<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
DATE OF REPORT (DATE OF EARLIEST EVENT REPORTED): June 1, 1999
GARGOYLES, INC.
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(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
WASHINGTON 0-21355 91-1247269
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(STATE OR OTHER JURISDIC-) (COMMISSION (IRS EMPLOYER
TION OF INCORPORATION FILE NUMBER) IDENTIFICATION NO.)
5866 South 194th Street
Kent, Washington 98032
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(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (253) 796-2752
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(FORMER NAME OR FORMER ADDRESS, IF CHANGED SINCE LAST REPORT.)
<PAGE>
ITEM 1. CHANGES IN CONTROL OF REGISTRANT
(a) Refinancing and Recapitalization Transaction with U.S. Bank National
Association.
On June 1, 1999, Gargoyles, Inc. completed a transaction with its lender,
U.S. Bank National Association, for the restructure of its credit facility with
the bank and a recapitalization of the company. The new financing relieves the
immediate liquidity concerns that have faced Gargoyles throughout 1998 and
gives Gargoyles needed working capital. As a result of the refinancing, the
company's indebtedness to U.S. Bank has been decreased by $10 million, and the
balance of the loans has been restructured into $19.5 million of term loans
with maturity dates of June 1, 2005, and a commitment for a $9 million
revolving loan. No principal payments are due under $10 million of the term
loans until their maturity date, and principal payments under the remaining
$9.5 million term loan are much lower in the first two years than in the last
four years of the loan. In exchange for $10 million of debt, the company
issued 10 million shares of Gargoyles, Inc. Series A Preferred Stock to U.S.
Bank. The bank's Series A Preferred Stock is convertible into 31,600,342
shares of Gargoyles, Inc. Common Stock, or 79% of the authorized capital of the
company on a fully-diluted basis. U.S. Bank's affiliate, U.S. Bankcorp,
currently owns 400,000 shares of Gargoyles, Inc. common stock, or 1% of the
authorized capital of the company, giving U.S. Bank and its affiliate
beneficial ownership, in the aggregate, of 80% of the authorized capital of
Gargoyles on a fully-diluted basis.
As a condition to closing the transaction with U.S. Bank, directors
Timothy C. Potts, Paul S. Shipman, Walter F. Walker and Robert G. Wolfe
resigned from the board of directors of Gargoyles, Inc. and all committees of
the board effective as of the closing of the U.S. Bank transaction. The board
resignations were effective June 1, 1999. William D. Ruckelshaus remained on
the Gargoyles board of directors following the closing of the U.S. Bank
transaction.
On June 1, 1999, the board of directors of Gargoyles appointed Daniel C.
Regis and William C. Thompson, and reappointed Paul S. Shipman, to the board to
serve until the 1999 annual meeting of shareholders of Gargoyles, which is
scheduled for June 29, 1999. Mr. Ruckelshaus' term on the board expires as of
the June 29th shareholders' meeting, and it is contemplated that Mr.
Ruckelshaus will not stand for reelection.
Daniel C. Regis is the President of Kirlan Venture Capital, Inc. which
provides investment consulting services to several venture capital funds.
Prior to joining Kirlan Venture Capital, Inc. in 1996, Mr. Regis was the
Managing Partner of Price Waterhouse LLP for the Northwest Region. Mr. Regis
worked for Price Waterhouse LLP for more than 32 years serving many notable
clients during his career, including NIKE, Longview Fibre and Precision
Castparts.
William C. Thompson is the President of Worldwide Marketing Consultants.
From 1996 to 1998, Mr. Thompson was the Executive Vice President and Chief
Marketing Officer of Umbro International, a $600 million brand marketed through
a subsidiary/licensee network in 55 countries. From 1987 to 1995 Mr. Thompson
was Vice Chairman and Chief Marketing Officer of J.Walter Thompson, a $6
billion international advertising agency.
ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS
(c) Exhibits.
Exhibit
Number
-------
1.1 Stock Purchase Agreement dated May 28, 1999, between
Gargoyles, Inc. and U. S. Bank National Association
1.2 Second Amended and Restated Credit Agreement dated
May 28, 1999, between Gargoyles, Inc. and U.S. Bank
National Association
99.1 Press Release of Registrant dated June 2, 1999
<PAGE>
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 hereunto duly authorized.
GARGOYLES, INC.
Date: June 7, 1999 By: /s/ LEO ROSENBERGER
------------------------------------
Leo Rosenberger, Chief Executive
Officer and Chief Financial Officer
Exhibit
Number
- -------
1.1 Stock Purchase Agreement dated May 28, 1999, between
Gargoyles, Inc. and U. S. Bank National Association
1.2 Second Amended and Restated Credit Agreement dated
May 28, 1999, between Gargoyles, Inc. and U.S. Bank
National Association
99.1 Press Release of Registrant dated June 2, 1999
<PAGE>
EXHIBIT 1.1
STOCK PURCHASE AGREEMENT
between
GARGOYLES, INC.
and
U. S. BANK NATIONAL ASSOCIATION
May 28, 1999
<PAGE>
CONTENTS
--------
ARTICLE 1. AUTHORIZATION AND SALE OF SHARES 1
1.1 Authorization 1
1.2 Sale of Shares 2
ARTICLE 2. CLOSING 2
2.1 Closing Date; Location 2
2.2 Certificates 2
ARTICLE 3. REPRESENTATIONS AND WARRANTIES OF GARGOYLES 3
3.1 Organization and Standing 3
3.2 Authorization of Agreement 4
3.3 Subsidiaries 4
3.4 Consents and Approvals 4
3.5 No Violations 4
3.6 Capitalization 5
(a) As of the Date of this Agreement 5
(b) Following the Closing 5
(c) No Other Outstanding Securities 6
3.7 Financial Statements 6
3.8 No Undisclosed Liabilities 6
3.9 Taxes 6
3.10 Real Property 7
3.11 Intellectual Property 7
3.12 Material Contracts 7
3.13 Relations with Employees 9
3.14 Arrangements with Affiliates 9
3.15 Employee Benefits 9
3.16 Litigation 10
3.17 Compliance with Laws 11
3.18 Environmental Matters 11
3.19 Insurance 12
3.20 Product Liability and Recalls 12
3.21 Preferred Stock Authorized 13
3.22 Disclosure 13
ARTICLE 4. REPRESENTATIONS AND WARRANTIES OF IN VESTOR 13
4.1 Authority and Validity of Agreement 13
4.2 Sophistication of Investor 14
ARTICLE 5. GENERAL COVENANTS OF GARGOYLES 14
5.1 Expenses 14
5.2 Registration Rights Agreement 15
ARTICLE 6. CONDITIONS TO CLOSING 15
6.1 Obligation of Investor to Close 15
6.2 Obligation of Gargoyles to Close 16
ARTICLE 7. SURVIVAL; INDEMNIFICATION 17
7.1 Survival of Representations and Warranties 17
7.2 Indemnification of the Investor 17
7.3 Indemnification of Gargoyles 17
7.4 Indemnification Procedures 18
ARTICLE 8. MISCELLANEOUS 18
8.1 Definitions 18
8.2 Further Assurances 23
8.3 Finder's Fees 23
8.4 Binding Effect and Assignment 24
8.5 Waiver 24
8.6 Notices 24
8.7 Governing Law; Service of Process 25
8.8 Schedules and Exhibits 25
8.9 Section Headings 26
8.10 Entire Agreement 26
8.11 Counterparts 26
Exhibits:
- --------
Exhibit A Certificate of Designation of Rights and Preferences
of Series A Preferred Stock of Gargoyles, Inc. A-1
Exhibit B Registration Rights Agreement B-1
Exhibit C Form of Closing Opinion of Messrs. Karr Tuttle
Campbell, Counsel to Gargoyles C-1
Schedules:
- ---------
3.4 Consents and Approvals
3.6(c) Options, Warrants
3.9 Taxes
3.10 Real Property Leases
3.11 Intellectual Property
3.12 Material Contracts
3.13 Employee Relations
3.14 Affiliate Arrangements
3.15 Benefit Plans
3.16 Legal Proceedings
3.17 Compliance with Laws
3.18 Environmental Matters
3.19 Insurance
<PAGE>
STOCK PURCHASE AGREEMENT
THIS STOCK PURCHASE AGREEMENT (this "Agreement") is made as of this 28th
day of May 1999, by and between GARGOYLES, INC., a Washington corporation
("Gargoyles"), and U. S. Bank National Association (the "Investor").
R E C I T A L S
Whereas, contemporaneously with the Closing (as defined herein) under this
Agreement, Gargoyles and the Investor are entering into a Second Amended and
Restated Credit Agreement dated as of the date of this Agreement and whereby
the secured indebtedness of Gargoyles to the Investor is being restructured;
Whereas, as part of such restructuring of indebtedness which is due and
payable or May 28, 1999, and which Gargoyles is unable to pay, the parties
hereto have agreed to enter into this Agreement and the related agreements
described herein;
Whereas, Gargoyles desires to designate the rights and preferences of its
Series A Preferred Stock by adopting the Certificate of Designation of Rights
and Preferences in the form attached hereto as Exhibit A (the "Certificate");
Whereas, subject to the terms and conditions of this Agreement, Gargoyles
desires to sell to the Investor, and the Investor desires to purchase from
Gargoyles, certain shares of capital stock of Gargoyles;
Whereas, Gargoyles has received a fairness opinion from Ladenburg Thalmann
& Co., Inc. addressed to the Board of Directors of Gargoyles to the effect that
the consideration received by Gargoyles for the Series A Preferred Stock to be
issued to the Investor is fair, from a financial point of view, to the holders
of the Common Stock of Gargoyles.
A G R E E M E N T
NOW, THEREFORE, in consideration of the premises and the mutual covenants
and conditions set forth herein, the parties hereto hereby agree as follows:
ARTICLE 1. AUTHORIZATION AND SALE OF SHARES
1.1 Authorization
------------------
Gargoyles represents and warrants that:
(a) The Board of Directors of Gargoyles:
(i) has adopted the "Designation of Rights and Preferences of
Series A Preferred Stock of Gargoyles, Inc." in the form attached hereto as
Exhibit A; and
(ii) has reserved 31,600,342 shares of the presently authorized but
unissued shares of Common Stock for issuance upon conversion of the Series A
Preferred Stock.
(c) Gargoyles has duly authorized the sale and issuance of ten million
shares of its Series A Preferred Stock (the "Series A Preferred Stock")
convertible into [forty million (40,000,000)] [or such greater number as is
supported by the fairness opinion] shares of its Common Stock (the "Conversion
Common Stock"). (The Series A Preferred Stock and the Common Stock to be
issued upon conversion of the Series A Preferred Stock are collectively
referred to herein as the "Shares").
(d) The Series A Preferred Stock, when issued, will have the rights,
privileges and preferences set forth in the attached Exhibit A.
1.2 Sale of Shares
-------------------
Subject to the terms and conditions of this Agreement, at the Closing (as
defined in Section 2.1 hereof) Gargoyles agrees to sell and issue to the
Investor, and the Investor agrees to purchase and accept from Gargoyles,
Series A Preferred Stock in exchange for indebtedness held by Investor having a
principal amount of $10,000,000.
ARTICLE 2. CLOSING
2.1 Closing Date; Location
---------------------------
The closing of the transactions contemplated by this Agreement (the
"Closing") shall take place at the offices of Perkins Coie, Seattle, Washington
at 4:00 PM local time on May 28, 1999 or such other date and time as agreed by
the parties (the "Closing Date").
2.2 Certificates
-----------------
Subject to satisfaction or waiver of the conditions to Closing set forth
herein, on the Closing Date Gargoyles shall deliver to the Investor a
certificate representing the Series A Preferred Stock.
ARTICLE 3. REPRESENTATIONS AND WARRANTIES OF GARGOYLES
Gargoyles hereby represents and warrants to the Investor that the
following statements are true and correct as of the date of this Agreement and
will be true and correct as of the Closing Date:
3.1 Organization and Standing
------------------------------
Gargoyles is a corporation duly organized, validly existing and in good
standing under the laws of the state of Washington and has full corporate power
and authority to own its properties and to carry on its business as it is now
conducted. Gargoyles is duly qualified or authorized to do business as a
foreign corporation in, and is in good standing under the laws of, each
jurisdiction in which the conduct of its business or the ownership of its
properties requires such qualification or authorization, except where the
failure to so qualify has not resulted in, and could not reasonably be expected
to result in, a Material Adverse Effect with respect to Gargoyles.
3.2 Authorization of Agreement
-------------------------------
Gargoyles has all requisite capacity, power and authority to execute and
deliver this Agreement and each other agreement, document, instrument or
certificate contemplated by this Agreement or to be executed by Gargoyles in
connection with the consummation of the transactions contemplated by this
Agreement (this Agreement, the Certificate, the Registration Rights Agreement
(in the form attached hereto as Exhibit B) and such other documents to be
executed and delivered by it in accordance herewith are referred to herein as
the "Stock Transaction Documents"), and to perform fully its obligations under
this Agreement and the other Stock Transaction Documents. Execution, delivery
and performance by Gargoyles of this Agreement and each of the other Stock
Transaction Documents to be executed by Gargoyles has been duly authorized by
all necessary action on behalf of Gargoyles. This Agreement has been, and each
of the Stock Transaction Documents will be, when executed and delivered by
Gargoyles, duly and validly executed and delivered by Gargoyles and, assuming
the due authorization, execution and delivery by the other parties hereto and
thereto, this Agreement constitutes, and each of the other Stock Transaction
Documents will constitute, when executed and delivered by Gargoyles, legal,
valid and binding obligations of Gargoyles, enforceable against Gargoyles in
accordance with their respective terms, and subject, as to enforceability, to
applicable bankruptcy, insolvency, reorganization, moratorium and similar laws
affecting creditors' rights and remedies generally and to general principles of
equity (regardless of whether enforcement is sought in a proceeding at law or
in equity).
3.3 Subsidiaries
-----------------
Gargoyles owns all the issued and outstanding capital stock of H.S.C.,
Inc., a Washington corporation, Private Eyes Sunglass Corporation, a Washington
corporation, and Sungold Eyewear, Inc., a Washington corporation (collectively,
the "Subsidiaries"). In addition, Gargoyles owns 70% of the issued and
outstanding shares of common stock of the kindling company, a California
corporation ("Kindling") which was formed to develop and distribute Timberland
brand sunglasses and eyewear under a license agreement with The Timberland
Company. In 1998, all the assets of Kindling were sold, and the license
agreement was terminated. Kindling no longer does any business and is in the
process of being wound up. Except for Kindling and the Subsidiaries, Gargoyles
does not own, directly or indirectly, any capital stock or other ownership
interest in any other Person or have any agreement to acquire any such capital
stock or other ownership interest. (Gargoyles and the Subsidiaries are referred
to collectively herein as the "Companies").
3.4 Consents and Approvals
---------------------------
Except as set forth on Schedule 3.4 and except where the failure to do so
has not resulted in and could not reasonably be expected to result in a
Material Adverse Effect with respect to Gargoyles, Gargoyles is not required to
obtain any Permit, make any filing with any Governmental Entity, or obtain the
consent of any party to any Contract to which any of the Companies is a party
in connection with the execution and delivery of this Agreement and any of the
other Stock Transaction Documents and the consummation of the transactions
contemplated hereby and thereby.
3.5 No Violations
------------------
Except as set forth in Schedule 3.4 with respect to required consents, the
execution and delivery of this Agreement and the other Stock Transaction
Documents by Gargoyles and the consummation by Gargoyles of the transactions
contemplated hereby and thereby do not (i) violate any provision of the
Articles of Incorporation or Bylaws of Gargoyles; (ii) conflict with, result in
a breach of, constitute a default under (or an event which, with notice or
lapse of time or both, would constitute a default under), accelerate the
performance required by, result in the creation of any Lien upon any of the
properties or assets of any of the Companies, or create in any party the right
to accelerate, terminate, modify, or cancel, or require any notice under, any
Contract to which any of the Companies is a party or by which the properties or
assets of any of the Companies is bound, except where such violation, conflict,
breach, default, acceleration or creation would not result in a Material
Adverse Effect with respect to any of the Companies; or (iii) violate any Law
or Order to which any of the Companies is subject, except where such violation
would not result in a Material Adverse Effect with respect to any of the
Companies.
3.6 Capitalization
-------------------
(a) As of the Date of this Agreement
As of the date of this Agreement, the authorized capital stock of
Gargoyles consists of:
(i) Forty Million (40,000,000) authorized shares of Common Stock,
without par value, of which 7,822,191 are issued and outstanding, 38,150 are
unissued and reserved for issuance to Walter F. Walker pursuant to a Common
Stock Purchase Warrant dated January 12, 1996, and 539,317 are unissued and
reserved for issuance pursuant to the Gargoyles Stock Incentive Plan, provided,
however, that 31,600,342 of the unissued shares have been reserved for issuance
upon conversion of the Series A Preferred Stock; and
(ii) Ten Million (10,000,000) shares of preferred stock, of which
no shares are issued and outstanding, provided, however, that all of such
shares of preferred stock have been designated as Series A Preferred Stock to
be issued to the Investor pursuant to this Agreement.
All the issued and outstanding shares of Common Stock have been duly
authorized and validly issued and are fully paid and non-assessable.
(b) Following the Closing
Immediately following the Closing:
(i) 7,422,191 shares of Common Stock will be held by Persons other
than Investor or its affiliates;
(ii) 400,000 shares of Common Stock will be held by the Investor or
its affiliates;
(iii) 539,317 shares of Common Stock will be reserved for the
Gargoyles, Inc. 1995 Stock Incentive Compensation Plan;
(iv) 38,150 shares of Common Stock will be reserved for issuance
under a Common Stock Purchase Warrant to Walter F. Walker dated January 12,
1996; and
(v) 31,600,342 shares of Common Stock will be reserved for
issuance upon conversion of the Series A Preferred Stock.
(c) No Other Outstanding Securities
Except as described in Schedule 3.6(c), there is no existing option,
warrant, call, right, commitment or other agreement of any character to which
Gargoyles is a party requiring, and there are no securities of Gargoyles
outstanding which upon conversion or exchange would require, the issuance, sale
or transfer of any additional shares of capital stock or other equity
securities of Gargoyles or other securities convertible into, exchangeable for
or evidencing the right to subscribe for or purchase shares of capital stock or
other equity securities of Gargoyles. Except as set forth on Schedule 3.6(c),
Gargoyles is not a party to any voting trust or other voting agreement with
respect to any shares of its capital stock or to any agreement relating to the
issuance, sale, redemption, transfer or other disposition of its capital stock.
3.7 Financial Statements
-------------------------
Copies of the consolidated financial statements, including consolidated
balance sheets, consolidated statements of operations, consolidated statements
of shareholders' equity, and consolidated statements of cash flows, for
Gargoyles as of and for the years ended 1998, 1997, 1996, and 1995, as audited
by BDO Seidman LLP (only 1998) and Ernst & Young LLP (other years), and the
interim unaudited consolidated financial statements for the quarter ended March
31, 1999 (the "Financial Statements") have been delivered to Investor. The
Financial Statements, including the notes thereto, fairly present the financial
position of Gargoyles as of the respective dates thereof and the results of
operations and cash flows of Gargoyles and its business for the periods
indicated therein, and have been prepared in accordance with GAAP.
3.8 No Undisclosed Liabilities
-------------------------------
Gargoyles has no liability of the type that should be reflected in balance
sheets prepared in accordance with GAAP that was not disclosed or reflected in
the Gargoyles March 31, 1999, consolidated balance sheet, except obligations
under Contracts described in Schedule 3.12 or under Contracts that are not
required to be disclosed thereon as a result of dollar thresholds specified in
Section 3.12.
3.9 Taxes
----------
Except as set forth on Schedule 3.9, all federal, state and local tax
returns required by law to be filed prior to the Closing Date by any of the
Companies have been filed, and Gargoyles has paid all taxes required to be paid
in respect of the periods covered by the tax returns. All money required to be
withheld by the Companies from the wages or salaries of their employees for
income tax, social security and unemployment taxes has been withheld, and
either paid to the proper tax receiving authority or set aside in accounts for
such purpose, or accrued, reserved against, and entered upon the books of the
Companies.
3.10 Real Property
------------------
None of the Companies holds fee title to any real property. Schedule 3.10
sets forth a complete list of all real property and interests in real property
leased by the Companies and identifies, for each real property lease (the "Real
Property Leases"), the parties thereto, the address of the property subject
thereto, and the fixed rent payable thereunder. Except as set forth in
Schedule 3.10, none of the Real Property Leases is subject to any sublease,
license or other agreement granting to any third Person any right to use,
occupy or possess any portion of the property subject to the Real Property
Leases. Except as set forth on Schedule 3.10, each of the Real Property Leases
is valid and enforceable in accordance with its terms, there is no default
under any of the Real Property Leases, and to the knowledge of Gargoyles no
event has occurred that with the lapse of time or the giving of notice or both
would constitute a default thereunder. Gargoyles has made available to the
Investor true, correct and complete copies of the Real Property Leases,
together with all amendments, modifications, supplements or side letters
affecting the obligations of any party thereunder.
3.11 Intellectual Property
--------------------------
Except as set forth in Schedule 3.11, the Companies own or have the right
to use all Intellectual Property used by them in the operation of their
businesses, free and clear of all Liens other than license fees not yet due and
payable. Except as set forth in Schedule 3.11, to the knowledge of Gargoyles,
no other Person has been granted the right to use any Intellectual Property
owned by any of the Companies, and to the knowledge of Gargoyles, no Person is
infringing upon or misappropriating any Intellectual Property used by any of
the Companies in the operation of their respective businesses. To the
knowledge of Gargoyles, no activity in which any of the Companies is engaged
infringes upon or misappropriates any Intellectual Property of any other
Person.
3.12 Material Contracts
-----------------------
(a) Except as set forth in Schedule 3.12, neither Gargoyles nor any
Subsidiary nor any of their properties or assets is a party to or is bound by
any of the following:
(i) a material employment, consulting, non-competition, severance
or indemnification Contract;
(ii) an advertising, public relations, franchise, distributorship
or sales agency Contract;
(iii) a Contract involving the commitment, payment or receipt of in
excess of $50,000 in the aggregate;
(iv) a Contract granting a right of first refusal for the
acquisition, sale or lease of any assets or capital stock of any of the
Companies;
(v) a Contract with any Person involving a sharing of profits;
(vi) a mortgage, pledge, conditional sales contract, security
agreement, factoring agreement or other similar Contract with respect to any
real or tangible personal property of any of the Companies;
(vii) a loan agreement, credit agreement, promissory note,
guarantee, subordination agreement, letter of credit or any other similar type
of Contract evidencing Indebtedness;
(viii) a Contract with any Governmental Entity;
(ix) a Contract with respect to the inspection, removal or
remediation of Hazardous Materials;
(x) a retainer Contract with any attorney, accountant, actuary,
appraiser, investment banker or other professional adviser; or
(xi) a commitment or agreement to enter into any of the foregoing.
(b) Gargoyles has delivered or otherwise made available to the Investor
true, correct and complete copies of the Contracts listed in Schedule 3.12,
together with all amendments, modifications, supplements or side letters
affecting the obligations of any party thereunder.
(c) Except as set forth in Schedule 3.12, each of the Contracts listed in
such schedule is valid and enforceable in accordance with its terms, there is
no material default under any such Contract by any of the Companies or, to the
knowledge of Gargoyles, by any other party thereto, and to the knowledge of
Gargoyles no event has occurred that with the lapse of time or the giving of
notice or both would constitute a material default thereunder.
3.13 Relations with Employees
-----------------------------
Except as set forth on Schedule 3.13,
(a) All of the Companies are in material compliance with all applicable
Laws respecting employment and labor practices;
(b) No collective bargaining agreement with respect to any of the
Companies is currently in effect or being negotiated. None of the Companies
has any obligation to negotiate any collective bargaining agreement;
(c) There are no strikes, slowdowns, or work stoppages pending or, to the
knowledge of Gargoyles, threatened in writing with respect to the employees of
any of the Companies, nor to the knowledge of Gargoyles has any such strike,
slowdown or work stoppage been threatened;
(d) No charges with respect to or relating to any of the Companies are
pending before any federal, state, local, or foreign agency responsible for the
prevention of unlawful employment practices, nor has Gargoyles received notice
that any such agency is investigating any of the Companies with respect to any
such labor matter; and
(e) To the knowledge of Gargoyles, none of the Companies or any employee
of any of the Companies is in material violation of any term of any employment
agreement, non-disclosure agreement, non-competition agreement or any other
agreement regarding an employee's employment with any of the Companies.
3.14 Arrangements with Affiliates
---------------------------------
Except as listed in Schedule 3.14, none of the Companies is a party to any
agreement or arrangement with any Affiliate of any of the Companies except on
terms or conditions no less favorable to any of the Companies than would be
customary for such transactions between unaffiliated parties or upon terms and
conditions on which similar transactions with others could fairly be expected
to be entered into.
3.15 Employee Benefits
----------------------
(a) Except as set forth in Schedule 3.15, none of the Companies maintains
any Employee Benefit Plan.
(b) Gargoyles has delivered or made available to the Investor or its
counsel true and complete copies of:
(i) any material employment agreement; and
(ii) any plan instruments and amendments thereto for all Employee
Benefit Plans and related trust agreement, insurance or other contract, and
summary plan descriptions, summaries of material modifications and material
communications distributed to the participants of each such plan.
(c) No Employee Benefit Plan is a "multiple employer plan" as described
in Section 3(40) of the Employee Retirement Income Security Act of 1974, as
amended ("ERISA") or Section 413(c) of the Code.
(d) None of the Employee Benefit Plans is subject to Title IV of ERISA or
is a "multi-employer plan" within the meaning of Section 3(37) of ERISA.
(e) Each Employee Benefit Plan is and has been operated in all material
respects in compliance with its terms and all applicable Laws, except where a
failure to so comply would not have a Material Adverse Effect on the Companies
in the aggregate.
(f) Except as set forth in Schedule 3.15, the consummation of the
transactions contemplated by the Stock Transaction Documents will not result
in:
(i) any payment (including, without limitation, severance,
unemployment compensation, golden parachute or bonus payments or otherwise)
becoming due to any director, officer, employee or consultant of any of the
Companies;
(ii) any increase in the amount of compensation or benefits payable
in respect of any director, officer, employee or consultant of any of the
Companies; or
(iii) acceleration of the vesting or timing of payment of any
benefits or compensation payable in respect of any director, officer, employee
or consultant of any of the Companies. No Employee Benefit Plan provides
benefits or payments contingent upon, triggered by, or increased as a result of
a change in the ownership or effective control of Gargoyles.
3.16 Litigation
---------------
Except as set forth in Schedule 3.16, there are no Legal Proceedings
pending or, to the knowledge of Gargoyles, threatened that
(a) question the validity of this Agreement or any of the other Stock
Transaction Documents or any action taken or to be taken in connection with the
consummation of the transactions contemplated hereby or thereby, or
(b) have resulted or could reasonably be expected to result in a Material
Adverse Effect on any of the Companies.
Schedule 3.16 sets forth a true, correct and complete list of all Legal
Proceedings pending or, to the knowledge of Gargoyles, threatened in writing
against any of the Companies, together with a brief and accurate description of
the claims involved. Except as set forth on Schedule 3.16, there is no
outstanding or, to the knowledge of Gargoyles, threatened Order against or
naming any of the Companies.
3.17 Compliance with Laws
-------------------------
Except as set forth on Schedule 3.17, to the knowledge of Gargoyles, the
Companies have at all times been in compliance in all material respects with
all Laws and Orders promulgated by any Governmental Entity applicable to them
or to the conduct of their business or operations or their properties or assets
(other than Environmental Laws, which are addressed in Section 3.18). Except
as set forth in Schedule 3.17, Gargoyles has not received, and to the knowledge
of Gargoyles there has been no issuance of, any notice of a violation or
alleged violation by any of the Companies of any such Law or Order. Except as
set forth in Schedule 3.17, there is no investigation or review by any
Governmental Entity with respect to any of the Companies pending or, to the
knowledge of Gargoyles, threatened in writing, nor has any Governmental Entity
notified Gargoyles in writing of its intention to conduct the same.
3.18 Environmental Matters
--------------------------
Except as disclosed in Schedule 3.18:
(a) the operations of the Companies are in material compliance with all
applicable Environmental Laws;
(b) to the knowledge of Gargoyles, no Hazardous Materials have been
released at or have migrated from the property subject to the Real Property
Leases not in compliance with applicable Environmental Law;
(c) except for costs incurred in order to maintain material compliance
with all Environmental Laws in the ordinary course of its business, Gargoyles
is not subject to Environmental Losses with respect to Hazardous Materials, and
to the knowledge of Gargoyles no facts or circumstances exist which could give
rise to Environmental Losses with respect to Hazardous Materials;
(d) the Companies obtained and currently maintain all Environmental
Permits the absence of which would have a Material Adverse Effect on Gargoyles,
and Gargoyles is in material compliance with such Environmental Permits and
there are no Legal Proceedings pending or threatened in writing to revoke such
Environmental Permits;
(e) except for the costs incurred in order to maintain material
compliance with all Environmental Laws in the ordinary course of its business,
Gargoyles is not subject to any outstanding Order respecting (i) Environmental
Laws, (ii) Remedial Action, (iii) any Environmental Claim or (iv) the Release
or threatened Release of any Hazardous Material;
(f) there are no Legal Proceedings pending or, to the knowledge of
Gargoyles, threatened in writing against any of the Companies alleging the
violation of any Environmental Law or Environmental Permit;
(g) none of the Companies nor, to the knowledge of Gargoyles, any owner
of property subject to a Real Property Lease has filed any notice with any
authority responsible for enforcement of any Environmental Law reporting a
Release of Hazardous Material into the environment at the real property subject
to the Real Property Leases;
(h) none of the operations of any of the Companies involves the
generation, transportation, treatment, storage or disposal of hazardous waste,
as defined under 40 CFR Parts 260-270, or any state, local or foreign
equivalent; and
(i) to the knowledge of Gargoyles, there is not now on, in, or under the
real property subject to the Real Property Leases any underground storage
tanks, above-ground storage tanks, dikes or impoundments, any asbestos-
containing materials, any polychlorinated biphenyls, or any radioactive
substances.
3.19 Insurance
--------------
Schedule 3.19 sets forth a list of all insurance policies of any kind
covering the Companies and any of their respective employees, properties,
assets, or operations, including, without limitation, policies of life,
disability, fire, theft, workers' compensation, employee fidelity, product
liability and other casualty and liability insurance.
3.20 Product Liability and Recalls
----------------------------------
Except as disclosed in Schedule 3.16, Gargoyles is not aware of any claim
against any of the Companies for injury to persons or property of employees or
any third parties suffered as a result of the manufacture, sale or distribution
of any product or the performance of any service by any of the Companies,
including claims arising out of the allegedly defective or unsafe nature of the
products sold or distributed by it.
3.21 Preferred Stock Authorized
-------------------------------
The Board of Directors of Gargoyles has the authority to issue up to Ten
Million (10,000,000) shares of Series A Preferred Stock and to fix the powers,
designations, rights, preferences and restrictions thereof, including dividend
rights, conversion rights, voting rights, redemption terms, liquidation
preferences and the number of shares consisting each such series, without any
further vote or action by the Gargoyles shareholders.
3.22 Disclosure
---------------
Neither this Agreement nor any of the other Stock Transaction Documents
nor any other document, certificate or written statement furnished to the
Investor by or on behalf of Gargoyles in connection with the transactions
contemplated by this Agreement and the other Stock Transaction Documents
contains any untrue statement of a material fact or omits to state a material
fact necessary in order to make the statements contained herein and therein not
misleading in the light of the circumstances under which such statements were
made, it being understood and agreed by the Investor that no representation or
warranty is made with respect to any projections or other prospective financial
information. There is no fact known to Gargoyles (other than information
concerning general economic conditions known to the public generally) which has
resulted in, or could reasonably be expected to result in, a Material Adverse
Effect on any of the Companies that has not been set forth in this Agreement,
the schedules hereto, the other Stock Transaction Documents or other documents,
certificates and written statements delivered in connection with the
transactions contemplated hereunder.
ARTICLE 4. REPRESENTATIONS AND WARRANTIES OF INVESTOR
Investor represents and warrants to Gargoyles that the following
statements are true and correct as of the date of this Agreement and will be
true and correct as of the Closing Date:
4.1 Authority and Validity of Agreement
----------------------------------------
Investor represents and warrants that it has all requisite power, capacity
and authority to execute and deliver this Agreement and any other Stock
Transaction Documents to be executed by Investor and to consummate the
transactions provided for herein and therein in accordance with their terms.
The execution, delivery and performance of this Agreement and each of the Stock
Transaction Documents to be executed by Investor and the consummation by each
Investor of the transactions provided for herein and therein, have been duly
authorized and approved by all necessary action on the part of Investor, and no
other action on the part of Investor is necessary to authorize the execution,
delivery and performance of this Agreement or any of the other Stock
Transaction Documents and the consummation of the transactions provided for
herein in accordance with the terms hereof. This Agreement and each of the
Stock Transaction Documents to be delivered by such Investor has been duly
executed and delivered by Investor and is a valid and binding obligation of
Investor, enforceable against Investor in accordance with its terms, except as
such enforcement may be limited by applicable bankruptcy, insolvency,
reorganization or other similar laws relating to or affecting the enforcement
of creditors' rights generally and by principles of equity regarding the
availability of remedies.
4.2 Sophistication of Investor
-------------------------------
(a) Investor is acquiring the Shares for Investor's own account, not as a
nominee or agent, and not with a view to distributing any of the Shares in
violation of federal or state securities laws.
(b) Investor understands that investment in the Shares is speculative and
involves a high degree of risk. Investor is knowledgeable in business and
financial matters and is capable of evaluating the merits and risks of an
equity investment in Gargoyles.
(c) Investor understands that the Shares have not been registered under
the Securities Act of 1933, as amended (the "Securities Act") and may not be
sold or otherwise disposed of except pursuant to an effective registration
statement filed under the Securities Act or pursuant to an exemption from the
Securities Act and are subject to the placing of a restrictive legend on the
certificates representing the Shares, and the placement of a stop transfer
order with the transfer agent, precluding transfer of the Shares unless these
restrictions are complied with. Investor acknowledges that Gargoyles is under
no obligation to register any of the Shares under the Securities Act on behalf
of Investor except in accordance with the Registration Rights Agreement
(Exhibit B hereto).
ARTICLE 5. GENERAL COVENANTS OF GARGOYLES
5.1 Expenses
-------------
At Closing, Gargoyles shall pay the reasonable fees and expenses of
Investor and of legal counsel to Investor incurred in connection with the
negotiation and documentation of the Stock Transaction Documents and the
transactions contemplated thereby.
5.2 Registration Rights Agreement
----------------------------------
Gargoyles and the Investor shall enter at the Closing into a registration
rights agreement in the form of Exhibit B attached hereto (the "Registration
Rights Agreement").
ARTICLE 6. CONDITIONS TO CLOSING
6.1 Obligation of Investor to Close
------------------------------------
The obligation of the Investor to purchase the Series A Preferred Stock
and to close the transactions contemplated by this Agreement is subject to the
satisfaction, or waiver by the Investor, of the following conditions at or
prior to the Closing. If the Closing occurs, such conditions shall be deemed
to have been satisfied or waived.
(a) Gargoyles shall have received all required consents or waivers (if
any) necessary to execute this Agreement and the other Stock Transaction
Documents, to issue the Shares, and to carry out the transactions contemplated
herein and therein.
(b) Gargoyles shall have executed and delivered the Second Amended and
Restated Credit Agreement dated as of May 28, 1999, by and between the Investor
and Gargoyles, the warranties and representations of Gargoyles set forth
therein shall be true and correct in all respects, the conditions therein to
the obligation of the Investor shall have been satisfied and no Default or
Event of Default by Gargoyles shall exist thereunder.
(c) Gargoyles shall have received a fairness opinion from Ladenburg
Thalmann & Co., Inc. addressed to the Board of Directors of Gargoyles to the
effect that the consideration received by Gargoyles for the Series A Preferred
Stock issued to the Investor was fair, from a financial point of view, to the
holders of the Common Stock of Gargoyles.
(d) Gargoyles and Investor shall have entered into the Registration
Rights Agreement in the form of Exhibit B hereto.
(e) Gargoyles shall have performed all agreements, obligations and
conditions contained in this Agreement that are required to be performed by it
on or before the Closing.
(f) The Chief Executive Officer of Gargoyles shall deliver to Investor at
the Closing a certificate certifying that the conditions specified in this
Section 6.1 have been fulfilled and stating that there has been no material
adverse change in the business or financial condition of Gargoyles from March
31, 1999 to the Closing Date.
(g) The offer and sale of the Series A Preferred Stock to such Investors
pursuant to this Agreement shall be qualified or exempt from qualification
under all applicable federal and state securities laws.
(h) The Board of Directors of Gargoyles shall have reserved 31,600,342
shares of Common Stock for insurance upon conversion of the Series A Preferred
Stock.
(i) All corporate and other proceedings in connection with the
transactions contemplated at the Closing and all documents incident thereto,
including evidence of filing with the Secretary of State of the State of
Washington of the Certificate, shall be reasonably satisfactory in form and
substance to Investor's counsel, and Investor and its counsel shall have
received all the counterpart original and certified or other copies of such
documents as they may reasonably request.
(j) Investor shall have received an opinion, dated as of the Closing
Date, from Karr Tuttle Campbell in the form of Exhibit C hereto.
(k) Gargoyles shall have paid the fees and expenses of Investor's legal
counsel.
(l) All members of the Gargoyles' board of directors other than William
Ruckleshaus shall have submitted their written resignations from the Board, and
such resignations shall be effective upon consummation of the Closing.
(m) The representations and warranties of Gargoyles in Article 3 hereof
shall be true and correct in all respects.
(n) Investor shall have received such other related documents and
certificates as it shall have reasonably requested.
6.2 Obligation of Gargoyles to Close
-------------------------------------
The obligation of Gargoyles to sell the Shares and to close the
transactions contemplated by this Agreement is subject to the satisfaction, or
waiver by Gargoyles, of the following conditions at or prior to the Closing.
If the Closing occurs, such conditions will be deemed to have been satisfied or
waived.
(a) Gargoyles shall have received all required consents or waivers (if
any) necessary to execute the Stock Transaction Documents, to issue the Series
A Preferred Stock, and to carry out the transactions contemplated by this
Agreement and the Stock Transaction Documents.
(b) Gargoyles shall have entered into the Second Amended and Restated
Credit Agreement dated May 28, 1999, with the Investor providing for credit to
Gargoyles on terms and conditions reasonably satisfactory to Gargoyles.
(c) As consideration for the purchase price of the Series A Preferred
Stock, the Investor shall have exchanged existing indebtedness of Gargoyles to
Investor in the amount of Ten Million Dollars ($10,000,000).
(d) Gargoyles shall have received a fairness opinion from Ladenburg
Thalmann & Co., Inc. addressed to the Board of Directors of Gargoyles to the
effect that the consideration received by Gargoyles for the Series A Preferred
Stock issued to the Investor was fair, from a financial point of view, to the
holders of the Common Stock of Gargoyles.
ARTICLE 7. SURVIVAL; INDEMNIFICATION
7.1 Survival of Representations and Warranties
-----------------------------------------------
All representations and warranties contained in this Agreement shall
survive for 24 months following the Closing.
7.2 Indemnification of the Investor
------------------------------------
Gargoyles shall indemnify Investor and each officer, director, employee,
agent, stockholder and Affiliate of Investor (collectively, the "Investor
Indemnified Parties") from and against, and shall pay or reimburse the Investor
Indemnified Parties for, any and all claims, losses, fines, costs, damages or
other liabilities, including without limitation reasonable out-of-pocket
expenses and reasonable attorneys' and accountants' fees incurred in the
investigation or defense of any of the same, net of any insurance proceeds
realized in connection therewith (collectively, "Losses"), resulting from or
arising out of breach of any covenant of Gargoyles, or any inaccuracy in any
representation or warranty of Gargoyles, contained in the Stock Transaction
Documents.
7.3 Indemnification of Gargoyles
---------------------------------
Investor shall indemnify Gargoyles and each officer, director, employee,
agent, stockholder and Affiliate of Gargoyles (collectively, the "Gargoyles
Indemnified Parties") from and against, and shall pay or reimburse the
Gargoyles Indemnified Parties for, any and all Losses resulting from or arising
out of breach of any covenant of Investor, or inaccuracy in any representation
or warranty of Investor, contained in the Stock Transaction Documents.
7.4 Indemnification Procedures
-------------------------------
In the case of any Legal Proceeding commenced by a third party against a
Person entitled to indemnification under this Agreement (the "Indemnified
Party"), notice shall be given by the Indemnified Party to the party required
to provide indemnification (the "Indemnifying Party") promptly after the
Indemnified Party has actual knowledge of any Legal Proceeding as to which
indemnity may be sought, and the Indemnified Party shall permit the
Indemnifying Party (at the expense of the Indemnifying Party) to assume the
defense of that Legal Proceeding, on condition that (a) the counsel for the
Indemnifying Party who will conduct the defense of that Legal Proceeding is
reasonably satisfactory to the Indemnified Party, and (b) the Indemnified Party
may participate in such defense at such Indemnified Party's expense. If,
however, control by the Indemnifying Party of the defense of a Legal Proceeding
as to which indemnity may be sought would create a conflict of interest between
the Indemnifying Party and the Indemnified Party, the Indemnified Party may
control its own defense in that Legal Proceeding, and the Indemnifying Party
shall pay the Indemnified Party's reasonable fees and expenses of counsel
incurred in connection therewith. Except with the prior written consent of the
Indemnified Party, no Indemnifying Party, in the defense of any such claim or
litigation, shall consent to entry of any judgment, or enter into any
settlement, that provides for injunctive or other non-monetary relief affecting
the Indemnified Party or that does not include as an unconditional term thereof
the giving by each claimant or plaintiff to such Indemnified Party of a release
from all liability with respect to such claim or litigation. If the
Indemnifying Party does not accept the defense of any claim as above provided,
the Indemnified Party shall have the full right to defend against any such
claim, but may not, without the prior written consent of the Indemnifying
Party, consent to entry of any judgment or enter into any settlement in
connection with any such claim. In any event, the Indemnifying Party and the
Indemnified Party shall cooperate in the defense of any claim or litigation
subject to this Section 7.4 and the records of each shall be available to the
other with respect to such defense.
ARTICLE 8. MISCELLANEOUS
8.1 Definitions
----------------
As used in this Agreement, the following terms have the following
respective meanings:
"Affiliate" means, with respect to any given Person, any other Person that
directly, or indirectly through one or more intermediaries, controls, is
controlled by, or is under common control with that Person. For purposes of
the foregoing, "control" means possession, directly or indirectly, of the power
to direct or cause the direction of the management policies of a Person,
whether through the ownership of voting securities, by contract, as trustee or
executor, or otherwise.
"Closing Date" has the meaning set forth in Section 2.1.
"Code" means the Internal Revenue Code of 1986, as amended.
"Companies" has the meaning set forth in Section 3.3.
"Contract" means any written contract, agreement, commitment, note, bond,
lease, mortgage, guaranty, license, or any other written contractual obligation
or commitment that is binding on any Person or its property.
"Conversion Common Stock" has the meaning set forth in Section 1.1.
"Employee Benefit Plan" means any "employee benefit plan" as defined in
Section 3(3) of ERISA and any other material plan, policy, program, practice,
agreement, understanding or arrangement (whether written or oral) providing
compensation or other benefits to any director, officer, employee or consultant
(or to any dependent or beneficiary thereof) of any of the Companies maintained
by any of the Companies, including, without limitation, all incentive, bonus,
deferred compensation, vacation, holiday, cafeteria, medical, disability, stock
purchase, stock option, stock appreciation, phantom stock, restricted stock or
other stock-based compensation plans, policies, programs, practices or
arrangements with respect to such director, officer, employee, consultant,
dependent or beneficiary.
"Environmental Claim" means any Legal Proceeding brought by any Person
alleging potential liability (including potential liability for Environmental
Losses) arising out of, based on, or resulting from (x) the presence, or
release into the environment, of any Hazardous Materials at any location,
whether or not owned or operated by Gargoyles, or (y) circumstances forming the
basis of any violation, or alleged violation, of any Environmental Law.
"Environmental Law" means any Law relating to the environment, natural
resources, or public or employee health and safety and includes, but is not
limited to, the Comprehensive Environmental Response, Compensation and
Liability Act ("CERCLA"), 42 U.S.C. 9601 et seq., the Hazardous Materials
Transportation Act, 49 U.S.C. 1801 et seq., the Resource Conservation and
Recovery Act ("RCRA"), 42 U.S.C. 6901 et seq., the Clean Water Act, 33 U.S.C.
1251 et seq., the Clean Air Act, 33 U.S.C. 2601 et seq., the Toxic
Substances Control Act ("TSCA"), 15 U.S.C. 2601 et seq., the Federal
Insecticide, Fungicide, and Rodenticide Act ("FIFRA"), 7 U.S.C. 136 et seq.,
the Oil Pollution Act of 1990, 33 U.S.C. 2701 et seq., and the Occupational
Safety and Health Act ("OSHA"), 29 U.S.C. 651 et seq., as such laws have been
amended or supplemented, and the regulations promulgated pursuant thereto, and
all analogous state or local statutes.
"Environmental Losses" means any and all Losses (including, without
limitation, fees, disbursements and expenses of legal counsel, experts,
engineers and consultants and the costs of investigation and feasibility
studies and Remedial Action) arising from or under any Environmental Law.
"Environmental Permit" means any Permit required under any applicable
Environmental Law.
"Financial Statements" has the meaning set forth in Section 3.7.
"GAAP" means U.S. generally accepted accounting principles.
"Gargoyles" refers to Gargoyles, Inc., a Washington company.
"Gargoyles Indemnified Parties" has the meaning set forth in Section 7.3.
"Governmental Entity" means any government and political subdivisions
thereof, court, arbitral tribunal, administrative agency, or any other
governmental or regulatory body, instrumentality or authority, whether domestic
(federal, state or local) or foreign.
"Hazardous Material" means any substance, material or waste which is
regulated by any Governmental Entity, including, without limitation, any
material, substance or waste which is defined as a "hazardous waste,"
"hazardous material," "hazardous substance," "extremely hazardous waste,"
"restricted hazardous waste," "contaminant," "toxic waste" or "toxic substance"
under any provision of Environmental Law, which includes, but is not limited
to, petroleum, petroleum products, asbestos, urea formaldehyde and
polychlorinated biphenyls.
"Indebtedness" means at a particular time, without duplication, (i) any
indebtedness for borrowed money or issued in substitution for or exchange of
indebtedness for borrowed money, including any bank overdraft or other similar
extension of credit; (ii) any indebtedness evidenced by any note, bond,
debenture or other debt security; (iii) any indebtedness for the deferred
purchase price of property or services with respect to which a Person is
liable, contingently or otherwise, as obligor or otherwise (other than trade
payables and other current liabilities incurred in the ordinary course of
business which are not more than 30 days past due); (iv) any commitment by
which a Person assures a creditor against loss (including, without limitation,
contingent reimbursement obligations with respect to letters of credit); (v)
any indebtedness guaranteed in any manner by a Person (including, without
limitation, guarantees in the form of an agreement to repurchase or reimburse);
(vi) any obligations under capitalized leases with respect to which a Person is
liable, contingently or otherwise, as obligor, guarantor or otherwise, or with
respect to which obligations a Person assures a creditor against loss; (vii)
any indebtedness secured by a Lien on a Person's assets; and (viii) any
unsatisfied obligation for "withdrawal liability" to a "multi-employer plan" as
such terms are defined under ERISA.
"Indemnified Party" has the meaning set forth in Section 7.4.
"Indemnifying Party" has the meaning set forth in Section 7.4.
"Intellectual Property" means patents and patent applications, trademarks,
trade names, service marks and copyrights, applications for registration of
trademarks, trade names, service marks and copyrights, and common law or
statutory trade secrets.
"Investor" means U. S. Bank National Association.
"Investor Indemnified Parties" has the meaning set forth in Section 7.2.
"Law" means any federal, state, local or foreign law (including common
law), statute, code, ordinance, rule, regulation or other requirement or
guideline of a Governmental Entity.
"Legal Proceeding" means any action, claim, suit or proceeding, at law or
in equity, or any arbitration or administrative or other proceeding, or any
investigation.
"Liens" means liens, pledges, claims, charges, security interests and
other restrictions or encumbrances of any nature whatsoever, except for (i)
liens for current taxes not yet delinquent or which are being contested in good
faith by appropriate proceedings; (ii) statutory liens imposed by law which are
incurred in the ordinary course of business for obligations not yet due
including those to carriers, warehousemen, laborers and materialmen; (iii)
deposits in connection with workers' compensation, unemployment insurance,
bids, trade contracts, bonds or leases created in the ordinary course of
business ; (iv) easements, rights-of-way and similar liens in the ordinary
course of business which do not in any case materially detract from the value
or use of the property subject thereto; and (v) liens disclosed on existing
title reports or surveys which have previously been made available to the
Investor.
"Losses" has the meaning set forth in Section 7.2.
"Material Adverse Effect" means a material adverse effect upon the assets,
properties, results of operations or financial condition of the Person referred
to.
"Order" means any order, consent, consent order, injunction, judgment,
decree, consent decree, ruling, writ, assessment or arbitration award of a
Governmental Entity.
"Permit" means any approval, authorization, registration, consent,
license, permit or certificate of or by any Governmental Entity.
"Person" means any natural person, a sole proprietorship, a corporation, a
partnership, a limited liability company, a joint venture, an association, a
trust, or any other entity or organization, including a Governmental Entity.
"Real Property Leases" has the meaning set forth in Section 3.10.
"Registration Rights Agreement" has the meaning set forth in Section 5.2.
"Release" means any release, spill, emission, leaking, pumping, pouring,
dumping, emptying, injection, deposit, disposal, discharge, dispersal,
leaching, or migration on or into the indoor or outdoor environment or into or
out of any property.
"Remedial Action" means all actions, including, without limitation, any
capital expenditures, required or voluntarily undertaken to (i) clean up,
remove, treat, or in any other way address any Hazardous Material or other
substance; (ii) prevent the Release or threat of Release, or minimize the
further Release of any Hazardous Material or other substance so it does not
migrate or endanger or threaten to endanger public health or welfare or the
indoor or outdoor environment; (iii) perform pre-remedial studies and
investigations or post-remedial monitoring; or (iv) bring facilities on any
property owned, operated or leased by Gargoyles and the facilities located and
operations conducted thereon into compliance with all Environmental Laws and
Environmental Permits.
"Shares" has the meaning set forth in Section 1.1(b).
"Series A Preferred Stock" has the meaning set forth in Section 1.1(b).
"Stock Transaction Documents" has the meaning set forth in Section 3.2.
"Subsidiaries" has the meaning set forth in Section 3.3.
"Subsidiary" of any Person means any other Person of which more than 50%
of the shares of capital stock (or other ownership interest) having general
voting power under ordinary circumstances to elect a majority of the board of
directors, managers or trustees or other governing body of that other Person
are owned or controlled directly or indirectly by that Person, irrespective of
whether or not at the time shares of any other class or classes of capital
stock (or other ownership interest) have or might have voting power by reason
of the happening of any contingency.
"Tax" or "Taxes" means all federal, state, local and foreign taxes,
charges duties, fees, levies, and other assessments or governmental charges,
including but not limited to, income, excise, property, sales, value added,
profits, license, withholding (with respect to compensation or otherwise),
payroll, employment, net worth, capital gains, transfer, stamp, social
security, environmental, occupation and franchise taxes, and including all
interest, penalties and additions imposed with respect to such amounts.
"To the knowledge of Gargoyles" means to the actual knowledge of one or more
officers of Gargoyles appointed by the Board of Directors of Gargoyles and
having direct responsibility for the applicable subject matter.
8.2 Further Assurances
-----------------------
From time to time, as and when reasonably requested by a party to this
Agreement or a party to one of the Stock Transaction Documents (each a
"Party"), the other Party shall execute and deliver, or cause to be executed
and delivered, all such documents and instruments and shall take, or cause to
be taken, all such further or other actions as are within the scope of the
obligations undertaken by such Party in the Stock Transaction Documents and
which such other Party may reasonably deem necessary to fully effectuate and
consummate the transactions contemplated by the Stock Transaction Documents.
8.3 Finder's Fees
------------------
Each Party represents that it has incurred no obligation to pay a finder's
fee or commission in connection with the transactions described in this
Agreement. Investor agrees to indemnify and hold harmless Gargoyles from any
liability for any commission or compensation in the nature of a finder's fee
(and the costs and expenses of defending against such liability or asserted
liability) for which Investor or any of its officers, partners, employees or
representatives is responsible. Gargoyles agrees to indemnify and hold
harmless Investor from any liability for any commission or compensation in the
nature of a finder's fee (and the costs and expenses of defending against such
liability or asserted liability) for which Gargoyles or any of its offers,
employees or representatives is responsible.
8.4 Binding Effect and Assignment
----------------------------------
This Agreement is binding upon and inures to the benefit of Gargoyles and
the Investor and their successors and permitted assigns (including transferees
of any Shares). Notwithstanding anything contained in this Agreement to the
contrary, nothing in this Agreement, express or implied, is intended to confer
on any Person other than Gargoyles and the Investor or their respective
successors and assigns (including transferees of any Shares) any rights,
remedies, obligations or liabilities under or by reason of this Agreement.
8.5 Waiver
-----------
No amendment, modification or alteration of the terms or provisions of
this Agreement is binding unless it is in a writing duly executed by Gargoyles
and the Investor. Any term or provision of this Agreement may be waived at any
time by a Party entitled to the benefit thereof by a written instrument duly
executed by such Party. No waiver of any of the provisions of this Agreement
shall be deemed to or shall constitute a waiver of any other provision hereof
(whether or not similar). No delay of a Party in exercising or enforcing a
right, power or privilege hereunder shall operate as a waiver thereof.
8.6 Notices
------------
Every notice or other communication required or contemplated by this
Agreement must be in writing and sent by one of the following methods: (i)
personal delivery, in which case delivery is deemed to occur the day of
delivery; (ii) transmission by telecopy with acknowledgment of receipt, in
which case delivery is deemed to occur the day of transmission; (iii) certified
or registered mail, postage prepaid, return receipt requested, in which case
delivery is deemed to occur the day it is officially recorded as delivered to
the intended recipient; or (iv) next-day delivery to a U.S. address by
recognized overnight delivery service such as Federal Express, in which case
delivery is deemed to occur the day of delivery. In each case, a notice or
other communication sent to a Party must be directed to the address for that
Party set forth below, or to other address designated by that Party by written
notice:
If to the Investor, to:
U. S. Bank National Association
U. S. Bank Place, MPFP 2516
601 Second Avenue South
Minneapolis, MN 55402-4302
Attention: David C. Larsen
Telephone: (612) 973-2129
Facsimile: (612) 973-2148
with a copy to:
Perkins Coie LLP
1201 Third Avenue, 40th Floor
Seattle, WA 98101-3099
Attention: James D. Gradel
Telephone: (206) 583-8888
Facsimile: (206) 583-8500
If to Gargoyles, to:
Gargoyles, Inc.
5866 South 194th Street
Kent, WA 98032
Attention: Cynthia L. Pope,
VP and General Counsel
Telephone: (253) 796-2752
Facsimile: (253) 872-3317
8.7 Governing Law; Service of Process
--------------------------------------
This Agreement is governed by the laws of the state of Washington, without
regard to the conflict of laws provisions thereof. Personal service of process
may be effected by any of the means specified in Section 8.6, addressed to the
Party to be served. The foregoing shall not limit the rights of either Party
to serve process in any other manner permitted by law.
8.8 Schedules and Exhibits
---------------------------
All schedules and exhibits referred to in this Agreement are incorporated
by reference herein and made a part hereof.
8.9 Section Headings
---------------------
All section headings herein have been inserted for convenience of
reference only and in no way modify or restrict any of the terms or provisions
hereof.
8.10 Entire Agreement
---------------------
This Agreement, together with the other agreements explicitly referred to
herein, sets forth the entire understanding of the Parties with respect to the
transactions provided for herein and therein, and supersedes any prior
understandings, agreements or representations by or among the Parties, written
or oral, relating in any way to the subject matter hereof.
8.11 Counterparts
-----------------
This Agreement may be executed in two or more counterparts, each of which
shall be deemed an original, but all of such counterparts together shall
constitute one and the same instrument.
IN WITNESS WHEREOF, Gargoyles and Investor have executed this Agreement as
of the date set forth above.
GARGOYLES, INC.
---------------------------
By: Leo Rosenberger
Chief Executive Officer and
Chief Financial Officer
THE INVESTOR
U. S. Bank National Association
-------------------------------
By: Name:
Title:
<PAGE>
EXHIBIT A TO STOCK
PURCHASE AGREEMENT
===============================================================================
CERTIFICATE OF DESIGNATION OF
RIGHTS AND PREFERENCES OF
SERIES A PREFERRED STOCK
OF
GARGOYLES, INC.
______________________________
May 28, 1999
===============================================================================
<PAGE>
CONTENTS
--------
Section 1. General Definitions 1
Section 2. Dividend Rights of Preferred Stock 2
Section 3. Liquidation Preference 3
(a) In General 3
(b) Certain Acquisitions 3
(i) Deemed Liquidation 3
(ii) Valuation of Consideration 3
(iii) Effect of Noncompliance 4
Section 4. Conversion 4
(a) Right to Convert 5
(b) Mechanics of Conversion 5
(c) Adjustment for Stock Splits and
Combinations 5
(d) Adjustment for Certain Dividends and
Distributions 6
(e) Other Distributions 6
(f) Adjustments for Reclassification 6
(g) Certificate as to Adjustments 7
(h) Notices of Record Date 7
(i) No Impairment 8
(j) Reservation of Stock Issuable Upon
Conversion 8
Section 5. Voting Rights 9
Section 6. Covenants 9
Section 7. Consent for Certain Repurchases of Common
Stock Deemed to be Distributions 10
Section 8. Residual Rights 10
* * *
<PAGE>
GARGOYLES, INC.
CERTIFICATE OF DESIGNATION OF RIGHTS AND
PREFERENCES OF SERIES A PREFERRED STOCK OF
GARGOYLES, INC.
Pursuant to Section 23B.06.020(4) of the Washington Business Corporation
Act, the undersigned President and Secretary, respectively, of Gargoyles, Inc.,
a Washington corporation (the "Corporation"), certify that pursuant to the
authority granted to and vested in the Board of Directors of the Corporation by
the provisions of its Articles of Incorporation and in accordance with the
provisions of Section 23B.06.020 of the Washington Business Corporation Act,
the Board of Directors has duly adopted the following resolution creating the
Series A Preferred Stock of the Corporation.
RESOLVED, that pursuant to the authority vested in the Board of Directors
of the Corporation by Article 2.2 of the Corporation's Articles of
Incorporation one series of preferred stock of the Corporation be, and it
hereby is, created out of the authorized but unissued shares of the capital
stock of the Corporation, such series to be designated "Series A Preferred
Stock", to consist of ten million (10,000,000) authorized shares and, effective
as of the date a certificate of designation setting forth a copy of this
resolution shall be filed with the Secretary of State of the State of
Washington and shall become effective in accordance with the Washington
Business Corporation Act, such certificate of designation shall have the effect
of amending, and this resolution shall become a part of, Article 2 of the
Corporation's Articles of Incorporation.
The designation, the preferences, relative, optional and special rights,
qualifications, limitations and restrictions of the Series A Preferred Stock
are as follows:
SECTION 1. GENERAL DEFINITIONS
- -------------------------------
For purposes of this Certificate, the following definitions shall apply:
A. "JUNIOR SHARES" shall mean all common stock without par value
("Common Stock") and any other shares of the Corporation other than the Series
A Preferred Stock.
B. "SUBSIDIARY" shall mean any corporation at least fifty percent (50%)
of whose outstanding voting shares shall at the time be owned by the
Corporation and/or one or more of such subsidiaries.
SECTION 2. DIVIDEND RIGHTS OF PREFERRED STOCK
- -----------------------------------------------
(a) The holders of the Series A Preferred Stock shall be entitled to
receive, out of any funds legally available therefor, dividends payable in
preference and priority to any payment of any dividend on Junior Shares, if,
when, and as declared by the Board of Directors. The right to such dividends
on the Series A Preferred Stock shall be cumulative, and the right to such
dividends shall accrue to holders of Series A Preferred Stock, without
interest, in the event that dividends on such shares are not declared or paid
in any prior year.
(b) Dividends on the Series A Preferred Stock shall be at a rate equal to
the Dividend Rate (as hereinafter defined) multiplied by $1.00 per share of the
Series A Preferred Stock then outstanding, payable in cash out of the assets of
the Corporation legally available therefor, quarterly in advance beginning on
June 1, 1999 (each such quarterly date being a "Dividend Date"). "Dividend
Rate" shall mean a rate of interest per annum equal to the sum of (i) the
"reference rate" of Bank (as hereinafter defined) which rate is in effect on
the date that is five business days prior to the Dividend Date and which serves
as the basis upon which effective rates of interest are calculated for those
loans making reference thereto plus (ii) seventy-five (75) basis points;
provided, however, that, notwithstanding the foregoing, in no event shall the
Dividend Rate be less than eight percent (8%) per annum. "Bank" shall mean U.
S. Bank National Association or, in the event that such bank shall no longer
publicly announce a "reference," "base" or "prime" rate, Wells Fargo Bank, N.A.
(c) No dividend shall be paid with respect to any Junior Shares unless
the holders of the Series A Preferred Stock are first paid (A) all unpaid
accumulated dividends at the rate specified in subsection (b), above, plus (B)
a dividend per share of Series A Preferred Stock equal to the dividend that
would be payable on the number of shares of Common Stock into which each share
of Series A Preferred Stock is then convertible pursuant to the provisions of
this Section 2.
(d) In the event that the Corporation shall have unpaid accumulated
dividends outstanding immediately prior to, and in the event of, a conversion
of Series A Preferred Stock (as provided in Section 4 hereof), the Corporation
shall pay in cash to the holder(s) of the Series A Preferred Stock subject to
such conversion the full amount of any such dividends.
(e) Cash dividend on the Series A Preferred Stock is payable only if the
Corporation has paid all principal and interest then due and payable on any
indebtedness secured by any assets of the Corporation.
SECTION 3. LIQUIDATION PREFERENCE
- -----------------------------------
(a) In General
---------------
In the event of any liquidation, dissolution or winding up of the
Corporation, either voluntary or involuntary, the holders of the Series A
Preferred Stock shall be entitled to receive, prior to and in preference to any
distribution of any of the assets or surplus funds of the Corporation to the
holders of the Junior Shares by reason of their ownership thereof, the amount
of $1.00 per share for each share of Series A Preferred Stock then held by
them, and, in addition, an amount equal to all unpaid accumulated dividends, if
any (the foregoing adjusted to reflect stock splits, stock dividends,
recapitalization and the like) on Series A Preferred Stock. If, upon the
occurrence of such event, the assets and funds thus distributed among the
holders of the Series A Preferred Stock are insufficient to permit the payment
of the full preferential amount to such holders, then the entire assets and
funds of the Corporation legally available for distribution shall be
distributed ratably among the holders of the Series A Preferred Stock in
proportion to respective amounts fixed for the Series A Preferred Stock upon a
liquidation, dissolution or winding up of the Corporation.
(b) Certain Acquisitions
-------------------------
(i) Deemed Liquidation
-----------------------
For purposes of this Section 3, a liquidation, dissolution or winding
up of the Corporation shall be deemed to occur if the Corporation shall sell,
convey, or otherwise dispose of all or substantially all of its property or
business or merge into or consolidate with any other corporation (other than a
wholly-owned subsidiary corporation) or effect any other transaction or series
of related transactions in which more than fifty percent (50%) of the voting
power of the Corporation is disposed of, provided that this Section 3(b)(i)
shall not apply to a merger effected solely for the purpose of changing the
domicile of the Corporation.
(ii) Valuation of Consideration
-------------------------------
In the event of a deemed liquidation as described in Section 3(b)(i)
above, if the consideration received by the Corporation is other than cash, its
value will be deemed its fair market value. Any securities shall be valued as
follows:
(1) Securities not subject to investment letter or other
similar restrictions on free marketability.
(A) If traded on a securities exchange or The Nasdaq Stock
Market, the value shall be deemed to be the average of the closing prices of
the securities on such exchange over the thirty-day period ending three (3)
days prior to the closing.
(B) If actively traded over-the-counter, the value shall
be deemed to be the average of the closing bid or sale prices (whichever is
applicable) over the thirty-day period ending three (3) days prior to the
closing.
(C) If there is no active public market, the value shall
be the fair market value thereof, as mutually determined by the Board of
Directors and the holders of at least a majority of the voting power of all
then-outstanding shares of Series A Preferred Stock.
(2) The method of valuation of securities subject to investment
letter or other restrictions on free marketability (other than restrictions
arising solely by virtue of a shareholder's status as an affiliate or former
affiliate) shall be to make an appropriate discount from the market value
determined as above in Section 3(b)(ii)(1) to reflect the appropriate fair
market value thereof, as mutually determined by the holders of at least a
majority of the voting power of all then-outstanding shares of Common Stock,
and the holders of at least a majority of the voting power of all then-
outstanding shares of Series A Preferred Stock.
(iii) Effect of Noncompliance
---------------------------------
In the event the requirements of this Section 3(b) are not complied
with, the Corporation shall forthwith either cause the closing of the
transaction to be postponed until such requirements have been complied with, or
cancel such transaction, in which event the rights, preferences and privileges
of the holders of the Series A Preferred Stock shall revert to and be the same
as such rights, preferences and privileges existing immediately prior to the
date of the first notice referred to in Section 4(j)(iv) hereof.
SECTION 4. CONVERSION
- ----------------------
The holders of Series A Preferred Stock shall have conversion rights as
follows (the "Conversion Rights"):
(a) Right to Convert
---------------------
Each share of Series A Preferred Stock, at the option of its holder, at
the office of the Corporation or any transfer agent for the Series A Preferred
Stock, at any time after the date of issuance of such share, shall be
convertible into 3.1600342 shares of fully paid and nonassessable shares of
Common Stock ("the Initial Conversion Ratio"). Such Initial Conversion Ratio
shall be subject to adjustment as provided in subsection 4(d), below (as
adjusted from time to time, the "Conversion Ratio").
(b) Mechanics of Conversion
----------------------------
No fractional shares of Common Stock shall be issued upon conversion of
any share of Series A Preferred Stock. In lieu of any fractional share to
which the holder would otherwise be entitled (after aggregating all shares into
which shares of Series A Preferred Stock held by such holder could be
converted), the Corporation shall pay cash equal to such fraction multiplied by
the then fair market value of the Common Stock, as determined by the Board of
Directors. Before any holder of Series A Preferred Stock shall be entitled to
convert the same into full shares of Common Stock, such holder shall surrender
the certificate or certificates therefor, duly endorsed, at the office of the
Corporation or of any transfer agent for the Series A Preferred Stock, and
shall give written notice to the Corporation at such office that such holder
elects to convert the same. The Corporation shall, as soon as practicable
thereafter, issue and deliver at such office to such holder of Series A
Preferred Stock, a certificate or certificates for the number of shares of
Common Stock to which such holder shall be entitled, together with a check
payable to the holder in the amount of any cash amounts payable as the result
of a conversion into fractional shares of Common Stock. Such conversion shall
be deemed to have been made immediately prior to the close of business on the
date of such surrender of the shares of Series A Preferred Stock to be
converted, and the person or persons entitled to receive the shares of Common
Stock issuable upon such conversion shall be treated for all purposes as the
record holder or holders of such shares of Common Stock on such date.
(c) Adjustment for Stock Splits and Combinations
-------------------------------------------------
If the Corporation at any time or from time to time effects a split or
subdivision of the outstanding Common Stock, the Conversion Ratio in effect
immediately before that split or subdivision shall be proportionately increased
(i.e., the number of shares of Common Stock to be issued per share of Series A
Preferred Stock shall be increased), and, conversely, if the Corporation at any
time or from time to time combines the outstanding shares of Common Stock, the
Conversion Ratio then in effect immediately before the combination shall be
proportionately decreased. Any adjustment under this Section 4(c) shall become
effective at the close of business on the date the subdivision or combination
becomes effective.
(d) Adjustment for Certain Dividends and Distributions
-------------------------------------------------------
In the event the Corporation at any time or from time to time makes, or
fixes a record date for the determination of holders of Common Stock entitled
to receive, a dividend or other distribution payable in Additional Shares of
Common Stock, then and in each such event the Conversion Ratio then in effect
shall be increased as of the time of such issuance or, in the event such a
record date is fixed, as of the close of business on such record date, by
multiplying the Conversion Ratio then in effect by a fraction (1) the
denominator of which is the total number of shares of Common Stock issued and
outstanding immediately prior to the time of such issuance on the close of
business on such record date, and (2) the numerator of which shall be the total
number of shares of Common Stock issued and outstanding immediately prior to
the time of such issuance on the close of business on such record date, plus
the number of shares of Common Stock issuable in payment of such dividend or
distribution; provided, however, that if such record date is fixed and such
dividend is not fully paid or if such distribution is not fully made on the
date fixed therefor, the Conversion Ratio shall be recomputed accordingly as of
the close of business on such record date and thereafter the Conversion Ratio
shall be adjusted pursuant to this Section 4(d) as of the time of actual
payment of such dividends or distributions.
(e) Other Distributions
------------------------
In the event the Corporation shall declare a distribution to holders of
Common Stock payable in securities of other persons, evidences of indebtedness
issued by the Corporation or other persons, assets (excluding cash dividends)
or options or rights not referred to in Section 4(c) or 4(d), then, in each
such case for the purpose of this Section 4(e), the holders of Series A
Preferred Stock shall be entitled to a proportionate share of any such
distribution as though they were the holders of the number of shares of Common
Stock of the Corporation into which their shares of Series A Preferred Stock
are convertible as of the record date fixed for the determination of the
holders of Common Stock of the Corporation entitled to receive such
distribution.
(f) Adjustments for Reclassification
-------------------------------------
If the Common Stock issuable upon the conversion of the Series A Preferred
Stock is changed into the same or a different number of shares of any class or
classes of stock, whether by recapitalization, reclassification or otherwise
(other than a subdivision or combination of shares or a stock dividend, as
provided for elsewhere in this Section 4), then and in any such event each
holder of Series A Preferred Stock shall have the right thereafter to convert
such stock into the kind and amount of stock and other securities and property
receivable upon such reclassification or other change, by holders of the number
of shares of Common Stock into which such shares of Series A Preferred Stock
might have been converted immediately prior to such reclassification or change,
all subject to further adjustment as provided herein.
(g) Certificate as to Adjustments
----------------------------------
Upon the occurrence of each adjustment or readjustment of the Conversion
Ratio pursuant to this Section 4, the Corporation at its expense promptly shall
compute such adjustment or readjustment in accordance with the terms hereof and
furnish to each holder of Series A Preferred Stock a certificate setting forth
such adjustment or readjustment and showing in detail the facts upon which such
adjustment or readjustment is based. The Corporation shall, upon the written
request at any time of any holder of Series A Preferred Stock, furnish or cause
to be furnished to such holder a like certificate setting forth (i) such
adjustments and readjustments, (ii) the Conversion Ratio in effect at the time,
and (iii) the number of shares of Common Stock and the amount, if any, of other
property which at the time would be received upon the conversion of Series A
Preferred Stock.
(h) Notices of Record Date
---------------------------
In the event that the Corporation shall propose at any time:
(i) to declare any dividend or distribution upon its Common Stock,
whether in cash, property, stock or other securities, whether or not a regular
cash dividend and whether or not out of earnings or earned surplus;
(ii) to offer for subscription pro rata to the holders of any class
or series of its stock any additional shares of stock of any class or series or
other rights;
(iii) to effect any reclassification or recapitalization of its
outstanding Common Stock involving a change in the Common Stock; or
(iv) to merge or consolidate with or into any other corporation, or
sell, lease or convey all or substantially all its property or business, or to
liquidate, dissolve or wind up; then, in connection with each such event, the
Corporation shall send to the holders of the Series A Preferred Stock:
(1) at least fifteen (15) days' prior written notice of the
date on which a record shall be taken for such dividend, distribution or
subscription rights and a description thereof (and specifying the date on which
the holders of Common Stock shall be entitled thereto) or for determining
rights to vote in respect of the matters referred to in (iii) and (iv) above;
and
(2) in the case of the matters referred to in (iii) and (iv)
above, at least fifteen (15) days' prior written notice of the date when the
same shall take place (and specifying the date on which the holders of Common
Stock shall be entitled to exchange their Common Stock for securities or other
property deliverable upon the occurrence of such event).
Each such written notice shall be given by first class mail, postage prepaid,
addressed to the holders of Series A Preferred Stock at the address for each
such holder as shown on the books of the Corporation.
(i) No Impairment
------------------
The Corporation will not, by amendment of its Articles of Incorporation or
through any reorganization, recapitalization, transfer of assets,
consolidation, merger, dissolution, issue or sale of securities or any other
voluntary action, avoid or seek to avoid the observance or performance of any
of the terms to be observed or performed hereunder by the Corporation, but will
at all times in good faith assist in the carrying out of all the provisions of
this Section 4 and in the taking of all such action as may be necessary or
appropriate in order to protect the Conversion Rights of the holders of Series
A Preferred Stock against impairment.
(j) Reservation of Stock Issuable Upon Conversion
--------------------------------------------------
The Corporation shall at all times reserve and keep available out of its
authorized but unissued shares of Common Stock, solely for the purpose of
effecting the conversion of the shares of the Series A Preferred Stock, such
number of its shares of Common Stock as shall from time to time be sufficient
to effect the conversion of all outstanding shares of Series A Preferred Stock;
and if at any time the number of authorized but unissued shares of Common Stock
shall not be sufficient to effect the conversion of all then-outstanding shares
of Series A Preferred Stock, in addition to such other remedies as shall be
available to the holder of Series A Preferred Stock, the Corporation will take
such corporate action as may, in the opinion of its counsel, be necessary to
increase its authorized but unissued shares of Common Stock to such number of
shares as shall be sufficient for such purposes, including, without limitation,
engaging in best efforts to obtain the requisite shareholder approval of any
necessary amendment to these articles.
SECTION 5. VOTING RIGHTS
- --------------------------
Except as otherwise required by law, each holder of shares of Series A
Preferred Stock shall be entitled to the number of votes equal to the number of
shares of Common Stock into which such Series A Preferred Stock could then be
converted (with any fractional share determined on an aggregate conversion
basis being rounded to the nearest whole share), and with respect to such vote,
such holder shall have full voting rights and powers equal to the voting rights
and powers of the holders of Common Stock (except as otherwise expressly
provided herein or as required by law, voting together with holders of Common
Stock, with respect to any question upon which holders of Common Stock have the
right to vote), and shall be entitled, notwithstanding any provision hereof, to
notice of any shareholders' meeting in accordance with the bylaws of the
Corporation.
SECTION 6. COVENANTS
- ----------------------
In addition to any other rights provided by law, so long as any shares of
Series A Preferred Stock shall be outstanding, this Corporation shall not,
without first obtaining the affirmative vote or written consent of the holders
of not less than a majority of such outstanding shares of Series A Preferred
Stock voting as a class:
(a) amend or repeal any provision of, or add any provision to, this
Corporation's Articles of Incorporation or Bylaws or to the Certificate;
(b) authorize or issue shares of any debt or equity security;
(c) merge, consolidate or reorganize with any other corporation;
(d) liquidate or sell or convey or otherwise dispose of all or any
material portion of the property or business of the Corporation or any
Subsidiary;
(e) pay or declare any dividend or any Junior Shares (except dividends
payable solely in shares of Common Stock);
(f) redeem, purchase or otherwise acquire (or pay into or set funds aside
for a sinking fund for such purpose) any share or shares of Common Stock;
provided, however, that this restriction shall not apply to the repurchase of
shares of Common Stock from employees, officers, directors, consultants or
other persons performing services for the Corporation or any Subsidiary
pursuant to agreements under which the Corporation has the option to repurchase
such shares at cost upon the occurrence of certain events, such as the
termination of employment, or through the exercise of any right of first
refusal approved by a disinterested majority of the Board;
(g) reclassify any securities into shares having any preference or
priority as to dividends or assets superior to or on a parity with any such
preference or priority of Series A Preferred Stock;
(h) effect any recapitalization; or
(i) take any other action within the meaning of a "significant business
transaction" as defined in RCW 23B.19.020(15).
SECTION 7. CONSENT FOR CERTAIN REPURCHASES OF COMMON STOCK DEEMED TO BE
DISTRIBUTIONS
- -------------------------------------------------------------------------
Each holder of an outstanding share of Series A Preferred Stock shall be
deemed to have consented, for purposes of RCW 23B.06.400 of the Washington
Business Corporation Act, to distributions made by the Corporation in
connection with the repurchase of shares of Common Stock issued to or held by
employees or consultants upon termination of their employment or services
pursuant to agreements providing for the right of said repurchase between the
Corporation and such persons, provided, however, that the foregoing shall apply
to any such agreement that either exists as of the date of this certificate or
shall have been approved by the vote of the holders of the majority of the
Series A Preferred Stock outstanding as of the date any such agreement shall be
entered into subsequent to the date hereof.
SECTION 8. RESIDUAL RIGHTS
- ---------------------------
All rights accruing to the outstanding shares of the Corporation not
expressly provided for to the contrary herein shall be vested in the Common
Stock.
IN WITNESS WHEREOF, the above named officers, acting for and on behalf of
Gargoyles, Inc. have executed and subscribed this Certificate and do affirm the
foregoing as true under penalties of perjury this _____ day of May, 1999.
Gargoyles, Inc.
By _____________________________
Leo Rosenberger
Chief Executive Officer and
Chief Financial Officer
ATTEST:
By _________________________________
Name: __________________________
Title: _________________________
* * *
<PAGE>
EXHIBIT B TO STOCK
PURCHASE AGREEMENT
==============================================================================
GARGOYLES, INC.
REGISTRATION RIGHTS AGREEMENT
May 28, 1999
==============================================================================
<PAGE>
TABLE OF CONTENTS
-----------------
SECTION 1. CERTAIN DEFINITIONS 1
SECTION 2. REGISTRATION RIGHTS 3
2.1 Requested Registration 3
(a) Request for Registration 3
(b) Underwriting 4
2.2 Corporation Registration 5
(a) Registration 5
(b) Underwriting 6
2.3 S-3 Registrations 6
2.4 Expenses of Registration 7
2.5 Registration Procedures 8
2.6 Indemnification 9
2.7 Information by Holder 12
2.8 Rule 144 Reporting 12
2.9 Termination of Registration Rights 12
SECTION 3. HOLDERS' RIGHTS OF FIRST REFUSAL 13
3.1 Rights 13
3.2 Notification 13
3.3 Waiver 13
3.4 Issuance 14
3.5 Excluded Securities 14
3.6 Termination 15
SECTION 4. MISCELLANEOUS 15
4.1 Governing Law 15
4.2 Successors and Assigns 15
4.3 Entire Agreement; Amendment 15
4.4 Notices, etc. 15
4.5 Delay or Omissions 16
4.6 Counterparts 17
4.7 Severability 17
4.8 Attorneys' Fees 17
<PAGE>
GARGOYLES, INC.
REGISTRATION RIGHTS AGREEMENT
THIS REGISTRATION RIGHTS AGREEMENT is made as of May 28, 1999 (the
"Agreement") by and between GARGOYLES, INC., a Washington corporation (the
"Corporation"), and U.S. BANK NATIONAL ASSOCIATION (the "Investor").
RECITALS
Whereas, the Corporation desires to sell and issue to the Investor, and
the Investor desires to purchase Ten Million (10,000,000) shares (the "Shares")
of Series A Preferred Stock of the Corporation pursuant to the Stock Purchase
Agreement of even date herewith (the "Stock Purchase Agreement").
Whereas, the Shares are, by their terms, convertible into shares of common
stock, no par value, of the Corporation.
Whereas, to induce the Investor to purchase the Shares pursuant to the
Stock Purchase Agreement, the Corporation desires to grant to the Investor the
registration and other rights set forth herein.
A G R E E M E N T
In consideration of the foregoing and the promises and covenants contained
herein and for other good and valuable consideration, the receipt and
sufficiency of which is hereby acknowledged, the parties agree as follows:
SECTION 1. CERTAIN DEFINITIONS
- --------------------------------
As used in this Agreement the following terms shall have the following
respective meanings:
"1934 ACT" shall mean the Securities Exchange Act of 1934, as
amended, or any similar federal statute and the rules and regulations of the
Commission thereunder, all as the same shall be in effect at the time.
"AFFILIATE" shall mean any entity who is controlled by, who controls
or who is under common control with a person.
"COMMISSION" shall mean the Securities and Exchange Commission or any
other federal agency at the time administering the Securities Act.
"COMMON STOCK" shall mean the Common Stock, no par value, of the
Corporation.
"CONVERSION SHARES" means the Common Stock issued or issuable upon
conversion of the Shares.
"HOLDER" or "HOLDERS" shall mean the Investor and its permitted
assignees hereunder.
"INITIATING HOLDERS" shall mean one or more of the Holders who in the
aggregate are holders of not less than 30% of the Registrable Securities and
who request registration pursuant to this Agreement.
"REGISTER," "REGISTERED" and "REGISTRATION" refer to a registration
effected by preparing and filing a registration statement in compliance with
the Securities Act, and the declaration or ordering of the effectiveness of
such registration statement.
"REGISTRABLE SECURITIES" shall mean all or any portion of (i) the
Shares (except that the Shares may not be registered prior to January 1, 2001),
(ii) the Conversion Shares; (iii) any Common Stock issued as (or issuable upon
the conversion or exercise of any warrant, right or other Security which is
issued as) a dividend or other distribution in respect of, in exchange for or
in replacement of the Conversion Shares or the Shares; and (iv) any other
Common Stock of the Corporation acquired by the Investor. Securities
previously sold to the public pursuant to a registered public offering or Rule
144 of the Securities Act shall cease to be Registrable Securities.
"REGISTRABLE SECURITIES THEN OUTSTANDING" means the number of shares
of Common Stock outstanding which are, and the number of shares of Common Stock
issuable pursuant to then exercisable or convertible Securities which shares
are, Registrable Securities.
"REGISTRATION EXPENSES" shall mean all expenses incurred in complying
with registrations, filings or qualifications under Sections 2.1 and 2.2, and
the first two registrations pursuant to Section 2.3 hereof, including, without
limitation, all registration, qualification and filing fees, accounting fees,
printing expenses, escrow fees, fees and disbursements of counsel for the
Corporation and the reasonable fees and expenses of one special counsel for the
Holders, blue sky fees and expenses, the expense of any special audits incident
to or required by any such registration (but excluding the underwriting
discount and commissions and stock transfer taxes).
"SECURITIES" shall mean (i) the Corporation's equity or debt
securities; (ii) rights, options or warrants to subscribe for, purchase or
otherwise acquire any equity or debt security of the Corporation; and (iii) any
agreement or commitment to issue any of the foregoing.
"SECURITIES ACT" shall mean the Securities Act of 1933, as amended,
or any similar federal statute and the rules and regulations of the Commission
thereunder, all as the same shall be in effect at the time.
"SELLING EXPENSES" shall mean all underwriting discounts and selling
commissions applicable to the sale and, except to the extent included in
Registration Expenses, all fees and disbursements of counsel for any Holder.
SECTION 2. REGISTRATION RIGHTS
- --------------------------------
2.1 Requested Registration
---------------------------
(a) Request for Registration
-----------------------------
If the Corporation shall receive from Initiating Holders a written
request that the Corporation effect any registration with respect to all or a
part of the Registrable Securities, and only in the event that the anticipated
aggregate offering price of the Registrable Securities proposed to be
registered equals or exceeds $3,000,000 (based on the closing price of the
Common Stock as reported on the Nasdaq National Market or as evidenced by
either a written bona fide offer to purchase or underwriting commitment), the
Corporation will:
(i) Within ten (10) days of the receipt thereof, give written
notice of such request for registration to all other Holders; and
(ii) use its best efforts to effect such registration as soon as
practicable, as may be so requested and as would permit or facilitate the sale
and distribution of all or such portion of such Registrable Securities as are
specified in such original request of the Initiating Holders and in requests in
writing of any other Holders received by the Corporation within twenty (20)
days after mailing of such written notice from the Corporation by first-class
mail, postage prepaid; PROVIDED, HOWEVER, that the Corporation shall not be
obligated to take any action to effect any such registration pursuant to this
Section 2.1 after the Corporation has effected two such registrations pursuant
to this Section 2.1 and such registrations have been declared or ordered
effective by the Commission.
Subject to the immediately preceding proviso, the Corporation shall
file a registration statement covering the Registrable Securities so requested
pursuant to this Section 2.1(a); PROVIDED, HOWEVER, that if the Corporation
shall furnish to the Initiating Holders a certificate signed by the President
or Chief Executive Officer of the Corporation stating that the Board of
Directors of the Corporation has determined in its good faith judgment that it
would be seriously detrimental to the Corporation and its stockholders for such
registration statement to be filed at such time, the Corporation shall have the
right to defer such filing for a period of not more than ninety (90) days after
receipt of the request of the Initiating Holders (provided that such right
shall not be used more than twice in any 12-month period).
(b) Underwriting
-----------------
If the Initiating Holders intend to distribute the Registrable
Securities covered by their request by means of an underwriting, they shall so
advise the Corporation as part of their request made pursuant to Section 2.1
and the Corporation shall include such information in the written notice
referred to in Section 2.1(a)(i). The right of each Holder to registration
pursuant to Section 2.1 shall be conditioned upon such Holder's participation
in such underwriting and the inclusion of such Holder's Registrable Securities
in the underwriting to the extent provided herein.
The Corporation shall (together with any other parties proposing to
distribute their securities through such underwriting) enter into an
underwriting agreement in customary form with the representative(s) of the
underwriter(s) (collectively, the "UNDERWRITER'S REPRESENTATIVE") selected for
such underwriting by a majority in interest of the Initiating Holders.
Notwithstanding any other provision of this Section 2.1, if the Underwriter's
Representative advises the Initiating Holders in writing that it has determined
in good faith that the marketing factors require a limitation of the number of
shares to be underwritten, the Corporation and the Underwriter's Representative
shall so advise the Initiating Holders and all Holders of Registrable
Securities, and the Underwriter's Representative may limit the number of
Registrable Securities to be included in the registration and underwriting on a
pro rata basis based upon the total number of securities (including, without
limitation, Registrable Securities) entitled to registration held by the
Holders exercising their respective registration rights under Section 2.1(a);
PROVIDED, HOWEVER, that the number of shares of Registrable Securities to be
included in such underwriting shall not be reduced unless all other securities
proposed to be sold by persons other than the Holders exercising their
respective registration rights under Section 2.1(a) are first entirely excluded
from the underwriting. The number of securities to be included by any Holder
or other person may, in the discretion of the underwriters, be rounded to the
nearest one hundred (100) shares. No securities excluded from the underwriting
by reason of the underwriter's marketing limitation shall be included in such
registration.
If any Holder of Registrable Securities disapproves of the terms of
the underwriting, such person may elect to withdraw therefrom by written notice
to the Corporation, the Underwriter's Representative and the Initiating
Holders. The Registrable Securities and/or other securities so withdrawn shall
also be withdrawn from registration; provided, however, that, if by the
withdrawal of such Registrable Securities a greater number of Registrable
Securities held by other participating Holders may be included in such
registration (up to the maximum of any limitation imposed by the Underwriter's
Representative), then the Corporation shall allocate such greater number of
Registrable Securities to such Holders in proportion, as nearly as practicable,
to the respective amount of Registrable Securities held by such participating
Holders.
If the Underwriter's Representative has not limited the number of
Registrable Securities to be underwritten, the Corporation may include
securities for its own account or for the account of other stockholders of the
Corporation in such registration if the Underwriter's Representative so agrees.
2.2 Corporation Registration
-----------------------------
(a) Registration
-----------------
If at any time or from time to time, the Corporation shall determine
to register any of its Securities, either for its own account or the account of
a security Holder or Holders exercising their respective demand registration
rights, other than (i) a registration on Form S-8 (or a similar or successor
form) relating solely to employee stock option, stock purchase or other benefit
plans, or (ii) a registration on Form S-4 (or similar or successor form)
relating solely to a Securities and Exchange Commission Rule 145 transaction,
the Corporation will:
(x) promptly give to each Holder written notice thereof; and
(y) include in such registration (and any related qualification
under blue sky laws or other compliance), and in any underwriting involved
therein, all the Registrable Securities specified in a written request or
requests, made within twenty (20) days after mailing of written notice by the
Corporation, by any Holder or Holders, except as set forth in Section 2.2(b)
below.
(b) Underwriting
-----------------
If the registration of which the Corporation gives notice is for a
registered public offering involving an underwriting, the Corporation shall so
advise the Holders as a part of the written notice given pursuant to
Section 2.2(a)(x). In such event the right of any Holder to registration
pursuant to Section 2.2 shall be conditioned upon such Holder's participation
in such underwriting and the inclusion of such Holder's Registrable Securities
in the underwriting to the extent provided herein.
All Holders proposing to distribute their securities through such
underwriting shall (together with the Corporation and the other Holders
distributing their securities through such underwriting) enter into an
underwriting agreement in customary form with the underwriter or underwriters
selected for such underwriting by the Corporation. Notwithstanding any other
provision of this Section 2.2, if the managing underwriter determines that
marketing factors require a limitation of the number of shares to be
underwritten, the underwriter may limit the number of Registrable Securities to
be included in the registration and underwriting, on a pro rata basis based on
the total number of Securities (including, without limitation, Registrable
Securities) entitled to registration pursuant to registration rights granted to
the participating Holders by the Corporation, but in no event shall the amount
of Securities of the selling Holders included in the offering be reduced below
twenty-five percent (25%) of the total amount of Securities included in such
offering. The number of Securities to be included by any Holder or other
person may, in the discretion of the underwriters, be rounded to the nearest
one hundred (100) shares. No Securities excluded from the underwriting by
reason of the underwriter's marketing limitation shall be included in such
registration.
If any Holder disapproves of the terms of any such underwriting, he
may elect to withdraw therefrom by written notice to the Corporation and the
underwriter. Any Securities excluded or withdrawn from such underwriting shall
be withdrawn from such registration.
If the underwriter has not limited the number of shares to be
underwritten for the Corporation's account and the account of the Holders, the
Corporation may include Securities for the account of employees, officers,
directors and consultants.
2.3 S-3 Registrations
----------------------
If the Corporation is requested (and qualifies under applicable Commission
rules) to undertake a Form S-3 or equivalent short-form registration,
regardless of its designation, and any related qualification or compliance, of
Securities by the Holders of at least 20% of the Registrable Securities then
outstanding for an offering estimated to result in aggregate offering proceeds
of at least $1,000,000 (before deduction of any discounts and underwriting
expenses), the Corporation shall promptly give notice of such proposed
registration to all Holders of Registrable Securities and the Corporation
shall, as expeditiously as possible, use its best efforts to effect the
registration on Form S-3 of the Registrable Securities which the Corporation
has been requested to register (i) in each request and (ii) in any response
given within twenty (20) days to a notice from the Corporation pursuant to this
Section 2.3. Notwithstanding the foregoing, however, such registration shall
be subject to the following:
(a) The Corporation shall not be required to effect more than two
such registrations pursuant to this Section 2.3 in any twelve (12) month
period.
(b) The Corporation shall not be required to effect a registration
pursuant to this Section 2.3 within one hundred eighty (180) days of the
effective date of any registration referred to in Section 2.2 in which the
Holders of Registrable Securities requesting registration pursuant to this
Section 2.3 were entitled to participate to the fullest extent they desired
pursuant to Section 2.2.
The Corporation may include in the registration under this Section 2.3 any
other shares of Common Stock (including issued and outstanding shares of Common
Stock as to which the Holders thereof have contracted with the Corporation for
company registration rights set forth in Section 2.2) so long as the inclusion
in such registration of such shares will not, in the opinion of the managing
underwriter (or in the reasonable opinion of the Corporation in the event that
the offering is not underwritten), interfere with the successful marketing in
accordance with the intended method of sale or other disposition of all the
shares of Registrable Securities sought to be registered by the Holder or
Holders of Registrable Securities pursuant to this Section 2.3. If it is
determined as provided above that there will be such interference, the other
shares of Common Stock sought to be included by the Corporation shall be
excluded to the extent deemed necessary by the managing underwriter, and all
other shares of Common Stock held by other parties shall be excluded before the
exclusion of any shares of Registrable Securities held by the Holders who
desire to have their shares included in the registration and offering. If, as
contemplated above, and after excluding all other shares of Common Stock held
by other parties, shares of the Common Stock of the Holders are to be excluded,
the number of shares of Common Stock of each participating Holder which are to
be excluded shall be proportionate to the number of shares which such Holder is
seeking to register.
2.4 Expenses of Registration
-----------------------------
All Registration Expenses incurred in connection with any registration,
qualification or compliance pursuant to the Sections 2.1 and 2.2, and the first
two registrations pursuant to Section 2.3 shall be borne by the Corporation;
and, unless otherwise stated, all Selling Expenses relating to Securities
registered by the Holders shall be borne by the Holders of such Securities pro
rata on the basis of the number of shares so registered.
2.5 Registration Procedures
----------------------------
In the case of each registration, qualification or compliance effected by
the Corporation pursuant to this Section 2, the Corporation will keep each
Holder advised in writing as to the initiation of each registration,
qualification and compliance and as to the completion thereof. Whenever
required under this Agreement to effect the registration of any Registrable
Securities, the Corporation shall, at its expense and as expeditiously as
reasonably possible:
(a) Prepare and file with the Commission a registration statement
with respect to such Registrable Securities and use its commercially reasonable
efforts to cause such registration statement to become effective, and keep such
registration statement effective for a period of one hundred twenty (120) days
or until the Holder or Holders have completed the distribution described in the
registration statement relating thereto, whichever occurs first.
(b) Prepare and file with the Commission such amendments and
supplements to such registration statement and the prospectus used in
connection with such registration statement as may be necessary to comply with
the provisions of the Securities Act with respect to the disposition of all
securities covered by such registration statement.
(c) Furnish to the Holders such copies of a prospectus, including a
preliminary prospectus, in conformity with the requirements of the Securities
Act, and such other documents as they may reasonably request to facilitate the
disposition of all securities covered by such registration statement.
(d) Use commercially reasonable efforts to register and qualify the
securities covered by such registration statement under such other securities
or blue sky laws of such states and jurisdictions as shall be reasonably
requested by the Holders, provided that the Corporation shall not be required
to qualify to do business or to file a general consent to service of process in
any such states or jurisdictions.
(e) In the event of any underwritten public offering, enter into and
perform its obligations under an underwriting agreement, in usual and customary
form, with the managing underwriter(s) of such offering.
(f) Notify each Holder of Registrable Securities covered by such
registration statement, during the time when a prospectus is required to be
delivered under the Securities Act, of the happening of any event as a result
of which the prospectus included in such registration statement, as then in
effect, includes an untrue statement of a material fact or omits to state a
material fact required to be stated therein or necessary to make the statements
therein not misleading in the light of the circumstances then existing.
(g) At the request of any Holder selling Registrable Securities in
such registration, furnish on the date that such Registrable Securities are
delivered to the underwriters for sale in connection with such registration
(i) an opinion, dated such date, of legal counsel representing the Corporation
for the purposes of such registration, in form and substance as is customarily
given by company counsel to underwriters in an underwritten public offering,
addressed to the underwriters, and (ii) a letter, dated such date, from the
independent certified public accountants of the company, in form and substance
as is customarily given by independent certified public accountants to
underwriters in an underwritten public offering, addressed to the underwriters.
(h) Apply to list the Registrable Securities being registered on any
national securities exchange on which a class of the Corporation's equity
securities is listed or qualify the Registrable Securities being registered for
inclusion on the Nasdaq National Market if the Corporation does not have a
class of equity securities listed on a national securities exchange.
2.6 Indemnification
--------------------
(a) The Corporation will, and does hereby undertake to, indemnify
and hold harmless each Holder, each of its officers, directors and partners,
and each person controlling such Holder within the meaning of Section 15 of the
Securities Act, with respect to which registration, qualification or compliance
has been effected pursuant to this Section 2, and each underwriter, if any, and
each person who controls any underwriter within the meaning of Section 15 of
the Securities Act, against all expenses, claims, losses, damages and
liabilities (or actions in respect thereof), including settlement of any
litigation, commenced or threatened, to which they may become subject under the
Securities Act, the 1934 Act, or other federal or state law, arising out of or
based on any untrue statement (or alleged untrue statement) of a material fact
contained in any registration statement, prospectus (preliminary or final),
offering circular or other document or amendments thereto, or arising out of or
based on any omission (or alleged omission) to state therein a material fact
required to be stated therein or necessary to make the statements therein, in
light of the circumstances in which they were made, not misleading, or arising
out of or any violation by the Corporation of the Securities Act, the 1934 Act
or any other federal, state or common law rule or regulation applicable to the
Corporation, and will reimburse each such Holder, each of its officers,
directors and partners, and each person controlling such Holder, each such
underwriter and each person who controls any such underwriter, for any legal
and any other expenses reasonably incurred in connection with investigating,
preparing or defending any such claim, loss, damage, liability or action,
provided that the Corporation will not be liable in any such case to the extent
that any such claim, loss, damage, liability or expense arises out of or is
based on any untrue statement or omission or alleged untrue statement or
omission, made in reliance upon and in conformity with written information
furnished to the Corporation by an instrument executed by such Holder or
underwriter expressly for use in connection with such registration.
(b) Each Holder will, if Registrable Securities held by such Holder
are included in the Securities as to which such registration, qualification or
compliance is being effected, indemnify and hold harmless the Corporation, each
of its directors and officers, agents and employees, each underwriter, if any,
of the Corporation's Securities covered by such a registration statement, each
person who controls the Corporation or such underwriter within the meaning of
Section 15 of the Securities Act, and each other such Holder, each of its
officers, directors and partners and each person controlling such Holder within
the meaning of Section 15 of the Securities Act, against all claims, losses,
damages and liabilities (or actions in respect thereof to which they may become
subject) arising out of or based on any untrue statement (or alleged untrue
statement) of a material fact contained in any such registration statement,
prospectus, offering circular or other document, or amendments thereto, or any
omission (or alleged omission) to state therein a material fact required to be
stated therein or necessary to make the statements therein, in light of the
circumstances in which they were made, not misleading, and will reimburse the
Corporation, such Holders, such directors, officers, persons, underwriters or
control persons for any legal or any other expenses reasonably incurred in
connection with investigating or defending any such claim, loss, damage,
liability or action, in each case to the extent, but only to the extent, that
such untrue statement (or alleged untrue statement) or omission (or alleged
omission) is made in such registration statement, prospectus, offering circular
or other document in reliance upon and in conformity with written information
furnished to the Corporation by an instrument executed by such Holder expressly
for use in connection with such registration; PROVIDED, HOWEVER, that the
obligations of such Holders hereunder shall be limited to an amount equal to
the net proceeds to each such Holder of Registrable Securities from the sale of
such Registrable Securities as contemplated herein.
(c) Each party entitled to indemnification under this Section 2.6
(the "INDEMNIFIED PARTY") shall give notice to the party required to provide
indemnification (the "INDEMNIFYING PARTY") promptly after such Indemnified
Party has actual knowledge of any claim as to which indemnity may be sought,
and shall deliver written notice to the Indemnifying Party of commencement
thereof. The Indemnifying Party, at its sole option and expense, may
participate in or assume the defense of any such claim or any litigation
resulting therefrom with counsel reasonably satisfactory to the Indemnified
Party, and the Indemnified Party may participate in such defense at Indemnified
Party's expense; PROVIDED, HOWEVER, that the Indemnified Party shall have the
right to retain its own counsel, with the fees and expenses to be paid by the
Indemnifying Party, if representation of the Indemnified Party by the counsel
retained by the Indemnifying Party would be inappropriate due to actual or
potential differing interests between the Indemnified Party and any other party
represented by such counsel in the proceeding.. The failure of any Indemnified
Party to give notice as provided herein shall not relieve the Indemnifying
Party of its obligations under this Section 2 except to the extent that such
failure to give notice shall materially adversely affect the Indemnifying Party
in the defense of any such litigation. No Indemnifying Party, in the defense
of any such claim or litigation shall, except with the consent of each
Indemnified Party, consent to entry of any judgment or enter into any
settlement which does not include as an unconditional term a release from all
liability in respect to such claim or litigation by the claimant or plaintiff
to such Indemnified Party.
(d) If the indemnification provided for in this Section 2.6 is held
by a court of competent jurisdiction to be unavailable to an Indemnified Party
with respect to any expense, claims, losses, damages, liabilities or other
indemnifiable amounts under this Section 2.6 (collectively, "LOSSES"), then the
Indemnifying Party, in lieu of indemnifying such Indemnified Party, shall
contribute to the amount paid or payable by such Indemnified Party as a result
of such Losses in such proportion as is appropriate to reflect the relative
fault of the Indemnifying Party on the one hand and of the indemnified party on
the other in connection with the statements, omissions or violations that
resulted in such Losses as well as any other relevant equitable considerations;
provided, that, in no event shall any contribution by a Holder under this
Section 2.6(d) exceed the net proceeds to such Holder in the registration,
except in the case of willful fraud by such Holder. The relative fault of the
Indemnifying Party and of the Indemnified Party shall be determined by
reference to, among other things, whether the statement, omission or violation
resulting in such Losses relates to information supplied by the Indemnifying
Party or by the Indemnified Party and the parties' relative intent, knowledge,
access to information, and opportunity to correct or prevent such statement,
omission or violation.
(e) The obligations of the Corporation and Holders under this
Section 2.6 shall survive the completion of any offering of Registrable
Securities and the termination of registration rights pursuant to this Section
2.
2.7 Information by Holder
--------------------------
Each Holder of Registrable Securities included in any registration shall
furnish to the Corporation such information regarding such Holder and the
distribution proposed by such Holder as the Corporation may reasonably request
in writing and as shall be required in connection with any registration,
qualification or compliance referred to in this Section 2.
2.8 Rule 144 Reporting
-----------------------
With a view to making available the benefits of certain rules and
regulations of the Commission which may at any time permit the sale of the
Restricted Securities to the public without registration, the Corporation
agrees to:
(a) Maintain the registration of its Common Stock under Section
12(g) of the 1934 Act;
(b) Make and keep public information available regarding the
Corporation, as these terms are understood and defined in Rule 144 under the
Securities Act, at all times after the date hereof;
(c) File with the Commission in a timely manner all reports and
other documents required of the Corporation under the Securities Act and the
1934 Act; and
(d) Furnish to any Holder, so long as such Holder owns any
Registrable Securities, forthwith upon request, a written statement as to
compliance by the Corporation with the reporting requirements of Rule 144 and
of its compliance with the Securities Act and the 1934 Act; the Corporation
shall provide forthwith upon written request a copy of the most recent annual
or quarterly report of the Corporation, and such other reports, documents and
information of the Corporation as any Holder may reasonably request in availing
itself of any rule or regulation of the Commission allowing such Holder to sell
any Securities without registration.
2.9 Termination of Registration Rights
---------------------------------------
The registration rights and related rights granted pursuant to Section 2
shall terminate as to each Holder upon the occurrence of the earlier of the
following:
(a) Ten (10) years after the date hereof; or
(b) At such time as all Restricted Securities held by such Holder or
its permitted transferee can be sold within a given three (3) month period
without compliance with the registration requirements of the Securities Act
pursuant to Rule 144(k) (or its successor provision).
SECTION 3. HOLDERS' RIGHTS OF FIRST REFUSAL
- ---------------------------------------------
3.1 Rights
-----------
(a) If, at any time prior to the expiration of the period set forth
in Section 3.6 below, the Corporation should desire to issue any Securities in
a transaction not registered under the Securities Act, it shall give each
Holder the first right to purchase such Holder's Pro Rata Share (as defined
below), of all of such Securities on the same terms and at the same price as
the Corporation is willing to sell such Securities to any other person. A
Holder's "PRO RATA SHARE" of the Securities shall be equal to that percentage
of the outstanding Common Stock of the Corporation held by such Holder, on the
date of the Corporation's written notification referred to in Section 3.2
below.
(b) For purposes of this Section 3.1, the Common Stock of the
Corporation held by a Holder shall be adjusted for stock dividends, stock
splits, stock combinations, recapitalizations and the like, and shall be deemed
to include shares of Common Stock issued or issuable upon conversion of the
Shares or upon the conversion or exercise of any other Securities of the
Corporation on an as-converted basis.
3.2 Notification
-----------------
Prior to any sale or issuance by the Corporation of any Securities, the
Corporation shall notify each Holder, in writing, of its intention to sell and
issue such Securities, setting forth in reasonable detail the terms, price and
description under which it proposes to make such sale. Within twenty (20) days
thereafter, each Holder shall notify the Corporation whether it will exercise
its option and elects to purchase its Pro Rata Share (or any part thereof) of
the Securities so offered.
3.3 Waiver
-----------
If, within twenty (20) days after the Corporation gives notice pursuant to
Section 3.2 above, a Holder does not notify the Corporation that it desires to
purchase all of its Pro Rata Share of the Securities described in such notice
upon the terms and conditions set forth therein, the Corporation may, during a
period of one hundred eighty (180) days following the end of such twenty (20)-
day period, sell and issue such Securities as to which such Holder does not
indicate a desire to purchase to another person upon the same terms and
conditions as those set forth in the notice to the Holder but at a price at
least as great as the price offered to the Holders; provided, however, that
failure by a Holder to exercise its option to purchase with respect to one
offering, sale and issuance shall not affect its option to purchase Securities
in any subsequent offering, sale and purchase. In the event the Corporation
has not sold the Securities, or entered into a binding agreement to sell the
Securities, within such one hundred eighty (180)-day period, the Corporation
shall not thereafter issue or sell any Securities without first offering such
Securities to the Holders in the manner provided above.
3.4 Issuance
-------------
If a Holder gives the Corporation notice that it desires to purchase any
of the Securities offered by the Corporation, payment for the Securities shall
be by check or wire transfer, against delivery of the Securities at the
executive offices of the Corporation within ten (10) days after giving the
Corporation such notice, or if later, the closing date for the sale of such
Securities. The Corporation shall take all such action as may be required by
any regulatory authority in connection with the exercise by any Holders of the
right to purchase Securities as set forth in this Section 3, but the right of
Holders is subject to the Corporation's compliance with regulatory
requirements.
3.5 Excluded Securities
------------------------
The right of first refusal contained in this Section 3 shall not apply to
the following:
(a) the issuance by the Corporation of shares of Common Stock to
officers, directors, or employees of, or consultants or contractors to, the
Corporation pursuant to stock purchase or stock option plans or agreements
approved by the Corporation's Board of Directors (of which 539,317 shares of
Common Stock are reserved for issuance under such plans and agreements as of
the date of this Agreement);
(b) the issuance of Securities in connection with the acquisition of
a third party, by merger, or acquisition of more than fifty-one percent (51%)
of the outstanding shares or substantially all of the assets of such third
party approved by directors representing the Shares sold pursuant to the Stock
Purchase Agreement;
(c) the issuance of Conversion Shares;
(d) the issuance of Securities pursuant to currently outstanding
options, warrants, notes, or other rights to acquire Securities of the
Corporation; or
(e) the issuance of Securities by means of stock splits, stock dividends or
like transactions unanimously approved by the Corporation's Board of Directors.
3.6 Termination
----------------
The right of first refusal contained in this Section 3 shall terminate as
to a Holder at the time when such Holder ceases to own at least 100,000 shares
of Common Stock (determined in the manner contemplated by Section 3.1(b)
above).
SECTION 4. MISCELLANEOUS
- --------------------------
4.1 Governing Law
------------------
This Agreement shall be governed in all respects by the laws of the state
of Washington without regard to its conflict of law provisions.
4.2 Successors and Assigns
---------------------------
The provisions hereof shall inure to the benefit of, and be binding upon
the parties hereto and the respective successors, permitted assigns, heirs,
executors and administrators of the parties hereto. The rights specified in
Section 2 and may not be assigned except (i) to a transferee or assignee of
more than 200,000 shares of the Registrable Securities or shares of Common
Stock (as determined in the manner contemplated by Section 3.1(b)) held by a
Holder; (ii) to an Affiliate of a Holder or to any other Holder; (iii) to a
successor entity to a Holder pursuant to a reorganization or recapitalization
of such Holder; or (iv) pursuant to a transfer to a Holder's ancestors or
descendants or spouse or to a trustee for their benefit. The transferring
Holder agrees to give notice of any such assignment to the Corporation,
including the name and address of such transferee or assignee, within a
reasonable time after such assignment.
4.3 Entire Agreement; Amendment
--------------------------------
This Agreement and the other documents delivered pursuant hereto
constitute the full and entire understanding and agreement between the parties
with regard to the subjects hereof and thereof. This Agreement may only be
amended or waived by a writing signed by all parties to this Agreement;
provided, however, that Holders holding in the aggregate a majority of the
Registrable Securities then outstanding acting together may amend or waive, on
behalf of all the Holders, any provisions hereof benefiting the Holders as a
class so long as the effect thereof will be that all Holders will be treated
equally.
4.4 Notices, Etc.
------------------
Every notice or other communication required or contemplated by this
Agreement must be in writing and sent by one of the following methods: (i)
personal delivery, in which case delivery is deemed to occur the day of
delivery; (ii) transmission by telecopy with acknowledgment of receipt, in
which case delivery is deemed to occur the day of transmission; (iii) certified
or registered mail, postage prepaid, return receipt requested, in which case
delivery is deemed to occur the day it is officially recorded as delivered to
the intended recipient; or (iv) next-day delivery to a U.S. address by
recognized overnight delivery service such as Federal Express, in which case
delivery is deemed to occur the day of delivery. In each case, a notice or
other communication sent to a party must be directed to the address for that
party set forth below, or to other address designated by that party by written
notice:
If to the Investor, to: U.S. Bank National Association
U.S. Bank Place, MPFP 2516
601 Second Avenue South
Minneapolis, MN 55402-4302
Attention: David C. Larsen
Telephone: (612) 973-2129
Facsimile: (612) 973-2148
with a copy to: Perkins Coie LLP
1201 Third Avenue, 40th Floor
Seattle, WA 98101-3099
Attention: James D. Gradel
Telephone: (206) 583-8888
Facsimile: (206) 583-8500
If to Corporation, to: Gargoyles, Inc.
5866 South 194th Street
Kent, WA 98032
Attention: Cynthia L. Pope,
VP and General Counsel
Telephone: (253) 796-2752
Facsimile: (253) 872-3317
4.5 Delay or Omissions
-----------------------
No delay or omission to exercise any right, power or remedy accruing to
any Holder upon any breach or default of the Corporation under this Agreement
shall impair any such right, power or remedy of such Holder nor shall it be
construed to be a waiver of any such breach or default, or an acquiescence
therein, or of or in any similar breach or default thereafter occurring, nor
shall any waiver of any single breach or default be deemed a waiver of any
other breach or default theretofore or thereafter occurring. Any waiver,
permit, consent or approval of any kind or character on the part of any Holder
of any breach or default under this Agreement, or any waiver on the part of
such Holder of any provisions or conditions of this Agreement, must be in
writing and shall be effective only to the extent specifically set forth in
such writing. All remedies, either under this Agreement, or by law or
otherwise afforded to the Holders, shall be cumulative and not alternative.
4.6 Counterparts
-----------------
This Agreement may be executed in any number of counterparts, all of which
together shall constitute one instrument, and each of which may be executed by
less than all of the parties to this Agreement.
4.7 Severability
-----------------
In the event that any provision of this Agreement becomes or is declared
by a court of competent jurisdiction to be illegal, unenforceable or void, this
Agreement shall continue in full force and effect without said provision;
provided that no such severability shall be effective if it materially changes
the economic benefit of this Agreement to any party.
4.8 Attorneys' Fees
--------------------
If any suit or action arising out of or related to this Agreement is
brought by any party, the prevailing party or parties shall be entitled to
recover the costs and fees (including without limitation reasonable attorneys'
fees, the fees and costs of experts and consultants, copying, courier and
telecommunication costs, and deposition costs and all other costs of discovery)
incurred by such party or parties in such suit or action, including, without
limitation, any post-trial or appellate proceeding.
The foregoing Registration Rights Agreement is hereby executed as of the
date first above written.
HOLDER:
U.S. BANK NATIONAL ASSOCIATION
By ___________________________
Name:_____________________
Title:____________________
Address:__________________
__________________________
__________________________
GARGOYLES, INC.
By ____________________________
Leo Rosenberger
Chief Executive Officer and
Chief Financial Officer
5866 S. 194th St.
Kent, WA 98032
<PAGE>
EXHIBIT 1.2
SECOND AMENDED AND RESTATED CREDIT AGREEMENT
Between
U. S. BANK NATIONAL ASSOCIATION
and
GARGOYLES, INC.
Dated as of May 28, 1999
<PAGE>
CONTENTS
--------
SECTION 1. DEFINITIONS 1
1.1 Terms Defined 1
1.2 Accounting Terms 8
1.3 Rules of Construction 8
1.4 Incorporation of Recitals and Exhibits 9
SECTION 2. REVOLVING LOAN 9
2.1 Loan Commitment 9
2.2 Use of Proceeds 9
2.3 Revolving Note 9
2.4 Revolving Loan Interest Rates 10
2.5 Repayment 10
2.6 Revolving Loan Unused Portion Fee 10
2.7 Borrowing Base 10
2.8 Letters of Credit 11
SECTION 3. TERM LOAN I 12
3.1 Loan Commitment 12
3.2 Use of Proceeds 12
3.3 Term Note I 12
3.4 Term Loan I Interest Rates 12
3.5 Repayment 13
SECTION 4. TERM LOAN II 13
4.1 Loan Commitment 13
4.2 Use of Proceeds 13
4.3 Term Note II 14
4.4 Term Loan II Interest Rates 14
4.5 Repayment 14
SECTION 5. TERM LOAN III 14
5.1 Loan Commitment 14
5.2 Use of Proceeds 14
5.3 Term Note III 14
5.4 Term Loan III Interest Rates 15
5.5 Repayment 15
SECTION 6. GENERAL PROVISIONS APPLICABLE TO THE LOANS 15
6.1 Manner of Payment 15
6.2 Statements 15
6.3 Book Entry Loan Account 16
6.4 Bank Control Account 16
6.5 Computations of Interest 16
6.6 Default Interest 16
6.7 Maximum Interest Rate 16
6.8 Late Charge 17
6.9 Prepayments 17
6.10 Fundings 17
6.13 Extensions, Renewals, and Modifications 18
6.14 Renewal of Existing Notes 18
6.15 Collateral 18
SECTION 7. CONDITIONS PRECEDENT FOR FUNDINGS UNDER THE LOANS 18
7.1 Conditions Precedent for Initial Funding 18
7.2 Conditions Precedent to Each Subsequent Funding 20
SECTION 8. AFFIRMATIVE COVENANTS 21
8.1 Financial Data 21
8.2 Licenses and Permits 22
8.3 Maintenance of Properties 22
8.4 Payment of Charges 22
8.5 Insurance 23
8.6 Maintenance of Records 24
8.7 Inspection 24
8.8 Hazardous Substances 24
8.9 Corporate Existence 25
8.10 Notice of Disputes and Other Matters 25
8.11 Exchange of Note 26
8.12 Maintenance of Liens 26
8.13 Other Agreements 26
8.14 After-Acquired Collateral 26
8.15 Further Assurances 27
8.16 Maintenance of Bank Accounts 27
SECTION 9. NEGATIVE COVENANTS 27
9.1 Dividends and Distributions 27
9.2 Transactions With Affiliates 27
9.3 Other Indebtedness 27
9.4 Leases and Leasebacks 28
9.5 Liens 28
9.6 Advances and Loans 29
9.7 Investments 29
9.8 Acquisitions 29
9.9 Consolidation, Merger, and Sale of Assets 30
9.10 Type of Business 30
9.11 Change of Chief Executive Office or Name 30
9.12 Change in Documents 30
9.13 Control 30
9.14 Pension Plan 31
9.15 Working Capital 31
9.16 Debt Service Coverage Ratio 31
9.17 Capital Expenditures 32
9.18 Sungold Enterprises, Ltd. Payments 32
SECTION 10. REPRESENTATIONS AND WARRANTIES 32
10.1 Corporate Status 32
10.2 Power and Authority 33
10.3 No Violation of Agreements 33
10.4 Recording and Enforceability 33
10.5 Litigation 34
10.6 Good Title to Properties 34
10.7 Licenses and Permits 34
10.8 No Burdensome Agreements 34
10.9 Properties in Good Condition 35
10.10 Financial Statements 35
10.11 Outstanding Indebtedness 35
10.12 Taxes 35
10.13 License Fees 36
10.14 Trademarks, Patents, Etc. 36
10.15 Governmental Approvals 36
10.16 Disclosure 36
10.17 Regulations U and X 36
10.18 Names 37
10.19 Condition of Property 37
10.20 Pension Plans 37
10.21 Year 2000 37
SECTION 11. EVENTS OF DEFAULT; REMEDIES 38
11.1 Events of Default 38
11.2 Acceleration; Remedies 40
SECTION 12. MISCELLANEOUS 40
12.1 Notices 40
12.2 Payment of Expenses 41
12.3 Setoff 42
12.4 Waiver of Setoff 42
12.5 Fees and Commissions 42
12.6 No Waiver 42
12.7 Entire Agreement and Amendments 43
12.8 Benefit of Agreement 43
12.9 Release of Claims 43
12.10 Severability 44
12.11 Descriptive Headings 44
12.12 Governing Law 44
12.13 Consent to Jurisdiction, Service, and Venue 44
12.14 Arbitration 44
12.15 Counterparts 45
12.16 Statutory Notice 45
EXHIBITS
--------
Exhibit A Revolving Note, Section 2.3
Exhibit B Term Note I, Section 3.3
Exhibit C Term Note II, Section 4.3
Exhibit D Term Note III, Section 5.3
Exhibit E Opinion of Counsel 7.1(c)
Exhibit F (F-1 through F-3) Board Resolution and Incumbency Certificates,
Section 7.1(e)(iii)
Exhibit G Existing Liens, Section 9.5
Exhibit H Schedule of Trademarks, Trade Names, Service Marks, Patents and
Applications,Section 10.14
<PAGE>
SECOND AMENDED AND RESTATED CREDIT AGREEMENT
THIS SECOND AMENDED AND RESTATED CREDIT AGREEMENT is made and entered into
as of the 28th day of May, 1999, by and between U. S. BANK 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 doing 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 April 7, 1997, U. S. Bank and Borrower entered into that certain
First Amended and Restated Credit Agreement (together with all amendments,
supplements, exhibits, and modifications thereto, the "Existing Credit
Agreement"), whereby U. S. Bank agreed to provide the credit facilities
described therein to Borrower.
C. Borrower has requested U. S. Bank to modify the credit facilities
provided for in the Existing Credit Agreement. U. S. Bank is ready, able, and
willing to grant Borrower's requests on the terms and conditions of this
Agreement.
D. In order to modify the credit facilities 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:
"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 Second 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 2.7 hereof.
"Borrowing Notice" has the meaning set forth in Section 6.10(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 tax expense) 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 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, which cash does not constitute
proceeds of loans made to Borrower for the specific purpose of financing
Capital Expenditures, (iii) dividends and distributions paid to Borrower's
shareholders, and (iv) decreases in deferred tax accounts.
"Claims" has the meaning set forth in Section 12.14 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, for the relevant period, the aggregate amount of
Borrower's interest expense and principal reduction payments required on all
Indebtedness of Borrower for borrowed money, including, without limitation,
payments required during the relevant period on leases that would be required
to be capitalized under generally accepted accounting principles.
"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 25 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
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 Foreign Accounts Receivable" means the accounts receivable of
Borrower and the Subsidiaries due from Persons not residents of the United
States, 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 consignments, (f) accounts
receivable that constitute any retainage, (g) accounts receivable that
constitute dated billings other than approved by U. S. Bank in writing,
(h) accounts receivable in which any Person other than U. S. Bank has a
security interest, and (i) 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. Notwithstanding the foregoing,
"Eligible Foreign 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. There shall be no
duplication between Eligible Foreign Accounts Receivable and Eligible 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.
"ERISA" means the Employee Retirement Income Security Act of 1974, as
amended from time to time.
"Equity Documents" means the Stock Purchase Agreement and Registration
Rights Agreement of even date herewith entered into between Borrower and
U. S. Bank, as well as the Certificate of Designation of Rights and Preferences
of Series A Preferred Stock of Borrower of even date herewith and issued to
U. S. Bank.
"Event of Default" has the meaning set forth Section 11.1 hereof.
"Excess Cash Flow" means Borrower's net income (before tax expense) for
the relevant period, subject to the following adjustments:
(a) There shall be added to net income charges against income
consisting of depreciation of real and personal property, amortization, write-
off of goodwill, and other intangibles;
(b) There shall be deducted from net income: (i) to the extent
included in determining net income, all noncash revenue and income items under
generally accepted accounting principles, (ii) cash paid by Borrower for
Capital Expenditures, which cash does not constitute proceeds of loans made to
Borrower for the specific purpose of financing Capital Expenditures,
(iii) without duplication of other charges against income, cash paid by
Borrower to Sungold Enterprises, Ltd. as permitted by this Agreement, (iv) cash
principal reduction payments made by Borrower on Term Loan I and Excess Cash
Flow payments made on Term Loan II during the relevant period pursuant to
Section 4.5(b), (v) cash dividends and distributions paid to Borrower's
shareholders, and (vi) cash paid by Borrower during the relevant period for
income taxes.
"Existing Credit Agreement" has the meaning set forth in Recital B hereof.
"Funding" means any disbursement of the proceeds of the Revolving Loan,
the Term Loans, or the issuance or renewal of any Letter of Credit.
"Governmental Approval" means any authorization, consent, approval,
certificate of compliance, license, permit, or exemption from, contract with,
registration or filing with, or report or notice to, any Governmental Body
required or permitted by Applicable Law.
"Governmental Body" means the government of the United States, any state
or any foreign country, or any governmental or regulatory official, body,
department, bureau, subdivision, agency, commission, court, arbitrator, or
authority, or any instrumentality thereof, whether federal, state, or local.
"Guarantor" means H.S.C., Inc., a Washington corporation, Sungold Eyewear,
Inc., a Washington corporation, and Private Eyes Sunglass Corporation, together
with any Subsidiary that executes a guaranty of the Loans after the date of
this Agreement.
"Guaranties" means the guaranties executed by Guarantors in connection
with the Existing Credit Agreement, together with all amendments thereto.
"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.
"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.
"Letters of Credit" has the meaning set forth in Section 2.8 hereof and
includes all renewals, replacements, and amendments to the Letters of Credit.
"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 and the Term Loans, as well as all
renewals, replacements, and amendments thereof.
"Notes" means the Revolving Note and Term Note I, Term Note II, and Term
Note III, 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 9.5 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" means the Pledge Agreement executed by Borrower in
connection with the Existing Credit Agreement, together with all amendments to
the foregoing.
"Reference Rate" means that rate of interest announced by U. S. Bank from
time to time as its reference rate. The Reference 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 Reference 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 Reference
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 Reference Rate; however, the Reference Rate is available upon inquiry of
U. S. Bank.
"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" means all security agreements executed by Borrower and
Guarantors in connection with the Existing Credit Agreement, together with all
amendments to any of the foregoing.
"Subsidiaries" means the Persons 100 percent of the equity interest of
which is owned by Borrower.
"Term Loan I" has the meaning set forth in Section 3.1 hereof and includes
all renewals, replacements, and amendments of Term Loan I.
"Term Loan II" has the meaning set forth in Section 4.1 hereof and
includes all renewals, replacements, and amendments of Term Loan II.
"Term Loan III" has the meaning set forth in Section 5.1 hereof and
includes all renewals, replacements, and amendments of Term Loan III.
"Term Loans" means Term Loan I, and Term Loan II, and Term Loan III.
"Term Note I" has the meaning set forth in Section 3.3 hereof and includes
all renewals, replacements, and amendments of Term Note I.
"Term Note II" has the meaning set forth in Section 4.3 hereof and
includes all renewals, replacements, and amendments of Term Note II.
"Term Note III" has the meaning set forth in Section 5.3 hereof and
includes all renewals, replacements, and amendments of Term Note III.
"U. S. Bank" means U. S. Bank 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 Loans.
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.
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 January 31, 2000
("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, $9,000,000 (the "Revolving Loan"). Borrower may borrow, repay,
and reborrow hereunder either the full amount of the Revolving Loan or any
lesser sum. The Commitment Period shall be extended for two 1-year periods,
provided that (a) there exist no Events of Default as of the date of any
extension, (b) U. S. Bank and Lender agree on financial covenants for each
extension period at least 30 days prior to the expiration of the Commitment
Period or the extended Commitment Period (as the case may be), and (c) the
terms of such an extension are confirmed by an amendment to this Agreement in a
form acceptable to U. S. Bank and Borrower.
2.2 Use of Proceeds
--------------------
The initial Funding under the Revolving Loan shall be used to renew and
refinance the "Revolving Loan" under the Existing Credit Agreement.
Thereafter, the proceeds of the Revolving Loan shall be used by Borrower for
operating cash for Borrower and the Subsidiaries.
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
----------------------------------
The Revolving Loan shall bear interest at the Reference Rate plus .75
percent per annum.
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 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.
2.7 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) 65 percent of Eligible Foreign Accounts Receivable;
provided that the maximum advance based upon Eligible Foreign Accounts
Receivable is limited to $500,000, plus
(iii) 65 percent of Eligible Inventory; provided that the
maximum advance based upon Eligible Inventory is limited to
$8,000,000,("Borrowing Base").
(b) Borrower shall execute and submit to U. S. Bank a Borrowing Base
report in a form acceptable to U. S. Bank calculating the Borrowing Base (i) on
Tuesday of each week, dated as of Friday of the previous week, (ii) concur-
rently with each request for a Funding under the Revolving Loan or request for
the issuance of a Letter of Credit, and (iii) 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) exceeds 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.
2.8 Letters of Credit
----------------------
(a) Subject to and upon the terms and conditions set forth herein
and in reliance upon the representations, warranties, and covenants of Borrower
contained herein or made pursuant hereto, U. S. Bank will issue standby and
commercial letters of credit (the "Letters of Credit") for the benefit of
Borrower 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, $750,000. 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, $9,000,000.
(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 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 I
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
$9,500,000 on a term loan basis ("Term Loan I").
3.2 Use of Proceeds
--------------------
The proceeds of Term Loan I, together with the proceeds of the other Term
Loans shall be used to renew and refinance "Term Loan I," "Term Loan II," and
the "Equipment Loans" that are outstanding under the Existing Credit Agreement
as of the date of this Agreement.
3.3 Term Note I
----------------
Term Loan I shall be evidenced by a promissory note in the form attached
hereto as Exhibit B ("Term Note I").
3.4 Term Loan I Interest Rates
-------------------------------
Term Loan I shall bear interest at the Reference Rate plus .75 percent per
annum.
3.5 Repayment
--------------
(a) Commencing on the first day of the first month following the initial
Funding under Term Loan I 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) Commencing on July 1, 1999, and continuing on the first day of each
month thereafter, Borrower shall make principal reduction payments to
U. S. Bank to apply against Term Loan I in the following amounts:
<TABLE>
<CAPTION>
Year of Payment Amount of Monthly Payment
--------------- -------------------------
<S> <C> <C>
1999 (commencing 7/1/99) $16,666.67
2000 $75,000.00
2001 $125,000.00
2002 $166,666.67
2003 $166,666.67
2004 $166,666.67
2005 (until maturity date) $166,666.67
</TABLE>
(c) On June 1, 2005, Borrower shall pay U. S. Bank all outstanding
principal, accrued interest, and other charges with respect to Term Loan I.
SECTION 4. TERM LOAN II
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 lend to Borrower
$7,000,000 on a term loan basis ("Term Loan II").
4.2 Use of Proceeds
--------------------
The proceeds of Term Loan II, together with the proceeds of the other Term
Loans shall be used to renew and refinance "Term Loan I," "Term Loan II," and
the "Equipment Loans" that are outstanding under the Existing Credit Agreement
as of the date of this Agreement.
4.3 Term Note II
-----------------
Term Loan II shall be evidenced by a promissory note in the form attached
hereto as Exhibit C ("Term Note II").
4.4 Term Loan II Interest Rates
--------------------------------
Term Loan II shall bear interest at the Reference Rate plus .75 percent
per annum.
4.5 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 or before March 31 of each year, commencing March 31, 2000,
and continuing until Term Loan II is paid in full, Borrower shall make
principal reduction payments to U. S. Bank to apply against Term Loan II in an
amount equal to 50 percent of Excess Cash Flow of for the previous fiscal year
of Borrower.
(c) On June 1, 2005, Borrower shall pay U. S. Bank all outstanding
principal, accrued interest, and other charges with respect to Term Loan II.
SECTION 5. TERM LOAN III
5.1 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
$3,000,000 on a term loan basis ("Term Loan III").
5.2 Use of Proceeds
--------------------
The proceeds of Term Loan III, together with the proceeds of the other
Term Loans shall be used to renew and refinance "Term Loan I," "Term Loan II,"
and the "Equipment Loans" that are outstanding under the Existing Credit
Agreement as of the date of this Agreement.
5.3 Term Note III
------------------
Term Loan III shall be evidenced by a promissory note in the form attached
hereto as Exhibit D ("Term Note III").
5.4 Term Loan III Interest Rates
---------------------------------
Term Loan III shall bear interest at the Reference Rate plus .75 percent
per annum.
5.5 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 June 1, 2005, Borrower shall pay U. S. Bank all outstanding
principal, accrued interest, and other charges with respect to Term Loan III.
SECTION 6. GENERAL PROVISIONS APPLICABLE TO THE LOANS
6.1 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.
6.2 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 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.
6.3 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.
6.4 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. U. S. Bank and Borrower hereby agree that U. S. Bank may charge 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.
6.5 Computations of Interest
-----------------------------
All computations of interest shall be based on a 360-day year for the
actual number of days elapsed.
6.6 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 Reference 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.
6.7 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.
6.8 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.
6.9 Prepayments
----------------
Borrower may make prepayments of all or any portion of the Loans at any
time without premium or penalty. All prepayments shall be applied to the Loans
being prepaid in the inverse order of maturity.
6.10 Fundings
-------------
(a) Borrower shall give U. S. Bank notice (either in writing or
orally) for each Funding under the Revolving Loan between 8 a.m. and noon,
Seattle time on or before the day of the requested Funding. Each such notice
("Borrowing Notice") shall be given by the CEO, CFO or controller of Borrower,
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. Each Borrowing Notice shall be effective
upon receipt, except that notices received by U. S. Bank after 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 6.10(a) hereof.
Therefore, to induce U. S. Bank to lend funds in response to such requests and
in consideration for U. S. Bank's agreement to receive and consider such
requests, Borrower assumes all risk of the validity, authenticity, and
authorization of such requests, whether or not the individual making such
requests has authority to request Fundings and whether or not the aggregate sum
owing exceeds the maximum principal amount referred to above. U. S. Bank shall
not be responsible under principles of 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.
6.13 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.
6.14 Renewal of Existing Notes
------------------------------
The "Revolving Note," "Term Note I," Term Note II," and the "Equipment
Note," under the Existing Credit Agreement and all previous renewals thereof
shall be marked "Renewed" and retained by U. S. Bank until all Loans hereunder
are repaid in full.
Collateral
----------
All Security Agreements, the Pledge Agreement, financing statements,
filings with the United States Patent and Trademark Office, and other
instruments, documents, and agreements whereby Borrower or any Guarantor has
granted U. S. Bank a security interest in connection with the Existing Credit
Agreement shall remain in full force and effect and shall secure repayment of
the Loans and all obligations of Borrower and Guarantors under this Agreement,
the Notes, the Guaranties and all other Loan Documents.
SECTION 7. CONDITIONS PRECEDENT FOR FUNDINGS UNDER THE LOANS
7.1 Conditions Precedent for Initial Funding
---------------------------------------------
U. S. Bank shall not be required to make the any 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 and the Notes,
duly executed and delivered by Borrower.
(b) U. S. Bank shall have received, duly executed and delivered by
Borrower and Guarantors, such financing statements and other documents deemed
necessary by U. S. Bank to perfect the security interests granted to U. S. Bank
by Borrower or Guarantors.
(c) U. S. Bank shall have received updated schedules of
registrations of and applications for patents, trademarks and other
intellectual property to the Security Agreements previously executed by
Borrower and Guarantors, together with such other agreements, instruments and
documents as U. S. Bank deems necessary to perfect its interest in the assets
described in such schedules.
(d) 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.
(e) U. S. Bank shall have received from counsel for Borrower
acceptable to U. S. Bank, an opinion addressed to U. S. Bank and dated as of
the date of this Agreement, in the form attached hereto as Exhibit E.
(f) Each of Guarantors shall have executed the reaffirmation of
their respective Guaranties and Security Agreements attached to this Agreement.
(g) The transactions contemplated by the Equity Documents shall have
been consummated in accordance with the terms and conditions thereof.
(h) 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.
(i) 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.
(j) All corporate proceedings of Borrower and each Guarantor 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 Guarantor, 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 Guarantor 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 Guarantor in the form attached hereto as
Exhibit F-1, F-2, and F-3.
(k) Borrower shall have paid U. S. Bank all accrued interest on all
outstanding credit facilities under the Existing Credit Agreement through the
date of this Agreement.
7.2 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 7.1 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 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 10
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 8. 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:
8.1 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 and on a year to date basis, 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 month a calculation of the financial covenants
provided for in Section 9 hereof.
(b) As soon as practicable and in any event within 90 days after the
close of each fiscal year of Borrower, the following financial statements of
Borrower, setting forth the corresponding figures for the previous fiscal year
in comparative form where appropriate, all in reasonable detail and audited
(without any qualification or exception deemed material by U. S. Bank) by
Borrower's current independent certified public accountant or such other
independent certified public accountants selected by Borrower and satisfactory
to U. S. Bank: balance sheet, statement of income, and statement of cash
flows. Borrower shall provide U. S. Bank with a copy of its independent
certified public accountants' management letter or other similar report or
correspondence to Borrower.
(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 9 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) Copies of all reports relative to the operations of Borrower and
its Affiliates filed with any Governmental Body, including, without limitation,
copies of Borrower's 10Q and 10K reports filed with the United States
Securities and Exchange Commission.
(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.
8.2 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.
8.3 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.
8.4 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.
8.5 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 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 8.5 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.
8.6 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.
8.7 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.
8.8 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, 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 10.19 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 8.8 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 8.8 and Section 10.19 hereof
(including, but not limited to, the indemnity provided for in Section 8.8(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 hereunder are
separate and distinct from its obligations under the Loans and the Loan
Documents.
8.9 Corporate Existence
------------------------
Maintain and preserve the corporate existence of Borrower and Guarantors.
8.10 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.
8.11 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 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 8.11 shall be dated so that neither gain nor loss of interest
shall result therefrom.
8.12 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 9.5 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.
8.13 Other Agreements
---------------------
Comply with all covenants and agreements set forth in or required pursuant
to any of the other Loan Documents.
8.14 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.
8.15 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.
8.16 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.
SECTION 9. 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 and shall not permit any Guarantor,
without the prior written consent of U. S. Bank:
9.1 Dividends and Distributions
--------------------------------
Except as provided in the Equity Documents, 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.
9.2 Transactions With Affiliates
---------------------------------
Except as provided in Section 9.6 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.
9.3 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; and
(c) additional Indebtedness outstanding or committed to at any time (including,
but not limited to, indebtedness evidenced by notes, bonds, debentures, leases,
purchase agreements, and other contractual obligations) not in excess of an
aggregate amount at any one time outstanding of 250,000. Notwithstanding
clause (c) above, Borrower may not guarantee or become contingently liable for
the obligation of any Person other than Guarantors. In computing the
additional indebtedness permitted by clause (c) hereof, all capital lease
payments due from Borrower within 12 months shall be included if the amounts of
such rental payments are not otherwise included as Indebtedness in accordance
with generally accepted accounting principles. Except as set forth in
Section 9.5 hereof, none of the additional indebtedness permitted by this
Section 9.3 shall be secured by the Collateral.
9.4 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 9.3(c) hereof.
9.5 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 G hereto. The liens described in
clauses (a) through (h) hereof are called the "Permitted Liens."
9.6 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 Guarantors.
9.7 Investments
----------------
Invest in (by capital contribution or otherwise), acquire, purchase, or
make any commitment to purchase the obligations, stock, or equity of any
Person, except (a) direct obligations of the government of the United States of
America or any agency or instrumentality thereof, (b) interest-bearing
certificates of deposit or repurchase agreements issued by any commercial
banking institution satisfactory to U. S. Bank, 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.
9.8 Acquisitions
-----------------
Either directly or through an Affiliate, acquire, purchase, or make any
commitment to acquire or purchase an interest in the stock or other equity
interest of any Person or all or a substantial portion of the assets of any
Person.
9.9 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 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, or allow any Guarantor to do any of the foregoing.
9.10 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.
9.11 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.
9.12 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.
9.13 Control
------------
Except as contemplated in the Equity Documents or in connection with any
employment agreement, enter into any agreement 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.
9.14 Pension Plan
-----------------
Terminate or partially terminate any Plan now existing or hereafter
established for Borrower or its Affiliates or withdraw from participation
therein under 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.
9.15 Working Capital
--------------------
Permit Working Capital to be less than the following as of the last day of
the applicable month:
<TABLE>
<CAPTION>
Month Minimum Working Capital
--------------- -----------------------
<S> <C> <C>
June 1999 $2,200,000
July 1999 $2,500,000
August 1999 $2,900,000
September 1999 $2,800,000
October 1999 $2,600,000
November 1999 $2,000,000
December 1999 $1,300,000
</TABLE>
9.16 Debt Service Coverage Ratio
--------------------------------
Permit the Debt Service Coverage Ratio to be less than the following,
calculated on a year to date basis as of the last day of each month:
<TABLE>
<CAPTION>
Month Debt Service Coverage
---------------- ---------------------
<S> <C> <C>
June 1999 2.0:1.0
July 1999 2.1:1.0
August 1999 2.2:1.0
September 1999 2.0:1.0
October 1999 1.8:1.0
November 1999 1.4:1.0
December 1999 1.2:1.0
</TABLE>
9.17 Capital Expenditures
-------------------------
Permit Capital Expenditures to exceed $225,000 during any fiscal year of
Borrower.
9.18 Sungold Enterprises, Ltd. Payments
---------------------------------------
Permit (a) payments to Sungold Enterprises, Ltd. to exceed $750,000 in the
aggregate during Borrower's fiscal year ending December 31, 1999, or the amount
in the aggregate due and owing by Borrower under the terms of Section 2 of that
certain Royalty Agreement dated April 10, 1997, between Borrower and Sungold
Enterprises, Ltd. during Borrower's fiscal year ending December 31, 2000, or
(b) any payments to Sungold Enterprises, Ltd. after December 31, 2000.
SECTION 10. 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:
10.1 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.
10.2 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.
10.3 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 (x) for the execution of this Agreement,
the making of the Notes, or the assumption and performance of this Agreement or
the Notes by Borrower or (y) for the consummation by Borrower and Guarantors of
the transactions contemplated by this Agreement, including, but not limited to,
the grant of the security interests to U. S. Bank.
10.4 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.
10.5 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.
10.6 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 9.5 hereof.
10.7 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 advisable in connection with the
conduct of its business as now conducted and as presently proposed to be
conducted.
10.8 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.
10.9 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.
10.10 Financial Statements
------------------------------
The (a) audited financial statements of Borrower dated as of December 31,
1998, 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 March 31, 1999.
10.11 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 March 31, 1999.
10.12 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).
10.13 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.
10.14 Trademarks, Patents, Etc.
-----------------------------------
Attached hereto as Exhibit H 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.
10.15 Governmental Approvals
--------------------------------
Borrower holds all material Governmental Approvals necessary for the
operation of Borrower's and Guarantors' business.
10.16 Disclosure
--------------------
To the best of Borrower's knowledge, the exhibits hereto, the financial
information and statements referred to in Section 10.10 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.
10.17 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 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.
10.18 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 the following: Eyeking,
Gargoyles Performance Eyewear, and Hobie Polarized Sunglasses.
10.19 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 reasonable
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.
10.20 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.
10.21 Year 2000
-------------------
Borrower has reviewed and assessed its business operations and computer
systems and applications to address the "year 2000 problem" (that is, that
computer applications and equipment used by Borrower, directly or indirectly
through third parties, may be unable to properly perform date-sensitive
functions before, during, and after January 1, 2000). Borrower reasonably
believes that the year 2000 problem will not result in a material adverse
change in Borrower's business condition (financial or otherwise), operations,
properties, or prospects or ability to repay U. S. Bank. Borrower agrees that
this representation will be true and correct on and shall be deemed made by
Borrower on each date Borrower requests any Funding under this Agreement or
delivers any information to U. S. Bank. Borrower will promptly deliver to
U. S. Bank such information relating to this representation as U. S. Bank
requests from time to time.
SECTION 11. EVENTS OF DEFAULT; REMEDIES
11.1 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):
(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
$100,000 (other than as set forth in Section 11.1(b) hereof), whether now or
hereafter incurred; provided, that past-due trade credit shall not constitute
an Event of Default until after December 31, 1999; 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 8 and 9 hereof; or
(f) If Borrower fails to observe or perform (not otherwise specified
in this Section 11) 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 11.1, 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 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 8.10 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 Borrower breaches or fails to pay or perform (after any
applicable grace period) any obligation under any of the Equity Documents; 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.
11.2 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 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.
Notwithstanding the foregoing, upon the occurrence of any event specified in
Section 11.1(i), the obligation of U. S. Bank to make Fundings shall
automatically terminate and the unpaid principal amount of all outstanding
Loans (together with interest thereon) and Letters of Credit shall
automatically become due and payable without further act of U. S. Bank.
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 12. MISCELLANEOUS
12.1 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 registered or certified mail, return receipt requested
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: Leo Rosenberger
Facsimile No.: (206) 872-3317
(b) If to U. S. Bank:
U. S. Bank National Association
601 Second Avenue South
Minneapolis, Minnesota 55402-4302
Attention: David C. Larsen
Facsimile No.: (612) 973-2148
The designation of the persons to be so notified or the address of such persons
for the purposes of such notice may be changed from time to time by similar
notice in writing, except that any communication with respect to a change of
address shall be deemed to be given or made when received by the party to whom
such communication was sent.
12.2 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.
12.3 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.
12.4 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.
12.5 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.
12.6 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.
12.7 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.
(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 shall be deemed
amended and superseded in their entirety by this Agreement and the exhibits to
this Agreement.
12.8 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.
12.9 Release of Claims
----------------------
IN CONSIDERATION FOR U. S. BANK'S AGREEMENT TO ENTER INTO THIS AGREEMENT
AND THE EQUITY DOCUMENTS, BORROWER, H.S.C., INC., SUNGOLD EYEWEAR, INC., AND
PRIVATE EYES SUNGLASS CORPORATION EACH HEREBY RELEASES AND FOREVER DISCHARGES
U. S. BANK, ITS PREDECESSORS AND SUCCESSORS-IN-INTEREST, AND THEIR RESPECTIVE
DIRECTORS, OFFICERS, EMPLOYEES, REPRESENTATIVES AND AGENTS FROM ANY AND ALL
CLAIMS, DEMANDS, DAMAGES, LIABILITIES, CHARGES, ACTIONS, LOSSES, CAUSES OF
ACTION, COSTS, EXPENSES, COMPENSATION, AND SUITS OF ANY KIND, PAST, PRESENT OR
FUTURE, ARISING FROM OR ALLEGED TO ARISE FROM THEIR BUSINESS RELATIONSHIP,
INCLUDING THE RELATIONSHIP PROVIDED FOR IN THE EXISTING CREDIT AGREEMENT
THROUGH THE DATE OF THIS AGREEMENT, WHETHER KNOWN OR UNKNOWN. THIS RELEASE IS
INTENDED TO BE COMPLETE AND COMPREHENSIVE WITH RESPECT TO ALL SUCH CLAIMS.
THIS RELEASE OF CLAIMS HAS BEEN COMPLETELY READ AND FULLY UNDERSTOOD AND
VOLUNTARILY ACCEPTED FOR THE PURPOSE OF MAKING A FULL AND FINAL COMPROMISE AND
SETTLEMENT WITH RESPECT TO ALL CLAIMS, DISPUTED OR OTHERWISE.
12.10 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.
12.11 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.
12.12 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.
12.13 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.
12.14 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 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.
12.15 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.
12.16 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: Leo Rosenberger
Chief Executive Officer
Chief Financial Officer
U. S. BANK NATIONAL ASSOCIATION
--------------------------------
By: David C. Larsen
Vice President
<PAGE>
Affirmation of Guaranty and Security Agreements
-----------------------------------------------
Each of the undersigned Guarantors hereby (i) reaffirms its Guaranty and
its Security Agreement, (ii) agrees that its Guaranty guarantees the repayment
of the Loans and all other obligations of Borrower under this Agreement and the
other Loan Documents, (iii) agrees that its respective Security Agreement and
related collateral documents secures the payment and performance of the Secured
Obligations described in such Security Agreement, which Secured Obligations
shall include, without limitation, all obligations of such Guarantor under its
Guaranty, as well as all obligations of Borrower under this Agreement and the
other Loan Documents, (iv) acknowledges that its obligations pursuant to its
Guaranty and Security Agreement are enforceable without defense, offset, or
counterclaim, and (v) agrees to the release of claims set forth in Section 12.9
of this Agreement.
H.S.C., Inc., a Washington corporation
--------------------------------------
By: Leo Rosenberger
President
Chief Financial Officer
SUNGOLD EYEWEAR, INC., a Washington
corporation
--------------------------------------
By: Leo Rosenberger
Chief Executive Officer
Chief Financial Officer
PRIVATE EYES SUNGLASS CORPORATION,
a Washington corporation
--------------------------------------
By: Leo Rosenberger
President
Chief Financial Officer
Page 2
<PAGE>
EXHIBIT 99.1
GARGOYLES COMPLETES REFINANCING AND RECAPITALIZATION
----------------------------------------------------
KENT, WASHINGTON: JUNE 2, 1999 - Gargoyles, Inc. (OTC Bulletin Board:GOYL)
today announced that it has reached an agreement with its lender U.S. Bank
National Association for the restructure of its credit facility with the Bank
and a recapitalization of the company. "This new financing relieves the
immediate liquidity concerns that have faced us throughout 1998 and gives us
the working capital necessary to move forward," said Leo Rosenberger, the
company's CEO and CFO. As a result of the refinancing, the company's
indebtedness to U.S. Bank has been decreased by $10 million, and the balance of
the loans has been restructured into $19.5 million of term loans with maturity
dates of June 1, 2005, and a commitment for a $9 million revolving loan. No
principal payments are due under $10 million of the term loans until their
maturity date, and principal payments under the remaining $9.5 million term
loan are much lower in the first two years than in the last four years of the
loan. In exchange for $10 million of debt, the company issued 10 million
shares of Gargoyles, Inc. Series A Preferred Stock to U.S. Bank. The bank's
Series A Preferred Stock is convertible into 31,600,342 shares of Gargoyles,
Inc. Common Stock, or 79% of the authorized capital of the company on a fully-
diluted basis.
1998 was a turn-around year for the company. Management spent significant time
and effort in 1998 examining company operations and reviewing and investigating
the causes and results of the company's past performance. During the year, the
company cut its expense levels nearly in half to levels that can be sustained
by operations, sold or discontinued unprofitable operations, negotiated
terminations of leases and other endorsement contracts and license agreements
which reduced the company's contingent liabilities by more than $24 million,
refocused its brands and its marketing efforts, solidified its relationships
with the bank and with its key vendors and key customers, improved the quality
of its products while at the same time reducing the costs of its products,
restructured its operations, and improved its processes and systems to make it
easier for its customers to do business with the company.
"Our restructure efforts in 1998 were difficult and costly," said Mr.
Rosenberger, "Despite the significant challenges which remain, we are very
optimistic about our future. Our focus in 1999 is on improving our product
distribution and sales and on profitability. With this focus and with our
financing in place, we are poised to achieve real success in 1999 and beyond.
We are fortunate to have a dedicated and loyal work force which has worked hard
throughout the past year to turn our financial performance around, but we could
not have achieved these results without the continued support of our customers,
vendors and the hard work and support of the Special Assets Division of U.S.
Bank. It has been a joint effort on everyone's part."
Gargoyles, Inc. is a designer and distributor of a broad range of sunglasses
and eyewear products and is headquartered in Kent, Washington. The company
also has operations in New York State.
This press release contains forward-looking statements concerning the company's
expectations with respect to future operations. 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, factors described in this press release and those
involving business cycles and developments involving consumer products in
general and the sunglass industry in particular, and other factors, including
those described in the company's filings with the Securities and Exchange
Commission. The company undertakes no obligation to update forward-looking
statements to reflect changes in circumstances or changes in the views,
estimates or opinions of management that occur after the statements are made.
Because of the inherent uncertainty of forward-looking statements and because
circumstances or management's views, estimates and opinions may change,
investors are cautioned not to place undue reliance on forward-looking
statements.
CONTACT GARGOYLES, INC.: LEO ROSENBERGER, CEO AND CFO, 253-796-2752 EXT. 3405
OR CYNTHIA POPE, VP AND GENERAL COUNSEL, 253-796-2752 EXT. 3404.
