<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON OCTOBER 21, 1996
FILE NO. 333-
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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KANI, INC.
(NAME OF REGISTRANT SPECIFIED IN ITS CHARTER)
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<S> <C> <C>
CALIFORNIA 3149 95-4599743
(STATE OR OTHER JURISDICTION (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
OF INCORPORATION) CODE NUMBER) IDENTIFICATION NO.)
</TABLE>
228 MANHATTAN BEACH BOULEVARD, SUITE 200
MANHATTAN BEACH, CALIFORNIA 90266
(888) 222-5264
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
------------------------
ROBERT GREENBERG
CHIEF EXECUTIVE OFFICER
KANI, INC.
228 MANHATTAN BEACH BOULEVARD, SUITE 200
MANHATTAN BEACH, CALIFORNIA 90266
(888) 222-5264
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF AGENT FOR SERVICE)
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COPIES TO:
<TABLE>
<S> <C>
THOMAS J. POLETTI, ESQ. SCOTT W. ALDERTON, ESQ.
KATHERINE J. BLAIR, ESQ. JOHN D. JENKINS, ESQ.
DARREN O. BIGBY, ESQ. TROOP MEISINGER STEUBER & PASICH, LLP
FRESHMAN, MARANTZ, ORLANSKI, COOPER & KLEIN 10940 WILSHIRE BOULEVARD
9100 WILSHIRE BOULEVARD LOS ANGELES, CALIFORNIA 90024-3902
EIGHTH FLOOR, EAST TOWER TEL. (310) 824-7000
BEVERLY HILLS, CALIFORNIA 90212-3480 FAX (310) 443-8569
TEL. (310) 273-1870
FAX (310) 274-8293
</TABLE>
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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
As soon as practicable after the effective date of this Registration Statement.
------------------------
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: /X/
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of 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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PROPOSED
MAXIMUM AMOUNT OF
TITLE OF EACH CLASS OF SECURITIES AMOUNT TO BE OFFERING PRICE MAXIMUM AGGREGATE REGISTRATION
TO BE REGISTERED REGISTERED PER SHARE(1) OFFERING PRICE(1) FEE
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<S> <C> <C> <C> <C>
Common Stock, no par value........................ 1,400,000 Shares $12.00 $16,800,000 $5,792
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Representative's Warrant (2)...................... 140,000 Shares $.001 $140 --
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Common Stock Underlying Representative's Warrant
(3).............................................. 140,000 Shares $14.40(4) $2,016,000 $695
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Common Stock, no par value (5).................... 210,000 Shares $12.00 $2,520,000 $869
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Total............................................. $21,336,140 $7,356
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</TABLE>
(1) Estimated solely for the purpose of computing the amount of the registration
fee pursuant to Rule 457.
(2) No registration fee required pursuant to Rule 457(g).
(3) Issuable upon exercise of the Representative's Warrant.
(4) Represents the exercise price of the Representative's Warrant.
(5) Issuable pursuant to an option granted to the Underwriters by the Company,
solely to cover over-allotments, if any.
The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant shall
file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until this Registration Statement shall become
effective on such date as the Commission, acting pursuant to Section 8(a), may
determine.
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<PAGE> 2
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
PRELIMINARY PROSPECTUS DATED , 1996
KANI, INC.
1,400,000 SHARES
COMMON STOCK
All of the shares of Common Stock offered hereby are being sold by Kani,
Inc., a California corporation (the "Company" or "Kani"). Prior to this
offering, there has been no public market for the Common Stock and there can be
no assurance that any such market will develop. It is anticipated that the
initial public offering price will be between $10.00 and $12.00 per share. The
initial public offering price has been determined by negotiation between the
Company and Joseph Charles & Associates, Inc., the Representative of the
Underwriters (the "Representative"), and does not necessarily reflect the
Company's asset value, performance or any other established criteria. For a
discussion of the factors considered in determining the initial public offering
price, see "Underwriting." It is anticipated that the Common Stock will be
quoted on the Nasdaq National Market under the symbol "KANI."
THE SECURITIES OFFERED HEREBY ARE SPECULATIVE AND INVOLVE A HIGH DEGREE OF
RISK AND SHOULD NOT BE PURCHASED BY INVESTORS WHO CANNOT AFFORD THE
LOSS OF THEIR ENTIRE INVESTMENT. SEE "RISK FACTORS" COMMENCING ON
PAGE 6 OF THIS PROSPECTUS.
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.
<TABLE>
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PRICE TO UNDERWRITING DISCOUNTS PROCEEDS TO
PUBLIC AND COMMISSIONS(1) COMPANY(2)
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<S> <C> <C> <C>
Per Share............... $ $ $
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Total(3)................ $ $ $
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</TABLE>
(1) Does not include additional compensation to be received by the
Representative in the form of (i) a 2 1/2% nonaccountable expense allowance
and (ii) the sale to the Representative of a warrant to purchase 140,000
shares of Common Stock at a price of 120% of the public offering price of
the Common Stock offered hereby, exercisable over a period of four years,
commencing one year from the date of this Prospectus (the "Representative's
Warrant"). The Company has also agreed to indemnify the Underwriters against
certain liabilities, including liabilities under the Securities Act of 1933.
See "Underwriting."
(2) Before deducting other expenses of this offering payable by the Company,
estimated to be $1,300,000, including the Representative's non-accountable
expense allowance.
(3) The Company has granted the Underwriters an option, exercisable within 60
days from the date of this Prospectus, to purchase up to an aggregate of
210,000 additional shares of Common Stock at the initial price to public for
share, less the Underwriting discount, solely for the purpose of covering
over-allotments, if any. If the Underwriters' over-allotment option is
exercised in full, the total Price to the Public, Underwriting Discounts and
Commissions, and Proceeds to the Company will be $ , $ and
$ , respectively. See "Underwriting."
The shares of Common Stock are being offered by the Underwriters, subject
to prior sale, when, as and if delivered to and accepted by the Underwriters and
subject to approval of certain legal matters by counsel and to certain other
conditions. The Underwriters reserve the right to withdraw, cancel or modify the
offering and to reject any order in whole or in part. It is expected that
delivery of the certificates representing the shares of Common Stock will be
made against payment therefor at the offices of Joseph Charles & Associates,
Inc., 9701 Wilshire Boulevard, Beverly Hills, California 90212, or through the
facilities of Depository Trust Company, on or about , 1996.
JOSEPH CHARLES & ASSOCIATES, INC.
THE DATE OF THIS PROSPECTUS IS , 1996.
<PAGE> 3
[PICTURES]
As of the date of this Prospectus, the Company will become subject to the
reporting requirements of the Securities Exchange Act of 1934 and in accordance
therewith will file reports, proxy statements and other information with the
Securities and Exchange Commission. The Company intends to furnish its
shareholders with annual reports containing audited financial statements and
such other periodic reports as the Company deems appropriate or as may be
required by law.
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS THAT STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK AT
LEVELS ABOVE THOSE THAT MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH
TRANSACTIONS MAY BE EFFECTED IN THE OVER-THE-COUNTER MARKET OR OTHERWISE. SUCH
STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
Kani, Karl Kani, and Karl Kani Jeans are registered trademarks of Carl
Williams, and will be licensed to the Company on the effective date of this
offering. This Prospectus also contain trademarks and registered trademarks of
other companies.
2
<PAGE> 4
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and financial statements, including the notes thereto, appearing
elsewhere in this Prospectus. Each prospective investor is urged to read this
Prospectus in its entirety. Unless otherwise indicated, all share and per share
data and information contained in this Prospectus relating to the number of
shares of Common Stock outstanding (i) assumes no exercise of the Underwriters'
over-allotment option and (ii) does not include 140,000 shares of Common Stock
reserved for issuance to the Representative upon exercise of the
Representative's Warrants.
THE COMPANY
Kani, Inc. ("Kani" or the "Company") is a recently-formed company that has
the exclusive right to market and sell products under the "Kani" brand name
pursuant to a license from Carl Williams, a.k.a. Karl Kani (the "Master
License"). The Company designs, develops, markets, and distributes footwear
bearing the Kani brand name, and selectively sublicenses the Kani brand name to
manufacturers of other products, principally apparel, which are designed by Carl
Williams, a.k.a., Karl Kani ("Karl Kani"), a nationally recognized clothing
designer. The Company receives income from the sale of its footwear products,
and royalty income from the sale by sublicensees of apparel products bearing the
Kani brand name. Prior to this offering, the Company operated as a division of
Skechers U.S.A., Inc. ("Skechers"). The operations of Kani include certain
ongoing operations contributed to the Company by Skechers. See "The Company."
The Company's footwear lines consist of performance athletic footwear,
street athletic footwear, utility/multi-purpose footwear, sandals and casual
footwear and children's footwear. The Company recently refocused its footwear
efforts on the athletic footwear market where the Company seeks to extend
further the Kani brand name from the apparel industry into footwear. The
Company's footwear is developed by its design team, manufactured by independent
contract manufacturers outside the United States and marketed by the Company
through salespersons and product promotions.
From late 1993 to 1995 the Company built the Kani brand name by selectively
sublicensing the Kani brand name for the manufacture of apparel products and
focusing its efforts in the utility/multi-purpose and casual footwear market.
Since July 1995, the Company has strategically refocused its footwear efforts
towards the production of athletic footwear, primarily high performance
basketball shoes aimed at a younger urban audience. This refocus is reflected in
Kani's new performance athletic footwear line which was first marketed in early
1996 with results expected in the third quarter of 1996. In connection with its
new athletic footwear products, the Company entered into a contract with John
Wallace of the National Basketball Association's New York Knicks to promote the
Kani brand name and it plans to introduce two signature footwear products that
will be endorsed by Mr. Wallace. The Company intends to use a portion of the
proceeds of this offering to secure additional athletic endorsement contracts.
The Company sublicenses the Kani brand name to provide for the manufacture
and distribution of various types of apparel and merchandise in the United
States and foreign markets. The Company sublicenses its trademarks for the
purpose of enhancing the Kani image by widening the range and distribution of
Kani products without requiring the Company to make a significant capital
investment or incur significant operating expenses. Generally, the Company
receives an initial royalty payment when it grants a sublicense and receives
monthly royalty payments based on the sublicensee's net sales of products
covered by the sublicense, provided the sublicensee maintains certain minimum
net sales. For the year ended December 31, 1995 and the six months ended June
30, 1996, net royalty income totaled approximately $1.3 million and $491,000,
respectively.
According to the United States Bureau of Economic Analysis, the 1995
domestic retail market for footwear was approximately $36 billion, which
represents a 29% increase between 1985 and 1995, of which approximately $11.4
billion represented athletic footwear. Sportstyle, a sporting goods industry
magazine, reported that Kani brand shoes ranked 22nd in domestic athletic
footwear sales for 1995. In addition, the Company believes that the
utility/multi-purpose footwear market, consisting primarily of boots, shoes and
sandals for outdoor recreational activities such as hiking and casual wear, is
driven by consumer demand for
3
<PAGE> 5
highly functional footwear that is rugged and durable as well as fashionable,
and by consumer preferences and lifestyles that include more outdoor and
recreational activities. In regards to apparel, according to the United States
Bureau of Economic Analysis, from 1985 to 1995, domestic consumer spending on
men's clothing increased approximately 47% with retail sales of approximately
$76 billion domestically on men's clothing in 1995.
The Company's management and design team consists of persons who are highly
experienced in the footwear and apparel industry. The Company has successfully
brought together Karl Kani with Robert Greenberg, the founder of L.A. Gear, Inc.
("L.A. Gear") and its past President and Chairman. The Company's apparel line is
exclusively designed by Karl Kani and his design team, and he has approval
rights of the Company's footwear design and promotion. Robert Greenberg, the
Company's Chief Executive Officer, was largely responsible for L.A. Gear's
growth in sales from $36 million in 1986, to over $900 million in 1990, and
co-founded Skechers, together with Michael Greenberg, the Company's President.
Since the inception of Skechers in 1992, the Company's management team has been
responsible for Skechers' growth in sales from $10.9 million in 1993 to over
$100 million in 1995. The Company believes this core group translates into an
effective and efficient management and design team with proven abilities to
recognize and respond to emerging consumer trends and demands.
The Company's objective is to build brand name loyalty to the Kani brand
name and become a leading footwear and apparel resource serving the contemporary
urban market. The Company's overall strategy focuses on the enhancement of the
Kani brand image and the maximization of the manufacture and sale of Kani
products. To achieve its objective, the Company's strategies include (i)
focusing on the athletic footwear market by developing and marketing its new
line of performance athletic footwear, (ii) increasing brand name recognition
and enhancing the Kani image, (iii) leveraging its management and design
expertise, (iv) selectively sublicensing the Kani brand name, (v) continuously
developing and introducing innovative footwear products, and (vi) expanding
domestic and international distribution.
THE OFFERING
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<S> <C>
Common Stock offered by the Company.. 1,400,000 shares
Common Stock to be Outstanding after
the Offering*...................... 4,000,000 shares
Use of Proceeds...................... The Company intends to use the net proceeds of this
offering to advertise the Kani brand name, secure
athletic endorsements of the Company's products and
establish concept shops for the distribution of the
Company's products, and for working capital and
general corporate purposes. See "Use of Proceeds."
Risk Factors......................... The shares offered hereby are speculative and involve
a high degree of risk and immediate substantial
dilution and should not be purchased by investors who
cannot afford the loss of their entire investment. See
"Risk Factors."
Proposed Nasdaq National Market
Symbol............................. "KANI"
</TABLE>
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* Does not include 400,000 shares of Common Stock reserved for issuance upon
exercise of options available for grant under the Company's 1996 Stock Option,
Deferred Stock and Restricted Stock Plan (the "Stock Option Plan"), none of
which have been granted.
4
<PAGE> 6
SUMMARY FINANCIAL DATA
(In thousands, except for per share data)
The summary financial information set forth below is derived from and
should be read in conjunction with the financial statements of the Company,
including the notes thereto, and certain pro forma financial data of the
Company, appearing elsewhere in this Prospectus.
<TABLE>
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SIX MONTHS
YEAR ENDED ENDED
DECEMBER 31, JUNE 30,
----------------------------- ----------------
1993(1) 1994 1995 1995 1996
------- ------- ------- ------ ------
<S> <C> <C> <C> <C> <C>
STATEMENT OF EARNINGS:
Net sales....................................... $3,356 $19,884 $18,063 $8,571 $6,774
Gross profit.................................... 1,296 7,989 4,690 2,115 1,999
Royalty income, net............................. -- 1,087 1,267 698 491
Earnings before income taxes.................... 522 3,374 762 367 180
Extraordinary item, net of taxes(2)............. -- -- 443 443 --
Net earnings.................................... 509 3,323 751 361 177
====== ======= ======= ====== ======
SUPPLEMENTAL STATEMENT OF EARNINGS DATA: (3)
Earnings before income taxes.................... $ 522 $ 3,374 $ 762 $ 367 $ 180
Income taxes.................................... 214 1,383 312 150 74
------ ------- ------- ------ ------
Net earnings.................................... $ 308 $ 1,991 $ 450 $ 217 $ 106
====== ======= ======= ====== ======
Net earnings per share before extraordinary
item(2)....................................... $ .07 $ --
Net earnings per share.......................... 0.17 0.04
======= ======
Weighted average number of shares
outstanding(4)................................ 2,600 2,600
======= ======
PRO FORMA STATEMENT OF EARNINGS DATA: (5)
Earnings before income taxes.................... $ 237 $ 74
Income taxes.................................... 97 30
------- ------
Net earnings.................................... $ 140 $ 44
======= ======
Net earnings per share.......................... $ .05 $ .02
======= ======
Weighted average number of shares
outstanding(4)................................ 2,600 2,600
======= ======
</TABLE>
<TABLE>
<CAPTION>
JUNE 30, 1996
--------------------------------------
PRO PRO FORMA
ACTUAL FORMA(6) AS ADJUSTED(7)
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<S> <C> <C> <C>
BALANCE SHEET DATA:
Working capital............................................ $1,765 $1,765 $ 14,749
Total assets............................................... 5,665 5,665 18,649
Short-term borrowings...................................... 1,702 1,702 1,702
Long-term note to shareholder of Skechers.................. 2,263 -- --
Owners' equity............................................. 847 3,110 16,094
</TABLE>
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(1) Reflects the period from November 1, 1993 (commencement of operations) to
December 31, 1993.
(2) Includes extraordinary gain of $443,000 net of income taxes of $7,000 for
the year ended December 31, 1995 and the six months ended June 30, 1995,
respectively, resulting from the acceleration of payment of a note. See Note
9 of Notes to Financial Statements.
(3) Reflects adjustments for Federal and state income taxes as if the Company
had been taxed as a "C" corporation rather than an "S" corporation.
(4) For information pertaining to the weighted average number of shares
outstanding, see Note 2 of Notes to Financial Statements.
(5) Reflects pro forma adjustments to historical results for (i) the elimination
of interest expense associated with the long term note payable to a
shareholder of Skechers which note will be retained by Skechers, and (ii)
the change in operating expenses associated with the allocation of certain
expenses from Skechers, the costs of which will be determined under a
management agreement between the Company and Skechers. See "Pro Forma
Financial Data".
(6) Gives effect to the Contribution Transaction as that term is defined herein.
See "Risk Factors -- Recently Formed Enterprise; the Contribution
Transaction" and "The Company."
(7) As adjusted to give effect to the sale of the Common Stock offered by the
Company hereby based upon an assumed initial public offering price of $11.00
per share. See "Use of Proceeds" and "Capitalization."
5
<PAGE> 7
RISK FACTORS
The shares offered hereby are speculative and involve a high degree of
risk. Prospective investors should carefully consider the following risk factors
before making an investment decision. This Prospectus contains forward-looking
statements that involve risks and uncertainties. The Company's actual results
could differ materially from those anticipated in these forward-looking
statements as a result of certain factors, including those set forth in the
following risk factors and elsewhere in this Prospectus.
RELIANCE ON AND CONFLICTS OF INTEREST WITH SKECHERS
The Company is, and for the foreseeable future will remain, heavily
dependent upon its relationship with its parent, Skechers, which has interests
that may conflict with those of the Company. For example, the Company and
Skechers both design footwear, and thus, compete in the overall footwear market.
Specifically, the Company and Skechers compete in the utility/multi-purpose and
casual footwear markets which was historically the primary focus of the
Company's footwear operations. Furthermore, although Skechers has not currently
expressed any intention to do so, there can be no assurance that Skechers will
not enter the performance athletic footwear market, the effect of which could
have a material adverse effect on the Company's operations. In addition, certain
of the officers and directors of Skechers are also officers and directors of the
Company, including Robert Greenberg, Michael Greenberg and David Weinberg, the
Chief Executive Officer, President and Chief Financial Officer, respectively, of
Skechers. The Company will be dependent upon the services of Messrs. Greenberg,
Greenberg and Weinberg for the oversight of the day-to-day operations of its
business; however, they will primarily devote their efforts and attention to
Skechers' business, and will devote their time to the Company on an as-needed
basis only. Consequently, the interests of the Company may suffer if one or more
of these individuals should cease working with Skechers (and thereby become
unavailable to the Company) or if any of their respective commitments to
Skechers should materially interfere with their ability to give adequate
attention to the business of the Company. As the holder of a majority of the
outstanding voting stock of the Company, Skechers will have the right to elect
all directors of the Company and the ability to control the outcome of all
matters for which the consent of the holders of the common stock of the Company
is required. This voting control may have the effect of discouraging offers to
acquire the Company because the consummation of any such acquisition would
require the consent of Skechers.
On the effective date of the offering, the Company and Skechers will enter
into a management agreement (the "Management Agreement") under which Skechers
will provide various general and administrative services to the Company,
including the services of the executive officers of the Company who are also
employees of Skechers, data processing, human resource administration, finance
and accounting, accounts receivable and collection, check processing, payment of
accounts payable, inventory control, and the use of its facilities. The
Management Agreement has been developed in the context of a parent/subsidiary
relationship and therefore is not the result of arm's-length negotiations
between independent parties. Although management believes that the terms of the
Management Agreement are as favorable to the Company as could be obtained from
independent third parties, management did not attempt to negotiate with any
other third party for the provision of the services to be provided by Skechers
under the Management Agreement and consequently, no assurance can be given that
similar services could not have been obtained at greater benefit to the Company.
As a result of the Management Agreement, the Company will be materially
dependent upon Skechers. Skechers is only required to provide services under the
Management Agreement for a period of five years, and no assurance can be given
that the Company will not continue to require services from Skechers for a
longer period of time. Should Skechers be unable to provide the services
required of it under the Management Agreement or any other agreements or
arrangements with the Company as a result of a downturn in the business,
financial condition and results of operations of Skechers, or in the event
Skechers is otherwise unable or unwilling to perform its obligations under the
Management Agreement, the Company's business, financial condition and results of
operations would be materially adversely affected. See "Certain
Transactions -- Management Agreement."
6
<PAGE> 8
REFOCUS OF BUSINESS AND NEW PRODUCT INTRODUCTION
Since 1995, the Company has strategically refocused its footwear efforts
towards the design and development of performance athletic footwear. Prior to
that time, the Company had not developed any athletic footwear products. The
Company's ability to sell its athletic footwear will be substantially dependent
on the successful promotion, advertising and market acceptance of such new
products, of which there can be no assurance. The development of the Company's
performance athletic footwear line was not completed until the conclusion of the
six month period ended June 30, 1996 and sales of this line did not commence
until July 1996. Failure of the Company's existing or anticipated athletic
footwear products to achieve market acceptance would have a material adverse
effect on the Company's business, financial condition and results of operation.
See "Business -- Strategy" and "-- Products."
ECONOMIC CONDITIONS AND SEASONALITY; VARIABILITY OF QUARTERLY RESULTS
The footwear and apparel industry in general are dependent on the economic
environment and levels of consumer spending which affect not only the ultimate
consumer, but also retailers, the Company's primary direct customers. As a
result, the Company's operating results may be adversely affected by downward
trends in the economy or the occurrence of events that adversely affect the
economy in general. Sales of footwear and apparel products are somewhat seasonal
in nature with the strongest sales generally occurring in the third and fourth
quarters. Because the timing of shipment of products for any season may vary
from year to year, the results for any particular quarter may not be indicative
of results for the full year. The Company has experienced, and expects to
continue to experience variability in its net sales and operating results on a
quarterly basis. The Company believes the factors which influence this
variability include (i) the timing of the Company's introduction of new footwear
and apparel products, (ii) the level of consumer acceptance of new and existing
products, (iii) general economic and industry conditions that affect consumer
spending and retail purchasing, (iv) the timing of the placement or cancellation
of customer orders, (v) the timing of income earned as royalties from
sublicensing agreements, and (vi) the timing of expenditures in anticipation of
increased sales and customer delivery requirements. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations" and
"Business -- Sales and Marketing."
Since the Company is introducing its new line of athletic footwear, it is
likely that selling expenses (which consist of selling commissions, advertising
and sales promotion expenses) will dramatically increase. During at least the
first half of 1997, net sales will not likely be adequate to cover overall
expenses in light of the Company's advertising and promotional activities.
Although the proceeds of this offering should be sufficient to fund these
expenses, if net sales are not adequate to cover such selling expenses, the
Company will incur losses which could have a material adverse effect on the
Company's business, financial condition and results of operations.
RECENTLY FORMED ENTERPRISE; THE CONTRIBUTION TRANSACTION
The Company was incorporated in the State of California on September 10,
1996. On the effective date of this offering, Skechers will contribute to the
Company the Master License covering all products marketed and sold under the
Kani brand name and all assets relating to the ongoing footwear business
conducted by Skechers to the extent such assets are used by Skechers solely in
the connection with the sale of products under the Kani brand name, together
with the rights to certain customer lists, in exchange for shares representing
100% of the Common Stock of the Company. For a further description of the terms
of this contribution, which shall be known herein as the "Contribution
Transaction," see "The Company." The footwear operations to be contributed by
Skechers pursuant to the Contribution Transaction have been conducted by
Skechers since 1993. The Company will also assume all liabilities associated
with such contributed assets, whether known or unknown, excluding amounts lent
to Skechers by the Greenberg Family Trust, of which Robert Greenberg, the
Company's Chief Executive Officer, is a trustee. Also, it is expected that
certain personnel employed by Skechers in the ongoing footwear business of Kani
(seven persons at October 15, 1996), will become employees of the Company.
Certain other employees of Skechers, and Messrs. Greenberg, Greenberg and
Weinberg, will perform some services for the Company under the Management
Agreement.
7
<PAGE> 9
As a result of the terms of the Contribution Transaction, a majority of the
equity capital of the Company will be contributed by investors in this offering;
however, such investors will only hold approximately 35% of the outstanding
equity of the Company. See "-- No Assurance of Public Market; Possible
Volatility of Share Price; Dilution." Historical financial information presented
herein and information under the section entitled "Management's Discussion and
Analysis of Financial Condition and Results of Operations" should be regarded
solely as background information and may not be indicative of future results
which may vary substantially and adversely from those shown herein.
RELIANCE ON KARL KANI
Pursuant to the Master License, Karl Kani is the exclusive designer of all
apparel that bears the Kani brand name, and has approval rights of the Company's
footwear design and development and thus, the Company is substantially dependent
on the design services of Karl Kani. The loss of the design services of Karl
Kani would have a material adverse effect on the Company, its results of
operations and financial condition. See "Business -- Design and Development" and
"Certain Transactions -- Other Transactions."
SIGNIFICANT CAPITAL REQUIREMENTS
The Company's capital requirements have been and will continue to be
significant. To date, the Company has operated as a division of Skechers which
has received funding from loans from Heller Financial, Inc. ("Heller") and the
Greenberg Family Trust. A portion of the Heller loan has been allocated to the
Company on a historical basis and will become the obligation of the Company on
the effective date of this offering pursuant to the Contribution Transaction
(the "Heller Loan"). See "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Liquidity and Capital Resources" and "Pro
Forma Financial Data." The Company is dependent on and intends to use a
significant portion of the proceeds of this offering to fund its ongoing
operations. The Company has no current arrangements with respect to, or readily
available sources of, additional financing and it is not anticipated that
Skechers will provide any portion of the Company's future financing
requirements. There can be no assurance that additional financing will be
available to the Company when needed or on commercially reasonable terms. Any
inability to obtain additional financing when needed would have a material
adverse effect on the Company, including requiring the Company to curtail the
expansion of its operations and possibly causing the Company to cease its
operations. In addition, any additional equity financing may involve substantial
dilution to the Company's then-existing shareholders. See "Use of Proceeds" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources."
CHANGING CONSUMER DEMANDS AND FASHION TRENDS
The footwear and apparel industries are subject to changing consumer
demands and fashion trends. The Company believes that its success depends in
large part upon its ability to identify and interpret fashion trends and to
anticipate and respond to such trends in a timely manner. There can be no
assurance that the Company will be able to continue to meet changing consumer
demands or to develop successful styles in the future. Decisions with respect to
product designs often need to be made several months in advance of the time when
consumer acceptance can be determined. As a result, the Company's failure to
anticipate, identify or react appropriately to changes in styles and features
could lead to, among other things, excess inventories and higher markdowns, and
lower gross margins due to the necessity of providing discounts to retailers.
Conversely, failure by the Company to anticipate consumer demand could result in
inventory shortages, which can adversely affect the timing of shipments to
customers, negatively impacting retailer and distributor relationships and
diminishing brand loyalty. See "Business -- Design and Development."
The Company intends to market additional lines of footwear and apparel in
the future, and as is typical with new products, demand and market acceptance
will be subject to uncertainty. Achieving market acceptance for new products may
require substantial marketing efforts. For example, one of the Company's
business strategies is to promote its recently introduced athletic footwear line
through securing athletic endorsements and expending a substantial portion of
the proceeds of the offering and cash generated by future
8
<PAGE> 10
sales on the advertisement of these new products. There can be no assurance that
the Company's marketing efforts will be successful or that the Company will have
the funds necessary to undertake sufficient efforts. See "Business -- Strategy"
and "-- Sales and Marketing."
COMPETITION
Competition in the footwear and apparel industries is intense. The
Company's products compete with other branded products within their product
category as well as with private label products sold by retailers, including
some of the Company's customers. In the footwear industry, the Company's
performance athletic shoes compete with brands of athletic footwear offered by
companies such as Nike, Inc., Reebok International Ltd, Fila Ltd., Adidas AG and
L.A. Gear. The Company's utility/multi-purpose footwear and casual shoes compete
with footwear offered by companies such as The Timberland Company, Doc Martins,
Kenneth Cole, Frye Boot, Wolverine World Wide, Inc. and Skechers, the Company's
parent. With respect to its apparel line, the Company's principal competition
include brand name manufacturers such as Tommy Hilfiger, Ralph Lauren, Nautica
and Guess, Inc.? In varying degrees, depending on the product category involved,
the Company competes on the basis of style, price, quality, comfort and brand
name prestige and recognition, among other considerations. The Company also
competes with numerous manufacturers, importers and distributors of footwear and
apparel for the limited shelf-space available for the display of such products
to the consumer. Moreover, the general availability of contract manufacturing
capacity allows ease of access by new market entrants. Many of the Company's
competitors are larger, have achieved greater recognition for their brand names,
have captured greater market share and/or have substantially greater financial,
distribution, marketing and other resources than the Company. See
"Business -- Competition."
RISKS ASSOCIATED WITH FOREIGN OPERATIONS
Substantially all of the Company's net sales for the year ended December
31, 1995 and the six months ended June 30, 1996 were derived from sales of
footwear manufactured for the Company outside of the United States.
Approximately half of the Company's royalty income from sales of products
bearing the Kani brand name by sublicensees for the same periods was from the
sale of products manufactured outside the United States.
Foreign manufacturing is subject to a number of risks, including work
stoppages, transportation delays, changing economic conditions, expropriation,
nationalization, the imposition of tariffs, import and export controls and other
nontariff barriers and changes in domestic and foreign governmental policies,
any of which could have an adverse affect on the Company's business. While the
Company has not experienced material losses as a result of fluctuation in the
value of foreign currencies and does not engage in currency hedging, currency
fluctuations could adversely affect the Company in the future. In regards to
apparel manufactured by sublicensees, there can be no assurance that the
sublicensees will be able to obtain quotas in the future (necessary for the
exportation of sublicensed products) in sufficient quantity and at acceptable
prices. Also, the Company may be subjected to additional duties, significant
monetary penalties, the seizure and the forfeiture of the products the Company
is attempting to import or the loss of its import privileges if the Company or
its suppliers are found to be in violation of United States laws and regulations
applicable to the importation of the Company's products. Such violations may
include (i) inadequate record keeping of its imported products, (ii)
misstatements or errors as to the origin, quota category, classification,
marketing or valuation of its imported products, (iii) fraudulent visas or (iv)
labor violations under United States or foreign laws. Although the Company
monitors its own compliance and the compliance of its suppliers with these laws
and regulations, there can be no assurance that the Company will not incur
significant penalties (monetary or otherwise) if the United States Customs
Service determines that these laws or regulations have been violated or that the
Company failed to exercise reasonable care in its obligations to comply with
these laws or regulations on an informed basis.
DEPENDENCE ON CONTRACT MANUFACTURERS
The Company's footwear products are currently manufactured by independent
contract manufacturers located primarily in China, Macau, Korea, Mexico, Romania
and Taiwan. The Company has no long-term
9
<PAGE> 11
contracts with its manufacturers and competes with other footwear companies for
production facilities. Although the Company has established close working
relationships with its principal manufacturers, the Company's future success
will depend, in large part, on maintaining such relationships and developing new
relationships. There can be no assurance that the Company will not experience
difficulties with such manufacturers, including reduction in the availability of
production capacity, failure to meet production deadlines or increases in
manufacturing costs. In the event that the Company's current manufacturers were
for any other reason to cease doing business with the Company, the Company could
experience an interruption in the manufacture of its products that could have an
adverse effect on the Company's business and results of operation. Although the
Company believes that it could find alternative sources to manufacture its
products within 90 to 120 days after the date of disruption, establishment of
new manufacturing relationships involves various uncertainties, including
payment terms, costs of manufacturing, adequacy of manufacturing capacity,
quality control and timeliness of delivery. The Company cannot predict whether
it will be able to establish new manufacturing relationships, either in the
countries in which it currently does business or in other countries in which it
does not currently do business, that will be as a favorable as those that now
exist. See "Business -- Manufacturing."
RISKS ASSOCIATED WITH DOL INVESTIGATIONS
In recent months, a number of garment manufacturing companies throughout
the United States have been fined by the U.S. Department of Labor (the "DOL")
for violations of applicable labor laws and regulations; and the DOL has seized
goods manufactured by the responsible companies in order to assure that such
companies comply with the applicable laws and regulations and/or to obtain
payment of those fines from firms that have contracted with the responsible
companies. The DOL has also held discussions with several sourcing companies
regarding the implementation of programs to monitor the compliance with these
laws and regulations by the garment manufacturing companies with which they
contract. Recently, the DOL, together with the California Department of
Industrial Relations and Cal/OSHA, in the Targeted Industries Partnership
Program, investigated and cited several southern California garment
manufacturing companies. Furthermore, in the past year there has been an
increasing trend by political activists to require the application of United
States labor laws on foreign countries and to impose pressure on foreign
manufacturers for human rights violations. The Company does not engage in the
garment manufacturing business. However, if any of its sublicensees were to
become subject to DOL action or enforcement action undertaken by the California
Department of Industrial Relations or Cal/OSHA, or if the Company were to become
a target of political activists, it could have a material adverse effect on the
Company's business, financial condition and results of operations.
MANAGEMENT OF GROWTH
The Company has experienced rapid growth over the past three years.
However, the Company remains vulnerable to a variety of business risks generally
associated with rapidly growing companies. The Company intends to continue to
pursue an aggressive growth strategy through expanded marketing and promotion
efforts, frequent introductions of products, broader lines of casual and
performance footwear, such as the expansion of its athletic footwear line, as
well as apparel and other accessories and increased international market
penetration. To the extent the Company is successful in increasing sales of its
products, a significant strain may be placed on its financial, management and
other resources, including the services to be provided to the Company by
Skechers pursuant to the Management Agreement. The Company's future performance
will depend in part on its ability to manage change in both its domestic and
international operations and will require the Company to attract, train, manage
and retain management, sales, marketing and other key personnel. The Company's
ability to manage its growth effectively will require it to continue to improve
its operational and financial control systems, infrastructure and management
information systems. There can be no assurance that the Company will be
successful in such efforts, and the inability of the Company's management to
manage growth effectively and to balance its time between the operations of the
Company and Skechers could have a material adverse effect on the Company's
business, financial condition and results of operations. See "-- Reliance on and
Conflicts of Interest with Skechers", "Business -- Sales and Marketing" and
"Management."
10
<PAGE> 12
RELIANCE ON KEY CUSTOMERS
During the year ended December 31, 1995 and the six month period ended June
30, 1996, the Company's net sales to its five largest customers accounted for
approximately 21.4% and 28.8%, respectively, of total net sales. During both
periods, the Company's largest customer was a shoe discount operation which sold
the Company's discontinued products as it shifted its primary focus from high
priced utility/multi-purpose footwear. Although the Company has long-term
relationships with many of its customers, none of its customers has any
contractual obligations to purchase the Company's products. The loss of or
significant decrease in business from any of the Company's major customers could
have a material adverse effect on its business, financial condition and results
of operations. See "Business -- Sales and Marketing."
DEPENDENCE ON SUBLICENSEES
With respect to its apparel operations, the Company sublicenses the sale of
apparel to selected sublicensees in exchange for a royalty obligation. The
failure of the Company to attract qualified sublicensees may adversely affect
the Company's ability to increase revenue. In addition, the sublicensees may
have existing relationships with, or may undertake relationships with, the
Company's direct competitors. If the Company is unable to develop and maintain
effective, long-term relationships with sublicensees, or if such sublicensees
fail to effectively promote and distribute the Company's products or meet the
needs of their customers in a timely fashion, or at all, the Company could
experience a loss of revenues and/or injury to its reputation or brand name, any
of which would have a material adverse effect on the Company's business,
financial condition and results of operations. See "Business -- Licensing."
PROPRIETARY RIGHTS
The Company relies on copyright and trade secret protection, non-disclosure
agreements and licensing arrangements to establish, protect and enforce
proprietary rights in its products. Despite the Company's efforts to safeguard
and maintain its proprietary rights, there can be no assurance that the Company
will be successful. There can be no assurance that third parties will not assert
intellectual property claims against the Company in the future. Such claims, if
proved, could materially and adversely affect the Company's business and results
of operations. In addition, although any such claims may ultimately prove to be
without merit, the necessary management attention to and legal costs associated
with litigation or other resolution of such claims could materially and
adversely affect the Company's business and results of operations. The laws of
certain foreign countries do not protect intellectual property rights to the
same extent or in the same manner as do the laws of the United States. Although
the Company continues to implement protective measures and intends to defend its
proprietary rights vigorously, there can be no assurance that these efforts will
be successful or that the costs associated with protecting its rights in certain
jurisdictions will not be prohibitive.
NO DIVIDENDS
The Company has never paid cash or other dividends on its Common Stock. It
is the Company's intention to retain its earnings, if any, to finance the
operation and expansion of its business and, therefore, it does not expect to
pay any cash dividends in the foreseeable future. See "Dividend Policy."
NO ASSURANCE OF PUBLIC MARKET; POSSIBLE VOLATILITY OF SHARE PRICE; DILUTION
Prior to this offering, there has been no public trading market for the
Common Stock of the Company. There can be no assurance that a regular trading
market for the Common Stock will develop after this offering or that, if
developed, it will be sustained. The initial public offering price for the
Common Stock being sold by the Company in this offering has been determined by
negotiations between the Company and the Representative and does not necessarily
reflect the Company's book value or other established criteria of value. The
market price for the Company's Common Stock following this offering may be
highly volatile as has been the case with the securities of other companies in
emerging businesses. Factors such as the Company's financial results and
introduction of new products by the Company or its competitors, and various
factors affecting the footwear and apparel industries generally, may have a
significant impact on the market price of the Company's
11
<PAGE> 13
securities. Purchasers of Common Stock in this offering will suffer an immediate
substantial dilution of $6.98 per share of Common Stock.
SHARES ELIGIBLE FOR FUTURE SALE
Upon consummation of this offering, the Company will have 4,000,000 shares
of Common Stock outstanding, of which the 1,400,000 shares of Common Stock
offered hereby will be freely tradeable without restriction or further
registration under the Securities Act of 1933, as amended (the "Securities
Act"). The remaining 2,600,000 shares of Common Stock outstanding, all of which
are held by Skechers, are "restricted securities," as that term is defined under
Rule 144 promulgated under the Securities Act and may be sold, subject to
certain conditions, without registration pursuant to Rule 144 commencing 24
months following the date of this Prospectus. Each of Skechers and each of the
officers and directors of the Company have agreed not to sell any shares of
Common Stock owned by them for a period of 12 months after the date of this
Prospectus without the prior written consent of Joseph Charles & Associates,
Inc. ("Joseph Charles"). No prediction can be made as to the effect, if any,
that sales of shares of Common Stock or even the availability of such shares for
sale will have on the market prices prevailing from time to time. The
possibility that substantial amounts of Common Stock may be sold in the public
market may adversely affect prevailing market prices for the Common Stock and
could impair the Company's ability to raise capital through the sale of its
equity securities. See "Shares Eligible for Future Sale" and "Underwriting."
SUBSTANTIAL NUMBER OF SHARES RESERVED FOR FUTURE ISSUANCE
The Company has reserved (i) an aggregate of 400,000 shares of Common Stock
for issuance to key employees, officers, directors and consultants and other
third parties pursuant to the exercise of options under the Stock Option Plan,
none of which have been granted, and (ii) 140,000 shares of Common Stock for
issuance pursuant to the Representative's Warrant to be issued in this offering.
The existence of the aforementioned warrant and any other options or warrants
that may be granted in the future may prove to be a hinderance to future equity
financing by the Company. Further, the holders of such warrants and options may
exercise them at a time when the Company would otherwise be able to obtain
additional equity capital on terms more favorable to the Company. See
"Description of Securities."
12
<PAGE> 14
THE COMPANY
The Company was incorporated in the State of California on September 10,
1996. The footwear operations to be contributed by Skechers pursuant to the
Contribution Transaction has been conducted by Skechers since 1993 and commenced
operations on November 1, 1993.
On the effective date of this offering, Skechers will contribute to the
Company the Master License covering all products marketed and sold under Kani
brand name and all assets relating to the ongoing footwear business conducted by
Skechers to the extent such assets are used by Skechers solely in connection
with the sale of the products under the Kani brand name, together with the
rights to certain customer lists, in exchange for shares representing 100% of
the Common Stock of the Company. The Company will also assume all liabilities
associated with such contributed assets, whether known or unknown, but excluding
amounts lent to Skechers by the Greenberg Family Trust, of which Robert
Greenberg, the Company's Chief Executive Officer, is a trustee. For financial
reporting purposes, such assets and liabilities will be recorded by the Company
at the carrying value of Skechers. Also, certain personnel employed by Skechers
in the ongoing footwear business of Kani (seven persons at October 15, 1996) are
expected to become employees of the Company. References to the Company prior to
the Contribution Transaction refer to the Company as an operating division of
Skechers. The Company and Skechers will enter into the Management Agreement
effective as of the effective date of this offering under which Skechers will
provide various general and administrative services to the Company, including
the services of the executive officers of the Company who are also employees of
Skechers, data processing, human resources administration, finance and
accounting, accounts receivable and collection, check processing, payment of
accounts payable, inventory control, and the use of its facilities. Skechers
will be obligated to provide these services for a period of not less than five
years; however, the Company may terminate the agreement at any time. The Company
will pay Skechers on a monthly basis for such services in an amount equal to 15%
of the Company's net sales for the preceding month. The services will be
accounted for on the Company's financial statements as general and
administrative expenses, specifically excluding bad debt and design services. As
a result of the Contribution Transaction, a majority of the equity capital of
the Company will be contributed by investors in this offering; however, such
investors will only hold approximately 35% of the outstanding equity of the
Company. Historical financial information presented herein and information under
the section entitled "Management's Discussion and Analysis of Financial
Condition and Results of Operations" should be regarded solely as background
information and may not be indicative of future results which may vary
substantially and adversely from those shown herein. For a description of
certain pro forma financial information of the Company after the Contribution
Transaction, see "Certain Transactions -- The Contribution Transaction" and "Pro
Forma Financial Data."
The principal executive offices of the Company are located at 228 Manhattan
Beach Boulevard, Suite 200, Manhattan Beach, California 90266, and its telephone
number is (888) 222-KANI.
13
<PAGE> 15
USE OF PROCEEDS
The net proceeds to the Company from the sale of the 1,400,000 shares of
Common Stock being offered by the Company hereby (assuming an initial public
offering price of $11.00 per share), after deducting underwriting discounts and
commissions and offering expenses, are estimated to be approximately $12,984,000
(approximately $15,068,000 if Underwriters' over-allotment option is exercised
in full). The Company intends to apply the net proceeds to advertise,
domestically and internationally, the Kani brand name (approximately 35%);
secure athletic endorsements of the Company's products (approximately 10%);
establish concept shops in major department stores and specialty retail stores
for the distribution of the Company's products, (approximately 10%); and the
balance for working capital and general corporate purposes.
The projected expenditures described above are estimates and approximations
only and do not represent firm commitments of the Company. In the event that the
Company's plans change, or if the proceeds of this offering or cash flow
otherwise prove to be insufficient to fund operations, the Company may find it
necessary or advisable to reallocate some of the proceeds within the categories
above described or may be required to seek additional financing or curtail its
expansion activities. There can be no assurance that any additional financing
will be available to the Company or on commercially reasonable terms.
The Company currently has no plans or intention to acquire any specific
business, and there are no negotiations, arrangements or understandings with
respect to any such acquisitions. While the Company has established no formal
guidelines with respect to any such acquisitions, management may consider
acquisitions of other businesses should such opportunities become available
which are complementary to its business and which are expected to enhance
shareholder value. In such cases, a portion of the net proceeds to the Company
from this offering may be used to make such acquisitions.
Proceeds not immediately required for the purposes described above will be
invested principally in short term bank certificates of deposit, short term
investment grade securities, United States Government obligations or money
market instruments.
DIVIDEND POLICY
To date, the Company has not declared or paid any dividends on its Common
Stock. The payment of dividends, if any, in the future is within the discretion
of the Board of Directors and will depend upon the Company's earnings, if any,
its capital requirements and financial condition and other relevant factors. The
Company does not expect to declare or pay any dividends in the foreseeable
future. The Company's ability to pay dividends will be restricted pursuant to
the Heller Loan. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Liquidity and Capital Resources."
14
<PAGE> 16
CAPITALIZATION
The following table sets forth the short-term debt and capitalization of
the Company (i) as of June 30, 1996, (ii) on a pro forma basis to reflect the
Contribution Transaction and (iii) pro forma as adjusted to give effect to the
sale of the 1,400,000 shares of Common Stock offered by the Company hereby at an
assumed initial public offering price of $11.00 per share. The capitalization of
the Company should be read in conjunction with the Company's Financial
Statements and the notes thereto included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
JUNE 30, 1996
---------------------------------------
PRO FORMA
ACTUAL PRO FORMA(1) AS ADJUSTED
------- ------------ -----------
<S> <C> <C> <C>
(IN THOUSANDS, EXCEPT SHARE DATA)
Short-term borrowings..................................... $1,702 $1,702 $ 1,702
====== ====== ======
Long-term note to shareholder of Skechers................. $2,263 $ -- $ --
------ ------ ------
Owners' equity:
Preferred Stock, no par value; 5,000,000 shares
authorized, no shares issued and outstanding......... -- -- --
Common Stock, no par value; 25,000,000 shares
authorized, no shares issued and outstanding, actual;
2,600,000 shares issued and outstanding, pro forma;
4,000,000 shares issued and outstanding, as
adjusted(2).......................................... -- 3,110 16,094
Division equity(3)........................................ 847 -- --
------ ------ ------
Owners' equity............................................ 847 3,110 16,094
------ ------ ------
Total capitalization...................................... $4,812 $4,812 $17,796
====== ====== ======
</TABLE>
- ---------------
(1) Reflects pro forma adjustments to historical data for the elimination of
note payable to a shareholder of Skechers which note will be retained by
Skechers.
(2) Does not include a total of 400,000 shares of Common Stock reserved for
issuance upon the exercise of options available for grant under the
Company's Stock Option Plan, none of which have been granted.
(3) Represents the excess of net assets over net liabilities which will be
converted to Common Stock at the date of the Contribution Transaction.
15
<PAGE> 17
SELECTED FINANCIAL DATA
(in thousands, except per share data)
The selected financial data set forth below have been derived from the
financial statements of the Company and the related notes thereto. The statement
of earnings data for the period from November 1, 1993 (commencement of
operations) to December 31, 1993 and the years ended December 31, 1994 and 1995
and the balance sheet data as of December 31, 1993, 1994 and 1995 are derived
from the financial statements of the Company, which have been audited by KPMG
Peat Marwick LLP, independent auditors. Financial data as of June 30, 1996 and
for the six months ended June 30, 1995 and 1996, are unaudited, but, in the
opinion of management, include all adjustments, consisting only of normal
recurring adjustments necessary for a fair presentation of such data. The
results of operations for the six months ended June 30, 1996 are not necessarily
indicative of the results to be expected for the entire year. The following
selected financial data should be read in conjunction with the Company's
financial statements and the related notes thereto and "Management's Discussion
and Analysis of Financial Condition and Results of Operations," which are
included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED ENDED
DECEMBER 31, JUNE 30,
--------------------------- ---------------
1993(1) 1994 1995 1995 1996
------- ------- ------- ------ ------
<S> <C> <C> <C> <C> <C>
STATEMENT OF EARNINGS DATA:
Net sales........................................................... $3,356 $19,884 $18,063 $8,571 $6,774
Cost of sales....................................................... 2,060 11,895 13,373 6,456 4,775
------ ------- ------- ------ ------
Gross profit........................................................ 1,296 7,989 4,690 2,115 1,999
Royalty income, net................................................. -- 1,087 1,267 698 491
Operating expenses.................................................. 750 4,988 5,116 2,611 2,099
------ ------- ------- ------ ------
Earnings from operations............................................ 546 4,088 841 202 391
Interest expense.................................................... (24 ) (718) (532) (285) (234)
Other, net.......................................................... -- 4 3 -- 23
------ ------- ------- ------ ------
Earnings (loss) before income taxes and extraordinary item.......... 522 3,374 312 (83) 180
Income taxes........................................................ 13 51 4 (1) 3
------ ------- ------- ------ ------
Earnings (loss) before extraordinary item........................... 509 3,323 308 (82) 177
Extraordinary item, net of taxes (2)................................ -- -- 443 443 --
------ ------- ------- ------ ------
Net earnings........................................................ $ 509 $ 3,323 $ 751 $ 361 $ 177
====== ======= ======= ====== ======
SUPPLEMENTAL STATEMENT OF EARNINGS DATA (3):
Earnings before income taxes........................................ $ 522 $ 3,374 $ 762 $ 367 $ 180
Income taxes........................................................ 214 1,383 312 150 74
------ ------- ------- ------ ------
Net earnings........................................................ $ 308 $ 1,991 $ 450 $ 217 $ 106
====== ======= ======= ====== ======
Net earnings per share before extraordinary item.................... $ 0.07 $ --
Net earnings per share(2)........................................... 0.17 0.04
======= ======
Weighted average common shares outstanding(4)....................... 2,600 2,600
======= ======
</TABLE>
<TABLE>
<CAPTION>
JUNE 30, 1996
----------------------------------
DECEMBER 31, PRO FORMA
-------------------------- PRO AS
1993 1994 1995 ACTUAL FORMA(5) ADJUSTED(6)
------ ------ ------ ------ --------- -----------
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital....................................... $2,732 $3,226 $2,009 $1,765 $ 1,765 $14,749
Total assets.......................................... 5,246 11,457 7,412 5,665 5,665 18,649
Short-term borrowings................................. 1,543 4,277 3,056 1,702 1,702 1,702
Long-term note to shareholder of Skechers............. 2,024 3,225 2,062 2,263 -- --
Owners' equity........................................ 708 1,475 1,335 847 3,110 16,094
</TABLE>
- ---------------
(1) Reflects the period from November 1, 1993 (commencement of operations) to
December 31, 1993.
(2) Includes extraordinary gain of $443,000 net of income taxes of $7,000 for
the year ended December 31, 1995 and the six months ended June 30, 1995,
respectively, resulting from the acceleration of payment of a note. See Note
9 of Notes to Financial Statements.
(3) Reflects adjustments for Federal and state income taxes as if the Company
had been taxed as a "C" Corporation rather than an "S" Corporation.
(4) For information pertaining to the weighted average number of shares
outstanding, see Note 2 of Notes to Financial Statements.
(5) Gives effect to the Contribution Transaction as that term is defined herein.
See "Risk Factors -- Recently Formed Enterprise; the Contribution
Transaction" and "The Company."
(6) As adjusted to give effect to the sale of the Common Stock offered by the
Company hereby based upon an assumed initial public offering price of $11.00
per share. See "Use of Proceeds" and "Capitalization."
16
<PAGE> 18
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
The financial statements of the Company were prepared on the basis of the
historical operations of the Company as a division of Skechers. The Company
began its operations on November 1, 1993. Historical financial information
presented herein should be regarded solely as background information. References
herein to the Company refer to it as an operating division of Skechers. See Note
1 of Notes to Financial Statements. There can be no assurance that the results
of the Company as a division of Skechers are indicative of future results, which
may vary substantially and adversely from those shown herein.
Since its inception through the effective date of this offering, Skechers
conducted the operations of the Company as a division during which time Skechers
provided financing and administrative services (including human resource
administration, data processing, payroll, and finance and accounting) and
charged the division for such services through an intercompany allocation. The
financial statements included elsewhere herein reflect management's allocation
of certain expenses. The expenses allocated from Skechers are based on the
specific nature of the expense and/or formula which management believes fairly
allocated expenses to the Company. Management believes that such allocations for
corporate services and overhead are reasonable under the circumstances; however,
these allocations are not necessarily indicative of the costs and expenses that
would have resulted if the Company had been operated as a separate entity.
In 1995, the Company began to refocus strategically its efforts towards the
design and development of performance athletic footwear. Prior to that time, the
Company had not developed any athletic footwear products. The development of the
Company's performance athletic footwear line was not complete until the
conclusion of the six month period ended June 30, 1996 and sales of this line
did not commence until July 1996. The Company intends to expend additional
amounts on the development and marketing of its athletic footwear line. See
"Risk Factors -- Refocus of Business and New Product Introduction."
THE CONTRIBUTION TRANSACTION
On the effective date of this offering, Skechers will contribute to the
Company the Master License covering all products marketed and sold under the
Kani brand name and all assets relating to the ongoing footwear business
conducted by Skechers to the extent such assets are used by Skechers solely in
connection with the sale of products under the Kani brand name, together with
the rights to certain customer lists, in exchange for shares representing 100%
of the Common Stock of the Company. The Company will also assume all liabilities
associated with such contributed assets, whether known or unknown, excluding
amounts lent to Skechers by the Greenberg Family Trust, of which Robert
Greenberg, the Company's Chief Executive Officer, is a trustee. For financial
reporting purposes, such assets and liabilities will be recorded by the Company
at the carrying value of Skechers. The Company and Skechers will enter into the
Management Agreement effective as of the effective date of this offering under
which Skechers will provide various general and administrative services to the
Company, including, the services of the executive officers of the Company who
are also employees of Skechers, data processing, human resources administration,
finance and accounting, accounts receivable and collection, check processing,
payment of accounts payable, inventory control, and the use of its facilities.
Skechers will be obligated to provide these services for a period of not less
than five years; however, the Company may terminate the agreement at any time.
The Company will pay Skechers on a monthly basis for such services in an amount
equal to 15% of the Company's net sales for the preceding month. As a result of
the Contribution Transaction, a majority of the Company's equity capital will be
contributed by investors in this offering; however, such investors will only
hold approximately 35% of the outstanding equity of the Company. For a
description of certain pro forma financial information of the Company after the
Contribution Transaction, see "Certain Transactions -- The Contribution
Transaction" and "Pro Forma Financial Data."
17
<PAGE> 19
RESULTS OF OPERATIONS
The following table sets forth for the periods indicated, selected
information from the Company's results of operations as a percentage of net
sales.
<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS ENDED
DECEMBER 31, JUNE 30,
----------------------------- -----------------
1993(1) 1994 1995 1995 1996
----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C>
Net sales.................................. 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of sales............................ 61.4 59.8 74.0 75.3 70.5
----- ----- ----- ----- -----
Gross profit............................. 38.6 40.2 26.0 24.7 29.5
Royalty income, net........................ -- 5.5 7.0 8.1 7.2
Operating expenses:
General and administrative............... 11.9 17.3 19.1 20.0 21.0
Selling.................................. 10.1 7.4 8.6 10.1 9.2
Research and development................. 0.3 0.4 0.6 0.3 0.8
----- ----- ----- ----- -----
Earnings from operations.............. 16.3 20.6 4.7 2.4 5.8
Pro forma income taxes..................... 6.4 7.0 1.7 1.8 1.1
----- ----- ----- ----- -----
Pro forma net earnings..................... 9.2% 10.0% 2.5% 2.5% 1.6%
===== ===== ===== ===== =====
</TABLE>
- ---------------
(1) Reflects the period from November 1, 1993 (commencement of operations) to
December 31, 1993.
SIX MONTHS ENDED JUNE 30, 1996 COMPARED TO SIX MONTHS ENDED JUNE 30, 1995
Net Sales. Net sales decreased $1.8 million, or 20.9%, to $6.8 million for
the six months ended June 30, 1996 from $8.6 for the six months ended June 30,
1995 primarily due to the Company's change in strategic focus in 1995. In the
first six months of 1996, the Company's volume of footwear sales was down from
the comparable period of 1995 due to the following factors: (i) development of
the Company's performance athletic footwear line was not complete until the end
of June 1996 and sales of this line did not commence until July 1996 and (ii)
during the six month period ended June 30, 1995, the Company was in the process
of repositioning its product lines from high priced non-athletic footwear to
moderately priced casual, multi-purpose and performance athletic footwear. For
these reasons, the 1995 period included a high volume of close-out sales.
Cost of Sales. Cost of sales consists of freight costs, insurance, import
duties and the cost of footwear from the manufacturers. Cost of sales decreased
26.0% to $4.8 million for the six months ended June 30, 1996 from $6.5 million
for the six months ended June 30, 1995. The absolute dollar decrease in cost of
sales was due principally to the reduction in volume of footwear sold as
discussed above.
Gross Profit. The Company's gross profit margin increased to 29.5% as a
percentage of net sales for the six months ended June 30, 1996 compared to 24.7%
for the prior year period primarily from fewer pairs of shoes being sold at
closeout prices than the earlier comparative period.
Royalty Income. Royalty income decreased to $491,000 for the six months
ended June 30, 1996 compared to $698,000 for the six months ended June 30, 1995.
The Company receives royalty income based upon a percentage of sales of its
sublicensees. In the six months ended June 30, 1996, the Company's principal
sublicensee reported a reduction in sales volume due to the bankruptcy of one of
its major retail customers, Merry Go Round. The Company anticipates that
royalties received from its sublicensing operations may make an increased
contribution to the Company's financial performance if and when new sublicensees
are added and sales of sublicensed products expand, of which there can be no
assurance.
General and Administrative Expenses. General and administrative expenses
decreased 17.2% to $1.4 million for the six months ended June 30, 1996 from $1.7
million for the six months ended June 30, 1995. During both periods, general and
administrative expenses were calculated as a pro rata share of certain
18
<PAGE> 20
administrative costs based on relative assets and liabilities of the Company, as
a division of Skechers. The absolute dollar decrease in general and
administrative expenses in the six months ended June 30, 1996 was due
principally to the effect of applying the allocation formula to the reduced
volume of the Company's net sales as compared to those of Skechers. In the
future, pursuant to the Management Agreement, Skechers will provide the Company
with general and administrative services at a monthly fee of 15% of the
Company's net sales. See "-- The Contribution Transaction" and "Pro Forma
Financial Data."
Selling Expenses. Selling expenses generally include sales commissions and
incentives, advertising, promotions and tradeshows. Selling expenses decreased
to $622,000 for the six months ended June 30, 1996 from $864,000 for the six
months ended June 30, 1995, a 28.0% decrease, primarily due to the reduction in
footwear sales. Since the Company is introducing its new line of athletic
footwear, it is likely that selling expenses will dramatically increase as the
Company spends a substantial amount of the proceeds from the offering and from
product sales on promotion. During at least the first six months of 1997, net
sales will not likely be adequate to cover overall expenses in light of the
Company's advertising and promotional activities. To the extent net sales are
not adequate to cover such selling expenses, the Company will incur losses which
would have a material adverse effect on the Company's business, financial
condition and results of operations.
Research and Development Expenses. Research and development expenses
increased by 92.6% to $52,000 for the six months ended June 30, 1996 from
$27,000 for the six months ended June 30, 1995 primarily due to an increase in
the development of the Company's performance athletic footwear line. The Company
expects that research and development costs will increase in future periods due
to further development of the Company's performance athletic footwear line, and
to a lesser extent, development of the Company's other footwear lines such as
utility/multi-purpose footwear.
Pro Forma Income Taxes. Pro forma income taxes reflect adjustments for
Federal and state income taxes as if the Company had been taxed as a "C"
corporation rather than an "S" corporation. Pro forma income taxes have been
provided at 41% for Federal and state purposes.
YEAR ENDED DECEMBER 31, 1995 COMPARED TO YEAR ENDED DECEMBER 31, 1994
Net Sales. Net sales decreased by $1.8 million, or 9.2%, to $18.1 million
for the year ended December 31, 1995 from $19.9 million for the year ended
December 31, 1994. In the first six months of 1995, the Company repositioned its
product line offerings from high priced footwear to moderately priced casual,
multi-purpose and performance athletic footwear. As a result, net sales were
reduced as additional markdowns, discounts, and other promotional allowances
were made to reduce inventory lines. The effect was offset in part by increased
volume of pairs of shoes as compared to the prior period.
Cost of Sales. Although sales decreased in 1995 as compared to 1994, cost
of sales increased $1.5 million, or 12.4%, to $13.4 million for the year ended
December 31, 1995 from $11.9 million for the year ended December 31, 1994
primarily due to increase in volume of footwear sold.
Gross Profit. Gross profit decreased by $3.3 million, or 41.3%, to $4.7
million for the year ended December 31, 1995 from $8.0 million for the year
ended December 31, 1994. The decrease in gross profit was attributable to the
sales of a greater quantity of footwear sold at discounted prices.
Royalty Income. Royalty income increased by approximately $180,000, or
16.6%, to $1.3 million for the year ended December 31, 1995 from $1.1 million
for the year ended December 31, 1994. The increase was the result of
experiencing a full year of royalty income during 1995 since the Company did not
sublicense the Kani brand name until mid 1994.
General and Administrative Expenses. General and administrative expenses
remained relatively stable at $3.4 million for each of the years ended December
31, 1995 and 1994. As a percentage of net sales, general and administrative
expenses increased to 19.1% for the year ended December 31, 1995, from 17.3% for
the year ended December 31, 1994. During both periods, general and
administrative expenses were calculated as a pro rata share of certain
administrative costs based on relative assets and liabilities of the Company, as
a division of Skechers. In the future, pursuant to the Management Agreement,
Skechers will provide the
19
<PAGE> 21
Company with general and administrative services at a monthly fee of 15% of the
Company's net sales. See "-- The Contribution Transaction" and "Pro Forma
Financial Data."
Selling Expenses. Selling expenses increased 6.0% to $1.6 million for the
year ended December 31, 1995 from $1.5 million for the year ended December 31,
1994 primarily because the Company offered more commissions and incentives in
order to introduce new product offerings and to sell its discontinued footwear
products.
Research and Development Expenses. Research and development expenses
increased by $37,000, or 46.3%, to $117,000 for the year ended December 31, 1995
from $80,000 for the year ended December 31, 1994 primarily due to the Company's
refocus on its new performance athletic footwear products.
Pro Forma Income Taxes. Pro forma income taxes reflect adjustments for
Federal and state income taxes as if the Company had been taxed as a "C"
corporation rather than an "S" corporation. Pro forma income taxes have been
provided at 41% for Federal and state purposes.
YEAR ENDED DECEMBER 31, 1994 COMPARED TO YEAR ENDED DECEMBER 31, 1993
Net Sales. Net sales increased to $19.9 million for the year ended December
31, 1994 from $3.4 million for the year ended December 31, 1993. Since the
Company did not begin its operations until November 1, 1993, the increase was a
result of experiencing a full year of sales.
Cost of Sales. Cost of sales increased to $11.9 million for the year ended
December 31, 1994 from $2.1 million for the year ended December 31, 1993.
However, the cost of sales as a percentage of net sales decreased to 59.8% for
the year ended December 31, 1994 from 61.4% for the year ended December 31,
1993. The increase in absolute dollars was primarily due to the Company's first
full year of sales, while the decrease as a percentage of net sales was due to
higher sales levels.
Gross Profit. Gross profit increased $6.7 million to $8.0 million for the
year ended December 31, 1994 from $1.3 million for the year ended December 31,
1993 as a result of a full year of sales compared to two months of sales during
1993.
Royalty Income. Royalty income increased to $1.1 million for the year ended
December 31, 1994 from zero for the year ended December 31, 1993 as a result of
entering into the Master License with Karl Kani and then subsequently entering
into a sublicense agreement in 1994.
General and Administrative Expenses. General and administrative expenses
increased to $3.4 million for the year ended December 31, 1994 from $399,000 for
the year ended December 31, 1993 primarily due to the allocation of expenses of
a full year of sales as compared to expenses from two months of sales during
1993. During both periods, general and administrative expenses were calculated
as a pro rata share of certain administrative costs based on relative assets and
liabilities of the Company, as a division of Skechers. In the future, pursuant
to the Management Agreement, Skechers will provide the Company with general and
administrative services at a monthly of 15% of the Company's net sales. See
"-- The Contribution Transaction" and "Pro Forma Financial Data."
Selling Expenses. Selling expenses increased to $1.5 million for the year
ended December 31, 1994, from $340,000 for 1993. The increase was attributable
to the Company's first full year of sales in 1994.
Research and Development Expenses. Research and development expenses
increased from $11,000 for the year ended December 31, 1993 to $80,000 for the
year ended December 31, 1994, while, as a percentage of net sales, research and
development remained relatively stable at 0.3% for 1993 and 0.4% for 1994. The
increase in research and development expenses in absolute dollars was primarily
due to a full year of expenses.
Pro Forma Income Taxes. Pro forma income taxes reflect adjustments for
Federal and state income taxes as if the Company had been taxed as a "C"
corporation rather than an "S" corporation. Pro forma income taxes have been
provided at 41% for Federal and state purposes.
20
<PAGE> 22
LIQUIDITY AND CAPITAL RESOURCES
The Company's need for funds arises primarily from its working capital
requirements, including the need to finance its inventory and receivables. The
Company's working capital was $3.2 million and $2.0 million at December 31, 1994
and 1995, respectively, and $1.8 million at June 30, 1996. The decrease from
1994 to 1995 was primarily due to the reduction of the Company's inventory of
high priced footwear.
The Company has funded its operations primarily through loans from
shareholders and a line of credit from Heller. At December 31, 1994 and 1995 and
June 30, 1996, the Company was allocated $3.2 million, $2.1 million and $2.3
million, respectively, of an unsecured note payable to the Greenberg Family
Trust, of which Robert Greenberg, the Company's Chief Executive Officer, is a
trustee, by Skechers, bearing interest at 6%, 8% and 8%, respectively, due on
demand through October 1997. The Company recorded interest expense of
approximately $193,000, $165,000 and $91,000 related to this note during the
years ended December 31, 1994 and 1995 and the six months ended June 30, 1996,
respectively. Pursuant to the Contribution Transaction, this note will be
retained by Skechers. At December 31, 1994 and 1995 and June 30, 1996, the
Company was allocated $4.3 million, $3.1 million and $1.7 million, respectively,
of the outstanding balance on a line of credit between Skechers and Heller. The
line of credit contains certain restrictive covenants. At June 30, 1996,
Skechers was in violation of the working capital and net worth covenants of that
line of credit, as to which it received a written waiver. Skechers has informed
the Company that it is currently in compliance with the agreement. The line of
credit is based upon eligible accounts receivable and inventories of Skechers,
including the operations of the Company as a division of Skechers. The
borrowings bear interest at the rate of prime (8.5% at December 31, 1994, 1995
and June 30, 1996) plus 3/4%. The line expired on June 21, 1996 and has been
extended by the lender on a month-to-month basis. In October 1996, Skechers
entered into a letter of intent with Heller to govern the Heller Loan. The
Heller Loan will be a line of credit in an aggregate amount up to $12 million to
be provided to the Company at the time of the Contribution Transaction. The
Heller Loan will be secured by the Company's inventory and receivables and will
provide for the issuance of letters of credit up to a maximum of $5 million. The
Company will pay a 1% per annum fee on the maximum letter of credit amount plus
.50% multiplied by the revolving loan commitment less the maximum letter of
credit amount. The Company will also pay a floating rate of interest per annum
equal to a certain base rate plus .75%. The Heller Loan will contain restrictive
covenants.
Net cash provided by (used in) operating activities totaled $(3.8) million,
$215,000 and $2.9 million for the years ended December 31, 1993, 1994 and 1995,
respectively, and $2.1 million and $1.9 million for the six months ended June
30, 1995 and 1996, respectively. The increase of net cash provided by operating
activities during the years ended 1993, 1994, and 1995 was a result in the
increase in sales and the sale of the Company's moderately priced footwear
products. Furthermore, the Company's 1993 fiscal year reflected only two months
of operating results. The decrease from six months June 30, 1995 to 1996 was due
to the Company's emphasis on the development of its performance athletic
footwear with a similar reduction in sales of other footwear.
Net cash used in investing activities was $0, $1.6 million and $74,000 for
the years ended December 31, 1993, 1994 and 1995, respectively, and $46,000 and
$41,000 for the six months ended June 30, 1995 and 1996, respectively. Cash used
in investing activities reflects the licensing of trademarks as a result of
entering into the Master License with Karl Kani.
The Company believes that cash flows from operations and its financing
arrangements, along with the net proceeds from this offering should be
sufficient to provide the Company with the liquidity necessary to fund its
anticipated working capital and capital requirements for the next 12 months.
21
<PAGE> 23
NEWLY ISSUED ACCOUNTING STANDARDS
Effective January 1, 1996, the Company adopted Statement of Financial
Accounting Standards No. 121 ("FAS 121"), "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of," which was issued
in March 1995. This statement establishes accounting standards for the
recognition and measurement of impairment of long-lived assets, certain
identifiable intangibles and goodwill either to be held or disposed of. The
adoption of FAS 121 did not have a material impact on the Company's financial
position or results of operations.
Effective January 1, 1996, the Company adopted Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-Based Compensation" ("FAS
123") which was issued in October 1995. This statement encourages, but does not
require, a fair value based method of accounting for employee stock options or
similar equity instruments. FAS 123 allows an entity to elect to continue to
measure compensation cost under Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" ("APB No. 25"), but requires pro
forma disclosures of net earnings and earnings per share as if the fair value
based method of accounting had been applied. The Company has elected to continue
to measure compensation cost under APB No. 25, "Accounting for Stock Issued to
Employees," and will comply with the pro forma disclosure requirements in its
December 31, 1996 financial statements. The adoption of FAS 123 had no impact on
the Company's financial position or results of operations.
22
<PAGE> 24
KARL KANI DIVISION (A DIVISION OF SKECHERS U.S.A., INC.)
PRO FORMA FINANCIAL DATA
(UNAUDITED)
The following pro forma financial data have been prepared based on the
historical audited December 31, 1995 and unaudited six months ended June 30,
1996 financial statements of the Company. The unaudited pro forma financial data
give effect to the Contribution Transaction which will occur upon the effective
date of this offering. The pro forma adjustments are based upon currently
available information and upon certain assumptions that management believes to
be reasonable under the circumstances. This pro forma information is for
illustrative purposes only and should not be viewed as a projection or forecast
of the Company's performance for any future period. These pro forma balance
sheet and earnings statements do not purport to represent the Company's actual
financial position and results of operations had such events occurred on the
aforementioned dates. Such pro forma information should be read in conjunction
with the Company's financial statements and the notes relating hereto included
elsewhere herein.
On the effective date of this offering, Skechers will contribute to the
Company the Master License covering all products marketed and sold under the
Kani brand name and all assets relating to the ongoing footwear business
conducted by Skechers to the extent such assets are used by Skechers solely in
connection with the sale of products under the Kani brand name, together with
the rights to certain customer lists, in exchange for shares representing 100%
of the Common Stock of the Company. The Company will also assume all liabilities
associated with such contributed assets, whether known or unknown, excluding
amounts lent to Skechers by the Greenberg Family Trust, of which Robert
Greenberg, the Company's Chief Executive Officer, is a trustee. For financial
reporting purposes, such assets and liabilities will be recorded by the Company
at the carrying value of Skechers. The Company and Skechers will enter into the
Management Agreement effective as of the effective date of this offering under
which Skechers will provide various general and administrative services to the
Company, including the services of the executive officers of the Company who are
also employees of Skechers, data processing, human resources administration,
finance and accounting, accounts receivable and collection, check processing,
payment of accounts payable, inventory control, and the use of its facilities.
Skechers will be obligated to provide these services for a period of not less
than five years; however, the Company may terminate the agreement at any time.
The Company will pay Skechers on a monthly basis for such services in an amount
equal to 15% of the Company's net sales for the preceding month. The services
will be accounted for on the Company's financial statements as general and
administrative expenses, specifically excluding bad debt and design services.
As a result of the Contribution Transaction, a majority of the Company's
equity capital will be contributed by investors in this offering, however, such
investors will only hold approximately 35% of the outstanding equity of the
Company. Historical financial information presented herein and information under
the section entitled "Management's Discussion and Analysis of Financial
Condition and Results of Operations"' should be regarded solely as background
information and may not be indicative of future results which may vary
substantially and adversely from those shown herein.
Amounts reflect pro forma adjustments to historical results for (i) the
elimination of interest expense associated with the long term note payable to a
shareholder, which note will be retained by Skechers, and (ii) the change in
operating expenses associated with the allocation of certain expenses from
Skechers, the costs of which will be determined under the Management Agreement.
The historical results of operations reflect adjustments for Federal and state
income taxes as if the Company had been taxed as a "C" corporation rather than
an "S" corporation.
23
<PAGE> 25
KARL KANI DIVISION (A DIVISION OF SKECHERS U.S.A., INC.)
PRO FORMA FINANCIAL DATA
(UNAUDITED)
PRO FORMA BALANCE SHEET
<TABLE>
<CAPTION>
AS OF JUNE 30, 1996
-------------------------------------------
ADJUSTMENTS ADJUSTED
FOR THE FOR THE
CONTRIBUTION CONTRIBUTION
HISTORICAL TRANSACTION TRANSACTION
---------- ----------- ------------
(IN THOUSANDS)
<S> <C> <C> <C>
ASSETS
Trade accounts receivable................................. $2,077 $ -- $2,077
Other receivables......................................... 311 -- 311
---------- ------------
Total receivables............................... 2,388 -- 2,388
Inventories............................................... 1,932 -- 1,932
---------- ------------
Total current assets............................ 4,320 -- 4,320
Intangible assets......................................... 1,345 -- 1,345
---------- ----------- ------------
$5,665 $ -- $5,665
======= ========= =========
LIABILITIES AND OWNERS' EQUITY
Short-term borrowings..................................... $1,702 $ -- $1,702
Accounts payable and accrued expenses..................... 853 -- 853
---------- ----------- ------------
Total current liabilities....................... 2,555 -- 2,555
Long-term note to shareholder of Skechers................. 2,263 (2,263)(1) --
---------- ----------- ------------
Total liabilities............................... 4,818 (2,263) 2,555
---------- ----------- ------------
Division equity........................................... 847 (847)(1) --
Common stock.............................................. -- 3,110(1) 3,110
---------- ----------- ------------
$5,665 $ -- $5,665
======= ========= =========
</TABLE>
See accompanying notes to Pro Forma Financial Data.
24
<PAGE> 26
KARL KANI DIVISION (A DIVISION OF SKECHERS U.S.A., INC.)
PRO FORMA FINANCIAL DATA
(UNAUDITED)
PRO FORMA STATEMENT OF EARNINGS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1995
------------------------------------------------
ADJUSTMENTS ADJUSTED
FOR THE FOR THE
CONTRIBUTION CONTRIBUTION
HISTORICAL TRANSACTION TRANSACTION
---------- ------------ ------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C>
Net sales............................................ $ 18,063 $ -- $ 18,063
Cost of sales........................................ 13,373 -- 13,373
------- ------- -------
Gross profit......................................... 4,690 -- 4,690
Royalty income, net.................................. 1,267 -- 1,267
Operating expenses................................... 5,116 240(2) 5,356
------- ------- -------
Earnings from operations............................. 841 (240) 601
Interest expense..................................... (532) 165(1) (367)
Other, net........................................... 3 -- 3
------- ------- -------
Earnings before income taxes......................... 312 (75) 237
Income taxes......................................... 128 (31) 97
------- ------- -------
Net earnings......................................... $ 184 $ (44) $ 140
======= ======= =======
Net earnings per share............................... $ 0.07 $ .05
Weighted average common shares outstanding........... 2,600 2,600
</TABLE>
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30, 1996
------------------------------------------------
ADJUSTMENTS ADJUSTED
FOR THE FOR THE
CONTRIBUTION CONTRIBUTION
HISTORICAL TRANSACTION TRANSACTION
---------- ------------ ------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C>
Net sales............................................ $ 6,774 $ -- $ 6,774
Cost of sales........................................ 4,775 -- 4,775
------- ------- -------
Gross profit......................................... 1,999 -- 1,999
Royalty income, net.................................. 491 -- 491
Operating expenses................................... 2,099 197(2) 2,296
------- ------- -------
Earnings from operations............................. 391 (197) 194
Interest expense..................................... (234) 91(1) (143)
Other, net........................................... 23 -- 23
------- ------- -------
Earnings before income taxes......................... 180 (106) 74
Income taxes......................................... 74 (44) 30
------- ------- -------
Net earnings......................................... $ 106 $ (62) $ 44
======= ======= =======
Net earnings per share............................... $ 0.04 $ .02
Weighted average common shares outstanding........... 2,600 2,600
</TABLE>
See accompanying notes to Pro Forma Financial Data.
25
<PAGE> 27
NOTES TO PRO FORMA FINANCIAL DATA
(UNAUDITED)
(1) Reflects the elimination of the long term note payable to a shareholder of
Skechers which note will not be transferred pursuant to the Contribution
Transaction (converted to Division Equity) and the related interest costs
associated with such debt.
(2) Reflects the change in general and administrative costs associated with the
allocation of certain expenses from Skechers, the costs of which will be
determined under the Management Agreement at 15% of the Company's net sales.
26
<PAGE> 28
BUSINESS
GENERAL
Kani, Inc. is a recently-formed company that has the exclusive right to
market and sell products under the "Kani" brand name pursuant to the Master
License. The Company designs, develops, markets, and distributes footwear
bearing the Kani brand name, and selectively sublicenses the Kani brand name to
manufacturers of other products, principally apparel, which are designed by Karl
Kani. The Company receives income from the sale of its footwear products, and
royalty income from the sale by sublicensees of apparel products bearing the
Kani brand name. Prior to this offering, the Company operated as a division of
Skechers. The operations of Kani include certain ongoing operations contributed
to the Company by Skechers. See "The Company."
The Company's footwear lines consist of performance athletic footwear,
street athletic footwear, utility/multi-purpose footwear, sandals and casual
footwear and children's footwear. The Company recently refocused its footwear
efforts on the athletic footwear market where the Company seeks to extend
further the Kani brand name from the apparel industry into footwear. The
Company's footwear is developed by its design team, manufactured by independent
contract manufacturers outside the United States and marketed by the Company
through salespersons and product promotions.
The Company sublicenses the Kani brand name to provide for the manufacture
and distribution of various types of apparel and merchandise in the United
States and foreign markets. The Company sublicenses its trademarks for the
purpose of enhancing the Kani image by widening the range and distribution of
Kani products without requiring the Company to make a significant capital
investment or incur significant operating expenses. Generally, the Company
receives an initial royalty payment when it grants a sublicense and receives
monthly royalty payments based on the sublicensee's net sales of products
covered by the sublicense, provided the sublicensee maintains certain minimum
net sales. For the year ended December 31, 1995 and the six months ended June
30, 1996, net royalty income totaled approximately $1.3 million and $491,000,
respectively.
The Company's objective is to build brand name loyalty to the Kani brand
name and become a leading footwear and apparel resource serving the contemporary
urban market. The Company's overall strategy focuses on the enhancement of the
Kani brand image and the maximization of the manufacture and sale of Kani
products. To achieve its objective, the Company's strategies include (i)
focusing on the athletic footwear market by developing and marketing its new
line of performance athletic footwear, (ii) increasing brand name recognition
and enhancing the Kani image, (iii) leveraging its management and design
expertise, (iv) selectively sublicensing the Kani brand name, (v) continuously
developing and introducing innovative footwear products, and (vi) expanding
domestic and international distribution.
INDUSTRY OVERVIEW
Footwear. According to the United States Bureau of Economic Analysis, the
1995 domestic retail market for footwear was approximately $36 billion, which
represents a 29% increase between 1985 and 1995, of which approximately $11.4
billion represented athletic footwear. The Company's current primary focus is on
the sale of athletic footwear. Sportstyle, a sporting goods industry magazine,
reported that Kani brand shoes ranked 22nd in domestic athletic footwear sales
for 1995.
According to an industry report, in 1994, 80% of all athletic shoes were
purchased for purposes other than sports and exercise. The Company believes that
consumers' athletic footwear purchases are based largely upon style and brand
name recognition and are influenced by advertising and athletic endorsements.
Unique and identifying features create brand awareness among consumers and allow
favorable reputations to be transferred to new products. The Company believes
that once consumers build loyalties to brands, they are likely to stay with
them.
The Company believes that the utility/multi-purpose footwear market,
consisting primarily of boots, shoes and sandals for outdoor recreational
activities such as hiking and casual wear, is driven by consumer
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demand for highly functional footwear that is rugged and durable as well as
fashionable, and by consumer preferences and lifestyles that include more
outdoor and recreational activities.
Apparel. According to the United States Bureau of Economic Analysis, from
1985 to 1995, domestic consumer spending on men's clothing increased
approximately 47% with consumers spending approximately $76 billion domestically
on men's clothing in 1995. Companies such as Tommy Hilfiger, Ralph Lauren,
Nautica, Guess, Inc.? and others have demonstrated that strong brand image in
the apparel industry allows expansion and distribution to new markets such as
eyewear, watches, fragrances and other apparel accessories. The Company believes
it can leverage its success utilizing the Kani brand name in the apparel
industry to expand into other target markets.
STRATEGY
The Company's strategy focuses on the enhancement of the Kani brand image
and the maximization of the manufacture and sale of Kani products. The following
are the key elements of the Company's strategy.
Focus on Athletic Footwear. The Company's current primary
footwear focus is on the athletic footwear market where the Company
seeks to extend further the Kani brand name from the apparel industry
into footwear. From late 1993 to 1995 the Company built the Kani brand
name by selectively sublicensing the Kani brand name for the
manufacture of apparel products and focusing its efforts in the
utility/multi-purpose and casual footwear market. Since July 1995, the
Company has strategically refocused its footwear efforts towards the
production of athletic footwear, primarily high performance basketball
shoes aimed at a younger urban audience. This refocus is reflected in
Kani's new performance athletic footwear line which was first marketed
in early 1996 with results expected in the third quarter of 1996. The
Company believes that this strategic focus and the introduction of
high performance athletic basketball footwear such as Kani Ball should
significantly broaden the Company's customer base, further diversify
the Company's product lines and boost profitability.
Increase Brand Name Recognition and Enhance the Kani Image. The
Company believes that enhancement of its brand name image is critical
to its success and that significant opportunities exist to leverage
the Company's brand image and reputation for style, quality and
performance to capture market share in new, related footwear and
apparel categories and other products. The Company intends to
accomplish this goal through innovative and effective advertising
campaigns, strategic marketing efforts to targeted customers and
selective sublicensing arrangements to manufacturers and distributors
of products that compliment existing Kani product offerings and expand
distribution to new markets. For example, the Company intends to use a
portion of the proceeds of this offering to secure athletic
endorsements for its high performance athletic footwear. Furthermore,
substantial proceeds will be utilized to increase the promotion of
Kani products through magazines, television and print advertising, to
augment with current advertising in such popular magazines such as
Vibe, The Source and GQ.
Leverage Management and Design Expertise. The Company's
management and design team consists of persons who are highly
experienced in the footwear and apparel industry. The Company has
successfully brought together Karl Kani, a nationally recognized
clothing designer, with Robert Greenberg, the founder of L.A. Gear and
its past President and Chairman. Karl Kani's current firm, Karl Kani
Infinity, ranks No. 25 on the 1995 Black Enterprise Industrial/Service
100 list and was recently named Black Enterprise Company of the Year.
The Company's apparel line is exclusively designed by Karl Kani and
his design team, and he has approval rights of the Company's footwear
design and promotion. Robert Greenberg, the Company's Chief Executive
Officer, was largely responsible for L.A. Gear's growth in sales from
$36 million in 1986, to over $900 million in 1990, and co-founded
Skechers, together with Michael Greenberg, the Company's President.
Since the inception of Skechers in 1992, the Company's management team
has been responsible for Skechers' growth in sales from $10.9 million
in 1993 to over $100 million in 1995. The Company believes this
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core group translates into an effective and efficient management and design
team with proven abilities to recognize and respond to emerging consumer
trends and demands.
Selectively Sublicense Kani Brand Name and Tradebrands. The
Company believes that selectively sublicensing the Kani brand name to
apparel manufacturers broadens and enhances the Kani image without
requiring the Company to make significant capital investments or incur
significant operating expenses which would be required if it conducted
its own manufacturing operations. Leveraging off the Company's growing
reputation for fashion-forward designs and high-quality products, the
Company intends to continue to sublicense selectively the Kani brand
name for use on clothing and accessories. The Company anticipates that
royalties from its sublicensing operations may make an increasing
contribution to the Company's financial performance if and when new
sublicenses are added and sales of sublicensed products expand.
New Product Introduction. The Company intends to develop
continuously and introduce innovative footwear products that promote
the Kani image and incorporate distinctive fabrics, styles and colors
and dependable construction to appeal to customers who are looking for
"cutting-edge" footwear trends. The Company believes the introduction
of additional products, such as its performance athletic footwear,
Kani Ball, which is offered in the Company's 1996 product offerings,
and the development of other high-performance basketball and athletic
footwear, should broaden the Company's customer base and further
diversify the Company's product lines. The Company pursues this
strategy by reinterpreting its existing products and developing new
products with short production runs so as to allow it to introduce
frequent product updates incorporating emerging fashion trends.
The Company also intends further to implement this strategy by
increasing its product development and marketing efforts on women's
and children's footwear. The Company has expanded its footwear
offerings by translating its popular adult athletic and athleisure
styles into smaller sizes for children without the attendant costs
involved in designing and developing products.
Expand Domestic and International Distribution. The Company
believes significant growth opportunities exist within its current
national account base and intends to grow this base through a
broadened product line in an attempt to increase the number of retail
customers and the number of units sold through each store. The
Company's current focus on athletic footwear has been effected through
distribution to athletic footwear stores, specialty retailers and
upscale department stores who market products that are consistent with
the Company's standards and that provide a high level of customer
service and expertise. The Company plans to continue to pursue this
strategy by opening additional "concept shops" which focus exclusively
on the distribution of Kani products within department stores and
specialty retail stores. The Company currently has "concept shops" in
Marshall Fields in Chicago and in Macy's in each of Manhattan and
Brooklyn, New York, and is currently negotiating to establish
additional shops with a major southeast department chain. The Company
is also seeking to capitalize on international markets opportunities
where the Company believes that many of its international target
customers similarly identify with the lifestyles of their counterparts
in the United States. The Company's international distributor base
currently consists of Australia and Switzerland, and the Company
recently entered into a distribution agreement with Achilles
Corporation, with Mitsubishi Corporation ("Mitsubishi") as the import
agent, to be the Company's sole distributor in Japan. See "-- Sales
and Marketing."
PRODUCTS
The Company's products, including those which are sold by sublicensees of
the Kani brand name, are divided into two broad categories -- footwear
(athletic, utility/multi-purpose and casual shoes) and apparel. The Company's
footwear is developed by its design team while Karl Kani has the ability to
approve all footwear designs. The Company designs and develops all of its
footwear products, and manufactures them through independent contract
manufacturers located primarily in China, Macau, Korea, Mexico, Romania and
Taiwan. The footwear products are marketed by the Company through sales persons
and product
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promotions. The Company's footwear sales were approximately $18.1 million and
$6.8 million for the year ended December 31, 1995 and six months ended June 30,
1996, respectively. The Company does not currently manufacture any apparel. All
of its apparel sales are made by sublicensees of the Kani brand name under the
Master License. Karl Kani is the exclusive designer of all such apparel. See
"-- Licensing." Royalty income recognized under sublicense agreements
represented 7.0% and 7.2% of total sales for the year ended December 31, 1995
and the six months ended June 30, 1996, respectively.
FOOTWEAR
The Company currently offers athletic footwear, consisting of performance
and street athletic footwear, utility/multi-purpose footwear consisting of boots
and leather shoes with lug soles for outdoor activities, and casual footwear
consisting of sandals and casual dress footwear. Commencing in 1995, the Company
strategically refocused its product design and development and marketing efforts
in the area of performance athletic footwear.
Performance Athletic Footwear. The Company's "Kani Sport" line of
performance athletic footwear consists of fashion forward, sport specific styles
that are built technically correct while creating a Kani identification and feel
by virtue of its design and fabrication. The Company's "Kani Ball," a line of
fashion forward performance basketball shoes designed for the young contemporary
market features innovative styling and lightweight midsole and solid rubber
outsole. The Company has targeted as its primary customer base the more serious
basketball player who seeks a high performance athletic shoe and the more casual
recreational player or contemporary youth who places greater emphasis on styling
and comfort. The Company believes these shoes are attractive to the athletic
community and also to the young contemporary market where shoes are chosen as a
fashion accessory to complement casual or urban-style clothing.
Kani Ball footwear is offered in a variety of color combinations, including
black/white, navy/white and natural/black, and are offered in a selection of
heights. These styles feature phylon cushioning with rubber outsoles and pivot
points, advanced lacing systems, interior cushioning and anatomically correct
footbeds. Each style features the Kani logo prominently displayed on the tongue
and ankle and incorporates nylon lace loops, double lacing systems, stirrup
tongues and an insole comfort system. The performance basketball shoes are
currently offered at domestic retail prices ranging from $65.00 to $90.00 per
pair.
In addition to the Kani Ball line of footwear, the Company intends to
introduce "Kani-Trainer," a collection of cross training styles for the
multi-sport market, and "Kani-Run," a collection of running shoes. It is
anticipated that these new footwear lines will incorporate new upper designs and
a variety of fabrications, colors and treatments that will promote the Kani
trade name.
In August 1996, Skechers entered into a contract with John Wallace of the
National Basketball Association's New York Knicks pursuant to which Mr. Wallace
will endorse the Company's products, make personal appearances, appear in
product promotion, including television commercials, and wear the Company's
basketball shoes and apparel as permitted by the rules of the National
Basketball Association. In connection with this agreement, the Company plans to
introduce two signature footwear products that will be endorsed by Mr. Wallace.
The term of the contract ends on October 31, 1999, with a right to renew.
Pursuant to Contribution Transaction, this contract will be assigned to the
Company.
Street Athletic Footwear. These athletic inspired shoes are developed for
casual wear that are not sport specific. Street athletic shoes are characterized
by detailed rear and tongue pull tabs, cutting-edge lacing patterns and sturdy
rubber soles. These athletic shoes are geared towards the fashion conscious by
incorporating innovative design and appearance. Fabrications such as canvas,
nubuk and suede leathers, combined with outsoles molded in rubber, or
vulcanized, allow for a casual lightweight construction. The Company's street
athletic footwear is currently offered at domestic retail prices ranging from
$45.00 to $65.00 per pair.
Utility/Multi-Purpose Footwear. Utility/multi-purpose footwear consists of
hiking silhouette boots, work-boot inspired designs and street rugged casual
boots. The boots are either full-leather utility boots or logger boots and
leather shoes with lug soles, that are geared towards "street hiking." Goodyear
welting, a
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stitching process for attaching the sole to the shoe is recognized for its
durable construction and adds to the rugged industrial appearance. The outsoles
of the utility/multi-purpose footwear line define the "Kani Boot look" ranging
from aggressive lug profiles to large smooth bottoms. The utility/multi-purpose
line of footwear is currently offered at domestic retail prices ranging from
$60.00 to $110.00 per pair.
Casual Footwear. The Company's casual footwear primarily consists of
sandals and casual shoes. The Company offers three different styles of sandals.
The sandals have a sturdy construction made of either stylish leather or nubuk
with metal hardware, and are designed to provide a higher level of foot support
than more traditional sandals, as they are primarily designed for "street
hiking" in an urban environment. The Company's casual dress shoes consist
predominantly of unisex low and high top canvas and leather shoes and are
complimented by updated fashion-oriented selections and styles incorporating
cutting-edge fashion features. These shoes are designed to be more casual than
standard business attire, thus being appropriate for business "casual days." The
Company's sandals and casual dress footwear can be worn as everyday shoes or
with fashionable clothing. This line of footwear is currently offered at
domestic retail prices ranging from $40.00 to $110.00 per pair.
Children's Footwear. The Company offers a variety of Kani Kids footwear
designed for infants, young boys and pre-teens. These shoes are designed exactly
like their adult counterparts but in "takedown" versions, thus maintaining the
integrity of the product in the premium leathers, hardware and outsoles. The
result is a range of products including boots, shoes and sneakers that reflect
the Kani level of design and quality. The Kani Kids footwear is currently
offered at domestic retail prices ranging from $35.00 to $65.00 per pair.
APPAREL
In addition to footwear, the Company also selectively sublicenses the Kani
brand name and logo to independent apparel manufacturers. The Company receives a
royalty on sales made by these independent manufacturers on apparel bearing the
Kani brand name. See "-- Licensing." Karl Kani is responsible for all design
work in connection with the apparel lines and sublicensees are responsible for
the manufacture and/or sales of the products. Consistent with the Company's
image conscious strategy, the Company believes apparel and accessories serve to
heighten awareness of the Kani brand name.
Apparel products include contemporary jeans and other casual wear for the
youth conscious market. The Company markets basic and fashion apparel designed
with urban flair including jeans, pants, t-shirts, jackets and shirts for men.
The Company believes it has earned a reputation in the apparel industry as an
innovator in the development of new urban styles. These products are currently
offered at domestic retail prices generally ranging from $22.00 to $120.00 per
unit.
The Company regularly adjusts its product mix to meet changing consumer
preferences, although basic styles that do not require significant design or
production changes are carried from collection to collection. In addition, the
Company frequently introduces more fashion oriented styles with new colors or
fits among its basic products. Through the use of related styles, color schemes
and fabrics, the consumer is able to coordinate pieces from each individual line
of apparel marketed by the Company.
DESIGN AND DEVELOPMENT
The Company believes that its product success is related to its ability to
recognize trends in the footwear and apparel markets and to anticipate
consumers' ever-evolving preferences. The Company's design and development team
consists of experienced design personnel in the apparel industries. Karl Kani is
the Company's principal designer and is directly responsible for the design of
all apparel and accessories bearing the Kani brand name. In addition, Karl Kani
has the right to approve the character, quality, price point and advertising of
products bearing the Kani brand name.
The Company's efforts to balance fashion and function are guided by current
worldwide lifestyles and the demands of everyday life. As a result, the Company
has focused its footwear and apparel towards a contemporary urban audience. Karl
Kani's design concepts are tested through consultations with the Company's sales
staff and retail buyers who provide input. This not only allows the Company to
measure
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consumer reaction to the Company's latest designs but provide the Company with
an opportunity to establish and foster personal relationships with customers.
The Company's and Karl Kani's design teams also coordinate with overseas
manufacturers to ensure that goods can be produced in a timely and
cost-efficient manner, with a level of quality that the Company's customers have
come to expect.
CUSTOMERS
The Company's primary customers are department stores and specialty
retailers. The following sets forth a partial listing of some of the Company's
primary customers for the six months ended June 30, 1996.
<TABLE>
<S> <C>
Bob's Stores Dillards
Famous Footwear Footaction U.S.A.
Footlocker J.C. Penney Co.
Macy's Nordstrom
Ross Wild Pair
Sears Roebuck and Co.
</TABLE>
SALES AND MARKETING
Sales. The Company's six person sales force coordinates with customers to
determine the inventory level and product mix that should be carried in each
store to help retail sell-through and enhance the customers' product margins.
The Company has also focused on the establishment of concept shops within some
of its department and specialty retail store customers. A concept shop is an
exclusive selling area within a department store that sells the Company's
products using Kani signage and fixtures. Typically, the Company will provide
the displays for the concept shop and is required to maintain sufficient sales
in order to continue the concept shop in the store. There are currently concept
shops in Marshall Fields in its State Street store in Chicago and in Macy's in
each of Manhattan and Brooklyn, New York. The Company is currently negotiating
to establish additional concept shops with a major southeastern department
chain. The Company believes that the use of concept shops aids in maintaining
effective relationships with its customers and provides input for future design
and development.
In addition to its own sales force, the Company also utilizes existing
sales channels established by Skechers. Management believes that the utilization
of Skechers' sales and marketing network affords the Company access to an
established distribution channel without the attendant overhead associated with
its establishment. If requested by the Company, certain selected members of the
Skechers' sales force offer the Company's products in certain target areas.
Thereafter, if demand for the Company's products in the target territory
dictates, the Company may introduce a full-time in-house salesperson in the
subject territory. Skechers utilizes a 30-person national sales force and
continues to expand worldwide through an extensive network of local distribution
arrangements. Domestically, Skechers offers its products through more than 1,000
wholesale customers, including Nordstroms, Dillards and J.C. Penney department
stores and Footlocker, Athletes Foot, Journeys, Wild Pair and Jarman.
Internationally, the Company's footwear products are offered through
distributors. In February 1996, Achilles Corporation, with Mitsubishi as the
import agent, agreed to be the exclusive distributor of Kani footwear in Japan.
The term of the agreement is for one year, which will automatically be extended
for an additional two year period provided certain conditions are met. The
Company intends to expand its own international sales efforts while continuing
to utilize the international sales operations of Skechers to enhance
international distribution.
Marketing. The Company has developed an aggressive national advertising and
promotion strategy in order to create and expand consumer awareness for the Kani
brand name. The Company's advertising campaigns are designed to increase brand
awareness among consumers and to emphasize the features of the Company's
footwear and apparel products that distinguish it from competitors. Toward that
end, the Company's senior management devotes significant resources to shaping
the Company's image through an aggressive advertising program designed to offer
its products to a contemporary multi-ethnic audience through
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television and print media. For example, the Company has recently secured an
athletic endorsement with John Wallace of the New York Knicks and intends to use
a portion of these proceeds of this offering to secure additional athletic
endorsements for its athletic footwear, which the Company believes is an
important factor in consumer athletic footwear purchasing decisions.
Furthermore, proceeds will be utilized to increase the promotion of Kani
products through magazines, television and print advertising, to augment with
current advertising in such popular magazines such as The Source, Vibe, and GQ.
In addition, the Company participates in major footwear trade shows each year,
and prides itself on having innovative and dynamic exhibits on the show floor.
LICENSING
The Company does not currently manufacture any apparel, but derives royalty
income from sales by its sublicensees of apparel and other products bearing the
Kani brand name. The Company has the exclusive, worldwide right to use the
registered trademarks Kani, Karl Kani, and Karl Kani Jeans, and the proprietary
designs associated therewith, for all goods and services of every kind and
description, except for any restaurant, bar and/or nightclub in which Karl Kani
owns a majority interest.
The Company sublicenses the use of its trademarks for the purpose of
enhancing the Kani image by widening the range and distribution of Kani products
without requiring the Company to make a significant capital investment or incur
significant operating expenses. Generally, the Company receives an initial
royalty payment when it grants a sublicense and receives monthly royalty
payments based on the sublicensee's net sales of products covered by the
sublicense, provided the sublicensee maintains certain minimum net sales.
Pursuant to the terms of the Master License, for net sales of footwear by
the Company, and apparel and other products by its sublicensees bearing the Kani
brand name up to $250 million during a year, the Company pays Karl Kani a
quarterly royalty of 2% of all net sales of the licensed and sublicensed
products. Thereafter, the Company pays a royalty of 1 1/2% of footwear, apparel
and other products bearing the Kani brand name. The Company also pays a design
fee to Karl Kani to maintain a design studio for the design of apparel and other
merchandise bearing the Kani brand name, the amount of which is $65,000 per
month unless adjusted up or down pursuant to the terms of the Master License. If
the Master License is transferred to an entity in which Robert Greenberg and/or
his family does not own a majority interest, then the entity must spend a
minimum of 8% of its annual net sales on advertising and promotion of products
bearing the Kani brand name. Prior to any such transfer, there are no
promotional spending requirements. The Master License has a term that ends on
December 31, 2039 with renewals for additional 10 year periods provided that
certain conditions are met. The Company has licensed and sublicensed the use of
its trademarks since 1994. The Company is also obligated to pay to Karl Kani an
additional 2% of net sales of apparel products bearing the Kani brand name sold
pursuant to a sublicense with Collingwood Partners, Ltd. ("Collingwood"), but
only in excess of $16 million and up to $50 million of net sales by Collingwood
of such products. See "Certain Transactions -- Other Transactions."
To maintain the Kani image, the Company monitors its sublicensees and
approves all products sublicensed. In evaluating a potential sublicensee, the
Company considers the experience, financial stability, manufacturing performance
and marketing ability of the proposed sublicensee and evaluates the
marketability of the proposed products and the compatibility of the proposed
products with other products of the Company. The Company monitors product
design, development, merchandising and marketing and maintains periodic contact
with sublicensees to ensure consistency with the Company's overall marketing,
merchandising and design strategies, and to ensure uniformity and quality
control. Pursuant to the Master License, Karl Kani provides design services for
all products bearing the Kani trade name which is then manufactured and
distributed by a sublicensee. All products, advertising, promotional and
packaging materials must be approved in advance by the Company.
As of October 15, 1996, there were two sublicensees of the Kani, Karl Kani
and Karl Kani Jeans trademarks, one of which is currently generating royalties.
Collingwood has an exclusive license to manufacture, promote, market, sell and
distribute certain menswear products, bearing the Kani brand name, in the United
States and its territories. The term of the sublicense ends on December 31,
2039. For the years ended
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December 31, 1994 and 1995 and the six months ended June 30, 1996, $1.1 million,
$1.3 million and $491,000, respectively, in royalties have been paid to the
Company under the sublicense agreement with Collingwood. "See Certain
Transactions -- Other Transactions." The Company recently entered into a
sublicense agreement with Mitsubishi pursuant to which Mitsubishi will
exclusively manufacture, promote, market, sell and distribute certain men's and
women's apparel and accessories, bearing the Kani brand name, in Japan. The term
of the sublicense ends on December 31, 1999.
MANUFACTURING
The Company's footwear products are manufactured by independent contract
manufacturers located in China, Macau, Korea, Mexico, Romania and Taiwan. The
Company does not currently manufacture any apparel products, but derives royalty
income from sales by sublicensees of apparel and other products bearing the Kani
brand name. The Company utilizes its footwear manufacturers on a purchase order
basis and uses several different manufacturers at any given time. The Company
avoids long-term manufacturing agreements with its independent manufacturers in
order to foster competition among the manufacturers, thereby obtaining
competitive prices while ensuring quality and service.
All manufacturing is performed in accordance with detailed specifications
furnished by the Company, subject to strict quality control standards, with a
right to reject products that do not meet specifications. The Company's future
success will depend, in large part, on maintaining such relationships and
developing new relationships.
COMPETITION
Competition in the footwear and apparel industries is intense. The
Company's products compete with other branded products within their product
category as well as with private label products sold by retailers, including
some of the Company's customers. In the footwear industry, the Company's
performance athletic shoes compete with brands of athletic footwear offered by
companies such as Nike, Inc., Reebok International Ltd, Fila Ltd., Adidas AG and
L.A. Gear. The Company's utility/multi-purpose footwear and casual shoes compete
with footwear offered by companies such as The Timberland Company, Doc Martins,
Kenneth Cole, Frye Boot, Wolverine World Wide, Inc. and Skechers, the Company's
parent. With respect to its apparel line, the Company's principal competition
include brand name manufacturers such as Tommy Hilfiger, Ralph Lauren, Nautica
and Guess, Inc.? In varying degrees, depending on the product category involved,
the Company competes on the basis of style, price, quality, comfort and brand
name prestige and recognition, among other considerations. The Company also
competes with numerous manufacturers, importers and distributors of footwear and
apparel for the limited shelf-space available for the display of such products
to the consumer. Moreover, the general availability of contract manufacturing
capacity allows ease of access by new market entrants. Many of the Company's
competitors are larger, have achieved greater recognition for their brand names,
have captured greater market share and/or have substantially greater financial,
distribution, marketing and other resources than the Company.
PROPRIETARY RIGHTS
The Company relies on copyright and trade secret protection, non-disclosure
agreements and sublicensing arrangements to establish, protect and enforce
proprietary rights in its products. Despite the Company's efforts to safeguard
and maintain its proprietary rights, there can be no assurance that the Company
will be successful.
There can be no assurance that third parties will not assert intellectual
property claims against the Company in the future. Such claims, if proved, could
materially and adversely affect the Company's business and results of
operations. In addition, although any such claims may ultimately prove to be
without merit, the necessary management attention to and legal costs associated
with litigation or other resolution of such claims could materially and
adversely affect the Company's business and results of operations.
The laws of certain foreign countries do not protect intellectual property
rights to the same extent or in the same manner as do the laws of the United
States. Although the Company continues to implement
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protective measures and intends to defend its proprietary rights vigorously,
there can be no assurance that these efforts will be successful.
EMPLOYEES
On the effective date of this offering, it is expected that the Company
will have approximately seven employees, all of whom are currently employees of
Skechers. None of these employees are represented by a labor union. The Company
believes its relationship with its employees is good.
FACILITIES
The Company has historically been allocated a portion of the rent expense
incurred by Skechers. Skechers leases its facilities under operating lease
agreements expiring through February 1998. Rent expense was historically
allocated to the Company from Skechers based on a formula which management
believes fairly allocates expenses associated with rent to the Company. Rent
expense allocated to the Company was $14,000, $138,000, $213,000, and $99,000
from November 1, 1993 to December 31, 1993, the years ended December 31, 1994
and 1995, and the six months ended June 30, 1996, respectively.
Upon completion of the offering, the Company's headquarters will be located
in Manhattan Beach, California. The Company will utilize space for its
headquarters from Skechers, pursuant to the Management Agreement that provides
for Skechers to make available to the Company sufficient space as reasonably
required by the Company to conduct its operations. Management believes that
these facilities are adequate for the Company's foreseeable needs.
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MANAGEMENT
DIRECTORS, EXECUTIVE OFFICERS AND KEY EMPLOYEES
The directors, executive officers and key employees of the Company are as
follows:
<TABLE>
<CAPTION>
DIRECTORS AND
EXECUTIVE OFFICERS
- ------------------
NAME AGE POSITION
- ------------------ --- --------------------------------------------------
<S> <C> <C>
Robert Greenberg 56 Chief Executive Officer and Chairman of the Board
Michael Greenberg 33 President and Director
David Weinberg 46 Chief Financial Officer, Secretary and Director
Carl Williams 28 Director
F. Paul Garrier 30 Director
</TABLE>
ROBERT GREENBERG has served as Chief Executive Officer and Chairman of the
Board of the Company since its inception. Prior to his involvement with the
Company, Mr. Greenberg co-founded Skechers in 1992 and continues to serve as its
Chairman of the Board. From 1979 to 1992, Mr. Greenberg was the Chairman and
President of L.A. Gear, an athletic footwear and apparel company.
MICHAEL GREENBERG has been the President and a Director of the Company
since its inception. Since May 1992, Mr. Greenberg has been President and was
the co-founder of Skechers. From 1989 to 1992 he was the National Sales Manager
of L.A. Gear. Previously, from 1986 to 1989 he was the Regional Sales Manager of
L.A. Gear for the west coast and from 1984 through 1986 he was an account
representative for the west coast at L.A. Gear.
DAVID WEINBERG has been the Chief Financial Officer, Secretary and a
Director of the Company since its inception. Since September 1992, Mr. Weinberg
has been Chief Financial Officer of Skechers. From June 1989 to September 1992,
Mr. Weinberg was Vice President Finance for L.A. Gear.
CARL WILLIAMS, A.K.A., KARL KANI, has been a Director of the Company since
its inception. Since 1993, Mr. Kani has been President of Karl Kani Infinity
which designs casual clothing with urban styling for the youth market. From 1990
to 1993, he was a designer at Threads for Life which also designed casual wear.
F. PAUL GARRIER has been a Director of the Company since its inception.
From July 1989 to August 1993, Mr. Garrier was an analyst at Salomon Brothers
Inc. in their Investment Banking department. From October 1993 to July 1995, he
was a tax consultant at Coopers & Lybrand L.L.P. where he provided tax planning
to individuals and corporations, and since July 1995 he has been President of
K.M.G. Consulting providing financial, tax and management consulting.
KEY EMPLOYEES
DWAYNE EDWARDS has been the Chief Designer of the Company since September
1993. Since September 1993, he has been Head Designer of Skechers for the Karl
Kani footwear division. From November 1992 to September 1993, Mr. Edwards was
Design Director at MVP Footwear which produced athletic shoes and from January
1989 to October 1992 he was a designer at L.A. Gear.
HARVEY BERNSTEIN has been the Vice President of Sales of the Company since
it commenced operations. Since 1994, Mr. Bernstein has been National Sales
Manager for Skechers, managing the sales of the Karl Kani division. From 1992 to
1994 he was a sales representative for Skechers for the New York market and from
1990 to 1992 he held the same position at L.A. Gear.
All directors hold offices until the next annual meeting of shareholders
and the election and qualification of their successors, if any. Directors
currently receive no cash compensation for serving on Board of Directors other
than reimbursement of reasonable expenses incurred in attending meetings.
Directors are entitled to receive options to purchase shares of Common Stock
upon their election as a director and annually while they serve as director.
Officers are elected annually by the Board of Directors and serve at the
discretion of the Board. The Company will pay an annual director's fee to each
independent director equal to $12,000 and will
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reimburse such director's costs and expenses for attending meetings. Two
independent directors will be appointed by the Company prior to the effective
date of the offering. Robert Greenberg is the father of Michael Greenberg.
On the effective date of the offering, the Company expects to have in place
"key man" life insurance in the amount of $2,000,000 on the lives of each of
Robert Greenberg and Karl Kani.
COMMITTEES OF THE BOARD OF DIRECTORS
On the effective date of this offering, the Company will have an Audit
Committee and a Compensation Committee. The Board of Directors will not have a
Nominating Committee and the functions of such a committee are performed by the
Board of Directors.
Audit Committee. The functions of the Audit Committee will include
recommendations to the Board of Directors with respect to the engagement of the
Company's independent certified public accountants and the review of the scope
and effect of the audit engagement.
Compensation Committee. The function of the Compensation Committee will be
to make recommendations to the Board with respect to compensation of management
employees. The Compensation Committee will also administer plans and programs
relating to employee benefits, incentives and compensation.
EXECUTIVE COMPENSATION
None of the executive officers of the Company who also remain employed by
Skechers will be paid compensation by the Company for services rendered; all of
the Company's general and administrative services, which includes services of
executive officers of the Company also employed by Skechers will be provided and
paid for by Skechers under the Management Agreement.
Each of the Company's executive officers who will also remain employed by
Skechers have each agreed to devote as much of his time to the operations of the
Company as is reasonably necessary. The Company does not believe that its
operations will be adversely affected as a result of these relationships.
STOCK OPTIONS
The Company will adopt a Stock Option, Deferred Stock and Restricted Stock
Plan (the "Stock Option Plan"), which provides for the grant of qualified
incentive stock options ("ISOs") that meet the requirements of Section 422 of
the Internal Revenue Code (the "Code"), stock options not so qualified ("NQSOs")
and deferred stock, restricted stock, stock appreciation rights and limited
stock appreciation rights awards ("Awards"). The Stock Option Plan will be
administered by the Compensation Committee (the "Committee") of the Board of
Directors. ISOs may be granted to the officers and key employees of the Company.
NQSOs and Awards may be granted to the directors, officers, key employees and
consultants or advisors of the Company, its parent or any of its subsidiaries.
The exercise price for any option granted under the Stock Option Plan may not be
less than 100% (or 110% in the case of ISOs granted to an employee who is deemed
to own in excess of 10% of the outstanding Common Stock) of the fair market
value of the shares of Common Stock at the time the option is granted. The
purpose of the Stock Option Plan is to provide a means of performance-based
compensation in order to attract and retain qualified personnel and to provide
an incentive to those whose job performance affects the Company. The Stock
Option Plan will become effective on the effective date of the offering.
Subject to anti-dilution provisions for stock splits, stock dividends and
similar events, the Stock Option Plan authorizes the grant of options to
purchase, and Awards of, an aggregate of up to 400,000 shares of the Company's
Common Stock. If an option granted under the Stock Option Plan expires or
terminates, or an Award is forfeited, the shares subject to any unexercised
portion of such option or Award will again become available for the issuance of
further options or Awards under the Stock Option Plan.
Under the Stock Option Plan, the Company may make loans available to stock
option holders, subject to the Committee's approval, in connection with the
exercise of stock options granted under the Stock Option
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Plan. If shares of Common Stock are pledged as collateral for such indebtedness,
such shares may be returned to the Company in satisfaction of such indebtedness.
If so returned, such shares shall again be available for issuance in connection
with future stock options and Awards under the Stock Option Plan.
Unless previously terminated by the Board of Directors, no options or
Awards may be granted under the Stock Option Plan 10 years after its effective
date.
Options granted under the Stock Option Plan will become exercisable in
accordance with the terms of the grant made by the Committee. Awards will be
subject to the terms and restrictions of the award made by the Committee. The
Committee has discretionary authority to select participants from among eligible
persons and to determine at the time an option or Award is granted and, in the
case of options, whether it is intended to be an ISO or a NQSO, and when and in
what increments shares covered by the option may be purchased.
Under current law, ISOs may not be granted to any individual who is not
also an officer or employee of the Company.
Each option must terminate no more than 10 years from the date it is
granted (or 5 years in the case of ISOs granted to an employee who is deemed to
own in excess of 10% of the combined voting power of the Company's outstanding
Common Stock). Options may be granted on terms providing for exercise in whole
or in part at any time or times during their respective terms, or only in
specified percentages at stated time periods or intervals during the term of the
option, as determined by the Committee.
The exercise price of any option granted under the Stock Option Plan is
payable in full (1) in cash, (2) by surrender of shares of the Company's Common
Stock already owned by the option holder having a market value equal to the
aggregate exercise price of all shares to be purchased including, in the case of
the exercise of NQSOs, restricted stock subject to an Award under the Stock
Option Plan, (3) by cancellation of indebtedness owed by the Company to the
optionholder, (4) by a full recourse promissory note executed by the
optionholder or (5) by any combination of the foregoing. The terms of any
promissory note may be changed from time to time by the Board of Directors to
comply with applicable United States Internal Revenue Service or Securities and
Exchange Commission (the "Commission") regulations or other relevant
pronouncements.
The Board of Directors may from time to time revise or amend the Stock
Option Plan, and may suspend or discontinue it at any time. However, no such
revision or amendment may impair the rights of any participant under any
outstanding Award without his consent or may, without shareholder approval,
increase the number of shares subject to the Stock Option Plan or decrease the
exercise price of a stock option to less than 100% of fair market value on the
date of grant (with the exception of adjustments resulting from changes in
capitalization), materially modify the class of participants eligible to receive
options or Awards under the Stock Option Plan, materially increase the benefits
accruing to participants under the Stock Option Plan or extend the maximum
option term under the Stock Option Plan.
401(K) PLAN
On the effective date of the offering, the Company will commence
participation in the Skechers contributory retirement plan ("401(k) Plan") for
all full time employees with at least six months of service, which is designed
to be tax deferred in accordance with the provisions of Section 401(k) of the
Code. The 401(k) Plan provides that each participant may contribute up to 15% of
his or her salary, and the Company may contribute to the participant's plan
account at the end of each plan year. Under the 401(k) Plan, employees may elect
to enroll in January or July of each year, provided that they have been employed
for at least six months.
Subject to the rules for maintaining the tax status of the 401(k) Plan, an
additional Company contribution may be made at the discretion of the Company, as
employer profit sharing contributions. The Company will also make qualified
non-elective contributions, in an amount determined by the Company, only to
non-highly compensated employees in the ratio in which each employee's
compensation for the plan year bears to the total compensation of all
participants for such plan year.
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LIMITATIONS ON LIABILITY AND INDEMNIFICATION MATTERS
The Company's Articles of Incorporation provide that to the fullest extent
permitted by the California Business Corporation Act, the Company's directors
will not be liable for monetary damages to the Company or its shareholders. The
Company's Bylaws provide that the Company will indemnify its directors and, by
action of the Board of Directors, may indemnify its officers, employees and
other agents of the Company to the fullest extent permitted by applicable law,
except for any legal proceeding that is initiated by such directors, officers,
employees or agents without authorization from the Board of Directors. The
Company has entered into indemnification agreements with its officers and
directors containing provisions which require the Company, among other things,
to indemnify the officers and directors against certain liabilities that may
arise by reason of their status or service as directors or officers (other than
liabilities arising from willful misconduct of a culpable nature) and to advance
their expense incurred as a result of any proceeding against them as to which
they could be indemnified.
At the present time, there is no pending litigation or proceeding involving
a director, officer, employee or other agent of the Company in which
indemnification would be required or permitted. The Company is not aware of any
threatened litigation or proceeding that may result in a claim for such
indemnification.
CERTAIN TRANSACTIONS
THE CONTRIBUTION TRANSACTION
On the effective date of this offering, Skechers will contribute to the
Company the Master License covering all products marketed and sold under the
Kani brand name and all assets relating to the ongoing footwear business
conducted by Skechers to the extent such assets are used by Skechers solely in
connection with the sale of products under the Kani brand name, together with
the rights to certain customer lists, in exchange for shares representing 100%
of the Common Stock of the Company. The Company will also assume all liabilities
associated with such contributed assets, whether known or unknown, excluding
amounts lent to Skechers by the Greenberg Family Trust, of which Robert
Greenberg, the Company's Chief Executive Officer, is a trustee. For financial
reporting purposes, such assets and liabilities will be recorded at the carrying
value of Skechers. As a result of the Contribution Transaction, a majority of
the Company's equity capital will be contributed by investors in this offering;
however, such investors will only hold approximately 35% of the outstanding
equity of the Company. Historical financial information presented herein and
information under the section entitled "Management's Discussion and Analysis of
Financial Condition and Results of Operations" should be regarded solely as
background information and may not be indicative of future results which may
vary substantially and adversely from those shown herein. For a description of
certain pro forma financial information of the Company after the Contribution
Transaction, see "Pro Forma Financial Data."
ARRANGEMENTS AND TRANSACTIONS WITH SKECHERS
The Company and Skechers will enter into agreements for the purpose of
defining their ongoing, relationships. These agreements have been developed in
the context of a parent/subsidiary relationship and therefore are not the result
of arm's-length negotiations between independent parties. It is the intention of
the Company and Skechers that such agreements and the transactions provided for
therein, taken as a whole, are fair to both parties, while continuing certain
mutually beneficial arrangements. However, there can be no assurance that each
of such agreements, or the transactions provided for therein, have been effected
on terms at least as favorable to the Company as could have been obtained from
unaffiliated third parties.
Additional or modified arrangements and transactions may be entered into by
the Company, Skechers, or any of their respective affiliates, after completion
of this offering. It is the intention of the Company and Skechers that any
agreements and transactions, taken as a whole, between the Company, on the one
hand, and Skechers or its affiliates, on the other hand, are fair to both
parties. Any such future arrangements and transactions will be determined
through negotiation between the Company and Skechers, and it is possible that
conflicts of interest will be involved. To minimize or avoid potential conflicts
of interest, the unaffiliated directors of the Company, consisting of directors
independent of the Company, and Skechers and their
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affiliates, must independently approve all transactions by and between the
Company and Skechers. However, there can be no assurance that each of such
transactions or agreements or arrangements entered into will be on terms at
least as favorable to the Company as could have been obtained from unaffiliated
third parties.
The following is a summary of certain arrangements and transactions between
the Company and Skechers.
TAX AGREEMENT
The Company will enter into an agreement (the "Tax Agreement") effective as
of the effective date of this offering with Skechers for the purposes of (1)
providing for filing certain tax returns, (2) allocating certain tax liability
and (3) establishing procedures for certain audits and contests of tax
liability.
Under the Tax Agreement, Skechers will agree to indemnify and hold the
Company harmless from any tax liability attributable to periods ending on or
before the effective date of this offering in excess of such taxes as the
Company has already paid or provided for. For periods ending after the effective
date of this offering, the Company will pay its tax liability directly to the
appropriate taxing authorities. To the extent (1) there are audit adjustments
that result in a tax detriment to the Company or (2) the Company incurs losses
that are carried back to an earlier year and any such adjustment described in
(1) or loss described in (2) results in a tax benefit to Skechers or its
affiliates, then Skechers will pay to the Company an amount equal to the tax
benefit as that benefit is realized. Skechers will also agree to indemnify the
Company for any liability associated with the Contribution Transaction or any
liability arising out of the filing of a Federal tax return by Skechers or any
tax return filed with any state or local counterpart. To the extent there are
audit adjustments that result in any tax detriment to Skechers or any of its
affiliates with respect to any period ending on or before the effective date of
this offering, and, as a result thereof, the Company for any taxable period
after the effective date of this offering realizes a tax benefit, then the
Company shall pay to Skechers the amount of such benefit at such time or times
as the Company actually realizes such benefit.
Skechers will generally control audits and administrative and judicial
proceedings which are brought with respect to periods ending on or before the
effective date of this offering, although Skechers cannot compromise or settle
any issue that increases the Company's liability without first obtaining the
consent of the Company. The Company will generally control all other audits and
administrative and judicial proceedings.
MANAGEMENT AGREEMENT
The Company, as a division of Skechers, was historically allocated expenses
of various general and administrative services provided by Skechers. The costs
of such services were not directly attributable to the operation of the Company
as a division and primarily included general corporate overhead, such as
accounting and cash management services, human resources and other
administrative functions. These expenses were calculated as a pro rata share of
certain administrative costs based on relative assets and liabilities of the
division, which management believed was a reasonable method of allocation. The
allocations of expenses for the years ended December 31, 1993, 1994, and 1995
and the six months ended June 30, 1996 were $399,000, $3.4 million, $3.4 million
and $1.4 million, respectively.
The Company and Skechers will enter into the Management Agreement effective
as of the effective date of this offering under which Skechers will continue to
provide various general and administrative services to the Company, including
the services of the executive officers of the Company who are also employees of
Skechers, data processing, human resource administration, finance and
accounting, inventory control, accounts receivable and collection, check
processing, payment of accounts payable and the use of its facilities. See "Risk
Factors -- Reliance on and Conflict of Interest with Skechers."
Skechers will charge a fee for the services which it will provide under the
Management Agreement based upon a percentage of net sales of the Company. The
services to be provided by Skechers to the Company will be accounted for on the
Company's financial statements as general and administrative expenses,
specifically excluding bad debt and design services. The Company will reimburse
Skechers on a monthly basis for the services in an amount equal to 15% of the
Company's net sales for the preceding month. The Management Agreement will have
an initial term that ends on December 31, 2001 and is renewable annually
thereafter. The
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Company may terminate the Management Agreement, in whole or in part, upon one
month's written notice. As part of the services to be provided under the
Management Agreement, Skechers will provide the Company, if requested, with
insurance coverage and self insurance programs, including health insurance. The
charge to the Company for coverage will be based upon a pro rata portion of the
costs to Skechers for the various policies. Management believes that the terms
of the Management Agreement are as favorable to the Company as could be obtained
from independent third parties.
OTHER TRANSACTIONS
The Company has historically been allocated a portion of the rent expense
incurred by Skechers. Skechers leases its facilities under operating lease
agreements expiring through February 1998. Skechers also leases certain
equipment and automobiles under operating lease agreements expiring at various
dates through 1998. Rent expense was historically allocated to the Company from
Skechers based on a formula which management believes fairly allocated expenses
associated with rent and leases to the Company. Rent expense allocated to the
Company was $14,000, $138,000, $213,000 and $99,000 for the period from November
1, 1993 (commencement of operations) to December 31, 1993, the years ended
December 31, 1994 and 1995 and the six months ended June 30, 1996, respectively.
In March 1994, Skechers entered into the Master License with Karl Kani to
pay certain royalties and design costs for Kani licensed products. See
"Business -- Licensing." The design fee for the years ended December 31, 1994,
1995 and the six months ended June 30, 1996 was $585,000, $780,000, and
$390,000, respectively. Royalties of $264,000, $668,000 and $290,000 for the
years ended December 31, 1994 and 1995 and the six months ended June 30, 1996,
respectively, were paid by the Company to Karl Kani pursuant to the Master
License. The Master License has a term that ends on December 31, 2039 with
renewals for additional 10 year periods provided that certain conditions are
met.
The Company entered into a sublicense agreement, dated March 30, 1994, with
Collingwood which expires on May 31, 2009. Collingwood is owned by the family of
Gil N. Schwartzberg, which is also the beneficial owner of 5% of the capital
stock of Skechers. For the years ended December 31, 1994 and 1995 and the six
months ended June 30, 1996, $1.1 million, $1.3 million and $491,000,
respectively, in royalties have been paid to the Company under the sublicense
agreement. See "Business -- Licensing."
At December 31, 1994 and 1995, and June 30, 1996, the Company was allocated
amounts owed under an unsecured note payable to the Greenberg Family Trust, of
which Robert Greenberg, the Company's Chief Executive, is a trustee. The note
and all unpaid interest will be retained by Skechers pursuant to the
Contribution Transaction. See Note 4 of Notes to Financial Statements. The
Company was allocated interest expense of approximately $10,000, $193,000,
$165,000 and $91,000 for the years ended December 31, 1993, 1994, 1995 and the
six months ended June 30, 1996, respectively. The note bore interest at 6%, 8%
and 8% at December 31, 1994 and 1995 and at June 30, 1996, respectively, and is
due on demand. The Greenberg Family Trust has agreed not to call the note prior
to October 1, 1997. At June 30, 1996, $2,263,000 was outstanding under the
allocated amount of the note.
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PRINCIPAL SHAREHOLDERS
The following table sets forth certain information known to the Company
with respect to beneficial ownership of the Company's Common Stock as of
September 30, 1996, after giving effect to the Contribution Transaction and as
adjusted to reflect the sale of Common Stock being offered hereby, by Skechers,
the Company's sole shareholder. No officer or director of the Company or any
person beneficially owns any shares of the Company's Common Stock. Skechers has,
to the knowledge of the Company, sole voting and investment power with respect
to the shares which it beneficially owns.
<TABLE>
<CAPTION>
PERCENTAGE OF SHARES
BENEFICIALLY
NUMBER OF OWNED
SHARES ------------------------
BENEFICIALLY BEFORE AFTER
NAME OF BENEFICIAL OWNER(1) OWNED OFFERING OFFERING(2)
-------------------------------------------- ------------ -------- -----------
<S> <C> <C> <C>
Skechers U.S.A., Inc........................ 2,600,000 100% 65%
</TABLE>
- ---------------
(1) The address of Skechers is Skechers U.S.A., Inc. 228 Manhattan Beach Blvd.,
Suite 200, Manhattan Beach, CA 90266.
(2) Assuming no exercise of the Underwriters' over-allotment option and no
purchases in this offering by Skechers.
DESCRIPTION OF SECURITIES
Following the closing of the sale of the Common Stock offered hereby, the
authorized capital stock of the Company will consist of 25,000,000 shares of
Common Stock and 5,000,000 shares of Preferred Stock.
COMMON STOCK
There will be 4,000,000 shares of Common Stock outstanding after giving
effect to the sale of the shares of Common Stock offered hereby. The holders of
Common Stock are entitled to one vote per share on all matters to be voted on by
shareholders. Subject to preferences that may be applicable to any outstanding
Preferred Stock, if any, the holders of Common Stock are entitled to receive
ratably such dividends, if any, as may be declared from time to time by the
Board of Directors in its discretion out of funds legally available therefor.
See "Dividend Policy." In the event of a liquidation, dissolution or winding up
of the Company, the holders of Common Stock are entitled to share ratably in all
assets remaining after payment of liabilities, subject to prior rights of
Preferred Stock, if any, then outstanding. The Common Stock has no preemptive or
other subscription rights and there are no conversion rights or redemption or
sinking fund provisions with respect to such shares. All of the outstanding
shares of Common Stock are fully paid and nonassessable.
PREFERRED STOCK
The Company is authorized to issue up to 5,000,000 shares of undesignated
Preferred Stock. The Board of Directors will have the authority to issue the
undesignated Preferred Stock in one or more series and to determine the powers,
preferences and rights and the qualifications, limitations or restrictions
granted to or imposed upon any wholly unissued series of undesignated Preferred
Stock, as well as to fix the number of shares constituting any series and the
designations of such series, without any further vote or action by the
shareholders. The issuance of any Preferred Stock may have the effect of
delaying, deferring or preventing a change in control of the Company without
further action by the shareholders and may adversely affect the voting and other
rights of the holders of the Common Stock. As present, the Company has no plans
to issue any shares of Preferred Stock.
WARRANTS
At the closing of this offering, the Company will issue to the
Representative the Representative's Warrant to purchase for investment a maximum
of 140,000 shares of Common Stock. The Representative's Warrant
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will be exercisable for a four-year period commencing one year from the date of
this Prospectus. The exercise price of the Representative's Warrant will be
$13.20 per share (assuming an initial public offering price per share of
$11.00). The Representative's Warrant will contain anti-dilution provisions. The
Representative's Warrant does not entitle the Representative to any rights as
shareholders of the Company until such warrant is exercised and shares are
purchased thereunder. The Representative's Warrant and the shares of Common
Stock thereunder may not be offered for sale except in compliance with the
applicable provisions of the Securities Act. The Company has agreed that, if it
shall cause to be filed with the Commission either an amendment to the
Registration Statement of which this Prospectus is a part or a separate
registration statement, the Representative shall have the right during the
four-year period commencing on the date of this Prospectus to include in such
amendment or Registration Statement the Representative's Warrant and the shares
of Common Stock issuable upon its exercise at no expense to the Representative.
Additionally, the Company has agreed that, upon written request by a holder or
holders of 50% or more of the Representative's Warrant which is made during the
exercise period of the Representative's Warrant, the Company will, on two
separate occasions, register the Representative's Warrant and the shares of
Common Stock issuable upon exercise thereof. The initial such registration will
be at the Company's expense and the second registration will be at the expense
of the holder(s) of the Representative's Warrant.
TRANSFER AGENT AND REGISTRAR
The Transfer Agent and Registrar for the Common Stock is U.S. Stock
Transfer Corporation, Glendale, California.
SHARES ELIGIBLE FOR FUTURE SALE
Prior to this offering, there has been no public market for the Common
Stock of the Company. Future sales of substantial amounts of Common Stock in the
public market could materially adversely affect the market price of the Common
Stock. As described below, only a limited number of shares will be available for
sale shortly after this offering due to certain contractual and legal
restrictions on resale. Nevertheless, sale of substantial amounts of Common
Stock of the Company in the public market or the perception that such sales
could occur after such restrictions lapse could materially adversely affect the
prevailing market price and the ability of the Company to raise equity capital
in the future.
Upon completion of this offering, the Company will have outstanding
approximately 4,000,000 shares of Common Stock, assuming no exercise of the
Underwriters' over-allotment option and no exercise of outstanding options or
warrants. The 1,400,000 shares of Common Stock that are sold by the Company to
the public in this offering will be freely tradable without restriction under
the Securities Act, unless purchased by "affiliates" of the Company as that term
is defined in Rule 144 under the Securities Act.
The remaining 2,600,000 shares of Common Stock outstanding upon completion
of this offering will be "restricted securities" as that term is defined in Rule
144 under the Securities Act ("Restricted Shares"). Restricted Shares may be
sold in the public market only if registered or if they qualify for an exemption
from registration under Rule 144, 144(k) or 701 promulgated under the Securities
Act, which are summarized below. Sales of the Restricted Shares in the public
market, or the availability of such shares for sale, could materially adversely
affect the market price of the Common Stock. In general, under Rule 144, as
currently in effect, beginning 90 days after the date of this Prospectus, a
person (or persons whose shares are aggregated) who has beneficially owned
Restricted Shares for at least two years (including the holding period of any
prior owner other than an affiliate or the Company) would be entitled to sell
within any three month period a number of shares that does not exceed the
greater of (i) one percent of the number of shares of Common Stock then
outstanding (which will equal approximately 40,000 shares immediately after this
offering) or (ii) the average weekly trading volume of the Common Stock during
the four calendar weeks preceding the filing of notice of such sale. Sales under
Rule 144 are also subject to certain manner of sale provisions and notice
requirements and 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 three months preceding a sale and who has
beneficially owned the shares proposed to be sold for at least three
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years (including the holding period of any prior owner except an affiliate of
the Company), is entitled to sell such shares without complying with the manner
of sale, public information, volume limitation or notice provision of Rule 144.
Unless otherwise restricted, such "144(k) shares" may therefore be sold
immediately upon the completion of this offering.
Any employee, officer or director of or consultant to the Company who
purchased his or her shares pursuant to a written compensatory plan or contract
may be entitled to rely on the resale provisions of Rule 701. Rule 701 permits
affiliates of the Company to sell their Rule 701 shares under Rule 144 without
complying with the holding period requirements of Rule 144. Rule 701 further
provides that nonaffiliates may sell such shares in reliance on Rule 144 without
having to comply with the public information, volume limitation or notice
provision of Rule 144. In both cases, a holder of Rule 701 shares is required to
wait until 90 days after the date of this Prospectus before selling such shares.
The Securities and Exchange Commission has announced potential changes to Rules
144 and 701 which could result in shares becoming eligible for future sale in
the public markets earlier than indicated above, subject to the lock-up
agreements described below.
Each of Skechers, which holds all 2,600,000 Restricted Shares, and each of
the directors and officers of the Company have entered into a contractual
"lock-up" agreement providing that it will not offer, sell, contract to sell or
grant any option to purchase or otherwise dispose of the shares of stock owned
by it or that could be purchased by it through the exercise of options to
purchase stock of the Company, for a period of twelve (12) months after the date
of this Prospectus, without the prior written consent of Joseph Charles. Taking
into account the lock-up agreements and the restrictions of Rule 144 as
described above, the 2,600,000 Restricted Shares will be eligible for sale
beginning twenty-four (24) months after the date of this Prospectus.
The Company has agreed not to offer, issue, sell, contract to sell, grant
any option for the sale of, or otherwise dispose of, directly or indirectly, any
shares of Common Stock or any securities convertible into or exercisable or
exchangeable for Common Stock or any rights to acquire Common Stock for a period
of twelve (12) months from the date of this Prospectus without the prior written
consent of Joseph Charles, subject to certain exceptions.
The Company intends to file a registration statement on Form S-8 under the
Securities Act covering shares of Common Stock reserved for issuance under the
Stock Option Plan. Based on the number of shares reserved for issuance under
such Plan, such registration statement would cover 400,000 shares. Such
registration statement will automatically become effective upon filing.
Accordingly, shares registered under such registration statement will, subject
to Rule 144 volume limitations applicable to affiliates of the Company, be
available for sale in the open market, subject to vesting restrictions and the
lock-up agreements described above. See "Management -- Stock Options."
44
<PAGE> 46
UNDERWRITING
The Underwriters named below have agreed, subject to the terms and
conditions of the Underwriting Agreement between the Company and the
Underwriters, to purchase from the Company 1,400,000 shares of Common Stock. The
underwriting discount set forth on the cover page of this Prospectus will be
allowed to the Underwriters at the time of delivery to the Underwriters of the
shares so purchased.
<TABLE>
<CAPTION>
NUMBER OF SHARES
TO BE
NAME OF UNDERWRITER PURCHASED
------------------------------------------------------------- ----------------
<S> <C>
Joseph Charles & Associates, Inc. ...........................
---------
Total........................................................ 1,400,000
=========
</TABLE>
The Underwriters have advised the Company that they propose to offer the
shares of Common Stock to the public at an offering price of $ per
share and that the Underwriters may allow certain dealers who are members of the
National Association of Securities Dealers a concession of not in excess of
$ per share, of which not in excess of $ may be reallowed to
certain other dealers. After commencement of the offering, the public offering
price and concession may be changed.
The Company has granted to the Underwriters an option, exercisable during
the 60-day period from the date of this Prospectus, to purchase up to a maximum
of 210,000 additional shares on the same terms set forth above. The Underwriters
may exercise such rights only to satisfy over-allotment in the sale of the
shares.
The Company has agreed to pay to the Representative a non-accountable
expense equal to 2 1/2% of the total proceeds of the offering, or $
($ if the Underwriters exercise the over-allotment option in full). In
addition to the Underwriters' commission and the Representative's
non-accountable expense allowance, the Company is required to pay the costs of
qualifying the shares of Common Stock, under federal and state securities laws,
together with legal and accounting fees, printing and other costs in connection
with this offering, estimated to total approximately $1,300,000.
At the closing of this offering, the Company will issue to the
Representative the Representative's Warrant to purchase for investment a maximum
of 140,000 shares of Common Stock. The Representative's Warrant will be
exercisable for a four-year period commencing one year from the date of this
Prospectus. The exercise price of the Representative's Warrant will be $13.20
per share (assuming an initial public offering price of $11.00 per share). The
Representative's Warrant will not be transferable prior to its exercise date
except to officers or shareholders of the Representative and members of the
selling group and officers and partners thereof. The Representative's Warrant
will contain anti-dilution provisions. The Representative's Warrant does not
entitle the Representative to any rights as a shareholder of the Company until
such warrant is exercised and the shares of Common Stock are purchased
thereunder. The Representative's Warrant and the shares of Common Stock
thereunder may not be offered for sale except in compliance with the applicable
provisions of the Securities Act. The Company has agreed that, if it shall cause
to be filed with the Commission either an amendment to the Registration
Statement of which this Prospectus is a part or a separate registration
statement, the Representative shall have the right during the five-year period
commencing on the date of this Prospectus to include in such amendment or
Registration Statement the Representative's Warrant and the Company has agreed
that, upon written request by a holder or holders of 50% or more of the
Representative's Warrant which is made during the exercise period of the
Representative's Warrant, the Company will on two separate occasions, register
the Representative's Warrant and the shares of Common Stock issuable upon
exercise thereof. The initial such registration will be at the Company's expense
and the second which registration will be at the expense of the holder(s) of the
Representative's Warrant.
For the period during which the Representative's Warrant is exercisable,
the holder or holders will have the opportunity to profit from a rise in the
market value of the Company's Common Stock, with a resulting dilution in the
interests of the other shareholders of the Company. The holder or holders of the
Representative's Warrant can be expected to exercise it at a time when the
Company would, in all likelihood, be able to obtain any needed capital from an
offering of its unissued Common Stock on terms more favorable to the Company
than those provided for in the Representative's Warrant. Such facts may
materially adversely affect
45
<PAGE> 47
the terms on which the Company can obtain additional financing. To the extent
that the Representative realizes any gain from the resale of the
Representative's Warrant or the securities issuable thereunder, such gain may be
deemed additional underwriting compensation under the Securities Act.
The Company has agreed not to offer, issue, sell, contract to sell, grant
any option for the sale of, or otherwise dispose of, directly or indirectly, any
shares of Common Stock or any securities convertible into or exercisable or
exchangeable for Common Stock or any rights to acquire Common Stock for a period
of twelve (12) months from the date of this Prospectus without the prior written
consent of Joseph Charles, subject to certain exceptions.
Skechers, the holder of 2,600,000 shares of the Company's Common Stock,
which represents all shares outstanding immediately prior to this offering, and
each of the officers and directors of the Company have entered into a lock-up
agreement under which each of them agreed not to sell or dispose of any shares
owned by them prior to this offering, or subsequently acquired under any option,
warrant or convertible security owned prior to this offering, for a period of
twelve (12) months after the date of this Prospectus, without prior written
consent of Joseph Charles.
The Underwriting Agreement provides for reciprocal indemnification between
the Company and the Underwriters against certain liabilities in connection with
the Registration Statement, including liabilities under the Securities Act.
The Representative has advised the Company that the Underwriters do not
intend to confirm sales to any account over which they exercise discretionary
authority.
Prior to this offering, there has been no public market for the shares of
Common Stock. The initial public offering price has been negotiated between the
Company and the Representative. Among the factors considered in determining the
initial public offering price of the Common Stock, in addition to prevailing
market conditions, are estimates of the business potential and earning prospects
of the Company, an assessment of the Company's management and the consideration
of the above factors in relation to market valuation of companies in related
businesses.
LEGAL MATTERS
The validity of the Common Stock offered hereby will be passed upon for the
Company by Freshman, Marantz, Orlanski, Cooper & Klein, a law corporation,
Beverly Hills, California. Certain legal matters in connection with the offering
will be passed upon for the Underwriters by Troop Meisinger Steuber & Pasich,
LLP.
EXPERTS
The financial statements and schedule of Karl Kani Division (a division of
Skechers U.S.A., Inc.) as of December 31, 1994 and 1995, and for the period from
November 1, 1993 (commencement of operations) to December 31, 1993 and the
two-years ended December 31, 1995, included herein and elsewhere in the
Registration Statement, have been included herein and elsewhere in the
Registration Statement in reliance upon the reports 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 Commission a Registration Statement on Form
S-1 under the Securities Act with respect to the shares offered hereby. This
Prospectus, which constitutes a part of the Registration Statement, omits
certain of the information contained in the Registration Statement and the
exhibits and schedules thereto on file with the Commission pursuant to the
Securities Act and the rules and regulations of the Commission thereunder. For
further information with respect to the Company and the shares, reference is
made to the Registration Statement and the exhibits and schedules thereto. The
Registration Statement,
46
<PAGE> 48
including exhibits thereto, may be inspected and copied at the public reference
facilitates maintained by the Commission at Room 1024, Judiciary Plaza, 450
Fifth Street, N.W., Washington, D.C. 20549 and at the Commission's Regional
Offices at 75 Park Place, Room 1400, New York, New York 10007 and Northwestern
Atrium Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661 and
copies may be obtained at the prescribed rates from the Public Reference Section
of the Commission at its principal office in Washington, D.C. The Commission
maintains a web site that contains reports, proxy and information statements and
other information regarding companies that file electronically with the
Commission. The address of the site is http://www.sec.gov. Statements contained
in the Prospectus as to the contents of any contract of other document referred
to are not necessarily complete and in each instance reference is made to the
copy of such contract or other document filed as an exhibit to the Registration
Statement, each such statement being qualified in its entirety by such
reference.
47
<PAGE> 49
KARL KANI DIVISION
(A DIVISION OF SKECHERS U.S.A., INC.)
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Karl Kani division (a division of Skechers U.S.A., Inc.):
Independent Auditors' Report....................................................... F-2
Audited Financial Statements of the Karl Kani Division (a division of Skechers
U.S.A., Inc.):
Balance Sheets -- December 31, 1994 and 1995.................................... F-3
Statements of Earnings -- Period from November 1, 1993
(commencement of operations) to December 31, 1993 and the years
ended December 31, 1994 and 1995.............................................. F-4
Statements of Division Equity -- Period from November 1, 1993
(commencement of operations) to December 31, 1993 and the years
ended December 31, 1994 and 1995.............................................. F-5
Statements of Cash Flows -- Period from November 1, 1993
(commencement of operations) to December 31, 1993 and the years
ended December 31, 1994 and 1995.............................................. F-6
Notes to Financial Statements................................................... F-7
Unaudited Interim Condensed Financial Statements:
Condensed Balance Sheet -- June 30, 1996........................................ F-12
Condensed Statements of Earnings -- Six-month periods ended June 30, 1995 and
1996........................................................................... F-13
Condensed Statement of Division Equity -- Six-month period ended June 30,
1996........................................................................... F-14
Condensed Statements of Cash Flows -- Six-month periods ended June 30, 1995 and
1996........................................................................... F-15
Notes to Condensed Financial Statements......................................... F-16
</TABLE>
F-1
<PAGE> 50
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders
Skechers U.S.A., Inc.:
We have audited the accompanying balance sheets of Karl Kani Division (a
division of Skechers U.S.A., Inc.) as of December 31, 1994 and 1995 and the
related statements of earnings, division equity and cash flows for the period
from November 1, 1993 (commencement of operations) to December 31, 1993 and the
years ended December 31, 1994 and 1995. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Karl Kani Division as of
December 31, 1994 and 1995 and the results of its operations and its cash flows
for the period from November 1, 1993 (commencement of operations) to December
31, 1993 and for the years ended December 31, 1994 and 1995 in conformity with
generally accepted accounting principles.
Los Angeles, California KPMG PEAT MARWICK LLP
August 1, 1996
F-2
<PAGE> 51
KARL KANI DIVISION
(A DIVISION OF SKECHERS U.S.A., INC.)
BALANCE SHEETS
DECEMBER 31, 1994 AND 1995
<TABLE>
<CAPTION>
1994 1995
----------- ----------
<S> <C> <C>
ASSETS
Current assets:
Trade accounts receivable, less allowances for bad debts
and returns of $793,000 in 1994 and $350,000 in 1995........ $ 3,550,000 $3,148,000
Other receivables.............................................. 350,000 420,000
----------- ----------
Total receivables...................................... 3,900,000 3,568,000
Inventories.................................................... 5,885,000 2,452,000
Other assets, at cost.......................................... 198,000 4,000
----------- ----------
Total current assets................................... 9,983,000 6,024,000
Intangible assets, less applicable amortization of $119,000 in
1994 and $279,000 in 1995...................................... 1,474,000 1,388,000
----------- ----------
$11,457,000 $7,412,000
=========== ==========
LIABILITIES AND DIVISION EQUITY
Current liabilities:
Short-term borrowings (note 5)................................. $ 4,277,000 $3,056,000
Accounts payable and accrued expenses.......................... 2,469,000 959,000
Accrued interest on note to shareholder of Skechers (note 4)... 11,000 --
----------- ----------
Total current liabilities.............................. 6,757,000 4,015,000
Long-term note to shareholder of Skechers (note 4)............... 3,225,000 2,062,000
Commitments and subsequent events (notes 8 and 11)...............
----------- ----------
Total liabilities...................................... 9,982,000 6,077,000
Division equity.................................................. 1,475,000 1,335,000
----------- ----------
$11,457,000 $7,412,000
=========== ==========
</TABLE>
See accompanying notes to financial statements.
F-3
<PAGE> 52
KARL KANI DIVISION
(A DIVISION OF SKECHERS U.S.A., INC.)
STATEMENTS OF EARNINGS
PERIOD FROM NOVEMBER 1, 1993 (COMMENCEMENT OF OPERATIONS) TO
DECEMBER 31, 1993 AND THE YEARS ENDED DECEMBER 31, 1994 AND 1995
<TABLE>
<CAPTION>
1993 1994 1995
---------- ----------- -----------
<S> <C> <C> <C>
Net sales (note 7)................................. $3,356,000 $19,884,000 $18,063,000
Cost of sales...................................... 2,060,000 11,895,000 13,373,000
---------- ---------- ----------
Gross profit............................. 1,296,000 7,989,000 4,690,000
Royalty income, net (note 10)...................... -- 1,087,000 1,267,000
---------- ---------- ----------
1,296,000 9,076,000 5,957,000
---------- ---------- ----------
Operating expenses:
General and administrative....................... 399,000 3,439,000 3,442,000
Selling.......................................... 340,000 1,469,000 1,557,000
Research and development......................... 11,000 80,000 117,000
---------- ---------- ----------
750,000 4,988,000 5,116,000
---------- ---------- ----------
Earnings from operations................. 546,000 4,088,000 841,000
---------- ---------- ----------
Other income (expense):
Interest expense................................. (24,000) (718,000) (532,000)
Other, net....................................... -- 4,000 3,000
---------- ---------- ----------
(24,000) (714,000) (529,000)
---------- ---------- ----------
Earnings before income taxes and
extraordinary item..................... 522,000 3,374,000 312,000
Income taxes (note 6).............................. 13,000 51,000 4,000
---------- ---------- ----------
Earnings before extraordinary item....... 509,000 3,323,000 308,000
Extraordinary gain on forgiveness of debt, net of
income taxes of $7,000 (note 9).................. -- -- 443,000
---------- ---------- ----------
Net earnings.................................. $ 509,000 $ 3,323,000 $ 751,000
========== ========== ==========
Supplemental pro forma information:
Earnings before income taxes and extraordinary
item, as presented............................ $ 522,000 $ 3,374,000 $ 312,000
Extraordinary item............................... -- -- 450,000
---------- ---------- ----------
Total earnings before income taxes....... 522,000 3,374,000 762,000
---------- ---------- ----------
Pro forma provision for income taxes (unaudited):
Extraordinary item............................ -- -- 184,000
Operations.................................... 214,000 1,383,000 128,000
---------- ---------- ----------
Total pro forma income taxes............. 214,000 1,383,000 312,000
---------- ---------- ----------
Pro forma net earnings (unaudited)....... $ 308,000 $ 1,991,000 $ 450,000
========== ========== ==========
Pro forma net earnings per share before
extraordinary item (unaudited)................ $ .07
Pro forma net earnings per share (unaudited)..... .17
Weighted average common shares outstanding
(unaudited)................................... 2,600,000
==========
</TABLE>
See accompanying notes to financial statements.
F-4
<PAGE> 53
KARL KANI DIVISION
(A DIVISION OF SKECHERS U.S.A., INC.)
STATEMENTS OF DIVISION EQUITY
PERIOD FROM NOVEMBER 1, 1993 (COMMENCEMENT OF OPERATIONS) TO
DECEMBER 31, 1993 AND THE YEARS ENDED DECEMBER 31, 1994 AND 1995
<TABLE>
<CAPTION>
NET DIVISION EQUITY
-------------------
<S> <C>
Commencement of operations................................................ $ --
Net earnings.............................................................. 509,000
Intercompany distributions................................................ 199,000
----------
Balance at December 31, 1993.............................................. 708,000
Net earnings.............................................................. 3,323,000
Intercompany distributions................................................ (2,556,000)
----------
Balance at December 31, 1994.............................................. 1,475,000
Net earnings.............................................................. 751,000
Intercompany distributions................................................ (891,000)
----------
Balance at December 31, 1995.............................................. $ 1,335,000
==========
</TABLE>
See accompanying notes to financial statements.
F-5
<PAGE> 54
KARL KANI DIVISION
(A DIVISION OF SKECHERS U.S.A., INC.)
STATEMENTS OF CASH FLOWS
PERIOD FROM NOVEMBER 1, 1993 (COMMENCEMENT OF OPERATIONS) TO
DECEMBER 31, 1993 AND THE YEARS ENDED DECEMBER 31, 1994 AND 1995
<TABLE>
<CAPTION>
1993 1994 1995
----------- ----------- -----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net earnings...................................... $ 509,000 $ 3,323,000 $ 751,000
Adjustments to reconcile net earnings to net cash
provided by (used in) operating activities:
Depreciation and amortization.................. -- 119,000 159,000
Provision for bad debts and returns............ (135,000) (214,000) (193,000)
Forgiveness of debt............................ -- -- (450,000)
(Increase) decrease in assets:
Receivables.................................. (3,005,000) (546,000) 526,000
Inventories.................................. (2,103,000) (3,782,000) 3,433,000
Prepaid expenses and other current assets.... (3,000) (195,000) 194,000
Increase (decrease) in liabilities, accounts
payable and accrued expenses................. 971,000 1,510,000 (1,521,000)
----------- ----------- -----------
Net cash provided by (used in) operating
activities.............................. (3,766,000) 215,000 2,899,000
----------- ----------- -----------
Cash flows used in investing activities -- purchase
of trademarks..................................... -- (1,593,000) (74,000)
----------- ----------- -----------
Cash flows from financing activities:
Net proceeds (payments) from short-term
borrowings..................................... 1,543,000 2,733,000 (771,000)
Interdivision transfers........................... 199,000 (2,556,000) (891,000)
Net proceeds (payments) on long-term note to
shareholder of Skechers........................ 2,024,000 1,201,000 (1,163,000)
----------- ----------- -----------
Net cash provided by (used in) financing
activities.............................. 3,766,000 1,378,000 (2,825,000)
----------- ----------- -----------
Net increase (decrease) in cash and cash
balance................................. $ -- $ -- $ --
=========== =========== ===========
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest....................................... $ 2,000 $ 667,000 $ 531,000
Income taxes................................... 2,000 10,000 1,000
=========== =========== ===========
</TABLE>
See accompanying notes to financial statements.
F-6
<PAGE> 55
KARL KANI DIVISION
(A DIVISION OF SKECHERS U.S.A., INC.)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1995
(1) BASIS OF PRESENTATION
Karl Kani (Kani) is a division of Skechers U.S.A., Inc. (Skechers). These
financial statements include accounts of the Division on a stand-alone basis.
Kani designs, develops, markets and distributes sports and casual footwear.
Kani distributes its products through department stores, retailers and foreign
distributors. Additionally, Kani has licensing agreements for use of its name
and trademark.
Skechers does not maintain separate cash or equity accounts for its
operating divisions. Division equity represents the difference between
identifiable assets of Kani, less identifiable liabilities of Kani. All
remaining cash as of a financial statement date is included in Skechers'
accounts.
The statements of income and division equity include certain expenses
allocated from Skechers. These expenses have been allocated based on the
specific nature of the expense and/or a formula which management believes fairly
allocates expenses to Kani. Kani's management believes that such allocations for
corporate services and overhead are reasonable under the circumstances; however,
these allocations are not necessarily indicative of the costs and expenses that
would have resulted if Kani had been operated as a separate entity.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Revenue Recognition
Revenue is recognized upon shipment of product. Allowances for estimated
returns and discounts are provided when the related revenue is recorded.
Revenue from royalty agreements is recognized as earned, in accordance with
the specific terms of the license agreement.
Inventories
Inventories, principally finished goods, are stated at the lower of cost
(based on the first-in, first-out method) or market.
Income Taxes
Skechers has elected to be treated for Federal and certain state income tax
purposes as an S Corporation under Subchapter S of the Internal Revenue Code and
comparable state laws. As a result, the earnings of Skechers, including the Kani
division, have been included in the taxable income of the shareholders for
Federal and certain state income tax purposes, and Skechers has not been subject
to income tax on such earnings, other than California and other state franchise
taxes. Under the provisions of the California franchise tax law, S Corporation
earnings are assessed a 2.5% surtax for 1993 and 1.5% for 1994 and 1995, at the
corporate level and flow through to the shareholder to be taxed at the
individual level.
Income taxes have been provided as if Kani was a separate taxable entity
under the S Corporation provisions of the Internal Revenue Code. Kani accounts
for income taxes under the asset and liability method. 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 basis. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be
recovered or settled. The effect on deferred assets and liabilities of a change
in the tax rates is recognized in income in the period that includes the
enactment date.
F-7
<PAGE> 56
KARL KANI DIVISION
(A DIVISION OF SKECHERS U.S.A., INC.)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Depreciation and Amortization
All property and equipment is held by Skechers. Depreciation and
amortization expenses are allocated to Kani from Skechers based on a formula
which management believes fairly allocates expenses associated with property and
equipment used by Kani.
Intangible Assets
Intangible assets consist of trademarks, stated at cost, less applicable
amortization, provided on a straight-line basis over ten years. As part of an
ongoing review of the valuation of the intangible assets, management assesses
the carrying value of the intangible assets to determine if the facts and
circumstances suggest that they may be impaired. If this review indicates that
the intangibles will not be recoverable, as determined by a nondiscounted cash
flow over the remaining amortization period, the carrying value of the
intangibles would be reduced to its estimated fair market value.
Advertising Costs
Advertising costs are expensed as incurred the first time the advertising
takes place. Advertising expense for the period from November 1, 1993
(commencement of operations) to December 31, 1993 and the years ended December
31, 1994 and 1995 approximated $230,000, $682,000 and $589,000, respectively.
Earnings per Share
For purposes of presenting the pro forma net earnings per share, Kani has
assumed the issuance of 2,600,000 shares of common stock (see note 11).
Use of Estimates
Management of Kani has made a number of estimates and assumptions relating
to the reporting of assets, liabilities and expenses and the disclosure of
contingent assets and liabilities to prepare these financial statements in
conformity with generally accepted accounting principles. Actual results could
differ from those estimates.
Recently Issued Accounting Pronouncements
In March 1995, the Financial Accounting Standards Board issued Statement
No. 121, "Accounting for the Impairment of Long-Lived Assets" (FAS No. 121). FAS
No. 121 establishes standards for the impairment of long-lived assets, certain
intangible assets and goodwill. FAS No. 121 will be adopted in 1996 and is not
expected to have a material impact on Kani's financial position or results of
operations.
Statement of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation" (FAS No. 123), issued in October 1995 and effective
for fiscal years beginning after December 15, 1995, encourages, but does not
require, a fair value based method of accounting for employee stock options or
similar equity instruments. FAS No. 123 allows an entity to continue to measure
compensation cost under Accounting Principles Board Opinion No. 25, "Accounting
for Stock Issued to Employees" (APB No. 25), but requires pro forma disclosures
of net earnings and earnings per share as if the fair value based method of
accounting had been applied. While management is still evaluating FAS No. 123,
it currently expects to elect to continue to measure compensation cost under APB
No. 25, "Accounting for Stock Issued to Employees," and to comply with the pro
forma disclosure requirements. If management makes this election, FAS No. 123
will have no impact on Kani's financial position or results of operations.
F-8
<PAGE> 57
KARL KANI DIVISION
(A DIVISION OF SKECHERS U.S.A., INC.)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(3) FAIR VALUE OF FINANCIAL INSTRUMENTS
Trade accounts receivable, other receivables, other current assets,
accounts payable and accrued expenses, short-term borrowings and other
liabilities: the carrying amount approximates fair value because of the short
maturity of those investments.
Long-term note payable to shareholder: the carrying amount approximates
fair value because the interest rate charged is consistent with similar
facilities with similar underlying security.
(4) LONG-TERM NOTE TO SHAREHOLDER OF SKECHERS
At December 31, 1994 and 1995, Kani was allocated $3,225,000 and
$2,062,000, respectively, of an unsecured note payable to a shareholder of
Skechers by Skechers, bearing interest at 6% and 8%, respectively, due on demand
after January 1, 1996. The noteholder has agreed not to call this note prior to
October 1, 1997. Kani recorded interest expense of approximately $10,000,
$193,000 and $165,000 related to this note during the period from November 1,
1993 (commencement of operations) to December 31, 1993 and the years ended
December 31, 1994 and 1995, respectively.
(5) SHORT-TERM BORROWINGS
At December 31, 1994 and 1995, Kani was allocated $4,227,000 and $3,056,000
of the outstanding balance of Skechers secured line of credit. Skechers has an
available secured line of credit with a financial institution based upon
eligible accounts receivable and inventories of all Skechers divisions,
including Kani. The borrowings bear interest at the rate of prime (8.5% at
December 31, 1994 and 1995) plus 3/4% and the line expired on June 21, 1996.
Management is currently renegotiating the terms of the credit facility, and
until the negotiations are finalized, the line of credit has been renewed on a
month-to-month basis. The agreement provides for the issuance of letters of
credit up to a maximum of $18,000,000, which decreases the amount for available
borrowings under the agreement. Skechers paid a 1% per annum fee on the maximum
letter of credit amount plus .50% of the difference between the revolving loan
commitment, less the maximum letter of credit amount. At December 31, 1995,
Skechers had available credit aggregating approximately $2,857,000. The
agreement contains restrictive covenants with which Skechers was in compliance
at December 31, 1995. Management believes that it has the ability to renew the
line of credit to meet its capital needs.
(6) INCOME TAXES
The pro forma unaudited income tax adjustments presented represent taxes
which would have been reported had Kani been subject to Federal and California
income taxes as a C Corporation. The historical and pro forma provisions for
income tax expense were as follows:
<TABLE>
<CAPTION>
1993 1994 1995
-------- ---------- --------
<S> <C> <C> <C>
Historical income taxes........................... $ 13,000 $ 51,000 $ 11,000
-------- ---------- --------
Pro forma adjustments (unaudited):
Federal......................................... 165,000 1,047,000 241,000
California...................................... 36,000 285,000 60,000
-------- ---------- --------
Total pro forma adjustments................ 201,000 1,332,000 301,000
-------- ---------- --------
Total provision for pro forma income
taxes................................... $214,000 $1,383,000 $312,000
======== ========== ========
</TABLE>
F-9
<PAGE> 58
KARL KANI DIVISION
(A DIVISION OF SKECHERS U.S.A., INC.)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Pro forma income tax expense differs from the statutory tax rate of 34% as
applied to earnings before income taxes as follows:
<TABLE>
<CAPTION>
1993 1994 1995
--------- ---------- --------
<S> <C> <C> <C>
Expected income tax expense....................... $177,000 $1,147,000 $259,000
State income taxes, net of Federal benefit........ 37,000 236,000 53,000
-------- ---------- --------
$214,000 $1,383,000 $312,000
======== ========== ========
</TABLE>
As of December 31, 1995, the amount of the deferred tax assets which would
have been recorded had Kani been subject to Federal and state income taxes as a
C Corporation is approximately $240,000. The deferred tax assets are primarily
comprised of temporary differences relating to the recognition of certain
inventory and bad debt expense for income tax return and financial reporting
purposes.
(7) BUSINESS AND CREDIT CONCENTRATIONS
Kani sells footwear products principally throughout the United States and
foreign countries. The footwear industry is impacted by the general economy.
Changes in the marketplace may significantly affect management's estimates and
the Division's performance. Management performs regular evaluations concerning
the ability of customers to satisfy their obligations and provides for estimated
doubtful accounts. Domestic accounts receivable amounted to $4,047,000 and
$3,347,000 before allowance for bad debts at December 31, 1994 and 1995,
respectively, which generally do not require collateral from customers. Foreign
accounts receivable amounted to $296,000 and $151,000 before allowance for bad
debts at December 31, 1994 and 1995, respectively, which generally are
collateralized by letters of credit. Net export sales amounted to $1,600,000 and
$779,000 for the years ended December 31, 1994 and 1995, respectively. Kani's
credit losses for the period from November 1, 1993 (commencement of operations)
to December 31, 1993 and the years ended December 31, 1994 and 1995 were
$135,000, $214,000 and $193,000, respectively, and did not significantly exceed
management's expectations.
(8) COMMITMENTS
Kani is allocated a portion of the rent and lease expense incurred by
Skechers. Skechers leases its facilities under operating lease agreements
expiring through February 1998. Skechers also leases certain equipment and
automobiles under operating lease agreements expiring at various dates through
1998. Rent expense is allocated to Kani from Skechers based on a formula which
management believes fairly allocates expenses associated with rent and leases to
Kani. Rent expense allocated to Kani was $14,000, $138,000 and $213,000 for the
period from November 1, 1993 (commencement of operations) to December 31, 1993
and the years ended December 31, 1994 and 1995, respectively.
In March 1994, Skechers entered into an agreement to pay certain design
costs for Kani licensed products. These costs are subject to provisions of
minimum sales of Kani-licensed products and are not to exceed $65,000 per month.
Actual expenses for the years ended December 31, 1994 and 1995 were $585,000 and
$780,000, respectively. This agreement is renewable for one-year periods at
December 31 of each year for ten years commencing on January 1, 1995. Both
parties have agreed to renew the agreement through December 31, 1996.
(9) EXTRAORDINARY ITEM
In June 1995, Skechers entered into a settlement agreement to accelerate
payment on a promissory note for the purchase of rights to Kani trademarks, in
exchange for relief of $450,000 of a promissory note liability. Kani has
recorded this relief of debt as an extraordinary item, net of $7,000 of related
income taxes.
F-10
<PAGE> 59
KARL KANI DIVISION
(A DIVISION OF SKECHERS U.S.A., INC.)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(10) ROYALTY INCOME
Kani has licensing agreements with various licensees for use of the name
and trademark. Royalty payments received by Kani are generally on a percentage
of the licensees' net sales and require that minimum royalty payments be made if
specified minimum sales are not obtained. The licensing agreements expire on
various dates through December 2039.
(11) SUBSEQUENT EVENTS
The Board of Directors intends to authorize the filing of a registration
statement for an initial public offering. In order to facilitate the public
offering, Skechers intends to form a wholly owned subsidiary and contribute the
master licensing agreement covering all products marketed and sold under the
Kani name and certain assets and liabilities of the Kani division in exchange
for 2,600,000 shares of the common stock of the subsidiary. For financial
reporting purposes, such assets and liabilities will be recorded by the
subsidiary at the carrying value of Skechers.
F-11
<PAGE> 60
KARL KANI DIVISION
(A DIVISION OF SKECHERS U.S.A., INC.)
CONDENSED BALANCE SHEET
JUNE 30, 1996
(UNAUDITED)
ASSETS
<TABLE>
<S> <C>
Current assets:
Trade accounts receivable, less allowances for bad debts and returns of
$205,000 $2,077,000
Other receivables.............................................................. 311,000
----------
Total receivables...................................................... 2,388,000
Inventories.................................................................... 1,932,000
----------
Total current assets................................................... 4,320,000
Intangible assets, less applicable amortization of $362,000...................... 1,345,000
----------
$5,665,000
==========
LIABILITIES AND DIVISION EQUITY
Current liabilities:
Short-term borrowings (note 5)................................................. $1,702,000
Accounts payable and accrued expenses.......................................... 853,000
----------
Total current liabilities.............................................. 2,555,000
Long-term note to shareholder of Skechers (note 4)............................... 2,263,000
----------
Total liabilities...................................................... 4,818,000
Division equity.................................................................. 847,000
----------
$5,665,000
==========
</TABLE>
See accompanying notes to condensed financial statements.
F-12
<PAGE> 61
KARL KANI DIVISION
(A DIVISION OF SKECHERS U.S.A., INC.)
CONDENSED STATEMENTS OF EARNINGS
SIX-MONTH PERIODS ENDED JUNE 30, 1995 AND 1996
(UNAUDITED)
<TABLE>
<CAPTION>
1995 1996
---------- ----------
<S> <C> <C>
Net sales........................................................... $8,571,000 $6,774,000
Cost of sales....................................................... 6,456,000 4,775,000
---------- ----------
Gross profit.............................................. 2,115,000 1,999,000
Royalty income, net................................................. 698,000 491,000
---------- ----------
2,813,000 2,490,000
---------- ----------
Operating expenses:
General and administrative........................................ 1,720,000 1,425,000
Selling........................................................... 864,000 622,000
Research and development.......................................... 27,000 52,000
---------- ----------
2,611,000 2,099,000
---------- ----------
Earnings from operations.................................. 202,000 391,000
---------- ----------
Other income (expense):
Interest expense.................................................. (285,000) (234,000)
Other, net........................................................ -- 23,000
---------- ----------
(285,000) (211,000)
---------- ----------
Earnings (loss) before income taxes and extraordinary
item.................................................... (83,000) 180,000
Income taxes (benefit) (note 2)..................................... (1,000) 3,000
---------- ----------
Earnings (loss) before extraordinary item................. (82,000) 177,000
Extraordinary gain on forgiveness of debt, net of income taxes of
$7,000............................................................ 443,000 --
---------- ----------
Net earnings.............................................. $ 361,000 $ 177,000
========== ==========
Supplemental pro forma information:
Earnings (loss) before income taxes and extraordinary item, as
presented...................................................... $ (83,000) $ 180,000
Extraordinary item................................................ 450,000 --
---------- ----------
Total earnings before income taxes........................ 367,000 180,000
---------- ----------
Pro forma provision for income taxes:
Extraordinary item............................................. 185,000 --
Operations..................................................... (35,000) 74,000
---------- ----------
Total pro forma income taxes (note 2)..................... 150,000 74,000
---------- ----------
Pro forma net earnings.................................... $ 217,000 $ 106,000
========== ==========
Pro forma net earnings per share.................................. $ .04
==========
Weighted average common shares outstanding........................ 2,600,000
==========
</TABLE>
See accompanying notes to condensed financial statements.
F-13
<PAGE> 62
KARL KANI DIVISION
(A DIVISION OF SKECHERS U.S.A., INC.)
CONDENSED STATEMENT OF DIVISION EQUITY
SIX-MONTH PERIOD ENDED JUNE 30, 1996
(UNAUDITED)
<TABLE>
<S> <C>
Balance at December 31, 1995..................................................... $1,335,000
Net earnings..................................................................... 177,000
Intercompany distributions....................................................... 665,000
----------
Balance at June 30, 1996......................................................... $ 847,000
==========
</TABLE>
See accompanying notes to condensed financial statements.
F-14
<PAGE> 63
KARL KANI DIVISION
(A DIVISION OF SKECHERS U.S.A., INC.)
CONDENSED STATEMENTS OF CASH FLOWS
SIX-MONTH PERIODS ENDED JUNE 30, 1995 AND 1996
(UNAUDITED)
<TABLE>
<CAPTION>
1995 1996
----------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net earnings.................................................... $ 361,000 $ 177,000
Adjustments to reconcile net earnings to net cash provided by
operating activities:
Depreciation and amortization................................ 90,000 84,000
Provision for bad debts and returns.......................... (352,000) (216,000)
Forgiveness of debt.......................................... (450,000) --
(Increase) decrease in assets:
Receivables................................................ 1,264,000 1,396,000
Inventories................................................ 2,688,000 520,000
Prepaid expenses and other current assets.................. 198,000 4,000
Increase (decrease) in liabilities, accounts payable and
accrued expenses............................................ (1,730,000) (106,000)
----------- -----------
Net cash provided by operating activities............... 2,069,000 1,859,000
----------- -----------
Cash flows used in investing activities -- purchase of
trademarks...................................................... (46,000) (41,000)
----------- -----------
Cash flows from financing activities:
Net proceeds (payments) on short-term borrowings................ (584,000) (1,354,000)
Interdivision transfers......................................... (328,000) (665,000)
Net proceeds (payments) on long-term note to shareholder of
Skechers..................................................... (1,111,000) 201,000
----------- -----------
Net cash used in financing activities................... (2,023,000) (1,818,000)
----------- -----------
Net increase (decrease) in cash and cash balance........ $ -- $ --
=========== ===========
</TABLE>
See accompanying notes to condensed financial statements.
F-15
<PAGE> 64
KARL KANI DIVISION
(A DIVISION OF SKECHERS U.S.A., INC.)
NOTES TO CONDENSED FINANCIAL STATEMENTS
SIX-MONTH PERIODS ENDED JUNE 30, 1995 AND 1996
(UNAUDITED)
(1) GENERAL
The unaudited operating results have been prepared on the same basis as the
audited financial statements and, in the opinion of management, include all
adjustments (consisting only of normal recurring accruals) necessary for a fair
presentation for the periods. The results of operations for interim periods are
not necessarily indicative of results to be achieved for full fiscal years.
(2) INCOME TAXES
The pro forma unaudited income tax adjustments presented represent taxes
which would have been reported had Kani been subject to Federal and California
income taxes as a C Corporation. The historical and pro forma provisions for
income tax expense were as follows:
<TABLE>
<CAPTION>
JUNE 30,
--------------------
1995 1996
-------- -------
<S> <C> <C>
Historical income taxes......................................... $ 6,000 $ 3,000
-------- -------
Pro forma adjustments (unaudited):
Federal....................................................... 116,000 59,000
California.................................................... 28,000 12,000
-------- -------
Total pro forma adjustments........................... 144,000 71,000
-------- -------
Total provision for pro forma income taxes............ $150,000 $74,000
======== =======
</TABLE>
Pro forma income tax expense differs from the statutory tax rate of 34% as
applied to earnings before income taxes as follows:
<TABLE>
<CAPTION>
JUNE 30,
--------------------
1995 1996
-------- -------
<S> <C> <C>
Expected income tax expense..................................... $125,000 $61,000
State income taxes, net of Federal benefit...................... 25,000 13,000
-------- -------
$150,000 $74,000
======== =======
</TABLE>
As of June 30, 1996, the amount of the deferred tax assets which would have
been recorded had Kani been subject to Federal and state income taxes as a C
Corporation is approximately $235,000. The deferred tax assets are primarily
comprised of temporary differences relating to the recognition of certain
inventory and bad debt expense for income tax return and financial reporting
purposes.
(3) EARNINGS PER SHARE
For purposes of presenting the pro forma net earnings per share, Kani has
assumed the issuance of 2,600,000 shares of common stock.
(4) LONG-TERM NOTE TO SHAREHOLDER OF SKECHERS
At June 30, 1996, Kani was allocated $2,263,000 of an unsecured note
payable to a shareholder of Skechers by Skechers, bearing interest at 8%, due on
demand after July 1, 1996. The noteholder has agreed not to call this note prior
to October 1, 1997. Kani recorded interest expense of approximately $91,000
related to this note during the six-month period ended June 30, 1996.
F-16
<PAGE> 65
KARL KANI DIVISION
(A DIVISION OF SKECHERS U.S.A., INC.)
NOTES TO CONDENSED FINANCIAL STATEMENTS -- (CONTINUED)
(5) SHORT-TERM BORROWINGS
At June 30, 1996, Kani was allocated $1,702,000 of the outstanding balance
of Skechers secured line of credit. Skechers has an available secured line of
credit with a financial institution based upon eligible accounts receivable and
inventories of all Skechers divisions, including Kani. The borrowings bear
interest at the rate of prime (8.5% at June 30, 1996) plus 3/4% and the line
expired on June 21, 1996. The agreement provides for the issuance of letters of
credit up to a maximum of $18,000,000, which decreases the amount for available
borrowings under the agreement. Skechers paid a 1% per annum fee on the maximum
letter of credit amount plus .50% of the difference between the revolving loan
commitment, less the maximum letter of credit amount. At June 30, 1996, Skechers
had available credit aggregating approximately $2,720,000. The agreement
contains restrictive covenants with which Skechers was in compliance at June 30,
1996 or had obtained the appropriate waivers. Management is currently
renegotiating the terms of the credit facility, and until the negotiations are
finalized, the line of credit has been renewed on a month-to-month basis.
Management believes that it has the ability to renew the line of credit to meet
its capital needs.
(6) NEW ACCOUNTING STANDARDS
Effective January 1, 1996, Skechers adopted Statement of Financial
Accounting Standards No. 121 (FAS 121), "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of," which was issued
in March 1995. This statement establishes accounting standards for the
recognition and measurement of impairment of long-lived assets, certain
identifiable intangibles and goodwill either to be held or disposed of. The
adoption of FAS 121 did not have a material impact on Kani's financial position
or results of operations.
Effective January 1, 1996, Skechers adopted Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-Based Compensation" (FAS
123), which was issued in October 1995. This statement encourages, but does not
require, a fair value based method of accounting for employee stock options or
similar equity instruments. FAS 123 allows an entity to elect to continue to
measure compensation cost under Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" (APB No. 25), but requires pro forma
disclosures of net earnings and earnings per share as if the fair value based
method of accounting had been applied. Skechers has elected to continue to
measure compensation cost under APB No. 25, "Accounting for Stock Issued to
Employees," and will comply with the pro forma disclosure requirements in its
December 31, 1996 financial statements. The adoption of FAS 123 had no impact on
Kani's financial position or results of operations.
(7) SUBSEQUENT EVENTS
The Board of Directors intends to authorize the filing of a registration
statement for an initial public offering. In order to facilitate the public
offering, Skechers intends to form a wholly owned subsidiary and contribute the
master licensing agreement covering all products marketed and sold under the
Kani name and certain assets and liabilities of the Kani division in exchange
for 2,600,000 shares of the common stock of the subsidiary. For financial
reporting purposes, such assets and liabilities will be recorded by the
subsidiary at the carrying value of Skechers.
F-17
<PAGE> 66
- ------------------------------------------------------
- ------------------------------------------------------
NO DEALER, SALESPERSON OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS AND,
IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS
HAVING BEEN AUTHORIZED BY THE COMPANY, THE UNDERWRITERS OR BY ANY OTHER PERSON.
THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN
OFFER TO BUY, ANY SECURITY OTHER THAN THE SHARES OF COMMON STOCK OFFERED HEREBY
NOR DOES IT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY
OF THE SECURITIES OFFERED HEREBY TO ANY PERSON IN ANY JURISDICTION TO WHICH IT
IS UNLAWFUL TO MAKE SUCH AN OFFER TO SOLICITATION TO SUCH PERSON. NEITHER THE
DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL UNDER ANY
CIRCUMSTANCES CREATE ANY IMPLICATION THAT THE INFORMATION CONTAINED HEREIN IS
CORRECT AS OF ANY DATE SUBSEQUENT TO THE DATE HEREOF.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Prospectus Summary.................... 3
Risk Factors.......................... 6
The Company........................... 13
Use of Proceeds....................... 14
Dividend Policy....................... 14
Capitalization........................ 15
Selected Financial Data............... 16
Management's Discussion and Analysis
of Financial Condition and Results
of Operations....................... 17
Pro Forma Financial Data.............. 23
Business.............................. 27
Management............................ 36
Certain Transactions.................. 39
Principal Shareholders................ 42
Description of Securities............. 42
Shares Eligible for Future Sale....... 43
Underwriting.......................... 45
Legal Matters......................... 46
Experts............................... 46
Additional Information................ 46
Index to Financial Statements......... F-1
</TABLE>
------------------------
UNTIL , 1996 (25 CALENDAR DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL
DEALERS EFFECTING TRANSACTIONS IN THE COMMON STOCK, WHETHER OR NOT PARTICIPATING
IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS DELIVERY
REQUIREMENT IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS
WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR
SUBSCRIPTIONS.
- ------------------------------------------------------
- ------------------------------------------------------
- ------------------------------------------------------
- ------------------------------------------------------
1,400,000 SHARES
KANI, INC.
COMMON STOCK
---------------------
PROSPECTUS
---------------------
JOSEPH CHARLES &
ASSOCIATES, INC.
, 1996
- ------------------------------------------------------
- ------------------------------------------------------
<PAGE> 67
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the costs and expenses, other than
underwriting discounts and commissions, payable by the Company in connection
with the sale of Common Stock being registered. All amounts are estimates except
the SEC registration fee and the NASD filing fees.
<TABLE>
<S> <C>
SEC Registration fee............................................. $ 7,356
NASD filing fee.................................................. 2,634
Nasdaq National Market listing fee............................... 13,750
Underwriter's non-accountable expense allowance(1)............... 385,000
Printing and engraving expenses.................................. 80,000
Legal fees and expenses.......................................... 250,000
Directors' and Officers' Liability Insurance..................... 150,000
Accounting fees and expenses..................................... 350,000
Blue sky fees and expenses....................................... 15,000
Transfer agent fees.............................................. 5,000
Miscellaneous fees and expenses.................................. 41,260
Total............................................................ $1,300,000
</TABLE>
- ---------------
(1) $442,750 if the Underwriters' over-allotment option is exercised in full.
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 317 of the California Corporations Code authorizes a court to
award, or a corporation's Board of Directors to grant, indemnity to any person
who is or was a director or officer in terms sufficiently broad to permit such
indemnification under certain circumstances for liabilities (including
reimbursement for expenses incurred) arising under the Securities Act. Article V
of the Company's Articles of Incorporation (see Exhibit 3.1) provides for
indemnification of its directors, officers, employees and other agents to the
maximum extent permitted under California law. Article XI of the Company's
Bylaws (see Exhibit 3.2) provides for indemnification of its directors,
officers, employees and other agents to the maximum extent permitted under
California law. In addition, the Company has entered into Indemnification
Agreements (see Exhibit 10.12) with its officers and directors. Reference is
also made to the Underwriting Agreement contained in Exhibit 1.1 hereto,
pursuant to which the Underwriters will agree to indemnify officers and
directors of the Company against certain liabilities.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
On the effective date of the offering, the Registrant will issue 2,600,000
shares of Common Stock to Skechers U.S.A., Inc., in exchange for the exclusive
right to market and sell products under the Kani brand name pursuant to a
license from Carl Williams and all assets and certain corresponding liabilities,
whether known or unknown, relating to the ongoing footwear business conducted by
Skechers to the extent such assets are used by Skechers solely in connection
with the sale of the products under the Kani brand name, together with the
rights to certain customer lists.
II-1
<PAGE> 68
ITEM 16. EXHIBITS
(A) EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
----------- ------------------------------------------------------------------------
<S> <C>
1.1 Form of Underwriting Agreement.
3.1 Company's Articles of Incorporation, as currently in effect.
3.2 Company's Bylaws, as currently in effect.
4.1* Specimen Certificate of Company's Common Stock.
4.2 Form of Representative's Warrant.
5.1* Opinion of Freshman, Marantz, Orlanski, Cooper & Klein.
10.1* Form of Assignment of License Agreement by and among the Registrant,
Skechers U.S.A., Inc. and Carl Williams.
10.2* Form of Assignment of License Agreement by and among the Registrant,
Skechers U.S.A., Inc., and Collingwood Partners, Ltd.
10.3* Form of Assignment of License Agreement by and among the Registrant,
Skechers U.S.A., Inc. and Mitsubishi Corporation.
10.4* Form of Assignment of Distribution Agreement by and among Registrant,
Skechers, U.S.A., Inc., Achillies Corporation and Mitsubishi
Corporation.
10.5* Form of Assignment of Distribution Agreement by and among Registrant,
Skechers U.S.A., Inc. and Big Serve S.A.
10.6* Form of Assignment of Distribution Agreement by and among Registrant,
Skechers U.S.A., Inc. and Texas Peale P/C.
10.7* Form of Assignment of Distribution Agreement by and among Registrant,
Skechers U.S.A., Inc. and Fairbo Fashion B.V.
10.8 Form of Management Agreement by and between the Registrant and Skechers
U.S.A., Inc.
10.9 Form of Tax Agreement by and between the Registrant and Skechers U.S.A.,
Inc.
10.10 Form of Kani, Inc. 1996 Stock Option, Deferred Stock and Restricted
Stock Plan.
10.11 Form of Contribution Agreement between Registrant and Skechers U.S.A.,
Inc.
10.12 Form of Indemnification Agreement for Directors and Officers of
Registrant.
10.13 Letter of Intent for Loan and Security Agreement between Skechers
U.S.A., Inc. and Heller Financial, Inc.
10.14* Form of Assignment of Endorsement Agreement by and among the Registrant,
Skechers U.S.A., Inc. and John Wallace.
23.1* Consent of Freshman, Marantz, Orlanski, Cooper & Klein (included in
Exhibit 5).
23.2 Consent of KPMG Peat Marwick LLP.
24.1 Power of Attorney (included in signature page).
27.1 Financial Statement Schedule.
</TABLE>
- ---------------
* To be filed by amendment.
II-2
<PAGE> 69
(B) FINANCIAL STATEMENT SCHEDULES
The following financial statement schedule is filed with Part II of this
Registration Statement:
Schedule II -- Karl Kani Division (a division of Skechers U.S.A., Inc.)
Valuation and Qualifying Accounts
ITEM 17. UNDERTAKINGS
The undersigned Company hereby undertakes to provide to the Underwriters at
the closing specified in Underwriting Agreement certificates in such
denominations and registered in such names as required by Underwriters to permit
prompt delivery to each purchaser.
Insofar as indemnification by the Company for liabilities arising under the
Securities Act may be permit to directors, officers and controlling persons of
the Company pursuant to the provisions referenced in Item 14 of this
Registration Statement or otherwise, the Company has been advised that in the
opinion of the Securities and Exchange Commission, such indemnification is
against public policy as expressed in the Securities Act and therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than payment by the Company of expenses incurred or paid by a
director, officer, or controlling person of Company in the successful defense of
any action, suit or proceeding) is asserted by such director, officer
controlling person in connection with the securities being registered hereunder,
the Company will, unless in 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 Security Act and will be governed by the final adjudication of
such issue.
The undersigned Company hereby undertakes:
That for purposes of determining any liability under the Securities Act,
the information omitted from the form of Prospectus filed as part of this
Registration Statement in reliance upon Rule 430A and contained in a form of
Prospectus filed by the Company pursuant to Rule 424(b) (1) or (4) or 497(h)
under the Securities Act shall be deemed to be part of this Registration
Statement as of the time it was declared effective.
To file, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement
(i) To include any prospectus required by section 10(a)(3) of the
Securities Act of 1933, as amended;
(ii) To reflect in the Prospectus any facts or events arising after
the effective date of the Registration Statement (or the most recent
post-effective amendment thereof) which, individually or in the aggregate,
represent a fundamental change in the information set forth in the
Registration Statement; and
(iii) To include any material information with respect to the plan of
distribution not previously disclosed in the Registration Statement or any
material change to such information in the registration statement.
For the purpose of determining any liability under the Securities Act, each
post-effective amendment that contains a form of Prospectus shall be deemed to
be a new registration statement relating to the securities offered therein and
the offering of such securities at that time shall be deemed to be the initial
bona fide offering thereof.
The Company further undertakes to remove from registration by means of a
post-effective amendment any of the securities being registered which remain
unsold at the termination of the offering.
II-3
<PAGE> 70
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Company
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form S-1 and has duly caused this Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Manhattan Beach, State of California, on October 18,
1996.
Kani, Inc.
By: /s/ Robert Greenberg
------------------------------------
Robert Greenberg,
Chief Executive Officer and Director
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints Robert Greenberg and David Weinberg
jointly and severally, his attorneys-in-fact, each with the power of
substitution, for him in any and all capacities, to sign any amendment to this
Registration Statement on Form S-1 (including a registration statement filed
pursuant to Rule 462) and to file the same, with exhibits thereto and other
documents in connection therewith, with the Securities and Exchange Commission,
hereby ratifying and confirming all that each of said attorneys-in-fact, or his
substitute or substitutes, may do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ----------------------------------------------- --------------------------- -----------------
<S> <C> <C>
/s/ Robert Greenberg Chief Executive Officer October 18, 1996
- ----------------------------------------------- (Principal Executive
Robert Greenberg Officer) and Chairman of
the Board
/s/ David Weinberg Chief Financial Officer October 18, 1996
- ----------------------------------------------- (Principal Accounting
David Weinberg Officer) and Director
/s/ Michael Greenberg President and Director October 18, 1996
- -----------------------------------------------
Michael Greenberg
/s/ Carl Williams Director October 18, 1996
- -----------------------------------------------
Carl Williams
/s/ F. Paul Garrier Director October 18, 1996
- -----------------------------------------------
F. Paul Garrier
</TABLE>
II-4
<PAGE> 71
SCHEDULE II
KARL KANI DIVISION (A DIVISION OF SKECHERS U.S.A., INC.)
VALUATION AND QUALIFYING ACCOUNTS
PERIOD FROM NOVEMBER 1, 1993 (COMMENCEMENT OF OPERATIONS) TO
DECEMBER 31, 1993 AND THE YEARS ENDED DECEMBER 31, 1994 AND 1995
<TABLE>
<CAPTION>
BALANCE AT CHARGED TO DEDUCTIONS BALANCE
BEGINNING COSTS AND AND AT END
DESCRIPTIONS OF PERIOD EXPENSES WRITE-OFFS OF PERIOD
- ---------------------------------------------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
As of December 31, 1993
Allowance for obsolescence.................. $ -- -- -- --
Allowance for doubtful accounts............. -- 135,000 -- 135,000
Reserve for sales returns and allowances.... -- 218,000 (157,000) 61,000
As of December 31, 1994
Allowance for obsolescence.................. $ -- 329,000 -- 329,000
Allowance for doubtful accounts............. 135,000 461,000 (382,000) 214,000
Reserve for sales returns and allowances.... 61,000 2,476,000 (1,958,000) 579,000
As of December 31, 1995
Allowance for obsolescence.................. $ 329,000 175,000 (329,000) 175,000
Allowance for doubtful accounts............. 214,000 291,000 (312,000) 193,000
Reserve for sales returns and allowances.... 579,000 1,766,000 (2,188,000) 157,000
</TABLE>
S-1
<PAGE> 72
EXHIBIT INDEX
<TABLE>
<CAPTION>
SEQUENTIALLY
NUMBERED
EXHIBIT NO. DESCRIPTION PAGE
- ----------- ----------------------------------------------------------------------- ------------
<S> <C> <C>
1.1 Form of Underwriting Agreement. .......................................
3.1 Company's Articles of Incorporation, as currently in effect. ..........
3.2 Company's Bylaws, as currently in effect. .............................
4.1* Specimen Certificate of Company's Common Stock. .......................
4.2 Form of Representative's Warrant. .....................................
5.1* Opinion of Freshman, Marantz, Orlanski, Cooper & Klein. ...............
10.1* Form of Assignment of License Agreement by and among the Registrant,
Skechers U.S.A., Inc. and Carl Williams. ..............................
10.2* Form of Assignment of License Agreement by and among the Registrant,
Skechers U.S.A., Inc., and Collingwood Partners, Ltd. .................
10.3* Form of Assignment of License Agreement by and among the Registrant,
Skechers U.S.A., Inc. and Mitsubishi Corporation. .....................
10.4* Form of Assignment of Distribution Agreement by and among Registrant,
Skechers, U.S.A., Inc., Achillies Corporation and Mitsubishi
Corporation. ..........................................................
10.5* Form of Assignment of Distribution Agreement by and among Registrant,
Skechers U.S.A., Inc. and Big Serve S.A. ..............................
10.6* Form of Assignment of Distribution Agreement by and among Registrant,
Skechers U.S.A., Inc. and Texas Peale P/C. ............................
10.7* Form of Assignment of Distribution Agreement by and among Registrant,
Skechers U.S.A., Inc. and Fairbo Fashion B.V. .........................
10.8 Form of Management Agreement by and between the Registrant and Skechers
U.S.A., Inc. ..........................................................
10.9 Form of Tax Agreement by and between the Registrant and Skechers
U.S.A., Inc. ..........................................................
10.10 Form of Kani, Inc. 1996 Stock Option, Deferred Stock and Restricted
Stock Plan. ...........................................................
10.11 Form of Contribution Agreement between Registrant and Skechers U.S.A.,
Inc. ..................................................................
10.12 Form of Indemnification Agreement for Directors and Officers of
Registrant. ...........................................................
10.13 Letter of Intent for Loan and Security Agreement between Skechers
U.S.A., Inc. and Heller Financial, Inc. ...............................
10.14* Form of Assignment of Endorsement Agreement by and among the
Registrant, Skechers U.S.A., Inc. and John Wallace. ...................
23.1* Consent of Freshman, Marantz, Orlanski, Cooper & Klein (included in
Exhibit 5). ...........................................................
23.2 Consent of KPMG Peat Marwick LLP. .....................................
24.1 Power of Attorney (included in signature page). .......................
27.1 Financial Statement Schedule. .........................................
</TABLE>
- ---------------
* To be filed by amendment.
<PAGE> 1
EXHIBIT 1.1
KANI, INC.
FORM OF UNDERWRITING AGREEMENT
, 1996
JOSEPH CHARLES & ASSOCIATES, INC.
As Representatives of the
Several Underwriters
c/o Joseph Charles & Associates, Inc.
9701 Wilshire Blvd.
Beverly Hills, CA 90212
Ladies and Gentlemen:
Kani, Inc., a California corporation (the "Company"), proposes to issue
and sell to the several Underwriters named in Schedule I hereto (the
"Underwriters"), an aggregate of 1,400,000 shares (hereinafter referred to as
the "Firm Securities") of its authorized but unissued Common Stock, no par value
(the "Common Stock"). The Company also proposes to grant to the Underwriters an
option to purchase up to 210,000 additional shares (hereinafter referred to as
the "Option Securities") of Common Stock for the sole purpose of covering
over-allotments, if any, in connection with the sale of the Firm Securities. The
Firm Securities and any Option Securities purchased pursuant to this Agreement
are referred to in this Agreement as the "Securities." The Company also proposes
to sell to each of you individually, and not in your respective capacities as
Representatives, four-year warrants to purchase up to [140,000 in the aggregate]
shares of Common Stock (the "Representatives' Warrants"). The sale of the
Representatives' Warrants will be consummated in accordance with the terms and
conditions of that certain Representatives' Warrant Agreement dated as of
, 1996 between the Company and the Representatives (the
"Representatives' Warrant Agreement"). The shares of Common Stock issuable
upon the exercise of the Representative's Warrants are hereinafter sometimes
referred to collectively as the "Warrant Securities." Joseph Charles &
Associates, Inc. and are acting as representatives
of the several Underwriters, and in that capacity are referred to in this
Agreement as the "Representatives."
The term "Registration Statement" as used in this Agreement shall mean
such registration statement, including financial statements, schedules and
exhibits, in the form in which it became or becomes, as the case may be,
effective (including, if the Company omitted information from the Registration
Statement pursuant to Rule 430A(a) of the Rules and Regulations, the information
deemed to be a part of the Registration Statement at the time it became
effective pursuant to Rule 430A(b) of the rules and regulations (the "Rules and
Regulations") of the Securities and Exchange Commission (the "Commission") )
and, in the event of any amendment thereto after the effective date of the
Registration Statement, shall also mean (from and after the
<PAGE> 2
effectiveness of such amendment) the Registration Statement as so amended. The
term "Prospectus" as used in this Agreement shall mean the prospectus relating
to the Securities included in the Registration Statement at the time it became
effective, except that if any revised prospectus shall be provided to the
Underwriters by the Company for use in connection with the offering of the
Securities that differs from the Prospectus on file with the Commission at the
time the Registration Statement became or becomes, as the case may be,
effective, whether or not the revised prospectus is required to be filed with
the Commission pursuant to Rule 424(b)(3) of the Rules and Regulations, the term
"Prospectus" shall refer to such revised prospectus from and after the time it
is first provided to the Underwriters for such use. For purposes of this
Agreement, all references to the Registration Statement, any preliminary
prospectus, the Prospectus, or any amendment or supplement to any of the
foregoing, shall be deemed to include the copy filed with the Commission
pursuant to its Electronic Data Gathering and Retrieval System ("EDGAR").
The Company hereby confirms its agreement with the several Underwriters
as follows:
1. Representations and Warranties of the Company. The Company represents and
warrants to, and agrees with, each of the several Underwriters as follows:
(a) The Company meets the requirements for use of Form S-1
under the Securities Act of 1933, as amended (the "Securities Act"), and a
registration statement (Registration No. 333- ) on Form S-1 relating to the
Securities, including such amendments to such registration statement as may have
been required to the date of this Agreement, has been prepared by the Company
under and in conformity with the provisions of the Securities Act, and the Rules
and Regulations thereunder, and has been filed with the Commission. If such
registration statement has not become effective upon execution of this
Agreement, a further amendment to such registration statement, including a form
of final prospectus, necessary to permit such registration statement to become
effective will promptly be filed by the Company with the Commission. If such
registration statement has become effective, a final prospectus containing
information permitted to be omitted at the time of effectiveness by Rule 430A of
the Rules and Regulations will promptly be filed by the Company with the
Commission in accordance with Rule 424 of the Rules and Regulations (and in form
and substance reasonably satisfactory to the counsel for the Representatives).
(b) No stop order suspending the effectiveness of the
Registration Statement or preventing or suspending the use of the Prospectus has
been issued and no proceedings for that purpose are pending or threatened or, to
the best knowledge of the Company, contemplated by the Commission; no stop order
suspending the sale of the Securities in any jurisdiction has been issued and no
proceedings for that purpose are pending or, to the best knowledge of the
Company, threatened or are contemplated; and any request of the Commission for
additional information (to be included in the Registration Statement or the
Prospectus or otherwise) has been complied with.
(c) The Company has been duly organized and IS validly
existing in good standing under the laws of its jurisdiction of organization,
has full power and authority to own or lease its properties and conduct its
business as described in the Registration Statement and the
2
<PAGE> 3
Prospectus and as it is currently conducted, and is duly qualified as a foreign
organization and in good standing in all jurisdictions in which the character of
the property owned or leased or the nature of the business transacted by it
makes qualification necessary (except where the failure to be so qualified would
not have a material adverse effect on the business, properties, condition
(financial or otherwise), prospects or results of operations of the Company.
Except as disclosed in the Registration Statement, the Company is in possession
of and operating in compliance with all authorizations, licenses, certificates,
consents, orders and permits from state, federal and other regulatory
authorities (including foreign governments) that are material to the conduct of
its business, all of which are valid and in full force and effect. The Company
does not have any subsidiaries.
(d) Since the respective dates as of which information is
given in the Registration Statement and the Prospectus, there has not been any
material loss or interference with its business from fire, explosion, flood or
other calamity, whether or not covered by insurance, or from any court or
governmental action, order or decree, or any changes in the capital stock or
long-term debt of the Company, or any dividend or distribution of any kind
declared, paid or made on the capital stock of the Company, or any material
adverse change, or a development known to the Company that might cause or result
in a material adverse change, in or affecting the general affairs, management,
business, properties, condition (financial or otherwise), prospects or results
of operations of the Company, whether or not arising from transactions in the
ordinary course of business, other than as set forth in the Registration
Statement and the Prospectus, and since such dates, except in the ordinary
course of business, the Company has not entered into any material transaction
not described in the Registration Statement and the Prospectus.
(e) The Commission has not issued any order preventing or
suspending the use of any Preliminary Prospectus, and each Preliminary
Prospectus, at the time of filing thereof, conformed in all material respects to
the requirement of the Securities Act and the Rules and Regulations; when the
Registration Statement became or becomes, as the case may be, effective (the
"Effective Date") and when the Prospectus is first filed (if required) in
accordance with Rule 424(b), and at all times subsequent thereto up to and at
the "Closing Date" (as hereinafter defined) and through any later date on which
Option Securities are to be purchased, as the case may be, the Registration
Statement and the Prospectus, and any amendments or supplements thereto, will in
all material respects conform to the requirements of the Securities Act and the
Rules and Regulations, and the Securities Exchange Act of 1934, as amended, (the
"Exchange Act"), and the rules and regulations of the Commission thereunder; on
the Effective Date, the Registration Statement did not or will not contain any
untrue statement of a material fact and did not or will not omit to state any
material fact required to be stated therein or necessary in order to make the
statements therein not misleading; and neither the Registration Statement nor
the Prospectus, nor any amendment or supplement thereto, will include any untrue
statement of a material fact or omit to state any material fact necessary in
order to make the statements therein, in the light of the circumstances under
which they were made, not misleading; provided, however, that none of the
representations and warranties in this Section 1(a)(v) shall apply to statements
in, or omissions from, the Registration Statement or the Prospectus made in
reliance upon and in conformity with information furnished in writing to the
Company by or on behalf of the Underwriters through the Representatives
specifically for use
3
<PAGE> 4
in the Registration Statement or the Prospectus. There is no agreement,
contract, license, lease or other document required to be described in the
Registration Statement or the Prospectus or to be filed as an exhibit to the
Registration Statement which is not described or filed as required. The
contracts so described in the Prospectus are in full force and effect on the
date hereof, and neither the Company, nor to the best knowledge of the Company,
any other party, is in material breach of or default under any such contracts.
(f) All of the outstanding shares of capital stock of the
Company have been duly authorized and validly issued and are fully paid and
nonassessable, have been issued in compliance with all applicable federal and
state securities laws, were not issued in violation of or subject to any
preemptive rights or other rights to subscribe for or purchase securities, and
the authorized and outstanding capital stock of the Company conforms in all
material respects to the statements relating thereto contained in the
Registration Statement and the Prospectus (and such statements correctly state
the substance of the instruments defining the capitalization of the Company).
The description of the Company's stock option, stock bonus and other stock plans
or arrangements, and the options or other rights granted or exercised
thereunder, set forth in the Prospectus accurately and fairly present the
information required to be shown with respect to such plans, arrangements,
options and rights. The Common Stock to be sold by the Company hereunder has
been duly authorized for issuance and sale to the Underwriters pursuant to this
Agreement and, when issued and delivered by the Company against payment therefor
in accordance with the terms of this Agreement, will be duly and validly issued
and fully paid and nonassessable. Other than this Agreement, the
Representatives' Warrant Agreement and the options and warrants to purchase the
Common Stock described in the Prospectus, there are no options, warrants or
other rights outstanding to subscribe for or purchase any shares of the
Company's capital stock. There are no preemptive rights or any restrictions upon
the voting or transfer of any of the Firm Securities or Option Securities
pursuant to the Company's certificate of incorporation, bylaws or any other
governing document or agreement to which the Company is a party or by which it
may be bound. Neither the filing of the Registration Statement nor the offering
or sale of the Securities as contemplated by this Agreement gives rise to any
rights, other than those which have been waived or satisfied, for or relating to
the registration of any of the Firm Securities or Option Securities or any other
capital stock of the Company.
(g) The Company has full right, power and authority to enter
into and perform its obligations under this Agreement and the Representatives'
Warrant Agreement, and to issue, sell and deliver the Securities and the Option
Securities. This Agreement and the Representatives' Warrant Agreement have each
been duly authorized, executed and delivered by the Company and constitute the
valid and binding agreements of the Company and each is enforceable against the
Company in accordance with its terms.
(h) The Company is not, or with the giving of notice or lapse
of time or both would it be, in violation of or in default under, nor will the
execution or delivery of this Agreement or the Representatives' Warrant
Agreement, or the consummation of the transactions contemplated by such
agreements result in a violation of or constitute a default (with the giving of
notice, passage of time or otherwise) under the articles of incorporation or
other charter or governing documents of the Company, or any obligation,
agreement, covenant or condition contained in any bond, debenture, note or other
evidence of indebtedness or in any contract,
4
<PAGE> 5
indenture, mortgage, deed of trust, loan agreement, lease, license, joint
venture or other agreement or instrument to which the Company is a party or by
which it or any of its properties may be bound or affected, nor will the
performance by the Company of its obligations under this Agreement or the
Representatives' Warrant Agreement violate any law, rule, administrative
regulation or decree of any court or any governmental agency or body having
jurisdiction over the Company or any of its respective properties, or result in
the creation or imposition of any lien, charge, claim or encumbrance upon any
property or asset of the Company. Except for permits and similar authorizations
required under the Securities Act, the Exchange Act or under other securities or
Blue Sky laws of certain jurisdictions, and for such permits and authorizations
that have been obtained, no consent, approval, authorization or order of any
court, governmental agency or body or financial institution is required in
connection with the consummation of the transactions contemplated by this
Agreement or the Representatives' Warrant Agreement.
(i) The Company owns, or has valid rights to use, all items of
real and personal property which are material to the business of the Company,
free and clear of all liens, encumbrances and claims that might materially
interfere with the business, properties, condition (financial or otherwise) or
prospects of the Company.
(j) Except as described in the Prospectus, there is no
litigation or governmental proceeding to which the Company is a party, or to
which any property of the Company is subject, which is pending, or to the best
knowledge of the Company, contemplated against the Company, that might have any
material adverse effect on, or might result in any material adverse change in
the business, properties, condition (financial or otherwise), prospects or
results of operations of the Company, or that might prevent consummation of the
transactions contemplated by this Agreement or the Representatives' Warrant
Agreement or that are required to be disclosed in the Registration Statement.
(k) The Company is not in violation of any law, order,
ordinance, rule, regulation, writ, injunction, judgment or decree of any court
or governmental agency or body to which it or its properties (whether owned or
leased) may be subject, which violation might have a material adverse effect on
the business, properties, condition (financial or otherwise), prospects or
results of operations of the Company.
(l) The Company owns or possesses adequate rights to use all
material patents, patent rights, inventions, trade secrets, know-how,
trademarks, service marks, tradenames and copyrights described or referred to in
the Prospectus as owned by or used by it, or which are necessary for the conduct
of its business as described in the Prospectus; and the Company has not received
any notice of infringement of or conflict with asserted rights of others with
respect to any patents, patent rights, inventions, trade secrets, know-how,
trademarks, service marks, tradenames or copyrights which, singly or in the
aggregate, if the subject of an unfavorable decision, ruling or finding, might
have a material adverse effect on the business, properties, condition (financial
or otherwise), prospects or results of operations of the Company.
(m) The Company has not taken, and shall not take, directly or
indirectly, any action designed to cause or result in, or which has constituted
or which might reasonably be expected to cause or result in, under the Exchange
Act, the rules and regulations of the
5
<PAGE> 6
Commission under the Exchange Act, or otherwise, the stabilization or
manipulation of the price of any security of the Company to facilitate the sale
or resale of the Securities. No bid or purchase by the Company, and, to the best
knowledge of the Company, no bid or purchase that could be attributed to the
Company (as a result of bids or purchases by an "affiliated purchaser" within
the meaning of Rule 10b-6 under the Exchange Act) for or of the Common Stock,
any securities of the same class or series as the Common Stock or any securities
immediately convertible into or exchangeable for or that represent any right to
acquire the Common Stock, is now pending or in progress or will have commenced
at any time prior to the completion of the distribution of the Securities.
(n) KPMG Peat Marwick LLP, whose reports appear in the
Prospectus, are, and during the periods covered by their reports in the
Registration Statement were, independent accountants as required by the
Securities Act and the Rules and Regulations. The financial statements and pro
forma financial data included in the Registration Statement, any Preliminary
Prospectus or the Prospectus present fairly the consolidated financial
condition, results of operations, cash flow and changes in shareholders' equity
of the Company at the dates and for the periods indicated, and the financial
statements and pro forma financial data included in the Registration Statement
present fairly the information required to be stated therein. Such financial
statements and pro forma financial data have been prepared in accordance with
generally accepted accounting principles in the United States of America,
applied on a consistent basis throughout the periods presented, except as stated
therein. The selected and summary financial and statistical data, including pro
forma data, included in the Registration Statement and the Prospectus present
fairly the information shown therein and have been compiled on a basis
consistent with the audited financial statements presented therein. No other
financial statements and no schedules are required to be included in the
Registration Statement.
(o) The books, records and accounts of the Company accurately
and fairly reflect, in reasonable detail, the transactions in and dispositions
of the assets of the Company. The systems of internal accounting controls
maintained by the Company are sufficient to provide reasonable assurances that
(i) transactions are executed in accordance with management's general or
specific authorization; (ii) transactions are recorded as necessary (A) to
permit preparation of financial statements in conformity with generally accepted
accounting principles and (B) to maintain accountability for assets; (iii)
access to assets is permitted only in accordance with management's general or
specific authorization; and (iv) the recorded accountability for assets is
compared with the existing assets at reasonable intervals and appropriate action
is taken with respect to any differences.
(p) The Company has delivered to the Representatives the
written agreement of each of its officers and directors and Skechers U.S.A.,
Inc. to the effect that each of them will not, for a period of one year
following the Closing Date, other than intra-family transfers or transfers to
trusts for estate planning purposes, without the prior written consent of the
Representatives, offer, sell or contract to sell, or otherwise dispose of, or
announce the offer of, any Common Stock and/or securities exercisable or
exchangeable for, or convertible into, Common Stock.
6
<PAGE> 7
(q) No labor disturbance by the employees of the Company
exists or is imminent, nor is the Company aware of any existing or imminent
labor disturbance by the employees of any principal suppliers, contract
manufacturing organizations, manufacturers, authorized dealers or distributors,
in either case, where such labor disturbance might be expected to result in any
material adverse change in the condition (financial or otherwise), earnings,
operations, business or prospects of the Company. No collective-bargaining
agreement exists with any of the Company's employees and, to the best knowledge
of the Company, no such agreement is imminent.
(r) The Company has filed all United States, state, local and
foreign tax returns which are required to be filed or has requested extensions
thereof and has paid all taxes, including withholding taxes, penalties and
interest, assessments, fees and other charges to the extent that the same have
become due and payable. No tax assessment or deficiency has been made or
proposed against the Company nor has the Company received any notice of any
proposed assessment or deficiency.
(s) Except as set forth in the Prospectus and except as to
which may exist in the ordinary course of business with Skechers U.S.A., Inc.
consistent with past practice, there are no outstanding loans, advances or
guaranties of indebtedness by the Company to or for the benefit of any of its
"affiliates," as such term is defined in the Rules and Regulations, or any of
its officers or directors, or any of the members of the families of any of them.
(t) The Company has not, directly or indirectly, at any time
(i) made any contributions to any candidate for political office, or failed to
disclose fully any such contribution, in violation of law; (ii) made any payment
to any state, federal or foreign governmental officer or official, or other
person charged with similar public or quasi-public duties, other than payments
required or allowed by all applicable laws; or (iii) violated nor is it in
violation of any provision of the Foreign Corrupt Practices Act of 1977, as
amended.
(u) The Company does not have any liability, known or unknown,
matured or not matured, absolute or contingent, assessed or unassessed, imposed
or based upon any provision of, or has received notice of any potential
liability under, any foreign, United States, state or local law, rule or
regulation, or the common law, or any tort, nuisance or absolute liability
theory applicable to the Company, or under any code, order, decree, judgment or
injunction applicable to the Company relating to public health or safety, worker
health or safety or pollution, damage to or protection of the environment,
including, without limitation, laws relating to damage to natural resources,
emissions, discharges, releases or threatened releases of hazardous materials
into the environment (including, without limitation, ambient air, surface water,
groundwater, land surface or subsurface strata), or otherwise relating to the
manufacture, processing, use, treatment, storage, generation, disposal,
transport or handling of hazardous materials. As used herein, "hazardous
material" includes chemical substances, wastes, pollutants, contaminants,
hazardous or toxic substances, constituents, materials or wastes, whether solid,
gaseous or liquid in nature.
(v) The Company has not distributed and will not distribute
prior to the Closing Date or on or prior to any date on which the Option
Securities are to be purchased, as
7
<PAGE> 8
the case may be, any prospectus or other offering material in connection with
the offering and sale of the Securities other than the Prospectus, the
Registration Statement, and any other material which may be permitted by the
Securities Act and the Rules and Regulations.
(w) The Common Stock has been approved for inclusion for
quotation on the National Association of Securities Dealers Automated Quotation
National Market System (the "National Market System"), subject to official
notice of issuance.
(x) The Company is familiar with and has discussed with its
United States legal counsel the Investment Company Act of 1940, as amended (the
"1940 Act"), and the rules and regulations thereunder, and has in the past
conducted, and intends in the future to conduct, its affairs in such a manner as
to ensure that it will not become an "investment company" within the meaning of
the 1940 Act and such rules and regulations.
(y) The Representatives' Warrants have been duly and validly
authorized, and when issued and delivered will be valid and binding obligations
of the Company in accordance with their terms; the Warrant Securities have been
duly and validly authorized for issuance upon exercise of the Representatives'
Warrants, and when so issued will be validly issued, fully paid and
non-assessable; and no stockholder of the Company has any preemptive rights with
respect to the Representatives' Warrants or the Warrant Securities.
(z) The Company does not know of any facts which may adversely
affect its earnings, prospects or business which have not been fully disclosed
in writing to the Representatives.
2. Purchase, Sale and Delivery of Securities.
(a) On the basis of the representations, warranties and
covenants contained in this Agreement, and subject to the terms and conditions
set forth in this Agreement, the Company agrees to sell to the several
Underwriters, and each of the Underwriters agrees, severally and not jointly, to
purchase from the Company, at a purchase price of $ per share of Common Stock,
the respective number of Firm Securities set forth opposite the name of such
Underwriter in Schedule I to this Agreement (subject to adjustment as provided
in Section 8 of this Agreement).
(b) On the basis of the representations, warranties and
covenants contained in this Agreement, and subject to the terms and conditions
set forth in this Agreement, including the terms set forth below, the Company
grants an option to the several Underwriters to purchase from the Company all or
any portion of 210,000 shares of Common Stock at the same price per share of
Common Stock as the Underwriters shall pay for the shares of Common Stock
included in the Firm Securities. Said option may be exercised only to cover
over-allotments in the sale of the Firm Securities by the Underwriters and may
be exercised in whole or in part at any time (but not more than once) on or
before the sixtieth day after the date of the Prospectus upon written,
telecopied or telegraphic notice by the Representatives to the Company setting
forth the aggregate number and class of Option Securities as to which the
several Underwriters are exercising the option and the settlement date. The
Option Securities shall be purchased
8
<PAGE> 9
severally, and not jointly, by each Underwriter, if purchased at all, in the
same proportion that the number of Firm Securities set forth opposite the name
of the Underwriter in Schedule I to this Agreement bears to the total number of
Firm Securities to be purchased by the Underwriters under Section 2(a), above,
subject to such adjustments as the Representatives in their absolute discretion
shall make to eliminate any fractional shares. Delivery of certificates for the
Option Securities, and payment therefor, shall be made as provided in Section
2(c) and Section 2(d) below.
(c) Delivery of certificates for the Firm Securities and the
Option Securities (if the option granted by the Company in Section 2(b) above
shall have been exercised not later than 10:00 a.m., California time, on the
date two business days preceding the Closing Date), and payment therefor, less
any reimbursable expenses provided for in Section 4(a) of this Agreement and the
nonaccountable expense allowance provided for in Section 4(b) of this Agreement,
shall be made at the office of Joseph Charles &Associates, Inc., Beverly Hills,
California, at 7:00 a.m., California time, on the later to occur of (i) the
fourth business day after the date of this Agreement, (ii) the third business
day after the date the Firm Securities are first offered to the public, or (iii)
as provided in Section 8 of this Agreement. The date and hour of delivery and
payment for the Firm Securities are referred to in this Agreement as the
"Closing Date." As used in this Agreement, "business day" means a day on which
the New York Stock Exchange is open for trading and on which banks in California
are open for business and not permitted by law or executive order to be closed.
(d) If any of the options granted by the Company in Section
2(b) above shall be exercised after 10:00 a.m., California time, on the date two
business days preceding the Closing Date, delivery of certificates for the
Option Securities, and payment therefor, shall be made at the office of Joseph
Charles &Associates, Inc., Beverly Hills, California, at 7:00 a.m., California
time, on the date specified by the Representatives (which shall be within four
business days after the exercise of the option).
(e) Payment of the purchase price for the Securities by the
several Underwriters shall be made by certified or official bank check or checks
drawn in next-day funds, payable to the order of the Company (and the Company
agrees not to deposit or permit deposit of any such check in the bank on which
drawn until the day following the date of its delivery to the Company). Such
payment shall be made upon delivery of certificates for the Securities to you
for the respective accounts of the several Underwriters. Certificates for the
Securities to be delivered to you shall be registered in such name or names and
shall be in such denominations as the Representatives may request at least two
business days before the Closing Date, in the case of Firm Securities, and at
least one business day prior to the purchase of the Option Securities, in the
case of the Option Securities. Such certificates will be made available to the
Underwriters for inspection, checking and packaging at the offices of Joseph
Charles &Associates, Inc., Boca Raton, Florida, not less than one full business
day prior to the Closing Date or, in the case of the Option Securities, by 3:00
p.m., Florida time, on the first business day preceding the date of purchase.
It is understood that either or both of the Representatives,
individually and not on behalf of the Underwriters, may (but shall not be
obligated to) make payment to the Company for
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<PAGE> 10
Securities to be purchased by any Underwriter whose check shall not have been
received by the Representatives on the Closing Date or any later date on which
Option Securities are purchased for the account of such Underwriter. Any such
payment shall not relieve such Underwriter from any of its obligations
hereunder.
(f) It is understood that the several Underwriters propose to
offer the Securities for sale to the public as soon as the Representatives deem
it advisable to do so (the "Public Offering"). The Firm Securities are to be
initially offered to the public at the public offering price set forth in the
Prospectus (the "Public Offering Price"). The Representatives may from time to
time thereafter change the public offering price and other selling terms.
(g) The information set forth in the last paragraph on the
front cover page (insofar as such information relates to the Underwriters), the
legend respecting stabilization set forth on the inside front cover page, and
the statements in the first two paragraphs and the penultimate paragraph set
forth under the caption "Underwriting" in any Preliminary Prospectus and in the
final form of Prospectus filed pursuant to Rule 424(b), constitute the only
information furnished by the Underwriters to the Company for inclusion in any
Preliminary Prospectus, the Prospectus or the Registration Statement.
3. Further Agreements of the Company. The Company covenants and agrees
with the several Underwriters as follows:
(a) The Company will use its best efforts to cause the
Registration Statement, and any amendment thereof, if not effective at the time
of execution of this Agreement, to become effective as promptly as possible. If
the Registration Statement has become or becomes effective pursuant to Rule
430A, or filing of the Prospectus is otherwise required under Rule 424(b), the
Company will file the Prospectus, properly completed (and in form and substance
reasonably satisfactory to counsel for the Underwriters) pursuant to Rule 424(b)
within the time period prescribed and will provide evidence satisfactory to the
Representatives of such timely filing. The Company will not file the Prospectus,
any amended Prospectus, any amendment of the Registration Statement or
supplement to the Prospectus without advising the Representatives of, and
furnishing the Representatives with copies thereof a reasonable time prior to
the proposed filing of, such amendment or supplement and without obtaining the
prior consent of the Representatives to such filing. The Company will prepare
and file with the Commission, promptly upon the request of the Representatives,
any amendment to the Registration Statement or supplement to the Prospectus that
may be necessary or advisable in connection with the distribution of the
Securities by you, and use its best efforts to cause the same to become
effective as promptly as possible.
(b) The Company will promptly advise the Representatives (i)
when the Registration Statement shall have become effective, (ii) when any
amendment thereof shall have become effective, (iii) of any request by the
Commission for any amendment of or supplement to the Registration Statement or
the Prospectus or for any additional information, (iv) of the issuance by the
Commission of any stop order suspending the effectiveness of the Registration
Statement or the institution or threatening of any proceeding for that purpose
and (v) of the receipt by the Company of any notification with respect to the
suspension of the qualification
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<PAGE> 11
of the Securities for sale in any jurisdiction or the initiation or threatening
of any proceeding for such purpose. The Company will use its best efforts to
prevent the issuance of any such stop order or suspension and, if issued, to
obtain as soon as possible the withdrawal thereof.
(c) The Company will (i) on or before the Closing Date,
deliver to each of you and your counsel a conformed copy of the Registration
Statement as filed and of each amendment thereto filed prior to the time the
Registration Statement becomes effective and, promptly upon the filing thereof,
a conformed copy of each post-effective amendment, if any, to the Registration
Statement (together with, in each case, all exhibits thereto unless previously
furnished to you) and all documents filed by the Company with the Commission
under the Exchange Act and deemed to be incorporated by reference into any
Preliminary Prospectus or the Prospectus, and will also deliver to you, for
distribution to the several Underwriters, a sufficient number of additional
conformed copies of each of the foregoing (excluding exhibits) so that one copy
of each may be distributed to each Underwriter, (ii) as promptly as possible
deliver to each of you and send to the several Underwriters, at such office or
offices as you may designate, as many copies of the Prospectus as you may
reasonably request and (iii) thereafter from time to time during the period in
which a prospectus is required by law to be delivered by an Underwriter or a
dealer, likewise send to the Underwriters as many additional copies of the
Prospectus and as many copies of any supplement to the Prospectus and of any
amended Prospectus, filed by the Company with the Commission, as you may
reasonably request for the purposes contemplated by the Securities Act.
(d) If at any time during the period in which a prospectus is
required by law to be delivered by an Underwriter or a dealer any event shall
occur as a result of which it is necessary to supplement or amend the Prospectus
in order to make the Prospectus not misleading in the light of the circumstances
existing at the time it is delivered to a purchaser of the Securities, or if it
shall be necessary to amend or to supplement the Prospectus to comply with the
Securities Act or the Rules and Regulations, the Company will forthwith prepare
and file with the Commission a supplement to the Prospectus or an amended
Prospectus so that the Prospectus as so supplemented or amended will not contain
any untrue statement of a material fact or omit to state any material fact
necessary in order to make the statements therein, in the light of the
circumstances existing at the time such Prospectus is delivered to such
purchaser, not misleading, and so that it then will otherwise comply with the
Securities Act and the Rules and Regulations. If, after the public offering of
the Securities by the Underwriters and during such period, the Underwriters
shall propose to vary the terms of offering thereof by reason of changes in
general market conditions or otherwise, you will advise the Company in writing
of the proposed variation, and, if in the opinion either of counsel for the
Company or of counsel for the Underwriters such proposed variation requires that
the Prospectus be supplemented or amended, the Company will forthwith prepare
and file with the Commission a supplement to the Prospectus or an amended
prospectus setting forth such variation. The Company authorizes the Underwriters
and all dealers to whom any of the Securities may be sold by the several
Underwriters to use the Prospectus, as from time to time amended or
supplemented, in connection with the sale of the Securities in accordance with
the applicable provisions of the Securities Act and the Rules and Regulations
for such period.
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<PAGE> 12
(e) Prior to the filing thereof with the Commission, the
Company will submit to you, for your information, a copy of any post-effective
amendment to the Registration Statement and any supplement to the Prospectus or
any amended Prospectus proposed to be filed.
(f) The Company will cooperate with you and your counsel in
the qualification of the Securities for offer and sale under the securities or
Blue Sky laws of such jurisdictions as you may designate and, during the period
in which a prospectus is required by law to be delivered by an Underwriter or a
dealer, in keeping such qualifications in good standing under said securities or
Blue Sky laws; provided, however, that the Company shall not be obligated to
file any general consent to service of process or to qualify to do business as a
foreign corporation in any jurisdiction in which it is not so qualified. The
Company will, from time to time, prepare and file such statements, reports, and
other documents as are or may be required to continue such qualifications in
effect for so long a period as you may reasonably request for distribution of
the Securities.
(g) During a period of five years commencing with the date of
this Agreement, the Company will promptly furnish to each of you, and to each
Underwriter who may so request in writing, copies of all periodic and special
reports furnished to shareholders of the Company, of all information, documents
and reports filed with Commission, any securities exchange or the National
Association of Securities Dealers, Inc. and of all press releases and material
news items or articles in respect of the Company, its products or affairs
released or prepared by the Company (other than promotional and marketing
materials disseminated solely to customers and potential customers of the
Company in the ordinary course of business); and any additional information
concerning the Company or its business which you may reasonably request.
(h) As soon as practicable, but not later than the 45th day
following the end of the fiscal quarter first ending after the first anniversary
of the Effective Date, the Company will make generally available to its
securities holders and furnish to the Representatives an earnings statement or
statements in accordance with Section 11(a) of the Securities Act and Rule 158
thereunder.
(i) The Company agrees that it will cause each of its
executive officers and directors and Skechers U.S.A., Inc to enter into
agreements with the Representatives to the effect that they will not, directly
or indirectly, without your prior written consent, sell, offer, contract to
sell, grant any option to purchase, or otherwise dispose of any shares of Common
Stock, or any securities convertible into, exchangeable for or exercisable for
Common Stock, or any rights to purchase or acquire Common Stock (other than
intra-family transfers or transfers to trusts for estate planning purposes) for
a period of one year after the Closing Date, other than the sale of the
Securities to be sold to the Underwriters pursuant to this Agreement.
(j) The Company will apply the net proceeds from the offering
received by it in the manner set forth under the caption "Use of Proceeds" in
the Prospectus.
(k) The Company will, prior to the date of this Agreement, and
at all times thereafter, unless such securities are then listed on a national
securities exchange, cause each of the Securities to be included for quotation
on the National Market System, and the Company will
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<PAGE> 13
comply with all registration, filing, reporting and other requirements of the
Exchange Act and National Market System which may from time to time be
applicable to the Company.
(l) The Company will use its best efforts to maintain
insurance of the types and in the amounts which it deems adequate for its
business and consistent with insurance coverage maintained by companies of
similar size and engaged in similar businesses, including, but not limited to,
general liability insurance covering all real and personal property owned or
leased by the Company against theft, damage, destruction, acts of vandalism and
all other risks customarily insured against. The Company will obtain and
maintain a reasonable amount of Directors and Officers liability insurance from
a responsible insurer who shall be satisfactory to the Representatives (provided
that such insurance can be obtained at a reasonable cost, as determined by the
Company and the Representatives).
(m) In accordance with the Representative's Warrant Agreement,
the Company agrees, upon its receipt from each of Joseph Charles & Associates,
Inc. and of the exercise price set forth in the Representative's Warrant
Agreement in payment therefor, to deliver to each of Joseph Charles &
Associates, Inc. and (individually, and not as the Representatives of the
Underwriters) on the Closing Date upon completion of the purchase and sale of
the Securities pursuant to Section 2 of this Agreement, Warrants (in the form
attached as Exhibit A to the Representatives' Warrant Agreement) representing
the right to purchase up to [140,000 in the aggregate] shares of Common Stock at
a price equal to 120% of the offering price per share of Common Stock to the
public as set forth on the cover page of the Prospectus.
(n) The Company shall use its best efforts to retain in their
current positions the individuals named as executive officers under the caption
"Management" in the Registration Statement for a reasonable period after the
consummation of the Public Offering (but in no circumstance in the absence of
good cause shall such period be less than one year).
(o) The Company shall use its best efforts to at all times
maintain at least two (2) independent directors (that is directors that are not
officers of the Company, who are neither related to its officers nor represent
concentrated or family holdings of the Company's shares, and who, in the view of
the Company's board of directors, are free of any relationship that would
interfere with the exercise of independent judgement (the "Independent
Directors")). The Independent Directors shall constitute a majority of the
Company's audit and compensation committees. Further, the favorable vote of a
majority of the Company's directors, including at least one of the Independent
Directors, shall be required as to any related party transaction between the
Company and any 5% or more shareholder of the Company and/or officer or director
of the Company (or any affiliates of such individuals). Any proposed changes in
the Company's Articles of Incorporation that are not otherwise approved by the
majority vote of the shares held by the Company's non-management shareholders
(shareholders exclusive of Skechers U.S.A., Inc., and officers and directors of
the Company) shall be approved by a majority of the Company's directors and not
disapproved by a majority of the Company's Independent Directors.
(p) The Company will include in the Registration Statement
audited financial statements of the Company for the three fiscal years preceding
the effective date of the
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<PAGE> 14
Registration Statement (reported on by KPMG Peat Marwick, LLP) and, if required
under SEC rules and regulations, pro forma financial data and current unaudited
comparative interim financial statements. The financial statements and pro forma
financial data will present fairly the financial condition of the Company and
the results of its operations at the time and for the periods covered by such
financial statements and pro forma financial data, and such statements and pro
forma financial data will be substantially as heretofore represented to the
Representatives.
(q) Except in connection with acquisitions, and the Company's
right to adopt a stock option plan for the issuance of up to 450,000 shares of
Common Stock and the grant of options to its directors, officers and employees
under such Plan at an exercise price not less than the Public Offering Price
prior to the offering and the Bid price after the offering, the Company will
not, without the Representatives' prior written consent (1) sell any shares of
capital stock or issue any warrants, options or any other security exercisable
or convertible into any shares of capital stock, except pursuant to the
Company's employee benefit plans described in the Registration Statement, or (2)
purchase any shares of capital stock of the Company, in either case, during the
12-month period following the closing of the Public Offering (the "Closing").
(r) The Representatives shall have the right for a period of
three (3) years from the Closing to designate an observer to the Board of
Directors of the Company, which observer shall have the right to attend all
Board and Board committee meetings and shall be compensated on the same basis as
outside members of the Board. The Company shall use its reasonable efforts to
provide the Representative's nominee with an agenda and all accompanying back-up
data for each Board meeting at least one week prior to such meeting. The Company
shall pay all reasonable expenses of the Representative's observer in attending
Board meetings.
(s) As soon as it is legally permitted to do so, the Company
will file and maintain a Registration Statement on Form S-3 covering the Warrant
Securities.
(t) The Company shall enter into a Consulting Agreement for
financial and investment banking services with Joseph Charles & Associates, Inc.
for a period of 24 months, with consulting fees of $2,500 per month, payable in
advance at the Closing.
(u) The Company shall engage the services of an investor
relations advisory firm reasonably acceptable to the Representatives, commencing
prior to the effective date of the Registration Statement and continuing for a
period of at least one year.
4. Fees and Expenses. The Company agrees with each Underwriter that:
(a) The Company shall pay all costs and expenses incident to
the purchase, sale and delivery of the Securities, including without limitation,
all fees and expenses of filing the Registration Statement with the SEC and the
NASD; all Blue Sky fees and expenses, including fees of the Representatives'
counsel (which shall undertake all such Blue Sky matters) up to a maximum of
$15,000; fees and disbursements of counsel and accountants for the Company;
printing and mailing costs, including costs of printing the Registration
Statement, any amendments thereto, all underwriting documents, Blue Sky
memoranda and a reasonable quantity
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<PAGE> 15
of prospectuses as determined by the Representatives; the Company's and
Representatives' road show cost and expenses; and the cost of preparing a total
of three (3) sets of bound volumes of the Public Offering documents for the
Representatives and their counsel. The Company shall also pay for the cost of
advertising the Public Offering in the national edition of the Wall Street
Journal and all other expenses for advertising undertaken at the Company's
request, including graphic slide costs. The Representatives shall pay the fees
and disbursements of their counsel, with the exception of the Blue Sky fees
described above.
(b) In addition to its obligations under Section 4(a) above,
the Company agrees to pay the Representatives a non-accountable expense
allowance equal to two and one-half percent (2-1/2%) of the aggregate Public
Offering Price of the Securities sold in the Public Offering, including any
over-allotment Securities sold in such offering. Such allowance, less $40,000
which was paid to the Representatives by the Company upon the execution of the
letter of intent relating to this offering, shall be paid to the Representatives
as provided in Section 2(c) of this Agreement.
5. Conditions of Underwriters' Obligations. The obligations of the
several Underwriters to purchase and pay for the Securities shall be subject, in
the sole discretion of the Representatives, to the accuracy as of the date of
execution of this Agreement, the Closing Date and the date on which the Option
Securities are to be purchased, as the case may be, of the representations and
warranties of the Company set forth in this Agreement, to the accuracy of the
statements of the Company and its officers made in any certificate delivered
pursuant to the terms of this Agreement, to the performance by the Company of
all of its obligations to be performed under this Agreement at or prior to the
Closing Date or any later date on which Option Securities are to be purchased,
as the case may be, and to the following additional conditions:
(a) The Registration Statement shall have become effective,
(or, if a post-effective amendment is required to be filed pursuant to Rule 430A
under the Act, such post-effective amendment shall become effective and the
Company shall have provided evidence satisfactory to the Representatives of such
filing and effectiveness) not later than 5:00 p.m., California time, on the date
of this Agreement or at such later date and time as you may approve in writing
and, at the Closing Date, or, with respect to the Option Securities, the date on
which such Option Securities are to be purchased, no stop order suspending the
effectiveness of the Registration Statement or any qualification or exemption
from qualification for the sale of the Securities in any jurisdiction shall have
been issued and no proceedings for that purpose shall have been instituted or
threatened; and any request for additional information on the part of the
Commission shall have been complied with to the reasonable satisfaction of the
Representatives and their counsel.
(b) The Representatives shall have received from Troop
Meisinger Steuber & Pasich, LLP, counsel for the Underwriters, an opinion dated
the Closing Date, with respect to the issuance and sale of the Securities, and
such other related matters as the Representatives may reasonably require, and
the Company shall have furnished such counsel with all documents which they may
request for the purpose of enabling them to pass upon such matters.
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<PAGE> 16
(c) You shall have received on the Closing Date and on any
later date on which Option Securities are purchased, as the case may be, the
opinion of Freshman, Marantz, Orlanski, Cooper & Klein, counsel for the Company,
addressed to the Underwriters and dated the Closing Date or such later date, and
with reproduced copies or signed counterparts thereof for each of the
Underwriters, covering the matters set forth in Annex A to this Agreement.
(d) You shall be satisfied that there has not been any
material change in the market for securities in general or in political,
financial or economic conditions from those reasonably foreseeable as to render
it impracticable in your sole judgment to make a public offering of the
Securities, or a material adverse change in market levels for securities in
general (or those of companies in particular) or financial or economic
conditions which render it inadvisable to proceed.
(e) You shall have received on the Closing Date and on any
later date on which Option Securities are purchased a certificate, dated the
Closing Date or such later date, as the case may be, and signed by the President
and the Chief Financial Officer of the Company, stating that:
(i) The representations and warranties of the Company
set forth in Section 1 of this Agreement are true and correct with the same
force and effect as if expressly made at and as of such date, and the Company
has complied with all the agreements and satisfied all the conditions on its
part to be performed or satisfied at or prior to such date;
(ii) no stop order suspending the effectiveness of
the Registration Statement has been issued, and no proceedings for that purpose
have been instituted or are pending or are threatened under the Securities Act;
(iii) the Securities have been duly designated
national market system securities, duly authorized for quotation on the National
Market System; and
(iv) (A) the respective signers of said certificate
have carefully examined the Registration Statement in the form in which it
originally became effective and the Prospectus and any supplements or amendments
thereto, and that, as of the Effective Date, the statements made in the
Registration Statement and the Prospectus were true and correct in all material
respects, and the Registration Statement did not omit to state any material fact
required to be stated therein or necessary in order to make the statements
therein not misleading, and the Prospectus did not omit to state any material
fact required to be stated therein or necessary in order to make the statements
therein, in light of the circumstance under which they were made, not
misleading, (B) since the Effective Date, no event has occurred that should have
been set forth in a supplement or amendment to the Prospectus that has not been
set forth in such a supplement or amendment, (C) since the respective dates as
of which information is given in the Registration Statement in the form in which
it originally became effective and the Prospectus contained therein, there has
not been any material adverse change or any development involving a prospective
material adverse change in or affecting the business, properties, condition
(financial or otherwise), capitalization, prospects or results of operations of
the Company, whether or not arising from transactions in the ordinary course of
business, and, since such
16
<PAGE> 17
dates, except in the ordinary course of business, the Company has not entered
into any material transaction not referred to in the Registration Statement in
the form in which it originally became effective and the Prospectus contained
therein, (D) there are not any pending or known threatened legal proceedings to
which the Company is a party or of which property of the Company is the subject
which are material and which are not disclosed in the Registration Statement and
the Prospectus, and (E) there are not any license agreements, contracts, leases
or other documents that are required to be filed as exhibits to the Registration
Statement that have not been filed as required.
(f) On the date of this Agreement and on each Closing Date you
shall have received a letter from KPMG Peat Marwick LLP, independent
accountants, dated such date and Closing Date, respectively, addressed to you as
Representative, to the effect that:
(i) it is an independent certified public accountant
with respect to the Company within the meaning of the Securities Act and the
applicable Rules and Regulations;
(ii) in its opinion, the financial statements, pro
forma financial data, and the respective notes thereto, of the Company examined
by it and contained in the Prospectus comply as to form in all material respects
with the applicable accounting requirements of the Securities Act and the Rules
and Regulations;
(iii) On the basis of its procedures and inquiries as
specified in its letters, nothing has come to its attention to cause it to
believe that (A) the data (including pro forma data) included in the Prospectus
under the caption "Selected Financial Data" do not agree with the corresponding
amounts in the audited financial statements and pro forma data for and as at the
end of each of the periods then ended; and (B) at a specified date not more than
five business days prior to the date of such letter, (x) there was any change in
the capital stock or long-term debt of the Company or any decrease in net
current assets or net assets or share holders' equity, in each case as compared
with the corresponding amounts shown in the September 30, 1996 balance sheet
contained in the Prospectus, or (y) for the period from October 1, 1996 to the
specified date referred to above, as compared with the corresponding period in
the prior year, there was any decrease in sales, net income or income per share,
except in all instances for changes or decreases which the Prospectus discloses
have occurred or may occur, or if there was any change or decrease, setting
forth the amount of such change or decrease.
(iv) It has compared the information expressed in
amounts, dollar amounts and percentages derived therefrom, and other financial
information pertaining to the Company set forth in the Prospectus specified by
you, in each case to the extent such information was obtained or derived from
the general accounting records of the Company, with the results obtained from
the application of specified readings, inquiries and other appropriate
procedures set forth in such letters, and found by it to be in agreement.
In addition, you shall have received from KPMG Peat Marwick
LLP on or prior to the Closing Date, a letter addressed to the Company and made
available to you for the use of the Underwriters stating that their review of
the Company's system of internal controls, to
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<PAGE> 18
the extent they deemed necessary in establishing the scope of their examination
of the Company's financial statements as of December 31, 1995, did not disclose
any weaknesses in internal controls that they considered to be material
weaknesses.
(g) Prior to the Closing Date, the Securities shall have been
designated national market system securities, duly authorized for quotation on
the National Market System upon official notice of issuance.
(h) On or prior to the Closing Date, you shall have received
from the Company's officers and directors and from Skechers U.S.A., Inc.
executed lock-up agreements covering the matters described in Section 1(xvi) of
this Agreement.
(i) On or prior to the Closing Date, the Company shall have
entered into the Representatives' Warrant Agreement, substantially in the form
filed as Exhibit 4.2 to the Registration Statement; and on the Closing Date,
concurrently with the purchase and sale of the Securities, the Company shall
have issued, sold and delivered the Warrants to the Representatives.
(j) The Company shall have furnished to you such further
certificates and documents as you shall reasonably request (including
certificates of officers of the Company), as to the accuracy of the
representations and warranties of the Company set forth in this Agreement, as to
the performance by the Company of its obligations under this Agreement and as to
the other conditions concurrent and precedent to the obligations of the
Underwriters under this Agreement.
All the agreements, opinions, certificates and letters mentioned above
or elsewhere in this Agreement will be in compliance with the provisions of this
Agreement only if they are reasonably satisfactory to Troop Meisinger Steuber &
Pasich, LLP, counsel for the Underwriters. The Company will furnish you with
such number of conformed copies of such opinions, certificates, letters and
documents as you shall reasonably request.
If any of the conditions specified in this Section 5 shall not have
been fulfilled in all material respects when and as provided in this Agreement,
or if any of the opinions and certificates mentioned above or elsewhere in this
Agreement shall not be in all material respects reasonably satisfactory in form
and substance to the Representatives and their counsel, this Agreement and all
obligations of the Underwriters hereunder may be canceled by the Representatives
at, or at any time prior to, the Closing Date or (with respect to the Option
Securities) prior to the date upon which the Option Securities are to be
purchased, as the case may be. Notice of such cancellation shall be given to the
Company in writing or by telephone, telecopy or telegraph confirmed in writing.
Any such termination shall be without liability of the Company to the
Underwriters (except as provided in Section 4 or Section 7 of this Agreement)
and without liability of the Underwriters to the Company (except to the extent
provided in Section 7 of this Agreement).
6. Conditions of the Obligation of the Company. The obligations of the
Company to sell and deliver the Securities required to be delivered as and when
specified in this
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<PAGE> 19
Agreement shall be subject to the condition that at the Closing Date or (with
respect to the Option Securities) the date upon which the Option Securities are
to be purchased, no stop order suspending the effectiveness thereof shall be in
effect and no proceedings therefor shall be pending or threatened by the
Commission.
7. Indemnification and Contribution.
(a) The Company agrees to indemnify and hold harmless each
Underwriter and each person (including each partner or officer thereof) who
controls any Underwriter within the meaning of Section 15 of the Securities Act
from and against any and all losses, claims, damages or liabilities, joint or
several, to which such indemnified parties or any of them may become subject
under the Securities Act, the Exchange Act or other federal or state statute,
law or regulation, at common law or otherwise, specifically including but not
limited to losses, claims, damages or liabilities (or actions in respect
thereof) related to negligence on the part of any Underwriter, and the Company
agrees to reimburse each such Underwriter and controlling person for any legal
or other expenses (including, except as otherwise hereinafter provided,
settlement expenses and reasonable fees and disbursements of counsel) incurred
by the respective indemnified parties in connection with defending against any
such losses, claims, damages or liabilities or in connection with any
investigation or inquiry of, or other proceeding that may be brought against,
the respective indemnified parties, in each case insofar as such losses, claims,
damages or liabilities (or actions in respect thereof) arise out of or are based
upon, in whole or in part, (i) any breach of any representation, warranty, or
covenant of the Company in this Agreement, (ii) any untrue statement or alleged
untrue statement of a material fact contained in the Registration Statement in
the form originally filed or in any amendment thereto (including the Prospectus
as part thereof) or any post-effective amendment thereto, or the omission or
alleged omission to state therein a material fact required to be stated therein
or necessary to make the statements therein, in light of the circumstances under
which they were made, not misleading, or (iii) any untrue statement or alleged
untrue statement of a material fact contained in any Preliminary Prospectus or
the Prospectus (as amended or as supplemented if the Company shall have filed
with the Commission 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 the light of the circumstances under which they were
made, not misleading; or (iv) any untrue statement or alleged untrue statement
of a material fact contained in any application or other document, or any
amendment or supplement thereto, executed by the Company or based upon written
information furnished by or on behalf of the Company filed in any jurisdiction
in order to qualify the Securities under the securities or Blue Sky laws thereof
or filed with the Commission or any securities association or securities
exchange, or the omission or alleged omission to state therein a material fact
required to be stated therein or necessary to make the statements therein, in
light of the circumstances under which they were made, not misleading; provided,
however, that (1) the indemnity agreements of the Company contained in this
Section 7(a) shall not apply to any such losses, claims, damages, liabilities or
expenses if such statement or omission was made in reliance upon and in
conformity with information furnished in writing to the Company by or on behalf
of any Underwriter through the Representatives specifically for use in any
Preliminary Prospectus or the Registration Statement or the Prospectus or any
such amendment thereof or supplement thereto and (2) the indemnity agreement
contained in this Section 7(a) with respect to any Preliminary Prospectus
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<PAGE> 20
shall not inure to the benefit of any Underwriter from whom the person asserting
any such losses, claims, damages, liabilities or expenses purchased the
Securities that are the subject thereof (or to the benefit of any person
controlling such Underwriter) if a copy of the Prospectus (or the Prospectus as
amended or supplemented) was not sent or delivered to such person within the
time required by the Securities Act and the Rules and Regulations and the untrue
statement or omission of a material fact contained in such Preliminary
Prospectus was corrected in the Prospectus (or the Prospectus as amended or
supplemented), unless the failure is the result of noncompliance by the Company
with Section 3 of this Agreement. The indemnity agreements of the Company
contained in this Section 7(a) and the representations and warranties of the
Company contained in Section 1(a) of this Agreement shall remain operative and
in full force and effect regardless of any investigation made by or on behalf of
any indemnified party and shall survive the delivery of and payment for the
Securities. This Indemnity Agreement shall be in addition to any liabilities
which the Company may otherwise have.
(b) Each Underwriter severally agrees to indemnify and hold
harmless the Company, each of its officers who signs the Registration Statement,
each of its directors, each other Underwriter, and each person (including each
partner or officer thereof) who controls the Company or any such other
Underwriter within the meaning of Section 15 of the Securities Act from and
against any and all losses, claims, damages or liabilities, joint or several, to
which such indemnified parties or any of them may become subject under the
Securities Act, the Exchange Act, or other federal or state statute, law or
regulation or at common law or otherwise and to reimburse each of them for any
legal or other expenses (including, except as otherwise hereinafter provided,
settlement expenses and reasonable fees and disbursements of counsel) incurred
by the respective indemnified parties in connection with defending against any
such losses, claims, damages or liabilities or in connection with any
investigation or inquiry of, or other proceeding that may be brought against,
the respective indemnified parties, in each case arising out of or based upon
(i) any breach of any representation, warranty or covenant of the indemnifying
Underwriter in this Agreement, (ii) any untrue statement or alleged untrue
statement of a material fact contained in the Registration Statement (including
the Prospectus as part thereof) or any post-effective amendment thereto, or the
omission or alleged omission to state therein, in the light of the circumstances
under which they were made, a material fact required to be stated therein or
necessary to make the statements therein not misleading or (iii) any untrue
statement or alleged untrue statement of a material fact contained in any
Preliminary Prospectus or the Prospectus (as amended or as supplemented if the
Company shall have filed with the Commission 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 the light of the
circumstances under which they were made, not misleading, but only if such
statement or omission was made in reliance upon and in conformity with
information furnished in writing to the Company by or on behalf of such
indemnifying Underwriter through the Representatives specifically for use in any
Preliminary Prospectus or the Registration Statement or the Prospectus or any
such amendment thereof or supplement thereto. The Company acknowledges and
agrees that the disclosure described in Section 2(g) of this Agreement
constitutes the only information furnished in writing by or on behalf of the
several Underwriters for inclusion in the Registration Statement or the
Prospectus or in any Preliminary Prospectus. The indemnity agreement of each
Underwriter contained in this Section 7(b) shall remain operative and in full
force and effect regardless of any investigation made by or on
20
<PAGE> 21
behalf of any indemnified party and shall survive the delivery of and payment
for the Securities. This Indemnity Agreement shall be in addition to any
liabilities which each Underwriter may otherwise have.
(c) Each party indemnified under the provisions of Sections
7(a) and 7(b) above, agrees that, upon the service of a summons or other initial
legal process upon it in any action or suit instituted against it or upon its
receipt of written notification of the commencement of any investigation or
inquiry of, or proceeding against, it in respect of which indemnity may be
sought on account of any indemnity agreement contained in such Sections , it
will, if a claim in respect thereunder is to be made against the indemnifying
party or parties under this Section 7, promptly give written notice (the
"Notice") of such service or notification to the party or parties from whom
indemnification may be sought hereunder. No indemnification provided for in
Sections 7(a) and 7(b) above, shall be available to any party who shall fail so
to give the Notice if the party to whom such Notice was not given was unaware of
the action, suit, investigation, inquiry or proceeding to which the Notice would
have related and was materially prejudiced by the failure to receive the Notice,
but the omission so to notify such indemnifying party or parties of any such
service or notification shall not relieve such indemnifying party or parties
from any liability which it or they may have to the indemnified party for
contribution or otherwise than on account of such indemnity agreement. Any
indemnifying party shall be entitled at its own expense to participate in the
defense of any action, suit or proceeding against, or investigation or inquiry
of, an indemnified party. Any indemnifying party shall be entitled, if it so
elects within a reasonable time after receipt of the Notice by giving written
notice (the "Notice of Defense") to the indemnified party, to assume (alone or
in conjunction with any other indemnifying party or parties) the entire defense
of such action, suit, investigation, inquiry or proceeding, in which event such
defense shall be conducted, at the expense of the indemnifying party or parties,
by counsel chosen by such indemnifying party or parties and reasonably
satisfactory to the indemnified party or parties; provided, however, that (i) if
the indemnified party or parties reasonably determine that there may be a
conflict between the positions of the indemnifying party or parties and of the
indemnified party or parties in conducting the defense of such action, suit,
investigation, inquiry or proceeding or that there may be legal defenses
available to such indemnified party or parties different from or in addition to
those available to the indemnifying party or parties, then counsel for the
indemnified party or parties shall be entitled to conduct the defense to the
extent reasonably determined by such counsel to be necessary to protect the
interests of the indemnified party or parties and (ii) in any event, the
indemnified party or parties shall be entitled to have counsel chosen by such
indemnified party or parties participate in, but not conduct, the defense,
however, in no event shall the indemnifying parties be obligated to pay for more
than one firm of attorneys and one local counsel in each appropriate
jurisdiction for all of the indemnified parties. If, within a reasonable time
after receipt of the Notice, an indemnifying party gives a Notice of Defense and
the counsel chosen by the indemnifying party or parties is reasonably
satisfactory to the indemnified party or parties, the indemnifying party or
parties will not be liable under Sections 7(a) through 7(c) for any legal or
other expenses subsequently incurred by the indemnified party or parties in
connection with the defense of the action, suit, investigation, inquiry or
proceeding, except that (A) the indemnifying party or parties shall bear and pay
the legal and other expenses incurred in connection with the conduct of the
defense as referred to in clause (i) of the proviso to the preceding sentence
and (B) the indemnifying party or parties shall bear and pay such other
21
<PAGE> 22
expenses as it or they have authorized to be incurred by the indemnified party
or parties. If, within a reasonable time after receipt of the Notice, no Notice
of Defense has been given, the indemnifying party or parties shall be
responsible for any legal or other expenses incurred by the indemnified party or
parties in connection with the defense of the action, suit, investigation,
inquiry or proceeding.
(d) In order to provide for just and equitable contribution in
any action in which a claim for indemnification is made pursuant to this Section
7 but is judicially determined (by the entry of a final judgment or decree by a
court of competent jurisdiction and the expiration of time to appeal or the
denial of the last right to appeal) that such indemnification may not be
enforced in such case notwithstanding the fact that this Section 7 provides for
indemnification in such case, each indemnifying party shall contribute to the
amount paid or payable by such indemnified party as a result of the losses,
claims, damages or liabilities referred to in Section 7(a) and 7(b) above, (i)
in such proportion as is appropriate to reflect the relative benefits received
by each indemnifying party from the offering of the Securities or (ii) if the
allocation provided by clause (i) above is not permitted by applicable law, in
such proportion as is appropriate to reflect not only the relative benefits
referred to in clause (i) above but also the relative fault of each indemnifying
party in connection with the statements or omissions that resulted in such
losses, claims, damages or liabilities, or actions in respect thereof, as well
as any other relevant equitable considerations. The relative benefits received
by the Company and the Underwriters shall be deemed to be in the same respective
proportions as the total net proceeds from the offering of the Securities
received by the Company, and the total underwriting discount retained by the
Underwriters, bear to the aggregate public offering price of the Securities.
Relative fault shall be determined by reference to, among other things, whether
the untrue or alleged untrue statement of a material fact or the omission or
alleged omission to state a material fact relates to information supplied by
each indemnifying party, and the parties' relative intent, knowledge, access to
information and opportunity to correct or prevent such untrue statement or
omission.
The parties agree that it would not be just and equitable if
contribution pursuant to this Section 7(d) were to be determined by pro rata
allocation (even if the Underwriters were treated as one entity for such
purpose) or by any other method of allocation which does not take into account
the equitable considerations referred to in the first sentence of this Section
7(d). The amount paid by an indemnified party as a result of the losses, claims,
damages or liabilities, or actions in respect thereof, referred to in the first
sentence of this Section 7(d) shall be deemed to include any legal or other
expenses reasonably incurred by such indemnified party in connection with
investigating, preparing to defend or defending against any action or claim
which is the subject of this Section 7(d). Notwithstanding the provisions of
this Section 7(d), no Underwriter shall be required to contribute any amount in
excess of the underwriting discount applicable to the Securities purchased by
that Underwriter. For purposes of this Section 7(d), each person who controls an
Underwriter within the meaning of the Securities Act shall have the same rights
to contribution as such Underwriter, and each person who controls the Company
within the meaning of the Securities Act, each officer of the Company who shall
have signed the Registration Statement and each director of the Company shall
have the same rights to contribution as the Company, subject in each case to the
following sentence. No person guilty of fraudulent misrepresentation (within the
meaning of Section 11(f) of the Securities Act) shall
22
<PAGE> 23
be entitled to contribution from any person who was not guilty of such
fraudulent misrepresentation. The Underwriters' obligations to contribute in
this Section 7(d) are several in proportion to their respective underwriting
obligations and not joint.
Each party entitled to contribution agrees that upon the service of a
summons or other initial legal process upon it in any action instituted against
it in respect of which contribution may be sought, it will promptly give written
notice of such service to the party or parties from whom contribution may be
sought, but the omission so to notify such party or parties of any such service
shall not relieve the party from whom contribution may be sought from any
obligation it may have hereunder or otherwise (except as specifically provided
in Section 7(b) above). This Section 7(d) shall not be operative as to any
Underwriter to the extent that the Company is entitled to receive or has
received indemnity under this Section 7.
(e) Neither the Company nor any indemnified party shall,
without the prior written consent of each Underwriter and the indemnifying
party, settle or compromise or consent to the entry of any judgment in any
pending or threatened claim, action, suit or proceeding in respect of which
indemnification may be sought hereunder (whether or not such Underwriter or any
person who controls such Underwriter within the meaning of Section 15 of the
Securities Act is a party to such claim, action, suit or proceeding) unless such
settlement, compromise or consent includes an unconditional release of each such
Underwriter, each such controlling person and the Company from all liability
arising out of such claim, action, suit or proceeding.
(f) The parties to this Agreement hereby acknowledge that they
are sophisticated business persons who were represented by counsel during the
negotiations regarding the provisions of this Agreement, including, without
limitation, the provisions of this Section 7, and are fully informed regarding
said provisions. They further acknowledge that the provisions of this Section 7
fairly allocate the risks in light of the ability of the parties to investigate
the Company and its business in order to assure that adequate disclosure is made
in the Registration Statement and Prospectus as required by the Securities Act
and the Exchange Act. The parties are advised that federal or state policy, as
interpreted by the courts in certain jurisdictions, may be contrary to certain
provisions of this Agreement and this Section 7, and the parties hereto hereby
expressly waive and relinquish any right or ability to assert such public policy
as a defense to a claim under this Section 7 and further agree not to attempt to
assert any such defense.
(g) In addition to its obligations under Section 7(a) of this
Agreement, the Company agrees that, as an interim measure during the pendency of
any claim, action, investigation, inquiry or other proceeding arising out of or
based upon any loss, claim, damage or liability described in Section 7(a) of
this Agreement, they will reimburse the Underwriters, and each of them, on a
quarterly basis (for which the Company has received invoices and other
documentation reasonably requested) for all reasonable legal or other expenses
incurred in connection with investigating or defending any such claim, action,
investigation, inquiry or other proceeding, notwithstanding the absence of a
judicial determination as to the propriety and enforceability of the joint and
several obligation of the Company to reimburse the Underwriters for such
expenses and the possibility that such payments might later be held to have been
improper by a court of competent jurisdiction. To the extent that any portion,
or all, of any
23
<PAGE> 24
such interim reimbursement payments are so held to have been improper, the
Underwriters receiving the same shall promptly return such amounts to the
Company together with interest, compounded daily, determined on the basis of the
prime rate (or other commercial lending rate for borrowers of the highest credit
standing) announced from time to time by Bank of America, NT&SA, San Francisco,
California (the "Prime Rate"). Any such interim reimbursement payments that are
not made to the Underwriters within 30 days of a request for reimbursement shall
bear interest at the Prime Rate from the date of such request until the date
paid.
(h) In addition to their obligations under Section 7(b) of
this Agreement, the Underwriters agree that, as an interim measure during the
pendency of any claim, action, investigation, inquiry or other proceeding
arising out of or based upon any loss, claim, damage or liability described in
Section 7(b) of this Agreement, they will reimburse the Company on a quarterly
basis (for which the Underwriters have received invoices and other documentation
reasonably requested) for all reasonable legal or other expenses incurred by the
Company in connection with investigating or defending any such claim, action,
investigation, inquiry or other proceeding, notwithstanding the absence of a
judicial determination as to the propriety and enforceability of the
Underwriters' obligation to reimburse the Company for such expenses and the
possibility that such payments might later be held to have been improper by a
court of competent jurisdiction. To the extent that any portion, or all, of any
such interim reimbursement payments are so held to have been improper, the
Company shall promptly return such amounts to the Underwriters together with
interest, compounded daily, determined on the basis of the Prime Rate. Any such
interim reimbursement payments that are not made to the Company within 30 days
of a request for reimbursement shall bear interest at the Prime Rate from the
date of such request until the date paid.
(i) It is agreed that any controversy arising out of the
operation of the interim reimbursement arrangements set forth in Sections 7(g)
and 7(h) above, including the amounts of any requested reimbursement payments,
the method of determining such amounts and the basis on which such amounts shall
be apportioned among the indemnifying parties, shall be settled by arbitration
conducted under the provisions of the Constitution and Rules of the Board of
Governors of the New York Stock Exchange, Inc. or pursuant to the Code of
Arbitration Procedure of the National Association of Securities Dealers, Inc.
Any such arbitration must be commenced by service of a written demand for
arbitration or a written notice of intention to arbitrate, therein electing the
arbitration tribunal. If the party demanding arbitration does not make such
designation of an arbitration tribunal in such demand or notice, then the party
responding to said demand or notice is authorized to do so. Any such arbitration
will be limited to the interpretation and obligations of the parties under the
interim reimbursement provisions contained in Sections 7(g) and 7(h) above and
will not resolve the ultimate propriety or enforceability of the obligation to
indemnify for expenses that is created by the other provisions of this Section
7.
8. Substitution of Underwriters. If for any reason one or more of the
Underwriters shall fail or refuse (otherwise than for a reason sufficient to
justify the termination of this Agreement under the provisions of Section 5 or
Section 9 of this Agreement) to purchase and pay for the number of Firm
Securities agreed to be purchased by such Underwriter or Underwriters, the
Company shall immediately give notice thereof to the Representatives, and
24
<PAGE> 25
the non-defaulting Underwriters shall have the right within 24 hours after the
receipt by the Representatives of such notice to purchase, or procure one or
more other Underwriters to purchase, in such proportions as may be agreed upon
among the Representatives and such purchasing Underwriter or Underwriters and
upon the terms herein set forth, all or any part of the Firm Securities that
such defaulting Underwriter or Underwriters agreed to purchase. If the
non-defaulting Underwriters fail so to make such arrangements with respect to
all such Securities, the number of Firm Securities that each non-defaulting
Underwriter is otherwise obligated to purchase under this Agreement shall be
automatically increased on a pro rata basis to absorb the remaining Securities
that the defaulting Underwriter or Underwriters agreed to purchase; provided,
however, that the non-defaulting Underwriters shall not be obligated to purchase
the Securities that the defaulting Underwriter or Underwriters agreed to
purchase if the aggregate number of such Securities exceeds 10% of the total
number of Firm Securities that all Underwriters agreed to purchase under this
Agreement. If the total number of Firm Securities that the defaulting
Underwriter or Underwriters agreed to purchase shall not be purchased or
absorbed in accordance with the two preceding sentences, the Company shall have
the right, within 24 hours next succeeding the first 24-hour period above
referred to, to make arrangements with other underwriters or purchasers
satisfactory to you for purchase of such Securities on the terms set forth in
this Agreement. In any such case, either you or the Company shall have the right
to postpone the Closing Date determined as provided in Section 2(c) of this
Agreement for not more than seven business days after the date originally fixed
as the Closing Date pursuant to said Section 2(c) in order that any necessary
changes in the Registration Statement, the Prospectus or any other documents or
arrangements may be made.
If neither the non-defaulting Underwriters nor the Company
shall make arrangements within the time periods provided in the first three
sentences of the first paragraph this Section 8 for the purchase of all the Firm
Securities that the defaulting Underwriter or Underwriters agreed to purchase
hereunder, this Agreement shall be terminated without further act or deed and
without any liability on the part of the Company to any non-defaulting
Underwriter (except as provided in Section 4 or Section 7 of this Agreement) and
without any liability on the part of any nondefaulting Underwriter to the
Company (except to the extent provided in Section 7 of this Agreement). Nothing
in this Section 8, and no action taken hereunder, shall relieve any defaulting
Underwriter from liability, if any, to the Company or any nondefaulting
Underwriter for damages occasioned by its default under this Agreement. The term
"Underwriter" in this Agreement shall include any persons substituted for an
Underwriter under this Section 8.
9. Effective Date of Agreement and Termination.
(a) If the Registration Statement has not been declared
effective prior to the date of this Agreement, this Agreement shall become
effective at such time, after notification of the effectiveness of the
Registration Statement has been released by the Commission, as you shall release
the Securities to the public. If you shall not have released the Securities
prior to 5:00 p.m., California time, on the fifth full business day after the
Registration Statement shall have become effective, this Agreement shall
thereupon terminate without liability on the part of the Underwriters to the
Company, except as set forth in Section 7 of this Agreement. By giving
25
<PAGE> 26
notice as set forth in Section 10 of this Agreement before the time this
Agreement becomes effective, you, as Representatives of the several
Underwriters, may prevent this Agreement from becoming effective without
liability of any party to the other party, except that the Company shall remain
obligated to pay costs and expenses to the extent provided in Section 4 and
Section 7 of this Agreement. If the Registration Statement has been declared
effective prior to the date of this Agreement, this Agreement shall become
effective upon execution and delivery by you and the Company.
(b) This Agreement may be terminated by you in your absolute
discretion by giving written notice to the Company at any time on or prior to
the Closing Date or, with respect to the purchase of the Option Securities, on
or prior to any later date on which the Option Securities are to be purchased,
as the case may be, if prior to such time any of the following has occurred or,
in your opinion, is likely to occur: (i) after the respective dates as of which
information is given in the Registration Statement and the Prospectus, any
material adverse change or development involving a prospective adverse change in
or affecting particularly the condition (financial or otherwise) of the Company
or the earnings, prospects or business affairs of the Company, whether or not
arising in the ordinary course of business, which would, in your sole judgment,
make the offering or the delivery of the Securities impracticable or
inadvisable; or (ii) if there shall have been the engagement in hostilities or
an escalation of major hostilities by the United States or the declaration of
war or a national emergency by the United States on or after the date hereof, or
any outbreak of hostilities or other national or international calamity or
crisis or change in economic or political conditions, if the effect of such
outbreak, calamity, crisis or change in economic or political conditions on the
financial markets of the United States would, in your sole judgment, make the
offering or delivery of the Securities impracticable, or (iii) if there shall
have been suspension of trading in securities generally or a material adverse
decline in value of securities generally on the New York Stock Exchange, the
American Stock Exchange, or the National Market System, or limitations on prices
(other than limitations on hours or numbers of days of trading) for securities
on either such exchange or system, or (iv) if there shall have been the
enactment, publication, decree or other promulgation of any federal or state
statute, regulation, rule or order of, or commencement of any proceeding or
investigation by, or change in material substantive policy by, any court,
legislative body, agency or other foreign or domestic governmental authority
which in your sole judgment materially and adversely affects or will materially
or adversely affect the business, operations or prospects of the Company, or (v)
if there shall have been the declaration of a banking moratorium by United
States, New York or California state authorities, or (vi) if there shall have
been the taking of any action by any United States, state or local government or
agency in respect of its monetary or fiscal affairs which in your sole judgment
has a material adverse effect on the securities markets in the United States or
(vii) existing international monetary conditions shall have undergone a material
change which, in your sole judgment, makes the offering or delivery of the
Securities impracticable. If this Agreement shall be terminated pursuant to this
Section 9, there shall be no liability of the Company to the Underwriters and no
liability of the Underwriters to the Company (except to the extent provided in
Section 4 or Section 7 of this Agreement); provided, however, that in the event
of any such termination the Company agrees to indemnify and hold harmless the
Underwriters from all costs or expenses of the Company incident to the
performance of the obligations of the Company under this Agreement, including
all costs, expenses and advances referred to in Section 4 of this
26
<PAGE> 27
Agreement; provided, further, that the maximum amount of expenses that the
Company shall be obligated to reimburse the Representatives under Section 4 of
this Agreement shall be the Representatives actual accountable out-of-pocket
expenses.
10. Notices. Except as otherwise provided herein, all communications
hereunder shall be in writing delivered personally, by recognized overnight
courier service or by either telecopier or telegraph and, if to the
Underwriters, shall be delivered to Joseph Charles & Associates, Inc. at the
address set forth above (telecopier: (310) 859-2877) Attention: Director of
Investment Banking; and if to the Company, shall be mailed, telecopied,
telegraphed or delivered to it at its office, (telecopier: (310) - )
Attention: Robert Greenberg, Chief Executive Officer. All notices given by
telecopy or telegraph shall be promptly confirmed by letter.
11. Persons Entitled to Benefit of Agreement. This Agreement shall
inure to the benefit of the Company and the several Underwriters and, with
respect to the provisions of Section 4 and Section 7 of this Agreement, the
several parties (in addition to the Company and the several Underwriters)
indemnified under the provisions of said Section 4 and Section 7, and their
respective personal representatives, successors and assigns. Nothing in this
Agreement is intended or shall be construed to give to any other person, firm or
corporation any legal or equitable remedy or claim under or in respect of this
Agreement or any provision herein contained. The term "successors and assigns"
as herein used shall not include any purchaser, as such purchaser, of any of the
Securities from the several Underwriters.
12. Miscellaneous. Notwithstanding any provision of this Agreement to
the contrary, the reimbursement, indemnification and contribution agreements
contained in this Agreement and the representations, warranties and covenants in
this Agreement shall remain in full force and effect regardless of (a) any
termination of this Agreement, (b) any investigation made by or on behalf of any
Underwriter or controlling person thereof, or by or on behalf of the Company or
their respective directors or officers, and (c) delivery and payment for the
Securities under this Agreement; provided, however, that if this Agreement is
terminated prior to the Closing Date, the provisions of Sections 3(h), 3(i),
3(j), 3(k) and 3(l) of this Agreement shall be of no further force or effect.
This Agreement may be executed in two or more counterparts, each of
which shall constitute an original, but all of which together shall constitute
one and the same instrument.
13. Governing Law. THIS AGREEMENT SHALL BE GOVERNED BY, AND CONSTRUED
IN ACCORDANCE WITH, THE INTERNAL LAWS OF THE STATE OF CALIFORNIA APPLICABLE TO
CONTRACTS MADE, AND TO BE PERFORMED, SOLELY WITHIN THAT STATE.
14. Authority of the Representatives. In connection with this
Agreement, the Representatives will act for and on behalf of the several
Underwriters, and any action taken under this Agreement by the Representatives,
jointly as representatives of the several Underwriters, will be binding on all
the Underwriters.
27
<PAGE> 28
If the foregoing correctly sets forth the understanding among
the Company the several Underwriters, please so indicate in the space provided
below for that purpose, whereupon this letter shall constitute a binding
agreement among the Company and the several Underwriters.
Very truly yours,
KANI, INC.
By:______________________________
Its:_____________________________
The foregoing Agreement is hereby confirmed and accepted as of the date first
above written.
JOSEPH CHARLES & ASSOCIATES, INC.
On their behalf and on
behalf of each of the
several Underwriters
named in Schedule I hereto.
By: JOSEPH CHARLES & ASSOCIATES, INC.
By:______________________________
Richard Rappaport,
Managing Director
28
<PAGE> 29
SCHEDULE I
UNDERWRITERS
<TABLE>
<CAPTION>
NUMBER OF FIRM SECURITIES
UNDERWRITERS TO BE PURCHASED
- ------------ ---------------
<S> <C>
Joseph Charles & Associates, Inc...............................................
...............................................
...............................................
...............................................
...............................................
...............................................
...............................................
...............................................
...............................................
...............................................
...............................................
...............................................
...............................................
...............................................
...............................................
............................................... ---------
Total................................................................ 1,400,000
=========
</TABLE>
<PAGE> 30
ANNEX A
Matters to be Covered in the Opinion of
Freshman, Marantz, Orlanski Cooper & Klein
(i) The Company has been duly incorporated and is validly existing
as a corporation in good standing under the laws of the State
of California, with all necessary corporate power to own,
lease and operate its properties and to conduct its business
as described in the Prospectus;
(ii) The Company is duly qualified to do business as a foreign
corporation and is in good standing in all jurisdictions in
the United States, if any, in which the ownership or leasing
of its properties or the conduct of its business requires such
qualification, except where the failure so to qualify would
not have a material adverse effect on the condition (financial
or otherwise), earnings, operations, business or business
prospects of the Company;
(iii) The authorized, issued and outstanding capital stock of the
Company is as set forth in the Prospectus under the caption
"Capitalization" as of the dates stated therein; the issued
and outstanding shares of capital stock of the Company have
been duly and validly authorized and issued, are fully paid
and nonassessable, have not been issued in violation of the
registration or qualification requirements of the Securities
Act or any state securities laws, and have not been issued in
violation of any preemptive right, co-sale right, right of
first refusal or other similar right; there are no preemptive
rights, options, warrants, or other similar rights to acquire
any securities of the Company which are not disclosed in the
Prospectus;
(iv) The Securities have been duly authorized, and upon issuance
and delivery against payment therefor in accordance with the
terms of the Agreement, will be validly issued, fully paid and
nonassessable, and will not have been issued in violation of
any preemptive right, registration right, co-sale right, right
of first refusal or other similar right, and no holder thereof
is or will be subject to personal liability by reason of being
such a holder;
(v) The Company has corporate power and authority to enter into
the Agreement and the Representatives' Warrant Agreement and
to issue, sell and deliver the Securities to the Underwriters;
(vi) The Agreement and the Representatives' Warrant Agreement have
been duly authorized by all necessary corporate action on the
part of the Company and have been duly executed and delivered
by the Company and, assuming due authorization, execution and
delivery by you, are the valid and binding agreements of the
Company, except insofar as the indemnification and
contribution provisions of
1
<PAGE> 31
such agreements may be limited by public policy concerns, and
except as enforceability may be limited by bankruptcy,
insolvency, reorganization, moratorium or similar laws
affecting creditors' rights generally or by general equitable
principles;
(vii) The performance of the Agreement and the Representatives'
Warrant Agreement and the consummation of the transactions
contemplated thereby will not result in the breach or
violation of any of the terms and provisions of the Company's
Articles of Incorporation or Bylaws, or to the best of such
counsel's knowledge, result in the breach or violation of any
of the terms and provisions of, or constitute a default under,
any indenture, mortgage, deed of trust, loan agreement bond,
debenture, note agreement or other evidence of indebtedness,
or any lease, license, contract or other agreement or
instrument known to such counsel to which the Company is a
party or by which any of its properties are bound, or to the
best of such counsel's knowledge, (other than performance of
the Company's indemnification and contribution obligations
under such agreements, concerning which no opinion need be
expressed) any applicable statute, rule or regulation or, to
its knowledge, any order, writ or decree of any court or
governmental agency or body having jurisdiction over the
Company or over any of its properties or operations; provided,
however, that no opinion need be rendered concerning state
securities or Blue Sky laws
(viii) To the best knowledge of such counsel, the Company is not
presently in breach of, or in default under, its Articles of
Incorporation or Bylaws, or any bond, debenture, note or other
evidence of indebtedness or any contract, indenture, mortgage,
deed of trust, loan agreement, lease, license or other
agreement or instrument to which the Company is a party or by
which any of its properties are bound, which is material to
the financial condition, earnings, operations, business or
business prospects of the Company;
(ix) The forms of certificates evidencing the Common Stock comply
with the General Corporation Law of the State of California
and all other statutory requirements, the Bylaws of the
Company and any applicable rules of the NASD or the Nasdaq
National Market;
(x) The Registration Statement has become effective under the
Securities Act, any required filing of the Prospectus under
Rule 424(b) has been made in the manner and within the time
period required by Rule 424(b) and, to the best knowledge of
such counsel, no stop order suspending the effectiveness of
the Registration Statement has been issued, and no proceedings
for that purpose have been instituted or are pending or
threatened under the Securities Act;
(xi) The Registration Statement and the Prospectus, and each
amendment or supplement thereto (other than the financial
statements, pro forma financial data, financial and
statistical data included therein, as to which such counsel
need express no opinion) as of the effective date of the
Registration Statement,
2
<PAGE> 32
complied as to form in all material respects with the
requirements of the Securities Act and the applicable Rules
and Regulations;
(xii) The Common Stock conforms in all material respects to all
statements in relation thereto contained in the Prospectus;
(xiii) The description in the Registration Statement and the
Prospectus of the Articles of Incorporation and Bylaws of the
Company and of statutes and contracts are accurate in all
material respects and fairly present in all material respects
the information required to be presented by the Securities Act
and the Rules and Regulations;
(xiv) There are no statutes or regulations, or to the best knowledge
of such counsel, agreements, contracts, licenses, leases or
documents, of a character required to be described or referred
to in the Registration Statement or Prospectus or to be filed
as an exhibit to the Registration Statement, that are not
described or referred to therein and filed as required;
(xv) No authorization, approval or consent of any governmental
authority or agency of the United States of America is
necessary in connection with the consummation of the
transactions contemplated by the Agreement and the
Representatives' Warrant Agreement, except such as have been
obtained under the Securities Act or such as may be required
under the rules and regulations of the National Association of
Securities Dealers, Inc., or under state securities or Blue
Sky laws in connection with the purchase and the distribution
of the Securities by the Underwriters;
(xvi) To the best knowledge of such counsel, there are no legal or
governmental proceedings pending or threatened against the
Company or any of its subsidiaries of a character which are
required to be disclosed in the Registration Statement or the
Prospectus by the Securities Act or the applicable Rules and
Regulations, other than those described therein;
(xvii) The Company is not an "investment company" or an entity
"controlled" by an "investment company," as such terms are
defined in the 1940 Act; and
(xviii) To the best knowledge of such counsel, except as set forth in
the Registration Statement and Prospectus, no holders of
Common Stock or other securities of the Company have
registration rights with respect to securities of the Company
and, except as set forth in the Registration Statement and
Prospectus, all holders of securities of the Company having
rights to registration of such shares of Common Stock, or
other securities, because of the filing of the Registration
Statement by the Company have, with respect to the offering
contemplated hereby, waived such rights or such rights have
expired by reason of lapse of time following notification of
the Company's intent to file the Registration Statement, or
have
3
<PAGE> 33
included securities in the Registration Statement pursuant to
the exercise of such rights.
In addition, such counsel shall state that such counsel has
participated in conferences with officials and other representatives of
the Company, the Representatives, Underwriters' counsel and the
independent public accountants of the Company, at which conferences the
contents of the Registration Statement and the Prospectus and related
matters were discussed, and although they have not independently
checked or verified the accuracy, completeness or fairness of the
statements contained in the Registration Statement or the Prospectus,
nothing has come to the attention of such counsel that caused them to
believe that, at the time the Registration Statement became effective,
the Registration Statement (except as to financial statements, pro
forma financial data, financial data and supporting schedules contained
therein, as to which such counsel need express no opinion) contained
any untrue statement of a material fact or omitted to state a material
fact required to be stated therein or necessary to make the statements
therein not misleading, or at the Closing Date or any later date on
which the Option Securities are to be purchased, as the case may be,
the Prospectus (except as aforesaid) contained any untrue statement of
a material fact or omitted to state a material fact required to be
stated therein or necessary to make the statements therein, in light of
the circumstances under which they were made, not misleading.
Counsel rendering the foregoing opinion may rely as to
questions of fact upon representations or certificates of officers of
the Company, and of government officials, in which case their opinion
is explicitly to state that they are so relying thereon and that they
have no knowledge of any material misstatement or inaccuracy in such
opinions, representations or certificate. Copies of any opinion,
representation or certificate so relied upon shall be delivered to you,
as Representatives of the Underwriters, and to Underwriters' Counsel.
4
<PAGE> 1
Exhibit 3.1
1978694
ENDORSED
FILED
In the office of the Secretary of State
of the State of California
SEP 10 1996
/s/ BILL JONES
BILL JONES, Secretary of State
ARTICLES OF INCORPORATION
OF
KANI, INC.
I
The name of the corporation shall be Kani, Inc.
II
The purpose of this corporation is to engage in any lawful act
or activity for which a corporation may be organized under the General
Corporation Law of California other than the banking business, the trust
company business or the practice of a profession permitted to be incorporated
by the California Corporations Code.
III
The name and address in this state of the corporation's
initial agent for service of process is: David Weinberg, 228 Manhattan Beach
Boulevard, Suite 200, Manhattan beach, California 90266.
IV
(a) The corporation is authorized to issue two classes of
shares designated "Preferred Stock" and "Common Stock", respectively. The
total number of shares which the corporation is authorized is 30,000,000. The
number of shares of Preferred Stock authorized to be issued is 5,000,000 and
the number of shares of Common Stock authorized to be issued is 25,000,000.
(b) The Preferred Stock may be issued form time to time
in one or more series. The Board of Directors is hereby authorized to fix or
alter the dividend rights, dividend rate, conversion rights, voting rights,
rights and terms of redemption (including sinking fund provisions), redemption
price or prices, and the liquidation preferences of any wholly unissued series
of Preferred Stock, and the number of shares constituting any such series and
the designation thereof, or any of them; and to increase or decrease the number
of shares of any series subsequent to the issuance of shares of that series,
but not below the number of shares of such series then outstanding. In case
the number of shares of any series shall be so decreased, the shares
constituting such decrease shall resume the status that they had prior to the
adoption of the resolution originally fixing the number of shares of such
series.
<PAGE> 2
V
(a) Limitation of Directors' Liability. The liability of
directors of the corporation for monetary damages shall be eliminated to the
fullest extent permissible under California law.
(b) Indemnification of Corporate Agents. The corporation
is authorized to provide indemnification of its agents (as defined in Section
317 of the California Corporations Code) for breach of duty to the corporation
and its shareholders through by-law provisions or through agreements with its
agents or both, in excess of the indemnification otherwise permitted by Section
317 of the California Corporations Code, subject to the limits on excess
indemnification set forth in Section 204 of the California Corporations Code.
(c) Repeal or Modification. Any repeal or modification
of the foregoing provisions of this Article V by the shareholders of the
corporation shall not adversely affect any right or protection of a director of
the corporation existing at the time of such repeal or modification.
Dated: 9/9/96
-------------------
/s/ DARREN O. BIGBY
-----------------------------------
Darren O. Bigby, Sole Incorporator
I hereby declare that I am the person who executed the
foregoing Articles of Incorporation, which execution is my act and deed.
/s/ DARREN O. BIGBY
----------------------------------
Darren O. Bigby
<PAGE> 1
EXHIBIT 3.2
Bylaws
OF
KANI, INC.
a California Corporation
<PAGE> 2
TABLE OF CONTENTS
Page
ARTICLE I
OFFICES........................................... 1
Section 1. PRINCIPAL OFFICE.................................. 1
Section 2. OTHER OFFICES..................................... 1
ARTICLE II
DIRECTORS - MANAGEMENT............................ 1
Section 1. RESPONSIBILITY OF BOARD OF DIRECTORS.............. 1
Section 2. STANDARD OF CARE.................................. 1
Section 3. NUMBER AND QUALIFICATION OF DIRECTORS............. 2
Section 4. ELECTION AND TERM OF OFFICE OF DIRECTORS.......... 2
Section 5. VACANCIES......................................... 2
Section 6. REMOVAL OF DIRECTORS.............................. 3
Section 7. NOTICE, PLACE AND MANNER OF MEETINGS.............. 3
Section 8. ANNUAL MEETINGS................................... 3
Section 9. SPECIAL MEETINGS - NOTICES - WAIVERS.............. 3
Section 10. ACTION WITHOUT A MEETING BY WRITTEN
CONSENT........................................... 4
Section 11. QUORUM............................................ 4
Section 12. VOTING............................................ 4
Section 13. NOTICE OF ADJOURNMENT............................. 5
Section 14. COMPENSATION OF DIRECTORS......................... 5
Section 15. COMMITTEES........................................ 5
Section 16. ADVISORY DIRECTORS................................ 5
ARTICLE III
OFFICERS.......................................... 5
Section 1. OFFICERS.......................................... 5
Section 2. ELECTION.......................................... 5
Section 3. SUBORDINATE OFFICERS, ETC......................... 6
Section 4. REMOVAL AND RESIGNATION OF OFFICERS............... 6
Section 5. VACANCIES......................................... 6
Section 6. CHAIRMAN OF THE BOARD............................. 6
Section 7. PRESIDENT......................................... 6
Section 8. CHIEF EXECUTIVE OFFICER........................... 6
Section 9. VICE PRESIDENTS................................... 7
Section 10. SECRETARY......................................... 7
Section 11. CHIEF FINANCIAL OFFICER........................... 7
ARTICLE IV
i
<PAGE> 3
SHAREHOLDERS' MEETINGS............................. 8
Section 1. PLACE OF MEETINGS................................. 8
Section 2. ANNUAL MEETINGS................................... 8
Section 3. SPECIAL MEETINGS.................................. 8
Section 4. NOTICE OF MEETINGS - REPORTS...................... 8
Section 5. WAIVER OF NOTICE OR CONSENT BY ABSENT
SHAREHOLDER....................................... 9
Section 6. SHAREHOLDERS ACTING WITHOUT A MEETING-
ELECTION OF DIRECTORS............................. 10
Section 7. OTHER ACTIONS WITHOUT A MEETING................... 10
Section 8. QUORUM............................................ 10
Section 9. VOTING............................................ 11
Section 10. PROXIES........................................... 12
Section 11. ORGANIZATION...................................... 12
Section 12. INSPECTORS OF ELECTION............................ 12
ARTICLE V
CERTIFICATES AND TRANSFER OF SHARES............... 12
Section 1. CERTIFICATES FOR SHARES........................... 12
Section 2. TRANSFER ON THE BOOKS............................. 13
Section 3. LOST OR DESTROYED CERTIFICATES.................... 13
Section 4. TRANSFER AGENTS AND REGISTRARS.................... 13
Section 5. CLOSING STOCK TRANSFER BOOKS - RECORD
DATE.............................................. 13
Section 6. LEGEND CONDITION.................................. 14
ARTICLE VI
RECORDS - REPORTS - INSPECTION.................... 14
Section 1. RECORDS........................................... 14
Section 2. INSPECTION OF BOOKS AND RECORDS................... 14
Section 3. CERTIFICATION AND INSPECTION OF BYLAWS............ 14
ARTICLE VII
GENERAL MATTERS................................... 14
Section 1. CHECKS, DRAFTS, ETC............................... 14
Section 2. CONTRACTS, ETC. -- HOW EXECUTED................... 14
ARTICLE VIII
ANNUAL REPORTS.................................... 15
Section 1. WAIVER OF ANNUAL REPORTS TO SHAREHOLDER........... 15
ARTICLE IX
AMENDMENTS TO BYLAWS.............................. 15
Section 1. AMENDMENTS........................................ 15
ii
<PAGE> 4
Section 2. RECORD OF AMENDMENTS.............................. 15
ARTICLE X
CORPORATE SEAL.................................... 16
ARTICLE XI
INDEMNIFICATION OF DIRECTORS, OFFICERS,
EMPLOYEES AND OTHER AGENTS........................ 16
Section 1. AGENTS, PROCEEDINGS, AND EXPENSES................. 16
Section 2. ACTIONS OTHER THAN BY THE CORPORATION............. 16
Section 3. ACTIONS BY THE CORPORATION........................ 16
Section 4. SUCCESSFUL DEFENSE BY AGENT....................... 17
Section 5. REQUIRED APPROVAL................................. 17
Section 6. ADVANCE OF EXPENSES............................... 18
Section 7. OTHER RIGHTS AUTHORIZED........................... 18
Section 8. LIMITATIONS....................................... 18
Section 9. INSURANCE......................................... 18
Section 10. FIDUCIARIES OF CORPORATE EMPLOYEE BENEFIT
PLAN.............................................. 18
Section 11. RIGHT TO INDEMNITY CONTINUES...................... 19
ARTICLE XII
MISCELLANEOUS..................................... 19
Section 1. REPRESENTATION OF SHARES IN OTHER
CORPORATIONS...................................... 19
Section 2. SUBSIDIARY CORPORATIONS........................... 19
Section 3. ACCOUNTING YEAR................................... 19
iii
<PAGE> 5
Bylaws
OF
KANI, INC.
a California corporation
ARTICLE I
OFFICES
Section 1. PRINCIPAL OFFICE. The principal office for the
transaction of business of the corporation is hereby fixed and located at 228
Manhattan Beach Blvd., Suite 200, Manhattan Beach, CA 90266.
The location may be changed by approval of a majority of the
authorized Directors, and additional offices may be established and maintained
at such other place or places, either within or outside California, as the Board
of Directors may from time to time designate.
Section 2. OTHER OFFICES. Branch or subordinate offices may at
any time be established by the Board of Directors at any place or places where
the corporation is qualified to do business.
ARTICLE II
DIRECTORS - MANAGEMENT
Section 1. RESPONSIBILITY OF BOARD OF DIRECTORS. Subject to
the provisions of the General Corporation Law and to any limitations in the
Articles of Incorporation of the corporation relating to action required to be
approved by the Shareholders, as that term is defined in Section 153 of the
California Corporations Code (hereafter "Code"), or by the outstanding shares,
as that term is defined in Section 152 of the Code, the business and affairs of
the corporation shall be managed and all corporate powers shall be exercised by
or under the direction of the Board of Directors (hereafter the "Board"). The
Board may delegate the management of the day-to-day operations of the business
of the corporation to a person or persons, provided that the business and
affairs of the corporation shall be managed and all corporate powers shall be
exercised under the ultimate direction of the Board.
Section 2. STANDARD OF CARE. Each Director shall perform the
duties of a Director, including the duties as a member of any committee of the
Board upon which the Director may serve, in good faith, in a manner such
Director believes to be in the best interests of the corporation, and with such
care, including reasonable inquiry, as an ordinary prudent person in a like
position would use under similar circumstances.
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<PAGE> 6
Section 3. NUMBER AND QUALIFICATION OF DIRECTORS. The number
of Directors of the corporation shall not be less than four (4) nor more than
nine (9) provided, however, that (i) before shares are issued, the number may be
one, (ii) before shares are issued, the number may be two, (iii) so long as the
corporation has only one shareholder, the number may be one, (iv) so long as the
corporation has only one shareholder, the number may be two, and (v) so long as
the corporation has only two Shareholders, the number may be two. The exact
number of Directors shall be six (6) until changed by amending this Section 3,
duly adopted by the Board of Directors or by the Shareholders. The indefinite
number of Directors may be changed, or a definite number may be fixed without
provision for an indefinite number, by a duly adopted amendment to the articles
of incorporation or by an amendment to this bylaw, duly adopted by the vote or
written consent of holders of a majority of the outstanding shares entitled to
vote; provided, however, that an amendment reducing the fixed number and minimum
number of Directors to a number less than five (5), cannot be adopted if the
votes cast against its adoption at a meeting, or the shares not consenting in
the case of an action by written consent, are equal to more than sixteen and
two-thirds percent (16 2/3%) of the outstanding shares entitled to vote thereon.
No amendment may change the stated maximum number of authorized Directors to a
number greater than two times the stated minimum of Directors minus one.
Directors need not be Shareholders.
No reduction of the authorized number of Directors shall have
the effect of removing any Director before that Director's term of office
expires.
Section 4. ELECTION AND TERM OF OFFICE OF DIRECTORS. Directors
shall be elected at each annual meeting of the Shareholders to hold office until
the next annual meeting. Each Director, including a Director elected to fill a
vacancy, shall hold office until the expiration of the term for which elected
and until a successor has been elected and qualified.
Section 5. VACANCIES. Vacancies in the Board may be filled at
a meeting by a majority of the remaining Directors, though less than a quorum,
by the unanimous written consent of the Directors then in office or by a sole
remaining Director, except that a vacancy created by the removal of a director
by the vote or written consent of the Shareholders or by court order may be
filled only by (i) the vote of a majority of the shares entitled to vote
represented at a duly held meeting at which a quorum is present, or (ii) the
written consent of holders of a majority of the outstanding shares entitled to
vote. Each Director so elected shall hold office until the next annual meeting
of the Shareholders and until a successor has been elected and qualified.
A vacancy or vacancies in the Board shall exist (i) in the
event of the death, resignation, or removal of any Director; (ii) if the Board
by resolution declares vacant the office of a Director who has been declared of
unsound mind by an order of court or convicted of a felony; (iii) if the
authorized number of Directors is increased; or (iv) if the
2
<PAGE> 7
Shareholders fail, at any meeting of Shareholders at which any Director or
Directors are elected, to elect the number of Directors to be voted for at that
meeting.
The Shareholders may elect a Director or Directors at any time
to fill any vacancy or vacancies not filled by the Directors, but any such
election by written consent shall require the consent of a majority of the
outstanding shares entitled to vote.
Any Director may resign effective on giving written notice to
the Chairman of the Board, the President, the Secretary, or the Board, unless
the notice specifies a later time for that resignation to become effective. If
the resignation of a Director is effective at a future time, the Board may elect
a successor to take office when the resignation becomes effective.
Section 6. REMOVAL OF DIRECTORS. The entire Board or any
individual Director may be removed from office as provided by Sections 303 and
304 of the Code. Any such vacancy or vacancies thereby created shall be filled
by a majority vote of the Directors, provided, however, if there are no
Directors remaining in office, then by a majority vote of the shares entitled to
vote represented at a special meeting at which a quorum is present, or, by the
written consent of holders of a majority of the outstanding shares entitled to
vote.
Section 7. NOTICE, PLACE AND MANNER OF MEETINGS. Meetings of
the Board may be called by the Chairman of the Board, or the President, or the
Secretary, or any two (2) Directors and shall be held at the principal office of
the corporation, unless some other place is designated in the notice of the
meeting. Members of the Board may participate in a meeting through use of a
conference telephone or similar communications equipment so long as all members
participating in such a meeting can hear one another. Accurate minutes of any
meeting of the Board or any committee thereof, shall be maintained by the
Secretary or other Officer designated for that purpose.
Section 8. ANNUAL MEETINGS. The annual meeting of the Board
shall be held immediately following the adjournment of the annual meeting of the
Shareholders.
Section 9. SPECIAL MEETINGS - NOTICES - WAIVERS. Special
meetings of the Board may be called at any time by the President or, if he or
she is absent, unable, or refuses to act, the Chief Executive Officer, the Chief
Operating Officer or the Secretary or by any two (2) Directors, or by one (1)
Director if only one is provided.
At least forty-eight (48) hours notice of the time and place
of special meetings shall be delivered personally to the Directors or personally
communicated to them by a corporate Officer by telephone or telegraph. If the
notice is sent to a Director by letter, it shall be addressed to him or her at
his or her address as it is shown upon the records of the corporation, or if it
is not so shown on such records or is not readily ascertainable, at the place in
which the meetings of the Directors are regularly held. In case such notice is
3
<PAGE> 8
mailed, it shall be deposited in the United States mail, postage prepaid, in the
place in which the principal office of the corporation is located at least four
(4) days prior to the time of the holding of the meeting. Such mailing,
telegraphing, telephoning or delivery as above provided shall be due, legal and
personal notice to such Director.
Notice of meeting need not be given to a Director who signs a
waiver of notice or a consent to holding the meeting or an approval of the
minutes thereof, whether before or after the meeting, or who attends the meeting
without protesting, prior thereto or at its commencement, the lack of notice to
such Director. All such waivers, consents and approvals shall be filed with the
corporate records or made apart of the minutes of the meetings.
Section 10. ACTION WITHOUT A MEETING BY WRITTEN CONSENT. Any
action required or permitted to be taken by the Board may be taken without a
meeting, if all members of the Board individually or collectively consent in
writing to that action. Any action by written consent shall have the same effect
as a unanimous vote of the Board. All such written consents shall be filed with
the minutes of the proceedings of the Board.
Section 11. QUORUM. A majority of the number of Directors as
fixed by these Bylaws shall be necessary to constitute a quorum for the
transaction of business, and the action of a majority of the Directors present
at any meeting at which there is a quorum, when duly assembled, is valid as a
corporate act; provided that a minority of the Directors, in the absence of a
quorum, may adjourn from time to time, but may not transact any business. A
meeting at which a quorum is initially present may continue to transact
business, notwithstanding the withdrawal of Directors, if any action taken is
approved by a majority of the required quorum for such meeting.
Section 12. VOTING. The action of the majority of the
Directors present at a meeting at which a quorum is present shall be the action
of the Board of Directors, unless the concurrence of a greater proportion is
required for such action by applicable statute.
Any action pertaining to a transaction involving the
Corporation in which any parent or subsidiary of the Corporation, any Director
or officer of the Corporation or any affiliate of any of the foregoing persons
has an interest shall be approved in specific as to any isolated transaction or
in general as to any series of similar transactions by a majority of
unaffiliated directors (directors who are independent of the Company, and its
parent and their affiliates) who are not affiliates of such interested party,
even if the non-interested unaffiliated directors constitute less than a quorum.
In approving any such transaction or series of transactions the no-interested
directors must determine that the transaction as contemplated is fair as to the
Corporation and its Shareholders at the time it is authorized, approved or
ratified.
4
<PAGE> 9
Section 13. NOTICE OF ADJOURNMENT. Notice of the time and
place of holding an adjourned meeting need not be given to absent Directors if
the time and place be fixed at the meeting adjourned and held within twenty-four
(24) hours, but if adjourned more than twenty-four (24) hours, notice shall be
given to all Directors not present at the time of the adjournment.
Section 14. COMPENSATION OF DIRECTORS. Directors, as such,
shall not receive any stated salary for their services, but by resolution of the
Board a fixed sum and expense of attendance, if any, may be allowed for
attendance at each regular and special meeting of the Board; provided that
nothing herein contained shall be construed to preclude any Director from
serving the corporation in any other capacity and receiving compensation
therefor.
Section 15. COMMITTEES. Committees of the Board may be
appointed by resolution passed by a majority of the whole Board. Committees
shall be composed of two (2) or more members of the Board, and shall have such
powers of the Board as may be expressly delegated to it by resolution of the
Board, except those powers expressly made non-delegable by Section 311 of the
Code.
Section 16. ADVISORY DIRECTORS. The Board may, from time to
time, elect up to three persons to be Advisory Directors who shall not by such
appointment be members of the Board or have voting power. Advisory Directors
shall be available from time to time to perform special assignments specified by
the Board, to attend meetings of the Board upon invitation and to furnish
consultation to the Board. The period during which the title shall be held may
be prescribed by the Board. If no period is prescribed, the title shall be held
at the pleasure of the Board. Such Advisory members may receive such
compensation as the Board may determine.
ARTICLE III
OFFICERS
Section 1. OFFICERS. The Officers of the corporation shall be
a Chairman of the Board, a President, a Chief Executive Officer, a Secretary,
and a Chief Financial Officer. The corporation may also have, at the discretion
of the Board, one or more Vice Presidents, one or more Assistant Secretaries,
one or more Assistant Treasurers, and such other Officers as may be appointed in
accordance with the provisions of Section 3 of this Article III. Any number of
offices may be held by the same person.
Section 2. ELECTION. The Officers of the corporation, except
such Officers as may be appointed in accordance with the provisions of Section 3
or Section 5 of this Article, shall be elected annually by the Board, and each
shall hold office until he or she shall resign or shall be removed or otherwise
disqualified to serve, or a successor shall be elected and qualified.
5
<PAGE> 10
Section 3. SUBORDINATE OFFICERS, ETC. The Board may appoint or
may empower the President or the Chief Executive Officer to appoint such other
Officers as the business of the corporation may require, each of whom shall hold
office for such period, have such authority and perform such duties as are
provided in these Bylaws or as the Board may from time to time determine.
Section 4. REMOVAL AND RESIGNATION OF OFFICERS. Subject to the
rights, if any, of an Officer under any contract of employment, any Officer may
be removed, either with or without cause, by the Board, at any regular or
special meeting of the Board, or, except in case of an Officer chosen by the
Board, by any Officer upon whom such power of removal may be conferred by the
Board.
Any Officer may resign at any time by giving written notice to
the corporation. Any resignation shall take effect at the date of the receipt of
that notice or at any later time specified in that notice; and, unless otherwise
specified in that notice, the acceptance of the resignation shall not be
necessary to make it effective. Any resignation is without prejudice to the
rights, if any, of the corporation under any contract to which the Officer is a
party.
Section 5. VACANCIES. A vacancy in any office because of
death, resignation, removal, disqualification or any other cause shall be filled
in the manner prescribed in the Bylaws for regular appointments to that office.
Section 6. CHAIRMAN OF THE BOARD. The Chairman of the Board,
if such an officer be elected, shall, if present, preside at meetings of the
Board and exercise and perform such other powers and duties as may be from time
to time assigned by the Board or prescribed by these Bylaws.
Section 7. PRESIDENT. The President shall, subject to the
control of the Board, have general supervision, direction and control of the
business and Officers of the corporation. He or she shall preside at all
meetings of the Shareholders and in the absence of the Chairman of the Board, or
if there be none, at all meetings of the Board. The President shall be ex
officio a member of all the standing committees, including the Executive
Committee, if any, and shall have the general powers and duties of management
usually vested in the office of President of a corporation, and shall have such
other powers and duties as may be prescribed by the Board or these Bylaws.
Section 8. CHIEF EXECUTIVE OFFICER. The Chief Executive
Officer in the absence of the President, or in the event of such officer's
death, disability or refusal to act, shall perform the duties of the President
and when so acting, shall have all powers and be subject to all restrictions
upon the President. The Chief Executive Officer shall have such powers and
discharge such duties as may be assigned from time to time by the President or
by the Board.
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<PAGE> 11
Section 9. VICE PRESIDENTS. In the absence or disability of
the President, the Vice Presidents, if any, in order of their rank as fixed by
the Board or, if not ranked, a Vice President designated by the Board, shall
perform all the duties of the president and when so acting shall have all the
powers of, and be subject to all the restrictions upon, the President. The Vice
Presidents shall have such other powers and perform such other duties as from
time to time may be prescribed for them respectively by the Board, these bylaws,
the president or the Chairman of the Board.
Section 10. SECRETARY. The Secretary shall keep, or cause to
be kept, a book of minutes at the principal office or such other place as the
Board may order, of all meetings of Directors and Shareholders, with the time
and place of holding, whether regular or special, and if special, how
authorized, the notice thereof given, the names of those present at Directors'
meetings, the number of shares present or represented at Shareholders' meetings
and the proceedings thereof.
The Secretary shall keep, or cause to be kept, at the
principal office or at the office of the corporation's transfer agent, a share
register, or duplicate share register, showing the names of the Shareholders and
their addresses; the number and classes of shares held by each; the number and
date of certificates issued for the same; and the number and date of
cancellation of every certificate surrendered for cancellation.
The Secretary shall give, or cause to be given, notice of all
the meetings of the Shareholders and of the Board required by these Bylaws or by
law to be given. He or she shall keep, or cause to be kept, the seal of the
corporation in safe custody, and shall have such other powers and perform such
other duties as may be prescribed by the Board or by these Bylaws.
Section 11. CHIEF FINANCIAL OFFICER. The Chief Financial
Officer shall keep and maintain, or cause to be kept and maintained in
accordance with generally accepted accounting principles, adequate and correct
accounts of the properties and business transactions of the corporation,
including accounts of its assets, liabilities, receipts, disbursements, gains,
losses, capital, earnings (or surplus) and shares. The books of account shall at
all reasonable times be open to inspection by any Director.
This Officer or his designee shall deposit all moneys and
other valuables in the name and to the credit of the corporation with such
depositaries as may be designated by the Board. He or she shall disburse the
funds of the corporation as may be ordered by the Board, shall render to the
President and Directors, whenever they request it, an account of all of his or
her transactions and of the financial condition of the corporation, and shall
have such other powers and perform such other duties as may be prescribed by the
Board or these Bylaws.
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ARTICLE IV
SHAREHOLDERS' MEETINGS
Section 1. PLACE OF MEETINGS. All meetings of the Shareholders
shall be held at the principal office of the corporation unless some other
appropriate and convenient location be designated for that purpose from time to
time by the Board.
Section 2. ANNUAL MEETINGS. The annual meeting of the
Shareholders shall be held, each year, on such date and at such time as is
determined by the Board.
At the annual meeting, the Shareholders shall elect a Board,
consider reports of the affairs of the corporation and transact such other
business as may be properly brought before said meeting.
Section 3. SPECIAL MEETINGS. Special meetings of the
Shareholders may be called at any time by the Board, the Chairman of the Board,
the President, a Vice President, the Secretary, or by one or more Shareholders
holding not less than one-tenth (1/10) of the voting power of the corporation.
Except as provided hereafter, notice shall be given as for the annual meeting.
Upon receipt of a written request addressed to the Chairman,
President or Secretary, mailed or delivered personally to such Officer by any
person (other than the Board) entitled to call a special meeting of
Shareholders, such Officer shall cause notice to be given, to the Shareholders
entitled to vote, that a meeting will be held at a time requested by the person
or persons calling the meeting, not less than thirty-five (35) nor more than
sixty (60) days after receipt of such request. If such notice is not given
within twenty (20) days after receipt of such request, the persons calling the
meeting may give notice thereof in the manner provided by these Bylaws or apply
to the Superior Court as provided in Section 305(c) of the Code.
Section 4. NOTICE OF MEETINGS - REPORTS. Notice of meetings,
annual or special, shall be given in writing not less than ten (10) nor more
than sixty (60) days before the date of the meeting to Shareholders entitled to
vote thereat. Such notice shall be given by the Secretary or the Assistant
Secretary, or if there be no such Officer, or in the case of his or her neglect
or refusal, by any Director or Shareholder.
Such notices or any reports shall be given personally or by
mail or other means of written communication as provided in Section 601 of the
Code and shall be sent to the Shareholder's address appearing on the books of
the corporation, or supplied by him or her to the corporation for the purpose of
notice, and in the absence thereof, as provided in said Section 601.
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Notice of any meeting of Shareholders shall specify the place,
the day and the hour of meeting, and (i) in case of a special meeting, the
general nature of the business to be transacted and no other business may be
transacted, or (ii) in the case of an annual meeting, those matters which the
Board at date of mailing, intends to present for action by the Shareholders. At
any meetings where Directors are to be elected, notice shall include the names
of the nominees, if any, intended at date of notice to be presented by
management for election.
If a Shareholder supplied no address, notice shall be deemed
to have been given if mailed to the place where the principal office of the
corporation, in California, is situated, or published at least once in some
newspaper of general circulation in the County of said principal office.
Notice shall be deemed given at the time it is delivered
personally or deposited in the mail or sent by other means of written
communication. The Officer giving such notice or report shall prepare and file
an affidavit or declaration thereof.
When a meeting is adjourned for forty-five (45) days or more,
notice of the adjourned meeting shall be given as in the case of an original
meeting, provided, however, it shall not be necessary to give any notice of
adjournment or of the business to be transacted at an adjourned meeting other
than by announcement at the meeting at which such adjournment is taken.
If the Board of Directors does not so fix a record date:
(a) the record date for determining Shareholders entitled to
notice of or to vote at a meeting of Shareholders shall be at the close of
business on the business day next preceding the day on which notice is given or,
if notice is waived, at the close of business on the business day next preceding
the day on which the meeting is held; and
(b) the record date for determining Shareholders entitled to
give consent to corporate action in writing without a meeting, (i) when no prior
action by the Board has been taken, shall be the day on which the first written
consent is given, or (ii) when prior action by the Board has been taken, shall
be at the close of business on the day on which the Board adopts the resolution
relating to that action, or the sixtieth (60th) day before the date of such
other action, whichever is later.
Section 5. WAIVER OF NOTICE OR CONSENT BY ABSENT SHAREHOLDER.
The transactions of any meeting of Shareholders, however called and noticed,
shall be as valid as though said transactions occurred at a meeting duly held
after regular call and notice, if a quorum be present either in person or by
proxy, and if, either before or after the meeting, each of the Shareholders
entitled to vote, not present in person or by proxy, sign a written waiver of
notice, or a consent to the holding of such meeting or an approval of the
minutes thereof. All such waivers, consents or approvals shall be filed
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with the corporate records or made a part of the minutes of the meeting.
Attendance shall constitute a waiver of notice, unless objection shall be made
as provided in Section 601(e) of the Code.
Section 6. SHAREHOLDERS ACTING WITHOUT A MEETING- ELECTION OF
DIRECTORS. Any action which may be taken at a meeting of the Shareholders, may
be taken without a meeting or notice of meeting if authorized by a writing
signed by all of the Shareholders entitled to vote at a meeting for such
purpose, and filed with the Secretary of the corporation, provided, further,
that while ordinarily Directors can only be elected by unanimous written consent
under Section 603(d) of the Code, if the Directors fail to fill a vacancy, then
a Director to fill that vacancy may be elected by the written consent of persons
holding a majority of shares entitled to vote for the election of Directors.
Section 7. OTHER ACTIONS WITHOUT A MEETING. Unless otherwise
provided in the Code, any action which may be taken at any annual or special
meeting of Shareholders may be taken without a meeting and without prior notice,
if a consent in writing, setting forth the action so taken, signed by the
holders of the outstanding shares having not less than the minimum number of
votes that would be necessary to authorize or take such action at a meeting at
which all shares entitled to vote thereon were present and voted.
Unless the consents of all Shareholders entitled to vote have
been solicited in writing,
(1) Notice of any Shareholder approval pursuant to
Sections 310, 317, 1201 or 2007 of the Code without a meeting by less
than unanimous written consent shall be given at least ten (10) days
before the consummation of the action authorized by such approval, and
(2) Prompt notice shall be given of the taking of
any other corporate action approved by Shareholders without a meeting
by less than unanimous written consent, to each of those Shareholders
entitled to vote who have not consented in writing.
Any Shareholder giving a written consent, or the Shareholder's
proxyholders, or a transferee of the shares of a personal representative of the
Shareholder or their respective proxyholders, may revoke the consent by a
writing received by the corporation prior to the time that written consents of
the number of shares required to authorize the proposed action have been filed
with the Secretary of the corporation, but may not do so thereafter. Such
revocation is effective upon its receipt by the Secretary of the corporation.
Section 8. QUORUM. The holders of a majority of the shares
entitled to vote, whether present in person, or represented by proxy, shall
constitute a quorum at all
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meetings of the Shareholders for the transaction of business except as otherwise
provided by law, by the Articles of Incorporation of the corporation, or by
these Bylaws. If, however, such majority shall not be present or represented at
any meeting of the Shareholders, the Shareholders entitled to vote thereat,
present in person, or by proxy, shall have the power to adjourn the meeting from
time to time, until the requisite amount of voting shares shall be present. At
such adjourned meeting at which the requisite amount of voting shares shall be
represented, any business may be transacted which might have been transacted at
a meeting as originally notified.
If a quorum be initially present, the Shareholders may
continue to transact business until adjournment, notwithstanding the withdrawal
of enough Shareholders to leave less than a quorum, if any action taken is
approved by a majority of the Shareholders required to initially constitute a
quorum.
Section 9. VOTING. Only persons in whose names shares entitled
to vote stand on the stock records of the corporation on the day of any meeting
of Shareholders, unless some other day be fixed by the Board for the
determination of Shareholders of record, and then on such other day, shall be
entitled to vote at such meeting.
Provided that prior to the voting at a meeting, a candidate's
name has been placed in nomination and one or more Shareholders has given notice
at the meeting of the Shareholder's intent to cumulate the Shareholder's votes,
every Shareholder entitled to vote at any election for Directors of any
corporation for profit may cumulate their votes and give one candidate a number
of votes equal to the number of Directors to be elected multiplied by the number
of votes to which his or her shares are entitled, or distribute his or her votes
on the same principle among as many candidates as he or she thinks fit. If any
one shareholder has given such notice, all Shareholders may cumulate their votes
for candidates in nomination.
The candidates receiving the highest number of votes up to the
number of Directors to be elected are elected.
The Board may fix a time in the future not exceeding thirty
(30) days nor less than ten (10) preceding the date of any meeting of
Shareholders or the date fixed for the payment of any dividend or distribution,
or for the allotment of rights, or when any change or conversion or exchange of
shares shall go into effect, as a record date for the determination of the
Shareholders entitled to notice of and to vote at any such meeting, or entitled
to receive any such dividend or distribution, or any allotment of rights, or to
exercise the rights in respect to any such change, conversion or exchange of
shares. In such case only Shareholders of record on the date so fixed shall be
entitled to notice of and to vote at such meeting, or to receive such dividends,
distribution or allotment of rights, or to exercise such rights, as the case may
be notwithstanding any transfer of any share on the
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books of the corporation after any record date fixed as aforesaid. The Board may
close the books of the corporation against transfers of shares during the whole
or any part of such period.
Section 10. PROXIES. Every Shareholder entitled to vote, or to
execute consents, may do so, either in person or by written proxy, executed in
accordance with the provisions of Sections 604 and 705 of the Code and filed
with the Secretary of the corporation.
Section 11. ORGANIZATION. The President, or in the absence of
the President, the Chief Executive Officer, shall call the meeting of the
Shareholders to order, and shall act as chairman of the meeting. In the absence
of the President and the Chief Executive Officer, Shareholders shall appoint a
chairman for such meeting. The Secretary of the corporation shall act as
Secretary of all meetings of the Shareholders, but in the absence of the
Secretary at any meeting of the Shareholders, the presiding Officer may appoint
any person to act as Secretary of the meeting.
Section 12. INSPECTORS OF ELECTION. In advance of any meeting
of Shareholders the Board may, if they so elect, appoint inspectors of election
to act at such meeting or any adjournment thereof. If inspectors of election be
not so appointed, or if any persons so appointed fail to appear or refuse to
act, the chairman of any such meeting may, and on the request of any Shareholder
or his or her proxy shall, make such appointment at the meeting in which case
the number of inspectors shall be either one (1) or three (3) as determined by a
majority of the Shareholders represented at the meeting.
The Inspectors of Elections shall determine the number of
shares outstanding and the voting power of each, the shares represented at the
meeting, the existence of a quorum and the voting power of each, the shares
represented at the meeting, the existence of a quorum and the authenticity,
validity and effect of proxies, receive votes, ballots or consents, hear and
determine all challenges and questions in connection with the right to vote,
count and tabulate all votes or consents, determine when the polls shall close,
determine the result and do any other acts that may be proper to conduct the
election or vote with fairness to all Shareholders.
ARTICLE V
CERTIFICATES AND TRANSFER OF SHARES
Section 1. CERTIFICATES FOR SHARES. Certificates for shares
shall be of such form and device as the Board may designate and shall state the
name of the record holder of the shares represented thereby; its number; date of
issuance; the number of shares for which it is issued; a statement of the
rights, privileges, preferences and restrictions, if any; a statement as to the
redemption or conversion, if any; a statement of liens or restrictions upon
transfer or voting, if any; if the shares be assessable or, if assessments are
collectible by personal action, a plain statement of such facts.
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All certificates shall be signed in the name of the
corporation by either of the Chairman of the Board, President or Chief Executive
Officer and by the Chief Financial Officer or an Assistant Treasurer or the
Secretary or any Assistant Secretary, certifying the number of shares and the
class or series of shares owned by the Shareholder.
Any or all of the signatures on the certificate may be
facsimile. In case any Officer, transfer agent, or registrar who has signed or
whose facsimile signature has been placed on a certificate shall have ceased to
be that Officer, transfer agent, or registrar before that certificate is issued,
it may be issued by the corporation with the same effect as if that person were
an Officer, transfer agent, or registrar at the date of issue.
Section 2. TRANSFER ON THE BOOKS. Upon surrender to the
Secretary or transfer agent of the corporation of a certificate for shares duly
endorsed or accompanied by proper evidence of succession, assignment or
authority to transfer, it shall be the duty of the corporation to issue a new
certificate to the person entitled thereto, cancel the old certificate and
record the transaction upon its books.
Section 3. LOST OR DESTROYED CERTIFICATES. Any person claiming
a certificate of stock to be lost or destroyed shall make an affidavit or
affirmation of that fact and shall, if the Directors so require, give the
corporation a bond of indemnity, in form and with one or more sureties
satisfactory to the Board, in at least double the value of the stock represented
by said certificate, whereupon a new certificate may be issued in the same tenor
and for the same number of shares as the one alleged to be lost or destroyed.
Section 4. TRANSFER AGENTS AND REGISTRARS. The Board may
appoint one or more transfer agents or transfer clerks, and one or more
registrars, which shall be an incorporated bank or trust company, either
domestic or foreign, who shall be appointed at such times and places as the
requirements of the corporation may necessitate and the Board may designate.
Section 5. CLOSING STOCK TRANSFER BOOKS - RECORD DATE. In
order that the corporation may determine the Shareholders entitled to notice of
any meeting or to vote or entitled to receive payment of any dividend or other
distribution or allotment of any rights or entitled to exercise any rights in
respect of any other lawful action, the Board may fix, in advance, a record
date, which shall not be more than sixty (60) nor less than ten (10) days prior
to the date of such meeting nor more than sixty (60) days prior to any other
action.
The record date for determining Shareholders for any other
purpose shall be at the close of business on the day on which the Board adopts
the resolution relating thereto, or the sixtieth (60th) day prior to the date of
such other action, whichever is later.
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Section 6. LEGEND CONDITION. In the event any shares of the
corporation are issued pursuant to a permit or exemption therefrom requiring the
imposition of a legend condition, the person or persons issuing or transferring
said shares shall make said legend appear on the certificate and on the stub
relating thereto in the stock record book and shall not be required to transfer
any shares free of such legend unless an amendment to such permit or a new
permit be first issued so authorizing such a deletion.
ARTICLE VI
RECORDS - REPORTS - INSPECTION
Section 1. RECORDS. The corporation shall maintain, in
accordance with generally accepted accounting principles, adequate and correct
accounts, books and records of its business and properties. All of such books,
records and accounts shall be kept at its principal office in the State of
California, as fixed by the Board from time to time.
Section 2. INSPECTION OF BOOKS AND RECORDS. All books and
records provided for in Section 1500 of the Code shall be open to inspection by
the Directors and Shareholders from time to time and in the manner provided in
Section 1600 through 1602, inclusive, of the Code.
Section 3. CERTIFICATION AND INSPECTION OF BYLAWS. The
original or a copy of these Bylaws, as amended from time to time, certified by
the Secretary, shall be kept at the corporation's principal office and shall be
open to inspection by the Shareholders of the corporation at all reasonable
times during office hours.
ARTICLE VII
GENERAL MATTERS
Section 1. CHECKS, DRAFTS, ETC. All checks, drafts, or other
orders for payment of money, notes or other evidences of indebtedness, issued in
the name of or payable to the corporation, shall be signed or endorsed by such
person or persons and in such manner as shall be determined from time to time by
resolution of the Board.
Section 2. CONTRACTS, ETC. -- HOW EXECUTED. The Board, except
as otherwise provided by these Bylaws, may authorize any Officer or Officers,
agent or agents, to enter into any contract or execute any instrument in the
name of and on behalf of the corporation. Such authority may be general or
confined to specific instances. Unless so authorized by the Board, no Officer,
agent or employee shall have any power or authority to bind the corporation by
any contract or agreement, or to pledge its credit, or to render it liable for
any purpose or to any amount, except as provided in Section 313 of the Code.
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ARTICLE VIII
ANNUAL REPORTS
Section 1. WAIVER OF ANNUAL REPORTS TO SHAREHOLDER. The Board shall
cause an annual report to be sent to the Shareholders not later than one hundred
twenty (120) days after the close of the fiscal year adopted by the corporation.
Such report shall be sent to the Shareholders at least fifteen (15) (or, if sent
by third-class mail, thirty-five (35)) days prior to the annual meeting of
Shareholders to be held during the next fiscal year and in the manner specified
in Article IV, Section 2.4 of these Bylaws for giving notice to Shareholders of
the corporation.
The annual report shall contain a balance sheet as of the end of the
fiscal year and an income statement and statement of changes in financial
position for the fiscal year, accompanied by any report thereon of independent
accountants or, if there is no such report, the certificate of an authorized
officer of the corporation that the statements were prepared without audit from
the books and records of the corporation.
The annual report to Shareholders referred to in Section 1501 of the
Code is expressly waived so long as the corporation shall have less than one
hundred (100) Shareholders. However, nothing herein shall be interpreted as
prohibiting the Board from issuing annual or other periodic reports to the
Shareholders of the corporation as they consider appropriate.
ARTICLE IX
AMENDMENTS TO BYLAWS
Section 1. AMENDMENTS. After initial Bylaws of the corporation shall
have been adopted by the incorporator or incorporators of the corporation, the
Bylaws may be amended or repealed or new Bylaws may be adopted by a majority of
the outstanding shares entitled to vote or by the Board; provided, however, that
the Board shall have no control over any Bylaw which changes the authorized
number of Directors of the corporation; provided, further, than any control over
the Bylaws herein vested in the Board shall be subject to the authority of the
aforesaid Shareholders to amend or repeal the Bylaws or to adopt new Bylaws; and
provided further than any Bylaw amendment or new Bylaw which changes the minimum
number of Directors to fewer than five (5) shall require authorization by the
greater proportion of voting power of the Shareholders as hereinbefore set
forth.
Section 2. RECORD OF AMENDMENTS. Whenever an amendment or new Bylaw is
adopted, it shall be copied in the book of Bylaws with the original Bylaws, in
the appropriate place. If any Bylaw is repealed, the fact of repeal with the
date of the meeting at which the repeal was enacted or written assent was filed
shall be stated in said book.
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ARTICLE X
CORPORATE SEAL
The corporate seal shall be circular in form, and shall have inscribed
thereon the name of the corporation, the date of its incorporation, and the word
"California".
ARTICLE XI
INDEMNIFICATION OF DIRECTORS, OFFICERS,
EMPLOYEES AND OTHER AGENTS
Section 1. AGENTS, PROCEEDINGS, AND EXPENSES. For the purposes of this
Article, "agent" means any person who is or was a Director, Officer, employee,
or other agent of the corporation, or is or was serving at the request of the
corporation as a Director, Officer, employee, or agent of another foreign or
domestic corporation, partnership, joint venture, trust or other enterprise, or
was a director, officer, employee, or agent of a foreign or domestic corporation
which was a predecessor corporation of the corporation or of another enterprise
at the request of such predecessor corporation; "proceeding" means any
threatened, pending or completed action or proceeding, whether civil, criminal,
administrative, or investigative; and "expenses" includes, without limitation,
attorneys' fees and any expenses of establishing a right to indemnification
under Section 4 or Section 5(c) of this Article.
Section 2. ACTIONS OTHER THAN BY THE CORPORATION. The corporation shall
indemnify any person who was or is a party, or is threatened to be made a party,
to any proceeding (other than an action by or in the right of the corporation to
procure a judgment in its favor) by reason of the fact that such person is or
was an agent of the corporation, against expenses, judgments, fines, settlements
and other amounts actually and reasonably incurred in connection with such
proceeding if such person acted in good faith and in a manner such person
reasonably believed to be in the best interests of the corporation and, in the
case of a criminal proceeding, had no reasonable cause to believe the conduct of
such person was unlawful. The termination of any proceeding by judgment, order,
settlement, conviction, or upon a plea of nolo contendere or its equivalent
shall not, of itself, create a presumption that the person did not act in good
faith and in a manner which the person reasonably believed to be in the best
interests of the corporation or that the person had reasonable cause to believe
that the persons' conduct was unlawful.
Section 3. ACTIONS BY THE CORPORATION. The corporation shall indemnify
any person who was or is a party, or is threatened to be made a party, to any
threatened, pending or completed action by or in the right of the corporation to
procure a judgment in its favor by reason of the fact that such person is or was
an agent of the corporation, against expenses actually and reasonably incurred
by such person in connection with the defense or settlement of such action if
such person acted in good faith, in a manner such person believed to be in the
best interests of the corporation. No indemnification shall be made under this
Section 3 for any of the following:
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(a) In respect of any claim, issue or matter as to which such
person shall have been adjudged to be liable to the corporation and its
Shareholders, unless and only to the extent that the court in which
such proceeding is or was pending shall determine upon application
that, in view of all the circumstances of the case, such person is
fairly and reasonably entitled to indemnity for the expenses which the
court shall determine; or
(b) Of amounts paid in settling or otherwise disposing of a pending
action without court approval; or
(c) Of expenses incurred in defending a pending action which is
settled or otherwise disposed of without court approval.
Section 4. SUCCESSFUL DEFENSE BY AGENT. To the extent that an agent of
the corporation has been successful on the merits in defense of any proceeding
referred to in Sections 2 or 3 of this Article, or in defense of any claim,
issue, or matter therein, the agent shall be indemnified against expenses
actually and reasonably incurred by the agent in connection therewith.
Section 5. REQUIRED APPROVAL. Except as provided in Section 4 of this
Article, any indemnification under this Article shall be made by the corporation
only if authorized in the specific case, upon a determination that
indemnification of the agent is proper in the circumstances because the agent
has met the applicable standard of conduct set forth in Sections 2 or 3 of this
Article; by any of the following:
(a) A majority vote of a quorum consisting of Directors who are not
parties to such proceeding; or
(b) If such a quorum of Directors is not obtainable, by independent
legal counsel in a written opinion; or
(c) Approval of the Shareholders, with the shares owned by the
person to be indemnified not being entitled to vote thereon. For the
purposes of this subsection, "approval of the Shareholders" means
approved or ratified by the affirmative vote of a majority of the
shares of the corporation represented and voting at a duly held meeting
at which a quorum is present (which shares voting affirmatively shall
also constitute at least a majority of the required quorum) or by the
written consent signed by the holders of a majority of the outstanding
shares entitled to vote, which written consent shall be procedurally
procured in the manner provided by law; or
(d) The court in which the proceeding is or was pending upon
application made by the corporation or the agent of the attorney or
other person
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rendering services in connection with the defense, whether or not such
application by the agent, attorney, or other person is opposed by the
corporation.
Section 6. ADVANCE OF EXPENSES. Expenses incurred in defending any
proceeding may be advanced by the corporation before the final disposition of
the proceedings on receipt of an undertaking by or on behalf of the agent to
repay the amount of the advance unless it shall be determined ultimately that
the agent is entitled to be indemnified as authorized in this Article.
Section 7. OTHER RIGHTS AUTHORIZED. The indemnification provided by
this Article shall not be exclusive of any other rights to which those seeking
indemnification may be entitled under any bylaw, agreement, vote of
Shareholders, or vote of disinterested Directors or otherwise, both as to action
in an official capacity and as to action in another capacity while holding such
office, to the extent such additional rights to indemnification are authorized
in the articles of incorporation of the corporation. Nothing contained in this
Section shall affect any right to indemnification to which persons other than
Directors and officers of the corporation or any subsidiary hereof may be
entitled by contract or otherwise.
Section 8. LIMITATIONS. No indemnification or advance shall be made
under this Article, except as provided in Section 4 or Section 5(c), in any
circumstance where it appears:
(a) That it would be inconsistent with a provision of the articles,
by-laws, a resolution of the Shareholders or an agreement in effect at
the time of the accrual of the alleged cause of action asserted in the
proceeding in which the expenses were incurred or other amounts were
paid, which prohibits or otherwise limits indemnification; or
(b) That it would be inconsistent with any condition expressly
imposed by a court in approving a settlement.
Section 9. INSURANCE. Upon and in the event of a determination by the
Board of Directors of the corporation to purchase such insurance, the
corporation shall purchase and maintain insurance on behalf of any agent of the
corporation against any liability asserted against or incurred by the agent in
such capacity or arising out of the agent's status as such whether or not the
corporation would have the power to indemnify the agent against that liability
under the provisions of this Section .
Section 10. FIDUCIARIES OF CORPORATE EMPLOYEE BENEFIT PLAN. This
Article does not apply to any proceeding against any trustee, investment
manager, or other fiduciary of an employee benefit plan in that person's
capacity as such, even though that person may also be an agent of the
corporation as defined in Section 1 of this Article. Nothing contained in this
Article shall limit any right to indemnification to
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which such a trustee, investment manager, or other fiduciary may be entitled by
contract or otherwise, which shall be enforceable to the extent permitted by
applicable law other than this Article.
Section 11. RIGHT TO INDEMNITY CONTINUES. The rights to indemnity
provided for in this Article shall continue as to a person who has ceased to be
a director, officer, employee, or agent and shall inure to the benefit of the
heirs, executors, and administrators of the person.
ARTICLE XII
MISCELLANEOUS
Section 1. REPRESENTATION OF SHARES IN OTHER CORPORATIONS. Shares of
other corporations standing in the name of the corporation may be voted or
represented and all incidents thereto may be exercised on behalf of the
corporation by the Chairman of the Board, the President or any Vice President
and the Secretary or an Assistant Secretary.
Section 2. SUBSIDIARY CORPORATIONS. Shares of the corporation owned by
a subsidiary shall not be entitled to vote on any matter. A subsidiary for these
purposes is defined as a corporation, the shares of which possessing more than
25% of the total combined voting power of all classes of shares entitled to
vote, are owned directly or indirectly through one or more subsidiaries.
Section 3. ACCOUNTING YEAR. The accounting year of the corporation
shall be a calendar year unless otherwise fixed by resolution of the Board.
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CERTIFICATE BY INCORPORATOR
I, the undersigned, do hereby certify:
That I am the Incorporator of that the foregoing Bylaws, constitute the
Bylaws of said corporation as duly adopted by action of the Incorporator of the
corporation on September 30, 1996.
IN WITNESS WHEREOF, I have hereunto subscribed my name and affixed the
seal of said corporation on this 30th day of September, 1996.
By: /s/ Darren O. Bigby
---------------------
Darren O. Bigby
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EXHIBIT 4.2
KANI, INC.
FORM OF REPRESENTATIVES' WARRANT AGREEMENT
Joseph Charles & Associates, Inc.
9701 Wilshire Blvd.
Beverly Hills, CA 90212
Ladies and Gentlemen:
Kani, Inc., a California corporation (the "Company"), hereby
agrees, on the terms and subject to the conditions of this Warrant Agreement
(the "Agreement") to sell and deliver to Joseph Charles & Associates, Inc.
("Holder"), individually as the Underwriter referred to in the "Underwriting
Agreement" (as defined below), for a purchase price of $0.001 per "Warrant" (as
defined below), Warrants to purchase up to [140,000 in the aggregate] shares of
"Common Stock" (as defined below) and Holder agrees, on the terms and subject to
the conditions of this Agreement, to purchase such Warrants from the Company.
The Warrants shall be evidenced by an instrument in the form annexed hereto as
Exhibit "A" (said instrument and all instruments hereafter issued in replacement
thereof being hereinafter referred to as the "Warrants"). Each of the Warrants
will be exercisable by the "Holder" thereof (as defined below) as to all or any
lesser number of shares of the Common Stock covered thereby, at the "Purchase
Price" per share (as defined below) at any time and from time to time on and
after 9:00 a.m., Los Angeles time, on , 1997 and ending at 5:00 p.m.,
Los Angeles Time, on , 2001.
The delivery of the Warrants and payment of the purchase price
of the Warrants are to be made on the "Closing Date" (as defined in the
Underwriting Agreement defined below), at the offices of the Holder, 9701
Wilshire Blvd., Beverly Hills, California, or such other time and place as may
be agreed upon between Holder and the Company (the "Closing Time").
1. Definitions. As used in this Agreement, the following terms, unless the
context otherwise clearly requires, shall have for all purposes the following
respective meanings, and capitalized terms used herein without definition shall
have the meanings ascribed to them in the Underwriting Agreement:
(a) The term "Common Stock" refers to the Common Stock, no par value,
of the Company, and all other shares of any class or classes (however
designated) of the common stock of the Company, now or hereafter authorized, the
holders of which by operation of law shall have the right, without limitation as
to amount, either to all or to a part of the balance of current dividends and
liquidating dividends and distributions after the payment of dividends and
distributions on any shares entitled to preference, and the holders of which
ordinarily, in the absence of contingency, shall be entitled to vote for the
election of the directors of the Company (even though the right so to vote has
been suspended by the occurrence of such a contingency), other than those
directors of the Company (constituting a portion of the Board of Directors) who,
pursuant to the Articles of
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Incorporation or other charter documents of the Company, are to be elected by a
designated class or series of the capital stock of the Company.
(b) The term "Warrant Shares" refers to the shares of Common Stock (or
Other Securities) issuable under this Warrant Agreement pursuant to the
exercise, in whole or in part, of the Warrants.
(c) The term "Other Securities" refers to any stock (other than Common
Stock) and other securities of the Company or any other person (corporate or
otherwise) which the Holders of the Warrants at any time shall be entitled to
receive, or shall have received, upon the exercise of the Warrants, in lieu of
or in addition to Common Stock, or which at any time shall be issuable or shall
have been issued in exchange for or in replacement of Common Stock or Other
Securities pursuant to Section 6 below or otherwise.
(d) The term "Prospectus" refers to the prospectus which is part of the
Company's Registration Statement on Form S-1 (No. 333- ) in the form first filed
with the Securities and Exchange Commission (the "Commission") pursuant to Rule
424(b) of the applicable rules and regulations (the "Rules and Regulations") of
the Commission under the Securities Act of 1933, as amended (the "Act").
(e) The term "Purchase Price" refers to the per share purchase price of
the Warrant Shares subject to this Warrant Agreement. The Purchase Price shall
initially be $ per share (120% of the per share price to the public), subject to
adjustment as provided in Section 6 below.
(f) The term "Registration Statement" refers to the Company's
Registration Statement on Form S-1 (No. 333- ), as amended, when it first
became effective under the Act.
(g) The term "Holder" when used with respect to the Warrants or the
Warrant Shares, shall mean the person registered on the books and records of the
Company as being the holder of record of the Warrants or the initial Holder or
Holders of the Warrant Shares, as the case may be, and, so long as Holder holds
of record any Warrants or Warrant Shares, it shall be included in the definition
of "Holder," and any action to be taken or approval to be given by the Holders,
shall, unless otherwise provided in this Agreement, require the action by, or
approval of, the Holder or Holders of at least that number of Warrants and
Warrant Shares which in the aggregate shall constitute a majority of all Warrant
Shares issued or issuable under this Agreement.
(h) "Common Stock Outstanding" shall mean the aggregate of all Common
Stock outstanding plus all Common Stock issuable upon exercise of all
outstanding Options and conversion of all outstanding Convertible Securities.
(i) "Convertible Securities" shall mean any indebtedness, shares of
stock or other rights granted by the Company (other than Options) convertible
into or exchangeable for Common Stock.
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(j) "Options" shall mean any rights, warrants or options granted by the
Company to purchase Common Stock or Convertible Securities.
2.1 Representations and Warranties. The Company represents and warrants to
Holder as follows:
(a) Corporate Action. The Company has all requisite power and
authority, and has taken all necessary action, to enter into and perform all of
its obligations under this Agreement, to issue and deliver the Warrants and to
authorize and reserve for issuance, and upon payment from time to time of the
Purchase Price in accordance with the terms of this Agreement, to issue and
deliver, the Warrant Shares; and this Agreement has been duly authorized,
executed and delivered by the Company and constitutes the legal, valid and
binding agreement of the Company, enforceable against the Company in accordance
with its terms.
(b) Outstanding Common Stock. The outstanding shares of Common Stock
have been duly and validly authorized and issued and are fully paid and
non-assessable and free of preemptive rights. The Warrant Shares (i) are duly
authorized by the Company's charter documents, (ii) have been duly and validly
authorized to be issued and adequately reserved by the Board of Directors of the
Company, and (iii) will, when issued and delivered to the Holders in accordance
with this Agreement, be duly and validly issued, fully paid and non-assessable,
and free and clear of all liens, charges, encumbrances or rights of others
except for those which may be created by the Holder. The holders of outstanding
shares of capital stock of the Company are not entitled to any preemptive or
similar rights to subscribe for or purchase Warrant Shares or other shares of
capital stock of the Company and, except as otherwise set forth or incorporated
by reference in the Prospectus, there are no outstanding rights, warrants or
options to acquire, or instruments convertible into or exchangeable for, or
agreements or understandings with respect to the sale or issuance of, any shares
of capital stock of the Company.
(c) No Violation. Neither the execution or delivery of this Agreement,
the consummation of the transactions contemplated by this Agreement nor
compliance with the terms and provisions of this Agreement will conflict with or
constitute a breach of, or a default (with the passage of time or otherwise)
under, or result in the imposition of a lien on any properties of the Company,
or an acceleration of indebtedness pursuant to, the charter or bylaws, or other
equivalent instruments, of the Company or any bond, debenture, note or other
evidence of indebtedness or any indenture, mortgage, deed of trust or any other
agreement or instrument to which the Company is a party or by which it is bound
or to which any of the property or assets of the Company is subject, or any law,
administrative regulation or order of any court or governmental agency or
authority applicable to the Company or any of its properties or assets (subject
to the accuracy of the representations and warranties of Holder set forth
herein). No consent, approval, authorization or other order of any regulatory
body, administrative agency, or other governmental body is required for the
valid issuance and sale of the Warrant Shares to Holder or the other
transactions contemplated by this Agreement except for registration under the
federal securities laws and for permits and similar authorizations required
under state Blue Sky laws or similar laws.
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(d) Underwriting Agreement. All representations and warranties made by
the Company in Section 1 of the Underwriting Agreement, dated
, 1996, by and among the Company, Joseph Charles & Associates,
Inc. and (the "Underwriting Agreement"), will be true and
correct at and as of the Closing Time and are hereby incorporated by reference
into this Agreement as if such representations and warranties were set forth
herein.
2.2 Representations and Warranties of Holder. Holder represents and warrants to
the Company that it has all requisite power and authority, and has taken all
necessary action, to enter into and perform all of its obligations under this
Agreement; and this Agreement has been duly authorized, executed and delivered
by it and constitutes its legal, valid and binding agreement, enforceable
against it in accordance with its terms, except (i) as such enforceability may
be subject to or limited by bankruptcy, insolvency, reorganization, moratorium
and other similar laws or equitable principles now or hereafter in effect
relating to or affecting creditors rights generally (collectively, the
"Equitable Defenses") and (ii) insofar as the indemnification and contribution
provisions hereof may be limited under federal and state securities laws and the
public policies underlying such laws. Holder represents and warrants to the
Company that it is acquiring the Warrants and the Warrant Shares for investment
purposes, and without a view to or for the resale thereof.
3. Compliance with the Act.
(a) Transferability of Warrants. Holder agrees that the Warrants may
not be transferred, sold, assigned or hypothecated before , 1997,
except (i) to its successors in a merger or consolidation or other business
combination; (ii) to purchasers of all or substantially all of its assets;
(iii) to any officers or partners of Holder; or (iv) by operation of law.
Holder further agrees that the Company shall have no obligation to effect
any transfer of the Warrants during the respective time periods referred to
above, except in accordance with applicable federal and state securities laws
and unless the transferee, purchaser, assignee or pledgee, as the case may be,
shall have executed an agreement obligating the transferee to comply with all
terms and conditions of this Warrant Agreement applicable to the transferor.
(b) Transferability of Warrant Shares.
(i) Except as otherwise provided in this Section 3(b), each
certificate for Warrant Shares initially issued upon the exercise of any
Warrants, shall be stamped or otherwise imprinted with a legend in substantially
the following form:
"The Shares represented by this certificate are subject to the
conditions specified in a certain Warrant Agreement dated , 1996.
No transfer, sale, pledge, hypothecation, encumbrance or other
disposition of the Shares represented by this certificate shall be
valid or effective until registered or the Company has received an
opinion of counsel, satisfactory to it, that the transaction is exempt
from registration, and until such conditions as are contained in the
Warrant Agreement have been fulfilled. A copy of the form of the
Warrant Agreement is on
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file at the offices of Kani, Inc. The holder of this certificate, by
acceptance of this certificate, agrees to be bound by the provisions of
the Warrant Agreement."
(ii) Prior to any transfer, sale, pledge, assignment,
hypothecation or other disposition (each, a "Transfer") of any Warrant Shares or
the Warrant, the Holder of such Warrant Shares or Warrant shall (a) give ten
days' prior written notice (a "Transfer Notice") to the Company of such Holder's
intention to effect such Transfer, describing the manner and circumstances of
the proposed Transfer, and (b) obtain from counsel to such Holder an opinion
reasonably satisfactory to the Company that the proposed Transfer of such
Warrant Shares or Warrant may be effected without registration under the Act,
any applicable state securities laws, and in accordance with the provisions of
this Agreement. The Company shall be deemed to have consented to such transfer
if it has not notified the Holder of such Warrant Shares or Warrant within three
business days of receipt of the Transfer Notice and opinion that it objects to
such transfer, and such Holder shall thereupon be entitled to Transfer such
Warrant Shares and Warrant in accordance with the terms of the Transfer Notice.
Each certificate evidencing such Warrant Shares issued upon such Transfer shall
bear the restrictive legend set forth in Section 3(b)(i), unless in the opinion
of counsel to such Holder, which opinion shall be reasonably satisfactory to the
Company, such legend is not required in order to ensure compliance with the Act.
(iii) Notwithstanding the foregoing provisions of this Section
3(b), the restrictions imposed by items (i) and (ii) of this Section upon the
transferability of the Warrant Shares and the legend requirements of Section
3(b)(i) shall terminate as to any particular Warrant Shares (A) when and so long
as such security shall have been effectively registered under the Act and
disposed of pursuant thereto, or (B) when the Company shall have delivered to
the Holder or Holders of any Warrants or Warrant Shares the written opinion of
counsel to the Company, which opinion of counsel shall be reasonably
satisfactory to such Holder or Holders, stating that such legend is not required
in order to ensure compliance with the Act. Whenever the restrictions imposed by
this Section shall terminate as to any Warrant Shares, as hereinabove provided,
the Holder thereof shall be entitled to receive from the Company, at the
Company's expense, a new certificate representing such Warrant Shares in the
name of the same Holder not bearing the restrictive legend set forth in Section
3(b)(i).
(c) Piggyback Registration of Warrant Shares. If, at any time during
the period commencing on the Closing Date and ending on the date which is five
years after the Closing Date, the Company shall propose to register any shares
of Common Stock or Other Securities (but excluding any registration pursuant to
Form S-8 or Form S-4 or any successor or comparable form thereto), the Company
shall (i) give each Holder written notice, or telegraphic, telecopy or
telephonic notice followed as soon as practicable by written confirmation
thereof, of such proposed registration at least 10 business days prior to the
filing of such registration statement and, (ii) upon written notice, or
telegraphic or telephonic notice followed as soon as practicable by written
confirmation thereof, given to the Company by any Holder within five business
days after the giving of such written confirmation or written notice by the
Company, the Company shall include or cause to be included in any such
registration statement all or such portion of the Warrant Shares as such Holder
may request (to the extent such Warrant Shares may be included in such
registration
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statement); provided, however, that the Company may at any time withdraw or
cease proceeding with any such registration if it shall at the same time
withdraw or cease proceeding with the registration of the Common Stock or Other
Securities originally proposed to be registered; and provided further, that in
connection with any registered public offering involving an underwriting, the
managing underwriter may (if in its opinion marketing factors so require) limit
the number of securities (including any Warrants or Warrant Shares) included in
such offering (other than securities of the Company). In the event of any such
limitation, the total number of Warrant Shares to be offered for the account of
the Holders participating in the registration shall be reduced pro rata in
proportion to the respective number of shares requested to be included therein
(other than securities being issued or sold by the Company) to the extent
necessary to reduce the total number of shares proposed to be registered to the
number of shares recommended by the managing underwriter.
(d) Demand Registration. In addition, at any time during the period
commencing on the Closing Date and ending on the date which is five years after
the Closing Date, upon written, telegraphic or telephonic notice followed as
soon as practicable by written confirmation thereof, from any Holder or Holders
(the "Requesting Holders") of that number of Warrants and Warrant Shares which
in the aggregate shall constitute a majority of all Warrant Shares issued or
issuable under this Agreement (excluding Warrant Shares which have been
previously sold, transferred or otherwise disposed of in a registered public
offering, pursuant to Rule 144 under the Act, as such rule may be amended from
time to time, or pursuant to Regulation S under the Act, as such Regulation may
be amended from time to time), that such Holder or Holders request the
registration under the Act of any of the Warrant Shares, the Company, as
promptly as possible after the receipt of such notice, but in any event within
45 days of the receipt of such notice shall file a registration statement with
respect to the offering and sale or other disposition of the Warrant Shares with
respect to which it shall have received such notice. Such registration may, if
the Company satisfies the applicable requirements, be made on Form S-3. If a
registration requested pursuant to this Section 3(d) is an underwritten
registration, the Company and other holders of securities of the Company may
include securities in such registration without the written consent of the
Holders of the Warrant Shares for which registration has been requested pursuant
to this Section 3(d) if, but only if, in the case of other holders of Securities
of the Company, the managing underwriters of such registration advise the
Company in writing that in their opinion such inclusion will not materially
adversely affect the successful marketing of the Warrant Shares. The Company
shall be obligated to file only one registration statement pursuant to this
Section 3(d), whether or not the registration statement at the time it becomes
effective covers all or a portion of the Warrant Shares. The Holders shall not
be deemed to have effected a demand registration pursuant to this Section 3(d)
unless and until the Registration Statement is declared effective.
Notwithstanding the foregoing, the Company shall not be required to effect a
registration under this Section 3(d) if, the Company in good faith gives written
notice to the participating Holders of Warrant Shares that it has determined to
prepare a Company-initiated registration statement in which, on the terms and
subject to the conditions set forth herein, such Holders may participate, and
the Company is actively employing in good faith reasonable efforts to cause such
registration statement to be filed and thereafter to become effective, or if the
Board of Directors of the Company determines for any reason that it would not be
in the
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best interests of the Company to file such registration statement at the time of
the receipt of the request, the Company may defer such filing for up to 120
days.
(e) Company's Obligations in Registration. If any Holder timely elects
to participate in an offering by including Warrant Shares in a registration
statement pursuant to Section 3(c) or (d) above, the Company shall use its
reasonable best efforts to effect such registration to permit the sale of
Warrant Shares in accordance with the intended method or methods of disposition
thereof, and pursuant thereto the Company shall:
(i) notify the Holders as to the filing thereof and of all
amendments or supplements thereto filed prior to the effective date thereof;
(ii) use its reasonable best efforts to cause any registration
statement filed under the Act pursuant to Section 3(c) or (d) above to become
effective at the earliest possible date (subject to the Company's right to
withdraw any registration statement pursuant to Section 3(c) above) after the
filing thereof and to comply with all applicable rules and regulations of the
Commission in connection therewith; provided, that before filing a registration
statement or prospectus or any amendments or supplements thereto, including
documents which would be incorporated or deemed to be incorporated by reference
in the registration statement after the initial filing of any registration
statement, the Company will furnish to the Holders, their respective counsel and
the underwriters, if any, to be engaged in connection with the offering and sale
by the Company (for purposes of this Section 3(e), the "Underwriters"), copies
of all such documents proposed to be filed, which documents will be subject to
the review of the Holders, their respective counsel and the Underwriters, and
the Company will not file any registration statement, or amendment thereto or
any prospectus or any supplement thereto relating in whole or in part to the
Holders' Shares (including such documents incorporated or deemed to be
incorporated by reference) to which the Holders or the Underwriters, if any,
shall reasonably object; provided, however, if such Holders object to a
registration statement pursuant to Section 3(c) above, they shall withdraw from
such registration statement;
(iii) notify the Holders (1) when the registration statement
or any post-effective amendment becomes effective, (2) when a prospectus or
prospectus supplement or post-effective amendment has been filed, (3) of any
request by the Commission for amendments, supplements or additional information
related to a registration statement or prospectus or otherwise, (4) of the
issuance by the Commission of any stop order or of the initiation, or the
threatening, of any proceedings for that purpose known to the Company, or (5) of
the receipt by the Company of any notification with respect to the suspension of
qualification of the Warrant Shares for sale in any jurisdiction in which they
were qualified or of the initiation, or the threatening, of any proceedings for
that purpose;
(iv) make reasonable efforts to obtain the withdrawal of any
order suspending the effectiveness of a registration statement, or the lifting
of any suspension of the qualification (or exemption from qualification) of any
of the Warrant Shares for sale in any jurisdiction in which they were qualified,
at the earliest possible moment;
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(v) if reasonably requested by the Underwriters, if any, or
the Holders, immediately incorporate in a prospectus supplement or
post-effective amendment such information as the Company and the Holders and the
Underwriters, if any, agree should be included therein relating to the sale and
distribution of the Warrant Shares, including, without limitation, information
with respect to the number of Warrant Shares being sold to such Underwriters,
the purchase price being paid therefor by such Underwriters and with respect to
any other terms of the underwritten offering of the Warrant Shares to be sold in
such offering; make all required filings of such Prospectus supplement or
post-effective amendment promptly after being notified of the matters to be
incorporated in such prospectus supplement or post-effective amendment; and
supplement or amend any registration statement if reasonably requested by the
Holders or any Underwriter of Warrant Shares covered by such Warrant Shares;
(vi) furnish to each of the Holders whose Warrant Shares have
been included therein, their respective counsel and each Underwriter, if any,
without charge, at least one signed copy of any registration statement
(including all amendments thereto) and any post-effective amendment thereto,
including financial statements and schedules, all documents incorporated therein
by reference and all exhibits (including those incorporated by reference);
(vii) during the time when a prospectus is required to be
delivered under the Act in connection with the distribution of the Warrant
Shares, comply so far as it is able with all requirements imposed upon it by the
Act, as now and hereafter amended, and by the Rules and Regulations promulgated
by the Commission thereunder, as from time to time in force, so far as necessary
to permit the continuance of sales of or dealings in the Warrant Shares (which
period shall be limited to the period the Company otherwise maintains the
registration statement in effect in the case of a registration statement
pursuant to Section 3(c), above, and 120 days in the case of a registration
statement pursuant to Section 3(d), above). If at any time when a prospectus
relating to the Warrant Shares is required to be delivered under the Act any
event shall have occurred as a result of which, in the opinion of counsel for
the Company or counsel for the Holders, the prospectus relating to the Warrant
Shares as then amended or supplemented 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, in the light of the circumstances
under which they were made, not misleading, or if it is necessary at any time to
amend such prospectus to comply with the Act, the Company will use its best
efforts promptly to prepare and file with the Commission an appropriate
amendment or supplement (in form reasonably satisfactory to the Holders);
(viii) make generally available to its security holders as
soon as practicable but not later than 15 months following the effective date of
such Registration Statement, an earnings statement or statements of the Company
and its subsidiaries covering a period of at least twelve months beginning after
the effective date of the registration statement (but in no event commencing
later than 90 days after such date), which shall satisfy the provisions of
Section 11(a) of the Act and Rule 158 promulgated thereunder;
(ix) prepare and promptly file with the Commission such
amendments and post-effective amendments to such registration statement as may
be necessary to keep such
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registration statement continuously effective for a period of 120 days; cause
the related prospectus to be supplemented by any required prospectus supplement,
and as so supplemented to be filed pursuant to Rule 424 under the Act; and
comply with the provisions of the Act with respect to the disposition of all
Warrant Shares covered by such registration statement during the applicable
period in accordance with the intended methods of disposition as set forth in
such registration statement or supplement to such prospectus;
(x) deliver to each of the Holders, their respective counsel
and the Underwriters, if any, without charge, as many copies of the prospectus
or prospectuses (including each preliminary prospectus) and any amendment or
supplement thereto as such persons may reasonably request; the Company consents
to the use of any such prospectus or any amendment or supplement thereto by the
Holders and each of the Underwriters, if any, in connection with the offering
and sale of the Warrant Shares covered by such prospectus or any amendment or
supplement thereto;
(xi) prior to any public offering of Warrant Shares, register
or qualify or cooperate with the Holders, the Underwriters, if any, and their
respective counsel in connection with the registration or qualification (or
exemption from such registration or qualification) of such Warrant Shares for
offer and sale under the securities or Blue Sky laws of such jurisdictions as
the Holders or any Underwriter reasonably requests in writing; keep each such
registration or qualification (or exemption therefrom) effective during the
period the applicable registration statement is required to be kept effective
and do any and all other acts or things necessary or advisable to enable the
disposition in such jurisdictions of the Warrants and the Warrant Shares covered
by the applicable registration statement; provided, that the Company will not be
required to qualify generally to do business in any jurisdiction where it is not
then so qualified or to take any action which would subject it to general
service of process in any such jurisdiction where it is not then so subject;
(xii) cooperate with the Holders and the Underwriters, if any,
to facilitate the timely preparation and delivery of certificates representing
Warrant Shares to be sold which certificates shall not bear any restrictive
legends; and enable such Warrant Shares to be in such denominations and
registered in such names as the Underwriters may request at least two business
days prior to any sale of Warrant Shares to the Underwriters;
(xiii) enter into such agreements in form and substance
reasonably acceptable to the Company and its counsel (including an underwriting
agreement) and take all such other actions in connection therewith as may be
necessary to expedite or facilitate the disposition of such Warrant Shares and,
in such connection, whether or not an underwriting agreement is entered into and
whether or not the registration is an underwritten registration, (1) in the case
of an underwritten offering, enter into an underwriting agreement in form, scope
and substance as is customary in underwritten offerings and obtain (a) opinions
of counsel to the Company and updates thereof (which counsel and opinions (in
form, scope and substance) shall be reasonably satisfactory to the Underwriters)
addressed to the Underwriters covering the matters customarily covered in
opinions requested by underwriters in underwritten offerings and such other
matters as may be reasonably requested by the Underwriters and (b) obtain
opinions of counsel to the Company and updates thereof (which counsel and
opinions (in form, scope and substance) shall be reasonably satisfactory
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to the Holders) addressed to the Holders covering matters reasonably requested
by the Holders; (2) obtain "comfort" letters and updates thereof from the
independent certified public accountants of the Company (and, if necessary, any
other independent certified public accountants of any subsidiary of the Company
or of any business acquired by the Company for which financial statements and
financial data is or is required to be included in the registration statement)
addressed to the Holders and each of the Underwriters, if any, such letters to
be in customary form and covering matters of the type customarily covered in
"comfort" letters to underwriters in connection with underwritten offerings; (3)
if an underwriting agreement is entered into, the same shall set forth in full
the indemnification and contribution provisions and procedures of Section 3(f)
hereof (or such other indemnification and contribution provisions as shall be
acceptable to the Holders and the Underwriters of such underwritten offering)
with respect to all parties to be indemnified pursuant to said section (and each
participating Holder shall agree to enter into such agreement and provide the
indemnification to the Company contained in Section 3(f) hereof); and (4) the
Company shall deliver such documents and certificates as may be requested by the
Holders and the Underwriters, if any, to evidence the continued validity of the
representations and warranties made pursuant to clause (1) above and to evidence
compliance with any customary conditions contained in the underwriting agreement
or other agreement entered into by the Company. The above shall be done at each
closing under such underwriting or similar agreement or as and to the extent
required thereunder;
(xiv) pay all costs and expenses incident to the performance
of the Company's obligations under Sections 3(c) and (d) above and under this
Section 3(e) (collectively "Registration Expenses"), including without
limitation the fees and disbursements of the Company's auditors, legal counsel,
and of legal counsel responsible for qualifying the Warrant Shares under Blue
Sky laws, all filing fees and printing expenses, all expenses in connection with
the transfer and delivery of the Warrant Shares, and all expenses in connection
with the qualification of the Warrant Shares under applicable Blue Sky laws
reasonably designated by the Holders; provided, that in no event shall
Registration Expenses include any underwriting discounts, commissions or fees or
the fees of counsel retained by the Holders or Underwriters in either case in
connection with the sale of Warrant Shares pursuant to Section 3(c) or 3(d)
above; and
(xv) in connection with the filing of a registration statement
pursuant to Section 3(c) or (d) above, use its reasonable best efforts to obtain
indemnification of the Holders by the Underwriter to the same extent said
Underwriter provides indemnification to the Company (but only if such Holders
provide a reciprocal indemnification).
As used in this Section 3(e), the term "Holders" refers only to those
Holders who have timely elected to participate in an offering. In addition to
the rights granted to the participating Holders as a group, all notifications,
approvals and other rights granted to the Holders in this Section 3(e) may be
separately exercised by Holder (other than the right to demand registration
pursuant to Section 3(d) above), but only if they are participating Holders in
the offering.
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(f) Indemnification.
(i) The Company shall indemnify and hold harmless Holder, the
Holders and any underwriter (as defined in the Act) for Holder, and the Holders,
and each person, if any, who respectively controls (within the meaning of
Section 15 of the Act) Holder or any of the Holders or such underwriter against
any losses, claims, damages or liabilities (or actions in respect thereof) and
expense whatsoever (including, but not limited to, any and all expense
whatsoever reasonably incurred in investigating, preparing or defending against
any litigation, commenced or threatened, or any claim whatsoever), joint or
several, to which Holder, the Holders or such underwriter or such controlling
person becomes subject, under the Act, the Exchange Act, or other federal or
state statute, law or regulation, at common law or otherwise, insofar as any
such loss, liability, claim, damage or expense (or actions in respect thereof)
(1) arises out of or is based upon any breach of any representation, warranty,
or covenant of the Company in this Agreement or upon any untrue statement or
alleged untrue statement of any material fact contained in (A) Section 2 of this
Agreement, (B) any registration statement (including the Registration Statement)
covering the Warrant Shares as originally filed or in any amendment thereof, in
the prospectus contained therein or in an amendment or supplement thereto, or
(C) in any application or other document, or any amendment or supplement thereto
(in this Section collectively called "application") executed by or on behalf of
the Company or based upon written information furnished by or on behalf of the
Company filed in any jurisdiction in order to qualify the Warrant Shares under
the securities laws thereof or filed with the Commission or any securities
association or securities exchange, or (2) arises out of or is based upon the
omission or alleged omission to state in any of the documents described in
subclauses (A), (B) or (C) above, a material fact required to be stated therein
or necessary to make the statements therein not misleading, and agrees to
reimburse each such indemnified person, as incurred, for any legal or other
expenses reasonably incurred by them in connection with investigation or
defending any such loss, claim, damage, liability or action; provided, however,
that the Company shall not be obligated to indemnify in any such case to the
extent that any such loss, claim, damage, expense or liability arises out of or
is based upon any untrue statement or alleged untrue statement or omission or
alleged omission made therein in reliance upon, and in conformity with, written
information furnished to the Company by the indemnified person specifically for
use therein. The Company will not, without the prior written consent of Holder
(not to be unreasonably withheld), settle or compromise or consent to the entry
of any judgment in any pending or threatened claim, action, suit or proceeding
in respect of which indemnification may be sought hereunder (whether or not
Holder is a party to such claim, action, suit or proceeding), unless such
settlement, compromise or consent includes an unconditional release of all
indemnified parties from all liability arising out of such claim, action, suit
or proceeding, satisfactory in form and substance to Holder.
(ii) Holder (whether or not it is a party), and each Holder
that sells all or a part of the Warrant Shares pursuant to the Registration
Statement, agrees to indemnify and hold harmless the Company and each of its
directors and officers who have signed the Registration Statement, any other
Holder of Warrant Shares included in such registration statement, and any
underwriter (as defined in the Act) for the Company or the Holders of Warrant
Shares, and each person, if any, who controls (within the meaning of Section 15
of the Act) the Company or such underwriter to the same
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<PAGE> 12
extent as the indemnity by the Company in Section 3(f)(i) but only with respect
to any untrue statement or alleged untrue statement or omissions or alleged
omissions, if any, made in the Registration Statement, or any amendment thereto,
or in any application in reliance upon, and in conformity with, written
information furnished by it or Holder to the Company or such controlling person
expressly for use in the Registration Statement, or any amendment or supplement
thereto, or any application, as the case may be. Neither Holder nor any such
Holder shall, without the prior written consent of the Company (not to be
unreasonably withheld), settle or compromise or consent to the entry of any
judgment in any pending or threatened claim, action, suit or proceeding in
respect of which indemnification may be sought hereunder (whether or not the
Company is a party to such claim, action, suit or proceeding), unless such
settlement, compromise or consent includes an unconditional release of all
indemnified parties from all liability arising out of such claim, action, suit
or proceeding, satisfactory in form and substance to the Company. If any action
shall be brought in respect of which indemnity may be sought against any of the
Holders, such person shall have the rights and duties given to the indemnifying
party, and the persons so indemnified shall have the rights and duties given to
the indemnified party, by the provisions of Section 3(f)(iii) below;
(iii) If any action is brought against a person in respect of
which indemnity may be sought hereunder against an indemnifying party, such
person shall promptly notify the indemnifying party in writing of the
institution of such action and the indemnifying party shall assume the defense
of the action, including the employment of counsel satisfactory to the
indemnified person and payment as incurred of all fees and expenses related
thereto. The indemnified person shall have the right to employ its own counsel
in any such case, but the fees and expenses of such counsel shall be at the
expense of such indemnified person unless (1) the employment of such counsel
and the payment of fees and expenses thereof shall have been authorized in
writing by the indemnifying party in connection with the defense of the action
or (2) the indemnifying party shall have failed promptly after notice by such
indemnified person to assume the defense of such action or proceeding and to
employ counsel satisfactory to the indemnified person in any such action or
proceeding or (3) the named parties to any such action or proceeding (including
any impleaded parties) include both such indemnified person and the
indemnifying party, and such indemnified person shall have been advised by
counsel that there is an actual conflict in such representation (in
which case, if such indemnified person notifies the indemnifying party in
writing that it elects to employ separate counsel at the expense of the
indemnifying party, the indemnifying party shall not have the right to assume
the defense of such, it being understood, however, that the indemnifying party
shall not, in connection with any one such action or proceeding or separate but
substantially similar or related actions or proceedings in the same jurisdiction
arising out of the same general allegations or circumstances, be liable for the
reasonable fees and expenses of more than one separate firm of attorneys
(together with appropriate local counsel) at any time for such indemnified
person. Anything in this paragraph to the contrary notwithstanding, the
indemnifying party shall not be liable for any settlement of any claim or action
effected without its written consent. The indemnity agreements contained in this
Section shall remain in full force and effect regardless of any investigation
made by or on behalf of any indemnified person, and shall survive any
termination of this Agreement. The indemnifying party agrees promptly to notify
the indemnified party of the commencement of any litigation or proceedings
against the indemnifying
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<PAGE> 13
party or any of its officers or directors in connection with the registration
statement pursuant to Section 3(c) or (d) above.
(iv) If the indemnification provided for in items (i), (ii)
and (iii) of this Section 3(f) from the indemnifying party is unavailable to an
indemnified party hereunder in respect of any losses, claims, damages,
liabilities or expenses referred to therein, then the indemnifying party, in
lieu of indemnifying such indemnified party, shall contribute to the amount paid
or payable by such indemnified party as a result of such losses, claims,
damages, liabilities or expenses in such proportion as is appropriate to reflect
not only the relative benefits received by the indemnified party and the
indemnifying party, but also the relative fault of the indemnifying party and
indemnified parties in connection with the actions which resulted in such
losses, claims, damages, liabilities or expenses, as well as any other relevant
equitable considerations. The relative fault of the indemnifying party and
indemnified parties shall be determined by reference to, among other things,
whether any action in question, including any untrue or alleged untrue statement
of a material fact or omission or alleged omission to state a material fact, has
been made by, or relates to information supplied by, the indemnifying party or
indemnified parties, and the parties' relative intent, knowledge, access to
information and opportunity to correct or prevent such action. The amount paid
or payable by a party as a result of the losses, claims, damages, liabilities
and expenses referred to above shall be deemed to include, subject to the
limitations set forth in item (iii) of this Section 3(f), any legal or other
fees or expenses reasonably incurred by such party in connection with any
investigation or proceeding.
The parties hereto agree that it would not be just and
equitable if contribution pursuant to this item (iv) of this Section 3(f) were
determined by pro rata allocation or by any other method of allocation which
does not take account of the equitable considerations referred to in the
immediately preceding paragraph. If the full amount of the contribution
specified in this item (iv) of this Section 3(f) is not permitted by law, then
such indemnified person shall be entitled to contribution from the indemnifying
party to the full extent permitted by law. Notwithstanding the provisions of
this Section 3(f)(iv), no Holder shall be required to contribute any amount in
excess of the amount by which the total price at which the Warrant Shares of
such Holder were offered to the public exceeds the amount of any damages which
such Holder has otherwise been required to pay by reason of such untrue
statement or omission. No party found guilty of fraudulent misrepresentation
(within the meaning of Section 11(f) of the Act) shall be entitled to
contribution from any party who was not found guilty of such fraudulent
misrepresentation.
4. Exercise of Warrants.
(a) Exercise of Warrants. The Warrants may be exercised in full or in
part by the Holder thereof by surrender of (i) the Warrants, with the Election
to Purchase attached thereto duly executed by such Holder, to the Company at its
offices at 228 Manhattan Beach Blvd., Suite 200, Manhattan Beach, California, or
at such other office or agency as the Company may from time to time designate in
writing, accompanied by payment, in cash or by certified or bank cashier's check
payable to the order of the Company, in the amount obtained by multiplying the
number of Warrant Shares designated by the Holder in the Election to Purchase
by the Purchase Price per share and (ii) an
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<PAGE> 14
acknowledgment by the purchasing Holder that it will not dispose of the Warrant
Shares except in compliance with Section 3(b) hereof, the Act and any applicable
state securities laws. Upon any partial exercise of the Warrants, the Company at
its expense will forthwith issue and deliver to the purchasing Holder a new
Warrant, in the name of such Holder on the face or faces of the Warrants for the
number of Warrant Shares equal to the number of shares called for on the face of
the surrendered Warrant (after giving effect to any adjustment therein as
provided in Section 6 below) minus the number of such Warrant Shares (after
giving effect to such adjustment) purchased by the Holder pursuant to such
exercise.
(b) Company to Reaffirm Obligations. On the date of any exercise of any
Warrants (except that if, upon such date, the stock transfer books of the
Company shall be closed, in which case on the next succeeding date on which the
transfer books are open) the Holder exercising the same shall be deemed to have
become, and therefor shall be considered, a holder of record of the shares of
Common Stock purchased upon such exercise for all purposes. Holders of Warrants
shall have no rights of share ownership until they exercise their Warrants. The
Company will, at the time of any exercise of any Warrant, upon the request of
the Holder thereof, acknowledge in writing its continuing obligation to afford
to that Holder any rights (including without limitation any right to
registration of the Warrant Shares issued upon such exercise) to which the
Holder shall continue to be entitled after such exercise in accordance with the
provisions of this Agreement; provided, however, that if the Holder of a Warrant
shall fail to make any such request, such failure shall not affect the
continuing obligation of the Company to afford to such Holder any of such
rights.
5. Delivery of Stock Certificates, etc., on Exercise. As soon as practicable
after the exercise of any Warrants and in any event within five business days
thereafter, the Company, at its expense (including the payment by it of any
applicable issue taxes), will cause to be issued in the name of and delivered to
the purchasing Holder a certificate or certificates for the number of fully paid
and nonassessable Warrant Shares to which such Holder shall be entitled upon
such exercise, plus cash, in lieu of any fractional share to which such Holder
would otherwise be entitled, as provided in Section 6(a) of this Agreement,
together with any Other Securities and property (including cash, where
applicable) to which such Holder is entitled upon such exercise pursuant to
Section 6 of this Agreement or otherwise.
6. Anti-dilution Provisions. The Warrants are subject to the following
additional terms and conditions:
(a) Fractional Shares. The Company will not issue a fractional share of
Common Stock upon exercise of a Warrant. Instead, the Company will deliver an
amount, in cash, and rounded to the nearest whole cent equal to the product of
(x) the Current Market Price (as defined below) of a full share of the Common
Stock as of the last trading day prior to the exercise date multiplied by (y)
the fractional amount.
(b) Adjustment for Change in Capital Stock. If, after the date of this
Agreement, the Company:
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<PAGE> 15
(1) pays a dividend or makes a distribution on its Common
Stock in shares of its capital stock (including Common Stock);
(2) subdivides its outstanding shares of Common Stock into a
greater number of shares;
(3) combines its outstanding shares of Common Stock into a
smaller number of shares; or
(4) issues by reclassification of its Common Stock any shares
of its capital stock or other securities (including any such reclassification in
connection with a consolidation or merger in which the Company is the continuing
corporation);
then the Purchase Price in effect at the time of the record date of such
dividend, distribution, subdivision, combination, reclassification or
recapitalization shall be adjusted so that the Purchase Price shall be equal to
the price determined by multiplying the Purchase Price in effect immediately
prior to such event by a fraction, the numerator of which shall be (x) the total
number of outstanding shares of Common Stock of the Company immediately prior to
such event; and the denominator of which shall be (y) the total number of
outstanding shares of Common Stock of the Company, or such shares of its capital
stock or other securities issued in connection with any such reclassification,
immediately after such event, as appropriate, and, as so adjusted or readjusted,
the Purchase Price shall remain in effect until a further adjustment or
readjustment is required by this Section 6(b).
The adjustment shall become effective on (x) in the case of a
dividend or distribution, the earlier of the record date or the distribution
date and (y) in the case of a subdivision, combination or reclassification, the
earlier of the record date or the effective date; provided, that such adjustment
shall be reversed and shall be of no effect if such dividend or distribution, or
such subdivision, combination or reclassification is not in fact effected.
Whenever the Purchase Price payable upon exercise of each
Warrant is adjusted pursuant to this Section 6(b), the Warrant Shares shall
simultaneously be adjusted by multiplying the number of Warrant Shares issuable
upon exercise of each Warrant immediately prior to such event by the Purchase
Price in effect on the date thereof and dividing the product so obtained by the
Purchase Price, as adjusted.
(c) Adjustments For Other Distributions. If, after the date of this
Agreement the holders of Common Stock shall generally have received, or (on or
after the record date fixed for the determination of eligible stockholders)
shall generally have become entitled to receive in respect of the Common Stock
(i) securities other than capital stock, (ii) evidences of its indebtedness,
(iii) assets (excluding cash dividends made in the ordinary course of business),
or (iv) rights, options or warrants or convertible or exchangeable securities
(other than Convertible Securities or Options) containing the right to subscribe
for or purchase securities of the Company, then, and in each such case the
holder of each Warrant, upon the exercise thereof as provided in Section 4
above, shall be entitled to receive the amount of securities, indebtedness,
assets (including cash in the case referred
15
<PAGE> 16
to in subdivision (iii) of this Section 6(c)) and rights which such Holder would
hold on the date of such exercise if on the date of this Agreement such Holder
had been the holder of record of the number of shares of Common Stock called for
on the face of the Warrant held by such Holder and had thereafter, during the
period from the date of this Agreement to and including the date of such
exercise, retained such shares receivable by such Holder as aforesaid during
such period, giving effect to all adjustments called for during such period by
this Section 6.
(d) Excluded Events. Notwithstanding anything in this Section 6 to the
contrary, the Purchase Price shall not be adjusted by virtue of (i) the
conversion of the Warrants or any other convertible securities of the Company
outstanding on the date hereof or the existence or exercise of any other
warrants or options of the Company outstanding on the date hereof, or (ii) the
repurchase of shares from the Company's employees, consultants, officers, or
directors at such person's cost (or at such other price as may be agreed to by
the Company's Board of Directors), or (iii) the issuance or sale of, or the
grant of options to purchase, Common Stock to employees, directors, or officers
of, or consultants to, the Company or its subsidiaries, if any, pursuant to
stock option plans currently existing, or hereafter approved by the shareholders
of the Company.
(e) Current Market Price. For the purpose of any computation under this
Section 6, the "Current Market Price" per share of Common Stock at any date
shall be the average of the daily closing prices for 15 consecutive trading days
commencing 20 trading days before such date. The closing price for each day
shall be the last reported sale price, regular way, or, in case no such reported
sale takes place on such day, the average of the closing bid and asked prices,
regular way, for such day, in either case on the principal national securities
exchange on which the shares are listed or admitted to trading, or if they are
not listed or admitted to trading on any national securities exchange, but are
traded in the NASDAQ National Market System, or if the Shares are otherwise
securities for which transaction reports are required to be made on a real-time
basis pursuant to an effective transaction reporting plan under rule 11a3-1 of
the Rules of the Commission under the Exchange Act, the last reported sales
price, or if they are not listed or admitted to trade, and if last sale data is
not then available from NASDAQ, but are traded in the over-the-counter market,
the average of the representative closing bid and asked quotations for the
Common Stock on NASDAQ or any comparable system, or if the Common Stock is not
listed on NASDAQ or a comparable system, the average of the closing bid and
asked prices as furnished by two members of the National Association of
Securities Dealers, Inc. selected from time to time by the Company for that
purpose.
(f) Minimum Adjustment. No adjustment in the number of Warrant Shares
purchasable hereunder shall be required unless such adjustment would require an
increase or decrease of at least one percent in the number of Warrant Shares
purchasable upon the exercise of each Warrant. Any adjustments that by reason of
this Section 6(f) are not required to be made shall be carried forward and taken
into account in any subsequent adjustment, and, notwithstanding the foregoing,
all adjustments so carried forward shall be made at the time of, and in
connection with, each exercise of any of the Warrants. All calculations shall be
made to the nearest one-thousandth of a share, or cent, as the case may be.
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<PAGE> 17
(g) Other Securities. If at any time, as a result of an adjustment made
pursuant to this Section 6, the Holders shall become entitled to purchase any
shares of capital stock or other securities of the Company other than shares of
Common Stock, thereafter the number of such other securities so purchasable upon
exercise of each Warrant and the Purchase Price of such securities shall be
subject to adjustment from time to time in a manner and on terms as nearly
equivalent as practicable to the provisions with respect to the Warrant Shares
contained in this Section 6; and the provisions of Sections 3, 4 and 7,
inclusive, with respect to the Warrant Shares, shall apply on like terms to any
such Other Securities.
(h) Consolidations, Mergers and Other Transactions. In case of any
consolidation of the Company with or merger of the Company into another
corporation or in case of any sale or conveyance to another corporation of the
property of the Company as an entirety or substantially as an entirety, the
Company or such successor or purchasing corporation, as the case may be, shall
execute an agreement whereby each Holder shall have the right thereafter upon
payment of the Purchase Price in effect immediately prior to such action to
purchase upon exercise of each Warrant the kind and amount of shares and other
securities and property, if any, which the Holder would have owned or have been
entitled to receive after the happening of such consolidation, merger, sale or
conveyance had such Warrant been exercised immediately prior to such action. The
Company shall mail by first class mail, postage prepaid, to each Holder, notice
of the execution of any such agreement. Such agreement shall provide for
adjustments, which shall be as nearly equivalent as may be practicable to the
adjustments provided for in this Section 6. The provisions of this Section 6
shall similarly apply to successive consolidations, mergers, sales or
conveyances. Each Holder of Warrants shall be under no duty or responsibility to
determine the correctness of any provisions contained in any such agreement
relating either to the kind or amount of shares of stock or other securities or
property receivable upon exercise of warrants or with respect to the method
employed and provided therein for any adjustments.
(i) Notice of Adjustments. Whenever the Purchase Price or the kind or
amount of securities purchasable under the Warrants shall be adjusted pursuant
to any of the provisions of this Warrant Agreement, the Company shall forthwith
thereafter cause to be sent to Holder and all other Holders a certificate
setting forth the adjustments in the Purchase Price and in said number of
shares, and also setting forth in detail the facts requiring such adjustments.
(j) Notice of Certain Events. In the event of (i) any taking by the
Company of a record of the holders of any class of securities for the purpose of
determining the holders thereof who are entitled to receive any dividend or
other distribution, or any right to subscribe for, purchase or otherwise acquire
any shares of stock of any class or any other securities or property, or to
receive any other right, or (ii) any capital reorganization of the Company, or
any reclassification or recapitalization of the capital stock of the Company,
or any transfer of all or substantially all of the assets of the Company to, or
consolidation or merger of the Company with or into, any other person, or (iii)
any voluntary or involuntary dissolution or liquidation of the Company, then and
in each such event the Company will mail or cause to be mailed to each Holder a
notice specifying the date upon which any such record is to be taken for the
purpose of such dividend, distribution or right, stating the amount and
character of such dividend, distribution or right, and the date on which any
such
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<PAGE> 18
reorganization, reclassification, recapitalization, transfer, consolidation,
merger, dissolution, liquidation or winding-up is to take place, and the time,
if any, as of which the holders of record of Common Stock (or Other Securities)
shall be entitled to exchange their shares of Common Stock (or Other Securities)
for securities or other property deliverable upon such reorganization,
reclassification, recapitalization, transfer, consolidation, merger,
dissolution, liquidation or winding-up. Such notice shall be mailed at least
five days prior to the proposed record date therein specified.
(k) Other Events Altering Purchase Price. Upon the occurrence of any
event not specifically denominated in this Section 6 as altering the Purchase
Price and the amount of Common Stock purchasable upon the exercise of the
Warrants, if the reasonable exercise of the business judgment of the Board of
Directors of the Company requires, on equitable principles, the alteration of
the Purchase Price and corresponding adjustment to the number of shares into
which the Warrants are exercisable, the Purchase Price and such number of shares
shall be equitably altered.
7. Further Covenants of the Company. The Company hereby agrees as follows:
(a) Reservation of Stock. The Company shall at all times reserve and
keep available, solely for issuance and delivery upon the exercise of the
Warrants, all Warrant Shares from time to time issuable upon the exercise of the
Warrants.
(b) Title to Stock. All of the Warrant Shares delivered upon the
exercise of the Warrants shall be validly issued, fully paid and nonassessable;
each Holder of a Warrant shall receive good and marketable title to the Warrant
Shares, free and clear of all voting and other trust arrangements, liens,
encumbrances, equities, and claims whatsoever; and the Company shall have paid
all taxes, if any, in respect of the issuance thereof.
(c) Exchange of Warrants. Subject to Section 3(a) hereof, upon
surrender for exchange of any Warrant to the Company, the Company at its expense
will promptly issue and deliver to the Holder thereof a new Warrant or Warrants
of like tenor, in the name of such Holder, calling in the aggregate on the face
or faces thereof for the number of Warrant Shares called for on the face or
faces of the Warrants so surrendered.
(d) Replacement of Warrants. Upon receipt of evidence reasonably
satisfactory to the Company of the loss, theft, destruction or mutilation of
Warrants and, in the case of any such loss, theft or destruction, upon delivery
of an indemnity agreement by the Warrant Holder reasonably satisfactory in form
and amount to the Company or, in the case of any such mutilation, upon surrender
by the Holder and cancellation of such Warrants, the Company at its expense will
execute and deliver, in lieu thereof, new Warrants of like tenor.
(e) Reporting by the Company. The Company agrees that during the term
of the Warrants, it will use its best efforts to keep current in the filing of
all forms and other materials which it may be required to file with the
appropriate regulatory authority pursuant to the Exchange Act. The Company will
take such further action as any Holder may reasonably request, all to the
18
<PAGE> 19
extent required from time to time to enable such Holder to sell Warrant Shares
without registration under the Act within the limitation of the exemptions
provided by (a) Rule 144 under the Act, as such Rule may be amended from time to
time, or (b) any similar rule or regulation hereafter adopted by the Commission.
8. Other Holders. The Warrants are issued upon the following terms, to all of
which each Holder or owner thereof by the taking thereof consents and agrees as
follows: (a) any person who shall become a transferee, within the limitations on
transfer imposed by Section 3(a) hereof, of a Warrant properly endorsed, shall
take such Warrant subject to the provisions of Sections 3(a) and 3(b) hereof and
thereupon shall be authorized to represent that such transferee is the absolute
owner thereof and, subject to the restrictions contained in this Warrant
Agreement, shall be empowered to transfer absolute title by endorsement and
delivery thereof to a permitted bona fide purchaser for value; and (b) each
prior taker or owner waives and renounces all equities or rights in such Warrant
in favor of each such permitted bona fide purchaser, and each such permitted
bona fide purchaser shall acquire absolute title thereto and to all rights
presented thereby; and (c) until such time as the respective Warrant is
transferred on the books of the Company, the Company may treat the registered
Holder thereof as the absolute owner thereof for all purposes, notwithstanding
any notice to the contrary.
9. Miscellaneous. All notices, certificates and other communications from or at
the request of the Company to the Holder of any Warrant shall be mailed by first
class, registered or certified mail, postage prepaid, to the Holder at the
address specified above, or such other address as the Holder may have furnished
to the Company in writing. This Warrant Agreement and any of the terms hereof
may be changed, waived, discharged or terminated only by an instrument in
writing signed by the party against which enforcement of such change, waiver,
discharge or termination is sought. Notwithstanding the foregoing, the
provisions of Section 6 hereof cannot be changed, waived, discharged or
terminated in a manner adverse to the Holders without the written consent of
either Holder or one or more Holder or Holders who collectively own, of record,
that number of Warrants and/or Warrant Shares which in the aggregate shall
constitute a majority of all Warrant Shares issued or issuable under this
Agreement (excluding Warrant Shares which have been previously sold, transferred
or otherwise disposed of in a registered public offering, pursuant to Rule 144
under the Act, as such Rule may be amended from time to time, or pursuant to
Regulation S, as such regulation may be amended from time to time). The headings
in this Warrant Agreement are for purposes of reference only and shall not limit
or otherwise affect any of the terms hereof. This Warrant Agreement, together
with the forms of instruments annexed hereto, constitutes the full and complete
agreement of the parties hereto with respect to the subject matter hereof.
10. GOVERNING LAW. THIS WARRANT AGREEMENT SHALL BE GOVERNED BY, AND CONSTRUED IN
ACCORDANCE WITH, THE LAWS OF THE STATE OF CALIFORNIA APPLICABLE TO AGREEMENTS
BETWEEN CALIFORNIA RESIDENTS ENTERED INTO AND TO BE PERFORMED ENTIRELY WITHIN
CALIFORNIA.
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<PAGE> 20
IN WITNESS WHEREOF, the Company has caused this Warrant
Agreement to be executed on this day of
, 1996 by its proper corporate officers thereunto duly authorized.
KANI, INC.
By:_______________________________
Its:______________________________
The foregoing Agreement is
hereby confirmed and accepted
as of the date first above written
JOSEPH CHARLES & ASSOCIATES, INC.
By:______________________________
Name: Richard Rappaport
Title: Managing Director
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<PAGE> 21
Exhibit A
FORM OF WARRANT
THE WARRANTS REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO THE CONDITIONS
SPECIFIED IN A WARRANT AGREEMENT, DATED , 1996
BY AND BETWEEN KANI, INC. AND JOSEPH CHARLES & ASSOCIATES, INC. AND
. NO TRANSFER, SALE, PLEDGE, HYPOTHECATION, ENCUMBRANCE OR
OTHER DISPOSITION OF THE SHARES REPRESENTED BY THIS CERTIFICATE SHALL BE VALID
OR EFFECTIVE UNTIL REGISTERED OR THE COMPANY HAS BEEN ADVISED BY AN OPINION OF
COUNSEL SATISFACTORY TO IT THAT THE SHARES WILL BE TRANSFERRED IN A TRANSACTION
EXEMPT FROM REGISTRATION AND UNTIL SUCH CONDITIONS IN THE WARRANT AGREEMENT HAVE
BEEN FULFILLED. A COPY OF THE FORM OF SAID WARRANT AGREEMENT IS ON FILE AT THE
OFFICES OF KANI, INC. THE HOLDER OF THIS CERTIFICATE, BY ACCEPTANCE OF THIS
CERTIFICATE, AGREES TO BE BOUND BY THE PROVISIONS OF SUCH WARRANT AGREEMENT.
THIS WARRANT IS NON-TRANSFERRABLE EXCEPT AS PROVIDED IN THE WARRANT AGREEMENT.
No. __________________________
Warrant to Purchase up to ____________ Shares of
Common Stock EXERCISABLE COMMENCING 9:00 A.M.,
LOS ANGELES TIME, ON
________________, 1997 AND ENDING
5:00 P.M., LOS ANGELES TIME, ON
_____________, 2001
KANI, INC.
COMMON STOCK PURCHASE WARRANT
THIS CERTIFIES that Joseph Charles & Associates, Inc., or
registered assigns, is the holder (the "Holder") of this Warrant to purchase,
subject to adjustment, the number of fully paid and nonassessable shares set
forth above (the "Warrant Shares") of Common Stock, no par value (the "Common
Stock"), of Kani, Inc., a California corporation (the "Company"), at the per
share exercise price, subject to adjustment (the "Purchase Price"), set forth in
the Warrant Agreement, dated , 1996 (the "Warrant Agreement"), between the
Company and Joseph Charles & Associates, Inc. and at any time prior to the
Expiration Date (defined below), by surrendering this Warrant, with the form of
subscription set forth hereon duly executed, to the Company at the Company's
offices at 228 Manhattan Beach Blvd., Suite 200, Manhattan Beach, California, or
at such other office or agency as the Company may designate and by paying in
full in the manner provided in Section 4 of the Warrant Agreement, the Purchase
Price for the Warrant Shares then purchased. Payment of the Purchase Price may
be made in cash or by certified or bank
<PAGE> 22
cashier's check payable to the order of the Company, or by surrender of a
portion of this Warrant, as provided in Section 4(c) of the Warrant Agreement.
This Warrant may be exercised at any time and from time to
time, in whole or in part, at the option of the Holder, commencing 9:00 a.m.,
Los Angeles time, on , 1997 until 5:00 p.m., Los Angeles time, on
, 2001 (the "Expiration Date"). Upon the purchase of fewer
than all of the Warrant Shares, there shall be issued to the Holder a new
Warrant exercisable for the number of Warrant Shares for which this Warrant has
not been exercised or surrendered as payment. Prior to the Expiration Date, the
Holder shall be entitled to exchange this Warrant, without charge, for another
Warrant or Warrants exercisable for the same aggregate number of Warrant Shares.
This Warrant is issued under and in accordance with the
Warrant Agreement and, except as otherwise provided in this Warrant, is subject
to the terms and provisions contained therein. Upon certain events provided for
in the Warrant Agreement, the Purchase Price and the number of shares of Common
Stock issuable upon the exercise of the Warrant are subject to adjustment. No
fractional shares will be issued upon the exercise of a Warrant. Instead, the
Company shall pay the cash value thereof, determined as provided in the Warrant
Agreement.
THIS WARRANT SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE
WITH, THE LAWS OF THE STATE OF CALIFORNIA APPLICABLE TO AGREEMENTS BETWEEN
CALIFORNIA RESIDENTS ENTERED INTO AND TO BE PERFORMED ENTIRELY WITHIN
CALIFORNIA.
IN WITNESS WHEREOF, the Company has caused this Warrant to be
duly executed.
KANI, INC.
By: ________________________________________
Its: ________________________________________
Attest:
________________________________________
________________________________________
Secretary
A-2
<PAGE> 23
ELECTION TO PURCHASE
The undersigned hereby irrevocably elects to exercise this
Warrant to purchase _________ shares of Common Stock, acknowledges that it will
not dispose of such shares except in compliance with Section 3(b) of the Warrant
Agreement and the Securities Act of 1933, and requests that Certificates for
such shares be issued and delivered as follows:
ISSUE TO: __________________________________________________
(Name)
__________________________________________________
(Address, Including Zip Code)
__________________________________________________
(Social Security or Tax Identification Number)
DELIVER TO: __________________________________________________
(Name)
__________________________________________________
(Address, Including Zip Code)
In full payment of the aggregate purchase price with respect
to the number of shares being purchased upon exercise of this Warrant, the
undersigned hereby (check applicable payment method): (i)/ / tenders payment of
$_________ by certified or bank cashier's check payable to the order of Kani,
Inc. or (ii) / / hereby surrenders to the Company, Warrants to purchase ______
shares of Common Stock. If the Warrant is exercised hereby (and surrendered, as
the case may be) so as to purchase fewer than all the shares of Common Stock
that may be purchased pursuant to this Warrant, the undersigned requests that a
new Warrant representing the number of full shares for which the Warrant has not
been exercised or surrendered be issued and delivered as set forth below.
Name of Warrant holder or Assignee:_____________________________________________
(Please Print)
Address:________________________________________________________________________
________________________________________________________________________________
Signature DATED: , 199_
(Signature must conform in all respects to name of holder as specified
on the face of the Warrant)
<PAGE> 24
ASSIGNMENT
FOR VALUE RECEIVED, the undersigned hereby sells, assigns and transfers unto the
Assignee named below all of the rights of the undersigned represented by the
within Warrant, with respect to the number of shares of Common Stock set forth
below:
<TABLE>
<S> <C> <C> <C>
Number of Taxpayer
Shares of Identification
Name of Assignee Address Common Stock Number
- ---------------- ------- ------------ --------------
</TABLE>
and does hereby irrevocably authorize the Company to make such transfer on the
Warrant Register maintained at the principal office of the Company.
Dated:_____________, 199__
___________________________
Signature
(Signature must conform in all respects to name of holder as
specified on the face of the Warrant).
<PAGE> 1
Exhibit 10.8
MANAGEMENT AGREEMENT
This MANAGEMENT AGREEMENT (this "Agreement") entered into on
_______________ ___, 1996, is made effective as of the effective date of the
initial public offering of Common Stock on Registration Statement Form S-1 (the
"Effective Date") of Kani, Inc., a California corporation ("Kani"), by and
between Skechers USA, Inc., a California corporation ("Skechers") and Kani.
For good and valuable consideration, the adequacy of which is hereby
acknowledged, the parties agree as follows:
1. Services. Skechers will perform those services (the "Services")
requested by Kani including general administrative services, data processing,
accounts payable, all as enumerated on Exhibit "A" attached hereto. This
Agreement will terminate on that date (the "Termination Date") which is the
earlier of (i) five years from the date hereof, unless extended by mutual
agreement of the parties hereto (the "Initial Term") or (ii) upon thirty (30)
days prior written notice by Kani at any time during the Initial Term.
Skechers will continue to perform the Services until the last day of the month
following the Initial Term, unless extended, or the month in which Kani
provides Skechers with a written notice of its election to terminate this
Agreement, whichever is earlier. Skechers will have no further duty to perform
the Services after the Termination Date.
In addition, Skechers will offer to continue to provide Kani with
insurance coverages and self insurance programs (collectively "Insurance
Coverage Programs") including health insurance, public liability, workers'
compensation, property damage, business interruption, fiduciary liability and
surety bonds. The charge to Kani for coverage, if requested by Kani, will be
based upon a pro rata portion of the costs to Skechers for such coverage under
the various policies. The charge for the insurance will be renegotiated
annually based upon Skechers's costs for the insurance and Kani's loss
experience.
2. Compensation. Kani will pay Skechers' on a monthly basis a
fee equal to 15% of Kani's net sales for the preceding month, as determined in
accordance with generally accepted accounting principles consistently applied.
Kani will remit the fee to Skechers by the 25th day of the month following the
month in which the Services are rendered.
3. Confidential Information. (a) The parties agree: (i) to
hold in trust and maintain confidential, (ii) not to disclose to others without
prior written approval from the disclosing party, (iii) not to sue for any
purpose, other than such purpose as may be authorized in writing by the
disclosing party, and (iv) to prevent duplication of and disclosure to any
other party, any Information received from the disclosing party or developed,
presently held or continued to be held, or otherwise obtained, by the receiving
party under this Agreement.
(b) "Information" shall mean all results of the Services,
Information disclosed by either party orally, visually, in writing, or in other
tangible form, and includes,
1
<PAGE> 2
but is not limited to, technical, economic plans, computer Information data
bases, and the like in connection with this Agreement.
(c) The foregoing obligations of confidentiality,
non-disclosure and non-use shall not apply to any Information to the extent
that the obligated party can show that: (i) such Information is or becomes
knowledge generally available to the public other than through the acts or
omissions of the obligated party; (ii) such Information is subsequently
received by the obligated party on a non-confidential basis from a third party
who did not receive it directly or indirectly from the disclosing party; (iii)
such Information is developed independently by the obligated party without
reference to the Information; or (iv) disclosure of such Information is
required under applicable law or regulations.
Specific elements of Information shall not be deemed to come under the
above exceptions merely because they are embraced by more general Information
which is or becomes public knowledge.
4. Standard of Care. Skechers shall perform the Services for
Kani with the same degree of care, skill and prudence customarily exercised by
it for its own operations.
5. Indemnification. Skechers shall indemnify, defend and hold
Kani, its directors, officers and employees harmless from and against all
direct damages, losses and out-of-pocket expenses (including reasonable legal
fees) caused by or arising out of any failure in the performance of any
obligation or agreement of Skechers hereunder.
6. Assignment or Transfer. Neither party shall assign or
transfer any of its rights under this Agreement without the prior written
approval of the other party, except no such approval shall be required for an
assignment to an affiliate or a successor to all or a substantial portion of
the assets or the business of either party, provided that such affiliate or
successor assumes such party's obligations hereunder with respect to the rights
assigned or transferred.
7. Notices. All notices, requests, demands and other
communications provided for hereunder shall be in writing (including
telegraphic or facsimile communications) and shall be mailed (return receipt
requested), telegraphed, sent by facsimile or delivered to each party at the
address set forth as follows, or at such other address as either party may
designate by notice to the other, and any such notice, request, demand or other
communication shall be effective upon receipt. All payments required in this
Agreement shall be paid to and delivered to the party as provided herein for
notice.
If to Skechers: Skechers USA, Inc.
228 Manhattan Beach Blvd.
Suite 200
Manhattan Beach, CA 90266
Telephone: (310) 318-3100
Facsimile: (310) 318-5019
2
<PAGE> 3
Attention: Robert Greenberg
Chief Executive Officer
If to Kani: Kani, Inc.
228 Manhattan Beach Blvd.
Suite 200
Manhattan Beach, CA 90266
Telephone: (310) 318-3100
Facsimile: (310) 318-5019
Attention: David Weinberg
Chief Financial Officer
8. Severability. In the event any provision of this Agreement is
held invalid or unenforceable, such holding shall not invalidate nor render
unenforceable any other provision hereof.
9. Governing Law. This Agreement shall be construed in
accordance with the laws of the State of California.
10. Reference Provision.
(a) Each controversy, dispute or claim between the
parties arising out of or relating to this Agreement, which controversy,
dispute or claim is not settled in writing within thirty (30) days after the
"Claim Date" (defined as the date on which a party subject to the Agreement
gives written notice to all other parties that a controversy, dispute or claim
exists) , will be settled by a reference proceeding in Los Angeles County,
California, in accordance with the provisions of Section 638 et seq. of the
California Code of Civil Procedure, or their successor section ("CCP") , which
shall constitute the exclusive remedy for the settlement of any controversy,
dispute or claim concerning this Agreement, including whether such controversy,
dispute or claim is subject to the reference proceeding and the parties waive
their rights to initiate any legal proceedings against each other in any court
or jurisdiction other than the Superior court of Los Angeles County (the
"Court"). The referee shall be a retired Judge of the Court selected by mutual
agreement of the parties, and if they cannot so agree within forty-five (45)
days after the Claim Date, the referee shall be promptly selected by the
Presiding Judge of the Los Angeles County Superior Court (or his
representative). The referee shall be appointed to sit as a temporary judge,
with all of the powers for a temporary judge, as authorized by law, and upon
selection should take and subscribe to the oath of office as provided for in
Rule 244 of the California Rules of Court (or any subsequently enacted Rule).
Each party shall have one preemptory challenge pursuant to CCP 170.6. The
referee shall (a) be requested to set the matter for hearing within sixty (60)
days after the Claim Date and (b) try any and all issues of law or fact and
report a statement of decision upon them, if possible, within ninety (90) days
of the Claim Date. Any decision rendered by the referee will be final, binding
and conclusive and judgment shall be entered pursuant to CCP 644 in any court
in the State of California
3
<PAGE> 4
having jurisdiction. Any party may apply for a reference at any time after
thirty (30) days following notice to any other party of the nature of the
controversy, dispute or claim, by filing a petition for a hearing and/or trial.
All discovery permitted by this Agreement shall be completed no later than
fifteen (15) days before the first hearing date established by the referee.
The referee may extend such period in the event of a party's refusal to provide
requested discovery for any reason whatsoever, including, without limitation,
legal objections raised to such discovery or unavailability of a witness due to
absence or illness. No party shall be entitled to "priority" in conducting
discovery. .Depositions may be taken by either party upon seven (7) days
written notice, and, request for production or inspection of documents shall be
responded to within ten (10) days after service. All disputes relating to
discovery which cannot be resolved by the parties shall be submitted to the
referee whose decision shall be final and binding upon the parties.
(b) Except as expressly set forth in this Agreement, the
referee shall determine the manner in which the reference proceeding is
conducted including the time and place of all hearings, the order of
presentation of evidence, and all other questions that arise with respect to
the course of the reference proceeding. All proceedings and hearings conducted
before the referee, except for trial, shall be conducted without a court
reporter, except that when any party so requests, a court reporter will be used
at any hearing conducted before the referee. The party making such a request
shall have the obligation to arrange for and pay for the court reporter. The
costs of the court reporter at the trial shall be borne equally by the parties.
(c) The referee shall be required to determine all issues
in accordance with existing case law and the statutory laws of the State of
California. The rules of evidence applicable to proceedings at law in the
State of California will be applicable to the reference proceeding. The
referee shall be empowered to enter equitable as well as legal relief, to
provide all temporary and/or provisional remedies and to enter equitable orders
that will be binding upon the parties. The referee shall issue a single
judgment at the close of the reference proceeding which shall dispose of all of
the claims of the parties that are the subject of the reference. The parties
hereto expressly reserve the right to contest or appeal from the final judgment
or any appealable order or appealable judgment entered by the referee. The
parties hereto expressly reserve the right to findings of fact, conclusions of
law, a written statement of decision, and the right to move for a new trial or
a different judgment, which new trial, if granted, is also to be a reference
proceeding under this provision.
(d) In the event that the enabling legislation which
provides for appointment of a referee is repealed (and no successor statute is
enacted), any dispute between the parties that would otherwise be determined by
the reference procedure herein described will be resolved and determined by
arbitration. The arbitration will be conducted by a retired judge of the Los
Angeles County Superior Court, in accordance with the California Arbitration
Act, Sections 1280 through 1294.2 of the CCP as amended from time to time. The
limitations with respect to discovery as set forth hereinabove shall apply to
any such arbitration proceeding.
4
<PAGE> 5
12. Counterparts. This Agreement may be executed in any number of
counterparts, each of which when so executed shall be deemed to be an original,
and all of which taken together shall constitute one and the same instrument.
5
<PAGE> 6
IN WITNESS WHEREOF, this Services Agreement is made as of the day and
year first above written.
KANI, INC.
A CALIFORNIA CORPORATION
By:_______________________________
Name:
Title:
SKECHERS USA, INC.
A CALIFORNIA CORPORATION
By:_______________________________
Name:
Title:
6
<PAGE> 7
EXHIBIT A
SCHEDULE OF SERVICES
Human Resources
Payroll
401K Profit Sharing
ESOP
Employment Services
Industrial Relation Services
Compensation Consulting
Grievance Resolution
Organization, Development and Training
Operations and Accounting
General Ledger Accounts
Check Processing
Accounts Payable
Accounts Receivables and Collection
Data Processing
Accounting
Inventory Control
Finance and Accounting
Services
Services of Robert Greenberg, Michael Greenberg and David Weinberg who have
each agreed to devote as much of his time to the operations of the Company as
is reasonably necessary.
Facilities
Sufficient space at 228 Manhattan Beach Boulevard, Suite 200, Manhattan Beach,
California as reasonably required by Kani to conduct its operations.
7
<PAGE> 1
Exhibit 10.9
TAX AGREEMENT
THIS TAX AGREEMENT entered into on ______________ __, 1996, is made
effective as of the effective date of the initial public offering of Common
Stock on Registration Statement Form S-1 (the "Effective Date") of Kani, Inc.,
a California corporation (the "Company"), by and among the Company, and
Skechers USA, Inc., a California corporation ("Skechers").
BACKGROUND
A. Upon the Effective Date, Skechers will contribute to the Company
the License Agreement, dated March 30, 1994, between Skechers and Karl Kani
(the "Master License"), covering all products marketed and sold under the Karl
Kani name and the ongoing footwear business conducted under the Karl Kani name,
in exchange for shares representing 100% of the Common Stock of the Company.
Furthermore, on the Effective Date, the Company will also issue shares of its
Common Stock pursuant to an initial public offering so that Skechers will than
own 65% of the outstanding of its Common Stock of the Company. The Company, as
a division, is currently included in Skechers' Federal income tax return. The
Company files tax returns directly with, and pays Taxes to, states, including
California, and local taxing authorities.
B. Upon the Effective Date, Skechers will not hold the requisite
stock interest in the Company for the Company to be a member of Skechers'
"affiliated group," as such term is defined in Section 1504(a)(1) of the
Internal Revenue Code of 1986, as amended (the "Code").
C. The parties hereto desire to apportion liability for taxes among
themselves.
NOW, THEREFORE, in consideration of the foregoing and of the mutual
covenants and agreements hereinafter contained, the parties hereto agree as
follows:
SECTION 1. DEFINITIONS.
The following terms, when used in this Agreement with an initial
capital letter, have the following meanings:
"After-Tax Basis" means on a basis such that any payment to be
received or deemed to be received by the payee shall be supplemented by a
further payment to the payee so that the sum of the two payments, after
deduction of all Taxes resulting from the receipt or accrual of such payments,
shall be equal to the payments to be received or deemed to have been received.
1
<PAGE> 2
"Taxes" means any and all taxes (including, without limitation, gross
receipts, sales, use, property, income, franchise, capital, occupational,
license, value added, excise and stamp taxes and customs duties), assessments,
fees (including, without limitation, documentation, license, filing and
registration fees) and charges, of any nature or kind whatsoever, together with
any penalties, fines, additions to tax or interest thereon, however imposed,
withheld, levied, or assessed by any taxing authority.
SECTION 2. LIABILITY FOR TAXES.
(a) Tax Liability for Periods Ending on or Before the Effective
Date. Skechers shall, on an After-Tax Basis, indemnify and hold harmless the
Company from and against any and all liability (including, without limitation,
interest, additions to tax and penalties) imposed by any taxing authority for
or with respect to Taxes of any entity (including, without limitation, the
Company) assessed, for any reason, against the Company for or fairly
attributable to any taxable period ending on or before the Effective Date;
provided, however, that Skechers shall have no obligation to indemnify the
Company to the extent such Taxes have actually been paid or have been disclosed
in the statement attached hereto as Exhibit A.
(b) Periods Ending After the Effective Date.
(1) The Company shall be solely responsible for payment of
Taxes imposed by any taxing authority with respect to any period ending after
the Effective Date, and the Company shall indemnify and hold harmless Skechers
for and against any and all liability for such Taxes.
(2) If (x) any adjustment shall be made by any taxing
authority for any taxable period, as a result of or in settlement of any audit,
other administrative proceeding or judicial proceeding or as the result of the
filing of an amended return to reflect the consequences of any determination
made in connection with any such audit or proceeding, and if such adjustment
results in any tax detriment to the Company with respect to any period ending
after the Effective Date or (y) the Company incurs losses which are carried
back to prior years and, as a result of any adjustment described in (x) or loss
described in (y), Skechers or any affiliate of Skechers for any taxable period
realizes a tax benefit, then Skechers shall pay to the Company the amount of
such tax benefit at such time or times as Skechers or any affiliate of Skechers
realizes such benefit through a refund of Tax or a reduction in the amount of
Tax which Skechers or any such affiliate would otherwise have had to pay if
such adjustment had not been made or such loss had not been incurred. If any
adjustment shall be made by any taxing authority for any taxable period, other
than for Taxes described in subsection (b), as a result of or in settlement of
any audit, other administrative proceeding or judicial proceeding or as the
result of the filing of an amended return to reflect the consequences of any
determination made in connection with any such audit or proceeding, and if such
adjustment results in any tax determination to Skechers or
2
<PAGE> 3
any of its affiliates with respect to any period ending on or before the
Effective Date, and, as a result thereof, the Company or any affiliate of the
Company for any taxable period after the Effective Date realizes a tax benefit,
then the Company shall pay to Skechers the amount of such benefit at such time
or times as the Company or any affiliate of the Company actually realizes such
benefit through a refund of Tax or reduction in the amount of Tax which the
Company or any such affiliate would otherwise have had to pay if such
adjustment had not been made.
(c) Indemnity with Respect to Specified Events. Notwithstanding
anything herein to the contrary, Skechers shall indemnify and hold the Company
harmless, on an After-Tax Basis, from any and all liability (including, without
limitation, interest, additional to tax and penalties) for Taxes imposed by any
taxing authority with respect to any period (i) in connection with the
contribution by Skechers of the Master License and the Karl Kani footwear
business and the deconsolidation of the Company on the Effective Date,
including, without limitation, any restoration of deferred intercompany gain
associated with such events, or (ii) by reason the Company being severally
liable for the entire tax of any affiliated group of which Skechers is a member
pursuant to Treasury Regulations section 1.1502-6(a) or any analogous state or
local provision.
SECTION 3. TAX RETURNS.
(a) All Returns For Periods Ending on or Before the Effective
Date. The Company shall join for all taxable periods of the Company ending on
or before the Effective Date for which the Company is eligible to do so, in any
consolidated or combined federal, state and local income and franchise tax
returns which Skechers shall request it to join. Skechers shall cause to be
prepared and filed all required tax returns of the Company for all periods
ending on or before the Effective Date. All such returns of the Company for
all periods ending on or before the Effective Date shall be prepared and all
elections with respect to such return shall be made, to the extent permitted by
law, in a manner consistent with prior practice with respect to the Company.
The Company shall cooperate with Skechers in preparation of the portions of
such return pertaining it, and shall take no position inconsistent with the
Company being a member of the consolidated or combined groups of which Skechers
is a member for all such periods. Skechers shall submit copies of such returns
to the Company for the Company's approval, which approval shall not be
unreasonably withheld.
(b) All Returns For Periods Ending After the Effective Date. The
Company shall be solely responsible for preparation and filing of all returns
for periods ending after the Effective Date.
3
<PAGE> 4
SECTION 4. AUDITS AND CONTEST.
(a) In General. Skechers shall promptly notify the Company in
writing upon receipt by Skechers of any notice of (i) any pending or threatened
federal, state or local income or franchise tax audits or assessments of the
Company, and (ii) any pending or threatened federal, state or local income or
franchise tax audits or assessments of Skechers which may affect the
liabilities of the Company for Taxes.
(b) Periods on or Before the Effective Date. For tax periods
ending on or before the Effective Date, Skechers shall have the right to
represent the Company's interests in any tax audit, or administrative or
judicial proceeding and to employ counsel of its choice at its expense.
Skechers agrees to consult with the Company and to keep the Company informed on
a regular basis regarding the status of any such audit or proceeding.
(c) Periods After the Effective Date. For tax periods ending
after the Effective Date, the Company shall have the right to represent the
Company's interest in any tax audit or administrative or judicial proceeding,
and to employ counsel of its choice at its expense. The Company agrees to keep
Skechers informed on a regular basis regarding any such audit or proceeding and
to consult with Skechers with a view to maintaining positions reasonably
consistent with those that may be urged by Skechers; provided, however, that
the Company shall have ultimate control of any such audit or proceeding.
SECTION 5. MISCELLANEOUS.
(a) Supersedes Prior Agreements. This Agreement supersedes any
existing agreement presently in effect between the Company and Skechers or any
affiliate of Skechers, including, without limitation, with respect to the
subject matter hereof.
(b) Cooperation. After the Effective Date, the Company and
Skechers shall make available to the other, as reasonably requested, and to any
taxing authority, all information, records or documents relating to tax
liabilities or potential tax liabilities of the Company for all periods prior
to or including the Effective Date and shall preserve all such information,
records and documents until the expiration of any applicable statute of
limitations or extensions thereof.
(c) Consistency. Unless otherwise required to settle any
adjustments proposed or asserted by a taxing authority, the Company shall not
take any material position with respect to federal, state or local income or
franchise taxes or foreign income taxes for periods ending after the Effective
Date that is inconsistent with positions taken by the Company with respect to
taxes for periods ending on or before the Effective Date; provided, however,,
that, within 30 days of notification by the Company of a proposed assertion of
an inconsistent tax position, Skechers shall have furnished to the Company an
opinion of counsel, which counsel shall be reasonable satisfactory to the
Company, to the effect that
4
<PAGE> 5
there is "substantial authority" (or such higher standard as may be required by
Code Section 6662(d)(2)(C)) within the meaning of section 6662(d)(2)(B)(i) of
the Code for not asserting such inconsistent tax position.
(d) Elections. Skechers acknowledges that, for any period on or
after the Effective Date, the Company may make any election, and any affiliated
group of which the Company after the Effective Date was or is a member may
cause the Company to make any election, respectively permitted to them under
the Code, including, without limitation, the election set forth in section
172(b)(3) of the Code.
(e) Payments. Amounts payable pursuant to this Agreement shall be
paid within 30 days after notice and demand therefor by the person entitled
thereto.
(f) Reference Provision.
(i) Each controversy, dispute or claim between the
parties arising out of or relating to this Agreement, which controversy,
dispute or claim is not settled in writing within thirty (30) days after the
"Claim Date" (defined as the date on which a party subject to the Agreement
gives written notice to all other parties that a controversy, dispute or claim
exists), will be settled by a reference proceeding in Los Angeles County,
California, in accordance with the provisions of Section 638 et seq. of the
California Code of Civil Procedure, or their successor section ("CCP"), which
shall constitute the exclusive remedy for the settlement of any controversy,
dispute or claim concerning this Agreement, including whether such controversy,
dispute or claim is subject to the reference proceeding and the parties waive
their rights to initiate any legal proceedings against each other in any court
or jurisdiction other than the Superior court of Los Angeles County (the
"Court"). The referee shall be a retired Judge of the Court selected by mutual
agreement of the parties, and if they cannot so agree within forty-five (45)
days after the Claim Date, the referee shall be promptly selected by the
Presiding Judge of the Los Angeles County Superior Court (or his
representative). The referee shall be appointed to sit as a temporary judge,
with all of the powers for a temporary judge, as authorized by law, and upon
selection should take and subscribe to the oath of office as provided for in
Rule 244 of the California Rules of Court (or any subsequently enacted Rule).
Each party shall have one preemptory challenge pursuant to CCP 170.6. The
referee shall (a) be requested to set the matter for hearing within sixty (60)
days after the Claim Date and (b) try any and all issues of law or fact and
report a statement of decision upon them, if possible, within ninety (90) days
of the Claim Date. Any decision rendered by the referee will be final, binding
and conclusive and judgment shall entered pursuant to CCP 644 in any court in
the State of California having jurisdiction. Any party may apply for a
reference at any time after thirty (30) days following notice to any other
party of the nature of the controversy, dispute or claim, by filing a petition
for a hearing and/or trial. All discovery permitted by this Agreement shall be
completed no later than fifteen (15) days before the first hearing date
established by the referee. The referee may extend such period in the event of
a party's refusal to provide
5
<PAGE> 6
requested discovery for any reason whatsoever, including, without limitation,
legal objections raised to such discovery or unavailability of a witness due to
absence or illness. No party shall be entitled to "priority" in conducting
discovery. Depositions may be taken by either party upon seven (7) days
written notice, and, request for production or inspection of documents shall be
responded to within ten (10) days after service. All disputes relating to
discovery which cannot be resolved by the parties shall be submitted to the
referee whose decision shall be final and binding upon the parties.
(ii) Except as expressly set forth in this Agreement, the
referee shall determine the manner in which the reference proceeding is
conducted including the time and place of all hearings, the order of
presentation of evidence, and all other questions that arise with respect to
the course of the reference proceeding. All proceedings and hearings conducted
before the referee, except for trial, shall be conducted without a court
reporter, except that when any party so requests, a court reporter will be used
at any hearing conducted before the referee. The party making such a request
shall have the obligation to arrange for and pay for the court reporter. The
costs of the court reporter at the trial shall be borne equally by the parties.
(iii) The referee shall be required to determine all issues
in accordance with existing case law and the statutory laws of the State of
California. The rules of evidence applicable to proceedings at law in the
State of California will be applicable to the reference proceeding. The
referee shall be empowered to enter equitable as well as legal relief, to
provide all temporary and/or provisional remedies and to enter equitable orders
that will be binding upon the parties. The referee shall issue a single
judgment at the close of the reference proceeding which shall dispose of all of
the claims of the parties that are the subject of the reference. The parties
hereto expressly reserve the right to contest or appeal from the final judgment
or any appealable order or appealable judgment entered by the referee. The
parties hereto expressly reserve the right to findings of fact, conclusions of
law, a written statement of decision, and the right to move for a new trial or
a different judgment, which new trial, if granted, is also to be a reference
proceeding under this provision.
(iv) In the event that the enabling legislation which
provides for appointment of a referee is repealed (and no successor statute is
enacted), any dispute between the parties that would otherwise be determined by
the reference procedure herein described will be resolved and determined by
arbitration. The arbitration will be conducted by a retired judge of the Los
Angeles County Superior Court, in accordance with the California Arbitration
Act, Sections 1280 through 1294.2 of the CCP as amended from time to time. The
limitations with respect to discovery as set forth hereinabove shall apply to
any such arbitration proceeding.
(g) Notices. All notices, requests, demands and other
communications provided for hereunder shall be in writing (including
telegraphic or facsimile communications) and
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shall be mailed (return receipt requested), telegraphed , sent by facsimile or
delivered to each party at the address set forth as follows, or at such other
addresses either party may designate by notice to the other, and any such
notice, request, demand or other communication shall be effective upon receipt.
If to Skechers: Skechers USA, Inc.
228 Manhattan Beach Blvd., Suite 200
Manhattan Beach, CA 90266
Telephone: (310) 318-3100
Facsimile: (310) 318-5019
Attention: Robert Greenberg
Chief Executive Officer
If to the Company: Kani, Inc.
228 Manhattan Beach Blvd., Suite 200
Manhattan Beach, CA 90266
Telephone: (310)
Facsimile: (310)
Attention:
(g) Governing Law. This Agreement shall be deemed a contract
made under the laws of the State of California, and the rights and obligations
of the parties hereto shall be governed and construed in accordance with the
laws of such State.
(h) Sections and Headings. All "Section" references herein are to
a section of this Agreement, unless otherwise stated. Titles or captions of
Sections or subsections contained in this Agreement are inserted only as a
matter of convenience and for reference, and in no way define, limit, extend or
describe the scope of this Agreement or the intent of any provision hereof.
(i) Counterparts. This Agreement may be executed in any number of
counterparts, each of which when so executed shall be deemed to be an original,
but all of which taken together shall constitute one and the same agreement.
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IN WITNESS WHEREOF, Skechers and the Company have caused this
Agreement to be duly executed as of the date first herein above set forth.
SKECHERS USA, INC.
A CALIFORNIA CORPORATION
By: _______________________________
Name:
Title:
KANI, INC.
A CALIFORNIA CORPORATION
By: _______________________________
Name:
Title:
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Exhibit 10.10
KANI, INC.
1996 STOCK OPTION, DEFERRED STOCK
AND
RESTRICTED STOCK PLAN
SECTION 1. GENERAL PURPOSE OF PLAN; DEFINITIONS.
(a) This plan is intended to implement and govern the
Stock Option, Deferred Stock and Restricted Stock Plan (the "Plan") of Kani,
Inc., a California corporation (the "Company"). The Plan was adopted by the
Board on _______________ ___, 1996, subject to the approval of the Company's
shareholders. The purpose of the Plan is to enable the Company and its
Subsidiaries, to obtain and retain competent personnel who will contribute to
the Company's success by their ability, ingenuity and industry, and to provide
incentives to such personnel and members that are linked directly to increases
in shareholder value, and will therefore, inure to the benefit of all
shareholders of the Company.
(b) For purposes of the Plan, the following terms shall
be defined as set forth below:
(1) "Award" means any award of Deferred Stock, Restricted
Stock, Stock Appreciation Right, Limited Stock Appreciation Right or Stock
Option.
(2) "Board" means the Board of Directors of the Company.
(3) "Code" means the Internal Revenue Code of 1986, as
amended from time to time, or any successor thereto.
(4) "Committee" means the Compensation Committee of the
Board plus such additional directors of the Company as the Board shall
designate.
(5) "Company" means Kani, Inc., a California corporation
organized under the laws of the State of California (or any successor
corporation).
(6) "Deferred Stock" means an award made pursuant to
Section 7 below of the right to receive Stock at the end of a specified
deferral period.
(7) "Disability" means permanent and total disability as
determined under the Company's disability program or policy.
(8) "Effective Date" shall mean the date provided
pursuant to Section 16.
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(9) "Eligible Employee" means an employee of the Company
or any Subsidiary eligible to participate in the Plan pursuant to Section 4.
(10) "Fair Market Value" means, as of any given date, with
respect to any Awards granted hereunder, at the discretion of the Committee and
subject to such limitations as the Committee may impose, (A) the closing sale
price of the Stock on such date as reported in the Western Edition of the Wall
Street Journal Composite Tape or (B) the average on such date of the closing
price of the Stock on each day on which the Stock is traded over a period of up
to twenty trading days immediately prior to such date or (C) if on the date for
which current fair market value is to be determined the Stock is not listed on
any securities exchange or quoted in the NASDAQ System or over-the-counter
market, the current fair market value of the Stock shall be the highest price
per share which the Company could then obtain from a willing buyer (not a
current employee or director) for shares of the Stock sold by the Company, from
authorized but unissued shares, as determined in good faith by the Board.
(11) "Incentive Stock Option" means any Stock option
intended to be designated as an "incentive stock option" within the meaning of
Section 422 of the Code.
(12) "IPO" means the Company's initial public offering of
its Stock on Registration Statement Form S-1.
(13) "Limited Stock Appreciation Right" means a Stock
Appreciation Right that can be exercised only in the event of a Change of
Control as defined in Section 10.
(14) "Non-Qualified Stock Option" means any Stock Option
that is not an Incentive Stock Option, including any Stock Option that provides
(as of the time such option is granted) that it will not be treated as an
Incentive Stock Option.
(15) "Parent Corporation" means any corporation (other
than the Company) in an unbroken chain of corporations ending with the Company,
if each of the corporations other than the Company owns stock possessing 50% or
more of the combined voting power of all classes of stock in one of the other
corporations in the chain.
(16) "Participant" means any Eligible Employee selected by
the Committee, pursuant to the Committee's authority in Section 2 below, to
receive grants of Stock Options or Awards or any combination of the foregoing.
(17) "Restricted Period" means the period set by the
Committee as it pertains to Deferred Stock or Restricted Stock awards pursuant
to Section 7.
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(18) "Restricted Stock" means an award of shares of Stock
that is subject to restrictions under Section 7 that will lapse with the
passage of time or upon the attainment of performance objectives.
(19) "Skechers" means Skechers USA, Inc., a California
corporation and parent corporation of the Company.
(20) "Stock" means the Common Stock, no par value per
share, of the Company.
(21) "Stock Appreciation Right" means the right pursuant
to an award granted under Section 6 below to receive an amount equal to the
difference between (i) the Fair Market Value, as of the date such Stock
Appreciation Right or portion thereof is surrendered, of the shares of Stock
covered by such right or such portion thereof and (ii) the aggregate exercise
price of such right or such portion thereof.
(22) "Stock Option" means any option to purchase shares
of Stock granted pursuant to Section 5.
(23) "Subsidiary" means any corporation (other than the
Company) in an unbroken chain of corporations beginning with the Company if
each of the corporations (other than the last corporation in the unbroken
chain) owns stock possessing 50% or more of the total combined voting power of
all classes of stock in one of the other corporations in the chain.
SECTION 2. ADMINISTRATION.
(a) The Plan shall be administered by the Committee which
shall be appointed by the Board and which shall serve at the pleasure of the
Board.
(b) The Committee shall have the power and authority to
grant to Eligible Employees, pursuant to the terms of the Plan: (A) Stock
Options, (B) Stock Appreciation Rights, (C) Deferred Stock, (D) Restricted
Stock, or (E) any combination of the foregoing.
In particular, the Committee shall have the authority;
(1) to select those employees of the Company or its
Subsidiaries who are Eligible Employees;
(2) to determine whether and to what extent Stock
Options, Stock Appreciation Rights, Deferred Stock, Restricted Stock or a
combination of the foregoing, are to be granted to Eligible Employees
hereunder;
(3) to determine the number of shares of Stock to be
covered by each such Award;
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(4) to determine the terms and conditions, not
inconsistent with the terms of the Plan, of any such Award including, but not
limited to, (x) the restricted period applicable to Deferred Stock or
Restricted Stock awards, (y) the date or dates on which restrictions applicable
to such Deferred Stock or Restricted Stock shall lapse during such period, and
(z) when and in what increments shares covered by Stock Options may be
purchased; and
(5) to determine the terms and conditions, not
inconsistent with the terms of the Plan, which shall govern all written
instruments evidencing the Stock Options, Stock Appreciation Rights, Deferred
Stock, Restricted Stock or any combination of the foregoing.
(c) The Committee shall have the authority to adopt,
alter and repeal such administrative rules, guidelines and practices governing
the Plan as it shall from time to time deem advisable; to interpret the terms
and provisions of the Plan and any Award issued under the Plan; and to
otherwise supervise the administration of the Plan.
(d) All decisions made by the Committee pursuant to the
provisions of the Plan shall be final and binding on all persons, including the
Company and its Subsidiaries and the Participants.
SECTION 3. STOCK SUBJECT TO PLAN.
(a) The total number of shares of Stock reserved and
available for issuance under the Plan shall be four hundred thousand (400,000)
shares of Stock. Such shares shall consist of authorized but unissued shares.
(b) To the extent that (i) a Stock Option expires or is
otherwise terminated without being exercised or (ii) any shares of Stock
subject to any Deferred Stock or Restricted Stock award granted hereunder are
forfeited, such shares shall again be available for issuance in connection with
future Awards under the Plan. If any shares of Stock have been pledged as
collateral for indebtedness incurred by a Participant in connection with the
exercise of a Stock Option and certificates representing such shares are
surrendered to the Company in satisfaction of such indebtedness, such shares
shall again be available for issuance in connection with future Awards under
the Plan.
(c) In the event of any merger, reorganization,
consolidation, recapitalization, stock dividend, or other change in corporate
structure affecting the Stock, a substitution or adjustment shall be made in
(i) the aggregate number of shares reserved for issuance under the Plan, and
(ii) the kind, number and option price of shares subject to outstanding Stock
Options granted under the Plan as may be determined by the Committee, in its
sole discretion, provided that the number of shares subject to any Award
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shall always be a whole number. Such other substitutions or adjustments shall
be made as may be determined by the Committee, in its sole discretion. An
adjusted option price shall also be used to determine the amount payable by the
Company upon the exercise of any Stock Appreciation Right.
SECTION 4. ELIGIBILITY.
Officers, other key employees and consultants or advisors of
the Company, its Parent Corporation or its Subsidiaries who are responsible for
or contribute to the management, growth and/or profitability of the business of
the Company or its Subsidiaries, and the directors of the Company, its Parent
Corporation and its Subsidiaries, shall be eligible to be granted Non-Qualified
Stock Options, Stock Appreciation Rights, and Deferred Stock or Restricted
Stock awards hereunder. Officers and other key employees of the Company or its
Subsidiaries shall also be eligible to be granted Incentive Stock Options
hereunder. The Participants under the Plan shall be selected from time to time
by the Committee, in its sole discretion, from among Eligible Employees
recommended by the senior management of the Company, and the Committee shall
determine, in its sole discretion, the number of shares covered by each Award.
SECTION 5. STOCK OPTION FOR ELIGIBLE EMPLOYEES
(a) Stock Options may be granted to Eligible Employees
alone or in addition to other Awards granted under the Plan. Any Stock Option
granted under the Plan shall be in such form as the Committee may from time to
time approve, and the provisions of Stock Options need not be the same with
respect to each optionee. Recipients of Stock Options shall enter into a Stock
Option Agreement with the Company, in such form as the Committee shall
determine, which agreement shall set forth, among other things, the exercise
price of the option, the term of the option and provisions regarding
exercisability of the option granted thereunder.
i) The Stock Options granted under the Plan
to Eligible Employees may be of two types:
(x) Incentive Stock Options and (y)
Non-Qualified Stock Options.
ii) The Committee shall have the authority
to grant any Eligible Employee (x) Incentive
Stock Options (provided such Eligible
Employee is also an employee of the Company,
its Parent Corporation or its Subsidiaries),
(y) Non-Qualified Stock Options, or (z) both
types of Stock Options (in each case with or
without Stock Appreciation Rights or Limited
Stock Appreciation Rights). To the extent
that any Stock Option does not qualify as an
Incentive
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Stock Option, it shall constitute a separate
Non-Qualified Stock Option.
(b) Stock Options granted under this Section 5 shall be
subject to the following terms and conditions and shall contain such additional
terms and conditions, not inconsistent with the terms of the Plan, as the
Committee shall deem desirable:
i) Option Price. The option price per share of Stock
purchasable under a Stock Option shall be determined
by the Committee at the time of grant but shall be
not less than 100% of the Fair Market Value of the
Stock on such date. If an employee owns or is deemed
to own (by reason of the attribution rules applicable
under Section 424(d) of the Code) more than 10% of
the combined voting power of all classes of stock of
the Company or any Parent Corporation or Subsidiary
and an Incentive Stock Option is granted to such
employee, the option price of such Incentive Stock
Option (to the extent required by the Code at the
time of grant) shall be no less than 110% of the Fair
Market Value of the Stock on the date such Incentive
Stock Option is granted.
ii) Option Term. The term of each Stock Option
shall be fixed by the Committee, but no Stock Option
shall be exercisable more than ten years after the
date such Stock Option is granted; provided, however,
that if an employee owns or is deemed to own (by
reason of the attribution rules of Section 424(d) of
the Code) more than 10% of the combined voting power
of all classes of stock of the Company or any Parent
Corporation or Subsidiary and an Incentive Stock
Option is granted to such employee, the term of such
Incentive Stock Option (to the extent required by the
Code at the time of grant) shall be no more than five
years from the date of grant.
(c) Exercisability. Stock Options shall be exercisable
at such time or times and subject to such terms and conditions as shall be
determined by the Committee at or after grant; provided, however, that, except
as provided herein or unless otherwise determined by the Committee at or after
grant, Stock Options shall be exercisable one year following the date of grant
of the option. If the Committee provides, in its discretion, that any Stock
Option is exercisable only in installments, the Committee may waive such
installment exercise provisions at any time in whole or in part based on such
factors as the Committee may determine in its sole discretion.
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(d) Method of Exercise. Subject to Section 5(c) above,
Stock Options may be exercised in whole or in part at any time during the
option period, by giving written notice of exercise to the Company specifying
the number of shares to be purchased, accompanied by payment in full of the
purchase price in cash or its equivalent, as determined by the Committee. As
determined by the Committee, in its sole discretion, payment in whole or in
part may also be made (i) in the form of unrestricted Stock already owned by
the optionee, or, in the case of the exercise of a Non-Qualified Stock Option,
Restricted Stock subject to an Award hereunder (based, in each case, on the
Fair Market Value of the Stock on the date the option is exercised), (ii) by
cancellation of any indebtedness owed by the Company to the optionee, (iii) by
a full recourse promissory note executed by the optionee, or (iv) by any
combination of the foregoing; provided, however, that in the case of an
Incentive Stock Option, the right to make payment in the form of already owned
shares may be authorized only at the time of grant. An optionee shall
generally have the rights to dividends and other rights of a stockholder with
respect to shares subject to the option only after the optionee has given
written notice of exercise, has paid in full for such shares, and, if
requested, has given the representation described in paragraph (a) of Section
11.
(e) The Committee may require the voluntary surrender of
all or a portion of any Stock Option granted under the Plan as a condition
precedent to a grant of a new Stock Option. Subject to the provisions of the
Plan, such new Stock Option shall be exercisable at the price, during such
period and on such other terms and conditions as are specified by the Committee
at the time the new Stock Option is granted; provided, however, should the
Committee so require, the number of shares subject to such new Stock Option
shall not be greater than the number of shares subject to the surrendered Stock
Option. Upon their surrender, the Stock Options shall be canceled and the
shares previously subject to such canceled Stock Options shall again be
available for the grants of Stock Options and other Awards hereunder.
(f) Loans. The Company may make loans available to Stock
Option holders as the Committee, in its discretion, may determine in connection
with the exercise of outstanding options granted under the Plan. Such loans
shall (i) be evidenced by promissory notes entered into by the holders in favor
of the Company, (ii) be subject to the terms and conditions set forth in this
Section 5(f) and such other terms and conditions, not inconsistent with the
Plan, as the Committee shall determine, (iii) bear interest, if any, at such
rate as the Committee shall determine and (iv) be subject to Board approval.
In no event may the principal amount of any such loan exceed the sum of (x) the
exercise price less the par value of the shares of Stock covered by the option,
or portion thereof, exercised by the holder and (y) any Federal, state, local
income tax attributable to such exercise. The initial term of the loan, the
schedule of payments of principal and interest under the loan, the extent to
which the loan is to be
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with or without recourse against the holder with respect to principal or
interest and the conditions upon which the loan will become payable in the
event of the holder's termination of employment shall be determined by the
Committee; provided, however, that the term of the loan, including extensions,
shall not exceed seven years. Unless the Committee determines otherwise, when
a loan shall have been made, shares of Common Stock having a Fair Market Value
at least equal to the principal amount of the loan shall be pledged by the
holder to the Company as security for payment of the unpaid balance of the
loan, and such pledge shall be evidenced by a pledge agreement, the terms of
which shall be determined by the Committee, in its discretion; provided,
however, that each loan shall comply with all applicable laws, regulations and
rules of the Board of Governors of the Federal Reserve System and any other
governmental agency having jurisdiction.
(g) Non-transferability of Options. No Stock Options
shall be transferable by the optionee otherwise than by will or by the laws of
descent and distribution, and all Stock Options shall be exercisable, during
the optionee's lifetime, only by the optionee. To the extent such Options are
intended to qualify as Incentive Stock Options no disposition of an Optioned
Share may be made by optionee within two (2) years from the date of the
granting of the Option(s) nor within one (1) year after the transfer of such
Optioned Share to him.
(h) Termination by Death. If an optionee's employment
with the Company and any Subsidiary terminates by reason of death, the Stock
Option may thereafter be immediately exercised, to the extent then exercisable
(or on such accelerated basis as the Committee shall determine at or after
grant), by the legal representative of the estate or by the legatee of the
optionee under the will of the optionee, for a period of twelve months (or such
shorter period as the Committee shall specify at grant) from the date of such
death or until the expiration of the stated term of such Stock Option,
whichever period is shorter.
(i) Termination by Reason of Disability. If an optionee's
employment with the Company or any Subsidiary terminates by reason of
Disability, any Stock Option held by such optionee may thereafter be exercised,
to the extent it was exercisable at the time of such termination (or on such
accelerated basis as the Committee shall determine at the time of grant), for a
period of twelve months (or such shorter period as the Committee shall specify
at grant) from the date of such termination of employment or until the
expiration of the stated term of such Stock Option, whichever period is
shorter; provided, however, that, if the optionee dies within such twelve-month
period (or such shorter period as the Committee shall specify at grant) and
prior to the expiration of the stated term of such Stock Option, any
unexercised Stock Option held by such optionee shall thereafter be exercisable
to the extent to which it was exercisable at the time of death for a period of
twelve months (or such shorter period as the Committee
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shall specify at grant) from the time of death or until the expiration of the
stated term of such Stock Option, whichever period is shorter. In the event of
a termination of employment by reason of Disability, if an Incentive Stock
Option is exercised after the expiration of the exercise periods that apply for
purposes of Section 422 of the Code, such Stock Option will thereafter be
treated as a Non-Qualified Stock Option.
(j) Other Termination. Except as otherwise provided in
this paragraph or otherwise determined by the Committee, if an optionee's
employment with the Company or any Subsidiary terminates for any reason other
than death or Disability, the Stock Option may be exercised until the earlier
to occur of (A) three months from the date of such termination or (B) the
expiration of such Stock Option's term.
(k) Annual Limit on Incentive Stock Options. To the
extent that the aggregate Fair Market Value (determined as of the date the
Incentive Stock Option is granted) of the shares of Stock with respect to which
Incentive Stock Options granted under this Plan and all other option plans of
the Company, its Parent Corporation and any Subsidiary become exercisable for
the first time by an optionee during any calendar year exceed $100,000, such
options shall be treated as Non-Qualified Stock Options.
(l) Annual Limit on Stock Options. More than one Stock
Option may be granted to an Eligible Employee during any fiscal year of the
Company, but the aggregate number of shares of Stock underlying Stock Options
granted to any Eligible Employee during any such fiscal year shall not exceed
fifty percent (50%) of the shares of Stock reserved for issuance under the Plan
pursuant to Section 3 of the Plan.
SECTION 6. STOCK APPRECIATION RIGHTS.
(a) Grant and Exercise. Stock Appreciation Rights may be
granted to Eligible Employees either alone ("Free Standing Rights") or in
conjunction with all or part of any Stock Option granted under the Plan
("Related Rights"). In the case of a Non-Qualified Stock Option, Related
Rights may be granted either at or after the time of the grant of such Stock
Option. In the case of an Incentive Stock Option, Related Rights may be
granted only at the time of the grant of the Incentive Stock Option.
A Related Right or applicable portion thereof granted with
respect to a given Stock Option shall terminate and no longer be exercisable
upon the termination or exercise of the related Stock Option, except that,
unless otherwise provided by the Committee at the time of grant, a Related
Right granted with respect to less than the full number of shares covered by a
related Stock Option shall only be reduced if and to the extent that the number
of shares covered by the exercise or termination of the
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related Stock Option exceeds the number of shares not covered by the Stock
Appreciation Right.
A Related Right may be exercised by an optionee, in accordance
with paragraph (b) of this Section 6, by surrendering the applicable portion of
the related Stock Option. Upon such exercise and surrender, the optionee shall
be entitled to receive an amount determined in the manner prescribed in
paragraph (b) of this Section 6. Stock Options which have been so surrendered,
in whole or in part, shall no longer be exercisable to the extent the Related
Rights have been exercised.
(b) Terms and Conditions. Stock Appreciation Rights
shall be subject to such terms and conditions, not inconsistent with the
provisions of the Plan, as shall be determined from time to time by the
Committee, including the following;
i) Stock Appreciation Rights that are Related
Rights ("Related Stock Appreciation Rights") shall be
exercisable only at such time or times and to the
extent that the Stock Options to which they relate
shall be exercisable in accordance with the
provisions of Section 5 and this Section 6 of the
Plan.
ii) Upon the exercise of a Related Stock
Appreciation Right, an optionee shall be entitled to
receive up to, but not more than, an amount in cash
or that number of shares of Stock (or in some
combination of cash and shares of Stock) equal in
value to the excess of the Fair Market Value of one
share of Stock over the option price per share
specified in the related Stock Option multiplied by
the number of shares in respect of which the Related
Stock Appreciation Right shall have been exercised,
with the Committee having the right to determine the
form of payment.
(c) Related Stock Appreciation Rights shall be
transferable only when and to the extent that the underlying Stock Option would
be transferable under paragraph (g) of Section 5 of the Plan.
(d) Upon the exercise of a Related Stock Appreciation
Right, the Stock Option or part thereof to which such Related Stock
Appreciation Right is related shall be deemed to have been exercised for the
purpose of the limitation set forth in Section 3 of the Plan on the number of
shares of Stock to be issued under the Plan, but only to the extent of the
number of shares issued under the Related Stock Appreciation Right.
(e) A Related Stock Appreciation Right granted in
connection with an Incentive Stock Option may be exercised only if
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and when the market price of the stock subject to an Incentive Stock Option
exceeds the exercise price of such Stock Option.
(f) Stock Appreciation Rights that are Free Standing
Rights ("Free Standing Stock Appreciation Rights") shall be exercisable at such
time or times and subject to such terms and conditions as shall be determined
by the Committee at or after grant.
(g) The term of each Free Standing Stock Appreciation
Right shall be fixed by the Committee, but no Free Standing Stock Appreciation
Right shall be exercisable more than ten years after the date such right is
granted.
(h) Upon the exercise of a Free Standing Stock
Appreciation Right, a recipient shall be entitled to receive up to, but not
more than, an amount in cash or that number of shares of Stock (or any
combination of cash or shares of Stock) equal in value to the excess of the
Fair Market Value of one share of Stock over the price per share specified in
the Free Standing Stock Appreciation Right (which shall be no less than 100% of
the Fair Market Value of the Stock on the date of grant) multiplied by the
number of shares in respect to which the right is being exercised, with the
Committee having the right to determine the form of payment.
(i) No Free Standing Stock Appreciation Right shall be
transferable by the recipient otherwise than by will or by the laws of descent
and distribution, and all such rights shall be exercisable, during the
recipient's lifetime, only by the recipient.
(j) In the event of the termination of an employee who
has received Free Standing Stock Appreciation Rights, such rights shall be
exercisable to the same extent that a Stock Option would have been exercisable
in the event of the termination of the optionee.
SECTION 7. DEFERRED STOCK AND RESTRICTED STOCK.
(a) General. Deferred Stock and Restricted Stock awards
may be issued to Eligible Employees either alone or in addition to other Awards
granted under the Plan. The Committee shall determine to whom, and the time or
times at which, grants of Deferred Stock or Restricted Stock awards will be
made; the number of shares to be awarded; the price, if any, to be paid by the
recipient of Deferred Stock or Restricted Stock awards; the Restricted Period
(as defined in paragraph (c) hereof) applicable to Deferred Stock or Restricted
Stock awards; the performance objective applicable to Deferred Stock or
Restricted Stock awards; the date or dates on which restrictions applicable to
such Deferred Stock or Restricted Stock awards shall lapse during such
Restricted Period; and all other conditions of the Deferred Stock or Restricted
Stock awards. The
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Committee may also condition the grant of Deferred Stock or Restricted Stock
awards upon the exercise of Stock Options, or upon such other criteria as the
Committee may determine, in its sole discretion. The provisions of Deferred
Stock or Restricted Stock awards need not be the same with respect to each
recipient.
(b) Awards and Certificates. The prospective recipient
of a Deferred Stock or Restricted Stock award shall not have any rights with
respect to such Award, unless and until such recipient has executed an
agreement evidencing the Award (an "Award Agreement") and has delivered a fully
executed copy thereof to the Company, within a period of sixty days (or such
other period as the Committee may specify after the Award date).
Each Participant who is awarded Restricted Stock shall be
issued a stock certificate in respect of such shares of Restricted Stock; and
such certificate shall be registered in the name of the Participant, and shall
bear an appropriate legend referring to the terms, conditions, and restrictions
applicable to such Award, substantially in the following form:
The shares of stock represented by this certificate are subject to
restrictions and limitations on transferability contained in the Kani,
Inc., 1996 Stock Option, Deferred Stock and Restricted Stock Plan (the
"Plan") and a Restricted Stock Award Agreement (the "Agreement")
entered into between the registered owner of the shares of stock
represented by this certificate and Kani, Inc., a California
corporation (the "Company"). Copies of the Plan and the Agreement
will be furnished by the Company to any holder of this certificate
upon request and without charge.
The Company shall require that the stock certificates
evidencing such shares be held in the custody of the Company until the
restrictions thereon shall have lapsed, and that, as a condition of any
Restricted Stock award, the Participant shall have delivered a stock power,
endorsed in blank, relating to the Stock covered by such Award.
With respect to Deferred Stock awards, at the expiration of
the Restricted Period, stock certificates in respect of such shares of Deferred
Stock shall be delivered to the Participant, or his legal representative, in a
number equal to the shares of Stock covered by the Deferred Stock award.
(c) Restriction and Conditions. The Deferred Stock or
Restricted Stock awards granted pursuant to this Section 7 shall be subject to
the following restrictions and conditions:
(i) Subject to the provisions of the Plan and the
Deferred Stock or Restricted Stock Award Agreements, during such period as may
be set by the Committee commencing on the grant date
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(the "Restricted Period"), the Participant shall not be permitted to sell,
transfer, pledge or assign shares of Deferred Stock awarded under the Plan.
Within these limits, the Committee may, in its sole discretion, provide for the
lapse of such restrictions in installments and may accelerate or waive such
restrictions in whole or in part based on such factors and such circumstances
as the Committee may determine, in its sole discretion, including, but not
limited to, the attainment of certain performance related goals, the
Participant's termination, death or Disability or the occurrence of a "Change
of Control" as defined in Section 10 below.
(ii) With respect to Deferred Stock awards, the
Participant shall generally not have the rights of a stockholder of the
Company, including the right to vote the shares during the Restricted Period;
provided, however, that dividends declared during the Restricted Period with
respect to the number of shares covered by a Deferred Stock award shall be paid
to the Participant. Certificates for shares of unrestricted Stock shall be
delivered to the Participant promptly after, and only after, the Restricted
Period shall expire without forfeiture in respect of such shares of Deferred
Stock, except as the Committee shall otherwise determine. With respect to the
shares of Restricted Stock, except as provided in paragraph (b) of this Section
7, the Participant shall have all of the rights of a shareholder of the
Company, including the right to vote the shares, and the right to receive any
dividends thereon during the Restricted Period.
(iii) Subject to the provisions of the Deferred
Stock or Restricted Stock Award Agreement and this Section 7, upon termination
of employment for any reason during the Restricted Period, all shares still
subject to restriction shall be forfeited by the Participant, and the
Participant shall only receive the amount, if any, paid by the Participant for
such Deferred Stock or Restricted Stock, plus simple interest at 8% per year.
SECTION 8. AMENDMENT AND TERMINATION.
(a) The Board may amend, alter or discontinue the Plan,
but no amendment, alteration, or discontinuation shall be made that would
impair the rights of the Participant under any Award theretofore granted
without such Participant's consent, or that without the approval of the
stockholders (as described below) would:
(i) except as provided in Section 3, increase the total
number of shares of Stock reserved for the purpose of the Plan;
(ii) except as provided in this Plan, decrease the option
price of any Stock Option to less than 100% of the
Fair Market Value on the date of the grant of the
option;
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(iii) materially change the employees or class of employees
eligible to participate in the Plan;
(iv) materially increase the benefits accruing to
Participants under the Plan; or
(v) extend the maximum option period under paragraph (b)
of Section 5 of the Plan.
(b) The Committee may amend the terms of any Award
theretofore granted, prospectively or retroactively, but, subject to Section 3
above, no such amendment shall impair the rights of any holder without his or
her consent.
SECTION 9. UNFUNDED STATUS OF PLAN.
The Plan is intended to constitute an "unfunded" plan for
incentive compensation. With respect to any payments not yet made to a
Participant or optionee by the Company, nothing contained herein shall give any
such Participant or optionee any rights that are greater than those of a
general creditor of the Company.
SECTION 10. CHANGE OF CONTROL.
The following acceleration and valuation provisions shall
apply in the event of a "Change of Control", as defined in paragraph (b) of
this Section 10:
(a) in the event of a "Change of Control," unless
otherwise determined by the Committee or the Board in writing at or after grant
(including under any individual agreement), but prior to the occurrence of such
Change of Control;
(i) any Stock Appreciation Rights outstanding for
at least six months and any Stock Options awarded under the Plan not previously
exercisable and vested shall become fully exercisable and vested;
(ii) the restrictions applicable to any Restricted
Stock or Deferred Stock awards under the Plan shall lapse, and such shares and
Awards shall be deemed fully vested;
(iii) any indebtedness incurred pursuant to Section
5(f) above shall be forgiven and the collateral pledged in connection with any
such loan shall be released; and
(iv) the value of all outstanding Stock Options,
Stock Appreciation Rights, Limited Stock Appreciation Rights, Restricted Stock
and Deferred Stock awards shall, to the extent determined by the Committee at
or after grant, be cashed out on the basis of the "Change of Control Price" (as
defined in paragraph (c) of this Section 10) as of the date the Change of
Control occurs or
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such other date as the Committee may determine prior to the Change of Control.
(b) For purposes of paragraph (a) of this Section 10, a
"Change of Control" shall be deemed to have occurred if;
(i) Any "person" (as such term is used in
Sections 13(d) and 14(d) of the Securities Exchange Act of 1934 (the "Exchange
Act") (other than the Company; any trustee or other fiduciary holding
securities under an employee benefit plan of the Company; or any company owned,
directly or indirectly, by the stockholders of the Company in substantially the
same proportions as their ownership of the Stock of the Company) is or becomes
the "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act),
directly or indirectly, of securities of the Company (not including in the
securities beneficially owned by such Person or any securities acquired
directly from the Company or its affiliates) representing 30% or more of the
combined voting power of the Company's then outstanding securities; or
(ii) during any period of two consecutive years
(not including any period prior to the Effective Date), individuals who at the
beginning of such period constitute the Board, and any new director (other than
a director designated by a person who has entered into an agreement with the
Company to effect a transaction described in clause (i), (iii) or (iv) of this
Section 10(b)) whose election by the Board or nomination for election by the
Company's shareholders was approved by a vote of at least two-thirds (2/3) of
the directors then still in office who either were directors at the beginning
of the period or whose election or nomination for election was previously so
approved, cease for any reason to constitute at least a majority thereof; or
(iii) the shareholders of the Company approve a
merger or consolidation of the Company with any other corporation, other than
(A) a merger or consolidation which would result in the voting securities of
the Company outstanding immediately prior thereto continuing to represent
(either by remaining outstanding or by being converted into voting securities
of the surviving entity), in combination with the ownership of any trustee or
other fiduciary holding securities under an employee benefit plan of the
Company, at least 75% of the combined voting power of the voting securities of
the Company or such surviving entity outstanding immediately after such merger
or consolidation or (B) a merger or consolidation effected to implement a
recapitalization of the Company (or similar transaction) in which no person
acquires more than 50% of the combined voting power of the Company's then
outstanding securities; or
(iv) the shareholders of the Company approve a
plan of complete liquidation of the Company or an agreement for the sale or
disposition by the Company of all or substantially all of the Company's assets.
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(c) For purposes of this Section 10, "Change of Control
Price" means the higher of (i) the highest price per share paid or offered in
any transaction related to a Change of Control of the Company or (ii) the
highest price per share paid in any transaction reported on the exchange or
national market system on which the Stock is listed, at any time during the
preceding sixty day period as determined by the Committee, except that, in the
case of Incentive Stock Options and Stock Appreciation Rights or Limited Stock
Appreciation Rights relating to Incentive Stock Options, such price shall be
based only on transactions reported for the date on which the Committee decides
to cash out such options.
SECTION 11. GENERAL PROVISIONS.
(a) The Committee may require each person purchasing
shares pursuant to a Stock Option to represent to and agree with the Company in
writing that such person is acquiring the shares without a view to distribution
thereof. The certificates for such shares may include any legend which the
Committee deems appropriate to reflect any restrictions on transfer.
All certificates for shares of Stock delivered under the Plan
shall be subject to such stock-transfer orders and other restrictions as the
Committee may deem advisable under the rules, regulations, and other
requirements of the Securities and Exchange Commission, any stock exchange upon
which the Stock is then listed, and any applicable Federal or state securities
law, and the Committee may cause a legend or legends to be placed on any such
certificates to make appropriate reference to such restrictions.
(b) Nothing contained in the Plan shall prevent the Board
from adopting other or additional compensation arrangements, subject to
shareholder approval if such approval is required; and such arrangements may be
either generally applicable or applicable only in specific cases. The adoption
of the Plan shall not confer upon any employee of the Company or any Subsidiary
any right to continued employment with the Company or a Subsidiary, as the case
may be, nor shall it interfere in any way with the right of the Company or a
Subsidiary to terminate the employment of any of its employees at any time.
(c) Each Participant shall, no later than the date as of
which the value of an Award first becomes includable in the gross income of the
Participant for Federal income tax purposes, pay to the Company, or make
arrangements satisfactory to the Committee regarding payment of, any Federal,
state, or local taxes of any kind required by law to be withheld with respect
to the Award. The obligations of the Company under the Plan shall be
conditional on such payment or arrangements, and the Company (and, where
applicable, its Subsidiaries) shall, to the extent permitted by law, have the
right to deduct any such taxes from any payment of any kind otherwise due to
the Participant.
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(d) No member of the Board or the Committee, nor any
officer or employee of the Company acting on behalf of the Board or the
Committee, shall be personally liable for any action, determination, or
interpretation taken or made in good faith with respect to the Plan, and all
members of the Board or the Committee and each and any officer or employee of
the Company acting on their behalf shall, to the extent permitted by law, be
fully indemnified and protected by the Company in respect of any such action,
determination or interpretation.
SECTION 12. SPECIFIC PERFORMANCE.
The Stock Options granted under this Plan and the Shares
issued pursuant to the exercise of such Stock Options cannot be readily
purchased or sold in the open market, and, for that reason among others, the
Company and its shareholders will be irreparably damaged in the event that this
Plan is not specifically enforced. In the event of any controversy concerning
the right or obligation to purchase or sell any such Option or Optioned Stock,
such right or obligation shall be enforceable in a court of equity by a decree
of a specific performance. Such remedy shall, however, be cumulative and not
exclusive, and shall be in addition to any other remedy which the parties may
have.
SECTION 13. INVALID PROVISION.
In the event that any provision of this Plan is found to be
invalid or otherwise unenforceable under any applicable law, such invalidity or
unenforceability shall not be construed as rendering any other provisions
contained herein invalid or unenforceable, and all such other provisions shall
be given full force and effect to the same extent as though the invalid
unenforceable provision was not contained herein.
SECTION 14. APPLICABLE LAW.
This Plan shall be governed by and construed in accordance
with the laws of the State of California.
SECTION 15. SUCCESSORS AND ASSIGNS.
This Plan shall be binding on and inure to the benefit of the
Company and the employees to whom an Option is granted hereunder, and such
employees' heirs, executors, administrators, legatees, personal
representatives, assignees and transferees.
SECTION 16. EFFECTIVE DATE OF PLAN.
The Plan became effective (the "Effective Date") on
_______________ ____, 1996.
SECTION 17. TERM OF PLAN.
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No Stock Option, Stock Appreciation Right, Deferred Stock or
Restricted Stock award shall be granted pursuant to the Plan on or after the
tenth anniversary of the Effective Date, but Awards theretofore granted may
extend beyond that date.
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IN WITNESS WHEREOF, pursuant to the due authorization and adoption of
this plan by the Board on the day and year first above written, the Company has
caused this Plan to be duly executed by its duly authorized officers.
KANI, INC.
By:______________________________
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Exhibit 10.11
CONTRIBUTION AGREEMENT
This CONTRIBUTION AGREEMENT (this "Agreement") entered into on
___________, __, 1996, is made effective as of the effective date of the
initial public offering of Common Stock on Registration Statement Form S-1 (the
"Effective Date") of Kani, Inc., a California corporation (the "Company"), by
and between the Company and Skechers USA, Inc. ("Skechers").
BACKGROUND
A. Skechers has agreed to contribute to the Company (i) the
master license agreement covering all products marketed and sold under the Karl
Kani brand name (the "Master License") and the sublicenses thereunder and (ii)
all of the operating assets and liabilities, but specifically excluding amounts
owed by the Company to Robert Greenberg, relating to the ongoing footwear
business conducted by Skechers to the extent such assets are used by Skechers
solely in the connection with the sale of products under the Karl Kani brand
name, together with the rights to certain customer lists (the "Kani Operations
Assets"), in exchange for 100% of the outstanding Common Stock of the Company.
B. This Agreement is intended to accomplish and memorialize the
above contributions and to provide certain operating agreements applicable to
the relationship between Skechers and the Company concerning the existing and
ongoing business of the Company.
NOW, THEREFORE, in consideration of the mutual covenants and
conditions hereof, the parties agree as follows:
1. Contribution.
(a) On the Effective Date, Skechers shall transfer to the
Company the Master License Agreement and the Kani Operations Assets as set
forth on Schedule A attached hereto. In consideration therefor, the Company
hereby covenants that on the Effective Date, it shall issue or cause to be
issued to Skechers 100% of its outstanding Common Stock.
(b) Heller Financial, Inc. ("Heller") extended a credit
facility to Skechers to fund the operations of Skechers (including the
operations of the Company as a division of Skechers) with an outstanding
principal amount of $_________ as of the date hereof (the "Heller Loan").
Effective as of the Effective Date, the Heller Loan will be terminated and the
following will occur: (i) Skechers and Heller will enter into a credit
facility with similar terms and conditions as the Heller Loan for an aggregate
amount of $__________ (representing ___% of the principal amount of the Heller
Loan), such amount to be secured
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by the assets of Skechers and (ii) the Company and Heller will enter into a
credit facility with similar terms and conditions as the Heller Loan for an
aggregate amount of $_________ (representing ___% of the principal amount of
the Heller Loan), such amount to be secured by the assets of the Company.
2. Transfer of Stock, Operations and Assets.
(a) Effective as of the Effective Date, Skechers conveys,
assigns, transfers and delivers to the Company and the Company hereby acquires
from Skechers all of its right, title and interest in and to the Kani
Operations Assets. Skechers not shall use the following name in business:
Kani, Inc.; provided, however, nothing herein shall limit Skechers from the use
of its name or initials in any way.
(b) The contributions under subsection (a) above shall only
be effective upon, on the Effective Date, the issuance by the Company to
Skechers of all of its outstanding Common Stock.
3. Employees.
(a) Six employees of Skechers will become employees of
the Company, effective as of the Effective Date. The employees are set forth
on Schedule B attached hereto.
4. Indemnification.
(a) Skechers shall indemnify and hold harmless the Company
against and in respect of any and all damages, claims, losses, liabilities and
expenses incurred by the Company which arise out of or relate to (i) any breach
or violation of this Agreement by Skechers, (ii) any breach of any of the
representations or warranties made in this Agreement by Skechers and (iii) the
ownership and use of the Kani Operations Assets prior to the Effective Date.
(b) The Company shall indemnify and hold harmless
Skechers against and in respect of any and all damages, claims, losses,
liabilities and expenses incurred by Skechers which arise out of or relate to
(i) any breach or violation of this Agreement by the Company, (ii) any breach
of any of the representations or warranties made in this Agreement by the
Company and (iii) the ownership and use of the Kani Operations Assets on or
after the Effective Date.
5. Representations, Warranties and Covenants of Skechers.
Skechers represents, warrants, and covenants to the Company as follows:
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(a) There is no material dispute, grievance, controversy
or strike pending or, to the best of the knowledge and belief of Skechers,
threatened against Skechers and related to the Kani Operations Assets.
(b) There are no actions, suits or proceedings pending,
except as may be filed but not served of which Skechers has no knowledge, or,
to the best knowledge of Skechers, threatened, against or affecting Skechers,
or any of its properties or businesses, at law or in equity, or before or by
any United States, state, local or foreign governmental department, commission,
board, bureau, agency or instrumentality, which relate to the Kani Operations
Assets. Skechers is not subject to any order, writ, injunction or decree of
any court or governmental agency or body, domestic or foreign, relating to the
operation of the Kani Operations Assets.
(c) Skechers is not as of the date hereof and, as a
result of the transactions contemplated hereby, will not be as of the Effective
Date in violation of any law, rule, regulation, ordinance, code or order of any
governmental authority relating to the ownership and use of the Kani Operations
Assets. All governmental licenses, permits, approvals, authorizations and
consents have been obtained as are required to own or lease the assets of and
conduct the business of Kani Operations Assets as currently conducted and in
order to carry out the transactions contemplated hereby.
(d) Skechers has full power to own or lease the Kani
Operations Assets, as now owned or leased, to own or lease the assets of and
carry out the business of the Company, to enter into this Agreement and to
carry out their respective obligations hereunder. The execution and delivery
of this Agreement, and the consummation of the transactions contemplated
hereby, have been duly authorized by all necessary action required on the part
of Skechers. When executed by the parties hereto, this Agreement will
constitute the valid and legally binding obligation of Skechers, enforceable
against Skechers in accordance with its terms, except as such enforceability
may be limited by insolvency, reorganization, moratorium or other similar laws
of general application relating to or affecting the enforcement of creditors'
rights and by general equitable principles.
(e) Neither the execution and delivery of this Agreement
nor the consummation of the transactions contemplated hereby will violate, or
conflict with, or result in a breach of any provisions of, or constitute a
default (or an event which, with notice or lapse of time or both, would
constitute a default) under, any of the terms, conditions or provisions of any
agreement, lease or other instrument or obligation to which Skechers is a party
or by which it is bound or violate any law, regulation, interpretation order,
writ, injunction or decree applicable to Skechers or any of its properties or
assets.
(f) Upon consummation of the transactions contemplated by
this Agreement, the Company will have good and marketable title in and to the
Kani Operations Assets free and clear of all liens, charges or encumbrances,
except (i) liens for taxes not yet
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due, (ii) mechanics' and similar liens, (iii) liens in the ordinary course of
business not material in nature, and (iv) unknown liens which, if discovered,
shall be satisfied prior to the Effective Date.
6. Notice. All notices, requests, demands and other
communications provided for hereunder shall be in writing (including
telegraphic or facsimile communications) and shall be mailed (return receipt
requested), telegraphed, sent by facsimile or delivered to each party at the
address set forth as follows, or at such other address as either party may
designate by notice to the other, and any such notice, request, demand or other
communication shall be effective upon receipt.
If to Skechers: Skechers USA, Inc.
228 Manhattan Beach Blvd., Suite 200
Manhattan Beach, CA 90266
Telephone: (310) 318-3100
Facsimile: (310) 318-5019
Attention: Robert Greenberg
Chief Executive Officer
If to the Company: Kani, Inc.
228 Manhattan Beach Blvd., Suite 200
Manhattan Beach, CA 90266
Telephone: (310)
Facsimile: (310)
Attention:
7. Miscellaneous. Any provision of this Agreement which is
prohibited or unenforceable in any applicable jurisdiction shall, as to such
jurisdiction, not be in effect to the extent of such prohibition or
unenforceability without invalidating the remaining provisions hereof or
thereof or affecting the validity or enforceability of such provision in any
other jurisdiction. No amendment or waiver of any provision of this Agreement,
nor consent to any departure by either party therefrom, shall in any event be
effective unless the same shall be in writing and signed by an authorized
representative of the other party and any such waiver or consent shall be
effective only in the specific instance and for the specific purpose for which
it is given. All rights and remedies of the parties hereunder shall, except as
otherwise specifically provided herein, be cumulative and non-exclusive of any
rights or remedies which either may have under any other agreement or
instrument, by operation of law, or otherwise. This Agreement shall become
effective when it is executed by all parties and thereafter shall be binding
upon and inure to the benefit of the parties and their respective successors
and assigns, except that the Company shall not have the right to assign its
rights, obligations or interests hereunder without the prior written consent of
Skechers. This Agreement shall be governed by and construed in accordance with
the laws of the State of California applicable to contracts made and performed
in said State.
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8. Attorneys' Fees. In the event of any dispute arising out of
or in connection with this Agreement, and any documents executed pursuant
hereto, the prevailing party, in addition to any other amounts which it may be
entitled to, shall be entitled to recover from the other party reasonable
attorneys' fees and court costs as shall be awarded in the resolution of such
dispute.
9. Reference Provision.
(a) Each controversy, dispute or claim between the
parties arising out of or relating to this Agreement, which controversy,
dispute or claim is not settled in writing within thirty (30) days after the
"Claim Date" (defined as the date on which a party subject to the Agreement
gives written notice to all other parties that a controversy, dispute or claim
exists), will be settled by a reference proceeding in Los Angeles County,
California, in accordance with the provisions of Section 638 et seq. of the
California Code of Civil Procedure, or their successor section ("CCP"), which
shall constitute the exclusive remedy for the settlement of any controversy,
dispute or claim concerning this Agreement, including whether such controversy,
dispute or claim is subject to the reference proceeding and the parties waive
their rights to initiate any legal proceedings against each other in any court
or jurisdiction other than the Superior court of Los Angeles County (the
"Court"). The referee shall be a retired Judge of the Court selected by mutual
agreement of the parties, and if they cannot so agree within forty-five (45)
days after the Claim Date, the referee shall be promptly selected by the
Presiding Judge of the Los Angeles County Superior Court (or his
representative). The referee shall be appointed to sit as a temporary judge,
with all of the powers for a temporary judge, as authorized by law, and upon
selection should take and subscribe to the oath of office as provided for in
Rule 244 of the California Rules of Court (or any subsequently enacted Rule).
Each party shall have one preemptory challenge pursuant to CCP 170.6. The
referee shall (a) be requested to set the matter for hearing within sixty (60)
days after the Claim Date and (b) try any and all issues of law or fact and
report a statement of decision upon them, if possible, within ninety (90) days
of the Claim Date. Any decision rendered by the referee will be final, binding
and conclusive and judgment shall entered pursuant to CCP 644 in any court in
the State of California having jurisdiction. Any party may apply for a
reference at any time after thirty (30) days following notice to any other
party of the nature of the controversy, dispute or claim, by filing a petition
for a hearing and/or trial. All discovery permitted by this Agreement shall be
completed no later than fifteen (15) days before the first hearing date
established by the referee. The referee may extend such period in the event of
a party's refusal to provide requested discovery for any reason whatsoever,
including, without limitation, legal objections raised to such discovery or
unavailability of a witness due to absence or illness. No party shall be
entitled to "priority" in conducting discovery. Depositions may be taken by
either party upon seven (7) days written notice, and, request for production or
inspection of documents shall be responded to within ten (10) days after
service. All disputes relating to discovery which cannot be resolved by the
parties shall be submitted to the referee whose decision shall be final and
binding upon the parties.
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(b) Except as expressly set forth in this Agreement, the
referee shall determine the manner in which the reference proceeding is
conducted including the time and place of all hearings, the order of
presentation of evidence, and all other questions that arise with respect to
the course of the reference proceeding. All proceedings and hearings conducted
before the referee, except for trial, shall be conducted without a court
reporter, except that when any party so requests, a court reporter will be used
at any hearing conducted before the referee. The party making such a request
shall have the obligation to arrange for and pay for the court reporter. The
costs of the court reporter at the trial shall be borne equally by the parties.
(c) The referee shall be required to determine all issues
in accordance with existing case law and the statutory laws of the State of
California. The rules of evidence applicable to proceedings at law in the
State of California will be applicable to the reference proceeding. The
referee shall be empowered to enter equitable as well as legal relief, to
provide all temporary and/or provisional remedies and to enter equitable orders
that will be binding upon the parties. The referee shall issue a single
judgment at the close of the reference proceeding which shall dispose of all of
the claims of the parties that are the subject of the reference. The parties
hereto expressly reserve the right to contest or appeal from the final judgment
or any appealable order or appealable judgment entered by the referee. The
parties hereto expressly reserve the right to findings of fact, conclusions of
law, a written statement of decision, and the right to move for a new trial or
a different judgment, which new trial, if granted, is also to be a reference
proceeding under this provision.
(d) In the event that the enabling legislation which
provides for appointment of a referee is repealed (and no successor statute is
enacted), any dispute between the parties that would otherwise be determined by
the reference procedure herein described will be resolved and determined by
arbitration. The arbitration will be conducted by a retired judge of the Los
Angeles County Superior Court, in accordance with the California Arbitration
Act, Sections 1280 through 1294.2 of the CCP as amended from time to time. The
limitations with respect to discovery as set forth hereinabove shall apply to
any such arbitration proceeding.
10. Counterparts. This Agreement may be executed in any number of
counterparts, each of which when so executed shall be deemed an original, and
which taken together shall constitute one and the same instrument.
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IN WITNESS WHEREOF, this Agreement is executed on behalf of the
parties by duly authorized representatives as of the date first above written.
KANI, INC.
a California corporation
By:_______________________________
Name: David Weinberg
Title: Chief Financial Officer
SKECHERS USA, INC.
a California corporation
By:_______________________________
Name: Robert Greenberg
Title: Chief Executive Officer
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SCHEDULE A
See attached.
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SCHEDULE B
See attached.
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Exhibit 10.12
INDEMNIFICATION AGREEMENT
This Indemnification Agreement, dated effective as of
__________, 1995, is made by and between KANI, INC., a California corporation
(the "Company"), and ___________________ (the "Indemnitee").
RECITALS
A. The Company is aware that competent and experienced
persons are increasingly reluctant to serve as directors or officers of
corporations unless they are protected by comprehensive liability insurance or
indemnification, due to increased exposure to litigation costs and risks
resulting from their service to such corporations, and due to the fact that the
exposure frequently bears no reasonable relationship to the compensation of
such directors and officers;
B. The statutes and judicial decisions regarding the
duties of directors and officers are often difficult to apply, ambiguous or
conflicting, and therefore fail to provide such directors and officers with
adequate, reliable knowledge of legal risks to which they are exposed or
information regarding the proper course of action to take;
C. Plaintiffs often seek damages in such large amounts
and the costs of litigation may be so enormous (whether or not the case is
meritorious), that the defense and/or settlement of such litigation is often
beyond the personal resources of officers and directors;
D. The Company believes that it is unfair for its
directors and officers to assume the risk of huge judgments and other expenses
which may occur in cases in which the director or officer received no personal
profit and in cases where the director or officer was not culpable;
E. The Company recognizes that the issues in controversy
in litigation against a director or officer of a corporation such as the
Company are often related to the knowledge, motives and intent of such director
or officer, that such director or officer is usually the only witness with
knowledge of the essential facts and exculpating circumstances regarding such
matters and that the long period of time which usually elapses before the trial
or other disposition of such litigation often extends beyond the time that the
director or officer can reasonably recall such matters; and may extend beyond
the normal time for retirement for such director or officer with the result
that such director or officer, after retirement or in the event of such
director's death, his spouse, heirs executors or administrators, may be faced
with
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<PAGE> 2
limited ability and undue hardship in maintaining an adequate defense, which
may discourage such director or officer from serving in that position;
F. Based upon their experience as business managers, the
Board of Directors of the Company (the "Board") has concluded that, to retain
and attract talented and experienced individuals to serve as officers and
directors of the Company and its subsidiaries and to encourage such individuals
to take the business risks necessary for the success of the Company and its
subsidiaries, it is necessary for the Company to contractually indemnify its
officers and directors, and to assume for itself maximum liability for expenses
and damages in connection with claims against such officers and directors in
connection with their service to the Company, and has further concluded that
the failure to provide such contractual indemnification could result in great
harm to the Company and its subsidiaries and the Company's shareholders;
G. Sections 204 and 317 of the California Corporations
Code (the "Corporations Code"), under which the Company is organized, empowers
the Company to indemnify its officers, directors, employees and agents by
agreement and to indemnify persons who serve, at the request of the Company as
the directors, officers, employees or agents of other corporations,
partnerships, joint ventures, trusts or enterprises;
H. The Articles of Incorporation of the Company provide
that the directors and officers of the Company shall be indemnified by the
Company to the fullest extent permitted by the Corporations Code;
I. The Company, after reasonable investigation prior to
the date hereof, has determined that the liability insurance coverage available
to the Company as of the date hereof is inadequate and/or unreasonably
expensive. The Company believes, therefore, that the interest of the Company's
shareholders would best be served by a combination of such insurance as the
Company may obtain, pursuant to the Company's obligations hereunder and the
indemnification by the Company of the directors and officers of the Company;
J. The Company desires and has requested the Indemnitee
to serve or continue to serve as a director and/or officer of the Company free
from undue concern for claims for damages arising out of or related to such
services to the Company; and
K. The Indemnitee is willing to serve, or to continue to
serve, the Company, provided that the Indemnitee is furnished the indemnity
provided for herein.
2
<PAGE> 3
AGREEMENT
NOW, THEREFORE, the parties hereto, intending to be legally
bound, hereby agree as follows:
1. Definitions.
(a) Agent. For the purpose of this Agreement,
"agent" of the Company means any person who is or was a director, officer,
employee or other agent of the Company or a subsidiary of the Company; or is or
was serving at the request of, for the convenience of, or to represent the
interests of the Company or a subsidiary of the Company as a director, officer,
employee or agent of another foreign or domestic corporation, partnership,
joint venture, trust or other enterprise.
(b) Expenses. For purposes of this Agreement,
"expenses" includes all direct and indirect costs of any type or nature
whatsoever (including, without limitation, all attorneys' fees and related
disbursements, other out-of-pocket costs and reasonable compensation for time
spent by the Indemnitee for which he is not otherwise compensated by the
Company or any third party) actually and reasonably incurred by the Indemnitee
in connection with the investigation, defense or appeal of a proceeding or in
establishing or enforcing a right to indemnification under this Agreement or
Section 317, or in settling or otherwise disposing of a pending action provided
court approval is obtained, or otherwise.
(c) Proceeding. For the purposes of this Agreement,
"proceeding" means any threatened, pending, or completed action, suit or other
proceeding, whether civil, criminal, administrative, or investigative.
2. Agreement to Serve. The Indemnitee agrees to serve
and/or continue to serve as an agent of the Company, at its will (or under
separate agreement, if such agreement exists), in the capacity Indemnitee
currently serves as an agent of the Company, so long as he is duly appointed or
elected and qualified in accordance with the applicable provisions of the
Bylaws of the Company or until such time as the Indemnitee tenders the
Indemnitee's resignation in writing; provided, however, that nothing in this
Agreement is intended to create any right to continued employment by
Indemnitee.
3. Maintenance of Liability Insurance.
(a) The Company hereby covenants and agrees that, so
long as the Indemnitee shall continue to serve as an agent of the Company and
thereafter so long as the Indemnitee shall be subject to any possible
proceeding by reason of the fact that the Indemnitee was an agent of the
Company, the
3
<PAGE> 4
Company, subject to Section 3(c), shall promptly obtain and maintain in full
force and effect directors' and officers' liability insurance ("D&O Insurance")
in reasonable amounts from established and reputable insurers.
(b) In all policies of D&O Insurance, the Indemnitee
shall be named as an insured in such a manner as to provide the Indemnitee the
same rights and benefits as are accorded to the most favorably insured of the
Company's directors, if the Indemnitee is a director; or of the Company's
officers, if the Indemnitee is not a director of the Company but is an officer;
or of the Company's key employees, if the Indemnitee is not an officer or
director but is a key employee.
(c) Notwithstanding the foregoing, the Company shall
have no obligation to obtain or maintain D&O Insurance if the Company
determines in good faith that such insurance is not reasonably available, the
premium costs for such insurance are disproportionate to the amount of coverage
provided, the coverage provided by such insurance is limited by exclusions so
as to provide an insufficient benefit, or the Indemnitee is covered by similar
insurance maintained by a subsidiary of the Company.
4. Mandatory Indemnification. Subject to 4(d) and (e) below,
the Company shall indemnify the Indemnitee:
(a) Third Party Actions. If the Indemnitee is a
person who was or is a party or is threatened to be made a party to any
proceeding (other than action by or in the right of the Company) by reason of
the fact that he is or was an agent of the Company, or by reason of anything
done or not done by him in any such capacity, against any and all expenses and
liabilities of any type whatsoever (including, but not limited to, judgments,
fines, ERISA excise taxes or penalties and amounts paid in settlement) actually
and reasonably incurred by him in connection with the investigation, defense,
settlement or appeal of such proceeding; and
(b) Derivative Actions. If the Indemnitee is a
person who was or is a party or is threatened to be made a party to any
proceeding by or in the right of the Company to procure a judgment in its favor
by reason of the fact that he is or was an agent of the Company, or by reason
of anything done or not done by him in any such capacity, against any and all
expenses actually and reasonably incurred by him in connection with the
investigation, defense, settlement, or appeal of such proceeding; and
(c) Actions Where Indemnitee is Deceased. If the
Indemnitee is a person who was or is a party or is threatened to be made a
party to any proceeding by reason of the fact that he is or was an agent of the
Company, or by reason of
4
<PAGE> 5
anything done or not done by him in any such capacity, against any and all
expenses and liabilities of any type whatsoever (including, but not limited to,
judgments, fines, ERISA excise taxes and penalties, and amounts paid in
settlement) actually and reasonably incurred by or for him in connection with
the investigation, defense, settlement or appeal of such proceeding and, prior
to, during the pendency or after completion of such proceeding Indemnitee is
deceased.
(d) Limitations Imposed by Sections 204 and 317.
Notwithstanding the foregoing, the Company shall not be obligated to indemnify
the Indemnitee as to circumstances in which indemnity is expressly prohibited
by Section 317 of the Corporations Code, or if the Indemnitee is a director,
for any acts or omissions from which a director may not be relieved of
liability as set forth in Section 204 of the Corporations Code.
(e) Expenses Paid by Insurance. Notwithstanding the
foregoing, the Company shall not be obligated to indemnify the Indemnitee for
expenses or liabilities of any type whatsoever (including, but not limited to,
judgments, fines, ERISA excise taxes or penalties, and amounts paid in
settlement) which have been paid directly to Indemnitee by D&O Insurance.
5. Partial Indemnification. If the Indemnitee is entitled
under any provision of this Agreement to indemnification by the Company for
some or a portion of any expense or liabilities of any type whatsoever
(including, but not limited to, judgments, fines, ERISA excise taxes or
penalties, and amounts paid in settlement) incurred by him in the
investigation, defense, settlement or appeal of a proceeding but not entitled,
however, to indemnification for all of the total amount thereof, the Company
shall nevertheless indemnify the Indemnitee for such total amount except as to
the portion thereof to which the Indemnitee is not entitled.
6. Mandatory Advancement of Expenses. Subject to Section
10(a) below, the Company shall advance all expenses incurred by the Indemnitee
in connection with the investigation, defense, settlement or appeal of any
proceeding to which the Indemnitee is a party or is threatened to be made a
party by reason of the fact that the Indemnitee is or was an agent of the
Company. Indemnitee hereby undertakes to repay such amounts advanced only if,
and to the extent that, it shall be determined ultimately that the Indemnitee
is not entitled to be indemnified by the Company as authorized hereby. The
advances to be made hereunder shall be paid by the Company to the Indemnitee
within twenty (20) days following delivery of a written request therefor by the
Indemnitee to the Company.
5
<PAGE> 6
7. Notice and Other Indemnification Procedures.
(a) Promptly after receipt by the Indemnitee of
notice of the commencement of or the threat of commencement of any proceeding,
the Indemnitee shall, if the Indemnitee believes that indemnification with
respect thereto may be sought from the Company under this Agreement, notify the
Company of the commencement or threat of commencement thereof; provided,
however, that failure of Indemnitee to provide such notice will not relieve the
Company of its liability hereunder if the Company receives notice of such
proceeding from any other source.
(b) If, at the time of the receipt of a notice of
the commencement of a proceeding pursuant to Section 7(a) hereof, the Company
has D&O Insurance in effect, the Company shall give prompt notice of the
commencement of such proceeding to the insurers in accordance with the
procedures set forth in the respective policies. The Company shall thereafter
take all necessary or desirable action to cause such insurers to pay, on behalf
of the Indemnitee, all amounts payable as a result of such proceeding in
accordance with the terms of such policies.
(c) In the event the Company shall be obligated to
pay the expenses of any proceeding against the Indemnitee, the Company, if
appropriate, shall be entitled to assume the defense of such proceeding, with
counsel approved by the Indemnitee, upon the delivery to the Indemnitee of
written notice of its election so to do. After delivery of such notice,
approval of such counsel by the Indemnitee and the retention of such counsel by
the Company, the Company will not be liable to the Indemnitee under this
Agreement for any fees of counsel subsequently incurred by the Indemnitee with
respect to the same proceeding except for reasonable costs of investigation,
provided that (i) the Indemnitee shall have the right to employ his counsel in
any such proceeding at the Indemnitee's expense; and (ii) if (A) the employment
of counsel by the Indemnitee has been previously authorized by the Company, (B)
the Indemnitee shall have reasonably concluded that there may be a conflict of
interest between the Company and the Indemnitee in the conduct of any such
defense or (C) the Company shall not, in fact, have employed counsel to assume
the defense of such proceeding, the fees and expenses of Indemnitee's counsel
shall be at the expense of the Company.
8. Enforcement. Any right to indemnification or advances
granted by this Agreement to Indemnitee shall be enforceable by or on behalf of
Indemnitee in any court of competent jurisdiction if (a) the claim for
indemnification or advances is denied, in whole or in part, or (b) no
disposition of such claim is made within ninety (90) days of request therefor.
Indemnitee, in such enforcement action, if successful in whole or in part,
shall be entitled to be paid also the
6
<PAGE> 7
expense of prosecuting his claim. It shall be a defense to any action for
which a claim for indemnification is made under this Agreement (other than an
action brought to enforce a claim for expenses pursuant to Section 6 hereof,
provided that the required undertaking has been tendered to the Corporation)
that Indemnitee is not entitled to indemnification because of the limitations
set forth in Sections 4(d) and 10 hereof. Neither the failure of the
Corporation (including its Board of Directors or its shareholders) to have made
a determination prior to the commencement of such enforcement action that
indemnification of Indemnitee is proper in the circumstances, nor an actual
determination by the Corporation (including its Board of Directors or its
stockholders) that such indemnification is improper shall be a defense to the
action or create a presumption that Indemnitee is not entitled to
indemnification under this Agreement or otherwise.
9. Shareholder Ratification. Unless the form of this
Agreement has been approved by the shareholders of the Company, this Agreement
shall be expressly subject to ratification by such shareholders. If the form
of this Agreement is not so ratified and/or approved by such shareholders
before the effective date of this Agreement, or within one year after the
effective date hereof, this Agreement shall be void.
10. Exceptions. Any other provision herein to the
contrary notwithstanding, the Company shall not be obligated pursuant to the
terms of this Agreement:
(a) Claims Initiated by Indemnitee. To indemnify or
advance expenses to the Indemnitee with respect to proceedings or claims
initiated or brought voluntarily by the Indemnitee and not by way of defense,
except with respect to proceedings brought to establish or enforce a right to
indemnification under this Agreement or any other statute or law or otherwise
as required under Section 317, but such indemnification or advancement of
expenses may be provided by the Company in specific cases if the Board of
Directors finds it to be appropriate; or
(b) Lack of Good Faith. To indemnify the Indemnitee
for any expenses incurred by the Indemnitee with respect to any proceeding
instituted by the Indemnitee to enforce or interpret this Agreement, if a court
of competent jurisdiction determines that each of the material assertions made
by the Indemnitee in such proceeding was not made in good faith or was
frivolous; or
(c) Unauthorized Settlements. To indemnify the
Indemnitee under this Agreement for any amounts paid in settlement of a
proceeding unless the Company consents to such settlement, which consent shall
not be unreasonably withheld.
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<PAGE> 8
11. Non-exclusivity. The provisions for indemnification
and advancement of expenses set forth in this Agreement shall not be deemed
exclusive of any other rights which the Indemnitee may have under any provision
of law, the Company's Articles of Incorporation or Bylaws, the vote of the
Company's shareholders or disinterested directors, other agreements, or
otherwise, both as to action in his official capacity and to action in another
capacity while occupying his position as an agent of the Company, and the
Indemnitee's rights hereunder shall continue after the Indemnitee has ceased
acting as an agent of the Company and shall inure to the benefit of the heirs,
executors and administrators of the Indemnitee.
12. Interpretation of Agreement. It is understood that the
parties hereto intend this Agreement to be interpreted and enforced so as to
provide indemnification to the Indemnitee to the fullest extent permitted by
law.
13. Severability. If any provision or provisions of this
Agreement shall be held to be invalid, illegal or unenforceable for any reason
whatsoever, (a) the validity, legality and enforceability of the remaining
provisions of the Agreement (including without limitation, all portions of any
paragraphs of this Agreement containing any such provision held to be invalid,
illegal or unenforceable, that are not themselves invalid, illegal or
unenforceable) shall not in any way be affected or impaired thereby, and (b) to
the fullest extent possible, the provisions of this Agreement (including,
without limitation, all portions of any paragraph of this Agreement containing
any such provision held to be invalid, illegal or unenforceable, that are not
themselves invalid, illegal or unenforceable) shall be construed so as to give
effect to the intent manifest by the provision held invalid, illegal or
unenforceable and to give effect to Section 12 hereof.
14. Modification and Waiver. No supplement, modification or
amendment of this Agreement shall be binding unless executed in writing by both
of the parties hereto. No waiver of any of the provisions of this Agreement
shall be deemed or shall constitute a waiver of any other provisions hereof
(whether or not similar) nor shall such waiver constitute a continuing waiver.
15. Successors and Assigns. The terms of this Agreement
shall bind, and shall inure to the benefit of, the successors and assigns of
the parties hereto.
16. Notices. All notices, requests, demands and other
communications provided for hereunder shall be in writing (including
telegraphic or facsimile communications) and shall be mailed (return receipt
requested), telegraphed, sent by facsimile or delivered to each party at the
address set forth as follows, or at such other address as either party may
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<PAGE> 9
designate by notice to the other, and any such notice, request, demand or other
communication shall be effective upon receipt. All payments required in this
Agreement shall be paid to and delivered to the party as provided herein for
notice.
Company: Kani, Inc.
228 Manhattan Beach Boulevard
Suite 200
Manhattan, CA 90266
Attention: Robert Greenberg
Chief Executive Officer
Indemnitee: _______________________________
_______________________________
_______________________________
17. Governing Law. This Agreement shall be governed
exclusively by and construed according to the laws of the State of California
as applied to contracts between California residents entered into and to be
performed entirely within California.
18. Consent to Jurisdiction. The Company and the Indemnitee
each hereby irrevocably consent to the jurisdiction of the courts of the State
of California for all purposes in connection with any action or proceeding
which arises out of or relates to this Agreement and agree that any action
instituted under this Agreement shall be brought only in the state court of the
State of California.
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<PAGE> 10
The parties hereto have entered into this Indemnification
Agreement effective as of the date first above written.
"Company"
KANI, INC.
By:______________________________
Name:
Title:
"Indemnitee"
_________________________________
_________________________________
(Print Name)
10
<PAGE> 1
EXHIBIT 10.13
[Heller Financial letterhead]
HAND DELIVERED
October 11, 1996
Mr. Robert Greenberg
Skechers U.S.A., Inc.
228 Manhattan Beach Boulevard, Suite 200
Manhattan Beach, California 90266
Re: Proposed Credit Facility for Kani, Inc.
Dear Robert:
The Western Division of the Current Asset Management Group of Heller Financial,
Inc. ("Heller") is pleased to advise you that the Executive Portfolio Committee
of Heller has approved a credit facility (the "Credit Facility") in an
aggregate principal amount not to exceed $12,000,000. The Credit Facility will
be provided to a corporation to be formed which is to be named Kani, Inc.
("Borrower") to which Skechers U.S.A., Inc. ("Skechers") will contribute the
master licensing agreement covering all products marketed and sold under the
Kani brand name and all of the operating assets of the Kani operating division
of Skechers in exchange for shares representing 100% of the common stock of
Borrower. The Credit Facility will be used to provide working capital financing
for Borrower and to provide funds for other general corporate purposes of
Borrower.
I. TERMS OF THE CREDIT FACILITY
A. The Revolving Loan.
Heller will make available to Borrower a revolving loan (the "Revolver") in an
aggregate principal amount not to exceed $12,000,000 (the "Maximum Revolver
Amount").
<PAGE> 2
Mr. Robert Greenberg
Skechers U.S.A., Inc.
Page 2
- -------------------------------------------------------------------------
[Heller Financial logo]
Availability under the Revolver will be determined by reference to a borrowing
base which will consist of up to eighty percent (80%) of the gross amount of
"Eligible Accounts" and up to fifty percent (50%) of the value of "Eligible
Inventory", as such terms will be defined in the documentation evidencing the
Credit Facility (the "Credit Agreement"). The Revolver will have a term of
three (3) years commencing on the closing date of the Credit Facility (the
"Closing Date"). The facility will include a sublimit for inventory advances in
the amount of $5,000,000.
B. Letter of Credit Guaranties
Heller will issue guarantees, in an aggregate amount not to exceed $5,000,000
(the "Maximum L/C Guaranty Amount"), of Borrower's obligations to certain banks
acceptable to Heller that issue Letters of Credit for the benefit of Borrower's
suppliers, provided that such Letters of Credit, including the amount and
terms, are acceptable to Heller; and further provided, that the aggregate
amount of such guaranties outstanding at any time which have been issued by
Heller with respect to any usance Letters of Credit (any Letter of Credit that
provides for payment on a maturity date that is at least thirty (30) days after
the date such Letter of Credit is presented for acceptance) shall not exceed
$3,500,000.
C. Interest.
Borrower will be required to pay Heller interest monthly on the outstanding
daily principal balance of the Revolver at a floating rate of interest per
annum equal to the Base Rate (hereafter defined) plus three-quarters of one
percent (.75%).
As used herein, "Base Rate" means a fluctuating rate of interest per annum
equal to, on any day, the rate of interest from time to time announced by Bank
of America National Trust and Savings Association as its prime rate reference
rate or base rate.
<PAGE> 3
Mr. Robert Greenberg
Skechers U.S.A., Inc.
Page 3
- ------------------------------------------------------------------------
[HELLER FINANCIAL LOGO]
Interest will be billed and paid monthly in arrears, commencing the first day
of the month following the initial funding under the Credit Facility, and will
be calculated daily on the basis of a 360-day year for the actual number of days
elapsed.
D. Collection Clearance Charge.
Borrower will be required to pay to Heller each month, in addition to interest,
a collection clearance charge computed as follows: (a) total collections on
accounts for the month, multiplied by (b) three days, multiplied by (c) the
interest rate, divided by (d) 360 days.
E. Security.
Borrower's obligations to Heller under the Credit Facility will be secured by a
first priority, senior, valid and perfected security interest in and lien upon
all of Borrower's personal property of every type and description, whether now
owned or hereafter acquired and wherever located (collectively, the
"Collateral"). Liens in favor of persons other than Heller will be prohibited,
except as otherwise permitted in accordance with the terms of the Credit
Agreement.
F. Collections.
All of Borrower's customers would be directed to make all payments to a lock
box at a bank acceptable to Heller for forwarding to a Heller depository
account. Such funds shall be applied to Borrower's obligations.
G. Line Fees.
Borrower will pay Heller a monthly Line Fee in an amount equal to (a) one
percent (1.0%) multiplied by the Maximum L/C Guaranty Amount; plus (b) one-half
of one percent (.50%) multiplied by an amount equal to (i) the Maximum
Revolving
<PAGE> 4
Mr. Robert Greenberg
Skechers U.S.A., Inc.
Page 4
- --------------------------------------------------------------------------
[Heller Financial logo]
Loan Amount Less (ii) the Maximum L/C Guaranty Amount; divided by (c) twelve
(12)
H. Financial Covenants.
Borrower will be required to maintain, on the Closing Date and as at the end of
each month, Tangible Net Worth of at least $10,000,000, Working Capital of at
least $7,000,000 and a Ratio of Indebtedness to Tangible Net Worth no greater
than 4:1. All capitalized terms used in this paragraph shall have the meanings
customarily assigned to such terms by Heller.
I. Reporting Requirements.
Borrower will be required to deliver to Heller annual audited and monthly
internal financial statements and annual projections.
Borrower will also be required to deliver to Heller weekly borrowing base
certificates, weekly accounts receivable agings, monthly detailed inventory
reports and monthly gross profit reports.
II. GENERAL CONDITIONS TO THE CREDIT FACILITY
A. Credit Facility Documentation.
The Credit Facility is subject to negotiation, preparation and execution of
formal loan documentation, fully acceptable to Heller, and its respective
counsel. The documentation will contain such terms, conditions,
representations, warranties, covenants and events of default customary for
loans of this type as Heller may require. Warranties will include, but not be
limited to, evidence satisfactory to Heller that (i) the financial condition of
Borrower is as represented, (ii) Borrower is solvent, able to meet its
obligations as they mature and has sufficient capital to enable it to
profitably operate its business, (iii) Borrower has complied with all
applicable laws, statutes, regulations and orders in connection with the
financing arrangements and
<PAGE> 5
Mr. Robert Greenberg
Skechers U.S.A., Inc.
Page 5
- --------------------------------------------------------------------------
iv) no material adverse changes in the collateral or the financial condition or
projected cash flows of Borrower has occurred. The Credit Facility shall be the
only debt allowed to be incurred by the Borrower following the Closing Date
except for specific amounts of other indebtedness which will be specified in
the Credit Agreement.
B. Regulatory Matters; Compliance with Laws.
Heller and its counsel must be satisfied that Borrower has been duly
incorporated, that the initial public offering of shares of Borrower's stock
(the "IPO") has been consummated, that Robert Greenberg is an officer of
Borrower, and that Borrower has complied with all federal and state laws, rules
and regulations pertaining to Borrower's business and pertaining to the
financing and has taken all requisite corporate action with respect to the
financing.
C. Costs and Expenses.
Borrower shall pay all reasonable and customary costs, fees and expenses
incurred or to be incurred by Heller in connection with the documentation
and/or closing of this transaction, whether or not the transaction described
herein is consummated.
D. Capital, Organizational and Legal Structure; Tax Matters.
Borrower's tax assumptions and capital, organizational, ownership and legal
structure must be satisfactory to Heller and not impair the ability of Heller
to enforce its claims against the Collateral; and all Collateral must be freely
pledgeable as collateral security for the Credit Facility.
E. Agreement between Skechers and Heller.
Prior to or contemporaneously with the closing of the Credit Facility, Skechers
will be required to execute an amendment of the financing agreements between
Skechers and Heller (such
<PAGE> 6
Mr. Robert Greenberg
Skechers U.S.A., Inc.
Page 6
- ----------------------------------------------------------------------
[Heller Financial Logo]
agreements are hereinafter referred to as the "Skecher Agreements" and all
capitalized terms that are hereafter referred to in this paragraph shall have
the meanings assigned to such terms in the Skechers Agreements) which will
provide that: (a) such financing agreements will have the same three (3) year
term as the Credit Agreement; (b) the Maximum Facility Amount will be reduced to
$25,000,000; (c) the Maximum L.C. Amount will be reduced to $13,000,000 and the
aggregate amount of Lender Guaranty Liability with respect to Lender Guaranties
issued with respect to usance letters of credit will be reduced to $6,500,000;
and (d) the sublimit for advances against Eligible Inventory will be reduced to
$10,000,000. As a condition to the closing of the Credit Facility, Skechers must
be in compliance with the financial covenants contained in, and all other
terms and conditions of, the Skechers Agreements.
F. Indemnification
Borrower and Skechers shall indemnify Heller and its directors, officers,
agents, auditors, accountants, and any consultants engaged by Heller to appraise
or review the collateral, employees, counsel and affiliates from, and hold each
of them harmless against, any and all losses, liabilities, claims, damages or
expenses incurred by any of them arising out of or by reason of any
investigation, litigation or other proceeding brought or threatened relating to
any loan made or proposed to be made to Borrower in connection with the matters
herein (including, but without limitation, any use made or proposed to be made
by Borrower or any of its affiliates of the proceeds of such loans, but
excluding any such losses, liabilities, claims, damages or expenses incurred by
reason of the gross negligence or willful misconduct of the indemnitee),
including, without limitation, amounts paid in settlement, court costs and fees
and disbursements of counsel incurred in connection with any such investigation,
litigation or other proceedings.
<PAGE> 7
Mr. Robert Greenberg
Skechers U.S.A., Inc.
Page 7
[Heller Financial Logo]
G. Participations/Assignments.
Heller will have the right at any time to sell, assign or transfer any portion
of its loan position to one or more other lenders. In connection therewith,
Heller will have the right to disclose to such prospective lender(s) any and all
information regarding or relating to Borrower or this transaction which has now
or may hereafter be provided to or obtained by Heller; provided, however, that
Heller will require each such prospective lender to keep all information
confidential. In order to facilitate the sale, assignment or transfer of all or
part of the Credit Facility to other lenders and/or participants, Heller will
have the option of providing in the documentation for the Credit Facility that
payment of any part of the Credit Facility will be subordinated to payment of
any other part upon terms satisfactory to Heller.
So long as Heller is proceeding in good faith to complete the transactions
described in this letter, Heller shall have the exclusive right to provide the
financing described in this letter.
This commitment to provide the Credit Facility may not be conveyed or assigned
to any third party.
Heller is delivering this letter on the understanding that neither Borrower nor
Skechers will disclose the contents of this letter or Heller's involvement or
interest in this transaction without Heller's prior written consent. Heller
reserves the right to review and approve any and all documents that contain the
name of Heller, that describe the financing transaction proposed by Heller or
that otherwise describe Heller's involvement in this transaction. Neither
Borrower nor Skechers shall distribute or disclose any such documents without
first obtaining Heller's written consent.
If the foregoing is in accordance with your understanding, and you are desirous
of proceeding towards a closing of the Credit Facility, please sign and return
the enclosed copy of
<PAGE> 8
Mr. Robert Greenberg
Skechers U.S.A., Inc.
Page 8
[HELLER FINANCIAL LOGO]
this letter to the attention of the undersigned no later than 5:00 p.m. Los
Angeles time, October 25, 1996. The provisions of this commitment shall remain
in effect until the earlier to occur of six (6) months following the date of
this letter or thirty (30) days from the consummation of the IPO.
Very truly yours,
HELLER FINANCIAL, INC.
By: /s/ William F. Elliott
-----------------------------
William F. Elliott
Vice President
Accepted and Agreed this
_____ day of October, 1996
SKECHERS U.S.A., INC.
By:
-----------------------------
Title:
--------------------------
<PAGE> 1
EXHIBIT 23.2
EXHIBIT 23.2
CONSENT OF INDEPENDENT AUDITORS
The Board of Directors
Skechers U.S.A., Inc.
The audits referred to in our report dated August 1, 1996, included the related
financial statement schedule as of December 31, 1995, and for the period from
November 1, 1993 (commencement of operations) to December 31, 1993 and the
years ended December 31, 1994 and 1995, included in the registration
statement. This financial statement schedule is the responsibility of the
Company's management. Our responsibility is to express an opinion on this
financial statement schedule based on our audits. In our opinion, such
financial statement schedule, when considered in relation to the basic
financial statements taken as a whole, present fairly in all material respects
the information set forth therein.
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
/s/ KPMG Peat Marwick LLP
--------------------------------
Los Angeles, California
October 17, 1996
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
Exhibit 27.1
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> YEAR 6-MOS
<FISCAL-YEAR-END> DEC-31-1995 DEC-31-1995
<PERIOD-START> JAN-01-1995 JAN-01-1996
<PERIOD-END> DEC-31-1995 JUN-30-1996
<CASH> 0 0
<SECURITIES> 0 0
<RECEIVABLES> 3,568 2,388
<ALLOWANCES> 350 205
<INVENTORY> 2,452 1,932
<CURRENT-ASSETS> 6,024 4,320
<PP&E> 0 0
<DEPRECIATION> 0 0
<TOTAL-ASSETS> 7,412 5,665
<CURRENT-LIABILITIES> 4,015 2,555
<BONDS> 0 0
0 0
0 0
<COMMON> 0 0
<OTHER-SE> 1,335 847
<TOTAL-LIABILITY-AND-EQUITY> 7,412 0
<SALES> 18,063 6,774
<TOTAL-REVENUES> 18,063 6,774
<CGS> 13,373 4,775
<TOTAL-COSTS> 5,116 2,099
<OTHER-EXPENSES> 0 0
<LOSS-PROVISION> 193 216
<INTEREST-EXPENSE> 532 234
<INCOME-PRETAX> 312 180
<INCOME-TAX> 4 3
<INCOME-CONTINUING> 0 0
<DISCONTINUED> 0 0
<EXTRAORDINARY> 443 0
<CHANGES> 0 0
<NET-INCOME> 751 177
<EPS-PRIMARY> 0 0
<EPS-DILUTED> 0 0
</TABLE>
