<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JANUARY 14, 1998
REGISTRATION 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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HAPPY KIDS INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
NEW YORK 5130 13-3473638
(STATE OR OTHER (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
JURISDICTION OF CLASSIFICATION CODE NUMBER) IDENTIFICATION NO.)
INCORPORATION OR
ORGANIZATION)
100 WEST 33RD STREET, SUITE 1100
NEW YORK, NEW YORK 10001
(212) 695-1151
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING
AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
----------------
JACK M. BENUN
CHAIRMAN OF THE BOARD, PRESIDENT AND
CHIEF EXECUTIVE OFFICER
HAPPY KIDS INC.
100 WEST 33RD STREET, SUITE 1100
NEW YORK, NEW YORK 10001
(212) 695-1151
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF AGENT FOR SERVICE)
----------------
COPIES TO:
DAVID J. SORIN, ESQ. ERIC M. LERNER, ESQ.
RICHARD S. MATTESSICH, ESQ. ROSENMAN & COLIN LLP
BUCHANAN INGERSOLL 575 MADISON AVENUE
500 COLLEGE ROAD EAST NEW YORK, NY 10022-2585
PRINCETON, NJ 08540 (212) 940-8800
(609) 987-6800
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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE OF THE SECURITIES TO THE
PUBLIC: As soon as practicable after this Registration Statement becomes
effective.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [_]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [_]
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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 this Form is a post-effective amendment filed pursuant to Rule 462(d)
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,
check the following box. [_]
CALCULATION OF REGISTRATION FEE
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<TABLE>
<CAPTION>
TITLE OF EACH CLASS OF PROPOSED
SECURITIES TO BE MAXIMUM AGGREGATE AMOUNT OF
REGISTERED OFFERING PRICE(1) REGISTRATION FEE
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<S> <C> <C>
Common Stock, $.01 par value................. $25,300,000 $7,463.50
</TABLE>
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(1) Estimated solely for purposes of calculating the registration fee pursuant
to Rule 457(o).
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THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS
REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH
SECTION 8(A) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION,
ACTING PURSUANT TO SAID SECTION 8(A), MAY DETERMINE.
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<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A +
+REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE +
+SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY +
+OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT +
+BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR +
+THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE +
+SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE +
+UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF +
+ANY SUCH STATE. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION, DATED JANUARY 14, 1998
PROSPECTUS
[ ] SHARES
[INSERT LOGO HERE]
COMMON STOCK
-----------
All of the shares of Common Stock offered hereby (the "Offering") are being
issued and sold by Happy Kids Inc. ("Happy Kids" or the "Company"). Prior to
the Offering, there has been no public market for the Common Stock of the
Company. It is currently anticipated that the initial public offering price
will be between $[ ] and $[ ] per share. See "Underwriting" for information
relating to the factors considered in determining the initial public offering
price.
Application has been made to have the Common Stock quoted on the Nasdaq
National Market under the trading symbol "HKID."
SEE "RISK FACTORS" COMMENCING ON PAGE 7 FOR A DISCUSSION OF CERTAIN FACTORS
THAT SHOULD BE CONSIDERED BY PROSPECTIVE PURCHASERS OF THE COMMON STOCK OFFERED
HEREBY.
-----------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
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<TABLE>
<CAPTION>
UNDERWRITING
PRICE DISCOUNTS AND PROCEEDS TO
TO PUBLIC COMMISSIONS (1) COMPANY (2)
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<S> <C> <C> <C>
Per Share................................. $ $ $
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Total (3)................................. $ $ $
</TABLE>
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(1) For information regarding indemnification of the Underwriters by the
Company and certain stockholders and certain compensation payable to the
Representatives of the Underwriters, see "Underwriting."
(2) Before deducting expenses of the Offering estimated to be approximately
$[ ].
(3) The Underwriters have been granted a 30-day option to purchase up to an
additional [ ] shares of Common Stock from the Company solely to cover
over-allotments, if any, on the same terms and conditions as the shares
offered hereby. If the Underwriters exercise such option in full, the total
"Price to Public," "Underwriting Discounts and Commissions" and "Proceeds
to Company" will be $[ ], $[ ] and $[ ], respectively. See
"Underwriting."
-----------
The shares of Common Stock are offered by the several Underwriters, when, as
and if delivered to and accepted by the Underwriters, subject to their right to
reject any order in whole or in part and to certain other conditions. It is
expected that delivery of the Common Stock will be made on or about [ ],
1998 at the offices of Ladenburg Thalmann & Co. Inc., New York, New York.
LADENBURG THALMANN & CO. INC. CRUTTENDEN ROTH
INCORPORATED
The date of this Prospectus is [ ], 1998
<PAGE>
PICTURES TO BE INSERTED
----------------
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK,
INCLUDING MAINTAINING A MARKET IN THE COMMON STOCK ON BEHALF OF THE
UNDERWRITERS. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING."
All trade names, trademarks or service marks appearing in this Prospectus
are the property of their respective owners and are not the property of the
Company.
<PAGE>
PROSPECTUS SUMMARY
The following material is qualified in its entirety by the more detailed
information and the financial statements, including the notes thereto,
appearing elsewhere in this Prospectus. Unless otherwise indicated, all
information in this Prospectus (i) gives effect to the Reorganization (as
defined below) that will be effected immediately prior to the effectiveness of
this Offering (see "The Company," "Capitalization" and "Management --
Compensation Committee Interlocks and Insider Participation"), (ii) gives
effect to a 34,875-for-1 split of the Common Stock effected December 31, 1997
and (iii) assumes no exercise of the Underwriters' over-allotment option. In
this Prospectus, the term "Company" includes Happy Kids Inc. and its wholly-
owned subsidiaries, after giving effect to the Reorganization. This Prospectus
contains forward-looking statements that involve material risks and
uncertainties. The Company's actual results could differ materially from the
results discussed in such forward-looking statements. Factors that could cause
or contribute to such differences include, but are not limited to, those set
forth in the section entitled "Risk Factors" and elsewhere in this Prospectus.
THE COMPANY
Happy Kids is a leading designer and marketer of custom-designed, licensed
and branded children's apparel. The Company produces high-quality, coordinated
apparel programs, including knit tops, bottoms, overalls, shortalls, coveralls
and swimwear, for newborns, infants, toddlers, boys and girls (collectively,
"playwear"). The Company's major licenses include Nickelodeon's Rugrats, And 1,
B.U.M. Equipment and Ocean Pacific and, in late 1997, the Company acquired
licenses to Warner Brothers' Scooby Doo, ACA Joe and E.N.U.F. Internationale.
The Company also designs and delivers private label branded playwear programs
for leading retailers, including Sesame Street for KMart, New Legends for Kids
R Us and Canyon River Blues for Sears and recently began participating in
Nickelodeon's Nick Universe program being launched by Kids R Us. The Company's
strategy is to work closely with its customers to design and market coordinated
playwear programs resulting in gross margins that the Company believes are
higher than those typically generated from sales of non-licensed or non-private
label branded playwear.
In 1995, to leverage its customer relationships, its popular licenses and
brand names and its reputation for quality products and reliable delivery, the
Company initiated its current sales strategy under which customers order
specific quantities of goods on a fixed-price basis six to nine months in
advance of a selling season. For 1997, substantially all of the Company's
apparel was produced upon receipt of customer orders. Based on orders received
as of December 31, 1997, the Company had backlog of $101.6 million, which it
expects to fill over the next six to nine months.
Also in 1995, the Company began focusing on the development of a diversified
portfolio of popular, established and well-recognized licensed properties and
branded private label arrangements. Consequently, the Company has shifted its
product mix to higher margin licensed and private label apparel programs from
lower margin house brands. As a result of this change in product mix combined
with the implementation of the Company's sales strategy, net sales and gross
margins increased to $90.7 million and 23.0% in 1996 from $79.8 million and
18.5% in 1995. For the nine months ended September 30, 1997, the Company's net
sales and gross margins were $77.3 million and 24.1%, as compared to $70.1
million and 23.0% in the corresponding period in 1996. Additionally,
historically the Company has been able to leverage the popularity and goodwill
associated with its licensed properties and brand names to promote sales,
rather than undertaking costly marketing initiatives.
The Company's playwear is designed by 42 in-house designers and graphic
artists organized in teams dedicated to each of the Company's licensed
properties and private label programs. Each team works closely with licensors,
customers and contract manufacturers, utilizing state-of-the-art CAD systems,
to design coordinated products featuring textured fabrications and detailed
graphics. The
3
<PAGE>
Company believes that its customers rely on its ability to design, have
manufactured and deliver on a timely basis commercially successful apparel
programs. The Company markets its playwear primarily to mass-market retailers,
mid-tier distributors and department stores, including KMart, Kids R Us,
Price/Costco, Sears and WalMart.
The Company's products are manufactured to exacting quality standards and
specifications by over 50 unaffiliated, foreign and domestic contract
manufacturers. The Company uses third-party manufacturers to eliminate the
significant capital investment requirements associated with maintaining
manufacturing facilities. The Company has developed long-standing relationships
with many of its contract manufacturers and, during the nine months ended
September 30, 1997, approximately 68.1% of the Company's products were
manufactured by contract manufacturers which have been utilized by the Company
for over three years. The Company's ability to design and have manufactured
high-quality playwear is evidenced by the Company's product return rates of
3.3% and 1.7% in 1996 and in the nine months ended September 30, 1997,
respectively.
The Company's growth strategy is to continue to leverage the strength of its
diversified portfolio of licensed properties, private label relationships and
the quality of its playwear products. The key elements of this strategy
include: (i) to increase sales to existing accounts by expanding product
categories and sizes incorporating the Company's existing licensed properties
and private label relationships; (ii) to expand the Company's customer base by
selling to additional mass-market retailers, mid-tier distributors, department
stores, specialty retailers and sporting goods chains; (iii) to leverage newly
acquired licensed properties and private label relationships; and (iv) to add
new licenses and private label relationships based on established and popular
brands.
THE OFFERING
<TABLE>
<C> <S>
Common Stock offered hereby............. [ ] shares
Common Stock to be outstanding after the
Offering(1)............................ [ ] shares
Use of proceeds......................... Repayment of a portion of the
Company's outstanding line of credit;
repayment of a $2.0 million portion
of promissory notes to be issued to
current stockholders in connection
with the termination of the Company's
S Corporation status.
Proposed Nasdaq National Market symbol.. HKID
</TABLE>
- --------
(1) Excludes 800,000 shares of Common Stock reserved for issuance upon the
exercise of options or stock purchase rights issuable under the Company's
1997 Stock Option Plan, none of which were outstanding as of December 31,
1997. See "Management--1997 Stock Option Plan."
4
<PAGE>
SUMMARY CONSOLIDATED FINANCIAL DATA
The following summary consolidated financial data should be read in
conjunction with the Consolidated Financial Statements and related Notes
thereto appearing elsewhere in this Prospectus and "Management's Discussion and
Analysis of Financial Condition and Results of Operations." The selected
financial data have been derived from the Consolidated Financial Statements of
the Company. The consolidated statements of operations for each of the three
years in the period ending December 31, 1996 and for the nine months ended
September 30, 1997 and the consolidated balance sheets at December 31, 1995 and
1996 and at September 30, 1997 have been audited by the Company's independent
auditors and are included elsewhere in this Prospectus. The selected statement
of operations data for each of the two years in the period ended December 31,
1993 and the selected statement of operations data for the nine months ended
September 30, 1996 have been derived from the unaudited Consolidated Financial
Statements of the Company not included herein, which, in the opinion of
management, reflect all adjustments (consisting solely of normal recurring
adjustments) necessary for a fair presentation of the results for these periods
and as of such dates. The selected financial data provided below is not
necessarily indicative of the future results of operations or financial
performance of the Company.
<TABLE>
<CAPTION>
NINE MONTHS
ENDED
YEARS ENDED DECEMBER 31, SEPTEMBER 30,
---------------------------------------- ---------------
1992 1993 1994 1995 1996 1996 1997
------- ------- ------- ------- ------- ------- -------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Net sales.............. $52,929 $64,747 $74,520 $79,828 $90,723 $70,061 $77,328
Gross profit........... 12,633 15,279 15,276 14,792 20,837 16,096 18,666
Operating expenses:
Selling, design and
shipping............ 4,749 5,765 5,962 7,986 7,686 5,768 6,634
General and
administrative...... 4,120 5,413 6,358 6,830 7,684 5,834 6,445
------- ------- ------- ------- ------- ------- -------
Total operating
expenses.......... 8,869 11,178 12,320 14,816 15,370 11,602 13,079
------- ------- ------- ------- ------- ------- -------
Operating income
(loss)................ 3,764 4,101 2,956 (24) 5,467 4,494 5,587
Interest expense,
net................... 918 1,160 1,631 2,375 2,980 2,203 2,522
Income (loss) before
pro forma income
taxes................. 2,846 2,941 1,325 (2,399) 2,487 2,291 3,065
Pro forma net
income(1)............. $ 1,497 $ 1,788
======= =======
Pro forma net income
per share............. $ [ ] $ [ ]
======= =======
Pro forma weighted
average shares
outstanding(2)........ [ ] [ ]
Supplemental pro forma
net income per
share(3).............. $ [ ] $ [ ]
======= =======
Supplemental pro forma
weighted average
shares
outstanding(2)(4)..... [ ] [ ]
</TABLE>
<TABLE>
<CAPTION>
SEPTEMBER 30, 1997
-----------------------------------
PRO FORMA
ACTUAL PRO FORMA(5) AS ADJUSTED(6)
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<S> <C> <C> <C>
BALANCE SHEET DATA:
Working capital........................... $ 5,249 $ 3,249
Total assets.............................. 39,308 39,308
Due to bank............................... 27,292 27,292
Due to stockholders....................... 1,400 5,570
Capital lease obligations................. 82 82
Stockholders' equity...................... 5,258 1,088
</TABLE>
5
<PAGE>
(1) The Company has operated as an S Corporation for federal and New York state
income tax purposes since 1988. Two of the wholly-owned subsidiaries are C
Corporations and, accordingly, have been taxed at the appropriate corporate
federal and state tax rates. The historical Consolidated Financial
Statements do not include a provision for federal and state income taxes
for such periods for those subsidiaries which have elected to be treated as
S Corporations. A provision for state income taxes has been made for those
states not recognizing S Corporation status. Pro forma net income has been
computed as if the Company had been fully subject to federal and state
income taxes based on the tax laws in effect during the respective periods.
See Notes A and O to the Consolidated Financial Statements.
(2) Reflects the weighted average shares outstanding and gives pro forma effect
to the additional shares that the Company would have to sell at the assumed
initial public offering price of $[ ] per share to repay the estimated
$4.2 million of promissory notes to be issued to the stockholders in
connection with the termination of the Company's S Corporation status. The
Company intends to repay $2.0 million of these notes with a portion of the
net proceeds of the Offering.
(3) Supplemental pro forma net income per share was computed by adjusting pro
forma net income per share to reflect a reduction in interest expense and
related fees, net of taxes, of $[ ] and $[ ] in the year ended
December 31, 1996 and for the nine months ended September 30, 1997,
respectively, resulting from the assumed repayment of debt with a portion
of the net proceeds of the Offering as if such repayment had occurred on
January 1, 1996, consisting solely of repayment of $[ ] million
outstanding under the Company's $42.0 million line-of-credit (of which
$27.3 million was outstanding at September 30, 1997).
(4) Gives pro forma effect to the additional shares that the Company would have
to sell at the assumed initial public offering price of $[ ] per share to
repay the debt referenced in footnote 3 above.
(5) Adjusted to give effect to an approximately $4.2 million decrease in
stockholders' equity and a corresponding increase in due to stockholders at
September 30, 1997, of which $2.0 million has been classified as a current
liability to be repaid with a portion of the net proceeds of the Offering,
resulting from an issuance of promissory notes to certain stockholders
related to the termination of the Company's status as an S Corporation. See
"The Company," "Capitalization," "Management--Compensation Committee
Interlocks and Insider Participation" and Note O to the Consolidated
Financial Statements.
(6) Adjusted to reflect the sale of [ ] shares of common stock at an assumed
offering price of $[ ] per share and the anticipated application of the
net proceeds therefrom. See "Use of Proceeds" and "Capitalization."
6
<PAGE>
RISK FACTORS
In addition to the other information contained in this Prospectus, the
following risk factors should be carefully considered before investing in the
Common Stock. Except for historical information contained herein, the
information in this Prospectus contains forward-looking statements that
involve risks and uncertainties, such as statements concerning the Company's
plans, objectives, expectations and intentions. The cautionary statements made
in this Prospectus should be read as being applicable to all related forward-
looking statements wherever they appear in this Prospectus. The Company's
actual results could differ materially from those discussed in the Prospectus.
Factors that could cause or contribute to such differences include those
discussed below, as well as those discussed elsewhere herein.
DEPENDENCE ON LICENSE AGREEMENTS
A majority of the Company's net sales in the year ended December 31, 1996
and for the nine months ended September 30, 1997 were derived from the sale of
products incorporating licensed properties. The Company's current license
arrangements extend for three- to six-year periods and expire between December
1998 and 2002 and include payment obligations and certain covenants, the
breach of which by the Company could result in the termination of the
applicable licensing arrangement. The Company believes that it is currently in
compliance with all material provisions of its existing licensing arrangements
and has no reason to believe that any events are likely to occur that would
permit any of its licensors to terminate their respective licenses. In
addition, to maintain and renew such licenses, the Company must continue to
satisfy certain conditions, including minimum sales requirements. There can be
no assurance that the Company will achieve such minimum sales requirements or
that any of its licenses will be extended beyond their current expirations on
terms acceptable to the Company, if at all. The first of the Company's
existing licensing arrangements is up for renewal in December 1998 and,
accordingly, the Company has no prior license renewal experience. The loss of
any major license could materially adversely affect the Company's business,
financial condition or results of operations.
The Company's future success and growth is dependent, in part, upon its
diversified portfolio of licensed properties and its ability to identify
properties that will appeal to consumers, its ability to obtain licenses for
such properties and its ability to produce marketable playwear products based
upon such licenses. There can be no assurance, however, that the Company will
be able to identify suitable properties, secure additional licenses, maintain
such a portfolio or produce marketable playwear.
Apparel industry licenses typically are granted with respect to specific
product categories, sizes and channels of distribution, and may be either
exclusive or non-exclusive. Certain of the Company's licenses are non-
exclusive. The granting of licenses by any of the Company's licensors within
the Company's licensed product categories, sizes or channels of distribution
may materially adversely affect the Company's future sales generated under any
such licenses. In addition, as a result of increased competition among
children's apparel companies for licenses, the Company may, in the future, be
required to pay licensors higher royalties and higher minimum guaranteed
payments in order to obtain attractive licenses. There can be no assurance
that licenses will not be granted to the Company's competitors within
categories in which the Company has a non-exclusive license. In addition, the
Company relies upon its licensors to protect licensed properties and to
enforce trademark and tradename rights. There can be no assurance that
licensors will adequately protect the licensed properties or enforce such
rights, if at all. Failure to protect and enforce trademark and tradename
rights by such licensors could reduce the value of such rights and have a
material adverse effect on the Company's business, financial condition or
results of operations. See "Business--Products and Licenses."
7
<PAGE>
DEPENDENCE ON PRIVATE LABEL RELATIONSHIPS
A substantial portion of the Company's net sales in the year ended December
31, 1996 and for the nine months ended September 30, 1997 were derived from
the sale of products based upon private label relationships. All of such sales
were made on a purchase order basis, rather than pursuant to contract, and
there are no long-term contracts with respect to any private label
relationships. There can be no assurance that existing private label
relationships will continue in the future or that the Company will be able to
obtain new private label relationships on an ongoing basis, if at all.
DEPENDENCE ON CONTRACT MANUFACTURERS
Substantially all of the Company's products are manufactured by unaffiliated
foreign and domestic contract manufacturers. The Company does not have long-
term contracts or formal arrangements with any of these manufacturers. Foreign
manufacturing is subject to a number of risks, including transportation delays
and interruptions, political and economic disruptions, tariffs, import and
export controls and changes in governmental policies. In addition, stringent
controls, such as review and inspection of fabrics, samples, specifications,
fit and completed garments and factory visits, must be undertaken to ensure
the production of quality products. Although the Company believes that it has
instituted such controls, there can be no assurance that such events will not
occur in the future, resulting in possible increases in costs and delays of
product deliveries resulting in losses of revenue and goodwill. During 1996
and the nine months ended September 30, 1997, the Company relied upon a single
manufacturer for 23.3% and 11.3% of the Company's production, respectively. No
other single manufacturer accounted for more than 10% of the Company's
production during such periods. The Company believes that alternate sources of
manufacturing are available if the need were to arise, although there can be
no assurance that the supply of such alternate facilities would be available
on commercially reasonable terms. Any substantial delay in locating, or
inability to locate, acceptable alternate sources of manufacturing could have
a material adverse effect on the Company's business, financial condition or
results of operations. See "Business--Manufacturing."
RELIANCE ON KEY CUSTOMERS
The Company's customer base has been and continues to be highly
concentrated. Sales of the Company's products to each of Price/Costco, KMart
and Kids R Us accounted for approximately 15.1%, 12.6% and 12.3% of net sales
for the nine months ended September 30, 1997, respectively. In addition, sales
of the Company's products to each of Kids R Us and WalMart accounted for 21.5%
and 13.4% of net sales, respectively, during 1996, while sales of the
Company's products to each of Kids R Us, WalMart and J.C. Penney accounted for
18.3%, 12.9% and 10.0% of net sales, respectively, during 1995. Based upon
historical and recent results and existing relationships with customers, the
Company believes that a substantial portion of its net sales and gross profits
will continue to be derived from a small number of large customers. The
Company had backlog of $101.6 million as of December 31, 1997, which it
expects to fill in the next six to nine months; however, consistent with
industry practice, these orders are not contractual commitments by customers
to purchase products from the Company and, therefore, may be cancelled by such
customers. Although the Company has not experienced significant cancellations
in the past, there can be no assurance that some portion of these orders will
not be cancelled. A significant reduction in orders from, the cancellation of
a significant portion of orders by, or the termination of the Company's
relationship with, any of its larger customers could have a material adverse
effect on the Company's business, financial condition or results of
operations. There can be no assurance that the Company's larger customers will
continue to place orders with the Company or that orders by such customers
will continue at their previous levels. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and "Business--
Merchandising" and "--Backlog."
DEPENDENCE ON ACCESS TO CREDIT FACILITIES
Historically, the Company has relied heavily on its access to credit
facilities to fund its operations. Substantially all of the Company's assets
are subject to security interests granted by the Company to
8
<PAGE>
its lenders. Although the Company has never had a payment default, it has,
from time to time, been in violation of certain financial covenants under its
credit facilities. While the Company's lender has waived such violations in
the past, there can be no assurance that such violations may not recur in the
future or that if such violations do recur, that the Company's lender will
grant waivers in the future on terms acceptable to the Company, if at all.
Accordingly, there can be no assurance that the Company will be able to retain
its current access to credit in the future or successfully obtain alternative
sources of credit on commercially reasonable terms. In addition, the Company's
lender has sole discretion to make or withhold advances under the credit line.
There can be no assurance that the lender will continue to lend under the
credit line. If the lender were to exercise its discretion to withhold
advances, there would be a material adverse effect on the Company's business,
financial condition or results of operations.
RISKS ASSOCIATED WITH SIGNIFICANT GROWTH
The Company has enjoyed rapid growth which has placed, and could continue to
place, a significant strain on the Company's management, administrative and
operational resources. The Company remains vulnerable to a variety of business
risks generally associated with rapidly growing companies as well as risks
related to the broadening of its product offerings and the expansion of its
distribution channels. To manage growth effectively, the Company will be
required to continue to implement changes in certain aspects of its business,
expand its information systems and operations to respond to increased demands
and to develop, train and manage an increasing number of management level and
other employees. None of the Company's senior management previously has
managed a business of the Company's scale or scope or has experience managing
a publicly-held company. Accordingly, the Company's past growth cannot be
assumed to be indicative of its future operating results. In addition, failure
by the Company to continue to enhance operating control systems or the
encountering of unexpected difficulties during a continued stage of expansion
could adversely affect the Company's business, financial condition or results
of operations.
COMPETITION
The children's playwear industry is highly competitive and fragmented. The
Company competes with many companies engaged in the design, production and
distribution of children's apparel for newborns, infants, toddlers, boys and
girls. Some of the Company's competitors have longer operating histories and
financial, sales, marketing and design capabilities and other competitive
resources which are substantially greater than those of the Company. There can
be no assurance that other companies will not attempt to enter or expand their
presence in any of the Company's existing product categories or in new
categories in which the Company plans or may plan to develop products. The
Company also faces competition from its existing customers, who may themselves
begin to produce children's playwear directly. In addition, such customers
have in the past competed, and may continue in the future to compete, for
available licensed properties. Further, to the extent that the Company's
customers or competitors maintain or initiate private label programs, such
customers or competitors will compete with the Company's licensed and branded
properties. The Company also competes with other manufacturers of children's
apparel for retail floor space. No assurance can be given that additional
floor space will be available in retail stores to support expansion of
products offered by the Company, or that the floor space currently allocated
to the Company's products will not be reduced in the future. There can be no
assurance that competition from the foregoing sources will not adversely
affect the Company's business, financial condition or results of operations.
See "Business--Products and Licenses" and "--Industry and Competition."
SEASONALITY
Sales of children's apparel are seasonal. Consequently, the Company's
operating results have varied substantially from quarter to quarter, and the
Company expects that they will continue to do so.
9
<PAGE>
Historically, the Company has experienced significantly higher net sales in
the first and third quarters as compared to the second and fourth quarters.
The seasonality of the Company's business also affects borrowings under the
Company's lines of credit and its level of backlog, which fluctuate in
response to demand for the Company's products. Therefore, the results of any
interim period are not necessarily indicative of the results that may be
achieved for an entire year. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
CYCLICALITY AND TRENDS IN THE APPAREL INDUSTRY
The apparel industry is subject to rapidly changing consumer demands and
preferences. Although the Company focuses on what it believes to be
established and popular properties, there can be no assurance that consumers
will continue to favor the properties licensed by the Company or the products
designed and produced by the Company under private label relationships, and a
significant shift in consumer preferences could have a material adverse effect
on the Company's business, financial condition or results of operations. The
apparel industry is a cyclical industry heavily dependent upon the overall
level of consumer spending, with purchases of apparel and related goods
tending to decline during recessionary periods when disposable income is low.
A difficult retail environment could result in downward price pressure which
could adversely impact the Company's gross profit margins. Additionally, all
of the Company's customers are in the retail industry, which industry has
experienced significant changes and difficulties over the past several years,
including consolidation of ownership, increased centralization of buying
decisions, restructurings, bankruptcies and liquidations. While various
retailers, including some of the Company's customers, experienced financial
difficulties in the past few years, thereby increasing the Company's risk of
extending credit to such retailers, the Company's bad debt experience has been
immaterial. Financial problems of a retailer could cause the Company's factor
to limit the amount of credit extended to such retailer. If the Company's
factor were to impose such limitation, the Company could be required
to curtail business with such retailer or to assume additional credit risk
relating to such customer's receivables. The Company cannot predict what
effect, if any, continued or additional changes within the retail industry
will have on its business, financial condition or results of operations.
IMPORT RESTRICTIONS AND OTHER RISKS ASSOCIATED WITH INTERNATIONAL BUSINESS
During 1996 and the nine months ended September 30, 1997, the Company
imported approximately 91.2% and 91.0% of its goods, respectively.
Approximately 40.3% and 40.7% and 37.4% and 28.0% of the products sold in such
periods were sourced in two overseas countries for 1996 and the nine months
ended September 30, 1997, respectively. There was no other country that
accounted for more than 10% of such products. The Company's products are
subject to bilateral textile agreements between the United States and a number
of foreign countries. Such agreements, which have been negotiated under the
framework established by the Arrangement Regarding International Trade in
Textiles, allow the United States to impose restraints at any time on the
importation of categories of merchandise that, under the terms of the
agreements are not currently subject to specified limits. The Company does not
own the right to import finished garments into the United States, but relies
on its contract manufacturers to obtain the necessary quotas. In the past, to
the extent that necessary import quotas have not been available with respect
to a particular source of supply, the Company has been able to find an
alternative source of supply. Accordingly, the availability of quotas has not
had a material effect upon the Company's business, financial condition or
results of operations. The Company's continued ability to source imported
products may be adversely affected by a significant decrease in available
import quotas as well as any additional bilateral agreements or unilateral
trade restrictions. In addition, a significant portion of the Company's
products are manufactured in Hong Kong. China recently resumed sovereignty
over Hong Kong. The Company cannot predict the effect, if any, this event will
have on its contract manufacturers in Hong Kong and there can be no assurance
that Hong Kong will not experience political, economic or social disruption as
a result of the resumption of Chinese sovereignty. In addition, there have
been a number of recent
10
<PAGE>
trade disputes between China and the United States during which the United
States has threatened to impose tariffs and duties on some products imported
from China and to withdraw China's "most favored nation" trade status. The
loss of such status for China, changes in current tariff structures or the
adoption by the United States of trade policies or sanctions adverse to China
could have a material adverse effect on the Company's business, financial
condition or results of operations. See "Business--Manufacturing."
DEPENDENCE ON KEY PERSONNEL
The Company is substantially dependent upon the efforts and skills of its
executive officers, particularly Jack M. Benun, the Company's Chairman of the
Board, President and Chief Executive Officer, Mark J. Benun, the Company's
Executive Vice President and Secretary and Isaac Levy, the Company's Senior
Vice President. The loss of the services of any of these executive officers
could have a material adverse effect on the Company. The Company has entered
into an employment agreement with each of these three individuals and
maintains key man life insurance on Jack Benun in the amount of $3.0 million.
There can be no assurance that the departure of one or more of such key
personnel would not have a material adverse effect on the Company's results of
operations. Furthermore, there can be no assurance that the Company will be
successful in attracting and retaining the personnel it requires to conduct
its operations or to meet its future needs. See "Management--Executive
Compensation," "--Employment Agreements and Indemnification Agreements" and
"--Key Man Insurance."
CONTROL BY CURRENT STOCKHOLDERS
After consummation of the Offering, Jack Benun, Mark Benun and Isaac Levy
together will own an aggregate of approximately [ %] of the outstanding
shares of Common Stock of the Company. As a result, such individuals will be
able to control the outcome of all matters requiring stockholder approval and
will be able to elect all of the Directors of the Company. Such control, which
may have the effect of delaying, deferring or preventing a change of control
of the Company, is likely to continue for the foreseeable future and
significantly diminishes control and influence which future stockholders may
have in the Company. See "Principal Stockholders."
Jack Benun, Mark Benun and Isaac Levy have entered into a stockholders
agreement dated January 1, 1998. Such agreement provides tag-along rights to
each of the parties thereto in the event that any of the other parties elects
to sell his Common Stock. In addition, each party is granted a right of first
refusal to purchase any shares of Common Stock offered for sale by any other
party to the agreement. Finally, Mark Benun has granted Jack Benun an
irrevocable proxy to vote any of the Company's voting securities beneficially
owned by Mark Benun for the life of Jack Benun.
SHARES ELIGIBLE FOR FUTURE SALE
Sales of substantial amounts of Common Stock in the public market after the
Offering, or the perception that such sales could occur, could adversely
affect the market price for the Common Stock. In addition to the [ ] shares
offered hereby which will be freely tradable in the public market, 3,487,500
shares of Common Stock held by the existing stockholders will be immediately
eligible for sale in the public market in the quantities and manner permitted
by Rule 144 promulgated under the Securities Act of 1933, as amended (the
"Act"). Each officer, director and current holder of the Company's Common
Stock has agreed with the Underwriters not to offer, sell, pledge or otherwise
dispose of any shares of Common Stock for 180 days after the date of this
Prospectus without the prior written consent of Ladenburg Thalmann & Co. Inc.,
on behalf of the Representatives. In addition, up to 800,000 shares of Common
Stock reserved for issuance pursuant to the exercise of options or stock
purchase rights will be available for sale in the public market from time to
time pursuant to exemptions from registration requirements or upon
registration. See "Management--1997 Stock Option Plan" and "Shares Eligible
for Future Sale."
11
<PAGE>
NO PRIOR PUBLIC MARKET FOR COMMON STOCK; DETERMINATION OF OFFERING PRICE;
VOLATILITY
Prior to the Offering, there has been no public market for the Common Stock.
Although application has been made for approval of the Common Stock for
listing on the Nasdaq National Market, there can be no assurance that an
active trading market for the Common Stock will develop or be sustained. The
initial public offering price of the Common Stock offered hereby will be
determined by negotiations between the Company and the Representatives of the
Underwriters. There can be no assurance that the price at which the Common
Stock will trade in the public market after the Offering will not be lower
than the initial public offering price. The market price of the Common Stock
could be subject to significant fluctuations in response to such factors as,
among others, variations in the Company's anticipated or actual results of
operations, limited trading volume in the Common Stock, general market
conditions or the children's apparel industry in general. See "Underwriting."
DILUTION
Purchasers of Common Stock in the Offering will experience immediate
substantial dilution in net tangible book value per share of Common Stock. See
"Dilution."
ANTI-TAKEOVER EFFECT OF CERTAIN CHARTER AND BY-LAW AND OTHER PROVISIONS
The Company's Restated Certificate of Incorporation (the "Certificate of
Incorporation") authorizes the Board of Directors to issue, without
stockholder approval, 5,000,000 shares of Preferred Stock with voting,
conversion and other rights and preferences that could adversely affect the
voting power or other rights of the holders of Common Stock. The issuance of
Preferred Stock or of rights to purchase Preferred Stock could be used to
discourage an unsolicited acquisition proposal. In addition, the possible
issuance of Preferred Stock could discourage a proxy contest, make more
difficult the acquisition of a substantial block of the Company's Common Stock
or limit the price that investors might be willing to pay in the future for
shares of the Company's Common Stock. The Certificate of Incorporation also
provides that: (i) the affirmative vote of the holders of at least 80% of the
voting power of all outstanding shares of the capital stock of the Company
shall be required to adopt, amend or repeal any provision of the bylaws of the
Company or the provisions in the Certificate of Incorporation limiting the
liability of directors and provisions relating to certain management issues;
(ii) stockholders of the Company may not take any action by written consent;
(iii) special meetings of stockholders may be called only by the President,
the Chairman of the Board or a majority of the Board of Directors and business
transacted at any such special meeting shall be limited to matters relating to
the purposes set forth in the notice of such special meeting; and (iv) the
Board of Directors, when evaluating an offer related to a tender or exchange
offer or other business combination, is authorized to give due consideration
to any relevant factors, including the social, legal and economic effects upon
employees, suppliers, customers, creditors, the community in which the Company
conducts its business, and the economy of the state, region and nation. The
foregoing provisions of the Certificate of Incorporation could have the effect
of delaying, deterring or preventing a change in control of the Company. In
addition, the Company is subject to Section 912 of the New York Business
Corporation Law (the "New York Act") which, subject to certain exceptions,
restricts certain transactions and business combinations between a corporation
and a stockholder owning 20% or more of the Company's outstanding voting stock
(an "interested stockholder") for a period of five years from the date the
stockholder becomes an interested stockholder. These provisions may have the
effect of delaying or preventing a change of control of the Company without
action by the stockholders and, therefore, could adversely affect the price of
the Company's Common Stock. See "Description of Capital Stock--Preferred
Stock," "--Limitation of Director Liability" and "--Anti-takeover Provisions."
ABSENCE OF DIVIDENDS
The Company does not anticipate paying any dividends on its Common Stock in
the foreseeable future. See "Dividend Policy."
12
<PAGE>
THE COMPANY
Reorganization
The Company was incorporated in 1988 in New York under the name O'Boy Inc.
and changed its name to Happy Kids Inc. in December 1997. Historically, the
Company operated as separate business entities, with the first of such
entities commencing business operations in 1979, all under the common
ownership of the stockholders of the Company. Immediately prior to the
effectiveness of this Offering, all of such separate entities shall become
wholly-owned subsidiaries of the Company. See "Management--Compensation
Committee Interlocks and Insider Participation." The Company's principal
executive office is located at 100 West 33rd Street, New York, New York,
10001, and its telephone number is (212) 695-1151.
S Corporation Distribution
Prior to the termination of its S Corporation status, the Company intends to
declare a distribution (the "S Corporation Distribution") to the stockholders
of record of the Company on such date. Such stockholders consist solely of
Jack Benun, the Company's Chairman of the Board, President and Chief Executive
Officer, Mark Benun, the Company's Executive Vice President and Secretary, and
Isaac Levy, its Senior Vice President. Such distribution (estimated at $4.2
million as of September 30, 1997) represents substantially all of the
Company's remaining undistributed S Corporation earnings and will be evidenced
by four-year 5.7% promissory notes to be issued to such stockholders in
connection with the termination of the Company's S Corporation status. The
actual amount of the S Corporation Distribution will be adjusted to include
the taxable income of the Company for the period from October 1, 1997 through
the day preceding the date on which S Corporation status is terminated, less
any state income tax payable by the Company with respect to such income and
any distributions made to the current stockholders during that time period
($3.1 million was distributed to the current stockholders in 1997 and 1998
through the date of this Prospectus in the form of dividends to fund their
1996 and 1997 tax liabilities resulting from the Company's status as an S
Corporation). Of the total S Corporation Distribution, $2.0 million of the net
proceeds from this Offering will be used to make a partial payment of amounts
due under such notes. See "Use of Proceeds" and "Management--Compensation
Committee Interlocks and Insider Participation."
USE OF PROCEEDS
The net proceeds to the Company from the sale of the [ ] shares of Common
Stock offered by the Company hereby (at an assumed initial public offering
price of $[ ] per share and after deducting estimated underwriting
discounts and commissions and Offering expenses) are estimated to be
approximately $[ ] million ($[ ] million if the Underwriters' over-
allotment option is exercised in full).
The Company expects to repay approximately $[ ] million under its $42.0
million line of credit (adjusted seasonally to $47.0 million for the period
January 1, 1998 through April 30, 1998), of which $27.3 million was
outstanding at September 30, 1997. The line of credit terminates on December
31, 1998, and currently bears interest at an effective annual rate of 10.1%,
including a base interest rate of prime plus 4.0% per annum on the first $5.0
million outstanding and prime plus 1.0% per annum on outstanding balances in
excess of $5.0 million, and related fees. The prime rate was 8.5% as of
September 30, 1997. The Company utilizes the line of credit for working
capital purposes. The Company also plans to use $2.0 million of the net
proceeds from the Offering to make a partial payment of amounts due to current
stockholders of the Company pursuant to four-year 5.7% promissory notes to be
issued in connection with the termination of the Company's S Corporation
status. See "Management--Compensation Committee Interlocks and Insider
Participation."
13
<PAGE>
DIVIDEND POLICY
The Board of Directors intends to retain any earnings of the Company to
support operations and to finance expansion and does not intend to pay cash
dividends on the Common Stock in the foreseeable future. Any future
determination as to the payment of dividends will be at the discretion of the
Board of Directors, and will depend on the Company's financial condition,
results of operations, capital requirements and such other factors as the
Board of Directors deems relevant. The Company also currently is restricted by
the terms of its credit facility from paying cash dividends on its Common
Stock. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Liquidity and Capital Resources."
Because the Company has operated as an S Corporation and will continue to do
so until immediately prior to the effectiveness of this Offering, a portion of
the net income of the Company in past years has been distributed to each of
Jack Benun, Mark Benun and Isaac Levy, solely for the payment of income taxes,
and an additional aggregate distribution of approximately $4.2 million
(adjusted to include the taxable income of the Company for the period October
1, 1997 to the day preceding the day on which S Corporation status is
terminated), evidenced by promissory notes, will be made to such individuals
upon termination of the Company's S Corporation status. See "Management--
Compensation Committee Interlocks and Insider Participation."
14
<PAGE>
DILUTION
The pro forma net tangible book value of the Company as of September 30,
1997 was approximately $[ ] or $[ ] per share. Pro forma net tangible book
value per share represents the Company's pro forma tangible assets less total
liabilities divided by the number of shares of Common Stock outstanding.
Dilution per share represents the difference between the amount per share paid
by purchasers of shares of Common Stock in the Offering made hereby and the
pro forma net tangible book value per share of Common Stock immediately after
completion of the Offering. Without taking into account any changes in such
pro forma net tangible book value after September 30, 1997, other than to give
effect to (i) the S Corporation Distribution (based upon the Company's
undistributed S Corporation earnings through September 30, 1997) and (ii) the
sale of [ ] shares of Common Stock by the Company in this Offering at an
assumed initial public offering price of $[ ] per share (after deducting
the underwriting discount and commissions and estimated Offering expenses) and
the application of the estimated net proceeds therefrom, the pro forma as
adjusted net tangible book value of the Company as of September 30, 1997 would
have been $[ ], or $[ ] per share. This represents an immediate increase
in pro forma net tangible book value of $[ ] per share to existing
stockholders and an immediate dilution in pro forma as adjusted net tangible
book value of $[ ] per share to new investors. The following table
illustrates this dilution on a per share basis:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share................. $[ ]
Pro forma net tangible book value per share as of September 30,
1997........................................................... $[ ]
Increase per share attributable to the Offering................ [ ]
------
Pro forma as adjusted net tangible book value per share after
the Offering...................................................
------
Dilution per share to new investors............................. $
======
</TABLE>
The following table summarizes, on a pro forma basis as of September 30,
1997, giving effect to the assumed distribution of the Company's previously
undistributed S Corporation earnings through that date, the difference between
the existing stockholders and new investors with respect to the number of
shares purchased from the Company, at the assumed initial public offering
price of $[ ] per share, the total consideration paid and the average price
paid per share:
<TABLE>
<CAPTION>
TOTAL
SHARES PURCHASED CONSIDERATION
------------------ -------------- AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
-------- -------- ------ ------- -------------
<S> <C> <C> <C> <C> <C>
Existing stockholders........... [ ] [ ]% $ % $
New investors................... [ ] [ ]% % $
-------- ------- --- ---
Total......................... [ ] [ ]% $ %
======== ======= === ===
</TABLE>
15
<PAGE>
CAPITALIZATION
The following table sets forth as of September 30, 1997 (i) the actual
capitalization and short-term borrowings of the Company, (ii) the pro forma
capitalization and short-term borrowings of the Company after giving effect to
an approximately $4.2 million decrease in stockholders' equity resulting from
a distribution of promissory notes to certain stockholders related to the
termination of the Company's status as an S Corporation, but without otherwise
giving effect to this Offering and (iii) the capitalization and short-term
borrowings of the Company, as adjusted, to give effect to the foregoing pro
forma adjustments and the issuance and sale by the Company of [ ] shares of
Common Stock offered hereby at an assumed initial public offering price of $[
] per share, less offering expenses and the anticipated application of the
estimated net proceeds therefrom. See "Use of Proceeds," "Management--
Compensation Committee Interlocks and Insider Participation" and Notes A and O
to the Consolidated Financial Statements. This table should be read in
conjunction with the Consolidated Financial Statements and the Notes thereto,
included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
SEPTEMBER 30, 1997
--------------------------------------------------
PRO PRO FORMA
ACTUAL FORMA(1) AS ADJUSTED(2)
-------------- -------------- ------------------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C>
SHORT-TERM DEBT:(3)
Due to bank.................. $ 27,292 $ 27,292 $
Due to stockholders.......... -- 2,000
Capital lease obligations.... 43 43
-------------- -------------- ------------
Total short-term debt...... $ 27,335 $ 29,335 $
============== ============== ============
LONG-TERM DEBT, NET OF CURRENT
PORTION:(3)
Due to stockholders.......... $ 1,400 $ 3,570 $
Capital lease obligations.... 39 39
-------------- -------------- ------------
Total long-term debt....... 1,439 3,069
-------------- -------------- ------------
STOCKHOLDERS' EQUITY:
Preferred Stock, $.01 par
value, 5,000 shares
authorized; none
outstanding................. -- --
Common Stock, $.01 par value,
30,000 shares authorized;
7,750 shares issued and
outstanding actual and pro
forma; [ ] shares issued
and outstanding pro forma as
adjusted(4)................. 78 78
Additional paid-in capital... 1,119 1,119
Retained earnings (deficit).. 4,061 (109)
-------------- -------------- ------------
Total stockholders'
equity.................. 5,258 1,088
-------------- -------------- ------------
TOTAL CAPITALIZATION........... $ 6,697 $ 4,697 $
============== ============== ============
</TABLE>
- -------
(1) Adjusted to give effect to an approximately $4.2 million decrease in
stockholders' equity and a corresponding increase in due to stockholders
at September 30, 1997, resulting from an issuance of four-year, 5.7%
promissory notes to certain stockholders related to the termination of the
Company's status as an S Corporation, $2.0 million of which is short-term
debt and the balance of which is long-term debt. Existing due to
stockholders of $1.4 million shall be subject to the terms of such
promissory notes. See "Capitalization," "Use of Proceeds," "Management--
Compensation Committee Interlocks and Insider Participation" and Note O to
Consolidated Financial Statements.
(2) Adjusted to reflect the sale of [ ] shares of Common Stock offered by
the Company hereby at an assumed offering price of $[ ] per share and
the anticipated application of the estimated net proceeds therefrom. See
"Use of Proceeds."
(3) For information concerning the Company's short-term and long-term debt,
see Notes F and H of Notes to Consolidated Financial Statements.
(4) Excludes 800,000 shares of Common Stock reserved for issuance upon the
exercise of options or stock purchase rights issuable under the Company's
1997 Stock Option Plan, none of which were outstanding as of December 31,
1997. See "Management--1997 Stock Option Plan."
16
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
The following selected consolidated financial data should be read in
conjunction with the Consolidated Financial Statements and related Notes
thereto appearing elsewhere in this Prospectus and "Management's Discussion
and Analysis of Financial Condition and Results of Operations." The selected
financial data have been derived from the Consolidated Financial Statements of
the Company. The consolidated statements of operations for each of the three
years in the period ending December 31, 1996 and for the nine months ended
September 30, 1997 and the consolidated balance sheets at December 31, 1995
and 1996 and at September 30, 1997 have been audited by the Company's
independent auditors and are included elsewhere in this Prospectus. The
selected balance sheet data as of December 31, 1992, 1993 and 1994 and the
selected statements of operations data for each of the two years in the period
ended December 31, 1993 and the selected statement of operations data for the
nine months ended September 30, 1996 have been derived from the unaudited
Consolidated Financial Statements of the Company not included herein, which in
the opinion of management, reflect all adjustments (consisting solely of
normal recurring adjustments) necessary for a fair presentation of the results
for these periods and as of such dates. The selected financial data provided
below is not necessarily indicative of the future results of operations or
financial performance of the Company.
<TABLE>
<CAPTION>
NINE MONTHS
ENDED
YEARS ENDED DECEMBER 31, SEPTEMBER 30,
---------------------------------------- ---------------
1992 1993 1994 1995 1996 1996 1997
------- ------- ------- ------- ------- ------- -------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Net sales.............. $52,929 $64,747 $74,520 $79,828 $90,723 $70,061 $77,328
Gross profit........... 12,633 15,279 15,276 14,792 20,837 16,096 18,666
Operating expenses:
Selling, design and
shipping.............. 4,749 5,765 5,962 7,986 7,686 5,768 6,634
General and
administrative........ 4,120 5,413 6,358 6,830 7,684 5,834 6,445
------- ------- ------- ------- ------- ------- -------
Total operating
expenses............. 8,869 11,178 12,320 14,816 15,370 11,602 13,079
------- ------- ------- ------- ------- ------- -------
Operating income
(loss)................ 3,764 4,101 2,956 (24) 5,467 4,494 5,587
Interest expense, net.. 918 1,160 1,631 2,375 2,980 2,203 2,522
------- ------- ------- ------- ------- ------- -------
Income (loss) before
pro forma income
taxes................. 2,846 2,941 1,325 (2,399) 2,487 2,291 3,065
Pro forma net
income(1)............. $ 1,497 $ 1,788
======= =======
Pro forma net income
per share............. $ [ ] $ [ ]
======= =======
Pro forma weighted
average shares
outstanding(2)........ [ ] [ ]
Supplemental pro forma
net income per
share(3).............. $ [ ] $ [ ]
======= =======
Supplemental pro forma
weighted average
shares
outstanding(2)(4)..... [ ] [ ]
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30, 1997
--------------------------------------- -------------------------------
PRO PRO FORMA
1992 1993 1994 1995 1996 ACTUAL FORMA(5) AS ADJUSTED(6)
------- ------- ------- ------- ------- ------- -------- --------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital........ $ 4,673 $ 5,125 $ 5,942 $ 3,260 $ 5,228 $ 5,249 $ 3,249 $
Total assets........... 19,129 25,413 27,570 33,568 33,986 39,308 39,308
Due to bank............ 7,925 12,050 14,435 21,340 19,732 27,292 27,292
Due to stockholders.... 934 900 1,200 1,500 1,560 1,400 5,570
Capital lease
obligations........... 23 -- 14 52 123 82 82
Stockholders' equity... 4,255 5,474 6,135 3,848 5,573 5,258 1,088
</TABLE>
17
<PAGE>
- --------
(1) The Company has operated as an S Corporation for federal and New York
state income tax purposes since 1988. Two of the wholly-owned subsidiaries
are C Corporations and, accordingly, have been taxed at the appropriate
corporate federal and state tax rates. The historical Consolidated
Financial Statements do not include a provision for federal and state
income taxes for such periods for those subsidiaries which have elected to
be treated as S Corporations. A provision for state income taxes has been
made for those states not recognizing S Corporation status. Pro forma net
income has been computed as if the Company had been fully subject to
federal and state income taxes based on the tax laws in effect during the
respective periods. See Notes A and O to the Consolidated Financial
Statements.
(2) Reflects the weighted average shares outstanding and gives pro forma
effect to the additional shares that the Company would have to sell at the
assumed initial public offering price of $[ ] per share to repay the
estimated $4.2 million of promissory notes to be issued to the
stockholders in connection with the termination of the Company's S
Corporation status. The Company intends to repay $2.0 million of these
notes with a portion of the net proceeds of the Offering.
(3) Supplemental pro forma net income per share was computed by adjusting pro
forma net income per share to reflect a reduction in interest expense and
related fees, net of taxes, of $[ ] and $[ ] in the year ended
December 31, 1996 and for the nine months ended September 30, 1997,
respectively, resulting from the assumed repayment of debt with a portion
of the net proceeds of the Offering as if such repayment had occurred on
January 1, 1996, consisting solely of repayment of $[ ] million
outstanding under the Company's $42.0 million line-of-credit (of which
$27.3 million was outstanding at September 30, 1997).
(4) Gives pro forma effect to the additional shares that the Company would
have to sell at the assumed initial public offering price of $[ ] per
share to repay the debt referenced in footnote 3 above.
(5) Adjusted to give effect to an approximately $4.2 million decrease in
stockholders' equity and a corresponding increase in due to stockholders
at September 30, 1997, of which $2.0 million has been classified as a
current liability to be repaid with a portion of the net proceeds of the
Offering, resulting from an issuance of promissory notes to certain
stockholders related to the termination of the Company's status as an S
Corporation. See "The Company," "Capitalization," "Management--
Compensation Committee Interlocks and Insider Participation" and Note O to
the Consolidated Financial Statements.
(6) Adjusted to reflect the sale of [ ] shares of common stock in the
Offering at an assumed offering price of $[ ] per share and the
anticipated application of the net proceeds therefrom. See "Use of
Proceeds" and "Capitalization."
18
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
OVERVIEW
Happy Kids is a leading designer and marketer of custom-designed, licensed
and branded children's apparel. The Company produces high-quality, coordinated
apparel programs, including knit tops, bottoms, overalls, shortalls, coveralls
and swimwear, for newborns, infants, toddlers, boys and girls. The Company's
major licenses include Nickelodeon's Rugrats, And 1, B.U.M. Equipment and
Ocean Pacific and, in late 1997, the Company acquired licenses to Warner
Brothers' Scooby Doo, ACA Joe and E.N.U.F. Internationale. The Company also
designs and delivers private label branded playwear programs for leading
retailers, including Sesame Street for KMart, New Legends for Kids R Us and
Canyon River Blues for Sears and recently began participating in Nickelodeon's
Nick Universe program being launched by Kids R Us.
Prior to and including much of 1995, the Company's operating strategy
primarily focused on developing and marketing its own house brands. The
Company manufactured products for inventory under the Company's brands and
often concentrated on enhancing sales volume rather than focusing on a
combination of sales volume and gross margins. The Company believes that the
loss in 1995 was primarily attributable to these factors. In 1995, to leverage
its strong customer relationships, the Company initiated its current sales
strategy under which the Company's customers order specific quantities of
goods on a fixed-priced basis six to nine months in advance of a selling
season. As a result, for 1997, substantially all of the Company's playwear was
produced upon receipt of customer orders. Also in 1995, the Company elected to
concentrate on developing a diversified portfolio of popular, established and
well-recognized licensed properties and private label relationships and de-
emphasized its reliance on house brands, which have been a declining component
of the Company's net sales in each year since 1995. Since that time, the
Company's strategy has been to work closely with its customers to design and
market high-quality coordinated apparel programs resulting in gross margins
that the Company believes are higher than those typically generated from sales
of non-licensed or non-private label branded playwear.
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, information
derived from the Company's Consolidated Statements of Operations expressed as
a percentage of net sales unless otherwise noted:
<TABLE>
<CAPTION>
PERCENTAGE OF NET SALES
------------------------------------
NINE MONTHS
YEARS ENDED ENDED
DECEMBER 31, SEPTEMBER 30,
-------------------- --------------
1994 1995 1996 1996 1997
----- ----- ----- ------ ------
<S> <C> <C> <C> <C> <C>
Net sales................................. 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of goods sold........................ 79.5 81.5 77.0 77.0 75.9
----- ----- ----- ------ ------
Gross profit.............................. 20.5 18.5 23.0 23.0 24.1
Operating expenses:
Selling, design and shipping............. 8.0 10.0 8.5 8.2 8.6
General and administrative............... 8.5 8.5 8.5 8.3 8.3
----- ----- ----- ------ ------
Total operating expenses................ 16.5 18.5 17.0 16.5 16.9
----- ----- ----- ------ ------
Operating income (loss)................... 4.0 -- 6.0 6.5 7.2
Interest expense, net..................... 2.2 3.0 3.3 3.2 3.3
----- ----- ----- ------ ------
Income (loss) before income taxes......... 1.8% (3.0)% 2.7% 3.3% 3.9%
===== ===== ===== ====== ======
</TABLE>
19
<PAGE>
NINE MONTHS ENDED SEPTEMBER 30, 1997 COMPARED TO NINE MONTHS ENDED SEPTEMBER
30, 1996
Net Sales. Net sales increased by $7.2 million, or 10.4%, to $77.3 million
for the nine months ended September 30, 1997 from $70.1 million for the nine
months ended September 30, 1996. The increase in net sales is attributable
primarily to increased sales of playwear incorporating the properties covered
by the Company's Rugrats license with Nickelodeon and increased sales to KMart
resulting in part from the 1997 commencement of its Sesame Street private
label program. This increase was partially offset by a decrease in net sales
of products incorporating properties covered by one of the Company's former
major licenses, which license currently represents only a small percentage of
net sales.
Gross Profit. Gross profit increased by $2.6 million, or 16.0%, to $18.7
million for the nine months ended September 30, 1997 from $16.1 million for
the nine months ended September 30, 1996. The gross profit margin increased to
24.1% for the nine months ended September 30, 1997 from 23.0% for the nine
months ended September 30, 1996. The increase in the gross margin is
attributable to the implementation of the Company's current sales strategy. As
part of such strategy, initiated in 1995, orders are received six to nine
months in advance of shipment resulting in finished goods being produced
according to customer order. Due to the timing of the order cycle and revenue
recognition (sales are recognized when products are shipped), the Company
first began to fully realize the benefits of such strategy in mid-1996. In
addition, during 1997, there was a decrease in the Company's product return
rates as compared to the comparable period in 1996. Gross profit is net of any
royalties associated with the use of licensed properties.
Selling, Design and Shipping Expenses. Selling, design and shipping expenses
increased by $866,000, or 15.0%, to $6.6 million for the nine months ended
September 30, 1997 from $5.8 million for the nine months ended September 30,
1996. This increase is attributable primarily to higher sales salaries and
commissions for existing personnel and the hiring of additional sales and
design personnel during the first nine months of 1997. As a percentage of net
sales, selling, design and shipping expenses increased to 8.6% for the nine
months ended September 30, 1997 from 8.2% for the nine months ended September
30, 1996.
General and Administrative Expenses. General and administrative expenses
increased $611,000, or 10.5%, to $6.4 million for the nine months ended
September 30, 1997 from $5.8 million for the nine months ended September 30,
1996. This increase is primarily the result of higher factor commissions
associated with increased sales volume. The Company utilized its factoring
arrangement for the entire nine month period in 1997 as compared to only seven
months of the corresponding period in 1996. As a percentage of net sales,
general and administrative expenses remained constant at 8.3% for both the
nine months ended September 30, 1997 and 1996.
Interest Expense, net. Interest expense, net increased $319,000, or 14.5%,
to $2.5 million for the nine months ended September 30, 1997 from $2.2 million
for the nine months ended September 30, 1996. This increase is a result of
higher sales volume resulting in an increase in borrowings, interest expense
and fees under the line of credit. As a percentage of net sales, interest
expense, net increased slightly to 3.3% for the nine months ended September
30, 1997 from 3.2% for the nine months ended September 30, 1996.
Income Before Income Taxes. Income before income taxes increased $774,000,
or 33.8%, to $3.1 million for the nine months ended September 30, 1997 from
$2.3 million for the nine months ended September 30, 1996 due to the reasons
described above. As a percentage of net sales, income before income taxes
increased to 3.9% for the nine months ended September 30, 1997 from 3.3% for
the nine months ended September 30, 1996.
20
<PAGE>
1996 COMPARED TO 1995
Net Sales. Net sales increased $10.9 million, or 13.6%, to $90.7 million in
1996 from $79.8 million for 1995. The increase in net sales is due primarily
to the introduction by the Company of products incorporating the properties
covered by the B.U.M. Equipment and Nickelodeon's Rugrats licenses, as well as
increases in certain private label programs. The increase in net sales was
partially offset by the reduction of sales under the Company's house brands,
evidencing the continuing shift in the Company's product mix from sales of
house brands to sales of products incorporating licensed and branded
properties.
Gross Profit. Gross profit increased by $6.0 million, or 40.9%, to $20.8
million in 1996 from $14.8 million in 1995. The gross profit margin increased
to 23.0% in 1996 from 18.5% in 1995. The increase in gross margin is
attributable to the Company's successful implementation of its current sales
strategy and a change in product mix toward higher margin licensed and branded
properties from lower margin house brands.
Selling, Design and Shipping Expenses. Selling, design and shipping expenses
decreased $300,000, or 3.8%, to $7.7 million in 1996 from $8.0 million in
1995. This decrease is due primarily to the cost benefits associated with the
installation of an in-house CAD system early in 1996. As a percentage of net
sales, selling, design and shipping expenses decreased to 8.5% in 1996 from
10.0% in 1995.
General and Administrative Expenses. General and administrative expenses
increased $854,000, or 12.5%, to $7.7 million in 1996 from $6.8 million in
1995. This increase is due to charges associated with the Company's factoring
agreement. The Company had no factoring agreement in the comparable period of
the prior year. As a percentage of net sales, general and administrative
expenses remained constant at 8.5% in 1996 and 1995.
Interest Expense, net. Interest expense, net increased $605,000, or 25.5%,
to $3.0 million in 1996 from $2.4 million in 1995. This increase is a result
of higher sales volume resulting in an increase in borrowings, interest
expense and fees under the line of credit. As a percentage of net sales,
interest expense, net increased to 3.3% in 1996 from 3.0% in 1995.
Income (Loss) Before Income Taxes. Income before income taxes increased $4.9
million to $2.5 million in 1996 from a loss of $2.4 million in 1995 due to the
reasons described above. As a percentage of net sales, income before income
taxes was 2.7% in 1996 as compared to (3.0%) in 1995.
1995 COMPARED TO 1994
Net Sales. Net sales increased $5.3 million, or 7.1%, to $79.8 million in
1995 from $74.5 million in 1994. The increase in net sales is attributable
primarily to an entire year of sales of products incorporating the properties
covered by the Ocean Pacific license, as well as increased sales of certain
private label programs. This increase was partially offset by a significant
decline in sales of the Company's house brands. In 1995, the Company's product
mix shifted materially from sales of house brands.
Gross Profit. Gross profit decreased by $484,000, or 3.2%, to $14.8 million
in 1995 from $15.3 million in 1994. Gross profit as a percentage of net sales
decreased to 18.5% in 1995 from 20.5% in 1994. This decrease in gross margin
is attributable to lower margins associated with certain licensed and private
label programs.
Selling, Design and Shipping Expenses. Selling, design and shipping expenses
increased $2.0 million, or 33.9%, to $8.0 million in 1995 from $6.0 million in
1994. This increase is due to higher
21
<PAGE>
salaries associated with the expansion of the Company's in-house sales force
in 1995, as well as increased warehouse and design costs. As a percentage of
net sales, selling, design and shipping expenses increased to 10.0% in 1995
from 8.0% in 1994.
General and Administrative Expenses. General and administrative expenses
increased $472,000, or 7.4%, to $6.8 million in 1995 from $6.4 million in
1994. This increase is due to the hiring of additional office staff,
professional fees associated with the development and implementation of new
business strategies and rent associated with a new showroom facility. As a
percentage of net sales, general and administrative expenses remained constant
at 8.5% in 1995 and 1994.
Interest Expense, net. Interest expense, net increased $744,000, or 45.6%,
to $2.4 million in 1995 from $1.6 million in 1994. This increase is a result
of higher sales volume resulting in an increase in borrowings, interest
expense and fees under the line of credit. As a percentage of net sales,
interest expense, net increased to 3.0% in 1995 from 2.2% in 1994.
Income (Loss) Before Income Taxes. Income before income taxes decreased $3.7
million to a loss of $2.4 million in 1995 from $1.3 million in 1994 due to the
reasons described above. As a percentage of net sales, income before income
taxes was (3.0%) in 1995 as compared to 1.8% in 1994.
LIQUIDITY AND CAPITAL RESOURCES
The Company has financed its cash requirements primarily through operations
and borrowings under its bank credit line. Historically, the Company's
borrowing requirements have been seasonal, with peak working capital needs
arising during the first and third quarters.
The Company's bank credit facility currently permits borrowings up to $42.0
million as a revolving credit line that expires on December 31, 1998, subject
to annual renewals (adjusted seasonally to $47.0 million from January 1, 1998
through April 30, 1998). The first $5.0 million of borrowings under this line
of credit bear interest at the prime rate plus 4.0% (12.5% at September 30,
1997). The remaining borrowings bear interest at the prime rate plus 1.0%
(9.5% at September 30, 1997). Additionally, the Company is subject to certain
fees associated with the line of credit. The amount available under this line
of credit is dependent upon levels of eligible accounts receivable and
inventory. The credit facility is collateralized by substantially all of the
assets of the Company and is guaranteed by the Company's three major
stockholders. As of September 30, 1997, the Company had $27.3 million of
outstanding direct borrowings and $11.2 million of contingent liabilities
under open letters of credit. The Company intends to use approximately $[ ]
million of the net proceeds from this Offering to reduce the outstanding
balance of direct borrowings under the credit facility. In addition, the
Company's lender has sole discretion to make or withhold advances under the
credit line. There can be no assurance that the lender will continue to lend
under the credit line. If the lender exercises its discretion to withhold
advances, there would be a material adverse effect on the Company's business,
financial condition and results of operations. See "Risk Factors--Dependence
on Access to Credit Facilities."
As of September 30, 1997 the Company's principal sources of liquidity
included cash of $619,000, amounts due from factor of $25.1 million and net
accounts receivable of $599,000. The Company had working capital of $5.2
million and long-term debt of $1.4 million as of September 30, 1997.
For the nine months ended September 30, 1997, operating activities used cash
of $4.3 million primarily as a result of an increase in amounts due from
factor of $8.2 million due to increased sales volume, partially offset by
income from operations of $2.7 million. Net cash used in investing activities
during the nine months ended September 30, 1997 was $60,000 consisting
entirely of capital expenditures, while net cash provided by financing
activities during the same period was $4.4 million
22
<PAGE>
consisting primarily of net borrowings of $7.6 million under the Company's
bank credit facility offset by payments to stockholders of $3.0 million for
their personal income taxes due on the earnings of the S Corporations.
During fiscal 1996, operating activities provided cash of $3.1 million
primarily from net income of $2.4 million and a reduction in inventory levels
of $5.7 million. This cash provided by operations was partially offset by the
cash used by an increase in amounts due from factor of $16.9 million less the
cash generated by a decrease in accounts receivable of $10.5 million due to
the Company's implementation of its factoring program in 1996. Net cash used
in investing activities during fiscal 1996 was $378,000 reflecting the
purchase of certain fixed assets. Net cash used in financing activities during
1996 was $2.3 million consisting primarily of payments under the Company's
bank credit facility and distributions to stockholders for taxes on S
Corporation earnings.
Historically, the Company's business has not required significant capital
expenditures. The Company's capital expenditures were approximately $283,000,
$578,000, $378,000 and $60,000 for the years ended December 31, 1994, 1995 and
1996 and for the nine months ended September 30, 1997, respectively. The
Company believes that cash flow expected to be generated from operations,
together with borrowings under its existing credit facility and the net
proceeds from this Offering, will be adequate to satisfy current and planned
operations for at least the next 12 months.
BACKLOG
The Company's customers order specific quantities of goods on a fixed-price
basis six to nine months in advance of a selling season. Such customer orders
are placed in backlog upon their receipt and acceptance by the Company.
Customer orders are generally cancellable on notice to the Company without
penalty. Although the Company has not had significant cancellations in the
past, no assurance can be given that it will not experience a significant
level of cancellations in the future or that its backlog at any point in time
will be converted to sales. Many of the Company's orders are received
significantly in advance of scheduled delivery periods. Consequently, the
Company had backlog of $101.6 million and $68.7 million at December 31, 1997
and 1996, respectively. The Company expects to fill the December 31, 1997
backlog prior to September 30, 1998.
VARIABILITY OF RESULTS; SEASONALITY; CYCLICALITY
Sales of children's apparel are seasonal. Consequently, the Company's
operating results have varied substantially from quarter to quarter, and the
Company expects that they will continue to do so. Historically, the Company
has experienced significantly higher net sales in the first and third quarters
as compared to the second and fourth quarters. The seasonality of the
Company's business also affects borrowings under the Company's lines of credit
and its level of backlog, which fluctuate in response to demand for the
Company's products. Therefore, the results of any interim period are not
necessarily indicative of the results that may be achieved for an entire year.
In addition, the apparel industry is a cyclical industry heavily dependent
upon the overall level of consumer spending, with purchases of apparel and
related goods tending to decline during recessionary periods when disposable
income is low. A difficult retail environment could result in downward price
pressure which could adversely impact the Company's gross profit margins.
SELECTED QUARTERLY RESULTS OF OPERATIONS
The following table presents certain unaudited condensed consolidated
quarterly financial information for each of the eight most recent quarters in
the period ended December 31, 1997. This information is derived from unaudited
condensed Consolidated Financial Statements of the Company that include, in
the opinion of the Company, all adjustments (consisting only of normal
recurring adjustments) necessary for a fair presentation of results of
operations for such periods, when read in
23
<PAGE>
conjunction with the audited Consolidated Financial Statements of the Company
and notes thereto appearing elsewhere in this Prospectus.
<TABLE>
<CAPTION>
QUARTERS ENDED
---------------------------------------------------------------------------
MAR. 31, JUNE 30, SEPT. 30, DEC. 31, MAR. 31, JUNE 30, SEPT. 30, DEC. 31,
1996 1996 1996 1996 1997 1997 1997 1997
-------- -------- --------- -------- -------- -------- --------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net sales............... $29,260 $13,472 $27,329 $20,662 $24,811 $14,746 $37,771 $[ ]
Gross profit............ 6,536 1,964 7,596 4,741 5,981 3,273 9,412 [ ]
Operating income
(loss)................. 2,638 (950) 2,806 973 2,106 (529) 4,010 [ ]
Income (loss) before
income taxes........... 1,764 (1,676) 2,203 196 1,412 (1,203) 2,856 [ ]
</TABLE>
The operating results for any quarter are not necessarily indicative of
results which may be obtained for any future period. The Company's quarterly
results may fluctuate as a result of a variety of other factors, many of which
are not within the Company's control, including patterns of spending by
customers, the timing, size and receipt of orders, and delays of shipments to
customers due to delays in delivery by suppliers.
PRO FORMA ADJUSTMENTS FOR INCOME TAXES
The Company has operated as an S Corporation for federal and New York state
income tax purposes since 1988. As a result, for such tax periods, the
Company's earnings were taxed directly to the Company's stockholders. The pro
forma adjustments for income taxes reflected in the Prospectus Summary under
the caption "Summary Consolidated Financial Data" and in the accompanying
Financial Statements were calculated as if the Company were subject to tax
under the tax laws in effect for the respective periods using the criteria
established under Statement of Financial Accounting Standards ("SFAS") No. 109
"Accounting for Income Taxes." The effective tax rate (benefit) for the years
ended December 31, 1995 and 1996 and the nine months ended September 30, 1997
was (31.6)%, 4.8% and 12.2%, respectively.
RECENTLY ISSUED ACCOUNTING STANDARDS
SFAS No. 128, "Earnings per Share" was issued in February 1997 and replaces
Accounting Principles Board ("APB") Opinion No. 15. The new statement
simplifies the computations of earnings per share ("EPS") by replacing the
presentation of primary EPS with basic EPS, which is computed by dividing
income available to common stockholders by the weighted-average number of
common shares outstanding for the period. Diluted EPS under the new statement
is computed similarly to fully diluted EPS pursuant to APB Opinion No. 15.
SFAS No. 128 is effective for financial statements for both interim and annual
periods ending after December 15, 1997. Early application is prohibited. The
effect of adopting SFAS No. 128 is not expected to have a material impact on
the computation of the EPS presented in the financial statements.
SFAS No. 130, "Reporting Comprehensive Income" was issued in June 1997. This
statement is effective for the Company's fiscal year ending December 31, 1998.
This statement addresses the reporting and displaying of comprehensive income
and its components. EPS will only be reported for net income and not for
comprehensive income. Adoption of SFAS No. 130 is not expected to have a
material effect on the Company's financial statement disclosures.
SFAS No. 131, "Disclosures about Segments of an Enterprise and Related
Information" was issued in June 1997. This statement is effective for the
Company's fiscal year ending December 31, 1998. This statement changes the way
public companies report information about segments of their business in their
annual financial statements and requires them to report selected segment
information in their quarterly reports. Adoption of SFAS No. 131 is not
expected to have a material effect on the Company's financial statement
disclosures.
24
<PAGE>
BUSINESS
OVERVIEW
Happy Kids is a leading designer and marketer of custom-designed, licensed
and branded children's apparel. The Company produces high-quality, coordinated
apparel programs, including knit tops, bottoms, overalls, shortalls, coveralls
and swimwear, for newborns, infants, toddlers, boys and girls. The Company's
major licenses include Nickelodeon's Rugrats, And 1, B.U.M. Equipment and
Ocean Pacific and, in late 1997, the Company acquired licenses to Warner
Brothers' Scooby Doo, ACA Joe and E.N.U.F. Internationale. The Company also
designs and delivers private label branded playwear programs for leading
retailers, including Sesame Street for KMart, New Legends for Kids R Us and
Canyon River Blues for Sears and recently began participating in Nickelodeon's
Nick Universe program being launched by Kids R Us. The Company's strategy is
to work closely with its customers to design and market coordinated playwear
programs resulting in gross margins that the Company believes are higher than
those typically generated from sales of non-licensed or non-private label
branded playwear.
BUSINESS STRATEGY
The Company's operating strategies include the following:
Focus on Licensed and Branded Products and Private Label Relationships. The
Company designs and markets licensed and branded coordinated apparel programs
at gross margins that the Company believes are higher than those typically
generated from sales of non-licensed or non-private label branded playwear.
The Company's gross margins increased from 18.5% in 1995 to 24.1% in the nine
months ended September 30, 1997, resulting in part from this focus on licensed
and branded properties and private label relationships. The Company maintains
a diversified portfolio of popular, established and well-recognized licensed
properties and private label relationships to reduce its dependence upon any
one licensed property or private label relationship.
Emphasize Advance Sales. In 1995, the Company initiated its current sales
strategy under which customers order specific quantities of goods on a fixed-
price basis six to nine months in advance of a selling season. For 1997,
substantially all of the Company's apparel was produced upon receipt of
customer orders. Based on orders received as of December 31, 1997, the Company
had backlog of $101.6 million, which it expects to fill over the next six to
nine months. The Company intends to continue to utilize its sales strategy to
minimize its inventory risk.
Utilize Contract Manufacturers. The Company utilizes over 50 unaffiliated,
foreign and domestic contract manufacturers. The Company uses third-party
manufacturers to eliminate the significant capital investment requirements
associated with maintaining manufacturing facilities. The Company has
developed long-standing relationships with many of its contract manufacturers
and, during the nine months ended September 30, 1997, approximately 68.1% of
the Company's products were manufactured by contract manufacturers which have
been utilized by the Company for over three years.
Capitalize on In-House Design Capabilities. The Company's playwear is
designed by 42 in-house designers and graphic artists organized in teams
dedicated to each of the Company's licensed properties and private label
programs. The Company believes that its customers will continue to rely on its
ability to design, have manufactured and deliver on a timely basis
commercially successful apparel programs which foster long-term customer
relationships and result in a high level of customer satisfaction.
25
<PAGE>
The Company's growth strategies include the following:
Increase Sales to Existing Accounts. The Company seeks to increase sales to
its current customers by expanding its product categories and sizes
incorporating the Company's existing licensed properties and private label
relationships. The Company's customer base includes each of the top ten
childrenswear retailers. Historically, capital constraints have limited the
Company's ability to market products broadly to all children's apparel
departments within its current customer base. Following the completion of this
Offering, however, the Company expects to have improved access to capital
which the Company believes will permit it to market, design and produce
additional product categories and sizes under its existing licenses and
private label relationships. For example, the Company successfully expanded
its relationship with KMart from one to five size categories during the nine
months ended September 30, 1997. The Company believes there is significant
opportunity to increase sales to its existing customer base.
Expand Customer Base. The Company's customers include mass-market retailers,
mid-tier distributors and department stores, and the Company's current
customers include KMart, Kids R Us, Price/Costco, Sears and WalMart. Within
its current distribution channels, the Company seeks to generate sales from
new accounts by capitalizing on the demand for its licensed products and on
its ability to successfully execute private label programs. In addition, the
Company recently began to market certain licensed products to specialty
retailers, including sporting goods chains such as Champs, FootAction and The
Sports Authority.
Leverage Newly Acquired Licensed Properties and Private Label
Relationships. The Company recently acquired several new licenses, including
ACA Joe, E.N.U.F. Internationale and Warner Brothers' Scooby Doo, and a new
private label arrangement, Nickelodeon's Nick Universe being launched by Kids
R Us. In acquiring these new licenses, the Company has relied on its market
research and communications with its customers to assess the marketability of
these lines. The Company's design teams currently are developing apparel
programs in conjunction with its customers and licensors and the Company
expects to launch these apparel programs in late 1998, targeting both its
existing and new customers.
Pursue New Licenses and Private Label Relationships. The Company actively
pursues licensing of additional properties and new private label
relationships. The Company seeks licenses and private label arrangements that
are based on popular and established characters and brand names. The Company
believes that its reputation encourages potential licensors to seek out the
Company as a licensee of their branded properties and encourages retailers to
engage the Company to design and have manufactured coordinated apparel
programs under their own private labels. Furthermore, the Company believes
that its history of successfully executing licensed and private label
coordinated apparel programs provides it with a competitive advantage when
seeking new licenses and private label relationships. For example, the Company
acquired the Nickelodeon's Rugrats license based on a referral from one of the
Company's major customers.
26
<PAGE>
PRODUCTS AND LICENSES
The Company's playwear products are designed and marketed as coordinated
apparel programs and include knit tops, bottoms, overalls, shortalls,
coveralls and swimwear. The Company's products are marketed in a variety of
size categories including newborns, infants, toddlers (2T-4T), boys (4-7 and
8-20) and girls (4-6x and 7-16). The following is a description of the
Company's apparel programs:
<TABLE>
<CAPTION>
EXISTING CURRENT
LICENSED AND BRANDED CURRENT DISTRIBUTION PRODUCT CURRENT SIZE
APPAREL PROGRAMS DESCRIPTION CHANNELS OFFERINGS OFFERINGS
- -------------------- -------------- ------------------------ -------------- --------------
<S> <C> <C> <C> <C>
And 1........ Basketball- Department stores, All apparel Toddlers, boys
themed specialty retailers,
activewear mid-tier distributors
B.U.M.
Equipment... Lifestyle Mass-market retailers, All apparel Newborns,
activewear mid-tier distributors infants,
toddlers,
boys, girls
Canyon River
Blues for
Sears....... Activewear Sears Overalls, Infants,
shortalls, toddlers, boys
tops, bottoms (4-7), girls
(4-6x)
Jordache..... Lifestyle Mass-market retailers Tops, bottoms Infants,
activewear toddlers,
boys, girls
Lullaby Club
for Target.. Infantwear Target Coveralls, Newborns,
tops, bottoms infants
New Legends
for Kids R
Us.......... Activewear Kids R Us Overalls, Toddlers,
shortalls, girls
tops, bottoms
Nickelodeon's
Rugrats..... Character- Mass-market retailers, Coveralls, Boys, girls
based mid-tier distributors, overalls,
activewear department stores shortalls,
tops, bottoms,
swimwear
Ocean
Pacific..... Surf-inspired Department stores, mid- Swimwear, Toddlers, boys
activewear tier distributors tops, bottoms (4-7)
Sesame Street
for KMart... Character- KMart Coveralls, Infants,
based overalls, toddlers, boys
activewear shortalls, (4-7), girls
tops, bottoms, (4-6x)
swimwear
Sonoma for
Kohl's...... Activewear Kohl's Overalls, Infants,
shortalls, toddlers,
tops, bottoms, girls
swimwear
TriStar's
Godzilla.... Character- Mass-market retailers Swimwear Boys
based
activewear
</TABLE>
<TABLE>
<CAPTION>
NEW LICENSED AND
BRANDED ANTICIPATED
APPAREL PROGRAMS DESCRIPTION ANTICIPATED DISTRIBUTION CHANNELS LAUNCH (1)
---------------- ------------------------ --------------------------------- ----------------
<S> <C> <C> <C>
ACA Joe.......... Lifestyle activewear Mid-tier distributors Holiday 1998
E.N.U.F.
Internationale.. Lifestyle activewear Mid-tier distributors, Spring 1998
department stores
Nickelodeon's
Nick Universe
for Kids R Us... Character-based
activewear Kids R Us Fall 1998
Warner Brothers'
Scooby Doo...... Character-based Mid-tier distributors, Spring 1998
activewear mass-market retailers
</TABLE>
- -------
(1) The Company has not generated any revenue to date from these new programs.
The Company expects to commence the design, marketing and manufacturing of
its coordinated apparel programs incorporating the licensed properties and
private label relationships under such new programs in 1998.
The Company's current license arrangements extend for three- to six-year
periods and expire between December 1998 and 2002. The Company's licenses
generally require an initiation fee and/or minimum annual royalties to be
recouped from ongoing royalty payment obligations, which currently range from
5.0% to 12.0% of the Company's net sales of products incorporating a licensed
property. Apparel industry licenses typically are granted with respect to
product categories, sizes and channels of distribution, and may be either
exclusive or non-exclusive. The Company's private label relationships are
conducted on a purchase order basis, rather than pursuant to contract.
27
<PAGE>
MERCHANDISING
Design
The Company's playwear products are designed by 42 in-house designers and
graphic artists organized in teams dedicated to each of the Company's licensed
properties and private label programs. Each team works closely with licensors,
customers and contract manufacturers, utilizing state-of-the-art CAD systems,
to design coordinated products featuring textured fabrications and detailed
graphics. The Company believes that its customers rely on its ability to
design, have manufactured and deliver on a timely basis commercially
successful apparel programs.
The design process incorporates product design, merchandising, sourcing and
production. The Company's design and merchandising teams continually monitor
and evaluate the children's playwear market for styles and trends in fabrics,
trims and accessories, as well as analyze online sales information provided by
its customers. In conjunction with its customers and licensors, the Company's
design teams identify specific design needs and develop product programs. The
Company oversees all garment production, including pattern development and
color and sample approval, through regular communication with the Company's
customers and contract manufacturers.
Sales and Marketing
The Company markets and distributes its products through three primary
channels of distribution, including mass-market retailers, mid-tier
distributors and department stores and recently has begun selling to select
specialty retailers, including sporting goods chains. All of the Company's
sales are within the United States. The Company's customers include:
<TABLE>
<CAPTION>
MASS-
MARKET MID-TIER DEPARTMENT SPECIALTY
RETAILERS DISTRIBUTORS STORES RETAILERS
--------- ------------ --------------------------- --------------------
<S> <C> <C> <C>
KMart Kids R Us Dayton Hudson Champs
Target Kohl's Federated Department Stores FootAction
WalMart Price/Costco JC Penney Foot Locker
Sears The May Company The Sports Authority
</TABLE>
In 1995, to leverage its customer relationships, its popular licenses and
brand names and its reputation for quality products and reliable delivery, the
Company initiated its current sales strategy under which customers order
specific quantities of goods on a fixed-price basis six to nine months in
advance of a selling season. For 1997, substantially all of the Company's
apparel was produced upon receipt of customer orders. Additionally,
historically the Company has been able to leverage the popularity and goodwill
associated with its licenses and brand names to promote sales, rather than
undertaking costly marketing initiatives.
As of December 31, 1997, the Company maintained a sales and marketing staff
of 14 people, including its senior management. The Company is organized in
account teams led by key account sales executives. Each account sales
executive reports directly to senior management and is responsible for the day
to day customer relationship management and for supervising and monitoring the
sales staff. The Company's sales staff is compensated on a salary plus
commission basis.
The Company's sales and marketing staff works closely with the Company's
designers and graphic artists throughout the design and production process.
The Company's customers often launch a new product line associated with a new
license or private label relationship in a limited number of stores. If the
product is successful, the Company's customers often market the product line
throughout
28
<PAGE>
their retail chains or in a significantly larger number of stores. The
Company's design team and sales staff work closely with its customers to
monitor, review and analyze product launches.
The Company's customer base has been and continues to be highly
concentrated. Sales of the Company's products to each of Price/Costco, KMart
and Kids R Us accounted for approximately 15.1%, 12.6% and 12.3% of net sales
for the nine months ended September 30, 1997, respectively. In addition, sales
of the Company's products to each of Kids R Us and WalMart accounted for 21.5%
and 13.4% of net sales, respectively, during 1996, while sales of the
Company's products to each of Kids R Us, WalMart and J.C. Penney accounted for
18.3%, 12.9% and 10.0% of net sales, respectively, during 1995. Based upon
historical and recent results and existing relationships with customers, the
Company believes that a substantial portion of its net sales and gross profits
will continue to be derived from a small number of large customers. There can
be no assurance that the Company's larger customers will continue to place
orders with the Company or that orders by such customers will continue at
their previous levels.
MANUFACTURING
Contract Manufacturers
The Company's products are manufactured to exacting quality standards and
specifications by over 50 unaffiliated, foreign and domestic contract
manufacturers. The Company uses third-party manufacturers to eliminate the
significant capital investment requirements associated with maintaining
manufacturing facilities. The Company has developed long-standing
relationships with many of its contract manufacturers and, during the nine
months ended September 30, 1997, approximately 68.1% of the Company's products
were manufactured by contract manufacturers which have been utilized by the
Company for over three years.
The Company works with independent buying agents in six countries to assist
the Company in selecting a contract manufacturer. The Company and such buying
agents review, among other things, quality of merchandise produced, the
ability of such manufacturer to meet the Company's timing requirements for
delivery and price. The Company is not a party to long-term contractual or
other arrangements with any manufacturer and often uses more than one
manufacturer to produce a coordinated apparel program. The Company believes
that it has ready access to numerous contract manufacturers and that its
existing contract manufacturers have the ability to manufacture across several
product lines.
During 1996 and the nine months ended September 30, 1997, the Company
imported approximately 91.2% and 91.0%, respectively, of its goods.
Approximately 40.3% and 40.7% and 37.4% and 28.0% of the products sold in such
periods were sourced in two overseas countries for 1996 and the nine months
ended September 30, 1997, respectively. There was no other country that
accounted for more than 10% of such products.
The Company's products are subject to bilateral textile agreements between
the United States and a number of foreign countries. Such agreements, which
have been negotiated under the framework established by the Arrangement
Regarding International Trade in Textiles, allow the United States to impose
restraints at any time on the importation of categories of merchandise that,
under the terms of the agreements are not currently subject to specified
limits. The Company does not own the right to import finished garments into
the United States, but relies on its contract manufacturers to obtain the
necessary quotas. In the past, to the extent that necessary import quotas have
not been available with respect to a particular source of supply, the Company
has been able to find an alternative source of supply. Accordingly, the
availability of quotas has not had a material effect upon the Company's
business, financial condition or results of operations. The Company's
continued ability to source products that it imports may be adversely affected
by a significant decrease in available import quotas
29
<PAGE>
as well as any additional bilateral agreements or unilateral trade
restrictions. In addition, a significant portion of the Company's products are
manufactured in Hong Kong. China recently resumed sovereignty over Hong Kong.
The Company cannot predict the effect, if any, this event will have on its
contract manufacturers in Hong Kong and there can be no assurance that Hong
Kong will not experience political, economic or social disruption as a result
of the resumption of Chinese sovereignty. In addition, there have been a
number of recent trade disputes between China and the United States during
which the United States has threatened to impose tariffs and duties on some
products imported from China and to withdraw China's "most favored nation"
trade status. The loss of such status for China, changes in current tariff
structures or the adoption by the United States of trade policies or sanctions
adverse to China could have a material effect on the Company's business,
financial condition or results of operations.
The principal raw materials used in the production and sale of the Company's
products are yarn, fabric, trim, buttons and other accessories. Raw materials
are purchased by the manufacturers who deliver finished goods to the Company.
The Company believes that an adequate supply of raw materials used in the
manufacture of its products is readily available from existing and alternative
sources at reasonable prices.
Quality Control
The Company has in place comprehensive quality control procedures to ensure
that fabrics, materials and finished goods meet the Company's exacting quality
standards. The Company utilizes both internal and independent quality control
representatives to monitor contract manufacturers' production processes. In
addition, certain of the Company's buying agents engage their own personnel
who monitor compliance with the Company's quality control specifications.
The Company oversees testing of yarns and trim for colorfastness,
washability and other standards before sample garments are produced. Selected
product samples are sent to independent testing facilities which test garments
for colorfastness, washability, size specifications and other standards.
Sample garments are randomly subjected to similar quality control tests by the
Company for fit and appearance. Foreign and domestic contract manufacturers
are routinely visited on a spot check basis to ensure compliance with the
Company's quality standards. Finished garments are subject to final inspection
in the Company's warehouse for general appearance and quality prior to
shipment to customers. Prior to shipment, inspection certificates are issued
to indicate that the products have been inspected and found to be in
conformity with the order. Products which are manufactured in foreign
countries are tested to ensure that such products meet United States customs
import requirements by the foreign manufacturers prior to shipment, and the
results of such tests, along with samples of each product style, are sent to
the Company. The Company's ability to design and have manufactured high-
quality playwear is evidenced by the Company's product return rates of 3.3%
and 1.7% in 1996 and in the nine months ended September 30, 1997,
respectively.
DISTRIBUTION
Upon completion of the manufacturing process, the Company's products are
shipped from the contract manufacturers by sea, air or land to the Company's
domestic warehouse facilities. The Company utilizes its warehouse facilities
in New Brunswick, New Jersey, or its public warehouse arrangement in Long
Beach, California prior to shipping its products directly to its customers'
stores or distribution centers via common carrier.
BACKLOG
The Company's customers order specific quantities of goods on a fixed-price
basis six to nine months in advance of a selling season. Such customer orders
are placed in backlog upon their receipt
30
<PAGE>
and acceptance by the Company. Customer orders are generally cancellable on
notice to the Company without penalty. Although the Company has not had
significant cancellations in the past, no assurance can be given that it will
not experience a significant level of cancellations in the future or that its
backlog at any point in time will be converted to sales. Many of the Company's
orders are received significantly in advance of scheduled delivery periods.
The Company had backlog of $101.6 million and $68.7 million at December 31,
1997 and 1996, respectively. The Company expects to fill the December 31, 1997
backlog prior to September 30, 1998.
MANAGEMENT INFORMATION SYSTEMS
The Company believes that advanced information processing is essential to
maintaining its competitive position. The Company participates in the
electronic data interchange program maintained by many of its larger
customers, including J.C. Penney, Kids R Us, Sears, Target and WalMart. This
program allows the Company to receive customer orders, provide advanced
shipping notices, monitor store inventory and track orders on-line from the
time such orders are placed through delivery. The Company is also able to
notify certain of its client's warehouses, in advance, as to shipments. The
Company currently is upgrading its management information systems, which it
expects to complete in 1998, to ensure proper processing of transactions
relating to the year 2000 and beyond. The Company continues to evaluate
appropriate courses of corrective action, including replacement of certain
systems. The Company does not expect the costs associated with ensuring year
2000 compliance to have a material effect on its financial position or results
of operations. All costs associated with year 2000 compliance are being funded
with cash flow generated from operations and are being expensed as incurred.
INDUSTRY AND COMPETITION
The domestic children's apparel industry has increased in market size from
$24.7 billion in 1994 to $26.9 billion in 1996, a 4.4% annual increase, as
measured by The NPD Group, an industry trade group. For 1996, according to
Children's Business, the top ten childrenswear retailers, consisting of
WalMart, KMart, J.C. Penney (including the J.C. Penney catalog), Sears,
Federated Department Stores, Target, Kids R Us, Mervyns, May Company and TJX
Company, accounted for 56.4% of the market.
The children's playwear industry is highly competitive and fragmented. The
Company competes with many companies engaged in the design, production and
distribution of children's apparel for newborns, infants, toddlers, boys and
girls. Some of the Company's competitors have longer operating histories and
financial, sales, marketing, design capabilities and other competitive
resources which are substantially greater than those of the Company. The
Company also faces competition from its existing customers, who may themselves
begin to produce children's playwear directly. In addition, such customers
have in the past competed, and may continue in the future to compete, for
available branded programs. Further, to the extent that the Company's
customers or competitors maintain or initiate private label programs, such
customers or competitors will compete with the Company's licensed and branded
properties. The Company also competes with other manufacturers of children's
apparel for retail floor space.
The Company believes that the principal competitive factors affecting its
business include the ability to deliver, on a timely basis, high quality
coordinated playwear apparel; the ability to successfully obtain licensing
arrangements and private label relationships based on characters and brands
that are appealing to children and parents; the ability to successfully design
coordinated apparel programs based on such licensing arrangements and
relationships; and the ability to produce playwear at competitive prices.
31
<PAGE>
EMPLOYEES
As of December 31, 1997, the Company employed 133 persons, consisting of 14
in sales and marketing, 42 in design and graphic arts, 45 in warehousing and
distribution and 32 in finance, administration and management. Forty of the
Company's 45 employees at its New Brunswick, New Jersey warehouse facility are
subject to a collective bargaining agreement. The Company considers its
relations with its employees to be good.
FACILITIES
The Company currently leases all of its office space. The Company leases
approximately 19,000 square feet for its executive offices and showroom
located at 100 West 33rd Street, New York, New York. Such lease expires in
September 2005 and contains renewal options for an additional three and one
half years. The Company also leases approximately 130,000 square feet for
warehousing and distribution at its warehouse facility in New Brunswick, New
Jersey. Such lease expires in March 2000 and contains renewal options for two
additional five year terms. The Company also maintains a small showroom in
Bentonville, Arkansas. The Company believes that its facilities are sufficient
to meet current needs for its sales, marketing, design, administrative,
warehousing and distribution requirements.
LEGAL PROCEEDINGS
The Company is not a party to any material legal proceedings.
32
<PAGE>
MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The directors and executive officers of the Company are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- -----------------------------------
<C> <C> <S>
Jack M. Benun.. 56 Chairman of the Board, President
and Chief Executive Officer
Stuart Bender.. 43 Chief Financial Officer and
Treasurer
Mark J. Benun.. 31 Executive Vice President, Secretary
and Director
Isaac Levy..... 34 Senior Vice President and Director
</TABLE>
Within ninety days of the consummation of this Offering, the Company intends
to identify and elect two additional independent, unaffiliated directors.
Jack M. Benun. Mr. Benun founded the predecessor to the Company in 1979 and
is the Company's Chairman of the Board, President and Chief Executive Officer.
Mr. Benun has over 30 years experience in the apparel industry. Prior to
founding the Company, Mr. Benun managed a family domestic apparel
manufacturing business.
Mark J. Benun. Mr. Benun joined the Company in 1984 and currently oversees
all sales for the Company. He currently serves as Executive Vice President,
Secretary and as a Director.
Isaac Levy. Mr. Levy joined the Company in 1987 and is responsible for all
operations of the boys division, including buying, design and marketing. He
currently serves as the Company's Senior Vice President and as a Director.
Stuart Bender, CPA. Mr. Bender joined the Company in 1985 as Chief Financial
Officer and Treasurer. Prior to joining the Company, Mr. Bender served as the
corporate controller and divisional controller for two private companies. Mr.
Bender has four years public accounting experience at Grant Thornton LLP.
Other than Jack Benun and Mark Benun, who are father and son, there are no
family relationships among any of the Directors, executive officers and key
employees of the Company. Each of the above persons has served as an executive
officer and/or a Director since joining the Company.
All Directors hold office until the next annual meeting of stockholders and
until their successors shall be duly elected and qualified. Effective upon the
consummation of this Offering and the election of two additional independent,
unaffiliated Directors, the Board of Directors will have a Compensation
Committee, which will approve salaries and certain incentive compensation for
management and key employees of the Company; an Audit Committee, which will
review the results and scope of the audit and other services provided by the
Company's independent accountants; and an Option Committee, which will
administer the Company's 1997 Stock Option Plan. The Compensation and Audit
Committees shall be comprised of Jack Benun and the two additional
independent, unaffiliated Directors and the Option Committee shall be
comprised of the two additional independent, unaffiliated Directors.
Executive officers of the Company are elected annually by the Board of
Directors and serve until their successors are duly elected and qualified.
DIRECTORS' COMPENSATION
Each of the Company's independent, unaffiliated Directors will receive
compensation of $1,500 per meeting for each regularly-scheduled meeting in
which he or she participates. In addition, each of such members of the Board
who serve on the Audit, Option and/or Compensation Committee of the Board will
receive a $750 fee per meeting for each regularly-scheduled Committee meeting
in which
33
<PAGE>
such Committee member participates, as long as such Committee meeting or
meetings is or are held on a day or days other than the day of a regularly-
scheduled Board meeting. The Company also will provide reimbursement to
Directors for reasonable and necessary expenses incurred in connection with
attendance at meetings of the Board of Directors or its Committees. Directors
are eligible to receive stock option grants pursuant to the Company's 1997
Stock Option Plan.
EXECUTIVE COMPENSATION
The following table sets forth information concerning compensation for
services in all capacities awarded to, earned by or paid to the Company's
Chief Executive Officer and each of the other executive officers of the
Company (collectively, the "Named Executives") during the year ended December
31, 1997.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION
---------------------------
OTHER ANNUAL ALL OTHER
SALARY BONUS COMPENSATION COMPENSATION
NAME AND PRINCIPAL POSITION YEAR ($) ($) ($)(1) ($)
(A) (B) (C) (D) (E) (I)(2)
--------------------------- ---- ------- ------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Jack M. Benun..................... 1997 551,064 -- 52,000 2,373
President and Chief Executive Of-
ficer
Mark J. Benun..................... 1997 590,416 -- -- 2,292
Executive Vice President,
Secretary and Director
Isaac Levy........................ 1997 400,242 -- -- 2,266
Senior Vice President and
Director
Stuart Bender..................... 1997 209,803 75,000 -- 2,114
Chief Financial Officer and
Treasurer
</TABLE>
- --------
(1) The costs of certain benefits are not included because, in the aggregate,
they did not exceed, in the case of each Named Executive, the lesser of
$50,000 or 10% of the total annual salary and bonus reported in columns
(c) and (d) of the above table.
(2) Represents 401(k) contributions made by the Company on behalf of the Named
Executive.
1997 STOCK OPTION PLAN
The Company's 1997 Stock Option Plan (the "Plan") was adopted by the Board
of Directors and approved by the stockholders of the Company on December 31,
1997. A total of 800,000 shares of Common Stock are reserved for issuance upon
exercise of options and/or stock purchase rights to be granted under the Plan,
none of which have been granted. Those eligible to receive stock option grants
or stock purchase rights under the Plan include employees, non-employee
Directors and consultants. The Plan is administered by the Option Committee of
the Board of Directors of the Company, which is comprised solely of outside
directors.
Subject to the provisions of the Plan, the administrator of the Plan has the
discretion to determine the optionees and/or grantees, the type of options to
be granted (incentive stock options ("ISOs") or non-qualified stock options
("NQSOs")), the vesting provisions, the terms of the option grants and such
other related provisions as are consistent with the Plan. The exercise price
of an ISO may not be less than the fair market value per share of the Common
Stock on the date of grant or, in the case of an optionee who beneficially
owns 10% or more of the outstanding capital stock of the Company, not less
than 110% of the fair market value per share on the date of grant. The
exercise price of a NQSO may not be less than 85% of the fair market value per
share of the Common Stock on the date of grant or in the case of any Optionee
who beneficially owns 10% or more of the outstanding capital stock of the
34
<PAGE>
Company, not less than 110% of the fair market value per share on the date of
grant. The purchase price of shares issued pursuant to stock purchase rights
may not be less than 50% of the fair market value of such shares as of the
offer date of such rights.
The options terminate not more than ten years from the date of grant,
subject to earlier termination on the optionee's death, disability or
termination of employment with the Company, but provide that the term of any
options granted to a holder of more than 10% of the outstanding shares of
Common Stock may be no longer than five years. Options are not assignable or
otherwise transferable except by will or the laws of descent and distribution.
In the event of a merger or consolidation of the Company with or into another
corporation or the sale of all or substantially all of the Company's assets in
which the successor corporation does not assume outstanding options or issue
equivalent options, the Board of Directors of the Company is required to
provide accelerated vesting of outstanding options. The Plan terminates on
December 31, 2007.
As of December 31, 1997, no awards have been granted by the Company under
the Plan. In addition, the Company has agreed, for a period of one year
commencing on the effective date of this Offering, not to issue any awards
under the Plan at less than the fair market value of the underlying Common
Stock on the date of award.
401(K) PLAN
The Company currently maintains a 401(k) salary reduction plan (the "401(k)
Plan") which is intended to qualify under Section 401(a) and 401(k) of the
Internal Revenue Code of 1986 (the "Code"). Generally, all employees who are
not members of a collective bargaining group and who are 21 years of age or
older are eligible to participate in the 401(k) Plan after they complete 1,000
hours or twelve months of service. All eligible executive officers have
elected to participate in the 401(k) Plan.
Eligible employees electing to participate in the 401(k) Plan may defer a
portion of their compensation on a pre-tax basis, by contributing a percentage
thereof to the 401(k) Plan. There is no minimum contribution, and the maximum
contribution is prescribed in Section 401(k) of the Code. Such maximum for
1997 was $9,500 and will be $10,000 in 1998. The Company makes matching
contributions equal to 25% of the first 4% of a participating employee's
annual salary. Eligible employees who elect to participate in a 401(k) Plan
are generally vested in the Company's matching contribution, according to the
following schedule: less than one year of service--0%; one year of service--
20%; two years of service--40%; three years of service--60%; four years of
service--80%; and five years of service--100%.
EMPLOYMENT AGREEMENTS AND INDEMNIFICATION AGREEMENTS
Each of the executive officers of the Company entered into a two-year
employment agreement with the Company commencing January 1, 1998. Under the
terms of the respective agreements, Messrs. Jack Benun, Mark Benun, Isaac Levy
and Stuart Bender are entitled to an annual base salary of $425,000, $300,000,
$300,000 and $225,000, respectively, and bonuses, the amounts and payments of
which are within the discretion of the Compensation Committee of the Board of
Directors. These agreements require each individual to maintain the
confidentiality of Company information. In addition, with the exception of Mr.
Bender, each of such persons has agreed that during the term of his respective
agreement and thereafter for a period of two years, he will not compete with
the Company in any state or territory of the United States where the Company
does business by engaging in any capacity in a business which is competitive
with the business of the Company. Each of the foregoing employment agreements
also provides that, for a period of two years following the termination of
employment, each such individual shall not solicit the Company's licensors,
customers or employees.
In addition to the foregoing employment contracts, the Company has executed
indemnification agreements with each of its executive officers and Directors
pursuant to which the Company has
35
<PAGE>
agreed to indemnify such parties to the full extent permitted by law, subject
to certain exceptions, if such party becomes subject to an action because such
party is a Director, officer, employee, agent or fiduciary of the Company.
KEY MAN INSURANCE
Messrs. Jack Benun, Mark Benun and Isaac Levy are key employees of the
Company and the contribution of each of them to the Company has been and will
be a significant factor in the Company's future success. The loss of any of
them could adversely affect the Company's business and results of operations.
The Company maintains, and is the beneficiary of, a life insurance policy on
the life of Jack Benun, the face amount of which is $3.0 million. The Company
does not maintain key man life insurance on the life of either Mark Benun or
Isaac Levy.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Company's Board of Directors currently does not, and during 1997 did
not, have a Compensation Committee. Consequently, all current Directors
participated in deliberations concerning executive officer compensation,
including decisions relative to their own compensation in 1997.
The Company and certain of its subsidiaries have been treated for federal
and state income tax purposes as an S Corporation under Sub-chapter S of the
Code since 1988. As a result of the Company's status as an S Corporation, the
Company's current stockholders, rather than the Company, have been taxed
directly on earnings of the Company for federal and certain state income tax
purposes, whether or not such earnings were distributed. Immediately prior to
the effectiveness of this Offering, the Company will terminate its status as
an S Corporation and will thereafter be subject to federal and state income
taxes at applicable C corporation rates.
Prior to the termination of its S Corporation status, the Company intends to
declare the S Corporation Distribution to the stockholders of record of the
Company on such date. Such stockholders consist solely of Jack Benun, the
Company's Chairman of the Board, President and Chief Executive Officer, Mark
Benun, the Company's Executive Vice President and Secretary, and Isaac Levy,
its Senior Vice President. Such distribution (estimated at $4.2 million as of
September 30, 1997) represents substantially all of the Company's remaining
undistributed S Corporation earnings and will be evidenced by four-year 5.7%
promissory notes to be issued to such stockholders in connection with the
termination of the Company's S Corporation status. Of this amount, $2.0
million of the net proceeds from this Offering will be used to make a partial
payment of amounts due under such notes. See "Use of Proceeds." The balance of
the S Corporation Distribution will be paid in accordance with the terms and
provisions of the promissory notes referred to above and will provide for the
timely distribution of amounts necessary to pay personal income taxes of the
stockholders due on amounts earned by the S Corporations for the period
October 1, 1997 through the termination of such S Corporation status. The
actual amount of the S Corporation Distribution will be adjusted to include
the taxable income of the Company for the period from October 1, 1997 through
the day preceding the date on which S Corporation status is terminated, less
any state income tax payable by the Company with respect to such income and
any distributions made to the current stockholders during that time period
($3.1 million was distributed to the current stockholders in 1997 and 1998
through the date of this Prospectus in the form of dividends to fund their
1996 and 1997 tax liabilities resulting from the Company's status as an S
Corporation). S Corporation distributions totalled $711,000 and $721,000 in
1995 and 1996, respectively.
From time to time, the Company has made loans to Jack Benun, Mark Benun and
Isaac Levy and received loans from Jack Benun. All outstanding loans made to
such individuals by the Company, totalling $352,691 as of September 30, 1997
will be repaid to the Company prior to the consummation of the Offering. Loans
received by the Company from Jack Benun will be repaid to Mr. Benun on the
same terms and conditions as those included in the four-year 5.7% promissory
notes to be issued in connection with the termination of the Company's S
Corporation status.
36
<PAGE>
Immediately prior to the effectiveness of this Offering, the Company will
acquire all of the issued and outstanding shares of certain related entities
of the Company, in exchange for shares of Common Stock of the Company, from
each of Jack Benun and Mark Benun. Each of Jack Benun and Mark Benun will
receive 2,131,250 shares of the Company's Common Stock in exchange for each of
their 50.0% ownership interests in each of Happy Kids, Ltd., Talk of the Town
Apparel Corp., O.P. Kids, L.L.C., H.O.T. Kidz, L.L.C., Hawk Industries, Inc.
and J & B 18 Corp.
Jack Benun, Mark Benun and Isaac Levy have entered into a stockholders
agreement dated January 1, 1998. Such agreement provides tag-along rights to
each of the parties thereto in the event that any of the other parties elects
to sell his Common Stock. In addition, each party is granted a right of first
refusal to purchase any shares of Common Stock offered for sale by any other
party to the agreement. Finally, Mark Benun has granted Jack Benun an
irrevocable proxy to vote any of the Company's voting securities beneficially
owned by Mark Benun for the life of Jack Benun.
CERTAIN TRANSACTIONS
For transactions involving Jack Benun, Mark Benun and Isaac Levy, see
"Management--Compensation Committee Interlocks and Insider Participation."
The Board of Directors of the Company has adopted a policy requiring that
any future transactions between the Company and its officers, Directors,
principal stockholders and their affiliates be on terms no less favorable to
the Company than could be obtained from unrelated third parties and that any
such transactions be approved by a majority of the disinterested members of
the Company's Board of Directors.
37
<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information regarding the beneficial
ownership of the Company's Common Stock as of December 31, 1997, and as
adjusted to reflect the sale of the shares of Common Stock offered hereby, by
(i) each person who is known to the Company to own beneficially more than 5.0%
of the outstanding shares of Common Stock, (ii) each of the Company's
Directors and Named Executives, and (iii) all Directors and executive officers
of the Company as a group.
<TABLE>
<CAPTION>
PERCENTAGE OF
SHARES BENEFICIALLY
OWNED(3)
SHARES ----------------------
DIRECTORS, NAMED EXECUTIVES AND 5% BENEFICIALLY BEFORE AFTER
STOCKHOLDERS(1) OWNED(2) OFFERING OFFERING
- ---------------------------------- ------------ --------- ---------
<S> <C> <C> <C>
Jack M. Benun(4)........................ 6,587,500 85.0% [ ]%
Mark J. Benun........................... 3,293,750 42.5 [ ]
Isaac Levy.............................. 1,162,500 15.0 [ ]
Stuart Bender........................... -- -- --
All Directors and executive officers as
a group (four persons)................. 7,750,000 100.0 [ ]
</TABLE>
- --------
(1) The address of each beneficial owner of more than 5% of the outstanding
Common Stock is 100 West 33rd Street, Suite 1100, New York, New York
10001.
(2) Except as set forth in the footnotes to this table and subject to
applicable community property law, the persons named in the table have
sole voting and investment power with respect to all shares of Common
Stock shown as beneficially owned by such Stockholder.
(3) Applicable ownership percentage is based on 7,750,000 shares of Common
Stock outstanding on December 31, 1997, including the shares issued in the
Reorganization, and [ ] shares of Common Stock outstanding after the
completion of this Offering.
(4) Includes 3,293,750 shares of Common Stock owned of record by Mark Benun,
as to which shares Jack Benun exercises voting power.
38
<PAGE>
DESCRIPTION OF CAPITAL STOCK
As of December 31, 1997, the Company's authorized capital stock consists of
30,000,000 shares of Common Stock, $.01 par value per share, and 5,000,000
shares of undesignated Preferred Stock, $.01 par value per share. At December
31, 1997, there were 7,750,000 shares of Common Stock issued and outstanding
and held of record by three stockholders. There are no shares of Preferred
Stock designated or issued.
The following statements are brief summaries of certain provisions with
respect to the Company's capital stock contained in its Certificate of
Incorporation and By-Laws, copies of which have been filed as exhibits to the
Registration Statement. The following summary is qualified in its entirety by
reference thereto.
COMMON STOCK
Holders of shares of Common Stock are entitled to one vote for each share
held of record on matters to be voted on by the stockholders of the Company.
Holders of shares of Common Stock will be entitled to receive dividends,
subject to the rights of preferred stockholders, if any, when, as and if
declared by the Board of Directors (see "Dividend Policy") and to share
ratably in the assets of the Company legally available for distribution to its
stockholders in the event of the liquidation, dissolution or winding-up of the
Company. Holders of Common Stock have no preemptive, subscription, redemption
or conversion rights. All of the issued and outstanding shares of Common Stock
are, and all shares of Common Stock to be sold in this Offering will be, duly
authorized, validly issued, fully paid and nonassessable.
PREFERRED STOCK
The Company's Board of Directors may without further action by the Company's
stockholders, from time to time, direct the issuance of shares of Preferred
Stock in series and may, at the time of issuance, determine the rights,
preferences and limitations of each series. The holders of Preferred Stock
would normally be entitled to receive a preference payment in the event of any
liquidation, dissolution or winding-up of the Company before any payment is
made to the holders of the Common Stock. The Company does not presently intend
to issue any series of Preferred Stock.
The overall effect of the ability of the Company's Board of Directors to
issue Preferred Stock may be to render more difficult the accomplishment of
mergers or other takeover or change-in-control attempts. To the extent that
this ability has this effect, removal of the Company's incumbent Board of
Directors and management may be rendered more difficult. Further, this may
have an adverse impact on the ability of stockholders of the Company to
participate in a tender or exchange offer for the Common Stock and in so doing
diminish the market value of the Common Stock. See "Risk Factors--Control by
Current Stockholders" and "--Anti-takeover Effect of Certain Charter and By-
Law and Other Provisions."
LIMITATION OF DIRECTOR LIABILITY
The Certificate of Incorporation of the Company limits the liability of
Directors of the Company to the Company or its stockholders to the fullest
extent permitted by New York law. Specifically, Directors of the Company will
not be personally liable for money damages for breach of a duty as a Director,
except that a Director shall not be relieved from liability if a judgment or
other final adjudication adverse to him establishes that his acts or omissions
were in bad faith or involved intentional misconduct or a knowing violation of
law, or that such Director personally gained in fact a financial profit or
other advantage to which such Director was not legally entitled, or that such
Director's acts violated Section 719 of the New York Act (which relates to
unlawful declarations of dividends or other distributions of assets to
stockholders or the unlawful purchase of shares of the corporation).
39
<PAGE>
ANTI-TAKEOVER PROVISIONS
The Company is governed by the provisions of Section 912 et seq., of the New
York Act, an anti-takeover law. In general, the statute prohibits a publicly-
held New York corporation from engaging in a "business combination" with an
"interested stockholder" for a period of five years after the date of the
transaction in which the person became an interested stockholder, unless the
business combination is approved in a prescribed manner. A "business
combination" includes mergers, asset sales and other transactions resulting in
a financial benefit to the interested stockholder. An "interested stockholder"
is a person who, together with affiliates and associates, owns (or within five
years, did own) 20% or more of the corporation's voting stock. After the five-
year waiting period has elapsed, a business combination between a corporation
and an interested stockholder will be prohibited unless the business
combination is approved by the holders of at least a majority of the voting
stock not beneficially owned by the interested stockholder, or unless the
business combination otherwise satisfies the provisions of the New York Act.
The New York Act's fair price provision is intended to provide that all
stockholders (other than the interested stockholders) receive a fair price for
their shares.
The Company's Certificate of Incorporation authorizes the Board of Directors
to issue, without stockholder approval, 5,000,000 shares of Preferred Stock
with voting, conversion and other rights and preferences that could adversely
affect the voting power or other rights of the holders of Common Stock. The
issuance of Preferred Stock or of rights to purchase Preferred Stock could be
used to discourage an unsolicited acquisition proposal. In addition, the
possible issuance of Preferred Stock could discourage a proxy contest, make
more difficult the acquisition of a substantial block of the Company's Common
Stock or limit the price that investors might be willing to pay in the future
for shares of the Company's Common Stock. The Certificate of Incorporation
also provides that: (i) the affirmative vote of the holders of at least 80% of
the voting power of all outstanding shares of the capital stock of the Company
shall be required to adopt, amend or repeal any provision of the bylaws of the
Company or the provisions in the Company's Certificate of Incorporation
limiting the liability of directors and provisions relating to certain
management issues; (ii) stockholders of the Company may not take any action by
written consent; (iii) special meetings of stockholders may be called only by
the President, the Chairman of the Board or a majority of the Board of
Directors and business transacted at any such special meeting shall be limited
to matters relating to the purposes set forth in the notice of such special
meeting; and (iv) the Board of Directors, when evaluating an offer related to
a tender or exchange offer or other business combination, is authorized to
give due consideration to any relevant factors, including the social, legal
and economic effects upon employees, suppliers, customers, creditors, the
community in which the Company conducts its business, and the economy of the
state, region and nation. The foregoing provisions of the Certificate of
Incorporation could have the effect of delaying, deterring or preventing a
change in control of the Company. In the event of a merger or consolidation of
the Company with or into another corporation or the sale of all or
substantially all of the Company's assets in which the successor corporation
does not assume outstanding options or issue equivalent options, the Board of
Directors of the Company is required to provide accelerated vesting of
outstanding options.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the Common Stock is American Stock
Transfer & Trust Company.
40
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of this Offering, the Company will have outstanding [ ]
shares of Common Stock. Of these shares, the [ ] shares sold in this
Offering will be freely transferable by persons other than affiliates of the
Company without restriction or further registration under the Act. The
remaining 7,750,000 shares of Common Stock outstanding are "restricted
securities" (the "Restricted Shares") within the meaning of Rule 144 under the
Act and may not be sold in the absence of registration under the Act unless an
exemption from registration is available, including an exemption afforded by
Rule 144.
The Company's current stockholders, Directors and executive officers have
entered into "lock-up" agreements with the Representatives of the
Underwriters, providing that, subject to certain exceptions, they will not
offer, sell or otherwise dispose of any shares of Common Stock for a period of
180 days after the date of this Prospectus without the prior written consent
of Ladenburg Thalmann & Co. Inc. acting as one of the Representatives of the
Underwriters. Following the expiration of the "lock-up" period, all of the
Restricted Shares will be eligible for resale in the public market pursuant to
Rule 144, subject to certain limitations described below.
Rule 144, as currently in effect, provides that an affiliate of the Company
or a person (or persons whose sales are aggregated) who has beneficially owned
Restricted Shares for at least one year, or a non-affiliate who has
beneficially owned Restricted Shares for at least one year but less than two
years, is entitled to sell, commencing 90 days after the date of this
Prospectus, within any three-month period, a number of shares that does not
exceed the greater of one percent of the then outstanding shares of Common
Stock ([ ] shares immediately after this Offering) or the average weekly
trading volume in the Common Stock during the four calendar weeks preceding
such sale. Sales under Rule 144 also are subject to certain manner-of-sale
provisions, notice requirements and the availability of current public
information about the Company. However, a person who is not an affiliate of
the Company at any time during the three months preceding a sale, and who has
beneficially owned Restricted Shares for at least two years, is entitled to
sell such shares under Rule 144 without regard to the limitations described
above.
As of the date of this Prospectus, there were no outstanding options to
purchase shares of Common Stock.
Since there has been no public market for shares of the Common Stock prior
to this Offering, the Company is unable to predict the effect that sales made
pursuant to Rule 144, or otherwise, may have on the prevailing market price at
such times for shares of the Common Stock. Nevertheless, sales of a
substantial amount of the Common Stock in the public market, or the perception
that such sales could occur, could adversely affect the market prices. See
"Risk Factors--Shares Eligible for Future Sale."
41
<PAGE>
UNDERWRITING
Subject to the terms and conditions of the Underwriting Agreement, a copy of
which has been filed as an exhibit to the Registration Statement of which this
Prospectus is a part, the underwriters named below (the "Underwriters"), have
severally, and not jointly, agreed, through Ladenburg Thalmann & Co. Inc. and
Cruttenden Roth Incorporated, the Representatives of the Underwriters (the
"Representatives"), to purchase from the Company, and the Company has agreed
to sell to the Underwriters, the aggregate number of shares of Common Stock
set forth opposite their respective names:
<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITER SHARES
----------- ---------
<S> <C>
Ladenburg Thalmann & Co. Inc. .....................................
Cruttenden Roth Incorporated.......................................
-----
Total.......................................................... [ ]
=====
</TABLE>
The Underwriters are committed to take and to pay for all of the shares of
Common Stock offered hereby (other than the shares covered by the over-
allotment option described below), if any are purchased.
The Underwriters have advised the Company that they propose to offer all or
part of the Common Stock offered directly to the public initially at the price
to the public set forth on the cover page of this Prospectus, that they may
offer shares to certain dealers at a price that represents a concession of not
more than $[ ] per share, and that the Underwriters may allow, and such
dealers may reallow, a concession of not more than $[ ] per share to certain
other dealers. After the Offering, the price to the public and the concessions
may be changed from time to time by the Representatives.
The Company has granted to the Underwriters an option, exercisable within 30
days after the date of this Prospectus, to purchase up to [ ] additional
shares of Common Stock at the initial public offering price, less the
underwriting discount set forth on the cover page of this Prospectus. The
Underwriters may exercise such option solely to cover over-allotments, if any,
made in connection with the sale of the shares offered hereby. To the extent
the Underwriters exercise such option, each of the Underwriters will be
committed, subject to certain conditions, to purchase the same percentage
thereof as the percentage of the initial shares to be purchased by that
Underwriter.
The Company and certain shareholders have agreed to indemnify the
Underwriters and certain related persons against certain liabilities,
including certain liabilities under the Act, and to contribute to payments the
Underwriters may be required to make in respect thereof.
The Company and its Directors, officers and all holders of the Common Stock
have agreed that they will not, directly or indirectly, offer, sell or
otherwise dispose of any equity securities of the Company or any securities
convertible into or exchangeable for, or any rights to purchase or acquire,
42
<PAGE>
equity securities of the Company for a period of 180 days after the date of
this Prospectus, without the prior written consent of Ladenburg Thalmann & Co.
Inc.
Prior to the Offering, there has been no public market for the Common Stock.
The initial offering price was determined by negotiations between the Company
and the Representatives. Among the factors considered in such negotiations
were the Company's historical results of operations and financial condition,
prospects for the Company and for the industry in which the Company operates,
the Company's capital structure and the general condition of the securities
market.
The Representatives have informed the Company that the Underwriters do not
expect sales to discretionary accounts to exceed 5% of the total number of
shares offered hereby, and the Representatives do not intend to confirm sales
of shares to any account over which they exercise discretionary authority.
In connection with the Offering, the Underwriters may over-allot or affect
transactions which stabilize or maintain the market price of the Common Stock
at a level above that which might otherwise prevail in the open market. Such
transactions may be effected on the Nasdaq National Market or otherwise. Such
stabilizing, if commenced, may be discontinued at any time.
The Company has granted Ladenburg Thalmann & Co. Inc., one of the
Representatives of the Underwriters, a right of first refusal to act as a
manager or placement agent in connection with any public or private offering
of equity, debt or convertible securities the Company may undertake in the
period ending two years from the consummation of this Offering.
BDO Seidman has provided financial consulting services to the Company. Upon
consummation of this Offering the Company will pay to BDO Seidman a fee for
such services not to exceed 1% of the gross proceeds from this Offering, less
amounts paid to date.
Application has been made to have the Common Stock quoted on the Nasdaq
National Market under the trading symbol "HKID."
LEGAL MATTERS
Certain legal matters in connection with the legality of the shares offered
by this Prospectus will be passed upon for the Company by Buchanan Ingersoll,
Princeton, New Jersey. Certain legal matters in connection with the Offering
will be passed upon for the Underwriters by Rosenman & Colin LLP, New York,
New York.
EXPERTS
The audited Consolidated Financial Statements of the Company included in
this Prospectus have been included herein and in the Registration Statement in
reliance upon the report of Grant Thornton LLP, independent certified public
accountants, appearing elsewhere herein and upon the authority of said firm as
experts in accounting and auditing.
43
<PAGE>
ADDITIONAL INFORMATION
The Company has filed with the Securities and Exchange Commission (the
"Commission") a Registration Statement on Form S-1 (the "Registration
Statement") of which this Prospectus is a part, under the Act and the rules
and regulations promulgated thereunder, with respect to the shares of Common
Stock offered pursuant to this Prospectus. This Prospectus does not contain
all of the information set forth in the Registration Statement and the
exhibits and schedules thereto, certain parts of which are omitted in
accordance with the rules and regulations of the Commission. Statements
contained in this Prospectus as to the content of any contract, agreement or
other document referred to herein are not necessarily complete, and in each
instance reference is made to the copy of such contract, agreement or other
document filed as an exhibit to the Registration Statement, each such
statement being qualified in all respects by such reference.
For further information with respect to the Company and the Common Stock
offered hereby, reference is made to the Registration Statement and such
schedules and exhibits, copies of which may be examined without charge at, or
copies obtained upon payment of prescribed fees from, the Public Reference
Section of the Commission at Judiciary Plaza, 450 Fifth Street, N.W.,
Washington D.C. 20549, and will also be available for inspection and copying
at the regional offices of the Commission located at 7 World Trade Center,
13th Floor, New York, New York 10048 and Citicorp Center, 500 West Madison
Street, Suite 1400, Chicago, Illinois 60661-2511. Such material may also be
accessed electronically by means of the Commission's website on the Internet
at http://www.sec.gov.
The Company intends to furnish to its stockholders annual reports containing
Consolidated Financial Statements audited by its independent public
accountants and quarterly reports containing unaudited Consolidated Financial
Statements for three quarters of each fiscal year.
44
<PAGE>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Certified Public Accountants......................... F-2
Financial Statements
Consolidated Balance Sheets.............................................. F-3
Consolidated Statements of Operations.................................... F-4
Consolidated Statement of Stockholders' Equity........................... F-5
Consolidated Statements of Cash Flows.................................... F-6
Notes to Consolidated Financial Statements............................... F-7
Schedule II--Valuation and Qualifying Accounts........................... F-19
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors
Happy Kids Inc.
We have audited the accompanying consolidated balance sheets of Happy Kids
Inc. and subsidiaries as of December 31, 1995 and 1996 and as of September 30,
1997, and the related consolidated statements of operations, stockholders'
equity, and cash flows for each of the three years in the period ended
December 31, 1996 and for the nine months ended September 30, 1997. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Happy Kids
Inc. and subsidiaries as of December 31, 1995 and 1996 and September 30, 1997,
and the consolidated results of their operations and their consolidated cash
flows for each of the three years in the period ended December 31, 1996 and
for the nine months ended September 30, 1997, in conformity with generally
accepted accounting principles.
We have also audited Schedule II of Happy Kids Inc. and subsidiaries as of
and for the three years ended December 31, 1996 and for the nine months ended
September 30, 1997. In our opinion, this schedule presents fairly, in all
material respects, the information required to be set forth therein.
New York, New York
November 17, 1997 (except for Notes
H and N, as to which the date is
January 1, 1998)
The foregoing auditors' report is the form which will be signed upon
consummation of the transaction described in Note A to the financial
statements.
/s/ Grant Thornton LLP
- ----------------------
Grant Thornton LLP
January 13, 1998
New York, New York
F-2
<PAGE>
HAPPY KIDS INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
PRO FORMA
SEPTEMBER 30,
DECEMBER 31, DECEMBER 31, SEPTEMBER 30, 1997
1995 1996 1997 (NOTE O)
------------ ------------ ------------- -------------
(UNAUDITED)
<S> <C> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash................... $ 283 $ 674 $ 619 $ 619
Due from factor........ -- 16,925 25,132 25,132
Accounts receivable-
trade (net of
allowance for doubtful
accounts of $274, $486
and $841 at December
31, 1995 and 1996 and
September 30, 1997,
respectively)......... 11,817 1,084 599 599
Inventories............ 15,156 9,488 8,615 8,615
Due from stockholders.. 527 405 353 353
Other current assets... 2,971 2,696 1,939 1,939
------- ------- ------- -------
Total current assets.. 30,754 31,272 37,257 37,257
FIXED ASSETS-NET......... 1,627 1,732 1,532 1,532
OTHER ASSETS:
Due from stockholders.. 597 410 -- --
Other.................. 590 572 519 519
------- ------- ------- -------
Total other assets.... 1,187 982 519 519
------- ------- ------- -------
Total assets.......... $33,568 $33,986 $39,308 $39,308
======= ======= ======= =======
LIABILITIES AND
STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Due to bank............ $21,340 $19,732 $27,292 $27,292
Current portion-capital
lease obligations..... 25 55 43 43
Accounts payable and
accrued liabilities... 6,129 6,258 4,673 4,673
Due to stockholders.... -- -- -- 2,000
------- ------- ------- -------
Total current
liabilities.......... 27,494 26,045 32,008 34,008
DEFERRED RENT PAYABLE.... 700 740 603 603
CAPITAL LEASE
OBLIGATIONS............. 26 68 39 39
DUE TO STOCKHOLDERS...... 1,500 1,560 1,400 3,570
COMMITMENTS AND
CONTINGENCIES
STOCKHOLDERS' EQUITY:
Preferred stock-5,000
shares authorized,
$.01 par value; no
shares issued and
outstanding........... -- -- -- --
Common stock-30,000
shares authorized,
$.01 par value; 7,750
shares issued and
outstanding at
December 31, 1995 and
1996 and September 30,
1997, respectively.... 78 78 78 78
Additional paid-in
capital............... 1,041 1,119 1,119 1,119
Retained earnings
(deficit)............. 2,729 4,376 4,061 (109)
------- ------- ------- -------
Total stockholders'
equity............... 3,848 5,573 5,258 1,088
------- ------- ------- -------
Total liabilities and
stockholders'
equity............... $33,568 $33,986 $39,308 $39,308
======= ======= ======= =======
</TABLE>
The accompanying notes are an integral part of these statements.
F-3
<PAGE>
HAPPY KIDS INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
------------------------- -------------------
1994 1995 1996 1996 1997
------- ------- ------- ----------- -------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net sales........................ $74,520 $79,828 $90,723 $70,061 $77,328
Cost of goods sold............... 59,244 65,036 69,886 53,965 58,662
------- ------- ------- ------- -------
Gross profit................... 15,276 14,792 20,837 16,096 18,666
Operating expenses:
Selling, design and shipping... 5,962 7,986 7,686 5,768 6,634
General and administrative..... 6,358 6,830 7,684 5,834 6,445
------- ------- ------- ------- -------
Total operating expenses..... 12,320 14,816 15,370 11,602 13,079
------- ------- ------- ------- -------
Operating earnings (loss).... 2,956 (24) 5,467 4,494 5,587
Interest expense, net............ 1,631 2,375 2,980 2,203 2,522
------- ------- ------- ------- -------
Income (loss) before income
taxes....................... 1,325 (2,399) 2,487 2,291 3,065
Income taxes (benefit)........... (108) (757) 119 111 373
------- ------- ------- ------- -------
Net income (loss)............ $ 1,433 $(1,642) $ 2,368 $ 2,180 $ 2,692
======= ======= ======= ======= =======
Pro forma data (unaudited):
Historical income before
provision for income taxes.... $ 2,487 $ 3,065
Provision for income taxes..... 990 1,277
------- -------
Net income................... $ 1,497 $ 1,788
======= =======
Pro forma net income per share... $ $
======= =======
Weighted average common shares
outstanding.....................
</TABLE>
The accompanying notes are an integral part of these statements.
F-4
<PAGE>
HAPPPY KIDS INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996
AND NINE MONTHS ENDED SEPTEMBER 30, 1997
(IN THOUSANDS)
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL
------------- PAID-IN RETAINED
SHARES AMOUNT CAPITAL EARNINGS
------ ------ ---------- --------
<S> <C> <C> <C> <C>
Balance at January 1, 1994................... 7,750 $ 78 $ 927 $ 4,467
Waived payment of interest on stockholder's
note...................................... -- -- 49 --
Dividends.................................. -- -- -- (818)
Net income................................. -- -- -- 1,433
----- ---- ------ -------
Balance at December 31, 1994................. 7,750 78 976 5,082
Waived payment of interest on stockholder's
note...................................... -- -- 65 --
Dividends.................................. -- -- -- (711)
Net loss................................... -- -- -- (1,642)
----- ---- ------ -------
Balance at December 31, 1995................. 7,750 78 1,041 2,729
Waived payment of interest on stockholder's
note...................................... -- -- 78 --
Dividends.................................. -- -- -- (721)
Net income................................. -- -- -- 2,368
----- ---- ------ -------
Balance at December 31, 1996................. 7,750 78 1,119 4,376
Dividends.................................. -- -- -- (3,007)
Net income................................. -- -- -- 2,692
----- ---- ------ -------
Balance at September 30, 1997................ 7,750 $ 78 $1,119 $ 4,061
===== ==== ====== =======
</TABLE>
The accompanying notes are an integral part of this statement.
F-5
<PAGE>
HAPPY KIDS INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
-------------------------- -------------------
1994 1995 1996 1996 1997
------- ------- -------- ----------- -------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from operating
activities:
Net income (loss)............ $ 1,433 $(1,642) $ 2,368 $ 2,180 $ 2,692
Adjustments to reconcile net
income (loss) to net cash
(used in) provided by
operating activities:
Depreciation and
amortization............... 211 232 388 223 260
Provision for losses on
accounts receivable........ 20 112 212 159 355
Deferred income taxes....... (222) (130) (8) -- 99
Noncash interest expense.... 49 65 78 59 --
Changes in operating assets
and liabilities:
Accounts receivable....... (1,550) 335 10,521 12,306 131
Due from factor........... -- -- (16,925) (22,843) (8,207)
Inventories............... 1,212 (4,702) 5,669 5,407 872
Other current assets...... (476) (463) (471) (955) 536
Other assets.............. -- 19 22 20 12
Accounts payable and
accrued liabilities...... (1,763) 857 919 (1,890) (1,558)
Due from stockholders..... (331) (793) 308 477 463
------- ------- -------- -------- -------
Net cash (used in) provided
by operating activities..... (1,417) (6,110) 3,081 (4,857) (4,345)
------- ------- -------- -------- -------
Cash flows from investing
activities:
Acquisition of fixed assets.. (283) (578) (378) (206) (60)
------- ------- -------- -------- -------
Cash flows from financing
activities:
Net borrowings under line of
credit...................... 2,385 6,630 (1,608) 5,053 7,560
Payments on capital lease.... 14 (11) (43) (30) (43)
Borrowings from
stockholders................ 300 300 60 200 (160)
Dividends paid............... (818) (711) (721) (60) (3,007)
------- ------- -------- -------- -------
Net cash provided by (used
in) financing
activities............... 1,881 6,208 (2,312) 5,163 4,350
------- ------- -------- -------- -------
NET INCREASE (DECREASE) IN
CASH..................... 181 (480) 391 100 (55)
Cash at beginning of year..... 582 763 283 283 674
------- ------- -------- -------- -------
Cash at end of year........... $ 763 $ 283 $ 674 $ 383 $ 619
======= ======= ======== ======== =======
</TABLE>
The accompanying notes are an integral part of these statements.
F-6
<PAGE>
HAPPY KIDS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1994, 1995 AND 1996 AND SEPTEMBER 30, 1996 AND 1997
(INFORMATION RELATING TO SEPTEMBER 30, 1996 IS UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE A--SUMMARY OF ACCOUNTING POLICIES
The Company was incorporated in 1988 in New York under the name O'Boy Inc.
and changed its name to Happy Kids Inc. (the "Company") in December 1997.
Historically, the Company operated as separate business entities, with the
first of such entities commencing operations in 1979, all under the common
ownership of the stockholders of the Company. Immediately prior to the
effectiveness of the Proposed Initial Public Offering as described in Note N,
all of such separate entities shall become wholly-owned subsidiaries of the
Company. All share and per share amounts have been restated to retroactively
reflect the reorganization.
The accompanying Consolidated Financial Statements include the consolidated
accounts of the Company and its wholly-owned subsidiaries to reflect the
reorganization as stated above. All significant intercompany accounts and
transactions have been eliminated in consolidation.
The Company is a leading designer and marketer of high-quality, custom-
designed children's apparel. The Company's revenues are derived from the sale
of children's apparel.
A summary of the significant accounting policies consistently applied in the
preparation of the accompanying Consolidated Financial Statements follows:
1. Revenue Recognition
Sales are recognized when merchandise is shipped to customers.
2. Inventories
Inventories, consisting primarily of finished goods, are stated at the lower
of cost or market. One subsidiary determines cost by the last-in, first-out
("LIFO") method which represented approximately $3,913, $1,637 and $1,655, of
total inventory at December 31, 1995, 1996 and at September 30, 1997,
respectively. The other subsidiaries determine cost by the first-in, first-out
("FIFO") method.
3. Depreciation and Amortization
The Company depreciates fixed assets over their estimated useful lives by
the straight-line method. Leasehold improvements are depreciated over their
expected useful life or the life of the respective leases, whichever is
shorter.
The following are the estimated lives of the Company's fixed assets:
<TABLE>
<S> <C>
Furniture and fixtures 5 years to 10 years
Equipment 5 years to 10 years
Leasehold improvements up to 10 years
</TABLE>
F-7
<PAGE>
HAPPY KIDS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1994, 1995 AND 1996 AND SEPTEMBER 30, 1996 AND 1997
(INFORMATION RELATING TO SEPTEMBER 30, 1996 IS UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
4. Cash and Cash Equivalents
Cash and cash equivalents include cash on hand and demand deposits.
Supplemental disclosures of cash flow information:
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
----------------------- -----------------
1994 1995 1996 1996 1997
------- ------- ------- -------- --------
<S> <C> <C> <C> <C> <C>
Cash paid during the year for
Interest........................... $ 1,617 $ 2,311 $ 2,711 $ 1,986 $ 2,225
Income taxes....................... 608 116 280 274 122
</TABLE>
Noncash investing and financing activities:
For the years ended December 31, 1995 and 1996, the Company acquired
equipment totalling approximately $115 and $49, respectively, under capital
leases.
5. Income Taxes
Deferred income taxes are determined based on the difference between the tax
basis of an asset or liability and its reported amount in the financial
statements using enacted tax rates for the year in which the differences are
expected to reverse.
The principal types of differences between assets and liabilities for
financial statement and tax return purposes giving rise to deferred income
taxes are accrued expenses, accumulated depreciation, certain costs
capitalized to inventory and allowance for doubtful accounts. A deferred tax
asset has been recorded for these differences.
Through December 31, 1996, the Company filed separate income tax returns for
its subsidiaries. Two wholly-owned subsidiaries which incurred approximately
$(893), $(2,163), $(508), $(649) and $918 of pretax (loss) income for the
years ended December 31, 1994, 1995 and 1996 and for the nine months ended
September 30, 1996 and 1997, respectively, were C Corporations and,
accordingly, were taxed or received tax benefits at the appropriate corporate
Federal and state rates. The remaining subsidiaries are S Corporations or LLCs
and income taxes on the earnings are paid personally by the stockholders of
these companies pursuant to an election for Federal income tax purposes not to
be taxed as a corporation. Accordingly, no provision has been made in the
accompanying financial statements for Federal income taxes on the net earnings
of these companies. Instead, the stockholders report their pro rata share of
corporate taxable income or loss on their respective individual tax returns. A
provision for state income taxes is made for those states not recognizing S
Corporation status.
The S Corporation and Partnership status will terminate immediately prior to
the effective date of the Initial Public Offering. (See Note N.) The Company
will convert to a C Corporation and will be subject to both Federal and state
income taxes and will file a consolidated Federal income tax return. Any
income tax adjustment required as a result of the conversion will be reflected
in the period in which it becomes effective. (See Note O.)
F-8
<PAGE>
HAPPY KIDS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1994, 1995 AND 1996 AND SEPTEMBER 30, 1996 AND 1997
(INFORMATION RELATING TO SEPTEMBER 30, 1996 IS UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
6. Use of Estimates
In preparing financial statements in conformity with generally accepted
accounting principles, management is required to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and revenues and expenses during the reporting period. Actual
results could differ from those estimates.
7. Fair Value of Financial Instruments
Due to the short-term nature of the bank loans, the fair value of the
Company's due to bank approximates carrying value. Furthermore, the carrying
value of all other financial instruments potentially subject to valuation risk
(principally consisting of cash, accounts receivable, due from factor and
accounts payable) also approximates fair value.
8. Interim Financial Statements
The Consolidated Financial Statements at September 30, 1996 and for the nine
months ended September 30, 1996 are unaudited. In the opinion of the Company,
the unaudited Consolidated Financial Statements at September 30, 1996 and for
the nine months ended September 30 1996, include all adjustments, consisting
only of normal recurring adjustments necessary for a fair presentation of the
financial position and results of operations for such periods.
9. Future Effect of Recently Issued Accounting Pronouncements
The Financial Accounting Standards Board ("FASB") has issued Statement of
Financial Accounting Standards No. 128 ("SFAS No. 128"), "Earnings Per Share,"
which is effective for financial statements for periods ending after December
15, 1997. Early adoption of the new standard is not permitted. The new
standard eliminates primary and fully diluted earnings per share and requires
presentation of basic and diluted earnings per share together with disclosure
of how the per share amounts were computed. The effect of adopting this
standard is not expected to have a material impact on earnings per share
presented in the financial statements.
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income," which is effective for the Company's fiscal year ending December 31,
1998. The statement addresses the reporting and displaying of comprehensive
income and its components. Earnings per share will only be reported for net
income and not for comprehensive income. Adoption of SFAS No. 130 is not
expected to have a material effect on the Company's financial statement
disclosures.
In June 1997, the FASB also issued SFAS No. 131, "Disclosures About Segments
of an Enterprise and Related Information," which is effective for the
Company's fiscal year ending December 31, 1998. The statement changes the way
public companies report information about segments of their business in their
annual financial statements and requires them to report selected segment
information in their quarterly reports. Adoption of SFAS No. 131 is not
expected to have a material effect on the Company's financial statement
disclosures.
F-9
<PAGE>
HAPPY KIDS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1994 1995 AND 1996 AND SEPTEMBER 30, 1996 AND 1997
(INFORMATION RELATING TO SEPTEMBER 30, 1996 IS UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
10. Reclassification
Certain prior year amounts have been reclassified to conform to the 1997
presentation.
NOTE B--INVENTORIES
Inventories consist of the following finished goods:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------- SEPTEMBER 30,
1995 1996 1997
------- ------- -------------
<S> <C> <C> <C>
Warehouse.................................... $ 9,735 $ 5,947 $6,545
In-transit and overseas...................... 7,098 4,709 2,559
LIFO valuation allowance..................... (1,677) (1,168) (489)
------- ------- ------
$15,156 $ 9,488 $8,615
======= ======= ======
</TABLE>
- --------
The following is a summary of the differences in inventories and earnings
had the first-in, first-out ("FIFO") method of inventory valuation been used
by one of the Company's subsidiaries, instead of the LIFO method:
(1) Inventories at December 31, 1995 and 1996 and at September 30, 1997
would have been higher by approximately $1,677, $1,168, and $489,
respectively.
(2) Earnings before income taxes for the years ended December 31, 1994,
1995 and 1996 and for the nine months ended September 30, 1996 and 1997
would have decreased by approximately $14, $97, $509, $683 and $679,
respectively.
(3) Net earnings for the years ended December 31, 1994, 1995 and 1996 and
for the nine months ended September 30, 1996 and 1997 would have
decreased by approximately $8, $55, $288, $388 and $385, respectively.
(4) For the year ended December 31, 1996 and for the nine months ended
September 30, 1996 and 1997, the liquidation of LIFO inventories
decreased cost of sales and, therefore, increased income before taxes
by $521, $696, and $1,022, respectively.
NOTE C--FACTORED ACCOUNTS RECEIVABLE--WITHOUT RECOURSE AS TO CREDIT RISK
The Company has an agreement with a commercial finance company which
provides for the factoring of trade accounts receivable. The factoring charge
amounts to 0.55% of the receivables assigned. Factor charges for the year
ended December 31, 1996 and for the nine months ended September 30, 1996 and
1997 were approximately $643, $497 and $542, respectively. The commercial
finance company also guarantees the Company's letters of credit and issues
letters of guarantee to company suppliers. The commercial finance company has
a first lien on all of the Company's tangible assets as collateral for all of
its obligations under the financing agreement. Advances and loans under the
agreement bear interest at 1% above the prime rate.
The aggregate amounts of such guarantees and advances are limited by formula
based upon the uncollected balance of 85% of eligible factored receivables,
and 50% of eligible inventory collateral, plus 50% of letters of credit
outstanding, and 25% of open letters of credit and any overadvance amount
permitted by the lender. At December 31, 1996 and at September 30, 1997, the
maximum amount of guarantees and advances permitted by such formula was
approximately $30,534 and $31,714, respectively.
F-10
<PAGE>
HAPPY KIDS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1994, 1995 AND 1996 AND SEPTEMBER 30, 1996 AND 1997
(INFORMATION RELATING TO SEPTEMBER 30, 1996 IS UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Accounts receivable are factored without recourse as to credit risk but with
recourse for any claims by the customer for adjustments in the normal course
of business relating to price errors, shortages, etc. The uncollected balance
of receivables held by the commercial finance company amounted to
approximately $16,925 at December 31, 1996 and $25,132 at September 30, 1997.
NOTE D--OTHER CURRENT ASSETS
Included in other current assets is the following:
<TABLE>
<CAPTION>
DECEMBER 31,
------------- SEPTEMBER 30,
1995 1996 1997
------ ------ -------------
<S> <C> <C> <C>
Advances to suppliers and others................. $ 892 $1,488 $ 946
Prepaid and refundable income taxes.............. 1,053 304 141
Prepaid expenses and other....................... 878 753 758
Deferred income taxes............................ 148 151 94
------ ------ ------
$2,971 $2,696 $1,939
====== ====== ======
</TABLE>
NOTE E--FIXED ASSETS
Fixed assets recorded at cost consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
------------- SEPTEMBER 30,
1995 1996 1997
------ ------ -------------
<S> <C> <C> <C>
Furniture and fixtures.. $ 819 $ 869 $ 883
Equipment............... 771 602 646
Leasehold improvements.. 962 1,157 1,158
------ ------ ------
2,552 2,628 2,687
Less accumulated
depreciation and
amortization........... 925 896 1,155
------ ------ ------
$1,627 $1,732 $1,532
====== ====== ======
</TABLE>
NOTE F--DUE TO BANK
The Company has a $42,000 financing agreement with several banks that
expires on December 31, 1998, subject to annual renewals (adjusted seasonally
to $47,000 for the period January 1, 1998 through April 30, 1998). The first
$5,000 of borrowings under this line of credit bears interest at the prime
rate plus 4% (12.5% at September 30, 1997). The remaining borrowings bear
interest at the prime rate plus 1% (9.5% at September 30, 1997). Borrowings
are collateralized by substantially all of the assets of the Company. In
addition, the stockholders have personally guaranteed the debt. At December
31, 1996 and at September 30, 1997, the Company has borrowed $19,732 and
$27,292, respectively, under this line. The agreement provides for various
restrictive financial covenants, including the requirement to maintain minimum
tangible net worth and working capital levels. At September 30, 1997, the
Company was not in compliance with certain financial covenants for which the
Company has obtained a waiver.
F-11
<PAGE>
HAPPY KIDS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1994, 1995 AND 1996 AND SEPTEMBER 30, 1996 AND 1997
(INFORMATION RELATING TO SEPTEMBER 30, 1996 IS UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE G--ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
Accounts payable and accrued liabilities consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
------------- SEPTEMBER 30,
1995 1996 1997
------ ------ -------------
<S> <C> <C> <C>
Accounts payable................................. $5,673 $5,280 $3,548
Accrued liabilities.............................. 396 895 897
Income taxes payable............................. 60 83 228
------ ------ ------
$6,129 $6,258 $4,673
====== ====== ======
</TABLE>
NOTE H--TRANSACTIONS WITH STOCKHOLDERS
Notes payable to stockholder consist of:
<TABLE>
<CAPTION>
DECEMBER 31,
------------- SEPTEMBER 30,
1995 1996 1997
------ ------ -------------
<S> <C> <C> <C>
7% loan payable.................................. $ 300 $ 160 $ --
7% due to stockholder............................ 1,200 1,400 1,400
------ ------ ------
$1,500 $1,560 $1,400
====== ====== ======
</TABLE>
Interest expense on these notes for the years ended December 31, 1994, 1995
and 1996 and for the nine months ended September 30, 1996 and 1997 was
approximately $74, $95, $107, $80 and $74, respectively. Interest totalling
$49, $65, $78 and $59 for the years ended December 31, 1994, 1995 and 1996 and
for the nine months ended September 30, 1996, respectively, was waived and
recorded as additional paid-in capital.
The three principal stockholders have entered into a stockholders' agreement
dated January 1, 1998. Such agreement provides tag-along rights to each of the
parties thereto in the event that any of the other parties elect to sell their
common stock under certain circumstances. In addition, each party is granted a
right of first refusal to purchase any shares of common stock offered for sale
by any other party to the agreement.
For the years ended December 31, 1994, 1995 and 1996 and for the nine months
ended September 30, 1996 and 1997, the Company contributed $0, $143, $127, $99
and $165, respectively, to a charitable foundation managed by an executive of
the Company.
F-12
<PAGE>
HAPPY KIDS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1994 1995 AND 1996 AND SEPTEMBER 30, 1996 AND 1997
(INFORMATION RELATING TO SEPTEMBER 30, 1996 IS UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE I--COMMITMENTS AND CONTINGENCIES
The Company leases showroom, office and warehouse facilities through May 31,
2006 at the following minimum annual rentals:
<TABLE>
<CAPTION>
YEAR ENDING SEPTEMBER 30, AMOUNT
------------------------- ------
<S> <C>
1998................................ $1,013
1999................................ 1,011
2000................................ 845
2001................................ 670
2002................................ 670
Thereafter.......................... 2,456
------
$6,665
======
</TABLE>
Rent expense for the years ended December 31, 1994, 1995 and 1996 and for
the nine months ended September 30, 1996 and 1997 was approximately $1,140,
$1,385, $978, $735 and $735, respectively.
At September 30, 1997, the Company is contingently liable under open letters
of credit in the amount of approximately $11,184.
The Company has entered into royalty agreements that provide for royalty
payments from 6% to 12% of net sales of licensed products. The Company
incurred royalty expense (included in cost of goods sold) of approximately
$1,419, $2,339, $3,685, $2,733 and $2,854 for the years ended December 31,
1994, 1995 and 1996 and the nine months ended September 30, 1996 and 1997,
respectively. Based on minimum sales requirements, future minimum royalty
payments required under these agreements are:
<TABLE>
<CAPTION>
YEAR ENDING SEPTEMBER 30, AMOUNT
------------------------- ------
<S> <C>
1998................................ $1,713
1999................................ 1,771
2000................................ 1,555
2001................................ 428
2002................................ 218
Thereafter.......................... 163
------
$5,848
======
</TABLE>
F-13
<PAGE>
HAPPY KIDS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1994, 1995 AND 1996 AND SEPTEMBER 30, 1996 AND 1997
(INFORMATION RELATING TO SEPTEMBER 30, 1996 IS UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE J--CAPITAL LEASE OBLIGATIONS
Included in fixed assets, as of September 30, 1997, is approximately $215
relating to amounts capitalized under certain equipment leases. Accumulated
depreciation under capital leases, at September 30, 1997, was approximately
$95. The present values of minimum future obligations have been calculated
based on interest rates at the inception of the lease. The following schedule
sets forth the future minimum lease payments under capital leases at September
30, 1997:
<TABLE>
<CAPTION>
YEAR ENDING SEPTEMBER 30,
-------------------------
<S> <C>
1998.................................................................. $47
1999.................................................................. 35
2000.................................................................. 8
---
Net minimum lease payments............................................ 90
Less amount representing interest..................................... (8)
---
Present value of minimum lease obligations............................ $82
===
</TABLE>
NOTE K--EMPLOYEE BENEFIT PLAN
The Company has established a 401(k) Profit Sharing Plan covering
substantially all eligible employees. The plan allows employees to defer a
percentage of their annual earnings subject to limitation of Section 401(m) of
the Internal Revenue Code.
The plan provides that the Company can make discretionary contributions.
These contributions are to be allocated to the participant based on the
participant's compensation in proportion to the compensation of all
participants. The Company's contribution to the plan for the years ended
December 31, 1994, 1995 and 1996 and the for nine months ended September 30,
1996 and 1997 was approximately $25, $27, $31, $23 and $30, respectively.
NOTE L--CONCENTRATIONS
During the years ended December 31, 1994, 1995 and 1996 and the nine months
ended September 30, 1996 and 1997, approximately 52%, 41%, 40%, 40% and 41%,
respectively, of total purchases of the Company were made from companies
located in one overseas country. In addition, for the years ended December 31,
1995 and 1996 and for the nine months ended September 30, 1996 and 1997, 35%,
37%, 37% and 28%, respectively, of total purchases of the Company were made
from companies located in a second overseas country. In addition, the Company
relied on a single manufacturer for 11%, 23%, 24% and 11% of the Company's
production for the years ended December 31, 1995 and 1996 and the nine months
ended September 30, 1996 and 1997, respectively. The Company's import
operations are subject to constraints imposed by bilateral textile agreements
between the United States and a number of foreign countries. These agreements
impose quotas on the amount and types of goods which can be imported into the
United States from these countries. The Company's operations may be adversely
affected by political instability, resulting in the disruption of trade from
foreign countries in which the Company's contractors and suppliers are
located, the imposition of additional regulations relating to imports or
duties, taxes, quotas and other charges on imports. The Company is unable to
predict whether any additional regulations, duties, taxes, quotas or other
charges may be imposed on the importation of its products. The assessment of
any of these items could result in increases in the cost of such imports and
affect sales and profitability. In addition,
F-14
<PAGE>
HAPPY KIDS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1994, 1995 AND 1996 AND SEPTEMBER 30, 1996 AND 1997
(INFORMATION RELATING TO SEPTEMBER 30, 1996 IS UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
the failure of manufacturers to ship some or all of the Company's orders on
time could impact the Company's ability to deliver products to its customers.
The Company does not have long-term contracts with any of its contract
manufacturers. The Company believes that alternate sources of manufacturing
are available if the need were to arise, although any substantial delay in
locating, or inability to locate, acceptable alternate sources of
manufacturing could have a material adverse effect on the Company's business,
financial condition and results of operations.
The Company's sales are made principally to department stores, mid-tier
distributors and mass market retailers of children's apparel. Sales to
customers that represent more than 10% of the Company's net sales are as
follows:
<TABLE>
<S> <C>
Nine months ended September 30, 1997........................ 15%, 13% and 12%
Nine months ended September 30, 1996........................ 22% and 15%
Year ended December 30, 1996................................ 22% and 13%
Year ended December 30, 1995................................ 18%, 13% and 10%
Year ended December 30, 1994................................ 21% and 14%
</TABLE>
The Company estimates an allowance for doubtful accounts based on the
creditworthiness of their customers as well as general economic conditions.
Consequently, an adverse change in those conditions could affect the Company's
estimate.
NOTE M--INCOME TAXES
The components of income tax expense (benefit) are summarized as follows:
<TABLE>
<CAPTION>
NINE MONTHS
ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
--------------------------- -------------
1994 1995 1996 1996 1997
-------- -------- ------- ------ ------
<S> <C> <C> <C> <C> <C>
Current
Federal........................ $ (117) $ (686) $ 17 $ 15 $ 370
State and city................. 231 59 109 96 (96)
-------- -------- ------- ------ ------
114 (627) 126 111 274
Deferred......................... (222) (130) (7) -- 99
-------- -------- ------- ------ ------
$ (108) $ (757) $ 119 $ 111 $ 373
======== ======== ======= ====== ======
</TABLE>
F-15
<PAGE>
HAPPY KIDS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1994, 1995 AND 1996 AND SEPTEMBER 30, 1996 AND 1997
(INFORMATION RELATING TO SEPTEMBER 30, 1996 IS UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
The tax effect of temporary differences which gave rise to deferred tax
assets and liabilities are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
------------- SEPTEMBER 30,
1995 1996 1997
------ ------ -------------
<S> <C> <C> <C>
Provision for doubtful accounts.................. $ 34 $ 72 $ 93
Accrued expenses................................. 330 327 288
Depreciation..................................... 28 57 (3)
Costs capitalized to inventory................... 81 36 12
Other............................................ 13 -- 4
------ ------ ----
Net deferred tax asset........................... $ 486 $ 492 $394
====== ====== ====
</TABLE>
During the year ended December 31, 1996, the Internal Revenue Service
("IRS") completed an examination of the tax returns of Happy Kids, Ltd. for
the years ended December 31, 1991, 1992 and 1993. As a result of the
examination, Happy Kids, Ltd. recorded an additional $235 in Federal and state
income taxes and $55 in penalties and interest.
NOTE N--SUBSEQUENT EVENTS
1. Initial Public Offering
The Company intends to offer shares of common stock to the general
public through an initial public offering (the "Offering"). Effective upon
consummation of the Offering, the common stock of the Company will consist of
30,000 shares of common stock, authorized, par value $.01 per share, of which
will be issued and outstanding.
2. Employment Agreement
Effective January 1, 1998, the Company entered into employment agreements
with its executive officers for initial terms expiring in two years at initial
aggregate annual base salaries of $1,250.
3. Stock Option Plan
In December 1997, the Company approved a Stock Option Plan (the "Plan") to
officers, directors and key employees of the Company. Stock options granted
pursuant to the plan shall be authorized by the Board of Directors. The
aggregate number of shares which may be issued under the Plan shall not exceed
800 shares of common stock. As of January 1, 1998, the Company has not granted
any stock options or stock purchase rights to any person. The Company intends
to adopt only the disclosure provisions of SFAS No. 123, "Accounting for
Stock-Based Compensation."
4. Stock Split
As of December 31, 1997, the Company performed a 34,875-for-1 stock split of
the Company's outstanding common stock. A total of 7,750 shares of common
stock will be issued and outstanding after the split. All share and per share
amounts have been restated to retroactively reflect the stock splits.
F-16
<PAGE>
HAPPY KIDS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1994, 1995 AND 1996 AND SEPTEMBER 30, 1996 AND 1997
(INFORMATION RELATING TO SEPTEMBER 30, 1996 IS UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE O--PRO FORMA INFORMATION (UNAUDITED)
1. Pro Forma Balance Sheet
Pro forma adjustments on the balance sheet at September 30, 1997 reflect the
recording of a four-year 5.7%, $4,170 note payable to the stockholders, of
which $2,000 will be paid from the proceeds of the Offering, relating to
undistributed equity resulting from the termination of the S Corporation or
LLC Status. The notes will provide for the timely distribution of amounts
necessary to pay personal income taxes of the stockholders or members due on
amounts earned by the S Corporations or LLCs for the period October 1, 1997
through the termination of the S Corporation or LLC status. The existing due
to stockholders of $1,400 (See Note H) will become subject to the same terms
as the above promissory notes.
2. Pro Forma Results of Operations and Pro Forma Income Taxes
Pro forma adjustments in the statements of operations for the year ended
December 31, 1996 and for the nine months ended September 30, 1997 reflect a
provision for income taxes based upon pro forma pretax income as if the
Company had been subject to Federal and additional state and local income
taxes.
As disclosed in Note A-5, the Company has elected for certain of its
affiliates to be taxed as an S Corporation or to be treated as a partnership
pursuant to the Internal Revenue Code. In connection with the Offering hereby,
the Company will terminate its S and Partnership elections and become subject
to Federal and additional state and local income taxes. The pro forma
provision for income taxes represents the income tax provisions that would
have been reported had the Company been subject to Federal and additional
state and local income taxes. The effective pro forma tax rate of the Company
differs from the Federal rate of 34% primarily due to the effects of state
income taxes.
The pro forma provision for income taxes, after giving effect to the Federal
statutory rate of 34% and an approximate state tax provision of 8% after
reflecting the Federal tax benefit, consists of the following:
<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS ENDED
DECEMBER 31, SEPTEMBER 30,
1996 1997
------------ -----------------
<S> <C> <C>
Federal....................................... $661 $ 992
State......................................... 329 285
---- ------
$990 $1,277
==== ======
</TABLE>
The differences between pro forma tax expense shown in the statements of
operations and the pro forma computed income tax expense based on the Federal
statutory corporate rate are as follows:
<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS ENDED
DECEMBER 31, SEPTEMBER 30,
1996 1997
------------ -----------------
<S> <C> <C>
Computed income taxes based on Federal
statutory rate of 34%..................... $845 $1,042
State income taxes, net of Federal
benefit................................... 217 254
Benefit of the utilization of net operating
loss...................................... (160) (66)
Interest waived on debt.................... 33 --
Officer's life insurance................... 40 34
Other...................................... 15 13
---- ------
$990 $1,277
==== ======
</TABLE>
F-17
<PAGE>
HAPPY KIDS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1994, 1995 AND 1996 AND SEPTEMBER 30, 1996 AND 1997
(INFORMATION RELATING TO SEPTEMBER 30, 1996 IS UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
3. Pro Forma Net Income and Net Income Per Common Share
Pro forma net income represents the historical amounts after the pro forma
adjustments discussed above.
Pro forma net income per share is based on the weighted average number of
shares outstanding during the period. The shares outstanding for the period
give retroactive effect to the reorganization and recapitalization of the
Company as well as shares deemed to be outstanding, which represent the
approximate number of shares deemed to be sold by the Company (at an assumed
initial public offering price of $ per share) to fund the portion of the
$4,170 pro forma distribution during the period ending September 30, 1997.
4. Supplemental Pro Forma Net Income and Net Income Per Share
The Company's supplemental pro forma net income and net income per share for
the year ended December 31, 1996 and the nine months ended September 30, 1997
are $ , and $ and $ , and $ , respectively. The supplemental
pro forma net income and net income per share reflect the issuance of shares
necessary to retire $ of amounts due to bank and the resulting increase
in net income in the amounts of $ , and $ for the year ended
December 31, 1996 and the nine months ended September 30, 1997, respectively,
as of the beginning of 1996. The calculation is based on the weighted average
shares outstanding used in the calculation of net income per share, adjusted
for estimated shares at $ per share that would be issued by the Company to
retire these obligations.
Weighted average common shares outstanding represent the weighted average
number of shares of common stock outstanding adjusted for the number of shares
of common stock required to pay down $[ ] of the outstanding debt and
$4,170 of notes payable, of which $2,000 will be repaid to stockholders from
the proceeds of the offering. (See Note O-3.)
F-18
<PAGE>
HAPPY KIDS INC.
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
(IN THOUSANDS)
<TABLE>
<CAPTION>
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
-------- ---------- --------------------- -------------- ----------
ADDITIONS
----------------------------------------------------------
(1) (2)
BALANCE AT CHARGED TO CHARGED TO BALANCE AT
BEGINNING COSTS AND OTHER END OF
DESCRIPTION OF PERIOD EXPENSES ACCOUNTS DEDUCTIONS (A) PERIOD
----------- ---------- ---------- ---------- -------------- ----------
<S> <C> <C> <C> <C> <C>
Year ended December 31,
1994
Deducted from asset
accounts
Allowance for
doubtful accounts... $142 $13 $ 7 -- $162
Year ended December 31,
1995
Deducted from asset
accounts
Allowance for
doubtful accounts... $162 90 22 -- $274
Year ended December 31,
1996
Deducted from asset
accounts
Allowance for
doubtful accounts... $274 13 199 -- $486
Nine months ended
September 30, 1997
Deducted from asset
accounts
Allowance for
doubtful accounts... $486 15 340 -- $841
</TABLE>
- --------
(a) Accounts written off as uncollectible.
F-19
<PAGE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFOR-
MATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS PRO-
SPECTUS, AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT
BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR THE UNDERWRITERS.
THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN
OFFER TO BUY ANY SECURITIES OTHER THAN THE COMMON STOCK TO WHICH IT RELATES OR
AN OFFER IN ANY JURISDICTION TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH
OFFER IN SUCH JURISDICTION. 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 TIME SUBSEQUENT TO
THE DATE HEREOF OR THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY
SINCE SUCH DATE.
---------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary....................................................... 3
Risk Factors............................................................. 7
The Company.............................................................. 13
Use of Proceeds.......................................................... 13
Dividend Policy.......................................................... 14
Dilution................................................................. 15
Capitalization........................................................... 16
Selected Consolidated Financial Data..................................... 17
Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... 19
Business................................................................. 25
Management............................................................... 33
Certain Transactions..................................................... 37
Principal Stockholders................................................... 38
Description of Capital Stock............................................. 39
Shares Eligible for Future Sale.......................................... 41
Underwriting............................................................. 42
Legal Matters............................................................ 43
Experts.................................................................. 43
Additional Information................................................... 44
Index to Consolidated Financial Statements............................... F-1
</TABLE>
---------------
UNTIL [ ], 1998 (25 DAYS AFTER THE COMMENCEMENT OF THE OFFERING), ALL DEAL-
ERS EFFECTING TRANSACTIONS IN THE REGISTERED SECURITIES, WHETHER OR NOT PAR-
TICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS
IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN ACT-
ING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR
SUBSCRIPTIONS.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
[ ] SHARES
[INSERT LOGO HERE]
COMMON STOCK
-------------
PROSPECTUS
-------------
LADENBURG THALMANN & CO. INC.
CRUTTENDEN ROTH
INCORPORATED
[ ], 1998
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
PART II
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth an itemized estimate of fees and expenses
payable by the Company in connection with the Offering described in this
Registration Statement, other than underwriting discounts and commissions:
<TABLE>
<S> <C>
SEC registration fee.............................................. $7,463.50
NASD filing fee................................................... 3,030.00
Nasdaq/NNM listing fee............................................ *
Counsel fees and expenses......................................... *
Accounting fees and expenses...................................... *
Financial consulting fee.......................................... *
Blue sky fees and expenses........................................ *
Printing expenses................................................. *
Transfer agent and registrar fees................................. *
Miscellaneous..................................................... *
---------
Total........................................................... *
=========
</TABLE>
- --------
* To be completed by amendment.
All of the above expenses will be paid by the Company.
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Article XI of the Company's By-laws specifies that the Company shall
indemnify its directors and officers because he or she was or is a director or
officer of the Company or was or is serving at the request of the Company as a
director or officer of another entity to the full extent that such right of
indemnity is permitted by the laws of the State of New York. This provision of
the By-laws is deemed to be a contract between the Company and each director
and officer who serves in such capacity at any time while such provision and
the relevant provisions of the New York Act are in effect, and any repeal or
modification thereof shall not offset any action, suit or proceeding
theretofore or thereafter brought or threatened based in whole or in part upon
any such state of facts. The affirmative vote of the holders of at least 80%
of the voting power of all outstanding shares of the capital stock of the
Company is required to adopt, amend or repeal such provision of the By-laws.
The Company has executed indemnification agreements with each of its
officers and directors pursuant to which the Company has agreed to indemnify
such parties to the full extent permitted by law, subject to certain
exceptions, if such party becomes subject to an action because such party is a
director, officer, employee, agent or fiduciary of the Company.
Section 402 of the New York Act enables a corporation in its certificate of
incorporation to limit the personal liability of members of its board of
directors for violation of a director's duty to the corporation. This Section
does not, however, limit the liability of a director for failing to act in
good faith, engaging in intentional misconduct or knowingly violating a law,
or from any transaction in which the director derived an improper personal
benefit. This Section also will have no effect on claims arising under the
federal securities laws. The Company's Certificate of Incorporation limits the
liability of its Directors as authorized by Section 402 of the New York Act.
The affirmative vote of the holders of at least 80% of the voting power of all
outstanding shares of the capital stock of the Company is required to amend
such provisions.
The Company intends to obtain liability insurance for the benefit of its
directors and officers which will provide coverage for losses of directors and
officers for liabilities arising out of claims against such
II-1
<PAGE>
persons acting as directors or officers of the Company (or any subsidiary
thereof) due to any breach of duty, neglect, error, misstatement, misleading
statement, omission or act done by such directors and officers, except as
prohibited by law.
At present, there is no pending litigation or proceeding involving a
director or officer of the Company as to which indemnification is being sought
nor is the Company aware of any threatened litigation that may result in
claims for indemnification by any director or officer.
Reference is made to Section 6 of the underwriting agreement, the proposed
form of which is filed as Exhibit One, in which the underwriters agree to
indemnify the directors and officers of the Company and certain other persons,
against certain civil liabilities, including certain liabilities under the
Act.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
Immediately prior to the effectiveness of this Offering, the Company will
acquire all of the issued and outstanding shares of certain related entities
of the Company, in exchange for shares of Common Stock of the Company, from
each of Jack Benun and Mark Benun. Each of Jack Benun and Mark Benun will
receive 2,131,250 shares of the Company's Common Stock in exchange for each of
their 50.0% ownership interests in each of Happy Kids, Ltd., Talk of the Town
Apparel Corp., O.P. Kids, L.L.C., H.O.T. Kidz, L.L.C., Hawk Industries, Inc.
and J & B 18 Corp.
The Company does not expect to employ an underwriter in connection with the
issuance and sale of the securities described above. The Company claims that
the issuance and sale of the foregoing securities will be exempt from
registration under the Act pursuant to Section 4(2) thereof, no public
Offering having been involved and securities having been acquired for
investment and not with a view to distribution. Appropriate legends will be
affixed to the stock certificates issued in such transactions. All recipients
had adequate access to information about the Company.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENTS.
(a) Exhibits
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION OF EXHIBIT
----------- ----------------------
<C> <S>
1 Form of Underwriting Agreement.
3.1 Restated Certificate of Incorporation.
3.2 Amended and Restated Bylaws.
4.1* Voting Agreement, dated January 1, 1998, by and between Jack Benun
and Mark Benun.
4.2* Shareholder Agreement, dated January 1, 1998, by and among Jack
Benun, Mark Benun and Isaac Levy.
5* Opinion of Buchanan Ingersoll as to validity of Common Stock.
10.1 1997 Stock Plan.
10.2 Form of Indemnification Agreement executed by each of the Company's
directors and officers.
10.3 Lease Agreement, by and between J & B 18 Corp. and SZS 33 Associates
L.P., as amended.
10.4 Lease Agreement, by and between Hawk Industries, Inc. and Triangle
Fidelco Industrial Center, as amended.
</TABLE>
II-2
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION OF EXHIBIT
----------- ----------------------
<C> <S>
10.5 Financing Agreement with the CIT Group/Commercial Services, Inc.,
as Agent for itself and certain other lenders, as amended.
10.6 Notification Factoring Agreement.
10.7 Employment Agreement, by and between the Company and Jack Benun.
10.8 Employment Agreement, by and between the Company and Mark Benun.
10.9 Employment Agreement, by and between the Company and Isaac Levy.
10.10 Employment Agreement, by and between the Company and Stuart
Bender.
10.11 Form of Employee-At-Will, Non-solicitation, Invention Assignment
and Non-Disclosure Agreement.
10.12 Securities Purchase Agreement, dated as of January 1, 1998, by and
among, the Company and Jack M. Benun and Mark J. Benun.
10.13** License Agreement by and between the Company and MTV Networks.
10.14** License Agreement by and between the Company and B.U.M. Equipment.
10.15** License Agreement by and between the Company and Ocean Pacific
Apparel Corp.
11* Statement re: Computation of Per Share Earnings.
21 Subsidiaries of the Registrant.
23.1 Consent of Grant Thornton LLP.
23.2* Consent of Buchanan Ingersoll (contained in the opinion filed as
Exhibit 5 to the Registration Statement).
23.3 Consent of The NPD Group.
23.4 Consent of Children's Business.
24 Powers of Attorney of certain officers and directors of the
Company (contained on the signature page of this Registration
Statement).
27 Financial Data Schedule.
</TABLE>
- --------
* To be filed by amendment.
** Confidential treatment has been requested for a portion of this Exhibit.
(b) Financial Statement Schedules
Schedule II--Valuation and Qualifying Accounts filed herewith. All other
financial statement schedules are omitted because the information is not
required, or is otherwise included in the consolidated financial statements or
the notes thereto.
ITEM 17. UNDERTAKINGS.
The undersigned registrant hereby undertakes that:
(1) Insofar as indemnification for liabilities arising under the Act may
be permitted to directors, officers, and controlling persons of the
registrant pursuant to the provisions described in Item 14, or otherwise,
the registrant has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as
expressed in the Act and is, therefore, unenforceable. In the event that a
claim for indemnification against such liabilities (other than the payment
by the registrant of expenses incurred or paid by a director, officer or
controlling person of the registrant in the successful defense of any
action, suit or proceeding) is asserted by such director, officer or
controlling person in connection with the securities being registered, the
registrant will, unless in the opinion of its counsel the matter has been
settled by controlling
II-3
<PAGE>
precedent, submit to a court of appropriate jurisdiction the question
whether such indemnification by it is against public policy as expressed in
the Act and will be governed by the final adjudication of such issue.
(2) For purpose of determining any liability under the Act, the
information omitted from the form of prospectus filed as part of this
registration statement in reliance upon Rule 430A and contained in a form
of prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or
497(h) under the Act shall be deemed to be part of this registration
statement as of the time it was declared effective.
(3) For the purpose of determining any liability under the Act each post-
effective amendment that contains a form of prospectus shall be deemed to
be a new registration statement relating to the securities offered therein,
and the Offering of such securities at that time shall be deemed to be the
initial bona fide Offering thereof.
(4) At the closing specified in the underwriting agreement, registrant
shall provide the Underwriters certificates in such denominations and
registered in such names as required by the Underwriters to permit prompt
delivery to each purchaser.
II-4
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THE REGISTRANT
HAS DULY CAUSED THIS REGISTRATION STATEMENT TO BE SIGNED ON ITS BEHALF BY THE
UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN THE CITY OF NEW YORK, STATE OF NEW
YORK, ON JANUARY 14, 1998.
Happy Kids Inc.
/s/ Jack M. Benun
By___________________________________
Jack M. Benun, President and Chief
Executive Officer
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, THAT EACH INDIVIDUAL WHOSE SIGNATURE
APPEARS BELOW HEREBY CONSTITUTES AND APPOINTS JACK BENUN AND STUART BENDER,
AND EACH OF THEM, HIS TRUE AND LAWFUL ATTORNEYS-IN-FACT AND AGENTS, EACH
ACTING ALONE, WITH FULL POWER OF SUBSTITUTION AND RESUBSTITUTION, FOR HIM AND
IN HIS NAME, PLACE AND STEAD, IN ANY AND ALL CAPACITIES, TO SIGN ANY AND ALL
AMENDMENTS (INCLUDING POST-EFFECTIVE AMENDMENTS) TO THIS REGISTRATION
STATEMENT AND A RELATED REGISTRATION STATEMENT THAT IS TO BE EFFECTIVE UPON
FILING PURSUANT TO RULE 462(B) UNDER THE SECURITIES ACT OF 1933, AND IN EACH
CASE, TO FILE THE SAME WITH ALL EXHIBITS THERETO, AND ALL DOCUMENTS IN
CONNECTION THEREWITH, WITH THE SECURITIES AND EXCHANGE COMMISSION, GRANTING
UNTO SAID ATTORNEYS-IN-FACT AND AGENTS, AND EACH OF THEM, FULL POWER AND
AUTHORITY TO DO AND PERFORM EACH AND EVERY ACT AND THING REQUISITE AND
NECESSARY TO BE DONE IN AND ABOUT THE PREMISES, AS FULLY TO ALL INTENTS AND
PURPOSES AS HE MIGHT OR COULD DO IN PERSON, HEREBY RATIFYING AND CONFIRMING
ALL THAT SAID ATTORNEYS-IN-FACT AND AGENTS OR ANY OF THEM, OR THEIR OR HIS
SUBSTITUTE OR SUBSTITUTES, MAY LAWFULLY 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.
SIGNATURES TITLE DATE
/s/ Jack M. Benun President and Chief January 14,
- ------------------------------------- Executive Officer 1998
JACK M. BENUN and Director
(Principal
Executive Officer)
/s/ Stuart Bender Chief Financial January 14,
- ------------------------------------- Officer and 1998
STUART BENDER Treasurer
(Principal
Financial and
Accounting Officer)
/s/ Mark J. Benun Executive Vice January 14,
- ------------------------------------- President, 1998
MARK J. BENUN Secretary and
Director
/s/ Isaac Levy Senior Vice January 14,
- ------------------------------------- President and 1998
ISAAC LEVY Director
II-5
<PAGE>
Exhibit 1
_______ Shares
HAPPY KIDS INC.
Common Stock, $.01 par value
UNDERWRITING AGREEMENT
----------------------
March ___, 1998
LADENBURG THALMANN & CO. INC.
CRUTTENDEN ROTH INC.
As Representatives of the several Underwriters
named in Schedule A hereto
c/o Ladenburg Thalmann & Co. Inc.
590 Madison Avenue
New York, New York 10022
Dear Sirs:
1. Introductory. Happy Kids Inc., a New York corporation (the
------------
"Company"), proposes to sell, pursuant to the terms of this Agreement, to the
several underwriters named in Schedule A hereto (the "Underwriters," or, each,
an "Underwriter"), an aggregate of _______ shares of common stock, $.01 par
value (the "Common Stock"), of the Company. The aggregate of _______ shares so
proposed to be sold is hereinafter referred to as the "Firm Stock." The Company
also proposes to sell to the Underwriters, upon the terms and conditions set
forth in Section 3 hereof, up to an additional _______ shares of Common Stock
(the "Option Stock"). The Firm Stock and the Option Stock are hereinafter
collectively referred to as the "Stock." Ladenburg Thalmann & Co. Inc.
("Ladenburg"), and Cruttenden Roth Inc. are acting as representatives of the
several Underwriters and in such capacity are hereinafter referred to as the
"Representatives."
You have advised us that concurrently with the effectiveness of the
offering of the Firm Stock by the Underwriters, the Company has caused each
of the Founding Companies (as hereinafter defined) to be reorganized (the
"Founding Company Reorganization") as wholly owned C-Corporation subsidiaries
of the Company pursuant to a securities purchase agreement ("Securities Purchase
Agreement") in the form thereof attached as an exhibit to the Registration
Statement (as hereinafter defined) the consideration for which will be shares of
Common Stock, and the terms of which Founding Company Reorganization are as
described in the Registration Statement.
<PAGE>
2. Representations and Warranties of the Company. Each of the
---------------------------------------------
Company, Jack M. Benun, Mark J. Benun and Isaac Levy, jointly and severally,
represent and warrant to, and agree with, the several Underwriters that:
(a) A registration statement on Form S-1 (File No. 333 ______)
in the form in which it became or becomes effective and also in such form as it
may be when any post-effective amendment thereto shall become effective with
respect to the Stock, including any pre-effective prospectuses included as part
of the registration statement as originally filed or as part of any amendment or
supplement thereto, or filed pursuant to Rule 424 under the Securities Act of
1933, as amended (the "Securities Act"), and the rules and regulations (the
"Rules and Regulations") of the Securities and Exchange Commission (the
"Commission") thereunder, copies of which have heretofore been delivered to you,
has been carefully prepared by the Company in conformity with the requirements
of the Securities Act and has been filed with the Commission under the
Securities Act; one or more amendments to such registration statement,including
in each case an amended pre-effective prospectus, copies of which amendments
have heretofore been delivered to you, have been so prepared and filed. Such
registration statement is referred to hereinafter as the "Registration
Statement." If it is contemplated, at the time this Agreement is executed, that
a post-effective amendment to the Registration Statement will be filed and must
be declared effective before the offering of the Stock may commence, the term
"Registration Statement" as used in this Agreement means the Registration
Statement as amended by said post-effective amendment. The term "Registration
Statement" as used in this Agreement shall also include any registration
statement relating to the Stock that is filed pursuant to Rule 462(b) under the
Securities Act. The term "Prospectus" as used in this Agreement means the
prospectus in the form included in the Registration Statement, or, (A) if the
prospectus included in the Registration Statement omits information in reliance
on Rule 430A under the Securities Act and such information is included in a
prospectus filed with the Commission pursuant to Rule 424(b) under the
Securities Act, the term "Prospectus" as used in this Agreement means the
prospectus in the form included in the Registration Statement as supplemented by
the addition of Rule 430A information contained in the prospectus filed with the
Commission pursuant to Rule 424(b) and (B) if prospectuses that meet the
requirements of Section 10(a) of the Securities Act are delivered pursuant to
Rule 434 under the Securities Act, then (i) the term "Prospectus" as used in
this Agreement means the "prospectus subject to completion" (as such term is
defined in Rule 434(g) under the Securities Act) as supplemented by (a) the
addition of Rule 430A information or other information contained in the form of
prospectus delivered pursuant to Rule 434(b)(2) under the Securities Act or (b)
the information contained in the term sheets described in Rule 434(b)(3) under
the Securities Act, (ii) the date of
2
<PAGE>
such prospectuses shall be deemed to be the date of the term sheets. The term
"Pre-effective Prospectus" as used in this Agreement means the prospectus
subject to completion in the form included in the Registration Statement at the
time of the initial filing of the Registration Statement with the Commission,
and as such prospectus shall have been amended from time to time prior to the
date of the Prospectus.
(b) The Commission has not issued or threatened to issue any order
preventing or suspending the use of any Pre-effective Prospectus, and, at its
date of issue, each Pre-effective Prospectus conformed in all material respects
with the requirements of the Securities Act and did not include any untrue
statement of a material fact or omit to state a material fact required to be
stated therein or necessary to make the statements therein, not misleading; and,
when the Registration Statement becomes effective and at all times subsequent
thereto up to and including the Closing Dates (as hereinafter defined), the
Registration Statement and the Prospectus and any amendments or supplements
thereto contained and will contain all material statements and information
required to be included therein by the Securities Act and conformed and will
conform in all material respects to the requirements of the Securities Act and
neither the Registration Statement nor the Prospectus, nor any amendment or
supplement thereto, included or will include any untrue statement of a material
fact or omit to state any material fact required to be stated therein, in light
of the circumstances under which they were made in the case of the Prospectus,
or necessary to make the statements therein not misleading, provided, however,
that the foregoing representations, warranties and agreements shall not apply to
information contained in or omitted from any Pre-effective Prospectus or the
Registration Statement or the Prospectus or any such amendment or supplement
thereto in reliance upon, and in conformity with, written information furnished
to the Company by or on behalf of any Underwriter, directly or through you,
specifically for use in the preparation thereof; and each Pre-effective
Prospectus and Prospectus delivered to the Underwriters for use in connection
with the offering of the Stock will, at the time of such delivery, be identical
to the electronically transmitted copies thereof filed with the Commission
pursuant to EDGAR, except to the extent permitted by Regulation S-T under the
Securities Act. There is no franchise, lease, contract, agreement or document
required to be described in the Registration Statement or Prospectus or to be
filed as an exhibit to the Registration Statement which is not described or
filed therein as required; and all descriptions of any such franchises, leases,
contracts, agreements or documents contained in the Registration Statement are
accurate and complete descriptions of such documents in all material respects.
(c) Subsequent to the respective dates as of which information is given in
the Registration Statement and Prospectus, and except as set forth or
3
<PAGE>
contemplated in the Prospectus, neither the Company nor any of the Founding
Companies, have incurred any liabilities or obligations, direct or contingent,
nor entered into any transactions not in the ordinary course of business, and
there has not been any material adverse change in the condition (financial or
otherwise), properties, business, management, prospects, net worth or results of
operations of the Company and/or any of the Founding Companies, individually or
in the aggregate (a "Material Adverse Effect"), or any change in the capital
stock, short-term or long-term debt of the Company or any of the Founding
Companies.
(d) The audited consolidated financial statements of the Company (which
include the consolidated accounts of each of Happy Kids, Ltd., O'Boy, Inc., Talk
of the Town Apparel Corp., O.P. Kids, Inc., H.O.T. Kidz, Inc., Hawk Industries,
Inc. and J & B 18 Corp.)(each a "Founding Company" and, together, the "Founding
Companies"), in each case together with related notes and schedules, as set
forth in the Registration Statement and/or any Pre-Effective Prospectus as
applicable, present fairly the financial position and the results of operations
and cash flows of the Company and the Founding Companies on a consolidated
basis, at the indicated dates and for the indicated periods. Such financial
statements and related schedules have been prepared in accordance with generally
accepted principles of accounting, consistently applied throughout the periods
involved, except as disclosed therein, and all adjustments necessary for a fair
presentation of results for such periods have been made. The summary
historical and statistical data include in the Registration Statement present
fairly the information shown therein and such data have been compiled on a basis
consistent with the financial statements presented therein and the books and
records of the Company and the Founding Companies, as applicable. The pro forma
consolidated balance sheet of the Company (as well as the supplemental pro forma
information presented in the Registration Statement), together with the related
notes, as set forth in the Registration Statement, present fairly the
information shown therein, have been prepared in accordance with the
Commission's rules and guidelines with respect to pro forma financial statements
and supplemental pro forma information and have been properly compiled on the
pro forma bases described therein, and the assumptions used in the preparation
thereof are reasonable and the adjustments used therein are appropriate to give
effect to the transactions or circumstances referred to therein. The selected
financial information included under the captions "Capitalization" and "Selected
Financial Data" in the Prospectus presents fairly the information shown therein
and has been compiled on a basis consistent with that of the audited
consolidated financial statements of the Company and the Founding Companies. No
other financial statements or schedules of the Company or the Founding Companies
are required by the Securities Act or the Rules and Regulations to be included
in the Registration Statement or Prospectus. None of the Company or any of the
4
<PAGE>
Founding Companies is currently planning any probable acquisition for which
disclosure of pro forma financial information would be required by the
Securities Act.
(e) Grant Thornton LLP, who have expressed their opinions on the audited
financial statements included in the Registration Statement and the Prospectus
are independent public accountants as required by the Securities Act and the
Rules and Regulations.
(f) The Company has been duly incorporated and is validly existing as a
corporation in good standing under the laws of the State of New York with full
corporate power and authority to own, lease and operate its properties and
conduct its business as described in the Prospectus. Each of the Founding
Companies has been duly incorporated and is validly existing as a corporation in
good standing under the laws of the jurisdiction of its incorporation, with full
corporate power and authority to own, lease and operate its properties and
conduct its business as described in the Prospectus. As of the Effective Date
after giving effect to the Founding Company Reorganization, all of the
outstanding capital stock of each of the Founding Companies is owned by the
Company, free and clear of any pledge, lien, security interest, encumbrance,
claim or equitable interest; and no preemptive right, co-sale right,
registration right, right of first refusal or other similar right of
stockholders exists with respect to any shares of any of the Founding Companies.
The Company and each of the Founding Companies is duly qualified to do business
as a foreign corporation and is in good standing in each jurisdiction in which
the ownership or leasing of its properties or the conduct of its business
requires such qualification, except where the failure to be so qualified or be
in good standing would not have a Material Adverse Effect, and to the knowledge
of the Company, no proceeding has been instituted in any such jurisdiction,
revoking, limiting or curtailing, or seeking to revoke, limit or curtail, such
power and authority or qualification. The Company does not own or control,
directly or indirectly, any corporation, association or other entity other than
the subsidiaries listed on Exhibit 21 to the Registration Statement. None of the
Founding Companies owns or controls, directly or indirectly, any corporation,
association or other entity. None of the shareholders of the Company immediately
prior to the Effective Date owns or controls, directly or indirectly, any
interest in any corporation, association or other entity (other than the Company
and the Founding Companies) engaged in the business conducted by, or related to
the business conducted by, the Company or any Founding Company. Except as
described in the Registration Statement and the Prospectus, the Company is not
engaged in any discussions or party to any agreement or understanding, written
or oral, regarding, the
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acquisition of, or of an interest in, any corporation, firm, partnership, joint
venture, association or other entity.
(g) All outstanding shares of capital stock of the Company have been duly
authorized and validly issued and are fully paid and non-assessable, have been
issued in compliance with all 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 is as set forth in the Prospectus under the caption "Capitalization"
and 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 Firm Stock and the Option Stock to be purchased from the
Company hereunder have been duly and validly 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, and
will be sold free and clear of any pledge, lien, security interest, encumbrance,
claim or equitable interest; and no preemptive right, co-sale right,
registration right, right of first refusal or other similar right of
stockholders exists with respect to any shares of the Firm Stock or Option Stock
to be purchased from the Company hereunder or the issuance and sale thereof. No
further approval or authorization of any stockholder, the Board of Directors of
the Company or others is required for the issuance and sale of the Stock except
as may be required under state or other securities or blue sky laws. Upon
completion of the Founding Company Reorganization in the manner described in the
Prospectus, the shares of Common Stock to be issued in such Reorganization will
be duly authorized, validly issued and fully paid and nonassessable. Except as
disclosed in the Prospectus and the audited consolidated financial statements of
the Company and the related notes thereto, included in the Prospectus, the
Company does not have outstanding any options to purchase, or any preemptive
rights or other rights to subscribe for or to purchase, any securities or
obligations convertible into, or any contracts or commitments to issue or sell,
shares of its capital stock or any such options, rights, convertible securities
or obligations. The description of the Company's 1997 Stock Option Plan (the
"Option Plan"), and the options or other rights granted and exercised
thereunder, set forth in the Prospectus accurately and fairly presents the
information required to be shown with respect to the Option Plan and the options
granted thereunder.
(h) All the issued and outstanding capital stock of each of the Founding
Companies has been duly authorized and validly issued and is fully paid and
nonassessable, and was not issued in violation of or subject to any preemptive
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right, or other rights to subscribe for or purchase any securities or
obligations convertible into, or any contracts or commitments to issue or sell,
shares of its capital stock or any such options, rights, convertible securities
or obligations, and is owned of record and beneficially, as of the date hereof,
and will be owned of record and beneficially at or prior to the closing of the
issuance of the Firm Stock, by the Company free and clear of any pledge, lien,
security interest, encumbrance, claim or equitable interest; and no preemptive
right, co-sale right, registration right, right of first refusal or other
similar right of stockholders exists with respect to any shares of the Founding
Companies. There are no outstanding rights, warrants or options to acquire, or
instruments convertible into or exchangeable for, any shares of capital stock or
other equity interest in any of the Founding Companies. Except as described in
the Registration Statement and the Prospectus or as may be restricted by the
terms and provisions of any credit or loan facility to which the Company or any
of the Founding Companies is a party and which is described in the Registration
Statement and the Prospectus or by relevant state law with respect to the need
for sufficient surplus, none of the Founding Companies is currently prohibited,
directly or indirectly, from paying any dividends to the Company, from making
any other distribution on its capital stock, or from transferring any of the
property or assets of any such Founding Company to the Company.
(i) Except as set forth in the Prospectus, there are no legal or
governmental proceedings pending to which the Company or any of the Founding
Companies is a party or of which any property of the Company or any Founding
Company is subject, which, if determined adversely to the Company or any such
Founding Company, might individually or in the aggregate (i) prevent or
adversely affect the transactions contemplated by this Agreement, including
without limitation the Founding Company Reorganization, (ii) suspend the
effectiveness of the Registration Statement, (iii) prevent or suspend the use of
the Pre-effective Prospectus in any jurisdiction or (iv) result in a Material
Adverse Effect; and to the best of the Company's knowledge no such proceedings
are threatened against the Company or any Founding Company by governmental
authorities or others. Neither the Company nor any Founding Company is a party
or subject to the provisions of any material injunction, judgment, decree or
order of any court, regulatory body or other governmental agency or body.
(j) The execution, delivery and performance of this Agreement and the
consummation of the transactions herein and therein contemplated, including
without limitation the Founding Company Reorganization, will not result (with or
without due notice or lapse of time or both) in the creation of any lien or in
a breach or violation of or constitute a default under any of the terms or
provisions of, or give rise to any right of termination, cancellation or
acceleration under (i) any material indenture, license, mortgage, deed of trust,
note agreement or other agreement or instrument to which the Company, Jack M.
Benun, Mark J. Benun or any of the Founding Companies is a party or by which it
or any of them or any of their properties is
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or may be bound, (ii) the charter, By-laws or other organizational documents of
the Company, or any of the Founding Companies or (iii) any law, statue, order,
rule or regulation of any court or governmental agency or body having
jurisdiction over the Company, Jack M. Benun, Mark J. Benun or any of the
Founding Companies or any of their properties.
(k) No consent, approval, authorization or order of any court or
governmental agency or body is required for the consummation by the Company and
/or any of the Founding Companies of the transactions contemplated by this
Agreement, including without limitation the Founding Company Reorganization,
except such as may be required by the National Association of Securities
Dealers, Inc. (the "NASD") or under the securities or blue sky laws of any
jurisdiction in connection with the purchase and distribution of the Stock by
the Underwriters.
(l) The Company has the full corporate power and authority to enter into
this Agreement and to perform its obligations hereunder (including to issue,
sell and deliver the Stock), and this Agreement has been duly and validly
authorized, executed and delivered by the Company and is a valid and binding
obligation of the Company, enforceable against the Company in accordance with
its terms, except to the extent that rights to indemnity and contribution
hereunder may be limited by federal or state securities laws or the public
policy underlying such laws or by applicable bankruptcy, insolvency,
reorganization, moratorium or other similar laws relating to or affecting
creditors' rights generally or by general equitable principles. The Company and
each of Jack and Mark Benun has full legal right, power and authority to enter
into the Securities Purchase Agreement and has performed all the transactions
contemplated thereby.
(m) The Company and each of the Founding Companies possesses all
authorizations, approvals, orders, licenses, certificates, franchises and
permits of and from, and have made all declarations and filings with, all
regulatory or governmental officials, bodies and tribunals ("Permits") to own,
lease or operate their respective properties and to conduct their respective
businesses described in the Registration Statement and the Prospectus, except
where the failure to have obtained or made the same would not have a Material
Adverse Effect and neither the Company nor any of the Founding Companies has
received any notice of proceedings relating to the revocation or modification of
any such Permits.
(n) The Company and each of the Founding Companies owns, and/or possesses
adequate rights to use, free and clear of all liens, charges, encumbrances,
pledges, security interests or defects, all patents, trademarks,
8
<PAGE>
service marks, logos, trade names, trade secrets, know how, copyrights,
proprietary technology and licenses, and rights with respect to the foregoing
(collectively, "Intellectual Property"), used in the conduct of their respective
businesses as described in the Registration Statement and the Prospectus, and
none of the Intellectual Property presently owned, held or used by the Company
or any of the Founding Companies infringes or conflicts with any Intellectual
Property of any other person or entity or are in dispute, and neither the
Company nor any Founding Company has received a notice, or knows of any basis,
of any infringement of or conflict with the asserted rights of others in any
such respect.
(o) The Company and each of the Founding Companies owns and has the right
to use all other trade secrets, know-how (including all other unpatented and/or
unpatentable proprietary or confidential information, systems or procedures),
inventions, designs, processes, works of authorship, computer programs and
technical data and information that are material to its business, properties and
operations.
(p) The Company and each of the Founding Companies is in compliance with,
and conducts its business in conformity with, all applicable federal, state,
local and foreign laws, rules and regulations of each court or governmental
agency or body having jurisdiction over the Company or any of the Founding
Companies, except where the failure to be in compliance would not have a
Material Adverse Effect; to the knowledge of the Company, otherwise than as set
forth in the Registration Statement and the Prospectus, no prospective change in
any of such federal or state laws, rules or regulations has been adopted which,
when made effective, would have a Material Adverse Effect.
(q) The Company and each of the Founding Companies is in compliance with
all federal, state, local or foreign laws or regulations relating to pollution
or protection of human health or the environment ("Environmental Laws"), except
where the failure to be in compliance would not have a Material Adverse Effect.
Neither the Company nor any of the Founding Companies has authorized, conducted
or generated, transported, stored, used, treated, disposed or released any
hazardous substance, hazardous waste, hazardous material, hazardous constituent,
toxic substance, pollutant, contaminant, petroleum product, natural gas,
liquified gas or synthetic gas, defined or regulated under any Environmental Law
on, in or under any property currently leased or owned or by any means
controlled by the Company or any of the Founding Companies (the "Real Property")
in violation of any applicable law, except for any violation which would not
have a Material Adverse Effect; there is no pending or, to the Company's
knowledge, threatened claim, action, litigation or any administrative agency
proceeding involving the Company, any of the Founding Companies or
9
<PAGE>
their respective properties, nor has the Company or any of the Founding
Companies received any written notice, or any oral notice to any executive
officer of the Company or any other employee responsible for receipt of any such
notice, from any governmental entity or third party, that (A) alleges a
violation of any Environmental Laws by the Company or any of the Founding
Companies or any person or entity whose liability for a violation of an
Environmental Law the Company or any of the Founding Companies has retained or
assumed either contractually or by operation of law, which liability or
violation could be reasonably expected to have a Material Adverse Effect, (B)
alleges the Company or any of the Founding Companies is a liable party under the
Comprehensive Environmental Response, Compensation and Liability Act, 42 U.S.C.
(S) 9601 et seq., or any state superfund law, (C) alleges possible contamination
of the environment by the Company or any of the Founding Companies or (D)
alleges possible contamination of the Real Property.
(r) The Company and each of the Founding Companies has filed all necessary
federal, state, local and foreign income, payroll, franchise and other tax
returns and has paid all taxes shown as due thereon or with respect to any of
its properties, and there is no tax deficiency that has been, or to the
knowledge of the Company is likely to be, asserted against the Company or any of
the Founding Companies or any of their respective properties or assets and all
tax liabilities are adequately provided for on the books of the Company and each
of the Founding Companies.
(s) Neither the Company nor any of its officers, directors or
affiliates has taken or will take, directly or indirectly, any action designed
or intended to stabilize or manipulate the price of any security of the Company,
or which caused or resulted in, or which might in the future reasonably be
expected to cause or result in, stabilization or manipulation of the price of
any security of the Company.
(t) The Company has provided you with all financial statements for
each of the Founding Companies since the year ended December 31, 1992 to the
date hereof.
(u) Neither the Company nor any of the Founding Companies is in
violation of its respective charter or by-laws. The Company and each of the
Founding Companies has performed all obligations required to be performed by
the Company or any such Founding Company under any material license, indenture,
mortgage, deed of trust, note agreement or other agreement or instrument to
which it is a party or by which it is or any of its properties may be bound, and
neither the Company nor any of the Founding Companies, nor to the knowledge of
the Company or any Founding Company, any other party to such material license,
indenture, mortgage, deed of trust, note agreement or other agreement or
instrument is in default under or in breach of any such obligations. Neither
the Company nor any of the Founding Companies has received or sent any notice of
such default or breach.
(v) Neither the Company nor any of the Founding Companies is involved in
any labor dispute nor, to their knowledge, is any such dispute threatened.
Neither the Company nor any of the Founding Companies is aware that (A) any
executive, key employee or significant group of employees of the Company or any
Founding Company plans to terminate employment with the Company or any such
Founding Company or (B) any such executive or key employee is subject to any
noncompete, nondisclosure, confidentiality, employment, consulting or similar
agreement that would be violated by the present or proposed business activities
of the Company or any of the Founding Companies. Neither the Company nor any
Founding Company has or expects to have any liability for any prohibited
transaction or funding deficiency or any complete or partial withdrawal
liability with respect to any pension, profit sharing or other plan which is
subject to the Employee Retirement Income Security Act of 1974, as amended
("ERISA"), to which the Company or any Founding Company makes or ever has made a
contribution and in which any employee of the Company or any Founding Company is
or has ever been a participant. With respect to such plans, the Company and each
Founding Company is in compliance in all material respects with all applicable
provisions of ERISA.
(w) The Company has obtained the written agreement described in Section
8(h) of this Agreement from each of its officers, directors, director designees
and holders of Common Stock listed on Schedule B hereto.
(x) The consummation of the Founding Company Reorganization has not
generated or caused to arise any intangible asset consisting of going concern
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<PAGE>
value in excess of the asset value of the Founding Companies (i.e., "goodwill")
----
that the Company would be required to write off over time in accordance with
generally accepted accounting principles.
(y) The Company and each of the Founding Companies have, and as of the
Closing Dates will have, good and marketable title to all real property free and
clear of all liens, encumbrances and defects except such as are described in the
Prospectus or such as would not have a Material Adverse Effect; and any real
property and buildings held under lease by the Company or any of the Founding
Companies or proposed to be held after giving effect to the transactions
described in the Prospectus are, or will be as of the Closing Dates, held by
them under valid, subsisting and enforceable leases with such exceptions as
would not have a Material Adverse Effect, in each case except as described in
the Prospectus. All personal property used by the Company and each of the
Founding Companies in their business is either owned or leased by the Company or
the Founding Companies and is in good working order and condition, ordinary wear
and tear excepted.
(z) The Company and each Founding Company is insured by insurers of
recognized financial responsibility against such losses and risks and in such
amounts as is customary in the businesses in which it is engaged or proposes to
engage after giving effect to the transactions described in the Prospectus; and
neither the Company nor any Founding Company has any reason to believe that it
will not be able to renew its existing insurance coverage as and when such
coverage expires or to obtain similar coverage from similar insurers as may be
necessary to continue their business at a cost that would not have a Material
Adverse Effect.
(aa) Other than as contemplated by this Agreement, the Registration
Statement or the Prospectus, there is no broker, finder or other party that is
entitled to receive from the Company any brokerage or finder's fee or other fee
or commission as a result of any of the transactions contemplated by this
Agreement.
(bb) The inventory of the Company and the Founding Companies is in
merchantable condition and can be sold in the ordinary course of business at the
carrying value of such inventory, as shown in the Company's or the Founding
Companies' financial statements, subject to pricing reductions in the ordinary
course of business.
(cc) The Company and each of the Founding Companies maintains a system of
internal accounting controls sufficient to provide reasonable assurances that
(i) transactions are executed in accordance with management's general or
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specific authorization; (ii) transactions are recorded as necessary to permit
preparation of financial statements in conformity with generally accepted
accounting principles and 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
existing assets at reasonable intervals and appropriate action is taken with
respect to any differences.
(dd) To the Company's knowledge, neither the Company nor any of the
Founding Companies nor any employee or agent of the Company or any of the
Founding Companies has made any payment of funds of the Company or any of the
Founding Companies or received or retained any funds in violation of any law,
rule or regulation, which payment, receipt or retention of funds is of a
character required to be disclosed in the Prospectus.
(ee) Neither the Company nor any of the Founding Companies is an
"investment company," or an entity "controlled" by an "investment company"
required to be registered under the Investment Company Act of 1940, as amended
(the "1940 Act"), as such terms are defined in the 1940 Act, and neither the
Company nor any of the Founding Companies expects to be treated as such by
reason of the receipt and application of the net proceeds from the sale of the
Stock.
(ff) The Stock has been duly approved for quotation on the Nasdaq National
Market, subject to notice of effectiveness.
(gg) No holder of any security of the Company has the right to have any
security owned by such holder included in the Registration Statement and, except
as described in the Registration Statement and the Prospectus, no holder of any
security of the Company has the right to demand registration of any security
owned by such holder during the period ending 12 months after the date of the
Prospectus.
(hh) Each certificate signed by any officer of the Company and delivered to
the Underwriters or counsel for the Underwriters pursuant to this Agreement
shall be deemed to be a representation and warranty by the Company as to the
matters covered thereby.
(ii) For all periods from its election under Subchapter S of the Internal
Revenue Code of 1986, as amended (the "Code"), until the Effective Date, each of
the Founding Companies that so elected was qualified as an S Corporation
pursuant to an election validly made under Subchapter S of the Code (which
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<PAGE>
election has not been and will not be revoked or terminated for any
such period) and the Company has not been and will not be subject to
federal corporate taxes for such periods. Any Subchapter S election
was duly terminated on or prior to the Effective Date.
(jj) All conditions to the consummation of the Founding Company
Reorganizations have been satisfied or waived, and the Founding
Company Reorganizations have been consummated as described in the
Registration Statement.
(kk) The Company has a backlog of $[ ] as of December 31, 1997
and $___ as of January 31, 1998.
(ll) All distributions made by the Company and each of the
Founding Companies pursuant to Subchapter S of the Code were made in
compliance with Section 510 of the New York Business Corporation Law.
3. Purchase by, and Sale and Delivery to, Underwriters-Closing
-----------------------------------------------------------
Dates. The Company agrees to sell to the Underwriters the Firm Stock, and on the
- -----
basis of the representations, warranties, covenants and agreements herein
contained, but subject to the terms and conditions herein set forth, the
Underwriters agree, severally and not jointly, to purchase the Firm Stock from
the Company, the number of Firm Stock to be purchased by each Underwriter being
set opposite its name in Schedule A, subject to adjustment in accordance with
Section 12 hereof.
The purchase price per share to be paid by the Underwriters to the
Company will be $_______ per share (the "Purchase Price").
The Company will deliver the Firm Stock to the Representatives for the
respective accounts of the several Underwriters (in the form of definitive
certificates, issued in such names and in such denominations as the
Representatives may direct by notice in writing to the Company given at or prior
to 12:00 Noon, New York City time, on the second full business day preceding the
First Closing Date (as defined below) or, if no such direction is received, in
the names of the respective Underwriters or in such other names as Ladenburg may
designate (solely for the purpose of administrative convenience) and in such
denominations as Ladenburg may determine), against payment of the aggregate
Purchase Price therefor by wire transfer of same-day funds to an account
specified by the Company in writing at least two (2) business days prior to the
First Closing Date, all at the offices of Rosenman & Colin LLP, 575 Madison
Avenue, New York, New York 10022 or such other place as the parties may
designate. The time and date of the delivery and closing shall be at 10:00 A.M.,
New York City time, on ____________, 1998, in accordance with Rule 15c6-1 of the
Exchange Act. The time and date of such payment and delivery are herein referred
to as the "First Closing Date." The First Closing Date and the location of
delivery of, and the form of payment for, the Firm Stock may be varied by
agreement between the Company and Ladenburg. The First Closing Date may be
postponed pursuant to the provisions of Section 12.
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The Company shall make the certificates for the Stock available to the
Representatives for examination on behalf of the Underwriters not later than
10:00 A.M., New York City time, on the business day preceding the First Closing
Date at the offices of Ladenburg, 590 Madison Avenue, New York, New York 10022.
It is understood that either of the Representatives, individually and not
as a Representative of the several Underwriters, may (but shall not be obligated
to) make payment to the Company on behalf of any Underwriter or Underwriters,
for the Stock to be purchased by such Underwriter or Underwriters. Any such
payment by either of the Representatives shall not relieve such Underwriter or
Underwriters from any of its or their other obligations hereunder.
The several Underwriters agree to make an initial public offering of the
Firm Stock at the initial public offering price set forth on the cover page of
the Prospectus as soon after the effectiveness of the Registration Statement as
in their judgment is advisable. The Representatives shall promptly advise the
Company of the making of the initial public offering.
For the purpose of covering any over-allotments in connection with the
distribution and sale of the Firm Stock as contemplated by the Prospectus, the
Company hereby grants to the Underwriters an option to purchase, severally and
not jointly, an aggregate of up to ________ of Common Stock. The price per
share to be paid for the Option Stock shall be the Purchase Price. The option
granted hereby may be exercised as to all or any part of the Option Stock at any
time, and from time to time, not more than thirty (30) days subsequent to the
effective date of this Agreement. No Option Stock shall be sold and delivered
unless the Firm Stock previously has been, or simultaneously is, sold and
delivered. The right to purchase the Option Stock or any portion thereof may be
surrendered and terminated at any time upon notice by the Underwriters to the
Company.
The option granted hereby may be exercised by the Underwriters by giving
written notice from Ladenburg to the Company setting forth the number of the
Option Stock to be purchased by them and the date and time for delivery of and
payment for the Option Stock. Each date and time for delivery of and payment
for the Option Stock (which may be the First Closing Date, but not earlier) is
herein called the "Option Closing Date" and shall in no event be earlier than
two (2) business days nor later than ten (10) business days after written notice
is given. (The Option Closing Date and the First Closing Date are herein called
the "Closing Dates.") Option Stock shall be purchased for the account of each
Underwriter in the same proportion as the number of Firm Stock set forth
opposite such Underwriter's name in Schedule A hereto bears to the total number
of Firm Stock (subject to adjustment by the Underwriters to eliminate odd lots).
Upon exercise of the option by the Underwriters, the Company agrees to sell to
the Underwriters the number of Option Stock set forth in the written notice of
exercise and the
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<PAGE>
Underwriters agree, severally and not jointly and subject to the terms and
conditions herein set forth, to purchase the number of such determined as
aforesaid.
The Company will deliver the Option Stock to the Underwriters (in the
form of definitive certificates, issued in such names and in such denominations
as the Representatives may direct by notice in writing to the Company given at
or prior to 12:00 Noon, New York City time, on the second full business day
preceding the Option Closing Date or, if no such direction is received, in the
names of the respective Underwriters or in such other names as Ladenburg may
designate (solely for the purpose of administrative convenience) and in such
denominations as Ladenburg may determine), against payment of the aggregate
Purchase Price therefor by wire transfer of same-day funds to an account
specified by the Company in writing at least two (2) business days prior to the
Option Closing Date, all at the offices of Rosenman & Colin LLP, 575 Madison
Avenue, New York, New York 10022. The Option Closing Date and the location of
delivery of, and the form of payment for, the Option Stock may be varied by
agreement between, the Company and Ladenburg. The Option Closing Date may be
postponed pursuant to the provisions of Section 12.
4. Covenants and Agreements of the Company. The Company covenants
---------------------------------------
and agrees with the several Underwriters that:
(a) The Company will (i) if the Company and the Representatives
have determined not to proceed pursuant to Rule 430A, use its best
efforts to cause the Registration Statement to become effective, (ii)
if the Company and the Representatives have determined to proceed
pursuant to Rule 430A, use its best efforts to comply with the
provisions of and make all requisite filings with the Commission
pursuant to Rule 430A and Rule 424 of the Rules and Regulations and
(iii) if the Company and the Representatives have determined to
deliver Prospectuses pursuant to Rule 434 of the Rules and
Regulations, to use its best efforts to comply with all the
applicable provisions thereof. The Company will advise the
Representatives promptly as to the time at which the Registration
Statement becomes effective, will advise the Representatives promptly
of the issuance by the Commission of any stop order suspending the
effectiveness of the Registration Statement or of the institution of
any proceedings for that purpose, and will use its best efforts to
prevent the issuance of any such stop order and to obtain as soon as
possible the lifting thereof, if issued. The Company will advise the
Representatives promptly of the receipt of any comments of the
Commission or any request by the Commission for any amendment of or
supplement to the Registration Statement or the Prospectus or for
additional information and will not at any time file any amendment to
the Registration Statement or supplement to the Prospectus which
shall not previously have been submitted to the Representatives a
reasonable time prior to the proposed filing thereof or to which the
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<PAGE>
Representatives shall reasonably object in writing or which is not in compliance
with the Securities Act and the Rules and Regulations.
(b) The Company will prepare and file with the Commission, promptly
upon the request of the Representatives, any amendments or supplements to the
Registration Statement or the Prospectus which in the opinion of the
Representatives may be necessary to enable the several Underwriters to continue
the distribution of the Stock and will use its best efforts to cause the same to
become effective as promptly as possible.
(c) If at any time after the effective date of the Registration
Statement when a prospectus relating to the Stock is required to be delivered
under the Securities Act any event relating to or affecting the Company or any
of the Founding Companies occurs as a result of which the Prospectus or any
other prospectus as then in effect would include an untrue statement of a
material fact, or omit to state any material fact necessary to make the
statements therein, in light of the circumstances under which they were made,
not misleading, or if it is necessary at any time to amend the Prospectus to
comply with the Securities Act, the Company will promptly notify the
Representatives thereof and will prepare an amended or supplemented prospectus
which will correct such statement or omission; and in case any Underwriter is
required to deliver a prospectus relating to the Stock nine (9) months or more
after the effective date of the Registration Statement, the Company upon the
request of the Representatives and at the expense of such Underwriter will
prepare promptly such prospectus or prospectuses as may be necessary to permit
compliance with the requirements of Section 10(a)(3) of the Securities Act.
(d) The Company will deliver to the Representatives, at or before the
Closing Dates, signed copies of the Registration Statement, as originally filed
with the Commission, and all amendments thereto including all financial
statements and exhibits thereto, and will deliver to the Representatives such
number of copies of the Registration Statement, including such financial
statements but without exhibits, and all amendments thereto, as the
Representatives may reasonably request. The Company will deliver or mail to or
upon the order of the Representatives, from time to time until the effective
date of the Registration Statement, as many copies of the Pre-effective
Prospectus as the Representatives may reasonably request. The Company will
deliver or mail to or upon the order of the Representatives on the date of the
initial public offering, and thereafter from time to time during the period when
delivery of a prospectus relating to the Stock is required under the Securities
Act, as many copies of the Prospectus, in final form or as thereafter amended or
supplemented as the Representatives may reasonably request; provided, however,
that the
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expense of the preparation and delivery of any prospectus required for use nine
(9) months or more after the effective date of the Registration Statement shall
be borne by the Underwriters required to deliver such prospectus.
(e) The Company will make generally available to its shareholders as soon
as practicable, but not later than fifteen (15) months after the effective date
of the Registration Statement, an earning statement which will be in reasonable
detail (but which need not be audited) and which will comply with Section 11(a)
of the Securities Act, covering a period of at least twelve (12) months
beginning after the "effective date" (as defined in Rule 158 under the
Securities Act) of the Registration Statement.
(f) The Company will cooperate with the Representatives to enable the
Stock to be registered or qualified for offering and sale by the Underwriters
and by dealers under the securities laws of such jurisdictions as the
Representatives may reasonably designate and at the request of the
Representatives will make such applications and furnish such consents to service
of process or other documents as may be required of it as the issuer of the
Stock for that purpose; provided, however, that the Company shall not be
required to qualify to do business or to file a general consent (other than that
arising out of the offering or sale of the Stock) to service of process in any
such jurisdiction where it is not now so subject. The Company will, from time to
time, prepare and file such statements and reports as are or may be required of
it as the issuer of the Stock to continue such qualifications in effect for so
long a period as the Representatives may reasonably request for the distribution
of the Stock. The Company will advise the Representatives promptly after the
Company becomes aware of the suspension of the qualifications or registration of
(or any such exception relating to) the Common Stock of the Company for
offering, sale or trading in any jurisdiction or of any initiation or threat of
any proceeding for any such purpose, and in the event of the issuance of any
orders suspending such qualifications, registration or exception, the Company
will, with the cooperation of the Representatives use its best efforts to obtain
the withdrawal thereof.
(g) The Company will furnish to its stockholders annual reports containing
financial statements certified by independent public accountants and with
quarterly summary financial information in reasonable detail which may be
unaudited. During the period of five (5) years from the date hereof, the Company
will deliver to the Representatives, as soon as they are available, copies of
each annual report of the Company containing the balance sheet of the Company as
of the close of such fiscal year and statements of income, stockholders' equity
and cash flows for the year then ended and the opinion thereon of the Company's
independent public accountants and each other report
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or communication furnished by the Company to its stockholders and will deliver
to the Representatives, (i) as soon as they are available, copies of any other
reports or communication (financial or other) which the Company shall publish or
otherwise make available to any of its stockholders as such and (ii) as soon as
they are available, copies of any reports and financial statements furnished
to or filed with the Commission, or the NASD or any national securities
exchange. So long as the Company has active subsidiaries, such financial
statements will be on a consolidated basis to the extent the accounts of the
Company and its subsidiaries are consolidated in reports furnished to its
stockholders generally. Separate financial statements shall be furnished for all
subsidiaries whose accounts are not consolidated but which at the time are
significant subsidiaries as defined in the Rules and Regulations.
(h) The Company will use its best efforts to qualify for inclusion,
subject to notice of effectiveness, on the Nasdaq National Market, the Stock to
be issued and sold by the Company.
(i) The Company will maintain a transfer agent and registrar for its
Common Stock.
(j) The Company will not, without the prior written consent of
Ladenburg, offer, sell, assign, transfer, encumber, contract to sell, grant an
option to purchase or otherwise dispose of any of Common Stock or securities
convertible into or exercisable or exchangeable for Common Stock during the 180
days following the date of the Prospectus, other than: (i) the Company's sale of
Common Stock hereunder, (ii) in connection with the Founding Company
Reorganization as described in the Registration Statement, (iii) upon the
exercise of stock options granted or issued prior to the date hereof and as
described in the Registration Statement and (iv) the grant of stock options
pursuant to the Option Plan.
(k) The Company will apply the net proceeds from the sale of the
Stock as set forth in the description under "Use of Proceeds" in the Prospectus,
which description complies in all respects with the requirements of Item 504 of
Regulation S-K.
(l) The Company will supply you with copies of all correspondence to
and from, and all documents issued to and by, the Commission in connection with
the registration of the Stock under the Securities Act.
(m) Prior to the Closing Dates the Company will furnish to you, as
soon as they have been prepared, copies of any unaudited interim consolidated
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financial statements of the Company and each of the Founding
Companies for any periods subsequent to the periods covered by the
financial statements appearing in the Registration Statement and the
Prospectus.
(n) Prior to the Closing Dates the Company will issue no press
release or other communications directly or indirectly and hold no
press conference with respect to the Company or any of the Founding
Companies, the financial condition, results of operation, business,
prospects, assets or liabilities of any of them, or the offering of
the Stock, without your prior written consent.
(o) The Company will not at any time, directly or indirectly,
take any action designed or intended to stabilize or manipulate the
price of any security of the Company, or which caused or resulted in,
or which might in the future reasonably be expected to cause or
result in, stabilization or manipulation of the price of any security
of the Company.
(p) Until the expiration of two years from the First Closing
Date, in connection with any public or private offering of equity,
debt or convertible securities by the Company or any Founding
Company, the Company shall (or shall cause the applicable Founding
Company to) first offer the opportunity to act as a manager or
placement agent of such offering, as applicable, to Ladenburg, upon
specified terms and conditions, and if Ladenburg shall fail to accept
such terms and conditions within thirty days, then the Company or
such Founding Company shall be free to appoint any other firm or
organization as a manager or placement agent of such offering, as
applicable, upon terms and conditions which shall not be more
favorable to such firm or organization than those so offered to
Ladenburg.
(q) Within days of the date hereof, the Company shall appoint
--
at least two independent directors to the Company's Board of
Directors who shall have no business or family relationship with
the Company or any other director or officer thereof, and which
independent directors will constitute at least half of the members of
the Company's Compensation Committee, Option Committee and Audit
Committee. The Company shall have provided to the Representative the
charter of the Audit Committee or resolutions establishing such
committee, which shall provide, among other things, for the Audit
Committee to approve in advance transactions between the Company and
any of its affiliates.
(r) Until the expiration of one year from the effective date of
the Offering contemplated hereby, the Company shall not grant any
options or stock purchase rights, pursuant to the Option Plan or
otherwise, at an exercise or conversion price below the then
applicable fair market value of the security issuable upon exercise
or conversion thereof.
5. Payment of Expenses. (a) The Company will pay (directly or by
-------------------
reimbursement) all costs, fees and expenses incurred in connection with expenses
incident to the performance of its obligations under this Agreement and in
connection with the transactions contemplated hereby, including but not limited
to (i) all expenses and taxes incident to the issuance and delivery of the Stock
to the Representatives; (ii) all expenses incident to the registration of the
Stock under the Securities Act; (iii) the costs of preparing stock certificates
(including printing and engraving costs); (iv) all fees and expenses of the
registrar and transfer agent of the Stock; (v) all necessary issue, transfer and
other stamp taxes in connection with the issuance and sale of the Stock to the
Underwriters; (vi) fees and expenses of the Company's counsel and the Company's
independent accountants; (vii) all costs and expenses incurred in connection
with the preparation, printing, filing, shipping and distribution of the
Registration
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Statement, each Pre-effective Prospectus and the Prospectus (including all
exhibits and financial statements) and all amendments and supplements provided
for herein, the "Agreement Among Underwriters" between the Representatives and
the Underwriters, the Selling Agreement, the Underwriters' Questionnaire and the
Blue Sky memoranda, if any, and this Agreement; (viii) all filing fees,
attorneys' fees and expenses incurred by the Company or the Underwriters in
connection with exemptions from the qualifying or registering (or obtaining
qualification or registration of) all or any part of the Stock for offer and
sale and determination of its eligibility for investment under the Blue Sky or
other securities laws of such jurisdictions as the Representatives may designate
and all fees and expenses, including attorneys' fees, paid or incurred in
connection with filings made with the NASD, up to $25,000 in respect of the
matters contemplated by this clause (viii); (ix) all fees and expenses in
connection with qualifying the Stock for inclusion on the Nasdaq National Market
and (x) all other costs and expenses incident to the performance of its
obligations hereunder which are not otherwise specifically provided for in this
Section 5, including any and all costs and expenses associated with the Founding
Company Reorganization, except for those costs which shall be borne by the
Founding Companies.
(b) In addition to its other obligations under Section 6(a) hereof,
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
(i) any statement or omission or any alleged statement or omission or (ii) any
breach or inaccuracy in its representations and warranties, it will reimburse
each Underwriter on a quarterly basis 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 Company's
obligation to reimburse each Underwriter 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 such interim reimbursement
payment is so held to have been improper, each Underwriter shall promptly return
it to the Company together with interest, 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 Citibank, NA, New York, New York (the
"Prime Rate"). Any such interim reimbursement payments which are not made to an
Underwriter in a timely manner as provided below shall bear interest at the
Prime Rate from the due date for such reimbursement. This expense reimbursement
agreement will be in addition to any other liability which the Company may
otherwise have. The request for reimbursement will be sent to the Company.
(c) In addition to its other obligations under Section 6(b) hereof,
each Underwriter severally 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 statement or omission, or any alleged statement
or omission, described in Section 6(c) hereof which relates to written
information furnished to the Company by the Representatives on behalf of the
Underwriters specifically for inclusion in the Registration Statement and the
Prospectus, it will
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reimburse the Company (and, to the extent applicable, each officer, director or
controlling person) on a quarterly basis 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
Underwriters' obligation to reimburse the Company (and, to the extent
applicable, each officer, director or controlling person) 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 such interim
reimbursement payment is so held to have been improper, the Company (and, to the
extent applicable, each officer, director or controlling person) shall promptly
return it to the Underwriters together with interest, compounded daily,
determined on the basis of the Prime Rate. Any such interim reimbursement
payments which are not made to the Company within thirty (30) days of a request
for reimbursement shall bear interest at the Prime Rate from the date of such
request. This indemnity agreement will be in addition to any liability which
such Underwriter may otherwise have.
(d) It is agreed that any controversy arising out of the operation
of the interim reimbursement arrangements set forth in paragraph (b) and/or (c)
of this Section 5, including the amounts of any requested reimbursement payments
and the method of determining amounts, 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 NASD. Any such arbitration must be commenced by service of a
written demand for arbitration or written notice of intention to arbitrate,
therein electing the arbitration tribunal. In the event 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. Such an arbitration would be limited to the operation of
the interim reimbursement provisions contained in paragraph (b) and/or (c) of
this Section 5 and would not resolve the ultimate propriety or enforceability of
the obligation to reimburse expenses which is created by the provisions of
Section 6.
6. Indemnification and Contribution. (a) The Company, Jack M.
--------------------------------
Benun, Mark J. Benun and Isaac Levy, jointly and severally, agree to indemnify
and hold harmless each Underwriter and each person, if any, who controls such
Underwriter within the meaning of the Securities Act and the respective
officers, directors, partners, employees, representatives and agents of each of
such Underwriter (collectively, the "Underwriter Indemnified Parties" and, each,
an "Underwriter Indemnified Party"), against any losses, claims, damages,
liabilities or expenses (including the reasonable cost of investigating and
defending against any claims therefor and counsel fees incurred in connection
therewith), joint or several, which may be based upon the Securities Act, or any
other statute or at common law, on the ground that any Pre-effective Prospectus,
the Registration Statement or the Prospectus (or any Pre-effective Prospectus,
the Registration Statement or the Prospectus as from time to time amended or
supplemented) includes or allegedly includes an untrue statement of a material
fact or omits to state a material fact required to be stated therein or
necessary in order to make the statements
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<PAGE>
therein, in light of the circumstances under which they were made, not
misleading; provided, however, that such indemnity shall not inure to the
benefit of any Underwriter (or any person controlling such) on account of any
losses, claims, damages, liabilities or expenses arising from the sale of the
Stock to any person by such Underwriter (i) if such untrue statement or omission
or alleged untrue statement or omission was made in any Pre-effective
Prospectus, the Registration Statement or the Prospectus, or such amendment or
supplement, in reliance upon and in conformity with information furnished in
writing to the Company by the Representatives on behalf of any Underwriter
specifically for use therein or (ii) as to any Pre-effective Prospectus, with
respect to any Underwriter, to the extent that any such loss, claim, damage,
liability or expense of such Underwriter results from an untrue statement of a
material fact contained in, or the omission of a material fact from, such
Pre-effective Prospectus, which untrue statement or omission was corrected in
the Prospectus, if such Underwriter sold Stock to the person alleging such
loss, claim, damage or liability without sending or giving, at or prior to the
written confirmation of such sale, a copy of the Prospectus, unless such
failure resulted from the failure of the Company to deliver copies of the
Prospectus to such Underwriter on a timely basis to permit such sending or
giving. The Company will be entitled to participate at its own expense in the
defense or, if it so elects, to assume the defense of any suit brought to
enforce any such liability, but if the Company elects to assume the defense,
such defense shall be conducted by counsel chosen by it. In the event the
Company elects to assume the defense of any such suit and retain such counsel,
any Underwriter Indemnified Parties, defendant or defendants in the suit, may
retain additional counsel but shall bear the fees and expenses of such counsel
unless (i) the Company shall have specifically authorized the retaining of such
counsel or (ii) the parties to such suit include any such Underwriter
Indemnified Parties, and the Company and such Underwriter Indemnified Parties at
law or in equity have been advised by counsel to the Underwriters that one or
more legal defenses may be available to it or them which may not be available to
the Company, in which case the Company shall not be entitled to assume the
defense of such suit notwithstanding its obligation to bear the fees and
expenses of such counsel. This indemnity agreement is not exclusive and will be
in addition to any liability which the Company might otherwise have and shall
not limit any rights or remedies which may otherwise be available at law or in
equity to each Underwriter Indemnified Party. The Company agrees that the
statements with respect to the price and underwriting discount set forth on, and
the information contained in the last paragraph of, the cover page of the
Prospectus, the stabilization legend on the inside front cover page of the
Prospectus, and the table of Underwriters, the paragraph regarding price and
underwriting discount, the paragraph regarding the amounts of the selling
concession and reallowance, all set forth under the caption "Underwriting" in
the Prospectus, constitute the only information provided in writing by the
Representatives on behalf of any Underwriter expressly for use in the
Registration Statement or the Prospectus.
(b) Each Underwriter severally and not jointly agrees to indemnify and hold
harmless the Company, each of its directors, each of its officers who have
signed the Registration Statement and each person, if any, who controls the
Company within the meaning
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<PAGE>
of the Securities Act (collectively, the "Company Indemnified Parties") against
any losses, claims, damages, liabilities or expenses (including, unless the
Underwriter or Underwriters elect to assume the defense, the reasonable cost of
investigating and defending against any claims therefor and counsel fees
incurred in connection therewith), joint or several, which arise out of or are
based in whole or in part upon the Securities Act, the Exchange Act or any other
federal, state, local or foreign statute or regulation, or at common law, on the
ground or alleged ground that any Pre-effective Prospectus, the Registration
Statement or the Prospectus (or any Pre-effective Prospectus, the Registration
Statement or the Prospectus, as from time to time amended and supplemented)
includes an untrue statement of a material fact or omits to state a material
fact required to be stated therein or necessary in order to make the statements
therein, in light of the circumstances in which they were made, not misleading,
but only insofar as any such statement or omission was made in reliance upon,
and in conformity with, written information furnished to the Company by such
Underwriter, directly or through the Representatives, specifically for use in
the preparation thereof; provided, however, that in no case is such Underwriter
to be liable with respect to any claims made against any Company Indemnified
Party against whom the action is brought unless such Company Indemnified Party
shall have notified such Underwriter in writing within a reasonable time after
the summons or other first legal process giving information of the nature of the
claim shall have been served upon the Company Indemnified Party, but failure to
notify such Underwriter of such claim shall not relieve it from any liability
which it may have to any Company Indemnified Party otherwise than on account of
its indemnity agreement contained in this paragraph. Such Underwriter shall be
entitled to participate at its own expense in the defense, or, if it so elects,
to assume the defense of any suit brought to enforce any such liability, but, if
such Underwriter elects to assume the defense, such defense shall be conducted
by counsel chosen by it. In the event that any Underwriter elects to assume the
defense of any such suit and retain such counsel, the Company Indemnified
Parties and any other Underwriter or Underwriters or controlling person or
persons, defendant or defendants in the suit, shall bear the fees and expenses
of any additional counsel retained by them, respectively. The Underwriter
against whom indemnity may be sought shall not be liable to indemnify any person
for any settlement of any such claim effected without such Underwriter's
consent. This indemnity agreement is not exclusive and will be in addition to
any liability which such Underwriter might otherwise have and shall not limit
any rights or remedies which may otherwise be available at law or in equity to
any Company Indemnified Party.
(c) If the indemnification provided for in this Section 6 is
unavailable or insufficient to hold harmless an indemnified party under
subsection (a) or (b) above in respect of any losses, claims, damages,
liabilities or expenses (or actions in respect thereof) referred to herein, then
each indemnifying party shall contribute to the amount paid or payable by such
indemnified party as a result of such losses, claims, damages, liabilities or
expenses (or actions in respect thereof) in such proportion as is appropriate to
reflect the relative benefits received by the Company on the one hand and the
Underwriters on the other from the offering of the Stock. If, however, the
allocation provided by the immediately preceding sentence is not permitted by
applicable law, then each indemnifying party shall contribute to such amount
paid
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or payable by such indemnified party in such proportion as is appropriate to
reflect not only such relative benefits but also the relative fault of the
Company on the one hand and the Underwriters on the other in connection with the
statements or omissions which resulted in such losses, claims, damages,
liabilities or expenses (or actions in respect thereof), as well as any other
relevant equitable considerations. The relative benefits received by the Company
on the one hand and the Underwriters on the other shall be deemed to be in the
same proportion as the total net proceeds from the offering (before deducting
expenses) received by the Company bear to the total underwriting discounts and
commissions received by the Underwriters, in each case as set forth in the table
on the cover page of the Prospectus. The 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 the Company or the Underwriters and the
parties' relative intent, knowledge, access to information and opportunity to
correct or prevent such statement or omission. The Company and the Underwriters
agree that it would not be just and equitable if contribution were 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 account
of the equitable considerations referred to above. The amount paid or payable by
an indemnified party as a result of the losses, claims, damages, liabilities or
expenses (or actions in respect thereof) referred to above shall be deemed to
include any legal or other expenses reasonably incurred by such indemnified
party in connection with investigating, defending, settling or compromising any
such claim. Notwithstanding the provisions of this subsection (c), no
Underwriter shall be required to contribute any amount in excess of the amount
by which the total price at which the shares of the Stock underwritten by it and
distributed to the public were offered to the public exceeds the amount of any
damages which such Underwriter has otherwise been required to pay by reason of
such untrue or alleged untrue statement or omission or alleged omission. The
Underwriters' obligations to contribute are several in proportion to their
respective underwriting obligations and not joint. No person guilty of
fraudulent misrepresentation (within the meaning of Section 11(f) of the
Securities Act) shall be entitled to contribution from any person who was not
guilty of such fraudulent misrepresentation.
(d) Notwithstanding the provisions of this Section 6, the maximum
liability of Jack M. Benun, Mark J. Benun and Isaac Levy in respect of this
Agreement shall not exceed $2,000,000 in the aggregate.
7. Survival of Indemnities, Representations, Warranties, etc. The
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respective indemnities, covenants, agreements, representations, warranties and
other statements of the Company and the several Underwriters, as set forth in
this Agreement or made by them respectively, pursuant to this Agreement, shall
remain in full force and effect, regardless of any investigation made by or on
behalf of any Underwriter, the Company or any of its officers or directors or
any controlling person, and shall survive delivery of and payment for the Stock.
8. Conditions of Underwriters' Obligations. The respective obligations
---------------------------------------
of the several Underwriters hereunder shall be subject to the accuracy, at and
(except as otherwise stated herein) as of the date hereof and at and as of the
Closing Dates, of the representations and warranties made herein by the Company,
to compliance at and as of the Closing Dates by the
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<PAGE>
Company with its covenants and agreements herein contained and other provisions
hereof to be satisfied at or prior to the Closing Dates, and to the following
additional conditions:
(a) The Registration Statement shall have become effective and no
stop order suspending the effectiveness thereof shall have been issued and
no proceedings for that purpose shall have been initiated or, to the
knowledge of the Company or the Representatives, shall be threatened by the
Commission, and any request for additional information on the part of the
Commission (to be included in the Registration Statement or the Prospectus
or otherwise) shall have been complied with to the reasonable satisfaction
of the Representatives. Any filings of the Prospectus, or any supplement
thereto, required pursuant to Rule 424(b) or Rule 434 of the Rules and
Regulations, shall have been made in the manner and within the time period
required by Rule 424(b) and Rule 434 of the Rules and Regulations, as the
case may be.
(b) The Representatives shall have been satisfied that there shall
not have occurred any change, on a consolidated basis, prior to the Closing
Dates in the condition (financial or otherwise), properties, business,
management, prospects, net worth or results of operations of the Company
and the Founding Companies, or any change in the capital stock, short-term
or long-term debt of the Company and the Founding Companies, taken as a
whole, such that (i) the Registration Statement or the Prospectus, or any
amendment or supplement thereto, contains an untrue statement of fact which
is material, or omits to state a fact which is required to be stated
therein or is necessary to make the statements therein not misleading, or
(ii) it is impracticable in the reasonable judgment of the Representatives
to proceed with the public offering or purchase the Stock as contemplated
hereby.
(c) At the time of execution of this Agreement and at each of the
Closing Dates, Grant Thornton LLP shall have furnished to the Underwriters
a letter or letters, dated, respectively, the date of execution of this
Agreement and each of the Closing Dates, confirming that they are
independent certified public accountants with respect to the Company and
each of the Founding Companies within the meaning of the Securities Act and
the applicable published Rules and Regulations and based upon the
procedures described in such letter delivered to you concurrently with the
execution of this Agreement (herein called the "Comfort Letter"), but
carried out to a date not more than five (5) business days prior to the
First Closing Date or such later date on which the Option Stock is to be
purchased, as the case may be, (i) confirming, to the extent true, that the
statements and conclusions set forth in the Comfort Letter are accurate as
of the First Closing Date or such later date on which Option Stock is to be
purchased, as the case may be, and (ii) setting forth any revisions and
additions to the
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<PAGE>
statements and conclusions set forth in the Comfort Letter which are necessary
to reflect any changes in the facts described in the Comfort Letter since the
date of such letter, or to reflect the availability of more recent financial
statements, data or information. The letter shall not contain any disclosure
relating to any change in the condition (financial or otherwise), earnings,
operations, business or business prospects of the Company or any of the
Founding Companies from that set forth in the Registration Statement or
Prospectus, which, in your sole judgment, is material and adverse and that makes
it, in your sole judgment, impracticable or inadvisable to proceed with the
public offering of the Stock as contemplated by the Prospectus. The Comfort
Letter shall be addressed to or for the use of the Underwriters in form and
substance satisfactory to the Underwriters and shall (i) represent that they are
independent certified public accountants with respect to the Company and each of
the Founding Companies within the meaning of the Act and the applicable
published Rules and Regulations, (ii) set forth their opinion with respect to
their examination of the balance sheet of the Company as of December 31, 1997,
each of the Founding Companies as of the end of their respective fiscal year
ends, and related consolidated statements or operations, shareholders' equity,
and cash flows for the twelve (12) months then ended, (iii) state that, on the
basis of a reading of the pro forma consolidated financial statements and
supplemental pro forma information included in the Registration Statement and
the Prospectus, carrying out certain specified procedures that would not
necessarily reveal matters of significance with respect to the comments set
forth in this clause (iii), inquiries of certain officials of the Company and
the Founding Companies who have responsibility for financial and accounting
matters and proving the arithmetic accuracy of the application of the pro forma
consolidated financial statements and supplemental pro forma information,
nothing came to their attention that caused them to believe that the pro forma
consolidated financial statements and supplemental pro forma information do not
comply in form in all material respects with the applicable accounting
requirements of Rule 11-02 of Regulation S-X or that the pro forma adjustments
have not been properly applied to the historical amounts in the compilation of
such statements and (iv) address other matters agreed upon by Grant Thornton LLP
and you.
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In addition, you shall have received from Grant Thornton LLP at the time of
execution of this Agreement 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 accounting controls, to the extent they deemed
necessary in establishing the scope of their examination of the above financial
statements as of December 31, 1997, did not disclose any weaknesses in internal
controls that they considered to be material weaknesses.
(d) The Representatives shall have received from Buchanan Ingersoll PC,
counsel for the Company, an opinion, dated each of the Effective Date and the
Closing Dates, to the effect set forth in Exhibit I hereto. Counsel rendering
the foregoing opinion may rely as to questions of law not involving the laws of
the United States or the State of New York upon opinions of local counsel, and
as to questions of fact upon representations or certificates of officers of the
Company and/or the Founding Companies, and of government officials, in which
case their opinion is to state that they are so relying and that they have no
knowledge of any material misstatement or inaccuracy in any such opinion,
representation 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.
(e) The Representatives shall have received from Rosenman & Colin LLP,
counsel for the Underwriters, their opinion or opinions dated the Closing Dates
with respect to the incorporation of the Company, the validity of the Stock, the
Registration Statement and the Prospectus and such other related matters as it
may reasonably request, and the Company shall have furnished to such counsel
such documents as they may reasonably request for the purpose of enabling them
to pass upon such matters. In rendering such opinion, Rosenman & Colin LLP may
rely as to all matters governed other than by the laws of New York or federal
laws on the opinion of counsel referred to in paragraph (d) of this Section 8.
(f) The Representatives shall have received a certificate, dated the
Closing Dates, of the chief executive officer or the President and the chief
financial officer of the Company to the effect that:
(i) No stop order suspending the effectiveness of the Registration
Statement has been issued, and, to the best of the knowledge
27
<PAGE>
of the signers, no proceedings for that purpose have been instituted or are
pending or contemplated under the Securities Act;
(ii) Neither any Pre-effective Prospectus, as of its date, nor the
Registration Statement nor the Prospectus, nor any amendment or supplement
thereto, as of the time when the Registration Statement became effective and at
all times subsequent thereto up to the delivery of such certificate, included
any untrue statement of a material fact or omitted to state any 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;
(iii) Subsequent to the respective dates as of which information is given
in the Registration Statement and the Prospectus, and except as set forth or
contemplated in the Prospectus, neither the Company nor any of the Founding
Companies has incurred any material liabilities or obligations, direct or
contingent, nor entered into any material transactions not in the ordinary
course of business and there has not been any material adverse change in the
condition (financial or otherwise), properties, business, management, prospects,
net worth or results of operations of the Company and the Founding Companies, or
any change in the capital stock, short-term or long-term debt of the Company and
any of the Founding Companies;
(iv) The representations and warranties of the Company in this Agreement
are true and correct at and as of the Closing Dates, and the Company has
complied with all the agreements and performed or satisfied all the conditions
on its part to be performed or satisfied at or prior to the Closing Dates; and
(v) Since the respective dates as of which information is given in the
Registration Statement and the Prospectus, and except as disclosed in or
contemplated by the Prospectus, (i) there has not been any material adverse
change or a development involving a material adverse change in the condition
(financial or otherwise), properties, business, management, prospects, net worth
or results of operations of the Company and the Founding Companies considered as
a whole; (ii) the business and operations conducted by the Company and the
Founding Companies have not sustained a loss by strike, fire, flood, accident or
other calamity (whether or not insured) of such a character as to interfere
materially with the conduct of the business and operations of the Company and
the Founding Companies considered as a whole; (iii) no legal or governmental
28
<PAGE>
action, suit or proceeding is pending or, to the knowledge of the Company,
threatened against the Company or any of the Founding Companies which is
material to the Company and the Founding Companies considered as a whole,
whether or not arising from transactions in the ordinary course of
business, or which may materially and adversely affect the transactions
contemplated by this Agreement; (iv) since such dates and except as so
disclosed, the Company has not incurred any material liability or
obligation, direct, contingent or indirect, made any change in its capital
stock (except pursuant to its stock plans), made any material change in its
short-term or funded debt or repurchased or otherwise acquired any of the
Company's capital stock; and (v) the Company has not declared or paid any
dividend, or made any other distribution, upon its outstanding capital
stock payable to stockholders of record on a date prior to the Closing
Dates.
(g) The Company shall have furnished to the Representatives such
additional certificates as the Representatives may have reasonably requested as
to the accuracy, at and as of the Closing Dates, of the representations and
warranties made herein by it and as to compliance at and as of the Closing
Dates by it with its covenants and agreements herein contained and other
provisions hereof to be satisfied at or prior to the Closing Dates, and as to
satisfaction of the other conditions to the obligations of the Underwriters
hereunder.
(h) Ladenburg shall have received the written agreements of the officers,
directors, director nominees of the Company and the holders of securities of the
Company listed in Schedule B that each will not offer, sell, assign, transfer,
encumber, contract to sell, grant an option to purchase or otherwise dispose of,
any of Common Stock (including, without limitation, Common Stock which may be
deemed to be beneficially owned by such officer, director, director nominee or
holder in accordance with the Rules and Regulations) or securities convertible
into or exercisable or exchangeable for Common Stock during the 180 days
following the date of the Prospectus.
(i) The Nasdaq National Market shall have approved the Stock for
inclusion, subject only to notice of effectiveness.
(j) The Founding Company Reorganization shall have been consummated as of
the Effective Date on the terms set forth in the Registration Statement. All
opinions, certificates, letters and other documents will be in compliance with
the provisions hereunder only if they are satisfactory in form and substance to
the Representatives. The Company will furnish to the Representatives conformed
copies of such opinions, certificates, letters and other
29
<PAGE>
documents as the Representatives shall reasonably request. If any of the
conditions hereinabove provided for in this Section 8 shall not have
been satisfied when and as required by this Agreement, this Agreement
may be terminated by the Representatives by notifying the Company of
such termination in writing or by telegram at or prior to the Closing
Dates, but Ladenburg shall be entitled to waive any of such conditions.
(k) Ladenburg shall have received, in form and substance
satisfactory to Ladenburg, opinions of counsel from each of Fishbach,
Hertan & Ives, Schechter Rishty Goldstein & Blumenthal, Amster Rothstein
and Sharretts & Paley.
9. Effective Date. This Agreement shall become effective
--------------
immediately as to Sections 5, 6, 7, 9, 10, 11, 13, 14, 15, 16, 17, 18 and 19
and, as to all other provisions, at 11:00 A.M. New York City time on the first
full business day following the effectiveness of the Registration Statement or
at such earlier time after the Registration Statement becomes effective as the
Representatives may determine on and by notice to the Company or by release of
any of the Stock for sale to the public. For the purposes of this Section 9, the
Stock shall be deemed to have been so released upon the release for publication
of any newspaper advertisement relating to the Stock or upon the release by you
of telegrams (i) advising Underwriters that the shares of Stock are released for
public offering or (ii) offering the Stock for sale to securities dealers,
whichever may occur first.
10. Termination. This Agreement (except for the provisions of
-----------
Section 5) may be terminated by the Company at any time before it becomes
effective in accordance with Section 9 by notice to the Representatives and may
be terminated by the Representatives at any time before it becomes effective in
accordance with Section 9 by notice to the Company. In the event of any
termination of this Agreement under this or any other provision of this
Agreement, there shall be no liability of any party to this Agreement to any
other party, other than as provided in Sections 5, 6 and 11 and other than as
provided in Section 12 as to the liability of defaulting Underwriters.
This Agreement may be terminated after it becomes effective by the
Representatives by notice to the Company (i) if at or prior to any First Closing
Date trading in securities on any of the New York Stock Exchange, American Stock
Exchange or Nasdaq National Market shall have been suspended or minimum or
maximum prices shall have been
30
<PAGE>
established and are then currently in effect on any such exchange or market, or
a banking moratorium shall have been declared by New York or United States
authorities; (ii) trading of any securities of the Company shall have been
suspended on any exchange or in any over-the-counter market; (iii) if at or
prior to any Closing Date there shall have been (A) an outbreak or escalation
of hostilities between the United States and any foreign power or of any other
insurrection or armed conflict involving the United States or (B) any change in
financial markets or any calamity or crisis which, in the reasonable judgement
of the Representatives, makes it impractical or inadvisable to offer or sell the
Firm Stock on the terms contemplated by the Prospectus; (iv) if there shall have
been any development or prospective development involving particularly the
business or properties or securities of the Company or any of the Founding
Companies or the transactions contemplated by this Agreement which, in the
judgement of the Representatives, makes it impracticable or inadvisable to offer
or deliver the Firm Stock on the terms contemplated by the Prospectus; (v) if
there shall be any litigation or proceeding, pending or threatened, which, in
the reasonable judgment of the Representatives, makes it impracticable or
inadvisable to offer or deliver the Firm Stock on the terms contemplated by the
Prospectus; or (vi) if there shall have occurred any of the events specified in
the immediately preceding clauses (i) - (v) together with any other such event
that makes it, in the reasonable judgement of the Representatives, impractical
or inadvisable to offer or deliver the Firm Stock on the terms contemplated by
the Prospectus.
11. Reimbursement of Underwriters. Notwithstanding any other
-----------------------------
provisions hereof, if this Agreement shall not become effective by reason of any
election of the Company pursuant to the first paragraph of Section 10 or shall
be terminated by the Representatives under Section 8 or Section 10, the Company
will bear and pay the expenses specified in Section 5 hereof and, in addition to
its obligations pursuant to Section 6 hereof, the Company will reimburse the
reasonable out-of-pocket expenses of the several Underwriters (including
reasonable fees and disbursements of counsel for the Underwriters) incurred in
connection with this Agreement and the proposed purchase of the Stock, and
promptly upon demand the Company will pay such amounts to you as
Representatives.
12. Substitution of Underwriters. If on the First Closing Date or the
----------------------------
Option Closing Date, as the case may be, any Underwriter or Underwriters shall
default in its or their obligations to purchase shares of Stock hereunder
(otherwise than by reason of default on the part of the Company), you, as
Representatives of the Underwriters, shall use your reasonable efforts to
procure within 48 hours thereafter one or more of the other Underwriters, or any
others, to purchase from the Company such amounts as may be agreed upon and upon
the terms set forth herein, the shares of Stock which the defaulting Underwriter
or Underwriters failed to purchase. If during such 48 hours you, as such
Representatives, shall not have procured such other Underwriters, or any others,
to purchase the shares of Stock agreed to be purchased by the defaulting
Underwriter or Underwriters, then (a) if the aggregate number of shares which
such defaulting Underwriter or Underwriters agreed but failed to purchase does
not exceed ten percent (10%) of the total number of shares underwritten, the
other Underwriters shall be obligated severally, in
31
<PAGE>
proportion to their respective commitments hereunder, to purchase the shares of
Stock which such defaulting Underwriter or Underwriters agreed but failed to
purchase, or (b) if the aggregate number of shares of Stock with respect to
which such default or defaults occur is more than ten percent (10%) of the total
number of shares underwritten, the Company or you, as the Representatives of the
Underwriters, will have the right, by written notice given within the next 48-
hour period to the parties to this Agreement, to terminate this Agreement
without liability on the part of the non-defaulting Underwriters or the Company.
If the remaining Underwriters or substituted Underwriters are required
hereby or agree to take up all or part of the shares of Stock of a defaulting
Underwriter or Underwriters as provided in this Section 12, (i) the Company
shall have the right to postpone the Closing Dates for a period of not more than
five (5) full business days in order that the Company may effect whatever
changes may thereby be made necessary in the Registration Statement or the
Prospectus, or in any other documents or arrangements, and the Company agrees
promptly to file any amendments to the Registration Statement or supplements to
the Prospectus which may thereby be made necessary, and (ii) the respective
numbers of shares to be purchased by the remaining Underwriters or substituted
Underwriters shall be taken as the basis of their underwriting obligation for
all purposes of this Agreement. Nothing herein contained shall relieve any
defaulting Underwriter of its liability to the Company or the other Underwriters
for damages occasioned by its default hereunder. Any termination of this
Agreement pursuant to this Section 12 shall be without liability on the part of
any non-defaulting Underwriter or the Company, except for expenses to be paid or
reimbursed pursuant to Section 5 and except for the provisions of Section 6.
13. Notices. All communications hereunder shall be in writing and, if
-------
sent to the Underwriters shall be mailed, delivered or telegraphed and confirmed
to you, as their Representatives c/o Ladenburg Thalmann & Co. Inc. at 590
Madison Avenue, New York, New York 10022, attention: ___________________, except
that notices given to an Underwriter pursuant to Section 6 hereof shall be sent
to such Underwriter at the address furnished by the Representatives or, if sent
to the Company, shall be mailed, delivered or telegraphed and confirmed c/o
_________________________.
14. Successors. This Agreement shall inure to the benefit of and be
----------
binding upon the several Underwriters, the Company and their respective
successors and legal representatives. Nothing expressed or mentioned in this
Agreement is intended or shall be construed to give any person other than the
persons mentioned in the preceding sentence any legal or equitable right, remedy
or claim under or in respect of this Agreement, or any provisions herein
contained, this Agreement and all conditions and provisions hereof being
intended to be and being for the sole and exclusive benefit of such persons and
for the benefit of no other person; except that the representations, warranties,
covenants, agreements and indemnities of the Company contained in this Agreement
shall also be for the benefit of the person or persons, if any, who control any
Underwriter or Underwriters within the meaning of
32
<PAGE>
Section 15 of the Securities Act or Section 20 of the Exchange Act, and the
indemnities of the several Underwriters shall also be for the benefit of each
director of the Company, each of its officers who has signed the Registration
Statement and the person or persons, if any, who control the Company within the
meaning of Section 15 of the Securities Act or Section 20 of the Exchange Act.
15. Applicable Law. This Agreement shall be governed by and construed in
--------------
accordance with the laws of the State of New York without giving effect to the
choice of law principles thereof.
16. Authority of the Representatives. In connection with this Agreement,
--------------------------------
you will act for and on behalf of the several Underwriters, and any action taken
under this Agreement by you, as Representatives, or individually as a
Representative, will be binding on all the Underwriters.
17. Partial Unenforceability. The invalidity or unenforceability of any
------------------------
section, paragraph or provision of this Agreement shall not affect the validity
or enforceability of any other section, paragraph or provision hereof. If any
section, paragraph or provision of this Agreement is for any reason determined
to be invalid or unenforceable, there shall be deemed to be made such minor
changes (and only such minor changes) as are necessary to make it valid and
enforceable.
18. General. This Agreement constitutes the entire agreement of the
-------
parties to this Agreement and supersedes all prior written or oral and all
contemporaneous oral agreements, understandings and negotiations with respect to
the subject matter hereof.
In this Agreement, the masculine, feminine and neuter genders and the
singular and the plural include one another. The section headings in this
Agreement are for the convenience of the parties only and will not affect the
construction or interpretation of this Agreement. This Agreement may be amended
or modified, and the observance of any term of this Agreement may be waived,
only by a writing signed by the Company and the Representatives.
19. Counterparts. This Agreement may be signed in two or more
------------
counterparts, each of which shall be an original, with the same effect as if the
signatures thereto and hereto were upon the same instrument.
33
<PAGE>
If the foregoing correctly sets forth our understanding, please indicate
your acceptance thereof in the space provided below for that purpose, whereupon
this letter and your acceptance shall constitute a binding agreement between us.
Very truly yours,
HAPPY KIDS INC.
By:
------------------------------------
Name: Jack M. Benun, Chairman of
the Board, President and
Chief Executive Officer
------------------------------------
Jack M. Benun, with respect to
Sections 2 and 6 hereof
------------------------------------
Mark J. Benun, with respect to
Sections 2 and 6 hereof
------------------------------------
Isaac Levy, with respect
to Sections 2 and 6 hereof
Accepted and delivered in _______________
as of the date first above written.
LADENBURG THALMANN & CO. INC.
CRUTTENDEN ROTH INCORPORATED
Each acting on its own behalf
and as a Representative of the
several Underwriters referred
to in the foregoing Agreement.
By: Ladenburg Thalmann & Co. Inc.
By:
--------------------------------------
Name:
Title:
34
<PAGE>
SCHEDULE A
Number of
Name Firm Stock to be Purchased
---- --------------------------
Ladenburg Thalmann & Co. Inc. .........
Cruttenden Roth Incorporated .........
- ----------------------------
. ................
- ---------------------
Total ..................................
--------
======
A-1
<PAGE>
SCHEDULE B
List of Officers, Directors, and 1% Shareholders
Subject to Lock Up Provision
B-1
<PAGE>
EXHIBIT I
Matters to be covered in
------------------------
opinion of Counsel to the Company/1/
------------------------------------
1. The Company is validly existing as a corporation in good standing
under the laws of the State of New York; each of the Founding Companies is
validly existing as a corporation in good standing under the laws of the
jurisdiction of its incorporation;
2. The Company has all corporate power and authority necessary to own or
hold its properties and to conduct its business (including, without limitation,
as conducted through the Founding Companies) as described in the Prospectus;
each of the Founding Companies has all corporate power and authority necessary
to own or hold its properties and to conduct their respective businesses as
described in the Prospectus;
3. The Company and each of the Founding Companies is duly qualified to
do business and is in good standing as a foreign corporation in each of the
jurisdictions set forth on a Schedule to the opinion; to such counsel's
knowledge, the Company does not own or control, and immediately after the
consummation of the Founding Company Reorganization will not own or control,
directly or indirectly, any corporation, association or other entity other than
the Founding Companies and to such counsel's knowledge none of the Founding
Companies owns or controls, directly or indirectly, any corporation, association
or other entity;
4. 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, have not been issued in violation of or subject to any
statutory pre-emptive right, and, to such counsel's knowledge, have not been
issued in violation of or subject to any contractual preemptive right, co-sale
right, registration right, right of first refusal or other similar right and,
except as set forth in the Registration Statement, to such counsel's knowledge,
there are no outstanding rights, warrants or options to acquire, or instruments
convertible into or exchangeable for, any shares of capital stock or other
equity interest in the Company, have not been issued in violation of or subject
to any statutory pre-emptive right, and, to such counsel's knowledge, have not
been issued in violation of or subject to any contractual preemptive right, co-
sale right, registration right, right of first refusal or other similar right;
based solely on a review of stock ledgers and relying upon such ledgers to be
complete, true and accurate, all the issued and outstanding shares of capital
stock of each of the Founding Companies are owned of record and beneficially by
the Company, free and clear of any security interests, liens, encumbrances,
equities or other claims and there are no outstanding rights, warrants or
options
- ---------------------------
/1/ Capitalized terms used herein but not defined shall have the meanings given
such terms in the Underwriting Agreement.
Exhibit I-1
<PAGE>
to acquire, or instruments convertible into or exchangeable for, any shares of
capital stock or other equity interest in any of the Founding Companies;
5. The Stock has been duly and validly authorized by the Company for
issuance, and the Company has full corporate power and authority to issue, sell
and deliver the Stock, and, when the Stock is issued and delivered against
payment therefor in accordance with the terms hereof, they will be fully paid
and nonassessable, and will not have been issued in violation of or subject to
any statutory preemptive right, or to such counsel's knowledge, any contractual
preemptive right, co-sale right, registration right, right of first refusal or
other similar right; and there are no restrictions upon the voting or transfer
of any of the Stock pursuant to the Certificate of Incorporation (as
hereinafter defined) or By-laws, or pursuant to any agreement or other
instrument of the Company known to such counsel.
6. To such counsel's knowledge, except as set forth in the Prospectus,
there are no legal or governmental proceedings pending to which the Company or
any of the Founding Companies is a party or of which any property or assets of
the Company or any of the Founding Companies is the subject which, if determined
adversely to the Company or any of the Founding Companies, could have a Material
Adverse Effect or prevent or adversely affect the transactions contemplated by
the Underwriting Agreement; and, to such counsel's knowledge, no such
proceedings are threatened by governmental authorities or other third parties.
7. This Agreement has been duly and validly authorized by all necessary
corporate action on the part of the Company and has been duly executed and
delivered by the Company and, assuming due authorization, execution and delivery
of this Agreement by you, is a valid and binding agreement of the parties; the
Company has full corporate power and authority to enter into this Agreement and
into the Securities Purchase Agreement.
8. The capital stock issued by the Company in the Founding Company
Reorganization is exempt from the registration requirements of the Securities
Act.
9. The execution, delivery and performance of the Underwriting Agreement,
and the consummation of the transactions therein contemplated will not result
(and in the case of the Founding Company Reorganization did not result), with or
without due notice or lapse of time or both, in a breach or violation of any of
the terms or provisions of or constitute a default under, or give rise to any
right of termination, cancellation or acceleration under, the Company's Amended
and Restated Certificate of Incorporation (the "Certificate of Incorporation"),
by-laws or other organizational documents of the Company or any of the Founding
Companies, or any material indenture, mortgage, deed of trust, note agreement
or, except for the Company's License Agreement with [Disney], other agreement or
instrument known to such counsel to which the Company or any of the Founding
Companies is a party or by which it or any of them or any of their properties is
or may be bound and will not result in a breach or violation of any law,
statute, order, rule or
Exhibit I-2
<PAGE>
regulation of any court or governmental agency or body having jurisdiction over
the Company or any of the Founding Companies or any of their properties or
result in the creation of a lien.
10. To such counsel's knowledge, neither the Company nor any of the
Founding Companies is presently (a) in violation of their respective charter or
by-laws, or (b), to such counsel's knowledge, in breach or default under any
lease, instrument, license, permit or any other agreement to which the Company
or any of the Founding Companies is bound or to which any property or assets of
the Company or any of the Founding Companies is the subject, where the
consequences of such violation, breach or default would have a Material Adverse
Effect;
11. No consent, approval, authorization or order of any court or
governmental agency or body is required for the consummation by the Company of
the transactions contemplated by the Underwriting Agreement (including without
limitation the Founding Company Reorganization) (except such as may be required
by the NASD or as required by the securities or "Blue Sky" laws of any
jurisdiction as to which such counsel need express no opinion) in connection
with the purchase and distribution of the Stock by the Underwriters except such
as have been obtained or made, specifying the same.
12. The Registration Statement has become effective under the
Securities Act and, to the best of such counsel's knowledge, no stop order
suspending the effectiveness of the Registration Statement has been issued and
no proceeding for that purpose is pending or threatened by the Commission.
13. The Registration Statement and the Prospectus and any amendments
or supplements thereto (except for the financial statements and notes thereto
and related schedules and other financial information as to which such counsel
need express no opinion) comply as to form in all material respects with the
requirements of the Securities Act and the Rules and Regulations.
14. There are no contracts, agreements or other documents, known to
such counsel, required to be described in the Registration Statement or
Prospectus or to be filed as an exhibit to the Registration Statement which is
not described or filed therein as required. All descriptions of any such
contracts, agreements or documents contained in the Registration Statement are
accurate and complete descriptions of such documents in all material respects.
15. The statements in the Prospectus under the captions
"Management-Employment Agreements," -- "1997 Stock Option Plan," "Description of
Capital Stock" and "Shares Eligible for Future Sale," to the extent they
constitute a summary of documents referred to therein or matters of law
accurately summarize and fairly present in all material respects the legal and
regulatory matters described therein.
Exhibit I-3
<PAGE>
16. Neither the Company nor any of the Founding Companies is an
"investment company," or an entity "controlled" by an "investment company"
required to be registered under the 1940 Act, as such terms are defined in the
1940 Act.
17. To such counsel's knowledge, except as set forth in the
Registration Statement and the Prospectus, no holder of any securities of the
Company or any other person has the right, contractual or otherwise, to cause
the Company to sell or otherwise issue to such person, or to permit such person
to underwrite the sale of, any of the Stock or the right to have any Common
Stock or other securities of the Company included in the Registration Statement
or the right, as a result of the filing of the Registration Statement, to
require registration under the Securities Act of any shares of Common Stock or
other securities of the Company that has not been waived or lapsed.
18. The Company and each of the Founding Companies possesses all
authorizations, approvals, orders, licenses, certificates, franchises and
permits of and from, and have made all declarations and filings with, all
regulatory or governmental officials, bodies and tribunals ("Permits") to own,
lease or operate their respective properties and to conduct their respective
businesses described in the Registration Statement and the Prospectus, except
where the failure to have obtained or made the same would not have a Material
Adverse Effect and to the knowledge of such counsel neither the Company nor any
of the Founding Companies has received any notice of proceedings relating to the
revocation or modification of any such Permits.
19. The Company and each of the Founding Companies owns, and/or
possesses adequate rights to use, free and clear of all liens, charges,
encumbrances, pledges, security interests or defects, all patents, trademarks,
service marks, logos, trade names, trade secrets, know how, copyrights,
proprietary technology and licenses, and rights with respect to the foregoing
(collectively, "Intellectual Property"), used in the conduct of their respective
businesses as described in the Registration Statement and the Prospectus, and to
the knowledge of such counsel neither the Company nor any of the Founding
Companies has received a notice, or knows of any basis, of any infringement of
or conflict with the asserted rights of others in any such respect.
Exhibit I-4
<PAGE>
20. To the knowledge of such counsel the Company and each of the
Founding Companies is in compliance with, and conducts its business in
conformity with, all applicable federal, state, local and foreign laws, rules
and regulations of each court or governmental agency or body having jurisdiction
over the Company or any of the Founding Companies, except where the failure to
be in compliance would not have a Material Adverse Effect; to the knowledge of
such counsel, otherwise than as set forth in the Registration Statement and the
Prospectus, no prospective change in any of such federal or state laws, rules or
regulations has been adopted which, when made effective, would have a Material
Adverse Effect.
21. To the knowledge of such counsel, neither the Company nor any
of the Founding Companies is in violation of its respective charter or by-laws.
To the knowledge of such counsel,the Company and each of the Founding Companies
has performed all obligations required to be performed by the Company or any
such Founding Company under any material license, indenture, mortgage, deed of
trust, note agreement or other agreement or instrument known to such counsel to
which it is a party or by which it is or any of its properties may be bound, and
neither the Company nor any of the Founding Companies, nor to the knowledge of
such counsel, any other party to such material license, indenture, mortgage deed
of trust, note agreement or other agreement or instrument is in default under or
in breach of any such obligations. To the knowledge of such counsel, neither the
Company nor any of the Founding Companies has received or sent any notice of
such default or breach.
22. The Stock has been duly approved for quotation on the Nasdaq
National Market, subject to notice of effectiveness.
23. All conditions to the consummation of the Founding Company
Reorganization have been satisfied, and the Founding Company Reorganization
has been consummated as described in the Registration Statement.
In addition to the matters set forth above, such opinion shall also include a
statement to the effect that nothing has come to the attention of such counsel
which leads them to believe that (i) the Registration Statement or any amendment
thereto, as to the time it became effective under the Securities Act (but after
giving effect to any modifications incorporated therein pursuant to Rule 430A
under the Securities Act), contained any untrue statement of a material fact or
omitted to state a material fact required to be stated therein or necessary in
order to make the statements therein not misleading, or (ii) that the
Prospectus, or any supplement thereto, on the date it was filed pursuant to the
Rules and Regulations and as of the First Closing Date or the Option Closing
Date, as the case may be, contained any untrue statement of a material fact or
omitted to state a material fact required to be stated therein or necessary in
order to make the statements therein, in light of the circumstances under which
they were made, not misleading (expect that such counsel need express no view as
to financial statements and notes thereto and schedules or other financial or
statistical information therein). With respect to such statement, such counsel
Exhibit I-5
<PAGE>
may state that their belief is based upon the procedures set forth therein, but
is without independent check and verification.
Exhibit I-6
<PAGE>
EXHIBIT 3.1
RESTATED CERTIFICATE OF INCORPORATION
OF
O'BOY INC.
UNDER SECTION 807 OF THE BUSINESS CORPORATION LAW
* * * * *
WE, THE UNDERSIGNED, JACK M. BENUN AND MARK J. BENUN, BEING
RESPECTIVELY THE PRESIDENT AND THE SECRETARY HEREBY CERTIFY:
1. THE NAME OF THE CORPORATION IS O'BOY INC.
2. THE CERTIFICATE OF INCORPORATION WAS FILED BY THE DEPARTMENT OF STATE
ON APRIL 11, 1988.
3. THE CERTIFICATE OF INCORPORATION IS AMENDED TO PROVIDE FOR A CHANGE OF
SHARES AS SET FORTH ON THE FOLLOWING TABLE:
<TABLE>
<CAPTION>
Pre-Amendment Post Amendment
------------- --------------
Issued Authorized, Conversion Issued Authorized,
but unissued Ratio but unissued
<S> <C> <C> <C> <C> <C>
Common 100 shares, 100 shares, 3,487,500 26,512,500
Stock no par value no par value 34,875 for 1 shares, shares, $.01 par
$.01 par value
value
Preferred None n/a n/a none 5,000,000
Stock Authorized shares, $.01 par
value
</TABLE>
4. THE CERTIFICATE OF INCORPORATION IS AMENDED IN THE FOLLOWING RESPECTS:
(a) Article FIRST relating to the name of the Corporation is amended to
read as follows:
FIRST: The name of the Corporation is Happy Kids Inc.
<PAGE>
(b) Article SECOND relating to the purpose for which the Corporation
was formed is amended to read as follows:
SECOND: The purpose for which it is formed is to engage in
any lawful act or activity for which corporations may be organized
under the Business Corporation Law provided that the Corporation is
not formed to engage in any act or activity which requires the consent
or approval of any state official, department, board, agency or other
body, without such consent or approval first being obtained.
(c) Article FOURTH relating to the Corporation's capitalization is
amended to read as follows:
FOURTH: The total number of shares of all classes of stock
which the Corporation shall have authority to issue is thirty-five
million (35,000,000) shares. The Corporation is authorized to issue
two classes of stock designated "Common Stock" and "Preferred Stock,"
respectively. The total number of shares of Common Stock authorized to
be issued by the Corporation is thirty million (30,000,000), each such
share of Common Stock having a par value of $.01. The total number of
shares of Preferred Stock authorized to be issued by the Corporation
shall be five million (5,000,000), each such share of Preferred Stock
having a par value of $.01, all of which is undesignated.
The undesignated Preferred Stock may be issued from time to time
in one or more series. The Board of Directors of the Corporation is
hereby authorized, by adopting a resolution or resolutions and filing
a certificate or certificates pursuant to the applicable provisions of
the Business Corporation Law, to establish from time to time the
number of shares to be included in each such series of Preferred
Stock, and to fix the designation, powers, preferences and rights of
the shares of each such series and the qualifications, limitations or
restrictions thereof, including but not limited to the fixing or
alteration of the dividend rights, dividend rate or rates, conversion
rights, voting rights, rights and terms of redemption (including
sinking fund provisions), the redemption price or prices, and the
liquidation preferences of any wholly unissued series of shares of
Preferred Stock, 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 the event the number of shares of any series shall be
so decreased, the shares removed from such series by such decrease
shall resume the status which they had prior to the adoption of the
resolution originally fixing the number of shares of such series.
Each share of common stock, no par value, of the Corporation
issued and outstanding is hereby reclassified and changed into 34,875
fully paid and nonassessable shares of Common Stock, $.01 par value,
of the Corporation and each holder of record of a certificate for one
or more shares of Common Stock, no par
<PAGE>
value, of the Corporation as of the close of business on the date this
Restated Certificate of Incorporation becomes effective shall be
entitled to receive, as soon as practicable, upon surrender of such
certificate, a certificate or certificates representing 34,875 shares
of Common Stock, $.01 par value, for each share of Common Stock, no
par value, represented by the certificate of such holder, and any
fractional shares resulting will be rounded up to the next whole
share.
(d) Article FIFTH relating to the designation of the Secretary of
State as agent of the Corporation for service of process is amended to read as
follows:
FIFTH: The Secretary of State is designated as the agent of the
Corporation upon whom process against the Corporation may be served.
The post office address to which the Secretary of State shall mail a
copy of any process against the Corporation served upon him is: 100
West 33rd Street, Suite 1100, New York, New York 10001, Attention:
President.
(e) Article SIXTH and Article SEVENTH are added to the certificate of
incorporation to read as follows:
SIXTH: The following provisions are included for the management
of the business and the conduct of the affairs of the Corporation, and
for further definition, limitation and regulation of the powers of the
Corporation and of its Board of Directors and shareholders:
(i) The Board of Directors of the Corporation is
expressly authorized to adopt, amend or repeal the Bylaws of the
Corporation, subject to any limitation thereof contained in the
Bylaws. The shareholders also shall have the power to adopt, amend or
repeal the Bylaws of the Corporation; provided, however, that, in
-------- -------
addition to any vote of the holders of any class or series of stock of
the Corporation required by law or by this Restated Certificate of
Incorporation, the affirmative vote of the holders of at least eighty
percent (80%) of the voting power of all of the then outstanding
shares of the capital stock of the Corporation entitled to vote
generally in the election of directors, voting together as a single
class, shall be required to adopt, amend or repeal any provision of
the Bylaws of the Corporation.
(ii) Any action required or permitted to be taken at a
meeting of the shareholders under the Business Corporation Law, other
than the annual election of directors, may be taken without a meeting
upon the written consent of shareholders who would have been entitled
to cast the minimum number of votes which would be necessary to
authorize such action at a meeting at which all shareholders entitled
to vote thereon were present and voting, provided that, upon the
consummation of an initial public offering of securities of the
Corporation
<PAGE>
under the Securities Act of 1933, as amended, shareholders of the
Corporation may not take any action by written consent in lieu of a
meeting under any circumstances.
(iii) Special meetings of shareholders may be called at
any time only by the President, the Chairman of the Board of Directors
of the Corporation (if any) or a majority of the Board of Directors of
the Corporation. Business transacted at any special meeting of
shareholders shall be limited to matters relating to the purpose or
purposes set forth in the notice of such special meeting.
(iv) The Board of Directors of the Corporation, when
evaluating any offer of another party (a) to make a tender or exchange
offer for any equity security of the Corporation, or (b) to effect a
business combination, shall, in connection with the exercise of its
judgment in determining what is in the best interests of the
Corporation as a whole, be authorized to give due consideration to any
such factors as the Board of Directors of the Corporation determines
to be relevant, and, in connection with any such evaluation, the Board
of Directors of the Corporation is authorized to conduct such
investigations and engage in such legal proceedings as the Board of
Directors of the Corporation may determine. Such factors for
consideration shall include, without limitation, each of the
following:
(1) both the long-term and the short term interests of the
Corporation and its shareholders, including the possibility that these
interests might be best served by the continued independence of the
Corporation;
(2) the effects that the Corporation's actions may have in
the short-term or in the long-term upon any of the following:
(a) the prospects for potential growth, development,
productivity and profitability of the Corporation;
(b) the Corporation's current employees;
(c) the Corporation's retired employees and other
beneficiaries receiving or entitled to receive retirement, welfare or
similar benefits from or pursuant to any plan sponsored, or agreement
entered into by the corporation ;
(d) the Corporation's customers and creditors;
(e) the ability of the Corporation to provide, as a
going concern, goods, services, employment opportunities and
employment benefits and otherwise to contribute to the communities in
which it does business;
<PAGE>
(3) whether the proposed transaction might violate federal
or state laws; and
(4) not only the consideration being offered in the proposed
transaction, in relation to the then current market price for the
outstanding capital stock of the Corporation, but also to the market
price for the capital stock of the Corporation over a period of years,
the estimated price that might be achieved in a negotiated sale of the
Corporation as a whole or in part or through orderly liquidation, the
premiums over market price for the securities of other corporations in
similar transactions, current political, economic and other factors
bearing on securities prices and the Corporation's financial condition
and future prospects.
(v) The shareholders of the Corporation shall not be entitled
to any preemptive rights under or by virtue of Section 622 of the New
York Business Corporation Law.
(vi) In addition to any vote of the holders of any class or
series of stock of the Corporation required by law or by this Restated
Certificate of Incorporation, the affirmative vote of the holders of
at least eighty percent (80%) of the voting power of all of the then
outstanding shares of the capital stock of the Corporation entitled to
vote generally in the election of directors, voting together as a
single class, shall be required to amend any provision of Articles
SIXTH or SEVENTH of this Restated Certificate of Incorporation.
SEVENTH: No director acting in his/her capacity as a director
shall be personally liable to the Corporation or its shareholders for
damages for breach of any duty owed to the Corporation or its
shareholders, except that this provision shall not relieve a director
from liability if a judgment or other final adjudication adverse to
him establishes that his acts or omissions were in bad faith or
involved intentional misconduct or a knowing violation of law or that
he personally gained in fact a financial profit or other advantage to
which he was not legally entitled or that his acts violated Section
719 of the Business Corporation Law.
5. THE TEXT OF THE CERTIFICATE OF INCORPORATION IS HEREBY RESTATED AS
AMENDED TO READ IN ITS ENTIRETY AS FOLLOWS:
FIRST: The name of the Corporation is Happy Kids Inc.
SECOND: The purpose for which it is formed is to engage in any lawful
act or activity for which corporations may be organized under the Business
Corporation Law provided that the Corporation is not formed to engage in any act
or activity which requires the consent or approval of any state official,
department, board, agency or other body, without such consent or approval first
being obtained.
<PAGE>
THIRD: The office of the Corporation in the State of New York is to
be located in the County of New York.
FOURTH: The total number of shares of all classes of stock which
the Corporation shall have authority to issue is thirty-five million
(35,000,000) shares. The Corporation is authorized to issue two classes of stock
designated "Common Stock" and "Preferred Stock," respectively. The total number
of shares of Common Stock authorized to be issued by the Corporation is thirty
million (30,000,000), each such share of Common Stock having a par value of
$.01. The total number of shares of Preferred Stock authorized to be issued by
the Corporation shall be five million (5,000,000), each such share of Preferred
Stock having a par value of $.01, all of which is undesignated.
The undesignated Preferred Stock may be issued from time to time
in one or more series. The Board of Directors of the Corporation is hereby
authorized, by adopting a resolution or resolutions and filing a certificate or
certificates pursuant to the applicable provisions of the Business Corporation
Law, to establish from time to time the number of shares to be included in each
such series of Preferred Stock, and to fix the designation, powers, preferences
and rights of the shares of each such series and the qualifications, limitations
or restrictions thereof, including but not limited to the fixing or alteration
of the dividend rights, dividend rate or rates, conversion rights, voting
rights, rights and terms of redemption (including sinking fund provisions), the
redemption price or prices, and the liquidation preferences of any wholly
unissued series of shares of Preferred Stock, 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 the event the number of shares of any series shall be so
decreased, the shares removed from such series by such decrease shall resume the
status which they had prior to the adoption of the resolution originally fixing
the number of shares of such series.
Each share of common stock, no par value, of the Corporation
issued and outstanding is hereby reclassified and changed into 34,875 fully paid
and nonassessable shares of Common Stock, $.01 par value, of the Corporation and
each holder of record of a certificate for one or more shares of Common Stock,
no par value, of the Corporation as of the close of business on the date this
Restated Certificate of Incorporation becomes effective shall be entitled to
receive, as soon as practicable, upon surrender of such certificate, a
certificate or certificates representing 34,875 shares of Common Stock, $.01 par
value, for each share of Common Stock, no par value, represented by the
certificate of such holder, and any fractional shares resulting will be rounded
up to the next whole share.
FIFTH: The Secretary of State is designated as the agent of the
Corporation upon whom process against the Corporation may be served. The post
office address to which the Secretary of State shall mail a copy of any process
against the Corporation served upon him is: 100 West 33rd Street, Suite 1100,
New York, New York 10001, Attention: President.
<PAGE>
SIXTH: The following provisions are included for the management of
the business and the conduct of the affairs of the Corporation, and for further
definition, limitation and regulation of the powers of the Corporation and of
its Board of Directors and shareholders:
(i) The Board of Directors of the corporation is expressly
authorized to adopt, amend or repeal the Bylaws of the corporation, subject to
any limitation thereof contained in the Bylaws. The shareholders also shall have
the power to adopt, amend or repeal the Bylaws of the Corporation; provided,
--------
however, that, in addition to any vote of the holders of any class or series of
- -------
stock of the Corporation required by law or by this Restated Certificate of
Incorporation, the affirmative vote of the holders of at least eighty percent
(80%) of the voting power of all of the then outstanding shares of the capital
stock of the Corporation entitled to vote generally in the election of
directors, voting together as a single class, shall be required to adopt, amend
or repeal any provision of the Bylaws of the Corporation.
(ii) Any action required or permitted to be taken at a meeting
of the shareholders under the Business Corporation Law, other than the annual
election of directors, may be taken without a meeting upon the written consent
of shareholders who would have been entitled to cast the minimum number of votes
which would be necessary to authorize such action at a meeting at which all
shareholders entitled to vote thereon were present and voting, provided that,
upon the consummation of an initial public offering of securities of the
Corporation under the Securities Act of 1933, as amended, shareholders of the
Corporation may not take any action by written consent in lieu of a meeting
under any circumstances.
(iii) Special meetings of shareholders may be called at any time
only by the President, the Chairman of the Board of Directors of the Corporation
(if any) or a majority of the Board of Directors of the Corporation. Business
transacted at any special meeting of shareholders shall be limited to matters
relating to the purpose or purposes set forth in the notice of such special
meeting.
(iv) The Board of Directors of the Corporation, when evaluating
any offer of another party (a) to make a tender or exchange offer for any equity
security of the Corporation, or (b) to effect a business combination, shall, in
connection with the exercise of its judgment in determining what is in the best
interests of the Corporation as a whole, be authorized to give due consideration
to any such factors as the Board of Directors of the Corporation determines to
be relevant, and, in connection with any such evaluation, the Board of Directors
of the Corporation is authorized to conduct such investigations and engage in
such legal proceedings as the Board of Directors of the Corporation may
determine. Such factors for consideration shall include, without limitation,
each of the following:
(1) both the long-term and the short term interests of
the Corporation and its shareholders, including the possibility that these
interests might be best served by the continued independence of the Corporation;
(2) the effects that the Corporation's actions may have
in the short-term or in the long-term upon any of the following:
<PAGE>
(a) the prospects for potential growth,
development, productivity and profitability of the Corporation;
(b) the Corporation's current employees;
(c) the Corporation's retired employees and other
beneficiaries receiving or entitled to receive retirement, welfare or similar
benefits from or pursuant to any plan sponsored, or agreement entered into by
the Corporation;
(d) the Corporation's customers and creditors;
(e) the ability of the Corporation to provide, as a
going concern, goods, services, employment opportunities and employment benefits
and otherwise to contribute to the communities in which it does business;
(3) whether the proposed transaction might violate
federal or state laws; and
(4) not only the consideration being offered in the
proposed transaction, in relation to the then current market price for the
outstanding capital stock of the Corporation, but also to the market price for
the capital stock of the Corporation over a period of years, the estimated price
that might be achieved in a negotiated sale of the Corporation as a whole or in
part or through orderly liquidation, the premiums over market price for the
securities of other corporations in similar transactions, current political,
economic and other factors bearing on securities prices and the Corporation's
financial condition and future prospects.
(v) The shareholders of the Corporation shall not be entitled
to any preemptive rights under or by virtue of Section 622 of the New York
Business Corporation Law.
(vi) In addition to any vote of the holders of any class or
series of stock of the Corporation required by law or by this Restated
Certificate of Incorporation, the affirmative vote of the holders of at least
eighty percent (80%) of the voting power of all of the then outstanding shares
of the capital stock of the Corporation entitled to vote generally in the
election of directors, voting together as a single class, shall be required to
amend any provision of Articles SIXTH or SEVENTH of this Restated Certificate of
Incorporation.
SEVENTH: No director acting in his/her capacity as a director
shall be personally liable to the Corporation or its shareholders for damages
for breach of any duty owed to the Corporation or its shareholders, except that
this provision shall not relieve a director from liability if a judgment or
other final adjudication adverse to him establishes that his acts or omissions
were in bad faith or involved intentional misconduct or a knowing violation of
law or that he personally gained in fact a financial profit or other advantage
to which he was not legally entitled or that his acts violated Section 719 of
the Business Corporation Law.
6. THIS RESTATEMENT OF THE CERTIFICATE OF INCORPORATION WAS AUTHORIZED
BY UNANIMOUS WRITTEN CONSENT OF THE BOARD OF DIRECTORS AND SHAREHOLDERS OF THE
CORPORATION.
*********
<PAGE>
IN WITNESS WHEREOF, WE HAVE SIGNED THIS CERTIFICATE ON THE 31ST DAY OF
DECEMBER, 1997, AND WE AFFIRM THE STATEMENTS CONTAINED THEREIN AS TRUE UNDER
PENALTIES OF PERJURY.
____________________________
JACK M. BENUN, PRESIDENT
____________________________
MARK J. BENUN, SECRETARY
<PAGE>
EXHIBIT 3.2
AMENDED AND RESTATED
BYLAWS
OF
HAPPY KIDS INC.
<PAGE>
AMENDED AND RESTATED BYLAWS
TABLE OF CONTENTS
-----------------
ARTICLE I OFFICES.....................................................1
Section 1.01 Registered Office...........................................1
Section 1.02 Other Offices...............................................1
ARTICLE II SEAL........................................................1
Section 2.01 Seal........................................................1
ARTICLE III SHAREHOLDERS' MEETINGS......................................2
Section 3.01 Place.......................................................2
Section 3.02 Annual Meetings.............................................2
Section 3.03 Special Meetings............................................2
Section 3.04 Notice of Shareholders' Meetings............................2
Section 3.05 Waiver of Notice............................................3
Section 3.06 Action by Shareholders Without Meeting......................3
Section 3.07 Fixing Record Date..........................................4
Section 3.08 Voting Lists................................................5
Section 3.09 Quorum......................................................6
Section 3.10 Voting......................................................6
Section 3.11 Election of Directors.......................................7
Section 3.12 Inspectors of Election......................................7
Section 3.13 Conduct of Meetings.........................................8
ARTICLE IV DIRECTORS...................................................8
Section 4.01 Number of Directors.........................................8
Section 4.02 Term of Directors...........................................9
Section 4.03 Removal of Directors........................................9
Section 4.04 Quorum of Board of Directors and Committees;
Action of Directors Without a Meeting.......................9
Section 4.05 Place of Board of Directors Meeting.........................9
Section 4.06 Annual Meeting.............................................10
Section 4.07 Meetings of the Board of Directors.........................10
Section 4.08 Adjournment................................................10
Section 4.09 Powers of Directors........................................11
Section 4.10 Compensation of Directors..................................11
Section 4.11 Executive Committee........................................11
-i-
<PAGE>
ARTICLE V OFFICERS...................................................12
Section 5.01 Officers...................................................12
Section 5.02 Salaries...................................................12
Section 5.03 Removal....................................................13
Section 5.04 President..................................................13
Section 5.05 Vice President.............................................13
Section 5.06 Chairman of the Board......................................13
Section 5.07 Secretary..................................................14
Section 5.08 Treasurer..................................................14
Section 5.09 Assistant Secretary or Assistant Treasurer.................14
ARTICLE VI VACANCIES..................................................15
Section 6.01 Directors..................................................15
Section 6.02 Officers...................................................15
Section 6.03 Resignations...............................................15
ARTICLE VII SHARE CERTIFICATES.........................................15
Section 7.01 Certificates...............................................15
Section 7.02 Uncertificated Shares......................................16
Section 7.03 Transfer of Shares.........................................16
Section 7.04 Loss of Certificates.......................................16
ARTICLE VIII BOOKS AND ACCOUNTS.........................................16
Section 8.01 Records....................................................16
Section 8.02 Inspection.................................................17
ARTICLE IX MISCELLANEOUS PROVISIONS...................................17
Section 9.01 Monetary Disbursements.....................................17
Section 9.02 Fiscal Year................................................17
Section 9.03 Dividends..................................................18
Section 9.04 Reserve....................................................18
Section 9.05 Giving Notice..............................................18
Section 9.06 Loans to Directors, Officers or Employees..................19
Section 9.07 Disallowed Compensation....................................19
ARTICLE X AMENDMENTS.................................................19
Section 10.01 Amendments.................................................19
ARTICLE XI INDEMNIFICATION AND INSURANCE..............................20
Section 11.01 Indemnification............................................20
Section 11.02 Insurance..................................................20
-ii-
<PAGE>
AMENDED AND RESTATED
BYLAWS
OF
HAPPY KIDS INC.
ARTICLE I
OFFICES
-------
1.01 Registered Office: The registered office of the Corporation shall
-----------------
be in the County of new York, State of New York.
1.02 Other Offices: The Corporation may have such other offices either
-------------
within or without the State of New York as the Board of Directors may designate
or as the business of the Corporation may require from time to time.
ARTICLE II
SEAL
----
2.01 Seal: The corporate seal shall have inscribed thereon the name of
----
the corporation, the year of its organization and the words "Corporate Seal, New
York", and shall otherwise be in the form adopted by the Board of Directors.
The seal may be used by causing it or a facsimile thereof to be impressed or
affixed or in any manner reproduced. The corporate seal may be altered by the
Board of Directors from time to time.
<PAGE>
ARTICLE III
SHAREHOLDERS' MEETINGS
----------------------
3.01 Place: All meetings of the shareholders shall be held at the
-----
registered office of the Corporation or at such other place or places, either
within or without the State of New York, as may from time to time be selected by
the Board of Directors.
3.02 Annual Meetings: The annual meeting of shareholders shall be held
---------------
at such time as may be fixed by the Board of Directors. At that meeting the
shareholders shall elect, by a plurality vote, a Board of Directors, and
transact such other business as may properly come before the meeting.
3.03 Special Meetings: Special meetings of the shareholders may be
----------------
called only by the President, the Chairman of the Board of Directors of the
Corporation (if any) or by order of a majority of the Board of Directors. Such
written request shall state the purpose or purposes of the proposed meeting.
Business transacted at a special meeting shall be confined to the purpose or
purposes stated in the notice calling such meeting.
3.04 Notice of Shareholders' Meetings: Written notice of the time,
--------------------------------
place and purpose or purposes of every meeting of shareholders shall be given
not less than ten or more than fifty days before the date of the meeting, either
personally or by first class mail (to the last address appearing on the books of
the Corporation), to each shareholder of record entitled to vote at the meeting
and to each shareholder otherwise entitled to notice by law, unless a greater
period of notice is required by statute in a particular case.
When a meeting is adjourned to another time or place, it shall not be
necessary to give notice of the adjourned meeting if the time and place to which
the meeting is adjourned are
-2-
<PAGE>
announced at the meeting at which the adjournment is taken and at the adjourned
meeting only such business is transacted as might have been transacted at the
original meeting. However, if after the adjournment the Board fixes a new record
date for the adjourned meeting, a notice of the adjourned meeting shall be given
to each shareholder of record on the new record date entitled to notice.
3.05 Waiver of Notice: Notice of a meeting need not be given to any
----------------
shareholder who signs a waiver of such notice, in person or by proxy, whether
before or after the meeting. The attendance of any shareholder at a meeting, in
person or by proxy, without protesting prior to the conclusion of the meeting
the lack of notice of such meeting, shall constitute a waiver of notice by that
shareholder.
Whenever shareholders are authorized to take any action after the lapse of
a prescribed period of time, the action may be taken without such lapse if such
requirement is waived in writing, in person or by proxy, before or after the
taking of such action, by every shareholder entitled to vote thereon as of the
date of the taking of such action.
3.06 Action by Shareholders Without Meeting:
--------------------------------------
Any action required or permitted to be taken at a meeting of
shareholders by statute or the Certificate of Incorporation or Bylaws of the
Corporation may be taken without a meeting on written consent, setting forth the
action so taken, signed by the holders of all outstanding shares entitled to
vote thereon. Notwithstanding the provisions of this Section 3.06, immediately
following the consummation of an initial public offering under the Securities
Act of 1933, as amended, by the Corporation of any of its capital stock,
shareholders of the Corporation may not take any action by written consent in
lieu of a meeting. Notwithstanding any other provision of law, the Certificate
of Incorporation or these Bylaws, and notwithstanding the fact
-3-
<PAGE>
that a lesser percentage may be specified by law, the affirmative vote of the
holders of at least eighty percent (80%) of the voting power of all the then
outstanding shares of the capital stock of the Corporation entitled to vote
generally in the election of directors, voting together as a single class, shall
be required to amend or repeal, or to adopt any provision inconsistent with,
this Section 3.06.
3.07 Fixing Record Date:
------------------
(1) The Board may fix, in advance, a date as the record date for
determining the Corporation's shareholders with regard to any corporate action
or event and, in particular, for determining the shareholders who are entitled
to
(a) notice of or to vote at any meeting of shareholders or any
adjournment thereof;
(b) give a written consent to any action without a meeting; or
(c) receive payment of any dividend or allotment of any right.
The record date may in no case be more than fifty days prior to the
shareholders' meeting or other corporate action or event to which it relates.
The record date for a shareholders' meeting may not be less than ten days before
the date of the meeting. The record date to determine shareholders to give a
written consent may not be more than fifty days before the date fixed for
tabulation of the consents or, if no date has been fixed for tabulation, more
than fifty days before the last day on which consents received may be counted.
(2) If no record date is fixed,
-4-
<PAGE>
(a) the record date for a shareholders' meeting shall be the
close of business on the day next preceding the day on which notice is given,
or, if no notice is given, the day next preceding the day on which the meeting
is held; and
(b) the record date for determining shareholders for any other
purpose shall be at the close of business on the day on which the resolution of
the Board relating thereto is adopted.
(3) When a determination of shareholders of record for a shareholders'
meeting has been made as provided in this section, such determination shall
apply to any adjournment thereof, unless the Board fixes a new record date under
this section for the adjourned meeting.
3.08 Voting Lists: The officer or agent having charge of the stock
------------
transfer books for shares of the Corporation shall make a complete list of
shareholders entitled to vote at a shareholders' meeting or any adjournment
thereof. A list required by this section may consist of cards arranged
alphabetically or any equipment which permits the visual display of the
information required. Such list shall be arranged alphabetically within each
class, series or group of shareholders maintained by the Corporation for
convenience of reference, with the address of, and the number of shares held by,
each shareholder; be produced (or available by means of a visual display) at the
time and place of the meeting; be subject to the inspection of any shareholder
for reasonable periods during the meeting; and be prima facie evidence of the
identity of the shareholders entitled to examine such list or to vote at any
meeting.
If the requirements of this section have not been complied with, the
meeting shall, on the demand of any shareholder in person or by proxy, be
adjourned until the requirements are
-5-
<PAGE>
complied with. Failure to comply with the requirements of this section shall not
affect the validity of any action taken at such meeting prior to the making of
any such demand.
3.09 Quorum: Unless otherwise provided in the Certificate of
------
Incorporation or by statute, the presence of holders of shares (in person or by
proxy) entitled to cast a majority of the votes at a meeting shall constitute a
quorum at such meeting. The shareholders present in person or by proxy at a
duly organized meeting may continue to do business until adjournment,
notwithstanding the withdrawal of enough shareholders to leave less than a
quorum. Less than a quorum may adjourn.
Whenever the holders of any class or series of shares are entitled to vote
separately on a specified item of business, the provisions of this section shall
apply in determining the presence of a quorum of such class or series for the
transaction of such specified item of business.
3.10 Voting: Each holder of shares with voting rights shall be entitled
------
to one vote for each such share registered in his/her name, except as otherwise
provided in the Certificate of Incorporation. Whenever any action, other than
the election of directors, is to be taken by vote of the shareholders, it shall
be authorized by a majority of the votes cast at a meeting of shareholders by
the holders of shares entitled to vote thereon, unless a greater plurality is
required by statute, these Bylaws or by the Certificate of Incorporation.
Every shareholder entitled to vote at a meeting of shareholders or to
express consent without a meeting may authorize another person or persons to act
for him/her by proxy. Every proxy shall be executed in writing by the
shareholder or his/her agent, except that a proxy may be given by a shareholder
or his/her agent by telegram or cable or its equivalent. No proxy shall be valid
for more than eleven months unless a longer time is expressly provided therein.
Unless it is coupled with an interest, a proxy shall be revocable at will. A
proxy shall not be revoked by the
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<PAGE>
death or incapacity of the shareholder but such proxy shall continue in force
until revoked by the personal representative or guardian of the shareholder. The
presence at any meeting of any shareholder who has given a proxy shall not
revoke such proxy unless the shareholder shall file written notice of such
revocation with the Secretary of the meeting prior to the voting of such proxy.
3.11 Election of Directors: At each election of directors every
---------------------
shareholder entitled to vote at such election shall have the right to vote the
number of shares owned by him for as many persons as there are directors to be
elected and for whose election he has a right to vote. Directors shall be
elected by a plurality of the votes cast at the election, except as otherwise
provided by the Certificate of Incorporation.
Elections of directors need not be by ballot unless a shareholder demands
election by ballot at the election and before the voting begins.
3.12 Inspectors of Election: The Board may, in advance of any
----------------------
shareholders' meeting, or of the tabulation of written consents of shareholders
without a meeting, appoint one or more inspectors to act at the meeting or any
adjournment thereof or to tabulate such consents and make a written report
thereof. If inspectors to act at any meeting of shareholders are not so
appointed or shall fail to qualify, the person presiding at a shareholders'
meeting may, and on the request of any shareholder entitled to vote there at
shall, make such appointment.
Each inspector, before entering upon the discharge of his duties, shall
take and sign an oath faithfully to execute the duties of inspector with strict
impartiality and according to the best of his ability. No person shall be
elected a director in an election for which he has served as an inspector.
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<PAGE>
3.13 Conduct of Meetings:
-------------------
(1) The President of the Corporation, and in the President's absence,
the Vice-President of the Corporation, shall preside at all meetings of
shareholders. In the absence of the President and the Vice-President, the
shareholders present shall, by a simple majority vote, elect a chairman of the
meeting.
(2) The Secretary of the Corporation shall act as secretary of all
meetings of shareholders; in the Secretary's absence, the chairman presiding at
any such meeting shall appoint a person to act as secretary of the meeting.
ARTICLE IV
DIRECTORS
---------
4.01 Number of Directors: The number of directors shall be three or
-------------------
such greater number (but not more than eleven) as shall be set by the vote of a
majority of the Board of Directors then authorized to hold office. A director
shall be at least eighteen years of age and need not be a United States citizen
or resident of this State or a shareholder in the Corporation. Each director
shall be elected by the shareholders, at the annual meeting of shareholders of
the Corporation, and shall be elected for the term of one year, and until his
successor shall be elected and shall qualify.
4.02 Term of Directors: The directors named in the Certificate of
-----------------
Incorporation shall hold office until the first annual meeting of shareholders,
and until their successors shall have been elected and qualified. At the first
annual meeting of shareholders and at each annual meeting thereafter, the
shareholders shall elect directors to hold office until the next succeeding
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<PAGE>
annual meeting. Each director shall hold office for the term for which he/she is
elected and until a successor shall have been elected and qualified.
4.03 Removal of Directors: Unless otherwise provided in the Certificate
--------------------
of Incorporation, any or all of the directors of the Corporation may be removed
for cause by the shareholders only by the affirmative vote of the majority of
all shares then entitled to vote for the election of the Directors.
4.04 Quorum of Board of Directors and Committees; Action of Directors
----------------------------------------------------------------
Without a Meeting:
----------------
(1) The participation of directors with a majority of the votes of the
entire Board of Directors, or of any Committee thereof, shall constitute a
quorum for the transaction of business.
(2) Any action required or permitted to be taken pursuant to
authorization voted at a meeting of the Board of Directors, or any Committee
thereof, may be taken without a meeting if, prior or subsequent to such action,
all members of the Board or such Committee, as the case may be, consent thereto
in writing and such written consents are filed with the minutes of the
proceedings of the Board or Committee.
4.05 Place of Board of Directors Meeting: Meetings of the Board of
-----------------------------------
Directors may be held either within or without the State of New York, at such
times and places as the Board of Directors shall determine.
4.06 Annual Meeting: An annual meeting of the newly elected Board of
--------------
Directors shall be held immediately following the annual meeting of shareholders
(or immediately following any adjournment thereof) at the place of such annual
meeting of shareholders, for the
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<PAGE>
organization of such Board of Directors and for the transaction of any other
business as may conveniently and properly be brought before such meeting.
4.07 Meetings of the Board of Directors:
----------------------------------
(1) Regular meetings of the Board of Directors may be held with or
without notice. Special meetings of the Board of Directors shall be held upon
notice to the directors and may be called by the President upon at least one
day's notice to each director either personally or by mail, wire, or telephone;
special meetings shall be called by the President or Secretary in a like manner
upon written request of one or more directors. Notice of any meeting need not
be given to any director who signs a written waiver of notice, whether before or
after the meeting. The attendance of any director at a meeting, without
protesting prior to the conclusion of the meeting, the lack of notice of such
meeting shall constitute an effective waiver of notice by that director.
Neither the business to be transacted at, nor the purpose of, any meeting of the
Board of Directors need be specified in the notice or waiver of notice of such
meeting.
(2) Where appropriate communication facilities are reasonably
available, any or all Directors shall have the right to participate in all or
any part of a meeting of the Board of Directors, or any Committee thereof, by
means of conference telephone or any means of communication by which all persons
participating in the meeting are able to hear each other.
4.08 Adjournment: A majority of the directors present, whether or not a
-----------
quorum is present, may adjourn any meeting to another time and place. Notice of
the adjournment shall be given to all directors who were absent at the time of
the adjournment. Notice of an adjourned meeting need not be given to any
directors who were present at the time of the adjournment only if the time and
place are fixed at the meeting adjourning and if the period of adjournment does
not exceed ten days in any one adjournment.
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<PAGE>
4.09 Powers of Directors: The Board of Directors shall manage or direct
-------------------
the management of the business and affairs of the Corporation. In addition to
the powers and authorities expressly conferred upon them by these By-laws, the
Board may exercise all such powers of the Corporation and do all such lawful
acts and things as are not by statute or by these Bylaws directed or required to
be exercised or done by the shareholders.
4.10 Compensation of Directors: The Board, by the affirmative vote of a
-------------------------
majority of directors in office and irrespective of any personal interest of any
of them, shall have authority to establish reasonable compensation of directors
for services to the Corporation as directors, officers or otherwise.
4.11 Executive Committee: The Board of Directors, by resolution adopted
-------------------
by a majority of the entire Board, may appoint from among its members an
executive committee and one or more other committees, each of which shall have
three or more members. Each such committee shall have and may exercise all the
authority delegated to it by the Board, except that no such committee shall
make, alter or repeal any Bylaw of the Corporation; elect or appoint any
director, or remove any officer or director; submit to shareholders any action
that requires shareholders' approval; or amend or repeal any resolution
theretofore adopted by the Board which by its terms is amendable or repealable
only by the Board.
Actions taken at a meeting of any such committee shall be reported to the
Board at its next meeting following such committee meeting; except that, when
the meeting of the Board is held within two days after the committee meeting,
such report shall, if not made at the first meeting, be made to the Board at its
second meeting following such committee meeting.
ARTICLE V
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<PAGE>
OFFICERS
--------
5.01 Officers: The officers of the Corporation shall consist of a
--------
President, a Secretary, a Treasurer, and, if desired, a Chairman of the Board,
one or more Vice Presidents, and such other officers as the Board deems
appropriate. The officers shall be elected by the Board of Directors at its
annual meeting and shall hold office for one year and until their successors are
elected and have qualified, subject to earlier termination by removal or
resignation. The Board may also choose such employees and agents as it shall
deem necessary, who shall hold their offices for such terms and shall have such
authority and shall perform such duties as from time to time shall be prescribed
by the Board.
Unless otherwise provided by law, the Certificate of Incorporation or these
Bylaws, any two or more offices, except the offices of President and Secretary,
may be held by the same person but no officer shall execute, acknowledge, or
verify any instrument in more than one capacity if such instrument is required
by law or by these Bylaws to be executed, acknowledged, or verified by two or
more officers.
5.02 Salaries: The salaries of all officers, employees and agents of
--------
the Corporation shall be fixed by the Board of Directors.
5.03 Removal: Any officer elected or appointed by the Board of
-------
Directors may be removed by the Board with or without cause. An officer elected
by the shareholders may be removed, with or without cause, only by vote of the
shareholders but his authority to act as an officer may be suspended by the
Board for cause.
5.04 President: The President shall be the chief executive officer of
---------
the Corporation; he/she shall preside at all meetings of the shareholders and
directors; he/she shall have general
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<PAGE>
and active management of the business of the Corporation, shall see that all
orders and resolutions of the Board are carried into effect, subject, however,
to the right of the directors to delegate any specific powers, except such as
may be by statute exclusively conferred on the President, to any other officer
or officers of the Corporation. He/she shall execute bonds, mortgages and other
contracts requiring a seal, under the seal of the Corporation. He/she shall be
EX-OFFICIO a member of all committees, and shall have the general powers and
duties of supervision and management usually vested in the office of President
of the Corporation. He/she shall present a report of the condition of the
business of the Corporation at each annual meeting of the shareholders and the
Board of Directors.
5.05 Vice President: The Vice President, if one has been appointed,
--------------
shall be vested with all the powers and be required to perform all the duties of
the President in his/her absence or refusal to act. He/she shall also exercise
such powers and perform such duties as may be properly delegated by the
President or the Board of Directors.
5.06 Chairman of the Board: The Chairman of the Board, if one has been
---------------------
appointed, shall exercise such powers and perform such duties as shall be
provided in the resolution proposing that a Chairman of the Board be elected.
5.07 Secretary: The Secretary shall keep full minutes of all meetings
---------
of the shareholders and directors; he/she shall be EX-OFFICIO Secretary of the
Board of Directors; he/she shall attend all sessions of the Board, shall act as
clerk thereof, and record all votes and the minutes of all proceedings in a book
to be kept for that purpose; and shall perform like duties for the standing
committees when required. He/she shall give or cause to be given, notices of all
meetings of the shareholders of the Corporation and the Board of Directors, and
shall perform
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<PAGE>
such other duties as may be prescribed by the Board of Directors or President,
under whose supervision he/she shall be.
5.08 Treasurer: The Treasurer shall keep full and accurate accounts of
---------
receipts and disbursements in books belonging to the Corporation, and shall
deposit all moneys and other valuable effects in the name and to the credit of
the Corporation, in such depositories as may be designated by the Board of
Directors. He/she shall disburse the funds of the Corporation as may be ordered
by the Board, taking proper vouchers for such disbursements, and shall render to
the President and directors, at the regular meetings of the Board, or whenever
they may require it, an account of all his/her transactions as Treasurer and of
the financial condition of the Corporation, and shall submit a full financial
report at the annual meeting of the shareholders.
5.09 Assistant Secretary or Assistant Treasurer: Any Assistant
------------------------------------------
Secretary or Assistant Treasurer, if one has been appointed, shall be vested
with all the powers and be required to perform all the duties of the Secretary
or Treasurer, respectively, in his/her absence or refusal to act. He/she shall
also exercise such powers and perform such duties as may be properly delegated
by the President or the Board of Directors.
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<PAGE>
ARTICLE VI
VACANCIES
---------
6.01 Directors: Any directorship not filled at the annual meeting, any
---------
vacancy, however caused, occurring in the Board, and newly created directorships
resulting from an increase in the authorized number of directors, may be filled
by the affirmative vote of a majority of the remaining directors even though
less than a quorum of the Board, or by a sole remaining director. A director so
elected by the Board shall hold office until his successor shall have been
elected and qualified. If, for any reason, the Corporation shall at any time
have no directors then in office, any shareholder may call a special meeting of
shareholders for the election of directors and, over his/her signature, shall
give notice of such meeting in accordance with these Bylaws.
6.02 Officers: Any vacancy occurring among the officers, however
--------
caused, shall be filled by the Board of Directors.
6.03 Resignations: Any director or other officer may resign by written
------------
notice to the Corporation. The resignation shall be effective upon receipt
thereof by the Corporation or at such subsequent time as shall be specified in
the notice of resignation.
ARTICLE VII
SHARE CERTIFICATES
------------------
7.01 Certificates: The share certificates of the Corporation shall be
------------
in such form as the Board of Directors may from time to time prescribe and shall
be numbered consecutively and registered in the transfer records of the
Corporation as they are issued. When issued, they shall bear the holder's name,
the number of shares, the date of issue, and shall be signed by the
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<PAGE>
President of the Corporation. The Share certificates may also be countersigned
by the Secretary of the Corporation and may be sealed with the corporate seal or
a facsimile thereof. Any or all signatures upon a certificate may be a
facsimile.
7.02 Uncertificated Shares: The Board of Directors may provide that
---------------------
some or all of the shares of any class or series shall be represented by
uncertificated shares. Within a reasonable time after the issuance or transfer
of uncertificated shares, the Corporation shall send to the registered owner
thereof a written notice containing the information required to be set forth or
stated on certificates as provided in Chapter 7 of the Act.
7.03 Transfer of Shares: Upon surrender to the Corporation or the
------------------
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, and cancel the old certificate. Every such
transfer shall be entered on the transfer book of the Corporation which shall be
kept at its principal office. No transfer shall be made within fifteen days
next preceding the annual meeting of shareholders.
7.04 Loss of Certificates: In the event that a share certificate shall
--------------------
be lost, destroyed or mutilated, a new certificate may be issued therefor upon
such terms and indemnity to the Corporation as the Board of Directors may
prescribe.
ARTICLE VIII
BOOKS AND ACCOUNTS
------------------
8.01 Records: The Corporation shall keep books and records of account
-------
and minutes of the proceedings of the shareholders, Board of Directors and
executive committee, if any. Such books, records and minutes may be kept
outside this State. The Corporation shall keep at its
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<PAGE>
principal office, its registered office, or at the office of its transfer agent,
a record or records containing the names and addresses of all shareholders, the
number, class and series of shares held by each and the dates when they
respectively became the owners of record thereof. Any of the foregoing books,
minutes or records may be in written form or in any other form capable of being
converted into readable form within a reasonable time.
8.02 Inspection: Any person who shall have been a shareholder of record
----------
of the Corporation for at least six months immediately preceding his demand, or
any person holding, or so authorized in writing by the holders of, at least five
percent of the outstanding shares of any class or series, upon at least five
days written demand shall have the right for any proper purpose to examine in
person or by agent or attorney, during usual business hours, the minutes of the
proceedings of the shareholders and record of shareholders and to make extracts
therefrom at the places where the same are kept.
ARTICLE IX
MISCELLANEOUS PROVISIONS
------------------------
9.01 Monetary Disbursements: All checks or demands for money and notes
----------------------
of the Corporation shall be signed by such officer or officers as the Board of
Directors may from time to time designate.
9.02 Fiscal Year: The Board of Directors shall be authorized to choose
-----------
the initial fiscal year of the Corporation, and to change that fiscal year from
time to time.
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<PAGE>
9.03 Dividends: The Board of Directors may declare and pay dividends
---------
upon the outstanding shares of the Corporation from time to time and to such
extent as they deem advisable, in the manner and upon the terms and conditions
provided by statute and the Certificate of Incorporation.
9.04 Reserve: Before payment of any dividend there may be set aside
-------
such sum or sums as the directors, from time to time, in their absolute
discretion, think proper as a reserve fund to meet contingencies, or for
equalizing dividends, or for repairing or maintaining any property of the
Corporation, or for such other purpose as the directors shall think conducive to
the interests of the Corporation, and the directors may abolish any such reserve
in the manner in which it was created.
9.05 Giving Notice: Whenever written notice is required to be given to
-------------
any person, it may be given to such person, either personally or by sending a
copy thereof through the mail. If notice is given by mail, the notice shall be
deemed to be given when deposited in the mail addressed to the person to whom it
is directed at his last address as it appears on the records of the Corporation,
with postage pre-paid thereon. Such notice shall specify the place, day and
hour of the meeting and, in the case of a shareholders' meeting, the general
nature of the business to be transacted.
In computing the period of time for the giving of any notice required or
permitted by statute, or by the Certificate of Incorporation or these Bylaws or
any resolution of directors or shareholders, the day on which the notice is
given shall be excluded, and the day on which the matter noticed is to occur
shall be included.
9.06 Loans to Directors, Officers or Employees: The Corporation may
-----------------------------------------
lend money to, or guarantee any obligation of, or otherwise assist, any
director, officer or employee of the
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<PAGE>
Corporation or of any subsidiary, whenever it may reasonably be expected to
benefit the Corporation.
9.07 Disallowed Compensation: Any payments made to an officer or
-----------------------
employee of the Corporation as salary, commission, bonus, interest or rent,
which shall be disallowed in whole or in part as a deductible expense by the
Internal Revenue Service, shall be reimbursed by such officer or employee to the
Corporation to the full extent of such disallowance. It shall be the duty of
the directors, as a Board, to enforce payment of each such amount disallowed.
In lieu of payment by the officer or employee, subject to the determination of
the directors, proportionate amounts may be withheld from his future
compensation payments until the amount owed to the Corporation has been
recovered.
ARTICLE X
AMENDMENTS
----------
10.01 Amendments: The Board of Directors shall have the power to adopt,
----------
amend and repeal these Bylaws, but Bylaws adopted by the Board may be amended or
repealed, and new Bylaws may be made, by the shareholders; provided, however,
that, if a shareholder vote is taken, then and in that instance, in addition to
any vote of the holders of any class or series of stock of the Corporation
required by law or by the Certificate of Incorporation, the affirmative vote of
the holders of at least eighty percent (80%) of the voting power of all of the
then outstanding shares of the capital stock of the Corporation entitled to vote
generally in the election of directors, voting together as a single class, shall
be required to adopt, amend or repeal any provision of the Bylaws of the
Corporation.
ARTICLE XI
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<PAGE>
INDEMNIFICATION AND INSURANCE
-----------------------------
11.01 Indemnification: Every person who was or is a party or is
---------------
threatened to be made a party to or is involved in any action, suit or
proceeding, whether civil, criminal, administrative or investigative, by reason
of the fact that he or a person of whom he is the legal representative is or was
a director or officer of the Corporation or is or was serving at the request of
the Corporation or for its benefit as a director or officer of another
Corporation, or as a representative in another enterprise, shall be indemnified
and held harmless to the fullest extent permissible under and pursuant to any
procedure specified in the Act, as amended from time to time, against all
expenses, liabilities and losses (including attorneys' fees, judgments, fines
and amounts paid or to be paid in settlement) reasonably incurred or suffered by
him in connection therewith. Such right of indemnification shall be a contract
that may be enforced in any manner desired by such person. Such right of
indemnification shall not be exclusive of any right which such directors,
officers or representatives may have or hereafter acquire and, without limiting
the generality of such statement, they shall be entitled to their respective
rights of indemnification under any agreement, vote of shareholders, provision
of law or otherwise, as well as their rights hereunder.
11.02 Insurance: The Board of Directors may cause the Corporation to
---------
purchase and maintain insurance on behalf of any person who is or was a director
or officer of the Corporation or is or was serving at the request of the
Corporation as a director or officer of another Corporation, or as its
representative in a partnership, joint venture, trust or other enterprise
against any liability asserted against such person and incurred in any such
capacity or arising out of such status, whether or not the Corporation would
have the power to indemnify such person.
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<PAGE>
EXHIBIT 10.1
HAPPY KIDS INC.
1997 STOCK PLAN
1. Purposes of the Plan. The purposes of this Stock Plan are to attract
--------------------
and retain the best available personnel for positions of substantial
responsibility, to provide additional incentive to Employees, non-Employee
members of the Board and Consultants of the Company and its Subsidiaries and to
promote the success of the Company's business. Options granted under the Plan
may be incentive stock options (as defined under Section 422 of the Code) or
non-statutory stock options, as determined by the Administrator at the time of
grant of an option and subject to the applicable provisions of Section 422 of
the Code, as amended, and the regulations promulgated thereunder. Stock purchase
rights may also be granted under the Plan.
2. Certain Definitions. As used herein, the following definitions shall
-------------------
apply:
(a) "Administrator" means the Board or any of its Committees
-------------
appointed pursuant to Section 4 of the Plan.
(b) "Board" means the Board of Directors of the Company.
-----
(c) "Code" means the Internal Revenue Code of 1986, as amended.
----
(d) "Committee" means the Committee appointed by the Board of
---------
Directors in accordance with paragraph (a) of Section 4 of the Plan.
(e) "Common Stock" means the Common Stock of the Company.
------------
(f) "Company" means Happy Kids Inc., a New York corporation.
-------
(g) "Consultant" means any person, including an advisor, who is
----------
engaged by the Company or any Subsidiary to render services and is compensated
for such services, and any director of the Company whether compensated for such
services or not.
(h) "Continuous Status as an Employee" means the absence of any
--------------------------------
interruption or termination of the employment relationship by the Company or any
Subsidiary. Continuous Status as an Employee shall not be considered interrupted
in the case of: (i) sick leave; (ii) military leave; (iii) any other leave of
absence approved by the Board, provided that such leave is for a period of not
more than ninety (90) days, unless reemployment upon the expiration of such
leave is guaranteed by contract or statute, or unless provided otherwise
pursuant to Company policy adopted from time to time; or (iv) transfers between
locations of the Company or between the Company, its Subsidiaries or its
successor.
<PAGE>
(i) "Employee" means any person, including officers and
--------
directors, employed by the Company or any Subsidiary of the Company. The payment
of a director's fee by the Company shall not be sufficient to constitute
"employment" by the Company.
(j) "Exchange Act" means the Securities Exchange Act of 1934, as
------------
amended.
(k) "Fair Market Value" means, as of any date, the value of Common
-----------------
Stock determined as follows:
(i) If the Common Stock is listed on any established stock
exchange or a national market system including without limitation the
National Market System of the National Association of Securities Dealers,
Inc. Automated Quotation ("Nasdaq") System, its Fair Market Value shall be
the closing sales price for such stock (or the closing bid, if no sales
were reported) as quoted on such system or exchange for the last market
trading day prior to the time of determination as reported in the Wall
Street Journal or such other source as the Administrator deems reliable or;
(ii) If the Common Stock is quoted on Nasdaq (but not on the
National Market System thereof) or regularly quoted by a recognized
securities dealer but selling prices are not reported, its Fair Market
Value shall be the mean between the high and low asked prices for the
Common Stock or;
(iii) In the absence of an established market for the Common
Stock, the Fair Market Value thereof shall be determined in good faith by
the Administrator.
(l) "Incentive Stock Option" means an Option intended to qualify
----------------------
as an incentive stock option within the meaning of Section 422 of the Code.
(m) "Nonstatutory Stock Option" means an Option not intended to
-------------------------
qualify as an Incentive Stock Option.
(n) "Option" means a stock option granted pursuant to the Plan.
------
(o) "Optioned Stock" means the Common Stock subject to an Option.
--------------
(p) "Optionee" means an Employee or Consultant who receives an
Option.
(q) "Parent" means a "parent corporation", whether now or hereafter
------
existing, as defined in Section 424(e) of the Code.
(r) "Plan" means this 1997 Stock Plan.
----
(s) "Restricted Stock" means shares of Common Stock acquired
----------------
pursuant to a grant of stock purchase rights under Section 11 below.
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<PAGE>
(t) "Share" means a share of the Common Stock, as adjusted in
-----
accordance with Section 13 of the Plan.
(u) "Subsidiary" means a "subsidiary corporation", whether now or
----------
hereafter existing, as defined in Section 424(f) of the Code.
3. Stock Subject to the Plan. Subject to the provisions of Section 13
-------------------------
of the Plan, the maximum aggregate number of shares which may be optioned and
sold under the Plan is 800,000 shares of Common Stock. The shares may be
authorized, but unissued, or reacquired Common Stock.
If an option should expire or become unexercisable for any reason
without having been exercised in full, the unpurchased Shares which were subject
thereto shall, unless the Plan shall have been terminated, become available for
future grant under the Plan.
4. Administration of the Plan.
--------------------------
(a) Procedure.
---------
(i) Administration With Respect to Directors and Officers. With
-----------------------------------------------------
respect to grants of Options or stock purchase rights to Employees who
are also officers or directors of the Company, the Plan shall be
administered by (A) the Board if the Board may administer the Plan in
compliance with Rule 16b-3 promulgated under the Exchange Act or any
successor thereto ("Rule 16b-3") or (B) a Committee designated by the
Board to administer the Plan, which Committee shall be constituted in
such a manner as to permit the Plan to comply with Rule 16b-3. Once
appointed, such Committee shall continue to serve in its designated
capacity until otherwise directed by the Board. From time to time the
Board may increase the size of the Committee and appoint additional
members thereof, remove members (with or without cause) and appoint new
members in substitution therefor, fill vacancies, however caused, and
remove all members of the Committee and thereafter directly administer
the Plan, all to the extent permitted by Rule 16b-3.
(ii) Multiple Administrative Bodies. If permitted by Rule 16b-
------------------------------
3, the Plan may be administered by different bodies with respect to
directors, non-director officers and Employees who are neither directors
nor officers.
(iii) Administration With Respect to Consultants and Other
----------------------------------------------------
Employees. With respect to grants of Options or stock purchase rights to
---------
Employees who are neither directors nor officers of the Company or to
Consultants, the Plan shall be administered by (A) the Board, if the
Board may administer the Plan in compliance with Rule 16b-3, or (B) a
Committee designated by the Board, which Committee shall be constituted
in such a manner as to satisfy the legal requirements relating to the
administration of incentive stock option plans, if any, of New York
corporate law and applicable securities laws and
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<PAGE>
of the Code (the "Applicable Laws"). Once appointed, such Committee
shall continue to serve in its designated capacity until otherwise
directed by the Board. From time to time the Board may increase the size
of the Committee and appoint additional members thereof, remove members
(with or without cause) and appoint new members in substitution
therefor, fill vacancies, however caused, and remove all members of the
Committee and thereafter directly administer the Plan, all to the extent
permitted by the Applicable Laws.
(b) Powers of the Administrator. Subject to the provisions of
---------------------------
the Plan and in the case of a Committee, the specific duties delegated by the
Board to such Committee, the Administrator shall have the authority, in its
discretion:
(i) to determine the Fair Market Value of the Common Stock, in
accordance with Section 2(k) of the Plan;
(ii) to select the officers, Consultants and Employees to whom
Options and stock purchase rights may from time to time be granted
hereunder;
(iii) to determine whether and to what extent Options and stock
purchase rights or any combination thereof, are granted hereunder;
(iv) to determine the number of shares of Common Stock to be
covered by each such award granted hereunder;
(v) to approve forms of agreement for use under the Plan;
(vi) to determine the terms and conditions, not inconsistent
with the terms of the Plan, of any award granted hereunder (including, but
not limited to, the share price and any restriction or limitation or waiver
of forfeiture restrictions regarding any Option or other award and/or the
shares of Common Stock relating thereto, based in each case on such factors
as the Administrator shall determine, in its sole discretion);
(vii) to determine whether and under what circumstances an
Option may be settled in cash under subsection 9(f) instead of Common
Stock;
(viii) to determine whether, to what extent and under what
circumstances Common Stock and other amounts payable with respect to an
award under this Plan shall be deferred either automatically or at the
election of the participant (including providing for and determining the
amount, if any, of any deemed earnings on any deferred amount during any
deferral period);
(ix) to reduce the exercise price of any Option to the then
current Fair Market Value if the Fair Market Value of the Common Stock
covered by such Option shall have declined since the date the Option was
granted; and
-4-
<PAGE>
(x) to determine the terms and restrictions applicable to stock
purchase rights and the Restricted Stock purchased by exercising such stock
purchase rights.
(c) Effect of Committee's Decision. All decisions, determinations
------------------------------
and interpretations of the Administrator shall be final and binding on all
Optionees and any other holders of any Options.
5. Eligibility.
-----------
(a) Nonstatutory Stock Options may be granted to Employees and
Consultants. Incentive Stock Options may be granted only to Employees. An
Employee or Consultant who has been granted an Option may, if he is
otherwise eligible, be granted an additional Option or Options.
(b) Each Option shall be designated in the written option agreement
as either an Incentive Stock Option or a Nonstatutory Stock Option.
However, notwithstanding such designations, to the extent that the
aggregate Fair Market Value of the Shares with respect to which Options
designated as Incentive Stock Options are exercisable for the first time by
any optionee during any calendar year (under all plans of the Company or
any Subsidiary) exceeds $100,000, such excess Options shall be treated as
Nonstatutory Stock Options.
(c) For purposes of Section 5(b), Incentive Stock Options shall be
taken into account in the order in which they were granted, and the Fair
Market Value of the Shares shall be determined as of the time the Option
with respect to such Shares is granted.
(d) The Plan shall not confer upon any Optionee any right with
respect to continuation of employment or consulting relationship with the
Company, nor shall it interfere in any way with his right or the Company's
right to terminate his employment or consulting relationship at any time,
with or without cause.
6. Term of Plan. The Plan shall become effective upon the earlier to
------------
occur of its adoption by the Board of Directors or its approval by the
shareholders of the Company as described in Section 19 of the Plan. It shall
continue in effect for a term of ten (10) years unless sooner terminated under
Section 15 of the Plan.
7. Term of Option. The term of each Option shall be the term stated in
--------------
the written agreement evidencing such Option; provided, however, that in the
case of an Incentive Stock Option, the term shall be no more than ten (10) years
from the date of grant thereof or such shorter term as may be provided in the
written agreement evidencing such Option. However, in the case of an Option
granted to an Optionee who, at the time the Option is granted, owns stock
representing more than ten percent (10%) of the voting power of all classes of
stock of the Company or any Subsidiary, the term of the Option shall be five (5)
years from the date of grant thereof or such shorter term as may be provided in
the written agreement evidencing such Option.
-5-
<PAGE>
8. Option Exercise Price and Consideration.
---------------------------------------
(a) The per share exercise price for the Shares to be issued
pursuant to exercise of an Option shall be such price as is determined by the
Board, but shall be subject to the following:
(i) In the case of an Incentive Stock Option
(A) granted to an Employee who, at the time of the grant
of such Incentive Stock Option, owns stock representing more than ten
percent (10%) of the voting power of all classes of stock of the Company or
any Subsidiary, the per Share exercise price shall be no less than 110% of
the Fair Market Value per Share on the date of grant.
(B) granted to any Employee, the per Share exercise price
shall be no less than 100% of the Fair Market Value per Share on the date
of grant.
(ii) In the case of a Nonstatutory Stock Option
(A) granted to a person who, at the time of the grant of
such Option, owns stock representing more than ten percent (10%) of the
voting power of all classes of stock of the Company or any Subsidiary, the
per Share exercise price shall be no less than 110% of the Fair Market
Value per Share on the date of the grant.
(B) granted to any person, the per Share exercise price
shall be no less than 85% of the Fair Market Value per Share on the date of
grant.
(b) The consideration to be paid for the Shares to be issued upon
exercise of an Option, including the method of payment, shall be determined
by the Administrator (and, in the case of an Incentive Stock Option, shall
be determined at the time of grant) and may consist entirely of (1) cash,
(2) check, (3) promissory note, (4) other Shares which (x) in the case of
Shares acquired upon exercise of an Option either have been owned by the
Optionee for more than six months on the date of surrender or were not
acquired, directly or indirectly, from the Company, and (y) have a Fair
Market Value on the date of surrender equal to the aggregate exercise price
of the Shares as to which said Option shall be exercised, (5) authorization
from the Company to retain from the total number of Shares as to which the
Option is exercised that number of Shares having a Fair Market Value on the
date of exercise equal to the exercise price for the total number of Shares
as to which the option is exercised, (6) delivery of a properly executed
exercise notice together with irrevocable instructions to a broker to
promptly deliver to the Company the amount of sale or loan proceeds
required to pay the exercise price, (7) by delivering an irrevocable
subscription agreement for the Shares which irrevocably obligates the
option holder to take and pay for the Shares not more than twelve months
after the date of delivery of the subscription agreement, (8) any
combination of the foregoing methods of payment, or (9) such other
consideration and method of payment for the issuance of Shares to the
-6-
<PAGE>
extent permitted under Applicable Laws. In making its determination as to the
type of consideration to accept, the Administrator shall consider if acceptance
of such consideration may be reasonably expected to benefit the Company.
9. Exercise of Option.
------------------
(a) Procedure for Exercise; Rights as a Shareholder. Any Option
-----------------------------------------------
granted hereunder shall be exercisable at such times and under such conditions
as determined by the Administrator, including performance criteria with respect
to the Company and/or the Optionee, and as shall be permissible under the terms
of the Plan.
An Option may not be exercised for a fraction of a Share.
An Option shall be deemed to be exercised when written notice of such
exercise has been given to the Company in accordance with the terms of the
Option by the person entitled to exercise the Option and full payment for the
Shares with respect to which the Option is exercised has been received by the
Company. Full payment may, as authorized by the Administrator, consist of any
consideration and method of payment allowable under Section 8(b) of the Plan.
Until the issuance (as evidenced by the appropriate entry on the books of the
Company or of a duly authorized transfer agent of the Company) of the stock
certificate evidencing such Shares, no right to vote or receive dividends or any
other rights as a shareholder shall exist with respect to the Optioned Stock,
notwithstanding the exercise of the Option. The Company shall issue (or cause
to be issued) such stock certificate promptly upon exercise of the Option. No
adjustment will be made for a dividend or other right for which the record date
is prior to the date the stock certificate is issued, except as provided in
Section 11 of the Plan.
Exercise of an Option in any manner shall result in a decrease in the
number of Shares which thereafter may be available, both for purposes of the
Plan and for sale under the Option, by the number of Shares as to which the
Option is exercised.
(b) Termination of Employment. In the event of termination of an
-------------------------
Optionee's consulting relationship or Continuous Status as an Employee with the
Company (as the case may be), such Optionee may, but only within ninety (90)
days (or such other period of time as is determined by the Board, with such
determination in the case of an Incentive Stock Option being made at the time of
grant of the Option and not exceeding ninety (90) days) after the date of such
termination (but in no event later than the expiration date of the term of such
Option as set forth in the written agreement evidencing such Option), exercise
his Option to the extent that Optionee was entitled to exercise it at the date
of such termination. To the extent that Optionee was not entitled to exercise
the Option at the date of such termination, or if Optionee does not exercise
such Option to the extent so entitled within the time specified herein, the
Option shall terminate.
(c) Disability of Optionee. Notwithstanding the provisions of
----------------------
Section 9(b) above, in the event of termination of an Optionee's consulting
relationship or Continuous Status as an Employee as a result of his total and
permanent disability (as defined in Section 22(e)(3) of
-7-
<PAGE>
the Code), Optionee may, but only within twelve (12) months from the date of
such termination (but in no event later than the expiration date of the term of
such Option as set forth in the written agreement evidencing such Option),
exercise the Option to the extent otherwise entitled to exercise it at the date
of such termination. To the extent that Optionee was not entitled to exercise
the Option at the date of termination, or if Optionee does not exercise such
Option to the extent so entitled within the time specified herein, the Option
shall terminate.
(d) Death of Optionee. In the event of the death of an Optionee, the
-----------------
Option may be exercised, at any time within twelve (12) months following the
date of death (but in no event later than the expiration date of the term of
such Option as set forth in the written agreement evidencing such Option), by
the Optionee's estate or by a person who acquired the right to exercise the
Option by bequest or inheritance, but only to the extent the Optionee was
entitled to exercise the Option at the date of death. To the extent that
Optionee was not entitled to exercise the Option at the date of termination, or
if Optionee does not exercise such Option to the extent so entitled within the
time specified herein, the Option shall terminate.
(e) Rule 16b-3. Options granted to persons subject to Section 16(b)
----------
of the Exchange Act must comply with Rule 16b-3 and shall contain such
additional conditions or restrictions as may be required thereunder to qualify
for the maximum exemption from Section 16 of the Exchange Act with respect to
Plan transactions.
(f) Buyout Provisions. The Administrator may at any time offer to
-----------------
buy out for a payment in cash or Shares, an Option previously granted, based on
such terms and conditions as the Administrator shall establish and communicate
to the Optionee at the time that such offer is made.
10. Non-Transferability of Options. The Option may not be sold,
------------------------------
pledged, assigned, hypothecated, transferred, or disposed of in any manner other
than by will or by the laws of descent or distribution and may be exercised,
during the lifetime of the Optionee, only by the Optionee. The terms of the
Option shall be binding upon the executors, administrators, heirs, successors
and assigns of the Optionee.
11. Stock Purchase Rights.
---------------------
(a) Rights to Purchase. Stock purchase rights may be issued either
------------------
alone, in addition to, or in tandem with other awards granted under the Plan
and/or cash awards made outside of the Plan. After the Administrator determines
that it will offer stock purchase rights under the Plan, it shall advise the
offeree in writing of the terms, conditions and restrictions related to the
offer, including the number of Shares that such person shall be entitled to
purchase, the price to be paid (which price shall not be less than 50% of the
Fair Market Value of the Shares as of the date of the offer), and the time
within which such person must accept such offer, which shall in no event exceed
thirty (30) days from the date upon which the Administrator made the
determination to grant the stock purchase right. The offer shall be accepted by
execution of a Restricted Stock purchase agreement in the form determined by the
Administrator.
-8-
<PAGE>
(b) Repurchase Option. Unless the Administrator determines
-----------------
otherwise, the Restricted Stock purchase agreement shall grant the Company a
repurchase option exercisable upon the voluntary or involuntary termination of
the purchaser's employment with the Company for any reason (including death or
Disability). The purchase price for Shares repurchased pursuant to the
Restricted Stock purchase agreement shall be the original price paid by the
purchaser and may be paid by cancellation of any indebtedness of the purchaser
to the Company. The repurchase option shall lapse at such rate as the Committee
may determine.
(c) Other Provisions. The Restricted Stock purchase agreement
----------------
shall contain such other terms, provisions and conditions not inconsistent with
the Plan as may be determined by the Administrator in its sole discretion. In
addition, the provisions of Restricted Stock purchase agreements need not be the
same with respect to each purchaser.
(d) Rights as a Shareholder. Once the stock purchase right is
-----------------------
exercised, the purchaser shall have the rights equivalent to those of a
shareholder, and shall be a shareholder when his or her purchase is entered upon
the records of the duly authorized transfer agent of the Company. No adjustment
will be made for a dividend or other right for which the record date is prior to
the date the stock purchase right is exercised, except as provided in Section 13
of the Plan.
12. Stock Withholding to Satisfy Withholding Tax Obligations. At the
--------------------------------------------------------
discretion of the Administrator, Optionees may satisfy withholding obligations
as provided in this paragraph. When an Optionee incurs tax liability in
connection with an Option or stock purchase right, which tax liability is
subject to tax withholding under applicable tax laws, and the Optionee is
obligated to pay the Company an amount required to be withheld under applicable
tax laws, the Optionee may satisfy the withholding tax obligation by electing to
have the Company withhold from the Shares to be issued upon exercise of the
Option, or the Shares to be issued in connection with the stock purchase right,
if any, that number of Shares having a Fair Market Value equal to the amount
required to be withheld. The Fair Market Value of the Shares to be withheld
shall be determined on the date that the amount of tax to be withheld is to be
determined (the "Tax Date").
All elections by an Optionee to have Shares withheld for this purpose
shall be made in writing in a form acceptable to the Administrator and shall be
subject to the following restrictions:
(a) the election must be made on or prior to the applicable Tax Date;
(b) once made, the election shall be irrevocable as to the particular
Shares of the Option or Right as to which the election is made;
(c) all elections shall be subject to the consent or disapproval of
the Administrator;
-9-
<PAGE>
(d) if the Optionee is subject to Rule 16b-3, the election must
comply with the applicable provisions of Rule 16b-3 and shall be subject to
such additional conditions or restrictions as may be required thereunder to
qualify for the maximum exemption from Section 16 of the Exchange Act with
respect to Plan transactions.
In the event the election to have Shares withheld is made by an
Optionee and the Tax Date is deferred under Section 83 of the Code because no
election is filed under Section 83(b) of the Code, the Optionee shall receive
the full number of Shares with respect to which the Option or stock purchase
right is exercised but such Optionee shall be unconditionally obligated to
tender back to the Company the proper number of Shares on the Tax Date.
13. Adjustments Upon Changes in Capitalization or Merger. Subject to
----------------------------------------------------
any required action by the shareholders of the Company, the number of shares of
Common Stock covered by each outstanding Option, and the number of shares of
Common Stock which have been authorized for issuance under the Plan but as to
which no Options have yet been granted or which have been returned to the Plan
upon cancellation or expiration of an Option, as well as the price per share of
Common Stock covered by each such outstanding Option, shall be proportionately
adjusted for any increase or decrease in the number of issued shares of Common
Stock resulting from a stock split, reverse stock split, stock dividend,
combination or reclassification of the Common Stock, or any other increase or
decrease in the number of issued shares of Common Stock effected without receipt
of consideration by the Company; provided, however, that conversion of any
convertible securities of the Company shall not be deemed to have been "effected
without receipt of consideration." Such adjustment shall be made by the Board,
whose determination in that respect shall be final, binding and conclusive.
Except as expressly provided herein, no issuance by the Company of shares of
stock of any class, or securities convertible into shares of stock of any class,
shall affect, and no adjustment by reason thereof shall be made with respect to,
the number or price of shares of Common Stock subject to an Option.
In the event of the proposed dissolution or liquidation of the
Company, the Board shall notify the Optionee at least fifteen (15) days prior to
such proposed action. To the extent it has not been previously exercised, the
Option will terminate immediately prior to the consummation of such proposed
action. In the event of a merger or consolidation of the Company with or into
another corporation or the sale of all or substantially all of the Company's
assets (hereinafter, a "merger"), the Option shall be assumed or an equivalent
option shall be substituted by such successor corporation or a parent or
subsidiary of such successor corporation. In the event that such successor
corporation does not agree to assume the Option or to substitute an equivalent
option, the Board shall, in lieu of such assumption or substitution, provide for
the Optionee to have the right to exercise the Option as to all of the Optioned
Stock, including Shares as to which the Option would not otherwise be
exercisable. If the Board makes an Option fully exercisable in lieu of
assumption or substitution in the event of a merger, the Board shall notify the
Optionee that the Option shall be fully exercisable for a period of fifteen (15)
days from the date of such notice, and the Option will terminate upon the
expiration of such period.
-10-
<PAGE>
For the purposes of this paragraph, the Option shall be considered assumed if,
following the merger, the Option or right confers the right to purchase, for
each Share of stock subject to the Option immediately prior to the merger, the
consideration (whether stock, cash, or other securities or property) received in
the merger by holders of Common Stock for each Share held on the effective date
of the transaction (and if holders were offered a choice of consideration, the
type of consideration chosen by the holders of a majority of the outstanding
Shares); provided, however, that if such consideration received in the merger
was not solely common stock of the successor corporation or its Parent, the
Board may, with the consent of the successor corporation and the participant,
provide for the consideration to be received upon the exercise of the Option,
for each Share of stock subject to the Option, to be solely common stock of the
successor corporation or its Parent equal in Fair Market Value to the per share
consideration received by holders of Common Stock in the merger or sale of
assets.
14. Time of Granting Options. The date of grant of an Option shall, for
------------------------
all purposes, be the date on which the Administrator makes the determination
granting such Option, or such other date as is determined by the Board. Notice
of the determination shall be given to each Employee or Consultant to whom an
Option is so granted within a reasonable time after the date of such grant.
15. Amendment and Termination of the Plan.
-------------------------------------
(a) Amendment and Termination. The Board may at any time amend,
-------------------------
alter, suspend or discontinue the Plan, but no amendment, alteration,
suspension or discontinuation shall be made which would impair the rights
of any Optionee under any grant theretofore made, without his or her
consent. In addition, to the extent necessary and desirable to comply with
Rule 16b-3 under the Exchange Act or with Section 422 of the Code (or any
other applicable law or regulation, including the requirements of the NASD
or an established stock exchange), the Company shall obtain shareholder
approval of any Plan amendment in such a manner and to such a degree as
required.
(b) Effect of Amendment or Termination. Any such amendment or
----------------------------------
termination of the Plan shall not affect Options already granted and such
Options shall remain in full force and effect as if this Plan had not been
amended or terminated, unless mutually agreed otherwise between the
Optionee and the Board, which agreement must be in writing and signed by
the Optionee and the Company.
16. Conditions Upon Issuance of Shares. Shares shall not be issued
----------------------------------
pursuant to the exercise of an Option unless the exercise of such Option and the
issuance and delivery of such Shares pursuant thereto shall comply with all
relevant provisions of law, including, without limitation, the Securities Act of
1933, as amended, the Exchange Act, the rules and regulations promulgated
thereunder, and the requirements of any stock exchange upon which the Shares may
then be listed, and shall be further subject to the approval of counsel for the
Company with respect to such compliance.
-11-
<PAGE>
As a condition to the exercise of an Option, the Company may require
the person exercising such Option to represent and warrant at the time of any
such exercise that the Shares are being purchased only for investment and
without any present intention to sell or distribute such Shares if, in the
opinion of counsel for the Company, such a representation is required by any of
the aforementioned relevant provisions of law.
17. Reservation of Shares. The Company, during the term of this Plan,
---------------------
will at all times reserve and keep available such number of Shares as shall be
sufficient to satisfy the requirements of the Plan.
The inability of the Company to obtain authority from any regulatory
body having jurisdiction, which authority is deemed by the Company's counsel to
be necessary to the lawful issuance and sale of any Shares hereunder, shall
relieve the Company of any liability in respect of the failure to issue or sell
such Shares as to which such requisite authority shall not have been obtained.
18. Agreements. Options and stock purchase rights shall be evidenced by
----------
written agreements in such form as the Board shall approve from time to time.
19. Shareholder Approval. Continuance of the Plan shall be subject to
--------------------
approval by the shareholders of the Company within twelve (12) months before or
after the date the Plan is adopted. Such shareholder approval shall be obtained
in the degree and manner required under applicable state and federal law.
20. Information to Optionees. The Company shall provide to each
------------------------
Optionee, during the period for which such Optionee has one or more Options
outstanding, copies of all annual reports and other information which are
provided to all shareholders of the Company. The Company shall not be required
to provide such information if the issuance of Options under the Plan is limited
to key employees whose duties in connection with the Company assure their access
to equivalent information.
-12-
<PAGE>
EXHIBIT 10.2
HAPPY KIDS INC.
INDEMNIFICATION AGREEMENT
This Indemnification Agreement ("Agreement") is made as of _______, 199_,
by and between Happy Kids Inc., a New York corporation (the "Company"), and
_________________ ("Indemnitee").
WHEREAS, Indemnitee is an officer and/or director of the Company and
performs a valuable service in such capacity for the Company;
WHEREAS, the Company and Indemnitee recognize the difficulty in obtaining
liability insurance for its directors, officers, employees, agents and
fiduciaries, the significant increases in the cost of such insurance and the
general reductions in the coverage of such insurance;
WHEREAS, the Company and Indemnitee further recognize the substantial
increase in corporate litigation in general, subjecting directors, officers,
employees, agents and fiduciaries to expensive litigation risks at the same time
as the availability and coverage of liability insurance has been severely
limited;
WHEREAS, Indemnitee does not regard the current protection available as
adequate under the present circumstances, and the Indemnitee and other
directors, officers, employees, agents and fiduciaries of the Company may not be
willing to continue to serve in such capacities without additional protection;
and
WHEREAS, the Company desires to attract and retain the services of highly
qualified individuals, such as Indemnitee, to serve the Company and, in part, in
order to induce Indemnitee to continue to provide services to the Company as an
officer and/or director, the Company wishes to provide for the indemnification
and advancing of expenses to Indemnitee to the maximum extent permitted by law.
NOW, THEREFORE, the Company and Indemnitee hereby agree as follows:
1. Indemnification.
---------------
(a) Indemnification of Expenses. The Company shall indemnify
---------------------------
Indemnitee to the fullest extent permitted by law if Indemnitee was or is or
becomes a party to or witness or other participant in, or is threatened to be
made a party to or witness or other participant in, any threatened, pending or
completed action, suit, proceeding or alternative dispute resolution mechanism,
or any hearing, inquiry or investigation that Indemnitee in good faith believes
might lead to the institution of any such action, suit, proceeding or
alternative dispute resolution mechanism, whether civil, criminal,
administrative, investigative or other (hereinafter a "Claim") by reason of (or
arising in part out of) any event or occurrence related to the fact that
Indemnitee is
<PAGE>
or was a director, officer, employee, agent or fiduciary of the Company, or any
subsidiary of the Company, or is or was serving at the request of the Company as
a director, officer, employee, agent or fiduciary of another corporation,
partnership, joint venture, trust or other enterprise, or by reason of any
action or inaction on the part of Indemnitee while serving in such capacity
(hereinafter an "Indemnifiable Event") against any and all expenses (including
attorneys' fees and all other costs, expenses and obligations incurred in
connection with investigating, defending, being a witness in or participating in
(including on appeal), or preparing to defend, be a witness in or participate
in, any such action, suit, proceeding, alternative dispute resolution mechanism,
hearing, inquiry or investigation), judgments, fines, penalties and amounts paid
in settlement (if such settlement is approved in advance by the Company, which
approval shall not be unreasonably withheld) of such Claim and any federal,
state, local or foreign taxes imposed on the Indemnitee as a result of the
actual or deemed receipt of any payments under this Agreement (collectively,
hereinafter "Expenses"), including all interest, assessments and other charges
paid or payable in connection with or in respect of such Expenses. Such payment
of Expenses shall be made by the Company as soon as practicable but in any event
no later than thirty (30) days after written demand by Indemnitee therefor is
presented to the Company.
(b) Reviewing Party. Notwithstanding the foregoing, (i) the
---------------
obligations of the Company under Section l(a) shall be subject to the condition
that the Reviewing Party (as described in Section 10(e) hereof) shall not have
determined (in a written opinion, in any case in which the Independent Legal
Counsel referred to in Section 1(c) hereof is involved) that Indemnitee would
not be permitted to be indemnified under applicable law, and (ii) the obligation
of the Company to make an advance payment of Expenses to Indemnitee pursuant to
Section 2(a) (an "Expense Advance") shall be subject to the condition that, if,
when and to the extent that the Reviewing Party determines that Indemnitee would
not be permitted to be so indemnified under applicable law, the Company shall be
entitled to be reimbursed by Indemnitee (who hereby agrees to reimburse the
Company) for all such amounts theretofore paid; provided, however, that if
Indemnitee has commenced or thereafter commences legal proceedings in a court of
competent jurisdiction to secure a determination that Indemnitee should be
indemnified under applicable law, any determination made by the Reviewing Party
that Indemnitee would not be permitted to be indemnified under applicable law
shall not be binding and Indemnitee shall not be required to reimburse the
Company for any Expense Advance until a final judicial determination is made
with respect thereto (as to which all rights of appeal therefrom have been
exhausted or lapsed). Indemnitee's obligation to reimburse the Company for any
Expense Advance shall be unsecured and no interest shall be charged thereon. If
there has not been a Change in Control (as defined in Section 10(c) hereof), the
Reviewing Party shall be selected by the Board of Directors, and if there has
been such a Change in Control (other than a Change in Control which has been
approved by a majority of the Company's Board of Directors who were directors
immediately prior to such Change in Control), the Reviewing Party shall be the
Independent Legal Counsel referred to in Section l(c) hereof. If there has been
no determination by the Reviewing Party or if the Reviewing Party determines
that Indemnitee substantively would not be permitted to be indemnified in whole
or in part under applicable law, Indemnitee shall have the right to commence
litigation seeking an initial determination by the court or challenging any such
determination by the Reviewing Party or
-2-
<PAGE>
any aspect thereof, including the legal or factual bases therefor, and the
Company hereby consents to service of process and to appear in any such
proceeding. Any determination by the Reviewing Party otherwise shall be
conclusive and binding on the Company and Indemnitee.
(c) Change in Control. The Company agrees that if there is a
-----------------
Change in Control of the Company (other than a Change in Control which has
been approved by a majority of the Company's Board of Directors who were
directors immediately prior to such Change in Control) then with respect to
all matters thereafter arising concerning the rights of Indemnitee to
payments of Expenses and Expense Advances under this Agreement or any other
agreement or under the Company's Restated Certificate of Incorporation or
Amended and Restated Bylaws as now or hereafter in effect, the Company
shall seek legal advice only from Independent Legal Counsel (as defined in
Section 10(d) hereof) selected by Indemnitee and approved by the Company
(which approval shall not be unreasonably withheld). Such counsel, among
other things, shall render its written opinion to the Company and
Indemnitee as to whether and to what extent Indemnitee would be permitted
to be indemnified under applicable law. The Company agrees to pay the
reasonable fees of the Independent Legal Counsel referred to above and to
fully indemnify such counsel against any and all expenses (including
attorneys' fees), claims, liabilities and damages arising out of or
relating to this Agreement or its engagement pursuant hereto.
(d) Mandatory Payment of Expenses. Notwithstanding any other
-----------------------------
provision of this Agreement other than Section 9 hereof, to the extent that
Indemnitee has been successful on the merits or otherwise, including, without
limitation, the dismissal of an action without prejudice, in defense of any
action, suit, proceeding, inquiry or investigation referred to in Section 1(a)
hereof or in the defense of any claim, issue or matter therein, Indemnitee shall
be indemnified against all Expenses incurred by Indemnitee in connection
therewith.
2. Expenses; Indemnification Procedure.
-----------------------------------
(a) Advancement of Expenses. The Company shall advance all Expenses
-----------------------
incurred by Indemnitee. The advances to be made hereunder shall be paid by the
Company to Indemnitee as soon as practicable but in any event no later than five
(5) days after written demand by Indemnitee therefor to the Company.
(b) Notice/Cooperation by Indemnitee. Indemnitee shall, as a
--------------------------------
condition precedent to Indemnitee's right to be indemnified under this
Agreement, give the Company notice in writing as soon as practicable of any
Claim made against Indemnitee for which indemnification will or could be sought
under this Agreement. Notice to the Company shall be directed to the Chief
Executive Officer of the Company at the address shown on the signature page of
this Agreement (or such other address as the Company shall designate in writing
to Indemnitee). In addition, Indemnitee shall give the Company such information
and cooperation as it may reasonably require and as shall be within Indemnitee's
power.
(c) No Presumptions; Burden of Proof. For purposes of this
--------------------------------
Agreement, the termination of any claim, action, suit or proceeding, by
judgment, order, settlement (whether with
-3-
<PAGE>
or without court approval) or conviction, or upon a plea of nolo contendere, or
---- ----------
its equivalent, shall not create a presumption that Indemnitee did not meet any
particular standard of conduct or have any particular belief or that a court has
determined that indemnification is not permitted by applicable law. In addition,
neither the failure of the Reviewing Party to have made a determination as to
whether Indemnitee has met any particular standard of conduct or had any
particular belief, nor an actual determination by the Reviewing Party that
Indemnitee has not met such standard of conduct or did not have such belief,
prior to the commencement of legal proceedings by Indemnitee to secure a
judicial determination that Indemnitee should be indemnified under applicable
law, shall be a defense to Indemnitee's claim or create a presumption that
Indemnitee has not met any particular standard of conduct or did not have any
particular belief. In connection with any determination by the Reviewing Party
or otherwise as to whether the Indemnitee is entitled to be indemnified
hereunder, the burden of proof shall be on the Company to establish that
Indemnitee is not so entitled.
(d) Notice to Insurers. If, at the time of the receipt by the
------------------
Company of a notice of a Claim pursuant to Section 2(b) hereof, the Company has
liability insurance in effect which may cover such Claim, the Company shall give
prompt notice of the commencement of such Claim 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 action,
suit, proceeding, inquiry or investigation in accordance with the terms of such
policies.
(e) Selection of Counsel. In the event the Company shall be
--------------------
obligated hereunder to pay the Expenses of any action, suit, proceeding, inquiry
or investigation, the Company, if appropriate, shall be entitled to assume the
defense of such action, suit, proceeding, inquiry or investigation with counsel
approved by Indemnitee, upon the delivery to Indemnitee of written notice of its
election so to do. After delivery of such notice, approval of such counsel by
Indemnitee and the retention of such counsel by the Company, the Company will
not be liable to Indemnitee under this Agreement for any fees of counsel
subsequently incurred by Indemnitee with respect to the same action, suit,
proceeding, inquiry or investigation; provided that, (i) Indemnitee shall have
the right to employ Indemnitee's counsel in any such action, suit, proceeding,
inquiry or investigation at Indemnitee's expense and (ii) if (A) the employment
of counsel by Indemnitee has been previously authorized by the Company, (B)
Indemnitee shall have reasonably concluded that there may be a conflict of
interest between the Company and Indemnitee in the conduct of any such defense,
or (C) the Company shall not continue to retain such counsel to defend such
action, suit, proceeding, inquiry or investigation, then the fees and expenses
of Indemnitee's counsel shall be at the expense of the Company.
-4-
<PAGE>
3. Additional Indemnification Rights; Nonexclusivity.
-------------------------------------------------
(a) Scope. The Company hereby agrees to indemnify the Indemnitee to
-----
the fullest extent permitted by law, notwithstanding that such indemnification
is not specifically authorized by the other provisions of this Agreement, the
Company's Restated Certificate of Incorporation, the Company's Amended and
Restated Bylaws or by statute. In the event of any change after the date of this
Agreement in any applicable law, statute or rule which expands the right of a
New York corporation to indemnify a member of its board of directors or an
officer, employee, agent or fiduciary, it is the intent of the parties hereto
that Indemnitee shall enjoy by this Agreement the greater benefits afforded by
such change. In the event of any change in any applicable law, statute or rule
which narrows the right of a New York corporation to indemnify a member of its
board of directors or an officer, employee, agent or fiduciary, such change, to
the extent not otherwise required by such law, statute or rule to be applied to
this Agreement, shall have no effect on this Agreement or the parties' rights
and obligations hereunder.
(b) Nonexclusivity. The indemnification provided by this Agreement
--------------
shall be in addition to any rights to which Indemnitee may be entitled under the
Company's Restated Certificate of Incorporation, its Amended and Restated
Bylaws, any agreement, any vote of stockholders or disinterested directors, the
New York Business Corporation Law, or otherwise. The indemnification provided
under this Agreement shall continue as to Indemnitee for any action taken or not
taken while serving in an indemnified capacity even though Indemnitee may have
ceased to serve in such capacity.
4. No Duplication of Payments. The Company shall not be liable under
--------------------------
this Agreement to make any payment in connection with any action, suit,
proceeding, inquiry or investigation made against Indemnitee to the extent
Indemnitee has otherwise actually received payment (under any insurance policy,
Restated Certificate of Incorporation, Bylaw or otherwise) of the amounts
otherwise indemnifiable hereunder.
5. Partial Indemnification. If Indemnitee is entitled under any
-----------------------
provision of this Agreement to indemnification by the Company for some or a
portion of Expenses in the investigation, defense, appeal or settlement of any
civil or criminal action, suit, proceeding, inquiry or investigation, but not,
however, for all of the total amount thereof, the Company shall nevertheless
indemnify Indemnitee for the portion of such Expenses to which Indemnitee is
entitled.
6. Mutual Acknowledgment. Both the Company and Indemnitee acknowledge
---------------------
that in certain instances, Federal law or applicable public policy may prohibit
the Company from indemnifying its directors, officers, employees, agents or
fiduciaries under this Agreement or otherwise. Indemnitee understands and
acknowledges that the Company has undertaken or may be required in the future to
undertake with the Securities and Exchange Commission to submit the question of
indemnification to a court in certain circumstances for a determination of the
Company's right under public policy to indemnify Indemnitee.
-5-
<PAGE>
7. Liability Insurance. To the extent the Company maintains liability
-------------------
insurance applicable to directors, officers, employees, agents or fiduciaries,
Indemnitee shall be covered by such policies in such a manner as to provide
Indemnitee the same rights and benefits as are accorded to the most favorably
insured of the Company's directors, if Indemnitee is a director; or of the
Company's officers, if Indemnitee is not a director of the Company but is an
officer; or of the Company's key employees, agents or fiduciaries, if Indemnitee
is not an officer or director but is a key employee, agent or fiduciary.
8. Exceptions. Any other provision herein to the contrary
----------
notwithstanding, the Company shall not be obligated pursuant to the terms of
this Agreement:
(a) Excluded Action or Omissions. To indemnify Indemnitee for acts,
----------------------------
omissions or transactions from which Indemnitee may not be relieved of liability
under applicable law.
(b) Claims Initiated by Indemnitee. To indemnify or advance
------------------------------
expenses to Indemnitee with respect to proceedings or claims initiated or
brought voluntarily by Indemnitee and not by way of defense, except (i) with
respect to proceedings brought to establish or enforce a right to
indemnification under this Agreement or any other agreement or insurance policy
or under the Company's Restated Certificate of Incorporation or Amended and
Restated Bylaws now or hereafter in effect relating to Claims for Indemnifiable
Events, (ii) in specific cases if the Board of Directors has approved the
initiation or bringing of such suit, or (iii) as otherwise required under the
applicable provisions of the New York Business Corporation Law, regardless of
whether Indemnitee ultimately is determined to be entitled to such
indemnification, advance expense payment or insurance recovery, as the case may
be.
(c) Lack of Good Faith. To indemnify Indemnitee for any expenses
------------------
incurred by the Indemnitee with respect to any proceeding instituted by
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
(d) Claims Under Section 16(b). To indemnify Indemnitee for
--------------------------
expenses and the payment of profits arising from the purchase and sale by
Indemnitee of securities in violation of Section 16(b) of the Securities
Exchange Act of 1934, as amended, or any similar successor statute.
9. Period of Limitations. No legal action shall be brought and no cause
---------------------
of action shall be asserted by or in the right of the Company against
Indemnitee, Indemnitee's estate, spouse, heirs, executors or personal or legal
representatives after the expiration of two years from the date of accrual of
such cause of action, and any claim or cause of action of the Company shall be
extinguished and deemed released unless asserted by the timely filing of a legal
action within such two-year period; provided, however, that if any shorter
-------- -------
period of limitations is otherwise applicable to any such cause of action, such
shorter period shall govern.
-6-
<PAGE>
10. Construction of Certain Phrases.
-------------------------------
(a) For purposes of this Agreement, references to the "Company"
shall include, in addition to the resulting corporation, any constituent
corporation (including any constituent of a constituent) absorbed in a
consolidation or merger which, if its separate existence had continued, would
have had power and authority to indemnify its directors, officers, employees,
agents or fiduciaries, so that if Indemnitee is or was a director, officer,
employee, agent or fiduciary of such constituent corporation, or is or was
serving at the request of such constituent corporation as a director, officer,
employee, agent or fiduciary of another corporation, partnership, joint venture,
employee benefit plan, trust or other enterprise, Indemnitee shall stand in the
same position under the provisions of this Agreement with respect to the
resulting or surviving corporation as Indemnitee would have with respect to such
constituent corporation if its separate existence had continued.
(b) For purposes of this Agreement, references to "other
enterprises" shall include employee benefit plans; references to "fines" shall
include any excise taxes assessed on Indemnitee with respect to an employee
benefit plan; and references to "serving at the request of the Company" shall
include any service as a director, officer, employee, agent or fiduciary of the
Company which imposes duties on, or involves services by, such director,
officer, employee, agent or fiduciary with respect to an employee benefit plan,
its participants or its beneficiaries; and if Indemnitee acted in good faith and
in a manner Indemnitee reasonably believed to be in the interest of the
participants and beneficiaries of an employee benefit plan, Indemnitee shall be
deemed to have acted in a manner "not opposed to the best interests of the
Company" as referred to in this Agreement.
(c) For purposes of this Agreement a "Change in 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, as amended), other than
a trustee or other fiduciary holding securities under an employee benefit plan
of the Company or a corporation owned directly or indirectly by the stockholders
of the Company in substantially the same proportions as their ownership of stock
of the Company, is or becomes the "beneficial owner" (as defined in Rule
13(d)(3) under said Act), directly or indirectly, of securities of the Company
representing more than 20% of the total voting power represented by the
Company's then outstanding Voting Securities, (ii) during any period of two
consecutive years, individuals who at the beginning of such period constitute
the Board of Directors of the Company and any new director whose election by the
Board of Directors or nomination for election by the Company's stockholders 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 a majority thereof, or (iii) the stockholders of the
Company approve a merger or consolidation of the Company with any other
corporation other than 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) at least 80% of the total voting
power represented by the Voting
-7-
<PAGE>
Securities of the Company or such surviving entity outstanding immediately after
such merger or consolidation, or the stockholders of the Company approve a plan
of complete liquidation of the Company or an agreement for the sale or
disposition by the Company of (in one transaction or a series of transactions)
all or substantially all of the Company's assets.
(d) For purposes of this Agreement, "Independent Legal Counsel"
shall mean an attorney or firm of attorneys, selected in accordance with the
provisions of Section 1(c) hereof, who shall not have otherwise performed
services for the Company or Indemnitee within the last three years (other than
with respect to matters concerning the rights of Indemnitee under this
Agreement, or of other indemnitees under similar indemnity agreements).
(e) For purposes of this Agreement, a "Reviewing Party" shall mean
any appropriate person or body consisting of a member or members of the
Company's Board of Directors or any other person or body appointed by the Board
of Directors who is not a party to the particular Claim for which Indemnitee is
seeking indemnification, or Independent Legal Counsel.
(f) For purposes of this Agreement, "Voting Securities" shall mean
any securities of the Company that vote generally in the election of directors.
11. Counterparts. This Agreement may be executed in one or more
------------
counterparts, each of which shall constitute an original.
12. Binding Effect; Successors and Assigns. This Agreement shall be
--------------------------------------
binding upon and inure to the benefit of and be enforceable by the parties
hereto and their respective successors and assigns, including any direct or
indirect successor by purchase, merger, consolidation or otherwise to all or
substantially all of the business and/or assets of the Company, spouses, heirs,
and personal and legal representatives. The Company shall require and cause any
successor (whether direct or indirect by purchase, merger, consolidation or
otherwise) to all, substantially all, or a substantial part, of the business
and/or assets of the Company, by written agreement in form and substance
satisfactory to Indemnitee, expressly to assume and agree to perform this
Agreement in the same manner and to the same extent that the Company would be
required to perform if no such succession had taken place. This Agreement shall
continue in effect regardless of whether Indemnitee continues to serve as a
director of the Company or of any other enterprise at the Company's request.
13. Attorneys' Fees. In the event that any action is instituted by
---------------
Indemnitee under this Agreement or under any liability insurance policies
maintained by the Company to enforce or interpret any of the terms hereof or
thereof, Indemnitee shall be entitled to be paid all Expenses incurred by
Indemnitee with respect to such action, regardless of whether Indemnitee is
ultimately successful in such action, and shall be entitled to the advancement
of Expenses with respect to such action, unless as a part of such action the
court of competent jurisdiction over such action determines that each of the
material assertions made by Indemnitee as a basis for such action were not made
in good faith or were frivolous. In the event of an action instituted by or in
the name of the Company under this Agreement to enforce or interpret any of the
terms of this Agreement,
-8-
<PAGE>
Indemnitee shall be entitled to be paid all Expenses incurred by Indemnitee in
defense of such action (including costs and expenses incurred with respect to
Indemnitee's counterclaims and cross-claims made in such action), and shall be
entitled to the advancement Expenses with respect to such action, unless as a
part of such action the court having jurisdiction over such action determines
that each of Indemnitee's material defenses to such action were made in bad
faith or were frivolous.
14. Notice. All notices, requests, demands and other communications
------
under this Agreement shall be in writing and shall be deemed duly given (i) if
delivered by hand and receipted for by the party addressee, on the date of such
receipt, or (ii) if mailed by domestic certified or registered mail with postage
prepaid, on the third business day after the date postmarked. Addresses for
notice to either party are as shown on the signature page of this Agreement, or
as subsequently modified by written notice.
15. Consent to Jurisdiction. The Company and Indemnitee each hereby
-----------------------
irrevocably consent to the jurisdiction of the courts of the State of New York
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 commenced, prosecuted and continued only in the Superior
Court of the State of New York in and for New York County, which shall be the
exclusive and only proper forum for adjudicating such a claim.
16. Severability. The provisions of this Agreement shall be
------------
severable in the event that any of the provisions hereof (including any
provision within a single section, paragraph or sentence) are held by a court of
competent jurisdiction to be invalid, void or otherwise unenforceable, and the
remaining provisions shall remain enforceable to the fullest extent permitted by
law. Furthermore, to the fullest extent possible, the provisions of this
Agreement (including, without limitations, each portion of this Agreement
containing any provision held to be invalid, void or otherwise unenforceable,
that is not itself invalid, void or unenforceable) shall be construed so as to
give effect to the intent manifested by the provision held invalid, illegal or
unenforceable.
17. Choice of Law. This Agreement shall be governed by and its
-------------
provisions construed and enforced in accordance with the laws of the State of
New York, as applied to contracts between New York residents, entered into and
to be performed entirely within the State of New York, without regard to the
conflict of laws principles thereof.
18. Subrogation. In the event of payment under this Agreement, the
-----------
Company shall be subrogated to the extent of such payment to all of the rights
of recovery of Indemnitee, who shall execute all documents required and shall do
all acts that may be necessary to secure such rights and to enable the Company
effectively to bring suit to enforce such rights.
19. Amendment and Termination. No amendment, modification,
-------------------------
termination or cancellation of this Agreement shall be effective unless it is in
writing signed by both the parties hereto. No waiver of any of the provisions of
this Agreement shall be deemed or shall constitute a
-9-
<PAGE>
waiver of any other provisions hereof (whether or not similar) nor shall such
waiver constitute a continuing waiver.
20. Integration and Entire Agreement. This Agreement sets forth the
--------------------------------
entire understanding between the parties hereto and supersedes and merges all
previous written and oral negotiations, commitments, understandings and
agreements relating to the subject matter hereof between the parties hereto.
21. No Construction as Employment Agreement. Nothing contained in
---------------------------------------
this Agreement shall be construed as giving Indemnitee any right to be retained
in the employ of the Company or any of its subsidiaries.
**********
-10-
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the date first above written.
HAPPY KIDS INC.
By:
--------------------------------------
Jack M. Benun
President and Chief Executive Officer
AGREED TO AND ACCEPTED:
INDEMNITEE:
- -----------------------------
(signature)
- -----------------------------
(name of Indemnitee)
- -----------------------------
- -----------------------------
(address)
<PAGE>
FIRST AMENDMENT TO LEASE
THIS AGREEMENT (this "Agreement") is made as of the 30th day of
---------
August, 1994 by and between SZS 33 Associates L.P. ("Landlord"), a Delaware
--------
limited partnership and J&B 18 Corp. ("Tenant"), a New York corporation.
------
W I T N E S S E T H:
- - - - - - - - - -
WHEREAS, by lease dated February 5, 1993 (the "Lease"), Landlord did
-----
demise and let to Tenant and Tenant did hire and take from Landlord, certain
premises (the "Existing Premises") located on the eleventh (11th) floor of the
-----------------
building (the "Building") known as 100 West 33rd Street, located in the City,
--------
County and State of New York, as more particularly described therein;
WHEREAS, Landlord and Tenant desire to modify, amend and supplement
the Lease by adding certain additional contiguous space on the eleventh (11th)
floor of the Building, identified as the "J&B 18 Corp. Expansion" on Exhibit "A"
----------------------
attached hereto (the "Additional Premises", the Existing Premises and the
-------------------
Additional Premises are sometimes collectively referred to as the "Premises"),
--------
to the Existing Premises, and in other respects as hereinafter provided;
WHEREAS, Landlord and Tenant desire to modify, amend and supplement
the Lease to confirm Landlord's consent to Tenant's modifications to and
redesign of the entrance doors and reception areas of the Existing Premises; and
WHEREAS, the parties desire to modify, amend and supplement the Lease
as hereinafter provided.
NOW, THEREFORE, in consideration of the sum of Ten Dollars ($10.00)
paid by Tenant to Landlord and for other good and valuable consideration, the
mutual receipt and legal sufficiency of which are hereby acknowledged, the
parties hereby agree to modify, amend and supplement the Lease as follows:
1. Words and phrases used in this Agreement but not otherwise
defined herein shall have the meaning ascribed thereto in the Lease.
2. Landlord hereby leases to Tenant and Tenant hereby hires from
Landlord, the Additional Premises for a term (the "Additional Premises Term")
------------------------
commencing on the Additional Premises Effective Date (as hereinafter defined).
<PAGE>
3. As of the Additional Premises Effective Date, the Existing
Premises shall include the Additional Premises. Tenant shall use and occupy the
Additional Premises from and after the Additional Premises Effective Date under
the same terms, covenants and conditions as provided in the Lease (except as set
forth herein).
4. The "Additional Premises Effective Date" means the earlier of (a)
----------------------------------
the date when Tenant, any Employee of Tenant, or any Person holding by, through,
or under Tenant, first occupies the Premises; or (b) the date when Landlord
Substantially Completes the Building Standard Work and the Tenant's Initial Work
(other than any work which cannot be completed on such date provided that the
failure to complete such work will not substantially interfere with Tenant's use
of the Premises); provided, however, that if Landlord shall be delayed in
Substantial Completion as a result of (i) Tenant's failure to agree to plans and
specifications before the date required under this Lease, (ii) Tenant's request
for materials, finishes or installations other than Building Standard Work,
(iii) any Tenant changes in Tenant's Plans, or (iv) the performance or
completion by a Person employed by Tenant; then the Additional Premises
Effective Date and the payment of Rent under this Agreement shall be accelerated
by the number of days of such delay.
5. Landlord shall give Tenant written notice specifying when the
Additional Premises Effective Date has occurred. At either party's request, the
other shall execute a written agreement confirming the Additional Premises
Effective Date. Tenant's failure to agree in writing shall not invalidate the
Additional Premises Effective Date as determined by Landlord.
6. (a) As of the Additional Premises Effective Date, Section 3.1
(a) of the Lease shall be deemed deleted and Tenant shall pay Fixed Rent for the
Existing Premises and the Additional Premises in the aggregate amount of SIX
HUNDRED SIXTY-NINE THOUSAND EIGHT HUNDRED SIXTY-FIVE DOLLARS ($669,865.00) per
annum in equal monthly installments of FIFTY-FIVE THOUSAND EIGHT HUNDRED
TWENTY-TWO DOLLARS AND EIGHT CENTS ($55,822.08) for the period from the
Additional Premises Effective Date through the expiration of the Term in advance
on the first day of each and every calendar month. Tenant shall pay Landlord one
month's rent in the amount of TEN THOUSAND EIGHT HUNDRED FORTY-SEVEN DOLLARS AND
EIGHT CENTS ($10,847.08) upon the execution of this Agreement which shall be
applied equally to the rent due and payable for the first (1st) and the
fifteenth (15th) month after the Additional Premises Effective Date.
(b) Notwithstanding anything contained herein to the contrary,
provided Tenant shall not be in default of its obligations under this Agreement
or the Lease, Tenant shall be entitled to an abatement in an amount equal to Ten
Thousand Eight Hundred Forty-Seven Dollars and Eight Cents ($10,847.08) per
month for a period of fifteen (15) months (the "Additional Premises Abatement
-----------------------------
Period") after the Additional Premises Effective Date and commencing on the
- ------
Additional Premises Effective Date. The entire Fixed Rent otherwise due and
payable for the Additional Premises Abatement Period shall become immediately
due and payable upon the occurrence of a default beyond applicable grace and
notice periods by Tenant under this Agreement or the Lease.
2
<PAGE>
7. From and after the Additional Premises Effective Date:
(a) The reference to the number "15,420" in the definition of
the term "Premises" in Section 1.1 of the Lease shall be deemed deleted and
replaced with the number "19,139";
(b) The reference to the number "4.90" in the definition of the
term "Tenant's Percentage" in Section 1.1 of the Lease shall be deemed deleted
and replaced with the number "6.08%";
(c) The two (2) references to the number "15,420" in Section 6.2
of the Lease shall be deemed deleted and replaced in both cases with the number
"19,139";
(d) The reference to the amount of "One Hundred and Thirty-Five
Thousand One Hundred Sixty Dollars and Ninety-Nine Cents ($135,160.99)" in
Section 37.1 of the Lease shall be deemed deleted and replaced with the amount
"One Hundred Fifty-Six Thousand Eight Hundred Fifty-Five Dollars and Sixteen
Cents ($156,855.16)";
(e) The language "Six Hundred Forty-Seven Thousand Six Hundred
Forty Dollars ($647,640.00) in equal monthly installments of Fifty-Three
Thousand Nine Hundred Seventy Dollars ($53,970.00)" in Section 4.2 of the Lease
shall be deemed deleted and replaced with "Eight Hundred Three Thousand Eight
Hundred Thirty-Eight Dollars ($803,838.00) in equal monthly installments of
Sixty-Six Thousand Nine Hundred Eighty-Six Dollars and Fifty Cents
($66,986.50)";
(f) The definition of the term "Expiration Date" in Section 1.1
of the Lease shall be deemed deleted and replaced with "Expiration Date" means
the last day of the ninth (9th) month after the twelfth (12th) anniversary of
the Commencement Date."; and
(g) The reference to "eleven (11) years and six (6) months in
Section 2.1 of the Lease shall be deemed deleted and replaced with "twelve (12)
years and nine (9) months".
8. With respect to the Additional Premises only, Tenant shall
deposit with Landlord, upon Tenant's execution of this Agreement, the sum of
Twenty-One Thousand Six Hundred Ninety-Four Dollars and Seventeen Cents
($21,694.17) as additional security for the faithful performance and observance
by Tenant of the terms, provisions and conditions of the Lease, as amended by
this Agreement.
9. (a) Tenant will prepare and furnish the following ("Tenant's
--------
Plans") to Landlord within thirty (30) days after the date hereof (i) complete,
- -----
finished, detailed architectural drawings and specifications for the Additional
Premises; and (ii) all information necessary to
3
<PAGE>
reflect modifications in the air-conditioning system, if any, and any additional
electrical or plumbing requirements of Tenant, if any, in connection with
Landlord's Building Standard Work.
(b) Tenant shall deliver to Landlord, also, five (5) sets of
blue prints and one set of reproducible final working drawings and
specifications as described in Section 12(a)(i) and Section 12(a)(ii) above,
marked FINAL FOR PRICING AND CONSTRUCTION, within forty (40) days of the date
hereof. All final drawings shall be drawn to a minimum scale of 1/8 inch = 1
foot.
(c) In accordance with Tenant's Plans, Landlord at Landlord's
expense except as otherwise expressly specified in this Lease, will cause its
designated contractor to make and complete in and to the Additional Premises the
work and installations (hereinafter called "Tenant's Initial Work") specified in
---------------------
the Tenant's Plans: provided, however, that in no event shall Landlord be
required to pay or incur costs in excess of One Hundred Eighty-Five Thousand
Nine Hundred Fifty Dollars ($185,950.00) (the "Expansion Contribution") to
----------------------
perform Tenant's Initial Work. Landlord and Tenant shall mutually agree upon
three (3) contractors to request bids from for the construction of Tenant's
Initial Work. In the event Tenant elects to designate the contractor to perform
the construction which contractor is not the lowest bidder, then the Landlord's
obligation to pay Tenant the Expansion Contribution shall be limited to the
lowest bid received from the three (3) designated contractors. As used herein,
"Tenant's Initial Work" shall be deemed to mean the installation of fixtures,
improvements and appurtenances attached to or built into the Additional Premises
in accordance with Tenant's Plans and specifications and shall not include the
fees and expenses of Tenant's architect (including, without limitation, any and
all permit and filing fees), engineer and attorney, or the cost of any movable
partitions, business and trade fixtures, machinery, equipment, furniture,
furnishings and other articles of personal property. In the event that the cost
of Tenant's Initial Work exceeds One Hundred Eighty-Five Thousand Nine Hundred
Fifty Dollars ($185,950.00), Tenant shall pay Landlord fifty percent (50%) of
the amount of such excess before Landlord commences any work and Tenant shall
reimburse Landlord the balance of such excess costs within five (5) days after
written demand therefor. Tenant has requested permission from the Landlord to
install a separate entry for the Expansion Premises and Landlord hereby consents
to the installation of the separate entry and Tenant agrees to pay for all costs
and expenses in connection therewith.
(d) Notwithstanding anything to the contrary in this Lease,
Landlord shall not be required to perform, and Tenant shall not request, any
work or installations which would:
(i) require changes to structural components of the
Building or the exterior design of the Building;
(ii) require any modification to the Building's Systems or
installations outside the Premises:
4
<PAGE>
(iii) not comply with all applicable Laws of any Government
Entity having jurisdiction over the construction of the
Building and/or the Premises; and/or
(iv) be incompatible with plans previously filed for the
Building with the Department of Building of the City of
New York or with the occupancy of the Building as a
first-class office building.
Any changes required by any Government Entity affecting the Building and/or the
Premises shall not be deemed a modification of Tenant's Plans, plans and
specifications or any provision of this Article, and shall be acceptable by
Tenant; but Landlord shall notify Tenant of the same within a reasonable period
of time.
(e) Tenant has requested Landlord's permission to install a clothes
washing machine and a clothes dryer in the Premises (hereinafter collectively
referred to as the "Installation") and Landlord has agreed to consent to such
------------
installation upon the following terms and conditions: (i) Tenant shall pay for
all costs and expenses incurred by Landlord and Tenant with respect to the
Installation (including, without limitation, review of plans by Landlord's
engineer, architect and other professionals, and any increase in Landlord's
insurance costs as a result of the Installation), (ii) Tenant shall place the
Installation at a location in the Premises acceptable to Landlord, (iii) the
Installation shall be installed in a self-contained unit, (iv) Landlord shall
have the right to approve the plans for the Installation, in its sole and
absolute discretion, (v) Landlord shall have the right to inspect the
Installation at any time and from time to time to insure that the Installation
complies with the terms of this Agreement and the Lease, (vi) Tenant shall
obtain any and all permits, consents and approvals which may be required of any
governmental entity or by any applicable Law for the operation, maintenance,
installation and use of the Installation, (vii) Tenant shall be responsible for
any and all damage which results from the operation of the Installation, whether
or not Tenant has complied with the terms of this paragraph, (viii) Tenant
shall obtain a water damage and leakage endorsement to the Insurance Policy and
shall name Landlord as an additional insured with respect to such matters and
(ix) Landlord shall have the right at Landlord's sole and absolute discretion to
direct Tenant to remove the Installation and in such event Tenant shall remove
the Installation at Tenant's sole cost and expense within five (5) days after
notice from Landlord and in the event Tenant does not remove the Installation
within such time period, then Tenant hereby authorizes Landlord and its
designated agents, managers and/or representatives to remove the Installation at
Tenant's sole cost and expense. In addition to the requirements outlined above
in this subparagraph, Tenant agrees that Tenant will not and Tenant will advise
its Employees and affiliates to not disclose the Installation to any other
tenant in the Building and to keep the existence of the Installation private and
confidential.
10. (a) This Agreement shall serve to modify and amend the Lease to
reflect Landlord and Tenant's understanding and agreement regarding the
installation, maintenance and
5
<PAGE>
design of glass wall sidelights adjacent to Tenant's entry door to the Existing
Premises. Subject to the following terms and conditions. Tenant shall be
permitted to install two (2) glass sidelights, one on each side of the entrance
door to the Existing Premises and transom lights for the purpose of permitting
Tenant's reception area to be visible from the common areas of the Building.
(b) Tenant shall comply with all of the following requirements:
(i) The contents and appearance of the reception areas of
the Existing Premises visible from the common areas of the Building shall be
subject to the absolute and unconditional approval of the Landlord throughout
the term of the Lease. Tenant agrees to promptly remove and/or redesign any
portion of its Existing Premises which are visible from the common areas of the
Building that do not meet Landlord's approval. Attached hereto as Schedule "1"
is a copy of the plans and specifications for the Existing Premises which are
hereby approved by Landlord.
(ii) After written approval is issued by Landlord, Tenant,
at Tenant's sole cost and expense is required to comply with all Laws
(including, without limitation, obtaining all permits and government approvals)
before commencing any work.
(iii) Tenant's name or logo or simple design element must be
used as a safety bands on glass sidelights at heights of 2'8" and 5'0" above
finished floor. The safety bands may contain Tenant's name, logo or similar
design which will be subject to Landlord's prior written approval which will not
be unreasonable withheld or delayed. The safety bands shall not exceed 4" in
height and must be integrated into overall sidelight design. The safety bands
must be metallic graphics in black or silver only. The safety bands will be
designed and provided by Tenant at Tenant's sole cost and expense after Landlord
approves the design.
(iv) Primary identification signs shall be limited to the
Tenant's trade name as approved in the Lease or as otherwise approved in writing
by the Landlord. The Tenant may use a crest, shield, logo or other established
corporate insignia. Its area shall be included within the allowable sign area.
(v) No sign, advertisement, notice or lettering other than
the Tenant name or approved trade names or graphic logos shall be exhibited,
inscribed, painted or affixed on any part of any sidelight or be visible from
the common areas of the Building unless specifically approved in advance in
writing by Landlord.
(vi) All signs, including colors, materials and design are
subject to Landlord's prior written approval in Landlord's sole and absolute
discretion.
11. Landlord acknowledges that it has approved (i) the glass
sidelights and transom lights installed by Tenant in the Existing Premises as of
the date hereof, (ii) the contents and appearance of the Tenant's reception area
in the Existing Premises as it exists on and as of
6
<PAGE>
the date hereof, (iii) the safety bands on the glass sidelights as designed and
provided by the Tenant as of the date hereof and (iv) the signs and logos
exhibited on such sidelights and which are visible from the common areas of the
Building on and as of the date hereof.
12. From and after the date of this Agreement the reference to
Landlord's address in the Lease shall be deleted and replaced with:
"SZS 33 Associates L.P.
c/o Sumitomo Life Realty (N.Y.), Inc.
245 Park Avenue, 34th Floor
New York, New York 10167-3498
Attention: Mr. Ernest E. Hunt, IV
With a copy to:
Handsman & Kaminsky
609 Fifth Avenue, 6th Floor
New York, New York 10017
Attention: David S. Handsman, Esq."
13. From and after the date of this Agreement, Section 3.5 of the
Lease shall be deemed deleted and replaced with the following "Tenant shall pay
all Rents due Landlord at the office of Landlord at A&S Plaza-Office, P.O. Box
9074, GPO, New York, New York 10087-9074, or at such other place as Landlord may
designate by notice to Tenant from time to time."
14. Landlord and Tenant represent and warrant to each other that
neither Landlord or Tenant has consulted or negotiated with any real estate
broker or sales agent in connection with the leasing of the Additional Premises
from Landlord other than Newmark Real Estate Services (the "Broker"). Landlord
------
and Tenant agree to indemnify and hold each other harmless from and against any
claims, costs, liabilities and expenses including, without limitation,
attorneys' fees, cost and disbursements incurred by either party by reason of
any breach of the foregoing representation if such claims are based in whole or
in part on dealings with the other party or its Employees. Landlord agrees to
pay the Broker any commission to which they may be entitled pursuant to a
separate written agreement.
15. Tenant acknowledges and agrees that, as of the date hereof, its
obligations under the Lease, as modified and amended by this Agreement, are not
subject to any reduction, limitation, impairment or termination for any reason
whatsoever, including, without limitation, any claim of waiver, release,
surrender or compromise and are not subject to any defense or setoff,
counterclaim, recoupment or termination whatsoever by reason of the invalidity,
illegality or unenforceability of any of the Tenant's obligations under the
Lease, as modified by this Agreement, or otherwise. Tenant absolutely,
unconditionally and irrevocably waives any and all right hereafter to assert any
defense, setoff, counterclaim or crossclaim of any nature whatsoever
7
<PAGE>
with respect to the Lease (as modified by this Agreement) or the Tenant's
obligation thereunder arising prior to the date of this Agreement.
16. Except as amended by this Agreement, the Lease is unmodified and
is in full force and effect.
17. This Agreement may not be amended, modified, supplemented or
terminated except by a writing signed by Landlord and Tenant.
IN WITNESS WHEREOF, this Agreement has been duly executed by the
parties hereto as of the day and year first written above.
SZS 33 ASSOCIATES L.P.
By: Sumitomo Life Realty (N.Y.), Inc.,
general partner
By: /s/ Shigeyoshi Kurematsu
---------------------------
Name: Shigeyoshi Kurematsu
Title: President
J&B 18 CORP.
By: [ILLEGIBLE SIGNATURE]
---------------------------
Name:
Title: President
8
<PAGE>
STATE OF NEW YORK )
) ss.:
COUNTY OF NEW YORK )
On this 18 day of August, 1994 before me personally came Jack M Benun, to
me known, who being by me duly sworn, did depose and say that he resides in 1123
E 8 St Brooklyn; that he is the President of J&B 18 Corp., the corporation
described in and which executed the foregoing instrument; and that he signed his
name thereto by order of the Board of Directors of said corporation.
/s/ Stuart Bender
----------------------------------
Notary Public
STUART BENDER
Notary Public, State of New York
No. 4982260
Qualified in Nassau County
Term Expires May 28, 199
<PAGE>
[PICTURE OF FLOOR PLAN FOR B&H / HAPPY KIDS EXPANSION LOCATION PLAN]
<PAGE>
================================================================================
LEASE
Between
SZS 33 ASSOCIATES L.P.
Landlord,
and
J&B 18 CORP.
Tenant,
Dated: February 5, 1993
================================================================================
PREMISES:
The Childrenswear Center
100 West 33rd Street
New York, New York
<PAGE>
TABLE OF CONTENTS
<TABLE>
<S> <C>
ARTICLE 1. Definitions.................................................................... 1
ARTICLE 2. Terms; Commencement Date....................................................... 3
ARTICLE 3. Fixed Rent; Additional Rent.................................................... 3
ARTICLE 4. Option......................................................................... 4
ARTICLE 5. Tax Payment.................................................................... 5
ARTICLE 6. Wage Rate Escalation........................................................... 6
ARTICLE 7. Electricity.................................................................... 8
ARTICLE 8. Use............................................................................ 10
ARTICLE 9. Compliance with Laws........................................................... 11
ARTICLE 10. Alterations and Installations.................................................. 11
ARTICLE 11. Fixtures and Equipment; Tenant's Property...................................... 13
ARTICLE 12. Maintenance; Repairs........................................................... 14
ARTICLE 13. Required Insurance............................................................. 15
ARTICLE 14. Damage; Restoration............................................................ 16
ARTICLE 15. Condemnation................................................................... 17
ARTICLE 16. Building Services.............................................................. 17
ARTICLE 17. Rules and Regulations.......................................................... 18
ARTICLE 18. Landlord's Access to Premises; Related Matters................................. 18
ARTICLE 19. Subordination: Estoppel Certificate; Attornment................................ 19
ARTICLE 20. Landlord's Inability to Perform................................................ 20
ARTICLE 21. Surrender of Premises.......................................................... 21
ARTICLE 22. Assignment, Mortgaging, Subletting, etc........................................ 21
ARTICLE 23. Quiet Enjoyment................................................................ 23
ARTICLE 24. Real Estate Brokers............................................................ 23
ARTICLE 25. Adjacent Excavation; Shoring; Construction..................................... 24
ARTICLE 26. Defaults; Conditional Limitations; Remedies.................................... 24
ARTICLE 27. Indemnification................................................................ 27
ARTICLE 28. Consents and Approvals......................................................... 27
ARTICLE 29. Notices........................................................................ 27
ARTICLE 30. No Waivers..................................................................... 28
ARTICLE 31. No Representations by Landlord; Landlord's Interest; Transferee
Landlords...................................................................... 28
ARTICLE 32. Name of Building; Waiver of Zoning Rights...................................... 29
ARTICLE 33. Memorandum of Lease............................................................ 29
ARTICLE 34. Delivery of Possession......................................................... 29
ARTICLE 35. Hazardous Materials............................................................ 29
ARTICLE 36. Waiver of Immunity............................................................. 30
ARTICLE 37. Security Deposit............................................................... 30
ARTICLE 38. Substitute Space............................................................... 31
ARTICLE 39. Intentionally Omitted.......................................................... 31
ARTICLE 40. Construction of Premises....................................................... 31
ARTICLE 41. Miscellaneous.................................................................. 32
Exhibit A Land
Exhibit B Floor Plan of Premises
Exhibit C Permitted Encumbrances
Exhibit D Rules and Regulations
Exhibit E Construction
Exhibit F Sign Criteria
</TABLE>
-i-
<PAGE>
INDEX
<TABLE>
<CAPTION>
Page
<S> <C>
Abatement Period.......................................................... 3
Accountants............................................................... 7
Additional Rent........................................................... 4
Alteration................................................................ 1
Alterations Insurance..................................................... 13
Base Rate................................................................. 7
Base Tax.................................................................. 1
Building Services......................................................... 17
Building Standard Work.................................................... 1
Building Systems.......................................................... 1
Business Day.............................................................. 1
Business Hours............................................................ 1
City...................................................................... 1
Commencement Date......................................................... 3
Condemnation.............................................................. 1
Damage.................................................................... 1
Default................................................................... 24
Deficiency................................................................ 25
Electricity Additional Rent............................................... 8
Employee.................................................................. 1
Encumbrance............................................................... 1
Expiration Date........................................................... 1
Fees-And-Costs............................................................ 1
Fixed Rent................................................................ 3
Government Entity......................................................... 2
Hazardous Materials....................................................... 29
Indemnitees............................................................... 2
Insurance Policy.......................................................... 15
Insurance Requirement..................................................... 2
Interest Rate............................................................. 2
Landlord.................................................................. 1, 2
Landlord's Affiliates..................................................... 2
Landlord's Estimate....................................................... 7
Law....................................................................... 2
Legal Proceeding.......................................................... 2
Lien...................................................................... 2
New Landlord.............................................................. 19
Operating Year............................................................ 2
Overhead Charge........................................................... 8
Permitted Encumbrances................................................Exhibit C
Person.................................................................... 2
Porters................................................................... 7
Premises.................................................................. 2
Program................................................................... 6
Rent...................................................................... 2
Replaced Premises......................................................... 31
Required Insurance........................................................ 2
Restoration............................................................... 2
Rules and Regulations.....................................................18, 1
Security Deposit.......................................................... 30
Senior Encumbrance........................................................ 2
State..................................................................... 2
Submeter.................................................................. 8
Substantially Complete.................................................... 2
Substitute Premises....................................................... 31
Target Substantial Completion Date........................................ 29
Tax Statement............................................................. 5
Tax Year.................................................................. 3
Taxes..................................................................... 5
Tenant.................................................................... 1
Tenant's Extra Work....................................................... 32
Tenant's Initial Work..................................................... 31
Tenant's Percentage....................................................... 3
Term...................................................................... 3
Termination Notice........................................................ 25
Wage Rate Escalation...................................................... 7
Wage Rate Escalation Statement............................................ 7
</TABLE>
-ii-
<PAGE>
LEASE made ________, 1992 between SZS 33 Associates L.P., a Delaware
limited partnership with offices at c/o M.S. Management Associates, Inc., One
Merchant Plaza, P.O. Box 7033, Indianapolis, Indiana 46207 ("Landlord") and J&B
18 Corp., a New York corporation, with offices at c/o B&H Industries Inc., 112
West 34th Street, New York, New York ("Tenant").
W I T N E S S E T H:
-------------------
WHEREAS, Landlord is the owner of the land described in Exhibit "A"
attached hereto (the "Land") and the buildings and improvements situate thereon
(the "Building"); and
WHEREAS, Tenant desires to lease from Landlord, and Landlord is
willing to lease to Tenant, certain premises on the eleventh (11th) floor of the
Building as shown on the plan attached as Exhibit "B" hereto (the "Premises")
upon the terms, covenants, conditions and provisions set forth below;
NOW THEREFORE, in consideration of the rents and agreements set forth
herein, and intending to be legally bound hereby, Landlord and Tenant agree as
follows:
ARTICLE 1. Definitions.
-----------
1.1 The following terms shall have the following meanings wherever
used in this Lease:
"Alteration" means any and every alteration, addition, construction,
improvement, or modification of or to the Premises and/or any and every
installation in the Premises (including, without limitation, all fixtures,
panelling, partitions, railings, wall coverings, and all electrical, mechanical,
plumbing, heating, ventilating and air conditioning installations affixed or
attached to the Premises).
"Base Tax" means the Taxes for the twelve month period commencing
January 1, 1993 and ending December 31, 1993.
"Building Services" means those services required to be provided by
Landlord pursuant to Article 16 hereof.
"Building Standard Work" means the materials, labor, and services to
be provided by Landlord as specified in Section I of Exhibit "E" attached
hereto.
"Building Systems" means the plumbing, heating, ventilating, air
conditioning, elevator, wiring, and electrical systems, installations and
facilities of the Building.
"Business Day" means any day except Saturday, Sunday, or any State or
federal holiday, or any other day defined as a holiday in any union contract
covering the Building.
"Business Hours" means 9:00 a.m. to 6:00 p.m. on Business Days.
"City" means the City of New York.
"Condemnation" (or to "Condemn") means any and every taking (whether
temporary or permanent) for any public or quasi-public purpose, by any
Government Entity by exercise of condemnation or eminent domain (or any transfer
or conveyance by agreement in lieu thereof).
"Damage" means any and all damage or destruction resulting from fire
or other casualty.
"Employee" means an officer, director, employee, partner, agent,
contractor, subcontractor, or representative.
"Encumbrance" means any and every lease, security interest, charge,
covenant, restriction, lien, mortgage, or other encumbrance of any kind
whatsoever.
"Expiration Date" means the last day of the sixth (6th) month after
the eleventh (11th) anniversary of the Commencement Date.
"Fees-And-Costs" means fees and expenses of attorneys, architects,
engineers, expert witnesses, contractors, consultants and other Persons and
costs of transcripts, printing of briefs and records, copying, and other
reimbursable expenses charged by any of the foregoing.
-1-
<PAGE>
"Government Entity" means the United States, the State, the City, and
any and every other agency, department, commission, rule-making body, bureau,
instrumentality and/or political subdivision of government of any kind
whatsoever, now existing or hereafter created, now or hereafter having
jurisdiction over the Premises, the Land, the Building, and/or the use,
occupancy, possession, operation and/or maintenance of the Premises, the Land
and/or the Building.
"Indemnitees" means Landlord, Landlord's Affiliates, and Managing
Agent.
"Insurance Requirement" means any rule, regulation, code, or other
requirement issued by any fire insurance rating bureau or any body having
similar functions and/or any insurance company which has issued a policy of
insurance covering the Premises, the Land and/or the Building, as in effect from
the date of this Lease through the Expiration Date.
"Interest Rate" means a rate per annum equal to the lesser of (a) 2%
above the so-called "prime rate" of Citibank, N.A., New York, New York, as
publicly announced from time to time (or if Citibank, N.A. shall cease to exist
or cease to announce such rate, any similar rate which is publicly announced
from time to time by any other bank in the City having total assets in excess of
$500 million and designated by Landlord in writing); or (b) the maximum rate of
interest, if any, which Tenant may legally contract to pay in the State.
"Landlord" means only the owner (or mortgagee in possession) of the
Land and the Building (or the holder of a lease of the Land and/or the entire
Building) for the time being.
"Landlord's Affiliates" means (i) any corporation controlling Landlord
and any parent corporation controlling the same (whether directly or
indirectly); (ii) any corporation controlled by Landlord and any corporation
controlled by the same (whether directly or indirectly); (iii) any Person which
acquires substantially all of the assets of Landlord or any corporation into
which Landlord may be merged or with which Landlord may be consolidated; and
(iv) all Employees of Landlord and of every corporation referred to in (i), (ii)
and (iii) above.
For purposes of this definition, "control" means the ownership of more than
twenty per cent (20%) of the common stock of a corporation or the beneficial
ownership of an unincorporated enterprise.
"Law" or "Laws" means each and every law, rule, regulation, order,
ordinance, statute, requirement, code, or executive mandate of any kind
whatsoever, present or future, issued by any Government Entity applicable to or
affecting the Premises, the Land, the Building, and/or the use, occupancy,
possession, operation, and/or maintenance of the Premises, the Land and/or the
Building.
"Legal Proceeding" means every action, litigation, summary proceeding,
arbitration, administrative proceeding, and other legal or equitable proceeding
of any kind whatsoever.
"Lien" means any and every lien of any kind whatsoever for the
furnishing (or alleged furnishing) of (or on account of) labor, materials,
services, facilities, or any other things whatsoever.
"Operating Year" means each calendar year which includes any part of
the Term.
"Person" means an individual person, corporation, partnership, trust,
joint venture, proprietorship, estate or other incorporated or unincorporated
enterprise, entity, or organization of any kind whatsoever.
"Premises" means and includes the Premises and/or every part or
portion thereof. For the purposes of this Lease, the Premises shall be deemed to
contain 15,420 square feet of space, and Landlord and Tenant conclusively accept
such figure as correct.
"Rent" or "Rents" means, collectively, Fixed Rent and Additional Rent.
"Required Insurance" means the insurance coverage required to be
provided by Tenant under Article 13 hereof, and the Alterations Insurance
required under Section 10.6 hereof.
"Restoration" (or "Restore") means and includes any and all repairs,
additions, restorations, rebuilding, construction, alterations, improvements and
replacements of every kind (whether structural or otherwise).
"Senior Encumbrance" means the following (a) any and every mortgage
now a lien, or hereafter becoming a lien, upon the Land or the Building, and (b)
any lease presently or hereafter in effect between Landlord, as lessee or
tenant, and any owner of the Land or the Building.
"State" means New York State.
"Substantially Complete" or "Substantial Completion" means that the
work in question is complete, except for (a) minor or insubstantial details of
construction, decoration, or mechanical adjustment; and/or (b) portions of the
Building Standard Work which cannot be completed until after completion of
Tenant's Initial Work.
-2-
<PAGE>
"Tax Year" means the fiscal year of the City, commencing on July 1 and
expiring on June 30 in each year (as modified by the City from time to time).
"Tenant's Percentage" means 4.90%.
1.1. Certain other terms and phrases are defined elsewhere in this
Lease and/or the Exhibits hereto.
1.2 Wherever used in this Lease,
(a) the words "include" or "including" shall be construed
as incorporating "BUT NOT LIMITED TO" or "WITHOUT
LIMITATION";
(b) the phrase "at Tenant's expense" means at the sole and
exclusive expense of Tenant, who shall be responsible
for all costs involved in, or associated with, the
applicable matter; and
(c) the phrase "in Landlord's judgment" means in Landlord's
sole and exclusive discretion and judgment.
1.3. Wherever this Lease imposes any obligation upon Tenant, or
provides that Tenant shall be responsible for any action or matter, the Lease
shall be construed to mean that Tenant shall perform or undertake the matter at
Tenant's expense, unless expressly specified otherwise.
ARTICLE 2. Term; Commencement Date.
-----------------------
2.1. Landlord hereby leases to Tenant and Tenant hereby hires from
Landlord, the Premises for a term (the "Term") of approximately eleven (11)
years and six (6) months commencing at 12:00 a.m. on the Commencement Date and
expiring at 11:59 p.m. on the Expiration Date (or on such earlier date as the
Lease may otherwise terminate in accordance with its terms, covenants,
conditions and provisions).
2.2. "Commencement Date" means the earlier of:
(a) the date when Landlord Substantially Completes the
Building Standard Work and the Tenant's Initial Work
(other than any work which cannot be completed on such
date provided that the failure to complete such work
will not substantially interfere with Tenant's use of
the Premises);
(b) the date when Tenant, any Employee of Tenant, or any
Person holding by, through, or under Tenant, first
occupies the Premises;
provided, however, that if Landlord shall be delayed in Substantial Completion
of the Building Standard Work and the Tenant's Initial Work as a result of (i)
Tenant's failure to agree to plans and specifications before the date required
under this Lease, (ii) Tenant's request for materials, finishes or installations
other than Building Standard Work, (iii) any Tenant changes in plans, or (iv)
the performance or completion by a Person employed by Tenant; then the
Commencement Date and the payment of Rent hereunder shall be accelerated by the
number of days of such delay.
2.3. Landlord shall give Tenant written notice specifying when the
Commencement Date has occurred. At either party's request, the other shall
execute a written agreement confirming the Commencement Date. Tenant's failure
to agree in writing shall not invalidate the Commencement Date as determined by
Landlord.
ARTICLE 3. Fixed Rent; Additional Rent
---------------------------
3.1. (a) Tenant agrees to pay Landlord fixed rent ("Fixed Rent")
at the annual rate of Five Hundred Thirty-Nine Thousand Seven Hundred Dollars
($539,700.00) in equal monthly installments of Forty-Four Thousand Nine Hundred
Seventy-Five Dollars ($44,975.00) for the period from the Commencement Date
through the expiration of the Term in advance on the first day of each and every
calendar month.
(b) Notwithstanding anything contained herein to the
contrary, provided Tenant shall not be in default beyond applicable grace and
notice periods of its obligations under this Lease, Tenant shall be entitled to
an abatement of the Fixed Rent payable hereunder for a period of eighteen (18)
months (the "Abatement Period") after the Commencement Date.
(c) The entire Fixed Rent otherwise due and payable for the
Abatement Period shall become immediately due and payable upon the occurrence of
a default beyond applicable grace and notice periods by Tenant under this Lease.
-3-
<PAGE>
3.2. If the Commencement Date falls on any day other than the first
day of a calendar month, the installment of Fixed Rent for such calendar month
shall be prorated on a per diem basis, which Tenant shall pay on the
Commencement Date. Tenant has paid one full month's installment of Fixed Rent to
Landlord upon execution of this Lease.
3.3. Tenant agrees to pay as additional rent ("Additional Rent")
all sums of money, costs, expenses, charges, interest, or fees (including all
Fees-And-Costs) of every kind or amount whatsoever, other than Fixed Rent, which
Tenant has assumed or agreed to pay to Landlord, or which otherwise may become
due and payable by Tenant, under this Lease. Unless otherwise specified, Tenant
shall pay all Additional Rent within five (5) days after Landlord's demand.
Landlord shall have the same rights (and remedies) to terminate this Lease
and/or to recover possession of the Premises for Tenant's failure to pay
Additional Rent as for Tenant's failure to pay Fixed Rent.
3.4. Tenant shall pay Fixed Rent and all Additional Rent in lawful
money of the United States by unendorsed check drawn to Landlord's order on a
bank or financial institution which is a member of the New York Clearinghouse
Association in the City.
3.5. Tenant shall pay all Rents due Landlord at the office of
Landlord at c/o M.S. Management Associates, Inc., One Merchant Plaza, P.O. Box
7033, Indianapolis, Indiana 46207, or at such other place as Landlord may
designate by notice to Tenant from time to time.
3.6. Tenant shall pay all Fixed Rent and Additional Rent promptly
when due and payable, without notice or demand, and without offset, deduction,
credit, abatement, or counterclaim of any kind or for any reason whatsoever
(unless, however, specifically permitted elsewhere in this Lease).
3.7. If Tenant fails to pay any installment of Fixed Rent or any
amount of Additional Rent for more than ten (10) days after the same is due,
Tenant shall pay interest thereof at the Interest Rate from the date when due
through the date of payment.
3.8 If Tenant fails to make any payment required by this Lease
(other than Rent), or if Tenant fails to keep or perform any other term,
covenant, condition or provision of this Lease, or if this Lease provides in any
case that Landlord may take certain actions at Tenant's expense, Landlord may
(at Landlord's election) (a) make any such payment; and/or (b) take such action
as Landlord deems necessary or desirable (in Landlord's judgment) to perform and
fulfill such term, covenant, condition or provision.
Tenant agrees to reimburse Landlord, upon demand, for any such payment, and/or
for all amounts so paid or incurred by Landlord (including all Fees-And-Costs),
together with interest on each such amount at the Internal Rate from the date of
Landlord's demand.
3.9. If any Fixed Rent or any Additional Rent shall be or become
uncollectible by virtue of any Laws, Tenant shall enter into such agreement or
agreements and take such other action as Landlord may request to permit Landlord
to collect the maximum Fixed Rent and Additional Rent which may, from time to
time during the continuance of such restriction, be legally permissible, but not
in excess of the amounts due hereunder. Upon the termination of such
restriction, (a) the Fixed Rent and Additional Rent shall become payable in
accordance with the terms of this Lease and (b) Tenant shall pay Landlord, if
legally permissible, an amount equal to (i) the Fixed Rent and Additional Rent
which would have been payable hereunder but for the restriction, less (ii) the
amounts paid by Tenant to Landlord during the period that such rent restriction
was in effect.
ARTICLE 4. Option.
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4.1. Provided that this Lease is then in full force and effect, and
Tenant is not in default hereunder, Tenant shall have an option (the "Option")
to renew the term of this Lease for one additional period of three (3) years and
six (6) months (the "Renewal Term"), which term shall commence at 12:00 a.m.
immediately following the Expiration Date of the original Term and expire at
11:59 p.m. on the date which is three (3) years and six (6) months after the
commencement date of the Renewal Term or such earlier date upon which this Lease
may be terminated as herein provided. Tenant may only exercise this Option by
giving written notice to Landlord of its intent to renew this Lease pursuant to
this Section 4.1 not less than twelve (12) calendar months prior to the
Expiration Date. Notwithstanding the foregoing, Tenant shall not have the right
to extend the term of this Lease for the Renewal Term if a default shall have
occurred beyond the expiration of any applicable notice and cure periods and
otherwise have not been cured on or before the date on which notice of renewal
is given by Tenant or on the date preceding the Expiration Date, as the case may
be. Time shall be of the essence with respect to the exercise of Tenant's notice
to renew. The Renewal Term shall be upon all of the terms and conditions of this
Lease, except that (a) the Fixed Rent for the Renewal Term shall be as
determined pursuant to Section 4.2, (b) the Expiration Date shall be deemed
extended as hereinabove described and (c) Tenant shall have no further right or
option to renew or extend the term of this Lease.
4.2. In the event Tenant exercises its Option pursuant to Section
4.1, then Tenant agrees to pay Landlord Fixed Rent for the Renewal Term at the
annual rate of Six Hundred Forty-Seven Thousand Six Hundred Forty Dollars
($647,640.00) in equal monthly installments of Fifty-Three Thousand Nine
Hundred Seventy
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Dollars ($53,970.00) for the period from the commencement of the Renewal Term
through the expiration of the Renewal Term.
4.3. In the event Tenant exercises its Option pursuant to Section 4.1
for the Renewal Term, the definition of Base Rate and Base Tax shall not change
for the Renewal Term.
ARTICLE 5. Tax Payment.
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5.1. Tenant shall pay Landlord as Additional Rent for each Tax Year
an amount (the "Tax Payment") equal to Tenant's Percentage of the EXCESS of
Taxes for such Tax Year over the Base Tax. The Tax Payment shall be payable in
equal semi-annual installments on the first day of each December and June.
5.2. In this Lease "Taxes" means a sum equal to one-third (1/3) of
ANY AND ALL OF THE FOLLOWING imposed under the Laws of the City, the State, or
any other Government Entity upon or with respect to the Land or the Building:
(a) real and personal property taxes;
(b) general and special assessments;
(c) water, water meter, sewer rents, rates and charges, and
all costs and charges (if any) for installing,
repairing, or replacing water meters;
(d) excises, levies, licenses and permit fees;
(e) service charges, if any, with respect to police and
fire protection, security, or street maintenance and
lighting;
(f) fees and charges for construction, maintenance,
occupancy or use of any vault, passageway or space in,
on, over, or under the street or sidewalks adjacent to
the Land or the Building, or for the construction,
maintenance or use of any part of the Land or the
Building within the limits of any street;
(g) other levies, fees, rents, assessments, taxes and
charges, general or special, ordinary or extraordinary,
foreseen or unforeseen, or any kind or nature
whatsoever;
(h) all increases in any of the foregoing, whether
resulting from increases in rates, reassessments, or
otherwise, and whether ordinary or extraordinary,
foreseeable or unforeseeable; and
(i) all Fees-And-Costs incurred by Landlord to contest (or
defend against) any of the foregoing.
If, by reason of any change in the method of taxation or in the applicable
Government Entity, a new or additional real estate tax, or a franchise, income,
transit, profit or other tax or governmental imposition, however designated, is
levied against Landlord, the Land, the Building, or the Premises, in addition to
(or in substitution in whole or in part for) any item previously included in
"Taxes", or in lieu of additional Taxes, such new, additional, or redesignated
item shall be included in "Taxes". The term "Taxes" shall not include income,
franchise or estate taxes.
5.3. Landlord shall furnish Tenant a written statement of the Tax
Payment for each Tax Year (each such statement, a "Tax Statement"). If Landlord
issues a Tax Statement after the beginning of the applicable Tax Year (a) until
such Tax Statement is rendered, Tenant shall pay the Tax Payment for such Tax
Year in installments based upon the most recent Tax Statement rendered to
Tenant; and (b) within ten (10) days after receiving a new Tax Statement, Tenant
shall pay Landlord an amount equal to any underpayment for such Tax Year (and,
in the event of an overpayment by Tenant, Landlord shall permit Tenant to credit
against subsequent payments under this Section 5.3 the amount of such
overpayment).
5.4. If the Taxes for any Tax Year change, whether during or after
such Tax Year, Landlord may give Tenant a revised Tax Statement for such Tax
Year, and Tenant's Tax Payment for such Tax Year shall be adjusted and paid or
credited, as appropriate, in accordance with Section 5.3(b).
5.5. If at any time, Taxes are required to be paid in annual,
monthly, quarterly, or other installments, or on any date or dates other than as
presently required, whether to any Government Entity or in escrow under any
Senior Encumbrance, then, at Landlord's option, the Tax Payments shall be
correspondingly rescheduled so that Tenant's Tax Payments are due at least
thirty (30) days before such payments are due. Tenant shall receive no discount
or credit as the result of any prepayment of Taxes.
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5.6 If Landlord receives a refund of Taxes for any Tax Year, Landlord
shall credit Tenant's Percentage of the refund (after deduction of Landlord's
Fees-and-Costs incurred in obtaining the same) received by Landlord (without
interest other than interest actually received by Landlord as part of such
refund) against Tenant's next succeeding Tax Payment(s).
5.7 A Tax Payment covering any fiscal period which includes a period
BEFORE the Commencement Date or AFTER the Expiration Date shall be apportioned
between Landlord and Tenant on a per diem basis and, subject to later adjustment
based on the Tax Statement, shall be paid on the Commencement Date or the
Expiration Date, as the case may be.
5.8 Tenant shall pay Landlord, upon demand, any occupancy tax or rent
tax which Landlord is now or subsequently required to pay with respect to the
Premises or this Lease.
5.9 This Article shall never apply so as to reduce Fixed Rent. The
rights and obligations of Landlord and Tenant under this Article shall survive
the expiration of the Term or other termination of this Lease; and Tenant shall
pay all amounts due under this Article even if Landlord gives a Tax Statement
after the Expiration Date or any earlier termination of this Lease.
5.10 Landlord's delay in rendering a Tax Statement with respect to any
Tax Year shall not prejudice Landlord's right thereafter to render a Tax
Statement with respect to that (or any other) Tax Year so long as Landlord
delivers the Tax Statement to Tenant within two (2) years after the Taxes in
question are due and payable.
5.11 Only Landlord shall be eligible to institute proceedings to
contest the Taxes or reduce the assessed valuation of the Land and the Building.
Landlord shall be under no obligation to contest the Taxes or the assessed
valuation of the Land and the Building for any Tax Year or to refrain from
contesting the same, and may settle any such contest on such terms as Landlord
in its sole judgement considers proper. In the event Landlord elects not to
contest the Taxes or reduce the assessed valuation of the Land and the Building,
Tenant shall be entitled to request a reasonable explanation by Landlord why it
has not contested such matters, but shall not, under any circumstances, be
permitted to initiate such contest or require Landlord to initiate such contest.
5.12. (a) Tenant understands that Landlord is seeking benefits under
the Industrial and Commercial Incentive Program (the "Program") as defined and
described in Sections 11-256 through 11-266 of the Administrative Code of the
City of New York, and the regulations promulgated thereunder. Tenant recognizes
that in connection with Landlord's receipt of benefits under the Program,
Landlord and Tenant must comply as required, and cause contractors,
subcontractors, materialmen and suppliers engaged in constructing or installing
any improvements or fixtures in the Building, to comply with regulations
promulgated pursuant to the Program as required with respect to the employment
and training of employees engaged in such construction and installation. In
furtherance of Tenant's compliance with the Program and the regulations
promulgated thereunder, Tenant agrees (i) to report to Landlord from time to
time, upon request, the number of workers permanently engaged in employment at
the Premises, the nature of each worker's employment and the New York City
residency of each and (ii) to provide access to the Premises by employees and
agents of any Government Entity enforcing the Program at all reasonable times if
and when requested by Landlord.
(b) Tenant shall not be required to pay Taxes or other charges
which become due because of the willful neglect or fraud by Landlord in
connection with the Program or otherwise to relieve or indemnify Landlord from
any personal liability arising under the Program except where imposition of such
Taxes, charges, or liability is occasioned by actions of Tenant in violation of
this lease or the Program.
(c) Tenant acknowledges that Tenant's failure to comply fully
with each and every provision of the Program or the regulations promulgated
thereunder may cause Landlord to lose some or all of the benefits of the Program
and that such loss will be very substantial. Tenant shall furnish to Landlord
simultaneously with the transmission thereof to any agency charged with
administration of the Program true copies of any and all documents submitted or
required to be submitted by Tenant, its contractors or subcontractors, in
connection with the Program. Tenant acknowledges that it has received a copy of
the Program and the regulations promulgated thereunder as of the date hereof.
(d) Tenant acknowledges and agrees that Landlord may at any
time, in its sole discretion, withdraw from or decline to participate in this
Program.
ARTICLE 6. Wage Rate Escalation.
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6.1. In this Lease:
(a) "Wage Rate" shall mean the average of the minimum hourly
wage rates for a regular 40-hour week with respect to
Porters (inclusive of any overtime or premium pay work in
such regular work week), together with all payroll taxes
calculated on such minimum hourly rate required to be paid
for Porters in Class "A" office buildings, established by
the Realty/Advisory Board on Labor Relations, Incorporated
and Locals 32B/32J of the Service Employees
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International Union AFL-CIO; or their successors (the
"Labor Agreement") in effect as of December 1st of each
Operating Year; provided, however, that (i) if there is no
Labor Agreement in effect prescribing a Wage Rate for
Porters on December 1, 1993 or on December 1 of any
Operating Year, computations and payments shall be on the
basis of the regular hourly Wage Rate actually payable to
or on behalf of Porters by Landlord's service contractors
over a 40-hour week, in effect as of December 1st of each
such year, and (ii) if in any Operating Year the regular
employment of Porters shall occur on days or during hours
when overtime or other premium pay rates are in effect
pursuant to the Labor Agreement, then the term "hourly
rate of wages" as used herein shall be deemed to mean the
average hourly wage rate for the hours in a calendar week
during which Porters are regularly employed (e.g., if
pursuant to the Labor Agreement the regular employment of
Porters for forty hours during the calendar week is at a
regularly hourly wage rate of $3.00 for the first thirty
hours, and premium or overtime hourly wage rate of $4.50
for the remaining ten hours, then the hourly rate of wages
under this Article during such period shall be the total
week rate of $135.00 divided by the total number of
regular hours of employment, forty, or $3.375).
(b) "Porters" shall mean that classification of employee
engaged in the general operation and maintenance of Class
"A" office buildings most nearly comparable to the
classification of porters in the Labor Agreement.
(c) "Basic Rate" shall mean the Wage Rate in effect as of
December 1, 1993.
6.2. If, in any Operating Year during the Term, the Wage Rate shall
exceed the Base Rate, Tenant shall pay as Additional Rent that amount equal to
the sum obtained by multiplying the number 15,420 by the number of cents by
which the Wage Rate exceeds the Base Rate (i.e., the number of cents, including
any fraction of a cent of any increase in such hourly rate multiplied by
15,420)(the "Wage Rate Escalation").
6.3. (a) The amount of Additional Rent payable pursuant to Section
6.2 shall be fixed as of the effective date of such increase or decrease in the
Wage Rate, and Tenant shall pay in equal monthly installments one-twelfth
(1/12th) of the amount of such adjustment until a new adjustment becomes
effective pursuant to the terms of this Article. If the adjustment in the
Additional Rent pursuant to Section 6.4 affects months for which Tenant has
already paid the monthly installment of Additional Rent, the amount of the
increase for such months shall be paid by Tenant to Landlord, as Additional Rent
hereunder, within ten (10) days of receipt of the statement referred to in
Section 6.4 hereof.
(b) Any such adjustment for less than a year or for less than
a month shall be prorated over the applicable period.
6.4. Landlord may give Tenant a written statement for each Operating
Year setting forth Landlord's estimate of Tenant's Wage Rate Escalation for such
Operating Year ("Landlord's Estimate"). Tenant shall pay Landlord an amount
equal to one-twelfth (1/12th) of Landlord's Estimate on the first day of each
and every month during the Operating Year. If Landlord delivers Landlord's
Estimate after an Operating Year begins, then:
(a) until the first of the month after the month in which
Tenant receives Landlord's Estimate, Tenant shall pay Landlord an amount equal
to the monthly sum payable by Tenant under this Section for the last month of
the preceding Operating Year; and
(b) on the first day of the month following the month in which
Tenant receives Landlord's Estimate (and monthly thereafter for the balance of
such Operating Year), Tenant shall pay Landlord an amount equal to one-twelfth
(1/12th) of Landlord's Estimate.
Landlord may revise Landlord's Estimate for a particular Operating Year (but not
more often than three times as to any Operating Year). In such event the Wage
Rate Escalation payment for such Operating Year shall be adjusted and Tenant
shall pay any underpayment within ten (10) days after receiving any revised
Landlord's Estimate, or Tenant shall receive a credit for any overpayment
against subsequent payments.
6.5. After the end of each Operating Year Landlord shall submit to
Tenant a written statement (each such, a "Wage Rate Escalation Statement")
prepared by an independent firm of certified public accountants selected by
Landlord (the "Accountants") setting forth the Wage Rate Escalation for the
preceding Operating Year and the balance of Tenant's Wage Rate Escalation
payment (if any) due from Tenant for such Operating Year. If Tenant's payments
under Section 6.4 have exceeded the Wage Rate Escalation payment for such
Operating Year, Tenant shall receive a credit for such excess against subsequent
payments under this Article. If Tenant's prior payments were less than the Wage
Rate Escalation payment for such Operating Year, Tenant shall pay Landlord the
deficiency within ten (10) days after receipt of the Wage Rate Escalation
Statement. Landlord's annual Wage
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Rate Escalation Statements under this Section shall be in reasonable detail but
need not be audited or certified by the Accountants. The Accountants may rely
on Landlord's reasonable allocations and estimates of costs and expenses where
allocations or estimates are necessary or practicable.
6.6. This Article shall never apply so as to reduce Fixed Rent. The
rights and obligations of Landlord and Tenant under this Article shall survive
expiration of the Term or other termination of this Lease; and Tenant shall pay
all amounts due under this Article even if Landlord gives a written statement of
Wage Rate Escalation after the Expiration Date or any earlier termination of
this Lease.
6.7. Landlord's delay in rendering a Wage Rate Escalation Statement
for any Operating Year shall not prejudice Landlord's right thereafter to render
a Wage Rate Escalation Statement with respect to that (or any other) Operating
Year so long as Landlord delivers the Wage Rate Escalation Statement to Tenant
within two (2) years after the Wage Rate Escalation in question was due and
payable.
6.8. Each Wage Rate Escalation Statement shall be conclusive and
binding upon Tenant unless within thirty (30) days after receipt Tenant notifies
Landlord that Tenant disputes the correctness of such Wage Rate Escalation
Statement, specifying the particular respects in which the same Wage Rate
Escalation Statement is allegedly incorrect. Pending the determination of any
such dispute, Tenant shall make all payments in accordance with the disputed
statement without prejudice to Tenant's position.
ARTICLE 7. Electricity.
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7.1. Subject to the provisions of this Lease, Landlord shall provide
for the furnishing of electric current to the premises in accordance with the
provisions of Section I.B.1.a. of Exhibit E of this Lease. As provided therein,
Landlord shall, at Tenant's sole cost and expense, install a meter or meters
(collectively, the "Submeter"), at a location designated by Landlord, to measure
Tenant's consumption of and demand for electric current. If and so long as
electric current is supplied by Landlord to the Premises, Tenant will pay
Landlord or Landlord's designated agent, as Additional Rent for such service
(the "Electricity Additional Rent"), a sum determined by computing the electric
utility's charges directly from the utility to Landlord and in proportion to
Tenant's consumption and demand (including Tenant's actual portion of any fuel
adjustment charges, rate adjustment charges, sales tax, and/or any other charges
used by the electric utility in computing its charges to Landlord) and adding to
such amount a fee (the "Overhead Charge") equal to the greater of (x) six
percent (6%) of such amount representing administrative and overhead costs of
Landlord, or (y) Tenant's Percentage of Landlord's actual administrative
overhead charges (together with supporting documentary evidence of such charges)
but in no event to exceed fifteen (15%) percent of such amount. In the event
the Overhead Charge exceeds six percent (6%), Tenant shall be permitted to audit
Landlord's books and records pertaining to the Overhead Charge.
7.2. The amounts measured by the Submeter shall be binding and
conclusive on Tenant. If the Submeter should fail to properly register or
operate at any time during the term of this Lease for any reason whatsoever,
Landlord may estimate the Electricity Additional Rent for such period. The
period to be used for the aforesaid computation shall be as Landlord, in its
sole discretion, may from time to time elect. Where more than one meter
measures the electric service to Tenant, the electric service rendered through
each meter may be computed and billed separately, as set forth above or
cumulatively, at Landlord's option. Bills for the Electricity Additional Rent
shall be rendered to Tenant at such time as Landlord may elect.
7.3. (a) If Landlord is required by Law, the utility or Insurance
Requirements to discontinue furnishing electricity to Tenant on a submetering
basis, then Landlord may (but shall not be obligated to) elect in writing to
continue to furnish electricity to Tenant and in such event Tenant shall pay
Landlord the Electricity Additional Rent for such electric service as if such
electricity was provided on a submetering basis as in Section 7.2 above;
provided that Tenant's consumption and demand shall be determined based on an
electrical survey made by an electrical consultant selected by Landlord (the
"Consultant"), which Consultant shall then compute in the Electricity Additional
Rent then payable in accordance with the other provisions of this Article 7.
(b) If no survey has yet been performed under this Section 7.3,
Tenant's monthly consumption and demand shall be deemed to equal its average
monthly consumption and demand for the prior twelve-month period (or since the
Commencement Date if such date occurred within the past year).
(c) The Consultant may resurvey the Premises from time to time
and adjust the Electricity Additional Rent accordingly.
(d) The determinations made by the Consultant shall be binding
and conclusive on Landlord and Tenant from and after the delivery of copies of
such determinations to Landlord and Tenant, unless within fifteen (15) days
after the delivery of such copies, Tenant disputes such determination by having
an independent reputable electrical consultant, selected and paid for by Tenant,
consult with Landlord or its consultant as to said determinations. If they shall
both agree upon the same, their said agreement shall be binding upon the
parties, or if the difference between them in the computation of the Electricity
Additional Rent is ten (10%) percent or less of the determinations made by the
Consultant, then the determinations made by the Consultant shall be binding upon
the parties. If Landlord or the Consultant and Tenant's consultant cannot agree
within the said ten (10%) percent of each other, they shall jointly select a
third duly qualified independent, reputable electrical
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consultant who shall determine the matter and whose decision shall be binding
upon both parties with the same force and effect as if a non-appealable
judgement has been entered by a court of competent jurisdiction. If Landlord or
the Consultant and Tenant's consultant cannot agree upon such a third electrical
consultant, the matter shall be submitted to the American Arbitration
Association in the City to be determined in accordance with its rules and
regulations and the decision of the arbitrators shall be binding upon the
parties with the same force and effect as if a non-appealable judgment had been
entered by a court of competent jurisdiction. Any charges of such third
consultant or of the American Arbitration Association and all costs and expenses
of either shall be borne equally by both parties. When the amount of the
Electricity Additional Rent has been determined, the parties shall execute an
agreement supplementary hereto to reflect such Electricity Additional Rent
effective from the date determined by such electrical consultant as aforesaid.
Notwithstanding the foregoing, until such final determination, Tenant shall pay
such Additional Rent to Landlord in accordance with the determinations made by
the Consultant. After such final determinations, the parties shall make
adjustment for any deficiency owed by Tenant or any overage paid by Tenant.
7.4. Landlord may adjust to Electricity Additional Rent from time to
time (without additional survey, if applicable) to reflect changes in the
utility's charges to Landlord as specified in Section 7.1 and in any tax charges
as specified in Section 7.5.
7.5. If any tax is imposed upon Landlord's receipts from the sale or
resale of electric current to Tenant by any Government Entity, Tenant agrees
that, unless prohibited by law, such taxes shall be passed on to, and included
in the bill of, and paid by tenant to Landlord as Additional Rent.
7.6. Tenant's use of electric current in the Premises shall not
exceed the capacity of any electrical conductors and equipment in or otherwise
serving the Premises.
7.7. Landlord shall not be liable to Tenant for any reduction in
service, failure, or defect in the supply or character of electric current
furnished to the Premises where such reduction in service, failure, or defect is
required by Laws or results from any requirement, act or omission of the public
utility supplying electricity to the Building or for any other reason
whatsoever. If required by Consolidated Edison, Laws or Insurance Requirements,
Landlord may discontinue the delivery of electricity and/or the use of submeters
and in such event Landlord shall permit Tenant to purchase electricity directly
from Consolidated Edison or other public utility.
7.8. Tenant agrees that at no time will the connected electrical
load in the Premises exceed six (6) watts per square foot.
7.9. Intentionally omitted.
7.10. In the event that pursuant to any of the provisions of this
Article, any initial determinations, statements or estimates are made by or on
behalf of Landlord (whether such initial determinations, statements or estimates
are subject to dispute or not pursuant to the provisions of this Article),
Tenant shall pay to Landlord the amount(s) set forth on such initial
determinations, statements or estimates, as the case may be, until subsequent
determinations, statements or estimates are rendered, at which time the parties
shall make adjustment for any deficiency owed by Tenant, or any overage paid by
Tenant.
7.11. (a) For purposes of this Section 7.11, the following terms
shall have the following meanings:
i) The term "Landlord's Cost", shall mean the average cost
per kilowatt hour and average cost per kilowatt demand, by time of
day, if applicable, to Landlord of purchasing electricity for the
building, including, without limitation, fuel adjustment charges (as
determined for each month of the relevant period and not averaged)
rate adjustment charges, sales tax, and/or any other factors, used by
the public utility company (the "Utility") servicing the Building in
computing its charges to Landlord applied to the kilowatt hours of
energy and kilowatts of demand purchased by Landlord during a given
period, and further including transmission and transformer losses (to
be determined by Landlord if such losses are not measured by the
Submeter, as defined herein);
ii) The term, "Common Area Electric Costs", shall mean
Landlord's Cost for all electricity used in maintaining, operating and
lighting all the public and service areas of the entire Building,
including, without limitation, electricity used to operate house
pumps, ejector pumps, elevators, corridor lighting, exterior
lighting, central or package type air conditioning systems of the
Building, and all space in the Building not leased to tenants (but
shall not include any cost Landlord is responsible for pursuant to
Section 18.4);
iii) The term "Landlord's Statement", shall mean an
instrument containing a computation (or estimate thereof), of
Landlord's Cost, the Common Area Electric Payment (hereinafter
defined), or any other computation to be made by Landlord pursuant to
the provisions of this Section 7.11; and
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iv) The term "Electric Year", shall mean any calendar year
which shall include any part of the term of this Lease.
(b) In addition to all other sums payable by Tenant to
Landlord pursuant to the provisions of this Article 11, and regardless of the
manner of service of electric current to the Premises (whether by submetering or
direct meter), Tenant shall pay to Landlord, as additional rent (the "Common
Area Electric Payment"), an amount equal to Tenant's Percentage of the Common
Area Electric Costs for each Electric Year.
(c) Landlord shall furnish to Tenant, prior to the
commencement of each Electric Year, an Landlord's Statement setting forth
Landlord's estimate of the Common Area Electric Payment for such Electric Year.
Tenant shall pay to Landlord on the first day of each month during such Electric
Year an amount equal to one-twelfth (1/12th) of Landlord's estimate of the
Common Area Electric Payment for such Electric Year. If, however, landlord shall
furnish any such estimate for an Electric Year subsequent to the commencement
thereof, then i) until the first day of the month following the month in which
such estimate is furnished to Tenant, Tenant shall pay to Landlord on the first
day of each month an amount equal to the monthly sum payable by Tenant to
Landlord under this Section 7.11 in respect of the last month of the preceding
Electric Year; ii) promptly after such estimate is furnished to Tenant or
together therewith, Landlord shall give notice to Tenant stating whether the
installments of the Common Area Electric Payment previously made for such
Electric Year were greater or less than the installments of the Common Area
Electric Payment to be made for such Electric Year in accordance with such
estimate, and (x) if there shall be a deficiency, Tenant shall pay the amount
thereof within ten (10) days after demand therefor, or (y) if there shall have
been an overpayment, Landlord shall permit Tenant to credit the amount thereof
against subsequent payments due and payable under this Section 7.11; and (z) on
the first day of the month in which such estimate is furnished to Tenant, and
monthly thereafter throughout the remainder of such Electric Year, Tenant shall
pay to Landlord an amount equal to one-twelfth (1/12th) of the Common Area
Electric Payment shown on Landlord's Statement. Landlord may at any time or from
time to time, furnish to Tenant a revised statement of Landlord's estimate of
the Common Area Electric Payment for such Electric Year, based on any increase
or decrease in the Common Area Electric Costs, and, in such event, the Common
Area Electric Payment for such Electric Year shall be adjusted and paid or
credited, as the case may be, substantially in the same manner as provided in
the preceding sentence.
(d) After the end of each Electric Year, Landlord shall
furnish to Tenant an Landlord's Statement for such Electric Year which
Landlord's Statement shall be binding and conclusive on Tenant absent manifest
error. If Landlord's Statement shall show that the sums paid by Tenant under
this Section exceeded the Common Area Electric Payment paid by Tenant for such
Electric Year, Landlord shall permit Tenant to credit the amount of such excess
against subsequent payments due and payable under this Section 7.11; and if the
Landlord's Statement for such Electric Year shall show that the sums so paid by
Tenant were less than the Common Area Electric Payment payable by Tenant for
such Electric Year, Tenant shall pay the amount of such deficiency within thirty
(30) days after demand therefor.
(e) If the Commencement Date or the Expiration Date shall
occur on a date other than January 1 or December 31, respectively, any
additional rent payable by Tenant pursuant to this Section 7.11 for the Electric
Year in which such Commencement Date or Expiration Date shall occur shall be
apportioned in that percentage which the number of days in the period from the
Commencement Date to December 31 or from January 1 to the Expiration Date, as
the case may be, both inclusive, shall bear to the total number of days in such
Electric Year. In the event of a termination of this lease, any additional rent
under this Section 7.11 shall be paid or adjusted within thirty (30) days after
submission of an Landlord's Statement. In no event shall fixed rent ever be
reduced by operation of Section 7.11 of this Article 7 and the rights and
obligations of Landlord and Tenant under the provisions of this Article with
respect to any additional rent shall survive the expiration or sooner
termination of this lease.
(f) Landlord's failure to render an Landlord's Statement
with respect to any Electric Year shall not prejudice Landlord's right to
thereafter render an Landlord's Statement with respect thereto or with respect
to any subsequent Electric Year. Nothing herein contained shall restrict
Landlord from issuing an Landlord's Statement at any time there is an increase
in Common Area Electric Costs during any Electric Year or any time thereafter.
ARTICLE 8. Use.
---
8.1. The Premises shall be used solely for executive and general
offices and showroom for Tenant's children's wear business, and for no other
purpose; provided, however, that Tenant may use up to ten (10) sewing machines
to manufacture samples. Notwithstanding the preceding sentence, Tenant shall be
permitted to permit affiliated companies controlled by Tenant to use the
Premises for their childrenswear business.
8.2. Tenant will not:
(a) do anything (or suffer anything to be done) in the
Premises, the Land or the Building which creates danger
to persons or property or which constitutes a public or
private nuisance;
(b) cause or allow any waste, disfigurement or damage, to
the Premises, the Land or the Building;
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(c) permit waste or trash to accumulate in the Premises;
(d) use or allow use of the Premises for any hazardous
purpose;
(e) use or permit the use of the Premises in violation of
Laws or in violation of any Certificate of Occupancy for
the Premises or the Building;
(f) permit the Premises to be used in a manner or anything to
be done, brought into or kept therein which in Landlord's
judgement will or might impair or interfere with (i) the
character, reputation or appearance of the Building as a
first class building; (ii) any Building Services or
maintenance repairs or other servicing of the Land, the
Building or the Premises; or (iii) the use of other areas
of the Land or the Building by Landlord or any other
tenants or occupants of the Building;
(g) use the Premises for any retail purpose whatsoever.
8.3. Landlord shall obtain a temporary certificate of occupancy and
maintain it in full force and effect and shall thereafter obtain a permanent
certificate of occupancy at Landlord's cost and expense. As of the Commencement
Date, there shall be no violation of record or encumbrance affecting the
Premises which would prevent Tenant's use of the Premises for the purposes set
forth in this Lease.
ARTICLE 9. Compliance with Laws.
--------------------
9.1. At Tenant's expense, Tenant shall comply with all Laws.
9.2. To the extent permitted by Law, Tenant may in good faith
contest, at Tenant's expense and by appropriate proceedings, the validity or
effect of any Law (and Tenant may defer compliance during such contest);
provided, however, that (a) Tenant shall first deliver to Landlord a surety
company bond in form and substance satisfactory to Landlord in an amount
equivalent to one hundred per cent (100%) of the cost of full compliance with
the contested Law, which bond shall provide for the payment of all costs of
compliance with such Law and shall indemnify Landlord against all losses, costs,
penalties and interest (including all Fees-And-Costs) which Landlord may suffer
by reason of Tenant's failure to comply (or delay in complying) with such Law;
(b) Tenant shall conduct the contest diligently; and (c) Tenant shall advise
Landlord regularly as to the status of the contest.
9.3. Landlord shall comply with all Laws that relate to the Building
which would, if violated, unreasonably interfere with Tenant's use of the
Premises.
ARTICLE 10. Alterations and Installations.
-----------------------------
10.1. Tenant shall not undertake any Alteration, whether voluntarily
or in connection with a Restoration required by this Lease, unless Tenant
complies with all requirements of this Article.
10.2. Tenant shall not commence any Alteration without Landlord's
prior written consent.
10.3. Landlord will not unreasonably withhold consent to an
Alteration EXCEPT, HOWEVER, any Alteration which will:
(a) alter or affect any portion of the Building Systems or
structure, facade, roof, or foundation of the Building;
(b) detract from the use or character of the Building;
(c) require amendment of any certificate of occupancy for the
Premises or the Building;
(d) interfere with the use or occupancy of Landlord or any
other tenant in the Building; or
(e) require the consent of any insurer under any Required
Insurance or any other policy of insurance covering the
Land or the Building so long as Landlord provides Tenant
with a reasonable explanation of the requirement set forth
in such insurance policies.
Notwithstanding the foregoing, Landlord shall not unreasonably withhold or delay
its consent to an Alteration which redesigns Tenant's internal electrical
outlets or the heating, ventilating and air-conditioning systems so long as such
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alterations do not increase Tenant's consumption of such services and do not
interfere with the proper functioning of the Building Systems.
10.4. With respect to every Alteration (unless Landlord waives such
requirement in writing in any case), Tenant shall cause all necessary designs,
plans and specifications for a proposed Alteration to be prepared at Tenant's
expense by an architect (or engineer, if appropriate) licensed by the State and
shall submit the same to Landlord for Landlord's written approval; provided,
however, that Landlord's approval (if given) shall not imply that the Alteration
is properly designed or complies with Laws.
10.5. With respect to every Alteration:
(a) Tenant shall procure or cause to be procured all permits,
approvals, consents, licenses and filings of any kind required
by Laws.
(b) Tenant shall obtain (and pay any additional costs for) the
consent of any insurer to such Alteration if such consent is
required to keep any Insurance Policy in full force and
effect.
(c) Tenant shall undertake, prosecute, and complete all work in
connection with the Alteration continuously and expeditiously
and in a good and workmanlike manner; and Tenant shall
incorporate in the Alteration only new materials (and
equipment, if applicable) of the best quality specified in the
plans and specifications.
(d) Tenant will inform Landlord in writing of the names of any
contractor subcontractor Tenant proposes to use in the
Premises at least ten (10) days prior to the beginning of work
by such contractor or subcontractor. Tenant shall employ only
contractors approved by Landlord in writing (Landlord shall
provide Tenant with a list of at least three (3) approved
contractors); and any contractor employed by Tenant (and all
subcontractors) shall agree to employ only such labor as will
not result in jurisdictional disputes or strikes or cause
disharmony with other workers employed at the Building. Upon
the happening of any such dispute, strike or disharmony,
Tenant shall immediately upon notice from Landlord discontinue
the labor giving rise thereto. In the event Tenant fails to
do so, Landlord, in addition to any rights available to it
under this Lease and pursuant to Law, shall have the right to
an injunction with or without notice.
(e) Tenant shall pay each contractor, as the work progresses, the
entire cost of supplying the materials and performing the work
shown on Tenant's approved plans and specifications, subject
to a reasonable retainage.
(f) Tenant shall cause the Alteration to be installed in
compliance with Laws.
(g) Tenant represents, warrants and covenants that the Alteration
will:
(i) be of good quality and free from faults and defects,
latent or otherwise;
(ii) be free and clear of Liens;
(iii) conform to the plans and specifications as approved by
Landlord;
(iv) be fit for the intended use and purpose.
(h) Tenant and Tenant's contractors shall allow access for
inspection by Landlord's representatives at all reasonable
times (but this provisions shall not obligate Landlord to
conduct any such inspections).
(i) With respect to any Alteration requiring Landlord's, consent
under Section 10.3, Tenant shall pay Landlord, as Additional
Rent upon demand, an amount equal to five (5%) percent of the
cost of the Alteration, including the cost of all materials
and labor (to reimburse Landlord for review by architects
and/or engineers, field inspection, coordination, and other
indirect costs of Landlord with respect to such Alteration);
provided, however, that Tenant shall not be required to pay
this amount with respect to Tenant's Initial Work. Landlord,
at Tenant's sole cost and expense, shall cooperate with Tenant
in connection with obtaining any government approvals or
permits with respect to such Alteration.
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(j) Tenant shall obtain all necessary asbestos certifications
and comply with the New York City Asbestos Control Law, as
the same may be amended, including the removal of any
materials containing asbestos.
(k) Tenant shall comply with all requirements of the ICIP
Program.
10.6. Before commencing any work with respect to an Alteration,
Tenant shall deliver to Landlord the following, at Tenant's sole expense, each
in a form satisfactory to Landlord and each issued by a surety company or
insurer previously approved in writing by Landlord, and shall maintain the same
until completion of the work:
(a) a payment bond guaranteeing to Landlord and/or Landlord's
assigns Tenant's timely payment for all labor, services,
materials and equipment furnished in connection with the
Alteration or any portion thereof (and to all persons or
firms furnishing the same);
(b) a performance bond guaranteeing to Landlord and/or
Landlord's assigns Tenant's full and faithful completion
of the Alteration in accordance with the plans and
specifications approved by Landlord;
(c) the insurance coverages specified in Section II.A.5. of
Exhibit E of this Lease (the "Alterations Insurance").
With respect to any such Alteration, moreover, Tenant shall cause all work to be
undertaken under the supervision of a licensed architect or licensed
professional engineer reasonably satisfactory to Landlord. Tenant, at its
option, in lieu of the payment and performance bonds discussed above, may
deliver to Landlord (i) a standby letter of credit in form acceptable to
Landlord in an amount equal to at least one hundred ten (110%) percent of the
estimated cost of the Alteration, or (ii) a personal unlimited guaranty of
payment and performance by Jack Benun.
10.7. Landlord shall not be responsible for any labor or materials
furnished to Tenant (other than the matters specified in Exhibit "E"), or for
delays of any kind experienced by Tenant's contractors. No lien for any labor,
materials, or other services or things furnished to Tenant shall attach to or
affect Landlord's estate or interest in the Premises, the Land and/or the
Building. Tenant agrees to discharge, at Tenant's expense (whether by payment,
bonding, or otherwise) every Lien filed against the Premises, the Land and/or
the Building for work claimed to have been done for or materials claimed to have
been furnished to Tenant, within thirty (30) days after receiving notice of the
same. Tenant shall require that all contractors and subcontractors engaged in
connection with Tenant's Alterations indemnify and hold Landlord harmless
against any and all claims for injury to persons or damage to property by reason
of such contractor's or subcontractor's use of the Premises or performance of
the work, including any claims, fines and penalties imposed due to a failure to
comply with Laws.
10.8. If at any time during the term of this Lease, Landlord expends
any sums for alterations or capital improvements to the Land or the Building
which are required to be made pursuant to any Law and required as a result of
Tenant's use and occupancy of the Premises, Tenant shall pay to Landlord, as
Additional Rent, Tenant's Percentage of all of such sums, within ten (10) days
after demand thereof. If, however, the cost of any such alterations or capital
improvements are required to be amortized over a period of time pursuant to
generally accepted accounting principles consistently applied, Tenant shall pay
to Landlord, as Additional Rent, during each Operating Year in which occurs any
part of the term of this Lease, Tenant's Percentage of the reasonable annual
amortization (based upon the shortest useful life of each such improvement),
with interest, of the cost of such alterations or improvements. For purposes of
this Article, the cost of any such alterations or improvements shall be deemed
to include the cost of preparing any necessary plans and the fees for filing
such plans and obtaining necessary approvals. The cost of such alterations or
improvements shall be reasonably substantiated by Landlord to Tenant.
10.9. Notwithstanding anything contained in this Article 10 to the
contrary, Tenant at its sole cost and expense and without the consent of
Landlord may perform non-structural alterations to the Premises including,
without limitation, painting, wallpapering, carpeting, racks and shelving as
Tenant may consider necessary or desirable for the conduct of its business at
the Premises provided Tenant (i) notifies Landlord in writing before commencing
such alteration, (ii) delivers plans and specifications (or a description) of
the work involved in form and substance reasonably acceptable to Landlord, (iii)
complies with all Laws and obtains any permits applicable thereto, (iv) such
alterations do not affect any structural portion of the Building or any Building
Systems and (v) such alteration does not require Tenant to spend more than Fifty
Thousand Dollars ($50,000.00).
ARTICLE 11. Fixtures and Equipment; Tenant's Property.
-----------------------------------------
11.1. All Alterations made and installed by Landlord (including, but,
not limited to, all matters referred to in this Article and in Exhibit "E")
shall be property and shall remain upon the Premises (and be surrendered by
Tenant) at the end of the Term.
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11.2. All Alterations made and installed by Tenant (or at Tenant's
expense) upon or in the Premises which are of a permanent nature and which
cannot be removed without damage to the Premises, the Land or the Building shall
become Landlord's property and shall remain upon (and be surrendered) with the
Premises at the end of the Term. However, Landlord shall have the right, by
written notice given at any time up to ninety (90) days prior to the Expiration
Date, to require Tenant to remove any of such Alterations that were not
consented to by Landlord; and, in such event, Tenant will remove the same, in
accordance with such request and restore the Premises to its original condition
prior to the Expiration Date, excepting only ordinary wear and tear.
11.3. All furniture, furnishings and trade fixtures furnished by
Tenant or at Tenant's expense (including business machines and equipment,
counters, screens, grill work, special panelled doors, cages, partitions, metal
railings, closets, panelling, free standing lighting fixtures and equipment,
drinking fountains, and any other movable property) shall be and remain property
of Tenant which Tenant must remove prior to the Expiration Date.
11.4. If any Alterations or other property which Tenant may or must
remove under Sections 11.2 or 11.3 are not removed prior to the Expiration Date,
Landlord may remove and dispose of the same, at Tenant's expense, and without
any accountability to Tenant.
11.5. Tenant shall repair all damage to the Premises, the Land or the
Building resulting from the installation, moving, or removal of any property of
any kind whatsoever (or reimburse Landlord for Landlord's cost in repairing any
such damage if Tenant fails to do so). This Section shall survive any
termination of this Lease.
11.6. Tenant shall keep records of the cost of all Alterations
costing more than Ten Thousand Dollars ($10,000) in each instance and shall give
copies of such records to Landlord upon request if Landlord requires the same in
connection with any Legal Proceedings relating to the assessed valuation of the
Land or the Building.
ARTICLE 12. Maintenance; Repairs.
--------------------
12.1. Tenant shall maintain the Premises in a good, clean, safe,
sanitary, and orderly condition, as befits similar space in executive and
general offices in a first class office building except for ordinary wear and
tear. Except unless otherwise specifically set forth as Landlord's obligation
under this Lease, Tenant shall make all non-structural repairs of every kind
whatsoever, ordinary or extraordinary, foreseen or unforeseen, in and/or about
the Premises caused by Tenant, its employees, agents and invitees so as, at all
times during the Term, to keep the Premises in such condition. Tenant's
obligations under this Section 12.1 shall include maintenance and repair of all
pipes, lines, ducts, wires, conduits, or other portions of the Building Systems
located in the Premises or within the walls of the Premises, and the interior
and working mechanisms of all windows in the Premises.
12.2. Any work or repairs by Tenant required or permitted with
respect to the Premises under this Lease shall be of a quality and class
befitting similar space in a first class building of similar type. If Tenant
fails to make any such required repairs after fifteen (15) Business Days prior
notice from Landlord, or to commence and diligently prosecute such repairs if
the same cannot be completed within such fifteen (15) Business Days, Landlord
may (but shall not be obligated to) effect the repairs at Tenant's expense and
collect the cost thereof, together with an amount equal to fifteen per cent
(15%) of Landlord's expenditure (to reimburse Landlord for its administrative
expenses) upon demand, as Additional Rent.
12.3. At Landlord's expense, Landlord shall maintain:
(a) the lobby and other public portions of the Building and
the exterior of the Building in good, clean, and orderly
condition, reasonable wear, tear and obsolescence
excepted; and
(b) the Building Systems and all structural portions of the
Building located inside or outside the Premises in working
order and repair so long as such repair(s) are not
required as a result of an act or omission of Tenant or
its agents, representatives, employees or invitees.
12.4. Tenant shall Restore promptly all Damage or injury to the
Premises, the Land and/or the Building caused by the willful acts or negligence
of Tenant or Tenant's Employees or entities.
12.5 Tenant shall not place a load upon any floor of the Premises
exceeding the floor load which such floor was designed to carry and which is
allowed by Laws. Business machines and mechanical equipment used by Tenant
which cause vibration, noise, cold or heat shall be placed and maintained by
Tenant in settings of cork, rubber or spring-type vibration eliminators
sufficient to absorb and prevent such vibration or noise, or prevent
transmission of such cold or heat. Landlord shall be under no obligation to
reduce such vibration, noise, heat or cold. Tenant acknowledges that heating and
air conditioning equipment will cause some vibration, noise, heat or cold which
may be transmitted to the Premises.
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12.6. Except as hereinafter provided, there shall be no allowance to
Tenant for a diminution of rental value (and no liability on the part of
Landlord) by reason of inconvenience, annoyance or injury to business arising
from the making of any maintenance, repairs, Restoration by Landlord, Tenant, or
any other Person in or to the Premises, the Land or the Building. Landlord shall
exercise reasonable diligence to minimize interference with Tenant's business
operations, but shall not (except in the event of an emergency) be required to
perform any maintenance, repairs, Restoration or Alterations on an overtime or
premium pay basic.
12.7. Tenant shall pay all cost, expenses, fines, penalties or
damages, and all additional costs of insurances charged by any insurer under any
insurance policy covering Landlord, the Land, the Building or the Premises
resulting from Tenant's failure to comply with Tenant's obligations under this
Article.
ARTICLE 13. Required Insurance.
------------------
13.1. At Tenant's sole expense, Tenant shall secure and keep in force
the following "Required Insurance" at all times during the Term:
(a) comprehensive general public liability insurance
(including contractual liability coverage recognizing this Lease, and products
and completed operations coverage) containing the so-called "occurrence" clause
(which shall include specifically the Premises and all public areas of the Land
and the Building as they relate to the Premises and Tenant's occupancy thereof)
with coverage limits not less than $5,000,000 per person, person occurrence, for
bodily injury, including death, and personal injury, and $1,000,000 per
occurrence for property damage, or combined single limit of $5,000,000, which
amounts shall be subject to increase from time to time as Landlord may
reasonably request (and within thirty (30) days after Landlord's request, Tenant
shall furnish Landlord with evidence of such increase in coverage); and
(b) "all-risk" insurance protecting against all risk of
physical loss or damage, including without limitation, fire, sprinkler leakage,
backup of sewers, drains and seepage, and plate glass coverage, (including store
fronts) in amounts not less than the actual replacement cost of Tenant's
merchandise, trade fixtures, furnishings, wall coverings, floor coverings,
drapes, equipment and all items of personal property of Tenant located within
the Premises; and
(c) any other insurance coverages commercially available from
time to time at reasonable rates in the locality of the Building generally in
effect among similar buildings and reasonably requested by Landlord.
13.2. All Required Insurance shall be evidenced by valid and
enforceable policies issued by companies (a) licensed to do business in the
State of New York and (b) having a financial size category of not less than XII
and with general policy holders rating of not less than "A" as rated by "Bests"
insurance reports; provided, however, that Tenant's current insurance carrier
"Home Insurance Company" shall be permitted to issue policies for the Required
Insurance so long as they maintain a financial size category of XI and a general
policy holders rating of not less than"A-" as rated by "Bests" insurance
reports. (Each policy providing Required Insurance is referred to in this Lease
as an "Insurance Policy".) All Insurance Policies shall name Landlord as an
additional insured. Tenant shall furnish Landlord with original insurance
certificates evidencing such coverage within ten (10) days from the date hereof
or, at Landlord's request, original policies evidencing such coverage within
ninety (90) days from the date hereof. Each Insurance Policy shall provide that
the same shall not be cancelled except after thirty (30) days' prior notice by
registered mail to Landlord (whether or not such provision is obtainable only by
payment of additional premium). No Insurance Policy shall contain any
endorsement permitting cancellation for default in payment of a loan financing
the premium. The minimum limits of the comprehensive general liability policy of
insurance shall in no way limit or diminish Tenant's liability under Article 27
of this Lease. Landlord shall maintain casualty insurance for the Building in
such amounts as Landlord deems necessary in its sole discretion.
13.3. All policies of insurance carried by Landlord and Tenant shall
include, if available without additional premium, waiver by the insurer of all
rights of subrogation against Landlord or Tenant in connection with any loss or
damage thereby insured against. Neither party (nor its agents, employees or
guests) shall be liable to the other for loss or damage caused by any risk
covered by such insurance, to the extent that policies are obtainable with
such waiver of subrogation. If insurance policies with such waivers are
available only at extra premium, the insured party will given written notice to
the other, who may pay the extra premium for such waiver within thirty (30) days
after the giving of such notice; and the insured party will then secure the
waiver of subrogation. If the release of either Landlord or Tenant in this
Section contravenes any law respecting exculpatory agreements, the party
purportedly released hereunder shall not be released; but such party's liability
shall be secondary to that of the other party's insurer.
13.4. Before any entry upon the Premises by Tenant or Tenant's
Employees, Tenant or Tenant's contractors, as the case may be, shall deliver to
Landlord certificates or, at Landlord's request, original policies, evidencing
that all Required Insurance is then in full force and effect. Such certificates
shall state the expiration date of such insurance. Twenty (20) days prior to the
expiration of any Insurance Policy, Tenant shall deliver to Landlord
certificates or, at Landlord's request, original policies evidencing renewal or
replacement of such Insurance Policy. If Tenant fails to deliver such
certificates or pay the premiums, Landlord may procure and pay for the renewal
or replacement policies after ten (10) days' notice to Tenant. Any such payments
by Landlord shall
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constitute Additional Rent due and payable by Tenant upon demand, with interest
at the Interest Rate from the date of Landlord's payment.
13.5. Tenant and Landlord shall cooperate with each other and with
the holders of any Senior Encumbrances in connection with collection of any
insurance monies.
13.6. Tenant shall not secure separate insurance concurrent in form
or contributing in the event of loss with any Insurance Policy required under
this Lease unless Landlord is included as a named insured with loss payable to
Landlord. Tenant shall give Landlord written notice promptly upon securing any
such separate insurance, specifying the insurer and full particulars of
applicable policies.
13.7. Tenant shall not do or permit to be done any act or thing upon
the Premises which will invalidate or contravene any Insurance Policy or be in
conflict with any Insurance Requirements, or prevent Landlord from obtaining
insurance, or increase the rate of fire insurance applicable to the Building;
and Tenant shall not do nor permit to be done any act or thing upon the Premises
which will or might subject Landlord to any liability or responsibility for
injury to any Person or to property.
13.8. Tenant shall reimburse Landlord, as Additional Rent upon
demand, for all increases of Landlord's insurance premiums resulting from
violations of Tenant's obligations under Section 13.7. In any Legal Proceeding
involving the cost of insurance, a schedule or "mark-up" of rates issued by the
body making insurance rates for the Building or the Premises shall be
presumptive evidence of the items and charges taken into consideration in fixing
the insurance rates then applicable to the Premises or the Building.
13.9. Landlord and Landlord's Affiliates shall not be liable for, and
Tenant waives all claim for, any injury or damage to Persons or property
resulting from any equipment or appurtenances coming out of repair, Landlord's
failure to keep any part of the Land or the Building in repair, fire, explosion,
falling plaster, broken glass, steam, gas, electricity, water, wind, rain, snow
or other natural elements, or leaks from any part of the Building, or from the
pipes, appliances, tanks, plumbing, roof, street, or subsurface, or the backing
up of any sewer pipe or drain downspout, or from any other place, or by dampness
or steam, or from theft or other criminal activity, or from the acts or
omissions of other tenants or occupants or owners of nearby properties, or any
other cause of whatsoever nature, unless any of the foregoing shall be caused by
or due to the negligence of Landlord or Landlord's Affiliates, as applicable.
13.10. If this Lease so permits and Tenant engages in the preparation
of food or packaged foods or engages in the use, sale or storage of inflammable
or combustible material, Tenant shall, subject to Article 10 of this Lease,
install automatic chemical extinguishing devices (such as Ansul) approved by
Underwriters Laboratories and Landlord's insurance company. Tenant shall keep
such devices under service as required by Landlord, Government Entities and
Landlord's insurance company. If gas is used in the Premises, Tenant shall
install gas cut-off devices (manual and automatic).
ARTICLE 14. Damage; Restoration.
-------------------
14.1. Tenant shall notify Landlord in writing of any Damage to the
Premises or the Building promptly after learning of the same.
14.2. In the case of Damage to the Building or the Premises, Landlord
shall promptly commence and diligently proceed to Restore the Damaged area as
nearly as possible to the value, condition and character of the same immediately
before the Damage, subject, however, to Sections 12.4. and 14.3.
14.3. If the Building is so Damaged (whether or not the Premises are
Damaged) as to require, for Restoration, a reasonably estimated expenditure of
more than thirty per cent (30%) of the value of the Building as actually insured
under Landlord's insurance policies immediately prior to such Damage, Landlord
may terminate this Lease by notice to Tenant within one hundred eighty (180)
days after the date of such Damage provided that at such time Landlord also
terminates eighty percent (80%) of all leases at The Childrenswear Center.
14.4. In the event of Damage to the Building or the Premises, if
Landlord is obligated to repair the same under Section 14.2 (or elects to repair
the same under Section 14.3) but has not completed the required repairs within
one hundred and eighty (180) days after the date of such Damage (unless Landlord
has been prevented from proceeding by causes beyond Landlord's control,
including insurance adjustments and negotiations) and if the Damage has deprived
(and then continues to deprive) Tenant of reasonable access to the Premises or
the use and enjoyment of the Premises, Tenant may, within fifteen (15) days
thereafter, terminate this Lease by written notice to Landlord.
14.5. If Landlord or Tenant terminates this Lease pursuant to Section
14.3 or 14.4, this Lease shall expire as of the date of Landlord's or Tenant's
notice, as the case may be, as if such date were the Expiration Date. Upon such
date, Tenant shall quit, surrender and vacate the Premises as if upon expiration
of the Term; and all Rents shall be apportioned as of such date (subject to
Section 14.6).
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14.6 In any case in which the Premises become unusable by Tenant
for a consecutive period of more than five (5) days by Damage to the Premises or
the Building (except any Damage caused by the willful acts or negligence of
Tenant or its Employees or invitees), Tenant shall be entitled to an abatement
of Fixed Rent and Additional Rent from the date of the Damage to the date when
such Damage has been Restored. Such abatement shall be in direct proportion to
the ratio which the area of Premises so taken or destroyed bears to the total
area of the Premises unless the Premises are rendered totally unusable, in which
case the Fixed Rent and Additional Rent shall abate in full.
14.7. Landlord shall have no liability for loss, cost, expense,
damage, or compensation whatsoever (including any claim for inconvenience, loss
of business or annoyance) by reason of any Restoration of the Premises or the
Building under this Article.
14.8. Notwithstanding any other provision of this Lease, if
Landlord or the holder of any Senior Encumbrance is unable to collect any
portion of the insurance proceeds (including rent insurance proceeds) for any
Damage to the Premises or the Building by reason of any act or omission of
Tenant or its Employees or invitees, there shall be no abatement of Rents (but
the total amount of Rents not abated, which would otherwise have been abated,
shall not exceed the amount of uncollected insurance proceeds).
14.9. This Article shall be considered an express agreement
governing any case of Damage to the Premises and/or the Building; and to the
extent permitted by law any statute purporting to govern in such cases, now or
hereafter in force, shall have no application under this Lease.
ARTICLE 15. Condemnation.
------------
15.1. If the entire Premises is Condemned or taken in
Condemnation, this Lease shall terminate and expire on and as of the date title
is conveyed under such Condemnation.
15.2. If more than thirty per cent (30%) of the usable area of the
Land or the Building shall be Condemned (whether or not the Premises are
Condemned), Landlord may elect to terminate this Lease by notice to Tenant
within thirty (30) days after the effective date of such Condemnation provided
that at such time Landlord also terminates eighty percent (80%) of all leases at
The Childrenswear Center; and this Lease shall terminate and expire on the date
specified in Landlord's notice (which shall be at least sixty (60) days after
the date of such notice), except that this Lease shall expire on the date or
dates specified in Sections 15.3 or 15.4 to the extent that the Condemnation is
also covered by those Sections.
15.3. Subject to Section 15.2, if part (but not all) of the
Premises is Condemned, this Lease shall terminate and expire with respect only
to the portion of the Premises so Condemned, on and as of the effective date of
such Condemnation. In all other respects this Lease shall remain in full force
and effect except that Tenant shall be entitled, after such date, to a reduction
in Rents in the proportion which the area of the Premises so Condemned bears to
the total area of the Premises at the time of such taking.
15.4. Notwithstanding Section 15.3, if more than thirty percent
(30%) of the Premises is Condemned, or if there is a Condemnation of a
substantial part of the means of access to the Premises, Tenant may elect to
terminate the Lease by notice to Landlord given within thirty (30) days after
Tenant receives notice from Landlord or otherwise of the effective date of such
Condemnation; and this Lease shall terminate one hundred (100) days after the
giving of Tenant's notice.
15.5. In the event of any Condemnation of the Land, the Building
or the Premises, whether or not this Lease survives, Landlord shall be entitled
to receive the entire award and compensation, without deduction for any estate
vested in Tenant by this Lease (or any value attributable thereto). Tenant
hereby assigns to Landlord any and all right, title and interest which the
Tenant may have in or to any such award and compensation (other than Tenant's
claim for improvements paid for by Tenant and statutory moving expenses, if
any); and Tenant agrees to execute and file any and all applications,
statements, documents, and instruments necessary or desirable to facilitate
Landlord's collection of any such award and compensation.
15.6. If this Lease terminates under Sections 15.1, 15.2 or 15.4,
or if this Lease terminates in part under Section 15.3, the effect shall be the
same (as to the portion of the Premises affected) as if the date of such
termination were the Expiration Date, and all Rents shall be apportioned as of
such date.
15.7. If the use of the Premises is Condemned for a period of two
(2) years or less, Tenant's obligations under this Lease shall not change; and
Tenant shall continue to pay all Rents without reduction or abatement. However,
Tenant shall be entitled to the portion of the award or compensation for such
temporary Condemnation (after subtraction of all necessary and proper expenses
of collection incurred by Landlord) equal to the Rents payable hereunder during
the period covered, together with such additional reasonable and actual expenses
as Tenant incurs in connection with relocation to alternate space for the period
of such temporary Condemnation. The balance of the award and compensation shall
be payable to Landlord.
ARTICLE 16. Building Services.
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16.1. Landlord shall maintain and repair the heating, ventilating and
air conditioning systems installed by Landlord in the Building to the point of
connection with the heating, ventilating and air conditioning installations
located within the Premises and/or within the walls of the Premises and shall
provide heating, ventilation and air conditioning through the Premises. Tenant
shall keep unobstructed all vents, intakes, outlets and grills of the air
conditioning, heating and ventilating systems within the Premises and shall
comply and observe all regulations and requirements prescribed by Landlord for
the proper functioning of such systems. Tenant acknowledges that the windows in
the Premises may be sealed, and, if so, that air will not circulate within the
Premises when the air conditioning, heating, and ventilating systems are not
operating.
16.2 Landlord shall furnish water to the floor on which Premises is
located for ordinary lavatory, drinking, and office cleaning purposes. If
Tenant uses water for any other purpose, Tenant shall pay Landlord, as
Additional Rent, Landlord's actual cost for any further supply of water, when
and as Landlord receives bills for water consumed, and for sewer rents and all
other tents and charges based upon Tenant's consumption of water in excess of
normal lavatory, drinking, and office cleaning purposes. At Landlord's election,
Tenant shall install and maintain, at Tenant's expense, a water meter to
register any consumption of water for other than lavatory, drinking, or office
cleaning purposes.
16.3 Tenant shall be responsible for any and all cleaning work in
the Premises. Such work shall be performed at Tenant's expense using an
independent union contractor approved by Landlord.
16.4 Landlord shall furnish automatic passenger elevator service
through the public elevators during Business Hours and, subject to Landlord's
security requirements, shall have at least one (1) elevator subject to call at
all other times.
16.5 Landlord reserves the right, without liability to Tenant and
without any abatement of Rents or claim of constructive eviction, to stop or
interrupt any or all services under this lease, and the use of any Building
Systems or other facilities, at such times as Landlord may deem reasonably
necessary by reason of accidents, strikes, making of repairs alterations or
improvements, inability to secure a proper supply of fuel, gas, steam, water,
electricity, labor or supplies, or any other similar or dissimilar causes
whatsoever beyond Landlord's reasonable control. No such stoppage or
interruption shall entitle Tenant to any diminution or abatement of Rents or any
other compensation whatsoever, or result in alteration or reduction of any
Tenant's obligations under this Lease. Notwithstanding anything to the contrary
contained in this Lease, in the event Landlord is not providing basic services
under this Lease for a period of ten (10) consecutive Business Days after
written notice from Tenant, and such interruption is not as a result of labor
strikes or other Force Majeure acts, then Tenant shall be entitled to an
abatement of rent hereunder until such services are restored.
16.6. Landlord shall clean the exterior of all windows in the
Premises. Tenant will not clean or cause to be cleaned windows in the Premises
from the outside in violation of any applicable Laws.
16.7. Tenant shall reimburse Landlord upon demand for all costs of
removing from the Premises refuse and rubbish which exceed ordinary daily
accumulations of routine business office occupancy.
16.8. Landlord will not be required to furnish any services other
than the Building Services under this Article, except for services specifically
required under other provisions of this Lease.
16.9. Tenant shall notify Landlord in writing of any defects or
problems in the Building Systems, or any services furnished under this Lease,
promptly after Tenant learns of the same.
ARTICLE 17. Rules and Regulations.
---------------------
17.1. Tenant shall observe and comply with the rules and regulations
which Landlord prescribes from time to time, upon written notice to Tenant, for
the safety, care and cleanliness of the Land and the Building and the comfort,
quiet, and convenience of other occupants of the Building ("Rules and
Regulations"). Landlord shall not be liable to Tenant for any violation of the
Rules and Regulations (or of any other tenant's lease) by any other tenant or by
any Employees of another tenant; but Landlord shall attempt in good faith to
apply the Rules and Regulations without discrimination against any tenant of the
Building.
17.2. The terms, covenants, conditions, and provisions of this Lease
shall govern in the event of any conflict or inconsistency between this Lease
and the Rules and Regulations.
17.3. Exhibit "D" sets forth the current Rules and Regulations.
ARTICLE 18. Landlord's Access to Premises; Related Matters.
----------------------------------------------
18.1. Tenant shall permit Landlord to erect, use and maintain pipes,
ducts and conduits in and through the Premises, provided the same are installed
adjacent to or concealed behind walls and ceilings of the Premises. To the
extent reasonably practicable, Landlord shall install such pipes, ducts and
conduits by methods and in locations which will not materially interfere with or
impair Tenant's layout or use of the Premises.
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18.2. Landlord shall be allowed to bring into and store upon the
Premises all necessary materials, equipment, tools, facilities, and supplies to
be used for any work permitted or required under this Lease without the same
constituting an actual or constructive eviction of Tenant; and Rents shall not
abate while said repairs or alterations are being made. Landlord shall exercise
reasonable diligence to minimize disturbance to Tenant during any such work but
need not perform any work on an overtime or premium pay basis.
18.3. Landlord reserves the right, without the same constituting an
actual or constructive eviction and without incurring liability to Tenant, to
change the arrangement and/or location of public entrances, passageways, doors,
doorways, corridors, the number of elevators serving the floor of the Building
the Premises are located on, stairways, toilets and/or other public parts of the
Building; provided, however, that there shall be no unreasonable obstruction of
access to the Premises or unreasonable interference with Tenant's use or
enjoyment of the Premises.
18.4. Landlord reserves the right to light the Premises at night for
display purposes, from time to time, at Landlord's sole cost and expense.
18.5. Tenant authorizes Landlord and Landlord's Employees to enter
the Premises during Business Hours on reasonable notice, but at any time in case
of emergency (and by force, if necessary, in such event) (a) to inspect the
Premises; and/or (b) to perform any maintenance or to make any repairs,
alterations, or improvements which Landlord deems necessary to the Premises, the
Land or the Building or which are otherwise permitted or required under this
Lease (including any work required under Article 12 which Tenant has failed to
perform or make).
If Tenant is not personally present to open and permit entry into the Premises
whenever entry is necessary by reason of fire or other emergency, Landlord or
Landlord's Employees may forcibly enter the Premises without liability to Tenant
or waiver or modification of Tenant's obligation under this Lease.
18.6. Except as otherwise provided in this Lease, Landlord shall not
be liable for, and Tenant shall not be entitled to, any abatement or adjustment
of Rents for inconvenience, annoyance, disturbance, loss of business or other
damage of any kind whatsoever to Tenant by reason of Landlord's entry on, or
work in, the Premises pursuant to this Article (or of bringing or storing
materials, tools, supplies and equipment into, on, or through the Premises
during or in connection with the same). However, Landlord shall repair any
damage to property caused by willful acts or gross negligence of Landlord or
Landlord's Employees.
18.7. Tenant agrees to permit Landlord and/or any Employee of
Landlord to enter the Premises during Business Hours, on reasonable notice, to
exhibit the Premises in connection with:
(a) any prospective sale or lease of the Land and/or the
Building; or
(b) any prospective securing, refinancing, or assignment of
any mortgage affecting the Building; and/or
(c) during the final twelve (12) months of the Term, any
prospective leasing of the Premises.
18.8. If, during the last month of the Term, Tenant has removed all
of Tenant's Property, Landlord may (at Landlord's option but without any
liability to do so) immediately enter and alter, renovate and redecorate the
Premises, without abatement or adjustment of any Rents or incurring liability to
Tenant for any compensation; and such acts shall have no effect upon this Lease.
ARTICLE 19. Subordination: Estoppel Certificate; Attornment.
-----------------------------------------------
19.1. This Lease (as amended, modified, extended, or otherwise
revised from time to time), and the leasehold estate created hereby, are now and
shall hereafter be subject and subordinate in every respect to all Senior
Encumbrances. This subordination shall be self-operative without requirement of
any further instrument of subordination from any Person to whom (or to whose
interest) this Lease, and leasehold estate created hereby, are subordinate.
However, if and whenever requested by Landlord or the holder of any Senior
Encumbrance, Tenant shall execute and deliver promptly any certificate or
instrument requested to evidence such subordination. Landlord shall request and
use best efforts to obtain a non-disturbance, subordination and attornment
agreement from the holder of any Senior Encumbrance, however, Landlord shall not
be required to incur any expense in obtaining such agreement.
19.2. Upon request of any present or future fee owner or the holder
of any Senior Encumbrance who succeeds to the rights of Landlord hereunder,
whether through conveyance pursuant to sale, possession, foreclosure action,
expiration or earlier termination of any ground lease, or otherwise (any such
Person, a "New Landlord"), Tenant shall attorn to and recognize each New
Landlord as "Landlord" under this Lease (as the same may then have been amended
or modified); and Tenant shall promptly execute and deliver any instrument which
each New Landlord may reasonably request to evidence such attornment. Upon such
attornment, this Lease (as then
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amended, modified, extended, or otherwise revised) shall continue in full force
and effect as, or as if it were, a direct lease between New Landlord and Tenant;
except, however, that any New Landlord shall not:
(a) be liable for any previous act or omission of Landlord under
the Lease, or any claim which shall have previously accrued
to Tenant against any prior Landlord; or
(b) be bound by any prepayment to any prior Landlord of more
than one month's Fixed Rent or Additional Rent, unless the
New Landlord shall have approved the prepayment in writing;
or
(c) be subject to any offsets, claims, defenses, or
counterclaims which Tenant might have against any prior
Landlord other than as expressly set forth in this Lease.
19.3. At either party's request from time to time, the non-requesting
party shall execute, acknowledge and deliver to the other a written statement
(each such statement, an "Estoppel Certificate") certifying that, except as
specifically disclosed in such Estoppel Certificate, on the date hereof:
(a) there are no agreements other than the Lease (and no
amendments, modifications, extensions, or other revisions of
the Lease) in effect between Tenant and Landlord (or any
other Person) with respect to the Premises;
(b) the Lease is valid and in full force and effect and the non-
requesting party has no setoffs, claims or defenses of any
kind whatsoever to enforcement of the Lease;
(c) to the best of such party's knowledge, the non-requesting
party has no claim, demand, cause of action or right to
institute any Legal Proceeding against the other party
arising out of or by virtue of the Lease or by reason of
Tenant's occupancy and use of the Premises; and
(d) the non-requesting party is not in default in the
performance of any of its obligations under the Lease; and
neither party has given any notice of default to the other.
In each Estoppel Certificate such party shall certify, also, the amount of
Fixed Rent then payable under the Lease, the amounts (and elements) of
Additional Rent then payable, and the dates to which Tenant has paid the
same, and such other matters as Landlord, Tenant or the holder of any Senior
Encumbrance may reasonably request. Tenant acknowledges and agrees that a
prospective purchaser or mortgagee of Landlord's interest in this Lease or the
Building and/or the Land, or the holder of any Senior Encumbrance (or the
assignee of any such Person) may rely upon each Estoppel Certificate.
19.4. If the holder of any Senior Encumbrance requests reasonable
modifications in this Lease as a condition to approval of any financing or
refinancing of the Land or the Building, Tenant will not unreasonably withhold
or delay making any requested modifications which do not increase Fixed Rent or
Additional Rent, impose additional liabilities on Tenant, or shorten or extend
the Term.
19.5. Except for the first month's Fixed Rent, Tenant will pay no Rent
under this Lease more than thirty (30) days in advance of its due date if so
restricted by any Senior Encumbrance.
19.6. Tenant will not exercise any right (or alleged right) to
terminate this Lease based upon any alleged act or omission of Landlord, unless
Tenant first gives written notice of such act or omission to the holder of each
Senior Encumbrance and until a reasonable period to remedy such act or
omission elapses after the giving of such notice (during which time such holder
shall have the right, but no obligation, to remedy the alleged act or omission).
Tenant agrees, further, not to exercise any such right if the holder of any such
Senior Encumbrance commences to cure such act or omission within a reasonable
time after such notice and diligently prosecutes such cure to completion.
ARTICLE 20. Landlord's Inability to Perform.
-------------------------------
Unless otherwise provided specifically to the contrary, this Lease and
Tenant's obligations to pay Rent and perform all of Tenant's other covenants,
agreements, terms, provisions and conditions hereunder shall not be affected,
impaired or excused because Landlord is unable to fulfill any of Landlord's
obligations or is unable to furnish or is delayed in furnishing any work or
service whatsoever expressly or impliedly to be furnished, or is unable to make
or is delayed in making any repairs, if Landlord is prevented or delayed from so
doing by reason of any cause beyond Landlord's reasonable control (including
strikes, governmental preemption in connection with a national emergency, Laws,
failure of utilities or public services, or severe weather).
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ARTICLE 21. Surrender of Premises.
---------------------
21.1. Upon the expiration of the Term or any earlier termination of
this Lease, Tenant shall quit and surrender to Landlord the Premises, broom
clean, in the condition required under this Lease, excepting ordinary wear and
tear and Damage (other than Damage caused by the willful misconduct or
negligence of Tenant or its Employees). This Section shall survive the
expiration of the Term or any earlier termination of this Lease.
21.2. If Tenant holds over after the Expiration Date (or any earlier
termination of this Lease) without Landlord's written consent, at Landlord's
election, such holding over shall be deemed a month-to-month tenancy terminable
on thirty (30) days' prior written notice. During such tenancy, Tenant agrees to
pay Landlord, each month, the greater of the fair market rental value for the
Premises or two hundred percent (200%) of the sum of the Fixed Rent and all
Additional Rent payable by Tenant for the last month of the Term, and otherwise
to be bound by all of the terms, covenants and conditions herein specified.
ARTICLE 22. Assignment, Mortgaging, Subletting, etc.
----------------------------------------
22.1. Except as otherwise expressly provided in this Article, Tenant
shall not, without obtaining the prior written consent of Landlord, in each
instance:
(a) assign or otherwise transfer this Lease, or any part of
Tenant's right, title or interest therein;
(b) sublet all or any part of the Premises or allow all or
any part of the Premises to be used or occupied by any
other Persons; or
(c) mortgage, pledge or otherwise encumber this Lease, or
the Premises.
For purposes of this Article:
(a) the transfer of more than forty-nine percent (49%) of
any class of capital stock of any corporate tenant or
subtenant, or the transfer of more than forty-nine
percent (49%) of the total interest in any other Person
which is a tenant or subtenant, however accomplished,
whether in a single transaction or in a series of
related or unrelated transactions, shall be deemed an
assignment of this Lease, or of such sublease, as the
case may be; provided, however, that Tenant may
transfer its stock to any current stockholder or to any
member of the immediate family of Jack Benun and/or
Mark Benun, or to a trust controlled by Jack Benun
and/or Mark Benun, and such transfer shall not be
deemed an assignment for the purposes of this Lease
provided Tenant notifies Landlord in advance of such
transfer;
(b) an agreement by any other Person, directly or
indirectly, to assume Tenant's obligations under this
Lease shall be deemed an assignment;
(c) any Person to whom Tenant's interest under this Lease
passes by operation of law, or otherwise, shall be
bound by the provisions of this Article; and
(d) each modification, amendment or extension or any
sublease to which Landlord has previously consented
shall be deemed a new sublease.
Tenant agrees to furnish to Landlord upon demand at any time such information
and assurances as Landlord may reasonably request that neither Tenant, nor any
previously permitted subtenant, has violated the provisions of this Article.
22.2. Section 22.1 shall NOT apply to transactions entered into by
Tenant with a corporation into (or with) which Tenant is merged or consolidated
or to which substantially all of Tenant's assets are transferred, provided that
(a) such merger, consolidation, or transfer of assets is for a good business
purpose and not a device for the transfer of Tenant's interest in this Lease;
and (b) the assignee or successor entity has a net worth at least equal to or in
excess of the net worth of Tenant immediately prior to such merger,
consolidation, or transfer, or as of the date of this Lease, whichever is
greater, as evidenced by financial statements prepared and certified by
independent certified public accountants.
22.3. Any assignment, whether made with Landlord's consent as
required by Section 22.1 or without Landlord's consent pursuant to Section 22.2,
shall not be effective, and shall be null and void as against Landlord, unless
and until:
(a) the assignee shall execute, acknowledge and deliver to
Landlord an agreement, in form and substance reasonably
satisfactory to Landlord, under which (i) the assignee
assumes the obligations and performance of this Lease
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and agrees to be bound personally by all of the covenants,
agreements, terms, provisions and conditions hereby on the
part of Tenant to be performed or observed on and after
the effective date of any such assignment; and (ii) the
assignor agrees that the provisions of this Article shall
continue binding upon it in the future, notwithstanding
the assignment or other transfer; and
(b) in the case of an assignment pursuant to Section 22.2,
Tenant or its successor shall have delivered to Landlord
financial statements certified by certified public
accountants evidencing satisfaction of the net worth
requirement in Section 22.2(b).
22.4. Tenant covenants that, notwithstanding any assignment or
transfer, whether or not in violation of the provisions of this Lease, and
notwithstanding the acceptance of Rents by Landlord from an assignee,
transferee, or any other Person, Tenant shall remain fully and primarily and
jointly and severally liable for the payment of all Rents due and to become due
under this Lease and for the performance and observance of all of the covenants,
agreements, terms, provisions and conditions of this Lease on the part of
Tenant to be performed or observed. After any assignment, subletting, or other
transfer permitted under Sections 22.1 or 22.2, Tenant's liabilities and
obligations under this Lease shall not be discharged, released or impaired in
any respect by an agreement or stipulation made by Landlord (or the holder of
any Senior Encumbrance) extending the Term, or modifying any obligations
contained in this Lease, or by any waiver or failure of Landlord to enforce any
of Tenant's obligations under this Lease, and Tenant shall continue liable
hereunder. If any such agreement or modification operates to increase the
obligations of Tenant under this Lease, the liability under this Section of the
Tenant named in the Lease shall continue to be no greater than as if such
agreement or modification had not been made.
22.5. Landlord shall not unreasonably withhold its consent to an
assignment of this Lease, or a subletting of the whole or a part of the
Premises, and shall use reasonable efforts to respond to Tenant's request within
thirty (30) days after receipt of the information required under this Lease,
provided:
(a) Tenant shall give Landlord the name and business address
of the proposed subtenant or assignee, adequate
information with respect to the nature and character of
the proposed subtenant's or assignee's business,
references and current financial information with respect
to net worth, credit and financial responsibility as are
reasonably satisfactory to Landlord, and an executed
counterpart of the sublease or assignment agreement;
(b) the proposed subtenant or assignee must be a reputable
party whose financial net worth, credit and financial
responsibility are, considering the obligations under this
Lease, reasonably satisfactory to Landlord;
(c) the nature and character of the proposed subtenant or
assignee, its business or activities and intended use of
the Premises are, in Landlord's reasonable judgment, in
keeping with the standards and character of the Building
and the floor or floors on which the Premises are located;
(d) the proposed subtenant or assignee is not then an occupant
of any part of the Building or a Person who dealt with
Landlord (directly or through a broker) with respect to
space in the Building during the six (6) months
immediately preceding Tenant's request for Landlord's
consent;
(e) Tenant shall bear all costs of providing appropriate means
of ingress and egress from the sublet space (or of
separating the space to be subleased from the remainder of
the Premises) and shall comply with Article 10;
(f) each assignment or sublease shall specifically state that:
(i) it is subject to all of the terms, covenants,
agreements, provisions, and conditions of this
Lease;
(ii) the subtenant or assignee as the case may be, will
not have the right to further assign or sublet all
or part of the Premises or to allow same to be used
by others, without Landlord's prior written consent
in each instance;
(iii) a consent by Landlord thereto shall not be deemed
or construed to modify, amend or affect the terms
and provisions of this Lease, or Tenant's
obligations hereunder, which shall continue to
apply to the space involved, and the occupants
thereof, as if the sublease or assignment had not
been made;
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<PAGE>
(iv) if Tenant defaults in paying any Rents,
Landlord is authorized to collect any Rents
due or accruing from any assignee, subtenant
or other occupant of the Premises and to apply
the net amounts collected to the Rents due
hereunder, in such priorities as Landlord may
determine;
(v) Landlord's receipt or acceptance of any
payments from an assignee, subtenant, or other
occupant of any part of the Premises shall not
be deemed or construed as releasing Tenant
from Tenant's obligations under this Lease or
the acceptance of that Person as a direct
tenant; and
(iv) each subtenant shall be required to pay its
proportionate share of the Tax Payment and the
Wage Rate Escalation;
(g) Tenant shall have paid Landlord all Fees-And-Costs
incurred by Landlord in connection with the proposed
transaction, including review of the requested
consent;
(h) the proposed subtenant or assignee is NOT (i) a bank
or trust company, safe deposit business, savings and
loan association or loan company; (ii) employment or
recruitment agency; (iii) school, college, university
or educational institution whether or not for profit;
or (iv) a Government Entity, or government of any
other sovereign nation (or any branch or division
thereof);
(i) in the case of a subletting of a portion of the
Premises, the portion so sublet shall be regular in
shape and suitable for normal renting purposes;
(j) the subletting or assignment shall not be at a rental
rate more than ten percent (10%) less than the Fixed
Rent set forth in this Lease;
(k) there shall be no more than three (3) subtenants of
the Premises at any time.
22.6. If Landlord consents to any assignment or sublease, Tenant
shall pay Landlord, as Additional Rent (a) in the case of each and every
assignment equal to fifty percent (50%) of ALL sums and other considerations
whatsoever paid Tenant by the assignee for (or by reason of) such assignment
(including sums paid for the sale of Tenant's fixtures, leasehold improvements,
equipment, furniture, furnishings or other personal property); and (b) in the
case of each and every sublease, fifty percent (50%) of ALL rents, additional
charges or other consideration whatsoever payable to Tenant by the subtenant
which EXCEED all Rents under this Lease accruing during the term of the sublease
in respect of the subleased space (i.e. allocated in proportion to the space
demised, as reasonably computed by Landlord) pursuant to the terms hereof
(including, but not limited to, sums paid for the sale of rental of Tenant's
fixtures, leasehold improvements, equipment, furniture or furnishings or other
personal property).
Tenant shall pay Landlord all amounts due under this Section 22.6 as and when
payable by the assignee or subtenant to Tenant.
ARTICLE 23. Quiet Enjoyment.
---------------
23.1. Upon paying Fixed Rent and Additional Rent and keeping and
performing the terms, covenants, conditions and provisions of this Lease,
Tenant may lawfully and quietly hold and enjoy the Premises during the Term
without hindrance, ejection, molestation, or interruption, SUBJECT, HOWEVER, to
the terms, covenants, conditions, and provisions of this Lease.
ARTICLE 24. Real Estate Brokers.
-------------------
24.1. Landlord and Tenant covenant, represent and warrant to
each other that neither party has had any dealings with any real estate broker
or sales agent in connection with the negotiation and execution of this Lease,
other than Newmark Real Estate Services and CB Commercial Real Estate Group,
Inc. (the "Broker(s)"). Landlord and Tenant agree to indemnify each other and
hold the other party harmless from and against any commission or fee claimed by
any Person other than the Broker(s) with respect to the negotiation or
execution of this Lease if such claim(s) are based in whole or in part on
dealings with the other party or its Employees. This indemnity shall cover,
also, all expenses which such party incurs to defend against any such claim,
including all Fees-And-Costs. Landlord agrees to pay the Broker(s) any
commissions to which they may be entitled pursuant to a separate written
agreement. Landlord acknowledges that Tenant spoke with Mr. Norman Jacobson
about leasing space in The Childrenswear Center several years prior to the date
hereof and Tenant shall not be in breach of the foregoing representation as a
result of such conversations.
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ARTICLE 25. Adjacent Excavation; Shoring; Construction.
------------------------------------------
Except as otherwise set forth in this Lease, if excavation,
foundation, other substructure or superstructure work, or other construction
work shall be made or authorized in, on or upon land adjacent to the Premises,
the Land and/or the Building, Tenant shall afford to the Person causing (or
authorized to cause) such excavation or construction, license to enter the
Premises to do such work as necessary to preserve the walls of the Building from
injury or damage, and to support the same by proper foundations, without any
claim for damages or indemnity against Landlord, or diminution or abatement of
Rents.
ARTICLE 26. Defaults; Conditional Limitations; Remedies.
-------------------------------------------
26.1 Each of the following events shall be a "Default" under
this Lease:
(a) Tenants fail to pay any installment of Fixed Rent
or Additional Rent when such installment is due
and such default continues for five (5) days after
written notice;
(b) Tenant fails to keep or perform any other term,
covenant, condition, or provision of this Lease,
and such failure continues for twenty (20) days
after written notice from Landlord-unless such
failure is susceptible of cure and requires work
to be performed, acts to be done, or conditions to
be removed which cannot be performed, done or
removed within such twenty (20) days, in which
case the Default shall not be deemed to exist as
long as Tenant:
(i) advises Landlord by written notice within
twenty (20) days after Landlord's notice
that Tenant intends to take all steps
necessary to remedy such failure with due
diligence and specifies a date by which all
steps will have been completed (which shall
not exceed seventy-five (75) days after the
date of Landlord's notice;
(ii) duly commences curing the same within such
period; and
(iii) diligently and continuously prosecutes to
completion all steps necessary to remedy
the same;
(c) Tenants admits, in writing, that Tenant is unable
to pay Tenant's debts as such become due;
(d) Tenant makes an assignment for the benefit of
creditors;
(e) Tenant files a voluntary petition in bankruptcy or
a petition is filed against Tenant and an order
for relief is entered, or Tenant files any
petition or answer seeking any reorganization,
arrangement, composition, readjustment,
liquidation, dissolution or similar relief under
any present or future federal, state or other law,
or Tenant seeks or consents to or acquiesces in or
suffers the appointment of any trustee, receiver
or liquidator of Tenant or of the Premises (or
Tenant's interest therein) or of all or any
substantial part of Tenant's properties;
(f) Within one hundred and twenty (120) days after the
commencement of any proceeding against Tenant
seeking any reorganization, arrangement,
composition, readjustment, liquidation,
dissolution or similar relief under any present or
future federal, state or other law, such
proceeding is not dismissed; within one hundred
and twenty (120) days after the appointment
(without the consent or acquiescence of Tenant) of
any trustee, receiver or liquidator of Tenant or
of all or any substantial part of Tenant's
properties or of the Premises (or Tenant's
interest therein), such appointment is not vacated
or stayed on appeal or otherwise, or within sixty
(60) days after the expiration of any such stay,
such appointment shall not have been vacated;
(g) Within thirty (30) days after the Commencement
Date, Tenant has not occupied the Premises for the
use specified in Article 8;
(h) Tenant sublets the Premises (or any part thereof)
or mortgages, pledges, assigns, transfers, or
otherwise disposes of this Lease (or any part of
Tenant's right, title, and interest hereunder)
without complying with all requirements of this
Lease;
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(i) A levy under execution or attachment is made against
Tenant or Tenant's property and is not vacated or removed
by court order, bonding or otherwise within thirty (30)
days thereafter; and/or
(j) Tenant shall be in default under any other lease for space
in the Building after the expiration of any applicable
grace and cure periods have expired.
26.2. If and whenever any Default occurs, at Landlord's option,
Landlord may give written notice to Tenant (the "Termination Notice"), stating
that this Lease and the Term shall expire and terminate on the date specified in
such Termination Notice (which date shall be not less than fifteen (15) days
after the giving of the Termination Notice). In such event, this Lease and the
Term (and Tenant's entire right, title, and interest therein) shall expire and
terminate as if the date specified in the Termination Notice were the Expiration
Date; and Tenant shall quit and surrender the Premises but shall remain liable
as hereinafter provided.
26.3. If and whenever any Default occurs, or if this Lease and the
Term terminate under Section 26.2 or otherwise, Landlord may without notice
re-enter and repossess the Premises using such force for that purpose as may be
necessary without being liable to indictment, prosecution or damages and Tenant
shall remain liable as hereinafter provided. If Landlord so re-enters, at its
options, Landlord may:
(a) complete Landlord's Work and Tenant's Work to the extent
not then complete;
(b) repair and alter the Premises in such manner as Landlord
may deem necessary or desirable without relieving Tenant
of any liability whatsoever under this Lease; and/or
(c) let or relet the Premises (or any parts thereof) for the
whole or any part of the remainder of the Term or for a
longer period, in Landlord's names or as agent of Tenant,
and pay and apply all rents and other sums thus collected
or received as follows:
(i) FIRST, to all costs and expenses which Landlord
pays or incurs in terminating this Lease, re-
entering, retaking, repossessing, repairing and/or
altering the Premises, and removing all Persons and
property therefrom, including all Fees-And-Costs;
(ii) SECOND, to all costs and expenses which Landlord
incurs in securing any new tenant(s) of the
Premises (including in such costs brokerage
commissions and expenses of preparing the Premises
for reletting, and all Fees-And-Costs; and, if
Landlord maintains the Premises, all costs and
expenses of maintaining the Premises, including
utilities); and
(iii) THIRD, any balance then remaining on account of
Tenant's liability to Landlord.
In no case shall re-entry by Landlord, whether under summary proceedings or
otherwise, absolve or discharge Tenant from any liability whatsoever under this
Lease. Landlord shall have no obligation whatsoever to relet the Premises (or
any parts thereof), or to collect any rent or other sum due on any reletting;
and Landlord's failure to relet or to collect rent shall not relieve Tenant of
any liability whatsoever under this Lease. Tenant shall not be entitled to any
excess of rents collected upon any reletting of the Premises over the Rents and
other sums payable by Tenant under this Lease.
26.4. If Tenant Defaults or if this Lease and the Term terminate
under Section 26.2 or otherwise, or if Landlord re-enters the Premises under
Section 26.3 or by any summary proceeding or other Legal Proceeding, then, in
any of such events:
(a) Tenant shall pay Landlord all Fixed Rent and Additional
Rent due under this Lease to the date upon which this
Lease and the Term have terminated or to the date of re-
entry upon the Premises by Landlord, as the case may be;
and
(b) Tenant shall pay Landlord an amount equal to the Fixed
Rent which, but for the abatement in Section 3.1(b), (if
any), would have been payable for the Abatement Period;
and
(c) Tenant shall pay Landlord, also, as damages, any
deficiency (a "Deficiency") between (i) the Fixed Rent and
all Additional reserved in this Lease for the period which
otherwise would have constituted the unexpired portion of
the Term and (ii) the amount, if any, of rents actually
collected by Landlord under any reletting effected
pursuant to Section
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26.3(c) for any part of such period (after deducting
from such collections all Fees-and-Costs paid or
incurred by Landlord pursuant to Section 26.3(c)).
Tenant shall pay any Deficiency in installments on the
days specified in this Lease for payments of Fixed
Rent. Landlord shall be entitled to recover from Tenant
each Deficiency installment as the same arises; and no
Legal Proceeding to collect any Deficiency installment
shall prejudice Landlord's right to collect any
subsequent installment by a similar or other Legal
Proceeding.
Whether or not Landlord collects any unpaid Deficiency installments under (b)
above, Tenant shall pay Landlord, or demand, in lieu of any further Deficiency,
as and for liquidated and agreed final damages (it being agreed that it would be
impractical or extremely difficult to fix the actual damages), a sum equal to
the amount by which Fixed Rent and Additional Rent reserved in this Lease for
the period which otherwise would have constituted the unexpired portion of the
Term EXCEEDS the then fair and reasonable rental value of the Premises for the
same period, both discounted to present worth at the rate of four (4%) per cent
per annum. If, before presentation of proof of such liquidated damages to any
court, commission or tribunal, the Premises (or any part thereof) shall have
been relet for the period which otherwise would have constituted the unexpired
portion of the Term, the amount of rent reserved upon such reletting shall be
deemed prima facie the fair and reasonable rental value for the part or the
----- -----
whole of the Premises so relet during the term such reletting.
26.5. Landlord may bring Legal Proceedings from time to time,
at Landlord's election, for the recovery of damages, or for a sum equal to any
installment or installments of Fixed Rent or Additional Rent or any Deficiency
or other sum payable by Tenant to Landlord pursuant to this Article; and nothing
in this Lease shall require Landlord to await the originally scheduled
Expiration Date for any such purpose.
26.6. Nothing in this Lease shall limit or prejudice Landlord's
right to prove and obtain as liquidated damages in any bankruptcy, insolvency,
receivership, reorganization or dissolution proceeding an amount equal to the
maximum allowed by any applicable law at the time when such damages are to be
proved, whether such amount is greater, equal to, or less than, the amount of
damages otherwise specified in this Article.
26.7. No receipt of moneys by Landlord from Tenant after the
giving of a Termination Notice, or after a termination of this Lease, shall
reinstate, continue or extend the Term or affect any Termination Notice or other
written notice previously given to Tenant, or operate as a waiver of Landlord's
right to enforce payment of Fixed Rent or Additional Rent then or subsequently
becoming due, or operate as a waiver of Landlord's right to recover possession
of the Premises. Tenant agrees that after the giving of a Termination Notice or
commencement of summary proceedings or other Legal Proceeding, or after final
order or judgement for possession of the Premises, Landlord may demand, receive
and collect all moneys without invalidating or rescinding such Termination
Notice, proceeding, order, suit or judgement; and at Landlord's election, all
moneys so collected shall be deemed payments either on account of the use and
occupancy of the Premises or on account of Tenant's liability hereunder.
26.8 In event Tenant is dispossessed by judgment or warrant of
any court, or in event of re-entry or repossession by Landlord or in event of
expiration or any termination of this Lease, Tenant (on behalf of Tenant and all
Persons claiming by, through, or under Tenant) hereby expressly waives to the
fullest extent permitted by law (a) service of any notice of intention to re-
enter now or hereafter provided by law, or of commencement of Legal Proceedings
for such purpose; (b) any and all right redemption now or hereafter provided by
law; and (c) any re-entry or repossession or right to restore the Term or legal
continuance of this Lease.
26.9. Landlord and Tenant hereby waive trial by jury in any
Legal Proceeding brought by either against the other with respect to any matter
whatsoever arising out of or in any way connected with this Lease, the
relationship of Landlord and Tenant, Tenant's use or occupancy of the Premises,
or any claims of injury or damage.
26.10. The terms "enter", "re-enter", "entry" or "re-entry", as
used in this Lease are not restricted to their technical legal meaning. If
Landlord commences any summary proceeding or other Legal Proceeding for
non-payment of Rents, Tenant will not interpose and does hereby waive the right
to interpose any counterclaim of whatever nature or description in any such
proceeding.
26.11. No failure by Landlord to insist upon the strict
performance of any covenant, agreement, term or condition of this Lease or to
exercise any right or remedy after any Default, and no acceptance of full or
partial Fixed Rent or Additional Rent during the continuance of any Default
shall constitute a waiver of any such covenant, agreement, term, condition, or
Default. No covenant, agreement, term or condition of this Lease to be performed
or complied with by Tenant, and no Default, shall be waived, altered or modified
except by a written instrument executed by Landlord. No waiver of any Default
shall affect or alter this Lease, but each and every term, covenant, condition
and provision of this Lease shall continue in full force and effect with respect
to any other then existing or subsequent Default.
26.12 In event of any Default, or any threatened breach by
Tenant of any term, covenant, condition or provision of this Lease, Landlord
shall be entitled to enjoin such Default or threatened breach and shall
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have the right to invoke all rights and remedies allowed at law or in equity as
though this Lease did not provide for re-entry, summary proceedings, or other
remedies.
26.13. Each right and remedy of Landlord in this Lease shall be
cumulative and in addition to every other right or remedy in this Lease, or now
or hereafter existing at law or in equity; and the exercise (or beginning of
exercise) by Landlord of any one or more rights or remedies shall not preclude
the simultaneous or later exercise by Landlord of any and all other rights or
remedies.
ARTICLE 27. Indemnification.
---------------
27.1. Tenant hereby agrees, to the fullest extent permitted by law,
to indemnify each and every Indemnitee and hold each and every Indemnitee
harmless from and against (and to pay the full amount of) all loss, liability,
obligation, damage, penalty, tax, cost, claim, demand, judgment, charge, or
expense of every kind whatsoever which any Indemnitee may suffer, incur or pay
out, or which may be asserted against any Indemnitee, in whole or in part, by
reason of, or in connection with (a) Tenant's use, occupancy, management or
control of the Premises, or Tenant's operations, conduct or activities in the
Land and the Building; (b) any Legal Proceeding by Landlord to terminate the
Lease, or any other Legal Proceeding by Landlord against Tenant, in which
Landlord secures a judgment against Tenant, final beyond appeal, or in which
Landlord receives any payment from Tenant pursuant to any written settlement
agreement disposing of such Legal Proceeding; (c) any Default by Tenant in the
observance or performance of any obligation under the Lease (including matters
involving: payment of Rent and Additional Rent; computation of escalations;
Alterations or other Tenant's Work; subletting or assignment; and/or Rules and
Regulations) whether or not Landlord commences any Legal Proceeding against
Tenant; (d) any Legal Proceeding brought by Tenant against Landlord (or any
Employee of Landlord) in which Tenant fails to secure a judgment against
Landlord final beyond appeal (other than those proceedings which Landlord and
Tenant agree to settle, unless such stipulation of settlement provides for
Tenant to pay Landlord's attorneys' fees); (e) any bodily injury, sickness,
disease or death of or to any person or persons, or any Damage to or of the
Premises, the Land or the Building (or to property of any other Person),
resulting (or alleged to result) from any acts or omissions of Tenant or
Tenant's Employees; (f) any failure of Tenant to comply with Laws or Insurance
Requirements (as required under this Lease); any failure to Tenant to secure and
maintain Required Insurance (or any loss of coverage under any Required
Insurance); (g) any other appearance by Landlord (or any Employee of Landlord)
as a witness or otherwise in any Legal Proceeding whatsoever involving or
affecting Tenant or this Lease; (h) any failure by Tenant to comply timely,
fully and faithfully with any requirement of the Program or any regulations
promulgated thereunder from time to time applicable to Tenant, its officers,
employees, agents, suppliers, contractors or subcontractors; (i) any assignment,
sublease, or leasehold mortgage proposed or granted by Tenant or consented to by
Landlord (whether or not permitted under this Lease), and all negotiations with
respect thereto; and/or (j) any Alterations of the Premises by Tenant, and any
negotiations with respect thereto.
27.2. Tenant shall defend any and all Legal Proceedings commenced
against Landlord by any Person (other than Tenant) concerning any matter which
MAY or MIGHT be covered by any indemnity or obligation under Section 27.1
(i.e., regardless of any alleged fault or cause). Tenant shall deliver to
Landlord copies of documents served in any such Legal Proceeding and, whenever
requested by Landlord, shall advise as to the status of such Legal Proceeding.
If Tenant fails to defend diligently any such Legal Proceeding, or if Landlord
elects to defend by written notice to Tenant at any time, Landlord shall have
the right (but no obligation) to defend the same at Tenant's expense. Tenant
shall not settle any such Legal Proceeding without Landlord's prior written
consent unless (i) such settlement is without cost to Landlord, (ii) Tenant
reimburses Landlord for all actual attorneys' fees and any other professional
fees incurred by Landlord in connection with such Legal Proceeding, and (iii)
Tenant notifies Landlord promptly after such matter has been settled.
27.3. Tenant's indemnities and obligations under Sections 27.1 and
27.2 shall cover and include all Fees-And-Costs incurred by Landlord in
connection with any and every matter and amount referred to in Sections 27.1 and
27.2. Tenant shall pay all such Fees-And-Costs to Landlord upon demand.
27.4. Tenant shall notify Landlord immediately of every Legal
Proceeding or claim which may or might be covered by any indemnity under this
Article 27 and/or by any Required Insurance. Tenant shall also give timely
notice of such Legal Proceedings and claims to each insurer which has issued an
applicable policy of Required Insurance.
ARTICLE 28. Consents and Approvals.
----------------------
Whenever in this Lease Landlord's consent or approval is required and
Landlord delays or refuses such consent or approval, Tenant shall NOT be
entitled to make (and shall NOT make) any claim, and Tenant hereby waives any
claim, for money damages (nor shall Tenant claim any money damages by way of
set-off, counterclaim or defense) based upon any claim or assertion by Tenant
that Landlord unreasonably withheld or delayed Landlord's consent or approval.
Tenant's sole remedy in every such case shall be an action or proceeding for
specific performance to enforce Landlord's obligation.
ARTICLE 29. Notices.
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<PAGE>
All notices, requests, demands, elections, consents, approvals and
other communications hereunder must be in writing (each such, a "notice") and
addressed as follows (or to any address which either party may designate by
notice):
Landlord:
---------
SZS 33 Associates L.P.
c/o M.S. Management Associates, Inc.
One Merchant Plaza
P.O. Box 7033
Indianapolis, Indiana 46207
Tenant:
-------
B&H Industries Inc.
112 West 34th Street
New York, New York
Attention: Mark Benun
with a copy to:
Fishbach, Hertan & Reis
919 Third Avenue
New York, New York 10022
Attention: Myron Fishbach, Esq.
Any notice required by this Lease to be given or made within a specified period
of time, or on or before a date certain, shall be deemed to have been duly given
only if delivered BY HAND, evidenced by written receipt, or mailed by first
class, certified or registered mail, return receipt requested, postage and fees
prepaid. A notice sent by certified or registered mail (as above) shall be
deemed given when mailed. All other notices shall be deemed given when
received. After Tenant occupies the Premises, all notices to Tenant shall be
addressed to the Premises.
ARTICLE 30. No Waivers
----------
30.1. No agreement to accept a surrender of this Lease shall be valid
unless in writing signed by landlord. No Employee of Landlord shall have any
power to accept the keys of the Premises prior to the Expiration Date. The
delivery of keys to any Employee of Landlord shall not operate as a termination
of this Lease or a surrender of the Premises. If Tenant at any time desires to
have Landlord sublet the premises for Tenant's account, Landlord or Landlord's
Employees are authorized to received said keys for such purpose without
releasing Tenant from any of the obligations under this Lease. The failure of
Landlord to seek redress for violation of, or to insist upon the strict
performance of, any covenant or condition of this Lease or any of the Rules and
Regulations (now or hereafter in effect) shall not prevent a subsequent act,
which would have originally constituted a violation, from having all the force
and effect of an original violation. The receipt by Landlord of Rent with
knowledge of the breach of any covenant of this Lease shall not be deemed a
waiver of such breach.
30.2. This Lease contains the entire agreement between the parties,
and any executory agreement hereafter made shall be ineffective to change,
modify, discharge or effect an abandonment of it in whole or in part unless such
executory agreement is in writing and signed by the party against whom
enforcement of the change, modification, discharge or abandonment is sought.
ARTICLE 31. No Representations by Landlord; Landlord's Interest;
Transferee Landlords.
----------------------------------------------------
31.1. Landlord or Landlord's Employees have made no representations
or promises with respect to the Land, the Building or Premises except as herein
expressly set forth.
31.2. Tenant agrees to look solely to Landlord's interest in the
Building and/or Land for the satisfaction of any right or remedy of Tenant for
the collection of a judgment (or other judicial process) requiring the payment
of money by Landlord (or Landlord's Affiliates), in the event of any liability
by Landlord, and no other property or assets of Landlord (or Landlord's
Affiliates) shall be subject to levy, execution, attachment, or other
enforcement procedure for the satisfaction of Tenant's remedies under or with
respect to this Lease, the relationship of Landlord and Tenant hereunder, or
Tenant's use and occupancy of the Premises, or any other liability of Landlord
(or Landlord's Affiliates) to Tenant.
31.3. In the event of any transfer of title to the Land and Building,
or in the event of a lease of the Building, or of the Land and Building, upon
written notification to Tenant of such transfer or lease the
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transferor Landlord shall be and hereby is entirely freed and relieved of all
future covenants, obligations and liabilities of Landlord hereunder, and it
shall be deemed and construed as a covenant running with the land without
further agreement between the parties or their successors in interest, or
between the parties and the transferee of title to said Land and Building or
said lease, or the said lease of the Building or of the Land and Building, that
the transferee or the lessee, as applicable, has assumed and agreed to carry out
any and all future covenants, obligations and liabilities of Landlord hereunder.
Landlord shall transfer any Security Deposit delivered by Tenant hereunder to
any purchaser of the Land and Building.
ARTICLE 32. Name of Building: Waiver of Zoning Rights
-----------------------------------------
32.1. The name of the Building shall be "A&S Plaza", "The
Childrenswear Center" or 100 West 33rd Street. Landlord shall have the right at
any time to name, and charge the name of, the Building and to change the
designated address of the Building. The Building may be named after any Person,
whether or not such name is, or resembles, the name of a tenant of the Building.
Tenant agrees not to refer to the Building by any other name.
32.2 Tenant hereby assigns to Landlord any interest of any kind
in any zoning or development rights with respect to the Land and/or the Building
which Tenant might acquire by reason of this Lease; and Tenant hereby releases
to Landlord any claim or right of every kind whatsoever with respect to all such
zoning or development rights (if any).
ARTICLE 33. Memorandum of Lease.
-------------------
Tenant shall, at the request of Landlord execute and deliver a
statutory form of memorandum of this Lease for the purpose of recording, but
said memorandum of this Lease shall not in any circumstances be deemed to modify
or to change any of the provisions of this Lease.
ARTICLE 34. Delivery of Possession.
----------------------
34.1. If the Premises or any additional space to be included
within the Premises shall not be available for occupancy by Tenant on the
specific date hereinbefore designated for the commencement of the term of this
Lease of for the inclusion of such space for any reason whatsoever, then this
Lease shall not be affected thereby but, in such case, said specific date shall
be deemed to be postponed until the date when the Premises or such additional
space shall be available for occupancy by Tenant, and Tenant shall not be
entitled to possession of the Premises or such additional space until the same
are available for occupancy by Tenant; provided, however, Landlord shall have no
liability to Tenant by reason of any such postponement of said specific date,
and the parties agree further that any failure to have the Premises or such
additional space available for occupancy by Tenant on said specific date or on
the Commencement Date shall not affect the obligations of Tenant under this
Leases nor shall the same be construed to extend the Term. This Section 34.1
constitutes and express provision to the contrary under Section 223-a of the New
York State Real Property Law.
34.2. Notwithstanding anything contained in this Lease to the
contrary, subject to delays caused by force majeure (including, without
limitation, for purposes of this Section 34.2, Landlord's inability to schedule
inspections despite a good faith effort by Landlord to arrange for inspections
with the New York City Department of Buildings) and/or Tenant (including,
without limitation, its agents, employees and representatives) in the event
Landlord has not Substantially Completed the construction of Tenant's Initial
Work pursuant to Tenant's Plans within one hundred and eighty (180) days after
receipt of a building permit (the "Target Substantial Completion Date"), then
the Abatement Period shall be extended one (1) additional day for each day that
the Substantial Completion of the construction of the Premises by Landlord is
delayed beyond the Target Substantial Completion Date.
ARTICLE 35. Hazardous Materials.
-------------------
35.1. Tenant shall not, without the prior written consent of
Landlord, cause or permit, knowingly any Hazardous Material (hereinafter
defined) to be brought or remain upon, kept or used in or about the Premises,
the Land or the Building. As used in this Lease, "Hazardous Material(s)" shall
mean any hazardous, toxic or radioactive substance, material, matter or waste
which is or becomes regulated by any federal, state or local law, rule
regulation, code, ordinance or any other governmental restriction or
requirement. However, "Hazardous Materials" shall not include substances which
are used in the ordinary course of a business similar to Tenant's as permitted
pursuant to Section 8.1 of this Lease, provided, however, that such substances
are used, handled, transported or stored in strict compliance with any
applicable federal, state or local law, rule, regulation, code, ordinance or any
other governmental restriction or requirement. If such substances are not so
used, handled, transported or stored then they shall be deemed "Hazardous
Materials" for purposes of this Lease. Should Landlord consent in writing to
Tenant bringing, using or storing any Hazardous Material in or upon the
Premises, the Land or the Building, Tenant shall strictly obey and adhere to any
and all federal, state or local laws, rules, regulations or ordinances which in
any way regulates, governs or impacts Tenant's possession, use, storage or
disposal of said
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<PAGE>
Hazardous Material. Upon Landlord's written request, prior to the Commencement
Date of this Lease, and on January 1 of each year thereafter, Tenant shall
disclose in writing to Landlord the names and amounts of all Hazardous Material
which Tenant is then currently or is intending to bring, use or store in or upon
the Premises, the Land or the Building, or which Tenant has in the past brought,
used or stored in or upon the Premises, the Land or the Building.
35.2 In addition to, and in no way limiting Tenant's duties and
obligations as set forth in this Lease, should Tenant breach any of its duties
and obligations as set forth in this Lease or if the presence of any Hazardous
Material in or upon the Premises, the Land or the Building, that Tenant causes
or permits knowingly to brought upon, used remained upon or kept at the Premises
(excluding those Hazardous Materials that were present in the Premises prior to
Tenant's occupancy and those Hazardous Materials brought upon by the Premises by
Landlord after Tenant's occupancy) results in contamination of the Premises, the
Land, the Building, any land other than the Land or the Building, the
atmosphere, or any water or waterway (including groundwater), or if
contamination of the Premises, the Land, or the Building by any Hazardous
Material otherwise occurs for which Tenant is otherwise legally liable to
Landlord for damage resulting therefrom, Tenant shall indemnify, save harmless,
and, at Landlord's option and with attorneys approved in writing by Landlord,
defend Landlord and its agents, employees, partners, officers, directors, and
mortgagees, if any; from any and all claims, demands, damages, expenses, fees,
costs, fines, penalties, suits, proceedings, actions, causes of actions, and
losses of any and every kind and nature, including, without limitation,
diminution in value of the Premises, the Land or the Building, damages for the
loss or restriction on use of the rentable or usable space or of any amenity
of the Premises, the Land or the Building, damages arising from any adverse
impact on marketing space in the Building, and sums paid in settlement of claims
and for attorney's fees, consultant fees and expert fees; which may arise during
or after the Lease Term or any extension thereof as a result of such
contamination. This includes, without limitation, costs and expenses incurred in
connection with any investigation of site conditions or any cleanup, remedial,
removal or restoration work required by any federal, state or local governmental
agency or political subdivision because of Hazardous Material present on or
about the Premises (excluding those Hazardous Materials that were present in the
Premises prior to Tenant's occupancy and those Hazardous Materials brought upon
the Premises by Landlord after Tenant's occupancy, that Tenant causes or permits
knowingly to be brought upon, used, remained upon or kept at the Premises) or
because of the presence of Hazardous Material anywhere else which came or
otherwise emanated from Tenant or the Premises (excluding those Hazardous
Materials that were present in the Premises prior to Tenant's occupancy and
those Hazardous Materials brought upon the Premises by Landlord after Tenant's
occupancy, that Tenant causes or permits knowingly to be brought upon, used,
remained upon or kept at the Premises). Without limiting the foregoing, if the
presence of any Hazardous Material on or about the Premises, the Land or the
Building caused or permitted by Tenant results in any contamination of the
Premises, the land or the Building, Tenant shall, at its sole expense, promptly
take all actions as are necessary to return the Premises, the Land and/or the
Building to the condition existing prior to the introduction or any such
Hazardous Material to the Premises, the Land or the Building; provided, however,
that Landlord's approval of such actions shall first be obtained.
ARTICLE 36. Waiver of Immunity.
------------------
Tenant hereby agrees that any Legal Proceeding with respect to
the Lease may be brought in the courts of the State of New York or in the
United States District Court for the District in which the Building is
located, as Landlord may elect. Tenant hereby accepts with regard to any
such Legal Proceeding, for itself and in respect of its property, generally
and unconditionally, the jurisdiction of such courts. Nothing in this
Article shall affect Landlord's rights to commence Legal Proceedings or
otherwise proceed against Tenant in the City or in any other jurisdiction in
which assets of Tenant are located or to serve process in any other manner
permitted by applicable law. Tenant further agrees that final judgment in any
such Legal Proceeding shall be conclusive and, to the extent permitted by
applicable law, may be enforced in any other jurisdiction within or
outside the United States of America by suit on the judgment, a certified or
exemplified copy of which shall be conclusive evidence of the fact and of
the amount of Tenant's indebtedness.
ARTICLE 37. Security Deposit.
----------------
37.1. Tenant shall deposit with Landlord upon Tenant's execution of
this Lease the sum of One Hundred and Thirty-Five Thousand One Hundred Sixty
Dollars and Ninety-Nine Cents ($135,160.99) as security (the "Security Deposit")
for Tenant's performance of the terms, covenants, conditions and provisions of
this Lease. Landlord shall have the right, without notice to Tenant, to apply
all or any part of the Security Deposit (and/or any interest accrued thereon) to
cure any Default of Tenant under this Lease, notwithstanding the exercise of any
other remedy of or by Landlord. In such event, upon Landlord's demand by written
notice, Tenant shall deposit with Landlord an amount equal to the portion of the
Security Deposit (and/or accrued interest) so applied in order that Landlord may
hold the full amount of the Security Deposit (and accrued interest) at all times
during (and until the end of) the Term. Notwithstanding the foregoing, in the
event there have not been any monetary defaults beyond applicable grace and cure
periods by Tenant hereunder then a portion of the Security Deposit in the
amount of $45,053.67 shall be returned to Tenant after the last day of the sixth
(6th) month after the fifth (5th) anniversary of the Commencement Date.
37.2. Landlord will invest the Security Deposit in a Bank Account
In this Lease "Bank Account" means one or more interest-bearing accounts or
certificates of deposit of (or issued by) any state or national bank, trust
company, savings bank, and/or savings and loan association (whether or not
insured in whole or in part by the Federal Deposit Insurance Corporation or any
similar body). Landlord shall have no responsibility
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<PAGE>
for the rate or amount of any interest earned on the Security Deposit or for the
preservation of the principal of the Security Deposit if invested in a Bank
Account.
37.3. All interest actually paid from time to time on each Bank
Account, shall be paid to Tenant annually upon written request from Tenant,
except for one per cent (1%) per annum of the Security Deposit which shall be
retained by Landlord for Landlord's expenses in administering the Security
Deposit.
37.4. Upon the termination of this Lease, Landlord shall return the
Security Deposit to Tenant, less any amount retained or applied by Landlord in
accordance with the terms of this Lease. Upon the sale of the Land and Building,
Landlord shall transfer to the purchaser the Security Deposit.
ARTICLE 38. Substitute Space.
----------------
At any time prior to or during the term hereof, Landlord may
substitute for the Premises at such time (such premises being hereinafter called
the "Replaced Premises"), whether or not any other substitution has been made
pursuant to this Article prior to such time, other space in the Building (such
other space being hereinafter referred to as the "Substitute Premises") by a
written notice given to Tenant not later than forty-five (45) days prior to the
date specified in such notice as the effective date for such substitution. Such
notice shall have annexed thereto a floor plan identifying the Substitute
Premises on such plan. The Substitute Premises shall be reasonably acceptable to
Tenant, reasonably comparable to the Premises, reasonably similar proximity to
the elevators, and shall have substantially at least as much rentable area as
the Replaced Premises. If the effective date specified in such notice is
subsequent to the Commencement Date, Tenant shall vacate the Replaced Premises
and surrender the same to Landlord on or before such effective date, provided
Landlord, at its expense, shall have substantially duplicated in the Substitute
Premises the Landlord's work performed in the Premises (if any), it being the
intention of the parties hereto that the Substitute Premises shall have
substantially the equivalent installations as the Replaced Premises, at no
expense to Tenant. Landlord shall promptly after Tenant enters into occupancy of
the Substitute Premises, pay to Tenant any reasonable moving costs (including,
packing, unpacking and telephone relocation costs) incurred by Tenant because of
such substitution, it being understood that Tenant may move after Business Hours
or on a non-Business Day. In the event of a substitution of space pursuant
hereto, the term "Premises" in this Lease shall thereafter and for all purposes
be deemed to refer to the Substitute Premises at such time.
ARTICLE 39. Intentionally Omitted.
ARTICLE 40. Construction of Premises.
------------------------
40.1. Tenant will prepare and furnish the following ("Tenant's
Plans") to Landlord within sixty (60) days after the date hereof (a) complete,
finished, detailed architectural drawings and specifications for the Premises;
and (b) all information necessary to reflect modifications in the
air-conditioning system, if any, and any, additional electrical or plumbing
requirements of Tenant, if any, in connection with Landlord's Work.
40.2. Tenant shall deliver to Landlord, also, five (5) sets of blue
prints and one set of reproducible final working drawings and specifications as
described in (a) and (b) above, marked FINAL FOR PRICING AND CONSTRUCTION,
within sixty (60) days of the date hereof. All final drawings shall be drawn to
a minimum scale of 1/8 inch = 1 foot, Tenant's architectural drawings and
specifications shall furnish all required information described in Exhibit "E"
attached hereto.
40.3. In accordance with Tenant's Plans, Landlord at Landlord's
expense, except as otherwise expressly specified in this Lease, will cause its
designated contractor (selected in accordance with the provisions of this
Article) to make and complete in and to the Premises the work and installations
(hereinafter called "Tenant's Initial Work") specified in the Plans; provided,
however, that in no event shall Landlord be required to pay or incur costs in
excess of Seven Hundred Seventy-One Thousand Dollars ($771,000.00) (the "Maximum
Contribution") to perform Tenant's Initial Work. Landlord and Tenant shall
mutually agree upon three (3) contractors to present bids for the construction
of Tenant's Initial Work. In the event Tenant elects to designate the contractor
to perform the construction which is not the low bidder, the Landlord's
obligation to pay Tenant the Maximum Contribution shall be limited to the lowest
bid received from the three (3) designated contractors. As used herein,
"Tenant's Initial Work" shall be deemed to mean the installation of fixtures,
improvements and appurtenances (including, without limitation, wallpaper,
painting, and carpeting) attached to or built into the Premises in accordance
with Tenant's plans and specifications and shall not include the fees and
expenses of Tenant's architect, engineer and attorney, or the cost of any
movable partitions, business and trade fixtures, machinery, equipment,
furniture, furnishings and other articles of personal property. In the event
that the cost of Tenant's Initial Work exceeds Seven Hundred Seventy-One
Thousand Dollars ($771,000.00), Tenant shall reimburse Landlord for such excess
costs within five (5) days after written demand therefor and shall deposit with
Landlord an amount equal to fifty percent (50%) of such work before Landlord
commences construction.
40.4. Each architect or designer acting on behalf of Tenant shall be
deemed an Employee of and authorized to bind Tenant with respect to all
decisions, issues, consents, and approvals arising under this Lease
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<PAGE>
or any matter pertaining thereto. Tenant will be required to obtain and deliver
to Landlord all documents required for Landlord to obtain a permanent
certificate of occupancy for the Building.
40.5. Notwithstanding anything to the contrary in this Lease,
Landlord shall not be required to perform, and Tenant shall not request, any
work or installations which would:
(a) require changes to structural components of the
Building or the exterior design of the Building;
(b) require any modification to the Building's System
or installations outside the Premises;
(c) not comply with all applicable Laws of any
Government Entity having jurisdiction over the
construction of the Building and/or the Premises;
and/or
(d) be incompatible with plans previously filed for the
Building with the Department of Buildings of the
City of New York or with the occupancy of the
Building as a first-class office building.
Any changes required by any Government Entity affecting the Building and/or
Premises shall not be deemed a modification of Tenant's Plans, plans and
specifications or any provision of this Article, and shall be acceptable by
Tenant; but Landlord shall notify Tenant of the same within a reasonable period
of time.
40.6. Within five (5) days after delivery of Tenant's Plans to
Landlord pursuant to Section 40.2, Tenant's architect shall meet with Landlord's
engineer at one of two times to be designated by such engineer and shall answer
any reasonable questions raised by such engineer with respect to Tenant's
submission.
40.7. If Building Standard Work is not Substantially Complete
prior to March 1, 1993, as a result of any act, neglect, failure or omission of
Tenant or its Employees, including any of the following, such delay shall be
deemed a "Tenant Delay":
(a) Tenant's failure to furnish Tenant's Plans in
accordance with Section 40.2 hereof;
(b) Tenant's delays in submitting or approving any
other drawings, plans or specifications ("Tenant's
Extra Work"), or in supplying information, within
the times required under this Lease;
(c) Tenant's failure to meet with Landlord's engineer
pursuant to Section 40.6 or failure in such meeting
to supply necessary information or correct or
complete any incorrect or incomplete submissions;
(d) Tenant's request for materials, finishes or
installations (other than those included in
Building Standard Work) which will not be readily
available when Landlord, or Landlord's contractor,
is ready to install same;
(e) Tenant's changes in drawings, plans or
specifications previously submitted to or prepared
by Landlord;
(f) performance of any work (or delays in completion of
any work) by any Persons employed by Tenant; and/or
(g) delays attributable to Tenant's Extra Work,
including delays in preparation of mechanical and
electrical drawings for the Premises by reason of
additional time required to reflect Tenant's Extra
Work.
40.8. Tenant shall pay Landlord, as Additional Rent (whether or
not the Term has commenced) a sum equal to any additional cost actually incurred
by Landlord in completing Landlord's Work resulting from any Tenant Delay. In
the event Tenant does not deliver Tenant's Plans within the time periods
required by Sections 40.1 and 40.2, then the Commencement Date shall be
accelerated by the same number of days by which Tenant's Plans were delivered to
Landlord beyond the date required hereunder whether or not the Tenant's Initial
Work has been Substantially Completed. Any such sums shall be in addition to any
sums payable pursuant to Article 3 hereof and shall be paid to Landlord within
ten (10) days after Landlord bills Tenant.
ARTICLE 41. Miscellaneous.
-------------
41.1. This Lease shall be governed by and construed in
accordance with the laws of the State of New York.
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<PAGE>
41.2. This Lease shall be construed without regard to any
presumption or other rule requiring construction against the party causing this
Lease to be drafted.
41.3. Except as otherwise expressly provided in this Lease, each
covenant, agreement, obligation or other provision of this Lease on Tenant's
part to be performed shall be deemed and construed as a separate and
independent covenant of Tenant, not dependent on any other provision of this
Lease.
41.4. Time shall be of the essence with respect to the exercise of
any option by Tenant under this Lease.
41.5. Any interest payable by Tenant under this Lease shall be at
the Interest Rate, unless otherwise provided.
41.6. If and whenever Tenant is in arrears in payment of Fixed Rent
or Additional Rent hereunder, Tenant waives Tenant's right, if any, to designate
the items against which any payments made by Tenant are to be credited, and
Tenant agrees that Landlord may apply any of Tenant's payments to any items
Landlord sees fit, notwithstanding any designation or request by Tenant as to
the items against which any such payments shall be credited.
41.7. Exhibits A through F (and all accompanying Schedules) to this
Lease are incorporated in this Lease by reference.
41.8. The terms, covenants, conditions, and provisions of this Lease
shall bind and inure to the benefit of Landlord and Tenant and, subject to
Article 22, their respective legal representatives, successors, and assigns.
41.9. No remedy or election of Landlord under this Lease be deemed
exclusive but shall, whenever possible, be cumulative with all other remedies
at law or in equity.
41.10. If any term, covenant, condition or provision of this Lease
(or the application thereof to any circumstance or Person) shall be invalid or
unenforceable to any extent, at Landlord's option the remaining terms,
covenants, conditions and provisions of this Lease shall not be affected
thereby; and each remaining term, covenant, condition and provision of this
Lease shall be valid and shall be enforceable to the fullest extent permitted
by law.
41.11. The captions of this document are set forth for convenience
and do not define, limit or describe the scope of this Lease or the intent of
any provisions thereof.
41.12. It is understood and agreed that this Lease is offered to
Tenant for signature subject to Landlord's acceptance and approval, and that
Tenant shall have affixed its signature hereto with the understanding that such
act shall not, in any way, bind Landlord until such time as this Lease shall
have been approved and executed by Landlord and unconditionally delivered to
Tenant.
41.13. If Tenant is a corporation, each person executing this Lease
on behalf of Tenant hereby covenants, represents and warrants that Tenant is a
duly qualified (if foreign) corporation and is authorized to do business in the
State of New York (a copy of evidence thereof to be supplied to Landlord upon
request); and that each person executing this Lease on behalf of Tenant is an
officer of Tenant and that he is duly authorized to execute, acknowledge and
deliver this Lease to Landlord (a copy of a resolution to that effect to be
supplied to Landlord upon request).
41.14. If Tenant is a partnership (or is comprised of 2 or more
persons, individually, or as joint venturers or as copartners of a partnership)
or if Tenant's interest in this Lease shall be assigned to a partnership (or to
2 or more persons, individually, or as joint venturers or as copartners of a
partnership, any such partnership and such persons are referred to in this
Section as "Partnership Tenant"), the following provisions of this Section
shall apply to such Partnership Tenant: (i) the liability of each of the parties
comprising Partnership Tenant shall be joint and several, and (ii) each of the
parties comprising Partnership Tenant hereby consents in advance to, and agrees
to be bound by, any modifications, termination, discharge or surrender of this
Lease which may hereafter be made and by any notices, demands, requests or other
communications which may hereafter be given, by Partnership Tenant or by any of
the parties comprising Partnership Tenant, and (iii) any bills, statements,
notices, demands, requests or other communications given or rendered to
Partnership Tenant or to any of the parties comprising Partnership Tenant
shall be deemed given or rendered to Partnership Tenant and to all such parties
and shall be binding upon Partnership Tenant and all parties, and (iv) if
Partnership Tenant shall admit new partners, all such new partners shall, by
their admission to Partnership Tenant, be deemed to have assumed performance of
all of the terms, covenants and conditions of this Lease on Tenant's part to be
observed or performed, and (v) Partnership Tenant shall give prompt notice to
Landlord of the admission of any such new partners, and upon demand of Landlord,
shall cause each such new partner to execute and deliver to Landlord an
agreement in form satisfactory to Landlord, wherein each such new partner shall
assume performance of all of the terms, covenants and conditions of this Lease
on Tenant's part to be observed and performed (but neither Landlord's failure to
request any such agreement nor the failure of any such new partner to execute or
deliver any such agreement to Landlord shall vitiate the provisions of this
Section).
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<PAGE>
41.15. All signs will be subject to Landlord's prior written approval.
Tenant will be required to comply with the Sign Criteria set forth in Exhibit F
hereto
41.16. Tenant will be entitled to one strip in the main building
directory in the lobby and one strip in the floor directory for each 2000 square
feet of space in the Premises. Landlord's acceptance of any name for listing on
the building directory will not be deemed, nor will it substitute for,
Landlord's consent, as required by this Lease, to any sublease, assignment, or
other occupancy of the Premises.
IN WITNESS WHEREOF, LANDLORD AND TENANT HAVE RESPECTIVELY EXECUTED
THIS LEASE AS OF THE DAY AND YEAR FIRST ABOVE WRITTEN.
J&B 18 CORP.
WITNESS:
[ILLEGIBLE SIGNATURE] By: [ILLEGIBLE SIGNATURE]
- ---------------------------------- ---------------------------------
Its: Pres
SZS 33 ASSOCIATES L.P.,
a Delaware limited partnership
By: M.S. Management Associates, Inc.,
an Indiana Corporation d/b/a
Simon Management Company, its
agent
WITNESS:
[ILLEGIBLE SIGNATURE] By: [ILLEGIBLE SIGNATURE]
- ---------------------------------- ----------------------------------
Its:
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<PAGE>
STATE OF NY )
)ss.:
COUNTY OF NY )
On this 10 day of December, 1992, before me personally came Jack M
Benun, to me known, who, being duly sworn by me, did depose and say that he
resides in 1123 E 8 St Bklyn NY that he is the President of J&B 18 Corp., the
corporation described in and which executed the above instrument and that he
signed his name thereto by order of the board of directors of said corporation.
/s/ Stuart Bender
-----------------------
Notary Public
[SEAL]
<PAGE>
Exhibit A
---------
Land
----
ALL that certain plot, piece or parcel of land situate, lying and
being in the Borough of Manhattan, City of New York, County of New York and
State of New York, bounded and described as follows:
BEGINNING at the corner formed by the intersection of the northerly
side of West 32nd Street with the westerly side of Sixth Avenue (formerly
Broadway); running
THENCE Westerly along the said northerly side of West 32nd Street, 400
feet;
THENCE northerly parallel with Sixth Avenue, 197 feet 6 inches to the
southerly side of West 33rd Street;
THENCE Easterly along the said southerly side of West 33rd Street, 400
feet to the corner formed by the intersection of the said southerly side of West
33rd Street with the westerly side of Sixth Avenue;
THENCE Southerly along the said westerly side of Sixth Avenue, 197
feet 6 inches to the first above mentioned corner, point or place of BEGINNING.
<PAGE>
[PICTURE OF FLOOR PLAN FOR B & H / HAPPY KIDS LOCATION PLAN]
<PAGE>
Exhibit C
---------
Permitted Encumbrances
----------------------
The following are "Permitted Encumbrances" to which this Lease (and
Tenant's estate hereunder) are and shall be subject and subordinate:
(a) any and all Senior Encumbrances now or at any time hereafter in
effect or constituting liens on or against the Premises;
(b) zoning regulations and ordinances of the City;
(c) any Laws whatsoever governing environmental quality or land use
now or hereafter in effect;
(d) consents by Landlord or any former owner of the Building for the
erection of any structure, superstructure or substructure on,
under or above any street or streets, or any portion of any
building, on which the Premises or the Building abut;
(e) encroachments of stoops, areas, cellar steps, trim, and cornices,
if any, upon any street or highway; and any other state of facts
which an accurate survey would show;
(f) utility company rights, licenses, and/or easements to maintain
poles, lines, wires, towers, stations, cables, pipes, boxes
and/or other fixtures or installations presently serving,
crossing, existing, or granted on, under or with respect to the
Building;
(g) right, lack of right or restricted right of any owner of the
Building to construct or maintain a vault or vaulted area in or
under the sidewalks abutting the Building; and any licensing
statute, ordinance, or regulation, and/or the terms of any
license pertaining thereto and the rights, if any, of the City
with respect to vaults under the sidewalk beyond the building
line of the Building;
(h) existing or future designation of the Building (or any portion
thereof) as an historic landmark, or designation of a district in
which the Building is located as an historic district, and all
related restrictions applicable to the Building; and
(i) all covenants, restrictions, easements, or reservations (if any)
of record against the Land or the Building.
<PAGE>
Exhibit D
---------
Rules and Regulations
---------------------
1. Any moving of furniture or equipment into or out of the Premises must
be done by Tenant at its own cost and expense, on Monday through Friday after
6:00 p.m., or on Saturday. If such move requires use of an elevator, such move
shall not be in excess of such elevator's carrying load capacity.
2. The sidewalks, entrances passages, lobby, elevators, vestibules,
stairways, corridors or halls of the Building shall not be obstructed or
encumbered by any tenant or used for any purpose other than ingress and egress
to and from the Premises, and Tenant shall not permit any of its employees,
agents or invitees to congregate in any of said areas. No door mat of any kind
whatsoever shall be placed or left in any public hall or outside any entry door
of the Premises.
3. No awnings or other projections shall be attached to the outside walls
of the Building. No curtains, blinds, shades, or screens shall be attached to or
hung in, or used in connection with, any window or door of the Premises, without
the prior written consent of Landlord. Such curtains, blinds, shades or screens
must be of a quality, type, design and color, and attached in the manner,
approved by Landlord.
4. No sign, insignia, advertisements, object, notice or other lettering
shall be exhibited, inscribed, painted or affixed by any tenant on any part of
the outside or inside of the Premises or the Building without the prior written
consent of Landlord. In the event of the violation of the foregoing by any
tenant, Landlord may remove the same without any liability, and may charge the
expense incurred in such removal to the tenant or tenants violating this rule.
Interior signs and lettering on doors and directory table shall, if and when
approved by Landlord, be inscribed painted or affixed for each tenant by
Landlord at the expense of such tenant, and shall be of a size, color and style
acceptable to Landlord.
5. The sashes, sash doors, skylights, windows and doors that reflect or
admit light and air into the halls, passageways or other public places in the
Building shall not be covered or obstructed by Tenant, nor shall any bottles,
parcels, or other articles be placed on the window sills.
6. No showcase or other articles shall be put in front of or affixed to
any part of the exterior of the Building, nor placed in the halls, corridors or
vestibules.
7. The water and wash closets and other plumbing fixtures shall not be
used for any purpose other than those for which they were designed or
constructed, and no sweepings, rubbish rags, acids or other substances shall be
thrown or deposited therein. All damages resulting from any misuse of the
fixtures shall be borne by the tenant who, or whose servants, employees, agents,
visitors or licensees, shall have caused the same.
8. Other than as set forth in the Lease, no tenant shall mark, paint,
drill into, or in any way deface any part of the Premises or the Building. No
boring, cutting or stringing of wires shall be permitted, except with the prior
written consent of Landlord, and as Landlord may direct. No tenant shall lay
linoleum, or other similar floor covering, so that the same shall come in direct
contact with the floor of the Premises, and, if linoleum or other similar floor
covering is desired to be used an interlining of builder's deadening felt shall
be first affixed to the floor, by a paste or other material, soluble in water,
the use of cement and other similar adhesive material being expressly
prohibited.
9. No bicycles, vehicles, animals, fish or birds or any kind shall be
brought into or kept in or about the premises.
10. No noise, including, but not limited to, music or the playing of
musical instruments, recordings, radio or television which, in the judgment of
Landlord, might disturb other tenants in the Building, shall be made or
permitted by any tenant. Nothing shall be done or permitted in the Premises by
Tenant which would impair or interfere with the use or enjoyment by any other
tenant of any other space in the building. No tenant shall throw anything out of
the doors, windows of skylights or down the passageways.
11. Tenant, its servants, employees, agents, visitors or licensees, shall
not at any time bring or keep upon the Premises any explosive fluid, chemical or
substance, nor any inflammable or combustible objects or materials other than
standard and ordinary cleaning materials kept and maintained in compliance with
all Laws.
12. Additional locks or bolts of any kind which shall not be operable by
the grand master key for the Building shall not be placed upon any of the door
or windows by any tenant, nor shall any changes be made in locks or the
mechanism thereof which shall make such locks inoperable by said grand master
key. Each tenant shall, upon the termination of its tenancy, turn over to
Landlord all keys of stores, offices and toilet rooms, either furnished to, or
otherwise procured by, such tenant and in the event of the loss of any keys
furnished by Landlord, such tenant shall pay to Landlord the cost thereof.
13. All removals from the Premises or the Building, or the moving or
carrying in or out of the Premises or the Building of any safes, freight,
furniture, packages, boxes, crates or any other object or matter of any
description must take place during such hours and in such elevators as Landlord
or its agent may determine
<PAGE>
from time to time. All deliveries of any nature whatsoever to the Building or
the Premises must be made only through Building entrances specified for such
deliveries by Landlord and shall be subject to such coordination and security
arrangements as Landlord may reasonably require.
14. Tenant shall not occupy or permit any portion of the Premises to be
occupied as an office for a public stenographer or public typist, or for the
possession, storage, manufacture other than as set forth in the Lease, or sale
of beer, wine or liquor, narcotics, drugs, tobacco in any form, or as a barber,
beauty or manicure shop, or as an employment bureau. Tenant shall not engage or
pay any employees on the Premises, except those actually working for Tenant on
the Premises, nor advertise for laborers giving an address at the Premises.
Tenant shall not use the Premises or any part thereof, or permit the Premises or
any part thereof to be used for manufacturing, or for sale at auction of
merchandise, goods or property of any kind.
15. Landlord shall have the right to prohibit any advertising or
identifying sign by any tenant which in Landlord's judgment tends to impair the
reputation of the Building or its desirability as a building for offices, and
upon written notice from Landlord, such tenant shall refrain from or discontinue
such advertising or identifying sign.
16. The Premises shall not be used for lodging or sleeping.
17. There shall not be used in any space, or in any lobbies, corridors,
public halls or other public areas of the Building, either by any tenant or by
jobbers or any others, in the moving or delivery or receipt of safes, freights,
furniture, packages, boxes, crates, paper, office material, or any other object
or thing, any hand trucks except those equipped with rubber tires, side guards,
and such other safeguards as Landlord shall require. No move or delivery of any
object or thing of whatever nature, other than light-weight objects hand-carried
by not more than one person, shall be made without at lease 24 hours' prior
written notice by Tenant to Landlord and without Tenant, prior to any such move
or delivery, laying (without affixation or attachment to any part of the floor
or floor covering) adequate masonite sheets covering all lobby, corridor, public
hall and other public areas floors of the Building (whether carpeted or
terrazzo) over which such move or delivery shall take place.
18. Tenant shall not cause or permit any odors of cooking or other
processes or any unusual or objectionable odors to emanate from the Premises
which would annoy other tenants or create a public or private nuisance. No
cooking shall be done in the Premises unless expressly permitted under other
provisions of the Lease.
19. Landlord reserves the right to rescind, alter, or waive the Rules and
Regulations for the Building, when, in its judgment, it deems it necessary or
desirable for the reputation, safety, care or appearance of the Building, or the
preservation of good order therein, or the operation or maintenance of the
Building or the equipment thereof, or the comfort of tenants or others in the
Building. No recision, alteration or waiver of any rule or regulation in favor
of one tenant shall operate as a recision, alteration or waiver in favor of any
other tenant.
20. Tenant shall not and shall not permit its personnel, agents or
visitors to litter any public areas of the Building or the land or improvements
on the land on which the Building is located (including the walkways and parking
areas located thereon), and Tenant shall be responsible to Landlord, and shall
pay Landlord for, the cost of removal of such litter within 10 days of notice
thereof by Landlord.
21. Landlord shall not unreasonably withhold from Tenant any approval
provided for in the Rules and Regulations.
-D-2-
<PAGE>
EXHIBIT E
---------
CONSTRUCTION
DESCRIPTION OF LANDLORD'S WORK AND OF TENANT'S WORK
---------------------------------------------------
I. LANDLORD'S WORK - The following work is to be performed exclusively by
Landlord and, except where otherwise indicated, shall be at Landlord's sole
expense:
A. COMMON AREA
1. Sidewalks.
Landlord will maintain sidewalks.
2. Public Spaces
a. Lobbies, service/office corridors, elevators, escalators,
stairs and service areas.
b. Public Spaces and Facilities - The following public spaces
and facilities have been provided:
(1) Public lounge and telephone area located on the eighth
floor.
(2) Public Toilet facilities located outside of the
Premises at such locations as the Landlord has
determined.
B. BUILDINGS
1. Utilities: Subject to the provisions of Article VII of the Lease
to which this Exhibit is attached.
a. Electrical Service - Landlord will install, electrical
conduit (with wiring) to a disconnect switch within the
Premises at a point determined by Landlord. Electrical
service shall be 265/460 volt, three phase, four wire, for
Tenant's combined power and lighting requirement. Conduit
shall be sized to accommodate a service of 6 watts per
square foot of floor area of the Premises. Landlord will
make the connection to Landlord's electrical distribution
panel at Tenant's expense. Any further upgrades in
electrical service shall be at Tenant's expense. Landlord
may install a check meter for the demised Premise, at
Tenant's expense within Landlord electrical closet.
b. Sprinkler System - Landlord has installed a basic grid
automatic fire sprinkler system throughout the Premises in
compliance with the requirements of Factory Mutual
Engineering, local and state agencies. Any modifications of
the sprinkler system, which will include, but not be limited
to, the cost of relocating, re-sizing, draining or adding
sprinkler mains or heads shall be in compliance with all
applicable governmental regulations and performed by Tenant,
by a Landlord designated contractor at Tenant's expense.
c. Central System - Landlord will provide and maintain a
central plant and system of chilled air to the Premises
installed at a point determined by Landlord. Tenant agrees
to adapt to Landlord's central system and provide a complete
air distribution system connected to variable air volume
control unit(s). Variable Air Volume control unit(s) (VAV),
supplied and installed by Tenant, shall be sized to
accommodate the design conditions as defined in Paragraph
I.B.I.c.(1), or upgrade design conditions if the same are
required by Tenant's approved plans and specifications. The
VAV unit shall match the existing base building system and
matching thermostat for the air volume control unit will be
required, and Tenant shall provide at Tenant's expense, and
Tenant shall at its expense install thermostat.
(1) Central system Design. The Landlord's central plant and
system of chilled air supply will be designed to
provide the following capacities per square foot of
floor area of the tenant's leased Premises:
(a) Design Total Cooling Perimeter 35 btu/hr
square foot
Interior 24 6 btu/hr
square foot
(b) Design Air Delivery Perimeter 1 7 cfm/square
foot
Interior 1 2 cfm/square
foot
(c) Air Supply Temperature
EXHIBIT "E"
Page 1
<PAGE>
Summer 56 (degrees) FDB & 53.5 (degrees) FWB
Winter 56 (degrees) FDB
(2) Operation - Landlord will make chilled air available to the
Premises at such times and days as the Office Space is normally
open for business to the public.
(3) Landlord has provided a condenser water riser to Tenant's
auxiliary cooling. Tenant shall install a flow control valve flow
meter and water cooled package, self contained unit not to exceed
4 GPM/100 square feet. Extension of condenser water pipes shall
be at a point determined by Landlord, and routing of pipes shall
be performed by Tenant at Tenant's expense.
2. Structure
a. Frame, etc. - The structural frame, columns, beams, concrete slab
and/or resurfaced floor shall be constructed of non-combustible and/or
wood framing and the floor slabs shall be designed to carry live and
dead loads in accordance with the governing building codes. All floor
penetrations, if any, must be approved by Landlord, and if approved,
shall be performed by Tenant, by a Landlord approved contractor, at
Tenant's expense. Landlord has provided the Building standard raised
floor system.
b. Space Heights - The minimum clear heights, measured between the floor
slab and the underside of the floor slab on the upper level when
finished as hereinafter provided, will vary according to the floor
level on which the Premises is located. Tenant shall field verify the
actual heights.
c. Exterior Walls - Exterior walls shall be of non-combustible
construction and a finish of suitable nature and of appropriate
materials having a finished appearance and decorative quality designed
by Landlord's architect.
d. Partitions - Partitions shall be provided between the Premises and
other areas, as well as between public spaces and the Premises.
Demising Partitions shall consist of fire rated gypsum board on metal
studs, taped, spackled and extending from floor slab to underside of
slab above.
3. Showroom Doors
One pair of frameless tempered clear glass doors will be provided and
installed by Landlord upon submission to Landlord of Tenant's approved
Plans and Specifications. Tenant shall be permitted to install a
single glass panel on each side of the showroom doors for the purpose
of creating an enclosed display area pursuant to plans and
specifications approved by Landlord in accordance with the terms and
conditions of this Lease. If two (2) panels are installed they shall
be of equal width, and in no event shall the panel(s) exceed five (5)
feet in width. The contents and appearance of the displays in the
display cases visible from the Common Areas of the premises shall be
subject to absolute and unconditional approval by the Landlord
throughout the term of the Lease.
4. Temporary Services
Any temporary services required by Tenant during its construction
period, including heat, water or electrical service, shall be secured
from Landlord or Landlord's contractor, as the case may be, at a fee
to Tenant, defined as additional rent, payable prior to commencement
of Tenant's Work, at a sum equal to One and 50/100 Dollars ($1.50) per
square foot. If Tenant performs any of its work before 7:00 a.m. or
after 4:00 p.m., then Tenant shall pay, in addition to the temporary
service charge, the charge for such standby electrical service.
5. General
a. Landlord, Landlord's agent, an independent contractor, hired by
Landlord or agent, or an authorized utility company, as the case may
be, shall have the right subject to Landlord's written approval, to
run utility lines, pipes, wiring, conduits duct work, where necessary.
b. Landlord has provided hot water linned radiation along window areas at
exterior walls.
EXHIBIT "E"
Page 2
<PAGE>
II. TENANT'S WORK - The following work required to complete and place the
Premises in finished condition ready to open for business is to be
performed by the Tenant at the Tenant's own expense. Tenant's Work
includes, but is not limited to, the following:
A. GENERAL PROVISIONS
All work done by Tenant shall be governed in all respects by, and be
subject to, the following.
1. Landlord shall have the right to require Tenant to furnish
payment and performance bonds or other security in form
satisfactory to Landlord for the prompt and faithful performance
of Tenant's Work, assuring completion of Tenant's Work and
conditioned that Landlord will be held harmless from payment of
any claim either by way of damages or liens on account of bills
for labor or material in connection with Tenant's Work. Tenant's
Work shall at all times be conducted in such manner so that
Tenant shall not be in violation of the Lease.
2. It is understood and agreed between Landlord and Tenant that
costs incurred by Landlord, if any, as a result of Tenant's
failure or delay in providing the information as required in this
Exhibit and in the Lease to which this Exhibit is attached, shall
be the sole responsibility of Tenant and Tenant will pay such
costs, if any, promptly upon Landlord's demand.
3. All Tenant's Work shall conform to applicable statutes,
ordinances, regulations and codes and the requirements of Factory
Mutual Insurance Company and all rating bureaus. Tenant shall
obtain and convey to Landlord all approvals with respect to
electrical, water, sewer, heating, cooling, fire protection and
fire alarm system, and telephone work, all as may be required by
any agency or utility company.
4. No approval by Landlord shall be deemed valid unless in writing
and signed by Landlord.
5. Prior to commencement of Tenant's Work and until completion
thereof, or commencement of the Lease Term, whichever is the last
to occur, Tenant shall maintain a comprehensive "All Risk"
policy of insurance protecting against all risk of physical loss
or damage to all Tenant's Work in place and all materials stored
at the site of Tenant's Work, and all materials, equipment,
supplies and temporary structures of all kinds incidental to
Tenant's Work, and equipment, all while forming a part of or
contained in such improvements or temporary structures, or while
on the Premises or within the Building, all to the actual
replacement cost thereof at all times on a completed value basis.
In addition, Tenant agrees to indemnify and hold Landlord
harmless against any and all claims for injury to persons or
damage to property by reason of the use of the Premises for the
performance of Tenant's Work, and claims, fines, and penalties
arising out of any failure of Tenant or its agents, contractors
and employees to comply with any law ordinance, code
requirement, regulations or other requirement applicable to
Tenant's Work and Tenant agrees to require all contractors and
subcontractors engaged in the performance of Tenant's Work
likewise to indemnify and hold Landlord harmless as well as to
effect and maintain and deliver to Tenant and Landlord,
certificates evidencing the existence of, and covering Landlord,
Tenant and Tenant's contractors, prior to commencement of
Tenant's Work and until completion thereof, the following
insurance coverages:
a. Workmen's Compensation and Occupational Disease Insurance in
accordance with the laws of the State in which the property
is located, including Employee Insurance to the limit of
$500 000
b. Comprehensive General Liability Insurance, (excluding
"Automobile insurance against bodily injury), including
independent contractors, contractual liability for completed
operations, including death resulting therefrom, and bodily
injury and personal injury in the limits of $3,000.000 for
any one occurrence and property damage in the limits of
$1,000,000 for any one occurrence or a combined limit policy
of $3,000,000 per occurrence.
c. Comprehensive Automobile Insurance, including "non-owned"
and automobiles, against bodily injury, including death
resulting therefrom, with policy limits of $1,000,000
EXHIBIT "E"
Page 3
<PAGE>
d. Owners and contractors protective liability coverage for an
amount not less than $3,000,000.
e. Disability Benefits insurance in accordance with the laws of the
State of New York.
6. Tenant agrees that Tenant's Work and any other work performed by Tenant at
the Premises shall be performed in a manner which will not create any work
stoppage, picketing, labor disruption or dispute or violate Landlord's
union contracts affecting the building or interfere with the business of
Landlord. In the event of the occurrence of any work stoppage, picketing,
labor disruption or dispute resulting from actions or omissions of Tenant
or any subtenant or concessionaire, or their respective employees,
contractors or sub-contractors, Tenant shall, immediately upon notice from
Landlord cease the conduct giving rise to such condition. In the event
Tenant fails to cease such manner of conduct as aforesaid, Landlord in
addition to any rights available to it under this Lease and pursuant to
law, shall have the right to injunction with or without notice.
B. FLOOR SLAB
All floor penetrations, if any, must be approved by Landlord, and if
approved, shall be performed by Tenant, by a Landlord approved contractor,
at Tenant's expense. All tenants with food preparation areas shall install
a waterproofing membrane and a pan underneath the raised floor in those
areas of the Premises. All floor penetrations to be properly sealed to
prevent leaks on Premises below. Tenant's permitted to structurally modify
the floor slab and shall be required to restore the floor slab to its
original condition prior to the structural change.
C. CEILING
1. All finished ceilings and coves, the height of which will vary
according to the floor level on which the Premises is located. Tenant
should field verify the actual height.
2. Tenant's ceilings shall be one hour fire rated acoustic tile, gypsum
board and/or plaster, suspended by adequate suspension systems to
conform to final requirements of governing authorities, Landlord and
Landlord's structural engineers.
3. The space above the ceiling line, which is not occupied or allotted to
Landlord's Work (structural members, duct work, piping, etc.) may be
used for the installation of suspended ceiling, recessed lighting
fixtures and duct work. Under no circumstances will Tenant's Work be
hung or suspended from non-structural construction. Any Tenant Work
involving the hanging or suspension of construction shall be
accomplished only by methods, in locations and by use of assemblies
approved by Landlord and Landlord's structural engineers.
D. WALLS
All interior walls and curtain walls within the Premises, including all
interior lath and plastering and gypsum board thereon, and including lath
and plastering, and/or dry wall on Landlord's exposed masonry or stud party
wall partitions. Interior partitions shall not extend to slab above, they
shall not exceed 6" above the hung ceiling in the Premises. Tenant shall
provide and install bracing and/or studs and/or blocking as necessary to
support wall mounted fixtures. Tenant shall be responsible for all exterior
wall insulation. Cracks, joints and openings in walls to be filled with
appropriate fire resistant materials. Return air openings shall be provided
in the demising walls between Premises as required for proper air movement.
Walls with sheetrock to the slab will be permitted in conference rooms and
executive offices with return air openings sized by engineer so long as
such walls comply with all applicable laws, rules, regulations and building
codes.
E. INTERIOR PAINTING
All interior painting and decoration as approved by Landlord.
F. FLOOR COVERINGS
All floor coverings and floor finishes including recesses for special
floor finishes. It is Tenant's responsibility to join neatly to the finish
Common Area Floor provided by Landlord.
G. FURNITURE AND FIXTURES
All furnishings, trade fixtures and related parts, including installation.
H. PLUMBING
Plumbing vents, drainage and water piping for applicable tenant spaces will
be installed by, Tenant, at Tenant's expense, at Landlord approved
designated locations. All plumbing and plumbing fixtures as required by
applicable codes, including a properly sized water meter if the
EXHIBIT "E"
Page 4
<PAGE>
same is required by Landlord, in which latter event Tenant shall make any
required utility deposits.
I. TELEPHONE CONDUIT
Suitable conduit for telephone service from Landlord's designated telephone
closet to the Premises.
J. HOT WATER HEATER
Domestic electric hot water heater, where required, including final
connections.
K. DOMESTIC WATER
Available from a location determined by Landlord. Extension of service
shall be at a point determined by Landlord, routing shall be performed by
Tenant at Tenant's expense.
L. HEATING, VENTILATING AND AIR CONDITIONING
1. Complete HVAC Systems shall be designed, furnished and installed
within the Premises by the Tenant. The HVAC systems, calculations,
designs and installations shall be as recommended in ASHRAE
Publications. Tenant's systems and ventilation shall meet all codes
and ASHRAE standards. Tenant shall furnish Landlord with complete load
calculations including information as to Tenant's lighting load in
watts and Tenant's estimated office showroom population (employees and
customers).
2. Tenant's cooling system shall be adequate for cooling the Premises to
75 (degrees) F DB and 50% RH based on the latest ASHRAE guide outdoor
design dry bulb and design wet bulb temperatures for the area as
tabulated in the 2-1/2% columns.
3. Tenant's heating method shall be adequate for heating the Premises to
60 (degrees) F DB during times other than regular business hours based
on the latest ASHRAE guide outdoor design temperature for the area as
tabulated in the 99% column.
4. Tenant's exhaust systems shall provide the required exhaust air
capacities and shall be independent of the central cooling system. The
Tenant's exhaust systems shall be inoperative during other than
regular business hours. Replacement air for the Tenant's exhaust will
be provided through the Landlord's air supply system up to the design
air supply quantity. Any additional replacement air required will be
drawn from the common areas of the Office Space. Independent air make-
up air systems shall not be installed by the Tenant.
5. Tenant's HVAC systems shall be complete with air distribution systems,
ventilating systems, control systems, insulation and all other
components required to make a complete system. Tenant's systems shall
be specifically designed to coordinate with variable air volume
cooling temperature control. Tenant's HVAC system components shall be
installed in locations as designated by the Landlord.
6. Tenant shall provide smoke and fire dampers in accordance with all
codes and where the Tenant's ductwork passes through service corridor
walls, other fire separations or demising partitions. Tenant's
installation shall include complete access and access panels to all
valves, dampers and similar service devices (including the Landlord's)
required for testing, balancing and servicing.
7. Tenant shall connect to Landlord's central cooling system and shall
use the Tenant Criteria Handbook in designing systems and controls.
Alterations to the Landlord's central system required due to Tenant's
design shall be done by Landlord at Tenant's sole expense.
8. If Landlord so desires, Landlord will design, provide and install
within the Premises or other location designated by Landlord, the
necessary equipment to adequately heat and air condition the Premises
for Tenant's normal requirements. Tenant will reimburse Landlord for
its costs in amortizing, operating and maintaining the heating and air
conditioning system. Landlord may, at its option, install a cental
system and/or a ? Energy System.
M. MECHANICAL EQUIPMENT
All mechanical equipment including elevators, conveyors, and their shafts
and doors, located within the Premises, including electrical work for these
items must be approved by Landlord.
N. ELECTRICAL
EXHIBIT "E"
Page 5
<PAGE>
1. All interior distribution panels, lighting panels, power panels,
conduits, outlet boxes, switches, outlets and wires within the
Premises. Tenant shall provide electric conduit and boxes in the
ceiling and walls, including all electrical service panels, pull boxes
and equipment.
2. All electrical fixtures, including lighting fixtures and equipment,
and installation thereof.
3. All systems, where required for intercommunication, music antenna,
material handling or conveyor, burglar alarm, vault wiring, time
clock and demand control.
4. All conduit, as required by the utility company supplying the services
for necessary telephone wires in the Premises.
5. Feeder conductors from Landlord's facilities to the Tenant's Premises
including the connections to Tenant's equipment.
6. Tenant's power requirements in excess of six watts per square feet
shall be dependent upon availability, and if available such additional
electrical service shall be at Tenant's sole cost and expense.
O. SUBSEQUENT REPAIRS AND ALTERATIONS
Landlord reserves the right to require changes in Tenant's Work when
necessary by reason of code requirements.
Q. DOORS AND EXITING REQUIREMENTS
1. Tenant will be responsible for adherence to existing codes.
R. CONSTRUCTION ACTIVITIES
1. During Premises interior construction, Tenant shall use rear opening
to Premises for moving in/out of materials, for those Premises that
contain a rear door.
2. Use of Common Areas shall be kept to a minimum, and shall be for those
Premises not served by a rear door. Tenant shall be responsible for
any damage caused by Tenant or its contractors to any Common Areas.
3. Tenant will be responsible for the storage removal and proper disposal
of construction rubbish resulting from Tenant's Work. In the event
that Tenant does not remove such rubbish, the same shall be removed by
Landlord at Tenant's expense.
4. Tenant and Tenant's Contractor shall protect the Common Areas
including the building equipment within or without the Premises during
construction.
5. All work shall be performed in compliance with the rules of the
Building.
S. FIRE/SAFETY SYSTEM
Tenant shall interface with Landlord's Fire/Safety system, if required by
code, which work shall be done by Tenant, by a Landlord designated
contractor, at Tenant's expense.
T. ENGINEER DRAWING REVIEW
In the event, Tenant's drawings are reviewed by Landlord's engineer for
compliance to the Building design only, this cost shall be reimbursed by
Tenant.
EXHIBIT "E"
Page 6
<PAGE>
Exhibit F
---------
Sign Criteria
-------------
Tenant will not erect any signs except in conformity with Landlord's sign
criteria and the following policy:
(a) Landlord reserves right to accept or reject signage that does not fall into
the sign criteria.
(b) Any tenant that does not have enough room for signage adjacent to their
entrance doors will be required to incorporate the signage into their
interior entry way design.
(c) Wording on large scale signs shall be limited to approved trade names only.
Each party's customary signature or logo, hallmark, insignia, or other
trade identification will be respected.
(d) Signs with exposed neon tubing or exposed lamps and signs of the flashing,
blinking, rotating, moving, or animated types or audible type signs are not
permitted.
(e) The size of all Tenant's signs shall be limited. The scale and concept of
the showroom requires the use of signs which are not larger than necessary
to be legible from within the Common Areas. Thus, Tenant's signs shall be
located within the limits of its showroom and shall not project more than
1 inch beyond the leaseline.
(f) The maximum number of signage names is three (3). The maximum combined
total letter height (for up to three names) is 12 inches. The minimum
letter height is 2 inches. A two inch minimum spacing to be used between
names. All signs to be made of polished chrome, brushed chrome or black
styled letters.
(g) Painted or printed signs are prohibited.
(h) Paper signs, sticker, banners or flags are prohibited.
(i) No exposed raceways, ballast boxes or electrical transformers will be
permitted except as required by Code.
(j) Sign company names or stamps shall be concealed (Code permitting).
(k) Except as otherwise approved in writing by Landlord, only three (3) lines
per Tenant will be permitted. All three lines must be of a size that fits
within the sign boundaries below.
(l) Signs shall be placed entirely within the boundaries of Tenant's Premises
with no part higher than 5' or "8" feet above the finished floor line, nor
shall any sign be located closer than 3' - 8" feet to the finished floor
line, and no closer than 10" from entrance door vestibule, and no farther
than 8' - 6" feet from entrance door vestibule.
(m) Illuminated sign cabinets or modules are not permitted.
(n) Tenant shall install no pylon signs.
(o) Three (3) complete sets of sign drawings must be submitted to the Landlord
for written approval before fabrication. Tenant's sign drawings must
include the following;
1. Elevation view of sign (drawn to accurate scale) with dimensions of
height of letters and length of sign.
2. Color sample of sign letters.
3. Cross section view through sign letter showing the dimensioned
projection of the face of the letter from the face of the sign panel.
The Landlord shall not be responsible for the cost of refabrication of
signs fabricated, ordered or constructed, that do not conform to the sign
criteria.
(p) All signage shall be one quarter (1/4) inch pin mounted.
<PAGE>
EXHIBIT 10.4
FIFTH AMENDMENT TO LEASE
BETWEEN
TRIANGLE FIDELCO INDUSTRIAL CENTER
AND
HAWK INDUSTRIES, INC,
FIFTH AMENDMENT TO LEASE made this 31st day of October, 1994, by and
between TRIANGLE FIDELCO INDUSTRIAL CENTER (Landlord), 501 Watchung Avenue,
Watchung, New Jersey, 07060, and HAWK INDUSTRIES, INC. (Tenant) 690 Jersey
Avenue, Building 8, New Brunswick, New Jersey, 08901.
WHEREAS, the parties hereto have hereunto entered into a Lease Agreement,
an Amendment to Lease, a Second Amendment to Lease, all dated March 2, 1990; a
Third Amendment to Lease dated October 31, 1991; and a Fourth Amendment to Lease
dated March 19, 1993.
WHEREAS, the parties desire to amend said Lease as hereinafter set forth
below.
NOW THEREFORE, in consideration of the mutual covenants hereinafter set
forth, the parties hereby agree as follows:
1. The Tenant agrees to lease the adjoining premises previously occupied by
America China, which premises are hereinafter called the "Additional
Premises".
2. The term of the Lease for the Additional Premises shall commence on January
1, 1995, and expire March 31, 2000.
3. For the Period of January 1, 1995 to March 31, 2000, the annual base rental
for the Additional Premises shall be TWENTY-NINE THOUSAND SEVEN HUNDRED
($29,700.00) DOLLARS payable in equal monthly installments of TWO THOUSAND
FOUR HUNDRED SEVENTY-FIVE ($2,475.00) DOLLARS.
4. The Tenant's pro rata share for the Additional Premises shall be THREE
POINT SIX SEVEN (3.67%) PERCENT thereby increasing the definition of pro
rata share as set forth in paragraph 34.04 of the original Lease Agreement
to THIRTY-NINE POINT ZERO ONE (39.01%) PERCENT.
5. The Landlord agrees to complete at its sole cost and expense the following,
subject to Township approval:
A. Create two (2) openings approximately twenty (20') feet in width
between the existing premises and the Additional Premises.
B. Install gas heat in the Additional Premises.
6. The Tenant agrees to pay TWO THOUSAND FOUR HUNDRED SEVENTY-FIVE ($2,475.00)
DOLLARS as additional security deposit, as provided in Section 38.01, Paragraph
D, of the Addendum to Lease, payable upon execution of this Amendment to Lease.
7. If Landlord shall be unable to give possession of the Premises on the date
of commencement of the Term, because of the holding-over or retention of
possession of any Tenant, undertenant or occupants, or because of the face that
a Certificate of Occupancy for the Premises has not been procured, or for any
other reason not within Landlord's control, then, and in any of such events,
Landlord shall not be subject to any liability for failure to give possession on
said date, and the validity of this Lease shall not be impaired under such
circumstances, nor shall the same be construed in any vise to extend the Terms,
but the rent payable hereunder shall be abated (provided Tenant is not
responsible for the inability to obtain possession) until after Landlord shall
have given Tenant written notice that the Premises are substantially ready
for Tenant's occupancy.
8. The Tenant agrees that the Landlord has fulfilled all of its obligations
under the Lease Agreement and Amendments to Lease, and the Tenant has no claims
whatsoever against the Landlord.
9. All other terms and conditions of the original Lease Agreement and
Amendments to Lease (except as modified herein) are incorporated by reference
herein, shall apply to the Additional Premises and shall remain in full force
and effect.
IN WITNESS WHEREOF THE PARTIES HERETO AND HEREUNTO SET THEIR HANDS AND
SEALS THIS 31st DAY OF OCTOBER, 1994.
LANDLORD: TENANT:
[ILLEGIBLE SIGNATURE] [ILLEGIBLE SIGNATURE]
- ----------------------------------- ---------------------------------
Triangle Fidelco Industrial Center Hawk Industries, Inc.
<PAGE>
FOURTH AMENDMENT TO LEASE
BETWEEN
TRIANGLE FIDELCO INDUSTRIAL CENTER
AND
HAWK INDUSTRIES, INC.
FOURTH AMENDMENT TO LEASE made this 19th day of March, 1993 by and between
TRIANGLE FIDELCO INDUSTRIAL CENTER (LANDLORD), 501 Watchung Avenue, Suite #6,
Watchung, New Jersey and HAWK INDUSTRIES, INC. (TENANT) 690 JERSEY AVE., BLDG.
#8 NEW BRUNSWICK, NJ 08901.
WHEREAS, the parties hereto have hereunto entered into a Lease Agreement,
an Amendment to Lease, a Second Amendment to Lease all dated March 2, 1990, and
a Third Amendment to Lease dated October 31, 1991.
WHEREAS, the parties desire to amend said Lease as hereinafter set forth
below.
NOW THEREFORE, in consideration of the mutual covenants hereinafter set
forth, the parties hereby agree as follows:
1. The Tenant agrees to lease the adjoining premises previously occupied by
RAK Industries, which premises are hereinafter called the "Additional Premises".
2. The term of the Lease for the Additional Premises shall commence on April
1, 1993 and shall expire on March 31, 2000.
3. For the period of April 1, 1993 - March 31, 2000 the annual base rental for
the Additional Premises shall be FIFTY FOUR THOUSAND DOLLARS ($54,000.00)
payable in equal monthly installments of FOUR THOUSAND FIVE HUNDRED DOLLARS
($4,500.00).
4. The Tenant's pro rata share for the Additional Premises shall be SIX POINT
SIX SEVEN PERCENT (6.67%), thereby increasing the definition of pro rata share
as set forth in paragraph 34.04 of the original lease agreement to THIRTY FIVE
POINT THREE FOUR PERCENT (35.34%).
5. The Landlord agrees to complete at its sole cost and expense the following,
subject to Township approval:
A. Install three (3) new tailboard loading doors. Said installation to
include excavation, paving, doors, dockseals, and bumpers. Install dockseals on
remaining two (2) loading doors.
B. Create an opening approximately forty (40) feet in width between the
back premises and the Additional Premises, and demolish approximately seventy-
five (75) feet of wall between the original premises and the Additional
Premises, starting at front wall of premises.
C. Block up one (1) existing overhead door and six (6) office windows in
the additional premises. Tenant agrees that the Landlord shall be allowed to
leave the existing overhead door in place.
D. Demolish the existing office space in the additional premises,
including all bathrooms.
E. Patch existing holes in the floor adjacent to the existing loading
doors.
<PAGE>
6. The Tenant agrees to pay FOUR THOUSAND FIVE HUNDRED DOLLARS ($4,500.00) as
additional security deposit, as provided in Section 38.01, Paragraph D, of the
Addendum to Lease, payable upon execution of this Amendment to Lease.
7. The Tenant agrees that the Landlord has fulfilled all of its obligations
under the Lease Agreement and the Tenant has no claims whatsoever against the
Landlord.
8. All other terms and conditions of the original Lease Agreement and
Amendments to Lease (except as modified herein) are incorporated by reference
herein, shall apply to the Additional Premises and shall remain in full force
and effect.
IN WITNESS WHEREOF THE PARTIES HERETO AND HEREUNTO SET THEIR HANDS AND
SEALS THIS 19TH DAY OF MARCH, 1993.
[ILLEGIBLE SIGNATURE]
- -----------------------------------------------------
TRIANGLE FIDELCO INDUSTRIAL CENTER (LANDLORD)
[ILLEGIBLE SIGNATURE]
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HAWK INDUSTRIES, INC. (TENANT)
<PAGE>
THIRD AMENDMENT TO LEASE
BETWEEN
TRIANGLE FIDELCO INDUSTRIAL CENTER
AND
HAWK INDUSTRIES, INC.
THIRD AMENDMENT TO LEASE made this 31st day of OCTOBER, 1991 by and between
TRIANGLE FIDELCO INDUSTRIAL CENTER (LANDLORD), 501 Watchung Avenue, Watchung,
New Jersey and HAWK INDUSTRIES, INC. (TENANT) Suite 1010, 112 West 34th Street,
New York, New York, 10120.
WHEREAS, the parties hereto have entered into a Lease Agreement, an
Addendum to Lease, and a Second Addendum to Lease all dated March 2, 1990, and
WHEREAS, the parties desire to amend the Lease as hereinafter set forth
below,
NOW; THEREFORE, in consideration of the mutual covenants hereinafter set
forth, the parties hereby agree as follows:
1. The Tenant agrees to lease the adjoining premises previously occupied by LC
& S Motor Freight, which premises are hereinafter called the "Additional
Premises".
2. The term of the Lease for the Additional Premises shall commence on
December 1, 1991 and shall expire on March 31, 2000.
3. For the period of December 1, 1991 - March 31, 2000 the annual base rental
for the Additional Premises shall be SEVENTY THOUSAND TWO HUNDRED DOLLARS
($70,200.00) payable in equal monthly installments of FIVE THOUSAND EIGHT
HUNDRED FIFTY DOLLARS ($5,850.00).
4. The Tenant's pro rata share for the Additional Premises shall be EIGHT
POINT SIX SEVEN PERCENT (8.67%), thereby increasing the definition of pro rata
share as set forth in paragraph 34.04 of the original lease agreement to TWENTY
EIGHT POINT SIX SEVEN PERCENT (28.67%).
5. The Landlord agrees to complete at its sole cost and expense (except as
amended in paragraph 6 below), the following:
A. Install three (3) new tailboard loading doors. Said installation to
include excavation, paving, dock seals, and bumpers.
B. Remove the existing front office space so as to create the three doors
called for in paragraph A Above.
C. Create two (2) openings each approximately twenty (20) feet in width
between the original premises and the additional premises.
D. Block up six (6) existing overhead doors and three (3) office windows
in the additional premises. Tenant agrees that the Landlord shall be allowed to
leave the existing overhead doors in place.
E. Demolish the existing office space in the additional premises. The
Landlord and Tenant agree that the existing bathrooms and one (1) office shall
remain.
F. Paint the first floor of the existing structural bathroom and lunch
room in the additional premises.
6. The Tenant agrees to contribute ONE THOUSAND EIGHT HUNDRED DOLLARS
($1,800.00) toward the cost of said construction, payable upon execution of this
Amendment to Lease.
7. The Tenant agrees to pay FIVE THOUSAND EIGHT HUNDRED FIFTY DOLLARS
($5,850.00) as additional security deposit, as provided in Section 38.01,
Paragraph D, of the Addendum to Lease, payable upon execution of this Amendment
to Lease.
<PAGE>
8. Notwithstanding the provisions of Section 38.01, Paragraph C of the
Addendum to Lease, if the Tenant exercises its First Option to Extend, pursuant
to Paragraph 39.01 of the original lease, then in that event, the Tenant's
right to expand shall be extended to March 31, 2005.
9. In the event the Tenant exercises its Option to extend pursuant to Section
39.01 of the original lease, the annual base rental for the original premises
and the Additional Premises shall be: TWO HUNDRED SEVENTY NINE THOUSAND FIVE
HUNDRED DOLLARS ($279,500.00) payable in equal monthly installments of TWENTY
THREE THOUSAND TWO HUNDRED NINETY ONE DOLLARS AND SIXTY SEVEN CENTS ($23,291.67)
plus $3.25 per square foot net net net for any space hereinafter leased by the
Tenant pursuant to this lease agreement.
10. The Landlord grants to the Tenant a second FIVE (5) year option to renew
the Lease, as amended, under the following terms and conditions:
A. The Tenant shall not be in default of any of the terms and conditions
of the original Lease or any Addendum or Amendment to Lease.
B. The Second Option period shall commence on April 1, 2005 and expire on
March 31, 2010.
C. Base Rental for the Second Option period for the original premises and
the Additional Premises shall be THREE HUNDRED FORTY FOUR THOUSAND DOLLARS
($344,000.00) payable in equal monthly installments of TWENTY EIGHT THOUSAND SIX
HUNDRED SIXTY SIX DOLLARS AND SIXTY SEVEN CENTS ($28,666.67). However, if the
Tenant shall have exercised its right to expand hereafter, and shall be in
possession of additional space under this lease agreement as amended, then its
rental for the second option shall be the rental stated herein plus $4.00 per
square foot net net net for any space hereinafter leased by the Tenant pursuant
to this lease agreement.
D. Notice of intent to exercise said option must be given to and received
by the Landlord in writing, by Certified Mail, Return Receipt Requested, no
later than ONE HUNDRED EIGHTY DAYS (180) days prior to the expiration date of
the First Option to extend.
E. All other terms and conditions of the original Lease, Addenda to
Lease, and Amendments to Lease, shall continue to apply during the Second Option
period, except for the Tenant's right to expand as called for in Section 38.01,
and as amended in Paragraph 8 above.
11. The Tenant agrees that the Landlord has fulfilled all of its obligations
under the Lease Agreement and the Tenant has no claims whatsoever against the
Landlord.
12. All other terms and conditions of the original Lease Agreement and Addenda
to Lease (except as modified herein) are incorporated by reference herein, shall
apply to this Third Amendment to Lease, and shall remain in full force and
effect, including without limitation section 38.01 of the original lease as
amended in paragraph 8 above.
The above agreed to by:
[ILLEGIBLE SIGNATURE]
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TRIANGLE FIDELCO INDUSTRIAL CENTER (LANDLORD)
[ILLEGIBLE SIGNATURE]
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HAWK INDUSTRIES, INC. (TENANT)
10/31/91
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DATE
<PAGE>
ADDENDUM TO LEASE
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Section 38.01. Option to Expand. Notwithstanding anything to the contrary
----------------
herein contained Landlord agrees that it shall notify the Tenant of any
impending vacancy within the building located at 690 Jersey Avenue, New
Brunswick, NJ.
Tenant shall have SEVEN (7) days from Landlord's notification to provide
written notice of its intention to occupy said vacancy at the rate of $2.70 per
square foot net net net (i.e. tenants paying all expenses associated with its
use and occupancy of the premises) under the following terms and conditions:
A. Tenant shall not be in default of any of the terms and conditions of the
original Lease Agreement including but not limited to payment of basic and all
additional rentals.
B. Any additional premises occupied by the Tenant shall be occupied in an "as
is" condition, except that Landlord agrees to provide the premises in a broom
swept clean condition, and fill in any large holes in the floor.
C. This option to expand shall only be in effect through March 31, 2000.
Tenant shall have no right to expand pursuant to the terms of this Paragraph
38.01 during the option period as called for in Paragraph 39.01 in this Lease or
during any time that the Tenant occupies any portion of the property thereafter
except: Window. This eliminates T's R+ to expand after year 15
D. Tenant shall at the time that it exercises said option to expand, pay to
the Landlord an additional security deposit equivalent to ONE (1) month's rent
on the additional space, to be held by the Landlord in accordance with Paragraph
25.01 hereof.
E. It is understood that this option to expand is given only to Hawk
Industries, Inc. for their exclusive use and occupancy. Under no condition shall
the Tenant have the right to sublease or assign the right to occupy any
additional space.
F. Under no circumstances shall the SEVEN (7) day notification period called
for in this Paragraph 38.01 be extended.
G. All other terms and conditions of the original Lease shall remain in full
force and effect and shall apply to any additional space occupied by the Tenant,
except as modified in this Paragraph 38.01.
<PAGE>
Section 39.01. Option to Extend. The Landlord grants to the Tenant ONE (1)
----------------
FIVE (5) year option to renew the lease under the following terms and
conditions:
1. Tenant is not in default of any of the terms and conditions of the original
Lease.
2. Option period shall commence April 1, 2000 and expire on March 31, 2005.
3. Rental for the option period shall be:
For the period April 1, 2000-March 31, 2005 annual base rental shall be ONE
HUNDRED NINETY FIVE THOUSAND DOLLARS ($195,000.00) payable in equal monthly
installments of SIXTEEN THOUSAND TWO HUNDRED FIFTY DOLLARS ($16,250.00).
4. Notice of intent to exercise said option must be given to the Landlord in
writing, by Certified Mail, Return Receipt Requested, no later than ONE HUNDRED
EIGHTY DAYS (180) days prior to the expiration of the original Lease Agreement.
5. Notwithstanding anything to the contrary herein contained, in the event
Tenant has exercised its option to expand as called for in Paragraph 38.01
above, this option to extend shall apply to any additional space that the Tenant
has taken occupancy of. In that event, the base rental shall be adjusted so as
to accurately represent a base rental of $3.25 per square foot net net net for
all space occupied by the Tenant.
6. All other terms and conditions of the original Lease Agreement shall
prevail during the option period with the exception of Section 38.01.
THE ABOVE AGREED TO BY:
[ILLEGIBLE SIGNATURE]
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TRIANGLE FIDELCO INDUSTRIAL CENTER (LANDLORD)
[ILLEGIBLE SIGNATURE]
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HAWK INDUSTRIES, INC. (TENANT)
<PAGE>
TRIANGLE FIDELCO INDUSTRIAL CENTER
AND
HAWK INDUSTRIES INC.
1. Landlord represents that the following additional rental charges currently
total approximately for the entire building:
Area Lighting ................... $ 251.15/month
Outside Maintenance.............. 1,267.83/Month
Disposal......................... 269.19/month
Alarm............................ 909.67/month
Sprinkler........................ 183.21/month
Water............................ 1,541.29/month
Snow............................. 964.00/year
2. Section 4.03 is amended to provide for the Tenant paying its prorata share
of taxes thirty (30) days in advance of the Landlord's quarterly payment to the
City of New Brunswick.
3. Section 5.03. Notwithstanding anything to the contrary herein contained,
Landlord agrees that the Tenant shall not be liable for any unreasonable
increase in insurance occasioned by other Tenants' action.
4. Section 9.01. Notwithstanding anything to the contrary herein contained,
Landlord agrees that it shall make necessary structural repairs to the floors
and walls and to the roof so as to keep it reasonably free from leaks.
5. Section 15.01. Notwithstanding anything to the contrary herein contained,
it is understood that Tenant shall have the right to assign or sublet its
premises without any requirement of consent of Landlord subject to the
provisions of Section 15.03 of this Lease. Tenant shall also have the right to
assign or sublet its premises to its parent, subsidiaries or affiliates.*
6. Paragraph 7 of the Environmental Rider is omitted and replaced with the
following:
Landlord indemnifies and holds Tenant harmless against any loss, cost, or
expense with respect to any environmental matters, Hazardous Discharge or like
items, arising out of or relating to conditions existing prior to the date of
Tenant's occupancy or caused by Landlord or other tenants.
7. Landlord will remove all spikes in floor around the loading bay doors.
8. Landlord represents that it has not had any Hazardous Discharge or
environmental complaints relating to the demised premises.
* Unless the subtenant's operation at the premises is involved in
manufacturing of any kind except apparel, in which case the Landlord's
consent shall be required which consent shall not be unreasonably withheld.
Tenant shall not be allowed to sublease to any tenant whose operation at
the premises significantly involves hazardous materials without Landlord's
consent which shall not be unreasonably withheld.
THE ABOVE AGREED TO BY:
[ILLEGIBLE SIGNATURE]
- ----------------------------------------------
TRIANGLE FIDELCO INDUSTRIAL CENTER (LANDLORD)
[ILLEGIBLE SIGNATURE]
- ----------------------------------------------
HAWK INDUSTRIES, INC. (TENANT)
<PAGE>
THIS LEASE, dated the 2nd day of March, 1990, between TRIANGLE FIDELCO
INDUSTRIAL CENTER, 225 Millburn Avenue, Suite 202, Millburn, New Jersey 07041
(hereinafter designated as "Landlord"), and HAWK INDUSTRIES, INC., Suite 1010,
112 West 34th Street, New York City, New York 10120 (hereinafter designated as
"Tenant").
W I T N E S S E T H :
ARTICLE 1
Demise and Premises
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Section 1.0. Demise and Premises. Landlord does hereby demise and lease
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to Tenant, and Tenant does hereby take and hire from Landlord, those premises
described as follows: Portion of premises known as Unit 8 at 690 Jersey Avenue,
new Brunswick, New Jersey, more accurately described in Schedule A attached.
TO HAVE AND TO HOLD for the Term, as defined herein, and subject to the
terms, covenants and conditions herein contained, which each of the parties
hereto expressly covenants and agrees to keep, perform and observe.
Article 11
Term
----
Section 2.01. Term. The term of this Lease (herein the "Term") shall be
----
for a period of TEN (10) years commencing on April 1, 1990 and expiring on March
31, 2000. Landlord hereby gives permission to the Tenant to occupy the premises
upon execution of the Lease until April 1, 1990 at no rental under the following
terms and conditions: (1) All other terms and conditions of the within Lease
shall apply to the early occupancy period. (2) Tenant shall not interfere with
the Landlord's work to be done. (3) Providing Tenant has paid its security
deposit (as per Section 25.01 of the within Lease) and first month's rent.
Section 3.01. Rent During Term ("Basic Rent"). Landlord reserves and
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Tenant covenants to pay to Landlord, without demand or notice, and without any
set-off or deduction, a net basic rental therein the "Basic Rent" of
For the period of April 1, 1990-March 31, 2000 annual base rental shall be ONE
HUNDRED SIXTY TWO THOUSAND DOLLARS ($162,000.00) payable in equal monthly
payments of THIRTEEN THOUSAND FIVE HUNDRED DOLLARS ($13,500.00).*
Section 3.02. Payment of Rent. The Basic Rent and all additional rents and
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monies payable to Landlord under this Lease shall be paid at the above address
of Landlord or at such other address as may be specified by Landlord from time
to time by notice given to Tenant. Said rent shall be due and payable on or
before the first of each and every month during the entire term of this Lease
Agreement.
Additional rentals required by the Lease may be paid by Tenant, at the
Landlord's option, in monthly installments in such amounts as are estimated and
billed by Landlord at the beginning of a twelve (12) month period commencing and
ending on dates designated by Landlord, each such installment being due on the
first (1st) day of each month.
* except that the monthly payments for the each of the months of April 1999
through March 2000 shall be $12,666.67.
<PAGE>
on improvements in accordance with provisions of the financial agreement
pursuant to NJSA 40:55C-40, ET. SEQ. between the City of New Brunswick and
Triangle Fidelco Industrial Center Urban Renewal Limited Partnership attached
hereto as Schedule C.
ARTICLE IV
Taxes and Impositions
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Section 4.01. Real Estate Taxes and Impositions. As additional rent
hereunder, Tenant shall reimburse to Landlord upon demand or in accordance with
Section 4.03 hereinbelow, at the Landlord's option, Tenant's Pro Rata Share (as
defined hereafter) of the Real Property Taxes (as defined hereinbelow) and
assessments (whether special, for improvements or otherwise) levied or assessed
against the land and building owned by the Landlord and of which the premises
form a part. Landlord represents that the current taxes on the property are
$130,548.36.*
Section 4.02. Definition. The term "Real Property Taxes" means all real
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property taxes currently in existence on the land and buildings of which the
Premises are part, together with any and all taxes or imposts which may at some
future time be levied by any governmental entity in total or partial
substitution for current real property taxes, including, without limiting the
generality thereof, personal property taxes, rental gross receipt taxes,
leasehold improvement taxes, use and occupancy taxes and excise taxes.
Section 4.03. Payment. Upon notice by the Landlord, Tenant shall deposit
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monthly, at the same time and place as the payment of Basic Rent, an amount
equal to one-twelfth (1/12) of the Landlord's reasonable estimate of Tenant's
Pro Rata Share of the annual Real Property Taxes and assessments for the tax
fiscal year. Any over-payment of the Tenant's Pro Rata Share of such increase in
Real Property Taxes and assessments for any tax fiscal year shall be credited to
rent thereafter due and payable, and any balance of such increase not covered by
the monthly deposits shall be paid by the Tenant within ten (10) days of the
Landlord's demand therefor. Any interest earned on the escrow deposits payable
hereunder shall be and remain the property of the Landlord.
Section 4.04. Apportionment During First and Last Year of Term. The amount
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of Real Property Taxes and assessments payable by Tenant during any partial
calendar year during the Term shall be apportioned between Landlord and Tenant
in accordance with the portion of the tax year within the Term.
ARTICLE V
Insurance
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Section 5.01. Tenant's Insurance. Throughout the Term, Tenant shall:
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a. obtain and maintain in force Workmen's Compensation Insurance as
required by law;
b. maintain Public Liability Insurance (issued by an insurance
company licensed to do business in New Jersey and reasonably acceptable to
Landlord) covering the Premises in minimum limits of TWO MILLION
($2,000,000.00) DOLLARS per accident or occurrence for Personal Damage, and
FIVE HUNDRED THOUSAND ($500,000) DOLLARS for Property Damage which
insurance shall name Landlord and the holder(s) of any mortgage(s)
affecting the Premises as additional assureds thereunder, and
c. maintain Fire and Extended Coverage on Tenant's personal
property on the Premises and on any leasehold improvements which may be
placed on or affixed to the Premises by Tenant.
Section 5.02. Policies. Tenant shall at all times during the Term maintain
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in full force and effect and on deposit at Landlord's office a certificate of
insurance or a duplicate original of the insurance policy, together with
evidence of payment of premium. Any such policy shall provide that it shall not
be cancellable without at least ten (10) day's, prior written notice to
Landlord. If Tenant shall default in maintaining such insurance, Landlord may,
at its option and without waiving any of Landlord's rights hereunder or
releasing Tenant from any obligation hereunder, procure such insurance, and
Tenant shall, on demand, reimburse Landlord, as additional rent, for the cost
thereof with interest at the Lease Interest Rate (as hereinafter defined).
-2-
<PAGE>
Section 5.03. Landlord's Insurance. Landlord shall maintain fire and
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extended coverage and general liability insurance on the building of which the
Premises are a part. Tenant shall not keep anything in the Premises except as
now are hereafter permitted by the Fire Department, Board of Fire Underwriters,
Fire Insurance Rating Organization or other authority having jurisdiction.
Tenant shall pay to the Landlord as additional rent, within ten (10) days of
demand therefore, its Pro Rata Share of the amounts of insurance premiums, and
any expenses related thereto, payable by the Landlord. Tenant shall pay, as
additional rent, all costs, expenses, fines, penalties or damages which may be
imposed upon the Landlord by reason of the Tenant's failure to comply with the
provisions of the this section 5.03. Landlord represents that the current
insurance on the property is $38,717.96.
Section 5.04. Right of Termination. If Landlord shall be unable to procure
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fire and extended coverage insurance because of Tenant's use of the Premises,
Landlord shall have the right to terminate this Lease upon written notice to
Tenant specifying the reason for such termination and the rent shall be adjusted
between the parties hereto as of the date of termination provided in such
notice.
Section 5.05. Waiver of Subrogation. Landlord hereby releases Tenant from
----------------------
liability for damage or destruction to the land and buildings at which time
Premises are part, and Tenant hereby release Landlord for liability for damages
or destruction to any of its personal property or leasehold improvements,
provided, however, that such releases shall be in force and effect only in
respect of damage or destruction covered by standard policies of fire insurance
with extended coverage (as maintained by the Tenant or Landlord pursuant to the
Lease), and such waivers shall be in effect solely to the extent of proceeds
under any said policy. Tenant and Landlord shall each cause any policies of
insurance maintained by it with respect to the Premises and the personal
property contained therein or appurtenant thereto and with respect to the
building of which the Premises form a part, to contain a waiver by the insurers
of any rights of subrogation. In the event that there is an extra premium for
such waiver, the party benefited by it shall bear the cost.
ARTICLE VI
Lien of Landlord
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[TEXT DELETED]
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<PAGE>
ARTICLE VII
Mechanic's Liens
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Section 7.01. Mechanic's Liens Prohibited. Tenant shall not suffer any
mechanic's notice of intention or lien claim to be filed against the Premises by
reason of work, labor, services or materials permitted for or furnished to
Tenant or to anyone holding the Premises, or any part thereof, through or under
Tenant.
Section 7.02. Landlord's Remedy for Tenant's Breach. If Tenant shall fail
-------------------------------------
to remove or discharge any aforesaid mechanic's notice of intention or lien
claim within fourteen (14) days after notice of knowledge of the filing of same,
then in addition to all other rights of Landlord hereunder or by law upon a
default by Tenant, Landlord may, at its option, procure the removal or discharge
of same. Any amount paid by Landlord for such purpose, including all reasonable
attorney's fees and other expenses therefor, together with interest thereon at
the Lease Interest Rate (as hereinafter defined), shall become due and payable
by Tenant to Landlord as additional rent, and in the event of Tenant's failure
to pay therefor within fifteen (15) days after demand, the same shall be added
to and be due and payable with the next month's rent.
ARTICLE VIII
Alterations
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Section 8.01. Alterations. Tenant shall make no changes in or to the
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Premises without Landlord's prior written consent. Subject to the prior written
consent of Landlord, and to the provisions of this Article, Tenant may make
alterations, installations, additions or improvements which are non-structural
and which do not affect utility services or plumbing; and electrical lines, in
or to the interior of the Premises by using contractors or mechanics first
approved in writing by Landlord.* All fixtures, all electrical items and all
panelling, partitions, railings and like installations, installed in the
Premises at any time, either by Tenant or by Landlord in Tenant's behalf, shall
become the property of Landlord and shall remain upon and be surrendered with
the Premises unless Landlord, by notice to Tenant no later than thirty (30) days
prior to the date fixed as the termination of this Lease or before sixty (60)
days after the expiration of this Lease, elects to have them removed by Tenant,
in which event the same shall be removed from the Premises by Tenant forthwith.
Nothing in this Article shall be construed to prevent Tenant's removal of trade
fixtures, but upon removal of any such trade fixtures from the Premises or upon
removal of other installations as may be required by Landlord, Tenant shall
immediately and at its expense repair and restore the Premises to the condition
existing prior to installation, and shall repair any damage to the Premises on
the building due to such removal. All property permitted or required to be
removed by Tenant at the end of the Term remaining in the Premises after
Tenant's removal shall be deemed abandoned and may, at the election of Landlord,
either be retained as Landlord's property or may be removed from the Premises by
Landlord at Tenant's expense, which right of Landlord shall survive expiration
of this Lease. Tenant shall, before making any alterations, additions,
installations or improvements, obtain all permits, approvals and certificates
required by any governmental or quasi-governmental bodies and (upon completion)
certificates at final approval thereof and shall promptly deliver duplicates of
all such permits, approvals and certificates to Landlord; and Tenant agrees to
carry such Workman's Compensation, General Liability, Personal and Property
Damage Insurance as Landlord may reasonably require. Tenant agrees to obtain and
deliver to Landlord, written and unconditional waivers of mechanic's liens upon
the real property in which the Premises are located, for all work, labor and
services to be performed and materials to be furnished in connection with such
work, signed by all contractors, sub-contractors; materialmen and laborers to
become involved in such work. The work shall be done in a good and workmanlike
manner and in compliance with all applicable laws, ordinances, codes,
governmental rules, regulations and requirements, and in accordance with the
standards, if any, of the Board of Fire Underwriters, or other organizations
exercising the functions of a board of fire underwriters the jurisdiction of
which includes the Premises.
* Notwithstanding Landlord agrees that its consent shall not be required for any
non-structural alterations which amount to less than $15,000.00.
-4-
<PAGE>
it shall maintain a service contract on the existing heating system. Landlord
agrees that Tenant shall be responsible for the first $7,500.00 per year towards
the cost of the replacement for any aspects of the heating and plumbing systems.
Landlord agrees that it shall be responsible for any amount over and above the
$7,500.00 per year figure. However, ARTICLE IX it is specifically understood
that Landlord shall in no event be responsible for any costs associated with the
Tenant's neglect or misuse of the heating and plumbing Repairs systems.
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Section 9.01. Repairs. Landlord shall make the necessary structural
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repairs to the roof and walls of the building of which the Premises are a part
(such obligation not to include operating parts such as overhead ducts or fans
or skylights). Except for the above and for what may other-wise be specifically
provided for in this Lease, Tenant shall be responsible for all maintenance and
repairs of and to the Premises, including but not limited to the following
responsibilities: Tenant shall take good care of the Premises and the fixtures,
appurtenances and systems in or affecting the Premises (including but not
limited to plumbing, sewers, gutters, downspouts, doors, painting, windows,
electrical heating and sprinkler and air conditioning, if any, except components
thereof servicing the entire building of which the Premises are a part, such as
main power lines, water mains and general sewer lines), and shall make all
repairs thereto or replace as and when needed to preserve them in good working
order and condition, and shall maintain the premises in a clean, neat condition,
and Landlord shall maintain the parking area and other outside portions of the
Premises, including but not limited to landscaping, all necessary removal of
snow, ice and debris, and maintenance of lawns, shrubbery and entranceways and
Tenant shall pay its pro rata of same. Tenant shall not permit or suffer the
Premises to fall to such low temperature as would cause freezing of the water
lines or sprinkler servicing the Premises; and, in default hereof, Tenant shall
promptly effect and pay for all repairs the need for which shall arise from such
freezing, and shall hold Landlord harmless from any loss, damage or liability
caused by or arising out of such freezing. Notwithstanding anything above to the
contrary, all damage or injury to the Premises or to any other part of the said
building, or to its fixtures, equipment and appurtenances, whether requiring
structural or non-structural repairs caused by or resulting from carelessness,
omission, neglect or improper conduct of Tenant, its servants, employees,
invitees or licensees, shall be repaired promptly by Tenant at its sole cost and
expense, to the reasonable satisfaction of Landlord and in accordance with
Section 8.01 hereinabove. Tenant shall also repair all damage to the Premises
and to the building of which the Premises are part, caused by the moving of
Tenant's fixtures, furniture or equipment. All the aforesaid repairs shall be of
quality or class at least equal to the original work or construction. If Tenant
fails after ten (10) days notice to proceed with due diligence to make repairs
required to be made by Tenant, the same may be made by Landlord, at Landlord's
option (in which event Landlord shall not be liable for any injury to persons,
damage to property or loss of business arising out of the making of such
repairs) at the expense of Tenant, and the expenses thereof incurred by Landlord
(together with interest at the Lease Interest Rate, as hereinafter defined)
shall be collectible as additional rent with ten (10) days of demand therefor.
There shall be no allowance to Tenant for a diminution of rental value and no
liability on the part of Landlord by reason of inconvenience, annoyance or
injury to business arising from the making or failing to make by Landlord,
Tenant or others, of any repairs, alterations, additions or improvements in or
to the fixtures, appurtenances or equipment thereof.
ARTICLE X
Damage to Premises
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Section 10.01. Notice. If the Premises or any part thereof shall be
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damaged by fire or other casualty, Tenant shall give immediate notice thereof to
Landlord, and this Lease shall continue in full force and effect except as
hereinafter set forth.
Section 10.02. Partial Damage. Subject to Section 10.03 hereinbelow, if
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Premises are partially damaged or rendered partially unusable by fire or other
casualty, the damages thereto shall be repaired by Landlord with all reasonable
expedition, subject to delays due to adjustment of insurance
Section 10.03. Substantial Damage. If the Premises are substantially
----------- ------
damaged or rendered wholly unusable or (whether or not the Premises are damaged
in whole or in part) if the building of which the Premises are part shall be so
damaged as, in Landlords's reasonable judgement, practically to require
demolition
<PAGE>
Notwithstanding the above, if there is a partial taking of condemnation
totaling 25% or more of the premises, Tenant shall have the right to cancel this
Lease.
or rebuilding thereof, then, in any of such events, Landlord may elect to
terminate this Lease by written notice to Tenant given within one hundred eighty
(180) days after such fire or casualty specifying a date for the expiration of
this Lease, which date shall not be more than sixty (60) days after the giving
of such notice, and upon the date specified in such notice the Term shall expire
as fully and completely as if such date were the date set forth above for the
expiration of this Lease, and Tenant shall forthwith quit, surrender and vacate
the Premises, without prejudice, however, to Landlord's rights and remedies
against Tenant under provisions of this Lease in effect prior to such
termination, and any rent owing shall be paid up to such date, and any payments
of rent made by Tenant which were on account of any period subsequent to such
date shall be returned to Tenant. Unless Landlord shall serve a termination
notice as provided for herein, Landlord shall make the repairs and restorations
with all reasonable expedition subject to delays due to adjustment of insurance
claims, labor troubles and causes beyond Landlord's control, and this Lease
shall continue in full force and effect. Notwithstanding anything to the
contrary herein contained, in the event the Landlord elects to rebuild the
premises, this Lease shall continue in full force and effect except that, it is
understood that there shall be a prorata abatement of rent for any period of
time during which the Premises shall be in a damaged condition, whether or not
the Premises shall be partially or wholly unusable.
Section 10.04. Tenant's Property. Tenant acknowledges that Landlord will
-------- --------
not carry insurance on Tenant's furniture and/or furnishings or any fixtures or
equipment, improvements or appurtenances removable by Tenant and agrees that
Landlord will not be obligated to repair any damage thereto or replace same.
Section 10.05. Mortgages. It is understood and agreed that the provisions
---------
of this Article X are subject to the rights of mortgagees at Landlord's interest
in the land and buildings of which the Premises are part.
ARTICLE XI
Eminent Domain
------- ------
Section 11.01. Total Taking. In the event that any public authority or
----- ------
agency holding the power of eminent domain under applicable law shall at any
time during the Term condemn, or acquire title in lieu of condemnation to, all
or substantially all of the Premises, this Lease shall terminate and expire as
of the date upon which title shall vest in such authority, and Tenant shall pay
rent only to the time of such vesting of title.
Section 11.02. Partial Taking. If there shall be only a partial taking or
------- ------
condemnation as aforesaid totalling one-third (1/3) or less of the building of
which the Premises are part and which shall not substantially prevent Tenant's
use of the Premises for purposes of its business, this Lease shall thereafter
continue as to the untaken part and Tenant shall be entitled to a reduction
in the Basic Rent in such proportion as Landlord shall reasonably deem fair and
equitable.
Section 11.03. Restoration by Landlord. If there shall be a partial
----------- -- --------
taking and this Lease shall continue as to the remaining part of the Premises,
Landlord, at its own expense and as promptly as practicable, shall restore such
remaining part as nearly as may be practicable to its former condition, but only
upon receipt of, and to the extent of, the condemnation award made on account of
such partial taking.
Section 11.04. Award to Landlord. Landlord reserves the exclusive right
----- -- --------
to negotiate with the condemning authority with respect to any proposed
condemnation award, and all damages and compensation paid for the taking under
the power of eminent domain, whether for the whole or a part of the Premises and
whether by agreement or award, shall belong to and be the property of Landlord.
Tenant hereby releases and disclaims any interest or right whatsoever in the
award or compensation offered or paid by the condemning authority to the
Landlord for the loss of the fee. There is expressly excluded from any right of
compensation to the Tenant, and the Tenant expressly waives, any claim against
the condemning authority for diminution in the value of the leasehold.
Section 11.05. Awards Pursuant to Relocation Assistance Act.
------ -------- -- ---------- ---------- ---
Notwithstanding the provisions of Section 11.04, there is expressly reserved to
Tenant the right to recover against the condemning authority for its actual
reasonable expenses in moving its business from the Premises and its actual
direct losses
-6-
<PAGE>
in tangible personal property by virtue of the taking, all as contemplated in
the Relocation Assistance Act (R.S. 20:4-1 et seq.), and the rules and
-- ---
regulations adopted thereunder.
Section 11.06. Notice to Tenant. Landlord shall give prompt notice to
----------------
Tenant of any eminent domain proceedings with respect to the Premises.
ARTICLE XII
Notices
-------
Section 12.01. Notices. Every notice or demand required or permitted
-------
under this Lease shall, unless otherwise specifically provided herein, be given
in writing and shall either be personally delivered to a principal of Landlord
or Tenant, as the case may be, or sent by United States certified mail, return
receipt requested, addressed by the party giving, making or sending the same to
the other at the other's address first above given, or to such other address as
either party may designate from time to time by a notice given to the other
party. All mailed notices shall be effective upon mailing.
ARTICLE XIII
Memorandum of Lease
-------------------
Section 13.01. Memorandum of Lease. Tenant shall not record this
-------------------
Lease, but if either party should desire to record a short form Memorandum of
Lease setting forth only the parties, the Premises and the Term, such Memorandum
of Lease shall be executed, acknowledged and delivered by both parties upon
notice from either party.
ARTICLE XIV
Use
---
Section 14.01. Use. The premises shall be used and occupied by Tenant
---
for warehousing and distribution of apparel and other items* commonly sold in
department stores and for no other purpose. Tenant's use of the Premises shall
be in compliance with all applicable governmental laws, rules and regulations
and ordinances, and other applicable codes including but not limited to the
requirements of the Occupational Safety and Health Administration and of any
board of fire underwriters or like organization having jurisdiction over the
Premises. Tenant shall not store, warehouse, handle or in any other way use
highly flammable material or red label items anywhere on the Premises.
* sold in department stores
ARTICLE XV
Assignment, Subletting, etc.
---------------------------
Section 15.01. Assignment, Subletting, etc. Tenant shall not sell,
---------------------------
assign, mortgage, pledge or, in any manner, transfer or encumber this Lease or
any estate or interest hereunder, or sublet the Premises or any part thereof,
without the previous written consent of Landlord.** In any of the events
aforesaid, Tenant nevertheless shall remain primarily liable for the payment of
the Basic Rent and all additional rents, and for the performance of Tenant's
other covenants and obligations hereunder. No consent to any assignment of this
Lease or subletting of any or all of the premises shall be deemed or be
construed as a consent by Landlord to any further or additional assignment or
subletting. In the event of an assignment of this lease, the assignee shall
assume, by written recordable instrument reasonably satisfactory to Landlord,
the due performance of all of Tenant's obligations under this Lease. No
assignment shall be valid or effective in the absence of such assumption. A true
copy of such assignment and the original assumption agreement shall be delivered
to Landlord within ten (10) days of the effective date of such assignment.
Notwithstanding anything to the contrary herein contained, Landlord hereby gives
its consent for Tenant to sublease the premises to its subsidiaries.
- -------------------------
** Said consent not be unreasonably withheld.
- 7 -
<PAGE>
notwithstanding anything to the contrary herein contained, Landlord agrees that
if it is unable to give possession of the premises to the Tenant by May 1, 1990,
Tenant shall have the right to cancel this Lease.
Section 15.02. Transfer of Controlling Interest. The above prohibition
--------------------------------
against assignment of this Lease and subletting of the Premises shall be
construed to prohibit any change or series of changes in the controlling
interest of Tenant, whether that change be effected by acquisition, merger,
consolidation, change of controlling interest of stock or partnership interests
or otherwise.
Section 15.03. Recapture of Premises. If at any time during the Term,
---------------------
Tenant shall have received a bona fide offer from a prospective sub-tenant of
the Premises with respect to proposed occupancy as sub-tenant of FIFTY PERCENT
(50%) more of the original Premises, Tenant shall furnish a copy of such offer
to Landlord. In addition to the right to exercise reasonable consent with
respect to the proposed sub-tenancy Landlord shall have the right, by written
notice given to Tenant within ten (10) days of Landlord's receipt of the copy of
such offer, to agree to accept the proposed sub-tenant as a direct tenant of
Landlord. In the event that (i) Landlord shall have given timely notice as
aforesaid to Tenant, (ii) Landlord and the prospective sub-tenant shall have
entered into a written agreement for direct tenancy by such sub-tenant, and
(iii) such sub-tenant shall have entered into occupancy of the Premises and
commenced direct payment of rent to Landlord, then automatically upon the
occurrence of all three such events, Landlord and Tenant hereunder shall be and
become released from any further obligation under the Lease, and the Lease
between Landlord and Tenant hereunder shall be deemed terminated and of no
further force and effect (rental to be adjusted as of the date of termination).
If Landlord shall not have given notice to Tenant within the said ten (10) day
period, Landlord shall be deemed to have waived its right to effect a direct
tenancy with the proposed sub-tenant. It is understood and agreed that neither
party hereto shall be released from its obligations to the other party unless
and until Landlord shall have entered into an agreement in writing as aforesaid
with the proposed sub-tenant and such sub-tenant shall have entered into
occupancy of the Premises and commenced direct payment of rent to Landlord.
Unless and until the said events shall have occurred by virtue of which Landlord
and Tenant shall have been released from their obligations under the Lease, the
Lease shall remain in full force and effect and shall continue to be binding
upon Landlord and Tenant.
ARTICLE XVI
Landlord's Warranty
-------------------
Section 16.01. Warranty. Landlord warrants that has the right to execute
--------
this Lease, and covenants that at the commencement of the Term there will be no
covenants, easements, restrictions or liens which would adversely affect
Tenant's use of the Premises for the purposes permitted hereunder.
Notwithstanding the above, if Landlord shall be unable to give possession of the
Premises on the date of commencement of the Term, because if the holding-over or
retention of possession of any Tenant, undertenant or occupants or because of
the fact that a Certificate of Occupancy for the Premises has not been procured,
or for any other reason not within Landlord's control, then and in any of such
events, Landlord shall not be subject to any liability for failure to give
possession on said date, and the validity of this Lease shall not be impaired
under such circumstances, nor shall the same be construed in any wise to extend
the Term, but the rent payable hereunder shall be abated (provided Tenant is not
responsible for the inability to obtain possession) until after Landlord shall
have given Tenant written notice that the Premises are substantially ready for
Tenant's occupancy.
ARTICLE XVII
Subordination
-------------
Section 17.01 Subordination to Mortgages. This Lease is hereby made and
--------------------------
shall be subject and subordinate to all mortgages which may now or hereafter
affect the Premises, and to all renewals, modifications, consolidations,
replacements or extensions there. Landlord agrees that it shall use its best
efforts to obtain a non-disturbance agreement on all existing and future
mortgages.
- 8 -
<PAGE>
Section 17.02. Tenant's Certificate. Notwithstanding the automatic
--------------------
applicability, as to all current and future mortgages, of the subordination of
this Lease, Tenant shall, upon request of Landlord, execute any instrument which
may be deemed necessary or desirable by Landlord to confirm such subordination
or as otherwise required for mortgage financing or sale of the Premises
including, but not limited to, certified financial statements and estoppel
certificates executed and acknowledged to any mortgagee or purchaser, or any
proposal mortgage lender or purchaser, including but not limited to
certifications that this Lease is in full force and effect or, if not, in what
respect it is not; that this Lease has not been modified, or the extent to which
it has been modified; and that there are no existing defaults hereunder to the
best of Tenant's knowledge, or specifying the defaults, if any. If Tenant fails
to respond after due notice within seven (7) days, it shall automatically
constitute affirmation of the items contained in the estoppel statement.
ARTICLE XVIII
Non-Liability of Landlord
-------------------------
Section 18.01. Non-Liability of Landlord. Landlord agrees to use its best
-------------------------
efforts to relet the premises. Except for Landlord's gross negligence, Landlord
shall not be responsible or liable to Tenant for any loss, damage or injury to
person or property that may be occasioned by the acts or omissions of Landlord
or of persons occupying any space adjacent to or adjoining the Premises, or any
part thereof, including, not in limitation of the foregoing, loss, damage or
injury resulting to Tenant or to any other person or the any property of Tenant
or of any other person, from water, gas, steam, fire or the bursting, stoppage
or leakage of sewer pipes.
ARTICLE XIX
Indemnification of Landlord
---------------------------
Section 19.01. Indemnification of Landlord. Tenant agrees to indemnify and
---------------------------
save Landlord harmless from and against all liability and all loss, cost and
expense, including reasonable attorney's fees and costs, arising out of the
operation, maintenance, management and control of the Premises or in connection
with (a) any injury or damage whatsoever caused to or by any person, including
Tenant, its employees, contractors or agents, or to property, including Tenant's
property, arising out of any occurrence on the Premises; (b) any breach of this
Lease by Tenant; (c) any act or omission of Tenant or of any person on the
Premises, occurring in, on or about the Premises; or [DELETED TEXT]
ARTICLE XX
Defaults and Remedies
---------------------
Section 20.01. Tenant's Defaults. If Tenant defaults in the timely payment
-----------------
of Basic Rent or any additional rent or sum herein reserved, as required in this
Lease, or if Tenant defaults in compliance with any of the other covenants or
conditions of this Lease and fails to cure such default, other than the payment
of Basic Rent or any additional rent or sum herein reserved, within twenty (20)
days after the receipt of notice specifying the default, then at the expiration
of said twenty (20) days, Landlord may (a) cancel and terminate this Lease upon
written notice to Tenant (whereupon the Term shall terminate and expire, and
Tenant shall then quit and surrender the Premises to Landlord, but Tenant shall
remain liable as hereinafter provided); and/or (b) at any time thereafter
re-enter and resume possession of the Premises as if this Lease had not been
made, Tenant hereby waiving the service of any notice of intention to re-enter
or to institute legal proceedings to that end.
-9-
<PAGE>
Section 20.02. Re-entry by Landlord. If this Lease shall be
-- ----- -- --------
terminated or if Landlord shall be entitled to re-enter the Premises and
dispossess or remove Tenant under the provisions of Section 20.01 (either or
both of which events are hereinafter referred to as a "Termination"), Landlord
or Landlord's agents or servants may immediately or at any time thereafter re-
enter the Premises and remove therefrom Tenant, its agents, employees, servants,
licensees and any sub-tenants and other persons, firms or corporations, and all
or any of its or their property therefrom, either by summary dispossess
proceedings or by any suitable action or proceeding at law or by peaceable re-
entry or otherwise, without being liable to indictment, prosecution or damages
therefor, and may repossess and enjoy the Premises, including all additions,
alterations and improvements thereto.
Section 20.03. Effect of Termination. In case of Termination, the
------ -- -----------
Basic Rent and all other charges required to be paid by Tenant hereunder shall
thereupon become due and shall be paid by Tenant up to the time of the
Termination, and Tenant shall also pay to Landlord all reasonable expenses which
Landlord may then or thereafter incur as a result of or arising out of a
Termination, including but not limited to court costs, attorneys' fees,
brokerage commissions and costs of terminating the tenancy of Tenant, re-
entering, dispossessing or otherwise removing Tenant, and restoring the Premises
to good order and condition, and from time to time altering and otherwise
preparing the same for re-letting. Upon a Termination, Landlord may, at any time
and from time to time, re-let the Premises, in whole or in part, either in its
own name or as Tenant's agent, for a term or terms which, at Landlord's option,
may be for the remainder of the ten current Term, or for any longer or shorter
period.
Section 20.04. Damages. In addition to the payments required by
-------
Section 20.03 hereinabove, Tenant shall be obligated to, and shall, pay to
Landlord upon demand and at Landlord's option:
[DELETED TEXT]
b. damages (payable in monthly installments), in advance, on the
first day of each calendar month following the Termination, and continuing
until the date originally fixed herein for the expiration of the then
current Term in amounts equal to the excess, if any, of the sums of the
aggregate expenses paid by Landlord during the month immediately preceding
such calendar month for all such items as, by the terms of this Lease, are
required to be paid by Tenant, plus an amount equal to the installment of
Basic Rent which would have been payable by Tenant hereunder in respect to
such calendar month, had this Lease not been terminated, over the sum of
rents, if any, collected by or accruing to Landlord in respect to such
calendar month pursuant to a re-letting or to any holding over by any sub-
tenants of Tenant.
Section 20.05. No Obligation to Re-let. Landlord shall in no event
-- ---------- -- -- ---
be liable for failure to re-let the Premises, or in the event that the Premises,
are re-let, for failure to collect rent due under such re-letting; and in no
event shall Tenant be entitled to receive any excess of the Basic Rent over the
sums payable by Tenant to Landlord hereunder but such excess shall be credited
to the unpaid rentals due hereunder, and to the expenses of re-letting and
preparing for re-letting as provided herein.*
Section 20.06. Successive Suits. Suit or suits for the recovery of
---------- -----
damages hereunder, or for any installments of rent, may be brought by Landlord
from time to time at its election, and nothing herein contained shall be deemed
to require Landlord to postpone suit until the date when the Term would have
expired if it had not been terminated under the provisions of this Lease, or
under any provision of law, or had Landlord not re-entered into or upon the
Premises.
- ------------------------
* Landlord agrees to use its best efforts to relet the premises
-10-
<PAGE>
Section 20.07. Acceleration. Anything to the contrary hereinbefore
------------
notwithstanding. Landlord shall have the option to accelerate all future
rentals due and hold Tenant responsible, in advance, for the aggregate "damages"
(as described in this Article XX) to be suffered by landlord during the
remainder of the then current Term of renewal term, as well as damages covering
any renewal term, the option for which shall have been exercised by the Tenant.
Section 20.08. Late Fee. Landlord, at its option, in addition to any and
---- ---
all remedies available to it, shall have the right to charge legal fees, court
cost necessary to collect late rental and a fee of payment of rent received
later than the seventh (7th) day of the month in which said rent was due, which
fee shall be four (4%) per cent per month in the amount of such overdue rent.
Section 20.09. Waiver of Redemption. Tenant hereby waives all rights of
------ -- ----------
redemption to which Tenant or any person claiming under Tenant might be
entitled, after an abandonment of the Premises, or after a surrender and
acceptance of the Premises and the Tenant's leasehold estate, or after a
dispossession of Tenant from the Premises, or after a termination of this lease,
or after a judgement against Tenant in an action in ejectment, or after the
issuance of a final order or warrant of dispossess in a summary proceeding, or
in any other proceeding or action authorized by any rule of law or statute now
or hereafter in force or effect.
ARTICLE XXI
Bankruptcy
----------
Section 21.01. Bankruptcy, Insolvency, etc. If at any time after the date
---------- ---------- ---
of this Lease (whether prior to the commencement of or during the Term) (a) any
proceedings in bankruptcy, insolvency or reorganization shall be instituted
against Tenant pursuant to any Federal or State law now or hereafter enacted, or
any receiver or trustee shall be appointed of all or any portion of Tenant's
business or property, or any execution or attachment shall issue against Tenant
or any of Tenant's business or property or against the leasehold estate created
hereby, and any of such proceedings, process or appointment be not discharge and
dismissed within thirty (30) days from the date of such filing, appointment or
issuance; or (b) Tenant shall be adjudge a bankrupt or insolvent, or Tenant
shall make an assignment for the benefit of creditors, or Tenant shall file a
voluntary petition in bankruptcy or petitions for (or enters into) an
arrangement or for reorganization, composition or any other arrangement with
Tenant's creditors under any Federal or State law now or hereafter enacted, or
this Lease or the estate of Tenant herein shall pass to or devolve upon, by
operation of law or otherwise, anyone other than Tenant (except as herein
provided), the occurrence of any one of such contingencies shall be deemed to
constitute and shall be construed as a repudiation by Tenant of Tenant's
obligations hereunder and shall cause this Lease ipso facto to be cancelled and
---- -----
terminated, without thereby releasing Tenant; and upon such termination Landlord
shall have the immediate right to re-enter the Premises and to remove all
persons and property therefrom and this Lease shall not be treated as an asset
of Tenant's estate and neither Tenant nor anyone claiming by, through or under
Tenant by virtue of any law or any order of any Court shall be entitled to the
possession of the Premises or to remain in the possession thereof. Upon the
termination of this Lease, as aforesaid, Landlord shall have the right to retain
as partial damages, and not as a penalty, any prepaid rents deposited by Tenant
hereunder, and Landlord shall also be entitled to exercise such rights and
remedies to recover from Tenant as damages such amounts as are specified in
Article XX hereof. As used in this Article XXI, the term "Tenant" shall be
deemed to include Tenant and its successors and assigns and the guarantor(s), if
any, of Tenant's obligations under this Lease.
ARTICLE XXII
Utilities
---------
Section 22.01. Utilities. Except as may otherwise be provided in this
---------
Lease, Tenant shall undertake and be responsible for having all utilities
installed
-11-
<PAGE>
and metered in its name in the Premises and agrees to pay, on or before the date
due, all charges for same directly to the respective utility companies. Such
utilities include gas, water, sewer, electricity, heat, power, telephone, A.D.T.
Protective Service (or similar service by another company) or other
communication service or other utility or service used by, or rendered or
supplied to, Tenant at the Premises throughout the Term. Landlord may at its
option furnish any one or more utilities to Tenant, in which event Tenant shall
pay for such utility as metered (or, if not separately metered, shall pay its
Pro Rata Share thereof) as additional rent within ten (10) days of Landlord's
demand therefor from time to time. In no event shall Landlord incur any
liability to Tenant by reason of interruption of any utility service for reasons
beyond the control of Landlord. If Tenant fails to make payment as herein
provided, Landlord may, without further notice, terminate such utility service.
Tenant will thereafter be liable for all costs in connection with termination
and reinstallation of reestablishment of services.
Section 22.02. Electric Current. Tenant's use of electric current shall
----------------
not exceed the capacity of existing feeders to the building or the risers or
wiring installation, and Tenant may not use any electrical equipment which, in
the Landlord's reasonable judgement, will overload such installations or
interfere with the use thereof by other tenants in the building.
ARTICLE XXIII
Access to Premises
------------------
Section 23.01. Landlord's Right of Access. Tenant shall permit Landlord or
--------------------------
its agents to enter the Premises at any time during business hours for the
purpose of inspecting or showing the Premises. Tenant may in no way interfere
with the Landlord's right to inspect. Tenant shall, upon its being given notice
of Landlord's desire or intent to see the Premises and/or within one year prior
to the expiration of the Term or any renewal term, permit the usual notice of
"To Let," "For Rent" and "For Sale" to be placed at reasonable locations on the
Premises and to remain thereon without hindrance and molestation. Landlord shall
also have the right, but not the obligation, to enter the Premises at reasonable
times to run utility, plumbing or sewer lines, conduits, ducts and the like,
over, under or through the Premises, and to make repairs.
ARTICLE XXIV
Signs
-----
Section 24.01. Erection of Signs. Tenant shall have the right, with the
-----------------
prior written consent of Landlord, to erect signs for advertising purposes in
connection with its business at the Premises. All signs shall comply with
applicable governmental rules and regulations, and Tenant shall remove such
signs at the expiration of the Term or sooner termination of this Lease, as the
case may be, and restore area to original condition.
Section 24.02. Repair of Damage. Tenant shall be responsible for any damage
----------------
caused to the Premises by the erection or maintenance on the Premises of said
signs, and any damage so caused shall be repaired forthwith at Tenant's sole
cost and expense. In the event any sign erected by Tenant is removed during the
Term or at the expiration or earlier termination thereof, Tenant shall, at its
sole cost and expense, repair any damage whatsoever caused by the removal.
ARTICLE XXV
Security Deposit
----------------
Section 25.01. Security Deposit. Tenant has this day deposited with
----------------
Landlord the sum of TWENTY THOUSAND DOLLARS ($20,000.00)------------------------
as security for the payment of the rent due
<PAGE>
hereunder and the full and faithful performance by Tenant of the covenants and
conditions on the part of Tenant to be performed. Sold sum shall be returned to
Tenant, without interest, after the expiration of the Term, provided that Tenant
has fully and faithfully performed all such covenants and conditions and is not
in arrears in rent. Landlord may, if it so elects, have recourse to such
security to make good any default by Tenant, in which event Tenant shall, on
demand, promptly restore said security to its original amount. Liability to
repay said security to Tenant shall run with the reversion and title to the
Premises, whether any change in ownership thereof be by voluntary or involuntary
alienation. Landlord shall assign or transfer said security for the benefit of
Tenant, to any subsequent owner or holder of the reversion or title to the
Premises, in which case such assignee or transferee shall become liable for the
repayment thereof as herein provided, and the assignor or transferor shall be
deemed to be released by Tenant from all liability to return such security. This
provision shall be applicable to every alienation or change in title and shall
in no wise be deemed to permit Landlord to retain the security after termination
of Landlord's encumber or assign said security without the prior written consent
of Landlord.
ARTICLE XXVI
Premises "As Is"
---------------
Section 26.01. "As Is." Neither Landlord nor Landlord's agents have
-----
made any representations or promises with respect to the physical condition of
the building of which the Premises are part, the land upon which such building
is erected or the Premises, the rents, leases, expenses of operation or any
other matter or thing affecting or related to the Premises except as herein
expressly set forth, and no rights, easements or licenses are acquired by Tenant
by implication or otherwise except as expressly set forth in this Lease. Tenant
has inspected the building and the Premises and is thoroughly acquainted with
their conditions, and agrees to take the same "as is" and acknowledges that the
taking of possession of the Premises by Tenant shall be conclusive evidence that
the Premises and the building of which the same form a part were in good and
satisfactory condition at the time such possession was so taken.
ARTICLE XXVIII
Attornment
----------
Section 28.01. Attornment. Tenant agrees that in the event of a sale,
----------
transfer or assignment, or sale and leaseback, of Landlord's interest in the
real property of which the Premises are part, or any part thereof, including the
Premises, or in the event any proceedings are brought for the foreclosure of or
for the exercise of any power of sale under any mortgage constituting a lien
upon such real property or any part thereof, including the Premises, to attorn
to and to recognize such transferee, purchaser, or mortgage, as Landlord under
this lease or, in the case of a sale-leaseback, to continue to recognize
Landlord as its lessor under this Lease. The foregoing provisions of this
Section shall be self-operative and no further instrument shall be required to
give effect to said provisions. Tenant, however, agrees, at the request of the
party to which it
<PAGE>
has attorned, to execute, acknowledge and deliver without charge, from time to
time, instruments acknowledging such attornment, and to execute such other
documents, including estoppel certificates and certified financial statements,
as may reasonably be requested by such party.
ARTICLE XXIX
Guard Service
-------------
Section 29.01. Guard Service. Landlord may, at the sole option,
-------------
provide reasonable guard service for the building of which the Premises are a
part. Tenant shall pay to the Landlord, as additional rent, together with
payment at the Basic Rent, its Pro Rata Share of said service.
ARTICLE XXX
Elevator
--------
[DELETED TEXT]
ARTICLE XXXI
End of Term
-----------
Section 31.01. Condition of Premises. Tenant shall, on the last day
---------------------
of the Term or renewal term, as the case may be, or upon the earlier termination
of this Lease, peaceably and quietly surrender and deliver up to Landlord the
Premises broom-clean, with the Demised Premises and all equipment in or
appurtenant thereto, in as good condition and repair as when delivered to
Tenant.
ARTICLE XXXII
General Provisions
------------------
Section 32.01. No Waste. Tenant covenants not to do or suffer any
--------
waste or damage, or injury to the Premises or to the fixtures and equipment
therein.
Section 32.02. Landlord's Liability. If Landlord shall breach any of
--------------------
the provisions hereof, Landlord's liability shall in no event exceed Landlord's
interest in the Premises as of the date of Landlord's breach; and Tenant
expressly agrees that any judgment or award which it may obtain against
Landlord shall be recoverable and satisfied solely out of the right, title and
interest of Landlord in and to the Premises and that Tenant shall have no rights
against the partners, general and limited, of Landlord or rights of lien or levy
against any other property of Landlord (or of any person or entity comprising
Landlord), nor shall any other property or assets of Landlord be subject to
levy, execution or other enforcement proceedings for the collection of any such
sums or satisfaction of any such judgment or award.
-14-
<PAGE>
Section 32.03. Partial Invalidity. If any term or provision of this
------------------
Lease or the application thereof to any part or circumstances shall to any
extent be invalid or unenforceable, the remainder of this Lease or the
application of such term or provision to parties or circumstances other than
those to which it is held invalid or unenforceable, shall not be affected
thereby, and each term and provision of this Lease shall be valid and enforced
to the fullest extent permitted by Law.
Section 32.04. No Waiver. One or more waivers by either party of the
---------
obligation of the other to perform any covenant or condition shall not be
construed as a waiver of a subsequent breach of the same or any other covenant
or condition. The receipt of rent by the Landlord, with knowledge of any breach
of this Lease by Tenant or of any default by Tenant in the observance or
performance of any of the conditions or covenants of this Lease, shall not be
deemed to be a waiver of any provision of this Lease. Neither the acceptance of
the keys nor any other act or thing done by Landlord or any agent or employee
during the Term shall be deemed to be an acceptance of a surrender of the
Premises, excepting only an agreement, in writing, signed by the Landlord
accepting or agreeing to accept such a surrender.
Section 32.05. Number and Gender. Wherever herein the singular number
-----------------
is used, the same shall include the plural, and the masculine gender shall
include the feminine and neuter genders.
Section 32.06. Successors and Assigns. The terms, covenants and
----------------------
conditions herein contained shall be binding upon and inure to the benefit of
the respective parties and their successors and assigns.
Section 32.07. Article and Marginal Headings. The article and
-----------------------------
marginal headings herein are intended for convenience in finding the subject
matters, and are not to be used in determining the intent of the parties of this
Lease.
Section 32.08. Entire Agreement. This instrument contains the entire
----------------
and only agreement between the parties, and no oral statements or
representations or prior written matter not contained or referred to in this
instrument shall have any force or effect. This Lease shall not be modified in
any way or terminated by mutual agreement except by a writing executed by both
parties.
Section 32.09. Obligations also Covenants. Whenever in this Lease any
--------------------------
words of obligation or duty are used, such words or expressions shall have the
same force and effect as though made in the form of covenants.
Section 32.10. Cost of Performing Obligations. Unless otherwise
------------------------------
specified, the respective obligations of the parties to keep, perform and
observe any terms, covenants or conditions of this Lease shall be at the sole
cost and expense of the party so obligated.
Section 32.11. Remedies Cumulative. The specified remedies to which
-------------------
the Landlord or Tenant may resort under the terms of this Lease are cumulative
and are not intended to be exclusive of any other remedies or means of redress
to which the Landlord or Tenant may be lawfully entitled in case of any breach
or threatened breach of any provision of this Lease.
Section 32.12. Holding Over. If Tenant holds over after the
------------
expiration or earlier termination of this Lease, and if Tenant is not otherwise
in default hereunder, such holding over shall not be deemed to create an
extension of the Term, but such occupancy shall be deemed to create a
month-to-month tenancy at twice the rental rate, and on the same terms and
conditions (except as the same may be then inapplicable) as are in effect on the
date of said expiration or earlier termination.
-15-
<PAGE>
Section 32.13. Force Majeure. The period of time during which either
-------------
party hereto is prevented from performing any act required to be performed under
this Lease by reason of fire, catastrophe, labor difficulties, strikes, lock-
outs, civil commotion, acts of God or of the public enemy, governmental
prohibitions or preemptions, embargoes, inability to obtain materials or labor
by reason of governmental regulations or prohibitions, or other events beyond
the reasonable control of Landlord or Tenant, as the case may be, shall be added
to the time for performance of such act, and neither party shall be liable to
the other or in default under this Lease as the result thereof. The provisions
of this Section shall not apply to or in any manner extend or defer the time for
any obligations to make payment of monies required of either party hereunder.
Section 32.14. Vacancy or Abandonment. In the event that the Premises
----------------------
shall become vacant as the result of being vacated or abandoned by Tenant during
the Term, Landlord may re-enter the same, either by peaceable re-entry or
otherwise, without being liable to prosecution therefor, and re-let the Premises
as agent of Tenant and receive the rent therefor and apply the same first to
payment of such expenses as Landlord may be put to in re-entering, and then to
payment of rent due under this Lease. In addition, such vacancy or abandonment
shall constitute a default under Section 20.01 entitling Landlord to the
exercise of all remedies specified in such Section or otherwise allowed by law.
Section 32.15. Governing Law. The interpretation and validity of this
-------------
Lease shall be governed by the substantive law of New Jersey.
Section 32.16. Brokerage. Landlord and Tenant represent that Sholom
---------
Shalom Kerbrot Wellins & CNJ, Inc. was the only broker instrumental in
consummating this Lease and that neither party has had any dealing with or
entered into agreement with any other broker in connection with this Lease. Each
party shall indemnify and hold harmless the other from all loss, cost or expense
of any nature, including reasonable attorney's fees, arising out of a
misrepresentation by such indemnifying party.
Section 32.17. Floor Loads. Tenant shall not place a load upon any
-----------
floor of the Premises exceeding the floor load per square foot area which it was
designed to carry and which is allowed by law. Landlord reserves the right to
prescribe the weight and position of all safes, business machines and mechanical
equipment. Such installations shall be placed and maintained by Tenant, at
Tenant's expense, in settings sufficient, in Landlord's judgment, to absorb and
prevent vibration, noise and annoyance.
Section 32.18. Waiver of Jury Trial. It is mutually agreed by and
--------------------
between Landlord and Tenant that the respective parties hereto shall, and they
hereby do, waive trial by jury in any action, proceeding or counterclaim brought
by either of the parties hereto against the other (except for personal injury or
property damage) on any matters whatsoever arising out of or in any way
connected with this Lease, the relationship of Landlord and Tenant, Tenant's use
of or occupancy of the Premises, and any emergency statutory or any other
statutory remedy. It is further mutually agreed that in the event Landlord
commences any summary proceeding for non-payment of rent, Tenant will not
interpose any counterclaim or whatever nature or description in any such
proceeding.
Section 32.19. No Option. For the convenience of Tenant, this Lease
---------
may be submitted to Tenant prior to its execution by or on behalf of Landlord,
but such submission shall not constitute an offer or an option and this Lease
shall not bind Landlord in any manner whatsoever unless and until this Lease
shall have been signed and delivered on behalf of Landlord.
Section 32.20. Modification of Lease Terms. Tenant shall enter into
---------------------------
any modification of the terms of this Lease requested by any bona fide
institutional lender of Landlord to facilitate mortgaging, provided that such
modification shall not alter the Basic Rent, additional rent or Term hereof. Not
in limitation of the foregoing, it is agreed that if requested by any mortgagee,
Tenant shall enter into an agreement with Landlord or such mortgagee, as
requested, to the effect that this Lease shall not be modified or surrendered,
nor rent prepaid, without the consent of such mortgagee.
-16-
<PAGE>
Section 32.21. Rules and Regulations. Landlord may, from time to
---------------------
time promulgate reasonable rules and regulations for the health, safety and
welfare of all the tenants of the lands and premises of which the Premises are
part, including but not limited to use of any common areas and facilities, and
Tenant agrees that such rules and regulations shall, upon notice to Tenant,
automatically be incorporated herein as if fully set forth.
Section 32.22. Restriction on Tenant.
---------------------
a. Trash. Tenant shall store and dispose of all trash and
-----
garbage in suitable containers and locate same as Landlord designates
from time to time. Tenant shall not burn any paper, trash or garbage
in or about the Demised Premises.
b. Tenant to Perform its Obligations Under this Lease. The
--------------------------------------------------
Tenant shall keep the Premises in a clean and sanitary condition, free
from vermin and escaping offensive odors.
c. Plumbing Facilities. Tenant shall not use or permit other
-------------------
to use any plumbing facilities in the Demised Premises for any purpose
other than that for which they were constructed or to dispose of any
damaging or injurious substance or any grease or garbage therein.
d. Obstructions. Tenant shall not obstruct, or permit others
------------
to obstruct, any entrances to the building or the halls and stairs or
loading facilities thereof. Landlord may prohibit congregation by
employees in hallways and other common areas.
e. Storage. Tenant is prohibited from storing any materials,
-------
equipment, parts, pallets or any other items used in its business
outside the Demised Building Premises.
Section 32.23. Quiet Enjoyment. Upon the payment of the Basic Rent
---------------
and all additional rents and sums herein reserved and due and upon the due
performance of all the terms, covenants and conditions herein contained on
Tenant's part to be kept and performed, Tenant shall and may at all times during
the Term peaceably and quietly enjoy the Premises, subject to the terms of this
Lease.
ARTICLE XXXIII
EDA, HUD, etc.
--------------
Section 33.01. EDA, HUD, etc., Documents. Tenant shall execute and
-------------------------
deliver to Landlord, within three (3) days of request therefor, all documents
and certifications of any nature, including but not limited to financial
statements and application forms, which shall be deemed necessary or advisable
by Landlord in connection with Landlord's making of application for and/or
procuring financing which shall be issued or guaranteed by, or shall otherwise
involve any form of financial assistance or intervention by, the New Jersey
Economic Development Authority (EDA), the Housing and Urban Development Agency
of the United States (HUD), and/or any other federal, state or local
governmental agency or instrumentality. [DELETED TEXT]
ARTICLE XXXIV
Definitions
-----------
Section 34.01. "Re-enter and Re-entry." The terms "re-enter" and
---------------------
"re-entry" as used in this Lease are not restricted to their technical, legal
meaning.
Section 34.02. "Landlord." The term "Landlord" as used in this Lease
--------
means only the holder, for the time being, of Landlord's interest under this
Lease so that in the event of any transfer of title to the Premises, Landlord
shall be and hereby is entirely freed and relieved of all obligations of
Landlord hereunder accruing after such transfer, and it shall be deemed without
further agreement between the parties that such grantee, transferee or designee
has assumed and agreed to observe and perform all obligations of Landlord
hereunder arising during the period it is the holder of Landlord's interest
hereunder.
-17-
<PAGE>
Section 34.03. "Lease Interest Rate." The term "Lease Interest Rate"
-------------------
as used in this Lease, shall mean interest at the then current "prime" plus four
(4%) per cent rate of interest charged by Fidelity Union Trust Company, Newark,
New Jersey, to its commercial customers.
Section 34.04 "Tenant's Pro Rata Share," The term "Tenant's Pro Rata
-----------------------
Share" as it appears in this Lease shall be TWENTY ------------- (20%) per cent.
Section 34.05 "Additional Rent." All costs and charges of whatever
---------------
nature to be paid by Tenant under this Lease, whether to be made to Landlord or
to any other party, shall be deemed additional rent, whether or not expressly so
stated elsewhere in this Lease.
ARTICLE XXXV
Parking
-------
Section 35.01. Parking. Tenant shall have the non-exclusive
-------
privilege to use such common parking areas of the property for the parking of
Tenant's motor vehicles as may be made available from time to time by Landlord,
in common with others to whom Landlord may grant such privilege provided such
motor vehicles shall not obstruct or otherwise interfere with the loading
platforms of any other tenant.
ARTICLE XXXVI
Submission Not Binding
----------------------
Section 36.01. Submission Not Binding. Submission by the Landlord of
----------------------
the within Lease for execution by the Tenant shall confer no rights nor impose
any obligations on either party, unless and until both the Landlord and Tenant
shall have executed this Lease and duplicate originals thereof shall have been
delivered to the respective parties.
ARTICLE XXXVII
Compliance With Laws
--------------------
Section 37.01. Compliance With Laws. Tenant shall, at Tenant's sole
--------------------
expense, promptly execute and comply with all requirements of all laws, orders
county and municipal authorities and any board of fire underwriters or similar
organization having jurisdiction over the Premises, concerning the Premises and
or the use and occupancy thereof, including but not limited to all requirements
of the Occupational Safety and Health Administration and Tenant shall not make
any claim against Landlord for any expense or damages resulting from such
execution and compliance. Tenant shall also comply with the Environmental
Cleanup Responsibility Act, P.L. 1983, Chapter 330, and shall do all things and
execute all documents necessary for said compliance including, but not limited
to, the submission to the New Jersey Department of Environmental Protection of
all necessary documentation upon the termination of this Lease, the termination
of the use set forth in Section 14.01 hereof or the conveyance of title to the
Premises.
Section 38.01. Option to Expand. See Addendum
----------------
Section 39.01. Option to Extend. See Addendum
----------------
IN WITNESS WHEREOF THE PARTIES HERETO AND HEREUNTO SET THEIR HANDS AND
SEALS THIS DAY OF , 19 .
TRIANGLE FIDELCO INDUSTRIAL CENTER
LANDLORD: __________________
HAWK INDUSTRIES, INC.
TENANT:[ILLEGIBLE SIGNATURE]
---------------------
-18-
<PAGE>
ENVIRONMENTAL RIDER
-------------------
1. If Tenant receives any notice of the happening of any event involving the
use, spill, discharge or cleanup of any hazardous or toxic substances or
waste, or any oil or pesticide on or about the demised premises or into the
sewer, septic system or waste treatment system servicing the demised
premises (any such event is hereinafter referred to as a "Hazardous
Discharge") or of any complaint, order citation, or notice with regard to
air emissions, water discharges, noise emissions or any other
environmental, health or saftey matter affecting the Tenant (an
"Environmental Complaint") from any person, entity, including the DEP and
the EPA, then the Tenant shall give immediate oral and written notice of
---
same to the Landlord, detailing all relevant facts and circumstances.
2. Without limitation of the foregoing, Landlord shall have the right, but not
the obligation, to exercise any of its right as provided in Article XX of
this Lease or to enter onto the Premises or to take such actions as it
deems necessary or advisable to cleanup, remove, resolve or minimize the
impact of or otherwise deal with any Hazardous Discharge or Environmental
Complaint upon its receipt of any notice from any person or entity,
including without limitation the DEP and the EPA, asserting the happening
of a Hazardous Discharge or an Environmental Complaint on or pertaining to
the demised premises. All costs and expenses incurred by Landlord in the
exercise of any such rights shall be deemed to be additional rent hereunder
and shall be payable by the Tenant to the Landlord upon demand.
3. The occurrence of any of the following events shall constitute an Event of
Default under this lease:
(a) If Landlord receives it first notice of a Hazardous Discharge or
an Environmental Complaint, of which Tenant has knowledge, or should
reasonably have knowledge, on or pertaining to the demised premises
other than from Tenant, and Landlord does not receive a notice (which
may be given in any oral or written form, provided same is followed
with all due dispatch by written notice given by certified mail,
return receipt requested) of such Hazardous Discharge or Environmental
Complaint from Tenant within twenty-four (24) hours of the time
Landlord first receives said notice other than from the Tenant; or
(b) If the DEP, EPA or any other state or federal agency asserts a
claim against Tenant, the demised premises of Landlord for damages or
cleanup costs related to a Hazardous Discharge or an Environmental
Complaint on or pertaining to the demised premises provided, however,
such claim shall not constitute a default if, within five (5) days of
notice to Tenant of the occurrence giving rise to the claim:
(i) Tenant can prove to Landlord's satisfaction that relief has
commenced and is diligently pursuing either: (x) cure or
correction of the event which constitutes the basis for the
claim, and continues diligently to pursue such cure or correction
to completion, or (y) proceedings for an injunction, a
restraining order or other appropriate emergent relief preventing
such agents or agencies from asserting such claim, which relief
is granted within ten (10) days or the occurrence giving rise to
the claim and if emergent relief is not thereafter dissolved or
reversed on appeal; and
(ii) In either of the foregoing events, Tenant has posted a bond,
letter of credit or other security satisfactory in form,
substance and amount to Landlord and the agency or entity
asserting the claim to secure the proper and complete cure or
correction of the event which constitutes the basis for
the claim.
<PAGE>
4(a) If Tenant's operations on the Premises now or hereafter constitute an
"Industrial Establishment" subject to the requirements of the New Jersey
Environmental Cleanup Responsibility Act, N.J.S.A. 13:1k-6 et seq., and
the regulations pertaining thereto, A.C.S.A. 7:1-3, 1 et seq. ("ECRA"),
then prior to the expiration or sooner termination of this lease and upon
any and every condemnation, casualty, assignment or sublease (if
permitted), change in ownership or control of Tenant or any other closure
or transfer by Landlord or Tenant covered by ECRA, Tenant shall comply
with all requirements of ECRA pertaining to an Industrial Establishment
closing or transferring operations, at its sole cost and expense, to the
satisfaction of the DEP and Landlord. Without limitation of the foregoing,
Tenant's obligations shall include (i) the proper filing of the initial
notice to the DEP required by N.J.A.C. 7:1-3.7, (ii) the performance to
DEP's and Landlord's satisfaction of all air, soil, ground water and
surface water sampling and testing required by N.J.A.C. 7:1-3.9 and (iii)
either (x) the filing of a "negative declaration" with DEP under N.J.A.C.
7:1-3.11 which has been approved by DEP or (y) the performance of a proper
and approved cleanup plan to the full satisfaction of DEP and Landlord in
accordance with N.J.A.C. 7:1-3.12. Tenant shall immediately provide
Landlord with copies of all correspondence, reports, notices, orders,
findings, declarations and other materials pertinent to Tenant's
compliance and DEP's requirements under ECRA, as any of same are issued or
received by Tenant from time to time.
4(b) In the event that ECRA does not apply to Tenant's operations on the
Premises, at Landlord's option, request and expense, Tenant shall
cooperate with Landlord's compliance with ECRA, and, in the event that
said compliance discloses the occurrence of a Hazardous Discharge by
Tenant, Tenant shall promptly cleanup and remove said Hazardous Discharge
at Tenant's sole cost and expense.
5. In the event of Tenant's failure to comply in full with this Article,
Landlord may, at its option, perform any or all of Tenant's obligations as
aforesaid and all costs and expenses incurred by Landlord in exercise of
this right shall be deemed to be additional rent payable on demand.
6. This Article shall survive the expiration or sooner termination of the
Lease.
7. Notwithstanding anything to the contrary herein contained, Landlord agrees
that the Tenant shall be responsible only for its own occupancy and not
for any pre-existing condition or any prior Tenant or user.
THE ABOVE AGREED TO BY:
------------------------------------------------
TRIANGLE FIDELCO INDUSTRIAL CENTER (LANDLORD)
[ILLEGIBLE SIGNATURE]
------------------------------------------------
HAWK INDUSTRIES, INC.
<PAGE>
ADDENDUM TO LEASE
-----------------
Section 38.01. Option to Expand. Notwithstanding anything to the contrary
----------------
herein contained Landlord agrees that it shall notify the Tenant of any
impending vacancy within the building located at 690 Jersey Avenue, New
Brunswick, NJ.
Tenant shall have SEVEN (7) days from Landlord's notification to provide
written notice of its intention to occupy said vacancy at the rate of $2.70 per
square foot net net net (i.e. tenants paying all expenses associated with its
use and occupancy of the premises) under the following terms and conditions:
A. Tenant shall not be in default of any of the terms and conditions of the
original Lease Agreement including but not limited to payment of basic and all
additional rentals.
B. Any additional premises occupied by the Tenant shall be occupied in an "as
is" condition, except that Landlord agrees to provide the premises in a broom
swept clean condition, and fill in any large holes in the floor.
C. This option to expand shall only be in effect through March 31, 2000.
Tenant shall have no right to expand pursuant to the terms of this Paragraph
38.01 during the option period as called for in Paragraph 39.01 in this Lease or
during any time that the Tenant occupies any portion of the property thereafter.
D. Tenant shall at the time that it exercises said option to expand, pay to
the Landlord an additional security deposit equivalent to ONE (1) month's rent
on the additional space, to be held by the Landlord in accordance with Paragraph
25.01 hereof.
E. It is understood that this option to expand is given only to Hawk
Industries, Inc. for their exclusive use and occupancy. Under no condition shall
the Tenant have the right to sublease or assign the right to occupy any
additional space.
F. Under no circumstances shall the SEVEN (7) day notification period called
for in this Paragraph 38.01 be extended.
G. All other terms and conditions of the original Lease shall remain in full
force and effect and shall apply to any additional space occupied by the
Tenant, except as modified in this Paragraph 38.01.
<PAGE>
Section 39.01 Option to Extend. The Landlord grants to the Tenant ONE (1)
----------------
FIVE (5) year option to renew the lease under the following terms and
conditions:
1. Tenant is not in default of any of the terms and conditions of the original
Lease.
2. Option period shall commence April 1, 2000 and expire on March 31, 2005.
3. Rental for the option period shall be:
For the period April 1, 2000-March 31, 2005 annual base rental shall be ONE
HUNDRED NINETY FIVE THOUSAND DOLLARS ($195,000.00) payable in equal monthly
installments of SIXTEEN THOUSAND TWO HUNDRED FIFTY DOLLARS ($16,250.00).
4. Notice of intent to exercise said option must be given to the Landlord in
writing, by Certified Mail, Return Receipt Requested, no later than ONE HUNDRED
EIGHTY DAYS (180) days prior to the expiration of the original Lease Agreement.
5. Notwithstanding anything to the contrary herein contained, in the event
Tenant has exercised its option to expand as called for in Paragraph 38.01
above, this option to extend shall apply to any additional space that the Tenant
has taken occupancy of. In that event, the base rental shall be adjusted so as
to accurately represent a base rental of $3.25 per square foot net net net for
all space occupied by the Tenant.
6. All other terms and conditions of the original Lease Agreement shall
prevail during the option period with the exception of Section 38.01.
THE ABOVE AGREED TO BY:
________________________________________________
TRIANGLE FIDELCO INDUSTRIAL CENTER (LANDLORD)
[ILLEGIBLE SIGNATURE]
- ------------------------------------------------
HAWK INDUSTRIES, INC. (TENANT)
<PAGE>
BETWEEN
TRIANGLE FIDELCO INDUSTRIAL CENTER
AND
HAWK INDUSTRIES, INC.
1. Landlord represents that the following additional rental charges currently
total approximately for the entire building:
Area Lighting................. $ 251.15/month
Outside Maintenance........... 1,267.83/month
Disposal...................... 269.19/month
Alarm......................... 909.67/month
Sprinkler..................... 183.21/month
Water......................... 1,541.29/month
Snow.......................... 964.00/year
2. Section 4.03 is amended to provide for the Tenant paying its prorata share
of taxes thirty (30) days in advance of the Landlord's quarterly payment to the
City of New Brunswick.
3. Section 5.03. Notwithstanding anything to the contrary herein contained,
Landlord agrees that the Tenant shall not be liable for any unreasonable
increase in insurance occasioned by other Tenants' actions.
4. Section 9.01. Notwithstanding anything to the contrary herein contained,
Landlord agrees that it shall make necessary structural repairs to the floors
and walls and to the roof so as to keep it reasonably free from leaks.
5. Section 15.01. Notwithstanding anything to the contrary herein contained,
it is understood that Tenant shall have the right to assign or sublet its
premises without any requirement of consent of Landlord subject to the
provisions of Section 15.03 of this Lease. Tenant shall also have the right to
assign or sublet its premises to its parent, subsidiaries or affiliates.*
6 Paragraph 7 of the Environmental Rider is omitted and replaced with the
following:
Landlord indemnifies and holds Tenant harmless against any loss, cost, or
expense with respect to any environmental matters, Hazardous Discharge or like
items, arising out of or relating to conditions existing prior to the date of
Tenant's occupancy or caused by Landlord or other tenants.
7. Landlord will remove all spikes in floor around the loading bay doors.
8. Landlord represents that it has not had any Hazardous Discharge or
environmental complaints relating to the demised premises.
* Unless the subtenant's operation at the premises is involved in
manufacturing of any kind except apparel, in which case the Landlord's consent
shall be required which consent shall not be unreasonably withheld. Tenant shall
not be allowed to sublease to any tenant whose operation at the premises
significantly involves hazardous materials without Landlord's consent which
shall not be unreasonably withheld.
THE ABOVE AGREED TO BY:
___________________________________________________
TRIANGLE FIDELCO INDUSTRIAL CENTER (LANDLORD)
[ILLEGIBLE SIGNATURE APPEARS HERE]
- ---------------------------------------------------
HAWK INDUSTRIES, INC. (TENANT)
<PAGE>
In consideration of the Landlord entering into this Lease Agreement with the
corporate Tenant; plus as a material inducement to Landlord to enter into this
Lease Agreement with the corporate Tenant the undersigned, Happy Kids Inc.
(which has represented itself to be the parent corporation of the Tenant) hereby
irrevocably and unconditionally guarantees the complete performance by Tenant
of its obligations under the Lease Agreement including but not limited to by the
monetary and non-monetary obligations of the Tenant.
Without notice to or further assent from the undersigned, the Landlord may waive
or modify any of the terms and conditions of the Lease, any rules and
regulations or related Tenant obligations; or compromise, settle, or extend the
time of payment of any amount due from the Tenant or the time of performance of
any obligations of the Tenant.
These actions maybe taken by the Landlord without discharging or otherwise
affecting the obligations of the undersigned.
Notwithstanding anything to the contrary herein contained, it is understood that
the monetary extent of this Guaranty shall be no greater than an amount
equivalent to four and one-half (4-12) months of the then current rental. This
Guaranty shall be in addition to the Tenant's security to be deposited pursuant
to Paragraph 25.01 of the Lease.
This Guaranty, is binding upon the undersigned and its successors.
THE ABOVE AGREED TO BY:
[ILLEGIBLE SIGNATURE APPEARS HERE]
- -----------------------------------------
HAPPY KIDS, INC.
___________________________
DATE
<PAGE>
S C H E D U L E B
1. Landlord agrees to construct approximately 600 square feet of office on the
first floor, incorporating an existing private office of approximately 200
square feet. New office to consist of one (1) open room with painted
sheetrock walls, drop ceiling, vinyl tiles or carpet on the floors, and
sufficient lighting and outlets. The existing private office shall be
repainted, ceiling tiles replaced, and carpeting installed.
2. Landlord agrees to paint and clean all bathroom facilities throughout the
premises.
3. Landlord agrees to paint and clean the warehouse locker room.
4. Landlord agrees to replace all ceiling tiles in the warehouse locker room.
5. Landlord agrees to install a dock seal on each of the existing overhead
doors.
6. Landlord agrees that the Tenant shall have the right at its sole cost and
expense to build a "steam tunnel". Tenant agrees that it shall provide
plans to the Landlord for said construction and Tenant agrees that it shall
remove said "steam tunnel" at the expiration of this Lease pursuant to
Article 8.01 hereof.
AGREED TO BY:
_________________________________________________
TRIANGLE FIDELCO INDUSTRIAL CENTER (LANDLORD)
_________________________________________________
HAWK INDUSTRIES, INC. (TENANT)
<PAGE>
S C H E D U L E C
- - - - - - - - -
FINANCIAL AGREEMENT PURSUANT TO N.J.S.A.
--------
40:55C-40, ET SEQ. BETWEEN THE CITY OF
NEW BRUNSWICK AND TFIC URBAN RENEWAL
LIMITED PARTNERSHIP
THIS FINANCIAL AGREEMENT, hereinafter referred to as the "Agreement", made
the December, 1986, between TFIC URBAN RENEWAL LIMITED PARTNERSHIP,
qualified to do business under the provision of the Urban Renewal Corporation
and Association Law of 1961, (pursuant to the attached Certificate of
Formation), having its principal office at 225 Millburn Avenue, Millburn, New
Jersey, hereinafter referred to as the "Entity",
and
THE CITY OF NEW BRUNSWICK, a municipal corporation in the County of
Middlesex and the State of New Jersey, hereinafter referred to as the "City".
W I T N E S S E T H
- - - - - - - - - -
IN consideration of the mutual covenants herein contained and for the other
good and valuable consideration, it is mutually covenanted and agreed as
follows:
1. This Agreement shall be governed by the provisions of the Urban
Renewal Corporation and Association Law of 1961 (N.J.S.A. 40:55C-40, et. seq.),
--------
being sometime herein referred to as the "Law". It is expressly understood and
agreed that the City relies upon the facts, data, and presentation contained in
the Application attached hereto.
2.(a). The City has granted, and does hereby grant, its approval for an
urban renewal project to be undertaken pursuant to the provisions of the "Law
(40:55C-40, et. seq.), pursuant to Ordinance No. 0-098407 attached hereto,
described in said Application, commonly known on the Official Tax Map of the
City of New Brunswick as:
Block 597.05, Lot 1
(Former Lots 1 and 2)
2.(b). Approval hereunder is granted to the Entity for the undertaking of
the project on the lands referred to above, which project shall provide adequate
parking facilities, shall in all respects comply and conform to all applicable
Statutes and Municipal Ordinances, and the lawful regulations made pursuant
thereto governing land, building(s) and the use thereof, and is more
particularly described in the accompanying Application.
<PAGE>
3. The project to be constructed by the Entity shall be exempt from
taxation on improvements in accordance with the provisions of the Law and in the
manner provided by this Agreement for a period of not more than twenty (20)
years from the date of execution of this Agreement, or earlier at the end of
fifteen (15) years of operation of said project, and only so long as the Entity
and its project remain subject to the provisions of the Law and comply with this
Agreement.
4. In consideration of the aforesaid exemption from taxation on
improvements, the Entity shall make payment to the City of an annual service
charge for municipal services supplied to said project in an amount equal to two
percent (2%) of the total project cost, determined pursuant to N.J.S.A.
--------
40:55C-47, calculated from the first day of the month following the substantial
completion of the project. Two percent (2%) of the total project cost,
determined pursuant to 40:55C-47, shall not be less than the presently estimated
amount of $96,000.00. However, it is nevertheless provided that in no event
shall such Annual Service Charge payment together with the taxes on the Land, in
any year after commencement of payment of the Annual Service Charge, be less
than the total taxes assessed on all real property in the area covered by the
Project in the calendar year immediately preceding the acquisition of the said
area by the Entity.
5.(a). The parties recognize that the Law provides that payment of the
Annual Service Charge shall be made annually within thirty (30) days after the
close of each calendar year. Because such payment annually may result in a
hardship to the City because of cash flow, the Entity agrees that the aforesaid
Annual Service Charge shall be made in quarterly installments on those dates
when real estate tax payments are due, subject nevertheless to adjustment for
over or underpayment within thirty (30) days after the close of each calendar
year. By making such payments quarterly rather than annually, the Entity shall
not be deemed to have waived any right under the Law to which it would be
otherwise entitled if such payment had been made annually.
Against such Annual Charge the Entity shall be entitled to credit for the
amount, without interest, of the real estate taxes on the Land paid by it, or by
the prior owner of the Land, in the last four (4) preceding quarterly
installments.
5.(b). The "Annual Service Charge" shall only accrue from the first day of
the month following the "substantial completion" of the project.
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<PAGE>
5.(c). "The Annual Service Charge" for the first calendar year of tax
exemption shall be on a pro rata basis, from the date of commencement of the
exemption to the close of the calendar year, and, for the last calendar year of
the tax exemption, from the first of the calendar year to the date of
termination of the exemption.
6. In the event of a breach of the Agreement by either of the parties
hereto, or a dispute arising between the parties in reference to the terms and
provisions as set forth herein, either party may apply to the Superior Court of
New Jersey by an appropriate proceeding to settle and resolve said dispute in
such fashion as will tend to accomplish the purposes of the Law. In the event of
a default on the part of the Entity of its obligation to pay the "Annual Service
Charge" as hereinabove defined in paragraph 4, the City may terminate the tax
abatement if the default is not remedied within ninety (90) days of the due date
of the "Annual Service Charge" or in the alternative it reserves the right to
proceed against the Entity's land and premises, the subject of this Agreement,
in the manner provided by N.J.S.A. 54:5-1 to 54:5-129 and any act
--------
supplementary or amendatory thereof. It is understood and agreed by the parties
hereto that throughout N.J.S.A. 54:5-1 to 54:5-129 and any act supplementary or
--------
amendatory thereof, whenever the word "taxes" appears, or is applied, directly
or impliedly to mean taxes or municipal liens on land, such statutory provisions
shall be read, as far as is pertinent to this Agreement, as if the "annual
service charge" were taxes or municipal liens on land. In any event, however,
the Entity does not waive any defense it may have to contest the right of the
City to proceed in the above mentioned manner by conventional or In rem tax
------
foreclosures.
7. During the period of tax exemption as provided herein, the profits of,
and dividends payable by, the Entity shall be limited pursuant to the provisions
of N.J.S.A. 40:55C-66.
--------
8. The Entity shall have the right to establish reserves against unpaid
rentals, contingencies and/or vacancies in an amount not exceeding ten (10%)
percent of the gross revenues of the Entity for the fiscal year preceding the
year in which a determination is being made with respect to permitted net
profits as provided in N.J.S.A. 40:55C-66.
--------
9. It is agreed between the parties that the Entity, at any time after
the expiration of one (1) year from the commencement of the "Annual Service
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<PAGE>
Charge as set forth in paragraph 5(b) hereof, may relinquish its status as an
Urban Renewal Corporation or Association, as the case may be, and terminate any
rights it may have to the tax exemptions provided herein. Notice of such
election shall be given to the City in writing and the tax exemption, the
"Annual Service Charges", and the profit and dividend restrictions shall
terminate on the date designated in such notice, and the entire property and
improvements comprising the project shall thereupon be assessed and taxed
according to general law as other property in the City is assessed and taxed.
10. Upon termination of the tax exemption and its related obligations and
restrictions, whether by affirmative action of the Entity, by the provisions of
the Law, or pursuant to the terms of this Agreement, the date of such
termination shall be the end of the fiscal year of the City. Within ninety (90)
days after the date of such termination, the Entity shall pay the City a sum
equal to the amount of the reserve, if any, maintained pursuant to this N.J.S.A.
--------
40:55C-66, as well as the excess profit, if any, payable pursuant to N.J.S.A.
--------
40:55C-66 by reason of the treatment of such termination date as the end of a
fiscal year.
11. The Entity shall submit annually, within ninety (90) days after the
close of each of its fiscal years, its reports of income and expenses related to
the Project as certified by a Certified Public Accountant, to the Mayor and
Municipal Council of the City.
12. The Entity shall permit inspection of the property, equipment,
buildings and other facilities of the Entity by authorized representatives of
the City. The Entity shall also permit examination and audit of its books,
contracts, records, documents, and papers by authorized representatives of the
City. Such inspection, examination or audit shall be made during the reasonable
hours of the business day, in the presence of an officer or agent of the Entity.
13. Any notice required hereunder to be sent by either party to the other,
shall be sent by certified mail, return receipt requested, addressed as follows:
(a). When sent by the City to the Entity, it shall be addressed to: TFIC
Urban Renewal Partnership, c/o Marc E. Berson, 225 Millburn Avenue, Millburn,
New Jersey, unless prior to the giving of such notice the Entity shall have
notified the City otherwise.
-4-
<PAGE>
(b). When sent by the Entity to the city, it shall be addressed to the City
Clerk, City Hall,78 Bayard Street, New Brunswick, New Jersey, unless prior to
the giving of such notice the city shall have notified the Entity otherwise.
14. In the event that the Entity sells its project, the subject of this
Agreement, the tax abatement granted hereunder shall terminate unless the city
consents in writing to the sale.
15. All conditions in the Ordinance of the Municipal Council of the City
approving this Agreement are hereby incorporated into this Agreement and made a
part hereof.
IN WITNESS WHEREOF, the parties have caused these presents to be executed
the day and year first above written.
WITNESS TFIC URBAN RENEWAL LIMITED PARTNERSHIP
/s/ Frank A. Biancola /s/ Marc C. Berson
- ----------------------------- -----------------------------------
FRANK A. BIANCOLA Marc C. Berson General Partner
ATTORNEY AT LAW IFIC URBAN RENEWAL LIMITED PARTNERSHIP
OF NEW JERSEY
/s/ Donald S. Hert
-----------------------------------
Donald S. Hert, General Partner
TFIC URBAN RENEWAL LIMITED PARTNERSHIP
ATTEST: THE CITY OF NEW BRUNSWICK
/s/ William J. Cahill /s/ John A. Lynch
- ----------------------------- ----------------------------------
WILLIAM J. CAHILL, City Clerk JOHN A. LYNCH MAYOR
-5-
<PAGE>
Exhibit 10.5
FINANCING AGREEMENT
Dated as of February 13, 1996
by and among
HAPPY KIDS, LTD.,
CERTAIN AFFILIATES OF
HAPPY KIDS, LTD.,
THE LENDERS LISTED IN SCHEDULE A HERETO,
and
THE CIT GROUP/COMMERCIAL SERVICES, INC.,
as Agent
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
ARTICLE I
DEFINITIONS; CERTAIN TERMS
<S> <C>
SECTION 1.01. Definitions................................................ 1
SECTION 1.02. Accounting and Other Terms................................. 16
SECTION 1.03. Time References............................................ 17
ARTICLE II
THE LOANS
SECTION 2.01. Credit Exposure............................................ 17
SECTION 2.02. Loans...................................................... 17
SECTION 2.03. Making the Loans........................................... 17
SECTION 2.04. Notes; Repayment of Loans.................................. 18
SECTION 2.05. Funding and Settlement Procedures.......................... 18
SECTION 2.06. Interest................................................... 20
(a) Loan............................................................... 20
(b) Default Interest................................................... 20
(c) Interest Payment................................................... 20
(d) General............................................................ 20
SECTION 2.07. Prepayment of Loans........................................ 20
ARTICLE III
LETTERS OF CREDIT
SECTION 3.01. General.................................................... 21
SECTION 3.02. Participations............................................. 24
SECTION 3.03. Letters of Credit.......................................... 25
ARTICLE IV
FEES, PAYMENTS AND OTHER COMPENSATION
SECTION 4.01. Fees....................................................... 27
SECTION 4.02. Payments; Computations and Statements...................... 27
SECTION 4.03. Sharing of Payments, Etc................................... 28
SECTION 4.04. Apportionment of Payments.................................. 29
SECTION 4.05. Increased Costs and Reduced Return......................... 29
</TABLE>
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<PAGE>
ARTICLE V
CONDITIONS OF EFFECTIVENESS, LETTER OF CREDIT ISSUANCE AND LENDING
<TABLE>
<S> <C>
SECTION 5.01. Conditions Precedent to Effectiveness....................... 31
SECTION 5.02. Conditions Precedent to Loans and Letters of Credit......... 36
ARTICLE VI
REPRESENTATIONS AND WARRANTIES
SECTION 6.01. Representations and Warranties of the Borrower.............. 37
ARTICLE VII
COVENANTS OF THE BORROWER
SECTION 7.01. Affirmative Covenants....................................... 42
SECTION 7.02. Negative Covenants.......................................... 51
ARTICLE VIII
MANAGEMENT, COLLECTION AND STATUS OF ACCOUNTS RECEIVABLE AND
OTHER COLLATERAL
SECTION 8.01. Management of Collateral.................................... 56
SECTION 8.02. Accounts Receivable Documentation........................... 58
SECTION 8.03. Status of Accounts Receivable and Other Collateral.......... 58
SECTION 8.04. Collateral Custodian........................................ 60
ARTICLE IX
THE AGENT AND L/C ISSUER
SECTION 9.01. Authorization and Action.................................... 60
SECTiON 9.02. Borrower's Default.......................................... 61
SECTION 9.03. Agent's Reliance, Etc....................................... 61
SECTION 9.04. CIT......................................................... 62
SECTION 9.05. Lender Credit Decision...................................... 62
SECTION 9.06. Indemnification............................................. 63
SECTION 9.07. Successor Agent............................................. 63
SECTION 9.08. Collateral Matters.......................................... 64
</TABLE>
-ii-
<PAGE>
ARTICLE X
EVENTS OF DEFAULT
<TABLE>
<S> <C>
SECTION 10.01. Events of Default.......................................... 64
SECTION 10.02. Deposit for Letters of Credit.............................. 67
ARTICLE XI
MISCELLANEOUS
SECTION 11.01. Termination................................................ 68
SECTION 11.02. Notices, Etc............................................... 69
SECTION 11.03. Amendments, Etc............................................ 70
SECTION 11.04. No Waiver; Remedies, Etc................................... 70
SECTION 11.05. Fees, Costs, Expenses and Taxes............................ 71
SECTION 11.06. Happy Kids as Agent for Borrowers.......................... 72
SECTION 11.07. Right of Set-off........................................... 72
SECTION 11.08. Severability............................................... 73
SECTION 11.09. Assignments and Participations............................. 73
SECTION 11.10. Counterparts............................................... 75
SECTION 11.11. Headings................................................... 75
SECTION 11.12. Governing Law; Service of Process.......................... 75
SECTION 11.13. Waiver of Jury Trial, Etc.................................. 76
SECTiON 11.14. Consent by the Agent....................................... 76
SECTION 11.15. No Party Deemed Drafter.................................... 76
SECTION 11.16. Reinstatement; Certain Payments............................ 76
SECTION 11.17. Indemnification............................................ 77
SECTION 11.18. Binding Effect............................................. 77
ARTICLE XII
GUARANTY
SECTION 12.01. Guaranty................................................... 78
SECTION 12.02. Obligations Unconditional.................................. 78
SECTION 12.03. Waivers.................................................... 79
SECTION 12.04. Subrogation................................................ 79
SECTION 12.05. No Waiver; Remedies........................................ 79
SECTION 12.06. Stay of Acceleration....................................... 79
</TABLE>
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<PAGE>
EXHIBIT A Form of Note
EXHIBIT B Form of Guaranty
EXHIBIT C Form of Security Agreement
EXHIBIT D Form of Cash Collateral Agreement
EXHIBIT E Form of Letter of Credit Application
EXHIBIT F Form of New York Counsel Opinion
EXHIBIT G Form of Local Counsel Opinion
EXHIBIT H Form of Assignment and Acceptance
EXHIBIT I Form of Notice of Borrowing
EXHIBIT J Form of Subordination Agreement
SCHEDULE A Lenders and Lenders' Credit Exposure
SCHEDULE B Guarantors
SCHEDULE 3.03(c) Existing Letters of Credit
SCHEDULE 6.01(e) Inventory Locations
SCHEDULE 6.01(f) Subsidiaries
SCHEDULE 6.01(g) Litigation
SCHEDULE 6.01(s) Operating Lease Obligations
SCHEDULE 6.01(t) Environmental
SCHEDULE 6.0l(y) Tradenames
SCHEDULE 6.01(aa) Material Contracts
SCHEDULE 7.02(a)(ii) Liens
SCHEDULE 7.02(b)(ii) Indebtedness
SCHEDULE 7.02(c)(ii) Guaranties
SCHEDULE 7.02(f)(ii) Investments
SCHEDULE 7.02(g) Capitalized Lease Obligations
-iv-
<PAGE>
FINANCING AGREEMENT
FINANCING AGREEMENT, dated as of February 13,1996 by and among Happy
Kids, Ltd., a New York corporation ("Happy Kids"), O'Boy Inc. a New York
corporation ("O'Boy"), Talk of the Town Apparel Corp., a New York corporation
("TOT Apparel") and O.P. Kids, L.L.C., a New Jersey limited liability company
("OP, LLC" and together with Happy Kids, O'Boy and TOT Apparel, each a
"Borrower" and collectively the "Borrowers"), the guarantors listed on Schedule
B hereto (each a "Guarantor" and collectively, the "Guarantors"), the lenders
listed on Schedule A hereto (each a "Lender" and collectively, the "Lenders")
and The CIT Group/Commercial Services, Inc., as agent for the Lenders (in such
capacity, the "Agent").
RECITALS
--------
The Borrowers and the Guarantors have asked the Lenders to extend
credit to the Borrowers, from the date hereof through the Final Maturity Date
(as hereinafter defined) in the form of discretionary revolving credit loans to
the Borrowers at any time and from time to time prior to the Final Maturity Date
in an aggregate principal amount not in excess of $36,000,000 at any time
outstanding, reducing to an aggregate principal amount not in excess of
$32,000,000 at any time outstanding on and after May 31, 1996. This revolving
credit facility may include a $18,000,000 letter of credit subfacility. The
proceeds of the discretionary revolving credit loans shall be used to refinance
existing indebtedness of the Borrowers to The Chase Manhattan Bank, N.A.
("Chase"), Chemical Bank ("Chemical") and Israel Discount Bank of New York
("IDB" and together with Chase and Chemical, each an "Existing Lender" and
collectively the "Existing Lenders") and for general working capital purposes.
The letters of credit will be used to finance the purchase of finished goods
inventory in the normal course of the Borrowers' business. The Lenders are
severally, and not jointly, willing to consider extending such credit to the
Borrowers on a discretionary basis and subject to the terms and conditions
hereinafter set forth. Accordingly, the Borrowers, the Guarantors, the Lenders
and the Agent hereby agree as follows:
ARTICLE I
DEFINITIONS; CERTAIN TERMS
SECTION 1.01. Definitions. As used in this Agreement, the following
-----------
terms shall have the respective meanings indicated below, such meanings to be
applicable equally to both the singular and plural forms of such terms:
"Account Debtor" means each debtor, customer or obligor in any way
--------------
obligated on or in connection with any Account Receivable.
"Account Receivable" means any and all rights of a Borrower to payment
------------------
for goods sold, including accounts, contract rights, general intangibles and any
such right evidenced
<PAGE>
by chattel paper, instruments or documents, whether due or to become due and
whether or not it has been earned by performance, and whether now or hereafter
acquired or arising in the future and any proceeds arising therefrom or relating
thereto.
"Action" has the meaning specified therefor in Section 11.14 hereof.
------
"Administrative Borrower" has the meaning specified therefor in
-----------------------
Section 11.06 hereof.
"Agreement" means this Financing Agreement, including all amendments,
---------
modifications and supplements and any exhibit or schedule to any of the
foregoing, and shall refer to the Agreement as the same may be in effect at the
time such reference becomes operative.
"Affiliate" means, as to any Person, (i) any other Person that
---------
directly or indirectly through one or more intermediaries, controls, is
controlled by, or is under common control with, such Person, or (ii) any trade
or business (whether or not incorporated) which is a member of a group of which
such Person is a member and which is under common control within the meaning of
Section 414 of the IRC and the rules and regulations promulgated thereunder from
time to time. Notwithstanding anything to the contrary, for purposes of this
Agreement and the other Loan Documents, the term "Affiliate" shall also include
any Family Member of an Individual Guarantor and any Person controlled by a
Family Member of an Individual Guarantor.
"Agent" has the meaning specified therefor in the preamble hereto.
-----
"Agent Advances" has the meaning specified therefor in Section 9.08(a)
--------------
hereof.
"Assignment and Acceptance" means an assignment and acceptance entered
-------------------------
into by an assigning Lender and an assignee and accepted by the Agent, in
accordance with Section 11.09 hereof and substantially in the form of Exhibit H
hereto.
"Borrower" and "Borrowers" has the meaning specified therefor in the
-------- ---------
preamble hereto.
"Borrowing Base" means, as of any date, the sum of (i) up to 85% of
--------------
the value of the Borrowers' Net Amount of Eligible Accounts Receivable, (ii) up
to 50% of the value of the Borrowers' Eligible Inventory, (iii) up to 50% of the
Borrowers' L/C Inventory, provided that the Inventory with respect thereto is
not otherwise included in the Borrowing Base, and (iv) the Overadvance Amount.
The value of all Inventory shall be determined at the lower of cost or market
value in accordance with GAAP.
"BUM" means B.U.M. International, Inc., a Nevada corporation.
---
"BUM License Agreement" means the License Agreement, dated as of June
---------------------
1, 1995, as amended to the date of this Agreement, between BUM and Happy Kids,
as the same
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<PAGE>
may be further amended, modified or supplemented from time to time in accordance
with the provisions of Section 7.02(n) of this Agreement.
"Business Day" means any day, other than a Saturday, Sunday or legal
------------
holiday, on which banks are required or authorized to close in New York City.
"Capital Guideline" means any law, rule, regulation, policy, guideline
-----------------
or directive, whether or not having the force of law and whether or not the
failure to comply therewith would be unlawful: (i) regarding capital adequacy,
capital ratios, capital requirements, the calculation of a bank's capital or
similar matters, or (ii) affecting the amount of capital required to be obtained
or maintained by the Lenders, the Affiliates of the Lenders or the L/C Issuer or
the manner in which the Lenders, the Affiliates of the Lenders or the L/C Issuer
allocate capital to any of their contingent liabilities (including letters of
credit), advances, acceptances, commitments, assets or liabilities.
"Capitalized Lease" means any lease which is required under GAAP to be
-----------------
capitalized on the balance sheet of the lessee.
"Capital Stock" means any and all shares, interests, participations,
-------------
warrants, options or other equivalents (however designated) of capital stock of
a corporation or any and all equivalent ownership interest in a Person (other
than a corporation).
"Capitalized Lease Obligations" means obligations for the payment of
-----------------------------
rent for any real or personal property under leases or agreements to lease that,
in accordance with GAAP, have been or should be capitalized on the books of the
lessee and, for purposes hereof, the amount of any such obligation shall be the
capitalized amount thereof determined in accordance with such principles.
"Cash Collateral Agreement" means the Cash Collateral Agreement, dated
-------------------------
as of the Effective Date, made by Jack M. Benun in favor of the Agent,
substantially in the form of Exhibit D hereto, securing the Obligations and
delivered to the Agent pursuant to Article V hereof, as the same may be amended
or otherwise modified from time to time.
"Change of Control" means (i) Jack M. Benun shall cease to own and
-----------------
control, of record and beneficially, at least 50% of the then-outstanding
Capital Stock of each Borrower and Corporate Guarantor other than O'Boy, free
and clear of all Liens, (ii) Jack M. Benun shall cease to own and control, of
record and beneficially, at least 33-1/3% of the then-outstanding Capital Stock
of O'Boy free and clear of all Liens, (iii) Mark J. Benun shall cease to own and
control, of record and beneficially, at least 50% of the then-outstanding
Capital Stock of each Borrower and Corporate Guarantor other than O'Boy, free
and clear of all Liens, (iv) Mark J. Benun shall cease to own and control, of
record and beneficially, at least 33-1/3% of the then-outstanding Capital Stock
of O'Boy free and clear of all Liens, (v) Isaac Levy shall cease to own and
control, of record and beneficially, at least 33-1/3% of the then-outstanding
Capital Stock of O'Boy free and clear of all Liens, or (vi) Jack M. Benun shall
cease to be involved in the day-to-day operations and management of the business
of each Borrower and Corporate Guarantor, provided that for
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<PAGE>
the purposes of clauses (iii), (iv) and (v) above, a transfer by Mark J. Benun
or Isaac Levy of all or any part of their Capital Stock of any Borrower or
Corporate Guarantor or any rights therein to Jack M. Benun shall not constitute
a Change of Control.
"Chase" has the meaning specified therefor in the RECITALS.
-----
"Chemical" has the meaning specified therefor in the RECITALS.
--------
"CIT" means The CIT Group/Commercial Services, Inc., a New York
---
corporation.
"CIT Assignment Agreement" means the Intercreditor Agreement and
------------------------
Assignment of Factoring Proceeds dated the date hereof among the Factor, the
Agent and the Borrowers.
"Collateral" means all of the property (tangible and intangible)
----------
purported to be subject to the lien or security interest purported to be created
by any mortgage, deed of trust, security agreement, cash collateral agreement,
pledge agreement, assignment or other security document heretofore or hereafter
executed by any Person as security for all or any part of the Obligations.
"Combined Current Assets" means, with respect to the Borrowers, H.O.T.
-----------------------
Kidz and their Subsidiaries, at any date, the aggregate amount of all cash,
Accounts Receivable (excluding Accounts Receivable due from an Affiliate of the
Borrower or any Guarantor) and Inventory which would be properly classified as
current assets of the Borrowers, H.O.T. Kidz and their Subsidiaries at such date
all computed and combined in accordance with GAAP.
"Combined Current Liabilities" means, with respect to the Borrowers,
----------------------------
H.O.T. Kidz and their Subsidiaries, at any date, the aggregate amount of all
liabilities (including tax and other proper accruals) which would be classified
as current liabilities of the Borrowers, H.O.T. Kidz and their Subsidiaries and
for purposes of this Agreement, including the outstanding principal amount of
the Notes, all computed and combined in accordance with GAAP.
"Combined Tangible Net Worth" means, with respect to the Borrowers,
---------------------------
H.O.T. Kidz and each of their Subsidiaries, the excess of (i) the aggregate net
book value of the assets (other than patents, patent rights, trademarks, trade
name, franchises, copyrights, licenses, permits, goodwill and other intangible
assets classified as such in accordance with GAAP) of the Borrowers, H.O.T. Kidz
and each of their Subsidiaries after all appropriate adjustments in accordance
with GAAP applied on a consistent basis (including, without limitation, reserves
for doubtful receivables, obsolescence, depreciation and amortization and
excluding the amount of any write-up or revaluation of any asset) over (ii) the
Combined Total Unsubordinated Liabilities of the Borrowers, H.O.T. Kidz and each
of their Subsidiaries, in each case computed and combined in accordance with
GAAP applied on a consistent basis.
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<PAGE>
"Combined Total Unsubordinated Liabilities" means, with respect to the
-----------------------------------------
Borrowers, H.O.T. Kidz and each of their Subsidiaries, all items which, in
accordance with GAAP applied on a consistent basis, would properly be included
on the liability side of the balance sheet of the Borrowers, H.O.T. Kidz and
each of their Subsidiaries (other than indebtedness subject to the Subordination
Agreement, capital stock, capital surplus and retained earnings), as of the date
on which the amount of Combined Total Unsubordinated Liabilities is to be
computed and combined in accordance with GAAP applied on a consistent basis.
"Corporate Guarantors" mean H.O.T. Kidz, Hawk and J&B.
--------------------
"Credit Exposure" means, with respect to each Lender, the total credit
---------------
exposure of such Lender (i) prior to May 31, 1996, as set forth in Part A of
Schedule A hereto and (ii) on and after May 31, 1996, as set forth in Part B of
Schedule A hereto, in each case as the same may be adjusted from time to time
pursuant to Sections 10.01 or 11.01 hereof.
"Cumulative Net Loss" means, for each fiscal quarter of Happy Kids,
-------------------
the Net Loss for the period beginning on the first day of the fiscal year and
ending at the end of such fiscal quarter.
"Disney" means The Walt Disney Company.
------
"Disney License Agreements" means (i) the License Agreement dated as
-------------------------
of September 30, 1994, as amended to the date of this Agreement, between Disney
and Happy Kids with respect to certain characters relating to the motion picture
entitled, "Disney's Pocohontas" and (ii) the License Agreement dated as of June
27, 1995, as amended to the date of this Agreement, between Disney and Happy
Kids with respect to certain characters relating to the motion picture entitled,
"The Hunchback of Notre Dame", in each case, as the same may be further
amended, modified or supplemented from time to time in accordance with the
provisions of Section 7.02(n) of this Agreement.
"Effective Date" has the meaning specified therefor in Article V
--------------
hereof.
"Eligible Accounts Receivable" means such Accounts Receivable of a
----------------------------
Borrower which are and at all times shall continue to be, acceptable to the
Agent in all respects. Criteria for eligibility may be fixed and revised from
time to time solely by the Agent in its exclusive judgment exercised reasonably.
In general, Accounts Receivable shall be deemed to be eligible if such Accounts
Receivable of a Borrower are generated in the ordinary course of business of
such Borrower and are either (a) purchased, credit approved and continue to be
credit approved under the Factoring Agreements or (b) "Approved Accounts" and
continue to be "Approved Accounts" under the Existing Factoring Agreement. In
addition, Accounts Receivable that are not purchased and credit approved and do
not remain credit approved under the Factoring Agreements and that are not
"Approved Accounts" and do not remain Approved Accounts under the Existing
Factoring Agreement may, in the sole and absolute discretion of the Agent, be
deemed to be eligible if: (i) (A) the Account Debtor with respect to such
Account Receivable is on the list of Account Debtors for which the Factor
charges a surcharge, which may include
-5-
<PAGE>
Account Debtors subject to a Bankruptcy Proceeding (as hereinafter defined), and
(B) such Account Receivable is not credit approved under the Factoring
Agreements solely because the Borrower is not paying the surcharge applicable to
the Account Debtor with respect to such Account Receivable under the Factoring
Agreements; (ii) delivery of the merchandise has been completed; (iii) no
return, rejection or repossession has occurred; (iv) such merchandise has been
accepted by the Account Debtor without dispute, setoff, defense or counterclaim;
(v) such Account Receivable is owned by a Borrower free and clear of any Lien
other than in favor of the Agent for the benefit of the Lenders, in favor of the
Factor under the Factoring Agreements or in favor of Trust Company Bank under
the Existing Factoring Agreement and otherwise continues to be in full
conformity with any and all representations and warranties made by such Borrower
to the Agent and the Lenders with respect thereto in the Loan Documents; (vi)
such Account Receivable is unconditionally payable in U.S. dollars within 90
days from the invoice date and is not evidenced by a promissory note, chattel
paper or any other instrument or document; (vii) no more than 60 days have
elapsed from the invoice due date and no more than 120 days have elapsed from
the invoice date; (viii) the Account Debtor with respect thereto is not an
Affiliate of any Borrower or any Corporate Guarantor; (ix) such Account
Receivable does not constitute an obligation of the United States or Canada or
any other Governmental Authority other than a post exchange; (x) the Account
Debtor (or the applicable office of the Account Debtor) with respect thereto is
located in the continental United States, unless the Account Receivable is
supported by a letter of credit or other similar obligation satisfactory to the
Agent; (xi) the Account Debtor with respect thereto is not also a supplier to or
creditor of a Borrower or Corporate Guarantor, unless such supplier or creditor
has executed a no-offset letter satisfactory to the Agent; (xii) not more than
50% of the aggregate amount of all Accounts Receivable of the Account Debtor
with respect to such Account Receivable have remained unpaid 60 days past the
invoice due date or 120 days past the invoice date; (xiii) subject to clause (i)
above, the Account Debtor is not the subject of a "Bankruptcy Proceeding"; for
purposes hereof an Account Debtor is subject to a "Bankruptcy Proceeding" if
that Account Debtor has filed a petition for bankruptcy or any other relief
under the United States Bankruptcy Code or any other law relating to bankruptcy,
insolvency, reorganization or relief of debtors, made an assignment for the
benefit of creditors, had filed against it any petition or other application for
relief under the United States Bankruptcy Code or any such other law, has
failed, suspended business operations, become insolvent, called a meeting of its
creditors for the purpose of obtaining any financial concession or
accommodation, or had or suffered a receiver or a trustee to be appointed for
all or a significant portion of its assets or affairs; and (xiv) the Agent is,
and continues to be, satisfied with the credit standing of the Account Debtor in
relation to the amount of credit extended.
"Eligible Inventory" means all finished goods Inventory which is owned
------------------
by a Borrower and held for sale or to be furnished under contracts of sale,
which meet all of the following specifications: (i) the Inventory is lawfully
owned by a Borrower and is not subject to any existing Lien, other than that of
the Agent for the benefit of the Lenders under the Loan Documents, is not held
on consignment and may be lawfully sold, and continues to be in full conformity
with any representations and warranties made in the Loan Documents by the
Borrowers to the Agent and the Lenders with respect thereto; (ii) a Borrower has
the right to grant Liens thereon; (iii) the Inventory arose or was acquired in
the ordinary course of the business of a Borrower and such Inventory does not
represent damaged goods; (iv) no Account
-6-
<PAGE>
Receivable or, except as permitted by clause (vi)(B) below, document of title
has been created or issued with respect to such Inventory; (v) the Inventory is
readily marketable for sale by a Borrower; (vi) the Inventory is (A) located in
one of the locations listed on Schedule 6.01(e) hereto or such other locations
in the continental United States as the Agent shall approve in writing from time
to time or (B) "in transit", provided that such "in-transit" Inventory is
finished goods Inventory that is shipped under a Letter of Credit issued by the
L/C Issuer pursuant to this Agreement; (vii) except as permitted by clause
(vi)(B) above, such Inventory is located within the United States; (viii) the
Inventory is not Prior Season Inventory, raw materials, work in process, piece
goods or supplies; (ix) if the Inventory is sold under a licensed trademark (A)
the Agent shall have entered into a licensor waiver letter, in form and
substance satisfactory to the Agent, with the licensor with respect to the
rights of the Agent to use the trademark to sell or otherwise dispose of such
Inventory or (B) the Agent shall otherwise be satisfied, in its sole discretion
exercised reasonably, that the Agent has rights to sell or dispose of such
Inventory; and (x) the Inventory is not otherwise regarded by Agent, in its sole
and absolute discretion, exercised reasonably, as unsuitable Collateral for the
Obligations.
"Employee Plan" means an employee benefit plan (other than a
-------------
Multiemployer Plan) covered by Title IV of ERISA and maintained (or was
maintained at any time during the five (5) calendar years preceding the date of
any borrowing hereunder) for employees of a Borrower or any of their ERISA
Affiliates.
"Environmental Law" means the Comprehensive Environmental Response.
-----------------
Compensation, and Liability Act (42 U.S.C. (S) 9601, et seq.), the Hazardous
-- ---
Materials Transportation Act (49 U.S.C. (S) 1801, et seq.), the Resource
-- ---
Conservation and Recovery Act (42 U.S.C. (S) 6901, et seq.), the Federal Water
-- ---
Pollution Control Act (33 U.S.C. (S) 1251 et seq.), the Clean Air Act (42 U.S.C.
-- ---
(S) 7401 et seq.), the Toxic Substances Control Act (15 U.S.C. (S) 2601 et
-- --- --
seq.) and the Occupational Safety and Health Act (29 U.S.C. (S) 651 et seq.), as
- --- -- ---
such laws have been amended or supplemented from time to time, and any other
present or future Federal, state, local or foreign statute, ordinance, rule,
regulation, order, judgment, decree, permit, license or other binding
determination of any Governmental Authority relating to Hazardous Materials.
"ERISA" means the Employee Retirement Income Security Act of 1974, as
-----
amended from time to time, and, unless the context otherwise requires, the rules
and regulations promulgated thereunder from time to time.
"ERISA Affiliate" means, with respect to any Person, any trade or
---------------
business (whether or not incorporated) which is a member of a group of which
such Person is a member and which would be deemed to be a "controlled group"
within the meaning the Sections 414(b), (c), (m) and (o) of the IRC.
"Event of Default" means any of the events set forth in Section 10.01
----------------
hereof.
"Existing Factoring Agreement" means the Factoring Agreement, dated as
----------------------------
of September 14, 1995, as amended, among the Borrowers, H.O.T. Kidz and the
Trust Company Bank.
-7-
<PAGE>
"Existing Lenders" has the meaning specified therefor in the RECITALS.
--------------------------------------------------------------------
"Existing Letters of Credit" has the meaning specified in Section
--------------------------
3.03(c) hereof.
"Existing Line Letters" means the line letter or other agreements or
---------------------
documents among Happy Kids, certain other Borrowers and Chemical with respect to
the discretionary financing provided by Chemical to Happy Kids and such other
Borrowers prior to the Effective Date, the line letter or other agreements or
documents among Happy Kids, certain other Borrowers and Chase with respect to
the discretionary financing provided by Chase to Happy Kids and such other
Borrowers prior to the Effective Date, and the line letter or other agreements
or documents among Happy Kids, certain other Borrowers and IDB with respect to
the discretionary financing provided by IDB to Happy Kids and such other
Borrowers prior to the Effective Date.
"Facility Fee" has the meaning specified in Section 4.01(c) hereof.
------------
"Factor" means CIT, in its capacity as factor under the Factoring
------
Agreements.
"Factoring Agreement" has the meaning specified in Section 5.01(d)(xv)
-------------------
hereof.
"Family Member" means, as applied to any individual, any parent,
-------------
spouse, child, spouse of a child, brother or sister of the individual, cousin of
the individual, and each trust created for the benefit of one or more of such
Persons and each custodian of a property of one or more such Persons.
"Federal Funds Rate" means, for any period, a fluctuating interest
------------------
rate per annum equal for each day during such period to the weighted average of
the rates on overnight Federal funds transactions with members of the Federal
Reserve System arranged by Federal funds brokers, as published for such day (or,
if such day is not a Business Day, for the next preceding Business Day) by the
Federal Reserve Bank of New York, or, if such rate is not so published for any
day which is a Business Day, the average of the quotations for such day on such
transactions received by the Agent from three Federal funds brokers of
recognized standing selected by it.
"Final Maturity Date" means the date this Agreement is terminated
-------------------
pursuant to Section 11.01 hereof.
"Financial Statements" means the financial statements of the Borrowers
--------------------
and H.O.T. Kidz and of Hawk and J&B delivered to the Lenders pursuant to Section
5.01(d)(xiii) hereof.
"GAAP" means generally accepted accounting principles in effect from
----
time to time in the United States, applied on a consistent basis.
-8-
<PAGE>
"Governmental Authority" means any nation or government, any federal,
----------------------
state, city, town, municipality, county, local or other political subdivision
thereof or thereto and any department, commission, board, bureau,
instrumentality, agency or other entity exercising executive, legislative,
judicial, regulatory or administrative functions of or pertaining to government.
"Guaranteed Obligations" means (i) with respect to any Borrower, all
----------------------
obligations of the other Borrowers, including, without limitation, all amounts
now or hereafter owing by such other Borrowers in respect of the Loan Documents
and (ii) with respect to each Guarantor, all obligations of the Borrowers
including, without limitation, all amounts now or hereafter owing by the
Borrowers in respect of the Loan Documents.
"Guarantors" has the meaning specified in the preamble hereto and
----------
shall include the Borrowers, the Corporate Guarantors, the Individual Guarantors
and all other Persons which hereafter guarantee, pursuant to Sections 5.01
(d)(xxvii) or 7.01(b) hereof or otherwise, all or any part of the Obligations.
"Guaranty" means (i) the guaranty contained in Article XII hereof made
--------
by each of the Guarantors in favor of the Lenders guaranteeing the Obligations,
(ii) the guaranty made by Francine Benun and delivered to the Agent pursuant to
Section 5.01(d)(xxvii) hereof, and (iii) any guaranty, substantially in the
form of Exhibit B hereto, made by the Guarantors in favor of the Lenders
guaranteeing the Obligations and delivered to the Agent pursuant to Section
7.01(b) hereof.
"Hawk" means Hawk Industries, Inc., a New Jersey corporation.
----
"H.O.T. Kidz" means H.O.T. Kidz, L.L.C., a New York limited liability
-----------
company.
"Happy Kids" has the meaning therefor in the preamble hereto.
----------
"Happy Kids License Agreement" means the License Agreement, dated as
----------------------------
of June 10, 1988, as amended to the date of this Agreement, between Spencer's
and Happy Kids, as the same may be amended, modified or supplemented from time
to time in accordance with the provisions of Section 7.02(n) of this Agreement.
"Hazardous Materials" means, without limit, any pollutant, flammable
-------------------
explosives, radioactive materials, hazardous materials, hazardous wastes,
hazardous or toxic substances, or other materials defined in, regulated under
or which form the basis of liability under any Environmental Law.
"IDB" has the meaning specified therefor in the RECITALS.
---
"Indebtedness" means, with respect to any Person, (i) all indebtedness
------------
or other obligations of such Person for borrowed money or for the deferred
purchase price of property or
-9-
<PAGE>
services, (ii) all Capitalized Lease Obligations of such Person, (iii) all
obligations of such Person under guaranties in respect of, and contingent or
other obligations of such Person to purchase or otherwise acquire or otherwise
assure a creditor against loss in respect of, indebtedness or other obligations
of any other Person for borrowed money or for the deferred purchase price of
property or services or Capitalized Lease Obligations of any other Person, (iv)
all indebtedness or other obligations of any other Person for borrowed money or
for the deferred purchase price of property or services secured by (or for which
the holder of such indebtedness has an existing right, contingent or otherwise,
to be secured by) any lien, security interest or other charge or encumbrance
upon or in property owned by such Person, (v) all obligations of such Person in
respect of letters of credit and bankers' acceptances, (vi) all liabilities
incurred under Title IV of ERISA with respect to any plan (other than a
Multiemployer Plan) covered by Title IV of ERISA and maintained for employees of
such Person or any of its Affiliates, and (vii) withdrawal liability incurred
under ERISA by such Person or any of its Affiliates to any Multiemployer Plan.
"Indemnitees" has the meaning specified therefor in Section 11.17
-----------
hereof.
"Individual Guarantors" means Jack M. Benun, Mark J. Benun and Isaac
---------------------
Levy.
"IRC" means the Internal Revenue Code of 1986, as amended from time to
---
time.
"Inventory" means all goods and merchandise of a Borrower including,
---------
but not limited to, all raw materials, work in process, piece goods, finished
goods, materials and supplies of every nature used or usable in connection with
the shipping, storing, advertising or sale of such goods and merchandise,
whether now owned or hereafter acquired and all such property, the sale or other
disposition of which would give rise to Accounts Receivable.
"Jeanjer" means Jeanjer Ltd., a Delaware corporation.
-------
"Jordache" means Jordache Enterprises Inc., a New York corporation.
--------
"Jordache License Agreements" means the (i) the License Agreement,
---------------------------
dated as of May 22, 1991, as amended to the date of this Agreement, between
Jordache and TOT Apparel with respect to girl's activewear, (ii) the License
Agreement, dated as of May 22, 1991, as amended to the date of this Agreement,
between Jordache and TOT Apparel with respect to infant and toddler playwear and
activewear, (iii) the License Agreement, dated as of June 30, 1992, as amended
to the date of this Agreement, between Jordache and O'Boy with respect to boy's
activewear, (iv) the License Agreement, dated as of March 1, 1993, as amended to
the date of this Agreement, between Jeanjer and TOT Apparel with respect to
girl's activewear and infant and toddler playwear, activewear and dresses, (v)
the License Agreement, dated as of August 10, 1993, as amended to the date of
this Agreement, between Jeanjer and O'Boy with respect to boy's activewear, (vi)
the License Agreement, dated as of May 2, 1995, as amended to the date of this
Agreement, between Jordache and TOT Apparel with respect to infant and toddler
outerwear, and (vii) the License Agreement, dated as of May 2, 1995, as amended
to the date of this Agreement, between Jordache and TOT Apparel with respect to
girl's outerwear, in each case, as the same may be further amended, modified or
supplemented from time to time in
-10-
<PAGE>
accordance with the provisions of Section 7.02(n) of this Agreement.
"J&B" means J & B 18 Corp., a New York corporation.
---
"LA Gear" means L.A. Gear, Inc., a California corporation.
-------
"LA Gear License Agreement" means the License Agreement, dated as of
-------------------------
December 1, 1994, as amended to the date of this Agreement, between LA Gear and
Happy Kids, as the same may be further amended, modified or supplemented from
time to time in accordance with the provisions of Section 7.02(n) of this
Agreement.
"L/C Inventory" means the undrawn stated amount of documentary Letters
-------------
of Credit for the importation of finished goods Eligible Inventory which has
been or will be consigned to a common carrier that has or will issue documents
of title covering such Inventory to the Agent or the L/C Issuer (and shall not
include Eligible Inventory supported by Letters of Credit issued for the benefit
of domestic trade creditors).
"L/C Issuer" means Chemical or its successor and, with respect to any
----------
Existing Letter of Credit, the Existing Lender that issued such Existing Letter
of Credit.
"L/C Subfacility" shall mean that portion of the Total Credit Exposure
---------------
equal to $18,000,000, or such other amount as shall be agreed to in writing by
the Agent, the Lenders and Happy Kids.
"Letter of Credit" has the meaning specified therefor in Section
----------------
3.01(a) hereof.
"Letter of Credit Application" has the meaning specified therefor in
----------------------------
Section 3.01(a) hereof.
"Letter of Credit Obligations" means, at any time and without
----------------------------
duplication, the sum of (i) the Reimbursement Obligations at such time, plus
----
(ii) the aggregate maximum amount available for drawing under the outstanding
Letters of Credit at such time, plus (iii) all amounts for which the Agent may
----
be liable to the L/C Issuer in connection with any steamship guaranty, airway
release, indemnity or deliver order issued by the L/C Issuer at the request of
or for the benefit of a Borrower, in each case as calculated by the L/C Issuer.
"License Agreements" means the BUM License Agreement, the Jordache
------------------
License Agreements, the LA Gear License Agreement, the OP License Agreement, the
Disney License Agreements and the Happy Kids License Agreement and each license
agreement entered into by any Borrower or Corporate Guarantor after the
Effective Date.
"Licensor" means BUM, Ocean Pacific, LA Gear, Jeanjer, Jordache,
--------
Disney, Spencer's and any Person entering into a license agreement with any
Borrower or Corporate Guarantor after the Effective Date.
-11-
<PAGE>
"Lien" means any mortgage, deed of trust, pledge, lien, security
----
interest, charge or other encumbrance or security arrangement of any nature
whatsoever, including but not limited to any conditional sale or title retention
arrangement, and any assignment, deposit arrangement or lease intended as, or
having the effect of, security.
"Loan" means any revolving credit loan made by a Lender or the Agent
----
to a Borrower pursuant to Section 2.02 or Section 2.05 hereof.
"Loan Account" means the Borrowers' joint account maintained at the
------------
Payment Office of the Agent and designated by the Agent as the "Happy Kids Loan
Account", or such other account as the Agent shall designate from time to time.
"Loan Documents" means this Agreement, the Notes, the Security
--------------
Agreements, the CIT Assignment Agreement, the Guaranties, the Cash Collateral
Agreement, the Letter of Credit Applications, the Mortgage, the Subordination
Agreement and all other instruments, documents and agreements executed and
delivered pursuant hereto.
"Material Adverse Effect" means a material adverse effect upon (i) the
-----------------------
business, operations, condition (financial or otherwise) or prospects of any
Borrower or any Guarantor, (ii) the ability of any Borrower or any Guarantor to
perform its obligations hereunder or under any other Loan Documents, (iii) the
legality, validity or enforceability of this Agreement or any other Loan
Document, or (iv) the aggregate value of the property included in the
calculation of the Borrowing Base, provided that a Material Adverse Effect shall
not arise solely by reason of the loss before taxes of not more than $2,160,000,
excluding any LIFO adjustments made for the prior fiscal year in accordance with
GAAP, incurred by the Borrower and the Corporate Guarantor prior to December 31,
1995.
"Material Contracts" means, with respect to any Person, each contract
------------------
to which such Person is a party involving aggregate consideration payable to or
by such Person of $100,000 or more (other than contracts that by their terms
may be terminated by any party thereto in the ordinary course of its business
upon less than 60 days notice and purchase orders for piece goods) or otherwise
material to the business, condition (financial or otherwise), operations,
performance, properties or prospects of such Person.
"Mortgage" has the meaning specified therefor in Section 5.01(d)(xxi)
--------
hereof.
"Multiemployer Plan" means a "multiemployer plan" as defined in
------------------
Section 4001(a)(3) of ERISA for which a Borrower or any ERISA Affiliate has
contributed to, or has been obligated to contribute to, during the preceding 5
years.
"Net Amount of Eligible Accounts Receivable" means the outstanding
------------------------------------------
balance of the invoice amount of Eligible Accounts Receivable less (i) sales,
excise or similar taxes and less returns, discounts, chargebacks, claims,
advance payments, credits and allowances of any nature at any time issued,
owing, granted, outstanding, available or claimed, and (ii) in the case of sums
due a Borrower under the Factoring Agreements or the Existing Factoring
Agreement, less
-12-
<PAGE>
deductions for factoring charges, interest, discounts, estimated anticipation,
chargebacks based upon disputes and returns, chargebacks of client risk accounts
purchased with recourse, and all other charges, offsets and reserves under the
Factoring Agreements or the Existing Factoring Agreement.
"Net Income (Loss)" means, for any period, the net income (or loss) of
-----------------
a Person after income taxes for such period, but excluding any extraordinary
gains, all computed in accordance with GAAP applied on a basis consistent with
the corresponding prior period.
"Notes" means the joint and several promissory notes of the Borrowers,
-----
substantially in the form of Exhibit A hereto, evidencing the Indebtedness
resulting from the making of the Loans and delivered to the Lenders pursuant to
Article II hereof, as such promissory notes may be modified or extended from
time to time, and any promissory note or notes issued in exchange or replacement
therefor.
"Notice of Borrowing" has the meaning specified therefor in Section
-------------------
2.03 hereof.
"O'Boy" has the meaning specified therefor in the preamble hereto.
-----
"Obligations" means (i) the joint and several obligations of the
-----------
Borrowers to pay, as and when due and payable (by scheduled maturity or
otherwise), all amounts from time to time owing by it in respect of any Loan
Document, whether for principal, interest (including, without limitation, all
interest that accrues after the commencement of any case, proceeding or other
action relating to the bankruptcy, insolvency or reorganization of any
Borrower), Reimbursement Obligations, Letter of Credit Obligations fees or
otherwise, and (ii) the joint and several obligations of the Borrowers to
perform or observe all of their other obligations from time to time existing
under any Loan Document.
"Ocean Pacific" means Ocean Pacific Apparel Corp., a Delaware
-------------
corporation.
"OP,LLC" has the meaning specified therefor in the preamble hereto.
------
"OP License Agreement" means the License Agreement, dated as of
--------------------
October 27, 1994, as amended to the date of this Agreement, between Ocean
Pacific and Happy Kids, as the same may be further amended, modified or
supplemented from time to time in accordance with the provisions of Section
7.02(n) of this Agreement.
"Operating Lease Obligations" means all obligations for the payment of
---------------------------
rent for any real or personal property under leases or agreements to lease,
other than Capitalized Lease Obligations.
"Overadvance Amount" means any amount agreed to by the Agent, in its
------------------
sole and absolute discretion, for a period of time specified by the Agent,
provided that the Agent shall have no obligation whatsoever to agree to any
such amount or period of time.
-13-
<PAGE>
"Payment Office" means the Agent's office located at 1211 Avenue of
--------------
the Americas, New York, New York 10036 or such other offices as the Agent may
designate.
"PBGC" means the Pension Benefit Guaranty Corporation.
----
"Permitted Investments" means (i) marketable direct obligations issued
---------------------
or unconditionally guaranteed by the United States Government or issued by any
agency thereof and backed by the full faith and credit of the United States, in
each case maturing within six months from the date of acquisition thereof; (ii)
commercial paper, maturing not more than 270 days after the date of issue
rated P-1 by Moody's Investors Service, Inc. or A-1 by Standard & Poor's
Corporation, (iii) certificates of deposit maturing not more than 270 days after
the date of issue, issued by commercial banking institutions and money market or
demand deposit accounts maintained at commercial banking institutions, each of
which is a member of the Federal Reserve System and has a combined capital and
surplus and undivided profits of not less than $500,000,000, and (iv) repurchase
agreements having maturities of not more than 90 days from the date of
acquisition which are entered into with major money center banks included in the
commercial banking institutions described in clause (iii) above and which are
secured by readily marketable direct obligations of the Government of the United
States of America or any agency thereof.
"Person" means an individual, corporation, limited liability company,
------
partnership, association, joint-stock company, trust, unincorporated
organization, joint venture or governmental authority.
"Post-Default Rate" means a rate of interest per annum equal to the
-----------------
Prime Rate plus 2-1/2%.
"Potential Default" means an event which, with the giving of notice or
-----------------
the lapse of time or both, would constitute an Event of Default.
"Prime Rate" means the rate of interest publicly announced by Chemical
----------
Bank in New York, New York or its successor from time to time as its prime
rate. The Prime Rate is determined from time to time by Chemical Bank as a means
of pricing some loans to its borrowers and neither is tied to any external rate
of interest or index, nor necessarily reflects the lowest rate of interest
actually charged by Chemical Bank to any particular class or category of
customers. Each change in the Prime Rate shall be effective on the date such
change is announced.
"Prior Season Inventory" means finished goods Inventory that is
----------------------
manufactured to be sold in prior selling seasons of the Borrowers, provided that
finished goods Inventory is not Prior Season Inventory to the extent that a
Borrower has valid purchase orders for the purchase of such goods.
"Pro Rata Share" means, with respect to any Lender, a fraction
--------------
(expressed as a percentage), the numerator of which shall be the amount of such
Lender's Credit Exposure and
-14-
<PAGE>
the denominator of which shall be the aggregate amount of all of the Lenders'
Credit Exposures, as adjusted from time to time in accordance with the
provisions of Sections 11.01 or 11.07, provided that, if the Credit Exposures
have been reduced to zero, the numerator shall be the unpaid amount of such
Lender's Loans (including Agent Advances) and its interest in the Letter of
Credit Obligations and the denominator shall be the aggregate amount of all
unpaid Loans (including Agent Advances) and Letter of Credit Obligations.
"Reimbursement Obligations" means the aggregate joint and several
-------------------------
obligations of the Borrowers to reimburse CIT and the Lenders for amounts
payable by CIT and the Lenders in respect of any drawings made under any Letter
of Credit issued by the L/C Issuer, together with interest thereon.
"Release" means any spilling, leaking, pumping, pouring, emitting,
-------
emptying, discharging, injecting, escaping, leaching, seeping, migrating,
dumping, or disposing of any Hazardous Material into the indoor or outdoor
environment, including ambient air, soil, surface or ground water (including the
abandonment or discarding of barrels, containers, and other closed receptacles
containing any Hazardous Material).
"Reportable Event" means an event described in Section 4043 of ERISA
----------------
(other than an event not subject to the provision for 30 day notice to the PBGC
under the regulations promulgated under such Section).
"Required Lenders" means, at any time, the holders of at least 75% of
----------------
the aggregate unpaid principal amount of the Notes and the Letter of Credit
Obligations, or, if no amounts are outstanding under the Notes and no Letter of
Credit Obligations are outstanding, the Lenders having at least 75% of the Total
Credit Exposure.
"Retained Obligations" has the meaning specified therefor in Section
--------------------
11.01(b) hereof.
"Security Agreement(s)" means the Security Agreement(s), dated as of
---------------------
the date hereof, made by each Borrower and Corporate Guarantor in favor of the
Agent, substantially in the form of Exhibit C hereto, securing the Obligations
and delivered to the Agent pursuant to Article V hereof, as the same may be
amended or otherwise modified from time to time.
"Settlement Period" has the meaning specified therefor in Section
-----------------
2.05(b)(i) hereof.
"Spencer's" means Spencer's Incorporated of Mount Airy, N.C., a North
---------
Carolina corporation.
"Subordinated Note" means the Subordinated Note, dated February 13,
-----------------
1996 made by the Borrowers payable to the order of Jack M. Benun in the
principal amount of $1,200,000.
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<PAGE>
"Subordination Agreement" means the Subordination Agreement made by
-----------------------
the Borrowers, as obligors and Jack M. Benun, as subordinated creditor, in favor
of the Agent and the Lenders, in the form of Exhibit J hereto, as the same may
be amended or otherwise modified from time to time.
"Subsidiary" means, as to any Person, any corporation of which more
----------
than 50% of the outstanding capital stock having (in the absence of
contingencies) ordinary voting power to elect directors (or Persons performing
similar functions) of such corporation is, at the time of determination, owned
directly, or indirectly through one or more intermediaries, by such Person.
"Termination Anniversary Date" means December 31, 1996 and thereafter
----------------------------
December 31 of each succeeding calendar year.
"Termination Event" means (i) a Reportable Event with respect to any
-----------------
Employee Plan, (ii) any event that causes a Borrower or any of its ERISA
Affiliates to incur liability under Section 409, 502(i), 502(l), 515, 4062,
4063, 4064, 4069, 4201, 4204 or 4212 of ERISA or Section 4971 or 4975 of the
IRC, (iii) the filing of a notice of intent to terminate an Employee Plan or the
treatment of an Employee Plan amendment as a termination under Section 4041 of
ERISA, (iv) the institution of proceedings by the PBGC to terminate an Employee
Plan, or (v) any other event or condition which might constitute grounds under
Section 4042 of ERISA for the termination of, or the appointment of a trustee to
administer, any Employee Plan.
"TOT Apparel" has the meaning specified therefor in the preamble
-----------
hereto.
"Total Credit Exposure" means (i) prior to May 31, 1996, the sum of
---------------------
the Lenders' Credit Exposures in Part A of Schedule A hereto and (ii) on or
after May 31, 1996, the sum of the Lenders' Credit Exposures in Part B of
Schedule A hereto, in each case as the same may be reduced from time to time
pursuant to Sections 10.01 and 11.01 of this Agreement.
"Trust Company Assignment Agreement" means the Intercreditor Agreement
----------------------------------
and Assignment of Factoring Proceeds dated February 13; 1996 between the Agent,
the Factor, the Borrowers and Trust Company Bank.
"UCC" means the Uniform Commercial Code in effect in the State of New
---
York.
"Working Capital" means with respect to the Borrowers, H.O.T. Kidz and
---------------
their Subsidiaries, at any time, the excess of Combined Current Assets over
Combined Current Liabilities at such time.
SECTION 1.02. Accounting and Other Terms. Unless otherwise expressly
--------------------------
provided herein, each accounting term used herein has the meaning given it under
GAAP applied on a basis consistent with those used in preparing the financial
statements referred to in Section 5.01(d)(xiii) hereof. All terms used in this
Agreement which are defined in Article 9 of the UCC on the date hereof and which
are not otherwise defined herein shall have the same meanings herein as set
forth therein.
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SECTION 1.03. Time References. Unless otherwise indicated herein,
---------------
all references to time of day refer to Eastern standard time or Eastern daylight
saving time, as in effect in New York City on such day. For purposes of the
computation of a period of time from a specified date to a later specified date,
the word "from" means "from and including" and the words "to" and "until" each
means "to but excluding", provided, however, that with respect to a computation
-------- -------
of fees or interest payable to the Agent, the Lenders or the L/C Issuer, such
period shall in any event consist of at least one full day.
ARTICLE II
THE LOANS
SECTION 2.01. Credit Exposure. Subject to the terms and conditions
---------------
and relying upon the representations and warranties herein set forth, each
Lender, in its sole and absolute discretion, may make Loans to a Borrower, at
any time and from time to time from the Effective Date to the Final Maturity
Date, or until the earlier reduction of its Credit Exposure to zero in
accordance with the terms hereof, in an aggregate principal amount at any time
outstanding to the Borrowers not to exceed the amount of such Lender's Credit
Exposure set forth opposite its name in Schedule A, as such Credit Exposure may
be reduced to zero in accordance with the provisions of this Agreement.
Notwithstanding the foregoing, the aggregate principal amount of Loans
outstanding at any time to the Borrowers shall not exceed the lower of (i) the
difference between (A) the Total Credit Exposure, and (B) the aggregate Letter
of Credit Obligations, (ii) the difference between (A) the then current
Borrowing Base and (B) the aggregate Letter of Credit Obligations, and (iii)
prior to May 31, 1996, $31,000,000 and thereafter, $26,000,000. The Credit
Exposure of each Lender shall automatically and permanently be reduced to zero
on the Final Maturity Date. Within the foregoing limits and in the sole and
absolute discretion of the Lenders, the Borrowers may borrow, repay and
reborrow, on or after the Effective Date and prior to the Final Maturity Date,
subject to the terms, provisions and limitations set forth herein.
SECTION 2.02. Loans. Except as otherwise provided in Section 2.05,
-----
Loans shall be made ratably by the Lenders in accordance with their respective
Credit Exposures. The initial Loans shall be made on or after the Effective Date
by the Lenders against delivery of Notes, payable to the order of the Lenders,
as referred to in Section 2.04 hereof.
SECTION 2.03. Making the Loans. The Administrative Borrower, on
----------------
behalf of itself or any other Borrower, shall give the Agent prior written or
telephone notice (which notice, if requested by the Agent, must be promptly
confirmed in writing in substantially the form of Exhibit I hereto (a "Notice of
Borrowing")) no later than 12:00 noon on the date of each proposed borrowing.
Such Notice of Borrowing shall be irrevocable and shall specify the principal
amount of the proposed borrowing and the proposed borrowing date, which must be
a Business Day and, if the Agent agrees in its sole and absolute discretion to
make such Loan to a Borrower, such Borrower shall be bound to make a borrowing
in accordance therewith. The Agent may act without liability upon the basis of
written, telecopy, or telephone notice believed
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by the Agent in good faith to be from the Administrative Borrower (or from any
officer thereof designated in writing to the Agent) and the Borrowers hereby
waive the right to dispute the Agent's record of the terms of any such
telephonic Notice of Borrowing.
SECTION 2.04. Notes: Repayment of Loans. (a) All Loans made by a
-------------------------
Lender shall be evidenced by a single Note, duly executed on behalf of the
Borrowers, dated the Effective Date, and delivered and jointly and severally
payable to such Lender in a principal amount equal to its Credit Exposure on
such date.
(b) The outstanding principal balance of each Loan, as evidenced by
the Notes, shall be due and payable on the Final Maturity Date. Each Note shall
bear interest from its date on the outstanding principal balance thereof, as
provided in Section 2.06(a) hereof.
(c) The Notes and the books and records of the Agent and the Lenders
shall be presumptive evidence of the Loans absent manifest error.
SECTION 2.05. Funding and Settlement Procedures. (a) (i)
---------------------------------
Notwithstanding any other provision of this Agreement, in order to reduce the
number of fund transfers among the Borrowers, the Lenders and the Agent, the
Borrowers, the Lenders and the Agent agree that the Agent may, but shall not be
obligated to, and the Borrowers and the Lenders hereby irrevocably authorize the
Agent to, fund, on behalf of the Lenders, Loans pursuant to Section 2.02,
subject to the procedures for settlement set forth in subsection 2.05(b);
provided, however, that the Agent shall not be required to determine that, or
- -------- -------
take notice whether, the conditions precedent in Section 5.02 have been
satisfied. If the Agent advises the Lenders that the Agent will make a Loan to
the Administrative Borrower and the Agent requests that each Lender make its Pro
Rata Share of such Loan available to the Agent, each Lender shall make its Pro
Rata Share of the Loan available to the Agent, in immediately available funds,
at the Payment Office no later than 3:00 p.m. (provided that the Agent requests
payment from such Lender not later than 12:00 noon) on the date of the proposed
Loan. The Agent may, in its sole and absolute discretion, make the proceeds of
such Loans available to the Administrative Borrower on the day of the proposed
Loan by causing an amount, in immediately available funds, equal to the
proceeds of all such Loans received by the Agent at the Payment Office or the
amount funded by the Agent on behalf of the Lenders to be deposited in an
account designated by the Administrative Borrower.
(ii) If the Agent has notified the Lenders that the Agent, on
behalf of the Lenders, will fund a particular Loan pursuant to subsection
2.05(a)(i) and the Agent requests that each Lender make its Pro Rata Share of
such Loan available to the Agent, the Agent may assume that such Lender has
made such amount available to the Agent on such day and the Agent, in its sole
and absolute discretion, may, but shall not be obligated to, cause a
corresponding amount to be made available to the Administrative Borrower on such
day. If the Agent makes such corresponding amount available to the
Administrative Borrower and such corresponding amount is not in fact made
available to the Agent by such Lender, the Agent shall be entitled to recover
such corresponding amount on demand from such Lender together with interest
thereon, for each day from the date such payment was due until the date such
amount is
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paid to the Agent, at the Federal Funds Rate for three Business Days and
thereafter at the Prime Rate. During the period in which such Lender has not
paid such corresponding amount to the Agent, notwithstanding anything to the
contrary contained in this Agreement or any other Loan Document, the amount so
advanced by the Agent to the Administrative Borrower shall, for all purposes
hereof, be a Loan made by the Agent for its own account. Upon any such failure
by a Lender to pay the Agent, the Agent shall promptly thereafter notify the
Administrative Borrower of such failure and the Borrowers shall immediately pay
such corresponding amount to the Agent for its own account.
(b) (i) With respect to all periods for which the Agent has funded
Loans pursuant to Subsection 2.05(a), on the first Business Day after the last
day of each week, or such shorter period as the Agent may from time to time
select (any such week or shorter period being herein called a "Settlement
Period"), the Agent shall notify each Lender of the average daily unpaid
principal amount of the Loans outstanding during such Settlement Period. In the
event that such amount is greater than the average daily unpaid principal amount
of the Loans outstanding during the Settlement Period immediately preceding such
Settlement Period (or, if there has been no preceding Settlement Period, the
amount of the Loans made on the date of such Lender's initial funding), each
Lender shall promptly (and in any event not later than 2:00 p.m. if the Agent
requests payment from such Lender not later than 11:00 a.m. on such day) make
available to the Agent its Pro Rata Share of the difference in immediately
available funds. In the event that such amount is less than such average daily
unpaid principal amount, the Agent shall promptly pay over to each other Lender
its Pro Rata Share of the difference in immediately available funds. In
addition, if the Agent shall so request at any time when an Event of Default
shall have occurred and be continuing, or any other event shall have occurred as
a result of which the Agent shall determine that it is desirable to present
claims against the Borrowers for repayment, each Lender shall promptly remit to
the Agent or, as the case may be, the Agent shall promptly remit to each Lender,
sufficient funds to adjust the interests of the Lenders in the then outstanding
Loans to such an extent that, after giving effect to such adjustment, each
Lender's interest in the then outstanding Loans will be equal to its Pro Rata
Share thereof. The obligations of the Agent and each Lender under this
subsection 2.05(b) shall be absolute and unconditional. Each Lender shall only
be entitled to receive interest on its Pro Rata Share of the Loans which have
been funded by such Lender.
(ii) In the event that any Lender fails to make any payment
required to be made by it pursuant to Subsection 2.05(b)(i), the Agent shall be
entitled to recover such corresponding amount on demand from such Lender
together with interest thereon, for each day from the date such payment was due
until the date such amount is paid to the Agent, at the Federal Funds Rate for
three Business Days and thereafter at the Prime Rate. During the period in which
such Lender has not paid such corresponding amount to the Agent, notwithstanding
anything to the contrary contained in this Agreement or any other Loan Document,
the amount so advanced by the Agent to the Borrowers shall, for all purposes
hereof, be a Loan made by the Agent for its own account. Upon any such failure
by a Lender to pay the Agent, the Agent shall promptly thereafter notify the
Borrowers of such failure and the Borrower shall immediately pay such
corresponding amount to the Agent for its own account.
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<PAGE>
(iii) Except with respect to the payments required to be made
between the Agent and the Lenders pursuant to this Section 2.05, nothing in this
Section 2.05 shall impose on the Agent or any Lender any commitment or other
obligation to make Loans or otherwise extend credit to the Borrowers.
SECTION 2.06. Interest.
--------
(a) Loan. Each Loan shall bear interest on the principal amount
----
thereof from time to time outstanding from the date of such Loan until such
principal amount becomes due, at the Prime Rate plus 1%.
(b) Default Interest. Any amount of principal of any Loan and (to
----------------
the extent permitted by law) interest which is not paid when due, whether upon
demand, by acceleration or otherwise, shall bear interest from the day when due
until such amount is paid in full at a fluctuating interest rate per annum equal
at all times to the Post-Default Rate.
(c) Interest Payment. Interest on each Loan shall be payable monthly,
----------------
in arrears, on the first day of each month, commencing on March 1, 1996, and at
maturity (whether at stated maturity, demand made pursuant to the terms of this
Agreement, acceleration or otherwise). Interest at the Post-Default Rate shall
be payable on demand. The Borrowers hereby authorize the Agent to, and the Agent
may, from time to time, charge the Borrowers' Loan Account pursuant to Section
4.02 of this Agreement with the amount of any interest payment due hereunder.
(d) General. All interest shall be computed on the basis of a year of
-------
360 days for the actual number of days, including the first day but excluding
the last day, elapsed.
SECTION 2.07. Prepayment of Loans.
-------------------
(a) Subject to the terms and conditions contained in this Section
2.07 and elsewhere in this Agreement, the Borrowers shall have the right to
prepay any Loan in whole or, from time to time, in part together with, in the
case of a prepayment in whole, accrued interest to the date of such prepayment
on the amount prepaid.
(b) The Borrowers agree that at any time the Borrowing Base is less
than the sum of (i) the outstanding principal on all Loans outstanding plus (ii)
the outstanding amount of all Letter of Credit Obligations, the Borrowers will
(A) upon becoming aware of the existence of the differential, immediately give
notice of such occurrence to the Agent and (B) upon demand by the Agent, prepay
the Loans in an amount which will reduce the sum of the outstanding principal on
all Loans outstanding to an amount less than or equal to the then current
Borrowing Base. If at any time after the Borrower has complied with the first
sentence of this Section 2.07(b), the sum of the aggregate Letter of Credit
Obligations is greater than the then current Borrowing Base, the Borrowers shall
provide cash collateral to the Agent in the amount of such excess, which cash
collateral shall be deposited in a joint non-interest bearing account maintained
at the Payment Office of the Agent and returned to the Borrowers, provided that
no
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<PAGE>
Event of Default shall have occurred and be continuing, at such time as the
aggregate Letter of Credit Obligations plus the aggregate principal amount of
all outstanding Loans no longer exceeds the then current Borrowing Base.
(c) The Agent shall on each Business Day, apply all funds received
pursuant to the Factoring Agreements, the CIT Assignment Agreement and the Trust
Company Assignment Agreement to the payment, in whole or in part, of the
Obligations then outstanding.
(d) On the date of receipt thereof, the Borrowers and the Corporate
Guarantors shall prepay the Loans in an amount equal to the federal, state and
local tax refunds received by the Borrowers or any Corporate Guarantors in any
year.
(e) On the date of receipt of any federal, state or local tax refunds
by the Individual Guarantors or, if such Individual Guarantors file jointly with
their spouses, such spouses for 1995, the Borrowers shall prepay the Loans in an
amount equal to such refunds.
(f) Except as otherwise expressly provided in this Section 2.07,
payments with respect to any paragraph of this Section 2.07 are in addition to
payments made or required to be made under any other paragraph of this Section
2.07.
ARTICLE III
LETTERS OF CREDIT
SECTION 3.01. General.
-------
(a) In order to assist the Borrowers in establishing or opening
documentary letters of credit, which shall not have expiration dates that exceed
120 days (or, with the prior approval of the Agent, such longer period as may be
approved by the Agent) from the date of issuance (the "Letters of Credit"), with
the L/C Issuer, the Borrowers have requested CIT to guarantee payment or
performance of such Letters of Credit, thereby lending CIT's credit to the
Borrowers, and CIT may, in its sole and absolute discretion, do so. These
arrangements shall be handled by CIT subject to the terms and conditions set
forth below. No Letter of Credit shall be issued by the L/C Issuer without the
consent of CIT in the exercise of its sole and absolute discretion. CIT shall
not be required to be the issuer of any Letter of Credit and no Lender shall be
required to do so unless such Lender shall consent. Any Borrower,may be the
account party for any application for a Letter of Credit, which shall be
substantially in the form of Exhibit E hereto or on a computer transmission
system approved by the L/C Issuer or such other written form or computer
transmission system as may from time to time be approved by the L/C Issuer and
shall be duly completed in a manner acceptable to the L/C Issuer, together with
such other certificates', agreements, documents and other papers and information
as the L/C Issuer may request (the "Letter of Credit Application"). In the event
of any conflict between the terms of the Letter of Credit Application and this
Agreement, the terms of this Agreement shall control.
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<PAGE>
(i) The aggregate Letter of Credit Obligations shall not
exceed the lesser of (A) the difference between (x) the Total Credit Exposure
and (y) the aggregate principal amount of Loans then outstanding, (B) the
difference between (x) the then current Borrowing Base and (y) the aggregate
principal amount of Loans then outstanding and (C) the L/C Subfacility. In
addition, changes or modifications of the Letters of Credit by a Borrower and/or
the L/C Issuer of the terms and conditions thereof that result in an increase in
the amount available to be drawn under any Letter of Credit or result in an
extension of the expiration date of any Letter of Credit shall in all respects
be subject to the prior approval of CIT in the exercise of its sole and absolute
discretion, provided, however, that (1) any other changes or modifications may
-------- -------
be made without the consent of CIT, (2) the L/C Issuer shall promptly notify CIT
of all changes or modifications of the Letters of Credit whether or not such
changes or modifications require the consent of CIT, (3) the expiry date of all
Letters of Credit shall be no later than one day prior to the Final Maturity
Date unless, in the case of Letters of Credit, on or prior to 15 days prior to
the Final Maturity Date either such Letters of Credit shall be cash
collateralized in an amount equal to 105% of the face amount of such Letters
of Credit or the Borrowers shall provide the Lenders with an indemnification, in
form and substance satisfactory to the Agent, from a commercial bank or other
financial institution acceptable to the Agent for any Letter of Credit
Obligations with respect to such Letters of Credit, and (4) the Letters of
Credit and all documentation in connection therewith shall be in form and
substance satisfactory to CIT and the L/C Issuer.
(ii) The Agent shall have the right, without notice to the
Borrowers, to charge the Loan Account with the amount of any and all
indebtedness, liability or obligation of any kind (including indemnification for
breakage costs, capital adequacy and reserve requirement charges) incurred by
the Agent, CIT or the Lenders or incurred by any L/C Issuer with respect to any
Letter of Credit at the earlier of (A) payment by CIT or the Lenders to the L/C
Issuer of any Letter of Credit Obligations, (B) the occurrence of an Event of
Default, or (C) payment by an L/C Issuer with respect to a drawing under an
Letter of Credit. Any amount charged to the Loan Account shall be deemed a Loan
hereunder made by the Lenders to the Borrowers, funded by the Agent on behalf of
the Lenders and subject to subsections 2.05(a) and (b) hereof. Any charges,
fees, commissions, costs and expenses charged to CIT for the Borrowers' account
by the L/C Issuer in connection with or arising out of Letters of Credit issued
pursuant to this Agreement or out of transactions relating thereto will be
charged to the Loan Account in full when charged to or paid by CIT and when
charged shall be conclusive on the Borrowers. Each of the Lenders and the
Borrowers (1) agree that the Agent shall have the right to make such charges
regardless of whether any Event of Default or Potential Default shall have
occurred and be continuing or whether any of the conditions precedent in Section
5.02 have been satisfied and (2) authorize and instruct the Agent to charge the
Loan Account and to transfer funds (by wire transfer or other transfer of good
funds) to an Existing Lender, in connection with an Existing Letter of Credit,
if such Existing Lender makes a payment or is obligated to make a payment in
connection with such Existing Letter of Credit.
(iii) The Borrowers unconditionally and jointly and severally
indemnify the Agent, CIT, the L/C Issuer and each Lender and hold the Agent,
CIT, the L/C Issuer and each Lender harmless from any and all loss, claim or
liability incurred by the Agent, CIT, the L/C
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<PAGE>
Issuer or any Lender arising from any transactions or occurrences relating to
Letters of Credit established or opened for the Borrowers' account, the
Collateral relating thereto, and all Obligations thereunder, including any such
loss or claim due to any action taken by the L/C Issuer, other than for any such
loss, claim or liability arising out of the gross negligence or willful
misconduct of the Agent, CIT, the L/C Issuer or any Lender as determined by a
final judgment of a court of competent jurisdiction. The Borrowers further agree
to jointly and severally hold the Agent, CIT and each Lender harmless from any
errors or omission, negligence or misconduct by the L/C Issuer. The Borrowers'
unconditional joint and several obligations to the Agent, CIT, the L/C Issuer
and each Lender hereunder shall not be modified or diminished for any reason or
in any manner whatsoever, other than as a result of the Agent's, CIT'S, the L/C
Issuer's or such Lender's gross negligence or willful misconduct as determined
by a final judgment of a court of competent jurisdiction. The Borrowers agree
that any charges incurred by CIT for the Borrowers' account by the L/C Issuer
shall be conclusive on the Borrower and may be charged to the Loan Account.
(iv) None of the Agent, CIT, the Lenders or the L/C Issuer
shall be responsible for the existence, character, quality, quantity, condition,
packing, value or delivery of the goods purporting to be represented by any
documents; any difference or variation in the character, quality, quantity,
condition, packing, value or delivery of the goods from that expressed in the
documents; the validity, sufficiency or genuineness of any documents or of any
endorsements thereof even if such documents should in fact prove to be in any or
all respects invalid, insufficient, fraudulent or forged; the time, place,
manner or order in which shipment is made; partial or incomplete shipments, or
failure or omission to ship any or all of the goods referred to in the Letters
of Credit or documents; any deviation from instructions; delay, default, or
fraud by the shipper and/or anyone else in connection with the Collateral or the
shipping thereof; or any breach of contract between the shipper or vendors and
the Borrowers. Furthermore, without being limited by the foregoing, none of the
Agent, CIT, the L/C Issuer and the Lenders shall be responsible for any act or
omission with respect to or in connection with any goods covered by Letters of
Credit.
(v) The Borrowers agree that any action taken by the Agent,
CIT, the L/C Issuer or any Lender in connection with the Letters of Credit or
any drafts presented, pursuant thereto, or the goods purported to be covered
thereby, if taken in the absence of gross negligence or willful misconduct on
the part of the Agent, CIT, the L/C Issuer or any Lender, shall be binding on
the Borrowers (with respect to the L/C Issuer, the Agent, CIT and the Lenders)
and shall not put the Agent, CIT, the L/C Issuer or the Lenders in any resulting
liability to the Borrowers.
(vi) Without CIT's express written consent, the L/C Issuer and
the Borrowers agree: (x) not to apply for or execute any and all steamship or
airway guaranties, indemnities or delivery orders; not to grant any extensions
of the maturity of, time of payment for, or time of presentation of, any drafts
or documents; and not to agree to any amendments, renewals, extensions,
modifications, changes, cancellations or waivers of any of the terms or
conditions of any of the applications, Letters of Credit or drafts that result
in any increase in the amount available to be drawn under any Letter of Credit
or result in any extension of the
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expiration date of any Letter of Credit; and (y) after the occurrence of an
Event of Default which is not cured within any applicable grace period, if any,
or waived by the Required Lenders. (A) not to clear and resolve any questions of
non-compliance of documents, and (B) not to give any instructions as to
acceptances or rejection of any documents or goods. The L/C Issuer will promptly
notify CIT of all such actions, whether or not the consent of CIT is required by
this Agreement.
(vii) The Borrowers agree that any necessary and material
import, export or other license or certificates for the import or handling of
Inventory will have been promptly procured; all foreign and domestic material
governmental laws and regulations in regard to the shipment and importation of
Inventory or the financing thereof will have been promptly and fully complied
with, in each case, where the failure to obtain such certificate or license or
the failure to comply with such laws would result in a Material Adverse Effect;
and any certificates in that regard that the L/C Issuer may at any time
reasonably request will be promptly furnished. In this connection, the Borrowers
jointly and severally warrant and represent that all shipments made under any
Letters of Credit are in accordance with the laws and regulations of the
countries in which the shipments originate and terminate, and are not prohibited
by any such laws and regulations. As between the Borrowers, on the one hand, and
the Agent, CIT, the Lenders and the L/C Issuer, on the other hand, the Borrowers
assume all risk, liability and responsibility for, and agree to pay and
discharge, all present and future local, state, federal or foreign taxes,
duties, or levies. As between the Borrowers, on the one hand, and the Agent,
CIT, the Lenders and the L/C Issuer, on the other hand, any embargo,
restriction, laws, customs or regulations of any country, state, city, or other
political subdivision, where such Inventory is or may be located, or wherein
payments are to be made, or wherein drafts may be drawn, negotiated, accepted,
or paid, shall be solely the Borrower's joint and several risk, liability and
responsibility.
(viii) Upon any payments made to the L/C Issuer by CIT or the
Lenders, CIT or the Lenders, as the case may be, shall, without prejudice to its
rights under this Agreement (including that such unreimbursed amounts shall
constitute Loans hereunder), acquire by subrogation, any rights, remedies,
duties or obligations granted or undertaken by the Borrowers to the L/C Issuer
in any Letters of Credit Applications, any drafts, any standing agreement
relating to Letters of Credit, drafts or otherwise, all of which shall be deemed
to have been granted to CIT and the Lenders and apply in all respects to CIT and
the Lenders and shall be in addition to any rights, remedies, duties or
obligations contained herein.
SECTION 3.02. Participations.
--------------
(a) Purchase of Participations. Immediately upon issuance by the L/C
--------------------------
Issuer of any Letter of Credit pursuant to this Agreement, each Lender (except
with respect to an Existing Letter of Credit, other than CIT) shall be deemed to
have irrevocably and unconditionally purchased and received from CIT (or the L/C
Issuer in the case of an Existing Letter of Credit), without recourse or
warranty, an undivided interest and participation, to the extent of such
Lender's Pro Rata Share, in all obligations of CIT (or the L/C Issuer in the
case of
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<PAGE>
an Existing Letter of Credit) in such Letter of Credit (including, without
limitation, all Reimbursement Obligations of the Borrowers with respect
thereto).
(b) Sharing of Payments. In the event that CIT or the Lenders make
-------------------
any payment in respect of a Letter of Credit to the L/C Issuer (or an L/C Issuer
makes any payment in respect of an Existing Letter of Credit) and the Borrowers
shall not have repaid such amount to the Agent for the account of CIT and the
Lenders (or such L/C Issuer), the Agent shall charge the Loan Account in the
amount of the Reimbursement Obligation, in accordance with Sections 3.01(a)(ii)
and 4.02 hereof.
(c) Obligations Irrevocable. The obligations of a Lender to make
-----------------------
payments to the Agent for the account of the Agent, CIT or an L/C Issuer with
respect to a Letter of Credit shall be irrevocable, not subject to any
qualification or exception whatsoever and shall be made in accordance with, but
not subject to, the terms and conditions of this Agreement under all
circumstances, including, without limitation, any of the following
circumstances:
(i) any lack of validity or enforceability of this Agreement
or any of the other Loan Documents;
(ii) the existence of any claim, setoff, defense or other
right which a Borrower may have at any time against a beneficiary named in
a Letter of Credit or any transferee of any Letter of Credit or any holder
of a draft (or any Person for whom any such transferee may be acting), the
Agent, L/C Issuer, any Lender, or any other Person. whether in connection
with this Agreement, any Letter of Credit or draft, the transactions
contemplated herein or any unrelated transactions (including any underlying
transactions between a Borrower or any other party and the beneficiary
named in any Letter of Credit);
(iii) any draft, certificate or any other document presented
under the Letter of Credit proving to be forged, fraudulent, invalid or
insufficient in any respect or any statement therein being untrue or
inaccurate in any respect;
(iv) the surrender or impairment of any security for the
performance or observance of any of the terms of any of the Loan Documents;
(v) any failure by the Agent or the L/C Issuer to provide any
notices required pursuant to this Agreement relating to Letters of Credit
or drafts; or
(vi) the occurrence of any Event of Default or Potential
Default.
SECTION 3.03. Letters of Credit.
-----------------
(a) Request for Issuance. Any Borrower may from time to time, upon
--------------------
notice not later than 12:00 noon, at least two Business Days in advance, request
the L/C Issuer to establish or open a Letter of Credit by delivering to the L/C
Issuer, a Letter of Credit
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Application, together with any necessary related documents or information.
Neither CIT, the L/C Issuer nor the Agent shall be required to determine that,
or take notice whether, the conditions precedent set forth in Section 5.02 have
been satisfied.
(b) Letters of Credit Fees. (i) The Borrowers shall pay to the Agent
----------------------
for the account of the Lenders in accordance with the Lenders' respective Pro
Rata Shares a nonrefundable issuance fee for each Letter of Credit equal to .25%
of the stated amount of such Letter of Credit, provided that if an issuance fee
has already been paid at the time of issuance of an Existing Letter of Credit
another issuance fee shall not be payable on such Existing Letter of Credit.
This fee shall be payable on the date of issuance of a Letter of Credit. In
addition, the Borrowers shall also pay to the Agent for the account of the
Lenders in accordance with the Lenders' respective Pro Rata Shares a fee equal
to .25% of the amount of any increase of the stated amount of any Letter of
Credit, such fee to be payable on the date of any such increase. The amount of
the fees for Letters of Credit set forth in this Section 3.03(b)(i) may be
changed by the Lenders, in their discretion, from time to time, provided that,
-------- ----
in the absence of an Event of Default, such issuance fees shall not be changed
prior to the first Termination Anniversary Date.
(ii) L/C Issuer Charges. The Borrowers shall pay to the L/C
------------------
Issuer and CIT for their own accounts the standard charges assessed by the L/C
Issuer and CIT in connection with the issuance, administration, amendment,
payment or cancellation of Letters of Credit.
(iii) Charges to Loan Account. The Borrowers hereby authorize
-----------------------
the Agent to, and the Agent may, from time to time, charge the Loan Account
pursuant to Sections 3.01(a)(ii) and 4.02 of this Agreement with the amount of
any Letter of Credit fees or charges due hereunder.
(c) Existing Letters of Credit. Schedule 3.03(c) hereto contains a
--------------------------
description of all letters of credit issued by the Existing Lenders for the
account of the Borrowers pursuant to the Existing Line Letters and outstanding
on the Effective Date. Each such letter of credit (each an "Existing Letter of
Credit") shall constitute a "Letter of Credit" for all purposes of this
Agreement issued on the Effective Date. Changes or modifications of the terms or
conditions of the Existing Letters of Credit and waivers of any non-compliance
of documents with the terms or conditions of the Existing Letters of Credit that
in any case result in an increase in the amount available to be drawn under any
Existing Letter of Credit or result in an extension of the expiration date of
any Existing Letter of Credit shall be subject to the prior approval of CIT in
the exercise of its sole discretion. Any other changes, modifications or waivers
may be made without the consent of CIT, provided that the Existing Lender making
any such change or modification or consenting to any such waiver shall promptly
notify CIT of such change, modification or waiver.
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ARTICLE IV
FEES, PAYMENTS AND OTHER COMPENSATION
SECTION 4.01. Fees.
----
(a) Agent and Collateral Management Fee. The Borrowers shall jointly
-----------------------------------
and severally pay to the Agent for its own account (or the Agent may charge the
Loan Account pursuant to Section 4.02), on the last day of each calendar month a
non-refundable agent and collateral management fee in the amount of $6,250 for
each such month.
(b) Field Examination Fee. In addition to the agent and collateral
---------------------
management fee described in Section 4.01(a) above, the Borrowers, jointly and
severally, agree to pay the Agent for its own account (or the Agent may charge
the Loan Account pursuant to Section 4.02) $750 per day per examiner plus the
examiner's out-of-pocket costs and expenses incurred in connection with all
visits, inspections, audits and examinations conducted by the Agent, provided
that in the absence of a continuing Event of Default the aggregate per diem fee
and out-of-pocket costs and expenses shall not exceed $10,000 for any year.
(c) Facility Fee. From and after the Effective Date until the Final
------------
Maturity Date, the Borrowers shall jointly and severally pay to the Agent for
the account of the Lenders in accordance with the Lenders' respective Pro Rata
Shares (or the Agent may charge the Loan Account pursuant to Section 4.02) a
facility fee ("Facility Fee") of $150,000 per annum. The Facility Fee shall be
owing by the Borrowers and earned in full by the Lenders on the Effective Date'
and on the first day of each February thereafter; however, the Facility Fee
shall be paid in advance in four equal quarterly installments on the Effective
Date and thereafter on the first day of January, April, July and October of each
year.
(d) Letters of Credit Fee for Existing Letters of Credit. The
----------------------------------------------------
Borrowers shall jointly and severally pay to the Agent for the account of the
Lenders a fee with respect to the Existing Letters of Credit in the amount of
$15,718.83 on or prior to the Effective Date.
SECTION 4.02. Payments; Computations and Statements. (a) The
-------------------------------------
Borrowers will make each payment under the Notes not later than 11:00 a.m. on
the day when due, in lawful money of the United States of America and in
immediately available funds, to the Agent at the Payment Office. All payments
shall be made by the Borrowers without defense, set-off or counterclaim to the
Agent. Except as provided in Section 2.05, after receipt, the Agent will
promptly thereafter cause to be distributed like funds relating to the payment
of principal ratably to the Lenders and like funds relating to the payment of
any other amount payable to any Lenders to such Lenders in each case to be
applied in accordance with the terms of this Agreement, provided that the Agent
will cause to be distributed all interest and fees received from or for the
account of the Borrowers not less than once each month. The Lenders and the
Borrowers hereby authorize the Agent to, and the Agent may, from time to time
charge the Borrowers' Loan Account with any amount due and payable under any
Loan Document to which any Borrower is a party. The Lenders and the Borrowers
confirm that any charges which the
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Agent may so make to the Borrowers' Loan Account as herein provided will be made
as an accommodation to the Borrowers and solely at the Agent's discretion. The
Agent shall maintain a common Loan Account on its books in the joint name of the
Borrowers. It is expressly understood and agreed by the Borrowers that the Agent
and the Lenders shall have no responsibility to inquire into the correctness of
the apportionment, allocation or disposition of Loans, Agent's Advances or
Letters of Credit made to the Borrowers or any fees, costs or expenses for which
the Borrowers are jointly and severally obligated under this Agreement. Whenever
any payment to be made under any such Loan Document shall be stated to be due on
a day other than a Business Day, such payment shall be made on the next
succeeding Business Day and such extension of time shall in such case be
included in the computation of interest or fees as the case may be. All
computations of interest under the Notes and all fees shall be made by the Agent
on the basis of a year of 360 days for the actual number of days (including the
first day but excluding the last day) occurring in the period for which such
interest is payable. Each determination by the Agent of an interest rate or fees
hereunder shall be conclusive and binding for all purposes in the absence of
manifest error.
(b) The Agent shall provide the Administrative Borrower, promptly
after the end of each calendar month, a summary statement (in the form from time
to time used by Agent) of (A) the opening and closing daily balances in the Loan
Account during such month, (B) the amounts and dates on all Loans and Agent
Advances made during such month, (C) the amounts and dates of all payments on
account of the Loans and Agent Advances during such month and the Loans and
Agent Advances to which such payments were applied, (D) the amount of interest
accrued on the Loans and Agent Advances during such month, (E) any Letters of
Credit issued by the L/C Issuer during such month, specifying the face amount
thereof, (F) the amount of charges to the Loan Account and/or Loans made during
such month to reimburse the Lenders for drawings made under Letters of Credit,
and (G) the amount and nature of any charges to the Loan Account made during
such month on account of fees, commissions, expenses and other obligations. All
entries on any such statement shall be presumed to be correct 30 days after the
same is sent, and shall constitute presumptive evidence of the information
contained in such statement absent manifest error.
(c) Unless the Agent shall have received notice from the
Administrative Borrower prior to the date on which any payment is due to the
Lenders hereunder that the Borrowers will not make such payment in full, the
Agent may assume that the Borrowers have made such payment in full to the Agent
on such date and the Agent may, in reliance upon such assumption, cause to be
distributed to each Lender on such due date an amount equal to the amount then
due such Lender. If and to the extent the Borrowers shall not have so made such
payment in full to the Agent, each Lender shall repay to the Agent forthwith on
demand such amount distributed to such Lender together with interest thereon,
for each day from the date such amount is distributed to such Lender to the date
such Lender repays such amount to the Agent, at the Federal Funds Rate for three
Business Days and thereafter at the Prime Rate.
SECTION 4.03. Sharing of Payments, Etc. Except as provided in Section
------------------------
2.05 of this Agreement, if any Lender shall obtain any payment (whether
voluntary, involuntary, through the exercise of any right of set-off or
otherwise) on account of any Obligations or
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Guaranteed Obligations of any Borrower or Guarantor hereunder or under any other
Loan Document in excess of its ratable share of payments on account of similar
Obligations or Guaranteed Obligations obtained by all the Lenders, such Lender
shall forthwith purchase from the other Lenders such participations in such
similar obligations held by them as shall be necessary to cause such purchasing
Lender to share the excess payment ratably with each of them; provided, however,
-------- -------
that if all or any portion of such excess payment is thereafter recovered from
such purchasing Lender, such purchase from each Lender shall be rescinded and
such Lender shall repay to the purchasing Lender the purchase price to the
extent of such recovery together with an amount equal to such Lender's ratable
share (according to the proportion of (i) the amount of such Lender's required
repayment) to (ii) the total amount so recovered from the purchasing Lender of
any interest or other amount paid by the purchasing Lender in respect of the
total amount so recovered. The Borrowers agree that any Lender so purchasing a
participation from another Lender pursuant to this Section 4.03 may, to the
fullest extent permitted by law, exercise all its rights (including the Lender's
right of set-off) with respect to such participation as fully as if such Lender
were the direct creditor of the Borrowers in the amount of such participation.
SECTION 4.04. Apportionment of Payments. (a) Subject to Sections 2.05
-------------------------
and 11.01 hereof, all payments of principal and interest in respect of
outstanding Loans, all payments in respect of the Reimbursement Obligations, all
payments of fees (other than the fees with respect to Letters of Credit provided
for in Section 3.03(b)(ii) and the fees provided for in Sections 4.01(a) and
(b)), and all other payments in respect of any other Obligations, shall be
allocated among such of the Lenders as are entitled thereto, in proportion to
their respective Pro Rata Shares or otherwise as provided herein or, in respect
of payments not made on account of Loans or Letter of Credit Obligations, as
designated by the Person making payment when the payment is made.
(b) After the occurrence and during the continuance of an Event of
Default, the Agent may, and upon the direction of the Required Lenders shall,
apply all payments in respect of any Obligations and all proceeds of the
Collateral, subject to the provisions of this Agreement (i) first, to pay the
-----
Obligations in respect of any fees, expense reimbursements or indemnities then
due to the Agent, in its capacity as Agent, and the L/C Issuer, in its capacity
as L/C Issuer; (ii) second, to pay the Obligations in respect of any fees and
------
indemnities then due to the Lenders; (iii) third, ratably to pay interest due
-----
in respect of the Loans and Reimbursement Obligations; (iv) fourth, ratably to
------
pay or prepay principal of the Loans and Letter of Credit Obligations (or, to
the extent such Obligations are contingent, to prepay or provide cash collateral
in respect of such Obligations); and (v) fifth, to the ratable payment of all
-----
other Obligations then due and payable.
SECTION 4.05. Increased Costs and Reduced Return.
----------------------------------
(a) If any Lender or the L/C Issuer shall have determined that the
adoption or implementation of, or any change in, any law, rule, treaty or
regulation, or any policy, guideline or directive of, or any change in the
interpretation or administration thereof by, any court, central bank or other
administrative or Governmental Authority, or compliance by the L/C Issuer or
any
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Lender or any Affiliate of any Lender or the L/C Issuer with any directive of or
guideline from any central bank or other Governmental Authority or the
introduction of or change in any accounting principles applicable to the L/C
Issuer or any Lender or any Affiliate of any Lender or the L/C Issuer (in each
case, whether or not having the force of law), shall (i) change the basis of
taxation of payments to the L/C Issuer or any Lender or any Affiliate of any
Lender or the L/C Issuer of any amounts payable hereunder (except for taxes on
the overall net income of the L/C Issuer or any Lender or any Affiliate of any
Lender or the L/C Issuer), (ii) impose, modify or deem applicable any reserve,
special deposit or similar requirement against any Loan, Letter of Credit or
against assets of or held by, or deposits with or for the account of, or credit
extended by, the L/C Issuer or any Lender, or any Affiliate of any Lender or the
L/C Issuer or (iii) impose on the L/C Issuer or any Lender or any Affiliate of
any Lender or the L/C Issuer any other condition regarding this Agreement or any
Loan or Letter of Credit, and the result of any event referred to in clauses
(i), (ii) or (iii) above shall be to increase the cost to the L/C Issuer or any
Lender of making any Loan, issuing, guaranteeing or participating in any Letter
of Credit or agreeing to make any Loan, issue, guaranty or participate in any
Letter of Credit or to reduce any amount received or receivable by the L/C
Issuer or any Lender hereunder, then, within three Business Days after demand by
the L/C Issuer or such Lender, the Borrowers shall pay to the L/C Issuer or such
Lender such additional amounts as will compensate the L/C Issuer or such Lender
for such increased costs or reductions in amount, together with interest on such
additional amounts.
(b) If any Lender or the L/C Issuer shall have determined that any
Capital Guideline or adoption or implementation of, or any change in, any
Capital Guideline by the Governmental Authority charged with the interpretation
or administration thereof, or compliance by the L/C Issuer, any Lender or any
Affiliate of the L/C Issuer or any Lender with any Capital Guideline or with any
request or directive of any such Governmental Authority with respect to any
Capital Guideline, or the implementation of, or any change in, any applicable
accounting principles (in each case, whether or not having the force of law),
either (i) affects or would affect the amount of capital required or expected to
be maintained by the L/C Issuer, any Lender or any Affiliate of the L/C Issuer
or any Lender, and the L/C Issuer or any Lender determines that the amount of
such capital is increased as a direct or indirect consequence of any Loans made
or maintained, Letters of Credit issued or any guaranty or participation with
respect thereto, or the L/C Issuer's, any Lender's or any such Affiliate's other
obligations hereunder, or (ii) has or would have the effect of reducing the rate
of return on the L/C Issuer's, any Lender's, any such Affiliate's capital to a
level below that which such L/C Issuer, such Lender or such Affiliate could have
achieved but for such circumstances as a consequence of any Loans made or
maintained, Letters of Credit issued, or any guaranty or participation with
respect thereto or any agreement to make Loans or to issue Letters of Credit, or
such L/C Issuer's, such Lender's, such Affiliate's other obligations hereunder
(in each case, taking into consideration such L/C Issuer's, such Lender's or
such Affiliate's policies with respect to capital adequacy), then, within three
Business Days after demand by the L/C Issuer or any Lender, the Borrowers shall
pay to the L/C Issuer or such Lender from time to time such additional amounts
as will compensate the L/C Issuer or such Lender for such cost of maintaining
such increased capital or such reduction in the rate of return on such L/C
Issuer's, such Lender's or such Affiliate's capital.
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(c) All amounts payable under this Section 4.05 shall bear interest
from the date that is three Business Days after the date of demand by the L/C
Issuer or a Lender until payment in full to the L/C Issuer or such Lender at the
Post-Default Rate. A certificate of the L/C Issuer or any Lender claiming
compensation under this Section 4.05 shall be submitted by the L/C Issuer or
such Lender to the Borrower, setting forth the amount due and the L/C Issuer's,
or such Lender's reasons for invoking the provisions of this Section, and shall
be final and conclusive, absent manifest error.
ARTICLE V
CONDITIONS OF EFFECTIVENESS, LETTER OF CREDIT
ISSUANCE AND LENDING
SECTION 5.01. Conditions Precedent to Effectiveness. This Agreement
-------------------------------------
shall become effective as of the Business Day (the "Effective Date") when each
of the following conditions precedent shall have been satisfied:
(a) Payment of Fees, Etc. The Borrowers shall have paid on or before
--------------------
the date of this Agreement, all fees, costs, expenses and taxes then payable by
the Borrower pursuant to Sections 4.01 and 11.05 hereof.
(b) Representation and Warranties: No Event of Default. The
--------------------------------------------------
representations and warranties contained in Section 6.01 of this Agreement and
in each other Loan Document and certificate or other writing delivered to the
Lenders or the L/C Issuer pursuant hereto on or prior to the Effective Date
shall be correct on and as of the Effective Date as though made on and as of
such date; and no Event of Default or Potential Default shall have occurred and
be continuing on the Effective Date or would result from this Agreement becoming
effective in accordance with its terms.
(c) Legality. The making of the initial Loans or the issuance of the
--------
initial Letter of Credit shall not contravene any law, rule or regulation
applicable to the Lenders or the L/C Issuer.
(d) Delivery of Documents. The Agent shall have received on or before
---------------------
the Effective Date the following, each in form and substance satisfactory to the
Agent and, unless indicated otherwise, dated the Effective Date:
(i) a Note payable to the order of each Lender, duly executed
by each Borrower;
(ii) a Security Agreement, duly executed by each Borrower and
Corporate Guarantor;
(iii) a Cash Collateral Agreement, duly executed by Jack M.
Benun;
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(iv) appropriate financing statements on Form UCC-1, duly executed
by each Borrower and Corporate Guarantor and duly filed in such office or
offices as may be necessary or, in the opinion of the Agent, desirable to
perfect the security interests purported to be created by the Security
Agreements;
(v) certified copies of requests for copies of information on
Form UCC-11, listing all effective financing statements which name as
debtors each Borrower and Corporate Guarantor and which are filed in the
offices referred to in paragraph (iv) above, together with copies of such
financing statements, none of which, except as otherwise agreed to in
writing by the Agent, shall cover any of the Collateral;
(vi) a copy of the resolutions adopted by the Board of Directors
of each Borrower and Corporate Guarantor, certified as of the Effective
Date by authorized officers thereof, authorizing (A) the borrowings
hereunder and the transactions contemplated by the Loan Documents to which
such Borrower and Corporate Guarantor is or will be a party, and (B) the
execution, delivery and performance by each Borrower and Corporate
Guarantor of each Loan Document and the execution and delivery of the other
documents to be delivered by each Borrower and Corporate Guarantor in
connection herewith;
(vii) a certificate of authorized officers of each Borrower and
Corporate Guarantor, certifying the names and true signatures of the
officers of such Borrower and Corporate Guarantor authorized to sign each
Loan Document to which such Borrower and Corporate Guarantor is or will be
a party and the other documents to be executed and delivered by such
Borrower and Corporate Guarantor in connection herewith, together with
evidence of the incumbency of such authorized officers;
(viii) a certificate of the appropriate official(s) of the states of
incorporation or organization and each state of foreign qualification of
each Borrower and Corporate Guarantor, certifying as to the subsistence in
good standing of, and the payment of taxes by, each Borrower and Corporate
Guarantor in such states and listing all charter or organizational
documents of such Borrower and Corporate Guarantor on file with such
official(s), together with confirmation by telephone or telegram (where
available) on the Effective Date from such official(s) as to such matters;
(ix) a copy of the charter, articles of organization or
certificate of formation, as appropriate, of each Borrower and Corporate
Guarantor certified by the appropriate official(s) of the state of
organization of such Borrower and Corporate Guarantor and as of the
Effective Date by an authorized officer of the Borrower;
(x) a copy of the by-laws or operating agreement, as appropriate,
of each Borrower and Corporate Guarantor, certified as of the Effective
Date by an authorized officer of such Borrower and Corporate Guarantor;
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(xi) an opinion of Fishbach, Hertan & Ives, New York counsel to
the Borrowers and Guarantors, substantially in the form of Exhibit F
hereto, and an opinion of special New Jersey counsel to the Borrowers and
Corporate Guarantors, substantially in the form of Exhibit G hereto and in
each case as to such other matters as the Agent may reasonably request;
(xii) a certificate of the chief executive officer or the chief
financial officer of Happy Kids, certifying as to the matters set forth in
subsection (b) of this Section 5.01;
(xiii) a copy of (A) the Financial Statements together with a
certificate of the chief executive officer or chief financial officer of
Happy Kids setting forth (x) all existing Indebtedness, guarantees, pending
or threatened litigation or claims and other contingent liabilities of the
Borrowers and Corporate Guarantors, and (y) all dividends declared or paid
since the date of such Financial Statements and all intercompany payments
made or obligations incurred to Affiliates outside the ordinary course of
Borrowers' business since such date, (B) the preliminary combined balance
sheets and combined statements of income and retained earnings of the
Borrowers and H.O.T. Kidz as at December 31, 1995, (C) the preliminary
individual balance sheet and statements of income and retained earnings of
Hawk and J&B as at December 31, 1995, and (D) the projections described in
Section 6.01(h)(ii) hereof,
(xiv) a breakdown of Inventory of each Borrower by location in the
form specified in Section 7.01(a)(viii)(B) of this Agreement certified by
the chief financial officer of Happy Kids;
(xv) a copy, certified by the chief executive officer of each
Borrower, of each executed factoring agreement, (each a "Factoring
Agreement" and collectively the "Factoring Agreements"), between a Borrower
and the Factor and the Existing Factoring Agreement, and the Factor and
each Borrower shall have entered into the CIT Assignment Agreement
satisfactory in form and scope to the Agent;
(xvi) execution and delivery by (A) each of the Existing Lenders of
assignments (including UCC-3 assignments) of all rights of the Existing
Lenders under the Existing Line Letters and all related security documents
and other related agreements, including, without limitation, an assignment
by Chemical of the $700,000 mortgage covering the real property located at
1123 East Eighth Street, Brooklyn, New York owned by Jack M. Benun and
Francine Benun, (B) each of the Existing Lenders of a termination of any
existing collateral assignment of the key man life insurance policy on the
life of Jack M. Benun and (C) the Trust Company Bank and the Borrowers of
the Trust Company Assignment Agreement satisfactory in form and scope to
the Agent (including UCC-3 partial releases);
(xvii) a certificate of insurance evidencing insurance on the
property of the Borrowers and the Corporate Guarantors as is required by
Section 7.01(h) of this Agreement, naming the Agent as additional insured
and loss payee, using a long form
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loss payee endorsement, for all insurance maintained by the Borrowers and
the Corporate Guarantors;
(xviii) a certificate of an authorized officer of Happy Kids
certifying the names and true signatures of those officers of each Borrower
and Corporate Guarantor that are authorized to provide Notices of
Borrowings and Letter of Credit Applications and all other notices under
this Agreement and the Loan Documents;
(xix) licensor waiver letters, in form and substance satisfactory
to the Agent, executed by the Licensors in existence on the date hereof
other than Spencer's;
(xx) a copy of each of the License Agreements as in effect on the
date hereof, certified as a true and correct copy thereof by the chief
executive officer or the chief financial officer of each of the Borrowers
together with a certification that such License Agreements remain in full
force and effect and that the Borrowers have not breached or defaulted in
any of the obligations under the License Agreement;
(xxi) (A) a duly executed and delivered mortgage in the amount of
$1,199,999 in recordable form in favor of the Agent which shall cover the
real property owned by Jack M. Benun and Francine Benun and located at 1123
East Eighth Street, Brooklyn, New York (the "Mortgage"), (B) a current ALTA
survey of such property certified to the Agent and to such parties as the
Agent may request, accompanied by a satisfactory legal description of such
property, (C) a report of a title insurance policy covering such real
property interest in an amount reasonably acceptable to the Agent on a form
of and issued by a title company reasonably satisfactory to the Agent (the
"Title Company") subject only to such exceptions as are satisfactory to the
Agent, and (D) evidence that Jack M. Benun shall have paid to the Title
Company all expenses of the Title Company in connection with the issuance
of such report and in addition shall have paid to the Title Company an
amount equal to the recording and stamp taxes (including mortgage recording
taxes), if any, payable in connection with recording such mortgage in the
appropriate county land offices, each in form and substance reasonably
satisfactory to the Agent;
(xxii) a copy of a key man life insurance policy on the life of Jack
M. Benun from a responsible and reputable life insurance company in the
amount of $3,000,000, together with a collateral assignment of such life
insurance policy to the Agent for the benefit of the Lenders, duly executed
by each of the Borrowers, and acknowledged by the home office of the
insurance company;
(xxiii) completed personal financial statements of each of the
Individual Guarantors, prepared as of a date no earlier than 30 days prior
to the Effective Date, in form and substance reasonably satisfactory to the
Agent, together with a schedule of contingent liabilities and guarantees;
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(xxiv) landlord waivers from each of the Borrowers' landlords and
contractor waivers from each of the Borrowers' contractors that may from
time to time have possession of the Borrowers' Inventory, in each case in
form and substance satisfactory to the Agent;
(xxv) the Subordination Agreement executed by each of the Borrowers
and Jack M. Benun;
(xxvi) a copy of the Subordinated Note, certified by the chief
executive officer of Happy Kids;
(xxvii) a limited guaranty executed by Jack M. Benun and Francine
Benun in favor of the Lenders, which party shall provide that recourse
thereunder is limited to her interest in the real property located at 1123
East Eighth Street, Brooklyn, New York;
(xxviii) an assignment of tax refunds duly executed by each of the
Individual Guarantors and Francine Benun;
(xxix) a certificate of the chief financial officer of Happy Kids,
certifying as to the matters set forth in subsection (h) of this Section
5.01;
(xxx) the letter agreement executed by the Borrowers, the
Guarantors and Francine Benun with respect to (a) the release of the
$500,000 cash collateral pledged to the Agent for the benefit of the
Lenders by Jack M. Benun pursuant to the terms of the Cash Collateral
Agreement and (b) the reduction of the principal amount of the Mortgage by
$499,999 to $700,000; and
(xxxi) such other agreements, instruments, approvals, opinions and
other documents as the Agent may reasonably request.
(e) Proceedings; Receipt of Documents. All proceedings in connection
---------------------------------
with the transactions contemplated by this Agreement, and all documents
incidental thereto, shall be satisfactory to the Agent and its special counsel,
and the Agent and such special counsel shall have received all such information
and such counterpart originals or certified or other copies of such documents as
the Agent or such special counsel may reasonably request.
(f) Audit. The Agent may, at its option, obtain an update of the
-----
audit of the assets and liabilities of the Borrowers and the Corporate
Guarantors and the Agent shall be satisfied (in its sole discretion) with the
results of such updated audit.
(g) Material Adverse Effect. The Lenders shall have determined, in
-----------------------
their sole judgment, that no Material Adverse Effect shall have occurred after
December 31, 1994.
(h) Overadvance Amount. After giving effect to all Loans made and
------------------
all Letters of Credit issued or deemed issued on the Effective Date, and after
deducting such
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reserves to the Borrowing Base as the Agent determines to be appropriate for
duty and freight in connection with the importation of Inventory, the
Overadvance Amount shall not exceed $14,000,000.
SECTION 5.02. Conditions Precedent to Loans and Letters of Credit. In
---------------------------------------------------
addition to the requirements of Section 5.01, as a condition precedent to the
Agent or any Lender making any Loan, or CIT assisting the Borrowers in
establishing, or opening any Letter of Credit, each of the following conditions
precedent shall be fulfilled in a manner satisfactory to the Agent:
(a) Payment of Fees, Etc. The Borrowers shall have paid all fees,
--------------------
costs, expenses and taxes then payable by the Borrower pursuant to Sections 4.01
and 11.05 hereof.
(b) Representations and Warranties; No Event of Default. The
---------------------------------------------------
following statements shall be true, and the submission by the Administrative
Borrower to the Agent of a Notice of Borrowing with respect to a Loan and a
Borrower's acceptance of the proceeds of such Loan, or the submission by a
Borrower of a Letter of Credit Application with respect to a Letter of Credit
and the issuance of such Letter of Credit shall be deemed to be a representation
and warranty by the Borrowers on the date of such Loan and the date of the
issuance of such Letter of Credit that (i) the representations and warranties
contained in Section 6.01 of this Agreement and in each other Loan Document and
certificate or other writing delivered to the Lenders pursuant hereto on or
prior to the date of such Loan or Letter of Credit are correct on and as of such
date as though made on and as of such date; and (ii) no Event of Default or
Potential Default has occurred and is continuing or would result from the making
of the Loan to be made on such date, the issuance of the Letter of Credit to be
issued on such date or the acceptance of the Draft to be accepted on such date.
(c) Legality. The making of such Loan or the issuance of such Letter
--------
of Credit shall not contravene any law, rule or regulation applicable to the
Agent, CIT, the Lenders or the L/C Issuer.
(d) Notices. Except in the case of a borrowing of a Loan pursuant to
-------
Sections 3.01(a)(ii), 3.07 and 3.08, the Agent shall have received, if requested
by the Agent, a Notice of Borrowing pursuant to Section 2.03 hereof no later
than 12:00 noon on the date of the proposed borrowing with respect to a Loan or
the L/C Issuer shall have received a Letter of Credit Application pursuant to
Section 3.03 hereof not later than 12:00 noon three Business Days prior to the
proposed date of issuance of a Letter of Credit.
(e) Delivery of Documents. The Agent shall have received such other
---------------------
agreements, instruments, approvals, opinions and other documents, each in form
and substance satisfactory to the Agent, as the Agent may reasonably request.
(f) Proceedings; Receipt of Documents. All proceedings in connection
---------------------------------
with the making of such Loan or the issuance of such Letter of Credit and the
other transactions contemplated by this Agreement, and all documents incidental
thereto, shall be satisfactory to the
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Agent and its special counsel, and the Agent and such special counsel shall have
received all such information and such counterpart originals or certified or
other copies of such documents as the Agent or such special counsel may
reasonably request.
ARTICLE VI
REPRESENTATIONS AND WARRANTIES
SECTION 6.01. Representations and Warranties of the Borrower. Each
----------------------------------------------
Borrower and Guarantor represents and warrants as follows:
(a) Organization, Good Standing, Etc. Each Borrower and Corporate
--------------------------------
Guarantor (i) is a corporation or limited liability company duly organized,
validly existing and in good standing under the laws of the state of its
organization set forth in the preamble hereto, (ii) has all requisite power and
authority to conduct its business as now conducted and as presently contemplated
and to make the borrowings hereunder and to consummate the transactions
contemplated hereby, and (iii) is duly qualified to do business and is in good
standing in each jurisdiction in which the character of the properties owned or
leased by it or in which the transaction of its business makes such
qualification necessary.
(b) Authorization, Etc. The execution, delivery and performance by
------------------
each Borrower and Corporate Guarantor of each Loan Document to which it is a
party, (i) have been duly authorized by all necessary action, (ii) do not and
will not contravene the charter, articles of organization, certificate of
formation, by-laws or operating agreement, any applicable law or any contractual
restriction binding on or otherwise affecting it or any of its properties, (iii)
do not and will not result in or require the creation of any Lien (other than
pursuant to any such Loan Document) upon or with respect to any of its
properties, and (iv) do not and will not result in any suspension, revocation,
impairment, forfeiture or nonrenewal of any permit, license, authorization or
approval applicable to its operations or any of its properties.
(c) Governmental Approvals. No authorization or approval or other
----------------------
action by, and no notice to or filing with, any Governmental Authority or other
regulatory body is required in connection with the due execution, delivery and
performance by each Borrower and Guarantor of any Loan Document to which it or
will be a party.
(d) Enforceability of Loan Documents. This Agreement is, and each
--------------------------------
other Loan Document to which each Borrower and Guarantor is or will be a party,
when delivered hereunder, will be, a legal, valid and binding obligation of the
Borrower and the Guarantors, enforceable against each Borrower and Guarantor in
accordance with its terms.
(e) Inventory Locations; Places of Business; Chief Executive Office.
---------------------------------------------------------------
There is no location at which any Borrower has any Inventory (except for
Inventory in transit) other than (i) those locations listed on Part A of
Schedule 6.01(e) hereto and (ii) any other locations approved in writing by the
Agent pursuant to the definition of "Eligible Inventory". Part B of
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Schedule 6.01(e) hereto contains a true, correct and complete list, as of the
Effective Date, of the legal names and addresses of each warehouse at which
Inventory of any Borrower is stored. None of the receipts received by a Borrower
from any warehouse states that the goods covered thereby are to be delivered to
bearer or to the order of a named Person or to a named Person and such named
Person's assigns. Part C of Schedule 6.01(e) sets forth a complete and accurate
list as of the date hereof of (a) each place of business of each Borrower and
Corporate Guarantor; and (B) the chief executive office of each Borrower and
Corporate Guarantor. Part D of Schedule 6.01(e) sets forth a complete and
accurate description and list as of the date hereof of the location, by state
and street address, of all real property owned and leased by the Borrowers and
the Corporate Guarantors.
(f) Subsidiaries. Schedule 6.01(f) hereto is a complete and correct
------------
description of the name, jurisdiction of incorporation and ownership of the
outstanding Capital Stock of each Subsidiary and Affiliate of each Borrower and
Corporate Guarantor in existence on the date hereof, including, in the case of
Affiliates of each Borrower and Corporate Guarantor, a description of the
relationship, including transactions, between such Affiliates and Borrowers or
Corporate Guarantors. All shares of Capital Stock owned by each Borrower and
Corporate Guarantor or one or more of its Subsidiaries or Affiliates, as
indicated in such Schedule, are owned free and clear of all liens, security
interests and other charges and encumbrances.
(g) Litigation. Except as set forth on Schedule 6.01(g) hereto, on
----------
the Effective Date there is no pending or, to the knowledge of the Borrowers and
the Guarantors, threatened action, suit or proceeding affecting any Borrower or
Guarantor or any of their respective Subsidiaries before any court or other
Governmental Authority or any arbitrator. There is no pending or threatened
action, suit or proceeding affecting any Borrower or Guarantor or any of their
respective Subsidiaries before any court or other Governmental Authority or any
arbitrator which is reasonably likely to result in a Material Adverse Effect.
(h) Financial Condition.
-------------------
(i) The Financial Statements, copies of which have been
delivered to the Lenders, fairly present the financial condition of each
Borrower and H.O.T. Kidz and of J&B and Hawk, as applicable, as at the
respective dates thereof and the results of operations of such Borrowers
and H.O.T. Kidz and J&B and Hawk, as applicable, for the fiscal periods
ended on such respective dates, all in accordance with generally accepted
accounting principles consistently applied, and since December 31, 1994
there has been no Material Adverse Effect.
(ii) Happy Kids has heretofore furnished to the Agent and the
Lenders projected balance sheets, income statements and statements of cash
flow for the Borrowers and H.O.T. Kidz prepared on a monthly basis for the
period from January 1, 1996 through December 31, 1996. Such projections
were believed at the time furnished and on the Effective Date to be
reasonable, have been prepared on a reasonable basis and in good faith by
Happy Kids, and have been based on assumptions believed by Happy Kids to be
reasonable at the time made and on the Effective Date and upon the best
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<PAGE>
information then reasonably available to Happy Kids and have been reviewed
by and are acceptable to a financial consultant, acceptable to the Agent
and the Lenders, retained by the Borrowers.
(i) Compliance with Law, Etc. No Borrower or Corporate Guarantor is
------------------------
in violation of its charter, articles of organization, certificate of formation,
by-laws or operating agreement, any law or any material term of any agreement or
instrument binding on or otherwise affecting it or any of its properties.
(j) ERISA. (i) Each Employee Plan is in substantial compliance with
-----
ERISA and the IRC, (ii) no Termination Event has occurred nor is reasonably
expected to occur with respect to any Employee Plan, (iii) the most recent
annual report (Form 5500 Series) with respect to each Employee Plan, including
Schedule B (Actuarial Information) thereto, copies of which have been filed with
the Internal Revenue Service and delivered to the Agent, is complete and correct
and fairly presents the funding status of such Employee Plan, and since the date
of such report there has been no material adverse change in such funding status,
(iv) no Employee Plan had an accumulated or waived funding deficiency or
permitted decreases which would create a deficiency in its funding standard
account or has applied for an extension of any amortization period within the
meaning of Section 412 of the IRC at any time during the previous 60 months, and
(v) no lien, security interest or other charge or encumbrance imposed under the
IRC or ERISA exists or is likely to arise on account of any Employee Plan within
the meaning of Section 412 of the IRC at any time during the previous 60 months.
No Borrower or Corporate Guarantor nor any of their respective ERISA Affiliates
have incurred any withdrawal liability under ERISA with respect to any
Multiemployer Plan, and no Borrower or Corporate Guarantor is aware of any facts
indicating that any Borrower or Corporate Guarantor or any of their respective
ERISA Affiliates may in the future incur any such withdrawal liability. Except
as required by Section 4980B of the IRC, neither any Borrower or Corporate
Guarantor nor any of their respective ERISA Affiliates maintains an employee
welfare benefit plan (as defined in Section 3(1) of ERISA) which provides health
or welfare benefits (through the purchase of insurance or otherwise) for any
retired or former employee of any Borrower or Corporate Guarantor or any of
their respective ERISA Affiliates or coverage after a participant's termination
of employment. Neither any Borrower nor any Corporate Guarantor nor any of their
respective ERISA Affiliates has incurred any liability or obligation under the
Worker Adjustment and Retraining Notification Act ("WARN") or similar state law,
which remains unpaid or unsatisfied. Neither any Borrower nor any Corporate
Guarantor nor any of their respective ERISA Affiliates has laid off more than
33% of its employees at any single site of employment in any 90-day period
during the last 12 months.
(k) Taxes, Etc. All Federal, state and local tax returns and other
----------
reports required by applicable law to be filed by each Borrower and Guarantor
have been filed, and all taxes, assessments and other governmental charges
imposed upon each Borrower or Guarantor or any property of such Borrower or
Guarantor and which have become due and payable on or prior to the date hereof
have been paid, except to the extent contested in good faith by proper
proceedings which stay the imposition of any penalty, fine or lien resulting
from the non-
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<PAGE>
payment thereof and with respect to which adequate reserves have been set aside
for the payment thereof.
(l) Regulation U. No Borrower or Corporate Guarantor is or will be
------------
engaged in the business of extending credit for the purpose of purchasing or
carrying margin stock (within the meaning of Regulation U issued by the Board of
Governors of the Federal Reserve System), and no proceeds of any Loan will be
used to purchase or carry any margin stock or to extend credit to others for the
purpose of purchasing or carrying any margin stock.
(m) Nature of Business. No Borrower or Corporate Guarantor or any of
------------------
their respective Subsidiaries are engaged in any business other than the
importation, distribution and sale of infant's and children's apparel.
(n) Adverse Agreements, Etc. No Borrower or Guarantor nor any of
-----------------------
their respective Subsidiaries are a party to any agreement or instrument, or
subject to any charter or other restriction or any judgment, order, regulation,
ruling or other requirement of a court or other Governmental Authority or
regulatory body, which is reasonably likely to have a Material Adverse Effect.
(o) Holding Company and Investment Company Acts. No Borrower or
-------------------------------------------
Corporate Guarantor is (i) a "holding company" or a "subsidiary company" of a
"holding company" or an "affiliate" of a "holding company", as such terms are
defined in the Public Utility Holding Company Act of 1935, as amended, or (ii)
an "investment company" or an "affiliated person" or "promoter" of, or
"principal underwriter" of or for, an "investment company", as such terms are
defined in the Investment Company Act of 1940, as amended.
(p) Permits, Etc. The Borrowers, the Corporate Guarantors and their
------------
respective Subsidiaries have all permits, licenses, authorizations and approvals
required for them lawfully to own and operate their business.
(q) Title to Properties. The Borrowers, the Corporate Guarantors and
-------------------
their respective Subsidiaries have good and marketable title to all of their
properties and assets, free and clear of all Liens except such as are permitted
by Section 7.02(a) hereof.
(r) Full Disclosure. No Loan Document or schedule or exhibit thereto
---------------
and no certificate, report, statement or other document or information furnished
to the Lenders in connection herewith or with the consummation of the
transactions contemplated hereby, contains any material misstatement of fact or
omits to state a material fact or any fact necessary to make the statements
contained herein or therein not misleading. There is no fact materially
adversely affecting the condition or operations, financial or otherwise, or the
business or prospects of the Borrowers, the Guarantors or any of their
respective Subsidiaries which has not been set forth in a footnote included in
the Financial Statements or a Schedule hereto.
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<PAGE>
(s) Operating Lease Obligations. The Borrowers and the Corporate
---------------------------
Guarantors do not have any obligations as lessee for the payment of rent for any
real or personal property other than the Operating Lease Obligations set forth
in Schedule 6.01(s) hereto.
(t) Environmental Matters. Except as disclosed in Schedule 6.01(t)
---------------------
hereto, (i) none of the operations of the Borrowers, the Corporate Guarantors or
their respective Subsidiaries are the subject of any federal, state or local
investigation to determine whether any remedial action is needed to address the
presence, Release or threatened Release of any Hazardous Material into the
environment, (ii) the Borrowers, the Corporate Guarantors and their respective
Subsidiaries do not have any liability or contingent or potential liability in
connection with any Release of any Hazardous Material into the indoor or outdoor
environment and none of the Borrowers or Corporate Guarantors knows of any
facts, circumstances or conditions likely to give rise to such liability, (iii)
the operations of and the properties owned or used by the Borrowers, the
Corporate Guarantors and their respective Subsidiaries comply in all respects
with all Environmental Laws, and (iv) there has been no Release, generation,
use, storage, recycling or treatment of any Hazardous Material on, the
Collateral or, to the best knowledge of the Borrowers and the Corporate
Guarantors, any property or facility owned, operated or occupied by the
Borrowers and the Corporate Guarantors or any of their Subsidiaries.
(u) Schedules. All of the information which is required to be
---------
scheduled to this Agreement is set forth on the Schedules attached hereto, is
correct and accurate and does not omit to state any information material
thereto.
(v) Insurance. The Borrowers, the Corporate Guarantors and their
---------
respective Subsidiaries keep their properties adequately insured and maintain
(i) insurance to such extent and against such risks, including fire, as is
customary with companies in the same or similar businesses, (ii) workmen's
compensation insurance in the amount required by applicable law, (iii) public
liability insurance, which shall include product liability insurance, in the
amount customary with companies in the same or similar business against claims
for personal injury or death on properties owned, occupied or controlled by
them, and (iv) such other insurance as may be required by law or as may be
reasonably required in writing by the Agent.
(w) Use of Proceeds. The proceeds of the Loans shall be used to repay
---------------
existing indebtedness of the Borrowers to the Existing Lenders and for general
working capital purposes. The Letters of Credit will be used to purchase and
finance Inventory in the ordinary course of the Borrowers' business.
(x) Security Interest. The Security Agreements and the Cash
-----------------
Collateral Agreement create and grant to the Agent, for the benefit of the
Lenders, a legal, valid and perfected first priority (except as permitted by
Section 7.02(a) hereof) security interest in the Collateral. Such Collateral is
not subject to any other Lien whatsoever, except as permitted by Section 7.02(a)
hereof.
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<PAGE>
(y) Tradenames. Schedule 6.01(y) hereto sets forth a complete and
----------
accurate list as of the Effective Date of all tradenames used by the Borrowers
and the Corporate Guarantor on or before the Effective Date.
(z) Solvency. After giving effect to the transactions contemplated by
--------
the terms of this Agreement and before and after giving effect to each Loan and
Letter of Credit: (i) the fair value of the assets of each Borrower exceeds the
book value of the liabilities of each Borrower and each Corporate Guarantor,
(ii) each Borrower and each Corporate Guarantor is generally able to pay its
debts as they become due and payable, and (iii) each Borrower and each Corporate
Guarantor does not have unreasonably small capital to carry on its business as
it is currently conducted.
(aa) Material Contracts. Set forth on Schedule 6.01 (aa) hereto is a
------------------
complete and accurate list as of the Effective Date of all Material Contracts of
the Borrowers and the Corporate Guarantors, showing the parties and subject
matter thereof and amendments and modifications thereto. Each such Material
Contract (i) is in full force and effect and is binding upon and enforceable
against each Borrower and Corporate Guarantor that is a party thereto and, to
the best of such Person's knowledge, all other parties thereto in accordance
with its terms, (ii) has not been otherwise amended or modified, and (iii) there
exists no default under any Material Contract by any Borrower and Corporate
Guarantor, or to such Person's knowledge, any other party thereto.
ARTICLE VII
COVENANTS OF THE BORROWER
SECTION 7.01. Affirmative Covenants. So long as any principal of or
---------------------
interest on the Loans or the Reimbursement Obligations or any other Letter of
Credit Obligations (whether or not due) shall remain unpaid or the Lenders shall
have any Credit Exposure hereunder, each Borrower, each Corporate Guarantor and,
where appropriate, each Individual Guarantor will, unless the Required Lenders
shall otherwise consent in writing:
(a) Reporting Requirements. Furnish to the Lenders:
----------------------
(i) as soon as available, and in any event within 45 days after
the end of each of the first and third fiscal quarters in each fiscal year
of Happy Kids, combined and combining balance sheets, combined and
combining statements of income and retained earnings and combined and
combining statements of cash flow of the Borrowers and H.O.T. Kidz as at
the end of such quarter; and for the period commencing at the end of the
immediately preceding fiscal year and ending with the end of such quarter,
setting forth in comparative form the corresponding figures for the
corresponding date or period of the immediately preceding fiscal year and
setting forth in comparative form the corresponding figures set forth in
the financial projections delivered to the Lenders on or prior to the
Effective Date and in the most recent financial projections delivered by
the Borrowers to the Lenders pursuant to clause (x) of this Section
7.01(a), all in reasonable
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<PAGE>
detail and prepared in accordance with GAAP, duly certified by the chief
executive officer of Happy Kids as (A) fairly presenting the financial
condition of the Borrowers and H.O.T. Kidz at the end of such quarter and
the results of the operations of the Borrowers and H.O.T. Kidz for such
periods (subject to normal year-end audit adjustments), and (B) having been
prepared in accordance with GAAP;
(ii) as soon as available and in any event within 60 days after
the end of the second fiscal quarter of Happy Kids, combined and combining
balance sheets, combined and combining statements of income and retained
earnings and combined and combining statements of cash flow of the
Borrowers and H.O.T. Kidz for such fiscal quarter and for the six-month
period ended at the end of such quarter, setting forth in each case in
comparative form the figures for the corresponding quarter and the
corresponding six-month period of the previous fiscal year and setting
forth in comparative form the corresponding figures set forth in the
financial projections delivered to the Lenders on or prior to the Effective
Date and in the most recent financial projections delivered by the
Borrowers to the Lenders pursuant to clause (x) of this Section 7.01 (a),
all in reasonable detail and prepared in accordance with GAAP and, in the
case of the combined financial statements, accompanied by a review report
thereon of the Happy Kids' certified public accountants Grant Thornton, LLP
or other independent public accountants acceptable to the Agent and the
Required Lenders, which report shall state that such accountants reviewed
such semi-annual financial statements and that based on such review, such
accountants are not aware of any material modifications that should be made
in such financial statements in order for them to be in conformity with
GAAP;
(iii) as soon as available, and in any event within 90 days
after the end of each fiscal year of Happy Kids, combined and combining
balance sheets, combined and combining statements of income and retained
earnings and combined and combining statements of cash flow of the
Borrowers and H.O.T. Kidz as at the end of such fiscal year, setting forth
in comparative form the corresponding figures for the immediately preceding
fiscal year and setting forth in comparative form the corresponding figures
set forth in the financial projections delivered to the Lenders on or prior
to the Effective Date and in the most recent financial projections
delivered by the Borrowers to the Lenders pursuant to clause (x) of this
Section 7.01(a), all in reasonable detail and prepared in accordance with
GAAP, and, in the case of the combined financial statements accompanied by
an audit report and with an unqualified opinion of Grant Thornton, LLP or
other independent certified public accountants of recognized standing
selected by Happy Kids and satisfactory to the Agent and the Required
Lenders, together with a written statement of such accountants (A) to the
effect that, in making the examination necessary for their unqualified
opinion of such financial statements, they have not obtained any knowledge
of the existence of an Event of Default as it relates to Sections 7(l)(i)
through (iii) and insofar as it relates to accounting matters and (B) if
such accountants shall have obtained any knowledge of the existence of such
Event of Default described in clause (A) above, describing the nature
thereof;
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<PAGE>
(iv) as soon as available and in any event within 60 days after
the end of the second fiscal quarter of Hawk and J&B, balance sheets,
statements of income and retained earnings and statements of cash flow of
each such Corporate Guarantor for the six-month period ended at the end of
such quarter, setting forth in each case in comparative form the figures
for the corresponding six-month period of the previous fiscal year, all in
reasonable detail and prepared in accordance with GAAP, duly certified by
the chief executive officer of each such Corporate Guarantor as (A) fairly
presenting the financial condition of such Corporate Guarantor at the end
of such six-month period and the results of operations of such Corporate
Guarantors for such period (subject to year-end adjustments) and (B) having
been prepared in accordance with GAAP;
(v) as soon as available, and in any event within 90 days
after the end of each fiscal year of Hawk and J&B, balance sheets,
statements of income and retained earnings and statements of cash flow of
each such Corporate Guarantor as at the end of such fiscal year, setting
forth in comparative form the corresponding figures for the immediately
preceding fiscal year, all in reasonable detail and prepared in accordance
with GAAP and accompanied by a review report thereon of Grant Thornton, LLP
or other independent public accountants acceptable to the Agent and the
Required Lenders, which report shall state that such accountants reviewed
such annual financial statements and that based on such review, such
accountants are not aware of any material modifications that should be made
in such financial statements in order for them to be in conformity with
GAAP;
(vi) as soon as available and in any event within 30 days of
the end of each month, an internally prepared combined balance sheets,
combined statements of income and retained earnings and combined statements
of cash flow for such month of the Borrowers and H.O.T. Kidz and for the
period commencing at the end of the immediately preceding fiscal year and
ending at the end of such month, setting forth in comparative form the
corresponding figures for the corresponding period of the immediately
preceding fiscal year, all in reasonable detail and prepared in accordance
with GAAP;
(vii) simultaneously with the delivery of the financial
statements required by clauses (i), (ii), (iii), (iv) and (v) of this
Section 7.01(a), a certificate of the chief executive officer of Happy
Kids, (A) stating that such officer has reviewed the provisions of this
Agreement and the other Loan Documents to which the Borrowers and the
Corporate Guarantors are a party and has made or caused to be made under
his supervision a review of the condition and operations of the Borrowers
and the Corporate Guarantors during the period covered by such financial
statements with a view to determining whether the Borrowers and the
Corporate Guarantors were in compliance with all of the provisions of such
Loan Documents at the times such compliance is required by the Loan
Documents, and that such review has not disclosed, and such officer has no
knowledge of, the existence during such period of an Event of Default or
Potential Default or, if an Event of Default or such Potential Default
existed, describing the nature and period of existence thereof and the
action which the Borrowers and the Corporate
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<PAGE>
Guarantors propose to take or took with respect thereto, (B) containing a
breakdown of the expenses set forth on such financial statements together
with any back-up requested by the Agent, and (C) containing a schedule
showing the calculations specified in Section 7.01(1) of this Agreement;
(viii) within 15 days after the end of each month, a schedule, in
form and substance reasonably satisfactory to the Agent, current as of the
close of business on the last day of such month, certified by the chief
executive officer of Happy Kids (A) of all Accounts Receivable of the
Borrowers existing on the Effective Date showing separately those which are
more than 30, 60, 90 and 120 days old and a description of all Liens, set-
offs, defenses and counterclaims with respect thereto reasonably
satisfactory to the Agent and current as of the close of business on the
last day of such month together with a reconciliation of such schedule with
the schedule delivered to the Lenders pursuant to this clause (A) for the
prior month and (B) containing a breakdown of the Borrowers' Inventory on a
combined basis for all Borrowers and on an individual basis by Borrower, by
amount and valued at the lower of cost or market value (which shall include
dollar valuation by location and dollar valuation by the season for which
the Inventory was manufactured to be sold) and warehouse and production
facility location, appropriately completed with information satisfactory to
the Agent, incorporating all appropriate month-end adjustments and current
as of the close of business on the last day of such month immediately prior
to such date;
(ix) within 15 days after the end of each month, a schedule, in
form and substance satisfactory to the Agent, current as of the close of
business on the last day of such month, certified by the chief executive
officer of Happy Kids, containing all Inventory by style and season, all
open orders by style and season and all Inventory by style and season
available to be shipped against such orders;
(x) financial projections, prepared on a monthly basis on or
before November 1 of each calendar year for the succeeding calendar year
for the Borrowers and H.O.T. Kidz and on or before August 15 of each
calendar year for the following "spring season" of the Borrowers and H.O.T.
Kidz, such financial projections to be reasonable, to be prepared on a
reasonable basis and in good faith, and to be based on assumptions believed
by the Borrowers and H.O.T. Kidz to be reasonable at the time made and from
the best information then available to the Borrowers and H.O.T. Kidz,
provided that, in order to satisfy the requirements of this clause (x),
such financial projections must (A) be reasonably acceptable to the Agent
and the Lenders and (B) be reviewed by and be acceptable to a financial
consultant, acceptable to the Agent and the Lenders, retained by the
Borrowers;
(xi) promptly after submission to any Government Authority all
documents and information furnished to such Government Authority in
connection with any investigation of any Borrower or Guarantor other than
inquiries by such Governmental Authority that will not adversely effect in
any material respect any
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<PAGE>
Borrower, any Guarantor, the Collateral or the rights of the Lenders, CIT,
the Agent or the L/C Issuer under this Agreement or the other Loan
Documents.;
(xii) as soon as possible, and in any event within five days
after the occurrence of an Event of Default or Potential Default, or a
material adverse change in the condition or operations, financial or
otherwise, of the Borrowers, the Guarantors or any of their respective
Subsidiaries, the written statement of the chief executive officer or the
chief financial officer of Happy Kids, setting forth the details of such
Event of Default, Potential Default or material adverse change and the
action which the Borrowers and the Guarantors propose to take with respect
thereto;
(xiii) (A) as soon as possible and in any event (1) within 30
days after the Borrowers, the Corporate Guarantors or any of their
respective ERISA Affiliates knows or has reason to know that any
Termination Event described in clause (i) of the definition of Termination
Event with respect to any Employee Plan has occurred, (2) within 10 days
after the Borrowers, the Corporate Guarantors or any of their respective
ERISA Affiliates knows or has reason to know that any other Termination
Event with respect to any Employee Plan has occurred, and (3) within 10
days after any of the Borrowers, any of the Corporate Guarantors or any of
their respective ERISA Affiliates knows or has reason to know that an
accumulated funding deficiency has been incurred or an application has been
made to the Secretary of the Treasury for a waiver or modification of the
minimum funding standard (including installment payments) or an extension
of any amortization period under Section 412 of the IRC with respect to an
Employee Plan, a statement of the chief financial officer of Happy Kids
setting forth the details of such occurrence and the action, if any, which
the Borrowers, the Corporate Guarantors or any of their respective ERISA
Affiliate proposes to take with respect thereto, (B) promptly and in any
event within two Business Days after receipt thereof by the Borrowers, the
Corporate Guarantors or any of their respective ERISA Affiliates from the
PBGC, copies of each notice received by the Borrowers, the Corporate
Guarantors or any of their respective ERISA Affiliates of the PBGC's
intention to terminate any Plan or to have a trustee appointed to
administer any Plan, (C) promptly and in any event within 30 days after the
filing thereof with the Internal Revenue Service, copies of each Schedule B
(Actuarial Information) to the annual report (Form 5500 Series) with
respect to each Employee Plan and Multiemployer Plan, (D) promptly and in
any event within five Business Days after receipt thereof by the Borrowers,
the Corporate Guarantors or any of their respective ERISA Affiliates from a
sponsor of a Multiemployer Plan or from the PBGC, a copy of each notice
received by the Borrowers, the Corporate Guarantors or any of their
respective ERISA Affiliates concerning the imposition or amount of
withdrawal liability under Section 4202 of ERISA or indicating that such
Multiemployer Plan may enter reorganization status under Section 4241 of
ERISA and (E) promptly and in any event within 1O days after any of the
Borrowers, any of the Corporate Guarantors or any of their respective ERISA
Affiliates sends notice of a plant closing or mass layoff (as defined in
WARN) to employees, copies of each such notice sent by the Borrowers, the
Corporate Guarantors or any of their respective ERISA Affiliates;
-46-
<PAGE>
(xiv) promptly after the commencement thereof but in any event
not later than five days after service of process with respect thereto on,
or the obtaining of knowledge thereof by, the Borrowers or the Guarantors,
notice of each action, suit or proceeding before any court or other
Governmental Authority or other regulatory body or any arbitrator which may
materially adversely affect the operations or condition, financial or
otherwise, of the Borrowers or the Corporate Guarantors;
(xv) with respect to each Individual Guarantor (A) complete
annual financial statements, in form and substance reasonably satisfactory
to the Agent, together with a schedule of contingent liabilities, no later
than April 30 of each year for the prior calendar year and (B) federal,
state and local tax returns no later than 45 days after the filing date,
each certified as a true and correct copy thereof, by each of the
Individual Guarantors;
(xvi) as soon as available and in any event (A) within 5 days
after receipt or delivery thereof, copies of any notices that the Borrowers
receive from or send to any Licensor, other than notices that (1) are made
in the ordinary course of business, (2) do not involve matters that will
result in a material increase in the obligations or liabilities of the
Borrowers under any License Agreement and (3) will not adversely effect in
any material respect the Borrowers, the Collateral or the rights of the
Lenders, CIT, the Agent or the L/C Issuer under this Agreement or the other
Loan Agreements (B) within 5 Business Days after entering into any License
Agreement not in effect on the Effective Date, a copy of the License
Agreement, and (C) within 5 Business Days prior to the effective date
thereof, copies of any amendments, modifications, waivers or other changes
to the License Agreements or the Subordinated Note; and
(xvii) promptly upon request, such other information concerning
the condition or operations, financial or otherwise, of the Borrowers or
the Guarantors as the Agent from time to time may reasonably request.
(b) Guaranties, Etc. Cause each of the Subsidiaries of each Borrower
---------------
and Corporate Guarantor to execute and deliver to the Agent promptly upon the
formation or acquisition thereof (i) a guaranty, substantially in the form of
Exhibit B hereto, guaranteeing the Obligations, and (ii) a security agreement,
in form and substance satisfactory to the Agent, securing such guaranty,
securing such guaranty, and, in connection with such delivery, cause to be
delivered to the Agent, in form and substance satisfactory to the Agent, a
favorable written opinion of counsel satisfactory to the Agent as to such
matters relating thereto as the Agent may reasonably request, together with such
other agreements, instruments, approvals or other documents as the Agent may
reasonably request.
(c) Compliance with Laws, Etc. Comply, and cause each of their
-------------------------
respective Subsidiaries to comply, in all material respects with all applicable
laws, rules, regulations and orders (including, without limitation,
Environmental Laws), such compliance to include, without limitation, (i) paying
before the same become delinquent all taxes, assessments and governmental
charges or levies imposed upon it or upon its income or profits or upon any of
its properties, and
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<PAGE>
(ii) paying all lawful claims which if unpaid might become a lien or charge upon
any of its properties, except to the extent contested in good faith by proper
proceedings which stay the imposition of any penalty, fine or lien resulting
from the non-payment thereof and with respect to which adequate reserves have
been set aside for the payment thereof.
(d) Preservation of Existence, Etc. Maintain and preserve, and cause
------------------------------
each of their Subsidiaries to maintain and preserve, its existence, rights and
privileges, and become or remain duly qualified and in good standing in each
jurisdiction in which the character of the properties owned or leased by them or
in which the transaction of their business makes such qualification necessary.
(e) Keeping of Records and Books of Account. Keep, and cause each of
---------------------------------------
their Subsidiaries to keep, adequate records and books of account, with complete
entries made in accordance with generally accepted accounting principles
consistently applied.
(f) Inspection Rights. Permit, and cause each of their Subsidiaries
-----------------
to permit, the Agent, or any agents or representatives thereof at any time and
from time to time during normal business hours to examine and make copies of and
abstracts from their records and books of account, to visit and inspect their
properties, to conduct audits or examinations and to discuss their affairs,
finances and accounts with any of the directors, officers, managerial employees,
independent accountants or other representatives thereof.
(g) Maintenance of Properties, Etc. Maintain and preserve, and cause
------------------------------
each of their Subsidiaries to maintain and preserve, all of their properties
which are necessary or useful in the proper conduct of their business in good
working order and condition, ordinary wear and tear excepted, and comply, and
cause each of their Subsidiaries to comply, at all times with the provisions of
all leases to which each of them is a party as lessee or under which each of
them occupies property, so as to prevent any loss or forfeiture thereof or
thereunder.
(h) Maintenance of Insurance. Maintain, and cause each of their
------------------------
Subsidiaries to maintain, with responsible and reputable insurance companies or
associations insurance (including, without limitation, comprehensive general
liability and hazard insurance) with respect to their properties and business,
in such amounts and covering such risks, as is required by any Governmental
Authority or other regulatory body having jurisdiction with respect thereto and
as is carried generally in accordance with sound business practice by companies
in similar businesses similarly situated.
(i) Environmental Indemnity. (a) Comply with the requirements of all
-----------------------
Environmental Laws applicable to each Borrower and Corporate Guarantor and
provide to the Agent all documentation in connection with such compliance that
the Agent may reasonably request; and (b) not cause or permit the Collateral or
any property or facility owned, operated or occupied by the Borrowers, the
Corporate Guarantors or any of their respective Subsidiaries to be used for any
activities involving, directly or indirectly, the use, generation, treatment,
storage, release or disposal of any Hazardous Materials. On behalf of the
Borrowers, the Corporate Guarantors and their respective Subsidiaries, the
Borrowers jointly and severally hereby agree to
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<PAGE>
defend, indemnify, and hold harmless the Agent, the Lenders and the L/C Issuer,
their employees, agents, officers, and directors, from and against any claims,
demands, penalties, fines, liabilities, settlements, damages, costs, or expenses
(including, without limitation, attorney and consultant fees, investigation and
laboratory fees, court costs, and litigation expenses) arising out of (i) the
presence, disposal, release, or threatened release of any Hazardous Materials
on any property at any time owned or occupied by the Borrowers or the Corporate
Guarantors (or its predecessors in interest or title); (ii) any personal injury
(including wrongful death) or property damage (real or personal) arising out of
or related to such Hazardous Materials; (iii) any investigation, lawsuit brought
or threatened, settlement reached, or government order relating to such
Hazardous Materials; (iv) any violation of any Environmental Law, and/or (v)
the breach of any representation or warranty made by the Borrowers and the
Corporate Guarantors in Section 6.01(t) hereof or the breach of any covenant
made by any of the Borrowers in this Section 7.01(i).
(j) Further Assurances. The Borrowers and the Guarantor shall, and
------------------
shall cause each Subsidiary to, do, execute, acknowledge and deliver, at the
sole cost and expense of the Borrowers all such further acts, deeds,
conveyances, mortgages, assignments, estoppel certificates, financing
statements, notices of assignment, transfers and assurances as the Agent may
require from time to time in order to better assure, convey, grant, assign,
transfer and confirm unto the Agent, the Lenders and the L/C Issuer the rights
now or hereafter intended to be granted to the Agent, the Lenders and the L/C
Issuer under this Agreement, any Loan Document or any other instrument under
which the Borrowers, the Guarantors or any of their respective Subsidiaries may
be or may hereafter become bound for carrying out the intention or facilitating
the performance of the terms of the Agreement.
(k) Borrowing Base. Maintain all Loans and Letters of Credit in
--------------
compliance with the then current Borrowing Base.
(l) Financial Covenants.
-------------------
(i) Tangible Net Worth. Maintain Combined Tangible Net Worth (before
------------------
any LIFO adjustments made for the prior fiscal year in accordance with
GAAP) on each date set forth below of at least:
<TABLE>
<CAPTION>
Minimum Combined
Date Tangible Net Worth
---- ------------------
<S> <C>
December 31, 1995 $5,550,000
March 31, 1996 $6,500,000
June 30, 1996 $6,100,000
September 30, 1996 $7,300,000
December 31, 1996 $7,250,000
</TABLE>
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<PAGE>
(ii) Working Capital. Maintain Working Capital (before any LIFO
---------------
adjustments made for the prior fiscal year in accordance with GAAP) on each
date set forth below of at least:
<TABLE>
<CAPTION>
Minimum Working
Date Capital
---- ------------------
<S> <C>
March 31, 1996 $750,000
June 30, 1996 $850,000
September 30, 1996 $2,450,000
December 31, 1996 $2,350,000
</TABLE>
(iii) Net Loss. (A) Not incur a Cumulative Net Loss (before any LIFO
--------
adjustments made for the prior fiscal year in accordance with GAPP) for
the Borrowers and H.O.T. Kidz at the end of any fiscal quarter of Happy
Kids.
(B) Not incur a Net Loss of more than $100,000 on a combined
basis for Hawk and J&B in any calendar year
(iv) Upon receipt of the financial projections required to be
delivered to the Lenders pursuant to Section 7.01(a)(x) for a calendar
year, Happy Kids and the Lenders shall negotiate in good faith to determine
minimum Combined Tangible Net Worth, minimum Working Capital, and combined
and individual Net Loss for each Borrower and Corporate Guarantor for the
calendar year covered by such projections.
(m) Key Man Life Insurance. Maintain at all times key man or other
----------------------
life insurance policies on the life of Jack Benun from a responsible and
reputable life insurance company in an amount of not less than $3,000,000,
together with an assignment of such life insurance policies to the Agent for the
benefit of the Lenders.
(n) Change in Collateral; Collateral Records. Give the Agent not
----------------------------------------
less than thirty days' prior written notice of any change in the location of any
Collateral, other than Collateral to be moved to locations that as of the date
hereof are known to the Agent and at which the Agent has filed financing
statements and otherwise fully perfected its Liens thereon. The Borrowers shall
also advise the Agent promptly, in sufficient detail, of any material adverse
change relating to the type, quantity or quality of the Collateral or the Lien
granted thereon. The Borrowers agree to execute and deliver to the Agent for the
benefit of the Lenders from time to time, solely for the Agent's convenience in
maintaining a record of Collateral, such written statements and schedules as the
Agent may reasonably require, designating, identifying or describing the
Collateral. The Borrowers' failure, however, to promptly give the Agent such
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<PAGE>
statements or schedules shall not effect, diminish or modify or otherwise limit
the Lenders' security interest in the Collateral.
(o) Financial Consultant. The Borrowers and the Corporate Guarantors
--------------------
shall retain and cause to be retained at all times during the term of this
Agreement a financial consultant reasonably acceptable to the Lenders, and the
nature and scope of the work to be performed by such financial consultant shall
be reasonably acceptable to the Lenders.
(p) Subordinated Debt. On or before February 28, 1996, the Agent
-----------------
shall have received evidence satisfactory to it that the Borrowers have received
from Jack M. Benun proceeds of subordinated debt in an aggregate amount of not
less than $200,000, which together with the subordinated debt of $1,200,000
existing on the Effective Date shall be subject to the terms of the
Subordination Agreement.
(q) Tax Returns. As soon as possible and in any event on or before
-----------
April 15, 1996, the Individual Guarantors shall file all federal, state and
local tax returns and other information necessary to obtain any tax refunds for
the 1995 tax year.
(r) Tax Audits. As soon as possible and in any event within five
----------
days after a written settlement is executed by Happy Kids and the Internal
Revenue Service, the Agent shall have received evidence satisfactory to it that
the audit by the Internal Revenue Service for the 1991, 1992 and 1993 tax years
of Happy Kids has been settled and that the aggregate payments made by Happy
Kids in connection with such settlement did not exceed $250,000.
SECTION 7.02. Negative Covenants. So long as any principal of or
------------------
interest on the Loans or the Reimbursement Obligations or any Letter of Credit
Obligations (whether or not due) shall remain unpaid or any Lender shall have
any Credit Exposure hereunder, no Borrower or Corporate Guarantor will, without
the prior written consent of the Required Lenders:
(a) Liens, Etc, Create or suffer to exist, or permit any of their
----------
Subsidiaries to create or suffer to exist, any Lien upon or with respect to any
of their properties, rights or other assets, whether now owned or hereafter
acquired, or assign or otherwise transfer, or permit any of its Subsidiaries to
assign or otherwise transfer, any right to receive income, other than:
(i) Liens created pursuant to the Loan Documents;
(ii) Liens existing on the date hereof, as set forth in Schedule
7.02(a)(ii) hereto, but not the (A) extension of coverage thereof to other
property or the extension of maturity, refinancing or other modification of
the terms thereof or of the Indebtedness secured thereby;
(iii) Liens for taxes, assessments or governmental charges or levies
to the extent that the payment thereof shall not be required by Section
7.01(c) hereof;
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<PAGE>
(iv) Liens created by operation of law, such as materialmen's Liens,
mechanics' Liens and other similar Liens, arising in the ordinary course of
business and securing claims the payment of which shall not be required by
Section 7.01(c) hereof,
(v) deposits, pledges or Liens (other than Liens arising under
ERISA or the IRC) securing (A) obligations incurred in respect of workers'
compensation, unemployment insurance or other forms of governmental
insurance or benefits, (B) the performance of bids, tenders, leases,
contracts (other than for the payment of money) and statutory obligations,
or (C) obligations on surety or appeal bonds, but only to the extent such
deposits, pledges or liens are incurred or otherwise arise in the ordinary
course of business and secure obligations which are not past due;
(vi) restrictions on the use of real property and minor
irregularities in the title thereto which do not (A) secure obligations for
the payment of money or (B) materially impair the value of such property or
its use by the Borrowers, the Corporate Guarantors or any of their
Subsidiaries in the normal conduct of such Person's business;
(vii) Liens created under the Factoring Agreements;
(viii) purchase money Liens on or purchase money security interests in
equipment acquired or held in the ordinary course of business of the
Borrowers, the Corporate Guarantors and their Subsidiaries securing
Indebtedness not exceeding the aggregate principal amount of $200,000 in
any year for the Borrowers, the Corporate Guarantors and their
Subsidiaries; and
(ix) Liens created under the Existing Factoring Agreement.
(b) Indebtedness. Create, incur or suffer to exist, or permit any
------------
of their Subsidiaries to create, incur or suffer to exist, any Indebtedness,
other than:
(i) Indebtedness created hereunder or under the Notes or any Letter
of Credit;
(ii) Indebtedness existing on the date hereof, as set forth in
Schedule 7.02(b)(ii) hereto, but not the extension of maturity, refinancing
or other modification of the terms thereof if such extension, refinancing
or other modification increases the amount of such Indebtedness or results
in terms that are more restrictive to the Borrower or Corporate Guarantor;
(iii) Indebtedness represented by accounts payable incurred in the
ordinary course of business;
(iv) Indebtedness owing to any Borrower or Corporate Guarantor by
any other Borrower or Corporate Guarantor;
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<PAGE>
(v) Indebtedness permitted by subsection (c) of this Section 7.02;
(vi) Indebtedness of any Borrower the payment of which is fully
subordinated to the payment of the Obligations on terms fully approved in
writing by each Lender, provided that such Indebtedness is not secured;
(vii) Indebtedness evidenced by the Subordinated Note;
(viii) Indebtedness represented by minimum royalty payments under any
License Agreement not existing on the Effective Date, provided that the
aggregate amount of all such Indebtedness does not exceed $250,000 in any
year; and
(ix) Indebtedness secured by Liens permitted by clause (viii) of
subsection (a) of this Section 7.02.
(c) Guaranties, Etc. Assume, guarantee, endorse or otherwise become
---------------
directly or contingently liable (including, without limitation, liable by way of
agreement, contingent or otherwise, to purchase, to provide funds for payment,
to supply funds to or otherwise invest in the debtor or otherwise to assure the
creditor against loss), in connection with any Indebtedness of any other Person,
other than:
(i) guaranties by endorsement of negotiable instruments for deposit
or collection in the ordinary course of business;
(ii) guaranties existing on the date hereof, as set forth in
Schedule 7.02(c)(ii) hereto, but not any renewal or other modification
thereof; and
(iii) guaranties of the Indebtedness permitted by clause (viii) of
subsection (b) of this Section 7.02.
(d) Merger, Consolidation, Sale of Asset Etc.
----------------------------------------
(A) Merge or consolidate with any Person, or permit any of
their Subsidiaries to merge or consolidate with, any Person; provided, however,
-------- -------
that any Subsidiary of the Borrowers or the Corporate Guarantors may be merged
into a Borrower or a Corporate Guarantor or another such Subsidiary, or may
consolidate with another such Subsidiary, so long as (i) no other provision of
this Agreement would be violated thereby, and (ii) Happy Kids gives the Lenders
at least 30 days' prior written notice of such merger or consolidation.
(B) Sell, assign, lease or otherwise transfer or dispose of, or
permit any of their Subsidiaries to sell, assign, lease or otherwise transfer or
dispose of, whether in one transaction or in a series of related transactions,
any substantial portion of its properties, rights or other assets (whether now
owned or hereafter acquired) to any Person; provided, however, that any
-------- -------
Subsidiary of the Borrowers or the Corporate Guarantors may sell, assign or
otherwise transfer its properties, rights or other assets to the Borrowers or
the Corporate Guarantors or to
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<PAGE>
another such Subsidiary so long as (x) no other provision of this Agreement
would be violated thereby and (y) Happy Kids gives the Lender at least 30 days'
prior written notice of such sale, assignment or other transfer.
(e) Change in Nature of Business. Make, or permit any of their
----------------------------
Subsidiaries to make, any change in the nature of its business as carried on at
the date hereof.
(f) Investments, Etc. Make, or permit any of its Subsidiaries to
----------------
make, any loan or advance to any Person or purchase or otherwise acquire, or
permit any of its Subsidiaries to purchase or otherwise acquire, any capital
stock, properties, assets or obligations of, or any interest in, any Person,
other than:
(i) Permitted Investments; and
(ii) investments existing on the date hereof, as set forth in Schedule
7.02(f)(ii) hereto.
(g) Lease Obligations. Create, incur or suffer to exist, or permit
-----------------
any of their Subsidiaries to create, incur or suffer to exist, any obligations
as lessee (i) for the payment of rent for any real or personal property in
connection with any sale and leaseback transaction, or (ii) for the payment of
rent for any real or personal property under leases or agreements to lease other
than (A) obligations under Capitalized Leases (other than the existing
Capitalized Leases set forth on Schedule 7.02(g) hereto) which would not cause
the aggregate amount of all obligations under Capitalized Leases entered into
after the Effective Date owing by the Borrowers, the Corporate Guarantors and
their respective Subsidiaries in any 12-month period to exceed the amounts set
forth in subsection (h) of this Section 7.02, and (B) Operating Lease
Obligations which would not cause the aggregate amount of all Operating Lease
Obligations owing by the Borrowers, the Corporate Guarantors and their
Subsidiaries in any 12-month period to exceed $100,000 or such greater amount as
shall be approved by the Required Lenders.
(h) Capital Expenditures. Make or be committed to make, or permit any
--------------------
of its Subsidiaries to make or be committed to make, any expenditure (by
purchase or capitalized lease) for fixed or capital assets other than
expenditures (including obligations under Capitalized Leases) which would not
cause the aggregate amount of all such expenditures to exceed $200,000.
(i) Dividends, Prepayments, Etc.
---------------------------
(1) Declare or pay any dividends or distributions, purchase or
otherwise acquire for value any of its Capital Stock now or hereafter
outstanding, return any capital to its stockholders or members as such, or
make any other payment or distribution of assets to its stockholders or
members as such, or permit any of its Subsidiaries to do any of the
foregoing, provided that, so long as after giving effect to any Tax
--------
Distribution no Event of Default shall have occurred and be continuing, any
Borrower or Corporate Guarantor that is a Subchapter S Corporation or a
limited liability
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<PAGE>
company (a "Non-Taxed Entity") may make a tax distribution (the "Tax
---
Distribution") with respect to each fiscal year of such Non-Taxed Entity
------------
which, in the aggregate, may be equal to the amount of the income tax
liability such Non-Taxed Entity would have had for such fiscal year if such
Non-Taxed Entity were an individual subject to federal, state of New York
and City of New York income tax at the highest applicable marginal tax
rates in effect in each jurisdiction for such year and taking into account
the deductibility of the state and city income taxes for federal purposes
and the characterization of the income of such Non-Taxed Entity as ordinary
income or capital gain, as appropriate, provided further, that the Tax
-------- -------
Distribution with respect to a fiscal year of such Non-Taxed Entity is paid
by such Non-Taxed Entity, within 20 days of (A) the estimated tax payment
date, in the amount of the estimated tax due on such date calculated in
accordance with this proviso or (B) the date the tax return with respect to
such taxes is due, in the amount of such taxes less all prior Tax
Distributions.
(2) Purchase or otherwise acquire for value any Capital Stock of
any Borrower or Corporate Guarantor or make any payment or prepayment of
principal of, premium, if any, or interest on, or redeem, defease or
otherwise retire, any other Indebtedness of any Borrower or any Corporate
Guarantor before its scheduled due date.
(j) Sale of Notes, Etc. Sell, discount or otherwise dispose of notes,
------------------
Accounts Receivable or other obligations owing to the Borrowers or the Corporate
Guarantors except for collection in the ordinary course of business.
(k) Compromise of Receivable. Compromise or adjust any of the
------------------------
Accounts Receivable (or extend the time for payment thereof) or grant any
discounts, allowance or credits thereon, in each case other than in the normal
course of business.
(1) Federal Reserve Regulations. Permit any Loan or the proceeds of
---------------------------
any Loan under this Agreement to be used for any purpose which violates or is
inconsistent with the provisions of Regulations G, T, U or X of the Board of
Governors of the Federal Reserve System.
(m) Transactions with Affiliates.
----------------------------
(1) Enter into or be a party to, or permit any of its
Subsidiaries to enter into or be a party to, any transaction with any
Affiliate of the Borrowers or the Guarantors except (i) as otherwise
provided herein and in the ordinary course of business in a manner and to
an extent consistent with past practice and necessary or desirable for the
prudent operation of its business for fair consideration and on terms no
less favorable to such Borrower, Guarantor or such Subsidiary as are
available from unaffiliated third parties and (ii) transactions among the
Borrowers and the Corporate Guarantors.
(2) Permit (i) the aggregate invoice amount of all Accounts
Receivable due to the Borrowers and the Corporate Guarantors from Suzzette
Kiddie Togs to exceed $390,000 on the Closing Date, provided that such
amount shall be reduced upon each
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<PAGE>
payment with respect to such Accounts Receivable until such amount is
reduced to an amount of not more than $350,000 and therefore such amount
shall not exceed $350,000 at any time or (ii) the aggregate Accounts
Receivable due to the Borrowers and H.O.T. Kidz from Hawk and J&B to exceed
$1,450,000 at any time outstanding, provided that any reduction (cash or
otherwise) of such Accounts Receivable shall permanently reduce the amount
of Accounts Receivable permitted by this clause (ii).
(n) License Agreements. Agree to any material amendment or other
------------------
material change to, or waive any of its rights under, any License Agreement
without the prior written consent of all the Lenders, which consent shall not be
unreasonably withheld, provided that, any amendment or change that extends or
-------------
expands the product categories set forth in any License Agreement (on terms
substantially the same as those in such License Agreement) shall not require the
prior written consent of all Lenders if any increase in the minimum royalty
payment accompanying such amendment or change is permitted under clause (viii)
of Section 7.02(b) hereof.
(o) Amendment or Waiver of Subordinated Notes; Prepayment of
--------------------------------------------------------
Subordinated Debt. (i) Agree, or permit any of its Subsidiaries to agree, to any
- -----------------
amendment or other change to (or make any payment consistent with any amendment
or other change to), or waive any of its rights under, the Subordinated Note or
refinance any of the Subordinated Debt evidenced by the Subordinated Note
without obtaining the prior written consent of the Required Lenders to such
amendment, modification, payment, waiver, change or refinancing.
(ii) Directly or indirectly, by deposit of monies or otherwise,
prepay, purchase, redeem, retire, defease or otherwise acquire, or make any
payment on account of any principal of, premium or interest payable in
connection with the payment, prepayment, redemption, defeasance or retirement of
any Subordinated Debt, provided that the Borrowers may make interest payments on
--------
not more than S500,000 of the principal amount of such Subordinated Debt
pursuant to the terms of the Subordination Agreement.
ARTICLE VIII
MANAGEMENT, COLLECTION AND STATUS OF
ACCOUNTS RECEIVABLE AND OTHER COLLATERAL
SECTION 8.01. Management of Collateral. After the occurrence of an
------------------------
Event of Default, the Agent may, subject to the requirements of the Factoring
Agreements and the CIT Assignment Agreement, send a notice of assignment and/or
notice of the Agent's security interest to any and all Account Debtors or any
third party holding or otherwise concerned with any of the Collateral, and
thereafter the Agent shall have the sole right to collect the Accounts
Receivable and/or take possession of the Collateral and the books and records
relating thereto. The Borrowers and the Corporate Guarantors shall not without
prior written consent of the Agent, grant any extension of time of payment of
any Account Receivable, compromise or settle any Account Receivable for less
than the full amount thereof, release, in
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whole or in part, any Person or property liable for the payment thereof, or
allow any credit or discount whatsoever thereon, except, prior to the occurrence
of an Event of Default, as permitted by Section 7.02(k) hereof.
(b) (i) Subject to the requirements of the Factoring Agreements
and the CIT Assignment Agreement, the Borrowers and the Corporate Guarantors
hereby constitute the Agent or its designee on behalf of the Agent as the
Borrowers' and the Corporate Guarantors' attorney-in-fact with power to endorse
a Borrower's or Corporate Guarantor's name upon any notes, acceptances, checks,
drafts, money orders or other evidences of payment or Collateral that may come
into its possession, to sign a Borrower's or Corporate Guarantor's name on any
invoice or bill of lading relating to any of the Accounts Receivable, drafts
against Account Debtors, assignments and verifications of Accounts Receivable
and notices to Account Debtors, to send verification of Accounts Receivable, and
upon the acceleration of the Loans and any other Obligations under the Loan
Documents following an Event of Default, to notify the Postal Service
authorities to change the address for delivery of mail addressed to the
Borrowers and the Corporate Guarantors to such address as the Agent may
designate and to do all other acts and things necessary to carry out this
Agreement. All acts of said attorney or designee are hereby ratified and
approved, and said attorney or designate shall not be liable for any acts of
omission or commission (other than acts or omissions constituting gross
negligence or willful misconduct as determined by a final judgment of a court of
competent jurisdiction), nor for any error of judgment or mistake of fact or
law; this power being coupled with an interest is irrevocable until all of the
Loans and any other Obligations under the Loan Documents are paid in full and
all of the Loan Documents are terminated.
(iii) Subject to the requirements of the Factoring Agreements
and the CIT Assignment Agreement, the Agent, without notice to or consent of any
Borrower or any Corporate Guarantor upon the occurrence and during the
continuance of an Event of Default (A) may sue upon or otherwise collect, extend
the time of payment of, or compromise or settle for cash, credit or otherwise
upon any terms, any of the Accounts Receivable or any securities, instruments or
insurance applicable thereto and/or release the Account Debtor thereon; (B) is
authorized and empowered to accept the return of the goods represented by any of
the Accounts Receivable, and (C) shall have the right to receive, endorse,
assign and/or deliver in its name or the name of any Borrower or Corporate
Guarantor any and all checks, drafts, and other instruments for the payment of
money relating to the Accounts Receivable. Each Borrower or Corporate Guarantor
hereby waives notice of presentment, protest and non-payment of any instrument
so endorsed, all in a commercially reasonable manner and without discharging or
in any way affecting liability hereunder.
(c) Nothing herein contained shall be construed to constitute any
Borrower or any Corporate Guarantor as agent of the Agent or the Lenders or any
purpose whatsoever, and the Agent and the Lenders shall not be responsible or
liable for any shortage, discrepancy, damage, loss or destruction of any part of
the Collateral wherever the same may be located and regardless of the cause
thereof (other than from acts or omissions of the Agent or the Lenders
constituting gross negligence or willful misconduct as determined by a final
judgment of a court of competent jurisdiction). The Agent or the Lenders shall
not, under any circumstances or in
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any event whatsoever, have any liability for any error or omission or delay of
any kind occurring in the settlement, collection or payment of any of the
Accounts Receivable or any instrument received in payment thereof or for any
damage resulting therefrom (other than acts or omissions of the Agent or the
Lenders constituting gross negligence or willful misconduct as determined by a
final judgment of a court of competent jurisdiction). The Agent or the Lenders,
by anything herein or in any assignment or otherwise, do not assume any of
Borrowers' or Corporate Guarantors' obligations under any contract or agreement
assigned to the Agent and the Agent or the Lenders shall not be responsible in
any way for the performance by such Borrower or Corporate Guarantor of any of
the terms and conditions thereof
(d) If any of the Accounts Receivable includes a charge for any tax
payable to any Governmental Authority, the Agent is hereby authorized (but in no
event obligated) in its discretion to pay the amount thereof to the proper
taxing authority for any Borrower's or any Corporate Guarantor's account and to
charge such Borrowers or Corporate Guarantors therefor. Such Borrower or
Corporate Guarantor shall notify the Agent if any Accounts Receivable include
any taxes due to any such authority and, in the absence of such notice, the
Agent shall have the right to retain the full proceeds of such Accounts
Receivable and shall not be liable for any taxes that may be due from such
Borrower or Corporate Guarantor by reason of the sale and delivery creating such
Accounts Receivable.
SECTION 8.02. Accounts Receivable Documentation. Subject to the
---------------------------------
requirements of the Factoring Agreements and the CIT Assignment Agreement, each
Borrower and Corporate Guarantor will at such intervals as the Agent may
require, execute and deliver confirmatory written assignments of the Accounts
Receivable to the Agent and furnish such further schedules and/or information as
the Agent may require relating to the Accounts Receivable, including, without
limitation, sales invoices or the equivalent, credit memos issued, remittance
advises, reports and copies of deposit slips and copies of original shipping or
delivery receipts for all merchandise sold. In addition, each Borrower or
Corporate Guarantor shall notify the Agent of any non-compliance in respect of
the representations, warranties and covenants contained in Section 8.03 below.
The items to be provided under this Section 8.02 are to be in form reasonably
satisfactory to the Agent and are to be executed and delivered to the Agent from
time to time solely for its convenience in maintaining records of the
Collateral. Any Borrower's or Corporate Guarantor's failure to give any of such
items to the Agent shall not affect, terminate, modify or otherwise limit the
Agent's Lien on the Collateral. Subject to the requirements of the Factoring
Agreements, each Borrower and Corporate Guarantor shall not re-date any invoice
or sale or make sales on extended dating beyond that customary in such
Borrower's or Corporate Guarantor's industry, and shall not re-bill any Accounts
Receivable without promptly disclosing the same to the Agent and providing the
Agent with copy of such re-billing, identifying the same as such. If any
Borrower or Corporate Guarantor becomes aware of anything materially detrimental
to any of Borrower's or Corporate Guarantor's customers' credit, such Borrower
or Corporate Guarantor will promptly advise the Agent thereof.
SECTION 8.03. Status of Accounts Receivable and Other Collateral.
--------------------------------------------------
With respect to Collateral of any Borrower or any Corporate Guarantor at the
time the Collateral
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becomes subject to the Agent's security interests, each Borrower or Corporate
Guarantor covenants, represents and warrants:
(a) such Borrower or Corporate Guarantor shall be the sole owner,
free and clear of all Liens, except in the favor of the Agent for the benefit of
the Lenders or otherwise permitted hereunder, of and fully authorized to sell,
transfer, pledge and/or grant a security interest in each and every item of said
Collateral;
(b) each Account Receivable shall be a good and valid account
representing an undisputed bona fide indebtedness incurred or an amount
indisputably owed by the Account Debtor therein named, for a fixed sum as set
forth in the invoice relating thereto with respect to any absolute sale and
delivery upon the specified terms of goods sold by such Borrower or Corporate
Guarantor, or work, labor and/or services theretofore rendered by such Borrower
or Corporate Guarantor;
(c) no Account Receivable is subject to any defense, offset,
counterclaim, discount or allowance except as may be stated in the invoice
relating thereto or discounts and allowances as may be customary in such
Borrower's or Corporate Guarantor's business, and each of such Accounts
Receivable will be paid when due;
(d) none of the transactions underlying or giving rise to any
Accounts Receivable shall violate any applicable state or federal laws or
regulations, and all documents relating thereto shall be legally sufficient
under such laws or regulations and shall be legally enforceable in accordance
with their terms;
(e) no agreement under which any deduction or offset of any kind,
other than normal trade discounts, may be granted or shall have been made by
such Borrower or Corporate Guarantor at or before the time such Accounts
Receivable is created;
(f) all documents and agreements relating to Accounts Receivable
shall be true and correct and in all respects what they purport to be;
(g) all signatures and endorsements that appear on all documents and
agreements relating to Accounts Receivable shall be genuine and all signatories
and endorsers shall have full capacity to contract;
(h) such Borrower and Corporate Guarantor shall maintain books and
records pertaining to said Collateral in such detail, form and scope as the
Agent shall reasonably require;
(i) such Borrower and Corporate Guarantor will immediately notify the
Agent if any of their accounts arise out of contracts with the United States or
any department, agency, or instrumentality thereof and will execute any
instruments and take any steps required by the Agent in order that all monies
due or to become due under any such contract shall be assigned to the Agent and
notice thereof given to the United States Government under the Federal
Assignment of Claims Act;
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(j) such Borrower and Guarantor will, immediately upon learning
thereof, report to the Agent any material loss or destruction of, or substantial
damage to, any of the Collateral, and any other matters affecting the value,
enforceability or collectibility of any of the Collateral;
(k) if any amount payable under or in connection with any Account
Receivable is evidenced by a promissory note or other instrument, as such term
is defined in the UCC, such promissory note or instrument shall be immediately
pledged, endorsed, assigned and delivered to the Agent as additional Collateral;
(l) such Borrower and Corporate Guarantor shall not redate any
invoice or sale or make sales on extended dating beyond that which is customary
in the ordinary course of its business and in the industry;
(m) such Borrower and Corporate Guarantor shall conduct a physical
count of its Inventory at such intervals as the Agent may request and such
Borrower and Corporate Guarantor shall promptly supply the Agent with a copy of
such count accompanied by a report of the value (based on the lower of cost or
market value) of such Inventory, provided that prior to the occurrence of an
Event of Default or Potential Default such Borrower or Corporate Guarantor shall
not be required to conduct a physical count of its Inventory more frequently
than twice each fiscal year; and
(n) such Borrower and Corporate Guarantor is not and shall not be
entitled to pledge the Agent's or the Lenders' credit on any purchases for or
any purpose whatsoever.
SECTION 8.04. Collateral Custodian. Upon the occurrence of an Event
--------------------
of Default or Potential Default, the Agent may at any time and from time to time
employ and maintain in the premises of such Borrower and Corporate Guarantor a
custodian selected by the Agent who shall have full authority to do all acts
necessary to protect the Agent's interests. Such Borrower and Corporate
Guarantor hereby agrees to cooperate with any such custodian and to do whatever
the Agent may reasonably request to preserve the Collateral. All costs and
expenses incurred by the Agent, by reason of the employment of the custodian
shall be charged to the Loan Account.
ARTICLE IX
THE AGENT AND L/C ISSUER
SECTION 9.01. Authorization and Action. Each Lender (and each
------------------------
subsequent holder of any Note by its acceptance thereof) hereby irrevocably
appoints and authorizes CIT, in its capacity as Agent (i) to receive on behalf
of each Lender any payment of principal of or interest on the Notes outstanding
hereunder and all other amounts accrued hereunder paid to the Agent, and,
subject to Section 2.05 of this Agreement, to distribute
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promptly to each Lender its Pro Rata Share of all payments so received, (ii) to
distribute to each Lender copies of all material notices and agreements received
by the Agent and not required to be delivered to each Lender pursuant to the
terms of this Agreement, provided that the Agent shall not have any liability to
the Lenders for the Agent's inadvertent failure to distribute any such notice or
agreements to the Lenders, and (iii) subject to Section 11.03 of this Agreement,
to take such action as Agent deems appropriate on its behalf to administer the
Loans, Letters of Credit and the Loan Documents and to exercise such other
powers delegated to the Agent by the terms hereof or the Loan Documents
(including, without limitation, the power to give or to refuse to give notices,
waivers, consents, approvals and instructions and the power to make or to refuse
to make determinations and calculations) and authorizes Chemical, in its
capacity as L/C Issuer to issue and administer the Letter of Credit, in each
case together with such powers as are reasonably incidental thereto to carry out
the purposes hereof and thereof. As to any matters not expressly provided for by
this Agreement and the other Loan Documents (including, without limitation,
enforcement or collection of the Notes), the Agent and the L/C Issuer shall not
be required to exercise any discretion or take any action, but shall be required
to act or to refrain from acting (and shall be fully protected in so acting or
refraining from acting) upon the instructions of the Required Lenders, and such
instructions of the Required Lenders shall be binding upon all Lenders and all
holders of Notes; provided, however, that the L/C Issuer shall not be required
-------- -------
to refuse to honor a drawing under any Letter of Credit and the Agent shall not
be required to take any action which, in the reasonable opinion of the Agent,
exposes the Agent to liability or which is contrary to this Agreement or any
Loan Document or applicable law. If the Agent seeks the consent or approval of
the Required Lenders to the taking or refraining from taking any action
hereunder, the Agent shall send notice thereof to all Lenders. The Agent shall
promptly notify each Lender anytime that the Required Lenders have instructed
the Agent to act or to refrain from acting pursuant to this Agreement.
SECTION 9.02. Borrower's Default. In the event that (i) any Borrower
------------------
fails to pay when due the principal of or interest on any Note or any
Reimbursement Obligation or any fee payable hereunder, or (ii) the Agent
receives written notice of the occurrence of an Event of Default, the Agent
shall promptly give written notice thereof to the Lenders, and shall take such
action with respect to such Event of Default as it shall be directed to take by
the Required Lenders; provided, however, that, unless and until the Agent
-------- -------
shall have received such directions, the Agent may take such action or refrain
from taking such action hereunder or under the other Loan Documents with respect
to an Event of Default, or Potential Default, as it shall deem advisable in the
best interest of the Lenders.
SECTION 9.03. Agent's Reliance, Etc. The Agent and the L/C Issuer or
---------------------
any of their directors, officers, agents or employees shall not be liable for
any action taken or omitted to be taken by it or them under or in connection
with this Agreement or the other Loan Documents, except for its own gross
negligence or willful misconduct as determined by a final judgment of a court of
competent jurisdiction. Without limiting the generality of the foregoing, the
Agent and the L/C Issuer, as appropriate (i) may treat the payee of any Note as
the holder thereof until the Agent receives written notice of the assignment or
transfer thereof, pursuant to Section 11.09 hereof, signed by such payee and in
form satisfactory to the Agent; (ii) may consult with legal counsel (including,
without limitation, counsel to the Agent or the L/C Issuer
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or counsel to the Borrower), independent public accountants, and other experts
selected by it and shall not be liable for any action taken or omitted to be
taken in good faith by it in accordance with the advice of such counsel,
accountants or experts; (iii) makes no warranty or representation to any Lender
and shall not be responsible to any Lender for any statements, certificates,
warranties or representations made in or in connection with this Agreement or
the other Loan Documents; (iv) shall not have any duty to ascertain or to
inquire as to the performance or observance of any of the terms, covenants or
conditions of this Agreement or the other Loan Documents on the part of any
Person or to inspect the Collateral or other property (including, without
limitation, the books and records) of any Person; (v) shall not be responsible
to any Lender for the due execution, legality, validity, enforceability,
genuineness, sufficiency or value of this Agreement or the other Loan Documents
or any other instrument or document furnished pursuant hereto or thereto; (vi)
shall not be deemed to have made any representation or warranty regarding the
existence, value or collectibility of the Collateral, the existence, priority or
perfection of the Lenders' lien or security interest thereon, or the Borrowing
Base or any certificate prepared by the Borrower in connection therewith, nor
shall the Agent be responsible or liable to the Lenders for any failure to
monitor or maintain the Borrowing Base or any portion of the Collateral; and
(vii) shall incur no liability under or in respect of this Agreement or the
other Loan Documents by acting upon any notice, consent, certificate or other
instrument or writing (which may be by telegram, telecopy, cable or telex)
believed by it to be genuine and signed or sent by the proper party or parties.
SECTION 9.04. CIT. With respect to the Loans made by it and the Notes
---
issued to it and the Letters of Credit, CIT and its Affiliates shall have the
same rights and powers under this Agreement as any other Lender and may
exercise the same as though it were not the Agent; and the term "Lender" or
"any Lenders" shall, unless otherwise expressly indicated, include CIT in its
individual capacity. CIT and its Affiliates may accept deposits from, lend money
to, act as trustee or paying agent under indentures of, and generally engage in
any kind of business with, any Borrower or any Guarantor, any of their
Affiliates, or any Person who may do business with or own securities of any
Borrower or Guarantor, or any of their Affiliates, all as if CIT were not the
Agent and without any duty to account therefor to any Lenders. The Lenders
acknowledge and agree that the Factor and the L/C Issuer, an Affiliate of the
Agent, may take actions which are not in the interests of, or may have an
adverse effect on, the Lenders, or may omit to take actions which would be in
the interests of, or would have a favorable effect on, the Lenders, and (iii)
the Lenders will not assert any claim against the Agent based on actions or
omissions by the L/C Issuer and will not assert any such actions or omissions as
a defense or offset to the Lenders' obligations hereunder.
SECTION 9.05. Lender Credit Decision. Each Lender acknowledges that
----------------------
it has, independently and without reliance upon the Agent or any other Lender,
made its own credit analysis and decision to enter into this Agreement. Each
Lender also acknowledges that it will, independently and without reliance upon
any Agent or any other Lender and based on such documents and information as it
shall deem appropriate at the time, continue to make its own credit decisions in
taking or not taking action under this Agreement and the other Loan Documents.
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SECTION 9.06. Indemnification. Each Lender agrees to indemnify and
---------------
hold harmless the Agent and the L/C Issuer (to the extent not reimbursed by any
Borrower or any Guarantor), ratably according to the Pro Rata Shares of each
Lender, from and against any and all liabilities, obligations, losses, damages,
penalties, actions, judgments, suits, costs, expenses or disbursements of any
kind or nature whatsoever which may be imposed on, incurred by, or asserted
against the Agent or the L/C Issuer in any way relating to or arising out of
this Agreement or the other Loan Documents or any action taken or omitted by the
Agent or the L/C Issuer under this Agreement or the other Loan Documents;
provided, however, that no Lender shall be liable to the Agent or the L/C Issuer
- -------- -------
for any portion of such liabilities, obligations, losses, damages, penalties,
actions, judgments, suits, costs, expenses or disbursements for which there has
been a final judicial determination that such resulted from the Agent's or the
L/C Issuer's gross negligence or willful misconduct. Without limiting the
foregoing, each Lender agrees to reimburse the Agent and the L/C Issuer promptly
upon demand for its ratable share of any out-of-pocket expenses (including
reasonable counsel fees, disbursements and other charges) incurred by the Agent
and the L/C Issuer in connection with the preparation, execution, delivery,
administration, modification, amendment or enforcement (whether through
negotiation, legal proceedings or otherwise) of, or legal advice in respect of
rights or responsibilities under, this Agreement or the other Loan Documents, to
the extent that the Agent or the L/C Issuer is not reimbursed in full for such
expenses by the Borrowers. The obligations of each Lender under this Section
9.06 shall survive the termination of the Agreement and the other Loan Documents
and the payment of all other obligations of the Agent and the Lenders under the
Agreement and the other Loan Documents.
SECTION 9.07 Successor Agent. The Agent may resign at any time by
---------------
giving written notice thereof to the Lenders and Happy Kids and the Agent may be
removed at any time with or without cause by all Lenders other than CIT,
provided that the Agent may not be removed unless, as a condition to any such
removal, all Loans, Letters of Credit Obligations and all other Obligations or
amounts payable to CIT by the Borrowers and the other Lenders are paid in full
or purchased in full. Upon any such resignation, the Required Lenders shall have
the right to appoint a successor Agent, reasonably acceptable to Happy Kids,
with such rights and obligations hereunder as those previously held by the
retiring Agent, provided, the successor Agent may be appointed by the Required
--------
Lenders without any consultation with or consent of Happy Kids if an Event of
Default or Potential Default has occurred. If no successor Agent shall have been
so appointed by the Required Lenders, been accepted by Happy Kids, and shall
have accepted such appointment, within 30 days after the retiring Agent's giving
of notice of resignation, then the retiring Agent may, on behalf of the Lenders,
appoint a successor Agent, which shall be a commercial bank or other financing
institution organized under the laws of the United States of America or any
State thereof. Upon the acceptance of any appointment as Agent hereunder by a
successor Agent, such successor Agent shall thereupon succeed to and become
vested with all the rights, powers, privileges and duties of the retiring or
removed Agent, and the retiring or removed Agent shall be discharged from its
duties and obligations under this Agreement and the other Loan Documents. After
any Agent's resignation or removal hereunder as the Agent, the provisions of
this Article IX shall inure to its benefit as to any actions taken or omitted to
be taken by it while it was Agent under this Agreement and the other Loan
Documents.
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SECTION 9.08. Collateral Matters.
------------------
(a) The Agent may from time to time, make such disbursements and
advances ("Agent Advances") which the Agent, in its sole discretion, deems
necessary or desirable to preserve or protect the Collateral or any portion
thereof, to enhance the likelihood or maximize the amount of repayment by any
Borrower, any Guarantor or other Person of the Loans, Reimbursement Obligations
or Letters of Credit and other Obligations or to pay any other amount chargeable
to such Borrower or Guarantor pursuant to the terms of this Agreement,
including, without limitation, costs, fees and expenses as described in Section
11.05. The Agent Advances shall be repayable on demand and be secured by the
Collateral. The Agent Advances shall not constitute Loans but shall otherwise
constitute Obligations hereunder. Without limitation to its obligations pursuant
to Section 9.06, each Lender agrees that it shall make available to the Agent,
upon the Agent's demand, in dollars in immediately available funds, the amount
equal to such Lender's Pro Rata Share of each such Agent Advance. If such funds
are not made available to the Agent by such Lender, the Agent shall be entitled
to recover such funds, on demand from such Lender together with interest
thereon, for each day from the date such payment was due until the date such
amount is paid to the Agent, at the Federal Funds Rate for three Business Days
and thereafter at the Prime Rate.
(b) The Agent shall have no obligation whatsoever to any Lenders to
assure that the Collateral exists or is owned by any Borrower or any Guarantor
or is cared for, protected or insured or has been encumbered or that the Liens
granted to the Agent herein or pursuant hereto, have been properly or
sufficiently or lawfully created, perfected, protected or enforced or are
entitled to any particular priority, or to exercise at all or in any particular
manner or under any duty of care, disclosure or fidelity, or to continue
exercising, any of the rights, authorities and powers granted or available to
the Agent in this Section 9.08 or in any of the Loan Documents, it being
understood and agreed that in respect of the Collateral, or any act, omission or
event related thereto, the Agent may act in any manner it may deem appropriate,
in its sole discretion, given the Agent's own interest in the Collateral as one
of the Lenders and that the Agent shall have no duty or liability whatsoever to
any other Lender.
ARTICLE X
EVENTS OF DEFAULT
SECTION 10.01. Event of Default. If any of the following Events of
----------------
Default shall occur and be continuing:
(a) Any Borrower or any Guarantor shall (i) fail to pay any principal
of any Loan, any Agent Advance or any Reimbursement Obligation when due (whether
by scheduled maturity, required prepayment, acceleration, demand or otherwise)
or (ii) fail to pay any interest on any Loan. any Agent Advance or any
Reimbursement Obligation, or any fee or other amount
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when due (whether by scheduled maturity, required prepayment, acceleration,
demand or otherwise) and in the case of clause (ii), such failure shall remain
unremedied for three days;
(b) Any representation or warranty made by any Borrower or Guarantor
or any officer of such Borrower or Guarantor under or in connection with any
Loan Document shall have been incorrect in any material respect when made;
(c) Any Borrower or any Guarantor shall fail to perform or observe
(i) any covenant contained in paragraphs (b), (c), (d), (f), (h), (j) (k), (1),
(m), (n), (o), (p) or (q) of Section 7.01, Section 7.02 or Article VIII hereof,
(ii) any covenant contained in paragraphs (a) (other than clauses (viii), (ix),
(xii), (xiv) and (xvi) thereof), (e), (g), (i) or (r) of Section 7.01 hereof and
such failure shall continue unremedied for ten days, or (iii) any covenant
contained in clauses (viii), (ix), (xii), (xiv) and (xvi) of Section 7.01 (a)
and such failure shall continue unremedied for three days;
(d) Any Borrower or any Guarantor shall fail to perform or observe
any other term, covenant or agreement contained in any Loan Document and to be
performed or observed by such Borrower or Guarantor and such failure, if capable
of being remedied, shall remain unremedied for 10 days after written notice
thereof shall have been given by the Agent to such Borrower;
(e) Any Borrower or any Guarantor shall fail to pay any principal or
interest on any of its Indebtedness (excluding Indebtedness evidenced by the
Notes) in excess of $100,000, or any interest or premium thereon, when due
(whether by scheduled maturity, required prepayment, acceleration, demand or
otherwise) and such failure shall continue after the applicable grace period, if
any, specified in the agreement or instrument relating to such Indebtedness, or
any other default under any agreement or instrument relating to any such
Indebtedness, or any other event, shall occur and shall continue after the
applicable grace period, if any, specified in such agreement or instrument, if
the effect of such default or event is to accelerate, or to permit the
acceleration of, the maturity of such Indebtedness; or any such Indebtedness in
excess of such amount shall be declared to be due and payable, or required to be
prepaid (other than by a regularly scheduled required prepayment), prior to the
stated maturity thereof,
(f) Any Borrower or any Guarantor (i) shall institute any proceeding
or voluntary case seeking to adjudicate it a bankrupt or insolvent, or seeking
dissolution, liquidation, winding up, reorganization, arrangement, adjustment,
protection, relief or composition of it or its debts under any law relating to
bankruptcy, insolvency, reorganization or relief of debtors, or seeking the
entry of an order for relief or the appointment of a receiver, trustee,
custodian or other similar official for such Borrower or Guarantor or for any
substantial part of its property, (ii) shall be generally not paying its debts
as such debts become due, or shall admit in writing its inability to pay its
debts generally, (iii) shall make a general assignment for the benefit of
creditors, or (iv) shall take any action to authorize or effect any of the
actions set forth above in this subsection (f);
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(g) Any proceeding shall be instituted against any Borrower or
any Guarantor seeking to adjudicate it a bankrupt or insolvent, or seeking
dissolution, liquidation, winding up, reorganization, arrangement, adjustment,
protection, relief of debtors, or seeking the entry of an order for relief or
the appointment of a receiver, trustee, custodian or other similar official for
such Borrower or such Guarantor or for any substantial part of its property, and
either such proceeding shall remain undismissed or unstayed for a period of 60
days or any of the actions sought in such proceeding (including, without
limitation, the entry of an order for relief against it or the appointment of a
receiver, trustee, custodian or other similar official for it or for any
substantial part of its property) shall occur;
(h) Any material provision of any Loan Document shall at any
time for any reason be declared to be null and void, or the validity or
enforceability thereof shall be contested by any Borrower or Guarantor, or a
proceeding shall be commenced by any Borrower, any Guarantor or any
Governmental Authority or other regulatory body having jurisdiction over such
Borrower or Guarantor, seeking to establish the invalidity or unenforceability
thereof, or any Borrower or any Guarantor shall deny in writing that such
Borrower or such Guarantor has any liability or obligation purported to be
created under any Loan Document;
(i) The Security Agreements, the Mortgage, the Cash Collateral
Agreement, or any other security document, after delivery thereof pursuant
hereto, shall for any reason fail or cease to create a valid and perfected and,
except to the extent permitted by the terms hereof or thereof, first priority
Lien on any Collateral purported to be covered thereby;
(j) One or more judgments or orders (other than a judgment or
award described in subsections (f) or (g) of this Section 10.01) for the payment
of money exceeding any applicable insurance or bond coverage by more than
$100,000 in the aggregate for the Borrowers or the Guarantors shall be rendered
against any Borrowers or any Guarantors and either (i) enforcement proceedings
shall have been commenced by any creditor upon any such judgment or order, or
(ii) there shall be any period of 30 consecutive days during which a stay of
enforcement of any such judgment or order, by reason of a pending appeal or
otherwise, shall not be in effect;
(k) Any Borrower or Corporate Guarantor or any of its ERISA
Affiliates shall have made a complete or partial withdrawal from a Multiemployer
Plan, and, as a result of such complete or partial withdrawal, such Borrower or
such ERISA Affiliate incurs a withdrawal liability in an annual amount exceeding
$100,000; or a Multiemployer Plan enters reorganization status under Section
4241 of ERISA, and, as a result thereof, such Borrower's or such ERISA
Affiliate's annual contribution requirement with respect to such Multiemployer
Plan increases in an annual amount exceeding $100,000;
(l) Any Termination Event with respect to any Employee Plan
shall have occurred, and, 30 days after notice thereof shall have been given to
any Borrower by the Agent, (i) such Termination Event (if correctable) shall not
have been corrected, and (ii) the then current value of such Employee Plan's
vested benefits exceeds the then current value of assets allocable to such
benefits in such Employee Plan by more than $100,000 (or, in the case of a
Termination
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Event involving liability under Section 409, 502(i), 502(l), 515, 4062, 4063,
4064, 4069, 4201, 4204 or 4212 of ERISA or Section 4971 or 4975 of the IRC, the
liability is in excess of such amount);
(m) A change in the condition or operations, financial or
otherwise, of any Borrower or any Guarantor that may have a Material Adverse
Effect, as determined by the Required Lenders in their sole discretion, shall
occur after the Effective Date and written notice thereof shall have been given
to such Borrower or Guarantor by the Agent;
(n) A default or event of default shall occur under any
Factoring Agreement, any Factoring Agreement shall terminate or any Borrower
shall give a notice to the Factor terminating any Factoring Agreement;
(o) A Change of Control shall have occurred; or
(p) A breach, default or event of default shall occur under any
License Agreement if the effect of such breach, default or event of default is
to permit any Licensor to terminate its respective License Agreement, or any
Licensor shall exercise any remedy with respect to a breach, default or event of
default under any License Agreement; then, and in any such event, the Agent may
and, upon the direction of the Required Lenders, shall by notice to any
Borrower, (i) declare the Total Credit Exposure to be reduced to zero, whereupon
the Total Credit Exposure shall forthwith be reduced to zero, (ii) declare all
Loans and all Reimbursement Obligations, all interest thereon and all other
amounts payable under this Agreement to be forthwith due and payable, whereupon
the Loans, all Reimbursement Obligations, all such interest and all such amounts
shall become and be forthwith due and payable, without presentment, demand,
protest or further notice of any kind, all of which are hereby expressly waived
by each Borrower and Guarantor; provided, however, that upon the occurrence of
-------- -------
any Event of Default described in subsections (f) or (g) of this Section 10.01,
the Loans and all Reimbursement Obligations, all such interest and all such
amounts shall become and be forthwith due and payable, without presentment,
demand, protest or further notice of any kind, all of which are expressly waived
by each Borrower and Guarantor, and (iii) exercise any and all of its other
rights under applicable law, hereunder and under the other Loan Documents.
SECTION 10.02. Deposit for Letters of Credit. Upon demand by the
-----------------------------
Agent after the occurrence of any Event of Default, the Borrowers shall deposit
with the Agent with respect to each Letter of Credit then outstanding cash or
equivalents, acceptable to the Agent, readily convertible into cash in an
amount equal to the greatest amount for which such Letter of Credit may be
drawn. Such deposits shall be held by the Agent in a joint non-interest bearing
account maintained at the Payment Office of the Agent as security for, and to
provide for the payment of, the Letter of Credit Obligations.
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ARTICLE XI
MISCELLANEOUS
SECTION 11.01 Termination. (a) Except as otherwise permitted
-----------
herein, the Administrative Borrower may terminate the Total Credit Exposure and
this Agreement only as of a Termination Anniversary Date and then only by giving
the Agent not less than sixty (60) days prior written notice of termination.
Notwithstanding the foregoing, the Agent may terminate the Total Credit Exposure
and this Agreement immediately, by notice to the Administrative Borrower upon
the occurrence of an Event of Default, provided, however, that if the Event of
Default is an event listed in Sections 10.01(f) or (g) of this Agreement, the
Agent may regard the Total Credit Exposure and the Agreement as terminated and
notice to that effect is not required. The Total Credit Exposure and this
Agreement, unless terminated as herein provided on a Termination Anniversary
Date, shall automatically continue to the next Termination Anniversary Date. All
Obligations shall become due and payable as of the date of any termination under
this Section 11.01 and, pending a final accounting, the Agent may withhold any
balances in the Loan Account (unless supplied with an indemnity satisfactory to
the Agent) to cover all of the Obligations, whether absolute or contingent. All
of the Agent's and the Lenders' rights and Liens shall continue after any
termination until all Obligations for the payment of money have been paid in
cash and satisfied in full and all Letters of Credit have been canceled and
returned to the L/C Issuer. After such payment and satisfaction, the Agent and
the Lenders will, upon the reasonable request of the Administrative Borrower,
execute all documents necessary to release, without recourse, representation and
warranty and at the expense of the Borrowers, its Liens granted pursuant to the
terms of this Agreement and the other Loan Documents.
(b) Any Lender may elect not to renew its Credit Exposure by
giving the Agent, the other Lenders and the Administrative Borrower written
notice of its intention not to renew its Credit Exposure not less than sixty
(60) days prior to a Termination Anniversary Date. If such Lender does not
assign its rights, interests and obligations under this Agreement pursuant to
Section 11.09 hereof, then the Credit Exposure of such Lender shall be
terminated as of such Termination Anniversary Date. The Borrowers hereby,
jointly and severally, agree to pay to the Agent on such Termination Anniversary
Date, for the account of such non-renewing Lender, the principal amount of, and
all accrued interest on, such Lender's Pro Rata Share of all funded Loans and
Reimbursement Obligations, together with any amounts payable to such Lender
pursuant to Section 11.17 and any fees or other amounts owing to such Lender
under this Agreement and such Lender's Note. If the Agent makes any Loan or
Agent Advance or assists a Borrower in opening or establishing any Letter of
Credit, during the period between giving notice of its intention to not renew
its Credit Exposure and such Termination Anniversary Date, the obligations of
such non-renewing Lender pursuant to Sections 2.05, 3.01 (a)(ii), 3.02, 4.02 and
9.08 of the Financing Agreement shall be irrevocable, absolute and unconditional
with respect to such Loan, Agent Advance or Letter of Credit. Notwithstanding
such termination and repayment, the non-renewing Lender shall remain obligated
to the Agent under Sections 3.02, 3.03(b), 3.07 and 3.08 for its Pro Rata Share
(calculated immediately prior to the Termination Anniversary Date on which such
termination became effective) of the aggregate maximum amount available for
drawing under all outstanding Letters of Credit on such Termination
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Anniversary Date (the "Retained Obligations") until all Retained Obligations
have been paid in full and the Letters of Credit giving rise to such Retained
Obligations have been canceled. After the effective date of any such termination
and repayment pursuant to this Section 11.01(b), for purposes of Sections
3.02, 3.03(b), 3.07 and 3.08 of this Agreement such non-renewing Lender's Pro
Rata Share shall be a fraction (expressed as a percentage) the numerator of
which shall be the Retained Obligations and the denominator of which shall be
the aggregate amount of all unpaid Loans, Agent Advances and Letters of Credit
Obligations.
SECTION 11.02. Notices, Etc. All notices and other communications
------------
provided for hereunder shall be in writing and shall be mailed, telecopied,
telexed, telegraphed or delivered, if to any Lender, at its address specified
under its signature on the signature pages hereof, if to any Borrower or any
Guarantor, at the following address:
Happy Kids, Ltd.
100 West 33rd Street
Suite 1100
New York, New York 10001
Attention: Jack M. Benun
Telephone: (212) 695-1511
Telecopier: (212) 736-0397
with a copy to:
Fishbach, Hertan & Ives
919 Third Avenue
New York, New York 10022
Attention: Myron Fishbach, Esq.
Telephone: (212) 752-4433
Telecopier: (212) 593-2441
and if to the Agent, to it at the following address:
The CIT Group/Commercial Services, Inc.
1211 Avenue of the Americas
New York, New York 10036
Attention: Anthony Lombardi
Vice President
Telephone: (212) 382-7295
Telecopier: (212) 382-9036
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with a copy to:
Schulte Roth & Zabel
900 Third Avenue
New York, New York 10022
Attention: Frederic L. Ragucci, Esq.
Telephone: (212) 758-0404
Telecopier: (212) 593-5955
or, as to each party, at such other address as shall be designated by such party
in a written notice to the other party complying as to delivery with the terms
of this Section 11.02. All such notices and other communications shall be
effective (i) if mailed, when received or five days after deposited in the
mails, whichever occurs first, (ii) if telecopied, when transmitted and such
telecopy is confirmed within a reasonable time by mail or by delivery, (iii) if
telexed, when the appropriate answerback is received, (iv) if telegraphed, when
delivered to the telegraph company, or (v) if delivered, upon delivery, except
that notices to the Agent or the L/C Issuer pursuant to Articles II and III
hereof shall not be effective until received by the Agent.
SECTION 11.03. Amendments, Etc. No amendment or waiver of any
---------------
provision of this Agreement or the other Loan Documents. and no consent to any
departure by any Borrower or Guarantor therefrom, shall in any event be
effective unless the same shall be in writing and signed by such Borrower or
Guarantor and the Required Lenders, and then such waiver or consent shall be
effective only in the specific instance and for the specific purpose for which
given; provided, however, that no amendment, waiver or consent shall, unless in
-------- -------
writing and signed by all the Lenders, (i) increase the Total Credit Exposure,
(ii) reduce the principal of, or interest on, the Loans or the Reimbursement
Obligations, (iii) postpone any date, fixed for any payment of principal of, or
interest or fees on. the Loans or Reimbursement Obligations, (iv) change the
percentage of the Credit Exposures or of the aggregate unpaid principal amount
of the Notes, or the number of Lenders, which shall be required for the Lenders
or any of them to take any action hereunder, (v) release all or a substantial
portion of the Collateral (except as otherwise provided in this Agreement and
the other Loan Documents) or the Guarantors (other than inactive Guarantors),
(vi) amend Sections 7.01(a)(i), 7.01(a)(ii), 7.01(a)(iii), 7.01(a)(iv),
7.01(a)(v), 7.01(a)(vi), 7.01(a)(vii), 7.01(a)(x) or, 7.01(a)(xii), (vii) amend,
modify or waive Sections 7.01(I) or 11.01 or this Section 11.03, or (viii) amend
the definition of "Eligible Inventory",. "Eligible Receivables" or "Borrowing
Base" if the effect of such amendment is to increase the Borrowing Base
availability of the Borrowers, provided, further, that (A) no amendment, waiver
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or consent shall, unless in writing and signed by the Agent and L/C Issuer,
affect the rights or duties of the Agent or L/C Issuer with respect to the
Letters of Credit (but not in its capacity as a Lender) under this Agreement or
the other Loan Documents, and (B) no amendment, waiver or consent shall, unless
in writing and signed by the L/C Issuer, amend any provision of Article III.
SECTION 11.04. No Waiver: Remedies, Etc. No failure on the part
------------------------
of the L/C Issuer, any Lender or the Agent to exercise, and no delay in
exercising, any night hereunder
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or under any other Loan Document shall operate as a waiver thereof; nor shall
any single or partial exercise of any right under any Loan Document preclude any
other or further exercise thereof or the exercise of any other right. The rights
and remedies of the L/C Issuer, the Lenders and the Agent provided herein and in
the other Loan Documents are cumulative and are in addition to, and not
exclusive of, any rights or remedies provided by law. The rights of the Lenders,
the L/C Issuer and the Agent under any Loan Document against any party thereto
are not conditional or contingent on any attempt by the Lenders, the L/C Issuer
and the Agent to exercise any of their rights under any other Loan Document
against such party or against any other Person.
SECTION 11.05. Fees, Costs, Expenses and Taxes. The Borrowers
-------------------------------
agree to jointly and severally pay or cause to be paid, on demand, and to save
the Agent and the Lenders harmless against liability for the payment of, all
reasonable out-of-pocket expenses, regardless of whether the transactions
contemplated hereby are consummated, including but not limited to reasonable
fees and expenses of counsel for the Agent and the Lenders, accounting, due
diligence, periodic field audits, investigation, monitoring of assets,
syndication, miscellaneous disbursements, examination, travel, lodging and
meals, incurred by the Agent and the Lenders from time to time arising from or
relating to: (a) the negotiation, preparation, execution, delivery, performance
and administration of this Agreement and the other Loan Documents, (b) any
requested amendments, waivers or consents to this Agreement or the other Loan
Documents whether or not such documents become effective or are given, (c) the
preservation and protection of any of the Agent's and the Lenders' rights under
this Agreement or the other Loan Documents,, (d) the defense of any claim or
action asserted or brought against the Agent or the Lenders by any Person that
arises from or relates to this Agreement, any other Loan Document, the Agent's
or the Lenders' claims against the Borrowers or the Guarantors, or any and all
matters in connection therewith, (e) the commencement or defense of, or
intervention in, any court proceeding arising from or related to this Agreement
or any other Loan Document, (f) the filing of any petition, complaint, answer,
motion or other pleading by the Agent or the Lenders, or the taking of any
action in respect of the Collateral or other security, in connection with this
Agreement or any other Loan Document, (g) the protection, collection, lease,
sale, taking possession of or liquidation of, any Collateral or other security
in connection with this Agreement or any other Loan Document, (h) any attempt to
enforce any Lien on any Collateral or other security in connection with this
Agreement or any other Loan Document, (i) any attempt to collect from the
Borrowers or any Guarantors, (j) the receipt of any advice with respect to any
of the foregoing, (k) all liabilities and reasonable costs arising from or in
connection with the past, present or future operations of the Borrowers and the
Guarantors involving any damage to real or personal property or natural
resources or harm or injury alleged to have resulted from any Release of
Hazardous Materials on, upon or into such property, (l) any reasonable costs or
liabilities incurred in connection with the investigation, removal, cleanup
and/or remediation of any Hazardous Materials present or arising out of the
operations of any facility of the Borrowers and the Guarantors, or (m) any
liabilities or reasonable costs incurred in connection with any Lien arising
under any Environmental Law. Without limitation of the foregoing or any other
provision of any Loan Document: (x) the Borrowers jointly and severally agree to
pay all stamp, document, transfer, recording or filing taxes or fees (including,
without limitation, mortgage recording taxes) and similar impositions now or
hereafter reasonably determined by the Agent or
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any of the Lenders to be payable in connection with this Agreement or any other
Loan Document, and the Borrowers jointly and severally agree to save the Agent
and the Lenders harmless from and against any and all present or future claims,
liabilities or losses with respect to or resulting from any omission to pay or
delay in paying any such taxes, fees or impositions, and (y) upon the occurrence
and during the continuance of an Event of Default, if the Borrowers or any Loan
Party fail to perform any covenant or agreement contained herein or in any other
Loan Document, the Agent may itself perform or cause performance of such
covenant or agreement, and the expenses of the Agent incurred in connection
therewith shall be reimbursed on demand by the Borrowers.
SECTION 11.06. Happy Kids as Agent for Borrowers. Each Borrower
---------------------------------
hereby irrevocably appoints Happy Kids as the borrowing agent and attorney-in-
fact for the Borrowers (the "Administrative Borrower") which appointment shall
remain in full force and effect unless and until the Agent shall have received
prior written notice signed by all of the Borrowers that such appointment has
been revoked and that another Borrower has been appointed Administrative
Borrower). Each Borrower hereby irrevocably appoints and authorizes the
Administrative Borrower (i) to provide the Agent with all notices with respect
to Loans obtained for the benefit of any Borrower and all other notices and
instructions under this Agreement and (ii) to take such action as the
Administrative Borrower deems appropriate on its behalf to obtain Loans and to
exercise such other powers as are reasonably incidental thereto to carry out the
purposes of this Agreement. Each Borrower hereby irrevocably appoints and
authorizes the Administrative Borrower to provide the Agent with all notices and
to take all action as the Administrative Borrower deems appropriate with respect
to all Letters of Credit under this Agreement. It is understood that the
handling of the Loan Account and Collateral of the Borrowers in a combined
fashion, as more fully set forth herein, is done solely as an accommodation to
the Borrowers in order to utilize the collective borrowing powers of the
Borrowers in the most efficient and economical manner and at their request, and
that neither the Agent, the L/C Issuer nor the Lenders shall incur liability to
the Borrowers as a result hereof. Each of the Borrowers expects to derive
benefit, directly or indirectly, from the handling of the Loan Account and the
Collateral in a combined fashion since the successful operation of each Borrower
is dependent on the continued successful performance of the integrated group. To
induce the Agent, the L/C Issuer and the Lenders to do so, and in consideration
thereof, each of the Borrowers hereby jointly and severally agrees to indemnify
the Indemnitees (as hereinafter defined) and hold the Indemnitees harmless
against any and all liability, expense, loss or claim of damage or injury, made
against such Indemnitee by any of the Borrowers or by any third party whosoever,
arising from or incurred by reason of (a) the handling of the Loan Account and
Collateral of the Borrowers as herein provided, (b) the Agent, the Lenders and
the L/C Issuer relying on any instructions of the Administrative Borrower, or
(c) any other action taken by the Agent, the L/C Issuer or any Lender hereunder
or under the other Loan Documents.
SECTION 11.07. Right of Set-off. Upon the occurrence and during
----------------
the continuance of any Event of Default, each Lender may, and is hereby
authorized to, at any time and from time to time, without notice to any Borrower
or Guarantor (any such notice being expressly waived by the Borrowers and
Guarantors) and to the fullest extent permitted by law, set-off and apply any
and all deposits (general or special, time or demand, provisional or final) at
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any time held and other indebtedness at any time owing by such Lender to or for
the credit or the account of any Borrower or Guarantor against any and all joint
and several obligations of the Borrowers now or hereafter existing under any
Loan Document, irrespective of whether or not such Lender shall have made any
demand hereunder or thereunder and although such obligations may be contingent
or unmatured. Such set-off shall be subject to the provisions of Section 4.03.
Such Lender agrees to notify the Administrative Borrower promptly after any such
set-off and application made by such Lender provided that the failure to give
such notice shall not affect the validity of such set-off and application. The
rights of the Agent under this Section 11.07 are in addition to the other
rights and remedies (including, without limitation, other rights of set-off)
which such Lender may have.
SECTION 11.08. Severability. Any provision of this Agreement, or
------------
of any other Loan Document to which any Borrower or any Guarantor is a party,
which is prohibited or unenforceable in any jurisdiction shall, as to such
jurisdiction, be ineffective to the extent of such prohibition or
unenforceability without invalidating the remaining portions hereof or thereof
or affecting the validity or enforceability of such provision in any other
jurisdiction.
SECTION 11.09. Assignments and Participations.
------------------------------
(a) Each Lender may, except as otherwise provided in clause
(f) of this Section 11.09, with the written consent of the Agent which consent
shall not be unreasonably withheld, assign to one or more other lenders or other
entities, all or a portion of its rights and obligations under this Agreement
(including, without limitation, all or a portion of its Credit Exposure, the
Loans made by it, the Notes held by it and its Pro Rata Share of Letter of
Credit Obligations); provided, however, that (i) any such assignment shall be in
-------- -------
a minimum principal of not less than $5,000,000 or an amount equal to all of the
assigning Lender's Credit Exposure, (ii) such assignee enter into an agreement
among Lenders, in form and substance satisfactory to the Agent and each Lender
and (iii) the parties to each such assignment shall execute and deliver to the
Agent, for its acceptance, an Assignment and Acceptance, together with any Note
subject to such assignment and such parties shall deliver to the Agent a
processing and recordation fee of $3,000, provided that such fee shall not be
payable upon any assignment arising from the merger between Chase and Chemical.
Upon such execution, delivery and acceptance, from and after the effective date
specified in each Assignment and Acceptance, which effective date shall be at
least three Business Days after the delivery thereof to the Agent (or such
shorter period as shall be agreed to by the Agent and the parties to such
assignment), (A) the assignee thereunder shall, in addition to the rights and
obligations hereunder held by it immediately prior to such effective date, have
the rights and obligations hereunder that have been assigned to it pursuant to
such Assignment and Acceptance and (B) the assigning Lender thereunder shall, to
the extent that rights and obligations hereunder have been assigned by it
pursuant to such Assignment and Acceptance, relinquish its rights and be
released from its obligations under this Agreement (and, in the case of an
Assignment and Acceptance covering all or the remaining portion of an assigning
Lender's rights and obligations under this Agreement, such Lender shall cease to
be a party hereto). Any such assignment shall not adversely affect the
Borrowers' rights under this Agreement except that the assigning Lender shall
not be responsible for the obligations assigned.
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(b) By executing and delivering an Assignment and Acceptance,
the assigning Lender thereunder and the assignee thereunder confirm to and agree
with each other and the other parties hereto that: (i) other than as provided in
such Assignment and Acceptance, such assigning Lender makes no representation or
warranty and assumes no responsibility with respect to any statements,
warranties or representations made in or in connection with this Agreement or
the execution, legality, validity, enforceability, genuineness, sufficiency or
value of this Agreement of any other instrument or document furnished pursuant
hereto, and (ii) such assigning Lender makes no representation or warranty and
assumes no responsibility with respect to the financial condition of any
Borrower or any Guarantor or any of their Subsidiaries or the performance or
observance by such Borrower or such Guarantor or any of their Subsidiaries of
any of their obligations under this Agreement, any other Loan Document or any
other instrument or document furnished pursuant hereto.
(c) The Agent shall maintain at its address referred to in
Section 11.02 hereof a copy of each Assignment and Acceptance delivered to and
accepted by it. Such copies shall be available for inspection by any Borrower or
any Guarantor or any Lender at any reasonable time and from time to time upon
reasonable prior notice.
(d) Upon its receipt of an Assignment and Acceptance executed by
an assigning Lender and an assignee Lender, together with the Notes subject to
such assignment and the processing and recordation fee, the Agent shall, if such
Assignment and Acceptance has been completed and is in substantially the form of
Exhibit H hereto, (i) accept such Assignment and Acceptance, and (ii) give
prompt notice thereof to the Borrower. Within three Business Days after its
receipt of such notice, any Borrower or any Guarantor, at its own expense, shall
execute and deliver to the Agent in exchange for the surrendered Note a new Note
to the order of such assignee Lender in an aggregate principal amount equal to
the Loan amount assumed by it pursuant to such Assignment and Acceptance, and if
the assigning Lender has retained any Loan amount hereunder, a new Note to the
order of the assigning Lender in an aggregate principal amount equal to the Loan
amount retained by it hereunder. Such new Note or Notes shall be in an aggregate
principal amount equal to the aggregate principal amount of such surrendered
Note or Notes, shall be dated the date of the Agent's acceptance of such
Assignment and Acceptance and shall otherwise be in substantially the form of
Exhibit A hereto.
(e) Each Lender may sell participations to one or more lenders
or other entities in or to all or a portion of its rights and obligations under
this Agreement (including, without limitation, all or a portion of its Credit
Exposure, the Loans made by it, the Notes held by it and its Pro Rata Share of
the Letter of Credit Obligations); provided, however, that (i) such
-------- -------
participation shall be in a minimum principal amount of not less than $2,000,000
or an amount equal to all of the selling Lender's Credit Exposure, (ii) such
Lender's obligations under this Agreement shall remain unchanged, (iii) such
Lender shall remain solely responsible to the other parties hereto for the
performance of such obligations, (iv) such Lender shall remain the holder of any
such Notes for all purposes of this Agreement, and (v) any Borrower or any
Guarantor, the Agent, the L/C Issuer and the other Lenders shall continue to
deal solely and directly with such Lender in connection with such Lender's
rights and obligations under this Agreement. Participants shall have no direct
rights under this Agreement except that participants shall have
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the rights of a Lender under Sections 4.05 and 11.07 hereof, provided that no
Lender may grant any participant any rights to consent to any amendment, waiver,
consent or other modification hereunder other than the rights set forth in
Section 11.03.
(f) Nothing contained in this Section 11.09 shall prohibit any
Lender from (i) pledging its Loans hereunder to a Federal Reserve Bank in
support of borrowings made by such Lender from such Federal Reserve Bank and
(ii) assigning its Loans hereunder to its parent or any of its subsidiaries,
provided the creditworthiness of any such parent or subsidiary is comparable to
the assigning Lender.
SECTION 11.10. Counterparts. This Agreement may be executed in
------------
any number of counterparts and by different parties hereto in separate
counterparts, each of which shall be deemed to be an original, but all of which
taken together shall constitute one and the same agreement.
SECTION 11.12. Headings. Section headings herein are included for
--------
convenience of reference only and shall not constitute a part of this Agreement
for any other purpose.
SECTION 11.12. GOVERNING LAW-SERVICE OF PROCESS. THIS AGREEMENT.
--------------------------------
THE NOTES AND THE OTHER LOAN DOCUMENTS SHALL BE GOVERNED BY, AND CONSTRUED IN
ACCORDANCE WITH, THE LAW OF THE STATE OF NEW YORK APPLICABLE TO CONTRACTS
MADE, AND TO BE PERFORMED IN THE STATE OF NEW YORK WITHOUT REGARD TO CONFLICTS
OF LAW PRINCIPLES. ANY LEGAL ACTION OR PROCEEDING WITH RESPECT TO THIS AGREEMENT
OR ANY OTHER LOAN DOCUMENT MAY BE BROUGHT IN THE COURTS OF THE STATE OF NEW YORK
OR OF THE UNITED STATES FOR THE SOUTHERN DISTRICT OF NEW YORK, AND, BY EXECUTION
AND DELIVERY OF THIS AGREEMENT, EACH BORROWER AND GUARANTOR HEREBY IRREVOCABLY
ACCEPT IN RESPECT OF ITS PROPERTY, GENERALLY AND UNCONDITIONALLY. THE
JURISDICTION OF THE AFORESAID COURTS EACH BORROWER AND GUARANTOR FURTHER
IRREVOCABLY CONSENT TO THE SERVICE OF PROCESS OUT OF ANY OF THE AFOREMENTIONED
COURTS AND IN ANY SUCH ACTION OR PROCEEDING BY THE MAILING OF COPIES THEREOF BY
REGISTERED OR CERTIFIED MAIL, POSTAGE PREPAID, TO SUCH BORROWER AND/OR GUARANTOR
AT ITS ADDRESS FOR NOTICES CONTAINED IN SECTION 11.02, SUCH SERVICE TO BECOME
EFFECTIVE TEN (10) DAYS AFTER SUCH MAILING. EACH BORROWER AND GUARANTOR HEREBY
IRREVOCABLY APPOINT THE SECRETARY OF STATE OF THE STATE OF NEW YORK AS ITS AGENT
FOR SERVICE OF PROCESS IN RESPECT OF ANY SUCH ACTION OR PROCEEDING. NOTHING
HEREIN SHALL AFFECT THE RIGHT OF THE AGENT TO SERVICE OF PROCESS IN ANY OTHER
MANNER PERMITTED BY LAW OR TO COMMENCE LEGAL PROCEEDINGS OR OTHERWISE PROCEED
AGAINST SUCH BORROWER AND/OR GUARANTOR IN ANY OTHER JURISDICTION.
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SECTION 11.13. WAIVER OF JURY TRIAL, ETC. EACH BORROWER AND
-------------------------
GUARANTOR, THE LENDERS AND THE AGENT HEREBY WAIVE ANY RIGHT TO A TRIAL BY JURY
IN ANY ACTION, PROCEEDING OR COUNTERCLAIM CONCERNING ANY RIGHTS UNDER THIS
AGREEMENT, THE NOTES OR OTHER LOAN DOCUMENTS, OR UNDER ANY AMENDMENT, WAIVER,
CONSENT, INSTRUMENT, DOCUMENT OR OTHER AGREEMENT DELIVERED OR WHICH IN THE
FUTURE MAY BE DELIVERED IN CONNECTION THEREWITH, OR ARISING FROM ANY BANKING
RELATIONSHIP EXISTING IN CONNECTION WITH THIS AGREEMENT, AND AGREE THAT ANY SUCH
ACTION, PROCEEDINGS OR COUNTERCLAIM SHALL BE TRIED BEFORE A COURT AND NOT BEFORE
A JURY. EACH BORROWER AND GUARANTOR CERTIFIES THAT NO OFFICER, REPRESENTATIVE,
AGENT OR ATTORNEY OF THE AGENT OR ANY LENDER HAS REPRESENTED, EXPRESSLY OR
OTHERWISE, THAT THE AGENT OR ANY LENDER WOULD NOT, IN THE EVENT OF ANY ACTION,
PROCEEDING OR COUNTERCLAIM, SEEK TO ENFORCE THE FOREGOING WAIVERS. EACH BORROWER
AND GUARANTOR HEREBY ACKNOWLEDGES THAT THIS PROVISION IS A MATERIAL INDUCEMENT
FOR THE AGENT AND THE LENDERS ENTERING INTO THIS AGREEMENT.
SECTION 11.14. Consent by the Agent. Except as otherwise
--------------------
expressly set forth herein to the contrary, if the consent, approval,
satisfaction, determination, judgment, acceptance or similar action (an
"Action") of the Agent or the Lenders shall be permitted or required pursuant to
any provision hereof or any provision of any other agreement to which any
Borrower or Guarantor is a party and to which the Agent or the Lenders has
succeeded thereto, such Action shall be required to be in writing and may be
withheld or denied by the Agent or any Lender, as the case may be, with or
without any reason, and without being subject to question or challenge on the
grounds that such Action was not taken in good faith.
SECTION 11.15. No Party Deemed Drafter. Each of the Borrowers,
-----------------------
the Guarantors, the Lenders and the Agent agrees that no party hereto shall be
deemed to be the drafter of this Agreement, and each of the Borrowers, the
Guarantors, the Lenders and the Agent further agrees that, in the event this
Agreement is ever construed by a court of law, such court shall not construe
this Agreement or any provision of this Agreement against any party hereto as
the drafter of this Agreement.
SECTION 11.16. Reinstatement; Certain Payments. If claim is ever
-------------------------------
made upon the Agent, the Lenders or the L/C Issuer for repayment or recovery of
any amount or amounts received by the Agent, the Lenders or the L/C Issuer in
payment or on account of any of the Obligations under this Agreement, the Agent,
the Lenders or the L/C Issuer shall give prompt notice of such claim to each
other Lender and the L/C Issuer, any Borrower, or any Guarantor and if the
Agent, the Lenders or the L/C Issuer repays all or part of said amount by reason
of (i) any judgment, decree or order of any court or administrative body having
jurisdiction over the Agent, the Lenders or the L/C Issuer or any of their
property, or (ii) any good faith settlement or compromise of any such claim
effected by the Agent with any such claimant, provided that, in the absence of
-------- ----
an Event of Default, reasonable efforts have been made by the Agent to give
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<PAGE>
notice of such settlement or compromise to the Administrative Borrower, then and
in such event each Borrower and Guarantor agrees that (A) any such judgment,
decree, order, settlement or compromise shall be binding upon such Borrower or
such Guarantor notwithstanding the cancellation of any Note or other instrument
evidencing the Obligations under this Agreement or the other Loan Documents or
the termination of this Agreement or the other Loan Documents, and (B) it shall
be and remain liable to the Agent, the Lenders or the L/C Issuer hereunder for
the amount so repaid or recovered to the same extent as if such amount had never
originally been received by the Agent, the Lenders or the L/C Issuer.
SECTION 11.17. Indemnification. In addition to all of any
---------------
Borrower's or any Guarantor's other Obligations under this Agreement, each
Borrower and Guarantor agrees to, jointly and severally, defend, protect,
indemnify and hold harmless the Agent, the L/C Issuer, each Lender, and all of
the respective officers, directors, employees, attorneys, consultants and agents
of the Agent, the L/C Issuer and each Lender (collectively called the
"Indemnitees") from and against any and all losses, damages, liabilities,
obligations, penalties, fees, costs and expenses (including, without limitation,
attorneys' fees, costs and expenses) incurred by such Indemnitees, whether prior
to or from and after the Effective Date, whether direct, indirect or
consequential, as a result of or arising from or relating to or in connection
with any of the following: (i) the negotiation, preparation, execution or
performance or enforcement of this Agreement or of any document executed in
connection with the transactions contemplated by this Agreement, (ii) the
Lender's furnishing of funds to such Borrower or such Guarantor or the L/C
Issuer's issuing Letters of Credit for the account of such Borrower or such
Guarantor under this Agreement, including, without limitation, the management of
any such Loans, or the Reimbursement Obligations, (iii) any matter relating to
the financing transactions contemplated by this Agreement or by any document
executed in connection with the transactions contemplated by this Agreement, or
(iv) any claim, litigation, investigation or proceeding relating to any of the
foregoing, whether or not any Indemnitee is a party thereto (collectively, the
"Indemnified Matters"); provided, however, that the Borrowers or such Guarantors
-------- -------
shall have no obligation to any Indemnitee hereunder for any Indemnified Matter
caused by or resulting from the gross negligence or willful misconduct of such
Indemnitee, as determined by a final judgment of a court of competent
jurisdiction. Such indemnification for all of the foregoing losses, damages,
fees, costs and expenses of the Indemnitees chargeable against the Loan Account.
To the extent that the undertaking to indemnify, pay and hold harmless set forth
in this Section 11.17 may be unenforceable because it is violative of any law
or public policy, the Borrowers and Guarantors shall contribute the maximum
portion which they are permitted to pay and satisfy under applicable law, to the
payment and satisfaction of all Indemnified Matters incurred by the Indemnitees.
SECTION 11.18. Binding Effect. This Agreement shall become
--------------
effective when it shall have been executed by the Borrowers, the Guarantors, the
Agent and the Lenders and when the conditions precedent set forth in Section
5.01 hereof have been satisfied or waived by the Agent, and thereafter shall be
binding upon and inure to the benefit of each Borrower, each Guarantor, the
Agent and each Lender, and their respective successors and assigns, except that
the Borrowers and the Guarantors shall not have the right to assign its rights
hereunder or
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<PAGE>
any interest herein without the prior written consent of all the Lenders, and
the assignment by any Lender shall be governed by Section 11.09 hereof.
ARTICLE XII
GUARANTY
SECTION 12.01. Guaranty. Each Guarantor, jointly and severally,
--------
hereby (i) irrevocably, absolutely and unconditionally guarantees the prompt
payment, as and when due and payable (whether by scheduled maturity, required
prepayment, acceleration, demand or otherwise), of (A) all of the Guaranteed
Obligations of such Guarantor, including, without limitation, all amounts now or
hereafter owing in respect of the Loan Documents, whether for principal,
interest, fees, expenses or otherwise, and (B) all indebtedness, obligations and
other liabilities, direct or indirect, absolute or contingent, now existing or
hereafter arising of any Borrower to the Lenders and (ii) agree to pay any and
all expenses (including reasonable counsel fees and expenses) incurred by the
Agent and the Lenders in enforcing its rights under this Article XII, provided
that, notwithstanding anything to the contrary contained in this Agreement, the
Guaranteed Obligations of Isaac Levy under clause (i) above this Section 12.01
are limited to the principal amount of $2,000,000 and all accrued and unpaid
interest on such principal amount (the "Limitation").
SECTION 12.02. Obligations Unconditional.
-------------------------
(a) Each of the Guarantors hereby jointly and severally
guarantees that, subject to the Limitation, the Guaranteed Obligations of such
Guarantor will be paid strictly in accordance with the terms of the Loan
Documents, regardless of any law, regulation or order now or hereafter in effect
in any jurisdiction affecting any of such terms or the rights of the Lenders
with respect thereto. Each Guarantor agrees that its guarantee constitutes a
guaranty of payment when due and not of collection, and waives any right to
require that any resort be had by the Lenders to any security held for payment
of the Guaranteed Obligations or to any balance of any deposit account or credit
on the books of the Lenders in favor of any Borrower or for any other reason.
The liability of each of the Guarantors hereunder shall be absolute and
unconditional, joint and several, irrespective of: (i) any lack of validity or
enforceability of any Loan Document or any agreement or instrument relating
thereto; (ii) any extension or change in the time, manner or place of payment
of, or in any other term in respect of, all or any of the Guaranteed Obligations
(including, without limitation, any extension for longer than the original
period), or any other amendment or waiver of or consent to any departure from
any provision of any Loan Document; (iii) any exchange or release of, or non-
perfection of any lien on or security interest in, any Collateral, or any
release or amendment or waiver of or consent to any departure from any other
guaranty, for all or any of the Guaranteed Obligations; or (iv) any other
circumstance which might otherwise constitute a defense available to, or a
discharge of, any Borrower or any other guarantor in respect of the Guaranteed
Obligations of the Guarantors in respect hereof.
(b) This Guaranty (i) is a continuing guaranty and shall remain
in full force and effect until such date on which all of the Guaranteed
Obligations and all other expenses to be
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<PAGE>
paid by any Guarantors pursuant hereto shall have been satisfied in full after
the Total Credit Exposure shall have been terminated, (ii) shall continue to be
effective or shall be reinstated, as the case may be, if at any time any payment
of any of the Guaranteed Obligations is rescinded or must otherwise be returned
by the Agent or the Lenders upon the insolvency, bankruptcy or reorganization of
any Borrower or any Guarantor or otherwise, all as though such payment had not
been made, and (iii) shall be binding upon each Guarantor, their heirs,
executors, successors and assigns.
SECTION 12.03. Waivers. Each of the Guarantors hereby waive, to
-------
the extent permitted by applicable law, (i) promptness and diligence, (ii)
notice of acceptance and notice of the incurrence of any Guaranteed Obligation,
(iii) notice of any action taken by the Agent, the Lenders or any Borrower or
any other agreement or instrument relating thereto, (iv) all other notices,
demands and protests, and all other formalities of every kind in connection with
the enforcement of the Guaranteed Obligations or of the obligations of the
Guarantors hereunder, the omission of or delay in which, but for the provisions
of this Section 12.03, might constitute grounds for relieving the Guarantors of
their obligations hereunder, (v) any requirement that the Agent or the Lenders
protect, secure, perfect or insure any security interest or lien or any property
subject thereto or exhaust any right or take any action against any Person or
any Collateral, and (vi) any other defenses available to the Borrower or such
Guarantor. All such waivers by any Guarantor shall be effective only to the
extent permitted by applicable law.
SECTION 12.04. Subrogation. Each of the Guarantors hereby
-----------
irrevocably waives and agrees that it will not exercise any and all rights which
it has or may have at any time or from time to time (whether arising directly
or indirectly by operation of law or contract) to assert any claim against any
Borrower or any other Guarantor on account of any payments made under this
Agreement, including, without limitation, any and all existing and future rights
of subrogation, reimbursement, exoneration, contribution and/or indemnity. If
any amount shall be paid to any Guarantor on account of such rights at any time
when all of such Guaranteed Obligations and all other Guaranteed Obligations
shall not have been paid in full, such amount shall be held in trust for the
benefit of the Agent or the Lenders, shall be segregated from the other funds of
such Guarantor and shall forthwith be paid over to the Agent to be applied in
whole or in part by the Agent against the Guaranteed Obligations, whether
matured or unmatured, in accordance with the terms of this Agreement.
SECTION 12.05. No Waiver: Remedies. No failure on the part of the
-------------------
Agent or the Lenders to exercise, and no delay in exercising, any right
hereunder shall operate as a waiver thereof; nor shall any single or partial
exercise of any right hereunder preclude any other or further exercise thereof
or the exercise of any other right. The remedies herein provided are cumulative
and not exclusive of any remedy provided by law.
SECTION 12.06. Stay of Acceleration. If acceleration of the time
--------------------
for payment of any amount payable by any Borrower in respect of the Guaranteed
Obligations is stayed upon the insolvency, bankruptcy or reorganization of such
Borrower, all such amounts otherwise subject to acceleration under the terms of
this Agreement shall nonetheless be payable by the Guarantors hereunder
forthwith on demand by the Agent or the Lenders.
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<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement
to be executed by their respective officers thereunto duly authorized, as of the
date first above written.
BORROWERS
---------
HAPPY KIDS, LTD.
By: /s/ Jack M. Benun
-------------------------------
Title: President
------------------------
Name: Jack M. Benun
------------------------
O'BOY INC.
By: /s/ Jack M. Benun
-------------------------------
Title: President
------------------------
Name: Jack M. Benun
------------------------
TALK OF THE TOWN APPAREL CORP.
By: /s/ Jack M. Benun
-------------------------------
Title: President
------------------------
Name: Jack M. Benun
------------------------
O.P. KIDS, L.L.C.
By: /s/ Jack M. Benun
-------------------------------
Title: President
------------------------
Name: Jack M. Benun
------------------------
GUARANTORS
----------
H.O.T. KIDZ, L.L.C.
By: /s/ Jack M. Benun
-------------------------------
Title: President
------------------------
Name: Jack M. Benun
------------------------
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<PAGE>
HAWK INDUSTRIES, INC.
By: /s/ Jack M. Benun
-------------------------------
Title: President
------------------------
Name: Jack M. Benun
------------------------
J&B 18 CORP
By: /s/ Jack M. Benun
-------------------------------
Title: President
------------------------
Name: Jack M. Benun
------------------------
/s/ Jack M. Benun
-----------------------------------
JACK M. BENUN
/s/ Mark J Benun
-----------------------------------
MARK J. BENUN
/s/ Isaac Levy
-----------------------------------
ISAAC LEVY
AGENT AND LENDER
----------------
THE CIT GROUP/COMMERCIAL SERVICES,
INC.
By: /s/ Barbara Rechan
-------------------------------
Title: Vice President
------------------------
Name: Barbara Rechan
------------------------
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<PAGE>
LENDERS
-------
CHEMICAL BANK
By: /s/ Randolph Cates
-------------------------------
Title: Vice President
---------------------
Name: Randolph Cates
---------------------
Address:
-------
111 West 40th Street, 10th Floor
New York, New York 10018
Attention: Randolph E. Cates
Vice President
Telephone: (212) 403-5107
Telecopier: (212) 403-5089
THE CHASE MANHATTAN BANK, N.A.
By: /s/ Roberta Weissenberg
-------------------------------
Title: Vice President
------------------------
Name: Roberta Weissenberg
------------------------
Address:
-------
1411 Broadway, 5th Floor
New York, New York 10018
Attention: Roberta L. Weissenberg
Vice President
Telephone: (212) 391-6082
Telecopier: (212) 391-7118
-82-
<PAGE>
ISRAEL DISCOUNT BANK OF NEW YORK
By: /s/ Barry Shivak & Phyllis Rosenfeld
------------------------------------------
Title: Vice President
-----------------------------------
Name: Barry Shivak & Phyllis Rosenfeld
-----------------------------------
Address:
-------
511 Fifth Avenue, 6th Floor
New York, New York 10017
Attention: Barry Shivak
Vice President
--------------
Telephone: (212) 551-8829
Telecopier: (212) 551-8720
511 Fifth Avenue, 6th Floor
New York, New York 10017
Attention: Theodore Itzkowitz, Esq.
General Counsel
Telephone: (212) 551-8902
(212) 551-8916
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<PAGE>
SCHEDULE A
----------
PART A: Prior to May 31, 1996
- -------
<TABLE>
<CAPTION>
Lender Exposure Percentage
- ------ -------- ----------
<S> <C> <C>
The CIT Group/Commercial Services, Inc. $10,000,000.00 27.7778%
Chemical Bank $12,187,500.00 33.8542%
The Chase Manhattan Bank, N.A. $ 8,125,000.00 22.5694%
Israel Discount Bank of New York $ 5,687,500.00 15.7986%
-------------- -------
$36,000,000.00 100.00%
<CAPTION>
PART B: On and after May 31, 1996
- -------
Lender Exposure Percentage
- ------ -------- ----------
<S> <C> <C>
The CIT Group/Commercial Services Inc. $ 8,888,888.89 27.7778%
Chemical Bank $10,833,333.33 33.8542%
The Chase Manhattan Bank, N.A. $ 7,222,222.22 22.5694%
Israel Discount Bank of New York $ 5,055,555.56 15.7986%
-------------- -------
$32,000,000.00 100.00%
</TABLE>
<PAGE>
SCHEDULE B
----------
Guarantors
----------
H.O.T. Kidz, a New York limited liability company
Hawk Industries, Inc., a New Jersey corporation
J & B 18 Corp., a New York corporation
Jack M. Benun
Mark J. Benun
Isaac Levy
<PAGE>
FIRST AMENDMENT
TO THE
FINANCING AGREEMENT
FIRST AMENDMENT, dated as of February 13, 1997 (this "Amendment"), to
the Financing Agreement, dated as of February 13, 1996 (the "Financing
Agreement"), by and among Happy Kids, Ltd., a New York corporation ("Happy
Kids"), O'Boy Inc., a New York corporation ("O'Boy"), Talk of the Town Apparel
Corp., a New York corporation ("TOT Apparel") and O.P. Kids L.L.C., a New Jersey
limited liability company ("OP, LLC" and together with Happy Kids, O'Boy and TOT
Apparel, each a "Borrower" and collectively, the "Borrowers"), the guarantors
listed on Schedule B to the Financing Agreement (each a "Guarantor" and
collectively, the "Guarantors"), the lenders listed on Schedule A to the
Financing Agreement (each a "Lender" and collectively the "Lenders") and The CIT
Group/Commercial Services, Inc., as agent for the Lenders (in such capacity, the
"Agent").
The Borrowers, the Guarantors, the Lenders and the Agent wish to amend
the Financing Agreement to (i) increase the Credit Exposure (as defined in the
Financing Agreement) of each Lender and the Total Credit Exposure (as defined in
the Financing Agreement), (ii) amend the tangible net worth financial covenant,
and (ii) eliminate the working capital financial covenant. Accordingly, the
Borrowers, the Guarantors, the Lenders and the Agent hereby agree as follows:
1. Definitions. All terms which are defined in the Financing
-----------
Agreement and not otherwise defined herein are used herein as defined therein.
2. Recitals. The Recitals are hereby amended by deleting the words",
--------
reducing to an aggregate principal amount not in excess of $32,000,000 at any
time outstanding on and after May 31, 1996 "and substituting in lieu thereof"
reducing to an aggregate principal amount not in excess of $32,000,000 during
the periods from April 1, 1997 through May 31, 1997 and after September 30,
1997 and reducing to aggregate principal amount not in excess of $35,000,000
during the period from January 1, 1997 through March 31, 1997."
3. Changes to Existing, Definitions. The definitions of the terms
--------------------------------
"Credit Exposure" and "Total Credit Exposure" in Section 1.01 of the Financing
Agreement are hereby amended in their entirety to read as follows:
"Credit Exposure" means, with respect to each Lender, the total
----------------
credit exposure of such Lender (i) prior to April 1, 1997, as set
forth in Part A of Schedule A hereto, (ii) during the periods from
April 1, 1997 through May 31, 1997 and after September 30, 1997, as
set forth in Part B of Schedule A hereto, and (iii) during the
period from June 1, 1997 through September
<PAGE>
30, 1997, as set forth in Part C of Schedule A hereto, in each case
as the same may be adjusted from time to time pursuant to Sections
10.01 or 11.01 hereof."
"Total Credit Exposure" means (i) prior to April 1, 1997, as set
---------------------
forth in Part A of Schedule A hereto, (ii) during the periods from
April 1,1997 through May 31, 1997 and after September 30, 1997, as
set forth in Part B of Schedule A hereto, and (iii) during the
period from June 1, 1997 through September 30, 1997, as set forth
in Part C of Schedule A hereto, in each case as the same may be
adjusted from time to time pursuant to Sections 10.01 or 11.01
hereof."
4. Credit Exposure. Section 2.01 of the Financing Agreement is
---------------
hereby amended by deleting clause (iii) thereof in its entirety and substituting
in lieu thereof "(iii) $26,000,000 increasing to $30,500,000 during the period
from June 1, 1997 through September 30, 1997".
5. Financial Covenants.
-------------------
(a) Tanigible Net Worth. Clause (i) of Section 7.01(1) of the
-------------------
Financing Agreement is hereby amended to read in its entirety as follows:
"(i) Tangible Net Worth. Maintained Combined Tangible Net Worth
------------------
(before any LIFO adjustments made for the prior fiscal year in
accordance with GAAP) on each date set forth below of at least:
<TABLE>
<CAPTION>
Date Minimum Combined Tangible Net Worth
---- -----------------------------------
<S> <C>
December 31, 1996 $6,500,000
March 31, 1997 $7,250,000
June 30, 1997 $6,250,000
September 30,1997 $8,100,000
December 31, 1997 $7,750,000"
</TABLE>
(b) Working Capital. Clause (ii) of Section 7.01(1) of the
---------------
Financing Agreement is hereby amended to read in its entirety as follows:
"(ii) intentionally omitted"
(c) Miscellaneous. Clause (iv) of Section 7.01(l) of the
-------------
Finanicing Agreement is hereby amended by deleting the words "minimum Working
Capital," in the fourth line thereof.
6. Schedule. Schedule A to the Financing Agreement is hereby amended
--------
by deleting such Schedule in its entirety and substituting in lieu thereof new
Schedule A, which is attached hereto as Annex 1.
2
<PAGE>
7. Conditions. This Amendment shall become effective only upon
----------
satisfaction in full of the following conditions precedent (the first date upon
which all such conditions have been satisfied being herein called the "Amendment
Effective Date"):
(a) The representations and warranties contained in this
Amendment and in Article VI of the Financing Agreement and each other Loan
Document shall be correct in all material respects on and as of the Amendment
Effective Date as though made on and as of such date (except where such
representations and warranties relate to an earlier date in which case such
representations and warranties shall be true and correct as of such earlier
date); no Event of Default or Potential Default shall have occurred and be
continuing on the Amendment Effective Date or result from this Amendment
becoming effective in accordance with its terms.
(b) The Agent shall have received counterparts of this Amendment,
duly executed by the Borrowers, the Guarantors and the Lenders.
(c) All legal matters incident to this Amendement shall be
satisfactory to the Agent and its counsel.
8. Representations and Warranties. Each of the Borrowers and the
------------------------------
Guarantors represents and warrants as follows:
(a) Each Borrower and Corporate Guarantor (i) is a corporation
or limited liability company duly organized, validly existing and in good
standing under the laws of the state of its organization and (ii) has all
requisite power, authority and legal right to execute, deliver and perform each
Amendment Document to which it is a party, and to perform the Financing
Agreement, as amended hereby.
(b) The execution, delivery and performance by each Borrower and
Corporate Guarantor of each Amendment Document to which it is a party and the
performance by each Borrowers and Corporate Guarantor of the Financing Agreement
as amended hereby (i) have been duly authorized by all necessary action, (ii) do
not and will not violate or create a default under any Borrower's or Corporate
Guarantor's charter, articles of organization, by-laws or operating agreement,
any such applicable law or any contractual restriction binding or otherwise
affecting any Borrower or Corporate Guarantor or any of such Borrower's or
Corporate Guarantor's properties, and (iii) except as provided in the Loan
Documents, do not and will not result in or require the creation of any lien,
security interest or other charge or encumbrance upon or with respect to any
Borrower's or Corporate Guarantor's property.
(c) No authorization or approval or other action by, and no
notice to or filing with, any Governmental Authority or other regulatory body is
required in connection with the due execution, delivery and performance by any
of the Borrowers and the Guarantors of each Amendment Document to which it is a
party and the performance by the Borrowers and the Guarantors of the Financing
Agreement as amended hereby.
3
<PAGE>
(d) Each Amendment Document and the Financing Agreement, as
amended hereby, constitute the legal, valid and binding obligations of the
Borrowers and the Guarantors party thereto, enforceable against each such Person
in accordance with their terms.
(e) The representations and warranties contained in Article VI of
the Financing Agreement are correct on and as of the Amendment Effective Date as
though made on and as of the Amendment Effective Date (except to the extent such
representations and warranties expressly relate to an earlier date), and no
Event of Default or Potential Default has occurred and is continuing on and as
of the Amendment Effective Date or will result from this Amendment becoming
effective in accordance with its terms.
9. Waiver and Consent. (a) Pursuant to the request of the Borrowers
------------------
and Guarantors and in accordance with Section 11.03 of the Financing Agreement,
and subject to the satisfaction of the conditions to the effectiveness set forth
in Section 7 of this Amendment, the Lenders and the Agent hereby consent to, and
waive any Event of Default that would otherwise arise under Section 10.01 of the
Financing Agreement from, any non-compliance by the Borrowers with (i) the
provisions of (i) the provisions of Section 7.01 (1)(i) of the Financing
Agreement by reason of the failure of the Borrowers and the Corporate Guarantors
to maintain a Combined Tangible Net Worth Tangible Net Worth of at least
$7,300,000 on September 30, 1996 and $7,250,000 on December 31, 1996, provided
that the Combined Tangible Net Worth was at least $5,900,000 on September 30,
1996 and $6,500,000 on December 31, 1996, (ii) the provisions of Section 7.01(r)
of the Financing Agreement by reason of the aggregate payments made by Happy
Kids in connection with the settlement of the Internal Revenue Service audit for
the 1991, 1992 and 1993 tax years of Happy Kids exceeding $250,000, provided
that such payments do not exceed $290,000, (iii) Sections 7.02(b)(viii) and
7.02(n) of the Financing Agreement by reason of the incurrence of minimum
royalty payments under License Agreements not existing on the Effective Date in
an amount in excess of $250,000 in 1996, provided that such minimum royalty
payments did not exceed $330,000 in 1996, (iv) Section 7.02(h) of the Financing
Agreement by reason of the Borrowers and Corporate Guarantors making capital
expenditures in 1996 exceeding $200,000, provided that the amount of such
capital expenditures did not exceed $493,000 in 1996, and (v) Section 7.02(m)(2)
of the Financing Agreement by reason of the failure of the Borrowers and the
Corporate Guarantors to reduce the Accounts Receivable owing from Suzzette
Kiddie Togs to an amount of not more than $350,000, provided that (A) prior to
June 30, 1997, the amount of such Accounts Receivable does not exceed $366,500,
and (B) on and after June 30, 1997, the amount of such Accounts Receivable does
not exceed $350,000.
(b) The waivers and consents in this Section 9 shall be effective
only in this specific instance and for the specific purposes set forth herein
and do not allow for any other or further departure from the terms and
conditions of the Financing Agreement or any other Loan Document, which terms
and conditions shall continue in full force and effect.
10. Continued Effectivenes of the Financing Agreement. Each of the
-------------------------------------------------
Borrowers and the Guarantors hereby (i) confirms and that each Loan Document to
which it is a party is, and shall continue to be, in full force and effect and
is hereby ratified and confirmed in all respects except that on and after the
Amendment Effective Date all references in
4
<PAGE>
any such Loan Document to "the Financing Agreement", "thereto", thereof",
"thereunder" or words of like import referring to the Financing Agreement shall
mean the Financing Agreement as amended by this Amendment, and (ii) confirms and
agrees that to the extent any such Loan Document purports to assign or pledge to
the Agent, or to grant to the Agent a security interest in or lien on, any
collateral as security for the Obligations of the Borrowers or the Guarantors
from time to time existing in respect of the Financing Agreement and the Loan
Documents, such pledge, assignment and/or grant of the security interest or lien
is hereby ratified and confirmed in all respects.
11. Miscellaneous.
-------------
(a) This Amendment may be executed in any number of counterparts
and by different parties hereto in separate counterparts, each of which shall be
deemed to be an original, but all of which taken together shall constitute one
and the same agreement.
(b) Section and paragraph headings herein are included for
convenience of reference only and shall not constitute a part of this Amendment
for any other purpose.
(c) This Amendment shall be governed by, and construed in
accordance with, the laws of the State of New York.
(d) The Borrowers will pay on demand all reasonable fees, costs
and expenses of the Agent in connection with the preparation, execution and
delivery of this Amendment and the other Amendment Documents, including, without
limitation, the reasonable fees, disbursements and other charges of Schulte Roth
& Zabel LLP, counsel to the Agent.
5
<PAGE>
IN WITNESS WHEREOF, the parties hereto) have caused this Amendment to
be executed by their respective officers thereunto duly authorized, as of the
date first above written.
BORROWERS
---------
HAPPY KIDS, LTD.
By: /s/ Jack M. Benun
-------------------------------------
Title: PRES
------------------------------
Name: JACK M BENUN
-------------------------------
O'BOY INC.
By: /s/ Jack M. Benun
--------------------------------------
Title: PRES
------------------------------
Name: JACK M BENUN
-------------------------------
TALK OF THE TOWN APPAREL CORP.
By: /s/ Jack M. Benun
-------------------------------------
Title: PRES
------------------------------
Name: JACK M BENUN
-------------------------------
O.P. KIDS, L.L.C.
By: /s/ Jack M Benun
------------------------------------
Title: PRES
------------------------------
Name: JACK M BENUN
-------------------------------
GUARANTORS
----------
H.O.T. KIDZ, L.L.C.
By: /s/ Jack M. Benun
-------------------------------------
Title: PRES
------------------------------
Name: JACK M BENUN
-------------------------------
6
<PAGE>
HAWK INDUSTRIES, INC.
By: /s/ Jack M. Benun
------------------------------------
Title:____________________________
Name:_____________________________
J&B 18 CORP.
By: /s/ Jack M. Benun
-------------------------------------
Title:_____________________________
Name:______________________________
/s/ Jack M. Benun
-----------------------------------------
JACK M. BENUN
/s/ Mark J. Benun
-----------------------------------------
MARK J. BENUN
/s/ Isaac Levy
-----------------------------------------
ISAAC LEVY
AGENT AND LENDER
----------------
THE CIT GROUP/COMMERCIAL SERVICES, INC.
By: _____________________________________
Title:_____________________________
Name:______________________________
LENDERS
-------
THE CHASE MANHATTAN BANK, formerly known
as Chemical Bank
By: /s/ Rebecca B. Allerdyee
--------------------------------------
Title: VP
------------------------------
Name: Rebecca B. Allerdyee
------------------------------
7
<PAGE>
HAWK INDUSTRIES, INC.
By: /s/ Jack M. Benun
---------------------------------------
Title:________________________________
Name:_________________________________
J&B 18 CORP.
By: /s/ Jack M. Benun
---------------------------------------
Title:________________________________
Name:_________________________________
/s/ Jack M. Benun
-------------------------------------------
JACK M. BENUN
/s/ Mark J. Benun
-------------------------------------------
MARK J. BENUN
/s/ Isaac Levy
-------------------------------------------
ISAAC LEVY
AGENT AND LENDER
----------------
THE CIT GROUP/COMMERCIAL SERVICES, INC.
By: /s/ Deborah Rogut
---------------------------------------
Title: AVP
------------------------------
Name: Deborah Rogut
------------------------------
LENDERS
-------
THE CHASE MANATTAN BANK, formerly
known as Chemical Bank
By:________________________________________
Title:______________________________
Name:_______________________________
7
<PAGE>
ISRAEL DISCOUNT BANK OF NEW YORK
By: /s/ [ILLEGIBLE SIGNATURE]
-------------------------------------
Title: AVP
----------------------------
Name: [ILLEGIBLE]
----------------------------
By: /s/ [ILLEGIBLE SIGNATURE]
-------------------------------------
Title: VP
----------------------------
Name: [ILLEGIBLE]
-----------------------------
8
<PAGE>
SECOND AMENDMENT
TO THE
FINANCING AGREEMENT
SECOND AMENDMENT, dated as of June 1, 1997 (this "Amendment"), to
the Financing Agreement, dated as of February 13, 1996, as amended by the First
Amendment dated as of February 13, 1997 (the "Financing Agreement"), by and
among Happy Kids, Ltd., a New York corporation ("Happy Kids"), O'Boy Inc., a New
York corporation ("O'Boy"), Talk of the Town Apparel Corp., a New York
corporation ("TOT Apparel") and O.P. Kids L.L.C., a New Jersey limited liability
company ("OP, LLC" and together with Happy Kids, O'Boy and TOT Apparel, each a
"Borrower" and collectively, the "Borrowers"), the guarantors listed on Schedule
B to the Financing Agreement (each a "Guarantor' and collectively, the
"Guarantors"), the lenders listed on Schedule A to the Financing Agreement (each
a "Lender" and collectively the "Lenders") and The CIT Group/Commercial
Services, Inc., as agent for the Lenders (in such capacity, the "Agent").
The Borrowers, the Guarantors, the Lenders and the Agent wish to
amend the Financing Agreement to (i) change the Credit Exposure (as defined in
the Financing Agreement) of each Lender and the Total Credit Exposure (as
defined in the Financing Agreement), (ii) to increase the maximum amount of
permitted Loans and the L/C Subfacility (as defined in the Financing Agreement),
(iii) to increase the interest rate on up to $5 million of the outstanding Loans
by 3% per annum until the Borrowers receive the proceeds of Additional Financing
(as defined in the Financing Agreement), and (iv) to amend certain other terms
and conditions in the Financing Agreement. Accordingly, the Borrowers, the
Guarantors, the Lenders and the Agent hereby agree as follows:
1. Definitions. All terms which are defined in the Financing
-----------
Agreement and not otherwise defined herein are used herein as defined therein.
2. Recitals. The first two sentences in the Recitals are hereby
--------
amended in their entirety to read as follows: "The Borrowers and the Guarantors
have asked the Lenders to extend credit to the Borrowers, from the date hereof
through the Final Maturity Date (as hereinafter defined) in the form of
discretionary revolving credit loans to the Borrowers at any time and from time
to time prior to the Final Maturity Date in an aggregate principal amount not in
excess of $41,500,000 (i) reducing to an aggregate principal amount not in
excess of $32,000,000 during the period after September 30, 1997 and (ii)
reducing by the cash proceeds received by the Borrower from any Additional
Financing (as hereinafter defined). This revolving credit facility may include a
$21,000,000 letter of credit subfacility."
3. Existing Definitions. (a) The definition of the term "Credit
--------------------
Exposure" in Section 1.01 of the Financing Agreement is hereby amended in its
entirety to read as follows:
<PAGE>
"Credit Exposure" means, with respect to each Lender, the
---------------
total credit exposure of such Lender (i) (A) during the period
from June 1, 1997 through September 30, 1997, as set forth in
Part A of Schedule A hereto and (B) during the period after
September 30, 1997, as set forth in Part B of Schedule A hereto,
less (ii) in the case of each subclause (A) and (B) in clause (i)
----
above, each such Lender's Pro Rata Share of the cash proceeds of
any Additional Financing received by the Borrowers, in each case
as the same may be further adjusted from time to time pursuant to
Sections 10.01 or 11.01 hereof."
(b) The definition of the term "L/C Subfacility" in Section 1.01
of the Financing Agreement is hereby amended by deleting the amount
"$18,000,000" and substituting in lieu thereof "$21,000,000".
(c) The definition of the term "Total Credit Exposure" in
Section 1.01 of the Financing Agreement is hereby amended in its entirety to
read as follows:
"Total Credit Exposure" means (i) (A) during the period from
---------------------
June 1, 1997 through September 30, 1997, as set forth in Part A
of Schedule A hereto and (B) during the period after September
30, 1997, as set forth in Part B of Schedule A hereto, less (ii)
in the case of each subclause (A) and (B) above, the cash
proceeds of any Additional Financing received by the Borrowers,
in each case as the same may be further adjusted from time to
time pursuant to Sections 10.01 or 11.01 hereof."
4. New Definitions. The following definitions of the terms
---------------
"Additional Financing" and "Increased Interest Amount" are hereby added to
Section 1.01 to the Financing Agreement:
"Additional Financing" has the meaning specified therefor
--------------------
in Section 2.06(a) hereof."
"Increased Interest Amount" has the meaning specified
-------------------------
therefor in Section 2.06(a) hereof."
5. Credit Exposure. Section 2.01 of the Financing Agreement is
---------------
hereby amended by deleting clause (iii) thereof in its entirety and substituting
in lieu thereof (iii) $26,000,000 increasing to $34,000,000 during the period
from June 1, 1997 through September 30, 1997."
6. Interest.
--------
(a) Loans. Section 2.06(a) of the Financing Agreement is
-----
hereby amended to read in its entirety as follows:
"Each Loan will bear interest on the principal amount
thereof from time to time outstanding from the date of such Loan
until such principal amount becomes
2
<PAGE>
due (i) on the Increased Interest Amount (as hereinafter defined)
of the Loans, at the Prime Rate plus 4% and (ii) on the
outstanding principal amount of the Loans in excess of the
Increased Interest Amount, at the Prime Rate plus 1%. The
Increased Interest Amount shall mean, on and after June 1, 1997,
the difference, if any, between (A) $5,000,000 and (B) the amount
of cash equity contributed to the Borrowers or other financing
obtained by the Borrowers, in each case pursuant to
documentation, on terms and in all other respects satisfactory to
the Lenders (the equity contribution or financing described in
this clause (B) is hereinafter referred to as the "Additional
Financing"). The Increased Interest Amount shall only be reduced
to the extent that the Borrowers have provided the Lenders with
evidence, reasonably satisfactory to the Lenders, that the cash
proceeds of such Additional Financing have been received by the
Borrowers. The Increased Interest Amount of the Loans shall be
allocated among the Lenders based on their respective Pro Rata
Shares."
(b) Default Interest. Section 2.06(b) of the Financing
----------------
Agreement is hereby amended in its entirety to read as follows:
"Any amount of principal of any Loan and (to the extent
permitted by law) interest and other amounts which are not paid
when due, whether upon demand, by acceleration or otherwise,
shall bear interest from the day when due until such amount is
paid in full at a fluctuating interest rate per annum equal at
all times to (i) on any principal amount of the Loans, up to the
Increased Interest Amount, which is not paid when due, at the
Post Default Rate plus 1-1/2% and (ii) on any principal amount of
the Loans which is not paid when due, in excess of the Increased
Interest Amount, and all other amounts not paid when due, at the
Post Default Rate."
7. Collateral Deficiency Fee. The following new Section 4.01(e)
-------------------------
is hereby added to the Financing Agreement:
"(e) Collateral Deficiency Fee. If on or before September
-------------------------
30, 1997, the Borrowers shall fail to deliver to, or cause to be
delivered to, the Agent $500,000 to be held as cash collateral for the
Obligations pursuant to documentation, on terms and in all other
respects satisfactory to the Agent in its sole discretion, the
Borrowers shall jointly and severally pay to the Agent for the account
of the Lenders in accordance with the Lenders' respective Pro Rata
Shares (or the Agent may charge the Loan Account pursuant to Section
4.02) a collateral deficiency fee of $50,000, which fee shall be
earned in full on September 30, 1997."
8. Cash Collateral. The following new Section 7.01(s) is hereby
---------------
added to the Financing Agreement:
"(s) Additional Cash Collateral. On or before September 30,
--------------------------
1997, the Borrowers shall deliver, or cause to be delivered, to the
Agent $500,000 to be held
3
<PAGE>
as cash collateral for the Obligations pursuant to documentation,
on terms and in all other respects satisfactory to the Agent in
its sole discretion."
9. Schedule. Schedule A to the Financing Agreement is hereby
--------
amended by deleting such Schedule in its entirety and substituting in lieu
thereof new Schedule A, which is attached hereto as Annex I.
10. Assignments. (a) On and as of the Second Amendment Effective
-----------
Date (as hereinafter defined), Chase hereby sells and assigns to CIT, and CIT
hereby purchases and assumes from Chase, a 7.48% interest in and to all of
Chase's rights and obligations as a Lender under the Financing Agreement as of
the Second Amendment Effective Date (including, without limitation (i) Chase's
Credit Exposure set forth in Section 2.01 of the Financing Agreement, (ii) the
outstanding principal amount of the Loans made by Chase, and (iii) Chase's
interest in all outstanding Letter of Credit Obligations): Such assignment and
purchase shall be without recourse or representation,except that Chase
represents and warrants to CIT that it is the legal and beneficial owner of the
interests assigned by it free and clear of any Lien.
(b) On the Second Amendment Effective Date (i) CIT, shall
pay the purchase price for the Loans purchased by it pursuant to paragraph (a)
of this Section 10 by wire transfer of immediately available funds to the Agent
in New York, New York, not later than 12:00 noon, New York City time, and (ii)
the Agent shall promptly pay to Chase, out of the amounts received by it
pursuant to clause (i) of this paragraph (b), the purchase price for the
interests assigned by it pursuant to such paragraph (a) by wire transfer of
immediately available funds to an account designated by Chase.
(c) The Borrowers and each Guarantor hereby consent to the
assignment and purchase provided for in paragraphs (a) and (b) of this Section
10 and agree that, commencing on the Second Amendment Effective Date, CIT shall
have all the rights of a Lender under the Financing Agreement with respect to
the interest purchased by it pursuant to, such paragraphs.
11. Delivery of Notes. Each Lender shall deliver to the Agent,
-----------------
for delivery to and cancellation by the Borrowers, all Notes issued by the
Borrowers and held by the Lenders under the Financing Agreement (collectively,
the "Old Notes"). Thee Borrowers shall execute and deliver to the Agent for the
account of each Lender the Notes which such Lender is entitled to receive
pursuant to Section 2.04 of the Financing Agreement, in the form of Exhibit A
thereto and in the principal amount for each Lender equal to its Pro Rata Share
of the Total Credit Exposure, as set forth in Annex I to this Amendment (the
"New Notes"). The Agent shall release and deliver the Old Notes to the Borrowers
for cancellation and deliver the New Notes to the Lenders.
12. Accrued Interest and Fees. At the times and pursuant to the
-------------------------
terms contained in the Financing Agreement, the Agent will pay all accrued
interest and fees payable pursuant to Sections 2.06(a), 3.03(b) and 4.01(c) of
the Financing Agreement to the Lenders entitled thereto after giving effect to
the assignments and purchases made pursuant to Section 10 above.
4
<PAGE>
13. Conditions. This Amendment shall become effective only upon
----------
satisfaction in full of the following conditions precedent (the first date upon
which all such conditions have been satisfied being herein called the "Second
Amendment Effective Date"):
(a) The representations and warranties contained in this
Amendment and in Article VI of the Financing Agreement and each other Loan
Document shall be correct on and as of the Second Amendment Effective Date as
though made on and as of such date (except where such representations and
warranties relate to an earlier date in which case such representations and
warranties shall be true and correct as of such earlier date); no Event of
Default or Potential Default shall have occurred and be continuing on the Second
Amendment Effective Date or result from this Amendment becoming effective in
accordance with its terms.
(b) The Agent shall have received counterparts of this
Amendment, duly executed by the Borrowers, the Guarantors and the Lenders.
(c) The Agent shall have received the New Notes (the New
Notes together with this Amendment, the "Amendment Documents"), duly executed by
each of the Borrowers.
(d) The Borrowers shall pay to the Agent for the account
of the Lenders in accordance with the Lenders' respective Pro Rata Shares (or
the Agent may charge the Loan Account pursuant to Section 4.02) a non-refundable
amendment fee of $125,000, which fee is earned, in full, on the date hereof.
(e) - The Agent shall have received a copy of the
resolutions adopted by the Board of Directors or other governing body of each of
the Borrowers and the Corporate Guarantors, certified as of the Second Amendment
Effective Date by authorized officers thereof, authorizing (A) the transactions
contemplated by the Amendment Documents, and the Financing Agreement as amended
hereby, and (B) the execution, delivery and performance by each of the Borrowers
and the Corporate Guarantors of the Amendment Documents to which it is a party.
(f) The Agent shall have received a certificate of
authorized officers of the Borrowers and Corporate Guarantors certifying the
names and true signatures of the officers of the Borrowers and the Corporate
Guarantors authorized to sign the Amendment Documents, together with evidence of
the incumbency of such authorized officers.
(g) The Agent shall have received a certificate of the
chief executive officer or the chief financial officer of each of the Borrowers
and Corporate Guarantors certifying as to the matters set forth in subsection
(a) of this Section 13.
(h) All legal matters incident to this Amendment shall be
satisfactory to the Agent and its counsel.
14. Representations and Warranties. Each of the Borrowers and
------------------------------
the Guarantors represents and warrants as follows:
5
<PAGE>
(a) Each Borrower and Corporate Guarantor (i) is a
corporation or limited liability company duly organized, validly existing and in
good standing under the laws of the state of its organization and (ii) has all
requisite power, authority and legal right to execute, deliver and perform the
Amendment Documents to which it is a party, and to perform the Financing
Agreement, as amended hereby.
(b) The execution, delivery and performance by it of each
Amendment Document to which it is a party and the performance by it of the
Financing Agreement, as amended hereby (i) have been duly authorized by all
necessary action, (ii) do not and will not violate or create a default under its
articles of organization, by-laws or operating agreement or any applicable law
or any contractual restriction binding or otherwise affecting it or any of its
properties, and (iii) except as provided in the Loan Documents, do not and will
not result in or require the creation of any Lien upon or with respect to its
property.
(c) No authorization or approval or other action by, and no
notice to or filing with, any Governmental Authority or other regulatory body is
required in connection with (i) the due execution, delivery and performance by
it of each Amendment Document to which it is a party and (ii) the performance by
it of each Amendment Document to which it is a party and the Financing
Agreement, as amended hereby.
(d) Each Amendment Document and the Financing Agreement, as
amended hereby, is a legal, valid and binding obligation of each Borrower
and Guarantor that is a party thereto enforceable against each such Person in
accordance with the terms thereof.
(e) The representations and warranties contained in Article
VI of the Financing Agreement are correct on and as of the Second Amendment
Effective Date as though made on and as of the Second Amendment Effective Date
(except to the extent such representations and warranties expressly relate to an
earlier date in which case such representations and warranties shall be true and
correct as of such earlier date), and no Event of Default or Potential Default
has occurred and is continuing on and as of the Second Amendment Effective Date
or will result from this Amendment becoming effective in accordance with its
terms.
15. Continued Effectiveness of the Financing Agreement. Each of
--------------------------------------------------
the Borrowers and the Guarantors hereby (i) confirms and agrees that each Loan
Document to which it is a party is, and shall continue to be, in full force and
effect and is hereby ratified and confirmed in all respects except that on and
after the Second Amendment Effective Date all references in any such Loan
Document to "the Financing Agreement", "thereto", "thereof", "thereunder" or
words of like import referring to the Financing Agreement shall mean the
Financing Agreement as amended by this Amendment, and (ii) confirms and agrees
that to the extent any such Loan Document purports to assign or pledge to the
Agent, or to grant to the Agent a Lien on any collateral as security for the
Obligations of the Borrowers or the Guarantors from time to time existing in
respect of the Financing Agreement and the Loan Documents, such pledge,
assignment and/or grant of the Lien is hereby ratified and confirmed in all
respects.
6
<PAGE>
16. Miscellaneous.
-------------
(a) This Amendment may be executed in any number of
counterparts and by different parties hereto in separate counterparts, each of
which shall be deemed to be an original, but all of which taken together shall
constitute one and the same agreement.
(b) Section and paragraph headings herein are included for
convenience of reference only and shall not constitute a part of this Amendment
for any other purpose.
(c) This Amendment shall be governed by, and construed in
accordance with, the laws of the State of New York.
(d) The Borrowers will pay on demand all reasonable fees,
costs and expenses of the Agent in connection with the preparation, execution
and delivery of this Amendment and the other Amendment Documents, including,
without limitation, the reasonable fees, disbursements and other charges of
Schulte Roth & Zabel LLP, counsel to the Agent.
7
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Amendment
to be executed by their respective officers thereunto duly authorized, as of the
date first above written.
BORROWERS
---------
HAPPY KIDS, LTD.
By: /s/ Jack M. Benun
-------------------------------
Title:_____________________
Name:______________________
O'BOY INC.
By: /s/ Jack M. Benun
-------------------------------
Title:_____________________
Name:______________________
TALK OF THE TOWN APPAREL CORP.
BY: /s/ Jack M. Benun
-------------------------------
Title:_____________________
Name:______________________
O.P. KIDS, L.L.C.
By: /s/ Jack M. Benun
------------------------------
Title:_____________________
Name:______________________
GUARANTORS
----------
H.O.T KIDZ, L.L.C.
BY: /s/ Jack M. Benun
-------------------------------
Title:_____________________
Name:______________________
HAWK INDUSTRIES, INC
By: /s/ Jack M. Benun
-------------------------------
Title:_____________________
Name:______________________
8
<PAGE>
J&B 18 CORP.
By: /s/ Jack M. Benun
-------------------------------
Title:_____________________
Name:______________________
/s/ Jack M. Benun
----------------------------------
JACK M. BENUN
/s/ Mark J. Benun
----------------------------------
MARK J. BENUN
/s/ Issac Levy
----------------------------------
ISAAC LEVY
AGENT AND LENDER
----------------
THE CIT GROUP/COMMERCIAL SERVICES,
INC.
By:_______________________________
Title:_____________________
Name:______________________
LENDERS
-------
THE CHASE MANHATTAN BANK, formerly
known as Chemical Bank
By:_______________________________
Title:_____________________
Name:______________________
9
<PAGE>
J&B 18 CORP.
By:_______________________________
Title:_____________________
Name:______________________
__________________________________
JACK M. BENUN
__________________________________
MARK J. BENUN
__________________________________
ISAAC LEVY
AGENT AND LENDER
----------------
THE CIT GROUP/COMMERCIAL SERVICES,
INC.
By: /s/ Deborah Rogut
-------------------------------
Title: AVP
---------------------
Name: Deborah Rogut
---------------------
LENDERS
-------
THE CHASE MANHATTAN BANK, formerly
known as Chemical Bank
By:_______________________________
Title:_____________________
Name:______________________
9
<PAGE>
J&B 18 CORP.
By:_______________________________
Title:_____________________
Name:______________________
__________________________________
JACK M. BENUN
__________________________________
MARK J. BENUN
__________________________________
ISAAC LEVY
AGENT AND LENDER
----------------
THE CIT GROUP/COMMERCIAL SERVICES,
INC.
By:_______________________________
Title:_____________________
Name:______________________
LENDERS
-------
THE CHASE MANHATTAN BANK, formerly
known as Chemical Bank
By: /s/ Barbara A. Saltzman
-------------------------------
Title: Vice President
---------------------
Name: Barbara A. Saltzman
----------------------
9
<PAGE>
ISRAEL DISCOUNT BANK OF NEW YORK
By: /s/ [ILLEGIBLE SIGNATURE]
-------------------------------
Title: VP
---------------------
Name: [ILLEGIBLE]
----------------------
By: /s/ Gary Harkins
-------------------------------
Title: AVP
---------------------
Name: Gary Harkins
----------------------
10
<PAGE>
ANNEX I
SCHEDULE A
----------
PART A: From June 1, 1997 through September 30, 1997
- ------
<TABLE>
<CAPTION>
Lender Exposure Percentage
- ------ -------- ----------
<S> <C> <C>
The CIT Group/Commercial Services, Inc. $14,632,900.00 35.26%
The Chase Manhattan Bank $20,310,100.00 48.94%
Israel Discount Bank of New York $ 6,557,000.00 15.80%
-------------- ------
$41,500,000.00 100.00%
<CAPTION>
PART B: After September 30, 1997
- ------
Lender Exposure Percentage
- ------ -------- ----------
<S> <C> <C>
The CIT Group/Commercial Services, Inc. $11,283,200.00 35.26%
The Chase Manhattan Bank $15,660,800.00 48.94%
Israel Discount Bank of New York $ 5,056,000.00 15.80%
-------------- ------
$32,000,000.00 100.00%
</TABLE>
11
<PAGE>
THIRD AMENDMENT
TO THE
FINANCING AGREEMENT
THIRD AMENDMENT, dated as of October 1, 1997 (this "Amendment"), to
the Financing Agreement, dated as of February 13, 1996, as amended by the First
Amendment dated as of February 13, 1997 and the Second Amendment dated as of
June 1, 1997 (the "Financing Agreement"), by and among Happy Kids, Ltd., a New
York corporation ("Happy Kids"), O'Boy Inc., a New York corporation ("O'Boy"),
Talk of the Town Apparel Corp., a New York corporation ("TOT Apparel") and O.P.
Kids L.L.C., a New Jersey limited liability company ("OP, LLC" and together with
Happy Kids, O'Boy and TOT Apparel, each a "Borrower" and collectively, the
"Borrowers"), the guarantors listed on Schedule B to the Financing Agreement
(each a "Guarantor" and collectively, the "Guarantors"), the lenders listed on
Schedule A to the Financing Agreement (each a "Lender" and collectively the
"Lenders") and The CIT Group/Commercial Services, Inc., as agent for the Lenders
(in such capacity, the "Agent").
The Borrowers, the Guarantors, the Lenders and the Agent wish to amend
the Financing Agreement to (i) change the Credit Exposure (as defined in the
Financing Agreement) of each Lender and the Total Credit Exposure (as defined in
the Financing Agreement) and (ii) to amend certain other terms and conditions in
the Financing Agreement. Accordingly, the Borrowers, the Guarantors, the Lenders
and the Agent hereby agree as follows:
1. Definitions. All terms which are defined in the Financing
-----------
Agreement and not otherwise defined herein are used herein as defined therein.
2. Recitals. The first two sentences in the Recitals are hereby
--------
amended in their entirety to read as follows: "The Borrowers and the Guarantors
have asked the Lenders to extend credit to the Borrowers, from the date hereof
through the Final Maturity Date (as hereinafter defined), in the form of
discretionary revolving credit loans to the Borrowers at any time and from time
to time prior to the Final Maturity Date in an aggregate principal amount not in
excess of $42,000,000 (i) increasing to an aggregate principal amount not in
excess of $47,000,000 during the period from January 1, 1998 through April 30,
1998 if the Increased Financing Condition (as hereafter defined) is satisfied
and (ii) permanently reducing by the cash proceeds received by the Borrower from
any Additional Financing (as hereinafter defined). This revolving credit
facility may include a $23,000,000 letter of credit subfacility."
<PAGE>
3. Existing Definitions. (a) The definition of the term "Credit
--------------------
Exposure" in Section 1.01 of the Financing Agreement is hereby amended in its
entirety to read as follows :
"Credit Exposure" means, with respect to each Lender, the total
---------------
credit exposure of such Lender (i) during the period from October 1,
1997 through December 31, 1998, as set forth in Part A of Schedule A
hereto, provided that, if the Increased Financing Condition is
satisfied (A) during the period from January 1, 1998 through April 30,
1998 the total credit exposure of each Lender shall be as set forth in
Part B of Schedule A hereto and (B) during the period from May 1, 1998
through December 31, 1998 the total credit exposure of each Lender
shall be as set forth in Part C of Schedule A hereto, less (ii) each
----
such Lender's Pro Rata Share of the cash proceeds of any Additional
Financing received by the Borrowers, in each case as the same may be
further adjusted from time to time pursuant to Sections 10.01 or 11.01
hereof."
(b) The definition of the term "L/C Subfacility" in Section 1.01 of
the Financing Agreement is hereby amended by deleting the amount "$21,000,000"
and substituting in lieu thereof "$23,000,000".
(c) The definition of the term "Total Credit Exposure" in Section
1.01 of the Financing Agreement is hereby amended in its entirety to read as
follows:
"Total Credit Exposure" means (i) during the period from October
---------------------
1, 1997 through December 30, 1998, as set forth in Part A of Schedule
A hereto, provided that, if the Increased Financing Condition is
satisfied (A) during the period from January 1, 1998 through April 30,
1998, as set forth in Part B of Schedule A hereto and (B) during the
period from May 1, 1998 through December 31, 1998, as set forth in
Part C of Schedule A hereto, less (ii) the cash proceeds of any
Additional Financing received by the Borrowers, in each case as the
same may be further adjusted from time to time pursuant to Sections
10.01 or 11.01 hereof."
4. New Definitions. The following definitions of the terms
---------------
"Additional Lender" and "Increased Financing Condition" are hereby added to
Section 1.01 to the Financing Agreement:
"Additional Lender" means a financial institution, acceptable to
-----------------
the Lenders, that becomes a Lender under this Agreement on or before
November 30, 1997 in connection with the increase in the Total Credit
Exposure to $47,000,000."
"Increased Financing Condition" means that an Additional Lender
-----------------------------
has agreed in writing to become a Lender under this Agreement with a
Credit Exposure of not less than $7,500,000."
2
<PAGE>
5. Credit Exposure. Section 2.01 of the Financing Agreement is
---------------
hereby amended by deleting clause (iii) thereof in its entirety and substituting
in lieu thereof"(iii) $34,000,000 prior to April 1, 1998 and $30,000,000
thereafter."
6. Prepayment of Loans. (a) Section 2.07(b) of the Financing
-------------------
Agreement is hereby amended by adding the following at the end thereof:
"In addition, the Borrowers agree that at any time the Total Credit
Exposure is less than the sum of (i) the outstanding principal on all
Loans outstanding plus (ii) the outstanding amount of all Letter of
Credit Obligations, the Borrowers will (A) upon becoming aware of the
existence of the differential, immediately give notice of such
occurrence to the Agent and (B) upon demand by the Agent, prepay the
Loans in an amount which will reduce the sum of the outstanding
principal on all Loans outstanding to an amount less than or equal to
the then current Total Credit Exposure. If at any time after the
Borrowers have complied with the immediately preceding sentence, the
sum of the aggregate Letter of Credit Obligations is greater than the
then current Total Credit Exposure, the Borrowers shall provide cash
collateral to the Agent in the amount of such excess, which cash
collateral shall be deposited in a joint non-interest bearing account
maintained at the Payment Office of the Agent and returned to the
Borrowers, provided that no Event of Default shall have occurred and
be continuing, at such time as the aggregate Letter of Credit
Obligations plus the aggregate principal amount of all outstanding
Loans no longer exceeds the then current Total Credit Exposure."
(b) Section 2.07 of the Financing Agreement is hereby amended by (i)
redesignating existing paragraph (f) as new paragraph (g) and (ii) adding
the following new paragraph (f):
"(f) On the date of receipt of the cash proceeds (net of reasonable
and customary expenses) from an Additional Financing, the Borrowers
shall prepay the Loans in an amount equal to such net proceeds."
7. Fees. (a) The last sentence of Section 4.01(c) of the Financing
----
Agreement is hereby amended to read in its entirety as follows:
"The Facility Fee shall be owing by the Borrowers and earned in full
by the Lenders on the Effective Date and on the first day of each
February thereafter, provided that (i) in 1998, the Facility Fee (A)
shall be paid on June 1, 1998 if on or prior to such date the
Borrowers shall not have received from an Additional Financing cash
proceeds (net of reasonable and customary expenses) in an amount of
(1) not less than $ 10 million from an initial public offering of the
Borrowers or (2) not less than $5 million from an issuance of
subordinated debt by the Borrowers or (B) shall not be required to be
paid if the Borrowers have received the cash proceeds from an
Additional Financing described in subclause (A) above
3
<PAGE>
on or before June 1, 1998 and (ii) in 1999 and thereafter, the
Facility Fee shall be paid annually in advance in four equal quarterly
installments on the first day of January, April, July and October of
each year."
(b) The following new Section 4.01(f) is hereby added to the
Financing Agreement:
"(f) Restructuring Fee. The Borrowers shall jointly and severally
-----------------
pay to the Agent for the account of the Lenders in accordance with the
Lenders' respective Pro Rata Shares (or the Agent may charge the Loan
Account pursuant to Section 4.02) a restructuring fee of $300,000,
which fee shall be paid and be earned in full on the date on which the
Borrowers receive from an Additional Financing cash proceeds (net of
reasonable and customary expenses) in an amount of (A) not less than
$10 million from an initial public offering of the Borrowers or (B)
not less than $5 million from an issuance of subordinated debt by the
Borrowers, provided that, if, on or before April 30, 1998, the Lenders
have not received evidence, satisfactory to the Lenders in their sole
discretion, that the Borrowers have received or will receive from an
Additional Financing cash proceeds in the amounts described above,
such $300,000 fee shall be earned in full on April 30, 1998 and shall
be paid in installments of $100,000 on each of April 30, 1998, May 29,
1998 and June 30, 1998."
8. Additional Financing. Section 7.01(s) is hereby amended in its
--------------------
entirety to read as follows:
"(s) Additional Financing. On or before February 28, 1998, the
--------------------
Borrowers shall provide the Lenders with evidence, satisfactory to the
Lenders in their sole discretion, that the Borrowers have received or
will receive from an Additional Financing cash proceeds (net of
reasonable and customary expenses) in an amount of not less than (A)
$10 million from an initial public offering of the Borrowers or (B)
$5 million from an issuance of subordinated debt by the Borrowers
pursuant to documentation, on terms and in all other respects
satisfactory to the Lenders in their sole discretion. The Borrowers
acknowledge and agree that the Lenders may change the terms, pricing
or amount of, or eliminate all or any part of, the revolving credit
facility under this Agreement if the Borrowers have not established on
such date, to the satisfaction of the Lenders in their sole
discretion, that such cash proceeds from an Additional Financing have
been received or will be received."
9. Schedule. Schedule A to the Financing Agreement is hereby amended
--------
by deleting such Schedule in its entirety and substituting in lieu thereof new
Schedule A, which is attached hereto as Annex I.
4
<PAGE>
10. Delivery of Notes. Each Lender shall deliver to the Agent, for
-----------------
delivery to and cancellation by the Borrowers, all Notes issued by the Borrowers
and held by the Lenders under the Financing Agreement (collectively, the "Old
Notes"). The Borrowers shall execute and deliver to the Agent for the account of
each Lender the Notes which such Lender is entitled to receive pursuant to
Section 2.04 of the Financing Agreement, in the form of Exhibit A thereto and in
the principal amount for each Lender equal to its Pro Rata Share of the Total
Credit Exposure, as set forth in Annex I to this Amendment (the "New Notes").
The Agent shall release and deliver the Old Notes to the Borrowers for
cancellation and deliver the New Notes to the Lenders.
11. Conditions. This Amendment shall become effective only upon
----------
satisfaction in full of the following conditions precedent (the first date upon
which all such conditions have been satisfied being herein called the "Third
Amendment Effective Date"):
(a) The representations and warranties contained in this
Amendment and in Article VI of the Financing Agreement and each other Loan
Document shall be correct on and as of the Third Amendment Effective Date as
though made on and as of such date (except where such representations and
warranties relate to an earlier date in which case such representations and
warranties shall be true and correct as of such earlier date); no Event of
Default or Potential Default shall have occurred and be continuing on the Third
Amendment Effective Date or result from this Amendment becoming effective in
accordance with its terms.
(b) The Agent shall have received counterparts of this
Amendment, duly executed by the Borrowers, the Guarantors and the Lenders.
(c) The Agent shall have received the New Notes (the New Notes
together with this Amendment, the "Amendment Documents"), duly executed by each
of the Borrowers.
(d) The Borrowers shall pay to the Agent for the account of the
Lenders in accordance with the Lenders' respective Pro Rata Shares (or the Agent
may charge the Loan Account pursuant to Section 4.02) a non-refundable amendment
fee of $200,000, which fee is earned, in full, on the date hereof.
(e) The Agent shall have received a copy of the resolutions
adopted by the Board of Directors or other governing body of each of the
Borrowers and the Corporate Guarantors, certified as of the Third Amendment
Effective Date by authorized officers thereof, authorizing (A) the transactions
contemplated by the Amendment Documents, and the Financing Agreement as amended
hereby, and (B) the execution, delivery and performance by each of the Borrowers
and the Corporate Guarantors of the Amendment Documents to which it is a party.
(f) The Agent shall have received a certificate of authorized
officers of the Borrowers and Corporate Guarantors certifying the names and true
signatures of the officers of the Borrowers and the Corporate Guarantors
authorized to sign the Amendment Documents, together with evidence of the
incumbency of such authorized officers.
5
<PAGE>
(g) The Agent shall have received a certificate of the chief
executive officer or the chief financial officer of each of the Borrowers and
Corporate Guarantors certifying as to the matters set forth in subsection (a) of
this Section 11.
(h) All legal matters incident to this Amendment shall be
satisfactory to the Agent and its counsel.
12. Representations and Warranties. Each of the Borrowers and the
------------------------------
Guarantors represents and warrants as follows:
(a) Each Borrower and Corporate Guarantor (i) is a corporation
or limited liability company duly organized, validly existing and in good
standing under the laws of the state of its organization and (ii) has all
requisite power, authority and legal right to execute, deliver and perform the
Amendment Documents to which it is a party, and to perform the Financing
Agreement, as amended hereby.
(b) The execution, delivery and performance by it of each
Amendment Document to which it is a party and the performance by it of the
Financing Agreement, as amended hereby (i) have been duly authorized by all
necessary action, (ii) do not and will not violate or create a default under its
articles of organization, by-laws or operating agreement or any applicable law
or any contractual restriction binding or otherwise affecting it or any of its
properties, and (iii) except as provided in the Loan Documents, do not and will
not result in or require the creation of any Lien upon or with respect to its
property.
(c) No authorization or approval or other action by, and no
notice to or filing with, any Governmental Authority or other regulatory body is
required in connection with (i) the due execution, delivery and performance by
it of each Amendment Document to which it is a party and (ii) the performance by
it of each Amendment Document to which it is a party and the Financing
Agreement, as amended hereby.
(d) Each Amendment Document and the Financing Agreement, as
amended hereby, is a legal, valid and binding obligation of each Borrower and
Guarantor that is a party thereto enforceable against each such Person in
accordance with the terms thereof.
(e) The representations and warranties contained in Article VI
of the Financing Agreement are correct on and as of the Third Amendment
Effective Date as though made on and as of the Third Amendment Effective Date
(except to the extent such representations and warranties expressly relate to an
earlier date in which case such representations and warranties shall be true and
correct as of such earlier date), and no Event of Default or Potential Default
has occurred and is continuing on and as of the Third Amendment Effective Date
or will result from this Amendment becoming effective in accordance with its
terms.
13. Continued Effectiveness of the Financing Agreement. Each of the
--------------------------------------------------
Borrowers and the Guarantors hereby (i) confirms and agrees that each Loan
Document to which it is a party is, and shall continue to be, in full force and
effect and is hereby ratified and
6
<PAGE>
confirmed in all respects except that on and after the Third Amendment Effective
Date all references in any such Loan Document to "the Financing Agreement",
"thereto", "thereof", "thereunder" or words of like import referring to the
Financing Agreement shall mean the Financing Agreement as amended by this
Amendment, and (ii) confirms and agrees that to the extent any such Loan
Document purports to assign or pledge to the Agent, or to grant to the Agent a
Lien on any collateral as security for the Obligations of the Borrowers or the
Guarantors from time to time existing in respect of the Financing Agreement and
the Loan Documents, such pledge, assignment and/or grant of the Lien is hereby
ratified and confirmed in all respects.
14. Miscellaneous.
-------------
(a) This Amendment may be executed in any number of counterparts
and by different parties hereto in separate counterparts, each of which shall be
deemed to be an original, but all of which taken together shall constitute one
and the same agreement.
(b) Section and paragraph headings herein are included for
convenience of reference only and shall not constitute a part of this Amendment
for any other purpose.
(c) This Amendment shall be governed by, and construed in
accordance with, the laws of the State of New York.
(d) The Borrowers will pay on demand all reasonable fees, costs
and expenses of the Agent in connection with the preparation, execution and
delivery of this Amendment and the other Amendment Documents, including, without
limitation, the reasonable fees, disbursements and other charges of Schulte Roth
& Zabel LLP, counsel to the Agent.
7
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to
be executed by their respective officers thereunto duly authorized, as of the
date first above written.
BORROWERS
---------
HAPPY KIDS, LTD
By: /s/ Jack M. Benun
----------------------------
Title: Pres.
--------------------
Name: Jack M. Benun
---------------------
O'BOY INC.
By: /s/ Jack M. Benun
----------------------------
Title: Pres.
--------------------
Name: Jack M. Benun
---------------------
TALK OF THE TOWN APPAREL CORP.
By: /s/ Jack M. Benun
----------------------------
Title: Pres.
--------------------
Name: Jack M. Benun
---------------------
O.P KIDS, L.L.C.
By: /s/ Jack M. Benun
----------------------------
Title: Pres.
--------------------
Name: Jack M. Benun
---------------------
GUARANTORS
----------
H.O.T KIDS, L.L.C.
By: /s/ Jack M. Benun
----------------------------
Title: Pres.
--------------------
Name: Jack M. Benun
---------------------
HAWK INDUSTRIES, INC.
By: /s/ Jack M. Benun
----------------------------
Title: Pres.
--------------------
Name: Jack M. Benun
---------------------
8
<PAGE>
J&B 18 CORP.
By: /s/ Jack M. Benun
----------------------------
Title: Pres.
--------------------
Name: Jack M. Benun
---------------------
/s/ Jack M. Benun
-------------------------------
JACK M. BENUN
/s/ Mark J. Benun
-------------------------------
MARK J. BENUN
/s/ Isaac levy
-------------------------------
ISAAC LEVY
AGENT AND LENDER
----------------
THE CIT GROUP/COMMERCIAL SERVICES,
INC.
By:___________________________
Title:___________________
Name:____________________
LENDERS
-------
THE CHASE MANHATTAN BANK
By:___________________________
Title:___________________
Name:____________________
9
<PAGE>
J&B 18 CORP.
By:____________________________
Title:____________________
Name:_____________________
_______________________________
JACK M. BENUN
_______________________________
MARK J. BENUN
_______________________________
ISAAC LEVY
AGENT AND LENDER
----------------
THE CIT GROUP/COMMERCIAL SERVICES,
INC.
By: /s/ Deborah Rogut
----------------------------
Title: Vice President
--------------------
Name: Deborah Rogut
---------------------
LENDERS
-------
THE CHASE MANHATTAN BANK
By:____________________________
Title:____________________
Name:_____________________
9
<PAGE>
J&B 18 CORP.
By:___________________________
Title:___________________
Name:____________________
______________________________
JACK M. BENUN
______________________________
MARK J. BENUN
______________________________
ISAAC LEVY
AGENT AND LENDER
----------------
THE CIT GROUP/COMMERCIAL SERVICES,
INC.
By:___________________________
Title:___________________
Name:____________________
LENDERS
-------
THE CHASE MANHATTAN BANK
By: /s/ Barbara Saltzman
---------------------------
Title: Vice President
---------------------
Name: Barbara Saltzman
---------------------
9
<PAGE>
ISRAEL DISCOUNT BANK OF NEW YORK
By: /s/ Gary Harkins
-----------------------------
Title: AVP
---------------------
Name: Gary Harkins
---------------------
By: /s/ [ILLEGIBLE SIGNATURE APPEARS HERE]
----------------------------
Title: VP
--------------------
Name: Ronald ????
--------------------
10
<PAGE>
ANNEX I
SCHEDULE A
----------
PART A: From October 1, 1997 through December 31, 1998, provided that, if the
- ------
Increased Financing Condition is satisfied, Part B hereof shall be
applicable for the period from January 1, 1998 through April 30, 1998
and Part C hereof shall be applicable for the period from May 1, 1998
through December 31, 1998.
<TABLE>
<CAPTION>
Lender Exposure Percentage
- ------ -------- ----------
<S> <C> <C>
The CIT Group/Commercial Services, Inc. $14,809,200 35.26%
The Chase Manhattan Bank $20,554,800 48.94%
Israel Discount Bank of New York $ 6,636,000 15.80%
----------- ------
$42,000,000 100.00%
<CAPTION>
PART B: From January 1, 1998 through April 30, 1998 if the Increased Financing
- ------
Condition is satisfied.
Lender Exposure Percentage
- ------ -------- ----------
<S> <C> <C>
The CIT Group/Commercial Services, Inc. $13,927,700 29.63%
The Chase Manhattan Bank $19,331,300 41.13%
Israel Discount Bank of New York $ 6,241,000 13.28%
[Additional Lender] $ 7,500,000 15.96%
-----------
$47,000,000 100.00%
<CAPTION>
PART C: From May 1, 1998 through December 31, 1998 if the Increased Financing
- ------
Condition is satisfied.
Lender Exposure Percentage
- ------ -------- ----------
<S> <C> <C>
The CIT Group/Commercial Services, Inc. $12,444,600 29.63%
The Chase Manhattan Bank $17,274,600 41.13%
Israel Discount Bank of New York $ 5,577,600 13.28%
[Additional Lender] $ 6,703,200 15.96%
-----------
$42,000,000 100.00%
</TABLE>
11
<PAGE>
EXHIBIT 10.6
[LETTER HEAD OF CIT GROUP]
THE
CIT
GROUP
February 13, 1996
Happy Kids, Ltd.
100 West 33rd Street, Suite 1100
New York, New York 10001
NOTIFICATION FACTORING AGREEMENT
--------------------------------
Ladies and Gentlemen:
We are pleased to confirm the terms and conditions that shall govern
our collected funds accounting factoring arrangement with you.
1. SALE OF ACCOUNTS
1. You hereby sell, assign and transfer to us, and we hereby
purchase as absolute owner, all of your accounts receivable created by or
arising from the sale of goods or rendition of services by you (referred to
herein collectively as the "Accounts", individually as an "Account"). This
includes, without limitation, all sales made and services rendered under any of
your trade names or styles or through any of your divisions.
2. CREDIT APPROVAL
2.1 Credit approval of all orders shall be requested from our Credit
Department via computer, in accordance with procedures more particularly
described in the Client Service Guide which we have provided to you, and any
modifications or revisions thereof or supplements thereto which we may hereafter
provide to you (herein the "Guide"). Orders may be submitted by either: (i) On-
Line Terminal Access, in accordance with the procedures more particularly
described in the appropriately marked section of the Guide, or (ii) Electronic
Batch Transmission, in accordance with the procedures more particularly
described in the supplement to the Guide referred to as the Guide to Batch Data
Communications. We shall assume the Credit Risk (the customer's failure to pay
an invoice representing an Account in full when due at its longest maturity
because of its financial inability to do so) on each Account with respect to
which the shipment of goods or rendition of services represented thereby has
been credit approved by our Credit Department in writing, and with respect to
which the customer actually receives and finally accepts delivery of the goods
or services. Without our prior written consent,
<PAGE>
you shall not change the amount, terms, shipping or delivery dates with respect
to any shipment of goods or rendition of services, or any invoice relating
thereto, whether or not approved by us as to credit, or grant any other
indulgence with respect thereto (other than accepting returns and granting
allowances as provided in paragraph 8 hereof). Credit approval of any shipment
of goods or rendition of services may be withdrawn by us any time before, but
not after, delivery is made and we shall provide you with a written confirmation
of any such withdrawal. Credit approvals shall be effective only if shipment is
made or services are rendered within thirty (30) days from the completion date
specified in the approval. We shall have no liability whatsoever to you or to
any person, firm or entity for not credit approving, or for withholding or
withdrawing credit approval of, any order pursuant to the terms of this
Agreement. In the event that we decline to credit approve an order from a
customer and, in connection therewith, furnish any information to you regarding
the credit standing of the customer in explanation of our decision, such
information shall be privileged and confidential and shall not be given by you
to the customer, your salesperson or any third party; however, you may advise
such party that any questions relating thereto may be directed to us.
2.2 To indicate credit decisions by our Credit Department each day,
we shall send to you a computer generated Credit Decisions Report. The Credit
Decisions Report shall constitute the official record of our written credit
approvals. All information and exhibits contained in the Guide or on any screen
accessed by you, or any print-outs, reports, statements or notices received by
you are, and shall remain, our exclusive property and shall not be disclosed to
or used by anyone other than you, in whole or part, except after obtaining the
express written permission of an authorized officer of the undersigned.
2.3 Accounts and portions of Accounts on which we bear the Credit
Risk shall be referred to herein collectively as "Factor Risk Accounts", and
individually as a "Factor Risk Account". Accounts and portions of Accounts on
which you bear the risk as to credit shall be referred to herein collectively as
"Client Risk Accounts", and individually as a "Client Risk Account".
3. INVOICING
3. Each of your invoices shall bear a notice (in form and content
approved by us) that the Account represented thereby has been sold, assigned and
transferred to us, and is owned by and payable only to us. All invoices shall be
mailed by you to your customers at your expense. You shall provide us with
copies of all invoices, and with such confirmation of the transfer of Accounts
to us and such proof of order, shipment or delivery as we may require. Your
printed name or rubber stamp signature on invoices and confirmatory assignment
schedules shall have the same legal effect as a manual signature by one of your
authorized officers or agents. Should you for any reason defer shipment of goods
which you have sold and invoiced to a customer (such sales are also known as
bill and hold sales) you shall: so advise us promptly, submit all relevant
details to us, and comply with such conditions as we deem necessary as a
prerequisite to our handling the Accounts arising therefrom on our books.
-2-
<PAGE>
4. REPRESENTATIONS AND WARRANTIES
4.1 You hereby represent and warrant that: each Account is based
upon an actual and bona fide sale and delivery of goods or rendition of services
to customers, made by you in the ordinary course of your business; the goods and
inventory being sold and the Accounts created are your exclusive property and
are not and shall not be subject to any lien, consignment arrangement,
encumbrance, security interest or financing statement whatsoever, other than in
our favor and in favor of the Agent as defined in the Financing Agreement dated
as of February 13, 1996, as amended (the "Financing Agreement"), among us,
certain of our affiliates, certain lenders and us, in our capacity as Agent (or
such Lenders); your customers have accepted the goods or services, owe and are
obligated to pay the full amounts stated in the invoices according to their
terms, without dispute, claim, offset, defense, deduction, recoupment,
counterclaim or contra account (any of the foregoing being referred to herein as
a "Customer Claim"); all amounts are due in United States Dollars; all original
invoices bear notice of the assignment and transfer to us; any taxes or fees
relating to your Accounts or goods are solely your responsibility; and none of
the Accounts factored with us hereunder represent sales to any subsidiary,
parent or affiliated company of yours.
4.2 You also warrant and represent that: you are a duly organized
and validly existing corporation, qualified to do business in all states where
required; there are no actions, suits or legal proceedings of any kind or nature
pending against you; and the most recent financial statements provided to us by
you accurately state your financial condition and there has been no material
adverse change in your financial condition since the date of said financial
statements. You shall maintain such books and records concerning the Accounts as
we may require and agree that they will reflect our ownership of the Accounts.
You shall furnish us with such information concerning your business affairs and
financial condition as we may request from time to time, and shall promptly
notify us of any change in your name, chief executive office, chief executive
officer, place(s) of business, corporate or business structure, or in the
ownership of the stock of your corporation.
5. PURCHASE OF ACCOUNTS
5. We shall purchase the Accounts for the gross amount of the
respective invoices, less factoring fees or commissions relating thereto, trade
and cash discounts allowable to your customers and credits and allowances (the
"Purchase Price of Accounts"). Our purchase of the Accounts shall be reflected
on the Statements of Account which we shall render to you, and such statements
shall also reflect all credits and discounts made available to your customers
(whether or not taken) and anticipation earned by your customers. A more
detailed description of these and all other accounting procedures used hereunder
is contained in the Guide.
-3-
<PAGE>
6. ADVANCES
6. Although we do not expect to make advances to you prior to the
collection of Accounts, we shall have the right to do so, which right may be
exercised by us in our sole discretion at any time. We shall have the right to
hold any reserve we deem necessary as security for the payment and performance
of any and all of your Obligations, as herein defined. All amounts owing to us
by you, including, without limitation, any advances which may be made to you
prior to shipment and any debit balance in your Client Position Account (as
defined below) shall be payable to us on demand.
7. PAYMENT OF ACCOUNTS
7.1. Checks and other proceeds received by us in payment of Accounts
will be applied to your account with us after crediting your customer's account.
The Purchase Price of Accounts for Accounts with respect to which such
remittances have been received and applied by us, less any amounts chargeable
by us hereunder, will be transferred and disbursed to you each business day;
however, we shall debit your account monthly with the cost of two (2) additional
business day on all such payments. No checks, drafts or other instruments
received by us shall constitute final payment of Accounts unless and until such
instruments have actually been collected. At our option, we may send to you, at
any time and without prior notice to you, any credit balance in your Funds-in-
Use Account (as defined below).
7.2 With respect to any Factor Risk Account which remains unpaid,
the Purchase Price of Accounts relating thereto shall be credited to your
account as follows:
(a) as of the date of the Account's longest
maturity, if such customer: makes an assignment for the
benefit of creditors; calls a meeting of its customers,
institutes any proceeding to compromise or adjust its
debts, or if any proceeding or petition is filed or
instituted by or against such customer for relief under
any State or Federal bankruptcy or insolvency law, or if
a receiver or trustee is appointed for the customer; or
(b) as of the one hundred-twentieth day
following its longest maturity date, if such Account
remains unpaid as of said date without the happening of
any of the events specified in (a) hereinabove.
Should it subsequently be determined that any Factor Risk Account credited to
your account with us was not paid for any reason other than the customer's
financial inability to do so, we shall reverse the credit and debit your account
accordingly.
-4-
<PAGE>
8. CUSTOMER CLAIMS AND CHARGEBACKS
8. You shall notify us promptly of any matter affecting the value,
enforceability or collectability of any Account and of all Customer Claims,
returns and rejections. You shall issue credit memoranda promptly upon accepting
returns or granting allowances, (and upon our request, send duplicates and/or
confirm the assignment of such credit memoranda to us), and may continue to do
so until we have notified you that such credits or allowances are to be made
only after our prior written approval. We shall have the right to adjust
Customer Claims directly with customers, upon such terms as we in our sole
discretion may deem advisable, but shall not be required to do so. We shall
cooperate in the adjustment of Customer Claims, but may at any time debit or
charge back to your account the amount of: (a) any Factor Risk Account which is
not paid in full when due for any reason other than the customer's financial
inability to do so; (b) any Factor Risk Account which is not paid in full when
due because of an act of God, civil strife, war and the like, whether or not
such occurrence results in financial inability to do so; (c) any anticipation
taken or Customer Claim asserted with respect to any Factor Risk Account; (d)
any Client Risk Account which is not paid in full on its due date; and (e) any
Account with respect to which we determine that there has been a breach of any
representation or warranty hereunder. Such debit or chargeback shall not
constitute a reassignment to you of the Account involved. Any deduction taken by
a customer shall be charged back to your account immediately, and we may at any
time debit or charge back to your account the amount of: (i) payments we receive
on Client Risk Accounts which we are required thereafter to turnover or return;
(ii) any and all expenses and attorneys' fees incurred by us in collecting or
attempting to collect any Account charged back to you or any Obligation
hereunder; and (iii) any expenses incurred by us as a result of remittances made
by customers on Client Risk Accounts that are not finally paid, for whatever
reason. Further, we shall be entitled to (A) place any Client Risk Account with
a collection agency or attorney for collection or settle any such Client Risk
Account provided that we provide you with twenty-four (24) hours prior notice of
such action and (B) charge you a reasonable fee for each Client Risk Account
which we may place with a collection agency or attorney for collection, which
fee shall be charged to your account in addition to any fees or expenses of such
collection agency or attorney.
9. HANDLING AND COLLECTION OF ACCOUNTS AND RETURNED GOODS
9.1 As owners and assignees of the Accounts, we shall have the
right to bring suit or otherwise enforce collection, in your name or ours, and
generally shall have all other rights respecting said Accounts, including,
without limitation, the right to: accelerate or extend the time of payment,
modify the terms of payment, settle, compromise, release in whole or in part any
amounts owing, and issue credits in your name or ours. To the extent applicable,
you hereby waive any and all claims and defenses based on suretyship. If monies
are due and owing from a customer for both Factor Risk Accounts and Client Risk
Accounts, you agree that any payments received in respect of any such Accounts
may be applied first to the Factor Risk Accounts, regardless of any notation to
the contrary on payment items, and regardless of the due dates of such Accounts.
Once you have granted or issued a discount, credit or allowance, you shall have
no further interest therein. Any checks, cash, notes or other instruments,
proceeds or property
-5-
<PAGE>
received by you with respect to any Accounts shall be held by you in trust for
us, separate from your own property and funds, and immediately turned over to us
with proper assignments or endorsements. We may endorse or sign your name or
ours on any checks or other instruments or documents with respect to Accounts or
the goods covered thereby.
9.2 At any time that we so request, and immediately upon the
occurrence of an Event of Default (as defined below) or upon termination of this
Agreement, any and all returned, reclaimed or repossessed inventory and goods
shall be set aside by you, marked with our name and held by you in trust for us
as owner, and for our account. Further, upon the occurrence of any of the
foregoing, you shall promptly notify us of all such inventory and goods and
deliver the same to us, pay us the invoice price thereof or sell the same for
our account and remit the full proceeds to us.
10. STATEMENTS OF ACCOUNT
10. After the end of each month, we shall send to you one or more
reports showing the accounting for sales, charges, advances and other
transactions between us during that month (herein the "Reports"). The Reports
sent to you each month will include, among other things, a Statement of Account
reflecting transactions in an accounts receivable account (the "Accounts
Receivable Account"), a client position account (the "Client Position Account")
and a funds-in-use account (the "Funds-In-Use Account"), which accounts shall be
established on our books in your name. All financial transactions between us
will be reflected on these monthly Reports. The monthly Reports shall be deemed
correct and binding upon you and shall constitute an account stated between us,
unless we receive a written statement of your exceptions within thirty (30) days
after the date the same are mailed to you.
11. GRANT OF SECURITY INTEREST
11. In addition to the sale of Accounts hereunder, and without the
necessity of any further formality, writing or evidence, you hereby transfer and
assign to us and grant us a security interest in all of your right, title and
interest in and to all of your now existing and future: (a) accounts receivable
(whether or not the same constitute Accounts purchased by us hereunder),
instruments, documents, chattel paper, general intangibles (including, without
limitation, all federal, state and local income tax refunds), and any and all
other forms of obligations owing to you; (b) unpaid seller's rights (including
rescission, repossession, replevin, reclamation and stoppage in transit)
relating to any of the foregoing or arising therefrom; (c) rights to any goods
represented by any of the foregoing, including returned or repossessed goods;
(d) reserves and credit balances arising hereunder; (e) guarantees or collateral
for any of the foregoing (including, without limitation, rights under any
letters of credit or other credit enhancements in your favor); (f) insurance
policies or rights relating to any of the foregoing; (g) bank deposits and
accounts; (h) cash and non-cash proceeds of any and all of the foregoing; and
(i) Books and Records (as defined below in paragraph 13) evidencing or
pertaining to any of the foregoing. (It is understood that we shall have no
obligation to perform in any respect, any
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<PAGE>
contracts relating to any Accounts). You shall comply with the requirements of
all applicable laws to perfect our security interest in collateral granted to us
hereunder, and execute such financing statements and other documents as we may
require to effectuate the foregoing and implement this Agreement. To the extent
permitted by applicable law, you hereby authorize us to sign your name on your
behalf on financing statements covering the collateral and to file financing
statements without your signature in order to perfect or maintain our security
interest in the collateral.
12. OBLIGATIONS SECURED
12. The security interest granted hereunder, and any lien or
security interest that we may have in any of your other assets or property,
shall secure the payment and performance of all of your now existing and future
indebtedness and obligations to us, whether absolute or contingent, and whether
arising hereunder or under any other agreement or arrangement between us, or by
operation of law or otherwise, including, without limitation, indebtedness for
goods and services purchased by you from any party whose accounts receivable are
factored or financed by us, and indebtedness arising under any guaranty, credit
enhancement or other credit support executed by you in our favor (herein
"Obligations"). Any reserves or balances to your credit and any other property
or assets of yours in our possession shall constitute security for any and all
Obligations. We may, in our discretion, debit your account at any time with the
amount of any and all Obligations.
13. BOOKS AND RECORDS AND EXAMINATIONS
13. You agree: to make your records, files and books of account
(including, without limitation, paper records, computer-based data, records or
media, electronic records, tapes, discs, etc., and all programs and procedure
manuals relating thereto) (all of the foregoing referred to herein as "Books and
Records") available to us on request; to permit us to visit your premises during
business hours to examine the same and to make copies or extracts thereof; and
to conduct such examinations as we deem necessary. In order to cover costs and
expenses we may incur in connection with any such examinations, we shall be
entitled to charge you a fee for each day or part thereof during which such
examination is conducted, which fee shall be charged to your account, in
addition to any out-of-pocket costs and expenses we incur as a result of
conducting said examinations.
14. INTEREST, FACTORING FEES OR COMMISSIONS AND OTHER CHARGES
14.1 Interest shall be charged as of the last day of each month on
the debit balance in your Funds-In-Use Account each day during that month. (The
amount that appears in your Funds-In-Use Account is the difference between the
balance in your Accounts Receivable Account and the balance in your Client
Position Account.) Interest shall be calculated at a rate of
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<PAGE>
one percent (1%) per annum above the "Chemical Rate", based on the eight and
one-half percent (8 1/2%) per annum "Chemical Rate" as of January 2, 1996. The
Chemical Rate is the per annum rate of interest publicly announced by Chemical
Bank in New York, New York from time to time as its prime rate. (The prime rate
is not intended to be the lowest rate of interest charged by Chemical Bank to
its borrowers.) Any change in the rate of interest hereunder due to a change in
the Chemical Rate shall take effect as of the first of the month following such
change in the Chemical Rate. Interest shall be calculated based on a 360 day
year. Interest shall be credited as of the last day of each month on any credit
balance in your Funds-In-Use Account each day during that month, at a rate four
percent (4%) per annum below the Chemical Rate being used to calculate interest
hereunder for the period. In no event, shall the rate charged hereunder exceed
the highest rate permitted under applicable law. In the event, however, that we
do receive interest hereunder in excess of the highest rate permissible, you
agree that your sole remedy shall be to seek repayment of such excess, and you
hereby waive any and all other rights and remedies which may be available to you
under law or in equity.
14.2 For our services hereunder, we shall be entitled to a factoring
fee or commission of fifty-five hundredths of one percent (.55%) on the gross
face amount of all Accounts factored with us, plus one-quarter of one percent
(1/4 of 1%) of the gross face amount of each Account for each thirty-day period
or part thereof by which the longest terms of sale applicable to such Account
exceed 60 days (whether as originally stated or as a result of a change of terms
requested by you or the customer). In addition, with respect to Accounts arising
from sales to customers located in United States territorial possessions, we
shall be entitled to an additional factoring fee or commission of one percent
(1%) on the gross face amount of such Accounts. The factoring fee or commission
shall be due and charged to your account upon our purchase of the underlying
Account. The minimum factoring fee or commission on each invoice evidencing an
Account shall be $3.50. In no event shall the aggregate factoring fees or
commissions payable by you hereunder and by Talk of The Town Apparel Corp.,
O'Boy Inc. and O.P. Kids, L.L.C. under the separate Factoring Agreement between
each of them and us for each Period, or part thereof, be less than $456,000, and
the amount by which $456,000 exceeds factoring fees or commissions earned on
Accounts factored with us by you, Talk of The Town Apparel Corp., O'Boy Inc. and
O.P. Kids, L.L.C. shall be charged to your account. However, neither the
additional commission charged on Accounts arising from sales to customers
located in United States territorial possessions, nor any other surcharge or fee
now or hereafter charged by us with respect to any of your Accounts shall be
included in the calculation of actual commissions paid by you during any Period.
Nothing contained herein shall be construed as consenting to a termination of
this Agreement other than as provided herein. As used herein, the term Period
shall mean the twelve month period commencing on the first day of the first full
calendar month that this Agreement is in effect, and each such successive twelve
month period thereafter.
14.3 In addition to the foregoing, you shall pay all costs and
expenses incurred by us in connection with the preparation, execution,
administration and enforcement of this Agreement. including, without limitation,
all reasonable fees and expenses attributable to the services of our attorneys
(whether in-house or outside), all search fees and the cost of all public record
filings. Furthermore, you shall pay to us a reasonable fee for: (i) all special
reports prepared by us at your request; (ii) all wire transfers; (iii) handling
all change of terms requests relating to Accounts:
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<PAGE>
(iv) the usage by you of our on-line computer services; and (v) each new
customer set-up on our accounts receivable data base, all as more fully
described in the Guide. All such fees shall be charged to your account and may
be changed by us from time to time upon notice to you.
14.4 If any tax by any governmental authority (other than income and
franchise taxes imposed on us which are not related to any transaction between
us) is or may be imposed on, or arises as a result of, any transactions between
us, any sales made by you, or any inventory or goods relating to such sales, and
we are or may be required to withhold or pay such tax and any interest or
penalties related thereto, you shall indemnify and hold us harmless in respect
thereof and pay to us the amount of any such tax, interest or penalties.
15. TERMINATION
15. You may terminate this Agreement for any reason whatsoever, but
only as of an Anniversary Date, as defined herein, and then only by giving us at
least sixty (60) days prior written notice of termination. We may terminate this
Agreement for any reason whatsoever at any time by giving you written notice
stating a termination date not less than sixty (60) days from the date such
notice is given, or immediately at any time without prior notice to you upon and
after the occurrence of an Event of Default (as defined below). This Agreement
continues uninterrupted unless terminated as herein provided. As used herein,
the term "Anniversary Date" shall mean the last day of the month occurring one
year from the date hereof or the same date in any year thereafter. Unless sooner
demanded, all Obligations shall become due and payable upon termination of this
Agreement and, pending a final accounting, we may withhold any balances in your
account unless supplied with an indemnity satisfactory to us to cover all
Obligations. All our rights, liens and security interests hereunder shall
continue and remain in effect after termination of this Agreement, whether said
termination is upon notice or as a result of the occurrence of an Event of
Default, and you shall continue to assign accounts receivable to us and to remit
to us all collections on accounts receivable, until all Obligations have been
paid in full or we have been supplied with an indemnity satisfactory to us to
cover all Obligations.
16. EVENTS OF DEFAULT AND REMEDIES UPON DEFAULT
16.1 An "Event of Default" shall be deemed to have occurred under
this Agreement upon: (a) the cessation of your business or the calling of a
meeting of your creditors; (b) your failure to meet your debts as they mature;
(c) the commencement by or against you of any bankruptcy, insolvency,
arrangement, reorganization, receivership or similar proceedings under any
federal or state law; (d) breach by you of any representation, warranty or
covenant contained herein; (e) your failure to pay any Obligation when due; or
(f) the occurrence of an event of default under the Financing Agreement.
16.2 Upon and after the occurrence of an Event of Default, this
Agreement may be terminated by us immediately at any time, without notice to
you, and all Obligations shall, at our option and without notice or demand of
any kind (all of which you hereby expressly waive),
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<PAGE>
become due and payable immediately. Further, we may remove, from any premises
where the same may be located, any and all documents, instruments, Books and
Records (and any receptacles or cabinets containing the same) pertaining to the
Accounts or other collateral hereunder and/or we may use (at your expense) such
of your personnel, supplies and space at your place of business or elsewhere, as
may be necessary to properly administer and enforce our rights in the Accounts
and any other collateral hereunder, and to facilitate the collection thereof and
realization thereon. We may sell, assign or otherwise dispose of the Accounts
and any returned, reclaimed or repossessed inventory, goods or other property
relating thereto, whether held by you or by us, at public or private sale, for
cash, on credit or otherwise, at such price and on such terms as we in our sole
option and discretion may determine, and we may bid or become purchasers at any
such sale, or acquire an interest in or dispose of said property. You hereby
acknowledge that you have no right to notice, or to an accounting or right of
redemption with respect to any such sale or other disposition of the aforesaid
Accounts or aforesaid goods. With respect to any other property or collateral in
which we have a security interest, we shall have all of the rights and remedies
of a secured party under Article 9 of the Uniform Commercial Code. If notice of
intended disposition of any of said property or collateral is required by law,
it is agreed that five (5) days notice shall constitute reasonable notice. The
net cash proceeds resulting from the exercise of any of the foregoing rights,
after deducting all charges, costs and expenses (including reasonable attorneys'
fees) shall be applied by us to the payment or satisfaction of the Obligations,
whether due or to become due, in such order as we may elect, and you shall
remain liable to us for any deficiencies. Upon and after the occurrence of an
Event of Default, or in the event of a termination of this Agreement by us, we
are hereby authorized by you to notify postal authorities at any time to change
the address for delivery of mail to you to such address as we may designate, and
to receive and open mail addressed to you to enable us to carry out our rights
under this Agreement.
17. MISCELLANEOUS PROVISIONS
17.1 This Agreement, and all attendant documentation, as the same
may be amended from time to time, constitutes the entire agreement between us
with regard to the subject matter hereof, and supersedes any prior agreements or
understandings. Furthermore, unless specifically provided otherwise herein, this
Agreement can be changed only by a writing signed by both of us, and shall bind
and benefit each of us and our respective successors and assigns, provided,
however, that you may not assign this Agreement or your rights hereunder without
our prior written consent. Our failure or delay in exercising any right
hereunder shall not constitute a waiver thereof or bar us from exercising any of
our rights at any time. The validity, interpretation and enforcement of this
Agreement shall be governed by the laws of the State of New York.
17.2 If any provision of this Agreement (including, without
limitation, any provision relating to charges constituting interest payable by
you) is contrary to, prohibited by, or deemed invalid under applicable laws or
regulations, such provision shall be inapplicable and deemed omitted to the
extent so contrary, prohibited or invalid, but the remainder hereof shall not be
invalidated thereby and shall be given effect so far as possible.
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<PAGE>
17.3 Paragraph headings are for convenience only and shall not be
deemed to be a controlling part of this Agreement.
18. JURY TRIAL WAIVER
18. TO THE EXTENT PERMITTED BY APPLICABLE LAW, YOU AND WE EACH
HEREBY WAIVE ANY RIGHT TO A TRIAL BY JURY IN ANY ACTION OR PROCEEDING ARISING
DIRECTLY OR INDIRECTLY OUT OF THIS AGREEMENT, OR ANY OTHER AGREEMENT OR
TRANSACTION BETWEEN US OR TO WHICH WE ARE BOTH PARTIES.
If the foregoing is in accordance with, and accurately reflects, your
understanding, please so indicate by signing and returning to us the original
and one copy of this Agreement. This Agreement shall take effect as of the date
set forth above, but only after being accepted below by one of our officers in
New York, after which, we shall forward your fully executed copy to you for your
files.
Very truly yours,
THE CIT GROUP/COMMERCIAL SERVICES,
INC.
By /s/ Barbara Rechan
-------------------------------
Name: Barbara Rechan
Title: Vice President
Read and Agreed to:
HAPPY KIDS, LTD.
By /s/ Jack M. Benun
-------------------------------
Name: Jack M. Benun
Title: President
Accepted at: New York
--------------------
THE CIT GROUP/COMMERCIAL SERVICES,
INC.
By /s/ Anthony Lombardi
------------------------------
Name: Anthony Lombardi
Title: Vice President
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<PAGE>
EXHIBIT 10.7
EMPLOYMENT AGREEMENT
THIS AGREEMENT made effective as of the 1st day of January, 1998 (the
"Effective Date") by and between Happy Kids Inc., a New York corporation with
its principal place of business at 100 West 33rd Street, Suite 1100, New York,
New York 10001 (the "Company"), and Jack M. Benun (the "Employee").
WITNESSETH:
WHEREAS, the Company desires to secure the employment of the Employee in
accordance with the provisions of this Agreement; and
WHEREAS, the Employee desires and is willing to accept employment with the
Company in accordance herewith.
NOW THEREFORE, in consideration of the premises and mutual covenants
contained herein, and intending to be legally bound hereby, the parties hereto
agree as follows:
1. Term. The Company hereby agrees to employ the Employee and the
----
Employee hereby agrees to serve the Company pursuant to the terms and conditions
of this Agreement as Chairman of the Board, President and Chief Executive
Officer of the Company, or in a position at least commensurate therewith in all
material respects, for a term commencing on the Effective Date hereof and
expiring on the second anniversary thereof, provided that the Employee is
elected to such office, or a comparable or higher office, at each annual meeting
of the Board of Directors of the Company (the "Board of Directors") during the
term of this Agreement. If the Employee shall not be so elected at any such
annual meeting of the Board of Directors, the
<PAGE>
Employee's employment hereunder shall forthwith terminate and the Company shall
be obligated to compensate the Employee in accordance with Section 6(a) of this
Agreement.
2. Positions and Duties.
--------------------
(a) Duties. The Employee's duties hereunder shall be those which
------
shall be prescribed from time to time by the Board of Directors in accordance
with the bylaws of the Company and shall include such executive duties, powers
and responsibilities as customarily attend the office of Chairman of the Board,
President and Chief Executive Officer of a company comparable to the Company.
The Employee will hold, in addition to the offices of Chairman of the Board,
President and Chief Executive Officer of the Company, such other executive
offices in the Company and its subsidiaries to which he may be elected,
appointed or assigned by the Board of Directors from time to time and will
discharge such executive duties in connection therewith. During the employment
period, the Employee's position (including status, offices and reporting
requirements), authority, duties and responsibilities shall be at least
commensurate in all material respects with the most significant of those held,
exercised and assigned immediately preceding the Effective Date. The Employee
shall devote his full working time, energy and skill (reasonable absences for
vacations and illness excepted), to the business of the Company as is necessary
in order to perform such duties faithfully, competently and diligently;
provided, however, that notwithstanding any provision in this Agreement to the
contrary, the Employee shall not be precluded from devoting reasonable periods
of time required for serving as a member of boards of companies or organizations
which have been approved by the Board of Directors so long as such memberships
or activities do not interfere with the performance of the Employee's duties
hereunder.
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(b) Board Nomination. So long as the Employee is Chairman of the
----------------
Board, President and Chief Executive Officer of the Company, the Company will
use diligent efforts to obtain the nomination and election of the Employee as a
director of the Company. In the event that the Employee is elected as a
director of the Company, the Employee shall perform all duties incident to such
directorship faithfully, diligently and competently and in the best interests of
the Company.
3. Compensation. During the term of this Agreement, the Employee shall
------------
receive, for all services rendered to the Company hereunder, the following
(hereinafter referred to as "Compensation"):
(a) Base Salary. For the term hereof, the Employee shall be paid an
-----------
annual base salary equal to four hundred twenty-five thousand dollars
($425,000.00). The Employee's annual base salary shall be payable in equal
installments in accordance with the Company's general salary payment policies
but no less frequently than monthly.
(b) Bonuses. The Employee shall be eligible for and may receive
-------
bonuses. The amount of such bonuses, if any, shall be solely within the
discretion of the Board of Directors or, if formed, the Compensation Committee
thereof.
(c) Incentive Compensation. The Employee shall be eligible for awards
----------------------
from the Company's incentive compensation plans, including without limitation
any stock option plans, applicable to high level executive officers of the
Company or to key employees of the Company or its subsidiaries, in accordance
with the terms thereof and on a basis commensurate with his position and
responsibilities.
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<PAGE>
(d) Benefits. The Employee and his "dependents," as that term may be
--------
defined under the applicable benefit plan(s) of the Company, shall be included,
to the extent eligible thereunder, in any and all plans, programs and policies
which provide benefits for employees and their dependents. Such plans, programs
and policies may include health care insurance, long-term disability plans, life
insurance, supplemental disability insurance, supplemental life insurance,
holidays and other similar or comparable benefits made available to the
Company's employees.
(e) Expenses. Subject to and in accordance with the Company's
--------
policies and procedures, the Employee hereby is authorized to incur, and, upon
presentation of itemized accounts, shall be reimbursed by the Company for, any
and all reasonable and necessary business-related expenses, which expenses are
incurred by the Employee on behalf of the Company or any of its subsidiaries.
4. Absences. The Employee shall be entitled to vacations, absences
--------
because of illness or other incapacity, and such other absences, whether for
holiday, personal time, or for any other purpose, as set forth in the Company's
employment manual or current procedures and policies, as the case may be, as
same may be amended from time-to-time.
5. Termination. In addition to the events of termination and expiration
-----------
of this Agreement provided for in Section 1 hereof, the Employee's employment
hereunder may be terminated only as follows:
(a) Without Cause. The Company may terminate the Employee's
-------------
employment hereunder without cause only upon action by the Board of Directors,
and upon no less than sixty
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<PAGE>
(60) days prior written notice to the Employee. The Employee may terminate
employment hereunder without cause upon no less than sixty (60) days prior
written notice to the Company.
(b) For Cause, by the Company. The Company may terminate the
-------------------------
Employee's employment hereunder for cause immediately and with prompt notice to
the Employee, which cause shall be determined in good faith solely by the Board
of Directors. "Cause" for termination shall include, but is not limited to, the
following conduct of the Employee:
(1) Material breach of any provision of this Agreement by the
Employee, which breach, if susceptible to cure, shall not have been cured by the
Employee within thirty (30) days of receipt of written notice of said breach;
(2) Misconduct as an employee of the Company, including but not
limited to: misappropriating any funds or property of the Company; attempting to
willfully obtain any personal profit from any transaction in which the Employee
has an interest which is adverse to the interests of the Company; or any other
act or omission which substantially impairs the Company's ability to conduct its
ordinary business in its usual manner;
(3) Unreasonable neglect or refusal to perform the duties
assigned to the Employee under or pursuant to this Agreement;
(4) Conviction of a felony; or
(5) Any other act or omission which subjects the Company or any
of its subsidiaries to substantial public disrespect, scandal or ridicule.
(c) For Good Reason by Employee. The Employee may terminate
---------------------------
employment hereunder for good reason immediately and with prompt notice to the
Company.
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<PAGE>
"Good reason" for termination by the Employee shall include, but is not limited
to, the following conduct of the Company:
(1) Material breach of any provision of this Agreement by the
Company, which breach shall not have been cured by the Company within thirty
(30) days of receipt of written notice of said breach;
(2) Failure to maintain the Employee in a position commensurate
with that referred to in Section 2 of this Agreement without his consent; or
(3) The assignment to the Employee without his consent of any
duties inconsistent with the Employee's position, authority, duties or
responsibilities as contemplated by Section 2 of this Agreement, or any other
action by the Company which results in a diminution of such position, authority,
duties or responsibilities, excluding for this purpose any isolated action not
taken in bad faith and which is promptly remedied by the Company after receipt
of notice thereof given by the Employee.
(d) Death. The period of active employment of the Employee hereunder
-----
shall terminate automatically in the event of his death.
(e) Disability. In the event that the Employee shall be unable to
----------
perform duties hereunder for a period of ninety (90) consecutive calendar days
or any one hundred eighty (180) days in any calendar year by reason of
disability as a result of illness, accident or other physical or mental
incapacity or disability, the Company may, in its discretion, by giving written
notice to the Employee, terminate the Employee's employment hereunder as long as
the Employee is still disabled on the effective date of such termination.
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<PAGE>
(f) Mutual Agreement. This Agreement may be terminated at any time by
----------------
mutual agreement of the Employee and the Company.
6. Compensation in the Event of Termination. In the event that the
----------------------------------------
Employee's employment pursuant to this Agreement terminates prior to the end of
the term of this Agreement because he is not reelected pursuant to Section 1 or
for a reason provided in Section 5 hereof, the Company shall pay the Employee
compensation as set forth below:
(a) Employee not Elected by Board of Directors; By Employee for Good
----------------------------------------------------------------
Reason; By Company Without Cause. In the event that the Employee's employment
- --------------------------------
hereunder is terminated: (i) because the Employee is not elected to the offices
of Chairman of the Board, President and Chief Executive Officer of the Company,
or in a position at least commensurate therewith in all material respects, at
any annual meeting of the Company's Board of Directors during the term of this
Agreement, as contemplated by Section 1 hereof, in each instance without
Employee's consent; (ii) by the Employee for good reason pursuant to Section
5(c) hereof; or (iii) by the Company without cause, then the Company shall
continue to pay or provide, as applicable, the following compensation to the
Employee:
(1) Annual base salary as set forth in Section 3(a) hereof; and
(2) Continuing coverage, but only to the extent required by law, for
the Employee and his eligible dependents under all of the Company's benefit
plans, programs and policies in effect as of the date of termination.
Such compensation shall continue to be paid or provided, as
applicable, in the same manner as before termination, and for a period of time
ending on the date when the term of this Agreement would otherwise have expired
in accordance with Section 1 of this Agreement.
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<PAGE>
The Employee shall not be required to mitigate the amount of any payment
provided for in this Section 6(a) by seeking employment or otherwise, nor shall
any amounts received from employment or otherwise by the Employee offset in any
manner the obligations of the Company hereunder.
(b) By Company Upon Termination of Agreement Due to Employee's Death
----------------------------------------------------------------
or Disability. In the event of the Employee's death or if the Company shall
- -------------
terminate the Employee's employment hereunder for disability pursuant to Section
5(e) hereof, the base salary payable hereunder shall continue to be paid at the
then current rate for three (3) months after the termination of employment to
the Employee or his personal representative, as applicable.
(c) By Company For Cause or By Employee Without Good Reason. Except
-------------------------------------------------------
as otherwise provided in Section 8(b) or 8(f) hereof, in the event that (i) the
Company shall terminate the Employee's employment hereunder for cause pursuant
to Section 5(b) hereof or (ii) the Employee shall terminate employment hereunder
without "good reason" as provided in Section 5(c) hereof, the Company shall not
be obligated to pay the Employee any compensation except for salary and other
Compensation which may have been earned and are due and payable but which have
not been paid as of the date of termination.
7. Effect of Termination. In the event of expiration or early termination
---------------------
of this Agreement as provided herein, neither the Company nor the Employee shall
have any remaining duties or obligations hereunder except that:
(a) The Company shall:
(1) Pay the Employee's accrued salary and any other accrued
benefits under Section 3 hereof;
-8-
<PAGE>
(2) Reimburse the Employee for expenses already incurred in
accordance with Section 3(e) hereof;
(3) To the extent required by law, pay or otherwise provide for
any benefits, payments or continuation or conversion rights in accordance with
the provisions of any benefit plan of which the Employee or any of his
dependents is or was a participant; and
(4) Pay the Employee or his beneficiaries any compensation due
pursuant to Section 6 hereof; and
(b) The Employee shall remain bound by the terms of Section 8 hereof
and Exhibit A attached hereto.
---------
8. Restrictive Covenant. (a) The Employee acknowledges and agrees that
--------------------
he has access to secret and confidential information of the Company and its
subsidiaries and that the following restrictive covenant is necessary to protect
the interests and continued success of the Company. Except as otherwise
expressly consented to in writing by the Company, until the termination of the
Employee's employment (for any reason and whether such employment was under this
Agreement or otherwise) and thereafter for twenty-four (24) months (the
"Restricted Period"), the Employee shall not, directly or indirectly, acting as
an employee, owner, shareholder, partner, joint venturer, officer, director,
agent, salesperson, consultant, advisor, investor or principal of any
corporation or other business entity:
(i) engage, in any state or territory of the United States of America
or other country where the Company is doing business (determined as of the date
the Employee's employment with the Company terminates), in direct or indirect
competition with the business
-9-
<PAGE>
conducted by the Company or activities which the Company plans to conduct within
one year of termination (determined as of the date the Employee's employment
with the Company terminates);
(ii) request or otherwise attempt to induce or influence, directly or
indirectly, any present customer or supplier, or prospective customer or
supplier, of the Company, or other persons sharing a business relationship with
the Company, to cancel, limit or postpone their business with the Company, or
otherwise take action which might be to the material disadvantage of the
Company; or
(iii) hire or solicit for employment, directly or indirectly, or
induce or actively attempt to influence, any Employee of the Company or any
Affiliate, as such term is defined in the Securities Act of 1933, as amended, to
terminate his or her employment or discontinue such person's consultant,
contractor or other business association with the Company.
(b) If the Employee violates any of the restrictions contained in
Section 8(a) above, the Restrictive Period shall be increased by the period of
time from the commencement of any such violation until the time such violation
shall be cured by the Employee to the satisfaction of the Company, and the
Company may withhold any and all payments, except salary, otherwise due and
owing to the Employee under this Agreement.
(c) In the event that either the geographical area or the Restrictive
Period set forth in Section 8(a) of this Agreement is deemed to be unreasonably
restrictive in any court proceeding, the court may reduce such geographical area
and Restrictive Period to the extent which it deems reasonable under the
circumstances.
(d) Nothing in this Section 8, whether express or implied, shall
prevent the Employee from being a holder of securities of a company whose
securities are registered under
-10-
<PAGE>
Section 12 of the Securities Exchange Act of 1934, as amended; provided,
however, that the Employee holds of record and beneficially less than two
percent (2%) of the votes eligible to be cast generally by holders of securities
of such company for the election of directors.
(e) The Employee, as a condition of his continued employment,
acknowledges and agrees that he has reviewed and will continue to be bound by
all of the provisions set forth in Exhibit A attached hereto, which is
---------
incorporated herein by reference and made a part hereof as though fully set
forth herein, during the term of this Agreement, and any time hereafter.
(f) Employee acknowledges and agrees that in the event of a breach or
threatened breach of the provisions of this Section 8 by Employee the Company
may suffer irreparable harm and therefore, the Company shall be entitled, to the
extent permissible by law, immediately to cease to pay or provide the Employee
any compensation being, or to be, paid or provided to him pursuant to Sections
3, except accrued salary, or 6 of this Agreement, and also to obtain immediate
injunctive relief restraining the Employee from conduct in breach or threatened
breach of the covenants contained in this Section 8. Nothing herein shall be
construed as prohibiting the Company from pursuing any other remedies available
to it for such breach or threatened breach, including the recovery of damages
from the Employee.
9. Resolution of Differences Over Breaches of Agreement. Except as
----------------------------------------------------
otherwise provided herein, any controversy or claim arising out of, or relating
to, this Agreement, or the breach hereof, shall be reviewed in the first
instance in accordance with the Company's internal review procedures, if any,
with recourse thereafter--for temporary or preliminary injunctive relief only--
to the courts having jurisdiction thereof, and if any relief other than
injunctive relief is sought, then to arbitration in New York County, New York in
accordance with the rules of the
-11-
<PAGE>
American Arbitration Association, and judgment upon the award rendered by the
Arbitrator(s) may be entered in any court having jurisdiction thereof.
10. Waiver. The waiver by a party hereto of any breach by the other party
------
hereto of any provision of this Agreement shall not operate or be construed as a
waiver of any subsequent breach by a party hereto.
11. Assignment. This Agreement shall be binding upon and inure to the
----------
benefit of the successors and assigns of the Company, and the Company shall be
obligated to require any successor to expressly assume its obligations
hereunder. This Agreement shall inure to the benefit of and be enforceable by
the Employee or his legal representatives, executors, administrators,
successors, heirs, distributees, devisees and legatees. The Employee may not
assign any of his duties, responsibilities, obligations or positions hereunder
to any person and any such purported assignment by him shall be void and of no
force and effect.
12. Notices. Any notices required or permitted to be given under this
-------
Agreement shall be sufficient if in writing, and if personally delivered or when
sent by first class certified or registered mail, postage prepaid, return
receipt requested--in the case of the Employee, to his residence address as set
forth below, and in the case of the Company, to the address of its principal
place of business as set forth below, in care of the Board of Directors--or to
such other person or at such other address with respect to each party as such
party shall notify the other in writing.
-12-
<PAGE>
13. Construction of Agreement.
-------------------------
(a) Governing Law. This Agreement shall be governed by and its
-------------
provisions construed and enforced in accordance with the internal laws of the
State of New York without reference to its principles regarding conflicts of
law.
(b) Severability. In the event that any one or more of the provisions
------------
of this Agreement shall be held to be invalid, illegal or unenforceable, the
validity, legality or enforceability of the remaining provisions shall not in
any way be affected or impaired thereby.
(c) Headings. The descriptive headings of the several paragraphs of
--------
this Agreement are inserted for convenience of reference only and shall not
constitute a part of this Agreement.
14. Entire Agreement. This Agreement contains the entire agreement of the
----------------
parties concerning the Employee's employment and all promises, representations,
understandings, arrangements and prior agreements on such subject are merged
herein and superseded hereby. The provisions of this Agreement may not be
amended, modified, repealed, waived, extended or discharged except by an
agreement in writing signed by the party against whom enforcement of any
amendment, modification, repeal, waiver, extension or discharge is sought. No
person acting other than pursuant to a resolution of the Board of Directors
shall have authority on behalf of the Company to agree to amend, modify, repeal,
waive, extend or discharge any provision of this Agreement or anything in
reference thereto or to exercise any of the Company's rights to terminate or to
fail to extend this Agreement. I further understand and agree that if the
Company does not consummate an initial public offering of its common stock prior
to March 31, 1998 that this Agreement shall be of no further force or effect.
-13-
<PAGE>
IN WITNESS WHEREOF, the Company has caused this Agreement to be executed and
attested by its duly authorized officers, and the Employee has set his hand, all
as of the day and year first above written.
ATTEST: Happy Kids Inc.
__________________________ By:_________________________________
Stuart Bender, Chief Financial Mark J. Benun, Executive Vice President
Officer
Address:______________________________
_______________________________
_______________________________
WITNESS: EMPLOYEE
___________________________ ______________________________
Jack M. Benun
Address:______________________________
_______________________________
_______________________________
-14-
<PAGE>
EXHIBIT A
HAPPY KIDS INC.
EMPLOYEE'S
INVENTION ASSIGNMENT AND CONFIDENTIALITY
AGREEMENT
In consideration of my employment or continued employment by Happy Kids
Inc., a New York corporation or any subsidiary or parent corporation thereof
(the "Company"), I hereby represent and agree as follows:
1. I understand that the Company is engaged in the business of designing
and distributing children's apparel, and that I may have access to or acquire
information with respect to Confidential Information (as defined below),
including processes and methods, development tools, scientific, technical and/or
business innovations.
2. Disclosure of Innovations. I agree to disclose in writing to the
-------------------------
Company all inventions, improvements and other innovations of any kind that I
may make, conceive, develop or reduce to practice, alone or jointly with others,
during the term of my employment with the Company, whether or not they are
related to my work for the Company and whether or not they are eligible for
patent, copyright, trademark, trade secret or other legal protection
("Innovations"). Examples of Innovations shall include, but are not limited to,
discoveries, research, inventions, formulas, techniques, processes, tools, know-
how, marketing plans, new product plans, production processes, advertising,
packaging and marketing techniques and improvements to computer hardware or
software.
3. Assignment of Ownership of Innovations. I agree that all Innovations
--------------------------------------
will be the sole and exclusive property of the Company and I hereby assign all
of my rights, title or interest in the Innovations and in all related patents,
copyrights, trademarks, trade secrets, rights of priority and other proprietary
rights to the Company. At the Company's request and expense, during and after
the period of my employment with the Company, I will assist and cooperate with
the Company in all respects and will execute documents, and, subject to my
reasonable availability, give testimony and take further acts requested by the
Company to obtain, maintain, perfect and enforce for the Company patent,
copyright, trademark, trade secret and other legal protection for the
Innovations. I hereby appoint the President and Chief Executive Officer of the
Company as my attorney-in-fact to execute documents on my behalf for this
purpose.
4. Protection of Confidential Information of the Company. I understand
-----------------------------------------------------
that my work as an employee of the Company creates a relationship of trust and
confidence between myself and the Company. During and after the period of my
employment with the Company, I will not use or disclose or allow anyone else to
use or disclose any "Confidential Information" (as defined below) relating to
the Company, its products, suppliers or customers except as may be necessary in
the performance of my work for the Company or as may be authorized in
- A1 -
<PAGE>
advance by appropriate officers of the Company. "Confidential Information" shall
include innovations, methodologies, processes, tools, business strategies,
financial information, forecasts, personnel information, customer lists, trade
secrets and any other non-public technical or business information, whether in
writing or given to me orally, which I know or have reason to know the Company
would like to treat as confidential for any purpose, such as maintaining a
competitive advantage or avoiding undesirable publicity. I will keep
Confidential Information secret and will not allow any unauthorized use of the
same, whether or not any document containing it is marked as confidential. These
restrictions, however, will not apply to Confidential Information that has
become known to the public generally through no fault or breach of mine or that
the Company regularly gives to third parties without restriction on use or
disclosure. Upon termination of my work with the Company, I will promptly
deliver to the Company all documents and materials of any nature pertaining to
my work with the Company and I will not take with me any documents or materials
or copies thereof containing any Confidential Information.
5. Non-Solicitation. I understand that my work as an employee of the
----------------
Company creates a relationship of trust and confidence between myself and the
Company. During and after the period of my employment with the Company, I will
not request or otherwise attempt to induce or influence, directly or indirectly,
any present customer or supplier, or prospective customer or supplier, of the
Company, or other persons sharing a business relationship with the Company to
cancel, to limit or postpone their business with the Company, or otherwise take
action which might be to the material disadvantage of the Company. During and
after the period of my employment with the Company, I will not hire or solicit
for employment, directly or indirectly, or induce or actively attempt to
influence, any Employee of the Company or any Affiliate of the Company, as such
term is defined in the Securities Act of 1933, as amended, to terminate his or
her employment or discontinue such person's consultant, contractor or other
business association with the Company.
6. Other Agreements. I represent that my performance of all the terms of
----------------
this Agreement and my duties as an employee of the Company will not breach any
invention assignment agreement, confidential information agreement, non-
competition agreement or other agreement with any former employer or other
party. I represent that I have not and will not bring with me to the Company or
use in the performance of my duties for the Company any documents or materials
of a former employer that are not generally available to the public.
7. Disclosure of this Agreement. I hereby authorize the Company to notify
----------------------------
others, including but not limited to customers of the Company and any of my
future employers, of the terms of this Agreement and my responsibilities
hereunder.
8. Injunctive Relief. I understand that in the event of a breach or
------------------
threatened breach of this Agreement by me the Company may suffer irreparable
harm and monetary damages alone would not adequately compensate the Company.
The Company will therefore be entitled to injunctive relief to enforce this
Agreement.
- A2 -
<PAGE>
9. Enforcement and Severability. I acknowledge that each of the
----------------------------
provisions in this Agreement are separate and independent covenants. I agree
that if any court shall determine that any provision of this Agreement is
unenforceable with respect to its term or scope such provision shall nonetheless
be enforceable by any such court upon such modified term or scope as may be
determined by such court to be reasonable and enforceable. The remainder of this
Agreement shall not be affected by the unenforceability or court ordered
modification of a specific provision.
10. Governing Law. I agree that this Agreement shall be governed by and
-------------
construed in accordance with the laws of the State of New York.
11. Superseding Agreement. I understand and agree that this Agreement
---------------------
contains the entire agreement of the parties with respect to subject matter
hereof and supersedes all previous agreements and understandings between the
parties with respect to its subject matter.
12. Acknowledgments. I acknowledge that I have read this agreement, was
---------------
given the opportunity to ask questions and sufficient time to consult an
attorney and I have either consulted an attorney or affirmatively decided not to
consult an attorney. I understand that this agreement does not alter the terms
of an executed Employment Agreement with the Company, or in the absence of an
Employment Agreement, this Agreement does not alter my status as an employee at
will and that my employment may be terminated at any time, with or without
cause. I also understand that my obligations under this Agreement survive the
termination of my employment with the Company.
*.*.*.*.*.*.*.*.*.*
- A3 -
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
date first written below.
Date: _________________ ______________________________
Name of Employee: Jack M. Benun
Address: ______________________
______________________
______________________
______________________
Happy Kids Inc.
Date:__________________ By:_________________________________
Mark J. Benun, Executive Vice President
- A4 -
<PAGE>
EXHIBIT 10.8
EMPLOYMENT AGREEMENT
THIS AGREEMENT made effective as of the 1st day of January, 1998 (the
"Effective Date") by and between Happy Kids Inc., a New York corporation with
its principal place of business at 100 West 33rd Street, Suite 1100, New York,
New York 10001 (the "Company"), and Mark J. Benun (the "Employee").
WITNESSETH:
WHEREAS, the Company desires to secure the employment of the Employee in
accordance with the provisions of this Agreement; and
WHEREAS, the Employee desires and is willing to accept employment with the
Company in accordance herewith.
NOW THEREFORE, in consideration of the premises and mutual covenants
contained herein, and intending to be legally bound hereby, the parties hereto
agree as follows:
1. Term. The Company hereby agrees to employ the Employee and the
----
Employee hereby agrees to serve the Company pursuant to the terms and conditions
of this Agreement as Executive Vice President and Secretary of the Company, or
in a position at least commensurate therewith in all material respects, for a
term commencing on the Effective Date hereof and expiring on the second
anniversary thereof, provided that the Employee is elected to such office, or a
comparable or higher office, at each annual meeting of the Board of Directors of
the Company (the "Board of Directors") during the term of this Agreement. If
the Employee shall not be so elected at any such annual meeting of the Board of
Directors, the Employee's
<PAGE>
employment hereunder shall forthwith terminate and the Company shall be
obligated to compensate the Employee in accordance with Section 6(a) of this
Agreement.
2. Positions and Duties.
--------------------
(a) Duties. The Employee's duties hereunder shall be those which
------
shall be prescribed from time to time by the Board of Directors in accordance
with the bylaws of the Company and shall include such executive duties, powers
and responsibilities as customarily attend the office of Executive Vice
President and Secretary of a company comparable to the Company. The Employee
will hold, in addition to the offices of Executive Vice President and Secretary
of the Company, such other executive offices in the Company and its subsidiaries
to which he may be elected, appointed or assigned by the Board of Directors from
time to time and will discharge such executive duties in connection therewith.
During the employment period, the Employee's position (including status, offices
and reporting requirements), authority, duties and responsibilities shall be at
least commensurate in all material respects with the most significant of those
held, exercised and assigned immediately preceding the Effective Date. The
Employee shall devote his full working time, energy and skill (reasonable
absences for vacations and illness excepted), to the business of the Company as
is necessary in order to perform such duties faithfully, competently and
diligently; provided, however, that notwithstanding any provision in this
Agreement to the contrary, the Employee shall not be precluded from devoting
reasonable periods of time required for serving as a member of boards of
companies or organizations which have been approved by the Board of Directors so
long as such memberships or activities do not interfere with the performance of
the Employee's duties hereunder.
-2-
<PAGE>
(b) Board Nomination. So long as the Employee is Executive Vice
----------------
President and Secretary of the Company, the Company will use diligent efforts to
obtain the nomination and election of the Employee as a director of the Company.
In the event that the Employee is elected as a director of the Company, the
Employee shall perform all duties incident to such directorship faithfully,
diligently and competently and in the best interests of the Company.
3. Compensation. During the term of this Agreement, the Employee shall
------------
receive, for all services rendered to the Company hereunder, the following
(hereinafter referred to as "Compensation"):
(a) Base Salary. For the term hereof, the Employee shall be paid an
-----------
annual base salary equal to three hundred thousand dollars ($300,000.00).
The Employee's annual base salary shall be payable in equal installments in
accordance with the Company's general salary payment policies but no less
frequently than monthly.
(b) Bonuses. The Employee shall be eligible for and may receive
-------
bonuses. The amount of such bonuses, if any, shall be solely within the
discretion of the Board of Directors or, if formed, the Compensation Committee
thereof.
(c) Incentive Compensation. The Employee shall be eligible for awards
----------------------
from the Company's incentive compensation plans, including without limitation
any stock option plans, applicable to high level executive officers of the
Company or to key employees of the Company or its subsidiaries, in accordance
with the terms thereof and on a basis commensurate with his position and
responsibilities.
(d) Benefits. The Employee and his "dependents," as that term may be
--------
defined under the applicable benefit plan(s) of the Company, shall be included,
to the extent
-3-
<PAGE>
eligible thereunder, in any and all plans, programs and policies which provide
benefits for employees and their dependents. Such plans, programs and policies
may include health care insurance, long-term disability plans, life insurance,
supplemental disability insurance, supplemental life insurance, holidays and
other similar or comparable benefits made available to the Company's employees.
(e) Expenses. Subject to and in accordance with the Company's
--------
policies and procedures, the Employee hereby is authorized to incur, and, upon
presentation of itemized accounts, shall be reimbursed by the Company for, any
and all reasonable and necessary business-related expenses, which expenses are
incurred by the Employee on behalf of the Company or any of its subsidiaries.
4. Absences. The Employee shall be entitled to vacations, absences
--------
because of illness or other incapacity, and such other absences, whether for
holiday, personal time, or for any other purpose, as set forth in the Company's
employment manual or current procedures and policies, as the case may be, as
same may be amended from time-to-time.
5. Termination. In addition to the events of termination and expiration
-----------
of this Agreement provided for in Section 1 hereof, the Employee's employment
hereunder may be terminated only as follows:
(a) Without Cause. The Company may terminate the Employee's
-------------
employment hereunder without cause only upon action by the Board of Directors,
and upon no less than sixty (60) days prior written notice to the Employee. The
Employee may terminate employment hereunder without cause upon no less than
sixty (60) days prior written notice to the Company.
-4-
<PAGE>
(b) For Cause, by the Company. The Company may terminate the
-------------------------
Employee's employment hereunder for cause immediately and with prompt notice to
the Employee, which cause shall be determined in good faith solely by the Board
of Directors. "Cause" for termination shall include, but is not limited to, the
following conduct of the Employee:
(1) Material breach of any provision of this Agreement by the
Employee, which breach, if susceptible to cure, shall not have been cured by the
Employee within thirty (30) days of receipt of written notice of said breach;
(2) Misconduct as an employee of the Company, including but not
limited to: misappropriating any funds or property of the Company; attempting to
willfully obtain any personal profit from any transaction in which the Employee
has an interest which is adverse to the interests of the Company; or any other
act or omission which substantially impairs the Company's ability to conduct its
ordinary business in its usual manner;
(3) Unreasonable neglect or refusal to perform the duties
assigned to the Employee under or pursuant to this Agreement;
(4) Conviction of a felony; or
(5) Any other act or omission which subjects the Company or any
of its subsidiaries to substantial public disrespect, scandal or ridicule.
(c) For Good Reason by Employee. The Employee may terminate
---------------------------
employment hereunder for good reason immediately and with prompt notice to the
Company. "Good reason" for termination by the Employee shall include, but is
not limited to, the following conduct of the Company:
-5-
<PAGE>
(1) Material breach of any provision of this Agreement by the
Company, which breach shall not have been cured by the Company within thirty
(30) days of receipt of written notice of said breach;
(2) Failure to maintain the Employee in a position commensurate
with that referred to in Section 2 of this Agreement without his consent; or
(3) The assignment to the Employee without his consent of any
duties inconsistent with the Employee's position, authority, duties or
responsibilities as contemplated by Section 2 of this Agreement, or any other
action by the Company which results in a diminution of such position, authority,
duties or responsibilities, excluding for this purpose any isolated action not
taken in bad faith and which is promptly remedied by the Company after receipt
of notice thereof given by the Employee.
(d) Death. The period of active employment of the Employee hereunder
-----
shall terminate automatically in the event of his death.
(e) Disability. In the event that the Employee shall be unable to
----------
perform duties hereunder for a period of ninety (90) consecutive calendar days
or any one hundred eighty (180) days in any calendar year by reason of
disability as a result of illness, accident or other physical or mental
incapacity or disability, the Company may, in its discretion, by giving written
notice to the Employee, terminate the Employee's employment hereunder as long as
the Employee is still disabled on the effective date of such termination.
(f) Mutual Agreement. This Agreement may be terminated at any time by
----------------
mutual agreement of the Employee and the Company.
-6-
<PAGE>
6. Compensation in the Event of Termination. In the event that the
----------------------------------------
Employee's employment pursuant to this Agreement terminates prior to the end of
the term of this Agreement because he is not reelected pursuant to Section 1 or
for a reason provided in Section 5 hereof, the Company shall pay the Employee
compensation as set forth below:
(a) Employee not Elected by Board of Directors; By Employee for Good
----------------------------------------------------------------
Reason; By Company Without Cause. In the event that the Employee's employment
- --------------------------------
hereunder is terminated: (i) because the Employee is not elected to the offices
of Executive Vice President and Secretary of the Company, or in a position at
least commensurate therewith in all material respects, at any annual meeting of
the Company's Board of Directors during the term of this Agreement, as
contemplated by Section 1 hereof, in each instance without Employee's consent;
(ii) by the Employee for good reason pursuant to Section 5(c) hereof; or (iii)
by the Company without cause, then the Company shall continue to pay or provide,
as applicable, the following compensation to the Employee:
(1) Annual base salary as set forth in Section 3(a) hereof; and
(2) Continuing coverage, but only to the extent required by law,
for the Employee and his eligible dependents under all of the Company's benefit
plans, programs and policies in effect as of the date of termination.
Such compensation shall continue to be paid or provided, as
applicable, in the same manner as before termination, and for a period of time
ending on the date when the term of this Agreement would otherwise have expired
in accordance with Section 1 of this Agreement. The Employee shall not be
required to mitigate the amount of any payment provided for in this Section 6(a)
by seeking employment or otherwise, nor shall any amounts received from
-7-
<PAGE>
employment or otherwise by the Employee offset in any manner the obligations of
the Company hereunder.
(b) By Company Upon Termination of Agreement Due to Employee's Death
----------------------------------------------------------------
or Disability. In the event of the Employee's death or if the Company shall
- -------------
terminate the Employee's employment hereunder for disability pursuant to Section
5(e) hereof, the base salary payable hereunder shall continue to be paid at the
then current rate for three (3) months after the termination of employment to
the Employee or his personal representative, as applicable.
(c) By Company For Cause or By Employee Without Good Reason. Except
-------------------------------------------------------
as otherwise provided in Section 8(b) and 8(f) hereof, in the event that (i) the
Company shall terminate the Employee's employment hereunder for cause pursuant
to Section 5(b) hereof or (ii) the Employee shall terminate employment hereunder
without "good reason" as provided in Section 5(c) hereof, the Company shall not
be obligated to pay the Employee any compensation except for salary and other
Compensation which may have been earned and are due and payable but which have
not been paid as of the date of termination.
7. Effect of Termination. In the event of expiration or early termination
---------------------
of this Agreement as provided herein, neither the Company nor the Employee shall
have any remaining duties or obligations hereunder except that:
(a) The Company shall:
(1) Pay the Employee's accrued salary and any other accrued
benefits under Section 3 hereof;
(2) Reimburse the Employee for expenses already incurred in
accordance with Section 3(e) hereof;
-8-
<PAGE>
(3) To the extent required by law, pay or otherwise provide for
any benefits, payments or continuation or conversion rights in accordance with
the provisions of any benefit plan of which the Employee or any of his
dependents is or was a participant; and
(4) Pay the Employee or his beneficiaries any compensation due
pursuant to Section 6 hereof; and
(b) The Employee shall remain bound by the terms of Section 8 hereof
and Exhibit A attached hereto.
---------
8. Restrictive Covenant. (a) The Employee acknowledges and agrees that
--------------------
he has access to secret and confidential information of the Company and its
subsidiaries and that the following restrictive covenant is necessary to protect
the interests and continued success of the Company. Except as otherwise
expressly consented to in writing by the Company, until the termination of the
Employee's employment (for any reason and whether such employment was under this
Agreement or otherwise) and thereafter for twenty-four (24) months (the
"Restricted Period"), the Employee shall not, directly or indirectly, acting as
an employee, owner, shareholder, partner, joint venturer, officer, director,
agent, salesperson, consultant, advisor, investor or principal of any
corporation or other business entity:
(i) engage, in any state or territory of the United States of America
or other country where the Company is doing business (determined as of the date
the Employee's employment with the Company terminates), in direct or indirect
competition with the business conducted by the Company or activities which the
Company plans to conduct within one year of termination (determined as of the
date the Employee's employment with the Company terminates);
-9-
<PAGE>
(ii) request or otherwise attempt to induce or influence, directly or
indirectly, any present customer or supplier, or prospective customer or
supplier, of the Company, or other persons sharing a business relationship with
the Company, to cancel, limit or postpone their business with the Company, or
otherwise take action which might be to the material disadvantage of the
Company; or
(iii) hire or solicit for employment, directly or indirectly, or
induce or actively attempt to influence, any Employee of the Company or any
Affiliate, as such term is defined in the Securities Act of 1933, as amended, to
terminate his or her employment or discontinue such person's consultant,
contractor or other business association with the Company.
(b) If the Employee violates any of the restrictions contained in
Section 8(a) above, the Restrictive Period shall be increased by the period of
time from the commencement of any such violation until the time such violation
shall be cured by the Employee to the satisfaction of the Company, and the
Company may withhold any and all payments, except salary, otherwise due and
owing to the Employee under this Agreement.
(c) In the event that either the geographical area or the Restrictive
Period set forth in Section 8(a) of this Agreement is deemed to be unreasonably
restrictive in any court proceeding, the court may reduce such geographical area
and Restrictive Period to the extent which it deems reasonable under the
circumstances.
(d) Nothing in this Section 8, whether express or implied, shall
prevent the Employee from being a holder of securities of a company whose
securities are registered under Section 12 of the Securities Exchange Act of
1934, as amended; provided, however, that the
-10-
<PAGE>
Employee holds of record and beneficially less than two percent (2%) of the
votes eligible to be cast generally by holders of securities of such company for
the election of directors.
(e) The Employee, as a condition of his continued employment,
acknowledges and agrees that he has reviewed and will continue to be bound by
all of the provisions set forth in Exhibit A attached hereto, which is
---------
incorporated herein by reference and made a part hereof as though fully set
forth herein, during the term of this Agreement, and any time hereafter.
(f) Employee acknowledges and agrees that in the event of a breach or
threatened breach of the provisions of this Section 8 by Employee the Company
may suffer irreparable harm and therefore, the Company shall be entitled, to the
extent permissible by law, immediately to cease to pay or provide the Employee
any compensation being, or to be, paid or provided to him pursuant to Sections
3, except accrued salary, or 6 of this Agreement, and also to obtain immediate
injunctive relief restraining the Employee from conduct in breach or threatened
breach of the covenants contained in this Section 8. Nothing herein shall be
construed as prohibiting the Company from pursuing any other remedies available
to it for such breach or threatened breach, including the recovery of damages
from the Employee.
9. Resolution of Differences Over Breaches of Agreement. Except as
----------------------------------------------------
otherwise provided herein, any controversy or claim arising out of, or relating
to, this Agreement, or the breach hereof, shall be reviewed in the first
instance in accordance with the Company's internal review procedures, if any,
with recourse thereafter--for temporary or preliminary injunctive relief only--
to the courts having jurisdiction thereof, and if any relief other than
injunctive relief is sought, then to arbitration in New York County, New York in
accordance with the rules of the
-11-
<PAGE>
American Arbitration Association, and judgment upon the award rendered by the
Arbitrator(s) may be entered in any court having jurisdiction thereof.
10. Waiver. The waiver by a party hereto of any breach by the other party
------
hereto of any provision of this Agreement shall not operate or be construed as a
waiver of any subsequent breach by a party hereto.
11. Assignment. This Agreement shall be binding upon and inure to the
----------
benefit of the successors and assigns of the Company, and the Company shall be
obligated to require any successor to expressly assume its obligations
hereunder. This Agreement shall inure to the benefit of and be enforceable by
the Employee or his legal representatives, executors, administrators,
successors, heirs, distributees, devisees and legatees. The Employee may not
assign any of his duties, responsibilities, obligations or positions hereunder
to any person and any such purported assignment by him shall be void and of no
force and effect.
12. Notices. Any notices required or permitted to be given under this
-------
Agreement shall be sufficient if in writing, and if personally delivered or when
sent by first class certified or registered mail, postage prepaid, return
receipt requested--in the case of the Employee, to his residence address as set
forth below, and in the case of the Company, to the address of its principal
place of business as set forth below, in care of the Board of Directors--or to
such other person or at such other address with respect to each party as such
party shall notify the other in writing.
-12-
<PAGE>
13. Construction of Agreement.
-------------------------
(a) Governing Law. This Agreement shall be governed by and its
-------------
provisions construed and enforced in accordance with the internal laws of the
State of New York without reference to its principles regarding conflicts of
law.
(b) Severability. In the event that any one or more of the provisions
------------
of this Agreement shall be held to be invalid, illegal or unenforceable, the
validity, legality or enforceability of the remaining provisions shall not in
any way be affected or impaired thereby.
(c) Headings. The descriptive headings of the several paragraphs of
--------
this Agreement are inserted for convenience of reference only and shall not
constitute a part of this Agreement.
14. Entire Agreement. This Agreement contains the entire agreement of the
----------------
parties concerning the Employee's employment and all promises, representations,
understandings, arrangements and prior agreements on such subject are merged
herein and superseded hereby. The provisions of this Agreement may not be
amended, modified, repealed, waived, extended or discharged except by an
agreement in writing signed by the party against whom enforcement of any
amendment, modification, repeal, waiver, extension or discharge is sought. No
person acting other than pursuant to a resolution of the Board of Directors
shall have authority on behalf of the Company to agree to amend, modify, repeal,
waive, extend or discharge any provision of this Agreement or anything in
reference thereto or to exercise any of the Company's rights to terminate or to
fail to extend this Agreement. I further understand and agree that if the
Company does not consummate an initial public offering of its common stock prior
to March 31, 1998 that this Agreement shall be of no further force or effect.
-13-
<PAGE>
IN WITNESS WHEREOF, the Company has caused this Agreement to be executed and
attested by its duly authorized officers, and the Employee has set his hand, all
as of the day and year first above written.
ATTEST: Happy Kids Inc.
__________________________ By:_____________________________
Stuart Bender, Chief Financial Jack M. Benun, President
Officer
Address:______________________________
_______________________________
_______________________________
WITNESS: EMPLOYEE
____________________________ ____________________________
Mark J. Benun
Address:______________________________
_______________________________
_______________________________
-14-
<PAGE>
EXHIBIT A
HAPPY KIDS INC.
EMPLOYEE'S
INVENTION ASSIGNMENT AND CONFIDENTIALITY
AGREEMENT
In consideration of my employment or continued employment by Happy Kids
Inc., a New York corporation or any subsidiary or parent corporation thereof
(the "Company"), I hereby represent and agree as follows:
1. I understand that the Company is engaged in the business of designing
and distributing children's apparel, and that I may have access to or acquire
information with respect to Confidential Information (as defined below),
including processes and methods, development tools, scientific, technical and/or
business innovations.
2. Disclosure of Innovations. I agree to disclose in writing to the
-------------------------
Company all inventions, improvements and other innovations of any kind that I
may make, conceive, develop or reduce to practice, alone or jointly with others,
during the term of my employment with the Company, whether or not they are
related to my work for the Company and whether or not they are eligible for
patent, copyright, trademark, trade secret or other legal protection
("Innovations"). Examples of Innovations shall include, but are not limited to,
discoveries, research, inventions, formulas, techniques, processes, tools, know-
how, marketing plans, new product plans, production processes, advertising,
packaging and marketing techniques and improvements to computer hardware or
software.
3. Assignment of Ownership of Innovations. I agree that all Innovations
--------------------------------------
will be the sole and exclusive property of the Company and I hereby assign all
of my rights, title or interest in the Innovations and in all related patents,
copyrights, trademarks, trade secrets, rights of priority and other proprietary
rights to the Company. At the Company's request and expense, during and after
the period of my employment with the Company, I will assist and cooperate with
the Company in all respects and will execute documents, and, subject to my
reasonable availability, give testimony and take further acts requested by the
Company to obtain, maintain, perfect and enforce for the Company patent,
copyright, trademark, trade secret and other legal protection for the
Innovations. I hereby appoint the President and Chief Executive Officer of the
Company as my attorney-in-fact to execute documents on my behalf for this
purpose.
4. Protection of Confidential Information of the Company. I understand
-----------------------------------------------------
that my work as an employee of the Company creates a relationship of trust and
confidence between myself and the Company. During and after the period of my
employment with the Company, I will not use or disclose or allow anyone else to
use or disclose any "Confidential Information" (as defined below) relating to
the Company, its products, suppliers or customers except as may be necessary in
the performance of my work for the Company or as may be authorized in
-A1-
<PAGE>
advance by appropriate officers of the Company. "Confidential Information" shall
include innovations, methodologies, processes, tools, business strategies,
financial information, forecasts, personnel information, customer lists, trade
secrets and any other non-public technical or business information, whether in
writing or given to me orally, which I know or have reason to know the Company
would like to treat as confidential for any purpose, such as maintaining a
competitive advantage or avoiding undesirable publicity. I will keep
Confidential Information secret and will not allow any unauthorized use of the
same, whether or not any document containing it is marked as confidential. These
restrictions, however, will not apply to Confidential Information that has
become known to the public generally through no fault or breach of mine or that
the Company regularly gives to third parties without restriction on use or
disclosure. Upon termination of my work with the Company, I will promptly
deliver to the Company all documents and materials of any nature pertaining to
my work with the Company and I will not take with me any documents or materials
or copies thereof containing any Confidential Information.
5. Non-Solicitation. I understand that my work as an employee of the
----------------
Company creates a relationship of trust and confidence between myself and the
Company. During and after the period of my employment with the Company, I will
not request or otherwise attempt to induce or influence, directly or indirectly,
any present customer or supplier, or prospective customer or supplier, of the
Company, or other persons sharing a business relationship with the Company to
cancel, to limit or postpone their business with the Company, or otherwise take
action which might be to the material disadvantage of the Company. During and
after the period of my employment with the Company, I will not hire or solicit
for employment, directly or indirectly, or induce or actively attempt to
influence, any Employee of the Company or any Affiliate of the Company, as such
term is defined in the Securities Act of 1933, as amended, to terminate his or
her employment or discontinue such person's consultant, contractor or other
business association with the Company.
6. Other Agreements. I represent that my performance of all the terms of
----------------
this Agreement and my duties as an employee of the Company will not breach any
invention assignment agreement, confidential information agreement, non-
competition agreement or other agreement with any former employer or other
party. I represent that I have not and will not bring with me to the Company or
use in the performance of my duties for the Company any documents or materials
of a former employer that are not generally available to the public.
7. Disclosure of this Agreement. I hereby authorize the Company to notify
----------------------------
others, including but not limited to customers of the Company and any of my
future employers, of the terms of this Agreement and my responsibilities
hereunder.
8. Injunctive Relief. I understand that in the event of a breach or
------------------
threatened breach of this Agreement by me the Company may suffer irreparable
harm and monetary damages alone would not adequately compensate the Company.
The Company will therefore be entitled to injunctive relief to enforce this
Agreement.
-A2-
<PAGE>
9. Enforcement and Severability. I acknowledge that each of the
----------------------------
provisions in this Agreement are separate and independent covenants. I agree
that if any court shall determine that any provision of this Agreement is
unenforceable with respect to its term or scope such provision shall nonetheless
be enforceable by any such court upon such modified term or scope as may be
determined by such court to be reasonable and enforceable. The remainder of this
Agreement shall not be affected by the unenforceability or court ordered
modification of a specific provision.
10. Governing Law. I agree that this Agreement shall be governed by and
-------------
construed in accordance with the laws of the State of New York.
11. Superseding Agreement. I understand and agree that this Agreement
---------------------
contains the entire agreement of the parties with respect to subject matter
hereof and supersedes all previous agreements and understandings between the
parties with respect to its subject matter.
12. Acknowledgments. I acknowledge that I have read this agreement, was
---------------
given the opportunity to ask questions and sufficient time to consult an
attorney and I have either consulted an attorney or affirmatively decided not to
consult an attorney. I understand that this agreement does not alter the terms
of an executed Employment Agreement with the Company, or in the absence of an
Employment Agreement, this Agreement does not alter my status as an employee at
will and that my employment may be terminated at any time, with or without
cause. I also understand that my obligations under this Agreement survive the
termination of my employment with the Company.
*.*.*.*.*.*.*.*.*.*
-A3-
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
date first written below.
Date: _________________ ______________________________
Name of Employee: Mark J. Benun
Address: ______________________
______________________
______________________
______________________
Happy Kids Inc.
Date:__________________ By:______________________________
Jack M. Benun, President
-A4-
<PAGE>
EXHIBIT 10.9
EMPLOYMENT AGREEMENT
THIS AGREEMENT made effective as of the 1st day of January, 1998 (the
"Effective Date") by and between Happy Kids Inc., a New York corporation with
its principal place of business at 100 West 33rd Street, Suite 1100, New York,
New York 10001 (the "Company"), and Isaac Levy (the "Employee").
WITNESSETH:
WHEREAS, the Company desires to secure the employment of the Employee in
accordance with the provisions of this Agreement; and
WHEREAS, the Employee desires and is willing to accept employment with the
Company in accordance herewith.
NOW THEREFORE, in consideration of the premises and mutual covenants
contained herein, and intending to be legally bound hereby, the parties hereto
agree as follows:
1. Term. The Company hereby agrees to employ the Employee and the
----
Employee hereby agrees to serve the Company pursuant to the terms and conditions
of this Agreement as Senior Vice President of the Company, or in a position at
least commensurate therewith in all material respects, for a term commencing on
the Effective Date hereof and expiring on the second anniversary thereof,
provided that the Employee is elected to such office, or a comparable or higher
office, at each annual meeting of the Board of Directors of the Company (the
"Board of Directors") during the term of this Agreement. If the Employee shall
not be so elected at any such annual meeting of the Board of Directors, the
Employee's employment hereunder shall
<PAGE>
forthwith terminate and the Company shall be obligated to compensate the
Employee in accordance with Section 6(a) of this Agreement.
2. Positions and Duties.
--------------------
(a) Duties. The Employee's duties hereunder shall be those which
------
shall be prescribed from time to time by the Board of Directors in accordance
with the bylaws of the Company and shall include such executive duties, powers
and responsibilities as customarily attend the office of Senior Vice President
of a company comparable to the Company. The Employee will hold, in addition to
the office of Senior Vice President of the Company, such other executive offices
in the Company and its subsidiaries to which he may be elected, appointed or
assigned by the Board of Directors from time to time and will discharge such
executive duties in connection therewith. During the employment period, the
Employee's position (including status, offices and reporting requirements),
authority, duties and responsibilities shall be at least commensurate in all
material respects with the most significant of those held, exercised and
assigned immediately preceding the Effective Date. The Employee shall devote
his full working time, energy and skill (reasonable absences for vacations and
illness excepted), to the business of the Company as is necessary in order to
perform such duties faithfully, competently and diligently; provided, however,
that notwithstanding any provision in this Agreement to the contrary, the
Employee shall not be precluded from devoting reasonable periods of time
required for serving as a member of boards of companies or organizations which
have been approved by the Board of Directors so long as such memberships or
activities do not interfere with the performance of the Employee's duties
hereunder.
-2-
<PAGE>
(b) Board Nomination. So long as the Employee is Senior Vice
----------------
President of the Company, the Company will use diligent efforts to obtain the
nomination and election of the Employee as a director of the Company. In the
event that the Employee is elected as a director of the Company, the Employee
shall perform all duties incident to such directorship faithfully, diligently
and competently and in the best interests of the Company.
3. Compensation. During the term of this Agreement, the Employee shall
------------
receive, for all services rendered to the Company hereunder, the following
(hereinafter referred to as "Compensation"):
(a) Base Salary. For the term hereof, the Employee shall be paid an
-----------
annual base salary equal to three hundred thousand dollars ($300,000.00).
The Employee's annual base salary shall be payable in equal installments in
accordance with the Company's general salary payment policies but no less
frequently than monthly.
(b) Bonuses. The Employee shall be eligible for and may receive
-------
bonuses. The amount of such bonuses, if any, shall be solely within the
discretion of the Board of Directors or, if formed, the Compensation Committee
thereof.
(c) Incentive Compensation. The Employee shall be eligible for awards
----------------------
from the Company's incentive compensation plans, including without limitation
any stock option plans, applicable to high level executive officers of the
Company or to key employees of the Company or its subsidiaries, in accordance
with the terms thereof and on a basis commensurate with his position and
responsibilities.
(d) Benefits. The Employee and his "dependents," as that term may be
--------
defined under the applicable benefit plan(s) of the Company, shall be included,
to the extent
-3-
<PAGE>
eligible thereunder, in any and all plans, programs and policies which provide
benefits for employees and their dependents. Such plans, programs and policies
may include health care insurance, long-term disability plans, life insurance,
supplemental disability insurance, supplemental life insurance, holidays and
other similar or comparable benefits made available to the Company's employees.
(e) Expenses. Subject to and in accordance with the Company's
--------
policies and procedures, the Employee hereby is authorized to incur, and, upon
presentation of itemized accounts, shall be reimbursed by the Company for, any
and all reasonable and necessary business-related expenses, which expenses are
incurred by the Employee on behalf of the Company or any of its subsidiaries.
4. Absences. The Employee shall be entitled to vacations, absences
--------
because of illness or other incapacity, and such other absences, whether for
holiday, personal time, or for any other purpose, as set forth in the Company's
employment manual or current procedures and policies, as the case may be, as
same may be amended from time-to-time.
5. Termination. In addition to the events of termination and expiration
-----------
of this Agreement provided for in Section 1 hereof, the Employee's employment
hereunder may be terminated only as follows:
(a) Without Cause. The Company may terminate the Employee's
-------------
employment hereunder without cause only upon action by the Board of Directors,
and upon no less than sixty (60) days prior written notice to the Employee. The
Employee may terminate employment hereunder without cause upon no less than
sixty (60) days prior written notice to the Company.
-4-
<PAGE>
(b) For Cause, by the Company. The Company may terminate the
-------------------------
Employee's employment hereunder for cause immediately and with prompt notice to
the Employee, which cause shall be determined in good faith solely by the Board
of Directors. "Cause" for termination shall include, but is not limited to, the
following conduct of the Employee:
(1) Material breach of any provision of this Agreement by the
Employee, which breach, if susceptible to cure, shall not have been cured by the
Employee within thirty (30) days of receipt of written notice of said breach;
(2) Misconduct as an employee of the Company, including but not
limited to: misappropriating any funds or property of the Company; attempting to
willfully obtain any personal profit from any transaction in which the Employee
has an interest which is adverse to the interests of the Company; or any other
act or omission which substantially impairs the Company's ability to conduct its
ordinary business in its usual manner;
(3) Unreasonable neglect or refusal to perform the duties assigned
to the Employee under or pursuant to this Agreement;
(4) Conviction of a felony; or
(5) Any other act or omission which subjects the Company or any of
its subsidiaries to substantial public disrespect, scandal or ridicule.
(c) For Good Reason by Employee. The Employee may terminate employment
---------------------------
hereunder for good reason immediately and with prompt notice to the Company.
"Good reason" for termination by the Employee shall include, but is not limited
to, the following conduct of the Company:
-5-
<PAGE>
(1) Material breach of any provision of this Agreement by the
Company, which breach shall not have been cured by the Company within thirty
(30) days of receipt of written notice of said breach;
(2) Failure to maintain the Employee in a position
commensurate with that referred to in Section 2 of this Agreement without his
consent; or
(3) The assignment to the Employee without his consent of any
duties inconsistent with the Employee's position, authority, duties or
responsibilities as contemplated by Section 2 of this Agreement, or any other
action by the Company which results in a diminution of such position, authority,
duties or responsibilities, excluding for this purpose any isolated action not
taken in bad faith and which is promptly remedied by the Company after receipt
of notice thereof given by the Employee.
(d) Death. The period of active employment of the Employee
-----
hereunder shall terminate automatically in the event of his death.
(e) Disability. In the event that the Employee shall be unable to
----------
perform duties hereunder for a period of ninety (90) consecutive calendar days
or any one hundred eighty (180) days in any calendar year by reason of
disability as a result of illness, accident or other physical or mental
incapacity or disability, the Company may, in its discretion, by giving written
notice to the Employee, terminate the Employee's employment hereunder as long as
the Employee is still disabled on the effective date of such termination.
(f) Mutual Agreement. This Agreement may be terminated at any time
----------------
by mutual agreement of the Employee and the Company.
-6-
<PAGE>
6. Compensation in the Event of Termination. In the event that the
----------------------------------------
Employee's employment pursuant to this Agreement terminates prior to the end of
the term of this Agreement because he is not reelected pursuant to Section 1 or
for a reason provided in Section 5 hereof, the Company shall pay the Employee
compensation as set forth below:
(a) Employee not Elected by Board of Directors; By Employee for Good
----------------------------------------------------------------
Reason; By Company Without Cause. In the event that the Employee's employment
- --------------------------------
hereunder is terminated: (i) because the Employee is not elected to the office
of Senior Vice President of the Company, or in a position at least commensurate
therewith in all material respects, at any annual meeting of the Company's Board
of Directors during the term of this Agreement, as contemplated by Section 1
hereof, in each instance without Employee's consent; (ii) by the Employee for
good reason pursuant to Section 5(c) hereof; or (iii) by the Company without
cause, then the Company shall continue to pay or provide, as applicable, the
following compensation to the Employee:
(1) Annual base salary as set forth in Section 3(a) hereof; and
(2) Continuing coverage, but only to the extent required by law,
for the Employee and his eligible dependents under all of the Company's benefit
plans, programs and policies in effect as of the date of termination.
Such compensation shall continue to be paid or provided, as
applicable, in the same manner as before termination, and for a period of time
ending on the date when the term of this Agreement would otherwise have expired
in accordance with Section 1 of this Agreement. The Employee shall not be
required to mitigate the amount of any payment provided for in this Section 6(a)
by seeking employment or otherwise, nor shall any amounts received from
-7-
<PAGE>
employment or otherwise by the Employee offset in any manner the obligations of
the Company hereunder.
(b) By Company Upon Termination of Agreement Due to Employee's Death
----------------------------------------------------------------
or Disability. In the event of the Employee's death or if the Company shall
- -------------
terminate the Employee's employment hereunder for disability pursuant to Section
5(e) hereof, the base salary payable hereunder shall continue to be paid at the
then current rate for three (3) months after the termination of employment to
the Employee or his personal representative, as applicable.
(c) By Company For Cause or By Employee Without Good Reason. Except
-------------------------------------------------------
as otherwise provided in Section 8(b) and 8(f) hereof, in the event that (i) the
Company shall terminate the Employee's employment hereunder for cause pursuant
to Section 5(b) hereof or (ii) the Employee shall terminate employment hereunder
without "good reason" as provided in Section 5(c) hereof, the Company shall not
be obligated to pay the Employee any compensation except for salary and other
Compensation which may have been earned and are due and payable but which have
not been paid as of the date of termination.
7. Effect of Termination. In the event of expiration or early termination
---------------------
of this Agreement as provided herein, neither the Company nor the Employee shall
have any remaining duties or obligations hereunder except that:
(a) The Company shall:
(1) Pay the Employee's accrued salary and any other accrued
benefits under Section 3 hereof;
(2) Reimburse the Employee for expenses already incurred in
accordance with Section 3(e) hereof;
-8-
<PAGE>
(3) To the extent required by law, pay or otherwise provide for
any benefits, payments or continuation or conversion rights in accordance with
the provisions of any benefit plan of which the Employee or any of his
dependents is or was a participant; and
(4) Pay the Employee or his beneficiaries any compensation due
pursuant to Section 6 hereof; and
(b) The Employee shall remain bound by the terms of Section 8 hereof
and Exhibit A attached hereto.
---------
8. Restrictive Covenant. (a) The Employee acknowledges and agrees that
--------------------
he has access to secret and confidential information of the Company and its
subsidiaries and that the following restrictive covenant is necessary to protect
the interests and continued success of the Company. Except as otherwise
expressly consented to in writing by the Company, until the termination of the
Employee's employment (for any reason and whether such employment was under this
Agreement or otherwise) and thereafter for twenty-four (24) months (the
"Restricted Period"), the Employee shall not, directly or indirectly, acting as
an employee, owner, shareholder, partner, joint venturer, officer, director,
agent, salesperson, consultant, advisor, investor or principal of any
corporation or other business entity:
(i) engage, in any state or territory of the United States of America
or other country where the Company is doing business (determined as of the date
the Employee's employment with the Company terminates), in direct or indirect
competition with the business conducted by the Company or activities which the
Company plans to conduct within one year of termination (determined as of the
date the Employee's employment with the Company terminates);
-9-
<PAGE>
(ii) request or otherwise attempt to induce or influence, directly or
indirectly, any present customer or supplier, or prospective customer or
supplier, of the Company, or other persons sharing a business relationship with
the Company, to cancel, limit or postpone their business with the Company, or
otherwise take action which might be to the material disadvantage of the
Company; or
(iii) hire or solicit for employment, directly or indirectly, or
induce or actively attempt to influence, any Employee of the Company or any
Affiliate, as such term is defined in the Securities Act of 1933, as amended, to
terminate his or her employment or discontinue such person's consultant,
contractor or other business association with the Company.
(b) If the Employee violates any of the restrictions contained in
Section 8(a) above, the Restrictive Period shall be increased by the period of
time from the commencement of any such violation until the time such violation
shall be cured by the Employee to the satisfaction of the Company, and the
Company may withhold any and all payments, except salary, otherwise due and
owing to the Employee under this Agreement.
(c) In the event that either the geographical area or the Restrictive
Period set forth in Section 8(a) of this Agreement is deemed to be unreasonably
restrictive in any court proceeding, the court may reduce such geographical area
and Restrictive Period to the extent which it deems reasonable under the
circumstances.
(d) Nothing in this Section 8, whether express or implied, shall
prevent the Employee from being a holder of securities of a company whose
securities are registered under Section 12 of the Securities Exchange Act of
1934, as amended; provided, however, that the
-10-
<PAGE>
Employee holds of record and beneficially less than two percent (2%) of the
votes eligible to be cast generally by holders of securities of such company for
the election of directors.
(e) The Employee, as a condition of his continued employment,
acknowledges and agrees that he has reviewed and will continue to be bound by
all of the provisions set forth in Exhibit A attached hereto, which is
---------
incorporated herein by reference and made a part hereof as though fully set
forth herein, during the term of this Agreement, and any time hereafter.
(f) Employee acknowledges and agrees that in the event of a breach or
threatened breach of the provisions of this Section 8 by Employee the Company
may suffer irreparable harm and therefore, the Company shall be entitled, to the
extent permissible by law, immediately to cease to pay or provide the Employee
any compensation being, or to be, paid or provided to him pursuant to Sections
3, except accrued salary, or 6 of this Agreement, and also to obtain immediate
injunctive relief restraining the Employee from conduct in breach or threatened
breach of the covenants contained in this Section 8. Nothing herein shall be
construed as prohibiting the Company from pursuing any other remedies available
to it for such breach or threatened breach, including the recovery of damages
from the Employee.
9. Resolution of Differences Over Breaches of Agreement. Except as
----------------------------------------------------
otherwise provided herein, any controversy or claim arising out of, or relating
to, this Agreement, or the breach hereof, shall be reviewed in the first
instance in accordance with the Company's internal review procedures, if any,
with recourse thereafter--for temporary or preliminary injunctive relief only--
to the courts having jurisdiction thereof, and if any relief other than
injunctive relief is sought, then to arbitration in New York County, New York in
accordance with the rules of the
-11-
<PAGE>
American Arbitration Association, and judgment upon the award rendered by the
Arbitrator(s) may be entered in any court having jurisdiction thereof.
10. Waiver. The waiver by a party hereto of any breach by the other party
------
hereto of any provision of this Agreement shall not operate or be construed as a
waiver of any subsequent breach by a party hereto.
11. Assignment. This Agreement shall be binding upon and inure to the
----------
benefit of the successors and assigns of the Company, and the Company shall be
obligated to require any successor to expressly assume its obligations
hereunder. This Agreement shall inure to the benefit of and be enforceable by
the Employee or his legal representatives, executors, administrators,
successors, heirs, distributees, devisees and legatees. The Employee may not
assign any of his duties, responsibilities, obligations or positions hereunder
to any person and any such purported assignment by him shall be void and of no
force and effect.
12. Notices. Any notices required or permitted to be given under this
-------
Agreement shall be sufficient if in writing, and if personally delivered or when
sent by first class certified or registered mail, postage prepaid, return
receipt requested--in the case of the Employee, to his residence address as set
forth below, and in the case of the Company, to the address of its principal
place of business as set forth below, in care of the Board of Directors--or to
such other person or at such other address with respect to each party as such
party shall notify the other in writing.
-12-
<PAGE>
13. Construction of Agreement.
-------------------------
(a) Governing Law. This Agreement shall be governed by and its
-------------
provisions construed and enforced in accordance with the internal laws of the
State of New York without reference to its principles regarding conflicts of
law.
(b) Severability. In the event that any one or more of the provisions
------------
of this Agreement shall be held to be invalid, illegal or unenforceable, the
validity, legality or enforceability of the remaining provisions shall not in
any way be affected or impaired thereby.
(c) Headings. The descriptive headings of the several paragraphs of
--------
this Agreement are inserted for convenience of reference only and shall not
constitute a part of this Agreement.
14. Entire Agreement. This Agreement contains the entire agreement of the
----------------
parties concerning the Employee's employment and all promises, representations,
understandings, arrangements and prior agreements on such subject are merged
herein and superseded hereby. The provisions of this Agreement may not be
amended, modified, repealed, waived, extended or discharged except by an
agreement in writing signed by the party against whom enforcement of any
amendment, modification, repeal, waiver, extension or discharge is sought. No
person acting other than pursuant to a resolution of the Board of Directors
shall have authority on behalf of the Company to agree to amend, modify, repeal,
waive, extend or discharge any provision of this Agreement or anything in
reference thereto or to exercise any of the Company's rights to terminate or to
fail to extend this Agreement. I further understand and agree that if the
Company does not consummate an initial public offering of its common stock prior
to March 31, 1998 that this Agreement shall be of no further force or effect.
-13-
<PAGE>
IN WITNESS WHEREOF, the Company has caused this Agreement to be executed and
attested by its duly authorized officers, and the Employee has set his hand, all
as of the day and year first above written.
ATTEST: Happy Kids Inc.
__________________________ By:_____________________________
Stuart Bender, Chief Financial Jack M. Benun, President
Officer
Address:______________________________
______________________________
______________________________
WITNESS: EMPLOYEE
_________________________ ________________________________
Isaac Levy
Address:______________________________
______________________________
______________________________
-14-
<PAGE>
EXHIBIT A
HAPPY KIDS INC.
EMPLOYEE'S
INVENTION ASSIGNMENT AND CONFIDENTIALITY
AGREEMENT
In consideration of my employment or continued employment by Happy Kids
Inc., a New York corporation or any subsidiary or parent corporation thereof
(the "Company"), I hereby represent and agree as follows:
1. I understand that the Company is engaged in the business of designing
and distributing children's apparel, and that I may have access to or acquire
information with respect to Confidential Information (as defined below),
including processes and methods, development tools, scientific, technical and/or
business innovations.
2. Disclosure of Innovations. I agree to disclose in writing to the
-------------------------
Company all inventions, improvements and other innovations of any kind that I
may make, conceive, develop or reduce to practice, alone or jointly with others,
during the term of my employment with the Company, whether or not they are
related to my work for the Company and whether or not they are eligible for
patent, copyright, trademark, trade secret or other legal protection
("Innovations"). Examples of Innovations shall include, but are not limited to,
discoveries, research, inventions, formulas, techniques, processes, tools, know-
how, marketing plans, new product plans, production processes, advertising,
packaging and marketing techniques and improvements to computer hardware or
software.
3. Assignment of Ownership of Innovations. I agree that all Innovations
--------------------------------------
will be the sole and exclusive property of the Company and I hereby assign all
of my rights, title or interest in the Innovations and in all related patents,
copyrights, trademarks, trade secrets, rights of priority and other proprietary
rights to the Company. At the Company's request and expense, during and after
the period of my employment with the Company, I will assist and cooperate with
the Company in all respects and will execute documents, and, subject to my
reasonable availability, give testimony and take further acts requested by the
Company to obtain, maintain, perfect and enforce for the Company patent,
copyright, trademark, trade secret and other legal protection for the
Innovations. I hereby appoint the President and Chief Executive Officer of the
Company as my attorney-in-fact to execute documents on my behalf for this
purpose.
4. Protection of Confidential Information of the Company. I understand
-----------------------------------------------------
that my work as an employee of the Company creates a relationship of trust and
confidence between myself and the Company. During and after the period of my
employment with the Company, I will not use or disclose or allow anyone else to
use or disclose any "Confidential Information" (as defined below) relating to
the Company, its products, suppliers or customers except as may be necessary in
the performance of my work for the Company or as may be authorized in ,
-A1-
<PAGE>
advance by appropriate officers of the Company. "Confidential Information" shall
------------------------
include innovations methodologies, processes, tools, business strategies,
financial information, forecasts, personnel information, customer lists, trade
secrets and any other non-public technical or business information, whether in
writing or given to me orally, which I know or have reason to know the Company
would like to treat as confidential for any purpose, such as maintaining a
competitive advantage or avoiding undesirable publicity. I will keep
Confidential Information secret and will not allow any unauthorized use of the
same, whether or not any document containing it is marked as confidential. These
restrictions, however, will not apply to Confidential Information that has
become known to the public generally through no fault or breach of mine or that
the Company regularly gives to third parties without restriction on use or
disclosure. Upon termination of my work with the Company, I will promptly
deliver to the Company all documents and materials of any nature pertaining to
my work with the Company and I will not take with me any documents or materials
or copies thereof containing any Confidential Information.
5. Non-Solicitation. I understand that my work as an employee of the
----------------
Company creates a relationship of trust and confidence between myself and the
Company. During and after the period of my employment with the Company, I will
not request or otherwise attempt to induce or influence, directly or indirectly,
any present customer or supplier, or prospective customer or supplier, of the
Company, or other persons sharing a business relationship with the Company to
cancel, to limit or postpone their business with the Company, or otherwise take
action which might be to the material disadvantage of the Company. During and
after the period of my employment with the Company, I will not hire or solicit
for employment, directly or indirectly, or induce or actively attempt to
influence, any Employee of the Company or any Affiliate of the Company, as such
term is defined in the Securities Act of 1933, as amended, to terminate his or
her employment or discontinue such person's consultant, contractor or other
business association with the Company.
6. Other Agreements. I represent that my performance of all the terms of
----------------
this Agreement and my duties as an employee of the Company will not breach any
invention assignment agreement, confidential information agreement, non-
competition agreement or other agreement with any former employer or other
party. I represent that I have not and will not bring with me to the Company or
use in the performance of my duties for the Company any documents or materials
of a former employer that are not generally available to the public.
7. Disclosure of this Agreement. I hereby authorize the Company to notify
----------------------------
others, including but not limited to customers of the Company and any of my
future employers, of the terms of this Agreement and my responsibilities
hereunder.
8. Injunctive Relief. I understand that in the event of a breach or
-----------------
threatened breach of this Agreement by me the Company may suffer irreparable
harm and monetary damages alone would not adequately compensate the Company.
The Company will therefore be entitled to injunctive relief to enforce this
Agreement.
-A2-
<PAGE>
9. Enforcement and Severability. I acknowledge that each of the
----------------------------
provisions in this Agreement are separate and independent covenants. I agree
that if any court shall determine that any provision of this Agreement is
unenforceable with respect to its term or scope such provision shall nonetheless
be enforceable by any such court upon such modified term or scope as may be
determined by such court to be reasonable and enforceable. The remainder of this
Agreement shall not be affected by the unenforceability or court ordered
modification of a specific provision.
10. Governing Law. I agree that this Agreement shall be governed by and
-------------
construed in accordance with the laws of the State of New York.
11. Superseding Agreement. I understand and agree that this Agreement
---------------------
contains the entire agreement of the parties with respect to subject matter
hereof and supersedes all previous agreements and understandings between the
parties with respect to its subject matter.
12. Acknowledgments. I acknowledge that I have read this agreement, was
---------------
given the opportunity to ask questions and sufficient time to consult an
attorney and I have either consulted an attorney or affirmatively decided not to
consult an attorney. I understand that this agreement does not alter the terms
of an executed Employment Agreement with the Company, or in the absence of an
Employment Agreement, this Agreement does not alter my status as an employee at
will and that my employment may be terminated at any time, with or without
cause. I also understand that my obligations under this Agreement survive the
termination of my employment with the Company.
*.*.*.*.*.*.*.*.*.*
-A3-
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
date first written below.
Date: _________________ ______________________________
Name of Employee: Isaac Levy
Address: ______________________
______________________
______________________
______________________
Happy Kids Inc.
Date:__________________ By:_____________________________
Jack M. Benun, President
-A4-
<PAGE>
EXHIBIT 10.10
EMPLOYMENT AGREEMENT
THIS AGREEMENT made effective as of the 1st day of January, 1998 (the
"Effective Date") by and between Happy Kids Inc., a New York corporation with
its principal place of business at 100 West 33rd Street, Suite 1100, New York,
New York 10001 (the "Company"), and Stuart Bender (the "Employee").
WITNESSETH:
WHEREAS, the Company desires to secure the employment of the Employee in
accordance with the provisions of this Agreement; and
WHEREAS, the Employee desires and is willing to accept employment with the
Company in accordance herewith.
NOW THEREFORE, in consideration of the premises and mutual covenants
contained herein, and intending to be legally bound hereby, the parties hereto
agree as follows:
1. Term. The Company hereby agrees to employ the Employee and the
----
Employee hereby agrees to serve the Company pursuant to the terms and conditions
of this Agreement as Chief Financial Officer and Treasurer of the Company, or in
a position at least commensurate therewith in all material respects, for a term
commencing on the Effective Date hereof and expiring on the second anniversary
thereof, provided that the Employee is elected to such office, or a comparable
or higher office, at each annual meeting of the Board of Directors of the
Company (the "Board of Directors") during the term of this Agreement. If the
Employee shall not be so elected at any such annual meeting of the Board of
Directors, the Employee's
<PAGE>
employment hereunder shall forthwith terminate and the Company shall be
obligated to compensate the Employee in accordance with Section 6(a) of this
Agreement.
2. Positions and Duties.
--------------------
The Employee's duties hereunder shall be those which shall be
prescribed from time to time by the Board of Directors in accordance with the
bylaws of the Company and shall include such executive duties, powers and
responsibilities as customarily attend the offices of Chief Financial Officer
and Treasurer of a company comparable to the Company. The Employee will hold,
in addition to the offices of Chief Financial Officer and Treasurer of the
Company, such other executive offices in the Company and its subsidiaries to
which he may be elected, appointed or assigned by the Board of Directors from
time to time and will discharge such executive duties in connection therewith.
During the employment period, the Employee's position (including status, offices
and reporting requirements), authority, duties and responsibilities shall be at
least commensurate in all material respects with the most significant of those
held, exercised and assigned immediately preceding the Effective Date. The
Employee shall devote his full working time, energy and skill (reasonable
absences for vacations and illness excepted), to the business of the Company as
is necessary in order to perform such duties faithfully, competently and
diligently; provided, however, that notwithstanding any provision in this
Agreement to the contrary, the Employee shall not be precluded from devoting
reasonable periods of time required for serving as a member of boards of
companies or organizations which have been approved by the Board of Directors so
long as such memberships or activities do not interfere with the performance of
the Employee's duties hereunder.
-2-
<PAGE>
3. Compensation. During the term of this Agreement, the Employee
------------
shall receive, for all services rendered to the Company hereunder, the following
(hereinafter referred to as "Compensation"):
(a) Base Salary. For the term hereof, the Employee shall be paid an
-----------
annual base salary equal to two hundred twenty-five thousands dollars
($225,000). The Employee's annual base salary shall be payable in equal
installments in accordance with the Company's general salary payment policies
but no less frequently than monthly.
(b) Bonuses. The Employee shall be eligible for and may receive
-------
bonuses. The amount of such bonuses, if any, shall be solely within the
discretion of the Board of Directors or, if formed, the Compensation Committee
thereof.
(c) Incentive Compensation. The Employee shall be eligible for awards
----------------------
from the Company's incentive compensation plans, including without limitation
any stock option plans, applicable to high level executive officers of the
Company or to key employees of the Company or its subsidiaries, in accordance
with the terms thereof and on a basis commensurate with his position and
responsibilities.
(d) Benefits. The Employee and his "dependents," as that term may be
--------
defined under the applicable benefit plan(s) of the Company, shall be included,
to the extent eligible thereunder, in any and all plans, programs and policies
which provide benefits for employees and their dependents. Such plans, programs
and policies may include health care insurance, long-term disability plans, life
insurance, supplemental disability insurance, supplemental life insurance,
holidays and other similar or comparable benefits made available to the
Company's employees.
-3-
<PAGE>
(e) Expenses. Subject to and in accordance with the Company's
--------
policies and procedures, the Employee hereby is authorized to incur, and, upon
presentation of itemized accounts, shall be reimbursed by the Company for, any
and all reasonable and necessary business-related expenses, which expenses are
incurred by the Employee on behalf of the Company or any of its subsidiaries.
4. Absences. The Employee shall be entitled to vacations, absences
--------
because of illness or other incapacity, and such other absences, whether for
holiday, personal time, or for any other purpose, as set forth in the Company's
employment manual or current procedures and policies, as the case may be, as
same may be amended from time-to-time.
5. Termination. In addition to the events of termination and expiration
-----------
of this Agreement provided for in Section 1 hereof, the Employee's employment
hereunder may be terminated only as follows:
(a) Without Cause. The Company may terminate the Employee's
-------------
employment hereunder without cause only upon action by the Board of Directors,
and upon no less than sixty (60) days prior written notice to the Employee. The
Employee may terminate employment hereunder without cause upon no less than
sixty (60) days prior written notice to the Company.
(b) For Cause, by the Company. The Company may terminate the
-------------------------
Employee's employment hereunder for cause immediately and with prompt notice to
the Employee, which cause shall be determined in good faith solely by the Board
of Directors. "Cause" for termination shall include, but is not limited to, the
following conduct of the Employee:
-4-
<PAGE>
(1) Material breach of any provision of this Agreement by the
Employee, which breach, if susceptible to cure, shall not have been cured by the
Employee within thirty (30) days of receipt of written notice of said breach;
(2) Misconduct as an employee of the Company, including but not
limited to: misappropriating any funds or property of the Company; attempting to
willfully obtain any personal profit from any transaction in which the Employee
has an interest which is adverse to the interests of the Company; or any other
act or omission which substantially impairs the Company's ability to conduct its
ordinary business in its usual manner;
(3) Unreasonable neglect or refusal to perform the duties assigned
to the Employee under or pursuant to this Agreement;
(4) Conviction of a felony; or
(5) Any other act or omission which subjects the Company or any of
its subsidiaries to substantial public disrespect, scandal or ridicule.
(c) For Good Reason by Employee. The Employee may terminate
---------------------------
employment hereunder for good reason immediately and with prompt notice to the
Company. "Good reason" for termination by the Employee shall include, but is
not limited to, the following conduct of the Company:
(1) Material breach of any provision of this Agreement by the
Company, which breach shall not have been cured by the Company within thirty
(30) days of receipt of written notice of said breach;
(2) Failure to maintain the Employee in a position commensurate with
that referred to in Section 2 of this Agreement without his consent; or
-5-
<PAGE>
(3) The assignment to the Employee without his consent of any
duties inconsistent with the Employee's position, authority, duties or
responsibilities as contemplated by Section 2 of this Agreement, or any other
action by the Company which results in a diminution of such position, authority,
duties or responsibilities, excluding for this purpose any isolated action not
taken in bad faith and which is promptly remedied by the Company after receipt
of notice thereof given by the Employee.
(d) Death. The period of active employment of the Employee hereunder
-----
shall terminate automatically in the event of his death.
(e) Disability. In the event that the Employee shall be unable to
----------
perform duties hereunder for a period of ninety (90) consecutive calendar days
or any one hundred eighty (180) days in any calendar year by reason of
disability as a result of illness, accident or other physical or mental
incapacity or disability, the Company may, in its discretion, by giving written
notice to the Employee, terminate the Employee's employment hereunder as long as
the Employee is still disabled on the effective date of such termination.
(f) Mutual Agreement. This Agreement may be terminated at any time by
----------------
mutual agreement of the Employee and the Company.
6. Compensation in the Event of Termination. In the event that the
----------------------------------------
Employee's employment pursuant to this Agreement terminates prior to the end of
the term of this Agreement because he is not reelected pursuant to Section 1 or
for a reason provided in Section 5 hereof, the Company shall pay the Employee
compensation as set forth below:
(a) Employee not Elected by Board of Directors; By Employee for Good
----------------------------------------------------------------
Reason; By Company Without Cause. In the event that the Employee's employment
- --------------------------------
hereunder is
-6-
<PAGE>
terminated: (i) because the Employee is not elected to the offices of Chief
Financial Officer and Treasurer of the Company, or in a position at least
commensurate therewith in all material respects, at any annual meeting of the
Company's Board of Directors during the term of this Agreement, as contemplated
by Section 1 hereof, in each instance without Employee's consent; (ii) by the
Employee for good reason pursuant to Section 5(c) hereof; or (iii) by the
Company without cause, then the Company shall continue to pay or provide, as
applicable, the following compensation to the Employee:
(1) Annual base salary as set forth in Section 3(a) hereof; and
(2) Continuing coverage, but only to the extent required by law,
for the Employee and his eligible dependents under all of the Company's benefit
plans, programs and policies in effect as of the date of termination.
Such compensation shall continue to be paid or provided, as
applicable, in the same manner as before termination, and for a period of time
ending on the date when the term of this Agreement would otherwise have expired
in accordance with Section 1 of this Agreement. The Employee shall not be
required to mitigate the amount of any payment provided for in this Section 6(a)
by seeking employment or otherwise, nor shall any amounts received from
employment or otherwise by the Employee offset in any manner the obligations of
the Company hereunder.
(b) By Company Upon Termination of Agreement Due to Employee's Death
----------------------------------------------------------------
or Disability. In the event of the Employee's death or if the Company shall
- -------------
terminate the Employee's employment hereunder for disability pursuant to Section
5(e) hereof, the base salary
-7-
<PAGE>
payable hereunder shall continue to be paid at the then current rate for three
(3) months after the termination of employment to the Employee or his personal
representative, as applicable.
(c) By Company For Cause or By Employee Without Good Reason. Except
-------------------------------------------------------
as otherwise provided in Section 8(b) or 8(f) hereof, in the event that (i) the
Company shall terminate the Employee's employment hereunder for cause pursuant
to Section 5(b) hereof or (ii) the Employee shall terminate employment hereunder
without "good reason" as provided in Section 5(c) hereof, the Company shall not
be obligated to pay the Employee any compensation except for salary and other
Compensation which may have been earned and are due and payable but which have
not been paid as of the date of termination.
7. Effect of Termination. In the event of expiration or early termination
---------------------
of this Agreement as provided herein, neither the Company nor the Employee shall
have any remaining duties or obligations hereunder except that:
(a) The Company shall:
(1) Pay the Employee's accrued salary and any other accrued
benefits under Section 3 hereof;
(2) Reimburse the Employee for expenses already incurred in
accordance with Section 3(e) hereof;
(3) To the extent required by law, pay or otherwise provide for
any benefits, payments or continuation or conversion rights in accordance with
the provisions of any benefit plan of which the Employee or any of his
dependents is or was a participant; and
(4) Pay the Employee or his beneficiaries any compensation due
pursuant to Section 6 hereof; and
-8-
<PAGE>
(b) The Employee shall remain bound by the terms of Section 8 hereof
and Exhibit A attached hereto.
---------
8. Restrictive Covenant. (a) The Employee acknowledges and agrees that
--------------------
he has access to secret and confidential information of the Company and its
subsidiaries and that the following restrictive covenant is necessary to protect
the interests and continued success of the Company. Except as otherwise
expressly consented to in writing by the Company, until the termination of the
Employee's employment (for any reason and whether such employment was under this
Agreement or otherwise) and thereafter for twenty-four (24) months (the
"Restricted Period"), the Employee shall not, directly or indirectly, acting as
an employee, owner, shareholder, partner, joint venturer, officer, director,
agent, salesperson, consultant, advisor, investor or principal of any
corporation or other business entity:
(i) request or otherwise attempt to induce or influence, directly or
indirectly, any present customer or supplier, or prospective customer or
supplier, of the Company, or other persons sharing a business relationship with
the Company, to cancel, limit or postpone their business with the Company, or
otherwise take action which might be to the material disadvantage of the
Company; or
(ii) hire or solicit for employment, directly or indirectly, or induce
or actively attempt to influence, any Employee of the Company or any Affiliate,
as such term is defined in the Securities Act of 1933, as amended, to terminate
his or her employment or discontinue such person's consultant, contractor or
other business association with the Company.
(b) If the Employee violates any of the restrictions contained in
Section 8(a) above, the Restrictive Period shall be increased by the period of
time from the commencement of
-9-
<PAGE>
any such violation until the time such violation shall be cured by the Employee
to the satisfaction of the Company, and the Company may withhold any and all
payments, except salary, otherwise due and owing to the Employee under this
Agreement.
(c) In the event that either the geographical area or the Restrictive
Period set forth in Section 8(a) of this Agreement is deemed to be unreasonably
restrictive in any court proceeding, the court may reduce such geographical area
and Restrictive Period to the extent which it deems reasonable under the
circumstances.
(d) Nothing in this Section 8, whether express or implied, shall
prevent the Employee from being a holder of securities of a company whose
securities are registered under Section 12 of the Securities Exchange Act of
1934, as amended; provided, however, that the Employee holds of record and
beneficially less than two percent (2%) of the votes eligible to be cast
generally by holders of securities of such company for the election of
directors.
(e) The Employee, as a condition of his continued employment,
acknowledges and agrees that he has reviewed and will continue to be bound by
all of the provisions set forth in Exhibit A attached hereto, which is
---------
incorporated herein by reference and made a part hereof as though fully set
forth herein, during the term of this Agreement, and any time hereafter.
(f) Employee acknowledges and agrees that in the event of a breach or
threatened breach of the provisions of this Section 8 by Employee the Company
may suffer irreparable harm and therefore, the Company shall be entitled, to the
extent permissible by law, immediately to cease to pay or provide the Employee
any compensation being, or to be, paid or provided to him pursuant to Sections
3, except accrued salary, or 6 of this Agreement, and also to obtain immediate
injunctive relief restraining the Employee from conduct in breach or threatened
-10-
<PAGE>
breach of the covenants contained in this Section 8. Nothing herein shall be
construed as prohibiting the Company from pursuing any other remedies available
to it for such breach or threatened breach, including the recovery of damages
from the Employee.
9. Resolution of Differences Over Breaches of Agreement. Except as
----------------------------------------------------
otherwise provided herein, any controversy or claim arising out of, or relating
to, this Agreement, or the breach hereof, shall be reviewed in the first
instance in accordance with the Company's internal review procedures, if any,
with recourse thereafter--for temporary or preliminary injunctive relief only--
to the courts having jurisdiction thereof, and if any relief other than
injunctive relief is sought, then to arbitration in New York County, New York in
accordance with the rules of the American Arbitration Association, and judgment
upon the award rendered by the Arbitrator(s) may be entered in any court having
jurisdiction thereof.
10. Waiver. The waiver by a party hereto of any breach by the other party
------
hereto of any provision of this Agreement shall not operate or be construed as a
waiver of any subsequent breach by a party hereto.
11. Assignment. This Agreement shall be binding upon and inure to the
----------
benefit of the successors and assigns of the Company, and the Company shall be
obligated to require any successor to expressly assume its obligations
hereunder. This Agreement shall inure to the benefit of and be enforceable by
the Employee or his legal representatives, executors, administrators,
successors, heirs, distributees, devisees and legatees. The Employee may not
assign any of his duties, responsibilities, obligations or positions hereunder
to any person and any such purported assignment by him shall be void and of no
force and effect.
-11-
<PAGE>
12. Notices. Any notices required or permitted to be given under this
-------
Agreement shall be sufficient if in writing, and if personally delivered or when
sent by first class certified or registered mail, postage prepaid, return
receipt requested--in the case of the Employee, to his residence address as set
forth below, and in the case of the Company, to the address of its principal
place of business as set forth below, in care of the Board of Directors--or to
such other person or at such other address with respect to each party as such
party shall notify the other in writing.
13. Construction of Agreement.
-------------------------
(a) Governing Law. This Agreement shall be governed by and its
-------------
provisions construed and enforced in accordance with the internal laws of the
State of New York without reference to its principles regarding conflicts of
law.
(b) Severability. In the event that any one or more of the provisions
------------
of this Agreement shall be held to be invalid, illegal or unenforceable, the
validity, legality or enforceability of the remaining provisions shall not in
any way be affected or impaired thereby.
(c) Headings. The descriptive headings of the several paragraphs of
--------
this Agreement are inserted for convenience of reference only and shall not
constitute a part of this Agreement.
14. Entire Agreement. This Agreement contains the entire agreement of the
----------------
parties concerning the Employee's employment and all promises, representations,
understandings, arrangements and prior agreements on such subject are merged
herein and superseded hereby. The provisions of this Agreement may not be
amended, modified, repealed, waived, extended or discharged except by an
agreement in writing signed by the party against whom enforcement of
-12-
<PAGE>
any amendment, modification, repeal, waiver, extension or discharge is sought.
No person acting other than pursuant to a resolution of the Board of Directors
shall have authority on behalf of the Company to agree to amend, modify, repeal,
waive, extend or discharge any provision of this Agreement or anything in
reference thereto or to exercise any of the Company's rights to terminate or to
fail to extend this Agreement. I further understand and agree that if the
Company does not consummate an initial public offering of its common stock prior
to March 31, 1998 that this Agreement shall be of no further force or effect.
-13-
<PAGE>
IN WITNESS WHEREOF, the Company has caused this Agreement to be executed and
attested by its duly authorized officers, and the Employee has set his hand, all
as of the day and year first above written.
ATTEST: Happy Kids Inc.
__________________________ By:_____________________________
Mark J. Benun, Secretary Jack M. Benun, President
Address:______________________________
______________________________
______________________________
WITNESS: EMPLOYEE
_______________________________ _______________________________
Stuart Bender
Address:______________________________
______________________________
______________________________
-14-
<PAGE>
EXHIBIT A
HAPPY KIDS INC.
EMPLOYEE'S
INVENTION ASSIGNMENT AND CONFIDENTIALITY
AGREEMENT
In consideration of my employment or continued employment by Happy Kids
Inc., a New York corporation or any subsidiary or parent corporation thereof
(the "Company"), I hereby represent and agree as follows:
1. I understand that the Company is engaged in the business of designing
and distributing children's apparel, and that I may have access to or acquire
information with respect to Confidential Information (as defined below),
including processes and methods, development tools, scientific, technical and/or
business innovations.
2. Disclosure of Innovations. I agree to disclose in writing to the
-------------------------
Company all inventions, improvements and other innovations of any kind that I
may make, conceive, develop or reduce to practice, alone or jointly with others,
during the term of my employment with the Company, whether or not they are
related to my work for the Company and whether or not they are eligible for
patent, copyright, trademark, trade secret or other legal protection
("Innovations"). Examples of Innovations shall include, but are not limited to,
discoveries, research, inventions, formulas, techniques, processes, tools, know-
how, marketing plans, new product plans, production processes, advertising,
packaging and marketing techniques and improvements to computer hardware or
software.
3. Assignment of Ownership of Innovations. I agree that all Innovations
--------------------------------------
will be the sole and exclusive property of the Company and I hereby assign all
of my rights, title or interest in the Innovations and in all related patents,
copyrights, trademarks, trade secrets, rights of priority and other proprietary
rights to the Company. At the Company's request and expense, during and after
the period of my employment with the Company, I will assist and cooperate with
the Company in all respects and will execute documents, and, subject to my
reasonable availability, give testimony and take further acts requested by the
Company to obtain, maintain, perfect and enforce for the Company patent,
copyright, trademark, trade secret and other legal protection for the
Innovations. I hereby appoint the President and Chief Executive Officer of the
Company as my attorney-in-fact to execute documents on my behalf for this
purpose.
4. Protection of Confidential Information of the Company. I understand
-----------------------------------------------------
that my work as an employee of the Company creates a relationship of trust and
confidence between myself and the Company. During and after the period of my
employment with the Company, I will not use or disclose or allow anyone else to
use or disclose any "Confidential Information" (as defined below) relating to
the Company, its products, suppliers or customers except as may be necessary in
the performance of my work for the Company or as may be authorized
-A1-
<PAGE>
in advance by appropriate officers of the Company. "Confidential Information"
------------------------
shall include innovations, methodologies, processes, tools, business strategies,
financial information, forecasts, personnel information, customer lists, trade
secrets and any other non-public technical or business information, whether in
writing or given to me orally, which I know or have reason to know the Company
would like to treat as confidential for any purpose, such as maintaining a
competitive advantage or avoiding undesirable publicity. I will keep
Confidential Information secret and will not allow any unauthorized use of the
same, whether or not any document containing it is marked as confidential. These
restrictions, however, will not apply to Confidential Information that has
become known to the public generally through no fault or breach of mine or that
the Company regularly gives to third parties without restriction on use or
disclosure. Upon termination of my work with the Company, I will promptly
deliver to the Company all documents and materials of any nature pertaining to
my work with the Company and I will not take with me any documents or materials
or copies thereof containing any Confidential Information.
5. Non-Solicitation. I understand that my work as an employee of the
----------------
Company creates a relationship of trust and confidence between myself and the
Company. During and after the period of my employment with the Company, I will
not request or otherwise attempt to induce or influence, directly or indirectly,
any present customer or supplier, or prospective customer or supplier, of the
Company, or other persons sharing a business relationship with the Company to
cancel, to limit or postpone their business with the Company, or otherwise take
action which might be to the material disadvantage of the Company. During and
after the period of my employment with the Company, I will not hire or solicit
for employment, directly or indirectly, or induce or actively attempt to
influence, any Employee of the Company or any Affiliate of the Company, as such
term is defined in the Securities Act of 1933, as amended, to terminate his or
her employment or discontinue such person's consultant, contractor or other
business association with the Company.
6. Other Agreements. I represent that my performance of all the terms of
----------------
this Agreement and my duties as an employee of the Company will not breach any
invention assignment agreement, confidential information agreement, non-
competition agreement or other agreement with any former employer or other
party. I represent that I have not and will not bring with me to the Company or
use in the performance of my duties for the Company any documents or materials
of a former employer that are not generally available to the public.
7. Disclosure of this Agreement. I hereby authorize the Company to notify
----------------------------
others, including but not limited to customers of the Company and any of my
future employers, of the terms of this Agreement and my responsibilities
hereunder.
8. Injunctive Relief. I understand that in the event of a breach or
-----------------
threatened breach of this Agreement by me the Company may suffer irreparable
harm and monetary damages alone would not adequately compensate the Company.
The Company will therefore be entitled to injunctive relief to enforce this
Agreement.
-A2-
<PAGE>
9. Enforcement and Severability. I acknowledge that each of the
----------------------------
provisions in this Agreement are separate and independent covenants. I agree
that if any court shall determine that any provision of this Agreement is
unenforceable with respect to its term or scope such provision shall nonetheless
be enforceable by any such court upon such modified term or scope as may be
determined by such court to be reasonable and enforceable. The remainder of this
Agreement shall not be affected by the unenforceability or court ordered
modification of a specific provision.
10. Governing Law. I agree that this Agreement shall be governed by and
-------------
construed in accordance with the laws of the State of New York.
11. Superseding Agreement. I understand and agree that this Agreement
---------------------
contains the entire agreement of the parties with respect to subject matter
hereof and supersedes all previous agreements and understandings between the
parties with respect to its subject matter.
12. Acknowledgments. I acknowledge that I have read this agreement, was
---------------
given the opportunity to ask questions and sufficient time to consult an
attorney and I have either consulted an attorney or affirmatively decided not to
consult an attorney. I understand that this agreement does not alter the terms
of an executed Employment Agreement with the Company, or in the absence of an
Employment Agreement, this Agreement does not alter my status as an employee at
will and that my employment may be terminated at any time, with or without
cause. I also understand that my obligations under this Agreement survive the
termination of my employment with the Company.
*.*.*.*.*.*.*.*.*.*
-A3-
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
date first written below.
Date: _________________ ______________________________
Name of Employee: Stuart Bender
Address: ______________________
______________________
______________________
______________________
Happy Kids Inc.
Date:__________________ By:______________________________
Jack M. Benun, President
-A4-
<PAGE>
EXHIBIT 10.11
HAPPY KIDS INC.
EMPLOYEE-AT-WILL
NON-SOLICITATION, INVENTION ASSIGNMENT
AND NON-DISCLOSURE
AGREEMENT
In consideration of my employment or continued employment by Happy Kids
Inc., a New York corporation or any subsidiary or parent corporation thereof
(the "Company"), I hereby represent and agree as follows:
1. I understand that the Company is engaged in the business of designing
and distributing children's apparel, and that I may have access to or acquire
information with respect to Confidential Information (as defined below),
including processes and methods, development tools, scientific, technical and/or
business innovations.
2. Disclosure of Innovations. I agree to disclose in writing to the
-------------------------
Company all inventions, improvements and other innovations of any kind that I
may make, conceive, develop or reduce to practice, alone or jointly with others,
during the term of my employment with the Company, whether or not they are
related to my work for the Company and whether or not they are eligible for
patent, copyright, trademark, trade secret or other legal protection
("Innovations"). Examples of Innovations shall include, but are not limited to,
discoveries, research, inventions, formulas, techniques, processes, tools, know-
how, marketing plans, new product plans, production processes, advertising,
packaging and marketing techniques and improvements to computer hardware or
software.
3. Assignment of Ownership of Innovations. I agree that all Innovations
--------------------------------------
will be the sole and exclusive property of the Company and I hereby assign all
of my rights, title or interest in the Innovations and in all related patents,
copyrights, trademarks, trade secrets, rights of priority and other proprietary
rights to the Company. At the Company's request and expense, during and after
the period of my employment with the Company, I will assist and cooperate with
the Company in all respects and will execute documents, and, subject to my
reasonable availability, give testimony and take further acts requested by the
Company to obtain, maintain, perfect and enforce for the Company patent,
copyright, trademark, trade secret and other legal protection for the
Innovations. I hereby appoint the President and Chief Executive Officer of the
Company as my attorney-in-fact to execute documents on my behalf for this
purpose.
4. Protection of Confidential Information of the Company. I understand
-----------------------------------------------------
that my work as an employee of the Company creates a relationship of trust and
confidence between myself and the Company. During and after the period of my
employment with the Company, I will not use or disclose or allow anyone else to
use or disclose any "Confidential Information" (as defined below) relating to
the Company, its products, suppliers or customers except as may be necessary in
the performance of my work for the Company or as may be authorized in advance by
appropriate officers of the Company. "Confidential Information" shall include
------------------------
innovations, methodologies, processes, tools, business strategies, financial
information, forecasts,
<PAGE>
personnel information, customer lists, trade secrets and any other non-public
technical or business information, whether in writing or given to me orally,
which I know or have reason to know the Company would like to treat as
confidential for any purpose, such as maintaining a competitive advantage or
avoiding undesirable publicity. I will keep Confidential Information secret and
will not allow any unauthorized use of the same, whether or not any document
containing it is marked as confidential. These restrictions, however, will not
apply to Confidential Information that has become known to the public generally
through no fault or breach of mine or that the Company regularly gives to third
parties without restriction on use or disclosure. Upon termination of my work
with the Company, I will promptly deliver to the Company all documents and
materials of any nature pertaining to my work with the Company and I will not
take with me any documents or materials or copies thereof containing any
Confidential Information.
5. Non-Solicitation. I understand that my work as an employee of the
----------------
Company creates a relationship of trust and confidence between myself and the
Company. During and after the period of my employment with the Company, I will
not request or otherwise attempt to induce or influence, directly or indirectly,
any present customer or supplier, or prospective customer or supplier, of the
Company, or other persons sharing a business relationship with the Company to
cancel, to limit or postpone their business with the Company, or otherwise take
action which might be to the material disadvantage of the Company. During and
after the period of my employment with the Company, I will not hire or solicit
for employment, directly or indirectly, or induce or actively attempt to
influence, any Employee of the Company or any Affiliate of the Company, as such
term is defined in the Securities Act of 1933, as amended, to terminate his or
her employment or discontinue such person's consultant, contractor or other
business association with the Company.
6. Other Agreements. I represent that my performance of all the terms of
----------------
this Agreement and my duties as an employee of the Company will not breach any
invention assignment agreement, confidential information agreement, non-
competition agreement or other agreement with any former employer or other
party. I represent that I have not and will not bring with me to the Company or
use in the performance of my duties for the Company any documents or materials
of a former employer that are not generally available to the public.
7. Disclosure of this Agreement. I hereby authorize the Company to notify
----------------------------
others, including but not limited to customers of the Company and any of my
future employers, of the terms of this Agreement and my responsibilities
hereunder.
8. Injunctive Relief. I understand that in the event of a breach or
------------------
threatened breach of this Agreement by me the Company may suffer irreparable
harm and monetary damages alone would not adequately compensate the Company.
The Company will therefore be entitled to injunctive relief to enforce this
Agreement.
9. Enforcement and Severability. I acknowledge that each of the
----------------------------
provisions in this Agreement are separate and independent covenants. I agree
that if any court shall determine that any provision of this Agreement is
unenforceable with respect to its term or scope such provision
-2-
<PAGE>
shall nonetheless be enforceable by any such court upon such modified term or
scope as may be determined by such court to be reasonable and enforceable. The
remainder of this Agreement shall not be affected by the unenforceability or
court ordered modification of a specific provision.
10. Governing Law. I agree that this Agreement shall be governed by and
-------------
construed in accordance with the laws of the State of New York.
11. Superseding Agreement. I understand and agree that this Agreement
---------------------
contains the entire agreement of the parties with respect to subject matter
hereof and supersedes all previous agreements and understandings between the
parties with respect to its subject matter.
12. Acknowledgments. I acknowledge that I have read this agreement, was
---------------
given the opportunity to ask questions and sufficient time to consult an
attorney and I have either consulted an attorney or affirmatively decided not to
consult an attorney. I understand that my obligations under this Agreement
survive the termination of my employment with the Company.
I UNDERSTAND THAT I AM AN EMPLOYEE-AT-WILL WITH THE COMPANY, MEANING THAT
EITHER I OR THE COMPANY IS COMPLETELY FREE TO TERMINATE OUR EMPLOYMENT
RELATIONSHIP AT ANY TIME AND FOR ANY REASON OR FOR NO REASON, WITHOUT
INCURRING ANY OBLIGATIONS OR LIABILITIES OF ANY KIND WHATSOEVER. I FURTHER
ACKNOWLEDGE THAT I HAVE HAD A FULL OPPORTUNITY TO REVIEW THIS AGREEMENT AND
CONSULT WITH COUNSEL OF MY CHOICE IF I SO CHOOSE REGARDING ITS TERMS, AND
THAT I AM FREELY ENTERING THIS AGREEMENT WITH A FULL UNDERSTANDING OF ITS
EFFECTS. I FURTHER UNDERSTAND THAT THIS AGREEMENT SUPERSEDES ANY AND ALL
PRIOR OR CONTEMPORANEOUS REPRESENTATIONS OR AGREEMENTS, WHETHER ORAL,
WRITTEN, OR IMPLIED, AND MAY NOT BE MODIFIED IN ANY WAY EXCEPT BY A SIGNED
WRITING WHICH SPECIFICALLY REFERS TO THIS AGREEMENT AND IS SIGNED BY AN
OFFICER OR OTHER DULY AUTHORIZED REPRESENTATIVE OF THE COMPANY.
*.*.*.*.*.*.*.*.*.*
-3-
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
date first written below.
Date: _________________ _____________________________________
Name of Employee:
Address: ___________________________________
___________________________________
___________________________________
___________________________________
Happy Kids Inc.
Date:__________________ By:_____________________________________
Name: Jack M. Benun
Title: President and Chief Executive
Officer
-4-
<PAGE>
EXHIBIT 10.12
SECURITIES PURCHASE AGREEMENT
-----------------------------
SECURITIES PURCHASE AGREEMENT dated as of January 1, 1998 by and among Happy
Kids Inc., a New York corporation (hereinafter referred to as the
"Corporation"), and Jack M. Benun and Mark J. Benun (each hereinafter referred
to as a "Securityholder" and collectively as the "Securityholders").
W I T N E S S E T H :
- - - - - - - - - -
WHEREAS, the Securityholders currently own, or as of the Closing Date (as
hereinafter defined) will own, in the aggregate, 100% of the issued and
outstanding shares of capital stock of each of the entities set forth on
Schedule I attached hereto (the "Entities"); and
WHEREAS, each of the Securityholders desires to sell, transfer and assign to
the Corporation all of his respective interest in and to the issued and
outstanding shares of capital stock of each of the Entities; and
WHEREAS, the Corporation desires to issue and sell to the Securityholders,
and the Securityholders desire to purchase from the Corporation, in
consideration of the aforesaid, an aggregate of 4,262,500 shares (collectively,
the "Shares") of the common stock, $.01 par value ("Common Stock"), of the
Corporation.
NOW, THEREFORE, in consideration of the premises and the mutual covenants and
agreements hereinafter set forth, the parties hereto hereby agree as follows:
SECTION I
PURCHASE AND SALE OF THE SHARES
-------------------------------
Subject to the terms and conditions of this Agreement and on the basis of the
representations, warranties, covenants and agreements herein contained, the
Corporation hereby agrees to issue, sell and convey to each of the
Securityholders, and each of the Securityholders subscribes for and agrees to
purchase, acquire and accept from the Corporation, such number of the Shares as
is set forth opposite such Securityholder's name on Schedule II attached hereto.
In consideration of the aforesaid issuance, sale, conveyance and delivery of
such Shares, each of the Securityholders, individually and not in the aggregate,
hereby agrees to sell, transfer and assign to the Corporation such shares of
capital stock in each of the Entities as is owned by each of the Securityholders
as of the Closing Date, in each instance as is set forth on Schedule II attached
hereto, all such shares of capital stock together representing, as of the
Closing Date, 100% of the issued and outstanding shares of capital stock of each
of the Entities.
<PAGE>
SECTION II
REPRESENTATIONS, WARRANTIES, COVENANTS
AND AGREEMENTS OF THE CORPORATION
---------------------------------
The Corporation represents and warrants to, and covenants and agrees with, the
Securityholders, as of the date hereof, that:
A. Organization; Good Standing. The Corporation is a corporation duly
---------------------------
organized, validly existing and in good standing under the laws of its
jurisdiction of incorporation and has full corporate power and authority to own
its properties and to conduct the businesses in which it is now engaged.
B. Authority. The Corporation has full corporate power and authority to
---------
execute and deliver this Agreement and to perform all of its obligations
hereunder, and no consent or approval of any other person or governmental
authority is required therefor. The execution and delivery of this Agreement by
the Corporation, the performance by the Corporation of its covenants and
agreements hereunder and the consummation by the Corporation of the transactions
contemplated hereby have been duly authorized by all necessary corporate action.
This Agreement constitutes a valid and legally binding obligation of the
Corporation, enforceable against the Corporation in accordance with its terms.
C. No Legal Bar; Conflicts. Neither the execution and delivery of this
-----------------------
Agreement, nor the consummation of the transactions contemplated hereby,
violates any provision of the Certificate of Incorporation or By-Laws of the
Corporation or any law, statute, ordinance, regulation, order, judgment or
decree of any court or governmental agency, or conflicts with or results in any
breach of any of the terms of or constitutes a default under or results in the
termination of or the creation of any lien pursuant to the terms of any contract
or agreement to which the Corporation is a party or by which the Corporation or
any of its assets is bound.
D. Capitalization. The authorized capital stock of the Corporation consists
--------------
of 30,000,000 shares of Common Stock and 5,000,000 shares of undesignated
Preferred Stock (the "Preferred Stock"). Immediately following the issuances
contemplated hereby, there will be 7,750,000 shares of Common Stock issued and
outstanding and no shares of Preferred Stock issued and outstanding. The Shares
being issued hereunder have been duly authorized and, when issued to the
Securityholders for the consideration herein provided, will be validly issued,
fully paid and nonassessable.
-2-
<PAGE>
SECTION III
REPRESENTATIONS, WARRANTIES, COVENANTS
AND AGREEMENTS OF THE SECURITYHOLDERS
-------------------------------------
Each of the Securityholders, individually and not in the aggregate, represents
and warrants to, and covenants and agrees with, the Corporation, as of the date
hereof, that:
A. Authority. Such Securityholder has the full power, authority and legal
---------
right to execute and deliver this Agreement, and to perform his respective
covenants and agreements hereunder, and this Agreement constitutes a valid and
legally binding obligation of each of them enforceable against each of them in
accordance with its terms.
B. Title to Shares. Such Securityholder is, or as of the Closing Date will
---------------
be, the lawful record and beneficial owner of all of the shares of capital stock
of each of the Entities set forth opposite his name on Schedule II attached
hereto, free and clear of all pledges, security interests, liens, charges,
encumbrances, equities, claims, options or limitations affecting his ability to
vote such shares of capital stock or to transfer such shares of capital stock to
the Corporation. The shares of capital stock set forth on Schedule II attached
hereto constitute, as of the Closing Date, 100% of the issued and outstanding
shares of capital stock of each of the Entities. There are no issued or
outstanding options, warrants, contracts, calls, commitments or demands of any
nature relating to such shares of capital stock. At the Closing, the
Corporation will acquire good title to such shares of capital stock free and
clear of all pledges, security interests, liens, charges, encumbrances,
equities, claims, options or limitations of whatever nature.
C. No Legal Bar; Conflicts. Neither the execution and delivery of this
-----------------------
Agreement, nor the consummation of the transactions contemplated hereby,
violates or will violate any law, statute, ordinance, regulation, order,
judgment or decree of any court or governmental agency, or violates or will
violate, or conflicts with or will conflict with or will result in any breach of
any of the terms of, or constitutes or will constitute a default under or result
in the termination of or the creation of any lien pursuant to the terms of any
contract, commitment, agreement, understanding or arrangement of any kind to
which such Securityholder is a party or by which such Securityholder or any of
such Securityholder's assets is bound.
D. No Litigation. No action, suit or proceeding against such Securityholder
-------------
relating to the consummation of any of the transactions contemplated by this
Agreement nor any governmental action seeking to delay or enjoin any such
transactions is pending or threatened.
E. Access to Public Information. Such Securityholder has been given access
----------------------------
to all public information relating to the business and affairs of the
Corporation which such Securityholder has requested and all additional
information which such Securityholder has considered necessary to verify the
accuracy of the information so received.
-3-
<PAGE>
F. Investment Intent. Such Securityholder (i) is an accredited investor
-----------------
within the meaning of Rule 501(a) under the Securities Act of 1933, as amended
(the "1933 Act") or, if not such an accredited investor, has, alone or together
with a purchaser representative within the meaning of Rule 501(h) under the 1933
Act, such knowledge and experience in financial and business matters as to be
capable of evaluating the merits and risks of an investment in securities in
general and to an investment in the Corporation in particular, (ii) is aware of
the limits on resale imposed by virtue of the nature of the transactions
contemplated by this Agreement and (iii) is acquiring the shares of the
Corporation hereunder without registration under the 1933 Act in reliance on the
exemption from registration contained in Section 4(2) of the 1933 Act, for
investment, and not with a view toward, or for sale in connection with, any
distribution thereof, nor with any present intention of distributing or selling
such shares.
G. Economic Risk. Such Securityholder recognizes that the investment in the
-------------
Common Stock involves a number of significant risks. Such Securityholder is
able to bear the substantial economic risks of an investment in the Common Stock
for an indefinite period of time, has no need for liquidity in such investment
and, at the present time, can afford a complete loss of such investment.
SECTION IV
THE CLOSING
-----------
A. Time and Place of the Closing. The closing shall be held at the offices
-----------------------------
of Buchanan Ingersoll, 500 College Road East, Princeton, New Jersey 08540 at
10:00 A.M., local time, on a date (the "Closing Date") to be determined by
agreement of the parties hereto, but in no event later than the day before the
effective date of the Corporation's proposed initial public offering, or such
other time, place and date as the Securityholders and the Corporation may agree.
B. Delivery by the Corporation. Delivery of the Shares shall be made by the
---------------------------
Corporation to the Securityholders on the Closing Date by delivering
certificates representing the Shares registered in the name of each of the
Securityholders, as applicable, each such certificate to be accompanied by any
requisite documentary or transfer tax stamps.
C. Delivery by the Securityholders. On the Closing Date, each of the
-------------------------------
Securityholders shall deliver to the Corporation certificates representing the
shares of capital stock of each Entity owned by each of the Securityholders, as
set forth on Schedule II attached hereto, duly endorsed in blank or accompanied
by duly executed instruments of transfers and (ii) any other documents that are
necessary to transfer to the Corporation good and marketable title to all the
shares of capital stock of each of the Entities.
-4-
<PAGE>
SECTION V
CONDITIONS TO THE CORPORATION'S
OBLIGATION TO CLOSE
-------------------
The obligation of the Corporation to issue the Shares and otherwise consummate
the transaction contemplated by this Agreement on the Closing Date is subject to
the following conditions precedent, which may be waived by the Corporation in
its sole discretion:
Representations and Warranties. The representations and warranties of each of
------------------------------
the Securityholders contained herein shall be true and correct at and as of the
Closing Date with the same effect as though all such representations and
warranties were made at and as of the Closing Date.
SECTION VI
CONDITIONS TO THE SECURITYHOLDERS'
OBLIGATION TO CLOSE
-------------------
The obligation of each of the Securityholders to purchase the Shares being
purchased by such person and the obligations of each of the Securityholders to
otherwise consummate the transaction contemplated by this Agreement on the
Closing Date is subject to the following condition precedent, which may be
waived by the Securityholders in their sole discretion:
Representations and Warranties. The representations and warranties of the
------------------------------
Corporation contained herein shall be true and correct at and as of the Closing
Date with the same effect as though all such representations and warranties were
made at and as of the Closing Date and the Corporation shall have complied with
all its covenants contained herein.
SECTION VII
MISCELLANEOUS
-------------
A. Notices. All notices required or permitted under this Agreement shall be
-------
in writing and delivered, by any method providing for proof of delivery, to the
address of the party or parties set forth on Schedule I, attached hereto. Any
notice shall be deemed to have been given on the date of receipt.
B. Survival of Representations. Each representation, warranty, covenant and
---------------------------
agreement of the parties hereto herein contained shall survive the date hereof,
notwithstanding any investigation at any time made by or on behalf of any party
hereto.
-5-
<PAGE>
C. Entire Agreement. This Agreement and the documents referred to herein
----------------
contain the entire agreement between the parties hereto with respect to the
transactions contemplated hereby, and no modification hereof shall be effective
unless in writing and signed by the party against which it is sought to be
enforced.
D. Assignment. Other than as provided herein, this Agreement shall not be
----------
assignable by any of the parties hereto except pursuant to a writing executed by
all of the parties hereto.
E. Invalidity, Etc. If any provision of this Agreement, or the application
---------------
of any such provision to any person or circumstance, shall be held invalid by a
court of competent jurisdiction, the remainder of this Agreement, or the
application of such provision to persons or circumstances other than those as to
which it is held invalid, shall not be affected thereby.
F. Headings. The headings of this Agreement are for convenience of reference
--------
only and are not part of the substance of this Agreement.
G. Binding Effect. This Agreement shall be binding upon and inure to the
--------------
benefit of the parties hereto and their respective successors and assigns.
H. Governing Law. This Agreement shall be governed by and construed in
-------------
accordance with the laws of the State of New York applicable in the case of
agreements made and to be performed entirely within such State.
I. Counterparts. This Agreement may be executed in counterparts, each of
------------
which shall be deemed an original, but all of which taken together shall
constitute one and the same instrument.
* * * * * * * * * * * * * * * * * * * *
-6-
<PAGE>
IN WITNESS WHEREOF, this Securities Purchase Agreement has been duly
executed by the parties hereto as of the date first above written.
HAPPY KIDS INC.
By: _________________________________
Jack M. Benun, President
and Chief Executive Officer
THE SECURITYHOLDERS
________________________________
Jack M. Benun
________________________________
Mark J. Benun
-7-
<PAGE>
SCHEDULE I
THE ENTITIES
------------
Name and Address of Entity State of Incorporation
------------------------- ----------------------
Happy Kids, Ltd. New York
100 W. 33rd Street
Suite 1100
New York, New York 10001-2916
Talk of the Town Apparel Corp. New York
100 W. 33rd Street
Suite 1100
New York, New York 10001-2916
O.P. Kids, Inc., successor to O.P. Kids, LLC New Jersey
690 Jersey Avenue
New Brunswick, New Jersey
H.O.T. Kidz, Inc., successor to H.O.T. Kidz, LLC New York
100 W. 33rd Street
Suite 1100
New York, New York 10001-2916
J & B 18 Corp. New York
100 W. 33rd Street
Suite 1100
New York, New York 10001-2916
Hawk Industries, Inc. New Jersey
690 Jersey Avenue
New Brunswick, New Jersey
<PAGE>
SCHEDULE II
OWNERSHIP TABLE
---------------
<TABLE>
<CAPTION>
No. of Shares Owned in each Entity
----------------------------------
Talk of the No. of
Town Hawk Corporation
Name of Happy Kids, Apparel J & B 18 Industries, O.P. Kids, H.O.T. Kidz, Shares to be
Securityholder Ltd. Corp.(1) Corp.(2) Inc.(3) Inc.(4) Inc.(4) Received
- --------------- --- ------- ---- --- --- --- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Jack M. Benun 51 50 50 50 50 50 2,131,250
Mark J. Benun 49 50 50 50 50 50 2,131,250
4,262,500
=========
</TABLE>
(1) Stock certificates representing ownership interests in Talk of the Town
Apparel Corp. will be delivered in January 1998. Although shares were
issued previously, no stock certificates were delivered.
(2) Corporate kit never ordered for J & B 18 Corp. Stock certificates
representing ownership interests in J & B 18 Corp. will be delivered in
January 1998.
(3) Stock certificates representing ownership interests in Hawk Industries,
Inc. will be delivered in January 1998. Although shares were issued
previously, no stock certificates were delivered.
(4) O.P. Kids, Inc. and H.O.T. Kidz, Inc. will be formed in January 1998.
Immediately prior to the effectiveness of the Corporation's proposed
initial public offering O.P. Kids, LLC will be merged into O.P. Kids, Inc.
and H.O.T. Kidz, LLC will be merged into H.O.T. Kidz, Inc. Each of O.P.
Kids, Inc. and H.O.T. Kidz, Inc. will be owned by Messrs. Jack Benun and
Mark Benun as noted above.
<PAGE>
EXHIBIT 10.13
Agreement made as of the 15th day of June, 1996, by and between MTV
Networks, a division of Viacom International Inc., a Delaware corporation,
with offices at 1515 Broadway, New York, New York 10036 ("MTVN"), and HAPPY
KIDS, a New York corporation, with offices at 100 West 33rd Street, Suite 1100,
New York City, NY 10001 ("Licensee").
BASIC PROVISIONS
----------------
LICENSED PROPERTY: The "RUGRATS" name, trademark and logo used in
connection with the MTVN television series entitled
"RUGRATS" and all names, trademarks and likenesses of
characters contained within the television series
aforementioned.
LICENSED PRODUCTS: Coordinated apparel inclusive of shorts, jackets,
shirts, pants, rompers, windsuits and swimsuits in the
following sizes:
Boys: 4-20
Girls: 4-16
LICENSED TERRITORY: United States, its territories and possessions.
LICENSED CHANNELS OF During the period June 15, 1996 through February 15,
DISTRIBUTION: 1997 only through Kids-R-Us; during the period February
15, 1996 through December 31, 1997 mid-tier stores such
as JC Penney, Sears and catalogue distribution,
subject to MTVN's prior written approval, shall be
added; and during the period from January 1, 1998
through December 31, 1998 mass market merchandisers
such as Caldors, Walmart, Target and Kmart shall also be
added.
LICENSE TERM: ***
PRESENTATION DATE TO
LICENSEE'S RETAILERS: May 1, 1996
INITIAL SHIP DATE TO
LICENSEE'S RETAILERS: June 30, 1996
ROYALTY RATE: Ten percent (10%) DOM of Net Sales (as defined in the
annexed Additional Terms and Conditions).
*** Confidential portion omitted and filed separately with the Securities and
Exchange Commission.
<PAGE>
GUARANTEED MINIMUM
ROYALTY: The Guaranteed Minimum Royalty for the Term is ***
and shall be payable as follows:
$200,000 upon Licensee's execution hereof ("Advance");
$50,000 on or before October 15, 1996;
$50,000 on or before February 15, 1997;
$50,000 on or before June 15, 1997;
$50,000 on or before September 15, 1997;
$50,000 on or before December 15, 1997;
***
COPYRIGHT NOTICE: "(c) 19___ [Year of Publication] VIACOM
INTERNATIONAL INC. All Rights Reserved".
TRADEMARK NOTICE: With respect to the Licensed Products shorts, jackets,
pants, rompers, windsuits and swimsuits "RUGRATS(TM)"
and with respect to the Licensed Product shirts
"RUGRATS(r)".
Licensee shall also include the following notice on all
materials set forth in subparagaph 5(b) of the
ADDITIONAL TERMS AND CONDITIONS in proximity to THE
Licensed Property. "RUGRATS and all related titles,
logos and characters are trademarks of Viacom
International Inc."
ADDITIONAL TERMS: 1. A credit, on packaging shall be given to
Klasky/Csupo Inc. as follows: Created by: Klasky/Csupo
Inc.
2. Licensee acknowledges that it will consult, through
MTVN, with the creators, Klasky/Csupo Inc., with respect
to the development of the Licensed Products.
*** Confidential portion omitted and filed separately with the Securities and
Exchange Commission.
2
<PAGE>
This Agreement includes the Additional Terms and Conditions and the
Riders and Schedules, if any, annexed hereto and made a part hereof. All
capitalized terms in the Additional Terms and Conditions shall have the
respective definitions as set forth in the Basic Provisions herein.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the day and year FIRST above written.
HAPPY KIDS MTV NETWORKS, a division of Viacom
International Inc.
By: _____________________________ By: _____________________________
Name:____________________________ Name:____________________________
Title:___________________________ Title:___________________________
3
<PAGE>
ADDITIONAL TERMS AND CONDITIONS
-------------------------------
1. LICENSE:
-------
MTVN hereby grants to Licensee the *** right to use the Licensed
Property solely for the purpose of the manufacture, distribution, sale and
advertisement of the Licensed Products through Licensee's present Licensed
Channels of Distribution in the Licensed Territory during the License Term (the
"License"). Licensee shall not have the right to sublicense the rights granted
hereunder.
2. RESERVATION OF RIGHTS:
---------------------
MTVN retains all rights not expressly granted hereunder (including but
not limited to the right to distribute and sell the Licensed Products through
premium offers, combination and give-away sales, direct response, direct mail,
home shopping type of networks, sales clubs and incentive programs, and the
rights to the Licensed Products containing The "RUGRATS" names, trademark and
logo, and all names, trademarks and likenesses of characters which are used in
connection with a motion picture or other theatrical or live stage presentation
involving the RUGRATS characters).
3. ROYALTIES, ACCOUNTING AND AUDIT:
-------------------------------
(a) COMPUTATION:
-----------
(i) Royalties shall be payable at the Royalty Rate set forth in
the Basic Provisions on Net Sales of all Licensed Products. "Net Sales" shall
mean gross sales less customary trade quantity discounts and allowances and
returns for damaged goods only, the aggregate of which shall not exceed five
percent (5%) of gross sales. Except for those expressly provided for in this
paragraph there shall be no deductions of any sort or kind, including but not
limited to deductions for returns, cash discounts, costs or expenses incurred
in the manufacture, distribution, sale or advertisement of the Licensed
Products, or for uncollected bills.
(ii) Royalty obligations shall accrue upon sale of the Licensed
Products. A Licensed Product is considered "sold" when it is invoiced, shipped,
or paid for, whichever event occurs first.
(iii) In the event that Licensed Products are sold to any party
affiliated, controlled, or in any way related to Licensee at a special price
lower than the average price charged to other parties, the royalty payable to
MTVN shall be based upon said average price.
(b) PAYMENT:
-------
Royalties shall be payable on a quarterly basis throughout the License
Term, within fifteen (15) days after the close of each respective quarter.
Quarters shall be based on a standard calendar year. All amounts past due shall
be subject to a late charge of one percent
*** Confidential portion omitted and filed separately with the Securities and
Exchange Commission.
4
<PAGE>
(1%) per month (or the highest rate allowed by law if lower), from the date such
payments were due.
(c) ACCOUNTING:
----------
Within fifteen (15) days after the close of each quarter, Licensee shall
furnish to MTVN complete and accurate statements of its sales of Licensed
Products and royalties due MTVN, in the form annexed hereto as Schedules A and B
("Quarterly Reports"). Quarterly Reports shall be furnished whether or not
Licensee has actual royalties to report for any quarter. All Quarterly Reports
shall be signed and certified as correct by an officer of Licensee. Acceptance
by MTVN of royalty payments and Quarterly Reports shall not preclude MTVN from
questioning the accuracy thereof.
(d) AUDIT:
-----
(i) Licensee shall keep accurate books of account and records at its
principal place of business of all transactions relating to or affecting this
License, during the License Term and for a period of three years thereafter.
MTVN or its representative shall have the right during reasonable business hours
to examine and verify Licensee's physical inventory of the Licensed Products as
well as Licensee's books of accounts and records, and to make copies and
extracts thereof.
(ii) In the event that an audit by MTVN discloses an underpayment
in royalties due MTVN, Licensee shall promptly pay MTVN such discrepancy plus a
late charge of one percent (1%) per month (or the highest rate allowed by law if
lower), from the day such payments were due. If such audit discloses a
discrepancy of five percent (5%) or more for any quarter, Licensee shall also
reimburse MTVN for all costs incurred by MTVN in connection with the audit.
4. QUALITY, SAMPLES, APPROVALS:
---------------------------
(a) The quality and style of all Licensed Products, and the manner in
which the Licensed Property may appear on the Licensed Product and on any
packaging, promotional materials, labels, advertising, publicity and display
materials of any kind used in connection with the Licensed Products are subject
to MTVN's prior written approval.
(b) At each stage of development or production and prior to manufacture,
Licensee shall promptly provide MTVN with two (2) samples in the form of proofs
and/or prototype for each Licensed Product and all related materials. MTVN shall
advise Licensee in writing of its approval or disapproval of such samples within
a reasonable time. No samples shall be deemed approved unless and until MTVN has
given its approval in writing. Licensee shall not proceed beyond any development
or production stage where approval is required without first securing such
approval. Once a sample has been approved, Licensee shall not depart therefrom.
Approval by MTVN shall not relieve Licensee of any of its agreements,
indemnities and warranties hereunder.
5
<PAGE>
(c) Licensee shall promptly reimburse MTVN for any and all costs of
artwork and other creative materials prepared by MTVN in connection with the
Licensed Products.
(d) Concurrently with the initial shipment of each Licensed Product,
Licensee shall furnish to MTVN, at no cost to MTVN, thirty (30) samples of each
Licensed Product and each subsequent year of the License Term, twenty-five (25)
samples of each Licensed Product. At MTVN's request, Licensee shall furnish
MTVN, at no cost to MTVN, a reasonable number of samples of the Licensed
Products. Any Licensed Products requested by MTVN in excess of the foregoing
amounts shall be made available to MTVN at Licensee's cost.
(e) Upon MTVN's request, Licensee shall provide MTVN with a list of the
names and addresses of Licensee's manufacturers and have such manufacturers fill
out MTVN's manufacturer's form.
(f) From time to time, upon MTVN's request, Licensee shall include
certain materials provided by MTVN relating to MTVN's programs, programming
services, or ancillary businesses in the packaging of the Licensed Products.
5. MARKINGS:
--------
(a) Licensee shall affix the Copyright and Trademark Notices set forth
in the Basic Provisions to all Licensed Products and to all packaging, labels,
promotional, advertising, publicity, and display materials used in connection
therewith, in accordance with instructions from MTVN. No Licensed Products or
related materials shall contain any other copyright, trademark or trade name
unless MTVN has given Licensee prior written consent thereto. MTVN may at any
time require an addition to or change of the Copyright and Trademark Notices,
effective not less than thirty (30) days after receipt by Licensee of notice
thereof, provided that Licensee shall have the right to continue to distribute
any inventory already manufactured at the time it receives such notice. Licensee
shall fully cooperate with MTVN in connection with MTVN's obtaining or
maintaining copyright and/or trademark protection for the Licensed Property in
MTVN's name.
(b) Licensee shall affix to the Licensed Products and all packaging,
labels, promotional materials, advertising, publicity, and display materials
used in connection therewith, any other legends, markings and notices required
by any law or regulation in the Licensed Territory or which MTVN reasonably may
request.
6. OWNERSHIP:
---------
(a) As between MTVN and Licensee, all right, title and interest in and
to the Licensed Property shall be and remain the sole and complete property of
MTVN. Licensee recognizes the value of the goodwill associated with the Licensed
Property, that the Licensed Property has secondary meaning in the mind of the
public, and that the trademarks and copyrights in the Licensed Property, and any
registrations therefor, are good and valid. All use by Licensee of the Licensed
Property shall inure to the benefit of MTVN. Licensee shall not, during the
License
6
<PAGE>
Term or thereafter, contest or assist others to contest, MTVN's rights or
interests in the Licensed Property or the validity of this License. Licensee
shall not seek any copyright or trademark registration for the Licensed
Property.
(b) Any copyright, trademark, or other proprietary rights owned by
Licensee and heretofore used by it, which are used in connection with the
Licensed Products as approved by MTVN pursuant to paragraph 5(a) above, shall
continue to be owned by Licensee and shall not become the property of MTVN.
(c) All right, title, or interest in or to any copyright, trademark, or
other proprietary rights that come into existence during the License Term as a
result of the exercise by Licensee of any right granted to it hereunder, shall
immediately and automatically vest in MTVN.
(d) Except as otherwise provided, all creations, including but not
limited to art work and designs, that come into existence during the License
Term, including any packaging, labels, and promotional, advertising, publicity,
and display materials used in connection with the Licensed Products shall be
deemed "works made for hire" for MTVN within the meaning of the U.S. Copyright
Law. To the extent that any such work does not so qualify, for the consideration
set forth herein, Licensee hereby irrevocably and absolutely assigns to MTVN all
rights throughout the universe in perpetuity in all media now known or hereafter
developed, including but not limited to the copyright and any extensions and
renewals thereof and the trademarks and the goodwill associated therewith.
(e) Licensee agrees to execute and deliver to MTVN any documents which
MTVN may reasonably request to confirm MTVN's ownership of its rights hereunder.
Licensee hereby irrevocably appoints MTVN as its attorney-in-fact coupled with
an interest to sign any such documents in Licensee's name.
7. INFRINGEMENTS:
-------------
Licensee shall promptly notify MTVN of any apparently unauthorized use
or infringement by third parties of any rights granted to Licensee herein, and
will cooperate fully in any action at law or in equity undertaken by MTVN, with
respect to such unauthorized use or infringement. Licensee shall not institute
any suit in connection with any apparently unauthorized use or infringement
without first obtaining the written consent of MTVN to do so, and MTVN shall
have the sole right to determine whether or not any action shall be taken on
account of any such unauthorized uses or infringements.
8. REPRESENTATIONS, WARRANTIES, AND UNDERTAKINGS:
---------------------------------------------
(a) Licensee represents, warrants, and undertakes as follows:
(i) It is free to enter into and fully perform this Agreement;
7
<PAGE>
(ii) All ideas, creations, designs, materials and intellectual
property furnished by Licensee in connection with the Licensed Products will be
Licensee's own and original creation or fully licensed by Licensee;
(iii) The Licensed Products and all materials used in connection
therewith shall be of the highest standard reasonably suitable for goods of the
type of the Licensed Products. The Licensed Products will be safe for use by
consumers and will comply with all applicable governmental rules, guidelines,
codes, regulations, and warranties (express or implied) including, without
limitation those contained in the Child Safety Protection Act and/or adopted by
the Consumer Product Safety Commission;
(iv) The Licensed Products will be manufactured, distributed,
sold and advertised in accordance with all applicable federal state and local
laws and in a manner that will not reflect adversely upon MTVN, and will not
infringe upon or violate any rights of any third parties;
(v) Licensee will use its best efforts to obtain maximum sales
in the Licensed Territory during the License Term.
(b) MTVN represents, warrants, and undertakes as follows:
(i) It is free to enter into and fully perform this Agreement;
(ii) The Licensed Property is original to and the sole property
of MTVN, and does not infringe upon or violate any copyright, trademark or
proprietary right of any third party.
9. INDEMNITIES:
-----------
(a) Licensee will at all times indemnify and hold MTVN, its officers,
directors and employees harmless from and against any and all claims, damages,
liabilities, costs and expenses, including reasonable counsel fees, arising out
of any breach or alleged breach by Licensee of any representation, warranty or
undertaking made herein or out of any defect (latent or patent) in the
Licensed Products, provided that MTVN shall give prompt written notice,
cooperation and assistance to Licensee relative to any such claim or suit, and
provided further that no settlement of any such claim or suit shall be made
without the prior written consent of MTVN.
(b) MTVN will at all times indemnify and hold Licensee, its officers,
directors and employees harmless from and against any and all claims, damages,
liabilities, costs and expenses, including reasonable counsel fees, arising out
of any breach or alleged breach by MTVN of any representation, warranty or
undertaking made herein, provided that Licensee shall give prompt written
notice, cooperation and assistance to MTVN relative to any such claim or suit,
and provided further that MTVN shall have the option to undertake and conduct
the defense and/or settlement of any such claim or suit so brought and that no
settlement of any such claim or suit is made without the prior written consent
of MTVN.
8
<PAGE>
10. INSURANCE:
---------
Licensee shall obtain and maintain at its own cost and expense from a
qualified insurance company licensed to do business in New York, standard
Product Liability Insurance naming MTVN as an additional named insured, with
respect to all Licensed Products manufactured hereunder, whether sold during the
License Term or thereafter. Such policy shall provide protection against any and
all claims, demands and causes of action arising out of any defects or failure
to perform, alleged or otherwise, of the Licensed Products or any material used
in connection therewith or any use thereof. The amount of coverage shall be Two
Million Dollars ($2,000,000) combined single limit coverage, with a deductible
amount not to exceed One Million Dollars ($1,000,000) for each single occurrence
for bodily and/or for property damage. The policy shall provide for ten (10)
days notice to MTVN from the insurer by Registered or Certified Mail return
receipt requested, in the event of any modification, cancellation or termination
thereof. Licensee agrees to furnish MTVN a certificate of insurance evidencing
same within thirty (30) days after execution of this Agreement and in no event
shall Licensee manufacture, distribute or sell the Licensed Products prior to
receipt by MTVN of such evidence of insurance.
11. DEFAULT:
-------
(a) Upon the occurrence of any of the following events (each of which is
a "Default"), then in addition and without prejudice to any rights which it may
have at law, in equity or otherwise, MTVN shall have the right to terminate this
Agreement, to delete from this Agreement any elements of the Licensed Property
or any Licensed Products and/or to require the immediate payment of any
royalties due or to become due hereunder.
(i) Licensee fails to meet the Presentation Date To Licensee's
Retailers or the Initial Ship Date To Licensee's Retailers of the Licensed
Products;
(ii) Licensee fails to actively manufacture, advertise,
distribute or sell the Licensed Products;
(iii) Licensee fails to make a payment or furnish a statement in
accordance herewith and does not cure such failure within fifteen (15) days
after notice thereof;
(iv) Licensee fails to comply with the approval quality, and
safety requirements hereunder and/or the Licensed Products do not comply with
such requirement and/or the Licensed Products are the subject matter of adverse
or negative publicity due to so such failure;
(v) Licensee fails to comply with any other of Licensee's
material obligations hereunder or breaches any warranty or representation made
by it hereunder and does not cure such failure or breach within fifteen (15)
days after notice thereof;
(vi) Licensee sells or otherwise disposes of all or substantially
all of its business or assets to a third party, or control of Licensee is
transferred and the management thereby
9
<PAGE>
changed;
(vii) Licensee sells or causes others to sell the Licensed
Products outside Licensee's Licensed Distribution Channels and/or outside the
Licensed Territory;
(viii) Licensee fails to obtain or maintain product liability
insurance in the amount of the type provided for herein; or
(ix) Licensee fails to comply with any provision of any other
agreement between Licensee and MTVN.
(b) In the event that the Licensed Products pose a safety threat to the
consumer, or are the subject of a claim or inquiry by the Consumer Product
Safety Commission or the Child Safety Protection Act or any other person, agency
or commission because of quality and/or safety concerns, and/or labeling or are
the subject of negative publicity due to poor quality and/or safety of the
Licensed Products, Licensee shall, upon MTVN's reasonable request immediately
recall such Licensed Products from the market place, and take any other
measures MTVN may reasonably demand.
(c) If a petition in bankruptcy is filed by or against Licensee, or
Licensee is adjudicated bankrupt, which is not dismissed within thirty (30)
days, or Licensee makes any assignment for the benefit of creditors or becomes
insolvent, is placed in the hands of a trustee or receiver, fails to satisfy any
judgment against it or is unable to pay its debts as they become due, whichever
is sooner, this License shall automatically terminate forthwith without any
notice whatsoever. Upon such termination for any reason under this subparagraph
1l(c) Licensee, its receiver, representatives, trustees, agents, administrators,
successors and assigns shall have no further rights hereunder, and neither this
License nor any right or interest herein shall be deemed an asset in any
insolvency, receivership, and/or bankruptcy.
12. FORCE MAJEURE:
-------------
In the event that Licensee is prevented from manufacturing, distributing
or selling the Licensed Products because of any act of God; unavoidable
accident; fire, epidemic; strike, lockout, or other labor dispute; war, riot or
civil commotion; act of public enemy; enactment of any rule, law, order or act
of government or governmental instrumentality (whether federal, state, local or
foreign); or other cause of a similar or different nature beyond Licensee's
control, and such condition continues for a period of two (2) months or more,
either party hereto shall have the right to terminate this Agreement effective
at any time during the continuation of such condition by giving the other party
at least thirty (30) days' notice to such effect. In such event, all royalties
on sales theretofore made shall become immediately due and payable and this
Agreement shall be automatically terminated.
10
<PAGE>
13. EFFECT OF EXPIRATION OR TERMINATION:
-----------------------------------
Upon expiration or termination of this Agreement, all rights granted to
Licensee herein shall forthwith revert to MTVN, with the following consequences:
(a) No portion of any prior payments shall be repayable to Licensee, and
any and all payments due or to become due, including any royalties shall be
immediately due and payable.
(b) After the expiration or termination of this Agreement, Licensee
shall not manufacture, advertise, distribute or sell the Licensed Products
containing or including the Licensed Property or any product which may infringe
upon MTVN's proprietary rights, or use any name, logo or design which is
substantially or confusingly similar to the Licensed Property on any product in
any place whatsoever. Licensee shall promptly deliver to MTVN a statement
indicating the number of Licensed Products then currently on hand or in the
process of being manufactured. MTVN shall have the right to conduct a physical
inventory in order to ascertain or verify such inventory and/or statement Except
as provided in subparagraph (c), such inventory shall at MTVN's option, be
destroyed by Licensee or purchased by MTVN at Licensee's cost of manufacture.
Disposition of any plates, moulds, forms, lithographs and other material
relating to the Licensed Products then remaining on hand shall be subject to
written instructions from MTVN to Licensee either to destroy or to deliver same
to MTVN or its designee. In the event that MTVN requests Licensee to destroy its
inventory, the Licensed Property or materials relating thereto, MTVN may require
Licensee to deliver to MTVN an affidavit by an officer of Licensee, attesting to
such destruction in such form as MTVN may in its sole discretion require.
(c) Upon expiration of this Agreement so long as Licensee is not in
default at time of expiration, Licensee may continue to sell any Licensed
Products, previously manufactured and on hand, on a non-exclusive basis during
the period of thirty (30) days thereafter subject to all of the terms and
conditions contained in this Agreement and provided that (i) the Licensed
Products are sold in the ordinary course of business at prices not lower than
the prevailing wholesale price or prices charged by Licensee during the ninety
(90) day period immediately preceding expiration; (ii) no new Licensed Products
are manufactured during such sell-off period; and (iii) MTVN is paid its then
existing Royalty Rate on all Licensed Products sold during the sell-off period.
(d) All warranties, indemnification and any other applicable obligations
of Licensee shall survive the expiration or termination of this License.
14. PAYMENTS AND NOTICES:
--------------------
All notices which either party hereto is required or may desire to give
to the other shall be given by addressing the same to the other at the address
first set forth above, or at such other address as may be designated in writing
by any such party in a notice to the other given in the manner prescribed in
this paragraph. All such notices shall be made in writing by mailing the same by
certified or registered mail, return receipt requested, and shall be effective
immediately
11
<PAGE>
upon receipt thereof. Any and all notices to MTVN shall be addressed to
Attention: Vice President, General Manager, Nickelodeon Toy and Gear Works, with
a copy to the Sr. Vice President, Business Affairs and General Counsel. All
payments and statements to MTVN hereunder shall be addressed to the Attention:
MTV Networks, Ancillary Sales, P.O. Box 13801, Newark, NJ 07188-0801 with a copy
to the Vice President, General Manager, Nickelodeon Toy and Gear Works.
15. GENERAL CLAUSES:
---------------
(a) Any attempted or purported assignment or other transfer, sublicense,
mortgage or other encumbrance of this License and the rights granted herein by
Licensee without the prior written approval of MTVN shall be void and of no
effect. This Agreement and the rights and obligations of the parties hereunder
shall be binding upon and shall insure to the benefit of MTVN and Licensee and
their respective legal representatives, successors in interest and permitted
assigns.
(b) Nothing herein contained shall be construed to constitute a
partnership or joint venture between the parties hereto, and neither Licensee
nor MTVN shall become bound by any representation, act or omission of the other.
Licensee is an independent contractor in the manufacture, advertisement, sale
and distribution of the Licensed Products, and Licensee will pay all sales taxes
and other taxes or charges imposed on Licensee or MTVN, except for MTVN's
corporate income tax, by any law, ordinance or requirement of any government or
governmental instrumentality in connection with the manufacture, advertisement,
sale and distribution of the Licensed Products.
(c) A waiver by either party of any terms or conditions of this
Agreement in any instance shall not be deemed or construed to be a waiver of
such term or condition for the future, or of any subsequent breach thereof. All
remedies, rights, undertakings, obligations and agreements contained in this
Agreement shall be cumulative, and none of them shall be in limitation of any
other remedy, right, undertaking, obligation or agreement of either party.
(d) This Agreement and all matters or issues collateral thereto shall be
governed by the laws of the State of New York applicable to contracts performed
entirely therein. In any such action or proceeding, service of process upon
Licensee may be accomplished by sending such process in the manner specified
herein for the giving of notice to Licensee. Licensee hereby consents and
submits to the jurisdiction of the federal and/or state court located in New
York.
(e) The entire understanding between the parties hereto relating to the
subject matter hereof is contained herein and no warranties, representations or
undertakings are made by the parties hereto except as expressly provided herein.
This Agreement cannot be changed except in writing signed by the parties.
(f) The paragraph titles of this Agreement are for convenience only and
shall not
12
<PAGE>
affect the interpretation of this Agreement or any paragraph thereof.
(g) The parties hereto agree to execute such other writings, documents
and instruments as may be necessary or desirable to effectuate the purposes of
this Agreement.
(h) Notwithstanding any termination, cancellation or expiration of this
Agreement, the provisions hereof that are intended to continue and survive,
shall continue and survive, including, but not limited to paragraphs: 3 (d);
6-10; 11 (b); and 13-15.
(i) This Agreement shall be interpreted as if the parties hereto jointly
prepared it.
13
<PAGE>
Schedule A
----------
(Due 15 Days After Quarter End)
MTV NETWORKS
QUARTERLY ROYALTY REPORT
Licensee (company name): _______________________________________________________
Licensed Property: _______________________________________________________
Address: _______________________________________________________
_______________________________________________________
Quarter: _______________________________________________________
_______________________________________________________
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------
Quantity Gross
S.K.U. and Product Description Account of Sales Royalty Total Deductions
Units Price Rate % Royalty $
Sold
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
- --------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------
</TABLE>
Please submit with payment to: Sub total: ______________________________
Less Advance/
Guarantee: ______________________________
MTV Networks Plus interest: ______________________________
Ancillary Sales
Total Due ______________________________
P.O. Box 13801
Newark, NJ 07188-0801
with copy to Vice President, I hereby certify that the above information
General Manager, Nickelodeon is true and accurate:
Toy and Gear Works _____________________________________________
Submitted by: ______________________________
(Signature)
_____________________________________________
(Print name/title/date)
14
<PAGE>
Schedule B
----------
(Due 15 Days After Quarter End)
MTV NETWORKS
QUARTERLY SALES REPORT
Licensee (company name): _______________________________________________________
Licensed Property: _______________________________________________________
Address: _______________________________________________________
_______________________________________________________
Quarter: _______________________________________________________
_______________________________________________________
Quarter Actual Shipped Total 199[ ] Projection
- ---------------------- -----------------------
(Revise each quarter)
$ $
I hereby certify that the
above information is
true and accurate:
______________________________
______________________________
Please submit with payment to: Submitted by: ______________________________
(signature)
MTV Networks
Ancillary Sales
P.O. Box 13801 ______________________________
Newark, NJ 07188-0801 (Print name/title/date)
with copy to Vice President,
General Manager, Nickelodeon Toy and
Gear Works
(same address)
15
<PAGE>
Exhibit 10.14
LICENSE AGREEMENT
(DOMESTIC)
BETWEEN
B.U.M. INTERNATIONAL, INC.
AND
HAPPY KIDS LTD., a New York Corporation
<PAGE>
LICENSE AGREEMENT
(Domestic)
-----------------
THIS LICENSE AGREEMENT ("Agreement") is made and entered into as of the 1st
day of June, 1995 by and between B.U.M. INTERNATIONAL, INC., a Nevada
Corporation ("Licensor") and HAPPY KIDS LTD., a New York Corporation
("Licensee").
BASIC TERMS
-----------
A. Trademarks. As used in this Agreement, the "Trademarks" mean the
federally registered trademarks "b.u.m. equipment(R)" Registration Nos.
1,430,327, 1,697,485 and 1,765,172, "LI'L B.U.M.(R)", Registration No.'s
1,766,772 and 1,805,300, "Little B.U.M.(R)" Registration No. 1,823,768, "Baby
B.U.M.(R)" Registration Nos. 1,712,713 and 1,803,738 and "Mini B.U.M.(TM)". The
term "Trademarks" shall include any other trademarks which use the word "B.U.M."
which Licensor may hereafter develop relative to the Licensed Products.
B. Licensed Products. As used in this Agreement, the "Licensed Products"
means all items of apparel *** for newborns, infants, toddlers, boys sizes 4-7
and girls sizes 4-6x, including, but not limited to, sportswear, dresses,
outerwear, swimwear and denim.
C. Territory. As used in this Agreement, the "Territory" means the United
States, its territories and possessions.
D. Term. The term of this Agreement commences on June 1, 1995 (the
"Commencement Date") and ends on December 31, 1998, subject to earlier
termination or extension as provided herein (the "Term"). As used in this
Agreement, a "Year" means a calendar year, except that the first Year of the
Term shall commence on the Commencement Date and shall end on December 31, 1996.
E. Options to Extend. Licensee is hereby granted two (2) options to
extend the Term of this Agreement for periods of three (3) Years each.
F. Guaranteed Minimum Royalties. Licensee agrees to pay to Licensor
Guaranteed Minimum Royalties ("GMR") in the following amounts for each Year of
the Term:
Year GMR
---- ---
1 ***
2 ***
3 ***
4 (Option) ***
5 (Option) ***
6 (Option) ***
7 (Option) ***
8 (Option) ***
9 (Option) ***
*** Confidential portion omitted and filed separately with the Securities and
Exchange Commission.
<PAGE>
G. Royalties. Licensee agrees to pay Royalties at the rate of *** of
Licensee's Net Sales (as defined in this Agreement) to the extent that such
amount exceeds the GMR.
H. Minimum Net Sales Requirements. During each Year of the Term of this
Agreement, Licensee must generate Net Sales equal to or in excess of the
following:
Year Minimum Net Sales
---- -----------------
1 ***
2 ***
3 ***
4 (Option) ***
5 (Option) ***
6 (Option) ***
7 (Option) ***
8 (Option) ***
9 (Option) ***
I. Advance. A non-refundable Advance in the amount of One Hundred
Seventy-Five Thousand Dollars ($175,000) shall be payable upon execution of this
Agreement.
J. Distribution Channels. Licensee agrees to sell Licensed Products only
in the following channels of distribution: specialty and department stores
(e.g., JC Penney, Sears, Kohls and any other stores to which Licensor sells its
Trademarked products). Without limiting the foregoing, Licensee agrees that it
will not sell or distribute Licensed Products (1) to any person or entity who
does not sell at retail in the territory, (2) to swap meets, flea markets,
parking lot sales, warehouse sales or similar sales or similar sellers which
maintain minimum quality standards, (3) to any person or entity who Licensee
knows or reasonably suspects will re-sell the Licensed Products outside of the
Territory or through unapproved channels of distribution.
K. Initial Marketing Date. Licensee agrees to have shipped commercially
reasonable quantities of Licensed Products no later than February 1, 1996.
L. Standard Terms and Conditions. The Standard Terms and Conditions
attached to this Agreement are a part of this Agreement and are binding upon the
parties hereto.
The Basic Terms are set forth above for ease of reference, and are
qualified by reference to the Standard Terms and Conditions. The Agreement
consists of the Basic Terms, the Standard Terms and Conditions, and any exhibits
or addenda attached hereto.
BY ITS INITIALS HEREON, LICENSEE EXPRESSLY ACKNOWLEDGES THE PROVISIONS OF
PARAGRAPH 14(g) OF THE STANDARD TERMS AND CONDITIONS AND AGREES THAT EXCEPT AS
SET FORTH IN THE AGREEMENT, NEITHER LICENSOR NOR ANY OF ITS EMPLOYEES, AGENTS OR
REPRESENTATIVES HAVE MADE ANY PROMISES OR REPRESENTATIONS TO LICENSEE CONCERNING
THE SUBJECT MATTER OF THIS AGREEMENT AND THAT ANY
*** Confidential portion omitted and filed separately with the Securities and
Exchange Commission.
- ii -
<PAGE>
PROMISES OR REPRESENTATIONS NOT EXPRESSLY SET FORTH IN THE AGREEMENT ARE OF NO
FORCE OR EFFECT.
/s/ JMB
-----------
LICENSEE'S
INITIALS
IN WITNESS WHEREOF, the parties have executed this Agreement on the date
first above written.
"LICENSOR" "LICENSEE"
B.U.M. INTERNATIONAL, INC., HAPPY KIDS LTD., a New York
a Nevada Corporation Corporation
By /s/ Morton [ILLEGIBLE] By /s/ Jack M. Benun
- ------------------------------ ----------------------------------
Its __________________________ Jack M. Benun, President
Address: Address:
20101 South Santa Fe Avenue 100 West 33rd Street, Suite 1100
Rancho Dominguez, California 90221 New York, New York 10001
Attn: Licensing Department
Fax No.: (212) 736-5839
Fax No.: (310) 764-2743
With Copy to: With Copy to:
BRUCE R. GREENE, ESQ. Neil S. Goldstein, Esq.
Richman, Lawrence, Mann, Greene, Schekter Rishty Goldstein &
Arbiter & Chizever Blumenthal, P.C.
9601 Wilshire Boulevard, 1500 Broadway, 21st Floor
Penthouse Suite New York, New York 10036
Beverly Hills, California 90210
Fax No: (212) 944-7372
Fax No.: (310) 274-2831
- iii -
<PAGE>
STANDARD TERMS AND CONDITIONS
1. GRANT OF LICENSE
----------------
(a) Licensor hereby grants to Licensee, upon the terms and conditions set
forth in this Agreement, and Licensee hereby accepts the grant of an exclusive
right (except as otherwise provided herein) to use the Trademarks in connection
with the manufacturing, wholesale sale and distribution (which includes
promotion and advertising) of Licensed Products throughout the Territory during
the Term. Notwithstanding the foregoing, Licensee is not granted the right to
use the Trademarks in connection with the manufacture, sale or distribution of
Licensed Products which are cross-licensed (i.e., which incorporate trademarks
other than the Trademarks whether or not such other trademarks are owned by
Licensor), which right is reserved to Licensor.
(b) Notwithstanding the provisions of subparagraph (a), the rights granted
under this License shall be non-exclusive with respect to any retail stores
owned or controlled by Licensor, or any affiliate or subsidiary of Licensor
("Licensor Retail Stores"). It is expressly understood and agreed that Licensor
may, at its option and at any time during the Term, manufacture, or cause third
parties to manufacture, sell and distribute (at wholesale) Licensed Products to
Licensor Retail Stores.
(c) Licensor hereby reserves all rights not expressly granted to Licensee
hereunder.
2. ROYALTIES AND REPORTING
-----------------------
(a) Guaranteed Minimum Royalties. Licensee agrees to pay to Licensor the
----------------------------
GMR set forth in the Basic Terms, in equal monthly installments, in advance on
the first day of each month during the Term, without demand, and without offset
or deduction of any nature. (It is understood that the full monthly installments
of GMR will continue to be payable by Licensee, notwithstanding that Licensee
has paid additional Royalties pursuant to Paragraph 2(c), until such time as the
sum of the installments of GMR and the Royalties paid pursuant to Paragraph 2(c)
for any Year equals the annual GMR, whereupon the payment of monthly
installments of GMR shall cease for the remainder of that Year. For example,
assume that the annual GMR is $120,000, payable in monthly installments of
$10,000 in advance on the first day of each month. Assume further that Licensee
pays the $10,000 installment of the GMR on January 1. If Licensee's sales for
the month of January result in Royalties earned in the amount of $15,000,
Licensee shall be required to pay the additional $5,000 on February 15 and will
still be required to pay the full $10,000 installments of the GMR on February 1
and March 1.) Under no circumstances will any portion of the GMR be refundable
to Licensee.
(b) Advance. The Advance set forth in the Basic Terms shall be applied
-------
against the installment of GMR due for the last month of the Term (exclusive of
options).
(c) Royalties. During the Term, Licensee shall pay to Licensor Royalties at
---------
the rate specified in the Basic Terms. As used in this Agreement, "Net Sales"
means the total number of units of Licensed Products sold by Licensee multiplied
by the gross invoice price actually charged to the purchaser, exclusive of sales
taxes, freight and insurance (the "Gross Sales"), reduced by quantity discounts
(but not cash
<PAGE>
discounts) to the extent actually reflected on the invoices and further reduced
by returns and allowances which are supported by bona fide credit memoranda,
provided, however, that the total of discounts, returns and allowances shall not
exceed fifteen percent (15%) of the Gross Sales during each Year. There shall be
no other deductions of any nature from Net Sales and, without limiting the
generality of the foregoing, there shall be no deductions for uncollectible
accounts, bad debts or for any costs incurred in the manufacturing, sale,
distribution, advertising or promotion of the Licensed Products. Any sales or
other distribution of Licensed Products made to parents, subsidiaries or any
other entity affiliated with Licensee, or which are given away for promotional
or similar purposes, will be deemed to have been sold at the established
wholesale line price for the purpose of computing Royalties. All Royalties
(including the GMR) shall be paid in U.S. currency. Royalties shall be paid
concurrently with the Statement of Royalties described herein.
(d) Statement of Royalties. No later than the fifteenth (15th) day of each
----------------------
month during the Term (commencing on the 15th day of the second month of the
first Year and ending on the 15th day of the month following the last month of
the Term), including any sell-off period subsequent to the termination of this
Agreement, Licensee shall deliver to Licensor a written report, in a form
designated by Licensor, showing, among other things, Gross Sales, Net Sales and
the computation of Royalties for the immediately preceding month (the "Statement
of Royalties"). The Statement of Royalties shall be certified as being true and
correct by an officer (or other duly authorized representative) of Licensee. The
Statement of Royalties must be furnished whether or not there are any Net Sales
for the month covered thereby, and whether or not any Royalties are due to
Licensor for such month. The receipt or acceptance by Licensor of any Statement
of Royalties shall not be deemed an acknowledgment by Licensor that such
Statement of Royalties is accurate, and Licensor shall be entitled at any time
to question the accuracy of any Statement of Royalties.
(e) Statement of Shipments by Account. Concurrently with the delivery of
---------------------------------
the Statement of Royalties, Licensee shall deliver to Licensor a written report,
in a form acceptable to Licensor, showing all shipments of Licensed Products for
the immediately preceding month by account.
(f) Interest. Any Royalties or other monetary sums which are not paid to
--------
Licensor when due shall bear interest at the highest rate allowable by law.
3. MINIMUM NET SALES REQUIREMENTS. If Licensee fails to meet the Minimum
------------------------------
Net Sales Requirements set forth in the Basic Terms during any Year of the Term
(whether or not Licensee has paid the annual GMR) Licensor shall have the right,
upon notice to Licensee, to immediately terminate this Agreement, provided that
such notice is given not later than sixty (60) days after the end of the Year in
which the Minimum Net Sales Requirements have not been met.
4. BOOKS AND RECORDS.
-----------------
(a) Licensee agrees to maintain complete and accurate books of account and
records covering all transactions related to this Agreement at Licensee's
principal place of business, during the Term and for at least three (3) years
after the expiration or termination of this Agreement. Licensor and its
-2-
<PAGE>
representatives shall have the right, upon reasonable advance notice to Licensee
and during regular business hours to inspect and audit (which includes the right
to copy at no expense to Licensor) such books of account and records. If any
audit discloses that the Royalties due to Licensor exceeded the Royalties
actually paid by Licensee by an amount greater than two percent (2%) for the
period being audited, Licensee shall pay immediately upon demand (in addition to
all unpaid Royalties plus interest) the cost of the audit.
(b) Licensee agrees to furnish to Licensor, within ninety (90) days after
the end of each Year during the Term, financial statements (current balance
sheet and profit and loss statement for the prior Year), certified by an
appropriate officer (or partner) of Licensee to be true, correct and complete
and prepared in accordance with generally accepted accounting principles,
consistently applied.
5. LICENSEE HANDBOOK. Licensee agrees to comply within all procedures
-----------------
(including forms for approvals and reporting requirements set forth herein) set
forth in the Licensee Handbook, as same may be modified and/or supplemented from
time to time and the provisions thereof are incorporated by reference into this
Agreement. Licensee acknowledges receipt of a copy of the Licensee Handbook.
6. EXPLOITATION OF LICENSE.
-----------------------
(a) Licensee agrees to use best efforts and diligence to continuously sell,
distribute, advertise and promote the Licensed Products throughout the entire
Territory. If at any time during the Term Licensee fails to ship Licensed
Products in commercially reasonable amounts for a consecutive period of more
than ninety (90) days, the Licensee shall be deemed to be material default under
this Agreement.
(b) Licensee shall at all times maintain (or contract for) facilities and
personnel adequate to fulfill its obligations under this Agreement.
(c) During each Year, Licensee shall ship not less than eighty-five percent
(85%) of Licensed Products for which Licensee has accepted and confirmed
purchased orders.
(d) Licensee shall have the exclusive right to establish prices and terms
for the sale of Licensed Products. Licensee shall provide Licensor, in advance
of each selling season, with line sheets and price lists, and Licensee shall
promptly notify Licensor of any change in pricing.
(e) Licensee shall provide Licensor, upon request, with the names and
addresses of all facilities at which the Licensed Products are manufactured and
stored, and Licensee shall make all necessary arrangements to allow Licensor or
its representatives to have reasonable access to all such facilities upon
reasonable advance notice during regular business hours for the purposes of
conducting inspections to insure that Licensee is in compliance with this
Agreement.
(f) Licensee shall not manufacture, sell or distribute any other products
which are competitive with the Licensed Products. Upon receipt of notice from
Licensor that Licensor has determined that any products being manufactured, sold
or distributed by Licensee are, in Licensor's reasonable opinion, competitive
with the Licensed Products, Licensee shall immediately discontinue the
manufacture, sale or distribution thereof. Without limiting the generality of
the foregoing, Licensee agrees that it will not copy any Licensed Products or
offer for sale any products which are similar in design to the Licensed
Products.
-3-
<PAGE>
(g) Licensee shall include in all of its written orders for the sale of
Licensed Products such language as Licensor may reasonably specify for the
purpose of preventing diversion of the Licensed Products from the approved
channels of distribution.
(h) Licensee shall include in all of its written orders for the purchase of
materials and/or finished goods from third parties such language as Licensor may
reasonably specify for the purpose of prohibiting the sale or other disposition
of any products bearing the Trademarks by such suppliers other than to Licensee.
(i) Licensee shall cut all labels and hangtags on defective merchandise
(seconds or irregulars) prior to shipment and shall disclose on any invoices
with respect thereto that such merchandise consists of seconds or irregulars.
(j) Licensee agrees, upon request of Licensor, to sell Licensed Products to
Licensor Retail Stores, on standard trade terms, at the lower of (i) Licensee's
wholesale line price less thirty-three and one-third percent (33-1/3%), or (ii)
the lowest price which Licensee has offered such Licensed Products for sale to
independent retailers. In addition, Licensee agrees to manufacture specific
Licensed Products which may be requested from time to time by Licensor for sale
to Licensor Retail Stores, whether or not Licensee is then manufacturing such
specific Licensed Products. Licensor shall be under no obligation to purchase
Licensed Products from Licensee for Licensor Retail Stores.
(k) Licensee agrees to participate (by among other things, providing an
adequate number of samples for display) in all major trade shows, utilizing
booths selected by Licensor. Licensee shall reimburse Licensor for a portion of
Licensor's costs incurred in connection with such trade shows, in an amount
which will be equitably established by Licensor.
(l) Licensee shall attend meetings called by Licensor from time to time to
discuss any matters relating to this Agreement. All such meetings will be held
at Licensor's offices and may be called by Licensor upon not less than thirty
(30) days' prior written notice to Licensee, but not more frequently than one
(1) time in each calendar quarter.
(m) Licensee shall cooperate with Licensor and other Licensees of Licensor
(domestic and international in connection with the exchange of ideas, design and
other information relative to the manufacture, sale and distribution of Licensed
Products (including, but not limited to, furnishing a reasonable quantity of
samples to be distributed among such other Licensees), but nothing shall require
Licensee to divulge any of its trade secrets or other confidential information.
(n) Licensee shall actively advertise and promote the Licensed Products in
the Territory during the entire Term. All advertising and promotion is subject
to the approval of Licensor as provided herein.
(o) Licensee shall submit to Licensor written sales projections. Such sales
projections shall be submitted to Licensor within thirty (30) days of the
Commencement Date, and quarter-annually thereafter during the Term.
-4-
<PAGE>
7. LICENSOR'S STANDARDS AND APPROVALS; SAMPLES.
-------------------------------------------
(a) Licensee agrees that the Licensed Products shall be of a high quality,
consistent with the quality of other products which include the Trademarks which
are manufactured, sold and distributed by Licensor and its other Licensees.
Accordingly, Licensee agrees to conform at all times to such standards as
Licensor may direct, from time to time, including, but not limited to, standards
relating to the design, manufacturing, packaging, advertising and promotion of
the Licensed Products. Licensee agrees to conform to all standards set forth in
the Quality Control Handbook, as same may be modified and/or supplemented from
time to time and the provisions thereof are incorporated by reference into this
Agreement. Licensee acknowledges receipt of a copy of the Quality Control
Handbook.
(b) In furtherance of maintaining Licensor's standards, it is agreed that
the following matters shall be subject to Licensor's prior written approval
(which may be given or withheld in Licensor's sole and absolute discretion):
(i) Advertising, promotional and display material;
(ii) Labels, hangtags and packaging;
(iii) Designwork (including, but not limited to, fabric, graphics,
colors and concepts);
(iv) Licensed Products (including. but not limited to , approval of all
samples).
Licensee shall strictly follow all procedures established by Licensor in
the Licensee Handbook with respect to obtaining Licensor's approvals of the
foregoing, including use of all forms as many be specified therein.
(c) Approval samples shall be provided to Licensor, at Licensee's expense,
at the times specified in the Calendar (described in the Licensee Handbook).
Additionally, Licensee shall provide Licensor, upon request, with a reasonable
number of samples, at no charge, for advertising and promotional purposes.
8. TRADEMARK AND COPYRIGHT PROTECTION.
----------------------------------
(a) Licensee recognizes the great value of the goodwill associated with the
Trademarks and acknowledges that such goodwill belongs exclusively to Licensor,
and that Licensee shall acquire no proprietary rights in the Trademarks or their
goodwill by virtue of this Agreement. Licensee further recognizes that the
Trademarks have acquired secondary meaning in the mind of the public.
Accordingly, Licensee agrees that the breach of its obligations under this
Agreement (other than breaches relating to payment of monetary sums) will cause
Licensor irreparable damages which may not be compensable by monetary damages,
and that in the event of such breach, in addition to any other rights or
remedies which Licensor may have, Licensor may seek and obtain injunctive
relief, without the necessity of posting bond (unless otherwise required by
law).
(b) Licensee shall prominently display on all Licensed Products, labels
hangtags, packing material, and in all advertising and promotional materials
using the Trademarks, such trademark and/or copyright notices as Licensor shall
designate.
-5-
<PAGE>
(c) Licensee shall not identify itself as the owner of the Trademarks or
any right or interest therein except as a licensee. Licensee shall not use the
Trademarks, or any similar mark, symbol or other designation, in connection with
its own corporate or business name, as tradename, or in any similar manner.
Licensee shall not apply for the registration of any of the Trademarks which is
confusingly similar to the Trademarks anywhere in the world. Licensee agrees
that all designwork created in connection with this Agreement shall be and
remain the property of Licensor, and that it will not use any such designwork,
or any similar designwork on any products bearing a trademark, brand, label or
similar identification other than the Trademarks.
(d) Licensee agrees that it will not attack or contest the validity or
ownership of the Trademarks by Licensor.
(e) Licensee shall promptly notify Licensor if any legal action is
instituted against Licensee relating to Licensee's use of the Trademarks.
Licensee shall also promptly notify Licensor of any counterfeiting or other
infringement of the Trademarks, or any diversion of the Licensed Products from
the approved channels of distribution, of which Licensee becomes aware. Licensor
shall have the right, but not the obligation, to institute legal action or take
any other actions which it deems necessary to protect its interest in the
Trademarks, and Licensee shall fully cooperate with Licensor in any such action,
provided that any out-of-pocket expenses of Licensee incurred in connection
therewith are paid or reimbursed by Licensor. Any monetary recovery resulting
from any such action shall belong solely to Licensor. If Licensor declines to
institute or continue any legal action, Licensee may, with the consent of
Licensor, which will not be unreasonably withheld, institute or continue same in
its name, at its sole expense, in which event any monetary recovery resulting
therefrom shall belong solely to Licensee.
(f) Licensee shall reasonably cooperate with Licensor to prevent unlawful
use of the Trademarks, including counterfeiting, and to prevent diversion of
Licensed Products outside of the Territory and/or approved distribution
channels.
(g) Licensee shall not take any action which damages the reputation of
Licensor or which reflects negatively upon Licensor, the Trademarks or the
Licensed Products.
9. TERMINATION.
-----------
(a) No Cure Period. In addition to any other termination rights which
--------------
Licensor has under this Agreement, Licensor shall have the right to terminate
this License Agreement by giving written notice to Licensee, if Licensee (i)
manufactures, sells, distributes, advertises, or promotes any Licensed Products
without having obtained all required approvals of Licensor as provided herein;
(ii) asserts any ownership or proprietary interest in the Trademarks, or
contests Licensor's ownership rights therein; (iii) breaches any of the
provisions of this Agreement prohibiting Licensee from assigning, transferring
or sublicensing this Agreement or any of its rights or obligations hereunder;
(iv) or any guarantor of Licensee's obligations hereunder files a voluntary
petition under the Federal Bankruptcy Code, or is subject to the filing of an
involuntary petition under the Federal Bankruptcy Code which is not dismissed
within thirty (30) days, or is declared insolvent, or makes an assignment for
the benefit of creditors, or dissolves, is liquidated or
-6-
<PAGE>
otherwise discontinues its business, or suffers a custodian, trustee or receiver
to be appointed for it or for it's business, which is not released or discharged
within thirty (30) days, or if substantially all of its assets or Licensee's
interest in this Agreement is subjected to any writ of attachment, execution,
garnishment or other legal process which is not released within thirty (30)
days; (v) fails to begin distributing substantial quantities of Licensed
Products by the Initial Marketing Date set forth in the Basic Provisions; or
(vi) sells or distributes any Licensed Products outside of the Territory or
outside of the approved distribution channels set forth in the Basic Provisions.
(b) Cure Period. This Agreement shall automatically terminate ten (10) days
-----------
after written notice by Licensor to Licensee of any breach or default by
Licensee in the performance of its obligations under this Agreement (other than
those set forth in subparagraph (a) unless such breach or default is cured
within such ten (10) day period; provided that if the nature of the breach or
default is such that it cannot reasonably be cured within such ten (10) day
period, then Licensee shall have an additional thirty (30) days to cure same if
Licensee commences the cure within the ten (10) day period and diligently
pursues same to completion. The additional thirty (30) day cure period shall not
apply to the breach or default by Licensee in the payment of Royalties or any
other monetary sums hereunder.
(c) Rights Upon Termination. Subject to the rights of Licensor to purchase
-----------------------
Licensee's inventory, as set forth below, upon termination (but not upon
expiration of the Term) of this Agreement, Licensee shall have the right to sell
inventory remaining on the date of termination, provided that: (i) a detailed
schedule of the inventory remaining on the date of termination and its location
is provided to Licensor within fifteen (15) days after the date of termination;
(ii) all such sales shall be duly accounted for and shall be subject to all
provisions of this Agreement, including, but not limited to, the furnishing of
Statements of Royalties and the payment of Royalties; (iii) all such inventory
is disposed of within ninety (90) days after the date of termination; and (iv)
no defective or unapproved Licensed Products may be sold. Licensee shall
immediately cease the manufacture of all Licensed Products on the date of
termination, except that any work-in-process may be completed at Licensee's
option, to fill orders taken prior to the date of termination, and such
work-in-process will be considered inventory for the purposes of this Paragraph.
Licensor shall have the option (but not the obligation) to purchase all or any
portion of the inventory of Licensed Products and/or raw materials remaining
upon termination (other than inventory necessary to fill existing orders) at
Licensee's actual cost of labor and materials. Licensor shall notify Licensee
within fifteen (15) days after receipt of the list of inventory required by this
Paragraph of its exercise of this option to purchase. Any Licensed Products
which are not disposed of in accordance with this Paragraph shall, immediately
upon expiration of the sell-off period, be turned over to Licensor, at no cost
to Licensor.
(d) At any time during the three (3) months preceding the expiration of the
Term (provided that Licensor has not duly exercised an option to renew),
Licensor or any new Licensee shall have the right to promote, advertise and take
orders for the Licensed Products.
(e) Any termination of this Agreement resulting from a breach or default by
Licensee shall not relieve Licensee from any obligations which accrued prior to
the date of termination or from the continuing obligation to pay GMR for the
balance of the Term. Notwithstanding the foregoing, the parties
-7-
<PAGE>
acknowledge that the breach by Licensee of this Agreement would cause
substantial damages to Licensor, including, but not limited to, loss of
"presence" in the marketplace while a successor or replacement Licensee is
located, and that the extent of such damages would be difficult and impractical
to ascertain. Accordingly, it is agreed that if Licensor terminates this
Agreement as a result of Licensee's breach, then Licensor shall be entitled to
recover from Licensee, as liquidated damages (in lieu of any recovery for
royalties or payments of GMR but not in limitation of any other remedies which
Licensor may have as a result of such breach) an amount equal to the greater of
(i) twelve (12) times the monthly GMR applicable on the date of termination; or
(ii) twelve (12) times the highest actual Royalties earned during any of the six
(6) months immediately preceding the month in which the Agreement is terminated.
The parties agree that under the circumstances existing on the date of this
Agreement the foregoing sum is a fair and reasonable estimate of Licensor's
damages resulting from Licensee's breach and that this sum is intended to
qualify as liquidated damages pursuant to California Civil Code ss.1671.
10. INDEMNIFICATION AND INSURANCE.
-----------------------------
(a) Licensee agrees to indemnify, defend and hold Licensor and its
shareholders, officers, directors, parents, subsidiaries and agents free and
harmless from and against any and all claims, demands, actions, causes of
action, lawsuits, judgments, costs, expenses and other liabilities of every
nature, including attorneys' fees, arising from (i) Licensee's manufacture,
sale, distribution, advertising or promotion of the Licensed Products including,
without limitation, any product liability claims or any chargebacks or credits
claimed by any customer, vendor, factor or creditor of Licensee, and (ii) the
breach or inaccuracy of any of Licensee's warranties or representations
contained in this Agreement. Licensor agrees to indemnify, defend and hold
Licensee and its shareholders, officers, directors, parents, subsidiaries and
agents free and harmless from and against any and all claims, demands, actions,
causes of action, lawsuits, judgments, costs, expenses and other liabilities of
every nature, including attorneys' fees, arising from the breach or inaccuracy
of any of Licensor's representations or warranties contained in this Agreement.
The foregoing indemnification provisions shall survive the termination of this
Agreement.
(b) Licensee shall obtain and maintain at its sole cost and expense
throughout the Term standard product liability insurance from a reputable
licensed insurance company reasonably acceptable to Licensor, naming Licensor as
additional insured, which policy shall provide protection against any and all
claims for injuries or property damage arising out of defects in the Licensed
Products. The minimum amount of coverage shall be Three Million Dollars
($3,000,000.00) combined single limit for bodily injury and/or for property
damage, plus a Two Million Dollar ($2,000,000.00) umbrella policy. The policy
shall provide for ten (10) days notice to Licensor from the insurer in the event
of any modification, cancellation or termination. Licensee agrees to furnish
Licensor with a certificate of insurance naming Licensor as additional insured
within ten (10) days after execution of this Agreement and upon each renewal of
insurance coverage.
11. REPRESENTATIONS AND WARRANTIES.
------------------------------
(a) Representations of Licensee. Licensee represents as follows:
---------------------------
-8-
<PAGE>
(i) [If Licensee is a corporation] Licensee has been duly incorporated
and organized and is validly existing in good standing under the laws of
the jurisdiction in which it was incorporated.
[If Licensee is a partnership] Licensee is a partnership (either
general or limited, as described in the Basic Provisions) duly formed
and existing under the laws of the jurisdiction in which it was
formed.
(ii) Licensee is duly qualified to do business in all jurisdictions
within the Territory which require such qualification to conduct the
business to be conducted by Licensee under this Agreement.
(iii) Licensee has corporate (or partnership, as applicable) power and
authority to enter into and perform this Agreement.
(iv) This Agreement has been duly authorized by all necessary
corporate (or partnership, as applicable) action on the part of Licensee
and has been duly executed and delivered by Licensee.
(v) Licensee has entered into no other agreement or contract, and is
not subject to any order, decree or ruling, which would prohibit Licensee
from performing its obligations under this Agreement.
(vi) Licensee has adequate capital to finance the business
contemplated by this Agreement and has adequate production resources to
fulfill its obligations hereunder.
(b) Representations of Licensor. Licensor represents as follows:
---------------------------
(i) Licensor has been duly incorporated and organized and is validly
existing in good standing under the laws of the State of Nevada.
(ii) Licensor has Corporate power and authority to enter into and
perform this Agreement.
(iii) This Agreement has been duly authorized by all necessary
corporate action on the part of Licensor and has been duly executed and
delivered by Licensor.
(iv) Licensor is the lawful owner of the Trademarks and has the right,
power and authority to grant the rights granted to Licensee hereunder.
(v) Licensor has entered into no other agreement or contract and is
not subject to any order, decree or ruling, which would prohibit Licensor
from performing its obligations under this Agreement.
12. OPTIONS TO EXTEND TERM. Licensee must exercise its options to extend
----------------------
the Term by delivering written notice thereof to Licensor not later than six (6)
months prior to the expiration of the Term, or any extension of the Term.
Notwithstanding anything herein to the contrary, Licensee shall have no right to
exercise any option to extend the Term if (a) at the time of purported exercise
of an option, Licensee is in default under this Agreement, or (b) during any
Year of the Term, including any option period, Licensee received more than two
notices of default from Licensor, regardless of whether such defaults were
cured.
-9-
<PAGE>
13. SUBLICENSING AND ASSIGNMENT.
---------------------------
(a) Licensee's rights under this Agreement may not be sublicensed without
the prior written consent of Licensor, which consent may be granted or withheld
in the sole and absolute discretion of Licensor. Approval of one sublicense
shall not be deemed an approval of any other sublicense.
(b) Licensee shall have no right or power to assign this Agreement, or any
interest therein, nor may this Agreement or any interest therein be assignable
by operation of law, or otherwise, without the prior written consent of
Licensor, which may be granted or withheld in the sole and absolute discretion
of Licensor. An assignment shall be deemed to have occurred in the event that
fifty percent (50%) or more of the ownership interests (which means shares if
Licensee is a corporation, or general partnership interests if Licensee is a
partnership) of Licensee shall be sold or otherwise transferred to any person or
entity who does not hold an ownership interest as of the date that this
Agreement is executed.
(c) Any assignment or sublicensing (or attempt to do either of the
foregoing) by Licensee without the prior written consent of Licensor shall be
null and void and of no force or effect and shall also constitute grounds for
immediate termination as provided in Paragraph 9(a) of this Agreement. No
approved assignment or sublicensing shall release Licensee from any of its
obligations hereunder, unless a release of liability is expressly agreed upon in
writing by Licensor.
14. GENERAL PROVISIONS.
------------------
(a) Disclaimer of Agency; Not a Franchise. This Agreement does not
-------------------------------------
constitute either party the agent of the other, or create a partnership or joint
venture between the parties, and neither Licensor nor Licensee shall have any
power to obligate or bind the other in any manner whatsoever. This Agreement
does not constitute a franchise.
(b) Governmental Compliance. Licensee agrees to comply, at its own expense,
-----------------------
with all laws, ordinances, rules, regulations, and other requirements of all
governmental authorities and agencies having jurisdiction over Licensee relating
to the manufacture, sale, distribution and advertising of the Licensed Products
or any of Licensee's other activities pursuant to this Agreement. Licensee
agrees that all Licensed Products shall be of good and merchantable quality,
free from all defects, and free from any materials or substances which may be
harmful or dangerous to human beings. Proof of compliance with the provisions of
this Paragraph shall be furnished by Licensee to Licensor upon demand.
(c) Notices. All notices required or permitted to be given pursuant to this
-------
Agreement shall be in writing, and shall be delivered either personally, by
overnight delivery service or by U.S. certified or registered mail, postage
prepaid, return-receipt requested and addressed to the parties at their
respective addresses as they appear below their respective signatures hereon.
Notices may also be given by facsimile transmission to the facsimile telephone
numbers which appear below the parties' respective signatures hereon, provided
that a copy of the notice is also sent by one of the other above-described
methods of service. The parties may change their addresses or facsimile
telephone numbers for notice by giving notice of such change in accordance with
this Paragraph. Notices sent by overnight delivery service shall be deemed
received on the business day following the date of deposit with the delivery
service. Mailed notices shall be deemed
-10-
<PAGE>
received upon the earlier of the date of delivery shown on the return-receipt,
or the second business day after the date of mailing. Notices sent by facsimile
transmission shall be deemed served on the date of transmission, provided that
is during regular business hours, otherwise on the next business day.
(d) Construction; Jurisdiction. This Agreement has been executed in and is
--------------------------
to be performed in the State of California, and this Agreement shall be
interpreted in accordance with the laws of the State of California. The parties
hereby submit to the jurisdiction of all state and federal courts in the State
of California, County of Los Angeles.
(e) Benefit. This Agreement shall be binding upon and inure to the benefit
-------
of the parties hereto, and their respective heirs, assigns, successors-in-
interest, and legal representatives, subject to the restrictions on assignment
set forth herein.
(f) Amendments. This Agreement may not be amended, modified or altered
----------
except by a written instrument executed by all parties hereto.
(g) Entire Agreement. Neither of the parties has made any representations,
----------------
warranties, covenants or promises relating to the subject matter of this
Agreement except as set forth herein, and any prior agreements or understandings
not specifically set forth herein shall be of no force or effect. This Agreement
constitutes the entire agreement of the parties relative to the subject matter
hereof.
(h) Invalidity. If any provision of this Agreement is declared by a court
----------
of competent jurisdiction to be invalid or unenforceable, the remaining
provisions hereof shall nevertheless be given full force and effect.
(i) Captions and Exhibits. Captions are for convenience only and shall not
---------------------
be considered in interpreting any of the provisions hereof. All exhibits and
addenda attached hereto are incorporated herein by reference.
(j) Gender; Number. As used herein, the masculine, feminine or neuter
--------------
gender, and the singular or plural number, shall each be deemed to include the
others whenever the context so indicates.
(k) Attorneys' Fees. Should either party be required to bring legal action
---------------
(including arbitration) to enforce its rights under this Agreement, the
prevailing party in said action shall be entitled to recover from the losing
party its reasonable attorneys' fees and costs in addition to any other relief
to which he is entitled. Such recovery of attorneys' fees shall include any
attorneys' fees incurred in connection with any bankruptcy or reorganization
proceeding, including stay litigation. The parties further agree that any
attorneys' fees incurred in enforcing any judgment are recoverable as a separate
item, and that this provision is intended to be severable from the other
provisions of this Agreement, shall survive the judgment, and is not to be
deemed merged into the judgment. Licensee also agrees to reimburse Licensor in
the sum of Three Hundred Dollars ($300) for attorneys' fees incurred in
connection with the sending of any notice of breach or default, whether or not
such breach or default is cured.
(l) Arbitration. Any controversy or claim arising out of or relating to
-----------
this Agreement, or breach thereof, shall be settled by binding arbitration in
Los Angeles, California, in accordance with the Commercial Arbitration Rules of
the American Arbitration Association then in effect, and judgment upon the award
rendered by the arbitrator(s) may be entered in any court of competent
jurisdiction. Notwithstanding
-11-
<PAGE>
the foregoing, nothing herein shall prohibit Licensor from applying to a court
of competent jurisdiction for any appropriate injunctive relief. The cost of
arbitration shall be borne by the losing party, or, if there is no losing party,
as the arbitrator(s) shall determine.
In any arbitration proceedings relative to this Agreement, or breach
thereof, all parties shall have the right to take depositions and to obtain
discovery regarding the subject matter of the arbitration pursuant to California
Code of Civil Procedure Section 1283.05, or any successor statute.
Service of any Petition to confirm or vacate the Arbitration award and
Notice of Hearing thereon may be made by certified or registered mail,
return-receipt requested, or by personal delivery.
The arbitrator'(s) award may be limited to a statement that one party pay
to the other a sum of money. The arbitrator(s) will not be deemed to exceed
their powers (per California Code of Civil Procedure Sections 1286.2 or 1286.6)
by committing an error of law or legal reasoning, it being agreed that the
decision of the arbitrator(s) shall be final and unreviewable for error of law
or legal reasoning of any kind.
(m) Counterparts. This Agreement may be executed in one (1) or more
------------
counterparts, each of which shall be deemed to be an original, but all of which
together shall constitute one (1) and the same instrument.
(n) Waiver. The failure of any party, at any time, to require timely
------
performance by any other party of any provision of this Agreement shall not
affect such party's rights thereafter to enforce the same, nor shall the waiver
by any party of any breach of any provision of this Agreement, whether or not
agreed to in writing, be taken or held to be a waiver of the breach of any other
provision or a waiver of any subsequent breach of the same provision of this
Agreement. No extension of time for the performance of any obligation or act
hereunder shall be deemed to be an extension of time for the performance of any
other obligation or act hereunder.
(o) Additional Acts. The parties agree to perform such further acts and to
---------------
execute, acknowledge and deliver such documents as may be necessary to
effectuate the provisions of this Agreement.
(p) Confidentiality. The parties agree that the provisions of this
---------------
Agreement shall be and remain confidential and shall not be disclosed by either
party to any other person or entity, except (i) as may be required by court
order or other legal process, or (ii) as may be required for the legitimate
conduct of a party's business, such as a disclosure to a party's attorneys,
accountants or other representatives, but only to the extent necessary for the
foregoing purposes. Each of the parties shall take reasonable precautions to
prevent any further disclosure by such party's employees and such party's
representatives to whom disclosure is permitted pursuant to this Paragraph.
-12-
<PAGE>
ADDENDUM TO LICENSE AGREEMENT
-----------------------------
THIS ADDENDUM TO LICENSE AGREEMENT ("Addendum") is attached to and made a
part of that certain License Agreement dated as of June 1, 1995 ("Agreement")
between B.U.M. INTERNATIONAL, INC., a Nevada Corporation ("Licensor") and HAPPY
KIDS LTD., a New York Corporation ("Licensee"). Capitalized terms used in this
Addendum shall have the same meaning as set forth in the Agreement, unless
otherwise provided herein. In the event of any conflict or inconsistency between
the provisions of the Agreement and the provisions of this Addendum, the
provisions of this Addendum shall control.
1. Paragraph 1(b): The following language is hereby inserted at the end of
--------------
the last sentence: "but not otherwise within the Territory."
2. Paragraph 2(b): The Advance shall be applied against the monthly
--------------
payments of GMR through December 31, 1995, and no additional payments of GMR
shall be due or payable during that time period. The balance of the GMR payable
for the first year of the Term *** shall be payable in twelve (12) consecutive
equal monthly installments of *** commencing on January 1, 1996 and continuing
thereafter on the first day of each succeeding calendar month through and
including December 31, 1996.
3. Paragraph 2(c): The words "(but not cash discounts)" in the second
--------------
sentence is hereby deleted.
4. Paragraph 2(d): The Statement of Royalties shall be due on the 20th day
--------------
of each month during the Term. The word "reasonably" is hereby inserted before
the word "designated" in the fourth line.
5. Paragraph 2(e): The words "Concurrently with" in the first line are
--------------
hereby deleted and replaced with the words "Within seven (7) days after the".
The word "reasonably" is hereby inserted before the word acceptable in the
second line.
6. Paragraph 3: The following sentence is added at the end of the
-----------
paragraph: "Notwithstanding the foregoing, Licensor shall not have the right to
terminate the Agreement as a result of the failure of Licensee to meet the
Minimum Net Sales Requirements during any Year if Licensee has (a) paid the full
GMR for that Year, and (b) Licensee has generated Net Sales equal to at least
eighty percent (80%) of the Minimum Net Sales Requirements."
7. Paragraph 4(a): Licensor's inspection and audit rights shall be
--------------
exercised no more frequently than one (1) time each Year. The words "two percent
(2%)" in the last sentence are hereby deleted and replaced with the words "five
percent (5%)".
*** Confidential portion omitted and filed separately with the Securities and
Exchange Commission.
<PAGE>
8. Paragraph 6(c): The words "eighty-five percent (85%)" are hereby deleted
--------------
and replaced with the words "eighty percent (80%)".
9. Paragraph 6(e): The entire Paragraph is hereby deleted and the following
--------------
is inserted in its place: "Throughout the Term, Licensee shall maintain accurate
and complete records containing the names and addresses of all facilities at
which the Licensed Products are manufactured and stored. In the event that
Licensor reasonably determines that just cause exists (i.e., as a result of
counterfeiting or other Trademark infringement, diversion of the Licensed
Products from the approved channels of distribution, quality control problems
with the License Products, or similar circumstances) Licensee shall disclose as
reasonably necessary the identity of such facilities to Licensor and shall
cooperate with Licensor to arrange for access thereto by Licensor or its
representatives for the limited purpose of remedying the problem. Any such
information disclosed to Licensor by Licensee shall be treated as confidential.
10. Paragraph 6(f): The entire Paragraph is hereby deleted and the
--------------
following is inserted in its place: "Licensee shall not manufacture, sell or
distribute any other products which are directly competitive with the Licensed
Products. Within ten (10) days of receipt of notice from Licensor that Licensor
has determined that any products being manufactured, sold or distributed by
Licensee are, in Licensor's reasonable opinion, directly competitive with the
Licensed Products, Licensee shall immediately discontinue the manufacture, sale
or distribution thereof. Without limiting the generality of the foregoing,
Licensee agrees that it will not copy the designs of any Licensed Products or
offer for sale any products which are substantially similar in design to the
Licensed Products."
11. Paragraph 6(i): The words "that bear any of the Trademarks" are hereby
--------------
inserted after the word "merchandise" in the first line.
12. Paragraph 6(j): The first sentence is hereby deleted and the following
--------------
is inserted in its place: "Licensee agrees, upon request of Licensor, and
subject to availability, to sell Licensed Products to Licensor Retail Stores, on
standard trade terms, at the lower of (i) Licensee's wholesale line price less
twenty-five percent (25%), or (ii) the lowest price at which Licensee has
offered such Licensed Products for sale to independent retailers, other than as
seconds, irregulars or close-outs.
13. Paragraph 6(k): The words "all major" in the first sentence are hereby
--------------
deleted and the words "the M.A.G.I.C." are hereby inserted in their place. The
word "direct" is hereby inserted before the word "costs" in the second sentence.
The following sentence is hereby added at the end of the Paragraph: "Licensee
shall be permitted to participate in such trade show separately from Licensor,
as long as it also participates jointly with Licensor".
14. Paragraph 6(m): The following words are added at the end of the
--------------
Paragraph: "which shall include, without limitation, its costs, pricing and
sources of new materials and/or production".
15. Paragraph 6(p): The following new Paragraph: 6(p) is added to the
--------------
Agreement: "(p) Licensor shall make available to Licensee, upon request of
Licensee, ideas, designs, and other information relative to the manufacture,
sale and distribution of Licensed Products developed by Licensor or derived from
other licensees of Licensor (domestic and international). Licensor makes no
representations that any such
- 2 -
<PAGE>
ideas, designs or information will in fact be developed and nothing herein shall
be deemed to require Licensor to create any designs for Licensee, such being the
sole responsibility of Licensee."
16. Paragraph 8(b): The word "reasonably" is hereby inserted before the
--------------
word "designate".
17. Paragraph 8(c): The following language is hereby added after the fourth
--------------
sentence: "Licensor shall notify Licensee within thirty (30) days after being
informed by Licensee of the institution of legal action against Licensee and/or
of becoming aware of any counterfeiting or infringing of the Trademarks, as to
whether Licensor will defend the legal action or institute its own action or
take such other steps to protect the Trademarks."
18. Paragraph 8(g): The following sentence is added at the end of the
--------------
Paragraph: "Licensor shall not take any action which damages the reputation of
Licensee or which reflects negatively upon the Licensee, the Trademarks or the
Licensed Products."
19. Paragraph 8(h): The following new Paragraph 8(h) is added to the
--------------
Agreement "(h) In the event that Licensor changes the marketing direction of the
Trademarks, including a material or substantive change in permitted retail
outlets, Licensor shall endeavor to give Licensee reasonable advance notice of
such change."
20. Paragraph 9(a): The words "regularly and repeatedly" are hereby
--------------
inserted before the word "manufactures" in the third line. The words "thirty
(30)", in both places where they appear in subparagraph (iv) only, are hereby
replaced with the words "sixty (60)".
21. Paragraph 9(b): The words "ten (10)", in all places which they appear,
--------------
are hereby replaced with the words "thirty (30)".
22. Paragraph 9(c): The words "(but not upon expiration of the Term)" in
--------------
the second line are hereby deleted. The words "including, without limitation,
work in process" are hereby added after the word "inventory" in the third line.
The words "fifteen (15)" in the fifth line are hereby deleted and replaced with
the words "thirty (30)". The words "ninety (90)" in the seventh line are hereby
deleted and replaced with the words "one hundred eighty (180)". The words "or
otherwise reasonably anticipated as of that date" are hereby inserted after the
word "termination" in the eleventh line.
23. Paragraph 9(e): The third sentence is hereby deleted and replaced with
--------------
the following: "Accordingly, it is agreed that if Licensor terminates this
Agreement as a result of Licensee's breach, beyond any applicable notice and/or
cure period, then Licensor shall be entitled to recover from Licensee, as
liquidated damages (in lieu of any recovery for future Royalties or payments of
GMR, but not in limitation of any other remedies which Licensor may have as a
result of such breach, including recovery of Royalties due through the
termination date) the sum of Five Hundred Thousand Dollars ($500,000).
24. Paragraph 9(f): The following new Paragraph 9(f) is hereby added to the
--------------
Agreement: "Licensee may, at any time during the Term, terminate the Agreement
by giving at least six (6) months advance notice to Licensor, accompanied by a
"termination fee" in the amount of Five Hundred Thousand Dollars ($500,000). In
such event, the Agreement shall terminate on the date set forth in the notice as
if the
-3-
<PAGE>
Term had expired on that date (it being understood that the provisions of
Paragraph 9(c) shall apply in such event and Licensee shall remain liable for
all Royalties due through the termination date)."
25. Paragraph 12: The word "two" is hereby deleted and the word "four (4)
------------
is hereby inserted in its place.
26. Paragraph 13(d): The following new Paragraph 13(d) is hereby added to
---------------
the Agreement: "Notwithstanding the foregoing, Licensee may, without Licensor's
prior consent, enter into sublicenses and/or assign this Agreement to a parent
or wholly-owned subsidiary of Licensee, or to an affiliate of Licensee which is
owned by the current shareholders of Licensee (and/or their spouses and/or their
children and/or any bona fide estate planning trust or similar device), provided
that Licensee shall notify Licensor of each such sublicense and assignment, and
provided further that such assignment or sublicense shall not release Licensee
from liability under the Agreement."
27. Paragraph 14(c): The word "second" in the next-to-last sentence is
---------------
hereby deleted and the word "third" is inserted in its place.
28. Paragraph 14(o): The word "reasonably" is hereby inserted before the
---------------
word "necessary".
29. Paragraph 14(q): The following new Paragraph 14(q) is hereby added to
---------------
the Agreement: "(q) Except as otherwise specifically provided herein, all
consents or approvals required of Licensor pursuant to this Agreement, shall not
be unreasonably withheld or delayed. If Licensor shall fail, for any reason, to
disapprove in writing (with the reason(s) for such disapproval) within ten (10)
business days after request for such consent or approval by Licensee (on forms
specified by Licensor, when applicable); then, notwithstanding any provision
herein requiring prior written approval, Licensor shall be deemed to have given
written approval or consent to such request.
30. Paragraph l4(r): The following new Paragraph 14(r) is hereby added to
---------------
the Agreement:
"(i) Neither party hereby shall be liable to the other for delay in
any performance or for the failure to render any performance under the
Agreement when such delay or failure is by reason of any cause or causes
beyond its reasonable control, including, without limitation, any present
or future statute, law, ordinance, regulation, order, judgment or decree,
government-imposed quota, act of God, earthquake, epidemic, explosion,
lockout, boycott, strike, riot, war or armed conflict (whether or not there
has been an official declaration of war or official statement as to the
existence of a state of war), or act of a public enemy. The party claiming
to be so effected shall give notice to the other party promptly after it
learns of the occurrence of said event and of the adverse results thereof.
Such notice shall set forth the nature and the extent of the event. The
delay or failure shall not be excused unless such notice is so given.
-4-
<PAGE>
(ii) Anything to the contrary contained herein notwithstanding, the
provisions of this Paragraph 14(r) shall not apply to Licensee's
obligations to make any payment of Royalties (including payments of GMR) or
any other monetary payments to Licensor required under the Agreement.
(iii) Anything to the contrary contained herein notwithstanding, in
the event that the circumstances under which Paragraph 14(r) shall apply
shall occur, to wit, there should be a condition requiring reference to
this "force majeure" provision, then, either party, on no less than sixty
(60) days' prior written notice to the other, effective as of the end of
nine (9) months from the commencement of the event of "force majeure", may
terminate this Agreement, provided that within such notice period, the
event of "force majeure" shall not have ended.
(iv) Should there be an event of "force majeure", unless this
Agreement is terminated pursuant to subparagraph (iii), then the particular
Year during which such event occurs, and each subsequent Year shall be
deemed automatically extended for the period of such "force majeure", and
the Term shall be similarly extended for a like period.
31. Licensee shall have a "right of first negotiation" with respect to
extending this Agreement to include boys sizes 7-14 and girls sizes 8-20. Before
Licensor offers any other person or entity (except for John M. Fulmer Co., which
has already been granted a "right of first negotiation" by Licensor and which is
prior and superior to Licensee's "right of first negotiation" granted herein)
the right to enter into a license for such products, it will extend such offer
to Licensee on the same terms and conditions. Licensee will have ten (10) days
after receipt of such offer to accept or reject same, and if not accepted within
such time period, then this "right of first recognition" shall terminate and
Licensor shall be free to offer such license to any other person or entity as
long as the terms and conditions are not materially more favorable to the
offeree.
32. Licensee shall reimburse Licensor for the reasonable expenses incurred
for two (2) trips to New York each Year for Licensor's Vice President of
Licensing (or comparable officer) to meet with Licensee and to verify that
Licensee is performing its obligations under the Agreement. Such reimbursable
costs include airfare (business class), lodging, local transportation, meals and
incidental expenses, and shall be reimbursed by Licensee to Licensor within ten
(10) days after demand, accompanied by appropriate documentation.
33. Licensor acknowledges that Licensee presently manufactures and
distributes products for OP, Jordache, Disney, McKids and Byoboy, which may be
similar in design to the Products to be manufactured and distributed under the
Agreement, and Licensor agrees that Licensee may continue to manufacture and
sell such products or similar products (including, without limitation, private
label products) without being deemed to have violated the "non-competition"
provisions (Paragraph 6(f)) of the Agreement.
-5-
<PAGE>
34. The Minimum Net Sales requirements shall be satisfied only if the Net
Sales in the following categories are approximately equal to the specified
percentages of total Net Sales:
CATEGORY PERCENTAGE OF NET SALES
-------- -----------------------
Infant/Newborn ***
Toddlers ***
Boys sizes 4-7/Girls sizes 4-6x ***
35. Licensee agrees that it will, upon request, fully cooperate with
Licensor's international licensees to allow such international licenses to
utilize Licensee's overseas offices to supervise or facilitate production of
Product.
36. Licensor represents to Licensee that it has applied to the U.S. Patent
and Trademark Office for registration of the Trademark "Mini B.U.M."
(application Serial No. 74/341,509) but that as of this date said Trademark has
not been registered. Licensor will use best efforts to effectuate the
registration of said Trademark, but Licensor makes no guarantee to Licensee that
said Trademark will be registered. Licensor shall have no liability to Licensee
relating in any way to the inability of Licensor to obtain such registration.
37. Licensee may offset any GMR or Royalty payments against any outstanding
amounts then owed by Licensor to Licensee resulting from retail purchases by
Licensor of Licensed Products from Licensee (based upon orders actually shipped
by Licensee to Licensor). Licensor may credit against Royalties owing by
Licensee to Licensor under this Agreement any amounts owned by Licensor to
Licensee which result from retail purchases by Licensor of Licensed Products
from Licensee.
IN WITNESS WHEREOF, the parties have executed this Addendum on the date
first above written.
"LICENSOR" "LICENSEE"
B.U.M. INTERNATIONAL, INC., a Nevada HAPPY KIDS LTD., a New York Corporation
Corporation
By /s/ ILLEGIBLE By /s/ Jack M. Benun
------------------------------- ------------------------------------
Its Jack M. Benun, President
-------------------------------
*** Confidential portion omitted and filed separately with the Securities and
Exchange Commission.
-6-
<PAGE>
FIRST AMENDMENT TO LICENSE AGREEMENT
------------------------------------
THIS FIRST AMENDMENT TO LICENSE AGREEMENT ("Amendment") is made and entered
into as of the 1st day of September, 1995, by and between B.U.M. INTERNATIONAL,
INC., a Nevada Corporation ("Licensor") and HAPPY KIDS LTD., a New York
Corporation ("Licensee").
RECITALS
--------
A. Licensor and Licensee entered into a License Agreement ("Agreement")
dated as of June 1, 1995 with respect to the manufacture, sale and distribution
of certain items of apparel bearing the b.u.m. equipment(R), Li'L B.U.M.(R),
Little B.U.M.(R), Baby B.U.M.(R) and Mini B.U.M.(TM) Trademarks.
B. The parties desire to amend the Agreement as provided herein.
NOW, THEREFORE, in consideration of the premises and the mutual covenants
set forth herein, the parties agree as follows:
1. The definition of Trademarks is hereby amended to specifically include
the federally registered Trademark "B.U.M. SPORT(R)" Registration No. 1,794,325.
2. The definition of Licensed Products is hereby amended to include Girls
apparel, sizes 7-14, ***
3. There will be separate GMR and Minimum Net Sales Requirements for the
Girls sizes 7-14 Product Category, as follows:
<TABLE>
<CAPTION>
Minimum Net
Year GMR Sales Requirements
---- --- ------------------
<S> <C> <C>
1 *** ***
2 *** ***
3 *** ***
4 (Option) *** ***
5 (Option) *** ***
6 (Option) *** ***
7 (Option) *** ***
8 (Option) *** ***
9 (Option) *** ***
</TABLE>
The payments of GMR for the first Year shall commence as of September 1,
1995 *** subject to the provisions of Paragraph 5 of this Amendment.
If Licensee fails to meet GMR or Minimum Net Sale Requirements for the
Girls sizes 7-14 Product Category during any Year of the Term, then Licensor
shall have the option to terminate said Product Category, but Licensor may not
otherwise declare Licensee to be in default under the Agreement or to terminate
the entire Agreement as a result of the failure of Licensee to meet the GMR or
Minimum Net Sales Requirements for such Product Category. Nothing herein shall
be deemed to restrict Licensor's rights under the Agreement if Licensee breaches
any other provision of the Agreement with respect to the Girls sizes 7-14
Product Category. If Licensor exercises it option to terminate the Girls sizes
7-14 Product Category as provided above prior to the end of the Term, then
Licensor shall be entitled to recover from Licensee, as
*** Confidential portion omitted and filed separately with the Securities and
Exchange Commission.
<PAGE>
liquidated damages, the sum of One Hundred Eighty Thousand Dollars ($180,000).
If Licensor terminates the entire Agreement pursuant to Paragraph 9(e) of the
Addendum to the License Agreement, then the amount of liquidated damages payable
to Licensor by Licensee shall be Six Hundred Eighty Thousand Dollars ($680,000),
instead of Five Hundred Thousand Dollars ($500,000).
4. Notwithstanding the Minimum Net Sales Requirements for the Girls sizes
7-14 Product Category as set forth in Paragraph 3 of this Amendment, the Net
Sales of Girls sizes 7-14 apparel bearing the "B.U.M. SPORT(R)" Trademark during
each Year of the Term shall not be less than the following amounts:
<TABLE>
<CAPTION>
Year Minimum Net Sales
---- -----------------
<S> <C>
1 ***
2 ***
3 ***
4 (Option) ***
5 (Option) ***
6 (Option) ***
7 (Option) ***
8 (Option) ***
9 (Option) ***
</TABLE>
5. An additional Advance in the amount of *** shall be due in connection
with this Amendment, payable *** upon execution hereof and the balance shall be
paid not later than December 31, 1995. The additional Advance shall be applied
against the Installments of GMR for the Girls sizes 7-14 Product Category due
for the months of September 1995 through November, 1996 (with *** credited
against the GMR due on December 1, 1996).
6. In addition to the payment of Royalties, Licensee shall pay to Licensor
an amount equal to *** of Licensee's Minimum Net Sales Requirements (for the
entire Girls sizes 7-14 Product Category only) during each Year of the Term, to
be used by Licensor for advertising and promotion of the Trademarks. Such fee
shall be paid monthly concurrently with the payment of GMR.
7. Capitalized terms used In this Amendment shall have the same meanings as
set forth in the Agreement, unless specified otherwise herein.
8. In all other respects, the Agreement shall remain in full force and
effect as originally written.
IN WITNESS WHEREOF, the parties have executed this Amendment as of the date
first above written.
"LICENSOR" "LICENSEE"
B.U.M. INTERNATIONAL, INC., a Nevada HAPPY KIDS LTD., a New York
Corporation Corporation
By [ILLEGIBLE] By /s/ Jack M. Benun
----------------------------------- --------------------------------
Its Jack M. Benun, President
----------------------------------
*** Confidential portion omitted and filed separately with the Securities and
Exchange Commission.
-2-
<PAGE>
SECOND AMENDMENT TO LICENSE AGREEMENT
-------------------------------------
THIS SECOND AMENDMENT TO LICENSE AGREEMENT ("Amendment") is made and
entered into as of the 1st day of October, 1997, by and between B.U.M.
INTERNATIONAL, INC., a Nevada Corporation ("Licensor") and HAPPY KIDS LTD., a
New York Corporation ("Licensee").
RECITALS
--------
A. Licensor and Licensee entered into a License Agreement (as
amended, the "Agreement") dated as of June 1, 1995 with respect to the
manufacture, sale and distribution of certain items of apparel bearing the
b.u.m. equipment(R), Li'L B.U.M.(R), Little BUM(R), Baby B.U.M.(R) and Mini
B.U.M.(TM) Trademarks. The Agreement was amended by a First Amendment to License
Agreement dated as of September 1, 1995 (the "First Amendment").
B. The parties desire to further amend the Agreement as provided
herein.
NOW, THEREFORE, in consideration of the premises and the mutual
covents set forth herein, the parties agree as follows:
1. Concurrently herewith, Licensor and Licensee have entered into
another License Agreement for boys (sizes 8-20) sportswear (the "Boys License
Agreement"). It is agreed that any default under the Boys License Agreement,
beyond any applicable notice, grace and/or cure period, shall be deemed a
default under the Agreement. Notwithstanding the foregoing, if Licensee promptly
pays the amount set forth in Paragraph 8(e) of the Boys License Agreement, as
liquidated damages, the Agreement shall not be deemed to be in default. Further,
if Licensee defaults hereunder but promptly pays the amount set forth in
Paragraph 23 of the Addendum to the Agreement, as modified by Paragraph 3 of the
First Amendment, as liquidated damages, the Boys License Agreement shall not be
deemed to be in default.
2. In the event that the Minimum Net Sales Requirements under both the
Agreement and the Boys License Agreement are equalled or exceeded during any
Year, then for that Year, the Royalty Rate applicable to such excess Net Sales
shall be as follows: *** of Net Sales in excess of the cumulative Minimum Net
Sales Requirements of both the Agreement and the Boys License Agreement and up
to *** of cumulative Net Sales, plus *** of Net Sales in excess of *** of
cumulative Net Sales.
3. Licensee is hereby granted a third option to extend the term of
the Agreement for a period of three (3) Years (from January 1, 2005 through
December 31, 2007). The GMR and Minimum Net Sales Requirements during the third
option period shall be as follows:
<TABLE>
<CAPTION>
Newborns, Infants, Toddlers
Boys (Sizes 4-7) and Girls (Sizes 4-6x)
---------------------------------------
Year GMR Minimum Net Sales
---- --- -----------------
<S> <C> <C>
10 (option period) *** ***
11 (option period) *** ***
12 (option period) *** ***
</TABLE>
*** Confidential portion omitted and filed separately with the Securities and
Exchange Commission.
<PAGE>
Girls (Sizes 7-14)
------------------
<TABLE>
<CAPTION>
Minimum Net Sales
Year GMR Minimum Net Sales (B.U.M. SPORT Only)
---- --- ----------------- -------------------
<S> <C> <C> <C>
10 (option period) *** *** ***
11 (option period) *** *** ***
12 (option period) *** *** ***
</TABLE>
4. The effectiveness of this Amendment is conditioned upon
Licensee concurrently executing the Boys License Agreement.
5. Capitalized terms used in this Amendment shall have the
same meanings as set forth in the Agreement, unless specified otherwise herein.
6. In all other respects, the Agreement, as amended by the
First Amendment, shall remain in full force and effect as originally written.
IN WITNESS WHEREOF, the parties have executed this Amendment as
of the date first above written.
"LICENSOR" "LICENSEE"
B.U.M. INTERNATIONAL, INC., a Nevada HAPPY KIDS LTD., a New York Corporation
Corporation
By /s/ [ILLEGIBLE SIGNATURE] By /s/ Jack M. Bernum
---------------------------- -----------------------------
Its Chairman CEO Jack M. Bernum, President
---------------------------
*** Confidential portion omitted and filed separately with the Securities and
Exchange Commission.
-2-
<PAGE>
HAPPY KIDS LTD.
100 WEST 33RD STREET, SUITE 1100
NEW YORK, NEW YORK 10011
As of October 1, 1997
VIA FACSIMILE (212) 764-7925
- ----------------------------
B.U.M. International, Inc.
1114 Avenue of the Americas
30th Floor
New York, New York 10036
Re: License Agreement Dated as of June 1, 1995 as
heretofore amended (the "Existing License
Agreement")
---------------------------------------------
Gentlemen:
In connection with the grant of a certain new license agreement dated as
of the date above written relative to boys (sizes 8-20) sportswear *** This is
to confirm that in consideration of and subject to B.U.M. International, Inc.
countersigning the second amendment license agreement and signing the new Boys
License Agreement, Happy Kids Ltd. as licensee, exercises the first option to
renew the term of the existing license agreement for the period January 1, 1999
through December 31, 2001.
Thank you for your cooperation.
Very truly yours,
HAPPY KIDS LTD.
By: /s/ Jack M. Benum
----------------------------
Jack M. Benum, President
cc: Larry Jacobs, Esq.
Bruce R. Greene, Esq.
*** Confidential portion omitted and filed separately with the Securities and
Exchange Commission.
<PAGE>
LICENSE AGREEMENT
(Domestic)
-------------
THIS LICENSE AGREEMENT ("Agreement") is made and entered into as of the 1st
day of October, 1997, by and between B.U.M. INTERNATIONAL, INC., a Nevada
Corporation ("Licensor") and HAPPY KIDS LTD., a New York Corporation
("Licensee").
BASIC TERMS
-----------
A. Trademarks. As used in this Agreement, the "Trademarks" mean the
----------
federally registered trademarks "b.u.m. equipment(R)" Registration Nos.
1,430,327, 1,697,485 and 1,765,172, and "B.U.M. SPORT(R)" Registration No.
1,794,325. The term "Trademarks" shall include any other trademarks now or
hereafter owned by Licensor, which incorporate the word "B.U.M." (with or
without periods between the letters).
B. Licensed Products. As used in this Agreement, the "Licensed Products"
-----------------
means boys (sizes 8-20) apparel, ***
C. Territory. As used in this Agreement, the "Territory" means the United
---------
States, its territories and possessions.
D. Term. The term of this Agreement commences as of October 1, 1997 (the
----
"Commencement Date") and ends on December 31, 2001, subject to earlier
termination or extension as provided herein (the "Term"). As used in this
Agreement, a "Year" means a calendar year, except that the first Year of the
Term shall commence on the Commencement Date and shall end on December 31, 1998.
E. Options to Extend. Licensee is hereby granted two (2) options to
-----------------
extend the Term of this Agreement for periods of three (3) Years each.
F. Guaranteed Minimum Royalties. Licensee agrees to pay to Licensor
----------------------------
Guaranteed Minimum Royalties ("GMR") in the following amounts for each Year of
the Term:
<TABLE>
<CAPTION>
Year GMR
---- ---
<S> <C>
1 (15 months) ***
2 ***
3 ***
4 ***
5 (option period) ***
6 (option period) ***
7 (option period) ***
8 (option period) ***
9 (option period) ***
10 (option period) ***
</TABLE>
*** Confidential portion omitted and filed separately with the Securities and
Exchange Commission.
<PAGE>
G. Royalties. Licensee agrees to pay Royalties (to the extent not paid as
---------
GMR) at the rate of *** of Licensee's Net Sales (as defined in this Agreement)
for Net Sales up to *** per Year, plus *** of Net Sales for Net Sales in excess
of *** and up to *** per Year, plus *** of Net Sales in excess of *** per Year.
H. Minimum Net Sales Requirements. During each Year of the Term of this
------------------------------
Agreement, Licensee must generate Net Sales equal to or in excess of the
following:
<TABLE>
<CAPTION>
Year Minimum Net Sales
---- -----------------
<S> <C>
1 (15 months) ***
2 ***
3 ***
4 ***
5 (option period) ***
6 (option period) ***
7 (option period) ***
8 (option period) ***
9 (option period) ***
10 (option period) ***
</TABLE>
I. Advance. A non-refundable Advance in the amount of Seventy-Five
-------
Thousand Dollars ($75,000) shall be payable upon execution of this Agreement.
J. Distribution Channels. Licensee agrees to sell Licensed Products only
---------------------
in the following channels of distribution: (1) "Upstairs" retailers, such as
national department stores and specialty stores, (2) "off-price" retailers,
including but not limited to, Ross Marshalls and retail stores of similar
quality, (3) "mid-tier" retailers, including, but not limited to, Sears, JC
Penney, Mervyn's and Montgomery Wards, and (4) the following "regional discount"
retailers: Bradlees, Caldor, Roses, Venture, Shopko, Meijers, Fred Meyer,
Parnida, and Target, and other retail stores of similar quality on a "case-by-
case" basis, as approved in the sole and absolute discretion of Licensor.
Licensee may also sell Licensed Products in any other channels of distribution
to which any other Major Licensee (as defined herein) is now or hereafter
permitted by Licensor to sell. Without limiting the foregoing, Licensee agrees
that it will not sell or distribute Licensed Products (a) to any person or
entity who does not sell at retail in the Territory, (b) to swap meets, flea
markets, parking lot sales, warehouse sales or similar sellers which maintain
minimum quality standards, (5) to any person or entity who Licensee knows or
reasonably suspects will re-sell the Licensed Products outside of the Territory
or through unapproved channels of distribution, including "jobbers". Licensor
may, in its absolute discretion, change (lower, but not higher) the distribution
channels at any time upon notice to Licensee. As used in this Paragraph J, the
term "Major Licensee" means those licensees of Licensor who are granted the
rights to sell men's, women's and children's sportswear,
*** Confidential portion omitted and filed separately with the Securities and
Exchange Commission.
- ii -
<PAGE>
which licensees are presently Dino di Milano Corporation, Trends Clothing
Corporation and Tahiti Apparel, respectively.
K. Initial Marketing Date. Licensee agrees to have shipped
----------------------
commercially reasonable quantities of Licensed Products no later than July 1,
1998.
L. Advertising Fee. Licensee agrees to pay to Licensor each Year
---------------
during the Term of this Agreement an Advertising Fee in an amount equal to the
greater of (1) *** of the Minimum Net Sales Requirements, or (2) *** of the
actual Net Sales. Payments equal to *** of one fourth (1/4) of the Minimum Net
Sales Requirements shall be payable concurrently with the quarter-annual
payments of GMR. To the extent that the actual Net Sales for any quarter exceeds
one-fourth (1/4) of the Minimum Net Sales Requirements for the Year, then
Licensee shall pay to Licensor an amount equal to *** of such excess
concurrently with the payment of Royalties for such quarter. Licensor shall
actively advertise and promote the Trademarks in the Territory during the Term,
using the Advertising Fee together with similar fees received from other
licensees.
M. Standard Terms and Conditions. The Standard Terms and Conditions
-----------------------------
attached to this Agreement are a part of this Agreement and are binding upon
the parties hereto.
The Basic Terms are set forth above for ease of reference, and are
qualified by reference to the Standard Terms and Conditions. The Agreement
consists of the Basic Terms, the Standard Terms and Conditions, and any exhibits
or addenda attached hereto.
BY ITS INITIALS HEREON, LICENSEE EXPRESSLY ACKNOWLEDGES THE PROVISIONS OF
PARAGRAPH 13(g) OF THE STANDARD TERMS AND CONDITIONS AND AGREES THAT EXCEPT AS
SET FORTH IN THE AGREEMENT, NEITHER LICENSOR NOR ANY OF ITS EMPLOYEES, AGENTS OR
REPRESENTATIVES HAVE MADE ANY PROMISES OR REPRESENTATIONS TO LICENSEE CONCERNING
THE SUBJECT MATTER OF THIS AGREEMENT AND THAT ANY PROMISES OR REPRESENTATIONS
NOT EXPRESSLY SET FORTH IN THE AGREEMENT ARE OF NO FORCE OR EFFECT.
----------
LICENSEE'S
INITIALS
///
///
///
///
///
///
///
///
///
*** Confidential portion omitted and filed separately with the Securities and
Exchange Commission.
-iii-
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement on the date
first above written.
<TABLE>
<S> <C>
"LICENSOR" "LICENSEE"
B.U.M. INTERNATIONAL, INC., a Nevada HAPPY KIDS LTD., a New York Corporation
Corporation
By /s/ Jack M. Benun
------------------------------------------
By [SIGNATURE ILLEGIBLE] Jack M. Benun, President
---------------------------------
Its [ILLEGIBLE]
--------------------------------
Address:
Address:
100 West 33rd Street, Suite 1100
1114 Avenue of the Americas New York, New York 10001
30th Floor
New York, New York 10036 Fax No.: (212) 736-5839
Fax No.: (212) 764-7925 With Copy To:
With Copy To: Joel Rishty, Esq.
Shekter Rishty Goldstein & Blumenthal P.C.
Stonefield Josephson, Inc. 1500 Broadway, 21st Floor
1620-26th Street, Suite 400 South New York, New York 10036-4015
Santa Monica, California 90404
Fax No.: (212) 944-7372
Attention: Larry Jacobs
Fax No.: (310) 453-1187
With Additional Copy To:
BRUCE R. GREENE, ESQ.
Richman, Lawrence, Mann, Greene,
Chizever, Friedman & Phillips
9601 Wilshire Boulevard, Penthouse Suite
Beverly Hills, California 90210
Fax No.: (310) 205-5348
</TABLE>
-iv-
<PAGE>
STANDARD TERMS AND CONDITIONS
-----------------------------
1. GRANT OF LICENSE.
----------------
(a) Licensor hereby grants to Licensee, upon the terms and conditions
set forth in this Agreement, and Licensee hereby accepts the grant of an
exclusive right to use the Trademarks in connection with the manufacturing,
wholesale sale and distribution of Licensed Products throughout the Territory
during the Term. Notwithstanding the foregoing, Licensee is not granted the
right to use the Trademarks in connection with the manufacture, sale or
distribution of Licensed Products which are cross-licensed (i.e., which
incorporate trademarks other than the Trademarks whether or not such other
trademarks are owned by Licensor), which right is reserved to Licensor.
(b) Licensor hereby reserves all rights not expressly granted to
Licensee hereunder.
2. ROYALTIES AND REPORTING.
-----------------------
(a) Guaranteed Minimum Royalties. Licensee agrees to pay to Licensor
----------------------------
the GMR set forth in the Basic Terms, in equal monthly installments, in advance
on the first day of each month during the Term, without demand, and without
offset or deduction of any nature. (It is understood that the full monthly
installments of GMR will continue to be payable by Licensee, notwithstanding
that Licensee has paid additional Royalties pursuant to Paragraph 2(c), until
such time as the sum of the installments of GMR and the Royalties paid pursuant
to Paragraph 2(c) for any Year equals the annual GMR, whereupon the payment of
monthly installments of GMR shall cease for the remainder of that Year. For
example, assume that the annual GMR is $120,000, payable in monthly installments
of $10,000 in advance on the first day of each month. Assume further that
Licensee pays the $10,000 installment of the GMR on January 1. If Licensee's
sales for the month of January result in Royalties earned in the amount of
$15,000, Licensee shall be required to pay the additional $5,000 on February 15
and will still be required to pay the full $10,000 installments of the GMR on
February 1 and March 1.) Under no circumstances will any portion of the GMR be
refundable to Licensee.
(b) Advance. The Advance set forth in the Basic Terms shall be
-------
credited against the first payment(s) of GMR due and payable by Licensee.
(c) Royalties. During the Term, Licensee shall pay to Licensor
---------
Royalties at the rate specified in the Basic Terms. As used in this Agreement,
"Net Sales" means the total number of units of Licensed Products sold by
Licensee multiplied by the gross invoice price actually charged to the
purchaser, exclusive of sales taxes, freight and insurance (the "Gross Sales"),
reduced by quantity discounts (but not cash discounts) to the extent actually
reflected on the invoices and further reduced by returns and allowances which
are supported by bona fide credit memoranda. Provided, however, that there shall
be no reduction from Gross Sales for discounts,
<PAGE>
returns and allowances which aggregate more than five percent (5%) of the Gross
Sales during each Year. For the purpose of computing Net Sales, there shall be
no other deductions of any nature from Gross Sales and, without limiting the
generality of the foregoing, there shall be no deductions for markdowns,
uncollectible accounts, bad debts or for any costs incurred in the manufacturing
sale, distribution, advertising or promotion of the Licensed Products. Any sales
or other distribution of Licensed Products made to parents, subsidiaries or any
other entity affiliated with Licensee, or which are given away for promotional
or similar purposes, will be deemed to have been sold at the established
wholesale line price for the purpose of computing Royalties. All Royalties
(including the GMR) shall be paid in U.S. currency. Royalties shall be paid
concurrently with the Statement of Royalties described herein.
(d) Statement of Royalties. No later than the fifteenth (15th)
----------------------
day of each month during the Term (commencing on the 15th day of the second
month of the first Year and ending on the 15th day of the month following the
last month of the Term), including any sell-off period subsequent to the
termination of this Agreement, Licensee shall deliver to Licensor a written
report, in a form provided by Licensor (which form may be modified from time to
time by Licensor), showing among other things, Gross Sales, Net Sales and the
computation of Royalties for the immediately preceding month (the "Statement of
Royalties"). The Statement of Royalties shall be certified as being true and
correct by an officer (or other duly authorized representative) of Licensee. The
Statement of Royalties must be furnished whether or not there are any Net Sales
for the month covered thereby, and whether or not any Royalties are due to
Licensor for such month. The receipt or acceptance by Licensor of any Statement
of Royalties shall not be deemed an acknowledgement by Licensor that such
Statement of Royalties is accurate, and Licensor shall be entitled at any time
to question the accuracy of any Statement of Royalties.
(e) Statement of Shipments by Account and Bookings. Concurrently
----------------------------------------------
with the delivery of the Statement of Royalties, and from time to time upon the
request of Licensor, Licensee shall deliver to Licensor a written report, in
a form acceptable to Licensor, showing (i) all shipments of Licensed Products
for the immediately preceding month by account, (ii) all booked (confirmed)
orders for future shipments of Licensed Products, and (iii) all unconfirmed
orders for future shipments of Licensed Products.
(f) Interest. Any Royalties or other monetary sums which are not
--------
paid to Licensor when due shall bear interest at the highest rate allowable by
law.
3. MINIMUM NET SALES REQUIREMENTS. If Licensee fails to meet the
------------------------------
Minimum Net Sales Requirements set forth in the Basic Terms during any Year of
the Term (whether or not Licensee has paid the annual GMR) Licensor shall have
the right, upon notice to Licensee, to immediately terminate this Agreement,
provided that such notice is given not later than sixty (60) days after the end
of the Year in which the Minimum Net Sales Requirements have not been met.
-2-
<PAGE>
4. BOOKS AND RECORDS.
-----------------
(a) Licensee agrees to maintain complete and accurate books of
account and records covering all transactions related to this Agreement at
Licensee's principal place of business, during the Term and for at least three
(3) years after the expiration or termination of this Agreement. Licensor and
its representatives shall have the right, upon reasonable advance notice to
Licensee and during regular business hours to inspect and audit (which includes
the right to copy at no expense to Licensor) such books of account and records.
If any audit discloses that the Royalties due to Licensor exceeded the Royalties
actually paid by Licensee by an amount greater than two percent (2%) for the
period being audited, Licensee shall pay immediately upon demand (in addition to
all unpaid Royalties plus Interest) the cost of the audit.
(b) Licensee agrees to furnish to Licensor, within ninety 990)
days after the end of each Year during the Term, financial statements (current
balance sheet and profit and loss statement for the prior Year), certified by an
appropriate officer (or partner) of Licensee to be true, correct and complete
and prepared in accordance with generally accepted accounting principles,
consistently applied.
5. EXPLOITATION OF LICENSE.
-----------------------
(a) Licensee agrees to use best efforts and diligence to
continuously sell and distribute the Licensed Products throughout the entire
Territory during the Term. If at any time during the Term Licensee fails to ship
Licensed Products in commercially reasonable amounts for a consecutive period of
more than ninety (90) days, the Licensee shall be deemed to be in material
default under this Agreement.
(b) Licensee shall at all times maintain (or contract for)
facilities and personnel adequate to fulfill its obligations under this
Agreement, including, but not limited to, an effective sales force.
(c) During each "season" (as such term is generally used in the
apparel industry), Licensee shall ship not less than eighty-five percent (85%)
of Licensed Products for which Licensee has accepted and confirmed purchase
orders which require delivery during such season.
(d) Licensee shall have the exclusive right to establish prices
and terms for the sale of Licensed Products, Licensee shall provide Licensor, in
advance of each selling season, with line sheets and price lists, and Licensee
shall promptly notify Licensor of any change in pricing.
(e) Licensee shall provide Licensor, upon request, with the names
and addresses of all facilities at which the Licensed Products are manufactured,
stored, and displayed for sale (excluding retailers) and Licensee shall make all
necessary arrangements to allow Licensor or its representatives to have
reasonable access to all such facilities upon reasonable advance notice during
regular business hours for the purposes of conducting inspections to insure that
Licensee is in compliance with this Agreement.
(f) Licensee shall not manufacture, sell or distribute any other
products which are identical or substantially similar to the Licensed Products.
Upon receipt of notice from Licensor that Licensor has determined that any
products being manufactured, sold or distributed by Licensee are, in Licensor's
reasonable opinion, identical or substantially similar to with the Licensed
Products, Licensee shall immediately discontinue the manufacture, sale or
distribution thereof. Without limiting the generality of the foregoing, Licensee
agrees
-3-
<PAGE>
that it will not copy or "knock off" any Licensed Products or offer for sale any
products which are similar in design to the Licensed Products.
(g) Licensee shall include in all of its written orders for the sale
of Licensed Products such language as Licensor may reasonably specify for the
purpose of preventing diversion of the Licensed Products from the approved
channels of distribution.
(h) Licensee shall include in all of its written orders for the
purchase of materials and/or finished goods from third parties such language as
Licensor may reasonably specify for the purpose of prohibiting the sale or other
disposition of any products bearing the Trademarks by such suppliers other than
to Licensee.
(i) Licensee shall cut all labels and hangtags on defective
merchandise (seconds or irregulars) prior to shipment and shall disclose on any
invoices with respect thereto that such merchandise consists of seconds or
irregulars.
(j) Licensee agrees to participate (by among other things, providing
an adequate number of samples for display) in all major trade shows. If Licensee
shares space with other licensees in a booth provided by Licensor, Licensee
shall reimburse Licensor for a portion of Licensor's costs incurred in
connection with such trade shows, in an amount which will be equitably
established by Licensor.
(k) Licensee shall attend meetings called by Licensor from time to
time to discuss any matters relating to this Agreement. All such meetings will
be held at Licensor's offices and may be called by Licensor upon not less than
thirty (30) days' prior written notice to Licensee, but not more frequently than
one (1) time in each calendar quarter.
(l) Licensee shall attend meetings and presentations with key
retailers of the Licensed Products, as requested by Licensor, but not more
frequently than twice each Year for each key retailer. Such meetings shall be
called upon reasonable advance written notice to Licensee, and shall be held at
either the retailer's corporate headquarters or such other place as may be
designated by Licensor.
(m) Licensee shall cooperate with Licensor and other licensees of
Licensor (domestic and international) in connection with the exchange of ideas,
design and other information relative to the manufacture, sale and distribution
of Licensed Products (including, but not limited to, furnishing a reasonable
quantity of samples to be distributed among such other licensees), but nothing
shall require Licensee to divulge any of its trade secrets or other confidential
information.
(n) Nothing herein shall require Licensee to advertise or promote the
Licensed Products. However, any advertising or promotion of the Licensed
Products which Licensee desires to undertake is subject to the approval of
Licensor as provided herein.
(o) Licensee shall submit to Licensor written sales projections. Such
sales projections shall be submitted to Licensor within thirty (30) days of the
Commencement Date, and quarter-annually thereafter during the Term.
-4-
<PAGE>
6. LICENSOR'S STANDARDS AND APPROVALS; SAMPLES.
-------------------------------------------
(a) Licensee agrees that the Licensed Products shall be of a high
quality, consistent with the quality of other products which include the
Trademarks which are manufactured, sold and distributed by Licensor and its
other licensees. Accordingly, Licensee agrees to conform at all times to such
standards as Licensor may direct, from time to time, including, but not limited
to, standards relating to the design, manufacturing and packaging of the
Licensed Products.
(b) In furtherance of maintaining Licensor's standards, it is agreed
that the following matters shall be subject to Licensor's prior written approval
(which may be given or withheld in Licensor's sole and absolute discretion):
(i) Advertising, promotional and display material;
(ii) Labels, hangtags and packaging;
(iii) Designwork (including, but not limited to, fabric,
graphics, colors and concepts);
(iv) Licensed Products (including, but not limited to, approval
of all samples).
Licensee shall strictly follow the procedures established by Licensor with
respect to obtaining Licensor's approvals of the foregoing, as more fully set
forth in Exhibit "A" attached hereto.
(c) Licensee shall provide Licensor, upon request, with a reasonable
number of samples, at no charge, for advertising and promotional purposes.
7. TRADEMARK AND COPYRIGHT PROTECTION.
----------------------------------
(a) Licensee recognizes the great value of the goodwill associated
with the Trademarks and acknowledges that such goodwill belongs exclusively to
Licensor, and that Licensee shall acquire no proprietary rights in the
Trademarks or their goodwill by virtue of this Agreement. Licensee further
recognizes that the Trademarks have acquired secondary meaning in the mind of
the public. Accordingly, Licensee agrees that the breach of its obligations
under this Agreement (other than breaches relating to the payment of monetary
sums) will cause Licensor irreparable damages which may not be compensable by
monetary damages, and that in the event of such breach, in addition to any other
rights or remedies which Licensor may have, Licensor may seek and obtain
injunctive relief, without the necessity of posting bond (unless otherwise
required by law).
(b) Licensee shall prominently display on all Licensed Products
manufactured by Licensee pursuant to this Agreement (including labels, hangtags
and packing material), and in all advertising and promotional materials using
the Trademarks, such trademark and/or copyright notices as Licensor shall
designate.
(c) Licensee shall not identify itself as the owner of the Trademarks
or any right or interest therein except as a licensee. Licensee shall not use
the Trademarks, or any similar mark, symbol or other designation, in connection
with its own corporate or business name, as a tradename, or in any similar
manner. Licensee shall not apply for the registration of any of the Trademarks
which is confusingly similar to the Trademarks anywhere in the world. Licensee
agrees that all designwork created in connection with this Agreement shall be
and remain the property of Licensor, and that it will not use any such
designwork, or any
-5-
<PAGE>
similar designwork on any products bearing a trademark, brand, label or similar
identification other than the Trademarks.
(d) Licensee agrees that it will not attack or contest the validity
or ownership of the Trademarks by Licensor.
(e) Licensee shall promptly notify Licensor if any legal action is
instituted against Licensee relating to Licensee's use of the Trademarks.
Licensee shall also promptly notify Licensor of any counterfeiting or other
infringement of the Trademarks, or any diversion of the Licensed Products from
the approved channels of distribution, of which Licensee becomes aware. Licensor
shall have the right, but not the obligation, to institute legal action or take
any other actions which it deems necessary to protect its interest in the
Trademarks, and Licensee shall fully cooperate with Licensor in any such action,
provided that any out-of-pocket expenses of Licensee incurred in connection
therewith are paid or reimbursed by Licensor. Any monetary recovery resulting
from any such action shall belong solely to Licensor. If Licensor declines to
institute or continue any legal action, Licensee may, with the consent of
Licensor, which will not be unreasonably withheld, institute or continue same in
its name, at its sole expense, in which event any monetary recovery resulting
therefrom shall belong solely to Licensee.
(f) Licensee shall reasonably cooperate with Licensor to prevent
unlawful use of the Trademarks, including counterfeiting, and to prevent
diversion of Licensed Products outside of the Territory and/or approved
distribution channels.
(g) Licensee shall not take any action which damages the reputation
of Licensor or which reflects negatively upon Licensor, the Trademarks or the
Licensed Products.
8. TERMINATION.
-----------
(a) No Cure Period. In addition to any other termination rights which
--------------
Licensor has under this Agreement, Licensor shall have the right to terminate
this Agreement by giving written notice to Licensee, if Licensee (i)
manufactures, sells, distributes, advertises, or promotes any Licensed Products
without having obtained all required approvals of Licensor as provided herein;
(ii) asserts any ownership or proprietary interest in the Trademarks, or
contests Licensor's ownership rights therein; (iii) breaches any of the
provisions of this Agreement prohibiting Licensee from assigning, transferring
or sublicensing this Agreement or any of its rights or obligations hereunder;
(iv) or any guarantor of Licensee's obligations hereunder files a voluntary
petition under the Federal Bankruptcy Code, or is subject to the filing of an
involuntary petition under the Federal Bankruptcy Code which is not dismissed
within thirty (30) days, or is declared insolvent, or makes an assignment for
the benefit of creditors, or dissolves, is liquidated or otherwise discontinues
its business, or suffers a custodian, trustee or receiver to be appointed for it
or for it's business, which is not released or discharged within thirty (30)
days, or if substantially all of its assets or Licensee's interest in this
Agreement is subjected to any writ of attachment, execution, garnishment or
other legal process which is not released within thirty (30) days; (v) fails to
begin distributing substantial quantities of Licensed Products by the Initial
Marketing Date set forth in the Basic
-6-
<PAGE>
Provisions; or (vi) sells or distributes any Licensed Products outside of the
Territory or outside of the approved distribution channels set forth in the
Basic Provisions.
(b) Cure Period. This Agreement shall automatically terminate ten
-----------
(10) days after written notice by Licensor to Licensee of any breach or default
by Licensee in the performance of its obligations under this Agreement (other
than those set forth in subparagraph (a) unless such breach or default is cured
within such ten (10) day period; provided that if the nature of the breach or
default is such that it cannot reasonably be cured within such ten (10) day
period, then Licensee shall have an additional thirty (30) days to cure same if
Licensee commences the cure within the ten (10) day period and diligently
pursues same to completion. The additional thirty (30) day cure period shall not
apply to the breach or default by Licensee in the payment of Royalties or any
other monetary sums hereunder.
(c) Rights Upon Termination. Subject to the rights of Licensor to
-----------------------
purchase Licensee's inventory, as set forth below, upon termination of this
Agreement (other than a termination resulting from the breach by Licensee
pursuant to Paragraph 8(a)(i), (ii), (iii) or (vi) hereof) or a termination upon
the expiration of the Term of this Agreement, Licensee shall have the right to
sell inventory remaining on the date of termination, provided that: (i) a
detailed schedule of the inventory remaining on the date of termination and its
location is provided to Licensor within fifteen (15) days after the date of
termination (and if such schedule is not provided within such time period,
Licensee shall not have any sell-off rights); (ii) all such sales shall be duly
accounted for and shall be subject to all provisions of this Agreement,
including but not limited to, the furnishing of Statements of Royalties and the
payment of Royalties; (iii) all such inventory is disposed of within ninety (90)
days after the date of termination; and (iv) no defective or unapproved Licensed
Products may be sold. Immediately upon the termination of this Agreement,
Licensee shall cease taking orders and shall cease the manufacture of all
Licensed Products, except that any work-in-process may be completed at
Licensee's option, to fill orders taken prior to the date of termination, and
such work-in-process will be considered inventory for the purposes of this
Paragraph. Licensor shall have the option (but not the obligation) to purchase
all or any portion of the inventory of Licensed Products and/or raw materials
which contain the Trademarks remaining upon termination (other than inventory
necessary to fill existing orders) at Licensee's actual cost of labor and
materials. Licensor shall notify Licensee within fifteen (15) days after receipt
of the list of inventory required by this Paragraph of its exercise of this
option to purchase. Any Licensed Products which are not disposed of in
accordance with this Paragraph shall, immediately upon expiration of the sell-
off period, be turned over to Licensor, at no cost to Licensor.
(d) At any time during the six (6) months preceding the expiration
of the Term (provided that Licensee has not duly exercised an option to renew),
Licensor or any new licensee shall have the right to promote, advertise and take
orders for the Licensed Products.
(e) Any termination of this Agreement resulting from a breach or
default by Licensee shall not relieve Licensee from any obligations which
accrued prior to the date of termination or from the continuing obligation to
pay GMR and the Advertising Fee for the balance of the Term. Notwithstanding the
foregoing, by placing their initials below, the parties acknowledge that the
breach by Licensee of this Agreement would cause
-7-
<PAGE>
substantial damages to Licensor, including, but not limited to, loss of
"presence" in the marketplace while a successor or replacement license is
located, and that the extent of such damages would be difficult and impractical
to ascertain. Accordingly, it is agreed that if Licensor terminates this
Agreement as a result of Licensee's breach or default, then Licensor shall be
entitled to recover from Licensee, as liquidated damages (in lieu of any
recovery for royalties, payments of GMR and Advertising Fees which would be
payable subsequent to the date of termination, but not in limitation of any
other remedies which Licensor may have a result of such breach or default, such
as the right to injunctive relief and the right to recover royalties, payments
of GMR and Advertising Fees due as of the date of termination) an amount equal
to the greater of (i) twenty-four (24) times the monthly GMR applicable on the
date of termination; or (ii) twenty-four (24) times the highest actual Royalties
payable during any of the six (6) months immediately preceding the month in
which the Agreement is terminated. The parties agree that under the
circumstances existing on the date of this Agreement the foregoing sum is a fair
and reasonable estimate of Licensor's damages resulting from Licensee's breach
and that this sum is intended to constitute liquidated damages pursuant to
California Civil Code (S)1671.
[DMD] JMB
------------------- -------------------
LICENSOR'S INITIALS LICENSEE'S INITIALS
9. INDEMNIFICATION AND INSURANCE.
-----------------------------
(a) Licensee agrees to indemnify, defend and hold Licensor
and its shareholders, officers, directors, parents, subsidiaries, managing
agents and other agents free and harmless from and against any and all claims,
demands, actions, causes of action, lawsuits, judgments, costs, expenses and
other liabilities of every nature, including attorneys' fees, arising from (i)
Licensee's manufacture, sale, advertising or promotion of the Licensed Products
including, without limitation, any product liability claims or any chargebacks
or credits claimed by any customer, vendor, factor or creditor of Licensee, and
(ii) the breach or inaccuracy of any of Licensee's warranties, representations
or covenants contained in this Agreement. Licensor agrees to indemnify, defend
and hold Licensee and its shareholders, officers, directors, parents,
subsidiaries and agents free and harmless from and against any and all claims,
demands, actions, causes of action, lawsuits, judgments, costs, expenses and
other liabilities of every nature, including attorneys' fees, arising from the
breach or inaccuracy of any of Licensor's representations or warranties
contained in this Agreement. The foregoing indemnification provisions shall
survive the termination of this Agreement.
(b) Licensee shall obtain and maintain at its sole cost and
expense throughout the Term standard product liability insurance from a
reputable licensed insurance company reasonably acceptable to Licensor, naming
Licensor as additional insured, which policy shall provide protection against
any and all claims for injuries or property damage arising out of defects in the
Licensed Products. The minimum amount of coverage shall be Five Million Dollars
($5,000,000.00) combined single limit for bodily injury and/or for property
damage, which may include an umbrella policy of not more than Two Million
Dollars ($2,000,000.00). The policy shall provide for ten (10) Days notice to
Licensor from the insurer in the event of any modification,
- 8 -
<PAGE>
cancellation or termination. Licensee agrees to furnish Licensor with a
certificate of insurance naming Licensor as additional insured within ten (10)
days after execution of this Agreement and upon each renewal of insurance
coverage.
10. REPRESENTATIONS AND WARRANTIES.
------------------------------
(a) Representations of Licensee. Licensee represents as
----------------------------
follows:
(i) [If Licensee is a corporation] Licensee has been duly
incorporated and organized and is validly existing in good standing
under the laws of the jurisdiction in which it was incorporated.
[If Licensee is a partnership] Licensee is a partnership
(either general or limited, as described in the Basic Provisions) duly
formed and existing under the laws of the jurisdiction in which it was
formed.
[If Licensee is a limited liability company] Licensee has
been duly organized and is validly existing in good standing under the
laws of the jurisdiction in which it was organized.
(ii) Licensee is duly qualified to do business in all
jurisdictions within the Territory which require such qualification to
conduct the business to be conducted by Licensee under this Agreement.
(iii) Licensee has full power and authority to enter into
and perform this Agreement.
(iv) This Agreement has been duly authorized by all
necessary action on the part of Licensee's board of directors (or other
governing body) and has been duly executed and delivered by Licensee.
(v) Licensee has entered into no other agreement or
contract, and is not subject to any order, decree or ruling, which would
prohibit Licensee from performing its obligations under this Agreement.
(vi) Licensee has adequate capital to finance the
business contemplated by this Agreement and has adequate production
resources to fulfill its obligations hereunder.
(b) Representations of Licensor. Licensor represents as follows:
---------------------------
(i) Licensor has been duly incorporated and organized and
is validly existing in good standing under the laws of the State of
Nevada.
(ii) Licensor has corporate power and authority to enter
into and perform this Agreement.
(iii) This Agreement has been duly authorized by all
necessary corporate action on the part of Licensor and has been duly
executed and delivered by Licensor.
(iv) Licensor is the lawful owner of the Trademarks and has
the right, power and authority to grant the rights granted to Licensee
hereunder.
-9-
<PAGE>
(v) Licensor has entered into no other agreement or
contract and is not subject to any order, decree or ruling, which would
prohibit Licensor from performing its obligations under this Agreement.
11. OPTIONS TO EXTEND TERM. Licensee must exercise its options to
----------------------
extend the Term by delivering written notice thereof to Licensor not later than
six (6) months prior to the expiration of the Term, or any extension of the
Term. Notwithstanding anything herein to the contrary, Licensee shall have no
right to exercise any option to extend the Term if (a) at the time of purported
exercise of any option, Licensee is in default under this Agreement, or (b)
during any Year of the Term, including any option period, Licensee received more
than two notices of default from Licensor, regardless of whether such defaults
were cured.
12. SUBLICENSING AND ASSIGNMENT.
---------------------------
(a) Licensee's right under this Agreement may not be
sublicensed without the prior written consent of Licensor, which consent may be
granted or withheld in the sole and absolute discretion of Licensor. Approval
of one sublicense shall not be deemed an approval of any other sublicense.
(b) Licensee shall have no right or power to assign this
Agreement, or any interest therein, nor may this Agreement or any interest
therein beassignable by operation of law, or otherwise, without the prior
written consent of Licensor, with may be granted or withheld in the sole and
absolute discretion of Licensor. An assignment shall be deemed to have occurred
in the event that fifty percent (50%) or more of the ownership interests (which
means shares if Licensee is a corporation, or general partnership interests if
Licensee is a partnership or membership interests if Licensee is a limited
liability company) of Licensee shall be sold or otherwise transferred to any
person or entity who does not hold an ownership interest as of the date that
this Agreement is executed.
(c) Any assignment or sublicensing (or attempt to do either
of the foregoing) by Licensee without the prior written consent of Licensor
shall be null and void and of no force or effect and shall also constitute
grounds for immediate termination as provided in Paragraph 8(a) hereof. No
approved assignment or sublicensing shall release Licensee from any of its
obligations hereunder, unless a release of liability is expressly agreed upon in
writing by Licensor.
13. GENERAL PROVISIONS.
------------------
(a) Disclaimer of Agency; No Franchise. This Agreement does
----------------------------------
not constitute either party the agent of the other, or create a partnership or
joint venture between the parties, and neither Licensor nor Licensee shall have
any power to obligate or bind the other in any manner whatsoever. The parties
specifically acknowledge that this Agreement creates a licensor/licensee
relationship between them, and that although Licensor retains certain approval
rights and other controls, Licensee acknowledges that such approval rights and
controls are necessary to protect the Trademarks and the goodwill associated
therewith, which Licensee recognizes as being usual and customary for licenses
in the apparel industry. Licensee further acknowledges that (i) it is relying
- 10 -
<PAGE>
primarily on its own knowledge, skill and expertise. In the apparel business,
and (ii) no marketing plan has been provided, suggested or recommended by
Licensor and that, subject to Licensor's approval rights and controls provided
herein, Licensee shall be free to operate its business according to its own
marketing plan or system. Accordingly, the parties specifically agree that this
Agreement does not create a franchise.
(b) Governmental Compliance. Licensee agrees to comply, at its own
-----------------------
expense, with all laws, ordinances, rules, regulations, and other requirements
of all governmental authorities and agencies having jurisdiction over Licensee
relating to the manufacture, sale, distribution and advertising of the Licensed
Products or any of Licensee's other activities pursuant to this Agreement.
Without limiting the generality of the foregoing, Licensee shall strictly comply
with the Fair Labor Standards Acts, the California Labor Code and all other
federal and state labor laws and regulations, and shall take all necessary steps
to insure compliance with such laws and regulations by all third-party
contractors which are retained by Licensee to manufacture the Licensed Products.
Licensee agrees that all Licensed Products shall be of good and merchantable
quality, free from all defects, and free from any materials or substances which
may be harmful or dangerous to human beings. Proof of compliance with the
provisions of this Paragraph shall be furnished by Licensee to Licensor upon
demand.
(c) Notices. All notices required or permitted to be given pursuant to
-------
this Agreement shall be in writing and shall be delivered either personally, by
overnight delivery service or by U.S. certified or registered mail, postage
prepaid, return-receipt requested and addressed to the parties at their
respective addresses as they appear below their respective signatures hereon.
Notices may also be given by facsimile transmission to the facsimile telephone
numbers which appear below the parties' respective signatures hereon, provided
that a copy of the notice is also sent by one of the other above-described
methods of service. The parties may change their addresses or facsimile
telephone numbers for notice by giving notice of such change in accordance with
this Paragraph. Notices sent by overnight delivery service shall be deemed
received on the business day following the date of deposit with the delivery
service. Mailed notices shall be deemed received upon the earlier of the date of
delivery shown on the return-receipt, or the second business day after the date
of mailing. Notices sent by facsimile transmission shall be deemed served on the
date of transmission, provided that is during regular business hours, otherwise
on the next business day.
(d) Construction; Jurisdiction. This Agreement has been executed in
--------------------------
and is to be performed in the State of California, and this Agreement shall be
interpreted in accordance with the laws of the State of California. The parties
specifically agree that any action to enforce or interpret this Agreement (which
is not subject to arbitration as provided herein) may be brought in any state or
federal court in the State of California, County of Los Angeles or in the State
of New York, Count of Kings (at the option of Licensor) and the parties hereby
submit to the jurisdiction of all such courts.
(e) Benefit. This Agreement shall be binding upon and Inure to the
-------
benefit of the parties hereto, and their respective heirs, assigns,
successors-in-interest, and legal representatives, subject to the restrictions
on assignment set forth herein.
(f) Amendments. This Agreement may not be amended, modified or altered
----------
except by a written instrument executed by all parties hereto.
-11-
<PAGE>
(g) Entire Agreement. Neither of the parties has made any
----------------
representations, warranties, covenants or promises relating to the subject
matter of this Agreement except as set forth herein, and any prior agreements or
understandings not specifically set forth herein shall be of no force or effect.
This Agreement constitutes the entire agreement of the parties relative to the
subject matter hereof.
(h) Invalidity. If any provision of this Agreement is declared by a court
----------
of competent jurisdiction to be invalid or unenforceable, the remaining
provisions hereof shall nevertheless be given full force and effect.
(i) Captions and Exhibits. Captions are for convenience only and shall
---------------------
not be considered in interpreting any of the provisions hereof. All exhibits and
addenda attached hereto are incorporated herein by reference.
(j) Gender; Number. As used herein, the masculine, feminine or neuter
--------------
gender, and the singular or plural number, shall each be deemed to include the
others whenever the context so indicates.
(k) Attorneys' Fees. Should either party be required to bring legal
---------------
action (including arbitration) to enforce its rights under this Agreement, the
prevailing party in said action shall be entitled to recover from the losing
party its reasonable attorneys' fees and costs in addition to any other relief
to which he is entitled. Such recovery of attorneys' fees shall include any
attorneys' fees incurred in connection with any bankruptcy or reorganization
proceeding, including stay litigation. The parties further agree that any
attorneys' fees incurred in enforcing any judgment are recoverable as a separate
item, and that this provision is intended to be severable from the other
provisions of this Agreement, shall survive the judgment, and is not to be
deemed merged into the judgment. Licensee also agrees to reimburse Licensor in
the sum of Three Hundred Dollars ($300) for attorneys' fees incurred in
connection with the sending of any notice of breach or default, whether or not
such breach or default is cured.
(l) Arbitration. Any controversy or claim arising out of or relating to
-----------
this Agreement, or breach thereof in which the amount in controversy is less
than Fifty Thousand Dollars ($50,000), shall be settled by binding arbitration
in Los Angeles, California, or New York, New York (at the option of Licensor) in
accordance with the Commercial Arbitration Rules of the American Arbitration
Association then in effect, and judgment upon the award rendered by the
arbitrator(s) may be entered in any court of competent jurisdiction.
Notwithstanding the foregoing, nothing herein shall prohibit Licensor from
applying to a court of competent jurisdiction for any appropriate injunctive
relief or othe provisional remedies. The cost of arbitration shall be borne by
the losing party, or, if there is no losing party, as the arbitrator(s) shall
determine.
In any arbitration proceedings relative to this Agreement, or breach
thereof, all parties shall have the right to take depositions and to obtain
discovery regarding the subject matter of the arbitration pursuant to California
Code of Civil Procedure Section 1283.05, or any successor statute.
Service of any Petition to confirm or vacate the Arbitration award and
Notice of Hearing thereon may be made by certified or registered mail,
return-receipt requested, or by personal delivery.
-12-
<PAGE>
The arbitrator'(s) award may be limited to a statement that one party pay
to the other a sum of money. The arbitrator(s) will not be deemed to exceed
their powers (per California Code of Civil Procedure Sections 1286.2 or 1286.6)
by committing an error of law or legal reasoning, it being agreed that the
decision of the arbitrator(s) shall be final and unreviewable for error of law
or legal reasoning of any kind.
(m) Counterparts. This Agreement may be executed in one (1) or
------------
more counterparts, each of which shall be deemed to be an original, but all of
which together shall constitute one (1) and the same instrument.
(n) Waiver. The failure of any party, at any time, to require
------
timely performance by any other party of any provision of this Agreement shall
not affect such party's rights thereafter to enforce the same, nor shall the
waiver by any party of any breach of any provision of this Agreement, whether or
not agreed to in writing, be taken or held to be a waiver of the breach of any
other provision or a waiver of any subsequent breach of the same provision of
this Agreement. No extension of time for the performance of any obligation or
act hereunder shall be deemed to be an extension of time for the performance of
any other obligation or act hereunder.
(o) Time of Essence. Time is of the essence with respect to the
---------------
performance by the parties of their respective obligations under this Agreement.
(p) Additional Acts. The parties agree to perform such further
---------------
acts and to execute, acknowledge and deliver such documents as may be necessary
to effectuate the provisions of this Agreement.
(q) Confidentiality. The parties agree that the provisions of this
---------------
Agreement shall be and remain confidential and shall not be disclosed by either
party to any other person or entity, except (i) as may be required by court
order or other legal process or (ii) as may be required for the legitimate
conduct of a party's business, such as a disclosure to a party's attorneys,
accountants or other representatives, but only to the extent necessary for the
foregoing purposes. Each of the parties shall take reasonable precautions to
prevent any further disclosure by such party's employees and such party's
representatives to whom disclosure is permitted pursuant to this Paragraph.
-13-
<PAGE>
ADDENDUM TO LICENSE AGREEMENT
-----------------------------
THIS ADDENDUM TO LICENSE AGREEMENT ("Addendum") is attached to and made a
part of that certain License Agreement dated as of October 1, 1997 ("Agreement")
between B.U.M. INTERNATIONAL, INC., a Nevada Corporation ("Licensor") and HAPPY
KIDS LTD., a New York Corporation ("Licensee"). Capitalized terms used in this
Addendum shall have the same meaning as set forth in the Agreement, unless
otherwise provided herein. In the event of any conflict or inconsistency
between the provisions of the Agreement and the provisions of this Addendum, the
provisions of this Addendum shall control.
1. Paragraph 2(a). The GMR shall be paid quarter-annually, in advance
--------------
on the fifteenth (15th) day of the months of January, April, July and October of
each Year.
2. Paragraph 2(c). The words "(but not cash discounts)" in the second
--------------
sentence are hereby deleted. The words and number "five percent (5%)" in the
third sentence are hereby amended to read "fifteen percent (15%)".
3. Paragraph 2(d). The Statement of Royalties shall be due
--------------
quarter-annually on the fifteenth (15th) day of January, April, July and October
of each Year.
4. Paragraph 3. The following sentence is added at the end of the
-----------
paragraph: "Notwithstanding the foregoing Licensor shall not have the right to
terminate the Agreement as a result of the failure of Licensee to meet the
Minimum Net Sales Requirements for any Year if (a) Licensee has paid the full
GMR for that Year, and (b) Licensee has generated Net Sales equal to at least
eighty percent (80%) of the Minimum Net Sales Requirements for that Year."
5. Paragraph 4(a). Licensor's inspection and audit rights shall be
--------------
exercised no more frequently than one (1) time each Year. The words and number
"two percent (2%)" in the last sentence are hereby amended to read "five percent
(5%)".
6. Paragraph 5(a). The provisions of Paragraph 5(a) shall apply only
--------------
after the Initial Marketing Date.
7. Paragraph 5(c). The words and number "eighty-five percent (85%)" are
--------------
hereby amended to read "eighty percent (80%)".
8. Paragraph 5(e). The entire Paragraph is hereby deleted and the
following is inserted in its place: "Throughout the Term, Licensee shall
maintain accurate and complete records containing the names and addresses of all
facilities at which the Licensed Products are manufactured and stored. In the
event that Licensor reasonably determines that just cause exists (i.e., as a
result of counterfeiting or other Trademark infringement, diversion of the
Licensed Products from the approved channels of distribution, quality control
problems with the License Products, or similar circumstances) Licensee shall
disclose as reasonably necessary the identity of such facilities to Licensor and
shall cooperate with Licensor to arrange for access thereto by Licensor or its
representatives for the limited purpose of remedying the problem. Any such
information disclosed to Licensor by Licensee shall be treated as confidential."
<PAGE>
9. Paragraph 5(f). The entire Paragraph is hereby deleted.
--------------
10. Paragraph 5(j). The words "that bear any of the Trademarks" are
--------------
hereby inserted after the word "merchandise" in the first line.
11. Paragraph 5(i). The words "all major" in the first sentence are
--------------
hereby deleted and the words "the M.A.G.I.C." are hereby inserted in their
place. The word "direct" is hereby inserted before the word "costs" in the
second sentence. The following sentence is hereby added at the end of the
Paragraph: "Licensee shall be permitted to participate in such trade show
separately from Licensor, as long as it also participates jointly with
Licensor".
12. Paragraph 5(m). The following words are added at the end of the
--------------
Paragraph: "which shall include, without limitation, its costs, pricing and
sources of new materials and/or production".
13. Paragraph 5(p). The following new Paragraph 5(p) is added to the
--------------
Agreement: "(p) Licensor shall make available to Licensee, upon request of
Licensee, ideas, designs, and other information relative to the manufacture,
sale and distribution of Licensed Products developed by Licensor or derived from
other licensees of Licensor (domestic and international). Licensor makes no
representations that any such ideas, designs or information will in fact be
developed and nothing herein shall be deemed to require Licensor to create any
designs for Licensee, such being the sole responsibility of Licensee."
14. Paragraph 8(a). The words "regularly and repeatedly" are hereby
--------------
inserted before the word "manufactures" in the third line. The words "thirty
(30)", in both places where they appear in subparagraph (iv) only, are hereby
replaced with the words "sixty (60)".
15. Paragraph 8(b). The words "ten (10)", in all places which they
--------------
appear, are hereby replaced with the words "thirty (30)".
16. Paragraph 8(c). The words "including, without limitation, work in
--------------
process" are hereby added after the word "inventory" in the fourth line. The
words "fifteen (15)" in the sixth line are hereby deleted and replaced with the
words "thirty (30)". The words "ninety (90)" in the ninth line are hereby
deleted and replaced with the words "one hundred eighty (180)". The words "or
otherwise reasonably anticipated as of that date" are hereby inserted after the
word "termination" in the thirteenth line.
17. Paragraph 8(e). The words "an amount equal to the greater of (i)
--------------
twenty-four (24) times the monthly GMR applicable on the date of termination; or
(1) twenty-four (24) times the highest actual Royalties payable during any of
the six (6) months immediately preceding the month in which the Agreement is
terminated" are hereby amended to read "the amount of Two Hundred Fifty Thousand
Dollars ($250,000)".
18. Paragraph 8(f). The following new Paragraph 8(f) is hereby added to
--------------
the Agreement: "Licensee may, at any time during the Term, terminate the
Agreement by giving at least six (6) months advance notice to Licensor,
accompanied by a "termination fee" in the amount of Two Hundred Fifty Thousand
Dollars ($250,000). In such event, the Agreement shall terminate on the date set
forth in the notice as if the Term had expired on that date (it being understood
that the provisions of Paragraph 8(c) shall apply in such event and Licensee
shall remain liable for all Royalties due through the termination date)."
19. Paragraph 11. The word "two" is hereby deleted and the word "four
------------
(4)" is hereby inserted in its place.
-2-
<PAGE>
20. Paragraph 12(b). The sale or transfer of common stock of
---------------
Licensee shall not be deemed to be an assignment if such common stock is
publicly trading on any nationally recognized securities exchange, or if
Licensee is a public company with its common stock trading "over the counter".
21. Paragraph 12(d). The following new Paragraph 12(d) is hereby
---------------
added to the Agreement: "Notwithstanding the foregoing, Licensee may, without
Licensor's prior consent, enter into sublicenses and/or assign this Agreement to
a parent or wholly-owned subsidiary of Licensee, or to an affiliate of Licensee
which is at least fifty-one percent (51%) owned and controlled by Jack Benun
(and/or his spouse and/or his children and/or any bona fide estate planning
trust or similar device for Jack Benun), provided that Licensee shall notify
Licensor of each such sublicense and assignment, and provided further that such
assignment or sublicense shall not release Licensee from liability under the
Agreement."
22. Any default under that certain License Agreement dated June 1,
1995 between Licensor and Licensee (the "Existing License Agreement") beyond any
applicable notice, grace and/or cure period, shall be deemed a default under
this Agreement. Notwithstanding the foregoing, if Licensee promptly pays the
amount set forth in Paragraph 23 of the Addendum to the Existing License
Agreement, as modified by Paragraph 3 of the First Amendment to the Existing
License Agreement, as liquidated damages, this License Agreement shall not be
deemed to be in default. Further, if Licensee defaults hereunder but promptly
pays the amount set forth in Paragraph 8(e) as liquidated damages, the Existing
License Agreement shall not be deemed to be in default.
23. The effectiveness of this Agreement is conditioned upon
Licensee concurrently exercising its first option to renew the term of the
Existing License Agreement (for the period January 1, 1999 through December 31,
2001) and the concurrent execution of a Second Amendment to the Existing License
Agreement.
24. In the event that the Minimum Net Sales Requirements under
both this Agreement and the Existing License Agreement are equalled or exceeded
during any Year, then for that Year, the Royalty Rate for such excess Net Sales
shall be as follows: *** of Net Sales in excess of the cumulative Minimum Net
Sales Requirements of both this Agreement and the Existing License Agreement and
up to *** of cumulative Net Sales, plus *** of Net Sales in excess of *** of
cumulative Net Sales.
IN WITNESS WHEREOF, the parties have executed this Addendum as of the
date above first written.
"LICENSOR" "LICENSEE"
B.U.M. INTERNATIONAL, INC. HAPPY KIDS, LTD., a New York Corporation
a Nevada Corporation
By: By: /s/ Jack M. Benun
------------------------------- -------------------------------------
Jack M. Benun, President
Its: Chairman and CEO
------------------------------
*** Confidential portion omitted and filed separately with the Securities and
Exchange Commission.
-3-
<PAGE>
APPROVAL PROCEDURE
------------------
1. Product Approval Procedure.
--------------------------
(a) Before offering for sale any item which Licensee intends
to sell as a Licensed Product, Licensee shall obtain Licensor's prior approval
of such item according to the procedure set forth in this Section 1, which
procedure may, from time to time, be changed by Licensor at its discretion on
written notice to Licensee.
(b) Not later than the fifteenth (15th) day of January of
each calendar year during the Term, Licensee shall give written notice to
Licensor of:
(i) The number of collections of Licensed Products
(also known in the trade as "lines" or "seasons") it intends to offer for sale
during that exact calendar year;
(ii) The approximate date Licensee intends to present
the final proposed Licensed Products for each such collection for approval by
Licensor in a pre-production showing pursuant to Section (c) hereof;
(iii) The approximate date Licensee intends to
commence production of each proposed Licensed Product; and
(iv) Any other related information Licensor may, from
time to time, request.
(c) (i) To obtain Licensor's prior approval of each
proposed Licensed Product, Licensee shall present to Licensor, for Licensor to
retain (and prior to the production thereof), no less than one (1) final product
representing each proposed Licensed Product intended to be part of that
collection, two (2) swatches of material of no less than six (6) square inches
each which indicate the material and color intended to be used for each Licensed
Product's specifications, sources of all raw materials and said source code
numbers and/or code numbers, relating thereto, and completed Licensed Product
Approval Forms (said presentation hereinafter being referred to as a
"Pre-Production Showing").
(ii) Licensor shall indicate its approvals, which
shall not survive the time period of the collection for which they are granted,
or disapprovals on the Licensed Product Approval Forms - copies of which shall
be delivered or mailed to Licensee within ten (10) business days thereafter (or
within a reasonable extension period, written notice of which shall be mailed or
personally delivered to Licensee during said ten (10) business day period).
Performance by Licensee shall be in strict accordance with that which is
indicated on the Licensed Product Approval Forms. No item may be manufactured
or sold as a Licensed Product unless approved by Licensor in accordance with the
procedures set forth herein.
(iii) Pre-Production Showings shall be set by the
parties at a mutually convenient date and time at Licensor's notice address or
where Licensor shall otherwise direct. If the parties cannot agree on a date
or time, Licensee shall give Licensor written notice of two (2) alternative
dates and times (between the hours of 10:00 a.m. and 5 p.m. on regular business
days), receipt by Licensor of which shall be no less than five (5) business days
prior to the first alternate date. If Licensor does not confirm an appointment
for each date
EXHIBIT "A"
Page - 1 -
<PAGE>
in writing at lease twenty-four (24) hours prior to the time set forth in the
first alternate date, then Licensee shall deliver to Licensor, at Licensor's
notice address, on said first alternate date at the time specified, that which
it intended to present Licensor at the Pre-Production Showing, and a written,
itemized receipt indicating each proposed Licensed Product, swatch set, sketch,
and Licensed Product Approval Forms delivered.
(iv) Any proposed Licensed Product or aspect of its
physical characteristics not disapproved by Licensor in writing and mailed or
personally delivered to Licensee within the ten (10) business days after
receipt of the Licensed Product Approval Form (subject to a reasonable extension
under the terms set forth in Section (c)(ii) hereof) shall be deemed approved
for use in that collection.
(v) Any disapproved item or aspect relating to its
physical characteristics thereof shall not be used by Licensee, but may be
submitted in altered form for Licensor's approval. Such resubmission must
follow the procedures set forth in this Section 1 as if it were an original
submission.
(d) In order for Licensor to determine and assure itself that
Licensee is maintaining the quality control standards set forth herein, within
ten (10) business days after the commencement of each Licensed Product's first
production run, Licensee shall deliver to Licensor no less than one (1) of each
first production run Licensed Product without charge. Licensee shall also, from
time to time, within five (5) business days of each request from Licensor,
deliver to Licensor, Licensed Products in accordance with Licensor's specific
order (e.g., color, size, fabrication and the like) in the then present
collection not to exceed twenty (20) items per Licensed Product style without
charge to licensor.
2. Trademark Use Approval Procedure.
--------------------------------
(a) All uses of the Trademarks (including, but not limited to
uses on hangtags, labels, packaging, advertising and promotion) shall at all
times be subject to the prior approval of Licensor according to the procedure
set forth in this Section 2. Such approval must be in writing on a Trademark Use
Approval Form. Said Trademark Use Approval Forms must be completed in detail and
submitted to Licensor as required. In all instances, Licensee shall inform
Licensor in writing of the name, address, and telephone number of each and every
person and/or entity that causes a use of the Trademarks on Licensee's behalf as
well as all details regarding the use relating thereto.
(b) Licensor shall indicate its approvals, which shall not
survive the time period of the specific use for which they are granted, or
disapprovals on the Trademark Use Approval Forms - copies of which shall be
delivered or mailed to Licensee within ten (10) business days thereafter (or
within a reasonable extension period, written notice of which shall be mailed or
personally delivered to Licensee during said ten (10) business day period).
Performance by licensee shall be in strict accordance with that which is
indicated on the Trademark Use Approval Forms. No use may be made of the
Trademarks unless approved by Licensor in accordance with the procedures set
forth herein.
EXHIBIT "A"
Page -2-
<PAGE>
(c) Any proposed Trademark use or aspect of its physical
characteristics not disapproved by Licensor in writing and mailed or personally
delivered to Licensee within the ten (10) business days after receipt of the
Trademark Use Approval Form (subject to a reasonable extension under the terms
set forth in Section (b) hereof) shall be deemed approved for the use requested.
(d) If any proposed use of the Trademarks has been disapproved by
Liscensor, Licensee may resubmit such proposed use in altered form only if
submitted in accordance with the procedures set forth herein. Licensee shall
under no circumstances use the Trademarks in any disapproved manner.
3. Forms.
-----
(a) The Licensed Product Approval Form and the Trademark Use
Approval form shall be provided by Licensor to Licensee, and shall initially be
in the form attached hereto as Exhibits "1" and "2", respectively.
(b) Licensor may, from time to time, upon reasonable notice
to Licensee, modify any of its forms, or provide additional forms for use by
Licensee to facilitate the approval procedures.
4. Standards for Approvals. In granting or withholding approvals
-----------------------
pursuant to Sections 1 and 2, Licensor agrees to act in good faith. Licensee
acknowledges that the nature of the approvals required hereunder is highly
subjective, and accordingly, Licensee agrees that Licensor shall not be held to
any objective standard of "reasonableness".
5. Limitations of Effect of Approvals. Licensor's approval in any
----------------------------------
instance of Licensed Products or any use of the Trademarks shall not be deemed
an acknowledgment by Licensor that Licensee has complied with its other
obligations under this Agreement, including, but not limited to, the obligation
of Licensee to comply with applicable laws and the obligation of Licensee to
manufacture safe and defect-free products.
<PAGE>
PRODUCT APPROVAL FORM-SUBMISSION SUMMARY/COVER PAGE
---------------------------------------------------
LICENSEE: [ ] PAGE OF
----------------------- ----- -----
PRODUCTS: [ ]
-----------------------
SUBMITTED ON: BY:
-----/-----/----- -------------------------------
==========================================================================
INTENDED SELLING SEASON: YEAR: SEASON: [CODE: ]
-------- ------------- ----
TOTAL ITEMS SUBMITTED: FIRST TIME SUBMISSIONS:
-------------
RESUBMISSIONS:
-------------
PRODUCTION/SHIPPING SCHEDULE:
DATE: EVENT:
----/----/---- -----------------------------------------
-----------------------------------------
DATE: EVENT:
----/----/---- -----------------------------------------
-----------------------------------------
DATE: EVENT:
----/----/---- -----------------------------------------
-----------------------------------------
NOTE: ANY APPROVAL SHALL NOT BE CONSTRUED AS CONSENT TO INFRINGE A THIRD-
PARTY'S COPYRIGHT, TRADEMARK OR OTHER RIGHT AND SHALL NOT SURVIVE THE
ABOVE SEASON.
==========================================================================
*****To Be Completed By Licensor*****
DATE RECEIVED: BY:
----/----/---- ---------------------------------------
ACTION TAKEN: TOTAL: ITEMS ITEMS
APPROVED APPROVED
----------------------------------
FIRST TIME SUBMISSIONS: |
----------------------------------
RESUBMISSIONS: |
----------------------------------
HARDFILE LOCATION: TITLE: DRAWER NO.:
------------------ ------------
DATE LICENSEE NOTIFIED: BY:
----/----/---- --------------------------------
METHOD:
-------------------------------
EXHIBIT "1"
Page 1 of 3
<PAGE>
PRODUCT APPROVAL FORM - SUBMISSION DETAIL BY ITEM
-------------------------------------------------
LICENSEE: [ ] PAGE OF
--------------------------------- --- ---
PRODUCTS: [ ]
---------------------------------
SUBMITTED ON: / / BY:
--- --- --- -------------------------------
INTENDED SELLING SEASON: YEAR: SEASON: [CODE: ]
--------- ------------ -------
================================================================================
ITEM NO./STYLE NO.: / [ ] FIRST TIME OR
----- -----
[ ] RESUBMISSION
PROPOSED WHOLESALE SELLING PRICE: $
---------------
DESCRIBE ITEM:
(Fabric, Color, -------------------------------------------------------------
Source Code No.,
Etc.) -------------------------------------------------------------
-------------------------------------------------------------
SHIPPING: BEGINS: / / ENDS: / /
--- --- --- --- --- ---
[ATTACH SKETCHES TO THIS FORM; ATTACH SWATCHES TO "SWATCH ATTACHMENT FORM"]
NOTE: ANY APPROVAL SHALL NOT BE CONSTRUED AS CONSENT TO INFRINGE A
THIRD-PARTY'S COPYRIGHT, TRADEMARK OR OTHER RIGHT AND SHALL NOT SURVIVE
THE ABOVE SEASON.
================================================================================
*****To Be Completed by Licensor*****
DECISION DATE: / / BY:
--- --- --- ------------------------------------------
Name
-----------------------------------------
Title/Department
-----------------------------
[_] APPROVED [_] DISAPPROVED
COMMENTS/BASIS:
-------------------------------------------------------------
-------------------------------------------------------------
-------------------------------------------------------------
WAS ITEM LEFT FOR QUALITY CONTROL PURPOSES?: [_] YES [_] NO
IF NOT, DATE ITEM IS DUE: / /
--- --- ---
DATE LICENSEE NOTIFIED: / / BY:
--- --- --- ------------------------------------
METHOD:
---------------------------------
EXHIBIT "1"
Page 2 of 3
<PAGE>
PRODUCT APPROVAL FORM-SWATCH ATTACHMENT PAGE
--------------------------------------------
LICENSEE: [ ] PAGE OF
------------------------------ ---- ----
PRODUCTS: [ ]
------------------------------
SUBMITTED ON: / / BY:
-------------- ----------------------------------
ITEM NO./STYLE NO.: /
------------------------------
INTENDED SELLING SEASON: YEAR: SEASON: [CODE: ]
------ ------ ----
================================================================================
*****AFFIX RELEVANT SWATCHES, ETC., TO THIS PAGE*****
<PAGE>
TRADEMARK USE APPROVAL FORM
---------------------------
LICENSEE: [ ] PAGE OF
------------------------------ ---- ----
PRODUCTS: [ ]
------------------------------
SUBMITTED ON: ___/___/___ BY:
----------------------------------
================================================================================
[ ] FIRST TIME SUBMITTED OR [ ] RESUBMISSION
DATE OF PRIOR SUBMISSION: / /
--------------
DESCRIPTION:
-----------------------------------------------------------------
-----------------------------------------------------------------
-----------------------------------------------------------------
***** AFFIX A SAMPLE OF THIS USE TO THIS FORM *****
SUPPLIER/AD AGENCY NAME:
--------------------------------------------------------
INTENDED USE:
------------------------------------------------------------
------------------------------------------------------------
USE PERIOD: ___/___/___ ___/___/___ SEASON:
-------------------
USE IS AFFIXED ON OR USED WITH WHAT PRODUCTS?:
----------------------------------
- --------------------------------------------------------------------------------
NOTE: ANY APPROVAL SHALL NOT BE CONSTRUED AS CONSENT TO INFRINGE A THIRD-PARTY'S
COPYRIGHT, TRADEMARK OR OTHER RIGHT AND SHALL NOT SURVIVE THE ABOVE-SEASON.
================================================================================
***** To Be Completed By Licensor *****
SUBMISSION NO.: DATE RECEIVED: ___/___/___ MEDIA CODE:
-------
or
NON-MEDIA CODE:
-------
DECISION DATE: ___/___/___ BY:
-----------------------------
Name
----------------------------
Title/Department
----------------
[ ] APPROVED [ ] DISAPPROVED
COMMENTS/BASIS:
-----------------------------------------------------------------
-----------------------------------------------------------------
-----------------------------------------------------------------
DATE LICENSEE NOTIFIED: ___/___/___ BY:
----------------------------
METHOD:
------------------------------------
EXHIBIT "2"
<PAGE>
Exhibit 10.15
U.S.A TRADEMARK LICENSE AGREEMENT
BETWEEN: OCEAN PACIFIC APPAREL CORP.,
a Delaware corporation
"LICENSOR" "Op"
AND
HAPPY KIDS, LTD.,
a New York corporation
"LICENSEE"
TRADEMARKS: "Ocean Pacific"; "Op"
PRODUCT CATEGORIES: See Exhibit A
TERRITORY: U.S.A., its territories and
possessions.
October 27, 1994
<PAGE>
U.S.A. TRADEMARK LICENSE AGREEMENT
----------------------------------
THIS U.S.A. TRADEMARK LICENSE AGREEMENT (this "Agreement") is made and
entered into this _______ day of October 1994, by and between Ocean Pacific
Apparel Corp., a Delaware corporation ("Licensor"), and Happy Kids, Ltd., a New
York corporation ("Licensee").
RECITALS
--------
A. Licensee is in the business of manufacturing and selling apparel,
B. Licensor is the owner (i) in the United States of the registrations
for the trademarks "Ocean Pacific" and "Op" and related marks, (ii) the goodwill
associated therewith, (iii) the owner of various common law and either rights in
said marks, and (iv) the owner in various foreign countries of said or similar
marks, goodwill and rights, all of which marks, goodwill and rights are
collectively referred to herein as the "Trademarks" and
C. Licensor is in the business of licensing the use of the Trademarks in
the manufacture and sale of apparel and related items and of providing design,
merchandising, marketing and sales direction and coordination to licensees of
the Trademarks.
AGREEMENT
---------
NOW, THEREFORE IN CONSIDERATION OF THEIR RESPECTIVE PROMISES MADE HEREIN
AND FOR OTHER GOOD AND VALUABLE CONSIDERATION, THE RECEIPT AND ADEQUACY OF WHICH
ARE HEREBY ACKNOWLEDGE, LICENSOR AND LICENSEE HEREBY AGREE AS FOLLOWS:
1. LICENSE
-------
1.1 GRANT OF LICENSE: Subject to the terms and conditions of this
----------------
Agreement, Licensor hereby grants to Licensee an exclusive right, but for the
rights of Licensor under this Agreement, to use the Trademarks in the
manufacture and wholesale distribution and sale in the United States, its
territories and possessions (the "Territory") only of the products set forth
October 27, 1994
1
<PAGE>
on Exhibit A attached hereto and made a part hereof, as such Exhibit may be
modified from time to time by the mutual agreement of Licensor and Licensee
(hereinafter the "Licensed Products"). For purposes of this Agreement, the term
"Trademark" shall not include the "Op Tech"(R) trademark of Licensor or any
---
other trademark, name, words, logo or design related to or similar to Licensor's
"OP Tech" (R) trademark or the "Op Pro" trademark or any other trademark, name,
words, logo or design related to or similar to the "Op Pro" trademark which
Licensor expects to develop and register as a trademark in the near future. The
license created hereby (hereinafter the "License") does not permit Licensee to
engage in the retail sale of the Licensed Products.
1.2 DETERMINATION OF LICENSED PRODUCTS: Licensee agrees to accept at all
----------------------------------
times the reasonable decision of Licensor with respect to whether a proposed
type of product is a Licensed product within the scope of the License. Licensee
will not manufacture or sell any type of product which Licensor in its
reasonable discretion decides is not a Licensed Product within the scope of the
License.
Any dispute between Licensee and any other licensee of Licensor regarding
the Licensed Products and the scope of their respective licenses shall be
resolved by Licensor as Licensor reasonably deems appropriate within the
confines of Licensee's rights hereunder, and Licensee agrees to be bound by such
resolution.
1.3 APPROVALS REGARDING OTHER PRODUCTS, ETC.: Licensee acknowledges that
---------------------------------------
Licensor has previously licensed the use of the Trademarks in connection with
products other than the Licensed Products to other manufacturers and that
Licensor may grant additional licenses to other persons or entitles in the
future for territories and/or products not within the scope of this License. If
at any time Licensor permits Licensee to manufacture a product, or to distribute
within an area, which is not, in the opinion of the Licensor, within the scope
of the
October 27, 1994
2
<PAGE>
License, such permission (i) shall apply only to the precise products, seasons
and territories specifically allowed by Licensor, and (ii) shall not constitute
a continuing approval, or a waiver of the right of Licensor subsequently to
disapprove, of such manufacture or distribution by Licensee.
1.4 USE OF TRADEMARK: Other than as expressly set forth in this Agreement
----------------
and in other license agreements between Licensor and Licensee (regarding other
product categories), if any, Licensee has absolutely no right, title or interest
in or to the Trademarks or the use thereof. Licensee shall make absolutely no
use of the Trademarks, whether in connection with the Licensed Products, in
advertising, in promotion, in public relations, or otherwise, that has not been
approved by Licensor pursuant to the approval procedures and requirements of
this Agreement.
Licensee acknowledges that it is only acquiring the right to use the
Trademarks in connection with (i) the manufacture of the Licensed Products, and
(ii) the wholesale distribution and sale of the Licensed Products in the United
States for the term of this Agreement. Upon the termination of the License,
Licensee shall cease all use of the Trademarks, except as specifically allowed
by the post-termination provisions of this Agreement.
Licensee will not apply for any registration of copyright, trademark or
trade name that in any way concerns, mentions or uses the Trademarks or any
similar marks or names without the express prior written consent of Licensor. In
any case, Licensee will transfer to Licensor, upon Licensor's request (whether
during or after the term of this Agreement), without charge, full and complete
ownership of any and all such applications, registrations, trademarks,
copyrights, or trade names whether or not they were obtained with the permission
of Licensor.
However, notwithstanding the foregoing, Licensor represents that Licensor
has not granted to any third party rights to use the Trademarks in the
manufacture and wholesale sale of
October 27, 1994
3
<PAGE>
the Licensed Products in the Territory during the term of this Agreement and
Licensor agrees to indemnify and hold harmless Licensee and its officers,
directors, representatives and agents against and from any and all losses,
damages, judgments, awards, penalties, costs and expenses (including attorneys'
fees and expenses) incurred by any of them as a result of any grant by Licensor
to any person or entity not a party to this Agreement of any right during the
term of this Agreement to use the Trademarks in the manufacture and wholesale
sale of the Licensed Products in the Territory, except for any such losses,
damages, judgments, awards, penalties, costs and expenses which occur as a
result of actions or failures to act on the part of Licensee or its officers,
directors, representatives or agents. A party claiming indemnification pursuant
to this Section 1.5 shall give prompt notice to Licensor any legal proceeding or
other claim which may give rise to such indemnification, and shall cooperate
with counsel for Licensor in connection with the conduct of the defense of any
legal action giving rise to such potential indemnification. Licensor shall have
the right to select counsel for the defense of any such action.
1.5 OWNERSHIP OF TRADEMARKS: Licensee acknowledges and agrees that the
-----------------------
Trademarks, all goodwill pertaining thereto, and all rights, registrations,
applications and entitlements thereto, and all extensions thereof, are and shall
remain the sole and exclusive property of Licensor and that nothing in this
Agreement shall be construed to convey any rights or interest in the Trademarks
to Licensee, other than the specific license granted hereunder. Whenever
requested by Licensor, whether during the term of this Agreement or thereafter,
Licensee shall execute such documents as Licensor may from time to time deem
necessary or appropriate to confirm, maintain or perfect Licensor's ownership of
the Trademarks and to ensure that all right, title and interest in and to the
Trademarks resides in Licensor.
Licensee acknowledges that it is often difficult to obtain clear,
registered title to
October 27, 1994
4
<PAGE>
trademarks and other intellectual property rights. Accordingly, Licensee agrees
that the rights granted herein exist only to the extent that Licensor owns such
rights, and, except as specifically provided in Section 1.4 above, no
representation, guarantee or warranty, express or implied, is made with respect
to Licensor's ownership of such rights or with respect to the rights of any
third parties that may conflict with the rights granted herein.
Without limiting the generality of the foregoing, Licensee specifically
acknowledges and agrees that, except as specifically provided in Section 1.4
above, Licensor makes no representation, guarantee or warranty of any kind that
the use by Licensee of the Trademarks does not or will not infringe upon any
trademark, copyright or other proprietary right of any other individual,
corporation, partnership, venture, estate, trust, association, governmental body
or authority or any other entity, and Licensee expressly waives any claim it may
now or hereafter have against Licensor for any such infringement.
1.6 USE OF NAMES: Except as this Agreement specifically authorizes the
------------
use of the Trademarks, and only to that extent, Licensee shall not use the words
and names "Ocean Pacific" or "Op" or any similar words or name as part of any
firm, corporate, trade or business name without the express prior written
consent of Licensor. Any permission by Licensor to Licensee to use such names or
words shall terminate upon termination of this Agreement or upon fifteen (15)
days' written notice from Licensor to Licensee.
1.7 NON-CONFLICT: Licensee shall not use the Trademarks in any manner
------------
that conflicts with the rights of any third party. If, in Licensor's good faith
determination, any use of the Trademarks by Licensee infringes or impairs the
rights of any third party or weakens or impairs Licensor's rights in the
Trademarks, Licensee will immediately terminate or modify such use in accordance
with Licensor's instructions. Except as may be specifically provided in Section
1.4 above, Licensee shall have no right of damages, offset or right to terminate
this
October 27, 1994
5
<PAGE>
Agreement in connection with such a termination or modification; provided,
however, that if Licensor requires any such termination or modification solely
as a result of any actual or alleged infringement by any of the Trademarks
themselves (as opposed to infringement by Licensee's usage of otherwise
non-infringing Trademarks) in any rights of any third party, Licensor shall
agree to negotiate in good faith an appropriate equitable reduction of the
minimum sales requirements set forth in Section 4 of this Agreement
corresponding to the Net Sales (as defined in Section 6.1 below) which Licensee
would reasonably expect to lose on account of such termination or modification;
and provided further that in the event any such termination or modification
resulting from any actual or alleged infringement by any of the Trademarks
materially deprives Licensee of the economic benefits of the License, Licensee
shall have the right to terminate this Agreement upon thirty (30) days' prior
written notice to Licensor, and Licensor shall thereafter reimburse Licensee
for the out-of-pocket costs actually incurred by Licensee in manufacturing any
Licensed Products whose sale was prohibited by Licensor because of such
termination or modification and for any penalties actually incurred by Licensee
under any contracts to purchase piece goods or raw materials for the manufacture
of any Licensed Products whose sale was prohibited by Licensor because of such
termination or modification In the event Licensee fails to terminate or modify
such use as directed by Licensor, Licensor may, in its sole discretion,
terminate the rights of Licensee under this Agreement.
1.8 BEST EFFORTS: To induce Licensor to grant the License provided for in
------------
this Agreement, Licensee has represented to Licensor that Licensee is
experienced in the development, production, manufacturing, marketing and sale of
products similar in nature to the Licensed Products, and that Licensee will
commit itself to a reasonable, vigorous and diligent program of exploiting the
License. Accordingly, Licensee agrees to devote its best efforts to
October 27, 1994
6
<PAGE>
manufacture and ship the Licensed Products in order to meet the demand for the
Licensed Products and to exploit the rights herein granted to maximize the
manufacture and sale of the Licensed Products. Licensee agrees to devote its
best efforts to manufacture and ship each accepted order for Licensed Products
within a reasonable time of receipt of the order or by the delivery date
specified in the order.
1.9 COOPERATION WITH OTHER LICENSEES: Licensee acknowledges that (i) it is
--------------------------------
one of various domestic and international licensees of the Trademarks; (ii)
Licensor has design, merchandising, marketing and other obligations to all
licensees of Trademarks: and (iii) it is Licensor's goal to have all licensees
produce products which are reasonably consistent and cohesive in terms of theme,
style, design, coloration, fabric, trim, identification, ect. and which cause
the consumer to perceive that such products (although coming from different
manufacturers and licensees) emanate from a single source. Licensee acknowledges
the value of this perception by both retailers and consumers and the benefit of
this perception both to Licensee and to all other licensees of the Trademarks.
Licensee agrees to cooperate with all other licensees of the Trademarks, both
foreign and domestic, in the following:
1. The sharing of information regarding fabric and other resources:
2. The joint purchasing of fabric and other materials where price
discounts, fabric or color consistency or other significant advantages are
available from joint purchasing: and
3. The sharing of merchandising and marketing ideas, concepts and
materials.
Licensor acknowledges that Licensee is entitled (i) to be reasonably
reimbursed by the benefitted licensees for expenses incurred in the reasonable
cooperation required by this paragraph, and (ii) to reasonable compensation from
the benefitted licensee for Licensee's efforts under this paragraph. Licensee
acknowledges that to the extent Licensee receives and uses information, ideas,
concepts or materials from other licensees under this paragraph or
October 27, 1994
7
<PAGE>
participates with other licensees in joint purchasing of materials under this
paragraph, other licensees of the Trademarks are entitled (i) to be reasonably
reimbursed by Licensee for their expenses incurred in the reasonable cooperation
required by this paragraph, and (ii) to reasonable compensation from Licensee
for their efforts under this paragraph. Any dispute between Licensee and other
licensees of the Trademarks regarding Licensee's obligations under this
paragraph or the obligations of other licensees to Licensee for such reasonable
cooperation or the amounts of money to be paid to or by Licensee under this
paragraph shall be resolved by Licensor as it deemes appropriate, and Licensee
agrees to be bound by any such resolution.
1.10 NOT A FRANCHISE: The parties acknowledge and agree that this
---------------
Agreement is an intellectual property rights license agreement and does not
constitute, and shall not be construed as, a franchise agreement. The parties
further acknowledge and agree that state and federal franchise laws do not and
will not apply to this Agreement or to the relationship between Licensee and
Licensor and their respective rights and obligations hereunder. The parties
agree that, due to their respective business backgrounds and prior licensing
experience, they do not need the protection of state or federal franchise laws.
2. TERRITORY: The Licensed Products shall not be sold, marketed,
---------
distributed or delivered, by Licensee, either directly or indirectly, anywhere
except in the Territory without the prior written consent of Licensor. Licensee
shall not sell or otherwise transfer the Licensed Products to any individual or
entity who Licensee knows intends to sell the Licensed Products outside the
Territory, or who Licensee has reason to believe intends to sell the Licensed
Product outside the Territory, without the prior written permission of Licensor.
Nothing in this paragraph shall be construed to prohibit Licensee from
manufacturing the Licensed Products outside the Territory, provided such
Licensed Products are sold, marketed, distributed or delivered only in the
Territory. Licensor may manufacture, market or sell, or allow others
October 27, 1994
8
<PAGE>
(including other licensees of the Trademarks) to manufacture, market or sell,
the Licensed Products outside of the Territory.
3. TERM: The initial term of this Agreement shall commence on
----
September___, 1994 (the "Commencement Date") and terminate on December 31, 1999,
unless sooner terminated as provided herein. Licensee has the option to extend
the term of this Agreement for an additional period of five (5) years, unless
sooner terminated as provided herein, commencing on the date following the
expiration of the original term. Such option must be exercised by a notice in
writing to Licensor delivered at least six (6) months and no more than nine (9)
months prior to the end of the initial term. Such option may be exercised only
if Licensee is in full compliance with its obligations under this Agreement at
the time of exercise, and only if Licensee shall have cured all defaults of this
Agreement of which Licensor has given notice to Licensee at the time of exercise
and which defaults occurred not more than six (6) months prior to notice
thereof. In addition, such option shall become null and void and of no further
force and effect, and this Agreement shall terminate not later than the
expiration of the initial term hereof, if Licensee shall have committed any
default of any of the provisions of this Agreement after the date of exercise of
such option but prior to the commencement of the extended term of this Agreement
and shall have failed to cure such default promptly after receiving notice of it
provided such default occurred not more than six (6) months prior to such
notice. All extensions will be on all of the terms and conditions of this
Agreement. Should Licensor, at any time, exercise its rights under this
Agreement to terminate the rights of Licensee hereunder, all options to extend
the term shall likewise be terminated, whether or not such options shall have
been exercised.
4. MINIMUM SHIPMENTS: From the Commencement Date through December 31,
-----------------
1995, Licensee shall timely and accurately ship at least seventy-five percent
(75%), and
October 27, 1994
9
<PAGE>
thereafter Licensee shall timely and accurately ship, each year, at least
eighty-five percent (85%) of all firm orders for Licensed Products accepted by
Licensee and input into Licensee's management information system (MIS). In
determining whether Licensee shall have met the shipping requirements of this
paragraph and for purposes of calculating the minimum royalties payable
hereunder, all firm orders accepted by Licensee, and all orders which should
have been accepted by Licensee, as required by this section, shall be deemed
"orders". In determining whether Licensee shall have met its minimum shipping
requirement, orders canceled as a result of late delivery, poor quality, or
other acts of Licensee shall be deemed orders not to have been shipped by
Licensee. For purposes of this section, "timely" shipment shall mean the
shipment of goods in such a time and manner that the customer receives the goods
on an order before the originally contracted and agreed upon delivery date,
without discounts or other concessions for late or otherwise improper delivery.
In determining whether Licensee shall have met its minimum shipping requirement
goods shipped and accepted by the customer after the cancellation date, as set
forth in the original order, will be deemed to have been timely shipped.
"Accurately" to ship shall mean to ship goods substantially in compliance with
the requirements of the orders therefor; provided that goods accepted by the
customer not in compliance with the requirements of the order shall be deemed to
have been accurately shipped.
As set forth in Section 23.1 hereof, if Licensee shall fail timely and
accurately to ship eighty-five percent (85%) of its orders for Licensed Products
as required by this Section 4 for any calendar year during the term hereof,
Licensor shall be entitled immediately to terminate Licensee's rights under this
Agreement at any time thereafter without prior notice to Licensee; provided,
however, that Licensee's failure to meet its obligation under this Section 4 in
a calendar year solely and exclusively because of circumstances mainly and
substantially beyond the control of Licensee, Licensee's failure so to meet such
obligation shall be excused to
October 27, 1994
10
<PAGE>
the extent caused by such circumstances and; provided, further, that in such
case Licensee shall timely and accurately ship eighty-five percent (85%)
(seventy-five percent [75%] from the Commencement Date through December 31,
1995) of all orders not precluded by such circumstances, and Licensor may, at
its option, terminate the rights of Licensee under this Agreement if Licensee
fails timely and accurately to ship eighty-five percent (85%) (seventy-five
percent [75%] from the Commencement Date through December 31, 1995) of the
orders not so precluded. Notwithstanding the previous sentence, Licensee may
cure a failure to timely and accurately ship such minimum percentage of accepted
firm orders and Licensor may not terminate Licensee's rights under this
Agreement pursuant to the preceding sentence (a) in the event Licensee shall
have failed to timely and accurately to ship seventy-five (75%) of its accepted
firm orders from the Commencement Date through December 31, 1995. If Licensee
shall have paid to Licensor, not later than January 20, 1996, an amount equal to
six percent (6%) of the difference between the total dollar amount of orders
actually shipped and seventy-five percent (75%) of all accepted firm orders; or
(b) in the event Licensee shall have failed timely and accurately to ship
eighty-five percent (85%) of such orders in any year after December 31, 1995. If
Licensee shall have paid to Licensor, not later than twenty (20) days following
the end of such year, six percent (6%) of the difference between the total
dollar amount of orders actually shipped and eighty-five percent (85%) of all
accepted firm orders during such year, but only if (i) Licensee shall have
shipped Licensed Products producing Net Sales (as defined in Section 6.1 below)
during such year equalling or exceeding one hundred twenty-five percent (125%)
of the amount set forth for such year in the paragraph immediately following,
and (ii) Licensee shall have timely and accurately shipped eighty-five percent
(85%) of all accepted firm orders during the immediately preceding year (or
seventy-five percent (75%) of such orders in the preceding year if such
preceding year shall have been
October 27, 1994
11
<PAGE>
the year ended December 31, 1995.
During the initial term hereof, Licensee shall sell and deliver Licensed
Products (with royalties paid thereon) producing Net Sales (as defined in
Section 6.1 below) equalling or exceeding the amounts set forth below for each
of the periods set forth below.
<TABLE>
<S> <C>
The Commencement Date through December 31, 1995 ***
January 1, 1996 through December 31, 1996 ***
January 1, 1997 through December 31, 1997 ***
January 1, 1998 through December 31, 1998 ***
January 1, 1999 through December 31, 1999 ***
</TABLE>
The required minimum deliveries of the Licensed Products for any calendar year
during any extended term of this Agreement shall be increased or decreased, as
the case may be, over the required minimum for the prior year by ***
If Licensee fails to sell and deliver Licensed Products producing Net Sales
equalling or
*** Confidential portion omitted and filed separately with the Securities and
Exchange Commission.
October 27, 1994
12
<PAGE>
exceeding the amounts set forth above (with royalties paid thereon) for any
calendar year (a "Poor Shipment Year") during the term of this Agreement (or any
extension thereof), Licensor shall have the right to terminate this Agreement
and Licensee's rights hereunder at any time at Licensor's option without prior
notice at any time after January 31 but before May 1 of the succeeding year;
provided, however, that Licensor shall not have the right to terminate this
Agreement and Licensee's rights hereunder due to a failure by Licensee to sell
and deliver Licensed Products producing such Net Sales in any such Poor Shipment
Year if Licensee shall pay to Licensor, not later than January 31 of the
succeeding year, an amount equal to the total combined royalty and advertising
payments which Licensee would have been required to pay to Licensor under this
Agreement for the Poor Shipment Year had Licensee sold and delivered Licensed
Products producing Net Sales equal to the amount set forth above for such Poor
Shipment Year, less the amount of any combined royalty and advertising payments
actually paid by Licensee to Licensor with respect to Net Sales for such Poor
Shipment Year. As set forth in Section 6.2 below, the failure of Licensee to
achieve the minimum sales and delivery amounts set forth above for the period
from the Commencement Date through December 31, 1995 shall not excuse Licensee's
obligation to pay minimum royalties based on such minimum sales and delivery
amounts.
In addition to the minimum shipping requirements set forth above with
respect to Net Sales of all of the Licensed Products, Licensee's Net Sales
during each of the periods set forth above of Licensed Products in each of the
product categories set forth below shall equal or exceed *** of the amounts set
forth above with respect to minimum Net Sales of all categories of Licensed
Products:
1. Sportswear, outerwear and swimwear and related accessories for
newborns and infants;
*** Confidential portion omitted and filed separately with the Securities and
Exchange Commission.
October 27, 1994
13
<PAGE>
2. Sportswear, outerwear and swimwear for toddler girls and toddler boys;
3. Little boys' sportswear, outerwear and swimwear in the size ranges
4-7;
4. Little girls' sportswear, outerwear and swimwear in the size ranges
4-6; and
5. Girls' sportswear and outerwear in the size range 7-14.
If Licensee fails to sell and deliver Licensed Products in any of the above
enumerated categories producing Net Sales equalling or exceeding *** of the
amounts set forth above with respect to required minimum Net Sales of all
categories of Licensed Products during any period set forth above, Licensor may
at its option exercised at any time after January 31 but before May 1 of the
succeeding year permanently exclude such category from the Licensed Products
covered under this Agreement. If Licensor exercises this option, Licensee's
license under this Agreement to use the Trademarks in the manufacture and
wholesale distribution and sale in the Territory of that category of products
shall immediately cease and terminate, and the definition of Licensed Products
in this Agreement and in Exhibit A thereto shall automatically be deemed to be
amended to delete such category of products from such definition. Upon
Licensor's exercise of such option, the rights and obligations of Licensor and
Licensee with respect to such category of products shall thereupon become
governed by the provisions of Sections 24 through 24.5 of this Agreement;
provided, however that the respective rights and obligations of Licensor and
Licensee under this Agreement shall remain unchanged and unaffected with respect
to all other categories of the Licensed Products, including without limitation
the obligations of Licensee under this Section 4.
In order for Licensor to determine whether Licensee is in compliance with
the shipping requirements of this Agreement, Licensee shall provide Licensor
with current and accurate information regarding its orders and shipments. Such
information shall be provided in such content, form and manner as Licensor may
from time to time direct.
*** Confidential portion omitted and filed separately with the Securities and
Exchange Commission.
October 27, 1994
14
<PAGE>
Non-compliance with any of the provisions of this Section 4 shall
constitute a default under this Agreement.
5. INITIAL LICENSING FEE: In addition to all other amounts due from
---------------------
Licensee to Licensor under this Agreement and notwithstanding any termination of
this Agreement. Licensee shall pay to Licensor the sum of Seventy-Five Thousand
Dollars ($75,000.00) payable as follows: Twenty-Five Thousand Dollars
($25,000.00) upon execution and delivery of this Agreement by Licensee, Twenty-
Five Thousand Dollars ($25,000.00)on or before December 31, 1995; and the
balance on or before December 31, 1996.
Any payment due to Licensor under this Section 5 shall be made to Licensor
notwithstanding any assignment by Licensor of any or all of its rights under
this Agreement, unless Licensor provides explicit written instructions to
Licensee directing such payments under this Section 5 to be made to another
person or entity.
6. ROYALTY AND ADVERTISING PAYMENTS: As a combined royalty and
--------------------------------
advertising payment. Licensee shall pay to Licensor a sum equal to *** of the
dollar amount of all Net Sales of the Licensed Products, up to the first *** of
such Net Sales in any calendar year, and a sum equal to *** of the dollar amount
of all Net Sales of the Licensed Products in excess of *** in any calendar year.
Royalties and advertising payments shall accrue upon the sale of the Licensed
Products. A sale of a Licensed Product shall be deemed to have occurred upon the
earliest to occur of the following: (a) the sending of an invoice for such
Licensed Product, (b) the shipment of such Licensed Product, or (c) receipt of
payment for such Licensed Product.
6.1 NET SALES: As used herein, "Net Sales" means the gross dollar amount
---------
of all sales by Licensee of the Licensed Products, less actual returns of
Licensed Products and bona
*** Confidential portion omitted and filed separately with the Securities and
Exchange Commission.
October 27, 1994
15
<PAGE>
fide trade discounts and allowances. No deduction from "Net Sales" shall be made
for cash or other payment discounts (including anticipation or other similar
discounts or allowances for early payment), uncollectible accounts, or reserves
for chargebacks. No costs or charges incurred in the manufacture, sale,
distribution, marketing, advertisement or promotion of the Licensed Products, in
the factoring or other financing of sales of the Licensed Products, or in the
payment by Licensee of any local, State or Federal taxes of any nature
whatsoever shall be deducted from the gross sales amount of the Licensed
Products in calculating "Net Sales" or from any royalty payable to Licensor.
Notwithstanding the foregoing, Licensee is not required to pay royalty (or any
other fees) on amounts it actually pays for bona fide freight charges. Any sales
or transfers of Licensed Products made by Licensee to any person or entity that
does not deal at arm's length with Licensee shall be computed, for the purpose
of determining "Net Sales", at an amount equal to the price at which Licensee
would charge purchasers who deal at arm's length with Licensee. "Net Sales"
does not include the sale of samples to Licensor's sales force.
6.2 MINIMUM ROYALTY PAYMENT: Regardless of whether or not Licensee sells
-----------------------
and delivers Licensed Products producing Net Sales equalling or exceeding the
amounts set forth in Section 4 above, Licensee shall pay to Licensor, as a
minimum royalty and advertising payment hereunder, for the period from the
Commencement Date through December 31, 1995, an amount equal to *** of the
required minimum sales and deliveries for that period (as set forth in Section 4
above). If by December 31, 1995, Licensee shall not have paid to Licensor
royalties and advertising payments equalling or exceeding the minimum royalty
and advertising payments for that year as set forth in this section, Licensee
shall pay to Licensor the balance due on such royalties and advertising payments
not later than January 20, 1996.
*** Confidential portion omitted and filed separately with the Securities and
Exchange Commission.
October 27, 1994
16
<PAGE>
6.3 MANNER OF PAYMENT: MONTHLY STATEMENTS: The payment of royalties and
-------------------------------------
advertising payments shall be made on or before the 20th day of each calendar
month for Net Sales occurring during the previous calendar month. Licensee shall
send to Licensor with each royalty payment a statement certified to be accurate
by an officer of Licensee, which completely and accurately sets forth a detailed
accounting of (i) the quantities of Licensed Products and Discounted Goods
shipped and/or sold during the preceding month by product and size. (ii) a
summary of the billings thereon and/or the payments received therefrom that
comprise the gross sales and Net Sales of such products during the preceeding
month, (iii) the calculation of royalties and advertising payments on such
shipments, billings and payments, and (iv) the total of royalties so computed
and due to Licensor. Such statement shall be in the form and shall contain such
additional information as Licensor may from time to time direct. Neither receipt
nor acceptance of any payment under this Agreement shall constitute acceptance
of such statement's contents or preclude Licensor from thereafter questioning
any such statements of the accruing of any payment made hereunder. Time is of
the essence with respect to all payments herein.
6.4 SYSTEMS, BOOKS AND RECORDS: Licensee shall maintain an adequate
--------------------------
system of internal controls, (i.e., policies, procedures, organizational plans,
and other measures), to ensure the accuracy and reliability of financial and
operational data. Additionally, Licensee shall maintain true, complete and
accurate books of account and records of all transactions with respect to the
Licensed Products and all other data necessary for the proper computation of the
royalty, advertising and other payments required under this Agreement, all in
accordance with generally accepted accounting principles applied on a consistent
basis.
6.5 ANNUAL REPORTS OF SALES: For each calendar year during the term
-----------------------
hereof, Licensee shall submit to Licensor an annual statement for the twelve
month period ending
October 27, 1994
17
<PAGE>
December 31. The annual statement shall be submitted by January 20th of each
year for the previous calendar year and shall include a detailed and cumulative
account of all transactions involving the Licensed Products, including, without
limit, all orders, shipments, returns, trade discounts and allowances, royalties
paid and payable, goods returned as substandard, and orders canceled for
non-delivery and such other information as Licensor may from time to time
request. This report shall be certified to be correct by the Chief Executive
Officer and the Chief Financial Officer of the Licensee or such officers or
employees of Licensee as Licensor and Licensee may agree.
6.6 MULTIPLE LICENSES: In the event Licensee is or shall become a party
-----------------
to more than one license agreement with Licensor, Licensee shall maintain and
generate separate reports and records as required by Sections 6.5, 6.6 and 6.7
hereof for each license agreement. Failure to comply with the provisions of this
Section 6.8 shall constitute a default of this Agreement.
7. AUDIT: Licensor or its authorized agent shall have the right from time
-----
to time, and at any reasonable time but not more than once in any calendar year,
to examine and to perform tests of the Licensee's books and records and
undertake other reasonable procedures to verify compliance by Licensee with the
provisions of this Agreement. The cost of said examination and tests shall be
borne by Licensor, unless the royalties or other amounts owing to Licensor by
Licensee hereunder are discovered to have been understated or underpaid by five
percent (5%) or more over the period since the last such examination or test, in
which case Licensee shall pay forthwith to Licensor the cost of such examination
and/or test, and all payments found to be due, with interest thereon, at the
rate of five hundred (500) basis points over the Prime Rate (as defined below)
per annum, or the maximum legal rate, whichever is less, computed from the date
said unpaid payments would have been due had they been properly accounted for
until the date they are actually paid. The "Prime Rate" shall mean the Prime
Rate
October 27, 1994
18
<PAGE>
(the base rate on corporate loans posted by at least seventy-five percent (75%)
of the nation's thirty (30) largest banks), as published in The Wall Street
Journal on the business day immediately following any day on which Licensee
shall have failed to make a payment under this Agreement when due.
If any such examination or tests reveal that Licensee has understated or
underpaid the royalties and/or other payments owing to Licensor hereunder and/or
under all other license agreements of which Licensee or any of its affiliates
and Licensor are parties by two hundred thousand dollars ($200,000) or more over
the period since the last such examination or test, Licensor shall have the
right, at its sole and absolute discretion, to terminate this Agreement
immediately, and Licensee shall have no right to cure any such underpayment
prior to such termination. In addition, if any two (2) such examinations shall
each reveal that Licensee has understated or underpaid the royalties and/or
other payments owing to Licensor hereunder and/or under all other license
agreements of which Licensee or any of its affiliates and Licensor are parties
by ten percent (10%) or more over the respective periods since the last such
examinations or tests, Licensor shall have the right at its sole and absolute
discretion, to terminate this Agreement immediately, and Licensee shall have no
right to cure any such under payment prior to such termination.
8. ANNUAL STATEMENTS; QUARTERLY SHIPPING STATEMENTS OF NET WORTH:
-------------------------------------------------------------
Promptly after Licensee's receipt thereof and in no event later than
seventy-five (75) days after the end of Licensee's fiscal year, Licensee shall
furnish Licensor with a statement of Licensee's net worth, which shall be
certified by a reputable certified public accounting firm as being Licensees net
worth as of the end of such fiscal year, as determined in accordance with
generally accepted accounting principles consistantly applied ("G.A.A.P."). In
addition, Licensee shall furnish to Licensor quarterly statements forty-five
(45) days after the end of
October 27, 1994
19
<PAGE>
each calendar quarter during the term of this Agreement which shall set forth in
detail Licensee's compliance with the minimum shipping requirement set forth in
Section 4 of this Agreement.
9. ADVERTISING/PUBLIC RELATIONS: Licensor shall spend the advertising
----------------------------
payment received pursuant to this Agreement in its sole discretion and judgment.
Licensor shall reasonably consult with all of its licensees of the Trademarks on
a periodic basis with respect to the advertisement and promotion of the Licensed
Products and the Trademarks. However, Licensor shall have the sole and absolute
right to decide how to advertise and promote the Licensed Products and the
Trademarks.
All advertising, promotions and public relations concerning the Licensed
Products and/or the Trademarks, including any done directly by Licensee or any
of its agents, representatives or customers, whether or not at Licensee's own
expense (including cooperative advertising), shall require the prior written
approval of Licensor, acting in its sole and absolute discretion; provided,
however that Licensor's consent shall not be required with respect to Licensee's
repeated use of an advertising format which Licensor has previously approved,
provided the product depicted or advertised in such format has itself been
approved by Licensor.
10. SHOW, SHOWROOM, SALES MEETING AND BRAND SUPPORT EXPENSE: Licensee
-------------------------------------------------------
shall be under no obligation to make use of any showroom owned, operated, leased
or managed by Licensor or participate with Licensor in any trade show or sales
meeting, but shall have the right to do so at Licensee's discretion. However, If
Licensee shall, during any calendar year during the term of this Agreement, use
or make use of any showroom owned, operated, leased or managed by Licensor or
participated with Licensor (at Licensee's request) in any display at any
tradeshow or sales meeting. Licensee shall pay to Licensor. In addition to all
other payments
October 27, 1994
20
<PAGE>
required hereunder, Licensee's pro rata share, based on the ratio of Licensee's
Net Sales of the Licensed Products to the total United States Net Sales of all
products using the Trademarks in the Territory, of Licensor's show, showroom,
sales meeting and brand support expenses, charges and overhead: provided,
however, that Licensee's payment under this Section 10 shall not exceed one and
one-half percent (1-1/2%) of the dollar amount of Net Sales of the Licensed
Products (including sales of Discounted Goods) in any calendar year.
Licensor shall spend the payment it receives under this Section 10 in its
sole discretion and judgment. Licensor shall reasonably consult with all of its
licensees of the Trademarks on a periodic basis with respect to the expenditure
of such payments. However, Licensor shall have the sole and absolute right to
decide how to spend such payments.
If Licensee shall not have made use of any showroom owned, operated, leased
or managed by Licensor in any display at any tradeshow or sales meeting during
any calendar year, Licensee shall not be liable for any expense under this
Section 10 for such calendar year.
11. ADMINISTRATIVE COSTS: Licensor and Licensee shall each pay its own
--------------------
administrative and legal costs associated with this Agreement.
12. REPRESENTATIONS AND WARRANTIES OF LICENSEE: Licensee represents and
------------------------------------------
warrants to Licensor as follows:
(a) ORGANIZATION AND AUTHORITY: Licensee is a corporation, duly
--------------------------
incorporated, validly existing and in good standing under the laws of the State
of New York and has all necessary corporate power and authority to enter into
this Agreement and to perform its obligations hereunder. This Agreement has been
duly authorized, executed and delivered by Licensee and constitutes a legal,
valid and binding obligation of Licensee enforceable against Licensee according
to its terms.
(b) NO CONFLICT: The execution, delivery and performance of this Agreement
-----------
by
October 27, 1994
21
<PAGE>
Licensee does not and will not (i) violate or conflict with its [Articles] of
Incorporation, or (ii) conflict with or violate any law, rule, registration,
order, writ, judgment, injunction, decree, determination or award applicable to
Licensee.
(c) ABSENCE OF LITIGATION: No claims, lawsuit, action, proceeding or
---------------------
Investigation has been asserted or instigated against Licensee which seeks to
delay or prevent the consummation of the License transaction contemplated by
this Agreement or which would be reasonably likely to adversely affect or
restrict Licensee's obligations hereunder.
13. PRODUCT STANDARDS: No Licensed Product shall be distributed or sold
-----------------
unless it is of the highest standards and unless it has received the approval of
Licensor prior to its distribution and sale as set forth below.
13.1 APPROVAL OF PRODUCT DESIGNS AND GRAPHICS: Each design of and graphic
----------------------------------------
for a Licensed Product that Licensee desires to manufacture or distribute, sell
or otherwise market, shall be submitted to Licensor for approval, along with
samples of all proposed colors, fabrics and other materials for such Licensed
Products. All submissions for approval shall be at the sole expense of the
Licensee. For purposes of submitting designs and graphics Licensee shall use
such design and graphics approval forms, and shall supply Licensor with such
information in connection therewith, as Licensor may from time to time direct.
Licensor shall have fifteen (15) working days following its receipt of a
proposed design and/or graphic, from Licensee within which to approve or
disapprove such design and/or graphic. Failure by Licensor to disapprove within
such fifteen (15) working day period shall be deemed to constitute approval of a
design or graphic. Licensor may approve a design or graphic subject to such
changes as it deems appropriate, in which event Licensee shall resubmit the
design and/or graphic with the suggested changes for Licensor's approval as set
forth above. Licensor may approve or disapprove of a design or graphic in its
sole and absolute
October 27, 1994
22
<PAGE>
discretion. Licensee shall not produce a Licensed Product which has not
received design and graphics approval from Licensor as set forth in this
paragraph.
Licensor shall grant approval of Licensee's line of Licensed Products for
each season upon approving Licensee's graphics and designs (storyboards) for
each Licensed Product proposed to be included in such line and fabric and color
samples proposed to be used in manufacturing each such Licensed Product. Such
approval shall be deemed to constitute approval of each Licensed Product in each
color and fabric approved for such Licensed Product; provided, however, that
such approval shall not limit in any way Licensee's obligation pursuant to
Section 13.2 below to submit a sample of each style of Licensed Product proposed
to be included in Licensee's line for each season, and Licensor reserves the
right to require Licenses to make changes to any such Licensed Product after
having examined Licensee's sample of such Licensed Product.
Without limiting the generality of the foregoing, it is specifically agreed
that Licensor may disapprove a design and/or graphic which Licensor decides does
not meet all of the following criteria: It is wholesome; not obscene or
obnoxious; not sacrilegious; not racist; not sexist; does not disparage
Licensor's product or the products of others; does not Infringe the trademark
rights or copyrights of others; properly uses the Trademarks; and does not
violate any Federal or state law; does not portray illegal conduct.
13.2 APPROVAL OF SAMPLES TO SALES FORCE: A sample of each proposed
----------------------------------
Licensed Product which has received design and graphics approval as set forth
above, shall be submitted by Licensee to Licensor for approval; provided,
however, that Licensee need submit a sample of any style of Licensed Product in
only one of the colors and fabrics approved by Licensor for such Licensed
Product pursuant to Section 13.1 above. All such submissions of samples for
approval shall be at the sole expense of Licensee. Licensee shall use such
sample approval forms and
October 27, 1994
23
<PAGE>
supply Licensor with such information in connection therewith as Licensor may
from time to time direct. All samples shall be submitted on a timely basis so
that the approval process (and any changes) may be accomplished in time to allow
an orderly distribution of samples to the sales force and show rooms and timely
manufacturing and shipment of the product. Licensee shall submit a sample of
each product it intends to sell, with complete specifications, fabric samples
and color swatches.
Licensor shall be permitted to approve a sample subject to such changes as
it deems appropriate. Licensor may approve or disapprove of a sample acting in
the exercise of its sole and absolute discretion. Licensee shall be permitted to
make running changes to any Licensed Product which has received Licensor's
approval, provided that such changes do not materially affect the style or
quality of the approved product. Licensee shall provide an approved sample of
each of the Licensed Products, with complete specifications, fabric samples and
color swatches (as requested by Licensor), to Licensor for Licensor's historical
sample line at the expense of Licensee.
13.3 APPROVAL PRIOR TO DELIVERY: Licensee shall not ship, distribute or
--------------------------
sell any LIcensed Product unless Licensor has granted design and/or graphics and
sample approval, as requires by Sections 13.1 and 13.2 above.
13.4 SEASONS: Licensee acknowledges that Licensor and Licensee shall
-------
jointly develop each season's proposed line in a cooperative process taking
various factors into account, including, without limitation, cost and
availability of fabric and other piece goods, price points, competitors'
products, other licensee's products, overall line direction, the retail
environment and general economic conditions,
13.5 PRODUCT DISTRIBUTION: Licensee agrees to maintain Licensor's
--------------------
marketing and retailing standards to protect the value of the Trademarks and the
image of the Licensed
October 27,1994
24
<PAGE>
Products. Licensee shall maintain the same or higher standards for the selection
of retail, wholesale and other outlets as those maintained by Licensor during
the term of this Agreement. Licensee acknowledges that Licensor may change such
standards from time to time during the term of this Agreement and that the
changed standards shall apply to Licensee after reasonable notice thereof;
provided, however, that Licensee may terminate this Agreement upon ninety (90)
days' written notice to Licensor if Licensor changes such standards such that
Licensor shall require or permit the Licensed Products to be sold in retail
outlets which are substantially "down market" from the outlets in which Licensor
previously allowed the Licensed Products to be sold.
Licensor shall have the right at any time, acting in the exercise of its
sole discretion, to disapprove the use of particular wholesale and/or retail
outlets, including the right to disapprove of outlets that were previously
acceptable, except as otherwise specifically provided herein. Unless prior
written approval is obtained from Licensor, Licensee shall not sell, dispose of
or distribute any Licensed Products through (i) K-Mart, Walmart, Target,
Montgomery Ward, Caldor, Venture, Sears, DSJS, Burlington Coat Factory, or
similar outlets, (ii) Newtons or Marshalls or similar outlets, except on a
close-out basis, (iii) any other outlets disapproved by Licensor except for
outlets to which Licensee has been permitted to sell the Licensed Products on a
regular basis unless such outlets shall have lowered retail standards (it being
understood that (x) Licensor may from time to time permit Licensee to sell
Licensed Products to specific retailers for a limited time or on a limited basis
without Licensee being considered to sell to such retailers on a regular basis,
and (y) Licensee shall not be deemed to be selling Licensed Products to Costco
or other clubs on a regular basis, and Licensor may prohibit Licensee from
selling to such clubs, unless Licensor and Licensee agree otherwise), or (iv)
any factory outlet stores, warehouse sales, parking lot sales, swap meets, flea
markets or similar
October 27, 1994
25
<PAGE>
sales, stores or outlets. Licensor may, at its sole option, terminate the rights
of Licensee under this Agreement for failure to adhere to the provisions of this
Section 13.5.
13.6 SAMPLES FOR SALES FORCE: Prior to the showing of any new line, and
-----------------------
after receiving the approvals described in Sections 13.1 and 13.2 above Licensee
shall furnish to Licensor sufficient samples for its use and display of the
Licensed Products to customers and at trade shows and showrooms. Licensor shall
consult with Licensee in determining the number of samples which Licensee shall
furnish under this Section 13.6; however, the decision of Licensor with respect
to such number shall be binding on Licensee. Nothing in this Section 13.6 shall
be construed to impose any duty or responsibility on Licensor to sell any of the
Licensed Products either by itself or with or through its sales force or to
imply that any such duty or responsibility exists.
13.7 MERCHANDISER/DESIGNER: Licensee shall provide, at its own expense,
---------------------
sufficient full time employees qualified to act as designers, merchandisers, and
production/sample coordinators with respect to the Licensed Products. Such
employees shall be subject to approval by Licensor and shall devote
substantially all of their working time on the development and coordination of
the Licensed Products in conjuction with the design and merchandising staff of
Licensor.
13.8 APPEARANCE AS ONE PRODUCT LINE: Licensee acknowledges that to the
------------------------------
extent reasonably possible and prudent, Licensor and its designers and
merchandisers will attempt to make the product lines of all licensees of the
Trademarks cohesive and consistent and appear to be the product of one company.
Licensee agrees to cooperate with Licensor in this endeavor.
14. SALES FORCE; FULL-TIME SALES MANAGER: Licensee agrees that all
------------------------------------
Licensed Products (including seconds, irregulars and close outs) shall be sold
and distributed through Licensee or a sales force which is managed by Licensee.
October 27,1994
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<PAGE>
Licensee shall retain a full-time sales manager who shall devote
substantially all of his or her time to sales of the Licensed Products, and to
managing Licensee's sales force in selling Licensed Products, Licensee agrees to
give due consideration to hiring Steve Pinkow or a corporation owned and
controlled by Steve Pinkow as such full-time sales manager: provided, however,
that nothing in this Section 14 shall be construed to require or bind Licensee
actually to retain Mr. Pinkow or corporation controlled by Mr. Pinkow.
15. QUALITY CONTROL: Licensor shall have the right to make on site
---------------
inspections at any reasonable time at all manufacturing and distribution points
used by Licensee to ensure the quality of the Licensed Products. If at any time
Licensor determines in its reasonable discretion that a Licensed Product is of
lesser quality than the sample approved pursuant to Section 12.1 hereof or is
otherwise an irregular or second product, Licensor shall give Licensee notice
thereof, and Licensee shall immediately cease production and distribution of
that Licensed Product until its quality is improved to the satisfaction of
Licensor.
15.1 SECONDS, IRREGULARS: Seconds and irregulars are merchandise which
-------------------
contain a production flaw or fabric flaw or other mistake or problem which makes
the goods unsalable for full line list price. Licensor shall have the right, in
its sole discretion, to determine whether goods are seconds or irregulars, and
Licensee agrees to be bound by such determination; provided, however, that if
Licensee or any customer for the Licensed Products believes that any Licensed
Product is a second or irregular, Licensor agrees to accept and be bound by such
determination. Licensee shall not sell or dispose of any irregulars or seconds
in excess of three percent (3%) of Licensee's total production of the Licensed
Products for any season without the express prior written permission of
Licensor. Licensor may, in its discretion, require Licensee to destroy seconds
or irregulars in excess of three percent (3%) of Licensee's total production of
the Licensed Products for any season and/or impose
October 27, 1994
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<PAGE>
requirements on the disposal of seconds and irregulars, including, without
limitation, the cutting or removal of labels and the removal of logos and/or
other brand identification.
16. LABELLING: All Licensed Products shall have a label and/or hangtag
---------
designated by Licensor. The labels and hangtags may be acquired only from
sources approved in writing by Licensor. On all labels, hangtags and Licensed
Products the appropriate Trademark notices (R) or (TM), denoting United States
Trademark registration or common law rights shall appear, and where applicable,
all items subject to copyright protection shall bear a proper and complete
copyright notice as specified by law. Licensor shall have the right at any time
to designate the exact symbols or language to be used by Licensee to denote
ownership by Licensor of trademarks, copyrights and other Intellectual property.
Licensee understands the importance of maintaining the security and
integrity of all labels used on the Licensed Products and agrees to obtain such
labels only from the sources approved by Licensor. Licensee further agrees to
maintain a strict, accurate and current inventory of all labels to preclude
diversion of labels. No additional labels, hangtags or identification shall
appear on the Licensed Products without the prior written approval of Licensor,
except for a separate label designating the care, content, size and country of
origin of the Licensed products. Any breach of the provisions of this paragraph
shall entitle Licensee, at its option, to terminate the rights of Licensee under
this Agreement.
16.1 SECURITY LABEL In addition to the labels designated in Section 16
--------------
above, when directed by Licensor, Licensee shall use a security label in a
location designated by Licensor on each of the Licensed Products. Licensee shall
fully cooperate in implementation of any security label program that Licensor
may deem necessary or appropriate to protect the Trademarks. Licensor shall pay
for the development of the security label program, but Licensee shall pay for
the labels and the appropriate hardware and software necessary to install
October 27, 1994
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<PAGE>
the labels.
16.2 U.P.C. LABEL: Licensee agrees to cooperate with Licensor and other
------------
licensees of Licensor in developing an appropriate U.P.C. or similar labelling
system at such time as Licensor deems necessary or appropriate.
16.3 LABEL INVENTORY: Licensee shall maintain a strict, accurate and
---------------
current inventory of all labels described in this Section 16 to preclude
diversion of such labels and shall furnish to Licensor a monthly accounting of
such inventory.
17. TRADEMARK: Licensee agrees to represent the Trademarks accurately, as
---------
directed by Licensor, in any reproduction by Licensee, whether on the Licensed
Products or in print or anywhere else. Licensee further agrees that the
Trademarks will be exactly reproduced, unless Licensee shall have received prior
written authorization for modification from Licensor. Each use of the Trademarks
on a Licensed Product shall be submitted to Licensor for prior approval pursuant
to the approval procedures set forth above in this Agreement. As provided in
Section 9 hereof, Licensee shall obtain Licensor's prior written approval for
all uses of the Trademarks in advertising, public relations and/or promotions by
Licensee.
17.1 TRADEMARK INFRINGEMENT OR MISUSE: Licensor shall maintain and defend
--------------------------------
all actions with respect to protection and maintenance of the Trademarks, as it
deems appropriate. Licensee shall fully and completely cooperate in the
protection of the Trademarks and in any investigation, maintenance, defense and
resolution of any action taken by Licensor and shall supply Licensor with
technical assistance, genuine samples, business records, as Licensor may deem
appropriate in undertaking any such action. If Licensee becomes aware of any
misuse or infringement of the Trademarks or if Licensee becomes aware of any
marks confusingly similar to any of the Trademarks, Licensee shall immediately
notify Licensor.
October 27, 1994
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<PAGE>
17.2 LATER DEVELOPED TRADEMARKS: Licensor has from time to time developed
--------------------------
and will continue to develop new trademarks and other intellectual property.
This Agreement shall automatically apply to all such later developed trademarks
which, in the sole opinion of Licensor, are specifically developed for use or
maintained in the same branded product line as the Licensed Products. Licensee
shall have no right whatsoever to any trademark or other intellectual property
that may be developed by Licensor or its affiliates that is not, in the sole
opinion of Licensor, part of the same branded product line as the Licensed
Products. The term "Trademarks" as used in this Agreement is intended to include
all such later developed trademarks which Licensee has the right to use under
the terms of this section.
18. GOODWILL: Licensee recognizes the great value of the publicity and
--------
goodwill associated with the Trademarks, and agrees that such value and
goodwill, including any such value and goodwill arising from the activities of
Licensee belong to and shall inure exclusively to Licensor. Licensee further
acknowledges that the Trademarks have acquired a secondary meaning in the mind
of the public.
19. COPYRIGHT NOTICE: Licensor has the right, in its sole discretion, to
----------------
register in its name the copyright on any and all graphics, artwork and/or
writings developed by Licensee and/or and incorporated in or on or associated
with the Licensed Products. Licensee agrees that all such artwork and writings
and the copyrights thereto shall be the sole and exclusive property of Licensor,
and Licensee agrees to execute any copyright assignments or other documents
deemed necessary by Licensor to transfer, perfect or confirm full copyright
ownership in and to Licensor, Licensee shall place a legally sufficient
copyright notice which protects the rights of Licensor on every design, style,
garment, creation or writing which is capable of protection pursuant to the
copyright laws of the United States of America or any treaty to which it is a
party. Any public distribution of goods bearing copyrightable works of
October 27, 1994
30
<PAGE>
Licensor by Licensee without a copyright notice as required above, is
unauthorized and shall constitute a default of this Agreement.
20. ADDITIONAL INSURED/INDEMNITY: During the term of this Agreement and
----------------------------
for one year thereafter Licensee shall maintain public and product liability
Insurance coverage of at least five million dollars ($5,000,000) with an insurer
reasonably acceptable to Licensor. Licensor agrees that [name of Licensee's
current carrier] __________________ is an insurer acceptable to Licensor. The
insurance policy shall name Licensor and its affiliates as additional insureds
and shall provide that such policies cannot be canceled without thirty (30)
days' prior written notice to Licensor. Licensee shall, on execution of this
Agreement, and annually thereafter, furnish to Licensor a certificate or other
adequate proof of such coverage naming Licensor and its affiliates as additional
insureds.
Without in any way limiting any of the rights or remedies otherwise
available to Licensor, Licensee shall indemnify and hold harmless Licensor and
its officers, directors, stockholders, employees, agents, attorneys,
representatives, affiliates, successors and assigns (collectively, the
"Indemnitees") against and from any and all losses, damages, injuries, lost
opportunities, liabilities, exposure, claims, demands, settlements, judgments,
awards, fines, penalties, taxes, fees, charges or expenses (including attorneys'
fees and expenses) (collectively, the "Losses") that are directly or indirectly
suffered or incurred at any time by any of the Indemnitees and that become
payable or arise directly out of, or by virtue of, or relate directly or
indirectly to, the manufacture, distribution, marketing, promotion or sale of
any of the Licensed Products or the performance of Licensee's duties under this
Agreement. Losses resulting from Licensor's wilful misconduct, wrongful acts or
wilful failure to act, except for Losses resulting from any actual infringement
by the Trademarks themselves (as opposed to Losses resulting from Licensee's
usage of otherwise non-infringing Trademarks) in
October 27, 1994
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<PAGE>
any rights of any third party. This indemnity and hold harmless shall survive
the termination of this Agreement.
21. NONASSIGNABILITY: Licensee shall not assign this Agreement or any of
----------------
its rights under this Agreement, without the express prior written consent of
Licensor, which consent may be withheld in the exercise of Licensor's sole and
absolute discretion. Except as described in Section 21.1 and 21.2 below, the
transfer of a majority of the issued and outstanding capital stock of
Licensee, however accomplished, and whether in a single transaction or in a
series of related or unrelated transactions, or the merger of Licensee into any
other person or entity in which Licensee is not the surviving entity, or the
sale of all or substantially all of Licensee's assets, shall be deemed an
assignment of Licensee's rights hereunder. Any attempted or purported assignment
of Licensee's rights under this Agreement without the prior written consent of
Licensor shall be deemed null and void ab initio. Any attempt by a non-approved
assignee or transferee to do business under the License shall entitle Licensor
to terminate the rights of Licensee (and such purported assignee or transferee)
under this Agreement immediately. Any direct or indirect transfer or assignment
of the License or any of Licensee's rights under this Agreement, by operation of
law or otherwise, including, without limitation, any transfer or assignment
which results from forfeiture of or foreclosure upon the License or any of
Licensee's rights hereunder pursuant to any security interest, lien, mortgage,
charge, pledge, hypothecation or other encumbrance or pursuant to any default
hereunder, shall be deemed to be an assignment subject to the provisions of this
Section 21. Nothing in the preceding sentence shall be construed to limit
Licensee's ability to grant a lien or security interest in the License or
Licensee's rights under this Agreement, or to require Licensor's consent for any
such grant, provided, however, than any purported transfer or assignment of the
License or Licensee's rights hereunder pursuant to any forfeiture or foreclosure
under any
October 27, 1994
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<PAGE>
such lien security interest which occurs without Licensor's express prior
written consent shall be deemed null and void ab initio and shall entitle
Licensor to terminate the rights of Licensee (and any purported transferee or
assignee) under this Agreement pursuant to this Section 21. In determining
whether to give its consent to an assignment Licensor may consider such factors
as it deems appropriate, including, without limitation, the following factors
and attributes of the proposed assignee, its principals and its related
entities; their business plans; their history; their financial resources;
potential competition by their other businesses; the impact of the proposed
assignment on Licensor's other licensees; and the compatibility of Licensor and
its other licensees with the proposed assignee and/or its principals and related
entities. Licensor may assign its rights or delegate its duties under this
Agreement to any person or entity at any time.
21.1 PERMITTED STOCK TRANSFERS
-------------------------
Notwithstanding the provisions of Section 21, the shareholders of
Licensee holding their shares immediately subsequent to the signing of this
Agreement (the "Current Shareholders") may transfer shares to the following
persons (hereafter the "Permitted Transferees") without requiring Licensor's
prior written consent for a transfer or assignment of this License;
A. Licensee;
B. other Current Shareholders;
C. any bona-fide employee stock ownership plan or similar plan
for the benefit of the employees of Licensee;
D. any current or former spouse of a Current Shareholder
incident to a judgment of dissolution of marriage;
E. any bona fide estate planning trust or other similar device,
and;
October 27, 1994
33
<PAGE>
F. the heirs, devisees and/or legatees of a current Shareholder upon
his or her death.
21.2 SUBLICENSEES/SUBCONTRACT: Licensee's rights under this Agreement may
------------------------
be sublicensed by Licensee only with the express prior written consent of
Licensor and subject to any conditions or requirements that Licensor in its sole
discretion may impose. Any attempted or purported sublicense by Licensee
without the prior written consent of Licensor shall constitute a breach of this
Agreement.
Licensee shall have the right to subcontract the actual manufacture of the
Licensed Products provided its subcontractors agree to be subject to all
inspections, audits, time limits, design and sample approval requirements,
quality control standards and procedures, and intellectual property protection
provisions set forth herein. Licensee shall promptly notify Licensor in writing
of the identity and location of any such subcontractor and the Licensed Products
being subcontracted. Licensor may from time to time require each such
subcontractor to sign such agreements as Licensor deems necessary or advisable
to protect the rights of Licensor hereunder, including, without limitation, the
agreement of the subcontractor not to sell or otherwise dispose of Licensed
Products or piece goods, trims, or fasteners bearing the Trademarks to any
unauthorized person or entity without the prior written consent of Licensor.
Licensee shall use its reasonable best efforts to cooperate with Licensor in
obtaining the signature of subcontractors to such agreements. Licensee shall
remain responsible for all of its obligations under this Agreement
notwithstanding any such subcontract, and Licensee agrees to be responsible for
any breach of any provisions of this agreement by any of Licensee's
subcontractors.
Licensee shall remain responsible for any Licensed Product sold, shipped,
delivered or distributed by or through Licensee to the full extent under this
Agreement as if Licensee had
October 27, 1994
34
<PAGE>
manufactured such Licensed Product itself, notwithstanding any such subcontract
for the manufacture of such Licensed Product. Licensee shall also remain fully
responsible and liable for any use by any such subcontractor of any labels
bearing the Trademarks which Licensee may supply to such subcontractor and any
product containing any such label, regardless of whether the manufacture of such
product was authorized under this Agreement or not. In addition, Licensee shall
indemnify and hold harmless Licensor and the other Indemnitees against and from
any Losses that are directly or indirectly suffered or incurred at any time by
any of the Indemnitees and that become payable or arise directly or indirectly
out of, or by virtue of, or relate directly or indirectly to, any injury or
damage suffered or incurred or alleged to have been suffered or incurred by any
party other than the Indemnitees in connection with any manufacture, sale or
distribution of any of the Licensed Products or any use or misuse of the
Trademarks, whether or not authorized by this Agreement, by any such
subcontractor. Licensee further agrees to use its best efforts to cause any
such subcontractor not to sell or distribute any Licensed Products to any person
or entity other than Licensee and to cease any use of the Trademarks not
explicitly authorized pursuant to this Agreement or any other conduct which
might constitute a breach of any of the provisions of this Agreement, and
Licensee agrees that, should such best efforts fail, Licensee shall (a) at
Licensor's request promptly terminate and discontinue its subcontract (and/or
any similar arrangement) with such subcontractor and its officers, directors,
stockholders, agents, affiliates, successors and assigns, and (b) reimburse
Licensor for eighty percent (80%) of any costs or expenses (including attorneys'
fees and expenses) incurred by Licensor in attempting to prevent such
subcontractor from selling or distributing Licensed Products to any person or
entity other than Licensee or from using the Trademarks in any manner not
explicitly authorized pursuant to this Agreement or from engaging in any other
conduct which might constitute a breach of any of the provisions of this
October 27, 1994
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<PAGE>
Agreement. The provisions of this Section 21.2 shall survive any termination of
this Agreement.
21.4 NO HYPOTHECATION: Licensee shall not pledge, hypothecate, mortgage,
----------------
grant liens in or upon, grant security interests in, use as collateral or
otherwise borrow upon the License, or any of Licensee's rights under this
Agreement, without the express prior written consent of Licensor which consent
shall not be unreasonably withheld, except that Licensor's consent shall be
deemed to have been granted in connection with any pledge, hypothecation, or
granting of a lien or security interest in all general intangibles of Licensee
existing as of the date of this Agreement. Any such action without consent shall
be void and of no effect and shall entitle Licensor to terminate Licensee's
rights under this Agreement.
22. MUTUAL EXCLUSIVITY: Licensee acknowledges that Licensor will provide
------------------
substantial design input with respect to the Licensed Products, and it is and
will be impossible to determine which design features of the Licensed Products
are not the result of Licensor's efforts. Licensee therefore agrees that, during
the term of this Agreement, Licensee shall not market or manufacture other
products unless a reasonable person would conclude that such other products
represent a distinctly different line and brand of products from the Licensed
Products.
Licensee agrees that all existing and future designs and artwork relating
to the Licensed Products are and shall remain the sole and exclusive property of
Licensor. Licensee agrees that it will not manufacture or sell products using
the designs or artwork of the Licensed Products or substantially similar designs
or artwork under any other name or label other than the Trademarks.
23. TERMINATION: The remedies provided in Sections 23.1 through 23.12
-----------
hereof are cumulative and not exclusive. In addition to these remedies, Licensor
may exercise any and
October 27, 1994
36
<PAGE>
all other rights and remedies it has under other provisions of this Agreement or
applicable law. Licensor may terminate the rights of Licensee under this
Agreement for the reasons set forth below or for other reasons provided for in
other provisions of this Agreement. Licensee agrees that if Licensor has a right
to terminate this Agreement, as set forth herein, and elects to terminate this
Agreement, such termination shall become effective, and the post-termination
provisions of Sections 24 through 24.5 shall become operable, notwithstanding
any actual or alleged breach by Licensor of any of its obligations under this
Agreement. Throughout this Agreement the phrases "termination of this
Agreement", "termination of the rights of Licensee under this Agreement",
"termination of Licensee's rights under this Agreement" and "termination of this
License" and similar phrases may be used interchangeably.
23.1 FAILURE TO MEET MINIMUM SALES: Except as otherwise provided herein,
-----------------------------
at the option of Licensor, the rights of Licensee under this Agreement shall
terminate immediately at any time if Licensee fails (a) to ship the required
eighty-five percent (85%) of its orders for any season during the term of this
Agreement or any extended term, or (b) fails to ship or deliver Licensed
Products producing Net Sales equalling or exceeding the amounts set forth in
Section 4 hereof without having paid the royalties and advertising payments
which would have been due on Net Sales in such amounts by January of the
succeeding year, as provided in Section 4. Licensee shall be obligated to pay
its initial licensing fee and minimum royalties as set forth in Sections 5 and
6.2 hereof, regardless of any failure to achieve minimum sales and deliveries.
23.2 DEFAULT IN LICENSEE PAYMENTS: At the option of Licensor, the rights
----------------------------
of Licensee under this Agreement shall terminate if Licensee fails to make
timely payment of any payment required hereunder, including, without limitation,
the timely payment of royalties and advertising payments, show and showroom
expenses and sales commissions. Except as otherwise provided in Section 23.9
hereof, Licensee shall have ten (10) days following written notice
October 27, 1994
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<PAGE>
from Licensor to cure a default by payment of the entire balance due of all
amounts then due from Licensee to Licensor (not limited to the amounts set forth
in the written notice) plus interest thereon.
23.3 DEFAULT OF LICENSEE/CROSS DEFAULT: At the option of Licensor, the
---------------------------------
rights of Licensee under this Agreement shall terminate if Licensee is in
default or breach of any of the terms of this Agreement. If Licensee or any of
its affiliates is, or at any time hereafter becomes, a licensee with respect to
other products using or incorporating the Trademarks (other than the Licensed
Products), a default under or with respect to any such other license shall be a
default under this Agreement and shall entitle Licensor to terminate this
Agreement.
23.4 DEFAULT ON OTHER PAYMENTS/OFF SETS: The parties hereto acknowledge
----------------------------------
that Licensee may from time to time become indebted to Licensor for patterns,
samples, fabrics, freight, and other goods and services. Failure of Licensee to
pay for such goods and service upon the terms agreed to by the parties shall
constitute a default under this Agreement, if such failure continues for ten
(10) days following written notice from Licensor. Licensee is prohibited from
using any funds owed by Licensor to Licensee as a set off, offset, charge back,
or reduction of any payment due from Licensee to Licensor or the sales force
managed by Licensor, and any attempt to do so shall constitute a default under
this Agreement. Licensee's sole remedy for enforcing a claim for funds owed or
alleged to be owed by Licensor to Licensee or for any breach or alleged breach
by Licensor of any of the provisions of this Agreement shall be a cause of
action for damages against Licensor.
23.5 LATE PAYMENTS: Regardless of whether a default is declared by
-------------
Licensor with respect to any late payment under this Agreement, Licensor is
entitled to and shall be paid by Licensee interest at the rate of five hundred
(500) basis points over the Prime Rate per annum or the maximum legal rate,
whichever is less, on any late payment from the date on which such
October 27, 1994
38
<PAGE>
payment was due until all principal and interest on such late payment has been
paid in full. The acceptance of late payments hereunder shall not constitute a
waiver of timely payments. If Licensor declares a default and the rights of
Licensee under this Agreement are terminated, all payments required hereunder
shall be due Licensor immediately, in full, plus interest at the rate of one and
one-half percent (1-1/2%) per month, five hundred (500) basis points over the
Prime Rate per annum or the maximum legal rate, whichever is less, from the date
due or the date of declaration of default, whichever is earlier.
23.6 INSOLVENCY OR BANKRUPTCY: NET WORTH: Licensor shall have the right to
-----------------------------------
terminate the rights of Licensee under this Agreement (i) if Licensee files a
petition in bankruptcy, or if a petition in bankruptcy is filed against it; (ii)
if Licensee becomes Insolvent, or makes an assignment for the benefit of its
creditors, or files a petition or otherwise seeks relief under or pursuant to
any bankruptcy, insolvency or reorganization statute or proceeding, or if it
discontinues its business, or if a custodian, receiver or trustee is appointed
for it or a substantial portion of its business or assets; or (iii) if at any
time, the total stockholders' equity (according to G.A.A.P.) of Licensee as
reflected in Licensee's year and financial statements is less than zero dollars
($0).
23.7 CURE PERIOD: Before Licensor terminates the rights of Licensee under
-----------
this Agreement for a default or breach of Licensee, Licensor shall give Licensee
a chance to cure said breach or default, if it is curable. If a provision of
this Agreement provides Licensor with a right to terminate this Agreement
forthwith or immediately, because of a default or breach of any provision of
this Agreement by Licensee, Licensee shall have no right to cure such default or
breach. If a provision of this Agreement specifies a certain cure or notice
period, such provision shall apply. If no such specific provison shall apply,
Licensee shall have thirty (30) days after notice from Licensor to cure the
breach or default, except as otherwise
October 27, 1994
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<PAGE>
provided in Section 23.8 below. If Licensee fails to cure the breach or default
within the applicable cure period, Licensor may thereupon immediately terminate
all of Licensee's rights hereunder. No notice need be given for breaches or
defaults which are not curable.
23.8 NO RIGHT TO CURE AFTER THREE (3) DEFAULTS: Notwithstanding anything
-----------------------------------------
in this Agreement to the contrary, Licensor shall have the right to terminate
this Agreement immediately upon Licensee's third default of any of the payment
provisions of this Agreement (including provisions relating to the times at
which payments are required to be made) within any period of twelve (12)
consecutive months, and Licensee shall have no right to cure any such third
default.
23.9 BREACH OF REPRESENTATION OR WARRANTY: Licensor shall have the right
------------------------------------
to terminate this Agreement immediately at any time upon the breach by Licensee
of any of its representations and warranties set forth in this Agreement, and
Licensee shall not have the right to cure any such breach.
23.10 ROYALTIES: Upon termination of this Agreement by either party,
---------
Licensee shall not be liable for any royalties to Licensor after termination of
this Agreement with respect to Licensed Products not sold, shipped or delivered
by Licensee under this Agreement, except for the initial licensing fee and
minimum royalties provided for in Sections 5 and 6.2 above. Nothing in this
Section 23.10 shall be construed or interpreted to limit in any way Licensee's
obligation to pay royalties and other amounts due under this Agreement with
respect to Licensed Products which are sold, shipped or delivered under this
Agreement, either before termination or after termination under the provisions
of Section 24.2 below.
23.11 INJUNCTIVE RELIEF: Licensee acknowledges that the Trademarks possess
-----------------
a special, unique and extraordinary character which makes difficult the
assessment of monetary damages that would be sustained by Licensor from the
unauthorized use of the Trademarks, and
October 27, 1994
40
<PAGE>
that irreparable injury would be caused by such use. Licensee further
acknowledges that any unauthorized use of the Trademarks would result in
substantial confusion in the minds of consumers as to the source of products
bearing the Trademarks and as to whether such products were authorized by
Licensor. Accordingly, Licensee recognizes and acknowledges that it would be
difficult, if not impossible, to compensate Licensor fully for damages for any
violation by Licensee of (i) the provisions of this Agreement relating to the
protection of, or the use of the Trademarks and/or other Intellactual property
of Licensor: and (ii) the provisions of this Agreement relating to quality
control and required design and sample approvals. Accordingly, Licensee
specifically agrees that Licensor shall be entitled to temporary and permanent
injunctive relief to enforce this Agreement or to enjoin Licensee against any
unauthorized use of the Trademarks (either with respect to products which are
not Licensed Products or after termination of this Agreement), and Licensee
shall expressly waive the defense that a remedy in damages would be adequate and
any requirement for the security or posting of any bond in connection with any
such injunctive relief. This provision with respect to injunctive relief shall
not, however, diminish the right of Licensor to claim and recover damages in
addition to or in lieu of injunctive relief.
24. POST TERMINATION RIGHTS AND DUTIES: All of the following rights and
-----------------------------------
duties shall be applicable upon any termination of Licensee's rights under this
Agreement, whether by expiration of the term hereof or by earlier termination
pursuant to the provisions hereof.
24.1 DELETION OF TRADEMARK: Immediately upon termination of this
----------------------
Agreement, Licensee shall take steps to change its name to the extent it has
incorporated any of the Trademarks, the words "Op" or "Ocean Pacific" or similar
words into such name to delete the Trademarks and such words from such name and
from any signs, business names, and any other use. This change of name and
deletion shall be completed within thirty (30) days after
October 27,1994
41
<PAGE>
termination.
24.2 DISPOSITION OF PATTERNS, MARKERS, LABELS AND FASTENERS:
------------------------------------------------------
Any patterns, markers, and labels or fasteners (snaps, buttons, etc.)
on which the Trademarks appear which are not affixed to a Licensed Product shall
be delivered by Licensee at its expense to Licensor, without charge to Licensor,
within thirty (30) days of termination. An inventory of such items on hand shall
be delivered to Licensor within ten (10) days of termination. Licensee shall be
strictly liable for any damages to Licensor resulting from any of these items
coming into the possession of a third party.
24.3 DISPOSITION OF TRADEMARK MANUFACTURING EQUIPMENT: Immediately upon
------------------------------------------------
termination of this Agreement, Licensee shall deliver to Licensor, without
charge, all computer chips, PROMS, gross tapes, heat stamp dyes and all other
equipment which have no function other than the reproduction of the Trademarks.
Licensee shall identify, collect and deliver to Licensor any and all such
devices which may be in the possession of Licensee's subcontractors within ten
(10) days of the date of termination.
24.4 LIQUIDATION OF GOODS: Immediately on termination of Licensee's rights
--------------------
under this Agreement, Licensee shall discontinue manufacture of the Licensed
Products and Licensee shall no longer have the right to use the Trademarks in
any form or manner. Licensor shall have the right of first refusal to purchase
all or any portion of the finished goods in the possession of Licensee at a
price equal to Licensee's cost of production plus ten percent (10%) and the
piece goods in possession of Licensee on the date of termination at a price
equal to Licensee's cost of production. Licensor shall have fifteen (15) days
from receipt of a full and complete list of such goods and costs in which to
exercise such right of first refusal. Licensee shall cease all shipment, sale or
distribution of the Licensed Products until Licensor shall have exercised, or
declined to exercise its right of first refusal hereunder or until seven (7)
days
October 27, 1994
42
<PAGE>
have elapsed from Licensor's receipt of Licensee's complete list of its goods
and costs. If Licensor fails to exercise its right of first refusal, then
Licensee shall have one hundred eighty (180) days from termination of this
Agreement to dispose of its inventory of the Licensed Products; provided,
however, that such disposal shall be made only through outlets acceptable as
provided herein. If any of the Licenses Product remain unsold after the
expiration of one hundred eighty (180), Licensee shall then remove from the
Licensed Products any labels on which the Trademarks appear before further
attempting to sell or distribute such Licensed Product. Royalties, advertising,
show and showroom charges and sales commissions shall be payable upon any sales
of goods pursuant to this Section 24.4 and the reporting requirements of this
Agreement shall apply to any such sale of goods pursuant to this section.
24.5 SURVIVAL OF OBLIGATIONS: The termination of Licensee's rights under
------------------------
this Agreement shall not terminate Licensee's duties, obligation and
responsibilities (i) to pay all monies owed to Licensor on a timely basis,
including money due on goods shipped post-termination, (ii) to prepare, make and
maintain timely, full and accurate reports and records of its activities
regarding the Licenses Products, (iii) to protect the Trademarks and copyrights
of Licensor and Licensor's full and complete ownership thereof, and (iv) to
indemnify and hold Licensor harmless pursuant to Section 20 hereof. Licensor's
rights to inspect and audit the books, and records of Licensee, and Licensees
obligation under Section 21.2 above, shall also survive termination of this
Agreement.
25 GENERAL PROVISIONS:
-------------------
25.1 ALL PAYMENTS: All payments due hereunder shall be payable to OCEAN
-------------
PACIFIC APPAREL CORP, and sent to 3 Studebaker, Irvine, California, 92718 or to
such other address as Licensor may designate in writing.
25.2 NOTICES: Any notice, report or communication hereunder shall be
--------
deemed
October 27, 1994
43
<PAGE>
sufficiently given by one party to another, if in writing, and if and when
delivered or tendered either in person, by courier, (including overnight air
courier), or by depositing it in the United States Mail in a sealed envelope,
registered or certified, with postage and postal charges prepaid or by telephone
facsimile transmission, with a hard copy delivered pursuant to one of the other
methods set forth above, addressed:
If to Licensor:
OCEAN PACIFIC APPAREL CORP.
3 Studebaker
Irvine, CA 92718
Telecopier No.: (714) 580-1877
Attn: President
With a copy to:
BERKELEY INTERNATIONAL CAPITAL CORPORATION
650 California Street
San Francisco, CA 94108
Telecopier No.: (415) 249-0554
Attn: John W. Quarterman, Esq.
If to Licensee:
HAPPY KIDS, LTD.
100 West 33rd Street, Suite 1100
New York, NY 10001-2916
or to such other address as the party addressed shall have previously designated
by notice to the serving party given in accordance with this paragraph;
provided, that a notice not given as above shall, if it is in writing, be deemed
given if and when actually received by the party to whom it is given.
25.3 ENTIRE AGREEMENT: This agreement constitutes the sole and entire
----------------
agreement among the parties pertaining to the subject matter hereof and
supersedes all prior negotiations, dealings, agreements and understandings of
the parties in connection therewith, and completely
October 27, 1994
44
<PAGE>
supersedes and replaces all prior agreements between Licensor and Licensee with
respect to the use of the Trademarks in connection with the Licensed Products.
25.4 SEVERABILITY: If any provision of this Agreement, or the
------------
application of such provision to any person or entity or set of circumstances,
shall be determined to be unenforceable to any extent, the remainder of this
Agreement, and the application of such provision to persons or entities or to
circumstances other than those as to which it is determined to be unenforceable,
shall not be affected and shall continue to be valid and enforceable to the
fullest extent permitted by law.
25.5 AMENDMENT: No amendment, modification or alteration of this
---------
Agreement shall be valid unless it shall be in writing and signed by all parties
hereto. No course of conduct or method of doing business shall modify or amend
the terms hereof.
25.6 NON-AGENCY OF PARTIES: This Agreement does not constitute and shall
---------------------
not be construed as constituting an agency, a partnership or joint venture
between and Licensor and Licensee and Licensee shall not hold itself out as an
agent, partner or joint venture of Licensor. Licensee shall have no right to
obligate or bind Licensor in any manner whatsoever except as may be expressly
stated herein, and nothing herein contained shall give, or is intended to give,
any rights of any kind to any third persons.
25.7 GOVERNING LAW: This Agreement shall be governed by, and construed
-------------
in accordance with, the laws of the State of California exclusive of conflicts
of laws provisions which would direct the application of another jurisdiction's
law. This Agreement is deemed to be consummated in the State of California and
the forum for any dispute shall be the Federal Courts located in the State of
California whose venue is the County of Orange or the Superior Court of
California for the County of Orange, whichever is appropriate.
25.8 CONFIDENTIALITY: This Agreement, its terms, conditions and
---------------
provisions, and
October 27, 1994
45
<PAGE>
the trade secrets, confidential information and property of Licensor are
confidential and shall not be disclosed by Licensee to any other person or
entity without the prior written consent of Licensor. The parties acknowledge
the Uniform Trade Secrets Act as codified in California in Civil Code (S)3426
et. seq. and agree to adhere to and be bound by the provisions thereof.
25.9 CONSTRUCTION: The paragraph headings and footers at the page
------------
bottoms are provided herein for convenience of reference only and shall not
serve as a basis for interpretation or construction of this Agreement. Each
party hereto agrees that any rule of construction to the effect that ambiguities
are to be resolved against the drafting party shall not be applied in the
construction or interpretation of this Agreement. As used in this Agreement, the
words "include" and "including," and all variations thereof, shall not be deemed
to be terms of limitation.
25.10 FURTHER ACTION: Each party hereto agrees to perform all further acts
--------------
and to execute and deliver or cause to be executed and delivered all documents,
instruments and agreements which may be reasonably necessary to carry out the
intents and purposes of this Agreement or to enable the other party to enforce
any of its rights under this Agreement.
25.11 COUNTERPARTS: This Agreement may be executed in counterparts, each
------------
of which shall be deemed an original, but both of which taken together shall
constitute one and the same agreement.
25.12 NO IMPLIED WAIVERS: The failure of either party at any time to
------------------
require performance at any time thereafter. The waiver by either party of a
breach of any provision hereof shall not be a waiver of the provision itself or
any other breach thereof. No failure on the part of either party to exercise any
right or remedy hereunder, and no delay on the part of either party hereto in
exercising any such right or remedy, shall preclude any other
October 27, 1994
46
<PAGE>
or further exercise thereof or of any other right or remedy.
25.13 TIME/FORCE MAJEURE: Time is of the essence of this Agreement.
------------------
However, neither Licensee nor Licensor shall be responsible for any delays
caused by acts of God, war, earthquake, labor controversy, acts of any
government, orders of court, or other material circumstances beyond the party's
reasonable control. The time for performance shall be extended for a period of
time equal to the delay caused by such circumstance, but not to exceed ninety
(90) days in any event.
IN WITNESS WHEREOF, the parties hereto have entered into this Agreement on
the day and year first written above.
LICENSOR:
OCEAN PACIFIC APPAREL CORP.
a Delaware corporation
By: [SIGNATURE ILLEGIBLE]
--------------------------
Its: CEO
--------------------------
LICENSEE:
HAPPY KIDS, LTD.,
a New York corporation
By: [SIGNATURE ILLEGIBLE]
--------------------------
Its: PRESIDENT
--------------------------
October 27, 1994
47
<PAGE>
EXHIBIT A
---------
PRODUCT CATEGORIES:
1. Sportswear, outerwear and swimwear for newborns:
2. Infants' apparel and related infants' accessories:
3. Sportswear, outerwear and swimwear for toddler girls:
4. Sportswear, outerwear and swimwear for toddler boys:
5. Little boys' sportswear, outerwear and swimwear in the size ranges 4
- 7:
6. Little girls' sportswear, outerwear and swimwear in the size range 4
-6X: and
7. Girls' sportswear and outerwear in the size range 7 - 14.
October 27, 1994
48
<PAGE>
EXHIBIT 21
SUBSIDIARIES OF THE REGISTRANT
HAPPY KIDS INC. - SUBSIDIARIES
Immediately prior to the effectiveness of the Registrant's proposed
initial public offering, the Registrant shall have the following wholly-owned
subsidiaries:
Happy Kids Children's Apparel, Ltd. a New York corporation
(formerly Happy Kids, Ltd.)
Talk of the Town Apparel Corp., a New York corporation
O.P. Kids, Inc., a New Jersey corporation, to be the successor to
O.P. Kids, LLC, a New Jersey Limited Liability Company
H.O.T. Kidz, Inc., a New York corporation, to be the successor to
H.O.T. Kidz, LLC, a New York Limited Liability Company
J & B 18 Corp., a New York corporation
Hawk Industries, Inc., a New Jersey corporation
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We have issued our report dated November 17, 1997 (except for Notes H and N,
as to which the date is January 1, 1998), accompanying the financial
statements and schedules of Happy Kids Inc. and Subsidiaries contained in the
Registration Statement and Prospectus which will be signed upon consummation
of the transactions described in Note A to the financial statements. We
consent to the use of the aforementioned reports in the Registration Statement
and Prospectus, and to the use of our name as it appears under the caption
"Experts."
/s/ Grant Thornton LLP
----------------------
Grant Thornton LLP
New York, New York
January 13, 1998
<PAGE>
EXHIBIT 23.3
[The NPD Group Logo]
January 7, 1998
Happy Kids Inc.
Suite 1100, 100 West 33rd Street
New York, New York 10001
The undersigned hereby expresses written consent to Happy Kids Inc. for use of
The NPD Group's name and children's apparel industry data in the Happy Kids Inc.
Registration Statement as detailed in EXHIBIT 1.
1/8/98
_________
Date
/s/ Peter Simon
______________________
Signature
<PAGE>
Exhibit 1
The domestic children's apparel industry has increased in market size from $24.7
billion in 1994 to $26.9 billion in 1996, a 4.4% annual increase, as measured by
The NPD Group, an industry trade group. According to Children's Business,
for 1996, the top ten childrenswear retailers, consisting of WalMart, KMart,
J.C. Penney (including the J.C. Penney catalog), Sears, Federated Department
Stores, Target, Kids R Us, Mervyns, May Company and TJX Company, accounted for
56.4% of the market. The U.S. Census Bureau reports that the population of
children under 13 years of age had been growing steadily from 1975 through 1997,
from 45.9 million to 50.3 million, and is expected to remain relatively flat
through 2010, growing slightly to 51.5 million.
<PAGE>
EXHIBIT 23.4
Children's
BUSINESS
Happy Kids, Inc.
Suite 1100, 100 West 33rd Street
New York, New York 10001
The undersigned hereby expresses written consent to Happy Kids, Inc. for the use
of the Children's Business name and children's apparel industry data in the
Happy Kids, Inc. Registration Statement.
/s/ Tracey Mitchell 1/7/98
________________________ ___________
Signature Date
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