 1995, the Company's Board of Directors retained
Ernst & Young LLP as the independent accountants for the Company. There were no
disagreements with McClinton, Workman & Assoc., P.S., the former accountants,
regarding accounting principles or practices, financial statement disclosure, or
auditing scope or procedure. The former accountants' reports for the fiscal
years ended November 30, 1991, 1992, 1993 and 1994, which reports are not
included herein, did not contain an adverse opinion or a disclaimer of an
opinion or qualifications as to uncertainty, audit scope or accounting
principles. Prior to retaining Ernst & Young LLP, the Company had not consulted
with Ernst & Young LLP regarding the application of accounting principles, the
type of audit opinion that might be rendered on the Company's financial
statements, or any event that was either a reportable event or the subject of a
disagreement.
Very truly yours,
McCLINTON, WORKMAN & ASSOC., P.S.
/s/ David B. McClinton
David B. McClinton, CPA
<PAGE> 1
EXHIBIT 21.1
SUBSIDIARIES OF THE REGISTRANT
<TABLE>
<CAPTION>
Name of Subsidiary State of Incorporation
- ------------------ ----------------------
<S> <C>
H.S.C., Inc. Washington
H.S.I. d/b/a Hobie Sunglasses California
the kindling company California
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S CONSOLIDATED FINANCIAL STATEMENTS CONTAINED IN THE COMPANY'S
REGISTRATION STATEMENT ON FORM S-1 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE
TO SUCH CONSOLIDATED FINANCIAL STATEMENTS.
</LEGEND>
<S> <C> <C>
<PERIOD-TYPE> YEAR 3-MOS
<FISCAL-YEAR-END> DEC-31-1995 DEC-31-1996
<PERIOD-START> JAN-01-1995 JAN-01-1996
<PERIOD-END> DEC-31-1995 MAR-31-1996
<CASH> 900 950
<SECURITIES> 0 0
<RECEIVABLES> 2,524,844 6,848,853
<ALLOWANCES> 10,355 32,469
<INVENTORY> 5,473,692 6,266,414
<CURRENT-ASSETS> 9,219,652 14,780,562
<PP&E> 2,575,550 2,899,222
<DEPRECIATION> 674,947 844,855
<TOTAL-ASSETS> 11,266,234 19,849,356
<CURRENT-LIABILITIES> 12,092,036 20,876,531
<BONDS> 0 0
0 0
0 0
<COMMON> 5,788,070 5,924,110
<OTHER-SE> (12,991,684) (12,983,108)
<TOTAL-LIABILITY-AND-EQUITY> 11,266,234 19,849,356
<SALES> 17,137,902 6,994,293
<TOTAL-REVENUES> 17,617,902 7,155,239
<CGS> 6,526,804 2,865,395
<TOTAL-COSTS> 10,281,458 3,774,530
<OTHER-EXPENSES> 3,206,455 531,238
<LOSS-PROVISION> 1,597,051 0
<INTEREST-EXPENSE> 1,042,523 529,372
<INCOME-PRETAX> (2,396,815) (15,924)
<INCOME-TAX> (100,000) 0
<INCOME-CONTINUING> 0 0
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (2,296,815) (15,924)
<EPS-PRIMARY> (0.38) 0
<EPS-DILUTED> (0.38) (0)
</TABLE>
