<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON OCTOBER 11, 1996
REGISTRATION NO. 333-
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- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
---------------
WILSONS THE LEATHER EXPERTS INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
---------------
MINNESOTA 5651 41-1839933
(STATE OR OTHER (PRIMARY STANDARD (I.R.S. EMPLOYER
JURISDICTION OF INDUSTRIAL IDENTIFICATION NO.)
INCORPORATION OR CLASSIFICATION CODE
ORGANIZATION) NUMBER)
7401 BOONE AVENUE NORTH
BROOKLYN PARK, MINNESOTA 55428
(612) 391-4000
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
---------------
DAVID L. ROGERS
PRESIDENT
WILSONS THE LEATHER EXPERTS INC.
7401 BOONE AVENUE NORTH
BROOKLYN PARK, MINNESOTA 55428
(612) 391-4000
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
COPIES TO:
KRIS SHARPE, ESQ. HOWARD L. SHECTER, ESQ.
FAEGRE & BENSON LLP MORGAN, LEWIS & BOCKIUS LLP
2200 NORWEST CENTER 101 PARK AVENUE
90 SOUTH SEVENTH STREET NEW YORK, NEW YORK 10178
MINNEAPOLIS, MINNESOTA 55402
---------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO PUBLIC: As soon as
practicable after this Registration Statement becomes effective.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box: [_]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering: [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering: [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box: [_]
CALCULATION OF REGISTRATION FEE
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<TABLE>
<CAPTION>
TITLE OF EACH CLASS OF PROPOSED MAXIMUM PROPOSED MAXIMUM
SECURITIES TO BE AMOUNT TO BE OFFERING PRICE PER AGGREGATE OFFERING AMOUNT OF
REGISTERED REGISTERED (1) SHARE (2) PRICE (2) REGISTRATION FEE
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<S> <C> <C> <C> <C>
Common Stock, $.01 par
value................. 3,450,000 Shares $14.00 $48,300,000 $16,656
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</TABLE>
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(1) Includes 450,000 shares of Common Stock which may be purchased by the
Underwriters to cover over-allotments, if any.
(2) Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457(a) of the Securities Act of 1933, as amended.
---------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS
REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH
SECTION 8(A) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID
SECTION 8(A), MAY DETERMINE.
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<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A +
+REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE +
+SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY +
+OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT +
+BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR +
+THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE +
+SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE +
+UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF +
+ANY SUCH STATE. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION, DATED OCTOBER 11, 1996
3,000,000 SHARES
[LOGO FOR WILSONS LEATHER EXPERTS APPEARS HERE]
COMMON STOCK
-----------
All of the shares of Common Stock offered hereby (the "Shares") are being
sold by Wilsons The Leather Experts Inc. (the "Company" or "Wilsons"). It is
anticipated that the initial public offering price will be between $12.00 and
$14.00 per share. See "Underwriting" for a discussion of the factors to be
considered in determining the initial offering price.
Prior to this offering (the "Offering"), there has been no public market for
the Common Stock of the Company. The Company has applied to have the Common
Stock approved for quotation on the Nasdaq National Market under the trading
symbol "WLSN."
SEE "RISK FACTORS" BEGINNING ON PAGE 6 FOR A DISCUSSION OF CERTAIN FACTORS
THAT SHOULD BE CONSIDERED BY PROSPECTIVE PURCHASERS OF THE SHARES.
-----------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS
A CRIMINAL OFFENSE.
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<TABLE>
<CAPTION>
PRICE TO UNDERWRITING PROCEEDS TO
PUBLIC DISCOUNT (1) COMPANY (2)
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Per Share................................... $ $ $
Total (3)................................... $ $ $
</TABLE>
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(1) See "Underwriting" for information concerning indemnification of the
Underwriters and other information.
(2) Before deducting expenses of the offering payable by the Company estimated
at $670,000.
(3) The Underwriters have been granted an option by the Company, exercisable
within 30 days of the date hereof, to purchase up to 450,000 additional
shares of Common Stock at the Price to Public per share, less the
Underwriting Discount, for the purpose of covering over-allotments, if any.
If the Underwriters exercise such option in full, the total Price to
Public, Underwriting Discount and Proceeds to Company will be $ ,
$ and $ , respectively. See "Underwriting."
-----------
The Shares are offered severally by the Underwriters, when, as and if
delivered to and accepted by them, subject to their right to withdraw, cancel
or reject orders in whole or in part and subject to certain other conditions.
It is expected that delivery of certificates representing the Shares will be
made against payment on or about , 1996 at the offices of Oppenheimer &
Co., Inc., Oppenheimer Tower, World Financial Center, New York, New York 10281.
-----------
OPPENHEIMER & CO., INC.
LADENBURG, THALMANN & CO. INC.
PIPER JAFFRAY INC.
The date of this Prospectus is , 1996.
<PAGE>
Color pictures.
Wilsons The Leather Experts(TM), Tannery West(R), Georgetown Leather
Design(R), Berman Buckskin(TM), Adventure Bound(R), Maxima(R), Open Road(TM)
and M. Julian(R) are trademarks of the Company. Other brand names or
trademarks appearing in this Prospectus (Guess?(R), Jones New York(R), Kenneth
Cole(R), Andrew Marc(R) and Bosca(R)) are the property of their respective
holders.
The Company intends to furnish to its shareholders annual reports containing
audited financial statements and quarterly reports containing unaudited
interim financial information for each of the first three quarters of each
fiscal year of the Company.
IN CONNECTION WITH THE OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK
OFFERED HEREBY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN
MARKET. SUCH TRANSACTIONS MAY BE EFFECTED ON THE NASDAQ NATIONAL MARKET, IN
THE OVER-THE-COUNTER MARKET OR OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY
BE DISCONTINUED AT ANY TIME.
2
<PAGE>
PROSPECTUS SUMMARY
The following summary should be read in conjunction with, and is qualified in
its entirety by, the more detailed information and consolidated financial
statements (including the notes thereto) and pro forma financial information
appearing elsewhere in this Prospectus. Unless otherwise indicated, all
references to the "Company" or "Wilsons" mean Wilsons The Leather Experts Inc.
and its subsidiaries, including the Predecessor Companies, and all references
to the "Predecessor Companies" mean Wilsons Center, Inc., Rosedale Wilsons,
Inc. and their subsidiaries prior to the acquisition of such companies by the
Company from Melville Corporation ("Melville") on May 25, 1996 (the
"Acquisition").
THE COMPANY
Wilsons is the leading specialty retailer of men's and women's leather
outerwear, apparel and accessories in the United States. In 1995, the Company
had net sales of $462.4 million, representing a management-estimated 18.0%
share of the $2.0 billion U.S. retail leather apparel market and a management-
estimated 2.7% share of the $3.9 billion U.S. retail leather accessories
market. As of October 5, 1996, the Company operated 476 stores. In addition,
the Company operates a significant number of holiday stores and seasonal kiosks
during its peak selling season, which for 1996 will total approximately 375
locations.
Wilsons operates in 45 states, the District of Columbia and England under
several formats including "Wilsons The Leather Experts," the Company's
traditional mall-based concept which offers moderately priced merchandise, and
"Tannery West" and "Georgetown Leather Design," mall-based concepts which offer
more upscale merchandise. In addition to the traditional mall-based stores, as
of October 5, 1996 Wilsons also operated nine airport stores that focus on
selling accessories, such as gloves, handbags, wallets, briefcases, planners
and computer cases, to business travelers and tourists, and eight outlet stores
located primarily in outlet malls that focus on the off-price sale of clearance
merchandise.
Unlike many retailers, Wilsons designs, purchases leather for, and contracts
for the manufacturing of most of the apparel and accessories sold in its
stores. This vertical integration enables the Company to reduce its order lead
times, respond more quickly to changing consumer preferences and fashion
trends, and offer its customers a better value through consistently high
quality products at competitive prices.
On May 25, 1996, an investor group, including management, acquired the
Predecessor Companies from Melville. As part of a program to enhance the
Company's profitability, between January 1, 1995 and May 25, 1996, management
closed 156 stores that had not achieved financial return targets, wrote off an
amount of goodwill and certain other non-productive assets and recorded certain
related lease obligations. Such store closings and charges are referred to
herein as the "Restructuring." As a part of the Restructuring, in 1995 the
Company recorded a restructuring charge of $134.3 million related to store
closings and the write-off of goodwill and other intangibles, and an asset
impairment charge of $47.9 million related to the write-off of certain assets
upon the adoption of Statement of Financial Accounting Standards No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets
to Be Disposed Of" ("SFAS No. 121").
Upon completion of the Offering and its transition to an independent public
company, Wilsons believes that it will have the capital resources and
management information systems to implement its long-term growth strategy,
which emphasizes the types of stores and products that offer greater growth
opportunities and higher profit margins in both existing and new distribution
channels. Specifically, this long-term growth strategy calls for annual
openings of approximately six to 15 traditional stores, two larger-sized mall
stores and 12 to 15 airport stores commencing in 1997. In addition, the Company
plans to increase the number of its holiday stores and seasonal kiosks by
approximately 50 locations each per year, to commence operation of accessory-
only stores, to increase the number of stores in military base post exchanges
("PXs") and leased department store units, and to open additional stores
outside of the United States.
The Company was incorporated as a Minnesota corporation in 1996. The
Company's principal executive offices are located at 7401 Boone Avenue North,
Brooklyn Park, Minnesota 55428 and its telephone number is (612) 391-4000.
3
<PAGE>
THE OFFERING
<TABLE>
<S> <C>
Common Stock offered...................... 3,000,000 shares
Common Stock outstanding after the
Offering................................. 12,000,000 shares(1)(2)
Use of proceeds........................... The net proceeds will be used to
reduce outstanding indebtedness
under the Company's revolving credit
facility, which will enable the
Company to use future cash flow from
operations and other financial
resources for working capital and
anticipated capital expenditures,
including expenditures for new
stores. See "Use of Proceeds."
Proposed Nasdaq National Market symbol.... WLSN
</TABLE>
- --------
(1) Includes 1,350,000 shares of Common Stock issuable upon exercise of a
warrant issued to Melville, with an exercise price of $.60 per share (the
"Melville Warrant"); excludes (i) 195,480 shares of Common Stock issuable
upon the exercise of outstanding stock options, with an exercise price of
$4.44 per share, and 804,520 shares of Common Stock reserved for issuance
pursuant to the Company's 1996 Stock Option Plan (the "1996 Option Plan"),
and (ii) 300,000 shares of Common Stock issuable upon exercise of certain
warrants issuable upon consummation of the Offering. See "Management,"
"Certain Transactions," "Description of Capital Stock" and "Underwriting."
(2) Includes 1,080,000 shares of Common Stock purchased by management as part
of the Acquisition that are subject to vesting upon the occurrence of
certain events (the "Restricted Stock"). To the extent that any such shares
of Restricted Stock do not vest by April 30, 2001, such shares will be
repurchased by the Company at a price of $.60 per share (the original
purchase price paid by management for such shares), and will no longer be
outstanding. Melville holds a second warrant (the "Manager Warrant") that
will become exercisable commencing April 30, 2001, at $.60 per share, for
the same number of shares of Common Stock that do not vest. See
"Management," "Certain Transactions" and "Description of Capital Stock."
----------------
Except as set forth in the consolidated financial statements or as otherwise
indicated herein, the information contained in this Prospectus (i) reflects the
conversion, upon completion of the Offering, of all of the Company's issued and
outstanding Class A Common Stock, Class B Common Stock and Class C Common Stock
(together, the "Class Stock") and all of the Class Stock to be issued and
outstanding upon exercise of the Melville Warrant and the Manager Warrant and
options under the Company's 1996 Stock Option Plan into a single class of
common stock of the Company, par value $.01 per share (the "Common Stock"),
(ii) reflects a 0.9-for-one reverse split of the Company's Common Stock
effected October 11, 1996, and (iii) assumes the Underwriters do not exercise
their over-allotment option.
When information herein is said to be on a "pro forma" basis, such
information gives effect to the Restructuring and the Acquisition accounted for
under the purchase method of accounting, as if such events had occurred on
January 1, 1995. See "Pro Forma Unaudited Consolidated Statements of
Operations." The fiscal year of the Predecessor Companies prior to the
Acquisition was the year ended on December 31. In July 1996, the Company
changed the end of its fiscal year to the Saturday which is twenty-six weeks
after the Saturday closest to January 31, which for 1996 was August 3, 1996. In
conformity with the general practice in the retail industry, the Company
intends to change the end of its fiscal year to the Saturday which is closest
to January 31, which will be February 1, 1997. As a result of the Acquisition,
certain financial information for the five months ended May 27, 1995 and May
25, 1996 and for the period from inception (May 26, 1996) to August 3, 1996 is
presented in this Prospectus.
4
<PAGE>
SUMMARY HISTORICAL AND PRO FORMA CONSOLIDATED FINANCIAL DATA
(IN MILLIONS EXCEPT SHARE AND PER SHARE AMOUNTS AND STORE DATA)
<TABLE>
<CAPTION>
PRO PREDECESSOR
PREDECESSOR COMPANIES FORMA(1) COMPANIES COMPANY
------------------------------------ ------------ ---------------- -----------
PERIOD FROM
FIVE MONTHS INCEPTION
YEARS ENDED DECEMBER 31, ENDED (MAY 26,
------------------------------------ YEAR ENDED ---------------- 1996) TO
DECEMBER 31, MAY 27, MAY 25, AUGUST 3,
1991 1992 1993 1994 1995 1995 1995 1996 1996
------ ------ ------ ------ ------- ------------ ------- ------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Net sales............... $456.7 $509.2 $478.5 $474.6 $ 462.4 $ 409.7 $124.7 $109.6 $ 28.5
Gross profit............ 222.0 243.0 227.2 221.0 220.6 195.2 55.6 49.7 12.8
Selling, general and
administrative
expenses............... 160.0 178.2 189.3 206.0 190.1 163.7 76.7 61.1 24.3
------ ------ ------ ------ ------- --------- ------ ------ ---------
Income (loss) from
operations before
depreciation,
amortization and
restructuring charges.. 62.0 64.8 37.9 15.0 30.5 31.5 (21.1) (11.4) (11.5)
Depreciation and
amortization........... 14.8 17.4 20.7 22.3 21.4 .1 9.0 4.7 --
Restructuring and asset
impairment charges..... -- -- -- -- 182.2 -- -- -- --
------ ------ ------ ------ ------- --------- ------ ------ ---------
Income (loss) from
operations............. 47.2 47.4 17.2 (7.3) (173.1) 31.4 (30.1) (16.1) (11.5)
Interest expense, net... 9.4 6.9 5.1 8.4 10.4 7.6 3.4 1.6 1.2
------ ------ ------ ------ ------- --------- ------ ------ ---------
Income (loss) before
income taxes........... 37.8 40.5 12.1 (15.7) (183.5) 23.8 (33.5) (17.7) (12.7)
Income tax provision
(benefit).............. 16.5 17.0 7.0 (3.1) (10.1) 9.5 (5.5) (6.6) (4.6)
------ ------ ------ ------ ------- --------- ------ ------ ---------
Net income (loss)....... $ 21.3 $ 23.5 $ 5.1 $(12.6) $(173.4) 14.3 $(28.0) $(11.1) (8.1)
====== ====== ====== ====== ======= ====== ======
Less preferred stock dividends.............................. (.6) --
--------- ---------
Net income (loss) attributable to common shareholders....... $ 13.7 $ (8.1)
========= =========
Net income (loss) per common share.......................... $ 1.51 $ (.89)
========= =========
Weighted average common shares outstanding.................. 9,066,410 9,066,410
========= =========
</TABLE>
<TABLE>
<CAPTION>
PREDECESSOR COMPANIES PRO FORMA(1) PREDECESSOR COMPANIES
-------------------------------- ------------ ------------------------
YEARS ENDED DECEMBER 31, FIVE MONTHS ENDED
-------------------------------- YEAR ENDED ------------------------
DECEMBER 31, MAY 27, MAY 25,
1991 1992 1993 1994 1995 1995 1995 1996
---- ---- ----- ---- ---- ------------ ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
STORE DATA:
Traditional stores:
Open at end of period.. 552 583 631 628 548 477 567 480
Net sales per square
foot for stores open
entire period......... $407 $416 $356 $341 $374 $391 $92 $98
Change in comparable
store sales(2)........ (3.1)% 2.1% (13.8)% (5.1)% (1.5)% (1.2)% 4.4% 3.9%
Seasonal stores at end
of period.............. 0 32 80 135 227 227 0 0
</TABLE>
<TABLE>
<CAPTION>
COMPANY
-------------------------------
AUGUST 3, 1996
-------------------------------
AS ADJUSTED AS FURTHER
FOR WARRANT ADJUSTED FOR
ACTUAL EXERCISE(3) OFFERING(4)
------ ----------- ------------
<S> <C> <C> <C>
BALANCE SHEET DATA:
Working capital................................. $ 51.7 $52.5 $88.1
Total assets.................................... 103.7 104.5 140.1
Total long-term debt............................ 55.8 55.8 55.8
Total liabilities............................... 99.8 99.8 99.8
Shareholders' equity............................ 3.9 4.7 40.3
</TABLE>
- -------
(1) The unaudited pro forma data give effect to the Restructuring and the
Acquisition accounted for under the purchase method of accounting, as if
such events had occurred on January 1, 1995. See "Pro Forma Unaudited
Consolidated Statements of Operations."
(2) Comparable store sales means sales generated by stores open at least one
full year.
(3) As adjusted to give effect to the exercise of the Melville Warrant for
1,350,000 shares of Common Stock, at its exercise price of $.60 per share.
(4) As further adjusted to give effect to the sale by the Company of 3,000,000
shares of Common Stock assuming an initial public offering price of $13.00
per share and the application of the net proceeds therefrom as described in
"Use of Proceeds."
5
<PAGE>
RISK FACTORS
An investment in the shares of Common Stock being offered by this Prospectus
involves a high degree of risk. In addition, this Prospectus contains forward-
looking statements that involve risks and uncertainties. Discussions
containing such forward-looking statements may be found in the material set
forth under "Prospectus Summary," "Risk Factors," "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and "Business--
Business Strategy," "--Growth Strategy," "--Vertically Integrated Operations,"
"--Store Formats," "--Marketing and Advertising," "--Distribution" and "--
Management Information Systems," as well as in the Prospectus generally. The
Company's actual results could differ materially from those anticipated in
such forward-looking statements as a result of certain factors, including
those set forth in the following risk factors and elsewhere in this
Prospectus. Accordingly, prospective investors should consider carefully the
following risk factors, in addition to the other information contained in this
Prospectus concerning the Company and its business, before purchasing the
shares of Common Stock offered hereby.
FASHION TRENDS AND CHANGING CONSUMER PREFERENCES
The Company's sales and profitability depend upon the continued demand by
its customers for leather apparel and accessories. The Company believes that
its success depends in large part upon its ability to anticipate, gauge and
respond in a timely manner to changing consumer demands and fashion trends and
upon the appeal of leather to the Company's customers. When leather apparel is
not generally in fashion (as was the case in the early 1990s), the Company's
results of operations are adversely affected. There can be no assurance that
the demand for leather apparel or accessories will not decline or that the
Company will be able to anticipate, gauge and respond to changes in fashion
trends. If demand for leather apparel and accessories were to decline or if
the Company were to misjudge fashion trends, the Company's business, financial
condition and results of operations could be materially adversely affected.
ECONOMIC CONDITIONS
Wilsons' financial performance is also sensitive to changes in overall
economic conditions, which have an impact on consumer spending trends.
Wilsons' stores are located primarily in enclosed regional malls.
Consequently, the ability of Wilsons to sustain its level of sales is
dependent in part on a high volume of mall traffic. Mall traffic may be
adversely affected by, among other things, economic downturns, the closing of
anchor department stores or changes in consumer preferences, all of which are
beyond the Company's control. Shifts in consumer discretionary spending to
other products or a general reduction in the level of such spending could also
adversely affect the Company. There can be no assurance that the foregoing
factors will not adversely affect the Company's business, financial condition
and results of operations in the future.
SEASONALITY
A significant portion of the Company's sales (56.1% for the year ended
December 31, 1995) is generated in the period from October through December,
which includes the Christmas selling season. For 1995, 37.3% of the Company's
sales were generated during the period from the day after Thanksgiving through
December 31. Net sales are generally lower during the period from April
through July. The Company typically does not become profitable, if at all,
until the fourth calendar quarter of a given year. As a result, the Company's
annual results of operations have been, and will continue to be, heavily
dependent on the results of operations during October through December. Due to
the seasonality of the business, misjudgments in fashion trends or
unseasonably warm or severe weather during the Company's peak selling season
in a given year could have an adverse impact on the Company's sales for the
year. The Company's quarterly results of operations may also fluctuate
significantly as a result of a variety of other factors, including the net
sales contributed by seasonal stores, merchandise mix and the timing and level
of markdowns and promotions. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Seasonality and Inflation."
LEVERAGE; CAPITAL REQUIREMENTS; RESTRICTIONS IMPOSED BY LENDERS
As of October 5, 1996, the Company's total debt was $97.0 million,
consisting of $39.3 million of borrowings under the Company's $150 million
revolving credit facility (the "Revolving Credit Facility") with
6
<PAGE>
General Electric Capital Corporation ("GE Capital") and a syndicate of banks
(together with GE Capital, the "Banks"), the $55.8 million Note to Melville,
described below, and $1.9 million of accrued interest. At October 5, 1996 the
Company also had $48.6 million of outstanding letters of credit.
The Company typically finances its operations through internally generated
cash flow and seasonal borrowings. Due to the seasonality of the Company's
business, the Company has substantially greater needs for borrowings and
letters of credit from July through November. The Company currently plans to
fund a substantial portion of its working capital and letter of credit needs
during future periods through the Revolving Credit Facility, and, as a result,
the Company is highly dependent on the Revolving Credit Facility. In addition,
the ability of the Company to meet its debt service obligations and borrow
under the Revolving Credit Facility will be dependent upon the future
performance of the Company, which is subject to general economic conditions,
and to financial, competitive, business and other factors, including factors
beyond the Company's control. The level of the Company's indebtedness could
restrict its ability to grow and respond to changing business and economic
conditions. If the Company at any time is unable to satisfy its working
capital needs or generate sufficient cash flow from operations to service its
debt, it may be required to seek refinancing for all or a portion of that debt
or to obtain additional financing. There can be no assurance that the Company
will be able to effect such a refinancing or obtain such additional financing,
or obtain such financing on terms acceptable to the Company. The inability of
the Company to obtain sufficient funds for working capital or letter of credit
needs would have a material adverse effect on the Company's business,
financial condition and results of operations. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations--Liquidity and
Capital Resources" and "Certain Transactions--Subordinated Note."
The Revolving Credit Facility and a 10% Senior Secured Subordinated Note of
the Company issued to Melville in the principal amount of $55.8 million, with
principal and accrued interest, compounded annually, payable on December 31,
2000 (the "Note"), impose restrictions and limitations on the Company. In
addition, the Revolving Credit Facility requires the Company to meet certain
financial tests. Such restrictions and limitations affect, and in many
respects limit or prohibit, among other things, the ability of the Company to
incur additional indebtedness, make capital expenditures (including
expenditures for new stores) above specified levels ($13 million for the
twelve months ending February 1, 1997), pay dividends or make other
distributions to shareholders, repay indebtedness, create liens, sell assets
or enter into mergers and certain other transactions above specified levels.
Obligations under the Revolving Credit Facility and the Note are secured by
liens on substantially all of the Company's assets other than real estate,
equipment and fixtures. If the Company is unable to comply with the terms and
covenants under the Revolving Credit Facility or the Note, such indebtedness
could be declared immediately due and payable, which would have a material
adverse effect on the Company's business, financial condition and results of
operations.
DECLINE IN COMPARABLE STORE SALES; PRIOR LOSSES
The Company's comparable store sales declines were 1.5%, 5.1% and 13.8%
during 1995, 1994 and 1993, respectively. The Company believes that the
declines from 1993 through 1995 were primarily attributable to an industry-
wide decline in sales of retail leather apparel, and outerwear in general, and
due in part to a shift in consumer discretionary spending away from apparel.
An inability to generate comparable store sales increases in the future would
adversely affect the Company's business, financial condition and results of
operations.
As part of the Restructuring, the Company incurred non-recurring
restructuring and asset impairment charges aggregating $182.2 million in the
fourth quarter of 1995, which resulted in a net loss of $173.4 million for the
year. Due in large part to decreases in comparable store sales and gross
profit margins and an increase in operating expenses associated with opening
40 new stores and acquiring 31 Georgetown Leather stores in 1993, the Company
incurred a net loss of $12.6 million in 1994. There can be no assurance that
the Company will not incur losses in the future. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations."
7
<PAGE>
LIMITED OPERATING HISTORY AS A STAND-ALONE COMPANY
The Predecessor Companies were owned and controlled by Melville through May
25, 1996. Certain administrative functions, including treasury, tax, external
financial reporting, real estate, legal, risk management and employee benefits
administration, were performed by Melville prior to the Acquisition. In
addition, as a subsidiary of Melville, the Company received preferential
borrowing and letter of credit rates under credit facilities obtained by
Melville. Accordingly, operation of Wilsons as an independent company may
involve certain additional risks, including risks associated with managing
such functions independently for the first time, the risk of increased
general, administrative and borrowing costs and the risk of increased costs
and difficulties in securing store locations and negotiating store leases
without guarantees by Melville or an affiliate of Melville. There can be no
assurance that such costs will not materially exceed historical levels or that
other unforeseen costs or difficulties in entering into leases will not arise
following the Acquisition. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
RISKS OF FOREIGN CONTRACT MANUFACTURING AND IMPORTING
The Company imports most of its products from independent foreign contract
manufacturers located primarily in the Far East. Many of the Company's
domestic vendors import a substantial portion of their merchandise from
abroad. Risks inherent in foreign sourcing include economic and political
instability, transportation delays and interruptions, restrictive actions by
foreign governments, the laws and policies of the United States affecting the
importation of goods, including duties, quotas and taxes, trade and foreign
tax laws, fluctuations in currency exchange rates, and the possibility of
boycotts or other actions prompted by domestic concerns regarding foreign
labor practices or other conditions beyond the Company's control. In 1995,
Wilsons sourced more than 60% of its leather apparel from contract
manufacturers located in The People's Republic of China, which currently has
Most Favored Nation ("MFN") trading status with the United States. Loss of MFN
status by China or by any other country from which Wilsons sources goods, or
any imposition of new or additional duties, quotas or taxes, could result in
significantly higher leather purchase and production costs for Wilsons and, as
a result, could negatively impact profitability, sale prices or demand for
leather merchandise. The Company's future performance will be subject to such
factors, which are beyond its control, and there can be no assurance that such
factors would not have a material adverse effect on the Company's business,
financial condition and results of operations.
COMPETITION
The retail leather apparel and accessories industry is highly competitive.
Wilsons competes with a broad range of other retailers, including other
specialty leather apparel and accessories stores, department stores, mass
merchandisers and discounters, some of which have greater financial and other
resources than Wilsons. Increased competition may reduce sales and gross
margins, increase operating expenses and decrease profit margins. Management
believes that the principal bases upon which Wilsons competes are selection,
price, style, quality, store location and service. There can be no assurance
that the Company will be able to compete successfully in the future. The
inability of Wilsons to compete effectively could have a material adverse
effect on the Company's business, financial condition and results of
operations. See "Business--Competition."
RISKS ASSOCIATED WITH FUTURE GROWTH
The Company's growth prospects are dependent upon a number of factors,
including, among other things, economic conditions, establishment and growth
of new selling channels, competition, growth in the leather apparel and
accessories market, the retail environment in general, financing and working
capital needs, the ability of the Company to negotiate store leases on
favorable terms, the availability of suitable new store locations, the ability
to develop new merchandise and the ability to hire and train qualified sales
associates. There can be no assurance that the Company will be able to
effectively realize its plans for future growth. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations" and "Business."
8
<PAGE>
PRICE AND AVAILABILITY OF RAW MATERIAL
Leather comprises approximately two-thirds of the garment cost of leather
apparel. As a result, the Company's gross margin levels are influenced by the
price of leather. The supply of leather is influenced by worldwide meat
consumption, and the demand for leather is influenced by the leather shoe,
furniture and auto upholstery markets. The availability and price of leather
may fluctuate significantly. There can be no assurance that fluctuations in
the availability and price of leather or other raw materials used by the
Company will not have a material adverse effect on the Company's profitability
or its ability to meet the demand of the Company's customers for its
merchandise.
CHARGES RELATING TO VESTING OF RESTRICTED STOCK
In connection with the Acquisition, management purchased 1,080,000 shares of
Restricted Stock. Such shares vest over five years if the Company achieves
specified earnings targets or as the Company repays the Note. See "Certain
Transactions -- Restricted Stock Agreement." As the Restricted Stock vests,
the Company will be required to record compensation charges equal to the
difference between the fair market value of the Restricted Stock on the date
the shares vest and the original purchase price of the Restricted Stock, which
was $.60 per share. By way of example, if all of the Restricted Stock were to
vest at a time when the fair market value of the Common Stock equaled $13.00
per share (the mid-point of the range of initial public offering prices set
forth on the cover page of this Prospectus), the Company would be required to
record a non-cash, after-tax charge of approximately $13.4 million, which
would not impact the Company's total shareholders' equity. The market price of
the Company's Common Stock, however, could be adversely affected when the
Company reports such charges, if any.
DEPENDENCE ON KEY PERSONNEL
The success of the Company will be highly dependent upon the efforts of Joel
Waller, Chairman and Chief Executive Officer of Wilsons, David Rogers,
President of Wilsons, and other members of Wilsons' senior management. The
loss of the services of any of these individuals could have a material adverse
effect on the Company's business, financial condition and results of
operations.
NO PRIOR MARKET; POSSIBLE VOLATILITY OF STOCK PRICE
Prior to the Offering, there has been no public market for the Common Stock,
and there can be no assurance that an active public market for the Common
Stock will develop or be sustained after the Offering, or that the price for
the Common Stock will not decrease. The initial public offering price will be
determined solely by negotiations among the Company and the Underwriters based
on several factors and may not necessarily reflect the market price of the
Common Stock after the Offering or the price at which the Common Stock may be
sold in the public market after the Offering. The market price of the Common
Stock could be subject to significant fluctuations in response to the
Company's financial performance, competitive position and other factors
relating to the Company and its business, such as variations in quarterly
operating results, government regulations, litigation and other factors. In
addition, the stock market has from time to time experienced extreme price and
volume volatility. These fluctuations may be unrelated to the operating
performance of particular companies whose shares are traded and may adversely
affect the market price of the Common Stock. Therefore, no assurance can be
given that the market price of the Common Stock will not decline substantially
below the initial public offering price. See "Underwriting."
SHARES ELIGIBLE FOR FUTURE SALE
Sales of substantial amounts of the Company's Common Stock in the public
market following the Offering could adversely affect the market price of the
Common Stock. The Company will have 10,650,000 shares of Common Stock
outstanding immediately following the Offering (an additional 1,350,000 shares
of Common Stock will be immediately issuable upon exercise of the Melville
Warrant at $.60 per share), of which the
9
<PAGE>
3,000,000 shares offered hereby will be eligible for sale in the public market
immediately following the Offering. The remaining 7,650,000 currently
outstanding shares are held by the current shareholders of the Company,
including the Company's executive officers and directors. The holders of all
7,650,000 shares of Common Stock that are currently outstanding (including the
Company's executive officers and directors and the partners of Limited
Partnership I (as hereinafter defined)) and Melville as the holder of the
Melville Warrant and the Manager Warrant have agreed not to sell, contract to
sell or otherwise dispose of any shares of Common Stock or warrants to
purchase shares of Common Stock without the consent of Oppenheimer & Co., Inc.
for a period of 180 days after the date of this Prospectus, subject to certain
limited exceptions. The Company has also agreed not to offer, sell, contract
to sell, or otherwise dispose of any shares of Common Stock or any securities
convertible into or exercisable or exchangeable for Common Stock or any rights
to acquire Common Stock (other than shares issuable upon exercise of
outstanding options and warrants) for a period of 180 days after the date of
this Prospectus, without the prior written consent of Oppenheimer & Co., Inc.,
subject to certain limited exceptions. Oppenheimer & Co., Inc., in its sole
discretion and at any time without notice, may release all or any portion of
the securities subject to such agreements not to sell. Additional shares may
also become available for sale in the public market from time to time in the
future. In addition, holders of all 7,650,000 shares of Common Stock that are
currently outstanding, Melville as the holder of the Melville Warrant and the
Manager Warrant and holders of certain warrants to purchase up to 300,000
additional shares of Common Stock, which warrants are issuable upon
consummation of the Offering, have certain registration rights under the
Securities Act of 1933, as amended (the "Securities Act"), with respect to
their Common Stock or warrants. See "Certain Transactions--Restricted Stock
Agreement," "Certain Transactions--Registration Rights Agreement," "Shares
Eligible for Future Sale" and "Underwriting."
DILUTION
Purchasers of the Common Stock offered hereby will experience immediate and
substantial dilution in the net book value per share of their investment of
$10.42 per share, assuming exercise of the Melville Warrant and an initial
public offering price of $13.00 per share (the mid-point of the range of the
initial public offering price on the cover page of this Prospectus).
Additional dilution is likely to occur upon exercise of other outstanding
warrants and stock options. See "Dilution."
DIVIDEND POLICY
The Company has not paid any dividends on its Common Stock and does not
intend to pay dividends in the foreseeable future. The payment of dividends by
the Company is subject to certain restrictions and prohibitions contained in
the Revolving Credit Facility, the Note and the Company's Series A Preferred
Stock (the "Series A Preferred"). Any determination to pay cash dividends in
the future will be at the discretion of the Company's Board of Directors (the
"Board" or the "Board of Directors") and will be dependent upon the Company's
business, results of operations, financial condition, contractual
restrictions, restrictions in the Amended and Restated Articles of
Incorporation (the "Amended Articles of Incorporation") and other factors
deemed relevant at the time by the Company's Board of Directors. See
"Dividends."
ANTI-TAKEOVER CONSIDERATIONS; CONTROL BY CURRENT SHAREHOLDERS
The Board of Directors has the authority, without further shareholder
action, to fix the rights and preferences of any shares of the Company's
preferred stock to be issued from time to time. In addition, as a Minnesota
corporation, the Company is subject to certain anti-takeover provisions of the
Minnesota Business Corporation Act. Both the authority of the Board with
regard to the preferred stock and the provisions of the Minnesota statutes
could have the effect of delaying, deferring or preventing a change in control
of the Company, may discourage bids for the Company's Common Stock and may
adversely affect the market price of, and the voting and other rights of the
holders of, Common Stock. See "Description of Capital Stock--Preferred Stock"
and "--Anti-Takeover Provisions of the Minnesota Business Corporation Act."
Upon completion of the Offering, the Company's directors and executive
officers will beneficially own, in the aggregate, 45.6% of the Company's
outstanding shares of Common Stock. If these shareholders vote together
10
<PAGE>
as a group, they will be able to control the business and affairs of the
Company, including the election of individuals to the Company's Board of
Directors, and to determine the outcome of certain actions that require
shareholder approval, including the adoption of amendments to the Company's
Amended Articles of Incorporation, and certain mergers, sales of assets and
other business acquisitions or dispositions.
THE ACQUISITION
The Company was organized to acquire all of the issued and outstanding
capital stock of Wilsons Center, Inc., the holding company of the Predecessor
Companies (the "Wilsons Shares"). In May 1996, the Company, which was owned by
management and the investor group, acquired the Wilsons Shares for $67.8
million plus the Melville Warrant and the Manager Warrant described below in
the following two-step transaction. First, Melville received (i) $2.0 million
in cash, (ii) the $55.8 million Note, (iii) the Melville Warrant to purchase
1,350,000 shares of Common Stock of the Company, having an exercise price of
$.60 per share, and the Manager Warrant described below, (iv) 4,320,000 shares
of Common Stock, and (v) 7,405 shares of Series A Preferred. The shares of
Series A Preferred are entitled to receive, when and as declared by the
Company's Board of Directors after repayment in full of the Note, cumulative
annual cash dividends of $80 per share from the date of issuance and have a
liquidation preference of $1,000 per share plus accumulated dividends and may
be redeemed by the Company for an aggregate of $7,405,000 plus accumulated
dividends after repayment of the Note in full. Thereafter, Leather Investors
Limited Partnership I, a Minnesota limited partnership ("Limited Partnership
I"), and Leather Investors Limited Partnership II, a Minnesota limited
partnership ("Limited Partnership II" and together with Limited Partnership I,
the "Limited Partnerships"), for each of which Lyle Berman and Morris Goldfarb
are the general partners, respectively purchased from Melville the 4,320,000
shares of Common Stock and the 7,405 shares of Series A Preferred for an
aggregate consideration of $10.0 million. Upon completion of the Offering, the
Limited Partnerships will automatically dissolve, and the shares of Common
Stock and Series A Preferred held by them will be distributed to their
partners based on their respective interests in the Limited Partnerships. See
"Certain Transactions" and "Description of Capital Stock."
As part of the Acquisition, management purchased 1,080,000 shares of
Restricted Stock. To the extent that any such shares of Restricted Stock do
not vest by April 30, 2001, such shares will be repurchased by the Company at
a price of $.60 per share and will no longer be outstanding. Melville holds
the Manager Warrant that will become exercisable commencing April 30, 2001, at
$.60 per share, for the same number of shares of Common Stock that do not
vest. See "Management," "Certain Transactions" and "Description of Capital
Stock."
11
<PAGE>
PRO FORMA UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS
The following pro forma unaudited consolidated financial information
consists of Pro Forma Unaudited Consolidated Statements of Operations for the
year ended December 31, 1995 and for the six months ended July 29, 1995 and
August 3, 1996. The Pro Forma Unaudited Consolidated Statements of Operations
give effect to the Restructuring and the Acquisition accounted for under the
purchase method. The Pro Forma Unaudited Consolidated Statements of Operations
give effect to such transactions and events as if they had occurred on January
1, 1995.
As part of the Restructuring, the Company closed 156 stores and wrote off
goodwill and certain other non-productive assets, recorded certain lease
obligations and adopted the provisions of SFAS No. 121. The Pro Forma
Unaudited Consolidated Statements of Operations give effect to certain
adjustments related to the Restructuring, including: (i) elimination of the
results of operations for the 156 closed stores which included only direct
costs associated with the stores; (ii) elimination of the restructuring and
asset impairment charges; and (iii) reflect the associated tax effects of the
above transactions.
The Pro Forma Unaudited Consolidated Statements of Operation also give
effect to certain adjustments related to the Acquisition, including: (i)
elimination of depreciation expense through the effect of purchase accounting
adjustments; (ii) reduction in interest expense attributable to the
elimination of all prior indebtedness owed to Melville and increase in
interest expense attributable to the Acquisition financing; and (iii) reflect
the associated tax effects of the above transactions.
The Pro Forma Unaudited Consolidated Statements of Operations and
accompanying notes should be read in conjunction with the consolidated
financial statements and notes thereto appearing elsewhere in this Prospectus.
The Pro Forma Unaudited Consolidated Statements of Operations do not purport
to represent what the results of operations of Wilsons would actually have
been if the aforementioned transactions or events had occurred on January 1,
1995 or at any future date.
FOR THE YEAR ENDED DECEMBER 31, 1995
(IN MILLIONS EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
PRO FORMA
THE PRO FORMA PRO FORMA PURCHASE
PREDECESSOR RESTRUCTURING AFTER ACCOUNTING
COMPANIES ADJUSTMENTS (1) RESTRUCTURING ADJUSTMENTS PRO FORMA
----------- --------------- ------------- ----------- ---------
<S> <C> <C> <C> <C> <C>
Net sales............... $ 462.4 $ (52.7) $409.7 $ -- $ 409.7
Cost of goods sold,
buying and warehousing
costs.................. 241.8 (27.3) 214.5 -- 214.5
------- ------- ------ ------ ---------
Gross profit............ 220.6 (25.4) 195.2 -- 195.2
Selling, general and
administrative
expenses............... 190.1 (26.4) 163.7 -- 163.7
Depreciation and
amortization........... 21.4 (6.8)(2) 14.6 (14.5)(5) .1
Restructuring and asset
impairment charges..... 182.2 (182.2)(3) -- -- --
------- ------- ------ ------ ---------
Income (loss) from
operations.......... (173.1) 190.0 16.9 14.5 31.4
Interest expense, net... 10.4 -- 10.4 (2.8)(6) 7.6
------- ------- ------ ------ ---------
Income (loss) before
income taxes........ (183.5) 190.0 6.5 17.3 23.8
Income tax provision
(benefit).............. (10.1) 12.6 (4) 2.5 7.0 (7) 9.5
------- ------- ------ ------ ---------
Net income (loss).... $(173.4) $ 177.4 $ 4.0 $ 10.3 $ 14.3
======= ======= ====== ======
Less preferred stock dividends................................................ (.6)(8)
---------
Net income attributable to common shareholders................................ $ 13.7
=========
Net income per common share................................................... $ 1.51
=========
Weighted average common shares outstanding.................................... 9,066,410
=========
</TABLE>
12
<PAGE>
FOR THE SIX MONTHS ENDED JULY 29, 1995
(IN MILLIONS EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
PRO FORMA
THE PRO FORMA PRO FORMA FOR PURCHASE
PREDECESSOR RESTRUCTURING THE ACCOUNTING
COMPANIES ADJUSTMENTS (1) RESTRUCTURING ADJUSTMENTS PRO FORMA
----------- --------------- ------------- ----------- ---------
<S> <C> <C> <C> <C> <C>
Net sales............... $118.7 $(17.7) $101.0 $-- $ 101.0
Cost of goods sold,
buying and warehousing
costs.................. 67.0 (10.3) 56.7 -- 56.7
------ ------ ------ ---- ---------
Gross profit............ 51.7 (7.4) 44.3 -- 44.3
Selling, general and
administrative
expenses............... 85.9 (14.2) 71.7 -- 71.7
Depreciation and
amortization........... 11.0 (3.6)(2) 7.4 (7.4)(5) --
------ ------ ------ ---- ---------
Income (loss) from
operations.......... (45.2) 10.4 (34.8) 7.4 (27.4)
Interest expense, net... 4.5 -- 4.5 (.9)(6) 3.6
------ ------ ------ ---- ---------
Income (loss) before
income taxes........ (49.7) 10.4 (39.3) 8.3 (31.0)
Income tax provision
(benefit).............. (8.2) (7.5)(4) (15.7) 3.3 (7) (12.4)
------ ------ ------ ---- ---------
Net income (loss).... $(41.5) $ 17.9 $(23.6) $5.0 $ (18.6)
====== ====== ====== ==== =========
Net loss per common share..................................................... $ (2.06)
=========
Weighted average common shares outstanding.................................... 9,066,410
=========
</TABLE>
FOR THE SIX MONTHS ENDED AUGUST 3, 1996
(IN MILLIONS EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
PRO FORMA
THE PRO FORMA PRO FORMA FOR PURCHASE
PREDECESSOR RESTRUCTURING THE ACCOUNTING
COMPANIES ADJUSTMENTS (1) RESTRUCTURING ADJUSTMENTS PRO FORMA
----------- --------------- ------------- ----------- ---------
<S> <C> <C> <C> <C> <C>
Net sales............... $108.2 $(2.2) $106.0 $-- $ 106.0
Cost of goods sold,
buying and warehousing
costs.................. 59.6 (.6) 59.0 -- 59.0
------ ----- ------ ---- ---------
Gross profit............ 48.6 (1.6) 47.0 -- 47.0
Selling, general and
administrative
expenses............... 72.6 (1.5) 71.1 -- 71.1
Depreciation and
amortization........... 3.8 -- 3.8 (3.8)(5) --
------ ----- ------ ---- ---------
Income (loss) from
operations......... (27.8) (.1) (27.9) 3.8 (24.1)
Interest expense, net... 2.4 -- 2.4 1.3 (6) 3.7
------ ----- ------ ---- ---------
Income (loss) before
income taxes....... (30.2) (.1) (30.3) 2.5 (27.8)
Income tax provision
(benefit).............. (11.1) (1.0)(4) (12.1) 1.0 (7) (11.1)
------ ----- ------ ---- ---------
Net income (loss)... $(19.1) $ .9 $(18.2) $1.5 $ (16.7)
====== ===== ====== ==== =========
Net loss per common share..................................................... $ (1.84)
=========
Weighted average common shares outstanding.................................... 9,066,410
=========
</TABLE>
- --------
(1) Reflects the elimination of the results of operations for the 156 closed
stores including all direct costs associated with the stores. No corporate
overhead or allocated selling expenses were eliminated.
(2) Reflects the elimination of the amortization of goodwill and other
intangibles of $4.0 million and $2.5 million for the year ended December
31, 1995 and for the six months ended July 29, 1995, respectively, which
were charged to operations prior to the asset impairment charge discussed
at Note (3).
(3) Reflects the elimination of the pre-tax restructuring charge of $134.3
million related to the anticipated costs associated with the closing of
the Predecessor Companies' stores and the write-off of goodwill and other
intangibles. Also reflects the elimination of the pre-tax asset impairment
charge of $47.9 million related to the write-off of certain assets upon
the adoption of SFAS No. 121.
(4) Reflects the income tax effect on the pro forma restructuring adjustments
at a rate to equate the pro forma after restructuring income tax provision
to a 40% tax rate.
13
<PAGE>
(5) Reflects the elimination of depreciation expense due to the write-down of
all depreciable property to $0 through the application of purchase
accounting.
(6) Reflects the reduction in interest expense attributable to the elimination
of all prior indebtedness owed by the Predecessor Companies to Melville
and certain capital contributions by Melville which resulted in Wilsons
having $85 million in working capital upon the closing of the Acquisition
(less Acquisition-related expenses). Also reflects an increase in interest
expense arising from the $55.8 million Note from the Acquisition
financing, the interest rate on the Revolving Credit Facility, and the
associated amortization for the related deferred financing costs.
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED ------------------
DECEMBER 31, JULY 29, AUGUST 3,
1995 1995 1996
------------ -------- ---------
(IN MILLIONS)
<S> <C> <C> <C>
Elimination of interest expense related
to the repayment of intercompany
indebtedness and additional capital
contribution, net of the higher
interest rate on the Revolving Credit
Facility at an average rate of 9.5%... $(9.0) $(4.0) $(1.8)
Additional interest expense related to
the Subordinated note................. 5.5 2.8 2.8
Amortization of deferred financing
costs................................. .7 .3 .3
----- ----- -----
$(2.8) $ (.9) $ 1.3
===== ===== =====
</TABLE>
(7) Reflects the income tax effect on the pro forma purchase accounting
adjustments at a 40% tax rate.
(8) Reflects the accrued dividends on the Series A Preferred at an annual rate
of $80 per share.
14
<PAGE>
USE OF PROCEEDS
The net proceeds to the Company from the sale of the 3,000,000 shares of
Common Stock offered hereby by the Company are estimated to be approximately
$35.6 million (approximately $41.0 million if the Underwriters' over-allotment
option is exercised in full), assuming a public offering price of $13.00 per
share (the mid-point of the range of initial public offering prices set forth
on the cover page of this Prospectus) and after deducting the underwriting
discounts and commissions and the estimated offering expenses payable by the
Company.
The Company intends to use such net proceeds to repay outstanding
indebtedness under the Revolving Credit Facility, which was $39.3 million on
October 5, 1996. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Liquidity and Capital Resources" for
information regarding interest payable on and the maturity date of borrowings
under the Revolving Credit Facility. Substantially all indebtedness incurred
under the Company's Revolving Credit Facility has been used to fund the
Company's working capital needs. Repayment of such outstanding indebtedness
will enable the Company to apply future cash flow from operations and other
financial resources, including reborrowings under the Revolving Credit
Facility, to working capital and anticipated capital expenditures, including
development and implementation of new information systems, financing of
inventory, development and implementation of new selling channels, building of
new stores and remodeling of existing stores, and for other general corporate
purposes.
DIVIDEND POLICY
The Company has not declared or paid cash dividends on its stock since its
inception in May 1996. The Company anticipates that all of its earnings in the
foreseeable future, if any, will be retained to fund working capital, to
reduce reliance on the Revolving Credit Facility and to repay the Note and,
therefore, has no plans to pay cash dividends in the foreseeable future. In
addition, the terms of the Revolving Credit Facility, the Note and the Series
A Preferred restrict and, in some cases, prohibit the Company from declaring
and paying dividends. Any determination to pay cash dividends in the future
will be at the discretion of the Company's Board of Directors and will be
dependent upon the Company's results of operations, financial condition and
capital requirements (including its cash needs), market conditions,
restrictions in financing agreements and the Amended Articles of Incorporation
and other factors deemed relevant at that time by the Company's Board of
Directors. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations--Liquidity and Capital Resources," "Certain
Transactions--Subordinated Note" and "Description of Capital Stock--Preferred
Stock."
15
<PAGE>
DILUTION
The net tangible book value (deficit) of the Company's Common Stock as of
August 3, 1996 was approximately $(5.4) million or $(.71) per share of Common
Stock. "Net tangible book value (deficit)" represents the total amount of the
Company's total tangible assets less the total amount of the Company's
liabilities and preferred stock; "net tangible book value (deficit) per share"
means such amount divided by the number of shares of Common Stock outstanding.
After giving effect (i) to the exercise of the Melville Warrant for 1,350,000
shares of Common Stock, with an exercise price of $.60 per share, and (ii) to
the sale by the Company of the Shares in the Offering assuming an initial
public offering price of $13.00 per share (the mid-point of the range of
initial public offering prices set forth on the cover page of this
Prospectus), and the application of the net proceeds therefrom, the net
tangible book value (deficit) as adjusted of the Common Stock as of August 3,
1996 would have been $31.0 million, or $2.58 per share. This represents an
immediate increase in net tangible book value (deficit) of $3.09 per share to
existing shareholders and an immediate dilution of $10.42 per share to new
investors purchasing Shares in the Offering.
The following table illustrates the dilution per share described above:
<TABLE>
<S> <C> <C>
Assumed initial public offering price..................... $13.00
Net tangible book value (deficit) ...................... $ (.71)
Increase in net tangible book value (deficit)
attributable to exercise of Melville Warrant........... .20
------
Net adjusted tangible book value (deficit) before the
Offering............................................... (.51)
Increase in net tangible book value (deficit)
attributable to purchase of Shares by new investors.... 3.09
------
Net tangible book value (deficit) as adjusted after the
Offering................................................. 2.58
------
Dilution to new investors................................. $10.42
======
</TABLE>
The following table sets forth, on an as adjusted basis as of August 3,
1996, the number of shares of Common Stock purchased from the Company, the
total cash consideration paid to the Company and the average price per share
paid by the existing shareholders and by the new investors purchasing Shares
in the Offering, assuming an initial public offering price of $13.00 per
share.
<TABLE>
<CAPTION>
TOTAL CASH
SHARES PURCHASED(1) CONSIDERATION AVERAGE
--------------------- ---------------------- COST
NUMBER PERCENTAGE AMOUNT PERCENTAGE PER SHARE
---------- ---------- ----------- ---------- ---------
<S> <C> <C> <C> <C> <C>
Existing shareholders... 9,000,000 75.0% $ 5,406,000 12.2% $ .60
New investors........... 3,000,000 25.0 39,000,000 87.8 13.00
---------- ----- ----------- -----
Total............... 12,000,000 100.0% $44,406,000 100.0%
========== ===== =========== =====
</TABLE>
- --------
(1) The above table includes 1,350,000 shares of Common Stock issuable upon
exercise of the Melville Warrant, with an exercise price of $.60 per
share; such table does not include (i) 195,480 shares of Common Stock
issuable upon the exercise of outstanding stock options, with an exercise
price of $4.44 per share, and 804,520 shares of Common Stock reserved for
issuance pursuant to the 1996 Option Plan, and (ii) 300,000 shares of
Common Stock issuable upon exercise of certain warrants issuable upon
consummation of the Offering. See "Management," "Certain Transactions,"
"Description of Capital Stock" and "Underwriting."
16
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of the Company (i) as of
August 3, 1996; (ii) to reflect the exercise of the Melville Warrant for
1,350,000 shares of Common Stock, with an exercise price of $.60 per share;
and (iii) as further adjusted to reflect the sale by the Company of the
3,000,000 shares of Common Stock offered hereby at an assumed initial public
offering price of $13.00 per share (the mid-point of the range of initial
public offering prices set forth on the cover page of this Prospectus) and the
application of the net proceeds therefrom. See "Use of Proceeds." The
information presented below should be read in conjunction with the
consolidated financial statements and the related notes thereto and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
AUGUST 3, 1996
----------------------------------
AS ADJUSTED AS FURTHER
FOR WARRANT ADJUSTED FOR
ACTUAL(1) EXERCISE OFFERING
--------- ----------- ------------
(IN THOUSANDS)
<S> <C> <C> <C>
Cash..................................... $ 9,443 $10,254 $45,854
======= ======= =======
Borrowings under Revolving Credit
Facility (2)............................ $ -- $ -- $ --
======= ======= =======
Long-term debt........................... $55,811 $55,811 $55,811
------- ------- -------
Shareholders' equity:
Preferred Stock, $.01 par value;
10,000,000 shares authorized; 7,405
shares, $1,000 stated value, issued
and outstanding....................... 7,405 7,405 7,405
Common Stock, $.01 par value;
100,000,000 shares authorized;
7,650,000 shares issued and
outstanding; 9,000,000 shares issued
and outstanding, as adjusted for
warrant exercise; 12,000,000 shares
issued and outstanding, as further
adjusted for Offering (3)............. 77 90 120
Additional paid-in capital............. 4,518 5,316 40,886
Accumulated deficit.................... (8,107) (8,107) (8,107)
------- ------- -------
Total shareholders' equity........... 3,893 4,704 40,304
------- ------- -------
Total capitalization................. $59,704 $60,515 $96,115
======= ======= =======
</TABLE>
- --------
(1) Reflects the conversion of all shares of Class Stock into an equal number
of shares of Common Stock of a single class concurrent with the Offering.
(2) Does not include $60.9 million of outstanding letters of credit as of
August 3, 1996.
(3) The above table does not include (i) 195,480 shares of Common Stock
issuable upon the exercise of outstanding stock options, with an exercise
price of $4.44 per share, and 804,520 shares of Common Stock reserved for
issuance pursuant to the 1996 Option Plan, and (ii) 300,000 shares of
Common Stock issuable upon exercise of certain warrants issuable upon
consummation of the Offering. See "Management," "Certain Transactions,"
"Description of Capital Stock" and "Underwriting."
17
<PAGE>
SELECTED HISTORICAL AND PRO FORMA CONSOLIDATED FINANCIAL DATA
The following tables present selected historical and pro forma consolidated
financial data of the Company, which should be read in conjunction with the
consolidated historical and pro forma financial statements and notes thereto
included elsewhere in this Prospectus and in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operations." The
selected consolidated financial data as of August 3, 1996 and for the period
from inception (May 26, 1996) to August 3, 1996 have been derived from the
consolidated financial statements of the Company audited by Arthur Andersen
LLP. The selected consolidated financial data as of December 31, 1994 and
1995, for the years ended December 31, 1993, 1994 and 1995 and for the five-
month period ended May 25, 1996 have been derived from the consolidated
financial statements of the Predecessor Companies audited by KPMG Peat Marwick
LLP. The consolidated financial data as of December 31, 1991, 1992 and 1993,
for the years ended December 31, 1991 and 1992 and for the five-month period
ended May 27, 1995 have been derived from unaudited consolidated financial
statements of the Predecessor Companies. The pro forma statement of operations
data and the store operations data for the periods set forth below are
unaudited. In the opinion of management, the unaudited information contains
all adjustments, consisting of only normal recurring adjustments, necessary
for a fair presentation of the financial position and results of operations
for the periods presented. The results of operations for the five-month period
ended May 25, 1996 and the period from inception (May 26, 1996) to August 3,
1996 are not indicative of the results of operations for the entire year. The
Company completed the Acquisition on May 25, 1996. Accordingly, due to the
effect of purchase accounting adjustments, and the fact that the Company is
operating as a stand-alone entity and is no longer supported by Melville's
finance and administrative functions, a comparison between the actual
financial data for the three months ended August 3, 1996 and the comparable
quarter of the prior year has not been included as it is not meaningful.
SUMMARY HISTORICAL AND PRO FORMA CONSOLIDATED FINANCIAL DATA
(IN MILLIONS EXCEPT SHARE AND PER SHARE AMOUNTS AND STORE DATA)
<TABLE>
<CAPTION>
PRO PREDECESSOR
PREDECESSOR COMPANIES FORMA(1) COMPANIES
------------------------------------ ------------ ----------------
FIVE MONTHS
YEARS ENDED DECEMBER 31, ENDED
------------------------------------ YEAR ENDED ----------------
DECEMBER 31, MAY 27, MAY 25,
1991 1992 1993 1994 1995 1995 1995 1996
------ ------ ------ ------ ------- ------------ ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net sales................................ $456.7 $509.2 $478.5 $474.6 $ 462.4 $ 409.7 $124.7 $109.6
Gross profit............................. 222.0 243.0 227.2 221.0 220.6 195.2 55.6 49.7
Selling, general and administrative
expenses................................ 160.0 178.2 189.3 206.0 190.1 163.7 76.7 61.1
------ ------ ------ ------ ------- --------- ------ ------
Income (loss) from operations before
depreciation, amortization and
restructuring charges................... 62.0 64.8 37.9 15.0 30.5 31.5 (21.1) (11.4)
Depreciation and amortization............ 14.8 17.4 20.7 22.3 21.4 .1 9.0 4.7
Restructuring and asset impairment
charges................................. -- -- -- -- 182.2 -- -- --
------ ------ ------ ------ ------- --------- ------ ------
Income (loss) from operations............ 47.2 47.4 17.2 (7.3) (173.1) 31.4 (30.1) (16.1)
Interest expense, net.................... 9.4 6.9 5.1 8.4 10.4 7.6 3.4 1.6
------ ------ ------ ------ ------- --------- ------ ------
Income (loss) before income taxes........ 37.8 40.5 12.1 (15.7) (183.5) 23.8 (33.5) (17.7)
Income tax provision (benefit)........... 16.5 17.0 7.0 (3.1) (10.1) 9.5 (5.5) (6.6)
------ ------ ------ ------ ------- --------- ------ ------
Net income (loss)........................ $ 21.3 $ 23.5 $ 5.1 $(12.6) $(173.4) 14.3 $(28.0) $(11.1)
====== ====== ====== ====== ======= ====== ======
Less preferred stock dividends............................................... (.6)
---------
Net income (loss) attributable to common shareholders........................ $ 13.7
=========
Net income (loss) per common share........................................... $ 1.51
=========
Weighted average common shares outstanding................................... 9,066,410
- --------------------------------------------------
=========
<CAPTION>
COMPANY
-----------
PERIOD FROM
INCEPTION
(MAY 26,
1996) TO
AUGUST 3,
1996
-----------
<S> <C>
STATEMENT OF OPERATIONS DATA:
Net sales................................ $ 28.5
Gross profit............................. 12.8
Selling, general and administrative
expenses................................ 24.3
-----------
Income (loss) from operations before
depreciation, amortization and
restructuring charges................... (11.5)
Depreciation and amortization............ --
Restructuring and asset impairment
charges................................. --
-----------
Income (loss) from operations............ (11.5)
Interest expense, net.................... 1.2
-----------
Income (loss) before income taxes........ (12.7)
Income tax provision (benefit)........... (4.6)
-----------
Net income (loss)........................ (8.1)
Less preferred stock dividends............................................... --
-----------
Net income (loss) attributable to common shareholders........................ $ (8.1)
===========
Net income (loss) per common share........................................... $ (.89)
===========
Weighted average common shares outstanding................................... 9,066,410
- --------------------------------------------------
===========
</TABLE>
18
<PAGE>
<TABLE>
<CAPTION>
PREDECESSOR
PREDECESSOR COMPANIES PRO FORMA(1) COMPANIES
-------------------------------- ------------ ---------------
FIVE MONTHS
YEARS ENDED DECEMBER 31, ENDED
-------------------------------- YEAR ENDED ---------------
DECEMBER 31, MAY 27, MAY 25,
1991 1992 1993 1994 1995 1995 1995 1996
---- ---- ----- ---- ---- ------------ ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
STORE DATA:
Traditional stores:
Open at end of period.. 552 583 631 628 548 477 567 480
Net sales per square
foot for stores open
entire period......... $407 $416 $356 $341 $374 $391 $ 92 $ 98
Change in comparable
store sales(2)........ (3.1)% 2.1% (13.8)% (5.1)% (1.5)% (1.2)% 4.4% 3.9%
Seasonal stores at end
of period.............. 0 32 80 135 227 227 0 0
</TABLE>
<TABLE>
<CAPTION>
PREDECESSOR COMPANIES COMPANY
---------------------------------- -------------------------
DECEMBER 31,
---------------------------------- AUGUST 3,
1991 1992 1993 1994 1995 1996
------ ------ ------ ------ ------ -------------------------
(IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital (3)..... $ 34.4 $ 36.7 $ 57.4 $ 77.1 $ 44.6 $ 51.7
Total assets............ 340.4 376.6 401.0 392.7 182.4 103.7
Total long-term debt.... -- -- -- -- -- 55.8
Total liabilities....... 155.5 154.1 183.8 191.7 154.8 99.8
Shareholders' equity.... 184.9 222.5 217.2 201.0 27.6 3.9
</TABLE>
- --------
(1) The unaudited pro forma data give effect to the Restructuring and the
Acquisition accounted for under the purchase method of accounting, as if
such events had occurred on January 1, 1995. See "Pro Forma Unaudited
Consolidated Statements of Operations."
(2) Comparable store sales means sales generated by stores open at least one
full year.
(3) The working capital calculation excludes amounts due to Melville as of
December 31, 1991, 1992, 1993, 1994 and 1995.
19
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion of the financial condition and results of
operations of Wilsons should be read in conjunction with the selected
historical and pro forma consolidated financial data and consolidated
financial statements and notes thereto appearing elsewhere in this Prospectus.
OVERVIEW
The Company was organized to acquire the Predecessor Companies from
Melville. In May 1996, management and the investor group, as the owners of the
Company, acquired the Wilsons Shares for $67.8 million plus the Melville
Warrant and the Manager Warrant described below in the following two-step
transaction. First, Melville received (i) $2.0 million in cash, (ii) the $55.8
million Note, (iii) the Melville Warrant to purchase 1,350,000 shares of
Common Stock of the Company, having an exercise price of $.60 per share, and
the Manager Warrant described below, (iv) 4,320,000 shares of Common Stock,
and (v) 7,405 shares of Series A Preferred (which are entitled to receive,
when and as declared by the Company's Board of Directors after repayment in
full of the Note, cumulative annual cash dividends of $80 per share from the
date of issuance and which have a liquidation preference of $1,000 per share
plus accumulated dividends). Thereafter, the 4,320,000 shares of Common Stock
and 7,405 shares of Series A Preferred were purchased from Melville by the
Limited Partnerships for an aggregate consideration of $10.0 million. The
Manager Warrant will become exercisable commencing April 30, 2001, at $.60 per
share, but only to the extent shares of Restricted Stock are repurchased by
the Company. See "The Acquisition." The transaction was accounted for under
the purchase method of accounting. The carrying value of the net assets
acquired exceeded the purchase price by approximately $63.3 million. As a
result, the book value of property and equipment in the Company's consolidated
financial statements was reduced from $64.6 million to $1.3 million at May 26,
1996, and initially will result in lower depreciation charges than would have
been experienced by the Predecessor Companies.
Prior to the Acquisition, the Predecessor Companies were operated as part of
Melville. The historical consolidated financial statements presented herein
reflect periods during which the Company did not operate as an independent
company. Such statements, therefore, may not necessarily reflect the results
of operations or the financial condition of the Company which would have
resulted had the Company operated as an independent company during the
reporting periods, and are not necessarily indicative of the Company's future
results or financial condition. Furthermore, the Company's net loss for the
year ended December 31, 1995, as reflected in the consolidated financial
statements included elsewhere in this Prospectus, was negatively impacted by
the recording of pre-tax charges aggregating $182.2 million in the fourth
quarter of 1995 in connection with the Restructuring.
Throughout the late 1980s and early 1990s, as part of the growth strategy of
Melville, the Company pursued a rapid store expansion program through
acquisitions and store openings, growing from 227 stores at the end of 1987 to
a peak of 631 stores at the end of 1993. Beginning in 1993, the Company's
business was negatively affected by the difficult retail apparel market for
mall-based chains, competition and changes in consumer fashion preferences.
These conditions have led a large number of retailers, including a number of
specialty retailers, to close stores or cease operations. In 1995, the Company
initiated a store-closing program, which has resulted in a reduction of the
number of stores to 476 by October 5, 1996. The stores closed by the Company
had not met financial targets established by management.
In connection with the Acquisition, Melville eliminated all prior
indebtedness owed by the Predecessor Companies to Melville, assumed closed
store lease obligations and provided that Wilsons would have $85 million in
working capital upon closing of the Acquisition (before paying certain
expenses associated with the Acquisition). The Predecessor Companies'
operations were funded primarily by Melville. In order for the Company to fund
its working capital and letter of credit needs, the Company entered into the
Revolving Credit Facility with the Banks simultaneously with the closing of
the Acquisition. The Revolving Credit Facility provides the Company with a
$150 million line of credit, which includes a $90 million letter of credit
subfacility.
20
<PAGE>
As of October 5, 1996, the Company had $39.3 million in borrowings under the
Revolving Credit Facility and had outstanding letters of credit in the amount
of $48.6 million. See "Liquidity and Capital Resources" below.
In connection with the Acquisition, the Company sold 3,330,000 shares of
Common Stock, including 1,080,000 shares of Restricted Stock, to certain
managers of the Company. The shares of Restricted Stock vest over five years
if the Company achieves specified earnings targets or as the Company repays
the Note. See "Certain Transactions--Restricted Stock Agreement." As the
Restricted Stock vests, the Company will be required to record compensation
charges equal to the difference between the fair market value of the
Restricted Stock on the date the shares vest and the original purchase price
of the Restricted Stock, which was $.60 per share. By way of example, if all
of the Restricted Stock were to vest at a time when the fair market value of
the Common Stock equaled $13.00 per share (the mid-point of the range of
initial public offering prices set forth on the cover page of this
Prospectus), the Company would be required to record a non-cash, after-tax
charge of approximately $13.4 million, which would not impact the Company's
total shareholders' equity.
RESULTS OF OPERATIONS
The following table sets forth information from the Company's historical and
pro forma consolidated statements of operations, expressed as a percentage of
net sales for the periods indicated:
<TABLE>
<CAPTION>
COMPANY
-----------
PREDECESSOR PREDECESSOR
COMPANIES COMPANIES
-------------------- ---------------- PERIOD FROM
YEARS ENDED FIVE MONTHS INCEPTION
DECEMBER 31, YEAR ENDED ENDED (MAY 26,
-------------------- DECEMBER 31, ---------------- 1996) TO
1995 MAY 27, MAY 25, AUGUST 3,
1993 1994 1995 (PRO FORMA) 1995 1996 1996
----- ----- ----- ------------ ------- ------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Net sales............... 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Gross profit............ 47.5 46.6 47.7 47.7 44.6 45.3 44.9
Selling, general and
administrative
expenses............... 39.6 43.4 41.1 40.0 61.5 55.7 85.3
Income (loss) from
operations before
depreciation,
amortization and
restructuring charges.. 7.9 3.2 6.6 7.7 (16.9) (10.4) (40.4)
Income (loss) from
operations............. 3.6 (1.5) (37.4) 7.7 (24.1) (14.7) (40.4)
Interest expense, net... 1.1 1.8 2.3 1.9 2.8 1.4 4.2
Income tax provision
(benefit).............. 1.4 (0.6) (2.2) 2.3 (4.4) (6.0) (16.2)
Net income (loss)....... 1.1% (2.7)% (37.5)% 3.5% (22.5)% (10.1)% (28.4)%
</TABLE>
RECENT SALES INFORMATION
Sales from inception (May 26, 1996) to October 5, 1996 were $79.4 million
for the 19-week period. Comparable store sales increased 4.8% compared to the
same period in 1995 as a result of strong sales of the new Fall 1996
merchandise, most significantly women's apparel.
FIVE MONTHS ENDED MAY 25, 1996 COMPARED TO FIVE MONTHS ENDED MAY 27, 1995
Wilsons closed 71 stores and opened three new stores in the five months
ended May 25, 1996, compared to 63 store closings and two store openings in
the five months ended May 27, 1995. The store closings in the first five
months of 1996 and in 1995 were a result of the Restructuring. Wilsons
operated 480 stores as of May 25, 1996 compared to 567 stores at the end of
the same period in 1995. Wilsons currently plans to close an additional six
stores by the end of January 1997, and up to 24 more stores during calendar
1997 whose leases are due to expire during that year.
21
<PAGE>
Sales for the five-month period in 1996 decreased 12.1% to $109.6 million
compared with sales of $124.7 million during the same period of the prior
year. While total sales decreased as a result of operating an average of 90
fewer stores, comparable store sales increased 3.9% in the 1996 period
compared to the same period in the previous year. The 3.9% comparable store
sales increase in the 1996 period was the result of strong merchandise sales
in the ladies and accessories areas due to the clearance of merchandise
associated with store closings and the closings of holiday stores and seasonal
kiosks combined with unseasonably cool weather within Wilsons' areas of
operation during the first three months of 1996.
Gross profit for the five-month period in 1996 was $49.7 million, or 45.3%
of sales, as compared to $55.6 million, or 44.6% of sales, for the same period
of the prior year. The increase in gross profit as a percentage of sales was
due primarily to closing 22 Snyder Leather stores, an off-price strip center
concept, which carried lower margin merchandise in the 1995 period, and an
increase in the sale of accessories which produced a higher gross margin in
the 1996 period.
Operating expenses in the five-month period in 1996 were $65.8 million, or
60.0% of sales, as compared to $85.7 million, or 68.7% of sales, for the same
period of the prior year. The expense decrease of $19.9 million, or 23.2%, was
a result of store closings and realizing the benefits of profit enhancement
measures initiated in 1995 that increased operational efficiencies in the
stores and the administrative departments. These included store sales
productivity gains as a result of revised store staffing patterns and levels
to achieve productivity increases, revising the layaway and check acceptance
policies, and reductions in headquarters rent expense. Operating expenses were
also lower than the same period in 1995 as a result of the Restructuring which
reduced Wilsons' 1996 depreciation and amortization expenses.
As a result of the Company's strategic and profit enhancement initiatives
discussed above, loss from operations was $16.1 million for the five months
ended May 25, 1996 compared to a loss from operations of $30.1 million for the
same period in 1995.
Net interest expense for the five months ended May 25, 1996 was $1.6
million, or 1.4% of sales, compared to $3.4 million, or 2.8% of sales, for the
five months ended May 27, 1995. The average outstanding loan balance with
Melville was reduced by $56.0 million from $118.1 million to $62.1 million in
the 1996 five-month period. The decrease is primarily attributable to a $14.8
million decrease in average inventory in 1996 due to store closings and an
improved inventory turn rate.
Income tax benefit for the 1996 five-month period was $6.6 million, or 6.0%
of sales, compared to $5.5 million, or 4.4% of sales, in the 1995 five-month
period. The effective tax rate increased in the five-month period in 1996 to
37.2% from 16.4% in the 1995 five-month period. The increase was primarily due
to the elimination of goodwill and other amortization expenses in 1996 which
in 1995 created non-deductible expenses for tax purposes.
YEAR ENDED DECEMBER 31, 1995 COMPARED TO YEAR ENDED DECEMBER 31, 1994
During 1995, Wilsons opened five new stores and closed 85 stores, compared
to 23 store openings and 26 store closings in 1994. The large number of store
closings in 1995 was a result of the Restructuring. At the end of 1995,
Wilsons operated 548 traditional stores, comprised of 546 stores in 46 states
and the District of Columbia and two stores in England, compared to 626
traditional stores in 46 states and the District of Columbia and two stores in
England at the end of 1994. Wilsons also operated 98 holiday stores and 129
seasonal kiosks during the fourth quarter of 1995, compared to 59 holiday
stores and 76 seasonal kiosks during the fourth quarter of 1994.
Sales decreased 2.6% in 1995 to $462.4 million from $474.6 million in 1994.
The decrease reflected a 1.5%, or $6.2 million, decline in comparable store
sales due primarily to a decline in demand for leather apparel. Wilsons
operated an average of 49 fewer stores during 1995 compared to 1994, as
Wilsons closed 85 stores that
22
<PAGE>
did not meet financial return targets. These declines were partially offset by
the expansion of holiday stores and seasonal kiosks, which were open in 39 and
53 more locations, respectively, than in 1994, accounting for an increase in
sales of $8.0 million compared to 1994. The Company plans to expand its
holiday stores and seasonal kiosks to 225 and 150, respectively, during the
fourth quarter of calendar 1996. Non-comparable store sales, other than
holiday stores and seasonal kiosk sales, were down $14.0 million from 1994 as
the Company opened 18 fewer traditional stores during 1995 compared to 1994.
Gross profit in 1995 was $220.6 million, or 47.7% of sales, as compared to
$221.0 million, or 46.6% of sales, in 1994. The increase as a percentage of
sales was due partially to closing 22 Snyder Leather stores during the first
quarter of 1995. In addition, in 1995 the Company also increased its accessory
sales, which have a higher gross profit margin, to 23.1% of total sales from
20.6% in 1994 as a result of increased emphasis on accessories in the
traditional stores and opening 53 additional seasonal kiosks, which primarily
sell accessories. The Company also achieved stronger sales in 1995 of styles
with higher fashion content and higher margins. Partially offsetting these
gross profit margin improvements in 1995 were additional markdowns required to
liquidate merchandise in 73 stores that were closed during December 1995 and
January 1996 in conjunction with the Restructuring, and to liquidate
merchandise from the 98 holiday stores and 129 seasonal kiosks.
Operating expenses in 1995, before restructuring and asset impairment
charges, were $211.5 million, or 45.7% of sales, compared to $228.3 million,
or 48.1% of sales, in 1994. Of the $16.8 million decrease in operating
expenses, $10.3 million was attributable to strategic initiatives to close 61
stores, including 22 Snyder Leather stores, during the first quarter of 1995.
The Company implemented certain profit enhancement measures during the second
quarter of 1995 that accounted for the majority of the remaining expense
reductions. These profit enhancement measures included store sales
productivity gains as a result of revising store staffing patterns and levels,
revising the layaway and check acceptance policies while simultaneously
introducing debit/ATM cards as an acceptable form of payment in a number of
markets, and improved expense control.
Operating expenses in 1995, after restructuring and asset impairment
charges, were $393.7 million, or 85.1% of sales, as compared to $228.3
million, or 48.1% of sales, in the previous year. As part of the
Restructuring, during the fourth quarter of 1995 the Company recorded a pre-
tax restructuring charge of $134.3 million to reflect the anticipated costs
associated with closing approximately 100 of Wilsons' stores and the write-off
of goodwill and other intangibles, and a pre-tax asset impairment charge of
$47.9 million related to the write-off of certain assets upon the adoption of
SFAS No. 121.
Income from operations before depreciation, amortization, restructuring and
asset impairment charges was $30.5 million, or 6.6% of sales, in 1995 compared
to $15.0 million, or 3.2% of sales, in 1994 due to the factors described
above.
Income from operations in 1995, before restructuring and asset impairment
charges, was $9.1 million, or 2.0% of sales, compared to a loss of $7.3
million, or 1.5% of sales, in 1994. The $16.4 million improvement was
primarily due to discontinuing the Snyder Leather off-price concept during the
first quarter of 1995 and profit enhancement measures introduced during the
second quarter of 1995. Loss from operations in 1995, after restructuring and
asset impairment charges, was $173.1 million compared to a loss of $7.3
million in 1994.
Net interest expense in 1995 was $10.4 million, or 2.3% of sales, compared
to $8.4 million, or 1.8% of sales, during the prior year. The average
outstanding loan balance with Melville was reduced to $151.9 million in 1995
compared to $165.1 million in 1994 as a result of lower inventory levels due
to store closings and a higher inventory turn rate. The Company's average
annual interest rate paid on outstanding loan amounts to Melville in 1995 was
6.4% compared to 4.7% in 1994.
Income tax benefit in 1995 was $10.1 million, or 2.2% of sales, compared to
$3.1 million, or 0.6% of sales, in 1994. The effective tax rate declined in
1995 to 5.5% from 19.8% in 1994. The decline was primarily due to the
effective tax rate impact of nondeductible goodwill in 1995 compared to 1994.
23
<PAGE>
YEAR ENDED DECEMBER 31, 1994 COMPARED TO YEAR ENDED DECEMBER 31, 1993
During 1994, Wilsons opened 23 new stores and closed 26 existing stores,
compared to 40 new store openings, 31 store acquisitions and 23 store closings
in 1993. At the end of 1994, Wilsons operated 628 traditional stores comprised
of 626 stores in 46 states and the District of Columbia and two stores in
England, compared to 631 traditional stores in 44 states and the District of
Columbia at the end of 1993. Wilsons also operated 59 holiday stores and 76
seasonal kiosks during the fourth quarter of 1994 compared to 25 holiday
stores and 55 seasonal kiosks during the fourth quarter of 1993.
Sales decreased 0.8% in 1994 to $474.6 million from $478.5 million in 1993.
The decrease reflected a 5.1%, or $23.1 million, decline in comparable store
sales due primarily to a decline in demand for all outerwear and leather
apparel during the fall of 1994. This decline was partially offset by
operating an average of 22 more stores in 1994 compared to 1993, reflecting
the full year impact of the 71 store openings and acquisitions in 1993, which
had a positive effect on 1994 sales. In addition, the comparable store sales
decline was partially offset by the expansion of holiday stores and seasonal
kiosks, which were open in 34 and 21 more locations, respectively, than in
1993, accounting for an increase in sales of $6.3 million compared to 1993.
Non-comparable store sales, other than holiday stores and seasonal kiosk
sales, were up $12.9 million from 1993 as the Company realized the full year
sales impact of the 1993 openings and acquisitions.
Gross profit in 1994 was $221.0 million, or 46.6% of sales, as compared to
$227.2 million, or 47.5% of sales, in 1993. The decrease as a percentage of
sales was primarily attributable to increased markdowns resulting from high
year end inventory levels as a result of sluggish demand for leather apparel
during the fourth quarter of 1994. At the same time, however, the Company
increased its mix of accessory sales, which have a higher gross profit margin,
to 20.6% of sales in 1994 from 16.8% in 1993. The increase in accessory sales
was a result of increased emphasis in the traditional stores due to the
acquisition of Georgetown Leather Design during June 1993 and opening 21
additional seasonal kiosks in 1994.
Operating expenses in 1994 were $228.3 million, or 48.1% of sales, compared
to $210.0 million, or 43.9% of sales, in 1993. The $18.3 million increase in
operating expenses was primarily attributable to the full year impact of 63
traditional stores opened or acquired during the last seven months of 1993,
combined with store occupancy expense increases associated with existing
traditional stores or lease renewals.
Income from operations before depreciation, amortization, restructuring and
asset impairment charges was $15.0 million, or 3.2% of sales, in 1994 compared
to $37.9 million, or 7.9% of sales, in 1993 due to the factors described
above.
Loss from operations in 1994 was $7.3 million, or 1.5% of sales, compared to
income from operations of $17.2 million, or 3.6% of sales, in 1993. The $24.5
million decline was primarily due to a 5.1% comparable store sales decline
during 1994 and the full year impact of 71 new or acquired stores during 1993.
Historically, the Company has opened most of its stores during the last half
of the year. As a result, new stores opened just prior to the fourth quarter
produce profits in excess of their annualized profits since the stores
typically generate losses in the first six months of the year.
Net interest expense in 1994 was $8.4 million, or 1.8% of sales, compared to
$5.1 million, or 1.1% of sales, during the prior year. The average outstanding
loan balance with Melville increased to $165.1 million in 1994 compared to
$147.1 million in 1993 due to operating an average of 22 more stores during
1994. The Company's average annual interest rate paid on outstanding loan
amounts to Melville in 1994 was 4.7% compared to 3.3% in 1993.
24
<PAGE>
Income tax benefit in 1994 was $3.1 million, or 0.6% of sales, compared to
an income tax provision of $7.0 million, or 1.4% of sales, in 1993. The
effective tax rate declined in 1994 to a 19.8% benefit from a 58.2% provision
in 1993. The decline was primarily due to the effective rate impact of
nondeductible goodwill and state income taxes in 1994 compared to 1993.
LIQUIDITY AND CAPITAL RESOURCES
Wilsons' primary capital requirements have been to support capital
investment to open new stores, to remodel existing stores, to update
information systems and to meet seasonal working capital needs. The Company's
peak working capital needs typically occur during the period from July through
November as inventory levels are increased in advance of the Company's peak
selling season of October through December.
Historically, the primary sources of the Company's cash for working capital
and capital expenditures have been net cash flows from operating activities
and borrowings from Melville. Prior to the Acquisition, the Company had
participated in Melville's centralized cash management system whereby cash
received from operations was transferred to Melville's centralized cash
accounts and cash disbursements were funded from the centralized cash accounts
on a daily basis. The receipt and disbursement of cash was tracked through an
intercompany cash management account. Accordingly, cash required for operating
and capital expenditures during the year was met from this source.
The Banks have provided the Company with a three-year Revolving Credit
Facility. The Revolving Credit Facility provides for borrowings of up to $150
million in aggregate principal amount, which amount includes a letter of
credit subfacility of up to $90 million. The maximum amount available under
the Revolving Credit Facility, however, is further subject to a borrowing base
limitation (less certain reserves) of 65% of eligible inventory, plus a
seasonal advance. The Company's borrowing availability is also reduced by
outstanding letters of credit. Interest is payable on borrowings at one or
more variable rates determined by reference to the "prime" rate plus 1.25%
(1.00% for up to $10.0 million of borrowings), or LIBOR plus 2.75%. The
spreads are subject to possible reductions from and after February 1997 based
upon the Company's success at achieving certain financial targets. As of
October 5, 1996, $10.0 million of the Company's borrowings bore interest at a
rate of 9.25%, $20.0 million bore interest at a rate of 8.24%, and $9.3
million bore interest at a rate of 9.5%. For letters of credit, the Company
pays a monthly fee in an amount equal to 1.75% per annum times the daily
average of the amount of letters of credit outstanding during each month,
which percentage is subject to possible reduction from and after February 1997
based on the Company's success at achieving certain financial targets. The
Revolving Credit Facility contains certain covenants limiting, among other
things, the Company's ability to make capital expenditures, pay cash dividends
or make other distributions. The Company plans to use the Revolving Credit
Facility for its immediate and future working capital needs, including capital
expenditures. As of October 5, 1996, the amounts outstanding under the
Revolving Credit Facility were $39.3 million of borrowings and $48.6 million
in letters of credit. During 1995, the highest amounts borrowed by the Company
from Melville, net of the prior indebtedness eliminated as part of the
Acquisition, to fund working capital expenditures and covered by outstanding
letters of credit were $112.7 million and $97.4 million, respectively, and the
average amounts of such borrowings and amounts covered by outstanding letters
of credit for such year were $51.9 million and $58.9 million, respectively.
The Company is highly dependent on the Revolving Credit Facility to fund
working capital and letter of credit needs, and management believes that the
Revolving Credit Facility will be sufficient to meet the Company's working
capital and capital expenditure requirements for the foreseeable future. There
can be no assurance, however, that the Revolving Credit Facility will be
sufficient to fund such needs, or, if the Revolving Credit Facility is
insufficient to meet such needs, that the Company will be able to obtain any
additional financing or obtain such financing on terms acceptable to the
Company.
The Company also has outstanding the Note payable to Melville, which is a
subordinated secured note for $55.8 million. $55.0 million of the principal
amount of the Note bears interest at the rate of 10% per annum, compounded
annually, with all such principal and interest due and payable on December 31,
2000.
25
<PAGE>
The remaining principal balance of the Note ($0.8 million) does not bear
interest and is due and payable on December 31, 2000. See "Certain
Transactions--Subordinated Note."
CASH FLOW ANALYSIS
Operating activities in the first five months of 1996 prior to the
Acquisition resulted in cash used of $16.0 million compared to cash used of
$11.5 million in the same period of 1995. The $4.5 million increase in cash
used by operating activities in the first five months of 1996 compared to the
same period in 1995 resulted primarily from negotiated settlements with
landlords for stores closed prior to their natural lease expiration dates
during the 1996 period. In addition, the net loss for the five-month period in
1996 declined by $16.9 million compared to the same period in 1995 as a result
of lower operating expenses associated with operating an average of 90 fewer
stores during the first five months of 1996, partially offset by $7.7 million
less cash generated by the reduction of inventory during that same period.
Operating activities in 1995 resulted in cash provided of $53.1 million
compared to cash provided of $12.2 million in 1994 and $12.0 million in 1993.
The increase in cash provided from operating activities in 1995 as compared to
1994 and 1993 was primarily generated by a $27.7 million decrease in inventory
resulting primarily from the liquidation of inventory from the closed stores
which exceeded the associated decrease in accounts payable.
Investing activity was comprised primarily of capital expenditures totaling
$3.6 million, $2.9 million, $10.1 million, $20.7 million and $26.6 million
during the five months ended May 25, 1996 and May 27, 1995, and the years 1995,
1994, and 1993, respectively. These expenditures were primarily for the
addition of new stores, which cost on average $182,000 and $173,000 to
construct in 1995 and 1994, respectively, renovations of and improvements to
existing stores and enhancements to the Company's management information
systems. The decrease in cash used in investing activities in 1995 as compared
to 1994 and 1993 was primarily due to five store openings in 1995 compared to
23 store openings in 1994 and 40 store openings in 1993. In addition, the
Company used approximately $6.4 million to purchase substantially all of the
assets of Georgetown Leather Design in June 1993. Capital expenditures for the
period from May 26, 1996 through December 31, 1996 and for calendar 1997 are
anticipated to be approximately $8.2 million and $15.1 million, respectively.
Cash used for financing activities was $46.0 million in 1995 compared to cash
provided from financing activities of $20.4 million in 1994 and $20.9 million
in 1993. The cash used for financing activities in 1995 resulted from paying
down outstanding intercompany debt to Melville. Wilsons' loan balance to
Melville was $78.8 million at the end of 1995 compared to $124.2 million at the
end of 1994 and $100.3 million at the end of 1993. As part of the Acquisition,
Melville eliminated all prior indebtedness owed by the Predecessor Companies to
Melville.
Management believes that Wilsons' financial resources, including the
Revolving Credit Facility, the net proceeds from the Offering and estimated
cash flow from operations will be adequate to fund the Company's operations for
the foreseeable future.
SEASONALITY AND INFLATION
A majority of the Company's net sales and operating profit is generated in
the peak selling period from October through December, which includes the
Christmas selling season. Wilsons recorded 56.1% of its total 1995 sales in the
fourth quarter of that year. For 1995, 37.3% of the Company's sales were
generated during the period from the day after Thanksgiving through December
31. As a result, the Company's annual operating results have been, and will
continue to be, heavily dependent on the results of its peak selling period.
Net sales are generally lowest during the period from April through July, and
the Company typically does not become profitable until the fourth calendar
quarter of a given year. Most of the Company's stores are unprofitable during
the first three calendar quarters. Conversely, nearly all of the Company's
stores are profitable during the calendar fourth quarter, even those that may
be unprofitable for the full year. Historically, the Company has opened most
26
<PAGE>
of its stores during the last half of the year. As a result, new stores opened
just prior to the fourth calendar quarter produce profits in excess of their
annualized profits since the stores typically generate losses in the first six
months of the year.
The following table sets forth certain unaudited financial information for
Wilsons for each calendar quarter of 1994 and 1995 (and pro forma for 1995),
and for the thirteen weeks ended April 27, 1996 and the fourteen weeks ended
August 3, 1996 (and pro forma for such periods). In the opinion of management,
this quarterly information has been prepared on a basis consistent with the
Company's audited financial statements appearing elsewhere in this Prospectus
and reflects adjustments, consisting of normal recurring adjustments,
necessary for a fair presentation of such unaudited quarterly results when
read in conjunction with the audited financial statements and notes thereto.
<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
------- ------- ------- -------
(IN MILLIONS)
<S> <C> <C> <C> <C>
Calendar 1994
Net sales................................. $93.0 $41.9 $68.3 $271.4
Income (loss) from operations before
depreciation and amortization............ (7.3) (25.0) (18.8) 66.1
Income (loss) from operations............. (12.8) (30.6) (24.3) 60.4
Net income (loss)......................... (11.2) (25.8) (21.5) 45.9
Calendar 1995
Net sales................................. 93.4 47.3 62.4 259.3
Income (loss) from operations before
depreciation, amortization and
restructuring charges.................... (10.0) (17.6) (13.4) 71.5
Loss from operations...................... (16.1) (22.6) (18.9) (115.5)
Net loss.................................. (15.2) (20.8) (18.3) (119.1)
Calendar 1995 (Pro Forma) (1)
Net sales................................. 77.8 41.1 55.6 235.2
Income (loss) from operations before
depreciation, amortization and
restructuring charges.................... (4.6) (15.3) (11.5) 62.9
Income (loss) from operations............. (4.6) (15.4) (11.5) 62.9
Net income (loss)......................... (3.8) (10.3) (8.1) 36.5
Year Ending February 1, 1997 (2)
Net sales................................. 66.8 41.4
Loss from operations before depreciation
and amortization......................... (6.8) (17.2)
Loss from operations...................... (9.8) (18.0)
Net loss.................................. (7.2) (11.9)
Year Ending February 1, 1997 (Pro Forma)
(1)(2)
Net sales................................. 65.0 41.0
Loss from operations before depreciation
and amortization......................... (6.9) (17.2)
Loss from operations...................... (6.9) (17.2)
Net loss.................................. (5.3) (11.4)
</TABLE>
- --------
(1) See "Pro Forma Unaudited Consolidated Statements of Operations."
(2) The fourteen weeks ended August 3, 1996 represent a period which combines
the results of operations of the Predecessor Companies prior to the
Acquisition from April 28, 1996 through May 25, 1996, and the Company
after the Acquisition from May 26, 1996 through August 3, 1996.
The Company does not believe that inflation has had a material adverse
effect on the results of operations during the past three years; however,
there can be no assurance that the Company's business will not be affected by
inflation in the future.
27
<PAGE>
BUSINESS
OVERVIEW
Wilsons is the leading specialty retailer of men's and women's leather
outerwear, apparel and accessories in the United States. In 1995, the Company
had net sales of $462.4 million, representing a management-estimated 18.0%
share of the $2.0 billion U.S. retail leather apparel market and a management-
estimated 2.7% share of the $3.9 billion U.S. retail leather accessories
market. As of October 5, 1996, the Company operated 476 stores. In addition,
the Company operates a significant number of holiday stores and seasonal
kiosks during its peak selling season, which for 1996 will total approximately
375 locations.
Wilsons operates in 45 states, the District of Columbia and England under
several formats including "Wilsons The Leather Experts," the Company's
traditional mall-based concept which offers moderately priced merchandise, and
"Tannery West" and "Georgetown Leather Design," mall-based concepts which
offer more upscale merchandise. In addition to the traditional mall-based
stores, as of October 5, 1996 Wilsons also operated nine airport stores that
focus on selling accessories, such as gloves, handbags, wallets, briefcases,
planners and computer cases, to business travelers and tourists, and eight
outlet stores located primarily in outlet malls that focus on the off-price
sale of clearance merchandise.
Unlike many retailers, Wilsons designs, purchases leather for, and contracts
for the manufacturing of most of the apparel and accessories sold in its
stores. This vertical integration enables the Company to reduce its order lead
times, respond more quickly to changing consumer preferences and fashion
trends, and offer its customers a better value through consistently high
quality products at competitive prices.
On May 25, 1996, an investor group, including management, acquired the
Predecessor Companies from Melville. As part of the Restructuring, management
closed 156 stores that had not achieved financial return targets, wrote off an
amount of goodwill and certain other non-productive assets and recorded
certain related lease obligations and, in 1995, the Company recorded a
restructuring charge of $134.3 million related to store closings and the
write-off of goodwill and other intangibles, and an asset impairment charge of
$47.9 million related to the write-off of certain assets upon the adoption of
SFAS No. 121.
Upon completion of the Offering and its transition to an independent public
company, Wilsons believes that it will have the capital resources and
management information systems to implement its long-term growth strategy,
which emphasizes the types of stores and products that offer greater growth
opportunities and higher profit margins in both existing and new distribution
channels. Specifically, this long-term growth strategy calls for annual
openings of approximately six to 15 traditional stores, two larger-sized mall
stores and 12 to 15 airport stores commencing in 1997. In addition, the
Company plans to increase the number of its holiday stores and seasonal kiosks
by approximately 50 locations each per year, to commence operation of
accessory-only stores, to increase the number of stores in military base PXs
and leased department store units, and to open additional stores outside of
the United States.
BUSINESS STRATEGY
Wilsons' objectives are to expand its leading position as the largest
specialty retailer of leather outerwear, apparel and accessories in the United
States and to increase the profitability of the Company. Key elements of the
Company's business strategy include:
Promote the Company's Leather Expertise. The Company has built its image as
"The Leather Experts" by offering its customers an extensive selection of
affordably priced quality leather products, demonstrated by the availability
of over 8,000 stock keeping units ("SKUs"). The Company believes that its
image as "The Leather Experts" is enhanced when a customer enters a Wilsons
store and experiences the fragrance, feel and fit of leather. The experience
is further enhanced by the detailed knowledge that the Wilsons sales
associates provide the customer regarding leather types, quality and care.
Maximize Merchandising Opportunities Through Vertical Integration. Unlike
many retailers, Wilsons designs, purchases leather for and contracts for the
overseas manufacturing of most of the apparel and accessories
28
<PAGE>
sold in its stores. Wilsons' operations integrate the design of leather
merchandise, the development and sourcing of new leather textures, colors and
finishes, and the contract manufacturing and importation of goods to
efficiently deliver merchandise to its stores. The Company believes that this
vertical integration gives it several competitive advantages, including the
enhanced ability to:
. Better manage order lead times and delivery schedules
. Change its merchandise mix and respond more rapidly to fashion trends and
consumer demand
. Purchase leather and contract for manufacturing at favorable prices
. Schedule promotions to coincide with merchandise availability
. Reorder faster selling merchandise within the same selling season
Create Brand Recognition. Over 80% of Wilsons' products are sold under its
proprietary brand names, including Wilsons The Leather Experts, Tannery West,
Georgetown Leather Design, Berman Buckskin, Adventure Bound, Maxima, Open Road
and M. Julian. This branding permits the Company to provide merchandise not
sold by other retailers. In addition to its own brands, Wilsons also
selectively offers designer brands such as Guess?, Jones New York, Kenneth
Cole, Andrew Marc and Bosca. The combination of the Wilsons brands with these
designer brands highlights to the customer the value of the Company's brands
and the breadth and depth of the Wilsons selection.
Maximize Usage of Distribution and Integrated Information Systems. The
Company supports its stores with highly automated, sophisticated and
integrated information systems in areas such as distribution, merchandising,
marketing, human resources and finance. Management in all of these areas works
closely together to make decisions on overall merchandise mix, order quantity
and marketing efforts. The Company's information systems allow it to integrate
its leather design and development, contract manufacturing management,
merchandising, marketing and retail sales functions. The Company spent $12.6
million between 1992 and 1994 to design a highly automated distribution center
which relies on high-speed sorting equipment, bar code scanning and radio
frequency technologies to maintain detailed current inventory records and
quickly ship products to the Company's stores. Since January 1995, the Company
has spent $2.5 million to transfer its information systems from the Company's
current mainframe platform to a client/server platform. The Company expects to
spend approximately $2.5 million to complete the upgrade of its information
systems by the end of 1997. Through utilization of the Company's information
systems, the Company expects to improve the product manufacturing cycle to
reduce the amount of time necessary to deliver products to the Company's
customers and to be able to allocate merchandise more effectively among the
Company's stores.
GROWTH STRATEGY
Wilsons seeks to improve its operating results by enhancing customer loyalty
and by gaining market share from its competitors, thereby increasing
comparable store sales. The Company also intends to increase the number of its
stores, improve its profitability by emphasizing higher margin products, and
utilize its information systems to identify opportunities to reduce costs and
more efficiently manage its merchandising, marketing and contract
manufacturing programs. Key elements of this growth strategy include:
Increase Comparable Store Sales. Wilsons has implemented programs to
increase its comparable store sales. These programs include (i) utilizing
fashion forward merchandise to draw customers to its stores while maintaining
a very broad assortment of basic products; (ii) training the Company's sales
associates as leather experts, in order to provide customers with a high level
of service and knowledge and improve sales associate productivity; (iii)
developing ongoing sales promotion and pricing strategies to provide customers
with the opportunity to buy quality products at value prices; (iv) utilizing
layaway programs to encourage customers to purchase merchandise earlier in the
season, allowing the Company to determine early what merchandise will be
popular, and to offer alternative financing for customers; (v) remerchandising
the stores during non-peak selling seasons to emphasize less seasonal items
such as sportswear and accessories; and (vi) selectively offering designer
brand name merchandise such as Guess?, Jones New York, Kenneth Cole, Andrew
Marc and Bosca, to highlight the value of Wilsons' proprietary brands.
29
<PAGE>
Enhance Profit Margins. Wilsons strives to increase its operating margins by
(i) shifting its product mix towards higher margin products such as
accessories; (ii) utilizing the Company's information systems to improve
merchandising and marketing, reduce order lead times and minimize markdowns,
while offering a broad product selection; (iii) selectively utilizing more
fashion forward, higher margin products to increase store traffic;
(iv) reducing operating costs through the closing of underperforming stores
and the creation of greater purchasing and operating efficiencies; and (v)
utilizing a small group of outlet stores to efficiently sell slower moving
products.
Increase Store Base. The Company plans to increase the number of its stores.
A substantial part of this increase is expected to come from the opening of
new stores utilizing the following formats:
. Mall-Based Stores. Wilsons plans to open six to 15 new mall-based stores
per year. In addition, Wilsons plans to open larger stores (approximately
twice the size of a traditional store) at the rate of approximately two
per year.
. Airport Stores. High traffic business traveler and tourist locations
offer significant growth opportunities for the Company. These locations
generally offer more accessories and are less seasonal than traditional
mall-based stores. Wilsons has opened nine airport locations since 1994
and plans to open at least 12 new airport stores per year.
. Seasonal Concepts. Wilsons has developed the expertise required to
successfully open holiday stores and seasonal kiosks that operate in
malls for three to four months each year. Holiday stores temporarily
occupy vacant store space in malls where the Company has no traditional
store. Seasonal kiosks are generally designed to complement and enhance
the operation of the traditional Wilsons store in the same mall. In 1996,
Wilsons plans to open approximately 225 holiday stores and 150 seasonal
kiosks. The Company believes that it can increase each of these concepts
by approximately 50 locations per year.
. New Retail Channels and Concepts. Wilsons is currently testing stores in
military PXs and has tested leased locations within department stores. In
addition, Wilsons plans to open accessories-only stores in the United
States and additional stores of various formats outside of the United
States.
. Non-Retail Channels. Wilsons is also exploring non-retail channels such
as direct mail, catalog sales, wholesale sales to other retailers and
direct sales to corporations.
INDUSTRY BACKGROUND
The retail leather apparel and accessories markets are well established in
the United States. Management believes that retail sales of leather apparel
and accessories in the United States have experienced significant growth in
the past twenty years and were a management-estimated $5.9 billion in 1995.
Management believes that a significant factor in the growth of the leather
apparel and accessories industry is the increase in foreign manufacturing,
particularly in the Far East. The increase in foreign sourcing, along with
technical advances in hide tanning in the early 1980s, have allowed the
Company to offer high-quality merchandise at lower prices to more consumers.
Due in part to the popularity of the leather "bomber" jacket, retail leather
apparel sales reached a peak in 1989. Mass merchandisers began selling leather
during the early 1990s on a broader basis.
However, during the early 1990s, due to adverse conditions in the retail
apparel industry and changes in fashion trends, there was a downtrend in
industry sales of leather apparel and outerwear in general and a consolidation
of retailers selling leather apparel. The Company has emerged as the leader in
the U.S. specialty retail leather apparel and accessories industry following
such consolidation.
COMPANY HISTORY
Wilsons House of Suede, Inc. ("House of Suede"), one of the Predecessor
Companies, was founded in the late 1940s as a family business which
established a reputation for quality leather, innovative fashion and a
commitment to customer service. In the mid-1960s, House of Suede developed a
strategy to make leather
30
<PAGE>
products an affordable purchase for the mass market. In implementing this
strategy, House of Suede grew successfully through the 1970's. By 1982, when
House of Suede was acquired by Melville, it had grown to a 42-store chain.
Through the 1980s, Melville pursued an aggressive expansion strategy for the
Company in order to achieve market penetration in the highly fragmented
leather apparel industry. Under Melville's ownership, the Company opened or
acquired between 30 and 60 stores per year and made strategic acquisitions of
small regional chains, including Leather Loft and Tannery West. Through its
acquisition of Bermans The Leather Experts, Inc. ("Bermans") in 1988, the
Company became the leading specialty retailer of leather apparel and
accessories operating nationwide. Founded in 1899, Bermans originally
specialized in purchasing and selling hides and furs, and subsequently
diversified into retailing. When the Company acquired Bermans, the result was
a company with expertise in all areas of the leather apparel business, from
design and contract manufacturing to the retail sale of quality leather
apparel. By 1989, the Company had established a national presence as the
leading specialty retailer of leather apparel, with over 500 traditional
stores, covering substantially all of the major regional malls in the United
States. This position was further reinforced by the acquisition of two
additional regional chains: Snyder Leather in 1992 and Georgetown Leather
Design in 1993. At the end of 1993, the Company operated its peak of 631
stores. The Company was organized in May 1996 to acquire the Predecessor
Companies from Melville. See "The Acquisition," "Certain Transactions" and
"Description of Capital Stock."
VERTICALLY INTEGRATED OPERATIONS
The Company believes that a key competitive advantage is its ability to
integrate the functions of its leather design and development, contract
manufacturing management, merchandising, marketing and retail sales
departments. These departments work closely together to make decisions on
overall merchandise mix, order quantity and marketing efforts. The Company is
testing information systems, which it believes will be fully operational by
the end of 1997, to further integrate its key management functions. The
Company believes that its integrated management and information systems give
it the ability to bring leather from raw material to finished product quickly
and efficiently.
An example of the Company's integrated functions is the anticipated
utilization of the Company's data on customer lifestyles and merchandise
preferences. The Company currently collects point-of-sale information on its
customers' names, addresses and purchase histories, which has resulted in the
compilation of information on more than 4 million customers. The Company
intends to use its new information systems to analyze this data for the
purpose of grouping such customers into one or more customer segments. These
segments are defined by demographic and socioeconomic guidelines and lifestyle
characteristics, which also relate to merchandise preference. The Company's
merchants will be able to use customer segment information to help design
merchandise and plan orders, and make distribution and reorder decisions for
each store. Wilsons' manufacturing managers located in the Far East will also
be integrated into this process to ensure that new styles are tested and
brought to market quickly and that strong selling merchandise is given
priority within the production pipeline and sent promptly to the stores. The
Company's marketing department will be able to use the customer segment
information to design more tightly targeted customer promotions.
31
<PAGE>
STORE FORMATS
Wilsons is the leading specialty retailer of leather apparel and accessories
in the United States. As of October 5, 1996, the Company had 476 store
locations in 45 states, the District of Columbia and England, covering
substantially all of the major regional malls in the United States. These
stores are operated under four formats: "Wilsons The Leather Experts" (421
locations); "Tannery West" and "Georgetown Leather Design" (38 locations);
airport stores (nine locations); and Wilsons Leather Outlets (eight
locations).
STORE COUNT AS OF OCTOBER 5, 1996
<TABLE>
<CAPTION>
WILSONS THE TANNERY WEST/ WILSONS LEATHER
LEATHER EXPERTS GEORGETOWN LEATHER AIRPORT OUTLET TOTAL
--------------- ------------------ ------- --------------- -----
<S> <C> <C> <C> <C> <C>
Alabama 2 - - - 2
Arkansas 1 - - - 1
Arizona 3 1 - - 4
California 60 4 - 2 66
Colorado 9 1 - - 10
Connecticut 6 2 - - 8
Washington,
D.C. - 1 - - 1
Delaware 3 - - - 3
Florida 3 1 - 1 5
Georgia 8 - 3 - 11
Idaho 1 - - - 1
Illinois 34 2 - 1 37
Indiana 12 - 1 - 13
Iowa 8 - - - 8
Kansas 2 - - - 2
Kentucky 4 - - - 4
Louisiana 3 - - - 3
Maine 3 - - - 3
Maryland 10 6 - - 16
Massachusetts 15 3 - - 18
Michigan 20 1 - - 21
Minnesota 12 1 1 - 14
Missouri 4 1 - - 5
Nebraska 4 - - - 4
Nevada 3 - - - 3
New Hampshire 5 - - - 5
New Jersey 18 3 - - 21
New Mexico 1 - - - 1
New York 33 3 - - 36
North
Carolina 8 - - - 8
North Dakota 4 - - - 4
Ohio 23 1 - - 24
Oklahoma 1 - - - 1
Oregon 3 - - - 3
Pennsylvania 22 2 2 1 27
Rhode Island 2 - - 1 3
South
Carolina 1 - - - 1
South Dakota 2 - - - 2
Tennessee 7 - - - 7
Texas 14 - - - 14
Utah 6 - - - 6
Virginia 8 4 - 1 13
Vermont 1 - - - 1
Washington 15 1 - 1 17
West Virginia 2 - - - 2
Wisconsin 15 - - - 15
England - - 2 - 2
--- --- --- --- ---
Total 421 38 9 8 476
=== === === === ===
</TABLE>
32
<PAGE>
- -------------------------------------------------------------------------------
476 Store Locations
- -------------------------------------------------------------------------------
LOGO
[MAP WITH STORE LOCATIONS]
The above map depicts the locations
of the Company's Wilsons The Leather . Corporate Headquarters and
Experts stores (traditional and Distribution Center
airport), Tannery West/Georgetown
Leather Design stores, and Wilsons
Leather Outlet stores as of October
5, 1996.
Wilsons also operates two seasonal formats which are generally open during
the Company's peak selling season of October through December: holiday stores
(225 locations estimated for 1996) and seasonal kiosks (150 locations
estimated for 1996).
Wilsons The Leather Experts Stores.
As of October 5, 1996, Wilsons operated 421 stores in 45 states under the
"Wilsons The Leather Experts" format. These stores average approximately 2,000
square feet in size and are located nationwide, primarily in regional shopping
malls. These traditional stores, which are designed to target a broad base of
consumers, showcase the full range of Wilsons products, from men's and women's
leather apparel (including coats, jackets and sportswear) to leather
accessories (including gloves, handbags, wallets, briefcases, planners and
computer cases). In 1995, Wilsons The Leather Experts stores had sales of
$380.0 million, representing 82.1% of the Company's total sales; such stores
averaged sales per store of $758.0 thousand and sales per square foot of $383;
and apparel and accessories represented 79.4% and 20.6% of sales,
respectively.
Tannery West and Georgetown Leather Design Stores.
As of October 5, 1996, Wilsons operated 38 "Tannery West" and "Georgetown
Leather Design" stores in 17 states and the District of Columbia. These stores
average approximately 1,600 square feet in size, target a
33
<PAGE>
slightly more upscale market than traditional Wilsons The Leather Experts
stores, and are located primarily in higher-end malls. The stores are visually
distinct from Wilsons The Leather Experts stores, and some malls may contain
both a Wilsons The Leather Experts and a Tannery West/Georgetown Leather
location. The Tannery West/Georgetown Leather stores focus more on leather
accessories than Wilsons The Leather Experts stores, averaging 50% more in
annual accessory sales. Management plans to broaden the exposure of its
proprietary Tannery West/Georgetown Leather merchandise by selectively
offering this merchandise in Wilsons The Leather Experts stores as brand-named
merchandise collections. In 1995, Tannery West/Georgetown Leather stores had
sales of $45.3 million, representing 9.8% of the Company's total sales; such
stores averaged sales per store of $716.3 thousand and averaged sales per
square foot of $437; and apparel and accessories represented 66.6% and 33.4%
of sales, respectively.
Airport Stores.
As of October 5, 1996, Wilsons operated nine airport stores under the
"Wilsons The Leather Experts" name, with seven locations in the United States
and two locations in England. These stores average approximately 900 square
feet in size and are designed to target business travelers and tourists.
Airport stores emphasize a wide assortment of leather accessories and carry a
limited assortment of leather apparel. Airport stores tend to be less
seasonal, due in part to a more even flow of customer traffic during the year
as compared to malls, and to an emphasis on accessories. In 1995, the airport
stores had sales of $3.0 million, representing 0.7% of the Company's total
sales; such stores averaged sales per store of $753.4 thousand and averaged
sales per square foot of $820; and accessories and apparel represented 87.6%
and 12.4% of sales, respectively. The Company currently plans to open two new
airport stores during the balance of 1996, and 12 to 15 new airport stores
during 1997.
Wilsons Leather Outlet Stores.
The Company operates eight "Wilsons Leather Outlet" stores which are located
in outlet malls in the United States. These stores average approximately 4,100
selling square feet in size. The Company generally uses these stores to
liquidate excess merchandise from its holiday stores and seasonal kiosks and
slow selling inventory from its traditional stores, allowing the Company to
more quickly introduce new merchandise into its traditional stores. In 1995,
Wilsons Leather Outlet stores had sales of $12.0 million, representing 2.6% of
the Company's total sales; such stores averaged sales per store of $1.6
million and averaged sales per square foot of $392; and apparel and
accessories represented 84.4% and 15.6% of sales, respectively.
Holiday Stores.
Holiday stores were first tested in 1992. In 1995, Wilsons operated 98
holiday stores in 31 states. A holiday store is a temporary, full-size Wilsons
store which is located in a vacant mall space and is operated only during
October through December, the Company's peak selling season. Wilsons typically
locates these stores in malls where there is not already an existing Wilsons
store. These stores offer a merchandise selection similar to the traditional
Wilsons The Leather Experts stores in a facility closely resembling the
traditional store. Lower occupancy costs as a percent of sales result in
higher operating margins for the holiday stores as compared to the full year
margins of the Company's traditional stores. An additional benefit of holiday
stores is the ability to test new malls where the Company is considering
opening a traditional store. In 1995, holiday stores had sales of $13.8
million, representing 3.0% of the Company's total sales; such stores averaged
sales per store of $141.1 thousand; and apparel and accessories represented
84.2% and 15.8% of sales, respectively. Management estimates that there will
be 225 holiday stores in 42 states during the Company's peak selling season in
1996.
Seasonal Kiosks.
In 1992, Wilsons began to use a seasonal "kiosk" concept in order to take
further advantage of the seasonality of the Company's business and provide a
new distribution channel for future growth. In 1995, Wilsons operated 129
seasonal kiosks, 124 of which were in malls where Wilsons already had a
traditional store. A seasonal kiosk is generally a 100 square-foot temporary
unit located in the common area of a mall. Open
34
<PAGE>
primarily during October through December, the Company's peak holiday selling
season, these locations generally offer a selected assortment of leather
accessory gift items and are designed to compliment and enhance the
traditional Wilsons store in the same mall. In 1995, seasonal kiosks had sales
of $8.3 million, representing 1.8% of the Company's total sales; such kiosks
averaged sales per store of $64.6 thousand; and accessories and apparel
represented 89.7% and 10.3% of sales, respectively. Management estimates that
there will be 150 seasonal kiosks in 37 states during the Company's peak
selling season in 1996.
MERCHANDISING
The Company's merchandising strategy is based on an understanding of its
customer base. Wilsons' merchandising strategy focuses on increasing its
market share by offering a broad assortment of quality leather apparel and
accessories at affordable prices. Wilsons offers more than 8,000 SKUs of men's
and women's leather apparel and leather accessories such as gloves, handbags,
wallets, briefcases, planners and computer cases. The Company emphasizes
proprietary brands, which generally carry higher margins than other
merchandise sold by the Company, including Wilsons The Leather Experts,
Tannery West, Berman Buckskin, Georgetown Leather Design, Adventure Bound,
Open Road, Maxima and M. Julian. Wilsons complements its product mix by
selling fashion forward designer merchandise, such as Guess?, Jones New York,
Kenneth Cole, Andrew Marc and Bosca. The Company anticipates that its
merchants will be able to use customer segment information (see "Vertically
Integrated Operations" above) to help design merchandise and plan orders, and
make distribution and reorder decisions for each store.
Key elements of the Company's merchandising strategy include:
. Selection--Wilsons offers its customers an extremely broad and deep
selection of leather apparel and accessories. Management believes that
the Company's traditional stores offer significantly more SKUs than do
those of its competition (e.g., department stores, specialty stores, mass
merchandisers).
. Style--The Company's use of proprietary brands is designed to translate
identified market trends into highly-focused leather apparel and
accessory assortments. The Company tests new designs on a limited basis
and reorders fast-selling goods in time for the peak weeks of its selling
season.
. Value--The Company strives to deliver its fashion-oriented, high-quality
merchandise at affordable prices, creating a strong sense of value. The
Company believes that its fully integrated product sourcing capability
enables it to offer lower prices than its competitors for merchandise of
comparable quality.
Wilsons has increased its emphasis on accessories including gloves,
handbags, wallets, briefcases, planners and computer cases, due in part to
their higher margins as compared to leather apparel, and has increased both
the number of SKUs and the amount of floor space allocated to accessory
presentation in the stores. As a result, accessories sales have grown as a
percentage of the Company's sales from 11.9% in 1991 to 23.1% in 1995. Over
the same period, men's apparel sales have decreased as a percentage of the
Company's sales from 46.8% to 42.5%, and women's apparel sales have decreased
from 41.3% to 34.4%.
PRODUCT DESIGN, DEVELOPMENT AND SOURCING
Wilsons' product offerings are highly dependent on the Company's ability to
identify fashion trends for Wilsons' customers, develop new leather finishes
and closely monitor the sourcing of its merchandise. Wilsons' buyers and
designers are trained to anticipate fashion trends and to translate such
trends into leather products appealing to the Wilsons customer. Such designers
and buyers also work closely with tanneries in identifying and developing
leather colors and finishes. Technical advancements in leather tanning have
allowed the Company to use a variety of leathers to achieve the look and feel
of more expensive leathers.
In addition to its leather development expertise, the Company believes that
a significant competitive advantage is its expertise and ability in managing
the sourcing of its leather apparel and accessories. In 1995, Wilsons
contracted for the manufacture of approximately 2.2 million leather garments,
making it the largest leather apparel purchaser in the world. The high volume
of leather purchased by the Company and its contract
35
<PAGE>
manufacturers, and the volume of merchandise acquired by the Company from its
contract manufacturers, allow the Company to benefit from better pricing and
faster delivery. Management believes that the volume of finished goods
purchased from the contract manufacturers enables the Company to secure
sufficient manufacturing capacity without having the added cost of
establishing its own manufacturing facilities.
The Company has developed an infrastructure in the Far East that allows the
Company to control merchandise production without owning manufacturing
facilities or extensively utilizing third-party wholesalers. The Company's
contract manufacturing managers located in China, Indonesia, Hong Kong and
South Korea, and contract agents in India, are primarily responsible for
managing the production and quality control process in overseas factories and
the shipping of the merchandise to the United States. Such management includes
inspecting leather at the tanneries, coordinating the production capacity,
matching of product samples to Wilsons' technical specifications and providing
technical assistance and quality control through inspection in the factories.
The Company's merchandising department works closely with the Company's
contract manufacturing managers to make order and reorder decisions on
merchandise. Since 1992, the Company has reduced its sourcing time from
approximately 120 days to approximately 90 days. The reduced time allows the
Company to analyze sales of certain merchandise and reorder better selling
merchandise in time for the weeks of its peak selling season. Management
believes that this strategy results in more efficient inventory management and
reduced need for markdowns on merchandise at the end of the Company's peak
selling season.
Due in large part to its overseas infrastructure, the Company has developed
the technology and capability to shift its contract manufacturing to various
countries of the Pacific Rim, depending on labor availability and costs and
the availability of leather and other raw materials. In 1989, Wilsons received
approximately 90% of its leather apparel sourced overseas from South Korean
vendors. Since that time, the Company implemented its strategy of shifting
production to lower cost countries, such as China, from which the Company
sourced over 60% of its leather apparel in 1995, and Indonesia and India, from
which the Company purchased approximately 16% and 7%, respectively, of its
leather apparel in 1995. As a result, South Korean sourcing was reduced to
below 5% in 1995. However, South Korean tanneries continue to provide a
substantial portion of the Company's tanned leather which is used in the
manufacturing process.
MARKETING AND ADVERTISING
Wilsons targets promotions to its customers through a combination of in-
store graphics displays, direct mail pieces and newspaper, radio and
television advertising. These event-driven promotional activities are designed
to emphasize Wilsons' broad assortment of quality, fashionable merchandise and
to build consumer awareness of Wilsons as "The Leather Experts." In 1995,
Wilsons spent approximately $6.6 million on national cable television, local
television and local radio advertising and other media in an attempt to reach
a majority of its target audience at least three times during its key selling
season, and the Company anticipates spending $5.8 million on advertising in
1996.
The Company's layaway program is a key marketing strategy designed to build
sales. The layaway program represented 15.1% and 20.3% of the Company's net
sales in 1995 and 1994, respectively. The layaway program is designed to: (i)
commit the Company's customers to buy coats early in the season, frequently
before such coats are needed; (ii) allow the Company to receive an early read
on fast-selling styles and important sales trends, enabling the Company to
reorder these styles and capitalize on the trends during its key holiday
selling season; (iii) make purchases of the Company's leather apparel
affordable to a wider range of customers; and (iv) bring the customer back to
the store several times before the layaway merchandise is picked up, offering
the Company multiple selling opportunities.
In addition, the marketing department uses the Company's in-house database
which includes data on over 4 million customers. The marketing department
regularly analyzes this data, communicating customer information to each area
of the business, and attempts to identify key activities in the business which
should incorporate customer segmentation information (e.g., marketing,
merchandising and store locations). In addition, Wilsons conducts marketing
research of Wilsons' and non-Wilsons' leather purchasing consumers to gain
36
<PAGE>
additional knowledge of consumer behavior. It is anticipated that the
Company's marketing department will be able to use the customer segment
information (see "Vertically Integrated Operations" above) to employ more
tightly targeted customer promotions.
DISTRIBUTION
All of the Company's merchandise is shipped directly from the Company's
contract manufacturers located in the Far East to the Company's state-of-the-
art 289,000 square foot distribution center located at the Company's
headquarters in Brooklyn Park, Minnesota. Between 1992 and 1994, the Company
spent approximately $12.6 million to redesign and automate its distribution
center. The distribution center is equipped with high speed sorting equipment
and radio frequency hand-held computer scanners for bar code scanning and
merchandise control. The distribution center is owned by the Company.
The distribution center is designed to receive 200,000 garments and one
million units of accessories and ship in excess of 500,000 combined units of
garments and accessories per week in a single shift operation. Approximately
41% of the merchandise that is received in the distribution center is directly
sent out to the Company's stores through cross-docking, which allows for
minimal handling, storage and reduced expense. Additional merchandise is
stored in the distribution center to replenish merchandise, to build inventory
for the Company's peak selling season and stock key styles. On average, each
store is shipped merchandise one to three times a week, depending on the
season and sales volume in each store. Airport stores are shipped merchandise
daily. Each store receives a shipment approximately two to three days after
the merchandise is shipped from the distribution center. The Company believes
that the distribution center will enable it to service its stores and needs
for the foreseeable future. The Company occasionally leases temporary
distribution locations on a short-term basis to facilitate stocking of its
seasonal kiosks.
CUSTOMER SERVICE
In addition to advertising and promotions which are designed in part to
reinforce Wilsons image with its customers as "The Leather Experts", the
Company emphasizes sales associate training and customer service. Wilsons'
associates are trained on an ongoing basis through the use of merchandise
videos and information packets, customer service tip cards and on-the-job
sales evaluations. The training is designed to develop each sales associate's
knowledge of Wilsons' service standards, the different kinds of leather and
leather finishes, how to best care for the different types of leather, and how
to perform many minor repairs in the store for the customer, free of charge.
Wilsons monitors customer service through a customer comment card program,
direct survey of customers who return merchandise and a system that tracks all
calls and letters sent to the corporate office. Wilsons periodically holds
customer focus group sessions with customers nationwide. All issues relating
to policy, procedure or merchandise are frequently reviewed to improve service
and quality.
Wilsons offers many services that are important to its customers. Key
services include a 14-day price guarantee, alterations service for major
alterations and repairs, a layaway program and a return policy on unworn
merchandise.
MANAGEMENT INFORMATION SYSTEMS
As part of the Company's strategic plan, Wilsons made a significant
commitment to upgrade its information systems and computer hardware and to
improve the computer skills of its associates. The major components of the
plan include converting from the Company's existing mainframe platform to a
client/server platform, and implementing new merchandising, financial and
human resources information systems. By the end of 1997, Wilsons believes it
will have completed its systems conversion to the client/server platform. Once
fully operational, management believes that these systems will allow greater
flexibility in anticipating future business needs, broader and quicker access
to information at all relevant levels of the organization, stronger analytical
37
<PAGE>
tools for understanding sales and operating trends, and increased customer
information and availability to such information (see "Vertically Integrated
Operations" above with regard to the anticipated use of customer segment
information that the new information systems will facilitate). Management
believes that system integrity will be enhanced and, as a result, inventory
accuracy and management will improve, providing Wilsons with the opportunity
to better control its merchandise flow from the factories to the stores. In
conjunction with the foregoing, Wilsons has spent $2.5 million since January
1995 on such upgrades and improvements and expects to spend an additional $2.5
million to complete the upgrades by the end of 1997.
The Company's automated point-of-sale registers in all stores capture
customer transactions by SKUs that are transmitted electronically to the
headquarters' computer, updating other systems with critical sales and
customer information to replenish stores and determine reorder quantities, to
modify merchandise allocation plans tailored to regional sales patterns and to
establish marketing promotions targeted to particular customer segments. To
assist in the operation of each store, the Company utilizes a PC-based
paperless communication system that permits daily communications of advanced
shipment notices, and electronic tracking of inventory transfers between
locations and supplies ordering. Each store uses computer-based interview
systems for new hiring.
Pending full implementation of the new information systems, Wilsons'
financial and human resource information systems are based on a mainframe
computer platform. Merchandise information systems receive information daily
from the point-of-sale registers and are updated with order information from
the production department on the progress and timing of orders and merchandise
received in the Company's distribution center. Wilsons recently implemented a
new merchandise planning application that enhances analytical capabilities and
increases flexibility in planning sales, inventory and gross margin. Wilsons'
merchandising department utilizes an international computer network to
communicate purchase order information from the Company's merchandising system
to its overseas personnel, in order to provide continual information updates
to allow for managing leather inventories and contract manufacturing capacity
planning. Garment design and specifications are controlled through a computer-
aided design system that distributes pattern and specification information to
the Company's contract manufacturing managers and designers to ensure
production consistency among the Company's contract manufacturers. Wilsons'
financial control systems provide daily information on store point-of-sale
transactions, inventory transfers and cash deposits and disbursements.
COMPETITION
The retail leather apparel and accessory industry is highly competitive.
Management believes that the principal bases upon which the Company competes
are selection, price, style, quality, store location and service. With a
management-estimated 18.0% share of leather apparel sales in the United States
in 1995 and 2.7% share of the U.S. leather accessories market in 1995, Wilsons
is a national leader in the specialty retail leather apparel and accessories
market. Wilsons' most significant competitor is J.C. Penney in addition to
other specialty retailers (e.g., The Limited and The Gap), department stores
(e.g., Macy's, Dayton's and Nordstroms), mass merchandisers (e.g., Sears and
J.C. Penney) and discounters (e.g., Wal-Mart and Kmart).
Wilsons believes that its broad merchandise selection, value and customer
service enable it to compete effectively. Many of the Company's competitors
are, however, larger and have greater financial resources than Wilsons, and
there can be no assurance that the Company will be able to compete
successfully in the future. Furthermore, while Wilsons believes it competes
effectively for favorable site locations and lease terms, competition for
prime locations within successful malls is intense.
PROPERTY
As of October 5, 1996, Wilsons operated 475 leased store locations and one
owned store location. Substantially all of Wilsons' stores were located in
regional shopping malls. Store leases with third parties are typically seven
to ten years in duration. In most cases, each store pays an annual base rent
plus a contingent rent based on the store's annual sales in excess of a
specified threshold. Substantially all leases which Wilsons has previously
entered into have been guaranteed by an affiliate of Melville. New store
leases which Wilsons is
38
<PAGE>
currently entering into or will enter into in the future will not be
guaranteed by Melville or an affiliate of Melville, and, with respect to
existing store leases, Wilsons is obligated, pursuant to the Sale Agreement
(as hereinafter defined), to use commercially reasonable efforts to remove the
affiliate of Melville as a guarantor.
The Company owns its distribution center.
LITIGATION
The Company is involved in various routine legal proceedings incidental to
the conduct of its business. Although the outcome of these matters cannot be
determined, management does not believe that any of these legal proceedings
will have a material adverse effect on the financial condition or results of
operations of the Company.
TRADEMARKS
Wilsons conducts its business under various trade names, trademarks and
service marks in the U.S., including Wilsons The Leather Experts, Tannery
West, Georgetown Leather Design, Berman Buckskin, Adventure Bound, Maxima,
Open Road and M. Julian, and has registered several trade names and trademarks
in the United Kingdom. Although Wilsons does not believe that its operations
are dependent upon any of its service marks or its trade name, Wilsons
considers its "Wilsons The Leather Experts" name to be valuable to its
business.
EMPLOYEES
As of October 5, 1996, Wilsons had approximately 4,200 employees. Wilsons
also employs additional seasonal employees, which results in approximately
4,000 additional sales associates during the peak selling season (from October
through December). Wilsons considers its relationships with its employees to
be good.
39
<PAGE>
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth certain information concerning the directors
and executive officers of the Company as of August 31, 1996:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<C> <C> <S>
Joel N. Waller........................ 57 Chairman of the Board of Directors and
Chief Executive Officer
David L. Rogers....................... 53 President, Chief Operating Officer and Di-
rector
Carol S. Lund......................... 44 Executive Vice President and General Mer-
chandise Manager
W. Michael Bode....................... 51 Vice President, Manufacturing
Betty Goff............................ 39 Vice President, Human Resources
Jed Jaffe............................. 42 Vice President, Store Sales
David B. Sharp........................ 49 Vice President, Marketing
Daniel R. Thorson..................... 37 Treasurer and Director, Business Planning
and Analysis
David J. Tidmarsh..................... 44 Vice President, Information Systems and
Strategies, Chief Information Officer and
Logistics
Douglas J. Treff...................... 39 Vice President, Finance, Chief Financial
Officer and Assistant Secretary
Thomas R. Wildenberg.................. 38 Chief Accounting Officer and Controller
Lyle Berman........................... 55 Director
Thomas J. Brosig...................... 47 Director
Morris Goldfarb....................... 45 Director
</TABLE>
All of the above-named officers have held the noted office with the Company,
and all directors have served in that capacity, since May 1996.
Joel N. Waller has served as Chairman and Chief Executive Officer of the
Company since April 1992. In 1983, Melville hired Mr. Waller as President of
Wilsons. Prior to joining Wilsons, Mr. Waller served in several capacities at
Bermans, including Senior Vice President-General Merchandise Manager from 1980
to 1983, Division Merchandise Manager from 1978 to 1980 and Buyer from 1976 to
1978. He currently serves on the Board of Directors of Grand Casinos, Inc.,
Rainforest Cafe, Inc. and Damark International, Inc.
David L. Rogers has served as President and Chief Operating Officer of the
Company since April 1992. In 1989, Mr. Rogers joined Wilsons as Executive Vice
President and Chief Operating Officer when Bermans was acquired by Wilsons.
Mr. Rogers served as Chief Operating Officer of Bermans from 1984 to 1989 and
Chief Financial Officer of Bermans from 1980 to 1984. Mr. Rogers currently
serves on the Board of Directors of Grand Casinos, Inc. and Rainforest Cafe,
Inc.
Carol S. Lund has served as Executive Vice President and General Merchandise
Manager of the Company since March 1994. Ms. Lund served as Executive Vice
President for the Snyder Leather division from 1992 to 1994, as Senior Vice
President and General Merchandise Manager of the Company from 1987 to 1992 and
as Vice President and General Merchandise Manager of the Company from 1983 to
1987. Prior to joining Wilsons, she was Divisional Merchandise Manager for
Bermans from 1981 to 1983 and a buyer for Bermans from 1976 to 1981.
40
<PAGE>
W. Michael Bode has served as Vice President, Manufacturing of the Company
since 1987. Mr. Bode served as Director of Manufacturing from 1985 to 1987, as
Divisional Merchandise Manager of Outerwear from 1982 to 1985 and as Regional
Director of Stores of the Company from 1981 to 1982.
Betty Goff has served as Vice President, Human Resources of the Company
since February 1992. Ms. Goff served as Director of Executive Recruitment and
Placement of the Company from October 1987 to February 1992.
Jed Jaffe has served as Vice President, Store Sales of the Company since
January 1996. Mr. Jaffe served as Vice President Strategic Planning from
January 1995 to December 1995, as Vice President/General Manager of Snyder
Leather from March 1994 to December 1994, as Merchandise Manager of Snyder
Leather from November 1993 to February 1994, as Eastern Zone Sales Vice
President from January 1993 to October 1993, as President of Tannery West from
October 1992 to January 1993 and as Director of Manufacturing of the Company
from October 1991 to September 1992. Prior to joining Wilsons, Mr. Jaffe
served as General Merchandise Manager of Henry Birks Jewelers, a jewelry store
chain, from 1990 to 1991.
David B. Sharp has served as Vice President, Marketing of the Company since
May 1995. Prior to joining Wilsons, Mr. Sharp held several positions from 1981
to 1995 at Lever Brothers Company, a consumer products company, most recently
as Senior Vice President of Marketing from 1989 to 1995.
Daniel R. Thorson has served as Treasurer of the Company since May 1996 and
as Director of Business Planning since October 1995. Prior to joining Wilsons,
Mr. Thorson held several positions from 1981 through 1995 at Northwest
Airlines, Inc., an airline company, most recently as Director of Finance and
Administration, Pacific Division, based in Tokyo, Japan from July 1991 to June
1995.
David J. Tidmarsh has served as Vice President, Information Systems and
Strategies of the Company and Chief Information Officer since February 1994
and as Vice President, Logistics since May 1996. Mr. Tidmarsh served as
Director of Business Systems Process Engineering of the Company from September
1993 to February 1994. Prior to joining Wilsons, he served as Chief Operating
Officer for Page-Com Inc., a direct mail marketing and telecommunications
company, from May 1992 to September 1993 and Vice President of Logistics for
Pier 1 Imports, from 1989 to 1992.
Douglas J. Treff has served as Vice President, Finance since January 1993
and as Chief Financial Officer and Assistant Secretary of the Company since
May 1996. Mr. Treff served as Controller of the Company from September 1992 to
January 1993 and as Director of Financial Planning and Analysis of the Company
from May 1990 to September 1992.
Thomas R. Wildenberg has served as Controller since October 1994 and as
Chief Accounting Officer of the Company since May 1996. Prior to joining
Wilsons, Mr. Wildenberg held several positions from 1990 through 1994 at
Woman's World Shops, Inc., a retail apparel company, most recently as Director
of Finance/Controller from June 1990 to October 1994.
Lyle Berman is a member of the Company's Board of Directors. Mr. Berman has
served as Chief Executive Officer and Chairman of the Board of Directors of
Grand Casinos, Inc., a gaming company, since October 1990, and as Chief
Executive Officer and Chairman of the Board of Directors of Rainforest Cafe,
Inc., a restaurant/retail company, since February 1994. From January 1989
through September 1991, Mr. Berman served as a consultant to Wilsons. Mr.
Berman served as the President and Chief Executive Officer of Bermans from
1978 until it was acquired by Wilsons in 1988. Mr. Berman is also Chief
Executive Officer and Chairman of the Board of Directors of Stratosphere
Corporation, Chairman of the Board of Directors of Innovative Gaming
Corporation of America and a director of G-III Apparel Group, Ltd. ("G-III")
and New Horizon Kids Quest, Inc.
Thomas J. Brosig is a member of the Company's Board of Directors. Mr. Brosig
has served as President of Grand Casinos, Inc. since September 1996. Mr.
Brosig also served as Executive Vice President--Investor
41
<PAGE>
Relations and Special Projects of Grand Casinos, Inc. from August 1994 to
September 1996, as Secretary of Grand Casinos, Inc. from its inception until
May 1995, as its President from May 1993 to August 1994, as its Chief
Operating Officer from October 1991 until May 1993 and as its Chief Financial
Officer from its inception until January 1992. Mr. Brosig is also a director
of G-III and Game Financial Corporation.
Morris Goldfarb is a member of the Company's Board of Directors. Mr.
Goldfarb serves as director, President and Chief Executive Officer of G-III, a
leather and non-leather apparel manufacturer, a director of Grand Casinos,
Inc. and a director of Panasia Bank. Mr. Goldfarb has served as either the
President or a vice president of G-III and its predecessors since its
formation in 1974.
Directors of the Company are elected by the shareholders at each annual
meeting to serve until the next annual meeting of the shareholders or until
their successors are duly elected and qualified. Executive officers of the
Company are chosen by and serve at the discretion of the Board of Directors.
There are no family relationships among any of the directors or executive
officers of the Company.
BOARD COMMITTEES
The Company's Board of Directors has established compensation and audit
committees (respectively, the "Compensation Committee" and the "Audit
Committee") whose members are appointed by the Company's Board of Directors.
The Compensation Committee has the responsibility of granting or making
recommendations to the Board of Directors concerning employee stock options,
bonuses and other compensation. The Compensation Committee members are Thomas
Brosig and Morris Goldfarb. The Audit Committee has the responsibility of
meeting with management and the Company's independent auditors to review the
general scope of audit coverage, including consideration of the Company's
accounting practices and procedures and system of internal accounting
controls, discussing the meaning and significance of the audited financial
results and reporting to the Board of Directors with respect thereto. The
Audit Committee will also recommend to the Board of Directors the appointment
of the Company's independent auditors. The Audit Committee members are Lyle
Berman, Thomas Brosig and David Rogers.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Thomas Brosig, a director of the Company, is a member of the Board's
Compensation Committee. Mr. Brosig is also the President of Grand Casinos,
Inc. Joel N. Waller, Chairman of the Board of Directors and Chief Executive
Officer of the Company, and David L. Rogers, President, Chief Operating
Officer and Director of the Company, are both members of the Compensation
Committee of the Board of Directors for Grand Casinos, Inc.
EXECUTIVE COMPENSATION AND EMPLOYMENT CONTRACTS
The Company was incorporated in 1996. Therefore, the requirement for prior
years' information regarding executive compensation for the Chief Executive
Officer of the Company, and the next four most highly compensated executives
of the Company, is not applicable. The Company has entered into employment
agreements with Joel Waller, as Chairman and Chief Executive Officer, and
David Rogers, as President, through May 25, 2000 (the "Employment
Agreements"). The Employment Agreements are identical in all material
respects, except for job responsibilities which are consistent with Messrs.
Waller's and Rogers' titles. Under the terms of the Employment Agreements, Mr.
Waller and Mr. Rogers each receive a base salary of $380,000 per year, or such
higher amount as is determined by the Board (prorated for any partial
employment year). In no event may the Board of Directors reduce Messrs.
Waller's and Rogers' base salary for any year below the greater of $380,000 or
the amount of base salary paid by the Company to Messrs. Waller and Rogers for
the immediately preceding year. Messrs. Waller and Rogers will each be
entitled to participate in the Incentive Plan (as hereinafter defined). Mr.
Waller and Mr. Rogers are each eligible to receive an annual bonus based on
the Company's performance. Their respective bonuses for the current year could
range from zero to $266,000 (i.e., 0% to 70% of their base salary), depending
on the Company's performance in relation to set performance targets. The
employment of each of Mr. Waller and Mr. Rogers under their respective
Employment Agreements will end
42
<PAGE>
only upon termination by the Company with or without Cause (as defined in the
Employment Agreements), upon death or Disability (as defined in the Employment
Agreements), upon expiration of the employment term or upon resignation. Upon
termination of employment, Mr. Waller or Mr. Rogers generally will be entitled
to receive his base salary through the date of termination (or through the end
of the employment period if termination by the Company occurred without Cause
or resignation by the employee occurred with Good Reason (as defined in the
Employment Agreements)), any amounts earned but not paid under the Incentive
Plan for a completed Plan Year (as defined in the Incentive Plan) and, in
certain circumstances, a pro rata portion of his Incentive Plan payment for
the year in which termination occurs, plus continuation of certain health,
life and disability insurance benefits. See "Employee Benefit Plans" below.
The next three most highly compensated executives are Carol S. Lund, David
B. Sharp and Jed Jaffe. Ms. Lund, Mr. Sharp and Mr. Jaffe are expected to be
paid base salaries at the annual rate of approximately $240,000, $208,000 and
$180,000 per year, respectively, and annual bonuses ranging from zero to
$134,400, $108,160, and $93,600, respectively, depending on the Company's
performance in relation to set performance targets. See "Employee Benefit
Plans" below.
Pursuant to the Restricted Stock Agreement dated as of May 25, 1996, Joel N.
Waller, David L. Rogers, Carol S. Lund, David B. Sharp and Jed Jaffe
purchased, respectively, 334,819.8, 334,819.8, 48,594.6, 48,594.6 and 40,495.5
shares of the Company's Restricted Stock at its then fair market value of $.60
per share. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations--Overview" and "Certain Transactions--Restricted
Stock Agreement." No options have been granted to these five most highly
compensated executive officers.
EMPLOYEE BENEFIT PLANS
The Company has an Executive and Key Management Incentive Plan (the
"Incentive Plan"), a 401(k) defined contribution Profit Sharing Plan (the
"401(k) Plan") and the 1996 Option Plan for the benefit of its employees.
The Incentive Plan provides for an annual incentive award designed to
motivate and reward key home office and distribution center associates.
Eligible participants include the Chairman, President, all Vice Presidents and
certain other key personnel. Cash awards, which range from 0% to 200% of the
payout level, are based on actual results measured generally against pre-
established corporate financial objectives for consolidated earnings, before
federal and state income taxes, of the Company and its direct and indirect
subsidiaries.
Under the 401(k) Plan, employees are entitled to make vested contributions
of up to 15% of their compensation (10% for those employees whose compensation
in the previous year exceeded $55,000) in lieu of receiving such amounts as
taxable compensation, subject to statutory limitations. Certain matching
contributions may be made by the Company, which vest after five years of
service, or at age 65 regardless of service, or upon the death of the
employee. The 401(k) Plan also allows the Company to make discretionary profit
sharing contributions, which are also subject to the vesting requirements.
The purpose of the 1996 Option Plan is to aid in maintaining and developing
personnel capable of assuring the future success of the Company by affording
them an opportunity to acquire a proprietary interest in the Company through
stock options. Options granted under the 1996 Option Plan may be either
incentive stock options ("ISOs"), as defined in the Internal Revenue Code of
1986, as amended (the "Code"), or nonstatutory stock options ("NSOs"). Subject
to certain adjustments, the maximum number of shares of Common Stock available
for issuance under the 1996 Option Plan is 1,000,000 shares. Employees of the
Company, or any parent or subsidiary thereof, including employees who are
directors or officers, are eligible to receive ISOs and NSOs under the 1996
Option Plan. Directors of, and consultants and advisors to, the Company who
are not employees of the Company, or any parent or subsidiary thereof, are
eligible to receive NSOs under the 1996 Option Plan. As of August 31, 1996,
the Company had granted options covering an aggregate of 195,480 shares of
Common Stock at an exercise price of $4.44 per share. Such options will vest,
cumulatively, on a pro-rata basis on each of
43
<PAGE>
the first, second and third anniversaries of the date of grant, subject to the
possible acceleration of vesting in certain circumstances.
RESTRICTED STOCK AGREEMENT
On May 25, 1996, the Company entered into a restricted stock agreement (the
"Restricted Stock Agreement") with certain managers of the Company, including
all of the five most highly compensated executive officers. The Restricted
Stock Agreement sets forth the vesting schedule for the Restricted Stock
purchased by such managers. See "Certain Transactions--Restricted Stock
Agreement."
DIRECTOR COMPENSATION
The Company does not anticipate paying cash compensation in the near term to
members of the Board of Directors for their services as directors. On June 26,
1996, the Company granted an option for 10,800 shares of Common Stock to
Thomas J. Brosig at an exercise price of $4.44 per share. Such option will
vest, cumulatively, on a pro rata basis on each of the first, second and third
anniversaries of the date of grant if such optionee continues as a director,
subject to the possible acceleration of vesting in certain circumstances.
CERTAIN TRANSACTIONS
The following are summaries of the material terms of certain agreements.
Copies of these agreements are filed as exhibits to the Registration Statement
of which this Prospectus is a part. The following summaries do not purport to
be complete and are qualified in their entirety by the terms of such
agreements.
RESTRICTED STOCK AGREEMENT
On May 25, 1996, the Company entered into the Restricted Stock Agreement
with certain managers of the Company (the "Managers"), including Joel N.
Waller, the Chairman, Chief Executive Officer and a director of the Company,
and David L. Rogers, the President and a director of the Company. The
Restricted Stock Agreement provides that 1,080,000 shares of the Company's
Common Stock (herein called the "Restricted Stock") purchased by the Managers
for $.60 per share will vest (i) up to 20 percent each year during a five-year
performance period if the Company achieves certain earnings targets that are
determined by the Board (plus potential catch-up vesting for years in which
the Company fails to achieve its targets); (ii) immediately upon payment or
prepayment of the Note in full at any time on or prior to December 31, 2000;
(iii) immediately upon any partial prepayment of the Note at any time prior to
December 31, 2000, but only that portion of the originally purchased shares of
Restricted Stock equal to the portion of the Note that has been repaid as of
such date will vest; (iv) immediately upon the death, Disability (as defined
in the Restricted Stock Agreement) or Retirement (as defined in the Restricted
Stock Agreement) of the Manager that purchased such Restricted Stock; and (v)
upon the occurrence of a Change in Control (as defined in the Restricted Stock
Agreement), subject to the written consent of Melville to such Change in
Control as long as the Note remains outstanding. Additionally, Messrs.
Waller's and Rogers' Restricted Stock will vest upon the termination without
Cause (as defined in the Restricted Stock Agreement) of Mr. Waller or Mr.
Rogers, or the termination by Mr. Waller or Mr. Rogers of his employment as a
result of the Company breaching terms of their respective Employment
Agreements.
The Company will purchase from the Managers any shares of Restricted Stock
that have not vested by the end of the five-year performance period at a price
per share equal to the $.60 per share. To the extent any shares of Restricted
Stock have not vested by the end of the five year performance period, the
Manager Warrant held by Melville becomes exercisable for such number of
unvested shares.
The Restricted Stock is subject to the terms of the Shareholder Agreement,
which, among other restrictions, includes prohibitions on transfers of
Restricted Stock prior to vesting. Except for these restrictions, each Manager
and his or her permitted transferees have all rights of a shareholder and
record owner. Each Manager is
44
<PAGE>
responsible for any taxes and other sums required by law to be withheld by the
Company in respect of the Restricted Stock.
The Company did not recognize any compensation deduction for tax purposes in
connection with the issuance of the Restricted Stock. For accounting purposes,
the Company will be required to record charges to earnings equal to the
difference between the fair market value of the Restricted Stock on the date
such Restricted Stock vests and the original purchase price of the Restricted
Stock, which was $.60 per share. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
REGISTRATION RIGHTS AGREEMENT
On May 25, 1996, the Company entered into a registration rights agreement
(the "Registration Rights Agreement") with the Managers, Melville and Limited
Partnership I and its partners (the "Partners"). The Registration Rights
Agreement provides that, subject to certain limitations, (i) at the expense of
the holders thereof, holders of a majority of the aggregate principal amount
of the Note (the "Note Holders"), holders of a majority of the Melville
Warrant (the "Warrant Holders"), and, to the extent exercisable, after April
30, 2001, holders of a majority of the Manager Warrant (the "Manager Warrant
Holders"), respectively, each will have three demand registration rights for
the Note, the Melville Warrant and the shares underlying the Manager Warrant,
for registration of such securities under the Securities Act, and (ii) at the
Company's expense, at any time after six months following the closing of the
Offering (but no later than May 25, 2007), holders of a majority of the number
of outstanding shares of Common Stock initially held by the Partners will have
two demand registration rights for such shares of Common Stock, and unlimited
demands for registration on Form S-3, if the Company can use that form, for
registration of such shares under the Securities Act. The Company is
prohibited from granting to any other holder of its securities (other than
holders of Common Stock), whether currently outstanding or issued in the
future, any incidental (piggyback) registration rights with respect to any
registration statement filed pursuant to any such demand registration. Subject
to certain limitations and customary cutbacks as reasonably determined by any
underwriter, if the Company proposes to register any of its Common Stock or
the Melville Warrant under the Securities Act, the Company will provide the
Warrant Holders and certain holders of its Common Stock (the Managers, Limited
Partnership I, the Partners and certain permitted transferees) with the
opportunity, pursuant to piggyback registration rights, to participate in such
public offering. Registration rights relating to the Common Stock expire upon
(i) certain transfers of such stock to a third party, and (ii) such Common
Stock becoming available for sale pursuant to Rule 144(k) of the Securities
Act.
The Registration Rights Agreement further provides that, if Melville desires
to transfer all or part of the Note or the Melville Warrant to a third party
in a bona fide arm's length transaction or proposes to register all or part of
the Note or the Melville Warrant pursuant to the Registration Rights
Agreement, Melville must give written notice to Joel N. Waller and David L.
Rogers, individually and on behalf of the other Managers, to Limited
Partnership I and the Partners and, in the case of a proposed sale or
registration of the Melville Warrant, to the Company (the "Parties"). Such
written notice will constitute an offer by Melville to sell the Melville
Warrant, and with respect to all Parties other than the Company, the Note to
the Parties. If the Parties fail to accept Melville's offer after a set time,
Melville will then have the right to effect a transfer to a third party of, or
to require the registration of all of, the Notes or Melville Warrant, subject
to certain terms and conditions.
SHAREHOLDER AGREEMENT
On May 25, 1996, the Company entered into a shareholder agreement (as
amended, the "Shareholder Agreement") with Limited Partnership I, Limited
Partnership II, the Partners, Waller and Rogers (as defined in the Shareholder
Agreement) and the Managers (other than Waller and Rogers, each a "Manager
Shareholder") (all such holders being collectively referred to as the
"Shareholders"). The Shareholder Agreement subjects the shares of the
Company's Common Stock and Series A Preferred (the "Subjected Shares") held by
the Shareholders to significant restrictions on transfer. Generally, except as
otherwise provided in the Shareholder Agreement, no person (other than the
Company) who is a party to the Shareholder Agreement is permitted, directly or
indirectly, to Dispose (as defined in the Shareholder Agreement) of any
Subjected Shares.
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<PAGE>
Generally, upon the occurrence of the Termination (as defined in the
Shareholder Agreement) of a Manager Shareholder without Cause (as defined in
the Shareholder Agreement), first Waller and Rogers, then the Company and
finally the other Shareholders pro rata would have the option (or obligation
in the case of the Company to the extent it has funds legally available
therefor) to purchase such Manager Shareholder's unvested Restricted Stock at
the original purchase price. Upon the occurrence of a Termination by Waller or
Rogers without Good Reason (as defined in the Shareholder Agreement), a
Termination by a Manager Shareholder, or a Termination of Waller, Rogers or a
Manager Shareholder with Cause (as defined in the Shareholder Agreement),
first Waller and Rogers (to the extent they are not the terminated or
resigning parties), then the Company and finally the other Shareholders pro
rata would have the option to purchase such Manager's unvested Restricted
Stock at the lower of the original purchase price or the Fair Market Value (as
defined in the Shareholder Agreement).
Upon the occurrence of a Repurchase Event (as hereinafter defined), first
Waller and Rogers, then the Company and finally the other Shareholders pro
rata would have the option to purchase such Manager's unrestricted stock at
the Fair Market Value, provided that, if the Repurchase Event occurs as a
result of the Termination by a Manager Shareholder on or prior to May 25,
2001, or a Termination by Waller or Rogers without Good Reason on or prior to
May 25, 2001, or a Termination of Waller, Rogers or a Manager Shareholder with
Cause, the purchase price of such unrestricted stock would be the lower of the
original purchase price or Fair Market Value on the date of such Repurchase
Event and the Company will have an option, and not an obligation, to purchase
such unrestricted stock. "Repurchase Event" means the death, Disability,
Retirement (as such terms are defined in the Shareholder Agreement) or
Termination of or by a Manager Shareholder, or the Termination by Waller or
Rogers without Good Reason on or before May 25, 2001, or the Termination of
Waller or Rogers with Cause.
Upon the occurrence of the death, Disability or Retirement of Waller or
Rogers, the termination of Waller or Rogers without Cause, the Termination by
Waller or Rogers with Good Reason or the Termination by Waller or Rogers after
May 25, 2001 with or without Good Reason, Waller or Rogers (or such
individual's estate) would have the right either to retain his Common Stock or
to offer to sell his Common Stock first to Waller (if Rogers or his estate is
selling such stock) or Rogers (if Waller or his estate is selling such stock),
then the Company and finally the other Shareholders pro rata, who would each,
in order, have the option to purchase such Common Stock at Fair Market Value.
Generally, if any Shareholder desires to Dispose of any Subjected Shares
(other than Dispositions of unvested Restricted Stock, which are prohibited)
to any Third Party (as defined in the Shareholder Agreement) other than a
Permitted Transferee (as defined in the Shareholder Agreement), first Waller
and Rogers (to the extent they are not the selling Shareholder), then the
Company and finally the other Shareholders pro rata would have the option to
buy such shares at the price such Third Party is willing to pay (if the
transfer is for value) or at the original purchase price (if the transfer is
other than for value); provided that (i) if Waller and Rogers desire to
Dispose of any Subjected Shares, Messrs. Berman and Goldfarb would have the
opportunity to purchase such stock before the Company, (ii) if Melville
desires to Dispose of any Subjected Shares, the Company, then Waller and
Rogers and finally the other Shareholders pro rata would have the option to
purchase such Subjected Shares, and (iii) Waller and Rogers would have the
right to Dispose of a limited number of Subjected Shares to employees of the
Company. If no one chooses to purchase the securities, then such Shareholder
would be permitted to Dispose of the securities to such Third Party on
substantially the same terms and at a price at least equal to the price such
Third Party was originally willing to pay for such securities, provided that
such Disposition is completed within 90 days and the Third Party agrees in
writing to be subject to the Shareholder Agreement. Such right of first
refusal would not apply to sales of unrestricted stock in a public offering or
sales by Waller, Rogers or the Partners (but not the Manager Shareholders) of
unrestricted stock in open market transactions.
Generally, subject to the terms of the Shareholder Agreement, no Shareholder
would be permitted to sell shares of Common Stock (other than to a Permitted
Transferee, in a public offering or in the case of Waller, Rogers or the
Partners (but not the Manager Shareholders), in an open market transaction)
without providing all
46
<PAGE>
other Shareholders the right to participate in such sale (the "Co-Sale
Rights"); provided that Waller and Rogers would have the right to sell a
limited number of shares of Common Stock to employees of the Company. Each
Shareholder who exercises such Shareholder's Co-Sale Rights would be permitted
to sell a percentage of the shares that the prospective buyer is willing to
purchase equal to such Shareholder's percentage ownership of the outstanding
shares of unrestricted stock owned by all of the Shareholders wishing to
participate in such sale. Shares of Restricted Stock that have not yet vested
could not be sold pursuant to the Co-Sale Rights.
Generally, except as set forth in the Shareholder Agreement, the Shareholder
Agreement will terminate with respect to all Subjected Shares (other than
shares of Restricted Stock which have not yet vested) upon the first to occur
of (i) a Control Transaction (as defined in the Shareholder Agreement), or
(ii) assuming completion of the Offering, May 25, 1998. The Co-Sale Rights
would remain in effect upon the occurrence of a Change in Control but,
assuming completion of the Offering, would expire on May 25, 1998. The
Shareholder Agreement will remain in effect for all shares of Restricted Stock
that have not vested until such shares vest or are purchased by the Company.
SALE AGREEMENT
On May 24, 1996, Melville, the Company and Wilsons Center, Inc., one of the
Predecessor Companies, entered into a sale agreement (the "Sale Agreement"),
which provided for Melville to sell the Wilsons Shares to the Company on May
25, 1996 (the "Closing"), subject to various conditions typically found in
transactions of this nature. In consideration for the Wilsons Shares, the
Company delivered to Melville (i) $2.0 million in cash, (ii) the $55.8 million
Note, (iii) the Melville Warrant, (iv) the Manager Warrant, (v) 4,320,000
shares of the Company's Common Stock, and (vi) 7,405 shares of the Company's
Series A Preferred. As part of the Acquisition, Limited Partnership I
subsequently purchased from Melville the 4,320,000 shares of the Company's
Common Stock and Limited Partnership II subsequently purchased from Melville
the 7,405 shares of the Company's Series A Preferred for an aggregate
consideration of $10.0 million.
Pursuant to the Sale Agreement, Melville agreed, subject to certain
limitations set forth therein, to indemnify the Company and its affiliates
(and their respective officers and directors) against and to hold them
harmless from any and all Damages (as defined in the Sale Agreement) incurred
or suffered by any such indemnified party arising out of, among other things,
(i) certain misrepresentations or breaches of warranties or covenants or
agreements to be performed by Melville or Wilsons Center, Inc. pursuant to the
Sale Agreement; (ii) claims relating to certain disclosed and undisclosed
liabilities of the Predecessor Companies; (iii) claims relating to the Closed
Store Leases (as defined in the Sale Agreement) and the Excluded Subsidiaries
(as defined in the Sale Agreement); (iv) claims related to certain taxes,
primarily income taxes; (v) claims related to certain recalled leather
protector sprays; and (vi) claims related to employees and certain employee
benefits matters. Generally, the indemnifications by Melville, other than
those referred to in clauses (iv), (v) and (vi) above, which will survive
until the expiration of the applicable statute of limitations and have no
dollar limit, must be asserted on or prior to August 25, 1997, and may not be
recovered except to the extent they exceed $1.2 million, with such recoveries
generally limited to $12 million in the aggregate.
The Company and its affiliates have also, subject to certain limitations set
forth in the Sale Agreement, agreed to indemnify Melville and its affiliates
(and their respective officers and directors) against and to hold them
harmless from any and all Damages incurred or suffered by any such indemnified
party arising out of certain misrepresentations or breaches of warranties or
covenants or agreements to be performed by the Company or, after May 25, 1996,
by Wilsons Center, Inc. pursuant to the Sale Agreement. The indemnifications
by the Company relating to misrepresentations or breaches of warranties must
be asserted on or prior to August 25, 1997, and may not be recovered except to
the extent they exceed $1.2 million in the aggregate, with such recoveries
generally limited to $12 million in the aggregate.
WARRANTS HELD BY MELVILLE
As of August 31, 1996, the Company had issued and outstanding (i) the
Melville Warrant to purchase 1,350,000 shares of the Company's Common Stock,
at an exercise price of $.60 per share, and (ii) the Manager
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<PAGE>
Warrant to purchase up to 1,080,000 shares of the Company's Common Stock, at
an exercise price of $.60 per share. The Melville Warrant is immediately
exercisable, in whole or in part, and remains exercisable until May 25, 2006.
The Manager Warrant is exercisable in whole or in part at any time from April
30, 2001 through April 30, 2003, subject to reduction in an amount equal to
the number of shares of Restricted Stock that have vested as of April 30,
2001. See "The Acquisition" and "Restricted Stock Agreement" above. The
exercise price and number of shares of Common Stock for which each of the
Melville Warrant and the Manager Warrant is exercisable will be
proportionately adjusted to reflect any stock dividend, distribution,
subdivision, split, combination, issuance or reclassification. Upon exercise
of such warrants and receipt of the Company's Common Stock, each holder of
such stock agrees to enter into the Shareholder Agreement, as long as the
Shareholder Agreement is in effect with respect to any shares of the Company's
Common Stock. The Melville Warrant and the Manager Warrant are also subject to
certain registration rights. See "Registration Rights Agreement" and
"Shareholder Agreement" above.
SUBORDINATED NOTE
On May 25, 1996, the Company issued the Note to Melville (along with
subsequent registered transferees, the "Holder(s)") for $55.8 million as
partial consideration for the Acquisition. $55.0 million of the principal
amount of the Note bears interest at the rate of 10% per annum, compounded
annually, with all such principal and interest due and payable on December 31,
2000. The remaining principal balance of the Note ($0.8 million) does not bear
interest and is due and payable on December 31, 2000. The Company may prepay
without premium or penalty all or any portion of the principal amount of the
Note, together with accrued interest thereon to the date of such prepayment.
The Note is secured by a lien on substantially all of the Company's assets
other than real estate, equipment and fixtures, but is subordinated to the
Revolving Credit Facility. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Liquidity and Capital
Resources."
If an Event of Default occurs (as defined in the Note, including, among
others, if (i) the Company defaults in the payment of the principal or
interest when the same becomes due and payable and such default continues for
a period of 30 days, (ii) the Company defaults in the performance of or
breaches certain covenants of the Company in the Note (as described below) and
such default continues for a period of 30 days, (iii) a court enters an order
for relief in respect of the Company in an involuntary case under applicable
bankruptcy law or appoints a receiver and such order remains in effect for a
period of 60 consecutive days, (iv) the Company commences a voluntary case
under any applicable bankruptcy law, or (v) there is a default under any
senior debt of the Company or its subsidiaries), the principal amount of the
Note and accrued interest becomes immediately due and payable upon written
notice of the Holders of at least 25% of the aggregate principal amount of the
Note then outstanding. The Note also contains covenants limiting, among other
things, the Company's ability to (i) liquidate the Company or sell 5% or more
of the Company's consolidated assets, (ii) generally declare or make dividends
or repurchase the Company's capital stock, (iii) sell 5% or less of the total
consolidated assets of the Company or make a public offering of the Company's
capital stock without reinvesting the proceeds of the sale or offering in the
Company's business or applying the proceeds against debt, (iv) purchase any
property or assets of any other entity in excess of five percent of the total
consolidated assets of the Company, and (v) make any material change in the
scope of the business of the Company.
Subject to certain limitations, the Holder may transfer or assign the Note,
in whole or in part, to any person without the prior written consent of the
Company. See "Registration Rights Agreement" above.
OTHER RELATIONSHIPS
The Company regularly conducts business with G-III, of which Morris
Goldfarb, a director of Wilsons, is the President, Chief Executive Officer and
a director. Purchases from G-III totaled $11.2 million and $4.7 million for
1994 and 1995, respectively, and $1.8 million for January 1 through October 5,
1996. The Company believes that transactions with G-III are on terms no less
favorable to the Company than those obtainable in arms-length transactions
with unaffiliated third parties.
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<PAGE>
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information regarding the beneficial
ownership of the Company's Common Stock as of August 31, 1996 and as adjusted
to reflect the sale of shares offered by this Prospectus by (i) each person
known by the Company to be the beneficial owner of 5% or more of the Company's
outstanding shares of Common Stock, (ii) each director of the Company and each
of the five most highly compensated executive officers, and (iii) all
directors and executive officers as a group. Except as otherwise indicated in
the footnotes to this table, each person named in this table has sole voting
and investment power with respect to all shares of Common Stock shown as
beneficially owned by such person.
<TABLE>
<CAPTION>
% BENEFICIALLY OWNED
------------------------
NUMBER OF SHARES PRIOR TO AFTER
NAME OF BENEFICIAL OWNER BENEFICIALLY OWNED OFFERING OFFERING
------------------------ ------------------ ---------- ----------
<S> <C> <C> <C>
Neil I. Sell, on behalf of
himself and as sole
trustee of four
irrevocable trusts for the
benefit of Lyle Berman's
children.................. 2,052,000.0(1) 26.8% 19.3%
3300 Norwest Center
90 South Seventh Street
Minneapolis, MN 55402
Morris Goldfarb............ 1,879,200.0(2)(3) 24.6 17.7
G-III Apparel Group, Ltd.
512 Seventh Avenue
New York, NY 10018
Melville Corporation....... 1,350,000.0(4) 15.0 11.3
One Theall Road
Rye, NY 10580
Joel N. Waller............. 1,032,368.4 13.5 9.7
7401 Boone Avenue North
Brooklyn Park, MN 55428
David L. Rogers............ 1,032,368.4 13.5 9.7
7401 Boone Avenue North
Brooklyn Park, MN 55428
Carol S. Lund.............. 149,833.8 2.0 1.4
David Sharp................ 141,509.7 1.9 1.3
Jed Jaffe.................. 124,861.5 1.6 1.2
Lyle Berman................ 43,200.0(2)(3) * *
Thomas J. Brosig........... -- -- --
All directors and executive
officers as a group (14
persons).................. 4,861,167.3 63.5 45.6
</TABLE>
- --------
* Represents beneficial ownership of less than one percent of the Common
Stock.
(1) Includes 1,836,000 shares of Common Stock held in four irrevocable trusts
for the benefit of Lyle Berman's children. Mr. Sell has disclaimed
beneficial ownership of such shares.
(2) Does not include 3,221.175 and 3,221.175 shares of the Company's non-
voting Series A Preferred that will be owned by Messrs. Berman and
Goldfarb, respectively, upon consummation of the Offering. These shares
are currently owned by Limited Partnership II, of which Messrs. Berman and
Goldfarb are general partners and which by its terms will dissolve upon
consummation of the Offering. See "Description of Capital Stock--Preferred
Stock."
(3) Limited Partnership I, of which Messrs. Berman and Goldfarb are general
partners, currently owns 4,320,000 shares of Common Stock. Upon the
consummation of the Offering, Limited Partnership I by its terms will
dissolve, leaving the partners with direct ownership of the Common Stock
in proportion to their investments in Limited Partnership I.
(4) Includes 1,350,000 shares of Common Stock issuable to Melville upon the
exercise of the Melville Warrant, which is currently exercisable in full.
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<PAGE>
DESCRIPTION OF CAPITAL STOCK
GENERAL
The Company's Amended Articles of Incorporation, which will become effective
upon the closing of the Offering, authorize the issuance of up to 100,000,000
shares of Common Stock, $0.01 par value, and 10,000,000 shares of Preferred
Stock, $0.01 par value, the rights and preferences of which may be established
from time to time by the Company's Board of Directors.
COMMON STOCK
As of August 31, 1996, 7,650,000 shares of Common Stock were issued and
outstanding (including 1,080,000 shares of Restricted Stock) and were held by
50 shareholders. An additional 1,350,000 and 1,080,000 shares of Common Stock,
respectively, are reserved for issuance upon exercise of the Melville Warrant
and the Manager Warrant and 1,000,000 shares of Common Stock are reserved for
issuance upon exercise of options pursuant to the 1996 Option Plan. Each
holder of shares of Common Stock will have equal rights in all respects,
including the right to one vote on all matters submitted to shareholders for
each share of Common Stock standing in the name of such holder on the books of
the Company. There are no cumulative voting rights for the election of
directors, which means that the holders of more than 50% of such outstanding
shares voting for the election of directors can elect all of the directors of
the Company standing for election. Outstanding shares of Common Stock do not
have subscription or conversion rights and there are no redemption or sinking
fund provisions applicable thereto. Holders of Common Stock have no preemptive
rights to purchase pro rata portions of new issues of Common Stock or
Preferred Stock. The outstanding shares of Common Stock are, and the shares of
Common Stock offered by the Company hereby will be, when issued and sold
hereunder, fully paid and non-assessable.
PREFERRED STOCK
As of August 31, 1996, 15,000 shares were authorized as Series A Preferred,
of which 7,405 shares were issued and outstanding and were held by Limited
Partnership II. By its terms, Limited Partnership II will dissolve upon
consummation of the Offering, leaving the partners with direct ownership of
the Preferred Stock in proportion to their investments in Limited Partnership
II. The Board of Directors may from time to time issue the remaining shares of
Preferred Stock in one or more series, each of such series to have such
relative rights, voting power, preferences, qualifications, limitations and
restrictions as are adopted by the Board of Directors, including dividend
rights, redemption and liquidation preferences, conversion rights and voting
rights, any or all of which may be greater than the rights of the Common
Stock. The Board of Directors, without shareholder approval, can issue
Preferred Stock with voting, conversion or other rights that could adversely
affect the voting power and other rights of the holders of Common Stock.
Preferred Stock could thus be issued quickly with terms calculated to delay or
prevent a change in control of the Company or make removal of management more
difficult. Additionally, the issuance of Preferred Stock may have the effect
of decreasing the market price of the Common Stock, and may adversely affect
the voting and other rights of the holders of Common Stock.
The Series A Preferred does not have voting rights, except as required by
law or as set forth below. Without the affirmative vote of the holders of at
least a majority of the shares of Series A Preferred at the time outstanding,
the Company is generally prohibited from (i) issuing additional shares of
Preferred Stock on parity with or superior to the Series A Preferred, (ii)
declaring or paying dividends or making any other distribution on any shares
of capital stock of the Company at any time created and issued ranking junior
to the Series A Preferred, or (iii) amending the Amended Articles of
Incorporation of the Company so as to materially alter any existing provision
relating to the terms of the Series A Preferred or waive any of the rights
granted to the holders of the Series A Preferred by the Amended Articles of
Incorporation of the Company or otherwise alter the rights or preferences of
the Series A Preferred.
After the repayment in full of the Note plus accrued interest thereon (the
date on which such repayment is made being hereinafter referred to as the
"Note Repayment Date"), the Series A Preferred will be entitled to
50
<PAGE>
receive, when and as duly declared by the Board of Directors in the manner
provided in the Amended Articles of Incorporation, cash dividends at the
annual rate of $80 per share (appropriately adjusted to reflect stock splits,
dividends or combinations, reorganizations, consolidations and similar changes
hereafter effected) from the date of issuance of such Series A Preferred,
which dividends will be cumulative (whether or not there shall be funds of the
Company legally available for the payment of such dividends) and will
accumulate (whether or not earned or declared) from the date of issuance of
such shares of Series A Preferred, and, to the extent accumulated and unpaid
as of May 31 of any year, will be payable before any dividends on any shares
of Common Stock shall be declared or paid or set apart for payment during the
twelve months following such May 31.
In the event of an involuntary or voluntary liquidation or dissolution of
the Company at any time, the holders of shares of Series A Preferred will be
entitled to receive out of the assets of the Company an amount equal to $1,000
per share (appropriately adjusted to reflect stock splits, divisions or
combinations or stock dividends, reorganizations, consolidations and similar
changes hereafter effected), plus all per-share dividends unpaid and
accumulated thereon (whether or not earned or declared) to the date of such
distribution.
The Series A Preferred will not be redeemable by the Company prior to the
Note Repayment Date without the consent of holders of a majority in principal
amount of the Note. On and after the Note Repayment Date, the Company will, to
the extent that funds are legally available therefor, have the option to
redeem without penalty or premium all or any portion of the Series A Preferred
for $1,000 per share (appropriately adjusted to reflect stock splits,
divisions or combinations, reorganizations, consolidations and similar changes
hereafter effected), plus an amount equal to all dividends unpaid and
accumulated thereon (whether or not earned or declared) to the date on which
such redemption is made.
If at any time (i) all or substantially all of the Company's assets are
sold, transferred or otherwise disposed of, or (ii) an Event of Default shall
occur and be continuing, the Company will, to the extent that funds are
legally available therefor, redeem all of the Series A Preferred for $1,000
per share (appropriately adjusted to reflect stock splits, divisions or
combinations, reorganizations, consolidations and similar changes hereafter
effected), plus an amount equal to all dividends unpaid and accumulated
thereon (whether or not earned or declared) to the date on which such
redemption is made, after payment in full of the Note. An Event of Default
will occur if, among other things, (i) the Company becomes insolvent or
bankrupt, (ii) a trustee or receiver is appointed for the Company, (iii) an
order for relief is entered in any Federal bankruptcy proceeding in which the
Company is the debtor and the order is not discharged within 60 days, or (iv)
the Company defaults in the performance or observance of certain covenants
pertaining to the Series A Preferred (such covenants include, among other
things, (i) the Company's duty not to, without the affirmative vote of the
majority of the shares of Series A Preferred outstanding at the time, (a)
issue more than 7,405 shares of Series A Preferred or authorize any shares of
stock ranking superior to or on a parity with the Series A Preferred, (b)
declare or pay any dividend or make any other distribution on any shares of
capital stock of the Company at any time created and issued ranking junior to
Series A Preferred with respect to the right to the payment of dividends or as
to the distribution of assets upon liquidation, dissolution or winding up of
the Company, and (c) amend the Articles of Incorporation of the Company so as
to materially alter any existing provision relating to the terms of the Series
A Preferred or otherwise alter the rights or preferences of the Series A
Preferred, and (ii) the Company's duty to (a) deliver to each holder of 10% or
more of the outstanding Series A Preferred within 45 days after the end of
each fiscal quarter, unaudited consolidated financial statements, and, within
90 days after the end of each fiscal year, audited consolidated financial
statements, and (b) not reissue any shares of Series A Preferred which have
been redeemed or reacquired by the Company).
WARRANTS
The Company has issued to Melville the Melville Warrant to purchase
1,350,000 shares of Common Stock at an exercise price of $.60 per share. The
Melville Warrant is immediately exercisable and remains exercisable until May
25, 2006. Subject to certain limitations, the Melville Warrant may be
transferred or assigned to any person without the prior written consent of the
Company and is subject to anti-dilution provisions. The Melville
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<PAGE>
Warrant is subject to certain registration rights. See "Certain Transactions--
Registration Rights Agreement" and "--Warrants."
The Company has also issued to Melville the Manager Warrant to purchase up
to 1,080,000 shares of Common Stock at an exercise price of $.60 per share.
The number of shares subject to the Manager Warrant will be reduced by an
amount equal to the number of shares of Restricted Stock that vest pursuant to
the terms of the Restricted Stock Agreement. To the extent any shares of
Restricted Stock have not vested after the close of business on the last
Measuring Date (as defined in the Restricted Stock Agreement), the Manager
Warrant becomes exercisable for such number of unvested shares. The Manager
Warrant cannot be exercised prior to April 30, 2001, if at all. See "The
Acquisition" and "Certain Transactions--Restricted Stock Agreement."
ANTI-TAKEOVER PROVISIONS OF THE MINNESOTA BUSINESS CORPORATION ACT
Certain provisions of Minnesota law described below could have an anti-
takeover effect. These provisions are intended to provide a Minnesota
corporation's management flexibility to enhance the likelihood of continuity
and stability in the composition of the board of directors and in the policies
formulated by a board of directors and to discourage an unsolicited takeover
of a Minnesota corporation if its board determines that such a takeover is not
in the best interests of the Company and its shareholders. However, these
provisions could have the effect of discouraging certain attempts to acquire
the Company that could deprive the Company's shareholders of opportunities to
sell their shares of Common Stock at prices higher than prevailing market
prices.
Section 302A.671 of the Minnesota Statutes, applying to certain control
share acquisitions, is inapplicable to the Company and its shareholders under
the By-laws of the Company.
Section 302A.673 of the Minnesota Statutes generally prohibits any business
combination by a publicly held Minnesota corporation, or, in certain
circumstances, any subsidiary of the corporation, with any shareholder who
beneficially owns 10% or more of the voting power of the corporation's
outstanding shares (an "Interested Shareholder") within four years following
such Interested Shareholder's acquisition of such 10% or greater interest,
unless the business combination or the acquisition of the 10% or greater
interest is approved by a committee of all of the disinterested members of the
board of directors of the corporation before the Interested Shareholder's
acquisition of such 10% or greater interest. This statute is inapplicable to
the Company's pre-public 10% beneficial owners and, to the extent permitted by
law, the affiliates and associates of such pre-public 10% beneficial owners,
under the By-laws of the Company.
Section 302A.675 of the Minnesota Statutes generally prohibits an offeror
from acquiring shares of a publicly held Minnesota corporation within two
years following the offeror's last purchase of the corporation's shares
pursuant to a takeover offer with respect to that class, unless the
corporation's shareholders are able to sell their shares to the offeror upon
substantially equivalent terms as those provided in the earlier takeover
offer. This statute will not apply if the acquisition of shares is approved by
a committee of all of the disinterested members of the Board of Directors of
the Company before the purchase of any shares by the offeror pursuant to a
takeover offer.
TRANSFER AGENT AND REGISTRAR
The Transfer Agent and Registrar for the Common Stock of the Company is
Norwest Bank Minnesota, N.A.
52
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Prior to the Offering, there has been no public market for the Company's
Common Stock. The Company can make no prediction as to the effect, if any,
that sales of shares of Common Stock or the availability of Common Stock for
sale will have on the market price prevailing from time to time. Nevertheless,
sales of substantial amounts of Common Stock in the public markets or the
perception that such sales will occur could adversely affect the market price
or the future ability of the Company to raise capital through an offering of
its equity securities.
Upon completion of the Offering, based on the number of shares outstanding
as of August 31, 1996, the Company will have outstanding an aggregate of
10,650,000 shares of Common Stock (assuming the issuance of 3,000,000 shares
of Common Stock offered by the Company hereby and assuming no exercise of the
Underwriters' over-allotment option and no exercise of outstanding options or
warrants), of which the 3,000,000 shares offered hereby (3,450,000 if the
Underwriters over-allotment option is exercised in full) will be freely
tradable without restriction or further registration under the Act, unless
purchased by an "affiliate" of the Company, as that term is defined by Rule
144 promulgated under the Act (an "Affiliate"), whose sales would be subject
to certain volume limitations and other restrictions described below.
The 7,650,000 shares of Common Stock originally issued and sold by the
Company in private transactions in reliance upon exemptions from the Act upon
the consummation of the Offering will be "restricted securities" as that term
is defined in Rule 144 under the Act, and may be sold in the public market
only if registered or if they qualify for an exemption from registration under
Rule 144.
In general, under Rule 144 as currently in effect, a person (or persons
whose shares are aggregated) who has beneficially owned shares for at least
two years (including the holding period of any prior owner except an Affiliate
of the Company) is entitled to sell, in "brokers' transactions" or to market
makers, within any three-month period commencing 90 days after the date of
this Prospectus, a number of shares that does not exceed the greater of (i)
one percent of the then outstanding shares of Common Stock (approximately
106,500 shares immediately after the Offering, assuming no exercise of
options, warrants or the Underwriters' over-allotment option), or (ii)
generally, the average weekly trading volume in the Common Stock during the
four calendar weeks preceding the required filing of a Form 144 with respect
to such sale, subject to certain other limitations or restrictions. Sales
under Rule 144 are generally subject to the availability of current public
information about the Company. Under Rule 144(k), a person who is not deemed
to have been an Affiliate of the Company at any time during the 90 days
preceding a sale, and who has beneficially owned the shares proposed to be
sold for at least three years (including the holding period of any prior owner
except an Affiliate), is entitled to sell such shares without complying with
the manner of sale, public information, volume limitation or notice provisions
of Rule 144. As a result, up to 7,650,000 shares of Common Stock originally
issued and sold by the Company on May 25, 1996 will become eligible for sale
under Rule 144 on May 25, 1998, subject to the other requirements of Rule 144
having been satisfied.
Any employee, officer or director of or consultant to the Company who
purchases his or her shares pursuant to a written compensatory plan or
contract is entitled to rely on the resale provisions of Rule 701, which
permit non-Affiliates to sell their Rule 701 shares without complying with the
public information, holding period, volume limitation or notice provisions of
Rule 144 and which permit Affiliates to sell their Rule 701 shares without
complying with the Rule 144 holding period restrictions, in each case
commencing 90 days after the date of this Prospectus.
The holders of all 7,650,000 shares of Common Stock that are currently
outstanding, and Melville as the holder of the Melville Warrant, have agreed,
subject to certain permitted transfers, not to sell, offer to sell or
otherwise dispose of or grant any rights with respect to any shares of Common
Stock, any options or warrants to purchase shares of Common Stock, or any
securities convertible into or exchangeable for shares of Common Stock, now
owned or hereafter acquired directly by such holders or with respect to which
they have the power of disposition, without the prior consent of Oppenheimer &
Co., Inc., for a period of 180 days from the date of
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<PAGE>
this Prospectus, subject to certain limited exceptions. The Company has also
agreed, pursuant to the Underwriting Agreement dated the date hereof (the
"Underwriting Agreement"), not to offer, sell, contract to sell, or otherwise
dispose of any shares of Common Stock or any securities convertible into or
exercisable or exchangeable for Common Stock or any rights to acquire Common
Stock (other than shares issuable upon exercise of outstanding options and
warrants) for a period of 180 days after the date of this Prospectus, without
the prior written consent of Oppenheimer & Co., Inc., subject to certain
limited exceptions. Oppenheimer & Co., Inc. may, in its sole discretion and at
any time without notice, release all or any portion of the securities subject
to such arrangements.
The Company has adopted the 1996 Option Plan and has reserved up to
1,000,000 shares of Common Stock for issuance thereunder. The Company intends
to register these shares under the Act on Form S-8 as soon as practicable
after the closing of the Offering, which registration statement will
automatically become effective upon filing. Shares issued under the 1996
Option Plan after the effective date of such registration statement, other
than shares issued to Affiliates of the Company, will be freely tradable in
the public market, subject to any applicable vesting restrictions with the
Company or other contractual restrictions. Currently, the Company has options
outstanding to purchase an aggregate of 195,480 shares of Common Stock. Such
options were granted on June 26, 1996, and will vest, cumulatively, on a pro
rata basis on each of the first, second and third anniversaries of the date of
grant, subject to the possible acceleration of vesting in certain
circumstances.
The Company has also issued the Melville Warrant to purchase 1,350,000
shares of Common Stock at $.60 per share. The Melville Warrant is immediately
exercisable. If the Melville Warrant is exercised, such Common Stock will be
eligible for sale two years from the date the full purchase price or other
consideration is paid or given by the holder of the Warrant acquiring such
Common Stock from the Company.
The Company has also agreed to issue to the Representatives (as hereinafter
defined) in exchange for nominal consideration five-year warrants to purchase
an aggregate of 300,000 shares of Common Stock at a price per share initially
equal to 120% of the public offering price set forth on the cover page of this
Prospectus. These warrants are not transferable (except to certain officers or
other employees of the Representatives) and may be exercised commencing one
year after the date of this Prospectus. The exercise price and the number of
shares may, under certain circumstances, be subject to adjustment pursuant to
anti-dilution provisions. The holders will have certain registration rights
with respect to the Common Stock issuable upon exercise of these warrants. See
"Underwriting."
In addition, after the Offering, holders of all 7,650,000 shares of Common
Stock that are currently outstanding, Melville as the holder of the Melville
Warrant and the holders of certain warrants to purchase up to 300,000
additional shares of Common Stock referred to in the immediately preceding
paragraph will be entitled to certain rights to cause the Company to register
the sale of such shares or warrants under the Act. See "Certain Transactions--
Registration Rights Agreement" and "Underwriting."
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<PAGE>
UNDERWRITING
Subject to the terms and conditions of the Underwriting Agreement, the
Company has agreed to sell to each of the Underwriters named below, and each
of the Underwriters, for whom Oppenheimer & Co., Inc., Ladenburg, Thalmann &
Co. Inc. and Piper Jaffray Inc. are acting as Representatives (the
"Representatives"), has severally agreed to purchase from the Company, the
respective number of shares of Common Stock set forth opposite their names
below:
<TABLE>
<CAPTION>
NAME NUMBER OF SHARES
---- ----------------
<S> <C>
Oppenheimer & Co., Inc...................................
Ladenburg, Thalmann & Co. Inc............................
Piper Jaffray Inc........................................
---------
Total................................................ 3,000,000
=========
</TABLE>
The Underwriters propose to offer the shares of Common Stock directly to the
public initially at the public offering price set forth on the cover page of
this Prospectus and in part to certain securities dealers at such price less a
concession of $ per share. The Underwriters may allow, and such dealers
may reallow, a concession not in excess of $ per share to other brokers
and dealers. After the shares of Common Stock are released for sale to the
public, the offering price and other selling terms may from time to time be
changed by the Representatives. The Underwriters are obligated to take and pay
for all of the shares of Common Stock offered hereby (other than those covered
by the over-allotment option described below) if any are taken.
The Company has granted the Underwriters an option, exercisable for up to 30
days after the date of this Prospectus, to purchase up to an aggregate of
450,000 additional shares of Common Stock to cover over-allotments, if any. If
the Underwriters exercise such over-allotment option, the Underwriters have
severally agreed, subject to certain conditions, to purchase approximately the
same percentage thereof that the number of shares to be purchased by each of
them as shown in the foregoing table bears to the 3,000,000 shares of Common
Stock offered hereby. The Underwriters may exercise such option only to cover
over-allotments made in connection with the sale of the shares of Common Stock
offered hereby. The Underwriters have advised the Company that the
Underwriters do not intend to confirm sales in excess of 5% of the shares
offered hereby to any account over which they exercised discretionary
authority.
The Company has agreed to indemnify the Representatives and the several
Underwriters against certain liabilities, including, without limitation,
liabilities under the Securities Act.
The holders of all 7,650,000 shares of Common Stock that are currently
outstanding, and Melville as the holder of the Melville Warrant, have agreed
not to sell, offer to sell, contract to sell, pledge or grant any option to
purchase or otherwise dispose of such securities for 180 days after the date
of this Prospectus without the prior written consent of Oppenheimer & Co.,
Inc. The Company has also agreed not to offer, sell, contract to sell, or
otherwise dispose of any shares of Common Stock or any securities convertible
into or exercisable or exchangeable for Common Stock or any rights to acquire
Common Stock (other than shares issuable upon exercise of outstanding options
and warrants) for a period of 180 days after the date of this Prospectus,
without the prior written consent of Oppenheimer & Co., Inc., subject to
certain limited exceptions. See "Shares Eligible for Future Sale."
The Company has agreed to issue to the Representatives in exchange for
nominal consideration five-year warrants to purchase an aggregate of 300,000
shares of Common Stock at a price per share initially equal to 120% of the
public offering price set forth on the cover page of this Prospectus. These
warrants are not transferable (except to certain officers or other employees
of the Representatives) and may be exercised commencing one year after the
date of this Prospectus. The exercise price and the number of shares may,
under
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<PAGE>
certain circumstances, be subject to adjustment pursuant to anti-dilution
provisions. The holders will have certain registration rights with respect to
the Common Stock issuable upon exercise of these warrants.
The Company paid Piper Jaffray Inc. $20,000 to serve as a purchaser
representative for certain members of the Company's management who purchased
shares of Common Stock from the Company in a private placement in connection
with the Acquisition.
Prior to the Offering, there has been no public market for the Common Stock
of the Company. The initial public offering price has been determined by
negotiations between the Company and the Representatives. The principal
factors considered in such negotiations were prevailing market conditions, the
results of operations of the Company in recent periods, market valuations of
companies that the Company and the Representatives believe to be comparable to
the Company, estimates of the business potential of the Company, the history
of and prospects for the industry in which the Company competes, and such
other factors as the Company and the Representatives deem relevant.
LEGAL MATTERS
The validity of the issuance of the shares of Common Stock offered hereby
and certain other legal matters will be passed upon for the Company by Faegre
& Benson LLP, Minneapolis, Minnesota. Certain legal matters will be passed
upon for the Underwriters by Morgan, Lewis & Bockius LLP, New York, New York.
EXPERTS
The consolidated financial statements of the Company as of August 3, 1996
and for the period from inception (May 26, 1996) to August 3, 1996 have been
audited by Arthur Andersen LLP, independent public accountants, as indicated
in their report with respect thereto, and are included herein in reliance upon
the authority of said firm as experts in giving said report.
The consolidated financial statements of the Predecessor Companies as of
December 31, 1994 and 1995 and for each of the years in the three-year period
ended December 31, 1995 and for the five-month period ended May 25, 1996 have
been included herein and in the registration statement in reliance upon the
report of KPMG Peat Marwick LLP, independent certified public accountants,
appearing elsewhere herein, and upon the authority of said firm as experts in
accounting and auditing.
ADDITIONAL INFORMATION
The Company has filed with the Securities and Exchange Commission (the
"Commission") a Registration Statement on Form S-1 (the "Registration
Statement") under the Act, and the rules and regulations thereunder, with
respect to the Common Stock offered hereby. This Prospectus which forms part
of the Registration Statement does not contain all of the information set
forth in the Registration Statement and the exhibits and schedules thereto.
For further information with respect to the Company and such Common Stock,
reference is made to the Registration Statement and the schedules and exhibits
filed as a part thereof. Statements contained in this Prospectus regarding the
contents of any contract or any other document are not necessarily complete
and, where such document is an exhibit to the Registration Statement, in each
instance, reference is hereby made to the copy of such contract or document
filed as an exhibit to the Registration Statement, each such statement being
qualified in all respects by such reference. The Registration Statement,
including exhibits thereto, may be inspected without charge at the
Commission's principal office at Judiciary Plaza, 450 Fifth Street, N.W.,
Washington, D.C. 20549, and copies of all or any part thereof may be obtained
from the Public Reference Section, Securities and Exchange Commission,
Washington, D.C. 20549, upon payment of the prescribed fees. In addition, the
Commission maintains a World Wide Web Site on the Internet at
http://www.sec.gov that contains reports, proxy and information statements and
other information regarding registrants that file electronically with the
Commission.
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WILSONS THE LEATHER EXPERTS INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Public Accountants................................... F-2
Independent Auditors' Report............................................... F-3
Consolidated Balance Sheets................................................ F-4
Consolidated Statements of Operations...................................... F-5
Consolidated Statements of Shareholders' Equity............................ F-6
Consolidated Statements of Cash Flows...................................... F-7
Notes to Consolidated Financial Statements................................. F-8
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Wilsons The Leather Experts Inc.:
We have audited the accompanying consolidated balance sheet of Wilsons The
Leather Experts Inc. (a Minnesota corporation) and Subsidiaries as of August
3, 1996, and the related consolidated statements of operations, shareholders'
equity and cash flows for the period from inception (May 26, 1996) to August
3, 1996. These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Wilsons
The Leather Experts Inc. and Subsidiaries as of August 3, 1996, and the
results of their operations and their cash flows for the period from inception
(May 26, 1996) to August 3, 1996 in conformity with generally accepted
accounting principles.
Arthur Andersen LLP
Minneapolis, Minnesota
September 23, 1996
(except for Note 14 as to which the
date is October 11, 1996)
F-2
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders
Wilsons Center, Inc.:
We have audited the accompanying consolidated balance sheets of Wilsons
Center, Inc. d.b.a. Wilsons The Leather Experts (a subsidiary of Melville
Corporation) and Subsidiaries as of December 31, 1994 and 1995, and the
related consolidated statements of operations, shareholder's equity, and cash
flows for each of the years in the three-year period ended December 31, 1995
and for the five-month period ended May 25, 1996. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
As discussed in Note 12 to the consolidated financial statements, Wilsons
Center, Inc. d.b.a. Wilsons The Leather Experts has been dependent on Melville
Corporation for a significant portion of its working capital financing.
Subsequent to the close of business on May 25, 1996, Melville Corporation sold
Wilsons Center, Inc. to Wilsons The Leather Experts Inc., a newly formed
company owned by members of management of Wilsons Center, Inc. d.b.a. Wilsons
The Leather Experts and other investors.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Wilsons
Center, Inc. d.b.a. Wilsons The Leather Experts and Subsidiaries as of
December 31, 1994 and 1995, and the results of their operations and their cash
flows for each of the years in the three-year period ended December 31, 1995
and for the five-month period ended May 25, 1996 in conformity with generally
accepted accounting principles.
As discussed in Note 3 to the consolidated financial statements, Wilsons
Center, Inc. d.b.a. Wilsons The Leather Experts adopted Statement of Financial
Accounting Standards No. 121, Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to Be Disposed Of, effective October 1, 1995.
KPMG Peat Marwick LLP
Minneapolis, Minnesota
July 19, 1996
F-3
<PAGE>
WILSONS THE LEATHER EXPERTS INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
PREDECESSOR
COMPANIES
-----------------
DECEMBER 31
----------------- AUGUST
1994 1995 3, 1996
-------- -------- --------
ASSETS
------
<S> <C> <C> <C>
Current assets:
Cash and cash equivalents....................................................................... $ 17,325 $ 14,286 $ 9,443
Accounts receivable, net........................................................................ 7,692 7,618 6,618
Inventories..................................................................................... 102,595 74,899 77,666
Prepaid expenses................................................................................ 3,140 2,317 783
Deferred income taxes........................................................................... 6,776 14,925 --
-------- -------- --------
Total current assets.......................................................................... 137,528 114,045 94,510
Property and equipment, net....................................................................... 97,216 65,884 2,161
Goodwill, net of accumulated amortization of $27,468 in 1994...................................... 152,522 -- --
Other assets, net................................................................................. 5,404 462 1,889
Deferred income taxes............................................................................. -- 1,979 5,092
-------- -------- --------
$392,670 $182,370 $103,652
======== ======== ========
<CAPTION>
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
<S> <C> <C> <C>
Current liabilities:
Accounts payable................................................................................ $ 18,106 $ 11,728 $ 11,412
Due to Melville................................................................................. 124,245 78,771 1,857
Accrued expenses................................................................................ 41,502 52,623 26,679
Income taxes payable............................................................................ 857 5,120 --
Deferred income taxes........................................................................... -- -- 2,819
-------- -------- --------
Total current liabilities..................................................................... 184,710 148,242 42,767
Long-term debt.................................................................................... -- -- 55,811
Other long-term liabilities....................................................................... 6,965 6,538 1,181
-------- -------- --------
Commitments and contingencies (Notes 9, 10, 11 and 13)
Shareholders' equity:
Series A preferred stock, $1,000 stated value; 15,000 shares authorized, 7,405 shares issued and
outstanding in 1996............................................................................ -- -- 7,405
Undesignated preferred stock, $.01 par value; 9,985,000 shares authorized, no shares issued or
outstanding.................................................................................... -- -- --
Common stock, no par value; 100 shares authorized, issued and outstanding in 1994 and 1995...... 146 146 --
Class A common stock, $.01 par value; 15,000,000 shares authorized, 4,320,000 issued and
outstanding in 1996............................................................................ -- -- 44
Class B common stock, $.01 par value; 7,500,000 shares authorized, 2,925,000 shares issued and
outstanding in 1996............................................................................ -- -- 29
Class C common stock, $.01 par value; 2,500,000 shares authorized, 405,000 shares issued and
outstanding in 1996............................................................................ -- -- 4
Undesignated common stock, $.01 par value; 25,000,000 shares authorized, no shares issued or
outstanding in 1996............................................................................ -- -- --
Additional paid-in capital...................................................................... 135,452 135,452 4,518
Retained earnings (accumulated deficit)......................................................... 65,397 (108,018) (8,107)
Cumulative translation adjustment............................................................... -- 10 --
-------- -------- --------
Total shareholders' equity.................................................................... 200,995 27,590 3,893
-------- -------- --------
$392,670 $182,370 $103,652
- --------------------------------------------------
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated balance
sheets.
F-4
<PAGE>
WILSONS THE LEATHER EXPERTS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
PREDECESSOR COMPANIES PERIOD FROM
-------------------------------------------------- INCEPTION
YEARS ENDED DECEMBER 31 FIVE MONTHS ENDED (MAY 26,
---------------------------- -------------------- 1996) TO
MAY 27, MAY 25, AUGUST 3,
1993 1994 1995 1995 1996 1996
-------- -------- --------- ----------- -------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
Net sales.................................................. $478,475 $474,623 $ 462,394 $124,700 $109,640 $ 28,518
Cost of goods sold, buying and warehousing costs........... 251,318 253,629 241,787 69,070 59,952 15,738
-------- -------- --------- -------- -------- ---------
Gross profit........................................... 227,157 220,994 220,607 55,630 49,688 12,780
Selling, general and administrative expenses............... 189,293 206,028 190,082 76,697 61,129 24,293
Depreciation and amortization.............................. 20,668 22,273 21,393 9,002 4,722 2
Restructuring and asset impairment charges................. -- -- 182,184 -- -- --
-------- -------- --------- -------- -------- ---------
Income (loss) from operations.......................... 17,196 (7,307) (173,052) (30,069) (16,163) (11,515)
Interest expense, net...................................... 5,102 8,393 10,463 3,396 1,581 1,148
-------- -------- --------- -------- -------- ---------
Income (loss) before income taxes...................... 12,094 (15,700) (183,515) (33,465) (17,744) (12,663)
Income tax provision (benefit)............................. 7,038 (3,109) (10,100) (5,461) (6,603) (4,556)
-------- -------- --------- -------- -------- ---------
Net income (loss)...................................... $ 5,056 $(12,591) $(173,415) $(28,004) $(11,141) $ (8,107)
======== ======== ========= ======== ======== =========
Net loss per common share................................................................................... $ (0.89)
=========
Weighted average common shares outstanding.................................................................. 9,066,410
- --------------------------------------------------
=========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
<PAGE>
WILSONS THE LEATHER EXPERTS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
PREDECESSOR COMPANIES
---------------------------------------------------------------
RETAINED
COMMON STOCK ADDITIONAL EARNINGS CUMULATIVE TOTAL
------------- PAID-IN (ACCUMULATED TRANSLATION SHAREHOLDERS'
SHARES AMOUNT CAPITAL DEFICIT) ADJUSTMENT EQUITY
------ ------ ---------- ------------ ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Balance, December 31,
1992................... 100 $146 $135,311 $ 87,066 $-- $ 222,523
Net income............ -- -- -- 5,056 -- 5,056
Dividends paid to
Melville............. -- -- -- (10,406) -- (10,406)
--- ---- -------- --------- ---- ---------
Balance, December 31,
1993................... 100 146 135,311 81,716 -- 217,173
Net loss.............. -- -- -- (12,591) -- (12,591)
Dividends paid to
Melville............. -- -- -- (3,728) -- (3,728)
Capital contributed by
Melville............. -- -- 141 -- -- 141
--- ---- -------- --------- ---- ---------
Balance, December 31,
1994................... 100 146 135,452 65,397 -- 200,995
Net loss.............. -- -- -- (173,415) -- (173,415)
Currency translation
adjustment........... -- -- -- -- 10 10
--- ---- -------- --------- ---- ---------
Balance, December 31,
1995................... 100 146 135,452 (108,018) 10 27,590
Net loss.............. -- -- -- (11,141) -- (11,141)
Capital contributed by
Melville............. -- -- 124,000 -- -- 124,000
Currency translation
adjustment........... -- -- -- -- 12 12
Other................. -- -- (141) 139 (10) (12)
--- ---- -------- --------- ---- ---------
Balance, May 25, 1996... 100 $146 $259,311 $(119,020) $ 12 $ 140,449
=== ==== ======== ========= ==== =========
</TABLE>
<TABLE>
<CAPTION>
COMPANY
--------------------------------------------------------------
COMMON STOCK
PREFERRED ------------------------------------------------
STOCK CLASS A CLASS B CLASS C
------------- ---------------- ---------------- --------------
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
------ ------ --------- ------ --------- ------ ------- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Initial capitalization.. 7,405 $7,405 4,320,000 $44 2,925,000 $29 405,000 $ 4
Net loss.............. -- -- -- -- -- -- -- --
----- ------ --------- --- --------- --- ------- ---
Balance, August 3, 1996. 7,405 $7,405 4,320,000 $44 2,925,000 $29 405,000 $ 4
===== ====== ========= === ========= === ======= ===
</TABLE>
<TABLE>
<CAPTION>
COMPANY
------------------------------------
ADDITIONAL TOTAL
PAID-IN ACCUMULATED SHAREHOLDERS'
CAPITAL DEFICIT EQUITY
---------- ----------- -------------
<S> <C> <C> <C>
Initial capitalization (continued)......... $4,518 $ -- $12,000
Net loss................................. -- (8,107) (8,107)
------ ------- -------
Balance, August 3, 1996.................... $4,518 $(8,107) $ 3,893
====== ======= =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
<PAGE>
WILSONS THE LEATHER EXPERTS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
PERIOD
PREDECESSOR COMPANIES FROM
-------------------------------------------------- INCEPTION
YEARS ENDED DECEMBER 31 FIVE MONTHS ENDED (MAY 26,
---------------------------- -------------------- 1996) TO
MAY 27, MAY 25, AUGUST 3,
1993 1994 1995 1995 1996 1996
------- -------- --------- ----------- -------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
Operating activities:
Net income (loss)........................................... $ 5,056 $(12,591) $(173,415) $(28,004) $(11,141) $(8,107)
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities--
Restructuring and asset impairment charges................. -- -- 182,184 -- -- --
Restructuring charges paid................................. -- -- (338) -- (5,958) --
Depreciation and amortization.............................. 20,668 22,273 21,393 9,002 4,722 2
Amortization of deferred financing costs................... -- -- -- -- -- 111
Loss on disposal of assets................................. 5,417 9,899 4,498 3,616 113 --
Deferred income tax provision (benefit).................... 1,302 (965) (11,233) -- 5,116 (4,939)
Changes in operating assets and liabilities, net of assets
and liabilities acquired:
Accounts receivable, net.................................. (4,224) 4,832 74 4,120 3,395 (2,709)
Inventories............................................... (11,859) 1,931 27,696 27,070 19,344 (24,526)
Prepaid expenses.......................................... 1,979 5,257 669 5,309 5,253 (4,494)
Other noncurrent assets................................... 12 1,668 (196) 12 145 --
Accounts payable and accrued expenses..................... 4,426 (14,537) (3,167) (26,444) (25,035) 2,625
Income taxes payable and other liabilities................ (10,765) (5,531) 4,941 (6,204) (11,926) 1,180
------- -------- --------- -------- -------- -------
Net cash provided by (used in) operating activities...... 12,012 12,236 53,106 (11,523) (15,972) (40,857)
------- -------- --------- -------- -------- -------
Investing activities:
Additions to property, equipment and other noncurrent
assets..................................................... (26,641) (20,720) (10,117) (2,852) (3,566) (823)
Acquisitions, net of cash acquired.......................... (6,373) -- -- -- -- 37,072
------- -------- --------- -------- -------- -------
Net cash provided by (used in) investing activities...... (33,014) (20,720) (10,117) (2,852) (3,566) 36,249
------- -------- --------- -------- -------- -------
Financing activities:
Change in due to/from Melville.............................. 31,054 23,966 (45,474) 9,923 (107,442) --
Dividends paid to Melville.................................. (10,406) (3,728) -- -- -- --
Capital contributed by Melville............................. -- 141 -- -- 124,000 --
Change in book overdrafts................................... 234 11 (554) (10,581) (8,024) 2,051
Proceeds from sale of common and preferred stock............ -- -- -- -- -- 12,000
------- -------- --------- -------- -------- -------
Net cash provided by (used in) financing activities...... 20,882 20,390 (46,028) (658) 8,534 14,051
------- -------- --------- -------- -------- -------
Net increase (decrease) in cash and cash equivalents......... (120) 11,906 (3,039) (15,033) (11,004) 9,443
Cash and cash equivalents, beginning of period............... 5,539 5,419 17,325 17,325 14,286 --
------- -------- --------- -------- -------- -------
Cash and cash equivalents, end of period..................... $ 5,419 $ 17,325 $ 14,286 $ 2,292 $ 3,282 $ 9,443
======= ======== ========= ======== ======== =======
Supplemental cash flow information:
Cash paid during the period for--
Interest................................................... $ 4,910 $ 7,865 $ 10,650 $ 6,217 $ 2,035 $ 210
======= ======== ========= ======== ======== =======
Income taxes............................................... $17,545 $ 4,959 $ 1,735 $ 828 $ 208 $ --
======= ======== ========= ======== ======== =======
Noncash investing and financing activities--
Liabilities assumed for acquisition of business............ $ 3,226 $ -- $ -- $ -- $ -- $44,191
======= ======== ========= ======== ======== =======
Issuance of long-term debt................................. $ -- $ -- $ -- $ -- $ -- $55,811
- --------------------------------------------------
======= ======== ========= ======== ======== =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-7
<PAGE>
WILSONS THE LEATHER EXPERTS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. NATURE OF ORGANIZATION AND ACQUISITION:
Wilsons The Leather Experts Inc., a Minnesota corporation (Wilsons) was
formed to acquire 100% of the common stock of Wilsons Center, Inc. and its
subsidiaries (the Predecessor Companies prior to the acquisition) in a
management-led buyout from Melville Corporation (Melville), the parent company
to the Predecessor Companies (the Acquisition). Wilsons and Wilsons Center,
Inc. are collectively referred to as the "Company." In May 1996, pursuant to a
sale agreement dated as of May 24, 1996 between Wilsons and Melville, Wilsons
acquired said common stock in exchange for (i) $2 million, (ii) a 10% senior
secured subordinated note due December 31, 2000 in the principal amount of
$55.8 million, (iii) a warrant to purchase 1,350,000 shares of common stock,
(iv) a warrant to purchase 1,080,000 shares of common stock (reduced by terms
of the Restricted Stock Agreement--see Note 9), (v) 4,320,000 shares of common
stock, and (vi) 7,405 shares of preferred stock. As part of the Acquisition,
the Leather Investors Limited Partnerships I and II (LILP) in turn purchased
from Melville the 4,320,000 shares of common stock and the 7,405 shares of
preferred stock for $10 million.
The Acquisition was accounted for using the purchase method. Accordingly,
the purchase price has been allocated on a preliminary basis to the assets
acquired and liabilities assumed based on their estimated fair values. This
resulted in the carrying value of the net assets acquired exceeding the
purchase price by approximately $63.3 million, which was applied to reduce the
amounts assigned to property and equipment. The Company is still in the
process of gathering information related to the fair values of certain assets
acquired and liabilities assumed. Accordingly, the preliminary allocation may
be revised when such information is obtained.
The Company operates a chain of 477 retail stores as of August 3, 1996, all
but two of which are located in the United States, specializing in the retail
sales of leather apparel and accessories. The Company's permanent stores
operate under two formats: (i) Wilsons The Leather Experts, the traditional
business, specializing in moderately priced products; and (ii) Tannery
West/Georgetown Leather Design, which provides a more upscale product
offering. In addition, the Company also operates holiday stores and seasonal
kiosks, primarily during the November and December peak holiday season. The
Company is the leading national specialty retailer of leather apparel and
accessories in the United States.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Basis of Presentation
Consolidated financial statements and footnote disclosures prior to May 26,
1996 relate to the Predecessor Companies before the Acquisition and are not
comparable to the period presented subsequent to the acquisition date due to
the effects of certain purchase accounting adjustments and the acquisition
financing. The accompanying consolidated financial statements include those of
the Company and all of its subsidiaries. All intercompany balances and
transactions between the entities have been eliminated in consolidation.
Year-End
Wilsons' fiscal year ends on the Saturday which is 26 weeks after the
Saturday closest to January 31. The Predecessor Companies' year-end was
December 31.
Interim Financial Statements
The unaudited consolidated financial information for the five-month period
ended May 27, 1995 has been prepared on the same basis as the audited
consolidated financial statements and, in the opinion of management, includes
all adjustments (consisting only of normal recurring adjustments) necessary to
state fairly the financial information set forth therein. The Company's
business is seasonal and, accordingly, interim results are not indicative of
full-year results.
F-8
<PAGE>
WILSONS THE LEATHER EXPERTS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Sources of Supply
The Company currently buys a significant percentage of its inventory from
China. While such sourcing is deemed preferable to meet operating
requirements, other sources of inventory are available to the Company.
Cash and Cash Equivalents
Cash equivalents consist principally of short-term investments with original
maturities of three months or less and are recorded at cost, which
approximates fair value. The Company's cash management program utilizes zero
balance accounts. Accordingly, all book overdrafts have been reclassified to
current asset or current liability accounts.
Fair Values of Financial Instruments
The carrying value of the Company's current financial assets and
liabilities, because of their short-term nature, approximates fair value. The
carrying value of the Company's long-term debt, related to the recent
financing for the Acquisition, approximates fair value.
Inventories
Inventories, principally finished goods, consist of merchandise purchased
from domestic and foreign vendors and are carried at the lower of cost or
market value, determined by the retail inventory method on the last-in, first-
out (LIFO) basis. The difference in inventories between the LIFO and first-in,
first-out (FIFO) method was not material as of August 3, 1996. The Predecessor
Companies determined cost using the retail inventory method on the FIFO basis.
Property and Equipment
Property and equipment are stated at cost. Depreciation and amortization of
property, equipment and leasehold improvements is computed on a straight-line
basis, generally over the estimated useful lives of the assets ranging from
five to forty years. Property and equipment retired or disposed of are removed
from cost and related accumulated depreciation accounts. Maintenance and
repairs are charged directly to expense as incurred. Major renewals or
replacements are capitalized after making the necessary adjustment to the
asset and accumulated depreciation accounts for the items renewed or replaced.
When changes in circumstances warrant measurement, impairment losses for store
fixed assets are calculated by the Company by comparing projected cash flows
over the lease terms to the asset carrying values.
Debt Issuance Costs
Debt issuance costs are amortized over the terms of the related financing
using the interest method and are included in other assets in the accompanying
consolidated balance sheets.
F-9
<PAGE>
WILSONS THE LEATHER EXPERTS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Goodwill
The excess of acquisition cost over the fair value of net assets acquired
was being amortized on a straight-line basis over periods not exceeding 40
years. In connection with Melville's decision to sell the Predecessor
Companies, all remaining goodwill was written off in the fourth quarter of
1995 (see Note 3).
The Predecessor Companies recorded $4.8 million, $4.8 million and $4.4
million of goodwill amortization for the years ended December 31, 1993, 1994
and 1995, respectively.
During 1994, the Predecessor Companies made the decision to close the
majority of the stores in the Predecessor Companies' Snyder Leather off-price
discount chain. This resulted in a write-off of goodwill of $3.9 million,
which is included in selling, general and administrative expenses.
Store Opening and Closing Costs
New store opening costs are charged to expense as incurred. In the event a
store is planned to close before its lease has expired, the total lease
obligation less sublease income is provided for in the period the decision to
close the store is made.
Advertising Costs
Advertising costs are charged to expense during the period when the
advertising first runs.
Layaway Sales
Layaway sales are recorded in full on the date of the layaway transaction.
Allowances for estimated returns are established as appropriate.
Income Taxes
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using enacted tax
rates in effect for the year in which those temporary differences are expected
to reverse.
The Predecessor Companies were included in the consolidated Federal income
tax return and, where applicable, group state and local returns of Melville
prior to May 26, 1996 in accordance with a tax sharing agreement with
Melville. The tax sharing agreement allowed for current recognition of
benefits for losses and deferred tax benefits which may only have been
realized by Melville in connection with filing consolidated Federal and state
returns.
Foreign Currency Translation
The functional currency for the Company's foreign operations is the
applicable local currency. The translation from the applicable foreign
currency to U.S. dollars is performed for balance sheet accounts using the
current exchange rate in effect at the balance sheet date and for revenue and
expense accounts using a weighted average exchange rate during the period. The
gains or losses resulting from such translation were included in shareholders'
equity. Transaction gains and losses are reflected in income.
Net Income (Loss) Per Common Share
Net income (loss) per common share is computed by dividing net income (loss)
by the weighted average number of common shares outstanding and dilutive
common equivalent shares assumed to be outstanding during each period. Common
equivalent shares consist of dilutive options and warrants to purchase common
stock. However, pursuant to certain rules of the Securities and Exchange
Commission, the calculation also includes equity securities, including options
and warrants, issued within one year of an initial public offering with an
issue price less than the initial public offering price, even if the effect is
anti-dilutive. The treasury stock method was used in determining the effect of
such issuances.
F-10
<PAGE>
WILSONS THE LEATHER EXPERTS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Reclassifications
Certain reclassifications have been made to the consolidated financial
statements of the prior years to conform to the 1996 presentation.
3. RESTRUCTURING AND ASSET IMPAIRMENT CHARGES:
On October 24, 1995, Melville announced a comprehensive restructuring plan,
including the planned sale of the Predecessor Companies. As a result, the
Predecessor Companies recorded a pre-tax restructuring charge of $134.3
million to reflect the anticipated costs associated with closing approximately
100 of the Predecessor Companies' stores and the write-off of goodwill and
other intangibles. Stores impacted by the plan represented $49.9 million in
sales and $6.9 million in operating losses in 1995 and $4.5 million in sales
and $0.8 million in operating losses for the five-month period ended May 25,
1996. In connection with the plan, approximately 600 store employees will be
terminated. As of August 3, 1996, approximately 570 store employees have been
terminated. The significant components of the restructuring charge and the
reserves remaining at December 31, 1995 were as follows (in thousands):
<TABLE>
<CAPTION>
FOR THE YEAR
ENDED AS OF
DECEMBER 31, DECEMBER 31,
1995 1995
------------ ------------
<S> <C> <C>
Goodwill and other intangibles write-offs...... $112,361 $ --
Lease obligations and asset write-offs for
store and other facility closings............. 21,121 8,000
Severance...................................... 476 448
Other.......................................... 378 179
-------- ------
Total...................................... $134,336 $8,627
======== ======
</TABLE>
The reserves remaining at May 25, 1996 were retained by Melville as part of
the Acquisition.
Effective October 1, 1995, the Predecessor Companies adopted Statement of
Financial Accounting Standards (SFAS) No. 121, "Accounting for the Impairment
of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of" and recorded
a pre-tax asset impairment charge of $47.9 million related to the write-off of
fixed and intangible assets. Certain of these assets relate to stores that
will be closed and the assets that will be disposed of on the store closing
date. These assets accounted for $37.7 million of the asset impairment charge.
4. ACCOUNTS RECEIVABLE:
Accounts receivable consisted of the following (in thousands):
<TABLE>
<CAPTION>
PREDECESSOR
COMPANIES
-----------------
DECEMBER 31
----------------- AUGUST 3,
1994 1995 1996
-------- ------- ---------
<S> <C> <C> <C>
Layaway receivables.......................... $ 15,904 $ 6,214 $ 8,898
Trade receivables............................ 3,320 5,226 2,346
Other receivables............................ 1,918 1,206 349
-------- ------- -------
21,142 12,646 11,593
Less:
Layaway return reserves.................... (12,000) (4,000) (4,600)
Allowance for doubtful accounts............ (1,450) (1,028) (375)
-------- ------- -------
Total.................................... $ 7,692 $ 7,618 $ 6,618
======== ======= =======
</TABLE>
F-11
<PAGE>
WILSONS THE LEATHER EXPERTS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
5. PROPERTY AND EQUIPMENT:
Property and equipment consisted of the following (in thousands):
<TABLE>
<CAPTION>
PREDECESSOR
COMPANIES
------------------
DECEMBER 31
------------------ AUGUST 3,
1994 1995 1996
-------- -------- ---------
<S> <C> <C> <C>
Land....................................... $ 1,340 $ 1,340 $ 1,340
Buildings and improvements................. 10,799 4,693 60
Equipment and furniture.................... 99,903 74,363 639
Leasehold improvements..................... 60,565 46,332 124
-------- -------- -------
Total.................................. 172,607 126,728 2,163
Less:
Accumulated depreciation and
amortization............................ (75,391) (60,844) (2)
-------- -------- -------
Total.................................. $ 97,216 $ 65,884 $ 2,161
======== ======== =======
</TABLE>
6. ACCRUED EXPENSES:
Accrued expenses consisted of the following (in thousands):
<TABLE>
<CAPTION>
PREDECESSOR
COMPANIES
-----------------
DECEMBER 31
----------------- AUGUST 3,
1994 1995 1996
-------- -------- ---------
<S> <C> <C> <C>
Taxes other than Federal and state income
taxes....................................... $ 11,843 $ 12,062 $ 6,811
Salaries and compensated absences............ 4,667 8,158 2,526
Current portion of lease obligations for
closed stores............................... 126 8,032 70
Other........................................ 24,866 24,371 17,272
-------- -------- -------
Total.................................... $ 41,502 $ 52,623 $26,679
======== ======== =======
</TABLE>
7. LONG-TERM DEBT:
As part of the Acquisition, the Company issued a $55.8 million senior
secured subordinated note (the Note) to Melville. Interest is accrued annually
at 10% on $55 million of the Note and is payable on the maturity date of the
Note at December 31, 2000. The remaining $0.8 million of the Note is
noninterest-bearing and is payable on the Note's maturity date. The Note is
collateralized by substantially all assets of the Company and is subordinate
to borrowings under the revolving credit agreement.
In conjunction with the Acquisition, the Company obtained a $150 million
revolving credit agreement (the Revolver) with certain banks, which extends
through May 1999 and includes a $90 million letter of credit subfacility. The
Revolver is collateralized by substantially all assets of the Company.
Interest on cash borrowings under the Revolver is at the bank reference rate
plus 0%-1.25%, or LIBOR plus 1.75%-2.75%. The interest rate is dependent upon
the amount and term of the borrowings as well as the Company's earnings before
income taxes/cash interest coverage ratio for the trailing four quarters. The
Company pays a monthly fee equal to .375% per annum on the unused amount of
the Revolver. There were no cash borrowings under the Revolver at August 3,
1996, nor during the period from May 26, 1996 to August 3, 1996.
The Note and the Revolver contain covenants, which among other things,
restrict the ability of the Company to, above certain thresholds, incur
indebtedness; to make capital expenditures, acquisitions, investments, stock
redemptions and dispositions of assets; and to pay dividends. The Revolver
also requires the Company to maintain certain financial covenants. At August
3, 1996, the Company was in compliance with all covenants of the Note and the
Revolver.
F-12
<PAGE>
WILSONS THE LEATHER EXPERTS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Prior to the Acquisition, the Predecessor Companies' operations were funded
primarily by Melville (see Note 12).
8. INCOME TAXES:
The income tax provision (benefit) is comprised of the following (in
thousands):
<TABLE>
<CAPTION>
PERIOD
FROM
PREDECESSOR COMPANIES FIVE INCEPTION
------------------------ MONTHS (MAY 26,
YEARS ENDED DECEMBER 31 ENDED 1996) TO
------------------------ MAY 25, AUGUST 3,
1993 1994 1995 1996 1996
------ ------- -------- -------- ---------
<S> <C> <C> <C> <C> <C>
Current:
Federal.................. $5,333 $(2,869) $ 1,137 $(11,731) $(4,705)
State.................... 981 (1,286) 608 -- 149
Deferred................... 724 1,046 (11,845) 5,128 --
------ ------- -------- -------- -------
Total.................. $7,038 $(3,109) $(10,100) $ (6,603) $(4,556)
====== ======= ======== ======== =======
</TABLE>
Reconciliations of the U.S. statutory income tax rate to the effective tax
rate are as follows:
<TABLE>
<CAPTION>
PREDECESSOR PERIOD
COMPANIES FROM
------------------- FIVE INCEPTION
YEARS ENDED MONTHS (MAY 26,
DECEMBER 31 ENDED 1996) TO
------------------- MAY 25, AUGUST 3,
1993 1994 1995 1996 1996
---- ----- ----- ------- ---------
<S> <C> <C> <C> <C> <C>
Tax rate provision (benefit):
Tax provision (benefit) at
statutory rate............... 35.0% (35.0)% (35.0)% (35.0)% (35.0)%
Goodwill amortization......... 13.4 19.8 29.4 -- --
State income taxes, net of
Federal tax effect........... 9.3 (5.0) -- (2.3) (5.0)
Other, net.................... 0.5 0.4 0.1 0.1 4.0
---- ----- ----- ----- -----
Effective tax rate.......... 58.2% (19.8)% (5.5)% (37.2)% (36.0)%
==== ===== ===== ===== =====
</TABLE>
F-13
<PAGE>
WILSONS THE LEATHER EXPERTS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components
of the deferred tax asset and liability were as follows (in thousands):
<TABLE>
<CAPTION>
PREDECESSOR
COMPANIES
----------------
DECEMBER 31
---------------- AUGUST 3,
1994 1995 1996
------- ------- ---------
<S> <C> <C> <C>
Deferred tax asset:
Inventories................................. $ 2,545 $ 327 $ --
Property and equipment...................... 687 11,835 2,004
Accrued liabilities......................... 3,785 4,501 4,616
Net operating loss carryforwards............ 1,678 1,678 4,148
Other....................................... -- 241 --
------- ------- -------
8,695 18,582 10,768
Less--Valuation allowance................... (1,678) (1,678) --
------- ------- -------
Total..................................... 7,017 16,904 10,768
------- ------- -------
Deferred tax liability:
Layaway and sales return reserve............ 1,121 -- 934
Inventories................................. -- -- 7,486
Other....................................... 225 -- 75
------- ------- -------
Total..................................... 1,346 -- 8,495
------- ------- -------
Net deferred tax asset.................... $ 5,671 $16,904 $ 2,273
======= ======= =======
</TABLE>
As of December 31, 1995, the Predecessor Companies had a Federal net
operating loss carryforward of $4.8 million expiring in the year 2002 which
was available to offset future taxable income in the retail subsidiaries that
generated the loss. A valuation allowance was provided for the full amount of
the deferred tax benefit related to this carryforward.
No valuation allowance was provided by the Company as it anticipates it will
be able to utilize the benefits of the net deferred tax asset during future
periods.
9. CAPITAL STOCK:
Common Stock
All shares of common stock, regardless of class, will automatically be
converted into an equal number of shares of common stock of a single class
without class designation (the Conversion) without any action by any holder
thereof immediately upon the occurrence of the closing of the first public
offering by the Company of shares of common stock of the Company registered
under the Securities Act. After the Conversion, such shares of common stock
will have equal rights in all respects, including the right to one vote per
share of common stock for all matters submitted to holders of common stock for
a vote.
Holders of the Class A common stock and Class B common stock (including
holders of the Restricted Stock--as defined below) and all other common stock
(other than Class C common stock) will have one vote on all matters submitted
to shareholders for each share outstanding in the name of such holder on the
books of the Company. Except as required by law, the Class C common stock will
have no voting rights. Subject to the rights of the holders of outstanding
classes of preferred stock and the Note, each share of common stock (including
holders of the Restricted Stock) will be entitled to share in dividends (when
and if such dividends are declared and paid) and liquidation distributions
ratably with all other shares of common stock then outstanding.
F-14
<PAGE>
WILSONS THE LEATHER EXPERTS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
As long as shares of Class B common stock are outstanding, (i) the Board of
Directors (the Board) will consist of not more than five members, (ii) the
holders of the Class B common stock, exclusively and voting as a single class,
will be entitled by a vote of a majority of the outstanding shares of Class B
common stock, to elect two directors to the Board (requirement is eliminated
upon the Company's completion of a $20 million or greater initial public
offering), and (iii) the holders of the Class A common stock, Class B common
stock and all other common stock (except Class C common stock), exclusively
and voting as a single class without regard to whether such common stock is
Class A common stock, Class B common stock or any other common stock (except
Class C common stock) will be entitled, by a vote of a majority of the sum of
the outstanding shares of Class A common stock, Class B common stock and all
other common stock (except Class C common stock) held by such holders, to
elect three of the directors to the Board.
All shares of Class C common stock will automatically be converted into an
equal number of shares of Class B common stock without any action by any
holder thereof at such time as the number of shares of Class A common stock
over which selected shareholders shall, directly or indirectly as partners in
a partnership or a limited partnership or otherwise, have the power to vote be
reduced to less than 4,275,000 (appropriately adjusted to reflect stock
splits, dividends or combinations, reorganizations, consolidations and similar
changes hereafter effected).
In conjunction with the Acquisition, certain members of management of the
Company purchased 1,080,000 shares of common stock with restrictions (the
Restricted Stock) at $.60 per share under a restricted stock agreement (the
Restricted Stock Agreement). The Restricted Stock vests over a five-year
performance period based on the Company achieving certain performance targets,
the paydown of the Note (see Note 7) or the occurrence of other defined
events, pursuant to the Restricted Stock Agreement. No shares were vested at
August 3, 1996.
Preferred Stock
The Series A preferred stock (Series A Preferred) will not have voting
rights, except as required by law or as set forth below. Without the
affirmative vote of the holders of at least a majority of the shares of Series
A Preferred at the time outstanding, the Company is generally prohibited from
(i) issuing additional shares of preferred stock on parity with or superior to
the Series A Preferred, (ii) declaring or paying dividends or making any other
distribution on any shares of capital stock of the Company at any time created
and issued ranking junior to the Series A Preferred, or (iii) amending the
Articles of Incorporation of the Company so as to materially alter any
existing provision relating to the terms of the Series A Preferred or waive
any of the rights granted to the holders of the Series A Preferred by the
Articles of Incorporation of the Company or otherwise alter the rights or
preferences of the Series A Preferred.
After the repayment in full of the Note plus accrued interest thereon (the
date of which such repayment is made being hereinafter referred to as the Note
Repayment Date), the Series A Preferred will be entitled to receive, when and
as duly declared by the Board in the manner provided in the Articles of
Incorporation, cash dividends at the annual rate of $80 per share
(appropriately adjusted to reflect stock splits, dividends or combinations,
reorganizations, consolidations and similar changes hereafter effected) from
the date of issuance of such Series A Preferred, which dividends will be
cumulative (whether or not there shall be funds of the Company legally
available for the payment of such dividends) and will accrue (whether or not
earned or declared) from the date of issuance of such shares of Series A
Preferred, and, to the extent accrued and unpaid as of May 31 of any year,
will be payable before any dividends on any shares of common stock shall be
declared or paid or set apart for payment during the 12 months following such
May 31.
In the event of an involuntary or voluntary liquidation or dissolution of
the Company at any time, the holders of shares of Series A Preferred will be
entitled to receive out of the assets of the Company an amount equal to $1,000
per share (appropriately adjusted to reflect stock splits, dividends or
combinations, reorganizations, consolidations and similar changes hereafter
effected), plus all per-share dividends unpaid and accumulated or accrued
thereon (whether or not earned or declared) to the date of such distribution.
F-15
<PAGE>
Warrants
As part of the Acquisition, the Company issued to Melville a warrant to
purchase 1,350,000 Class A shares at an exercise price of $.60 per share (the
Melville Warrant). The Melville Warrant is immediately exercisable and remains
exercisable until the tenth anniversary of the date of grant.
The Company also issued to Melville a warrant to purchase 1,080,000 Class A
shares at an exercise price of $.60 per share (the Manager Warrant). The
number of shares subject to the Manager Warrant will be reduced by an amount
equal to the number of shares of Restricted Stock that vest over a five-year
period, pursuant to the terms of the Restricted Stock Agreement. To the extent
any shares of the Restricted Stock have not vested after the fifth year, the
Manager Warrant becomes exercisable for such number of unvested shares.
10. STOCK OPTIONS:
During May 1996, Wilsons adopted the 1996 Stock Option Plan (the Plan),
pursuant to which options to acquire an aggregate of 1,000,000 shares of the
Company's common stock may be granted. The Plan is administered by a stock
option committee which has the discretion to determine the number and purchase
price of shares subject to stock options, the term of each option, and the
time or times during its term when the option becomes exercisable. During June
1996, 195,480 options, which vest in equal installments over three years, were
granted at an exercise price of $4.44 per share.
11. EMPLOYEE BENEFIT PLANS:
401(k) Profit Sharing Plan
The Company has a defined contribution 401(k) profit sharing plan (the
401(k) Plan) for eligible employees which is qualified under sections 401(a)
and 401(k) of the Internal Revenue Code of 1986. Employees are entitled to
make tax-deferred contributions of up to 15% of their eligible compensation
(10% for those employees whose compensation in the previous year exceeded
$55,000). For employees who have worked less than three years, the Company
will match 25% of contributions, up to a maximum of 4% of the employee's
eligible compensation. For employees who have worked more than three years,
the Company will match 50% of contributions up to a maximum of 4% of the
employee's eligible compensation. The Company may also, at its discretion,
make a profit sharing contribution to the 401(k) Plan for each plan year. The
Company's contributions vest after five years of service, or at age 65
regardless of service, or upon the death of the employee.
The Predecessor Companies' contributions to the 401(k) Plan were $0.7
million, $0.6 million, $0.6 million, $0.3 million, $1.0 million and $0.1
million for the years ended December 31, 1993, 1994 and 1995, for the five
months ended May 27, 1995 and May 25, 1996, and for the period from inception
(May 26, 1996) to August 3, 1996, respectively.
Employee Stock Ownership Plan
The Predecessor Companies' employees participated in Melville's Employee
Stock Ownership Plan (ESOP). The ESOP was a defined contribution plan for all
employees meeting certain eligibility requirements. The Company elected not to
provide for a similar plan for its employees after the Acquisition.
Compensation expense of $2.1 million, $1.4 million, $2.0 million, $0.1
million and $0.2 million was recognized during the years ended December 31,
1993, 1994 and 1995, and for the five months ended May 27, 1995 and May 25,
1996.
12. TRANSACTIONS WITH MELVILLE:
The Predecessor Companies' operations were funded primarily by Melville.
Under an agreement with Melville, the Predecessor Companies received cash
necessary to fund their daily operations. The Predecessor Companies were
dependent on Melville to provide a significant portion of their working
capital financing. The weighted average interest rate on borrowings from
Melville for the years ended December 31, 1993, 1994 and 1995, and the five
months ended May 27, 1995 and May 25, 1996, was 3.3%, 4.7%, 6.4%, 5.6% and
5.8%, respectively. Prior to the Acquisition, in anticipation of the sale,
Melville contributed $124 million to the Predecessor Companies, which was
reflected as a capital contribution in the accompanying consolidated financial
statements.
F-16
<PAGE>
WILSONS THE LEATHER EXPERTS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Melville allocated administrative expenses and employee benefits to the
Predecessor Companies. Allocations were based on the Predecessor Companies'
ratable share of expense paid by Melville on behalf of the Predecessor
Companies for combined programs. The total costs allocated to the Predecessor
Companies for the years ended December 31, 1993, 1994 and 1995, and for the
five months ended May 27, 1995 and May 25, 1996 were $1.3 million, $1.3
million, $1.5 million, $0.6 million and $0.5 million, respectively, and are
included in selling, general and administrative expenses.
Melville Realty Company, Inc., a subsidiary of Melville, guaranteed the
payment of the lease obligations of certain stores operated by the Predecessor
Companies and charged a fee for that service. These fees are included in
selling, general and administrative expenses and amounted to $0.6 million,
$0.7 million, $0.7 million, $0.3 million and $0.3 million for the years ended
December 31, 1993, 1994 and 1995 and for the five months ended May 27, 1995
and May 25, 1996, respectively.
13. COMMITMENTS AND CONTINGENCIES:
Leases
The Company has noncancelable operating leases, primarily for retail stores,
which expire through 2007. A limited number of the leases contain renewal
options for periods ranging from four to six years. These leases generally
require the Company to pay costs, such as real estate taxes, common area
maintenance costs and contingent rentals, based on sales. Net rental expense
for all operating leases was as follows (in thousands):
<TABLE>
<CAPTION>
PREDECESSOR COMPANIES
--------------------------------------------
PERIOD FROM
YEARS ENDED DECEMBER 31 FIVE MONTHS ENDED INCEPTION
----------------------- ------------------- (MAY 26, 1996)
MAY 27, MAY 25, TO AUGUST 3,
1993 1994 1995 1995 1996 1996
------- ------- ------- ----------- ------- -------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
Minimum rentals......... $38,724 $43,268 $42,894 $17,436 $14,917 $5,995
Contingent rentals...... 1,893 1,368 1,092 353 449 154
------- ------- ------- ------- ------- ------
40,617 44,636 43,986 17,789 15,366 6,149
Less--Sublease rentals.. -- -- (18) -- (122) (49)
------- ------- ------- ------- ------- ------
Total............... $40,617 $44,636 $43,968 $17,789 $15,244 $6,100
======= ======= ======= ======= ======= ======
</TABLE>
As of August 3, 1996, the future rental payments due under operating leases
and future minimum sublease rental income, excluding lease obligations, for
closed stores were as follows (in thousands):
<TABLE>
<S> <C>
Fiscal years ending:
1997.......................................................... $ 31,867
1998.......................................................... 28,823
1999.......................................................... 25,210
2000.......................................................... 21,999
2001.......................................................... 17,906
Thereafter...................................................... 36,249
--------
Total....................................................... $162,054
========
Total future minimum sublease rental income..................... $ 3,852
========
</TABLE>
As of August 3, 1996, a significant number of the existing lease obligations
continue to be guaranteed by Melville. Any leases entered into subsequent to
the Acquisition will no longer be guaranteed by Melville.
F-17
<PAGE>
WILSONS THE LEATHER EXPERTS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Litigation
The Company is involved in various legal actions arising in the ordinary
course of business. In the opinion of management, the ultimate disposition of
these matters will not have a material adverse effect on the Company's
consolidated financial position and results of operations.
Pursuant to the sale agreement, Melville has agreed to indemnify the Company
for certain claims. For certain other claims, Melville's indemnification
liability is limited to claims in the aggregate which exceed $1.2 million but
not to exceed $12 million.
Guarantees
As of August 3, 1996, the Company had outstanding letters of credit of
approximately $60.9 million which were primarily used to guarantee purchase
orders with foreign vendors.
Purchase Commitments
The Company has a contingent liability with respect to an unconditional
contractual obligation for the purchase of supplies. The Company had a
commitment to purchase $0.1 million of these supplies on an as-needed basis as
of August 3, 1996. Total payments under the agreement, which was entered into
in 1994, were $1.8 million, $1.6 million, $0.5 million and $0.1 million for
the years ended December 31, 1994 and 1995, for the five months ended May 25,
1996, and for the period from inception (May 26, 1996) to August 3, 1996,
respectively.
14. PROPOSED PUBLIC OFFERING:
On October 11, 1996, the Company declared a .9-for-1 reverse split of common
stock which has been retroactively reflected in the accompanying consolidated
financial statements as if the split had occurred as of inception (May 26,
1996).
The Company intends to file with the Securities and Exchange Commission a
Form S-1 Registration Statement regarding the proposed sale of 3,000,000
shares of common stock (excluding the underwriters' overallotment option to
purchase an additional 450,000 shares of common stock). The proceeds from the
offering will be used to repay any outstanding borrowings on the Revolver.
There can be no assurance that the Company will complete this proposed public
offering.
F-18
<PAGE>
[COLOR PICTURES]
<PAGE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
NO DEALER, SALESPERSON OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS IN CONNECTION WITH THE OFFERING
OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH IN-
FORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED
BY THE COMPANY OR ANY UNDERWRITER. THIS PROSPECTUS DOES NOT CONSTITUTE AN OF-
FER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY OF THE SECURITIES OFFERED
HEREBY IN ANY JURISDICTION IN WHICH SUCH OFFER TO SELL OR SOLICITATION IS NOT
AUTHORIZED, OR IN WHICH THE PERSON MAKING SUCH OFFER OR SOLICITATION IS NOT
QUALIFIED TO DO SO OR TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER
OR SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE
HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THE IN-
FORMATION CONTAINED HEREIN IS CURRENT AS OF ANY TIME SUBSEQUENT TO THE DATE
HEREOF OR THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE
SUCH DATE.
---------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary........................................................ 3
Risk Factors.............................................................. 6
The Acquisition........................................................... 11
Pro Forma Unaudited Consolidated Statements of Operations................. 12
Use of Proceeds........................................................... 15
Dividend Policy........................................................... 15
Dilution.................................................................. 16
Capitalization............................................................ 17
Selected Historical and Pro Forma Consolidated Financial Data............. 18
Management's Discussion and Analysis of Financial Condition and Results of
Operations............................................................... 20
Business.................................................................. 28
Management................................................................ 40
Certain Transactions...................................................... 44
Security Ownership of Certain Beneficial Owners and Management............ 49
Description of Capital Stock.............................................. 50
Shares Eligible for Future Sale........................................... 53
Underwriting.............................................................. 55
Legal Matters............................................................. 56
Experts................................................................... 56
Additional Information.................................................... 56
Index to Consolidated Financial Statements................................ F-1
</TABLE>
---------------
UNTIL , 1996 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL DEAL-
ERS EFFECTING TRANSACTIONS IN THE REGISTERED SECURITIES, WHETHER OR NOT PAR-
TICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS
IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN ACT-
ING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR
SUBSCRIPTIONS.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
3,000,000 SHARES
[LOGO OF WILSONS LEATHER EXPERTS APPEARS HERE]
COMMON STOCK
---------------
PROSPECTUS
---------------
OPPENHEIMER & CO., INC.
LADENBURG, THALMANN & CO. INC.
PIPER JAFFRAY INC.
, 1996
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
Expenses in connection with the issuance and distribution of the shares of
Common Stock being registered hereunder, other than underwriting commissions
and expenses, are estimated below.
<TABLE>
<S> <C>
SEC registration fee............................................ $ 16,656
NASD filing fee................................................. 5,330
Nasdaq listing fee.............................................. 44,125
Legal fees and expenses......................................... 290,000
Accounting fees and expenses.................................... 150,000
Blue Sky fees and expenses...................................... 25,000
Printing expenses............................................... 100,000
Transfer agent fees and expenses................................ 15,000
Miscellaneous expenses.......................................... 23,889
--------
Total....................................................... $670,000
========
</TABLE>
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Under Article V of the Company's By-laws, the Company indemnifies its
directors and officers to the extent permitted by Minnesota Statutes Section
302A.521. Section 302A.521 requires the Company to indemnify a person made or
threatened to be made a party to a proceeding, by reason of the former or
present official capacity of the person with respect to the Company, against
judgments, penalties, fines, including without limitation, excise taxes
assessed against the person with respect to an employee benefit plan,
settlements, and reasonable expenses, including attorneys' fees and
disbursements, if, with respect to the acts or omissions of the person
complained of in the proceeding, such person (1) has not been indemnified by
another organization or employee benefit plan for the same judgments,
penalties, fines, including without limitation, excise taxes assessed against
the person with respect to an employee benefit plan, settlements, and
reasonable expenses, including attorneys' fees and disbursements, incurred by
the person in connection with the proceeding with respect to the same acts or
omissions; (2) acted in good faith; (3) received no improper personal benefit,
and statutory procedure has been followed in the case of any conflict of
interest by a director; (4) in the case of a criminal proceeding, had no
reasonable cause to believe the conduct was unlawful; and (5) in the case of
acts or omissions occurring in the person's performance in the official
capacity of director or, for a person not a director, in the official capacity
of officer, committee member, employee or agent, reasonably believed that the
conduct was in the best interests of the Company, or in the case of
performance by a director, officer, employee or agent of the Company as a
director, officer, partner, trustee, employee or agent of another organization
or employee benefit plan, reasonably believed that the conduct was not opposed
to the best interests of the Company. In addition, Section 302A.521, subd. 3
requires payment by the Company, upon written request, of reasonable expenses
in advance of final disposition in certain instances. A decision as to
required indemnification is made by a majority of the disinterested Board of
Directors present at a meeting at which a disinterested quorum is present, or
by a designated committee of disinterested directors, by special legal
counsel, by the disinterested shareholders, or by a court.
Insofar as indemnification for liabilities arising under the Act may be
permitted to directors, officers or persons controlling the Company pursuant
to the foregoing provisions, the Company has been informed that in the opinion
of the Commission, such indemnification is against public policy as expressed
in the Act, and is therefore unenforceable.
Under the terms of the form of Underwriting Agreement filed as Exhibit 1.1
hereto, the Underwriters have agreed to indemnify, under certain conditions,
the Company, its directors, certain of its officers and persons who control
the Company within the meaning of the Act, against certain liabilities.
II-1
<PAGE>
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
During the past three years, the Company has sold the following securities
pursuant to exemptions from registration under the Act. All such sales were
made in reliance upon the exemptions from registration provided under Section
4(2) of the Act for transactions not involving a public offering or pursuant
to Rule 701 under the Act for securities sold pursuant to certain compensatory
benefit plans and contracts relating to compensation, and related state
securities laws. Unless otherwise stated, all shares were issued directly by
the Company, no underwriters were involved and, except as otherwise noted
below, no discount, commission or other transaction-related remuneration was
paid. Share figures have been adjusted for the 0.9-for-1 reverse stock split
that was effective on October 11, 1996.
1. On May 25, 1996, the Company issued 4,320,000 shares of its Class A
Common Stock to Melville Corporation, valued at $2.6 million or $.60 per
share, as partial consideration for the Acquisition.
2. On May 25, 1996, the Company sold an aggregate of 2,925,000 shares of
its Class B Common Stock, of which 1,080,000 shares are Restricted
Stock, to Company employees for $1,755,000 or $.60 per share.
3. On May 25, 1996, the Company sold an aggregate of 405,000 shares of its
Class C Common Stock to Company employees for $243,000 or $.60 per
share.
4. On May 25, 1996, the Company issued 7,405 shares of its Series A
Preferred Stock to Melville Corporation, valued at $7.4 million or
$1,000 per share, as partial consideration for the Acquisition.
5. On May 25, 1996, the Company issued a warrant to purchase 1,350,000
shares of its Class A Common Stock at a price per share of $.60 (with
both number of shares and price per share subject to periodic
adjustment) to Melville Corporation, as partial consideration for the
Acquisition.
6. On May 25, 1996, the Company issued a warrant to purchase 1,080,000
shares of its Class A Common Stock at a price per share of $.60 (with
both number of shares and price per share subject to periodic
adjustment) to Melville Corporation, as partial consideration for the
Acquisition.
7. On June 26, 1996, the Company issued options to purchase an aggregate of
184,680 shares of Class C Common Stock at an exercise price of $4.44 per
share to 74 Company employees.
8. On June 26, 1996, the Company issued an option to purchase 10,800 shares
of Class C Common Stock at an exercise price of $4.44 per share to
Thomas J. Brosig, a director of the Company.
9. On October 10, 1996, the Company issued an option to purchase 4,500
shares of Class C Common Stock at an exercise price of $4.44 per share
to an employee of the Company.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
------- -----------
<C> <S> <C>
1.1 *Form of Underwriting Agreement.
2.1 Sale Agreement dated as of May 24, 1996 by and among Mel-
ville Corporation, Wilsons Center, Inc., and Wilsons The
Leather Experts Inc.
3.1 Amended Articles of Incorporation of the Registrant dated
May 24, 1996.
3.2 *Amended Articles of Incorporation of the Registrant,
adopted subject to completion of the Offering.
3.3 By-laws of the Registrant.
3.4 *Amended By-laws of the Registrant, adopted subject to
completion of the Offering.
</TABLE>
II-2
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
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<C> <S> <C>
4.1 *Specimen of Common Stock certificate.
4.2 Warrant No. 1 issued to Melville Corporation for the Pur-
chase of 1,350,000 shares of Common Stock of Wilsons The
Leather Experts Inc., dated May 25, 1996.
4.3 Warrant No. 2 issued to Melville Corporation for the Pur-
chase of 1,080,000 shares of Common Stock of Wilsons The
Leather Experts Inc., dated May 25, 1996.
4.4 *Form of Underwriter Warrants.
4.5 Shareholder Agreement dated as of May 25, 1996 among
Leather Investors Limited Partnership I, Leather Investors
Limited Partnership II, the Other Investors Named on the
Signature Pages thereto and Wilsons The Leather Experts
Inc.
4.6 Amendment to the Shareholder Agreement among Leather In-
vestors Limited Partnership I, Leather Investors Limited
Partnership II, the Other Investors Named on the Signature
Pages thereto and Wilsons The Leather Experts Inc.
4.7 Restricted Stock Agreement dated as of May 25, 1996, by
and among Wilsons The Leather Experts Inc. and the Indi-
viduals Named on the Signature Pages thereto.
4.8 Registration Rights Agreement dated as of May 25, 1996, by
and among Melville Corporation, Wilsons The Leather Ex-
perts Inc., the Managers Listed on the Signature Pages
thereto, Leather Investors Limited Partnership I and the
Partners Listed on the Signature Pages thereto.
5.1 *Opinion of Faegre & Benson LLP.
10.1 Wilsons The Leather Experts Inc. 1996 Stock Option Plan.
10.2 Wilsons The Leather Experts Inc. Executive and Key Manage-
ment Incentive Plan.
10.3 Wilsons The Leather Experts Inc. 401(k) Plan.
10.4 Employment Agreement dated as of May 25, 1996 between
Wilsons The Leather Experts Inc. and Joel N. Waller.
10.5 Employment Agreement dated as of May 25, 1996 between
Wilsons The Leather Experts Inc. and David L. Rogers.
10.6 Credit Agreement dated as of May 25, 1996 among Wilsons
Leather Holdings Inc., as Borrower, the Lenders signatory
thereto from time to time, as Lenders, and General Elec-
tric Capital Corporation, as Agent, Lender and Swing Line
Lender.
10.7 Security Agreement dated as of May 25, 1996 by Wilsons
Leather Holdings Inc. and the other grantors listed on the
signature pages thereto, in favor of General Electric Cap-
ital Corporation, in its capacity as Agent for Lenders.
10.8 Security Agreement dated as of May 25, 1996 by Wilsons
Leather Holdings Inc. and the other grantors listed on the
signature pages thereto, in favor of Melville Corporation.
10.9 Subordinated Promissory Note dated May 25, 1996.
11.1 Computation of per share loss.
21.1 Subsidiaries of the Registrant.
23.1 Consent of Arthur Andersen LLP.
23.2 Consent of KPMG Peat Marwick LLP.
23.3 Consent of Faegre & Benson LLP (to be included in Exhibit
No. 5.1 to the Registration Statement).
24.1 Powers of Attorney.
27.1 Financial Data Schedule.
</TABLE>
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* To be filed by Amendment.
Share figures above have been adjusted for the 0.9-for-1 reverse stock split
that was effective on October 11, 1996.
II-3
<PAGE>
(B) FINANCIAL STATEMENT SCHEDULES
None required.
ITEM 17. UNDERTAKINGS
Insofar as indemnification for liabilities arising under the Act may be
permitted to directors, officers, and controlling persons of the Company
pursuant to the provisions summarized in Item 14 above, or otherwise, the
Company has been advised that, in the opinion of the Commission, such
indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the Company of expenses
incurred or paid by a director, officer or controlling person of the Company
in the successful defense of any action, suit, or proceeding) is asserted by
such director, officer, or controlling person in connection with the
securities being registered, the Company will, unless in the opinion of its
counsel the matter has been settled by controlling precedent, submit to a
court of appropriate jurisdiction the question whether such indemnification by
it is against public policy as expressed in the Act, and will be governed by
the final adjudication of such issue.
The undersigned Company hereby undertakes to provide to the Underwriters, at
the closing specified in the Underwriting Agreement, certificates in such
denominations and registered in such names as required by the Underwriters to
permit prompt delivery to each purchaser.
The undersigned Company hereby undertakes that:
(1) For purposes of determining any liability under the Act, the
information omitted from the form of prospectus filed as part of this
registration statement in reliance upon Rule 430A and contained in a form
of prospectus filed by the Company under Rule 424(b)(1) or (4) or 497(h)
under the Act shall be deemed to be part of this registration statement as
of the time it was declared effective.
(2) For the purpose of determining any liability under the Act, each
post-effective amendment that contains a form of prospectus shall be deemed
to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed
to be the initial bona fide offering thereof.
II-4
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THE COMPANY HAS
DULY CAUSED THIS REGISTRATION STATEMENT TO BE SIGNED ON ITS BEHALF BY THE
UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN THE CITY OF MINNEAPOLIS, STATE OF
MINNESOTA, ON OCTOBER 11, 1996.
Wilsons The Leather Experts Inc.
*
By __________________________________
Joel N. Waller
Chairman and Chief Executive
Officer
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS
REGISTRATION STATEMENT HAS BEEN SIGNED BY THE FOLLOWING PERSONS IN THE
CAPACITIES INDICATED ON OCTOBER 11, 1996.
<TABLE>
<CAPTION>
SIGNATURE TITLE
--------- -----
<S> <C>
* Chairman of the Board of Directors and
___________________________________________ Chief Executive Officer (Principal
Joel N. Waller Executive Officer)
/s/ Douglas J. Treff Vice President, Finance and Chief Financial
___________________________________________ Officer (Principal Financial and
Douglas J. Treff Accounting Officer)
</TABLE>
Lyle Berman
Thomas J. Brosig
Morris Goldfarb Board of Directors*
David L. Rogers
Joel N. Waller
- --------
* Douglas J. Treff, by signing his name hereto, does hereby sign this
document on behalf of each of the above-named officers and/or directors of
the Company pursuant to powers of attorney duly executed by such persons.
/s/ Douglas J. Treff
By __________________________________
Douglas J. Treff, Attorney-in-fact
II-5
<PAGE>
REGISTRATION NO. 33-
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------
EXHIBITS
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
----------------
WILSONS THE LEATHER EXPERTS INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION PAGE
------- ----------- ----
<C> <S> <C>
1.1 *Form of Underwriting Agreement.
2.1 Sale Agreement dated as of May 24, 1996 by and among Mel-
ville Corporation, Wilsons Center, Inc., and Wilsons The
Leather Experts Inc......................................
3.1 Amended Articles of Incorporation of the Registrant dated
May 24, 1996.............................................
3.2 *Amended Articles of Incorporation of the Registrant,
adopted subject to completion of the Offering.
3.3 By-laws of the Registrant................................
3.4 *Amended By-laws of the Registrant, adopted subject to
completion of the Offering.
4.1 *Specimen of Common Stock certificate.
4.2 Warrant No. 1 issued to Melville Corporation for the Pur-
chase of 1,350,000 shares of Common Stock of Wilsons The
Leather Experts Inc., dated May 25, 1996.................
4.3 Warrant No. 2 issued to Melville Corporation for the Pur-
chase of 1,080,000 shares of Common Stock of Wilsons The
Leather Experts Inc., dated May 25, 1996.................
4.4 *Form of Underwriter Warrants.
4.5 Shareholder Agreement dated as of May 25, 1996 among
Leather Investors Limited Partnership I, Leather Invest-
ors Limited Partnership II, the Other Investors Named on
the Signature Pages thereto and Wilsons The Leather Ex-
perts Inc................................................
4.6 Amendment to the Shareholder Agreement among Leather In-
vestors Limited Partnership I, Leather Investors Limited
Partnership II, the Other Investors Named on the Signa-
ture Pages thereto and Wilsons The Leather Experts Inc...
4.7 Restricted Stock Agreement dated as of May 25, 1996, by
and among Wilsons The Leather Experts Inc. and the Indi-
viduals Named on the Signature Pages thereto.............
4.8 Registration Rights Agreement dated as of May 25, 1996,
by and among Melville Corporation, Wilsons The Leather
Experts Inc., the Managers Listed on the Signature Pages
thereto, Leather Investors Limited Partnership I and the
Partners Listed on the Signature Pages thereto...........
5.1 *Opinion of Faegre & Benson LLP.
10.1 Wilsons The Leather Experts Inc. 1996 Stock Option Plan..
10.2 Wilsons The Leather Experts Inc. Executive and Key Man-
agement Incentive Plan...................................
10.3 Wilsons The Leather Experts Inc. 401(k) Plan.............
10.4 Employment Agreement dated as of May 25, 1996 between
Wilsons The Leather Experts Inc. and Joel N. Waller......
10.5 Employment Agreement dated as of May 25, 1996 between
Wilsons The Leather Experts Inc. and David L. Rogers.....
10.6 Credit Agreement dated as of May 25, 1996 among Wilsons
Leather Holdings Inc., as Borrower, the Lenders signatory
thereto from time to time, as Lenders, and General Elec-
tric Capital Corporation, as Agent, Lender and Swing Line
Lender...................................................
10.7 Security Agreement dated as of May 25, 1996 by Wilsons
Leather Holdings Inc. and the other grantors listed on
the signature pages thereto, in favor of General Electric
Capital Corporation, in its capacity as Agent for Lend-
ers......................................................
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION PAGE
------- ----------- ----
<C> <S> <C>
10.8 Security Agreement dated as of May 25, 1996 by Wilsons
Leather Holdings Inc. and the other grantors listed on
the signature pages thereto, in favor of Melville
Corporation..............................................
10.9 Subordinated Promissory Note dated May 25, 1996..........
11.1 Computation of per share loss............................
21.1 Subsidiaries of the Registrant...........................
23.1 Consent of Arthur Andersen LLP...........................
23.2 Consent of KPMG Peat Marwick LLP.........................
23.3 Consent of Faegre & Benson LLP (to be included in Exhibit
No. 5.1 to the Registration Statement).
24.1 Powers of Attorney.......................................
27.1 Financial Data Schedule..................................
</TABLE>
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*To be filed by Amendment.
Share figures above have been adjusted for the 0.9-for-1 reverse stock
split that was effective on October 11, 1996.
<PAGE>
Exhibit 2.1
SALE AGREEMENT
dated as of
May 24, 1996
by and among
Melville Corporation,
Wilsons Center Inc.,
and
Wilsons The Leather Experts Inc.
<PAGE>
SALE AGREEMENT
AGREEMENT dated as of May 24, 1996 by and among Wilsons The Leather
Experts Inc., a Minnesota corporation ("Newco"), Wilsons Center, Inc., a
Minnesota corporation (the "Company"), and Melville Corporation, a New York
corporation ("Melville").
W I T N E S S E T H:
WHEREAS, Melville is the owner of 100 shares of common stock of the
Company (the "Company Shares"), constituting one hundred percent of the issued
and outstanding capital stock of the Company;
WHEREAS, Melville desires to transfer the Company Shares to Newco in
exchange for $2,000,000, the Common Shares (as defined below) of Newco, the
Preferred Shares (as defined below) of Newco, the Note (as defined below) of
Newco, the Warrant (as defined below) and the Management Warrant (as defined
below);
WHEREAS, the consummation of the transactions contemplated hereby is a
condition precedent to the obligations of the parties to the Stock Purchase
Agreements (as defined below) to consummate the transactions contemplated
thereby;
NOW, THEREFORE, in consideration of good and valuable consideration
the receipt and sufficiency of which is hereby acknowledged, together with the
mutual covenants and agreements herein contained, the parties hereto agree as
follows:
ARTICLE 1
DEFINITIONS
1.1 Definitions. (a) The following terms, as used herein, have the
following meanings:
"Affiliate" means, with respect to any Person, any other Person
directly or indirectly controlling, controlled by, or under common control with
such Person; provided that none of the Company, Newco or any Subsidiary of the
Company or Newco shall be considered an Affiliate of Melville for purposes of
this Agreement.
"Articles of Incorporation" means the articles of incorporation of
Newco having substantially the terms and conditions set forth in Exhibit D to be
filed prior to the Closing Date.
"Balance Sheet" means the consolidated balance sheet of the Company,
the Subsidiaries and the Excluded Subsidiaries as at December 31, 1995.
<PAGE>
"Balance Sheet Date" means December 31, 1995.
"Base Working Capital" means $85,000,000.
"Benefit Arrangement" means any employment, severance or similar
contract, arrangement or policy, or any plan or arrangement (whether or not
written) providing for severance benefits, insurance coverage (including any
self-insured arrangements), workers' compensation, disability benefits,
supplemental unemployment benefits, vacation benefits, retirement benefits,
deferred compensation, profit-sharing, bonuses, stock options, stock
appreciation rights or other forms of incentive compensation or post-retirement
insurance, compensation or benefits that (i) is not an Employee Plan, (ii) is
entered into or maintained, as the case may be, by Melville or any of its ERISA
Affiliates and (iii) covers any employee or former employee (or any of their
respective dependents) of the Company or any of its Subsidiaries.
"Brooklyn Park Property" means the distribution center/warehouse
located at 7401 Boone Avenue North, Brooklyn Park, MN 55428.
"Business Day" means any day other than a Saturday, Sunday or a day
which is a statutory holiday under the laws of the United States, the State of
New York or the State of Minnesota.
"Charter" means, with respect to any juridical Person, the certificate
or articles of incorporation, or other analogous organizational or constituent
documents of such Person (including, in the case of a partnership, such
partnership's partnership agreement, or in the case of a limited liability
company, such limited liability company's limited liability company agreement).
"Class A Common Stock" means the Class A Common Stock, par value $.01
per share of Newco having the rights, voting power, preferences and restrictions
designated in the Articles of Incorporation.
"Class B Common Stock" means the Class B Common Stock, par value $.01
per share of Newco having the rights, voting power, preferences and restrictions
designated in the Articles of Incorporation.
"Class C Common Stock" means the Class C Common Stock, par value $.01
per share of Newco having the rights, preferences and restrictions designated in
the Articles of Incorporation.
"Closed Store Lease" means each real property lease related to stores
that have been closed as listed in Schedule 1.1.
"Closing Date" means the date of the Closing.
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<PAGE>
"Code" means the United States Internal Revenue Code of 1986, as
amended.
"Common Shares" means 4,800,000 shares of the Class A Common Stock to
be issued by Newco to Melville.
"Common Stock" means the Common Stock, par value $.01 per share, of
Newco.
"Contribution" means, with respect to any Lease, the "adjusted
contribution A" of the Store that is the subject of such Lease for the fiscal
year ended December 31, 1995, as reflected in the 1995 Revised Stores Profit and
Loss Statement of the Company and the Subsidiaries previously delivered to
Newco.
"Designated Closed Store Lease" means each Closed Store Lease to which
the Company or a Subsidiary is a party and does not include any Closed Store
Lease to which an Excluded Subsidiary (but not the Company or a Subsidiary) is a
party.
"Effective Rent" means, with respect to any Lease, the Original
Minimum Rent of such Lease plus the Original Percentage Rent of such Lease.
"Employee Plan" means any "employee benefit plan", as defined in
Section 3(3) of ERISA, that (i) is subject to any provision of ERISA, (ii) is
maintained, administered or contributed to by Melville or any of its ERISA
Affiliates and (iii) covers any employee or former employee (or any of their
respective dependents) of the Company or any of its Subsidiaries.
"Employment Agreements" means the employment agreement between Newco
and Joel Waller and the employment agreement between Newco and David Rogers,
both to be executed on the Closing Date in substantially the form as set forth
in Exhibit J.
"Environmental Claim" means any notice from a Person alleging (i) the
Company's or any Subsidiary's material non-compliance with, or failure to
perform any material duty under, any Environmental Laws or (ii) potential
material liability of the Company or any Subsidiary (including, without
limitation, potential material liability for investigatory costs, cleanup costs,
governmental response costs, natural resource damages, property damages,
personal injuries, or penalties) arising out of, based on or resulting from (A)
the presence, or release into the environment, of any Hazardous Substance at any
location, whether or not owned by the Company or any Subsidiary, or (B)
circumstances forming the basis of any violation, or alleged violation, of any
Environmental Law.
"Environmental Laws" means any and all federal, state, local and
foreign statutes, laws, regulations, ordinances, rules, judgments, orders,
requirements or directives of any federal, state, local or foreign government,
ministry, department or agency as in effect on the Closing Date, relating to
protection of the environment or to the effect on the environment of any
hazardous or toxic substances or to human health and safety, including without
-3-
<PAGE>
limitation (i) the generation, handling, treatment, storage, disposal,
transportation or release of any hazardous or toxic substance and (ii) the
protection, conservation, regulation, management or remediation of soil,
groundwater, surface water or air.
"ERISA" means the Employee Retirement Income Security Act of 1974, as
amended and any successor statute thereto, together with all regulations
thereunder.
"ERISA Affiliate" of any entity means any other entity (whether or not
an Affiliate of such entity) which, together with such entity, would be treated
as a single employer under Section 414 of the Code.
"Escrow Agent" means The Bank of New York, or such other party as may
be mutually agreed by Newco and Melville.
"Escrow Agreement" means an escrow agreement in form and substance
reasonably satisfactory to Newco, Melville and the Escrow Agent, containing
terms and conditions which are customary for such agreements.
"Excluded Subsidiary" means each subsidiary of the Company that is a
party to a Closed Store Lease and is not otherwise a party to a Lease.
"Final Working Capital" means the Closing Working Capital (i) as shown
in the calculation delivered pursuant to Section 2.4(a), if no notice of
disagreement with respect thereto is duly delivered pursuant to Section 2.4(b);
or (ii) if such a notice of disagreement is delivered, (A) as agreed by Newco
and Melville pursuant to Section 2.4(c) or (B) in the absence of such agreement,
as shown in the Independent Accountant's calculation delivered pursuant to
Section 2.4(c); provided that, in no event shall Final Working Capital be less
than the calculation of Closing Working Capital delivered pursuant to Section
2.4(b) or more than the calculation of Closing Working Capital delivered
pursuant to Section 2.4(a).
"Hazardous Substances" means (i) any flammable substances, explosives,
radioactive materials, hazardous wastes, toxic substances, pollutants and
contaminants and all other materials or substances identified in or regulated by
any Environmental Laws and (ii) asbestos, PCBs, urea formaldehyde, nuclear fuel
or material, chemical waste, known carcinogens, petroleum products and by-
products (including any fraction thereof) and radon.
"Headquarters Lease" means the Lease Agreement dated as of September
1, 1991 between the Equitable Life Assurance Society of the United States, as
landlord and Wilsons House of Suede Inc., as tenant for floors 3, 4, 5 and 6 at
Interchange South Building, 400 Highway 169 South, St. Louis Park, Minnesota,
which is subject to that certain Lease Assignment and Assumption Agreement dated
as of November 22, 1995 between Wilsons House of Suede, Inc., as Assignor and
Cargill, Incorporated, as Assignee and Consent to Assignment among the Equitable
Life Assurance Society of the United States, Wilsons House of Suede, Inc. and
Cargill, Incorporated.
-4-
<PAGE>
"HSR Act" means the Hart-Scott-Rodino Antitrust Improvements Act of
1976, as amended.
"Income Tax" means any Tax which is, in whole or in part, based on or
measured by income or gains, together with any interest, penalty, addition to
tax or additional amounts imposed by any governmental authority responsible for
the imposition of any such tax (domestic or foreign) (a "Taxing Authority").
"Indebtedness" means (i) all indebtedness of the Company or any
Subsidiary to lending institutions and all other indebtedness for borrowed money
created, incurred or accrued by the Company or any Subsidiary, or guaranteed by
the Company or any Subsidiary or for which the Company or any Subsidiary or the
holder is otherwise liable or responsible (including an agreement to assume the
indebtedness of others), (ii) all amounts owing by the Company or any Subsidiary
under indentures, and (iii) all payment obligations secured by any mortgage,
indenture or deed of trust upon any assets owned by the Company or any
Subsidiary though neither the Company nor any Subsidiary may have assumed or
become liable for the payment of such obligations; provided that (a)
intercompany indebtedness between Melville and its Affiliates, on the one hand,
and the Company and the Subsidiaries, on the other hand, that will no longer be
outstanding on the Closing Date as provided in Section 6.5, or between the
Company and its Subsidiaries or between Subsidiaries, (b) outstanding letters of
credit other than any letters of credit that Melville or a Melville Affiliate
has caused the Company to be obligated under without the knowledge of the
Management Disclosure Group, and (c) payables in the ordinary course of business
in connection with the obtaining of materials or services shall not be included
in this definition.
"Independent Accountants" means Deloitte & Touche LLP, or if Deloitte
& Touche LLP is unwilling to act as the Independent Accountants, a nationally
recognized independent accounting firm chosen by, and mutually acceptable to,
both Newco and Melville (other than KPMG Peat Marwick or Arthur Andersen & Co.,
SC), or if Newco and Melville are unable to mutually agree upon Independent
Accountants, then Newco and Melville shall mutually request the American
Arbitration Association to appoint the Independent Accountants; provided that
the Independent Accountants shall not include KPMG Peat Marwick or Arthur
Andersen & Co., SC.
"Intellectual Property Right" means any trademark, service mark, trade
name, trade dress, invention, patent, trade secret, copyright, know-how
(including any registrations or applications for registration of any of the
foregoing) or any other similar type of proprietary intellectual property right.
"Investor Stock Purchase Agreement" means the Stock Purchase Agreement
between Melville and the Investors to be executed by the Investors on or prior
to the Closing Date having the terms and conditions substantially as set forth
in Exhibit G.
-5-
<PAGE>
"Investors" means the investors listed on the signature pages to the
Investor Stock Purchase Agreement.
"Lease" means each real property lease or sublease to which the
Company or any Subsidiary is a party, other than a Closed Store Lease or the
Headquarters Lease.
"Lien" means, with respect to any property or asset, any mortgage,
lien, pledge, charge, security interest, encumbrance or other adverse claim of
any kind in respect of such property or asset. For the purposes of this
Agreement, a Person shall be deemed to own subject to a Lien any property or
asset which it has acquired or holds subject to the interest of a vendor or
lessor under any conditional sale agreement, capital lease or other title
retention agreement relating to such property or asset.
"Management Disclosure Group" means Joel Waller, David Rogers, Corrie
Lapinsky, Tom Wildenberg and any officer of the Company with the title of vice
president or a title senior to the title of vice president.
"Management Shares" means 2,050,000 shares of Class B Common Stock,
450,000 shares of Class C Common Stock and 1,200,000 shares of restricted Class
B Common Stock of Newco to be issued by Newco to the Managers pursuant to the
Manager Stock Purchase Agreement.
"Management Warrant" means the warrant to be issued by Newco to
Melville to purchase 1,200,000 shares of Class A Common Stock of Newco, as such
number of shares may be reduced by the terms of the Management Warrant, having
the terms and conditions specified in Exhibit C hereto.
"Manager Stock Purchase Agreement" means the Stock Purchase Agreement
between Newco and the Managers to be executed by the Managers on or prior to the
Closing Date having the terms and conditions substantially as set forth in
Exhibit F.
"Managers" means the managers listed on the signature pages to the
Manager Stock Purchase Agreement.
"Material Adverse Effect" means, with respect to any Person, a
material adverse effect on the condition (financial or otherwise), business,
assets, operations, or results of operations of such Person and its
Subsidiaries, taken as whole.
"Melville's ESOP" means The Melville Corporation and Subsidiaries
Employee Stock Ownership Plan.
"Melville's 401(k) Profit Sharing Plan" means the 401(k) Profit
Sharing Plan of Melville Corporation and Affiliated Companies.
-6-
<PAGE>
"Melville Group" means, with respect to federal Income Taxes, the
affiliated group of corporations (as defined in Section 1504(a) of the Code) of
which Melville is a member and, with respect to state income or franchise Taxes,
an affiliated, consolidated, combined, unitary or similar group of which
Melville, the Company or any of their respective Affiliates is a member.
"Melville's Individual Account Plans" means Melville's ESOP and
Melville's 401(k) Profit Sharing Plan.
"Melville Subsidiary" means any Subsidiary of Melville other than
Newco, the Company or any of the Company's Subsidiaries.
"MRC" means Melville Realty Company, Inc., a New York corporation.
"Multiemployer Plan" means a multiemployer plan, as defined in Section
3(37) of ERISA.
"1933 Act" means the Securities Act of 1933, as amended, and the rules
and regulations promulgated thereunder.
"1934 Act" means the Securities Exchange Act of 1934, as amended, and
the rules and regulations promulgated thereunder.
"Note" means the senior secured subordinated note due December 31,
2000 of Newco in the principal amount of $55,811,000 to be issued to Melville by
Newco having the terms and conditions specified in Exhibit A hereto.
"Note Repayment Date" means the date on which all of principal and
interest payable under the Note has been paid in full.
"Original Minimum Rent" means, with respect to any Lease, the amount
provided for by such Lease as minimum, base or other fixed amount of rent as of
the Closing Date.
"Original Percentage Rent" means, with respect to any Lease, the
amount of percentage rent provided for by such Lease, calculated in accordance
with the percentages and breakpoints provided for in such Lease, for (i) the
most recent 12-month period ending prior to the Closing Date or (ii) such other
period as is specifically provided for in such Lease.
"Person" means an individual, corporation, limited liability company,
partnership, association, trust or other entity or organization, including a
government or political subdivision or an agency or instrumentality thereof.
"Pledge Agreements" means each pledge agreement to be entered into on
the Closing Date between Melville and the Company, Rosedale Wilsons Inc., and
River Hills
-7-
<PAGE>
Wilsons Inc., respectively, having terms and conditions substantially similar to
the terms and conditions of the pledge agreement to be entered into on or prior
to the Closing Date between Wilsons House of Suede, Inc., a California
corporation, a Subsidiary of the Company, certain other Subsidiaries of the
Company and GE Capital as agent for the lenders thereunder (the "Senior Pledge
Agreement") except that the Pledge Agreement shall vary from the Senior Pledge
Agreement in such other respects as reasonably required by GE capital.
"Post-Closing Tax Period" means any Tax period ending after the
Closing Date, excluding the portion, if any, of such Tax period up to and
including the Closing Date.
"Pre-Closing Tax Period" means any Tax period ending on or before the
Closing Date; provided that if a Tax period ending after the Closing Date
contains any days which fall prior to or on the Closing Date, any portion of
such Tax period up to or including the Closing Date shall also be included in
the Pre-Closing Tax Period.
"Preferred Shares" means 7,405 shares of Preferred Stock of Newco to
be issued to Melville pursuant to Section 2.2(a).
"Preferred Stock" means the Series A Preferred Stock, par value $.01
per share, of Newco having the rights, voting power, preferences and
restrictions designated in the Articles of Incorporation.
"Registration Rights Agreement" means the registration rights
agreement to be entered into on the Closing Date between Melville, Newco, the
Managers, Leather Investors Limited Partnership I and the partners thereof
listed on the signature pages thereto having the terms and conditions specified
in Exhibit E hereto.
"Release Payment" means any payment required by any Landlord in
connection with a Lease before delivery by such Landlord of its Consent (as
hereinafter defined) with respect thereto, regardless of whether such payment is
required pursuant to the terms of the applicable Lease or is otherwise required
by such Landlord (including but not limited to any additional remodeling costs,
transfer or assignment charges, administration fees and fees and expenses of
counsel in connection therewith).
"Remediation" means any investigation, testing, remediation, cleanup,
treatment, monitoring, removal, disposal or abatement activities.
"Rent Increase" means an increase in rent (including, if applicable,
retroactive rent to the Closing Date); provided that an increase in rent shall
not be deemed to be a Rent Increase unless either (i) the Original Minimum Rent
is increased to an amount greater than the Effective Rent or (ii) the Original
Percentage Rent is increased such that the amount that would have been payable
under the applicable Lease for the most recent 12-month period ending prior to
the Closing Date is greater than the Effective Rent payable under such Lease for
such period.
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<PAGE>
"Return" means any return, statement, report or form relating to
Taxes.
"Security Agreement" means the security agreement to be entered into
on the Closing Date between Melville and Newco having terms and conditions
substantially similar to the terms and conditions of the security agreement to
be entered into on or prior to the Closing Date between Wilsons House of Suede,
Inc., a California corporation, a Subsidiary of the Company, certain other
Subsidiaries of the Company and General Electric Capital Corporation ("GE
Capital") as agent for the lenders thereunder (the "Senior Security Agreement")
except that Melville shall have a second priority security interest in the same
assets that are subject to the Senior Security Agreement and the Security
Agreement shall vary from the Senior Security Agreement in such other respects
as reasonably required by GE Capital.
"Shareholders Agreement" means the shareholders agreement to be
entered into on the Closing Date among Newco, the Managers, Leather Investors
Limited Partnership I, Leather Investors Limited Partnership II and the
investors listed on the signature pages thereto.
"Stock Purchase Agreements" means the Investor Stock Purchase
Agreement and the Manager Stock Purchase Agreement.
"Stores" means, collectively, the stores that are the subject of the
Leases, each of which individually is referred to as a Store.
"Subsidiary" means, with respect to any Person, any other entity of
which securities or other ownership interests having ordinary voting power to
elect a majority of the board of directors or other persons performing similar
functions are at the time directly or indirectly owned by such Person. Unless
otherwise specified in this Agreement, any reference to a Subsidiary shall mean
a Subsidiary of the Company; provided that no Excluded Subsidiary shall be
considered to be a Subsidiary of the Company.
"Tax" means (i) any tax imposed under Subtitle A of the Code, any net
income, alternative or add-on minimum tax, gross income, gross receipts, sales,
use, ad valorem, value added, transfer, franchise, profits, license, withholding
of tax on amounts paid to or by the Company or any Subsidiary, payroll,
employment, excise, severance, stamp, capital stock, occupation, property,
windfall profit tax, premium, custom, duty or other tax, governmental fee or
other like assessment or charge of any kind whatsoever, together with any
interest, penalty, addition to tax or additional amounts imposed by a Taxing
Authority and (ii) any liability, including but not limited to liability under
Treasury Regulation Section 1.1502-6, for the payment of any amount of the type
described in the immediately preceding clause (i).
"Terminated Lease" means any Lease (i) the premises of which Newco,
the Company or any Subsidiary cannot take or maintain possession of as of the
Closing Date as a result of an injunction or restraining order concerning or
resulting from the sale of the
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Company Shares contemplated by this Agreement, provided that if such injunction
or order is later lifted, such Lease will no longer be a Terminated Lease,
unless such Lease becomes a Terminated Lease under another provision of this
Agreement, (ii) the premises of which Newco, the Company or any Subsidiary must
vacate after the Closing Date as a result of (A) a final court or arbitration
order, judgment, ruling by a court or arbitrator, writ or other process
concerning or resulting from the sale of the Company Shares pursuant to this
Agreement for which all applicable appeal periods have expired or (B) a
settlement concerning or resulting from the sale of the Company Shares pursuant
to this Agreement negotiated by Newco with Landlord which requires Newco to
vacate such Store; provided that such settlement shall be subject to the prior
approval of Melville, which approval shall not be unreasonably conditioned,
delayed or withheld, or (iii) which Melville and Newco at any time mutually
agree is a Terminated Lease.
"Title IV Plan" means an Employee Plan, other than any Multiemployer
Plan, subject to Title IV of ERISA.
"Warrant" means the warrant to be issued by Newco to Melville to
purchase 1,500,000 shares of Class A Common Stock, having the terms and
conditions specified in Exhibit B hereto.
"Warrant Shares" means the shares of Common Stock of Newco to be
issued upon the exercise of the Warrant and the Management Warrant.
(b) Each of the following terms is defined in the Section set forth
opposite such term:
<TABLE>
<CAPTION>
Term Section
---- -------
<S> <C>
Acquisition Proposal 6.7
Annual Financials 3.7
Authorized Preferred Stock 5.9
Cash Consideration 2.2(a)
Closing 2.2
Closing Balance Sheet 2.4(a)
Closing Working Capital 2.4(a)
Commitment Letter 8.7
Company Intellectual Property Rights 3.17
Company Securities 3.5(b)
Consent 9.6(a)
Damages 13.2(a)
Delivered Lease 9.6(a)
Direct Rollover 11.2(a)
Director and Officer Claims 13.2(a)
Estimated Closing Balance Sheet 2.3(a)
</TABLE>
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<TABLE>
<CAPTION>
Term Section
---- -------
<S> <C>
Estimated Closing Working
Capital Statement 2.3(b)
Estimated Working Capital 2.3(b)
Expense Letters 15.3
Financing 8.7
Financing Agreement 8.7
GE Capital 1.1(a)
Indemnified Party 13.4(a)
Indemnifying Party 13.4(a)
Insured Claim 7.12
Inventory Firm 2.4(a)
Inventory Statement 2.4(a)
KPMG Peat Marwick Report 2.4(a)
Landlord 9.6(a)
Long-term Disability 11.1(a)
Loss 10.2(b)
Melville's Insurance Policies 7.12
Miscellaneous Taxes 10.5(a)
Newco Plan 11.2(a)
Newco Securities 5.9(b)
Permits 3.18
Price Allocation 10.2(a)
Section 338(h)(10) Election 10.2(a)
Senior Pledge Agreement 1.1(a)
Senior Security Agreement 1.1(a)
Short-term Disability 11.1(a)
Specified Indemnity Provision 13.2(a)
Spray Litigation 13.2(a)
Store Contribution 9.6(b)
Subsidiary Securities 3.6(b)
Subsidiary Shares 12.2
Successor Individual Account Plan 11.2(c)
Tax Accountants 10.2(a)
Tax Loss 10.5(a)
Tax Packages 10.2(f)
Third Party Claims 13.4(a)
Transfer Taxes 10.2(d)
Transferred Employees 11.1
Working Capital Payment 2.2(c)
</TABLE>
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ARTICLE 2
PURCHASE AND SALE
2.1 Purchase and Sale. Upon the terms and subject to the conditions
of this Agreement, Melville agrees to sell, assign and deliver to Newco and
Newco agrees to purchase from Melville, the Company Shares at the Closing.
2.2 Closing. The closing (the "Closing") of the purchase and sale of
the Company Shares hereunder shall take place at the offices of Davis Polk &
Wardwell, 450 Lexington Avenue, New York, New York, on May 25, 1996, or at such
other time or place as Melville and Newco may agree and shall be deemed to be
effective at 11:59 p.m. on the Closing Date. At the Closing,
(a) Newco shall deliver to Melville:
(i) $2,000,000 (the "Cash Consideration") in immediately
available funds by wire transfer to an account at a bank designated by
Melville by notice to Newco (to be designated no later than two business
days prior to the Closing Date); provided that if the account is not so
designated, Newco shall still be obligated to pay $2,000,000 as soon as
practicable after receipt by Newco from Melville of the designation of an
account at a bank for a wire transfer of the $2,000,000;
(ii) the Note;
(iii) the Warrant;
(iv) the Management Warrant;
(v) the Common Shares; and
(vi) the Preferred Shares.
(b) Melville shall deliver to Newco certificates for the Company
Shares duly endorsed or accompanied by stock powers duly endorsed in blank, with
any required transfer stamps affixed thereto, together with the stock
certificates for all shares of capital stock of the Subsidiaries (all of which
shall be registered in the name of the Company or its Subsidiaries).
(c) Melville shall deliver immediately available funds in an amount
equal to the amount by which the Base Working Capital exceeds Estimated Closing
Working Capital ("Working Capital Payment"), by wire transfer to an account
designated by the Company.
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Notwithstanding the foregoing, if the Closing Date shall be a day other than a
Business Day, on the Business Day immediately preceding the Closing Date, (x)
Newco, or its designee, shall deliver the Cash Consideration, in immediately
available funds by wire transfer, the Note, the Warrant, the Management Warrant,
the Common Shares and the Preferred Shares to the Escrow Agent for deposit
pursuant to the Escrow Agreement, (y) Melville shall deliver to the Escrow Agent
certificates for the Company Shares duly endorsed or accompanied by stock powers
duly endorsed in blank, with any required transfer stamps affixed thereto, and
in form proper for transfer, for deposit pursuant to the Escrow Agreement and
(z) Melville shall make the Working Capital Payment pursuant to Section 2.2(c).
All funds deposited with the Escrow Agent shall be applied by the Escrow Agent
in accordance with the terms of the Escrow Agreement to make the payment
required by Section 2.2(a)(i), provided that interest on such funds deposited by
Newco shall accrue and be payable to Newco from the date of deposit with the
Escrow Agent through and including the Closing Date and interest on such funds
deposited by Newco shall accrue and be payable to Melville from but not
including the Closing Date through and including the date of payment of such
funds to Melville by wire transfer of immediately available funds. The Note,
the Warrant, the Management Warrant, the Common Shares and the Preferred Shares
and the certificates for the Company Shares shall be distributed by the Escrow
Agent in accordance with the terms of the Escrow Agreement to satisfy the
requirements of Sections 2.2(a)(ii)-(vi) and 2.2(b), respectively. The fees and
expenses of the Escrow Agent shall be borne by Newco and Melville equally;
provided that if any amounts in respect of such fees are accrued by Newco and
the Company prior to Closing, such amounts shall be excluded from the
calculation of Estimated Working Capital and Closing Working Capital pursuant to
Article 2.
2.3 Estimated Adjustment to Working Capital. (a) Prior to the
Closing, the Company (including its officers at the time of the preparation of
the Estimated Closing Balance Sheet who, other than the Managers, are not
officers or employees of Melville or any of its Affiliates), with participation
by Melville, shall prepare, or cause to be prepared, a consolidated balance
sheet of the Company and the Subsidiaries (the "Estimated Closing Balance
Sheet") as of the close of business on the Closing Date. The Estimated Closing
Balance Sheet shall be prepared in accordance with generally accepted accounting
principles applied consistently with the Company's past practices used in the
preparation of the Annual Financials.
(b) Based upon the Estimated Closing Balance Sheet, the Company
(including its officers at the time of the preparation of the Estimated Closing
Balance Sheet who, other than the Managers, are not officers or employees of
Melville or any of its Affiliates), with participation by Melville, shall
prepare, or cause to be prepared, prior to the Closing, an Estimated Closing
Working Capital Statement in substantially the form of Schedule 2.3(b). Assets
and liabilities on the Estimated Closing Working Capital Statement will be equal
to such items in the Estimated Closing Balance Sheet except as otherwise
specified in Schedule 2.3(b). The Estimated Closing Working Capital Statement
will exclude those assets and liabilities detailed in Schedule 2.4(a)-1 under
the column titled "Items
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<PAGE>
Assumed/Retained by Melville". "Estimated Working Capital" means the estimated
working capital figure appearing on the Estimated Working Capital Statement. The
Company shall deliver such Estimated Closing Balance Sheet and Estimated Working
Capital Statement to Melville by the close of business on the day which is the
third business day prior to the Closing Date. If Melville disagrees with the
calculation of Estimated Working Capital delivered pursuant to the preceding
sentence by more than $500,000, Melville will notify the Company no later than
the close of business on the next succeeding business day and Melville and the
Company (through its officers who, other than the Managers, are not employees of
Melville or any of its Affiliates) shall agree on the calculation of the
Estimated Working Capital by the Closing Date. If the parties fail to agree on
the calculation of the estimated Working Capital, the Closing shall not occur
until the parties reach agreement on such calculation. Any delay of the Closing
pursuant to this Section 2.3(b) shall not constitute a failure of any condition
contained in Article 12 or give rise to a right of termination pursuant to
Article 14.
(c) If Base Working Capital exceeds Estimated Working Capital,
Melville shall contribute to the Company, on or prior to Closing, the amount of
the excess, as provided in Section 2.2(c).
2.4 Closing Balance Sheet. (a) As promptly as practicable following
the Closing Date but no later than 30 days after Closing, the Company shall
prepare a consolidated balance sheet of the Company and its Subsidiaries and the
Excluded Subsidiaries as of and including the Closing Date (the "Closing Balance
Sheet") in accordance with generally accepted accounting principles applied
consistently with the Company's past practices used in the preparation of the
Annual Financials. During the two days prior to and including the Closing Date,
R.G.I.S. (the "Inventory Firm") shall conduct a wall-to-wall physical count of
all owned inventory located at the stores, distribution centers and/or
warehouses of the Company and its Subsidiaries for purposes of preparing the
Closing Balance Sheet. Melville, Newco, the Company and their representatives
shall be entitled to observe the physical count of the inventory. The cost of
the physical count of the inventory conducted by the Inventory Firm shall be
borne by Melville. As promptly as practicable and no later than fifteen (15)
days following the Closing Date, the Inventory Firm shall deliver to Melville
and Newco a written statement setting forth the inventory count as of and
including the Closing Date (the "Inventory Statement"). The inventory reflected
on the Closing Balance Sheet shall be calculated in accordance with accounting
principles consistently applied by the Company consistent with past practice
based on the Inventory Statement, using the retail method consistent with the
Company's past practice. Amounts reflected on the Closing Balance Sheet for
those elements, accounts or items to be included in the calculation of the
Closing Working Capital shall include all known and estimated assets and
liabilities as of and including the Closing Date consistent with the Company's
past practices used in preparation of the Annual Financials.
As promptly as practicable following the receipt of the unaudited
Closing Balance Sheet, KPMG Peat Marwick LLP, at Melville's cost, shall issue an
independent
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<PAGE>
auditors' report of the Closing Balance Sheet including an unqualified opinion
as to such Closing Balance Sheet (the "KPMG Peat Marwick Report") (and prior to
the issuance by KPMG Peat Marwick LLP of such report, Arthur Andersen & Co., SC
and representatives of Newco and the Company reasonably designated by Newco
shall have the opportunity to review KPMG Peat Marwick's work papers and to be
present during the performance of all such procedures). KPMG Peat Marwick LLP
shall furnish the KPMG Peat Marwick Report to Newco and Melville within 60 days
following the Closing.
In connection with the KPMG Peat Marwick Report, KPMG Peat Marwick LLP
shall issue an Independent Accountant's Report on Applying Agreed Upon
Procedures in accordance with Statement on Auditing Standards No. 75 relating to
a Closing Working Capital Statement in substantially the form of Schedule
2.4(a). Current assets and current liabilities on the Closing Working Capital
Statement will be equal to such items in the Closing Balance Sheet except as
otherwise specified in Schedule 2.4(a). The Closing Working Capital Statement
will exclude those assets and liabilities detailed in Schedule 2.4(a)-1 under
the column titled "Items to be Assumed/Retained by Melville". "Closing Working
Capital" means the closing working capital figure appearing on the Closing
Working Capital Statement but shall not include the Working Capital Payment.
The parties agree that the Closing Working Capital Statement and the
calculation of Closing Working Capital shall not include as liabilities any
amounts which Melville, and not the Company or any Subsidiary, is required to
pay pursuant to the terms of this Agreement.
Schedule 2.4(a)-1 sets forth a statement of assets and liabilities to
be retained by Melville and the Company respectively.
(b) If Newco disagrees with the calculation of Closing Working Capital
delivered pursuant to Section 2.4(a), Newco may, within 15 days after delivery
of the documents referred to in Section 2.4(a), deliver a notice to Melville
disagreeing with such calculation and setting forth Newco's calculation of
Closing Working Capital. Any such notice of disagreement shall specify those
items or amounts as to which Newco disagrees, and Newco shall be deemed to have
agreed with all other items and amounts contained in the Closing Working Capital
Statement and the calculation of Closing Working Capital delivered pursuant to
Section 2.4(a). During such 15-day period, Melville shall use its commercially
reasonable efforts to provide Newco reasonable access to the partners and
employees of KPMG Peat Marwick who were involved in the preparation of the KPMG
Peat Marwick Report (together with access to the workpapers relating thereto);
provided that such access shall not interfere with the normal conduct of
business by such partners and employees.
(c) If a notice of disagreement shall be delivered pursuant to Section
2.4(b), Newco and Melville shall, during the 15 days following such delivery,
use their best efforts to reach agreement on the disputed items or amounts in
order to determine, as may be required, the amount of Closing Working Capital
which amount shall not be less than the amount
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<PAGE>
thereof shown in the calculation delivered pursuant to Section 2.4(b) nor more
than the amount thereof shown in the calculation delivered pursuant to Section
2.4(a). If, during such period, Newco and Melville are unable to reach such
agreement, they shall immediately thereafter cause the Independent Accountants
to review this Agreement and the disputed items or amounts for the purpose of
calculating Closing Working Capital. In making such calculation, the Independent
Accountants shall consider only those items or amounts in the Closing Working
Capital Statement or the calculation of Closing Working Capital delivered
pursuant to Section 2.4(a) as to which Newco has disagreed. The Independent
Accountants shall deliver to Newco and Melville, within 15 days, a written
report setting forth such calculation. Such report shall be final and binding
upon Newco and Melville. The cost of such review and report shall be borne (i)
by Newco in the proportion, if any, that (A) the amount by which Final Working
Capital exceeds the calculation of Closing Working Capital delivered pursuant to
Section 2.4(b) bears to (B) the difference between the calculation of Closing
Working Capital delivered pursuant to Section 2.4(a) and the calculation of
Closing Working Capital delivered pursuant to Section 2.4(b), and (ii) by
Melville with respect to the remainder of such cost.
(d) Newco, Melville and the Company agree that they will cooperate and
assist in the preparation of the Estimated Closing Balance Sheet, Estimated
Closing Working Capital Statement, Closing Balance Sheet, Closing Working
Capital Statement and the calculation of Estimated Working Capital and Closing
Working Capital and in the conduct of the audits and reviews referred to in this
Section, including without limitation, (i) the right of Melville and its agents
to have prompt and reasonable access during normal business hours to the
properties, books and records and employees of the Company and the Subsidiaries
and (ii) the right of Melville to have a representative present at the Company
or any Subsidiary during normal business hours.
2.5 Adjustment of Working Capital. (a) If Estimated Working Capital
exceeds Final Working Capital, Melville shall contribute to Newco, in the manner
and with interest as provided in Section 2.5(b), the amount of such excess. If
Final Working Capital exceeds Estimated Working Capital, Newco shall pay to
Melville, in the manner and with interest as provided in Section 2.5(b), the
amount of such excess.
(b) Any contribution pursuant to Section 2.5(a) shall be made within
five days after the Final Working Capital has been determined by delivery by
Newco or Melville, as the case may be, by wire transfer of immediately available
funds to an account of the other party designated by such other party. The
amount of any payment to be made pursuant to this Section shall bear interest
from but not including the Closing Date to but excluding the date of payment at
a rate per annum equal to the reference rate from time to time of Morgan
Guaranty Trust Company of New York. Such interest shall be payable at the same
time as the payment to which it relates and shall be calculated daily on the
basis of a year of 365 days and the actual number of days elapsed.
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<PAGE>
2.6 Legending of Securities. The Note, Warrant, Management Warrant,
Common Shares and Preferred Shares to be issued to Melville shall bear the
following legend:
"The [Note/Warrant/Management Warrant/Common Shares/Preferred
Shares] represented hereby has not been registered under the
Securities Act of 1933, as amended, and may not be offered, sold,
transferred or otherwise disposed of unless registered with the
Securities and Exchange Commission of the United States and the
securities regulatory authorities of applicable states or unless in
the written opinion of counsel to holder reasonably acceptable to
Newco that is delivered to Newco an exemption from such registration
[and, with respect to the Note, the Trust Indenture Act of 1939,] is
available."
2.7 Allocation of Note. The Note shall be treated first as
consideration for the inventories of the Company and its Subsidiaries.
ARTICLE 3
REPRESENTATIONS AND WARRANTIES OF COMPANY
The Company represents and warrants to Newco as of the date hereof and
as of the Closing Date that, except as disclosed in the Schedules hereto:
3.1 Corporate Existence and Power. The Company is a corporation duly
organized, validly existing and in good standing under the laws of the State of
Minnesota. The Company has all corporate powers and authority and all material
governmental licenses, authorizations, permits, consents and approvals required
to own its assets, lease the properties leased by it and carry on its business
as now conducted. The Company is duly qualified to do business as a foreign
corporation and is in good standing in each jurisdiction where the nature of the
business done or the properties owned or leased by the Company require such
qualification, except for those jurisdictions where failure to be so qualified
does not and would not, individually or in the aggregate, have a Material
Adverse Effect on the Company. Each jurisdiction in which the Company is
qualified to do business is set forth in Schedule 3.1. The Company has
heretofore delivered to Newco true and complete copies of the articles of
incorporation and bylaws of the Company as currently in effect and has made
available to Newco minute books containing all minutes and written actions of
the shareholders and directors of the Company, and all actions taken by the
shareholders and directors of the Company are reflected in such minutes and
actions. True and correct lists of the directors and officers of the Company
have been furnished to Newco.
3.2 Corporate Authorization. The execution, delivery and performance
by the Company of this Agreement are within the Company's corporate powers and
have been
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<PAGE>
duly authorized by all necessary corporate action on the part of the Company.
This Agreement constitutes a valid and binding agreement of the Company
enforceable in accordance with its terms, except as (i) the enforceability
hereof may be limited by bankruptcy, insolvency, moratorium or other similar
laws affecting the enforcement of creditors' rights generally and (ii) the
availability of equitable remedies may be limited by equitable principles of
general applicability.
3.3 Governmental Authorization. The execution, delivery and
performance by the Company of this Agreement require no action by or in respect
of, or filing with, any governmental body, agency, or official, except for (i)
if required, satisfaction of the requirements of the HSR Act, (ii) compliance
with any applicable requirements of the 1934 Act and (iii) any such action or
filing as to which the failure to make or obtain would not, individually or in
the aggregate, have a Material Adverse Effect on the Company and would not
impair in any respect the ability of the Company or Melville to consummate the
transactions contemplated by this Agreement.
3.4 Non-Contravention. The execution, delivery and performance by
the Company of this Agreement do not and will not (i) violate the Charter or
bylaws of the Company or any Subsidiary, (ii) assuming compliance with the
matters referred to in Section 3.3, violate any applicable statute, law, rule,
regulation, ordinance, judgment, ruling by a court, writ, injunction, order or
decree, (iii) require any consent or other action by, or, except as referred to
in Section 3.3, any notice to, any Person under, constitute a default or create
a penalty under, conflict with, or give rise to any right of termination,
cancellation or acceleration of any right or obligation of the Company or any
Subsidiary or to a loss of any benefit to which the Company or any Subsidiary is
entitled under, any agreement, contract, lease, license or other instrument
(other than any Lease) binding upon or applicable to the Company or any
Subsidiary or to which any asset of the Company or any Subsidiary is subject or
any license, franchise, permit or other similar authorization held by the
Company or any Subsidiary, or (iv) result in the creation or imposition of any
material Lien on any asset of the Company or any Subsidiary, except, in the case
of clauses (ii) and (iii), to the extent that any such violation, failure to
obtain any such consent or other action, default, conflict, penalty, right or
loss, individually or in the aggregate, does not and would not have a Material
Adverse Effect on the Company and would not impair in any respect the ability of
the Company or Melville to consummate the transactions contemplated by this
Agreement.
3.5 Capitalization. (a) The authorized capital stock of the Company
consists of 100 shares of common stock, no par value per share. As of the date
hereof, there are outstanding 100 shares of common stock.
(b) All outstanding shares of common stock of the Company have been
duly authorized and validly issued and are fully paid and non-assessable. The
Company has not issued any shares of Company Shares or other capital stock or
other voting or equity securities of the Company in violation of any preemptive
rights. Except as disclosed in Section 3.5(a), there are no outstanding (i)
shares of capital stock or voting or equity securities of the
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Company, (ii) securities of the Company convertible into or exchangeable for
shares of capital stock or voting or equity securities of the Company or (iii)
options, warrants, subscriptions or other rights to acquire from the Company, or
commitment or other obligation of the Company to issue, any capital stock, other
voting or equity securities or securities convertible into or exchangeable for
capital stock or other voting or equity securities of the Company (the items in
clauses (i), (ii) and (iii) being referred to collectively as the "Company
Securities"). There are no outstanding commitments or other obligations of the
Company or any Subsidiary to repurchase, redeem or otherwise acquire the Company
Shares or any Company Securities.
(c) The stock certificates and transfer books of the Company and each
Subsidiary have been made available to Newco and are true and complete, and
constitute all of the stock certificates and transfer books of the Company and
each Subsidiary.
3.6 Subsidiaries. (a) Each Subsidiary is a corporation duly
organized, validly existing and in good standing under the laws of its
jurisdiction of incorporation and has all corporate powers and authority and all
governmental licenses, authorizations, permits, consents and approvals required
to own its assets, lease the properties leased by it and carry on its business
as now conducted. Each Subsidiary is duly qualified to do business as a foreign
corporation and is in good standing in each jurisdiction where the nature of the
business done or the properties owned or leased by such Subsidiary require such
qualification except for those jurisdictions where failure to be so qualified
does not and would not, individually or in the aggregate, have a Material
Adverse Effect on the Company. All Subsidiaries and their respective
jurisdictions of incorporation are disclosed in Schedule 3.6. Schedule 3.6 also
sets forth each jurisdiction in which each Subsidiary is qualified to do
business as a foreign corporation. The Company has heretofore made available to
Newco true and complete copies of the Charter and bylaws of each Subsidiary as
currently in effect and has made available to Newco minute books containing all
minutes and written actions of the shareholders and directors of each
Subsidiary, and all actions taken by the shareholders and directors of each
Subsidiary are reflected in such minutes and actions. True and correct lists of
the directors and officers of each Subsidiary have been furnished to Newco.
(b) All of the outstanding capital stock of, and other voting and
equity securities and ownership interests in, each Subsidiary, is owned,
directly or indirectly, of record and beneficially by the Company, free and
clear of any Lien and free of any other limitation or restriction (including any
restriction on the right to vote, sell or otherwise dispose of such capital
stock or other voting and equity securities or ownership interests). No
Subsidiary has issued any shares of its capital stock or other voting or equity
securities of such Subsidiary in violation of any preemptive rights. There are
no outstanding (i) securities of any Subsidiary convertible into or exchangeable
for shares of capital stock or other voting or equity securities or ownership
interests in any Subsidiary or (ii) options, warrants, subscriptions or other
rights to acquire from the Company or any Subsidiary, or commitment or other
obligation of the Company or any Subsidiary to issue, any capital stock or other
voting or equity securities or ownership interests in, or any securities
convertible into or exchangeable for any capital stock or other voting or equity
securities or ownership interests
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in, any Subsidiary (the items in clauses (i) and (ii), together with the
outstanding capital stock of, and other voting and equity securities and
ownership interests in, each Subsidiary, being referred to collectively as the
"Subsidiary Securities"). There are no outstanding commitments or obligations of
the Company or any Subsidiary to repurchase, redeem or otherwise acquire any
outstanding Subsidiary Securities.
3.7 Financial Statements. The unaudited consolidated balance sheet
of the Company, the Subsidiaries and the Excluded Subsidiaries as of March 31,
1996 and the audited consolidated balance sheets of the Company, the
Subsidiaries and the Excluded Subsidiaries as of December 31, 1994 and December
31, 1995 and the consolidated statements of income and cash flows thereof for
each of the quarter ended March 31, 1996 (unaudited) and the years ended
December 31, 1993, December 31, 1994 and December 31, 1995 (audited) (such
consolidated balance sheets as of each such year end and consolidated statements
of income and cash flows for each such year being referred to herein as the
"Annual Financials") previously delivered to Newco, present fairly, in all
material respects, the consolidated financial position of the Company, the
Subsidiaries and the Excluded Subsidiaries as of the dates thereof and their
consolidated results of operations for the periods then ended in conformity with
generally accepted accounting principles applied on a basis consistent with the
Company's past practices throughout the periods involved and presented in
accordance with Regulation S-X of the 1933 Act.
3.8 Absence of Certain Changes. Except as disclosed in Schedule 3.8,
or as contemplated by this Agreement or the discontinuance of the issuance of
lease guarantees by MRC, since the Balance Sheet Date, the business of the
Company and the Subsidiaries has been conducted in the ordinary course
consistent with past practices and there has not been:
(a) any event, occurrence, development or state of circumstances or
facts which has had or would reasonably be expected to have a Material Adverse
Effect on the Company and the Subsidiaries, other than any resulting from or
attributable to (i) the transactions contemplated by this Agreement and (ii)
changes in general economic conditions that have not had a materially more
adverse effect on the Company and the Subsidiaries, taken as a whole, than on
similar retail businesses;
(b) any declaration, setting aside or payment of any dividend or other
distribution with respect to any shares of capital stock of the Company or any
of the Subsidiaries, or any repurchase, redemption or other acquisition by the
Company or any Subsidiary of any outstanding shares of capital stock or other
securities of, or other ownership interests in, the Company or any Subsidiary,
other than any distribution to the Company and its Subsidiaries or Melville and
its Affiliates in the ordinary course consistent with past practice, including
but not limited to distributions in connection with the repayment or
cancellation of any intercompany debt, advance or other balance;
(c) any amendment of any term of any outstanding security of the
Company or any Subsidiary;
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(d) any incurrence, assumption or guarantee by the Company or any
Subsidiary of any Indebtedness;
(e) any creation or assumption by the Company or any Subsidiary of, or
imposition by any Person of, any Lien on any material asset of the Company or
any Subsidiary, other than in the ordinary course of business consistent with
past practices;
(f) any making of any loan, advance or capital contributions to or
investment in any Person, other than (i) loans, advances or capital
contributions to or investments between the Company and any Subsidiary or
between Subsidiaries, (ii) intercompany indebtedness between Melville and its
Affiliates, on the one hand, and the Company and the Subsidiaries, on the other
hand, and (iii) loans or advances to suppliers in the ordinary course of
business;
(g) any damage, destruction or other casualty loss (whether or not
covered by insurance) affecting the business or assets of the Company or any
Subsidiary which, individually or in the aggregate, has had or would have a
Material Adverse Effect on the Company;
(h) any transaction or commitment made, or any contract or agreement
entered into, by the Company or any Subsidiary relating to its assets or
business (including the acquisition or disposition of any assets) or any
relinquishment by the Company or any Subsidiary of any contract or other right,
in either case, material to the Company and the Subsidiaries, taken as a whole,
other than (i) transactions and commitments in the ordinary course of business
consistent with past practices and (ii) those contemplated by this Agreement;
(i) any change in any method of accounting or accounting practice by
the Company or any Subsidiary, except for any change after the date hereof
required by reason of a concurrent change in generally accepted accounting
principles;
(j) any (i) employment, deferred compensation, severance, retirement
or other similar agreement entered into with any director, officer or employee
of the Company or any Subsidiary (or any amendment to any such existing
agreement), (ii) grant of any severance or termination pay to any director,
officer or employee of the Company or any Subsidiary, or (iii) increase in
compensation or other benefits payable to any director, officer or employee of
the Company or any Subsidiary pursuant to any severance or retirement plans or
policies thereof, except in each case in the ordinary course of business
consistent with past practice;
(k) any adoption of, or material change to, any Benefit Arrangement or
Employee Plan with respect to which the Company or any of its Subsidiaries has
or may have any liability or obligation after the Closing;
(l) any labor dispute, other than routine individual grievances, or
any activity or proceeding by a labor union or representative thereof to
organize any employees of
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the Company or any Subsidiary, or any lockouts, strikes, slowdowns, work
stoppages or threats thereof by or with respect to any employees of the Company
or any Subsidiary; or
(m) any cancellation or compromise by the Company or any Subsidiary of
any debt or other obligation owed to, or claim held by, it or other
relinquishment by the Company or any Subsidiary of any contract or other right
other than (i) for intercompany indebtedness between Melville and its
Affiliates, on the one hand, and the Company and the Subsidiaries, on the other
hand, or between the Company and its Subsidiaries or between Subsidiaries, or
(ii) for compromises of trade debt in the ordinary course of business consistent
with past practice.
3.9 No Undisclosed Material Liabilities. There are no liabilities
or obligations of the Company or any Subsidiary of any kind whatsoever, whether
accrued, contingent, absolute, determined, determinable or otherwise, other
than:
(i) liabilities provided for in the Balance Sheet or disclosed
in the notes thereto;
(ii) intercompany indebtedness between the Company and any
Subsidiary or between Subsidiaries, or intercompany indebtedness between
Melville and its Affiliates, on the one hand, and the Company and the
Subsidiaries, on the other hand, all of which indebtedness between Melville
and its Affiliates, on the one hand, and the Company and the Subsidiaries,
on the other hand, shall no longer be outstanding at the Closing as
provided in Section 6.5;
(iii) liabilities incurred in the ordinary course of business
consistent with past practice since the Balance Sheet Date;
(iv) liabilities disclosed in Schedule 3.9 or any other Schedule
to this Agreement; and
(v) other undisclosed liabilities which, individually or in the
aggregate, are not material to the Company and the Subsidiaries, taken as a
whole.
3.10 Labor Matters. The Company and the Subsidiaries have complied
and are complying with all Federal, state, local and foreign statutes, laws,
rules, regulations, ordinances and policies of a material nature respecting
employment and employment practices and have not and are not engaged in any
unfair labor practice or unlawful discriminatory act. Except as disclosed in
Schedule 3.10, there is no pending or threatened charge or complaint by or
against the Company or any Subsidiary before the Equal Employment Opportunity
Commission, any other federal governmental authority relating to labor or
employee matters or any similar foreign, state or local governmental authority.
Except as set forth on Schedule 3.10, neither the Company nor any Subsidiary is
a party to, or subject to, any collective bargaining or other similar agreement
with any labor union or other similar association representing employees of the
Company and the Subsidiaries, nor is any collective bargaining
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agreement currently being negotiated by the Company or any Subsidiary with
respect to any employees of the Company or any Subsidiary and, to the knowledge
of Melville or the Company, no movement to designate a collective bargaining
agent to represent any such employees is being (or since January 1, 1996 has
been) conducted or is threatened. No lockout, strike, slowdown, work stoppage
or, to the knowledge of Melville or the Company, threats thereof by or with
respect to any employees of the Company or any Subsidiary have occurred since
January 1, 1996.
3.11 Material Contracts. (a) Except as disclosed in Schedule 3.11,
and except for any agreements that are terminable on not more than 90 days
notice and without the payment of any penalty by, or any Material Adverse Effect
on, the Company from the loss of the benefits of such agreements, individually
or in the aggregate, neither the Company nor any Subsidiary is a party to or
bound by:
(i) any lease, sublease, license, tenancy, concession or other
occupancy agreement (other than the Closed Store Leases, the Headquarters
Lease and the Leases) providing for annual rentals of $250,000 or more;
(ii) any agreement for the purchase of goods, services,
equipment or other assets that provides for annual payments by the Company
and the Subsidiaries of $250,000 or more, other than purchase orders for
inventory and other arrangements with suppliers entered into in the
ordinary course of business;
(iii) any sales, distribution or other similar agreement
providing for the sale by the Company or any Subsidiary of materials,
supplies, goods, services, equipment or other assets that provides for
annual payments to the Company and the Subsidiaries of $250,000 or more;
(iv) any partnership, joint venture or other similar agreement
or arrangement;
(v) any agreement relating to Indebtedness (whether incurred,
assumed, guaranteed or secured by any asset), other than any such agreement
for the deferred purchase price of tangible personal property with an
aggregate outstanding principal amount not exceeding $250,000 and which may
be prepaid on not more than 30 days notice without the payment of any
penalty;
(vi) any license, franchise or similar agreement;
(vii) any agency, dealer, sales representative, advertising,
promotional, marketing or other similar agreement that provides for annual
payments by the Company or any Subsidiary of $250,000 or more;
(viii) any agreement (other than the Closed Store Leases, the
Headquarters Lease and the Leases) that limits the freedom of the Company
or any
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Subsidiary to compete in any line of business or with any Person or in any
area or which would so limit the freedom of the Company or any Subsidiary
after the Closing Date;
(ix) any agreement with (A) Melville or any of its Affiliates,
(B) any Person directly or indirectly owning, controlling or holding with
power to vote, 5% or more of the outstanding voting securities of Melville
or any of its Affiliates, (C) any Person 5% or more of whose outstanding
voting securities are directly or indirectly owned, controlled or held with
power to vote by Melville or any of its Affiliates or (D) any director or
officer of Melville or any of its Affiliates or any "associates" or members
of the "immediate family" (as such terms are respectively defined in Rule
12b-2 and Rule 16a-1 of the 1934 Act) of any such director or officer;
(x) any agreement with any director or officer of the Company
or any Subsidiary or with any "associate" or any member of the "immediate
family" (as such terms are respectively defined in Rules 12b-2 and 16a-1 of
the 1934 Act) of any such director or officer;
(xi) any agreement relating to any outstanding commitment for
capital expenditures since the Balance Sheet Date through June 30, 1996 in
excess of $3,600,000;
(xii) any guaranty by the Company or a Subsidiary of any
liability or obligation of any other Person other than the Company or a
Subsidiary, or any outstanding letters of credit that Melville or a
Melville Affiliate has caused the Company to be obligated under without the
knowledge of the Management Disclosure Group;
(xiii) any agreement pursuant to which the Company, any
Subsidiary or any other Person have an aggregate future liability in excess
of $1,000,000, except for (A) purchase orders of the nature described in
clause (ii), (B) liabilities between the Company and a Subsidiary or
between Subsidiaries, or (C) intercompany liabilities between the Company
or a Subsidiary, on the one hand, and Melville or an Affiliate, on the
other hand, that will no longer be outstanding on the Closing Date as
provided in Section 6.5;
(xiv) Employment agreements including compensation in excess of
$100,000; or
(xv) any other agreement, commitment, arrangement or plan not
made in the ordinary course of business that is material to the Company and
the Subsidiaries, taken as a whole.
(b) Each agreement, contract, commitment, arrangement, lease (other
than the Closed Store Leases, the Headquarters Lease and the Leases) or plan
disclosed in
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Schedule 3.11 is a valid and binding agreement of the Company or a Subsidiary,
as the case may be, and is in full force and effect, and neither the Company nor
any Subsidiary is nor, to the knowledge of Melville or the Company, is any other
party thereto in default or breach in any material respect under the terms of
any such agreement, contract, commitment, arrangement, lease or plan and to the
knowledge of Melville or the Company no event has occurred which constitutes or,
with the lapse of time or the giving of notice or both, would constitute such a
default or breach by the Company or any Subsidiary (or, to the knowledge of
Melville or the Company, any other party thereto) thereunder.
(c) The Company has made available to Newco true and correct copies of
all material agreements entered into by the Company or any Subsidiary since
January 1, 1988 relating to the disposition or acquisition of businesses by the
Company or any Subsidiary.
3.12 Litigation. Except as disclosed in Schedule 3.12, there is no
claim, action, suit, arbitration, investigation, proceeding or enforcement
action pending against, or to the knowledge of Melville or the Company,
threatened against or affecting, the Company or any Subsidiary or any of their
respective properties before any court or arbitrator or any governmental body,
agency or official (i) in which there is a reasonable possibility of an adverse
decision which would have a Material Adverse Effect on the Company, (ii) with
respect to litigation filed prior to the date hereof which in any manner
challenges or seeks to prevent, enjoin, alter or delay the transactions
contemplated by this Agreement, or (iii) if filed after the date hereof, which
in any manner challenges or seeks to prevent, enjoin, alter or materially delay
the transactions contemplated by this Agreement and which has a reasonable
likelihood of success on the merits. To the knowledge of Melville, Schedule
3.12 contains a list of all litigation pending against the Company or any
Subsidiary.
3.13 Compliance with Laws and Court Orders. Neither the Company nor
any Subsidiary is in violation of, or has since January 1, 1995 violated, any
applicable statute, law, rule, regulation, or ordinance, judgement, injunction,
order or decree, except for such violations that have not had and will not have
individually or in the aggregate a Material Adverse Effect on the Company and
the Subsidiaries. Since January 1, 1995 none of Melville, the Company or any
Subsidiary has received notice of any material violation by the Company or a
Subsidiary of any applicable statute, law, rule, regulation or ordinance.
Neither the Company nor any Subsidiary is in violation of, or has since January
1, 1995 violated any material judgment, ruling, writ, injunction, order or
decree of any court or of any governmental agency or instrumentality which apply
to the Company or any Subsidiary.
3.14 Leases. (a) The Company has given Newco a true and complete
copy of the Closed Store Leases, the Headquarters Lease, and each Lease,
together with all amendments and modifications thereto. Schedule 3.14(a)
contains a list of all Stores. Except for any consequence caused by the
transactions contemplated hereunder, the Headquarters Lease, each Lease and each
such amendment and modification is a valid and binding agreement of the tenant
thereunder and is in full force and effect. Except as set forth in Schedule
3.14(a), the Company and the Subsidiaries are not (and, to the knowledge of
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Melville and the Company, no other party is) in default in any material respect
under the Headquarters Lease or any Lease, and no event or breach has occurred
which constitutes or, with the lapse of time or the giving of notice or both,
would constitute such a material default by the Company or any Subsidiary
thereunder, (or, to the knowledge of Melville or the Company, any other party
thereto) other than any default resulting from the transactions contemplated by
this Agreement.
(b) Except as set forth on Schedule 3.14(b), as of the Closing Date,
the Company and the Subsidiaries shall have paid to Landlord under the
Headquarters Lease and each Lease all monies then due and owing pursuant to the
provisions of such Headquarters Lease and Lease other than monies then due and
owing in amounts not in excess of $7,500 which the Company or its Subsidiaries
deem to be in dispute.
(c) Except as set forth on Schedule 3.14(c), no leasing commissions
are payable by the Company or any Subsidiary in respect of the Closed Store
Leases, the Headquarters Lease or any Lease, including if the term of any such
lease is extended or renewed or the premises expanded.
3.15 Properties. (a) All real property owned by the Company or any
Subsidiary is listed on Schedule 3.15(a). The Company and the Subsidiaries have
good title to the real property listed in Schedule 3.15(a), or in the case of
leased property have valid leasehold interests in or the right to use, all
property and assets (whether real or personal, tangible or intangible) reflected
on the Balance Sheet or acquired after the Balance Sheet Date or otherwise used
in the operation of the business of the Company or any Subsidiary. As of the
Closing, neither Melville nor any Affiliate of Melville will own or have a right
to use any of the property described in the immediately preceding sentence.
None of such property or assets and none of such leasehold interest is subject
to any Liens, except:
(i) Liens disclosed on the Balance Sheet;
(ii) Liens disclosed in Schedule 3.15(a)(ii) or any other
Schedule to this Agreement;
(iii) Liens for Taxes not yet due or being contested in good
faith (and for which adequate accruals or reserves have been established on
the Balance Sheet); or
(iv) Liens on real property (other than Liens securing
obligations for borrowed money) which do not materially detract from the
value or materially interfere with any present or intended use of such
property or assets; or
(v) Materialmen's, warehouse, landlord's and similar Liens
securing obligations that are not due and payable that arise by operation
of law in the ordinary course of business.
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(b) Except as disclosed on Schedule 3.15(b), there are no developments
affecting any such property or assets (whether real or personal) pending or, to
the knowledge of Melville or the Company threatened, which might materially
detract from the value of such property or assets or materially interfere with
any present or intended use of any such property or assets, other than any such
developments affecting leased property resulting from the transactions
contemplated by this Agreement.
3.16 Environmental Matters. (a) Except as disclosed in Schedule
3.16:
(i) No Environmental Claim has been received by the Company or
any Subsidiary or, to the knowledge of Melville or the Company, by any
person or entity whose liability for such Environmental Claim has or may
have been retained or assumed, either contractually or by operation of law,
by the Company or any Subsidiary nor, to the knowledge of Melville or the
Company, is any such Environmental Claim threatened.
(ii) No penalty has been assessed against the Company or any
Subsidiary with respect to any (A) alleged material violation by the
Company or any Subsidiary of any Environmental Law or (B) alleged material
failure by the Company or any Subsidiary to have any permit, certificate,
license, approval, registration or authorization required under any
Environmental Law in connection with the conduct of its business;
(iii) Neither the Company nor any Subsidiary has violated, or
has created any condition that requires any remediation under, any
Environmental Laws except for any such violation or condition that would
not reasonably be expected to result, individually or in the aggregate, in
a material liability to the Company and its Subsidiaries, taken as a whole.
(iv) Neither the Company nor any Subsidiary has generated at or
transported from any real property now or previously owned or leased by it
any Hazardous Substances which have been transported to or disposed of in
any offsite disposal or other facility, except for any such transportation
or disposal which would not reasonably be expected to result in a Material
Adverse Effect on the Company.
(v) Without in any way limiting the generality of the
foregoing, to the knowledge of Melville or the Company, Schedule 3.16(a)
lists (a) all underground storage tanks located on any property presently
owned or leased by the Company or any Subsidiary and deposited, placed or
buried thereon by, or pursuant to the sole authorization of, the Company or
any Subsidiary and (b) all monitoring wells on any property presently owned
or leased by the Company or any Subsidiary (regardless of whether such
wells are in use) dug or made by, or pursuant to the sole authorization of,
the Company or any Subsidiary.
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(vi) To the knowledge of Melville, Melville has made available
to Newco all environmental reports and investigations which Melville, the
Company or any Subsidiary has obtained since January 1, 1993 with respect
to the Headquarters Lease, any Lease or any Closed Store Lease.
3.17 Intellectual Property. (a) Schedule 3.17 contains a list of
all material Intellectual Property Rights owned or licensed and used or held for
use by the Company or the Subsidiaries other than Intellectual Property Rights
licensed by the Company or a Subsidiary pursuant to customary, non-negotiated
licenses of computer software ("Company Intellectual Property Rights"),
specifying as to each, as applicable: (i) the nature of such Intellectual
Property Right; (ii) the jurisdictions by or in which such Intellectual Property
Right is recognized without regard to registration or has been issued or
registered or in which an application for such issuance or registration has been
filed, including the respective registration or application numbers; and (iii)
licenses, sublicenses and other agreements as to which the Company or any
Subsidiary is a party and pursuant to which any Person is authorized to use such
Intellectual Property Right, including the identity of all parties thereto, a
description of the nature and subject matter thereof, the applicable royalty and
the term thereof.
(b) (i) Since January 1, 1995, neither the Company nor any Subsidiary
has been a defendant in any action, suit, investigation or proceeding relating
to, or otherwise has been notified (nor has Melville been notified) of, any
alleged claim or infringement by the Company or any Subsidiary of Intellectual
Property Rights, and neither Melville nor the Company has knowledge of any other
such infringement, (ii) to the knowledge of Melville and the Company, neither
the Company nor any Subsidiary is materially infringing on Intellectual Property
Rights of others, and (iii) neither Melville nor the Company has knowledge of
any continuing infringement by any other Person of any Company Intellectual
Property Rights. No Company Intellectual Property Right is subject to any
outstanding judgment, injunction, order, decree or agreement restricting the use
thereof by the Company or restricting the licensing thereof by the Company to
any Person. The Company has not entered into any agreement to indemnify any
other Person against any charge of infringement of any Intellectual Property
Right.
(c) To the knowledge of Melville or the Company, neither the Company
nor any Subsidiary has used or enforced, or failed to use or enforce, any
material Company Intellectual Property Right in any manner which limits its
validity or could result in its invalidity.
(d) The Company Intellectual Property Rights constitute all
Intellectual Property Rights needed to carry on the businesses of the Company
and the Subsidiaries as now conducted, and, except as listed on Schedule
3.17(d), neither Melville nor any of its Affiliates have any rights to or
interests in any Company Intellectual Property Rights other than (i) interests
which will be transferred to the Company or a Subsidiary of the Company prior to
the Closing and (ii) interests identified on Schedule 3.17(d) owned by Melville
which
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will be licensed to the Company at Closing pursuant to royalty-free, perpetual,
freely transferable licenses in form and substance reasonably acceptable to
Newco. The Company will own or have the right to use all Company Intellectual
Property Rights immediately after the Closing.
3.18 Licenses and Permits. The Company and the Subsidiaries have all
licenses, franchises, permits or other similar authorizations affecting, or
relating in any way to, the assets of the Company or any Subsidiary or necessary
to carry on the business of the Company and its Subsidiaries as now conducted
(the "Permits") other than those Permits the Company's failure of which to have
would not have a Material Adverse Effect on the Company and the Subsidiaries.
Except as disclosed in Schedule 3.18, such Permits are valid and in full force
and effect and none of the Permits will be terminated or impaired or become
terminable, in whole or in part, as a result of the transactions contemplated
hereby except as would not reasonably be expected to have a Material Adverse
Effect on the Company.
3.19 Fixed Assets. All of the Stores are equipped and complete with
all fixtures, leasehold improvements, furnishing, machinery, equipment, signs
and other tangible personal property reasonably necessary for the operation of
the Stores in accordance with the Company's customary business practices. Such
assets are in normal working condition consistent with their age and useful
lives and shall be in the same condition on the Closing Date, subject to
ordinary wear and tear and damage due to fire or other casualty.
3.20 Insurance. The Company or a Subsidiary or an Affiliate of the
Company has in force property and casualty insurance on the real property owned
by the Company or a Subsidiary, the Headquarters Lease and each Lease, and all
tangible assets owned or leased by the Company or a Subsidiary on a replacement
cost basis and general and product liability insurance on the Company and each
Subsidiary in the amounts set forth on Schedule 3.20. Set forth on Schedule
3.20 is a true and correct schedule of all such policies. All premiums due and
payable as of the date hereof have been paid with respect to such policies.
Schedule 3.20 also sets forth a claims run under such policies as of April 1,
1996. Melville or the Company has delivered or made available to Newco a true
and correct copy of each such policy, self-insurance authorization or agreement
listed in Schedule 3.20.
3.21 No Recalls. No products of the Company or any Subsidiary have
been recalled voluntarily or involuntarily since January 1, 1995, no recall is
being considered by the Company or the Subsidiary and no recall has been
requested or ordered by any governmental authority or consumer group.
3.22 Benefit Plans. Schedule 3.22 contains a list of all Benefit
Arrangements and Employee Plans.
3.23 Accounts; Funds, etc. After the Closing Date, all bank or other
depository accounts arising out of, relating to or established for the Company
or any Subsidiary shall be held by, and accessible only to, the Company or the
relevant Subsidiary.
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There are no material powers of attorney in force from the Company or any
Subsidiary to Melville or any Affiliate or any director, officer or employee of
Melville or any of its Affiliates who is not a Manager or an employee of the
Company or any Subsidiary except for agency agreements which will be terminated
at or prior to Closing.
ARTICLE 4
REPRESENTATIONS AND WARRANTIES OF MELVILLE
Melville represents and warrants to Newco as of the date hereof and as
of the Closing Date that, except as disclosed in the Schedules hereto:
4.1 Corporate Existence and Power. Melville is a corporation duly
organized, validly existing and in good standing under the laws of the State of
New York and has all corporate powers and authority and all material
governmental licenses, authorizations, permits, consents and approvals required
to own the Company Shares and carry on its business as now conducted. Melville
has heretofore delivered to Newco true and complete copies of the certificate of
incorporation and bylaws of Melville as currently in effect.
4.2 Corporate Authorization. The execution, delivery and performance
by Melville of this Agreement, the Warrant, the Management Warrant, the Security
Agreement, each Pledge Agreement, the Registration Rights Agreement and the
Escrow Agreement are within Melville's corporate powers and have been duly
authorized by all necessary corporate action on the part of Melville. This
Agreement constitutes, and the Warrant, the Management Warrant, the Security
Agreement, each Pledge Agreement, the Registration Rights Agreement and the
Escrow Agreement, when executed and delivered by Melville, will constitute,
valid and binding agreements of Melville enforceable in accordance with their
terms, except as (i) the enforceability hereof and thereof may be limited by
bankruptcy, insolvency, moratorium or other similar laws affecting the
enforcement of creditors' rights generally and (ii) the availability of
equitable remedies may be limited by equitable principles of general
applicability.
4.3 Governmental Authorization. The execution, delivery and
performance by Melville of this Agreement, the Registration Rights Agreement,
the Warrant, the Management Warrant, the Security Agreement, each Pledge
Agreement and the Escrow Agreement require no action by or in respect of, or
filing with, any governmental body, agency or official, except for (i) if
required, satisfaction of the requirements of the HSR Act, (ii) compliance with
any applicable requirements of the 1934 Act and (iii) any such action or filing
as to which the failure to make or obtain would not, individually or in the
aggregate, have a Material Adverse Effect on Melville and would not impair in
any respect the ability of Melville or the Company to consummate the
transactions contemplated by this Agreement.
4.4 Non-Contravention. The execution, delivery and performance by
Melville of this Agreement, the Warrant, the Management Warrant, the Security
Agreement,
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each Pledge Agreement, the Registration Rights Agreement and the Escrow
Agreement do not and will not (i) violate the Charter or bylaws of Melville or
any Melville Subsidiary, (ii) assuming compliance with the matters referred to
in Section 4.3, violate any applicable statute, law, rule, regulation,
ordinance, judgment, ruling by a court, writ, injunction, order or decree, (iii)
require any consent or other action by, or except as referred to in Section 4.3,
any notice to any Person under, constitute a default or create a penalty under,
conflict with or give rise to any right of termination, cancellation or
acceleration of any right or obligation of Melville, any Melville Subsidiary,
the Company or any Subsidiary or to a loss of any benefit to which Melville, any
Melville Subsidiary, the Company or any Subsidiary is entitled under, any
agreement or other instrument (other than any Lease) binding upon or applicable
to Melville, any Melville Subsidiary, the Company or any Subsidiary or any
license, franchise, permit or other similar authorization held by Melville, any
Melville Subsidiary, the Company or any Subsidiary, or (iv) result in the
creation or imposition of any Lien on any asset of Melville, any Melville
Subsidiary, the Company or any Subsidiary except, in the case of clauses (ii)
and (iii) to the extent that any such violation, failure to obtain any such
consent or other action, default, conflict, penalty, right or loss, individually
or in the aggregate, does not and would not have a Material Adverse Effect on
Melville or the Company and would not impair in any respect the ability of
Melville or the Company to consummate the transactions contemplated by this
Agreement.
4.5 Ownership of Shares. Melville is the record and beneficial owner
of the Company Shares, free and clear of any Lien and any other limitation or
restriction (including any restriction on the right to vote, sell or otherwise
dispose of the Shares), and will transfer and deliver to Newco at the Closing
valid title to the Shares free and clear of any Lien and any such limitation or
restriction. Upon delivery of the Company Shares hereunder and payment of the
consideration therefor pursuant to this Agreement, Newco will be the record and
beneficial owner of the Company Shares.
4.6 Acquisition for Investment. Melville is acquiring the Note, the
Warrant, the Management Warrant and, except as contemplated by the Investor
Stock Purchase Agreement, the Common Shares and the Preferred Shares hereunder
for investment for its own account and not with a view to, or for sale in
connection with, any distribution thereof. Melville (either alone or together
with its advisors) has sufficient knowledge and experience in financial and
business matters so as to be capable of evaluating the merits and risks of its
investment in the Note, the Warrant, the Management Warrant, the Common Shares
and the Preferred Shares and is capable of bearing the economic risks of such
investment.
4.7 Litigation. There is no claim, action, suit, arbitration,
investigation or proceeding or enforcement action pending against, or to the
knowledge of Melville, threatened against or affecting, Melville before any
court or arbitrator or any governmental body, agency or official, (i) in which
there is a reasonable possibility of an adverse decision which would reasonably
be expected to have a Material Adverse Effect on the Company, (ii) with respect
to litigation filed prior to the date hereof, which in any manner challenges or
seeks to prevent, enjoin, alter or delay the transactions contemplated by this
Agreement, or
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(iii) if filed after the date hereof, which in any manner challenges or seeks to
prevent, enjoin, alter or materially delay the transaction contemplated by this
Agreement and which has a reasonable likelihood of success on the merits.
4.8 Finder's Fees. There is no investment banker, broker, finder or
other intermediary which has been retained by or is authorized to act on behalf
of Melville who might be entitled to any fee or commission from Newco or any of
its Affiliates upon consummation of the transactions contemplated by this
Agreement. CS First Boston Corporation has been retained by Melville as a
finder in connection with the sale of the Company Shares, but Melville shall be
responsible for all, and shall hold Newco and its Affiliates (including the
Company and the Subsidiaries) harmless against any, payments to CS First Boston
Corporation arising from the transfer or sale of the Company Shares or otherwise
arising from the consummation of the transactions resulting from this Agreement.
4.9 Shared Contracts, Other Contracts. Except for the Leases and the
Headquarters Lease or as disclosed on Schedule 4.9, neither Melville nor any of
its Affiliates is a party to any material contract or agreement relating to the
business of the Company or any Subsidiary or any contract providing for shared
purchases of assets, goods or services by Melville or any of its Affiliates, on
the one hand, and the Company or any Subsidiary on the other hand.
4.10 Services. Schedule 4.10 sets forth all material services that
Melville or any of its Affiliates performs for the Company or any Subsidiary.
4.11 Nonforeign Certification. Melville is not a "foreign person"
within the meaning of Section 1445 of the Code.
ARTICLE 5
REPRESENTATIONS AND WARRANTIES OF NEWCO
Newco represents and warrants to Melville as of the date hereof and as
of the Closing Date that:
5.1 Existence and Power. Newco is a corporation duly organized,
validly existing and in good standing under the laws of Minnesota and has all
corporate powers and authority and all material governmental licenses,
authorizations, permits, consents and approvals required to carry on its
business as now conducted. Newco has heretofore delivered to Melville true and
complete copies of the articles of incorporation and bylaws of Newco as
currently in effect.
5.2 Corporate Authorization. The execution, delivery and performance
by Newco of this Agreement, the Note, the Warrant, the Management Warrant, the
Registration
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Rights Agreement, the Security Agreement, each Pledge Agreement and the Escrow
Agreement and the issuance of the Common Shares and the Preferred Shares are
within Newco's corporate powers and have been duly authorized by all necessary
corporate action on the part of Newco. This Agreement constitutes and the
Registration Rights Agreement, the Security Agreement, each Pledge Agreement and
the Escrow Agreement when executed and delivered by Newco will constitute valid
and binding agreements of Newco enforceable in accordance with their terms,
except as (i) the enforceability hereof may be limited by bankruptcy,
insolvency, moratorium or other similar laws affecting the enforcement of
creditors' rights generally and (ii) the availability of equitable remedies may
be limited by equitable principles of general applicability. When issued and
delivered at Closing in accordance with the terms hereof, each of the Note, the
Warrant, the Management Warrant, the Common Shares and the Preferred Shares as
of Closing will constitute a valid and binding obligation of Newco enforceable
in accordance with their terms, except as (i) the enforceability thereof may be
limited by bankruptcy, insolvency, moratorium or other similar laws affecting
the enforcement of creditors' rights generally and (ii) the availability of
equitable remedies may be limited by equitable principles of general
applicability.
5.3 Governmental Authorization. The execution, delivery and
performance by Newco of this Agreement, the Note, the Warrant and the Management
Warrant, the Security Agreement, each Pledge Agreement, the Registration Rights
Agreement and the Escrow Agreement, and the issuance of the Common Shares and
the Preferred Shares require no action by or in respect of, or filing with
(except for filings to perfect security interests created under the Security
Agreement), any governmental body, agency or official except for (i) if
required, satisfaction of the requirements of the HSR Act, (ii) compliance with
any applicable requirements of the 1934 Act, (iii) in the case of the Note, the
Warrant and the Management Warrant, compliance with any state or federal
securities laws, and (iv) any such action or filing as to which the failure to
make or obtain would not, individually or in the aggregate, have a Material
Adverse Effect on Newco and would not impair in any respect the ability of Newco
to consummate the transactions contemplated by this Agreement.
5.4 Non-Contravention. The execution, delivery and performance by
Newco of this Agreement, the Note, the Warrant, the Management Warrant, the
Security Agreement, each Pledge Agreement, the Registration Rights Agreement and
the Escrow Agreement, and the issuance of the Common Shares and the Preferred
Shares do not and will not (i) violate the Charter or bylaws of Newco or (ii)
assuming compliance with the matters referred to in Section 5.3 and the accuracy
of the representations of Melville contained in Section 4.6, violate any
applicable statute, law, rule, regulation, ordinance, judgment, ruling by a
court, writ, injunction, order or decree.
5.5 Acquisition for Investment. Newco is acquiring the Company
Shares for investment for its own account and not with a view to, or for sale in
connection with, any distribution thereof. Newco (either alone or together with
their advisors) has sufficient knowledge and experience in financial and
business matters so as to be capable of evaluating
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the merits and risks of its investment in the Company Shares and is capable of
bearing the economic risks of such investment.
5.6 Litigation. There is no action, suit, investigation or
proceeding pending against, or to the knowledge of Newco threatened against or
affecting, Newco before any court or arbitrator or any governmental body, agency
or official (i) in which there is a reasonable possibility of an adverse
decision which would reasonably be expected to have a Material Adverse Effect on
Newco, (ii) with respect to litigation filed prior to the date hereof which in
any manner challenges or seeks to prevent, enjoin, alter or delay the
transactions contemplated by this Agreement, or (iii) if filed after the date
hereof, which in any manner challenges or seeks to prevent, enjoin, alter or
materially delay the transactions contemplated by this Agreement and which has a
reasonable likelihood of success on the merits.
5.7 Finders' Fees. There is no investment banker, broker, finder or
other intermediary which has been retained by or is authorized to act on behalf
of Newco who might be entitled to any fee or commission from Melville or any of
its Affiliates upon consummation of the transactions contemplated by this
Agreement.
5.8 Certain Matters Relating to the Warrant and the Management
Warrant. When issued upon exercise of the Warrant and the Management Warrant in
accordance with their terms, all Warrant Shares will be duly authorized, validly
issued, fully paid and non-assessable and will be free and clear of all Liens
and will not be subject to any preemptive or similar rights.
5.9 Capitalization. (a) The authorized capital stock of Newco
consists of 60,000,000 shares, consisting of 50,000,000 shares of Common Stock,
par value $.01 per share, of which 25,000,000 are undesignated as to class,
15,000,000 are designated as Class A Common Stock, 7,500,000 are designated as
Class B Common Stock and 2,500,000 are designated as Class C Common Stock, and
of 10,000,000 shares of preferred stock, par value $.01 per share ("Authorized
Preferred Stock"), of which 15,000 are designated as Preferred Stock. As of
the date hereof, there are no outstanding shares of capital stock of Newco.
(b) All outstanding shares of Common Stock and Preferred Stock of
Newco have been duly authorized and validly issued and are fully paid and non-
assessable. Newco has not issued any shares or other capital stock or other
voting or equity securities of Newco in violation of any preemptive rights.
Except as disclosed in Section 5.9(a) and except (i) for the Common Shares, the
Preferred Shares, the Warrant and the Management Warrant to be issued to
Melville at Closing as contemplated by this Agreement and (ii) the Management
Shares to be issued to the Managers on the Closing Date, there are no
outstanding (x) shares of capital stock or voting or equity securities of Newco,
(y) securities of Newco convertible into or exchangeable for shares of capital
stock or voting or equity securities of Newco or (z) options, warrants,
subscriptions or other rights to acquire from Newco, or commitment or other
obligation of Newco to issue, any capital stock, other voting or equity
securities or securities convertible into or exchangeable for capital stock or
other voting or equity securities
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of Newco (the items in clauses (x), (y) and (z) being referred to collectively
as the "Newco Securities"). There are no outstanding commitments or other
obligations of Newco or any Subsidiary to repurchase, redeem or otherwise
acquire any Newco Securities except pursuant to the Shareholders Agreement.
5.10 Financing. Newco has received and furnished copies to Melville
of a commitment letter (the "Commitment Letter") from GE Capital dated as of
April 29, 1996 pursuant to which GE Capital has committed, subject to the terms
and conditions thereof, to enter into a revolving credit agreement with Newco or
an Affiliate of Newco and GE Capital as Agent, which commitment letter
contemplates that an Affiliate of GE Capital will seek to syndicate the
remaining financing needed under such revolving credit agreement. The revolving
credit agreement referred to above is referred to herein as the "Financing
Agreement," and the financing to be provided thereunder or under any alternative
arrangements made by Newco is referred to herein as the "Financing." The
Management Disclosure Group believes the aggregate proceeds of the Financing (in
the event of a successful syndication) will be in an amount sufficient to carry
on the business as now conducted, and to pay all related fees and expenses. As
of the date hereof, Newco knows of no facts or circumstances that are reasonably
likely to result in any of the conditions set forth in the Financing Agreement
not being satisfied.
ARTICLE 6
COVENANTS OF THE COMPANY
The Company agrees as follows:
6.1 Conduct of the Company. Except as otherwise contemplated by this
Agreement or the discontinuance of the issuance of lease guarantees by MRC, from
the date hereof until the Closing Date, the Company and the Subsidiaries shall
conduct their businesses in the ordinary course consistent with past practice
and shall use their best efforts to preserve intact their business organizations
and relationships with third parties and to keep available the services of their
present officers and employees. Without limiting the generality of the
foregoing, except as otherwise contemplated by this Agreement, from the date
hereof until the Closing Date:
(i) the Company will not adopt or propose, or permit any
Subsidiary to adopt or propose, any change in the Charter or bylaws of the
Company or any Subsidiary;
(ii) the Company shall not, and shall not permit any Subsidiary
to, enter into the merger or consolidation of the Company or any Subsidiary
with any other Person or the acquisition by the Company or any Subsidiary
of a material amount
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of assets of any other Person, other than inventory in the ordinary course
of business, or otherwise acquire assets except in the ordinary course of
business;
(iii) the Company and its Subsidiaries shall not sell, lease,
license or otherwise dispose of or subject to the imposition of any Lien
any material assets or property except (A) pursuant to existing contracts
or commitments disclosed in Schedule 3.11 to this Agreement or the non-
disclosure of which does not create a misrepresentation under Section 3.11
of this Agreement and (B) in the ordinary course consistent with past
practice;
(iv) the Company and the Subsidiaries will not incur any capital
expenditures which, together with all other capital expenditures made since
the Balance Sheet Date through June 30, 1996, exceed $3,600,000 in the
aggregate;
(v) the Company and the Subsidiaries will not incur any
Indebtedness or create or allow to be created any Liens other than (A)
purchase money Indebtedness on tangible personal property and Liens solely
on such tangible personal property consistent with past practice and (B)
letters of credit in connection with the purchase of inventory;
(vi) the Company will not permit any material sums or other
assets of the Company or any Subsidiary to be paid, as compensation or
otherwise to or withdrawn by directors, officers or employees of Melville
or any of its Affiliates who are not Managers or employees of the Company
or a Subsidiary; and
(vii) neither the Company nor its Subsidiaries will agree or
commit to do any of the foregoing prohibited acts.
The Company and its Subsidiaries shall not (A) take or agree or commit
to take any action that would make any representation or warranty of the Company
or Melville hereunder inaccurate in any respect at, or as of any time prior to,
the Closing or (B) omit or agree or commit to omit to take any action necessary
to prevent any such representation or warranty from being inaccurate in any
respect at any such time.
6.2 Access to Information. From the date hereof until the Closing
Date, the Company (i) will give, and will cause each Subsidiary to give,
Melville, Newco, their counsel, financial advisors, auditors and other
authorized representatives access during normal business hours to the offices,
properties, books and records of the Company and the Subsidiaries, (ii) will
furnish, and will cause each Subsidiary to furnish, to Melville, Newco, their
counsel, financial advisors, auditors and other authorized representatives such
financial and operating data and other information relating to the Company or
any Subsidiary as such Persons may reasonably request including, allowing such
Persons to be present during, and to assist in, the preparation of such
financial and operating data at the Company and (iii) will instruct the
employees, counsel and financial advisors of the Company and the Subsidiaries to
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cooperate with Melville and Newco in their investigation of the Company and the
Subsidiaries.
6.3 Notices of Certain Events. The Company shall promptly notify
Newco and Melville of:
(i) any notice or other communication received from any Person
alleging that the consent of such Person is or may be required in
connection with the transactions contemplated by this Agreement;
(ii) any notice or other communication received from any
governmental or regulatory agency or authority in connection with the
transactions contemplated by this Agreement; and
(iii) any actions, suits, claims, investigations or proceedings
commenced or, to its knowledge threatened prior to the Closing against,
relating to or involving or otherwise affecting the Company or any
Subsidiary that, if pending on the date of this Agreement, would have been
required to have been disclosed pursuant to Section 3.12 or that relate to
the consummation of the transactions contemplated by this Agreement.
6.4 Resignation. At or prior to the Closing Date, the Company will
deliver or cause to be delivered to Melville the resignations of all Managers
and all employees of the Company and the Subsidiaries who are officers and/or
directors of Melville or any Affiliate of Melville.
6.5 Intercompany Accounts. As of the Closing, no intercompany
accounts reflecting intercompany transactions between Melville and its
Affiliates, on the one hand, and the Company and the Subsidiaries, on the other
hand, will be outstanding and any agreements relating to such intercompany
accounts shall have been terminated. As of the Closing, no balance in any
intercompany accounts reflecting intercompany transactions between the Company
and the Subsidiaries or between Subsidiaries will be outstanding. As of the
Closing, the Company shall have no liability for principal and accrued interest
under a credit facility dated as of May 1, 1995 of the Company and its
Subsidiaries with the Bank of Boston. The Estimated Closing Balance Sheet, the
Estimated Closing Working Capital Statement, Estimated Working Capital and
Closing Working Capital shall be prepared and calculated after giving effect to
the transactions agreed to in this Section 6.5.
6.6 New Stores. The Company and the Subsidiaries shall proceed with
the plans and preparations for new stores and the remodeling of certain existing
Stores during calendar year 1996, in the locations and in conformity with the
schedule of openings and remodelings disclosed in Schedule 6.6; provided that
the covenants contained in Section 6.6 shall be applicable only prior to
Closing. The terms and conditions of leases, agreements for the construction,
build-out and remodeling shall, to the extent not otherwise agreed to as of
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the date hereof, be subject to the consent of Melville and Newco, which consent
shall not, unless otherwise prohibited by Section 6.1, be unreasonably
conditioned, delayed or withheld.
6.7 Other Offers. From the date hereof until the Closing Date or
termination hereof, the Company and the Subsidiaries will not, directly or
indirectly, take any action to solicit, initiate or encourage any Acquisition
Proposal or in any manner discuss, consider or accept any Acquisition Proposal.
For purposes of this Agreement, "Acquisition Proposal" means any offer or
proposal for, or any indication of interest in, a business combination involving
the Company and the Subsidiaries or the acquisition of any equity interest in,
or a substantial portion of the assets of, the Company or any Subsidiary, other
than the transactions contemplated by this Agreement.
ARTICLE 7
COVENANTS OF MELVILLE
Melville agrees as follows:
7.1 Conduct of the Company. Except as otherwise contemplated by this
Agreement or necessary to effectuate the transactions hereunder or cause MRC not
to issue any lease guarantees, from the date hereof until the Closing Date,
Melville shall use its commercially reasonable efforts to cause the Company and
the Subsidiaries to conduct their businesses in the ordinary course consistent
with past practice and shall use its best efforts to preserve intact the
business organizations and relationships of the Company and the Subsidiaries
with third parties and to keep available the services of their present officers
and employees. Without limiting the generality of the foregoing, except as
otherwise contemplated by this Agreement, from the date hereof until the Closing
Date:
(i) Melville will not adopt or propose any change in the
Charter or bylaws of the Company or any Subsidiary;
(ii) Melville will not cause the Company or any Subsidiary to
enter into the merger or consolidation of the Company or any Subsidiary
with any other Person or the acquisition by the Company or any Subsidiary
of a material amount of assets of any other Person, other than inventory in
the ordinary course of business, or otherwise acquire assets except in the
ordinary course of business;
(iii) Melville will not cause the Company and its Subsidiaries
to sell, lease, license or otherwise dispose of or subject to the
imposition of any Lien any material assets or property except (A) pursuant
to existing contracts or commitments disclosed in Schedule 3.11 to this
Agreement or the non-disclosure of which does not create a
misrepresentation under Section 3.11 of this Agreement, (B) in the ordinary
course consistent with past practice and (C) dividends of cash or
intercompany
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receivables between the Company or a Subsidiary, on the one hand, Melville
or an Affiliate, on the other hand or between Subsidiaries, or from any
Subsidiary to the Company;
(iv) Melville will not cause the Company and the Subsidiaries to
incur any capital expenditures which, together with all other capital
expenditures made since the Balance Sheet Date through June 30, 1996,
exceed $3,600,000 in the aggregate;
(v) Melville will not cause the Company and the Subsidiaries to
incur any Indebtedness or create any Liens other than (A) purchase money
Indebtedness on tangible personal property and Liens solely on such
tangible personal property consistent with past practice and (B) letters of
credit in connection with the purchase of inventory; or
(vi) Melville will not cause the Company nor its Subsidiaries to
agree or commit to do any of the foregoing prohibited acts.
Melville will not (A) take or agree or commit to take any action that
would make any representation or warranty of Melville hereunder inaccurate in
any material respect at, or as of any time prior to the Closing or (B) omit or
agree or commit to omit to take any action necessary to prevent such
representation or warranty from being inaccurate in any respect at any such
time, and will not cause the Company and its Subsidiaries to (x) take or agree
or commit to take any action that would make any representation or warranty of
the Company hereunder inaccurate in any respect at, or as of any time prior to,
the Closing or (y) omit or agree or commit to omit to take any action necessary
to prevent any such representation or warranty from being inaccurate in any
respect at any such time.
7.2 Access to Information. From the date hereof until the Closing
Date, Melville (i) will give, and will cause each Subsidiary to give, Newco, its
counsel, financial advisors, auditors and other authorized representatives
reasonable access during normal business hours to the offices, properties, books
and records of the Company and the Subsidiaries and to the books and records of
Melville relating to the Company and the Subsidiaries, (ii) will furnish, and
will cause each Subsidiary to furnish, to Newco, its counsel, financial
advisors, auditors and other authorized representatives such financial and
operating data and other information relating to the Company or any Subsidiary
as such Persons may reasonably request and (iii) will instruct the employees,
counsel and financial advisors of Melville to cooperate with Newco in its
investigation of the Company and the Subsidiaries.
7.3 Notices of Certain Events. Melville shall promptly notify Newco
of:
(i) any notice or other communication received from any Person
alleging that the consent of such Person is or may be required in
connection with the transactions contemplated by this Agreement;
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(ii) any notice or other communication received from any
governmental or regulatory agency or authority in connection with the
transactions contemplated by this Agreement; and
(iii) any actions, suits, claims, investigations or proceedings
commenced or, to its knowledge threatened against, relating to or involving
or otherwise affecting the Company or any Subsidiary that, if pending on
the date of this Agreement, would have been required to have been disclosed
pursuant to Section 3.12 or that relate to the consummation of the
transactions contemplated by this Agreement.
7.4 Intercompany Accounts. As of the Closing, no intercompany
accounts reflecting intercompany transactions between Melville and its
Affiliates, on the one hand, and the Company and the Subsidiaries, on the other
hand, will be outstanding and any agreements relating to such intercompany
accounts shall have been terminated. As of the Closing, no balance in any
intercompany accounts reflecting intercompany transactions between the Company
and the Subsidiaries or between Subsidiaries will be outstanding. Melville
shall take such further action as may be necessary so that the only indebtedness
of the Company or any Subsidiary to third parties (including Melville and its
Affiliates as third parties) for borrowed money and the only guaranties by the
Company or any Subsidiary of, or security on assets of the Company or any
Subsidiary for, indebtedness of third parties (including Melville and its
Affiliates as third parties) for borrowed money outstanding immediately prior to
the Closing will be as described in Schedule 7.4. As of the Closing, the
Company shall have no liability for principal and accrued interest under a
credit facility dated as of May 1, 1995 of the Company and its Subsidiaries with
the Bank of Boston. The Estimated Closing Balance Sheet, the Estimated Closing
Working Capital Statement, Estimated Working Capital and Closing Working Capital
shall be prepared and calculated after giving effect to the transactions agreed
to in this Section 7.4.
7.5 Other Offers. From the date hereof until the Closing Date or
termination hereof, Melville will not, directly or indirectly, take any action
to solicit, initiate or encourage any Acquisition Proposal or in any manner
discuss, consider or accept any Acquisition Proposal.
7.6 Loss. If any Store or other asset of the Company or any
Subsidiary is damaged by fire or other casualty prior to the Closing Date or is
condemned in whole or in part, Melville shall assign to Newco all insurance
proceeds or condemnation awards, if any, for such Store or other asset which
relate to the Store and the assets of the Company and the Subsidiaries. To the
extent the Company and the Subsidiaries are self-insured, Melville shall pay to
Newco that amount needed to restore the Store and the assets of the Company and
the Subsidiaries to the same condition which such Store and such assets were in
prior to such casualty; provided that to the extent any such amount is taken
into account in connection with the preparation of the calculation of Estimated
Working Capital and Closing Working Capital pursuant to Article 2, Melville
shall no longer be obligated to pay such amount to Newco pursuant to this
Section 7.6. In addition, to the extent that the proceeds of insurance or such
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condemnation awards are not sufficient to return a Store to operation, Melville
shall pay to Newco, at or prior to Closing, an amount equal to three times the
Contribution of such Store but in no event less than $100,000 less the amount of
the proceeds of any such insurance or condemnation award and additional payments
referred to above in Section 7.6.
7.7 Confidentiality. From and after the Closing Date, Melville and
its Affiliates will hold in confidence and not use, and will use their best
efforts to cause their respective officers, directors, employees, accountants,
counsel, consultants, advisors and agents to hold in confidence and not use,
unless compelled to disclose by judicial or administrative process or by other
requirements of law (including but not limited to the rules and regulations of
the Internal Revenue Service or any comparable foreign or state agency or
authority) in which event Melville will, and will cause its Affiliates to, use
their commercially reasonable efforts to give sufficient advance notice to Newco
and the Company to enable Newco or the Company to attempt to receive appropriate
protective orders, all confidential documents and information concerning the
Company and the Subsidiaries (including information provided pursuant to Section
6.2 or 7.2), and such information relating to Newco, as may be received from
Newco, except to the extent that such information can be shown to have been (i)
in the public domain through no fault of Melville or (ii) lawfully acquired
after the Closing by Melville from sources other than Newco, the Company or any
Subsidiary. Melville shall be liable for any breach by any such Person of such
obligations. The obligation of Melville and its Affiliates to hold any such
information in confidence shall be satisfied if they use commercially reasonable
efforts to preserve the confidentiality of such information.
7.8 Records. At the Closing or as soon thereafter as practicable,
but in no event later than 30 days after the Closing Date, Melville will deliver
or cause to be delivered to the Company all corporate records of the Company and
its Subsidiaries and all other original agreements, documents, books and records
relating solely to the Company or any Subsidiary in the possession of Melville
or any of its Affiliates; provided that the Company for a period of five years
from the Closing Date shall have reasonable access on reasonable notice to
records in the possession of Melville which do not relate solely to the Company
or any Subsidiary; provided further that if at any time after such five year
period, Melville intends to destroy such records, Melville shall notify Newco in
writing of such intention and Newco shall have a period of 30 days from the date
of such notice to, at Newco's expense, take possession of such records.
7.9 Resignations. At or prior to the Closing Date, Melville will
deliver or cause to be delivered to Newco the resignations of all officers and
directors of the Company and each Subsidiary other than the Managers or any
employees of the Company and the Subsidiaries.
7.10 Audited Financial Statements. As soon as practicable after the
Closing, but in no event later than 60 days after the Company delivers the
Closing Balance Sheet, Melville will deliver or cause to be delivered to the
Company an audited Closing Balance Sheet and the related consolidated statement
of income and cash flow therefor for the period
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from January 1, 1996 through and including the Closing Date, prepared in
conformity with generally accepted accounting principles applied on a basis
consistent with preparation of the Annual Financials and presented in accordance
with Regulation S-X of the 1933 Act.
7.11 Status of Newco. From the date hereof to the Closing Date,
Melville will not take any action to change the composition of the board of
directors of Newco unless Newco consents to such change.
7.12 Insurance. (a) From and after the Closing, Melville shall use
commercially reasonable efforts, subject to the terms of Melville's Insurance
Policies, as hereinafter defined, to retain the right for claimants against the
Company, any Subsidiary or any director, officer or employee of the Company or
any Subsidiary to make claims and receive recoveries from insurers (and the
right of the Company and its Subsidiaries and directors, officers and employees
thereof to reimbursement from the insurer for payment by the Company or any
Subsidiary or any director, officer or employee thereof of such claims in the
event of coverage disputes), under (i) any workers compensation, commercial
general liability, automobile liability, product liability or other liability
insurance policies maintained at any time prior to the Closing by Melville or an
Affiliate, and (ii) any umbrella policies maintained at or at any time prior to
Closing by Melville or an Affiliate relating to matters of the nature covered by
such policies described in clause (i) (collectively, "Melville's Insurance
Policies"), covering any loss, liability, claim, damage or expense relating to
the assets, business, operations, conduct, products and employees (including
former employees) of the Company or any Subsidiary that relates to or arises out
of occurrences prior to the Closing (an "Insured Claim"), provided that to the
extent Melville's Insurance Policies provide for any deductibles, Melville shall
be liable for, and shall hold harmless and indemnify the Company and the
Subsidiaries against, the portion of any Insured Claim which is subject to such
deductible. If any amounts for deductibles under Melville's Insurance Policies
are accrued by the Company prior to the Closing, such amounts shall be excluded
from the calculation of Estimated Working Capital and Closing Working Capital
pursuant to Article 2. Subject to the terms of Melville's Insurance Policies,
Melville agrees to use commercially reasonable efforts so that the Company and
each Subsidiary shall have the right, power and authority, in the name of
Melville or any of its Affiliates, to make directly any request to the insurer
for payment of Insured Claims under Melville's Insurance Policies.
(b) In the event that any legal action, arbitration, negotiation or
other proceedings are required for coverage to be asserted against any insurer
or on an Insured Claim, in each case against or on behalf of the Company or any
Subsidiary or any director, officer or employee of the Company or any
Subsidiary, (i) the Company shall, to the extent possible, do so at its own
expense, provided that nothing stated herein shall limit the right of the
Company or any Subsidiary to the recovery of such expenses under Melville's
Insurance Policies or (ii) if the Company is not permitted to assert coverage
for an Insured Claim, upon notice from Newco or the Company, Melville or one of
its Affiliates shall do so, and, in such event, Newco and the Company shall hold
harmless and indemnify Melville and its Affiliates
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for any reasonable out-of-pocket costs and expenses not recoverable under
Melville's Insurance Policies that they may incur because of such action.
(c) Each of Melville, Newco, the Company and the Subsidiaries shall
use its commercially reasonable efforts to cooperate fully and to cause its
Affiliates to cooperate fully with the others in making requests and asserting
obligations of insurers for payment of Insured Claims against or on behalf of
the Company and the Subsidiaries or any director, officer or employee of the
Company or any Subsidiary under Melville's Insurance Policies.
7.13 Termination of Agency Agreement. Melville shall cause Melville
Equipment Leasing Corp. and the Company to terminate the Agency Agreement
between them dated as of December 29, 1995.
ARTICLE 8
COVENANTS OF NEWCO
Newco agrees that:
8.1 Confidentiality. Prior to the Closing Date and after any
termination of this Agreement, Newco and its Affiliates will hold in confidence
and not use, and will use their best efforts to cause their respective officers,
directors, employees, accountants, counsel, consultants, advisors and agents to
hold in confidence and not to use, unless compelled to disclose by judicial or
administrative process or by other requirements of law, all confidential
documents and information concerning Melville, the Company or any Subsidiary
furnished to Newco or its Affiliates in connection with the transactions
contemplated by this Agreement, except to the extent that such information can
be shown to have been (i) previously known on a nonconfidential basis by Newco,
(ii) in the public domain through no fault of Newco or (iii) later lawfully
acquired by Newco from sources other than Melville or the Company or any
Subsidiary and except that such Person may use such information for purposes
relating to consummation of the transactions contemplated hereby; provided that
Newco may disclose such information to its officers, directors, employees,
accountants, counsel, consultants, advisors and agents and the Managers in
connection with the transactions contemplated by this Agreement and to its
potential lenders and to potential purchasers of Common Shares and Preferred
Shares of Newco in connection with obtaining the financing for the transactions
contemplated by this Agreement so long as such Persons are informed by Newco of
the confidential nature of such information and are directed by Newco to comply
with the foregoing obligations. Newco shall be liable for any breach by any
such Person of such obligations. The obligation of Newco and its Affiliates to
hold any such information in confidence shall be satisfied if they use
commercially reasonable efforts to preserve the confidentiality of such
information. If this Agreement is terminated, Newco and its Affiliates will,
and will use their best efforts to cause their respective officers, directors,
employees, accountants, counsel, consultants, advisors and agents and the
Managers to, destroy or deliver
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to Melville, upon request, all documents and other materials, and all copies
thereof, obtained by Newco or its Affiliates or on their behalf from Melville or
the Company or any Subsidiary in connection with this Agreement that are subject
to such confidence.
8.2 Access. On or after the Closing Date until the Note Repayment
Date, Newco (i) will give, and will cause the Company and each Subsidiary to
give, Melville, its counsel, financial advisors, auditors and other authorized
representatives access upon reasonable notice during normal business hours to
the offices, properties, books and records of the Company and the Subsidiaries
and to the books and records of Newco, relating to the Company and the
Subsidiaries, (ii) will furnish, and will cause the Company and each Subsidiary
to furnish, to Melville, its counsel, financial advisors, auditors and other
authorized representatives such financial and operating data and other
information relating to Newco, the Company or any Subsidiary as such Persons may
reasonably request and (iii) will instruct the employees, counsel and financial
advisors of the Company and the Subsidiaries to cooperate with Melville in
obtaining information concerning the Company and the Subsidiaries.
8.3 Notices of Certain Events. Newco shall promptly notify Melville
of:
(i) any notice or other communication received from any Person
alleging that the consent of such Person is or may be required in
connection with the transactions contemplated by this Agreement;
(ii) any notice or other communication received from any
governmental or regulatory agency or authority in connection with the
transactions contemplated by this Agreement; and
(iii) any actions, suits, claims, investigations or proceedings
commenced or, to its knowledge threatened against, relating to or involving
or otherwise affecting Newco that, if pending on the date of this
Agreement, would have been required to have been disclosed pursuant to
Section 5.6 or that relate to the consummation of the transactions
contemplated by this Agreement.
8.4 Warrant Shares Reserved for Issuance. Newco shall at all times
cause sufficient authorized shares of its common stock to be reserved for
issuance of Warrant Shares upon exercise of the Warrant and the Management
Warrant.
8.5 Delivery of Information Following Closing. So long as any
principal amount of or interest on the Note remains unpaid or the Warrant has
not been exercised in respect of all Warrant Shares issuable thereunder or the
Management Warrant has not been exercised in respect of all Warrant Shares
issuable thereunder (or the number of shares issuable thereunder has not been
reduced to zero):
(i) Newco shall deliver to Melville copies of all financial
statements, reports and compliance certificates required to be delivered by
Newco to
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any of its lenders or all securityholders on the same day of delivery
thereof to such lenders or securityholders;
(ii) Newco shall promptly notify Melville of any default by
Newco under any credit agreement, indenture or other agreement or
instrument relating to or governing any indebtedness for borrowed money or
other material obligation of Newco except as would not have a Material
Adverse Effect on Newco or the Company; and
(iii) Newco shall cause its senior management and senior
management of the Company to be available to Melville at such times and
from time to time as Melville may reasonably request upon reasonable notice
in connection with the transactions contemplated hereby and to discuss the
business and affairs of Newco, the Company and their respective Affiliates.
8.6 Shareholders Agreement. Newco will not amend, alter or repeal
any of the provisions of the Shareholders Agreement as long as the Warrant is
outstanding without the consent of Melville which consent shall be exercised in
the reasonable judgment of Melville.
8.7 Indenture. Newco agrees that, at the request of Melville, Newco
will cooperate in preparing and will execute an indenture relating to the Note
(prepared at Melville's expense, including the payment by Melville of the
reasonable attorneys' fees of Newco's counsel and accountants) in a form
reasonably satisfactory to Newco.
8.8 Articles of Incorporation. Newco shall file the Articles of
Incorporation prior to the Closing Date.
ARTICLE 9
COVENANTS OF NEWCO, MELVILLE, AND THE COMPANY
Newco, Melville, and the Company, as the case may be, agree as
follows:
9.1 Commercially Reasonable Efforts. Subject to the terms and
conditions of this Agreement, Newco, Melville and the Company will use
commercially reasonable efforts to take, or cause to be taken, all actions and
to do, or cause to be done, all things necessary or desirable under applicable
laws and regulations to consummate the transactions contemplated by this
Agreement (including using commercially reasonable efforts to obtain Financing
on terms reasonably satisfactory to Newco); provided that nothing stated herein
shall require Melville, the Company or Newco to make any payment to obtain any
consent or Permit that is a condition to consummating this Agreement. Melville,
Newco and the Company agree, and Newco, after the Closing, agrees to cause the
Company and each Subsidiary, to execute and deliver such other documents,
certificates, agreements and other
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writings and to take such other actions as may be necessary or desirable in
order to consummate or implement expeditiously the transactions contemplated by
this Agreement.
9.2 Certain Filings. Newco, Melville, and the Company shall
cooperate and Newco, after the Closing, will cause the Company to cooperate,
with one another (i) in determining whether any action by or in respect of, or
filing with, any governmental body, agency, official or authority is required,
or any actions, consents, approvals or waivers are required to be obtained from
parties to any material contracts, in connection with the consummation of the
transactions contemplated by this Agreement and (ii) in taking such actions or
making any such filings, furnishing information required in connection therewith
and seeking timely to obtain any such actions, consents, approvals or waivers.
All filing fees required under the HSR Act shall be paid by Melville at the time
of the filing thereunder if such a filing is required under the HSR Act.
9.3 Public Announcements. Newco, Melville and the Company agree not
to issue and Newco, after the Closing, will cause the Company not to issue, any
press release or make any public statement with respect to this Agreement or the
transactions contemplated hereby without the approval of the other, which
approval shall not be unreasonably withheld, and, except as may be required by
applicable law or any listing agreement with any national securities exchange,
will not issue any such press release or make any such public statement prior to
receipt of such approval; provided that Newco may make any public statement
without the prior approval of Melville after the Closing, if such public
statement is made in connection with an offering of securities and is required,
in Newco's reasonable judgment, to be made under the 1933 Act or the 1934 Act.
9.4 Designated Closed Store Leases and Excluded Subsidiaries. Prior
to the Closing Date, Melville shall cause the Designated Closed Store Leases and
the Excluded Subsidiaries to be contributed, distributed or otherwise
transferred or assigned to Melville or one of its Affiliates; provided that, to
the extent any such contribution, distribution, transfer or assignment is
prohibited by a judgment, injunction, order or decree or by applicable law,
Newco and Melville shall use their best efforts to implement any lawful
arrangement designed to effect the intent of such parties hereunder.
9.5 Certain Matters Relating to Lease Consents. (a) If prior to the
first anniversary of the Closing Date, neither Melville nor Newco has received
any written notice from a lessor or sublessor or other party entitled to give
such notice on behalf of either (a "Landlord") under a Lease for any Store
indicating that a consent or other approval (a "Consent") of such Landlord is
required under such Lease in connection with the transactions contemplated by
this Agreement or that any of such transactions are prohibited by or otherwise
violate any of the provisions of such Lease (a "Violation"), a Consent shall be
deemed to have been delivered with respect to such Lease (a "Delivered Lease").
If prior to such first anniversary Melville, Newco, the Company or any
Subsidiary has received any such written notice from a Landlord, such Lease
shall not be considered a Delivered Lease until (a) two years have elapsed from
the Closing Date without the commencement of legal
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proceedings by such Landlord against Melville, Newco, the Company or any
Subsidiary resulting from the transactions contemplated by this Agreement or (b)
such Landlord withdraws its objections in writing or legal proceedings having
been commenced within two years after the Closing Date are discontinued with
prejudice or otherwise resolved against such Landlord without further right of
appeal on the part of such Landlord. If legal proceedings are commenced against
Melville, Newco, the Company or any Subsidiary regarding any such Consent or
Violation within two years of the Closing Date, Newco shall be responsible for
defending such action and Newco and Melville shall share equally the cost and
expense of such defense, including attorney fees of counsel to Newco reasonably
acceptable to Melville. If legal proceedings are commenced against Melville,
Newco, the Company or any Subsidiary regarding any such Consent more than two
years after the Closing Date, Newco shall be responsible for defending such
action at Newco's sole cost and expense.
(b) Melville's liability to Newco for each Terminated Lease shall,
notwithstanding any provision in this Agreement to the contrary, be no more than
and no less than three times the Contribution of such Terminated Lease but in no
event less than $100,000 (the "Store Contribution"); provided that the payment
in this sentence is the sole payment required related to Terminated Leases. If
Newco, the Company or any Subsidiary cannot take or maintain possession of a
Store as of the Closing Date as a result of an injunction or restraining order
concerning or resulting from the sale of the Company Shares to Newco pursuant to
this Agreement and such injunction or order is later lifted prior to the first
anniversary of the Closing Date, such Lease will no longer be a Terminated Lease
and Newco shall, within five business days after such injunction or order is
lifted, pay in cash to Melville, if such injunction or order is lifted prior to
November 1, 1996, an amount equal to the payment received by Newco from Melville
pursuant to this Section 9.5(b) or, if such injunction or order is lifted
between November 1, 1996 and the day prior to the first anniversary of the
Closing Date, an amount equal to half of the payment received by Newco from
Melville pursuant to this Section 9.5(b), provided that if such injunction or
order is not lifted prior to November 1, 1996, but is lifted prior to the first
anniversary of the Closing Date, as a result of Newco's or the Company's failure
to cooperate in any proceeding or action relating to such injunction or order,
Newco shall pay Melville an amount equal to the payment received by Newco from
Melville pursuant to this Section 9.5(b). For each Lease determined to be a
Terminated Lease, Melville shall, within five business days after Newco, the
Company or any Subsidiary has vacated the Store pertaining to such Terminated
Lease, pay in cash to Newco an amount equal to the Store Contribution of such
Lease.
(c) (i) Except as otherwise provided in this Agreement, Newco's only
obligation with respect to a Terminated Lease which becomes a Terminated Lease
as of the Closing Date shall be to accept delivery of the inventory from the
Store relating to such Terminated Lease; provided that the cost of shipping such
inventory from the Store subject to the Terminated Lease to Newco shall be
shared equally between Melville and Newco.
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(ii) Except as otherwise provided in this Agreement, Newco's
only obligations with respect to a Terminated Lease which the Company or a
Subsidiary must vacate after the Closing Date shall be (A) to remove the
inventory from the Store relating to such Terminated Lease and (B) deliver
possession of such Store to Landlord as soon as practicable, broom clean
and in a condition substantially equivalent to the condition in which such
Store was in at Closing.
(d) If, at any time subsequent to the Closing Date, any Landlord
provides as a condition to the delivery of a Consent with respect to the
applicable Lease (other than a Delivered Lease) (i) a Release Payment or (ii) a
Rent Increase, Melville shall, upon written notice thereof delivered to Melville
by Newco at any time within 30 days following the date Newco, the Company or any
Subsidiary enters into an agreement (including but not limited to any amendment
to such Lease or a new lease which replaces such Lease) with such Landlord
providing for such Release Payment or such Rent Increase, as the case may be,
pay to Newco in cash an amount equal to (x) in the case of a Release Payment,
50% of such Release Payment, or (y) in the case of a Rent Increase, 50% of the
present value (applying a discount rate of 10%) of the Rent Increase for the
remainder of the current term of the applicable Lease exclusive of any options
contained in such Lease; provided that, in the event of a Rent Increase
resulting from an increase in the Original Percentage Rent, for purposes of the
calculation in this clause (y), the amount of such Rent Increase shall be deemed
to be equal to the difference in rent that would have been payable for the most
recent 12-month period ending prior to the Closing Date had such increase in
Original Percentage Rent been in effect under such Lease. In no event shall the
amount required to be paid by Melville pursuant to this Section 9.5(d) exceed
the Store Contribution of the applicable Lease. Upon payment by Melville of any
amount required to be paid by it pursuant to this Section 9.5(d) with respect to
any Lease, such Lease shall be deemed to be a Delivered Lease and Melville shall
have no further obligation of any kind whatsoever with respect to such Lease.
(e) (i) If, at any time prior to the Closing Date, any Landlord
provides as a condition to the delivery of a Consent with respect to the
applicable Lease (other than a Delivered Lease) (A) a Release Payment or (B) a
Rent Increase, Melville shall obtain the consent of Newco prior to causing the
Company or any Subsidiary to enter into an agreement (including but not limited
to any amendment to such Lease or a new lease which replaces such Lease) with
such Landlord providing for such Release Payment or such Rent Increase, as the
case may be, which consent of Newco shall not be unreasonably conditioned,
delayed or withheld; provided that if Newco does not so consent, the applicable
Lease shall be deemed to be a Terminated Lease. Melville may otherwise enter
into, or cause the Company or any Subsidiary to otherwise enter into, any such
agreement with any Landlord to obtain the Consent of such Landlord with respect
to the applicable Lease, so long as such agreement does not provide for a
Release Payment or a Rent Increase, and such Lease shall be deemed to be a
Delivered Lease.
(ii) If Newco consents to such Release Payment or such Rent
Increase, as the case may be, Melville shall, on the Closing Date, pay to
Newco in cash
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an amount equal to (A) in the case of a Release Payment, 50% of such
Release Payment or (B) in the case of a Rent Increase, 50% of the present
value (applying a discount rate of 10%) of the Rent Increase for the
remainder of the current term of the applicable Lease; provided that, in
the event of a Rent Increase resulting from an increase in the Original
Percentage Rent, for purposes of the calculation in this clause (B), the
amount of such Rent Increase shall be deemed to be equal to the difference
in rent that would have been payable for the most recent 12-month period
ending prior to the Closing Date had such increase in Original Percentage
Rent been in effect under such Lease. Upon payment by Melville of any
amount required to be paid by it pursuant to this Section 9.5(e)(ii) with
respect to any Lease, such Lease shall be deemed to be a Delivered Lease
and Melville shall have no further obligation of any kind whatsoever with
respect to such Lease.
(f) Each of Newco and Melville agree to keep the other generally
apprised of the status of any matters that are the subject of this Section 9.5.
9.6 Guarantee Arrangements. Subject to the terms and conditions of
this Agreement, Newco, Melville and the Company will use commercially reasonable
efforts to take, and Newco, after the Closing, will cause the Company to use
commercially reasonable efforts to take, or cause to be taken, all actions and
to use commercially reasonable efforts to do, or cause to be done, all things
necessary or desirable to cause the Company, or an Affiliate of the Company
(other than any Manager or Investor or any Affiliate who is an individual)
acceptable to Melville, the Company and Newco, to be substituted for MRC as the
guarantor of the Headquarters Lease and the Leases to the extent permitted under
the Financing; provided that nothing stated herein shall require Melville, the
Company or Newco to make any payment (other than incidental postage and office
expenses) to obtain such substitution. Melville, Newco and the Company agree,
and Newco, after the Closing, agrees to cause the Company and each Subsidiary,
to execute and deliver such documents, certificates, agreements and other
writings and to take such other actions as may be necessary or desirable in
order to consummate or implement such substitution, subject to the proviso in
the immediately preceding sentence.
9.7 Shared Contracts. With respect to the shared contracts listed on
Schedule 4.9, if requested by Newco, Melville, Newco and the Company each agree
to use commercially reasonable efforts following the Closing to separate such
contracts or otherwise provide that the respective obligations of Melville and
its Affiliates, on the one hand, and the Company and its Subsidiaries, on the
other hand, with respect thereto shall reflect their respective benefits under
such contracts and that their respective benefits under such contracts after the
Closing shall be based upon their respective use of such assets, goods and
services covered by such contracts in the ordinary course of business.
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ARTICLE 10
TAX MATTERS
10.1 Tax Representations. Melville and the Company each represent
and warrant to Newco as of the date hereof and as of the Closing Date that,
except as set forth in the Balance Sheet (including the notes thereto) or on
Schedule 10.1, to Melville's or the Company's knowledge, as the case may be
(with respect to the Company and the Subsidiaries), (i) all material Returns
required to be filed on or before the date hereof with respect to any Pre-
Closing Tax Period by, or with respect to, the Company or any Subsidiary have
been duly and timely filed (taking into account any extensions); (ii) no
position is reflected in a Return referred to in clause (i) for which the
applicable limitation period has not expired (and for which a closing agreement
has not been entered into) which (A) was not, at the time such Return was filed,
supported by substantial authority (as determined for purposes of Section 6662
of the Code, or any predecessor provision, and any comparable provisions of
applicable foreign, Federal, state, or local tax statutes, rules or regulations)
and (B) would have a Material Adverse Effect on the Company if decided against
the taxpayer; (iii) all Taxes shown as due and payable on any Return have been
timely paid, withheld or provision has been made therefor; and (iv) there is no
action, suit, proceeding, investigation, audit or claim now proposed or pending
against or with respect to the Company or any Subsidiary in respect of any
material Tax; (v) there has been no waiver or extension of any applicable
statute of limitations period for the assessment or collection of any Taxes,
which period (after giving effect to such waiver or extension) has not yet
expired; (vi) there are no requests for rulings, subpoenas or information
pending with respect to any matter relating to Taxes; (vii) any adjustment of
Taxes made by the Internal Revenue Service in any examination which is required
to be reported to state, local, foreign or other taxing authorities has been so
reported, and any additional Taxes due with respect thereto have been paid;
(viii) no power of attorney has been granted by the Company and/or any
Subsidiary, and is currently in force, with respect to any matter relating to
Taxes; (ix) neither Melville nor any of its Affiliates has made with respect to
the Company or any Subsidiary, or any property held by the Company or any
Subsidiary, any consent under Section 341(f) of the Code; (x) no property of the
Company or any Subsidiary is "tax exempt use property" within the meaning of
Section 168(h) of the Code; (xi) neither the Company nor any Subsidiary is a
party to any lease made pursuant to Section 168(f)(8) of the Internal Revenue
Code of 1954, as amended; and (xii) neither the Company nor any Subsidiary is a
party to any agreement that has resulted in or could result in an obligation to
make payments that would not be deductible under Section 280G of the Code.
10.2 Tax Covenants. (a) Melville and Newco agree to make a timely,
complete and irrevocable election under Section 338(h)(10) of the Code and under
any comparable statutes in any other jurisdiction (other than the United Kingdom
or any other jurisdiction outside of the United States) with respect to the
Company and each of the Subsidiaries (the "Section 338(h)(10) Election"), and to
file such election in accordance with applicable regulations. Melville and
Newco agree to cooperate (and cause their respective
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subsidiaries to cooperate) in all respects for the purpose of effectuating a
timely and complete Section 338(h)(10) Election, including without limitation,
the execution and filing of any forms or returns. The Section 338(h)(10)
Election shall properly reflect the Price Allocation (as hereinafter defined).
Within 150 days after the Closing Date, Newco shall deliver to Melville an
allocation of the modified ADSP (as such term is defined in Treasury Regulations
Section 1.338(h)(10)-1), excluding any selling costs described in Treasury
Regulations Section 1.338(h)(10)-1(f)(4)(ii) among the assets of the Company and
the Subsidiaries in accordance with the Treasury regulations promulgated under
Section 338(h)(10). Melville shall have the right to review the Allocation
Statement. If within 30 days after receipt of the Allocation Statement Melville
notifies Newco in writing that Melville disagrees with a material item reflected
in the Allocation Statement because the proposed treatment of such item could
have an adverse effect on the Tax liability, or any Tax attribute that could
reduce the Tax liability of Melville or any of its Affiliates, Newco and
Melville will negotiate in good faith to resolve such dispute. If Newco and
Melville fail to resolve such dispute within 30 days, it shall be resolved by a
nationally recognized independent accounting firm chosen and mutually acceptable
to both Newco and Melville (the "Tax Accountants"). The costs, fees and expenses
of such firm shall be borne equally by Newco and Melville. Upon resolution of
the disputed items, the allocation reflected on the Allocation Statement shall
be adjusted to reflect such resolution and shall be the "Price Allocation" which
shall be binding on the parties hereto. Melville and Newco agree to act in
accordance with the Price Allocation in the preparation and filing of any
Return.
(b) Newco covenants that it will not, nor will it cause or permit the
Company, any Subsidiary or any Affiliate of Newco (i) to take any action on the
Closing Date other than in the ordinary course of business or as contemplated by
this Agreement, including but not limited to the distribution of any dividend or
the effectuation of any redemption that could give rise to any Tax liability of
the Melville Group or to any loss of Melville or the Melville Group under this
Agreement, (ii) to make or change any Tax election (other than the making of the
Section 338(h)(10) Election), amend any Return or take any position on any
Return that results in any increased Tax liability or reduction of any Tax
attribute that could reduce the Tax liability of the Melville Group, provided
that it is agreed that the foregoing covenant shall not preclude Newco from
making Tax elections on or amending or taking a position on any Federal Income
Tax Return for a Post-Closing Tax Period or any other Tax Return that does not
include days in the Pre-Closing Tax Period, (iii) to liquidate or merge Newco
into another entity for a period of two years following the Closing Date,
provided that during such two-year period Newco may be liquidated or merged into
an unrelated corporation if, and only if, such liquidation or merger is effected
pursuant to the acquisition of Newco by such corporation and none of the
Managers or Investors has ever had nor will have any affiliation other than as a
non-officer employee (other than ownership of less than 1% of its outstanding
capital stock by any Managers and Investors in the aggregate) with such
corporation prior to its acquisition of Newco, (iv) to liquidate or merge the
Company, or any entity into which the Company has been liquidated or merged,
into Newco for a period of two years following the Closing Date or (v) to sell,
convey, exchange or otherwise transfer
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(including by merger or liquidation) all or substantially all of the property or
assets of the Subsidiaries of the Company, taken as a whole, to or with Newco
for a period of two years following the Closing Date. Newco agrees that Melville
is to have no liability for any Tax resulting from any action, referred to in
the preceding sentence, of the Company, Newco or any Affiliate of Newco, and
agrees to indemnify and hold harmless Melville and its Affiliates against any
such Tax and any liabilities and expenses (including without limitation
reasonable expenses of investigation and reasonable accountants' and attorneys'
fees and expenses) (any such liability or expense referred to herein as a
"Loss") incurred in connection therewith. Melville agrees to give prompt notice
to Newco of the assertion of any claim, or the commencement of any action or
proceeding, in respect of which indemnity may be sought under this Section
10.2(b). Newco may participate in and assume the defense of any such suit,
action or proceeding at its own expense. If Newco assumes such defense, Melville
shall have the right (but not the duty) to participate in the defense thereof
and to employ counsel, at its own expense, separate from the counsel employed by
Newco. Whether or not Melville chooses to defend or prosecute any claim, the
parties hereto shall cooperate in the defense or prosecution thereof. Newco
represents that it has no present intention, nor does it have any present
intention to cause or permit (i) the merger or liquidation of Newco into another
entity, (ii) the liquidation or merger of the Company, or any entity into which
the Company has been liquidated or merged, into Newco, or (iii) the sale,
conveyance, exchange or other transfer (including by merger or liquidation) of
all or substantially all of the property or assets of the Subsidiaries of the
Company, taken as a whole, to or with Newco, and Newco represents further that
there are no present negotiations, offers or communications with or from any
Person regarding the acquisition of Newco following its acquisition of the
Company Shares (other than pursuant to the Investor Stock Purchase Agreement) by
such Person, or an Affiliate, joint venturer, partner or relative of such
Person, or by any other Person if such Person is acting (formally or informally,
for compensation or otherwise) as an accountant, advisor, agent, attorney,
banker, broker, dealer, facilitator, finder, intermediary, investment banker or
in any other similar type of capacity.
(c) Newco shall promptly pay or shall cause prompt payment to be made
to Melville of all refunds of Taxes and interest thereon received by, or
credited to the Tax liability of, Newco, any Affiliate of Newco, the Company, or
any Subsidiary attributable to Taxes paid by Melville, the Company or any
Subsidiary (or any predecessor or Affiliate of Melville) with respect to any
Pre-Closing Tax Period and not reflected on the Working Capital Balance Sheet.
If a state does not recognize the Section 338(h)(10) Election, Newco may carry
back any losses from a Post-Closing Tax Period to a Pre-Closing Tax Period and,
if the relevant return does not include Melville or any of its Affiliates,
including all corporations (other than Newco, the Company or any Subsidiary)
that were Affiliates of Melville during any Pre-Closing Tax Period, Newco shall
be entitled to any refunds and interest thereon resulting from such carryback.
(d) All transfer, documentary, sales, use, stamp, registration and
other such Taxes and fees (including any penalties and interest) incurred in
connection with this
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Agreement (including any New York State Real Property Transfer Gains Tax, New
York State Real Estate Transfer Tax, New York City Real Property Transfer Tax
and any similar tax imposed by any Taxing Authority) ("Transfer Taxes") shall be
borne and paid by Melville, and Melville will, at its own expense, file all
necessary Returns and other documentation with respect to all such Taxes and
fees, and, if required by applicable law, Newco will, and will cause its
Affiliates and, effective upon the Closing, the Company and its Subsidiaries to,
join in the execution of any such Returns and other documentation.
(e) Melville shall include the income of the Company and the
Subsidiaries in Melville's federal consolidated Income Tax Return, and shall
file all state, foreign and local Income Tax Returns of the Company and the
Subsidiaries, for all tax periods ending on or before the Closing Date and shall
be responsible for remitting all Income Taxes reflected on such Income Tax
Returns. Melville shall also prepare or cause to be prepared and file or cause
to be filed all Miscellaneous Tax Returns due on or before the Closing Date
(taking into account extensions) and shall be responsible for remitting all
Miscellaneous Taxes reflected on such Miscellaneous Tax Returns.
(f) With respect to Income Tax Returns for the Tax period ending on
the Closing Date, Newco shall cause the Company and the Subsidiaries to prepare
and provide to Melville one or more packages of information materials as are
reasonably necessary for the purpose of preparing each such Income Tax Return
(the "Tax Packages"). Each Tax Package shall be completed in all material
respects in accordance with the standards that Melville has established for its
other subsidiaries. Newco shall use commercially reasonable efforts to deliver
the Tax Packages to Melville as soon as practicable after the Closing Date, but
in no event later than the date that is five months after the Closing Date.
Within 30 days after the filing of such Income Tax Returns, Melville shall
provide Newco with copies of each separate company pro forma Income Tax Return
and any other Income Tax Return pertaining exclusively to the Company and the
Subsidiaries.
(g) Newco shall prepare and file, or cause to be prepared and filed,
on a timely basis all Income Tax Returns required to be filed by the Company and
each Subsidiary for any Tax period of the Company or any Subsidiary that
includes (but does not end on) the Closing Date and all Miscellaneous Tax
Returns due after the Closing Date (taking into account extensions) and shall be
responsible for remitting all Taxes reflected on such Returns. Any such Return
shall be prepared in a manner consistent with past practice and without a change
of any election or any accounting method and shall be submitted by Newco to
Melville (together with schedules, statements and, to the extent requested by
Melville, supporting documentation) at least 40 days prior to the due date
(including extensions) of such Return. Melville shall have the right to review
all work papers and procedures used to prepare any such Return. If Melville,
within 15 business days after delivery of any such Return, notifies Newco in
writing that it objects to any items in such Return, the parties shall proceed
in good faith to resolve the disputed items and, if they are unable to do so
within 10 business days, the disputed items shall be resolved (within a
reasonable time, taking into account the deadline for filing such Return) by the
Tax Accountants; provided that if the Tax
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Accountants shall determine that two or more alternative positions with respect
to the matter in question are equally supported by applicable law, the party
that is liable for such item under Section 10.5(a) shall determine which
position shall be taken on the relevant Return. Upon resolution of all disputed
items, the relevant Return shall be adjusted to reflect such resolution and
shall be binding upon the parties without further adjustment. The costs, fees
and expenses of the Tax Accountants shall be borne equally by Newco and
Melville.
10.3 Termination of Existing Tax Sharing Agreements. Any and all
existing Tax sharing agreements (written or unwritten, formal or informal)
between the Company or any Subsidiary, on the one hand, and Melville or any of
its Affiliates, on the other hand, shall terminate as of the Closing Date.
After such date neither the Company, any Subsidiary, Melville nor any Affiliate
of Melville shall have any further rights or liabilities thereunder.
10.4 Cooperation on Tax Matters. Newco and Melville agree to furnish
or cause to be furnished to each other, upon request, as promptly as
practicable, such information (including access to the relevant portions of any
books and records) and assistance relating to the Company and the Subsidiaries
as is reasonably necessary for the filing of any Return, for the preparation for
any audit, and for the prosecution or defense of any claim, suit or proceeding
relating to any proposed adjustment. Newco and Melville agree to retain or
cause to be retained all books and records pertinent to the Company and the
Subsidiaries until the applicable period for assessment under applicable law
(giving effect to any and all extensions or waivers) has expired, and to abide
by or cause the abidance with all record retention agreements entered into with
any Taxing Authority. The Company agrees to give Melville reasonable notice
prior to transferring possession of, discarding or destroying any such books and
records relating to tax matters and, if Melville so requests within 30 days
after receiving such notice, the Company shall allow Melville to take possession
of such books and records. Newco and Melville shall cooperate with each other
in the conduct of any audit or other proceedings involving the Company for any
tax purposes and each shall execute and deliver such powers of attorney and
other documents as are necessary to carry out the intent of this subsection.
10.5 Indemnification by Melville. (a) Melville hereby indemnifies
Newco against and agrees to hold it harmless from any (i) Income Tax of the
Company or any Subsidiary with respect to any Pre-Closing Tax Period, including
as transferee or successor, (ii) liability of the Company, any Subsidiary or
Newco under Treasury Regulation Section 1.1502-6 (or any similar provisions of
state, local or foreign law) for Income Taxes with respect to any Pre-Closing
Tax Period, (iii) Tax attributable to the Section 338(h)(10) Election, other
than any Tax on Newco, the Company or the Subsidiaries for a Post-Closing Tax
Period which results from the Price Allocation, (iv) Transfer Taxes, (v) Tax
other than Income Taxes and Transfer Taxes ("Miscellaneous Taxes") with respect
to any Pre-Closing Tax Period, but only to the extent the amount payable exceeds
the amount reflected on the Closing Balance Sheet for Miscellaneous Taxes, (vi)
Damages (as defined in Article 13) arising out of any misrepresentation or
breach of warranty made by Melville pursuant to this Article 10 or any breach of
covenant or agreement to be performed by Melville pursuant to
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this Article 10, or (vii) Loss, arising out of or incident to the imposition,
assessment or assertion of any Tax specified in clause (i), (ii), (iii), (iv),
(v) or (vi) above, including those incurred in the contest in good faith in
appropriate proceedings relating to the imposition, assessment or assertion of
such tax, in each case incurred or suffered by Newco, any of its Affiliates or,
effective upon the Closing, the Company or any Subsidiary (the sum of (i), (ii),
(iii), (iv), (v) or (vi) being referred to as a "Tax Loss"); provided, that
Melville shall have no liability for the payment of any loss attributable to or
resulting from any action described in Section 10.2(b) hereof and provided
further that, notwithstanding anything to the contrary in this Section 10.5(a),
Newco shall not be entitled to recover more than once for any Tax indemnified
under this Section 10.5(a).
(b) For purposes of this Section 10.5, in the case of any Taxes that
are imposed on a periodic basis and are payable for a Tax period that includes
(but does not end on) the Closing Date, the portion of such Tax related to the
Pre-Closing Tax Period shall (i) in the case of Taxes other than Taxes based
upon or related to income, sales, gross receipts, wages, capital expenditures,
expenses or any similar Tax base, be deemed to be the amount of such Tax for the
entire period multiplied by a fraction the numerator of which is the number of
days in the Tax period ending on the Closing Date and the denominator of which
is the number of days in the entire Tax period, and (ii) in the case of any Tax
based upon or related to income, sales, gross receipts, wages, capital
expenditures, expenses or any similar Tax base, be deemed equal to the amount
which would be payable if the relevant Tax period ended on the Closing Date.
Any credits relating to a tax period that begins before and ends after the
Closing Date shall be taken into account as though the relevant tax period ended
on the Closing Date. All determinations necessary to give effect to the
foregoing allocations shall be made in a manner consistent with prior practice
of the Company and the Subsidiaries.
(c) Melville shall pay Newco the amount of any Tax Loss for which
Melville is responsible pursuant to this Section 10.5 not later than 30 days
after receipt by Melville of written notice from Newco stating that any Tax Loss
has been paid by Newco, any of its Affiliates or, effective upon the Closing,
the Company or any Subsidiary and the amount thereof and of the indemnity
payment requested; provided, that Melville's share of Taxes payable with respect
to Income Tax Returns governed by Section 10.2(g) shall be paid five days prior
to the time the Company is required by law to remit such Taxes and Melville's
share of Taxes payable with respect to Miscellaneous Tax Returns governed by
Section 10.2(g) shall be paid at any time prior to the time the Company is
required by law to remit such Taxes.
(d) If any claim or demand for Taxes in respect of which indemnity may
be sought pursuant to this Section 10.5 is asserted in writing against Newco,
any of its Affiliates or, effective upon the Closing, the Company or any
Subsidiary, Newco shall notify Melville of such claim or demand within 10 days
of receipt thereof, or such earlier time that would allow Melville to timely
respond to such claim or demand, and shall give Melville such information with
respect thereto as Melville may request; provided, however, that failure to give
a timely notice under this Section 10.5 shall not limit the indemnification
obligations of Melville
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hereunder except to the extent that delay in giving, or failure to give, such
notice prejudices Melville's ability to defend against any Tax claim or demand.
Melville may, at its own expense, participate in and, upon notice to Newco,
assume the defense of any such claim, suit, action, litigation or proceeding
(including any Tax audit); provided, however, that Melville will not settle or
compromise any such controversy without Newco's consent if the settlement or
compromise would have a Material Adverse Effect on any Tax Return of Newco, the
Company or any Subsidiary. Notwithstanding the foregoing, Melville may
discharge, at any time, its indemnification obligation under this Section 10.5
by paying to Newco the amount of the applicable Tax Loss, calculated on the date
of such payment. Notwithstanding the foregoing, Melville shall not permit any
Lien that materially interferes with the operations of Newco, the Company or any
Subsidiary to be created or continued upon any property or any of the assets of
Newco, the Company or any Subsidiary in relation to such a controversy or
otherwise act so as to materially interfere with the operations of Newco, the
Company or any Subsidiary in connection with such a controversy. Whether or not
Melville chooses to defend or prosecute any claim, all of the parties hereto
shall cooperate in the defense or prosecution thereof.
(e) Melville shall not be liable under this Section 10.5 for (i) any
Tax the payment of which was made without Melville's prior written consent,
provided that such consent is not unreasonably withheld, or (ii) any settlements
effected without the consent of Melville, provided that such consent is not
unreasonably withheld, or resulting from any claim, suit, action, litigation or
proceeding in which Melville was not permitted an opportunity to participate.
10.6 Indemnification by Newco. Newco hereby indemnifies Melville
against and agrees to hold it harmless from (i) any Taxes and Loss for which
Newco is responsible and (ii) Damages (as defined in Article 13) arising out of
any misrepresentation or breach of warranty made by Newco pursuant to this
Article 10 or any breach of covenant or agreement to be performed by Newco
pursuant to this Article 10.
10.7 Survival. Notwithstanding anything in this Agreement to the
contrary, the provisions of this Article 10 shall survive for the full period of
all statutes of limitations (giving effect to any waiver, mitigation or
extension thereof).
10.8 Employee Plans and Benefit Arrangements Notwithstanding anything
in this Article 10 to the contrary, Article 11 (and not Article 10) shall govern
matters concerning Employee Plans and Benefit Arrangements.
ARTICLE 11
EMPLOYEES AND EMPLOYEE BENEFITS
11.1 Employees. With respect to each individual who, as of the
Closing Date, is employed (including persons absent from active service by
reason of Short Term
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Disability, as hereinafter defined, or absence not relating to disability,
whether paid or unpaid) by the Company or any Subsidiaries ("Transferred
Employees"), Newco shall cause the Company to continue the employment of each
Transferred Employee on the Closing Date, provided that nothing stated herein
shall limit the right of the Company or any Subsidiary to terminate the
employment of any Transferred Employee following the Closing Date or to reduce
or otherwise modify the position, responsibilities, compensation or benefits of
any Transferred Employee at any time, and provided further that an individual
who is employed as of the Closing Date by the Company or any Subsidiaries, but
on such date is absent from active service and is receiving Long Term Disability
Benefits (as hereinafter defined) shall not be considered a Transferred
Employee. The employee benefit plans and arrangements maintained by Newco shall
give full service credit for purposes of eligibility and vesting (and in
connection with any such severance or vacation plan or policy, for purposes of
determining the level of benefit) for any service on or prior to the Closing
Date of a Transferred Employee with Melville, the Company and the Subsidiaries.
For purposes of this Agreement, (i) "Short Term Disability" shall mean a
condition with respect to which an employee is receiving benefits, as of the
Closing Date, under either the Melville Short Term Disability Plan or the
Melville Salary Continuation Plan, and (ii) "Long Term Disability Benefits"
shall mean benefits under the Melville Long Term Disability Plan.
11.2 Qualified Plans. (a) Melville shall retain all liabilities and
obligations in respect to benefits accrued by Transferred Employees under
Melville's ESOP. Melville shall cause each Transferred Employee to become 100%
vested in the employee's account in Melville's ESOP as of the Closing Date. As
soon as practicable after the Closing Date, Melville shall take such action as
may be necessary, if any, to permit each Transferred Employee to exercise his
rights under Melville's ESOP to effect an immediate distribution of such
Transferred Employee's full account balances under Melville's ESOP or to effect
a tax-free rollover of the taxable portion of the account balances into an
eligible retirement plan (within the meaning of Section 401(a)(31) of the Code,
a "Direct Rollover") maintained by Newco or a Subsidiary of Newco (the "Newco
Plan") or to an individual retirement account. Melville and Newco shall work
together in order to facilitate any such distribution or rollover and to effect
a Direct Rollover for those participants who elect to roll over their account
balances directly into the Newco Plan; provided that nothing contained herein
shall obligate the Newco Plan to accept a Direct Rollover in a form other than
cash.
(b) On the Closing Date, or as soon as practicable thereafter, Newco
shall establish or designate the Newco Plan in order to accommodate the Direct
Rollovers described above and shall take all action necessary, if any, to
qualify the Newco Plan under the applicable provisions of the Code and shall
make any and all filings and submissions to the appropriate governmental
authorities required to be made by it in connection with any Direct Rollover.
(c) As soon as practicable after the Closing Date, Newco shall
establish or designate an individual account plan (the "Successor Individual
Account Plan") for the benefit of Transferred Employees, shall take all
necessary action, if any, to qualify such plan
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under the applicable provisions of the Code and shall make any and all filings
and submissions to the appropriate governmental agencies required to be made by
it in connection with the transfer of assets described below. Melville shall
cause each Transferred Employee to be 100% vested in the employee's account
balance under Melville's 401(k) Profit Sharing Plan as of the Closing Date. No
later than the date of the transfer described herein, Melville shall make all
applicable 401(k), profit sharing, matching contributions and qualified non-
elective contributions payable under Melville's 401(k) Profit Sharing Plan with
respect to Transferred Employees for periods on or prior to the Closing Date. As
soon as practicable following the Closing Date, Melville shall cause the trustee
of Melville's 401(k) Profit Sharing Plan to transfer in the form of cash or, to
the extent applicable, notes representing outstanding loans made to Transferred
Employees under Melville's 401(k) Profit Sharing Plan (or such other form as may
be agreed to by Melville and Newco) the full account balances of Transferred
Employees (and beneficiaries thereof) under Melville's 401(k) Profit Sharing
Plan (which account balances will have been credited with appropriate earnings
attributable to the period from the Closing Date to the date of transfer
described herein), reduced by any necessary benefit or withdrawal payments to or
in respect of Transferred Employees occurring during the period from the Closing
Date to the date of transfer described herein, to the appropriate trustee as
designed by Newco under the trust agreement forming a part of the Successor
Individual Account Plan, it being understood that Melville is under no
obligation to effect a distribution, payment or loan under Melville's 401(k)
Profit Sharing Plan in respect of a Transferred Employee who either requests a
loan or terminates employment after the Closing Date but prior to the date of
transfer described herein if the required distribution, payment or loan, as the
case may be, forms have not been received by Melville prior to the last day of
the month preceding the month in which the transfer described herein occurs.
Melville and Newco agree to take such actions and enter into such agreements, if
any, that may be necessary to effect the transfer described herein. In
consideration for the transfer of assets described herein, Newco shall,
effective as of the date of transfer described herein, assume all of the
obligations of Melville in respect of the account balances accumulated by
Transferred Employees under Melville's 401(k) Profit Sharing Plan (exclusive of
any portion of such account balances which are paid or otherwise withdrawn prior
to the date of transfer described herein) with respect to the account balances
transferred to the Successor Individual Account Plan. Melville hereby
indemnifies Newco, the Company and the Subsidiaries against and agrees to hold
them harmless from any liabilities or claims (including claims for benefits or
for breach of fiduciary duties, but excluding claims for benefits to the extent
of the assets transferred hereunder) relating to Melville's 401(k) Profit
Sharing Plan (or the qualified status of that Plan) which arose prior to the
transfer of assets described herein or which relate to the operation or
administration of that Plan prior to the transfer of assets. Newco hereby
indemnifies Melville against and agrees to hold it harmless from any liabilities
or claims relating to the qualified status of the Successor Individual Account
Plan or the operation or administration of that Plan following the transfer of
assets described herein.
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11.3 Other Employee Plans and Benefit Arrangements.
(a) Melville shall retain all obligations and liabilities under the
Employee Plans and Benefit Arrangements in respect of any employee or prior
employee (including any beneficiary or dependent thereof) who is not a
Transferred Employee. In addition, Melville shall retain all obligations and
liabilities for continuation coverage under the Employee Plans or Benefits
Arrangements arising under the Consolidated Omnibus Budget Reconciliation Act of
1985 or any similar federal, state or local law or regulation with respect to
any employee, former employee or dependent thereof (including any dependent of a
Transferred Employee but not including any Transferred Employee) which relates
to any "qualifying event" as defined in Code Section 4980B that occurred on or
prior to the Closing Date.
(b) Subject to the provisions of Sections 11.3(e) and 11.3(f)(ii) and
the last sentence of this Section 11.3(b), with respect to Transferred
Employees, Melville shall retain all obligations and liabilities relating to or
arising under the Employee Plans or Benefit Arrangements which are attributable
to claims incurred or benefits accrued or otherwise payable on or prior to the
Closing Date, except that with respect to any Transferred Employee who, on the
Closing Date, is absent by reason of Short Term Disability, Newco shall assume
and be liable for any payments attributable to the period beginning on the
Closing Date and ending on the date such Transferred Employee becomes eligible
for Long Term Disability Benefits; provided that any liabilities of Melville
pursuant to Section 11.3(a) and this Section 11.3(b) shall not be considered in
preparing the Closing Balance Sheet. The liabilities retained by Melville under
this subsection include, but are not limited to, (i) in the case of medical or
dental plans, liabilities incurred with respect to services performed for
Transferred Employees or their dependents on or prior to the Closing Date, (ii)
in the case of life insurance plans, liabilities payable with respect to any
person who dies on or prior to the Closing Date, (iii) in the case of workers
compensation, liabilities relating to claims asserted on or prior to the Closing
Date or for which Melville has agreed to indemnify the Company and its
Subsidiaries under Section 7.12 and (iv) in the case of a Transferred Employee
who, on the Closing Date, is absent by reason of Short Term Disability and after
the Closing Date becomes eligible for Long Term Disability Benefits, liabilities
under the Melville Long Term Disability Plan and liabilities under other
Employee Plans and Benefit Arrangements attributable to claims incurred or
benefits accrued after such Transferred Employee has become eligible for Long
Term Disability Benefits.
(c) Newco shall be responsible for all claims for severance benefits
or wrongful termination claims made by Transferred Employees who are discharged
by Newco, the Company or any Subsidiary after the Closing Date. In addition,
Melville shall have no obligations with respect to any act or omissions of
Newco, the Company or any Subsidiary and their respective officers, agents and
employees relating to Transferred Employees which occur after the Closing Date.
Newco shall indemnify and hold Melville harmless from any Damages with respect
to, arising from or pursuant to any complaint, charge or grievance made by any
such Transferred Employee with respect to any action or activities of Newco, the
Company or any Subsidiary after the Closing Date. Melville shall indemnify and
hold Newco,
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the Company and the Subsidiaries harmless from any Damages with respect to,
arising from or pursuant to any complaint, charge or grievance made prior to the
Closing Date by any such Transferred Employee with respect to any action or
activities of Melville or any Affiliate (or with respect to claims pending as of
the Closing Date that are set forth on Schedules 3.10 or 3.12, the Company or
any Subsidiary) or made by any employee or former employee who is not a
Transferred Employee, regardless of whether the complaint, charge or grievance
or the action or activities resulting in the complaint, charge or grievance
arose prior to, on or after the Closing Date.
(d) Except as otherwise provided in Section 11.2 or Sections 11.3(a),
11.3(b), 11.3(c), and 11.3(f)(ii), Melville shall have no liability or
responsibility under the Employee Plans or Benefit Arrangements after the
Closing Date with respect to Transferred Employees (and dependents and
beneficiaries thereof). Except as provided in Section 11.3(e), Melville hereby
indemnifies Newco, the Company and the Subsidiaries against and agrees to hold
them harmless from any liabilities or claims under the Employee Plans or
Benefits Arrangements (i) arising on or prior to the Closing Date with respect
to Transferred Employees (and dependents and beneficiaries thereof) and (ii)
with respect to any individual who is not a Transferred Employee or a dependent
or beneficiary of a Transferred Employee, whether (in the case of clause ii of
this sentence) the liability or claim arose before, on or after the Closing
Date; provided, however, this sentence is subject to the provisions of Section
13.5 other than clause (ii) thereof. Melville also indemnifies Newco, the
Company and the Subsidiaries against and agrees to hold them harmless from any
liabilities or claims related to any plan or arrangement maintained by Melville
or any Affiliate of Melville which is subject to ERISA but which is not an
Employee Plan or Benefit Arrangement, whether such liability or claim arose
before, on or after the Closing Date.
(e) Subject to Section 11.3(f)(iii), Newco shall cause the Company to
retain all obligations relating to bonuses, vacation and personal holidays to
which each Transferred Employee is entitled as of the Closing Date under the
applicable Employee Plans and Benefit Arrangements in effect on the Closing
Date; provided that, except as provided in Section 11.3(f)(iii), if any amounts
for bonuses in respect of employees of the Company and the Subsidiaries other
than Store employees are accrued by the Company prior to Closing, such amounts
shall be excluded from the calculation of Estimated Working Capital and Closing
Working Capital pursuant to Article 2. Subject to the foregoing, Newco's bonus,
vacation and holiday policies and practices may be made applicable to
Transferred Employees for all periods after the Closing Date.
(f) (i) The restrictions on all Melville restricted stock previously
granted to the Persons listed on Schedule 11.3(f)(i) will lapse on the
Closing Date and all performance goals with respect to performance-based
restricted stock will be deemed to have been met on the Closing Date. The
number of shares of restricted stock of Melville previously granted to each
Person that has not previously vested is set forth beside such Person's
name on Schedule 11.3(f)(i) and Melville will deliver to each
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such Person at the Closing unlegended stock certificates registered in such
Person's name representing such shares.
(ii) On the first business day of the month after the Closing
Date, Melville shall pay to Joel Waller a lump sum amount of $2,149,282
(less applicable withholding taxes) in full settlement of his benefit
entitlements under the July 1, 1995 Supplemental Retirement Plan I for
Select Senior Management of Melville Corporation.
(iii) With respect to the persons listed on Schedule
11.3(f)(iii), Melville will cause the Company to pay on the Closing Date
the amounts shown for each such person, subject to appropriate tax
withholding obligations. Such payments shall be reflected as paid
immediately prior to Closing for purposes of calculating Estimated Working
Capital and Closing Working Capital pursuant to Article 2.
11.4 Third Party Beneficiaries. No provision of this Article 11
shall create any third party beneficiary rights in any employee or former
employee of the Company (including any beneficiary or dependent thereof) in
respect of continued employment or resumed employment, and no provision of this
Article 11 except Section 11.3(f) shall create any rights in any such persons in
respect of any benefits that may be provided, directly or indirectly, under any
employee benefit plan or arrangement.
ARTICLE 12
CONDITIONS TO CLOSING
12.1 Conditions to Obligations of Newco and Melville. The
obligations of Newco and Melville to consummate the Closing are subject to the
satisfaction of the following conditions:
(i) No provision of any applicable law or regulation and no
judgment, injunction, order or decree shall prohibit the consummation of
the Closing.
(ii) Any applicable waiting period under the HSR Act relating to
the transactions contemplated hereby shall have expired or been terminated.
(iii) All actions by or in respect of or filings with any
governmental body, agency, official or authority required to permit the
consummation of the Closing shall have been taken, made or obtained.
12.2 Conditions to Obligation of Newco. The obligation of Newco to
consummate the Closing is subject to the satisfaction of the following further
conditions:
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(i) (A) Melville and the Company shall have performed in all
material respects all of their covenants, agreements and obligations
hereunder required to be performed by them on or prior to the Closing Date
and (B) the representations and warranties of Melville and the Company
contained in this Agreement and in any certificate or other writing
delivered by Melville and/or the Company pursuant hereto shall be true in
all material respects at and as of the Closing Date as if made at and as of
such date.
(ii) If the Closing Date is a Business Day, Newco shall have
received certificates for the Company Shares duly endorsed or accompanied
by stock powers duly endorsed in blank, with any required transfer stamps
affixed thereto and, if the Closing Date is not a Business Day, Melville
shall have deposited certificates representing the Company Shares duly
endorsed or accompanied by stock powers duly endorsed in blank, with any
required transfer stamps affixed thereto with the Escrow Agent pursuant to
the terms of the Escrow Agreement.
(iii) Newco shall have received all documents it may reasonably
request relating to the existence and foreign qualification of Melville (as
to existence only), the Company and the Subsidiaries and the authority of
Melville for this Agreement, all in form and substance reasonably
satisfactory to Newco.
(iv) Newco shall have received at the Closing an opinion dated
the Closing Date from Davis Polk & Wardwell, counsel to Melville, in
substantially the form set as forth in Exhibit H.
(v) The proceeds of the revolving credit necessary to provide
working capital, including the expenses of consummating the transactions
contemplated by this Agreement, shall be available to Newco at the Closing.
(vi) Melville shall have delivered to Newco an affidavit (a so-
called "FIRPTA affidavit") in form and substance reasonably satisfactory to
Newco duly executed and acknowledged, certifying facts that would exempt
the transactions contemplated hereby from the provisions of the Foreign
Investors Real Property Act.
(vii) Newco shall be reasonably satisfied that the Investors
will immediately thereafter purchase the Common Shares and Preferred Shares
of Newco pursuant to the Investor Stock Purchase Agreement.
(viii) The Company shall have transferred all Designated Closed
Store Leases and all Excluded Subsidiaries to Melville or an Affiliate of
Melville and Melville or such Affiliate shall have assumed or guaranteed
all liabilities and obligations of any nature (whether accrued, absolute,
contingent, known, unknown, asserted, unasserted or otherwise and including
Tax liabilities) relating to the Company's conduct of the business at the
stores subject to such Closed Store Leases,
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pursuant to documents executed and delivered by Melville to the Company at
Closing in form and substance reasonably satisfactory to Newco.
(ix) Melville shall have executed the Registration Rights
Agreement in substantially the form as set forth in Exhibit E.
(x) Melville shall have executed the Warrant and the
Management Warrant in substantially the form as set forth in Exhibits B and
C, respectively.
(xi) Melville shall have executed the Security Agreement and
each Pledge Agreement.
(xii) The Investors and Melville shall have executed the
Investor Stock Purchase Agreement in substantially the form as set forth in
Exhibit G.
(xiii) Newco shall have received certificates for all
outstanding shares of capital stock of all of the Subsidiaries ("Subsidiary
Shares") all of which shall be registered in the name of the Company or any
Subsidiary.
12.3 Conditions to Obligation of Melville. The obligation of
Melville to consummate the Closing is subject to the satisfaction of the
following further conditions:
(i) (A) Newco shall have performed in all material respects all
of its covenants, agreements and obligations hereunder required to be
performed by it at or prior to the Closing Date and (B) the representations
and warranties of Newco contained in this Agreement and in any certificate
or other writing delivered by Newco pursuant hereto shall be true in all
material respects at and as of the Closing Date as if made at and as of
such date.
(ii) If the Closing Date is a Business Day, Melville shall have
received the Cash Consideration, the Note, the Warrant, the Management
Warrant, the Common Shares and the Preferred Shares and, if the Closing
Date is not a Business Day, Newco, or its designee, shall have deposited
the Cash Consideration, the Note, the Warrant, the Management Warrant, the
Common Shares and the Preferred Shares with the Escrow Agent pursuant to
the terms of the Escrow Agreement.
(iii) Newco shall have executed and delivered the Registration
Rights Agreement, the Security Agreement and each Pledge Agreement.
(iv) Melville shall have received all documents it may
reasonably request relating to the existence of Newco and the authority of
Newco for this Agreement, all in form and substance reasonably satisfactory
to Melville.
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(v) Melville shall have received at the Closing an opinion
dated the Closing Date from Faegre & Benson, counsel to Newco, in
substantially the form as set forth in Exhibit I.
(vi) Joel Waller and David Rogers shall have executed the
Employment Agreements.
(vii) The Managers and Newco shall have executed the Manager
Stock Purchase Agreement in substantially the form as set forth in Exhibit
F.
(viii) The Investors and Melville shall have executed the
Investor Stock Purchase Agreement in substantially the form as set forth in
Exhibit G.
ARTICLE 13
SURVIVAL; INDEMNIFICATION
13.1 Survival. The covenants, agreements, representations and
warranties of the parties hereto contained in this Agreement or in any
certificate or other writing delivered pursuant hereto or in connection herewith
(and the indemnification therefor) shall survive the Closing until the day which
is 15 months from the Closing Date; provided that (i) the covenants and
agreements contained in Articles 2, 6, 7, 8, 9 and Section 15.13 (and the
indemnification therefor) shall survive indefinitely unless reduced by the
respective periods set forth therein, (ii) the covenants, agreements,
representations and warranties contained in Articles 10 and 11 (and the
indemnification therefor) shall survive until expiration of the statute of
limitations applicable to the matters covered thereby (giving effect to any
waiver, mitigation or extension thereof), (iii) the representations and
warranties set forth in Sections 3.5, 3.6(b), 4.5, 4.8 and 5.7 (and the
indemnification therefor) shall survive indefinitely, (iv) the indemnification
obligations of Newco, Melville and the Company in Section 13.2 other than for
breaches of representations, warranties, covenants and agreements and in Section
7.12 shall survive until the expiration of the applicable statute of
limitations, (v) the obligations of Newco in Section 13.3 shall survive until
there are no more Leases outstanding which are guaranteed by MRC and (vi) the
representations and warranties contained in Sections 3.8, 3.14 and 3.19 will not
survive the Closing; provided further that no representation or warranty shall
survive the Closing if (i) the party making it does not have knowledge as of the
date hereof of the fact that such representation or warranty is untrue and (ii)
the party to whom such representation or warranty is made has knowledge of facts
prior to the Closing Date that would cause such representation or warranty not
to be true in any material respect on such date. No covenant, agreement,
representation or warranty contained in this Agreement shall survive after the
time at which it would otherwise terminate pursuant to the preceding sentence
unless notice of the inaccuracy or breach thereof shall have been given to the
party against whom such indemnity may be sought prior to such time.
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13.2 Indemnification. (a) Melville hereby indemnifies Newco and its
Affiliates and, effective after the Closing, without duplication, the Company or
any Subsidiary and the respective directors and officers of Newco and its
Affiliates, the Company or any Subsidiary against and agrees to hold them
harmless from any and all damage, loss, liability and expense (including without
limitation reasonable expenses of investigation and reasonable attorneys' fees
and expenses in connection with any action, suit or proceeding) ("Damages")
incurred or suffered by such indemnified party arising out of (i) any
misrepresentation or breach of warranty made by Melville pursuant to this
Agreement or any breach of covenant or agreement to be performed by Melville
pursuant to this Agreement, (ii) any misrepresentation or breach of warranty
made by the Company pursuant to this Agreement or any breach of covenant or
agreement to be performed by the Company pursuant to this Agreement with respect
to any matter related to or covered in any Specified Indemnity Provision or any
breach of covenant or agreement to be performed by the Company prior to Closing
pursuant to this Agreement, (iii) the matters listed on Schedule 3.12 or
Schedule 3.16, (iv) any claim, action, suit, arbitration, investigation,
proceeding or enforcement action, which relates in any manner to the leather
protector sprays which were recalled in December 1992 and which exists as of the
Closing Date and is not disclosed on Schedule 3.12 or arises on or after the
Closing Date (the "Spray Litigation"), (v) any claim, action, suit, arbitration,
investigation, proceeding or enforcement action which relates in any manner to
service by a member of the Management Disclosure Group on the boards of
directors or as officers of Melville or any Affiliates of Melville other than
any actions which constitute wilful misconduct amounting to fraud (and Melville
hereby releases effective at Closing and shall cause each such Melville
Affiliate as to which a member of the Management Disclosure Group has served as
an officer or director to release effective at Closing each such member of the
Management Disclosure Group from any liability or obligation to Melville or such
Melville Affiliate arising out of such service except to the extent such
obligation or liability arises from wilful misconduct by such Person amounting
to fraud) ("Director and Officer Claims"), (vi) any claim, action, suit,
arbitration, investigation, proceeding or enforcement action which relates in
any manner to any transaction, commitment, contract or agreement outside the
ordinary course of business of the Company and the Subsidiaries which Melville
caused the Company or any Subsidiary to enter into or make ("Melville
Commitments") or (vii) any claim, action, suit, arbitration, investigation,
proceeding or enforcement action which relates in any manner to any Closed Store
Lease (including any guaranty thereof) or Excluded Subsidiary ("Closed Store
Liabilities") (provided that for purposes of this Agreement, Article 10, and not
Article 13 (other than where expressly provided), shall be the sole remedy for
claims relating to Taxes and Article 11 shall be the sole remedy for claims
relating to representations, warranties, covenants or agreements contained in
Article 11); provided that (A) Melville shall have no liability for any
misrepresentation or breach of warranty by the Company or Melville (and no
damage, loss, liability or expense arising from such misrepresentation or breach
of warranty shall constitute Damages for purposes of this Section 13.2 or
Article 10) if at any time prior to the Closing Date the Management Disclosure
Group had knowledge of the facts and circumstances giving rise to such
misrepresentation or breach of warranty unless, as of the date hereof, Melville
had knowledge as described in clause (IV)
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of the next succeeding sentence in which case this clause (A) shall not apply
and the provisions of the next succeeding sentence shall apply, (B) except as
provided below, Melville shall not be liable under this Section 13.2(a) unless
the aggregate amount of Damages with respect to all matters referred to in this
Section 13.2(a) exceeds $1,200,000 and then only to the extent of such excess,
(C) except as provided below, Melville's maximum liability under this Section
13.2(a) and claims for Miscellaneous Taxes under Article 10 shall not exceed
$12,000,000 and (D) Melville's liability under this Section 13.2 shall be
subject to the limitations set forth in Section 13.5 (other than clause (ii) of
Section 13.5 with regard to matters relating to Income Taxes). Notwithstanding
the foregoing, any Damages incurred or suffered by Newco and its Affiliates and
their respective directors and officers arising out of (I) any misrepresentation
or breach of warranty contained in Sections 7.7, 9.4 or 9.5, (II) the matters
listed on Schedule 3.12 or Schedule 3.16, (III) the Spray Litigation, Director
and Officer Claims, Melville Commitments or the Closed Store Liabilities, (IV)
any misrepresentation or breach of warranty by Melville or the Company (as to
the Company with respect to any matter related to or covered in any Specified
Indemnity Provision) pursuant to this Agreement, if as of the date hereof
Melville had knowledge of the fact that such representation or warranty was
untrue, (V) any misrepresentation or breach of warranty contained in Sections
3.5, 3.6(b), 4.5 or 4.8, or (VI) any breach of covenant or agreement to be
performed by Melville pursuant to this Agreement (including those contained in
Article 10) or any breach of covenant or agreement to be performed by the
Company pursuant to this Agreement (including those contained in Article 10)
prior to Closing shall not be subject to the limitation on Damages set forth in
clauses (C) and (D) of the proviso above.
As used herein, "Specified Indemnity Provision" means each of Sections
3.1 through and including 3.7, 3.9 (to the extent that Melville has knowledge of
the misrepresentation), 3.10 through and including 3.13, 3.15 through and
including 3.18 and 3.20 through and including 3.23 of this Agreement.
(b) Newco and, after the Closing, the Company hereby indemnify
Melville and its Affiliates and the respective directors and officers of
Melville and its Affiliates against and agree to hold them harmless from any and
all Damages incurred or suffered by such indemnified party arising out of (i)
any misrepresentation or breach of warranty, covenant or agreement made or to be
performed by Newco pursuant to this Agreement or (ii) any breach of any covenant
or agreement required to be performed by the Company or its Subsidiaries after
the Closing Date pursuant to this Agreement (provided that Article 10, and not
Article 13 (other than where expressly provided) shall be the sole remedy for
claims relating to Taxes); provided that (A) neither Newco nor the Company shall
have any liability for any misrepresentation or breach of warranty by Newco (and
no damage, loss, liability or expense arising from such misrepresentation or
breach of warranty shall constitute Damages for purposes of this Section 13.2 or
Article 10) if at any time on or prior to the Closing Date Melville had
knowledge of the facts and circumstances giving rise to such misrepresentation
or breach of warranty (including those made in Article 10) unless, as of the
date hereof, the Management Disclosure Group had knowledge as described in
clause (II) of the next
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succeeding sentence in which case this clause (A) shall not apply and the
provisions of the next succeeding sentence shall apply, (B) except as provided
below, Newco shall not be liable under this Section 13.2(b) unless the aggregate
amount of Damages with respect to all matters referred to in Section 13.2(b)
exceeds $1,200,000 and then only to the extent of such excess, (C) except as
provided below, Newco's maximum liability under Section 13.2(b) and claims for
Miscellaneous Taxes under Article 10 shall not exceed $12,000,000, and (D)
Newco's liability under this Section 13.2 shall be subject to the limitations
set forth in Section 13.5 other than clause (ii) of Section 13.5 with regard to
matters relating to Income Taxes. Notwithstanding the foregoing, any Damages
incurred or suffered by Melville and its Affiliates and their respective
directors and officers arising out of (I) any misrepresentation or breach of
warranty contained in Section 9.5 or any indemnification under Section 13.3,
(II) any misrepresentation or breach of warranty by Newco pursuant to this
Agreement, if as of the date hereof the Management Disclosure Group had
knowledge of the fact that such representation or warranty was untrue, (III) any
misrepresentation or breach of warranty contained in Sections 5.7 and 5.9 or
(IV) any breach of covenant or agreement to be performed by Newco pursuant to
this Agreement (including those contained in Article 10) or any breach of
covenant or agreement to be performed by the Company pursuant to this Agreement
(including those contained in Article 10) after Closing shall not be subject to
the limitations on Damages set forth in clauses (B) and (C) of the proviso
above.
(c) Any payments under this Section 13 or Article 10 shall be treated
as adjustments to the purchase and sale pursuant to Section 2.2 of this
Agreement.
(d) For purposes of this Agreement (including Article 10), in no case
will knowledge of the Managers be imputed to Melville as the owner of the
Company.
13.3 Lease Indemnity. Notwithstanding anything to the contrary in
this Agreement (including without limitation Section 12.2), Newco and the
Company hereby indemnify each of Melville and MRC and all directors and officers
of Melville and MRC against and agrees to hold each of Melville and MRC and all
directors and officers of Melville and MRC harmless from any and all Damages
incurred or suffered by such indemnified party arising out of Newco's, the
Company's or any Subsidiary's failure to pay all monies due and owing pursuant
to the provisions of any Lease after the Closing Date that were not due and
owing on or prior to the Closing Date (except that if a default resulting in the
obligation to pay such monies accrued on or prior to the Closing Date, Newco
shall not be liable for any Damages arising from such default), or by reason of
Newco's, the Company's or any Subsidiary's breach of any of the other terms,
covenants and conditions of any Lease occurring after the Closing Date that were
not breached on or prior to the Closing Date (except that if such breach
occurred prior to the Closing Date, Newco shall not be liable for any Damages
arising from such breach).
13.4 Claims. (a) If any third party shall notify the Person seeking
indemnification under Section 13.2 (the "Indemnified Party") with respect to any
claim of such third party (a "Third Party Claim") which may give rise to a claim
for indemnification by
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the Indemnified Party against any other party hereto (the "Indemnifying Party")
under Section 13.2, then the Indemnified Party shall notify the Indemnifying
Party thereof in writing within ten business days after receiving such
notification from the third party, provided that failure to give timely notice
under this Section 13.4(a) shall not limit the indemnification obligations of
the Indemnifying Party hereunder except to the extent that the delay in giving,
or failure to give, such notice prejudices the ability of the Indemnifying Party
to defend against the Third Party Claim. The Indemnifying Party, except as
otherwise provided in Section 13.4(b), shall have the right to elect to, by
written notice delivered to the Indemnified Party within ten days of receipt by
the Indemnifying Party of the notice from the Indemnified Party in respect of
the Third Party Claim, and shall if so requested by the Indemnified Party, at
the sole expense of the Indemnifying Party, assume control of the defense of the
Third Party Claim with counsel selected by the Indemnifying Party and reasonably
satisfactory to the Indemnified Party.
If the Indemnifying Party elects to assume such control within such
ten-day period or is requested by the Indemnified Party to assume control, the
Indemnifying Party will pursue such defense in a diligent and bona fide manner,
and the Indemnified Party shall cooperate with the Indemnifying Party and its
counsel and shall have the right to participate in the negotiation, settlement
or defense of such Third Party Claim, at its own expense (except for settlement
payments and except that the Indemnifying Party will be responsible for the fees
and expenses of the Indemnified Party's counsel if in the reasonable opinion of
counsel to the Indemnifying Party such counsel has a conflict of interest). If
the Indemnifying Party elects to assume such control, the Indemnified Party
agrees to (i) give the Indemnifying Party, its counsel and other authorized
representatives reasonable access during normal business hours to the employees,
offices, properties, books and records of the Indemnified Party reasonably
related to the investigation or defense of any such matters and (ii) instruct
the employees of the Indemnified Party to reasonably cooperate with and assist
the Indemnifying Party, its counsel and other authorized representatives in the
investigation and defense, in depositions or appearing as witnesses. The
Indemnifying Party shall reimburse the Indemnified Party or any of their
respective employees for the reasonable out-of-pocket expenses incurred by any
such Person in connection therewith. If the Indemnifying Party does not elect
to assume control of the defense within such ten-day period and is not requested
by the Indemnified Party to assume control of the defense or, having elected or
having been so requested to assume such control, thereafter fails to proceed
with the settlement or defense of any such Third Party Claim in a diligent and
bona fide manner, the Indemnified Party shall be entitled to assume such control
at the expense of the Indemnifying Party. In such case, the Indemnifying Party
shall cooperate where necessary with the Indemnified Party and its counsel in
connection with such Third Party Claim and the Indemnifying Party shall be bound
by the results obtained by the Indemnified Party with respect to such Third
Party Claim.
(b) Notwithstanding any provision of Section 13.4(a), if Melville is
the Indemnifying Party, it may not assume control of the defense of the Third
Party Claim if the Third Party Claim could reasonably result in an equitable
remedy which would materially impair the ability of Newco, the Company or any
Subsidiary to operate its business.
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(c) The Indemnified Party shall not settle any Third Party Claim
without the prior written consent of the Indemnifying Party, which shall not be
unreasonably withheld. The Indemnifying Party shall not settle any Third Party
Claim unless the Indemnified Party is relieved of all obligations thereunder
pursuant to the terms of the written settlement and, if the Indemnified Party is
Newco, the Company or any Subsidiary, is not impaired in any material respect
pursuant to the settlement from operating its business in the manner in which it
was operated in accordance with past practice.
(d) The Indemnified Party agrees to give prompt notice to the
Indemnifying Party of the assertion of any claim, or the commencement of any
suit, action or proceeding in respect of which indemnity may be sought under
this Agreement that does not constitute a Third Party Claim, provided that a
failure to give a timely notice under this Section 13.4(d) shall not limit the
indemnification obligation of the Indemnifying Party except to the extent that
the delay in giving, or the failure to give, such notice prejudices the ability
of the Indemnifying Party to defend against such claim, suit, action or
proceeding;
(e) After the Closing, Article 10 (and not Article 13 other than where
expressly provided) for Tax matters, Article 11 for the representations,
warranties, covenants and agreements and indemnification contained in Article
11, Section 7.12 with respect to matters covered thereby and Sections 13.2,
13.3, 13.4 and 13.5 will provide the exclusive remedies for any
misrepresentation or breach of warranty, covenant or other agreement (other than
those contained in Sections 2.2, 2.3, 2.4, 2.5, 7.8 and 8.1), or other claim
arising out of this Agreement or the transactions contemplated hereby. Without
limiting the generality of the foregoing, Newco and, effective at the Closing,
the Company and its Subsidiaries, to the extent permitted by law, hereby waive
all rights for contribution or any other rights of recovery (except as otherwise
provided in Section 13.2) with respect to any Damages arising under or relating
to Environmental Laws that it might have by statute or otherwise against
Melville or any of its Affiliates.
(f) Except for items 2 through 12 and item 33 on Schedule 3.12, Newco
shall be responsible for defending all matters disclosed in Schedules 3.10 and
3.12 and Melville shall indemnify Newco against and hold it harmless from any
and all Damages incurred or suffered by the Company, any Subsidiary or Newco
arising out of such matters. On the Closing Date, Melville shall deliver to
Newco a schedule updating the information disclosed in Schedules 3.10 and 3.12
as of the Closing Date. Newco and Melville hereby agree that, from and after
the Closing Date, Melville shall have the right to assume and take control of,
in the name and on behalf of the Company and the Subsidiaries, at Melville's
sole cost and expense, the actions disclosed in items 1 and 22 of Schedule 3.12.
Newco hereby agrees to cause the Company or any Subsidiary to promptly execute
and deliver any document, certificate, agreement or other writing and to take
such other actions as may be necessary or desirable in connection therewith as
are reasonably acceptable to Newco. Newco agrees to (i) give, and to cause the
Company and the Subsidiaries to give, Melville, its counsel and other authorized
representatives reasonable access during normal business hours to the employees,
offices, properties, books and records of the Company and the Subsidiaries
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reasonably related to the investigation, pursuit or defense of any such matters
and (ii) instruct the employees of the Company and the Subsidiaries to
reasonably cooperate with and assist Melville, its counsel and other authorized
representatives in the investigation, pursuit or defense, in depositions or
appearing as witnesses. Melville shall reimburse Newco, the Company or any
Subsidiary or any of their respective employees for the reasonable out-of-pocket
expenses incurred by any such Person in connection therewith. Notwithstanding
any other provision of this Agreement, with respect to items 1 and 22 on
Schedule 3.12, Newco and, after the Closing, the Company and its Subsidiaries
acknowledge that they have no right to receive any part of any recovery by
Melville in such matter and agree that Melville and its Affiliates shall have
the sole and exclusive right to receive any recovery in such matters.
13.5 Limitation of Indemnification. Notwithstanding the foregoing
provisions of this Article 13, Article 10 or Article 11, an Indemnifying Party's
obligation to indemnify an Indemnified Party shall be subject to the following
limitations:
(i) No indemnification shall be required to be made by Newco or
Melville to the extent that the Damages incurred or suffered by the
Indemnified Party have been taken into account in connection with the
preparation of the Closing Balance Sheet and the calculation of Final
Working Capital.
(ii) No indemnification shall be required (except for Income
Taxes or pursuant to Section 7.12 or Article 11) to be made by Newco or
Melville with respect to any claim for indemnity which individually is less
than $750.
(iii) Except as provided in Section 7.12 regarding Melville's
indemnification obligations for deductibles, the Damages required to be
paid by the Indemnifying Party shall be reduced to the extent of any
amounts actually received by the Indemnified Party after the Closing Date
pursuant to the terms of any insurance policies with third party insurers
covering such Damages.
(iv) Each of the parties agrees that to the extent the other
party indemnifies it from any claim for Damages and the Indemnified Party
is made whole as the result of such indemnification, the Indemnified Party
shall assign its rights to counter claim to the Indemnifying Party to the
extent of any amounts actually received by the Indemnified Party from the
Indemnifying Party.
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ARTICLE 14
TERMINATION
14.1 Grounds for Termination. This Agreement may be terminated at
any time prior to the Closing:
(i) by mutual written agreement of Melville and Newco;
(ii) by either Melville or Newco if the Closing shall not have
been consummated on or before June 30, 1996;
(iii) by either Melville or Newco if there shall be any law or
regulation that makes consummation of the transactions contemplated hereby
illegal or otherwise prohibited or if consummation of the transactions
contemplated hereby would violate any nonappealable final order, decree or
judgment of any court or governmental body having competent jurisdiction;
or
(iv) by Melville, if any representation or warranty of Newco
contained in this Agreement shall prove to be inaccurate in any material
respect at the time when made and Newco shall refuse or fail after written
notice to correct such representation or warranty within 30 days of such
written notice; provided that Melville may not terminate this Agreement
pursuant to this subsection (iv) if Newco continues in good faith to use
its best efforts to correct any such representation or warranty, and such
correction is capable of being performed prior to June 30, 1996; or
(v) by Newco, if any representation or warranty of Melville or
the Company contained in this Agreement shall prove to be inaccurate in any
material respect at the time when made and Melville shall refuse or fail
after written notice to correct such representation or warranty within 30
days of such written notice; provided that Newco may not terminate this
Agreement pursuant to this subsection (v) if Melville continues in good
faith to use its best efforts to correct any such representation or
warranty, and such correction is capable of being performed prior to June
30, 1996.
The party desiring to terminate this Agreement shall give notice of
such termination to the other party.
14.2 Effect of Termination. If this Agreement is terminated as
permitted by Section 14.1, termination shall be without liability of any party
(or any stockholder, director, officer, employee, agent, consultant or
representative of such party) to any other party to this Agreement; provided
that if such termination shall result from the wilful failure of Newco or
Melville to fulfill a condition to the performance of the obligations of the
other party, failure to perform a covenant of this Agreement or breach by such
party of any representation or warranty or agreement contained herein, such
party shall be fully liable for any and all
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Damages incurred or suffered by the other party as a result of such failure or
breach. The provisions of Sections 7.8, 8.1, 14.1, 14.2, 15.1, 15.2, 15.3, 15.5,
15.6, 15.9, 15.10 and 15.12 shall survive any termination hereof pursuant to
Section 14.1.
ARTICLE 15
MISCELLANEOUS
15.1 Notices. All notices, requests and other communications to any
party hereunder shall be in writing (including facsimile transmission) and shall
be given at the party's address (or telecopier number) set forth below, or such
other address (or telecopier number) as shall have been furnished to the party
giving or making such notice, request or other communication:
If to Newco or the Company, to:
Wilsons The Leather Experts Inc.
c/o Wilsons Center Inc.
400 Highway 169
St. Louis Park, Minnesota 55426
Telecopier: (612) 541-3152
Attention: Joel Waller, David Rogers
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with copies to:
Faegre & Benson
2200 Norwest Center
90 South Seventh Street
Minneapolis, Minnesota 55402
Telecopier: (612) 336-3026
Attention: Philip S. Garon, Esq.
Maslon Edelman Borman & Brand
3300 Norwest Center
90 South Seventh Street
Minneapolis, Minnesota 55402
Telecopier: (612) 672-8397
Attention: Neil I. Sell, Esq.
If to Melville, to:
Melville Corporation
One Theall Road
Rye, New York 10580
Telecopier: (914) 925-4052
Attention: Chief Executive Officer,
Chief Financial Officer and
General Counsel
with a copy to:
Davis Polk & Wardwell
450 Lexington Avenue
New York, New York 10017
Telecopier: (212) 450-4800
Attention: Dennis S. Hersch, Esq.
All such notices, requests and other communications shall be deemed received on
the date of receipt by the recipient thereof if received prior to 5 p.m. in the
place of receipt and such day is a business day in the place of receipt.
Otherwise, any such notice, request or communication shall be deemed not to have
been received until the next succeeding business day in the place of receipt.
15.2 Amendments and Waivers. (a) Any provision of this Agreement
may be amended or waived if, but only if, such amendment or waiver is in writing
and is signed, in the case of an amendment, by each party to this Agreement, or
in the case of a waiver, by the party against whom the waiver is to be
effective.
(b) No failure or delay by any party in exercising any right, power or
privilege hereunder shall operate as a waiver thereof nor shall any single or
partial exercise
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thereof preclude any other or further exercise thereof or the exercise of any
other right, power or privilege. The rights and remedies herein provided shall
be cumulative and not exclusive of any rights or remedies provided by law.
15.3 Expenses. Except as otherwise expressly provided herein or in
the letter from Joel Waller to Melville dated February 20, 1996 or in either of
the letters from Doug Treff to Melville dated March 15, 1996 or April 29, 1996
(together, the "Expense Letters"), all costs and expenses incurred in connection
with this Agreement shall be paid by the party incurring such cost or expense.
Newco and Melville agree that the costs of searches undertaken by GE Capital in
connection with the Financing, filing fees of GE Capital in connection with the
Financing and filing fees of Melville in connection with the Note and the
Security Agreement shall be borne equally by Newco and Melville.
15.4 Successors and Assigns. The provisions of this Agreement shall
be binding upon and inure to the benefit of the parties hereto and their
respective successors and permitted assigns; provided that no party may assign,
delegate or otherwise transfer any of its rights or obligations under this
Agreement without the consent of each other party hereto. Notwithstanding the
foregoing, Newco may assign its rights hereunder to one or more wholly owned
Subsidiaries of Newco and may collaterally assign its rights hereunder to one or
more institutions providing financing to Newco, the Company or any Subsidiary,
but neither such assignment nor collateral assignment shall relieve Newco of its
obligations hereunder.
15.5 Governing Law. This Agreement shall be governed by and
construed in accordance with the law of the State of New York, without regard to
the conflicts of law rules of such state.
15.6 Waiver of Jury Trial. With respect to any suit, action or
proceeding seeking to enforce any provision of, or based on any matter arising
out of or in connection with, this Agreement or the transactions contemplated
hereby, THE PARTIES HERETO WAIVE ANY RIGHTS THEY MAY HAVE TO A JURY TRIAL.
15.7 Counterparts; Effectiveness. This Agreement may be signed in
any number of counterparts, each of which shall be an original, with the same
effect as if the signatures thereto and hereto were upon the same instrument.
This Agreement shall become effective when each party hereto shall have received
a counterpart hereof signed by the other parties hereto.
15.8 Third Party Beneficiaries. Except as provided in Sections
11.3(f), 13.2 and 13.3, no provision of this Agreement is intended to confer
upon any Person other than the parties hereto any rights or remedies hereunder.
15.9 Entire Agreement. This Agreement, the Note, the Warrant, the
Management Warrant, the Expense Letters, the Registration Rights Agreement and
the Security Agreement constitute the entire agreement among the parties with
respect to the
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<PAGE>
subject matter thereof and supersede all prior agreements and understandings,
both oral and written, between the parties with respect to the subject matter
thereof. No representation, inducement, promise, understanding, condition or
warranty not set forth herein has been made or relied upon by either party
hereto. Except as provided in Section 13.2, neither this Agreement nor any
provision hereof is intended to confer upon any Person other than the parties
hereto any rights or remedies hereunder.
15.10 Validity of Provisions. Should any provision of this Agreement
be declared by any court of competent jurisdiction to be invalid or
unenforceable, the remaining provisions shall not be affected thereby. If any
provision of this Agreement shall be held to be partially invalid and
unenforceable, then that portion which is not held to be invalid or
unenforceable shall be deemed enforceable to the maximum extent permitted by
law.
15.11 Section Headings. The section headings contained in this
Agreement are for reference purposes only and shall not affect in any way the
meaning or interpretation of this Agreement.
15.12 Force Majeure. In the event that Newco or Melville shall be
delayed or hindered in or prevented from doing or performing any act or thing
required by this Agreement by reason of strikes, lock-outs, casualties, acts of
God, labor troubles, inability to procure materials, governmental laws or
regulations, riots, insurrection, war or other causes beyond its reasonable
control (except for a lack of funds or an inability to obtain financing), then
the delayed party shall not be liable or responsible for any such delay, and the
doing or performing of such act or thing shall be excused for the period of the
delay, and the period for performance of any such act shall be extended for a
period equivalent to the period of such delay, provided that nothing contained
in this paragraph will extend the date set forth in Section 14.1(ii).
15.13 Further Assurances. At any time and from time to time, each
party hereto, without further consideration, shall cooperate, take such further
action and execute and deliver such further instruments and documents as may be
reasonably requested by any other party in order to carry out the provisions and
purposes of this Agreement; provided that nothing contained in this paragraph
will extend the date set forth in Section 14.1(ii).
15.14 Pronouns. Use of either the singular or the plural should not
be deemed a limitation, and the use of the singular should be construed to
include, where appropriate, the plural. Use of masculine, feminine or neuter
pronouns should not be deemed a limitation, and the use of any such pronouns
should be construed to include, where appropriate, the other pronouns.
15.15 Interpretations. In this Agreement and the Schedules and
Exhibits thereto:
(a) the word "including" shall mean "including without limitation";
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<PAGE>
(b) when calculating the period of time within which or following
which any act is to be done or step taken, the date which is the reference day
in calculating such period shall be excluded and, if the last day of such period
is not a Business Day, the period shall end on the next day which is a Business
Day;
(c) all dollar amounts are expressed in United States funds;
(d) unless otherwise expressly provided herein, money shall be
tendered by wire transfer of immediately available federal funds;
(e) the Schedules and all Exhibits attached hereto are hereby
incorporated in and made a part of this Agreement as if set forth in full
herein. A disclosure made in any Schedule that is sufficient to reasonably
inform Newco of information required to be disclosed in another Schedule to
avoid a misrepresentation under such other Section of this Agreement shall be
deemed, for all purposes of this Agreement, to have been made under such other
Schedule.
15.16 Remedies Cumulative. Except as otherwise provided herein, the
remedies provided herein shall be cumulative and shall not preclude (i) the
assertion by Newco or the Company of any other rights hereunder or the seeking
by Newco or the Company of any other remedies against Melville provided herein,
or (ii) the assertion by Melville of any rights hereunder or the seeking by
Melville of any other remedies against Newco or the Company provided herein.
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<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to
be duly executed by their respective authorized officers as of the day and year
first above written.
MELVILLE CORPORATION
By: /s/Harvey Rosenthal
-------------------
Title: President
WILSONS THE LEATHER EXPERTS INC.
By: /s/ David L. Rogers
-------------------
Title:
WILSONS CENTER, INC.
By: /s/ David L. Rogers
-------------------
Title: President
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<PAGE>
EXHIBIT 3.1
AMENDED
ARTICLES OF INCORPORATION
OF
WILSONS THE LEATHER EXPERTS INC.
ARTICLE 1 - NAME
----------------
The name of this corporation shall be Wilsons The Leather Experts Inc.
ARTICLE 2 - REGISTERED OFFICE
-----------------------------
The registered office of this corporation shall be 400 South Highway 169,
St. Louis Park, Minnesota 55426.
ARTICLE 3 - AUTHORIZED SHARES
-----------------------------
Section 1. Authorized Capital Stock.
------------------------
(a) Total Number of Shares.
-----------------------
The aggregate number of shares of stock which the corporation is authorized
to issue is 60,000,000 shares, consisting of 50,000,000 shares of common stock,
par value $.01 (the "Common Stock"), of which 25,000,000 shares shall be
undesignated as to class, 15,000,000 shares shall be Class A Common Stock
("Class A Common Stock"), 7,500,000 shares shall be Class B Common Stock ("Class
B Common Stock") and 2,500,000 shares shall be Class C Common Stock ("Class C
Common Stock"), and 10,000,000 shares of preferred stock, par value $.01 (the
"Preferred Stock"). The shares of Preferred Stock and Common Stock are
sometimes collectively referred to herein as the "capital stock".
(b) Series of Preferred Stock.
--------------------------
Of the total number of shares of Preferred Stock authorized in paragraph
(a) above, 15,000 shares are hereby designated Series A Preferred Stock ("Series
A Preferred"). The remaining shares of Preferred Stock may be issued by the
Board of Directors of the corporation from time to time in one or more series,
each of such series to have such relative rights, voting power, preferences and
restrictions as adopted by the Board of Directors of the corporation.
Section 2. Description of Capital Stock.
-----------------------------
The rights, voting power, preferences and restrictions granted to or
imposed upon respective classes or series of shares designated in these Articles
of Incorporation or the holders thereof are as follows:
(a) Voting Power.
-------------
(i) General. Each holder of Class A Common Stock, Class B Common Stock
and all other Common Stock (other than Class C Common Stock) shall have one
vote on
<PAGE>
all matters submitted to the shareholders for each share of Class A
Common Stock, each share of Class B Common Stock and each other share of
Common Stock (other than Class C Common Stock) registered in the name of
such holder on the books of the corporation. Except as otherwise provided
herein or by law, the Class C Common Stock and the Series A Preferred shall
have no voting rights.
(ii) (A) Subject to Section 2(a)(ii)(B) below, as long as shares of
Class B Common Stock are outstanding, (i) the Board of Directors of
the corporation shall consist of not more than five members, (ii) the
holders of the Class B Common Stock, exclusively and voting as a
single class, shall be entitled, by a vote of a majority of the
outstanding shares of the Class B Common Stock, to elect two of the
directors of the corporation and to exercise any right of removal or
replacement of such directors, and (iii) the holders of the Class A
Common Stock, Class B Common Stock and all other Common Stock (except
Class C Common Stock), exclusively and voting as a single class
without regard to whether such Common Stock is Class A Common Stock,
Class B Common Stock or any other Common Stock (except Class C Common
Stock), shall be entitled, by a vote of a majority of the sum of the
outstanding shares of (x) Class A Common Stock, (y) Class B Common
Stock and (z) all other Common Stock (except Class C Common Stock)
held by such holders, to elect three of the directors of the
corporation and to exercise any right of removal or replacement of
such directors.
(B) Upon the occurrence of a Conversion (as hereinafter defined),
(i) the Board of Directors of the corporation shall consist of not
less than five or more than nine members and (ii) the directors of the
corporation shall be elected by the affirmative vote of the holders of
the greater of (a) a majority of the voting power of the shares
present and entitled to vote on the election of directors or (b) a
majority of the voting power of the minimum number of shares entitled
to vote that would constitute a quorum for the transaction of business
at a duly held meeting of shareholders.
(iii) Additional Class Votes by Series A Preferred. Without the
affirmative vote of the holders of at least a majority of the shares of
Series A Preferred at the time outstanding, the corporation shall not:
(A) issue more than 7,405 shares of Series A Preferred or
authorize or issue any shares of stock ranking on a parity with or
superior to the Series A Preferred as to the payment of dividends or
as to the payment or distribution of assets upon the liquidation or
dissolution, voluntary or involuntary, of the corporation; or
(B) declare or pay any dividend or make any other distribution on
any shares of capital stock, including Common Stock, of the
corporation at any time created and issued ranking junior to Series A
Preferred with respect to the right to the payment of dividends or as
to the distribution of assets upon liquidation, dissolution or winding
up of the corporation ("Junior Stock"), other than dividends
-2-
<PAGE>
or distributions payable solely in shares of Junior Stock, or
purchase, redeem or otherwise acquire for any consideration (other
than purchases of shares of Common Stock required or permitted to be
repurchased by the terms of that certain Shareholder Agreement to be
dated as of May 25, 1996 among the corporation and the persons who
will become shareholders and limited and general partners of
shareholders of the corporation on that date and to be retained at the
principal executive office of the corporation (the "Shareholder
Agreement)), or set aside a sinking fund or other fund for the
redemption or repurchase of any shares of Junior Stock or any
warrants, rights or options to purchase shares of Junior Stock;
provided, however, that the corporation may purchase the Common Stock
issued pursuant to that certain Restricted Stock Agreement to be dated
as of May 25, 1996 among the corporation and certain persons who will
become shareholders of the corporation and to be retained at the
principal executive office of the corporation (the "Restricted Stock
Agreement"), to the extent such purchases are required by the terms of
the Restricted Stock Agreement; or
(C) amend the Articles of Incorporation of the corporation so as
to materially alter any existing provision relating to the terms of
the Series A Preferred or waive any of the rights granted to the
holders of the Series A Preferred by the Articles of Incorporation of
the corporation or otherwise alter the rights or preferences of the
Series A Preferred.
(iv) No Cumulative Voting. No holder of shares of capital stock of the
corporation shall have any cumulative voting rights.
(b) Preemptive Rights.
------------------
Except for rights to be granted under the Shareholder Agreement prior to an
Initial Public Offering (as defined in Section 2(e) below), no holder of shares
of any class of capital stock of the corporation shall be entitled as such, as a
matter of right, to subscribe for, purchase or receive any part of any new or
additional issue of shares of stock of any class or series whatsoever, or of
securities convertible into or exchangeable for or exercisable for or carrying a
right to purchase any shares of stock of any class or series whatsoever, whether
now or hereafter authorized and whether issued for cash or other consideration
or by way of dividend or other distribution.
(c) Dividends.
----------
(i) Dividends on Common Stock. Subject to the prior rights of the
holders of Series A Preferred to be paid cumulative dividends as set forth
below and as otherwise provided herein, each share of Common Stock,
regardless of class, shall be entitled to share in dividends ratably with
all other shares of Common Stock then outstanding, when, if and as such
dividends are declared and paid.
-3-
<PAGE>
(ii) Dividends on Series A Preferred.
--------------------------------
(A) Prior to the repayment in full of the note (the "Note") to be
issued by the corporation to Melville Corporation ("Melville"),
pursuant to the Sale Agreement dated May 24, 1996 among the
corporation, Melville and Wilsons Center, Inc. retained at the
principal executive office of the Corporation (the "Note Repayment
Date"), the holders of shares of Series A Preferred shall not be
entitled to receive any dividends on the Series A Preferred.
(B) On or after the Note Repayment Date, the Series A Preferred
shall be entitled to receive, when and as declared by the Board of
Directors of the corporation, cash dividends at the annual rate of $80
per share (appropriately adjusted to reflect stock splits, divisions
or combinations or stock dividends, reorganizations, consolidations
and similar changes hereafter effected) from the date of issuance of
such shares of Series A Preferred, whether or not earned or declared,
which dividends shall accrue from the date of issuance of such shares
of Series A Preferred and, to the extent accrued and unpaid as of May
31 of any year, shall be payable before any dividends on any shares of
Common Stock shall be declared or paid or set apart for payment during
the twelve months following such May 31, and shall be cumulative
(whether or not there shall be funds of the corporation legally
available for the payment of such dividends), so that if any dividends
accrued on the outstanding Series A Preferred at such rate through May
31 of any year have not been paid thereon, or funds set apart for the
payment thereof, the amount of such unpaid, accrued dividends on the
Series A Preferred through such May 31 shall be fully paid, or set
apart for payment, before any distribution by way of dividend or
otherwise (except purchases of shares of Common Stock required or
permitted to be repurchased by the terms of the Shareholder Agreement
or required to be repurchased by the terms of the Restricted Stock
Agreement) shall be declared or paid upon, or set apart during the
twelve months following such May 31 for, the shares of Common Stock or
any other class of shares of Junior Stock. The amount of dividends
accruing on the Series A Preferred shall be computed on the basis of a
year of 360 days of twelve 30-day months but not more than 360 days in
any year.
(d) Other Terms of the Series A Preferred.
--------------------------------------
(i) Liquidation Preference. In the event of an involuntary or
voluntary liquidation or dissolution of the corporation at any time, the
holders of shares of Series A Preferred shall be entitled to receive out of
the assets of the corporation an amount equal to $1,000 per share
(appropriately adjusted to reflect stock splits, divisions or combinations
or stock dividends, reorganizations, consolidations and similar changes
hereafter effected), plus all per-share dividends unpaid and accumulated or
accrued thereon (whether or not earned or declared) to the date of such
distribution. In the event of either an involuntary or a voluntary
liquidation or dissolution of the corporation, payment shall be made to the
holders of Series A Preferred in the amounts herein fixed before any
payment shall be made or any assets distributed to the holders of the
Common
-4-
<PAGE>
Stock or any other Junior Stock. If upon any liquidation or dissolution of
the corporation, the assets available for distribution shall be
insufficient to pay the holders of all outstanding shares of Series A
Preferred the full amounts to which they respectively shall be entitled,
the holders of such shares shall share pro rata in any such distribution.
For purposes of this paragraph (d), none of a statutory merger of the
corporation into or with another corporation or of another corporation into
or with the corporation, a statutory share exchange involving the
corporation or a sale, transfer or other disposition of all or any part of
the assets of the corporation (except a transfer or other disposition of
substantially all of the assets of the corporation to its shareholders in
their capacities as shareholders) shall constitute a liquidation or
dissolution of the corporation.
(ii) Redemption.
-----------
(A) Optional Redemption. The Series A Preferred shall not be
redeemable by the corporation prior to the Note Repayment Date without
the consent of holders of a majority in principal amount of the Note.
On and after the Note Repayment Date, the corporation shall, to the
extent that funds are legally available therefor, have the option to
redeem without penalty or premium all or any portion of the Series A
Preferred for $1,000 per share (appropriately adjusted to reflect
stock splits, divisions or combinations, reorganizations,
consolidations and similar changes hereafter effected), plus an amount
equal to all dividends unpaid and accumulated or accrued thereon
(whether or not earned or declared) (the "Redemption Price") to the
date on which such redemption is made (the "Redemption Date").
(B) Mandatory Redemption. If at any time (x) all or substantially
all of the corporation's assets are sold, transferred or otherwise
disposed of, or (y) an Event of Default (as hereinafter defined) shall
occur and be continuing, the corporation shall, on the date of the
closing of such sale, transfer, other disposition or Event of Default,
to the extent that funds are legally available therefor, redeem all of
the Series A Preferred for the Redemption Price after payment in full
of the Note. In the event the corporation does not have sufficient
funds legally available to redeem 100% of the shares of outstanding
Series A Preferred, the corporation shall redeem such shares ratably
among all holders of shares of the Series A Preferred in accordance
with their holdings of such shares. Each of the following events shall
be an event of default (an "Event of Default"):
(1) if the corporation becomes insolvent or bankrupt, or
admits in writing its inability to pay its debts as they mature,
or makes an assignment for the benefit of creditors, or ceases
doing business as a going concern, or the corporation applies for
or consents to the appointment of a trustee or receiver for the
corporation, or for the major part of the property of the
corporation; or
-5-
<PAGE>
(2) if a trustee or receiver is appointed for the corporation
or for the major part of the property of the corporation and the order
of such appointment is not discharged, vacated or stayed within 60
days after such appointment; or
(3) if an order for relief shall be entered in any Federal
bankruptcy proceeding in which the corporation is the debtor; or if
bankruptcy, reorganization, arrangement, insolvency, or liquidation
proceedings, or other proceedings for relief under any bankruptcy or
similar law or laws for the relief of debtors, are instituted by or
against the corporation and, if instituted against the corporation,
are consented to or, if contested by the corporation, are not
dismissed by the adverse parties or by an order, decree or judgment
within 60 days after such institution; or
(4) if a default shall be made in the due and punctual
performance or observance of any covenant set forth in Section
2(a)(iii) above or Section 2(d)(iii) below, and such default shall
have continued for a period of 30 days after written notice thereof to
the corporation by the holder of any Series A Preferred.
(C) Notice. The corporation shall give notice by mail of redemptions
to the holders of record of the shares of Series A Preferred at least 10
days prior to the date of redemption. The notice (1) shall specify the date
of redemption and the number of shares to be redeemed from each shareholder
and (2) shall be addressed to each shareholder at the shareholder's post-
office address as shown on the records of the corporation. On or after the
date fixed for redemption, each holder of shares of Series A Preferred
called for redemption shall surrender the certificate or certificates
evidencing such shares to the corporation at the place designated in such
notice and shall thereupon be entitled to receive payment. If less than all
of the shares represented by any such surrendered certificate or
certificates are redeemed, the corporation shall issue a new certificate
for the unredeemed shares.
(iii) Covenants. The corporation shall:
(A) deliver to each holder of ten percent or more of the outstanding
Series A Preferred as soon as practicable, but in any event within 90 days
after the end of each fiscal year, an audited consolidated balance sheet of
the corporation and its subsidiaries, as of the end of such fiscal year,
together with the related consolidated statements of operations,
shareholders' equity and cash flow for such fiscal year;
(B) deliver to each holder of ten percent or more of the outstanding
Series A Preferred as soon as practicable, but in any event within 45 days
after the end of each fiscal quarter, an unaudited consolidated balance
sheet of the corporation and its subsidiaries, as of the
-6-
<PAGE>
end of such fiscal quarter, together with the related consolidated
statements of operations, shareholders' equity and cash flow for such
fiscal quarter;
(C) not reissue any shares of Series A Preferred which shall have
been redeemed or reacquired by the corporation in any manner after the
original issuance thereof, and all such shares so redeemed or reacquired
shall become undesignated Preferred Stock.
(e) Conversion
All shares of Common Stock, regardless of class, shall automatically
be converted into an equal number of shares of Common Stock of a single
class without class designation (the "Conversion") without any action by
any holder thereof immediately upon the occurrence of the closing of the
first public offering by the corporation of shares of Common Stock of the
corporation registered under the Securities Act of 1933, as amended
("Initial Public Offering");
(f) Class C Common Stock Conversion
All shares of Class C Common Stock shall automatically be converted
into an equal number of shares of Class B Common Stock without any action
by any holder thereof at such time as the number of shares of Class A
Common Stock over which either or both of Lyle Berman or Morris Goldfarb
shall, directly, or indirectly as partners in a partnership or limited
partnership or otherwise, have the power to vote, shall be reduced to less
than 4,750,000 (appropriately adjusted to reflect stock splits, dividends
or combinations, reorganizations, consolidations and similar changes
hereafter effected)).
(g) Equal Rights (Other than Voting Rights) of Common Stock
Except for the differences in voting rights of Common Stock as set
forth in Section 2(a)(i) and (ii) of Article 3, the rights of each share of
Common Stock, regardless of class, shall be equal in all respects.
ARTICLE 4 - VOTE OF DIRECTORS
-----------------------------
Section 1. Super-majority Vote.
Without the consent of at least 80% of all of the directors of the
corporation then serving on the Board of Directors of the corporation, no action
by the corporation (including but not limited to any action by its board of
directors or any committee thereof) shall be taken (a) with respect to an
Initial Public Offering closed prior to May 26, 1998 or (b) with respect to any
of the following events described in clause (i) through (vi) below that occur
prior to the closing of an Initial Public Offering:
(i) the issue or allotment of any unissued shares of capital stock or
other securities (including but not limited to warrants and options) of the
corporation (except through employee stock option plans, pursuant to the
exercise of certain warrants granted
-7-
<PAGE>
or to be granted by the corporation to Melville Corporation relating to the
purchase of 1,500,000 shares of Class A Common Stock and certain warrants
granted or to be granted by the corporation to Melville Corporation
relating to the purchase of 1,200,000 shares of Class A Common Stock or an
Initial Public Offering or pursuant to an offer or sale to all existing
shareholders on a pro rata basis) or any subsidiary, to any holder of
Common Stock or of an option, warrant or other right to purchase common
stock or to any affiliate of such holder;
(ii) any increase in the size of the Board of Directors of the
corporation from the number of directors immediately prior to such
increase;
(iii) the voluntary sale, conveyance, exchange or transfer (for cash,
shares of stock, securities or other consideration) of all or substantially
all of the property or assets of the corporation and its subsidiaries,
taken as a whole, or any merger, statutory share exchange or consolidation
by the corporation with any other corporation; provided that nothing stated
herein shall prohibit or limit (A) the merger of any subsidiary of the
corporation into the corporation or any other subsidiary of the corporation
or (B) the liquidation of the assets of any subsidiary of the corporation
into the corporation or any other subsidiary of the corporation or the
dissolution of the liquidated subsidiary of the corporation;
(iv) any acquisition, disposition, exchange or transfer (for cash,
shares of stock, securities or other consideration) of the property or
assets of the corporation or any of its subsidiaries in excess of five
percent (5%) of the total consolidated assets of the corporation with, to
or from, any individual, corporation, partnership, association, trust or
other entity or organization, including a government or political
subdivision or an agency or instrumentality thereof; provided that nothing
stated herein shall prohibit or limit (i) the merger of any subsidiary of
the corporation into the corporation or any other subsidiary of the
corporation or (ii) the liquidation of the assets of any subsidiary of the
corporation into the corporation or any other subsidiary of the corporation
or the dissolution of the liquidated subsidiary of the corporation;
(v) a material change in the scope of the business of the
corporation and its subsidiaries, taken as a whole; or
(vi) any amendment to the by-laws of the corporation.
Section 2. Majority Vote.
No action by the corporation shall be taken with respect to any of the
following matters without the approval of a majority of the directors of the
corporation:
(a) the determination of compensation, benefits, perquisites and
other incentives for executive officers of the corporation or any of its
subsidiaries and the approval or amendment of any employee benefits plans or
contracts or employment contracts in connection therewith;
-8-
<PAGE>
(b) the issuance or allotment of additional unissued shares of
capital stock or other securities (including but not limited to warrants,
options and other rights to purchase capital stock or other securities), of the
corporation;
(c) any alteration or amendment to the terms of any material
contracts or arrangements for borrowed money; or
(d) any dividends or other distributions on any capital stock of the
corporation.
ARTICLE 5 - AMENDMENT OF ARTICLES OF INCORPORATION
--------------------------------------------------
Except as otherwise provided by Article 3 hereof, as long as shares of both
Class A Common Stock and Class B Common Stock are outstanding and the Conversion
shall not have occurred, any provision contained in these Articles of
Incorporation may be amended, altered, changed or repealed only by the
affirmative vote of the holders of at least a majority of the voting power of
(i) the outstanding Class A Common Stock and (ii) the outstanding Class B Common
Stock, voting as separate classes, or such greater percentage as may be
otherwise prescribed by the laws of the State of Minnesota.
ARTICLE 6 - LIMITATION OF DIRECTOR LIABILITY
--------------------------------------------
To the fullest extent permitted by Chapter 302A, Minnesota Statutes, as the
same exists or may hereafter be amended, a director of this corporation shall
not be personally liable to the corporation or its shareholders for monetary
damages for breach of fiduciary duty as a director. No amendment or repeal of
this Article shall apply to or have any effect on the liability or alleged
liability of any director of this corporation for or with respect to any acts or
omissions of such director occurring prior to such amendment or repeal.
-9-
<PAGE>
EXHIBIT 3.3
BY-LAWS
OF
WILSONS THE LEATHER EXPERTS INC.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Section Page
- ------- ----
<C> <S> <C>
SHAREHOLDERS 1
- ------------
1.01 Place of Meetings 1
1.02 Regular Meetings 1
1.03 Special Meetings 1
1.04 Meetings Held Upon Shareholder Demand 1
1.05 Adjournments 2
1.06 Notice of Meetings 2
1.07 Waiver of Notice 2
1.08 Voting Rights 2
1.09 Proxies 2
1.10 Quorum 3
1.11 Acts of Shareholders 3
1.12 Action Without a Meeting 3
DIRECTORS 3
- ---------
2.01 Qualifications 3
2.02 Term 3
2.03 Intentionally Omitted 3
2.04 Place of Meetings 4
2.05 Regular Meetings 4
2.06 Special Meetings 4
2.07 Waiver of Notice; Previously Scheduled Meetings 4
2.08 Quorum 4
2.09 Acts of Board 4
2.10 Participation by Electronic Communications 5
2.11 Absent Directors 5
2.12 Action Without a Meeting 5
2.13 Committees 5
2.14 Special Litigation Committee 5
2.15 Compensation 6
</TABLE>
-i-
<PAGE>
<TABLE>
<CAPTION>
Section Page
- ------- ----
<S> <C> <C>
OFFICERS 6
- --------
3.01 Number and Designation 6
3.02 Chief Executive Officer 6
3.03 Chief Financial Officer 6
3.04 President 6
3.05 Vice Presidents 7
3.06 Secretary 7
3.07 Treasurer 7
3.08 Authority and Duties 7
3.09 Term 7
3.10 Salaries 8
INDEMNIFICATION 8
- ---------------
4.01 Indemnification 8
4.02 Insurance 8
SHARES 8
- ------
5.01 Certificated and Uncertificated Shares 8
5.02 Declaration of Dividends and Other Distributions 9
5.03 Transfer of Shares 9
5.04 Record Date 9
MISCELLANEOUS 9
- -------------
6.01 Execution of Instruments 9
6.02 Advances 9
6.03 Corporate Seal 10
6.04 Fiscal Year 10
6.05 Amendments 10
</TABLE>
This Table of Contents is not part of the By-Laws of the Corporation.
It is intended merely to aid in the utilization of the By-Laws.
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<PAGE>
BY-LAWS
OF
WILSONS THE LEATHER EXPERTS INC.
SHAREHOLDERS
------------
Section 1.01 Place of Meetings. Each meeting of the shareholders shall be
held at the principal executive office of the Corporation or at such other place
as may be designated by the Board of Directors or the Chief Executive Officer;
provided, however, that any meeting called by or at the demand of a shareholder
or shareholders shall be held in the county where the principal executive office
of the Corporation is located.
Section 1.02 Regular Meetings. Regular meetings of the shareholders may be
held on an annual or other less frequent basis as determined by the Board of
Directors; provided, however, that if a regular meeting has not been held during
the immediately preceding 15 months, a shareholder or shareholders holding three
percent or more of the voting power of all shares entitled to vote may demand a
regular meeting of shareholders by written demand given to the Chief Executive
Officer or Chief Financial Officer of the Corporation. At each regular meeting
the shareholders shall elect qualified successors for directors who serve for an
indefinite term or whose terms have expired or are due to expire within six
months after the date of the meeting and may transact any other business,
provided, however, that no business with respect to which special notice is
required by law shall be transacted unless such notice shall have been given.
Section 1.03 Special Meetings. A special meeting of the shareholders may be
called for any purpose or purposes at any time by the Chief Executive Officer;
by the Chief Financial Officer; by the Board of Directors or any two or more
members thereof; or by one or more shareholders holding not less than ten
percent of the voting power of all shares of the Corporation entitled to vote
(except that a special meeting for the purpose of considering any action to
directly or indirectly facilitate or effect a business combination, including
any action to change or otherwise affect the composition of the Board for that
purpose, must be called by shareholders holding not less than 25 percent of the
voting power of all shares of the Corporation entitled to vote), who shall
demand such special meeting by written notice given to the Chief Executive
Officer or the Chief Financial Officer of the Corporation specifying the
purposes of such meeting.
Section 1.04 Meetings Held Upon Shareholder Demand. Within 30 days after
receipt of a demand by the Chief Executive Officer or the Chief Financial
Officer from any shareholder or shareholders entitled to call a meeting of the
shareholders, it shall be the duty of the Board of Directors of the Corporation
to cause a special or regular meeting of shareholders, as the case may be, to be
duly called and held on notice no later than 90 days after receipt of such
<PAGE>
demand. If the Board fails to cause such a meeting to be called and held as
required by this Section, the shareholder or shareholders making the demand may
call the meeting by giving notice as provided in Section 1.06 hereof at the
expense of the Corporation.
Section 1.05 Adjournments. Any meeting of the shareholders may be adjourned
from time to time to another date, time and place. If any meeting of the
shareholders is so adjourned, no notice as to such adjourned meeting need be
given if the date, time and place at which the meeting will be reconvened are
announced at the time of adjournment.
Section 1.06 Notice of Meetings. Unless otherwise required by law, written
notice of each meeting of the shareholders, stating the date, time and place
and, in the case of a special meeting, the purpose or purposes, shall be given
at least ten days and not more than 60 days prior to the meeting to every holder
of shares entitled to vote at such meeting except as specified in Section 1.05
or as otherwise permitted by law. The business transacted at a special meeting
of shareholders is limited to the purposes stated in the notice of the meeting.
Section 1.07 Waiver of Notice. A shareholder may waive notice of the date,
time, place and purpose or purposes of a meeting of shareholders. A waiver of
notice by a shareholder entitled to notice is effective whether given before, at
or after the meeting, and whether given in writing, orally or by attendance.
Attendance by a shareholder at a meeting is a waiver of notice of that meeting,
unless the shareholder objects at the beginning of the meeting to the
transaction of business because the meeting is not lawfully called or convened,
or objects before a vote on an item of business because the item may not
lawfully be considered at that meeting and does not participate in the
consideration of the item at that meeting.
Section 1.08 Voting Rights. Subdivision 1. A shareholder shall have one
vote for each share held which is entitled to vote. Except as otherwise required
by law, a holder of shares entitled to vote may vote any portion of the shares
in any way the shareholder chooses. If a shareholder votes without designating
the proportion or number of shares voted in a particular way, the shareholder is
deemed to have voted all of the shares in that way.
Subdivision 2. The Board of Directors may fix a date not more than 60 days
before the date of a meeting of shareholders as the date for the determination
of the holders of shares entitled to notice of and entitled to vote at the
meeting. When a date is so fixed, only shareholders on that date are entitled to
notice of and permitted to vote at that meeting of shareholders.
Section 1.09 Proxies. A shareholder may cast or authorize the casting of a
vote by filing a written appointment of a proxy with an officer of the
Corporation at or before the meeting at which the appointment is to be
effective. The shareholder may sign or authorize the written appointment by
telegram, cablegram or other means of electronic transmission, provided that the
Corporation has no reason to believe that the telegram, cablegram or other
electronic transmission was not authorized by the shareholder. Any copy,
facsimile, telecommunication or other reproduction of the original of either the
writing or transmission may be used in lieu of the original, provided that it is
a complete and legible reproduction of the entire original.
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<PAGE>
Section 1.10 Quorum. The holders of a majority of the voting power of
the shares entitled to vote at a shareholders meeting are a quorum for the
transaction of business. If a quorum is present when a duly called or held
meeting is convened, the shareholders present may continue to transact business
until adjournment, even though the withdrawal of a number of the shareholders
originally present leaves less than the proportion or number otherwise required
for a quorum.
Section 1.11 Acts of Shareholders. Subdivision 1. Except as otherwise
required by law or specified in the Articles of Incorporation of the
Corporation, the shareholders shall take action by the affirmative vote of the
holders of the greater of (a) a majority of the voting power of the shares
present and entitled to vote on that item of business or (b) a majority of the
voting power of the minimum number of shares entitled to vote that would
constitute a quorum for the transaction of business at a duly held meeting of
shareholders.
Subdivision 2. A shareholder voting by proxy authorized to vote on less
than all items of business considered at the meeting shall be considered to be
present and entitled to vote only with respect to those items of business for
which the proxy has authority to vote. A proxy who is given authority by a
shareholder who abstains with respect to an item of business shall be considered
to have authority to vote on that item of business.
Section 1.12 Action Without a Meeting. Any action required or permitted
to be taken at a meeting of the shareholders of the Corporation may be taken
without a meeting by written action signed by all of the shareholders entitled
to vote on that action. The written action is effective when it has been signed
by all of those shareholders, unless a different effective time is provided in
the written action.
DIRECTORS
---------
Section 2.01 Qualifications. Except as authorized by the shareholders
pursuant to a shareholder control agreement or unanimous affirmative vote, the
business and affairs of the Corporation shall be managed by or under the
direction of a Board. Directors shall be natural persons. Subject to the
Articles of Incorporation of the Corporation, the shareholders at each regular
meeting shall determine the number of directors to constitute the Board,
provided that subject to the Articles of Incorporation of the Corporation,
thereafter the authorized number of directors may be increased by the
shareholders or the Board and decreased by the shareholders. Directors need not
be shareholders.
Section 2.02 Term. Each director shall serve for an indefinite term that
expires at the next regular meeting of the shareholders. A director shall hold
office until a successor is elected and has qualified or until the earlier
death, resignation, removal or disqualification of the director.
Section 2.03 Intentionally Omitted.
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<PAGE>
Section 2.04 Place of Meetings. Each meeting of the Board of Directors
shall be held at the principal executive office of the Corporation or at such
other place as may be designated from time to time by a majority of the members
of the Board or by the Chief Executive Officer. A meeting may be held by
conference among the directors using any means of communication through which
the directors may simultaneously hear each other during the conference.
Section 2.05 Regular Meetings. Regular meetings of the Board of
Directors for the election of officers and the transaction of any other business
shall be held without notice at the place of and immediately after each regular
meeting of the shareholders.
Section 2.06 Special Meetings. A special meeting of the Board of
Directors may be called for any purpose or purposes at any time by any member of
the Board by giving not less than two days' notice to all directors of the date,
time and place of the meeting, provided that when notice is mailed, at least
four days' notice shall be given. The notice need not state the purpose of the
meeting.
Section 2.07 Waiver of Notice; Previously Scheduled Meetings.
Subdivision 1. A director of the Corporation may waive notice of the date, time
and place of a meeting of the Board. A waiver of notice by a director entitled
to notice is effective whether given before, at or after the meeting, and
whether given in writing, orally or by attendance. Attendance by a director at
a meeting is a waiver of notice of that meeting, unless the director objects at
the beginning of the meeting to the transaction of business because the meeting
is not lawfully called or convened and thereafter does not participate in the
meeting.
Subdivision 2. If the day or date, time and place of a Board meeting have
been provided herein or announced at a previous meeting of the Board, no notice
is required. Notice of an adjourned meeting need not be given other than by
announcement at the meeting at which adjournment is taken of the date, time and
place at which the meeting will be reconvened.
Section 2.08 Quorum. The presence in person of a majority of the
directors currently holding office shall be necessary to constitute a quorum for
the transaction of business. In the absence of a quorum, a majority of the
directors present may adjourn a meeting from time to time without further notice
until a quorum is present. If a quorum is present when a duly called or held
meeting is convened, the directors present may continue to transact business
until adjournment, even though the withdrawal of a number of the directors
originally present leaves less than the proportion or number otherwise required
for a quorum.
Section 2.09 Acts of Board. Except as otherwise required by law or
specified in the Articles of Incorporation of the Corporation, the Board shall
take action by the affirmative vote of the greater of (a) a majority of the
directors present at a duly held meeting at the time the action is taken or (b)
a majority of the minimum proportion or number of directors that would
constitute a quorum for the transaction of business at the meeting.
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<PAGE>
Section 2.10 Participation by Electronic Communications. A director may
participate in a Board meeting by any means of communication through which the
director, other directors so participating and all directors physically present
at the meeting may simultaneously hear each other during the meeting. A
director so participating shall be deemed present in person at the meeting.
Section 2.11 Absent Directors. A director of the Corporation may give
advance written consent or opposition to a proposal to be acted on at a Board
meeting. If the director is not present at the meeting, consent or opposition
to a proposal does not constitute presence for purposes of determining the
existence of a quorum, but consent or opposition shall be counted as the vote of
a director present at the meeting in favor of or against the proposal and shall
be entered in the minutes or other record of action at the meeting, if the
proposal acted on at the meeting is substantially the same or has substantially
the same effect as the proposal to which the director has consented or objected.
Section 2.12 Action Without a Meeting. An action required or permitted
to be taken at a Board meeting may be taken without a meeting by written action
signed by all of the directors. Any action, other than an action requiring
shareholder approval, if the Articles of Incorporation so provide, may be taken
by written action signed by the number of directors that would be required to
take the same action at a meeting of the Board at which all directors were
present. The written action is effective when signed by the required number of
directors, unless a different effective time is provided in the written action.
When written action is permitted to be taken by less than all directors, all
directors shall be notified immediately of its text and effective date.
Section 2.13 Committees. Subdivision 1. A resolution approved by the
affirmative vote of a majority of the Board may establish committees having the
authority of the Board in the management of the business of the Corporation only
to the extent provided in the resolution. Committees shall be subject at all
times to the direction and control of the Board, except as provided in Section
2.14 or otherwise provided by law.
Subdivision 2. A committee shall consist of one or more natural persons,
who need not be directors, appointed by affirmative vote of a majority of the
directors present at a duly held Board meeting.
Subdivision 3. Section 2.04 and Sections 2.06 to 2.12 hereof shall apply
to committees and members of committees to the same extent as those sections
apply to the Board and directors.
Subdivision 4. Minutes, if any, of committee meetings shall be made
available upon request to members of the committee and to any director.
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<PAGE>
Section 2.14 Special Litigation Committee. Pursuant to the procedure set
forth in Section 2.13, the Board may establish a committee composed of one or
more independent directors or other independent persons to determine whether it
is in the best interests of the Corporation to consider legal rights or remedies
of the Corporation and whether those rights and remedies should be pursued. The
committee, once established, is not subject to the direction or control of, or
(unless required by law) termination by, the Board. To the extent permitted by
law, a vacancy on the committee may be filled by a majority vote of the
remaining committee members. The good faith determinations of the committee are
binding upon the Corporation and its directors, officers and shareholders to the
extent permitted by law. The committee terminates when it issues a written
report of its determinations to the Board.
Section 2.15 Compensation. The Board may fix the compensation, if any, of
directors.
OFFICERS
--------
Section 3.01 Number and Designation. The Corporation shall have one or
more natural persons exercising the functions of the offices of Chief Executive
Officer and Chief Financial Officer. The Board of Directors may elect or
appoint such other officers or agents as it deems necessary for the operation
and management of the Corporation, with such powers, rights, duties and
responsibilities as may be determined by the Board, including, without
limitation, a President, one or more Vice Presidents, a Secretary and a
Treasurer, each of whom shall have the powers, rights, duties and
responsibilities set forth in these By-Laws unless otherwise determined by the
Board. Any of the offices or functions of those offices may be held by the same
person.
Section 3.02 Chief Executive Officer. Unless provided otherwise by a
resolution adopted by the Board of Directors, the Chief Executive Officer (a)
shall have general active management of the business of the Corporation; (b)
shall, when present, preside at all meetings of the shareholders and Board; (c)
shall see that all orders and resolutions of the Board are carried into effect;
(d) may maintain records of and certify proceedings of the Board and
shareholders; and (e) shall perform such other duties as may from time to time
be assigned by the Board.
Section 3.03 Chief Financial Officer. Unless provided otherwise by a
resolution adopted by the Board of Directors, the Chief Financial Officer (a)
shall keep accurate financial records for the Corporation; (b) shall deposit all
monies, drafts and checks in the name of and to the credit of the Corporation in
such banks and depositories as the Board shall designate from time to time; (c)
shall endorse for deposit all notes, checks and drafts received by the
Corporation as ordered by the Board, making proper vouchers therefor; (d) shall
disburse corporate funds and issue checks and drafts in the name of the
Corporation, as ordered by the Board; (e) shall render to the Chief Executive
Officer and the Board, whenever requested, an account of all of such officer's
transactions as Chief Financial Officer and of the financial condition of the
Corporation; and (f) shall perform such other duties as may be prescribed by the
Board or the Chief Executive Officer from time to time.
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<PAGE>
Section 3.04 President. Unless otherwise determined by the Board of
Directors, the President shall be the Chief Executive Officer of the
Corporation. If an officer other than the President is designated Chief
Executive Officer, the President shall perform such duties as may from time to
time be assigned by the Board.
Section 3.05 Vice Presidents. Any one or more Vice Presidents, if any,
may be designated by the Board of Directors as Executive Vice Presidents or
Senior Vice Presidents. During the absence or disability of the President, it
shall be the duty of the highest ranking Executive Vice President, and, in the
absence of any such Vice President, it shall be the duty of the highest ranking
Senior Vice President or other Vice President, who shall be present at the time
and able to act, to perform the duties of the President. The determination of
who is the highest ranking of two or more persons holding the same office shall,
in the absence of specific designation of order of rank by the Board, be made on
the basis of the earliest date of appointment or election, or, in the event of
simultaneous appointment or election, on the basis of the longest continuous
employment by the Corporation.
Section 3.06 Secretary. The Secretary, unless otherwise determined by
the Board of Directors, shall attend all meetings of the shareholders and all
meetings of the Board, shall record or cause to be recorded all proceedings
thereof in a book to be kept for that purpose, and may certify such proceedings.
Except as otherwise required or permitted by law or by these By-Laws, the
Secretary shall give or cause to be given notice of all meetings of the
shareholders and all meetings of the Board.
Section 3.07 Treasurer. The Treasurer shall perform such duties as may
from time to time be assigned by the Board.
Section 3.08 Authority and Duties. In addition to the foregoing
authority and duties, all officers of the Corporation shall respectively have
such authority and perform such duties in the management of the business of the
Corporation as may be designated from time to time by the Board of Directors.
Unless prohibited by a resolution approved by the affirmative vote of a majority
of the directors present, an officer elected or appointed by the Board may,
without the approval of the Board, delegate some or all of the duties and powers
of an office to other persons.
Section 3.09 Term. Subdivision 1. All officers of the Corporation shall
hold office until their respective successors are chosen and have qualified or
until their earlier death, resignation or removal.
Subdivision 2. An officer may resign at any time by giving written notice
to the Corporation. The resignation is effective without acceptance when the
notice is given to the Corporation, unless a later effective date is specified
in the notice.
Subdivision 3. An officer may be removed at any time, with or without
cause, by a resolution approved by the affirmative vote of a majority of the
directors present at a duly held Board meeting.
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<PAGE>
Subdivision 4. A vacancy in an office because of death, resignation,
removal, disqualification or other cause may, or in the case of a vacancy in the
office of Chief Executive Officer or Chief Financial Officer shall, be filled
for the unexpired portion of the term by the Board.
Section 3.10 Salaries. The salaries of all officers of the Corporation
shall be fixed by the Board of Directors or by the Chief Executive Officer if
authorized by the Board.
INDEMNIFICATION
---------------
Section 4.01 Indemnification. The Corporation shall indemnify its
officers and directors for such expenses and liabilities, in such manner, under
such circumstances, and to such extent, as required or permitted by Minnesota
Statutes, Section 302A.521, as amended from time to time, or as required or
permitted by other provisions of law.
Section 4.02 Insurance. The Corporation may purchase and maintain
insurance on behalf of any person in such person's official capacity against any
liability asserted against and incurred by such person in or arising from that
capacity, whether or not the Corporation would otherwise be required to
indemnify the person against the liability.
SHARES
------
Section 5.01 Certificated and Uncertificated Shares. Subdivision 1. The
shares of the Corporation shall be either certificated shares or uncertificated
shares. Each holder of duly issued certificated shares is entitled to a
certificate of shares.
Subdivision 2. Each certificate of shares of the Corporation shall bear
the corporate seal, if any, and shall be signed by the Chief Executive Officer,
or the President or any Vice President, and the Chief Financial Officer, or the
Secretary or any Assistant Secretary, but when a certificate is signed by a
transfer agent or a registrar, the signature of any such officer and the
corporate seal upon such certificate may be facsimiles, engraved or printed. If
a person signs or has a facsimile signature placed upon a certificate while an
officer, transfer agent or registrar of the Corporation, the certificate may be
issued by the Corporation, even if the person has ceased to serve in that
capacity before the certificate is issued, with the same effect as if the person
had that capacity at the date of its issue.
Subdivision 3. A certificate representing shares issued by the Corporation
shall, if the Corporation is authorized to issue shares of more than one class
or series, set forth upon the face or back of the certificate, or shall state
that the Corporation will furnish to any shareholder upon request and without
charge, a full statement of the designations, preferences, limitations and
relative rights of the shares of each class or series authorized to be issued,
so far as they have been determined, and the authority of the Board to determine
the relative rights and preferences of subsequent classes or series.
-8-
<PAGE>
Subdivision 4. A resolution approved by the affirmative vote of a majority
of the directors present at a duly held meeting of the Board may provide that
some or all of any or all classes and series of the shares of the Corporation
will be uncertificated shares. Any such resolution shall not apply to shares
represented by a certificate until the certificate is surrendered to the
Corporation.
Section 5.02 Declaration of Dividends and Other Distributions. Subject
to the Articles of Incorporation of the Corporation, the Board of Directors
shall have the authority to declare dividends and other distributions upon the
shares of the Corporation to the extent permitted by law.
Section 5.03 Transfer of Shares. Shares of the Corporation may be
transferred only on the books of the Corporation by the holder thereof, in
person or by such person's attorney. In the case of certificated shares, shares
shall be transferred only upon surrender and cancellation of certificates for a
like number of shares. The Board of Directors, however, may appoint one or more
transfer agents and registrars to maintain the share records of the Corporation
and to effect transfers of shares.
Section 5.04 Record Date. The Board of Directors may fix a time, not
exceeding 60 days preceding the date fixed for the payment of any dividend or
other distribution, as a record date for the determination of the shareholders
entitled to receive payment of such dividend or other distribution, and in such
case only shareholders of record on the date so fixed shall be entitled to
receive payment of such dividend or other distribution, notwithstanding any
transfer of any shares on the books of the Corporation after any record date so
fixed.
MISCELLANEOUS
-------------
Section 6.01 Execution of Instruments. Subdivision 1. All deeds,
mortgages, bonds, checks, contracts and other instruments pertaining to the
business and affairs of the Corporation shall be signed on behalf of the
Corporation by the Chief Executive Officer, or the President, or any Vice
President, or by such other person or persons as may be designated from time to
time by the Board of Directors.
Subdivision 2. If a document must be executed by persons holding different
offices or functions and one person holds such offices or exercises such
functions, that person may execute the document in more than one capacity if the
document indicates each such capacity.
Section 6.02 Advances. The Corporation may, without a vote of the
directors, advance money to its directors, officers or employees to cover
expenses that can reasonably be anticipated to be incurred by them in the
performance of their duties and for which they would be entitled to
reimbursement in the absence of an advance.
-9-
<PAGE>
Section 6.03 Corporate Seal. The seal of the Corporation, if any, shall
be a circular embossed seal having inscribed thereon the name of the Corporation
and the following words:
"Corporate Seal Minnesota".
Section 6.04 Fiscal Year. The fiscal year of the Corporation shall be
determined by the Board of Directors.
Section 6.05 Amendments. The Board of Directors shall have the power to
adopt, amend or repeal the By-Laws of the Corporation, subject to the power of
the shareholders to change or repeal the same, provided, however, that the Board
shall not adopt, amend or repeal any By-Law fixing a quorum for meetings of
shareholders, prescribing procedures for removing directors or filling vacancies
in the Board, or fixing the number of directors or their classifications,
qualifications or terms of office, but may adopt or amend a By-Law that
increases the number of directors.
-10-
<PAGE>
Exhibit 4.2
WILSONS THE LEATHER EXPERTS INC.
WARRANT FOR THE PURCHASE OF SHARES OF
COMMON STOCK OF WILSONS THE LEATHER EXPERTS INC.
------------------------------------------------
NO. 1 WARRANT TO PURCHASE
1,500,000 SHARES
THIS WARRANT AND THE SHARES TO BE ISSUED UPON THE EXERCISE OF THIS WARRANT HAVE
NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND MAY NOT BE
OFFERED, SOLD, TRANSFERRED OR OTHERWISE DISPOSED OF UNLESS REGISTERED WITH THE
SECURITIES AND EXCHANGE COMMISSION OF THE UNITED STATES AND THE SECURITIES
REGULATORY AUTHORITIES OF APPLICABLE STATES OR UNLESS, IN THE WRITTEN OPINION OF
COUNSEL OF HOLDER REASONABLY ACCEPTABLE TO WILSONS THE LEATHER EXPERTS INC. (THE
"COMPANY") THAT IS DELIVERED TO THE COMPANY, AN EXEMPTION FROM SUCH REGISTRATION
IS AVAILABLE. THIS SECURITY IS ALSO SUBJECT TO CERTAIN REGISTRATION RIGHTS,
TRANSFER RESTRICTIONS AND OTHER PROVISIONS SET FORTH IN (1) THE REGISTRATION
RIGHTS AGREEMENT DATED AS OF MAY 25, 1996 BY AND AMONG MELVILLE CORPORATION
("MELVILLE"), THE COMPANY, THE MANAGERS LISTED ON THE SIGNATURE PAGES THERETO,
LEATHER INVESTORS LIMITED PARTNERSHIP I AND THE PARTNERS THEREOF LISTED ON THE
SIGNATURE PAGES THERETO, COPIES OF WHICH MAY BE OBTAINED FROM THE COMPANY, (2)
AS TO THE SHARES ISSUABLE UPON EXERCISE OF THIS WARRANT, THE SHAREHOLDERS
AGREEMENT DATED AS OF MAY 25, 1996 AMONG THE COMPANY AND THE SHAREHOLDERS OF THE
COMPANY, COPIES OF WHICH MAY BE OBTAINED FROM THE COMPANY, AND (3) THIS WARRANT.
<PAGE>
FOR VALUE RECEIVED, WILSONS THE LEATHER EXPERTS INC., a Minnesota
corporation (the "Company"), hereby certifies that Melville Corporation, its
successor or registered assigns (the "Holder"), is entitled, subject to the
provisions of this Warrant, to purchase from the Company, at the times specified
herein, 1,500,000 fully paid and non-assessable shares of Class A Common Stock
of the Company (as hereinafter defined), par value $.01 per share (such Class A
Common Stock together with all other classes of common stock of the Company, the
"Common Stock"), at a purchase price per share equal to the Exercise Price (as
hereinafter defined). The number of shares of Class A Common Stock to be
received upon the exercise of this Warrant and the price to be paid for a share
of Class A Common Stock are subject to adjustment from time to time as
hereinafter set forth.
(a) DEFINITIONS. (1) The following terms, as used herein, have the
following meanings:
"AFFILIATE" shall have the meaning given to such term in Rule 12b-2
promulgated under the Securities and Exchange Act of 1934, as amended.
"BOARD OF DIRECTORS" means the Board of Directors of the Company.
"BUSINESS DAY" means any day except a Saturday, Sunday or other day on
which commercial banks in the City of New York are authorized by law to close.
"CLASS A COMMON STOCK" means the Class A Common Stock, par value $.01
per share, of the Company having the rights, voting power, preferences and
restrictions designated in the articles of incorporation of the Company.
"DULY ENDORSED" means duly endorsed in blank by the Person or Persons
in whose name a stock certificate is registered or accompanied by a duly
executed stock assignment separate from the certificate with the signature(s)
thereon guaranteed by a commercial bank or trust company or a member of a
national securities exchange or of the National Association of Securities
Dealers, Inc.
"EXERCISE PRICE" means $.5406667 per Warrant Share, such Exercise
Price to be adjusted from time to time as provided herein.
"EXPIRATION DATE" means May 25, 2006 at 5:00 p.m. New York City time.
"MANAGEMENT WARRANT" means the warrant dated as of the date hereof,
issued by the Company to Melville relating to the purchase of 1,200,000 shares
of Class A Common Stock which number of shares may be reduced based on the
attainment of certain levels of performance by the Company.
-2-
<PAGE>
"PERSON" means an individual, partnership, corporation, trust, joint
stock company, association, joint venture, or any other entity or organization,
including a government or political subdivision or an agency or instrumentality
thereof.
"PRINCIPAL HOLDER" means the original Holder of this Warrant on the
date of issue, or if such original Holder so elects, any transferee of all or
any portion of this Warrant whom such original Holder shall have designated by
written notice to the Company as the successor Principal Holder; provided that
the original Holder may only designate a single Holder to be the successor
Principal Holder. Any successor Principal Holder designated pursuant to the
immediately preceding sentence shall also have the right upon any subsequent
transfer to designate a successor Principal Holder in the manner described
above.
"SALE AGREEMENT" means the Sale Agreement dated as of May 24, 1996
among the Company, the Holder and Wilsons Center, Inc.
"SHAREHOLDERS" means the shareholders listed on the signature pages to
the Shareholders Agreement.
"SHAREHOLDERS AGREEMENT" means the Shareholders Agreement dated as of
the date hereof among the Company and the Shareholders.
"WARRANT SHARES" means the shares of Class A Common Stock deliverable
upon exercise of this Warrant, as adjusted from time to time.
(2) Capitalized terms used but not defined herein shall have the
meanings assigned to such terms in the Sale Agreement.
(b) EXERCISE OF WARRANT.
(1) The Holder is entitled to exercise this Warrant in whole or in
part at any time, or from time to time, until the Expiration Date or, if such
day is not a Business Day, then on the next succeeding day that shall be a
Business Day. To exercise this Warrant, the Holder shall deliver to the Company
this Warrant Certificate, including the Warrant Exercise Subscription Form
forming a part hereof duly executed by the Holder, together with payment of the
applicable Exercise Price. At the close of business on the day of such delivery
and payment, the Holder shall be deemed to be the holder of record of the
Warrant Shares subject to such exercise, notwithstanding that the stock transfer
books of the Company shall then be closed or that certificates representing such
Warrant Shares shall not then be actually delivered to the Holder.
(2) The Exercise Price may be paid in cash, by certified check or
bank cashier's check of, or certified by, a bank reasonably acceptable to the
Company payable to the order of the Company or by any combination of such cash
or check or by wire transfer to
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an account of the Company designated by the Company. The Company shall pay any
and all documentary, stamp or similar issue or transfer taxes payable in respect
of the issue or delivery of the Warrant Shares.
(3) If the Holder exercises this Warrant in part, this Warrant
Certificate shall be surrendered by the Holder to the Company and a new Warrant
Certificate of the same tenor and for the unexercised number of Warrant Shares
shall be executed by the Company. The Company shall register the new Warrant
Certificate in the name of the Holder or in such name or names of its transferee
pursuant to paragraph (f) hereof as may be directed in writing by the Holder and
deliver the new Warrant Certificate to the Person or Persons entitled to receive
the same.
(4) Upon surrender of this Warrant Certificate in conformity with the
foregoing provisions, the Company shall transfer to the Holder of this Warrant
Certificate appropriate evidence of ownership of the shares of Common Stock or
other securities or property (including any money) to which the Holder is
entitled, registered or otherwise placed in the name or names of the Holder or
such transferee as may be directed in writing by the Holder, and shall deliver
such evidence of ownership and any other securities or property (including any
money) to the Person or Persons entitled to receive the same, together with an
amount in cash in lieu of any fraction of a share as provided in paragraph (e)
below. Holder agrees that upon receipt of such shares or other securities or
property (including any money), Holder shall enter into the Shareholders
Agreement.
(c) RESTRICTIVE LEGEND. Certificates representing shares of Common
Stock issued pursuant to this Warrant shall bear a legend substantially in the
form of the legend set forth in the Shareholders Agreement to the extent that
and for so long as such legend is required pursuant to the Shareholders
Agreement.
(d) RESERVATION OF SHARES. The Company hereby agrees that at all
times there shall be reserved for issuance and delivery upon exercise of this
Warrant such number of its authorized but unissued shares of Common Stock or
other securities of the Company from time to time issuable upon exercise of this
Warrant as will be sufficient to permit the exercise in full of this Warrant.
All such shares shall be duly authorized and, when issued upon such exercise and
upon payment of the Exercise Price therefor, shall be validly issued, fully paid
and non-assessable, free and clear of all liens, security interests, charges and
other encumbrances or restrictions on sale and free and clear of all preemptive
rights, except to the extent set forth in the Shareholders Agreement and
restrictions imposed by applicable securities laws.
(e) FRACTIONAL SHARES. No fractional shares or scrip representing
fractional shares shall be issued upon the exercise of this Warrant and in lieu
of delivery of any such fractional share upon any exercise hereof, the Company
shall pay to the Holder an amount in cash equal to such fraction multiplied by
the Current Market Price Per Common
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Share (as hereinafter defined) at the date of such exercise. For the purpose of
this Warrant on any determination date after the Company's initial public
offering, the Current Market Price Per Common Share shall, subject to the next
two succeeding sentences of this paragraph (e), be the average (weighted by
daily trading volume) of the Daily Prices (as defined below) per share of the
applicable class of Common Stock for the 20 consecutive trading days immediately
prior to such date. "Daily Price" means (1) if the shares of such class of
Common Stock then are listed and traded on the New York Stock Exchange, Inc.
("NYSE"), the closing price on such day as reported on the NYSE Composite
Transactions Tape; (2) if the shares of such class of Common Stock then are not
listed and traded on the NYSE, the closing price on such day as reported by the
principal national securities exchange on which the shares are listed and
traded; (3) if the shares of such class of Common Stock then are not listed and
traded on any such securities exchange, the last reported sale price on such day
on the National Market of the National Association of Securities Dealers, Inc.
Automated Quotation System ("NASDAQ"); or (4) if the shares of such class of
Common Stock then are not traded on the NASDAQ National Market, the average of
the highest reported bid and lowest reported asked price on such day as reported
by NASDAQ. At all times before the Company has made an initial public offering,
or if on any determination date the shares of such class of Common Stock are not
quoted by any such organization, the Current Market Price Per Common Share shall
be the fair market value of such shares on such determination date as determined
by the Board of Directors. If the Principal Holder shall object to any
determination by the Board of Directors of the Current Market Price Per Common
Share, the Current Market Price Per Common Share shall be the fair market value
per share of the applicable class of Common Stock as determined by an
independent appraiser retained by the Company and reasonably acceptable to the
Principal Holder, provided that the fees and expenses of such independent
appraiser shall be borne equally by the Company and the Holders. For purposes of
any computation under this paragraph (e), the number of shares of Common Stock
outstanding at any given time shall not include shares owned or held by or for
the account of the Company.
(f) EXCHANGE, TRANSFER OR ASSIGNMENT OF WARRANT.
(1) This Warrant Certificate and all rights hereunder are not
transferable by the registered holder hereof except to any Person who, prior to
such transfer, agrees in writing, in form and substance reasonably satisfactory
to the Company, to be bound by the terms of the Shareholders Agreement in
accordance with the provisions thereof. Each taker and holder of this Warrant
Certificate by taking or holding the same, consents and agrees that the
registered holder hereof may be treated by the Company and all other persons
dealing with this Warrant Certificate as the absolute owner hereof for any
purpose and as the person entitled to exercise the rights represented hereby.
(2) Subject to compliance with the legend to this Warrant
Certificate, the Holder of this Warrant shall be entitled, without obtaining the
consent of the Company, to assign and transfer this Warrant, at any time in
whole or from time to time in part, to any
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<PAGE>
Person or Persons. Subject to the preceding sentence, upon surrender of this
Warrant to the Company, together with the attached Warrant Assignment Form duly
executed, the Company shall, without charge (except that the Holder or assignee
shall pay any and all documentary, stamp or similar transfer taxes payable in
respect of the registration or transfer of all or part of this Warrant in the
name of, or to, assignee) execute and deliver a new Warrant in the name of the
assignee or assignees named in such instrument of assignment and, if the
Holder's entire interest is not being assigned, in the name of the Holder and
this Warrant shall promptly be canceled.
(g) LOSS OR DESTRUCTION OF WARRANT. Upon receipt by the Company of
evidence satisfactory to it (in the exercise of its reasonable discretion) of
the loss, theft, destruction or mutilation of this Warrant Certificate, and (in
the case of loss, theft or destruction) of reasonably satisfactory
indemnification and, if the Warrant has been registered under applicable
securities laws, such bond or other security as the Company reasonably deems
appropriate, and upon surrender and cancellation of this Warrant Certificate, if
mutilated, the Company shall execute and deliver a new Warrant Certificate of
like tenor and date.
(h) ANTI-DILUTION PROVISIONS.
(1) In case the Company shall at any time after the date hereof (i)
declare a dividend or make a distribution on Common Stock payable in Common
Stock, (ii) subdivide or split the outstanding Common Stock, (iii) combine or
reclassify the outstanding Common Stock into a smaller number of shares, or (iv)
issue any shares of its capital stock in a reclassification of Common Stock
(including any such reclassification in connection with a consolidation or
merger in which the Company is the continuing corporation other than a merger
described in paragraph (i) below), the Exercise Price in effect at the time of
the record date for such dividend or distribution or of the effective date of
such subdivision, split, combination, issuance or reclassification shall be
proportionately adjusted so that, giving effect to paragraph (h)(7), the
exercise of this Warrant after such time shall entitle the holder to receive,
for the same aggregate Exercise Price, the aggregate number of shares of Common
Stock or other securities of the Company (or shares of any security into which
such shares of Common Stock have been reclassified pursuant to clause (iii) or
(iv) above) which, if this Warrant had been exercised immediately prior to such
time, such holder would have owned upon such exercise and been entitled to
receive by virtue of such dividend, distribution, subdivision, split,
combination, issuance or reclassification. Such adjustment shall be made
successively whenever any event listed above shall occur. The Holder of this
Warrant acknowledges and agrees that under the terms of the articles of
incorporation of the Company, all Class A Common Stock may become Common Stock
without designation as to class, in which event, subject to this paragraph
(h)(1), this Warrant would be a warrant to purchase Common Stock without
designation as to class instead of Class A Common Stock.
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<PAGE>
(2) In case the Company shall issue or sell any Common Stock (other
than Common Stock issued (I) upon exercise of the Management Warrant, (II)
pursuant to the Company's stock option plan for employees of the Company or
pursuant to any other Common Stock related employee compensation plan of the
Company approved by the Company's Board of Directors, (III) upon conversion of
any class of Common Stock into any other class of Common Stock or into Common
Stock without designation as to class or (IV) upon exercise or conversion of any
security the issuance of which caused an adjustment under paragraphs (h)(3) or
(h)(4) hereof) without consideration or for a consideration per share less than
the Exercise Price, the Exercise Price to be in effect after such issuance or
sale shall be determined by dividing (A) an amount equal to the sum of (x) the
number of shares of Common Stock outstanding immediately prior to the time of
such issuance or sale multiplied by the Exercise Price immediately prior to such
issuance or sale and (y) the aggregate consideration, if any, to be received by
the Company upon such issuance or sale, by (B) the aggregate number of shares of
Common Stock outstanding immediately after such issuance or sale. In case any
portion of the consideration to be received by the Company shall be in a form
other than cash, the fair market value of such noncash consideration shall be
utilized in the foregoing computation. Such fair market value shall be
determined by the Board of Directors of the Company; provided that if the
Principal Holder shall object to any such determination, the Board of Directors
shall retain an independent appraiser reasonably satisfactory to the Principal
Holder to determine such fair market value. The Holder shall be notified
promptly of any consideration other than cash to be received by the Company and
furnished with a description of the consideration and the fair market value
thereof, as determined by the Board of Directors.
(3) In case the Company shall fix a record date for the issuance of
rights, options (other than options issued pursuant to a plan described in
clause II of paragraph (h)(2)) or warrants to the holders of its Common Stock or
other securities entitling such holders to subscribe for or purchase for a
period expiring within 60 days of such record date shares of Common Stock (or
securities convertible into shares of Common Stock) at a price per share of
Common Stock (or having a conversion price per share of Common Stock, if a
security convertible into shares of Common Stock) less than the Exercise Price
on such record date, the maximum number of shares of Common Stock issuable upon
exercise of such rights, options or warrants (or conversion of such convertible
securities) shall be deemed to have been issued and outstanding as of such
record date and the Exercise Price shall be adjusted pursuant to paragraph
(h)(2) hereof, as though such maximum number of shares of Common Stock had been
so issued for an aggregate consideration payable by the holders of such rights,
options, warrants or convertible securities prior to their receipt of such
shares of Common Stock. In case any portion of such consideration shall be in a
form other than cash, the fair market value of such noncash consideration shall
be determined as set forth in paragraph (h)(2) hereof. Such adjustment shall be
made successively whenever such record date is fixed; and in the event that such
rights, options or warrants are not so issued or expire unexercised, or in the
event of a change in the number of shares of Common Stock to which the holders
of such rights, options or warrants are entitled (other than pursuant to
adjustment
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<PAGE>
provisions therein comparable to those contained in this paragraph (h)), the
Exercise Price shall again be adjusted to be the Exercise Price which would then
be in effect if such record date had not been fixed, in the former event, or the
Exercise Price which would then be in effect if such holder had initially been
entitled to such changed number of shares of Common Stock, in the latter event.
(4) In case the Company shall issue rights, options (other than
options issued pursuant to a plan described in clause II of paragraph (h)(2)) or
warrants entitling the holders thereof to subscribe for or purchase Common Stock
(or securities convertible into shares of Common Stock) or shall issue
convertible securities, and the price per share of Common Stock payable pursuant
to such rights, options, warrants or convertible securities (including, in the
case of rights, options or warrants, the price at which they may be exercised)
is less than the Exercise Price, the maximum number of shares of Common Stock
issuable upon exercise of such rights, options or warrants or upon conversion of
such convertible securities shall be deemed to have been issued and outstanding
as of the date of such sale or issuance, and the Exercise Price shall be
adjusted pursuant to paragraph (h)(2) hereof as though such maximum number of
shares of Common Stock had been so issued for an aggregate consideration equal
to the aggregate consideration paid for such rights, options, warrants or
convertible securities and the aggregate additional consideration payable by the
holders of such rights, options, warrants or convertible securities prior to
their receipt of such shares of Common Stock. In case any portion of such
consideration shall be in a form other than cash, the fair market value of such
noncash consideration shall be determined as set forth in paragraph (h)(2)
hereof. Such adjustment shall be made successively whenever such rights,
options, warrants or convertible securities are issued; and in the event that
such rights, options or warrants expire unexercised, or in the event of a change
in the number of shares of Common Stock to which the holders of such rights,
options, warrants or convertible securities are entitled (other than pursuant to
adjustment provisions therein comparable to those contained in this paragraph
(h)), the Exercise Price shall again be adjusted to be the Exercise Price which
would then be in effect if such rights, options, warrants or convertible
securities had not been issued, in the former event, or the Exercise Price which
would then be in effect if such holders had initially been entitled to such
changed number of shares of Common Stock, in the latter event. No adjustment of
the Exercise Price shall be made pursuant to this paragraph (h)(4) to the extent
that the Exercise Price shall have been adjusted pursuant to paragraph (h)(3)
upon the setting of any record date relating to such rights, options, warrants
or convertible securities and such adjustment fully reflects the number of
shares of Common Stock to which the holders of such rights, options, warrants or
convertible securities are entitled and the price payable therefor.
(5) No adjustment in the Exercise Price shall be required unless such
adjustment would require an increase or decrease of at least one percent in such
price; provided that any adjustments which by reason of this paragraph (h)(5)
are not required to be made shall be carried forward and taken into account in
any subsequent adjustment. All calculations under this paragraph (h) shall be
made to the nearest one tenth of a cent or to the nearest hundredth of a share,
as the case may be.
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<PAGE>
(6) In the event that, at any time as a result of the provisions of
this paragraph (h), the holder of this Warrant upon subsequent exercise shall
become entitled to receive any shares of capital stock of the Company other than
Common Stock, the number of such other shares so receivable upon exercise of
this Warrant shall thereafter be subject to adjustment from time to time in a
manner and on terms as nearly equivalent as practicable to the provisions
contained herein.
(7) Upon each adjustment of the Exercise Price as a result of the
calculations made in paragraphs (h)(1), (2), (3) or (4) hereof, the number of
shares for which this Warrant is exercisable immediately prior to the making of
such adjustment shall thereafter evidence the right to purchase, at the adjusted
Exercise Price, that number of shares of Common Stock obtained by (i)
multiplying the number of shares covered by this Warrant immediately prior to
this adjustment of the number of shares by the Exercise Price in effect
immediately prior to such adjustment of the Exercise Price and (ii) dividing the
product so obtained by the Exercise Price in effect immediately after such
adjustment of the Exercise Price.
(i) CONSOLIDATION, MERGER, OR SALE OF ASSETS. In case of any
consolidation of the Company with, or merger of the Company into, any other
Person, any merger of another Person into the Company (other than a merger which
does not result in any reclassification, conversion, exchange or cancellation of
outstanding shares of Common Stock) or any sale or transfer of all or
substantially all of the assets of the Company or of the Person formed by such
consolidation or resulting from such merger or which acquires such assets, as
the case may be, this Warrant shall thereafter be exercisable for the kind and
amount of securities, cash and other property receivable upon such
consolidation, merger, sale or transfer by a holder of the number of shares of
Common Stock for which this Warrant may have been exercised immediately prior to
such consolidation, merger, sale or transfer (in lieu of Common Stock), assuming
(i) such holder of Common Stock is not a Person with which the Company
consolidated or into which the Company merged or which merged into the Company
or to which such sale or transfer was made, as the case may be ("constituent
Person"), or an Affiliate of a constituent Person and (ii) in the case of a
consolidation merger, sale or transfer which includes an election as to the
consideration to be received by the holders, such holder of Common Stock failed
to exercise its rights of election, as to the kind or amount of securities, cash
and other property receivable upon such consolidation, merger, sale or transfer
(provided that if the kind or amount of securities, cash and other property
receivable upon such consolidation, merger, sale or transfer is not the same for
each share of Common Stock held immediately prior to such consolidation, merger,
sale or transfer by other than a constituent Person or an Affiliate thereof and
in respect of which such rights of election shall not have been exercised ("non-
electing share"), then for the purpose of this paragraph (i) the kind and amount
of securities, cash and other property receivable upon such consolidation,
merger, sale or transfer by each non-electing share shall be deemed to be the
kind and amount so receivable per share by a plurality of the non-electing
shares). Adjustments for events subsequent to the effective date of such a
consolidation, merger and sale of assets shall be as
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<PAGE>
nearly equivalent as may be practicable to the adjustments provided for in this
Warrant. In any such event, effective provisions shall be made in the
certificate or articles of incorporation of the resulting or surviving
corporation, in any contract of sale, conveyance, lease or transfer, or
otherwise so that the provisions set forth herein for the protection of the
rights of the Holder shall thereafter continue to be applicable; and any such
resulting or surviving corporation shall expressly assume the obligation to
deliver, upon exercise, such shares of stock, other securities, cash and
property. The provisions of this paragraph (i) shall similarly apply to
successive consolidations, mergers, sales, leases or transfers.
(j) NOTICES. Any notice, demand or delivery authorized by this
Warrant Certificate shall be in writing and shall be given to the Holder or the
Company, as the case may be, at its address (or telecopier number) set forth
below, or such other address (or telecopier number) as shall have been furnished
to the party giving or making such notice, demand or delivery:
If to the Company: Wilsons The Leather Experts Inc.
c/o Wilsons Center Inc.
400 Highway 169
St. Louis Park, Minnesota 55426
Telecopier: (612) 541-3152
Attention: Joel Waller,
David Rogers
with copies to:
Faegre & Benson
2200 Norwest Center
90 South Seventh Street
Minneapolis, Minnesota 55402
Telecopier: (612) 336-3026
Attention: Philip S. Garon, Esq.
Maslon Edelman Borman & Brand
3300 Norwest Center
90 South Seventh Street
Minneapolis, Minnesota 55402
Telecopier: (612) 672-8397
Attention: Neil I. Sell, Esq.
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<PAGE>
If to the Holder: Melville Corporation
One Theall Road
Rye, New York 10580
Telecopier: (914) 925-4052
Attention: Chief Executive Officer,
Chief Financial Officer
and General Counsel
with a copy to:
Davis Polk & Wardwell
450 Lexington Avenue
New York, New York 10017
Telecopier: (212) 450-4800
Attention: Dennis S. Hersch, Esq.
Each such notice, demand or delivery shall be effective (i) if given by
telecopy, when such telecopy is transmitted to the telecopy number specified
herein and the intended recipient confirms the receipt of such telecopy or (ii)
if given by any other means, when received at the address specified herein.
(k) RIGHTS OF THE HOLDER. Prior to the exercise of this Warrant, the
Holder shall not, by virtue hereof, be entitled to any rights of a shareholder
of the Company, including, without limitation, the right to vote, to receive
dividends or other distributions, to exercise any preemptive right or to receive
any notice of meetings of shareholders or any notice of any proceedings of the
Company except as may be specifically provided for herein.
(l) GOVERNING LAW. THIS WARRANT CERTIFICATE AND ALL RIGHTS ARISING
HEREUNDER SHALL BE CONSTRUED AND DETERMINED IN ACCORDANCE WITH THE INTERNAL LAWS
OF THE STATE OF NEW YORK, AND THE PERFORMANCE THEREOF SHALL BE GOVERNED AND
ENFORCED IN ACCORDANCE WITH SUCH LAWS.
(m) AMENDMENTS; WAIVERS. Any provision of this Warrant Certificate
may be amended or waived if, and only if, such amendment or waiver is in writing
and signed, in the case of an amendment, by the Holder and the Company, or in
the case of a waiver, by the party against whom the waiver is to be effective.
No failure or delay by either party in exercising any right, power or privilege
hereunder shall operate as a waiver thereof nor shall any single or partial
exercise thereof preclude any other or further exercise thereof or the exercise
of any other right, power or privilege. The rights and remedies herein provided
shall be cumulative and not exclusive of any rights or remedies provided by law.
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IN WITNESS WHEREOF, the Company has duly caused this Warrant
Certificate to be signed by its duly authorized officer and to be dated as of
___________, 1996.
WILSONS THE LEATHER EXPERTS INC.
By
------------------------------
Name:
Title:
Acknowledged and Agreed:
MELVILLE CORPORATION
By
-------------------------
Name:
Title:
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WARRANT EXERCISE SUBSCRIPTION FORM
(To be executed only upon exercise of the Warrant)
To: Wilsons The Leather Experts Inc.
The undersigned irrevocably exercises the Warrant for the purchase of
___________ shares (the "Shares") of Common Stock, par value $.01 per share, of
Wilsons The Leather Experts Inc.(the "Company") at $_____ per Share (the
Exercise Price currently in effect pursuant to the Warrant) and herewith makes
payment of $___________ (such payment being made in cash, by certified check, by
bank cashier's check or by wire transfer payable to the order of the Company or
by any permitted combination of such cash or check), all on the terms and
conditions specified in the within Warrant Certificate, surrenders this Warrant
Certificate and all right, title and interest therein to the Company and directs
that the Shares deliverable upon the exercise of this Warrant be registered or
placed in the name and at the address specified below and delivered thereto.
Date: __________, ___.
Signature Guaranteed: --------------------------------
By: (Signature of Owner)
-----------------------------
--------------------------------
(Street Address)
-----------------------------
[Title]
--------------------------------
(City) (State) (Zip Code)
The signature to this document must correspond with the name as written
upon the face of the within Warrant in every particular, without alteration or
enlargement or any change whatever.
The signature to this document must be guaranteed by a commercial bank or
trust company in the United States or a member firm of the New York Stock
Exchange.
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Securities and/or check to be issued to:
Please insert social security or identifying number:
Name:
Street Address:
City, State and Zip Code:
Any unexercised portion of the Warrant evidenced by the
within Warrant Certificate to be issued to:
Please insert social security or identifying number:
Name:
Street Address:
City, State and Zip Code:
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<PAGE>
WARRANT ASSIGNMENT FORM
-----------------------
Dated ______________, ______
FOR VALUE RECEIVED,
---------------------------------------------------
hereby sells, assigns and transfers unto
----------------------------------------
(please type or print in block letters)
(the "Assignee"),
- --------------------------------------------------------------------------------
(insert address)
its right to purchase up to _______ shares of Common Stock represented by this
Warrant and does hereby irrevocably constitute and appoint
____________________________ Attorney, to transfer the same on the books of the
Company, with full power of substitution in the premises.
Signature Guaranteed: Signature
By: -------------------------
---------------------------
---------------------------
[Title]
The signature to this document must correspond with the name as written
upon the face of the within Warrant in every particular, without alteration or
enlargement or any change whatever.
The signature to this document must be guaranteed by a commercial bank or
trust company in the United States or a member firm of the New York Stock
Exchange.
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<PAGE>
Exhibit 4.3
WILSONS THE LEATHER EXPERTS INC.
WARRANT FOR THE PURCHASE OF SHARES OF
COMMON STOCK OF WILSONS THE LEATHER EXPERTS INC.
------------------------------------------------
NO. 2 WARRANT TO PURCHASE
1,200,000 SHARES
THIS WARRANT AND THE SHARES TO BE ISSUED UPON THE EXERCISE OF THIS WARRANT HAVE
NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND MAY NOT BE
OFFERED, SOLD, TRANSFERRED OR OTHERWISE DISPOSED OF UNLESS REGISTERED WITH THE
SECURITIES AND EXCHANGE COMMISSION OF THE UNITED STATES AND THE SECURITIES
REGULATORY AUTHORITIES OF APPLICABLE STATES OR UNLESS, IN THE WRITTEN OPINION OF
COUNSEL OF HOLDER REASONABLY ACCEPTABLE TO WILSONS THE LEATHER EXPERTS INC.
("THE COMPANY") THAT IS DELIVERED TO THE COMPANY, AN EXEMPTION FROM SUCH
REGISTRATION IS AVAILABLE. THIS SECURITY IS ALSO SUBJECT TO CERTAIN REGISTRATION
RIGHTS, TRANSFER RESTRICTIONS AND OTHER PROVISIONS SET FORTH IN (1) THE
REGISTRATION RIGHTS AGREEMENT DATED AS OF MAY 25, 1996 BY AND AMONG MELVILLE
CORPORATION ("MELVILLE"), THE COMPANY, THE MANAGERS LISTED ON THE SIGNATURE
PAGES THERETO, LEATHER INVESTORS LIMITED PARTNERSHIP I AND THE PARTNERS THEREOF
LISTED ON THE SIGNATURE PAGES THERETO, COPIES OF WHICH MAY BE OBTAINED FROM THE
COMPANY, (2) AS TO THE SHARES ISSUABLE UPON EXERCISE OF THIS WARRANT, THE
SHAREHOLDERS AGREEMENT DATED AS OF MAY 25, 1996 AMONG THE COMPANY AND THE
SHAREHOLDERS OF THE COMPANY, COPIES OF WHICH MAY BE OBTAINED FROM THE COMPANY,
AND (3) THIS WARRANT.
<PAGE>
FOR VALUE RECEIVED, WILSONS THE LEATHER EXPERTS INC., a Minnesota
corporation (the "Company"), hereby certifies that Melville Corporation, its
successor or registered assigns (the "Holder"), is entitled, subject to the
provisions of this Warrant, to purchase from the Company, at the times specified
herein, 1,200,000 fully paid and non-assessable shares of Class A Common Stock
of the Company (as hereinafter defined), par value $.01 per share (such Class
A Common Stock together with all other classes of common stock of the Company,
the "Common Stock") as such number of shares of Class A Common Stock may be
reduced pursuant to paragraph (b)(5), at a purchase price per share equal to the
Exercise Price (as hereinafter defined). The number of shares of Class A Common
Stock to be received upon the exercise of this Warrant and the price to be paid
for a share of Class A Common Stock are subject to adjustment from time to time
as hereinafter set forth.
(a) DEFINITIONS. (1) The following terms, as used herein, have the
following meanings:
"AFFILIATE" shall have the meaning given to such term in Rule 12b-2
promulgated under the Securities and Exchange Act of 1934, as amended.
"BOARD OF DIRECTORS" means the Board of Directors of the Company.
"BUSINESS DAY" means any day except a Saturday, Sunday or other day on
which commercial banks in the City of New York are authorized by law to close.
"CLASS A COMMON STOCK" means the Class A Common Stock, par value $.01
per share, of the Company having the rights, voting power, preferences and
restrictions designated in the articles of incorporation of the Company.
"DULY ENDORSED" means duly endorsed in blank by the Person or Persons
in whose name a stock certificate is registered or accompanied by a duly
executed stock assignment separate from the certificate with the signature(s)
thereon guaranteed by a commercial bank or trust company or a member of a
national securities exchange or of the National Association of Securities
Dealers, Inc.
"EXERCISE PRICE" means $.5408333 per Warrant Share, such Exercise
Price to be adjusted from time to time as provided herein.
"EXPIRATION DATE" means the second anniversary of the Initial Exercise
Date at 5:00 p.m. New York City time.
"INITIAL EXERCISE DATE" shall be April 30, 2001.
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<PAGE>
"MANAGER STOCK PURCHASE AGREEMENT" means the stock purchase agreement
dated as of May 25, 1996 among the Company and the Managers.
"MANAGERS" means the managers listed on the signature pages of the
Manager Stock Purchase Agreement.
"PERSON" means an individual, partnership, corporation, trust, joint
stock company, association, joint venture, or any other entity or organization,
including a government or political subdivision or an agency or instrumentality
thereof.
"PREFERRED STOCK" means the Preferred Stock, par value $.01 per share,
of the Company.
"PRINCIPAL HOLDER" means the original Holder of this Warrant on the
date of issue, or if such original Holder so elects, any transferee of all or
any portion of this Warrant whom such original holder shall have designated by
written notice to the Company as the successor Principal Holder; provided that
the original Holder may only designate a single Holder to be the successor
Principal Holder. Any successor Principal Holder designated pursuant to the
immediately preceding sentence shall also have the right upon any subsequent
transfer to designate a successor Principal Holder in the manner described
above.
"RESTRICTED COMMON STOCK" means the Common Stock of the Company
subject to the restrictions set forth in the restricted stock agreement (the
"Restricted Stock Agreement") issued to the Managers pursuant to the Manager
Stock Purchase Agreement.
"SALE AGREEMENT" means the Sale Agreement dated as of May 24, 1996
among the Company, the Holder and Wilsons Center, Inc.
"SHAREHOLDERS" means the shareholders listed on the signature pages to
the Shareholders Agreement.
"SHAREHOLDERS AGREEMENT" means the Shareholders Agreement dated as of
the date hereof among the Company and the Shareholders.
"WARRANT SHARES" means the shares of Class A Common Stock deliverable
upon exercise of this Warrant, as adjusted from time to time.
(2) Capitalized terms used but not defined herein shall have the
meanings assigned to such terms in the Sale Agreement.
-3-
<PAGE>
(b) EXERCISE OF WARRANT.
(1) Subject to the provisions of subparagraph (5) below, the Holder is
entitled to exercise this Warrant in whole or in part at any time, or from time
to time, from the Initial Exercise Date until the Expiration Date or, if such
day is not a Business Day, then on the next succeeding day that shall be a
Business Day. To exercise this Warrant, the Holder shall deliver to the Company
this Warrant Certificate, including the Warrant Exercise Subscription Form
forming a part hereof duly executed by the Holder, together with payment of the
applicable Exercise Price. At the close of business on the day of such delivery
and payment, the Holder shall be deemed to be the holder of record of the
Warrant Shares subject to such exercise, notwithstanding that the stock transfer
books of the Company shall then be closed or that certificates representing such
Warrant Shares shall not then be actually delivered to the Holder.
(2) The Exercise Price may be paid in cash, by certified check or bank
cashier's check of, or certified by, a bank reasonably acceptable to the Company
payable to the order of the Company or by any combination of such cash or check
or by wire transfer to an account of the Company designated by the Company. The
Company shall pay any and all documentary, stamp or similar issue or transfer
taxes payable in respect of the issue or delivery of the Warrant Shares.
(3) If the Holder exercises this Warrant in part, this Warrant Certificate
shall be surrendered by the Holder to the Company and a new Warrant Certificate
of the same tenor and for the unexercised number of Warrant Shares shall be
executed by the Company; provided that if the number of Shares for which this
Warrant is exercisable has been reduced pursuant to subparagraph (5) below, the
new Warrant Certificate shall be for the unexercised number of Warrant Shares
minus the number of shares of any such reduction. The Company shall register the
new Warrant Certificate in the name of the Holder or in such name or names of
its transferee pursuant to paragraph (f) hereof as may be directed in writing by
the Holder and deliver the new Warrant Certificate to the Person or Persons
entitled to receive the same.
(4) Upon surrender of this Warrant Certificate in conformity with the
foregoing provisions, the Company shall transfer to the Holder of this Warrant
Certificate appropriate evidence of ownership of the shares of Common Stock or
other securities or property (including any money) to which the Holder is
entitled, registered or otherwise placed in the name or names of the Holder or
such transferee as may be directed in writing by the Holder, and shall deliver
such evidence of ownership and any other securities or property (including any
money) to the Person or Persons entitled to receive the same, together with an
amount in cash in lieu of any fraction of a share as provided in paragraph (e)
below. Holder agrees that upon receipt of such shares or other securities or
property (including any money), Holder shall enter into the Shareholders
Agreement
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<PAGE>
(5) If any shares of Restricted Common Stock vest pursuant to the
terms of such Restricted Common Stock as set forth in the Restricted Stock
Agreement, then the number of shares of Class A Common Stock for which this
Warrant is then exercisable shall be reduced by an amount equal to such number
of shares of Restricted Common Stock which have vested. No later than 15 days
after any Restricted Common Stock vests pursuant to the terms thereof (or with
respect to vesting as a result of the Company's achievement of financial
objectives, within 15 days after the Company's receipt of the financial
statements verifying the satisfaction of such financial objectives), the Company
shall provide written notice to the Holders of the number of shares of
Restricted Common Stock which have vested and the corresponding reduction of the
number of shares for which this Warrant is exercisable, provided that the
failure to provide such notice within such 15 day period shall not affect the
reduction of the number of shares for which the Warrant is then exercisable as
provided in the first sentence of this subparagraph (5).
(c) RESTRICTIVE LEGEND. Certificates representing shares of Common
Stock issued pursuant to this Warrant shall bear a legend substantially in the
form of the legend set forth in the Shareholders Agreement to the extent that
and for so long as such legend is required pursuant to the Shareholders
Agreement.
(d) RESERVATION OF SHARES. The Company hereby agrees that at all
times there shall be reserved for issuance and delivery upon exercise of this
Warrant such number of its authorized but unissued shares of Common Stock or
other securities of the Company from time to time issuable upon exercise of this
Warrant as will be sufficient to permit the exercise in full of this Warrant;
provided that if the number of shares for which this Warrant is exercisable is
reduced pursuant to paragraph (b)(5), the Company will only be required to
reserve such number of shares of Common Stock issuable upon exercise of this
Warrant as will be sufficient to permit the exercise in full of this Warrant for
such reduced number of Shares. All such shares shall be duly authorized and,
when issued upon such Exercise and upon payment of the Exercise Price therefor,
shall be validly issued, fully paid and non-assessable, free and clear of all
liens, security interests, charges and other encumbrances or restrictions on
sale and free and clear of all preemptive rights, except to the extent set forth
in the Shareholders Agreement and restrictions imposed by applicable securities
laws.
(e) FRACTIONAL SHARES. No fractional shares or scrip representing
fractional shares shall be issued upon the exercise of this Warrant and in lieu
of delivery of any such fractional share upon any exercise hereof, the Company
shall pay to the Holder an amount in cash equal to such fraction multiplied by
the Current Market Price Per Common Share (as hereinafter defined) at the date
of such exercise. For the purpose of this Warrant on any determination date
after the Company's initial public offering, the Current Market Price Per Common
Share shall, subject to the next two succeeding sentences of this paragraph (e),
be the average (weighted by daily trading volume) of the Daily Prices (as
defined below) per share of the applicable class of Common Stock for the 20
consecutive trading days
-5-
<PAGE>
immediately prior to such date. "Daily Price" means (1) if the shares of such
class of Common Stock then are listed and traded on the New York Stock Exchange,
Inc. ("NYSE"), the closing price on such day as reported on the NYSE Composite
Transactions Tape; (2) if the shares of such class of Common Stock then are not
listed and traded on the NYSE, the closing price on such day as reported by the
principal national securities exchange on which the shares are listed and
traded; (3) if the shares of such class of Common Stock then are not listed and
traded on any such securities exchange, the last reported sale price on such day
on the National Market of the National Association of Securities Dealers, Inc.
Automated Quotation System ("NASDAQ"); or (4) if the shares of such class of
Common Stock then are not traded on the NASDAQ National Market, the average of
the highest reported bid and lowest reported asked price on such day as reported
by NASDAQ. At all times before the Company has made an initial public offering,
or if on any determination date the shares of such class of Common Stock are not
quoted by any such organization, the Current Market Price Per Common Share shall
be the fair market value of such shares on such determination date as determined
by the Board of Directors. If the Principal Holder shall object to any
determination by the Board of Directors of the Current Market Price Per Common
Share, the Current Market Price Per Common Share shall be the fair market value
per share of the applicable class of Common Stock as determined by an
independent appraiser retained by the Company and reasonably acceptable to the
Principal Holder, provided that the fees and expenses of such independent
appraisers shall be borne equally by the Company and the Holders. For purposes
of any computation under this paragraph (e), the number of shares of Common
Stock outstanding at any given time shall not include shares owned or held by or
for the account of the Company.
(f) EXCHANGE, TRANSFER OR ASSIGNMENT OF WARRANT.
(1) This Warrant Certificate and all rights hereunder are not
transferable by the registered holder hereof except to any Person who, prior to
such transfer, agrees in writing, in form and substance reasonably satisfactory
to the Company, to be bound by the terms of the Shareholders Agreement in
accordance with the provisions thereof. Each taker and holder of this Warrant
Certificate by taking or holding the same, consents and agrees that the
registered holder hereof may be treated by the Company and all other persons
dealing with this Warrant Certificate as the absolute owner hereof for any
purpose and as the person entitled to exercise the rights represented hereby.
(2) Subject to compliance with the legend to this Warrant
Certificate, the Holder of this Warrant shall be entitled, without obtaining the
consent of the Company, to assign and transfer this Warrant, at any time in
whole or from time to time in part, to any Person or Persons. Subject to the
preceding sentence, upon surrender of this Warrant to the Company, together with
the attached Warrant Assignment Form duly executed, the Company shall, without
charge (except that the Holder or assignee shall pay any and all documentary,
stamp or similar transfer taxes payable in respect of the registration or
transfer of all or part of this Warrant in the name of, or to, assignee) execute
and deliver a new Warrant in the name of
-6-
<PAGE>
the assignee or assignees named in such instrument of assignment and, if the
Holder's entire interest is not being assigned, in the name of the Holder and
this Warrant shall promptly be canceled.
(g) LOSS OR DESTRUCTION OF WARRANT. Upon receipt by the Company of
evidence satisfactory to it (in the exercise of its reasonable discretion) of
the loss, theft, destruction or mutilation of this Warrant Certificate, and (in
the case of loss, theft or destruction) of reasonably satisfactory
indemnification and, if the Warrant has been registered under applicable
securities laws, such bond or other security as the Company reasonably deems
appropriate, and upon surrender and cancellation of this Warrant Certificate,
if mutilated, the Company shall execute and deliver a new Warrant Certificate of
like tenor and date.
(h) ANTI-DILUTION PROVISIONS.
(1) In case the Company shall at any time after the date hereof (i)
declare a dividend or make a distribution on Common Stock payable in Common
Stock, (ii) subdivide or split the outstanding Common Stock, (iii) combine or
reclassify the outstanding Common Stock into a smaller number of shares, or (iv)
issue any shares of its capital stock in a reclassification of Common Stock
(including any such reclassification in connection with a consolidation or
merger in which the Company is the continuing corporation other than a merger
described in paragraph (i) below), the Exercise Price in effect at the time of
the record date for such dividend or distribution or of the effective date of
such subdivision, split, combination, issuance or reclassification shall be
proportionately adjusted so that, giving effect to paragraph (h)(7), the
exercise of this Warrant after such time shall entitle the holder to receive,
for the same aggregate Exercise Price, the aggregate number of shares of Common
Stock or other securities of the Company (or shares of any security into which
such shares of Common Stock have been reclassified pursuant to clause (iii) or
(iv) above) which, if this Warrant had been exercised immediately prior to such
time, such holder would have owned upon such exercise and been entitled to
receive by virtue of such dividend, distribution, subdivision, split,
combination, issuance or reclassification. Such adjustment shall be made
successively whenever any event listed above shall occur. The Holder of this
Warrant acknowledges and agrees that under the terms of the articles of
incorporation of the Company, all Class A Common Stock may become Common Stock
without designation as to class, in which event, subject to this paragraph
(h)(1), this Warrant would be a warrant to purchase Common Stock without
designation as to class instead of Class A Common Stock.
(2) In case the Company shall issue or sell any Common Stock (other
than Common Stock issued (I) upon exercise of this Warrant, (II) pursuant to the
Company's stock option plan for employees of the Company or pursuant to any
other Common Stock related employee compensation plan of the Company approved by
the Company's Board of Directors, (III) upon conversion of any class of Common
Stock into any other class of Common Stock or into Common Stock without
designation as to class, or (IV) upon exercise
-7-
<PAGE>
or conversion of any security the issuance of which caused an adjustment under
paragraphs (h)(3) or (h)(4) hereof) without consideration or for a consideration
per share less than the Exercise Price, the Exercise Price to be in effect after
such issuance or sale shall be determined by dividing (A) an amount equal to the
sum of (x) the number of shares of Common Stock outstanding immediately prior to
the time of such issuance or sale multiplied by the Exercise Price immediately
prior to such issuance or sale and (y) the aggregate consideration, if any, to
be received by the Company upon such issuance or sale, by (B) the aggregate
number of shares of Common Stock outstanding immediately after such issuance or
sale. In case any portion of the consideration to be received by the Company
shall be in a form other than cash, the fair market value of such noncash
consideration shall be utilized in the foregoing computation. Such fair market
value shall be determined by the Board of Directors of the Company; provided
that if the Principal Holder shall object to any such determination, the Board
of Directors shall retain an independent appraiser reasonably satisfactory to
the Principal Holder to determine such fair market value. The Holder shall be
notified promptly of any consideration other than cash to be received by the
Company and furnished with a description of the consideration and the fair
market value thereof, as determined by the Board of Directors.
(3) In case the Company shall fix a record date for the issuance of
rights, options (other than options issued pursuant to a plan described in
clause II of paragraph (h)(2)) or warrants to the holders of its Common Stock or
other securities entitling such holders to subscribe for or purchase for a
period expiring within 60 days of such record date shares of Common Stock (or
securities convertible into shares of Common Stock) at a price per share of
Common Stock (or having a conversion price per share of Common Stock, if a
security convertible into shares of Common Stock) less than the Exercise Price
on such record date, the maximum number of shares of Common Stock issuable upon
exercise of such rights, options or warrants (or conversion of such convertible
securities) shall be deemed to have been issued and outstanding as of such
record date and the Exercise Price shall be adjusted pursuant to paragraph
(h)(2) hereof, as though such maximum number of shares of Common Stock had been
so issued for an aggregate consideration payable by the holders of such rights,
options, warrants or convertible securities prior to their receipt of such
shares of Common Stock. In case any portion of such consideration shall be in a
form other than cash, the fair market value of such noncash consideration shall
be determined as set forth in paragraph (h)(2) hereof. Such adjustment shall be
made successively whenever such record date is fixed; and in the event that such
rights, options or warrants are not so issued or expire unexercised, or in the
event of a change in the number of shares of Common Stock to which the holders
of such rights, options or warrants are entitled (other than pursuant to
adjustment provisions therein comparable to those contained in this paragraph
(h)), the Exercise Price shall again be adjusted to be the Exercise Price which
would then be in effect if such record date had not been fixed, in the former
event, or the Exercise Price which would then be in effect if such holder had
initially been entitled to such changed number of shares of Common Stock, in the
latter event.
-8-
<PAGE>
(4) In case the Company shall issue rights, options (other than
options issued pursuant to a plan described in clause II of paragraph (h)(2)) or
warrants entitling the holders thereof to subscribe for or purchase Common Stock
(or securities convertible into shares of Common Stock) or shall issue
convertible securities, and the price per share of Common Stock payable pursuant
to such rights, options, warrants or convertible securities (including, in the
case of rights, options or warrants, the price at which they may be exercised)
is less than the Exercise Price, the maximum number of shares of Common Stock
issuable upon exercise of such rights, options or warrants or upon conversion of
such convertible securities shall be deemed to have been issued and outstanding
as of the date of such sale or issuance, and the Exercise Price shall be
adjusted pursuant to paragraph (h)(2) hereof as though such maximum number of
shares of Common Stock had been so issued for an aggregate consideration equal
to the aggregate consideration paid for such rights, options, warrants or
convertible securities and the aggregate additional consideration payable by the
holders of such rights, options, warrants or convertible securities prior to
their receipt of such shares of Common Stock. In case any portion of such
consideration shall be in a form other than cash, the fair market value of such
noncash consideration shall be determined as set forth in paragraph (h)(2)
hereof. Such adjustment shall be made successively whenever such rights,
options, warrants or convertible securities are issued; and in the event that
such rights, options or warrants expire unexercised, or in the event of a change
in the number of shares of Common Stock to which the holders of such rights,
options, warrants or convertible securities are entitled (other than pursuant to
adjustment provisions therein comparable to those contained in this paragraph
(h)), the Exercise Price shall again be adjusted to be the Exercise Price which
would then be in effect if such rights, options, warrants or convertible
securities had not been issued, in the former event, or the Exercise Price which
would then be in effect if such holders had initially been entitled to such
changed number of shares of Common Stock, in the latter event. No adjustment of
the Exercise Price shall be made pursuant to this paragraph (h)(4) to the extent
that the Exercise Price shall have been adjusted pursuant to paragraph (h)(3)
upon the setting of any record date relating to such rights, options, warrants
or convertible securities and such adjustment fully reflects the number of
shares of Common Stock to which the holders of such rights, options, warrants or
convertible securities are entitled and the price payable therefor.
(5) No adjustment in the Exercise Price shall be required unless such
adjustment would require an increase or decrease of at least one percent in such
price; provided that any adjustments which by reason of this paragraph (h)(5)
are not required to be made shall be carried forward and taken into account in
any subsequent adjustment. All calculations under this paragraph (h) shall be
made to the nearest one tenth of a cent or to the nearest hundredth of a share,
as the case may be.
(6) In the event that, at any time as a result of the provisions of
this paragraph (h), the holder of this Warrant upon subsequent exercise shall
become entitled to receive any shares of capital stock of the Company other than
Common Stock, the number of such other shares so receivable upon exercise of
this Warrant shall thereafter be subject to adjustment
-9-
<PAGE>
from time to time in a manner and on terms as nearly equivalent as practicable
to the provisions contained herein.
(7) Upon each adjustment of the Exercise Price as a result of the
calculations made in paragraphs (h)(1), (2), (3) or (4) hereof, the number of
shares for which this Warrant is exercisable immediately prior to the making of
such adjustment shall thereafter evidence the right to purchase, at the adjusted
Exercise Price, that number of shares of Common Stock obtained by (i)
multiplying the number of shares covered by this Warrant immediately prior to
this adjustment of the number of shares by the Exercise Price in effect
immediately prior to such adjustment of the Exercise Price and (ii) dividing the
product so obtained by the Exercise Price in effect immediately after such
adjustment of the Exercise Price.
(i) CONSOLIDATION, MERGER, OR SALE OF ASSETS. In case of any
consolidation of the Company with, or merger of the Company into, any other
Person, any merger of another Person into the Company (other than a merger which
does not result in any reclassification, conversion, exchange or cancellation of
outstanding shares of Common Stock) or any sale or transfer of all or
substantially all of the assets of the Company or of the Person formed by such
consolidation or resulting from such merger or which acquires such assets, as
the case may be, this Warrant shall thereafter be exercisable for the kind and
amount of securities, cash and other property receivable upon such
consolidation, merger, sale or transfer by a holder of the number of shares of
Common stock for which this Warrant may have been exercised immediately prior to
such consolidation, merger, sale or transfer (in lieu of Common Stock), assuming
(i) such holder of Common stock is not a Person with which the Company
consolidated or into which the Company merged or which merged into the Company
or to which such sale or transfer was made, as the case may be ("constituent
Person"), or an Affiliate of a constituent Person and (ii) in the case of a
consolidation merger, sale or transfer which includes an election as to the
consideration to be received by the holders, such holder of Common Stock failed
to exercise its rights of election, as to the kind or amount of securities, cash
and other property receivable upon such consolidation, merger, sale or transfer
(provided that if the kind or amount of securities, cash and other property
receivable upon such consolidation, merger, sale or transfer is not the same for
each share of Common Stock held immediately prior to such consolidation, merger,
sale or transfer by other than a constituent Person or an Affiliate thereof and
in respect of which such rights of election shall not have been exercised ("non-
electing share"), then for the purpose of this paragraph (i) the kind and amount
of securities, cash and other property receivable upon such consolidation,
merger, sale or transfer by each non-electing share shall be deemed to be the
kind and amount so receivable per share by a plurality of the non-electing
shares). Adjustments for events subsequent to the effective date of such a
consolidation, merger and sale of assets shall be as nearly equivalent as may be
practicable to the adjustments provided for in this Warrant. In any such event,
effective provisions shall be made in the certificate or articles of
incorporation of the resulting or surviving corporation, in any contract of
sale, conveyance, lease or transfer, or otherwise so that the provisions set
forth herein for the protection of the rights of the Holder shall thereafter
continue to be applicable; and any such resulting or surviving
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<PAGE>
corporation shall expressly assume the obligation to deliver, upon exercise,
such shares of stock, other securities, cash and property. The provisions of
this paragraph (i) shall similarly apply to successive consolidations, mergers,
sales, leases or transfers.
(j) NOTICES. Any notice, demand or delivery authorized by this
Warrant Certificate shall be in writing and shall be given to the Holder or the
Company, as the case may be, at its address (or telecopier number) set forth
below, or such other address (or telecopier number) as shall have been furnished
to the party giving or making such notice, demand or delivery:
If to the Company: Wilsons The Leather Experts Inc.
c/o Wilsons Center Inc.
400 Highway 169
St. Louis Park, Minnesota 55426
Telecopier: (612) 541-3152
Attention: Joel Waller,
David Rogers
with copies to:
Faegre & Benson
2200 Norwest Center
90 South Seventh Street
Minneapolis, Minnesota 55402
Telecopier: (612) 336-3026
Attention: Philip S. Garon, Esq.
Maslon Edelman Borman & Brand
3300 Norwest Center
90 South Seventh Street
Minneapolis, Minnesota 55402
Telecopier: (612) 672-8397
Attention: Neil I. Sell, Esq.
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<PAGE>
If to the Holder: Melville Corporation
One Theall Road
Rye, New York 10580
Telecopier: (914) 925-4052
Attention: Chief Executive Officer,
Chief Financial Officer
and General Counsel
with a copy to:
Davis Polk & Wardwell
450 Lexington Avenue
New York, New York 10017
Telecopier: (212) 450-4800
Attention: Dennis S. Hersch, Esq.
Each such notice, demand or delivery shall be effective (i) if given by
telecopy, when such telecopy is transmitted to the telecopy number specified
herein and the intended recipient confirms the receipt of such telecopy or (ii)
if given by any other means, when received at the address specified herein.
(k) RIGHTS OF THE HOLDER. Prior to the exercise of this Warrant, the
Holder shall not, by virtue hereof, be entitled to any rights of a shareholder
of the Company, including, without limitation, the right to vote, to receive
dividends or other distributions, to exercise any preemptive right or to receive
any notice of meetings of shareholders or any notice of any proceedings of the
Company except as may be specifically provided for herein.
(l) GOVERNING LAW. THIS WARRANT CERTIFICATE AND ALL RIGHTS ARISING
HEREUNDER SHALL BE CONSTRUED AND DETERMINED IN ACCORDANCE WITH THE INTERNAL LAWS
OF THE STATE OF NEW YORK, AND THE PERFORMANCE THEREOF SHALL BE GOVERNED AND
ENFORCED IN ACCORDANCE WITH SUCH LAWS.
(m) AMENDMENTS; WAIVERS. Any provision of this Warrant Certificate
may be amended or waived if, and only if, such amendment or waiver is in writing
and signed, in the case of an amendment, by the Holder and the Company, or in
the case of a waiver, by the party against whom the waiver is to be effective.
No failure or delay by either party in exercising any right, power or privilege
hereunder shall operate as a waiver thereof nor shall any single or partial
exercise thereof preclude any other or further exercise thereof or the exercise
of any other right, power or privilege. The rights and remedies herein provided
shall be cumulative and not exclusive of any rights or remedies provided by law.
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<PAGE>
IN WITNESS WHEREOF, the Company has duly caused this Warrant
Certificate to be signed by its duly authorized officer and to be dated as of
___________, 1996.
WILSONS THE LEATHER EXPERTS INC.
By
-------------------------------
Name:
Title:
Acknowledged and Agreed:
MELVILLE CORPORATION
By
-------------------------------
Name:
Title:
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<PAGE>
WARRANT EXERCISE SUBSCRIPTION FORM
(To be executed only upon exercise of the Warrant)
To: Wilsons The Leather Experts Inc.
The undersigned irrevocably exercises the Warrant for the
purchase of ___________ shares (the "Shares") of Common Stock, par value $.01
per share, of Wilsons The Leather Experts Inc. (the "Company") at $_____ per
Share (the Exercise Price currently in effect pursuant to the Warrant) and
herewith makes payment of $___________ (such payment being made in cash, by
certified check, by bank cashier's check or by wire transfer payable to the
order of the Company or by any permitted combination of such cash or check), all
on the terms and conditions specified in the within Warrant Certificate,
surrenders this Warrant Certificate and all right, title and interest therein to
the Company and directs that the Shares deliverable upon the exercise of this
Warrant be registered or placed in the name and at the address specified below
and delivered thereto.
Date:
------------, ----
Signature Guaranteed:
--------------------------------
By: (Signature of Owner)
--------------------------
--------------------------------
-------------------------- (Street Address)
[Title]
--------------------------------
(City) (State) (Zip Code)
The signature to this document must correspond with the name as
written upon the face of the within Warrant in every particular, without
alteration or enlargement or any change whatever.
The signature to this document must be guaranteed by a commercial bank
or trust company in the United States or a member firm of the New York Stock
Exchange.
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<PAGE>
Securities and/or check to be issued to:
Please insert social security or identifying number:
Name:
Street Address:
City, State and Zip Code:
Any unexercised portion of the Warrant evidenced by the
within Warrant Certificate to be issued to:
Please insert social security or identifying number:
Name:
Street Address:
City, State and Zip Code:
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<PAGE>
WARRANT ASSIGNMENT FORM
-----------------------
Dated
_____________, _________
FOR VALUE RECEIVED,
___________________________________________________
hereby sells, assigns and transfers unto
_______________________________________
(please type or print in block letters)
(the "Assignee"),
________________________________________________________________________________
(insert address)
its right to purchase up to _______ shares of Common Stock represented by this
Warrant, as such number of shares may be reduced pursuant to paragraph (b)(5) of
this Warrant, and does hereby irrevocably constitute and appoint
_____________________ Attorney, to transfer the same on the books of the
Company, with full power of substitution in the premises.
Signature Guaranteed: Signature
--------------------------
By:
-------------------------
-------------------------
[Title]
The signature to this document must correspond with the name as written
upon the face of the within Warrant in every particular, without alteration or
enlargement or any change whatever.
The signature to this document must be guaranteed by a commercial bank or
trust company in the United States or a member firm of the New York Stock
Exchange.
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<PAGE>
EXHIBIT 4.5
================================================================================
SHAREHOLDER AGREEMENT
AMONG
LEATHER INVESTORS LIMITED PARTNERSHIP I,
LEATHER INVESTORS LIMITED PARTNERSHIP II,
THE OTHER INVESTORS NAMED ON THE SIGNATURE PAGES HERETO,
JOEL WALLER,
DAVID ROGERS,
THE MANAGERS NAMED ON THE SIGNATURE PAGES HERETO
AND
WILSONS THE LEATHER EXPERTS INC.
DATED AS OF MAY 25, 1996
================================================================================
<PAGE>
SHAREHOLDER AGREEMENT
THIS AGREEMENT dated as of May 25, 1996 by and among Wilsons The
Leather Experts Inc., a Minnesota corporation (the "Company"), Leather Investors
Limited Partnership I, a Minnesota limited partnership (the "First Limited
Partnership"), Leather Investors Limited Partnership II, a Minnesota limited
partnership (the "Second Limited Partnership and, together with the First
Limited Partnership, collectively, the "Limited Partnerships" and individually,
a "Limited Partnership"), the other Investors (as hereinafter defined), Waller
and Rogers (as hereinafter defined) and the Managers (as hereinafter defined):
RECITALS
As of the date of this Agreement, the Shareholders (as hereinafter
defined) are the owners and holders of (i) all of the shares of outstanding
capital stock of the Company, consisting of 4,800,000 shares of Class A Common
Stock, par value $.01 per share (the "Class A Common Stock"), 3,250,000 shares
of Class B Common Stock, par value $.01 per share (the "Class B Common Stock"),
450,000 shares of Class C Common Stock, par value $.01 per share (the "Class C
Common Stock" and, together with the Class A Common Stock, the Class B Common
Stock and the common stock of the Company undesignated as to class, herein
collectively called the "Common Stock"), and 7,405 shares of Series A Preferred
Stock, par value $.01 per share (the "Preferred Stock"), and (ii) all of the
outstanding general and limited partnership interests in the Limited
Partnerships. The outstanding shares of Common Stock and Preferred Stock of the
Company, together with all other shares of Common Stock and Preferred Stock of
the Company at any time hereafter issued (whether upon exercise of options or
otherwise), are hereinafter referred to as the "Shares". The outstanding general
and limited partnership interests in the Limited Partnerships, together with all
other general and limited partnership interests in the Limited Partnerships at
any time hereafter issued, are hereinafter referred to as the "Partnership
Interests".
The parties hereto believe it to be in the best interests of the
Company and the Shareholders to set forth certain of their rights and
obligations with respect to the Shares and the Partnership Interests, and desire
to subject the Shares and the Partnership Interests owned by the Shareholders to
the terms of this Agreement.
NOW, THEREFORE, in consideration of the foregoing recitals and the
mutual covenants and conditions contained herein, the parties do hereby agree as
follows:
1. CERTAIN DEFINITIONS.
As used in this Agreement, the following defined terms have the
meanings indicated below.
"Affiliate" means, with respect to any Person, any other Person
directly or indirectly controlling, controlled by, or under common control with
such Person.
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"Bankruptcy" of a Shareholder means such Shareholder having an order
for relief or an order appointing a trustee, receiver or similar officer entered
in any bankruptcy, insolvency, reorganization, dissolution, receivership or
similar proceeding in which the Shareholder is the debtor. Each Shareholder
shall promptly give notice of any such order to the Company, including a
complete copy of such order.
"Board" or "Board of Directors" means the board of directors of the
Company.
"Business Day" means any day, other than a day which is a Saturday,
Sunday, or legal holiday in the City of Minneapolis or the City of New York or a
day on which banking institutions are authorized by law or other governmental
actions to close.
"Cause" means, with respect to any Employee, (i) the commission by
such Employee of any act of embezzlement against the Company or any of its
subsidiaries, (ii) the conviction of such Employee for, or entry by an Employee
of a guilty plea to, any felony which has a material adverse effect upon the
business, operating results, financial condition or employee, supplier or
customer relations generally of the Company and its Subsidiaries, taken as a
whole, or which precludes such Employee from performing his duties under his
Employment Agreement in the case of Waller or Rogers, or his or her duties to
the Company and its Subsidiaries as determined by the Board in the case of any
Manager, for 90 days during any 12-month period, (iii) the conviction of such
Employee for any crime involving dishonesty with respect to the Company (A)
intended by such Employee to result in personal enrichment of such Employee at
the expense of the Company or its Subsidiaries or (B) which has a material
adverse effect upon the business, operating results, financial condition or
employee, supplier or customer relations generally of the Company and its
Subsidiaries, taken as a whole, (iv) the absence by such Employee from
employment with whichever of the Company or its Subsidiaries is then employing
such Employee for a period of more than 90 days during any 12-month period
without the approval of the Board other than for vacations, illness, injury or
disability, (v) willful misconduct by such Employee in breach of the terms of
his Employment Agreement in the case of Waller or Rogers, or his or her duties
to the Company and its Subsidiaries as determined by the Board in the case of
any Manager, which misconduct has not been cured within 20 days following
notification thereof to such Employee (or if such misconduct is cured within 20
days after such notice of misconduct is received, but the same misconduct occurs
again at any time thereafter). For purposes hereof, no act or omission of an
Employee shall be deemed "willful" unless done, or omitted, by him or her in bad
faith without the belief his or her action or omission was in the best interests
of the Company or a Subsidiary thereof.
A "Control Transaction" shall be deemed to have occurred if:
(i) a majority of the directors of the Company shall be persons other
than Persons:
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(A) who are named as directors in the Company's articles of
incorporation or who are nominated by, or for whose election
proxies shall have been solicited by, the Board of
Directors, or
(B) who are then serving as directors appointed by the Board of
Directors to fill vacancies on the Board of Directors caused
by death or resignation (but not by removal) or to fill
newly-created directorships, or
(ii) more than 33 1/3% of the voting power of the outstanding voting
stock of the Company is acquired or beneficially owned (as
defined in Rule 13d-3 under the 1934 Act or any successor rule
thereto) by any individual, entity or group (within the meaning
of Section 13(d)(3) or 14(d)(2) of the 1934 Act), or any general
partnership interests in the First Limited Partnership become
held by any Person that, as of the date hereof, does not have a
general partnership interest in the First Limited Partnership;
provided, however, that the following acquisitions and beneficial
ownership shall not constitute a Control Transaction pursuant to
this clause (ii):
(A) any acquisition or beneficial ownership by the Company or a
Subsidiary of the Company, or
(B) any acquisition or beneficial ownership by any employee
benefit plan (or related trust) sponsored or maintained by
the Company or one or more of its Subsidiaries, or
(C) any acquisition or beneficial ownership of voting stock of
the Company or general partnership interests in the First
Limited Partnership by Waller or Rogers or any Person that,
as of the date of this Agreement, is a general partner in
the First Limited Partnership, or
(D) any acquisition or beneficial ownership by a parent
corporation or its wholly-owned subsidiaries, as long as
they shall remain wholly-owned subsidiaries, of 100% of the
outstanding voting stock of the Company as a result of a
merger or statutory share exchange which complies with
clause (iii)(A)(2) hereof or the exception in clause
(iii)(B) hereof in all respects; or
(iii) the shareholders of the Company approve a definitive agreement or
plan to:
(A) merge or consolidate the Company with or into another
corporation (other than (1) a merger or consolidation with a
Subsidiary of the Company or (2) a merger in which:
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(aa) the Company is the surviving corporation, and
(bb) no outstanding voting stock of the Company (other than fractional
shares) held by shareholders immediately prior to the merger is
converted into cash, securities or other property (except (I)
voting stock of a parent corporation owning directly, or
indirectly through wholly-owned subsidiaries, both beneficially
and of record 100% of the voting stock of the Company immediately
after the merger or (II) cash upon the exercise by holders of
voting stock of the Company of statutory dissenters' rights), and
(cc) the Persons who were thebeneficial owners, respectively, of the
outstanding Common Stock and outstanding voting stock of the
Company immediately prior to such merger beneficially own,
directly or indirectly, immediately after the merger, 66 2/3% or
more of, respectively, the then outstanding common stock and the
voting power of the then outstanding voting stock of the
surviving corporation or its parent corporation, and
(dd) if voting stock of the parent corporation is exchanged for voting
stock of the Company in the merger, all holders of any class or
series of voting stock of the Company immediately prior to the
merger have the right to receive substantially the same per share
consideration in exchange for their voting stock of the Company
as all other holders of such class or series), or
(B) exchange, pursuant to a statutory exchange of shares of voting stock
of the Company held by shareholders of the Company immediately prior
to the exchange, shares of one or more classes or series of voting
stock of the Company for cash, securities or other property, except
for (1) voting stock of a parent corporation of the Company owning
directly, or indirectly through wholly-owned subsidiaries, both
beneficially and of record 100% of the voting stock of the Company
immediately after the statutory share exchange if (aa) the Persons who
were the beneficial owners, respectively, of the outstanding Common
Stock and outstanding voting stock of the Company immediately prior to
such statutory share exchange own, directly or indirectly, immediately
after the statutory share exchange 66 2/3% or more of, respectively,
the then outstanding common stock and the voting power of the then
outstanding voting stock of such parent corporation, and (bb) all
holders of any class or series of voting stock of the Company
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immediately prior to the statutory share exchange have the
right to receive substantially the same per share
consideration in exchange for their voting stock of the
Company as all other holders of such class or series, or (2)
cash with respect to fractional shares of voting stock of
the Company or payable as a result of the exercise by
holders of voting stock of the Company of statutory
dissenters' rights, or
(C) sell or otherwise dispose of all or substantially all of the
assets of the Company (in one transaction or a series of
transactions), or
(D) liquidate or dissolve the Company.
"Disability" of an Employee means any physical or mental
incapacitation whereby such Employee is therefore unable for a period of 12
consecutive months or for an aggregate of 12 months in any 24 consecutive month
period to perform his or her duties to the Company and its Subsidiaries.
"Disposition" (including the verb "Dispose") means any sale, transfer,
assignment, exchange or other disposition (whether by gift, upon liquidation of
a corporate Shareholder or otherwise), or pledge or other encumbrance, by a
Shareholder, of all or any part of the Shares or Partnership Interests, as the
case my be, owned by such Shareholder other than (i) a Transfer by Legal
Process, (ii) a sale of Partnership Interests to either or both of Lyle Berman
("Berman") or Morris Goldfarb ("Goldfarb"), (iii) a sale in a Public Offering of
Shares of Common Stock that, at the time of such sale, are considered to be
Unrestricted Stock, or (iv) in the case of Waller, Rogers or the Investors, or
Permitted Transferees of Waller, Rogers or the Investors, a sale in an Open
Market Transaction of Shares of Common Stock that, at the time of such sale, are
considered to be Unrestricted Stock.
"Employee" means each of Waller, Rogers and the Managers, as long as
such Person shall own any Shares or Partnership Interests.
"Employment Agreement" means the Employment Agreement of even date
herewith between the Company and Waller or the Company and Rogers, as the case
may be, as the same may be amended from time to time in accordance with the
terms thereof.
"Event" means the death, Disability, Retirement or Termination of or
by Waller or Rogers (other than a Termination by Waller or Rogers without Good
Reason on or before the fifth anniversary of the date of this Agreement, or a
Termination of Waller or Rogers with Cause).
"Fair Market Value" means, with respect to any Shares of Common Stock,
the fair market value of such Shares as determined pursuant to Article 5.
"Good Reason", with respect to Waller or Rogers, has the meaning
ascribed thereto in such Employee's Employment Agreement.
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"Investors" means each of the Limited Partnerships, Berman, Goldfarb,
Neil I. Sell, Ercu Ucan and Irving Misel, as long as such Person shall own any
Shares or Partnership Interests, and any other Shareholder (including without
limitation Melville, in the event it becomes a party to this Agreement) other
than the Employees and the Permitted Transferees of the Employees.
"Lien" means, with respect to any property or asset, any mortgage,
lien, pledge, charge, security interest, encumbrance or other similar claim of
any kind in respect of such property or asset.
"Management Warrant" means the Warrant of even date herewith to
purchase 1,200,000 shares of Class A Common Stock (subject to adjustment
depending on the number of Shares of Restricted Stock which vest under the
Restricted Stock Agreement) issued by the Company to Melville pursuant to the
Sale Agreement, together with any warrant or warrants issued in substitution or
exchange therefor.
"Managers" means each of the individuals identified as managers on
Schedule A hereto, as long as such Person shall own any Shares or Partnership
Interests, and any other Shareholder (other than Waller or Rogers) who, at the
time he or she becomes a party to this Agreement, is an employee of the Company
or any of its Subsidiaries.
"Melville" means Melville Corporation, a New York corporation.
"1933 Act" means the Securities Act of 1933, as amended, and the rules
and regulations promulgated thereunder.
"1934 Act" means the Securities Exchange Act of 1934, as amended, and
the rules and regulations promulgated thereunder.
"Open Market Transaction" means a sale of Shares of Common Stock in an
open market transaction at such time as there shall have been a completed Public
Offering and shall be a bona fide public market for the Common Stock, such open
market transaction being pursuant to a registration statement filed under the
1933 Act or pursuant to Rule 144 (or any successor rule) under the 1933 Act.
"Original Cost" means (i) in the case of any Shares of Common Stock or
Partnership Interests held by a Seller, the per share price originally paid for
such security by such Seller or, in the event such Seller acquired such Shares
or Partnership Interests in a transfer other than for value (including for this
purpose any Transfer by Legal Process), by such Seller's transferor
(appropriately adjusted to reflect stock splits, reverse stock splits, stock
dividends, conversions and other recapitalizations), and (ii) in the case of any
Shares of Preferred Stock held by a Seller, $1,000 per share (appropriately
adjusted to reflect stock splits, reverse stock splits, stock dividends,
conversions and other recapitalizations), plus any unpaid dividends on such
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security, determined pursuant to the Articles of Incorporation of the Company,
accrued through the date of purchase of such security under this Agreement.
"Permitted Transferee" means (i) in the case of any Shareholder (other
than an Employee or any other natural person or a Limited Partnership), an
Affiliate of such Shareholder, (ii) in the case of any Investor who is a natural
person, the spouse of such Investor (but only if such Investor shall at all
times prior to such Investor's death retain exclusive voting and consensual
rights (including without limitation rights to consent to any amendment or
termination of this Agreement or any other agreement that the Investor is a
party to in the Investor's capacity as a shareholder of the Company) with
respect to all Shares at any time held by such spouse), and (iii) in the case of
any Shareholder who is a natural person (including without limitation any
Employee), any trust solely for the benefit of one or more of such Shareholder
and his or her Family Members (as hereinafter defined). "Family Members" of any
Shareholder means the spouse of such Shareholder, the parents and lineal
descendants of such Shareholder or his or her spouse, and spouses of parents or
lineal descendants of such Shareholder or his or her spouse.
"Person" means an individual, corporation, partnership, association,
trust or other entity or organization, including a government or political
subdivision or an agency or instrumentality thereof.
"Public Offering" means an underwritten public offering of Common
Stock of the Company pursuant to an effective registration statement or other
offering document in compliance with applicable Securities Laws; provided,
however, that a Public Offering shall not include (i) a public offering of the
Warrant, or (ii) an offering pursuant to a registration statement on Form S-4 or
Form S-8 under the 1933 Act or any successor forms thereto.
"Repurchase Event" means the death, Disability, Retirement or
Termination of or by a Manager, or the Termination by Waller or Rogers without
Good Reason on or before the fifth anniversary of the date of this Agreement, or
the Termination of Waller or Rogers with Cause.
"Restricted Stock" means the 1,200,000 Shares of Class B Common Stock
purchased by the Employees under the Manager Stock Purchase Agreement dated as
of the date hereof among the Company and the Employees and designated therein or
in subscription agreements delivered pursuant thereto as "Restricted Common
Stock" (together with any Shares of Common Stock issued in exchange for or in
respect of such Shares pursuant to any stock split, reverse stock split, stock
dividend, conversion or other recapitalization), other than any such Shares that
have vested pursuant to the terms of the Restricted Stock Agreement of even date
herewith among the Company and the Employees (the "Restricted Stock Agreement").
If the relevant time for determination of the Shares of Common Stock considered
to be Restricted Stock occurs after the close of business on a Measuring Date
(as defined in the Restricted Stock Agreement) but prior to notification by the
Board of the Employees of the number of Shares vested with respect to such
Measuring Date, the Shares that, upon receipt of such notice, would be deemed
pursuant to the terms of the Restricted Stock Agreement to have vested as of the
close of business on such Measuring Date shall not be considered to be
Restricted Stock.
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"Retirement" of an Employee means the retirement at age 65 or older of
such Employee from his or her employment with the Company and the Subsidiaries.
"Sale Agreement" means the Sale Agreement dated as of May 24, 1996
among the Company, Wilsons Center Inc. and Melville.
"SEC" means the Securities and Exchange Commission.
"Securities Laws" means the 1933 Act and state blue sky and securities
laws.
"Seller" means (i) a Restricted Stock Seller, a Without Cause
Restricted Stock Seller and a For Cause Restricted Stock Seller (as each such
term is defined in Section 3.1), (ii) a Repurchase Seller (as such term is
defined in Section 3.2), (iii) a Waller or Rogers Seller (as such term is
defined in Section 3.3), (iv) a Section 4.1 Seller (as such term is defined in
Section 4.1) and (v) a Section 4.2 Seller (as such term is defined in Section
4.2).
"Shareholder(s)" means each Person (other than the Company) who shall
be a party to this Agreement (including without limitation each such Person
holding a Partnership Interest), whether in connection with the execution and
delivery hereof as of the date hereof, pursuant to Section 9.2 or otherwise in
accordance herewith, so long as such Person shall own any Shares or Partnership
Interests.
"Subsidiary" means any entity of which securities or other ownership
interests having ordinary voting power to elect a majority of the board of
directors or other Persons performing similar functions are at the time directly
or indirectly owned by the Company.
"Termination" means, with respect to any Employee, the termination of
such Employee's employment with the Company or a Subsidiary. Whenever the phrase
"Termination of" an Employee is used in this Agreement, it shall mean an
involuntary Termination by the Company or a Subsidiary. Whenever the phrase
"Termination by" an Employee is used in this Agreement, it shall mean a
voluntary Termination by such Employee. Neither the transfer of employment
between any combination of the Company and its Subsidiaries nor a leave of
absence approved by the Board shall be deemed to be a Termination for purposes
of this Agreement.
"Third Party" means a prospective purchaser of Shares or Partnership
Interests in a bona fide arm's-length transaction from a Shareholder where such
purchaser is not a Permitted Transferee of such Shareholder or any other Person
to whom such Shareholder is permitted under Section 2.3 to so transfer such
securities without compliance with Article 4.
"Transfer by Legal Process" means any transfer of any Shares or
Partnership Interests of a Shareholder pursuant to such Shareholder's Bankruptcy
or pursuant to a levy of execution, foreclosure of pledge, garnishment,
attachment, divorce or separation decree or other legal process (other than a
transfer of Shares or Partnership Interests upon the death or
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<PAGE>
adjudication of incompetency of a Shareholder to the legal representative or
beneficiaries of such Shareholder or his or her estate, as the case may be).
"Unrestricted Stock" means any Shares of Common Stock other than
Shares of Restricted Stock.
"Waller and Rogers" means (i) Joel Waller ("Waller") and David Rogers
("Rogers") together, or (ii) Rogers alone, in the case of the death, Disability,
Retirement or Termination of Waller, or (iii) Waller alone, in the case of the
death, Disability, Retirement or Termination of Rogers.
"Warrant" means the Warrant of even date herewith to purchase
1,500,000 shares of Class A Common Stock issued by the Company to Melville
pursuant to the Sale Agreement, together with any warrant or warrants issued in
substitution or exchange therefor.
2. RESTRICTIONS ON TRANSFER AND ISSUANCE; LEGENDS; PERMITTED TRANSFEREES.
2.1 General.
(a) Except as otherwise provided in this Agreement, no Shareholder
shall, directly or indirectly, Dispose of any Shares or Partnership Interests.
Notwithstanding any other provision in this Agreement to the contrary, except as
provided in Sections 2.3 and 3.1, no Employee shall, directly or indirectly,
Dispose of any Shares of Common Stock that, at the time of such Disposition, are
considered to be Restricted Stock. Any attempt to Dispose of any Shares or
Partnership Interests not in compliance with this Agreement shall be null and
void and none of the Company, the Limited Partnerships or any transfer agent
shall give any effect in the Company's or the Limited Partnerships' records to
such attempted transfer.
(b) Neither of the Limited Partnerships shall offer or sell or
otherwise issue or grant any general or limited partnership interests in such
Limited Partnership which are not outstanding as of the date of this Agreement
without the approval of at least 80% of all of the directors of the Company then
serving on the Board.
2.2 Legend on Securities.
(a) Each Share and Partnership Interest that is held by any
Shareholder shall bear a legend in substantially the following form:
"THIS SECURITY HAS NOT BEEN REGISTERED UNDER THE UNITED STATES
SECURITIES ACT OF 1933, AS AMENDED, AND MAY NOT BE SOLD, OFFERED,
TRANSFERRED OR OTHERWISE DISPOSED OF UNLESS REGISTERED WITH THE
SECURITIES AND EXCHANGE COMMISSION OF THE UNITED STATES AND THE
SECURITIES REGULATORY AUTHORITIES OF APPLICABLE
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STATES OR UNLESS IN THE WRITTEN OPINION OF COUNSEL TO THE HOLDER
REASONABLY ACCEPTABLE TO THE ISSUER THAT IS DELIVERED TO THE ISSUER AN
EXEMPTION FROM SUCH REGISTRATION IS AVAILABLE. THIS SECURITY IS ALSO
SUBJECT TO AND HAS THE BENEFIT OF A SHAREHOLDER AGREEMENT DATED AS OF
MAY 25, 1996, AS THE SAME MAY BE AMENDED FROM TIME TO TIME IN
ACCORDANCE WITH THE TERMS THEREOF, A COPY OF WHICH IS ON FILE AT THE
PRINCIPAL EXECUTIVE OFFICE OF THE ISSUER."
(b) If any Shares or Partnership Interests cease to be subject to the
restrictions set forth in this Agreement, the Company or the appropriate Limited
Partnership, as the case may be, shall, upon the written request of the holder
thereof, issue to such holder in exchange for such holder's existing certificate
a new certificate evidencing such securities without any legend of the nature of
the second sentence of the legend in Section 2.2(a) endorsed thereon.
2.3 Permitted Transferees. Notwithstanding anything in this
Agreement to the contrary, but subject to the next sentence of this Section 2.3,
(a) any Shareholder may at any time transfer, in compliance with all applicable
Securities Laws, any or all of his, her or its Shares or Partnership Interests
(other than any general Partnership Interest), as the case may be, to one or
more of his, her or its Permitted Transferees, (b) Waller and/or Rogers may at
any time prior to his death, Disability, Retirement or Termination transfer, in
compliance with all applicable Securities Laws, up to an aggregate of 1,000,000
Shares of Common Stock to any Person who at the time of such transfer is an
employee of the Company or any Subsidiary thereof, and (c) each of the Limited
Partnerships may upon its liquidation at any time following completion of a
Public Offering transfer, in compliance with all applicable Securities Laws, all
of its Shares to the holders of its Partnership Interests pro rata in accordance
with the terms of its limited partnership agreement, in each case without the
consent of the Company, either Limited Partnership or any other Shareholder or
group of Shareholders and without compliance with Section 2.1 or Article 4;
provided, however, in any such case, that the Company or the appropriate Limited
Partnership, as the case may be, may request such transferee to provide an
opinion of legal counsel reasonably acceptable to the Company or such Limited
Partnership, as the case may be, to the effect that such transfer is in
compliance with such Securities Laws. Any Person who acquires Shares or
Partnership Interests, as the case may be, pursuant hereto shall comply with the
provisions of Section 9.2.
3. EMPLOYEE STOCK REPURCHASE.
3.1 Restricted Stock Repurchase Event.
(a) Upon the occurrence of a Termination of a Manager without Cause
(a "Without Cause Restricted Stock Event"), (i) Waller and Rogers shall have an
option (subject to Section (c) below) to purchase all or any part of the Shares
of Common Stock held by such Manager and his or her Permitted Transferees (the
"Without Cause Restricted Stock Seller") that, immediately after the occurrence
of such Without Cause Restricted Stock Event, are considered
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to be Restricted Stock at a purchase price equal to the Original Cost of such
Shares; (ii) the Company, to the extent not purchased by Waller or Rogers, shall
have an obligation (subject to Section (c) and Section 3.4 below) to purchase
all of the remaining unpurchased Shares of Common Stock held by such Without
Cause Restricted Stock Seller that, immediately after the occurrence of such
Without Cause Restricted Stock Event, are considered to be Restricted Stock at
the same purchase price as offered to Waller and Rogers; and (iii) the other
Shareholders, to the extent not purchased by Waller, Rogers or the Company,
shall have an option (subject to Section (c) below) to purchase all or any part
of the remaining unpurchased Shares of Common Stock held by such Without Cause
Restricted Stock Seller that, immediately after the occurrence of such Without
Cause Restricted Stock Event, are considered to be Restricted Stock at the same
purchase price as offered to Waller and Rogers.
(b) Upon the occurrence of a Termination by Waller or Rogers without
Good Reason or a Termination by a Manager or a Termination of an Employee with
Cause (each a "For Cause Restricted Stock Event" and, together with a Without
Cause Restricted Stock Event, a "Restricted Stock Event"), (i) Waller and Rogers
shall have an option (subject to Section (c) below) to purchase all or any part
of the Shares of Common Stock held by such Employee and his or her Permitted
Transferees (a "For Cause Restricted Stock Seller" and, together with a Without
Cause Restricted Stock Seller, a "Restricted Stock Seller") that, immediately
after the occurrence of such For Cause Restricted Stock Event, are considered to
be Restricted Stock at the lesser of the Original Cost of such Shares or the
Fair Market Value of such Shares on the date of such For Cause Restricted Stock
Event; (ii) the Company, to the extent not purchased by Waller or Rogers, shall
have an option (subject to Section (c) below) to purchase all or any part of the
remaining unpurchased Shares of Common Stock held by such For Cause Restricted
Stock Seller that, immediately after the occurrence of such For Cause Restricted
Stock Event, are considered to be Restricted Stock at the same purchase price as
offered to Waller and Rogers; and (iii) the other Shareholders, to the extent
not purchased by Waller, Rogers or the Company, shall have an option (subject to
Section (c) below) to purchase all or any part of the remaining unpurchased
Shares of Common Stock held by such For Cause Restricted Stock Seller that,
immediately after the occurrence of such For Cause Restricted Stock Event, are
considered to be Restricted Stock at the same purchase price as offered to
Waller and Rogers.
(c) Upon the occurrence of a Restricted Stock Event (or, if later,
upon the determination of both (i) the number of Shares of Common Stock held by
the Restricted Stock Seller that, immediately after the occurrence of such
Restricted Stock Event, are considered to be Restricted Stock and (ii) the Fair
Market Value of such Shares of Common Stock, if required), the Restricted Stock
Seller shall give a written notice (the "Restricted Stock Notice") to Waller and
Rogers, the Company and the other Shareholders stating (i) that a Restricted
Stock Event has occurred and the date of such event, (ii) the number of Shares
of Common Stock held by the Restricted Stock Seller that, immediately after the
occurrence of such Restricted Stock Event, are considered to be Restricted Stock
and (iii) the Original Cost per share (and the Fair Market Value per share, if
required) of such Shares. The receipt of a Restricted Stock Notice by Waller and
Rogers, the Company and the other Shareholders shall constitute an offer (the
"Restricted Stock Offer") to sell such Shares of Common Stock pursuant to
Section (a) or (b) above. Such offer shall be irrevocable until the expiration
of the last option period with respect thereto. During the
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first 30-day period after receipt of the Restricted Stock Notice by all parties
entitled thereto, Waller and Rogers shall have the exclusive right to accept the
Restricted Stock Offer by giving written notice to the Restricted Stock Seller,
prior to the expiration of such 30-day period, of the number of Shares of Common
Stock subject thereto which Waller and Rogers shall purchase. During the ten-day
period after completion of the Waller and Rogers 30-day period, to the extent
that Waller and Rogers do not accept the Restricted Stock Offer as to all of the
Shares of Common Stock subject thereto, the Company shall have the obligation
(subject to Section 3.4 below) or the exclusive right, as the case may be, to
accept such offer to acquire the remaining Shares of Common Stock subject
thereto by giving written notice to the Restricted Stock Seller, prior to the
expiration of such ten-day period, of the number of such Shares of Common Stock
which the Company shall purchase. During the ten-day period after completion of
the Company's ten-day period, to the extent that the Company does not accept the
Restricted Stock Offer as to all of the remaining Shares of Common Stock subject
thereto, the other Shareholders shall have the right to accept such offer to
acquire the remaining Shares of Restricted Stock subject thereto by giving
written notice to the Restricted Stock Seller, prior to the expiration of such
ten-day period, of the number of such Shares of Common Stock which such
Shareholders shall purchase. If any Shares of Common Stock subject to the
Restricted Stock Offer are not purchased by Waller, Rogers, the Company or the
other Shareholders, the Restricted Stock Seller may retain such remaining Shares
of Common Stock, subject to the terms of this Agreement (except for Sections 3.1
and 3.2, which shall no longer apply to such Shares) and the terms of the
Restricted Stock Agreement.
(d) Waller, Rogers, the Company and/or the other Shareholders, as the
case may be, shall purchase all Shares of Common Stock with respect to which the
Restricted Stock Offer has been accepted as set forth in Section 8.1. A
Restricted Stock Offer Notice shall be deemed to constitute a representation and
warranty by the Restricted Stock Seller that (i) such Seller has good title to
such Shares of Common Stock free of any Liens and (ii) has full power and
authority to make such offer and consummate such sale.
(e) Notwithstanding anything stated herein to the contrary, (i) no
Shareholder or the Company may exercise any option otherwise available to it
under this Section 3.1 unless it purchases the same percentage of Shares of
Common Stock held by the Restricted Stock Seller with respect to which a
purchase option is then available to such Shareholder or the Company under
Section 3.2, and (ii) any Forfeited Restricted Shares (as such term is defined
in the Restricted Stock Agreement) shall be purchased pursuant to paragraph 4 of
the Restricted Stock Agreement (and shall not be subject to any purchase option
or obligation under this Section 3.1).
3.2 Unrestricted Stock Repurchase Event.
(a) Upon the occurrence of a Repurchase Event, (i) Waller and Rogers
shall have an option (subject to Section (b) below) to purchase all or any part
of the Shares of Common Stock held by the Employee to whom such Repurchase Event
has occurred (or the legal representative or beneficiaries of such Employee or
his or her estate, as the case may be) and his or her Permitted Transferees (the
"Repurchase Seller") that, immediately after the occurrence of such Repurchase
Event, are considered to be Unrestricted Stock at a purchase price equal to the
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Fair Market Value of such Shares on the date of such Repurchase Event; (ii) the
Company, to the extent not purchased by Waller or Rogers, shall have an
obligation (subject to Section (b) and Sections 3.4 and 12.10 below) to purchase
all of the remaining unpurchased Shares of Common Stock held by such Repurchase
Seller that, immediately after the occurrence of such Repurchase Event, are
considered to be Unrestricted Stock at the same purchase price as offered to
Waller and Rogers; and (iii) the other Shareholders, to the extent not purchased
by Waller, Rogers or the Company, shall have an option (subject to Section (b)
below) to purchase all or any part of the remaining unpurchased Shares of Common
Stock held by such Repurchase Seller that, immediately after the occurrence of
such Repurchase Event, are considered to be Unrestricted Stock at the same
purchase price as offered to Waller and Rogers; provided, however, that if the
Repurchase Event occurs as a result of the Termination by a Manager on or prior
to the fifth anniversary of the date hereof, or a Termination by Waller or
Rogers without Good Reason on or prior to the fifth anniversary of the date
hereof, or a Termination of an Employee with Cause, the purchase price of such
Shares of Common Stock shall be the lesser of the Original Cost of such Shares
or the Fair Market Value of such Shares on the date of such Repurchase Event,
and the Company's obligation to purchase shall become an option to purchase.
(b) Upon the occurrence of a Repurchase Event (or, if later, upon the
determination of (i) the number of Shares of Common Stock held by the Repurchase
Seller that, immediately after the occurrence of such Repurchase Event, are
considered to be Unrestricted Stock and (ii) the Fair Market Value of such
Shares of Common Stock), the Repurchase Seller shall give a written notice (the
"Repurchase Notice") to Waller and Rogers, the Company and the other
Shareholders stating (i) that a Repurchase Event has occurred and the date of
such event, (ii) the number of Shares of Common Stock held by the Repurchase
Seller that, immediately after the occurrence of such Repurchase Event, are
considered to be Unrestricted Stock and (iii) the Fair Market Value per share
(and the Original Cost per share, if required) of such Shares. The receipt of a
Repurchase Notice by Waller and Rogers, the Company and the other Shareholders
shall constitute an offer (the "Repurchase Offer") to sell such Shares of Common
Stock pursuant to Section (a) above. Such offer shall be irrevocable until the
expiration of the last option period with respect thereto. During the first 30-
day period after receipt of the Repurchase Notice by all parties entitled
thereto, Waller and Rogers shall have the exclusive right to accept the
Repurchase Offer by giving written notice to the Repurchase Seller, prior to the
expiration of such 30-day period, of the number of Shares of Common Stock
subject thereto which Waller and Rogers shall purchase. During the ten-day
period after completion of the Waller and Rogers 30-day period, to the extent
that Waller and Rogers do not accept the Restricted Stock Offer as to all of the
Shares of Common Stock subject thereto, the Company shall have the obligation
(subject to Section 3.4 below) or the exclusive right, as the case may be, to
accept such offer to acquire the remaining Shares of Common Stock subject
thereto by giving written notice to the Repurchase Seller, prior to the
expiration of such ten-day period, of the number of such Shares of Common Stock
which the Company shall purchase. During the ten-day period after completion of
the Company's ten-day period, to the extent that the Company does not accept the
Repurchase Offer as to all of the remaining Shares of Common Stock subject
thereto, the other Shareholders shall have the right to accept such offer to
acquire the remaining Shares of Common Stock subject thereto by giving written
notice to the Repurchase Seller, prior to the expiration of such ten-day period,
of the number of such Shares of Common Stock which such Shareholders shall
purchase. If any
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Shares of Common Stock subject to the Repurchase Offer are not purchased by
Waller, Rogers, the Company or the other Shareholders, the Repurchase Seller may
retain such remaining Shares of Common Stock, subject to the terms of this
Agreement (except for Sections 3.1 and 3.2, which no longer apply to such
Shares).
(c) Waller, Rogers, the Company and/or the other Shareholders, as the
case may be, shall purchase all Shares of Common Stock with respect to which the
Repurchase Offer has been accepted as set forth in Section 8.1. A Repurchase
Offer Notice shall be deemed to constitute a representation and warranty by the
Repurchase Seller that (i) such Seller has good title to such Shares of Common
Stock free of any Liens and (ii) has full power and authority to make such offer
and consummate such sale.
(d) Notwithstanding anything stated herein to the contrary, no
Shareholder or the Company may exercise any option otherwise available to it
under this Section 3.2 unless it purchases the same percentage of Shares of
Common Stock held by the Repurchase Seller with respect to which a purchase
option is then available to such Shareholder or the Company under Section 3.1.
3.3 Waller or Rogers Repurchase Event.
(a) For 30 days after the determination of Fair Market Value
following the occurrence of an Event, the Employee to which such Event has
occurred and/or his Permitted Transferees and/or the legal representative or
beneficiaries of such Employee or his estate (the "Waller or Rogers Seller")
shall have an option to offer to sell all or any part of the Shares of Common
Stock held by the Waller or Rogers Seller as set forth in this Section 3.3 (the
"Put Option"), but unless such Put Option is exercised, the Waller or Rogers
Seller shall not be obligated under this Agreement to sell Shares of Common
Stock after an Event. Subject to Section (b) below, (i) Waller or Rogers (not
including the Waller or Rogers Seller) shall have an option to purchase all or
any part of the Shares of Common Stock subject to the Put Option at a purchase
price equal to the Fair Market Value of such Shares on the date of such Event;
(ii) the Company, to the extent not purchased by Waller or Rogers, shall have an
obligation (subject to Section 3.4 and 12.10 below) to purchase all of the
remaining unpurchased Shares of Common Stock subject to the Put Option at the
same purchase price as offered to Waller or Rogers; and (iii) the other
Shareholders, to the extent not purchased by Waller, Rogers or the Company,
shall have an option to purchase all or any part of the remaining unpurchased
Shares of Common Stock subject to the Put Option at the same purchase price as
offered to Waller or Rogers.
(b) The Waller or Rogers Seller shall, to the extent such Waller or
Rogers Seller is exercising the Put Option, give a written notice (the "Put
Notice") to Waller or Rogers (not including the Waller or Rogers Seller), the
Company and the other Shareholders stating (i) that an Event has occurred and
the date of such event, (ii) the number of Shares of Common Stock held by the
Waller or Rogers Seller available for purchase pursuant to the Put Option and
(iii) the Fair Market Value per share of such Shares of Common Stock. The
receipt of a Put Notice by Waller or Rogers, the Company and the other
Shareholders shall constitute an offer (the "Put Offer") to sell such Shares of
Common Stock pursuant to Section (a) above. Such offer
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shall be irrevocable until the expiration of the last option period with respect
thereto. During the first 30-day period after receipt of the Put Notice by all
parties entitled thereto, Waller or Rogers (not including the Waller or Rogers
Seller) shall have the exclusive right to accept the Put Offer by giving written
notice to the Waller or Rogers Seller, prior to the expiration of such 30-day
period, of the number of Shares of Common Stock subject thereto which Waller or
Rogers shall purchase. During the ten-day period after completion of the Waller
or Rogers 30-day period, to the extent that Waller or Rogers does not accept the
Put Offer as to all of the Shares of Common Stock subject thereto, the Company
shall have the obligation (subject to Section 3.4 below) or the exclusive right,
as the case may be, to accept such offer to acquire the remaining Shares of
Common Stock subject thereto by giving written notice to the Waller or Rogers
Seller, prior to the expiration of such ten-day period, of the number of such
Shares of Common Stock which the Company shall purchase. During the ten-day
period after completion of the Company's ten-day period, to the extent that the
Company does not accept the Put Offer as to all of the remaining Shares of
Common Stock subject thereto, the other Shareholders shall have the right to
accept such offer to acquire the remaining Shares of Common Stock subject
thereto by giving written notice to the Waller or Rogers Seller, prior to the
expiration of such ten-day period, of the number of such Shares of Common Stock
which such Shareholders shall purchase.
(c) Waller or Rogers (not including the Waller or Rogers Seller), the
Company and/or the other Shareholders, as the case may be, shall purchase all
Shares of Common Stock with respect to which the Put Offer has been accepted as
set forth in Section 8.1. A Put Offer Notice shall be deemed to constitute a
representation and warranty by the Waller or Rogers Seller that (i) such Seller
has good title to such Shares of Common Stock free of any Liens and (ii) has
full power and authority to make such offer and consummate such sale.
3.4 Legal Inability to Purchase. If the Company has an obligation
under this Section 3 to purchase any Shares owned by a Seller, but is legally
prohibited from purchasing all of such Shares, the Company shall purchase the
number of such Shares, if any, that it may legally purchase, and shall inform
each other Shareholder in writing by the end of the Company's ten-day period of
its legal inability to purchase the remainder of such Shares. The Shares of the
Seller so purchased by the Company shall be allocated proportionately among such
Seller's Restricted and Unrestricted Stock.
4. RIGHT OF FIRST REFUSAL; TRANSFERS BY LEGAL PROCESS; CO-SALE RIGHTS.
4.1 Right of First Refusal.
(a) Subject to Section (e) below, if any Shareholder (a "Section 4.1
Seller") desires to Dispose of any Shares or Partnership Interests to a Third
Party, (i) Waller (unless he is the Section 4.1 Seller) and Rogers (unless he is
the Section 4.1 Seller) shall have an option (subject to Section (b) below) to
purchase all or any part of the Shares or Partnership Interests, as the case may
be, subject to such Disposition at, if the desired Disposition is for value, the
Third Party Price (as hereinafter defined) of such Shares or Partnership
Interests or, if the desired Disposition is other than for value, the Original
Cost of such Shares or Partnership Interests; (ii) if
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the Section 4.1 Seller is Waller or Rogers, Berman and Goldfarb, to the extent
not purchased by Waller or Rogers, shall have an option (subject to Section (b)
below) to purchase all or any part of the remaining unpurchased Shares or
Partnership Interests, as the case may be, subject to such Disposition at the
same purchase price offered to Waller or Rogers; (iii) the Company, to the
extent not purchased by Waller, Rogers or, if applicable pursuant to clause (ii)
hereof, Berman or Goldfarb, shall have an option (subject to Section (b) below)
to purchase all or any part of the remaining unpurchased Shares or Partnership
Interests, as the case may be, subject to such Disposition at the same purchase
price as offered to Waller and Rogers; and (iv) the other Shareholders
(including Berman and Goldfarb, if the Section 4.1 Seller is other than Waller
or Rogers), to the extent not purchased by Waller, Rogers, the Company or, if
applicable pursuant to clause (ii) hereof, Berman or Goldfarb, shall have an
option (subject to Section (b) below) to purchase all or any part of the
remaining unpurchased Shares or Partnership Interests, as the case may be,
subject to such Disposition at the same purchase price as offered to Waller and
Rogers. "Third Party Price" of any Shares or Partnership Interests means the
price per share (or, if the consideration to be paid in the desired Disposition
is other than cash, the fair market value per share of the non-cash
consideration) that the Third Party has offered in writing to pay for such
Shares or Partnership Interests. In the case of any proposed pledge or
encumbrance of Shares or Partnership Interests, "Third Party Price" means the
fair market value per share of the cash or other property to be received upon
the security of such Shares or Partnership Interests.
(b) The Section 4.1 Seller shall give written notice (a "Section 4.1
Offer Notice") to Waller, Rogers, Berman, Goldfarb, the Company and the other
Shareholders stating (i) that such Section 4.1 Seller desires to effect such a
Disposition, (ii) the number of Shares or Partnership Interests, as the case may
be, proposed to be Disposed of and the identity of the Third Party offering to
acquire such Shares or Partnership Interests, (iii) the Original Cost per share
of such Shares or Partnership Interests, as the case may be, if applicable, (iv)
the Third Party Price per share for such Shares or Partnership Interests, as the
case may be, if applicable, and (v) the other material terms and conditions of
such Disposition. The receipt of a Section 4.1 Offer Notice by Waller, Rogers,
Berman, Goldfarb, the Company and such other Shareholders from any Section 4.1
Seller shall constitute an offer (the "Section 4.1 Offer") by such Section 4.1
Seller to sell such Shares or Partnership Interests, as the case may be,
pursuant to Section (a) above. Such offer shall be irrevocable until the
expiration of the last option period with respect thereto. During the first 30-
day period after receipt of the Section 4.1 Offer Notice by all parties entitled
thereto, Waller (unless he is the Section 4.1 Seller) and Rogers (unless he is
the Section 4.1 Seller) shall have the exclusive right to accept the Section 4.1
Offer by giving written notice to such Section 4.1 Seller, prior to the
expiration of such 30-day period, of the number of Shares or Partnership
Interests, as the case may be, subject thereto which Waller and Rogers shall
purchase. If the Section 4.1 Seller is Waller or Rogers, during the ten-day
period after completion of the Waller and Rogers 30-day period, to the extent
that Waller or Rogers does not accept the Section 4.1 Offer as to all of the
Shares or Partnership Interests, as the case may be, subject thereto, Berman and
Goldfarb shall have the exclusive right to accept such offer as to the remaining
Shares or Partnership Interests, as the case may be, subject thereto by giving
written notice to such Section 4.1 Seller, prior to the expiration of such ten-
day period, of the number of such Shares or Partnership Interests, as the case
may be, which Berman and Goldfarb shall purchase. During the ten-day period
after completion of the Berman and Goldfarb ten-day
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period, if the Section 4.1 Seller is Waller or Rogers, otherwise during the ten-
day period after completion of the Waller and Rogers ten-day period, to the
extent that Waller and Rogers and/or Berman and Goldfarb, as the case may be, do
not accept the Section 4.1 Offer as to all of the Shares or Partnership
Interests, as the case may be, subject thereto, the Company shall have the
exclusive right to accept such offer as to the remaining Shares or Partnership
Interests, as the case may be, subject thereto by giving written notice to such
Section 4.1 Seller, prior to the expiration of such ten-day period, of the
number of such Shares or Partnership Interests, as the case may be, which the
Company shall purchase. During the ten-day period after completion of the
Company's ten-day period, to the extent that the Company has not accepted the
Section 4.1 Offer as to all of the remaining Shares or Partnership Interests, as
the case may be, subject thereto, the other Shareholders (including Berman and
Goldfarb, if the Section 4.1 Seller is other than Waller or Rogers) shall have
the right to accept such offer as to the remaining Shares or Partnership
Interests, as the case may be, subject thereto by giving written notice to such
Section 4.1 Seller, prior to the expiration of such ten-day period, of the
number of such Shares or Partnership Interests, as the case may be, which the
other Shareholders shall purchase.
(c) Waller, Rogers, Berman, Goldfarb, the Company and/or the other
Shareholders, as the case may be, shall purchase all Shares or Partnership
Interests, as the case may be, with respect to which the Section 4.1 Offer has
been accepted as set forth in Section 8.1. A Section 4.1 Offer Notice shall be
deemed to constitute a representation and warranty by the Section 4.1 Seller
that (i) such Seller has good title to such Shares or Partnership Interests, as
the case may be, free of any Liens and (ii) has full power and authority to make
such offer and consummate such sale.
(d) Upon the failure to accept the Section 4.1 Offer with respect to
all of the Share or Partnership Interests, as the case may be, subject thereto
within the option periods referred to above there shall commence upon the
expiration of the last such option period a 90-day period during which the
Section 4.1 Seller shall have the right to effect a Disposition to the Third
Party named in the Section 4.1 Offer Notice of all of the remaining Shares or
Partnership Interests, as the case may be, subject to the 4.1 Offer on
substantially the same terms and conditions as were set forth in the Section 4.1
Offer Notice and, if applicable, at a price not less than the Third Party Price;
provided, however, that (i) such Third Party shall have complied with Section
9.2 hereof and (ii) the Company, in the case of a Disposition of Shares, or the
applicable Limited Partnership, in the case of a Disposition of Partnership
Interests, shall have received an opinion of legal counsel reasonably acceptable
to it to the effect that the Disposition to such Third Party is not in violation
of the Securities Laws. If such Section 4.1 Seller does not consummate the sale
of the Shares or Partnership Interests, as the case may be, subject to the
Section 4.1 Offer in accordance with the foregoing limitations, such Shareholder
may not sell such Shares or Partnership Interests without repeating the
foregoing procedures.
(e) Notwithstanding anything in this Agreement to the contrary, the
provisions of this Section 4.1 will not be applicable to Dispositions made
pursuant to and in compliance with Article 3 of this Agreement or pursuant to
the exercise of any right of co-sale granted under Section 4.3 of this
Agreement.
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(f) Notwithstanding anything in this Section 4.1 to the contrary, if
Melville shall at any time become subject to this Agreement and thereafter
desire to Dispose of any Shares or Partnership Interests to a Third Party, the
order of priority of the options granted under this Section 4.1 to purchase all
of any part of the Shares or Partnership Interests, as the case may be, subject
to such Disposition shall change, such that (i) the Company (rather than Waller
and Rogers) shall have the first such option, (ii) Waller and Rogers (rather
than the Company) shall have the second such option, and (iii) the other
Shareholders shall continue to have the third such option; and all provisions of
this Section 4.1 shall be enforced and applied with such adjustments therein as
may be reasonable in light of such change.
4.2 Transfers by Legal Process.
(a) Upon any Transfer by Legal Process of any Shares or Partnership
Interests of a Shareholder, (i) Waller (unless he was the transferor) and Rogers
(unless he was the transferor) shall have an option (subject to Section (b)
below) to purchase all or any part of the Shares or Partnership Interests, as
the case may be, acquired pursuant to such Transfer by Legal Process at the
lesser of the Original Cost of such Shares or Partnership Interests or the fair
market value per share of the consideration, if any, paid for such Shares or
Partnership Interests by the transferee or successor in title thereto in such
Transfer by Legal Process; (ii) the Company, to the extent not purchased by
Waller or Rogers, shall have an option (subject to Section (b) below) to
purchase all or any part of the remaining unpurchased Shares or Partnership
Interests, as the case may be, acquired pursuant to such Transfer by Legal
Process at the same purchase price as offered to Waller and Rogers; and (iii)
the other Shareholders, to the extent not purchased by Waller, Rogers or the
Company, shall have an option (subject to Section (b) below) to purchase all or
any part of the remaining unpurchased Shares or Partnership Interests, as the
case may be, acquired pursuant to such Transfer by Legal Process at the same
purchase price as offered to Waller and Rogers.
(b) The transferee or successor in title to the Shares or Partnership
Interests, as the case may be, subject to such Transfer by Legal Process (a
"Section 4.2 Seller") shall give written notice (a "Section 4.2 Offer Notice")
to Waller, Rogers, the Company and the other Shareholders stating (i) that such
Transfer by Legal Process has occurred, (ii) the number of Shares or Partnership
Interests, as the case may be, acquired pursuant to such Transfer by Legal
Process, (iii) the Original Cost per share of such Shares or Partnership
Interests, as the case may be, and (iv) the fair market value per share of the
consideration, if any, paid for such Shares or Partnership Interests by the
Section 4.2 Seller in such Transfer by Legal Process and the other material
terms and condition upon which such Shares or Partnership Interests, as the case
may be, were acquired by the Section 4.2 Seller pursuant to such Transfer by
Legal Process. The receipt of a Section 4.2 Offer Notice by Waller, Rogers, the
Company and such other Shareholders from any Section 4.2 Seller shall constitute
an offer (the "Section 4.2 Offer") by such Section 4.2 Seller to sell such
Shares or Partnership Interests, as the case may be, pursuant to Section (a)
above. Such offer shall be irrevocable until the expiration of the last option
period with respect thereto. During the first 30-day period after receipt of the
Section 4.2 Offer Notice by all parties entitled thereto, Waller (unless he was
the transferor) and Rogers (unless he was the transferor) shall have the
exclusive right to accept the Section 4.2 Offer by giving written notice to the
Section 4.2
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Seller, prior to the expiration of such 30-day period, of the number of Shares
or Partnership Interests, as the case may be, subject thereto which Waller and
Rogers shall purchase. During the ten-day period after completion of the Waller
and Rogers 30-day period, to the extent Waller and Rogers do not accept the
Section 4.2 Offer as to all of the Shares or Partnership Interests, as the case
may be, subject thereto, the Company shall have the exclusive right to accept
such offer to acquire the remaining Shares or Partnership Interests, as the case
may be, subject thereto by giving written notice to the Section 4.2 Seller,
prior to the expiration of such ten-day period, of the number of such Shares or
Partnership Interests, as the case may be, which the Company shall purchase.
During the ten-day period after completion of the Company's ten-day period, to
the extent that the Company does not accept the Section 4.2 Offer as to all of
the remaining Shares or Partnership Interests, as the case may be, subject
thereto, the other Shareholders shall have the right to accept such offer to
acquire the remaining Shares or Partnership Interests, as the case may be,
subject thereto by giving written notice to the Section 4.2 Seller, prior to the
expiration of such ten-day period, of the number of such Shares or Partnership
Interests, as the case may be, which such Shareholders shall purchase. If any
Shares or Partnership Interests, as the case may be, subject to the Section 4.2
Offer are not purchased by Waller, Rogers, the Company or the other
Shareholders, the Section 4.2 Seller may retain such remaining Shares or
Partnership Interests, subject to the terms of this Agreement.
(c) Waller, Rogers, the Company and/or the other Shareholders, as the
case may be, shall purchase all Shares or Partnership Interests, as the case may
be, with respect to which the Section 4.2 Offer has been accepted as set forth
in Section 8.1. A Section 4.2 Offer Notice shall be deemed to constitute a
representation and warranty by the Section 4.2 Seller that (i) such Seller has
good title to such Shares or Partnership Interests, as the case may be, free of
any Liens and (ii) has full power and authority to make such offer and
consummate such sale.
4.3 Co-Sale Rights.
(a) In addition to any incidental rights of co-sale which the
Shareholders might have in connection with "piggy-back" registration rights
granted by the Registration Rights Agreement dated as of the date hereof among
the Company, certain of the other parties hereto and Melville, each of the
Shareholders agrees not to sell for value any Shares of Common Stock owned by
such Shareholder (other than a sale (i) made pursuant to and in compliance with
Article 3 of this Agreement, (ii) in a Public Offering, (iii) in the case of
Waller, Rogers or the Investors, or Permitted Transferees of Waller, Rogers or
the Investors, in an Open Market Transaction or (iv) to Permitted Transferees of
such Shareholder or to any other Person to whom such Shareholder is permitted
under Section 2.3 to so transfer such Shares without compliance with Article 4)
without permitting each other Shareholder holding Shares of Common Stock that,
upon consummation of such sale, would be considered to be Unrestricted Stock to
participate as a seller in such transaction such that each such Shareholder
exercising a right of co-sale hereunder shall be entitled to sell, in connection
with such transaction, a percentage of the total number of Shares of Common
Stock which the purchaser is willing to acquire in such transaction equal to
such Shareholder's percentage ownership of all of the outstanding Shares of
Common Stock owned by the Shareholder proposing the sale and the Shareholders
exercising rights of co-sale
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under this Agreement that, upon consummation of such sale, would be considered
to be Unrestricted Stock.
(b) Before accomplishing or entering into a binding contract for any
sale for value of Shares of Common Stock that would be covered by the rights of
co-sale granted by Section (a) above, each Shareholder agrees to give each other
Shareholder holding Shares of Common Stock that, upon consummation of such sale,
would be considered to be Unrestricted Stock prompt written notice of any such
proposed sale (a "Sale Proposal"), stating the material terms and conditions of
the Sale Proposal. Such other Shareholders each agree to notify the Shareholder
giving such written notice (the "Proposing Party") within 20 Business Days after
receipt of such notice as to whether they wish to exercise their rights of co-
sale and participate in the Sale Proposal, and thereafter all negotiations
leading to the consummation of the Sale Proposal shall be conducted under the
collective control of the Proposing Party and those other Shareholders
exercising their rights of co-sale hereunder, provided that nothing herein
stated shall preclude the Proposing Party from selling such party's Shares of
Common Stock following the exercise of co-sale rights by one or more other
Shareholders if the Proposing Party sells such party's Shares of Common Stock on
finally negotiated terms and conditions which are unacceptable to such other
Shareholders following such negotiations. Failure by a Shareholder to respond
within such 20-Business Day period shall be deemed to be a declination of such
Shareholder's right of co-sale with respect to such Sale Proposal, provided that
(i) such Sale Proposal is fully consummated within 90 days after the expiration
of such 20-Business Day period and (ii) the terms of the actual transaction are
in all material respects the same as those set forth in the notice given by the
Proposing Party to the other Shareholders hereunder. Failure to meet either of
the foregoing conditions shall again subject the Shares of Common Stock covered
by the Sale Proposal to the other Shareholders' rights of co-sale.
5. DETERMINATION OF FAIR MARKET VALUE.
5.1 General. The Fair Market Value of any Shares of Common Stock
purchased under this Agreement shall be (a) prior to the completion of an
initial Public Offering, determined in accordance with Section 5.2 below, and
(b) after the completion of an initial Public Offering, determined in accordance
with Section 5.3 below.
5.2 Appraisal. In the event that any option or obligation to
purchase Shares of Common Stock arises under this Agreement, the Seller and the
Company shall attempt in good faith for at least 15 days after the first attempt
by either such party to agree upon the Fair Market Value per share of such
Shares of Common Stock. At any time after the expiration of such 15-day period,
either the Seller or the Company may make a written demand, delivered or sent to
the other such party, that an appraisal be conducted to determine the Fair
Market Value per share of such Shares of Common Stock, in which case such Fair
Market Value shall be determined by an appraiser selected by the mutual
agreement of the Company and the Seller. If such parties cannot reach mutual
agreement on a single appraiser within 15 days after a demand for an appraisal
has been made, each such party shall select an appraiser that is a nationally or
regionally recognized investment banking firm, and the appraisers so selected
shall select an independent appraiser that is not related to and does not have
any material business relationship with the
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Company, the Seller or any other Shareholder and is a nationally or regionally
recognized investment banking firm, in which case the applicable Fair Market
Value shall be the appraised fair market value which is determined by such
independent appraiser. Any appraisal shall reflect the value of the Company on a
going concern basis (so long as the Company is not insolvent and is otherwise a
"going concern" as defined by generally accepted accounting principles), without
regard to minority shareholder discounts or key man life or disability insurance
benefiting the Company and, in the case of Shares of Common Stock that are at
the relevant time considered to be Restricted Stock, without regard to the fact
that the same had not yet vested at such time pursuant to the terms of the
Restricted Stock Agreement, but shall take into consideration earnings and any
other general or specific economic indicators and circumstances deemed by the
appraiser to be relevant and appropriate. The fees and expenses of appraisal
shall be borne by the Company.
5.3 Fair Market Value After an Initial Public Offering. Upon
completion of an initial Public Offering, the Fair Market Value per share of any
Shares of Common Stock subject to any purchase option or obligation shall equal:
(a) the closing price of a Share of Common Stock on the date of the
event giving rise to a need to calculate Fair Market Value or, if no sale of
Shares of Common Stock shall have occurred on that date, on the next preceding
day on which a sale of Shares of Common Stock occurs:
(i) on the composite tape for New York Stock Exchange listed
shares; or
(ii) if Shares of Common Stock are not quoted on the composite
tape for New York Stock Exchange listed shares, on the principal United States
Securities Exchange registered under the 1934 Act on which Shares of Common
Stock are listed; or
(iii) if Shares of Common Stock are not listed on any such
exchange, on the Nasdaq National Market; or
(b) if clause (a) is inapplicable, the mean between the closing "bid"
and the closing "asked" quotation of a Share of Common Stock on the date of the
event giving rise to a need to calculate Fair Market Value or, if no closing bid
or asked quotation is made on that date, on the next preceding day on which a
quotation is made, on the Nasdaq SmallCap Market or any system then in use.
6. PREEMPTIVE RIGHTS.
6.1 General Rights. Except as provided below, prior to the
completion of an initial Public Offering (a) the Company shall not issue any
shares of Common Stock (or any options, warrants or other rights to purchase or
subscribe for shares of Common Stock or securities convertible into shares of
Common Stock) unless each Shareholder who holds Shares of Common Stock is
offered the right to purchase, at the same price and on the same terms proposed
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to be issued and sold, such amount of such shares of Common Stock (the "Common
Stock Maintenance Securities") as is necessary for such Shareholder to maintain
its Percentage Ownership (as hereinafter defined) of Common Stock as it existed
immediately prior to such issuance (the "Common Stock Preemptive Rights"), and
(b) the Company shall not issue any shares of Preferred Stock (or any options,
warrants or other rights to purchase or subscribe for shares of Preferred Stock
or securities convertible into shares of Preferred Stock) unless each
Shareholder that holds Shares of Preferred Stock is offered the right to
purchase, at the same price and on the same terms proposed to be issued and
sold, such amount of such shares of Preferred Stock (the "Preferred Stock
Maintenance Securities" and together with the Common Stock Maintenance
Securities, the "Maintenance Securities") as is necessary for such Shareholder
to maintain its Percentage Ownership of Shares of Preferred Stock as it existed
immediately prior to such issuance (the "Preferred Stock Preemptive Rights" and,
together with the Common Stock Preemptive Rights, the "Preemptive Rights"). Such
offer shall be made by written notice given to each Shareholder entitled to
receive such offer and shall specify therein the number of shares of Common
Stock or Preferred Stock, as the case may be, being offered, and the purchase
price and other material terms and conditions of such offer. Each Shareholder
shall have the right, during the period specified in Section 6.2, to accept the
offer for any or all of such Shareholder's Maintenance Securities.
6.2 Waiver. Any Shareholder who does not deliver to the Company
written notice of acceptance of any offer made pursuant to Section 6.1 within 20
Business Days after such offer has been made (a "Waiving Shareholder") shall be
deemed to have waived such Shareholder's right to purchase all or any part of
his, her or its Maintenance Securities (including, if the Maintenance Securities
include options, warrants or other rights to acquire other securities, or
securities convertible into other securities, such other securities), but only
if such Maintenance Securities are issued by the Company to others within 90
days after the expiration of such 20-Business Day period on terms and conditions
which are in all material respects the same as those set forth in the offer to
such Waiving Shareholder. If any Shareholder becomes a Waiving Shareholder with
respect to a particular offering, such Shareholder shall still be entitled to
his, hers or its preemptive rights under Section 6.1 with respect to future
offerings.
6.3 Classes of Common Stock. If a Shareholder accepts in accordance
with this Article 6 an offer for any or all of his, her or its Common Stock
Maintenance Securities, such securities shall be issued by the Company to such
Shareholder as shares of the same class or classes as the Shares of Common Stock
held by such Shareholder immediately prior to such issuance (allocated among
such classes, if more than one, in proportion to the total number of such Shares
in each such class).
6.4 Limitations. The Preemptive Rights set forth above shall not
apply to (i) the grant of options to purchase Common Stock or the issuance of
Common Stock to, or the exercise of options to purchase Common Stock by, any
employees of the Company or any of its Subsidiaries, (ii) the exercise of the
Warrant or the Management Warrant by Melville, (iii) the conversion of Shares of
Common Stock of any class into Shares of Common Stock of another class or Shares
of Common Stock without class designation pursuant to the articles of
incorporation of the Company, (iv) the issuance of securities upon the exercise
of rights to
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purchase securities of the Company or the conversion of securities of the
Company as set forth in (i), (ii) or (iii) above, (v) the issuance of securities
pursuant to any stock split, stock dividend or other similar stock
recapitalization, (vi) the issuance of Common Stock pursuant to an initial
Public Offering, (vii) the issuance of securities pursuant to a plan of merger,
reorganization or exchange or in consideration for the acquisition of another
company or (viii) the issuance of securities for consideration other than money.
6.5 Percentage Ownership. As used herein, the term "Percentage
Ownership" means, with respect to any Shareholder, the quotient of the number of
Shares of Common Stock or Preferred Stock, as the case may be, that such
Shareholder owns immediately prior to the proposed issuance, divided by the
total number of Shares of Common Stock or Preferred Stock, as the case may be,
outstanding immediately prior to the proposed issuance.
7. PAYMENT.
7.1 Manner of Purchase by the Company and the Shareholders. The
entire purchase price payable by the Company and the Shareholders for any Shares
or Partnership Interests purchased by them under this Agreement shall be payable
in cash on the date of closing provided in Section 8.1.
7.2 Alternative Manner of Purchase for Shares or Partnership
Interests Subject to a Proposed Disposition or Transfer by Legal Process.
Notwithstanding anything to the contrary in Section 7.1, (a) any Shares or
Partnership Interests subject to an option arising in connection with a proposed
Disposition for value may, at the discretion of the holder of such option, be
purchased upon either the terms set forth in Section 7.1 or the terms, as to
manner of purchase, of the proposed Disposition, and (b) any Shares or
Partnership Interests subject to an option arising in connection with a Transfer
by Legal Process for value may, at the discretion of the holder of such option,
be purchased upon either the terms set forth in this Section 7.1 or the same
terms, as to manner of purchase, as those upon which they were acquired by the
Section 4.2 Seller.
8. CLOSING.
8.1 Duties of Company, Seller and Shareholders. Except as otherwise
set forth in Sections 3 or 4, on the first Business Day to occur at least 30
days after the exercise, waiver and/or expiration of all option and/or
obligation periods as provided in Sections 3 or 4, the Company and/or purchasing
Shareholders, as the case may be, shall tender to the Seller the purchase price
for such Shares or Partnership Interests, as the case may be, in the form(s)
required under Article 7. Coincident with the payment of said purchase price,
the Seller shall deliver the certificate or certificates representing such
Shares or Partnership Interests, as the case may be, to the purchaser(s), duly
endorsed in blank for transfer of record upon the books of the Company or the
Limited Partnership, as the case may be (accompanied, if the Seller is other
than a natural person, by a duly certified copy of evidence of the incumbency
and authority of the Person purporting to act as or on behalf of the Seller and,
if the Seller is the legal representative or beneficiary of a Shareholder or his
or her estate, by a duly certified copy of evidence of such
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<PAGE>
Seller's status as such). The purchaser(s) shall be entitled to require such
additional evidence of good title and right and power to transfer good title to
such Shares free and clear of all Liens, as they shall reasonably request. If
there is more than one purchaser, the purchasers' obligations to the Seller
shall be several and not joint, and the Seller's obligations to each purchaser
shall not be conditioned upon the performance of this Agreement by the other
purchasers.
9. CONSENT TO AGREEMENT.
9.1 Filing of Agreement. An executed counterpart of this Agreement
shall be put and remain on file at the principal executive office of the Company
and the principal executive office of each Limited Partnership.
9.2 Written Consent to Agreement. No sale, transfer, assignment,
exchange or other disposition of Shares or Partnership Interests shall be made
by a Shareholder to any Person other than the Company or another Shareholder
unless and until such Person shall agree in writing to take such Shares or
Partnership Interests subject to, and shall subscribe in writing to the terms
and conditions of, this Agreement. Any Person who so agrees in writing to take
Shares or Partnership Interests subject to, and subscribes in writing to the
terms and conditions of, this Agreement, shall be a party to this Agreement
entitled to the benefits thereof and bound thereby.
10. TERMINATION.
10.1 Termination Upon Certain Events. This Agreement shall terminate
upon the bankruptcy, receivership or dissolution of the Company and, except to
the extent set forth in Section 10.4, upon the voluntary written agreement of
the Company, the holders of at least 80% of the Shares of Common Stock then
outstanding and the holders of at least a majority of the Shares of Preferred
Stock then outstanding. Except to the extent set forth in Section 10.4, this
Agreement (other than, in the case of a Control Transaction, Sections 4.3 and
Article 6 hereof) shall also terminate upon the first to occur of (i) a Control
Transaction or (ii) the latter of the second anniversary of the date hereof or
the completion of a Public Offering, except with respect to purchases or sales
of Shares or Partnership Interests triggered by events or circumstances
occurring prior to the first to occur of an event described in clause (i) or
(ii) hereof.
10.2 Transfer of All Shares. Upon the sale or other transfer of all
the Shares and Partnership Interests owned by a Shareholder, such Shareholder
shall no longer be entitled to the benefits of this Agreement.
10.3 Public Offering; Open Market Transactions. This Agreement shall
not be applicable to Shares of Common Stock that have been transferred in a
Public Offering or Open Market Transaction; and transferees of such Shares of
Common Stock in such Public Offering or Open Market Transaction and their
subsequent transferees shall not be deemed to be Shareholders or be required to
comply with Section 9.2 or be bound by or entitled to any benefits of this
Agreement solely by reason of such transfers.
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<PAGE>
10.4 Restricted Stock. Notwithstanding anything in this Agreement to
the contrary, subject to the terms of the Restricted Stock Agreement, as long as
any Shares of Common Stock are considered to be Shares of Restricted Stock
hereunder, the terms of this Agreement shall remain in effect as to such Shares
of Restricted Stock.
11. NOTICES; EXERCISE OF OPTIONS; WAIVERS.
11.1 Additional Information in the Event of a Proposed
Disposition. Any holder of an option hereunder may, in the event of a proposed
Disposition and prior to the purchase of any Shares or Partnership Interests,
require the Seller to furnish written evidence of a bona fide offer of the
proposed transferee to purchase such Shares or Partnership Interests. Such
information shall be provided promptly by the Seller.
11.2 Notices by the Company and Optionees. Each notice required or
permitted to be given under this Agreement by the Company or any Shareholder
holding an option hereunder, including but not limited to a notice of exercise,
waiver or expiration of any option, shall be given by the Company or the
optionee to all other parties to this Agreement simultaneously by means
identical to that by which the notice is given to the Seller.
11.3 Method of Sending Notices. Every notice to be given pursuant to
this Agreement shall be delivered personally, or sent by certified or registered
mail, postage prepaid. Notice delivered personally shall be deemed given when
delivered; notice mailed shall be deemed given when properly mailed. Notice
mailed to the Company shall be addressed to its principal executive office, to
the attention of the Company's chief executive officer and chief financial
officer. Notice mailed to any Shareholder shall be addressed to the
Shareholder's address indicated on Schedule A to this Agreement or to such other
address as such Shareholder shall specify by written notice to the Company and
all other Shareholders.
11.4 Failure to Give Required Notice. If any party hereto fails to
give on a timely basis any notice required by this Agreement of any event or
circumstance giving rise to a purchase option or obligation hereunder, the
Company or any other party that discovers such failure shall promptly give
notice thereof to the remaining parties to the end that the applicable
provisions in this Agreement will thereafter be promptly enforced and applied
with such adjustments in the periods specified herein as may be reasonable in
the circumstances.
11.5 Waivers. Any party to this Agreement may irrevocably waive any
rights of such party hereunder by giving notice of such waiver to the other
parties hereto in the manner of giving notice generally specified elsewhere in
this Agreement. Exercise of an option as to some, but not all, Shares or
Partnership Interests subject to the option shall be deemed such a waiver of the
option with respect to the Shares or Partnership Interests not covered by the
option exercise.
11.6 Proportional Purchases. If more than one Shareholder has an
option of the same priority granted under Section 3 or 4 hereof, then, unless a
different allocation is agreed upon by all of the Shareholders exercising such
option, each Shareholder exercising such option shall be entitled to purchase
the same proportion of the Shares or Partnership Interests, as the
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<PAGE>
case may be, subject to such option as the total number of Shares of Common
Stock owned by such Shareholder on the first day such option becomes exercisable
bears to the total number of Shares of Common Stock owned by all of the
Shareholders exercising such option on the first day such option becomes
exercisable.
12. MISCELLANEOUS.
12.1 Interested Shareholder. Any determination by the Company to
exercise or not exercise an option or to take or not take any other action under
this Agreement shall be made, if and to the extent permitted by law, without any
participation, directly or indirectly, of the Shareholder whose Shares or
Partnership Interests are subject to the matter in question or of any Affiliate
of such Shareholder, whether in any such Person's capacity as shareholder,
director, officer or employee of the Company; and all parties agree to be bound
by the actions of a majority of those shareholders or directors, excluding the
interested Shareholder and such Shareholder's Affiliates, acting in connection
with any such issue without regard to quorum or voting requirements specified in
the articles of incorporation and/or bylaws of the Company or which would
otherwise apply under the Minnesota Business Corporation Act or other applicable
statute or law.
12.2 Equitable Remedies. The parties hereto agree that the failure
of any party to perform any obligation or duty under this Agreement will cause
irreparable harm to the parties willing to perform their obligations and duties
herein, which harm cannot be adequately compensated by money damages. It is
further agreed by the parties hereto that an order of specific performance or
for injunctive relief against a party or parties in default under the terms of
this Agreement would be equitable and would not work a hardship on the
defaulting party or parties. Accordingly, in the event of a default by any party
hereto, a non-defaulting party, in addition to whatever other remedies are or
might be available at law or in equity, shall have the right to compel specific
performance by (or to obtain injunctive relief against) the defaulting party or
parties as to any obligation or duty created by this Agreement or any breach
thereof.
12.3 Complete Agreement. This Agreement, the Restricted Stock
Agreement and all other instruments and documents referred to herein and therein
constitute the entire understanding and agreement among the parties hereto with
respect to the subject matter hereof and supersede all prior agreements and
understandings among the parties with respect to such subject matter. There are
no agreements, understandings, restrictions, representations or warranties among
the parties relating to the subject matter hereof, except for those expressly
set forth in this Agreement, the Restricted Stock Agreement or any other
instruments or documents referred to herein or therein.
12.4 Amendment. This Agreement may be altered, amended or terminated
by a writing signed by the Company, the holders of at least 80% of the Shares of
Common Stock then outstanding and the holders of a majority of the Shares of
Preferred Stock then outstanding.
12.5 Benefit and Assignment. This Agreement shall bind and inure to
the benefit of the parties hereto, their personal representatives, heirs,
successors and assigns.
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<PAGE>
12.6 Severability. If any provision or application of this Agreement
is held unlawful or unenforceable in any respect, such illegality or
unenforceability shall not affect other provisions or applications which can be
given effect, and this Agreement shall be construed as if the unlawful or
unenforceable provision or application had never been contained herein or
prescribed hereby.
12.7 Governing Law. This Agreement shall be construed and governed
by and according to the laws of the State of Minnesota.
12.8 Counterparts. This Agreement may be executed in counterparts,
each of which when so executed shall be deemed to be an original, and such
counterparts shall together constitute but one and the same instrument.
12.9 Table of Contents and Captions. The Table of Contents attached
to this Agreement, and the captions preceding the Sections of this Agreement,
are for convenience only, and shall not affect the interpretation of this
Agreement.
12.10 Company Option. Notwithstanding anything in this Agreement to
the contrary, after a Public Offering any obligation of the Company to purchase
Shares pursuant to Section 3.2 or 3.3 shall become an option of the Company to
purchase all or any portion of such Shares.
12.11 Election of Directors. After completion of an initial Public
Offering and prior to completion of a Public Offering in which the gross cash
proceeds of the Public Offering received by the Company is at least $20,000,000,
each Shareholder agrees to vote all of the Shares of Common Stock held by such
Shareholder and entitled to vote in favor of the election to the Board of
Directors of two individuals who shall be nominated by a vote of a majority of
the outstanding Shares of Common Stock held by the Employees and their Permitted
Transferees and, upon the vote of a majority of the outstanding Shares of Common
Stock held by the Employees and their Permitted Transferee, to remove or replace
such directors.
13. RELIANCE ON THIS AGREEMENT.
13.1 METHOD OF DETERMINING PURCHASE PRICE. EACH SHAREHOLDER
ACKNOWLEDGES THAT, ALTHOUGH THERE ARE MANY POSSIBLE METHODS OF DETERMINING THE
PURCHASE PRICE OF THE SHARES AND PARTNERSHIP INTERESTS, ALL OF THE SHAREHOLDERS
HAVE ENTERED INTO THIS AGREEMENT IN RELIANCE UPON THE EXPECTATION AND
UNDERSTANDING THAT THE METHOD(S) CONTAINED IN THIS AGREEMENT FOR DETERMINING THE
PURCHASE PRICE OF THE SHARES AND PARTNERSHIP INTERESTS WILL BE APPLIED UNDER THE
CIRCUMSTANCES AND IN ACCORDANCE WITH THE TERMS AND CONDITIONS SET FORTH IN THIS
AGREEMENT. ACCORDINGLY, IT IS THE INTENTION AND EXPECTATION OF ALL THE
SHAREHOLDERS THAT, IN SITUATIONS IN WHICH THIS
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<PAGE>
AGREEMENT IS APPLICABLE, THE COURTS INTERPRET AND APPLY THIS AGREEMENT STRICTLY
IN ACCORDANCE WITH ITS TERMS AND CONDITIONS, WHETHER ACTING UNDER SECTION
302A.751 OF THE MINNESOTA BUSINESS CORPORATION ACT OR OTHERWISE.
13.2 SEPARATE REPRESENTATION. EACH SHAREHOLDER CONFIRMS THAT SUCH
SHAREHOLDER HAS CAREFULLY REVIEWED THIS AGREEMENT AND UNDERSTANDS IT. EACH
SHAREHOLDER FURTHER CONFIRMS THAT SUCH SHAREHOLDER HAS BEEN ADVISED TO CONSULT
WITH LEGAL COUNSEL REPRESENTING SUCH SHAREHOLDER CONCERNING THIS AGREEMENT AND
ANY OTHER AGREEMENTS BETWEEN OR AMONG SUCH SHAREHOLDER, THE COMPANY AND ANY OF
ITS PRESENT OR PROSPECTIVE SHAREHOLDERS, DIRECTORS, OFFICERS AND/OR EMPLOYEES.
13.3 NO EXPECTATIONS OF EMPLOYMENT, ETC. EACH SHAREHOLDER FURTHER
REPRESENTS THAT, ALTHOUGH THE SHAREHOLDER IS (OR FROM TIME TO TIME MAY BE) AN
EMPLOYEE, OFFICER AND/OR DIRECTOR OF THE COMPANY (OR OF A DIRECT OR INDIRECT
SUBSIDIARY OR OTHER AFFILIATE OF THE COMPANY), THE SHAREHOLDER IS HOLDING SHARES
OR PARTNERSHIP INTERESTS, AS THE CASE MAY BE, FOR THEIR POTENTIAL AS AN EQUITY
INVESTMENT AND WITHOUT ANY EXPECTATION UNDER SECTION 302A.751 OF THE MINNESOTA
BUSINESS CORPORATION ACT OR OTHERWISE THAT THE OWNERSHIP OF THE SHARES OR
PARTNERSHIP INTERESTS WILL ENTITLE THE SHAREHOLDER TO ANY RIGHTS AS AN EMPLOYEE,
OFFICER OR DIRECTOR OF THE COMPANY (OR OF ANY SUCH SUBSIDIARY OR OTHER AFFILIATE
OF THE COMPANY) THAT WOULD NOT EXIST IF THE SHAREHOLDER WERE NOT A HOLDER OF
SHARES OR PARTNERSHIP INTERESTS. THE SHAREHOLDER FURTHER AGREES THAT NO CHANGE
IN HIS OR HER EXPECTATIONS CONCERNING EMPLOYMENT OR CONCERNING HIS OR HER
PARTICIPATION AS AN OFFICER OR DIRECTOR WILL HAVE A REASONABLE BASIS UNLESS SET
FORTH IN A WRITTEN AGREEMENT EXPRESSLY GIVING THE SHAREHOLDER ADDITIONAL RIGHTS
AS TO SUCH MATTERS. THE COMPANY HEREBY ADVISES THE SHAREHOLDER THAT THE COMPANY
HAS THE EXPECTATION THAT THE SHAREHOLDER WILL NOT HAVE ANY RIGHT TO EMPLOYMENT
BY THE COMPANY (OR BY ANY DIRECT OR INDIRECT SUBSIDIARY OR OTHER AFFILIATE OF
THE COMPANY) OR TO CONTINUE TO BE AN OFFICER OR DIRECTOR OF THE COMPANY (OR OF
ANY SUCH SUBSIDIARY OR OTHER AFFILIATE) BY VIRTUE OF THE SHAREHOLDER'S OWNERSHIP
OF THE SHARES OR PARTNERSHIP INTERESTS, EXCEPT, WITH RESPECT TO WALLER AND
ROGERS, AS SET FORTH IN THE EMPLOYMENT AGREEMENTS, AND THAT NO SHARES OR
PARTNERSHIP INTERESTS WOULD HAVE BEEN ISSUED TO THE SHAREHOLDER IF THE
SHAREHOLDER HAD ANY CONTRARY EXPECTATIONS.
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<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the date first above stated.
WILSONS THE LEATHER EXPERTS
INC.
By /s/ DAVID L. ROGERS
-----------------------
Its President
-------------------
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OTHER SHAREHOLDERS:
LEATHER INVESTORS LIMITED PARTNERSHIP I
By: /s/ LYLE BERMAN
-------------------
Name: Lyle Berman
Title: General Partner
And: /s/ MORRIS GOLDFARB
-----------------------
Name: Morris Goldfarb
Title: General Partner
LEATHER INVESTORS LIMITED PARTNERSHIP II
By: /s/ LYLE BERMAN
------------------------
Name: Lyle Berman
Title: General Partner
And: /s/ MORRIS GOLDFARB
----------------------------
Name: Morris Goldfarb
Title: General Partner
/s/ LYLE BERMAN
- ----------------------------
Lyle Berman
/s/ MORRIS GOLDFARB
- -----------------------------
Morris Goldfarb
/s/ NEIL I. SELL
- ----------------------------
Neil I. Sell
/s/ ERCU UCAN
- ---------------------------
Ercu Ucan
/s/ IRVING MISEL
- ---------------------------
Irving Misel
<PAGE>
MANAGERS: SCOTT CHRISTIAN
Name and Signature
- ------------------ /s/ SCOTT CHRISTIAN
-----------------------------------------
ANN BENSON MICHAEL CROWE
/s/ ANN BENSON /s/ MICHAEL CROWE
- ----------------------------------- -----------------------------------------
KEVIN BLODGETT KELLIE DAVIES
/s/ KEVIN BLODGETT /s/ KELLIE DAVIES
- ----------------------------------- -----------------------------------------
MARGO BLOMBERG LESLIE DAWSON
/s/ MARGO BLOMBERG /s/ LESLIE DAWSON
- ----------------------------------- -----------------------------------------
WM MICHAEL BODE RUSSELL EDWARDS-SIMPSON
/s/ WM MICHAEL BODE /s/ RUSSELL EDWARDS SIMPSON
- ----------------------------------- -----------------------------------------
GEORGE BOLES STANFORD EVAVOLD
/s/ GEORGE BOLES /s/ STANFORD EVAVOLD
- ----------------------------------- -----------------------------------------
MICHAEL CAMPBELL JOHN FOWLER
/s/ MICHAEL CAMPBELL /s/ JOHN FOWLER
- ----------------------------------- -----------------------------------------
<PAGE>
ROSALIE GELSO CORRINE LAPINSKY
/s/ ROSALIE GELSO /s/ CORRINE LAPINSKY
- ----------------------------------- -----------------------------------------
BETTY GOFF DARRELL LAWRENCE
/s/ BETTY GOFF /s/ DARRELL LAWRENCE
- ----------------------------------- -----------------------------------------
APRIL HANSON CAROL LUND
/s/ APRIL HANSON /s/ CAROL LUND
- ----------------------------------- -----------------------------------------
DAISY HSU DAVID LUNNEBORG
/s/ DAISY HSU /s/ DAVID LUNNEBORG
- ----------------------------------- -----------------------------------------
GERARD IRVIN LYNN MCKEE
/s/ GERARD IRVIN /s/ LYNN MCKEE
- ----------------------------------- -----------------------------------------
JED JAFFE ALFRED MINNITI
/s/ JED JAFFE /s/ ALFRED MINNITI
- ----------------------------------- -----------------------------------------
ROSS KIEFER JEFFREY MONTANG
/s/ ROSS KIEFER /s/ JEFFREY MONTANG
- ----------------------------------- -----------------------------------------
NANCY KIELTY GREGORY MORNEAU
/s/ NANCY KIELTY /s/ GREGORY MORNEAU
- ----------------------------------- -----------------------------------------
<PAGE>
JEFFREY ORTON JONI SEYMOUR
/s/ JEFFREY ORTON /s/ JONI SEYMOUR
- ----------------------------------- -----------------------------------------
PETER PAEK DAVID SHARP
/s/ PETER PAEK /s/ DAVID SHARP
- ----------------------------------- -----------------------------------------
GARY PETERSEN HENRY SHEMMER
/s/ GARY PETERSEN /s/ HENRY SHEMMER
- ----------------------------------- -----------------------------------------
ROBERT POIRIER RANDALL STEEN
/s/ ROBERT POIRIER /s/ RANDALL STEEN
- ----------------------------------- -----------------------------------------
JAMES RAGON DANIEL THORSON
/s/ JAMES RAGON /s/ DANIEL THORSON
- ----------------------------------- -----------------------------------------
DAVID L. ROGERS DAVID TIDMARSH
/s/ DAVID L. ROGERS /s/ DAVID TIDMARSH
- ----------------------------------- -----------------------------------------
MARY SADOWSKI DOUGLAS J. TREFF
/s/ MARY SADOWSKI /s/ DOUGLAS J. TREFF
- ----------------------------------- -----------------------------------------
MARK SCHWARTZ JOEL WALLER
/s/ MARK SCHWARTZ /s/ JOEL WALLER
- ----------------------------------- -----------------------------------------
<PAGE>
JAMES WANNINGER
/s/ JAMES WANNINGER
- -----------------------------------
LAWRENCE WEINBERG
/s/ LAWRENCE WEINBERG
- -----------------------------------
THOMAS WILDENBERG
/s/ THOMAS WILDENBERG
- -----------------------------------
KATHERINE WODTKE
/s/ KATHERINE WODTKE
- -----------------------------------
<PAGE>
Exhibit 4.6
AMENDMENT TO SHAREHOLDER AGREEMENT
THIS AMENDMENT TO SHAREHOLDER AGREEMENT is made and entered into as of the
25th day of June, 1996, by and among Wilsons The Leather Experts Inc., a
Minnesota corporation (the "Company"), Leather Investors Limited Partnership I,
a Minnesota limited partnership (the "First Limited Partnership"), Leather
Investors Limited Partnership II, a Minnesota limited partnership (the "Second
Limited Partnership" and, together with the First Limited Partnership,
collectively, the "Limited Partnerships"), Joel Waller ("Waller") and David
Rogers ("Rogers").
WHEREAS, as of the date of this Agreement, the Company has outstanding (i)
4,800,000 shares of Class A Common Stock, par value $.01 per share (the "Class A
Common Stock"), 3,250,000 shares of Class B Common Stock, par value $.01 per
share (the "Class B Common Stock"), and 450,000 shares of Class C Common Stock,
par value $.01 per share (the "Class C Common Stock" and, together with the
Class A Common Stock, the Class B Common Stock and the common stock of the
Company undesignated as to class, herein collectively called the "Common
Stock"), and (ii) 7,405 shares of Series A Preferred Stock, par value $.01 per
share (the "Preferred Stock") (the outstanding shares of Common Stock and
Preferred Stock of the Company being hereinafter referred to as the "Shares");
and
WHEREAS, the Company, the Limited Partnerships, the holders of all of the
general and limited partnership interests in the Limited Partnerships, Waller,
Rogers and certain other employees of the Company are parties to a Shareholder
Agreement dated as of May 25, 1996 (the "Shareholder Agreement"), which, among
other things, governs the transfer of the Shares and the outstanding general and
limited partnership interests in the Limited Partnerships, gives the Company and
certain other parties the right or obligation to purchase the Shares and such
partnership interests in certain events, and grants, subject to certain
exceptions, preemptive rights to certain parties in the event the Company issues
shares of Common Stock or Preferred Stock (or options, warrants or other rights
to purchase or subscribe for shares of Common Stock or Preferred Stock or
securities convertible into shares of Common Stock or Preferred Stock); and
WHEREAS, Section 6.4 of the Shareholder Agreement provides that the
preemptive rights granted under the Shareholder Agreement do not apply to the
grant of options to purchase Common Stock or the issuance of Common Stock to, or
the exercise of options to purchase Common Stock by, any employees of the
Company or any of its Subsidiaries; and
WHEREAS, Section 12.4 of the Shareholder Agreement provides that it may be
amended by a writing signed by the Company, the holders of at least 80% of the
Shares of Common Stock then outstanding and the holders of a majority of the
Shares of Preferred Stock then outstanding; and
<PAGE>
WHEREAS, the First Limited Partnership, Waller and Rogers hold at least 80%
of the outstanding Shares of Common Stock, and the Second Limited Partnership
holds all of the outstanding Shares of Preferred Stock; and
WHEREAS, the Company, the Limited Partnerships, Waller and Rogers desire to
amend the Shareholder Agreement to provide that the preemptive rights granted
thereby shall not apply to, among other things, the grant to non-employee
directors of the Company of options to purchase Common Stock or the issuance of
shares of Common Stock upon the exercise of such options.
NOW, THEREFORE, the parties hereto hereby agree as follows:
1. Clause (i) of Section 6.4 of the Shareholder Agreement is hereby
amended in its entirety to read as follows:
(i) the grant of options to purchase Common Stock or the issuance of
Common Stock to, or the exercise of options to purchase Common Stock by,
any employees or directors of the Company or any of its Subsidiaries,
2. The Shareholder Agreement shall continue in full force and effect,
unmodified except as expressly amended hereby.
3. This Amendment may be executed in two or more counterparts, each of
which shall be an original, but all of which shall constitute but one agreement,
and shall be effective only if executed by each of the parties hereto and
accepted and agreed to in writing by Melville Corporation.
IN WITNESS WHEREOF, the parties hereto have executed this Amendment as of
the date first written above.
WILSONS THE LEATHER EXPERTS
INC.
By /s/ DAVID L. ROGERS
-------------------------
Its President
------------------------
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<PAGE>
LEATHER INVESTORS LIMITED
PARTNERSHIP I
By /s/ LYLE BERMAN
-------------------------
Name: Lyle Berman
Title: General Partner
And /s/ MORRIS GOLDFARB
------------------------
Name: Morris Goldfarb
Title: General Partner
LEATHER INVESTORS LIMITED
PARTNERSHIP II
By /s/ LYLE BERMAN
-------------------------
Name: Lyle Berman
Title: General Partner
And /s/ MORRIS GOLDFARB
------------------------
Name: Morris Goldfarb
Title: General Partner
/s/ JOEL WALLER
---------------------------
Joel Waller
/s/ DAVID ROGERS
---------------------------
David Rogers
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<PAGE>
Exhibit 4.7
RESTRICTED STOCK AGREEMENT
--------------------------
RESTRICTED STOCK AGREEMENT dated as of May 25, 1996, by and among Wilsons
The Leather Experts Inc., a Minnesota corporation (the "Company"), and the
individuals named on the signature pages hereto, each of whom is an employee of
the Company or a direct or indirect subsidiary of the Company (collectively, the
"Employees" and individually, an "Employee").
WHEREAS, pursuant to that certain Manager Stock Purchase Agreement dated as
of the date hereof among the Company and the Employees (the "Manager Stock
Purchase Agreement"), the Employees have this day purchased from the Company an
aggregate of 3,700,000 shares of common stock, par value $.01 per share, of the
Company ("Common Stock"), consisting of 3,250,000 shares of Class B Common Stock
("Class B Common Stock") and 450,000 shares of Class C Common Stock, for a
purchase price of $.5406 per share; and
WHEREAS, of the total number of shares of Class B Common Stock so purchased
by the Employees, the parties have determined that an aggregate of 1,200,000
shares shall be subject to vesting over a period of time, and to forfeiture by
the Employees to the extent unvested at the end of such period.
NOW, THEREFORE, the parties hereto, desiring to provide for such vesting
and forfeiture, hereby agree as follows:
1. Definitions. For purposes of this Agreement, the following terms shall
have the following meanings:
(a) "Actual Annual EBITDA" at any Measuring Date shall mean, subject to
the provisions of paragraph 3(a)(ii) hereof, consolidated net income (or net
loss) of the Company and its Subsidiaries for the Measuring Period ending on
such Measuring Date, plus any interest expense, income taxes, depreciation,
amortization, compensation expense related to the Restricted Shares or the
issuance, holding or vesting thereof constituting non-cash accounting charges,
and extraordinary expenses or losses deducted in determining the same, all
computed in accordance with generally accepted accounting principles consistent
with those applied in the preparation of the certified consolidated financial
statements of the Company and its Subsidiaries.
(b) "Board" or "Board of Directors" shall mean the board of directors of
the Company.
<PAGE>
(c) "Business Day" shall mean any day, other than a day which is a
Saturday, Sunday or legal holiday in the City of Minneapolis or the City of New
York or a day on which banking institutions are authorized by law or other
governmental actions to close.
(d) "Cause", with respect to Waller or Rogers, shall mean:
(i) the commission by such Employee of any act of embezzlement
against the Company or any of its Subsidiaries;
(ii) the conviction of such Employee for, or entry by such Employee
of a guilty plea to, any felony which has a material adverse
effect upon the business, operating results, financial
condition or employee, supplier or customer relations generally
of the Company and its Subsidiaries, taken as a whole, or which
precludes such Employee from performing his duties under his
Employment Agreement for 90 days during any 12-month period;
(iii) the conviction of such Employee for any crime involving
dishonesty with respect to the Company (A) intended by such
Employee to result in personal enrichment of such Employee at
the expense of the Company or its Subsidiaries or (B) which has
a material adverse effect upon the business, operating results,
financial condition or employee, supplier or customer relations
generally of the Company and its Subsidiaries, taken as a
whole;
(iv) the absence by such Employee from employment with the Company
for a period of more than 90 days during any 12-month period
without the approval of the Board of Directors other than for
vacations, illness, injury or disability; or
(v) willful misconduct by such Employee in breach of the terms of
his Employment Agreement, which misconduct has not been cured
within 20 days following notification thereof to such Employee
(or if such misconduct is cured within 20 days after such
notice of misconduct is received, but the same misconduct
occurs again at any time thereafter).
For purposes hereof, no act or omission of Waller or Rogers shall be deemed to
be "willful" unless done, or omitted, by him in bad faith without the belief his
action or omission was in the best interests of the Company or a Subsidiary
thereof.
(e) A "Change in Control" shall be deemed to have occurred if:
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<PAGE>
(i) a majority of the directors of the Company shall be Persons other
than Persons:
(A) who are named as directors in the Company's articles of
incorporation or who are nominated by, or for whose election
proxies shall have been solicited by, the Board of
Directors, or
(B) who are then serving as directors appointed by the Board of
Directors to fill vacancies on the Board of Directors caused
by death or resignation (but not by removal) or to fill
newly-created directorships; or
(ii) more than 33 1/3% of the voting power of the outstanding voting
stock of the Company is acquired or beneficially owned (as
defined in Rule 13d-3 under the Securities Exchange Act of 1934,
as amended (the "Exchange Act"), or any successor rule thereto)
by any individual, entity or group (within the meaning of Section
13(d)(3) or 14(d)(2) of the Exchange Act), or any general
partnership interests in the First Limited Partnership (as
defined in the Shareholder Agreement) become held by any Person
that, as of the date hereof, does not have a general partnership
interest in the First Limited Partnership; provided, however,
that the following acquisitions and beneficial ownership shall
not constitute a Change in Control pursuant to this clause (ii):
(A) any acquisition or beneficial ownership by the Company or a
Subsidiary of the Company, or
(B) any acquisition or beneficial ownership by any employee
benefit plan (or related trust) sponsored or maintained by
the Company or one or more of its Subsidiaries, or
(C) any acquisition or beneficial ownership of voting stock of
the Company or general partnership interests in the First
Limited Partnership by Waller or Rogers or any Person that,
as of the date of this Agreement, is a general partner in
the First Limited Partnership, or
(D) any acquisition or beneficial ownership by a parent
corporation or its wholly-owned subsidiaries, as long as
they shall remain wholly-owned subsidiaries, of 100% of the
outstanding voting
-3-
<PAGE>
stock of the Company as a result of a merger or statutory
share exchange which complies with clause (iii)(A)(2)
hereof or the exception in clause (iii)(B) hereof in all
respects; or
(iii) the shareholders of the Company approve a definitive agreement
or plan to:
(A) merge or consolidate the Company with or into another
corporation (other than (1) a merger or consolidation with
a Subsidiary of the Company or (2) a merger in which:
(aa) the Company is the surviving corporation, and
(bb) no outstanding voting stock of the Company (other
than fractional shares) held by shareholders
immediately prior to the merger is converted into
cash, securities or other property (except (I)
voting stock of a parent corporation owning
directly, or indirectly through wholly-owned
subsidiaries, both beneficially and of record 100%
of the voting stock of the Company immediately after
the merger or (II) cash upon the exercise by holders
of voting stock of the Company of statutory
dissenters' rights), and
(cc) the Persons who were the beneficial owners,
respectively, of the outstanding Common Stock and
outstanding voting stock of the Company immediately
prior to such merger beneficially own, directly or
indirectly, immediately after the merger, 66 2/3% or
more of, respectively, the then outstanding common
stock and the voting power of the then outstanding
voting stock of the surviving corporation or its
parent corporation, and
(dd) if voting stock of the parent corporation is
exchanged for voting stock of the Company in the
merger, all holders of any class or series of voting
stock of the Company immediately prior to the merger
have the right to receive substantially the same per
share consideration in exchange for their voting
stock of the Company as all other holders of such
class or series), or
-4-
<PAGE>
(B) exchange, pursuant to a statutory exchange of shares of
voting stock of the Company held by shareholders of the
Company immediately prior to the exchange, shares of one or
more classes or series of voting stock of the Company for
cash, securities or other property, except for (1) voting
stock of a parent corporation of the Company owning
directly, or indirectly through wholly-owned subsidiaries,
both beneficially and of record 100% of the voting stock of
the Company immediately after the statutory share exchange
if (aa) the Persons who were the beneficial owners,
respectively, of the outstanding Common Stock and
outstanding voting stock of the Company immediately prior to
such statutory share exchange own, directly or indirectly,
immediately after the statutory share exchange 66 2/3% or
more of, respectively, the then outstanding common stock and
the voting power of the then outstanding voting stock of
such parent corporation, and (bb) all holders of any class
or series of voting stock of the Company immediately prior
to the statutory share exchange have the right to receive
substantially the same per share consideration in exchange
for their voting stock of the Company as all other holders
of such class or series, or (2) cash with respect to
fractional shares of voting stock of the Company or payable
as a result of the exercise by holders of voting stock of
the Company of statutory dissenters' rights, or
(C) sell or otherwise dispose of all or substantially all of the
assets of the Company (in one transaction or a series of
transactions), or
(D) liquidate or dissolve the Company.
(f) "Disability" of any Employee shall mean any physical or mental
incapacitation whereby such Employee is therefore unable for a period of 12
consecutive months or for an aggregate of 12 months in any 24 consecutive month
period to perform his or her duties to the Company and its Subsidiaries.
(g) "Employment Agreement", with respect to Waller or Rogers, shall mean
the Employment Agreement between the Company and such Employee dated the date
hereof, as the same may be amended from time to time in accordance with the
terms thereof.
(h) "Forfeited Restricted Share(s)" shall have the meaning set forth in
paragraph 4(a) hereof.
5
<PAGE>
(i) "Measuring Date" shall mean the last day of each Measuring Period,
commencing with the Measuring Period ending on February 1, 1997 and continuing
through and including the Measuring Period ending on February 3, 2001.
(j) "Measuring Period" shall mean each of the periods (i) from but not
including the date hereof through and including February 1, 1997, (ii) from and
including February 2, 1997 through and including January 31, 1998, (iii) from
and including February 1, 1998 through and including January 30, 1999, (iv) from
and including January 31, 1999 through and including January 29, 2000, and (v)
from and including January 30, 2000 through and including February 3, 2001.
(k) "Melville" shall mean Melville Corporation, a New York corporation.
(l) "Minimum Annual EBITDA" at any Measuring Date shall mean 50% of Target
Annual EBITDA at such Measuring Date.
(m) "Note" shall mean that certain Subordinated Note of the Company dated
the date hereof payable to Melville or registered assigns in the original
principal amount of $55,811,000.
(n) "Original Cost", with respect to any Restricted Shares held by an
Employee and his or her Permitted Transferees (under and as defined in the
Shareholder Agreement), shall mean $.5406 per share (appropriately adjusted to
reflect stock splits, reverse stock splits, stock dividends, conversions and
other recapitalizations).
(o) "Person" shall mean an individual, corporation, partnership,
association, trust or other entity or organization, including a government or
political subdivision or an agency or instrumentality thereof.
(p) "Restricted Share(s)" shall mean the shares of Class B Common Stock
purchased by the Employees under the Manager Stock Purchase Agreement and
designated therein as "Restricted Common Stock", together with any shares of
Common Stock of the Company issued in exchange for or in respect of such shares
pursuant to any stock split, reverse stock split, stock dividend, conversion or
other recapitalization. The number of Restricted Shares purchased by each
Employee under the Manager Stock Purchase Agreement is set forth in a
subscription agreement delivered by such Employee to the Company pursuant to the
Manager Stock Purchase Agreement.
(q) "Retirement" of any Employee shall mean the retirement at age 65 or
older of such Employee from his or her employment with the Company and its
Subsidiaries.
6
<PAGE>
(r) "Rogers" shall mean David Rogers.
(s) "Shareholder Agreement" shall mean that certain Shareholder Agreement
dated as of the date hereof among Leather Investors Limited Partnership I,
Leather Investors Limited Partnership II, Lyle Berman, Morris Goldfarb, Neil I.
Sell, Ercu Ucan, Irving Misel, the Employees and the Company, as the same may be
amended from time to time in accordance with the terms thereof.
(t) "Subsidiary" shall mean any entity of which securities or other
ownership interests having ordinary voting power to elect a majority of the
board of directors or other persons performing similar functions are at the time
directly or indirectly owned by the Company.
(u) "Target Annual EBITDA" at any Measuring Date shall mean, in the case of
the Measuring Date occurring on February 1, 1997, $50,690,000 and, in the case
of each subsequent Measuring Date, the amount determined by the Board of
Directors as Target Annual EBITDA at such Measuring Date in accordance with
paragraph 2(a) hereof (provided that, if one or more notices of an adjustment in
Target Annual EBITDA at any Measuring Date shall have been delivered pursuant to
paragraph 2(b) hereof, "Target Annual EBITDA" at such Measuring Date shall be as
shown on the most recent such notice).
(v) "Tender Date" shall have the meaning set forth in paragraph 4(b)
hereof.
(w) "Waller" shall mean Joel Waller.
2. Determination of Target Annual EBITDA.
(a) No later than the beginning of each Measuring Period, commencing with
the Measuring Period ending on January 31, 1998, the Board of Directors shall
determine Target Annual EBITDA at the Measuring Date occurring on the last day
of such Measuring Period. Target Annual EBITDA at any such Measuring Date as so
determined by the Board shall be at least $1 more than Target Annual EBITDA at
the immediately preceding Measuring Date (as adjusted in any manner determined
by the Board in good faith to be equitable in the event of an intervening
acquisition or disposition of any business operations by the Company or any of
its Subsidiaries (through stock purchase, asset acquisition or disposition,
merger or otherwise) other than in the ordinary course of business). The
Company shall notify each Employee and Melville in writing of the Board's
determination of Target Annual EBITDA at any Measuring Date promptly after
making the same, provided that failure to give such notice on a timely basis
shall not effect the vesting of the Restricted Shares hereunder.
7
<PAGE>
(b) In the event an acquisition or disposition of any business operations
by the Company or any of its Subsidiaries (through stock purchase, asset
acquisition or disposition, merger or otherwise) other than in the ordinary
course of business occurs prior to any Measuring Date but after Target Annual
EBITDA at such Measuring Date has been fixed in this Agreement or determined by
the Board in accordance herewith, such Target Annual EBITDA shall be adjusted in
a manner which the Board determines in good faith to be equitable. The Board
shall notify each Employee and Melville in writing of any such adjustments
promptly after making the same, provided that failure to give such notice on a
timely basis shall not effect the vesting of the Restricted Shares hereunder.
3. Vesting of Restricted Shares. The Restricted Shares held by the
Employees and their Permitted Transferees shall vest only under the
circumstances specified in this paragraph 3.
(a) With respect to each of the Measuring Dates, the Restricted Shares held
by the Employees and their Permitted Transferees shall vest as provided in
clauses (i) and (ii) below.
(i) Subject to the vesting of additional Restricted Shares pursuant to
clause (ii) below, with respect to each Measuring Date:
(A) if Actual Annual EBITDA at such Measuring Date equals or
exceeds Target Annual EBITDA at such Measuring Date, then a number of
Restricted Shares held by each Employee and his or her Permitted
Transferees shall vest pursuant to this clause (i) with respect to
such Measuring Date equal to the sum of (1) 20% of the total number of
Restricted Shares purchased by such Employee from the Company under
the Manager Stock Purchase Agreement (appropriately adjusted to
reflect stock splits, reverse stock splits, stock dividends,
conversions and other recapitalizations), plus (2) the total number of
Restricted Shares acquired by such Employee from any other Employee or
Permitted Transferee thereof pursuant to the Shareholder Agreement
that would have vested pursuant to this clause (i) with respect to
such Measuring Date if the transferring Employee or Permitted
Transferee still owned such Restricted Shares;
(B) if Actual Annual EBITDA at such Measuring Date exceeds
Minimum Annual EBITDA at such Measuring Date, but is less than Target
Annual EBITDA at such Measuring Date, then a number of Restricted
Shares held by each Employee and his or her Permitted Transferees
shall vest pursuant to this clause (i) with respect to such Measuring
Date equal to the sum of (1) a percentage between 10% and 20%,
determined in the manner provided below, of the total number of
Restricted Shares purchased by such Employee from the
8
<PAGE>
Company under the Manager Stock Purchase Agreement (appropriately
adjusted to reflect stock splits, reverse stock splits, stock
dividends, conversions and other recapitalizations), plus (2) the
total number of Restricted Shares acquired by such Employee from any
other Employee or Permitted Transferee thereof pursuant to the
Shareholder Agreement that would have vested pursuant to this clause
(i) with respect to such Measuring Date if the transferring Employee
or Permitted Transferee still owned such Restricted Shares;
(C) if Actual Annual EBITDA at such Measuring Date equals Minimum
Annual EBITDA at such Measuring Date, then a number of Restricted
Shares held by each Employee and his or her Permitted Transferees
shall vest pursuant to this clause (i) with respect to such Measuring
Date equal to the sum of (1) 10% of the total number of Restricted
Shares purchased by such Employee from the Company under the Manager
Stock Purchase Agreement (appropriately adjusted to reflect stock
splits, reverse stock splits, stock dividends, conversions and other
recapitalizations), plus (2) the total number of Restricted Shares
acquired by such Employee from any other Employee or Permitted
Transferee thereof pursuant to the Shareholder Agreement that would
have vested pursuant to this clause (i) with respect to such Measuring
Date if the transferring Employee or Permitted Transferee still owned
such Restricted Shares; and
(D) if Actual Annual EBITDA at such Measuring Date is less than
Minimum Annual EBITDA at such Measuring Date, then no portion of the
Restricted Shares held by any Employee or his or her Permitted
Transferees shall vest pursuant to this clause (i) with respect to
such Measuring Date.
Whenever, with respect to any Measuring Date, a percentage of Restricted
Shares between 10% and 20% is required to be determined pursuant to clause
(B) above, such percentage (expressed as a decimal) shall equal the sum of
(aa) .10, plus (bb) the product of (II) .10, times (II) a fraction, the
numerator of which is the amount by which Actual Annual EBITDA at such
Measuring Date exceeds Minimum Annual EBITDA at such Measuring Date, and
the denominator of which is the amount by which Target Annual EBITDA at
such Measuring Date exceeds Minimum Annual EBITDA at such Measuring Date.
(ii) If Actual Annual EBITDA at any Measuring Date (the "Current
Measuring Date") exceeds Target Annual EBITDA at such Current Measuring
Date, then (A) that portion of such Actual Annual EBITDA which is in excess
of such Target Annual EBITDA (the "Carry Over EBITDA") shall be carried
back to each Measuring Date occurring prior to the Current Measuring Date
(a "Preceding
9
<PAGE>
Measuring Date"), in inverse order of occurrence until no further excess
remains, and applied to the computation of Actual Annual EBITDA at such
Preceding Measuring Date, as if earned in the Measuring Period ended on
such Preceding Measuring Date, to the extent necessary to achieve Target
Annual EBITDA at such Preceding Measuring Date, (B) the total number of
Restricted Shares held by each Employee and his or her Permitted
Transferees which would have vested under clause (i) above with respect to
all Preceding Measuring Dates had such application of the Carry Over EBITDA
been given effect at the time of the original computation thereof shall be
recomputed (the aggregate number of such Restricted Shares vested in
accordance with such recomputation being herein called the "Recomputed
Vested Restricted Shares"), and (C) in addition to the Restricted Shares
vested in accordance with clause (i) above with respect to the Current
Measuring Date, a number of Restricted Shares held by each Employee and his
or her Permitted Transferees shall vest pursuant to this clause (ii) with
respect to the Current Measuring Date equal to the amount by which (1) the
Recomputed Vested Restricted Shares, exceeds (2) the aggregate number of
Restricted Shares held by such Employee and his or her Permitted
Transferees which actually vested pursuant to this paragraph 3(a) prior to
the Current Measuring Date. Any portion of the Carry Over EBITDA which is
not applied to the computation of Actual Annual EBITDA at any Preceding
Measuring Date as provided above shall be carried forward to each Measuring
Date occurring after the Current Measuring Date (a "Subsequent Measuring
Date"), in order of occurrence until no further excess remains, and applied
to the computation of Actual Annual EBITDA at such Subsequent Measuring
Date, as if earned in the Measuring Period ended on such Subsequent
Measuring Date, to the extent necessary to achieve Target Annual EBITDA at
such Subsequent Measuring Date.
(iii) The Board shall notify each Employee and Melville in writing of
the number of Restricted Shares held by such Employee and his or her
Permitted Transferees which shall have vested pursuant to this paragraph
3(a) with respect to a Measuring Date as soon as practicable and in no
event later than 90 days after such Measuring Date (which notice shall set
forth in reasonable detail the computations on which the determination of
such number was based), provided that failure to give such notice on a
timely basis shall not effect the vesting of the Restricted Shares
hereunder. The number of Restricted Shares set forth in such notice shall
thereupon be deemed to have vested as of the close of business on such
Measuring Date.
(iv) All Restricted Shares held by an Employee and his or her
Permitted Transferees which would otherwise vest with respect to a
Measuring Date shall vest even if a Restricted Stock Event under and as
defined in the Shareholder Agreement occurs with respect to such Employee
after the close of business on such Measuring
10
<PAGE>
Date but prior to the date the Board notifies the Employee and Melville of
the number of Restricted Shares vested with respect to such Measuring Date.
(b) Immediately upon payment or prepayment in full of the Note in
accordance with its terms at any time on or prior to December 31, 2000, all
Restricted Shares then held by any Employee or his or her Permitted Transferees
that remain unvested immediately prior to such payment or prepayment shall vest.
Immediately upon any partial prepayment of the Note in accordance with its terms
at any time prior to December 31, 2000, a number of Restricted Shares held by
each Employee and his or her Permitted Transferees shall vest equal to the sum
of (i) the product of (A) the total number of Restricted Shares purchased by
such Employee from the Company under the Manager Stock Purchase Agreement
(appropriately adjusted to reflect stock splits, reverse stock splits, stock
dividends, conversions and other recapitalizations), times (B) a fraction, the
numerator of which is the principal amount of the Note so prepaid, and the
denominator of which is the sum of (1) the original principal amount of the
Note, plus (2) the aggregate amount of capitalized interest that shall have been
added to the principal amount of the Note through the date of such prepayment,
plus (ii) the total number of Restricted Shares acquired by such Employee from
any other Employee or Permitted Transferee thereof pursuant to the Shareholder
Agreement that would have vested pursuant to this paragraph 3(b) immediately
upon such prepayment if the transferring Employee or Permitted Transferee still
owned such Restricted Shares.
(c) Immediately upon the death, Disability or Retirement of an Employee at
any time prior to the close of business on the last Measuring Date, all
Restricted Shares then held by such Employee (or, in the event of such
Employee's death, his or her estate) and his or her Permitted Transferees that
remain unvested immediately prior to such death, Disability or Retirement shall
vest.
(d) Immediately upon (i) termination by the Company of Waller's or Rogers'
employment with the Company other than for Cause or (ii) termination by Waller
or Rogers of his employment with the Company as a result of a breach by the
Company of any of the terms of such Employee's Employment Agreement which has
not been cured within ten days after notice thereof has been given by such
Employee to the Company, in each case at any time prior to the close of business
on the last Measuring Date, all Restricted Shares then held by such Employee and
his Permitted Transferees that remain unvested immediately prior to such
termination shall vest.
(e) Subject to the written consent of Melville to such Change in Control as
long as the Note shall remain outstanding, immediately prior to the occurrence
of a Change in Control at any time before the close of business on the last
Measuring Date, all Restricted Shares then held by any Employee or his or her
Permitted Transferees that remain unvested at such time shall vest.
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<PAGE>
(f) If any Restricted Shares shall have vested as of the close of business
on a Measuring Date or upon the occurrence of any other event, they shall at no
time thereafter cease to be vested by reason of the Company's failure to achieve
with respect to any subsequent Measuring Date all or any percentage of Target
Annual EBITDA at such Measuring Date or failure to pay or prepay the Note in
full in accordance with its terms on or prior to December 31, 2000 or for any
other reason.
(g) If any shares of Common Stock are issued in exchange for or in respect
of any Restricted Shares pursuant to a stock split, reverse stock split, stock
dividend, conversion or other recapitalization, such securities shall at the
time of issuance be vested hereunder if issued in exchange for or in respect of
vested Restricted Shares, and unvested hereunder if issued in exchange for or in
respect of unvested Restricted Shares.
(h) Notwithstanding anything to the contrary provided in paragraph 3(a) or
3(b) above, (i) in no event shall there vest with respect to any Measuring Date
or upon any partial prepayment of the Note a number of Restricted Shares held by
an Employee and his or her Permitted Transferees which is greater than the total
number of Restricted Shares held by such Employee and his or her Permitted
Transferees that remain unvested immediately prior to the close of business on
such Measuring Date or immediately prior to such partial prepayment, as the case
may be, and (ii) any Restricted Shares acquired by any Person or Persons from an
Employee or Permitted Transferee thereof pursuant to the Shareholder Agreement
which vest (or, in the event the acquiring Person is the Company, would have
vested had such Person been an Employee) with respect to any Measuring Date or
upon any partial prepayment of the Note pursuant to clause (i)(A)(2), (i)(B)(2)
or (i)(C)(2) of paragraph 3(a) or pursuant to clause (ii) of paragraph 3(b),
shall reduce, on a share-for-share basis, the number of Restricted Shares, if
any, that continue to be held by the transferring Employee or Permitted
Transferee which would have otherwise vested under such paragraphs with respect
to such Measuring Date or upon such partial prepayment.
4. Forfeiture of Unvested Restricted Shares.
(a) Each Employee and his or her Permitted Transferees shall sell to the
Company, and the Company shall purchase from such Employee and his or her
Permitted Transferees, all of the Restricted Shares, if any, held by such
Employee and his or her Permitted Transferees that remain unvested after the
close of business on the last Measuring Date (the "Forfeited Restricted
Share(s)"), at a price per Forfeited Restricted Share, payable in cash, equal to
the Original Cost thereof.
(b) Subject to the provisions of paragraph 4(c) hereof, the Company shall
tender to each Employee and his or her Permitted Transferees the purchase price
for the Forfeited
12
<PAGE>
Restricted Shares held by such Employee and his or her Permitted Transferees on
the first Business Day to occur at least 20 days after each of the Employees and
Melville has been given written notice by the Board of the number of Restricted
Shares which have vested pursuant to paragraph 3(a) hereof with respect to the
last Measuring Date (the "Tender Date"). Coincident with the payment of said
purchase price, such Employee and his or her Permitted Transferees shall deliver
the certificate or certificates representing such Forfeited Restricted Shares to
the Company, duly endorsed in blank for transfer of record upon the books of the
Company. The Company shall be entitled to require from each Employee and his or
her Permitted Transferees such additional evidence of good title and right and
power to transfer good title to the Forfeited Restricted Shares held by such
Employee and his or her Permitted Transferees free and clear of all liens,
adverse claims and other encumbrances, as it shall reasonably request.
(c) Notwithstanding the foregoing, if, on the Tender Date, the Company does
not have funds legally available to purchase all of the Forfeited Restricted
Shares held by each Employee and his or her Permitted Transferees, the Company
shall purchase from the Employees and their Permitted Transferees, pro rata in
accordance with the respective number of Forfeited Restricted Shares held by
each, on the Tender Date, the number of Forfeited Restricted Shares, if any, for
which it has funds legally available. Thereafter, as and to the extent funds
legally available therefor exist from time to time, the Company shall purchase
from the Employees and their Permitted Transferees additional Forfeited
Restricted Shares, pro rata in accordance with the respective number of
Forfeited Restricted Shares held by each, until all of the Forfeited Restricted
Shares have been purchased.
(d) Upon tender by the Company to an Employee and his or her Permitted
Transferees of the purchase price for any Forfeited Restricted Shares held by
such Employee and his or her Permitted Transferees in accordance with this
paragraph 4, such Forfeited Restricted Shares, regardless of whether the
certificate or certificates evidencing the same are delivered by such Employee
and his or her Permitted Transferees to the Company as required by paragraph
4(b), shall no longer be deemed to be outstanding, and all voting, dividend and
other rights of such Employee and his or her Permitted Transferees in respect of
such Forfeited Restricted Shares shall cease, except the right to receive from
the Company payment for such Forfeited Restricted Shares as provided in this
paragraph 4 upon compliance by such Employee and his or her Permitted
Transferees with the requirements of paragraph 4(b).
5. Shareholder Agreement. All Restricted Shares, whether vested or
unvested, shall be subject to the terms of the Shareholder Agreement, which,
among other things, governs the transfer of the Restricted Shares and gives the
Company and certain other Persons the right or obligation to purchase the
Restricted Shares in certain events.
13
<PAGE>
6. Rights Incident to Restricted Shares. Subject to the restrictions on
transfer expressly set forth in the Shareholder Agreement and to the provisions
of paragraph 4(d) hereof, each Employee and his or her Permitted Transferees
shall at all times have all rights of a shareholder and record owner with
respect to the Restricted Shares held thereby, regardless of whether or not such
Restricted Shares have vested, including without limitation all rights to vote
such Restricted Shares and to receive dividends or other distributions thereon.
7. Tax Withholding. Each Employee shall pay to the Company, promptly upon
request therefor, an amount in cash equal to the amount, if any, of all taxes
and other sums required by law to be withheld by the Company in respect of the
issuance of any Restricted Shares to such Employee or in respect of the vesting
of, or lapse of restrictions with respect to, any Restricted Shares held by such
Employee or any Permitted Transferee thereof.
8. Endorsement and Consent to Agreement.
(a) All certificates representing Restricted Shares issued by the Company
shall have endorsed thereon a legend in substantially the following form:
The shares evidenced by this certificate are subject to the terms and
conditions (including vesting and forfeiture conditions) contained in that
certain Restricted Stock Agreement among the Company and certain employees
of the Company and its direct and indirect subsidiaries dated as of May 25,
1996, a copy of which is on file at the principal executive office of the
Company.
Upon the vesting of any Restricted Shares and receipt by the Company of the
certificate or certificates representing such Restricted Shares, duly and
properly endorsed, the Company shall issue to the Employee or Permitted
Transferee holding the same a new certificate evidencing such Restricted Shares
without the foregoing legend.
(b) An executed counterpart of this Agreement shall be put and remain on
file at the principal executive office of the Company.
(c) No sale, transfer, assignment, exchange or other disposition of any
unvested Restricted Shares shall be made by an Employee to any Person other than
the Company or another Employee unless and until such Person shall agree in
writing to take such Restricted Shares subject to, and shall subscribe in
writing to the terms and conditions of, this Agreement. Any Person, other than a
Permitted Transferee, who so agrees in writing to take unvested Restricted
Shares subject to, and subscribes in writing to the terms and conditions of,
this Agreement shall be and become an Employee as that term is used in this
Agreement (except that the provisions of paragraphs 3(c) and 3(d) hereof shall
not be applicable to the
14
<PAGE>
Restricted Shares held by such Person). Nothing stated herein shall permit any
sale, transfer, assignment, exchange or other disposition of Restricted Shares
that is not permitted under the Shareholder Agreement.
9. Notices. All notices to any party hereunder shall be in writing and
shall be given in the manner and with the effect provided in the Shareholder
Agreement (or, in the case of notices to Melville, in the Management Warrant
referred to in the Shareholder Agreement).
10. Equitable Remedies. The parties hereto agree that the failure of any
party to perform any obligation or duty under this Agreement will cause
irreparable harm to the parties willing to perform their obligations and duties
herein, which harm cannot be adequately compensated by money damages. It is
further agreed by the parties hereto that an order of specific performance or
for injunctive relief against a party or parties in default under the terms of
this Agreement would be equitable and would not work a hardship on the
defaulting party or parties. Accordingly, in the event of a default by any party
hereto, a non-defaulting party, in addition to whatever other remedies are or
might be available at law or in equity, shall have the right to compel specific
performance by (or to obtain injunctive relief against) the defaulting party or
parties as to any obligation or duty created by this Agreement or any breach
thereof.
11. Complete Agreement. This Agreement, the Shareholder Agreement and all
other instruments and documents referred to herein or therein constitute the
entire understanding and agreement among the parties hereto with respect to the
subject matter hereof and supersede all prior agreements and understandings
among the parties with respect to such subject matter. There are no agreements,
understandings, restrictions, representations or warranties among the parties
relating to the subject matter hereof, except for those expressly set forth in
this Agreement, the Shareholder Agreement or any other instruments or documents
referred to herein or therein.
12. Amendment. This Agreement may be altered, amended or terminated by a
writing signed by the Company and the Employees who, together with their
Permitted Transferees, hold at least 80% of the unvested Restricted Shares that
are then outstanding.
13. Benefit and Assignment. This Agreement shall bind and inure to the
benefit of the parties hereto and their personal representatives, heirs,
successors and assigns. Melville and its successors and assigns shall be third
party beneficiaries of this Agreement as long as the Note or the Management
Warrant shall remain outstanding.
14. Severability. If any provision or application of this Agreement is held
unlawful or unenforceable in any respect, such illegality or unenforceability
shall not affect other
15
<PAGE>
provisions or applications which can be given effect, and this Agreement shall
be construed as if the unlawful or unenforceable provision or application had
never been contained herein or prescribed hereby.
15. Governing Law. This Agreement shall be construed and governed by and
according to the laws of the State of Minnesota.
16. Counterparts. This Agreement may be executed in counterparts, each of
which when so executed shall be deemed to be an original, and such counterparts
shall together constitute but one and the same instrument.
17. Captions. The captions preceding the paragraphs of this Agreement are
for convenience only, and shall not affect the interpretation of this Agreement.
18. Termination. At such time as all Restricted Shares shall have vested in
accordance with paragraph 3 hereof, this Agreement shall be of no further force
or effect, provided that the Shareholder Agreement shall remain in full force
and effect until terminated in accordance with its terms.
16
<PAGE>
IN WITNESS WHEREOF the Employees and the Company have executed this
Agreement as of the day and year first above written.
WILSONS THE LEATHER EXPERTS
INC.
By /s/ DAVID ROGERS
--------------------
Its President
---------------
17
<PAGE>
EMPLOYEES:
Name and Signature
- ------------------
ANN BENSON MICHAEL CAMPBELL
/s/ ANN BENSON /s/ MICHAEL CAMPBELL
- --------------- --------------------
KEVIN BLODGETT SCOTT CHRISTIAN
/s/ KEVIN BLODGETT /s/ SCOTT CHRISTIAN
- ------------------ -------------------
MARGO BLOMBERG MICHAEL CROWE
/s/ MARGO BLOMBERG /s/ MICHAEL CROWE
- ------------------ -----------------
WM MICHAEL BODE KELLIE DAVIES
/s/ WM MICHAEL BODE /s/ KELLIE DAVIES
- ------------------- -----------------
GEORGE BOLES LESLIE DAWSON
/s/ GEORGE BOLES /s/ LESLIE DAWSON
- ------------------- -----------------
18
<PAGE>
RUSSELL EDWARDS-SIMPSON DAISY HSU
/s/ RUSSELL EDWARDS SIMPSON /s/ DAISY HSU
- --------------------------- -------------
STANFORD EVAVOLD GERARD IRVIN
/s/ STANFORD EVAVOLD /s/ GERARD IRVIN
- -------------------- ----------------
JOHN FOWLER JED JAFFE
/s/ JOHN FOWLER /s/ JED JAFFE
- ---------------- -------------
ROSALIE GELSO ROSS KEIFER
/s/ ROSALIE GELSO /s/ ROSS KEIFER
- --------------------- ---------------
BETTY GOFF NANCY KIELTY
/s/ BETTY GOFF /s/ NANCY KIELTY
- ----------------- ----------------
APRIL HANSON CORRINE LAPINSKY
/s/ APRIL HANSON /s/ CORRINE LAPINSKY
- -------------------- --------------------
19
<PAGE>
DARRELL LAWRENCE GREGORY MORNEAU
/s/ DARRELL LAWRENCE /s/ GREGORY MORNEAU
- -------------------- -------------------
CAROL LUND JEFFREY ORTON
/s/ CAROL LUND /s/ JEFFREY ORTON
- -------------- -----------------
DAVID LUNNEBORG PETER PAEK
/s/ DAVID LUNNEBORG /s/ PETER PAEK
- ------------------- --------------
LYNN MCKEE GARY PETERSEN
/s/ LYNN MCKEE /s/ GARY PETERSEN
- -------------- -----------------
ALFRED MINNITI ROBERT POIRIER
/s/ MINNITI /s/ ROBERT POIRIER
- ----------- ------------------
JEFFREY MONTANG JAMES RAGON
/s/ JEFFREY MONTANG /s/ JAMES RAGON
- ------------------- ---------------
20
<PAGE>
DAVID ROGERS RANDALL STEEN
/s/ DAVID ROGERS /s/ RANDALL STEEN
- ---------------------- -----------------------
MARY SADOWSKI DANIEL THORSON
/s/ MARY SADOWSKI /s/ DANIEL THORSON
- ---------------------- -----------------------
MARK SCHWARTZ DAVID TIDMARSH
/s/ MARK SCHWARTZ /s/ DAVID TIDMARSH
- ---------------------- ----------------------
JONI SEYMOUR DOUGLAS TREFF
/s/ JONI SEYMOUR /s/ DOUGLAS TREFF
- ---------------------- -----------------------
DAVID SHARP JOEL WALLER
/s/ DAVID SHARP /s/ JOEL WALLER
- ---------------------- -----------------------
HENRY SHEMMER JAMES WANNINGER
/s/ HENRY SHEMMER /s/ JAMES WANNINGER
- ---------------------- -----------------------
21
<PAGE>
LAWRENCE WEINBERG
/s/ LAWRENCE WEINBERG
- ----------------------
THOMAS WILDENBERG
/s/ THOMAS WILDENBERG
- ----------------------
KATHERINE WODTKE
/s/ KATHERINE WODTKE
- ----------------------
22
<PAGE>
Exhibit 4.8
REGISTRATION RIGHTS AGREEMENT
dated as of
May 25, 1996
by and among
Melville Corporation,
Wilsons The Leather Experts Inc.,
The Managers Listed on The Signature Pages Hereto,
Leather Investors Limited Partnership I
and
The Partners Listed on the Signature Pages Hereto
<PAGE>
REGISTRATION RIGHTS AGREEMENT
AGREEMENT dated as of May 25, 1996 by and among Wilsons The Leather
Experts Inc., a Minnesota corporation ("Newco"), Melville Corporation, a New
York corporation ("Melville"), the managers listed on the signature pages hereto
(the "Managers"), Leather Investors Limited Partnership I, a Minnesota Limited
Partnership (the "Limited Partnership I"), and the partners of the Limited
Partnership I listed on the signature pages hereto (the "Partners", and
collectively and individually, and with the Limited Partnership I, the
"Investors").
W I T N E S S E T H:
WHEREAS, pursuant to the Sale Agreement dated as of May 24, 1996 among
Newco, Wilsons Center, Inc. (the "Company"), and Melville (the "Sale Agreement")
Melville has agreed to transfer 100 shares of common stock of the Company,
constituting one hundred percent of the issued and outstanding capital stock of
the Company, to Newco in exchange for the Common Shares (as defined below) of
Newco, the Preferred Shares (as defined below) of Newco, the Note (as defined
below) of Newco, the Warrant (as defined below) and the Management Warrant (as
defined below);
WHEREAS, pursuant to the Stock Purchase Agreement ("Manager Stock
Purchase Agreement") dated as of May 25, 1996 among Newco and the Managers,
Newco has agreed to sell to the Managers 2,050,000 shares of the Class B Common
Stock and 450,000 shares of the Class C Common Stock (the "Management Shares")
and 1,200,000 shares of restricted Class B Common Stock (the "Restricted Common
Stock") of Newco for an aggregate purchase price of $2,000,000.
WHEREAS, pursuant to the Stock Purchase Agreement ("Investor Stock
Purchase Agreement") dated as of May 25, 1996 among Melville, the Limited
Partnership I and Leather Investors Limited Partnership II, a Minnesota limited
partnership (the "Limited Partnership II"), Melville has agreed to sell to the
Limited Partnership I 4,800,000 shares of the Class A Common Stock (the "Common
Shares") and to the Limited Partnership II 7,405 shares of preferred stock (the
"Preferred Shares") of Newco for an aggregate purchase price of $10,000,000.
WHEREAS, the execution and delivery of this Agreement is a condition
precedent to the obligations of the parties to the Sale Agreement to consummate
the transactions contemplated thereby;
NOW, THEREFORE, in consideration of good and valuable consideration
the receipt and sufficiency of which is hereby acknowledged, together with the
mutual covenants and agreements herein contained, the parties hereto agree as
follows:
<PAGE>
DEFINITIONS
1.1 Definitions. (a) The following terms, as used herein, have the
following meanings:
"Class A Common Stock" means the Class A Common Stock, par value $.01
per share of Newco, having the rights, voting power, preferences and
restrictions designated in the articles of incorporation of Newco.
"Class B Common Stock" means the Class B Common Stock, par value $.01
per share of Newco, having the rights, voting power, preferences and
restrictions designated in the articles of incorporation of Newco.
"Class C Common Stock" means the Class C Common Stock, par value $.01
per share of Newco, having the rights, preferences and restrictions designated
in the articles of incorporation of Newco.
"Closing Date" means the date of the Closing.
"Common Shares" means 4,800,000 shares of Class A Common Stock of
Newco issued by Newco to Melville pursuant to the Sale Agreement.
"Common Stock" means the Class A Common Stock, Class B Common Stock,
Class C Common Stock and any common stock undesignated as to class, par value
$.01 per share, of Newco.
"Lien" means, with respect to any property or asset, any mortgage,
lien, pledge, charge, security interest, encumbrance or other adverse claim of
any kind in respect of such property or asset. For the purposes of this
Agreement, a Person shall be deemed to own subject to a Lien any property or
asset which it has acquired or holds subject to the interest of a vendor or
lessor under any conditional sale agreement, capital lease or other title
retention agreement relating to such property or asset.
"Management Warrant" means the warrant issued by Newco to Melville
pursuant to the Sale Agreement to purchase 1,200,000 shares of Class A Common
Stock during the two year period after April 30, 2001, as such number of shares
may be reduced by the terms of the Management Warrant.
"Manager Stock Purchase Agreement" means the stock purchase agreement
dated May 25, 1996 among Newco and the Managers.
"1933 Act" means the Securities Act of 1933, as amended, and the rules
and regulations promulgated thereunder.
"Note" means the senior secured subordinated note due December 31,
2000 of Newco in the principal amount of $55,811,000 issued to Melville pursuant
to the Sale Agreement.
2
<PAGE>
"Person" means an individual, corporation, limited liability company,
partnership, association, trust or other entity or organization, including a
government or political subdivision or an agency or instrumentality thereof.
"Preferred Shares" means 7,405 shares of the series A preferred stock
of Newco, issued by Newco to Melville pursuant to the Sale Agreement.
"Warrant" means the warrant issued by Newco to Melville to purchase
1,500,000 shares of Class A Common Stock issued to Melville pursuant to the Sale
Agreement.
"Warrant Shares" means the shares of Class A Common Stock of Newco to
be issued upon the exercise of the Warrant and the Management Warrant.
(a) Each of the following terms is defined in the Section set forth
opposite such term:
<TABLE>
<CAPTION>
Term Section
---- -------
<S> <C>
Demanding Holders........... 2.1
Demanding Shareholders...... 2.1
Management Warrant Holders.. 2.1
Note Holders................ 2.1
Registering Holders......... 2.2
Section 3.1 Offer........... 3.1
Section 3.1 Offer Notice.... 3.1
Section 3.1 Offer Period.... 3.1
Section 3.1 Sale Price...... 3.1
SEC......................... 2.1
Subject Obligations......... 2.1
Subject Securities.......... 2.1
Third Party Claim........... 2.5
Warrant Holders............. 2.1
</TABLE>
3
<PAGE>
REGISTRATION RIGHTS
4
<PAGE>
2.1 Registration Upon Request. Subject to the provisions herein, (i) at
any time commencing on the Closing Date and continuing thereafter, holders of a
majority in aggregate principal amount of the Notes (such holders being referred
to as the "Note Holders"), holders of a majority of the Warrants determined by
reference to the number of shares of Common Stock for which such Warrants are
exercisable (such holders being referred to as the "Warrant Holders") and, after
April 30, 2001 holders of a majority of the Management Warrants determined by
reference to the number of shares of Common Stock for which such Management
Warrants are exercisable (such holders being referred to as the "Management
Warrant Holders") shall have the right to make written demand upon Newco, on not
more than three separate occasions (and may not effect more than one
registration each 120 days) for each of the Note, the Warrant and the Management
Warrant (subject to the provisions of this Section 2.1) (the Note, Warrant and
Management Warrant being referred to as the "Subject Obligations"), to register
under the 1933 Act, the portion of the Note, the Warrant or the Management
Warrant (but in the case of the Management Warrant, to register the portion of
the number of shares of Common Stock for which such Management Warrant is
exercisable in lieu of the Management Warrant) held by such Note Holders,
Warrant Holders or Management Warrant Holders, as the case may be (the
"Demanding Holders"), and (ii) at any time after the earlier of (A) six months
following the closing of an initial public offering of Common Stock or (B) the
second anniversary of the Closing Date, but no later than May 25, 2007, holders
of a majority of the outstanding Class A Common Stock that was outstanding as of
the date of this Agreement whether held by the original holders or by the
transferees of such Class A Common Stock from such holders (so long as any such
transferee provides evidence reasonably satisfactory to Newco that such transfer
is permitted under all applicable federal and state securities laws and under
the Shareholders Agreement referred to in the Sale Agreement) or, if all Class A
Common Stock shall have been converted into Common Stock without designation as
to class, a majority of the number of outstanding shares of Common Stock into
which such Class A Common Stock outstanding as of the date of this Agreement
shall have been converted whether held by the original holders or by transferees
of such Class A Common Stock from such holders (so long as any such transferee
provides evidence reasonably satisfactory to Newco that such transfer is
permitted under all applicable federal and state securities laws and under the
Shareholders Agreement referred to in the Sale Agreement) ("Demanding
Shareholders") shall have the right to make written demand upon Newco, on not
more than two separate occasions (subject to the provisions of this Section 2.1)
but may make unlimited demands for registration on Form S-3, if permitted, to
register under the 1933 Act the shares of Common Stock held by such shareholders
in such amount that such shareholders request to be registered (such Subject
Obligations and Common Stock being referred to as the "Subject Securities"),
provided that they may not effect more than one registration each 120 days, and
Newco shall use its best efforts to cause such securities to be registered under
the 1933 Act and take all other action reasonably necessary under state law or
regulation as soon as reasonably practicable so as to permit the sale thereof
promptly, provided further that, notwithstanding anything in this Agreement to
the contrary, the Subject Obligations or Subject Securities, as the case may be,
shall cease to be subject to this Section 2.1 and Section 2.2 when (i) a
registration statement registering such Subject Obligations or Subject
Securities, as the case may be, under the 1933 Act has been declared effective
and such Subject Obligations or Subject Securities, as the case may be, have
been sold or otherwise transferred by the holder thereof pursuant to such
effective registration statement or (ii) such Subject Obligations or Subject
Securities, as the case may be, are sold pursuant to Rule 144 (or any successor
provision) promulgated under the 1933 Act under circumstances in which any
legend borne by such Subject Obligations or Subject Securities relating to
restrictions on transferability thereof, under the
5
<PAGE>
1933 Act or otherwise, is removed by Newco. Promptly after receiving any of the
above demands for registration, Newco shall give notice in the case of clause
(i) of the first sentence of this paragraph, to all Note Holders, Warrant
Holders or Management Warrant Holders, as the case may be, and in the case of
clause (ii) of the first sentence of this paragraph, to all holders of
outstanding Class A Common Stock that was outstanding as of the date of this
Agreement, whether held by the original holders or by transferees of such Common
Stock from such holders (so long as any such transferee provides evidence
reasonably satisfactory to Newco that such transfer is permitted under all
applicable federal and state securities laws and under the Shareholders
Agreement referred to in the Sale Agreement) (or Common Stock undesignated as to
class into which such Class A Common Stock outstanding as of the date of this
Agreement shall have been converted whether held by the original holders or by
transferees (so long as any such transferee provides evidence reasonably
satisfactory to Newco that such transfer is permitted under all applicable
federal and state securities laws and under the Shareholders Agreement referred
to in the Sale Agreement)) of the receipt of such demand and provide an
opportunity to such holders to participate in such demanded registration by
giving notice to Newco, with fifteen days after receipt of such notice from
Newco, of the number of Subject Securities that such holders desire to register,
in which event they shall also be deemed to be Demanding Holders or Demanding
Shareholders, as the case may be. In connection therewith, Newco shall prepare,
and within 45 days of the receipt of the request, file, on Form S-3 if permitted
or within 120 days of the receipt of the request file on the appropriate form if
Form S-3 is not available, a registration statement under the 1933 Act to effect
such registration. Notwithstanding the foregoing, the Company shall not be
obligated to register securities that are available for resale pursuant to Rule
144(k) promulgated under the 1933 Act. The Demanding Holders or Demanding
Shareholders, as the case may be, agree to provide all such information and
materials and to take all such action as may be reasonably required in order to
permit Newco to comply with all applicable requirements of the 1933 Act, the
rules and regulations thereunder and the Securities and Exchange Commission (the
"SEC") and to obtain any desired acceleration of the effective date of such
registration statement. If the offering to be registered is to be underwritten,
the managing underwriter shall be selected by Newco and such underwriter shall
be reasonably satisfactory to a majority, measured by Subject Securities
holdings, of the Demanding Holders or the Demanding Shareholders, as the case
may be, and Newco, the Demanding Holders or the Demanding Shareholders, as the
case may be, shall enter into an underwriting agreement containing customary
terms and conditions. Notwithstanding the foregoing, Newco shall be entitled to
postpone for up to 90 days, the filing of any registration statement otherwise
required to be prepared and filed by Newco if Newco is, at such time, conducting
or about to conduct an underwritten public offering of securities and is advised
by its managing underwriter or underwriters in writing (with a copy to the
Demanding Holders or Demanding Shareholders, as the case may be), that such
offering would, in its or their opinion, be materially adversely affected by the
registration so requested. In the event of such postponement, the Demanding
Holders or Demanding Shareholders, as the case may be, by action of a majority
in interest thereof, shall have the right to withdraw the request for
registration by giving written notice to Newco within 20 days after receipt of
the notice of postponement (and, in the event of such withdrawal, such request
shall not be counted for purposes of determining the number of registrations to
which the Demanding Holders or Demanding Shareholders, as the case may be, are
entitled pursuant to this Section 2.1). Newco shall not grant to any other
holder of its securities (other than holders of Common Stock), whether currently
outstanding or issued in the future, any incidental or piggyback registration
rights with respect to any registration statement filed pursuant to a demand
registration under this Section 2.1.
6
<PAGE>
2.2 Incidental Registration Rights. If Newco (on its own initiative or
as the result of a demand) proposes to register any of its Common Stock or the
Warrant under the 1933 Act (other than (i) pursuant to Section 2.1 hereof, (ii)
securities to be issued pursuant to a stock option or other employee benefit or
similar plan, or (iii) securities proposed to be issued in exchange for other
securities or assets (other than cash) or in connection with a merger or
consolidation with another corporation), Newco shall, as promptly as
practicable, give written notice to all holders of Warrants and Melville, all
Managers and all Investors then holding Common Stock (but shall not be required
to give such written notice to any other holder of Common Stock other than a
Permitted Transferee (as that term is defined in the Shareholders Agreement
referred to in the Sale Agreement) of Common Stock from Melville, any such
Manager or any such Investor only to the extent of the Common Stock so
transferred) of Newco's intention to effect such registration. If, within 15
days after receipt of such notice, holders of Warrants or Common Stock entitled
to such notice submit a written request to Newco specifying the part or all of
the Warrants or shares of Common Stock that are then beneficially owned by
holders of the Warrants and Common Stock and that such holders ("Registering
Holders") propose to sell or otherwise dispose of in accordance with this
Section 2.2, Newco shall use its best efforts to include the securities
specified in the Registering Holders request in such registration. If the
offering pursuant to such registration statement is to be made by or through
underwriters, the Registering Holders and such underwriter shall execute an
underwriting agreement in customary form. If the managing underwriter reasonably
determines in good faith and advises the Registering Holders that the inclusion
in the registration statement of all of the Warrants or Common Stock proposed to
be included by all holders of the Warrants or Common Stock entitled to
participate (other than on a demand basis) would interfere with the successful
marketing of the securities proposed to be registered, then Newco will include
in such registration that number of the Warrants or shares of Common Stock which
does not exceed the number which such managing underwriter reasonably determines
in good faith can be sold without interfering with the successful marketing of
the securities proposed to be registered based upon the following order of
priority: (A) first, the securities Newco proposes to sell, or in the event of a
demand registration, the securities any participant exercising demand
registration rights proposes to sell, (B) second, in the event of a demand
registration, the securities Newco proposes to sell, and (C) third, the
securities of each other Person who is entitled to participate (other than on a
demand basis) in such registration on a pro rata basis as to each type of
security based on the number of shares of Common Stock (or, in the case of
Warrants, on the number of shares subject to the Warrants) owned by each such
Person; provided that if the managing underwriter reasonably determines in good
faith that inclusion in the registration statement of Warrants will prevent the
successful marketing of shares of Common Stock proposed to be registered, then
Newco need not include the incidental registration of the Warrants in such
registration and Newco shall provide the Warrant Holders the opportunity to
include in such registration statement the Warrant Shares underlying the
Warrants pursuant to this Section 2.2 in the same manner as other Common Stock
and, provided further that if the number of securities that the Registering
Holder had initially requested be included in a registration under this Section
2.2 is reduced pursuant to clause (C), the Registering Holder may withdraw all
securities from such registration. No registration effected under this Section
2.2 shall relieve Newco of its obligation to effect any registration upon
request under Section 2.1. Whether or not a Registering Holder has been
permitted to participate in a proposed offering pursuant to this Section 2.2,
Newco thereafter may determine either not to file a registration
7
<PAGE>
statement relating thereto, or to withdraw such registration statement, or
otherwise not to consummate such offering, without any liability hereunder.
2.3 Registration Mechanics. In connection with any offering of shares of
Subject Securities registered pursuant to Section 2.1 and 2.2 herein, Newco
shall (i) furnish to the Demanding Holders, Demanding Shareholders or
Registering Holders, as the case may be, such number of copies of any prospectus
(including preliminary and summary prospectuses) and conformed copies of the
registration statement (including amendments or supplements thereto and, in each
case, all exhibits) and such other documents as it may reasonably request, but
only while Newco shall be required under the provisions hereof to cause the
registration statement to remain current; (ii)(A) use its commercially
reasonable efforts to register or qualify the Subject Securities covered by such
registration statement under such blue sky or other state securities laws for
offer and sale as the holders of such Subject Securities shall reasonably
request and (B) keep such registration or qualification in effect for so long as
the registration statement remains in effect; provided, however, that Newco
shall not be obligated to qualify to do business as a foreign corporation under
the laws of any jurisdiction in which it shall not then be qualified or to file
any general consent to service of process in any jurisdiction in which such a
consent has not been previously filed or subject itself to taxation in any
jurisdiction wherein it would not otherwise be subject to tax but for the
requirements of this Section 2.3; (iii) use its commercially reasonable efforts
to cause all Subject Securities covered by such registration statement to be
registered with or approved by such other federal or state government agencies
or authorities as may be necessary in the opinion of counsel to Newco to enable
the Demanding Holders, Demanding Shareholders or Registering Holders, as the
case may be, to consummate the disposition of such shares of Subject Securities;
(iv) at any time when a prospectus relating thereto is required to be delivered
under the 1933 Act, notify the Demanding Holders, Demanding Shareholders or
Registering Holders, as the case may be, upon discovery that, or upon the
happening of any event as a result of which, the prospectus included in such
registration statement, as then in effect, includes an untrue statement of a
material fact or omits to state any material fact required to be stated therein
or necessary to make the statements therein not misleading, in the light of the
circumstances under which they were made, and (subject to the good faith
determination of Newco's Board of Directors as to whether to permit sales under
such registration statement), at the request of the Demanding Holders, Demanding
Shareholders or Registering Holders, as the case may be, promptly prepare and
furnish to them a reasonable number of copies of a supplement to or an amendment
of such prospectus as may be necessary so that, as thereafter delivered to the
purchasers of such securities, such prospectus shall not include an untrue
statement of a material fact or omit to state a material fact required to be
stated therein or necessary to make the statements therein not misleading, in
the light of the circumstances under which they were made; (v) otherwise use its
commercially reasonable efforts to comply with all applicable rules and
regulations of the SEC; (vi) use its commercially reasonable efforts to list (if
required by the rules of the applicable securities exchange or, if securities of
the same class are then so listed) the Subject Securities covered by such
registration statement on the New York Stock Exchange or on any other securities
exchange or the Nasdaq Stock Market on which Subject Securities are then listed
or traded; and (vii) before filing any registration statement or any amendment
or supplement thereto, and as far in advance as is reasonably practicable,
furnish to the Demanding Holders, Demanding Shareholders or Registering Holders,
as the case may be, and their counsel copies of such documents. In connection
with the closing of any offering of Subject Securities registered pursuant to
Section 2.1 or 2.2, Newco shall (x) furnish to the underwriter, if any,
unlegended certificates representing ownership of the
8
<PAGE>
Subject Securities being sold in such denominations as requested and (y)
instruct any transfer agent and registrar of the Subject Securities to release
any stop transfer orders with respect to such Subject Securities. Upon any
registration becoming effective pursuant to Section 2.1 or 2.2, Newco shall use
its best efforts to keep such registration statement effective for a period of
270 days or such shorter period as shall be necessary to effect the distribution
of the Subject Securities.
The Demanding Holders, Demanding Shareholders and Registering Holders
agree that upon receipt of any notice from Newco of the happening of any event
of the kind described in subdivision (iv) of this Section 2.3, it will forthwith
discontinue its disposition of Subject Securities pursuant to the registration
statement relating to such Subject Securities until its receipt of the copies of
the supplemented or amended prospectus contemplated by subdivision (iv) of this
Section 2.3 and, if so directed by Newco, will deliver to Newco all copies then
in its possession of the prospectus relating to such Subject Securities current
at the time of receipt of such notice. If the Demanding Holders', Demanding
Shareholders' and Registering Holders', as the case may be, disposition of
Subject Securities is discontinued pursuant to the foregoing sentence, unless
Newco thereafter extends the effectiveness of the registration statement to
permit dispositions of Subject Securities for an aggregate of 180 days (or 210
days, if Newco is eligible to use a Form S-3, or successor form) or such shorter
period during which all such Subject Securities are disposed of, whether or not
consecutive, the registration statement shall not be counted for purposes of
determining the number of registrations to which the Demanding Holders,
Demanding Shareholders and Registering Holders, as the case may be, are entitled
pursuant to Section 2.1.
2.4 Expenses. The Demanding Holders, Demanding Shareholders and
Registering Holders shall pay all agent fees and commissions and underwriting
discounts and commissions related to shares of Subject Securities being sold by
such holders and the fees and disbursements of their counsel and accountants and
Newco shall pay all fees and disbursements of its counsel and accountants in
connection with any registration demanded pursuant to this Article 2, provided
that the Note Holders, Warrant Holders or Management Warrant Holders, as the
case may be, shall pay all fees and disbursements of Newco's counsel and
accountants in connection with any registration pursuant to clause (i) of the
first sentence of Section 2.1. All other fees and expenses in connection with
any registration statement (including, without limitation, all registration and
filing fees, all printing costs and all fees and expenses of complying with
securities or blue sky laws) shall (i) in the case of a registration other than
of Common Stock, or in the case of the registration of Warrant Shares for which
the Management Warrant is exercisable, be borne by the Note Holders, Warrant
Holders or Management Warrant Holders, as the case may be, or (ii) in the case
of a registration of Common Stock other than the Warrant Shares for which the
Management Warrant is exercisable, be borne by Newco.
2.5 Indemnification and Contribution. In the case of any offering
registered pursuant to this Article 2, Newco agrees to indemnify and hold each
seller of the Subject Securities and each underwriter (as defined in the 1933
Act) under such registration and each person who controls any of the foregoing
within the meaning of Section 15 of the 1933 Act, and any officer, employee or
partner of the foregoing, harmless against any and all losses, claims, damages
or liabilities (including reasonable legal fees and other reasonable expenses
incurred in the investigation and defense thereof) to which they or any of them
may become subject under the 1933 Act or otherwise (collectively "Losses"),
9
<PAGE>
insofar as any such Losses shall arise out of or shall be based upon (i) any
untrue statement or alleged untrue statement of a material fact contained in any
registration statement distributed to potential purchasers relating to the sale
of such Subject Securities (as amended if Newco shall have filed with the SEC
any amendment thereof), or the omission or alleged omission to state therein a
material fact required to be stated therein or necessary to make the statements
therein not misleading or (ii) any untrue statement or alleged untrue statement
of a material fact contained in the prospectus relating to the sale of such
Subject Securities (as amended or supplemented if Newco shall have filed with
the SEC any amendment thereof or supplement thereto), or the omission or alleged
omission to state therein a material fact necessary in order to make the
statements therein, in light of the circumstances under which they were made,
not misleading, provided, however, that the indemnification contained in this
Section 2.5 shall not apply to such Losses which shall arise out of or shall be
based upon any such untrue statement or alleged untrue statement, or any such
omission or alleged omission, which shall have been made in reliance upon and in
conformity with information furnished in writing to Newco by the Demanding
Holders, Demanding Shareholders and Registering Holders, as the case may be, or
any such underwriter or such controlling person, specifically for use in
connection with the preparation of the registration statement or prospectus
contained in the registration statement or any such amendment thereof or
supplement therein.
In the case of each offering registered pursuant to this Article 2,
the Demanding Holders, Demanding Shareholders and Registering Holders, as the
case may be, severally agree and each underwriter or such controlling person, if
any, participating therein shall severally agree, substantially in the same
manner and to the same extent as set forth in the preceding paragraph, to
indemnify and hold harmless Newco and each person, if any, who controls Newco
within the meaning of Section 15 of the 1933 Act, and the directors and officers
of Newco, and any underwriter with respect to any statement in or omission from
such registration statement or prospectus contained in such registration
statement (as amended or as supplemented, if amended or supplemented as
aforesaid) if such statement or omission shall have been made in reliance upon
and in conformity with information furnished in writing to Newco by the
Demanding Holders, Demanding Shareholders and Registering Holders, as the case
may be, or such underwriter or such controlling person, as the case may be,
specifically for use in connection with the preparation of such registration
statement or prospectus contained in such registration statement or any such
amendment thereof or supplement thereto.
If any third party shall notify the indemnified party with respect to
any claim of such third party (a "Third Party Claim") which may give rise to a
claim for indemnification by the indemnified party against the indemnifying
party, then the indemnified party shall notify the indemnifying party thereof in
writing within ten business days after receiving such notification from the
third party, provided that failure to give timely notice under this paragraph of
Section 2.5 shall not limit the indemnification obligations of the indemnifying
party hereunder except to the extent that the delay in giving, or failure to
give, such notice prejudices the ability of the indemnifying party to defend
against the Third Party Claim. The indemnifying party shall have the right to
elect to, by written notice delivered to the indemnified party within ten days
of receipt by the indemnifying party of the notice from the indemnified party in
respect of the Third Party Claim, and shall if so requested by the indemnified
party, at the sole expense of the indemnifying party, assume control of the
defense of the Third Party Claim with counsel selected by the indemnifying party
and reasonably satisfactory to the indemnified party.
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<PAGE>
If the indemnifying party elects to assume such control within such
ten-day period or is requested by the indemnified party to assume control, the
indemnifying party will pursue such defense in a diligent and bona fide manner,
and the indemnified party shall cooperate with the indemnifying party and its
counsel and shall have the right to participate in the negotiation, settlement
or defense of such Third Party Claim, at its own expense (except for settlement
payments and except that the indemnifying party will be responsible for the fees
and expenses of the indemnified party's counsel if in the reasonable opinion of
counsel to the indemnifying party such counsel has a conflict of interest). If
the indemnifying party elects to assume such control, the indemnified party
agrees to (i) give the indemnifying party, its counsel and other authorized
representatives reasonable access during normal business hours to the employees,
offices, properties, books and records of the indemnified party reasonably
related to the investigation or defense of any such matters and (ii) instruct
the employees of the indemnified party to reasonably cooperate with and assist
the indemnifying party, its counsel and other authorized representatives in the
investigation and defense, in depositions or appearing as witnesses. The
indemnifying party shall reimburse the indemnified party and its employees for
the reasonable out-of-pocket expenses incurred by such Person in connection
therewith. If the indemnifying party does not elect to assume control of the
defense within such ten-day period and is not requested by the indemnified party
to assume control of the defense or, having elected or having been so requested
to assume such control, thereafter fails to proceed with the settlement or
defense of any such Third Party Claim in a diligent and bona fide manner, the
indemnified party shall be entitled to assume such control at the expense of the
indemnifying party. In such case, the indemnifying party shall cooperate where
necessary with the indemnified party and its counsel in connection with such
Third Party Claim and the indemnifying party shall be bound by the results
obtained by the indemnified party with respect to such Third Party Claim.
The indemnified party shall not settle any Third Party Claim without
the prior written consent of the indemnifying party, which shall not be
unreasonably withheld. The indemnifying party shall not settle any Third Party
Claim unless the indemnified party is relieved of all obligations thereunder
pursuant to the terms of the written settlement and, if the indemnified party is
Newco, Melville or the Limited Partnership I, is not impaired in any material
respect pursuant to the settlement from operating its business in the manner in
which it was operated in accordance with past practice.
The indemnified party agrees to give prompt notice to the indemnifying
party of the assertion of any claim, or the commencement of any suit, action or
proceeding in respect of which indemnity may be sought under this Agreement that
does not constitute a Third Party Claim, provided that a failure to give a
timely notice under this paragraph of Section 2.5 shall not limit the
indemnification obligation of the indemnifying party except to the extent that
the delay in giving, or the failure to give, such notice prejudices the ability
of the indemnifying party to defend against such claim, suit, action or
proceeding.
Notwithstanding the provisions of this Section 2.5, no underwriter
shall be required to contribute any amount in excess of the amount by which the
total price at which the securities underwritten by it and distributed to the
public were offered to the public exceeds the amount of any damages which such
underwriter has otherwise been required to pay by reason of such untrue or
alleged untrue statement or omission or alleged omission, and the Demanding
Holders, Demanding
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<PAGE>
Shareholders and Registering Holders, as the case may be, registering shares
pursuant to Section 2.1 or Section 2.2 shall not be required to contribute any
amount in excess of the amount by which the total price at which the securities
of the Demanding Holders, Demanding Shareholders and Registering Holders, as the
case may be, were offered to the public (less underwriters' discounts and
commissions) exceeds the amount of any damages which the Demanding Holders,
Demanding Shareholders and Registering Holders, as the case may be, have
otherwise been required to pay by reason of such untrue or alleged untrue
statement or omission or alleged omission.
The parties hereto agree that it would not be just and equitable if
contribution pursuant to this Section 2.5 were determined by pro rata allocation
or by any other method of allocation that does not take account of the equitable
considerations referred to in the immediately preceding paragraph. No person
guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of
the 1933 Act) shall be entitled to contribution from any person who was not
guilty of such fraudulent misrepresentation.
2.6 Holdback Agreements. If and to the extent requested by the managing
underwriter or underwriters, in the case of any underwritten public offering,
the Demanding Holders, Demanding Shareholders and Registering Holders, as the
case may be, agree not to effect, except as part of such registration, any sale
of the Note, Warrant, or Management Warrant or shares of Common Stock during the
14 days prior to, and during the 90-day period (or if the underwriter reasonably
concludes that a longer period is necessary, such longer period as is mutually
agreed) beginning on the effective date of such registration statement.
2.7 Participation in Underwritten Registrations. Without limiting the
generality of the foregoing, no Demanding Holders, Demanding Shareholders or
Registering Holders may participate in any underwritten registration hereunder
unless (i) such Demanding Holder, Demanding Shareholder or Registering Holder
agrees to sell such holder's registrable shares on the basis provided in any
underwriting arrangements approved by Newco, and (ii) such Demanding Holder,
Demanding Shareholder or Registering Holder completes and executes all
questionnaires.
RIGHT OF FIRST OFFER
3.1 Right of First Offer. (a) If Melville desires to transfer all or
part of the Note or the Warrant to a third party in a bona fide arm's-length
transaction or proposes to register all or part of the Note or the Warrant
pursuant to Section 2, Melville shall give written notice (a "Section 3.1 Offer
Notice") to Joel Waller and David Rogers individually and on behalf of the other
Managers, to the Investors and, in the case of a proposed sale or registration
of the Warrant, to Newco (i) stating that Melville desires to effect such a
transfer or registration and (ii) setting forth the amount of the Note and/or
Warrant proposed to be transferred or registered and, in the case of a sale or
other transfer to a third party, the cash price or other consideration that such
third party proposes to pay for such Notes or Warrants, the identity of the
proposed transferee and the other material terms and conditions of such proposed
transfer or in the case of a proposed registration of the Note, the principal
and interest then
12
<PAGE>
due under the Note or in the case of a proposed registration of the Warrants, an
appraisal from an investment banking firm of national reputation reasonably
acceptable to Newco setting forth the fair market value of the Warrants proposed
to be registered (the "Section 3.1 Sale Price").
(b) The receipt of a Section 3.1 Offer Notice by Joel Waller and
David Rogers, the Investors and, in the case of a proposed sale or registration
of the Warrant, by Newco from Melville shall constitute an offer (the "Section
3.1 Offer") by Melville to sell, to Joel Waller and David Rogers, the other
Managers, the Investors and, in the case of a proposed sale or registration of
the Warrant, Newco, in the aggregate all but not less than all of the offered
amount of such Notes or Warrants for cash at the Section 3.1 Sale Price (and, if
the proposed transfer shall include non-cash consideration, such consideration
shall be valued at its fair market value for purposes of establishing the
Section 3.1 Sale Price) or, if the buyers so elect if the Section 3.1 Sale Price
includes non-cash consideration, at the price and on the terms proposed by the
third party. Such offer shall be irrevocable for 30 days after receipt of such
Section 3.1 Offer Notice by Joel Waller and David Rogers, the other Managers,
the Investors and, in the case of a proposed sale or registration of the
Warrant, by Newco (the "Section 3.1 Offer Period"). During the Section 3.1 Offer
Period, Joel Waller and David Rogers, the other Managers, the Investors and, in
the case of a proposed sale or registration of the Warrant, Newco shall have the
exclusive right to accept such offer by giving written notice of acceptance to
Melville prior to the expiration of the Section 3.1 Offer Period. If Newco shall
accept such offer with respect to the Warrant during the Section 3.1 Offer
period, the portion of the Warrant so offered shall be sold to Newco and not to
the other offerees. If either or both of Joel Waller and David Rogers shall
accept such offer during the Section 3.1 Offer Period (and, if the offer is with
respect to the Warrant, Newco shall not have accepted such offer), the portion
of the Note or the Warrant, as the case may be, so offered shall be sold to
whichever of Joel Waller or David Rogers accepted the offer (or pro-rata based
upon the respective ownership of outstanding Common Stock by them and their
Permitted Transferees under the Shareholders Agreement on the date of
commencement of the Section 3.1 Offer Period if both shall have accepted the
offer) and not to the other offerees. In all other events, the portion of the
Note or the Warrant so offered shall be sold pro-rata (based upon the respective
ownership by the shareholders of outstanding Common Stock on the date of
commencement of the Section 3.1 Offer Period) to the other Managers and the
Investors (and their Permitted Transferees under the Shareholders Agreement) who
accepted the offer.
(c) Joel Waller and David Rogers, the other Managers, the Investors
or, in the case of a proposed sale or registration of the Warrant, Newco, in the
order of priority set forth in Section 3.1(b) shall purchase and pay cash for
all Notes or Warrants accepted within a 20-day period of their acceptance of the
offer, provided that if the Section 3.1 Sale Price includes non-cash
consideration, they may instead elect to purchase at the price and on the terms
proposed by the third party. A Section 3.1 Offer Notice shall be deemed to
constitute a representation and warranty by Melville that (i) Melville has good
title to such Notes or Warrants free of any Liens and (ii) has full power and
authority to make such offer and consummate such sale.
(d) Upon the failure to accept the Section 3.1 Offer within such
Section 3.1 Offer Period (including failure to accept all of the Notes or
Warrants offered in the Section 3.1 Offer Notice), there shall commence a 90-day
period during which Melville shall have the right to effect a transfer to a
third party of or to register all of the Notes or Warrants subject to the
Section 3.1 Offer on substantially
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<PAGE>
the same terms and conditions as were set forth in the Section 3.1 Offer Notice
at a price in cash not less than 100% (or if the Section 3.1 Offer Notice stated
that Melville proposed to register all or part of the Note or Warrant, 90%) of
the Section 3.1 Sale Price; provided that Newco shall have received an opinion
of qualified legal counsel to Melville to the effect that the transfer to such
third party is not in violation of the 1933 Act. Notwithstanding the foregoing,
if the purchase and sale of such Notes or Warrants is subject to any prior
regulatory approval, the time period during which such purchase and sale may be
consummated shall be extended until the expiration of five Business Days after
all such approvals shall have been received but in no event shall such time
period exceed 120 days without the consent of Newco. If Melville does not
consummate the sale of the Notes or Warrants subject to the Section 3.1 Offer in
accordance with the foregoing time limitations, Melville may not sell any Notes
or Warrants without repeating the foregoing procedures.
MISCELLANEOUS
4.1 Notices. All notices, requests and other communications to any party
hereunder shall be in writing (including facsimile transmission) and shall be
given at the party's address (or telecopier number) set forth below, or such
other address (or telecopier number) as shall have been furnished to the party
giving or making such notice, request or other communication:
If to Newco, to:
Wilsons The Leather Experts Inc.
c/o Wilsons Center Inc.
400 Highway 169
St. Louis Park, Minnesota 55426
Telecopier: (612) 541-3152
Attention: Joel Waller, David Rogers
with copies to:
Faegre & Benson
2200 Norwest Center
90 South Seventh Street
Minneapolis, Minnesota 55402
Telecopier: 612-336-3026
Attention: Philip S. Garon, Esq.
and
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<PAGE>
Maslon Edelman Borman & Brand
3300 Norwest Center 90
South Seventh Street
Minneapolis, Minnesota 55402
Telecopier: (612) 672-8397
Attention: Neil I. Sell, Esq.
If to Melville, to:
Melville Corporation
One Theall Road
Rye, New York 10580
Telecopier: (914) 925-4052
Attention: Chief Executive Officer, Chief
Financial Officer and General Counsel
with a copy to:
Davis Polk & Wardwell
450 Lexington Avenue
New York, New York 10017
Telecopier: (212) 450-4800
Attention: Dennis S. Hersch, Esq.
If to the Investors or Managers, at the most recent addresses shown on the
stock record books of Newco.
All such notices, requests and other communications shall be deemed received on
the date of receipt by the recipient thereof if received prior to 5 p.m. in the
place of receipt and such day is a business day in the place of receipt.
Otherwise, any such notice, request or communication shall be deemed not to have
been received until the next succeeding business day in the place of receipt.
4.2 Amendments and Waivers. (a) Any provision of this Agreement may be
amended or waived if, but only if, such amendment or waiver is in writing and is
signed, in the case of an amendment, by each party to this Agreement (except
that in the case of the Managers, it need be signed only by Managers holding 80%
of the outstanding Common Stock then held by the Managers and their respective
Permitted Transferees under the Shareholders Agreement), or in the case of a
waiver, by the party against whom the waiver is to be effective (except that in
the case of the Managers, it need be signed only by Managers holding 80% of the
outstanding Common Stock then held by the Managers and their respective
Permitted Transferees under the Shareholders Agreement).
15
<PAGE>
(a) No failure or delay by any party in exercising any right, power or
privilege hereunder shall operate as a waiver thereof nor shall any single or
partial exercise thereof preclude any other or further exercise thereof or the
exercise of any other right, power or privilege. The rights and remedies herein
provided shall be cumulative and not exclusive of any rights or remedies
provided by law.
4.3 Expenses. Except as otherwise expressly provided herein, all costs
and expenses incurred in connection with this Agreement shall be paid by the
party incurring such cost or expense.
4.4 Successors and Assigns. The provisions of this Agreement shall be
binding upon and inure to the benefit of the parties hereto and their respective
successors and assigns; provided that no party may assign, delegate or otherwise
transfer any of its rights or obligations under this Agreement without the
consent of each other party hereto except as otherwise expressly provided
herein. Notwithstanding the foregoing, Newco may assign its rights hereunder to
one or more wholly owned Subsidiaries of Newco, but such assignment shall not
relieve Newco of its obligations hereunder.
4.5 Governing Law. This Agreement shall be governed by and construed in
accordance with the law of the State of New York, without regard to the
conflicts of law rules of such state.
4.6 Jurisdiction. With respect to any suit, action or proceeding seeking
to enforce any provision of, or based on any matter arising out of or in
connection with, this Agreement or the transactions contemplated hereby, THE
PARTIES HERETO WAIVE ANY RIGHTS THEY MAY HAVE TO A JURY TRIAL.
4.7 Counterparts; Effectiveness. This Agreement may be signed in any
number of counterparts, each of which shall be an original, with the same effect
as if the signatures thereto and hereto were upon the same instrument. This
Agreement shall become effective when each party hereto shall have received a
counterpart hereof signed by the other parties hereto.
4.8 Third Party Beneficiaries. No provision of this Agreement is intended
to confer upon any Person other than the parties hereto any rights or remedies
hereunder except as otherwise expressly provided herein.
4.9 Entire Agreement. This Agreement, the Note, the Warrant, the
Management Warrant and the Sale Agreement constitute the entire agreement
between the parties with respect to the subject matter thereof and supersedes
all prior agreements and understandings, both oral and written, between the
parties with respect to the subject matter thereof. No representation,
inducement, promise, understanding, condition or warranty not set forth herein
has been made or relied upon by either party hereto. Neither this Agreement nor
any provision hereof is intended to confer upon any Person other than the
parties hereto any rights or remedies hereunder.
4.10 Validity of Provisions. Should any provision of this Agreement be
declared by any court of competent jurisdiction to be invalid or unenforceable,
the remaining provisions
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<PAGE>
shall not be affected thereby. If any provision of this Agreement shall be held
to be partially invalid and unenforceable, then that portion which is not held
to be invalid or unenforceable shall be deemed enforceable to the maximum extent
permitted by law.
4.11 Section Headings. The section headings contained in this Agreement
are for reference purposes only and shall not affect in any way the meaning or
interpretation of this Agreement.
4.12 Further Assurances. At any time and from time to time, each party
hereto, without further consideration, shall cooperate, take such further action
and execute and deliver such further instruments and documents as may be
reasonably requested by any other party in order to carry out the provisions and
purposes of this Agreement.
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<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to
be duly executed by their respective authorized officers as of the day and year
first above written.
Melville Corporation
By: /s/ HARVEY ROSENTHAL
----------------------------
Name: Harvey Rosenthal
Title: President
WILSONS THE LEATHER EXPERTS INC.
By: /s/ DAVID ROGERS
----------------------------
Name: David Rogers
Title: President
LEATHER INVESTORS LIMITED PARTNERSHIP I
By: /s/ LYLE BERMAN
----------------------------
Title:
/s/ LYLE BERMAN
-------------------------------
Lyle Berman
/s/ MORRIS GOLDFARB
--------------------------------
Morris Goldfarb
/s/ NEIL I. SELL
--------------------------------
Neil I. Sell
/s/ ERCU UCAN
--------------------------------
Ercu Ucan
/s/ IRVING MISEL
---------------------------------
Irving Misel
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ANN BENSON
/s/ ANN BENSON
- ----------------------------
KEVIN BLODGETT
/s/ KEVIN BLODGETT
- ----------------------------
MARGO BLOMBERG
/s/ MARGO BLOMBERG
- ----------------------------
WM MICHAEL BODE
/s/ WM MICHAEL BODE
- ----------------------------
GEORGE BOLES
/s/ GEORGE BOLES
- ----------------------------
MICHAEL CAMPBELL
/s/ MICHAEL CAMPBELL
- ----------------------------
SCOTT CHRISTIAN
/s/ SCOTT CHRISTIAN
- ----------------------------
MICHAEL CROWE
/s/ MICHAEL CROWE
- ----------------------------
KELLIE DAVIES
/s/ KELLIE DAVIES
- ----------------------------
LESLIE DAWSON
/s/ LESLIE DAWSON
- ----------------------------
RUSSELL EDWARDS-SIMPSON
/s/ RUSSELL EDWARDS SIMPSON
- ----------------------------
STANFORD EVAVOLD
/s/ STANFORD EVAVOLD
- ----------------------------
19
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JOHN FOWLER
/s/ JOHN FOWLER
- ----------------------------
ROSALIE GELSO
/s/ ROSALIE GELSO
- ----------------------------
BETTY GOFF
/s/ BETTY GOFF
- ----------------------------
APRIL HANSON
/s/ APRIL HANSON
- ----------------------------
DAISY HSU
/s/ DAISY HSU
- ----------------------------
GERARD IRVIN
/s/ GERARD IRVIN
- ----------------------------
JED JAFFE
/s/ JED JAFFE
- ----------------------------
ROSS KIEFER
/s/ ROSS KIEFER
- ----------------------------
NANCY KIELTY
/s/ NANCY KIELTY
- ----------------------------
CORRINE LAPINSKY
/s/ CORRINE LAPINSKY
- ----------------------------
DARRELL LAWRENCE
/s/ DARRELL LAWRENCE
- ----------------------------
CAROL LUND
/s/ CAROL LUND
- ----------------------------
20
<PAGE>
DAVID LUNNEBORG
/s/ DAVID LUNNEBORG
- ---------------------------
LYNN MCKEE
/s/ LYNN MCKEE
--------------------------
ALFRED MINNITI
/s/ ALFRED MINNITI
---------------------------
JEFFREY MONTANG
/s/ JEFFREY MONTANG
---------------------------
GREGORY MORNEAU
/s/ GREGORY MORNEAU
---------------------------
JEFFREY ORTON
/s/ JEFFREY ORTON
---------------------------
PETER PAEK
/s/ PETER PAEK
---------------------------
GARY PETERSEN
/s/ GARY PETERSEN
---------------------------
ROBERT POIRIER
/s/ ROBERT POIRIER
---------------------------
JAMES RAGON
/s/ JAMES RAGON
---------------------------
DAVID ROGERS
/s/ DAVID ROGERS
---------------------------
MARY SADOWSKI
/s/ MARY SADOWSKI
---------------------------
21
<PAGE>
MARK SCHWARTZ
/s/ MARK SCHWARTZ
- ---------------------
JONI SEYMOUR
/s/ JONI SEYMOUR
- --------------------
DAVID SHARP
/s/ DAVID SHARP
- -------------------
HENRY SHEMMER
/s/ HENRY SHEMMER
- ---------------------
RANDALL STEEN
/s/ RANDALL STEEN
- ---------------------
DANIEL THORSON
/s/ DANIEL THORSON
- ----------------------
DAVID TIDMARSH
/s/ DAVID TIDMARSH
- ----------------------
DOUGLAS TREFF
/s/ DOUGLAS TREFF
- ---------------------
JOEL WALLER
/s/ JOEL WALLER
- -------------------
JAMES WANNINGER
/s/ JAMES WANNINGER
- -----------------------
LAWRENCE WEINBERG
/s/ LAWRENCE WEINBERG
- -------------------------
THOMAS WILDENBERG
/s/ THOMAS WILDENBERG
- -------------------------
22
<PAGE>
KATHERINE WODTKE
/s/ KATHERINE WODTKE
- ------------------------
23
<PAGE>
Exhibit 10.1
WILSONS THE LEATHER EXPERTS INC.
1996 STOCK OPTION PLAN
1. PURPOSE. The purpose of this 1996 Stock Option Plan (the "Plan")
is to promote the interests of Wilsons The Leather Experts Inc., a Minnesota
corporation (the "Company"), and its shareholders by providing personnel of the
Company and any subsidiaries thereof with an opportunity to acquire a
proprietary interest in the Company and thereby develop a stronger incentive to
put forth maximum effort for the continued success and growth of the Company. In
addition, the opportunity to acquire a proprietary interest in the Company will
aid in attracting and retaining personnel of outstanding ability.
2. ADMINISTRATION.
(a) General. This Plan shall be administered by a committee of
two or more directors of the Company (the "Committee") appointed by the
Company's Board of Directors (the "Board"). If the Board has not appointed
a committee to administer this Plan, then the Board shall constitute the
Committee. The Committee shall have the power, subject to the limitations
contained in this Plan, to fix any terms and conditions for the grant or
exercise of any option under this Plan. From and after the date on which
the Company first registers a class of its equity securities under Section
12 ("Section 12 Registration") of the Securities Exchange Act of 1934, as
amended (the "Exchange Act"), unless the Board shall constitute the
Committee, no director shall serve as a member of the Committee unless such
director shall be a "non-employee director" as that term is defined in Rule
16b-3 promulgated under the Exchange Act or any successor statute or
regulation comprehending the same subject matter. A majority of the members
of the Committee shall constitute a quorum for any meeting of the
Committee, and the acts of a majority of the members present at any meeting
at which a quorum is present or the acts unanimously approved in writing by
all members of the Committee shall be the acts of the Committee. Subject to
the provisions of this Plan, the Committee may from time to time adopt such
rules for the administration of this Plan as it deems appropriate. The
decision of the Committee on any matter affecting this Plan or the rights
and obligations arising under this Plan or any option granted hereunder,
shall be final, conclusive and binding upon all persons, including without
limitation the Company, shareholders and optionees.
(b) Indemnification. To the full extent permitted by law, (i) no
member of the Committee shall be liable for any action or determination
taken or made in good faith with respect to this Plan or any option granted
hereunder and (ii) the members of the Committee and each person to whom the
Committee delegates authority under this Plan shall be entitled to
indemnification by the Company against and from any loss incurred by such
member or person by reason of any such actions and determinations.
<PAGE>
(c) Delegation of Authority. The Committee may delegate all or
any part of its authority under this Plan to the Chief Executive Officer of
the Company for purposes of granting and administering awards granted to
persons other than persons who are then subject to the reporting
requirements of Section 16 of the Exchange Act ("Section 16 Individuals").
The Chief Executive Officer of the Company may, in turn, delegate such
authority to such other officer of the Company as the Chief Executive
Officer may determine.
3. Shares. The shares that may be made subject to options granted
under this Plan shall be authorized and unissued shares of Class C Common Stock
of the Company, par value $0.01 per share or, in the event of the conversion of
all outstanding Class C Common Stock of the Company to Class B Common Stock or
Common Stock of the Company without designation as to class pursuant to the
Articles of Incorporation of the Company, shall be authorized and unissued
shares of Class B Common Stock, par value $0.01 per share, or Common Stock of
the Company without designation as to class, par value $0.01 per share, as the
case may be ("Shares," and each individually a "Share"), and they shall not
exceed 309,278 Shares in the aggregate, subject to adjustment as provided in
paragraph 13, below, except that, if any option lapses or terminates for any
reason before such option has been completely exercised, the Shares covered by
the unexercised portion of such option may again be made subject to options
granted under this Plan.
4. Eligible Participants. For purposes of this Plan, any person who
is employed by the Company, or any parent or subsidiary thereof, is referred to
herein as an "Associate." Options may be granted under this Plan to any
Associate, including any such Associate who is also an officer or director of
the Company or any parent or subsidiary thereof. Nonstatutory stock options (as
defined in subparagraph 5(a) below) also may be granted to any director of the
Company who is not an "employee" of the Company or any parent or subsidiary
thereof and may also be granted to other individuals or entities who are not
"employees" but who provide services to the Company or a parent or subsidiary
thereof in the capacity of an advisor or consultant. References herein to
"employment" and similar terms (except "associate") shall include the providing
of services in any such capacity or as a director. The Associates and other
individuals and entities to whom options may be granted pursuant to this
paragraph 4 are referred to herein as "Eligible Participants."
5. Terms and Conditions of Associate, Advisor, Consultant and
Director Options.
(a) General. Subject to the terms and conditions of this Plan,
the Committee may, from time to time during the term of this Plan, grant to
such Eligible Participants as the Committee may determine options to
purchase such number of Shares of the Company on such terms and conditions
as the Committee may determine. In determining the Eligible Participants to
whom options shall be granted and the number of
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<PAGE>
Shares to be covered by each option, the Committee may take into account
the nature of the services rendered by the respective Eligible
Participants, their present and potential contributions to the success of
the Company, and such other factors as the Committee in its sole discretion
may deem relevant. The date and time of approval by the Committee of the
granting of an option shall be considered the date and the time of the
grant of such option. The Committee in its sole discretion may designate
whether an option granted to an Associate is to be considered an "incentive
stock option" (as that term is defined in Section 422 of the Internal
Revenue Code of 1986, as amended (the "Code"), or any amendment thereto) or
a nonstatutory stock option (an option granted under this Plan that is not
intended to be an "incentive stock option"). The Committee may grant both
incentive stock options and nonstatutory stock options to the same
Associate. However, if an incentive stock option and a nonstatutory stock
option are awarded simultaneously, such options shall be deemed to have
been awarded in separate grants, shall be clearly identified, and in no
event shall the exercise of one such option affect the right to exercise
the other. To the extent that the aggregate Fair Market Value (as defined
in paragraph 7 below) of Shares with respect to which incentive stock
options (determined without regard to this sentence) are exercisable for
the first time by any Associate during any calendar year (under all plans
of the Company and its parent and subsidiary corporations) exceeds
$100,000, such options shall be treated as nonstatutory stock options. The
maximum number of Shares subject to options that may be granted to any one
Eligible Participant under the Plan in any fiscal year of the Company may
not exceed 25,000 Shares (subject to adjustment pursuant to paragraph 13
hereof). Notwithstanding the foregoing, no incentive stock option may be
granted under this Plan unless this Plan is approved by the shareholders of
the Company within twelve months after the effective date of this Plan.
(b) Purchase Price. The purchase price of each Share subject to
an option granted pursuant to this paragraph 5 shall be fixed by the
Committee, subject, however, to the remainder of this subparagraph 5(b).
For nonstatutory stock options, such purchase price may be set at any price
the Committee may determine; provided, however, that from and after a
Section 12 Registration, such purchase price shall be not less than 85% of
the Fair Market Value of a Share on the date of grant. For incentive stock
options, such purchase price shall be no less than 100% of the Fair Market
Value of a Share on the date of grant, provided that if such incentive
stock option is granted to an Associate who owns, or is deemed under
Section 424(d) of the Code to own, at the time such option is granted,
stock of the Company (or of any parent or subsidiary of the Company)
possessing more than 10% of the total combined voting power of all classes
of stock therein (a "10% Shareholder"), such purchase price shall be no
less than 110% of the Fair Market Value of a Share on the date of grant.
(c) Vesting. Each option agreement provided for in paragraph 6
shall specify when each option granted under this Plan shall become
exercisable with respect to the Shares covered by the option.
Notwithstanding the provisions of any option
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<PAGE>
agreement provided for in paragraph 6, the Committee may, in its sole
discretion, declare at any time that any option granted under this Plan
shall be immediately exercisable.
(d) Termination. Each option granted pursuant to this paragraph
5 shall expire, and all rights to purchase Shares thereunder shall
terminate, on the earliest of:
(i) ten years after the date such option is granted (or in
the case of an incentive stock option granted to a 10% Shareholder,
five years after the date such option is granted) or on such date
prior thereto as may be fixed by the Committee on or before the date
such option is granted;
(ii) the expiration of the period after the termination of
the optionee's employment within which the option is exercisable as
specified in paragraph 10(b) or 10(c), whichever is applicable
(provided that the Committee may, in any option agreement provided for
in paragraph 6 or by Committee action with respect to any outstanding
option, extend the periods specified in paragraph 10(b) and 10(c)); or
(iii) the date, if any, fixed for cancellation pursuant to
paragraph 12 below.
6. Option Agreements. All options granted under this Plan shall be
evidenced by a written agreement in such form or forms as the Committee may from
time to time determine, which agreement shall, among other things, designate
whether the options being granted thereunder are nonstatutory stock options or
incentive stock options. So long as the Shareholder Agreement dated as of May
25, 1996 among Leather Investors Limited Partnership I, Leather Investors
Limited Partnership II, Joel Waller, David Rogers, certain investors and
managers named in the signature pages thereto, and the Company (the "Shareholder
Agreement") is in effect with respect to any share of common stock of the
Company, regardless of class or lack of class designation (other than
"Restricted Stock," as defined in the Shareholder Agreement), each option
agreement will provide that any person exercising an option will execute and
deliver to the Company an agreement to subscribe to the terms and conditions of
the Shareholder Agreement at the time of such option exercise.
7. Fair Market Value. For purposes of this Plan, the "Fair Market
Value" of a Share at a specified date shall, unless otherwise expressly provided
in this Plan, mean the closing sale price of a Share on the date immediately
preceding such date or, if no sale of Shares shall have occurred on that date,
on the next preceding day on which a sale of Shares occurred, on the Composite
Tape for New York Stock Exchange listed shares or, if Shares are not quoted on
the Composite Tape for New York Stock Exchange listed shares, on the Nasdaq
National Market or any similar system then in use or, if Shares are not included
in the Nasdaq National
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<PAGE>
Market or any similar system then in use, the mean between the closing "bid" and
the closing "asked" quotation of a Share on the date immediately preceding the
date as of which such Fair Market Value is being determined, or, if no closing
bid or asked quotation is made on that date, on the next preceding day on which
a quotation is made, on the Nasdaq SmallCap Market or any similar system then in
use, provided that if the Shares in question are not quoted on any such system,
Fair Market Value shall be what the Committee determines in good faith to be
100% of the fair market value of a Share as of the date in question.
Notwithstanding anything stated in this paragraph 7, if the applicable
securities exchange or system has closed for the day by the time the
determination is being made, all references in this paragraph to the date
immediately preceding the date in question shall be deemed to be references to
the date in question.
8. MANNER OF EXERCISE. A person entitled to exercise an option granted
under this Plan may, subject to its terms and conditions and the terms and
conditions of this Plan, exercise it in whole at any time, or in part from time
to time, by delivery to the Company at its principal executive office, to the
attention of its Vice President, Human Resources, of written notice of exercise,
specifying the number of Shares with respect to which the option is being
exercised. the purchase price of the shares with respect to which an option is
being exercised shall be payable in full at the time of exercise, provided that,
to the extent permitted by law, the holder of an option may simultaneously
exercise an option and sell all or a portion of the Shares thereby acquired
pursuant to a brokerage or similar relationship and use the proceeds from such
sale to pay the purchase price of such Shares. The purchase price of each Share
on the exercise of any option shall be paid in full in cash (including check,
bank draft or money order) or, at the discretion of the person exercising the
option, by delivery to the Company of unencumbered Shares, by a reduction in the
number of Shares delivered upon exercise of the option, or by a combination of
cash and such Shares (in each case such Shares having an aggregate Fair Market
Value on the date of exercise equal to the amount of the purchase price being
paid through such delivery or reduction of Shares); provided, however, that no
person shall be permitted to pay any portion of the purchase price with Shares
if, in the opinion of the Committee, payment in such manner could have adverse
financial accounting consequences for the Company. The granting of an option to
a person shall give such person no rights as a shareholder except as to Shares
issued to such person.
9. TAX WITHHOLDING. Delivery of Shares upon exercise of any nonstatutory
stock option granted under this Plan shall be subject to any required
withholding taxes. A person exercising such an option may, as a condition
precedent to receiving the Shares, be required to pay the Company a cash amount
equal to the amount of any required withholdings. In lieu of all or any part of
such a cash payment, the Committee may, but shall not be required to, provide in
any option agreement provided for in paragraph 6 (or provide by Committee action
with respect to any outstanding option) that a person exercising an option may
cover all or any part of the required withholdings, and any additional
withholdings up to the amount needed to cover the individual's full FICA and
federal, state and local income tax liability with respect to income arising
from the exercise of the option, through the delivery to the Company of
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<PAGE>
unencumbered Shares, through a reduction in the number of Shares delivered to
the person exercising the option or through a subsequent return to the Company
of Shares delivered to the person exercising the option (in each case, such
Shares having an aggregate Fair Market Value on the date of exercise equal to
the amount of the withholding taxes being paid through such delivery, reduction
or subsequent return of Shares).
10. TRANSFERABILITY AND TERMINATION OF EMPLOYMENT.
(a) Transferability. During the lifetime of an optionee, only such
optionee or his or her guardian or legal representative may exercise
options granted under this Plan. No option granted under this Plan shall
be assignable or transferable by the optionee otherwise than by will or the
laws of descent and distribution or pursuant to a qualified domestic
relations order as defined by the Code or Title I of the Employee
Retirement Income Security Act, or the rules thereunder.
(b) Termination of Employment During Lifetime. During the lifetime
of an optionee, an option may be exercised only while the optionee is
employed by the Company or by a parent or subsidiary thereof, and only if
such optionee has been continuously so employed since the date the option
was granted, except that:
(i) an option shall continue to be exercisable for three months
after termination of the optionee's employment but only to the extent
that the option was exercisable immediately prior to such optionee's
termination of employment;
(ii) in the case of an optionee who is disabled (as hereinafter
defined) while employed, such optionee or his or her legal
representative may exercise the option within one year after
termination of such optionee's employment; and
(iii) as to any optionee whose termination occurs following a
declaration pursuant to paragraph 12 below, such optionee may exercise
the option at any time permitted by such declaration.
(c) Termination Upon Death. With respect to an optionee whose
employment terminates by reason of death, any option held by such optionee
at the time of death may be exercised by such optionee's legal
representatives, heirs or legatees, but only within one year after the
death of such optionee.
(d) Vesting Upon Disability or Death. In the event of the disability
(as hereinafter defined) or death of an optionee, any option held by such
individual or his or her legal representative that was not previously
exercisable shall become immediately exercisable in full if the disabled or
deceased individual shall have been continuously
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<PAGE>
employed by the Company or a parent or subsidiary thereof between the date
such option was granted and the date of such disability or death.
"Disability" of an optionee shall mean any physical or mental
incapacitation whereby such optionee is therefore unable for a period of
twelve consecutive months or for an aggregate of twelve months in any
twenty-four consecutive month period to perform his or her duties for the
Company or any parent or subsidiary thereof. "Disabled", with respect to
any optionee, shall mean that such optionee has incurred a Disability.
(e) Transfers and Leaves of Absence. Neither the transfer of
employment of a person to whom an option is granted between any combination
of the Company, a parent corporation or a subsidiary thereof, nor a leave
of absence granted to such person and approved by the Committee, shall be
deemed a termination of employment for purposes of this Plan. The terms
"parent" or "parent corporation" and "subsidiary" as used in this Plan
shall have the meaning ascribed to "parent corporation" and "subsidiary
corporation", respectively, in Sections 424(e) and (f) of the Code.
(f) Right to Terminate Employment. Nothing contained in this Plan,
or in any option granted pursuant to this Plan, shall confer upon any
optionee holding an option any right to continued employment by the Company
or any parent or subsidiary of the Company or limit in any way the right of
the Company or any such parent or subsidiary to terminate such optionee's
employment at any time.
(g) Expiration Date. In no event shall any option be exercisable at
any time after the time it shall have expired in accordance with paragraph
5(d) of this Plan. When an option is no longer exercisable, it shall be
deemed to have lapsed or terminated and will no longer be outstanding.
11. CHANGE IN CONTROL.
(a) A "Change in Control" shall be deemed to have occurred if there
shall have occurred a Change in Control as defined in that certain
restricted stock agreement dated as of May 25, 1996 by and among the
Company and certain employees of the Company or a direct or indirect
subsidiary of the Company, without regard to any amendments to or
termination of such restricted stock agreement subsequent to the effective
date of this Plan.
(b) Acceleration of Vesting. Notwithstanding anything in
subparagraph 5(c) above to the contrary, if a Change of Control of the
Company shall occur, then, without any action by the Committee or the
Board, each option granted under this Plan and not already exercised in
full or otherwise terminated, expired or canceled shall become immediately
exercisable in full.
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<PAGE>
(c) Cash Payment. If a Change in Control of the Company shall
occur, then, so long as a majority of the members of the Board are persons
(i) who are named as directors in the Company's articles of incorporation
or who are nominated by, or for whose election proxies shall have been
solicited by, the Board, or (ii) who are then serving as directors
appointed by the Board to fill vacancies on the Board caused by death or
resignation (but not by removal) or to fill newly-created directorships,
the Committee, in its sole discretion, and without the consent of any
optionee affected thereby, may determine that some or all optionees holding
outstanding options shall receive, with respect to some or all of the
Common Shares subject to such options, as of the effective date of any such
Change in Control of the Company, cash in an amount, for each Share subject
to an option, equal to the excess of the per Share Fair Market Value of
such Shares immediately prior to such Change in Control of the Company over
the exercise price per Share of such options.
(d) Limitation on Change in Control Payments. Notwithstanding
anything in subparagraph 11(b) or 11(c) above or paragraph 12 below to the
contrary, if, with respect to an optionee, the acceleration of the
exercisability of an option or the payment of cash in exchange for all or
part of an option as provided in subparagraph 11(b) or 11(c) above or
paragraph 12 (which acceleration or payment could be deemed a "payment"
within the meaning of Section 280G(b)(2) of the Code), together with any
other payments which such optionee has the right to receive from the
Company or any corporation which is a member of an "affiliated group" (as
defined in Section 1504(a) of the Code without regard to Section 1504(b) of
the Code) of which the Company is a member, would constitute a "parachute
payment" (as defined in Section 280G(b)(2) of the Code), then the
acceleration of exercisability and the payments to such optionee pursuant
to subparagraph 11(b) or 11(c) above or paragraph 12 shall be reduced to
the largest amount as, in the sole judgment of the Committee, will result
in no portion of such payments being subject to the excise tax imposed by
Section 4999 of the Code.
12. Dissolution, Liquidation, Merger. In the event of (a) the
proposed dissolution or liquidation of the Company, (b) a proposed sale of
substantially all of the assets of the Company or (c) a proposed merger,
consolidation of the Company with or into any other entity, regardless of
whether the Company is the surviving corporation, or a proposed statutory share
exchange with any other entity (the actual effective date of the dissolution,
liquidation, sale, merger, consolidation or exchange being herein called an
"Event"), the Committee may, but shall not be obligated to, either (i) if the
Event is a merger, consolidation or statutory share exchange, make appropriate
provision for the protection of outstanding options granted under this Plan by
the substitution, in lieu of such options, of options to purchase appropriate
voting common stock (the "Survivor's Stock") of the corporation surviving any
such merger or consolidation or, if appropriate, the parent corporation of the
Company or such surviving corporation, or, alternatively, by the delivery of a
number of shares of the Survivor's Stock which has a Fair Market Value as of the
effective date of such merger, consolidation or statutory share exchange equal
to the product of (x) the excess of (A) the Event Proceeds per Share (as
hereinafter defined) covered by the option as of such effective date over (B)
the exercise price
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<PAGE>
per Share of the Shares subject to such option, times (y) the number of Shares
covered by such option or (ii) declare, at least twenty days prior to the Event,
and provide written notice to each optionee of the declaration, that each
outstanding option, whether or not then exercisable, shall be canceled at the
time of, or immediately prior to the occurrence of, the Event (unless it shall
have been exercised prior to the occurrence of the Event). In connection with
any declaration pursuant to clause (ii) of the preceding sentence, the Committee
may, but shall not be obligated to, cause payment to be made, within twenty days
after the Event, in exchange for each cancelled option to each optionee holding
an option that is cancelled, of cash equal to the amount (if any), for each
Share covered by the cancelled option, by which the Event Proceeds per Share (as
hereinafter defined) exceeds the exercise price per Share covered by such
option. At the time of any declaration pursuant to clause (ii) of the first
sentence of this paragraph 12, each option that has not previously expired
pursuant to subparagraph 5(d)(i) or 5(d)(ii) of this Plan shall immediately
become exercisable in full and each optionee shall have the right, during the
period preceding the time of cancellation of the option, to exercise his or her
option as to all or any part of the Shares covered thereby. In the event of a
declaration pursuant to clause (ii) of the first sentence of this paragraph 12,
each outstanding option granted pursuant to this Plan that shall not have been
exercised prior to the Event shall be cancelled at the time of, or immediately
prior to, the Event, as provided in the declaration, and this Plan shall
terminate at the time of such cancellation, subject to the payment obligations
of the Company provided in this paragraph 12. Notwithstanding the foregoing, no
person holding an option shall be entitled to the payment provided in this
paragraph 12 if such option shall have expired pursuant to subparagraph 5(d)(i)
or 5(d)(ii) of this Plan. For purposes of this paragraph 12, "Event Proceeds per
Share" shall mean the cash plus the fair market value, as determined in good
faith by the Committee, of the non-cash consideration to be received per Share
by the shareholders of the Company upon the occurrence of the Event.
13. ADJUSTMENTS. In the event of any reorganization, merger,
consolidation, recapitalization, liquidation, reclassification, stock dividend,
stock split, combination of shares, rights offering, or extraordinary dividend
or divestiture (including a spin-off), or any other change in the corporate
structure or Shares of the Company, the Committee (or if the Company does not
survive any such transaction, a comparable committee of the Board of Directors
of the surviving corporation) may, without the consent of any optionee, make
such adjustment as it determines in its discretion to be appropriate as to the
number and kind of securities subject to and reserved under this Plan and, in
order to prevent dilution or enlargement of rights of participants in this Plan,
the number and kind of securities issuable upon exercise of outstanding options
and the exercise price thereof.
14. SUBSTITUTE OPTIONS. Options may be granted under this Plan from
time to time in substitution for stock options held by employees of other
corporations who are about to become Associates, or whose employer is about to
become a subsidiary of the Company, as the result of a merger or consolidation
of the Company or a subsidiary of the Company with another corporation, the
acquisition by the Company or a subsidiary of the Company of all or
substantially all the assets of another corporation or the acquisition by the
Company or a
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subsidiary of the Company of at least 50% of the issued and outstanding stock of
another corporation. The terms and conditions of the substitute options so
granted may vary from the terms and conditions set forth in this Plan to such
extent as the Board at the time of the grant may deem appropriate to conform, in
whole or in part, to the provisions of the stock options in substitution for
which they are granted, but with respect to stock options which are incentive
stock options, no such variation shall be permitted which affects the status of
any such substitute option as an incentive stock option.
15. COMPLIANCE WITH LEGAL REQUIREMENTS.
(a) General. No certificate for Shares distributable under this
Plan shall be issued and delivered unless the issuance of such certificate
complies with all applicable legal requirements including, without
limitation, compliance with the provisions of applicable state securities
laws, the Securities Act of 1933, as amended, and the Exchange Act.
(b) Rule 16b-3. With respect to Section 16 Individuals,
transactions under this Plan are intended to comply with all applicable
conditions of Rule 16b-3 or its successors under the Exchange Act. To the
extent any provision of this Plan or action by the Committee fails to so
comply, it shall be deemed null and void, to the extent permitted by law
and deemed advisable by the Committee.
16. GOVERNING LAW. To the extent that federal laws do not otherwise
control, this Plan and all determinations made and actions taken under this Plan
shall be governed by the laws of the State of Minnesota and construed
accordingly.
17. AMENDMENT AND DISCONTINUANCE OF PLAN. The Board may at any time
amend, suspend or discontinue this Plan; provided, however, that no amendment to
this Plan shall, without the consent of the holder of the option, alter or
impair any option previously granted under this Plan. To the extent considered
necessary to comply with applicable provisions of the Code, any such amendments
to this Plan may be made subject to approval by the shareholders of the Company.
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18. TERM.
(a) Effective Date. This Plan shall be effective as of June 25, 1996.
(b) Termination. This Plan shall remain in effect until all Shares
subject to it are distributed or this Plan is terminated under paragraph 17
above. No award of an incentive stock option shall be made under this Plan more
than ten years after the effective date of this Plan (or such other limit as may
be required by the Code) if such limitation is necessary to qualify the option
as an incentive stock option.
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<PAGE>
Exhibit 10.2
WILSONS THE LEATHER EXPERTS
EXECUTIVE AND KEY MANAGEMENT
INCENTIVE PLAN
(AS ADOPTED EFFECTIVE MAY 26, 1996)
<PAGE>
Wilsons The Leather Experts
Executive and Key Management
Incentive Plan
A. INTRODUCTION AND PURPOSE
This Plan has been developed to provide opportunities for Wilsons The Leather
Experts Inc. (hereinafter "Wilsons") to motivate and reward key home office and
distribution center associates through annual incentive awards. Eligible
participants include the Chairman, President, all Vice Presidents, Directors and
certain designated key personnel below the Director level. Cash awards are based
on actual results measured against pre-established corporate financial
objectives for consolidated earnings before federal and state income taxes of
Wilsons and its direct and indirect subsidiaries ("EBT"). Selected positions
below the level of President may also have position-specific measures in
addition to the corporate financial performance measure. Awards are paid in cash
to provide an immediate reward and supplement our base compensation program.
Generally, payments are made in March or April following the end of each Plan
Year.
This Plan is intended to be as simple as possible so that the goals are very
clear to all parties. Important features of the Plan are described in this
document. Any questions regarding the interpretation of this Plan, or any
details not covered in this document, will be determined by the Incentive
Committee in its sole discretion.
B. INCENTIVE PLAN PROVISIONS
1. ADMINISTRATION
The Human Resource group administers the Plan. An Incentive Committee,
consisting of the Vice President-Human Resources, the President and the
Chairman, selects the participants in the Plan, establishes position-specific
goals, if any, for the participants and targeted award percentages for
incentive-eligible positions, and resolves disputes on interpretation and
application of the Plan. The budgeted EBT for the first Plan Year is
$24,774,000. The budgeted EBT for each subsequent Plan Year will be established
by the Board of Directors of Wilsons (the "Board").
2. TERMS OF PARTICIPATION AND PAYOUT
Incentive-eligible positions, targeted award amounts, Wilsons' EBT goals and any
applicable position-specific goals will be established and communicated, as
early as possible, at the beginning of each Plan Year.
a. Eligibility Requirements.
You must be actively employed by Wilsons or one of its direct or indirect
subsidiaries as of the last day of the Plan Year in order to receive an
incentive award for that year. In addition, in order to receive an
incentive award for a Plan Year, you must be in an incentive eligible
position as of the last day of that year, so that associates who transfer
during a Plan Year from an incentive eligible position to an ineligible
position will receive no incentive payout for that
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<PAGE>
year. Incentive awards generally will be distributed in March or April
following the close of the Plan Year.
Associates on written warning status either at the end of the Plan Year or
on the date of payout will receive no incentive payout for that year.
Further, associates terminated on or after the last day of a Plan Year but
prior to the date of award payout for such Plan Year for a reason that
Wilsons determines to be for cause will receive no incentive award payout
for that year.
For participants at the level of Vice President or below, functional area
Vice President's budget/expense plan(s) must be met for the Plan Year in
order to participate in a payout under this Plan for that year. Failure to
achieve functional area Vice President's budget disqualifies you from
eligibility for an award/payout under this Plan for the year.
b. Pro-rated Awards.
Associates who become participants during a Plan Year will be eligible to
receive a pro-rated bonus for that year reflecting their time as an
eligible participant.
Associates who transfer from an eligible position to another eligible
position during a Plan Year will receive a pro-rata award based on the time
spent in each of the eligible positions. In this situation, the ending base
salary in, and targeted award percentage for, each position will be used to
calculate the pro-rata award for the portion of the Plan Year spent in that
position.
In each case, a pro-rated award will be paid for a Plan Year only if all
the requirements of subsection a. above are satisfied for that year. For
purposes of pro-rating awards under the preceding two paragraphs, a
transfer or other event that occurs prior to the 15th day of a month will
be deemed to have occurred on the first day of that month, and a transfer
or other event that occurs on or after the 15th day of a month will be
deemed to occur on the first day of the following month.
Company-paid leave-of-absence which exceeds eight weeks will result in the
award being pro-rated to reflect time on leave which is greater than eight
weeks. Unpaid leave-of-absence will result in the award being pro-rated for
time on unpaid-leave status.
3. PERFORMANCE MEASURES
The basis for award payment will be EBT as established herein or by the Board in
accordance herewith. Select associates below the level of President may have
additional position-specific performance measures such as sales or gross margin.
Foremost is the intent to motivate and reward our associates for contributions
that successfully drive Wilsons' businesses. A personalized award sheet will be
provided to each participant which outlines the basis upon which incentives will
be awarded.
4. INCENTIVE AWARDS
A targeted award amount is established for each participant each Plan Year
expressed as a percentage of base salary at the beginning of the year. While
your targeted award amount communicated to you at the beginning of each Plan
Year is based on your base salary at the beginning of that year, your actual
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<PAGE>
award will be based on your base salary on the last day of the Plan Year
(subject to the proration provisions set forth above).
Your targeted award amount is the amount of the incentive award which will be
earned by you with respect to a Plan Year (assuming no change in your base
salary and no transfer between positions during the year) if 100% of budgeted
EBT for such Plan Year is achieved and if the other conditions to your receipt
of such award set forth in or established pursuant to this Plan are satisfied.
However, the program is structured to include a flexible scale ranging from 65%
achievement of budgeted EBT to 135% achievement of budgeted EBT. The following
chart shows the actual percents which will be paid out when EBT results are
above or below budget:
<TABLE>
<CAPTION>
% Achievement % of Targeted
of Budget Award Amount
------------- -------------
<S> <C>
135.0% or more 200%
131.5% 190%
128.0% 180%
124.5% 170%
121.0% 160%
117.5% 150%
114.0% 140%
110.5% 130%
107.0% 120%
103.5% 110%
100.0% 100%
95.0% 90%
90.0% 80%
85.0% 70%
80.0% 60%
75.0% 50%
70.0% 40%
65.0% 30%
less than 65.0% 0%
</TABLE>
Note that at 135% achievement of budgeted EBT your incentive award DOUBLES! At
the sole discretion of the Incentive Committee, there may be interpolation
between levels unless otherwise expressly provided in the chart.
5. GENERAL PROVISIONS
The Plan operates on a "Plan Year" that ends on the Saturday nearest January 31
of each year. The following chart shows the first five Plan Years:
<TABLE>
<CAPTION>
Beginning Date Ending Date
-------------- -----------
<S> <C>
February 4, 1996 February 1, 1997
February 2, 1997 January 31, 1998
February 1, 1998 January 30, 1999
January 31, 1999 January 29, 2000
January 30, 2000 February 3, 2001
</TABLE>
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<PAGE>
Please see your Vice President-Human Resources if you need assistance in
interpretation of this Plan.
C. RIGHTS OF THE PARTICIPANT
This Plan is not an employment agreement and does not ensure or evidence to any
degree the continued employment of any participant for any time, period or
position. If a participant is covered by a written employment agreement that
specifically refers to this Plan, the participant's rights and benefits shall be
governed by the terms of the employment agreement to the extent inconsistent
with this Plan.
No participant shall, by virtue of this Plan, have any interest in any specific
asset or assets of Wilsons or any of its direct or indirect subsidiaries. A
participant has only an unsecured right to receive an Incentive Plan payout in
accordance with, and at the time specified by, the Plan.
D. RIGHTS OF WILSONS
Wilsons reserves the right to change, amend, or terminate this Plan at any time,
with or without notice to participants. Any changes, amendments or Plan
termination may be made only by the Board.
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<PAGE>
EXHIBIT 10.3
WILSONS THE LEATHER EXPERTS
401(k) PROFIT SHARING PLAN
(AS ADOPTED EFFECTIVE MAY 26, 1996)
<PAGE>
WILSONS THE LEATHER EXPERTS
401(K) PROFIT SHARING PLAN
ARTICLE I
GENERAL
-------
SEC. 1.1 NAME OF PLAN. The name of the discretionary contribution
profit sharing plan set forth herein is Wilsons The Leather Experts 401(k)
Profit Sharing Plan. It is sometimes herein referred to as the "Plan". The
Plan holds certain accounts that were transferred to this Plan in a spinoff of a
portion of the 401(k) Profit Sharing Plan of Melville Corporation and Affiliated
Companies (hereinafter referred to as the "Melville Plan").
SEC. 1.2 PURPOSE. The Plan has been established so that eligible
associates may have an additional source of retirement income.
SEC. 1.3 EFFECTIVE DATE. The "Effective Date" of the Plan, the date
as of which the Plan was established, is May 26, 1996.
SEC. 1.4 COMPANY. The "Company" is Wilsons The Leather Experts Inc.,
a Minnesota corporation, acting through its agent, River Hills Wilsons, Inc.,
and any Successor Employer thereof.
SEC. 1.5 PARTICIPATING EMPLOYERS. The Company is a Participating
Employer in the Plan. With the consent of the Company, any other employer
may also become a Participating Employer in the Plan effective as of the date
specified by it in its adoption of the Plan. Any Successor Employer to a
Participating Employer shall also be a Participating Employer in the Plan.
The other Participating Employers are:
(a) River Hills Wilsons, Inc., a Minnesota corporation, effective
May 26, 1996.
(b) Wilsons Leather Holdings Inc., a Minnesota corporation, effective
May 26, 1996.
(c) Any other direct or indirect domestic U.S. subsidiary of the
Company which employs Qualified Employees, effective as of the
earliest date on or after the Effective Date that any of its
employees satisfies the eligibility requirements of Article IV.
SEC. 1.6 CONSTRUCTION AND APPLICABLE LAW. The Plan is intended to
meet the requirements for qualification under section 401(a) of the Code and the
requirements applicable to qualified cash or deferred arrangements under section
401(k) of the Code. The Plan is also intended to be in full compliance with
applicable requirements of ERISA. The Plan shall be administered and construed
consistent with said intent. It shall also be construed and administered
according to the laws of the State of Minnesota to the extent that such laws are
not preempted by the laws of the United States of America. All controversies,
disputes, and claims arising hereunder shall be submitted to the United States
District Court for the District of Minnesota, except as otherwise provided in
any trust agreement entered into with a Funding Agency.
SEC. 1.7 BENEFITS DETERMINED UNDER PROVISIONS IN EFFECT AT
TERMINATION OF EMPLOYMENT. Except as may be specifically provided herein to
the contrary, benefits under the Plan attributable to service prior to a
Participant's Termination of Employment shall be determined and paid
<PAGE>
in accordance with the provisions of the Plan as in effect as of the date
the Termination of Employment occurred unless he or she becomes an Active
Participant after that date and such active participation causes a contrary
result under the provisions hereof. However, the provisions of this document
shall apply to any such Participant to the extent necessary to maintain the
qualified status of the Plan under Code section 401(a) or to comply with the
requirements of ERISA.
SEC. 1.8 EFFECTIVE DATE OF DOCUMENT. Unless a different date
is specified for some purpose in this document, the provisions of this Plan
document are generally effective as of May 26, 1996.
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<PAGE>
ARTICLE II
MISCELLANEOUS DEFINITIONS
SEC. 2.1 ACCOUNT. "Account" means a Participant's or Beneficiary's
interest in the Fund of any of the types described in Sec. 7.1.
SEC. 2.2 ACTIVE PARTICIPANT. An individual is an "Active
Participant" only while he or she is both a Participant and a Qualified
Associate.
SEC. 2.3 AFFILIATE. "Affiliate" means any trade or business entity
under Common Control with a Participating Employer, or under Common Control with
a Predecessor Employer while it is such.
SEC. 2.4 BENEFICIARY. "Beneficiary" means the person or persons
designated as such pursuant to the provisions of Article VIII.
SEC. 2.5 BOARD. The "Board" is the board of directors of the
Company, and includes any executive committee thereof authorized to act for said
board of directors.
SEC. 2.6 CERTIFIED EARNINGS. "Certified Earnings" of a Participant
from a Participating Employer for a Plan Year or other period means the amount
determined by the Participating Employer and reported to the Company to be the
total regular basic compensation, including bonuses under a position-specific
defined plan, overtime pay, pay for earned vacation, and sick pay or salary
continuance pay, paid to the Participant by the Participating Employer on or
after June 1, 1996 and during such Plan Year or other period for service as a
Qualified Associate, subject to the following:
(a) Certified Earnings include Pre-Tax Contributions to this Plan
and any contributions made by salary reduction to any other plan
which meets the requirements of Code sections 125 or 401(k),
whether or not such contributions are actually excludable from
the Participant's gross income for federal income tax purposes.
Certified Earnings do not include Profit Sharing Contributions,
Special Profit Sharing Contributions or Matching Contributions
to this Plan.
(b) Allowances or reimbursements for expenses, relocation payments or cost
of living allowances, severance pay, payments or contributions to or
for the benefit of the individual under any other deferred
compensation, pension, profit sharing, insurance, short-term
disability, long-term disability, or other employee benefit plan or
policy, workers' compensation payments, imputed income, stock options,
stock appreciation rights, restricted stock awards or cash payments in
lieu thereof, special ad hoc incentive awards such as individual
recognition awards, contests or one-time incentive awards, merchandise
or service discounts, equalization payments to expatriates, non-cash
awards, benefits in the form of property or the use of property, or
other similar fringe benefits or forms of special pay shall not be
included in computing Certified Earnings, except as provided in
subsection (a) or to the extent such amounts are required to be
included in determining the individual's regular rate of pay under the
Federal Fair Labor Standards Act for purposes of computing overtime
pay thereunder.
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<PAGE>
(c) Certified Earnings of a Participant for any Plan Year shall not exceed
$150,000, adjusted for each Plan Year to take into account any cost of
living increase provided for that year in accordance with regulations
prescribed by the Secretary of the Treasury, subject to the provisions
of Sec. 2.10(b) in the case of certain Family Members. The dollar
increase in effect on January 1 of any calendar year shall apply to
Plan Years beginning in that calendar year. If a Plan Year is shorter
than 12 months, the limit under this subsection for that year shall be
multiplied by a fraction, the numerator of which is the number of
months in the short Plan Year and the denominator of which is 12.
However, for purposes of applying this subsection to Profit Sharing
Contributions under Sec. 5.3 for the Plan Year ending on December 31,
1996, said Plan Year shall be deemed to have begun on January 1, 1996.
SEC. 2.7 CODE. "Code" means the Internal Revenue Code of 1986 as
from time to time amended.
SEC. 2.8 COMMON CONTROL. A trade or business entity (whether a
corporation, partnership, sole proprietorship or otherwise) is under "Common
Control" with another trade or business entity (i) if both entities are
corporations which are members of a controlled group of corporations as defined
in Code section 414(b), or (ii) if both entities are trades or businesses
(whether or not incorporated) which are under common control as defined in Code
section 414(c), or (iii) if both entities are members of an affiliated service
group as defined in Code section 414(m), or (iv) if both entities are required
to be aggregated pursuant to regulations under Code section 414(o). Service for
all entities under Common Control shall be treated as service for a single
employer to the extent required by the Code; provided, however, that an
individual shall not be a Qualified Associate by reason of this section. In
applying the first sentence of this section for purposes of Article VI, the
provisions of subsections (b) and (c) of section 414 of the Code are deemed to
be modified as provided in Code section 415(h).
SEC. 2.9 ERISA. "ERISA" means the Employee Retirement Income
Security Act of 1974 as from time to time amended.
SEC. 2.10 FAMILY MEMBER. "Family Member" means an individual
described in Code section 414(q)(6) with respect to a Highly Compensated
Associate who is a more than 5-percent owner or is among the 10 Highly
Compensated Associates paid the greatest compensation. Family Members include
the Highly Compensated Associate, his or her spouse and lineal ascendants or
descendants, and the spouses of such lineal ascendants or descendants. Legal
adoptions shall be taken into account and treated as blood relations for
purposes of determining lineal ascendants and descendants.
(a) An individual who qualifies as a Family Member on any day of a Plan
Year will be treated as a Family Member for the entire Plan Year.
(b) For purposes of applying the dollar limit on Certified Earnings under
Sec. 2.6(c), any Participant who is the spouse of a Highly Compensated
Associate who is a more than 5-percent owner or is among the 10 Highly
Compensated Associates paid the greatest compensation and any of the
lineal descendants of such a Highly Compensated Associate who have not
attained age 19 before the end of the Plan Year shall not be treated
as a separate Participant, and any Certified Earnings of the Family
Member shall be treated as Certified Earnings of the Highly
Compensated Associate. If the dollar limit is exceeded as a result of
the preceding sentence, the limit shall be prorated among the affected
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<PAGE>
individuals in proportion to each such individual's compensation
determined prior to the application of the preceding sentence. The
dollar limit shall be applied separately to any other Family Member.
SEC. 2.11 FORFEITURES. "Forfeitures" means that part of the Fund so
recognized under Sec. 9.2(b).
SEC. 2.12 FUND. "Fund" means the aggregate of assets described in
Sec. 11.1.
SEC. 2.13 FUNDING AGENCY. "Funding Agency" is a trustee or trustees
or an insurance company appointed and acting from time to time in accordance
with the provisions of Sec. 11.2 for the purpose of holding, investing, and
disbursing all or a part of the Fund.
SEC. 2.14 HIGHLY COMPENSATED ASSOCIATE. "Highly Compensated
Associate" for any Plan Year means an individual described as such in Code
section 414(q).
(a) Unless otherwise provided in Code section 414(q), each individual who
meets one of the following requirements is a "Highly Compensated
Associate":
(1) The individual at any time during the current or prior Plan Year
was a more than 5-percent owner as defined in Code section
414(q)(3).
(2) The individual received Compensation from the employer in
excess of $100,000 for the prior Plan Year.
(3) The individual both received Compensation from the employer in
excess of $66,000 for the prior Plan Year and was in the top 20
percent of employees of the employer who performed services for
the employer in such prior Plan Year, when ranked on the basis of
Compensation paid during the Plan Year. For purposes of
determining the top 20 percent of employees under Code section
414(q)(8), any non-resident aliens who receive no earned income
from the employer which constitutes income from sources within
the United States shall be disregarded.
(4) The individual was an officer of the employer receiving
Compensation in excess of $60,000 for the prior Plan Year.
However, no more than the lesser of (i) 50 employees or (ii) the
greater of 3 employees or 10 percent of all employees of the
employer shall be treated as officers for purposes of this
paragraph. If for any Plan Year no officer meets the requirements
of this paragraph (4), then the officer receiving the greatest
Compensation in the prior Plan Year shall be treated as a Highly
Compensated Associate.
(5) The individual would meet the requirements of paragraph (2), (3),
or (4) in the current Plan Year (but not in the prior Plan Year)
and is among the 100 employees paid the greatest Compensation by
the employer during the current Plan Year.
(6) The individual is a former employee who had a separation year
prior to the current Plan Year and such individual performed
services for the employer and was a Highly Compensated Associate
for either (i) such separation year, or (ii) any Plan Year ending
on or after the individual's 55th birthday. A "separation year"
is the Plan
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<PAGE>
Year in which the individual separates from service with the
employer. With respect to an individual who separated from
service before January 1, 1987, the individual will be included
as a Highly Compensated Associate only if the individual was a
more than 5-percent owner or received Compensation in excess of
$50,000 during (i) the individual's separation year (or the year
preceding such separation year), or (ii) any year ending on or
after such individual's 55th birthday (or the last year ending
before such individual's 55th birthday).
(b) The dollar amounts specified in paragraphs (2), (3), and (4) of
subsection (a) shall be indexed for cost of living increases for
each calendar year after 1995 as provided in the applicable
Treasury regulations. For any Plan Year, the applicable dollar
amount shall be the dollar amount in effect for the calendar year
in which the Plan Year commences.
(c) For purposes of this section, "employer" includes all Employers
and Affiliates, "employee" includes Leased Employees, and for
periods prior to 1997, the "Plan Year" is the calendar year.
(d) For purposes of this section, "Compensation" means the amount
defined as such under Sec. 6.1(f) plus the Pre-Tax Contributions
to this Plan and any elective salary reduction contributions made
by or on behalf of the individual to any other plan maintained by
a Participating Employer or an Affiliate which are not includible
in the gross income of the individual under Code sections 125,
401(k), 402(h)(1)(B), or 403(b).
SEC. 2.15 LEASED EMPLOYEE. "Leased Employee" means any person
defined as such by Code section 414(n). In general, a Leased Employee is any
person who is not otherwise an employee of a Participating Employer or an
Affiliate (referred to collectively as the "recipient") and who pursuant to an
agreement between the recipient and any other person ("leasing organization")
has performed services for the recipient (or for the recipient and related
persons determined in accordance with Code section 414(n)(6)) on a substantially
full-time basis for a period of at least one year and such services are of a
type historically performed by employees in the business field of the recipient.
For purposes of the requirements listed in Code section 414(n)(3), any Leased
Employee shall be treated as an employee of the recipient, and contributions or
benefits provided by the leasing organization which are attributable to services
performed for the recipient shall be treated as provided by the recipient.
However, if Leased Employees constitute less than 20% of the Participating
Employers' non-highly compensated work force within the meaning of Code section
414(n)(5)(C)(ii), those Leased Employees covered by a plan described in Code
section 414(n)(5) shall be disregarded. Notwithstanding the foregoing, no Leased
Employee shall be a Qualified Associate or a Participant in this Plan.
SEC. 2.16 NAMED FIDUCIARY. The Company is a "Named Fiduciary"
for purposes of ERISA with authority to control or manage the operation and
administration of the Plan, including control or management of the assets of
the Plan. Other persons are also Named Fiduciaries under ERISA if so provided
thereunder or if so identified by the Company, by action of the Board. Such
other person or persons shall have such authority to control or manage the
operation and administration of the Plan, including control or management of
the assets of the Plan, as may be provided by ERISA or as may be allocated by
the Company, by action of the Board.
SEC. 2.17 NON-HIGHLY COMPENSATED ASSOCIATE. "Non-Highly Compensated
Associate" means an individual employed by the Participating Employers who is
neither a Highly Compensated Associate nor a Family Member.
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<PAGE>
SEC. 2.18 NORMAL RETIREMENT AGE. "Normal Retirement Age" is the
later of age 65 or the fifth anniversary of the date the individual first became
a Participant in the Plan.
SEC. 2.19 PARTICIPANT. A "Participant" is an individual described as
such in Article IV.
SEC. 2.20 PLAN YEAR. A "Plan Year" is the 12-consecutive-month
period commencing on January 1, and is the year on which the records of the Plan
are kept. However, the first Plan Year is the period commencing on the Effective
Date and ending on December 31, 1996.
SEC. 2.21 PREDECESSOR EMPLOYER. Any corporation, partnership, firm,
or individual, a substantial part of the assets and employees of which are
acquired by a successor is a "Predecessor Employer" if named in this section,
subject to any conditions and limitations with respect thereto imposed by this
section; provided, however, that any such corporation, partnership, firm, or
individual may be named as a Predecessor Employer only if all of its employees
who at the time of the acquisition become employees of the successor and
Participants hereunder are treated uniformly, the use of service with it does
not produce discrimination in favor of Highly Compensated Associates, and there
is no duplication of benefits for such service. To be considered a Predecessor
Employer, the acquisition of assets and employees of a corporation, partnership,
firm, or individual must be by a Participating Employer, by an Affiliate, or by
another Predecessor Employer. Each of the following is a Predecessor Employer
for the period prior to the date indicated and subject to such other conditions
and limitations, if any, specified with respect thereto:
(a) Melville Corporation, a New York corporation, and any affiliate of
that corporation, for periods of service prior to the Effective Date
to the extent that service with such entities was recognized under the
provisions of the Melville Plan in effect immediately prior to the
Effective Date.
Any other employer shall be a Predecessor Employer if so required by regulations
prescribed by the Secretary of the Treasury.
SEC. 2.22 QUALIFIED ASSOCIATE. "Qualified Associate" means any
individual (sometimes referred to herein as an "associate") employed by a
Participating Employer who is paid from a payroll maintained in the United
States, Puerto Rico or the U.S. Virgin Islands, subject to the following:
(a) An individual is not a Qualified Associate prior to the date as
of which his or her employer becomes a Participating Employer.
(b) A nonresident alien within the meaning of Code section 7701(b)(1)(B)
while not receiving earned income (within the meaning of Code section
911(d)(2)) from a Participating Employer which constitutes income from
sources within the United States (within the meaning of Code section
861(a)(3)) is not a Qualified Associate.
(c) An individual who is classified by a Participating Employer as
temporary or seasonal or as an independent contractor is not a
Qualified Associate.
(d) Eligibility of individuals in a collective bargaining unit to
participate in the Plan is subject to negotiations with the
representative of that unit. During any period that an individual is
covered by the provisions of a collective bargaining agreement between
a Participating
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<PAGE>
Employer and such representative, he or she shall not be considered a
Qualified Associate for purposes of this Plan unless such agreement
expressly so provides. For purposes of this section only, such an
agreement shall be deemed to continue after its formal expiration
during collective bargaining negotiations pending the execution of a
new agreement.
(e) An individual shall be deemed to be a Qualified Associate during a
period of absence from active service which does not result from a
Termination of Employment, provided he or she is a Qualified Associate
at the commencement of such period of absence.
SEC. 2.23 SUCCESSOR EMPLOYER. A "Successor Employer" is any entity
that succeeds to the business of a Participating Employer through merger,
consolidation, acquisition of all or substantially all of its assets, or any
other means and which elects before or within a reasonable time after such
succession, by appropriate action evidenced in writing, to continue the Plan;
provided, however, that in the case of such succession with respect to any
Participating Employer other than the Company, the acquiring entity shall be a
Successor Employer only if consent thereto is granted by the Company, by action
of the Board or a duly authorized officer.
SEC. 2.24 TOP-HEAVY PLAN. "Top-Heavy Plan" is defined in Sec.
14.2(a).
SEC. 2.25 VALUATION DATE. "Valuation Date" means the date on which
the Fund and Accounts are valued as provided in Article VII. Each business day
is a Valuation Date; provided, however, that the Company may designate in a
written notice to the Funding Agency that Valuation Dates shall instead occur on
the last day of each month or quarter or on such other dates as may be
prescribed by the Company.
-8-
<PAGE>
ARTICLE III
SERVICE PROVISIONS
------------------
SEC. 3.1 EMPLOYMENT COMMENCEMENT DATE. "Employment Commencement
Date" means the date on which an individual first performs an Hour of Service
for a Participating Employer (whether before or after the Participating Employer
becomes such), an Affiliate, or a Predecessor Employer.
SEC. 3.2 TERMINATION OF EMPLOYMENT. The "Termination of Employment"
of an individual for purposes of the Plan shall be deemed to occur upon
resignation, discharge, retirement, death, failure to return to active work at
the end of an authorized leave of absence or the authorized extension or
extensions thereof, failure to return to work when duly called following a
temporary layoff, or upon the happening of any other event or circumstance
which, under the policy of a Participating Employer, Affiliate, or Predecessor
Employer as in effect from time to time, results in the termination of the
employer-employee relationship; provided, however, that a Termination of
Employment shall not be deemed to occur upon a transfer between any combination
of Participating Employers, Affiliates, and Predecessor Employers. If the
employer-employee relationship is terminated because of the entry of an
individual into the armed forces of the United States and if the individual
subsequently returns to employment with a Participating Employer or an Affiliate
under circumstances such that he or she has reemployment rights under the
provisions of any applicable federal law, for all purposes of the Plan and only
for such purposes the individual shall be deemed to have been on authorized
leave of absence during the period of military service. Notwithstanding the
foregoing, a Termination of Employment shall be deemed not to have occurred for
purposes of entitling a Participant to distributions from his or her 401-K
Account or Special Profit Sharing Account if the Participant has not incurred a
"separation from service" or "disability" as defined in applicable regulations,
except as provided in Sec. 10.12.
SEC. 3.3 HOURS OF SERVICE. "Hours of Service" are determined
according to the following subsections with respect to each applicable
computation period. The Company may round up the number of Hours of Service at
the end of each computation period or more frequently as long as a uniform
practice is followed with respect to all individuals determined by the Company
to be similarly situated for compensation, payroll, and recordkeeping purposes.
(a) Hours of Service are computed only with respect to service with
Participating Employers (for service both before and after the
Participating Employer becomes such), Affiliates, and Predecessor
Employers and are aggregated for service with all such employers.
(b) For any portion of a computation period during which a record of hours
is maintained for an individual, Hours of Service shall be credited as
follows:
(1) Each hour for which the individual is paid, or entitled to
payment, for the performance of duties as an employee for his or
her employer during the applicable computation period is an Hour
of Service.
(2) Each hour for which the individual is paid, or entitled to
payment, by his or her employer on account of a period of time
during which no duties are performed (irrespective of whether the
employment relationship has terminated) due to vacation, holiday,
illness, incapacity (including disability), layoff, jury duty,
military duty, or
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leave of absence, is an Hour of Service. No more than 501 Hours
of Service shall be credited under this paragraph for any single
continuous period (whether or not such period occurs in a single
computation period). Hours of Service shall not be credited under
this paragraph with respect to payments under a plan maintained
solely for the purpose of complying with applicable workers'
compensation, unemployment compensation, or disability insurance
laws or with respect to a payment which solely reimburses the
individual for medical or medically related expenses incurred by
the individual.
(3) Each hour for which back pay, irrespective of mitigation of
damages, is either awarded or agreed to by the employer is an
Hour of Service. Such Hours of Service shall be credited to the
computation period or periods to which the award or agreement for
back pay pertains, rather than to the computation period in which
the award, agreement, or payment is made. Crediting of Hours of
Service for back pay awarded or agreed to with respect to periods
described in paragraph (2) shall be subject to the limitations
set forth therein.
(4) Hours under this subsection shall be calculated and credited
pursuant to section 2530.200b-2 of the Department of Labor
Regulations, which are incorporated herein by this reference.
(5) The Company may use any records to determine Hours of Service
which it considers an accurate reflection of the actual facts.
(c) For any portion of a computation period during which an individual
is within a classification for which a record of hours for the
performance of duties is not maintained, the individual shall be
credited with 45 Hours of Service for each week for which he or she
would otherwise be credited with at least one Hour of Service under
subsection (b).
(d) Nothing in this section shall be construed as denying an individual
credit for an Hour of Service if credit is required by any federal
law other than ERISA. The nature and extent of such credit shall be
determined under such other law.
(e) In no event shall duplicate credit as an Hour of Service be given
for the same hour.
(f) This subsection shall apply to an individual who has service as (i)
either a common law employee or a Leased Employee of (ii) either a
Participating Employer or Affiliate. For purposes of determining Hours
of Service, such an individual shall be considered an employee of the
Participating Employer or Affiliate during any period he or she would
have been a Leased Employee of such Participating Employer or
Affiliate but for the requirement that he or she must have performed
services for such Participating Employer or Affiliate on a
substantially full-time basis for a period of at least one year. If
this Plan is a multiple employer plan as defined in section 2530.210
of the Department of Labor Regulations, service as a leased individual
with more than one legal entity shall be aggregated only in accordance
with the rules set forth in said section.
SEC. 3.4 ELIGIBILITY COMPUTATION PERIOD. An individual's first
Eligibility Computation Period is the 12-consecutive-month period beginning on
his or her Employment Commencement Date. The second Eligibility Computation
Period is the Plan Year commencing in said 12-consecutive-month
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period. Each subsequent Plan Year is an Eligibility Computation Period. For
purposes of this section, the Plan Year ending on December 31, 1996 shall be
deemed to have commenced on January 1, 1996.
SEC. 3.5 YEAR OF ELIGIBILITY SERVICE. A "Year of Eligibility
Service" is an Eligibility Computation Period in which an individual has at
least 1000 Hours of Service.
SEC. 3.6 VESTING SERVICE. An individual's "Vesting Service" is equal
to the aggregate time elapsed between his or her Employment Commencement Date
and his or her most recent Termination of Employment or any other date as of
which a determination of Vesting Service is to be made, expressed in years and
days, subject to the following:
(a) All Recognized Breaks in Service shall be subtracted. Any periods
that would have been included in a Recognized Break In Service if
Sec. 3.7(a) did not apply shall also be subtracted.
(b) If a nonvested individual has had a Recognized Break in Service
that was (i) of at least 60 months duration, and (ii) equal to or
longer than his or her Vesting Service prior to such break, all
Vesting Service prior to such Recognized Break in Service shall
be disregarded, subject to the following:
(1) The individual's Vesting Service prior to a Recognized Break In
Service shall not include any Vesting Service disregarded under
this section because of any previous Recognized Break In Service.
(2) For purposes of this subsection, a "nonvested individual" is an
individual who has no vested right to an accrued benefit under
the Plan derived from employer contributions (including Pre-Tax
Contributions).
(c) All Vesting Service prior to the date an individual attains age
18 shall be disregarded.
(d) Notwithstanding anything in the foregoing provisions of this section
to the contrary, in the case of an individual who was a Qualified
Associate on the Effective Date, the individual shall be credited with
Vesting Service as of the day preceding the Effective Date equal to
the Vesting Service credited to the individual as of that date under
the Melville Plan.
(e) For purposes of converting days into years, 365 days constitute
one year.
SEC. 3.7 RECOGNIZED BREAK IN SERVICE. A "Recognized Break in
Service" is a period of at least 12 consecutive months duration which begins on
the day on which an individual's Termination of Employment occurs. A Recognized
Break in Service ends, if ever, on the day on which the individual again
performs an Hour of Service for a Participating Employer, an Affiliate or a
Predecessor Employer.
(a) If an individual is absent from work for maternity or paternity
reasons, the 12-month period beginning with the first day of such
absence shall not be included in a Recognized Break In Service.
(b) For purposes of subsection (a), an absence from work for maternity or
paternity reasons means an absence (i) by reason of the pregnancy of
the individual, (ii) by reason of the
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birth of a child of the individual, (iii) by reason of the placement
of a child with the individual in connection with the adoption of such
child by such individual, or (iv) for purposes of caring for such
child for a period beginning immediately following such birth or
placement.
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ARTICLE IV
PLAN PARTICIPATION
------------------
SEC. 4.1 ENTRY DATE. "Entry Date" means the first day of each
calendar month.
SEC. 4.2 ELIGIBILITY FOR PARTICIPATION. Each individual who is a
Qualified Associate on the Effective Date and who was a participant in the
Melville Plan immediately prior to the Effective Date shall be a Participant
in this Plan on the Effective Date. After the Effective Date, eligibility to
participate in the Plan shall be determined as follows:
(a) An individual employed by a Participating Employer shall become a
Participant in the Plan on the earliest Entry Date (on or after the
date the Plan becomes effective with respect to his or her
Participating Employer) on which all of the following requirements
are met:
(1) He or she is a Qualified Associate.
(2) He or she has completed one Year of Eligibility Service
during an Eligibility Computation Period that ended prior
to the Entry Date.
(3) He or she has attained age 21 prior to the Entry Date.
(b) If a former Participant is reemployed and meets the requirements
of subsection (a) on the date of rehire, he or she will become a
Participant again on that date.
(c) If a former employee who was not previously a Participant is
reemployed as a Qualified Associate, if the individual meets the
requirements of subsection (a) on the date of rehire, and if the
individual would have met the requirements of subsection (a) on the
immediately preceding Entry Date if he or she had been a Qualified
Associate on that Entry Date, the individual shall become a
Participant on the date of rehire. However, if the individual was not
a Qualified Associate at any time between the Effective Date and the
date of rehire and has incurred a Plan Year in which he or she had 500
or fewer hours of Service, service prior to such break shall not be
recognized for purposes of this subsection until the individual has
completed a new Year of Eligibility Service following the break.
(d) If an individual employed by a Participating Employer or an Affiliate
who is neither a Participant nor a Qualified Associate is transferred
to a position in which he or she is a Qualified Associate and if the
individual would have met the eligibility requirements of subsection
(a) on the Entry Date preceding the transfer had he or she been a
Qualified Associate on that Entry Date, the individual shall become a
Participant on the date of transfer.
SEC. 4.3 DURATION OF PARTICIPATION. A Participant shall continue to
be such until the later of:
(a) The Participant's Termination of Employment.
(b) The date all benefits, if any, to which the Participant is entitled
hereunder have been distributed from the Fund.
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SEC. 4.4 NO GUARANTEE OF EMPLOYMENT. Participation in the Plan does
not constitute a guarantee or contract of employment with the Participating
Employers. Such participation shall in no way interfere with any rights the
Participating Employers would have in the absence of such participation to
determine the duration of an individual's employment.
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ARTICLE V
CONTRIBUTIONS
-------------
SEC. 5.1 PRE-TAX CONTRIBUTIONS. Each Active Participant may elect to
have his or her Participating Employer make Pre-Tax Contributions on his or her
behalf, subject to the following:
(a) The Participant may elect to have his or her current earnings reduced
by any whole percent the Participant may designate, but not exceeding
10% of Certified Earnings in the case of any Participant whose total
compensation (as defined in Sec. 2.15(d)) for the preceding Plan Year
was more than $55,000 (or such higher or lower dollar amount as the
Company may prescribe for the Plan Year), and not exceeding 15% of
Certified Earnings in the case of any other Participant. This election
may only be made pursuant to a salary reduction agreement. The
agreement shall be in such form and executed subject to such rules as
the Company may prescribe. Each election shall apply only to earnings
which become payable after the election is filed with the Company or
its agent. Each election shall continue in effect until a new election
is filed pursuant to this section.
(b) Each Participating Employer will make a Pre-Tax Contribution with
respect to each Participant in its employ who elects to have earnings
for that period reduced pursuant to this section. The amount of the
contribution will be equal to the amount by which the Participant's
earnings were reduced.
(c) The salary reduction agreement may be effective as of the first day
of the first pay period beginning on or after the date on which the
individual becomes a Participant or the first day of the first pay
period beginning in any subsequent month; provided that the individual
has filed the agreement with the Company or its designated agent prior
to the deadline established by the Company for the effective date,
which deadline may vary depending on the form in which the election
is filed.
(d) An Active Participant may amend his or her salary reduction agreement
to increase or decrease the contribution rate effective as of the
first day of the first pay period beginning in any month by filing an
approved amendment with the Company or its designated agent, in a
manner authorized by the Company, prior to the deadline established by
the Company from time to time for such amendments.
(e) An Active Participant may discontinue making Pre-Tax Contributions at
any time by filing an election with the Company or its designated
agent. That election shall be effective as of the first payroll period
beginning after the election is filed, provided it is filed before the
deadline established by the Company for that payroll period. The
Participant may thereafter resume Pre-Tax Contributions as of the
first day of any month which is at least six months after the end of
the month in which contributions were discontinued by filing a new
salary reduction agreement prior to the deadline established by the
Company from time to time for such elections.
(f) All Pre-Tax Contributions by a Participant shall cease when the
Participant ceases to be a Qualified Associate.
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(g) Pre-Tax Contributions by a Participant for any calendar year may not
exceed $9,500, and shall cease at the point that limit is reached
during the year. The $9,500 limit in the previous sentence shall be
adjusted for any cost of living increases provided for any calendar
year after 1996 in accordance with regulations issued by the Secretary
of the Treasury.
Sec. 5.2 Matching Contributions. The Participating Employers will
match each Participant's Pre-Tax Contributions as follows:
(a) If the Participant is credited with at least three full years of
Vesting Service prior to the first day of a calendar month, the
Matching Contribution for the Participant for pay periods ending
during that month will be equal to 50% of the Pre-Tax Contributions
made by the Participant for pay periods ending during that month. If
the Participant is credited with less than three full years of Vesting
Service prior to the first day of a calendar month, the Matching
Contribution will be equal to 25% of the Pre-Tax Contributions made by
the Participant for pay periods ending during that month. In either
case, all Pre-Tax Contributions for a month in excess of 4% of the
Participant's Certified Earnings for pay periods ending during the
month will be disregarded in applying this subsection (a). In the case
of any individual who was not a Qualified Associate on the Effective
Date, any Vesting Service prior to the Effective Date for any employer
that is not a Participating Employer shall be disregarded for purposes
of this section.
(b) No Matching Contribution will be made with respect to any amount by
which the Participant's Pre-Tax Contributions must be reduced pursuant
to Sec. 5.4, Sec. 5.5, Sec. 5.7 or Sec. 6.1. Any such Matching
Contributions which are made before the amount of the reduction is
determined shall be forfeited and shall be applied as a credit against
future contributions from the Participating Employers.
(c) Any Forfeitures for a Plan Year which are not used to reinstate
Accounts pursuant to Sec. 9.2(b), and which the Company does not
direct are to be allocated as Special Profit Sharing Contributions
under Sec. 5.3(b) or used to pay Plan expenses, shall be credited
against the future Matching Contributions due from the Participating
Employers.
Sec. 5.3 Profit Sharing Contributions. For each Plan Year the
Company shall determine whether it will make a Profit Sharing Contribution to
the Fund for such Plan Year and, if it is determined that a contribution will be
made, the amount of the contribution or the formula by which the amount of the
contribution will be calculated. The contribution of each Participating Employer
other than the Company for a Plan Year shall be an amount which is the same
percent of the Certified Earnings of Participants in its employ who are eligible
to share in the contribution for that year as the contribution of the Company
for the Plan Year bears to the total Certified Earnings of Participants in its
employ who are eligible to share in the contribution for that year, unless the
Participating Employer determines that its contribution for such Plan Year shall
be in a different amount and also determines the amount or the formula by which
the amount of the contribution shall be calculated. Profit Sharing Contributions
shall be paid to the Funding Agency designated by the Company.
(a) To be eligible to share in the Profit Sharing Contributions of a
Participating Employer for a Plan Year, a Participant (i) must have
been an Active Participant at some time during the Plan Year, (ii)
must be employed by the Participating Employer or an Affiliate on the
last day of the Plan Year, and (iii) must have completed at least
1,000 Hours of Service during
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the Plan Year. Profit Sharing Contributions of a Participating
Employer shall be allocated in proportion to the Certified Earnings
from that Participating Employer of those eligible Participants who
are employed by that Participating Employer.
(b) The Company may designate that part or all of the Profit Sharing
Contribution of the Participating Employers under this section for a
Plan Year shall be classified as a Special Profit Sharing Contribution
which shall be used to satisfy the requirements of Sec. 5.4(c) and/or
Sec. 5.6(c) for that Plan Year. The Company may also designate that
some or all of the Forfeitures for a Plan Year which are not used to
reinstate Accounts pursuant to Sec. 9.2(b) shall be allocated as
Special Profit Sharing Contributions. The Company shall designate
whether the Special Profit Sharing Contribution will be allocated (i)
among all those Participants who satisfy the requirements of
subsection (a), or (ii) only among the Non-Highly Compensated
Associates who satisfy those requirements, or (iii) among those Non-
Highly Compensated Associates included in the tests under Sec. 5.4
and/or Sec. 5.6, whether or not they satisfy the requirements of
subsection (a). The Company shall also designate whether the Special
Profit Sharing Contribution shall be allocated (i) in proportion to
the Certified Earnings of the eligible Participants, or (ii) first to
the eligible Participant with the lowest amount of Certified Earnings
until he or she has received the maximum allocation permitted under
Sec. 6.1, and then to the next lowest paid eligible Participant, and
so on until the entire amount has been allocated. Notwithstanding any
provisions of the Plan to the contrary, any contributions that are
classified as Special Profit Sharing Contributions shall be placed in
a separate Account as provided in Sec. 7.1, may not be withdrawn prior
to Termination of Employment except as required under Sec. 10.1, and
shall be 100% vested and nonforfeitable when made.
Sec. 5.4 Adjustment of Contributions Required by Code Section 401K).
If necessary to satisfy the requirements of Code section 401(k), Pre-Tax
Contributions shall be adjusted in accordance with the following:
(a) Each Plan Year, the "deferral percentage" will be calculated for each
Active Participant. Each Participant's deferral percentage is
calculated by dividing the amount referred to in paragraph (1) by the
amount referred to in paragraph (2), subject to the family aggregation
rules in subsection (g):
(1) The total Pre-Tax Contributions (including Excess Deferrals of
Highly Compensated Associates distributed under Sec. 5.5 but
excluding Excess Deferrals of Non-Highly Compensated Associates
that arise solely from contributions made under plans of the
Participating Employers or Affiliates), if any, allocated to the
Participant's Accounts with respect to the Plan Year. The Company
may also elect to include all or part of the Special Profit
Sharing Contributions to be allocated to the Participant's
Accounts with respect to that Plan Year, provided that the
provisions of Treasury Regulation (S) 1.401(k)-1(b) are
satisfied.
(2) The Participant's Compensation with respect to the Plan Year. For
purposes of this section, a Participant's "Compensation" for the
Plan Year means compensation determined according to a definition
selected by the Company for that year which satisfies the
requirements of Code section 414(s). The same definition of
Compensation shall be used for all Participants for a particular
Plan Year, but different definitions may be used for different
Plan Years. The Company shall also
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determine whether Compensation includes or does not include the
Pre-Tax Contributions to this Plan and any contributions made
pursuant to a salary reduction agreement by or on behalf of the
Participant to any other plan which meets the requirements of
Code sections 125, 401(k), 402(h)(1)(B), or 403(b), and whether
or not it includes amounts paid prior to the date an individual
became a Participant. Compensation shall be subject to the limit
provided under Sec. 2.6(c).
(3) For the short Plan Year commencing on the Effective Date,
paragraphs (1) and (2) shall be applied based on contributions
for and Compensation during the period beginning on the Effective
Date and ending on December 31, 1996.
(b) Each Plan Year, the average deferral percentage for Active
Participants who are Highly Compensated Associates and the average
deferral percentage for Active Participants who are Non-Highly
Compensated Associates will be calculated. A separate average deferral
percentage shall be calculated for Active Participants in a collective
bargaining unit who are required to be disaggregated pursuant to
applicable Treasury Regulations. Such Participants shall be
disregarded in calculating the average deferral percentage for Active
Participants who are not in such collective bargaining units. In each
case, the average is the average of the percentages calculated under
subsection (a) for each of the individuals in the particular group.
The deferral percentage for each Participant and the average deferral
percentage for a particular group of individuals shall be calculated
to the nearest one-hundredth of one percent.
(c) If the requirements of either paragraph (1) or (2) are satisfied, then
no further action is needed under this section:
(1) The average deferral percentage for Participants who are Highly
Compensated Associates is not more than 1.25 times the average
deferral percentage for Participants who are Non-Highly
Compensated Associates.
(2) The excess of the average deferral percentage for Participants
who are Highly Compensated Associates over the average deferral
percentage for Participants who are Non-Highly Compensated
Associates is not more than two percentage points, and the
average deferral percentage for such Highly Compensated
Associates is not more than 2 times the average deferral
percentage for such Non-Highly Compensated Associates.
The requirements of this subsection (c) shall be applied separately
with respect to Participants in a collective bargaining unit who are
required to be disaggregated pursuant to applicable Treasury
Regulations.
(d) If neither of the requirements of subsection (c) is satisfied, then
the Pre-Tax Contributions with respect to Highly Compensated
Associates shall be reduced, beginning with the contributions
representing the highest percent of Compensation and taking into
account the family aggregation rules under subsection (g)(2), if
applicable, to the extent necessary to meet the requirements of
subsection (c)(1) or (c)(2), whichever is met first.
(e) At any time during the Plan Year, the Company may make an estimate of
the amount of Pre-Tax Contributions by Highly Compensated Associates
that will be permitted under this
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section for the year and may reduce the percent specified in Sec.
5.1(a) for such Participants to the extent the Company determines in
its sole discretion to be necessary to satisfy at least one of the
requirements in subsection (c).
(f) If Pre-Tax Contributions with respect to a Highly Compensated
Associates are reduced pursuant to subsection (d), the Excess Pre-Tax
Contributions shall be distributed, subject to the following:
(1) For purposes of this subsection, "Excess Pre-Tax Contributions"
mean the amount by which Pre-Tax Contributions for Highly
Compensated Associates have been reduced under subsection (d).
(2) Excess Pre-Tax Contributions (adjusted for income or losses
allocable thereto as specified in paragraph (3), if any) shall be
distributed to Participants on whose behalf such excess
contributions were made for the Plan Year no later than the last
day of the following Plan Year. Furthermore, the Company shall
attempt to distribute such amount by the 15th day of the third
month following the Plan Year for which the excess contributions
were made to avoid the imposition on the Participating Employers
of an excise tax under Code section 4979.
(3) Income or losses allocable to Excess Pre-Tax Contributions for
the Plan Year shall be determined by multiplying the amount of
income or loss for the Plan Year which is allocable to the
Participant's Pre-Tax Contributions (and to other amounts
credited to the Participant that the Company elects to include
under subsection (a)(1)) by a fraction. The numerator of the
fraction is the Participant's Excess Pre-Tax Contributions for
the Plan Year. The denominator of the fraction is the total
balance in the Participant's Accounts attributable to Pre-Tax
Contributions (and to other amounts the Company has elected to
include under subsection (a)(1)) on the first day of the Plan
Year, plus Pre-Tax Contributions for the Plan Year and any other
amounts the Company has elected to include under subsection
(a)(1) for the Plan Year.
(4) The amount of Excess Pre-Tax Contributions and income or losses
allocable thereto which would otherwise be distributed pursuant
to this subsection shall be reduced, in accordance with
regulations, by the amount of Excess Deferrals and income or
losses allocable thereto previously distributed to the
Participant pursuant to Sec. 5.5 for the calendar year ending
with or within the Plan Year.
(g) If a Highly Compensated Associates is subject to the family
aggregation rules of Code section 414(q)(6) because such individual is
a more than 5-percent owner or is among the 10 highest paid Highly
Compensated Associates, the following rules shall apply:
(1) For purposes of determining the deferral percentage of the Highly
Compensated Associate and Family Members under subsection (a),
one combined deferral percentage shall apply to the family group
(which is treated as one Highly Compensated Associate).
(A) The combined deferral percentage shall be determined by
combining the contributions and Compensation for all of the
eligible Family Members.
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(B) All Family Members included in the family group shall be
disregarded in determining the average deferral percentage
for Participants who are Non-Highly Compensated Associates.
If an individual is required to be aggregated as a member of
more than one family group, all eligible Participants who
are members of those family groups that include that
individual shall be treated as one family group under this
subsection (g).
(2) If subsection (d) requires the reduction of contributions on
behalf of a Highly Compensated Associate who is subject to the
family aggregation rules set forth in paragraph (1) of this
subsection, the Excess Pre-Tax Contributions shall be allocated
among the Family Members in proportion to the dollar amount of
Pre-Tax Contributions (and amounts treated as Pre-Tax
Contributions under subsection (a)(1) of this section) made by
each Family Member who was included in the combined deferral
percentage.
(h) The deferral percentage for any Participant who is a Highly
Compensated Associate for the Plan Year, and who is eligible to
participate in two or more plans with cash or deferred arrangements
described in Code section 401(k) to which any Participating Employer
or Affiliate contributes, shall be determined as if all employer
contributions were made under a single arrangement unless mandatorily
disaggregated pursuant to regulations under Code section 401(k). This
subsection shall be applied by treating all cash or deferred
arrangements with Plan Years ending within the same calendar year as a
single arrangement.
(i) If two or more plans which include cash or deferred arrangements are
considered as one plan for purposes of Code section 401(a)(4) or Code
section 410(b), the cash or deferred arrangements shall be treated as
one for the purposes of applying the provisions of this section unless
mandatorily disaggregated pursuant to regulations under Code section
401(k).
(j) If the entire Account balance of a Highly Compensated Associate has
been distributed during the Plan Year in which an excess arose, the
distribution shall be deemed to have been a corrective distribution of
the excess and income attributable thereto to the extent that a
corrective distribution would otherwise have been required under
subsection (f) of this section, Sec. 5.5 or Sec. 5.6(f).
(k) A corrective distribution of excess contributions under subsection (f)
of this section, Excess Aggregate Contributions under Sec. 5.6(f), or
Excess Deferrals under Sec. 5.5 may be made without regard to any
notice or Participant or spousal consent required under Article VIII
or X.
(l) In the event of a complete termination of the Plan during the Plan
Year in which an excess arose, any corrective distribution under
subsection (f) of this section or Sec. 5.6(f) shall be made as soon as
administratively feasible after the termination, but in no event later
than 12 months after the date of termination.
Sec. 5.5 Distribution of Excess Deferrals. Notwithstanding any other
provisions of the Plan, Excess Deferrals for a calendar year and income or
losses allocable thereto shall be
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distributed no later than the following April 15 to Participants who claim such
Excess Deferrals, subject to the following:
(a) For purposes of this section, "Excess Deferrals" means the amount of
Pre-Tax Contributions for a calendar year that the Participant claims
pursuant to the procedure set forth in subsection (b) because the
total amount deferred for the calendar year exceeds $9,500 for 1996
(indexed for inflation for subsequent calendar years) or such other
limit imposed on the Participant for that year under Code section
402(g).
(b) The Participant's written claim, specifying the amount of the
Participant's Excess Deferral for any calendar year, shall be
submitted to the Company no later than the March 1 following such
calendar year. The claim shall include the Participant's written
statement that if such amounts are not distributed, such Excess
Deferrals, when added to amounts deferred under other plans or
arrangements described in Code section 401(k), 403(b), or 408(k),
exceed the limit imposed on the Participant by Code section 402(g) for
the year in which the deferral occurred. A Participant shall be deemed
to have submitted such a claim to the extent the Participant has
Excess Deferrals for the calendar year taking into account only
contributions under this Plan and any other plan maintained by a
Participating Employer or an Affiliate.
(c) Excess Deferrals distributed to a Participant with respect to a
calendar year shall be adjusted to include income or losses allocable
thereto using the same method specified for excess Pre-Tax
Contributions under Sec. 5.4(f)(3).
(d) The amount of Excess Deferrals and income allocable thereto which
would otherwise be distributed pursuant to this section shall be
reduced, in accordance with applicable regulations, by the amount of
excess Pre-Tax Contributions and income allocable thereto previously
distributed to the Participant pursuant to Sec. 5.4 for the Plan Year
beginning with or within such calendar year, and by the amount of any
deferrals properly distributed as excess annual additions under Sec.
6.1.
Sec. 5.6 Adjustment of Contributions Required by Code Section 401(m).
After the provisions of Sec. 5.4 and Sec. 5.5 have been satisfied, the
requirements set forth in this section must also be met. If necessary to satisfy
the requirements of Code section 401(m), Voluntary Contributions and Matching
Contributions shall be adjusted in accordance with the following:
(a) Each Plan Year, the "contribution percentage" will be calculated for
each Active Participant (other than an Active Participant who is in a
collective bargaining unit required to be disaggregated pursuant to
Treasury Regulation (S) 1.401(m)-1(b)(3)(ii)). Each Participant's
contribution percentage is calculated by dividing the amount referred
to in paragraph (1) by the amount referred to in paragraph (2),
subject to the family aggregation rules in subsection (g).
(1) The total Matching Contributions under Sec. 5.2, if any,
allocated to the Participant's Accounts with respect to the Plan
Year. The Company may also elect to include all or part of the
Pre-Tax Contributions and Special Profit Sharing Contributions to
be allocated to the Participant's Accounts with respect to that
Plan Year, provided that the requirements of Treasury Regulation
(S)1.401(m)-1(b) are satisfied and provided that the requirements
of Sec. 5.4 are met before such
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contributions are used under this section and continue to be met
after the exclusion for purposes of Sec. 5.4 of those
contributions that are used to satisfy the requirements of this
section. However, any Matching Contributions that are forfeited,
either to correct excess contributions under subsection (f) of
this section, or because the contributions to which they relate
are Excess Pre-Tax Contributions under Sec. 5.4, Excess Deferrals
under Sec. 5.5 or excess contributions under subsection (f) of
this section, shall be disregarded.
(2) The Participant's Compensation with respect to the Plan Year For
purposes of this section, "Compensation" has the same meaning as
provided in Sec. 5.4(a)(2).
(3) For the short Plan Year commencing on the Effective Date,
paragraphs (1) and (2) shall be applied based on contributions
for and Compensation during the period beginning on the Effective
Date and ending on December 31, 1996.
(b) Each Plan Year, the average contribution percentage of Active
Participants who are Highly Compensated Associates and the average
contribution percentage for Active Participants who are Non-Highly
Compensated Associates will be calculated. In each case, the average
is the average of the percentages calculated under subsection (a) for
each of the individuals in the particular group. In calculating
average contribution percentages, Participants employed in a
collective bargaining unit required to be disaggregated pursuant to
Treasury Regulation (S) 1.401(m)-1(b)(3)(ii) shall be disregarded. The
contribution percentage for each Participant and the average
contribution percentage for a particular group of Participants shall
be calculated to the nearest one-hundredth of one percent.
(c) If the requirements of either paragraph (1) or (2) are satisfied, then
no further action is needed under this section:
(1) The average contribution percentage for Participants who are
Highly Compensated Associates is not more than 1.25 times the
average contribution percentage for Participants who are Non-
Highly Compensated Associates.
(2) The excess of the average contribution percentage for
Participants who are Highly Compensated Associates over the
average contribution percentage for Participants who are Non-
Highly Compensated Associates is not more than two percentage
points, and the average contribution percentage for such Highly
Compensated Associates is not more than 2 times the average
contribution percentage for such Non-Highly Compensated
Associates.
(d) If neither of the requirements of subsection (c) is satisfied, then
the Matching Contributions with respect to Highly Compensated
Associates shall be reduced, beginning with the contributions
representing the highest percentage of Compensation, to the extent
necessary to meet the requirements of subsection (c)(1) or (c)(2),
whichever is met first.
(e) At any time during the Plan Year, the Company may make an estimate of
the amount of Matching Contributions on behalf of Highly Compensated
Associates that will be permitted under this section for the year. If
the Company determines in its sole discretion that reductions are
necessary to assure that at least one of the requirements in
subsection (c) are satisfied, the Company may take written action
modifying Sec. 5.2 to reduce or eliminate
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Matching Contributions for Highly Compensated Associates with respect
to Certified Earnings to be paid from the date such action is adopted
to the end of the Plan Year.
(f) If contributions with respect to a Highly Compensated Associate are
reduced pursuant to subsection (d), the Excess Aggregate Contributions
shall be treated as follows:
(1) For purposes of this subsection, "Excess Aggregate Contributions"
mean the amount by which Matching Contributions must be reduced
under subsection (d).
(2) Excess Matching Contributions (adjusted for income or losses
allocable thereto) shall be forfeited (if otherwise forfeitable
under the provisions of Sec. 9.2 if the Participant were to
terminate employment on the last day of the Plan Year for which
the contribution was made). Excess Matching Contributions which
are non-forfeitable (adjusted for income or losses allocable
thereto) shall be distributed to Participants on whose behalf
such excess contributions were made for the Plan Year no later
than the last day of the following Plan Year. Furthermore, the
Company shall attempt to distribute such amount by the 15th day
of the third month following the Plan Year for which the excess
contributions were made to avoid the imposition on the
Participating Employers of an excise tax under Code section 4979.
(3) Income or losses allocable to Excess Aggregate Contributions
shall be determined in the same manner specified for Excess Pre-
Tax Contributions under Sec. 5.4(f)(3).
(4) Amounts forfeited by Highly Compensated Associates pursuant to
paragraph (2) shall be applied to reduce future Matching
Contributions as provided in Sec. 5.2.
(g) For purposes of subsection (a), the contribution percentage of a
Highly Compensated Associate who is a more than 5-percent owner or who
is among the 10 highest paid Highly Compensated Associates and any
Family Members of such a person shall be determined in the same manner
specified for determining the deferral percentage under Sec.
5.4(g)(1). If subsection (d) requires reduction of the contributions
by or on behalf of a Highly Compensated Participant who is subject to
family aggregation, reductions of contributions for that family group
shall be determined in the same manner specified for reducing Pre-Tax
Contributions under Sec. 5.4(g)(2).
(h) The contribution percentage for any Participant who is a Highly
Compensated Associate for the Plan Year, and who is eligible to make
nondeductible employee contributions or to receive matching
contributions under two or more plans described in Code section 401(a)
that are maintained by the Participating Employers or any Affiliate,
shall be determined as if all such contributions were made under a
single arrangement unless mandatorily disaggregated pursuant to
regulations under Code section 401(m).
(i) If two or more plans maintained by the Participating Employers or
Affiliates are treated as one plan for purposes of satisfying the
eligibility requirements of Code section 410(b), those plans must be
treated as one plan for purposes of applying the provisions of this
section unless mandatorily disaggregated pursuant to regulations under
Code section 401(m).
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(j) Notwithstanding the foregoing, if neither subparagraph (c)(1) of this
section nor Sec. 5.4(c)(1) was satisfied, the requirements set forth
in Sec. 5.7 must also be satisfied.
Sec. 5.7 Multiple Use of the Alternative Limitations. If neither
Sec. 5.4(c)(1) nor Sec. 5.6(c)(1) was satisfied, the following additional
requirements must also be satisfied:
(a) The sum of the following two amounts must not exceed the greater of
the limit determined under subsection (b) or the limit determined
under subsection (c):
(1) The average deferral percentage for Highly Compensated Associates
(determined under Sec. 5.4(b) following any adjustments required
by Sec. 5.4).
(2) The average contribution percentage for Highly Compensated
Associates (determined under Sec. 5.6(b) following any
adjustments required by Sec. 5.6).
(b) The limit under this subsection is the sum of the following amounts:
(1) 1.25 multiplied by the greater of:
(A) The average deferral percentage for Non-Highly Compensated
Associates (determined under Sec. 5.4(b) following any
adjustments required by Sec. 5.4), or
(B) The average contribution percentage for Non-Highly
Compensated Associates (determined under Sec. 5.6(b)
following any adjustments required by Sec. 5.6).
(2) Two percentage points plus the lesser of:
(A) The average deferral percentage for Non-Highly Compensated
Associates, or
(B) The average contribution percentage for Non-Highly
Compensated Associates.
Notwithstanding the foregoing, the amount under this paragraph
(2) cannot exceed the lesser of (A) or (B) above, multiplied by
two, or such other limit as may be prescribed by Treasury
Regulations.
(c) The limit under this subsection (c) is the amount that would be
determined under subsection (b) by:
(1) Substituting "lesser" for "greater" in paragraph (1) of
subsection (b), and
(2) Substituting "greater" for "lesser" each place that word appears
in paragraph (2) of subsection (b).
(d) If the amount determined under subsection (a) exceeds the greater of
the limits determined under subsections (b) and (c), an additional
amount must be treated as Excess Pre-Tax Contributions and distributed
under Sec. 5.4. In addition, any Matching Contributions attributable
to those Pre-Tax Contributions shall be treated as forfeited and shall
be applied
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as a credit against future contributions from the Participating
Employers. Appropriate adjustments under this subsection must be made
pursuant to Treasury regulations until the sum of the average deferral
percentage and average contribution percentage for Highly Compensated
Associates is equal to the greater of the limits determined under
subsections (b) and (c).
Sec. 5.8 Time of Contributions. Pre-Tax Contributions, Matching
Contributions, and Profit Sharing Contributions by a Participating Employer for
a Plan Year shall be paid to the Funding Agency no later than the time
(including extensions thereof) prescribed by law for filing the employer's
federal income tax return for the tax year in which the Plan Year ends. Pre-Tax
Contributions and any other contributions taken into account under Sec.
5.4(a)(1) shall be paid to the Funding Agency no later than 12 months following
the end of the Plan Year, if earlier. In addition, Pre-Tax Contributions or
Matching Contributions shall be paid to the Funding Agency by any earlier date
that may be specified in Treasury or Department of Labor regulations.
Sec. 5.9 Allocations. Contributions under Sections 5.1, 5.2, and 5.3
shall be allocated to the Accounts of Participants as follows:
(a) Pre-Tax Contributions with respect to each Participant electing
deferrals pursuant to Sec. 5.1 for a Plan Year shall be allocated to
the 401(k) Account of each such Participant as of the last day of the
Plan Year.
(b) Matching Contributions for a Plan Year, and the Forfeitures credited
against such Contributions, shall be allocated to the Matching Account
of each eligible Participant as of the last day of the Plan Year.
(c) Profit Sharing Contributions and Special Profit Sharing Contributions
for a Plan Year shall be allocated to the Profit Sharing Account or
Special Profit Sharing Account, as the case may be, of each eligible
Participant as of the last day of the Plan Year.
(d) Allocations shall be reflected in Accounts as provided in Article VII.
However, the Funding Agency shall treat contributions as though they
had been allocated to the Accounts as of the Valuation Date coinciding
with or following the date they were deposited with the Funding Agency
for purposes of allocating investment gains and losses pursuant to
Sec. 7.2 and Sec. 7.3.
(e) Pre-Tax Contributions and Matching Contributions for a Plan Year which
are deposited with the Funding Agency after the end of that Plan Year
but prior to the deadline specified in Sec. 5.8 shall also be
allocated to the appropriate 401-K Account or Matching Account as of
the last day of that Plan Year except to the extent the Company
determines that it is necessary to treat some or all of such
contributions as being contributions for the Plan Year in which they
are deposited with the Funding Agency in order to satisfy the
requirements of Sec. 5.4 or Sec. 5.6.
Sec. 5.10 Limitations on Contributions. In no event shall the amount
of a Participating Employer's contribution under this Article for any Plan Year
exceed the lesser of:
(a) The maximum amount allowable as a deduction in computing its taxable
income for that Plan Year for federal income tax purposes.
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(b) The aggregate of the amount of contributions by such Participating
Employer that may be allocated to the Accounts of each Participant
under the provisions of Article VI.
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ARTICLE VI
LIMITATION ON ALLOCATIONS
SEC. 6.1 LIMITATION ON ALLOCATIONS. Notwithstanding any provisions of
the Plan to the contrary, allocations to Participants under the Plan shall not
exceed the maximum amount permitted under Code section 415. For purposes of the
preceding sentence, the following rules shall apply unless otherwise provided in
Code section 415:
(a) The Annual Additions with respect to a Participant for any Plan Year
shall not exceed the lesser of:
(1) $30,000, adjusted for each Plan Year to reflect cost-of-living
increases pursuant to applicable Treasury regulations.
(2) 25% of the Compensation of such Participant for such Plan Year.
(b) If a Participant is also a participant in one or more other defined
contribution plans maintained by a Participating Employer or an
Affiliate, and if the amount of employer contributions and forfeitures
otherwise allocated to the Participant for a Plan Year must be reduced
to comply with the limitations under Code section 415, such
allocations under this Plan and each of such other plans shall be
reduced pro rata in the sequence specified in subsection (c), and pro
rata within each category within that sequence, to the extent
necessary to comply with said limitations, except that reductions to
the extent necessary shall be made in allocations under profit sharing
plans and stock bonus plans before any reductions are made under money
purchase plans.
(c) If for any Plan Year the limitation described in subsection (a) would
otherwise be exceeded by contributions to this Plan with respect to
any Participant, the Participant's Annual Additions shall be adjusted
in the following sequence, but only to the extent necessary to reduce
Annual Additions to the level permitted in subsection (a):
(1) The Participant's after-tax voluntary employee contributions for
the Plan Year, if any, shall be refunded to the Participant
during the Plan Year or as soon as reasonably possible following
the end of the Plan Year.
(2) The Participant's Pre-Tax Contributions for the Plan Year, if
any, shall be reduced, and that amount shall be refunded to the
Participant.
(3) If, after the adjustments in paragraphs (1) and (2) there is an
excess amount with respect to a Participant for a Plan Year, such
excess amount shall be held unallocated in a suspense account.
The suspense account will be applied to reduce future employer
contributions for all Participants in the current Plan Year, the
next Plan Year, and in each succeeding Plan Year, if necessary.
The suspense account will participate in the allocation of the
investment gains and losses of the Fund and the value of such
account will be considered in valuing other Accounts under the
Plan.
(4) Any amounts refunded under paragraphs (1) or (2) shall be
disregarded for purposes of applying the limits under Sec. 5.4,
Sec. 5.5 and Sec. 5.6.
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(d) If the Participant is also a participant in one or more defined
benefit plans maintained by a Participating Employer or an Affiliate,
the sum of the Participant's defined benefit plan fraction and defined
contribution plan fraction, determined according to Code section
415(e), for any Plan Year may not exceed 1.0. If the sum of a
Participant's defined benefit fraction and defined contribution
fraction would otherwise exceed 1.0 for any Plan Year, the benefits
provided under the defined benefit plan or plans shall be reduced to
the extent necessary to reduce the sum of the fractions to 1.0.
(e) For purposes of this section, "Annual Additions" means the sum of the
following amounts allocated to a Participant for a Plan Year under
this Plan and all other defined contribution plans maintained by a
Participating Employer or an Affiliate in which he or she
participates:
(1) Employer contributions, including Pre-Tax Contributions made under
this Plan. Excess Pre-Tax Contributions, and Excess Aggregate
Contributions which are distributed under the provisions of
Article V are included in Annual Additions, but Excess Deferrals
which are distributed under Sec. 5.5 are not included in Annual
Additions.
(2) Forfeitures, if any.
(3) Voluntary non-deductible contributions, if any.
(4) Amounts attributable to medical benefits as described in Code
sections 415(1)(2) and 419A(d)(2).
An Annual Addition with respect to a Participant's Accounts shall be
deemed credited thereto with respect to a Plan Year if it is allocated
to the Participant's Accounts under the terms of the Plan as of any
date within such Plan Year.
(f) For purposes of this section, "Compensation" means an individual's
earned income, wages, salaries, fees for professional services and
other amounts received (without regard to whether or not an amount is
paid in cash) for personal services actually rendered in the course of
employment with the Participating Employers and Affiliates to the
extent that the amounts are includible in gross income (including, but
not limited to, commissions, compensation for services on the basis of
a percentage of profits, tips, bonuses, fringe benefits, and
reimbursements or other expense allowances under a nonaccountable plan
described in Treasury Regulation (S) 1.62-2(c)), subject to the
following:
(1) Compensation excludes the Pre-Tax Contributions to this Plan, any
elective salary reduction contributions to any other plan which
meets the requirements of Code sections 125, 401(k), 402(h)(1)(B)
or 403(b), any other employer contributions to a plan of deferred
compensation which are not includible in the individual's gross
income for the taxable year in which contributed, any distributions
from a plan of deferred compensation, and any other amounts which
receive special tax benefits. However, any amounts received by an
individual pursuant to an unfunded non-qualified plan of deferred
compensation may be considered as Compensation in the year such
amounts are includible in the individual's gross income.
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(2) Compensation excludes amounts realized from the exercise of a non-
qualified stock option, or when restricted stock (or property) either
becomes transferable or is no longer subject to a substantial risk of
forfeiture.
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ARTICLE VII
INDIVIDUAL ACCOUNTS
SEC. 7.1 ACCOUNTS FOR PARTICIPANTS. The following Accounts may be
established under the Plan for a Participant:
(a) A 401(k) Account, Matching Account, and Profit Sharing Account shall
be established for each Participant who makes or receives
contributions allocable to such an Account.
(b) A Special Profit Sharing Account shall be established for each
Participant who receives a Special Profit Sharing Contribution under
Sec. 5.3(b).
(c) A Forfeiture Account shall be established for each Participant whose
Termination of Employment occurs under circumstances such that at that
time the Participant has not become 100% vested in his or her Matching
or Profit Sharing Account.
(d) A Rollover Account shall be established for each Participant who makes
a Rollover Contribution, as provided by Sec. 7.5.
(e) A Transfer Account shall be established to hold any amounts
transferred to this Plan from the Melville Plan with respect to the
Participant. To the extent that amounts transferred from the Melville
Plan must be separated into two or more portions to reflect any
special rules that apply to such portions, multiple Transfer Accounts
shall be maintained for the Participant.
More than one of any of the above types of Accounts may be established if
required by the Plan or if considered advisable by the Company in the
administration of the Plan. Except as expressly provided herein to the contrary,
the Fund shall be held and invested on a commingled basis, Accounts shall be for
bookkeeping purposes only, and the establishment of Accounts shall not require
any segregation of Fund assets.
SEC. 7.2 VALUATION PROCEDURE. As of each Valuation Date, the value of
each Account shall be adjusted to reflect the effect of distributions,
transfers, withdrawals, income, realized and unrealized profits and losses,
contributions, and all other transactions with respect to the Account since the
next preceding Valuation Date, as follows:
(a) The value of each Account determined in accordance with this section
as of the preceding Valuation Date (and adjusted as provided in
subsection (c) below) shall be adjusted to reflect any investment
gains, losses or expenses credited to or charged against the Account
by the Funding Agency pursuant to Sec. 7.3.
(b) There shall be added to the adjusted value of each Account the amount
of any contributions made for that Account pursuant to Article V
during the period subsequent to the preceding Valuation Date and
ending on the current Valuation Date.
(c) From the value of each Account determined as of the next preceding
Valuation Date, there shall be deducted the amount of all
distributions and withdrawals, if any, made from the Account since the
preceding Valuation Date.
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If a Participant's Termination of Employment (or any other event) occurred after
the preceding Valuation Date and on or before the current Valuation Date, and if
the Participant was not 100% vested in his or her Matching and Profit Sharing
Accounts, the value of such Accounts as determined above shall be adjusted by
deducting the percentage of such Accounts not so vested and crediting them to
the Participant's Forfeiture Account.
SEC. 7.3 INVESTMENT OF ACCOUNTS. Each Participant shall direct the
investment of his or her Accounts, subject to the following:
(a) The Company shall determine the class or classes of investments which
will be made available as investment options under this Plan from time
to time. The Company may in its sole discretion add additional options
or delete existing options at any time.
(b) All investment directions shall be filed with the Company, or with
such agent or agents as may be designated from time to time by the
Company for this purpose, and shall be made in writing or in such
other manner as the Company may authorize from time to time. Each
investment direction shall remain in effect until a new investment
direction is filed by the Participant. An initial investment direction
shall be filed by the Participant when an Account is first established
for the Participant. Thereafter, a Participant may change the
investment of the existing Account balances as of any Valuation Date
(or as of such other dates as may be authorized by the Company from
time to time) and may change the investment of future contributions
commencing with contributions to be deposited during a particular
month. All investment designations must be in whatever increments for
any investment option are established by the Company from time to
time. All such investment designations must be filed with the Company
or its agent prior to the deadline established by the Company for the
effective date. Except where the foregoing provisions establish a
later effective date, investment directions shall be implemented as
soon as reasonably possible after they are received by the Funding
Agency.
(c) All investment directions by a Participant shall be complete as to the
terms of the investment transaction. The Participant shall provide for
both the investment of existing Account balances and the investment of
future contributions on behalf of the Participant. No Funding Agency
shall have any obligation whatsoever to invest or manage any assets
held in a Participant's Accounts, its sole duty being to follow within
a reasonable period of time all proper directions of the Participant
which are made in accordance with the Plan and which are not contrary
to ERISA. If a Participant fails to provide directions as to the
investment of any cash held in his or her Accounts, the Company may in
its sole discretion designate an investment vehicle to be used to hold
such funds.
(d) All earnings and losses on the investments held for each of the
Participant's Accounts shall be credited directly to such Account, and
the Account shall be charged with all expenses attributable to such
investments. If assets of an Account are commingled for investment
with assets of other Accounts, all such Accounts shall share
proportionately in the investment experience of and expenses
chargeable to the commingled fund according to a method which the
Funding Agency determines in its sole discretion to be reasonable. The
Funding Agency may also charge to each such Account such portion of
the general expenses of the Fund as the Funding Agency determines in
its sole discretion to be reasonable.
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(e) Following the death of the Participant, each of his or her
Beneficiaries shall have the right to direct the investment of the
portion of the Participant's Accounts held on behalf of the
Beneficiary. An "alternate payee" pursuant to the terms of a qualified
domestic relations order shall have the right to direct the investment
of the Accounts held on behalf of the alternate payee after the order
is determined to be qualified, unless the order specifically provides
to the contrary. In each such case, the directions shall be subject to
the same terms and conditions as applied to the Participant.
(f) The Funding Agency shall at all times retain title to all assets held
for Accounts, and shall have the voting power with respect to all
stock or other securities held for Accounts, unless that voting power
has been delegated in writing to an investment manager or other entity
or individual.
(g) All investment directions shall be in accordance with such rules and
regulations as the Company or the Funding Agency may establish from
time to time for this purpose.
(h) Each Account shall be valued by the Funding Agency at fair market
value as of each Valuation Date and at such other times as may be
necessary for the proper administration of the Plan. If fair market
value of an asset is not available, it shall be deemed to be fair
value as determined in good faith by the Company or other Named
Fiduciary assigned such function, or if such asset is held in trust
and the trust agreement so provides, as determined in good faith by
the trustee. If any portion of the fund is invested in a contract
issued by an insurance company, of a type sometimes referred to as a
"guaranteed income contract", under which the insurance company pays a
guaranteed minimum rate of interest for a stated period of time, and
if no event has occurred that will result in repayment of principal at
a discounted value, the fair market value of the contract shall be
deemed to be its book value.
(i) Notwithstanding anything herein to the contrary, if the Plan receives
a recovery on an investment (including, but not limited to, a recovery
from the Federal Deposit Insurance Corporation, a state insurance
guaranty association or the Securities Industry Protection
Corporation, or a recovery under federal or state securities laws)
which recovery is earmarked by the paying entity as attributable to a
specific Participant or Beneficiary, the amount recovered shall be
allocated only to the Account(s) of such Participant or Beneficiary,
and the Accounts of other Participants and Beneficiaries shall not
share in the recovery. The Company shall make appropriate adjustments
in allocations of investment earnings and losses and Account values to
reflect the provisions of this subsection.
SEC. 7.4 PARTICIPANT STATEMENTS. Each Plan Year the Company may cause
each Participant to be provided with a statement of Account balances as of the
end of the immediately preceding Plan Year.
SEC. 7.5 ROLLOVER ACCOUNTS. At the request of a Qualified Associate
and with the consent of the Company, the Plan may accept a transfer to the Fund
of an amount that constitutes a Rollover Contribution. The Company shall grant
such consent in its sole discretion and only if it is certain that the amount to
be transferred will constitute a proper Rollover Contribution. All Rollover
Contributions shall be in the form of cash or cash equivalents. Notwithstanding
any provisions of the Plan to the contrary, the following shall apply with
respect to a Rollover Contribution:
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(a) A Rollover Account shall be established for each individual who makes
a Rollover Contribution. From the date the assets of the Rollover
Contribution are transferred to the Fund through the first Valuation
Date following such transfer, the Rollover Account shall be valued at
the fair market value of said assets on the date of such transfer.
(b) A Rollover Account shall be treated in all respects the same as a
Profit Sharing Account except as provided in (a) above, and any
references in the Plan to a Profit Sharing Account shall apply equally
to a Rollover Account, except that no employer or employee
contributions shall ever be added to a Rollover Account, and in the
event of the individual's Termination of Employment entitling him or
her to a benefit under Sec. 9.2, the vested percentage in the Rollover
Account shall be 100%.
(c) The individual shall be treated the same as a Participant hereunder
from the time of the transfer, but shall not actually be a Participant
and shall not be eligible to receive an allocation of employer
contributions or to make employee contributions until he or she has
satisfied the requirements of Article IV.
(d) For purposes of this section, "Rollover Contribution" means a
contribution of an amount which may be rolled over to this Plan
pursuant to Code section 401(a)(31), 402(c), 403(a)(4), 408(d)(3), or
any other provision of the Code which may permit rollovers to this
Plan from time to time.
SEC. 7.6 TRANSFERS FROM OTHER PLANS. With the consent of the Company,
the Plan may accept a direct transfer from another plan of funds credited to one
or more Qualified Associates under such other plan. Direct rollovers pursuant to
Code section 401(a)(31) are subject to Sec. 7.5 rather than this section, and
transfers from the Melville Plan are also subject to specific provisions in
other sections of this Plan. The Company shall grant such consent in its sole
discretion and only if it determines that the transfer of funds is consistent
with the provisions of the Code. Such a transfer shall be subject to the
following:
(a) Any funds so received shall be credited to one or more separate
Accounts in the categories listed in Sec. 7.1 which are subject to the
same requirements under the Code as applied to the transferred funds
while they were held in the other plan. If no such Account exists
under Sec. 7.1 to receive any part of the transferred funds, such
funds shall be placed in one or more separate Rollover Accounts which
shall thereafter be subject to any requirements under the other plan
which are required by the Code to continue to apply to those funds
after the transfer. From the date of the transfer through the first
Valuation Date following such transfer, such Accounts shall be valued
at the fair market value of the transferred assets on the date of such
transfer.
(b) Each separate Account established as provided in (a) shall be treated
in all respects as the corresponding type of Account under this Plan,
except as provided in subsection (a) and except that no employer or
employee contributions shall ever be added to such a separate Account,
and in the event of the individual's Termination of Employment
entitling him or her to a benefit under Sec. 9.2, the vested
percentage in each such separate Account shall be not less than the
vested percentage in such funds prior to the transfer.
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(c) The individual shall be treated the same as a Participant from the
time of the transfer, but shall not actually be a Participant and
shall not be eligible to share in employer contributions or to make
contributions until he or she has satisfied the requirements of
Article IV.
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ARTICLE VIII
DESIGNATION OF BENEFICIARY
SEC. 8.1 PERSONS ELIGIBLE TO DESIGNATE. Any Participant may designate
a Beneficiary to receive any amount payable from the Fund as a result of the
Participant's death, provided that the Beneficiary survives the Participant. The
Beneficiary may be one or more persons, natural or otherwise. By way of
illustration, but not by way of limitation, the Beneficiary may be an
individual, trustee, executor, or administrator. The Beneficiary with respect to
one Account may be different from the Beneficiary with respect to another
Account. A Participant may also change or revoke a designation previously made,
without the consent of any Beneficiary named therein.
SEC. 8.2 SPECIAL REQUIREMENTS FOR MARRIED PARTICIPANTS.
Notwithstanding the provisions of Sec. 8.1, if a Participant is married at the
time of his or her death, the Beneficiary shall be the Participant's spouse
unless the spouse has consented in writing to the designation of a different
Beneficiary, the spouse's consent acknowledges the effect of such designation,
and the spouse's consent is witnessed by a representative of the Plan or a
notary public. Such consent shall be deemed to have been obtained if it is
established to the satisfaction of the Company that such consent cannot be
obtained because there is no spouse, because the spouse cannot be located, or
because of such other circumstances as may be prescribed by federal regulations.
Any consent by a spouse shall be irrevocable. Any designation of a Beneficiary
which has received spousal consent may be changed (other than by being revoked)
without spousal consent only if the consent by the spouse expressly permits
subsequent designations by the Participant without any requirement for further
consent by the spouse. Any such consent shall be valid only with respect to the
spouse who signed the consent, or in the case of a deemed consent, the
designated spouse.
SEC. 8.3 FORM AND METHOD OF DESIGNATION. Any designation or a
revocation of a prior designation of Beneficiary shall be in writing on a form
acceptable to the Company and shall be filed with the Company. The Company and
all other parties involved in making payment to a Beneficiary may rely on the
latest Beneficiary designation on file with the Company at the time of payment
or may make payment pursuant to Sec. 8.4 if an effective designation is not on
file, shall be fully protected in doing so, and shall have no liability
whatsoever to any person making claim for such payment under a subsequently
filed designation of Beneficiary or for any other reason.
SEC. 8.4 NO EFFECTIVE DESIGNATION. If there is not on file with the
Company an effective designation of Beneficiary by a deceased Participant, the
Beneficiary shall be the person or persons surviving the Participant in the
first of the following classes in which there is a survivor, share and share
alike:
(a) The Participant's spouse.
(b) The Participant's children, except that if any of the Participant's
children predecease the Participant but leave issue surviving the
Participant, such issue shall take by right of representation the
share their parent would have taken if living.
(c) The Participant's parents.
(d) The Participant's brothers and sisters.
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(e) The Participant's estate.
Determination of the identity of the Beneficiary in each case shall be made by
the Company.
SEC. 8.5 SUCCESSOR BENEFICIARY. If a Beneficiary who survives the
Participant subsequently dies before receiving all payments to which the
Beneficiary was entitled, the successor Beneficiary, determined in accordance
with the provisions of this section, shall be entitled to the balance of any
remaining payments due. A Beneficiary who is not the surviving spouse of the
Participant may not designate a successor Beneficiary. A Beneficiary who is the
surviving spouse may designate a successor Beneficiary only if the Participant
specifically authorized such designations on the Participant's Beneficiary
designation form. If a Beneficiary is permitted to designate a successor
Beneficiary, each such designation shall be made according to the same rules
(other than Sec. 8.2) applicable to designations by Participants. If a
Beneficiary is not permitted to designate a successor Beneficiary, or is
permitted to do so but fails to make such a designation, the balance of any
payments remaining due will be payable to a contingent Beneficiary if the
Participant's Beneficiary designation so specifies, and otherwise to the estate
of the deceased Beneficiary.
SEC. 8.6 INSURANCE CONTRACT. Notwithstanding the foregoing provisions
of this Article VIII, as to benefits payable under a contract issued by an
insurance company, said contract shall govern the designation of Beneficiary
entitled to benefits thereunder except to the extent the contract is
inconsistent with the provisions of Sec. 8.2 or Sec. 10.1.
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ARTICLE IX
BENEFIT REQUIREMENTS
SEC. 9.1 BENEFIT ON RETIREMENT OR DISABILITY. If a Participant's
Termination of Employment occurs (for any reason other than death) after either
of the following events, the Participant shall be 100% vested and shall be
entitled to a benefit equal to the value of all of his or her Accounts:
(a) The Participant has reached Normal Retirement Age.
(b) The Participant's Termination of Employment has occurred due to a
bodily injury or disease which the Company determines, based on
competent medical evidence, makes the Participant permanently disabled
from performing the normal duties of his or her position with a
Participating Employer.
The benefit shall be paid at the times and in the manner determined under
Article X.
SEC. 9.2 OTHER TERMINATION OF EMPLOYMENT. If a Participant's
Termination of Employment occurs (for any reason other than death) under
circumstances such that the Participant is not entitled to a benefit under Sec.
9.1, the Participant shall be entitled to a benefit equal to the value of all of
his or her Accounts other than Matching and Profit Sharing Accounts and also a
benefit equal to the vested percentage of the value of the Participant's
Matching and Profit Sharing Accounts, subject, however, to the following:
(a) The vested percentage shall depend upon the number of the
Participant's full Years of Vesting Service at the time of the
Termination of Employment, as follows: <TABLE>
<CAPTION>
Vesting Schedule
----------------
Full Years of Vesting Service Vested Percentage
----------------------------- -----------------
<S> <C> <C>
Less than 5 0%
5 or more 100%
</TABLE>
(b) The portion of the Matching and Profit Sharing Accounts that is not
vested shall be transferred to the Participant's Forfeiture Account as
of the Valuation Date coincident with or next following his or her
Termination of Employment, as provided in Sec. 7.2. Thereafter, the
disposition of said Forfeiture Account shall be as provided below:
(1) If the Participant is subsequently reemployed before the date the
Forfeiture occurs under paragraph (2), the Forfeiture Account
shall be reinstated as separate Matching and Profit Sharing
Accounts, to which the Participant shall be entitled in
accordance with the provisions of this Article IX upon a
subsequent Termination of Employment.
(2) The value of the Forfeiture Account shall be recognized as
Forfeitures as of the earlier of the following dates:
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(A) The date the Participant incurred a five-year Recognized
Break In Service.
(B) The date that the vested portion of all of the Participant's
Accounts has been distributed to the Participant. If the
Participant was 0% vested in a particular Account, that
Account will be deemed for purposes of this subparagraph (B)
to have been distributed when the Participant's Termination
of Employment occurred.
The Participant shall lose all claim to the Forfeiture Account
when the Forfeiture occurs. The Forfeiture Account shall then be
(i) applied to reinstate Accounts pursuant to paragraph (4), (ii)
allocated as Special Profit Sharing Contributions under Sec.
5.3(b), (iii) applied as a credit against future Matching
Contributions under Sec. 5.2, or (iv) used to pay administrative
expenses of the Plan, as directed by the Company.
(3) If a former Participant whose Account was forfeited under
paragraph (2) on or after the Effective Date is subsequently
reemployed before incurring a Recognized Break In Service of at
least 60 months duration, separate Matching and Profit Sharing
Accounts shall be reinstated for the Participant as of the
Valuation Date coincident with the last day of the Plan Year in
which the reemployment occurred. The Participant shall be
entitled to such Accounts in accordance with the provisions of
this Article IX upon any subsequent Termination of Employment.
The total value of such Accounts as of such Valuation Date shall
be equal to the value of the Forfeiture Account as of the
Valuation Date referred to in paragraph (2). The reinstated
Accounts shall be funded as provided in paragraph (4).
(4) The amount required to reinstate an Account pursuant to paragraph
(3) as of the last day of a Plan Year shall be provided from the
following sources in the priority indicated:
(A) Amounts forfeited under this subsection (b) for the Plan
Year.
(B) Employer contributions for the Plan Year.
(C) Net income or gain of the Fund not previously allocated to
other Accounts.
(5) If Forfeitures are to be applied as a credit against future
contributions and a Forfeiture would exceed the amount remaining
due from the Participating Employers for the Plan Year, the
Forfeiture shall instead occur on the first day of the following
Plan Year.
(c) If the Participant has had a Recognized Break In Service of at least
60 months duration, for purposes of determining the vested portion of
the Participant's Accounts attributable to employer contributions
which accrued before such break, Vesting Service after the break in
service shall not be taken into account.
(d) The benefit under this section shall be paid at the times and in the
manner determined under Article X.
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SEC. 9.3 DEATH. If a Participant's Termination of Employment is the
result of death, his or her Beneficiary shall be entitled to a benefit equal to
the value of all of the Participant's Accounts. Such benefit shall be paid at
the times and in the manner determined under Article X. If a Participant's death
occurs after his or her Termination of Employment, distribution of the vested
balance of the Participant's Accounts shall be made to the Beneficiary in
accordance with the provisions of Article X.
SEC. 9.4 WITHDRAWALS BEFORE TERMINATION OF EMPLOYMENT. If some or all
of a Participant's Transfer Account could have been withdrawn prior to
Termination of Employment under the provisions of the Melville Plan in effect
immediately prior to the Effective Date, the Participant shall have the same in-
service withdrawal rights under this Plan with respect to such Transfer Account.
SEC. 9.5 LOANS TO PARTICIPANTS. The Company may authorize a loan to a
Participant who is employed by a Participating Employer or an Affiliate and who
makes application therefor. Each such loan shall be subject to the following
provisions:
(a) The amount of any loan to a Participant, when added to the balance of
all other loans to the Participant under this Plan and all related
plans which are outstanding on the day on which such loan is made,
shall not exceed the lesser of:
(1) $50,000, reduced by the excess (if any) of (i) the highest
outstanding balance of loans to the Participant from the Plan and
all related plans during the one-year period ending on the day
before the date the loan is made, over (ii) the outstanding
balance of loans to the Participant from the Plan and all related
plans on the date the loan is made; or
(2) 50% of the amount to which the Participant would be entitled in
the event his or her Termination of Employment were to occur on
the date the loan is made.
For purposes of this section, a related plan is any "qualified
employer plan", as defined in Code section 72(p)(4), sponsored by the
Participant's Participating Employer or any related employer,
determined according to Code section 72(p)(2)(D).
(b) The minimum amount of any loan shall be $1,000.00. Only one loan can
be outstanding to a Participant at any time. The monthly repayment
amount cannot exceed 20% of the greater of (i) the Participant's
regular average monthly pay over the 12-month period preceding the
date the loan is made, or (ii) the Participant's current regular
average monthly pay on the date the loan is made.
(c) Each loan shall be evidenced by the Participant's promissory note
payable to the order of the Funding Agency. Each loan shall be
adequately secured as determined by the Company. A loan shall be
considered adequately secured whenever the outstanding balance does
not exceed the amount in which the Participant would have a vested
interest in the event of his or her Termination of Employment.
(d) The Company shall determine the rate of interest to be paid with
respect to each loan, which shall be a reasonable rate of interest
within the meaning of Code section 4975. The rate shall be based on
the interest rates charged by persons in the business of lending money
in the region in which the Company operates for loans which would be
made under
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similar circumstances. As of the Effective Date, the interest rate is
1% above the prime rate in effect at a bank designated by the Company
as of the first day of the month in which the loan is requested.
(e) Each such loan shall provide for the payment of accrued interest and
for repayment of principal in substantially equal installments not
less frequently than quarterly. There will be no penalty for
prepayments of any loan in full after it has been outstanding for at
least one year. Partial prepayments are not allowed. While the
Participant is employed by the Participating Employers, all loans
shall be repaid through payroll deductions on each regular payroll
period to the extent possible. The Participant shall execute any
documents required to authorize such deductions. If the Participant's
payroll frequency changes, any remaining loan principal will be
reamortized over the remainder of the current amortization period
using the new payroll frequency.
(f) Each loan shall extend for a stated period determined by agreement of
the Participant and the Company, not exceeding five years. The
limitation in the preceding sentence shall not apply to any loan
designated by the Company as a home loan. For purposes of this
paragraph, a home loan is a loan used to acquire any dwelling unit
which within a reasonable time is to be used as the principal
residence of the Participant. The duration of home loans shall be
determined by the Company, and shall not exceed 25 years or the
Participant's life expectancy on the date the loan is made, whichever
is less.
(g) Failure to pay any installment of interest or principal when due shall
constitute a default of the loan, subject to the following:
(1) The default shall not occur if the installment is paid on or
before the last day of the calendar quarter following the quarter
in which the installment was due (or such earlier deadline for
correcting the default as may be established by the Company from
time to time). If the default is not corrected within the
applicable grace period, the default shall occur on the last day
of said grace period.
(2) If a Participant takes a leave of absence authorized by a
Participating Employer, and if the leave is unpaid or the
Participant's pay during the leave (after income and employment
tax withholding) is not sufficient to pay the installments when
due, a default shall not occur during the period of the leave if
the Participant returns to employment with a Participating
Employer by the first anniversary of the date the leave began. If
the Participant does not return to employment with a
Participating Employer by the first anniversary of the date the
leave began, a default with respect to any installment due during
the leave shall occur on the later of (i) the first anniversary
of the date the leave began, or (ii) the applicable grace period
with respect to that installment under paragraph (1).
(3) If a failure to pay installments on a loan during a leave of
absence does not result in a default under paragraph (2), the
installments under the Participant's note shall be extended for a
period of time sufficient to repay the principal and accrued
interest on the loan in full; provided that the repayment period
shall not be extended beyond the maximum period allowed under
subsection (f) from the date the loan was made.
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Events of default shall also include any other events identified as
such in the Participant's note. Upon any default, the entire loan
balance shall become due and payable in full.
(h) Notwithstanding subsections (f) and (g), all loans shall become due
and payable in full on the last day of the calendar quarter following
the quarter in which the Participant's Termination of Employment
occurs (unless the Participant is reemployed by a Participating
Employer prior to that deadline). If the loan has not been repaid in
full by that time, the remaining principal and accrued interest shall
become a default on that date, and the loan shall be distributed in
kind by distributing the note to the Participant.
(i) In the event of a default on a loan, foreclosure on the note and
application of the Participant's Accounts to satisfy the note will
occur on the earliest date on which the Participant or Beneficiary is
eligible to receive payment of benefits under the Plan (to the extent
the payment is sufficient to satisfy the note), but shall not occur
prior to such date.
(j) If a loan to a Participant is outstanding on the date a distribution
is to be made from the Fund with respect to the portion of the
Participant's Account or Accounts represented by the loan, the balance
of the loan, or a portion thereof equal to the amount to be
distributed, if less, shall on such date become due and payable (if
not already due and payable). The portion of the loan due and payable
shall be satisfied by offsetting such amount against the amount to be
distributed to the Participant. Alternatively, the portion of the
Participant's Account or Accounts equal to the outstanding balance on
the loan may be distributed in kind by distribution of the
Participant's note.
(k) If a loan to a Participant is outstanding at the time of the
Participant's death, and if the loan is not repaid by the
Participant's executor or administrator by the last day of the
calendar quarter following the quarter in which the Participant died,
the note shall be distributed in kind to the Participant's
Beneficiary.
(l) The Company shall administer the loan program under this section and
shall direct the Funding Agency with respect to the making of loans to
Participants, the collection thereof, and all other matters pertaining
thereto. The Funding Agency shall follow such directions to the extent
possible and shall not take any independent action with respect to
such loans. The Funding Agency shall have no responsibility whatsoever
with respect to loans to Participants except to follow the directions
of the Company to the extent possible.
(m) In accordance with the foregoing standards and requirements, loans
shall be available to all Participants on a reasonably equivalent
basis.
(n) All loans shall be governed by such non-discriminatory written rules
as the Company may adopt, which shall be deemed to be a part of this
Plan. Applications for loans shall be filed with the Company or its
agent in such form as the Company may prescribe for this purpose.
(o) The Company shall cause to be furnished to any Participant receiving a
loan any information required to be furnished pursuant to the Federal
Truth In Lending Act, if applicable, or pursuant to any other
applicable law.
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(p) The portion of a Participant's Account or Accounts represented by the
outstanding loan principal shall be segregated for investment
purposes. In lieu of sharing in income or losses on investments of the
Fund, the segregated portion of the Participant's Accounts shall be
credited with all interest paid by the Participant on the loan.
Repayments of principal and interest on a loan shall be reinvested in
accordance with the investment designation in effect under Sec. 7.3
for future contributions on the date the repayment is received by the
Funding Agency. The Funding Agency may charge to the Participant's
Accounts any expenses attributable to the loan and such portion of the
general expenses of the Fund as the Funding Agency determines in its
discretion to be reasonable. If a Participant's Termination of
Employment results in a transfer to a Forfeiture Account, no portion
of an Account attributable to an outstanding loan may be transferred
to the Forfeiture Account.
(q) The Participant shall provide directions as to the investments held in
his or her Accounts that are to be liquidated to provide the Fund with
cash equal to the loan principal.
(r) Solely for purposes of this section, a former Participant (or any
Beneficiary of a deceased Participant) who is entitled to a benefit
from the Plan, and who is a "party in interest" as defined in section
3(14) of ERISA, is considered to be still employed by a Participating
Employer.
(s) No loan shall be made to a Participant who is an owner-employee (as
defined in Code section 401(c)(3)) or a shareholder-employee (as
defined in Code section 1379(d), as in effect on the day before the
enactment of the Subchapter S Revision Act of 1982) unless a
prohibited transaction exemption for the loan has been obtained from
the Department of Labor.
(t) Any loan transferred to this Plan from the Melville Plan with respect
to a Participant shall be treated as a loan from this Plan and shall
be subject to the provisions of this Sec. 9.5 except to the extent
such provisions are specifically contradicted by the terms of the note
or other documents governing the loan.
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ARTICLE X
DISTRIBUTION OF BENEFITS
SEC. 10.1 TIME AND METHOD OF PAYMENT. The benefit to which a
Participant or Beneficiary may become entitled under Article IX shall be
distributed to that individual at such time as he or she elects, subject to the
following:
(a) The distribution may be made at any time after the date as of which
the Participant or Beneficiary becomes entitled to a benefit payment.
All distributions shall be made by payment in a single sum, except as
provided in subsection (j).
(b) Distribution must be made no later than the 60th day after the close
of the Plan Year in which the Participant reaches age 65 or in which
the Participant's Termination of Employment occurs, whichever is
later; provided, however, that if the amount of the payment to be made
cannot be determined by the later of the aforesaid dates, a payment
retroactive to such date may be made no later than 60 days after the
earliest date on which the amount of such payment can be ascertained.
(c) The distribution to a Participant must be made by April 1 following
the calendar year in which the Participant attains age 70 1/2 unless
the Participant's death occurs before that date. However, if the
Participant attained age 70 1/2 before January 1, 1988 and is not a
more than 5-percent owner, the distribution is not required to be made
until April 1 following the calendar year in which the Participant's
Termination of Employment occurs, if later. For purposes of this
subsection, a "more than 5-percent owner" is a person who was a more
than 5-percent owner of a Participating Employer (as defined in Code
section 416) at any time during the Plan Year ending with or within
the calendar year in which he or she attained age 66 1/2 or any
subsequent Plan Year.
(d) If the Participant dies before receiving the distribution, the
Participant's vested Accounts shall be distributed to the Beneficiary
as soon as administratively practicable following the Participant's
death, but in no event not later than December 31 of the year
containing the fifth anniversary of the Participant's death.
(e) If more than one Beneficiary is entitled to benefits following the
Participant's death, the interest of each Beneficiary shall be
segregated into a separate Account for purposes of applying this
section.
(f) For purposes of this section, "designated Beneficiary" means any
individual who is a Beneficiary pursuant to Article VIII.
(g) Notwithstanding the foregoing, if the total vested value of the
Accounts of a Participant is $3,500 or less on the Valuation Date
coincident with or immediately following the date the Participant's
Termination of Employment occurs, a single-sum distribution shall be
made to the Participant as of the earliest date permitted by the Plan.
However, this subsection shall not apply to a Participant if the total
vested value of the Participant's Accounts exceeded $3,500 at the time
any previous distribution was made to the Participant.
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(h) Notwithstanding any provision of the Plan to the contrary,
distributions under this section shall be made in accordance with the
requirements of Code section 401(a)(9), including the incidental death
benefit requirements of Code section 401(a)(9)(G) and the regulations
thereunder. No distribution option otherwise permitted under this Plan
will be available to a Participant or Beneficiary if such distribution
option does not meet the requirements of Code section 401(a)(9),
including subparagraph (G) thereof.
(i) Notwithstanding any provision of the Plan to the contrary that would
otherwise limit a distributee's election, a distributee may elect, at
the time and in the manner prescribed by the Company, to have any
portion of an eligible rollover distribution paid directly to an
eligible retirement plan specified by the distributee in a direct
rollover. For purposes of this subsection:
(1) An "eligible rollover distribution" is any distribution of all or
any portion of the balance to the credit of the distributee,
except that an eligible rollover distribution does not include
any distribution to the extent such distribution is required
under Code section 401(a)(9).
(2) An "eligible retirement plan" is an individual retirement account
described in Code section 408(a), an individual retirement
annuity described in Code section 408(b), an annuity plan
described in Code section 403(a), or a qualified trust described
in Code section 401(a), that accepts the distributee's eligible
rollover distribution. However, in the case of an eligible
rollover distribution to the surviving spouse, an eligible
retirement plan is an individual retirement account or individual
retirement annuity.
(3) A "distributee" includes a Participant or former Participant. In
addition, the Participant's or former Participant's surviving
spouse and the Participant's or former Participant's spouse or
former spouse who is the alternate payee under a qualified
domestic relations order, as defined in Code section 414(p), are
distributees with regard to the interest of the spouse or former
spouse.
(4) A "direct rollover" is a payment by the Plan to the eligible
retirement plan specified by the distributee.
(j) If a Participant is employed by a Participating Employer on the date
that a distribution is required to occur under subsection (c), the
lump sum distribution requirement under subsection (a) shall not apply
until the Participant's Termination of Employment occurs. The amount
to be distributed on each date by which a distribution is required
prior to the Participant's Termination of Employment will be
determined under paragraphs (1) and (2) below.
(1) The amount to be distributed to the Participant on or before
April 1 following the calendar year in which the Participant
attains age 70 1/2 shall be equal to the Participant's entire
interest in the Plan as of the December 31st preceding such
calendar year divided by the smaller of:
(A) The joint life and last survivor expectancy (determined
pursuant to Treasury Regulation (S)1.72-9) of the
Participant and the Participant's oldest designated
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Beneficiary, if any, based on the age of each individual as
of their birthdays in such calendar years.
(B) In the case of distributions to a Participant whose
designated Beneficiary is not the Participant's spouse, the
applicable divisor provided in regulations under Code
section 401(a)(9)(G) relating to incidental death benefits.
(2) The amount to be distributed to the Participant by December 31st
of each calendar year following the year in which the Participant
attains age 70 1/2 shall be equal to the Participant's entire
interest in the Plan as of the December 31st preceding each such
calendar year divided by the smaller of (i) the life expectancy
determined in paragraph (1)(A) reduced by one year for each
subsequent calendar year, or (ii) the applicable divisor
determined under paragraph (1)(B).
(3) The Participant's entire remaining interest in the Plan shall be
distributed not later than December 31st of the calendar year in
which the Participant's Termination of Employment occurs, unless
the Participant's death occurs prior to that date.
SEC. 10.2 DISTRIBUTION IN CASH ONLY. Distributions will be made in
cash only, except as otherwise provided in Sec. 9.5.
SEC. 10.3 ACCOUNTING FOLLOWING TERMINATION OF EMPLOYMENT. If
distribution of a benefit is deferred or delayed for any reason, the
undistributed Accounts shall continue to be revalued as of each Valuation Date
as provided in Article VII. If Sec. 10.1(g) does not apply, payment shall be
made as of a Valuation Date determined by the Funding Agency which occurs as
soon as administratively practicable after the date the Participant files the
request for payment with the Company or its agent, but not later than the date
the distribution is required to be made under Sec. 10.1. If Sec. 10.1(g) applies
to the Participant, or in the case of the Participant's death, payment shall be
made as of a Valuation Date determined by the Funding Agency which occurs as
soon as administratively practicable after the Participant's Termination of
Employment or death occurred.
SEC. 10.4 REEMPLOYMENT. Except where distributions are required under
Sec. 10.1, entitlement to a distribution from the Fund shall cease upon
reemployment of a Participant in a regular position by a Participating Employer,
and shall recommence in accordance with the provisions of this Article upon the
Participant's subsequent Termination of Employment.
SEC. 10.5 SOURCE OF BENEFITS. All benefits to which persons become
entitled hereunder shall be provided only out of the Fund and only to the extent
that the Fund is adequate therefor. No benefits are provided under the Plan
except those expressly described herein.
SEC. 10.6 INCOMPETENT PAYEE. If in the opinion of the Company a
person entitled to payments hereunder is disabled from caring for his or her
affairs because of mental or physical condition, or age, payment due such person
may be made to such person's guardian, conservator, or other legal personal
representative upon furnishing the Company with evidence satisfactory to the
Company of such status. Prior to the furnishing of such evidence, the Company
may cause payments due the person under disability to be made, for such person's
use and benefit, to any person or institution then in the opinion of the Company
caring for or maintaining the person under disability. The Company shall have no
liability with respect to payments so made. The Company shall have no duty to
make inquiry as to the competence of any person entitled to receive payments
hereunder.
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SEC. 10.7 BENEFITS MAY NOT BE ASSIGNED OR ALIENATED. Except as
otherwise expressly permitted by the Plan or required by law, the interests of
persons entitled to benefits under the Plan may not in any manner whatsoever be
assigned or alienated, whether voluntarily or involuntarily, or directly or
indirectly. However, the Plan shall comply with the provisions of any court
order which the Company determines is a qualified domestic relations order as
defined in Code section 414(p). Notwithstanding any provisions in the Plan to
the contrary, an individual who is entitled to payments from the Plan as an
"alternate payee" pursuant to a qualified domestic relations order shall receive
a lump sum payment from the Plan as soon as administratively feasible after the
Valuation Date coincident with or next following the date of the Company's
determination that the order is a qualified domestic relations order, unless the
order specifically provides for payment to be made at a later time.
SEC. 10.8 PAYMENT OF TAXES. The Funding Agency may pay any estate,
inheritance, income, or other tax, charge, or assessment attributable to any
benefit payable hereunder which in the Funding Agency's opinion it shall be or
may be required to pay out of such benefit. The Funding Agency may require,
before making any payment, such release or other document from any taxing
authority and such indemnity from the intended payee as the Funding Agency shall
deem necessary for its protection.
SEC. 10.9 CONDITIONS PRECEDENT. No person shall be entitled to a
benefit hereunder until his or her right thereto has been finally determined by
the Company nor until the person has submitted to the Company relevant data
reasonably requested by the Company, including, but not limited to, proof of
birth or death.
SEC. 10.10 COMPANY DIRECTIONS TO FUNDING AGENCY. The Company shall
issue such written directions to the Funding Agency as are necessary to
accomplish distributions to the Participants and Beneficiaries in accordance
with the provisions of the Plan.
SEC. 10.11 EFFECT ON UNEMPLOYMENT COMPENSATION. For purposes of any
unemployment compensation law, a distribution hereunder in one sum to the extent
attributable to employer contributions, shall be considered to be a severance
payment and shall be allocated over a period of weeks equal to the one sum
payment divided by the individual's regular weekly pay while employed by the
Participating Employers, which period shall commence immediately following the
individual's Termination of Employment.
SEC. 10.12 SPECIAL DISTRIBUTION EVENTS. Notwithstanding anything
herein to the contrary, if the agreement between the buyer and the seller in one
of the following types of transaction provides that distributions are to be made
to affected Participants, each such Participant shall receive a distribution of
his or her vested Account balance as soon as administratively feasible after
either of the following events:
(a) The disposition by a Participating Employer to an unrelated
corporation of substantially all of the assets (within the meaning of
Code section 409(d)(2)) used in a trade or business of such
Participating Employer if such Participating Employer continues to
maintain this Plan after the disposition, but only with respect to
individuals who continue employment with the corporation acquiring
such assets.
(b) The disposition by a Participating Employer or by an Affiliate to an
unrelated entity of such corporation's interest in a subsidiary
(within the meaning of Code section 409(d)(3))
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which was a Participating Employer if such corporation continues to
maintain this Plan, but only with respect to individuals who continue
employment with such subsidiary.
All distributions under this section are subject to any applicable consent
requirements under Sec. 10.1. In addition, distributions under this section
must be made in a lump sum.
SEC. 10.13 OTHER PAYMENT OPTIONS FOR TRANSFER ACCOUNTS.
Notwithstanding anything in the foregoing sections of this Article to the
contrary, if all or any part of a Transfer Account was subject to any optional
settlement or other right or feature under the provisions of the Melville Plan
in effect immediately prior to the Effective Date which is required to be
maintained by Code section 411(d)(6), that optional settlement or other right or
feature shall continue to apply to said portion (but only said portion) of the
Transfer Account. Such optional settlement or other right or feature shall be
governed by the applicable provisions of the Melville Plan in effect immediately
prior to the Effective Date to the extent that such provisions are not contrary
to any applicable law or regulation.
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ARTICLE XI
FUND
----
SEC. 11.1 COMPOSITION. All sums of money and all securities and other
property received by the Funding Agency for purposes of the Plan, together with
all investments made therewith, the proceeds thereof, and all earnings and
accumulations thereon, and the part from time to time remaining shall constitute
the "Fund". The Company may cause the Fund to be divided into any number of
parts for investment purposes or any other purposes necessary or advisable for
the proper administration of the Plan.
SEC. 11.2 FUNDING AGENCY. The Fund may be held and invested as one
fund or may be divided into any number of parts for investment purposes. Each
part of the Fund, or the entire Fund if it is not divided into parts for
investment purposes, shall be held and invested by one or more trustees or by an
insurance company. The trustee or trustees or the insurance company so acting
with respect to any part of the Fund is referred to herein as the Funding Agency
with respect to such part of the Fund. The selection and appointment of each
Funding Agency shall be made by the Company. The Company shall have the right at
any time to remove a Funding Agency and appoint a successor thereto, subject
only to the terms of any applicable trust agreement or group annuity contract.
The Company shall have the right to determine the form and substance of each
trust agreement and group annuity contract under which any part of the Fund is
held, subject only to the requirement that they are not inconsistent with the
provisions of the Plan. Any such trust agreement may contain provisions pursuant
to which the trustee will make investments on direction of a third party.
SEC. 11.3 COMPENSATION AND EXPENSES OF FUNDING AGENCY. The Funding
Agency shall be entitled to receive such reasonable compensation for its
services as may be agreed upon with the Company. The Funding Agency shall also
be entitled to reimbursement for all reasonable and necessary costs, expenses,
and disbursements incurred by it in the performance of its services. Such
compensation and reimbursements shall be paid from the Fund if not paid directly
by the Participating Employers in such proportions as the Company shall
determine.
SEC. 11.4 FUNDING POLICY. The Company shall adopt a procedure, and
revise it from time to time as it shall consider advisable, for establishing and
carrying out a funding policy and method consistent with the objectives of the
Plan and the requirements of ERISA. It shall advise each Funding Agency of the
funding policy in effect from time to time.
SEC. 11.5 SECURITIES AND PROPERTY OF PARTICIPATING EMPLOYERS. An
agreement with a Funding Agency may provide that all or any part of the Fund may
be invested in qualifying employer securities or qualifying employer real
property, as those terms are used in ERISA; provided, however, that the Company
shall take any steps necessary to assure that investments in securities of any
Participating Employer or any trade or business entity directly or indirectly
controlling, controlled by, or under Common Control with a Participating
Employer do not exceed those that can be acquired by that part of the Fund
attributable to contributions by Participating Employers (other than Pre-Tax
Contributions), as distinguished from that part of the Fund, if any,
attributable to contributions by Participants or Pre-Tax Contributions, unless
there has been compliance with any applicable securities laws. If qualifying
employer securities or qualifying employer real property are purchased or sold
as an investment of the Fund from or to a disqualified person or party in
interest, as those terms are used in ERISA, and if there is no generally
recognized market for such securities or property, the purchase shall be for not
more than fair market value and the sale shall be for not less than fair market
value, as
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determined in good faith by the Company or other Named Fiduciary assigned such
function, or if such assets are held in trust and the trust agreement so
provides, as determined in good faith by the trustee.
SEC. 11.6 NO DIVERSION. The Fund shall be for the exclusive purpose
of providing benefits to Participants under the Plan and their beneficiaries and
defraying reasonable expenses of administering the Plan. Such expenses may
include premiums for the bonding of Plan officials required by ERISA. No part of
the corpus or income of the Fund may be used for, or diverted to, purposes other
than for the exclusive benefit of employees of the Participating Employers or
their beneficiaries. Notwithstanding the foregoing:
(a) If any contribution or portion thereof is made by a Participating
Employer by a mistake of fact, the Funding Agency shall, upon written
request of the Company, return such contribution or portion thereof to
the Participating Employer within one year after the payment of the
contribution to the Funding Agency; however, earnings attributable to
such contribution or portion thereof shall not be returned to the
Participating Employer but shall remain in the Fund, and the amount
returned to the Participating Employer shall be reduced by any losses
attributable to such contribution or portion thereof.
(b) Contributions by a Participating Employer are conditioned upon initial
qualification of the Plan as to such Participating Employer under Code
section 401(a). If the Plan receives an adverse determination letter
from the Internal Revenue Service with respect to such initial
qualification, the Funding Agency shall, upon written request of the
Company, return the amount of such contribution to the Participating
Employer within one year after the date of denial of qualification of
the Plan. For this purpose, the amount to be so returned shall be the
contributions actually made, adjusted for the investment experience
of, and any expenses chargeable against, the portion of the Fund
attributable to the contributions actually made.
(c) Contributions by the Participating Employers are conditioned upon the
deductibility of each contribution under Code section 404. To the
extent the deduction is disallowed, the Funding Agency shall return
such contribution to the Participating Employer within one year after
the disallowance of the deduction; however, earnings attributable to
such contribution (or disallowed portion thereof) shall not be
returned to the Participating Employer but shall remain in the Fund,
and the amount returned to the Participating Employer shall be reduced
by any losses attributable to such contribution (or disallowed portion
thereof).
In the case of any such return of contribution the Company shall cause such
adjustments to be made to the Accounts of Participants as it considers fair and
equitable under the circumstances resulting in the return of such contribution.
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ARTICLE XII
ADMINISTRATION OF PLAN
SEC. 12.1 ADMINISTRATION BY COMPANY. The Company is the
"administrator" of the Plan for purposes of ERISA. Except as expressly otherwise
provided herein, the Company shall control and manage the operation and
administration of the Plan and make all decisions and determinations incident
thereto. In carrying out its Plan responsibilities, the Company shall have
discretionary authority to construe the terms of the Plan. Except in cases where
the Plan expressly provides to the contrary, action on behalf of the Company may
be taken by any of the following:
(a) The Board.
(b) The chief executive officer of the Company.
(c) Any person or persons, natural or otherwise, or committee, to whom
responsibilities for the operation and administration of the Plan are
allocated by the Company, by resolution of the Board or by the chief
executive officer of the Company, but action of such person or persons
or committee shall be within the scope of said allocation.
SEC. 12.2 CERTAIN FIDUCIARY PROVISIONS. For purposes of the Plan:
(a) Any person or group of persons may serve in more than one
fiduciary capacity with respect to the Plan.
(b) A Named Fiduciary, or a fiduciary designated by a Named Fiduciary
pursuant to the provisions of the Plan, may employ one or more persons
to render advice with regard to any responsibility such fiduciary has
under the Plan.
(c) To the extent permitted by any applicable trust agreement or group
annuity contract a Named Fiduciary with respect to control or
management of the assets of the Plan may appoint an investment manager
or managers, as defined in ERISA, to manage (including the power to
acquire and dispose of) any assets of the Plan.
(d) At any time the Plan has more than one Named Fiduciary, if pursuant to
the Plan provisions fiduciary responsibilities are not already
allocated among such Named Fiduciaries, the Company, by action of the
Board or its chief executive officer, may provide for such allocation;
except that such allocation shall not include any responsibility, if
any, in a trust agreement to manage or control the assets of the Plan
other than a power under the trust agreement to appoint an investment
manager as defined in ERISA.
(e) Unless expressly prohibited in the appointment of a Named Fiduciary
which is not the Company acting as provided in Sec. 12.1, such Named
Fiduciary by written instrument may designate a person or persons
other than such Named Fiduciary to carry out any or all of the
fiduciary responsibilities under the Plan of such Named Fiduciary;
except that such designation shall not include any responsibility, if
any, in a trust agreement to manage or control the assets of the Plan
other than a power under the trust agreement to appoint an investment
manager as defined in ERISA.
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(f) A person who is a fiduciary with respect to the Plan, including a
Named Fiduciary, shall be recognized and treated as a fiduciary only
with respect to the particular fiduciary functions as to which such
person has responsibility.
Each Named Fiduciary (other than the Company), each other fiduciary, each person
employed pursuant to (b) above, and each investment manager shall be entitled to
receive reasonable compensation for services rendered, or for the reimbursement
of expenses properly and actually incurred in the performance of their duties
with the Plan and to payment therefor from the Fund if not paid directly by the
Participating Employers in such proportions as the Company shall determine.
Notwithstanding the foregoing, no person so serving who already receives full-
time pay from any employer or association of employers whose employees are
Participants, or from an employee organization whose members are Participants,
shall receive compensation from the Plan, except for reimbursement of expenses
properly and actually incurred. Furthermore, no Participant, Beneficiary, or
"alternate payee" under a qualified domestic relations order who is eligible to
direct the investment of his or her Accounts shall receive any compensation or
reimbursement of expenses with respect to such investing.
SEC. 12.3 DISCRIMINATION PROHIBITED. No person or persons in
exercising discretion in the operation and administration of the Plan shall
discriminate in favor of Highly Compensated Associates.
SEC. 12.4 EVIDENCE. Evidence required of anyone under this Plan may
be by certificate, affidavit, document, or other instrument which the person
acting in reliance thereon considers to be pertinent and reliable and to be
signed, made, or presented to the proper party.
SEC. 12.5 CORRECTION OF ERRORS. It is recognized that in the
operation and administration of the Plan certain mathematical and accounting
errors may be made or mistakes may arise by reason of factual errors in
information supplied to the Company or Funding Agency. The Company shall have
power to cause such equitable adjustments to be made to correct for such errors
as the Company in its discretion considers appropriate. Such adjustments shall
be final and binding on all persons. Any return of a contribution due to a
mistake in fact will be subject to Sec. 11.6.
SEC. 12.6 RECORDS. Each Participating Employer, each fiduciary with
respect to the Plan, and each other person performing any functions in the
operation or administration of the Plan or the management or control of the
assets of the Plan shall keep such records as may be necessary or appropriate in
the discharge of their respective functions hereunder, including records
required by ERISA or any other applicable law. Records shall be retained as long
as necessary for the proper administration of the Plan and at least for any
period required by ERISA or other applicable law.
SEC. 12.7 GENERAL FIDUCIARY STANDARD. Each fiduciary shall discharge
its duties with respect to the Plan solely in the interests of Participants and
their beneficiaries and with the care, skill, prudence, and diligence under the
circumstances then prevailing that a prudent person acting in a like capacity
and familiar with such matters would use in the conduct of an enterprise of a
like character and with like aims.
SEC. 12.8 PROHIBITED TRANSACTIONS. A fiduciary with respect to the
Plan shall not cause the Plan to engage in any prohibited transaction within the
meaning of ERISA.
SEC. 12.9 CLAIMS PROCEDURE. The Company shall establish a claims
procedure consistent with the requirements of ERISA. Such claims procedure shall
provide adequate notice in
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writing to any Participant or beneficiary whose claim for benefits under the
Plan has been denied, setting forth the specific reasons for such denial,
written in a manner calculated to be understood by the claimant and shall afford
a reasonable opportunity to a claimant whose claim for benefits has been denied
for a full and fair review by the appropriate Named Fiduciary of the decision
denying the claim.
SEC. 12.10 BONDING. Plan personnel shall be bonded to the extent
required by ERISA. Premiums for such bonding may, in the sole discretion of the
Company, be paid in whole or in part from the Fund. Such premiums may also be
paid in whole or in part by the Participating Employers in such proportions as
the Company shall determine. The Company may provide by agreement with any
person that the premium for required bonding shall be paid by such person.
SEC. 12.11 WAIVER OF NOTICE. Any notice required hereunder may be
waived by the person entitled thereto.
SEC. 12.12 AGENT FOR LEGAL PROCESS. The Company shall be the agent
for service of legal process with respect to any matter concerning the Plan,
unless and until the Company designates some other person as such agent.
SEC. 12.13 INDEMNIFICATION. In addition to any other applicable
provisions for indemnification, the Participating Employers jointly and
severally agree to indemnify and hold harmless, to the extent permitted by law,
each director, officer, and employee of the Participating Employers against any
and all liabilities, losses, costs, or expenses (including legal fees) of
whatsoever kind and nature which may be imposed on, incurred by, or asserted
against such person at any time by reason of such person's services as a
fiduciary in connection with the Plan, but only if such person did not act
dishonestly, or in bad faith, or in willful violation of the law or regulations
under which such liability, loss, cost, or expense arises.
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ARTICLE XIII
AMENDMENT, TERMINATION, MERGER
SEC. 13.1 AMENDMENT. Subject to the non-diversion provisions of Sec.
11.6, the Company, by action of the Board, by written action of the chief
executive officer of the Company, or by written action of any other person so
authorized by resolution of the Board, may amend the Plan at any time and from
time to time. No action by a person other than the Board shall be an amendment
of the Plan unless it specifically references the Plan and states that it alters
the terms or conditions of the Plan. No amendment of the Plan shall have the
effect of changing the rights, duties, and liabilities of any Funding Agency
without its written consent. Also, no amendment shall divest a Participant or
Beneficiary of Accounts accrued prior to the amendment or decrease a
Participant's accrued benefit except to the extent permitted by Code section
411(d)(6).
(a) Promptly upon adoption of any amendment to the Plan, the Company will
furnish a copy of the amendment, together with a certificate
evidencing its due adoption, as follows:
(1) To each Funding Agency then acting.
(2) To any other Participating Employer who is not under Common
Control with the Company. The amendment shall be effective as to
such a Participating Employer and individuals in its employ
unless, within 30 days of receipt of the certificate it notifies
the Company and each Funding Agency in writing that it is
discontinuing its joint participation in the Plan pursuant to
Sec. 13.8.
(b) If an amendment to the Plan changes the vesting schedule of the Plan,
each Participant having not less than three years of service by the
end of the election period with respect to such amendment shall be
permitted within such election period to elect to have his or her
vested percentage computed under the Plan without regard to such
amendment. Each election shall be made in writing by filing with the
Company within the election period a form available from the Company
for the purpose. The election period shall be a reasonable period
determined by the Company commencing not later than the date the
amendment is adopted and shall be in conformance with any applicable
regulation prescribed by the Secretary of Labor or the Secretary of
the Treasury. Notwithstanding the foregoing, no election need be
provided for any Participant whose vested percentage under the Plan,
as amended, cannot at any time be less than the vested percentage
determined without regard to such amendment.
SEC. 13.2 PERMANENT DISCONTINUANCE OF CONTRIBUTIONS. The Company, by
action of the Board, may completely discontinue contributions in support of the
Plan by all Participating Employers. In such event, notwithstanding any
provisions of the Plan to the contrary, (i) no individual shall become a
Participant after such discontinuance, (ii) any then existing Forfeiture Account
of a Participant shall revert to its prior status as a Matching or Profit
Sharing Account and be nonforfeitable, and (iii) the Accounts of each
Participant in the employ of the Participating Employers at the time of such
discontinuance shall be nonforfeitable. Subject to the foregoing, all of the
provisions of the Plan shall continue in effect, and upon entitlement thereto
distributions shall be made in accordance with the provisions of Article X.
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SEC. 13.3 TERMINATION. The Company, by action of the Board, may
terminate the Plan as applicable to all Participating Employers and their
employees. After such termination no individual shall become a Participant, no
further contributions shall be made, and any then existing Forfeiture Account of
a Participant shall revert to its prior status as a Matching or Profit Sharing
Account and be nonforfeitable. The Accounts of each Participant in the employ of
the Participating Employers at the time of such termination shall be
nonforfeitable, the Participant shall be entitled to a benefit equal to the
value of those Accounts determined as of the Valuation Date coincident with or
next following the termination of the Plan, distributions shall be made to
Participants, Beneficiaries and alternate payees promptly after the termination
of the Plan, but not before the earliest date permitted under the Code and
applicable regulations, and the Plan and any related trust agreement or group
annuity contract shall continue in force for the purpose of making such
distributions.
SEC. 13.4 PARTIAL TERMINATION. If there is a partial termination of
the Plan, either by operation of law, by amendment of the Plan, or for any other
reason, which partial termination shall be confirmed by the Company, any then
existing Forfeiture Account of a Participant (who was in the classification of
individuals with respect to which the partial termination occurs) shall revert
to its prior status as a Matching or Profit Sharing Account and be
nonforfeitable, and the Accounts of each Participant with respect to whom the
partial termination applies shall be nonforfeitable. Subject to the foregoing,
all of the provisions of the Plan shall continue in effect as to each such
Participant, and upon entitlement thereto distributions shall be made in
accordance with the provisions of Article X.
SEC. 13.5 MERGER, CONSOLIDATION, OR TRANSFER OF PLAN ASSETS. In the
case of any merger or consolidation of the Plan with any other plan, or in the
case of the transfer of assets or liabilities of the Plan to any other plan,
provision shall be made so that each Participant, Beneficiary and alternate
payee would (if such other plan then terminated) receive a benefit immediately
after the merger, consolidation, or transfer which is equal to or greater than
the benefit he or she would have been entitled to receive immediately before the
merger, consolidation, or transfer (if the Plan had then terminated). No such
merger, consolidation, or transfer shall be effected until such statements with
respect thereto, if any, required by ERISA to be filed in advance thereof have
been filed.
SEC. 13.6 DEFERRAL OF DISTRIBUTIONS. Notwithstanding any provisions
of the Plan to the contrary, in the case of a complete discontinuance of
contributions to the Plan or of a complete or partial termination of the Plan,
the Company or the Funding Agency may defer any distribution of benefit payments
to Participants and Beneficiaries with respect to which such discontinuance or
termination applies (except for distributions which are required to be made
under Sec. 10.1) until after the following have occurred:
(a) Receipt of a final determination from the Treasury Department or any
court of competent jurisdiction regarding the effect of such
discontinuance or termination on the qualified status of the Plan
under Code section 401(a).
(b) Appropriate adjustment of Accounts to reflect taxes, costs, and
expenses, if any, incident to such discontinuance or termination.
SEC. 13.7 REORGANIZATIONS OF PARTICIPATING EMPLOYERS. In the event
two or more Participating Employers are consolidated or merged or in the event
one or more Participating Employers acquires the assets of another Participating
Employer, the Plan shall be deemed to have continued, without termination and
without a complete discontinuance of contributions, as to all the Participating
Employers involved in such reorganization and their employees. In such event, in
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administering the Plan the corporation resulting from the consolidation, the
surviving corporation in the merger, or the employer acquiring the assets shall
be considered as a continuation of all of the Participating Employers involved
in the reorganization.
SEC. 13.8 DISCONTINUANCE OF JOINT PARTICIPATION OF A PARTICIPATING
EMPLOYER. The Company, by action of the Board, may discontinue the joint
participation in the Plan by another Participating Employer. A Participating
Employer which is not under Common Control with the Company may discontinue its
joint participation in the Plan with the other Participating Employers by action
of its board of directors and on appropriate written notice to the Company and
each Funding Agency then acting.
(a) If the Company determines in its sole discretion to spin off the
portion of the Plan attributable to the withdrawing employer, the
Company shall cause a determination to be made of the equitable part
of the Fund assets held on account of Participants of the withdrawing
employer and their Beneficiaries. The Company shall direct the Funding
Agency or Funding Agencies to transfer assets representing such
equitable part to a separate fund for the plan of the withdrawing
employer. Such withdrawing employer may thereafter exercise, with
respect to such separate fund, all the rights and powers reserved to
the Company with respect to the Fund. The plan of the withdrawing
employer shall, until amended by the withdrawing employer, continue
with the same terms as the Plan herein, except that with respect to
the separate plan of the withdrawing employer the words "Participating
Employer", "Participating Employers", and "Company" shall thereafter
be considered to refer only to the withdrawing employer. Any such
spinoff shall be effected in such manner that each Participant or
Beneficiary would (if the Plan and the plan of the withdrawing
employer then immediately terminated) receive a benefit which is equal
to or greater than the benefit the individual would have been entitled
to receive immediately before such spinoff if the Plan had then
terminated. No transfer of assets pursuant to this section shall be
effected until such statements with respect thereto, if any, required
by ERISA to be filed in advance thereof have been filed.
(b) If subsection (a) does not apply, the Accounts of Participants of the
withdrawing employer and their Beneficiaries shall continue to be held
in the Plan for distribution in accordance with the provisions hereof.
SEC. 13.9 PARTICIPATING EMPLOYERS NOT UNDER COMMON CONTROL. If a
Participating Employer is not under Common Control with the Company, the
provisions of the Plan (other than this Article XIII) shall be applied as though
a separate plan is being maintained for that Participating Employer to the
extent required by Code section 413(c).
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ARTICLE XIV
TOP-HEAVY PLAN PROVISIONS
SEC. 14.1 KEY EMPLOYEE DEFINED. "Key Employee" means any employee or
former employee of the employer who at any time during the determination period
was an officer of the employer or is deemed to have had an ownership interest in
the employer and who is within the definition of key employee in Code section
416(i). "Non-Key Employee" means any employee who is not a Key Employee.
SEC. 14.2 DETERMINATION OF TOP-HEAVY STATUS. The top-heavy status of
the Plan shall be determined according to Code section 416 and the regulations
thereunder, using the following standards and definitions:
(a) The Plan is a Top-Heavy Plan for a Plan Year if either of the
following applies:
(1) If this Plan is not part of a required aggregation group and the
top-heavy ratio for this Plan exceeds 60 percent.
(2) If this Plan is part of a required aggregation group of plans and
the top-heavy ratio for the group of plans exceeds 60 percent.
Notwithstanding paragraphs (1) and (2) above, the Plan is not a Top-
Heavy Plan with respect to a Plan Year if it is part of a permissive
aggregation group of plans for which the top-heavy ratio does not
exceed 60 percent.
(b) The "top-heavy ratio" shall be determined as follows:
(1) If the employer maintains one or more defined contribution plans
(including any simplified employee pension plan) and has not
maintained any defined benefit plan which during the 5-year
period ending on the determination date has or has had accrued
benefits, the top-heavy ratio for this Plan or for the required
or permissive aggregation group (as appropriate) is a fraction,
the numerator of which is the sum of the account balances of all
Key Employees under the Plan or plans as of the determination
date (including any part of any account balance distributed in
the five-year period ending on the determination date), and the
denominator of which is the sum of the account balances
(including any part of any account balance distributed in the
five-year period ending on the determination date) of all
Participants under the Plan or plans as of the determination
date. Both the numerator and denominator of the top-heavy ratio
shall be increased to reflect any contribution not actually made
as of the determination date but which is required to be taken
into account on that date under Code section 416 and the
regulations thereunder.
(2) If the employer maintains one or more defined contribution plans
(including any simplified employee pension plan) and maintains or
has maintained one or more defined benefit plans which during the
5-year period ending on the determination date has or has had any
accrued benefits, the top-heavy ratio for any required or
permissive aggregation group (as appropriate), is a fraction, the
numerator of which is the sum of the account balances of all Key
Employees under the aggregated
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defined contribution plan or plans, determined according to
paragraph (1) above, and the present value of accrued benefits of
all Key Employees under the defined benefit plan or plans as of
the determination date, and the denominator of which is the sum
of such account balances of all participants under the aggregated
defined contribution plan or plans and the present value of
accrued benefits of all participants under the defined benefit
plan or plans as of the determination date. The account balances
and accrued benefits in both the numerator and denominator of the
top-heavy ratio shall be adjusted to reflect any distributions
made in the five-year period ending on the determination date and
any contributions due but unpaid as of the determination date.
(3) For purposes of paragraphs (1) and (2), the value of account
balances and the present value of accrued benefits will be
determined as of the most recent valuation date that falls within
the 12-month period ending on the determination date, except as
provided in Code section 416 and the regulations thereunder for
the first and second plan years of a defined benefit plan. The
account balances and accrued benefits of an individual (i) who is
not a Key Employee but who was a Key Employee in a prior year, or
(ii) who has not been credited with at least one hour of service
with any employer maintaining the Plan at any time during the
5-year period ending on the determination date, will be
disregarded. The calculation of the top-heavy ratio and the
extent to which distributions, rollovers, and transfers are taken
into account will be made in accordance with Code section 416 and
the regulations thereunder. When aggregating plans, the value of
account balances and accrued benefits will be calculated with
reference to the determination dates that fall within the same
calendar year.
(c) "Required aggregation group" means (i) each qualified plan of the
employer in which at least one Key Employee participates in the Plan
Year containing the determination date, or any of the four preceding
Plan Years, and (ii) any other qualified plan of the employer that
enables a plan described in (i) to meet the requirements of Code
sections 401(a)(4) and 410.
(d) "Permissive aggregation group" means the required aggregation group of
plans plus any other plan or plans of the employer which, when
consolidated as a group with the required aggregation group, would
continue to satisfy the requirements of Code sections 401(a)(4) and
410.
(e) "Determination date" means, for any Plan Year subsequent to the first
Plan Year, the last day of the preceding Plan Year. For the first Plan
Year of the Plan, the last day of that year is the determination date.
(f) The "determination period" for a Plan Year is the Plan Year in which
the applicable determination date occurs and the four preceding Plan
Years.
(g) The "valuation date" is the last day of each Plan Year and is the date
as of which account balances or accrued benefits are valued for
purposes of calculating the top-heavy ratio.
(h) For purposes of establishing the "present value" of benefits under a
defined benefit plan to compute the top-heavy ratio, any benefit shall
be discounted only for mortality and interest
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based on the interest rate and mortality table specified in the
defined benefit plan for this purpose.
(i) If an individual has not performed services for the employer at any
time during the five-year period ending on the determination date with
respect to a Plan Year, any account balance or accrued benefit for
such individual shall not be taken into account for such Plan Year.
(j) For purposes of determining if a defined benefit plan included in a
required aggregation group of which this Plan is a part is a Top-Heavy
Plan, the accrued benefit to any individual (other than a Key
Employee) shall be determined as follows:
(1) Under the method which is used for accrual purposes under all
defined benefit plans maintained by the employer.
(2) If there is no method described in paragraph (1), as if such
benefit accrued not more rapidly than the lowest accrual rate
permitted under Code section 411(b)(1)(C).
SEC. 14.3 MINIMUM CONTRIBUTION REQUIREMENT. For any Plan Year with
respect to which the Plan is a Top-Heavy Plan, the employer contributions and
Forfeitures allocated to each Active Participant who is not a Key Employee and
whose Termination of Employment has not occurred prior to the end of such Plan
Year shall not be less than the minimum amount determined in accordance with the
following:
(a) The minimum amount shall be the amount equal to that percentage of the
Participant's Compensation for the Plan Year which is the smaller of:
(1) 3 percent.
(2) The percentage which is the largest percentage of Compensation
allocated to any Key Employee from employer contributions and
Forfeitures for such Plan Year.
For purposes of this section, "Compensation" means the amounts
specified in Sec. 6.1(f), subject to the limitation in Sec. 2.6(c).
(b) For purposes of this section, any employer contribution attributable
to a salary reduction or similar arrangement shall be taken into
account. Any employer contribution attributable to a salary reduction
or similar arrangement (including Pre-Tax Contributions and Matching
Contributions under this Plan) may not be used to satisfy the minimum
amount of employer contributions which must be allocated under
subsection (a).
(c) This section shall not apply to any Participant who is covered under
any other plan of the employer under which the minimum contribution or
minimum benefit requirement applicable to Top-Heavy Plans will be
satisfied.
SEC. 14.4 VESTING SCHEDULE. If the Plan is a Top-Heavy Plan, a
Participant's vested accrued benefit under the Plan derived from employer
contributions shall be the greater of the vested accrued benefit attributable to
such contributions determined under Sec. 9.2 or the vested accrued benefit
determined under the following subsections:
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(a) Subject to the following subsections, the vested percentage applied to
the Participant's Accounts attributable to employer contributions
shall be determined from the following table:
<TABLE>
<CAPTION>
Full Years of Vesting Service Vested Percentage
----------------------------- ------------------
<S> <C>
Less than 2 0%
2 but less than 3 20%
3 but less than 4 40%
4 but less than 5 60%
5 or more 100%
</TABLE>
(b) Years of Vesting Service for purposes of this section shall be as
defined in Sec. 3.6.
(c) This section shall not apply to a Participant who has no Hours of
Service after the Plan becomes a Top-Heavy Plan.
(d) If the Plan ceases to be a Top-Heavy Plan and continues to be a
non-Top-Heavy Plan until the Participant's Termination of Employment,
the Participant's Accounts attributable to employer contributions for
purposes of this section shall not include the portion of such
Accounts attributable to employer contributions for periods after such
cessation. However, for purposes of Sec. 13.1(b), the vesting schedule
of the Plan shall be deemed to have been amended effective as of the
first day of the Plan Year following the last Plan Year for which the
Plan was a Top-Heavy Plan.
SEC. 14.5 PARTICIPATION UNDER DEFINED BENEFIT PLAN AND DEFINED
CONTRIBUTION PLAN. If a Participant is also a participant in a defined benefit
plan maintained by the employer, with respect to any Plan Year for which the
Plan is a Top-Heavy Plan, Sec. 6.1(d) shall be applied:
(a) By substituting "1.0" for "1.25" in paragraphs (2)(B) and (3)(B) of
Code section 415(e).
(b) By substituting "$41,500" for "$51,875" in Code section
415(e)(6)(B)(i).
The foregoing provisions of this section shall be suspended with respect to any
individual so long as there are no employer contributions, forfeitures, or
voluntary nondeductible contributions allocated to such individual, and no
defined benefit plan accruals for such individual, either under this Plan or
under any other plan that is in a required aggregation group of plans, within
the meaning of Code section 416(g)(2)(A)(i), that includes this Plan.
SEC. 14.6 DEFINITION OF EMPLOYER. For purposes of this Article XIV,
the term "employer" means all Participating Employers and any trade or business
entity under Common Control with a Participating Employer.
SEC. 14.7 EXCEPTION FOR COLLECTIVE BARGAINING UNIT. Sections 14.3,
and 14.4 shall not apply with respect to any individual included in a unit
covered by an agreement which the Secretary of Labor finds to be a collective
bargaining agreement between employee representatives and one or more employers
if there is evidence that retirement benefits were the subject of good faith
bargaining between such employee representative and such employer or employers.
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<PAGE>
ARTICLE XV
MISCELLANEOUS PROVISIONS
SEC. 15.1 INSURANCE COMPANY NOT RESPONSIBLE FOR VALIDITY OF PLAN. No
insurance company that issues a contract under the Plan shall have any
responsibility for the validity of the Plan. An insurance company to which an
application may be submitted hereunder may accept such application and shall
have no duty to make any investigation or inquiry regarding the authority of the
applicant to make such application or any amendment thereto or to inquire as to
whether a person on whose life any contract is to be issued is entitled to such
contract under the Plan.
SEC. 15.2 HEADINGS. Headings at the beginning of articles and
sections hereof are for convenience of reference, shall not be considered a part
of the text of the Plan, and shall not influence its construction.
SEC. 15.3 CAPITALIZED DEFINITIONS. Capitalized terms used in the
Plan shall have their meaning as defined in the Plan unless the context clearly
indicates to the contrary.
SEC. 15.4 GENDER. Any references to the masculine gender include the
feminine and vice versa.
SEC. 15.5 USE OF COMPOUNDS OF WORD "HERE". Use of the words
"hereof", "herein", "hereunder", or similar compounds of the word "here" shall
mean and refer to the entire Plan unless the context clearly indicates to the
contrary.
SEC. 15.6 CONSTRUED AS A WHOLE. The provisions of the Plan shall be
construed as a whole in such manner as to carry out the provisions thereof and
shall not be construed separately without relation to the context.
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<PAGE>
Exhibit 10.4
EMPLOYMENT AGREEMENT
--------------------
(WALLER)
THIS EMPLOYMENT AGREEMENT (this "Agreement") is made this 25th day of May,
1996, by and between WILSONS THE LEATHER EXPERTS INC., a Minnesota Corporation
(the "Company"), and JOEL WALLER, a resident of Minnesota (the "Executive").
WHEREAS, the Company wishes to secure the Executive's services as Chairman
and Chief Executive Officer of the Company under the terms hereof; and
WHEREAS, the Executive wishes to provide such services to the Company.
NOW THEREFORE, in consideration of the premises and of the mutual covenants
and undertakings stated herein, the Executive and the Company hereby agree as
follows:
1. EMPLOYMENT. Subject to all terms and conditions hereof, the Company
shall employ the Executive as, and the Executive shall serve the Company as,
Chairman and Chief Executive Officer of the Company during the period commencing
on the date hereof and ending on the fourth anniversary of the date hereof (such
period, as the same may be extended by written agreement of the Executive and
the Company, being herein called the "Employment Period"), unless the
Executive's employment hereunder terminates earlier in accordance with Section 5
hereof. If at any time after the second anniversary of the date hereof, either
the Company or the Executive desires to negotiate an extension of the Employment
Period beyond the date specified above, such party may notify the other party in
writing of such desire. The Company and the Executive agree to meet with one
another at a mutually acceptable time and place within thirty days after any
such notice is given and thereafter as often as either party reasonably deems
necessary to attempt in good faith to negotiate such extension and the terms and
conditions thereof.
2. DUTIES AND POWERS OF THE EXECUTIVE. As Chairman and Chief Executive
Officer of the Company, the Executive shall have all duties customarily
associated with the offices of chairman and chief executive officer of a
significant business enterprise, shall have primary management responsibility
for the Company, shall chair the governing board of the Company, and shall
perform such other duties consistent with the offices of Chairman and Chief
Executive Officer as may be specified by the Board of Directors of the Company,
to whom the Executive shall report. While the Executive is employed by the
Company hereunder, the Executive shall devote substantially all of his business
time and energy to the performance of his duties hereunder and shall not accept
other employment with or engage in or render services to any other business or
enterprise; provided, however, that nothing in this Agreement shall preclude the
Executive from serving as, and receiving compensation for serving as, a director
or member of a committee of any corporation or other business
<PAGE>
organization involving no conflict of interest with the interests of the Company
and its Subsidiaries (as defined in Section 9 hereof), engaging in charitable
and community activities, or managing his personal investments as long as such
activities do not materially interfere with the regular performance of his
duties under this Agreement. Notwithstanding anything to the contrary stated
herein, in no event shall the Executive be required to be based in a location
which would require him to change his residence to a location outside of the
Minneapolis, Minnesota metropolitan area.
3. COMPENSATION.
(a) Subject to all terms and conditions hereof, while the Executive is
employed by the Company hereunder, the Company shall pay, or cause one or more
of its Subsidiaries to pay, to the Executive a base salary ("Base Salary") of
$380,000 per Employment Year, as defined in Section 9 hereof (prorated for any
partial Employment Year) or such higher amount as is from time to time hereafter
established by the Board of Directors of the Company. The Executive's annual
Base Salary shall be payable in substantially equal installments once every two
weeks. The Board of Directors of the Company will review the Executive's Base
Salary at the beginning of each Employment Year, commencing with the Employment
Year ending on the second anniversary of the date hereof, to determine whether
an increase in the annual amount thereof is merited. In no event shall the
Board of Directors reduce the Executive's Base Salary for any Employment Year
below the greater of $380,000 or the amount of Base Salary paid by the Company
to the Executive for the immediately preceding Employment Year.
(b) Subject to all terms and conditions hereof, while the Executive is
employed by the Company hereunder, the Executive shall participate in the
Incentive Plan of the Company and its Subsidiaries (the "Incentive Plan"), and
the Executive's Normal Award for each Plan Year (as each such term is defined in
Section 9 hereof) shall be no less than 35% of the Executive's annual Base
Salary in effect on the last day of such Plan Year. Except as modified by the
provisions of this Section 3(b) and Section 6 hereof, payments by the Company of
Incentive Plan awards to the Executive shall be governed by the terms of the
Incentive Plan as in effect from time to time, provided that in no event shall
the Incentive Plan be modified in any manner adverse to the Executive or
terminated without the prior written consent of the Executive.
4. FRINGE BENEFITS.
(a) While the Executive is employed by the Company hereunder, the Company
shall provide, or cause one or more of its Subsidiaries to provide, to the
Executive and his dependents such medical, dental, life insurance, disability,
retirement savings, vacation, sick leave and other employee and fringe benefits
as are provided from time to time by the Company or any of its Subsidiaries to
its senior executives and their dependents, in accordance with the general
benefits practices of the Company or such Subsidiary then in
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<PAGE>
effect; provided, however, that the benefits provided to the Executive and his
dependents hereunder shall in no event be less favorable to them, on a benefit-
by-benefit basis, than the benefits provided by the Company or any of its
Subsidiaries to its senior executives and their dependents on the date hereof, a
listing of which appears on Attachment 1 hereto.
(b) The Company shall promptly reimburse, or cause one or more of its
Subsidiaries to promptly reimburse, the Executive for all reasonable travel and
other expenses which are incurred by him in connection with the conduct of the
business of the Company or any of its Subsidiaries while he is employed by the
Company hereunder and for which he furnishes appropriate documentation in
accordance with the Company's general expense reimbursement practices then in
effect.
5. TERMINATION. The Executive's employment by the Company hereunder shall
end immediately upon:
(i) receipt by the Company of the Executive's written resignation
from the Company (which resignation shall specify whether it is
with or without Good Reason (as defined in Section 9 hereof)
and, if with Good Reason, shall set forth in reasonable detail
the basis therefor);
(ii) receipt by the Executive of written notice from the Company of
termination of the Executive's employment (which notice shall
specify whether such termination is with or without Cause (as
defined in Section 9 hereof) and, if with Cause, shall set
forth in reasonable detail the basis therefor);
(iii) the Executive's death or Disability (as defined in Section 9
hereof); or
(iv) expiration of the Employment Period,
and the date on which termination of the Executive's employment by the Company
hereunder occurs shall be the "Termination Date".
6. PAYMENTS UPON TERMINATION.
(a) If the Executive's employment by the Company hereunder ends by reason
of resignation by the Executive without Good Reason or termination by the
Company for Cause, then:
(i) the Company shall pay, or cause one or more of its Subsidiaries
to pay, to the Executive, in accordance with Section 3(a)
hereof, the Executive's Base Salary through and including the
Termination Date;
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<PAGE>
(ii) if the Termination Date occurs on or after the last day of any
Plan Year but prior to the date payment of the Executive's
award, if any, under the Incentive Plan for such Plan Year has
been made, the Company shall pay, or cause one or more of its
Subsidiaries to pay, the full amount of such award to the
Executive on the same date awards under the Incentive Plan for
such Plan Year are paid to the other participants in the
Incentive Plan; and
(iii) the Company shall pay, or cause one or more of its Subsidiaries
to pay, to the Executive, in accordance with Section 4(b)
hereof, all amounts due thereunder for reimbursement of
expenses.
(b) If the Executive's employment hereunder ends by reason of the
Executive's death or Disability or the expiration of the Employment Period,
then:
(i) the Company shall pay, or cause one or more of its Subsidiaries
to pay, to the Executive (or, in the event of the Executive's
death, to his estate), in accordance with Section 3(a) hereof,
the Executive's Base Salary through and including the last day
of the month in which the Termination Date occurs (in the event
employment hereunder ends by reason of death or Disability) or
through and including the Termination Date (in the event
employment hereunder ends by reason of the expiration of the
Employment Period);
(ii) if the Termination Date occurs on or after the last day of any
Plan Year but prior to the date payment of the Executive's
award, if any, under the Incentive Plan for such Plan Year has
been made, the Company shall pay, or cause one or more of its
Subsidiaries to pay, the full amount of such award to the
Executive (or, in the event of the Executive's death, to his
estate) no later than the date awards under the Incentive Plan
for such Plan Year are paid to the other participants in the
Incentive Plan;
(iii) if the Termination Date occurs on any day of a Plan Year other
than the last day, the Company shall pay, or cause one or more
of its Subsidiaries to pay, to the Executive (or, in the event
of the Executive's death, to his estate) a pro rata portion of
the award which would have been payable to the Executive under
the Incentive Plan for such Plan Year had the Executive
remained employed by the Company hereunder for the duration of
such Plan Year, which payment shall be made no later than the
date awards under the Incentive Plan for such Plan Year are
paid to the other participants in the Incentive Plan; and
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<PAGE>
(iv) the Company shall pay, or cause one or more of its Subsidiaries
to pay, to the Executive (or, in the event of the Executive's
death, to his estate), in accordance with Section 4(b) hereof,
all amounts due thereunder for reimbursement of expenses.
(c) If the Executive's employment hereunder ends by reason of resignation
by the Executive for Good Reason or termination by the Company without Cause,
then:
(i) the Company shall continue to pay, or cause one or more of its
Subsidiaries to continue to pay, to the Executive, in
accordance with, and at the times provided in, Section 3(a)
hereof, the Executive's Base Salary through and including the
last day of the Employment Period;
(ii) if the Termination Date occurs on or after the last day of any
Plan Year but prior to the date payment of the Executive's
award, if any, under the Incentive Plan for such Plan Year has
been made, the Company shall pay, or cause one or more of its
Subsidiaries to pay, the full amount of such award to the
Executive on the same date awards under the Incentive Plan for
such Plan Year are paid to the other participants in the
Incentive Plan;
(iii) if the Termination Date occurs on any day during the last six
months of a Plan Year other than the last day, the Company
shall pay, or cause one or more of its Subsidiaries to pay, to
the Executive a pro rata portion of the award which would have
been payable to the Executive under the Incentive Plan for such
Plan Year had the Executive remained employed by the Company
hereunder for the duration of such Plan Year, which payment
shall be made no later than the date awards under the Incentive
Plan for such Plan Year are paid to the other participants in
the Incentive Plan;
(iv) the Executive and his dependents shall continue for the
remainder of the Employment Period to be entitled to all
medical, dental, life insurance and disability benefits they
would have received under Section 4(a) hereof had the Executive
remained employed by the Company hereunder for the duration of
such period (or, in the event their participation in a plan
pursuant to which any such benefits are provided is barred by
the terms of such plan, benefits which are no less favorable to
them than the benefits under such plan), except to the extent
essentially equivalent and no less favorable benefits are
provided to them by a subsequent employer; and
-5-
<PAGE>
(v) the Company shall pay, or cause one or more of its Subsidiaries
to pay, to the Executive, in accordance with Section 4(b)
hereof, all amounts due thereunder for reimbursement of
expenses.
(d) For purposes of determining any amounts payable under this Section 6,
the Executive's Base Salary at any time after the Termination Date shall be
deemed to equal his Base Salary as in effect on the Termination Date.
(e) In the event the Executive's employment hereunder is terminated on any
day of an Employment Year or a Plan Year other than the last day and payment is
required hereunder of a pro rata portion of any sum due with respect to such
Employment Year or Plan Year, such pro rata portion shall be determined based on
the number of days in such Employment Year or Plan Year occurring on or before,
and after, the Termination Date.
(f) Nothing in this Section 6 shall limit any obligations the Company or
any of its Subsidiaries may have to the Executive or his dependents upon
termination of the Executive's employment hereunder (i) as a matter of law, (ii)
under any other provision of this Agreement, (iii) under that certain
Shareholder Agreement dated as of the date hereof among the Executive, the
Company, the other shareholders of the Company and certain other persons, (iv)
under that certain Restricted Stock Agreement dated as of the date hereof among
the Executive, the Company and certain other employees of the Company or one or
more of its Subsidiaries, or (v) in the event of termination by reason of the
Executive's death or Disability, under insurance policies then in effect.
(g) The Executive shall not be required to mitigate the amount of any
payment or other benefit provided for in this Section 6 by seeking employment
with another employer or otherwise; nor shall the amount of any payment or other
benefit provided for in this Section 6 be reduced by any compensation earned by
the Executive as the result of his subsequent employment by another employer,
except as otherwise provided in Section 6(c)(iv) hereof.
7. DIRECTORS' AND OFFICERS' INDEMNIFICATION. While the Executive is
employed by the Company hereunder, the Company shall not, without the prior
written consent of the Executive, amend or permit any of the Subsidiaries to
amend its articles of incorporation or by-laws to prohibit or limit the
indemnification of, or advances of expenses to, its directors and officers or to
impose conditions on such indemnification or advances of expenses in addition to
those provided by law.
8. CONFIDENTIAL INFORMATION.
(a) The Executive shall not at any time disclose or use any Trade Secrets
(as defined in Section 9 hereof) of which the Executive has become informed
during his employment by the Company or any of its Subsidiaries, except as
required in the performance of his duties to the Company or any of its
Subsidiaries, except for disclosures required by law
-6-
<PAGE>
or administrative process or in the defense of any claim against the Executive
or in the prosecution of any claim by the Executive against the Company or any
of its Subsidiaries, and except for information which is publicly known on the
date hereof or hereafter becomes publicly known other than as a result of a
breach by the Executive of this Section 8(a).
(b) Upon termination of his employment with the Company, the Executive
agrees to deliver to the Company all materials under his control that include
Trade Secrets or otherwise relate to the business of the Company or any of its
Subsidiaries.
9. CERTAIN DEFINITIONS. As used in this Agreement, the following defined
----------------------------------------------------------------------
terms have the meanings indicated below:
- ----------------------------------------
(a) "Cause" shall mean:
(i) the commission by the Executive of any act of embezzlement
against the Company or any of its Subsidiaries;
(ii) the conviction of the Executive for, or entry by the Executive
of a guilty plea to, any felony which has a material adverse
effect upon the business, operating results, financial
condition or employee, supplier or customer relations generally
of the Company and its Subsidiaries, taken as a whole, or which
precludes the Executive from performing his duties under this
Agreement for 90 days during any 12-month period;
(iii) the conviction of the Executive for any crime involving
dishonesty with respect to the Company (A) intended by the
Executive to result in personal enrichment of the Executive at
the expense of the Company or its Subsidiaries or (B) which has
a material adverse effect upon the business, operating results,
financial condition or employee, supplier or customer relations
generally of the Company and its Subsidiaries, taken as a
whole;
(iv) the absence by the Executive from employment with the Company
for a period of more than 90 days during any 12-month period
without the approval of the Board of Directors of the Company
other than for vacations, illness, injury or disability; or
(v) willful misconduct by the Executive in breach of the terms of
this Agreement, which misconduct has not been cured within 20
days following notification thereof to the Executive (or if
such misconduct is cured within 20 days after such notice of
misconduct is received, but the same misconduct occurs again at
any time thereafter).
-7-
<PAGE>
For purposes hereof, no act or omission of the Executive shall be deemed to be
"willful" unless done, or omitted, by him in bad faith without the belief his
action or omission was in the best interests of the Company or a Subsidiary.
(b) "Disability" shall mean any physical or mental incapacitation whereby
the Executive is therefore unable for a period of 12 consecutive months or for
an aggregate of 12 months in any 24 consecutive month period to perform his
duties hereunder.
(c) "Employment Year" shall mean the 12-month period ending on each
anniversary of the date hereof.
(d) "Good Reason" shall mean (i) a breach by the Company of any of its
obligations hereunder to pay or provide to the Executive and/or his dependents,
as the case may be, any installment of Base Salary, any Incentive Plan awards or
any employee or fringe benefits, which breach has not been cured within 20 days
after notice thereof shall have been given by the Executive to the Company, or
(ii) the removal of the Executive from the office of Chairman of the Board or
Chief Executive Officer of the Company or any material diminution of the duties
of the Executive from those specified in Section 2 hereof or any assignment to
the Executive of duties materially inconsistent with the offices of Chairman and
Chief Executive Officer.
(e) "Normal Award" shall mean the award under the Incentive Plan which
would be earned with respect to any Plan Year if the budgeted or target
performance measures under the Incentive Plan for such Plan Year were met but
not exceeded.
(f) "Plan Year" shall mean the plan year with respect to which awards are
determined under the Incentive Plan.
(g) "Subsidiary" shall mean any entity of which securities or other
ownership interests having ordinary voting power to elect a majority of the
board of directors or other individuals performing similar functions are at the
time directly or indirectly owned by the Company.
(h) "Trade Secrets" shall mean information that has been created,
discovered or developed by, or otherwise become known to, the Company or any of
its Subsidiaries, including without limitation any formula, pattern,
compilation, program, device, method, technique or process, and that (i) derives
independent economic value, actual or potential, from not being generally known
to, and not being readily ascertainable by proper means by, other persons or
entities who can obtain economic value from its disclosure or use, and (ii) is
the subject of efforts by the Company or a Subsidiary that are reasonable under
the circumstances to maintain its secrecy. The existence of a Trade Secret is
not negated merely because the Executive has acquired the Trade Secret without
express or specific notice that it is a Trade Secret if, under all the
circumstances, the Executive knows or has reason to know
-8-
<PAGE>
that the Company or a Subsidiary intends or expects the secrecy of the type of
information comprising the Trade Secret to be maintained.
10. OFFICE FURNITURE. If the Executive's employment with the Company ends
for any reason, or if the Company intends at any time while the Executive is
employed by the Company to dispose of any of the office furniture or accessories
located in the Executive's office on the date of this Agreement, the Executive
shall be entitled to take, without payment of any consideration, all of such
office furniture and accessories.
11. NO SOLICITATION OF EMPLOYEES. The Executive hereby agrees that, for a
period of one year after the Termination Date, he will not, directly or
indirectly, solicit any person who is then employed at a manager or higher level
by the Company or any of its Subsidiaries to become an employee of any business
or entity of which the Executive is a shareholder, investor, partner, joint
venturer, sole proprietor, director, officer or employee (provided that nothing
herein shall prohibit the solicitation by the Executive, directly or indirectly,
of employees by general advertisement).
12. SUCCESSORS AND ASSIGNS. This Agreement is binding on and inures to
the benefit of the Executive and his heirs, personal representatives and
permitted assigns, and on the Company and its successors and permitted assigns.
No rights or obligations of the Executive or the Company hereunder may be
assigned by such party to any other person or entity without the prior written
consent of the other party.
13. SEPARATE REPRESENTATION. The Executive hereby acknowledges that he
has sought and received independent advice from counsel of his own selection in
connection with this Agreement and has not relied to any extent on any officer,
director or shareholder of, or counsel to, the Company in deciding to enter into
this Agreement.
14. GOVERNING LAW. This Agreement shall be construed under and governed
by the laws of the State of Minnesota.
15. SEVERABILITY. Each section and provision of this Agreement shall be
considered severable and any invalidity of any provision shall not render
invalid or impair to any extent any other section or provision hereof.
16. WITHHOLDING OF TAXES, ETC. All payments to the Executive hereunder
are subject to withholding of income and employment taxes and all other amounts
required by law.
17. SPECIFIC PERFORMANCE. Each of the parties acknowledges and agrees
that the other party would be damaged irreparably in the event any of the
covenants contained in this Agreement are not performed in accordance with their
specific terms or otherwise are breached. Accordingly, each of the parties
agrees that the other party shall be entitled to an
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injunction or injunctions to prevent breaches of such covenants and to enforce
specifically such covenants in any action instituted before a proper forum in
addition to any other remedy to which such other party may be entitled under
this Agreement or at law or in equity.
18. ARBITRATION. If any dispute arises between the parties with respect
to the application, interpretation or termination of this Agreement, then such
dispute shall be submitted to arbitration for resolution. The arbitrator shall
be selected and the arbitration shall be conducted pursuant to the Employment
Dispute Resolution Rules of the American Arbitration Association ("AAA")
(effective January 1, 1993). Any request for arbitration must be made in
writing by the party seeking arbitration and must be delivered by hand or sent
by registered or certified mail, return receipt requested, postage prepaid, to
both the other party and the AAA. The decision of the arbitrator regarding any
such dispute shall be final and binding on both parties, and any court of
competent jurisdiction may enter judgment upon the award. Notwithstanding
anything to the contrary provided in this Section 18 and without prejudice to
the above procedures, either party may apply to any court of competent
jurisdiction for temporary injunctive or other provisional judicial relief if in
such party's sole judgment such action is necessary to avoid irreparable damage
or to preserve the status quo until such time as the arbitration award is
rendered or the controversy is otherwise resolved.
19. NOTICES. All notices hereunder shall be delivered by hand or sent by
registered or certified mail, return receipt requested, postage prepaid, to the
party to receive the same at the address set forth with the signature of such
party hereto or at such other address as may have been furnished to the sender
by notice hereunder.
20. COUNTERPARTS. This Agreement may be executed in counterparts, each of
which when so executed shall be deemed to be an original, and such counterparts
shall together constitute but one and the same instrument.
21. ENTIRE AGREEMENT. This Agreement and the documents and instruments
referred to herein contain the entire understanding of the parties hereto with
respect to the employment of the Executive by the Company.
22. AMENDMENTS AND WAIVERS. No provision hereof may be altered, amended,
modified, waived or discharged in any way whatsoever except by written agreement
executed by both parties. No delay or failure of either party to insist, in any
one or more instances, upon performance of any of the terms and conditions of
this Agreement or to exercise any rights or remedies hereunder shall constitute
a waiver or a relinquishment of such rights or remedies or any other rights or
remedies hereunder.
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<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed on the date and year first above written.
WILSONS THE LEATHER EXPERTS
INC.
/s/ JOEL WALLER By: /s/ DAVID ROGERS
-------------------------- --------------------------------
Name: Joel Waller Name: David Rogers
Address: 1201 Yale Place, #1306 Title: President
Minneapolis, Minnesota 55403 Address: 400 Highway 169 South
Suite 600
Minneapolis, Minnesota 55426
The undersigned hereby unconditionally jointly and severally guaranty
the payment and performance when due of all obligations of the Company to the
Executive under the terms of the foregoing Employment Agreement.
WILSONS CENTER, INC.
WILSONS LEATHER HOLDINGS INC.
ROSEDALE WILSONS, INC.
RIVER HILLS WILSONS, INC.
BERMANS THE LEATHER EXPERTS INC.
WILSONS HOUSE OF SUEDE, INC.
WILSONS TANNERY WEST, INC.
By: /s/ DAVID ROGERS
-------------------------------
Name: David Rogers
Title: President
Address: 400 Highway 169 South
Suite 600
Minneapolis, Minnesota 55426
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<PAGE>
Exhibit 10.5
EMPLOYMENT AGREEMENT
--------------------
(ROGERS)
THIS EMPLOYMENT AGREEMENT (this "Agreement") is made this 25th day of May,
1996, by and between WILSONS THE LEATHER EXPERTS INC., a Minnesota corporation
(the "Company"), and DAVID ROGERS, a resident of Minnesota (the "Executive").
WHEREAS, the Company wishes to secure the Executive's services as President
of the Company under the terms hereof; and
WHEREAS, the Executive wishes to provide such services to the Company.
NOW THEREFORE, in consideration of the premises and of the mutual covenants
and undertakings stated herein, the Executive and the Company hereby agree as
follows:
1. EMPLOYMENT. Subject to all terms and conditions hereof, the Company
shall employ the Executive as, and the Executive shall serve the Company as,
President of the Company during the period commencing on the date hereof and
ending on the fourth anniversary of the date hereof (such period, as the same
may be extended by written agreement of the Executive and the Company, being
herein called the "Employment Period"), unless the Executive's employment
hereunder terminates earlier in accordance with Section 5 hereof. If at any
time after the second anniversary of the date hereof, either the Company or the
Executive desires to negotiate an extension of the Employment Period beyond the
date specified above, such party may notify the other party in writing of such
desire. The Company and the Executive agree to meet with one another at a
mutually acceptable time and place within thirty days after any such notice is
given and thereafter as often as either party reasonably deems necessary to
attempt in good faith to negotiate such extension and the terms and conditions
thereof.
2. DUTIES AND POWERS OF THE EXECUTIVE. As President of the Company, the
Executive shall have all duties customarily associated with the office of
president of a significant business enterprise, and shall perform such duties
consistent with the office of President as may be specified by the Board of
Directors of the Company, to whom the Executive shall report. While the
Executive is employed by the Company hereunder, the Executive shall devote
substantially all of his business time and energy to the performance of his
duties hereunder and shall not accept other employment with or engage in or
render services to any other business or enterprise; provided, however, that
nothing in this Agreement shall preclude the Executive from serving as, and
receiving compensation for serving as, a director or member of a committee of
any corporation or other business organization involving no conflict of interest
with the interests of the Company and its Subsidiaries (as defined in Section 9
hereof), engaging in charitable and community activities,
<PAGE>
or managing his personal investments as long as such activities do not
materially interfere with the regular performance of his duties under this
Agreement. Notwithstanding anything to the contrary stated herein, in no event
shall the Executive be required to be based in a location which would require
him to change his residence to a location outside of the Minneapolis, Minnesota
metropolitan area.
3. COMPENSATION.
------------
(a) Subject to all terms and conditions hereof, while the Executive is
employed by the Company hereunder, the Company shall pay, or cause one or more
of its Subsidiaries to pay, to the Executive a base salary ("Base Salary") of
$380,000 per Employment Year, as defined in Section 9 hereof (prorated for any
partial Employment Year) or such higher amount as is from time to time hereafter
established by the Board of Directors of the Company. The Executive's annual
Base Salary shall be payable in substantially equal installments once every two
weeks. The Board of Directors of the Company will review the Executive's Base
Salary at the beginning of each Employment Year, commencing with the Employment
Year ending on the second anniversary of the date hereof, to determine whether
an increase in the annual amount thereof is merited. In no event shall the
Board of Directors reduce the Executive's Base Salary for any Employment Year
below the greater of $380,000 or the amount of Base Salary paid by the Company
to the Executive for the immediately preceding Employment Year.
(b) Subject to all terms and conditions hereof, while the Executive is
employed by the Company hereunder, the Executive shall participate in the
Incentive Plan of the Company and its Subsidiaries (the "Incentive Plan"), and
the Executive's Normal Award for each Plan Year (as each such term is defined in
Section 9 hereof) shall be no less than 35% of the Executive's annual Base
Salary in effect on the last day of such Plan Year. Except as modified by the
provisions of this Section 3(b) and Section 6 hereof, payments by the Company of
Incentive Plan awards to the Executive shall be governed by the terms of the
Incentive Plan as in effect from time to time, provided that in no event shall
the Incentive Plan be modified in any manner adverse to the Executive or
terminated without the prior written consent of the Executive.
4. FRINGE BENEFITS.
---------------
(a) While the Executive is employed by the Company hereunder, the Company
shall provide, or cause one or more of its Subsidiaries to provide, to the
Executive and his dependents such medical, dental, life insurance, disability,
retirement savings, vacation, sick leave and other employee and fringe benefits
as are provided from time to time by the Company or any of its Subsidiaries to
its senior executives and their dependents, in accordance with the general
benefits practices of the Company or such Subsidiary then in effect; provided,
however, that the benefits provided to the Executive and his dependents
hereunder shall in no event be less favorable to them, on a benefit-by-benefit
basis, than the
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<PAGE>
benefits provided by the Company or any of its Subsidiaries to its senior
executives and their dependents on the date hereof, a listing of which appears
on Attachment 1 hereto.
(b) The Company shall promptly reimburse, or cause one or more of its
Subsidiaries to promptly reimburse, the Executive for all reasonable travel and
other expenses which are incurred by him in connection with the conduct of the
business of the Company or any of its Subsidiaries while he is employed by the
Company hereunder and for which he furnishes appropriate documentation in
accordance with the Company's general expense reimbursement practices then in
effect.
5. TERMINATION. The executive's employment by the company hereunder shall
end immediately upon:
(i) receipt by the Company of the Executive's written resignation
from the Company (which resignation shall specify whether it is
with or without Good Reason (as defined in Section 9 hereof)
and, if with Good Reason, shall set forth in reasonable detail
the basis therefor);
(ii) receipt by the Executive of written notice from the Company of
termination of the Executive's employment (which notice shall
specify whether such termination is with or without Cause (as
defined in Section 9 hereof) and, if with Cause, shall set forth
in reasonable detail the basis therefor);
(iii) the Executive's death or Disability (as defined in Section 9
hereof); or
(iv) expiration of the Employment Period,
and the date on which termination of the Executive's employment by the Company
hereunder occurs shall be the "Termination Date".
6. PAYMENTS UPON TERMINATION.
(a) If the Executive's employment by the Company hereunder ends by reason
of resignation by the Executive without Good Reason or termination by the
Company for Cause, then:
(i) the Company shall pay, or cause one or more of its Subsidiaries
to pay, to the Executive, in accordance with Section 3(a)
hereof, the Executive's Base Salary through and including the
Termination Date;
(ii) if the Termination Date occurs on or after the last day of any
Plan Year but prior to the date payment of the Executive's
award, if any, under the
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<PAGE>
Incentive Plan for such Plan Year has been made, the Company
shall pay, or cause one or more of its Subsidiaries to pay, the
full amount of such award to the Executive on the same date
awards under the Incentive Plan for such Plan Year are paid to
the other participants in the Incentive Plan; and
(iii) the Company shall pay, or cause one or more of its Subsidiaries
to pay, to the Executive, in accordance with Section 4(b)
hereof, all amounts due thereunder for reimbursement of
expenses.
(b) If the Executive's employment hereunder ends by reason of the
Executive's death or Disability or the expiration of the Employment Period,
then:
(i) the Company shall pay, or cause one or more of its Subsidiaries
to pay, to the Executive (or, in the event of the Executive's
death, to his estate), in accordance with Section 3(a) hereof,
the Executive's Base Salary through and including the last day
of the month in which the Termination Date occurs (in the event
employment hereunder ends by reason of death or Disability) or
through and including the Termination Date (in the event
employment hereunder ends by reason of the expiration of the
Employment Period);
(ii) if the Termination Date occurs on or after the last day of any
Plan Year but prior to the date payment of the Executive's
award, if any, under the Incentive Plan for such Plan Year has
been made, the Company shall pay, or cause one or more of its
Subsidiaries to pay, the full amount of such award to the
Executive (or, in the event of the Executive's death, to his
estate) no later than the date awards under the Incentive Plan
for such Plan Year are paid to the other participants in the
Incentive Plan;
(iii) if the Termination Date occurs on any day of a Plan Year other
than the last day, the Company shall pay, or cause one or more
of its Subsidiaries to pay, to the Executive (or, in the event
of the Executive's death, to his estate) a pro rata portion of
the award which would have been payable to the Executive under
the Incentive Plan for such Plan Year had the Executive
remained employed by the Company hereunder for the duration of
such Plan Year, which payment shall be made no later than the
date awards under the Incentive Plan for such Plan Year are
paid to the other participants in the Incentive Plan; and
(iv) the Company shall pay, or cause one or more of its Subsidiaries
to pay, to the Executive (or, in the event of the Executive's
death, to his estate),
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<PAGE>
in accordance with Section 4(b) hereof, all amounts due
thereunder for reimbursement of expenses.
(c) If the Executive's employment hereunder ends by reason of resignation
by the Executive for Good Reason or termination by the Company without Cause,
then:
(i) the Company shall continue to pay, or cause one or more of its
Subsidiaries to continue to pay, to the Executive, in
accordance with, and at the times provided in, Section 3(a)
hereof, the Executive's Base Salary through and including the
last day of the Employment Period;
(ii) if the Termination Date occurs on or after the last day of any
Plan Year but prior to the date payment of the Executive's
award, if any, under the Incentive Plan for such Plan Year has
been made, the Company shall pay, or cause one or more of its
Subsidiaries to pay, the full amount of such award to the
Executive on the same date awards under the Incentive Plan for
such Plan Year are paid to the other participants in the
Incentive Plan;
(iii) if the Termination Date occurs on any day during the last six
months of a Plan Year other than the last day, the Company
shall pay, or cause one or more of its Subsidiaries to pay, to
the Executive a pro rata portion of the award which would have
been payable to the Executive under the Incentive Plan for such
Plan Year had the Executive remained employed by the Company
hereunder for the duration of such Plan Year, which payment
shall be made no later than the date awards under the Incentive
Plan for such Plan Year are paid to the other participants in
the Incentive Plan;
(iv) the Executive and his dependents shall continue for the
remainder of the Employment Period to be entitled to all
medical, dental, life insurance and disability benefits they
would have received under Section 4(a) hereof had the Executive
remained employed by the Company hereunder for the duration of
such period (or, in the event their participation in a plan
pursuant to which any such benefits are provided is barred by
the terms of such plan, benefits which are no less favorable to
them than the benefits under such plan), except to the extent
essentially equivalent and no less favorable benefits are
provided to them by a subsequent employer; and
(v) the Company shall pay, or cause one or more of its Subsidiaries
to pay, to the Executive, in accordance with Section 4(b)
hereof, all amounts due thereunder for reimbursement of
expenses.
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<PAGE>
(d) For purposes of determining any amounts payable under this Section 6,
the Executive's Base Salary at any time after the Termination Date shall be
deemed to equal his Base Salary as in effect on the Termination Date.
(e) In the event the Executive's employment hereunder is terminated on any
day of an Employment Year or a Plan Year other than the last day and payment is
required hereunder of a pro rata portion of any sum due with respect to such
Employment Year or Plan Year, such pro rata portion shall be determined based on
the number of days in such Employment Year or Plan Year occurring on or before,
and after, the Termination Date.
(f) Nothing in this Section 6 shall limit any obligations the Company or
any of its Subsidiaries may have to the Executive or his dependents upon
termination of the Executive's employment hereunder (i) as a matter of law, (ii)
under any other provision of this Agreement, (iii) under that certain
Shareholder Agreement dated as of the date hereof among the Executive, the
Company, the other shareholders of the Company and certain other persons, (iv)
under that certain Restricted Stock Agreement dated as of the date hereof among
the Executive, the Company and certain other employees of the Company or one or
more of its Subsidiaries, or (v) in the event of termination by reason of the
Executive's death or Disability, under insurance policies then in effect.
(g) The Executive shall not be required to mitigate the amount of any
payment or other benefit provided for in this Section 6 by seeking employment
with another employer or otherwise; nor shall the amount of any payment or other
benefit provided for in this Section 6 be reduced by any compensation earned by
the Executive as the result of his subsequent employment by another employer,
except as otherwise provided in Section 6(c)(iv) hereof.
7. DIRECTORS' AND OFFICERS' INDEMNIFICATION. While the Executive is
employed by the Company hereunder, the Company shall not, without the prior
written consent of the Executive, amend or permit any of the Subsidiaries to
amend its articles of incorporation or by-laws to prohibit or limit the
indemnification of, or advances of expenses to, its directors and officers or to
impose conditions on such indemnification or advances of expenses in addition to
those provided by law.
8. CONFIDENTIAL INFORMATION.
------------------------
(a) The Executive shall not at any time disclose or use any Trade Secrets
(as defined in Section 9 hereof) of which the Executive has become informed
during his employment by the Company or any of its Subsidiaries, except as
required in the performance of his duties to the Company or any of its
Subsidiaries, except for disclosures required by law or administrative process
or in the defense of any claim against the Executive or in the prosecution of
any claim by the Executive against the Company or any of its Subsidiaries, and
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<PAGE>
except for information which is publicly known on the date hereof or hereafter
becomes publicly known other than as a result of a breach by the Executive of
this Section 8(a).
(b) Upon termination of his employment with the Company, the Executive
agrees to deliver to the Company all materials under his control that include
Trade Secrets or otherwise relate to the business of the Company or any of its
Subsidiaries.
9. CERTAIN DEFINITIONS. As used in this Agreement, the following defined
terms have the meanings indicated below:
(a) "Cause" shall mean:
(i) the commission by the Executive of any act of embezzlement
against the Company or any of its Subsidiaries;
(ii) the conviction of the Executive for, or entry by the Executive
of a guilty plea to, any felony which has a material adverse
effect upon the business, operating results, financial
condition or employee, supplier or customer relations generally
of the Company and its Subsidiaries, taken as a whole, or which
precludes the Executive from performing his duties under this
Agreement for 90 days during any 12-month period;
(iii) the conviction of the Executive for any crime involving
dishonesty with respect to the Company (A) intended by the
Executive to result in personal enrichment of the Executive at
the expense of the Company or its Subsidiaries or (B) which has
a material adverse effect upon the business, operating results,
financial condition or employee, supplier or customer relations
generally of the Company and its Subsidiaries, taken as a
whole;
(iv) the absence by the Executive from employment with the Company
for a period of more than 90 days during any 12-month period
without the approval of the Board of Directors of the Company
other than for vacations, illness, injury or disability; or
(v) willful misconduct by the Executive in breach of the terms of
this Agreement, which misconduct has not been cured within 20
days following notification thereof to the Executive (or if
such misconduct is cured within 20 days after such notice of
misconduct is received, but the same misconduct occurs again at
any time thereafter).
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<PAGE>
For purposes hereof, no act or omission of the Executive shall be deemed to be
"willful" unless done, or omitted, by him in bad faith without the belief his
action or omission was in the best interests of the Company or a Subsidiary.
(b) "Disability" shall mean any physical or mental incapacitation whereby
the Executive is therefore unable for a period of 12 consecutive months or for
an aggregate of 12 months in any 24 consecutive month period to perform his
duties hereunder.
(c) "Employment Year" shall mean the 12-month period ending on each
anniversary of the date hereof.
(d) "Good Reason" shall mean (i) a breach by the Company of any of its
obligations hereunder to pay or provide to the Executive and/or his dependents,
as the case may be, any installment of Base Salary, any Incentive Plan awards or
any employee or fringe benefits, which breach has not been cured within 20 days
after notice thereof shall have been given by the Executive to the Company, or
(ii) the removal of the Executive from the office of President of the Company or
any material diminution of the duties of the Executive from those specified in
Section 2 hereof or any assignment to the Executive of duties materially
inconsistent with the office of President.
(e) "Normal Award" shall mean the award under the Incentive Plan which
would be earned with respect to any Plan Year if the budgeted or target
performance measures under the Incentive Plan for such Plan Year were met but
not exceeded.
(f) "Plan Year" shall mean the plan year with respect to which awards are
determined under the Incentive Plan.
(g) "Subsidiary" shall mean any entity of which securities or other
ownership interests having ordinary voting power to elect a majority of the
board of directors or other individuals performing similar functions are at the
time directly or indirectly owned by the Company.
(h) "Trade Secrets" shall mean information that has been created,
discovered or developed by, or otherwise become known to, the Company or any of
its Subsidiaries, including without limitation any formula, pattern,
compilation, program, device, method, technique or process, and that (i) derives
independent economic value, actual or potential, from not being generally known
to, and not being readily ascertainable by proper means by, other persons or
entities who can obtain economic value from its disclosure or use, and (ii) is
the subject of efforts by the Company or a Subsidiary that are reasonable under
the circumstances to maintain its secrecy. The existence of a Trade Secret is
not negated merely because the Executive has acquired the Trade Secret without
express or specific notice that it is a Trade Secret if, under all the
circumstances, the Executive knows or has reason to know
-8-
<PAGE>
that the Company or a Subsidiary intends or expects the secrecy of the type of
information comprising the Trade Secret to be maintained.
10. OFFICE FURNITURE. If the Executive's employment with the Company ends
for any reason, or if the Company intends at any time while the Executive is
employed by the Company to dispose of any of the office furniture or accessories
located in the Executive's office on the date of this Agreement, the Executive
shall be entitled to take, without payment of any consideration, all of such
office furniture and accessories.
11. NO SOLICITATION OF EMPLOYEES. The Executive hereby agrees that, for a
period of one year after the Termination Date, he will not, directly or
indirectly, solicit any person who is then employed at a manager or higher level
by the Company or any of its Subsidiaries to become an employee of any business
or entity of which the Executive is a shareholder, investor, partner, joint
venturer, sole proprietor, director, officer or employee (provided that nothing
herein shall prohibit the solicitation by the Executive, directly or indirectly,
of employees by general advertisement).
12. SUCCESSORS AND ASSIGNS. This Agreement is binding on and inures to
the benefit of the Executive and his heirs, personal representatives and
permitted assigns, and on the Company and its successors and permitted assigns.
No rights or obligations of the Executive or the Company hereunder may be
assigned by such party to any other person or entity without the prior written
consent of the other party.
13. SEPARATE REPRESENTATION. The Executive hereby acknowledges that he
has sought and received independent advice from counsel of his own selection in
connection with this Agreement and has not relied to any extent on any officer,
director or shareholder of, or counsel to, the Company in deciding to enter into
this Agreement.
14. GOVERNING LAW. This Agreement shall be construed under and governed
by the laws of the State of Minnesota.
15. SEVERABILITY. Each section and provision of this Agreement shall be
considered severable and any invalidity of any provision shall not render
invalid or impair to any extent any other section or provision hereof.
16. WITHHOLDING OF TAXES, ETC. All payments to the Executive hereunder
are subject to withholding of income and employment taxes and all other amounts
required by law.
17. SPECIFIC PERFORMANCE. Each of the parties acknowledges and agrees
that the other party would be damaged irreparably in the event any of the
covenants contained in this Agreement are not performed in accordance with their
specific terms or otherwise are breached. Accordingly, each of the parties
agrees that the other party shall be entitled to an
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<PAGE>
injunction or injunctions to prevent breaches of such covenants and to enforce
specifically such covenants in any action instituted before a proper forum in
addition to any other remedy to which such other party may be entitled under
this Agreement or at law or in equity.
18. ARBITRATION. If any dispute arises between the parties with respect
to the application, interpretation or termination of this Agreement, then such
dispute shall be submitted to arbitration for resolution. The arbitrator shall
be selected and the arbitration shall be conducted pursuant to the Employment
Dispute Resolution Rules of the American Arbitration Association ("AAA")
(effective January 1, 1993). Any request for arbitration must be made in
writing by the party seeking arbitration and must be delivered by hand or sent
by registered or certified mail, return receipt requested, postage prepaid, to
both the other party and the AAA. The decision of the arbitrator regarding any
such dispute shall be final and binding on both parties, and any court of
competent jurisdiction may enter judgment upon the award. Notwithstanding
anything to the contrary provided in this Section 18 and without prejudice to
the above procedures, either party may apply to any court of competent
jurisdiction for temporary injunctive or other provisional judicial relief if in
such party's sole judgment such action is necessary to avoid irreparable damage
or to preserve the status quo until such time as the arbitration award is
rendered or the controversy is otherwise resolved.
19. NOTICES. All notices hereunder shall be delivered by hand or sent by
registered or certified mail, return receipt requested, postage prepaid, to the
party to receive the same at the address set forth with the signature of such
party hereto or at such other address as may have been furnished to the sender
by notice hereunder.
20. COUNTERPARTS. This Agreement may be executed in counterparts, each of
which when so executed shall be deemed to be an original, and such counterparts
shall together constitute but one and the same instrument.
21. ENTIRE AGREEMENT. This Agreement and the documents and instruments
referred to herein contain the entire understanding of the parties hereto with
respect to the employment of the Executive by the Company.
22. AMENDMENTS AND WAIVERS. No provision hereof may be altered, amended,
modified, waived or discharged in any way whatsoever except by written agreement
executed by both parties. No delay or failure of either party to insist, in any
one or more instances, upon performance of any of the terms and conditions of
this Agreement or to exercise any rights or remedies hereunder shall constitute
a waiver or a relinquishment of such rights or remedies or any other rights or
remedies hereunder.
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<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed on the date and year first above written.
WILSONS THE LEATHER EXPERTS
INC.
/s/ DAVID ROGERS By: /s/ JOEL WALLER
- ---------------------------------------- ----------------------------------
Name: David Rogers Name: Joel Waller
Address: 2208 Huntington Point Road East Title: CEO
Wayzata, Minnesota 55391 Address: 400 Highway 169 South
Suite 600
Minneapolis, Minnesota 55426
The undersigned hereby unconditionally jointly and severally guaranty the
payment and performance when due of all obligations of the Company to the
Executive under the terms of the foregoing Employment Agreement.
WILSONS CENTER, INC.
WILSONS LEATHER HOLDINGS INC.
ROSEDALE WILSONS, INC.
RIVER HILLS WILSONS, INC.
BERMANS THE LEATHER EXPERTS
INC.
WILSONS HOUSE OF SUEDE, INC.
WILSONS TANNERY WEST, INC.
By: /s/ JOEL WALLER
----------------------------------
Name: Joel Waller
Title: CEO
Address: 400 Highway 169 South
Suite 600
Minneapolis, Minnesota 55426
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<PAGE>
EXHIBIT 10.6
EXECUTION COPY
MAY 25, 1996
CREDIT AGREEMENT
Dated as of May 25, 1996
among
WILSONS LEATHER HOLDINGS INC.,
as Borrower,
THE LENDERS SIGNATORY HERETO
FROM TIME TO TIME,
as Lenders,
and
GENERAL ELECTRIC CAPITAL CORPORATION,
as Agent, Lender and Swing Line Lender
<PAGE>
This CREDIT AGREEMENT, dated as of May 25, 1996 among WILSONS LEATHER
HOLDINGS INC., a Minnesota corporation ("Borrower"), GENERAL ELECTRIC CAPITAL
CORPORATION, a New York corporation (in its individual capacity, "GE Capital"),
for itself, as Lender, as Swing Line Lender and as Agent for Lenders, and the
other Lenders signatory hereto from time to time.
RECITALS
--------
WHEREAS, Borrower desires that Lenders extend a revolving credit
facility to Borrower of up to One Hundred Fifty Million Dollars ($150,000,000)
in the aggregate for working capital purposes, including capital expenditures;
and for these purposes, Lenders are willing to make certain loans and other
extensions of credit to Borrower of up to such amount upon the terms and
conditions set forth herein;
WHEREAS, Borrower desires to secure all of its obligations under the
Loan Documents by granting to Agent, for the benefit of Agent and Lenders, a
security interest in and lien upon all of its existing and after-acquired
personal property other than equipment and fixtures as set forth in the Security
Agreement;
WHEREAS, capitalized terms used in this Agreement shall have the
meanings ascribed to them in Schedule A. All Schedules, Disclosure Schedules,
Exhibits and other attachments (collectively, "Appendices") hereto, or expressly
identified to this Agreement, are incorporated herein by reference, and taken
together, shall constitute but a single agreement. These Recitals shall be
construed as part of the Agreement.
NOW, THEREFORE, in consideration of the premises and the mutual
covenants hereinafter contained, and for other good and valuable consideration,
the parties hereto agree as follows:
1. AMOUNT AND TERMS OF CREDIT
1.1 Credit Facilities.
(a) Revolving Credit Facility. (i) Subject to the terms and conditions
hereof, each Lender agrees to make available from time to time until the
Commitment Termination Date its Pro Rata Share of advances (each, a "Revolving
Credit Advance"). The obligations of each Lender hereunder shall be several and
not joint. The aggregate amount of Revolving Credit Advances outstanding shall
not exceed at any time the lesser of (A) the Maximum Amount less the sum of 100%
of the Letter of Credit Obligations, 100% of the eligible Trade L/C Obligations
and the Swing Line Loan outstanding and (B) the Borrowing Base, less the sum of
100% of the Letter of Credit Obligations, 35% of the Eligible Trade L/C
Obligations and the Swing Line Loan outstanding at such time ("Borrowing
Availability"). Furthermore, the Pro Rata Share of the Revolving Loan of any
Lender shall not at any time exceed its separate Revolving Loan Commitment.
Until the Commitment Termination Date, Borrower may from time to time
<PAGE>
borrow, repay and reborrow under this Section 1.1(a). Each Revolving Credit
Advance shall be made on notice by Borrower to the representative of the Agent
identified on Schedule 1.1 at the address specified thereon. Those notices must
be given no later than (1) 11:00 a.m. (Chicago time) on the Business Day of the
proposed Revolving Credit Advance, in the case of an Index Rate Loan, or (2)
11:00 a.m. (Chicago time) on the date which is three (3) Business Days prior to
the proposed Revolving Credit Advance, in the case of a LIBOR Loan. Each such
notice (a "Notice of Revolving Credit Advance") must be substantially in the
form of Exhibit 1.1(a)(i), and must specify the requested date, the amount and
type of the requested Revolving Credit Advance, and such other information as
may be required by Agent and must be given in writing (by telecopy or overnight
courier) or by telephone confirmed immediately in writing. Revolving Credit
Advances in the form of Index Rate Loans must be in a minimum amount of $25,000
and multiples of $10,000 in excess of such amount; minimum advances and integral
multiples for LIBOR Loans are set forth in Section 1.5(e). Notwithstanding the
foregoing, any Revolving Credit Advance to Borrower which is to be used solely
to repay the Swing Line Loan to Borrower may be in the aggregate principal
amount of the Swing Line Loan even if less than the foregoing minimums. If
Borrower desires to have the Revolving Loan bear interest by reference to a
LIBOR Rate, it must comply with Section 1.5(e).
(ii) Borrower shall execute and deliver to each Lender a promissory
note to evidence the Revolving Loan. Each note shall be in the principal amount
of the Revolving Loan Commitment of the applicable Lender, dated the Closing
Date and substantially in the form of Exhibit 1.1(a)(ii) (each a "Revolving
Note" and, collectively, the "Revolving Notes"). The Revolving Notes shall
represent the obligation of Borrower to pay the amount of the Revolving Loan
Commitment or, if less, the applicable Lender's Pro Rata Share of the aggregate
unpaid principal amount of all Revolving Credit Advances made by the applicable
Lender to Borrower together with interest thereon as prescribed in Section 1.5.
The entire unpaid balance of the Revolving Loan and all other non-contingent
Obligations shall be immediately due and payable in full in immediately
available funds in Dollars on the Commitment Termination Date.
(iii) In its discretion the Agent may (but shall have absolutely no
obligation to) make Revolving Credit Advances to Borrower on behalf of the
Lenders in amounts which cause the outstanding principal balance of the
aggregate Revolving Credit Advances to exceed Borrowing Availability (any such
excess Revolving Credit Advances are herein referred to collectively as
"Overadvances"), and no such event or occurrence shall cause or constitute a
waiver by Agent or Lenders of any Default or Event of Default that may result
therefrom or of their right to refuse to make any further Overadvances,
Revolving Credit Advances or Swing Line Advances or incur any Letter of Credit
Obligations or Eligible Trade L/C Obligations at any time that an Overadvance
exists or would result therefrom. In addition, Overadvances may be made even if
the conditions to lending set forth in Section 2 have not been met. The
authority of the Agent to make Overadvances is limited to an aggregate amount
not to exceed $1,500,000 at any time, shall not cause the sum of the Revolving
Loan plus the Swing Line Loan to exceed the Maximum Amount, and may be revoked
prospectively by a written notice to Agent signed by Lenders holding fifty
percent (50%) or more of the Revolving Loan Commitments. The aggregate
principal balance of all Overadvances shall bear interest at the Default Rate
then
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<PAGE>
applicable to Index Rate Loans. Each Overadvance shall be payable by Borrower
as and when specified by Agent at the time that such Overadvance is made or, if
not so specified by Agent, shall be payable on demand.
(b) Swing Line Facility. (i) Subject to the terms and conditions
hereof, the Swing Line Lender agrees to make available from time to time until
the Commitment Termination Date advances (each, a "Swing Line Advance");
provided that no Swing Line Advance may be made after the occurrence and during
the continuance of an Event of Default unless such Swing Line Advance is
approved by Requisite Lenders. The aggregate amount of Swing Line Advances
outstanding shall not exceed the lesser of (A) the Swing Line Commitment and (B)
the Borrowing Base less the sum of the outstanding balance of the Revolving
Credit Advances plus 100% of outstanding Letter of Credit Obligations and 35%
of outstanding Eligible Trade L/C Obligations as of any date of determination
("Swing Line Availability"). Until the Commitment Termination Date, Borrower
may from time to time borrow, repay and reborrow under this Section 1.1(b). In
order to minimize fluctuations in the Revolving Loan balance, it is intended
that the Swing Line Loan shall be the first Loan borrowed and the first Loan
repaid. Each Swing Line Advance shall be made on notice by Borrower to the
representative of the Agent identified on Schedule 1.1 at the address specified
thereon. Those notices must be given no later than 11:00 a.m. (Chicago time) on
the Business Day of the proposed Swing Line Advance. Each such notice (a
"Notice of Swing line Advance") must be substantially in the form of Exhibit
1.1(b)(i), and must specify the requested date, the amount of the requested
Swing Line Advance, and such other information as may be required by Agent or
the Swing Line Lender and must be given in writing (by telecopy or overnight
courier) or by telephone confirmed immediately in writing.
(ii) Borrower shall execute and deliver to the Swing Line Lender a
promissory note to evidence the Swing Line Loan. Such note shall be in the
principal amount of the Swing Line Commitment of the Swing Line Lender, dated
the Closing Date and substantially in the form of Exhibit 1.1(b)(ii) (the "Swing
Line Note"). The Swing Line Note shall represent the obligation of Borrower to
pay the amount of the Swing Line Commitment or, if less, the aggregate unpaid
principal amount of all Swing Line Advances made to Borrower together with
interest thereon as prescribed in Section 1.5. The entire unpaid balance of the
Swing Line Loan and all other non-contingent Obligations shall be immediately
due and payable in full in immediately available funds on the Commitment
Termination Date if not sooner paid in full.
(iii) Refunding of Swing Line Loans. The Swing Line Leader, at any
time and from time to time in its sole and absolute discretion and otherwise at
Borrower's request, may on behalf of Borrower (and Borrower hereby irrevocably
authorizes the Swing Line Lender to so act on its behalf) request by telephone
or telecopy each Lender (including the Swing Line Lender) to make a Revolving
Credit Advance to Borrower (which initially shall be an Index Rate Loan, but may
be converted to a LIBOR Loan) in an amount equal to such Lender's Pro Rata Share
of the principal amount of the Swing Line Loan (the "Refunded Swing Line Loan")
outstanding on the date such notice is given. Unless any of the events
described in Sections 8.1(h) or 8.1(i) shall have occurred (in which event the
procedures of Section 1.1(b)(iv) shall apply) and regardless of whether the
conditions precedent set forth in this Agreement to the
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<PAGE>
making of a Revolving Credit Advance are then satisfied, each Revolving Lender
shall make the proceeds of its Revolving Credit Advance available to the Swing
Line Lender prior to 1:00 p.m. (Chicago time), in immediately available funds on
the Business Day that such notice is given. The proceeds of such Revolving
Credit Advances shall be immediately applied to repay the Refunded Swing Line
Loan.
(iv) Participation in Swing Line Loans. If, prior to refunding a Swing
Line Loan with a Revolving Credit Advance pursuant to Section 1.1(b)(iii), one
of the events described in Sections 8.1(h) or 8.1(i) shall have occurred with
respect to Borrower, then, subject to the provisions of Section 1.1(b)(v) below,
each Lender will, on the date such Revolving Credit Advance was to have been
made to Borrower, purchase from the Swing Line Lender an undivided participation
interest in the Swing Line Loan in an amount equal to its Pro Rata Share of such
Swing Line Loan. Upon request, each Lender will promptly transfer to the Swing
Line Lender, in immediately available funds, the amount of its participation and
upon receipt thereof the Swing Line Lender will deliver to such Lender a Swing
Line Loan Participation Certificate, substantially the form of Exhibit
1.1(b)(iv), dated the date of receipt of such funds and in such amount.
(v) Lenders' Obligations Unconditional. Each Revolving Lender's
obligation to make Revolving Credit Advances in accordance with Section
1.1(b)(iii) and to purchase participating interests in accordance with Section
1.1(b)(iv) shall be absolute and unconditional (unless the Swing Line Advance
was not made to fund a Letter of Credit Obligation or Eligible Trade L/C
Obligation, an Event of Default had occurred and was continuing at the time the
underlying Swing Line Advance was made and the Swing Line Lender was aware of
the same at the time of the relevant Swing Line Advance) and shall not be
affected by any of the following circumstances: (A) any setoff, counterclaim,
recoupment, defense or other right which such Lender may have against the Swing
Line Lender, Borrower or any other Person for any reason whatsoever; (B) the
occurrence or continuance of any Default or Event of Default; (C) any inability
of Borrower to satisfy the conditions precedent to borrowing set forth in this
Agreement on the date upon which such participating interest is to be purchased
or (D) any other circumstance, happening or event whatsoever, whether or not
similar to any of the foregoing. If any Revolving Lender does not make available
to the Swing Line Lender the amount required pursuant to Section 1.1(b)(iii) or
1.1(b)(iv), as the case may be, the Swing Line Lender shall be entitled to
recover such amount on demand from such Lender, together with interest thereon
for each day from the date of non-payment until such amount is paid in full at
the federal funds rate for the first two Business Days and at the Index Rate
thereafter.
(c) Reliance on Notices. Agents shall be entitled to rely upon, and shall
be fully protected in relying upon, any Notice of Revolving Credit Advance,
Notice of Conversion/Continuation, Notice of Swing Line Advance or similar
notice believed by Agent to be genuine. Agent may assume that each Person
executing and delivering such a notice was duly authorized, unless the
responsible individual acting thereon for Agent has actual knowledge to the
contrary.
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<PAGE>
1.2 Letters of Credit. Subject to and in accordance with the terms
and conditions contained herein and in Schedule B, Borrower shall have the right
to request, and the Lenders agree to incur, Eligible Trade L/C Obligations and
Letter of Credit Obligations in respect of Borrower. The aggregate Letter of
Credit Obligations and Eligible Trade L/C Obligations outstanding at any time
shall not exceed as of any date of determination, the lesser of (A) $90,000,000
and (B) $150,000,000 less the then outstanding Revolving Credit Advances and
Swing Line Loan. In addition, 100% of the Letter of Credit Obligations plus 35%
of the Eligible Trade L/C Obligations outstanding as of any date of
determination shall not exceed the Borrowing Base, less the then outstanding
Revolving Credit Advances and Swing Line Loan. The determination of availability
described in the preceding two sentences is herein referred to as "L/C
Availability."
1.3 Prepayment. (a) If at any time Borrowing Availability of L/C
Availability is less than zero, Borrower shall immediately repay the aggregate
outstanding Revolving Credit Advances and Swing Line Advances (in such order as
shall minimize the aggregate of LIBOR breakage costs and the interest costs on
the Revolving Loan and/or Swing Line Loan that remains outstanding) to the
extent required to eliminate such deficit. If any deficit remains after
repayment in full of the aggregate outstanding Revolving Credit Advances and
Swing Line Advances, Borrower shall provide cash collateral for the Letter of
Credit Obligations and Eligible Trade L/C Obligations in the manner set forth in
Schedule B to the extent required to eliminate such deficit. Notwithstanding the
foregoing, the repayment requirements of any Overadvance made pursuant to
Section 1.1(a)(iii) shall be determined as set forth therein.
(b) Except as set forth in Section 6.14 hereof, if Newco issues
Stock, no later than the Business Day following the date of receipt of the
proceeds thereof, Borrower shall prepay the Loans in an amount equal to all such
proceeds, net of underwriting discounts and commissions and other reasonable
costs paid to non-Affiliates in connection therewith. Any such prepayment
shall be applied in accordance with clause (d) below.
(c) Borrower may at any time on at least five (5) days' (sixty (60)
days' in the case of prepayment in full of the Loans) prior written notice to
Agent voluntarily prepay all or part of the Revolving Loan and/or the Swing Line
Loan and permanently reduce or terminate the Revolving Loan Commitment or the
Swing Line Commitment, as applicable; provided that (a) any such prepayments or
reductions shall be in a minimum amount of $1,000,000 and integral multiples of
$250,000 in excess of such amount, (b) such voluntary prepayments or reductions
may be made or effected no more frequently than once per year following the
Closing Date, (c) any partial reduction of the Revolving Loan Commitment shall
result in a ratable reduction in the Swing Line Commitment and (d) any partial
reduction of the Revolving Loan Commitment to $120,000,000 or less shall result
in a ratable reduction in the L/C Sublimit. Any such voluntary prepayment and
any such reduction or termination of the Revolving Loan Commitment must be
accompanied by the payment of the fee required by Section 1.9(c), if any, plus
the payment of any LIBOR funding breakage costs in accordance with Section
1.13(b). Upon any such prepayment in full and termination in full of the
Revolving Loan Commitment and the Swing Line Commitment, Borrower's right to
request Revolving Credit Advances, request that Letter of
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<PAGE>
Credit Obligations or Eligible Trade L/C Obligations be incurred on its behalf,
or request Swing Line Advances shall simultaneously be permanently terminated.
(d) Any prepayments made by Borrower pursuant to clause (b) above or
pursuant to Section 5.4(c) shall be applied in the following order of priority,
in each instance until all Obligations having a higher priority have been paid
in full: first, to accrued Fees and expenses reimbursable hereunder; second, to
accrued interest on the Swing Line Loan; third, to the principal balance of the
Swing Line Loan; fourth, to the accrued interest on the Index Rate Loans; fifth,
to the principal balance of the Index Rate Loans; sixth, if L/C Availability is
less than zero, to any Letter of Credit Obligations and Eligible Trade L/C
Obligations of Borrower to provide cash collateral therefor in the manner set
forth in Schedule B, until all such Letter of Credit Obligations and Eligible
Trade L/C Obligations have been cash collateralized to the extent so required;
and seventh, in the case of a prepayment pursuant to clause (b) above to
eliminate any Seasonal Over-Advance outstanding (if not eliminated under clause
third above) as required by Section 6.14. If an Event of Default shall have
occurred and be continuing, the remainder of any such prepayments shall be
applied to outstanding Obligations in such order as Agent may deem appropriate,
including the cash collaterization of Letter of Credit Obligations and Eligible
Trade L/C Obligations. Otherwise the remainder of such prepayments shall be
returned to Borrower and held by Borrower in a Disbursement Account or other
account as permitted by Section 6.2 subject to a Control Letter. Neither the
Revolving Loan Commitment nor the Swing Line Commitment shall be permanently
reduced by the amount of any prepayments applied to the Revolving Loan or the
Swing Line Loan pursuant to the foregoing.
1.4 Use of Proceeds. Borrower shall utilize the proceeds of the
Revolving Credit Advances and the Swing Line Advances solely for the financing
of Borrower's ordinary working capital needs, including Capital Expenditures
(but excluding in any event the making of any Restricted Payment not
specifically permitted by Section 6.14). Schedule 1.4 contains a description of
Borrower's sources and uses of funds as of the Closing Date, including Loans,
Letter of Credit Obligations and Eligible Trade L/C Obligations to be made or
incurred on that date.
1.5 Interest. (a) Borrower shall pay interest to Agent, for the
ratable benefit of Lenders, in arrears on each applicable Interest Payment Date,
at the following rates: (i) with respect to the Revolving Credit Advances
bearing interest at the Index Rate, at a per annum rate equal to the Index Rate
plus the Applicable Index Margin, or at the election of Borrower, at a per annum
rate equal to the applicable LIBOR Rate plus the Applicable LIBOR Margin, based
on the aggregate Revolving Credit Advances outstanding from time to time; and
(ii) with respect to the Swing Line Loan at a per annum rate equal to the Index
Rate plus the Applicable Swing Line Margin.
(b) If any payment on any Loan becomes due and payable on a day other
than a Business Day, the maturity thereof will be extended to the next
succeeding Business Day (except as set forth in the definition of LIBOR Period)
and, with respect to payments of principal, interest thereon shall be payable at
the then applicable rate during such extension.
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<PAGE>
(c) All computations of interest with respect to LIBOR Loans shall be made
by Agent on the basis of a three hundred sixty (360) day year, for the actual
number of days occurring in the period for which such interest is payable. All
computations of interest with respect to Index Rate Loans, shall be made by
Agent on the basis of a three hundred sixty-five (365) day year for the actual
number of days elapsed. The Index Rate shall be determined each day based upon
the Index Rate as in effect each day. Each determination by Agent of an interest
rate hereunder shall be conclusive, absent manifest error.
(d) So long as any Event of Default shall have occurred and be continuing,
and at the election of Agent (or upon the written request of Requisite Lenders)
after written notice from Agent to Borrower, the interest rates applicable to
the Revolving Loan, the Swing Line Loan and the Letter of Credit Fees shall be
increased by two percentage points (2%) per annum above the rate of interest or
the rate of such Fees otherwise applicable hereunder ("Default Rate"), and all
outstanding Obligations shall bear interest at the Default Rate applicable to
such Obligations. If such notice is issued, interest and Letter of Credit Fees
at the Default Rate shall accrue from the initial date of such Event of Default
for so long as that Event of Default shall continue and shall be payable upon
demand.
(e) So long as no Default or Event of Default shall have occurred and be
continuing, Borrower shall have the option to (i) request that any Revolving
Credit Advance (other than an Overadvance) be made as a LIBOR Loan, (ii) convert
at any time all or any part of outstanding Revolving Credit Advances (including
a Refunded Swing Line Loan) from Index Rate Loans to LIBOR Loans, (iii) convert
any LIBOR Loan to an Index Rate Loan, subject to payment of LIBOR breakage costs
in accordance with Section 1.13(b) if such conversion is made prior to the
expiration of the LIBOR Period applicable thereto, or (iv) continue all or any
portion of any LIBOR Loan as a LIBOR Loan upon the expiration of the applicable
LIBOR Period and the succeeding LIBOR Period of that continued Loan shall
commence on the last day of the LIBOR Period of the Loan to be continued. Any
Loan to be made or continued as, or converted into, a LIBOR Loan must be in a
minimum amount of $5,000,000 and integral multiples of $1,000,000 in excess of
such amount. Any such election must be made by 11:00 a.m. (Chicago time) on the
third (3rd) Business Day prior to (1) the date of any proposed Advance which is
to bear interest at the LIBOR Rate, (2) the end of each LIBOR Period with
respect to any LIBOR Loans to be continued as such, or (3) the date on which
Borrower wishes to convert any Index Rate Loan to a LIBOR Loan for a LIBOR
Period designated by Borrower in such election. If no election is received with
respect to a LIBOR Loan by 11:00 a.m. (Chicago time) on the third (3rd) Business
Day prior to the end of the LIBOR Period with respect thereto (or if a Default
or an Event of Default shall have occurred and be continuing), that LIBOR Loan
shall be converted to an Index Rate Loan at the end of its LIBOR Period.
Borrower must make such election by notice to Agent in writing, by telecopy or
overnight courier. In the case of any conversion or continuation, such election
must be made pursuant to a written notice (a "Notice of Conversion/
Continuation") in the form of Exhibit 1.5(e). Unless Agent shall otherwise
consent, no Loan may be made as or converted into a LIBOR Loan until forty-five
(45) days after the Closing Date. Furthermore, Borrower shall not be entitled to
request or continue any Revolving
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<PAGE>
Loan as, or convert any Revolving Loan into, a LIBOR Loan unless at the time of
such request, conversion or continuation, the aggregate outstanding principal
balance of the Revolving Credit Advances plus the amount of the Swing Line
Advances equals or exceeds $5,000,000 and Borrower reasonably anticipates that
the aggregate outstanding principal balance of the Revolving Credit Advances
will continue to equal or exceed such amount for the duration of the LIBOR
Period selected by Borrower.
(f) Notwithstanding anything to the contrary set forth in this
Section 1.5, if a court of competent jurisdiction determines in a final order
that the rate of interest payable hereunder exceeds the highest rate of interest
permissible under law (the "Maximum Lawful Rate"), then so long as the Maximum
Lawful Rate would be so exceeded, the rate of interest payable hereunder shall
be equal to the Maximum Lawful Rate; provided, however, that if at any time
thereafter the rate of interest payable hereunder is less than the Maximum
Lawful Rate, Borrower shall continue to pay interest hereunder at the Maximum
Lawful Rate until such time as the total interest received by Agent, on behalf
of Lenders, is equal to the total interest which would have been received had
the interest rate payable hereunder been (but for the operation of this
paragraph) the interest rate payable since the Closing Date as otherwise
provided in this Agreement. Thereafter, the interest rate payable hereunder
shall be the rate(s) of interest provided in Sections 1.5(a) through (e) above,
unless and until the rate of interest again exceeds the Maximum Lawful Rate, and
at that time this paragraph shall again apply. In no event shall the total
interest received by any Lender pursuant to the terms hereof exceed the amount
which such Lender could lawfully have received had the interest due hereunder
been calculated for the full term hereof at the Maximum Lawful Rate. If the
Maximum Lawful Rate is calculated pursuant to this paragraph, such interest
shall be calculated at a daily rate equal to the Maximum Lawful Rate divided by
the number of days in the year in which such calculation is made. If,
notwithstanding the provisions of this Section 1.5(f), a court of competent
jurisdiction shall finally determine that a Lender has received interest
hereunder in excess of the Maximum Lawful Rate, Agent shall, to the extent
permitted by applicable law, promptly apply such excess in the order specified
in Section 1.11 and thereafter shall refund any excess to Borrower or as a court
of competent jurisdiction may otherwise order.
1.6 Applicable Margins. The Applicable Swing Line Margin, Applicable
Index Margin, Applicable LIBOR Margin and Applicable L/C Margin will be adjusted
(up or down) quarterly based on Newco's consolidated financial performance for
the trailing four quarters as evidenced by its quarterly consolidated Financial
Statements in accordance with the following grid:
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<TABLE>
<CAPTION>
If EBIT/Cash Applicable Applicable Applicable Applicable
Interest Swing Line Index LIBOR L/C
Coverage is: Margin is: Margin is: Margin is: Margin is:
- ------------ ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
less than 2.0 1.00% 1.25% 2.75% 1.75%
2.0 up to but not including 3.0 .75% 1.00% 2.50% 1.50%
3.0 up to but not including 4.0 .25% .50% 2.00% 1.25%
4.0 or more 0.0% .25% 1.75% 1.25%
</TABLE>
The Applicable Swing Line Margin, Applicable Index Margin, Applicable
LIBOR Margin and Applicable L/C Margin will be 1.0%, 1.25%, 2.75% and 1.75%,
respectively, as of the Closing Date and will first be subject to adjustment on
February 1, 1997, based on Parent's quarterly consolidated Financial Statements
for February 1, 1996, through the Closing Date and Newco's quarterly
consolidated Financial Statements from the day following the Closing Date
through the last day of the Fiscal Quarter ending on the Saturday closest to
January 31, 1997 (collectively the "Measuring Period"), subject to the following
conditions. To adjust the margins for the periods commencing February 1, 1997,
Borrower must deliver to Agent and Lenders before February 28, 1997, internally
prepared consolidated Financial Statements for the Measuring Period,
demonstrating that a reduction has been earned. If earned, margin reductions
will be implemented for all interest and Letter of Credit Fee payments accrued
during the month of February 1997 and due on or after March 1, 1997; provided
that such consolidated Financial Statements are received before February 28,
1997; otherwise margin reductions will be implemented on the date such Financial
Statements are received. Newco's consolidated Financial Statements for the
period commencing on the day following the Closing Date and ending on the last
day of the Fiscal Quarter ending on the Saturday closest to January 31, 1997,
shall be reviewed by Newco's outside auditors and subsequently delivered to
Agent. If those Financial Statements demonstrate that margin reductions were
not, in fact, earned as of the last day of the Measuring Period, Borrower shall
pay to Agent for the ratable benefit of Lenders a make-up payment within five
(5) days after delivery of those Financial Statements. The make-up payment will
equal the difference between interest and Letter of Credit Fees that should have
been paid for the period commencing February 1, 1997, and those actually paid.
After February 1, 1997, adjustments in the Applicable Swing Line
Margin, Applicable Index Margin, Applicable LIBOR Margin and Applicable L/C
Margin shall be prospective only and shall be based on Newco's consolidated
financial performance for the trailing four quarters as of the last day of each
Fiscal Quarter as evidenced by Newco's unaudited consolidated Financial
Statements for the first three Fiscal Quarters of each Fiscal Year and Newco's
audited consolidated Financial Statements for each Fiscal Year. Each increase or
decrease in the above-referenced margins shall become effective starting (i) in
the case of the Swing Line Loan, Index Rate Loans and Letter of Credit Fees on
the first day of the first calendar month after delivery of the applicable
Financial Statements and (ii) in the case of LIBOR Loans on
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the first day of each LIBOR Period commencing after delivery of the applicable
Financial Statements.
1.7 Eligible Inventory. Based on the most recent Borrowing Base
Certificate delivered by Borrower to Agent and on other information available to
Agent, Agent shall in its reasonable credit judgment determine which Inventory
of Borrower shall be "Eligible Inventory" for purposes of this Agreement. In
determining whether any particular Inventory of Borrower constitutes Eligible
Inventory, Agent shall not include any such Inventory to which any of the
exclusionary criteria set forth in Schedule D applies. Agent reserves the right,
at any time and from time to time after the Closing Date, to adjust any such
criteria, and to establish new criteria, and to establish Reserves against the
Borrowing Base in its reasonable credit judgment based on changes in the
salability of Inventory, Liens, unpaid liabilities or other changed
circumstances arising after the Closing Date, subject to the approval of Lenders
in the case of adjustments or new criteria which have the effect of making more
credit available; provided that if any such adjustment in criteria or the
establishment of new criteria or Reserves (other than Reserves specifically
described in the definition of Reserves, Section 1.11(c), Section 5.4(c), or
Section 5.9) materially reduces Borrowing Availability, Borrower may prepay the
Revolving Loan (including the Swing Line Loan) within one (1) year thereafter
without payment of a prepayment fee.
1.8 Cash Management Systems. On or prior to the Closing Date,
Borrower will establish and will maintain until the Termination Date, the cash
management systems described on Schedule E (the "Cash Management Systems").
1.9 Fees. (a) Borrower shall pay to GE Capital, individually, the
Fees specified in that certain Fee Letter dated as of April 29, 1996 (the "GE
Capital Fee Letter"), at the times specified for payment therein.
(b) As additional compensation for the Lenders having Revolving Loan
Commitments, Borrower agrees to pay to Agent, for the ratable benefit of such
Lenders, in arrears, on the first Business Day of each month prior to the
Commitment Termination Date and on the Commitment Termination Date, a fee for
Borrower's non-use of available funds (the "Non-Use Fee") in an amount equal to
three-eights of one percent (.375%) per annum (calculated on the basis of a 365
day year for actual days elapsed) of the difference between the respective daily
averages of (x) the Maximum Amount (as it may be reduced from time to time) and
(y) the amount of the Revolving Loan outstanding during the period for which the
Non-Use Fee is due.
(c) Except as otherwise provided herein, if Borrower prepays the
Revolving Loan and in connection therewith reduces or terminates the Revolving
Loan Commitment, whether voluntarily or involuntarily and whether before or
after acceleration of the Obligations, Borrower shall pay to the Agent, for the
benefit of Lenders as liquidated damages and compensation for the costs of being
prepared to make funds available hereunder an amount determined by multiplying
the Applicable Percentage by the amount of the reduction of the Revolving Loan
Commitment. As used herein, the term "Applicable Percentage" shall mean (x) two
percent (2.0%), in the case of a prepayment on or prior to the second
anniversary of the
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Closing Date, and (y) one percent (1.0%), in the case of a prepayment after the
second anniversary of the Closing Date but on or prior to the third anniversary
of the Closing Date. Notwithstanding the foregoing, no prepayment fee shall be
payable by Borrower upon a mandatory prepayment made pursuant to Section 1.3(b)
so long as the transaction giving rise to such prepayment is expressly permitted
under Section 6 and so long as Borrower does not permanently reduce the
Revolving Loan Commitment.
1.10 Receipt of Payments. Terms used and not otherwise defined in
this Section shall have the respective meanings given such terms in Schedule E.
Pursuant to the Blocked Account Agreement, Agent and Borrower have directed the
Concentration Account Bank to sweep the balance of funds on deposit in the
Concentration Account at 11:00 a.m. (Chicago time) each day into the Collection
Account. For purposes of computing interest and Fees and determining the amount
available for borrowing by Borrower pursuant to Section 1.1, all payments shall
be deemed received on the day of receipt of immediately available funds therefor
in the Collection Account. So long as Borrower and the Store Guarantors have
cash or cash equivalents (consisting of investments permitted under clause (a)
of Section 6.2) on hand or on deposit of $7,000,000 or more in the aggregate,
Borrower shall not request (and Lenders are not obligated to make) any Revolving
Credit Advance or Swing Line Advance. To the extent not applied to the Revolving
Loan or Swing Line Loan and so long as no Event of Default shall have occurred
and be continuing and so long as L/C Availability exceeds zero, good funds
received by Agent in its Collection Account before 2:00 p.m. (Chicago time) on
each Business Day will be transferred to Borrower's Disbursement Account on that
Business Day. Notwithstanding any provision herein contained to the contrary, so
long as no Default or Event of Default has occurred and is continuing, and
Borrowing Availability and L/C Availability are greater than the amount of the
funds transfer described below, Agent will transfer good funds to Borrower's
Disbursement Account based on assurances from Borrower's Concentration Account
Bank that good funds in a corresponding amount will be transferred to Agent's
Collection Account on the same Business Day as such assurances are given. If
Agent makes such a transfer under the foregoing circumstances and does not
receive such funds from Borrower's Concentration Account Bank prior to 1:00 p.m.
(Chicago time), Agent shall promptly notify Borrower. If Agent does not receive
corresponding good funds from Borrower's Concentration Account Bank prior to
2:00 p.m. (Chicago time), Agent's transfer of funds to Borrower as described
above shall be deemed to constitute a Swing Line Advance to the extent that such
transfer would not cause the Swing Line Loan to exceed the Swing Line
Commitment, and a Revolving Credit Advance to the extent of such excess.
1.11 Application and Allocation of Payments. (a) Borrower hereby
irrevocably waives as to all payments from and after the Commitment Termination
Date, the right to direct the application of such payments received from or on
behalf of Borrower, and Borrower hereby irrevocably agrees that Agent shall have
the continuing exclusive right to apply any and all such payments against the
Obligations as Agent may deem advisable notwithstanding any previous entry by
Agent in the Loan Account or any other books and records. In the absence of a
specific determination by Agent with respect thereto after the Commitment
Termination Date and in all other instances (except as otherwise expressly
provided herein), payments shall be applied in the
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following order of priority, in each instance until all Obligations having a
higher priority have been paid in full: (1) to Fees and Agent's expenses
reimbursable hereunder; (2) to accrued interest on the Swing Line Loan; (3) to
the outstanding principal balance of the Swing Line Loan; (4) to accrued
interest on the Index Rate Loans; (5) to the principal balance of Index Rate
Loans; (6) to accrued interest on LIBOR Rate Loans; (7) to the principal balance
of LIBOR Rate Loans; (8) if the Commitment Termination Date has occurred or if
L/C Availability is less than zero, to cash collateralize Letter of Credit
Obligations and Eligible Trade L/C Obligations in the manner described in
Schedule B and (9) to all other Obligations then due and payable including
expenses of Lenders reimbursable under Section 11.3.
(b) Agent is authorized to, and at its sole election may, charge to
the Swing Line Loan to the extent such charge would not cause the Swing Line
Loan balance to exceed the Swing Line Commitment and then to Revolving Loan
balance on behalf of Borrower and cause to be paid all Fees, expenses, Charges,
costs (including insurance premiums in accordance with Section 5.4(a)) and
interest owing by Borrower under this Agreement or any of the other Loan
Documents if and to the extent Borrower fails to promptly pay any such amounts
as and when due, even if such charges would cause the Revolving Loan to exceed
Borrowing Availability. At Agent's option and to the extent permitted by law,
any charges so made shall constitute part of the Swing Line Loan or Revolving
Loan hereunder.
(c) If a Default or an Event of Default has occurred and is
continuing, Agent may in its sole and absolute discretion, impose a Reserve
against Borrowing Availability for interest, Fees and expenses due and payable
or which will become due and payable hereunder on the next respective payment
dates therefor.
(d) If Borrower pays less than all of the interest due hereunder on
any Interest Payment Date, Agent shall apply such partial payment ratably to all
interest then due hereunder.
1.12 Loan Account and Accounting. Agent shall maintain a loan
account (the "Loan Account") on its books to record: (a) all Advances (b) all
payments made by Borrower, and (c) all other debits and credits as provided in
this Agreement with respect to the Loans or any other Obligations. All entries
in the Loan Account shall be made in accordance with Agent's customary
accounting practices as in effect from time to time. The balance in the Loan
Account, as recorded on Agent's most recent printout or other written statement,
shall be presumptive evidence of the amounts due and owing to Agent and Lenders
by Borrower; provided that any failure to so record or any error in so recording
shall not limit or otherwise affect Borrower's duty to pay the Obligations.
Agent shall render to Borrower a monthly accounting of transactions with respect
to the Loans setting forth the balance of the Loan Account. Unless Borrower
notifies Agent in writing of any objection to any such accounting (specifically
describing the basis for such objection), within thirty (30) days after the date
thereof, each and every such accounting shall (absent manifest error) be deemed
final, binding and conclusive upon Borrower in all respects as to all matters
reflected therein. Only those items expressly objected to in such notice shall
be deemed to be disputed by Borrower.
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1.13 Indemnity. (a) Borrower shall indemnify and hold harmless each
of Agent, Lenders and their respective Affiliates, and each such Person's
respective officers, directors, employees, attorneys, agents and representatives
(each, an "Indemnified Person"), from and against any and all suits, actions,
proceedings, claims, damages, losses, liabilities and expenses (including
attorneys' fees and disbursements and other costs of investigation or defense,
including those incurred upon any appeal) which may be instituted or asserted
against or incurred by any such Indemnified Person as the result of credit
having been extended, suspended or terminated under this Agreement and the other
Loan Documents, and in connection with or arising out of the transactions
contemplated hereunder and thereunder and any actions or failures to act in
connection therewith, including any and all Environmental Liabilities and Costs
and legal costs and expenses arising out of or incurred in connection with
disputes between or among any parties to any of the Loan Documents; provided,
that Borrower shall not be liable for any indemnification to an Indemnified
Person to the extent that any such suit, action, proceeding, claim, damage,
loss, liability or expense results solely from that Indemnified Person's gross
negligence or willful misconduct, as finally determined by a court of competent
jurisdiction. NO INDEMNIFIED PERSON SHALL BE RESPONSIBLE OR LIABLE TO ANY OTHER
PARTY TO ANY LOAN DOCUMENT, ANY SUCCESSOR, ASSIGNEE OR THIRD PARTY BENEFICIARY
OF SUCH PERSON OR ANY OTHER PERSON ASSERTING CLAIMS DERIVATIVELY THROUGH SUCH
PARTY, FOR INDIRECT, PUNITIVE, EXEMPLARY OR CONSEQUENTIAL DAMAGES WHICH MAY BE
ALLEGED AS A RESULT OF CREDIT HAVING BEEN EXTENDED, SUSPENDED OR TERMINATED
UNDER ANY LOAN DOCUMENT OR AS A RESULT OF ANY OTHER TRANSACTION CONTEMPLATED
HEREUNDER OR THEREUNDER.
(b) To induce Lenders to provide the LIBOR Rate option on the terms
provided herein, if (i) any LIBOR Loans are repaid in whole or in part prior to
the last day of any applicable LIBOR Period (whether that repayment is made
pursuant to any provision of this Agreement or any other Loan Document or is the
result of acceleration, by operation of law or otherwise); (ii) Borrower shall
default in payment when due of the principal amount of or interest on any LIBOR
Loan; (iii) Borrower shall default in making any borrowing of, conversion into
or continuation of LIBOR Loans after Borrower has given notice requesting the
same in accordance herewith; or (iv) Borrower shall fail to make any prepayment
of a LIBOR Loan after Borrower has given a notice thereof in accordance
herewith, Borrower shall indemnify and hold harmless each Lender from and
against all losses, costs and expenses resulting from or arising from any of the
foregoing. Such indemnification shall include, without limitation, any loss
(including, without limitation, loss of margin) or expense arising from the
reemployment of funds obtained by it or from fees payable to terminate deposits
from which such funds were obtained. For the purpose of calculating amounts
payable to a Lender under this subsection, each Lender shall be deemed to have
actually funded its relevant LIBOR Loan through the purchase of a deposit
bearing interest at the LIBOR Rate in an amount equal to the amount of that
LIBOR Loan and having a maturity comparable to the relevant Interest Period;
provided, however, that each Lender may fund each of its LIBOR Loans in any
manner it sees fit, and the foregoing assumption shall be utilized only for the
calculation of amounts payable under this subsection. This covenant shall
survive the termination of this Agreement and the payment of the Notes and all
other amounts payable hereunder. As
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promptly as practicable under the circumstances, each Lender shall provide
Borrower and Agent with its written calculation of all amounts payable pursuant
to this Section 1.13(b), and such calculation shall be binding on the parties
hereto unless Borrower shall object in writing within ten (10) Business Days of
receipt thereof, specifying the basis for such objection in detail. All amounts
payable pursuant to this Section 1.13(b) shall be made payable to Agent for the
benefit of the requesting Lender and shall then be funded by Agent to such
Lender.
1.14 Access. (a) Borrower shall, and in accordance with the
Guaranties, shall cause each other Credit Party who is a signatory thereto to,
during normal business hours, from time to time upon one (1) Business Day's
prior notice as frequently as Agent reasonably determines to be appropriate: (a)
provide Agent and any of its officers, employees and agents access to its
properties, facilities, advisors and employees (including officers) of each
Credit Party and to the Collateral, (b) permit Agent, and any of its officers,
employees and agents, to inspect, audit and make extracts from any Credit
Party's books and records, and (c) permit Agent, and its officers, employees and
agents, to inspect, review and evaluate the Accounts, Inventory and other
Collateral of any Credit Party. If a Default or Event of Default shall have
occurred and be continuing, Borrower, Parent, First Intermediate Parent, Second
Intermediate Parent and Newco shall provide such access at all times and without
advance notice. Borrower, Parent, First Intermediate Parent, Second Intermediate
Parent and Newco shall make available to Agent and its counsel, as quickly as is
possible under the circumstances, originals or copies of all books and records
which Agent may request. Borrower, Parent, First Intermediate Parent, Second
Intermediate Parent and Newco shall deliver any document or instrument necessary
for Agent, as it may from time to time request, to obtain records from any
service bureau or other Person which maintains records for Borrower, Parent,
First Intermediate Parent, Second Intermediate Parent or Newco, and shall
maintain duplicate records or supporting documentation on media, including
computer tapes and discs owned by Borrower, Parent, First Intermediate Parent,
Second Intermediate Parent and Newco.
(b) Borrower shall pay Agent a Fee of $500 per day per individual
(plus all out-of-pocket costs and expenses) in connection with Agent's field
examinations permitted under Section 1.14(a) above and Section 4(c) of the
Security Agreement, including the cost of verifying Eligible In-Transit
Inventory in the possession of Approved Shippers; provided that such Fees and
expenses shall not be reimbursable by Borrower with respect to more than two
field examinations during any period of twelve consecutive months unless an
Event of Default shall have occurred and be continuing at the time of those
field examinations that exceed two during any period of twelve consecutive
months.
1.15 Taxes. (a) Any and all payments by Borrower hereunder or under
the Notes shall be made, in accordance with this Section 1.15, free and clear of
and without deduction for any and all present or future Taxes. Except as
provided in Section 1.16(d), if Borrower shall be required by law to deduct any
Taxes from or in respect of any sum payable hereunder under the Notes, (i) the
sum payable shall be increased as much as shall be necessary so that after
making all required deductions (including deductions applicable to additional
sums payable under this Section 1.15) Agent or Lenders, as applicable, receive
an amount equal to the sum they
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would have received had no such deductions been made, (ii) Borrower shall make
such deductions, and (iii) Borrower shall pay the full amount deducted to the
relevant taxing or other authority in accordance with applicable law. Within
thirty (30) days after the date of any payment of Taxes, Borrower shall furnish
to Agent the original or a certified copy of a receipt evidencing payment
thereof.
(b) Borrower shall indemnify and, within ten (10) days of demand
therefor, pay, Agent and each Lender for the full amount of Taxes (including any
Taxes imposed by any jurisdiction on amounts payable under this Section 1.15)
paid by Agent or such Lender, as appropriate, and any liability (including
penalties, interest and expenses) arising therefrom or with respect thereto,
whether or not such Taxes were correctly or legally asserted.
1.16 Capital Adequacy; Increased Costs; Illegality. (a) If any
Lender shall have determined that the adoption after the date hereof of any law,
treaty, governmental (or quasi-governmental) rule, regulation, guideline or
order regarding capital adequacy, reserve requirements or similar requirements
or compliance by any Lender with any request or directive regarding capital
adequacy, reserve requirements or similar requirements (whether or not having
the force of law) from any central bank or other Governmental Authority
increases or would have the effect of increasing the amount of capital, reserves
or other funds required to be maintained by such Lender and thereby reducing the
rate of return on such Lender's capital as a consequence of its obligations
hereunder, then Borrower shall from time to time upon demand by such Lender
(with a copy of such demand to Agent) pay to Agent, for the account of such
Lender, additional amounts sufficient to compensate such Lender for such
reduction. A certificate as to the amount of that reduction and showing the
basis of the computation thereof submitted by such Lender to Borrower and to
Agent shall, absent manifest error, be final, conclusive and binding for all
purposes.
(b) If, due to either (i) the introduction of or any change in any
law or regulation (or any change in the interpretation thereof) or (ii) the
compliance with any guideline or request from any central bank or other
Governmental Authority (whether or not having the force of law), there shall be
any increase in the cost to any Lender of agreeing to make or making, funding or
maintaining any Loan, then Borrower shall from time to time, upon demand by such
Lender (with a copy of such demand to Agent), pay to Agent for the account of
such Lender additional amounts sufficient to compensate such Lender for such
increased cost. A certificate as to the amount of such increased cost, submitted
to Borrower and to Agent by such Lender, shall be conclusive and binding on
Borrower for all purposes, absent manifest error. Each Lender agrees that, as
promptly as practicable after it becomes aware of any circumstances referred to
above which would result in any such increased cost, the affected Lender shall,
to the extent not inconsistent with such Lender's internal policies of general
application, use reasonable commercial efforts to minimize costs and expenses
incurred by it and payable to it by Borrower pursuant to this Section 1.16(b).
(c) Notwithstanding anything to the contrary contained herein, if the
introduction of or any change in any law or regulation (or any change in the
interpretation
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thereof) shall make it unlawful, or any central bank or other Governmental
Authority shall assert that it is unlawful, for any Lender to agree to make or
to make or to continue to fund or maintain any LIBOR Loan, then, unless that
Lender is able to make or to continue to fund or to maintain such LIBOR Loan at
another branch or office of that Lender without, in that Lender's opinion,
adversely affecting it or its Loans or the income obtained therefrom, on notice
thereof and demand therefor by such Lender to Borrower through Agent, (i) the
obligation of such Lender to agree to make or to make or to continue to fund or
maintain LIBOR Loans shall terminate and (ii) Borrower shall forthwith prepay in
full all outstanding LIBOR Loans owing by Borrower to such Lender, together with
interest accrued thereon (but without LIBOR breakage costs), unless Borrower,
within five (5) Business Days after the delivery of such notice and demand,
converts all such Loans into a Loan bearing interest based on the Index Rate
(which conversion shall be without LIBOR breakage costs).
(d) Foreign Lenders. Each Lender organized under the laws of a
jurisdiction outside the United States (a "Foreign Lender") as to which payments
to be made under this Agreement or under the Notes are exempt from United States
withholding tax under an applicable statute or tax treaty shall provide to
Borrower and Agent a properly completed and executed IRS Form 4224 or Form 1001
or other applicable form, certificate or document prescribed by the IRS or the
United States certifying as to such Foreign Lender's entitlement to such
exemption (a "Certificate of Exemption"). Prior to becoming a Lender under this
Agreement and within fifteen (15) days after a reasonable written request of
Agent or Borrower from time to time thereafter, each Foreign Lender that becomes
a Lender under this Agreement shall provide a Certificate of Exemption to
Borrower and Agent. No Person may become a Lender hereunder if such Person is
unable to deliver a Certificate of Exemption. If a Foreign Lender does not
provide a Certificate of Exemption to Agent and Borrower within the time periods
set forth above, Borrower shall withhold taxes from payments to such Foreign
Lender at the applicable statutory rate and Borrower shall not be required to
pay any additional amounts as a result of such withholding; provided, that all
such withholding shall cease upon delivery by such Foreign Lender of a
Certificate of Exemption to Agent and Borrower.
(e) Replacement of Lender in Respect of Increased Costs. Within
fifteen (15) days after receipt by Borrower of written notice and demand from
any Lender or a participant that has purchased a participation from such Lender
(an "Affected Lender") for payment of taxes, additional amounts or increased
costs as provided in Section 1.15 or Section 1.16(a) or (b), Borrower may, at
its option, notify Agent and such Affected Lender of its intention to replace
the Affected Lender as follows: So long as no Default or Event of Default shall
have occurred and be continuing, Borrower, with the consent of Agent, may
obtain, at Borrower's expense, a replacement Lender ("Replacement Lender") for
the Affected Lender, which Replacement Lender must be reasonably satisfactory to
Agent. If Borrower obtains a Replacement Lender within ninety (90) days
following notice of its intention to do so, the Affected Lender must sell and
assign its Loans and Commitments to such Replacement Lender provided that
Borrower reimbursed such Affected Lender for the additional amounts or increased
costs that it is entitled to receive under this Agreement through the date of
such sale and assignment.
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Notwithstanding the foregoing, Borrower shall not have the right to
obtain a Replacement Lender, if the Affected Lender rescinds its demand for
increased costs or additional amounts within fifteen (15) days following its
receipt of Borrower's notice of intention to replace such Affected Lender.
Furthermore, if Borrower gives a notice of intention to replace and does not so
replace such Affected Lender within ninety (90) days thereafter, Borrower's
rights under this Section 1.16(e) shall terminate and Borrower shall promptly
pay all increased costs or additional amounts demanded by such Affected Lender
pursuant to Sections 1.15, 1.16(b) and (c).
1.17 Single Loan. All Loans to Borrower and all of the other
Obligations of Borrower arising under this Agreement and the other Loan
Documents shall constitute one general obligation of Borrower secured, until the
Termination Date, by all of its Collateral.
2. CONDITIONS PRECEDENT
2.1 Conditions to the Initial Loans.
No Lender shall be obligated to make any Loan or incur any Eligible
Trade L/C Obligations or Letter of Credit Obligations on the Closing Date, or to
take, fulfill, or perform any other action hereunder, until the following
conditions have been satisfied, in Agent's sole discretion, or waived in writing
by Agent and those Lenders present at the closing on the Closing Date:
(a) Credit Agreement; Loan Documents. This Agreement or counterparts
hereof shall have been duly executed by, and delivered to, Borrower, Agent and
Lenders; and Agent shall have received such documents, instruments, agreements
and legal opinions as Agent shall request in connection with the transactions
contemplated by this Agreement and the other Loan Documents, including all those
listed in the Schedule of Documents attached hereto as Schedule F, each in form
and substance satisfactory to Agent.
(b) Repayment of Prior Loans. Agent shall have received a fully
executed original of a pay-off letter satisfactory to Agent confirming that all
intercompany loans, if any, owing to Seller or its Affiliates by Parent or any
Subsidiary of Parent have been paid, discharged or canceled other than the
Subordinated Note. In addition, Agent shall have received evidence satisfactory
to it of the termination of borrowing arrangements with The First National Bank
of Boston ("Bank of Boston"), other than an unsecured overdraft facility
provided by Bank of Boston not to exceed $25,000.
(c) Governmental Approvals. Agent shall have received (i)
satisfactory evidence that the Credit Parties have obtained all required
consents and approvals of all Persons including, but not limited to, all
requisite Governmental Authorities, to the execution, delivery and performance
of this Agreement and the other Loan Documents and the consummation of the
Related Transactions or (ii) an officer's certificate in form and substance
satisfactory to Agent affirming that no such consents or approvals are required.
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(d) Working Capital. Newco and its Subsidiaries shall have estimated
net working capital of not less than $85,000,000, subject to purchase accounting
adjustments, including payments of expenses of the Related Transactions and
subject to post-closing gross-up of short-falls by Seller.
(e) Net Borrowing Availability. Borrower's Net Borrowing
Availability plus Newco's, Parent's, Borrower's and the Store Guarantors'
aggregate cash on hand and on deposit shall equal or exceed $28,000,000 after
giving effect to the consummation of the Related Transactions and the payment of
all expenses with respect thereto.
(f) Payment of Fees. Borrower shall have paid the Fees required to be
paid on the Closing Date in the respective amounts specified in Section 1.9
(including without limitation the Fees specified in the GE Capital Fee Letter),
and shall have reimbursed Agent for all fees, costs and expenses of closing to
the extent statements therefor are presented at closing (including fees of
consultants and special loan counsel to Agent presented as of the Closing Date).
(g) Compliance with Laws. Each Credit Party shall be in compliance
in all material respects with all applicable foreign, federal, state and local
laws and regulations, including those specifically referenced in Section 5.5.
(h) Capital Structure: Other Indebtedness. The capital structure of
each Credit Party and the terms and conditions of all Indebtedness of each
Credit Party shall be acceptable to Agent in its sole discretion.
(i) Consummation of Related Transactions. Agent shall have received
fully executed copies of the Acquisition Agreement and each of the other Related
Transactions Documents, each of which shall be in form and substance
satisfactory to Agent and its counsel. The Acquisition and the other Related
Transactions shall have been consummated in accordance with the terms of the
Acquisition Agreement and the other Related Transactions Documents.
(j) Equity Contributions. Third party investors shall have purchased
for $10,000,000 in cash common and preferred stock of Newco from Seller; and
management employees of Newco or the other Loan Parties shall have paid at least
$2,000,000 in cash for the purchase of common stock of Newco.
(k) Subordinated Note. Newco shall have issued the Subordinated Note
in the amount of $55,811,000 to Seller on terms and conditions satisfactory to
Newco and Agent. Agent shall have entered into a subordination agreement with
Seller on mutually satisfactory terms.
(l) Transfers of Assets. On the Closing Date and immediately after
the closing, each Store Guarantor shall have sold by bill of sale all of its
Inventory to Borrower and Borrower shall be the owner thereof free and clear of
all Liens other than Liens in favor of Agent and Seller.
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(m) Lease. As of the Closing Date and immediately after the closing,
Bermans shall have entered into a three year lease of the Distribution Center to
Borrower in form and substance satisfactory to Agent in its sole discretion or
shall have sold the Distribution Center to Borrower.
(n) Transaction Expenses. Aggregate costs and expenses incurred in
connection with the Related Transactions shall not exceed $5,000,000.
(o) Consolidation of Closing Stores. As of the Closing Date,
Inventory previously located at any Stores closed more than ten (10) days prior
to the Closing Date shall have been consolidated at Stores that remain open as
of the Closing Date.
(p) Compensation/Management Structure. Agent shall be reasonably
satisfied with Newco's compensation and equity incentive plans for management,
the management structure of Newco and its Subsidiaries, the composition of their
respective boards of directors and their board selection procedures.
(q) Consignment Agreement. Borrower and all of the Store Guarantors
shall have entered into and executed the Consignment Agreement in form and
substance satisfactory to Agent.
(r) Bank Accounts. The Concentration Account in the name of House of
Suede shall have been transferred to Borrower and Borrower shall have
established a funding Disbursement Account in its name.
(s) Borrower shall have been added as a named insured on all
liability and casualty insurance policies maintained by Credit Parties.
2.2 Further Conditions to Each Loan. It shall be a further condition
to the initial and each subsequent Loan and to the incurrence of the initial and
any subsequent Letter of Credit Obligations or Eligible Trade L/C Obligations
that the following statements shall be true on the date of each such advance or
incurrence, as the case may be:
(a) All of each Credit Party's representations and warranties
contained herein or in any of the other Loan Documents shall be true and correct
in all material respects as though made on and as of such date, except to the
extent that any such representation or warranty expressly relates to an earlier
date and except for changes therein expressly permitted or expressly
contemplated by this Agreement.
(b) No event or circumstance having a Material Adverse Effect shall
have occurred since the date hereof.
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(c) No Event of Default shall have occurred and be continuing or
would result from the making of any Loan (or the incurrence of any Letter of
Credit Obligations or Eligible Trade L/C Obligations).
(d) After giving effect to any Revolving Credit Advance or Swing Line
Advance, Net Borrowing Availability shall be greater than zero. After giving
effect to the incurrence of any Letter of Credit Obligations or Eligible Trade
L/C Obligations, L/C Availability shall be greater than zero.
(e) In the case of a Revolving Credit Advance, only, Borrower and the
Store Guarantors shall have cash and cash equivalents on hand or on deposit of
less than $7,000,000.
The request and acceptance by Borrower of the proceeds of any Loan or the
incurrence of any Letter of Credit Obligations or Eligible Trade L/C Obligations
shall be deemed to constitute, as of the date of such request or acceptance, (i)
a representation and warranty by Borrower that the conditions in this Section
2.2 have been satisfied and (ii) a reaffirmation by Borrower of the granting and
continuance of Agent's Liens, on behalf of itself and Lenders, pursuant to the
Collateral Documents.
3. REPRESENTATIONS AND WARRANTIES
To induce Lenders to make the Loans and to incur Letter of Credit
Obligations and Eligible Trade L/C Obligations, the Loan Parties, jointly and
severally, make the following representations and warranties to Agent and each
Lender, each and all of which shall survive the execution and delivery of this
Agreement.
3.1 Corporate Existence; Compliance with Law. Each Credit Party (a)
is a corporation duly organized, validly existing and in good standing under the
laws of its jurisdiction of incorporation; (b) is duly qualified to conduct
business and is in good standing in each other jurisdiction where its ownership
or lease of property or the conduct of its business requires such qualification
except where the failure to so qualify would not have a Material Adverse Effect;
(c) has the requisite corporate power and authority and the legal right to own,
pledge, mortgage or otherwise encumber and operate its properties, to lease the
property it operates under lease and to conduct its business as now, heretofore
and proposed to be conducted; (d) has all material licenses, permits, consents
or approvals from or by, and has made all filings with, and has given all
notices to, all Governmental Authorities having jurisdiction, to the extent
required for such ownership, operation and conduct; (e) is in compliance with
its charter and by-laws; and (f) is in compliance with all applicable provisions
of law to the extent required by Section 5.5.
3.2 Executive Offices; FEIN. As of the Closing Date, the current
location of each Credit Party's chief executive office and principal place of
business is set forth in Disclosure Schedule 3.2. In addition, the Disclosure
Schedule 3.2 lists the federal employer identification number of each Credit
Party.
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3.3 Corporate Power, Authorization, Enforceable Obligations. The
execution, delivery and performance by each Credit Party of the Loan Documents
to which it is a party and the creation of all Liens provided for therein: (a)
are within such Person's corporate power; (b) have been duly authorized by all
necessary or proper corporate and shareholder action; (c) do not contravene any
provision of such Person's charter or bylaws; (d) do not violate any law or
regulation, or any order or decree of any court or Governmental Authority; (e)
do not conflict with or result in the breach or termination of, constitute a
default under or accelerate any performance required by, any indenture,
mortgage, deed of trust, lease, agreement or other instrument to which such
Person is a party or by which such Person or any of its property is bound; (f)
do not result in the creation or imposition of any Lien upon any of the property
of such Person other than those in favor of Agent, on behalf of itself and
Lenders, pursuant to the Loan Documents; and (g) do not require the consent or
approval of any Governmental Authority or any other Person, except those
referred to in Section 2.1(c), all of which will have been duly obtained, made
or complied with prior to the Closing Date. On or prior to the Closing Date,
each of the Loan Documents shall have been duly executed and delivered by each
Credit Party thereto and each such Loan Document shall then constitute a legal,
valid and binding obligation of such Credit Party enforceable against it in
accordance with its terms.
3.4 Financial Statements and Projections. Except for the
Projections, all Financial Statements concerning Parent and its Subsidiaries
which are referenced below have been prepared in accordance with GAAP
consistently applied throughout the periods covered (except as disclosed therein
and except, with respect to unaudited Financial Statements, for the absence of
footnotes and normal year-end audit adjustments) and present fairly in all
material respects the financial condition of the Persons covered thereby as at
the dates thereof and the results of their operations for the periods then
ended.
(a) The following Financial Statements attached hereto as Disclosure
Schedule 3.4(A) have been delivered on the date hereof:
(i) The audited consolidated balance sheets at December 31, 1994
and 1995 and the related statements of income and cash flows of First
Intermediate Parent and its Subsidiaries for the Fiscal Years then
ended, certified by KPMG Peat Marwick, LLP.
(ii) The unaudited consolidated balance sheet at March 31, 1996
and the related consolidated statement of income and cash flows of
Parent and its Subsidiaries for the Fiscal Quarter then ended.
(b) Pro Forma. The Pro Forma delivered on the date hereof and
attached hereto as Disclosure Schedule 3.4(B) was prepared by Borrower giving
pro forma effect to the Related Transactions, was based on the unaudited
consolidated balance sheets of Parent and its Subsidiaries dated March 31, 1996,
and was prepared in accordance with GAAP, with only such adjustments thereto as
would be required in accordance with GAAP.
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(c) Projections. The Projections delivered on the date hereof and
attached hereto as Disclosure Schedule 3.4(C) have been prepared by Parent in
light of the past operations of its Subsidiaries' businesses, but including
future payments of known contingent liabilities, and reflect projections for the
three year period beginning on January 1, 1996 on a month by month basis. The
Projections are based upon estimates and assumptions stated therein, all of
which Parent believes to be reasonable and fair in light of current conditions
and current facts known to Parent and, as of the Closing Date, reflects Parent's
good faith and reasonable estimates of the future financial performance of
Parent and its Subsidiaries and of the other information projected therein for
the period set forth therein.
3.5 Material Adverse Effect. Between December 31, 1995 and the
Closing Date, (a) except for the Related Transactions, no Credit Party has
incurred any obligations, contingent or non-contingent liabilities, liabilities
for Charges, long-term leases or unusual forward or long-term commitments which
are not reflected in the Pro Forma and which, alone or in the aggregate, could
reasonably be expected to have a Material Adverse Effect, (b) except for the
Related Transaction Documents, no contract, lease or other agreement or
instrument has been entered into by any Credit Party or has become binding upon
any Credit Party's assets and no law or regulation applicable to any Credit
Party has been adopted which has had or could reasonably be expected to have a
Material Adverse Effect, and (c) no Credit Party is in default and to the best
of the Credit Parties' knowledge no third party is in default under any material
contract, lease or other agreement or instrument, which alone or in the
aggregate could reasonably be expected to have a Material Adverse Effect.
Since December 31, 1995, no event has occurred, which alone or
together with other events could reasonably be expected to have a Material
Adverse Effect.
3.6 Ownership of Property; Liens. (a) As of the Closing Date, the
real estate ("Real Estate") listed on Disclosure Schedule 3.6 constitutes all of
the real property owned, leased, subleased, or used by any Credit Party. Each
Credit Party owns good and marketable fee simple title to all of its owned real
estate, and valid and marketable leasehold interests in all of its leased Real
Estate, all as described on Disclosure Schedule 3.6. Disclosure Schedule 3.6
further describes any Real Estate with respect to which any Credit Party is a
lessor, sublessor or assignor as of the Closing Date. Each Credit Party also has
good and marketable title to, or valid leasehold interests in, all of its
personal properties and assets. As of the Closing Date, none of the properties
and assets of any Credit Party are subject to any Liens, except Permitted
Encumbrances. Disclosure Schedule 3.6 also describes any purchase options,
rights of first refusal or other similar contractual rights pertaining to any
Real Estate. As of the Closing Date, no portion of any Credit Party's Real
Estate has suffered any material damage by fire or other casualty loss or a
Release which has not heretofore been completely repaired and restored to its
original condition or otherwise remedied. As of the Closing Date, all permits
required to have been issued or appropriate to enable the Real Estate to be
lawfully occupied (other than municipal store licenses) and used for all of the
purposes for which they are currently occupied and used have been lawfully
issued and are in full force and effect.
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3.7 Labor Matters. As of the Closing Date (a) no strikes or other
material labor disputes against any Credit Party are pending or, to any Credit
Party's knowledge, threatened; (b) hours worked by and payment made to employees
of each Credit Party in all material respects comply with the Fair Labor
Standards Act and each other federal, state, local or foreign law applicable to
such matter; (c) all material payments due from any Credit Party for employee
health and welfare insurance have been paid or accrued as a liability on the
books of such Credit Party; (d) except as set forth in Disclosure Schedule 3.7,
no Credit Party is a party to or bound by any collective bargaining agreement,
management agreement, consulting agreement or any employment agreement providing
for payments in excess of $100,000 annually (and true and complete copies of any
agreements described on Disclosure Schedule 3.7 have been delivered to Agent);
(e) there is no organizing activity involving any Credit Party pending or, to
any Credit Party's knowledge, threatened by any labor union or group of
employees; (f) there are no representation proceedings pending or, to any Credit
Party's knowledge, threatened with the National Labor Relations Board, and no
labor organization or group of employees of any Credit Party has made a pending
demand for recognition; and (g) except as set forth in Disclosure Schedule 3.7,
there are no complaints or charges against any Credit Party pending or
threatened to be filed with any Governmental Authority or arbitrator based on,
arising out of, in connection with, or otherwise relating to the employment or
termination of employment by any Credit Party of any employee, other than
routine, non-material claims by individual employees or former employees.
3.8 Ventures, Subsidiaries and Affiliates; Outstanding Stock and
Indebtedness. Except as set forth in Disclosure Schedule 3.8, no Credit Party
has any Subsidiaries, is engaged in any joint venture or partnership with any
other Person, or is an Affiliate of any other Person. All of the issued and
outstanding Stock of each Credit Party is owned by each of the stockholders and
in the amounts set forth on Disclosure Schedule 3.8. There are no outstanding
rights to purchase, options, warrants or similar rights or agreements pursuant
to which any Credit Party may be required to issue, sell, repurchase or redeem
any of its Stock or other equity securities or any Stock or other equity
securities of its Subsidiaries. All outstanding Indebtedness of each Credit
Party as of the Closing Date is described in Section 6.3 (including Disclosure
Schedule 6.3).
3.9 Government Regulation. No Credit Party is an "investment
company" or an "affiliated person" of, or "promoter" or "principal underwriter"
for, an "investment company," as such terms are defined in the Investment
Company Act of 1940 as amended. No Credit Party is subject to regulation under
the Public Utility Holding Company Act of 1935, the Federal Power Act, or any
other federal or state statute that restricts or limits its ability to incur
Indebtedness or to perform its obligations hereunder. The making of the Loans by
Lenders to Borrower, the incurrence of the Letter of Credit Obligations and the
Eligible Trade L/C Obligations on behalf of Borrower, the application of the
proceeds thereof and repayment thereof and the consummation of the Related
Transactions will not violate any provision of any such statute or any rule,
regulation or order issued by the Securities and Exchange Commission.
3.10 Margin Regulations. No Credit Party is engaged, nor will it
engage, principally or as one of its important activities, in the business of
extending credit for the purpose
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of "purchasing" or "carrying" any "margin security" as such terms are defined in
Regulation U or G of the Board of Governors of the Federal Reserve System (the
"Federal Reserve Board") as now and from time to time hereafter in effect (such
securities being referred to herein as "Margin Stock"). No Credit Party owns any
Margin Stock, and none of the proceeds of the Loans or other extensions of
credit under this Agreement will be used, directly or indirectly, for the
purpose of purchasing or carrying any Margin Stock, for the purpose of reducing
or retiring any Indebtedness which was originally incurred to purchase or carry
any Margin Stock or for any other purpose which might cause any of the Loans or
other extensions of credit under this Agreement to be considered a "purpose
credit" within the meaning of Regulation G, T, U or X of the Federal Reserve
Board. No Credit Party will take or permit to be taken any action which might
cause any Loan Document to violate any regulation of the Federal Reserve Board.
3.11 Taxes. All tax returns, reports and statements, including, but
not limited to, information returns, required by any Governmental Authority to
be filed by any Credit Party have been filed with the appropriate Governmental
Authority and all Charges have been paid prior to the date on which any fine,
penalty, interest or late charge may be added thereto for nonpayment thereof (or
any such fine, penalty, interest, late charge or loss has been paid), excluding
Charges or other amounts being contested in accordance with Section 5.2(b) or
for which Seller is solely liable. Proper and accurate amounts have been
withheld by each Credit Party from its respective employees for all periods in
full and complete compliance with all applicable federal, state, local and
foreign law and such withholdings have been timely paid to the respective
Governmental Authorities. Disclosure Schedule 3.11 sets forth as of the Closing
Date those taxable years for which any Credit Party's tax returns are currently
being audited by the IRS or any other applicable Governmental Authority and any
assessments or threatened assessments in connection with such audit, or
otherwise currently outstanding. Except as described on Disclosure Schedule
3.11, no Credit Party has executed or filed with the IRS or any other
Governmental Authority any agreement or other document extending, or having the
effect of extending, the period for assessment or collection of any Charges.
None of the Credit Parties and their respective predecessors are liable for any
Charges: (a) under any agreement (including, without limitation, any tax sharing
agreements) or (b) to the best of each Credit Party's knowledge, as a
transferee. As of the Closing Date, no Credit Party has agreed or been requested
to make any adjustment under IRC Section 481(a), by reason of a change in
accounting method or otherwise, which would have a Material Adverse Effect.
3.12 ERISA. (a) Disclosure Schedule 3.12 lists and separately
identifies all Title IV Plans, Multiemployer Plans, ESOPs and Retiree Welfare
Plans. Copies of all such listed Plans, together with a copy of the latest form
5500 for each such Plan, have been delivered to Agent. Each Qualified Plan has
been determined by the IRS to qualify under Section 401 of the IRC (or will have
been so determined within the applicable remedial amendment period), and the
trusts created thereunder have been (or will be) determined to be exempt from
tax under the provisions of Section 501 of the IRC, and nothing has occurred
which would cause the loss of such qualification or tax-exempt status. Each Plan
is in compliance in all material respects with the applicable provisions of
ERISA and the IRC, including the filing of reports required under the IRC or
ERISA. No Credit Party or ERISA Affiliate has failed to make any material
contribution
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or pay any material amount due as required by either Section 412 of the IRC or
Section 302 of ERISA or the terms of any such Plan. No Credit Party or ERISA
Affiliate has engaged in a prohibited transaction, as defined in Section 4975 of
the IRC, in connection with any Plan, which would subject any Credit Party to a
material tax on prohibited transactions imposed by Section 4975 of the IRC.
(b) Except as set forth in Disclosure Schedule 3.12: (i) no Title IV
Plan has any Unfunded Pension Liability; (ii) no material ERISA Event or event
described in Section 4062(e) of ERISA with respect to any Title IV Plan has
occurred or is reasonably expected to occur; (iii) there are no pending, or to
the knowledge of any Credit Party, threatened claims (other than claims for
benefits in the normal course), sanctions, actions or lawsuits, asserted or
instituted against any Plan or any Person as fiduciary or sponsor of any Plan;
and (iv) no Credit Party or ERISA Affiliate has incurred or reasonably expects
to incur any material liability as a result of a complete or partial withdrawal
from a Multiemployer Plan.
3.13 No Litigation. No action, claim or proceeding is now pending or,
to the knowledge of any Credit Party, threatened against any Credit Party,
before any court, board, commission, agency or instrumentality of any federal,
state, local or foreign government or of any agency or subdivision thereof, or
before any arbitrator or panel of arbitrators (collectively, "Litigation"), (a)
which challenges any Credit Party's right or power to enter into or perform any
of its obligations under the Loan Documents to which it is a party, or the
validity or enforceability of any Loan Document or any action taken thereunder,
or (b) which is reasonably likely to be determined adversely to any Credit Party
and which, if so determined, would have a Material Adverse Effect. Except as set
forth on Disclosure Schedule 3.13, as of the Closing Date there is no Litigation
pending or threatened which seeks damages in excess of $100,000 or injunctive
relief.
3.14 Brokers. No broker or finder acting on behalf of any Credit
Party brought about the obtaining, making or closing of the Loans or the
transactions contemplated by the Related Transactions Documents, except CS First
Boston and Crown Financial Corporation. No Credit Party has any obligation to
any Person in respect of any finder's or brokerage fees in connection therewith.
3.15 Intellectual Property. As of the Closing Date, each Credit Party
owns or has rights to use all Intellectual Property necessary to continue to
conduct its business as now or heretofore conducted by it or proposed to be
conducted by it, and each Patent, Trademark, Copyright and License is listed,
together with application or registration numbers, as applicable, in Disclosure
Schedule 3.15 hereto. Each Credit Party conducts and will continue to conduct
its business and affairs without infringement of or interference with any
Intellectual Property of any other Person.
3.16 Full Disclosure. No information contained in this Agreement, any
of the other Loan Documents, any Projections, Financial Statements or Collateral
Reports or other reports from time to time delivered hereunder or any written
statement furnished by any Material
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Credit Party with respect to any Credit Party to Agent or any Lender pursuant to
the terms of this Agreement contains any untrue statement of a material fact or
omits or will omit to state a material fact necessary to make the statements
contained herein or therein not misleading in light of the circumstances under
which they were made. The Liens granted to Agent, on behalf of itself and
Lenders, pursuant to the Collateral Documents will at all times be fully
perfected first priority Liens in and to the Collateral described therein,
subject only to Permitted Encumbrances with respect to the Collateral.
3.17 Hazardous Materials. (a) Except as set forth in Disclosure
Schedule 3.17, as of the Closing Date, the Real Estate is free of contamination
from any Hazardous Material. In addition, Disclosure Schedule 3.17 discloses
material environmental liabilities of any Credit Party (i) that could result in
Environmental Liabilities and Costs, or (ii) associated with the Real Estate. No
Credit Party has caused or suffered to occur any Release with respect to any
Hazardous Material at, under, above or upon any of its Real Estate. No Credit
Party is involved in operations that are likely to result in the imposition of
any Lien on its assets or any material liability under any Environmental Law,
and no Credit Party has permitted any tenant or occupant of such premises to
engage in any such operations. The Credit Parties have provided to Agent copies
of all existing environmental reports, reviews and audits and all written
information pertaining to actual or potential Environmental Liabilities and
Costs, in each case relating to any Credit Party.
(b) Each Credit Party hereby acknowledges and agrees that Agent (i)
is not now, and has not ever been, in control of any of the Real Estate or any
Credit Party's affairs, and (ii) does not have the capacity through the
provisions of the Loan Documents or otherwise to influence any Credit Party's
conduct with respect to the ownership, operation or management of any of its
Real Estate.
3.18 Insurance. Disclosure Schedule 3.18 lists all insurance policies
of any nature maintained, as of the Closing Date, for current occurrences by
each Credit Party, as well as a summary of the terms of each such policy.
3.19 Deposit and Disbursement Accounts. Disclosure Schedule 3.19
lists all banks and other financial institutions at which any Credit Party
maintains deposits and/or other accounts as of the Closing Date, including any
Disbursement Accounts, and such Schedule correctly identifies the name, address
and telephone number of each depository, the name in which the account is held,
a description of the purpose of the account, and the complete account number.
3.20 Government Contracts. Except as set forth in Disclosure Schedule
3.20, as of the Closing Date, no Credit Party is a party to any contract or
agreement with the federal government and no Credit Party's Accounts are subject
to the Federal Assignment of Claims Act (31 U.S.C. Section 3727).
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3.21 Landlords and Trade Relations. As of the Closing Date, there
exists no actual or threatened termination or cancellation of, or any material
adverse modification or change in (a) the Store leases between any Landlord and
any Store Guarantor as to any Store with an annual positive Contribution greater
than $50,000 or (b) the business relationship of any Credit Party with any
supplier material to its operations.
3.22 Agreements and Other Documents. As of the Closing Date, each
Credit Party has provided to Agent or its counsel, on behalf of Lenders,
accurate and complete copies (or summaries) of all of the following agreements
or documents to which it is subject and each of which are listed on Disclosure
Schedule 3.22: (a) manufacturing agreements or purchase agreements not
terminable by such Credit Party within ninety (90) days following written notice
issued by such Credit Party and which provide for payments in excess of $250,000
per year; (b) any lease of Equipment having a remaining term of one year or
longer and requiring aggregate rental and other payments in excess of $100,000
per annum; (c) material licenses and permits necessary for the conduct of such
Credit Party's business (other than municipal Store licenses); (d) instruments
or documents evidencing Indebtedness of such Credit Party and any security
interest granted by such Credit Party with respect thereto; and (e) instruments
and agreements evidencing the issuance of any equity securities, warrants,
rights or options to purchase equity securities of such Credit Party other than
us delivered in accordance with Schedule F.
3.23 Solvency. Both before and after giving effect to (a) the
Revolving Loan, Eligible Trade L/C Obligations and Letter of Credit Obligations
to be made or incurred on the Closing Date, (b) the disbursement of the proceeds
of such Loans pursuant to the instructions of Borrower, (c) the consummation of
the Related Transactions and (d) the payment and accrual of all transaction
costs in connection with the foregoing, each Material Credit Party is Solvent.
3.24 Acquisition Agreement As of the Closing Date, Borrower has
delivered to Agent a complete and correct copy of the Acquisition Agreement
(including all schedules, exhibits, amendments, supplements, modifications,
assignments and all other documents delivered pursuant thereto or in connection
therewith). No Credit Party and no other Person party thereto is in default in
the performance or compliance with any provisions thereof. The Acquisition
Agreement complies with, and the Acquisition has been consummated in accordance
with, all applicable laws. The Acquisition Agreement is in full force and effect
as of the Closing Date, and has not been terminated, rescinded or withdrawn. All
requisite approvals by Governmental Authorities having jurisdiction over Seller,
any Credit Party and other Persons referenced therein, with respect to the
transactions contemplated by the Acquisition Agreement, have been obtained, and
no such approvals impose any conditions to the consummation of the transactions
contemplated by the Acquisition Agreement or to the conduct by any Credit Party
of its business thereafter. To the best of each Credit Party's knowledge, none
of the Seller's representations or warranties in the Acquisition Agreement
contain any untrue statement of a material fact or omit any fact necessary to
make the facts therein not misleading. Each of the representations and
warranties given by each applicable Credit Party in the Acquisition Agreement is
true and correct in all material respects. Notwithstanding anything contained in
the Acquisition Agreement to the contrary, such representations and warranties
of the Credit Parties are incorporated into this
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Agreement by this Section 3.24 and shall, solely for purposes of this Agreement
and the benefit of the Agent and the Lenders, survive the consummation of the
Acquisition.
3.25 Subordinated Debt. As of the Closing Date, Borrower has
delivered to Agent a complete and correct copy of the Subordinated Note
(including all schedules, exhibits, amendments, supplements, modifications,
assignments and all other documents delivered pursuant thereto or in connection
therewith). Newco has the corporate power and authority to incur the
Indebtedness evidenced by the Subordinated Note. The subordination provisions
applicable to the Subordinated Note are enforceable against the holders of the
Subordinated Note by the Agent and Lenders. All Obligations, including the
Obligations to pay principal of and interest on the Loans and to reimburse
Eligible Trade L/C Obligations and Letter of Credit Obligations, constitute
senior Indebtedness entitled to the benefits of the subordination provisions
contained in the Subordinated Notes. The principal of and interest on the Notes,
all Eligible Trade L/C Obligations, Letter of Credit Obligations and all other
Obligations will constitute "senior debt" as that or any similar term is or may
be used in any other instrument evidencing or applicable to any other
Subordinated Debt. Borrower acknowledges that the Agent and each Lender are
entering into this Agreement and are extending the Commitments in reliance upon
the subordination provisions applicable to the Subordinated Note and this
Section 3.25.
4. FINANCIAL STATEMENTS AND INFORMATION
4.1 Reports and Notices. (a) Borrower hereby agrees that from and
after the Closing Date and until the Termination Date, it shall deliver or cause
to be delivered to Agent and/or Lenders, as required, Financial Statements,
notices, Projections and other information at the times, to the Persons and in
the manner set forth in Schedule G.
(b) Borrower hereby agrees that from and after the Closing Date and
until the Termination Date, it shall deliver or cause to be delivered to Agent
and/or Lenders, as required, the various Collateral Reports (including, without
limitation, Borrowing Base Certificates in the form of Exhibit 4.1(b)) at the
times, to the Persons and in the manner set forth in Schedule H.
4.2 Communication with Accountants. Parent authorizes Agent to
communicate directly with its independent certified public accountants,
including KPMG Peat Marwick, LLP and authorizes and shall instruct those
accountants and advisors to disclose and make available to Agent any and all
Financial Statements and other supporting financial documents, schedules and
information relating to any Credit Party (including, without limitation, copies
of any issued management letters) with respect to the business, financial
condition and other affairs of any Credit Party. On or before the Closing Date,
the Credit Parties shall obtain a letter from such accountants, on which the
Agent shall be designated as a recipient, acknowledging that Lenders may rely
upon such certification.
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5. AFFIRMATIVE COVENANTS
Each Loan Party jointly and severally agrees that it shall and shall
cause all Credit Parties from and after the date hereof and until the
Termination Date to do the following:
5.1 Maintenance of Existence and Conduct of Business. Each Credit
Party shall: (a) do or cause to be done all things necessary to preserve and
keep in full force and effect its corporate existence and its rights and
franchises (except for mergers, sales, dispositions and other transactions
permitted in Section 6 hereof and liquidations of Store Guarantors that are not
Material Credit Parties following such dispositions and transactions); (b)
continue to conduct its business substantially as now conducted or as otherwise
permitted hereunder; (c) except as permitted in Section 6.8 hereof, at all times
maintain, preserve and protect all of its assets and properties used or useful
in the conduct of its business, and keep the same in good repair, working order
and condition (taking into consideration ordinary wear and tear) and from time
to time make, or cause to be made, all necessary or appropriate repairs,
replacements and improvements thereto consistent with industry practices; and
(d) transact business only in such corporate and trade names as are set forth in
Disclosure Schedule 5.1 and as otherwise disclosed to Agent in accordance with
the Loan Documents.
5.2 Payment of Obligations. (a) Subject to Section 5.2(b), each
Credit Party shall pay and discharge or cause to be paid and discharged promptly
all Charges payable by it, including (A) Charges imposed upon it, its income and
profits, or any of its property (real, personal or mixed) and all Charges with
respect to tax, social security and unemployment withholding with respect to its
employees, and (B) lawful claims for labor, materials, supplies and services or
otherwise, before any thereof shall become past due.
(b) Each Credit Party may in good faith contest, by appropriate
proceedings, the validity or amount of any Charges or claims described in
Section 5.2(a); provided, that (i) the imposition of such Charge does not
otherwise constitute an Event of Default under Section 8.1 hereof, (ii) adequate
reserves with respect to such contest are maintained on the books of such Credit
Party, in accordance with GAAP, (iii) such contest is maintained and prosecuted
continuously and with diligence, (iv) none of the Collateral becomes subject to
forfeiture or loss as a result of such contest, (v) no Lien shall be filed or
imposed to secure payment of such Charges or claims which would, with the
passage of time or otherwise, have priority over Agent's Liens with respect to
the Collateral, (vi) such Credit Party shall promptly pay or discharge such
contested Charges or claims and all additional charges, interest, penalties and
expenses, if any, and shall deliver to Agent evidence acceptable to Agent of
such compliance, payment or discharge, if such contest is terminated or
discontinued adversely to such Credit Party or the conditions set forth in this
Section 5.2(b) are no longer met, and (vii) Agent has not advised Borrower in
writing that Agent reasonably believes that nonpayment or nondischarge thereof
could have or result in a Material Adverse Effect.
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5.3 Books and Records. Each Credit Party shall keep adequate books
and records with respect to its business activities in which proper entries,
reflecting all financial transactions, are made in accordance with GAAP and on a
basis consistent with the Financial Statements attached as Disclosure Schedule
3.4(A).
5.4 Insurance; Damage to or Destruction of Collateral. (a) The Credit
Parties shall, at their sole cost and expense, maintain the policies of
insurance described on Disclosure Schedule 3.18 or substantially equivalent
coverage in form and with insurers reasonably recognized as adequate by Agent.
If Borrower at any time or times hereafter shall fail to obtain or maintain any
of the policies of insurance required above or to pay all premiums relating
thereto, Agent may at any time or times thereafter obtain and maintain such
policies of insurance and pay such premiums and take any other action with
respect thereto which Agent deems reasonably advisable. Agent shall have no
obligation to obtain insurance for any Credit Party or pay any premiums
therefor. By doing so, Agent shall not be deemed to have waived any Default or
Event of Default arising from any Credit Party's failure to maintain such
insurance or pay any premiums therefor. All sums so disbursed, including
attorneys' fees, court costs and other charges related thereto, shall be payable
on demand by Borrower to Agent and shall be additional Obligations hereunder
secured by the Collateral.
(b) Agent reserves the right at any time upon any material change in
any Credit Party's risk profile (including, without limitation, any change in
the product mix maintained by any Credit Party or any laws affecting the
potential liability of such Credit Party) to require additional forms and limits
of insurance to, in Agent's opinion, adequately protect both Agent's and
Lender's interests in all or any portion of the Collateral and to ensure that
each Credit Party is protected by insurance in amounts and with coverage
customary for its industry. If requested by Agent, each Credit Party shall
deliver to Agent from time to time a report of a reputable insurance broker,
satisfactory to Agent, with respect to its insurance policies.
(c) Borrower shall deliver or cause to be delivered to Agent, in form
and substance satisfactory to Agent, endorsements to (i) all "All Risk" and
business interruption insurance naming Agent, on behalf of itself and Lenders,
as loss payee, and (ii) all general liability and other liability policies
naming Agent, on behalf of itself and Lenders, as additional insured. Each Loan
Party irrevocably makes, constitutes and appoints Agent (and all officers,
employees or agents designated by Agent) as its true and lawful agent and
attorney-in-fact for the purpose of making, settling and adjusting claims under
such "All Risk" policies of insurance, endorsing the name of each such Credit
Party on any check or other item of payment for the proceeds of such "All Risk"
policies of insurance and for making all determinations and decisions with
respect to such "All Risk" policies of insurance; provided that so long as no
Event of Default shall have occurred and be continuing, Borrower shall have the
right to participate in any such settlements and adjustments. The Credit Parties
that are signatories hereto shall promptly notify Agent of any loss, damage, or
destruction to the Collateral in the amount of $250,000 or more, whether or not
covered by insurance. Agent is hereby authorized to collect all insurance
proceeds relating to the Collateral. After deducting from such proceeds the
expenses, if any, incurred by Agent in the collection or handling thereof, Agent
may, at its option, apply such proceeds to the reduction of
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the Obligations in accordance with Section 1.3(d), or permit or require Borrower
to use such money, or any part thereof, to replace the Collateral in a diligent
and expeditious manner. Notwithstanding the foregoing, if the casualty giving
rise to such insurance proceeds would not reasonably be expected to have a
Material Adverse Effect and such insurance proceeds do not exceed $1,000,000 in
the aggregate, Agent shall permit Borrower to replace the Collateral so long as
no Event of Default shall have occurred and be continuing at the time of any
requested release of funds; provided that, if Borrower shall not have completed
the replacement of the Collateral within 60 days of such casualty, Agent may
apply such insurance proceeds to the Obligations in accordance with Section
1.3(d). Except as otherwise provided in this Section, all insurance proceeds
which are to be made available to Borrower to replace the Collateral shall first
be applied by Agent in accordance with Section 1.3(d) and any excess shall be
held by Borrower in a cash collateral account (which application in accordance
with Section 1.3(d) shall not result in a permanent reduction of the
Commitments) and upon such application in accordance with Section 1.3(d), Agent
shall establish a Reserve against the Borrowing Base in an amount equal to the
amount of such proceeds so applied. Thereafter, such funds shall be made
available to Borrower to provide funds to replace the Collateral as follows: (i)
Borrower shall request a Swing Line Advance or Revolving Credit Advance be made
to Borrower in the amount requested to be released; (ii) so long as the
conditions set forth in Section 2.2 have been met, Agent shall make such Swing
Line Advance or Revolving Credit Advance; and (iii) the Reserve established with
respect to such insurance proceeds shall be reduced by the amount of such Swing
Line Advance or Revolving Credit Advance.
5.5 Compliance with Laws. Each Credit Party shall comply with all
federal, state and local laws and regulations applicable to it, including those
relating to ERISA, customs import and export laws and labor matters and
Environmental Laws, except to the extent that the failure to so comply would not
have a Material Adverse Effect.
5.6 Supplemental Disclosure. From time to time as may be requested by
Agent, but in any event at least on each anniversary of the Closing Date, the
Credit Parties shall supplement each Disclosure Schedule hereto, or any
representation herein or in any other Loan Document, with respect to any matter
hereafter arising which, if existing or occurring at the date of this Agreement,
would have been required to be set forth or described in such Disclosure
Schedule or as an exception to such representation or which is necessary to
correct any information in such Disclosure Schedule or representation which has
been rendered inaccurate thereby (and, in the case of any supplements to any
Disclosure Schedule, such Disclosure Schedule shall be appropriately marked to
show the changes made therein); provided, however, that Disclosure Schedules
pertaining to representations and warranties that relate only to the Closing
Date need not be updated; provided, further, that no such supplement to any such
Disclosure Schedule or representation shall be or be deemed a waiver of any
Default or Event of Default resulting from the matters disclosed therein, except
as consented to by Agent and Requisite Lenders in writing.
5.7 Employee Plans. Each Credit Party shall promptly notify Agent of
(a) any violation of ERISA or the IRC with respect to any Plan which results in
a material increase in any
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Credit Party's obligations with respect thereto; (b) the occurrence or likely
occurrence of an ERISA Event resulting in a material increase in Borrower's
fixed liabilities under ERISA; (c) the filing for a funding waiver under Section
412 of the IRC with respect to any Plan; (d) the occurrence of an "accumulated
funding deficiency" under Section 412 of the IRC with respect to any Plan; (e) a
material increase in the Unfunded Pension Liability of any Title IV Plan or a
material increase in the aggregate Unfunded Pension Liability of all Title IV
Plans, but only taking into account Title IV Plans with Unfunded Pension
Liability at the time of reference; and (f) a material increase in any Credit
Party's obligations under any Retiree Welfare Plan. For purposes of clauses (e)
and (f) above and Sections 6.9(d) and (e), a "material increase" shall mean the
lesser of (i) 50% or (ii) $500,000, in each case measured from the Closing Date.
In addition, the Credit Parties shall promptly furnish to the Agent copies of
the annual form 5500 filed for each Title IV Plan.
5.8 Environmental Matters. Each Credit Party shall (a) notify Agent
promptly after such Credit Party becomes aware of any Release upon or at any
Real Estate which is reasonably likely to result in Environmental Liabilities
and Costs in excess of $100,000, and (b) promptly forward to Agent a copy of any
order, notice, permit, application, or any communication or report received by
such Credit Party in connection with any such Release, its compliance with
Environmental Laws and Environmental Permits or any other matter relating to the
Environmental Laws that may affect such premises or such Credit Party, in each
case whether or not the Environmental Protection Agency, any other federal
agency or any state, local or foreign environmental agency has taken or
threatened any action in connection with any such Release or other matter. So
long as any Event of Default shall have occurred and be continuing, Borrower
shall permit Agent or its representatives to have access to all premises owned
or occupied by it for the purpose of conducting such environmental audits and
testing as Agent deems appropriate, including phase 2 environmental testing.
Borrower shall reimburse Agent for the costs of such audits and tests and the
same will constitute a part of the Obligations secured hereunder.
5.9 Landlords' Agreements, and Bailee Letters. Borrower shall obtain
a landlord's agreement, or bailee letter, from Bermans (if Borrower has not
acquired the Distribution Center from Bermans) with respect to the Distribution
Center and from each other lessor of a warehouse or bailee in possession of
collateral property or with respect to any other warehouse where Collateral is
located. After the Closing Date, no warehouse space shall be leased or acquired
by any Credit Party, unless and until a landlord agreement or bailee letter, as
appropriate, shall first have been obtained with respect to such location.
Although the Credit Parties are not required to obtain landlord waivers as to
Store locations, if an Event of Default shall have occurred and be continuing,
Agent may impose a Reserve against Borrowing Availability equal to one month's
rent as to all Store locations and if any Store Guarantor shall default in the
payment of rent under its Store Lease, Agent may impose a Reserve against
Borrowing Availability in the amount of those defaulted rent obligations (which
may exceed one month's rent). All such landlord and bailee letters shall be in
form and substance satisfactory to Agent. Each Credit Party shall timely and
fully pay and perform its obligations under all leases
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and other agreements with respect to each leased location or public warehouse
where any Collateral is or may be located.
5.10 Ownership of Assets. So long as this Agreement shall remain in
effect, Borrower shall own all Inventory held for sale by each Store Guarantor.
No Store Guarantor shall execute any agreement or take any action inconsistent
with the foregoing.
5.11 Additional Pledges. Within one-hundred eighty (180) days after
the Closing Date, the Credit Parties signatory hereto shall pledge or cause to
be pledged to Agent for the benefit of Lenders the Stock of the Store Guarantors
not pledged to Agent as of the Closing Date, on terms reasonably satisfactory to
Agent.
6. NEGATIVE COVENANTS
The Loan Parties jointly and severally covenant and agree that without
the prior written consent of Agent and the Requisite Lenders, from and after the
date hereof until the Termination Date:
6.1 Mergers, Subsidiaries, Etc. No Credit Party shall directly or
indirectly, by operation of law or otherwise, (a) form or acquire any
Subsidiary, or (b) merge with, consolidate with, acquire all or substantially
all of the assets or capital stock of, or otherwise combine with or acquire, any
Person, except (i) one or more Store Guarantors may be merged with any other
Store Guarantor or Parent so long as Parent is the survivor in any merger
involving Parent; (ii) cash and financial assets may be transferred among the
Loan Parties; provided that such financial assets shall be subject to Control
Letters and cash shall be subject to blocked account agreements in favor of
Agent; (iii) the Stock or fixed assets, Trademarks and Trademark Licenses of
Store Guarantors may be transferred to other Store Guarantors or to Parent,
Borrower or Newco; (iv) the Credit Parties may form new wholly-owned domestic
Subsidiaries to operate new Stores; provided that (x) the aggregate initial cash
investment in each new domestic Subsidiary in the form of equity shall not
exceed $100,000 and (y) the Credit Parties and each new domestic Subsidiary
shall execute and deliver to Agent forms of the Loan Documents executed by or
with respect to the Loan Parties as of the Closing Date; and (v) the Credit
Parties may form new Foreign Subsidiaries after the Closing Date provided that
the aggregate equity contributions with respect to all such Foreign Subsidiaries
shall not exceed $250,000.
6.2 Investments; Loans and Advances. Except as otherwise expressly
permitted by this Section 6, no Credit Party shall make any investment in, or
make or accrue loans or advances of money to, any Person, through the direct or
indirect lending of money, holding of securities or otherwise, except that (a)
First Intermediate Parent, Second Intermediate Parent and Borrower may, subject
to Control Letters satisfactory to Agent (in the case of investments
constituting "financial assets" purchased through or held by a "securities
intermediary" as such terms are defined in the Code), make investments in (i)
marketable direct obligations issued or unconditionally guaranteed by the United
States of America or any agency thereof maturing within one year from the date
of acquisition thereof, (ii) commercial paper maturing no more than
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one year from the date of creation thereof and having an investment rating of
A-2 or P-2 or better from either Standard & Poor's Corporation or Moody's
Investors Service, Inc., (iii) time deposits, demand deposits and certificates
of deposit, maturing no more than one year from the date of creation thereof,
issued by commercial banks incorporated under the laws of the United States of
America, each having combined capital, surplus and undivided profits of not less
than $300,000,000 and having a senior secured rating of "A" or better by a
nationally recognized rating agency (an "A Bank"), (iv) time deposits, maturing
no more than 30 days from the date of creation thereof with an A Bank; and (v)
overnight repurchase obligations issued by an A Bank; and (b) each Credit Party
may (i) maintain its existing investments in its Subsidiaries as of the Closing
Date, (ii) make unlimited investments in Borrower, (iii) make investments in new
Subsidiaries in accordance with Section 6.1, (iv) upon prior written notice to
Agent, make equity investments in Store Guarantors necessary to maintain them as
Solvent in an aggregate amount not to exceed $1,000,000 and (v) make other
investments not exceeding $100,000 in the aggregate at any time outstanding. If
any bank or issuer refuses to enter into a Control Letter with Agent regarding
such investments, Borrower shall deposit the same with a brokerage or other
intermediary that will enter into a Control Letter agreement.
6.3 Indebtedness. No Credit Party shall create, incur, assume or
permit to exist any Indebtedness, except (a) Indebtedness secured by Permitted
Encumbrances, (b) the Loans and the other Obligations, (c) reimbursement
obligations owed by Borrower to the L/C Issuer with respect to Letters of Credit
and Eligible Trade L/Cs, (d) the Subordinated Note, (e) deferred taxes, (f)
unfunded pension fund and other employee benefit plan obligations and
liabilities to the extent they are permitted to remain unfunded under applicable
law, (g) existing Indebtedness set forth in Disclosure Schedule 6.3 and
refinancings thereof or amendments or modifications thereto on terms and
conditions no less favorable to any Credit Party, Agent or any Lender, as
determined by Agent, than the terms of the Indebtedness being refinanced,
amended or modified, (h) intercompany loans among the Loan Parties for operating
expenses incurred in the ordinary course of business, (i) intercompany loans by
Borrower, First Intermediate Parent or Second Intermediate Parent in the
ordinary course of business, to Store Guarantors and intercompany loans by Store
Guarantors to Borrower, First Intermediate Parent or Second Intermediate Parent
in the ordinary course of business, (j) intercompany loans to Borrower's three
Foreign Subsidiaries existing as of the Closing Date not to exceed $500,000 in
the aggregate and intercompany loans to Foreign Subsidiaries formed after the
Closing Date not to exceed $1,250,000 in the aggregate; provided that at the
time any such intercompany loan is made to a Foreign Subsidiary no Event of
Default shall have occurred and be continuing or would result after giving
effect thereto and Borrower shall have Borrowing Availability of at least
$1,000,000 after giving effect thereto, and (k) an unsecured $25,000 overdraft
line from Bank of Boston for the Foreign Subsidiaries.
6.4 Employee Loans and Affiliate Transactions.
(a) No Credit Party shall enter into or be a party to any transaction
with any other Credit Party or any Affiliate thereof except in the ordinary
course of and pursuant to the reasonable requirements of such Credit Party's
business and upon fair and reasonable terms that
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are no less favorable to such Credit Party than would be obtained in a
comparable arm's length transaction with a Person not an Affiliate of such
Credit Party, except intercompany loans permitted in clauses (h) and (i) of
Section 6.3 and the Consignment Agreement. In addition, if any such transaction
or series of related transactions involves payments in excess of $1,000,000 in
the aggregate, the terms of these transactions must be disclosed in advance to
Agent (which disclosure may be in the form of a request for issuance of an
Eligible Trade L/C). All such transactions existing as of the date hereof are
described on Disclosure Schedule 6.4(a).
(b) No Credit Party shall enter into any lending or borrowing
transaction with any employees of any Credit Party, except loans to their
respective employees on an arm's-length basis in the ordinary course of business
consistent with past practices for travel expenses, relocation costs and similar
purposes up to a maximum of $100,000 to any employee and up to a maximum of
$500,000 in the aggregate at any one time outstanding.
(c) No Credit Party shall increase the aggregate compensation of the
ten most highly compensated employees of the Credit Parties, taken as a whole
(excluding the Credit Parties' target bonus program), by more than 10% per annum
in excess of the current compensation level for those employees (expressed as an
aggregate dollar amount) as set forth in Disclosure Schedule 6.4(c).
6.5 Capital Structure and Business. No Credit Party shall (a) make
any changes in any of its business objectives, purposes or operations which
could in any way adversely affect the repayment of the Loans or any of the other
Obligations or could have or result in a Material Adverse Effect, (b) make any
change in its capital structure as described on Disclosure Schedule 3.8
(including the issuance of any shares of Stock, warrants or other securities
convertible into Stock or any revision of the terms of its outstanding Stock),
or (c) amend its charter or bylaws in a manner which would adversely affect the
Agent or Lenders or such Credit Party's duty or ability to repay the
Obligations. No Credit Party shall engage in any business other than the
businesses currently engaged in by it or businesses reasonably related thereto.
6.6 Guaranteed Indebtedness. No Credit Party shall incur any
Guaranteed Indebtedness except (a) by endorsement of instruments or items of
payment for deposit to the general account of any Credit Party, (b) for
Guaranteed Indebtedness incurred for the benefit of any other Credit Party
consisting of payments under the Store leases or if the primary obligation is
otherwise expressly permitted by this Agreement, and (c) a guaranty of the
$25,000 Bank of Boston overdraft line for the Foreign Subsidiaries.
6.7 Liens. No Credit Party shall create, incur, assume or permit to
exist any Lien on or with respect to its Accounts or any of its other properties
or assets (whether now owned or hereafter acquired) except for Permitted
Encumbrances and those existing Liens set forth on Schedule 6.7. In addition, no
Credit Party shall become a party to any agreement, note, indenture or
instrument, or take any other action, which would prohibit the creation of a
Lien on any of its properties or other assets in favor of Agent, on behalf of
itself and Lenders, as
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additional collateral for the Obligations, except operating leases, Capital
Leases, purchase money obligations, or Licenses which prohibit Liens upon the
assets that are subject thereto.
6.8 Sale of Stock and Assets. No Credit Party shall sell, transfer,
convey, assign or otherwise dispose of any of its properties or other assets,
including its capital Stock or the capital Stock of any of its Subsidiaries
(whether in a public or a private offering or otherwise, other than a public
offering of the capital stock of Newco or Parent) or any of their Accounts,
other than as permitted under Section 6.1 and (a) the sale of Inventory in the
ordinary course of business, (b) the sale, transfer, conveyance or other
disposition by a Credit Party of equipment, fixtures or Real Estate that are
obsolete or no longer used or useful in such Credit Party's business and having
a value not exceeding $250,000 in any single transaction or $1,000,000 in the
aggregate in any Fiscal Year, (c) other equipment and fixtures having a value
not exceeding $500,000 in any single transaction or $2,000,000 in the aggregate
in any Fiscal Year, (d) Bermans may sell the Distribution Center to Borrower in
an arms'-length transaction; provided that the sale proceeds are transferred to
Second Intermediate Parent and invested subject to a Control Letter in
accordance with Section 6.2, and (e) the sale of the Store owned by Snyder
Leather of Warwick, R.I., Inc., a Rhode Island corporation (the "Rhode Island
Store").
6.9 ERISA. No Credit Party shall cause or permit (a) the occurrence
of an ERISA Event which results, or could reasonably be expected to result, in a
distress termination of a Title IV Plan under Section 4041 of ERISA, an
involuntary termination of a Title IV Plan by the PBGC under Section 4042 of
ERISA, a Lien on any property of a Credit Party or ERISA Affiliate or a
liability in excess of $100,000 being assessed against any Credit Party or ERISA
Affiliate; (b) any Title IV Plan to incur an "accumulated funding deficiency"
under Section 412 of the IRC in excess of $100,000, regardless of any waiver;
(c) any Credit Party or ERISA Affiliate to apply for a funding waiver under
Section 412(d) of the IRC; (d) a material increase in the aggregate Unfunded
Pension Liability of all Title IV Plans, but only taking into account Title IV
Plans with Unfunded Pension Liability at the time of reference; or (e) a
material increase in any Credit Party's obligations under any Retiree Welfare
Plan.
6.10 Financial Covenants. Parent shall not breach or fail to comply
with any of the Financial Covenants (the "Financial Covenants") set forth in
Schedule I.
6.11 Hazardous Materials. No Credit Party shall cause or permit a
Release of any Hazardous Material on, at, in, under, above, to, from or about
any of the Real Estate where such Release would violate in any material respect,
or form the basis for any material Environmental Liabilities under, any
Environmental Laws or Environmental Permits or would otherwise materially and
adversely impact the value or marketability of any of the Real Estate or any of
the Collateral.
6.12 Sale-Leasebacks. No Credit Party shall engage in any sale-
leaseback, synthetic lease or similar transaction involving any of its assets,
except a sale-leaseback of the Rhode Island Store described in Section 6.8.
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6.13 Cancellation of Indebtedness. No Credit Party shall cancel any
claim or debt owing to it, except for reasonable consideration negotiated on an
arm's-length basis or in the ordinary course of its business consistent with
past practices.
6.14 Restricted Payments. No Credit Party shall make any Restricted
Payment, except (a) asset or Stock transfers permitted under Section 6.1, (b)
intercompany loans permitted under Section 6.3, (c) restricted payments
consisting of cash dividends paid to to Newco for the purposes set forth in
clause (f) below and to Parent, First Intermediate Parent and Second
Intermediate Parent so long as no Event of Default shall have occurred and be
continuing and concurrently with the payment of each such dividend Parent, First
Intermediate Parent and Second Intermediate Parent (as applicable) shall pay a
dividend to Newco for the purposes set forth in clause (f) below or make an
intercompany loan or a cash contribution to equity in a corresponding amount of
Borrower, First Intermediate Parent or Second Intermediate Parent to be invested
subject to Control Letters in accordance with Section 6.2, (d) payments
consisting of payments of principal or interest with respect to the Subordinated
Note; provided that (i) no Event of Default shall have occurred and be
continuing as of the date of such payment or after giving effect thereto; (ii)
such payments shall be funded solely with the proceeds of a Qualified Public
Offering; (iii) Newco shall loan or contribute at least $9,000,000 of the
proceeds of that Qualified Public Offering to the capital of Borrower; (iv) any
Seasonal Over-Advance outstanding at the time of such payment shall be reduced
to zero; and (v) the Seasonal Over-Advance shall irrevocably cease to be
available, and Schedule A shall be deemed to be amended to delete all references
thereto, (e) payments to Seller in satisfaction of warranty claims by Seller
under the Acquisition Agreement and payment to Seller of the amount by which
Final Working Capital exceeds $85,000,000 under the terms of (and as defined in)
the Acquisition Agreement, and (f) Newco may redeem Stock of former employees of
any of the Loan Parties in accordance with Sections 3 and 4 of the Shareholder
Agreement in an amount not to exceed $250,000 in a period of 12 months. Nothing
contained in this Section shall affect the Borrower's right to a Seasonal Over-
Advance if no proceeds of a Qualified Public Offering are used to make any
payment with respect to the Subordinated Note.
6.15 Leases. No Credit Party shall enter into any operating lease
for equipment or personal property, if the aggregate of all such operating lease
payments payable in any Fiscal Year for all Credit Parties on a consolidated
basis would exceed $1,000,000.
6.16 Change of Corporate Name or Location; Change of Fiscal Year. No
Credit Party shall (a) change its corporate name, or (b) change its chief
executive office, principal place of business, corporate offices or warehouses
or Collateral locations, or the location of its records concerning the
Collateral, in any case without at least thirty (30) days prior written notice
to Agent and after Agent's written acknowledgment that any reasonable action
requested by Agent in connection therewith, including, without limitation, to
continue the perfection of any Liens in favor of Agent, on behalf of Lenders, in
any Collateral has been completed or taken, and provided that any such new
location shall be in the continental United States. Without limiting the
foregoing, no Credit Party shall change its name, identity or corporate
structure in any manner which might make any financing or continuation statement
filed in connection herewith seriously
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misleading within the meaning of Section 9.402(7) of the Code or any other then
applicable provision of the Code except upon prior written notice to Agent and
Lenders and after Agent's written acknowledgment that any reasonable action
requested by Agent in connection therewith, including, without limitation, to
continue the perfection of any Liens in favor of Agent, on behalf of Lenders, in
any Collateral has been completed or taken. The Credit Parties shall change
their Fiscal Year within ninety (90) days following the Closing Date to a fiscal
year having Fiscal Quarters ending on the Saturday closest to the last day of
January, April, July and October of each year.
6.17 No Impairment of Upstreaming. No Credit Party shall directly or
indirectly enter into or become bound by any agreement, instrument, indenture or
other obligation (other than this Agreement and the other Loan Documents) which
could directly or indirectly restrict, prohibit or require the consent of any
Person with respect to the payment of dividends or distributions or the making
of intercompany loans by a Subsidiary of Parent to any other Subsidiary of
Parent.
6.18 Changes Relating to Subordinated Debt. No Credit Party shall
(a) change or amend the terms of any Subordinated Debt (or any indenture or
agreement in connection therewith) if the effect of such amendment is to: (i)
increase the interest rate on such Subordinated Debt; (ii) change the dates upon
which payments of principal or interest are due on such Subordinated Debt other
than to extend such dates; (iii) change any default or event of default other
than to delete or make less restrictive any default provision therein, or add
any covenant with respect to such Subordinated Debt; (iv) change the redemption
or prepayment provisions of such Subordinated Debt other than to extend the
dates therefor or to reduce the premiums payable in connection therewith; (v)
grant any security or collateral to secure payment of such Subordinated Debt in
which Agent does not have a first priority perfected security interest for the
benefit of Lenders; or (vi) change or amend any other term if such change or
amendment would materially increase the obligations of the obligor or confer
additional material rights to the holder of such Subordinated Debt in a manner
adverse to any Credit Party, Agent or any Lender; or (b) prepay, defease or
purchase any Subordinated Debt except as permitted in Section 6.14.
6.19 Eligible Trade L/Cs. Agent shall have no obligation to approve
any request for a trade letter of credit for the purchase of finished goods
unless each of the following documents are required as conditions to any draw
thereon, unless Agent shall otherwise consent, and such deliveries must
constitute conditions to drawing for a trade letter of credit to constitute an
Eligible Trade L/C.
i) the original Eligible Trade L/C, if only one draw is permitted
thereunder or if multiple draws are permitted and the subject draw is the
final draw thereunder;
ii) any draft or pre-approved form of certificate executed by
Borrower's supplier, certifying that it has met the conditions for a draw
under the Eligible Trade L/C;
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iii) an inspection certificate substantially in the form attached
hereto as Schedule 6.19, executed by Borrower's employee or agent at the
point of origin of the finished goods;
iv) a commercial invoice with respect to the purchase order(s)
against which such finished goods are being delivered and a packaging list
with respect to such goods;
v) a non-negotiable ocean bill of lading, freight forwarders cargo
receipt, a house bill of lading or a copy of an airway bill of lading (a
"Document of Title") issued by an Approved Shipper with respect to the
finished goods being shipped and providing for the delivery thereof to
House of Suede or Borrower; and
vi) a certificate of origin.
7. TERM
7.1 Termination. The financing arrangements contemplated hereby
shall be in effect until the Commitment Termination Date, and the Loans and all
other Obligations shall be automatically due and payable in full on such date.
7.2 Survival of Obligations Upon Termination of Financing
Arrangements. Except as otherwise expressly provided for in the Loan Documents,
no termination or cancellation (regardless of cause or procedure) of any
financing arrangement under this Agreement shall in any way affect or impair
the obligations, duties and liabilities of Borrower or the rights of Agent and
Lenders relating to any unpaid portion of the Loans or any other Obligations,
due or not due, liquidated, contingent or unliquidated or any transaction or
event occurring prior to such termination, or any transaction or event, the
performance of which is required after the Commitment Termination Date. Except
as otherwise expressly provided herein or in any other Loan Document, all
undertakings, agreements, covenants, warranties and representations of or
binding upon any Credit Party, and all rights of Agent and each Lender, all as
contained in the Loan Documents, shall not terminate or expire, but rather shall
survive any such termination or cancellation and shall continue in full force
and effect until the Termination Date.
8. EVENTS OF DEFAULT: RIGHTS AND REMEDIES
8.1 Events of Default. The occurrence of any one or more of the
following events (regardless of the reason therefor) shall constitute an "Event
of Default" hereunder:
(a) (i) Borrower shall fail to make any payment of principal of, or
interest on, or Fees owing in respect of, the Revolving Loan, when due and
payable, or (ii) Borrower shall fail to pay or reimburse Agent or Lenders for
any expense reimbursable hereunder or under any other Loan Document or any other
Obligations within ten (10) days following Agent's demand for such reimbursement
or payment thereof.
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(b) Any Credit Party shall fail or neglect to perform, keep or observe
any of the provisions of Sections 1.4, 1.8, 5.4 or 6, or any of the provisions
set forth in Schedules E or I, respectively.
(c) Borrower shall fail or neglect to perform, keep or preserve any of
the provisions of Section 4 or any provisions set forth in Schedules G or H,
respectively, and the same shall remain unremedied for ten (10) days or more.
(d) Any Credit Party shall fail or neglect to perform, keep or observe
any other provision of this Agreement or of any of the other Loan Documents
(other than any provision embodied in or covered by any other clause of this
Section 8.1) and the same shall remain unremedied for twenty (20) days or more
following notice to such Credit Party.
(e) A default or breach shall occur under any other agreement,
document or instrument to which any Credit Party is a party which is not cured
within any applicable grace period, and such default or breach (i) involves the
failure to make any payment when due in respect of any Indebtedness (other than
the Obligations) of any Credit Party in excess of $1,000,000 in the aggregate,
or (ii) causes, or such permits any holder of such Indebtedness or a trustee to
cause, Indebtedness or a portion thereof in excess of $1,000,000 in the
aggregate to become due prior to its stated maturity or prior to its regularly
scheduled dates of payment, regardless of whether such right is exercised, by
such holder or trustee.
(f) Any representation or warranty herein or in any Loan Document or
in any written statement, report, financial statement or certificate made or
delivered to Agent or any Lender by any Credit Party shall be untrue or
incorrect in any material respect as of the date when made or deemed made.
(g) Assets of any Credit Party with a fair market value of $500,000 or
more shall be attached, seized, levied upon or subjected to a writ or distress
warrant, or come within the possession of any receiver, trustee, custodian or
assignee for the benefit of creditors of any Credit Party and such condition
continues for thirty (30) days or more.
(h) A case or proceeding shall have been commenced against any
Material Credit Party seeking a decree or order in respect of any Material
Credit Party (i) under Title 11 of the United States Code, as now constituted or
hereafter amended or any other applicable federal, state or foreign bankruptcy
or other similar law, (ii) appointing a custodian, receiver, liquidator,
assignee, trustee or sequestrator (or similar official) for any Material Credit
Party or of any substantial part of any such Person's assets, or (iii) ordering
the winding-up or liquidation of the affairs of any Material Credit Party, and
such case or proceeding shall remain undismissed or unstayed for sixty (60) days
or more or such court shall enter a decree or order granting the relief sought
in such case or proceeding.
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(i) Any Material Credit Party shall (i) file a petition seeking
relief under Title 11 of the United States Code, as now constituted or hereafter
amended, or any other applicable federal, state or foreign bankruptcy or other
similar law, (ii) consent to the institution of proceedings thereunder or to the
filing of any such petition or to the appointment of or taking possession by a
custodian, receiver, liquidator, assignee, trustee or sequestrator (or similar
official) of any Material Credit Party or of any substantial part of any such
Person's assets, (iii) make an assignment for the benefit of creditors, or (iv)
take any corporate action in furtherance of any of the foregoing.
(j) A final judgment or judgments for the payment of money in excess
of $500,000 in the aggregate at any time outstanding shall be rendered against
any Credit Party and the same shall not, within thirty (30) days after the entry
thereof, have been discharged or execution thereof stayed or bonded pending
appeal, or shall not have been discharged prior to the expiration of any such
stay.
(k) Any provision of any Loan Document shall for any reason cease to
be valid, binding and enforceable in accordance with its terms (or any Credit
Party shall challenge the enforceability of any Loan Document or shall assert in
writing, or engage in any action or inaction based on any such assertion, that
any provision of any of the Loan Documents has ceased to be or otherwise is not
valid, binding and enforceable in accordance with its terms), or any security
interest created under any Loan Document shall cease to be a valid and perfected
first priority security interest or Lien (except as otherwise permitted herein
or therein) in any of the Collateral purported to be covered thereby other than
as a result of Agent's failure to take any action within its control.
(l) Any "Change of Control" shall occur.
8.2 Remedies. (a) (i) If any Event of Default shall have occurred
and be continuing, Agent may (and at the written request of the Requisite
Lenders shall), without notice, suspend this facility with respect to further
Advances and/or the incurrence of further Letter of Credit Obligations and
Eligible Trade L/C Obligations whereupon any further Advances, Letter of Credit
Obligations, and Eligible Trade L/C Obligations shall be made or extended in
Agent's sole discretion (or in the sole discretion of the Requisite Lenders, if
such suspension occurred at their direction) so long as such Event of Default
is continuing and (ii) if any Event of Default shall have occurred and be
continuing, Agent may (and at the request of the Requisite Lenders shall),
following notice increase the rate of interest applicable to the Loans and the
Letter of Credit Fees to the Default Rate.
(b) If any Event of Default shall have occurred and be continuing,
Agent may (and at the written request of the Requisite Lenders shall), without
notice, (i) terminate this facility with respect to further Advances or the
incurrence of further Letter of Credit Obligations and Eligible Trade L/C
Obligations; (ii) declare all or any portion of the Obligations, including all
or any portion of any Loan to be forthwith due and payable, and require that
the Letter of Credit Obligations and Eligible Trade L/C Obligations be cash
collateralized as provided in Schedule B,
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all without presentment, demand, protest or further notice of any kind, all of
which are expressly waived by Borrower and each Credit Party that is a signatory
hereto; and (iii) exercise any rights and remedies provided to Agent under the
Loan Documents and/or at law or equity, including all remedies provided under
the Code; provided, however, that upon the occurrence of an Event of Default
specified in Sections 8.1(g), (h) or (i), Commitments to make further Advances
or the incurrence of further Letter of Credit Obligations and Eligible Trade L/C
Obligations shall automatically terminate and all of the Obligations, including
the Revolving Loan, shall become immediately due and payable without
declaration, notice or demand by any Person.
8.3 Waivers by Credit Parties. Except as otherwise provided for in
this Agreement or by applicable law, each Credit Party waives (a) presentment,
demand and protest and notice of presentment, dishonor, notice of intent to
accelerate, notice of acceleration, protest, default, nonpayment, maturity,
release, compromise, settlement, extension or renewal of any or all commercial
paper, accounts, contract rights, documents, instruments, chattel paper and
guaranties at any time held by Agent on which any Credit Party may in any way be
liable, and hereby ratifies and confirms whatever Agent may do in this regard,
(b) all rights to notice and a hearing prior to Agent's taking possession or
control of, or to Agent's replevy, attachment or levy upon, the Collateral or
any bond or security which might be required by any court prior to allowing
Agent to exercise any of its remedies, and (c) the benefit of all valuation,
appraisal and exemption laws.
9. ASSIGNMENT AND PARTICIPATIONS; APPOINTMENT OF AGENT
9.1 Assignment and Participations. (a) Any Lender may assign at any
time or times, any of the Loan Documents, any Commitment or of any portion
thereof or interest therein, including, without limitation, any Lender's rights,
title, interests, remedies, powers or duties thereunder, whether evidenced by a
writing or not, with Borrower's consent which shall not be unreasonably withheld
or delayed; provided that so long as any Event of Default shall have occurred
and be continuing Borrower's consent shall not be required. Any assignment by a
Lender shall (i) require the consent of Agent which shall not be unreasonably
withheld or delayed and the execution of a Lender Addition Agreement in form and
substance satisfactory to Agent; (ii) be conditioned on such assignee Lender
representing to the assigning Lender and the Agent that it is purchasing the
applicable Loans to be assigned to it for its own account, for investment
purposes and not with a view to the distribution thereof; (iii) if a partial
assignment, be in an amount at least equal to $5,000,000 and, after giving
effect to any such partial assignment, the assigning Lender shall have retained
Commitments in an amount at least equal to $5,000,000; and (iv) include a
payment by the assigning Lender to the Agent of an assignment fee of $3,000. In
the case of an assignment by a Lender under this Section 9.1, the assignee shall
have, to the extent of such assignment, the same rights, benefits and
obligations as it would if it were a Lender hereunder. The assigning Lender
shall be relieved of its obligations hereunder with respect to its Commitments
or assigned portion thereof from and after the date of such assignment.
Borrower hereby acknowledges and agrees that any assignment will give rise to
a direct obligation of Borrower to the assignee and that the assignee shall be
considered to be a "Lender". In all instances, each Lender's liability to make
Loans hereunder shall be several and not joint and shall be limited to such
Lender's Pro Rata Share of the Commitment. In the event Agent or any
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Lender assigns or otherwise transfers all or any part of a Note, Agent or any
such Lender shall so notify Borrower and Borrower shall, upon the request of
Agent or such Lender, execute new Notes in exchange for the Notes being
assigned.
(b) Borrower consents to any Lender's sale of a participation, at any
time or times, in all or part of its Commitment. Any sale of a participation by
a Lender of all or any part of its Commitments shall be made with the
understandings that all amounts payable by Borrower hereunder shall be
determined as if that Lender had not sold such participation, except as provided
in the following sentence, and that the holder of any such participation shall
not be entitled to require such Lender to take or omit to take any action
hereunder except actions directly affecting (i) any reduction in the principal
amount of, or interest rate or Fees payable with respect to, any Loan in which
such holder participates, (ii) any extension of the final scheduled maturity
date of the principal amount of any Loan in which such holder participates, and
(iii) any release of all or substantially all of the Collateral (other than in
accordance with the terms of this Agreement, the Collateral Documents or the
other Loan Documents). Solely for purposes of Sections 1.13, 1.15, 1.16 and
9.8, Borrower acknowledges and agrees that a participation shall give rise to a
direct obligation of Borrower to the participant and the participant shall be
considered to be a "Lender". Except as set forth in the preceding sentence
neither Borrower nor any Credit Party shall have any obligation or duty to any
participant. Neither Agent nor any Lender (other than the Lender selling a
participation) shall have any duty to any participant and may continue to deal
solely with the Lender selling a participation as if no such sale had occurred.
(c) So long as no Event of Default shall have occurred and be
continuing, no Lender shall assign or sell participations in any portion of its
Loans or Commitments to a potential Lender or participant, if, as of the date of
the proposed assignment or sale, the assignee Lender or participant would be
subject to capital adequacy or similar requirements under Section 1.16(a),
increased costs under Section 1.16(b), an inability to fund LIBOR Loans under
Section 1.16(c), or withholding taxes in accordance with Section 1.16(d).
(d) Except as expressly provided in this Section 9.1, no Lender
shall, as between Borrower and that Lender, or Agent and that Lender, be
relieved of any of its obligations hereunder as a result of any sale,
assignment, transfer or negotiation of, or granting of participation in, all
or any part of the Loans, the Notes or other Obligations owed to such Lender.
(e) Borrower shall assist any Lender permitted to sell assignments
under this Section 9.1 as reasonably required to enable the assigning or selling
Lender to effect any such assignment, including the execution and delivery of
any and all agreements, notes and other documents and instruments as shall be
requested, and the participation of management in meetings with, potential
assignees at Borrower's headquarters. Borrower shall certify the correctness,
completeness and accuracy of all descriptions of Borrower and its affairs
contained in any selling materials provided by it and all other information
provided by it and included in such materials, except that any Projections
delivered by Borrower shall only be certified by Borrower as having been
prepared by Borrower in compliance with the representations contained in
Section 3.4(c).
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(f) A Lender may furnish any information concerning Borrower in
the possession of such Lender from time to time to assignees and participants
(including prospective assignees and participants). Each Lender shall obtain
from assignees or participants confidentiality covenants substantially
equivalent to those contained herein.
(g) If (a) GE Capital assigns its Commitment or sells participations
in its Commitment so that its Commitment, net of participations sold by it, is
less than $30,000,000, or (b) resigns as Agent and is not replaced as Agent by
a Lender reasonably acceptable to Borrower, Borrower may, within one hundred
eighty (180) days thereafter terminate the Commitments, prepay the Revolving
Loans, Swing Line Loan and all other Obligations in full and cash collateralize
all outstanding Letter of Credit Obligations and Eligible Trade L/C Obligations,
without payment of any prepayment fee as to the Pro Rata Share of GE Capital.
9.2 Appointment of Agent. GE Capital is hereby appointed to act
on behalf of all Lenders as Agent under this Agreement and the other Loan
Documents. The provisions of this Section 9.2 are solely for the benefit of
Agent and Lenders and no Credit Party nor any other Person shall have any rights
as a third party beneficiary of any of the provisions hereof. In performing its
functions and duties under this Agreement and the other Loan Documents, Agent
shall act solely as an agent of Lenders and does not assume and shall not be
deemed to have assumed any obligation toward or relationship of agency or trust
with or for any Credit Party or any other Person. Agent shall have no duties
or responsibilities except for those expressly set forth in this Agreement and
the other Loan Documents. The duties of Agent shall be mechanical and
administrative in nature and Agent shall not have, or be deemed to have, by
reason of this Agreement, any other Loan Document or otherwise a fiduciary
relationship in respect of any Lender. Neither Agent nor any of its Affiliates
nor any of their respective officers, directors, employees, agents or
representatives shall be liable to any Lender for any action taken or omitted to
be taken by it hereunder or under any other Loan Document, or in connection
herewith or therewith, except for damages solely caused by its or their own
gross negligence or willful misconduct as finally determined by a court of
competent jurisdiction.
If Agent shall request instructions from Requisite Lenders with
respect to any act or action (including failure to act) in connection with this
Agreement or any other Loan Document, then Agent shall be entitled to refrain
from such act or taking such action unless and until Agent shall have received
instructions from Requisite Lenders, and Agent shall not incur liability to any
Person by reason of so refraining. Agent shall be fully justified in failing or
refusing to take any action hereunder or under any other Loan Document (a) if
such action would, in the opinion of Agent, be contrary to law or the terms of
this Agreement or any other Loan Document, (b) if such action would, in the
opinion of Agent, expose Agent to Environmental Liabilities and Costs or (c) if
Agent shall not first be indemnified to its satisfaction against any and all
liability and expense which may be incurred by it by reason of taking or
continuing to take any such action. Without limiting the foregoing, no Lender
shall have any right of action whatsoever against Agent as a result of Agent
acting or refraining from acting hereunder or under any other Loan Document in
accordance with the instructions of Requisite Lenders.
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9.3 Agent's Reliance, Etc. Neither Agent nor any of its Affiliates
nor any of their respective directors, officers, agents or employees shall be
liable for any action taken or omitted to be taken by it or them under or in
connection with this Agreement or the other Loan Documents, except for damages
solely caused by its or their own gross negligence or willful misconduct as
finally determined by a court of competent jurisdiction. Without limitation of
the generality of the foregoing, Agent: (a) may treat the payee of any Note as
the holder thereof until Agent receives written notice of the assignment or
transfer thereof signed by such payee and in form satisfactory to Agent; (b) may
consult with legal counsel, independent public accountants and other experts
selected by it and shall not be liable for any action taken or omitted to be
taken in good faith by it in accordance with the advice of such counsel,
accountants or experts; (c) makes no warranty or representation to any Lender
and shall not be responsible to any Lender for any statements, warranties or
representations made in or in connection with this Agreement or the other Loan
Documents; (d) shall not have any duty to ascertain or to inquire as to the
performance or observance of any of the terms, covenants or conditions of this
Agreement or the other Loan Documents on the part of any Credit Party or to
inspect the Collateral (including the books and records) of any Credit Party;
(e) shall not be responsible to any Lender for the due execution, legality,
validity, enforceability, genuineness, sufficiency or value of this Agreement or
the other Loan Documents or any other instrument or document furnished pursuant
hereto or thereto; and (f) shall incur no liability under or in respect of this
Agreement or the other Loan Documents by acting upon any notice, consent,
certificate or other instrument or writing (which may be by telecopy, telegram,
cable or telex) believed by it to be genuine and signed or sent by the proper
party or parties.
9.4 GE Capital and Affiliates. With respect to its Commitments
hereunder, GE Capital shall have the same rights and powers under this Agreement
and the other Loan Documents as any other Lender and may exercise the same as
though it were not Agent; and the term "Lender" or "Lenders" shall, unless
otherwise expressly indicated, include GE Capital in its individual capacity.
GE Capital and its Affiliates may lend money to, invest in, and generally engage
in any kind of business with, any Credit Party, any of their Affiliates and any
Person who may do business with or own securities of any Credit Party or any
such Affiliate, all as if GE Capital were not Agent and without any duty to
account therefor to Lenders. GE Capital and its Affiliates may accept fees and
other consideration from any Credit Party for services in connection with this
Agreement or otherwise without having to account for the same to Lenders.
9.5 Lender Credit Decision. Each Lender acknowledges that it has,
independently and without reliance upon Agent or any other Lender and based on
the Financial Statements referred to in Section 3.4(a) and such other documents
and information as it has deemed appropriate, made its own credit and financial
analysis of the Credit Parties and its own decision to enter into this
Agreement. Each Lender also acknowledges that it will, independently and
without reliance upon Agent or any other Lender and based on such documents
and information as it shall deem appropriate at the time, continue to make its
own credit decisions in taking or not taking action under this Agreement. Each
Lender acknowledges the potential conflict of interest of each other Lender as a
result of the Lenders holding disproportionate
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interests in the Loans, and expressly consents to, and waives any claim based
upon, such conflict of interest.
9.6 Indemnification. Lenders agree to indemnify Agent (to the extent
not reimbursed by Borrower and without limiting the obligations of Borrower
hereunder), ratably according to their respective Pro Rata Shares, from and
against any and all liabilities, obligations, losses, damages, penalties,
actions, judgments, suits, costs, expenses or disbursements of any kind or
nature whatsoever which may be imposed on, incurred by, or asserted against
Agent in any way relating to or arising out of this Agreement or any other
Loan Document or any action taken or omitted by Agent in connection therewith;
provided, however, that no Lender shall be liable for any portion of such
liabilities, obligations, losses, damages, penalties, actions, judgments, suits,
costs, expenses or disbursements resulting solely from Agent's gross negligence
or wilful misconduct as finally determined by a court of competent jurisdiction.
Without limiting the foregoing, each Lender agrees to reimburse Agent promptly
upon demand for its ratable share of any out-of-pocket expenses (including
counsel fees) incurred by Agent in connection with the preparation, execution,
delivery, administration, modification, amendment or enforcement (whether
through negotiations, legal proceedings or otherwise) of, or legal advice in
respect of rights or responsibilities under, this Agreement and each other Loan
Document, to the extent that Agent is not reimbursed for such expenses by
Borrower.
9.7 Successor Agent. Agent may resign at any time by giving not less
than thirty (30) days' prior written notice thereof to Lenders and Borrower.
Upon any such resignation, the Requisite Lenders shall have the right to appoint
a successor Agent which shall be reasonably acceptable to Borrower. If no
successor Agent shall have been so appointed by the Requisite Lenders and shall
have accepted such appointment within 30 days after the resigning Agent's giving
notice of resignation, then the resigning Agent may, on behalf of the Lenders,
appoint a successor Agent, which shall be a Lender, if a Lender is willing to
accept such appointment, or otherwise shall be a commercial bank or financial
institution organized under the laws of the United States of America or of any
State thereof having a combined capital and surplus of at least $300,000,000.
If no successor Agent has been appointed pursuant to the foregoing, by the 30th
day after the date such notice of resignation was given by the resigning Agent,
such resignation shall become effective and the Requisite Lenders shall
thereafter perform all the duties of Agent hereunder until such time, if any,
as the Requisite Lenders appoint a successor Agent (which shall be reasonably
acceptable to Borrower) as provided above. Upon the acceptance of any
appointment as Agent hereunder by a successor Agent, such successor Agent shall
succeed to and become vested with all the rights, powers, privileges and duties
of the resigning Agent, and the resigning Agent shall be discharged from its
duties and obligations under this Agreement and the other Loan Documents, except
that any indemnity rights or other rights in favor of such resigning Agent shall
continue. After any resigning Agent's resignation hereunder, the provisions of
this Section 9 shall inure to its benefit as to any actions taken or omitted to
be taken by it while it was Agent under this Agreement and the other Loan
Documents.
9.8 Setoff and Sharing of Payments. In addition to any rights now
or hereafter granted under applicable law and not by way of limitation of such
rights, upon the occurrence and
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during the continuance of any Event of Default, each Lender and each holder of
any Note is hereby authorized at any time or from time to time, without notice
to Borrower or to any other Person, any such notice being hereby expressly
waived, to set off and to appropriate and to apply any and all balances held by
it at any of its offices for the account of Borrower (regardless of whether such
balances are then due to Borrower) and any other properties or assets any time
held or owing by that Lender or that holder to or for the credit or for the
account of Borrower against and on account of any of the Obligations which are
not paid when due. Any Lender or holder of any Note exercising a right to set
off shall purchase for cash (and the other Lenders or holders shall sell) such
participations in each such other Lender's or holder's Pro Rata Share of the
Obligations as would be necessary to cause such Lender to share the amount so
set off with each other Lender or holder in accordance with their respective Pro
Rata Shares. Borrower agrees, to the fullest extent permitted by law, that (a)
any Lender or holder may exercise its right to set off with respect to amounts
in excess of its Pro Rata Share of the Obligations and may sell participations
in such amount so set off to other Lenders and holders and (b) any Lender or
holders so purchasing a participation in the Loans made or other Obligations
held by other Lenders or holders may exercise all rights of set-off, bankers'
lien, counterclaim or similar rights with respect to such participation as fully
as if such Lender or holder were a direct holder of the Loans and the other
Obligations in the amount of such participation. Notwithstanding the foregoing,
if all or any portion of the set-off amount is thereafter recovered from the
Lender that has exercised the right of set-off, the purchase of participations
by that Lender shall be rescinded and the purchase price restored without
interest.
9.9 Advances; Payments; Information; Non-Funding Lender.
(a) Advances; Payments; Fee Payments.
(i) The parties hereto agree that, whenever possible, the Swing Line
Loan shall be the first Loan advanced and the first Loan repaid so as to
minimize fluctuations in the Revolving Loan balance. Furthermore, for ease of
administration, Agent may, on behalf of Lenders, disburse funds to Borrower for
requested Revolving Credit Advances and the Revolving Loan balance may fluctuate
from day to day through Agent's disbursement of funds to, and receipt of funds
from, Borrower. In order to minimize the frequency of transfers of funds
between Agent and each Lender, Revolving Credit Advances and payments in respect
thereof will be settled according to the procedures described in Sections
9.9(a)(ii) and 9.9(a)(iii) below. Notwithstanding these procedures, each
Lender's obligation to fund its portion of any Revolving Credit Advances made
by Agent to Borrower will commence on the date such Advances are made by Agent.
Such payments will be made by each Lender without setoff, counterclaim or
reduction of any kind.
(ii) Not later than 11:00 a.m. (Chicago time) on the second (2nd) and
fifth (5th) Business Day of each week, or more frequently (including daily) if
Agent so elects (each such day being a "Settlement Date"), Agent will advise
each Lender by telephone or telecopy of the amount of such Lender's Pro Rata
Share of the balance of the Revolving Loan as of the close of business on the
first (1st) Business Day immediately preceding the Settlement
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Date. In the event that payments are necessary to adjust the amount of such
Lender's portion of the Revolving Loan to such Lender's Pro Rata Share of the
Revolving Loan as of any Settlement Date, the party from which such payment is
due will pay the other, in same day funds, by wire transfer to the other's
account not later than 2:00 p.m. (Chicago time) on the Settlement Date.
Notwithstanding the foregoing, if Agent so elects, Agent may require that each
Lender make its Pro Rata Share of any requested Revolving Credit Advance
available to Agent for disbursement prior to the funding of such Advance. If
Agent elects to require that such funds be so made available, Agent shall advise
each Lender by telephone or telecopy of the amount of such Lender's Pro Rata
Share of the requested Revolving Credit Advance no later than 11:00 a.m.
(Chicago time) on the date of funding thereof, and each such Lender shall pay
Agent such amount in same day funds, by wire transfer to the Collection Account
not later than 2:00 p.m. (Chicago time) on the date of funding such Advance.
(iii) For purposes of this Section 9.9(a)(iii), the following
terms will have the following meanings:
(A) "Daily Loan Balance" means, with respect to the Revolving
Credit Advances, an amount calculated as of the end of each
calendar day by subtracting (i) the cumulative principal amount
paid by Agent to a Lender with respect to the Revolving Credit
Advances from the Closing Date through and including such
calendar day, from (ii) the cumulative principal amount of the
Revolving Credit Advances advanced by such Lender to Agent from
the Closing Date through and including such calendar day.
(B) "Daily Interest Rate" means, with respect to the Revolving
Credit Advances, an amount calculated by dividing the interest
rate payable to a Lender on the Revolving Credit Advances (as
determined pursuant to Sections 1.5 and 1.6) as of each
calendar day by three hundred sixty (360) days in the case of
LIBOR Loans and three hundred sixty-five (365) days in the case
of Index Rate Loans.
(C) "Daily Interest Amount" means, with respect to the
Revolving Loan, an amount calculated by multiplying the Daily
Loan Balance of the Revolving Credit Advances by the associated
Interest Rate applicable to such Revolving Credit
Advances.
(D) "Interest Ratio" means, with respect to the Revolving
Credit Advances, a number calculated by dividing the total
amount of interest on the Revolving Credit Advances received by
Agent during the immediately preceding month by the total
amount of interest on the Revolving Credit Advances due from
Borrower during the immediately preceding month.
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On the first (1st) Business Day of each calendar month (an "Interest Settlement
Date"), Agent will advise each Lender by telephone or telecopy of the amount of
such Lender's Pro Rata Share of principal, interest and Fees paid for the
benefit of Lenders with respect to the Revolving Credit Advances as of the end
of the last day of the immediately preceding month. Provided that such Lender
has made all payments required to be made by it under this Agreement and the
other Loan Documents, Agent will pay to such Lender such Lender's Pro Rata Share
of principal, interest and Fees paid for the benefit of Lenders on the Revolving
Loans. Such payments shall be made by wire transfer to such Lender's account (as
specified by such Lender to Agent in writing, as amended by such Lender from
time to time after the date hereof pursuant to the notice provisions contained
herein or in the applicable Lender Addition Agreement) not later than 12:00 noon
(Chicago time) on the next Business Day following the Interest Settlement Date.
Such Lender's Pro Rata Share of interest on Revolving Credit Advances will be
calculated by adding together such Lender's Pro Rata Share of the Daily Interest
Amounts for each calendar day of the prior month for the Revolving Credit
Advances and multiplying the total thereof by the Interest Ratio for the
Revolving Credit Advances. Consistent with the foregoing, during those periods
between Settlement Dates in which Agent has advanced more than its Pro Rata
Share of the Revolving Credit Advances, the Daily Interest Amounts allocable to
the Lenders will be reduced and the interest accrued on such amounts shall be
for the account of Agent.
(b) Availability of Lender's Pro Rata Share. Agent may assume that
each Lender will make its Pro Rata Share of each Revolving Credit Advance
available to Agent on each Settlement Date. If such Pro Rata Share is not, in
fact, paid to Agent by such Lender when due, Agent will be entitled to recover
such amount on demand from such Lender without set-off, counterclaim or
deduction of any kind. If any Lender fails to pay the amount of its Pro Rata
Share forthwith upon Agent's demand, Agent shall promptly notify Borrower and
Borrower shall immediately repay such amount to Agent. Nothing in this Section
9.9 or elsewhere in this Agreement or the other Loan Documents shall be deemed
to require Agent to advance funds on behalf of any Lender or to relieve any
Lender from its obligation to fulfill its Commitments hereunder or to prejudice
any rights that Borrower may have against any Lender as a result of any default
by such Lender hereunder.
(c) Return of Payments.
(i) If Agent pays an amount to a Lender under this Agreement in
the belief or expectation that a related payment has been or will be received by
Agent from Borrower and such related payment is not received by Agent, then
Agent will be entitled to recover such amount from such Lender on demand without
set-off, counterclaim or deduction of any kind.
(ii) If Agent determines at any time that any amount received by
Agent under this Agreement must be returned to Borrower or paid to any other
Person pursuant to any insolvency law or otherwise, then, notwithstanding any
other term or condition of this Agreement or any other Loan Document, Agent will
not be required to distribute any portion thereof to any Lender. In addition,
each Lender will repay to Agent on demand any portion of such amount that
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Agent has distributed to such Lender, together with interest at such rate, if
any, as Agent is required to pay to Borrower or such other Person, without set-
off, counterclaim or deduction of any kind.
(d) Non-Funding Lenders.
The failure of any Lender (such Lender, a "Non-Funding Lender") to
make any Revolving Credit Advance to be made by it on the date specified
therefor shall not relieve any other Lender (each such other Lender, an "Other
Lender") of its obligations to make a Revolving Credit Advance on such date, but
neither any Other Lender nor Agent shall be responsible for the failure of any
Non-Funding Lender to make a Revolving Credit Advance to be made by such Non-
Funding Lender, and no Other Lender shall have any obligation to Agent or any
Other Lender for the failure by such Non-Funding Lender. Notwithstanding
anything set forth herein to the contrary so long as any Lender continues to be
a Non-Funding Lender, such Non-Funding Lender shall not have any voting or
consent rights under or with respect to any Loan Document or constitute a
"Lender" (or be included in the calculation of "Requisite Lenders" hereunder)
for any voting or consent rights under or with respect to any Loan Document.
(e) Dissemination of Information.
Agent will use reasonable efforts to provide Lenders with any notice
of Default or Event of Default received by Agent from, or delivered by Agent to,
any Credit Party, with notice of any Event of Default of which Agent has
actually become aware and with notice of any action taken by Agent following any
Event of Default; provided, however, that Agent shall not be liable to any
Lender for any failure to do so, except to the extent that such failure is
attributable solely to Agent's gross negligence or willful misconduct as finally
determined by a court of competent jurisdiction. Lenders acknowledge that
Borrower is required to provide Financial Statements and Collateral Reports to
certain of the Lenders in accordance with Schedules G and H hereto and agree
that Agent shall have no duty to provide the same to Lenders.
(f) Actions in Concert.
Anything in this Agreement to the contrary notwithstanding, each
Lender hereby agrees with each other Lender that no Lender shall take any action
to protect or enforce its rights arising out of this Agreement or the Notes
(including, without limitation, exercising any rights of set-off) without first
obtaining the prior written consent of Agent or Requisite Lenders, it being the
intent of Lenders that any such action to protect or enforce rights under this
Agreement and the Notes shall be taken in concert and at the direction or with
the consent of the Agent.
10. SUCCESSORS AND ASSIGNS
10.1 Successors and Assigns. This Agreement and the other Loan
Documents shall be binding on and shall inure to the benefit of each Credit
Party signatory hereto, Agent, Lenders and their respective successors and
assigns (including, in the case of any Credit Party, a
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debtor-in-possession on behalf of such Credit Party), except as otherwise
provided herein or therein. No Credit Party may assign, transfer, hypothecate or
otherwise convey its rights, benefits, obligations or duties hereunder or under
any of the other Loan Documents without the prior express written consent of
Agent and Requisite Lenders. Any such purported assignment, transfer,
hypothecation or other conveyance by any Credit Party signatory hereto without
the prior express written consent of Agent and Requisite Lenders shall be void.
The terms and provisions of this Agreement are for the purpose of defining the
relative rights and obligations of each Credit Party signatory hereto, Agent and
Lenders with respect to the transactions contemplated hereby and no Person shall
be a third party beneficiary of any of the terms and provisions of this
Agreement or any of the other Loan Documents.
11. MISCELLANEOUS
11.1 Complete Agreement; Modification of Agreement. The Loan
Documents constitute the complete agreement between the parties with respect to
the subject matter thereof and may not be modified, altered or amended except as
set forth in Section 11.2 below. Any letter of interest, commitment letter, fee
letter (other than the GE Capital Fee Letter) or confidentiality agreement
between any Credit Party and Agent or any Lender or any of their respective
affiliates, predating this Agreement and relating to a financing of
substantially similar form, purpose or effect shall be superseded by this
Agreement.
11.2 Amendments and Waivers. (a) Except as otherwise provided below,
no amendment, modification, termination or waiver of any provision of this
Agreement or any of the Notes, or any consent to any departure by any Credit
Party therefrom, shall in any event be effective unless the same shall be in
writing and signed by Agent and each Credit Party signatory hereto, and by
Requisite Lenders.
(b) No amendment, modification, termination or waiver of or consent
with respect to any provision of this Agreement which (i) increases the
percentage advance rates set forth in the definition of Borrowing Base or (ii)
makes less restrictive the nondiscretionary criteria for exclusion from Eligible
Inventory set forth in Schedule D hereto, shall be effective unless the same
shall be in writing and signed by Agent, all Lenders and each Credit Party
signatory hereto.
(c) No amendment, modification, termination or waiver shall, unless
in writing and signed by Agent and each Lender directly affected thereby, do any
of the following: (i) increase the principal amount of the Commitment of any
Lender (and all Lenders shall be deemed to be affected thereby); (ii) reduce the
principal of, rate of interest on or Fees payable with respect to any Loan,
Letter of Credit Obligations or Eligible Trade L/C Obligations of any affected
Lender; (iii) extend the final scheduled maturity date of the principal amount
of any Loan of any affected Lender; (iv) waive, forgive, defer, extend or
postpone any payment of interest or Fees as to any affected Lender; (v) release
any Guaranty of a Material Credit Party; (vi) except as otherwise permitted
herein or in the other Loan Documents, release the Agent's Liens upon, or permit
any Credit Party to sell or otherwise dispose of, any Collateral with a value
exceeding
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$5,000,000 in the aggregate other than sales of Inventory in the ordinary
course; (vii) increase the L/C Sublimit (and all Lenders shall be deemed to be
affected thereby); (viii) change the percentage of the Commitments or of the
aggregate unpaid principal amount of the Loans which shall be required for
Lenders or any of them to take any action hereunder; and (ix) amend or waive
this Section 11.2 or the definitions of the terms used in this Section 11.2
insofar as the definitions affect the substance of this Section 11.2.
Furthermore, no amendment, modification, termination or waiver affecting the
rights or duties of Agent under this Agreement or any other Loan Document shall
be effective unless in writing and signed by Agent, in addition to Lenders
required hereinabove to take such action. Each amendment, modification,
termination or waiver shall be effective only in the specific instance and for
the specific purpose for which it was given. No amendment, modification,
termination or waiver shall be required for Agent to take additional Collateral
pursuant to any Loan Document. No notice to or demand on any Credit Party in any
case shall entitle such Credit Party or any other Credit Party to any other or
further notice or demand in similar or other circumstances. Any amendment,
modification, termination, waiver or consent effected in accordance with this
Section 11.2 shall be binding upon each holder of the Notes at the time
outstanding and each future holder of the Notes.
(d) If, in connection with any proposed amendment, modification,
waiver or termination (a "Proposed Change"):
(i) requiring the consent of all affected Lenders, the consent
of Requisite Lenders is obtained, but the consent of other Lenders
whose consent is required is not obtained (each such Lender whose
consent is not obtained as described in this clause (i) or in clause
(ii) below being referred to as a "Non Consenting Lender"), or
(ii) requiring the consent of Requisite Lenders, the consent of
Lenders holding 50.1% of the aggregate Commitments is obtained, but
the consent of Requisite Lenders is not obtained,
then, so long as Agent is not a Non-Consenting Lender, Agent shall have the
right in its sole discretion (but shall be under no obligation) to purchase from
such Non-Consenting Lenders, and such Non-Consenting Lenders agree that they
shall, upon Agent's request, sell and assign to Agent, all of the Commitments of
such Non-Consenting Lender for an amount equal to the principal balance of all
Loans held by the Non-Consenting Lender and all accrued interest and Fees (other
than prepayment Fees) with respect thereto through the date of sale, such
purchase and sale to be consummated pursuant to an executed Lender Addition
Agreement.
(e) Upon indefeasible payment in full in cash and performance of all
of the Obligations (other than indemnification Obligations under Section 1.13)
and termination of the Commitments, and so long as no suits, actions,
proceedings or claims are pending or threatened against any Indemnified Person
asserting any damages, losses or liabilities that are Indemnified Liabilities,
Agent shall deliver to Borrower termination statements, termination letters
regarding bailee agreements, Control Letters and blocked account agreements and
other documents
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necessary or appropriate to evidence the termination of the Liens securing
payment of the Obligations.
11.3 Fees and Expenses. Borrower shall reimburse Agent for all out-of-
pocket expenses incurred in connection with the preparation of the Loan
Documents (including the reasonable fees and expenses of all of its special loan
counsel, advisors, consultants and auditors retained in connection with the Loan
Documents and the Related Transactions and advice in connection therewith).
Borrower shall reimburse Agent (and, with respect to clauses (c), (d) and (e)
below, each Lender) for all fees, costs and expenses, including the fees, costs
and expenses of counsel (including the allocated cost of in-house counsel) or
other advisors (including environmental and management consultants) for advice,
assistance, or other representation in connection with:
(a) the forwarding to Borrower or any other Person on behalf of
Borrower by Agent of the proceeds of the Loans;
(b) any amendment, modification or waiver of, or consent with
respect to, any of the Loan Documents or Related Transactions Documents or
advice in connection with the administration of the Loans made pursuant hereto
or its rights hereunder or thereunder;
(c) any litigation, contest, dispute, suit, proceeding or action
(whether instituted by Agent, any Lender, Borrower or any other Person) in any
way relating to the Collateral, any of the Loan Documents or any other agreement
to be executed or delivered in connection therewith or herewith, whether as
party, witness, or otherwise, including any litigation, contest, dispute, suit,
case, proceeding or action, and any appeal or review thereof, in connection with
a case commenced by or against Borrower or any other Person that may be
obligated to Agent by virtue of the Loan Documents;
(d) any attempt to enforce any rights of Agent or any Lender
against any or all of the Credit Parties or any other Person that may be
obligated to Agent or any Lender by virtue of any of the Loan Documents;
(e) any work-out or restructuring of the Loans during the
pendency of one or more Events of Default, but only as to Persons who are
Lenders as of the Closing Date and who continue to hold 7.5% or more of the
total Commitments;
(f) efforts to (i) consistent with the terms of the Loan
Documents, monitor the Loans or any of the other Obligations, (ii) consistent
with the terms of the Loan Documents verify, observe or assess any of the Credit
Parties or their respective affairs, and (iii) protect, assess, appraise,
collect, sell, liquidate or otherwise dispose of any of the Collateral;
including, without limitation, all the attorneys' and other professional and
service providers' fees arising from such services, including those in
connection with any appellate proceedings; and all expenses, costs, charges and
other fees incurred by such counsel and others in any way or respect
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arising in connection with or relating to any of the events or actions described
in this Section 11.3 shall be payable, on demand, by Borrower to Agent. Without
limiting the generality of the foregoing, such expenses, costs, charges and fees
may include: fees, costs and expenses of accountants, environmental advisors,
appraisers, investment bankers, management and other consultants and paralegals;
court costs and expenses; photocopying and duplication expenses; court reporter
fees, costs and expenses; long distance telephone charges; air express charges;
telegram or telecopy charges; secretarial overtime charges; and expenses for
travel, lodging and food paid or incurred in connection with the performance of
such legal or other advisory services.
11.4 No Waiver. Agent's or any Lender's failure, at any time or times,
to require strict performance by the Credit Parties of any provision of this
Agreement and any of the other Loan Documents shall not waive, affect or
diminish any right of Agent or such Lender thereafter to demand strict
compliance and performance therewith. Any suspension or waiver of an Event of
Default shall not suspend, waive or affect any other Event of Default whether
the same is prior or subsequent thereto and whether the same or of a different
type. None of the undertakings, agreements, warranties, covenants and
representations of any Credit Party contained in this Agreement or any of the
other Loan Documents and no Default or Event of Default by any Credit Party
shall be deemed to have been suspended or waived by Agent or any Lender, unless
such waiver or suspension is by an instrument in writing signed by an officer of
or other authorized employee of Agent and Requisite Lenders and directed to
Borrower specifying such suspension or waiver.
11.5 Remedies. Agent's and Lenders' rights and remedies under this
Agreement shall be cumulative and nonexclusive of any other rights and remedies
which Agent or any Lender may have under any other agreement, including the
other Loan Documents, by operation of law or otherwise. Recourse to the
Collateral shall not be required.
11.6 Severability. Wherever possible, each provision of this Agreement
and the other Loan Documents shall be interpreted in such a manner as to be
effective and valid under applicable law, but if any provision of this Agreement
shall be prohibited by or invalid under applicable law, such provision shall be
ineffective to the extent of such prohibition or invalidity, without
invalidating the remainder of such provision or the remaining provisions of this
Agreement.
11.7 Conflict of Terms. Except as otherwise provided in this Agreement
or any of the other Loan Documents by specific reference to the applicable
provisions of this Agreement, if any provision contained in this Agreement is in
conflict with, or inconsistent with, any provision in any of the other Loan
Documents, the provision contained in this Agreement shall govern and control.
11.8 Authorized Signature. Until Agent shall be notified by Borrower
to the contrary, the signature upon any Notice of Revolving Credit Advance,
Notice of Swing Line Advance, Notice of Continuation/Conversion or other notice
or certificate delivered in accordance herewith delivered pursuant hereto of an
officer of Borrower listed on Schedule 11.8
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shall bind Borrower and be deemed to be the act of Borrower affixed pursuant to
and in accordance with resolutions duly adopted by Borrower's Board of
Directors.
11.9 GOVERNING LAW. EXCEPT AS OTHERWISE EXPRESSLY PROVIDED IN ANY OF
THE LOAN DOCUMENTS, IN ALL RESPECTS, INCLUDING ALL MATTERS OF CONSTRUCTION,
VALIDITY AND PERFORMANCE, THIS AGREEMENT AND THE OBLIGATIONS ARISING HEREUNDER
SHALL BE GOVERNED BY, AND CONSTRUED AND ENFORCED IN ACCORDANCE WITH, THE
INTERNAL LAWS OF THE STATE OF ILLINOIS (WITHOUT REGARD TO CONFLICT OF LAW
PROVISIONS) AND ANY APPLICABLE LAWS OF THE UNITED STATES OF AMERICA. BORROWER
HEREBY CONSENTS AND AGREES THAT THE STATE OR FEDERAL COURTS LOCATED IN COOK
COUNTY, CITY OF CHICAGO, ILLINOIS SHALL HAVE EXCLUSIVE JURISDICTION TO HEAR AND
DETERMINE ANY CLAIMS OR DISPUTES BETWEEN BORROWER, AGENT AND LENDERS PERTAINING
TO THIS AGREEMENT OR ANY OF THE OTHER LOAN DOCUMENTS OR TO ANY MATTER ARISING
OUT OF OR RELATING TO THIS AGREEMENT OR ANY OF THE OTHER LOAN DOCUMENTS,
PROVIDED, THAT AGENT, LENDERS AND BORROWER ACKNOWLEDGE THAT ANY APPEALS FROM
THOSE COURTS MAY HAVE TO BE HEARD BY A COURT LOCATED OUTSIDE OF COOK COUNTY,
CITY OF CHICAGO, ILLINOIS AND, PROVIDED, FURTHER NOTHING IN THIS AGREEMENT SHALL
BE DEEMED OR OPERATE TO PRECLUDE AGENT FROM BRINGING SUIT OR TAKING OTHER LEGAL
ACTION IN ANY OTHER JURISDICTION TO REALIZE ON THE COLLATERAL OR ANY OTHER
SECURITY FOR THE OBLIGATIONS, OR TO ENFORCE A JUDGMENT OR OTHER COURT ORDER IN
FAVOR OF AGENT. BORROWER EXPRESSLY SUBMITS AND CONSENTS IN ADVANCE TO SUCH
JURISDICTION IN ANY ACTION OR SUIT COMMENCED IN ANY SUCH COURT, AND BORROWER
HEREBY WAIVES ANY OBJECTION WHICH BORROWER MAY HAVE BASED UPON LACK OF PERSONAL
JURISDICTION, IMPROPER VENUE OR FORUM NON CONVENIENS AND HEREBY CONSENTS TO THE
GRANTING OF SUCH LEGAL OR EQUITABLE RELIEF AS IS DEEMED APPROPRIATE BY SUCH
COURT. BORROWER HEREBY WAIVES PERSONAL SERVICE OF THE SUMMONS, COMPLAINT AND
OTHER PROCESS ISSUED IN ANY SUCH ACTION OR SUIT AND AGREES THAT SERVICE OF SUCH
SUMMONS, COMPLAINTS AND OTHER PROCESS MAY BE MADE BY REGISTERED OR CERTIFIED
MAIL ADDRESSED TO BORROWER AT THE ADDRESS SET FORTH IN SCHEDULE J OF THIS
AGREEMENT AND THAT SERVICE SO MADE SHALL BE DEEMED COMPLETED UPON THE EARLIER OF
BORROWER'S ACTUAL RECEIPT THEREOF OR THREE (3) DAYS AFTER DEPOSIT IN THE U.S.
MAILS, PROPER POSTAGE PREPAID.
11.10 Notices. Except as otherwise provided herein, whenever it is
provided herein that any notice, demand, request, consent, approval, declaration
or other communication shall or may be given to or served upon any of the
parties by any other parties, or whenever any of the parties desires to give or
serve upon any other parties any communication with respect to
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this Agreement, each such notice, demand, request, consent, approval,
declaration or other communication shall be in writing and shall be deemed to
have been validly served, given or delivered (a) upon the earlier of actual
receipt and three (3) Business Days after deposit in the United States Mail,
registered or certified mail, return receipt requested, with proper postage
prepaid, (b) upon transmission, when sent by telecopy or other similar facsimile
transmission (with such telecopy or facsimile promptly confirmed by delivery of
a copy by personal delivery or United States Mail as otherwise provided in this
Section 11.10), (c) one (1) Business Day after deposit with a reputable
overnight courier with all charges prepaid or (d) when delivered, if hand-
delivered by messenger, all of which shall be addressed to the party to be
notified and sent to the address or facsimile number indicated on Schedule J or
to such other address (or facsimile number) as may be substituted by notice
given as herein provided. The giving of any notice required hereunder may be
waived in writing by the party entitled to receive such notice. Failure or delay
in delivering copies of any notice, demand, request, consent, approval,
declaration or other communication to any Person (other than Borrower or Agent)
designated on Schedule J to receive copies shall in no way adversely affect the
effectiveness of such notice, demand, request, consent, approval, declaration or
other communication.
11.11 Section Titles. The Section titles and Table of Contents
contained in this Agreement are and shall be without substantive meaning or
content of any kind whatsoever and are not a part of the agreement between the
parties hereto.
11.12 Counterparts. This Agreement may be executed in any number of
separate counterparts, each of which shall collectively and separately
constitute one agreement.
11.13 WAIVER OF JURY TRIAL. BECAUSE DISPUTES ARISING IN CONNECTION
WITH COMPLEX FINANCIAL TRANSACTIONS ARE MOST QUICKLY AND ECONOMICALLY RESOLVED
BY AN EXPERIENCED AND EXPERT PERSON AND THE PARTIES WISH APPLICABLE STATE AND
FEDERAL LAWS TO APPLY (RATHER THAN ARBITRATION RULES), THE PARTIES DESIRE THAT
THEIR DISPUTES BE RESOLVED BY A JUDGE APPLYING SUCH APPLICABLE LAWS. THEREFORE,
TO ACHIEVE THE BEST COMBINATION OF THE BENEFITS OF THE JUDICIAL SYSTEM AND OF
ARBITRATION, THE PARTIES HERETO WAIVE ALL RIGHT TO TRIAL BY JURY IN ANY ACTION,
SUIT, OR PROCEEDING BROUGHT TO RESOLVE ANY DISPUTE, WHETHER SOUNDING IN
CONTRACT, TORT OR OTHERWISE, AMONG AGENT, LENDERS AND BORROWER ARISING OUT OF,
CONNECTED WITH, RELATED TO, OR INCIDENTAL TO THE RELATIONSHIP ESTABLISHED AMONG
THEM IN CONNECTION WITH, THIS AGREEMENT OR ANY OF THE OTHER LOAN DOCUMENTS OR
THE TRANSACTIONS RELATED THERETO.
11.14 Press Releases. Each Credit Party agrees that neither it nor its
Affiliates will in the future issue any press release or other public disclosure
using the name of GE Capital or its affiliates or referring to this Agreement,
the other Loan Documents or the Related Transactions without at least two (2)
Business Days' prior notice to GE Capital and without the prior written consent
of GE Capital unless (and only to the extent that) such Credit Party or
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Affiliate is required to do so by law or regulation and then, in any event, such
Credit Party or Affiliate will consult with GE Capital before issuing such press
release or other public disclosure. Each Credit Party consents to the
publication by Agent of a tombstone or similar advertising material relating to
the financing transactions contemplated by this Agreement and after such
publication, Borrower may make public disclosure of the same information set
forth in the tombstone. Furthermore, Borrower may make private disclosures to
its suppliers of the existence of this Agreement, the Maximum Amount hereunder,
and the fact that GE Capital acts as Agent hereunder.
11.15 Reinstatement. This Agreement shall remain in full force and
effect and continue to be effective should any petition be filed by or against
Borrower for liquidation or reorganization, should Borrower become insolvent or
make an assignment of the benefit of any creditor or creditors or should a
receiver or trustee be appointed for all or any significant part of Borrower's
assets, and shall continue to be effective or to be reinstated, as the case may
be, if at any time payment and performance of the Obligations, or any part
thereof, is, pursuant to applicable law, rescinded or reduced in amount, or must
otherwise be restored or returned by any obligee of the Obligations, whether as
a "voidable preference," "fraudulent conveyance," or otherwise, all as though
such payment or performance had not been made. In the event that any payment, or
any part thereof, is rescinded, reduced, restored or returned, the Obligations
shall be reinstated and deemed reduced only by such amount paid and not so
rescinded, reduced, restored or returned.
11.16 Advice of Counsel. Each of the parties represents to each other
party hereto that it has discussed this Agreement and, specifically, the
provisions of Sections 11.9 and 11.13, with its counsel.
11.17 No Strict Construction. The parties hereto have participated
jointly in the negotiation and drafting of this Agreement. In the event an
ambiguity or question of intent or interpretation arises, this Agreement shall
be construed as if drafted jointly by the parties hereto and no presumption or
burden of proof shall arise favoring or disfavoring any party by virtue of the
authorship of any provisions of this Agreement.
11.18 Confidentiality. Agent and Lenders shall maintain as
confidential all non-public information provided to them by the Credit Parties
for a period of two (2) years following the Commitment Termination Date,
provided that, Agent and Lenders may disclose such information (i) to Persons
employed or engaged by Agent or any Lender in evaluating, approving, structuring
or administering the Loans and the Commitments, (ii) to any bona fide assignee
or participant that has agreed to comply with the covenant contained in this
Section 11.18 (and any such bona fide assignee or participant may disclose such
information to Persons employed or engaged by them as described in clause (i)
above), (iii) as required or requested by any Governmental Authority, (iv)
pursuant to legal process, or (v) in connection with the exercise of any remedy
under the Loan Documents; provided further that, the foregoing restriction shall
cease to apply to any information that becomes publicly available other than by
the actions of Agent, Lenders or any Persons described in clauses (i) or (ii)
above.
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11.19 Effectiveness of this Agreement. This Agreement and the other
Loan Documents shall not become effective unless and until each of the
conditions set forth in Section 2.1 and on Schedule F hereto have been met or
satisfied, which shall occur on May 28, 1996, except for those items (such as
Approved Shippers' bailee letters) that are set forth in a Post-Closing Matters
Agreement dated as of the Closing Date between the Loan Parties and Agent.
[SIGNATURE PAGES FOLLOW]
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IN WITNESS WHEREOF, this Agreement has been duly executed as of the
date first written above.
WILSONS LEATHER HOLDINGS INC.
By: _____________________________________
Title: __________________________________
Revolving Loan GENERAL ELECTRIC CAPITAL
Commitment: CORPORATION, as Agent, Lender and
$45,000,000 Swing Line Lender
(including $10,000,000
Swing Line Commitment) By: _____________________________________
Title: __________________________________
Revolving Loan THE FIRST NATIONAL BANK OF BOSTON,
Commitment: as Lender
$12,500,000 By: _____________________________________
Title: __________________________________
Revolving Loan SANWA BUSINESS CREDIT
Commitment: CORPORATION, as Lender
$20,000,000
By: _____________________________________
Title: __________________________________
Revolving Loan SIGNET BUSINESS CREDIT, as Lender
Commitment:
$5,000,000 By: _____________________________________
Title: __________________________________
<PAGE>
Revolving Loan THE CIT GROUP/BUSINESS CREDIT, INC.,
Commitment: as Lender
$20,000,000 By: _____________________________________
Title:___________________________________
Revolving Loan TRANSAMERICA BUSINESS CREDIT
Commitment: CORPORATION, as Lender
$12,500,000 By: _____________________________________
Title:___________________________________
Revolving Loan CORESTATES BANK N.A., as Lender
Commitment:
$7,500,000 By: _____________________________________
Title: __________________________________
Revolving Loan BANKAMERICA BUSINESS CREDIT, INC.,
Commitment: as Lender
$20,000,000 By: _____________________________________
Title: __________________________________
Revolving Loan FIRST BANK NATIONAL ASSOCIATION,
Commitment: as Lender
$7,500,000 By: _____________________________________
Title: __________________________________
<PAGE>
The undersigned are executing this Credit Agreement in their capacity as Credit
Parties, but only as to the representations, warranties and covenants contained
in Sections 3, 5 and 6:
BERMANS THE LEATHER EXPERTS INC. ROSEDALE WILSONS, INC.
By: By:
---------------------------- ------------------------------
Title: Title:
------------------------- ---------------------------
RIVER HILLS WILSONS, INC. WILSONS HOUSE OF SUEDE, INC.
By: By:
---------------------------- ------------------------------
Title: Title:
------------------------- ---------------------------
WILSONS THE LEATHER EXPERTS INC. WILSONS CENTER, INC.
By: By:
---------------------------- ------------------------------
Title: Title:
------------------------- ---------------------------
<PAGE>
SCHEDULE A
DEFINITIONS
-----------
Capitalized terms used in the Agreement shall have (unless otherwise
provided elsewhere in the Agreement) the following respective meanings and all
section references in the following definitions shall refer to Sections of the
Agreement:
"Account Debtor" shall mean any Person who may become obligated to any
Credit Party under, with respect to, or on account of, an Account.
"Accounts" shall mean all "accounts," as such term is defined in the
Code, now owned or hereafter acquired by any Credit Party and, in any event,
including, without limitation, (a) all accounts receivable, other receivables,
book debts and other forms of obligations (other than forms of obligations
evidenced by Chattel Paper, Documents or Instruments) now owned or hereafter
received or acquired by or belonging or owing to any Credit Party, whether
arising out of goods sold or services rendered by it or from any other
transaction (including, without limitation, any such obligations which may be
characterized as an account or contract right under the Code), (b) all of each
Credit Party's rights in, to and under all purchase orders or receipts now owned
or hereafter acquired by it for goods or services, (c) all of each Credit
Party's rights to any goods represented by any of the foregoing (including,
without limitation, unpaid sellers' rights of rescission, replevin, reclamation
and stoppage in transit and rights to returned, reclaimed or repossessed goods),
(d) all monies due or to become due to any Credit Party, under all purchase
orders and contracts for the sale of goods or the performance of services or
both by such Credit Party or in connection with any other transaction (whether
or not yet earned by performance on the part of such Credit Party) now or
hereafter in existence, including, without limitation, all rights to receive the
proceeds of said purchase orders and contracts, and (e) all collateral security
and guarantees of any kind, now or hereafter in existence, given by any Person
with respect to any of the foregoing.
"Acquisition" shall mean a series of related transactions by which (i)
the Management Investors invest $2,000,000 in cash equity in Newco, a
corporation formed by Seller; (ii) Newco acquires common stock of Parent for (1)
$2,000,000 in cash, (2) the Subordinated Note, (3) a warrant for 15% of the
common stock of Newco, (4) a management warrant for 12% of the common stock of
Newco which will be reduced share-for-share by the vesting in management of
performance restricted stock, (5) common stock of Newco, and (6) preferred stock
of Newco; and (iii) Seller sells its common and preferred stock of Newco for
$10,000,000 in cash to the Investors.
"Acquisition Agreement" means collectively, the Sale Agreement dated
as of May 24, 1996 among Seller, Newco and Parent; the Investor Stock Purchase
Agreement of even date herewith among Seller and the Investors; and the Manager
Stock Purchase Agreement of even date herewith among Seller and the Management
Investors.
S-A-1
<PAGE>
"Advance" shall mean any Revolving Credit Advance or Swing Line
Advance, as the context may require.
"Affiliate" shall mean, with respect to any Person, (a) each Person
that, directly or indirectly, owns or controls, whether beneficially, or as a
trustee, guardian or other fiduciary, five percent (5%) or more of the Stock
having ordinary voting power in the election of directors of such Person, (b)
each Person that controls, is controlled by or is under common control with such
Person or (c) each of such Person's officers, directors, joint venturers and
partners. For the purposes of this definition, "control" of a Person shall mean
the possession, directly or indirectly, of the power to direct or cause the
direction of its management or policies, whether through the ownership of voting
securities, by contract or otherwise; provided, however, that the term
"Affiliate" shall specifically exclude Agent and each Lender.
"Agent" shall mean GE Capital or its successor appointed pursuant to
Section 9.7.
"Agreement" shall mean the Credit Agreement by and among Borrower, GE
Capital, as Lender, Swing Line Lender and Agent and the other Lenders signatory
from time to time to the Agreement.
"Appendices" shall have the meaning assigned to it in the recitals to
the Agreement.
"Applicable Index Margin" shall mean a per annum rate of interest
payable in addition to the Index Rate on Index Rate Loans, determined by
reference to Section 1.6.
"Applicable LIBOR Margin" shall mean a per annum rate of interest
payable in addition to the LIBOR Rate on LIBOR Rate Loans, determined by
reference to Section 1.6.
"Applicable L/C Margin" shall mean the per annum letter of credit fee
payable with respect to Letter of Credit Obligations and Eligible Trade L/C
Obligations, determined by reference to Section 1.6.
"Applicable Swing Line Margin" shall mean the per annum rate of
interest payable in addition to the Index Rate on Swing Line Loans, determined
by reference to Section 1.6.
"Approved Shipper" shall mean any reputable and creditworthy shipper
or freight forwarder transporting finished goods Inventory from overseas to
Borrower's Distribution Center or, at Borrower's direction, to Store Guarantors'
Stores that has entered into a bailee letter with Agent on terms acceptable to
Agent regarding the in-transit Inventory.
"Bermans" mean Bermans The Leather Experts Inc., a Delaware
corporation.
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<PAGE>
"Borrower" shall have the meaning assigned thereto in the recitals to
the Agreement.
"Borrowing Availability" shall have the meaning assigned to it in
Section 1.1(a)(i).
"Borrowing Base" shall mean, as of any date of determination, the sum
of (i) sixty-five percent (65%) of the book value of Eligible Inventory (other
than Lay Away Inventory) valued on a first-in, first-out basis (at the lower of
cost or market), plus (ii) a seasonal over-advance of $7,500,000 during the
months of August and September of each year, plus (iii) sixty-five percent (65%)
of Lay Away Inventory valued as follows: (unpaid purchase price (divided by)
.625) x .50, minus (iv) Reserves.
"Borrowing Base Certificate" shall mean a certificate to be executed
and delivered from time to time by Borrower in the form attached to the
Agreement as Exhibit 4.1(b).
"Business Day" shall mean any day that is not a Saturday, a Sunday or
a day on which banks are required or permitted to be closed in the State of
Illinois or the State of Minnesota and in reference to LIBOR Loans shall mean
any such day that is also a LIBOR Business Day.
"Capital Expenditures" shall mean all payments during any measuring
period (including the principal portion of payments under Capital Leases,
installment purchase agreements and other similar purchase money financing
arrangements) for any fixed assets or improvements or for replacements,
substitutions or additions thereto, that have a useful life of more than one
year and that are required to be capitalized under GAAP.
"Capital Lease" shall mean, with respect to any Person, any lease of
any property (whether real, personal or mixed) by such Person as lessee that, in
accordance with GAAP, either would be required to be classified and accounted
for as a capital lease on a balance sheet of such Person or otherwise be
disclosed as such in a note to such balance sheet.
"Capital Lease Obligation" shall mean, with respect to any Capital
Lease, the amount of the obligation of the lessee thereunder that, in accordance
with GAAP, would appear on a balance sheet of such lessee in respect of such
Capital Lease or otherwise be disclosed in a note to such balance sheet.
"Cash Management Systems" shall have the meaning assigned to it in
Section 1.8.
"Change of Control" shall mean any event, transaction or occurrence as
a result of which (a) prior to a Qualified Public Offering Management Investors
shall cease to own and control all of the economic and voting rights associated
with ownership of at least twenty-two percent (22%) of the outstanding capital
Stock of all classes of Newco on a fully diluted basis, (b) Newco shall cease to
own and control all of the economic and voting rights associated with all of the
outstanding capital stock of Parent or (c) Parent shall cease to own and control
all of the
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<PAGE>
economic and voting rights associated with all of the outstanding capital stock
of each of its Subsidiaries, except as permitted under Section 6.1 of the
Agreement.
"Charges" shall mean all federal, state, county, city, municipal,
local, foreign or other governmental taxes (including, without limitation, taxes
owed to the PBGC at the time due and payable), levies, assessments, charges,
liens, claims or encumbrances upon or relating to (a) the Collateral, (b) the
Obligations, (c) the employees, payroll, income or gross receipts of any Credit
Party, (b) any Credit Party's ownership or use of any properties or other
assets, or (e) any other aspect of any Credit Party's business.
"Chattel Paper" shall mean any "chattel paper," as such term is
defined in the Code, now owned or hereafter acquired by any Credit Party,
wherever located.
"Closing Date" shall mean May 25, 1996.
"Code" shall mean the Uniform Commercial Code as the same may, from
time to time, be enacted and in effect in the State of Illinois; provided,
however, in the event that, by reason of mandatory provisions of law, any or all
of the attachment, perfection or priority of Agent's or any Lender's security
interest in any Collateral is governed by the Uniform Commercial Code as enacted
and in effect in a jurisdiction other than the State of Illinois, the term
"Code" shall mean the Uniform Commercial Code as enacted and in effect in such
other jurisdiction solely for purposes of the provisions hereof relating to such
attachment, perfection or priority and for purposes of definitions related to
such provisions.
"Collateral" shall mean the property covered by the Security Agreement
and the other Collateral Documents and any other personal property, tangible or
intangible, now existing or hereafter acquired, that may at any time be or
become subject to a security interest or Lien in favor of Agent, on behalf of
itself and Lenders, to secure the Obligations.
"Collateral Documents" shall mean the Security Agreement, the
Consignment Agreement, the Pledge Agreements, the Guaranties, the Patent
Security Agreement, the Trademark Security Agreement, the Copyright Security
Agreement and all similar agreements entered into guaranteeing payment of, or
granting a Lien upon property as security for payment of, the Obligations.
"Collateral Reports" shall mean the reports with respect to the
Collateral referred to in Schedule H.
"Collection Account" shall mean that certain account of Agent, account
number 502-328-54 in the name of Agent at Bankers Trust Company in New York,
New York or any substitute Collection Account established in accordance with
Schedule E hereto.
"Commitments" shall mean (a) as to any Lender, the aggregate of such
Lender's Revolving Loan Commitment and/or Swing Line Commitment as set forth on
the signature page
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<PAGE>
to the Agreement or in the most recent Lender Addition Agreement executed by
such Lender and (b) as to all Lenders, the aggregate of all Lenders' Revolving
Loan Commitments and Swing Line Commitment, which aggregate commitment shall be
One Hundred Fifty Million Dollars ($150,000,000) on the Closing Date, as such
amount may be adjusted, if at all, from time to time in accordance with the
Agreement.
"Commitment Termination Date" shall mean the earliest of (a) May 24,
1999, (b) the date of termination of Lenders' obligations to make Advances
and/or incur Letter of Credit Obligations and Eligible Trade L/C Obligations or
permit existing Loans to remain outstanding pursuant to Section 8.2(b), and (c)
the date of indefeasible prepayment in full by Borrower of the Loans and the
cancellation and return of all Letters of Credit or the cash collateralization
of all Letter of Credit Obligations and Eligible Trade L/C Obligations pursuant
to Schedule B, and the permanent reduction of the Revolving Loan Commitment and
the Swing Line Commitment to zero dollars ($0), in accordance with the
provisions of Section 1.3(c).
"Concentration Account" shall have the meaning assigned to it on
Schedule E.
"Consignment Agreement" shall mean the Master Consignment Agreement of
even date herewith among Borrower and all of the Store Guarantors.
"Contracts" shall mean all "contracts," as such term is defined in the
Code, now owned or hereafter acquired by any Credit Party, in any event,
including all contracts, undertakings, or agreements (other than rights
evidenced by Chattel Paper, Documents or Instruments) in or under which any
Credit Party may now or hereafter have any right, title or interest, including,
without limitation, any and all agreements relating to the terms of payment or
the terms of performance of any Account.
"Contribution" shall mean as to each Store, for any fiscal period,
revenues of that Store less direct operating expenses of that Store, including
advertising and supervisory allocated expenses.
"Control Letter" shall mean a letter agreement between the Agent and
(i) the issuer of uncertificated securities with respect to uncertificated
securities in the name of any Credit Party, (ii) a securities intermediary with
respect to securities, whether certificated or uncertificated, securities
entitlements and other financial assets held in a securities account in the name
of any Credit Party, (iii) a futures commission merchant or clearing house with
respect to commodity accounts and commodity contracts held by any Credit Party,
whereby, among other things, the issuer, securities intermediary or futures
commission merchant disclaims any security interest in the applicable financial
assets, acknowledges the Lien of the Agent, on behalf of itself and the Lenders,
on such financial assets, and agrees to follow the instructions or entitlement
orders of the Agent without further consent by such Credit Party.
"Credit Parties" shall mean Parent, Borrower, Newco and each Store
Guarantor.
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"Default" shall mean any event which, with the passage of time or
notice or both, would, unless cured or waived, become an Event of Default.
"Default Rate" shall have the meaning assigned to it in Section
1.5(d).
"Disbursement Accounts" shall have the meaning assigned to it on
Schedule E.
"Distribution Center" shall mean the warehouse and distribution center
owned by Borrower or owned by Bermans and leased to and operated by Borrower,
located at 7401 Boone Avenue North, Brooklyn Park, Minnesota 55428.
"Documents" shall mean any "documents," as such term is defined in the
Code, now owned or hereafter acquired by any Credit Party, wherever located.
"Dollars or $" shall mean lawful currency of the United States of
America.
"EBIT" shall mean, with respect to Newco for any fiscal period,
consolidated net income from operations before Interest Charges, income taxes
and non-cash charges relating to the vesting of restricted stock held by
employees of Newco and its consolidated Subsidiaries (without duplication)
determined in accordance with GAAP and in a manner consistent with the Financial
Statements attached as Disclosure Schedule 3.4(A).
"EBIT/Cash Interest Coverage" shall mean for any fiscal period or
periods of Newco, EBIT for such period(s) divided by cash Interest Charges for
such period(s).
"EBITDA" shall mean, with respect to Newco for any fiscal period
(without duplication), consolidated net income from operations (before Interest
Charges, income taxes, depreciation, amortization (including amortization of
capitalized costs relating to the Related Transactions), and non-cash charges
relating to the vesting of restricted stock held by employees, determined in
accordance with GAAP.
"Eligible In-Transit Inventory" shall mean Inventory which is not
excluded from being Eligible Inventory by any of the criteria set forth in
Schedule D, except that such Inventory is in-transit from the manufacturer
thereof to the Distribution Center or by drop shipment to one or more Stores
operated by a Store Guarantor. In furtherance of and without limiting the
foregoing: Eligible In-Transit Inventory shall be limited to finished goods (i)
in the possession of an Approved Shipper under contract with Borrower and in
which Borrower has good title; (ii) as to which Agent for the benefit of Lenders
has a first priority security interest through constructive possession by means
of a bailee agreement with an Approved Shipper; (iii) which have been accepted
by Borrower (F.O.B. shipping point) as conforming goods and as to which the L/C
Issuer has received an inspection certificate signed by Borrower's agent or
employee; (iv) which are fully insured against loss under insurance naming Agent
as loss payee for the benefit of Lenders; and (v) as to which the purchase price
has been paid to the manufacturer by a draw under the corresponding Eligible
Trade L/C.
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<PAGE>
"Eligible Inventory" shall have the meaning assigned to it in Schedule
D to the Agreement. Unless the context otherwise requires, Eligible Inventory
shall include Eligible In-Transit Inventory.
"Eligible Trade L/C's" shall mean, subject to the further conditions
contained in Section 6.19 of the Agreement, trade letters of credit issued by
the L/C Issuer for the account of Borrower or prior to the Closing Date for the
account of House of Suede for payment of the purchase price of finished goods
inventory which will be Eligible In-Transit Inventory upon presentation of a
draft under that trade letter of credit.
"Eligible Trade L/C Obligations" shall mean all outstanding
obligations incurred by Agent and Lenders at the request of Borrower, whether
direct or indirect, contingent or otherwise, due or not due, in connection with
the issuance of a reimbursement agreement or guaranty by Agent with respect to
any Eligible Trade L/C. The amount of any such Eligible Trade L/C Obligations
shall equal the maximum amount which may be payable by Agent or Lenders
thereupon or pursuant thereto.
"Environmental Laws" shall mean all federal, state, local and foreign
laws, statutes, ordinances and regulations, now or hereafter in effect, and in
each case as amended or supplemented from time to time, and any applicable
judicial or administrative interpretation thereof, including any applicable
judicial or administrative order, consent decree or judgment, relative to the
applicable real estate, relating to the regulation and protection of human
health, safety, the environment and natural resources (including ambient air,
surface water, groundwater, wetlands, land surface or subsurface strata,
wildlife, aquatic species and vegetation). Environmental Laws include, but are
not limited to, the Comprehensive Environmental Response, Compensation, and
Liability Act of 1980, as amended (42 U.S.C. (S)(S) 9601 et seq.) ("CERCLA");
the Hazardous Material Transportation Act, as amended (49 U.S.C. (S)(S) 1801 et
seq.); the Federal Insecticide, Fungicide, and Rodenticide Act, as amended (7
U.S.C. (S)(S) 136 et seq.); the Resource Conservation and Recovery Act, as
amended (42 U.S.C. (S)(S) 6901 et seq.) ("RCRA"); the Toxic Substance Control
Act, as amended (15 U.S.C. (S)(S) 2601 et seq.); the Clean Air Act, as amended
(42 U.S.C. (S)(S) 740 et seq.); the Federal Water Pollution Control Act, as
amended (33 U.S.C. (S)(S) 1251 et seq.); the Occupational Safety and Health Act,
as amended (29 U.S.C. (S)(S) 651 et seq.) ("OSHA"); and the Safe Drinking Water
Act, as amended (42 U.S.C. (S)(S) 300(f) et seq.), and any and all regulations
promulgated thereunder, and all analogous state, local and foreign counterparts
or equivalents and any transfer of ownership notification or approval statutes.
"Environmental Liabilities and Costs" shall mean all liabilities,
obligations, responsibilities, remedial actions, removal actions, losses,
damages, punitive damages, consequential damages, treble damages, costs and
expenses (including all fees, disbursements and expenses of counsel, experts and
consultants and costs of investigation and feasibility studies), fines,
penalties, sanctions and interest incurred as a result of any claim, suit,
action or demand by any person or entity, whether based in contract, tort,
implied or express warranty, strict liability, criminal or civil statute or
common law (including any thereof arising under any Environmental
S-A-7
<PAGE>
Law, permit, order or agreement with any Governmental Authority) and which
relate to any health or safety condition regulated under any Environmental Law
or in connection with any other environmental matter or Release, threatened
Release or the presence of a Hazardous Material or threatened Release of a
Hazardous Material.
"Environmental Permits" shall mean all permits, licenses,
administrative orders, consent orders, consent decrees, governmental agency
agreements, or other written documents detailing required environmental
performance expected of or permitted by any Credit Party by Governmental
Authority.
"ERISA" shall mean the Employee Retirement Income Security Act of 1974
(or any successor legislation thereto), as amended from time to time, and any
regulations promulgated thereunder.
"ERISA Affiliate" shall mean, with respect to any Credit Party, any
trade or business (whether or not incorporated) which, together with such Credit
Party, are treated as a single employer within the meaning of Sections 414(b),
(c), (m) or (o) of the IRC with respect to any period after the Closing Date.
"ERISA Event" shall mean, with respect to any Credit Party or any
ERISA Affiliate, (a) any event described in Section 4043(c) of ERISA with
respect to a Title IV Plan; (b) the withdrawal of any Credit Party or ERISA
Affiliate from a Title IV Plan subject to Section 4063 of ERISA during a plan
year in which it was a substantial employer, as defined in Section 4001(a)(2) of
ERISA; (c) the complete or partial withdrawal of any Credit Party or any ERISA
Affiliate from any Multiemployer Plan; (d) the filing of a notice of intent to
terminate a Title IV Plan or the treatment of a plan amendment as a termination
under Section 4041 of ERISA; (e) the institution of proceedings to terminate a
Title IV Plan or Multiemployer Plan by the PBGC; (f) the failure by any Credit
Party or ERISA Affiliate to make when due required contributions to a
Multiemployer Plan or Title IV Plan unless such failure is cured within 30 days;
(g) any other event or condition which might reasonably be expected to
constitute grounds under Section 4042 of ERISA for the termination of, or the
appointment of a trustee to administer, any Title IV Plan or Multiemployer Plan
or for the imposition of liability under Section 4069 or 4212(c) of ERISA; (h)
the termination of a Multiemployer Plan under Section 4041A of ERISA or the
reorganization or insolvency of a Multiemployer Plan under Section 4241 of
ERISA; or (i) the loss of a Qualified Plan's qualification or tax exempt status.
"ESOP" shall mean a Plan which is intended to satisfy the requirements
of Section 4975(e)(7) of the IRC.
"Event of Default" shall have the meaning assigned to it in Section
8.1.
"Fees" shall mean any and all fees payable to Agent or any Lender
pursuant to the Agreement or any of the other Loan Documents.
S-A-8
<PAGE>
"Financial Statements" shall mean the consolidated income statements,
statements of cash flows and balance sheets of Newco and/or its Subsidiaries
delivered in accordance with Section 3.4 of the Agreement and Schedule G to the
Agreement.
"First Intermediate Parent" shall mean Rosedale Wilsons, Inc., a
Minnesota corporation.
"Fiscal Month" shall mean any of the monthly accounting periods of
Newco.
"Fiscal Quarter" shall mean any of the four 13 calendar week
accounting periods of Newco ending on or about the last day of January, April,
July and October of each year.
"Fiscal Year" shall mean any of the annual accounting periods of
Parent ending on December 31st of each year with respect to Fiscal Years ended
on or prior to December 31, 1995 and with respect to subsequent Fiscal Years any
of the annual accounting periods having Fiscal Quarters which end on the
Saturday closest to the last day of January, April, July, and October, of each
year in accordance with Section 6.16 of the Agreement.
"Fixed Charges" shall mean, for any fiscal period with respect to
Newco and its Subsidiaries on a consolidated basis, the aggregate of all
Interest Charges paid in cash during such period, plus (a) scheduled payments of
principal with respect to Indebtedness during such period, plus (b) lease
payments with respect to Stores (including base rent, percentage rent, common
area payments and real estate taxes) during such period, plus (c) the provision
for income taxes with respect to such period.
"Fixed Charges Coverage Ratio" shall mean, with respect to Newco and
its Subsidiaries on a consolidated basis for any fiscal period, the ratio of
(x) the sum of EBITDA, plus lease payments with respect to Stores (including
base rent, percentage rent, common area payments and real estate taxes) during
such period, less the unfinanced portion of Capital Expenditures during such
period to (y) Fixed Charges.
"Foreign Subsidiaries" shall mean Melville (U.K.) Holdings Ltd.,
Wilsons Leather Gatsland Limited and Wilsons Leather Gatsair Limited which
operate two stores in Great Britain as of the Closing Date and other
subsidiaries incorporated after the Closing Date under the laws of jurisdictions
outside of the United States to operate Stores in those jurisdictions.
"GAAP" shall mean generally accepted accounting principles in the
United States of America as from time to time in effect, consistently applied.
"GE Capital" shall mean General Electric Capital Corporation, a New
York corporation.
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<PAGE>
"GE Capital Fee Letter" shall mean that certain letter, dated as of
April 29, 1996, between GE Capital, Parent, and House of Suede with respect to
certain Fees to be paid from time to time by Borrower to GE Capital.
"General Intangibles" shall mean any "general intangibles," as such
term is defined in the Code, now owned or hereafter acquired by any Credit
Party, and, in any event, including, without limitation, all right, title and
interest which such Credit Party may now or hereafter have in or under any
Contract (including the Consignment Agreement, as amended or modified from time
to time) any Licenses, including, without limitation, all customer lists,
Trademarks, service marks, tradenames, business names, corporate names, trade
styles, logos and other source or business identifiers, and all applications
therefor and reissues, extensions or renewals thereof, rights in intellectual
property, interests in partnerships, joint ventures and other business
associations, licenses, permits, copyrights, trade secrets, proprietary or
confidential information, inventions (whether or not patented or patentable),
technical information, procedures, designs, knowledge, know-how, software, data
bases, data, skill, expertise, experience, processes, models, drawings,
materials and records, goodwill (including all goodwill associated with any
Trademark registration, or Trademark licensed under any Trademark License), all
rights and claims in or under insurance policies (including, without limitation,
insurance for fire, damage, loss and casualty, whether covering personal
property, tangible rights or intangible rights, all liability, life, key man and
business interruption insurance, and all unearned premiums), uncertificated
securities, choses in action, deposit, checking and other bank accounts, tax
refunds, rights to receive tax refunds and other payments and rights of
indemnification.
"Georgetown Subsidiaries" shall mean separate corporations each of
which operates an individual Store under the Georgetown name, consisting of 19
separate corporations as of the Closing Date.
"Governmental Authority" shall mean any nation or government, any
state or other political subdivision thereof, and any agency, department or
other entity exercising executive, legislative, judicial, regulatory or
administrative functions of or pertaining to government.
"Guaranteed Indebtedness" shall mean, as to any Person, any obligation
of such Person guaranteeing any indebtedness, lease, dividend, or other
obligation ("primary obligations") of any other Person (the "primary obligor")
in any manner, including any obligation or arrangement of such Person (a) to
purchase or repurchase any such primary obligation, (b) to advance or supply
funds (i) for the purchase or payment of any such primary obligation or (ii) to
maintain working capital or equity capital of the primary obligor or otherwise
to maintain the net worth or solvency or any balance sheet condition of the
primary obligor, (c) to purchase property, securities or services primarily for
the purpose of assuring the owner of any such primary obligation of the ability
of the primary obligor to make payment of such primary obligation, or (d) to
indemnify the owner of such primary obligation against loss in respect thereof.
The amount of any Guaranteed Indebtedness at any time shall be deemed to be an
amount equal to the lesser at such time of (x) the stated or determinable amount
of the primary obligation in respect of which such Guaranteed Indebtedness is
made or (y) the maximum amount for which such Person may be
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liable pursuant to the terms of the instrument embodying such Guaranteed
Indebtedness; or, if not stated or determinable, the maximum reasonably
anticipated liability (assuming full performance) in respect thereof.
"Guaranties" shall mean, collectively, the Parent Guaranty, the Store
Guarantors' Guaranty and any other guaranty executed by any Guarantor in favor
of Agent and Lenders in respect of the Obligations.
"Guarantors" shall mean Newco, Parent, each Store Guarantor, and each
other Person, if any, which executes a guarantee or other similar agreement in
favor of Agent in connection with the transactions contemplated by the Agreement
and the other Loan Documents.
"Hazardous Material" shall mean any substance, material or waste, the
generation, handling, storage, treatment or disposal of which is regulated by or
forms the basis of liability now or hereafter under, any Government Authority in
any jurisdiction in which Borrower or any Subsidiary thereof has owned, leased,
or operated real property or disposed of hazardous materials, or by any Federal
government authority, including, without limitation, any material or substance
which is (a) defined as a "solid waste," "hazardous waste," "hazardous
material," "hazardous substance," "extremely hazardous waste" or "restricted
hazardous waste" or other similar term or phrase under any Environmental Laws,
(b) petroleum or any fraction or by-product thereof, asbestos, polychlorinated
biphenyls (PCB's), any radioactive substance, methane, volative hydrocarbons or
any industrial solvent, (c) designated as a "hazardous substance" pursuant to
Section 311 of the Clean Water Act, 33 U.S.C. (S)(S) 1251 et seq. (33 U.S.C.
(S)(S) 1321) or listed pursuant to Section 307 of the Clean Water Act (33 U.S.C.
(S) 1317), (d) defined as a "hazardous waste" pursuant to Section 1004 of the
Resource Conservation and Recovery Act, 42 U.S.C. (S) 6901, et seq. (42 U.S.C.
(S) 6903), or (e) defined as a "hazardous substance" pursuant to Section 1012 of
the Comprehensive Environmental Response, Compensation, and Liability Act, 42
U.S.C. (S) 9601 et seq. (42 U.S.C. (S) 9601).
"House of Suede" shall mean Wilsons House of Suede, Inc., a California
corporation.
"Indebtedness" of any Person shall mean without duplication (a) all
indebtedness of such Person for borrowed money or for the deferred purchase
price of property payment for which is deferred six (6) months or more, but
excluding obligations to trade creditors incurred in the ordinary course of
business that are not overdue by more than six (6) months unless being contested
in good faith, (b) all reimbursement and other obligations with respect to
letters of credit, bankers' acceptances and surety bonds, whether or not
matured, (c) all obligations evidenced by notes, bonds, debentures or similar
instruments, (d) all indebtedness created or arising under any conditional sale
or other title retention agreement with respect to property acquired by such
Person (even though the rights and remedies of the seller or lender under such
agreement in the event of default are limited to repossession or sale of such
property), (e) all Capital Lease Obligations, (f) all obligations of such Person
under commodity purchase or option agreements or other commodity price hedging
arrangements, in each case whether contingent or
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matured, (g) all obligations of such Person under any foreign exchange contract,
currency swap agreement, interest rate swap, cap or collar agreement or other
similar agreement or arrangement designed to alter the risks of that Person
arising from fluctuations in currency values or interest rates, in each case
whether contingent or matured, (h) all Indebtedness referred to above secured by
(or for which the holder of such Indebtedness has an existing right, contingent
or otherwise, to be secured by) any Lien upon or in property or other assets
(including accounts and contract rights) owned by such Person, even though such
Person has not assumed or become liable for the payment of such Indebtedness,
and (i) the Obligations.
"Index Rate" shall mean the higher of (a) the highest of the most
recently published or announced prime, corporate base, reference or similar
benchmark rate, however designated, announced by any of the five (5) largest
member banks of the New York Clearing House Association and (b) one half of one
percent (.5%) per annum over the Federal funds rate, in each case as of any date
of determination. Changes in the rate of interest applicable to Index Rate
Loans shall occur simultaneously with changes in the Index Rate.
"Index Rate Loan" shall mean the Revolving Loan or any portion thereof
bearing interest by reference to the Index Rate.
"Individual Store Subsidiaries" shall mean separate corporations each
of which operates an individual Store, excluding Foreign Subsidiaries.
"Instruments" shall mean any "instrument," as such term is defined in
the Code, now owned or hereafter acquired by any Credit Party, wherever located,
including, without limitation, all certificated securities, all certificates of
deposit, and all notes and other evidences of indebtedness, other than
instruments that constitute, or are a part of a group of writings that
constitute, Chattel Paper.
"Intellectual Property" shall mean any and all Licenses, Trademarks,
trade secrets and customer lists.
"Interest Charges" shall mean, with respect to any Person for any
fiscal period, the amount which, in conformity with GAAP, would be set forth
opposite the caption "interest expense" (or any like caption) on a consolidated
income statement of such Person and all other Persons with which such Person's
Financial Statements are to be consolidated in accordance with GAAP for the
relevant period ended on such date, including without limitation, in the case of
Newco and its Subsidiaries, the L/C Fee and Non-Use Fee.
"Interest Payment Date" means (a) as to any Index Rate Loan, the first
Business Day of each month to occur while such Loan is outstanding, and (b) as
to each LIBOR Loan, the last day of the LIBOR Period applicable thereto;
provided, however, that, in addition to the foregoing, each of (x) the date upon
which all of the Commitments have been terminated and the Loans have been paid
in full and (y) the Commitment Termination Date shall be deemed to be an
"Interest Payment Date" with respect to any interest which is then accrued under
the Agreement.
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"Inventory" shall mean any "inventory," as such term is defined in the
Code, now or hereafter owned or acquired by any Credit Party, wherever located,
and in any event including, without limitation, all inventory, merchandise,
goods and other personal property which are held by or on behalf of any Credit
Party for sale or lease or are furnished or are to be furnished under a contract
of service, or which constitute raw materials, work in process or materials used
or consumed or to be used or consumed in such Credit Party's business or in the
processing, production, packaging, promotion, delivery or shipping of the same,
including, without limitation, all other supplies.
"Investment Property" shall mean all "investment property," as such
term is defined in the Code, now or hereafter owned or acquired by, any Credit
Party, wherever located and, in any event, including, without limitation: (a)
all securities, whether certificated or uncertificated, including, without
limitation, stocks, bonds, interests in limited liability companies, partnership
interests, treasuries, certificates of deposit and mutual funds shares; (b) all
securities entitlements of any Credit Party, including, without limitation, all
rights of any Credit Party to any securities account and any free credit balance
or other money owing by any securities intermediary with respect to any such
account; (c) all securities accounts held by any Credit Party; (d) all commodity
contracts held by any Credit Party and (e) all commodity accounts held by any
Credit Party.
"Investors" shall mean as of the Closing Date, the following
individuals: Lyle Berman and Morris Goldfarb, Neal I. Sell, Ercu Ucan, and
Irving Meisel through Leather Investors Limited Partnership I and II.
"IRC" shall mean the Internal Revenue Code of 1986, as amended, and
any successor thereto.
"IRS" shall mean the Internal Revenue Service, or any successor
thereto.
"L/C Issuer" shall have the meaning assigned to such term in Schedule
B.
"Lender Addition Agreement" shall mean an agreement in form and
substance acceptable to Agent or otherwise satisfactory to, and in any case
acknowledged by, Agent whereby a portion of any or all of the Commitments are
assigned to a Lender after the Closing Date.
"Lenders" shall mean GE Capital, the other Lenders named on the
signature page of the Agreement including without limitation the Swing Line
Lender, and, if any such Lender shall decide to assign all or any portion of the
Obligations, such term shall include such assignee.
"L/C Availability" shall have the meaning ascribed thereto in Section
1.2 of the Agreement.
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"L/C Fee" shall have the meaning ascribed thereto in Schedule B to
the Agreement.
"L/C Sublimit" shall mean $90,000,000.
"Lay Away Inventory" shall mean finished goods as to which retail
Store customers have made a deposit and possession of which is retained by a
Store Guarantor pending payment in full of the purchase price and has been
removed from inventory account records pursuant to the recording of a sale
transaction.
"Letter of Credit Obligations" shall mean all outstanding obligations
incurred by Agent and Lenders at the request of Borrower, whether direct or
indirect, contingent or otherwise, due or not due, in connection with the
issuance of a reimbursement agreement or guaranty by Agent with respect to any
Letter of Credit. The amount of such Letter of Credit Obligations shall equal
the maximum amount which may be payable by Agent or Lenders thereupon or
pursuant thereto. This term expressly excludes Eligible Trade L/C Obligations.
"Letters of Credit" shall mean trade or standby letters of credit
other than Eligible Trade L/Cs issued for the account of Borrower by L/C Issuer,
and bankers' acceptances issued by Borrower, for which Agent and Lenders have
incurred Letter of Credit Obligations.
"LIBOR Business Day" shall mean a Business Day on which banks in the
city of London are generally open for interbank or foreign exchange
transactions.
"LIBOR Loan" shall mean a Loan or any portion thereof bearing interest
by reference to the LIBOR Rate.
"LIBOR Period" shall mean, with respect to any LIBOR Loan, each period
commencing on a LIBOR Business Day selected by Borrower pursuant to this
Agreement and ending one, two or three months thereafter, as selected by
Borrower in an irrevocable notice to Agent as set forth in Section 1.5(e);
provided that the foregoing provision relating to LIBOR Periods is subject to
the following:
(a) if any LIBOR Period would otherwise end on a day that is not a
LIBOR Business Day, such LIBOR Period shall be extended to the next
succeeding LIBOR Business Day unless the result of such extension would be
to carry such LIBOR Period into another calendar month in which event such
LIBOR Period shall end on the immediately preceding LIBOR Business Day;
(b) any LIBOR Period that would otherwise extend beyond the
Commitment Termination Date shall end two (2) LIBOR Business Days prior to
such date;
(c) any LIBOR Period pertaining to a LIBOR Loan that begins on the
last LIBOR Business Day of a calendar month (or on a day for which there is
no numerically
S-A-14
<PAGE>
corresponding day in the calendar month at the end of such LIBOR Period)
shall end on the last LIBOR Business Day of a calendar month;
(d) Borrower shall select LIBOR Periods so as not to require a
payment or prepayment of any LIBOR Loan during a LIBOR Period for such
Loan; and
(e) Borrower shall select LIBOR Periods so that there shall be no
more than seven (7) separate LIBOR Loans outstanding at any one time.
"LIBOR Rate" shall mean for each LIBOR Period, a rate of interest
equal to:
(a) the offered rate for deposits in United States Dollars for the
applicable LIBOR Period which appears on Telerate Page 3750 as of 11:00
a.m., London time, on the second full LIBOR Business Day next preceding the
first day of each LIBOR Period (unless such date is not a Business Day, in
which event the next succeeding Business Day will be used); divided by
(b) a number equal to 1.0 minus the aggregate (but without
duplication) of the rates (expressed as a decimal fraction) of reserve
requirements in effect on the day which is two (2) LIBOR Business Days
prior to the beginning of such LIBOR Period (including, without limitation,
basic, supplemental, marginal and emergency reserves under any regulations
of the Board of Governors of the Federal Reserve system or other
governmental authority having jurisdiction with respect thereto, as now and
from time to time in effect) for Eurocurrency funding (currently referred
to as "Eurocurrency liabilities" in Regulation D of such Board) which are
required to be maintained by a member bank of the Federal Reserve System.
If such interest rates shall cease to be available from Telerate News
Service, the LIBOR Rate shall be determined from such financial reporting
service or other information as shall be mutually acceptable to Agent and
Borrower.
"License" shall mean any Trademark License or other license of rights
or interests in Trademarks now held or hereafter acquired by any Credit Party.
"Lien" shall mean any mortgage or deed of trust, pledge,
hypothecation, assignment, deposit arrangement, lien, charge, claim, security
interest, easement or encumbrance, or preference, priority or other security
agreement or preferential arrangement of any kind or nature whatsoever
(including any synthetic lease or title retention agreement, any financing lease
having substantially the same economic effect as any of the foregoing, and the
filing of, or agreement to give, any financing statement perfecting a security
interest under the Code or comparable law of any jurisdiction).
"Litigation" shall have the meaning assigned to it in Section 3.13.
S-A-15
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"Loan Account" shall have the meaning assigned to it in Section 1.12.
"Loan Documents" shall mean the Agreement, the Notes, the Collateral
Documents and all other agreements, instruments, documents and certificates
identified in the Schedule of Documents executed and delivered to, or in favor
of, Agent and/or Lenders and including (without limitation) all other pledges,
powers of attorney, consents, assignments, contracts, notices, and all other
written matter whether heretofore, now or hereafter executed by or on behalf of
any Material Credit Party, and delivered to Agent or any Lender in connection
with the Agreement or the transactions contemplated hereby. Any reference in
the Agreement or any other Loan Document to a Loan Document shall include all
appendices, exhibits or schedules thereto, and all amendments, restatements,
supplements or other modifications thereto, and shall refer to such Agreement as
the same may be in effect at any and all times such reference becomes operative.
"Loan Parties" shall mean Newco, Parent, Borrower, First Intermediate
Parent, Second Intermediate Parent, Bermans and House of Suede.
"Loans" shall mean the Revolving Loan and the Swing Line Loan.
"Management Investors" shall mean, as of the Closing Date, individuals
employed by Borrower or any Loan Party and who own Stock of Newco.
"Material Adverse Effect" shall mean a material adverse effect on (a)
the business, assets, operations, prospects or financial or other condition of
the Loan Parties considered as a whole, (b) Borrower's ability to pay any of the
Loans or any of the other Obligations in accordance with the terms thereof, (c)
any material part of the Collateral or Agent's Liens, on behalf of itself and
Lenders, on such Collateral or the priority of such Liens, or (d) Agent's or any
Lender's rights and remedies under the Agreement and the other Loan Documents.
Without limiting the foregoing, any event or occurrence which results or could
reasonably be expected to result in costs or liabilities in excess of the lesser
of $3,000,000 or 10% of Borrowing Base as of any date of determination shall be
deemed to have a Material Adverse Effect.
"Material Credit Party" shall mean Newco, Parent, First Intermediate
Parent, Second Intermediate Parent, Borrower, Bermans, House of Suede, and each
other Store Guarantor that operates more than twelve (12) Stores.
"Maximum Amount" shall mean, at any particular time, an amount equal
to the Revolving Loan Commitment (including as a subpart thereof the Swing Line
Commitment) of all Lenders.
"Multiemployer Plan" shall mean a "multiemployer plan" as defined in
Section 4001(a)(3) of ERISA, and to which any Credit Party or ERISA Affiliate is
making or is obligated to make contributions on behalf of participants who are
or were employed by any of them after the Closing Date.
S-A-16
<PAGE>
"Net Borrowing Availability" shall mean, as of any date of
determination thereof, the Borrowing Base at such time less the sum of (i) the
then outstanding aggregate Revolving Credit Advances, plus (ii) 100% of Letter
of Credit Obligations, plus (iii) 35% of Eligible Trade L/C Obligations, plus
(iv) the then outstanding Swing Line Loan.
"Net Worth" shall mean the book value of the assets of Newco on a
consolidated basis (inclusive of goodwill, patents, trademarks, tradenames,
copyrights, organization expenses, treasury stock, debt discount and expense,
deferred charges and other like intangibles), minus (a) reserves applicable
thereto, and (b) all of Newco's liabilities on a consolidated basis (including
accrued and deferred income taxes), all as determined in accordance with GAAP.
"Newco" shall mean Wilsons The Leather Experts Inc., a Minnesota
corporation.
"Non-use Fee" shall have the meaning assigned to it in Section 1.9(b).
"Notes" shall mean the Revolving Notes and the Swing Line Note,
collectively.
"Notice of Conversion/Continuation" shall have the meaning assigned to
it in Section 1.5(e).
"Notice of Revolving Credit Advance" shall have the meaning assigned
to it in Section 1.1(a).
"Notice of Swing Line Advance" shall have the meaning assigned to it
in Section 1.1(b)(i).
"Obligations" shall mean all loans, advances, debts, liabilities and
obligations, for the performance of covenants, tasks or duties or for payment of
monetary amounts (whether or not such performance is then required or
contingent, or such amounts are liquidated or determinable) owing by any Credit
Party to Agent or any Lender, and all covenants and duties regarding such
amounts, of any kind or nature, present or future, whether or not evidenced by
any note, agreement or other instrument, arising under the Agreement or any of
the other Loan Documents. This term includes all principal, interest
(including, without limitation, all interest which accrues after the
commencement of any case or proceeding in bankruptcy after the insolvency of, or
for the reorganization of any Credit Party, whether or not allowed in such
proceeding), Fees, Charges, expenses, attorneys' fees and any other sum
chargeable to any Credit Party under the Agreement or any of the other Loan
Documents.
"Overadvance" shall have the meaning assigned to it in Section
1.1(a)(iii).
"Parent" shall mean Wilsons Center, Inc., a Minnesota corporation.
S-A-17
<PAGE>
"Parent Guaranty" shall mean the Guaranty executed by Newco, Parent,
First Intermediate Parent and Second Intermediate Parent, as amended, modified
or restated from time to time.
"PBGC" shall mean the Pension Benefit Guaranty Corporation or any
successor thereto.
"Permitted Encumbrances" shall mean the following encumbrances: (a)
Liens for taxes or assessments or other governmental Charges not yet due and
payable or which are being contested in accordance with Section 5.2(b); pledges
or deposits securing obligations under workmen's compensation, unemployment
insurance, social security or public liability laws or similar legislation; (c)
pledges or deposits securing bids, tenders, contracts (other than contracts for
the payment of money) or leases to which any Credit Party is a party as lessee
made in the ordinary course of business; (d) deposits securing statutory
obligations of any Credit Party; (e) workers', mechanics', suppliers' or similar
liens arising in the ordinary course of business; (f) carriers', warehousemen's
or other similar possessory liens arising in the ordinary course of business;
(g) deposits securing, or in lieu of, surety, appeal or customs bonds in
proceedings to which any Credit Party is a party; (h) any attachment or judgment
lien not constituting an Event of Default under Section 8.1(j) of the Agreement;
(i) zoning restrictions, easements, licenses, or other restrictions on the use
of any Real Estate or other minor irregularities in title (including leasehold
title) thereto, so long as the same do not materially impair the use, value, or
marketability of such Real Estate; (j) Liens existing on the Closing Date and
listed on Schedule 6.7 hereto; (k) presently existing or hereinafter created
Liens in favor of Agent, on behalf of Lenders; (l) Liens created after the date
hereof by conditional sale or other title retention agreements (including,
without limitation, Capital Leases) or in connection with purchase money
Indebtedness with respect to assets acquired by any Credit Party in the ordinary
course of business, involving the incurrence of an aggregate amount of purchase
money Indebtedness and Capital Lease Obligations of not more than $5,000,000
outstanding at any one time for all such Liens (provided that such Liens attach
only to the assets subject to such purchase money debt and such Indebtedness is
incurred within thirty (30) days following such purchase and does not exceed
100% of the purchase price of the subject assets); and (m) subordinated Liens
securing the Subordinated Note.
"Person" shall mean any individual, sole proprietorship, partnership,
joint venture, trust, unincorporated organization, association, corporation,
limited liability company, institution, public benefit corporation, other entity
or government (whether federal, state, county, city, municipal, local, foreign,
or otherwise, including any instrumentality, division, agency, body or
department thereof).
"Plan" shall mean, at any time after the Closing Date, an employee
benefit plan, as defined in Section 3(3) of ERISA, which any Credit Party
maintains, contributes to or has an obligation to contribute to on behalf of
participants who are or were employed by any Credit Party.
S-A-18
<PAGE>
"Pledge Agreements" shall mean the separate Pledge Agreements,
executed by each of Newco, Parent and First Intermediate Parent with respect to
the Stock of their respective Subsidiaries and by Second Intermediate Parent
with respect to the Stock of Borrower, House of Suede and Bermans, as amended,
modified or restated from time to time.
"Proceeds" shall mean "proceeds," as such term is defined in the Code
and, in any event, shall include (a) any and all proceeds of any insurance,
indemnity, warranty or guaranty payable to any Credit Party from time to time
with respect to any of the Collateral, (b) any and all payments (in any form
whatsoever) made or due and payable to any Credit Party from time to time in
connection with any requisition, confiscation, condemnation, seizure or
forfeiture of all or any part of the Collateral by any Governmental Authority
(or any Person acting under color of governmental authority), (c) any claim of
any Credit Party against third parties for past, present or future infringement
of any Trademark or Trademark License, or for injury to the goodwill associated
with any Trademark or Trademark License, (d) any recoveries by any Credit Party
against third parties with respect to any litigation or dispute concerning any
of the Collateral, and (e) any and all other amounts from time to time paid or
payable under or in connection with any of the Collateral upon disposition or
otherwise.
"Pro Forma" means the unaudited consolidated balance sheet of Newco
and its Subsidiaries as of May 25, 1996 after giving pro forma effect to the
Related Transactions.
"Projections" means Parent's forecasted consolidated: (a) balance
sheets; (b) profit and loss statements; (c) cash flow statements; and (d)
capitalization statements, prepared in a manner consistent with the historical
Financial Statements of Parent together with appropriate supporting details and
a statement of underlying assumptions.
"Pro Rata Share" shall mean with respect to all matters relating to
any Lender, or with respect to the Revolving Loan, the percentage obtained by
dividing (i) the Revolving Loan Commitment and Swing Line Commitment of that
Lender by (ii) the aggregate Revolving Loan Commitments and Swing Line
Commitment of all Lenders.
"Qualified Plan" shall mean a Plan which is intended to be tax-
qualified under Section 401(a) of the IRC maintained by a Credit Party or ERISA
Affiliate after the Closing Date.
"Qualified Public Offering" shall mean a registered public offering of
common stock of Newco (on Form S-1 in the case of an initial public offering)
yielding at least $10,000,000 of net cash proceeds to Newco.
"Real Estate" shall have the meaning assigned to it in Section 3.6.
"Refunded Swing Line Loan" shall have the meaning assigned to it in
Section 1.1(b)(iii).
S-A-19
<PAGE>
"Related Transactions" means each borrowing under the Revolving Loan
on the Closing Date, the Acquisition, the issuance of the Subordinated Note, the
payment of all fees, costs and expenses associated with all of the foregoing and
the execution and delivery of all of the Related Transactions Documents.
"Related Transactions Documents" shall mean the Loan Documents, the
Acquisition Agreement, the Subordinated Note and the warrants issued in
connection with the Acquisition Agreement and all stockholders agreements among
the Investors and/or the Management Investors.
"Release" shall mean, as to any Person, any release, spill, emission,
leaking, pumping, injection, deposit, disposal, discharge, dispersal, dumping,
leaching or migration of Hazardous Materials in the indoor or outdoor
environment by such Person, including the movement of Hazardous Materials
through or in the air, soil, surface water, ground water or property.
"Requisite Lenders" shall mean (a) Lenders having more than sixty-six
and two-thirds percent (66 2/3%) of the Commitments of all Lenders, or (b) if
the Commitments have been terminated, more than sixty-six and two-thirds percent
(66 2/3%) of the aggregate outstanding amount of the Loans (with Swing Line
Loans being attributed to the Lenders participating therein) and Letter of
Credit Obligations and Eligible Trade L/C Obligations.
"Reserves" shall mean, for purposes of calculating the Borrowing Base,
(a) reserves established by Agent from time to time against the Borrowing Base
pursuant to Section 5.9 of the Agreement, (b) reserves established pursuant to
Section 5.4(c) of the Agreement, (c) reserves established pursuant to Section
1.11(c) of the Agreement and (d) subject to Section 1.7 of the Agreement, such
other reserves which Agent may, in its reasonable credit judgment, establish
from time to time. Without limiting the generality of the foregoing, shrinkage
Reserves consistent with those established by Borrower under GAAP, Reserves
established to ensure the payment of accrued and unpaid customs and shipping
charges with respect to Eligible In-Transit Inventory, a lay-away payment refund
Reserve with respect to Lay-Away Inventory, and a sales and use tax Reserve for
sales and use taxes due within ninety (90) days shall be deemed to be a
reasonable exercise of Agent's credit judgment.
"Restricted Payment" shall mean (a) the declaration or payment of any
dividend or the incurrence of any liability to make any other payment or
distribution of cash or other property or assets in respect of a Person's Stock,
(b) any payment on account of the purchase, redemption, defeasance, sinking fund
or other retirement of a Person's Stock or any other payment or distribution
made in respect thereof, either directly or indirectly, (c) any payment or
prepayment of principal of, premium, if any, or interest, fees or other charges
on or with respect to, and any redemption, purchase, retirement, defeasance,
sinking fund or similar payment and any claim for rescission with respect to,
any Subordinated Debt; (d) any payment made to redeem, purchase, repurchase or
retire, or to obtain the surrender of, any outstanding warrants, options or
other rights to acquire Stock of such Person now or hereafter outstanding; (e)
any payment of a claim
S-A-20
<PAGE>
for the rescission of the purchase or sale of, or for material damages arising
from the purchase or sale of, any shares of such Person's Stock or of a claim
for reimbursement, indemnification or contribution arising out of or related to
any such claim for damages or rescission; (f) any payment, loan, contribution,
or other transfer of funds or other property to any Stockholder of such Person;
and (g) any payment of management fees (or other fees of a similar nature) by
such Person to any Stockholder of such Person or their Affiliates.
"Retiree Welfare Plan" shall mean, at any time, a Plan that is a
"welfare plan" as defined in Section 3(2) of ERISA, that provides for continuing
coverage or benefits for any participant or any beneficiary of a participant
after such participant's termination of employment, other than continuation
coverage provided pursuant to Section 4980B of the IRC and at the sole expense
of the participant or the beneficiary of the participant which is maintained by
a Credit Party, or an ERISA Affiliate after the Closing Date.
"Revolving Credit Advance" shall have the meaning assigned to it in
Section 1.1(a)(i).
"Revolving Loan" shall mean as the context may require, at any time,
the sum of (i) the aggregate amount of Revolving Credit Advances outstanding to
Borrower plus (ii) the aggregate Letter of Credit Obligations and Eligible Trade
L/C Obligations incurred on behalf of Borrower.
"Revolving Loan Commitment" shall mean (a) as to any Lender, the
aggregate commitment of such Lender to make Revolving Credit Advances, Swing
Line Advances and/or incur Letter of Credit Obligations and Eligible Trade L/C
Obligations as set forth in the signature page to the Agreement or in the most
recent Lender Addition Agreement executed by such Lender and (b) as to all
Lenders, the aggregate commitment of all Lenders to make Revolving Credit
Advances, Swing Line Advances and/or incur Letter of Credit Obligations and
Eligible Trade L/C Obligations, which aggregate commitment shall be One Hundred
Fifty Million Dollars ($150,000,000) on the Closing Date, as such amount may be
adjusted, if at all, from time to time in accordance with the Agreement.
"Revolving Note" shall have the meaning assigned to it in Section
1.1(a)(ii).
"Schedule of Documents" shall mean the schedule, including all
appendices, exhibits or schedules thereto, listing certain documents and
information to be delivered in connection with the Agreement, the other Loan
Documents and the transactions contemplated thereunder, substantially in the
form attached hereto as Schedule F.
"Seasonal Over-Advance" shall mean the $7,500,000 seasonal over-
advance described in clause (ii) of the term "Borrowing Base".
"Second Intermediate Parent" shall mean River Hills Wilsons, Inc., a
Minnesota corporation.
S-A-21
<PAGE>
"Security Agreement" shall mean the Security Agreement of even date
herewith entered into among Agent, on behalf of itself and Lenders, and each
Credit Party thereto, as amended, modified or restated from time to time.
"Seller" shall mean Melville Corporation, a New York corporation.
"Shareholder Agreement" shall mean the Shareholder Agreement dated as
of the Closing Date among Newco, the Management Investors, and the Investors.
"Solvent" shall mean, with respect to any Person on a particular date,
that on such date (a) the fair value of the property of such Person on a going
concern basis is greater than the total amount of liabilities, including
contingent liabilities, of such Person; (b) the present fair salable value of
the assets of such Person on a going concern basis is not less than the amount
that will be required to pay the probable liability of such Person on its debts
as they become absolute and matured; (c) such Person does not intend to, and
does not believe that it will, incur debts or liabilities beyond such Person's
ability to pay as such debts and liabilities mature; and (d) such Person is not
engaged in a business or transaction, and is not about to engage in a business
or transaction, for which such Person's property would constitute an
unreasonably small capital. The amount of contingent liabilities (such as
litigation, guarantees and pension plan liabilities) at any time shall be
computed as the amount which, in light of all the facts and circumstances
existing at the time, represents the amount which can be reasonably be expected
to become an actual or matured liability.
"Stock" shall mean all shares, options, warrants, general or limited
partnership interests or other equivalents (regardless of how designated) of or
in a corporation, partnership or equivalent entity whether voting or nonvoting,
including common stock, preferred stock or any other "equity security" (as such
term is defined in Rule 3a11-1 of the General Rules and Regulations promulgated
by the Securities and Exchange Commission under the Securities Exchange Act of
1934, as amended).
"Store" shall mean a retail leather specialty goods store operated by
a Store Guarantor and shall include kiosks and holiday stores temporarily
operated by any Store Guarantor during the Christmas holiday season and located
in the United States.
"Store Guarantor" shall mean any one of the First Intermediate Parent,
the Second Intermediate Parent, Bermans, House of Suede, the Individual Store
Subsidiaries, the Tannery or the Georgetown Subsidiaries, and "Store Guarantors"
shall mean all of the foregoing, collectively.
"Store Guarantors' Guaranty" shall mean the Guaranty executed by the
Store Guarantors (excluding the First Intermediate Parent and Second
Intermediate Parent) in favor of the Lenders, as amended, modified or restated
from time to time.
S-A-22
<PAGE>
"Subordination Agreement" shall mean the Subordination Agreement of
even date herewith between Seller and Agent for the benefit of Lenders.
"Subordinated Debt" shall mean any Indebtedness of any Credit Party
subordinated to the Obligations in a manner and form satisfactory to the Agent
and the Lenders in their sole discretion, as to right and time of payment and as
to any other rights and remedies thereunder including without limitation the
Indebtedness of Newco evidenced by the Subordinated Note.
"Subordinated Note" shall mean the Senior Subordinated Note of even
date herewith issued by Newco to Seller in the initial principal amount of
$55,811,000, as the same may be amended, modified, renewed or extended.
"Subsidiary" shall mean, with respect to any Person, (a) any
corporation of which an aggregate of more than fifty percent (50%) of the
outstanding Stock having ordinary voting power to elect a majority of the board
of directors of such corporation (irrespective of whether, at the time, Stock of
any other class or classes of such corporation shall have or might have voting
power by reason of the happening of any contingency) is at the time, directly or
indirectly, owned legally or beneficially by such Person and/or one or more
Subsidiaries of such Person, or with respect to which any such Person has the
right to vote or designate the vote of fifty percent (50%) or more of such Stock
whether by proxy, agreement, operation of law or otherwise, and (b) any
partnership or limited liability company in which such Person and/or one or more
Subsidiaries of such Person shall have an interest (whether in the form of
voting or participation in profits or capital contribution) of more than fifty
percent (50%) or of which any such Person is a general partner or may exercise
the powers of a general partner. Unless the context otherwise requires all
references to Subsidiaries in the Agreement or in the other Loan Documents shall
be deemed to refer to Subsidiaries of Parent.
"Swing Line Advance" has the meaning assigned to it in Section
1.1(b)(i).
"Swing Line Availability" has the meaning assigned to it in Section
1.1(b)(i).
"Swing Line Commitment" shall mean, as to the Swing Line Lender, the
commitment of the Swing Line Lender to make Swing Line Loans as set forth on the
signature page to the Agreement, which commitment constitutes a part of the
Revolving Loan Commitment of the Swing Line Lender.
"Swing Line Lender" shall mean GE Capital.
"Swing Line Loan" shall mean as the context may require, at any time,
the aggregate amount of Swing Line Advances outstanding to Borrower.
"Swing Line Loan Participation Certificate" shall mean a certificate
delivered pursuant to Section 1.1(b)(iv).
S-A-23
<PAGE>
"Swing Line Note" has the meaning assigned to it in Section
1.1(b)(ii).
"Tannery" shall mean Wilsons Tannery West, Inc., a California
corporation.
"Taxes" shall mean taxes, levies, imposts, deductions, Charges or
withholdings, and all liabilities with respect thereto, excluding taxes imposed
on or measured by the net income of Agent or a Lender by the federal government
or any State or political subdivision thereof.
"Termination Date" shall mean the date on which the Loans have been
indefeasibly repaid in full and all other Obligations under the Agreement and
the other Loan Documents have been completely discharged and Borrower shall not
have any further right to borrow any monies thereunder.
"Title IV Plan" shall mean an employee pension benefit plan, as
defined in Section 3 (2) of ERISA (other than a Multiemployer Plan), which is
covered by Title IV of ERISA, and which any Credit Party or ERISA Affiliate
maintains, contributes to or has an obligation to contribute to after the
Closing Date on behalf of participants who are or were employed by any of them.
"Trademark" or "Trademarks" shall mean any and all of the following
now owned or hereafter acquired by any Credit Party: (a) all trademarks, trade
names, corporate names, business names, trade styles, service marks, logos,
other source or business identifiers, prints and labels on which any of the
foregoing have appeared or appear, designs and general intangibles of like
nature (whether registered or unregistered), now owned or existing or hereafter
adopted or acquired, all registrations and recordings thereof, and all
applications in connection therewith, including, without limitation, all
registrations, recordings and applications in the United States Patent and
Trademark Office or in any similar office or agency of the United States, any
state or territory thereof, or any other country or any political subdivision
thereof; (b) all reissues, extensions or renewals thereof; and (c) all goodwill
associated with or symbolized by any of the foregoing.
"Trademark License" shall mean any and all rights now owned or
hereafter acquired by any Credit Party under any written agreement granting any
right to use any Trademark.
"Trademark Security Agreements" shall mean the Trademark Security
Agreements made in favor of Agent, on behalf of Lenders, by each applicable
Credit Party, as amended, modified or restated from time to time.
"Unfunded Pension Liability" shall mean, at any time after the Closing
Date, the aggregate amount, if any, of the sum of (a) the amount by which the
present value of all accrued benefits under each Title IV Plan exceeds the fair
market value of all assets of such Title IV Plan allocable to such benefits in
accordance with Title IV of ERISA, all determined as of the most recent
valuation date for each such Title IV Plan using the actuarial assumptions for
funding
S-A-24
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purposes in effect under such Title IV Plan, and (b) for a period of five (5)
years following a transaction which might reasonably be expected to be covered
by Section 4069 of ERISA, the liabilities (whether or not accrued) that could be
avoided by any Credit Party or any ERISA Affiliate as a result of such
transaction.
All other undefined terms contained in any of the Loan Documents
shall, unless the context indicates otherwise, have the meanings provided for by
the Code as in effect in the State of Illinois to the extent the same are used
or defined therein. The words "herein," "hereof" and "hereunder" and other words
of similar import refer to the Agreement as a whole, including all Exhibits and
Schedules, as the same may from time to time be amended, restated, modified or
supplemented, and not to any particular section, subsection or clause contained
in the Agreement or any such Exhibit or Schedule.
Wherever from the context it appears appropriate, each term stated in
either the singular or plural shall include the singular and the plural, and
pronouns stated in the masculine, feminine or neuter gender shall include the
masculine, feminine and neuter genders. The words "including", "includes" and
"include" shall be deemed to be followed by the words "without limitation";
references to Persons include their respective successors and assigns (to the
extent and only to the extent permitted by the Loan Documents) or, in the case
of governmental Persons, Persons succeeding to the relevant functions of such
Persons; and all references to statutes and related regulations shall include
any amendments of the same and any successor statutes and regulations.
S-A-25
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Exhibit 10.7
SECURITY AGREEMENT
------------------
SECURITY AGREEMENT, dated as of May 25, 1996, by WILSONS LEATHER
HOLDINGS INC., a Minnesota corporation ("Borrower") and the other grantors
listed on the signature pages hereto (collectively "Grantors"), in favor of
GENERAL ELECTRIC CAPITAL CORPORATION, a New York corporation, in its capacity as
Agent for Lenders.
W I T N E S S E T H:
--------------------
WHEREAS, pursuant to that certain Credit Agreement dated as of the
date hereof by and among Borrower (and certain of Borrower's corporate
Affiliates), Agent and Lenders (including all appendices, exhibits or schedules
thereto, as from time to time amended, restated, supplemented or otherwise
modified, the "Credit Agreement"), Lenders have agreed to make the Loans and to
incur Letter of Credit Obligations and Eligible Trade L/C Obligations on behalf
of Borrower;
WHEREAS, pursuant to Guaranties of even date herewith entered into by
the Grantors (other than Borrower) in favor of Agent for the benefit of Lenders,
the other Grantors have guaranteed payment of Borrower's Obligations under the
Credit Agreement;
WHEREAS, Agent and Lenders are willing to make the Loans and to incur
Letter of Credit Obligations and Eligible Trade L/C Obligations as provided for
in the Credit Agreement, but only upon the condition, among others, that
Grantors shall have executed and delivered this Security Agreement to Agent, for
itself and the ratable benefit of Lenders;
NOW, THEREFORE, in consideration of the premises and mutual covenants
herein contained and for other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, Grantors hereby agree as follows:
1. DEFINED TERMS. All capitalized terms used but not otherwise
defined herein have the meaning given to them in the Credit Agreement or in
Schedule A thereto. All other undefined terms contained in this Security
Agreement, unless the context indicates otherwise, have the meanings provided
for by Article 9 of the Commercial Code as in effect in the State of Illinois
(the "Code") to the extent the same are used or defined therein.
2. GRANT OF SECURITY INTEREST.
(a) To secure the prompt and complete payment, performance and
observance of all of the Obligations, and to induce Agent and Lenders to enter
into the Credit Agreement and to make the Loans and incur Letter of Credit
Obligations and Eligible Trade L/C Obligations as provided for therein in
accordance with the terms and conditions thereof, each Grantor hereby grants,
assigns, conveys, mortgages, pledges, hypothecates and transfers to Agent, for
itself and
<PAGE>
the ratable benefit of Lenders, a security interest in its right, title and
interest in, to and under the following, whether now owned by or owing to, or
hereafter acquired by or arising in favor of such Grantor (including under any
trade names, styles or derivations thereof), and whether owned or consigned by
or to, or leased from or to, such Grantor, and regardless of where located (all
of which being hereinafter collectively referred to as the "Collateral"):
(i) all Accounts;
(ii) all Chattel Paper;
(iii) all Contracts;
(iv) all deposit accounts now or hereafter established by
Borrower, all cash deposited therein from time to time and
all other monies, cash, cash equivalents and property of
Borrower or any other Grantor in the possession or under
the control of Agent or any Lenders;
(v) all Documents;
(vi) all General Intangibles;
(vii) all Instruments;
(viii) all Inventory;
(ix) all Investment Property;
(x) all books, records, ledger cards, files, correspondence,
computer programs, tapes, disks and related data
processing software that at any time evidence or contain
information relating to any of the property described in
(i) through (ix) above or are otherwise necessary or
helpful in the collection thereof or realization thereon;
and
(xi) all Proceeds of and all accessions to, substitutions and
replacements for, and rents, profits and products of all
or any of the property described in (i) through (x) above.
(b) In addition, to secure the prompt and complete payment,
performance and observance of the Obligations and in order to induce Agent and
Lenders as aforesaid, each Grantor hereby grants to Agent, for itself and the
ratable benefit of Lenders, a security interest in the property of such Grantor
held by Agent or any Lender, consisting of property described above in Section
2(a) now or hereafter in the possession or custody of or in transit to Agent or
any Lender, for any purpose, including safekeeping, collection or pledge, for
the account of such Grantor, or as to which such Grantor may have any right or
power.
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<PAGE>
3. AGENT'S AND LENDERS' RIGHTS; LIMITATIONS ON AGENT'S AND LENDERS'
OBLIGATIONS.
(a) It is expressly agreed by each Grantor that, anything herein to
the contrary notwithstanding, each Grantor shall remain liable under each of its
Contracts and each of its Licenses to observe and perform all the conditions and
obligations to be observed and performed by it thereunder. Neither Agent nor
any Lender shall have any obligation or liability under any Contract or License
by reason of or arising out of this Security Agreement or the granting herein of
a security interest therein or the receipt by Agent or any Lender of any payment
relating to any Contract or License pursuant hereto. Neither Agent nor any
Lender shall be required or obligated in any manner to perform or fulfill any of
the obligations of any Grantor under or pursuant to any Contract or License, or
to make any payment, or to make any inquiry as to the nature or the sufficiency
of any payment received by it or the sufficiency of any performance by any party
under any Contract or License, or to present or file any claims, or to take any
action to collect or enforce any performance or the payment of any amounts which
may have been assigned to it or to which it may be entitled at any time or
times.
(b) Agent may at any time after an Event of Default shall have
occurred and be continuing, immediately upon notice to Borrower, notify Account
Debtors, parties to the Contracts and obligors in respect of Instruments and
Chattel Paper, that the Accounts and the right, title and interest of each
Grantor in and under such Contracts, Instruments and Chattel Paper have been
assigned to Agent, for itself and the ratable benefit of Lenders, and that
payments shall be made directly to Agent, for itself and the ratable benefit of
Lenders. Upon the request of Agent, if an Event of Default shall have occurred
and is continuing, each Grantor shall so notify Account Debtors, parties to
Contracts and obligors in respect of Instruments and Chattel Paper.
(c) Subject to the limitations contained in the Credit Agreement,
Agent shall have the right to make test verifications of the Accounts and
physical verifications and appraisals of the Inventory and other Collateral, at
Borrower's expense in any manner and through any medium that it considers
advisable, and each Grantor agrees to furnish all such information and
assistance as Agent may require in connection therewith. Agent may at any time
in Agent's own name (on behalf of itself and Lenders), or in the name of a
Grantor communicate with Account Debtors, parties to Contracts, obligors in
respect of Instruments and obligors in respect of Chattel Paper to verify with
such Persons, to Agent's satisfaction, the existence, amount and terms of any
such Accounts, Contracts, Instruments or Chattel Paper. If an Event of Default
shall have occurred and be continuing, Borrower or Newco, at their own expense,
shall cause the certified independent public accountants then engaged by
Borrower or Newco to prepare and deliver to Agent at any time and from time to
time promptly upon Agent's request (on behalf of itself and Lenders), the
following reports with respect to each Grantor: (i) a reconciliation of all
Accounts; (ii) an aging of all Accounts; (iii) trial balances; (iv) a test
verification of such Accounts as Agent may request; and (v) a summary of all
intercompany accounts. Each Grantor, at its own expense, shall deliver to Agent
the results of each physical verification, if any, which such Grantor may in its
discretion have made, or caused any other Person to have made on its behalf, of
all or any portion of its Inventory.
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<PAGE>
4. REPRESENTATIONS AND WARRANTIES. Each Grantor represents and
warrants that:
(a) Each Grantor is the sole owner of each item of the Collateral in
which it purports to grant a security interest hereunder, and has good and
marketable title thereto free and clear of any and all Liens other than
Permitted Encumbrances.
(b) No effective security agreement, financing statement, equivalent
security or Lien instrument or continuation statement covering all or any part
of the Collateral is on file or of record in any public office, except such as
may have been filed (i) by a Grantor in favor of Agent, for itself and the
ratable benefit of Lenders, pursuant to this Security Agreement, (ii) in
connection with any other Permitted Encumbrances; and (iii) to evidence
Borrower's interest as Consignor under the Consignment Agreement.
(c) This Security Agreement is effective to create a valid and
continuing Lien on and, upon the filing of the appropriate financing statements
listed on Schedule I hereto, a perfected security interest in favor of Agent,
for itself and the ratable benefit of Lenders, in the Collateral with respect to
which a security interest may be perfected by filing pursuant to the Code. That
Lien is prior to all other Liens, except Permitted Encumbrances that would be
prior to Liens in favor of Agent for the benefit of Agent and Lenders as a
matter of law, and is enforceable as such as against any and all creditors of
and purchasers from any Grantor (other than purchasers of Inventory in the
ordinary course of business). All actions by each Grantor necessary or
desirable to protect and perfect such security interest in each item of the
Collateral have been duly taken.
(d) Schedule II hereto lists all Instruments (other than certificated
securities) and Chattel Paper of each Grantor outstanding on the date hereof.
All actions by each Grantor necessary or desirable to protect and perfect the
security interest of Agent, for the benefit of Agent and Lenders, in each item
set forth on Schedule II (including the delivery of all originals thereof to
Agent (or to a bank or other Person acting as agent for Agent) and the legending
of all Chattel Paper as required by Section 5(b) hereof) has been duly taken.
The security interest of Agent, for the benefit of Agent and Lenders, in the
Collateral listed on Schedule II hereto is prior to all other Liens, except
Permitted Encumbrances, and is enforceable as such against any and all creditors
of and purchasers from each Grantor.
(e) Each Grantor's chief executive office, principal place of
business, corporate offices, all warehouses and premises where Collateral is
stored or located, and the locations of all of its books and records concerning
the Collateral are set forth on Schedule III-A hereto.
(f) With respect to the Accounts, (i) they represent bona fide sales
of Inventory or rendering of services to Account Debtors in the ordinary course
of any Grantor's business completed in accordance with the terms and provisions
contained in the documents available to Agent with respect thereto and are not
evidenced by a judgment, Instrument or Chattel Paper; (ii) the amounts shown on
such deliveries to Agent and on such records and all
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<PAGE>
invoices, statements and Collateral Reports which may be delivered to the Agent
with respect thereto are actually and absolutely owing to any Grantor as
indicated thereon and are not in any way contingent; (iii) no payments have been
or shall be made thereon except payments immediately delivered to the applicable
Grantor's account and transferred to Borrower's Concentration Account or the
Agent as required pursuant to the terms of Schedule E to the Credit Agreement;
(iv) except as specifically disclosed in a current Borrowing Base Certificate
delivered to Agent, there are no setoffs, claims or disputes existing or
asserted with respect thereto and no Grantor has made any agreement with any
Account Debtor for any extension of time for the payment thereof, any compromise
or settlement for less than the full amount thereof, any release of any Account
Debtor from liability therefor, or any deduction therefrom except a discount or
allowance allowed by any Grantor in the ordinary course of its business for
prompt payment and disclosed to Agent; (v) to the best of each Grantor's
knowledge, except as specifically disclosed in a Collateral Report delivered to
Agent, there are no facts, events or occurrences which in any way impair the
validity or enforcement thereof or tend to reduce the amount payable thereunder
as shown on such deliveries to Agent or on such Grantor's books and records and
all invoices, statements and Collateral Reports delivered to Agent and Lenders
with respect thereto; (vi) to the best of each Grantor's knowledge, all Account
Debtors have the capacity to contract; (vii) except as specifically disclosed in
a Collateral Report delivered to Agent, no Grantor has received any notice of
proceedings or actions which are threatened or pending against any Account
Debtor which might result in any adverse change in such Account Debtor's
financial condition; and (viii) except as specifically disclosed in a Collateral
Report delivered to Agent, no Grantor has knowledge that any Account Debtor is
unable generally to pay its debts as they become due.
(g) With respect to any Inventory scheduled or listed on any
statement, Collateral Report or other report delivered to Agent pursuant to the
terms of this Security Agreement or the Credit Agreement, (i) such Inventory is
located at one of the applicable Grantor's locations set forth on Schedule III-A
hereto or constitutes Eligible In-Transit Inventory; (ii) no Inventory is now,
or shall at any time or times hereafter be stored with a bailee, warehouseman or
similar party without Agent's prior consent, and if Agent gives such consent,
each Grantor will concurrently therewith cause any such bailee, warehouseman or
similar party to issue and deliver to Agent in form and substance acceptable to
Agent, warehouse receipts therefor in Agent's name, (iii) each Grantor has good,
indefeasible and merchantable title to such property and such property is not
subject to any Lien or security interest or document whatsoever except for the
perfected, first priority security interest granted to Agent, for the benefit of
Agent and Lenders, hereunder, and except for Permitted Encumbrances, (iv) except
as specifically disclosed in a Collateral Report delivered to Agent, such
Inventory is Eligible Inventory of good and merchantable quality, free from any
defects, (v) such property is not subject to any licensing, patent, royalty,
trademark, trade name or copyright agreements with any third parties which would
require any consent of any third party upon sale or disposition of that
Inventory or the payment of any monies to any third party as a precondition of
such sale or other disposition, and (vi) the completion of manufacture, sale or
other disposition of such property by Agent following an Event of Default shall
not require the consent of any Person and shall not constitute a breach or
default under any contract or agreement to which any Grantor is a party or to
which such property is subject. No Inventory shall be moved to any location not
listed on Schedule III-A or
5
<PAGE>
disclosed to Agent in advance. No Inventory shall be moved to any location which
would cause Agent to lose its perfected security interest therein, except that
up to 2% of Borrower's finished goods inventory at any time may be on
consignment with retailers other than Store Guarantors. As to kiosks, holiday
stores and other temporary sales locations, Grantors shall not cause or permit
such sales locations (i) to be operated by any entity other than a Person that
is a Grantor hereunder and a party to the Consignment Agreement with Borrower,
or (ii) to be operated in a jurisdiction in which an effective UCC-1 consignment
filing in favor of Borrower (and assigned to Agent) and an effective UCC-1
filing in favor of Agent, in each case signed by the applicable Grantor, are not
on file in the appropriate filing offices.
(h) No Grantor has any interest in, or title to, any Trademark
material to its business except as set forth in Schedule IV hereto. This
Security Agreement is effective to create a valid and continuing Lien on and,
upon filing of the Trademark Security Agreements with the United States Patent
and Trademark Office, perfected security interests in favor of Agent, for itself
and the ratable benefit of Lenders, in each Grantor's Trademarks and such
perfected security interests are enforceable as such as against any and all
creditors of and purchasers from each Grantor. Upon filing of the Trademark
Security Agreements with the United States Patent and Trademark Office, and upon
filing financing statements under the Code with respect to General Intangibles,
all action necessary or desirable to protect and perfect Agent's security
interest in each Grantor's Trademarks shall have been duly taken. The foregoing
shall apply only to those Grantors that own Trademarks.
5. COVENANTS. Each Grantor covenants and agrees with Agent, for the
benefit of Agent and Lenders, that from and after the date of this Security
Agreement and until the Termination Date:
(a) Further Assurances; Pledge of Instruments. At any time and from
time to time, upon the written request of Agent and at the sole expense of each
Grantor, such Grantor shall promptly and duly execute and deliver any and all
such further instruments and documents and take such further actions as Agent
may deem desirable to obtain the full benefits of this Security Agreement and of
the rights and powers herein granted, including (i) using its reasonable efforts
to secure all consents and approvals necessary or appropriate for the assignment
to or for the benefit of Agent, for itself and the ratable benefit of Lenders,
of any License or Contract held by such Grantor or in which such Grantor has any
rights not heretofore assigned, (ii) filing any financing or continuation
statements under the Code with respect to the Liens and security interests
granted hereunder or under any other Loan Document, (iii) transferring
Collateral to Agent's possession (for the benefit of Agent and Lenders) if such
Collateral consists of Chattel Paper, Instruments or if a security interest in
such Collateral can be perfected only by possession, or if requested by Agent,
and (iv) using its reasonable efforts to obtain waivers of Liens, if any exist,
from landlords and mortgagees, but only to the extent required by the Credit
Agreement. Each Grantor also hereby authorizes Agent, for itself and the ratable
benefit of Lenders, to file any such financing or continuation statements
without the signature of any Grantor to the extent permitted by applicable law.
If any amount payable under or in connection with any of the Collateral is or
shall become evidenced by any Instrument, such Instrument, other than checks and
6
<PAGE>
notes received in the ordinary course of business, shall be duly endorsed in a
manner satisfactory to Agent immediately upon a Grantor's receipt thereof.
(b) Maintenance of Records. Each Grantor shall keep and maintain, at
its own cost and expense, satisfactory and complete records of the Collateral,
including a record of any and all payments received and any and all credits
granted with respect to the Collateral and all other dealings with the
Collateral. Each Grantor shall mark its books and records pertaining to the
Collateral to evidence this Security Agreement and the security interests
granted hereby. All Chattel Paper shall be marked with the following legend:
"This writing and the obligations evidenced or secured hereby are subject to the
security interest of General Electric Capital Corporation, as Agent, for the
benefit of itself as a Lender and certain other Lenders." For Agent's further
security, each Grantor agrees that Agent, for itself and the ratable benefit of
Lenders, shall have a special property right and security interest in all of
each Grantor's books and records pertaining to the Collateral and, upon the
occurrence and during the continuance of any Event of Default, each Grantor
shall deliver and turn over any such books and records to Agent or to its
representatives at any time on demand of Agent. Prior to the occurrence of a
Default or Event of Default and upon notice from Agent, each Grantor shall
permit any representative of Agent to inspect such books and records and shall
provide photocopies thereof to Agent, for the benefit of Agent and Lenders, as
more specifically set forth in Section 5(c) below.
(c) Right of Inspection. Subject to the limitations contained in the
Credit Agreement, upon reasonable notice to Borrower, Agent and its employees,
officers, agents and representatives shall have the right (and without any
notice to any Grantor upon the occurrence and during the continuance of any
Event of Default) to enter into and upon any premises where any of the Inventory
or other Collateral is located for the purpose of inspecting the same, observing
its use or otherwise protecting Agent's interests (for the benefit of Agent and
Lenders) in the Collateral.
(d) Continuous Perfection. No Grantor shall change its chief
executive office, principal place of business, corporate offices, or warehouses
or other Collateral locations, or remove any such Books and Records from such
locations, other than in compliance with Section 6.16 of the Credit Agreement.
In addition, no Grantor shall change its name, identity or corporate structure
in any manner which might make any financing or continuation statement filed in
connection herewith seriously misleading within the meaning of Section 9.402(7)
of the Code or any other then applicable provision of the Code except in
compliance with the provisions of Section 6.16 of the Credit Agreement.
(e) Covenants Regarding Trademark Collateral.
(i) Borrower shall notify Agent immediately if it knows or has
reason to know that any application or registration relating to any
Trademark (now or hereafter existing) may become abandoned or dedicated, or
of any adverse determination or development (including the institution of,
or any such determination or development in, any proceeding in the United
States Patent and Trademark Office or any court) regarding
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<PAGE>
any Grantor's ownership of any Trademark, its right to register the same,
or to keep and maintain the same.
(ii) In no event shall any Grantor, either itself or through
any agent, employee, licensee or designee, file an application for the
registration of any Trademark with the United States Patent and Trademark
Office or any similar office or agency without giving Agent prior written
notice thereof, and, upon request of Agent, such Grantor shall execute and
deliver any and all Trademark Security Agreements as Agent may request to
evidence Agent's security interest (for the benefit of Agent and Lenders)
in such Trademark and the General Intangibles of any Grantor relating
thereto or represented thereby.
(iii) Each Grantor shall take all actions necessary or requested
by Agent to maintain and pursue each application, to obtain the relevant
registration and to maintain the registration of each of the Trademarks
(now or hereafter existing), including the filing of applications for
renewal, affidavits of use, affidavits of noncontestability and opposition
and interference and cancellation proceedings, unless such Grantor
determines, in its reasonable business judgment, that the Trademark which
is the subject of such application or registration is not material to the
business of such Grantor or the other Credit Parties.
(iv) In the event that any material Trademark Collateral is
infringed upon, or misappropriated or diluted by a third party, the
applicable Grantor shall notify Agent promptly after it learns thereof.
Such Grantor shall, unless it shall reasonably determine that such
Trademark Collateral is not material to the conduct of its business or
operations, promptly sue for infringement, misappropriation or dilution and
to recover any and all damages for such infringement, misappropriation or
dilution, and shall take such other actions as Agent shall deem appropriate
under the circumstances to protect such Trademark Collateral.
(f) Indemnification. In any suit, proceeding or action brought by
Agent or any Lender relating to any Account, Chattel Paper, Contract, Document,
General Intangible or Instrument for any sum owing thereunder or to enforce any
provision of any Account, Chattel Paper, Contract, Document, General Intangible
or Instrument, Grantors, jointly and severally, will save, indemnify and keep
Agent and Lenders harmless from and against all expense, loss or damage suffered
by reason of any defense, setoff, counterclaim, recoupment or reduction of
liability whatsoever of the obligor thereunder, arising out of a breach by any
Grantor of any obligation thereunder or arising out of any other agreement,
indebtedness or liability at any time owing to, or in favor of, such obligor or
its successors from any Grantor, except in the case of Agent or any Lender, to
the extent such expense, loss, or damage is attributable solely to the gross
negligence or willful misconduct of Agent or such Lender as finally determined
by a court of competent jurisdiction. All such obligations of Grantors shall be
and remain enforceable against and only against Grantors and shall not be
enforceable against Agent or any Lender.
(g) Compliance with Terms of Accounts, etc. In all material
respects, each Grantor will perform and comply with all obligations in respect
of its Accounts, Chattel Paper,
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Contracts and Licenses and all other agreements to which it is a party or by
which it is bound relating to the Collateral.
(h) Limitation on Liens on Collateral. Grantors will not create,
permit or suffer to exist, and each Grantor will defend the Collateral against,
and take such other action as is necessary to remove, any Lien on the Collateral
except Permitted Encumbrances, and will defend the right, title and interest of
Agent and Lenders in and to any of such Grantor's rights in the Collateral
against the claims and demands of all Persons whomsoever.
(i) Limitations on Modifications of Accounts. Each Grantor shall
promptly notify Agent if such Grantor grants any extension of the time of
payment of any of the Accounts, Chattel Paper or Instruments or compromises,
compounds or settles the same for less than the full amount thereof, or if such
Grantor releases, wholly or partly, any Person liable for the payment thereof,
or allows any credit or discount whatsoever thereon, in each case, other than
any such action taken in the ordinary course of business of such Grantor.
(j) Limitations on Disposition. No Grantor will sell, lease,
transfer or otherwise dispose of any of the Collateral, or attempt or contract
to do so except as permitted by the Credit Agreement.
(k) Notices. Each Grantor will advise Agent promptly, in reasonable
detail, (i) of any Lien (other than Permitted Encumbrances) made or asserted
against any of the Collateral, and (ii) of the occurrence of any other event
which would have a material adverse effect on the aggregate value of the
Collateral or on the security interests created hereunder.
6. AGENT'S APPOINTMENT AS ATTORNEY-IN-FACT.
(a) Each Grantor hereby irrevocably constitutes and appoints Agent,
and any officer or agent thereof, with full power of substitution, as its true
and lawful attorney-in-fact with full irrevocable power and authority in the
place and stead of any Grantor and in the name of such Grantor or in its own
name, from time to time in Agent's sole discretion for the purpose of carrying
out the terms of this Security Agreement, to take any and all appropriate action
and to execute and deliver any and all documents and instruments which may be
necessary or desirable to accomplish the purposes of this Security Agreement
and, without limiting the generality of the foregoing, hereby grants to Agent,
the power and right, on behalf of each Grantor, without notice to or assent by
any Grantor except as otherwise specifically provided for herein or in the
Credit Agreement, and at any time, to do the following (provided, however, that
Agent may only take the actions in clauses (i), (iii), (iv) and (vii) through
(xiv) so long as any Event of Default shall have occurred and be continuing):
(i) in the name of each Grantor, in its own name or
otherwise, take possession of, endorse and receive payment of any checks,
drafts, notes, acceptances, or other Instruments for the payment of monies
due under any Collateral;
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(ii) upon Grantor's failure to maintain the insurance required
by the Credit Agreement, continue any insurance existing pursuant to the
terms of this Security Agreement, the Credit Agreement or any other Loan
Document, and pay all or any part of the premiums therefor and the costs
thereof;
(iii) receive payment of any and all monies, claims, and other
amounts due or to become due at any time arising out of or in respect of
any Collateral;
(iv) ask, demand, collect, receive and give acquittances and
receipts for any and all money due or to become due under any Collateral;
(v) upon Grantor's failure to take any such action when
required under the Credit Agreement, pay or discharge taxes, Liens,
security interests or other encumbrances levied or placed on or threatened
against the Collateral to the extent that any such action may be necessary
or desirable to protect or preserve the Collateral or the first priority,
perfected security interest of Agent, in the Collateral;
(vi) effect any repairs or upon Grantor's failure to maintain
the insurance required by the Credit Agreement, obtain any insurance called
for by the terms hereof, of the Credit Agreement or of any other Loan
Document, and pay all or any part of the premiums therefor and costs
thereof;
(vii) direct any party liable for any payment under or in
respect of any of the Collateral to make payment of any and all monies due
or to become due thereunder, directly to Agent or as Agent shall direct;
(viii) sign and endorse any invoices, freight or express bills,
bills of lading, storage or warehouse receipts, drafts against debtors,
assignments, verifications and notices in connection with Accounts and
other documents constituting or related to the Collateral;
(ix) settle, compromise or adjust any suit, action, or
proceeding described herein and, in connection therewith, give such
discharges or releases as Agent may deem appropriate;
(x) file any claim or take or commence any other action or
proceeding in any court of law or equity or otherwise deemed appropriate by
Agent for the purpose of collecting any and all such monies due under any
Collateral whenever payable;
(xi) commence and prosecute any suits, actions or proceedings
at law or in equity in any court of competent jurisdiction to collect the
Collateral or any part thereof and to enforce any other right in respect of
any Collateral;
(xii) defend any suit, action or proceeding brought against any
Grantor with respect to any Collateral if such Grantor does not defend such
suit, action or
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proceeding or if Agent believes that such Grantor is not pursuing such
defense in a manner that will maximize the recovery with respect to such
Collateral;
(xiii) license or, to the extent permitted by an applicable
license, sublicense whether general, specific or otherwise, and whether on
an exclusive or non-exclusive basis, any Trademark for such consideration
and on such terms and conditions and in such manner as Agent shall, in its
sole discretion, determine; and
(xiv) sell, transfer, pledge, make any agreement with respect
to or otherwise deal with any of the Collateral as fully and completely as
though Agent were the absolute owner thereof for all purposes.
(b) Each Grantor hereby ratifies, to the extent permitted by law, all
that said attorneys shall lawfully do or cause to be done by virtue hereof. The
power of attorney granted pursuant to this Section 6 is a power coupled with an
interest and shall be irrevocable until all of the Obligations are indefeasibly
paid or otherwise satisfied in full.
(c) The powers conferred on Agent hereunder are solely to protect
Agent's interests in the Collateral and shall not impose any duty upon Agent to
exercise any such powers. Agent shall not be accountable for any amount other
than amounts that it actually receives as a result of the exercise of such
powers and none of Agent's officers, directors, employees, agents or
representatives shall be responsible to any Grantor for any act or failure to
act, except individually (and not jointly and severally) for their own gross
negligence or willful misconduct as finally determined by a court of competent
jurisdiction after all possible appeals have been exhausted.
(d) Each Grantor also authorizes Agent at any time and from time to
time upon the occurrence and during the continuation of any Event of Default, to
(i) communicate in its own name with any party to any Contract with regard to
the assignment of the right, title and interest of any Grantor in and under the
Contracts and other matters relating thereto, and (ii) execute, in connection
with any sale provided for in Section 7 hereof, any endorsements, assignments or
other instruments of conveyance or transfer with respect to the Collateral.
7. REMEDIES; RIGHTS UPON DEFAULT.
(a) If any Event of Default shall have occurred and be continuing,
Agent may exercise in addition to all other rights and remedies granted to it
under this Security Agreement, the Credit Agreement, the other Loan Documents
and under any other instrument or agreement securing, evidencing or relating to
any of the Obligations, all rights and remedies of a secured party under the
Code. Without limiting the generality of the foregoing, each Grantor expressly
agrees that in any such event Agent, without demand of performance or other
demand, advertisement or notice of any kind (except the notice specified below
of time and place of public or private sale) to or upon any Grantor or any other
Person (all and each of which demands, advertisements and notices are hereby
expressly waived to the maximum extent permitted by the Code and other
applicable law), may forthwith enter upon the premises of each Grantor where any
Collateral is located through self-help, without judicial process, without first
obtaining a final
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judgment or giving any Grantor or any other Person notice and opportunity for a
hearing on Agent's claim or action (on behalf of Agent and Lenders), and may
collect, receive, assemble, process, appropriate and realize upon the
Collateral, or any part thereof, and may forthwith sell, lease, assign, give an
option or options to purchase, or sell or otherwise dispose of and deliver said
Collateral (or contract to do so), or any part thereof, in one or more parcels
at a public or private sale or sales, at any exchange at such prices as it may
deem acceptable, for cash or on credit or for future delivery without assumption
of any credit risk. Agent or any Lender shall have the right upon any such
public sale or sales and, to the extent permitted by law, upon any such private
sale or sales, to purchase for the benefit of Agent or any Lenders, the whole or
any part of said Collateral so sold, free of any right or equity of redemption,
which equity of redemption each Grantor hereby releases. Such sales may be
adjourned and continued from time to time with or without notice. Agent shall
have the right to conduct such sales on each Grantor's premises or elsewhere and
shall have the right to use each Grantor's premises without charge for such time
or times as Agent deems necessary or advisable.
Each Grantor further agrees, if any Event of Default shall have
occurred and be continuing, at Agent's request, to assemble the Collateral and
make it available to Agent, for the benefit of Agent and Lenders, at places
which Agent shall select, whether at such Grantor's premises or elsewhere. Until
Agent is able to effect a sale, lease, or other disposition of Collateral, Agent
shall have the right to use Collateral, or any part thereof, to the extent that
it deems appropriate for the purpose of preserving Collateral or its value or
for any other purpose deemed appropriate by Agent. Agent shall have no
obligation to any Grantor to maintain or preserve the rights of such Grantor as
against third parties with respect to Collateral while Collateral is in the
possession of Agent. Agent may, if it so elects, seek the appointment of a
receiver or keeper to take possession of Collateral and to enforce any of
Agent's remedies (for the benefit of Agent and Lenders), with respect to such
appointment without prior notice or hearing. Agent shall apply the net proceeds
of any such collection, recovery, receipt, appropriation, realization or sale to
the Obligations as provided in Section 1.11 of the Credit Agreement, and only
after so paying over such net proceeds, and after the payment by Agent of any
other amount required by any provision of law, including Section 9-504(1)(c) of
the Code (but only after Agent has received what it considers reasonable proof
of a subordinate party's security interest), need Agent account for the surplus,
if any, to any Grantor. To the maximum extent permitted by applicable law, each
Grantor waives all claims, damages, and demands against Agent or any Lender
arising out of the repossession, retention or sale of the Collateral except such
as arise solely out of the gross negligence or willful misconduct of Agent or
such Lender as finally determined by a court of competent jurisdiction. Each
Grantor agrees that ten (10) days prior notice by Agent of the time and place of
any public sale or of the time after which a private sale may take place is
reasonable notification of such matters. Each Grantor shall remain liable for
any deficiency if the proceeds of any sale or disposition of the Collateral are
insufficient to pay all amounts to which Agent, for itself and the ratable
benefit of Lenders, is entitled, each Grantor also being liable for any
attorneys' fees incurred by Agent or any Lender to collect such deficiency.
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(b) Each Grantor, jointly and severally, agrees to pay any and all
costs of Agent or any Lender, including attorneys' fees and expenses, incurred
in connection with the enforcement of any of its rights and remedies hereunder.
(c) Except as otherwise specifically provided herein, each Grantor
hereby waives presentment, demand, protest or any notice (to the maximum extent
permitted by applicable law) of any kind in connection with this Security
Agreement or any Collateral.
8. GRANT OF LICENSE TO USE PATENT, TRADEMARK AND COPYRIGHT
COLLATERAL. For the purpose of enabling Agent to exercise rights and remedies
under Section 7 hereof (including, without limiting the terms of Section 7
hereof, in order to take possession of, hold, preserve, process, assemble,
prepare for sale, market for sale, sell or otherwise dispose of Collateral) at
such time as Agent, for itself and the ratable benefit of Lenders, shall be
lawfully entitled to exercise such rights and remedies, each Grantor hereby
grants to Agent, for the benefit of Agent and Lenders, an irrevocable, non-
exclusive license (exercisable without payment of royalty or other compensation
to any Grantor) to use, license or sublicense any Trademark or trade secret now
owned or hereafter acquired by such Grantor, and wherever the same may be
located, and including in such license access to all media in which any of the
licensed items may be recorded or stored and to all computer software and
programs used for the compilation or printout thereof.
9. LIMITATION ON AGENT'S AND LENDERS' DUTY IN RESPECT OF COLLATERAL.
Agent and each Lender shall use reasonable care with respect to the Collateral
in its possession or under its control. Neither Agent nor any Lender shall have
any other duty as to any Collateral in its possession or control or in the
possession or control of any agent or nominee of Agent or such Lender, or any
income thereon or as to the preservation of rights against prior parties or any
other rights pertaining thereto.
10. REINSTATEMENT. This Security Agreement shall remain in full
force and effect and continue to be effective should any petition be filed by or
against any Grantor for liquidation or reorganization, should any Grantor become
insolvent or make an assignment for the benefit of any creditor or creditors or
should a receiver or trustee be appointed for all or any significant part of any
Grantor's assets, and shall continue to be effective or be reinstated, as the
case may be, if at any time payment and performance of the Obligations, or any
part thereof, is, pursuant to applicable law, rescinded or reduced in amount, or
must otherwise be restored or returned by any obligee of the Obligations,
whether as a "voidable preference," "fraudulent conveyance," or otherwise, all
as though such payment or performance had not been made. In the event that any
payment, or any part thereof, is rescinded, reduced, restored or returned, the
Obligations shall be reinstated and deemed reduced only by such amount paid and
not so rescinded, reduced, restored or returned.
11. NOTICES. Except as otherwise provided herein, whenever it is
provided herein that any notice, demand, request, consent, approval, declaration
or other communication shall or may be given to or served upon any of the
parties by any other party, or whenever any of the parties desires to give and
serve upon any other party any communication with respect to this
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Security Agreement, each such notice, demand, request, consent, approval,
declaration or other communication shall be in writing and shall be given in the
manner, and deemed received, as provided for in Section 11.10 of the Credit
Agreement.
12. SEVERABILITY. Whenever possible, each provision of this Security
Agreement shall be interpreted in a manner as to be effective and valid under
applicable law, but if any provision of this Security Agreement shall be
prohibited by or invalid under applicable law, such provision shall be
ineffective to the extent of such prohibition or invalidity without invalidating
the remainder of such provision or the remaining provisions of this Security
Agreement. This Security Agreement is to be read, construed and applied together
with the Credit Agreement and the other Loan Documents which, taken together,
set forth the complete understanding and agreement of Agent, Lenders and the
Grantors with respect to the matters referred to herein and therein.
13. NO WAIVER; CUMULATIVE REMEDIES. Neither Agent nor any Lender
shall by any act, delay, omission or otherwise be deemed to have waived any of
its rights or remedies hereunder, and no waiver shall be valid unless in
writing, signed by Agent and then only to the extent therein set forth. A waiver
by Agent, for itself and the ratable benefit of Lenders, of any right or remedy
hereunder on any one occasion shall not be construed as a bar to any right or
remedy which Agent would otherwise have had on any future occasion. No failure
to exercise nor any delay in exercising on the part of Agent or any Lender, any
right, power or privilege hereunder, shall operate as a waiver thereof, nor
shall any single or partial exercise of any right, power or privilege hereunder
preclude any other or future exercise thereof or the exercise of any other
right, power or privilege. The rights and remedies hereunder provided are
cumulative and may be exercised singly or concurrently, and are not exclusive of
any rights and remedies provided by law. None of the terms or provisions of this
Security Agreement may be waived, altered, modified or amended except by an
instrument in writing, duly executed by Agent and Grantors.
14. LIMITATION BY LAW. All rights, remedies and powers provided in
this Security Agreement may be exercised only to the extent that the exercise
thereof does not violate any applicable provision of law, and all the provisions
of this Security Agreement are intended to be subject to all applicable
mandatory provisions of law that may be controlling and to be limited to the
extent necessary so that they shall not render this Security Agreement invalid,
unenforceable, in whole or in part, or not entitled to be recorded, registered
or filed under the provisions of any applicable law.
15. TERMINATION OF THIS SECURITY AGREEMENT. Subject to Section 10
hereof, this Security Agreement shall terminate upon the Termination Date.
16. SUCCESSORS AND ASSIGNS. This Security Agreement and all
obligations of each Grantor hereunder shall be binding upon the successors and
assigns of any Grantor (including any debtor-in-possession on behalf of any
Grantor) and shall, together with the rights and remedies of Agent, for the
benefit of Agent and Lenders, hereunder, inure to the benefit of Agent and
Lenders, all future holders of any instrument evidencing any of the Obligations
and
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<PAGE>
their respective successors and assigns. No sales of participations, other
sales, assignments, transfers or other dispositions of any agreement governing
or instrument evidencing the Obligations or any portion thereof or interest
therein shall in any manner affect the security interest granted to Agent, for
the benefit of Agent and Lenders, hereunder. No Grantor may assign, sell or
otherwise transfer any interest in or obligation under this Security Agreement.
17. COUNTERPARTS. This Security Agreement may be executed in any
number of separate counterparts, each of which shall collectively and separately
constitute one and the same agreement.
18. GOVERNING LAW. EXCEPT AS OTHERWISE EXPRESSLY PROVIDED IN ANY OF
THE LOAN DOCUMENTS, IN ALL RESPECTS, INCLUDING ALL MATTERS OF CONSTRUCTION,
VALIDITY AND PERFORMANCE, THIS SECURITY AGREEMENT AND THE OBLIGATIONS ARISING
HEREUNDER SHALL BE GOVERNED BY, AND CONSTRUED AND ENFORCED IN ACCORDANCE WITH,
THE LAWS OF THE STATE OF ILLINOIS (WITHOUT REGARD TO CONFLICT OF LAW
PROVISIONS), AND ANY APPLICABLE LAWS OF THE UNITED STATES OF AMERICA. EACH
GRANTOR HEREBY CONSENTS AND AGREES THAT THE STATE OR FEDERAL COURTS LOCATED IN
COOK COUNTY, CITY OF CHICAGO, ILLINOIS, SHALL HAVE EXCLUSIVE JURISDICTION TO
HEAR AND DETERMINE ANY CLAIMS OR DISPUTES BETWEEN ANY GRANTOR, AGENT AND LENDERS
PERTAINING TO THIS SECURITY AGREEMENT OR ANY OF THE OTHER LOAN DOCUMENTS OR TO
ANY MATTER ARISING OUT OF OR RELATING TO THIS SECURITY AGREEMENT OR ANY OF THE
OTHER LOAN DOCUMENTS, PROVIDED, THAT AGENT, LENDERS AND EACH GRANTOR ACKNOWLEDGE
THAT ANY APPEALS FROM THOSE COURTS MAY HAVE TO BE HEARD BY A COURT LOCATED
OUTSIDE OF COOK COUNTY, CITY OF CHICAGO, ILLINOIS, AND, PROVIDED, FURTHER,
NOTHING IN THIS AGREEMENT SHALL BE DEEMED OR OPERATE TO PRECLUDE AGENT FROM
BRINGING SUIT OR TAKING OTHER LEGAL ACTION IN ANY OTHER JURISDICTION TO REALIZE
ON THE COLLATERAL OR ANY OTHER SECURITY FOR THE OBLIGATIONS, OR TO ENFORCE A
JUDGMENT OR OTHER COURT ORDER IN FAVOR OF AGENT. EACH GRANTOR EXPRESSLY SUBMITS
AND CONSENTS IN ADVANCE TO SUCH JURISDICTION IN ANY ACTION OR SUIT COMMENCED IN
ANY SUCH COURT, AND EACH GRANTOR HEREBY WAIVES ANY OBJECTION WHICH IT MAY HAVE
BASED UPON LACK OF PERSONAL JURISDICTION, IMPROPER VENUE OR FORUM NON CONVENIENS
AND HEREBY CONSENTS TO THE GRANTING OF SUCH LEGAL OR EQUITABLE RELIEF AS IS
DEEMED APPROPRIATE BY SUCH COURT. EACH GRANTOR HEREBY WAIVES PERSONAL SERVICE OF
THE SUMMONS, COMPLAINT AND OTHER PROCESS ISSUED IN ANY SUCH ACTION OR SUIT AND
AGREES THAT SERVICE OF SUCH SUMMONS, COMPLAINTS AND OTHER PROCESS MAY BE MADE BY
REGISTERED OR CERTIFIED MAIL ADDRESSED TO SUCH GRANTOR AT THE ADDRESS OF
BORROWER SET FORTH ON SCHEDULE J TO THE CREDIT AGREEMENT AND THAT SERVICE SO
MADE SHALL BE DEEMED COMPLETED UPON THE EARLIER OF ACTUAL RECEIPT
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THEREOF OR THREE (3) DAYS AFTER DEPOSIT IN THE U.S. MAILS, PROPER POSTAGE
PREPAID.
19. WAIVER OF JURY TRIAL. BECAUSE DISPUTES ARISING IN CONNECTION
WITH COMPLEX FINANCIAL TRANSACTIONS ARE MOST QUICKLY AND ECONOMICALLY RESOLVED
BY AN EXPERIENCED AND EXPERT PERSON AND THE PARTIES WISH APPLICABLE STATE AND
FEDERAL LAWS TO APPLY (RATHER THAN ARBITRATION RULES), THE PARTIES DESIRE THAT
DISPUTES ARISING HEREUNDER OR RELATING HERETO BE RESOLVED BY A JUDGE APPLYING
SUCH APPLICABLE LAWS. THEREFORE, TO ACHIEVE THE BEST COMBINATION OF THE BENEFITS
OF THE JUDICIAL SYSTEM AND OF ARBITRATION, THE PARTIES HERETO WAIVE ALL RIGHT TO
TRIAL BY JURY IN ANY ACTION, SUIT OR PROCEEDING BROUGHT TO RESOLVE ANY DISPUTE,
WHETHER SOUNDING IN CONTRACT, TORT, OR OTHERWISE, AMONG AGENT, LENDERS, AND ANY
GRANTOR ARISING OUT OF, CONNECTED WITH, RELATED TO, OR INCIDENTAL TO THE
RELATIONSHIP ESTABLISHED IN CONNECTION WITH, THIS SECURITY AGREEMENT OR ANY OF
THE OTHER LOAN DOCUMENTS OR THE TRANSACTIONS RELATED HERETO OR THERETO.
20. Section Titles. The Section titles contained in this Security
Agreement are and shall be without substantive meaning or content of any kind
whatsoever and are not a part of the agreement between the parties hereto.
21. No Strict Construction. The parties hereto have participated
jointly in the negotiation and drafting of this Security Agreement. In the event
an ambiguity or question of intent or interpretation arises, this Security
Agreement shall be construed as if drafted jointly by the parties hereto and no
presumption or burden of proof shall arise favoring or disfavoring any party by
virtue of the authorship of any provisions of this Security Agreement.
22. Advice of Counsel. Each of the parties represents to each other
party hereto that it has discussed this Security Agreement and, specifically,
the provisions of Section 18 and Section 19, with its counsel.
23. Borrower as Agent. Each Grantor (other than Borrower) hereby
appoints Borrower as its agent and attorney-in-fact for purposes of giving and
receiving notices under this Security Agreement and agrees that any notice
hereunder delivered to Borrower shall be deemed to have been delivered to each
Grantor.
[SIGNATURE PAGES FOLLOW]
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IN WITNESS WHEREOF, each Grantor has caused this Security Agreement to
be executed and delivered by its duly authorized officer as of the date first
set forth above.
ACADIANA MALL WILSONS, INC.
ANNAPOLIS WILSONS, INC.
ANTELOPE VALLEY WILSONS, INC.
ARDEN FAIR WILSONS, INC.
ARSENAL WILSONS, INC.
ATLANTA AIR PORT CONCOURSE T WILSON, INC.
AUBURN-MAINE WILSONS, INC.
AUBURN WILSONS, INC.
AUGUSTA MALL WILSONS, INC.
AVENUE OF THE AMERICAS WILSONS, INC.
BALDWIN HILLS WILSONS, INC.
BANGOR MALL WILSONS, INC.
BARTON CREEK WILSONS, INC.
BAYSHORE WILSONS, INC.
BAYSHORE (CA) WILSONS, INC.
BAYSIDE TANNERY WEST, INC.
BEAVER VALLEY WILSONS, INC.
BELLEVUE BERMANS INC.
BELLIS FAIR WILSONS, INC.
BERKSHIRE WILSONS, INC.
BERMANS, THE LEATHER EXPERTS, INC.
BIRCHWOOD MALL WILSONS, INC.
BOISE WILSONS, INC.
BOULDER WILSONS, INC.
BOULEVARD MALL WILSONS, INC.
BRAINTREE TANNERY WEST, INC.
BRIARWOOD WILSONS, INC.
BRIDGEWATER COMMONS WILSONS, INC.
BRUNSWICK SQUARE WILSONS, INC.
BUCKLAND HILLS PELLE CUIR, INC.
BURLINGTON WILSONS, INC.
BURTON WILSONS, INC.
CAMBRIDGE GALLERIA WILSONS, INC.
CAPITOL COURT WILSONS, INC.
CARBONDALE IL WILSONS, INC.
CAROLINA PLACE WILSONS, INC.
CARSON WILSONS, INC.
CARY TOWN WILSONS, INC.
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CASCADE MALL WILSONS, INC.
CENTURY CITY WILSONS, INC.
CHAMPLAIN CENTRE WILSONS, INC.
CHARELSTON CENTER WILSONS, INC.
CHARLESTOWNE WILSONS, INC.
CHAUTAUQUA WILSONS, INC.
CHERRY HILL WILSONS, INC.
CHICAGO RIDGE WILSONS, INC.
CHICAGO YARD WILSONS, INC.
CHRISTIANA WILSONS, INC.
CHULA VISTA WILSONS, INC.
CIELO VISTA WILSONS, INC.
CLERMONT COUNTY WILSONS, INC.
COLONIE WILSONS, INC.
CONCOURSE A WILSONS, INC.
CORONADO WILSONS, INC.
CORTANA MALL WILSONS, INC.
COUNCIL BLUFFS WILSONS, INC.
COUNTY FAIR WILSONS, INC.
CROSS COUNTY WILSONS, INC.
CROSS CREEK MALL WILSONS, INC.
CROSSROADS WILSONS, INC., A NEVADA CORPORATION
CROSSROADS WILSONS, INC., A UTAH CORPORATION
CRYSTAL WATERFORD WILSONS, INC.
CUMBERLAND WILSONS, INC.
DAKOTA SQUARE WILSONS, INC.
DANBURY FAIR WILSONS, INC.
DEL AMO BERMANS, INC.
EASTFIELD WILSONS, INC.
EASTLAND MALL WILSONS, INC.
EASTLAND (MICH.) WILSONS, INC.
EASTPOINT WILSONS, INC.
EASTVIEW WILSONS, INC.
EMERALD SQUARE WILSONS, INC.
ESCONDIDO WILSONS, INC.
FAIRLANE WILSONS, INC.
FASHION PLACE WILSONS, INC.
FASHION SQUARE-SAGINAW WILSONS, INC.
FLATBUSH WILSONS, INC.
FOOTHILLS WILSONS, INC.
FORD CITY PELLE CUIR, INC.
FOUR SEASONS WILSONS, INC.
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<PAGE>
FOX RUN WILSONS, INC.
FRANKLIN MILLS BERMANS OUTLET, INC.
GARDEN STATE TANNERY WEST, INC.
GENESEE VALLEY WILSONS, INC.
GOLF MILL WILSONS, INC.
GOVERNOR'S SQUARE WILSONS, INC.
GRAND RAPIDS WILSONS, INC.
GRAND TRAVERSE WILSON, INC.
GREAT MALL SNYDER LEATHER OUTLET, INC.
GREAT NORTHWEST BERMANS OUTLET, INC.
GREEN ACRES WILSONS, INC.
GURNEE MILLS BERMANS OUTLET, INC.
GWINNETT PLACE WILSONS, INC.
HAMILTON PLACE WILSONS, INC.
HAMILTON WILSONS, INC.
HANES MALL WILSONS, INC.
HANFORD WILSONS, INC.
HARRISBURG WILSONS, INC.
HARTSFIELD ATRIUM WILSONS, INC.
HAYWOOD WILSONS, INC.
HENRIETTA WILSONS, INC.
HICKORY RIDGE BERMANS, INC.
HOLYOKE WILSONS, INC.
HULEN MALL WILSONS, INC.
HUNTINGTON-WEST VA. WILSONS, INC.
INGRAM PARK WILSONS, INC.
IRONDEQUOIT WILSONS, INC.
IRVING WILSONS, INC.
JANESVILLE WILSONS, INC.
JEFFERSON YORKTOWN WILSONS, INC.
KELSO WILSONS, INC.
KENWOOD WILSONS, INC.
KING OF PRUSSIA WILSONS, INC.
KITSAP MALL WILSONS, INC.
LAKEVIEW SQUARE WILSONS, INC.
LAKEWOOD WILSONS, INC.
LANDMARK CENTER (VA) WILSONS, INC.
LANESBOROUGH BERKSHIRE MALL WILSONS, INC.
LANSING MALL WILSONS, INC.
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LAREDO WILSONS, INC.
LAUREL MALL WILSONS, INC.
LAYTON HILLS WILSONS, INC.
LEOMINSTER WILSONS, INC.
LIBERTY TREE MALL WILSONS, INC.
LINDALE WILSONS, INC.
LIVINGSTON MALL WILSONS, INC.
LONG BEACH WILSONS, INC.
LONG RIDGE WILSONS, INC.
MACHESNEY WILSONS, INC.
MACON MALL WILSONS, INC.
MADISON SQUARE WILSONS, INC.
MAIN PLACE WILSONS, INC.
MAINE MALL WILSONS, INC.
MALL AT 163RD ST. WILSONS, INC.
MARLEY STATION WILSONS, INC.
MENLO PARK WILSONS, INC.
MERIDEN SQUARE WILSONS, INC.
METRO WILSONS, INC.
MIDLAND MALL WILSONS HOUSE OF SUEDE, INC.
MIDLAND MALL WILSONS, INC.
MID-RIVERS BERMANS, INC.
MILITARY CIRCLE WILSONS, INC.
MISSION VALLEY WILSONS, INC.
MONROEVILLE WILSONS, INC.
MONTCLAIR WILSONS, INC.
MONTEBELLO WILSONS, INC.
NANUET TANNERY WEST, INC.
NATICK MALL WILSONS, INC.
NESHAMINY WILSONS, INC.
NEWBURGH MALL WILSONS, INC.
NEWPORT CITY WILSONS, INC.
NORTHGATE WILSONS, INC.
NORTH COUNTY FAIR TANNERY WEST, INC.
NORTH DARTMOUTH WILSONS, INC.
NORTH EAST WILSONS, INC.
NORTHGATE-DURHAM WILSONS, INC.
NORTHPOINT WILSONS, INC.
NORTHSHORE WILSONS, INC.
NORTHTOWN WILSONS, INC.
OAKRIDGE WILSONS, INC.
OAKVIEW WILSONS, INC.
OAKWOOD WILSONS, INC.
20
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OCEAN COUNTY WILSONS, INC.
OLD CAPITAL CENTER WILSONS, INC.
ONODAGA COUNTY WILSONS, INC.
ORLAND SQUARE WILSONS, INC.
ORLANDO FASHION WILSONS, INC.
PARADISE VALLEY MALL WILSONS, INC.
PARAMUS PARK WILSONS, INC.
PARK CITY WILSONS, INC.
PARK LANE WILSONS, INC.
PARK PLAZA WILSONS, INC.
PARKERSBURG WILSONS, INC.
PARKWAY PLAZA WILSONS, INC.
PARMATOWN WILSONS, INC.
PEACHTREE MALL WILSONS, INC.
PENTAGON CITY TANNERY WEST, INC.
PHEASANT WILSONS, INC.
PHILADELPHIA GALLERY WILSONS, INC.
PHILLIPSBURG WILSONS, INC.
PITTSBURGH AIRPORT WILSONS, INC.
PORTAGE WILSONS, INC.
POUGHKEEPSIE GALLERIA WILSONS, INC.
RACEWAY WILSONS, INC.
RANDHURST WILSONS, INC.
RD. SQUARE WILSONS, INC.
RIDGEDALE TANNERY WEST, INC.
RIVER HILLS WILSONS, INC.
RIVERCHASE WILSONS, INC.
RI-WARWICK WILSONS HOUSE OF SUEDE, INC.
ROANOKE WILSONS, INC.
ROCKAWAY TANNERY WEST, INC.
ROCKINGHAM PARK WILSONS, INC.
ROGUE VALLEY WILSONS, INC.
ROOSEVELT FIELD TANNERY WEST, INC.
ROOSEVELT FIELD WILSONS, INC.
ROSEDALE WILSONS, INC.
ROSS PARK WILSONS, INC.
RUSHMORE MALL WILSONS, INC.
SACRAMENTO WILSONS, INC.
SALISBURY CENTRE WILSONS, INC.
SALMON RUN WILSONS, INC.
SAN LEANDRO WILSONS, INC.
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SANDUSKY MALL WILSONS, INC.
SANTA ANITA WILSONS, INC.
SANTA MARIA WILSONS, INC.
SANTA ROSA WILSONS, INC.
SAWGRASS MILLS BERMANS OUTLET, INC.
SCOTTSDALE FASHION WILSONS, INC.
SERRAMONTE WILSONS, INC.
SHERWOOD WILSONS, INC.
SHOPPINGTOWN WILSONS, INC.
SIERRA VISTA WILSONS, INC.
SMITH HAVEN TANNERY WEST, INC.
SMITH HAVEN WILSONS, INC.
SNYDER LEATHER OF WARWICK, RI, INC.
SOLANO MALL WILSONS, INC.
SOUTH HILL (WA) WILSONS, INC.
SOUTH HILLS WILSONS, INC.
SOUTH SQUARE WILSONS, INC.
SOUTHERN HILLS WILSONS, INC.
SOUTHLAKE WILSONS, INC.
SOUTHWEST PLAZA WILSONS, INC.
SPOTSYLVANIA WILSONS, INC.
SPRING HILL WILSONS, INC.
SQUARE ONE WILSONS, INC.
STATEN ISLAND WILSONS, INC.
STEEPLEGATE WILSONS, INC.
STEINWAY STREET WILSONS, INC.
STONERIDGE TANNERY WEST, INC.
STONEWOOD WILSONS, INC.
STRATFORD SQUARE WILSONS, INC.
ST. CHARLES WILSONS, INC.
ST. LAURENCE CENTER WILSONS, INC.
SWANSEA WILSONS, INC.
TACOMA WILSONS, INC.
TAYLOR TOWNSHIP WILSONS, INC.
THE OAKS WILSONS, INC.
TOUHY AVENUE PELLE CUIR, INC.
TOWN CENTER WILSONS, INC.
TOWNE EAST WILSONS, INC.
TRUMBULL PARK WILSONS, INC.
TUCSON MALL WILSONS, INC.
TWELVE OAKS TANNERY WEST, INC.
22
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TYLER MALL WILSONS, INC.
TYLER WILSONS, INC.
UNIVERSITY MALL WILSONS, INC.
VALLEY WEST WILSONS, INC.
VANCOUVER WILSONS, INC.
VICTOR VALLEY WILSONS, INC.
WAYNE COUNTY WILSONS, INC.
WEST COVINA WILSONS, INC.
WESTLAND-DETROIT WILSONS, INC.
WESTMINSTER (COLO.) WILSONS, INC.
WHITE PLAINS GALLERIA WILSONS, INC.
WILLOWBROOK WILSONS, INC.
WILSONS CENTER, INC.
WILSONS HOUSE OF SUEDE, INC.
WILSONS LEATHER HOLDINGS INC.
WILSONS TANNERY WEST, INC.
WILSONS THE LEATHER EXPERTS INC.
WILSONS/GEORGETOWN LEATHER DESIGN OF ARLINGTON, VA, INC.
WILSONS/GEORGETOWN LEATHER DESIGN OF BETHESDA, MD, INC.
WILSONS/GEORGETOWN LEATHER DESIGN OF COLUMBIA, MD, INC.
WILSONS/GEORGETOWN LEATHER DESIGN OF DALE CITY, VA, INC.
WILSONS/GEORGETOWN LEATHER DESIGN OF DENVER, CO, INC.
WILSONS/GEORGETOWN LEATHER DESIGN OF FAIRFAX, VA, INC.
WILSONS/GEORGETOWN LEATHER DESIGN OF FARMINGTON, CT, INC.
WILSONS/GEORGETOWN LEATHER DESIGN OF GAITHERSBURG, MD, INC.
WILSONS/GEORGETOWN LEATHER DESIGN OF KING PRUSSIA, PA, INC.
WILSONS/GEORGETOWN LEATHER DESIGN OF LANDOVER, MD, INC.
WILSONS/GEORGETOWN LEATHER DESIGN OF MCLEAN, VA, INC.
WILSONS/GEORGETOWN LEATHER DESIGN OF NASHVILLE, TN, INC.
WILSONS/GEORGETOWN LEATHER DESIGN OF OWINGS, MD, INC.
WILSONS/GEORGETOWN LEATHER DESIGN OF SPRINGFIELD, VA, INC.
WILSONS/GEORGETOWN LEATHER DESIGN OF STAMFORD, CT, INC.
WILSONS/GEORGETOWN LEATHER DESIGN OF ST. LOUIS, MO, INC.
WILSONS/GEORGETOWN LEATHER DESIGN OF TOWSON, MD, INC.
23
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WOODBRIDGE MALL WILSONS, INC.
WILSONS/GEORGETOWN LEATHER
DESIGN OF WILLOW GROVE, PA, YAKIMA WILSONS, INC.
INC.
YORK MALL WILSONS, INC.
WILSONS/GEORGETOWN LEATHER
DESIGN OF WOODBRIDGE, NJ, INC. YUBA CITY WILSONS, INC.
By: /s/David L. Rogers
-------------------
Name: David L. Rogers
----------------
The authorized officer of
each of the foregoing corporations
Accepted and Acknowledged by:
GENERAL ELECTRIC CAPITAL
CORPORATION, as Agent
By: /s/John Hatherly
-------------------------------
Name: John Hatherly
-----------------------------
Title: Region Manager
----------------------------
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<PAGE>
Exhibit 10.8
SECURITY AGREEMENT
------------------
SECURITY AGREEMENT, dated as of May 25, 1996, by WILSONS THE LEATHER
EXPERTS INC., a Minnesota corporation (the "Issuer") and the other grantors
listed on the signature pages hereto (together with the Issuer, the "Grantors"),
in favor of MELVILLE CORPORATION, a New York corporation (the "Secured Party").
W I T N E S S E T H:
--------------------
WHEREAS, the Issuer, Wilsons Center, Inc. (the "Company") and the
Secured Party are parties to a Sale Agreement dated as of May 24, 1996
(including all appendices, exhibits or schedules thereto, as from time to time
amended, restated, supplemented or otherwise modified, the "Sale Agreement");
WHEREAS, contemporaneously with entering into this Agreement, the
Grantors are entering into a separate Security Agreement (the "Other Agreement")
with General Electric Capital Corporation ( the "Agent") and the lenders (the
"Lenders" or the "Senior Secured Parties") party to the credit agreement of even
date herewith (the "Credit Agreement") among Wilsons Leather Holdings Inc.
("Wilsons"), certain affiliated corporations, the Lenders and the Agent;
WHEREAS, as a condition to the Secured Party's entering into the Sale
Agreement and purchasing the subordinated note referred to therein (the "Note"),
the Issuer and the other Grantors have agreed to grant a continuing security
interest in and to the Collateral (as hereafter defined) to secure the Secured
Obligations (as hereinafter defined);
NOW, THEREFORE, in consideration of the premises and mutual covenants
herein contained and for other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, Grantors hereby agree as follows:
1. DEFINED TERMS. All capitalized terms used but not otherwise
defined herein have the meaning given to them in the Credit Agreement or in
Schedule A thereto; provided, however, that the term "Event of Default" shall
have the meaning given such term in the Note. All other undefined terms
contained in this Security Agreement, unless the context indicates otherwise,
have the meanings provided for by Article 9 of the Commercial Code as in effect
in the State of New York (the "Code") to the extent the same are used or defined
therein.
"Security Documents" means this Agreement, each of the pledge
agreements between the Secured Party and Wilsons Center, Inc., Rosedale Wilsons,
Inc. and River Hills Wilsons, Inc., respectively, the Note and the subordination
agreement among the Secured Party, the Issuer and the Agent (the "Subordination
Agreement").
<PAGE>
2. GRANT OF SECURITY INTEREST.
---------------------------
(a) To secure the prompt and complete payment of all principal and
interest on the Note in full when due, whether at stated maturity, by
acceleration or otherwise, all other amounts payable by the Grantors under this
Agreement or any other Security Document and any amendments, restatements,
renewals, extensions or modifications of any of the foregoing (the "Secured
Obligations"), and to induce the Secured Party to enter into the Sale Agreement,
each Grantor hereby grants, assigns, conveys, mortgages, pledges, hypothecates
and transfers to the Secured Party a security interest in its right, title and
interest in, to and under the following, whether now owned by or owing to, or
hereafter acquired by or arising in favor of such Grantor (including under any
trade names, styles or derivations thereof), and whether owned or consigned by
or to, or leased from or to, such Grantor, and regardless of where located (all
of which being hereinafter collectively referred to as the "Collateral"):
(i) all Accounts;
(ii) all Chattel Paper;
(iii) all Contracts,
(iv) all deposit accounts now or hereafter established by Wilsons,
all cash deposited therein from time to time and all other
monies, cash, cash equivalents and property of Wilsons or any
other Grantor in the possession or under the control of the
Secured Party.
(v) all Documents;
(vi) all General Intangibles;
(vii) all Instruments;
(viii) all Inventory;
(ix) all Investment Property;
(x) all books, records, ledger cards, files, correspondence,
computer programs, tapes, disks and related data processing
software that at any time evidence or contain information
relating to any of the property described in (i) through (ix)
above or are otherwise necessary or helpful in the collection
thereof or realization thereon; and
(xi) all Proceeds of and all accessions to, substitutions and
replacements for, and rents, profits and products of all or
any of the property described in (i) through (x) above.
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<PAGE>
(b) In addition, to secure the prompt and complete payment,
performance and observance of the Secured Obligations and in order to induce the
Secured Party as aforesaid, each Grantor hereby grants to the Secured Party, a
security interest in the property of such Grantor held by the Secured Party
consisting of property described above in Section 2(a) now or hereafter in the
possession or custody of or in transit to the Secured Party, for any purpose,
including safekeeping, collection or pledge, for the account of such Grantor, or
as to which such Grantor may have any right or power.
3. SECURED PARTY'S RIGHTS; LIMITATIONS ON SECURED PARTY'S
OBLIGATIONS.
(a) It is expressly agreed by each Grantor that, anything herein to
the contrary notwithstanding, each Grantor shall remain liable under each of its
Contracts and each of its Licenses to observe and perform all the conditions and
obligations to be observed and performed by it thereunder. The Secured Party
shall not have any obligation or liability under any Contract or License by
reason of or arising out of this Agreement or the granting herein of a security
interest therein or the receipt by the Secured Party of any payment relating to
any Contract or License pursuant hereto. The Secured Party shall not be required
or obligated in any manner to perform or fulfill any of the obligations of any
Grantor under or pursuant to any Contract or License, or to make any payment, or
to make any inquiry as to the nature or the sufficiency of any payment received
by it or the sufficiency of any performance by any party under any Contract or
License, or to present or file any claims, or to take any action to collect or
enforce any performance or the payment of any amounts which may have been
assigned to it or to which it may be entitled at any time or times.
(b) The Secured Party may at any time after an Event of Default shall
have occurred and be continuing, immediately upon notice to Issuer, notify
Account Debtors, parties to the Contracts and obligors in respect of Instruments
and Chattel Paper, that the Accounts and the right, title and interest of each
Grantor in and under such Contracts, Instruments and Chattel Paper have been
assigned to the Secured Party pursuant to this Agreement and that payments shall
be made directly to the Secured Party. Upon the request of the Secured Party, if
an Event of Default shall have occurred and is continuing, each Grantor shall so
notify Account Debtors, parties to Contracts and obligors in respect of
Instruments and Chattel Paper.
(c) Grantor shall deliver to Secured Party copies of all appraisals
and other information delivered to the Agent and/or any of the Senior Secured
Parties pursuant to paragraph E of Schedule H to the Credit Agreement at such
time as delivered to the Agent and/or any of the Senior Secured Parties. If an
Event of Default shall have occurred and be continuing, the Issuer or Wilsons,
at their own expense, shall cause the certified independent public accountants
then engaged by the Issuer or Wilsons to prepare and deliver to the Secured
Party at any time and from time to time promptly upon the Secured Party's
request, the following reports with respect to each Grantor: (i) a
reconciliation of all Accounts; (ii) an aging of all Accounts; (iii) trial
balances; (iv) a test verification of such Accounts as the
3
<PAGE>
Secured Party may request; and (v) a summary of all intercompany accounts. Each
Grantor, at its own expense, shall deliver to the Secured Party the results of
each physical verification, if any, which such Grantor may in its discretion
have made, or caused any other Person to have made on its behalf, of all or any
portion of its Inventory.
4. REPRESENTATIONS AND WARRANTIES. Each Grantor represents and
warrants that:
(a) Each Grantor is the sole owner of each item of the Collateral in
which it purports to grant a security interest hereunder, and has good and
marketable title thereto free and clear of any and all Liens other than (i)
Liens created under the Other Agreement and (ii) Permitted Encumbrances.
(b) No effective security agreement, financing statement, equivalent
security or Lien instrument or continuation statement covering all or any part
of the Collateral is on file or of record in any public office, except such as
may have been filed (i) by a Grantor in favor of Agent, for itself and the
ratable benefit of Lenders, pursuant to the Other Agreement, (ii) by a Grantor
in favor of the Secured Party pursuant to this Agreement and, (iii) in
connection with any other Permitted Encumbrances and (iv) to evidence Wilson's
interest as consignor under the Consignment Agreement.
(c) This Security Agreement is effective to create a valid and
continuing Lien on and, upon the filing of the appropriate financing statements
listed on Schedule I hereto, a perfected security interest in favor of the
Secured Party, in the Collateral with respect to which a security interest may
be perfected by filing pursuant to the Code. That Lien is prior to all other
Liens, except (i) Liens created pursuant to the Other Agreement and (ii)
Permitted Encumbrances that would be prior to Liens in favor of the Senior
Secured Parties as a matter of law, and is enforceable as such as against any
and all creditors of and purchasers from any Grantor (other than purchasers of
Inventory in the ordinary course of business). All actions by each Grantor
necessary or desirable to protect and perfect such security interest in each
item of the Collateral have been duly taken.
(d) Schedule II hereto lists all Instruments (other than certificated
securities) and Chattel Paper of each Grantor outstanding on the date hereof.
All actions by each Grantor necessary or desirable to protect and perfect the
security interest of the Secured Party, in each item set forth on Schedule II
(including the delivery of all originals thereof to the Secured Party and the
legending of all Chattel Paper as required by Section 5(b) hereof) has been duly
taken. The security interest of the Secured Party in the Collateral listed on
Schedule II hereto is prior to all other Liens, except Liens created by the
Other Agreement and Permitted Encumbrances, and is enforceable as such against
any and all creditors of and purchasers from each Grantor.
(e) Each Grantor's chief executive office, principal place of
business, corporate offices, all warehouses and premises where Collateral is
stored or located, and the
4
<PAGE>
locations of all of its books and records concerning the Collateral are set
forth on Schedule III-A hereto.
(f) With respect to the Accounts, (i) they represent bona fide sales
of Inventory or rendering of services to Account Debtors in the ordinary course
of any Grantor's business completed in accordance with the terms and provisions
contained in the documents available to the Secured Party with respect thereto
and are not evidenced by a judgment, Instrument or Chattel Paper; (ii) the
amounts shown on such deliveries to the Secured Party and on such records are
actually and absolutely owing to any Grantor as indicated thereon and are not in
any way contingent; (iii) no payments have been or shall be made thereon except
payments immediately delivered to the applicable Grantor's account and
transferred to Borrower's Concentration Account or the Agent as required
pursuant to the terms of Schedule E to the Credit Agreement; (iv) except as
specifically disclosed to Secured Party there are no material setoffs, claims or
disputes existing or asserted with respect thereto and no Grantor has made any
agreement with any Account Debtor for any extension of time for the payment
thereof, any compromise or settlement for less than the full amount thereof, any
release of any Account Debtor from liability therefor, or any deduction
therefrom except a discount or allowance allowed by any Grantor in the ordinary
course of its business for prompt payment; (v) to the best of each Grantor's
knowledge, there are no facts, events or occurrences which impair in any
material manner the validity or enforcement thereof or tend to reduce the amount
payable thereunder as shown on such deliveries to the Secured Party or on such
Grantor's books and records; (vi) to the best of each Grantor's knowledge, all
Account Debtors have the capacity to contract; (vii) except as specifically
disclosed to the Secured Party, no Grantor has received any notice of
proceedings or actions which are threatened or pending against any Account
Debtor which might result in a material adverse change in such Account Debtor's
financial condition; and (viii) except as specifically disclosed to the Secured
Party, no Grantor has knowledge that any material Account Debtor is unable
generally to pay its debts as they become due.
(g) (i) Each Grantor has good, indefeasible and merchantable title to
its Inventory and such Inventory is not subject to any Lien or security interest
or document whatsoever except for the perfected, second priority security
interest granted to the Secured Party hereunder, the perfected, first priority
security interest granted to Agent, for the benefit of Agent and Lenders, under
the Other Agreement, and Permitted Encumbrances, (ii) except as specifically
disclosed to the Secured Party, all such material Inventory is of good and
merchantable quality, free from any defects, (iii) such property is not subject
to any licensing, patent, royalty, trademark, trade name or copyright agreements
with any third parties which would require any consent of any third party upon
sale or disposition of that Inventory or the payment of any monies to any third
party as a precondition of such sale or other disposition, and (iv) the
completion of manufacture, sale or other disposition of such property by the
Secured Party following an Event of Default shall not require the consent of any
Person (other than the Agent) and shall not constitute a breach or default under
any contract or agreement to which any Grantor is a party or to which such
property is subject. No Inventory shall be
5
<PAGE>
moved to any location not listed on Schedule III-A or disclosed to the Secured
Party in advance. No Inventory shall be moved to any location which would cause
the Secured Party to lose its perfected security interest therein except that up
to 2% of Wilsons' finished goods may be on consignment with consignees other
than the Grantors. As to kiosks, holiday stores and other temporary sales
locations, Grantors shall not cause or permit such sales locations (i) to be
operated by any entity other than a Person that is a Grantor hereunder and a
party to the Consignment Agreement with Wilsons, or (ii) to be operated in a
jurisdiction in which an effective UCC-1 consignment filing in favor of Wilsons
(and assigned to the Secured Party) and an effective UCC-1 filing in favor of
the Secured Party, in each case signed by the applicable Grantor, are not on
file in the appropriate filing offices.
(h) No Grantor has any interest in, or title to, any Trademark
material to its business except as set forth in Schedule IV hereto. This
Security Agreement is effective to create a valid and continuing Lien on and,
upon filing of the Trademark Security Agreements with the United States Patent
and Trademark Office, perfected security interests in favor of the Secured
Party, in each Grantor's Trademarks and such perfected security interests are
enforceable as such as against any and all creditors of and purchasers from each
Grantor. Upon filing of the Trademark Security Agreements with the United States
Patent and Trademark Office, and upon filing financing statements under the Code
with respect to General Intangibles, all action necessary or desirable to
protect and perfect the Secured Party's security interest in each Grantor's
Trademarks shall have been duly taken. The foregoing shall apply only to those
Grantors that own Trademarks.
5. COVENANTS. Each Grantor covenants and agrees with the Secured
Party that from and after the date of this Security Agreement and until the
Termination Date:
(a) Further Assurances; Pledge of Instruments. At any time and from
time to time, upon the written request of the Secured Party and at the sole
expense of each Grantor, such Grantor shall promptly and duly execute and
deliver any and all such further instruments and documents and take such further
actions as the Secured Party may deem desirable to obtain the full benefits of
this Security Agreement and of the rights and powers herein granted, including
(i) using its reasonable efforts to secure all consents and approvals necessary
or appropriate for the assignment to or for the benefit of the Secured Party, of
any License or Contract held by such Grantor or in which such Grantor has any
rights not heretofore assigned (provided that Secured Party shall not make such
request unless Agent also makes such request), (ii) filing any financing or
continuation statements under the Code with respect to the Liens and security
interests granted hereunder or under any other Loan Document, (iii) provided
that no Senior Debt (as defined in the Subordination Agreement) is outstanding
transferring Collateral to the Secured Party's possession if such Collateral
consists of Chattel Paper, Instruments or if a security interest in such
Collateral can be perfected only by possession, or if requested by the Secured
Party, and (iv) using its reasonable efforts to obtain waivers of Liens, if any
exist, from landlords and mortgagees (provided that Secured Party shall not make
such request unless Agent also makes such request). Each Grantor also hereby
authorizes the Secured Party to file any such financing or
6
<PAGE>
continuation statements without the signature of any Grantor to the extent
permitted by applicable law. If any amount payable under or in connection with
any of the Collateral is or shall become evidenced by any Instrument, such
Instrument, other than checks and notes received in the ordinary course of
business, shall be duly endorsed in a manner satisfactory to the Secured Party
immediately upon a Grantor's receipt thereof.
(b) Maintenance of Records. Each Grantor shall keep and maintain, at
its own cost and expense, satisfactory and complete records of the Collateral,
including a record of any and all payments received and any and all credits
granted with respect to the Collateral and all other dealings with the
Collateral. Each Grantor shall mark its books and records pertaining to the
Collateral to evidence this Security Agreement and the security interests
granted hereby. All Chattel Paper shall be marked with the following legend:
"This writing and the obligations evidenced or secured hereby are subject to the
security interest of Melville Corporation, as the secured party (the "Secured
Party") under the Security Agreement dated as of May 25, 1996 among the Secured
Party and the Grantors party thereto." For the Secured Party's further security,
each Grantor agrees that the Secured Party, shall have a special property right
and security interest in all of each Grantor's books and records pertaining to
the Collateral and, upon the occurrence and during the continuance of any Event
of Default, provided that no Senior Debt shall be outstanding, each Grantor
shall deliver and turn over any such books and records to the Secured Party or
to its representatives at any time on demand of the Secured Party. Prior to the
occurrence of a Default or Event of Default and upon notice from the Secured
Party, each Grantor shall permit any representative of the Secured Party to
inspect such books and records and shall provide photocopies thereof to the
Secured Party as more specifically set forth in Section 5(c) below.
(c) Right of Inspection. Upon reasonable notice to the Issuer and its
employees, officers, agents and representatives shall have the right (and
without any notice to any Grantor upon the occurrence and during the continuance
of any Event of Default) to enter into and upon any premises where any of the
Inventory or other Collateral is located for the purpose of inspecting the same,
observing its use or otherwise protecting the Secured Party's interests in the
Collateral.
(d) Continuous Perfection. No Grantor shall change its chief
executive office, principal place of business, corporate offices, or warehouses
or other Collateral locations, or remove any such Books and Records from such
locations, other than in compliance with Section 6.16 of the Credit Agreement.
In addition, no Grantor shall change its name, identity or corporate structure
in any manner which might make any financing or continuation statement filed in
connection herewith seriously misleading within the meaning of Section 9.402(7)
of the Code or any other then applicable provision of the Code except in
compliance with the provisions of Section 6.16 of the Credit Agreement.
7
<PAGE>
(e) Covenants Regarding Trademark Collateral.
-----------------------------------------
(i) Issuer shall notify the Secured Party immediately if it
knows or has reason to know that any application or registration relating
to any Trademark (now or hereafter existing) may become abandoned or
dedicated, or of any adverse determination or development (including the
institution of, or any such determination or development in, any proceeding
in the United States Patent and Trademark Office or any court) regarding
any Grantor's ownership of any Trademark its right to register the same, or
to keep and maintain the same.
(ii) In no event shall any Grantor, either itself or through
any agent, employee, licensee or designee, file an application for the
registration of any Trademark with the United States Patent and Trademark
Office or any similar office or agency without giving the Secured Party
prior written notice thereof, and, upon request of the Secured Party, such
Grantor shall execute and deliver any and all Trademark Security Agreements
as the Secured Party may request to evidence the Secured Party's security
interest in such Trademark and the General Intangibles of any Grantor
relating thereto or represented thereby.
(iii) Each Grantor shall take all actions necessary or requested
by the Secured Party to maintain and pursue each application, to obtain the
relevant registration and to maintain the registration of each of the
Trademarks (now or hereafter existing), including the filing of
applications for renewal, affidavits of use, affidavits of
noncontestability and opposition and interference and cancellation
proceedings, unless such Grantor determines, in its reasonable business
judgment, that the Trademark which is the subject of such application or
registration is not material to the business of such Grantor or the other
Credit Parties.
(iv) In the event that any material Trademark Collateral is
infringed upon, or misappropriated or diluted by a third party, the
applicable Grantor shall notify the Secured Party promptly after it learns
thereof. Such Grantor shall, unless it shall reasonably determine that such
Trademark Collateral is not material to the conduct of its business or
operations, promptly sue for infringement, misappropriation or dilution and
to recover any and all damages for such infringement, misappropriation or
dilution, and shall take such other actions as the Secured Party shall deem
appropriate under the circumstances to protect such Trademark Collateral.
(f) Indemnification. In any suit, proceeding or action brought by the
Secured Party relating to any Account, Chattel Paper, Contract, Document,
General Intangible or Instrument for any sum owing thereunder or to enforce any
provision of any Account, Chattel Paper, Contract, Document, General Intangible
or Instrument, Grantors, jointly and severally, will save, indemnify and keep
the Secured Party harmless from and against all expense, loss or damage suffered
by reason of any defense, setoff, counterclaim, recoupment or reduction of
liability whatsoever of the obligor thereunder, arising out of a breach by any
8
<PAGE>
Grantor of any obligation thereunder or arising out of any other agreement,
indebtedness or liability at any time owing to, or in favor of, such obligor or
its successors from any Grantor, except in the case of the Secured Party, to the
extent such expense, loss, or damage is attributable solely to the gross
negligence or willful misconduct of the Secured Party as finally determined by a
court of competent jurisdiction. All such obligations of Grantors shall be and
remain enforceable against and only against Grantors and shall not be
enforceable against the Secured Party.
(g) Compliance with Terms of Accounts, etc. In all material respects,
each Grantor will perform and comply with all obligations in respect of its
Accounts, Chattel Paper, Contracts and Licenses and all other agreements to
which it is a party or by which it is bound relating to the Collateral.
(h) Limitation on Liens on Collateral. Grantors will not create,
permit or suffer to exist, and each Grantor will defend the Collateral against,
and take such other action as is necessary to remove, any Lien on the Collateral
except Permitted Encumbrances, and will defend the right, title and interest of
the Secured Party in and to any of such Grantor's rights in the Collateral
against the claims and demands of all Persons whomsoever.
(i) Limitations on Modifications of Accounts. Each Grantor shall
promptly notify the Secured Party if such Grantor grants any extension of the
time of payment of any of the Accounts, Chattel Paper or Instruments or
compromises, compounds or settles the same for less than the full amount
thereof, or if such Grantor releases, wholly or partly, any Person liable for
the payment thereof, or allows any credit or discount whatsoever thereon, in
each case, other than any such action taken in the ordinary course of business
of such Grantor.
(j) Limitations on Disposition. No Grantor will sell, lease, transfer
or otherwise dispose of any of the Collateral, or attempt or contract to do so
except as permitted by the Credit Agreement.
(k) Notices. Each Grantor will advise the Secured Party promptly, in
reasonable detail, (i) of any Lien (other than Permitted Encumbrances) made or
asserted against any of the Collateral, and (ii) of the occurrence of any other
event which would have a material adverse effect on the aggregate value of the
Collateral or on the security interests created hereunder.
6. THE SECURED PARTY APPOINTMENT AS ATTORNEY-IN-FACT.
--------------------------------------------------
(a) Subject to the prior rights of the holders of the Senior Debt,
each Grantor hereby irrevocably constitutes and appoints the Secured Party, and
any officer or agent thereof, with full power of substitution, as its true and
lawful attorney-in-fact with full irrevocable power and authority in the place
and stead of any Grantor and in the name of such Grantor or in its own name,
from time to time in the Secured Party's sole discretion for the
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purpose of carrying out the terms of this Security Agreement, to take any and
all appropriate action and to execute and deliver any and all documents and
instruments which may be necessary or desirable to accomplish the purposes of
this Security Agreement and, without limiting the generality of the foregoing,
hereby grants to the Secured Party, the power and right, on behalf of each
Grantor, without notice to or assent by any Grantor except as otherwise
specifically provided for herein or in the Note, and at any time, to do the
following (provided, however, that the Secured Party may only take the actions
in clauses (i), (iii), (iv) and (vii) through (xiv) so long as any Event of
Default shall have occurred and be continuing):
(i) in the name of each Grantor, in its own name or otherwise,
take possession of, endorse and receive payment of any checks, drafts,
notes, acceptances, or other Instruments for the payment of monies due
under any Collateral;
(ii) upon Grantor's failure to maintain the insurance required
by the Note or this Security Agreement, continue any insurance existing
pursuant to the terms of this Security Agreement, and pay all or any part
of the premiums therefor and the costs thereof;
(iii) receive payment of any and all monies, claims, and other
amounts due or to become due at any time arising out of or in respect of
any Collateral;
(iv) ask, demand, collect, receive and give acquittances and
receipts for any and all money due or to become due under any Collateral;
(v) upon Grantor's failure to take any such action when
required under the Note, pay or discharge taxes, Liens, security interests
or other encumbrances levied or placed on or threatened against the
Collateral to the extent that any such action may be necessary or desirable
to protect or preserve the Collateral or the first priority, perfected
security interest of the Secured Party, in the Collateral;
(vi) effect any repairs or upon Grantor's failure to maintain
the insurance required by the Note or this Agreement, obtain any insurance
called for by the terms hereof or of the Note, and pay all or any part of
the premiums therefor and costs thereof;
(vii) direct any party liable for any payment under or in
respect of any of the Collateral to make payment of any and all monies due
or to become due thereunder, directly to the Secured Party or as the
Secured Party shall direct;
(viii) sign and endorse any invoices, freight or express bills,
bills of lading, storage or warehouse receipts, drafts against debtors,
assignments, verifications and notices in connection with Accounts and
other documents constituting or related to the Collateral;
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(ix) settle, compromise or adjust any suit, action, or
proceeding described herein and, in connection therewith, give such
discharges or releases as the Secured Party may deem appropriate;
(x) file any claim or take or commence any other action or
proceeding in any court of law or equity or otherwise deemed appropriate by
the Secured Party for the purpose of collecting any and all such monies due
under any Collateral whenever payable;
(xi) commence and prosecute any suits, actions or proceedings
at law or in equity in any court of competent jurisdiction to collect the
Collateral or any part thereof and to enforce any other right in respect of
any Collateral;
(xii) defend any suit, action or proceeding brought against any
Grantor with respect to any Collateral if such Grantor does not defend such
suit, action or proceeding or if the Secured Party believes that such
Grantor is not pursuing such defense in a manner that will maximize the
recovery with respect to such Collateral;
(xiii) license or, to the extent permitted by an applicable
license, sublicense whether general, specific or otherwise, and whether on
an exclusive or non-exclusive basis, any Trademark for such consideration
and on such terms and conditions and in such manner as the Secured Party
shall, in its sole discretion, determine; and
(xiv) sell, transfer, pledge, make any agreement with respect to
or otherwise deal with any of the Collateral as fully and completely as
though the Secured Party were the absolute owner thereof for all purposes.
(b) Each Grantor hereby ratifies, to the extent permitted by law, all
that said attorneys shall lawfully do or cause to be done by virtue hereof. The
power of attorney granted pursuant to this Section 6 is a power coupled with an
interest and shall be irrevocable until all of the Obligations are indefeasibly
paid or otherwise satisfied in full.
(c) The powers conferred on the Secured Party hereunder are solely to
protect the Secured Party's interests in the Collateral and shall not impose any
duty upon the Secured Party to exercise any such powers. The Secured Party shall
not be accountable for any amount other than amounts that it actually receives
as a result of the exercise of such powers and none of the Secured Party's
officers, directors, employees, the agents or representatives shall be
responsible to any Grantor for any act or failure to act, except individually
(and not jointly and severally) for their own gross negligence or willful
misconduct as finally determined by a court of competent jurisdiction after all
possible appeals have been exhausted.
(d) Each Grantor also authorizes the Secured Party at any time and
from time to time upon the occurrence and during the continuation of any Event
of Default, to
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(i) communicate in its own name with any party to any Contract with regard to
the assignment of the right, title and interest of any Grantor in and under the
Contracts and other matters relating thereto, and (ii) execute, in connection
with any sale provided for in Section 7 hereof, any endorsements, assignments or
other instruments of conveyance or transfer with respect to the Collateral.
7. REMEDIES; RIGHTS UPON DEFAULT.
------------------------------
(a) If any Event of Default shall have occurred and be continuing,
the Secured Party may exercise in addition to all other rights and remedies
granted to it under this Security Agreement, the Note and under any other
instrument or agreement securing, evidencing or relating to any of the
Obligations, all rights and remedies of a secured party under the Code. Without
limiting the generality of the foregoing, each Grantor expressly agrees that in
any such event the Secured Party, without demand of performance or other demand,
advertisement or notice of any kind (except the notice specified below of time
and place of public or private sale) to or upon any Grantor or any other Person
(all and each of which demands, advertisements and notices are hereby expressly
waived to the maximum extent permitted by the Code and other applicable law),
may forthwith enter upon the premises of each Grantor where any Collateral is
located through self-help, without judicial process, without first obtaining a
final judgment or giving any Grantor or any other Person notice and opportunity
for a hearing on the Secured Party's claim or action, and may collect, receive,
assemble, process, appropriate and realize upon the Collateral, or any part
thereof, and may forthwith sell, lease, assign, give an option or options to
purchase, or sell or otherwise dispose of and deliver said Collateral (or
contract to do so), or any part thereof, in one or more parcels at a public or
private sale or sales, at any exchange at such prices as it may deem acceptable,
for cash or on credit or for future delivery without assumption of any credit
risk. The Secured Party shall have the right upon any such public sale or sales
and, to the extent permitted by law, upon any such private sale or sales, to
purchase for its benefit, the whole or any part of said Collateral so sold, free
of any right or equity of redemption, which equity of redemption each Grantor
hereby releases. Such sales may be adjourned and continued from time to time
with or without notice. The Secured Party shall have the right to conduct such
sales on each Grantor's premises or elsewhere and shall have the right to use
each Grantor's premises without charge for such time or times as the Secured
Party deems necessary or advisable.
Each Grantor further agrees, if any Event of Default shall have
occurred and be continuing, at the Secured Party's request, to assemble the
Collateral and make it available to the Secured Party at places which the
Secured Party shall select, whether at such Grantor's premises or elsewhere.
Until the Secured Party is able to effect a sale, lease, or other disposition of
Collateral, the Secured Party shall have the right to use Collateral, or any
part thereof, to the extent that it deems appropriate for the purpose of
preserving Collateral or its value or for any other purpose deemed appropriate
by the Secured Party. The Secured Party shall have no obligation to any Grantor
to maintain or preserve the rights of such Grantor as against third parties with
respect to Collateral while Collateral is in the possession of the
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Secured Party. The Secured Party may, if it so elects, seek the appointment of a
receiver or keeper to take possession of Collateral and to enforce any of the
Secured Party's remedies, with respect to such appointment without prior notice
or hearing. The Secured Party shall apply the net proceeds of any such
collection, recovery, receipt, appropriation, realization or sale to the
Obligations, and only after so paying over such net proceeds, and after the
payment by the Secured Party of any other amount required by any provision of
law, including Section 9-504(1)(c) of the Code (but only after the Secured Party
has received what it considers reasonable proof of a subordinate party's
security interest), need the Secured Party account for the surplus, if any, to
any Grantor. To the maximum extent permitted by applicable law, each Grantor
waives all claims, damages, and demands against the Secured Party arising out of
the repossession, retention or sale of the Collateral except such as arise
solely out of the gross negligence or willful misconduct of the Secured Party as
finally determined by a court of competent jurisdiction. Each Grantor agrees
that ten (10) days prior notice by the Secured Party of the time and place of
any public sale or of the time after which a private sale may take place is
reasonable notification of such matters. Each Grantor shall remain liable for
any deficiency if the proceeds of any sale or disposition of the Collateral are
insufficient to pay all amounts to which the Secured Party is entitled, each
Grantor also being liable for any attorneys' fees incurred by the Secured Party
to collect such deficiency.
(b) Each Grantor, jointly and severally, agrees to pay any and all
costs of the Secured Party, including attorneys' fees and expenses, incurred in
connection with the enforcement of any of its rights and remedies hereunder.
(c) Except as otherwise specifically provided herein, each Grantor
hereby waives presentment, demand, protest or any notice (to the maximum extent
permitted by applicable law) of any kind in connection with this Security
Agreement or any Collateral.
8. GRANT OF LICENSE TO USE PATENT, TRADEMARK AND COPYRIGHT
COLLATERAL. For the purpose of enabling the Secured Party to exercise rights and
remedies under Section 7 hereof (including, without limiting the terms of
Section 7 hereof, in order to take possession of, hold, preserve, process,
assemble, prepare for sale, market for sale, sell or otherwise dispose of
Collateral) at such time as the Secured Party shall be lawfully entitled to
exercise such rights and remedies, each Grantor hereby grants to the Secured
Party an irrevocable, nonexclusive license (exercisable without payment of
royalty or other compensation to any Grantor) to use, license or sublicense any
Trademark or trade secret now owned or hereafter acquired by such Grantor, and
wherever the same may be located, and including in such license access to all
media in which any of the licensed items may be recorded or stored and to all
computer software and programs used for the compilation or printout thereof.
9. LIMITATION ON THE SECURED PARTY'S DUTY IN RESPECT OF COLLATERAL.
The Secured Party shall use reasonable care with respect to the Collateral in
its possession or under its control. The Secured Party shall not have any other
duty as to any Collateral in its possession or control or in the possession or
control of any
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agent or nominee of the Secured Party, or any income thereon or as to the
preservation of rights against prior parties or any other rights pertaining
thereto.
10. REINSTATEMENT. This Security Agreement shall remain in full force
and effect and continue to be effective should any petition be filed by or
against any Grantor for liquidation or reorganization, should any Grantor become
insolvent or make an assignment for the benefit of any creditor or creditors or
should a receiver or trustee be appointed for all or any significant part of any
Grantor's assets, and shall continue to be effective or be reinstated, as the
case may be, if at any time payment and performance of the Obligations, or any
part thereof, is, pursuant to applicable law, rescinded or reduced in amount, or
must otherwise be restored or returned by any obligee of the Obligations,
whether as a "voidable preference," "fraudulent conveyance," or otherwise, all
as though such payment or performance had not been made. In the event that any
payment, or any part thereof, is rescinded, reduced, restored or returned, the
Obligations shall be reinstated and deemed reduced only by such amount paid and
not so rescinded, reduced, restored or returned.
11. NOTICES. Except as otherwise provided herein, whenever it is
provided herein that any notice, demand, request, consent, approval, declaration
or other communication shall or may be given to or served upon any of the
parties by any other party, or whenever any of the parties desires to give and
serve upon any other party any communication with respect to this Security
Agreement, each such notice, demand, request, consent, approval, declaration or
other communication shall be in writing and shall be given in the manner, and
deemed received, as provided for in Section 15.1 of the Sale Agreement.
12. SEVERABILITY. Whenever possible, each provision of this Security
Agreement shall be interpreted in a manner as to be effective and valid under
applicable law, but if any provision of this Security Agreement shall be
prohibited by or invalid under applicable law, such provision shall be
ineffective to the extent of such prohibition or invalidity without invalidating
the remainder of such provision or the remaining provisions of this Security
Agreement. This Security Agreement is to be read, construed and applied together
with the Note and the Subordination Agreement which, taken together, set forth
the complete understanding and agreement of the Secured Party, the Issuer and
the Grantors with respect to the matters referred to herein and therein.
13. NO WAIVER; CUMULATIVE REMEDIES. The Secured Party shall not by
any act, delay, omission or otherwise be deemed to have waived any of its rights
or remedies hereunder, and no waiver shall be valid unless in writing, signed by
the Secured Party and then only to the extent therein set forth. A waiver by the
Secured Party, of any right or remedy hereunder on any one occasion shall not be
construed as a bar to any right or remedy which The Secured Party would
otherwise have had on any future occasion. No failure to exercise nor any delay
in exercising on the part of the Secured Party, any right, power or privilege
hereunder, shall operate as a waiver thereof, nor shall any single or partial
exercise of any right, power or privilege hereunder preclude any other or future
exercise
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thereof or the exercise of any other right, power or privilege. The rights and
remedies hereunder provided are cumulative and may be exercised singly or
concurrently, and are not exclusive of any rights and remedies provided by law.
None of the terms or provisions of this Security Agreement may be waived,
altered, modified or amended except by an instrument in writing, duly executed
by the Secured Party and Grantors.
14. LIMITATION BY LAW. All rights, remedies and powers provided in
this Security Agreement may be exercised only to the extent that the exercise
thereof does not violate any applicable provision of law, and all the provisions
of this Security Agreement are intended to be subject to all applicable
mandatory provisions of law that may be controlling and to be limited to the
extent necessary so that they shall not render this Security Agreement invalid,
unenforceable, in whole or in part, or not entitled to be recorded, registered
or filed under the provisions of any applicable law.
15. TERMINATION OF THIS SECURITY AGREEMENT. Subject to Section 10
hereof, this Security Agreement shall terminate upon the payment in full in cash
of the Secured Obligations.
16. SUCCESSORS AND ASSIGNS. This Security Agreement and all
obligations of each Grantor hereunder shall be binding upon the successors and
assigns of any Grantor (including any debtor-in-possession on behalf of any
Grantor) and shall, together with the rights and remedies of the Secured Party
hereunder, inure to the benefit of the Secured Party, all future holders of any
instrument evidencing any of the Obligations and their respective successors and
assigns. No sales of participations, other sales, assignments, transfers or
other dispositions of any agreement governing or instrument evidencing the
Obligations or any portion thereof or interest therein shall in any manner
affect the security interest granted to the Secured Party hereunder. No Grantor
may assign, sell or otherwise transfer any interest in or obligation under this
Security Agreement.
17. COUNTERPARTS. This Security Agreement may be executed in any
number of separate counterparts, each of which shall collectively and separately
constitute one and the same agreement.
18. GOVERNING LAW. THIS AGREEMENT AND THE OBLIGATIONS ARISING
HEREUNDER SHALL BE GOVERNED BY, AND CONSTRUED AND ENFORCED IN ACCORDANCE WITH,
THE LAWS OF THE STATE OF NEW YORK (WITHOUT REGARD TO CONFLICT OF LAW
PROVISIONS), AND ANY APPLICABLE LAWS OF THE UNITED STATES OF AMERICA. EACH
GRANTOR HEREBY CONSENTS AND AGREES THAT THE STATE OR FEDERAL COURTS LOCATED IN
NEW YORK COUNTY, CITY OF NEW YORK, NEW YORK, SHALL HAVE EXCLUSIVE JURISDICTION
TO HEAR AND DETERMINE ANY CLAIMS OR DISPUTES BETWEEN ANY GRANTOR AND THE SECURED
PARTY PERTAINING TO THIS AGREEMENT OR TO ANY MATTER ARISING OUT OF OR RELATING
TO THIS AGREEMENT,
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PROVIDED, THAT EACH GRANTOR AND THE SECURED PARTY ACKNOWLEDGE THAT ANY APPEALS
FROM THOSE COURTS MAY HAVE TO BE HEARD BY A COURT LOCATED OUTSIDE OF NEW YORK
COUNTY, CITY OF NEW YORK, NEW YORK, AND, PROVIDED, FURTHER, NOTHING IN THIS
AGREEMENT SHALL BE DEEMED OR OPERATE TO PRECLUDE THE SECURED PARTY FROM BRINGING
SUIT OR TAKING OTHER LEGAL ACTION IN ANY OTHER JURISDICTION TO REALIZE ON THE
COLLATERAL OR ANY OTHER SECURITY FOR THE OBLIGATIONS, OR TO ENFORCE A JUDGMENT
OR OTHER COURT ORDER IN FAVOR OF THE SECURED PARTY. EACH GRANTOR EXPRESSLY
SUBMITS AND CONSENTS IN ADVANCE TO SUCH JURISDICTION IN ANY ACTION OR SUIT
COMMENCED IN ANY SUCH COURT, AND EACH GRANTOR HEREBY WAIVES ANY OBJECTION WHICH
IT MAY HAVE BASED UPON LACK OF PERSONAL JURISDICTION, IMPROPER VENUE OR FORUM
NON CONVENIENS AND HEREBY CONSENTS TO THE GRANTING OF SUCH LEGAL OR EQUITABLE
RELIEF AS IS DEEMED APPROPRIATE BY SUCH COURT. EACH GRANTOR HEREBY WAIVES
PERSONAL SERVICE OF THE SUMMONS, COMPLAINT AND OTHER PROCESS ISSUED IN ANY SUCH
ACTION OR SUIT AND AGREES THAT SERVICE OF SUCH SUMMONS, COMPLAINTS AND OTHER
PROCESS MAY BE MADE BY REGISTERED OR CERTIFIED MAIL ADDRESSED TO SUCH GRANTOR AT
THE ADDRESS OF THE ISSUER SET FORTH ON THE SIGNATURE PAGES HERETO AND THAT
SERVICE SO MADE SHALL BE DEEMED COMPLETED UPON THE EARLIER OF ACTUAL RECEIPT
THEREOF OR THREE (3) DAYS AFTER DEPOSIT IN THE U.S. MAILS, PROPER POSTAGE
PREPAID.
19. WAIVER OF JURY TRIAL. BECAUSE DISPUTES ARISING IN CONNECTION WITH
COMPLEX FINANCIAL TRANSACTIONS ARE MOST QUICKLY AND ECONOMICALLY RESOLVED BY AN
EXPERIENCED AND EXPERT PERSON AND THE PARTIES WISH APPLICABLE STATE AND FEDERAL
LAWS TO APPLY (RATHER THAN ARBITRATION RULES), THE PARTIES DESIRE THAT DISPUTES
ARISING HEREUNDER OR RELATING HERETO BE RESOLVED BY A JUDGE APPLYING SUCH
APPLICABLE LAWS. THEREFORE, TO ACHIEVE THE BEST COMBINATION OF THE BENEFITS OF
THE JUDICIAL SYSTEM AND OF ARBITRATION, THE PARTIES HERETO WAIVE ALL RIGHT TO
TRIAL BY JURY IN ANY ACTION, SUIT OR PROCEEDING BROUGHT TO RESOLVE ANY DISPUTE,
WHETHER SOUNDING IN CONTRACT, TORT, OR OTHERWISE, AMONG THE SECURED PARTY AND
ANY GRANTOR ARISING OUT OF, CONNECTED WITH, RELATED TO, OR INCIDENTAL TO THE
RELATIONSHIP ESTABLISHED IN CONNECTION WITH, THIS AGREEMENT, THE NOTE OR THE
TRANSACTIONS RELATED HERETO OR THERETO.
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20. Section Titles. The Section titles contained in this Security
Agreement are and shall be without substantive meaning or content of any kind
whatsoever and are not a part of the agreement between the parties hereto.
21. No Strict Construction. The parties hereto have participated
jointly in the negotiation and drafting of this Security Agreement. In the event
an ambiguity or question of intent or interpretation arises, this Security
Agreement shall be construed as if drafted jointly by the parties hereto and no
presumption or burden of proof shall arise favoring or disfavoring any party by
virtue of the authorship of any provisions of this Security Agreement.
22. Advice of Counsel. Each of the parties represents to each other
party hereto that it has discussed this Security Agreement and, specifically,
the provisions of Section 18 and Section 19, with its counsel.
23. Issuer as Agent. Each Grantor (other than Issuer) hereby appoints
Issuer as its agent and attorney-in-fact for purposes of giving and receiving
notices under this Security Agreement and agrees that any notice hereunder
delivered to Issuer shall be deemed to have been delivered to each Grantor.
24. Subordination. NOTWITHSTANDING ANY PROVISION HEREIN CONTAINED TO
THE CONTRARY, ALL OF THE SECURED PARTY'S RIGHTS, REMEDIES AND LIENS AS SET FORTH
HEREIN AND THE EXERCISE OR ENFORCEMENT THEREOF ARE SUBJECT TO THE TERMS OF A
SUBORDINATION AGREEMENT OF EVEN DATE HEREWITH BETWEEN SECURED PARTY AND AGENT.
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IN WITNESS WHEREOF, each Grantor has caused this Security Agreement to
be executed and delivered by its duly authorized officer as of the date first
set forth above.
ACADIANA MALL WILSONS, INC. BERKSHIRE WILSONS, INC.
ANNAPOLIS WILSONS, INC. BERMANS, THE LEATHER
EXPERTS, INC.
ANTELOPE VALLEY WILSONS,
INC. BIRCHWOOD MALL WILSONS, INC.
ARDEN FAIR WILSONS, INC. BOISE WILSONS, INC.
ARSENAL WILSONS, INC. BOULDER WILSONS, INC.
ATLANTA AIR PORT CONCOURSE BOULEVARD MALL WILSONS, INC.
T WILSON, INC.
BRAINTREE TANNERY WEST, INC.
AUBURN-MAINE WILSONS, INC.
BRIARWOOD WILSONS, INC.
AUBURN WILSONS, INC.
BRIDGEWATER COMMONS
AUGUSTA MALL WILSONS, INC. WILSONS, INC.
AVENUE OF THE AMERICAS BRUNSWICK SQUARE WILSONS,
WILSONS, INC. INC.
BALDWIN HILLS WILSONS, INC. BUCKLAND HILLS PELLE CUIR,
INC.
BANGOR MALL WILSONS, INC.
BURLINGTON WILSONS, INC.
BARTON CREEK WILSONS, INC.
BURTON WILSONS, INC.
BAYSHORE WILSONS, INC.
CAMBRIDGE GALLERIA WILSONS,
BAYSHORE (CA) WILSONS, INC. INC.
BAYSIDE TANNERY WEST, INC. CAPITOL COURT WILSONS, INC.
BEAVER VALLEY WILSONS, INC. CARBONDALE IL WILSONS, INC.
BELLEVUE BERMANS INC. CAROLINA PLACE WILSONS, INC.
BELLIS FAIR WILSONS, INC. CARSON WILSONS, INC.
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CARY TOWN WILSONS, INC. CROSS CREEK MALL WILSONS,
INC.
CASCADE MALL WILSONS, INC.
CROSSROADS WILSONS, INC., A
CENTURY CITY WILSONS, INC. NEVADA CORPORATION
CHAMPLAIN CENTRE WILSONS, CROSSROADS WILSONS, INC., A
INC. NEVADA CORPORATION
CHARELSTON CENTER WILSONS, CRYSTAL WATERFORD WILSONS,
INC. INC.
CHARLESTOWNE WILSONS, INC. CUMBERLAND WILSONS, INC.
CHAUTAUQUA WILSONS, INC. DAKOTA SQUARE WILSONS, INC.
CHERRY HILL WILSONS, INC. DANBURY FAIR WILSONS, INC.
CHICAGO RIDGE WILSONS, INC. DEL AMO BERMANS, INC.
CHICAGO YARD WILSONS, INC. EASTFIELD WILSONS, INC.
CHRISTIANA WILSONS, INC. EASTLAND MALL WILSONS, INC.
CHULA VISTA WILSONS, INC. EASTLAND (MICH.) WILSONS, INC.
CIELO VISTA WILSONS, INC. EASTPOINT WILSONS, INC.
CLERMONT COUNTY WILSONS, EASTVIEW WILSONS, INC.
INC.
EMERALD SQUARE WILSONS, INC.
COLONIE WILSONS, INC.
ESCONDIDO WILSONS, INC.
CONCOURSE A WILSONS, INC.
FAIRLANE WILSON, INC.
CORONADO WILSONS, INC.
FASHION PLACE WILSONS, INC.
CORTANA MALL WILSONS, INC.
FASHION SQUARE-SAGINAW
COUNCIL BLUFFS WILSONS, INC. WILSONS, INC.
COUNTY FAIR WILSONS, INC. FLATBUSH WILSONS, INC.
CROSS COUNTY WILSONS, INC. FOOTHILLS, WILSONS, INC.
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FORD CITY PELLE CUIR, INC.
HARTSFIELD ATRIUM WILSONS,
FOUR SEASONS WILSONS, INC. INC.
FOX RUN WILSONS, INC. HAYWOOD WILSONS, INC.
FRANKLIN MILLS BERMANS HENRIETTA WILSONS, INC.
OUTLET, INC.
HICKORY RIDGE BERMANS, INC.
GARDEN STATE TANNERY WEST,
INC. HOLYOKE WILSONS, INC.
GENESEE VALLEY WILSONS, INC. HULEN MALL WILSONS, INC.
GOLF MILL WILSONS, INC. HUNTINGTON-WEST VA. WILSONS,
INC.
GOVERNOR'S SQUARE WILSONS,
INC. INGRAM PARK WILSONS, INC.
GRAND RAPIDS WILSONS, INC. IRONDEQUOIT WILSONS, INC.
GRAND TRAVERSE WILSON, INC. IRVING WILSONS, INC.
GREAT MALL SNYDER LEATHER JANESVILLE WILSONS, INC.
OUTLET, INC.
JEFFERSON YORKTOWN WILSONS,
GREAT NORTHWEST BERMANS INC.
OUTLET, INC.
KELSO WILSONS, INC.
GREEN ACRES WILSONS, INC.
KENWOOD WILSONS, INC.
GURNEE MILLS BERMANS
OUTLET, INC. KING OF PRUSSIA WILSONS, INC.
GWINNETT PLACE WILSONS, INC. KITSAP MALL WILSONS, INC.
HAMILTON PLACE WILSONS, INC. LAKEVIEW SQUARE WILSONS,
INC.
HAMILTON WILSONS, INC.
LAKEWOOD WILSONS, INC.
HANES MALL WILSONS, INC.
LANDMARK CENTER (VA)
HANFORD WILSONS, INC. WILSONS, INC.
HARRISBURG WILSONS, INC.
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LANESBOROUGH BERKSHIRE MIDLAND MALL WILSONS HOUSE
MALL WILSONS, INC. OF SUEDE, INC.
LANSING MALL WILSONS, INC. MIDLAND MALL WILSONS, INC.
LAREDO WILSONS, INC. MID-RIVERS BERMANS, INC.
LAUREL MALL WILSONS, INC. MILITARY CIRCLE WILSONS, INC.
LAYTON HILLS WILSONS, INC. MISSION VALLEY WILSONS, INC.
LEOMINSTER WILSONS, INC. MONROEVILLE WILSONS, INC.
LIBERTY TREE MALL WILSONS, MONTCLAIR WILSONS, INC.
INC.
MONTEBELLO WILSONS, INC.
LINDALE WILSONS, INC.
NANUET TANNERY WEST, INC.
LIVINGSTON MALL WILSONS, INC.
NATICK MALL WILSONS, INC.
LONG BEACH WILSONS, INC.
NESHAMINY WILSONS, INC.
LONG RIDGE WILSONS, INC.
NEWBURGH MALL WILSONS, INC.
MACHESNEY WILSONS, INC.
NEWPORT CITY WILSONS, INC.
MACON MALL WILSONS, INC.
NORTHGATE WILSONS, INC.
MADISON SQUARE WILSONS, INC.
NORTH COUNTY FAIR TANNERY
MAIN PLACE WILSONS, INC. WEST, INC.
MAINE MALL WILSONS, INC. NORTH DARTMOUTH WILSONS,
INC.
MALL AT 163RD ST. WILSONS, INC.
NORTH EAST WILSONS, INC.
MARLEY STATION WILSONS, INC.
NORTHGATE-DURHAM WILSONS,
MENLO PARK WILSONS, INC. INC.
MERIDEN SQUARE WILSONS, INC. NORTHPOINT WILSONS, INC.
METRO WILSONS, INC. NORTHSHORE WILSONS, INC.
NORTHTOWN WILSONS, INC.
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OAKRIDGE WILSONS, INC. PHILLIPSBURG WILSONS, INC.
OAKVIEW WILSONS, INC. PITTSBURGH AIRPORT WILSONS,
INC.
OAKWOOD WILSONS, INC.
PORTAGE WILSONS, INC.
OCEAN COUNTY WILSONS, INC.
POUGHKEEPSIE GALLERIA
OLD CAPITAL CENTER WILSONS, WILSONS, INC.
INC.
RACEWAY WILSONS, INC.
ONODAGA COUNTY WILSONS, INC.
RANDHURST WILSONS, INC.
ORLAND SQUARE WILSONS, INC.
RD. SQUARE WILSONS, INC.
ORLANDO FASHION WILSONS,
INC. RIDGEDALE TANNERY WEST, INC.
PARADISE VALLEY MALL RIVER HILLS WILSONS, INC.
WILSONS, INC.
RIVERCHASE WILSONS, INC.
PARAMUS PARK WILSONS, INC.
RI-WARWICK WILSONS HOUSE OF
PARK CITY WILSONS, INC. SUEDE, INC.
PARK LANE WILSONS, INC. ROANOKE WILSONS, INC.
PARK PLAZA WILSONS, INC. ROCKAWAY TANNERY WEST, INC.
PARKERSBURG WILSONS, INC. ROCKINGHAM PARK WILSONS,
INC.
PARKWAY PLAZA WILSONS, INC.
ROGUE VALLEY WILSONS, INC.
PARMATOWN WILSONS, INC.
ROOSEVELT FIELD TANNERY
PEACHTREE MALL WILSONS, INC. WEST, INC.
PENTAGON CITY TANNERY WEST, ROOSEVELT FIELD WILSONS, INC.
INC.
ROSEDALE WILSONS, INC.
PHEASANT WILSONS, INC.
ROSS PARK WILSONS, INC.
PHILADELPHIA GALLERY
WILSONS, INC. RUSHMORE MALL WILSONS, INC.
22
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SACRAMENTO WILSONS, INC. SOUTH SQUARE WILSONS, INC.
SALISBURY CENTRE WILSONS, SOUTHERN HILLS WILSONS, INC.
INC.
SOUTHLAKE WILSONS, INC.
SALMON RUN WILSONS, INC.
SOUTHWEST PLAZA WILSONS,
SAN LEANDRO WILSONS, INC. INC.
SANDUSKY MALL WILSONS, INC. SPOTSYLVANIA WILSONS, INC.
SANTA ANITA WILSONS, INC. SPRING HILL WILSONS, INC.
SANTA MARIA WILSONS, INC. SQUARE ONE WILSONS, INC.
SANTA ROSA WILSONS, INC. STATEN ISLAND WILSONS, INC.
SAWGRASS MILLS BERMANS STEEPLEGATE WILSONS, INC.
OUTLET, INC.
STEINWAY STREET WILSONS, INC.
SCOTTSDALE FASHION WILSONS,
INC. STONERIDGE TANNERY WEST,
INC.
SERRAMONTE WILSONS, INC.
STONEWOOD WILSONS, INC.
SHERWOOD WILSONS, INC.
STRATFORD SQUARE WILSONS,
SHOPPINGTOWN WILSONS, INC. INC.
SIERRA VISTA WILSONS, INC. ST. CHARLES WILSONS, INC.
SMITH HAVEN TANNERY WEST, ST. LAURENCE CENTER WILSONS,
INC. INC.
SMITH HAVEN WILSONS, INC. SWANSEA WILSONS, INC.
SNYDER LEATHER OF WARWICK, TACOMA WILSONS, INC.
RI, INC.
TAYLOR TOWNSHIP WILSONS,
SOLANO MALL WILSONS, INC. INC.
SOUTH HILL (WA) WILSONS, INC. THE OAKS WILSONS, INC.
SOUTH HILLS WILSONS, INC. TOUHY AVENUE PELLE CUIR, INC.
23
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TOWN CENTER WILSONS, INC. WILSONS TANNERY WEST, INC.
TOWNE EAST WILSONS, INC. WILSONS THE LEATHER EXPERTS
INC.
TRUMBULL PARK WILSONS, INC.
WILSONS/GEORGETOWN
TUCSON MALL WILSONS, INC. LEATHER DESIGN OF ARLINGTON,
VA, INC.
TWELVE OAKS TANNERY WEST,
INC. WILSONS/GEORGETOWN
LEATHER DESIGN OF BETHESDA,
TYLER MALL WILSONS, INC. MD, INC.
TYLER WILSONS, INC. WILSONS/GEORGETOWN
LEATHER DESIGN OF COLUMBIA,
UNIVERSITY MALL WILSONS, INC. MD, INC.
VALLEY WEST WILSONS, INC. WILSONS/GEORGETOWN
LEATHER DESIGN OF DALE CITY,
VANCOUVER WILSONS, INC. VA, INC.
VICTOR VALLEY WILSONS, INC. WILSONS/GEORGETOWN
LEATHER DESIGN OF DENVER,
WAYNE COUNTY WILSONS, INC. CO, INC.
WEST COVINA WILSONS, INC. WILSONS/GEORGETOWN
LEATHER DESIGN OF FAIRFAX,
WESTLAND-DETROIT WILSONS, VA, INC.
INC.
WILSONS/GEORGETOWN
WESTMINSTER (COLO.) WILSONS, LEATHER DESIGN OF
INC. FARMINGTON, CT, INC.
WHITE PLAINS GALLERIA WILSONS/GEORGETOWN
WILSONS, INC. LEATHER DESIGN OF
GAITHERSBURG, MD, INC.
WILLOWBROOK WILSONS, INC.
WILSONS/GEORGETOWN
WILSONS CENTER, INC. LEATHER DESIGN OF KING
PRUSSIA, PA, INC.
WILSONS HOUSE OF SUEDE, INC.
WILSONS/GEORGETOWN
WILSONS LEATHER HOLDINGS LEATHER DESIGN OF LANDOVER,
INC. MD, INC.
24
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WILSONS/GEORGETOWN WILSONS/GEORGETOWN
LEATHER DESIGN OF MCLEAN, LEATHER DESIGN OF TOWSON,
VA, INC. MD, INC.
WILSONS/GEORGETOWN WILSONS/GEORGETOWN
LEATHER DESIGN OF NASHVILLE, LEATHER DESIGN OF WILLOW
TN, INC. GROVE, PA, INC.
WILSONS/GEORGETOWN WILSONS/GEORGETOWN
LEATHER DESIGN OF OWINGS, LEATHER DESIGN OF
MD, INC. WOODBRIDGE, NJ, INC.
WILSONS/GEORGETOWN WOODBRIDGE MALL WILSONS,
LEATHER DESIGN OF INC.
SPRINGFIELD, VA, INC.
YAKIMA WILSONS, INC.
WILSONS/GEORGETOWN
LEATHER DESIGN OF STAMFORD, YORK MALL WILSONS, INC.
CT, INC.
YUBA CITY WILSONS, INC.
WILSONS/GEORGETOWN
LEATHER DESIGN OF ST. LOUIS,
MO, INC.
By: /s/ David L. Rogers
------------------------------
Name: President - David L. Rogers
----------------------------
The authorized officer of
each of the foregoing corporations
Accepted and Acknowledged by:
MELVILLE CORPORATION,
AS SECURED PARTY
By: /s/ Maureen Richards
---------------------
Name: Maureen Richards
-------------------
Title: Vice President
------------------
25
<PAGE>
Exhibit 10.9
THE NOTE REPRESENTED HEREBY HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF
1933, AS AMENDED, AND MAY NOT BE OFFERED, SOLD, TRANSFERRED OR OTHERWISE
DISPOSED OF UNLESS REGISTERED WITH THE SECURITIES AND EXCHANGE COMMISSION OF THE
UNITED STATES AND THE SECURITIES REGULATORY AUTHORITIES OF APPLICABLE STATES OR
UNLESS, IN THE WRITTEN OPINION OF COUNSEL TO HOLDER REASONABLY ACCEPTABLE TO
WILSONS THE LEATHER EXPERTS INC. (THE "ISSUER") THAT IS DELIVERED TO THE ISSUER,
AN EXEMPTION FROM SUCH REGISTRATION AND THE TRUST INDENTURE ACT OF 1939 IS
AVAILABLE.
THIS NOTE IS ALSO SUBJECT TO CERTAIN REGISTRATION RIGHTS, TRANSFER RESTRICTIONS
AND SUBORDINATION PROVISIONS AS SET FORTH IN (1) THE REGISTRATION RIGHTS
AGREEMENT DATED AS OF MAY 25, 1996 BETWEEN MELVILLE CORPORATION ("MELVILLE"),
ISSUER, THE MANAGERS LISTED ON THE SIGNATURE PAGES THERETO, LEATHER INVESTORS
LIMITED PARTNERSHIP I AND THE PARTNERS THEREOF LISTED ON THE SIGNATURE PAGES
THERETO, COPIES OF WHICH MAY BE OBTAINED FROM THE ISSUER, AND (2) THE
SUBORDINATION AGREEMENT DATED AS OF MAY 25, 1996 BETWEEN MELVILLE AND GENERAL
ELECTRIC CAPITAL CORPORATION ("GE CAPITAL"), AS AGENT FOR SENIOR DEBT, COPIES OF
WHICH MAY BE OBTAINED FROM THE ISSUER.
THIS NOTE WAS ISSUED ON MAY 25, 1996 (THE "ISSUE DATE") AT AN ISSUE PRICE OF
$55,811,000. UNDER THE INTERNAL REVENUE CODE AND TREASURY REGULATIONS, ALL
INTEREST PAYMENTS ON THIS SECURITY ARE TO BE TREATED AS PART OF THE STATED
REDEMPTION PRICE AT MATURITY, THEREBY CAUSING THIS NOTE TO HAVE ORIGINAL ISSUE
DISCOUNT ("OID"). ACCORDINGLY, (i) THE TOTAL AMOUNT OF OID FOR THIS NOTE IS
$30,365,831 AND (ii) THE YIELD TO MATURITY FOR PURPOSES OF ALLOCATING OID IS
9.88% COMPOUNDED ANNUALLY.
SUBORDINATED NOTE
<PAGE>
$55,811,000 MAY 25, 1996
Wilsons The Leather Experts Inc., a Minnesota corporation (the "Issuer"),
for value received hereby promises to pay to Melville Corporation, a New York
corporation, or registered assigns (the "Holder") on December 31, 2000 (the
"Maturity Date") the sum of $55,811,000, together with interest on all but
$811,000 of the $55,811,000 from May 26, 1996 until this Note is paid in full at
the rate of 10% per annum, compounded annually.
Except in the event of optional prepayments, as hereafter provided, no
payments of interest are required until the Maturity Date. However, commencing
May 25, 1997 and on each May 25 thereafter while the Note remains outstanding,
all interest accrued hereon during the twelve-month period ending on such May 25
and not previously added to the principal of this Note shall be added to and
shall become a part of the principal of this Note as of May 25 of such year
(whether or not such May 25 occurs prior to or after the Maturity Date), and
from and after such May 25, interest shall accrue on all but $811,000 of the
principal amount as so increased, provided that in the year 2000 such interest
shall be added to and shall become a part of the principal of this Note on such
May 25, 2000 (to the extent not previously added to the principal of this Note)
and on the Maturity Date. For purposes of accruing and calculating interest, the
principal amount of the Note shall be accrued and calculated as if it had been
reduced by $811,000. The Issuer shall pay all unpaid accrued interest that has
not been added to principal to the Holder on the Maturity Date. Interest shall
be computed on the basis of a year of 360 days of twelve 30-day months but not
more than 360 days in any year.
This Note is secured by a security agreement dated as of May 25, 1996 (the
"Security Agreement") among the Issuer, its Subsidiaries and the Holder,
covering all of the Collateral (as defined in the Security Agreement). The
Security Agreement secures the payment of any and all obligations of the Issuer
to the Holder under this Note.
All payments of principal and interest by the Issuer hereunder shall be
made by wire transfer of immediately available funds to the Holder's account at
The Bank of New York, 48 Wall Street, New York, New York 10286, ABA no.
021000018, for credit to Melville Corporation, account no. 825-2036-971 or to
another account specified by the Holder in writing to the Issuer at least two
business days before payment is due in such coin or currency of the United
States of America as at the time of payment shall be legal tender for the
payment of public and private debts.
The Issuer may, upon at least five days written notice to the Holder,
prepay without penalty or premium all or any portion of the principal amount of
this Note, together with accrued interest thereon to the date of such
prepayment.
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<PAGE>
This Note is the Note referred to in the Sale Agreement and is subject to
certain provisions set forth in the Sale Agreement. This Note may be transferred
or assigned, in whole or in part, to any Person by the Holder without the prior
written consent of the Issuer subject only to compliance with the Securities Act
of 1933, as amended, all applicable state securities laws, the Trust Indenture
Act of 1939, as amended, the restrictions on transfer under the Registration
Rights Agreement dated as of May 25, 1996 by and among Melville, the Issuer, the
managers listed on the signature pages thereto, Leather Investors Limited
Partnership I and the partners thereof listed on the signature pages thereto,
and the last two sentences of this paragraph. If at any time the Holder desires
to sell all or any part of the Note to a third party, the Holder shall notify
the Issuer in writing of the principal amount desired to be sold ("Offered
Amount"). For a period of 30 days from the date of such notice, the Holder shall
not sell all or any part of the Note; provided that after such 30 day period,
the Holder shall have the right to sell all or any part of the Offered Amount to
a third party within 90 days after the expiration of such 30 day period.
The Issuer shall keep at its principal office a register (the "Register")
in which shall be entered the names and addresses of the Holders of Notes and
the principal amounts of the respective Notes held by them and a record of all
transfers of such Notes. References to the "Holder" or "Holders" shall mean the
Person listed in the Register as the payee of any Note unless the payee shall
have presented such Note to the Issuer for transfer and the transferee shall
have been entered in the Register as a subsequent holder, in which case the term
shall mean such subsequent holder; provided that no transfer shall be recorded
unless a written instrument of assignment of all or a portion of such Note, as
the case may be, signed by the assignor of such Note is received by the Issuer.
The ownership of the Notes shall be proven by the Register. For the purpose of
paying interest and principal on the Notes, the Issuer shall be entitled to rely
on the names and addresses in the Register and notwithstanding anything to the
contrary contained in this Note, no Event of Default shall occur under Section
2.1(a) if payment of interest and principal is made in accordance with the names
and other information contained in the Register.
The Issuer agrees to issue to the Holder or any permitted transferee of the
Holder from time to time a replacement Note or Notes in the form hereof and in
such denominations as such Person may request to facilitate such transfers and
assignments upon surrender to the Issuer of the Note to be replaced, together
with an instrument of assignment signed by the assigning Holder. In addition,
upon receipt by the Issuer from the Holder of evidence satisfactory to it (in
the exercise of its reasonable judgment) of the loss, theft, destruction or
mutilation of this Note, and (in the case of loss, theft or destruction) of
reasonably satisfactory indemnification and, if the Note has been registered
under applicable securities laws, such bond or other security as the Issuer
reasonably deems appropriate, and upon surrender and cancellation of this Note,
if mutilated, the Issuer shall execute and deliver a new Note of like tenor and
date.
-3-
<PAGE>
Section 1. Certain Terms Defined. (a) The following terms for all purposes
of this Note shall have the respective meanings specified below.
"Board of Directors" means the Board of Directors of the Issuer.
"Event of Default" means any event or condition specified as such in
Section 2.1.
"Note" means this Note. References to "Notes" shall include the Note or
Notes issued following a permitted transfer or assignment of this Note in whole
or in part to more than one purchaser.
"Person" means an individual, corporation, partnership, association, trust
or other entity or organization, including a government or political subdivision
or agency or instrumentality thereof.
"Sale Agreement" means the Sale Agreement dated as of May 24, 1996 by and
among Melville, the Issuer, and Wilsons Center, Inc. ("Wilsons").
"Senior Debt" means (a) all letters of credit and reimbursement obligations
and risk participations with respect to letters of credit, all principal of,
premium and interest (including, without limitation, any interest ("Post-
Petition Interest") which accrues (or which would accrue but for such case,
proceeding or other action) after the commencement of any case, proceeding or
other action relating to the bankruptcy, insolvency or reorganization of the
Issuer or any Subsidiary (whether or not such interest is allowed or allowable
as a claim in such case, proceeding or other action)) with respect to the
revolving credit facility (the "Revolving Credit Facility") dated as of May 25,
1996 among Issuer, Wilsons Leather Holdings Inc., certain other Subsidiaries of
the Issuer, GE Capital and the lenders from time to time parties thereto
(together with any lenders under any renewal, refinancing or extension permitted
by clause (b) hereof, the "Lenders"), (b) any amendments, modifications,
renewals, refinancings or extensions with any Lenders (regardless of whether
such Lenders were lenders under the Revolving Credit Facility) of any of the
foregoing (or any portion thereof) and successive amendments, modifications,
renewals, refinancings or extensions of the foregoing, including Post-Petition
Interest, (c) all fees, expenses, indemnities and all other amounts payable by
the Issuer or any Subsidiary thereunder or with respect thereto and (d) any
increased borrowings permitted by any Lenders in excess of the original
borrowings permitted under the Revolving Credit Facility.
"Subsidiary" means, with respect to the Issuer, any other entity of which
securities or other ownership interests having ordinary voting power to elect a
majority of the board of directors or other persons performing similar functions
are at the same time directly or indirectly owned by such Person.
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<PAGE>
(b) Capitalized terms not otherwise defined herein are used herein as
defined in the Sale Agreement.
Section 2. Events of Default and Remedies.
-------------------------------
Section 2.1. Event of Default Defined; Acceleration of Maturity; Waiver of
Default. In case one or more of the following Events of Default (whatever the
reason for such Event of Default and whether it shall be voluntary or
involuntary or be effected by operation of law or pursuant to any judgment,
decree or order of any court or any order, rule or regulation of any
administrative or governmental body) shall have occurred and be continuing:
(a) the Issuer defaults in the payment of (i) the principal of the
Note when the same becomes due and payable at maturity, upon acceleration
or otherwise or of (ii) the interest on the Note when the same becomes due
and payable and such default continues for a period of 30 days;
(b) the Issuer defaults in the performance of or breaches any
covenants or agreements of the Issuer (other than Sections 3.1, 3.2, 3.3
and 3.6 below) in this Note and such default or breach continues for a
period of 30 consecutive days after written notice to the Issuer by the
Holder of such default or breach;
(c) a court having jurisdiction shall enter a decree or order for
relief in respect of the Issuer in an involuntary case under any applicable
bankruptcy, insolvency or other similar law now or hereafter in effect, or
appointing a receiver, liquidator, assignee, custodian, trustee,
sequestrator (or similar official) of the Issuer or for any substantial
part of the property of the Issuer or ordering the winding up or
liquidation of the affairs of the Issuer, and such decree or order shall
remain unstayed and in effect for a period of 60 consecutive days;
(d) the Issuer shall commence a voluntary case under any applicable
bankruptcy, insolvency or other similar law now or hereafter in effect, or
the Issuer shall consent to the entry of an order for relief in an
involuntary case under any such law, or consent to the appointment or
taking possession by a receiver, liquidator, assignee, custodian, trustee,
sequestrator (or similar official) of the Issuer or for any substantial
part of the property of the Issuer, or the Issuer shall make any general
assignment for the benefit of creditors; or
(e) there shall be a default under any Senior Debt of the Issuer or
any Subsidiary or under any mortgage, indenture or other instrument under
which there may be issued or by which there may be secured or evidenced any
Senior Debt of the Issuer or any Subsidiary and the holder of any Senior
Debt causes any Senior Debt to become due prior to its stated maturity,
- 5-
<PAGE>
then, and in each and every such case, the principal of and accrued interest on
the Note shall become and be immediately due and payable upon written notice of
holders of at least 25% in aggregate principal amount of the Notes then
outstanding but shall no longer be immediately due and payable and shall not be
deemed to have become due and payable if the default or Event of Default
resulting in such acceleration is waived by the Holder. Immediately upon the
occurrence of any Event of Default (which has not been waived in accordance with
the provisions of this Note) or upon failure to pay this Note at maturity, the
Holder, without any notice to the Issuer, which notice is expressly waived by
the Issuer, may proceed to protect, enforce, exercise and pursue any and all
rights and remedies available to the Holder under this Note and any other
agreement or instrument, and any and all rights and remedies available to the
Holder at law or in equity.
Section 2.2. Powers and Remedies Cumulative; Delay or Omission Not Waiver
of Default. No right or remedy herein conferred upon or reserved to the Holder
is intended to be exclusive of any other right or remedy, and every right and
remedy shall, to the extent permitted by law, be cumulative and in addition to
every other right and remedy given hereunder or now or hereafter existing at law
or in equity or otherwise. The assertion or employment of any right or remedy
hereunder, or otherwise, shall not prevent the concurrent assertion or
employment of any other appropriate right or remedy.
No delay or omission of the Holder to exercise any right or power accruing
upon any Event of Default occurring and continuing as aforesaid shall impair any
such right or power or shall be construed to be a waiver of any Event of Default
or an acquiescence therein; and every power and remedy given by this Note or by
law may be exercised from time to time, and as often as shall be deemed
expedient, by the Holder. Any waiver under this Note must be in writing signed
by the party making such waiver.
Section 2.3. Waiver of Past Defaults. The Holders of a majority in
aggregate principal amount of all Notes at the time outstanding may on behalf of
the Holders of all the Notes waive any past default or Event of Default
hereunder and its consequences. In the case of any such waiver, the Issuer and
the Holders of the Notes shall be restored to their former positions and rights
hereunder, respectively, subject to and in accordance with the provisions of the
waiver; but no such waiver shall extend to any subsequent or other default or
impair any right consequent thereon.
Upon any such waiver, such default shall cease to exist and be deemed to
have been cured and not to have occurred, and any Event of Default arising
therefrom shall be deemed to have been cured, and not to have occurred for every
purpose of this Note, subject to and in accordance with the provisions of the
waiver; but no such waiver shall extend to any subsequent or other default or
Event of Default or impair any right consequent thereon.
-6-
<PAGE>
Section 2.4. Default Interest. Any principal in excess of $811,000
owing under this Note by the Issuer which is not paid when due shall bear
interest from the date when due until said interest is paid in full at a rate
per annum equal at all times to (including capitalized interest) 12%.
Section 2.5. Collection Costs. The Issuer agrees to pay upon demand
all reasonable costs and expenses of collection of this Note or the enforcement
of the Holder's rights with respect to this Note, including, without limitation,
court costs and reasonable attorney's fees and disbursements. The Issuer also
agrees that such costs and expenses shall be added to the principal amount of
this Note and shall be subject to the terms and conditions hereof if not paid by
the Issuer to the Holder within ten (10) days after receipt by the Issuer of a
statement of an officer of the Holder attesting to the incurrence of those costs
and expenses and the Holder's entitlement to receipt of payment therefor from
the Issuer pursuant to this Section 2.5, provided that no failure to make such
payments within such 10 day period or thereafter shall constitute an Event of
Default under Section 2.1(a) or result in the acceleration of the Note.
Section 3. Covenants. The Issuer agrees that, so long as any amount
payable under this Note remains unpaid:
Section 3.1. Information. The Issuer shall deliver to each Holder
who, prior to registration of this Note under applicable securities laws, holds
at least 5% in aggregate principal amount of all Notes at the time outstanding
and continues to hold at least such 5% interest at the time such information is
delivered:
(a) within five days after the chief executive officer, president,
chief financial officer, chief accounting officer or any vice president of
the Issuer obtains actual knowledge of any Event of Default, a certificate
of the chief financial officer or the chief accounting officer of the
Issuer setting forth the details thereof and the action which the Issuer is
taking or proposes to take with respect thereto;
(b) copies of all internally prepared monthly financial statements,
quarterly financial statements and audited annual financial statements,
reports and compliance certificates required to be delivered by the Issuer
to any of its lenders or all of its securityholders at the same time as
delivery thereof to such lenders or all of its securityholders;
(c) promptly upon the filing thereof, the quarterly and annual
financial reports, if any, that the Issuer is required to file with the
Securities and Exchange Commission pursuant to Section 13 or Section 15(d)
of the Securities Exchange Act of 1934.
In addition, after the registration of this Note under applicable securities
laws, the Issuer shall deliver to each Holder all information required by
applicable securities laws.
-7-
<PAGE>
Section 3.2. Conduct of Business and Maintenance of Existence. The
Issuer will continue, and will cause each of its Subsidiaries to continue, to
engage in business of the same general type as now conducted by the Issuer and
its Subsidiaries in the ordinary course and consistent with past practice, and
will preserve, renew and keep in full force and effect, and will cause each
Subsidiary to preserve, renew and keep in full force and effect, their
respective corporate existence and their respective material rights, privileges
and franchises necessary in the normal conduct of business, provided that,
except as restricted under the Sale Agreement prior to the second anniversary of
the date hereof, nothing stated herein shall prohibit or limit (i) the merger of
any Subsidiary into the Issuer or any other Subsidiary or the merger of the
Issuer into Wilsons or any other Subsidiary or (ii) the liquidation of the
assets of any Subsidiary into the Issuer or any other Subsidiary or the
dissolution of the liquidated Subsidiary.
Section 3.3. Inspection of Property, Books and Records. The Issuer
will keep, and will cause each of its Subsidiaries to keep, proper books of
record and account in which full, true and correct entries shall be made of all
dealings and transactions in relation to its business and activities and will
permit, and will cause each of its Subsidiaries to permit, representatives of
the Holders who, prior to the registration of this Note under applicable
securities laws, are holding at least 5% in aggregate principal amount of all
Notes at the time outstanding (and, in addition, after registration of this Note
under applicable securities laws, Holders of the Note to the extent, if any,
required by applicable securities laws), at the Holders' expense, to visit and
inspect any of their respective properties, to examine and make abstracts from
any of their respective books and records and to discuss their respective
affairs, finances and accounts with their respective officers, employees and
independent public accountants, all upon reasonable notice at such reasonable
times and as often as may reasonably be desired, provided that each Holder shall
sign a confidentiality agreement with regard to such information as shall
reasonably be requested by the Issuer.
Section 3.4. Negative Covenants. The Issuer will not, as long as any
amount payable under this Note remains unpaid:
(a) amend, alter or repeal, whether by merger, consolidation, or
otherwise, any of the provisions of the articles of incorporation or the
bylaws of the Issuer or any Subsidiary in a manner adverse to the
preferences, privileges or powers of the Holders of the Notes solely in
their capacities as Holders of the Notes;
(b) liquidate, dissolve, or wind up the Issuer or any Subsidiary,
provided that, except as restricted under the Sale Agreement prior to the
second anniversary of the date hereof, nothing stated herein shall prohibit
or limit (i) the merger of any Subsidiary into the Issuer or any other
Subsidiary or the merger of the Issuer into Wilsons or any other Subsidiary
or (ii) the liquidation of the assets of any Subsidiary into the Issuer or
any other Subsidiary or the dissolution of the liquidated Subsidiary.
-8-
<PAGE>
(c) sell, convey, exchange or transfer in any single transaction or
series of related transactions (for cash, shares of stock, securities or other
consideration) property or assets of the Issuer or any Subsidiary constituting
all or substantially all of the consolidated assets of the Issuer or merge into
or consolidate with any other entity, provided that, except as restricted under
the Sale Agreement prior to the second anniversary of the date hereof, nothing
stated herein shall prohibit or limit (i) the merger of any Subsidiary into the
Issuer or any other Subsidiary or the merger of the Issuer into Wilsons or any
other Subsidiary, (ii) the sale, conveyance, exchange or transfer of property or
assets of the Issuer to or with any Subsidiary, or (iii) the sale, conveyance,
exchange or transfer of property or assets of any Subsidiary to or with the
Issuer or any other Subsidiary, including without limitation the liquidation of
the assets of any Subsidiary into the Issuer or any other Subsidiary or the
dissolution of the liquidated Subsidiary;
(d) sell, convey, exchange or transfer in any single transaction or
series of related transactions (for cash, shares of stock, securities or other
consideration) property or assets in excess of five percent (5%) of the total
consolidated assets of the Issuer other than sales, conveyances, exchanges or
transfers of inventory or obsolete equipment in the ordinary course of business,
provided that, except as restricted under the Sale Agreement prior to the second
anniversary of the date hereof, nothing stated herein shall prohibit or limit
(i) the merger of any Subsidiary into the Issuer or any other Subsidiary or the
merger of the Issuer into Wilsons or any other Subsidiary, (ii) the sale,
conveyance, exchange or transfer of property or assets of the Issuer to or with
any Subsidiary, or (iii) the sale, conveyance, exchange or transfer of property
or assets of any Subsidiary to or with the Issuer or any other Subsidiary,
including without limitation the liquidation of the assets of any Subsidiary
into the Issuer or any other Subsidiary or the dissolution of the liquidated
Subsidiary;
(e) purchase in any single transaction or series of related
transactions any property or assets of any other entity in excess of five
percent (5%) of the total consolidated assets of the Issuer, provided that,
except as restricted under the Sale Agreement prior to the second anniversary of
the date hereof, nothing stated herein shall prohibit or limit (i) the merger of
any Subsidiary into the Issuer or any other Subsidiary or the merger of the
Issuer into Wilsons or any other Subsidiary, (ii) the purchase by any Subsidiary
of property or assets of the Issuer, or (iii) the acquisition by the Issuer or
any Subsidiary of property or assets of any Subsidiary, including without
limitation the liquidation of the assets of any Subsidiary into the Issuer or
any other Subsidiary or the dissolution of the liquidated Subsidiary;
(f) sell, convey, exchange or transfer (for cash, shares of stock,
securities or other consideration) property or assets of the Issuer or any
Subsidiary constituting five percent (5%) or less of the total consolidated
assets of the Issuer without (i) reinvesting
-9-
<PAGE>
the net proceeds thereof in the business of the Issuer within 120 days of
the sale or (ii) applying the proceeds to any obligations outstanding under
the Senior Debt, if any (provided that Issuer shall not be required to
reduce its availability under the Senior Debt), and, unless prohibited
under the terms of the Senior Debt, then to this Note;
(g) make any material change in the scope of the business of the
Issuer and its Subsidiaries taken as a whole;
(h) nor will any Subsidiary, declare or make (i) any dividend or
other distribution on any shares of the Issuer's capital stock (except
dividends payable solely in shares of its capital stock) or (ii) any
payment on account of the purchase, redemption, retirement or acquisition
of (a) any shares of the Issuer's capital stock or (b) any option, warrant
or other right to acquire shares of the Issuer's capital stock, provided
that the Issuer may repurchase shares of its capital stock to the extent
permitted under the Shareholders Agreement or the Restricted Stock
Agreement (as defined in the Shareholders Agreement) as in effect on the
date hereof (without regard to any amendments to the Shareholders Agreement
or the Restricted Stock Agreement subsequent to the date hereof that are
not consented to by the Holder) and may repurchase any warrant issued to
Melville to the extent permitted under the terms of such warrant or
consented to by Melville; or
(i) make a public offering of the capital stock of the Issuer unless
all the proceeds of such public offering are reinvested in the business of
the Issuer within 120 days or are applied to any obligations outstanding
under the Senior Debt, provided that Issuer shall not be required to reduce
its availability under the Senior Debt, or are used to prepay amounts
outstanding under this Note unless prohibited under the terms of the Senior
Debt.
Section 3.5. Indebtedness, Additional Liens and Transactions with
Affiliates. The Issuer hereby covenants for the benefit of the Holder of this
Note as set forth in Sections 6.3, 6.4(a) (other than with respect to
disclosures (as provided in sentence 2 of Section 6.4(a)) in connection with
purchases of inventory in the ordinary course of business), 6.6 and 6.7 of the
Revolving Credit Facility, with the same effect as if such Sections were set
forth herein in full, and such Sections of the Revolving Credit Facility are
hereby incorporated herein by reference; provided that (a) all definitions used
in such Sections of the Revolving Credit Facility shall have the same meanings
for purposes of this Section 3.5 as are used in the Revolving Credit Facility,
and (b) for purposes of this Section 3.5 any reference in such Sections and
definitions of the Revolving Credit Facility to (i) the Agent or the Lenders
shall be deemed to be a reference to the Holder of this Note, (ii) the Closing
Date shall be deemed to be a reference to the date of this Note and (iii) the
Collateral Documents shall be deemed to include the corresponding or analogous
agreements and instruments, if any, entered into by the Issuer or any Subsidiary
providing for a subordinated Lien in favor of the Holder of this Note.
-10-
<PAGE>
Section 3.6. Affirmative Covenants. The Issuer will (a) allow an
individual designated by the Holders of a majority in aggregate principal amount
of all Notes at the time outstanding to attend all meetings of the Board of
Directors of the Issuer. Such individual shall receive the same written
materials as are given to the members of the Board of Directors of Issuer. Such
individual shall have no voting rights and shall be given the same notice of any
meetings as that given to the other members of the Board of Directors, provided
that if such notice is not given, such individual shall within 30 days after
such meeting be given the minutes and all other information regarding such
meeting and shall be entitled to meet with the chairman of such meeting.
Section 4. Subordination. The Holder and any and all successive
Holders of this Note and all notes evidencing any subdivision of the debt
evidenced hereby (collectively, the Notes) acknowledge that the initial Holder
has executed a Subordination Agreement in favor of the holders of the Senior
Debt on May 25, 1996, a copy of which is on file at the Issuer's headquarters.
The Holders of the Notes, by their acceptance of the Notes, agree that they are
bound by the terms of the Subordination Agreement, which are incorporated in the
Notes by reference, including without limitation payment bar provisions,
standstill provisions, and waivers of certain rights in bankruptcy. The Holders
of the Notes also agree by their acceptance thereof that all present and future
holders of the Senior Debt shall be entitled to rely upon the provisions of the
Subordination Agreement in making, acquiring, or continuing any portion of the
Senior Debt.
Section 5. Set-Off. Any amount owing (pursuant to a settlement,
judgment or agreement) from the Holder to the Issuer or its Affiliates under or
in connection with the Sale Agreement or any related agreement or instrument
shall be paid to the Issuer or such Affiliate in cash and without set-off
against any amounts owing to such Holder under this Note, without prejudice to
the right of the Issuer or its Affiliates to pursue any other remedies at law or
in equity.
Section 6. Modification. The Notes may be modified with the written
consent of the Issuer and of the Holders of a majority in aggregate principal
amount of all Notes at the time outstanding; provided that no amendment to the
principal amount of any Note or to the interest rate thereon may be made without
the consent of each Holder thereof. The Holders of a majority in aggregate
principal amount of all Notes at the time outstanding may waive compliance by
the Issuer with any provision of the Notes or consent to any action or omission
by the Issuer or any Subsidiary that would constitute a breach of any covenant
set forth in Section 3 in the absence of such consent.
Section 7. Miscellaneous. This Note shall be deemed to be a contract
under the laws of the State of New York, and for all purposes shall be construed
in accordance with the laws of said State, except as may otherwise be required
by mandatory provisions of law. The parties hereto hereby waive presentment,
demand, notice, protest and all other demands and
-11-
<PAGE>
notices in connection with the delivery, acceptance, performance and enforcement
of or any default under this Note, except as specifically provided herein, and
assent to extensions of the time of payment, or forbearance or other indulgence
without notice. THE PARTIES HERETO WAIVE ANY RIGHT TO A JURY TRIAL. The Holder
of this Note by acceptance of this Note agrees to be bound by the provisions of
this Note which are expressly binding on such Holder. The Section headings
herein are for convenience only and shall not affect the construction hereof.
Any provision of this Note which is illegal, invalid, prohibited or
unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective
to the extent of such illegality, invalidity, prohibition or unenforceability
without invalidating or impairing the remaining provisions hereof or affecting
the validity or enforceability of such provision in any other jurisdiction. This
Note shall bind the Issuer, its successors and assigns. The rights under and
benefits of this Note shall inure to the Holder and his, her or its heirs,
administrators, executors, personal representatives, successors and registered
assigns.
Section 8. Registration Rights. This Note is subject to certain
registration rights and transfer restrictions set forth in the Registration
Rights Agreement.
-12-
<PAGE>
IN WITNESS WHEREOF, the Issuer has caused this instrument to be duly
executed on the date indicated below.
Date: May 25, 1996 WILSONS THE LEATHER EXPERTS INC.
By:___________________________________
Name:
Title:
-13-
<PAGE>
Exhibit 11.1
Wilsons The Leather Experts Inc.
Computation of Net Loss Per Common Share
Period from Inception (May 26, 1996) to August 3, 1996
<TABLE>
<CAPTION>
<S> <C>
Weighted average number of issued shares outstanding 7,650,000
Effect of:
1996 Stock Option Plan 128,716
Melville Warrant to purchase common stock 1,287,694
-----------
Weighted average shares outstanding 9,066,410
===========
Net loss $(8,107,000)
===========
Net loss per common share $ (0.89)
===========
</TABLE>
<PAGE>
Exhibit 21.1
SUBSIDIARIES
OF
WILSONS THE LEATHER EXPERTS INC.
(1) Wilsons Center, Inc., a Minnesota corporation;
(2) Rosedale Wilsons, Inc., a Minnesota corporation;
(3) River Hills Wilsons, Inc., a Minnesota corporation;
(4) Bermans The Leather Experts, Inc., a Delaware corporation;
(5) Bermans Far East, LTD.;
(6) Wilsons House of Suede, Inc., a California corporation;
(7) Wilsons Tannery West, Inc., a California corporation;
(8) Wilsons Leather Holdings Inc., a Minnesota corporation;
(9) Melville (UK) Holdings Limited;
(10) Wilsons Leather Gatsland Limited;
(11) Wilsons Leather Gatsar Limited;
(12) Burlington Wilsons, Inc., a Vermont corporation;
(13) Christiana Wilsons, Inc., a Delaware corporation;
(14) Haywood Wilsons, Inc., a South Carolina corporation;
(15) Park Plaza Wilsons, Inc., an Arkansas corporation;
(16) Wilsons/Georgetown Leather Design of St. Louis, MO., Inc., a Missouri
corporation;
(17) Wilsons Leather of Alabama Inc., an Alabama corporation;
(18) Wilsons Leather of Connecticut Inc., a Connecticut corporation;
<PAGE>
(19) Wilsons Leather of Florida Inc., a Florida corporation;
(20) Wilsons Leather of Georgia Inc., a Georgia corporation;
(21) Wilsons Leather of Indiana Inc., an Indiana corporation;
(22) Wilsons Leather of Iowa Inc., an Iowa corporation;
(23) Wilsons Leather of Louisiana Inc., a Louisiana corporation;
(24) Wilsons Leather of Maryland Inc., a Maryland corporation;
(25) Wilsons Leather of Massachusetts Inc., a Massachusetts corporation;
(26) Wilsons Leather of Michigan Inc., a Michigan corporation;
(27) Wilsons Leather of Mississippi Inc., a Mississippi corporation;
(28) Wilsons Leather of New Jersey Inc., a New Jersey corporation;
(29) Wilsons Leather of New York Inc., a New York corporation;
(30) Wilsons Leather of North Carolina Inc., a North Carolina corporation;
(31) Wilsons Leather of Ohio Inc., an Ohio corporation;
(32) Wilsons Leather of Pennsylvania Inc., a Pennsylvania corporation;
(33) Wilsons Leather of Rhode Island Inc., a Rhode Island corporation;
(34) Wilsons Leather of Tennessee Inc., a Tennessee corporation;
(35) Wilsons Leather of Texas Inc., a Texas corporation;
(36) Wilsons Leather of Virginia Inc., a Virginia corporation;
(37) Wilsons Leather of West Virginia Inc., a West Virginia corporation; and
(38) Wilsons Leather of Wisconsin Inc., a Wisconsin corporation.
-2-
<PAGE>
Exhibit 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our report
included in or made a part of this registration statement.
ARTHUR ANDERSEN LLP
Minneapolis, Minnesota,
October 11, 1996
<PAGE>
Exhibit 23.2
Auditors' Consent
-----------------
The Board of Directors
Wilsons Center, Inc.:
We consent to the use of our report included herein and to the reference to our
firm under the heading "Experts" in the prospectus.
KPMG Peat Marwick LLP
Minneapolis, Minnesota
October 11, 1996
<PAGE>
Exhibit 24.1
WILSONS THE LEATHER EXPERTS INC.
Power of Attorney
of Director and/or Officer
The undersigned director and/or officer of WILSONS THE LEATHER EXPERTS
INC., a Minnesota corporation, does hereby make, constitute, and appoint Joel N.
Waller, David L. Rogers and Douglas J. Treff, and each or any of them, the
undersigned's true and lawful attorneys-in-fact and agent, with full power of
substitution and resubstitution, for the undersigned and in the undersigned's
name, place, and stead, to sign and affix the undersigned's name as such
director and/or officer of said Corporation to a Registration Statement or
Registration Statements, on Form S-1 or other applicable form, and any or all
amendments, including post-effective amendments, thereto, and all registration
statements for the same offering that are to be effective upon filing pursuant
to Rule 462(b) under the Securities Act of 1933, as amended (the "Act"), to be
filed by said Corporation with the Securities and Exchange Commission,
Washington, D.C. in connection with the registration under the Act of equity
securities proposed to be sold by said Corporation, and file the same, with all
exhibits thereto and other supporting documents pertaining to the registration
of the securities covered thereby, with said Commission, granting unto said
attorneys-in-fact and agents, and each or any of them, full power and authority
to do and perform each and every act and thing requisite and necessary or
incidental to the performance and execution of the powers herein expressly
granted, to be done in and about the premises, as fully to all intents and
purposes as the undersigned might or could do in person, hereby ratifying and
confirming all that said attorneys-in-fact and agents, or either or any of them,
or their substitute or substitutes, may lawfully do or cause to be done by
virtue hereof.
IN WITNESS WHEREOF, the undersigned has executed this power of attorney
this 10th day of August, 1996.
/s/ Joel N. Waller
-------------------
Joel N. Waller
<PAGE>
WILSONS THE LEATHER EXPERTS INC.
Power of Attorney
of Director and/or Officer
The undersigned director and/or officer of WILSONS THE LEATHER EXPERTS
INC., a Minnesota corporation, does hereby make, constitute, and appoint Joel N.
Waller, David L. Rogers and Douglas J. Treff, and each or any of them, the
undersigned's true and lawful attorneys-in-fact and agent, with full power of
substitution and resubstitution, for the undersigned and in the undersigned's
name, place, and stead, to sign and affix the undersigned's name as such
director and/or officer of said Corporation to a Registration Statement or
Registration Statements, on Form S-1 or other applicable form, and any or all
amendments, including post-effective amendments, thereto, and all registration
statements for the same offering that are to be effective upon filing pursuant
to Rule 462(b) under the Securities Act of 1933, as amended (the "Act"), to be
filed by said Corporation with the Securities and Exchange Commission,
Washington, D.C. in connection with the registration under the Act of equity
securities proposed to be sold by said Corporation, and file the same, with all
exhibits thereto and other supporting documents pertaining to the registration
of the securities covered thereby, with said Commission, granting unto said
attorneys-in-fact and agents, and each or any of them, full power and authority
to do and perform each and every act and thing requisite and necessary or
incidental to the performance and execution of the powers herein expressly
granted, to be done in and about the premises, as fully to all intents and
purposes as the undersigned might or could do in person, hereby ratifying and
confirming all that said attorneys-in-fact and agents, or either or any of them,
or their substitute or substitutes, may lawfully do or cause to be done by
virtue hereof.
IN WITNESS WHEREOF, the undersigned has executed this power of attorney
this 10th day of August, 1996.
/s/ David L. Rogers
-------------------
David L. Rogers
<PAGE>
WILSONS THE LEATHER EXPERTS INC.
Power of Attorney
of Director and/or Officer
The undersigned director and/or officer of WILSONS THE LEATHER EXPERTS
INC., a Minnesota corporation, does hereby make, constitute, and appoint Joel N.
Waller, David L. Rogers and Douglas J. Treff, and each or any of them, the
undersigned's true and lawful attorneys-in-fact and agent, with full power of
substitution and resubstitution, for the undersigned and in the undersigned's
name, place, and stead, to sign and affix the undersigned's name as such
director and/or officer of said Corporation to a Registration Statement or
Registration Statements, on Form S-1 or other applicable form, and any or all
amendments, including post-effective amendments, thereto, and all registration
statements for the same offering that are to be effective upon filing pursuant
to Rule 462(b) under the Securities Act of 1933, as amended (the "Act"), to be
filed by said Corporation with the Securities and Exchange Commission,
Washington, D.C. in connection with the registration under the Act of equity
securities proposed to be sold by said Corporation, and file the same, with all
exhibits thereto and other supporting documents pertaining to the registration
of the securities covered thereby, with said Commission, granting unto said
attorneys-in-fact and agents, and each or any of them, full power and authority
to do and perform each and every act and thing requisite and necessary or
incidental to the performance and execution of the powers herein expressly
granted, to be done in and about the premises, as fully to all intents and
purposes as the undersigned might or could do in person, hereby ratifying and
confirming all that said attorneys-in-fact and agents, or either or any of them,
or their substitute or substitutes, may lawfully do or cause to be done by
virtue hereof.
IN WITNESS WHEREOF, the undersigned has executed this power of attorney
this 10th day of August, 1996.
/s/ Douglas J. Treff
---------------------
Douglas J. Treff
<PAGE>
WILSONS THE LEATHER EXPERTS INC.
Power of Attorney
of Director and/or Officer
The undersigned director and/or officer of WILSONS THE LEATHER EXPERTS
INC., a Minnesota corporation, does hereby make, constitute, and appoint Joel N.
Waller, David L. Rogers and Douglas J. Treff, and each or any of them, the
undersigned's true and lawful attorneys-in-fact and agent, with full power of
substitution and resubstitution, for the undersigned and in the undersigned's
name, place, and stead, to sign and affix the undersigned's name as such
director and/or officer of said Corporation to a Registration Statement or
Registration Statements, on Form S-1 or other applicable form, and any or all
amendments, including post-effective amendments, thereto, and all registration
statements for the same offering that are to be effective upon filing pursuant
to Rule 462(b) under the Securities Act of 1933, as amended (the "Act"), to be
filed by said Corporation with the Securities and Exchange Commission,
Washington, D.C. in connection with the registration under the Act of equity
securities proposed to be sold by said Corporation, and file the same, with all
exhibits thereto and other supporting documents pertaining to the registration
of the securities covered thereby, with said Commission, granting unto said
attorneys-in-fact and agents, and each or any of them, full power and authority
to do and perform each and every act and thing requisite and necessary or
incidental to the performance and execution of the powers herein expressly
granted, to be done in and about the premises, as fully to all intents and
purposes as the undersigned might or could do in person, hereby ratifying and
confirming all that said attorneys-in-fact and agents, or either or any of them,
or their substitute or substitutes, may lawfully do or cause to be done by
virtue hereof.
IN WITNESS WHEREOF, the undersigned has executed this power of attorney
this 10th day of August, 1996.
/s/ Lyle Berman
----------------
Lyle Berman
<PAGE>
WILSONS THE LEATHER EXPERTS INC.
Power of Attorney
of Director and/or Officer
The undersigned director and/or officer of WILSONS THE LEATHER EXPERTS
INC., a Minnesota corporation, does hereby make, constitute, and appoint Joel N.
Waller, David L. Rogers and Douglas J. Treff, and each or any of them, the
undersigned's true and lawful attorneys-in-fact and agent, with full power of
substitution and resubstitution, for the undersigned and in the undersigned's
name, place, and stead, to sign and affix the undersigned's name as such
director and/or officer of said Corporation to a Registration Statement or
Registration Statements, on Form S-1 or other applicable form, and any or all
amendments, including post-effective amendments, thereto, and all registration
statements for the same offering that are to be effective upon filing pursuant
to Rule 462(b) under the Securities Act of 1933, as amended (the "Act"), to be
filed by said Corporation with the Securities and Exchange Commission,
Washington, D.C. in connection with the registration under the Act of equity
securities proposed to be sold by said Corporation, and file the same, with all
exhibits thereto and other supporting documents pertaining to the registration
of the securities covered thereby, with said Commission, granting unto said
attorneys-in-fact and agents, and each or any of them, full power and authority
to do and perform each and every act and thing requisite and necessary or
incidental to the performance and execution of the powers herein expressly
granted, to be done in and about the premises, as fully to all intents and
purposes as the undersigned might or could do in person, hereby ratifying and
confirming all that said attorneys-in-fact and agents, or either or any of them,
or their substitute or substitutes, may lawfully do or cause to be done by
virtue hereof.
IN WITNESS WHEREOF, the undersigned has executed this power of attorney
this 10th day of August, 1996.
/s/ Thomas J. Brosig
-------------------------------------
Thomas J. Brosig
<PAGE>
WILSONS THE LEATHER EXPERTS INC.
Power of Attorney
of Director and/or Officer
The undersigned director and/or officer of WILSONS THE LEATHER EXPERTS
INC., a Minnesota corporation, does hereby make, constitute, and appoint Joel N.
Waller, David L. Rogers and Douglas J. Treff, and each or any of them, the
undersigned's true and lawful attorneys-in-fact and agent, with full power of
substitution and resubstitution, for the undersigned and in the undersigned's
name, place, and stead, to sign and affix the undersigned's name as such
director and/or officer of said Corporation to a Registration Statement or
Registration Statements, on Form S-1 or other applicable form, and any or all
amendments, including post-effective amendments, thereto, and all registration
statements for the same offering that are to be effective upon filing pursuant
to Rule 462(b) under the Securities Act of 1933, as amended (the "Act"), to be
filed by said Corporation with the Securities and Exchange Commission,
Washington, D.C. in connection with the registration under the Act of equity
securities proposed to be sold by said Corporation, and file the same, with all
exhibits thereto and other supporting documents pertaining to the registration
of the securities covered thereby, with said Commission, granting unto said
attorneys-in-fact and agents, and each or any of them, full power and authority
to do and perform each and every act and thing requisite and necessary or
incidental to the performance and execution of the powers herein expressly
granted, to be done in and about the premises, as fully to all intents and
purposes as the undersigned might or could do in person, hereby ratifying and
confirming all that said attorneys-in-fact and agents, or either or any of them,
or their substitute or substitutes, may lawfully do or cause to be done by
virtue hereof.
IN WITNESS WHEREOF, the undersigned has executed this power of attorney
this 10th day of August, 1996.
/s/ Morris Goldfarb
-------------------------------------
Morris Goldfarb
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND> This schedule contains summary consolidated financial information
extracted from Wilsons The Leather Experts Inc. and Subsidiaries as of August 3,
1996 and for the period from inception (May 26, 1996) to August 3, 1996 and is
qualified in its entirety by reference to such consolidated financial
statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 2-MOS
<FISCAL-YEAR-END> AUG-03-1996
<PERIOD-START> MAY-26-1996
<PERIOD-END> AUG-03-1996
<CASH> 9,443
<SECURITIES> 0
<RECEIVABLES> 11,593
<ALLOWANCES> (4,975)
<INVENTORY> 77,666
<CURRENT-ASSETS> 94,510
<PP&E> 2,163
<DEPRECIATION> (2)
<TOTAL-ASSETS> 103,652
<CURRENT-LIABILITIES> 42,767
<BONDS> 55,811
<COMMON> 77
0
7,405
<OTHER-SE> (3,589)
<TOTAL-LIABILITY-AND-EQUITY> 103,652
<SALES> 28,518
<TOTAL-REVENUES> 28,518
<CGS> 15,738
<TOTAL-COSTS> 24,293
<OTHER-EXPENSES> 2
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,148
<INCOME-PRETAX> (12,663)
<INCOME-TAX> (4,556)
<INCOME-CONTINUING> (8,107)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (8,107)
<EPS-PRIMARY> (0.89)
<EPS-DILUTED> 0
</TABLE>
