<PAGE> 1
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark one)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
For the transition period from _________ to _________
Commission file number 0-21335
GARGOYLES, INC.
(Exact name of registrant as specified in its charter)
Washington 91-1247269
(State of Incorporation) (I.R.S. Employer Identification Number)
5866 SOUTH 194TH STREET
KENT, WASHINGTON 98032
(253) 872-6100
(Address and telephone number of registrant's principal executive offices)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
---------- ---------
As of March 31, 1997 there were 7,420,683 outstanding shares of the registrant's
common stock, no par value, which is the only class of common or voting stock of
the registrant.
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GARGOYLES, INC.
INDEX TO FORM 10-Q
<TABLE>
<CAPTION>
PAGE(S)
-------
PART I - FINANCIAL INFORMATION
Item 1: Financial Statements (Unaudited)
<S> <C> <C>
Consolidated Balance Sheets................................................................. 1
Consolidated Statements of Operations ...................................................... 2
Consolidated Statements of Cash Flows....................................................... 3
Notes to Consolidated Financial Statements ..................................... 4
Item 2: Management's Discussion and Analysis of Financial Condition
and Results of Operations................................................................ 6
PART II - OTHER INFORMATION
Item 3: Legal Proceedings.......................................................................... 10
Item 6: Exhibits and Reports on Form 8-K........................................................... 10
</TABLE>
<PAGE> 3
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
GARGOYLES, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1997 1996
------------ ------------
ASSETS (UNAUDITED)
Current assets:
<S> <C> <C>
Cash and cash equivalents $ 1,100 $ 4,382,048
Trade receivables, less allowances for doubtful
accounts of $192,559 and $172,600 12,516,578 8,897,879
Inventories 9,238,919 5,881,884
Trade credits 217,253 624,295
Other current assets and prepaid expenses 5,216,148 1,542,802
------------ ------------
Total current assets 27,189,998 21,328,908
Property and equipment, net 3,382,454 2,811,935
Intangibles, net 2,902,721 2,961,110
Other assets 276,979 160,262
------------ ------------
Total assets $ 33,752,152 $ 27,262,215
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 4,351,668 $ 3,380,895
Accrued expenses and other current liabilities 3,041,697 2,347,738
------------ ------------
Total current liabilities 7,393,365 5,728,633
------------ ------------
Note payable to bank 4,482,118 --
------------ ------------
Deferred license income 270,000 360,000
------------ ------------
Minority interest 271,923 270,198
------------ ------------
Commitments and contingencies
Shareholders' equity:
Preferred stock, no par value, authorized shares --
10,000,000, none issued -- --
Common stock, no par value, authorized shares --
40,000,000, issued and outstanding --
7,420,683 and 7,419,008 25,649,405 25,643,576
Retained earnings (deficit) (4,314,659) (4,740,192)
------------ ------------
Total shareholders' equity 21,334,746 20,903,384
------------ ------------
Total liabilities and shareholders' equity $ 33,752,152 $ 27,262,215
============ ============
</TABLE>
See accompanying notes.
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GARGOYLES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
-----------------------------------
1997 1996
----------- -----------
<S> <C> <C>
Net sales $ 8,198,266 $ 6,994,293
Cost of sales 3,081,997 2,865,395
----------- -----------
Gross profit 5,116,269 4,128,898
License income 110,000 160,946
----------- -----------
5,226,269 4,289,844
----------- -----------
Operating expenses:
Sales and marketing 2,789,205 2,367,583
General and administrative 1,157,001 968,934
Shipping and warehousing 409,030 278,457
Research and development 365,291 135,056
Stock compensation -- 24,500
----------- -----------
Total operating expenses 4,720,527 3,774,530
----------- -----------
Income from operations 505,742 515,314
----------- -----------
Other income (expense):
Interest, net 26,791 (529,372)
Other -- (1,866)
----------- -----------
Total other income (expense) 26,791 (531,238)
----------- -----------
Income (loss) before income taxes 532,533 (15,924)
Income tax provision 107,000 --
----------- -----------
Net income (loss) $ 425,533 $ (15,924)
=========== ===========
Net income (loss) per share $ 0.06 $ (0.00)
=========== ===========
Weighted average common shares 7,682,882 5,709,714
=========== ===========
</TABLE>
See accompanying notes.
2
<PAGE> 5
GARGOYLES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
----------------------------
1997 1996
----------- -----------
OPERATING ACTIVITIES
<S> <C> <C>
Net income (loss) $ 425,533 $ (15,924)
Adjustments to reconcile net income (loss)
to net cash used in operating activities:
Depreciation 222,829 88,039
Amortization 58,389 15,395
Stock compensation -- 24,500
Deferred license income (90,000) (45,000)
Minority interest 1,725 --
Changes in assets and liabilities, net of effects from purchase
of Hobie in 1996:
Accounts receivable (3,618,699) (4,007,275)
Inventories (3,357,035) 305,622
Other current assets and other assets (3,383,021) (401,610)
Accounts payable, accrued expenses and other
current liabilities 1,664,732 542,822
----------- -----------
Net cash used in operating activities (8,075,547) (3,493,431)
----------- -----------
INVESTING ACTIVITIES
Acquisition of property and equipment (793,348) (157,414)
Purchase of Hobie -- (3,974,900)
----------- -----------
Net cash used in investing activities (793,348) (4,132,314)
----------- -----------
FINANCING ACTIVITIES
Net proceeds (repayment) from issuance of note payable to bank
and long-term debt 4,482,118 7,865,196
Principal payments on long-term debt -- (295,401)
Proceeds from warrant issuance -- 56,000
Proceeds from stock issuance 5,829 --
----------- -----------
Net cash provided by financing activities 4,487,947 7,625,795
----------- -----------
Net increase (decrease) in cash and cash equivalents (4,380,948) 50
Cash and cash equivalents, beginning of period 4,382,048 900
----------- -----------
Cash and cash equivalents, end of period $ 1,100 $ 950
=========== ===========
</TABLE>
See accompanying notes.
3
<PAGE> 6
GARGOYLES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1997
(UNAUDITED)
1. INTERIM FINANCIAL STATEMENTS
The accompanying consolidated financial statements of Gargoyles, Inc.
and its subsidiaries ("Gargoyles" or the "Company") are unaudited and include,
in the opinion of management, all normal recurring adjustments necessary to
present fairly the consolidated financial position at March 31, 1997 and the
related consolidated results of operations and cash flows for the periods
presented. Certain information and footnote disclosure normally included in
financial statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted pursuant to the rules and regulations
of the Securities and Exchange Commission. These condensed consolidated
financial statements should be read in conjunction with the Company's audited
consolidated financial statements and the related notes thereto included in the
Company's Form 10-K filed with the Securities and Exchange Commission on March
31, 1997.
The Company's net sales are subject to seasonal variations.
Accordingly, the results of operations for the quarter ended March 31, 1997 are
not necessarily indicative of the results that may be expected for the entire
year.
2. INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
March 31, December 31,
1997 1996
---------- ----------
<S> <C> <C>
Raw materials $7,859,053 $4,503,054
Finished goods 1,379,866 1,378,830
---------- ----------
$9,238,919 $5,881,884
========== ==========
</TABLE>
3. COMMITMENTS AND CONTINGENCIES
In January 1997, the Company entered into a three-year agreement with
International Speedway Corporation to become the title sponsor of a NASCAR Busch
Series race at Daytona, Florida, the Gargoyles 300. Under the terms of the
sponsorship agreement, over the three-year term of the agreement the Company
will be required to pay $1,050,000 plus a portion of the Company's license
income from the sale of Gargoyles 300 souvenirs. The Company has the right to
terminate the agreement upon the payment of a $100,000 termination fee. In a
related agreement with CBS Television Network, the Company has agreed to pay CBS
$850,000 over the three-year term of that agreement for network broadcast
coverage of the Gargoyles 300 race.
4. GOLDEN BEAR LICENSING AGREEMENT
Effective January 1, 1997, the Company entered into an agreement with
Golden Bear Golf, Inc. ("Golden Bear") to develop a line of specialty eyewear
for golfers. The Company and Golden Bear will jointly create and develop the
golfing eyewear. The Company will manufacture and distribute the product. The
agreement requires the Company, as licensee, to make quarterly
4
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royalty payments based on a percentage of net sales, with certain annual minimum
payments. The agreement expires June 30, 2002, with an option to renew for an
additional five years.
5. EARNINGS PER SHARE
In February 1997, the Financial Accounting Standards Board (FASB)
issued Statement of Financial Accounting Standards No. 128, Earnings Per Share,
which is required to be adopted on December 31, 1997. At that time, the Company
will be required to change the method currently used to compute earnings per
share and to restate all prior periods. Under the new requirements for
calculating basic (primary) earnings per share, the dilutive effect of stock
options will be excluded. The impact of Statement No. 128 on the calculation of
earnings per share is not material for the quarters ended March 31, 1997 and
March 31, 1996, respectively.
6. INCOME TAXES
The Company recorded no income tax benefit relating to the net loss for the
three months ended March 31, 1996, since a future benefit was not assured. In
1997, the difference from the federal statutory income tax rate of 34% resulted
from a decrease in the reserve against certain tax assets.
7. SUBSEQUENT EVENTS
Credit Facility
Effective April 7, 1997, the Company negotiated an amended Credit
Facility with a bank (the "Credit Facility") consisting of (i) a revolving $15.0
million operating facility for general short-term corporate purposes, (ii) a
$5.0 million fixed asset term loan and (iii) an $11.0 million acquisition term
loan. The Credit Facility is secured by the assets of the Company and its
subsidiaries. The Credit Facility expires on June 30, 1999. Notes issued under
the fixed asset term loan have a five-year payment term.
Acquisition of Sungold
On April 11, 1997, the Company purchased substantially all the assets
and assumed certain liabilities of Sungold Enterprises, LTD., a New York
corporation ("Sungold"). The acquisition will be accounted for using the
purchase method of accounting from the date of acquisition. Accordingly, the
allocation of the purchase price of $10,970,000 will be based on the fair value
of the assets acquired and liabilities assumed. Sungold manufactures two
principal lines of premium sunglasses, Stussy EyeGear, a young men's fashion
brand licensed to Sungold by Stussy, Inc., a leading designer of streetwear
apparel and accessories featuring styles that reflect everything from easy
California living to the grit of inner city culture, and Anarchy Eyewear, a
cutting-edge brand popular with alternative sports enthusiasts age 15 to 25.
Stussy EyeGear offers a number of products which are sold at suggested retail
prices ranging from $60 to $120. Anarchy Eyewear offers styles which reflect the
brand's "Altercation with the Norm" tag line and are sold at suggested retail
prices ranging from $40 to $70.
Acquisition of Private Eyes
The Company has reached a preliminary agreement to acquire the assets
of The Private Eyes Sunglass Corporation, a Massachusetts corporation ("Private
Eyes"). The transaction is subject to several conditions to closing. If all
closing conditions are satisfied, the purchase transaction is expected to close
late in the second quarter of 1997. Private Eyes is the licensee for Ellen Tracy
eyewear which features a collection of high-quality, high-fashion women's
sunglasses, readers, optical frames and accessories in a variety of designs
ranging from traditional to fashion-forward. The collection reflects the
professional, self-assured and feminine look associated with the highly
successful Ellen Tracy line of women's clothing. Private Eyes is also the North
American distributor for Emmanuelle Khanh Paris Eyewear and a manufacturer of
its own high-quality line of prescription frames and eyewear accessories.
5
<PAGE> 8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
FORWARD-LOOKING STATEMENTS
This report may contain forward-looking statements. Such
forward-looking statements involve known and unknown risks, uncertainties and
other factors that may cause the actual results, performance or achievements of
the Company to be materially different from any future results, performance or
achievements expressed or implied by such forward-looking statements. Such
factors include, but are not limited to, those discussed in the section of the
Company's 1996 Annual Report on Form 10-K entitled "Business--Factors Affecting
Future Results and Regarding Forward-Looking Statements." Readers are cautioned
not to place undue reliance on these forward-looking statements, which speak
only as of the date hereof. The Company undertakes no obligation to publicly
release the result of any revisions to these forward-looking statements that may
be made to reflect events or circumstances after the date hereof or to reflect
the occurrences of unanticipated events.
GENERAL
Gargoyles, Inc., under its Gargoyles Performance Eyewear brand,
designs, manufactures and markets a broad line of performance sunglasses that
combine innovative styling with its patented dual lens toric curve technology.
The Company also designs, manufactures and markets the Hobie sunglass line, a
leading line of polarized sunglasses under license from Hobie Designs, Inc. In
the first quarter of 1997, the Company introduced the Timberland line, a line of
outdoor lifestyle-oriented sunglasses under license from the Timberland Company.
In addition, early in the second quarter of 1997, the Company completed its
acquisition of Sungold Eyewear, which manufactures the Stussy and Anarchy
sunglass lines. The Company also offers a popular line of protective eyewear
focused primarily on the medical and dental market segments.
RESULTS OF OPERATIONS
The following table sets forth results of operations, as a percentage
of net sales, for the periods indicated:
<TABLE>
<CAPTION>
Three Months Ended
March 31,
-------------------
1997 1996
------- ------
<S> <C> <C>
Net sales .................. 100.0% 100.0%
Cost of sales .............. 37.6 41.0
----- -----
Gross profit ............... 62.4 59.0
License income ............. 1.4 2.3
Operating expenses:
Sales and marketing ...... 34.0 33.9
General and administrative 14.1 13.8
Shipping and warehousing . 5.0 4.0
Research and development . 4.5 1.9
Stock compensation ....... - 0.3
----- -----
Total operating expenses 57.6 53.9
----- -----
Income from operations ..... 6.2% 7.4%
===== =====
</TABLE>
6
<PAGE> 9
THREE MONTHS ENDED MARCH 31, 1997 COMPARED TO THREE MONTHS ENDED MARCH 31, 1996
Net sales. Net sales increased to $8.2 million for the quarter ended
March 31, 1997 from $7.0 million for the quarter ended March 31, 1996. This
increase was primarily the result of (i) new product introductions in the
Gargoyles and Hobie lines and (ii) sales of Timberland eyewear, introduced in
March 1997.
Gross profit. Gross profit increased to $5.1 million for the quarter
ended March 31, 1997 from $4.1 million for the quarter ended March 31, 1996.
Gross margin increased to 62.4% in the 1997 quarter from 59.0% in the 1996
quarter. The increase in gross margin in 1997 was attributable, in part, to
achieving cost efficiencies in the production process and improvements in
pricing due to the growth and popularity of the Company's brands. In addition,
the gross margin improvement was attributable to reduced purchases by Sunglass
Hut, which receives higher volume discounts than the Company's other accounts.
The Company's sales to Sunglass Hut decreased to approximately 27% of the
Company's net sales in the 1997 quarter from 41% in the 1996 quarter.
License income. License income decreased to $110,000 for the quarter
ended March 31, 1997 from $161,000 for the quarter ended March 31, 1996. This
decrease is the result of a decline in license related product sales.
Operating expenses. Operating expenses increased to $4.7 million for
the quarter ended March 31, 1997 from $3.8 million for the quarter ended March
31, 1996. As a percentage of net sales, operating expenses increased to 57.6% in
the 1997 quarter from 53.9% in the 1996 quarter. Sales and marketing expenses
increased $422,000 in the 1997 quarter, primarily as a result of increased
marketing expenditures. As a percentage of net sales, sales and marketing
expenses remained consistent at approximately 34% in the first quarters of 1997
and 1996. General and administrative expenses increased $188,000 in the 1997
quarter, 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 remained consistent at approximately 14% in the first
quarters of 1997 and 1996. Shipping and warehousing expenses increased $131,000
in the 1997 quarter, primarily as a result of increased net sales and the
addition of the infrastructure necessary to support the Company's growth. As a
percentage of net sales, shipping and warehousing expenses increased to 5% in
the 1997 quarter from 4% in the 1996 quarter. Research and development expenses
increased $230,000 in the 1997 quarter, primarily as a result of expanding the
Gargoyles and Hobie lines and in anticipation of the launch of Timberland
products in March 1997. As a percentage of net sales, research and development
expenses increased to 4.5% in the first quarter of 1997 from 1.9% in the first
quarter of 1996.
Income from operations. The Company's income from operations decreased
to $506,000 for the quarter ended March 31, 1997 from $515,000 for the quarter
ended March 31, 1996. As a percentage of net sales, income from operations
decreased to 6.2% in the first quarter of 1997 from 7.4% in the first quarter of
1996. This decrease was the result of the Company's increased operating
expenses, which was only partially offset by net sales growth and gross margin
improvement.
Interest income (expense). Net interest income improved to $27,000 for
the quarter ended March 31, 1997 from interest expense of ($529,000) for the
quarter ended March 31, 1996. This improvement resulted from the Company's use
of the net proceeds from its initial public offering in October 1996 to pay off
outstanding debt during the fourth quarter of 1996 and its investment of the
remaining cash balances.
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Income tax provision. The Company's income tax provision was $107,000
for the quarter ended March 31, 1997 compared to an income tax benefit of zero
for the quarter ended March 31, 1996. Differences from the federal statutory
income tax rate of 34% resulted in 1997 from decreases in the reserve against
certain tax assets and in 1996 from increases in the reserve against certain tax
assets.
Net income. As a result of the items discussed above, the Company's net
income was $426,000 or $.06 per share for the quarter ended March 31, 1997
compared to a net loss of ($16,000) or ($.00) per share for the quarter ended
March 31, 1996.
LIQUIDITY AND CAPITAL RESOURCES
Historically, the Company has relied primarily on cash from operations
and borrowings to finance its operations. Cash used in the Company's operating
activities, primarily to fund the growth in accounts receivable and inventories,
totaled $8.1 million and $3.5 million for the quarters ended March 31, 1997 and
1996, respectively. Cash used in the Company's investing activities, primarily
to fund capital expenditures, and in 1996 to fund the Hobie Acquisition, totaled
$793,000 and $4.1 million for the quarters ended March 31, 1997 and 1996,
respectively. Cash provided by the Company's financing activities, primarily
proceeds from bank debt totaled $4.5 million and $7.6 million for the quarters
ended March 31, 1997 and 1996, respectively. As of March 31, 1997, the Company
had working capital of $19.8 million.
Effective April 7, 1997, the Company negotiated an amended credit
facility with a bank (the "Credit Facility") consisting of (i) a revolving $15.0
million operating facility for general short-term corporate purposes, (ii) a
$5.0 million fixed asset term loan and (iii) an $11.0 million acquisition term
loan. The Credit Facility is secured by the assets of the Company and its
subsidiaries. The Credit Facility expires on June 30, 1999. Notes issued under
the fixed asset term loan have a five-year payment term.
The Company regularly evaluates acquisitions, investments and other
business opportunities and the cash expenditures related to such activities and
to unanticipated expenses which could create a need for additional financing.
There can be no assurance, however, that if required such financing would be
available on acceptable terms or at all.
The Company's capital expenditures traditionally have included optical
molds and production and office equipment. Expenditures for the three months
ended March 31, 1997 totaled $793,000. The Company expects total capital
expenditures for 1997 to approximate $1.6 million. See "Forward-Looking
Statements."
The Company presently believes that cash flow from operations and
available borrowings under its Credit Facility will be sufficient to meet its
operating needs and capital expenditures for the foreseeable future. See
"Forward-Looking Statements."
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SEASONALITY
The following table sets forth certain unaudited quarterly data for the
periods shown:
<TABLE>
<CAPTION>
1997 Quarter Ended 1996 Quarter Ended
(in millions) (in millions)
------------------ --------------------------------------------------
March 31 March 31 June 30 September 30 December 31
--------- -------- ------- ------------ -----------
<S> <C> <C> <C> <C> <C>
Net sales.......... $8.2 $7.0 $10.6 $8.9 6.6
Gross profit...... 5.1 4.1 6.1 5.2 4.0
</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
first and fourth quarters, when net sales have historically been lower. The
Company also experiences higher accounts receivable during March through
September as a result of higher sales during this period. To date, this increase
in accounts receivable has not had a significant effect on the Company's
liquidity due to the Company's ability to borrow against these receivables under
its credit facilities. There can, however, be no assurance that this will
continue to be the case. See "Forward-Looking Statements." 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 "Forward-Looking Statements."
9
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PART II - OTHER INFORMATION
ITEM 3. LEGAL PROCEEDINGS
The Company advanced funds to Axcent Sports, Inc. ("Axcent"), a
corporation of record in the state of Washington, which had operations in
Boulder, Colorado, that distributed bicycling products produced by adidas
America, Inc. ("Adidas"). On February 24, 1997, Adidas filed a lawsuit in the
United States District Court for the District of Oregon under Case Number
CV-P7-239-JE. In this lawsuit, Adidas claims $603,905 plus prejudgment interest
and incidental damages against the Company, Axcent, and Conquest for product
shipped to Axcent by Adidas and for product ordered by Axcent and held in Adidas
warehouse facilities. Adidas claims that the Company is liable to it on the
theory that Axcent was a division of the Company. Adidas also asserts claims
against the Company based on piercing of the corporate form of Axcent and based
on promoter liability, alleging that the Company failed to adequately capitalize
and/or incorporate Axcent. The Company denies the allegations of Adidas and
intends to defend vigorously the claims of Adidas against the Company. Trillium
Corporation ("Trillium") and the Company's President, Douglas B. Hauff, jointly
and severally and on an unlimited basis, have agreed to indemnify, defend and
hold harmless the Company from and against all losses, liabilities,
deficiencies, claims and expenses (including but not limited to, costs of
defense and reasonable attorneys' fees) incurred by the Company arising from the
lawsuit. The Company has tendered defense of the Adidas lawsuit to Trillium and
Mr. Hauff, and they have accepted such defense. The parties have reached a
settlement of this matter and are currently drafting settlement documents. The
Company believes that the settlement and ultimate resolution of this matter will
not result in a charge to the Company in excess of amounts reserved. See
"Forward-Looking Statements."
In March 1997, the Company terminated an employee, and at the time of
termination, the Company offered the employee a severance package. The employee
has rejected the severance package and has proposed an alternative severance
package totaling $850,000, alleging, among other things, wrongful termination,
and discrimination in violation of applicable law. The employee has not yet,
however, filed suit against the Company. The Company has retained counsel to
investigate the allegations and intends to defend vigorously the employee's
claim. Although this matter is in its early stages and the Company's
investigation is not complete, the Company presently believes the employee's
damage claim is excessive and is not supported by the facts and circumstances of
the employee's employment and termination. The Company believes that the
ultimate resolution of the matter will not have a material adverse effect on its
results of operations or financial position. See "Forward-Looking Statements."
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(A) EXHIBITS
<TABLE>
<CAPTION>
<S> <C>
Exhibit 10.1 First Amended and Restated Credit Agreement dated April
7, 1997, between U.S. Bank of Washington, National Association,
and Gargoyles, Inc.
Exhibit 11.1 Computation of Earnings Per Share
Exhibit 27.1 Financial Data Schedule
</TABLE>
(B) REPORTS ON FORM 8-K
No reports have been filed during the quarter ended March 31, 1997.
10
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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Gargoyles, Inc.
(Registrant)
May 15, 1997 /s/ Steven R. Kingma
------------------------------------------
Steven R. Kingma
Vice-President, Chief Financial Officer
Secretary and Treasurer
11
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EXHIBIT INDEX
Exhibit No.
- -----------
10.1 First Amended and Restated Credit Agreement dated April 7,
1997, between U.S. Bank of Washington, National Association,
and Gargoyles, Inc.
11.1 Computation of Earnings Per Share
27.1 Financial Data Schedule
<PAGE> 1
EX 10.1
FIRST AMENDED AND RESTATED CREDIT AGREEMENT
Between
U. S. BANK OF WASHINGTON, NATIONAL ASSOCIATION
and
GARGOYLES, INC.
Dated as of April 7, 1997
<PAGE> 2
CONTENTS
<TABLE>
<S> <C> <C>
SECTION 1. DEFINITIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
1.1 Terms Defined . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
1.2 Accounting Terms . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
1.3 Rules of Construction . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
1.4 Incorporation of Recitals and Exhibits . . . . . . . . . . . . . . . . . . . 10
SECTION 2. REVOLVING LOAN . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
2.1 Loan Commitment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
2.2 Use of Proceeds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
2.3 Revolving Note . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
2.4 Revolving Loan Interest Rates . . . . . . . . . . . . . . . . . . . . . . . . 10
2.5 Repayment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
2.6 Revolving Loan Fee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
2.7 Revolving Loan Unused Portion Fee . . . . . . . . . . . . . . . . . . . . . . 11
2.8 Borrowing Base . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
2.9 Letters of Credit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
SECTION 3. TERM LOAN . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
3.1 Loan Commitment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
3.2 Use of Proceeds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
3.3 Term Note . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
3.4 Term Loan Interest Rates . . . . . . . . . . . . . . . . . . . . . . . . . . 14
3.5 Repayment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
3.6 Term Loan Fee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
3.7 Term Loan Unused Portion Fee . . . . . . . . . . . . . . . . . . . . . . . . 15
SECTION 4. EQUIPMENT LINE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
4.1 Loan Commitment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
4.2 Use of Proceeds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
4.3 Equipment Note . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
4.4 Equipment Loan Interest Rate . . . . . . . . . . . . . . . . . . . . . . . . 16
4.5 Repayment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
4.6 Equipment Line Unused Portion Fee . . . . . . . . . . . . . . . . . . . . . . 16
4.7 Limitations on Equipment Line Fundings . . . . . . . . . . . . . . . . . . . 16
SECTION 5. GENERAL PROVISIONS APPLICABLE TO THE LOANS . . . . . . . . . . . . . . . . . 17
5.1 Manner of Payment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
5.2 Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
</TABLE>
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5.3 Book Entry Loan Account . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
5.4 Bank Control Account . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
5.5 Computations of Interest . . . . . . . . . . . . . . . . . . . . . . . . . . 18
5.6 Default Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
5.7 Maximum Interest Rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
5.8 Late Charge . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
5.9 Prepayments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
5.10 Basis for Determining Interest Rate Inadequate or Illegal . . . . . . . . . . 19
5.11 Interest Cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
5.12 Fundings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
5.13 Extensions, Renewals, and Modifications . . . . . . . . . . . . . . . . . . . 21
SECTION 6. CONDITIONS PRECEDENT FOR FUNDINGS UNDER THE LOANS . . . . . . . . . . . . . . 21
6.1 Conditions Precedent for Initial Funding . . . . . . . . . . . . . . . . . . 21
6.2 Conditions Precedent to Each Funding Under the Equipment Line . . . . . . . . 24
6.3 Conditions Precedent to Acquisition Fundings . . . . . . . . . . . . . . . . 24
6.4 Conditions Precedent to Each Subsequent Funding . . . . . . . . . . . . . . . 25
SECTION 7. AFFIRMATIVE COVENANTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
7.1 Financial Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
7.2 Licenses and Permits . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
7.3 Maintenance of Properties . . . . . . . . . . . . . . . . . . . . . . . . . . 27
7.4 Payment of Charges . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
7.5 Insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
7.6 Maintenance of Records . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
7.7 Inspection . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
7.8 Hazardous Substances . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
7.9 Corporate Existence . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
7.10 Notice of Disputes and Other Matters . . . . . . . . . . . . . . . . . . . . 30
7.11 Exchange of Note . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
7.12 Maintenance of Liens . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
7.13 Other Agreements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
7.14 After-Acquired Collateral . . . . . . . . . . . . . . . . . . . . . . . . . . 31
7.15 Further Assurances . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
7.16 Maintenance of Bank Accounts . . . . . . . . . . . . . . . . . . . . . . . . 32
SECTION 8. NEGATIVE COVENANTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
8.1 Dividends and Distributions . . . . . . . . . . . . . . . . . . . . . . . . . 32
</TABLE>
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8.2 Transactions With Affiliates . . . . . . . . . . . . . . . . . . . . . . . . 32
8.3 Other Indebtedness . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
8.4 Leases and Leasebacks . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
8.5 Liens . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
8.6 Advances and Loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
8.7 Investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
8.8 Acquisitions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
8.9 Consolidation, Merger, and Sale of Assets . . . . . . . . . . . . . . . . . . 35
8.10 Type of Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35
8.11 Change of Chief Executive Office or Name . . . . . . . . . . . . . . . . . . 35
8.12 Change in Documents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35
8.13 Control . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35
8.14 Pension Plan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36
8.15 Tangible Net Worth . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36
8.16 Working Capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36
8.17 Debt Service Coverage Ratio . . . . . . . . . . . . . . . . . . . . . . . . . 36
8.18 Senior Debt Ratio . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36
SECTION 9. REPRESENTATIONS AND WARRANTIES . . . . . . . . . . . . . . . . . . . . . . . 36
9.1 Corporate Status . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37
9.2 Power and Authority . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37
9.3 No Violation of Agreements . . . . . . . . . . . . . . . . . . . . . . . . . 37
9.4 Recording and Enforceability . . . . . . . . . . . . . . . . . . . . . . . . 38
9.5 Litigation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38
9.6 Good Title to Properties . . . . . . . . . . . . . . . . . . . . . . . . . . 38
9.7 Licenses and Permits . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38
9.8 No Burdensome Agreements . . . . . . . . . . . . . . . . . . . . . . . . . . 39
9.9 Properties in Good Condition . . . . . . . . . . . . . . . . . . . . . . . . 39
9.10 Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39
9.11 Outstanding Indebtedness . . . . . . . . . . . . . . . . . . . . . . . . . . 39
9.12 Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40
9.13 License Fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40
9.14 Trademarks, Patents, Etc. . . . . . . . . . . . . . . . . . . . . . . . . . . 40
9.15 Governmental Approvals . . . . . . . . . . . . . . . . . . . . . . . . . . . 40
9.16 Disclosure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40
9.17 Regulations U and X . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40
9.18 Names . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41
9.19 Condition of Property . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41
9.20 Pension Plans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41
</TABLE>
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SECTION 10. EVENTS OF DEFAULT; REMEDIES . . . . . . . . . . . . . . . . . . . . . . . . . 41
10.1 Events of Default . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41
10.2 Acceleration; Remedies . . . . . . . . . . . . . . . . . . . . . . . . . . . 43
SECTION 11. MISCELLANEOUS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44
11.1 Notices . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44
11.2 Payment of Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45
11.3 Setoff . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45
11.4 Waiver of Setoff . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45
11.5 Fees and Commissions . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46
11.6 No Waiver . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46
11.7 Entire Agreement and Amendments . . . . . . . . . . . . . . . . . . . . . . . 46
11.8 Benefit of Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47
11.9 Severability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47
11.10 Descriptive Headings . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47
11.11 Governing Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47
11.12 Consent to Jurisdiction, Service, and Venue . . . . . . . . . . . . . . . . . 47
11.13 Arbitration . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48
11.14 Counterparts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49
11.15 Statutory Notice . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49
</TABLE>
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EXHIBITS
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Exhibit A Revolving Note, Section 2.3
Exhibit B Term Note, Section 3.3
Exhibit C Form of Equipment Note, Section 4.3
Exhibit D Prepayment Formula, Section 5.9
Exhibit E (E-1 through E-3) Security Agreements, Section 6.1(b)
Exhibit F Form of Guaranty, Section 6.1(d)
Exhibit G Opinion of Counsel 6.1(e)
Exhibit H (H-1 through H-3) Board Resolution and Incumbency Certificates, Section 6.1(h)(iii)
Exhibit I Pledge Agreement 6.1(k)
Exhibit J Existing Liens, Section 8.5
Exhibit K Schedule of Trademarks, Trade Names, Service Marks, Patents and Applications, Section 9.14
Exhibit L Schedule of Governmental Approvals, Section 9.15
</TABLE>
CREDIT AGREEMENT Page v
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FIRST AMENDED AND RESTATED CREDIT AGREEMENT
THIS FIRST AMENDED AND RESTATED CREDIT AGREEMENT is made and entered
into as of the 7th day of April, 1997, 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 Section 1 of this
Agreement.
RECITALS:
A. 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.
B. On October 2, 1996, U. S. Bank and Borrower entered into that
certain credit agreement (the "Existing Credit Agreement"), whereby U. S. Bank
agreed to provide the credit facilities described in the Existing Credit
Agreement to Borrower.
C. Borrower has requested U. S. Bank to modify and expand the
credit facilities provided for in the Existing Credit Agreement. U. S. Bank is
ready, able, and willing to extend such credit facilities to Borrower on the
terms and conditions of this Agreement.
D. In order to modify and expand the credit facilities to be
provided by U. S. Bank to Borrower, the parties desire to amend and restate the
Existing Credit Agreement in its entirety.
NOW, THEREFORE, in consideration of the mutual covenants and
conditions set forth herein, the parties agree as follows:
SECTION 1. DEFINITIONS
1.1 Terms Defined
As used herein, the following terms have the meanings set forth below:
"Adjusted Cash Flow" means Cash Flow for the relevant period adjusted
to a pretax basis, plus (a) cash paid by Borrower during the relevant period
for Capital Expenditures (excluding the purchase of all or substantially all of
the assets of another Person), which cash does not constitute proceeds of loans
made to Borrower for the
CREDIT AGREEMENT PAGE 1
<PAGE> 8
specific purpose of financing Capital Expenditures (including the Equipment
Loans), and (b) dividends and distributions paid to Borrower's shareholders
(which are prohibited by Section 8.1).
"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.
"Agreement" means this first amended and restated 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 2.8 hereof.
"Borrowing Notice" has the meaning set forth in Section 5.12(a)
hereof.
"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 (after taxes) for the relevant
period, subject to the following adjustments:
(a) There shall be added to net income: (i) charges against
income consisting of depreciation of real and personal property, amortization,
write-off of
CREDIT AGREEMENT PAGE 2
<PAGE> 9
goodwill, and other intangibles, (ii) increases in deferred tax accounts, (iii)
charges against income for noncash stock compensation, and (iv) interest
expense;
(b) 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 (excluding the purchase of all or
substantially all of the assets of another Person), which cash does not
constitute proceeds of loans made to Borrower for the specific purpose of
financing Capital Expenditures (including the Equipment Loans), (iii) dividends
and distributions paid to Borrower's shareholders (which are prohibited by
Section 8.1), and (iv) decreases in deferred tax accounts.
"Claims" has the meaning set forth in Section 11.13 hereof.
"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 hereof.
"Debt Service" means, as of the last day of the relevant period, the
current portion of Borrower's long-term debt (including leases that are or
should be capitalized in accordance with generally accepted accounting
principles), plus interest expense for the relevant period.
"Debt Service Coverage Ratio" means the ratio of Cash Flow to Debt
Service.
"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 and the Subsidiaries excluding the following: (a) accounts receivable
that have been outstanding in excess of 90 days from the date of invoice, (b)
all accounts receivable from any single customer of Borrower or any of the
Subsidiaries if 10 percent or more of such customer's accounts owed to Borrower
or any of the Subsidiaries 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
CREDIT AGREEMENT PAGE 3
<PAGE> 10
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, (k) all
accounts receivable from any single customer of Borrower or any of the
Subsidiaries in excess of 10 percent of the aggregate amount of Eligible
Accounts Receivable, except (i) as otherwise approved in writing by U. S. Bank,
and (ii) the limitation set forth in this clause (k) does not apply to accounts
receivable from Sunglass Hut International, and (l) all accounts receivable
from Sunglass Hut International in excess of the lesser of (i) $3,500,000, or
(ii) an amount equal to 35 percent of the aggregate amount of Eligible Accounts
Receivable; provided that such percentage may be reduced to not less than 10
percent by U. S. Bank, upon not less than 60 days prior written notice from
U.S. Bank to Borrower. 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 and the Subsidiaries,
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 salable 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.
"Equipment Line" has the meaning set forth Section 4.1 hereof and
includes all renewals, replacements, and amendments to the Equipment Line.
"Equipment Loan" has the meaning set forth Section 4.1 hereof and
includes all renewals, replacements, and amendments to the respective Equipment
Loan.
"Equipment Note" has the meaning set forth Section 4.3 hereof and
includes all renewals, replacements, and amendments to the respective Equipment
Note.
"ERISA" means the Employee Retirement Income Security Act of 1974, as
amended from time to time.
"Event of Default" has the meaning set forth Section 10.1 hereof.
"Existing Credit Agreement" has the meaning set forth in Recital B
hereof.
CREDIT AGREEMENT PAGE 4
<PAGE> 11
"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.
"GAC" means Gargoyles Acquisition Corporation, a Washington
corporation, and its successors.
"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 GAC and HSC, each of which is required to execute
and deliver to U. S. Bank a Guaranty pursuant to the terms of this Agreement,
together with any Subsidiary that executes a guaranty of the Loans after the
date of this Agreement.
"Guaranty" has the meaning set forth in Section 6.1(d) hereof and
includes all renewals, replacements, and amendments of the Guaranty.
"Hazardous Materials" means oil or petrochemical products, PCBs,
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 any Guarantor
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.
"HSC" means H.S.C., Inc., a Washington corporation, and its
successors.
CREDIT AGREEMENT PAGE 5
<PAGE> 12
"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 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.
"Interest Period" means (a) as to any LIBOR Rate Borrowing under the
Revolving Loan, a period of one, two, or three months commencing on the date
the LIBOR Borrowing Rate becomes applicable thereto, and (b) as to any LIBOR
Rate Borrowing under the Term Loan, a period of one, two, three, or six months
commencing on the date the LIBOR Borrowing Rate becomes applicable thereto;
provided however, that: (x) no Interest Period shall be selected which would
extend beyond the maturity date of the applicable Loan; (y) any Interest Period
that would otherwise expire on a day that is not a Business Day, shall be
extended to the next succeeding Business Day, unless the result of such
extension would be to extend such Interest Period into another calendar month,
in which event the Interest Period shall end on the immediately preceding
Business Day; and (z) any Interest Period that begins on the last Business Day
of a calendar month (or on a day for which there is no numerically
corresponding day in the calendar month at the end of such Interest Period)
shall end on the last Business Day of a calendar month.
"Letters of Credit" has the meaning set forth in Section 2.9 hereof
and includes all renewals, replacements, and amendments to the Letters of
Credit.
"LIBOR Borrowing Rate" means (a) for the Revolving Loan, the LIBOR
Rate plus 2 percent per annum, and (b) for the Term Loan, the LIBOR Rate plus 3
percent per annum.
"LIBOR Rate" means for any Interest Period, the rate per annum
(rounded upward to the nearest 1/16 of 1 percent) determined by U. S. Bank as
of 11:00 a.m., London time, on the date two Business Days prior to the first
day of the applicable Interest Period for U. S. dollar deposits for a period
equal to the applicable Interest Period; provided, however, that U. S. Bank's
LIBOR Rate shall be adjusted to take into account the maximum reserves required
to be maintained for Eurocurrency liabilities by banks during each such
Interest Period as specified in Regulation D of the Board of Governors of the
Federal Reserve System or any successor regulation.
CREDIT AGREEMENT PAGE 6
<PAGE> 13
"LIBOR Rate Borrowing" means any Funding or any portion of the
applicable Loan for which Borrower has elected the LIBOR Borrowing Rate to
apply. The minimum amount of each LIBOR Rate Borrowing shall be $1,000,000 and
may only be in integrals of $100,000 in excess thereof.
"Loan Documents" means this Agreement, the Notes, the Security
Agreements, the Pledge Agreement, and the Guaranties, 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.
"Loans" means the Revolving Loan, the Term Loan, and the Equipment
Loans as well as all renewals, replacements, and modifications 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 hereof.
"Person" means any individual, partnership, joint venture, firm,
corporation, association, limited liability company, limited liability
partnership, 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, as amended, 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) hereof
and includes all renewals, replacements, and amendments of the Pledge
Agreement.
"Prime Borrowing Rate" means (a) for the Revolving Loan, the Prime
Rate, (b) for the Term Loan, the Prime Rate plus .75 percent per annum, and (c)
for the Equipment Loans, the Prime Rate plus .25 percent per annum.
CREDIT AGREEMENT PAGE 7
<PAGE> 14
"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.
"Prime Rate Borrowing" means any Funding or portion of the applicable
Loan pursuant to the terms of this Agreement that bears interest at the Prime
Borrowing Rate.
"Revolving Loan" has the meaning set forth in Section 2.1 hereof and
includes all renewals, replacements, and amendments of the Revolving Loan.
"Revolving Note" has the meaning set forth in Section 2.3 hereof and
includes all renewals, replacements, and amendments of the Revolving Note.
"Security Agreements" has the meaning set forth in Section 6.1(b)
hereof and includes all renewals, replacements, and amendments of the Security
Agreement.
"Senior Debt" means the outstanding principal amount of all
Indebtedness of Borrower for borrowed money, including all Indebtedness under
the Loans, but excluding the outstanding principal amount of subordinated debt
that (a) has been approved in writing by U. S. Bank, and (b) is subordinate to
Borrower's Indebtedness to U. S. Bank pursuant to a subordination agreement
approved in writing by U. S. Bank.
"Senior Debt Ratio" means the ratio of Senior Debt to Adjusted Cash
Flow.
"Subsidiaries" means the Persons 100 percent of the equity interest of
which is owned by Borrower.
"Sungold" means Sungold Enterprises, Ltd., a New York corporation.
"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;
CREDIT AGREEMENT PAGE 8
<PAGE> 15
(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 hereof and
includes all renewals, replacements, and amendments of the Term Loan.
"Term Loan Commitment" has the meaning set forth in Section 3.1
hereof.
"Term Note" has the meaning set forth in Section 3.3 hereof 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. "Working
Capital" means Borrower's (a) current assets, less (b) Borrower's current
liabilities, including all amounts outstanding under the Revolving Loan, but
excluding all amounts outstanding under the Term Loan.
1.2 ACCOUNTING TERMS
(a) 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.
(b) All financial reporting required by this Agreement, and all
financial covenants set forth in this Agreement shall be measured, on a
consolidated basis in order to include the assets, liabilities, and results of
operations of the Subsidiaries.
(c) Upon completion of the acquisition of a Person by Borrower or
one of the Subsidiaries, and upon completion of the acquisition of all or
substantially all of the assets of another Person by Borrower or one of the
Subsidiaries, for purposes of measuring the financial covenants set forth in
this Agreement, all of the assets, liabilities, Cash Flow, and Adjusted Cash
Flow (as the case may be) of such Person shall be included as though the
acquisition had been consummated prior to the trailing four quarters from the
date as of which the calculation is being made.
CREDIT AGREEMENT PAGE 9
<PAGE> 16
1.3 RULES OF CONSTRUCTION
Unless the context otherwise requires, the following rules of
construction apply to the Loan Documents:
(a) Words in the singular include the plural and in the plural
include the singular.
(b) Provisions of the Loan Documents apply to successive events
and transactions.
(c) 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.
1.4 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.
SECTION 2. REVOLVING LOAN
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 June 30, 1999 ("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, $15,000,000 (the "Revolving Loan"). Borrower may borrow, repay,
and reborrow hereunder either the full amount of the Revolving Loan or any
lesser sum.
2.2 USE OF PROCEEDS
The proceeds of the Revolving Loan shall be used by Borrower (a) to
renew and refinance the revolving loan outstanding under the Existing Loan
Agreement, (b) for operating cash for Borrower and the Subsidiaries, (c) for
the acquisition by GAC of substantially all of the assets of Sungold, (d) for
the acquisition by Borrower or a
CREDIT AGREEMENT PAGE 10
<PAGE> 17
Subsidiary of a Person or substantially all of the assets of a Person, provided
that the use of proceeds for such acquisition is approved by U. S. Bank in
writing, and (e) to refinance operating loans of (i) Sungold, and (ii) Persons
acquired by Borrower or a Subsidiary or operating loans of Persons all or
substantially all of the assets of which are acquired by Borrower or a
Subsidiary, provided that any such acquisition is approved by U. S. Bank in
writing.
2.3 REVOLVING NOTE
The Revolving Loan shall be evidenced by a promissory note in the form
attached hereto as Exhibit A (the "Revolving Note").
2.4 REVOLVING LOAN INTEREST RATES
Each time Borrower requests a Funding, at any time prior to the
expiration of each Interest Period for any LIBOR Rate Borrowing, and at any
other time with respect to Prime Rate Borrowings, so long as there exists no
Event of Default, Borrower may elect either the Prime Borrowing Rate or the
LIBOR Borrowing Rate to apply to such Funding, such existing LIBOR Rate
Borrowing at the end of the Interest Period, or such existing Prime Rate
Borrowing. In the event that Borrower does not specify an interest rate
election as provided for herein for a requested Funding or prior to the end of
any Interest Period with respect to an existing LIBOR Rate Borrowing, then such
Funding or existing LIBOR Rate Borrowing at the expiration of such Interest
Period shall be deemed to constitute a Prime Rate Borrowing.
2.5 REPAYMENT
(a) 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.
(b) 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.
2.6 REVOLVING LOAN FEE
On or before September 30, 1997, Borrower shall pay U. S. Bank a
nonrefundable fee for the Revolving Loan in the amount of $75,000, less any
amounts previously paid by Borrower to U. S. Bank toward this fee.
CREDIT AGREEMENT PAGE 11
<PAGE> 18
2.7 REVOLVING LOAN UNUSED PORTION FEE
Borrower agrees to pay U. S. Bank a fee for the Revolving Loan in an
amount equal to .25 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 March, June, September, and December,
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 a 360-day year for the
actual number of days elapsed. The calculation of the unused portion fee
payable as of the last day of June 1997, shall include the unused portion fee
payable through the date of this Agreement for the revolving loan pursuant to
the Existing Credit Agreement.
2.8 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 is limited to $6,000,000
("Borrowing Base").
(b) 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 fifth Business Day of each calendar month for the previous
fiscal month of Borrower, and (ii) promptly upon U. S. Bank's request.
(c) If at any time the aggregate principal amount of the Revolving
Loan (including outstanding Letters of Credit) shall exceed the Borrowing Base,
Borrower shall 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.
2.9 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
CREDIT AGREEMENT PAGE 12
<PAGE> 19
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,
$15,000,000.
(b) 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.
(c) 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.
(d) 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
CREDIT AGREEMENT PAGE 13
<PAGE> 20
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.
SECTION 3. TERM LOAN
3.1 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 lend to Borrower
$11,000,000 on a term loan basis (the "Term Loan"). The maximum outstanding
principal balance under the Term Loan shall at no time exceed the following
amounts for the time periods set forth below ("Term Loan Commitment").
<TABLE>
<CAPTION>
TIME PERIOD TERM LOAN COMMITMENT
----------- --------------------
<S> <C>
4/7/97 - 12/30/97 $11,000,000
12/31/97 - 12/30/98 $8,250,000
12/31/98 - 4/7/99 $5,500,000
</TABLE>
3.2 USE OF PROCEEDS
The proceeds of the Term Loan shall be used (a) for the acquisition by
GAC of substantially all of the assets of Sungold, and (b) for the acquisition
by Borrower or a Subsidiary of a Person or substantially all of the assets of a
Person, provided that the use of proceeds for such acquisition is approved by
U. S. Bank in writing.
3.3 TERM NOTE
The Term Loan shall be evidenced by a promissory note in the form
attached hereto as Exhibit B (the "Term Note").
3.4 TERM LOAN INTEREST RATES
Each time Borrower requests a Funding, at any time prior to the
expiration of each Interest Period for any LIBOR Rate Borrowing, and at any
other time with respect to Prime Rate Borrowings, so long as there exists no
Event of Default, Borrower may elect either the Prime Borrowing Rate or the
LIBOR Borrowing Rate
CREDIT AGREEMENT PAGE 14
<PAGE> 21
to apply to such Funding, such existing LIBOR Rate Borrowing at the end of the
Interest Period, or such existing Prime Rate Borrowing. In the event that
Borrower does not specify an interest rate election as provided for herein for
a requested Funding or prior to the end of any Interest Period with respect to
an existing LIBOR Rate Borrowing, then such Funding or existing LIBOR Rate
Borrowing at the expiration of such Interest Period shall be deemed to
constitute a Prime Rate Borrowing.
3.5 REPAYMENT
(a) Commencing on the first day of the first month following the
initial 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.
(b) On December 31, 1997, and December 31, 1998, Borrower shall
make principal reduction payments on the Term Loan to U. S. Bank in an amount
(if any) necessary to reduce the outstanding balance of the Term Loan to the
then-applicable amount of the Term Loan Commitment.
(c) Borrower shall pay U. S. Bank all outstanding principal,
accrued interest, and other charges with respect to the Term Loan two years
from the date of this Agreement.
3.6 TERM LOAN FEE
On or before September 30, 1997, Borrower shall pay U. S. Bank a
nonrefundable fee for the Term Loan in the amount of $125,000.
3.7 TERM LOAN UNUSED PORTION FEE
Borrower agrees to pay U. S. Bank a fee for the Term Loan in an amount
equal to .25 percent per annum of the average unused portion of the Term Loan,
based on the unused amount of the commitment under the Term Loan during the
applicable time period. Such fee shall accrue from and include the date of
this Agreement throughout the term of the Term Loan and shall be payable
quarterly in arrears on the last day of March, June, September, and December,
and on any day that the Term Loan is paid in full and U. S. Bank's commitment
to make further Fundings under the Term Loan has expired or terminated.
Computations of such fee shall be based on a 360-day year for the actual number
of days elapsed.
CREDIT AGREEMENT PAGE 15
<PAGE> 22
SECTION 4. EQUIPMENT LINE
4.1 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 available to
Borrower a $5,000,000 nonrevolving equipment line of credit during the
Commitment Period (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 $5,000,000.
4.2 USE OF PROCEEDS
The proceeds of the Equipment Line shall be used by Borrower solely to
provide financing for equipment acquisitions; provided that the initial Funding
under the Equipment Line may be used to reimburse Borrower for working capital
used by Borrower to finance the acquisition of equipment. Proceeds of the
Equipment Line may not be used to finance the acquisition of another Person or
all or substantially all of the assets of another Person.
4.3 EQUIPMENT NOTE
Each Equipment Loan shall be evidenced by a promissory note in the
form attached hereto as Exhibit C (an "Equipment Note").
4.4 EQUIPMENT LOAN INTEREST RATE
Each Equipment Loan shall bear interest on the principal amount
thereof remaining unpaid from time to time at the applicable Prime Borrowing
Rate.
4.5 REPAYMENT
(a) 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.
(b) On March 31, June 30, September 30, and December 31 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.
CREDIT AGREEMENT PAGE 16
<PAGE> 23
(c) 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 September 30, 2003.
4.6 EQUIPMENT LINE UNUSED PORTION FEE
Borrower agrees to pay U. S. Bank a fee for the Equipment Line in an
amount equal to .25 percent per annum of the average unused portion of the
Equipment Line, based on the amount of the remaining unused commitment under
the Equipment Line during the applicable time period. Such fee shall accrue
from and include the date of this Agreement throughout the term of the
Equipment Line and shall be payable quarterly in arrears on the last day of
March, June, September, and December, and on any day that the Equipment Line is
paid in full and U. S. Bank's commitment to make further Fundings under the
Equipment Line has expired or terminated. Computations of such fee shall be
based on a 360-day year for the actual number of days elapsed.
4.7 LIMITATIONS ON EQUIPMENT LINE FUNDINGS
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.
SECTION 5. GENERAL PROVISIONS APPLICABLE TO THE LOANS
5.1 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.
5.2 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
CREDIT AGREEMENT PAGE 17
<PAGE> 24
Loans. Without limiting the methods by which U. S. Bank may otherwise be
entitled 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.
5.3 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.
5.4 BANK CONTROL ACCOUNT
So long as any amounts remain outstanding under any of the Loans,
there shall be established for Borrower and the Subsidiaries one or more bank
control accounts at U. S. Bank into which all funds obtained by Borrower and
the Subsidiaries from the collection of accounts receivable, from the sale of
inventory or services, or otherwise during the terms of the Loans shall be
deposited. Notwithstanding the foregoing, for a period not to exceed 180 days
following the date of this Agreement, GAC may maintain a depository account at
a bank in the state of New York into which GAC may deposit funds from the
collection of its accounts receivable, provided that Borrower shall be required
GAC to transfer all funds deposited into such account to a bank control account
at U. S. Bank every Business Day. U. S. Bank and Borrower hereby agree that
U. S. Bank may credit the bank control accounts in order to make any payments
under the Loans that Borrower is required to make pursuant to the terms of this
Agreement.
CREDIT AGREEMENT PAGE 18
<PAGE> 25
5.5 COMPUTATIONS OF INTEREST
All computations of interest shall be based on a 360-day year for the
actual number of days elapsed.
5.6 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 Prime Borrowing Rate applicable to each Loan 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.
5.7 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.
5.8 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.
5.9 PREPAYMENTS
Prepayments of all or any portion of Prime Rate Borrowings shall not
be subject to a prepayment charge. In the event Borrower prepays all or any
portion of any LIBOR Rate Borrowing prior to the expiration of the applicable
Interest Period, Borrower shall pay to U. S. Bank a yield maintenance charge in
an amount calculated pursuant to the formula set forth in Exhibit D. All
prepayments shall be applied to the Loans being prepaid in the inverse order of
maturity.
CREDIT AGREEMENT PAGE 19
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5.10 BASIS FOR DETERMINING INTEREST RATE INADEQUATE OR ILLEGAL
(a) U. S. Bank's obligation to maintain LIBOR Rate Borrowings
shall be suspended upon U. S. Bank's giving notice to Borrower that it shall be
against Applicable Law or impossible for U. S. Bank to maintain LIBOR Rate
Borrowings until U. S. Bank notifies Borrower that the circumstances giving
rise to the suspension no longer exist.
(b) After the date of this Agreement, if adoption of any
Applicable Law or any change therein or any change in the interpretation or
administration thereof by any Governmental Body, central bank, or comparable
agency charged with the interpretation or administration thereof, or if
compliance by U. S. Bank with any request or directive (whether or not having
the force of Applicable Law) of any such Governmental Body, central bank, or
comparable agency makes it against Applicable Law or impossible for U. S. Bank
to maintain LIBOR Rate Borrowings, U. S. Bank, shall immediately give notice
thereof to Borrower.
(c) Upon notice to Borrower provided for in Section 5.10(a) or (b)
herein, all LIBOR Rate Borrowings shall automatically convert to Prime Rate
Borrowings.
(d) If U. S. Bank notifies Borrower that the circumstances giving
rise to the suspension of LIBOR Rate Borrowings no longer apply, then the
interest rate election set forth in Sections 2.4 and 3.4 shall again be
effective on the date U. S. Bank provides such notice to Borrower.
5.11 INTEREST COST
If the revision of Regulation D announced by the Board of Governors of
the Federal Reserve Board, or if the adoption of any Applicable Law or any
change therein or any change in the interpretation or administration thereof by
any Governmental Body, central bank, or comparable agency charged with the
interpretation or administration thereof, or if compliance by U. S. Bank with
any request or directive (whether or not having the force of Applicable Law) of
any such Governmental Body, central bank, or comparable agency:
(a) Shall subject U. S. Bank to any tax, duty, or other charge
resulting from all or any portion of the Loans bearing interest at the LIBOR
Borrowing Rate, or shall change the basis of taxation of payments to U. S. Bank
of the principal of or interest on the Loans, or any portion thereof, with
interest accruing at the LIBOR Borrowing Rate or any other amount due under
this Agreement with regard to the Loans with interest bearing at the LIBOR
Borrowing Rate (except for changes in the rate of tax on
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the overall net income of U. S. Bank imposed by the jurisdiction in which U. S.
Bank's principal executive office lies); or
(b) Shall impose or modify any reserve (including but not limited
to any reserve imposed by the Board of Governors of the Federal Reserve System),
special deposit, or similar requirement against assets of, deposits with, or for
the account of, or credit extended by U. S. Bank or shall impose on U. S. Bank
any other condition affecting the LIBOR Rate Borrowings under the Loans' and the
result of any of the foregoing is to increase the cost to U. S. Bank of
maintaining the LIBOR Rate Borrowings or to reduce the return of U. S. Bank
under this Agreement; then, from time to time, within ten days after demand by
U. S. Bank, Borrower shall pay to U. S. Bank such additional amount or amounts
as will compensate U. S. Bank for such increase in cost or reduction in return.
5.12 FUNDINGS
(a) Borrower shall give U. S. Bank notice (either in writing or
orally) for each Prime Rate Borrowing and shall give U. S. Bank two Business
Days prior written notice for each LIBOR Rate Borrowing (between 8 a.m. and 12
noon Seattle, Washington time). Each such notice ("Borrowing Notice") shall be
given by Douglas Hauff, Travis Worth, Steven Kingma, Kimberly Eiring, or Brody
Hanssen, each of whom is authorized to request Fundings and direct disposition
of any such Fundings until written notice by Borrower of the revocation of such
authority is received by U. S. Bank. The Borrowing Notice shall specify (i)
the amount of the requested Funding, (ii) the interest option chosen by
Borrower, (iii) for LIBOR Rate Borrowings, the Interest Period, and (iv)
whether Borrower is requesting a new Funding at the LIBOR Borrowing Rate or
conversion of any portion of the Prime Rate Borrowing to an LIBOR Rate
Borrowing. Each Borrowing Notice shall be effective upon receipt, except that
notices received by U. S. Bank after 12 noon, Seattle time, on a Business Day
shall be deemed to be received on the immediately succeeding Business Day.
(b) 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 5.12(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
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aggregate sum owing exceeds the maximum principal amount referred to above.
U. S. Bank shall not be responsible under principles of contracts, tort, or
otherwise for the amount of an unauthorized or invalid Funding; rather,
Borrower agrees to repay any sums with interest as provided herein.
5.13 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.
SECTION 6. CONDITIONS PRECEDENT FOR FUNDINGS UNDER THE LOANS
6.1 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:
(a) U. S. Bank shall have received this Agreement, the Revolving
Note, and the Term Note, duly executed and delivered by the respective parties
thereto.
(b) U. S. Bank shall have received, duly executed and delivered by
each of Borrower, HSC, and GAC, triplicate originals of a security agreement in
the forms attached hereto as Exhibit E-1, E-2, and E-3 (together with the
replacement GAC security agreements described below, the "Security
Agreements"), 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. Concurrently with the name change
of GAC to "Sungold Eyewear, Inc.," GAC shall execute and deliver to U. S. Bank
triplicate originals of the GAC Security Agreement reflecting the name change.
Two of the triplicate originals of each of the Security Agreements shall be
filed by U. S. Bank with the United States Patent and Trademark Office.
(c) 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 interests granted to U. S. Bank.
(d) U. S. Bank shall have received a guaranty from each of the
Guarantors, duly executed and delivered, in the form attached hereto as
Exhibit F ("Guaranty").
CREDIT AGREEMENT PAGE 22
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(e) 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 G.
(f) 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.
(g) 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.
(h) All corporate proceedings of Borrower and each of the
Subsidiaries 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:
(i) Copies of the articles or certificates of
incorporation (as the case may be) of Borrower and each of the
Subsidiaries, together with all amendments thereto, certified by
Borrower to be true and complete;
(ii) A certificate of authority or good standing (as the
case may be) for Borrower and each of the Subsidiaries in its
respective state of incorporation and in the state of its respective
principal place of business, dated within 30 days of the date of the
execution of this Agreement; and
(iii) A certified resolution of the directors and
incumbency certificate of Borrower and each of the Subsidiaries in the
form attached hereto as Exhibit H-1, H-2, and H-3.
(i) 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.
(j) U. S. Bank shall have received, reviewed, and approved
Borrower's 1996 fiscal year end audit, Borrower's interim financial statements
since Borrower's 1996 fiscal year end, as well as a pro forma balance sheet of
Borrower dated as of the date of the initial Funding, reflecting the
acquisition contemplated by GAC of substantially all of the assets of Sungold.
CREDIT AGREEMENT PAGE 23
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(k) U. S. Bank shall have received a pledge agreement from
Borrower, duly executed and delivered, in the form attached hereto as Exhibit I
("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.
(l) U. S. Bank shall have received a Borrowing Notice from
Borrower for the initial Funding requested under the Revolving Loan and the
Term Loan.
(m) 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.
(n) U. S. Bank shall have received, reviewed, and approved all of
the manufacturing, employment, licensing, and distribution agreements of
Borrower, the Subsidiaries, and Sungold.
(o) U. S. Bank shall have received, reviewed, and approved all
documents in connection with the acquisition by GAC of substantially all of the
assets of Sungold. In addition, U. S. Bank shall have received evidence
satisfactory to U. S. Bank that such acquisition will close concurrently with
the initial Funding of the Term Loan in accordance with the documents approved
by U. S. Bank .
(p) U. S. Bank shall have received evidence satisfactory to U. S.
Bank reflecting that during the 1996 calendar year, the owners of Sungold
received aggregate cash compensation of not less than $3,000,000.
6.2 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:
(a) U. S. Bank shall have received an Equipment Note and Borrowing
Notice with respect to the requested Funding, duly executed and delivered by
Borrower.
(b) 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 or, in the case of the initial Funding under the Equipment
Line, of the equipment purchased with Borrower's working capital.
CREDIT AGREEMENT PAGE 24
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6.3 CONDITIONS PRECEDENT TO ACQUISITION FUNDINGS
The obligation of U. S. Bank to make any Funding under the Revolving
Loan or the Term Loan in order to finance the acquisition of any Person or all
or substantially all of the assets of any Person subsequent to the initial
Funding under the Term Loan is subject to the fulfillment, to the satisfaction
of U. S. Bank, of the following:
(a) U. S. Bank shall have approved in writing the acquisition by
Borrower or a Subsidiary of a Person or substantially all of the assets of a
Person in connection with which the proposed Funding under the Revolving Loan
or the Term Loan is to be used.
(b) U. S. Bank shall have received, reviewed, and approved all
documents arising out of or relating to the proposed acquisition. In addition,
U. S. Bank shall have received evidence satisfactory to U. S. Bank that such
acquisition will close concurrently with the requested Funding under the
Revolving Loan or the Term Loan in accordance with the documents approved by
U. S. Bank.
(c) There shall have been 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 and the Subsidiaries to U. S. Bank hereunder and the grant of security
in the equity interests and assets to be acquired, including, without
limitation, security agreements, pledge agreements, assignments separate from
certificate, stock certificates, UCC financing statements, guaranties, and
resolutions.
6.4 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:
(a) 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.
(b) U. S. Bank shall have received a Borrowing Notice for each
requested Funding.
(c) There shall have been executed and delivered to U. S. Bank
such further instruments, agreements, and documents as may be reasonably
necessary or proper in
CREDIT AGREEMENT PAGE 25
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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.
(d) The representations and warranties of Borrower in Section 9
hereof shall be true on the date of each Funding with the same force and effect
as if made on and as of that date.
(e) No Default or Event of Default shall exist, and, after having
given effect to the requested Funding, no Default or Event of Default would
exist.
(f) 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.
SECTION 7. 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:
7.1 FINANCIAL DATA
Keep its books of account in accordance with generally accepted
accounting principles, consistently applied, and furnish to U. S. Bank:
(a) 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 prepared as of
the end of each fiscal quarter of Borrower a calculation of the financial
covenants provided for in Section 8 hereof.
(b) 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,
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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.
(c) The financial statements of Guarantors as required by the
Guaranties.
(d) As soon as practicable and in any event within 45 days after
the close of each fiscal quarter of Borrower, 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 the financial covenants set forth in Section 8 hereof; 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.
(e) As soon as practicable and in any event within 25 days after
the close of each month, accounts receivable and accounts payable agings, as
well as a report of inventory by type and location for each such month in forms
and in such detail as is acceptable to U. S. Bank.
(f) Upon request by U. S. Bank, copies of all reports relative to
the operations of Borrower and its Affiliates filed with any Governmental Body.
(g) 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.
(h) 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.
(i) With reasonable promptness, such other information regarding
the business, operations, and financial condition of Borrower and Guarantors as
U. S. Bank may from time to time reasonably request.
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7.2 LICENSES AND PERMITS
Maintain all Governmental Approvals and all related or other material
agreements necessary for Borrower and the Guarantors to operate their
businesses, as they now exists or as they may be modified or expanded.
Borrower and the Guarantors will at all times comply with all Applicable Laws
relating to the operations, facilities, or activities of Borrower and the
Guarantors.
7.3 MAINTENANCE OF PROPERTIES
Keep Borrower's and Guarantors' 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.
7.4 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,
Guarantors, or their property or assets, or upon any property leased by
Borrower or Guarantors, 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, rentals, or anything else, that could, if unpaid, become a lien or
charge upon Borrower's or Guarantors' property or assets or the outstanding
capital stock of Borrower or adversely affect the facilities or operations of
Borrower or Guarantors (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 or
Guarantors, 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.
7.5 INSURANCE
(a) Maintain insurance upon Borrower's and Guarantors' 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
CREDIT AGREEMENT PAGE 28
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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 Borrower or Guarantor (as the case may
be) and U. S. Bank as secured party or otherwise as its interest may appear.
(b) 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.
7.6 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 and Guarantors.
7.7 INSPECTION
Allow any representative of U. S. Bank to visit and inspect any of the
properties of Borrower and Guarantors, to examine the books of account and
other records and files of Borrower and Guarantors, to make copies thereof, and
to discuss the affairs, business, finances, and accounts of Borrower and
Guarantors with their 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.
7.8 HAZARDOUS SUBSTANCES
(a) Borrower hereby covenants and agrees that so long as any
Indebtedness of Borrower to U. S. Bank is outstanding:
(i) Neither Borrower nor Guarantors will permit its
property or any portion thereof to be a site for the storage, use,
generation, manufacture,
CREDIT AGREEMENT PAGE 29
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disposal or transportation of Hazardous Materials in violation of
Hazardous Materials Laws;
(ii) Neither Borrower nor Guarantors will permit any
Hazardous Materials to be disposed of off its property other than in
properly licensed disposal sites;
(iii) Borrower and Guarantors, at their cost and expense,
will keep and maintain their 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
(iv) Borrower will immediately advise U. S. Bank in
writing of any Hazardous Material Claim.
(b) 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 attorneys' 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 hereof; (ii) any activities on its property during
Borrower's or any Guarantor's ownership, possession, or control of its property
that 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.
(c) 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 hereof (including, but not limited to, the indemnity provided for in
Section 7.8(b) hereof) 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
CREDIT AGREEMENT PAGE 30
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hereunder are separate and distinct from its obligations under the Loans and
the Loan Documents.
7.9 CORPORATE EXISTENCE
Maintain and preserve the corporate existence of Borrower and
Guarantors.
7.10 NOTICE OF DISPUTES AND OTHER MATTERS
Promptly give written notice to U. S. Bank of:
(a) Any citation, order to show cause, or other legal process or
order that could have a material adverse effect on Borrower or any Guarantor,
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 or any
Guarantor any Governmental Approval, and include with such notice a copy of any
such citation, order to show cause, or other legal process or order;
(b) Any (i) refusal, denial, threatened denial, or failure by any
Governmental Body to grant, issue, renew, or extend any material Governmental
Approval; (ii) proposed 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;
(c) Any dispute concerning or any threatened nonrenewal or
modification of any material lease for real or personal property to which
Borrower or any Guarantor is a party; or
(d) Any actions, proceedings, or claims of which Borrower may have
notice that may be commenced or asserted against Borrower or any Guarantor 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 or any
Guarantor.
7.11 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
CREDIT AGREEMENT PAGE 31
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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.
7.12 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 8.5 hereof, 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.
7.13 OTHER AGREEMENTS
Comply with all covenants and agreements set forth in or required
pursuant to any of the other Loan Documents.
7.14 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 or any Guarantor, concurrently with the acquisition thereof.
7.15 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.
7.16 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.
CREDIT AGREEMENT PAGE 32
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SECTION 8. 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:
8.1 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.
8.2 TRANSACTIONS WITH AFFILIATES
Except as provided in Section 8.6 hereof, 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.
8.3 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) a
promissory note of Borrower dated May 17, 1996, payable to the kindling company
in the initial principal amount of $300,000; and (d) 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 $500,000. Notwithstanding clause (d)
above, Borrower may not guarantee or become contingently liable for the
obligation of any Person except Indebtedness of Conquest Sports, Inc. to U. S.
Bank. In computing the additional indebtedness permitted by clause (d) 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 8.5 hereof, none of the additional indebtedness
permitted by this Section 8.3 shall be secured by the Collateral.
CREDIT AGREEMENT PAGE 33
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8.4 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, 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 8.3(d) hereof.
8.5 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 the property
of Borrower or any Guarantor 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, any Guarantor, 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 or any Guarantor; (g)
liens arising out of judgments or awards with regard to which Borrower or any
Guarantor 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) hereof are called the "Permitted Liens."
CREDIT AGREEMENT PAGE 34
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8.6 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 Indebtedness, performance,
obligations, stock, or dividends of any Person; or agree to or allow any
Guarantor to do any of the foregoing; but Borrower and Guarantors 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 (a) the Subsidiaries, and (b) to other Affiliates not to exceed
$100,000 in the aggregate at any time outstanding.
8.7 INVESTMENTS
Except as otherwise contemplated by this Agreement, invest in (by
capital contribution or otherwise), acquire, purchase, or make any commitment
to purchase the obligations, stock, or equity of any Person, or allow any
Guarantor to do any of the foregoing, 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, and
(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 or any Guarantor.
8.8 ACQUISITIONS
Either directly or through an Affiliate, acquire, purchase, or make
any commitment to acquire or purchase a controlling interest in the stock or
other equity interest of any Person or all or a substantial portion of the
assets of any Person unless (a) Borrower receives U. S. Bank's prior written
consent, and (b) Borrower has previously delivered to U. S. Bank evidence
reasonably deemed satisfactory to U. S. Bank reflecting that upon consummation
of any such proposed transaction, Borrower will be and thereafter will continue
to be in compliance with the financial Covenants set forth in Sections 8.15
through 8.18 herein.
8.9 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
CREDIT AGREEMENT PAGE 35
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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 (except as
contemplated by this Agreement), or allow any Guarantor to do any of the
foregoing.
8.10 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, or allow any
Guarantor to do any of the foregoing.
8.11 CHANGE OF CHIEF EXECUTIVE OFFICE OR NAME
Change (a) the chief executive office of Borrower or any Guarantor,
(b) Borrower's or any Guarantor's name, or (c) the location of any of the
Collateral, except in the ordinary course of business; 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.
8.12 CHANGE IN DOCUMENTS
Amend, supplement, terminate, or otherwise modify in any way
Borrower's or any Guarantor's articles of incorporation, contracts, or other
documents delivered to U. S. Bank hereunder or executed in connection herewith.
8.13 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 or any Guarantor.
8.14 PENSION PLAN
Terminate or partially terminate any Plan now existing or hereafter
established for Borrower or its Affiliates or withdraw from participation
therein under
CREDIT AGREEMENT PAGE 36
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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.
8.15 TANGIBLE NET WORTH
Permit Tangible Net Worth to be less than (a) $5,000,000 at any time
from December 31, 1997, through December 30, 1998, or (b) $15,000,000 as of
December 31, 1998, or at any time thereafter.
8.16 WORKING CAPITAL
Permit Working Capital to be less than (a) $5,000,000 at any time from
March 31, 1997, through December 30, 1997, or (b) $10,000,000 as of December
31, 1997, or at any time thereafter.
8.17 DEBT SERVICE COVERAGE RATIO
Permit the Debt Service Coverage Ratio to be less than 1.5:1.0 as of
the last day of any fiscal quarter of Borrower for the trailing four quarters
then ended, commencing with Borrower's fiscal quarter ended March 31, 1997.
8.18 SENIOR DEBT RATIO
Permit the Senior Debt Ratio to be greater than (a) 3.0:1.0 as of the
last day of any fiscal quarter of Borrower for the trailing four quarters then
ended, commencing with Borrower's fiscal quarter ended March 31, 1997, through
September 30, 1997, or (b) 2.5:1.0 as of the last day of any fiscal quarter of
Borrower thereafter for the trailing four quarters then ended.
SECTION 9. 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:
CREDIT AGREEMENT PAGE 37
<PAGE> 44
9.1 CORPORATE STATUS
Borrower and each Guarantor is a corporation organized and validly
existing under the laws of the state of Washington. Borrower and each
Guarantor 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 and each Guarantor is qualified to do business in all states except
where the failure to be qualified could not have a material adverse effect on
Borrower.
9.2 POWER AND AUTHORITY
Borrower and each Guarantor 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 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 and each
Guarantor (as the case may be) enforceable in accordance with their respective
terms.
9.3 NO VIOLATION OF AGREEMENTS
Neither Borrower nor any Guarantor is 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 or any Guarantor 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 or any Guarantor may
be bound, or to which Borrower or any Guarantor may be subject, and (c) will
not violate any of the provisions of the articles of incorporation of Borrower.
No Governmental Approval is necessary (i) 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 (ii) for the consummation by Borrower and Guarantors
of the transactions
CREDIT AGREEMENT PAGE 38
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contemplated by this Agreement, including, but not limited to, the grant of the
security interests to U. S. Bank.
9.4 RECORDING AND ENFORCEABILITY
Neither the articles of incorporation, bylaws, or other applicable
corporate documents of Borrower or any Guarantor, 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.
9.5 LITIGATION
There are no actions, suits, or proceedings pending or threatened
against or affecting Borrower or any Guarantor before any Governmental Body
that could have a material adverse effect on Borrower or any Guarantor or the
Collateral. Neither Borrower nor any Guarantor is 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 any
Guarantor or on the Collateral.
9.6 GOOD TITLE TO PROPERTIES
Borrower and each Guarantor 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 8.5 hereof.
9.7 LICENSES AND PERMITS
All Governmental Approvals with respect to the business of Borrower
and Guarantors 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 and Guarantors presently holds all material
Governmental Approvals as are necessary or
CREDIT AGREEMENT PAGE 39
<PAGE> 46
advisable in connection with the conduct of its business as now conducted and
as presently proposed to be conducted.
9.8 NO BURDENSOME AGREEMENTS
Neither Borrower nor any Guarantor is 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 or any Guarantor.
9.9 PROPERTIES IN GOOD CONDITION
All the material properties of Borrower and Guarantors 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 and Guarantors, and comparable to
industry standards and are and will be in compliance with all Applicable Laws.
9.10 FINANCIAL STATEMENTS
The (a) audited financial statements of Borrower dated as at December
31, 1996, 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 December 31,
1996.
9.11 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, 1997.
CREDIT AGREEMENT PAGE 40
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9.12 TAXES
Borrower and Guarantors have 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 and Guarantors or
upon their assets that are due and payable have been paid (except as otherwise
permitted in this Agreement).
9.13 LICENSE FEES
Borrower and Guarantors have paid all fees and charges that have
become due for any Governmental Approval for their business or has made
adequate provisions for any such fees and charges that have accrued.
9.14 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 and Guarantors or in which they has an interest, e.g., a license.
Borrower and Guarantors possess all necessary trademarks, trade names, service
marks, copyrights, patents, patent rights, and licenses to conduct their
businesses as now and as proposed to be conducted, without conflict with the
rights or claimed rights of others.
9.15 GOVERNMENTAL APPROVALS
Attached hereto as Exhibit L is a schedule of all material
Governmental Approvals necessary for the operation of Borrower's and
Guarantors' business.
9.16 DISCLOSURE
To the best of Borrower's knowledge, the exhibits hereto, the
financial information and statements referred to in Section 9.10 hereof, 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.
9.17 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
CREDIT AGREEMENT PAGE 41
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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 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.
9.18 NAMES
Neither Borrower, any Guarantors, 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 other than as set forth in the
Security Agreement of even date herewith.
9.19 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 and Guarantors' 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.
9.20 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.
SECTION 10. EVENTS OF DEFAULT; REMEDIES
10.1 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):
CREDIT AGREEMENT PAGE 42
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(a) 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
(b) If any Indebtedness of Borrower or any Guarantor 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
(c) If Borrower or any Guarantor 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) hereof), whether now or
hereafter incurred; or
(d) 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
(e) If Borrower fails to observe or perform any term, covenant, or
agreement to be performed or observed pursuant to Sections 7 and 8 hereof; or
(f) If Borrower fails to observe or perform (not otherwise
specified in this Section 10) 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
(g) If Borrower fails to perform any of its obligations under any
of the Loan Documents not otherwise specified in this Section 10, 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
(h) If custody or control of any substantial part of the property
of Borrower or any 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
(i) If Borrower or any Guarantor suspends or discontinues its
business, or if Borrower or Guarantor makes an assignment for the benefit of
creditors or a composition with creditors, is unable or admits in writing its
inability to pay its debts
CREDIT AGREEMENT PAGE 43
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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 any 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 any 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 any Guarantor; or
(j) 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 Guarantor, or any denial,
forfeiture or revocation by any Governmental Body of any Governmental Approval
that could have a material adverse effect on Borrower; or
(k) If any of the events described in Section 7.10 hereof 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
(l) If after the date of this Agreement, any Person acquires an
aggregate of 20 percent or more of the outstanding shares of voting stock of
Borrower; or
(m) If any material adverse change in the business or financial
condition of Borrower or any Guarantor occurs, or if any event that materially
increases U. S. Bank's risk or materially impairs the Collateral occurs.
10.2 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
CREDIT AGREEMENT PAGE 44
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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.
SECTION 11. MISCELLANEOUS
11.1 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:
(a) If to Borrower:
Gargoyles, Inc.
5866 S. 194th Street
Kent, Washington 98032
Attention: Steven R. Kingma
Facsimile No.: (206) 872-3317
(b) If to U. S. Bank:
U. S. Bank of Washington, National Association
1420 Fifth Avenue, Tenth Floor
Seattle, Washington 98101
Attention: Gerald L. Sorensen
Facsimile No.: (206) 344-3737
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
CREDIT AGREEMENT PAGE 45
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deemed to be given or made when received by the party to whom such
communication was sent.
11.2 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 attorneys' 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 attorneys' 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 attorneys' fees shall include, without limitation, attorneys' 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 regard to the identity of the prevailing party.
11.3 SETOFF
Borrower hereby pledges and gives to U. S. Bank, and any Participant,
a lien and security interest in and 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 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.
CREDIT AGREEMENT PAGE 46
<PAGE> 53
11.4 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.
11.5 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.
11.6 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.
11.7 ENTIRE AGREEMENT AND AMENDMENTS
(a) This Agreement and the exhibits to this Agreement represent
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.
CREDIT AGREEMENT PAGE 47
<PAGE> 54
(b) Upon execution of this Agreement and the exhibits to this
Agreement, and the satisfaction of the conditions precedent to the initial
Funding under this Agreement, the Existing Credit Agreement and the exhibits to
the Existing Credit Agreement shall be deemed amended and superseded in their
entirety by this Agreement and the exhibits to this Agreement. All promissory
notes signed by Borrower in connection with the Existing Credit Agreement shall
be marked "renewed" and retained by U. S. Bank until the Loans are repaid in
full and U. S. Bank's commitment to make additional Fundings under the Loans
have been terminated.
11.8 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.
11.9 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.
11.10 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.
11.11 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.
CREDIT AGREEMENT PAGE 48
<PAGE> 55
11.12 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.
11.13 ARBITRATION
(a) 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.
(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
CREDIT AGREEMENT PAGE 49
<PAGE> 56
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.
(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 Borrower and U. S. Bank.
11.14 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.
11.15 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.
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: __________________________________________
Title: Chief Operating Officer
By: __________________________________________
Title: V.P., C.F.O., Secretary, and Treasurer
U. S. BANK OF WASHINGTON,
NATIONAL ASSOCIATION
CREDIT AGREEMENT PAGE 50
<PAGE> 57
By: __________________________________________
Title: Senior Vice President
CREDIT AGREEMENT PAGE 51
<PAGE> 1
EXHIBIT 11.1
GARGOYLES, INC.
COMPUTATION OF EARNINGS PER SHARE
(Unaudited)
<TABLE>
<CAPTION>
Quarter Ended March 31,
---------------------------------------
1997 1996
----------- -----------
<S> <C> <C>
Shares outstanding at beginning of quarter 7,419,008 5,450,003
Weighted average number of shares issued
during the quarter 1,024 7,432
Net shares issued for options and warrant -
treasury stock method 262,850 252,279
----------- -----------
Weighted average number of common
stock outstanding 7,682,882 5,709,714
=========== ===========
Net income $ 425,533 $ (15,924)
=========== ===========
Net income per share $ 0.06 $ (0.00)
=========== ===========
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> MAR-31-1997
<CASH> 1,100
<SECURITIES> 0
<RECEIVABLES> 12,709,137
<ALLOWANCES> (192,559)
<INVENTORY> 9,238,919
<CURRENT-ASSETS> 27,189,998
<PP&E> 4,850,608
<DEPRECIATION> (1,468,154)
<TOTAL-ASSETS> 33,752,152
<CURRENT-LIABILITIES> 7,393,365
<BONDS> 0
0
0
<COMMON> 25,649,405
<OTHER-SE> (4,314,659)
<TOTAL-LIABILITY-AND-EQUITY> 33,752,152
<SALES> 8,198,266
<TOTAL-REVENUES> 8,308,266
<CGS> 3,081,997
<TOTAL-COSTS> 3,081,997
<OTHER-EXPENSES> 4,720,527
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 26,791
<INCOME-PRETAX> 532,533
<INCOME-TAX> 107,000
<INCOME-CONTINUING> 425,533
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 425,533
<EPS-PRIMARY> 0.06
<EPS-DILUTED> 0
</TABLE>
