<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON APRIL 9, 1999
REGISTRATION NO. 333-60065
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 1
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
SKECHERS U.S.A., INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C> <C>
DELAWARE 5139 95-4376145
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NUMBER)
</TABLE>
228 MANHATTAN BEACH BOULEVARD
MANHATTAN BEACH, CALIFORNIA 90266
(310) 318-3100
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
ROBERT GREENBERG
CHAIRMAN OF THE BOARD AND CHIEF EXECUTIVE OFFICER
MICHAEL GREENBERG
PRESIDENT
SKECHERS U.S.A., INC.
228 MANHATTAN BEACH BOULEVARD
MANHATTAN BEACH, CALIFORNIA 90266
(310) 318-3100
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF AGENTS FOR SERVICE)
COPIES TO:
<TABLE>
<S> <C>
THOMAS J. POLETTI, ESQ. BARRY E. TAYLOR, ESQ.
SUSAN B. KALMAN, ESQ. CRAIG D. NORRIS, ESQ.
KATHERINE J. BLAIR, ESQ. ANNA ITOI, ESQ.
FRESHMAN, MARANTZ, ORLANSKI, COOPER & KLEIN WILSON SONSINI GOODRICH & ROSATI,
9100 WILSHIRE BOULEVARD, SUITE 8E PROFESSIONAL CORPORATION
BEVERLY HILLS, CALIFORNIA 90212 650 PAGE MILL ROAD
TELEPHONE (310) 273-1870 PALO ALTO, CALIFORNIA 94304
FACSIMILE (310) 274-8357 TELEPHONE (650) 493-9300
FACSIMILE (650) 493-6811
</TABLE>
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
As soon as practicable after the effective date of this Registration Statement.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box: [ ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration number of the earlier effective
registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If 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,
please check the following box. [ ]
CALCULATION OF REGISTRATION FEE
<TABLE>
<S> <C> <C> <C> <C>
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TITLE OF EACH CLASS OF PROPOSED MAXIMUM PROPOSED MAXIMUM
SECURITIES AMOUNT TO BE OFFERING PRICE AGGREGATE OFFERING AMOUNT OF
TO BE REGISTERED REGISTERED(1) PER SHARE(2) PRICE(2) REGISTRATION FEE
- ---------------------------------------------------------------------------------------------------------------------------
Class A Common Stock,
$.001 par value...... 12,322,250 shares $15.00 $184,833,750 $51,384(3)
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</TABLE>
(1) Includes 1,607,250 shares that the Underwriters have the option to purchase
solely to cover over-allotments, if any.
(2) Estimated solely for the purpose of calculating the registration fee in
accordance with Rule 457(a) under the Securities Act of 1933.
(3) $33,942 of this amount has been previously paid.
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, AS AMENDED, OR UNTIL THE REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID
SECTION 8(a), MAY DETERMINE.
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- --------------------------------------------------------------------------------
<PAGE> 2
THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE MAY
NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER
TO SELL THESE SECURITIES AND WE ARE NOT SOLICITING AN OFFER TO BUY THESE
SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED.
SUBJECT TO COMPLETION
APRIL 9, 1999
10,715,000 SHARES
SKECHERS U.S.A., INC.
[LOGO]
CLASS A COMMON STOCK
------------------------
This is the initial public offering of Skechers U.S.A., Inc. Of the 10,715,000
shares of Class A common stock being offered, we are offering 8,925,000 shares
and one of our stockholders is offering 1,790,000 shares. We will not receive
any proceeds from the sale of stock by the selling stockholder. We anticipate
that the initial public offering price will be between $13.00 and $15.00 per
share.
We intend to apply to list our Class A common stock on the New York Stock
Exchange under the symbol "SKX."
INVESTING IN THE CLASS A COMMON STOCK INVOLVES RISKS. SEE "RISK FACTORS"
BEGINNING ON PAGE 9.
<TABLE>
<CAPTION>
PER SHARE TOTAL
--------- ----------
<S> <C> <C>
Public offering price....................................... $ $
Underwriting discounts and commissions...................... $ $
Proceeds, before expenses, to Skechers U.S.A., Inc.......... $ $
Proceeds to the selling stockholder......................... $ $
</TABLE>
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or passed upon the
adequacy or accuracy of this prospectus. Any representation to the contrary is a
criminal offense.
The selling stockholder has also granted the underwriters a 30-day option to
purchase up to 1,607,250 additional shares of Class A common stock to cover any
over-allotments. We will not receive any proceeds from the sale of Class A
common stock by the selling stockholder in the event the over-allotment option
is exercised.
------------------------
BT ALEX. BROWN PRUDENTIAL SECURITIES
, 1999
<PAGE> 3
[PICTURES]
CERTAIN PERSONS PARTICIPATING IN THE OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE CLASS A COMMON
STOCK, INCLUDING PURCHASES OF THE CLASS A COMMON STOCK TO STABILIZE ITS MARKET
PRICE, PURCHASES OF THE CLASS A COMMON STOCK TO COVER SOME OR ALL OF A SHORT
POSITION IN THE CLASS A COMMON STOCK MAINTAINED BY THE UNDERWRITERS AND THE
IMPOSITION OF PENALTY BIDS. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE
"UNDERWRITING."
2
<PAGE> 4
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by, and should be read
in conjunction with, the more detailed information and Consolidated Financial
Statements, including the Notes thereto, appearing elsewhere in this Prospectus.
This Prospectus, in addition to historical information, contains forward-looking
statements including, but not limited to, statements regarding the Company's
plans to increase the number of retail locations and styles of footwear, the
maintenance of customer accounts and expansion of business with such accounts,
the successful implementation of the Company's strategies, future growth and
growth rates and future increases in net sales, expenses, capital expenditures
and net earnings. Without limiting the foregoing, the words "believes,"
"anticipates," "plans," "expects," "may," "will," "intends," "estimates" and
similar expressions are intended to identify forward-looking statements. These
forward-looking statements involve risks and uncertainties, and the Company's
actual results could differ materially from those anticipated in these
forward-looking statements as a result of certain factors, including those set
forth under "Risk Factors" and elsewhere in this Prospectus.
THE COMPANY
Skechers U.S.A., Inc. ("Skechers" or the "Company") designs and markets
branded contemporary casual, active, rugged and lifestyle footwear for men,
women and children. The Company's objective is to become a leading source of
contemporary casual and active footwear while ensuring the longevity of both the
Company and the Skechers brand name through controlled, well managed growth. The
Company strives to achieve this objective by developing and offering a balanced
assortment of basic and fashionable merchandise across a wide spectrum of
product categories and styles, while maintaining a diversified, low-cost
sourcing base and controlling the growth of its distribution channels. The
Company sells its products to department stores such as Nordstrom, Macy's,
Dillards, Robinson's-May and JC Penney and specialty retailers such as Genesco's
Journeys and Jarman chains, The Venator Group's Foot Locker and Lady Foot Locker
chains, Pacific Sunwear and Footaction U.S.A. The Company also sells its
products both internationally in over 120 countries and territories through
major international distributors and directly to consumers through 37 of its own
retail stores.
The Company has realized rapid growth since inception, increasing net sales
at a compound annual growth rate of 42.4% from $90.8 million in 1994 to $372.7
million in 1998. From 1997 to 1998, the Company experienced a 102.7% and 117.4%
increase in net sales and earnings from operations, respectively. The Company
also experienced an improvement in gross profit as a percentage of net sales
from 37.4% to 41.5% and in earnings from operations as a percentage of net sales
from 8.5% to 9.1% over this same period. These improvements resulted in part
from the shift to offering Skechers product exclusively and in part from
economies of scale.
Management believes the Skechers product offerings of men's, women's and
children's footwear appeal to a broad customer base between the ages of 5 and 40
years. Management believes the Company's strategy of providing a growing and
balanced assortment of quality basic footwear and seasonal and fashion footwear
with progressive styling at competitive prices gives Skechers this broader based
customer appeal. Skechers men's and women's footwear are primarily designed with
the active, youthful lifestyle of the 12 to 25 year old age group in mind. The
Company's product offerings include casual and utility oxfords, loggers, boots
and demi-boots; skate, street and fashion sneakers; hikers, trail runners and
joggers; sandals, slides and other open-toe footwear; and dress casual shoes.
The Company continually seeks to increase the number of styles offered and the
breadth of categories with which the Skechers brand name is identified. This
style expansion and category diversification is balanced by the Company's strong
performance in its basic styles. The Company increased its styles offered from
approximately 600 for the year ended December 31, 1997 to approximately 900 for
the year ended December 31, 1998. Management believes that a substantial portion
of the Company's gross sales were generated from styles which management
considers basic.
3
<PAGE> 5
The Company's strategy in children's footwear is to adapt current fashion
from the Company's men's and women's lines by modifying designs and choosing
colors and materials that are more suitable to the playful image Skechers has
established in the children's footwear market. The Skechers children's line is
comprised primarily of shoes that are designed like their adult counterparts but
in "takedown" versions, so that the younger set can wear the same popular styles
as their older siblings and schoolmates. The playful image of Skechers
children's footwear is further enhanced by the Company's Skechers Lights line,
which features motion- and contact-activated lights in the outsole and other
areas of the shoes. During 1998, the Company's gross wholesale footwear sales
were derived 42.1% from men's, 42.2% from women's and 15.7% from children's
footwear.
The Company was founded in 1992 as a distributor of Dr. Martens footwear.
The Company began designing and marketing men's footwear under the Skechers
brand name and other brand names including "Cross Colours," "Karl Kani" and
"So . . . L.A." in 1992. Shortly after launching these branded footwear lines,
the Company discontinued distributing Dr. Martens footwear. In 1995, the Company
began to shift its focus to the Skechers brand name by de-emphasizing the sale
of "Kani" branded products and discontinuing the sale of "Cross Colours" and
"So . . . L.A." branded footwear. In early 1996, the Company substantially
increased its product offerings in, and marketing focus on, its Skechers women's
and children's lines. The Company divested the "Karl Kani" license in August
1997. Substantially all of the Company's products are marketed under the
Skechers name.
The Company's operating strategies are intended to continue to
differentiate the Company from other participants in the footwear market and to
provide controlled, well managed growth. These strategies include: (i) offering
a breadth of innovative products, (ii) enhancing and broadening the Skechers
brand name, (iii) maximizing the strategic value of retail distribution, (iv)
controlling the growth of distribution channels and (v) leveraging the
experience of the management team and the infrastructure the Company has
established. During 1998, the Company produced over 900 different styles of
footwear in a broad array of men's, women's and children's designs in an effort
to diversify product risk and increase the potential market available to the
Company. In keeping with its strategy, the Company has implemented an extensive
marketing campaign to build the Skechers brand name and its association with
casual and lifestyle footwear in general, as opposed to any single category of
footwear. The Company uses its retail stores to strengthen its brand name image
and showcase the range of its product offerings as well as to liquidate
close-outs, odd sizes and excess inventory more effectively. Management has
implemented a strategy of controlling the growth of the distribution channels
through which the Company's products are sold in order to protect the Skechers
brand name, properly service customer accounts and better manage the growth of
its business. Management believes it has the experience and has established the
infrastructure of personnel, information systems and distribution capabilities
to manage this growth.
In an effort to increase net sales and earnings, the Company has also
developed five growth strategies. First, the Company plans to continue to expand
its product offerings by developing new styles in existing categories as well as
entering categories in which the Company does not currently produce styles.
Second, the Company intends to increase penetration of its existing account base
by (i) increasing the number of styles carried by existing accounts, (ii)
increasing sell-through at the retail level for its existing accounts through
increased marketing efforts and (iii) opening new locations with existing
accounts. Third, the Company plans to open at least six new retail locations in
the remainder of 1999. The Company also recently launched a mail-order catalog
and Internet website. Fourth, the Company plans to increase international sales
through distribution agreements with partners in countries in which the Company
does not currently have distribution. The Company is also exploring selling
directly to retailers in certain European countries in which the Company does
not currently have distribution and selectively opening flagship retail stores
internationally either on its own or through joint ventures. Fifth, the Company
is exploring licensing the Skechers brand name for certain accessories and
apparel in a manner and with such partners as management believes will increase
earnings and maintain the integrity of the Skechers brand name.
4
<PAGE> 6
THE OFFERING
<TABLE>
<S> <C>
Class A Common Stock offered by the
Company.................................... 8,925,000 shares
Class A Common Stock offered by the
Selling Stockholder........................ 1,790,000 shares
Common Stock to be outstanding after the
Offering:
Class A Common Stock(1)(2)(3).............. 10,715,000 shares
Class B Common Stock....................... 26,024,155 shares
Use of Proceeds.............................. Of the net proceeds, approximately $66.5
million will be used to repay indebtedness,
approximately $7.6 million will be used to
fund the Final 1998 Distribution,
approximately $3.4 million will be used to
fund the Final Tax Distribution and
approximately $22.0 million will be used for
the Final S Corporation Distribution. The
remainder will be used for general corporate
purposes. See "Use of Proceeds."
Proposed New York Stock Exchange Symbol for
the Class A Common Stock................... "SKX"
</TABLE>
- ---------------
(1) The holders of Class A Common Stock are entitled to one vote per share and
holders of Class B Common Stock are entitled to ten votes per share.
(2) Excludes options to acquire 1,390,715 shares of Class A Common Stock
outstanding as of December 31, 1998 at a per share exercise price of $2.78.
Options to purchase an aggregate of shares of Class A Common
Stock are expected to be granted to certain employees and non-employee
directors of the Company on the effective date of this offering (the
"Offering") at an exercise price equal to the initial public offering price.
See "Management -- Stock Options."
(3) Does not include 1,607,250 shares of Class A Common Stock subject to a
30-day over-allotment option granted by the Greenberg Family Trust (the
"Selling Stockholder"), of which Robert Greenberg, Chief Executive Officer
and Chairman of the Board of the Company, is a trustee, together with his
wife.
------------------------
The Company's corporate headquarters are located at 228 Manhattan Beach
Boulevard, Manhattan Beach, California 90266, and its telephone number is (310)
318-3100.
Skechers, Street Cleat and Wompers are registered trademarks of the
Company. All other trademarks or tradenames referred to in this Prospectus are
the property of their respective owners.
------------------------
THE RECAPITALIZATION
Pursuant to a recapitalization to be effected prior to the consummation of
the Offering (the "Recapitalization"), the Company will have authorized two new
classes of common stock, Class A Common Stock and Class B Common Stock. The
Class A Common Stock and the Class B Common Stock will have identical rights
other than with respect to voting, conversion and transfer. The Class A Common
Stock will be entitled to one vote per share while the Class B Common Stock will
be entitled to ten votes per share on all matters submitted to a vote of
stockholders. The shares of Class B Common Stock will be convertible at any time
at the option of the holder into shares of Class A Common Stock on a
share-for-share basis. In addition, shares of Class B Common Stock will be
automatically converted into a like number of shares of Class A Common Stock
upon any transfer to any person or entity which is not a Permitted Transferee
(as defined in the Company's Certificate of Incorporation). After the Offering,
the Greenberg Family Trust will be the beneficial owner of
5
<PAGE> 7
16,289,198 shares of Class B Common Stock, which will represent 62.6% of the
Company's issued and outstanding Class B Common Stock. After the Offering, the
holders of Class B Common Stock will represent in the aggregate approximately
70.8% of the equity and 96.0% of the voting power of the Company. As a result of
such ownership, Robert Greenberg and his wife, as trustees of the Greenberg
Family Trust, will be able to control the vote on substantially all matters
submitted to a vote of the Company's stockholders, including the election of
directors and the approval of extraordinary corporate transactions. See
"Description of Capital Stock."
------------------------
Except as otherwise specified, all information in this Prospectus (i)
assumes no exercise of the Underwriters' over-allotment option (see
"Underwriting"), (ii) excludes 5,215,154 shares of Class A Common Stock reserved
for issuance under the Company's 1998 Stock Option, Deferred Stock and
Restricted Stock Plan (the "Stock Option Plan") and 2,781,415 shares of Class A
Common Stock reserved for issuance under the Company's 1998 Employee Stock
Purchase Plan (the "1998 Purchase Plan") and (iii) gives effect to the
Recapitalization and to the reincorporation of the Company in Delaware, which
will be effected prior to the consummation of the Offering, whereby the existing
California corporation will be merged into a newly formed Delaware corporation
and pursuant to which each outstanding share of common stock of the existing
California corporation will be exchanged for approximately 13,907 shares of
$.001 par value Class B Common Stock of the new Delaware corporation. Unless the
context indicates otherwise, all references herein to the Company refer to
Skechers U.S.A., Inc., its predecessor entity, and its wholly-owned subsidiary.
6
<PAGE> 8
SUMMARY FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------------------------
1994 1995 1996 1997 1998
------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net sales....................................... $90,755 $110,649 $115,410 $183,827 $372,680
Cost of sales................................... 61,579 78,692 81,199 115,104 218,100
------- -------- -------- -------- --------
Gross profit.................................. 29,176 31,957 34,211 68,723 154,580
Royalty income, net............................. 1,012 1,843 1,592 894 855
------- -------- -------- -------- --------
30,188 33,800 35,803 69,617 155,435
Operating expenses.............................. 26,682 32,000 30,678 53,981 121,444
------- -------- -------- -------- --------
Earnings from operations...................... 3,506 1,800 5,125 15,636 33,991
------- -------- -------- -------- --------
Other income (expense):
Interest...................................... (2,461) (3,676) (3,231) (4,186) (8,631)
Other, net.................................... 18 214 61 (37) (239)
------- -------- -------- -------- --------
(2,443) (3,462) (3,170) (4,223) (8,870)
Earnings (loss) before income taxes and
extraordinary credit........................ 1,063 (1,662) 1,955 11,413 25,121
Net earnings (loss)........................... 1,009 (1,222)(1) 1,910 11,023 24,471
PRO FORMA OPERATIONS DATA(2):
Earnings (loss) before income taxes and
extraordinary credit........................ $ 1,063 $ (1,662) $ 1,955 $ 11,413 $ 25,121
Income taxes (benefit)........................ 425 (665) 782 4,565 10,048
------- -------- -------- -------- --------
Earnings (loss) before extraordinary credit... 638 (997) 1,173 6,848 15,073
Extraordinary credit, net..................... -- 270(1) -- -- --
------- -------- -------- -------- --------
Net earnings (loss)........................... $ 638 $ (727) $ 1,173 $ 6,848 $ 15,073
======= ======== ======== ======== ========
Net earnings per share(3):
Basic....................................... $ .54
========
Diluted..................................... $ .50
========
Weighted average shares(3):
Basic....................................... 27,814
========
Diluted..................................... 30,418
========
</TABLE>
<TABLE>
<CAPTION>
AS OF DECEMBER 31, 1998
-------------------------------------------
PRO FORMA
ACTUAL PRO FORMA(4) AS ADJUSTED(4)(5)
-------- ------------ -----------------
<S> <C> <C> <C>
BALANCE SHEET DATA:
Working capital.................................... $ 23,106 $ 19,548 $ 91,428
Total assets....................................... 146,284 142,376 159,406
Total debt......................................... 70,933 70,933 4,366
Stockholders' equity............................... 27,676 23,768 108,025
</TABLE>
- ---------------
(1) Includes an extraordinary gain of $443,000 net of state income taxes of
$7,000 ($270,000 on a pro forma basis, net of $180,000) resulting from the
acceleration of the repayment of a note.
(2) Reflects adjustments for Federal and state income taxes as if the Company
had been taxed as a C Corporation, at the assumed rate of 40.0%, rather than
as an S Corporation.
(3) Weighted average diluted shares outstanding for the year ended December 31,
1998 include 1,068,630 shares of Class A Common Stock issuable upon exercise
of stock options outstanding, after applying the treasury stock method based
on an assumed initial public offering price of $14.00 per share (the
mid-point of the range). The weighted average diluted shares also give
effect to the sale by the Company of those shares of Class A Common Stock
necessary to fund the payment of the excess of (i) the sum of stockholder
distributions during the previous 12-month period (during fiscal 1998 for
the determination of shares outstanding for fiscal 1998) and distributions
paid or declared thereafter until the consummation of the Offering over (ii)
the S Corporation earnings in the previous 12-month period (for
7
<PAGE> 9
the year ended December 31, 1998), based on an assumed initial public
offering price of $14.00 per share (the mid-point of the range), net of
estimated underwriting discounts See "Capitalization" and
"Management -- Stock Options." For further information pertaining to the
calculation of earnings per share, see Note 1 of Notes to Consolidated
Financial Statements.
(4) Pro forma balance sheet data gives effect to (i) a $368,000 S Corporation
distribution of assets made in January 1999 related to the "Cross Colours"
trademark (the "January 1999 Distribution") and (ii) an anticipated $3.5
million S Corporation distribution to be made in April 1999 consisting of
the first installment of Federal income taxes payable on S Corporation
earnings for 1998 (the "April Tax Distribution"). See "Prior S Corporation
Status" and "Certain Transactions."
(5) Pro forma as adjusted balance sheet data reflects (i) an anticipated $7.6
million S Corporation distribution to be made with a portion of the proceeds
of the Offering consisting of the final installment of Federal income taxes
payable on S Corporation earnings for 1998 (the "Final 1998 Distribution"),
(ii) an estimated $3.4 million S Corporation distribution to be made with a
portion of the proceeds of the Offering consisting of income taxes payable
on S Corporation earnings from January 1, 1999 through the termination of
the Company's S Corporation status (the "Final Tax Distribution"), (iii) an
estimated $22.0 million S Corporation distribution to be made with a portion
of the proceeds of the Offering which is designed to constitute the
substantial portion of the Company's remaining undistributed accumulated S
Corporation earnings through the date of termination of the Company's S
Corporation status (the "Final S Corporation Distribution"), (iv) the
recording by the Company of $2.4 million of deferred tax assets as if the
Company had been a C Corporation since its inception and (v) the sale of the
Class A Common Stock offered by the Company hereby based upon an assumed
initial public offering price of $14.00 per share (the mid-point of the
range) and the anticipated application of the net proceeds therefrom. See
"Use of Proceeds," "Prior S Corporation Status" and "Capitalization."
8
<PAGE> 10
RISK FACTORS
An investment in the shares of Class A Common Stock offered hereby involves
a high degree of risk. Prospective investors should consider carefully the
following risk factors, in addition to the other information presented in this
Prospectus, before purchasing the shares of Class A Common Stock offered hereby.
This Prospectus, in addition to historical information, contains forward-
looking statements including, but not limited to, statements regarding the
Company's plans to increase the number of retail locations and styles of
footwear, the maintenance of customer accounts and expansion of business with
such accounts, the successful implementation of the Company's strategies, future
growth and growth rates and future increases in net sales, expenses, capital
expenditures and net earnings. Without limiting the foregoing, the words
"believes," "anticipates," "plans," "expects," "may," "will," "intends,"
"estimates" and similar expressions are intended to identify forward-looking
statements. These forward-looking statements involve risks and uncertainties,
and the Company's actual results could differ materially from the results
discussed in the forward-looking statements. Factors that could cause or
contribute to such differences include those discussed below, as well as those
discussed elsewhere in this Prospectus.
CHANGING CONSUMER DEMANDS AND FASHION TRENDS
The footwear industry is subject to rapidly changing consumer demands and
fashion trends. The Company believes that its success depends in large part upon
its ability to identify and interpret fashion trends and to anticipate and
respond to such trends in a timely manner. There can be no assurance that the
Company will be able to continue to meet changing consumer demands or to develop
successful styles in the future. Decisions with respect to product designs often
need to be made several months in advance of the time when consumer acceptance
can be determined. As a result, the Company's failure to anticipate, identify or
react appropriately to changes in styles and features could lead to, among other
things, lower sales, excess inventories, higher inventory markdowns, impairment
of the Company's brand image and lower gross margins as a result of allowances
and discounts provided to retailers. Conversely, the failure by the Company to
anticipate consumer demand could result in inventory shortages, which in turn
could adversely affect the timing of shipments to customers, negatively
impacting retailer and distributor relationships, and diminish brand loyalty. In
addition, even if the Company reacts appropriately to changes in consumer
preferences, consumers may identify the Company's brand image with an outmoded
fashion or the association of the brand may be limited to styles or categories
of footwear no longer in demand. There can be no assurance that the Company will
successfully adapt to changing consumer demands and fashion trends, and any such
failure to adapt could have a material adverse effect on the Company's business,
financial condition and results of operations. Because of these risks, a number
of companies in the footwear industry, and in the fashion and apparel industry,
have experienced periods, which can be over several years, of rapid growth in
revenues and earnings and thereafter periods of declining sales and losses which
in some cases have resulted in the companies ceasing to do business. Until
January 1992, several of the Company's executive officers and key employees were
employed by L.A. Gear, Inc. ("L.A. Gear"), an athletic and casual footwear and
apparel company, which experienced similar fluctuations. See "-- Ability to
Manage Growth," "Business -- Product Design and Development" and "Management."
The Company intends to market additional lines of footwear in the future
and, as is typical with new products, demand and market acceptance will be
subject to uncertainty. Failure to regularly develop and introduce new products
successfully could materially and adversely impact the Company's future growth
and profitability. Achieving market acceptance for new products may require
substantial marketing efforts. There can be no assurance that the Company's
marketing efforts will be successful or that the Company will have the funds
necessary to undertake sufficient efforts. See "Business -- Operating
Strategies," "-- Growth Strategies" and "-- Sales."
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RISKS RELATING TO STYLE CONCENTRATION
If any one style or group of similar styles of the Company's footwear were
to represent a substantial portion of the Company's net sales, the Company could
be exposed to risk should consumer demand for such style or group of styles
decrease in subsequent periods. In the past, gross sales were adversely affected
by decreased consumer demand for a style of footwear that previously represented
a significant portion of the Company's sales. This style no longer represents a
significant portion of the Company's sales. The Company attempts to hedge this
risk by offering a broad range of products, and no style comprised over 5.0% of
the Company's gross wholesale sales, net of discounts, for the year ended
December 31, 1998. There can be no assurance that fluctuations in sales of any
given style that represents a significant portion of the Company's net sales
will not recur in the future and have a material adverse effect on the Company's
business, financial condition and results of operations. See
"Business -- Footwear."
ABILITY TO MANAGE GROWTH
The Company has experienced rapid growth over the past three years and
remains vulnerable to a variety of business risks generally associated with
rapidly growing companies. The Company intends to continue to pursue an
aggressive growth strategy through expanded marketing and promotion efforts,
frequent introductions of products, broader lines of casual and performance
footwear, expansion of retail stores and increased international market
penetration, all of which may place a significant strain on the Company's
financial, management and other resources. The Company's future performance will
depend in part on its ability to manage change in both its domestic and
international operations and will require the Company to attract, train, manage
and retain management, sales, marketing and other key personnel. The Company's
ability to manage its growth effectively will require it to continue to improve
its operational and financial control systems, infrastructure and management
information systems. For example, in early 1998, the Company moved its
distribution center to a larger facility and currently intends to install a new
material handling system at its second distribution facility in mid-2000 at a
total cost of approximately $8.5 million. There can be no assurance that these
expansion efforts will be successfully completed or that they will not interfere
with existing operations. The inability of the Company's management to manage
growth effectively could have a material adverse effect on the Company's
business, financial condition and results of operations. See "Business -- Sales"
and "Management."
ABILITY TO SUSTAIN PRIOR RATE OF GROWTH OR INCREASE NET SALES OR EARNINGS
The Company has realized rapid growth since inception, increasing net sales
at a compound annual growth rate of 42.4% from $90.8 million in 1994 to $372.7
million in 1998. From 1997 to 1998, the Company experienced a 102.7% and 117.4%
increase in net sales and earnings from operations, respectively. In the future,
the Company's rate of growth will be dependent upon, among other things, the
continued success of its efforts to expand its footwear offerings and
distribution channels. The Company's profitability in any calendar quarter of
any fiscal year depends upon, among other things, the timing and level of
advertising and trade show expenditures and the timing and level of shipments of
seasonal merchandise. There can be no assurance that the Company's rate of
growth will not decline or that it will be profitable in any quarter of any
succeeding fiscal year. In addition, the Company may have more difficulty
maintaining its prior rate of growth to the extent it becomes larger. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Overview."
As part of its growth strategy, the Company seeks to further penetrate
existing retail accounts, open its own retail stores in selected locations and
increase its international operations, including in countries and territories
where the Company has little distribution experience and where the Company's
brand name is not yet well known. There can be no assurance that these and the
Company's other growth strategies will be successful. Success will depend on
various factors, including the strength of the Company's brand name, market
success of current and new products,
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competitive conditions, the ability of the Company to manage increased net sales
and stores and the availability of desirable locations. The Company's business
also depends on general economic conditions and levels of consumer spending,
which are currently high, and a decline in the economy or a recession could
adversely impact the Company's business, financial condition and operating
results since consumers often reduce spending on footwear and apparel in such
times. There can be no assurance that the Company will be able to increase its
sales to existing customers, open and operate new retail stores or increase its
international operations on a profitable basis or that the Company's operating
margins will improve, and there can be no assurance that the Company's growth
strategies will be successful or that the Company's net sales or net earnings
will increase as a result of the implementation of such strategies. In addition,
the Company has significantly expanded its infrastructure and personnel to
achieve economies of scale in anticipation of continued increases in net sales.
Because these expenses are fixed, at least in the short term, operating results
and margins would be adversely impacted if the Company does not achieve
anticipated continued growth.
RISKS ASSOCIATED WITH FOREIGN OPERATIONS
Substantially all of the Company's net sales for the year ended December
31, 1998 were derived from sales of footwear manufactured for the Company
outside of the United States. During such period, 96.2% of such manufactured
products were produced in China. Additionally, the Company intends to increase
its international sales efforts. Foreign manufacturing and sales are subject to
a number of risks, including work stoppages, transportation delays, changing
economic conditions, expropriation, political unrest, nationalization, the
imposition of tariffs, import and export controls and other nontariff barriers,
exposure to different legal standards (particularly with respect to intellectual
property), burdens with complying with a variety of foreign laws and changes in
domestic and foreign governmental policies, any of which could have a material
adverse effect on the Company's business, financial condition and results of
operations. The Company has not experienced material losses as a result of
fluctuation in the value of foreign currencies. The Company's net sales and cost
of goods sold are denominated in U.S. Dollars; consequently, the Company does
not engage in currency hedging. Nevertheless, currency fluctuations could
adversely affect the Company in the future. Also, the Company may be subjected
to additional duties, significant monetary penalties, the seizure and the
forfeiture of the products the Company is attempting to import or the loss of
its import privileges if the Company or its suppliers are found to be in
violation of U.S. laws and regulations applicable to the importation of the
Company's products. Such violations may include (i) inadequate record keeping of
its imported products, (ii) misstatements or errors as to the origin, quota
category, classification, marketing or valuation of its imported products, (iii)
fraudulent visas or (iv) labor violations under U.S. or foreign laws. There can
be no assurance that the Company will not incur significant penalties (monetary
or otherwise) if the United States Customs Service determines that these laws or
regulations have been violated or that the Company failed to exercise reasonable
care in its obligations to comply with these laws or regulations on an informed
basis. Such factors could render the conduct of business in a particular country
undesirable or impractical, which could have a material adverse effect on the
Company's business, financial condition and results of operations. The Company
continues to monitor the political and economic stability of the Asian countries
with which it conducts business. A substantial portion of the Company's footwear
is manufactured in China. China currently enjoys "normal trade relations" status
under United States tariff laws, which provides a favorable category of United
States import duties. As a result of continuing concerns in the United States
Congress regarding China's human rights policies, and disputes regarding Chinese
trade policies, including the country's inadequate protection of United States
intellectual property rights, there has been, and may be in the future,
opposition to the extension of "normal trade relations" status for China. The
loss of "normal trade relations" status for China would result in a substantial
increase in the import duty of goods manufactured in China and imported into the
United States and would result in
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increased costs for the Company. Such increases in import duties and costs could
have a material adverse effect on the Company's business, financial condition
and results of operations.
Although the footwear sold by the Company is not currently subject to
quotas in the United States, certain countries in which the Company's products
are sold are subject to certain quotas and restrictions on foreign products
which to date have not had a material adverse effect on the Company's business,
financial condition and results of operations. However, such countries may alter
or modify such quotas or restrictions. Countries in which the Company's products
are manufactured may, from time to time, impose new or adjust quotas or other
restrictions on exported products, and the United States may impose new duties,
tariffs and other restrictions on imported products, any of which could have a
material adverse effect on the Company's business, financial condition and
results of operations and its ability to import products at the Company's
current or increased quantity levels. Other restrictions on the importation of
the Company's products are periodically considered by the U.S. Congress, and
there can be no assurance that tariffs or duties on the Company's products may
not be raised, resulting in higher costs to the Company, or that import quotas
with respect to such products may not be imposed or made more restrictive.
DEPENDENCE ON CONTRACT MANUFACTURERS
The Company's footwear products are currently manufactured by independent
contract manufacturers. For the year ended December 31, 1998, the top four
manufacturers of the Company's manufactured products accounted for 15.4%, 14.2%,
12.1% and 10.4% of total purchases, respectively. Other than the foregoing, no
one manufacturer accounted for 10.0% or more of the Company's total purchases
for such period. The Company has no long-term contracts with its manufacturers
and competes with other footwear companies for production facilities. Although
the Company has established close working relationships with its principal
manufacturers, the Company's future success will depend, in large part, on
maintaining such relationships and developing new relationships. There can be no
assurance that the Company will not experience difficulties with such
manufacturers, including reduction in the availability of production capacity,
failure to meet the Company's quality control standards, failure to meet
production deadlines or increase in manufacturing costs. This could result in
cancellation of orders, refusal to accept deliveries or a reduction in purchase
prices, any of which could have a material adverse effect on the Company's
business, financial condition and results of operations. In the event that the
Company's current manufacturers were for any reason to cease doing business with
the Company, the Company could experience an interruption in the manufacture of
its products, which could have a material adverse effect on the Company's
business, financial condition and results of operations. Although the Company
believes that it could find alternative sources to manufacture its products
within 90 to 120 days after the date of disruption, establishment of new
manufacturing relationships involves various uncertainties, including payment
terms, costs of manufacturing, adequacy of manufacturing capacity, quality
control and timeliness of delivery. The Company cannot predict whether it will
be able to establish new manufacturing relationships, either in the countries in
which it currently does business or in other countries in which it does not
currently do business, that will be as favorable as those that now exist. Any
significant delay in manufacture of the Company's footwear products or the
inability to provide products consistent with the Company's standards, would
have a material adverse effect on the Company's business, financial condition
and results of operations. See "Business -- Sourcing."
The Company requires its independent contract manufacturers to operate in
compliance with applicable laws and regulations. The Company requires its
manufacturers to certify that neither convict, forced, indentured labor (as
defined under U.S. law) nor child labor (as defined by the manufacturer's
country) was used in the production process, that compensation will be paid in
accordance with local law and that the factory is in compliance with local
safety regulations. Although the Company's operating guidelines promote ethical
business practices and the Company's sourcing personnel periodically visit and
monitor the operations of its independent contract
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manufacturers, the Company does not control these vendors or their labor
practices. The violation of labor or other laws by an independent contract
manufacturer of the Company, or the divergence of an independent contract
manufacturer's labor practices from those generally accepted as ethical in the
United States, could result in adverse publicity for the Company and could have
a material adverse effect on the Company's business, financial condition and
results of operations.
DEPENDENCE ON KEY CUSTOMERS AND SALES REPRESENTATIVES
During the year ended December 31, 1998, the Company's net sales to its
five largest customers accounted for approximately 34.8% of total net sales. For
the year ended December 31, 1998, The Venator Group represented 11.8% of the
Company's net sales. Other than the foregoing, no one customer accounted for
10.0% or more of net sales for such period. Although the Company has long-term
relationships with many of its customers, none of its customers has any
contractual obligations to purchase the Company's products. There can be no
assurance that the Company will be able to retain its existing major customers.
In addition, the retail industry has periodically experienced consolidation,
contractions and closings and any future consolidation, contractions or closings
may result in loss of customers or uncollectability of accounts receivables of
any major customer in excess of amounts insured by the Company. For example, in
late 1998. The Venator Group announced the closure of its Kinney and
Footquarters shoe stores and, in early 1999, Edison Brothers closed its Wild
Pair shoe stores.
As of December 31, 1998, Famous Footwear represented 12.6% of trade
receivables. Other than the foregoing, no one customer accounted for 10.0% or
more of trade receivables for such period. The loss of or significant decrease
in sales to any one of the Company's major customers or uncollectability of any
accounts receivable of any major customer in excess of amounts insured could
have a material adverse effect on its business, financial condition and results
of operations. See "Business -- Sales."
In addition, for the year ended December 31, 1998, the top five
salespersons accounted for 39.8% of the Company's net sales. One of these
salespersons generated 17.9% of the Company's net sales for the year ended
December 31, 1998. Other than the foregoing, no salesperson accounted for 10.0%
or more of net sales for such period. The Company has entered into employment
agreements with each of its salespersons. Although each salesperson has agreed
under these agreements to keep certain information of the Company confidential,
these salespersons are not subject to non-competition agreements with the
Company. The loss of any of such salespersons may result in the disruption of
service to such customers serviced by such salespersons, which could have a
material adverse effect on the Company's business, financial condition and
results of operations.
SEASONALITY; QUARTERLY FLUCTUATIONS
Sales of footwear products are somewhat seasonal in nature with the
strongest sales generally occurring in the third and fourth quarters. In 1996
and 1997, 34.0% and 34.0% of net sales, respectively, and 94.7% and 52.5% of
earnings from operations, respectively, were generated in the third quarter and
28.2% and 33.2% of net sales, respectively, and 56.1% and 35.1% of earnings from
operations, respectively, were generated in the fourth quarter. However, in
1998, 38.4% of net sales and 72.0% of earnings from operations were generated in
the third quarter and 22.0% of net sales and a loss from operations were
generated in the fourth quarter. The Company's net sales in the fourth quarter
of 1998 were adversely affected by the overall weakness in the retail footwear
market. Also, operating expenses for the fourth quarter of 1998 were impacted by
certain discretionary expenses of approximately $3.2 million and by
significantly higher marketing expenses as a percentage of net sales than the
Company typically incurs. The Company has experienced and expects to continue to
experience variability in its net sales, operating results and net earnings on a
quarterly basis. The Company's domestic customers generally assume
responsibility for scheduling pickup and delivery of purchased products. Any
delay in scheduling or pickup which is beyond the Company's control, could
materially negatively impact the Company's net sales and results of
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operations for any given quarter. The Company believes the factors which
influence this variability include (i) the timing of the Company's introduction
of new footwear products, (ii) the level of consumer acceptance of new and
existing products, (iii) general economic and industry conditions that affect
consumer spending and retail purchasing, (iv) the timing of the placement,
cancellation or pickup of customer orders, (v) increases in the number of
employees and overhead to support growth, (vi) the timing of expenditures in
anticipation of increased sales and customer delivery requirements, (vii) the
number and timing of new Company retail store openings and (viii) actions by
competitors. Due to these and other factors, the results for any particular
quarter are not necessarily indicative of results for the full year. This
cyclicality and any related fluctuation in consumer demand could have a material
adverse effect on the Company's business, financial condition and results of
operations. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Quarterly Results and Seasonality" and
"Business -- Sales."
EXPOSURE TO FLUCTUATIONS IN ECONOMIC CONDITIONS
The footwear industry in general is dependent on the economic environment
and levels of consumer spending which affect not only the ultimate consumer, but
also retailers, the Company's primary direct customers. Purchases of footwear
tend to decline in periods of recession or uncertainty regarding future economic
prospects, when consumer spending, particularly on discretionary items,
declines. As a result, the Company's operating results may be adversely affected
by downward trends in the economy or the occurrence of events that adversely
affect the economy in general. See "Business -- Industry Overview."
INTENSE COMPETITION IN THE FOOTWEAR INDUSTRY
Competition in the footwear industry is intense. Although the Company
believes that it does not compete directly with any single company with respect
to its entire range of products, the Company's products compete with other
branded products within their product category as well as with private label
products sold by retailers, including some of the Company's customers. The
Company's utility footwear and casual shoes compete with footwear offered by
companies such as The Timberland Company, Dr. Martens, Kenneth Cole Productions,
Steven Madden, Ltd. and Wolverine World Wide, Inc. The Company's athletic shoes
compete with brands of athletic footwear offered by companies such as Nike,
Inc., Reebok International Ltd., adidas-Salomon AG and New Balance. The
Company's children's shoes compete with brands of children's footwear offered by
companies such as The Stride Rite Corporation. In varying degrees, depending on
the product category involved, the Company competes on the basis of style,
price, quality, comfort and brand name prestige and recognition, among other
considerations. These and other competitors pose challenges to the Company's
market share in its major domestic markets and may make it more difficult to
establish the Company in Europe, Asia and other international regions. The
Company also competes with numerous manufacturers, importers and distributors of
footwear for the limited shelf space available for the display of such products
to the consumer. Moreover, the general availability of contract manufacturing
capacity allows ease of access by new market entrants. Many of the Company's
competitors are larger, have achieved greater recognition for their brand names,
have captured greater market share and/or have substantially greater financial,
distribution, marketing and other resources than the Company. There can be no
assurance that the Company will be able to compete successfully against present
or future competitors or that competitive pressures faced by the Company will
not have a material adverse effect on the Company's business, financial
condition and results of operations. See "Business -- Competition."
RISKS RELATING TO ADVANCE PURCHASES OF PRODUCTS
To minimize purchasing costs, the time necessary to fill customer orders
and the risk of non-delivery, the Company places orders for certain of its
products with its manufacturers prior to the time the Company has received all
of its customers' orders and maintains an inventory of certain
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products that it anticipates will be in greater demand. There can be no
assurance, however, that the Company will be able to sell the products it has
ordered from manufacturers or that it has in its inventory. Inventory levels in
excess of customer demand may result in inventory write-downs and the sale of
excess inventory at discounted prices could significantly impair the Company's
brand image and could have a material adverse effect on the Company's business,
financial condition and results of operations. As of December 31, 1998, the
Company had approximately $53.0 million of open purchase orders with its
manufacturers, and $65.4 million of inventory at cost, relating to order backlog
of $74.9 million.
ADDITIONAL CAPITAL REQUIREMENTS
The Company expects that anticipated cash flow from operations, available
borrowings under the Company's revolving line of credit, after the repayment of
indebtedness described under "Use of Proceeds," cash on hand and its financing
arrangements will be sufficient to provide the Company with the liquidity
necessary to fund its anticipated working capital and capital requirements
through fiscal 2000. However, in connection with its growth strategy, the
Company will incur significant working capital requirements and capital
expenditures. The Company's future capital requirements will depend on many
factors, including, but not limited to, the levels at which the Company
maintains inventory, the market acceptance of the Company's footwear, the levels
of promotion and advertising required to promote its footwear, the extent to
which the Company invests in new product design and improvements to its existing
product design and the number and timing of new store openings. To the extent
that available funds are insufficient to fund the Company's future activities,
the Company may need to raise additional funds through public or private
financing. No assurance can be given that additional financing will be available
or that, if available, it can be obtained on terms favorable to the Company.
Failure to obtain such financing could delay or prevent the Company's planned
expansion, which could adversely affect the Company's business, financial
condition and results of operations. In addition, if additional capital is
raised through the sale of additional equity or convertible securities, dilution
to the Company's stockholders could occur. See "Use of Proceeds" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources."
ABILITY TO PROTECT INTELLECTUAL PROPERTY RIGHTS
The Company relies on trademark, copyright and trade secret protection,
patents, non-disclosure agreements and licensing arrangements to establish,
protect and enforce intellectual property rights in its products. In particular,
the Company believes that its future success will depend in significant part on
the Company's ability to maintain and protect the Skechers trademark. The
Company vigorously defends its trademarks against infringement. Despite the
Company's efforts to safeguard and maintain its intellectual property rights,
there can be no assurance that the Company will be successful in this regard.
There can be no assurance that third parties will not assert intellectual
property claims against the Company in the future. Furthermore, there can be no
assurance that the Company's trademarks, products and promotional materials do
not or will not violate the intellectual property rights of others, that its
intellectual property would be upheld if challenged or that the Company would,
in such an event, not be prevented from using its trademarks and other
intellectual property. Such claims, if proved, could materially and adversely
affect the Company's business, financial condition and results of operations. In
addition, although any such claims may ultimately prove to be without merit, the
necessary management attention to and legal costs associated with litigation or
other resolution of future claims concerning trademarks and other intellectual
property rights, could materially and adversely affect the Company's business,
financial condition and results of operations. The Company has sued and has been
sued by third parties in connection with certain matters regarding its
trademarks, none of which has materially impaired the Company's ability to
utilize its trademarks.
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The laws of certain foreign countries do not protect intellectual property
rights to the same extent or in the same manner as do the laws of the United
States. Although the Company continues to implement protective measures and
intends to defend its intellectual property rights vigorously, there can be no
assurance that these efforts will be successful or that the costs associated
with protecting its rights in certain jurisdictions will not be prohibitive.
From time to time, the Company discovers products in the marketplace that
are counterfeit reproductions of the Company's products or that otherwise
infringe upon intellectual property rights held by the Company. There can be no
assurance that actions taken by the Company to establish and protect its
intellectual property rights will be adequate to prevent imitation of its
products by others or to prevent others from seeking to block sales of the
Company's products as violating intellectual property rights. If the Company is
unsuccessful in challenging a third party's products on the basis of
infringement of its intellectual property rights, continued sales of such
product by that or any other third party could adversely impact the Skechers
trademark, result in the shift of consumer preferences away from the Company and
generally have a material adverse effect on the Company's business, financial
condition and results of operations. See "Business -- Intellectual Property
Rights."
DEPENDENCE ON KEY PERSONNEL
The Company's success depends to a large extent upon the expertise and
continuing contributions of Robert Greenberg, Chairman of the Board and Chief
Executive Officer, Michael Greenberg, President, and David Weinberg, Executive
Vice President and Chief Financial Officer. Upon the consummation of the
Offering, each of these officers will enter into three-year employment contracts
with the Company. These agreements will not have non-competition provisions upon
termination of employment. See "Management -- Executive
Compensation -- Employment Agreements." The loss of the services of any of these
individuals or any other key employee could have a material adverse effect on
the Company's business, financial condition and results of operations. The
Company's future success also depends on its ability to identify, attract and
retain additional qualified personnel. The competition for such employees is
intense, and there can be no assurance that the Company will be successful in
identifying, attracting and retaining such personnel. The Company maintains $5.0
million of "key man" life insurance on the life of Robert Greenberg. The loss of
key employees or the inability to hire or retain qualified personnel in the
future could have a material adverse effect on the Company's business, financial
condition and results of operations. See "Management -- Directors, Executive
Officers and Key Employees."
CONTROL OF THE COMPANY BY PRINCIPAL STOCKHOLDER; DISPARATE VOTING RIGHTS
After the Offering, Robert Greenberg, Chairman of the Board and Chief
Executive Officer, will beneficially own 62.6% of the outstanding Class B Common
Stock of the Company (or approximately 60.1% of the outstanding Class B Common
Stock if the Underwriters' over-allotment option is exercised in full). The
holders of Class A Common Stock and Class B Common Stock have identical rights
except that holders of Class A Common Stock are entitled to one vote per share
while holders of Class B Common Stock are entitled to ten votes per share on all
matters submitted to a vote of the stockholders. As a result, Mr. Greenberg will
hold approximately 60.1% of the aggregate number of votes eligible to be cast by
the Company's stockholders (or approximately 57.2% if the Underwriters'
over-allotment option is exercised in full). Therefore, Mr. Greenberg will be
able to control substantially all matters requiring approval by the stockholders
of the Company, including the election of directors and the approval of mergers
or other business combination transactions, and will also have control over the
management and affairs of the Company. As a result of such control, certain
transactions may not be possible without the approval of Mr. Greenberg,
including proxy contests, tender offers, open market purchase programs or other
transactions that could give stockholders of the Company the opportunity to
realize a premium over the then-prevailing market prices for their shares of
Class A Common Stock. The differential in the voting rights could adversely
affect the value of the Class A Common Stock to the extent that investors or any
potential future
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purchaser of the Company view the superior voting rights of the Class B Common
Stock to have value. See "Management," "Principal and Selling Stockholders" and
"Description of Capital Stock."
ANTI-TAKEOVER PROVISIONS
The Company is subject to the anti-takeover provisions of Section 203 of
the Delaware General Corporation Law ("DGCL"). In general, Section 203 prevents
an "interested stockholder" (defined generally as a person owning more than
15.0% or more of the Company's outstanding voting stock) from engaging in a
"business combination" with the Company for three years following the date that
person became an interested stockholder unless the business combination is
approved in a prescribed manner. This statute could make it more difficult for a
third party to acquire control of the Company. See "Description of Capital
Stock -- Section 203 of the Delaware General Corporation Law.
The Board of Directors has the authority to issue up to 10,000,000 shares
of Preferred Stock and to determine the rights, preferences, privileges and
restrictions of such shares without any further vote or action by the
stockholders. Although at present the Company has no plans to issue any shares
of Preferred Stock, Preferred Stock could be issued with voting, liquidation,
dividend and other rights superior to the rights of the Common Stock. The
issuance of Preferred Stock under certain circumstances could have the effect of
delaying or preventing a change in control of the Company. See "Description of
Capital Stock."
Mr. Greenberg's substantial beneficial ownership position, together with
the authorization of Preferred Stock, the disparate voting rights between the
Class A and Class B Common Stock, the classification of the Board of Directors
and the lack of cumulative voting in the Company's Certificate of Incorporation
and Bylaws, may have the effect of delaying, deferring or preventing a change in
control of the Company, may discourage bids for the Company's Class A Common
Stock at a premium over the market price of the Class A Common Stock and may
adversely affect the market price of the Class A Common Stock. See "Principal
and Selling Stockholders" and "Description of Capital Stock."
NO ASSURANCE OF ACTIVE TRADING MARKET FOR CLASS A COMMON STOCK AND POSSIBLE
VOLATILITY OF STOCK PRICE
Prior to the Offering, there has been no public market for the Company's
Class A Common Stock. Although the Company intends to apply for listing of the
Class A Common Stock on the New York Stock Exchange, there can be no assurance
that an active public trading market for the Class A Common Stock will develop
after the Offering or that, if developed, it will be sustained. The public
offering price of the Class A Common Stock offered hereby will be determined by
negotiations between the Company, the Selling Stockholder and the
Representatives of the Underwriters and may not be indicative of the price at
which the Class A Common Stock will trade after the Offering. Consequently,
there can be no assurance that the market price for the Class A Common Stock
will not fall below the initial public offering price. The market price for
shares of the Class A Common Stock may be volatile and may fluctuate based upon
a number of factors, including, without limitation, business performance, news
announcements, quarterly fluctuations in the Company's financial results,
changes in earnings estimates or recommendations by analysts or changes in
general economic and market conditions. See "Underwriting."
SHARES ELIGIBLE FOR FUTURE SALE; REGISTRATION RIGHTS
The sales of substantial amounts of the Company's Class A Common Stock in
the public market or the prospect of such sales could materially and adversely
affect the market price of the Class A Common Stock. Upon completion of the
Offering, the Company will have outstanding 10,715,000 shares of Class A Common
Stock. In addition, the Company will have outstanding 26,024,155 shares of Class
B Common Stock, all of which will be convertible into Class A Common Stock on a
share-for-share basis at the election of the holder or upon transfer or
disposition to
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persons who are not Permitted Transferees (as defined in the Company's
Certificate of Incorporation). The 10,715,000 shares of Class A Common Stock
offered hereby will be immediately eligible for sale in the public market
without restriction beginning on the date of this Prospectus. The 26,024,155
shares of Class B Common Stock are restricted in nature and are saleable
pursuant to Rule 144 under the Securities Act of 1933, as amended (the
"Securities Act"). All executive officers, directors, stockholders and
optionholders of the Company (including the Selling Stockholder) have agreed
that they will not, without the prior written consent of BT Alex. Brown
Incorporated on behalf of the Underwriters (which consent may be withheld in its
sole discretion) and subject to certain limited exceptions, offer, pledge, sell,
contract to sell, sell any option or contract to purchase, sell short, purchase
any option or contract to sell, grant any option, right or warrant to purchase,
lend, or otherwise transfer or dispose of, directly or indirectly, any shares of
Common Stock, or any securities convertible into or exercisable or exchangeable
for Common Stock, or enter into any swap or similar agreement that transfers in
whole or in part, any of the economic consequences of ownership of the Common
Stock, for a period commencing on the date of this Prospectus and continuing to
a date 180 days after such date; provided, however, that such restrictions do
not apply to shares of Class A Common Stock sold or purchased in the Offering or
to shares of Class A Common Stock purchased in the open market following the
Offering. BT Alex. Brown Incorporated, on behalf of the Underwriters, may, in
its sole discretion and at any time without notice, release all or any portion
of the securities subject to these lock-up agreements. Upon consummation of the
Offering, Robert Greenberg, Chairman of the Board and Chief Executive Officer,
and Michael Greenberg, President, will beneficially own an aggregate of
19,070,613 shares of Class B Common Stock for which they have received certain
registration rights to sell such shares of Class A Common Stock issuable upon
conversion of their shares of Class B Common Stock in the public market. The
Company also intends to register under the Securities Act shares of Class A
Common Stock reserved for issuance pursuant to the Stock Option Plan and the
1998 Purchase Plan. See "Shares Eligible for Future Sale" and "Underwriting."
YEAR 2000 COMPLIANCE
The Company is assessing the internal readiness of its computer systems for
handling the year 2000 ("Y2K") issue. Although the Company is not aware of any
material operational issues associated with preparing its internal systems for
the Y2K, there can be no assurance that there will not be a delay in the
implementation of the necessary systems and changes to address the Y2K issues.
The Company's inability to implement such systems and changes in a timely manner
could have a material adverse effect on the Company's business, financial
condition and results of operations. Furthermore, even if the internal systems
of the Company are not materially affected by the Y2K issue, the Company could
be affected by disruptions in the operation of the enterprises with which the
Company interacts. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Year 2000 Compliance."
IMMEDIATE AND SUBSTANTIAL DILUTION
The anticipated initial public offering price is substantially higher than
the book value per outstanding share of the Class A Common Stock. Purchasers of
the Class A Common Stock will experience immediate and substantial dilution in
net tangible book value of $11.14 per share (based upon an assumed initial
public offering price of $14.00 per share) from the assumed initial public
offering price per share of Class A Common Stock. Moreover, to the extent
outstanding options to purchase Class A Common Stock are exercised in the
future, there will be further dilution. See "Dilution."
18
<PAGE> 20
USE OF PROCEEDS
The net proceeds to be received by the Company from the sale of the
8,925,000 shares of Class A Common Stock offered by the Company (after deducting
the estimated underwriting discounts and commissions and estimated Offering
expenses payable by the Company) are estimated to be $114.2 million. The Company
intends to apply the net proceeds from the Offering (i) to repay all
indebtedness owed under its revolving line of credit (which had an outstanding
balance of $54.3 million as of December 31, 1998), (ii) to repay approximately
$12.2 million owed under two term notes (a $10.0 million subordinated note (the
"Subordinated Note") and a $2.2 million unsubordinated note (the "Unsubordinated
Note")), each owing to the Greenberg Family Trust, (iii) to make the Final 1998
Distribution, which consists of the final installment of Federal income taxes
payable on S Corporation earnings for 1998 and is anticipated to be $7.6
million, (iv) to make the Final Tax Distribution, which consists of income taxes
payable on S Corporation earnings from January 1, 1999 through the date of
termination of the Company's S Corporation status and is anticipated to be $3.4
million and (v) to make the Final S Corporation Distribution, which is designed
to constitute the substantial portion of the Company's remaining undistributed
accumulated S Corporation earnings through the date of termination of the
Company's S Corporation status and is anticipated to be $22.0 million. The
remainder of the net proceeds will be used for other general corporate purposes,
including working capital.
The revolving line of credit to be repaid is part of a credit facility
provided by Heller Financial, Inc. The revolving line of credit provides for
borrowings of up to $120.0 million and bears interest at the Company's option at
either the prime rate (7.75% at December 31, 1998) plus 25 basis points or at
Libor (5.07% at December 31, 1998) plus 2.75%. Approximately $54.3 million was
outstanding under the revolving line of credit as of December 31, 1998. By
repaying this indebtedness, the Company expects to have additional flexibility
and liquidity to pursue its growth strategies. The Subordinated Note and
Unsubordinated Note each bear interest at the prime rate (7.75% at December 31,
1998) and are due on demand. The Greenberg Family Trust has agreed not to call
the Subordinated Note prior to January 2000. The proceeds from the issuance of
these notes were used to repay a term note in the principal amount of $13.3
million owed to Heller Financial, Inc. See "Certain Transactions."
The Company will not receive any proceeds from the sale of shares of Class
A Common Stock by the Selling Stockholder.
PRIOR S CORPORATION STATUS
In May 1992, the Company elected to be treated for Federal and state income
tax purposes as an S Corporation under Subchapter S of the Internal Revenue Code
of 1986, as amended (the "Code"), and comparable state laws. As a result,
earnings of the Company, since such initial election, have been included in the
taxable income of the Company's stockholders for Federal and state income tax
purposes, and the Company has not been subject to income tax on such earnings,
other than franchise and net worth taxes. Prior to the closing of the Offering,
the Company will terminate its S Corporation status, and the Company will be
treated for Federal and state income tax purposes as a corporation under
Subchapter C of the Code and, as a result, will become subject to state and
Federal income taxes.
By reason of the Company's treatment as an S Corporation for Federal and
state income tax purposes, the Company, since inception, has provided to its
stockholders funds for the payment of income taxes on the earnings of the
Company. The Company declared distributions consisting of amounts attributable
to payment of such taxes of $112,000, $3.2 million and $7.9 million in 1996,
1997 and 1998, respectively. In January 1999, the Company made a $368,000 S
Corporation distribution of assets related to the "Cross Colours" trademark (the
"January 1999 Distribution"). See "Certain Transactions." In April 1999, the
Company anticipates making the first installment of Federal income taxes payable
on S Corporation earnings for 1998 (the "April Tax Distribution").
19
<PAGE> 21
Also, the Company will use a portion of the proceeds of the Offering to make the
final installment of Federal income taxes payable on S Corporation earnings for
1998 (the "Final 1998 Distribution"). The amount of the April Tax Distribution
is estimated to be approximately $3.5 million and the amount of the Final 1998
Distribution is estimated to be approximately $7.6 million.
Upon the termination of the Company's S Corporation status, the Company
will declare (i) the Final Tax Distribution consisting of income taxes payable
on S Corporation earnings from January 1, 1999 through the date of termination
of the Company's S Corporation status, and (ii) the Final S Corporation
Distribution in an amount designed to constitute the substantial portion of the
Company's remaining undistributed accumulated S Corporation earnings through the
date of termination of the Company's S Corporation status. The Company estimates
that the amount of the Final Tax Distribution will be approximately $3.4 million
(the "Final Tax Distribution") and the amount of the Final S Corporation
Distribution will be approximately $22.0 million (the "Final S Corporation
Distribution"); such amounts will be paid with a portion of the net proceeds of
the Offering. See "Use of Proceeds." Purchasers of shares of Class A Common
Stock in the Offering will not receive any portion of the April Tax
Distribution, the Final 1998 Distribution, the Final Tax Distribution or the
Final S Corporation Distribution. On and after the date of such termination, the
Company will no longer be treated as an S Corporation and, accordingly, will be
fully subject to Federal and state income taxes. All pro forma income taxes
reflect adjustments for Federal and state income taxes as if the Company had
been taxed as a C Corporation rather than an S Corporation.
In connection with the Offering and the termination of the Company's S
Corporation tax status, the Company will enter into a tax indemnification
agreement with each of its stockholders. The agreement will provide that the
Company will indemnify and hold harmless each of the stockholders for Federal,
state, local or foreign income tax liabilities, and costs relating thereto,
resulting from any adjustment to the Company's taxable income that is the result
of an increase in or change in character of, the Company's income during the
period it was treated as an S Corporation up to the benefit received by the
Company in connection with such adjustments. The agreements will also provide
that if there is a determination that the Company was not an S Corporation prior
to the Offering, the stockholders will indemnify the Company for the additional
tax liability arising as a result of such determination up to the amount of the
prior distributions to the stockholders less the taxes payable with respect to
such distributions.
DIVIDEND POLICY
The Company anticipates that after payment of the April Tax Distribution in
April 1999 and the Final 1998 Distribution, to be paid with a portion of the net
proceeds of the Offering to the Company, and after the payment of the Final Tax
Distribution and the Final S Corporation Distribution in connection with the
termination of the S Corporation status of the Company, all earnings will be
retained for the foreseeable future for use in the operations of the business.
Purchasers of shares of Class A Common Stock in the Offering will not receive
any portion of the April Tax Distribution, the Final 1998 Distribution, the
Final Tax Distribution or the Final S Corporation Distribution. Any future
determination as to the declaration or payment of dividends will be at the
discretion of the Company's Board of Directors and will depend upon the
Company's results of operations, financial condition, contractual restrictions
and other factors deemed relevant by the Board of Directors. The Company's
credit facility prohibits the payment of dividends by the Company if the Company
is in default of any provisions of the credit facility. For certain information
regarding S Corporation distributions declared by the Company in 1996, 1997 and
1998 and the January 1999 Distribution, the April Tax Distribution, the Final
1998 Distribution, the Final Tax Distribution and the Final S Corporation
Distribution, see "Management's Discussion and Analysis of Financial Condition
and Results of Operations -- Liquidity and Capital Resources."
20
<PAGE> 22
CAPITALIZATION
The following table sets forth the capitalization of the Company after
giving effect to the Recapitalization (i) on an actual basis as of December 31,
1998 (when the Company was an S Corporation), (ii) on a pro forma basis to
reflect the January 1999 Distribution of $368,000 of assets and the April Tax
Distribution estimated to be $3.5 million and (iii) on a pro forma basis as
adjusted to reflect (A) the Final 1998 Distribution, estimated to be $7.6
million, the Final Tax Distribution, estimated to be $3.4 million, and the Final
S Corporation Distribution, estimated to be $22.0 million, to be made in
connection with the termination of the Company's S Corporation status (see
"Prior S Corporation Status"), (B) the recording by the Company of $2.4 million
of deferred tax assets as if the Company were treated as a C Corporation since
its inception and (C) the issuance and sale of the shares of Class A Common
Stock offered by the Company at an assumed initial public offering price of
$14.00 per share (the mid-point of the range), after deducting the estimated
underwriting discounts and commissions and estimated Offering expenses payable
by the Company, and the anticipated application of the estimated net proceeds
therefrom. This table should be read in conjunction with the Consolidated
Financial Statements and the Notes thereto included elsewhere in this
Prospectus.
<TABLE>
<CAPTION>
AS OF DECEMBER 31, 1998
--------------------------------------
PRO FORMA,
ACTUAL PRO FORMA AS ADJUSTED(4)
------- --------- --------------
(IN THOUSANDS, EXCEPT SHARE DATA)
<S> <C> <C> <C>
Short-term debt(1).................................... $57,383 $57,383 $ 816
======= ======= ========
Long-term debt:
Notes payable to stockholder........................ $10,000 $10,000 $ --
Other long-term debt................................ 3,550 3,550 3,550
Stockholders' equity:
Preferred Stock, $.001 par value; 10,000,000 shares
authorized; none issued and outstanding actual,
pro forma and pro forma as adjusted.............. -- -- --
Class A Common Stock, $.001 par value; 100,000,000
shares authorized; none issued and outstanding
actual and pro forma; 10,715,000 shares issued
and outstanding pro forma as adjusted(2)......... -- -- 11
Class B Common Stock, $.001 par value; 60,000,000
shares authorized; 27,814,155 shares issued and
outstanding actual and pro forma; 26,024,155
shares issued and outstanding pro forma as
adjusted......................................... 2 2 26
Additional paid-in capital(3)....................... -- -- 114,829
Retained earnings (accumulated deficit)............. 27,674 23,766 (6,841)
------- ------- --------
Total stockholders' equity.................. 27,676 23,768 108,025
------- ------- --------
Total capitalization........................ $44,226 $37,318 $111,575
======= ======= ========
</TABLE>
- ---------------
(1) Includes the current installments of other long-term debt and the
Unsubordinated Note payable to stockholder.
(2) Excludes options to acquire 1,390,715 shares of Class A Common Stock
outstanding as of December 31, 1998, at a per share exercise price of $2.78.
Options to purchase an aggregate of shares of Class A Common
Stock are expected to be granted to certain employees and non-employee
directors of the Company at the effective date of the Offering at a per
share exercise price equal to the initial public offering price. See
"Management -- Stock Options."
(3) In 1998, the Company charged to expense $660,000 of costs related to the
Offering.
(4) Reflects the conversion of 1,790,000 shares of Class B Common Stock into
1,790,000 shares of Class A Common Stock as a result of the anticipated sale
of stock by the Selling Stockholder pursuant to the Offering.
21
<PAGE> 23
DILUTION
The net tangible book value of the Company's Common Stock at December 31,
1998 was approximately $26.7 million or $0.96 per share. The pro forma net
tangible book value of the Company's Common Stock at December 31, 1998 was
approximately $(9.9) million or $(0.35) per share. Pro forma net tangible book
value per share represents total tangible assets reduced by the amount of total
liabilities, divided by the number of shares of Common Stock outstanding, after
giving effect to (i) the April Tax Distribution estimated to be $3.5 million
which will be paid in April 1999 and (ii) the Final 1998 Distribution estimated
to be $7.6 million, the Final Tax Distribution estimated to be $3.4 million and
the Final S Corporation Distribution estimated to be $22.0 million and payment
of each thereof with a portion of the net proceeds of the Offering (see "Prior S
Corporation Status"). After giving effect to the sale by the Company of the
shares of Class A Common Stock offered by the Company hereby at an assumed
initial public offering price of $14.00 per share (the mid-point of the range),
after deducting the estimated underwriting discounts and commissions and
estimated Offering expenses, the pro forma as adjusted net tangible book value
of the Company at December 31, 1998 would have been $105.0 million or $2.86 per
share of Common Stock. This represents an immediate increase in pro forma net
tangible book value of $3.21 per share to existing stockholders and an immediate
and substantial dilution of $11.14 per share to new investors purchasing shares
in the Offering. The following table illustrates this per share dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share............. $ 14.00
Pro forma net tangible book value per share as of December
31, 1998............................................... $ (0.35)
Increase per share attributable to new investors.......... 3.21
--------
Pro forma as adjusted net tangible book value per share
after the Offering........................................ 2.86
--------
Dilution per share to new investors......................... $ 11.14
========
</TABLE>
The following table summarizes, on a pro forma basis as of December 31,
1998, after giving effect to the adjustments set forth above, the number of
shares of Class A Common Stock purchased from the Company, the total
consideration paid to the Company and the average price per share of Common
Stock paid by the existing stockholders and by the new investors in the
Offering:
<TABLE>
<CAPTION>
SHARES TOTAL
PURCHASED CONSIDERATION
--------------------- ----------------------- AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
---------- ------- ------------ ------- -------------
<S> <C> <C> <C> <C> <C>
Existing stockholders(1).... 27,814,155 75.7% $ 2,000 0.0% $ 0.00
New investors(1)............ 8,925,000 24.3 124,950,000 100.0 $14.00
---------- ----- ------------ ------
Total............. 36,739,155 100.0% $124,952,000 100.0%
========== ===== ============ ======
</TABLE>
- ---------------
(1) Sales by the Selling Stockholder in the Offering will reduce the number of
shares held by existing stockholders to 26,024,155, or 70.8% of the total
number of shares of Common Stock outstanding after the Offering, and will
increase the number of shares held by new investors to 10,715,000 shares, or
29.2% of the total number of shares of Common Stock outstanding after the
Offering. See "Principal and Selling Stockholders."
The above tables exclude 1,390,715 shares of Class A Common Stock issuable
upon the exercise of outstanding stock options at an exercise price of $2.78. To
the extent outstanding options are exercised, new investors will experience
further dilution. See "Management -- Stock Options -- 1998 Stock Option Plan,"
"-- 1998 Employee Stock Purchase Plan" and Note 6 of Notes to Consolidated
Financial Statements.
22
<PAGE> 24
SELECTED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
The selected data presented below under the captions "Statement of
Operations Data" and "Balance Sheet Data" for, and as of the end of, each of the
years in the five-year period ended December 31, 1998, are derived from the
Consolidated Financial Statements of Skechers U.S.A., Inc., which consolidated
financial statements have been audited by KPMG LLP, independent certified public
accountants. The Consolidated Financial Statements as of December 31, 1997 and
1998, and for each of the years in the three-year period ended December 31,
1998, and the report thereon, are included elsewhere in this Prospectus. Pro
Forma Operations Data is unaudited.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------------------
1994 1995 1996 1997 1998
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net sales................................................. $90,755 $110,649 $115,410 $183,827 $372,680
Cost of sales............................................. 61,579 78,692 81,199 115,104 218,100
------- -------- -------- -------- --------
Gross profit............................................ 29,176 31,957 34,211 68,723 154,580
Royalty income, net....................................... 1,012 1,843 1,592 894 855
------- -------- -------- -------- --------
30,188 33,800 35,803 69,617 155,435
------- -------- -------- -------- --------
Operating expenses:
Selling................................................. 10,872 12,150 11,739 21,584 49,983
General and administrative.............................. 15,810 19,850 18,939 32,397 71,461
------- -------- -------- -------- --------
26,682 32,000 30,678(1) 53,981 121,444
------- -------- -------- -------- --------
Earnings from operations................................ 3,506 1,800 5,125 15,636 33,991
------- -------- -------- -------- --------
Other income (expense):
Interest................................................ (2,461) (3,676) (3,231) (4,186) (8,631)
Other, net.............................................. 18 214 61 (37) (239)
------- -------- -------- -------- --------
(2,443) (3,462) (3,170) (4,223) (8,870)
------- -------- -------- -------- --------
Earnings (loss) before income taxes and extraordinary
credit................................................ 1,063 (1,662) 1,955 11,413 25,121
State income taxes -- all current......................... 54 3 45 390 650
------- -------- -------- -------- --------
Earnings (loss) before extraordinary credit............. 1,009 (1,665) 1,910 11,023 24,471
------- -------- -------- -------- --------
Extraordinary credit, net of state income taxes........... -- 443(1) -- -- --
------- -------- -------- -------- --------
Net earnings (loss)..................................... $ 1,009 $(1,222) $ 1,910 $11,023 $ 24,471
======= ======== ======== ======== ========
PRO FORMA OPERATIONS DATA(2):
Earnings (loss) before income taxes and extraordinary
credit.................................................. $ 1,063 $(1,662) $ 1,955 $11,413 $ 25,121
Income taxes (benefit).................................... 425 (665) 782 4,565 10,048
------- -------- -------- -------- --------
Earnings (loss) before extraordinary credit............. 638 (997) 1,173 6,848 15,073
Extraordinary credit, net of state income taxes........... -- 270(1) -- -- --
------- -------- -------- -------- --------
Net earnings (loss)..................................... $ 638 $ (727) $ 1,173 $ 6,848 $ 15,073
======= ======== ======== ======== ========
Net earnings per share(3):
Basic................................................... $ 0.54
========
Diluted................................................. $ 0.50
========
Weighted average shares(3):...............................
Basic................................................... 27,814
========
Diluted................................................. 30,418
========
</TABLE>
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
------------------------------------------------
1994 1995 1996 1997 1998
------- ------- ------- ------- --------
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital........................................... $ 8,930 $ 8,155 $11,987 $17,081 $ 23,106
Total assets.............................................. 43,575 47,701 42,151 90,881 146,284
Total debt................................................ 28,180 31,748 25,661 39,062 70,933
Stockholders' equity...................................... 2,330 938 3,336 11,125 27,676
</TABLE>
- ---------------
(1) Includes an extraordinary gain of $443,000 net of state income taxes of
$7,000 ($270,000 on a pro forma basis, net of $180,000) resulting from the
acceleration of the repayment of a note.
(2) Reflects adjustments for Federal and state income taxes as if the Company
had been taxed as a C Corporation, at the assumed rate of 40.0%, rather than
as an S Corporation.
23
<PAGE> 25
(3) Weighted average diluted shares outstanding for the year ended December 31,
1998 include 1,068,630 shares of Class A Common Stock issuable upon exercise
of stock options outstanding, after applying the treasury stock method based
on an assumed initial public offering price of $14.00 per share (the
mid-point of the range). The weighted average diluted shares also give
effect to the sale by the Company of those shares of Class A Common Stock
necessary to fund the payment of the excess of (i) the sum of stockholder
distributions during the previous 12-month period (during fiscal 1998 for
the determination of shares outstanding for fiscal 1998), and distributions
paid or declared thereafter until the consummation of the Offering over (ii)
the S Corporation earnings in the previous 12-month period (for the year
ended December 31, 1998), based on an assumed initial public offering price
of $14.00 per share (the mid-point of the range), net of estimated
underwriting discounts. See "Capitalization" and "Management -- Stock
Options." For further information pertaining to the calculation of earnings
per share, see Note 1 of Notes to Consolidated Financial Statements.
24
<PAGE> 26
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the Company's
Consolidated Financial Statements and Notes thereto appearing elsewhere herein.
This section contains certain forward-looking statements that involve risks and
uncertainties including, but not limited to, information with regard to the
Company's plans to increase the number of retail locations and styles of
footwear, the maintenance of customer accounts and expansion of business with
such accounts, the successful implementation of the Company's strategies, future
growth and growth rates, and future increases in net sales, expenses, capital
expenditures and net earnings. Without limiting the foregoing, the words
"believes," "anticipates," "plans," "expects," "may," "will," "intends,"
"estimates" and similar expressions are intended to identify forward-looking
statements. These forward-looking statements involve risks and uncertainties,
and the Company's actual results may differ materially from the results
discussed in the forward-looking statements as a result of certain factors set
forth in "Risk Factors" and elsewhere in this Prospectus.
OVERVIEW
The Company designs and markets branded contemporary casual, active, rugged
and lifestyle footwear for men, women and children. The Company sells its
products to department stores such as Nordstrom, Macy's, Dillards,
Robinson's-May and JC Penney, and specialty retailers such as Genesco's Journeys
and Jarman chains, The Venator Group's Foot Locker and Lady Foot Locker chains,
Pacific Sunwear and Footaction U.S.A. The Company's marketing focus is to
maintain and enhance recognition of the Skechers brand name as a casual, active,
youthful, lifestyle brand that stands for quality, comfort and design
innovation. Although the Company spent 18.3% of net sales on marketing in the
fourth quarter of 1998, which raised total marketing expenditures for the year
to 11.3% of net sales, the Company typically endeavors to spend between 8.0% and
10.0% of net sales in the marketing of Skechers footwear through an integrated
effort of advertising, promotions, public relations, trade shows and other
marketing efforts.
The Company was founded in 1992 as a distributor of Dr. Martens footwear.
The Company began designing and marketing men's footwear under the Skechers
brand name and other brand names including "Cross Colours," "Karl Kani" and
"So . . . L.A." in 1993. Shortly after launching these branded footwear lines,
the Company discontinued distributing Dr. Martens footwear. In 1995, the Company
began to shift its focus to the Skechers brand name by de-emphasizing the sale
of "Kani" branded products and discontinuing the sale of "Cross Colours" and
"So . . . L.A." branded footwear. In early 1996, the Company substantially
increased its product offerings in and marketing focus on its Skechers women's
and children's lines. The Company divested the "Karl Kani" license in August
1997. Substantially all of the Company's products are marketed under the
Skechers name.
Management believes the Skechers product offerings of men's, women's and
children's footwear appeal to a broad customer base between the ages of 5 and 40
years. Skechers men's and women's footwear are primarily designed with the
active, youthful lifestyle of the 12 to 25 year old age group in mind. Products
include basic styles, and seasonal or fashion styles. Seasonal or fashion styles
are designed to establish or capitalize on market trends. The Company increased
its styles offered from approximately 600 for the year ended December 31, 1997
to approximately 900 for the year ended December 31, 1998. Management believes
that a substantial portion of the Company's gross sales were generated from
styles which management considers basic.
The Company has realized rapid growth since inception, increasing net sales
at a compound annual growth rate of 42.4% from $90.8 million in 1994 to $372.7
million in 1998. From 1997 to 1998, the Company experienced a 102.7% and 117.4%
increase in net sales and earnings from operations, respectively. The Company
also experienced an improvement in gross profit as a percentage of net sales
from 37.4% to 41.5% and in earnings from operations as a percentage of net sales
from 8.5% to 9.1% over this same period. These improvements resulted in part
from the shift to
25
<PAGE> 27
offering Skechers product exclusively and in part from economies of scale. In
the future, the Company's rate of growth will be dependent upon, among other
things, the continued success of its efforts to expand its footwear offerings.
There can be no assurance that the rate of growth will not decline in future
periods or that the Company will improve or maintain operating margins.
As the Company's net sales growth has accelerated, management has focused
on investing in infrastructure to support continued expansion in a disciplined
manner. Major areas of investment have included expanding the Company's
distribution facilities, hiring additional personnel, developing product
sourcing and quality control offices in Taiwan, upgrading the Company's
management information systems, developing and expanding the Company's retail
stores and launching its direct mail business in August 1998 through its web
site and catalog. The Company has established this infrastructure to achieve
further economies of scale in anticipation of continued increases in net sales.
Because expenses relating to this infrastructure are fixed, at least in the
short-term, operating results and margins would be adversely affected if the
Company does not achieve anticipated continued growth.
As of March 31, 1999, the Company operated 22 concept stores at marquee
locations in major metropolitan cities. Each concept store serves not only as a
showcase for the Company's full product offering for the current season but also
as a rapid product feedback mechanism. Product sell-through information derived
from the Company's concept stores enables the Company's sales, merchandising and
production staff to respond to market changes and new product introductions.
Such responses serve to augment sales and limit inventory markdowns and customer
returns and allowances. As of March 31, 1999, the Company also operated 15
factory and warehouse outlet stores that enable the Company to liquidate excess,
discontinued and odd-size inventory in a cost efficient manner. The Company
plans to increase the number of retail locations in the future to further its
strategic goals as well as in an effort to increase net sales and net earnings.
The Company plans to open at least two new concept stores and four new outlet
stores in the remainder of 1999. For the year ended December 31, 1998
approximately 7.4% of net sales were generated by the Company's retail stores.
During 1998, Skechers sold to approximately 2,200 retail accounts
representing in excess of 10,000 storefronts. For the year ended December 31,
1998, The Venator Group represented 11.8% of the Company's net sales. Other than
the foregoing, no one customer accounted for 10.0% or more of the Company's net
sales for such period. Management has implemented a strategy of controlling the
growth of the distribution channels through which the Company's products are
sold in order to protect the Skechers brand name, properly service customer
accounts and better manage the growth of the business. Increasing sales to
existing customers and the opening of additional retail stores depend on various
factors, including strength of the Company's brand name, competitive conditions,
the ability of the Company to manage the increased sales and stores and the
availability of desirable locations. There can be no assurance that the Company
will be able to increase its sales to existing customers or to open and operate
new retail stores on a profitable basis. There can be no assurance that the
Company's growth strategy will be successful or that the Company's net sales or
net earnings will increase as a result of the implementation of such efforts.
Although the Company's primary focus is on the domestic market, the Company
presently markets its product in countries in Europe, Asia and selected other
foreign regions through distributorship agreements. For the year ended December
31, 1998, approximately 9.3% of the Company's net sales was derived from its
international operations. To date, substantially, all international sales have
been made in U.S. Dollars, although there can be no assurance that this will
continue to be the case. The Company's goal is to increase sales through
distributors by heightening the Company's marketing support in these countries.
Sales through foreign distributors result in lower gross margins to the Company
than domestic sales. To the extent that the Company expands its international
operations through distribution arrangements, its overall gross margins may be
adversely affected. In 1998, the Company launched its first major international
advertising campaign
26
<PAGE> 28
in Europe and Asia. In an effort to increase profit margins on products sold
internationally and more effectively promote the Skechers brand name, the
Company is exploring selling directly to retailers in certain European countries
in the future. In addition, the Company is exploring selectively opening
flagship retail stores internationally on its own or through joint ventures.
There can be no assurance that such expansion plans will be successful.
Management believes that selective licensing of the Skechers brand name to
non-footwear-related manufacturers may broaden and enhance the Skechers image
without requiring significant capital investments or the incurrence of
significant incremental operating expenses by the Company. Although the Company
has licensed certain manufacturers to produce and market certain Skechers
products on a limited basis, to date it has not derived any significant royalty
income from such licensing arrangements. Royalty income is recognized as revenue
when earned. The substantial portion of the Company's royalty income to date was
derived from royalties paid in connection with sales of "Karl Kani" licensed
apparel. The Company divested the license in August 1997. Management believes
that revenues from licensing agreements will not be a material source of growth
for the Company in the near term; however, management believes that such
revenues may present an attractive long-term opportunity with minimal near-term
costs.
The Company contracts with third parties for the manufacture of all of its
products. The Company does not own or operate any manufacturing facilities. For
the year ended December 31, 1998, the top four manufacturers of the Company's
products accounted for 15.4%, 14.2%, 12.1% and 10.4% of total purchases,
respectively. Other than the foregoing, no one manufacturer accounted for more
than 10.0% of the Company's total purchases for such period. To date,
substantially all products are purchased in U.S. Dollars, although there can be
no assurance that this will continue to be the case. The Company believes the
use of independent manufacturers increases its production flexibility and
capacity while at the same time allowing the Company to substantially reduce
capital expenditures and avoid the costs of managing a large production work
force. Substantially all of the Company's products are produced in China. The
Company finances its production activities in part through the use of
interest-bearing open purchase agreements with its Asian manufacturers. These
facilities currently bear interest at a rate between 9.0% and 12.0% per annum
with financing for up to 90 days. Management believes that the use of these
unsecured facilities affords the Company additional liquidity and flexibility.
Finished goods are reviewed, inspected and shipped to domestic accounts
primarily from the Company's distribution centers located in Ontario,
California, and are primarily shipped directly from the manufacturer to
Skechers' international distributors. The Company intends to install a new
material handling system in its most recently opened distribution center to
enhance its ability to monitor inventory levels and distribution activities at
such site. The system, which is expected to cost $10.0 million, is anticipated
to become operational mid-2000.
In May 1992, the Company elected to be treated for Federal and state income
tax purposes as an S Corporation under Subchapter S of the Code and comparable
state laws. As a result, earnings of the Company, since such initial election,
have been included in the taxable income of the Company's stockholders for
Federal and state income tax purposes, and the Company has not been subject to
income tax on such earnings, other than franchise and net worth taxes. Upon the
termination of the Company's S Corporation status, the Company will be treated
for Federal and state income tax purposes as a corporation under Subchapter C of
the Code and, as a result, will become subject to state and Federal income
taxes. By reason of the Company's treatment as an S Corporation for Federal and
state income tax purposes, the Company, since inception, has provided to its
stockholders funds for the payment of income taxes on the earnings of the
Company. The Company declared distributions consisting of amounts attributable
to payment of such taxes of $112,000, $3.2 million and $7.9 million in 1996,
1997 and 1998, respectively. In January 1999, the Company made the January 1999
Distribution consisting of $368,000 of assets related to the "Cross Colours"
trademark. See "Certain Transactions." In April 1999, the Company anticipates
making the April Tax Distribution consisting of the first installment of Federal
income taxes payable on S Corporation earnings for
27
<PAGE> 29
1998. Also, the Company will use a portion of its proceeds of the Offering to
make the Final 1998 Distribution consisting of the final installment of Federal
income taxes payable on S Corporation earnings for 1998. The amount of the April
Tax Distribution is estimated to be approximately $3.5 million and the amount of
the Final 1998 Distribution is \estimated to be approximately $7.6 million. Upon
the termination of the Company's S Corporation status, the Company will also
declare (i) the Final Tax Distribution consisting of income taxes payable on S
Corporation earnings from January 1, 1999 through the date of termination of the
Company's S Corporation status, and (ii) the Final S Corporation Distribution in
an amount designed to constitute the substantial portion of the Company's
remaining and undistributed accumulated S Corporation earnings through the date
of termination of the Company's S Corporation status. The Company estimates that
the amount of the Final Tax Distribution will be approximately $3.4 million and
the amount of the Final S Corporation Distribution will be approximately $22.0
million and such amounts will be paid with a portion of the net proceeds of the
Offering. See "Use of Proceeds." Purchasers of shares of Class A Common Stock in
the Offering will not receive any portion of the April Tax Distribution, the
Final 1998 Distribution, the Final Tax Distribution or the Final S Corporation
Distribution. On and after the date of such termination, the Company will no
longer be treated as an S Corporation and, accordingly, will be fully subject to
Federal and state income taxes. All pro forma income taxes reflect adjustments
for Federal and state income taxes as if the Company had been taxed as a C
Corporation rather than an S Corporation.
RESULTS OF OPERATIONS
The following table sets forth for the periods indicated, selected
information from the Company's results of operations as a percentage of net
sales. Pro forma reflects adjustments for federal and state income taxes as if
the Company had been taxed as a C Corporation rather than an S Corporation.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
1996 1997 1998
----- ----- -----
<S> <C> <C> <C>
Net sales................................................... 100.0% 100.0% 100.0%
Cost of sales............................................... 70.4 62.6 58.5
----- ----- -----
Gross profit.............................................. 29.6 37.4 41.5
Royalty income, net......................................... 1.4 0.5 0.2
----- ----- -----
31.0 37.9 41.7
----- ----- -----
Operating expenses:
Selling................................................... 10.2 11.8 13.4
General and administrative................................ 16.4 17.6 19.2
----- ----- -----
26.6 29.4 32.6
----- ----- -----
Earnings from operations.................................... 4.4 8.5 9.1
Interest expense, net..................................... (2.8) (2.3) (2.3)
Other, net................................................ 0.1 0.0 (0.1)
----- ----- -----
Earnings before pro forma income taxes...................... 1.7 6.2 6.7
Pro forma income taxes...................................... 0.7 2.5 2.7
----- ----- -----
Pro forma net earnings.................................... 1.0% 3.7% 4.0%
===== ===== =====
</TABLE>
YEAR ENDED DECEMBER 31, 1998 COMPARED TO YEAR ENDED DECEMBER 31, 1997
Net Sales
Net sales increased $188.9 million, or 102.7%, to $372.7 million for the
year ended December 31, 1998 as compared to $183.8 million for the year ended
December 31, 1997. This increase was due to increased sales of branded footwear
primarily as a result of (i) greater brand awareness driven in part by a
significant expansion of the Company's national marketing efforts, (ii) a
broader
28
<PAGE> 30
breadth of men's, women's and children's product offerings, (iii) the
development of the Company's domestic and international sales forces, (iv) the
transition of the Company's account base in the direction of larger accounts
with multiple stores and increased sales to such accounts, resulting in higher
sales per account, (v) the Company's opening of 12 concept and 11 outlet stores
and (vi) the launch of the Company's direct mail business in August 1998. Net
sales for the year ended December 31, 1998 were affected in part by the overall
weakness in the retail footwear market in the fourth quarter of 1998. Gross
wholesale men's footwear sales, including international, increased $42.5
million, or 39.7%, to $149.6 million for the year ended December 31, 1998, as
compared to $107.1 million for the year ended December 31, 1997. The increase in
gross wholesale men's footwear sales was achieved despite a decline in men's
"Kani" footwear sales of $10.8 million to $668,000 for the year ended December
31, 1998, as compared to $11.5 million in sales for the year ended December 31,
1997. The Company discontinued actively marketing "Kani" footwear in 1997. Sales
of "Kani" footwear for the year ended December 31, 1998 resulted from inventory
close-outs, which were substantially completed during this fiscal period. Gross
wholesale women's footwear sales, including international, increased $100.2
million, or 201.0%, to $150.1 million for the year ended December 31, 1998 as
compared to $49.9 million for the year ended December 31, 1997. Gross wholesale
children's footwear sales, including international, increased $34.5 million, or
163.5%, to $55.6 million for the year ended December 31, 1998 as compared to
$21.1 million for the year ended December 31, 1997. Sales of children's "Kani"
footwear represented $20,000 and $3.3 million of such sales for the year ended
December 31, 1998 and 1997, respectively. Provisions for returns and allowances
were $10.8 million for the year ended December 31, 1998 as compared to $5.5
million for the year ended December 31, 1997. Net sales through the Company's
retail stores increased $17.6 million, or 177.2%, to $27.4 million for the year
ended December 31, 1998 as compared to $9.8 million for the year ended December
31, 1997. This increase is due to an increase in sales from pre-existing stores
and new store openings. Net sales generated from international operations
increased $7.0 million, or 25.3%, to $34.7 million for the year ended December
31, 1998 as compared to $27.7 million for the year ended December 31, 1997.
Gross Profit
The Company's gross profit increased $85.9 million, or 124.9%, to $154.6
million for the year ended December 31, 1998 compared to $68.7 million for the
year ended December 31, 1997. The increase was attributable to higher sales and
an improvement in gross profit as a percentage of net sales (the "Gross
Margin"). The Gross Margin increased to 41.5% for the year ended December 31,
1998 from 37.4% for the year ended December 31, 1997. The increase in the Gross
Margin was primarily due to (i) an increase in the proportions of total sales
derived from the women's and children's footwear line, which had a higher margin
than the men's footwear line, (ii) better retail sell-through at the Company's
retail customer accounts, which typically results in fewer markdowns, (iii) an
increase in the Company's retail store sales, since such retail gross margins
are higher than customer retail gross margins as a percentage of net sales and
(iv) decreased international sales as a percentage of net sales as international
sales through distributors carry a lower Gross Margin.
Royalty Income, Net
Royalty income, net of related expenses, decreased $39,000, or 4.4%, to
$855,000 for the year ended December 31, 1998 compared to $894,000 for the year
ended December 31, 1997. The Company receives royalty income based upon a
percentage of sales of its sublicensees. The decrease was due to the termination
of the Company's license relating to "Kani" apparel. Royalty income attributable
to sales of "Kani" apparel represented $189,000 and $1.2 million of total
royalty income for the years ended December 31, 1998 and 1997, respectively.
Selling Expenses
Selling expenses include sales salaries, commissions and incentives,
advertising, promotions and trade shows. Selling expenses increased $28.4
million, or 131.6%, to $50.0 million (13.4% of
29
<PAGE> 31
net sales) for the year ended December 31, 1998 from $21.6 million (11.7% of net
sales) for the year ended December 31, 1997. The increase in total dollars was
primarily due to increased advertising expenditures and sales compensation due
to the increase in footwear sales, the implementation of a new sales
compensation package and the hiring of additional sales personnel. The increase
as a percentage of sales was due to a discretionary decision to increase
advertising expenses in the fourth quarter of 1998.
General and Administrative Expenses
General and administrative expenses increased $39.1 million, or 120.6%, to
$71.5 million (19.2% of net sales) for the year ended December 31, 1998 from
$32.4 million (17.6% of net sales) for the year ended December 31, 1997. The
increase in total dollars and as a percentage of net sales is primarily due to
(i) the hiring of additional personnel, (ii) an increase in costs associated
with the Company's distribution facilities to support the Company's growth,
(iii) increased product design and development costs, (iv) the addition of 23
retail stores which were not open in 1997, and (v) increased discretionary
expenses consisting of bonuses paid to an executive officer and certain
employees. Also included in general and administrative expenses for the years
ended December 31, 1998 and 1997 are $7.0 million and $2.6 million,
respectively, of bonus compensation expense, including those related to the
Company's 1996 Incentive Compensation Plan (the "1996 Incentive Compensation
Plan") which expired on December 31, 1998. See "Management -- Executive
Compensation -- Summary Compensation Table."
Interest Expense
Interest expense increased $4.4 million, or 106.2%, to $8.6 million for the
year ended December 31, 1998 as compared to $4.2 million for the year ended
December 31, 1997 as a result of increased borrowings under the Company's
revolving line of credit to fund the Company's expanded operations and interest
expense associated with open purchase agreements with the Company's Asian
manufacturers, which in part finance the Company's manufacturing activities.
Pro Forma Income Taxes
Pro forma income taxes have been provided at the assumed rate of 40.0% for
Federal and state purposes.
YEAR ENDED DECEMBER 31, 1997 COMPARED TO YEAR ENDED DECEMBER 31, 1996
Net Sales
Net sales increased $68.4 million, or 59.3%, to $183.8 million for the year
ended December 31, 1997 from $115.4 million for the year ended December 31,
1996. The increase was due to increased sales of branded footwear primarily as a
result of (i) greater domestic brand awareness driven in part by a significant
expansion of the Company's sales forces, (ii) a broad breadth of men's, women's
and children's product offering, (iii) the development of the Company's domestic
and international sales forces and (iv) the transition of the Company's account
base in the direction of larger accounts with multiple stores, resulting in
higher sales per account. Gross wholesale men's footwear sales, including
international, increased $26.1 million, or 32.3%, to $107.1 million for the year
ended December 31, 1997 as compared to $80.9 million for the year ended December
31, 1996. The increase in gross wholesale men's footwear sales was achieved
despite a decline in men's "Kani" footwear sales of $2.2 million to $11.5
million for the year ended December 31, 1997 as compared to $13.7 million for
the year ended December 31, 1996. The Company discontinued actively marketing
"Kani" footwear in 1997 and a substantial portion of sales of "Kani" footwear
during 1997 consisted of inventory close-outs. The Company began to de-emphasize
the sale of "Kani" footwear in late 1995 and early 1996 to concentrate its
marketing and sales efforts on its Skechers product line. Gross wholesale
women's footwear sales, including international, increased $25.1 million, or
101.3%, to
30
<PAGE> 32
$49.9 million for the year ended December 31, 1997 as compared to $24.8 million
for the year ended December 31, 1996. Gross wholesale children's footwear sales,
including international, increased $10.2 million, or 93.7%, to $21.1 million for
the year ended December 31, 1997 as compared to $10.9 million for the year ended
December 31, 1996. Sales of children's "Kani" footwear represented $3.3 million
and $4.1 million of such sales for the years ended December 31, 1997 and 1996,
respectively. Sales of children's "Kani" footwear in 1997 substantially
represented inventory close-out sales. Provisions for returns and allowances
were $5.5 million for each of the years ended December 31, 1997 and 1996. Net
sales through the Company's retail stores increased $6.5 million, or 194.5%, to
$9.8 million for the year ended December 31, 1997 as compared to $3.3 million
for the year ended December 31, 1996. This increase was due to an increase in
sales from pre-existing stores and new store openings. Net sales generated from
international operations decreased $3.9 million, or 12.2%, to $27.7 million for
the year ended December 31, 1997 as compared to $31.6 million for the year ended
December 31, 1996 largely as a result of a realignment of the Company's foreign
distribution arrangements.
Gross Profit
Gross profit increased $34.5 million, or 100.9%, to $68.7 million for the
year ended December 31, 1997 from $34.2 million for the year ended December 31,
1996. The increase was attributable to higher sales and an improvement in the
Gross Margin. The Gross Margin increased to 37.4% for the year ended December
31, 1997 from 29.6% for the year ended December 31, 1996. The increase in the
Gross Margin was primarily due to (i) better retail sell-through at the
Company's retail customer accounts which allowed for fewer markdowns, (ii) an
increase in the proportion of total sales derived from the women's and
children's footwear line, which had a higher margin than the men's footwear
line, (iii) the increase in the Company's retail store sales and (iv) decreased
international sales as a percentage of net sales as international sales through
distributors carry a lower Gross Margin, offset in part by inventory close-out
sales of "Kani" branded footwear.
Royalty Income, Net
Royalty income, net of related expenses, decreased $698,000, or 43.8%, to
$894,000 for the year ended December 31, 1997 from $1.6 million for the year
ended December 31, 1996. The decrease was due to decreased sales of apparel
under the Company's "Kani" license. Royalty income attributed to sales of "Kani"
apparel represented $1.2 million and $2.1 million of total royalty income for
the years ended December 31, 1997 and 1996, respectively.
Selling Expenses
Selling expenses increased $9.8 million, or 83.9%, to $21.6 million (11.8%
of net sales) for the year ended December 31, 1997 from $11.7 million (10.2% of
net sales) for the year ended December 31, 1996. The increase in total dollars
was primarily due to increased advertising expenditures and sales commissions
and incentives due to the increase in footwear sales. The increase as a
percentage of sales was due to increased advertising expenses on a percentage of
net sales.
General and Administrative Expenses
General and administrative expenses increased $13.5 million, or 71.1%, to
$32.4 million (17.6% of net sales) for the year ended December 31, 1997 as
compared to $18.9 million (16.4% of net sales) for the year ended December 31,
1996. The increase in total dollars was primarily due to (i) the hiring of
additional personnel and related costs to support the Company's substantial
growth in sales, (ii) an increase in costs associated with the Company's
distribution facilities to support the Company's growth, (iii) the addition of
seven retail stores which were not open in 1996, (iv) increased product design
and development costs and (v) bonus compensation expense of $2.6 million
including those related to the Company's 1996 Incentive Compensation Plan. See
31
<PAGE> 33
"Management -- Executive Compensation -- Summary Compensation Table." Included
in the $18.9 million of general and administrative expenses for 1996 is a
one-time $530,000 charge to operations related to costs of the terminated public
offering of the "Kani" division. The increase in general and administrative
expenses as a percentage of net sales is attributable to the $2.6 million of
bonus compensation expense, including those related to the Company's 1996
Incentive Compensation Plan.
Interest Expense
Interest expense increased $955,000, or 29.6%, to $4.2 million for the year
ended December 31, 1997 as compared to $3.2 million for the year ended December
31, 1996 as a result of increased borrowings under the Company's revolving line
of credit to fund the Company's expanded operations and interest expense
associated with open purchase agreements with the Company's Asian manufacturers.
Pro Forma Income Taxes
Pro forma income taxes have been provided at the assumed rate of 40.0% for
Federal and state purposes.
LIQUIDITY AND CAPITAL RESOURCES
To date, the Company has relied upon internally generated funds, trade
credit, borrowings under credit facilities and loans from stockholders to
finance its operations and expansion. The Company's need for funds arises
primarily from its working capital requirements, including the need to finance
its inventory and receivables. The Company's working capital was $23.1 million
and $17.1 million at December 31, 1998 and 1997, respectively. The increase in
working capital at December 31, 1998 was primarily due to increases in
receivables and inventories due to seasonal requirements and the need to support
additional Company retail stores. Inventory at December 31, 1998 and 1997 was
$65.4 million and $45.8 million, respectively. Trade accounts receivable, net of
reserves, at December 31, 1998 and 1997 were $46.8 million and $31.2 million,
respectively. Trade accounts receivable increases reflect the higher level of
footwear sales. Inventory levels increased in 1998 due to advance customer
orders.
As part of the Company's working capital management, the Company performs
substantially all customer credit functions internally, including extension of
credit and collections. The Company's bad debt write-offs were less than 1.0% of
net sales for each of the years ended December 31, 1998 and 1997. The Company
carries bad debt insurance to cover approximately the first 90.0% of bad debts
on substantially all of the Company's major retail accounts. As of December 31,
1998 and 1997, 65.1% and 47.1%, respectively, of the Company's accounts
receivables was covered under this insurance.
Net cash used in operating activities totaled $4.3 million and $2.1 million
for the years ended December 31, 1998 and 1997, respectively. The decrease of
cash provided by operating activities for the year ended December 31, 1998
compared to the year ended December 31, 1997 was due to an increase in trade
accounts receivable and inventory balances.
Net cash used in investing activities was $9.4 million and $6.8 million for
the years ended December 31, 1998 and 1997, respectively. The increase in net
cash used in investing activities in 1998 was primarily due to increased capital
expenditures in connection with the establishment of the Company's distribution
facilities in Ontario, California, additional hardware and software for the
Company's computer needs and additional Company retail stores.
Capital expenditures totaled $9.4 million and $6.2 million for the years
ended December 31, 1998 and 1997, respectively. The increase in 1998 relates
primarily to the establishment of the Company's distribution centers in Ontario,
California, the purchase of additional hardware and
32
<PAGE> 34
software for the Company's computer needs and additional Company retail stores.
The Company estimates that its capital expenditures for the year ending December
31, 1999 will be approximately $10.0 million, of which approximately $4.3
million will be used for the installation of a new material handling system for
the Company's most recently opened distribution facility. Total expenditures for
the new material handling system are expected to be approximately $8.5 million,
the balance of which will be spent in 2000. The Company also anticipates
spending $1.4 million for expenditures on equipment for the Company's
distribution facilities, and $4.9 million capital expenditures related to
general corporate purposes in 1999, including leasehold improvements and
purchases of furniture and equipment in connection with the opening of
additional retail stores, additions and advancements to the Company's management
information systems, costs associated with trade show booths and leasehold
improvements to the Company's facilities.
Net cash provided by financing activities was $23.2 million and $10.2
million for the years ended December 31, 1998 and 1997, respectively. The
increase in net cash provided by financing activities in 1998 was primarily due
to increased borrowings under the Company's revolving line of credit to finance
capital expenditures, increased accounts receivables and inventories and to fund
S Corporation distributions.
The Company's credit facility provides for borrowings under a revolving
line of credit of up to $120.0 million and a term loan, with actual borrowings
limited to available collateral and certain limitations on total indebtedness
(approximately $7.0 million of availability as of December 31, 1998) with Heller
Financial, Inc., as agent for the lenders. The revolving line of credit bears
interest at the Company's option at either the prime rate (7.75% at December 31,
1998) plus 25 basis points or at Libor (5.07% at December 31, 1998) plus 2.75%.
The revolving line of credit expires on December 31, 2002. Interest on the
revolving line of credit is payable monthly in arrears. The revolving line of
credit provides a sub-limit for letters of credit of up to $18.0 million to
finance the Company's foreign purchases of merchandise inventory. As of December
31, 1998, the Company had approximately $3.9 million of letters of credit under
the revolving line of credit. The term loan component of the credit facility,
which has a principal balance of approximately $2.7 million as of December 31,
1998, bears interest at the prime rate plus 100 basis points and is due in
monthly installments with a final balloon payment December 2002. The proceeds
from this note were used to purchase equipment for the Company's distribution
centers in Ontario, California and the note is secured by such equipment. The
Company intends to use a portion of the net proceeds of the Offering to repay
approximately $54.3 million under the revolving line of credit and $12.2 million
outstanding under the Unsubordinated Note and Subordinated Note. See "Use of
Proceeds." By repaying such indebtedness, the Company expects to have more
flexibility and liquidity to pursue its growth strategies. The credit facility
contains certain financial covenants that require the Company to maintain
minimum tangible net worth of at least $20.0 million, working capital of at
least $14.0 million and specified leverage ratios and limit the ability of the
Company to pay dividends if it is in default of any provisions of the credit
facility. The Company was in compliance with these covenants as of December 31,
1998. The credit facility is collateralized by the Company's real and personal
property, including, among other things, accounts receivable, inventory, general
intangibles and equipment and is guaranteed by Skechers By Mail, Inc., the
Company's wholly-owned subsidiary. As of December 31, 1998, the Unsubordinated
Note and Subordinated Note bear interest at the prime rate (7.75% at December
31, 1998) and are due on demand. The Greenberg Family Trust has agreed not to
require repayment of the Subordinated Note prior to January 2000. The Company
recorded interest expense of approximately $540,000, and $1.1 million related to
notes payable to the Greenberg Family Trust during the years ended December 31,
1998, and 1997, respectively. See "Use of Proceeds" and "Certain Transactions."
By reason of the Company's treatment as an S Corporation for Federal and
state income tax purposes, the Company since inception has provided to its
stockholders funds for the payment of income taxes on the earnings of the
Company. The Company declared distributions attributable to payment of such
taxes of $7.9 million and $3.2 million in 1998 and 1997, respectively. In April
1999,
33
<PAGE> 35
the Company will declare the April Tax Distribution, estimated to be $3.5
million, and upon consummation of the Offering will declare the Final 1998
Distribution, estimated to be $7.6 million, the Final Tax Distribution,
estimated to be $3.4 million, and the Final S Corporation Distribution,
estimated to be $22.0 million. Following the termination of the Company's S
Corporation status, earnings will be retained for the foreseeable future in the
operations of the business. See "Prior S Corporation Status" and "Dividend
Policy."
The Company believes that anticipated cash flows from operations, available
borrowings under the Company's revolving line of credit, after repayment of
indebtedness described under "Use of Proceeds," cash on hand and its financing
arrangements will be sufficient to provide the Company with the liquidity
necessary to fund its anticipated working capital and capital requirements
through fiscal 2000. However, in connection with its growth strategy, the
Company will incur significant working capital requirements and capital
expenditures. The Company's future capital requirements will depend on many
factors, including, but not limited to, the levels at which the Company
maintains inventory, the market acceptance of the Company's footwear, the levels
of promotion and advertising required to promote its footwear, the extent to
which the Company invests in new product design and improvements to its existing
product design and the number and timing of new store openings. To the extent
that available funds are insufficient to fund the Company's future activities,
the Company may need to raise additional funds through public or private
financing. No assurance can be given that additional financing will be available
or that, if available, it can be obtained on terms favorable to the Company and
its stockholders. Failure to obtain such financing could delay or prevent the
Company's planned expansion, which could adversely affect the Company's
business, financial condition and results of operations. In addition, if
additional capital is raised through the sale of additional equity or
convertible securities, dilution to the Company's stockholders could occur. See
"Use of Proceeds."
QUARTERLY RESULTS AND SEASONALITY
The table below sets forth certain quarterly operating data of the Company.
This quarterly information is unaudited, but in management's opinion reflects
all adjustments, consisting only of normal recurring adjustments, necessary for
a fair presentation of the information for the periods presented when read in
conjunction with the Company's Consolidated Financial Statements and Notes
thereto.
<TABLE>
<CAPTION>
1996 1997 1998
------------------ --------------------------------------- ---------------------------------------
SEPT. 30 DEC. 31 MARCH 31 JUNE 30 SEPT. 30 DEC. 31 MARCH 31 JUNE 30 SEPT. 30 DEC. 31
-------- ------- -------- ------- -------- ------- -------- ------- -------- -------
THREE MONTHS ENDED (IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net sales............... $39,277 $32,582 $27,591 $32,705 $62,562 $60,969 $59,873 $87,684 $143,045 $82,078
Gross profit............ 12,377 11,017 9,207 11,125 23,552 24,839 22,483 35,997 62,176 33,924
Earnings (loss) from
operations............ 4,854 2,877 (299) 2,244 8,203 5,488 2,505 10,834 24,460 (3,808)
Pro forma net earnings
(loss)................ 2,393 919 (559) 760 4,278 2,369 651 4,759 13,553 (3,890)
</TABLE>
Sales of footwear products are somewhat seasonal in nature with the
strongest sales generally occurring in the third and fourth quarters. In 1996
and 1997, 34.0% and 34.0% of net sales, respectively, and 94.7% and 52.5% of
earnings from operations, respectively, were generated in the third quarter and
28.2% and 33.2% of net sales, respectively, and 56.1% and 35.1% of earnings from
operations, respectively, were generated in the fourth quarter. However, in
1998, 38.4% of net sales and 72.0% of earnings from operations were generated in
the third quarter and 22.0% of net sales and a loss from operations were
generated in the fourth quarter. Management believes that annual seasonal
fluctuations will typically result in the Company realizing a significant
percentage of earnings from operations in the fourth quarter.
Although net sales increased by $21.1 million in the fourth quarter of 1998
as compared to the fourth quarter of 1997, the Company's net sales in the fourth
quarter of 1998 were adversely affected by the overall weakness in the retail
footwear market. Management believes this weakness resulted
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from a substantial number of store closings by unprofitable chains, as well as
store and inventory rationalizations at other chains, that combined to produce
heavy promotional activity at the retail level. These closures, inventory
liquidations and promotional activities adversely affected the Company's net
sales. Management believes that these closures in the aggregate should have a
positive impact on the footwear retailing industry in the future.
Operating results for the fourth quarter of 1998 were impacted by certain
discretionary expenses consisting of approximately $3.0 million in bonuses paid
to an executive officer and certain employees, and $242,000 in 401(k) employer
matching contributions. Results for this quarter were also impacted by
significantly higher marketing expenses as a percentage of net sales than the
Company typically incurs. The Company chose to spend $15.1 million in marketing
expenditures, $9.1 million of which was expended in December 1998. Expenses were
also affected by costs associated with the opening of six new Company stores in
the fourth quarter of 1998.
Management believes that the Company's operating results for the first
quarter of 1999 were not affected to the same degree by those factors which
impacted the Company's operating results in the fourth quarter of 1998. The
improvement in the retail footwear market and the expected reduction in
marketing and incentive compensation expenses is expected to have a positive
effect on the Company's first quarter operating results.
The Company has experienced, and expects to continue to experience,
variability in its net sales, operating results and net earnings, on a quarterly
basis. The Company's domestic customers generally assume responsibility for
scheduling pickup and delivery of purchased products. Any delay in scheduling or
pickup which is beyond the Company's control could materially negatively impact
the Company's net sales and results of operations for any given quarter. The
Company believes the factors which influence this variability include (i) the
timing of the Company's introduction of new footwear products, (ii) the level of
consumer acceptance of new and existing products, (iii) general economic and
industry conditions that affect consumer spending and retail purchasing, (iv)
the timing of the placement, cancellation or pickup of customer orders, (v)
increases in the number of employees and overhead to support growth, (vi) the
timing of expenditures in anticipation of increased sales and customer delivery
requirements, (vii) the number and timing of new Company retail store openings
and (viii) actions by competitors. Due to these and other factors, the operating
results for any particular quarter are not necessarily indicative of the results
for the full year.
INFLATION
The Company does not believe that the relatively moderate rates of
inflation experienced in the United States over the last three years have had a
significant effect on its net sales or profitability. However, the Company
cannot accurately predict the effect of inflation on future operating results.
Although higher rates of inflation have been experienced in a number of foreign
countries in which the Company's products are manufactured, the Company does not
believe that inflation has had a material effect on the Company's net sales or
profitability. In the past, the Company has been able to offset its foreign
product cost increases by increasing prices or changing suppliers, although no
assurance can be given that the Company will be able to continue to make such
increases or changes in the future.
EXCHANGE RATES
The Company receives U.S. Dollars for substantially all of its product
sales and its royalty income. Inventory purchases from offshore contract
manufacturers are primarily denominated in U.S. Dollars; however, purchase
prices for the Company's products may be impacted by fluctuations in the
exchange rate between the U.S. Dollar and the local currencies of the contract
manufacturers, which may have the effect of increasing the Company's cost of
goods in the future. During 1997 and 1998, exchange rate fluctuations did not
have a material impact on the Company's inventory costs.
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The Company does not engage in hedging activities with respect to such exchange
rate risk. See "Risk Factors -- Risks Associated with Foreign Operations."
MARKET RISK
The Company does not hold any derivative securities or other market rate
sensitive instruments.
YEAR 2000 COMPLIANCE
The Company relies on its internal computer systems to manage and conduct
its business. The Company also relies, directly and indirectly, on external
systems of business enterprises such as third party manufacturers and suppliers,
customers, creditors and financial organizations, and of governmental entities,
both domestic and internationally, for accurate exchange of data.
Many existing computer programs were designed and developed without regard
for the Year 2000 ("Y2K") and beyond. If the Company or its significant third
party business partners and intermediaries fail to make necessary modifications,
conversions, and contingency plans on a timely basis, the Y2K issue could have a
material adverse effect on the Company's business and financial condition.
Management believes that its competitors face a similar risk. In recognition of
this risk, the Company has established a project team to assess, remediate, test
and develop contingency plans.
State of Readiness
The Company has developed a Y2K plan with the objective of having all of
its information technology ("IT") systems compliant by September 1999. The
Company's significant IT systems include its order management and inventory
system, electronic data interchange ("EDI") system, distribution center
processing system, retail merchandise and point of sale system, financial
applications system, local area network and personal computers. The Company is
currently making Y2K changes to its order management and inventory system and
plans to begin testing in April 1999 with implementation targeted for June 1999.
The Company is currently testing its EDI system with implementation planned for
May 1999. The Company has completed substantially all Y2K changes to its
distribution center processing system except for upgrading the operating system
to the Y2K version. Upgrade to the Y2K version is part of the Company's on-going
maintenance contract with its vendor. The Company will begin upgrading the
operating system in May 1999 with implementation targeted for September 1999.
The Company's retail merchandise and point of sale system is currently
undergoing an upgrade with testing and implementation targeted for July 1999.
The Company's financial applications system is currently undergoing an upgrade
with testing and implementation targeted for May 1999. The EDI system upgrades
for the Company's retail and financial application systems began in 1998 for the
purpose of enhancing system functionality to accommodate the Company's expanding
business and related information needs. The Company's local area network
hardware and software providers have advised the Company that such systems are
Y2K compliant. The Company plans to begin assessing its personal computers
during April 1999 with necessary changes completed by September 1999.
The Company's non-IT systems include security, fire prevention,
environmental control equipment and phone systems. Many of these systems are
currently Y2K compliant. Modification to the remaining systems are expected by
September 1999.
The Company's Y2K project team plans to send surveys and conduct formal
communications with its significant business partners beginning in April 1999 to
determine the extent to which the Company is vulnerable to those third parties'
failure to remediate their own Y2K issues. This process is expected to continue
throughout 1999.
Risks and Contingency Plans
The Company is not aware of any material operational issues associated with
preparing its internal systems for the Y2K, however, there is no assurance that
there will not be a delay in the
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implementation. The Company's inability to implement such systems and changes in
a timely manner could have a material adverse effect on future results of
operations, financial condition and cash flows.
The potential inability of the Company's significant business partners and
intermediaries to address their own Y2K issues remains a risk which is difficult
to assess. The Company is dependent on four key manufacturers located in China
for the production of its footwear. The failure of one or more of these
manufacturers to adequately address their own Y2K issues could interrupt the
Company's supply chain. The inability of port authorities or shipping lines to
address their own Y2K issues could also interrupt the Company's supply chain.
Additionally, the inability of one or more of the Company's significant
customers to become Y2K compliant could adversely impact the Company's sales to
those customers.
The Company is developing contingency plans which may include finding
alternative suppliers, manual interventions and adding increased staffing. There
is no assurance that the Company will correctly anticipate the level, impact or
duration of noncompliance by its significant business partners that provide
inadequate information.
As the Company has not completed evaluations of its significant business
partners' Y2K readiness, the Company is currently unable to determine the most
reasonable likely worst case scenario. The Company will continue its efforts
towards contingency planning throughout 1999.
Costs
The Company estimates its costs associated with becoming Y2K compliant will
be less than $100,000, exclusive of system upgrades incurred in the normal
course of business. Efforts to modify the Company's IT systems have
substantially been performed internally, however, the Company does not
separately track such costs. These costs primarily relate to salaries and wages
which are expensed as incurred.
FUTURE ACCOUNTING CHANGES
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 133, Accounting for Derivative
Instruments and Hedging Activities ("SFAS No. 133"). SFAS No. 133 modifies the
accounting for derivative and hedging activities and is effective for fiscal
years beginning after December 15, 1999. Since the Company does not presently
invest in derivatives or engage in hedging activities, SFAS No. 133 will not
impact the Company's financial position or results of operations.
In March 1998, the American Institute of Certified Public Accountants
("AICPA") issued Statement of Position 98-1 ("SOP 98-1"), Accounting for the
Costs of Computer Software Developed or Obtained for Internal Use. The Company
will adopt SOP 98-1 effective in 1999. The adoption of SOP 98-1 will require the
Company to modify its method of accounting for software. Based on information
currently available, the Company does not expect the adoption of SOP 98-1 to
have a significant impact on its financial position or results of operations.
In April 1998, the AICPA Accounting Standards Executive Committee issued
Statement of Position 98-5 ("SOP 98-5"), "Reporting on the Costs of Start-up
Activities." SOP 98-5 requires that costs of start-up activities, including
organization costs and retail store openings, be expensed as incurred. SOP 98-5
is effective for financial statements for fiscal years beginning after December
15, 1998. Earlier application is encouraged. Restatement of previously issued
financial statements is not permitted. In the fiscal year in which the SOP 98-5
is first adopted, the application should be reported as a cumulative effect of a
change in accounting principle. Management believes the adoption of SOP 98-5
will not have a material impact on the Company's financial position or results
of operations.
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BUSINESS
The following Business section contains forward-looking statements which
involve risks and uncertainties including, but not limited to, information with
regard to the Company's plans to increase the number of retail locations, and
styles of footwear, the maintenance of customer accounts and expansion of
business with such accounts, the successful implementation of the Company's
strategies, future growth and growth rates and future increases in net sales,
expenses, capital expenditures and net earnings. The words "believes,"
"anticipates," "plans," "expects," "may," "will," "intends," "estimates," and
similar expressions are intended to identify forward-looking statements. These
forward-looking statements involve risks and uncertainties, and the Company's
actual results could differ materially from those anticipated in these
forward-looking statements as a result of certain factors, including those set
forth under "Risk Factors" and elsewhere in this Prospectus.
GENERAL
Skechers designs and markets branded contemporary casual, active, rugged
and lifestyle footwear for men, women and children. The Company's objective is
to become a leading source of contemporary casual and active footwear while
ensuring the longevity of both the Company and the Skechers brand name through
controlled, well managed growth. The Company strives to achieve this objective
by developing and offering a balanced assortment of basic and fashionable
merchandise across a wide spectrum of product categories and styles, while
maintaining a diversified, low-cost sourcing base and controlling the growth of
its distribution channels. The Company sells its products to department stores
such as Nordstrom, Macy's, Dillard's, Robinson's-May and JC Penney and specialty
retailers such as Genesco's Journeys and Jarman chains, The Venator Group's Foot
Locker and Lady Foot Locker chains, Pacific Sunwear and Footaction U.S.A. The
Company also sells its products both internationally in over 120 countries and
territories through major international distributors and directly to consumers
through 37 of its own retail stores.
The Company has realized rapid growth since inception, increasing net sales
at a compound annual growth rate of 42.4% from $90.8 million in 1994 to $372.7
million in 1998. From 1997 to 1998, the Company experienced a 102.7% and 117.4%
increase in net sales and earnings from operations, respectively. The Company
also experienced an improvement in gross profit as a percentage of net sales
from 37.4% to 41.5% and in earnings from operations as a percentage of net sales
from 8.5% to 9.1% over this same period. These improvements resulted in part
from the shift to offering Skechers product exclusively and in part from
economies of scale.
Management believes the Skechers product offerings of men's, women's and
children's footwear appeal to a broad customer base between the ages of 5 and 40
years. Management believes the Company's strategy of providing a growing and
balanced assortment of quality basic footwear and seasonal and fashion footwear
with progressive styling at competitive prices gives Skechers this broader based
customer appeal. Skechers men's and women's footwear are primarily designed with
the active, youthful lifestyle of the 12 to 25 year old age group in mind. The
Company's product offering includes casual and utility oxfords, loggers, boots
and demi-boots; skate, street and fashion sneakers; hikers, trail runners and
joggers; sandals, slides and other open-toe footwear; and dress casual shoes.
The Company continually seeks to increase the number of styles offered and the
breadth of categories with which the Skechers brand name is identified. This
style expansion and category diversification is balanced by the Company's strong
performance in its basic styles. The Company increased its styles offered from
approximately 600 for the year ended December 31, 1997 to approximately 900 for
the year ended December 31, 1998. Management believes that a substantial portion
of the Company's gross sales were generated from styles which management
considers basic.
The Company's strategy in children's footwear is to adapt current fashion
from the Company's men's and women's lines by modifying designs and choosing
colors and materials that are more suitable to the playful image Skechers has
established in the children's footwear market. The
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Skechers children's line is comprised primarily of shoes that are designed like
their adult counterparts but in "takedown" versions, so that the younger set can
wear the same popular styles as their older siblings and schoolmates. The
playful image of Skechers children's footwear is further enhanced by the
Company's Skechers Lights line, which features motion- and contact-activated
lights in the outsole and other areas of the shoes. During 1998, the Company's
gross wholesale footwear sales were derived 42.1% from men's, 42.2% from women's
and 15.7% from children's footwear.
The Company was founded in 1992 as a distributor of Dr. Martens footwear.
The Company began designing and marketing men's footwear under the Skechers
brand name and other brand names including "Cross Colours," "Karl Kani" and
"So . . . L.A." in 1993. Shortly after launching these branded footwear lines,
the Company discontinued distributing Dr. Martens footwear. In 1995, the Company
began to shift its focus to the Skechers brand name by de-emphasizing the sale
of "Kani" branded products and discontinuing the sale of "Cross Colours" and
"So . . . L.A." branded footwear. In early 1996, the Company substantially
increased its product offerings in and marketing focus on its Skechers women's
and children's lines. The Company divested the "Karl Kani" license in August
1997. Substantially all of the Company's products are marketed under the
Skechers name.
INDUSTRY OVERVIEW
The Company competes in the men's, women's and children's markets for
casual and rugged footwear. According to published industry sources, domestic
retail sales of men's and women's footwear in dollar volume were roughly equal
in 1998, representing approximately 46.1% and 44.6% of the retail footwear
market, respectively. The remaining 9.3% was comprised of children's footwear.
However, unit volume was skewed more heavily toward women's and children's
footwear, which represented 51.0% and 18.0%, of the total units sold at retail,
respectively. Men's footwear represented 31.0% of total units sold at retail in
1998. Average industry price points for men's, women's and children's footwear
were approximately $50.88, $29.91 and $17.51, respectively.
According to published industry sources, total retail footwear sales in the
United States during 1998 were approximately $38.8 billion, representing a 2.6%
increase over 1997. Of that total, approximately $21.7 billion, or 55.9%, was
derived from sales of casual and rugged shoes, boots and sandals, including
hiking and working boots. Casual footwear retail sales increased to $19.1
billion, or 3.2%, in 1998 from $18.5 billion in 1997, or 22.6% faster than the
rate of the total footwear market. Rugged footwear retail sales increased 13.0%
to $2.6 billion in 1998 from $2.3 billion in 1997 and has grown at a compound
annual rate of 24.4% since 1992. Together, these two categories are projected to
continue to outpace the overall footwear market, growing at a combined compound
annual rate of 4.9% between 1998 and 2003 as compared to overall annual industry
growth of 3.0%. By 2003, casual and rugged footwear retail sales are projected
to reach $27.6 billion, or approximately 61.5% of the total retail footwear
market. These industry growth rates may not be indicative of the Company's
future growth rate.
Retail sales of performance athletic footwear by comparison have grown at a
compound annual rate of 2.9% from 1992 to 1998 but rose only 2.4% from $12.4
billion in 1997 to $12.7 billion in 1998. Industry sources indicate that the
growth of the performance athletic shoe segment is expected to continue to slow
and underperform the overall footwear market, growing only 2.3% per year between
1998 and 2003. Retail sales of dress footwear declined 4.3%, from $4.6 billion
in 1997 to $4.4 billion in 1998, and is expected to continue to decline at a
compound annual rate of 6.8% to $3.1 billion by 2003.
Management believes that the shift to casual and rugged footwear from dress
shoes and, to a lesser extent, from performance athletic shoes is a result of
several factors. First, management believes that the widespread acceptance of
casual dress in the workplace has had a substantial impact on footwear
purchasing decisions. As this acceptance has spread from casual Fridays to the
entire work week, its impact has increased. Second, according to published
industry sources,
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approximately 80.0% of all athletic footwear purchased in 1996 was worn for
fashion instead of athletic performance purposes. Management believes that the
use of athletic footwear for non-athletic performance purposes has diminished
and that the casual and rugged footwear segment is eroding the market share this
80.0% portion has historically commanded, particularly as specialty retailers
such as Foot Locker, Footaction U.S.A., Finish Line and Athlete's Foot, which
have traditionally focused on athletic footwear, increase their selections of
casual and rugged footwear. Management believes that a recent increase in the
popularity of and marketing emphasis on khaki pants among consumers and apparel
companies, respectively, has accelerated and magnified the fashion shift from
performance athletic to casual and rugged footwear. Third, management believes
that the advent of alternative sports, which do not require traditional athletic
footwear for competition, has propelled a cultural movement among teenagers and
a shift in their cultural icons that have combined to generate a trend toward
alternative footwear. According to published industry sources, approximately
14.5 million people currently participate in alternative or extreme sports.
Participation rates are projected to increase to approximately 25.0 million by
2001.
According to the U.S. Bureau of the Census, the 12 to 25 year old age
segment of the population was approximately 51.8 million people, or 19.2% of the
total population, in 1998. This age group is projected to grow approximately
80.7% faster than the total U.S. population, from 1998 until 2005, when these
young consumers will represent approximately 20.1% of the U.S. population. 12 to
25 year olds are expected to reach approximately 59.7 million people in 2015.
The U.S. Bureau of the Census also estimates that 15 to 24 year olds generated
incomes of approximately $244.3 billion in 1995, excluding gifts, allowances and
other funding from family members. According to published industry sources, teen
spending increased 29% from 1993 to approximately $111.0 billion in 1997. In
1996 approximately $7.7 billion, or 7.1%, of total expenditures, was spent on
footwear. According to published industry sources, brand is an important
consideration in purchasing decisions among this age group, with 86% of female
shoppers and 81% of male shoppers willing to spend more money for a brand they
prefer. The influence of branding becomes apparent on consumers as young as 15
years old. Total spending by teenagers is expected to reach approximately $135.9
billion by 2001.
Management believes that this growing demographic is an important target
market within the footwear industry as a whole and within the casual and rugged
segment of that industry in particular. Management also believes that teenagers
and young adults set the prevailing fashion trends of their time and that these
fashion trends are generally widely accepted by older and younger consumers
alike in one form or another.
OPERATING STRATEGIES
The Company's operating strategies are intended to continue to
differentiate the Company from other participants in the casual footwear market
and to provide controlled, well-managed growth. These strategies are as follows.
Offer a Breadth of Innovative Products. The Company offered approximately
900 different styles of footwear generally in three to four different color and
material variations typically in 10 to 12 different sizes during 1998. These
styles span a broad spectrum of product categories ranging from skate and street
sneakers to fashion sneakers, from steel-toe boots with heavy-lugged soles to
casual dress shoes for men, from hiking boots, trail runners and joggers to
platform shoes, boots and sneakers. The Company has developed this breadth of
merchandise offerings in an effort to improve its ability to respond to changing
fashion trends and customer preferences, as well as to limit its exposure to any
single industry participant. Management does not believe that any single
industry participant competes directly with the Company across its entire
product offering. Although major new product introductions take place in advance
of both the spring and fall selling seasons, the Company typically introduces
new designs in its existing lines every 30 to 60 days to keep current with
emerging trends.
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All of the Company's footwear is designed with an active, youthful
lifestyle in mind. The design team's primary mandate is to design shoes
marketable to the 12 to 25 year old consumer. While these designs are
contemporary in styling, management believes that substantially all of the line
appeals to the broader 5 to 40 year old consumer. Although many of the Company's
shoes have performance features, such as hikers, trail runners, skate sneakers
and joggers, the Company generally does not position its shoes in the
marketplace as technical performance shoes. The Company's principal goal in
product design is to generate new and exciting footwear with contemporary and
progressive style features and comfort enhancing performance features.
Management does not believe that technology is a differentiating factor in
marketing footwear in the casual shoe industry.
Enhance and Broaden the Skechers Brand Name. Management believes that the
strength of the Skechers brand name is a competitive advantage and an integral
part of the Company's success to date. The Company's goal is to continue to
build the recognition of the Skechers name as a casual, active, youthful
lifestyle brand that stands for quality, comfort, durability and design
innovation. The Company's in-house marketing and advertising team has developed
a comprehensive program to promote the Skechers brand name through lifestyle and
image advertising. While all advertisements feature the Company's footwear, the
marketing program is image driven, not product specific. The Company has made a
conscious effort to avoid the association of the Skechers name with any single
category of shoe to provide merchandise flexibility and to aid management's
ability to take the brand and product design in the direction of evolving
footwear fashions and consumer preferences. The Company supports this image
through an advertising program that includes major networks and cable channels
such as MTV, Nickelodeon and ESPN, as well as print advertisements in popular
fashion and lifestyle consumer publications such as Spin, Details, Seventeen,
Rolling Stone, Vibe, GQ and Vogue. The Company also promotes the Skechers brand
name through product placement on a select group of films and popular television
shows. For example, Skechers shoes have been prominently displayed on the
television series Dharma & Greg and referenced in the recently released film 10
Things I Hate About You.
The Company also employs an aggressive point-of-purchase marketing campaign
which includes signage and, in many cases, "in-store shops" within specialty
retail stores and certain department stores. These in-store shops and visual
merchandising of the Company's product and point-of-purchase marketing materials
are monitored and maintained by the Company's field service representatives.
Substantially all of the Company advertising is conceived and designed by its
in-house staff of graphic designers. The Company also enhances its brand image
with its customers through high-profile trade show presentations that feature
fast-paced stage shows set to progressive dance and hip-hop music.
Maximize Strategic Value of Retail Distribution. As of March 31, 1999, the
Company operated 22 concept stores at marquee locations in major metropolitan
cities. These concept stores serve a threefold purpose in the Company's
operating strategy. First, concept stores serve as a showcase for the full range
of the Company's product offerings for the current season, providing the
customer with the entire product story. In contrast, management estimates that
its average retail customer carries no more than 5.0% of the complete Skechers
line. Second, retail locations are generally chosen to generate maximum
marketing value for the Skechers brand name through signage and store front
presentation. These locations include concept stores in Manhattan's Times Square
and Santa Monica's Third Street Promenade. Third, the concept stores provide
rapid product feedback. Management believes that product sell-through
information derived from the Company's concept stores enables the Company's
sales, merchandising and production staff to respond to market changes and new
product introductions. Such responses serve to augment sales and limit the
Company's inventory markdowns and customer returns and allowances. Management
adjusts its product and sales strategy based upon seven to 14 days of retail
sales information. The Company's concept stores serve as marketing and product
testing venues. As of March 31, 1999, the Company also operated 15 factory and
warehouse outlet stores that enable the Company to liquidate excess,
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discontinued and odd-size inventory in a cost-efficient manner. Inventory in
these stores is supplemented by certain first-line styles sold at full retail
price points generally of $60.00 or lower.
Control Growth of Distribution Channels. Management has implemented a
strategy of controlling the growth of the distribution channels through which
the Company's products are sold in order to protect the Skechers brand name,
properly service customer accounts and better manage the growth of the business.
The Company has limited distribution of product to those retailers which
management believes can best support the Skechers brand name in the market.
Management believes that by focusing on the Company's existing accounts, the
Company can deepen its relationships with its existing customers by providing a
heightened level of customer service. Field service representatives work closely
with these accounts to ensure proper presentation of merchandise and
point-of-purchase marketing materials. Sales executives and merchandise
personnel work closely with accounts to ensure the appropriate styles are
purchased for specific accounts and for specific stores within those accounts.
Management believes these close relationships help the Company to maximize their
customers' (i) retail sell-through, (ii) maintained margins and (iii) inventory
turns. Management believes that limiting product distribution to the appropriate
accounts and closely working with those accounts helps the Company to reduce its
own inventory markdowns and customer returns and allowances while maintaining
the proper showcase for the Skechers brand name and product.
Leverage Management Expertise and Infrastructure. The Company's management
and design team collectively possess extensive experience in the footwear
industry. Robert and Michael Greenberg, the Chairman of the Board and President,
respectively, founded the Company in 1992. Prior to that time, Robert Greenberg
had co-founded L.A. Gear and, together with a management team which included
Michael Greenberg, was instrumental in L.A. Gear's growth until his resignation
in early 1992. The Greenbergs are joined on the management team by several
design, merchandise, production and marketing executives with experience at a
broad range of industry participants, including: Robinson's-May, Macy's, Foot
Locker, Pentland Group PLC, The Stride Rite Corporation, and Track 'n Trail, as
well as L.A. Gear. Management believes this core group comprises an effective
and efficient management and design team with the experience to recognize and
respond to emerging consumer trends and demands.
As the Company's net sales growth has accelerated, management has focused
on investing in infrastructure to support continued expansion in a disciplined
manner. Major areas of investment have included the expansion of the Company's
distribution facilities, hiring of additional personnel, development of product
sourcing and a quality control office in Taiwan, upgrading the Company's
management information systems and development and expansion of Company's retail
stores. The Company has established this infrastructure to achieve further
economies of scale in anticipation of continued increases in net sales.
GROWTH STRATEGIES
The Company's growth strategies are to (i) expand product offerings, (ii)
increase penetration of existing domestic accounts, (iii) open new retail stores
and pursue other direct sales channels, (iv) expand international operations and
(v) selectively license the Skechers brand name.
Expand Product Offerings. The Company continually seeks to develop new
styles in existing categories and enter new product categories in an effort to
grow net sales and earnings. In keeping with this strategy, the Company has been
working to introduce new styles in its existing men's and women's categories.
Such new styles include the men's Jammer in June 1998 and the women's Blaster in
November 1997. The Company has also launched several new product categories over
the past year including: Skechers Sport, which includes joggers and court shoes;
Skechers Collection, a men's line featuring dress casual shoes designed to
complement a young man's evening attire; Sity by Skechers, a men's line
featuring newly introduced stylish urban footwear; and Skechers Lights, a
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children's line which features motion- and contact-activated lights in the
outsole and other areas of the shoes.
Increase Penetration of Existing Domestic Accounts. Management's goal is to
continue to increase net sales and earnings by expanding the number of styles
carried by its existing accounts, increasing the retail sell-through of existing
accounts and opening new locations with existing accounts. Between 1993 and
1998, the number of accounts which carry Skechers' products increased from
approximately 50 to approximately 2,200. In addition, the nature of the account
base has transitioned in the direction of larger accounts with multiple stores,
resulting in substantially higher sales per account. The Company's strategy is
to continue to better serve these accounts and grow within the existing account
base so that the Company's products will be more fully represented in existing
retail locations and new locations within each account. This growth strategy is
expected to be augmented as specialty retail accounts continue to open new
locations of their own. In addition to increasing its penetration of existing
accounts, the Company intends to selectively open new accounts in the future in
an effort to enhance the Company's image and increase net sales and earnings.
Open New Retail Stores and Pursue Other Direct Sales Channels. The
Company's retail stores accounted for approximately 7.4% of net sales for 1998.
The Company plans to increase the number of retail locations in the future in an
effort to further its strategic goals as well as to increase net sales and net
earnings. The Company plans to open at least two new concept stores and four new
outlet stores in the remainder of 1999. In addition, the Company launched its
first direct sales effort through the introduction of the Skechers mail-order
catalog in the third quarter of 1998. The initial mail-order catalog included 30
styles each of the Company's men's and women's line. The catalog is supplemented
by the Company's Internet website skechers.com which also allows customers to
purchase the same styles over the Internet. Management believes that these new
distribution channels may present attractive long-term opportunities with
minimal near-term costs.
Expand International Opportunities. Although the Company's primary focus is
on the domestic market, the Company presently markets its product in countries
in Europe, Asia and selected other foreign regions through distributorship
agreements. For the year ended December 31, 1998, approximately 9.3% of the
Company's net sales were derived from its international operations. The
Company's goal is to increase sales through distributors by heightening the
Company's marketing support in these countries. In 1998, the Company launched
its first major international advertising campaign in Europe and Asia. This
advertising program is designed to establish Skechers as a global brand
synonymous with casual shoes. In an effort to increase profit margins on
products sold internationally and more effectively promote the Skechers brand
name, the Company is exploring selling directly to retailers in certain European
countries in the future. In addition, the Company is exploring selectively
opening flagship retail stores internationally on its own or through joint
ventures.
Selectively License the Skechers Brand Name. Management believes that
selective licensing of the Skechers brand name to non-footwear-related
manufacturers may broaden and enhance the Skechers image without requiring
significant capital investments or the incurrence of significant incremental
operating expenses by the Company. The Company currently has licensing
agreements internationally for apparel with Life Gear Corporation in Japan and
for footwear with Pentland Group PLC in the United Kingdom. The Company also has
a licensing agreement domestically for bags, including backpacks, purses and
waist packs, with Signal Products, Inc. for distribution to Federated Department
Stores and JC Penney's. Management intends to be selective in pursuing licensing
business. Management believes that revenues from licensing agreements will not
be a material source of growth for the Company in the near term; however,
management believes that licensing arrangements may present attractive long-term
opportunities with minimal near-term costs.
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FOOTWEAR
Skechers offers men's, women's and children's footwear in a broad range of
styles, fabrics and colors. The Company offers a broad selection of merchandise
in an effort to maximize its ability to respond to changing fashion trends and
consumer preferences as well as to limit its exposure to any specific style. For
1998, 42.1%, 42.2% and 15.7% of gross sales at wholesale were derived from
men's, women's and children's footwear, respectively. For the year ended
December 31, 1998, the Company offered approximately 900 different styles of
footwear. Management believes that a substantial portion of the Company's gross
sales were generated from styles which management considers basic. No single
style accounted for more than 5.0% of gross wholesale sales in 1998.
Men's Footwear
The Company's introduced its first men's footwear line with the Skechers
brand name in June 1993. Since that time, the Company has expanded its product
offerings and grown its net sales of Skechers men's footwear while substantially
increasing the breadth and penetration of its account base. During 1998, the
Company marketed approximately 360 styles of men's footwear, generally ranging
its size from 6 1/2 to 13 in five major groups: (i) Casuals, (ii) Active Street
Footwear, (iii) Utility Boots, (iv) Hikers and (v) Sandalized Footwear.
Casuals. The Company's Casuals footwear group includes three categories:
(i) Sport Utility, (ii) Classics (iii) Skechers Collection and (iv) Sity by
Skechers. The Sport Utility category includes boots and shoes that have a
rugged, less refined design with industrial-inspired fashion features. This
category is defined by the heavy-lugged outsole and value-oriented materials
employed in the uppers. Uppers are typically constructed of oiled suede and
"Crazy Horse" or distressed leathers which enhance the rugged appearance of the
boots and oxfords of this category. The Company designs and prices this category
to appeal primarily to a younger men's target customer with broad acceptance
across age groups. Suggested retail price points range from $45.00 to $65.00 for
this category.
The Classics category includes comfort oriented design and performance
features. Boots and shoes in this category employ softer outsoles which are
often constructed of polyvinyl carbon ("PVC"). The more refined design of this
footwear employs better grades of leather and linings than those used in the
Company's Sport Utility boots and shoes. Uppers are generally constructed of
grizzly leather or highly-finished leather that produces a waxy shine. Designs
are sportier than the Sport Utility category and feature oxfords, wingtips,
monkstraps, demi-boots and boots. Suggested retail price points range from
$70.00 to $85.00 for this category.
The Skechers Collection category, which was introduced in 1997, features
dress casual shoes designed to complement a young man's evening attire. This
category features more sophisticated designs influenced, in part, by prevailing
trends in Italy and other European countries. As such, this footwear is more
likely than other categories to be sourced from Italy and Portugal. Outsoles
project a sleeker profile, while uppers are constructed of glossy, "box" leather
and aniline, resulting in a highly polished appearance. Designs include
monkstraps, wingtips, oxfords, cap toes and demi-boots and often feature
blind-eyelets to enhance the sophisticated nature of the styling. Suggested
retail price points range from $85.00 to $100.00 for this category.
The Sity by Skechers category, which was introduced in early 1999, features
men's stylish urban footwear. The line includes dress casuals, casuals, boots,
sneakers and athletic shoes for the fashion-forward consumer. Designs are more
diverse than the Sport Utility or Skechers Collection categories and feature
boots, sneakers, oxfords and moccasins. Suggested retail price points range from
$70.00 to $100.00 for this category.
Active Street Footwear. The Company's Active Street footwear group includes
Street Sneakers and Skechers Sport. Skechers Street Sneakers primarily include
low-profile skate sneakers, low-profile and mid-cut sport utility sneakers with
industrial-inspired styling and court/gym shoe-
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inspired street shoes. Outsoles typically are molded rubber or thermo plastic
rubber ("TPR") and, in the case of sport utility sneakers, may feature lugged
configurations. Uppers are typically constructed of split suede. While these
designs are athletic inspired in general, with the exception of certain skate
sneakers, they include few, if any, of the typical technical performance
features in today's popular athletic shoes. Certain of the Company's skate
sneakers are designed with the technical performance features necessary for
competitive level skateboarding. This category is designed to appeal to the
teenager whose casual shoe of choice is a skate or street sneaker and is
intended to be retailed most heavily through specialty casual shoe stores and
department stores. Suggested retail price points range from $40.00 to $55.00 for
this category.
The Skechers Sport category includes joggers, trail runners, sport hikers
and cross-trainers inspired multi-functional shoes. The Company distinguishes
its Skechers Sport category by its technical performance inspired looks;
however, generally the Company does not promote the technical performance
features of these shoes. Skechers Sport footwear includes comfort performance
not available in the Street Sneaker category. The Skechers Sport designs are
light-weight constructions that include cushioned heels, polyurethane mid-soles,
phylon and other synthetic outsoles and white leather or synthetic uppers such
as durabuck and cordura and ballistic nylon mesh. The Skechers Sport features
electric and technically inspired hues more prominently than it does the
traditional athletic white. Skechers Sport is most heavily marketed through
traditional athletic footwear specialty retailers. Suggested retail price points
range from $55.00 to $70.00 for this category.
Utility Boots. The Company's Utility boot group consists of a single
category of boots that are designed to meet the functional demands of a work
boot but are marketed as casual footwear. The outsoles of this category are
designed to be durable and wearable with Goodyear welted, hardened rubber
outsoles. Uppers are constructed of thicker, better grades of heavily oiled
leathers. Utility boots may include steel toes, water-resistant or water-proof
construction and/or materials, padded collars and Thermolite insulation. Styles
include logger boots and demi-boots, engineer boots, motorcycle boots and six-
and eight-eyelet work boots. Suggested retail price points range from $80.00 to
$100.00 for this category.
Hikers. The Company's Hiker group consists of a single category of boots
and demi-boots that include many comfort and technical performance features that
distinguish this footwear as Hikers. The Company markets this footwear primarily
on the basis of style and comfort rather than on technical performance. However,
many of the technical performance features in the Hikers contribute to the level
of comfort this footwear provides. Outsoles generally consist of molded and
contoured hardened rubber. Many designs may include gussetted tongues to prevent
penetration of water and debris, cushioned mid-soles, motion control devices
such as heel cups, water-resistant or water-proof construction and materials and
heavier, more durable hardware such as metal D-rings instead of eyelets. Uppers
are generally constructed of heavily oiled newbuck and full-grain leathers.
Suggested retail price points range from $55.00 to $100.00 for this category.
Sandalized Footwear. The Company's Sandalized footwear features open-toe
and open-side constructions consistent with the Company's offering in the Sport
Utility, Classics, Skechers Collection and Skechers Sport categories of
footwear. Such footwear includes fisherman's sandals, shower sandals, beach
sandals, slides, comfort-oriented land sandals and technically-inspired water
sport sandals. Sandalized footwear includes both leather and synthetic
constructions and may feature suede footbeds with form-fitting mid-soles. The
Company typically delivers its Sandalized footwear to retailers from February to
August. Suggested retail price points range from $20.00 to $60.00 for this
category.
Women's Footwear
The Company began emphasizing the marketing and product offerings of its
women's footwear line in early 1996. The women's product offerings are organized
in four major groups: (i) Casuals,
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(ii) Active Street Footwear, (iii) Utility Boots and (iv) Sandalized Footwear.
Skechers women's line differs from the men's product offerings in that it is
more seasonal and fashion oriented. The Company builds all of its women's shoes
with lasts and molds specifically designed for women, which management believes
distinguishes the Company from most athletic shoe companies and certain unisex
casual footwear companies. The women's line includes a broader array of
construction for bottoms which include several different heights. During 1998,
the Company marketed approximately 320 styles of women's footwear, generally
ranging in size from 5 to 11.
Casuals. The Company's Casuals footwear group includes two categories,
Sport Utility and Classics. Sport Utility footwear includes many of the same
design features as the Sport Utility category for men, but vary more widely in
the fabrication and coloration of uppers, as well as the height and construction
of the outsoles. Outsoles may feature raised bottoms with varying heel heights
and may be constructed of ethyl vinyl acetate ("EVA"). Suggested retail price
points range from $40.00 to $55.00 for this category.
The Classics category includes comfort-oriented design and performance
features much like the men's Classics category. Boots and shoes in this category
of women's footwear are offered in a broader array of upper fabrications and
colorations than men's Classics. While these shoes and boots do not feature
higher heels, outsole constructions may be thicker or higher than the men's
Classics category. In addition to oxfords, wingtips, monkstraps, demi-boots and
boots similar to those featured in the men's Classics category, the women's
Classics category also features mary janes. Suggested retail price points range
from $55.00 to $70.00 for this category.
Active Street Footwear. The Company's Active Street footwear group includes
Street Sneakers and Skechers Sport. Women's Street Sneakers differ from the
men's Street Sneakers in four significant ways: (i) variations in outsole
configuration, (ii) emphasis on combinations of high-tech and synthetic fabrics,
(iii) emphasis on canvas and (iv) the absence of a competitive skate shoe
product for women. The women's Street Sneakers are offered in four basic outsole
configurations: (i) low profile sneakers such as the Street Cleat, (ii) high
profile sneakers such as the Womper, (iii) hyper-wedges such as the Blaster and
(iv) platform sneakers such as the Fatsoles. The women's line offers a broader
array of coloration and fabrication of uppers and typically emphasizes
combinations of different fabrications to make a more bold lifestyle statement
than the men's Street Sneaker collection.
Within the Street Sneaker category, the women's line places particular
emphasis on canvas uppers. These canvas sneakers are available in a broad array
of vivid colors; however, white dominates the canvas sneaker style in sales.
Management believes the fuller color palette in canvas is necessary to allow
retailers to merchandise these styles effectively and to properly convey the
Skechers brand image to the consumer. Canvas Street Sneakers carry suggested
retail price points of $30.00 to $45.00 for this category. Management believes
that these affordable price points contribute to the attractiveness of the more
colorful Canvas Street Sneakers as impulse purchases. Suggested retail price
points for Street Sneakers, other than in canvas, range from $40.00 to $60.00
for this category.
The Skechers Sport Category for women differs from the Skechers Sport
Category for men primarily in the variety of colors and fabrics comprising the
uppers. While some height variation occurs in the outsoles, such variation is
not as frequent, severe or diverse as in the case of the Street Sneakers.
Suggested retail price points range from $40.00 to $60.00 for this category.
Utility Boots. The women's Utility Boot group differs from the men's
Utility Boot group in three primary ways: (i) outsoles may be raised and may
have higher heels, (ii) uppers may be constructed of softer leather such as
oiled newbuck and (iii) the Utility Boot category for women includes women's
hikers which is not yet significant enough to warrant its own group. Suggested
retail price points for this group range from $40.00 to $85.00 for this
category.
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Sandalized Footwear. Women's Sandalized Footwear consists of three
categories: (i) Surf and Sand Sandals, (ii) Active Lifestyle Sandals and (iii)
Comfort Sandals. Surf and Sand Sandals feature raised outsoles with wedge or
platform configurations and are often constructed from EVA. Footbeds emphasize
visual design patterns and colorations and may be constructed from synthetics
such as Neoprene. Active Lifestyle Sandals are opened-up interpretations of many
of the styles offered in the women's Street Sneaker category. Active Lifestyle
Sandals include the four outsole configurations featured on the Street Cleat,
Womper, Blaster and Fatsoles. Uppers typically feature synthetic fabrications.
Comfort Sandals are opened-up interpretations of the women's Classics category.
Uppers are constructed of similar leathers as the Classics Category with
contoured, cushioned suede footbeds. Suggested retail price points range from
$25.00 to $55.00 for this category.
Children's Footwear
In early 1996, the Company substantially increased its product offerings
and marketing focus on its children's footwear line and during 1998 offered
approximately 220 styles of Skechers footwear designed for infants, young boys
and girls and pre-teens, ranging in sizes from infant size 3 to boys size 6. The
children's line features a range of products including boots, shoes and sneakers
that reflect the Skechers level of design and quality. The Skechers children's
line is comprised primarily of shoes that are designed like their adult
counterparts but in "takedown" versions, so that the younger set can wear the
same popular styles as their older siblings and schoolmates. This "takedown"
strategy maintains the integrity of the product in the premium leathers,
hardware and outsoles without the attendant costs involved in designing and
developing new products. In addition, the Company also adapts current fashion
from the Company's men's and women's lines by modifying designs and choosing
colors and materials that are more suitable to the playful image Skechers has
established in the children's footwear market. The Company recently launched its
Skechers Lights category, which is a new line of lighted footwear combining
sequencing patterns and lights in the outsole and other areas of the shoes.
Skechers' children's footwear is currently offered at domestic retail prices
ranging from $25.00 to $50.00 per pair.
PRODUCT DESIGN AND DEVELOPMENT
The Company's principal goal in product design is to generate new and
exciting footwear with contemporary and progressive styles and comfort enhancing
performance features. The Company designs most new styles to be fashionable and
marketable to the 12 to 25 year old consumer, while appealing to the broader 5
to 40 year old age consumer, with the goal that the majority of the styles will
become basic. The sale of basic products funds the Company's design efforts and
allows it to introduce more progressive styles which improve brand recognition
and enhance the Company's image as being in the forefront of emerging lifestyle
trends. While many of the Company's shoes have performance features, the Company
generally does not position its shoes in the marketplace as technical
performance shoes.
The footwear design process typically begins about nine months before the
start of a season. Skechers offers a spring and fall line and typically
introduces new styles in its existing lines every 30 to 60 days to keep current
with emerging trends. Skechers' products are designed and developed by the
Company's in-house staff. The Company also utilizes outside design firms on an
item-specific basis to supplement its design efforts. Separate design teams
focus on each of the men's, women's and children's categories, reporting to the
Company's Vice President, Design, who has over nine years' experience in
footwear design. The design process is extremely collaborative; members of the
design staff meet weekly with the heads of retail and merchandising, sales and
production and sourcing to further refine the Company's products in order to
meet the particular needs of the Company's markets.
Management believes that its product success is related in large part to
its ability to recognize trends in the footwear markets and to design products
which anticipate and accommodate consumers' ever-evolving preferences. The
Company strives to analyze, interpret and translate current and
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emerging lifestyle trends affecting today's youthful culture into progressive
footwear styles. Lifestyle trend information is compiled by Skechers' designers
through various methods designed to monitor changes in culture and society,
including (i) review and analysis of modern music, television, cinema, clothing,
alternative sports and other trend-setting media, (ii) travel to domestic and
international fashion markets to identify and confirm current trends, (iii)
consultation with the Company's retail customers for information on current
retail selling trends, (iv) participation in major footwear trade shows to stay
abreast of popular brands, fashions and styles and (v) subscription to various
fashion and color information services. In addition, a key component of
Skechers' design philosophy is to continually reinterpret both its basic and
current successful styles in the Skechers image. In the Company's experience,
reinterpreted styles often sell well due to a combination of a level of
familiarity with the target customer group and new design features which create
renewed interest. The Company closely monitors sales to key retail customers, as
well as Skechers' own retail stores, to identify current popular styles which
may be subject to reinterpretation.
After the design team arrives at a consensus regarding the fashion themes
for the coming season, the group then translates these themes into Skechers
products. These interpretations include variations in product color, material
structure and decoration, which are arrived at after close consultation with the
Company's production department. Prototype blueprints and specifications are
created and forwarded to the Company's prototype manufacturers located in
Taiwan, which then forward design prototypes back to the Company's domestic
design team approximately two to four weeks after initial receipt. New design
concepts are often also reviewed by the Company's major retail customers. This
customer input not only allows the Company to measure consumer reaction to the
Company's latest designs, but also affords the Company an opportunity to foster
deeper and more collaborative relationships with these customers. The Company's
design team can easily and quickly modify and refine a design based on this
development input.
The Company occasionally orders limited production runs which may initially
be tested in Skechers' concept stores. By working closely with store personnel,
the Company obtains customer feedback that often influences product design and
development. Management believes that sales in Skechers' retail stores can help
forecast sales in national retail stores. The Company is able to determine
within seven to 14 days after initial introduction of a product whether there is
substantial demand for the style, thereby aiding the Company in its sourcing
decisions. Styles which have substantial consumer appeal are highlighted in
upcoming collections or offered as part of the Company's periodic style
offerings. The ability to initially test its products allows Skechers to
discontinue less popular styles after only a limited production run which
affords the Company an indicator of future production and a hedge to fashion
risks. Also, the Company monitors five and 10 weeks trailing trends of orders of
its retail account base in order to manage future production of styles that are
increasing or decreasing in popularity. Generally, the production process takes
approximately six months from design concept to commercialization.
MARKETING
The Company's marketing focus is to maintain and enhance recognition of the
Skechers brand name as a casual, active youthful brand that stands for quality,
comfort and design innovation. Senior management is directly involved in shaping
the Company's image and its advertising and promotional activities. The
conception, development and implementation of most aspects of Skechers men's,
women's and children's marketing efforts are overseen by a six person committee
headed by Robert and Michael Greenberg. Towards this end, the Company endeavors
to spend between 8.0% and 10% of net sales in the marketing of Skechers footwear
through an integrated effort of advertising, promotions, public relations, trade
shows and other marketing efforts, which the Company believes substantially
heightens brand awareness.
Advertising. Substantially all of the Company's advertising is conceived
and designed by Skechers' in-house staff. By retaining its advertising functions
in-house, management believes that the Company is able to maintain a greater
degree of control over both the creative process and the
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integrity of the Skechers brand image, while realizing substantial cost savings
compared to using outside agencies.
Management believes that the Company's success to date is due in large part
to its advertising strategies and methods. The Company's in-house marketing and
advertising team has developed a comprehensive program to promote the Skechers
brand name through lifestyle and image advertising. While all advertisements
feature the Company's footwear, Skechers' advertising generally seeks to build
and increase brand awareness by linking the brand to youthful, contemporary
lifestyles and attitudes rather than to market a particular footwear product.
The Company has made a conscious effort to avoid the association of the Skechers
name with any single category of shoe to provide merchandise flexibility and to
aid the ability to take the brand and product design in the direction of
evolving footwear fashions and consumer preferences.
The Company uses a variety of media for its national advertising. Print
efforts are represented by one or two page collage features in popular fashion
and lifestyle consumer publications that appeal to the Company's target customer
group, such as Spin, Details, Seventeen, GQ, Vibe, Rolling Stone, Vogue and many
others. The Company utilizes experienced graphic designers and styling teams
that work closely with professional fashion photographers to present the
Skechers image in a visually stimulating way. Skechers' progressive television
advertisements are primarily created in-house and air frequently on top
television shows on the major networks and on cable channels including MTV,
Nickelodeon, Comedy Central, ESPN and BET. Different advertisements are created
for each of the 5 to 9, 10 to 24 and 25 to 35 year old consumer groups. The
Company's in-house media buyer strategically selects during which program and in
which geographic area certain Skechers commercials will air in order to reach
the appropriate target audience. Radio spots often feature national celebrities
and are aired during national syndicated radio shows to appeal to a wider
audience.
The Company also participates with its retail customers in cooperative
advertising programs intended to take the brand awareness created by the
national print advertising and channel it to local retailers where consumers can
buy the Company's products. This advertising includes local advertising on
radio, television and newspaper, as well as Company participation in major
catalogs for retailers such as Macy's, Nordstrom, Bloomingdale's and Victoria's
Secret. The Company's co-op efforts are intended to maximize advertising
resources by having its retailers share in the cost of promoting the Company's
brands. Also, the Company believes that co-op advertising encourages the
retailer to merchandise the brands properly and sell them aggressively on the
sales floor.
Promotions. Skechers' in-house promotions department is responsible for
building national brand name recognition. Teaming up with national retailers and
radio stations, the promotions department is responsible for cross promotions,
which help draw customers to retail store locations. This department also
sponsors alternative sporting and entertainment events and coordinates a group
of extreme sport athletes such as skateboarders who make promotional
appearances, wear the Company's footwear exclusively and help increase overall
consumer awareness of the Skechers brand.
Public Relations. The Company's in-house public relations department is
responsible for increasing Skechers' media exposure. The department communicates
the Skechers image to the public and news media through the active solicitation
of fashion editorial space, arranging interviews with key Company personnel and
coordinating local publicity and special events programs for the Company,
including celebrity appearances and fashion shows. With its strategy tied to
promoting the newest styles produced by the product development team, Skechers'
products are often featured in fashion and pop culture magazines and on a select
group of films and popular television shows. For example, Skechers shoes have
been prominently displayed on the television series Dharma & Greg and referenced
on the recently released film 10 Things I Hate About You.
Trade Shows. To showcase the Skechers product to footwear buyers, the
Company exhibits at more than 20 trade shows worldwide, including all leading
industry shows. The Company prides itself on having innovative and dynamic
exhibits on the show floor. Designed by an in-house
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architect, the Company's state-of-the-art trade show exhibits feature the latest
products and provide a stage for Skechers' internally developed
music-video-style dance and stage shows featuring progressive music and
nightclub lighting.
Other. The Company's in-house display merchandising department supports
retailers and distributors by developing point-of-purchase advertising to
further promote its products in stores and to leverage the brand recognition at
the retail level. This group is supplemented by several part-time employees who
act as field service representatives. This department coordinates with the
Company's sales department to ensure better sell-through at the retail level.
Company representatives communicate with and visit their customers on a regular
basis to aid in the proper visual display of Skechers merchandise and to
distribute and display such point-of-purchase items as signage, packaging,
displays, counter cards, banners and other visual merchandising displays. These
materials mirror the look and feel of the national print advertising in order to
reinforce brand image at the point-of-purchase. Management believes these
efforts help stimulate impulse sales and repeat purchases.
Certain of the Company's retail accounts feature "in-store shop" formats in
which the Company provides fixtures, signage and visual merchandise assistance
in a dedicated floor space within the store. The design of the shops utilizes
the distinctive Skechers advertising to promote brand recognition and
differentiate Skechers' presence in the store from that of its competition. The
installation of these shops enables the Company to establish premium locations
within the retailers and management believes it aids in increased sell-through
and higher maintained margins for the Company's customers.
In August 1998, the Company launched its initial product mail-order
catalog. This full-color brochure was sent to more than 500,000 households,
including approximately 350,000 names on the Company's own mailing list. Two
subsequent catalog mailings have been completed to more than 900,000 households,
during which time the Company's own mailing list has grown to more than 600,000
names. The current mail-order catalog includes approximately 100 styles of the
Company's men's and women's line. The catalog reflects the Skechers image
featuring colorful, eye-catching layouts and younger models. The catalog was
created and produced in-house by the Company's designers, with the assistance of
professional fashion photographers and production artists. The catalog lists a
broad assortment of Skechers footwear and affords customers the ability to order
products telephonically or via mail. The catalog references a toll-free Skechers
number to provide customer assistance, including the location of the Skechers'
retail stores and selected other retail locations offering the Company's
products.
The Company also promotes its brand image through its website on the World
Wide Web to customers who directly access the Internet. This website currently
enables the Company to present information on Skechers' history, products and
store locations to consumers. The website is interactive, affording customers
the ability to directly order products on the Internet and to allow the Company
to receive and respond directly to customer feedback. The website features the
Skechers current mail-order catalog, photos, interviews and information on
Company-sponsored events and associated content designed to attract visitors to
the site. The Company's website and mail-order catalog are intended to enhance
the Skechers brand without the associated costs of advertising.
SALES
The Company seeks to enhance its brand image by controlling the
distribution channels for its products based on criteria which include the image
of the retailer and its ability to effectively promote and display the Company's
products. In addition, management has implemented a strategy of controlling the
growth of the distribution channels through which the Company's products will be
sold in order to protect the Skechers brand name, properly service customer
accounts and better manage the growth of the business. The Company has limited
distribution of its products to those retailers it believes can best support the
Skechers brand name in the market.
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To accomplish this, the Company has continued to broaden its product line
in an effort to reach a larger consumer base and to improve and enhance its
customer service. The Company intends to continue to leverage its reputation for
quality products and its relationships with retailers through, among other
things, the introduction of new styles in its existing and in also categories of
footwear. Also, the Company believes it enhances its position with retailers
through its in-stock inventory program. This program increases the availability
of Skechers' best-selling products, which management believes has contributed to
more consistent product flow to its retail customers and an increased ability to
respond to reorder demand.
The Company currently has 70 in-house sales and two independent sales
representatives. The Company also has 13 in-house customer service employees.
The sales force is segregated into men's, women's and children's divisions. The
men's and women's division each has a western, midwestern and eastern regional
sales manager, while the children's division is headed by a children's national
sales manager. Each of these sales managers reports to the Company's Vice
President, Sales, who has over 15 years of experience in the footwear industry.
Each of the sales staff and independent sales representatives are compensated on
a salary plus commission basis; none of the representatives sell competitive
products. Senior management, specifically Michael Greenberg, is actively
involved in selling to and maintaining relationships with Skechers' major retail
accounts. For the year ended December 31, 1998 the top five sales persons
accounted for 39.8% of the Company's net sales. One of these salespersons
generated 17.9% of the Company's net sales for the year ended December 31, 1998.
The Company's primary customers are department stores and specialty
retailers. During 1998, Skechers sold to more than 2,200 retail accounts
representing in excess of 10,000 storefronts, including Nordstrom, Macy's,
Dillards, Robinson's-May and JC Penney and specialty retailers such as Genesco's
Journeys and Jarman chains, The Venator Group's Foot Locker and Lady Foot Locker
chains, Pacific Sunwear and Footaction U.S.A. During the year ended December 31,
1998, the Company's net sales to its five largest customers accounted for
approximately 34.8% of total net sales. For the year ended December 31, 1998,
The Venator Group represented 11.8% of the Company's net sales. Other than the
foregoing, no one customer accounted for 10.0% or more of the Company's net
sales for such period.
The Company is committed to achieving customer satisfaction and to building
a loyal customer base by providing a high level of knowledgeable, attentive and
personalized customer service. The Company's sales and field service personnel
coordinate with retail customers to determine the inventory level and product
mix that should be carried in each store in an effort to help retail sell-
through and enhance the customer's product margin. Such information is then used
as a basis for developing sales projections and product needs for such
customers. In addition, Skechers' sales personnel work closely with their
customers in monitoring their inventory levels, which assists the Company with
scheduling production. The Company's field service representatives coordinate
with the sales department to work with the retailer to ensure that the Company's
products are appropriately displayed. Further support is provided through the
availability of EDI and co-op advertising. See "-- Distribution." Management
believes that limiting product distribution to the appropriate accounts and
closely working with those accounts helps the Company to reduce its own
inventory markdowns and customer returns and allowances, while maintaining the
proper showcase for the Skechers brand name and product.
SOURCING
Skechers products are produced by independent contract manufacturers
primarily located in China and to a lesser extent, in Macau, Korea, Mexico,
Romania, Italy, Portugal and Taiwan. For the year ended December 31, 1998, 96.2%
of the Company's products were manufactured in China. The Company does not own
or operate any manufacturing facilities. Management believes the use of
independent manufacturers increases its production flexibility and capacity
while at the same time substantially reducing capital expenditures and avoiding
the costs of managing a large production
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work force. While the Company has long standing relationships with many of its
manufacturers and believes its relationships to be good, there are no long-term
contracts between the Company and any of its manufacturers.
To safeguard product quality and consistency, the Company oversees the key
aspects of the production process. Monitoring is performed domestically by the
Company's in-house production department and in Asia through a 55-person staff
working in China and out of the Company's office in Taiwan. Management believes
the Company's Asian presence allows Skechers to negotiate supplier and
manufacturer arrangements more effectively and ensure timely delivery of
finished footwear. In addition, the Company requires its manufacturers to
certify that neither convict, forced, indentured labor (as defined under U.S.
law) nor child labor (as defined by the manufacturer's country) was used in the
production process, that compensation will be paid according to local law and
that the factory is in compliance with local safety regulations.
The Company oversees the key phases of production from initial prototype
manufacture through initial production runs to final manufacture. Manufacturers
are selected in large part on the basis of the Company's prior experience with
the manufacturer and the amount of available production capacity. The Company
attempts to monitor its selection of independent factories to ensure that no one
manufacturer is responsible for a disproportionate amount of the Company's
merchandise. In addition, the Company seeks to use, whenever possible,
manufacturers that have previously produced the Company's footwear, which the
Company believes enhances continuity and quality while controlling production
costs. The Company generally limits product orders to 30.0% or less of that
manufacturer's total production at any one period of time. In addition, the
Company sources product for styles that account for a significant percentage of
the Company's net sales from at least three different manufacturers. For the
year ended December 31, 1998, the top four manufacturers of the Company's
products accounted for 15.4%, 14.2%, 12.1% and 10.4% of total purchases,
respectively. Other than the foregoing, no one manufacturer accounted for 10.0%
or more of the Company's total purchases for such period. To date, the Company
has not experienced difficulty in obtaining manufacturing services.
Management believes that quality control is an important and effective
means of maintaining the quality and reputation of its products. The Company's
quality control program is designed to ensure that finished goods not only meet
with Company established design specifications, but also that all goods bearing
its trademarks meet the Company's standards for quality. Quality control
personnel perform an array of inspection procedures at stages of the production
process, including examination and testing of (i) prototypes of key products
prior to manufacture, (ii) samples and materials prior to production and (iii)
final products prior to shipment. The Company employees are on-site at each of
Skechers' major manufacturers to oversee in person key phases of production. The
Company employees and agents also make other unannounced visits to the
manufacturing sites to further monitor compliance with Skechers' manufacturing
specifications.
Skechers' on-site quality control program is also designed to provide
greater flexibility in the design and production process. Since Skechers reviews
many new design concepts with major retail customers, it is able to receive
direct feedback as to what changes, if any, in the design specification of a
particular style should be made prior to initial production runs. This input
often can be quickly translated into design modifications which are directed in
Asia by the Company's on-site staff. As a result, the Company is more responsive
to customer needs.
The Company maintains an in-stock position for selected styles of footwear
in order to minimize the time necessary to fill customer orders. In order to
maintain an in-stock position, the Company places orders for selected footwear
with its manufacturers prior to the time the Company receives customers' orders
for such footwear. In order to reduce the risk of overstocking, the Company
seeks to assess demand for its products by soliciting input from its customers
and monitoring retail sell-through. In addition, the Company analyzes historical
and current sales and market data to develop internal product quantity forecasts
which helps reduce inventory risks.
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SKECHERS' RETAIL STORES
The Company's retail stores are an important component of its product
marketing and development strategies and provide distinctive environments in
which to merchandise and sell the Skechers product line. The Company's own
retail operations are overseen by the Company's Vice President, Retail and
Merchandising, who has approximately 20 years of experience in retail footwear.
The Company's retail stores consist of free-standing and conventional mall
concept stores and factory and warehouse outlet stores. For the year ended
December 31, 1998, approximately 7.4% of net sales were generated by the
Company's retail stores.
Concept Stores
The Company's concept stores serve as a showcase for the Company's products
and are an integral part of the Company's strategy for building the Skechers
brand. The Company's strategy is to focus on opening concept stores primarily in
marquee sites in key urban, high-traffic, visible locations in major
metropolitan cities throughout the United States in an effort to enhance
national brand recognition. Retail locations are generally chosen to generate
maximum marketing value for the Skechers brand name through signage and store
front presentation. These locations include concept stores in Manhattan's Times
Square and Santa Monica's Third Street Promenade. The Company believes that as a
result of its ability to control the visual presentation and product assortment
in its concept stores, these stores help build brand awareness and introduce
consumers to a broad range of Skechers products. Also, the concept stores
provide rapid product feedback. Management believes that product sell-through
information derived from the Company's concept stores allows the Company's
sales, merchandising and production staff to respond to market changes and new
product introductions. Such responses serve to augment sales and limit the
Company's inventory markdowns and customer returns and allowances.
As of March 31, 1999, Skechers operated 22 concept stores, 13 of which were
located in California, five in New York, two in New Jersey and one in each of
Massachusetts and Florida. The concept stores are primarily located in
free-standing street locations and major shopping malls. The stores are
typically designed to create a distinctive Skechers look and feel and enhance
customer association of the Skechers brand with current youthful lifestyle
trends and styles. The concept stores feature modern music and lighting and
present an open floor design to allow customers to readily view the merchandise
on display. In December 1998, the Company opened a showroom in New York City's
SoHo district above its concept store. The showroom displays the Company's
current and upcoming men's, women's and children's lines in their entirety to
customers. The standard Skechers concept store is open seven days a week for an
average of eight to 11 hours per day, has two or three employees in the store
during business hours, and ranges in selling square footage from approximately
1,400 to 4,400.
The Company opened 13 new concept stores during 1998, two new concept
stores during the three months ended March 31, 1999 and plans to open at least
two new concept stores in the remainder of 1999. The Company's new concept store
prototype is approximately 2,500 square feet, although in certain selected
markets the Company may open larger or smaller stores. In developing its concept
store opening plan, the Company has identified top geographic markets in the
larger metropolitan areas of the United States. In selecting a specific site,
the Company evaluates the proposed sites' traffic pattern, co-tenancies, average
sales per square foot achieved by neighboring concept stores, lease economics
and other factors considered important within the specific location.
The Company seeks to instill enthusiasm and dedication in its concept store
management personnel and sales associates through incentive programs and regular
communication with store personnel. Sales associates receive commissions on
sales with a guaranteed minimum compensation. Concept store managers receive
base compensation plus incentive compensation based on sales.
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The Company has well-established concept store operating policies and
procedures and utilizes an in-store training regimen for all new store
employees. Merchandise presentation instructions and detailed product
descriptions also are provided to sales associates to enable them to gain
familiarity with Skechers product offerings. The Company offers Skechers' sales
associates a discount on Skechers merchandise to encourage enthusiasm for the
product and Company loyalty.
Factory and Warehouse Outlet Stores
As of March 31, 1999, the Company also operated 15 factory and warehouse
outlet stores, nine of which were located in California, two in New York and one
in each of Arizona, Massachusetts, Nevada and Hawaii. The factory outlet stores
are generally located in manufacturers' outlet centers throughout the country.
The Company's factory outlet stores have enabled it to increase sales in certain
geographic markets where Skechers' products were not previously available and to
consumers who favor value-oriented retailers. The outlets provide opportunities
for the Company to sell discontinued and excess merchandise, thereby reducing
the need to sell such merchandise to discounters at excessively low prices. The
Company's free-standing warehouse outlet stores enable it to liquidate other
excess merchandise, discontinued lines and odd sizes. The Company strives to
geographically position its factory and warehouse outlet stores to minimize
potential conflicts with the Company's retail customers. The standard Skechers
factory and warehouse outlet store is open seven days a week for an average of
eight to 11 hours per day, has two or three employees in the store during
business hours and ranges in selling square footage from approximately 1,800 to
11,000. Inventory in these stores is supplemented by certain first-line styles
sold at full retail generally at price points of $60.00 or lower. The Company
opened 10 new factory and warehouse outlet stores during 1998 and plans to open
at least four new factory and warehouse outlet stores in the remainder of 1999.
In addition, the Company's newly launched mail-order catalog and website
act as sales vehicles. Management believes that these new distribution channels
will not generate material growth for the Company in the near term; however,
management believes that they may present attractive long-term opportunities
with minimal near-term costs.
INTERNATIONAL OPERATIONS
Although the Company's primary focus is on the domestic market, the Company
presently markets its product in countries and territories in Europe, Asia and
selected other foreign regions. Skechers derives revenues and earnings from
outside the United States from two principal sources: (i) sales of Skechers
footwear directly to foreign distributors who distribute such footwear to
department stores and specialty retail stores and (ii) to a lesser extent,
royalties from licensees who manufacture and distribute Skechers products
outside the United States. For the year ended December 31, 1998, approximately
9.3% of the Company's net sales was derived from its international operations.
Management believes that international distribution of Skechers products
may represent a significant opportunity to increase revenue and profits.
Although the Company is in the early stages of its international expansion,
Skechers products are currently sold in over 120 countries and territories. The
Company's goal is to increase international sales through foreign distributors
by heightening the Company's international marketing presence in those
countries. In 1998, the Company launched its first major international
advertising campaign which is designed to establish Skechers as a global brand
synonymous with casual shoes. The Company is exploring selling directly to
retailers in certain European countries in the near future. In addition, the
Company is exploring selectively opening flagship retail stores internationally
on its own or through joint ventures.
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DISTRIBUTION
The Company believes that strong distribution support is a critical factor
in the Company's operations. Following manufacture, the Company's products are
packaged in shoe boxes bearing bar codes and generally either shipped to the
Company's approximately 700,000 square feet of leased distribution centers
located in Ontario, California, or shipped directly from the manufacturer to
Skechers' international customers. Upon receipt at the central distribution
centers, merchandise is inspected and recorded in the Company's management
information system and packaged according to customers' orders for delivery.
Merchandise is shipped to the customer by whatever means the customer requests,
which is usually by common carrier. The central distribution centers have multi-
access docks, enabling the Company to receive and ship simultaneously and to
pack separate trailers for shipments to different customers at the same time.
The Company has an EDI system to which some of the Company's larger customers
are linked. This system allows these customers to automatically place orders
with the Company, thereby eliminating the time involved in transmitting and
inputting orders, and includes direct billing and shipping information.
POTENTIAL LICENSING ARRANGEMENTS
As part of its growth strategy, the Company plans to continue to enter into
licensing agreements with respect to certain products on terms and with parties
management believes will provide more effective manufacturing, distribution or
marketing of such products than could be achieved in-house. Management believes
that selective licensing of the Skechers brand name to non-footwear-related
manufacturers may broaden and enhance the Skechers image without requiring
significant capital investments or the incurrence of significant incremental
operating expenses by the Company. In evaluating a licensing decision, the
Company will consider various factors, including the potential profit to be
earned and the capital and management resources available to the Company at such
time. The Company intends to maintain substantial control over the design,
manufacturing specifications, advertising and distribution of any licensed
products and to maintain a policy of evaluating any future licensing
arrangements to ensure consistent representation of the Skechers image.
The Company currently has licensing agreements internationally for apparel
with Life Gear Corporation in Japan and for footwear with Pentland Group PLC in
the United Kingdom. The Company also has a licensing agreement domestically for
bags, including backpacks, purses and waist packs, with Signal Products, Inc.
for distribution to Federated Department Stores and JC Penney's. Management
intends to be selective in pursuing licensing business. Management believes that
revenues from licensing agreements will not be a material source of growth for
the Company in the near term; however, management believes that licensing
arrangements may present attractive long-term opportunities with minimal
near-term costs.
MANAGEMENT INFORMATION SYSTEMS
The Company recognizes the importance of advanced computerization in
maintaining and improving its level of service, internal and external
communication and overall competitive position. The Company has a computerized
management information system that relies upon a Unix-based format with a local
area network of terminals at the corporate offices to support management
decision making, along with computers at the Company's distribution center and
PC-based point-of-sale computers at each of its retail stores. These computers
are connected via modem to the local area network at the Company's corporate
offices. The Company's system provides, among other things, comprehensive order
processing, production, accounting and management information for the marketing,
selling, manufacturing, retailing and distribution functions of the Company's
business. The Company has developed a sophisticated software program that
enables the Company to track, among other things, orders, manufacturing
schedules, inventory and sales of Skechers products. The program includes a
centralized management information system which provides the
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various operating departments with integrated financial, sales, inventory and
distribution related information.
As evidence of its continuing dedication to advanced computerization, the
Company intends to install a new material handling system in its new
distribution center. This new system is expected to enhance the Company's
ability to monitor inventory levels and distribution activities at such site.
The system, which is expected to cost approximately $8.5 million, is expected to
become operational in mid-2000. In addition, the Company is currently updating
its EDI system to make it more responsive to customer needs.
BACKLOG
The Company generally receives the bulk of the orders for each of the
spring and fall seasons a minimum of three months prior to the date the products
are shipped to customers. At December 31, 1998, the Company's backlog was $74.9
million, compared to $65.8 million at December 31, 1997. To manage inventory
risk, the Company estimates its production requirements and engages in certain
other inventory management techniques. See "-- Sourcing." For a variety of
reasons, including the timing of shipments, product mix of customer orders and
the amount of in-season orders, backlog may not be a reliable measure of future
sales for any succeeding period.
INTELLECTUAL PROPERTY RIGHTS
The Company owns and utilizes a variety of trademarks, including the
Skechers trademark. As of March 31, 1999, the Company had approximately 21
registrations and approximately 54 pending applications for its trademarks in
the United States. In addition, as of March 31, 1999, the Company had
approximately 360 trademark registrations and applications in approximately 80
foreign countries. The Company also had 27 design patents issued in the United
States and approximately 28 design patent applications pending in the United
States as of March 31, 1999. The Company regards its trademarks and other
intellectual property as valuable assets and believes that they have significant
value in the marketing of its products. The Company vigorously protects its
trademarks against infringement, including through the use of cease and desist
letters, administrative proceedings and lawsuits.
The Company relies on trademark, copyright and trade secret protection,
patents, non-disclosure agreements and licensing arrangements to establish,
protect and enforce intellectual property rights in the design of its products.
In particular, the Company believes that its future success will depend in
significant part on the Company's ability to maintain and protect the Skechers
trademark. Despite the Company's efforts to safeguard and maintain its
intellectual property rights, there can be no assurance that the Company will be
successful in this regard. There can be no assurance that third parties will not
assert intellectual property claims against the Company in the future.
Furthermore, there can be no assurance that the Company's trademarks, products
and promotional materials or other intellectual property rights do not or will
not violate the intellectual property rights of others, that its intellectual
property would be upheld if challenged or that the Company would, in such an
event, not be prevented from using its trademarks or other intellectual property
rights. Such claims, if proved, could materially and adversely affect the
Company's business, financial condition and results of operations. In addition,
although any such claims may ultimately prove to be without merit, the necessary
management attention to and legal costs associated with litigation or other
resolution of future claims concerning trademarks and other intellectual
property rights could materially and adversely affect the Company's business,
financial condition and results of operations. The Company has sued and has been
sued by third parties in connection with certain matters regarding its
trademarks and products, none of which has materially impaired the Company's
ability to utilize its trademarks.
The laws of certain foreign countries do not protect intellectual property
rights to the same extent or in the same manner as do the laws of the United
States. Although the Company continues
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to implement protective measures and intends to defend its intellectual property
rights vigorously, there can be no assurance that these efforts will be
successful or that the costs associated with protecting its rights in certain
jurisdictions will not be prohibitive.
From time to time, the Company discovers products in the marketplace that
are counterfeit reproductions of the Company's products or that otherwise
infringe upon intellectual property rights held by the Company. There can be no
assurance that actions taken by the Company to establish and protect its
trademarks and other intellectual property rights will be adequate to prevent
imitation of its products by others or to prevent others from seeking to block
sales of the Company's products as violating trademarks and intellectual
property rights. If the Company is unsuccessful in challenging a third party's
products on the basis of infringement of its intellectual property rights,
continued sales of such product by that or any other third party could adversely
impact the Skechers brand, result in the shift of consumer preferences away from
the Company and generally have a material adverse effect on the Company's
business, financial condition and results of operations.
COMPETITION
Competition in the footwear industry is intense. Although the Company
believes that it does not compete directly with any single company with respect
to its entire range of products, the Company's products compete with other
branded products within their product category as well as with private label
products sold by retailers, including some of the Company's customers. The
Company's utility footwear and casual shoes compete with footwear offered by
companies such as The Timberland Company, Dr. Martens, Kenneth Cole Productions,
Steven Madden, Ltd. and Wolverine World Wide, Inc. The Company's athletic shoes
compete with brands of athletic footwear offered by companies such as Nike,
Inc., Reebok International Ltd., adidas-Salomon AG and New Balance. The
Company's children's shoes compete with brands of children's footwear offered by
companies such as The Stride Rite Corporation. In varying degrees, depending on
the product category involved, the Company competes on the basis of style,
price, quality, comfort and brand name prestige and recognition, among other
considerations. These and other competitors pose challenges to the Company's
market share in its major domestic markets and may make it more difficult to
establish the Company in Europe, Asia and other international regions. The
Company also competes with numerous manufacturers, importers and distributors of
footwear for the limited shelf space available for the display of such products
to the consumer. Moreover, the general availability of contract manufacturing
capacity allows ease of access by new market entrants. Many of the Company's
competitors are larger, have achieved greater recognition for their brand names,
have captured greater market share and/or have substantially greater financial,
distribution, marketing and other resources than the Company. There can be no
assurance that the Company will be able to compete successfully against present
or future competitors or that competitive pressures faced by the Company will
not have a material adverse effect on the Company's business, financial
condition and results of operations.
EMPLOYEES
As of March 31, 1999, the Company employed 803 persons, 536 of which were
employed on a full-time basis and 267 of which were employed on a part-time
basis. The Company also from time to time employs part-time personnel. None of
the Company's employees is subject to a collective bargaining agreement. The
Company believes that its relations with its employees are satisfactory.
PROPERTIES
The Company's corporate headquarters and additional administrative offices
are located at three premises in Manhattan Beach, California, and consist of an
aggregate of approximately 37,000 square feet. The leases on the premises expire
between February 2002 and February 2008 and the current aggregate annual rent is
approximately $930,000.
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The Company also leases space for its distribution centers and its retail
stores. These facilities aggregate approximately 815,000 square feet, with an
annual aggregate base rental of approximately $7.0 million, plus, in some cases,
a percentage of the store's gross sales in excess of the base annual rent. The
terms of these leases vary as to duration and rent escalation provisions. The
Company has also signed leases for retail stores expected to be opened in 1999.
In general, the leases expire between April 2000 and December 2008 and provide
for rent escalations tied to either increases in the lessor's operating expenses
or fluctuations in the consumer price index in the relevant geographical area.
LEGAL PROCEEDINGS
The Company occasionally becomes involved in litigation arising from the
normal course of business. Management believes that any liability with respect
to pending legal actions, individually or in the aggregate, will not have a
material adverse effect on the Company's business, financial condition and
results of operations.
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MANAGEMENT
DIRECTORS, EXECUTIVE OFFICERS AND KEY EMPLOYEES
The following table sets forth the name, age as of March 31, 1999, and
position with the Company of all directors and executive officers and certain
key employees of the Company:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Directors and Executive Officers:
Robert Greenberg......................... 59 Chairman of the Board and Chief Executive
Officer
Michael Greenberg........................ 36 President and Director
David Weinberg........................... 48 Executive Vice President, Chief Financial
Officer and Director
Philip Paccione.......................... 37 General Counsel and Secretary
John Quinn(1)(2)......................... 48 Nominated Director
Richard Siskind(1)(2).................... 53 Nominated Director
Key Employees:
Marvin Bernstein......................... 52 Vice President, International Sales
Martin Brown............................. 37 Vice President, Corporate Imaging
Greg Christopulos........................ 41 Vice President, Finance
Larry Clark.............................. 42 Vice President, Production and Sourcing
Lynda Cumming............................ 39 Vice President, Allocation and Production
Paul Galliher............................ 49 Vice President, Distribution
Kathy Garber............................. 39 Vice President, Product Development
Jason Greenberg.......................... 29 Vice President, Visual Imaging
Jeffrey Greenberg........................ 31 Vice President, Electronic Media
Scott Greenberg.......................... 38 Vice President, Visual Merchandising
Geric Johnson............................ 47 Vice President, Direct Marketing
Michelle Kelchak......................... 35 Vice President, Design
Mark Nason............................... 37 Vice President, Retail and Merchandising
Ralph Vendetti........................... 43 Vice President, Sales
</TABLE>
- ---------------
(1) Member of the Compensation Committee.
(2) Member of the Audit Committee.
Robert Greenberg has been the Chairman of the Board and Chief Executive
Officer of the Company since October 1993. From 1979 to 1992, Mr. Greenberg was
the Chairman of the Board and President of L.A. Gear, an athletic and casual
footwear and apparel company. Mr. Greenberg is a member of the Board of
Directors of Stage II Apparel Corp. (AMEX:SA).
Michael Greenberg has been the President and a director of the Company
since its inception in 1992 and from June 1992 to October 1993 he was Chairman
of the Board. From 1989 to 1992, Mr. Greenberg was the National Sales Manager of
L.A. Gear. Previously, from 1986 to 1989, he was the Regional Sales Manager of
L.A. Gear for the West Coast, and from 1984 to 1986, he was an account
representative for the West Coast at L.A. Gear.
David Weinberg has been Chief Financial Officer of the Company since
October 1993 and Executive Vice President and a director since July 1998. From
June 1989 to September 1992, Mr. Weinberg was Vice President, Credit/Collection
at L.A. Gear.
Philip Paccione has been General Counsel since May 1998 and Secretary of
the Company since July 1998. Before joining the Company and from June 1997, Mr.
Paccione was an attorney at the law firm of Riordan & McKinzie, located in Los
Angeles, and from May 1996 to June 1997 he was a sole
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practitioner. Mr. Paccione also practiced law at the law firm of Gartner & Young
from December 1994 to May 1996 and at the law firm of Kelley, Drye & Warren from
June 1991 to December 1994.
John Quinn will become a director of the Company upon completion of the
Offering. Since January 1995, Mr. Quinn has been a principal of the law firm of
Riordan & McKinzie, a professional corporation, and before that, since 1987, he
was a partner at the law firm of Kelley Drye & Warren. Mr. Quinn received his
J.D. from Albany Law School of Union University and an LL.M from New York
University.
Richard Siskind will become a director of the Company upon the completion
of the Offering. Mr. Siskind has been President, Chief Executive Officer and a
director of Stage II Apparel Corp. (AMEX:SA) since May 1998. In 1991, Mr.
Siskind founded R. Siskind & Company, a business which purchases brand name
men's and women's apparel and accessories and redistributes those items to
off-price retailers, and he is the sole shareholder, a director, Chief Executive
Officer and President.
Marvin Bernstein has been the Vice President, International Sales of the
Company since May 1997 and joined the Company in June 1993 as Vice President of
Key Accounts. In December 1996, Mr. Bernstein became Vice President of
International Sales and Licensing.
Martin Brown has been the Vice President, Corporate Imaging of the Company
since June 1998, and joined the Company in March 1993 as Director of Special
Projects. From October 1992 to 1993 Mr. Brown was an independent marketing
consultant.
Greg Christopulos has been Vice President, Finance of the Company since
September 1998. From January 1988 to August 1998, he was at KPMG LLP, where he
had been a Senior Manager since July 1994. Mr. Christopulos is a Certified
Public Accountant.
Larry Clark has been the Vice President, Production and Sourcing of the
Company since March 1995 and joined the Company in August 1993 as Vice President
of Product Development/ Production, International Division. From 1992 to 1993,
Mr. Clark was Vice President, Operations at ALAD Inc., an apparel company, and
from 1985 from 1992 he was Vice President of Research and Development at L.A.
Gear. Prior to that, Mr. Clark was at Footlocker-Kinney Shoe Corp. for 10 years.
Lynda Cumming has been the Vice President, Allocation and Production of the
Company since October 1992. From 1988 to 1992, Ms. Cumming was Vice President,
Allocation at L.A. Gear.
Paul Galliher has been the Vice President, Distribution of the Company
since May 1994. Prior to that, from August 1989, he was a Director of
Distribution at L.A. Gear.
Kathy Garber has been the Vice President, Product Development of the
Company since June 1998 and joined the Company in May 1993 as the Children's
Product Manager. In September 1993, she became Product Development Manager and
in June 1996 she became Director of Product Development. Ms. Garber was also a
buyer at Robinson's-May.
Jason Greenberg has been the Vice President, Visual Imaging of the Company
since January 1998 and from June 1992 to July 1998 he was a director. From June
1996 to January 1998, Mr. Greenberg was Advertising Director and from June 1994
he held a product development position at the Company.
Jeffrey Greenberg has been Vice President, Electronic Media of the Company
since January 1998. From June 1992 to October 1993 Mr. Greenberg was Chief
Financial Officer of the Company and from June 1992 to July 1998 he was Chief
Operating Officer, Secretary and a director of the Company. From 1990 to 1992,
he was involved in operations and marketing at L.A. Gear.
Scott Greenberg has been Vice President, Visual Merchandising of the
Company since January 1998. Prior to that, from June 1994, he was in charge of
International Marketing at the Company and held a position in marketing at L.A.
Gear from 1986 to 1990. From January 1993 to May 1994 Mr. Greenberg owned and
operated a restaurant.
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Geric Johnson has been the Vice President, Direct Marketing of the Company
since January 1998. From January 1990 until January 1998, Mr. Johnson held
various positions with Frederick's of Hollywood, Inc., a retailer of women's
apparel. While at Frederick's of Hollywood he held the positions of President,
Executive Vice President, General Manager and Vice President of Operations, and
his responsibilities included running the day-to-day operations of the Mail
Order Division.
Michelle Kelchak has been the Vice President, Design of the Company since
June 1998. Ms. Kelchak joined the Company in July 1992 as Head Designer, and
from January 1995 through May 1998 served as the Company's Design Director.
Prior to joining the Company, Ms. Kelchak was a designer of men's, women's and
children's footwear at L.A. Gear.
Mark Nason has been the Vice President, Retail and Merchandising of the
Company since January 1998 and joined the Company in December 1993 as Director
of Merchandising and Retail Development. From January 1981 through November
1993, Mr. Nason was employed at Track 'n Trail in various capacities, including
General Merchandising Manager, Director of Visual Merchandising and Buyer.
Ralph Vendetti has been the Vice President, Sales of the Company since June
1997 and joined the Company in April 1995 as National Sales Manager. Before
that, since 1989, Mr. Vendetti was with KEDS, a division of The Stride Rite
Corporation, most recently as National Accounts Manager handling accounts such
as Macy's, Jordan Marsh, Kinney, Bloomingdale's, Federated Corp. and
Robinson's-May. Mr. Vendetti was also employed as a buyer for Macy's for 10
years.
As referenced above, a number of the Company's executive officers,
directors and key employees were previously employed by L.A. Gear. During the
time of their employment and thereafter, L.A. Gear was subject to many of the
uncertainties applicable to the footwear industry. From its fiscal 1985 through
mid-fiscal 1990, L.A. Gear experienced a period of rapid growth in revenues and
earnings and thereafter periods of declining sales and losses. In late 1991, an
outside investor group directed several significant changes in L.A. Gear's
management and board of directors. In response to the changes, Robert Greenberg
and a number of L.A. Gear's other members of management and employees, some of
whom are currently employed by the Company, resigned from L.A. Gear in January
1992. Six years later, in January 1998, L.A. Gear filed for reorganization in
bankruptcy court.
Upon the completion of the Offering, the Company's Board of Directors will
consist of five members. The Board of Directors is divided into three classes.
Class I Directors will serve until the annual meeting of stockholders in 2000
and thereafter for the terms of three years until their successors have been
elected and qualified. Class II Directors will serve until the annual meeting of
stockholders in 2001 and thereafter for terms of three years until their
successors have been elected and qualified. Class III Directors will serve until
the annual meeting of stockholders in 2002 and thereafter for terms of three
years until their successors have been elected and qualified. Robert Greenberg
is a Class I Director; Michael Greenberg and David Weinberg are Class II
Directors; and Richard Siskind and John Quinn will be Class III Directors.
Directors are elected annually to serve until the next annual meeting of
stockholders and until their successors are elected and qualified. The Company
intends to pay its non-employee directors annual compensation of $15,000 for
their services paid quarterly beginning upon the completion of the Offering. In
addition, non-employee directors will receive a fee of $1,000 for each meeting
attended. Non-employee directors attending any committee meeting will receive an
additional fee of $750 for each committee meeting attended, unless the committee
meeting is held on the day of a meeting of the Board of Directors, in which case
they will receive no additional compensation for the committee meeting.
Non-employee directors will also be reimbursed for reasonable costs and expenses
incurred for attending any director and committee meetings. Officers of the
Company who are directors will not be paid any directors fees. Concurrently with
the Offering, the Company will grant options to purchase shares
of Class A Common Stock under its Stock Option Plan to each of its non-employee
directors at an exercise price equal to the initial public offering price. See
"-- Stock Options." Robert Greenberg is the father of Michael, Jason, Jeffrey
and Scott
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<PAGE> 63
Greenberg; other than the foregoing, no family relationships exist between any
of the directors or executive officers or key employees of the Company.
The Company's Board of Directors has established an Audit Committee and a
Compensation Committee. The Audit Committee will be comprised of Richard Siskind
and John Quinn and will be responsible for making recommendations concerning the
engagement of independent certified public accountants, approving professional
services provided by the independent certified public accountants and reviewing
the adequacy of the Company's internal accounting controls. The Compensation
Committee will be comprised of Messrs. Siskind and Quinn and will be responsible
for recommending to the Board of Directors all officer salaries, management
incentive programs and bonus payments.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Company did not have a Compensation Committee in 1998. Robert Greenberg
and Michael Greenberg participated in deliberations concerning compensation of
executive officers during 1998. Robert Greenberg serves on the board of
directors and the compensation committee of Stage II Apparel Corp., whose
President and Chief Executive Officer is Richard Siskind. Other than as
described above, none of the executive officers of the Company has served on the
board of directors or on the compensation committee of any other entity which
had officers who served or will serve upon the closing of the Offering on the
Company's Board of Directors or on the Company's Compensation Committee.
EXECUTIVE COMPENSATION
Summary Compensation Table
The following table sets forth information concerning the annual and
long-term compensation earned by the Company's Chief Executive Officer and each
of the other executive officers whose annual salary and bonus during 1997 and
1998 exceeded $100,000 (the "Named Executive Officers").
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
----------------------
ANNUAL COMPENSATION AWARDS PAYOUTS
------------------------------------ ---------- ---------
OTHER ANNUAL SECURITIES LTIP
COMPENSATION UNDERLYING PAYOUTS ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY($) BONUS($) ($)(1) OPTIONS(#) ($)(2) COMPENSATION($)
--------------------------- ---- --------- --------- ------------ ---------- --------- ---------------
<S> <C> <C> <C> <C> <C> <C> <C>
Robert Greenberg.............. 1998 -- 2,079,943 26,518 -- -- 5,038(3)
Chairman of the Board and 1997 -- 1,560,877 14,518 -- -- 6,649(3)
Chief Executive Officer
Michael Greenberg............. 1998 300,000 -- 11,744 -- 1,013,769 11,859(4)
President 1997 300,000 -- 8,962 -- 205,250 12,696(4)
David Weinberg................ 1998 177,800 -- 2,000 278,142 259,180 9,838(5)
Executive Vice President and 1997 175,000 -- 4,800 -- 136,830 12,626(5)
Chief Financial Officer
</TABLE>
- ---------------
(1) Represents the amount of an automobile lease for the benefit of each
officer. With respect to Robert Greenberg and David Weinberg, excludes
rental payments of $12,000 and $18,000, respectively, in 1998 and $12,000
and $18,000, respectively, in 1997 made by the Company directly to landlords
regarding properties used primarily for corporate purposes but which are
leased under the individuals' names.
(2) With respect to 1997, represents payment of a bonus under the Company's 1996
Incentive Compensation Plan based on the increase of the Company's net sales
from 1996 to 1997 and with respect to 1998, represents payment of a bonus
based on the increase of the Company's net sales from 1996 to 1998. The
bonuses for Michael Greenberg and David Weinberg under the Company's 1996
Incentive Compensation Plan were 0.3% and 0.2% in 1997, respectively, and
0.4% and 0.1% in 1998, respectively, of the increase in net sales volumes,
respectively.
(3) Represents health and life insurance payments for 1998 and 1997,
respectively.
(4) Represents health and life insurance payments of $7,059 and $9,601 and a
$4,800 and a $3,095 contribution by the Company under the Company's 401(k)
Plan for 1998 and 1997, respectively.
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<PAGE> 64
(5) Represents health and life insurance payments of $5,038 and $9,601 and a
$4,800 and a $3,025 contribution by the Company under the Company's 401(k)
Plan for 1998 and 1997, respectively.
Employment Agreements
Each of Messrs. Robert Greenberg, Michael Greenberg and David Weinberg will
enter into an employment agreement with the Company, which will be effective as
of the consummation of the Offering. The employment agreements will each have an
initial term expiring three years from the closing of the Offering. Each officer
will be entitled to an annual base salary, an annual bonus based on the
Company's return on equity and a discretionary bonus as determined by the
Compensation Committee of the Board of Directors. The Company and each officer
are currently negotiating compensation, which will be determined prior to the
closing of the Offering.
Each officer will agree not to compete, directly or indirectly, with the
Company or disclose confidential information regarding the Company during the
term of the agreement; provided that the officer may own less than 5% of the
stock of a public company that competes with the Company. The employment
agreements will entitle the executives to participate in the Company's Stock
Option Plan and to receive certain insurance and other employee plans and
benefits established by the Company for its executive employees.
If an officer's employment agreement is terminated by the officer without
good reason, by mutual agreement, upon death of the officer, disability of the
officer or for cause, which includes any dishonest act, commission of a crime,
material injury to the Company's financial condition or business reputation or
malfeasance, misfeasance or non-feasance, then the officer will receive, through
the date of termination, (i) his base salary, (ii) any bonus due and (iii) any
benefits under the agreement. If the officer is terminated without cause or the
officer terminates the employment agreement for good reason, which includes the
Company's breach of a material term without cure or diminution of the officer's
duties without his consent, then the officer will receive, for the remainder
term of the agreement, (i) his base salary, (ii) performance-based bonus and
discretionary bonus and (iii) any benefits under the agreement. The Company has
agreed that upon any merger, reorganization, sale or disposition of assets or
otherwise, the successor company will be required to assume each employment
agreement.
STOCK OPTIONS
1998 Stock Option Plan
In January 1998, the Company's Board of Directors and stockholders adopted
the 1998 Stock Option, Deferred Stock and Restricted Stock Plan (the "Stock
Option Plan"), which provides for the grant of qualified incentive stock options
("ISOs") that meet the requirements of Section 422 of the Code, stock options
not so qualified ("NQSOs"), deferred stock and restricted stock awards
("Grants"). The Stock Option Plan is administered by a committee of directors
appointed by the Board of Directors (the "Committee"). ISOs may be granted to
the officers and key employees of the Company or any of its subsidiaries. The
exercise price for any ISO granted under the Stock Option Plan may not be less
than 100% (or 110% in the case of ISOs granted to an employee who is deemed to
own in excess of 10.0% of the outstanding Class A Common Stock) of the fair
market value of the shares of Class A Common Stock at the time the option is
granted. The exercise price for any NQSO granted under the Stock Option Plan may
not be less than 85.0% of the fair market value of the shares of Class A Common
Stock at the time the option is granted. The purpose of the Stock Option Plan is
to provide a means of performance-based compensation in order to attract and
retain qualified personnel and to provide an incentive to those whose job
performance affects the Company.
The Stock Option Plan authorizes the grant of options to purchase, and
Grants of, an aggregate of up to 5,215,154 shares of the Company's Class A
Common Stock. The number of shares reserved for issuance under the Stock Option
Plan is subject to anti-dilution provisions for stock splits, stock
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<PAGE> 65
dividends and similar events. If an option granted under the Stock Option Plan
expires or terminates, or a Grant is forfeited, the shares subject to any
unexercised portion of such option or Grant will again become available for the
issuance of further options or Grants under the Stock Option Plan.
Under the Stock Option Plan, the Company may make loans available to stock
option holders, subject to the Committee's approval, in connection with the
exercise of stock options granted under the Stock Option Plan. If shares of
Class A Common Stock are pledged as collateral for such indebtedness, such
shares may be returned to the Company in satisfaction of such indebtedness. If
so returned, such shares shall again be available for issuance in connection
with future stock options and Grants under the Stock Option Plan.
Unless previously terminated by the Board of Directors, no options or
Grants may be granted under the Stock Option Plan after January 14, 2008.
Options granted under the Stock Option Plan will become exercisable
according to the terms of the grant made by the Committee. Grants will be
subject to the terms and restrictions of the award made by the Committee. The
Committee has discretionary authority to select participants from among eligible
persons and to determine at the time an option or Grant is granted and in the
case of options, whether it is intended to be an ISO or a NQSO, and when and in
what increments shares covered by the option may be purchased. Under current
law, ISOs may not be granted to any individual who is not also an officer or
employee of the Company or any subsidiary.
The exercise price of any option granted under the Stock Option Plan is
payable in full (i) in cash, (ii) by surrender of shares of the Company's Class
A Common Stock already owned by the option holder having a market value equal to
the aggregate exercise price of all shares to be purchased including, in the
case of the exercise of NQSOs, restricted stock subject to a Grant under the
Stock Option Plan, (iii) by cancellation of indebtedness owed by the Company to
the optionholder, (iv) by a full recourse promissory note executed by the
optionholder or (v) by any combination of the foregoing. The terms of any
promissory note may be changed from time to time by the Board of Directors to
comply with applicable Internal Revenue Service or Securities and Exchange
Commission regulations or other relevant pronouncements.
The Board of Directors may from time to time revise or amend the Stock
Option Plan and may suspend or discontinue it at any time. However, no such
revision or amendment may impair the rights of any participant under any
outstanding option or Grant without such participant's consent or may, without
stockholder approval, increase the number of shares subject to the Stock Option
Plan or decrease the exercise price of a stock option to less than 100% of fair
market value on the date of grant (with the exception of adjustments resulting
from changes in capitalization), materially modify the class of participants
eligible to receive options or Grants under the Stock Option Plan, materially
increase the benefits accruing to participants under the Stock Option Plan or
extend the maximum option term under the Stock Option Plan.
In the event of a change of control, all stock options, restricted stock
and deferred stock will fully vest and any indebtedness incurred in connection
with the Stock Option Plan will be forgiven. A "change of control" occurs when
(i) any person becomes the beneficial owner, directly or indirectly, of 50% or
more of the combined voting power of the Company's securities, (ii) during any
consecutive two-year period, individuals who at the beginning of such period
constitute the Board, and any new director, with certain exceptions, who was
approved by at least two-thirds of the directors still in office who either were
directors at the beginning of the period or whose election or nomination for
election was previously so approved, cease for any reason to constitute at least
a majority of the Board of Directors, (iii) in some circumstances, the
stockholders approve a merger or consolidation, or (iv) the stockholders approve
the complete liquidation, sale or disposition of all or substantially all of the
Company's assets.
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<PAGE> 66
Options to acquire 1,390,715 shares of Class A Common Stock are outstanding
at an exercise price per share of $2.78. Of this amount, 278,142 were granted to
David Weinberg, of which 25.0% will vest on the consummation of the Offering,
and the balance will vest over the next three years. In addition, options to
purchase shares of Class A Common Stock are expected to be
granted to certain employees and non-employee directors of the Company on the
effective date of the Offering at an exercise price equal to the initial public
offering price, which options will vest ratably commencing one year from the
date of this Prospectus in 20.0% increments for any employees and officers, and
in 33.3% increments for non-employee directors. The options expire ten years
from the date of grant.
OPTION GRANTS AND YEAR-END OPTION VALUES
The following table sets forth information concerning individual grants of
stock options during 1998 to the Named Executive Officers:
OPTIONS GRANTED IN 1998
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS POTENTIAL REALIZABLE
-------------------------------------------------------------- VALUE AT ASSUMED
NUMBER OF ANNUAL RATES OF STOCK
SECURITIES PERCENT OF PRICE APPRECIATION FOR
UNDERLYING TOTAL OPTIONS EXERCISE OPTION TERM(4)
OPTIONS GRANTED TO OR BASE EXPIRATION ----------------------
NAME GRANTED(#)(1) EMPLOYEES(2) PRICE($/SH)(3) DATE 5%($) 10%($)
---- ------------- ------------- -------------- ---------- ----- ------
<S> <C> <C> <C> <C> <C> <C>
Robert Greenberg..... -- -- -- -- -- --
Michael Greenberg.... -- -- -- -- -- --
David Weinberg....... 278,142 20.0% 2.78 1/14/08 486,283 1,232,337
</TABLE>
- ---------------
(1) Upon completion of the Offering, 25% of the options immediately vest and the
balance will vest over the next three years.
(2) The total number of options granted to the Company's employees during 1998
was 1,390,715.
(3) The exercise price per share of options granted represents the fair market
value of the underlying shares of Common Stock on the date the options were
granted.
(4) In order to comply with the rules of the Securities and Exchange Commission
(the "Commission"), the Company is including the gains or "option spreads"
that would exist for the respective options the Company granted to the Named
Executive Officers. The Company calculated these gains by assuming an annual
compound stock price appreciation of 5% and 10% from the date of the option
grant until the termination date of the option. These gains do not represent
the Company's estimate or projection of the future Class A Common Stock
price.
The following table sets forth the outstanding stock options as of December
31, 1998 of the Named Executive Officers.
YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES UNDERLYING VALUE OF UNEXERCISED
UNEXERCISED OPTIONS IN-THE-MONEY OPTIONS
AT DECEMBER 31, 1998(1) AT DECEMBER 31, 1998(2)
---------------------------------- ----------------------------------
NAME EXERCISABLE(#) UNEXERCISABLE($) EXERCISABLE($) UNEXERCISABLE($)
---- -------------- ---------------- -------------- ----------------
<S> <C> <C> <C> <C>
Robert Greenberg............ -- --
Michael Greenberg........... -- --
David Weinberg.............. -- 278,142 -- 484,000
</TABLE>
- ---------------
(1) Upon the completion of the Offering, 25% of the options immediately vest and
the balance will vest over the next three years.
(2) The value of the unexercised "in-the-money" options is based on the fair
market value as of December 31, 1998, as determined by the Board of
Directors, minus the exercise price, multiplied by the numbers of shares
underlying the option.
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<PAGE> 67
1998 EMPLOYEE STOCK PURCHASE PLAN
The Company's 1998 Employee Stock Purchase Plan (the "1998 Purchase Plan")
was adopted by the Board of Directors and the stockholders in July 1998. The
1998 Purchase Plan, which is intended to qualify under Section 423 of the Code,
contains consecutive, overlapping, twelve month offering periods. Each offering
period includes two six-month purchase periods. The offering periods generally
start on the first trading day on or after January 1 and July 1 of each year.
The initial offering period will commence on the date of the initial public
offering and expire on December 31, 1999. A total of 2,781,415 shares of Class A
Common Stock have been reserved for issuance under the 1998 Purchase Plan, plus
annual increases equal to the lesser of (i) 1,000,000 shares, (ii) 1% of the
outstanding shares of Class A Common Stock on such date, and (iii) such lesser
amount as may be determined by the Board of Directors.
Employees are eligible to participate if they are customarily employed by
the Company or any designated subsidiary for at least 35 hours per week and more
than five months in any calendar year. However, any employee who (i) immediately
after grant owns stock possessing 5.0% or more of the total combined voting
power or value of all classes of the capital stock of the Company or (ii) whose
rights to purchase stock under all employee stock purchase plans of the Company
accrue at a rate which exceeds $25,000 worth of stock for each calendar year may
not be granted an option to purchase stock under the 1998 Purchase Plan.
The 1998 Purchase Plan permits participants to purchase Class A Common
Stock through payroll deductions of up to 10.0% of the participant's
"compensation." Compensation is defined as the participant's base straight time
gross earnings, including commissions, payments for overtime, incentive bonuses
and performance bonuses. Amounts deducted and accumulated by the participant are
used to purchase shares of Class A Common Stock at the end of each purchase
period. The price of stock purchased under the 1998 Purchase Plan is 85.0% of
the lower of the fair market value of the Class A Common Stock at the beginning
of the offering period or at the end of the purchase period. The maximum number
of shares a participant may purchase during a single offering period is
determined by dividing $25,000 by the fair market value of a share of the
Company's Class A Common Stock on the first day of the offering period. In the
event the fair market value at the end of a purchase period is less than the
fair market value at the beginning of the offering period, the participants will
be withdrawn from the current offering period following exercise and
automatically re-enrolled in a new offering period. Participants may end their
participation at any time during an offering period, and they will be paid their
payroll deductions to date. Participation ends automatically upon termination of
employment with the Company.
Rights granted under the 1998 Purchase Plan are not transferable by a
participant other than by will, the laws of descent and distribution, or as
otherwise provided under the 1998 Purchase Plan.
The 1998 Purchase Plan provides that, in the event of a merger of the
Company with or into another corporation or a sale of all or substantially all
of the Company's assets, each outstanding option may be assumed or substituted
for by the successor corporation. If the successor corporation refuses to assume
or substitute for the outstanding options, the offering period then in progress
will be shortened and a new purchase date will be set so that shares of Class A
Common Stock are purchased with the participant's accumulated payroll deductions
prior to the effective date of such transaction.
The Board of Directors has the authority to amend or terminate the 1998
Purchase Plan, except that no such action may adversely affect any outstanding
rights to purchase stock under the 1998 Purchase Plan, provided that the Board
of Directors may terminate an offering period on any exercise date if the Board
determines that the termination of the 1998 Purchase Plan is in the best
interests of the Company and its stockholders. Notwithstanding anything to the
contrary, the Board of Directors may in its sole discretion amend the 1998
Purchase Plan to the extent necessary and desirable to avoid unfavorable
financial accounting consequences by altering the purchase price for any
offering period, shortening any offering period or allocating remaining shares
among the participants. Unless
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<PAGE> 68
sooner terminated by the Board of Directors, the 1998 Purchase Plan will
terminate on June 30, 2008.
401(k) PLAN
The Company has in place a contributory retirement plan (the "401(k) Plan")
for all full time employees age 21 and older with at least 12 months of service,
which is designed to be tax deferred in accordance with the provisions of
Section 401(k) of the Code. The 401(k) Plan provides that each participant may
contribute up to 15.0% of his or her salary, and the Company may contribute to
the participant's plan account at the end of each plan year a percentage of
salary contributed by the participant. Under the 401(k) Plan, employees may
elect to enroll on January 1 and July 1 of any plan year, provided that they
have been employed for at least one year.
Subject to the rules for maintaining the tax status of the 401(k) Plan, an
additional Company contribution may be made at the Company's discretion. Company
matching contributions are made at the discretion of the Company. The Company's
contributions to the 401(k) Plan in 1997 and 1998 were $93,000 and $242,000,
respectively.
LIMITATIONS ON DIRECTORS' LIABILITIES AND INDEMNIFICATION
The Company's Certificate of Incorporation provides that, except to the
extent prohibited by the DGCL, its directors shall not be personally liable to
the Company or its stockholders for monetary damages for any breach of fiduciary
duty as directors of the Company. Under Delaware law, the directors have
fiduciary duties to the Company that are not eliminated by this provision of the
Certificate of Incorporation and, in appropriate circumstances, equitable
remedies such as injunctive or other forms of non-monetary relief will remain
available. In addition, each director will continue to be subject to liability
under Delaware law for breach of the director's duty of loyalty to the Company
for acts or omissions that are found by a court of competent jurisdiction to be
not in good faith or involving intentional misconduct, for knowing violations of
law, for actions leading to improper personal benefit to the director and for
payment of dividends or approval of stock repurchases or redemptions that are
prohibited by Delaware law. This provision also does not affect the director's
responsibilities under any other laws, such as the federal securities laws or
state or federal environmental laws. In addition, the Company intends to
maintain liability insurance for its officers and directors.
Section 145 of the DGCL permits the Company to, and the Certificate of
Incorporation provides that the Company shall, indemnify each person who was or
is a party or is threatened to be made a party to any threatened, pending or
completed action, suit or proceeding, whether civil, criminal, administrative or
investigative, by reason of the fact that he or she is or was, or has agreed to
become, a director or officer of the Company, or is or was serving, or has
agreed to serve, at the request of the Company, as a director, officer or
trustee of, or in a similar capacity with, another corporation, partnership,
joint venture, trust or other enterprise (including any employee benefit plan),
or by reason of any action alleged to have been taken or omitted in such
capacity, against all expenses (including attorneys' fees), judgments, fines and
amounts paid in settlement actually and reasonably incurred by him or on his
behalf in connection with such action, suit or proceeding and any appeal
therefrom. Such right of indemnification shall inure to such individuals whether
or not the claim asserted is based on matters that antedate the adoption of the
Certificate of Incorporation. Such right of indemnification shall continue as to
a person who has ceased to be a director or officer and shall inure to the
benefit of the heirs and personal representatives of such a person. The
indemnification provided by the Certificate of Incorporation shall not be deemed
exclusive of any other rights that may be provided now or in the future under
any provision currently in effect or hereafter adopted by the Certificate of
Incorporation, by any agreement, by vote of stockholders, by resolution of
directors, by provision of law or otherwise. Insofar as indemnification for
liabilities arising under the Securities Act may be permitted to directors of
the Company pursuant to the foregoing provision, or otherwise, the Company has
been advised that in the opinion of the Securities and Exchange
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<PAGE> 69
Commission such indemnification is against public policy as expressed in the
Securities Act and is, therefore, unenforceable. Section 102(b)(7) of the DGCL
permits a corporation to eliminate or limit the personal liability of a director
to the corporation or its stockholders for monetary damages for breach of
fiduciary duty as a director, provided that such provision shall not eliminate
or limit the liability of a director (i) for any breach of the director's duty
of loyalty to the corporation or its stockholders, (ii) for acts or omissions
not in good faith or which involve intentional misconduct or a knowing violation
of law, (iii) under Section 174 of the DGCL relating to unlawful dividends,
stock purchases or redemptions or (iv) for any transaction from which the
director derived an improper personal benefit. Section 102(b)(7) of the DGCL is
designed, among other things, to encourage qualified individuals to serve as
directors of Delaware corporations. The Company believes this provision will
assist it in securing the services of qualified directors who are not employees
of the Company. This provision has no effect on the availability of equitable
remedies, such as injunction or rescission. If equitable remedies are found not
to be available to stockholders in any particular case, stockholders may not
have any effective remedy against actions taken by directors that constitute
negligence or gross negligence.
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CERTAIN TRANSACTIONS
At December 31, 1996 and 1997, the Company had approximately $13.3 million
outstanding under an unsecured note payable to the Greenberg Family Trust of
which Robert Greenberg, Chairman of the Board and Chief Executive Officer of the
Company, and M. Susan Greenberg, Robert Greenberg's wife, are trustees. From
January 1, 1997 through June 1998, the note bore interest at 8.0% per annum and
was due upon demand after January 1, 1996. The Greenberg Family Trust agreed not
to call the note prior to January 1, 1999. In June 1998, the Company issued a
$13.3 million term note under its credit facility with Heller Financial, Inc. to
repay the indebtedness to the Greenberg Family Trust. In December 1998, in
connection with the amendment and restatement of the Company's credit facility
with Heller Financial, Inc., the note was refinanced by the Greenberg Family
Trust into the Subordinated Note and the Unsubordinated Note. At December 31,
1998, the Company repaid approximately $1.0 million due under the Unsubordinated
Note. The Subordinated and Unsubordinated Notes each bear interest at the prime
rate (7.75% at December 31, 1998) and are due on demand. The Greenberg Family
Trust agreed not to call the Subordinated Note prior to January 2000. The
Company recorded interest expense of approximately $1.1 million, $1.2 million
and $540,000 related to the notes during the years ended December 31, 1996, 1997
and 1998, respectively. The Company intends to use a portion of its net proceeds
of the Offering to repay the notes owed to the Greenberg Family Trust.
The Company has periodically advanced to the Greenberg Family Trust all or
a portion of the interest payments due on the indebtedness to the Greenberg
Family Trust. During the years ended December 31, 1996, 1997 and 1998, the
Company advanced approximately $220,000, $301,000 and $540,000, of such interest
payments, respectively. The Greenberg Family Trust intends to repay all
outstanding amounts on or before the closing of the Offering.
During the years ended December 31, 1996, 1997 and 1998, the Company
declared S Corporation distributions of $112,000, $3.2 million and $7.9 million,
respectively, of which the amounts indicated below were paid to the following
holders of 5% or more of the Company's Class B Common Stock:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------
NAME OF STOCKHOLDER 1996 1997(1) 1998(2)
------------------- ------- ---------- ----------
<S> <C> <C> <C>
The Greenberg Family Trust............ $72,387 $2,102,100 $5,148,000
Michael Greenberg..................... 11,136 323,400 792,000
Jason Greenberg(3).................... 5,568 161,700 396,000
Jeffrey Greenberg(4).................. 5,568 161,700 396,000
Joshua Greenberg...................... 5,568 161,700 396,000
Jennifer Greenberg.................... 5,568 161,700 396,000
</TABLE>
- ---------------
(1) At January 1, 1998, the Company had distributions payable, bearing interest
at 5% per annum, payable as follows: the Greenberg Family Trust -- $227,209;
Michael Greenberg -- $75,211; Jason Greenberg -- $56,526; Jeffrey
Greenberg -- $18,636; Joshua Greenberg -- $55,478; and Jennifer
Greenberg -- $63,813.
(2) At December 31, 1998, the Company had distributions payable, bearing
interest at 5% per annum, payable as follows: the Greenberg Family
Trust -- $264,522; Michael Greenberg -- $108,463; Jason
Greenberg -- $63,715; Joshua Greenberg -- $70,919; and Jennifer
Greenberg -- $72,273.
(3) Jason Greenberg was formerly a director of the Company.
(4) Jeffrey Greenberg was formerly the Chief Operating Officer and a director of
the Company.
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<PAGE> 71
In January 1999, the Company declared the January 1999 Distribution
consisting of its "Cross-Colours" trademark to the Greenberg Family Trust,
Michael Greenberg, Jason Greenberg, Jeffrey Greenberg, Joshua Greenberg and
Jennifer Greenberg. The Company valued this distribution at $350,000. The
remaining stockholders received cash in the aggregate amount of $18,421. The
following distributions were made to the holders of 5% or more of the Company's
Class B Common Stock:
<TABLE>
<CAPTION>
PERCENTAGE INTEREST IN VALUE OF
NAME OF STOCKHOLDER THE TRADEMARK PERCENTAGE INTEREST
------------------- ---------------------- -------------------
<S> <C> <C>
The Greenberg Family Trust.......... 68.3% $239,474
Michael Greenberg................... 10.5 36,842
Jason Greenberg..................... 5.3 18,421
Jeffrey Greenberg................... 5.3 18,421
Joshua Greenberg.................... 5.3 18,421
Jennifer Greenberg.................. 5.3 18,421
</TABLE>
The stockholders who received an interest in the trademark sold all of
their rights in the trademark to Stage II Apparel Corp., of which Robert
Greenberg, Chairman of the Board and Chief Executive Officer of the Company, and
Richard Siskind, a director of the Company, are each directors. In connection
with the sale, the Greenberg Family Trust and Michael Greenberg received 140,000
shares and 20,000 shares of Stage II Apparel Corp., respectively, and Jeffrey
Greenberg, Jason Greenberg, Joshua Greenberg and Jennifer Greenberg each
received 10,000 shares. The Company currently licenses under a ten year license
agreement the trademark from Stage II Apparel Corp. and pays a royalty of 1% of
the wholesale price of all footwear sold by the Company with the trademark. For
the years ended December 31, 1997 and 1998, the Company received royalty fees of
$0 and $20,000 for the trademark "Cross Colours." The Company currently does not
intend to materially exploit the "Cross Colours" trademark under the
above-described license agreement.
As a result of a tax refund from the payment of taxes on the Company's
earnings, the Company received a recovery of distributions from stockholders of
$600,000 for the year ended December 31, 1996.
In April 1999, the Company will make the April Tax Distribution consisting
of the first installment of Federal income taxes payable on S Corporation
earnings for 1998. It is estimated that the April Tax Distribution will be $3.5
million and will be paid to the following holders of 5% or more of the Company's
Class B Common Stock:
<TABLE>
<CAPTION>
AMOUNT OF APRIL
NAME OF STOCKHOLDER TAX DISTRIBUTION
------------------- ----------------
<S> <C>
The Greenberg Family Trust.................................. $ 66,000
Michael Greenberg........................................... 813,000
Jason Greenberg............................................. 521,600
Jeffrey Greenberg........................................... 597,400
Joshua Greenberg............................................ 519,600
Jennifer Greenberg.......................................... 511,600
</TABLE>
The Company intends to use a portion of the net proceeds of the Offering to
pay (i) the Final 1998 Distribution consisting of the final installment of
Federal income taxes payable on S Corporation earnings for 1998, (ii) the Final
Tax Distribution consisting of income taxes payable on S Corporation earnings
from January 1, 1999 through the date of termination of the Company's S
Corporation status and (iii) the Final S Corporation Distribution in an amount
designed to constitute the substantial portion of the Company's remaining
undistributed accumulated taxable S Corporation earnings through the date of
termination of the Company's S Corporation status. It is estimated that the
amount of the Final 1998 Distribution will be $7.6 million, all of which will be
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<PAGE> 72
paid to the Greenberg Family Trust. It is estimated that the amount of the Final
Tax Distribution will be $3.4 million, and that the amount of the Final S
Corporation Distribution will be $22.0 million.
The Final Tax Distribution and the Final S Corporation Distribution will be
paid to the holders of 5% or more of the Company's Class B Common Stock:
<TABLE>
<CAPTION>
FINAL TAX FINAL S CORPORATION
NAME OF STOCKHOLDER DISTRIBUTION DISTRIBUTION
------------------- ------------ -------------------
<S> <C> <C>
The Greenberg Family Trust.................................. $2,210,000 $13,849,000
Michael Greenberg........................................... 340,000 2,497,000
Jason Greenberg............................................. 170,000 1,133,400
Jeffrey Greenberg........................................... 170,000 1,057,600
Joshua Greenberg............................................ 170,000 1,135,400
Jennifer Greenberg.......................................... 170,000 1,143,400
</TABLE>
In connection with the Offering and the termination of the Company's S
Corporation tax status, the Company entered into a tax indemnification agreement
with each of its stockholders. The agreements provide that the Company will
indemnify and hold harmless each of the stockholders for Federal, state, local
or foreign income tax liabilities, and costs relating thereto, resulting from
any adjustment to the Company's income that is the result of an increase in or
change in character, of the Company's income during the period it was treated as
an S Corporation up to the benefit received by the Company in connection with
such adjustments. The agreements also provide that if there is a determination
that the Company was not an S Corporation prior to the Offering, the
stockholders will indemnify the Company for the additional tax liability arising
as a result of such determination up to the amount of the prior distributions to
the stockholders less the taxes payable with respect to such distributions.
Shares of Class A Common Stock issuable upon conversion of shares of Class
B Common Stock held by the Greenberg Family Trust and Michael Greenberg are
subject to certain registration rights. See "Description of Capital
Stock -- Registration Rights."
The Company intends to enter into employment agreements with certain
executive officers. See "Management -- Executive Compensation -- Employment
Agreements."
The Company believes that all of the foregoing transactions were on terms
no less favorable than those that could have been received from unrelated third
parties.
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<PAGE> 73
PRINCIPAL AND SELLING STOCKHOLDERS
The following table sets forth certain information regarding the beneficial
ownership of the Company's Class A and Class B Common Stock (assuming
consummation of the Recapitalization) by (i) each director and nominated
director of the Company, (ii) each of the Named Executive Officers, (iii) each
person known to the Company to be beneficial owner of more than 5% of either
class of the Common Stock and (iv) all directors and executive officers of the
Company as a group.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY SHARES BENEFICIALLY OWNED
OWNED PRIOR TO OFFERING(2) SHARES OF AFTER OFFERING(2)
-------------------------------------- CLASS A --------------------------------------
NUMBER OF NUMBER OF PERCENT OF COMMON NUMBER OF NUMBER OF PERCENT OF
NAME OF BENEFICIAL CLASS A CLASS B TOTAL VOTING STOCK CLASS A CLASS B TOTAL VOTING
OWNER(1)(2) SHARES SHARES POWER OFFERED(3) SHARES SHARES POWER
------------------ --------- ---------- ------------ ---------- --------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Robert Greenberg(3)........ -- 18,079,198(4) 65.0% 1,790,000 -- 16,289,198(4) 60.1%
Michael Greenberg.......... -- 2,781,415 10.0 -- -- 2,781,415 10.3
David Weinberg............. 69,535(5) -- * -- 69,535(5) -- *
Jeffrey Greenberg.......... -- 1,390,708 5.0 -- -- 1,390,708 5.1
Jason Greenberg............ -- 1,390,708 5.0 -- -- 1,390,708 5.1
Joshua Greenberg........... -- 1,390,708 5.0 -- -- 1,390,708 5.1
Jennifer Greenberg......... -- 1,390,708 5.0 -- -- 1,390,708 5.1
John Quinn................. -- -- -- -- -- -- --
Richard Siskind............ -- -- -- -- -- -- --
All directors, director
nominees and executive
officers as a group (6
persons)(5).............. 69,535(5) 20,860,613 75.0 1,790,000 69,535(5) 19,070,613 70.4
</TABLE>
- ---------------
* Less than 1.0%
(1) To the Company's knowledge, except as set forth in the footnotes to this
table and subject to applicable community property laws, each person named
in the table has sole voting and investment power with respect to the shares
of Common Stock set down opposite such person's name. Each of such persons
may be reached at 228 Manhattan Beach Boulevard, Manhattan Beach, California
90266.
(2) The percentage of total voting power is calculated assuming no shares of
Class A Common Stock and 27,814,155 shares of Class B Common Stock were
outstanding on March 31, 1999, as applicable, and 10,715,000 shares of Class
A Common Stock and 26,024,155 shares of Class B Common Stock will be
outstanding immediately following the completion of the Offering, as
applicable. Beneficial ownership is determined in accordance with the rules
of the Securities and Exchange Commission (the "Commission") and generally
includes voting or investment power with respect to the securities. In
computing the number of shares beneficially owned by a person and the
percentage ownership of that person, shares of Class A Common Stock subject
to options held by that person that are currently exercisable or exercisable
within 60 days of the effective date of the offering are deemed outstanding.
Such shares, however, are not deemed outstanding for the purposes of
computing the percentage ownership of each other person.
(3) Does not reflect the sale of the maximum number of shares which may be sold
by the Selling Stockholder if the over-allotment option is exercised in
full. If such option is exercised in full, the Greenberg Family Trust will
sell 1,607,250 shares of Class A Common Stock and Robert Greenberg will
beneficially own 57.2% of the voting power at such time. The Class B Common
Stock is convertible at any time into shares of the Class A Common Stock on
a share-for-share basis. See "Certain Transactions" for a description of
transactions between the Selling Stockholder and the Company.
(4) Represents shares of Class B Common Stock which Mr. Greenberg, Chief
Executive Officer and Chairman of the Board of the Company, is deemed to
beneficially own as a Trustee of the Greenberg Family Trust. M. Susan
Greenberg, Robert Greenberg's wife, is also a trustee of the Greenberg
Family Trust and is also deemed to beneficially own all shares held by the
Greenberg Family Trust.
(5) Represents shares of Class A Common Stock underlying options, which are
exercisable on the effective date of the Offering.
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<PAGE> 74
DESCRIPTION OF CAPITAL STOCK
The authorized capital stock of the Company consists of 160,000,000 shares
of Common Stock and 10,000,000 shares of Preferred Stock. Of the 160,000,000
shares of Common Stock authorized, 100,000,000 shares are designated as Class A
Common Stock and 60,000,000 shares are designated as Class B Common Stock. After
giving effect to the Offering, there will be 10,715,000 shares of Class A Common
Stock outstanding, 26,024,155 shares of Class B Common Stock outstanding and no
shares of Preferred Stock outstanding.
CLASS A COMMON STOCK AND CLASS B COMMON STOCK
General
The holders of Class A Common Stock and Class B Common Stock have identical
rights except with respect to voting, conversion and transfer. All shares of
Class B Common Stock outstanding upon the effective date of this Prospectus, and
the shares of Class A Common Stock offered hereby will, upon issuance and sale,
be fully paid and nonassessable.
Voting Rights
Holders of Class A Common Stock are entitled to one vote per share while
holders of Class B Common Stock are entitled to ten votes per share on all
matters to be voted on by stockholders. Holders of shares of Class A Common
Stock and Class B Common Stock are not entitled to cumulate their votes in the
election of directors. Generally, all matters to be voted on by stockholders
must be approved by a majority of the votes entitled to be cast by all shares of
Class A Common Stock and Class B Common Stock present in person or represented
by proxy, voting together as a single class, subject to any voting rights
granted to holders of any Preferred Stock. Except as otherwise provided by law
or in the Certificate of Incorporation, and subject to any voting rights granted
to holders of any outstanding Preferred Stock, amendments to the Certificate of
Incorporation must be approved by a majority of the votes entitled to be cast by
all shares of Class A Common Stock and Class B Common Stock present in person or
represented by proxy, voting together as a single class. However, amendments to
the Certificate of Incorporation that would alter or change the powers,
preferences or special rights of the Class A Common Stock so as to affect them
adversely also must be approved by a majority of the votes entitled to be cast
by the holders of the Class A Common Stock, voting as a separate class. Any
amendment to the Certificate of Incorporation to increase the authorized shares
of any class requires the approval of a majority of the votes entitled to be
cast by all shares of Class A Common Stock and Class B Common Stock present in
person or represented by proxy, voting together as a single class, subject to
the rights set forth in any series of Preferred Stock created as described
below.
Dividends, Distributions and Stock Splits
Holders of Class A Common Stock and Class B Common Stock will share equally
on a per share basis in any dividend declared by the Board of Directors, subject
to any preferential rights of any outstanding Preferred Stock.
Dividends or distributions consisting of shares of Class A Common Stock and
Class B Common Stock may be paid only as follows: (i) shares of Class A Common
Stock may be paid only to holders of Class A Common Stock, and shares of Class B
Common Stock may be paid only to holders of Class B Common Stock; and (ii) the
number of shares so paid will be equal on a per share basis with respect to each
outstanding share of Class A Common Stock and Class B Common Stock. In the case
of dividends or distributions consisting of other voting shares of the Company,
the Company will declare and pay such dividends in two separate classes of such
voting securities, identical in all respects, except that the voting rights of
each such security paid to the holders of the Class A Common Stock shall be
one-tenth of the voting rights of each such security paid to the holders of
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<PAGE> 75
Class B Common Stock, and such security paid to the holders of Class B Common
Stock shall convert into the security paid to the holders of the Class A Common
Stock upon the same terms and conditions applicable to the Class B Common Stock.
In the case of dividends or distributions consisting of securities convertible
into, or exchangeable for, voting securities of the Company, the Company will
provide that such convertible or exchangeable securities and the underlying
securities be identical in all respects, except that the voting rights of each
security underlying the convertible or exchangeable security paid to the holders
of the Class A Common Stock shall be one-tenth of the voting rights of each
security underlying the convertible or exchangeable security paid to the holders
of Class B Common Stock, and such underlying securities paid to the holders of
Class B Common Stock shall convert into the security paid to the holders of the
Class A Common Stock upon the same terms and conditions applicable to the Class
B Common Stock.
The Company may not reclassify, subdivide or combine shares of either class
of Common Stock without at the same time proportionally reclassifying,
subdividing or combining shares of the other class.
Conversion of Class B Common Stock
A share of Class B Common Stock will be convertible into a share of Class A
Common Stock on a share-for-share basis (i) at the option of the holder thereof
at any time, or (ii) automatically upon transfer to a person or entity which is
not a Permitted Transferee (as defined in the Certificate of Incorporation). In
general, Permitted Transferees will include (i) all holders of the Class B
Common Stock outstanding immediately prior to the Offering and (ii) any Person
(as defined in the Certificate of Incorporation) that is an affiliate, spouse or
descendent of any such holder, their estates or trusts for their benefit. The
Class A Common Stock has no conversion rights.
Liquidation
In the event of any dissolution, liquidation, or winding up of the affairs
of the Company, whether voluntary or involuntary, after payment of the debts and
other liabilities of the Company and making provision for the holders of
Preferred Stock, if any, the remaining assets of the Company will be distributed
ratably among the holders of the Class A Common Stock and the Class B Common
Stock, treated as a single class.
Mergers and Other Business Combinations
Upon a merger, combination, or other similar transaction of the Company in
which shares of Common Stock are exchanged for or changed into other stock or
securities, cash and/or any other property, holders of each class of Common
Stock will be entitled to receive an equal per share amount of stock,
securities, cash, and/or any other property, as the case may be, into which or
for which each share of any other class of Common Stock is exchanged or changed;
provided that in any transaction in which shares of capital stock are
distributed, such shares so exchanged for or changed into may differ as to
voting rights and certain conversion rights to the extent and only to the extent
that the voting rights and certain conversion rights of Class A Common Stock and
Class B Common Stock differ at that time.
Other Provisions
The holders of the Class A Common Stock and Class B Common Stock are not
entitled to preemptive rights. There are no redemption provisions or sinking
fund provisions applicable to the Class A Common Stock or the Class B Common
Stock.
PREFERRED STOCK
The Board of Directors has the authority, without further action by the
stockholders of the Company, to issue up to 10,000,000 shares of Preferred Stock
in one or more series, and to fix the
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<PAGE> 76
designations, rights, preferences, privileges, qualifications and restrictions
thereof including dividend rights, conversion rights, voting rights, rights and
terms of redemption, liquidation preferences and sinking fund terms, any or all
of which may be greater than the rights of the Common Stock. The Board of
Directors, without stockholder approval, can issue Preferred Stock with voting,
conversion and other rights which could adversely affect the voting power and
other rights of the holders of Common Stock. Preferred Stock could thus be
issued quickly with terms calculated to delay or prevent a change in control of
the Company or to make removal of management more difficult. In certain
circumstances, such issuance could have the effect of decreasing the market
price of the Common Stock. The issuance of Preferred Stock may have the effect
of delaying, deterring or preventing a change in control of the Company without
any further action by the stockholders including, but not limited to, a tender
offer to purchase Common Stock at a premium over then current market prices. The
Company has no present plan to issue any shares of Preferred Stock.
REGISTRATION RIGHTS
The Company has entered into a registration rights agreement with the
Greenberg Family Trust, of which Robert Greenberg, Chairman of the Board and
Chief Executive Officer, is a Trustee, and Michael Greenberg, President,
pursuant to which the Company has agreed that it will, on up to two separate
occasions per year, register up to one-third of the shares of Class A Common
Stock issuable upon conversion of their Class B Common Stock beneficially owned
as of the closing of the Offering by each such stockholder in any one year. The
Company also agreed that, if it shall cause to be filed with the Commission a
registration statement, each such stockholder shall have the right to include up
to one-third of the shares of Class A Common Stock issuable upon conversion of
their Class B Common Stock beneficially owned as of the closing of the Offering
by each of them in such registration statement subject to limitations due to
marketing conditions. All expenses of such registrations shall be at the
Company's expense. See "Certain Transactions."
ANTI-TAKEOVER EFFECTS OF PROVISIONS OF THE COMPANY'S CHARTER AND BYLAWS
The Company's Bylaws provide that the Board of Directors is divided into
three classes. Class I Directors will serve until the annual meeting of
stockholders in 2000 and thereafter for the terms of three years until their
successors have been elected and qualified. Class II Directors will serve until
the annual meeting of stockholders in 2001 and thereafter for terms of three
years until their successors have been elected and qualified. Class III
Directors will serve until the annual meeting of stockholders in 2002 and
thereafter for terms of three years until their successors have been elected and
qualified. Stockholders have no cumulative voting rights and the Company's
stockholders representing a majority of the shares of Common Stock outstanding
are able to elect all of the directors. The Company's Bylaws also provide that
any action that is required to be or may be taken at any annual or special
meeting of stockholders of the Company, may, if such action has been earlier
approved by the Board, be taken without a meeting, without prior notice and
without a vote, if a consent in writing, setting forth the action so taken,
shall be signed by the holders of outstanding stock having not less than the
minimum number of votes that would be necessary to authorize or take such action
at a meeting at which all shares entitled to vote thereon were present and
voted. The Bylaws provide that only the Company's Board of Directors or the
Chairman may call a special meeting of the stockholders.
The classification of the Board of Directors and lack of cumulative voting
makes it more difficult for the Company's existing stockholders to replace the
Board of Directors as well as for any other party to obtain control of the
Company by replacing the Board of Directors. Since the Board of Directors has
the power to retain and discharge officers of the Company, these provisions
could make it more difficult for existing stockholders or another party to
effect a change in management.
These and other provisions may have the effect of deterring hostile
takeovers or delaying changes in control or management of the Company. These
provisions are intended to enhance the likelihood of continued stability in the
composition of the Board of Directors and in the policies
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<PAGE> 77
furnished by the Board of Directors and to discourage certain types of
transactions that may involve an actual or threatened change of control of the
Company. These provisions are designed to reduce the vulnerability of the
Company to an unsolicited acquisition proposal. These provisions are also
intended to discourage certain tactics that may be used in proxy fights.
However, such provisions could have the effect of discouraging others from
making tender offers for the Company's shares and, as a consequence, they may
also inhibit fluctuations in the market price of the Company's shares that could
result from actual or rumored takeover attempts. Such provisions also may have
the effect of preventing changes in the management of the Company.
SECTION 203 OF THE DELAWARE GENERAL CORPORATION LAW
Generally, Section 203 of the DGCL prohibits a publicly held Delaware
corporation from engaging in a broad range of "business combinations" with an
"interested stockholder" (defined generally as a person owning 15.0% of more of
a corporation's outstanding voting stock) for three years following the date
such person became an interested stockholder unless (i) before the person
becomes an interested stockholder, the transaction resulting in such person
becoming an interested stockholder or the business combination is approved by
the board of directors of the corporation, (ii) upon consummation of the
transaction that resulted in the stockholder becoming an interested stockholder,
the interested stockholder owns at least 85.0% of the outstanding voting stock
of the corporation (excluding shares owned by directors who are also officers of
the corporation or shares held by employee stock plans that do not provide
employees with the right to determine confidentially whether shares held subject
to the plan will be tendered in a tender offer or exchange offer), or (iii) on
or after such date on which such person became an interested stockholder the
business combination is approved by the board of directors and authorized at an
annual or special meeting, and not by written consent, by the affirmative vote
of at least 66.6% of the outstanding voting stock excluding shares owned by the
interested stockholders. The restrictions of Section 203 do not apply, among
other reasons, if a corporation, by action of its stockholders, adopts an
amendment to its certificate of incorporation or bylaws expressly electing not
to be governed by Section 203, provided that, in addition to any other vote
required by law, such amendment to the certificate of incorporation or bylaws
must be approved by the affirmative vote of a majority of the shares entitled to
vote. Moreover, an amendment so adopted is not effective until twelve months
after its adoption and does not apply to any business combination between the
corporation and any person who became an interested stockholder of such
corporation on or prior to such adoption. The Certificate of Incorporation and
Bylaws do not currently contain any provisions electing not to be governed by
Section 203 of the DGCL.
Section 203 of the DGCL may discourage persons from making a tender offer
for or acquisitions of substantial amounts of the Class A Common Stock. This
could have the effect of inhibiting changes in management and may also prevent
temporary fluctuations in the Class A Common Stock that often result from
takeover attempts.
TRANSFER AGENT AND REGISTRAR
The Transfer Agent and Registrar for the Class A Common Stock is
.
SHARES ELIGIBLE FOR FUTURE SALE
Prior to the Offering, there has been no public market for the Class A
Common Stock. No prediction can be made as to the effect, if any, that market
sales of shares or the availability of shares for sale will have on the market
price prevailing from time to time. Sales of substantial amounts of Class A
Common Stock of the Company in the public market could adversely affect
prevailing market prices.
After the Offering, the Company will have outstanding 10,715,000 shares of
Class A Common Stock. In addition, the Company will have outstanding 26,024,155
shares of Class B Common Stock,
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<PAGE> 78
all of which will be convertible into Class A Common Stock on a share-for-share
basis at the election of the holder or upon transfer or disposition to persons
who are not Permitted Transferees (as defined in the Company's Certificate of
Incorporation). Of the outstanding shares, the 10,715,000 shares of Class A
Common Stock to be sold in the Offering will be freely tradeable without
restriction or further registration under the Securities Act unless purchased by
"affiliates" of the Company as that term is defined in Rule 144 under the
Securities Act.
The 26,024,155 shares of Class B Common Stock outstanding upon completion
of the Offering are "restricted securities" as that term is defined in Rule 144,
all of which will be eligible for sale under Rule 144 upon completion of the
Offering, subject to the lock-up described below. As described below, Rule 144
permits resales of restricted securities subject to certain restrictions.
In general, under Rule 144 as currently in effect, a person (or persons
whose shares are aggregated) who beneficially owned shares for at least one
year, including any person who may be deemed an "affiliate" of the Company (as
the term "affiliate" is defined under the Securities Act), would be entitled to
sell within any three month period a number of such shares that does not exceed
the greater of 1.0% of the shares of the Company's Class A Common Stock then
outstanding (107,150 shares immediately after the Offering) or the average
weekly trading volume in the Company's Class A Common Stock during the four
calendar weeks preceding the date on which notice of the sale is filed with the
Commission. A person who is not deemed to have been an "affiliate" of the
Company any time during the three months immediately preceding a sale and who
has beneficially owned shares for at least two years would be entitled to sell
such shares under Rule 144 without regard to the volume limitation described
above.
All executive officers, directors, stockholders and optionholders of the
Company (including the Selling Stockholder) have agreed that they will not,
without the prior written consent of BT Alex. Brown Incorporated on behalf of
the Underwriters (which consent may be withheld in its sole discretion) and
subject to certain limited exceptions, offer, pledge, sell, contract to sell,
sell any option or contract to purchase, sell short, purchase any option or
contract to sell, grant any option, right or warrant to purchase, lend or
otherwise transfer or dispose of, directly or indirectly, any shares of Common
Stock or any securities convertible into or exercisable or exchangeable for
Common Stock, or enter into any swap or similar agreement that transfers, in
whole or in part, any of the economic consequences of ownership of the Common
Stock, for a period commencing on the date of this Prospectus and continuing to
a date 180 days after such date; provided, however, that such restrictions do
not apply to shares of Class A Common Stock sold or purchased in the Offering or
to shares of Class A Common Stock purchased in the open market following the
Offering. BT Alex. Brown Incorporated, on behalf of the Underwriters, may, in
its sole discretion and at any time without notice, release all or any portion
of the securities subject to these lock up agreements. In addition, the Company
has agreed that, for a period of 180 days after the date of this Prospectus, it
will not, without the consent of BT Alex. Brown Incorporated, make any offering,
sale, short sale or other disposition of any shares of Common Stock of the
Company or other securities convertible into or exchangeable or exercisable for
shares of Common Stock or derivative of Common Stock (or agreement for such)
except for the grant of options to purchase shares of Class A Common Stock
pursuant to the Stock Option Plan and shares of Class A Common Stock issued
pursuant to the exercise of options granted under such plan and the grant of
purchase rights and issuance of shares under the 1998 Purchase Plan, provided
that such options and grants shall not vest, or the Company shall obtain the
written consent of the holder thereof not to transfer such shares, until the end
of such 180-day period. See "Management -- Stock Options" and "Underwriting."
In general, under Rule 701 under the Securities Act, any employee,
director, consultant or advisor of the Company who purchases shares from the
Company in connection with a compensatory stock or option plan or other written
compensatory agreement is entitled to resell such shares without having to
comply with the public information, holding period, volume limitation or notice
provisions of Rule 144, and affiliates are eligible to resell such shares 90
days after the effective date
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<PAGE> 79
of the Offering in reliance on Rule 144, subject to the provisions of the
180-day lock-up arrangements.
The Stock Option Plan authorizes the grant of options to purchase, and
awards of, an aggregate of up to 5,215,154 shares of the Company's Class A
Common Stock. Options to purchase 1,390,715 shares are outstanding. In addition,
options to purchase shares of Class A Common Stock are expected
to be granted to certain employees and non-employee directors of the Company on
the effective date of the Offering, which options will vest ratably commencing
one year from the date of this Prospectus in 20.0% increments for any employees
and officers, and in 33.3% increments for non-employee directors. An aggregate
of 2,781,415 shares are reserved for issuance under the 1998 Purchase Plan. The
Company intends to file a Registration Statement on Form S-8 covering all
outstanding options and shares reserved for issuance under the Stock Option Plan
and the 1998 Purchase Plan, thus permitting the resale of such shares in the
public market.
Certain stockholders beneficially owning an aggregate of 19,070,613 shares
of Class B Common Stock have certain registration rights relating to the shares
of Class A Common Stock issuable upon conversion of their Class B Common Stock.
If such holders, by exercising their registration rights, cause a large number
of shares to be registered and sold in the public market, such sales could have
a material adverse effect on the market price for the Company's Class A Common
Stock. See "Description of Capital Stock -- Registration Rights."
78
<PAGE> 80
UNDERWRITING
Subject to the terms and conditions of the Underwriting Agreement, the
Underwriters named below (the "Underwriters"), through their Representatives, BT
Alex. Brown Incorporated and Prudential Securities Incorporated have severally
agreed to purchase from the Company and the Selling Stockholder the following
respective numbers of shares of Class A Common Stock at the initial public
offering price less the underwriting discounts and commissions set forth on the
cover page of this Prospectus:
<TABLE>
<CAPTION>
UNDERWRITER NUMBER OF SHARES
----------- ----------------
<S> <C>
BT Alex. Brown Incorporated.................................
Prudential Securities Incorporated..........................
Total............................................. 10,715,000
==========
</TABLE>
The Underwriting Agreement provides that the obligations of the
Underwriters are subject to certain conditions precedent and that the
Underwriters will purchase all shares of the Class A Common Stock offered hereby
if any of such shares are purchased.
The Company and the Selling Stockholder have been advised by the
Representatives of the Underwriters that the Underwriters propose to offer the
shares of Class A Common Stock to the public at the initial public offering
price set forth on the cover page of this Prospectus and to certain dealers at
such price less a concession not in excess of $ per share. The Underwriters
may allow, and such dealers may reallow, a concession not in excess of $ per
share to certain other dealers. After the initial public offering, the offering
price and other selling terms may be changed by the Representatives of the
Underwriters. The expenses of the Offering, all of which are being paid by the
Company, are estimated to be $2,000,000.
The Selling Stockholder has granted an option to the Underwriters,
exercisable not later than 30 days after the date of this Prospectus, to
purchase up to 1,607,250 additional shares of Class A Common Stock at the public
offering price less the underwriting discounts and commissions set forth on the
cover page of this Prospectus. To the extent that the Underwriters exercise such
option, each of the Underwriters will have a firm commitment to purchase
approximately the same percentage thereof that the number of shares of Class A
Common Stock to be purchased by it shown in the above table bears to 10,715,000
and the Selling Stockholder will be obligated, pursuant to the option, to sell
such shares to the Underwriters. The Underwriters may exercise such option only
to cover over-allotments made in connection with the sale of Class A Common
Stock offered hereby. If purchased, the Underwriters will offer such additional
shares on the same terms as those on which the 10,715,000 shares are being
offered.
The Company and the Selling Stockholder have agreed to indemnify the
Underwriters against certain liabilities, including liabilities under the
Securities Act.
All executive officers, directors, stockholders and optionholders of the
Company (including the Selling Stockholder) have agreed that they will not,
without the prior written consent of BT Alex. Brown Incorporated, on behalf of
the Underwriters, (which consent may be withheld in its sole discretion) and
subject to certain limited exceptions, offer, pledge, sell, contract to sell,
sell any option or contract to purchase, sell short, purchase any option or
contract to sell, grant any option, right or warrant to purchase, lend or
otherwise transfer or dispose of, directly or indirectly, any shares of Common
Stock or any securities convertible into or exercisable or exchangeable for
Common Stock, or enter into any swap or similar agreement that transfers, in
whole or in part, any of the economic consequences of ownership of the Common
Stock, for a period commencing on the date of this Prospectus and continuing to
a date 180 days after such date; provided, however, that such restrictions do
not apply to shares of Class A Common Stock sold or purchased in the Offering or
to shares of Class A Common Stock purchased in the open market following the
Offering. BT
79
<PAGE> 81
Alex. Brown Incorporated, on behalf of the Underwriters, may, in its sole
discretion and at any time without notice, release all or any portion of the
securities subject to these lock up agreements. In addition, the Company has
agreed that, for a period of 180 days after the date of this Prospectus, it will
not, without the consent of BT Alex. Brown Incorporated, make any offering,
sale, short sale or other disposition of any shares of Common Stock of the
Company or other securities convertible into or exchangeable or exercisable for
shares of Common Stock or derivative of Common Stock (or agreement for such)
except for the grant of options to purchase shares of Class A Common Stock
pursuant to the Stock Option Plan and shares of Class A Common Stock issued
pursuant to the exercise of options granted under such plan and the grant of
purchase rights and issuance of shares under the 1998 Purchase Plan, provided
that such options and grants shall not vest, or the Company shall obtain the
written consent of the holder thereof not to transfer such shares, until the end
of such 180-day period. See "Management -- Stock Options" and "Shares Eligible
for Future Sale."
The Representatives of the Underwriters have advised the Company and the
Selling Stockholder that the Underwriters do not expect to make sales to
accounts over which they exercise discretionary authority in excess of 5.0% of
the number of shares of Class A Common Stock offered hereby.
Prior to the Offering, there has been no public market for the Class A
Common Stock of the Company. Consequently, the initial public offering price for
the Company will be determined by negotiations among the Company, the Selling
Stockholder and the Representatives. Among the factors to be considered in such
negotiations are the history of, and prospects for, the Company and the industry
in which it competes, an assessment of the Company management, its past and
present operations and financial performance, the prospects for further earnings
of the Company, the present state of the Company's development, the general
condition of the securities markets at the time of the Offering, the market
prices of and demand for publicly traded common stocks of comparable companies
in recent periods and other factors deemed relevant.
The Representatives have advised the Company that, pursuant to Regulation M
under the Securities Act, certain persons participating in the Offering may
engage in transactions, including stabilizing bids, syndicate covering
transactions or the imposition of penalty bids, which may have the effect of
stabilizing or maintaining the market price of the Class A Common Stock at a
level above that which might otherwise prevail in the open market. A
"stabilizing bid" is a bid for or the purchase of the Class A Common Stock on
behalf of the Underwriters for the purpose of fixing or maintaining the price of
the Class A Common Stock. A "syndicate covering transaction" is the bid for or
the purchase of the Class A Common Stock on behalf of the Underwriters to reduce
a short position incurred by the Underwriters in connection with the Offering. A
"penalty bid" is an arrangement permitting the Representatives to reclaim the
selling concession otherwise accruing to an Underwriter or syndicate member in
connection with the Offering if the Class A Common Stock originally sold by such
Underwriter or syndicate member is purchased by the Representative in a
syndicate covering transaction and has therefore not been effectively placed by
such Underwriter or syndicate member. The Representatives have advised the
Company that such transactions may be effected on the New York Stock Exchange or
otherwise and, if commenced, may be discontinued at any time.
LEGAL MATTERS
Certain matters relating to this offering are being passed upon for the
Company and the Selling Stockholder by Freshman, Marantz, Orlanski, Cooper &
Klein, a law corporation, Beverly Hills, California. Certain legal matters will
be passed upon for the Underwriters by Wilson Sonsini Goodrich & Rosati,
Professional Corporation, Palo Alto, California.
80
<PAGE> 82
EXPERTS
The consolidated financial statements and schedule of Skechers U.S.A., Inc.
as of December 31, 1997 and 1998, and for each of the years in the three-year
period ended December 31, 1998, have been included herein and in the
registration statement in reliance upon the report of KPMG LLP, independent
certified public accountants, appearing elsewhere herein, and upon the authority
of said firm as experts in accounting and auditing.
ADDITIONAL INFORMATION
The Company has filed a Registration Statement under the Securities Act
with the Commission with respect to the Class A Common Stock offered hereby.
This Prospectus, which constitutes part of the Registration Statement, omits
certain of the information contained in the Registration Statement and the
exhibits thereto on file with the Commission pursuant to the Securities Act and
the rules and regulations of the Commission. Statements contained in this
Prospectus such as the contents of any contract or other document referred to
are not necessarily complete and in each instance reference is made to the copy
of such contract or other document filed as an exhibit to the Registration
Statement, each such statement being qualified in all respects by such
reference. A copy of the Registration Statement, including the exhibits thereto,
may be inspected without charge at the Commission's principal office at 450
Fifth Street, N.W., Judiciary Plaza, Washington, D.C. 20549, and copies of all
or any part thereof may be obtained from the Commission upon the payment of
certain fees prescribed by the Commission. The Commission also maintains a World
Wide Web site that contains reports, proxy and information statements and other
information regarding registrants, such as the Company, that file electronically
with the Commission. The address of the site is http://www.sec.gov.
81
<PAGE> 83
SKECHERS U.S.A., INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Independent Auditors' Report................................
F-2
Audited Consolidated Financial Statements:
Consolidated Balance Sheets -- December 31, 1997 and
1998...................................................
F-3
Consolidated Statements of Earnings -- Each of the years
in the three-year period ended
December 31, 1998......................................
F-4
Consolidated Statements of Stockholders' Equity -- Each of
the years in the three-year period ended December 31,
1998...................................................
F-5
Consolidated Statements of Cash Flows -- Each of the years
in the three-year period ended December 31, 1998.......
F-6
Notes Consolidated to Financial Statements................
F-7
</TABLE>
\
F-1
<PAGE> 84
INDEPENDENT AUDITORS' REPORT
When the transactions referred to in Note 12 of the Notes to Consolidated
Financial Statements have been consummated, we will be in a position to render
the following report.
KPMG LLP
The Board of Directors and Stockholders
Skechers U.S.A., Inc.:
We have audited the accompanying consolidated balance sheets of Skechers
U.S.A., Inc. and subsidiary as of December 31, 1997 and 1998, and the related
consolidated statements of operations, stockholders' equity, and cash flows for
each of the years in the three-year period ended December 31, 1998. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated 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 consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Skechers
U.S.A., Inc. and subsidiary as of December 31, 1997 and 1998, and the results of
their operations and their cash flows for each of the years in the three-year
period ended December 31, 1998, in conformity with generally accepted accounting
principles.
Los Angeles, California
March 12, 1999, except as to
Note 12, which is as of April , 1999
F-2
<PAGE> 85
SKECHERS U.S.A., INC.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1997 AND 1998
(IN THOUSANDS, EXCEPT PER SHARE DATA)
ASSETS
<TABLE>
<CAPTION>
1997 1998
------- --------
<S> <C> <C>
Current assets:
Cash...................................................... $ 1,462 $ 10,942
Trade accounts receivable, less allowances for bad debts
and returns of $1,990 in 1997 and $3,413 in 1998....... 31,231 46,771
Due from officers and employees........................... 355 116
Other receivables......................................... 1,293 2,329
------- --------
Total receivables................................. 32,879 49,216
------- --------
Inventories............................................... 45,832 65,390
Prepaid expenses and other current assets................. 739 2,616
------- --------
Total current assets.............................. 80,912 128,164
------- --------
Property and equipment, at cost, less accumulated
depreciation and amortization............................. 7,423 15,196
Intangible assets, at cost, less applicable amortization.... 1,137 1,003
Other assets, at cost....................................... 1,409 1,921
------- --------
$90,881 $146,284
======= ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Short-term borrowings..................................... $22,837 $ 54,323
Current installments of long-term borrowings.............. 300 816
Current installments of notes payable to stockholder...... -- 2,244
Accounts payable.......................................... 36,013 38,145
Accrued expenses.......................................... 4,681 9,530
------- --------
Total current liabilities......................... 63,831 105,058
------- --------
Long-term borrowings, excluding current installments........ 2,675 3,550
Notes payable to stockholder, excluding current
installments.............................................. 13,250 10,000
Commitments and contingencies
Stockholders' equity:
Preferred Stock, $.001 par value; 10,000 shares
authorized; none issued and outstanding................ -- --
Class A Common Stock, $.001 par value; 100,000 shares
authorized; none issued and outstanding................ -- --
Class B Common Stock, $.001 par value; 60,000 shares
authorized; 27,814 shares issued and outstanding....... 2 2
Additional paid-in capital................................ -- --
Retained earnings......................................... 11,123 27,674
------- --------
Total stockholders' equity........................ 11,125 27,676
------- --------
$90,881 $146,284
======= ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE> 86
SKECHERS U.S.A., INC.
CONSOLIDATED STATEMENTS OF EARNINGS
THREE-YEAR PERIOD ENDED DECEMBER 31, 1998
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
1996 1997 1998
-------- -------- --------
<S> <C> <C> <C>
Net sales................................................... $115,410 $183,827 $372,680
Cost of sales............................................... 81,199 115,104 218,100
-------- -------- --------
Gross profit....................................... 34,211 68,723 154,580
Royalty income, net......................................... 1,592 894 855
-------- -------- --------
35,803 69,617 155,435
-------- -------- --------
Operating expenses:
Selling................................................... 11,739 21,584 49,983
General and administrative................................ 18,939 32,397 71,461
-------- -------- --------
30,678 53,981 121,444
-------- -------- --------
Earnings from operations........................... 5,125 15,636 33,991
-------- -------- --------
Other income (expense):
Interest.................................................. (3,231) (4,186) (8,631)
Other, net................................................ 61 (37) (239)
-------- -------- --------
(3,170) (4,223) (8,870)
-------- -------- --------
Earnings before income taxes....................... 1,955 11,413 25,121
State income taxes -- all current........................... 45 390 650
-------- -------- --------
Net earnings....................................... $ 1,910 $ 11,023 $ 24,471
======== ======== ========
Pro forma operations data (unaudited):
Earnings before income taxes.............................. $ 1,955 $ 11,413 $ 25,121
Income taxes.............................................. 782 4,565 10,048
-------- -------- --------
Net earnings....................................... $ 1,173 $ 6,848 $ 15,073
======== ======== ========
Net earnings per share:
Basic................................................... $ .54
Diluted................................................. $ .50
========
Weighted average shares:
Basic................................................... 27,814
Diluted................................................. 30,418
========
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE> 87
SKECHERS U.S.A., INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
THREE-YEAR PERIOD ENDED DECEMBER 31, 1998
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
COMMON STOCK TOTAL
--------------- RETAINED STOCKHOLDERS'
SHARES AMOUNT EARNINGS EQUITY
------ ------ -------- -------------
<S> <C> <C> <C> <C>
Balance at December 31, 1995....................... 27,814 $2 $ 936 $ 938
Net earnings..................................... -- -- 1,910 1,910
Recovery of distributions from stockholders...... -- -- 600 600
Distributions.................................... -- -- (112) (112)
------ -- ------- -------
Balance at December 31, 1996....................... 27,814 2 3,334 3,336
Net earnings..................................... -- -- 11,023 11,023
Distributions.................................... -- -- (3,234) (3,234)
------ -- ------- -------
Balance at December 31, 1997....................... 27,814 2 11,123 11,125
Net earnings..................................... -- -- 24,471 24,471
Distributions.................................... -- -- (7,920) (7,920)
------ -- ------- -------
Balance at December 31, 1998....................... 27,814 $2 $27,674 $27,676
====== == ======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE> 88
SKECHERS U.S.A., INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE-YEAR PERIOD ENDED DECEMBER 31, 1998
(IN THOUSANDS)
<TABLE>
<CAPTION>
1996 1997 1998
------- -------- --------
<S> <C> <C> <C>
Cash flows from operating activities:
Net earnings............................................ $ 1,910 $ 11,023 $ 24,471
Adjustments to reconcile net earnings to net cash
provided by (used in) operating activities:
Depreciation and amortization of property and
equipment.......................................... 743 1,137 2,843
Amortization of intangible assets.................... 289 1,456 148
Provision (recovery) for bad debts and returns....... (52) 870 1,423
Loss on disposal of property and equipment........... -- -- 190
(Increase) decrease in:
Receivables........................................ (2,707) (12,635) (17,760)
Inventories........................................ 7,749 (30,021) (19,558)
Prepaid expenses and other current assets.......... 418 (290) (1,877)
Other assets....................................... 71 (1,212) (512)
Increase (decrease) in:
Accounts payable................................... (4,344) 27,623 2,132
Accrued expenses................................... 2,524 (83) 4,249
------- -------- --------
Net cash provided by (used in) operating
activities.................................... 6,601 (2,132) (4,251)
------- -------- --------
Cash flows from investing activities:
Capital expenditures.................................... (630) (6,239) (9,434)
Intangible assets....................................... (199) (512) (14)
------- -------- --------
Net cash used in investing activities........... (829) (6,751) (9,448)
------- -------- --------
Cash flows from financing activities:
Net proceeds related to short-term borrowings........... (7,337) 10,426 31,486
Proceeds from long-term debt............................ -- 3,000 581
Payments on long-term debt.............................. -- (25) (562)
Proceeds from notes payable to stockholder.............. 1,250 -- --
Payments on notes payable to stockholder................ -- -- (1,006)
Distributions to stockholders........................... (112) (3,234) (7,320)
Recovery of distributions from stockholders............. 600 -- --
Other................................................... (41) -- --
------- -------- --------
Net cash provided by (used in) financing
activities.................................... (5,640) 10,167 23,179
------- -------- --------
Net increase in cash.......................... 132 1,284 9,480
Cash at beginning of year................................. 46 178 1,462
------- -------- --------
Cash at end of year....................................... $ 178 $ 1,462 $ 10,942
======= ======== ========
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest............................................. $ 3,188 $ 4,186 $ 8,067
Income taxes......................................... 30 226 1,416
======= ======== ========
</TABLE>
Supplemental disclosure of non-cash investing and financing activities:
During 1998, the Company acquired $1,372,000 of property and equipment under
capital lease arrangements. In connection with one of these arrangements, the
Company received $581,000 in cash through a sale leaseback transaction.
During 1998, the Company declared $7,920,000 of dividend distributions of which
$600,000 was included in accrued expenses at December 31, 1998.
See accompanying notes to consolidated financial statements.
F-6
<PAGE> 89
SKECHERS U.S.A., INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE-YEAR PERIOD ENDED DECEMBER 31, 1998
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The Company
Skechers U.S.A., Inc. (the "Company") designs, develops, markets and
distributes footwear. The Company also operates retail stores and a direct mail
business.
The accompanying consolidated financial statements include the accounts of
the Company and its wholly-owned subsidiary. All significant intercompany
balances and transactions have been eliminated in consolidation.
Revenue Recognition
Revenue is recognized upon shipment of product or at point of sale for
retail operations. Allowances for estimated returns and discounts are provided
when the related revenue is recorded.
Revenues from royalty agreements are recognized as earned.
Inventories
Inventories, principally finished goods, are stated at the lower of cost
(based on the first-in, first-out method) or market. The Company provides for
potential losses from obsolete or slow-moving inventories.
Income Taxes
The Company has elected to be treated for Federal and state income tax
purposes as an S Corporation under Subchapter S of the Internal Revenue Code and
comparable state laws. As a result, the earnings of the Company have been
included in the taxable income of the Company's stockholders for Federal and
state income tax purposes, and the Company has generally not been subject to
income tax on such earnings, other than California and other state franchise
taxes.
The Company accounts for income taxes under the asset and liability method.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. The effect on deferred tax assets and liabilities of a change in tax
rates is recognized in income in the period that includes the enactment date.
Due to the S Corporation election, deferred income taxes have been immaterial.
Depreciation and Amortization
Depreciation and amortization of property and equipment is computed using
the straight-line method utilizing the following estimated useful lives:
<TABLE>
<S> <C>
Furniture, fixtures and equipment 5 years
Leasehold improvements Useful life or remaining lease
term, whichever is shorter
</TABLE>
Intangible assets consist of trademarks and are amortized on a
straight-line basis over ten years. The accumulated amortization as of December
31, 1997 and 1998 is $940,000 and $1,088,000, respectively.
F-7
<PAGE> 90
SKECHERS U.S.A., INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
THREE-YEAR PERIOD ENDED DECEMBER 31, 1998
Long-Lived Assets
The Company accounts for long-lived assets, including intangibles, at
amortized cost. As part of an ongoing review of the valuation and amortization
of long-lived assets, management assesses the carrying value of assets if facts
and circumstances suggest that such assets may be impaired. If this review
indicates that the assets will not be recoverable, as determined by a
nondiscounted cash flow analysis over the remaining amortization period, the
carrying value of the assets would be reduced to its estimated fair market
value, based on discounted cash flows.
Advertising Costs
Advertising costs are expensed as incurred. Advertising expense for the
years ended December 31, 1996, 1997 and 1998 approximated $7.9 million, $15.8
million and $42.0 million, respectively.
Start-Up Costs
Start-up costs are charged to operations as incurred.
Earnings per Share
The Company reports earnings per share under Statement of Financial
Accounting Standards No. 128 ("SFAS No. 128"), "Earnings Per Share." Under SFAS
No. 128, basic earnings per share excludes any dilutive effects of options,
warrants and convertible securities. Diluted earnings per share reflects the
potential dilution that could occur if securities to issue common stock were
exercised or converted into common stock. The weighted average diluted shares
outstanding gives effect to the sale by the Company of those shares of Common
Stock (1,535,000 shares) necessary to fund the payment of the excess of (i) the
sum of stockholder distributions during the previous 12-month period and
distributions paid or declared thereafter until the consummation of the Offering
in excess of (ii) the S Corporation earnings in the previous 12-month period
based on the assumed initial public offering price of $14 per share (the
mid-point of the range), net of underwriting discounts.
The reconciliation of basic to diluted weighted average shares for 1998 is
as follows (in thousands):
<TABLE>
<S> <C>
Weighted average shares used in basic computation........... 27,814
Shares to fund stockholders distributions as described
above.................................................. 1,535
Dilutive stock options.................................... 1,069
------
Weighted average shares used in diluted computation......... 30,418
======
</TABLE>
Stock Compensation
The Company accounts for stock compensation under SFAS No. 123, "Accounting
for Stock-Based Compensation", and has elected to measure compensation cost
under Accounting Principles Board Opinion No. 25 and comply with the pro forma
disclosure requirements. Had compensation cost been determined using the fair
value at the grant date for awards during 1998, consistent with
F-8
<PAGE> 91
SKECHERS U.S.A., INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
THREE-YEAR PERIOD ENDED DECEMBER 31, 1998
the provisions of SFAS No. 123, the Company's net earnings would have been
reduced to the pro forma amount as indicated below (in thousands). No stock
awards were granted prior to 1998.
<TABLE>
<S> <C>
Pro forma net earnings...................................... $24,273
=======
Pro forma net earnings per share
Basic..................................................... $ .54
Diluted................................................... $ .49
</TABLE>
The fair value of each option is estimated on the date of grant using the
minimum value method with the following weighted average assumptions used for
grants during 1998; dividend yield of 0%; risk-free interest rate of 5.7% and
expected lives of eight years. The effects of applying SFAS No. 123 may not be
representative of effects on reported net earnings for future years.
Use of Estimates
Management has made a number of estimates and assumptions relating to the
reporting of assets, liabilities, revenues and expenses, and the disclosure of
contingent assets and liabilities to prepare these consolidated financial
statements in conformity with generally accepted accounting principles. Actual
results could differ from those estimates.
Product Design and Development Costs
The Company charges all product design and development costs to expense
when incurred. Product design and development costs aggregated approximately
$900,000, $1.8 million and $2.4 million during the years ended December 31,
1996, 1997 and 1998, respectively.
Comprehensive Income
Effective January 1, 1998, the Company adopted SFAS No. 130, "Reporting
Comprehensive Income." SFAS No. 130 establishes standards to measure all changes
in equity that result from transactions and other economic events other than
transactions with owners. Comprehensive income is the total of net earnings and
all other nonowner changes in equity. Except for net earnings, the Company does
not have any transactions and other economic events that qualify as
comprehensive income as defined under SFAS No. 130. Accordingly, the adoption of
SFAS No. 130 did not affect the Company's financial reporting.
Fair Value of Financial Instruments
The carrying amount of the Company's financial instruments, which
principally include cash, accounts receivable, accounts payable and accrued
expenses, approximates fair value due to the relatively short maturity of such
instruments.
The fair value of the Company's short-term instruments reflects the fair
value based upon current rates available to the Company for similar debt. The
fair value of the Company's long-term debt instruments is based on quoted market
prices.
Reclassifications
Certain amounts in the accompanying consolidated financial statements have
been reclassified to conform with the 1998 presentation.
F-9
<PAGE> 92
SKECHERS U.S.A., INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
THREE-YEAR PERIOD ENDED DECEMBER 31, 1998
(2) PROPERTY AND EQUIPMENT
Property and equipment is summarized as follows (in thousands):
<TABLE>
<CAPTION>
1997 1998
------ -------
<S> <C> <C>
Furniture, fixtures and equipment....................... $7,355 $11,849
Leasehold improvements.................................. 2,777 8,738
------ -------
Total property and equipment.................. 10,132 20,587
Less accumulated depreciation and amortization.......... 2,709 5,391
------ -------
Property and equipment, net................... $7,423 $15,196
====== =======
</TABLE>
(3) SHORT-TERM BORROWINGS
The Company has available a secured line of credit, as amended in December
1998, permitting borrowings up to $120,000,000 based upon eligible accounts
receivable and inventories. The agreement expires on December 31, 2002.
Borrowings bear interest at the rate of prime (7.75% at December 31, 1998) plus
.25% or at LIBOR (5.07% at December 31, 1998) plus 2.75% as elected by the
Company. The agreement provides for the issuance of letters of credit up to a
maximum of $18,000,000, which decreases the amount available for borrowings
under the agreement. Outstanding letters of credit at December 31, 1998 were
$3,942,000. Available borrowings under the line of credit at December 31, 1998
was approximately $7,000,000. The Company pays an unused line of credit fee of
.25% annually. The Company is required to maintain certain financial covenants
including specified minimum tangible net worth, working capital and leverage
ratios as well as limit the payment of dividends if it is in default of any
provision of the agreement. The Company was in compliance with these covenants
at December 31, 1998.
(4) NOTES PAYABLE TO STOCKHOLDER
At December 31, 1997, the Company had $13,250,000 outstanding under an
unsecured note payable to a stockholder, bearing interest at 8% and due upon
demand. In connection with the amended and restated line of credit, the Company
refinanced the note payable to stockholder with a financial institution. In
December 1998, the note payable was refinanced by the stockholder into a
$10,000,000 note payable which is subordinated to the line of credit and a
$3,250,000 note payable which is not subordinated to the line of credit. At
December 31, 1998, the $3,250,000 note was reduced by $1,006,000. The notes bear
interest at the prime rate (7.75% at December 31, 1998) and are due on demand.
The note holder has agreed not to call the subordinated note prior to January 1,
2000. Accordingly, the subordinated note has been shown as a long-term liability
in the accompanying consolidated financial statements. The Company recorded
interest expense of approximately $1,200,000, $1,060,000 and $540,000 related to
the stockholder notes during the years ended December 31, 1996, 1997 and 1998,
respectively.
F-10
<PAGE> 93
SKECHERS U.S.A., INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
THREE-YEAR PERIOD ENDED DECEMBER 31, 1998
(5) LONG-TERM BORROWINGS
Long-term debt at December 31, 1997 and 1998 is as follows (in thousands):
<TABLE>
<CAPTION>
1997 1998
------ ------
<S> <C> <C>
Note payable to bank, due in monthly installments of $25,000
plus interest at prime (7.75% at December 31, 1998) plus
1%, secured by equipment, due December 2002............... $2,975 $2,700
Capital leases, due in aggregate monthly installments of
$62,000, average interest rate of 16.3%, secured by
equipment, due through August 2002........................ -- 1,666
------ ------
2,975 4,366
Less current installments................................... 300 816
------ ------
$2,675 $3,550
====== ======
</TABLE>
The aggregate maturities of long-term borrowings at December 31, 1998 are
as follows:
<TABLE>
<S> <C>
1999................................ $ 816
2000................................ 910
2001................................ 641
2002................................ 1,999
------
$4,366
======
</TABLE>
(6) STOCKHOLDERS' EQUITY
In January 1998, the Board of Directors of the Company adopted the 1998
Stock Option, Deferred Stock and Restricted Stock Plan ("Stock Option Plan") for
the grant of qualified incentive stock options ("ISO"), stock options not
qualified and deferred stock and restricted stock. The exercise price for any
option granted may not be less than fair value (110% of fair value for ISOs
granted to certain employees). Under the Stock Option Plan, 5,215,154 shares are
reserved for issuance. In January 1998, 1,390,715 options were granted at an
exercise price of $2.78 per share. The options vest at the end of seven years
from the date of grant. If an initial public offering of the Company's
securities is consummated, 25.0% of the outstanding options will immediately
vest and the balance will vest over the next three years. The options expire ten
years from the date of grant.
Effective July 1, 1998, the Company adopted the 1998 Employee Stock
Purchase Plan ("1998 Stock Purchase Plan"). The 1998 Stock Purchase Plan is
intended to qualify as an Employee Stock Purchase Plan. Under terms of the 1998
Stock Purchase Plan, 2,781,415 shares of common stock are reserved for issuance.
No shares were issued under the 1998 Stock Purchase Plan.
(7) INCOME TAXES
The pro forma unaudited income tax adjustments presented represent taxes
which would have been reported had the Company been subject to Federal and state
income taxes as a C Corporation,
F-11
<PAGE> 94
SKECHERS U.S.A., INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
THREE-YEAR PERIOD ENDED DECEMBER 31, 1998
assuming a 40.0% rate. The historical and pro forma provisions for income tax
expense were as follows (in thousands):
<TABLE>
<CAPTION>
1996 1997 1998
---- ------ -------
<S> <C> <C> <C>
Historical income taxes......................... $ 45 $ 390 $ 650
---- ------ -------
Pro forma adjustments (unaudited):
Federal....................................... 610 3,573 7,864
State......................................... 127 602 1,534
---- ------ -------
Total pro forma adjustments........... 737 4,175 9,398
---- ------ -------
Total provision for pro forma income
taxes............................... $782 $4,565 $10,048
==== ====== =======
</TABLE>
Pro forma income taxes differs from the statutory tax rate as applied to
earnings before income taxes as follows:
<TABLE>
<CAPTION>
1996 1997 1998
---- ------ -------
<S> <C> <C> <C>
Expected income tax expense..................... $665 $3,880 $ 8,541
State income taxes, net of Federal benefit...... 117 685 1,507
---- ------ -------
$782 $4,565 $10,048
==== ====== =======
</TABLE>
(8) BUSINESS AND CREDIT CONCENTRATIONS
The Company sells footwear products principally throughout the United
States and foreign countries. The footwear industry is impacted by the general
economy. Changes in the marketplace may significantly affect management's
estimates and the Company's performance. Management performs regular evaluations
concerning the ability of its customers to satisfy their obligations and
provides for estimated doubtful accounts. Domestic accounts receivable amounted
to $29.9 million and $45.5 million before allowance for bad debts and returns at
December 31, 1997 and 1998, respectively, which generally do not require
collateral from customers. Foreign accounts receivable amounted to $3.3 million
and $4.6 million before allowance for bad debts and returns at December 31, 1997
and 1998, respectively, which generally are collateralized by letters of credit.
International net sales amounted to $31.6 million, $27.7 million and $34.7
million for the years ended December 31, 1996, 1997 and 1998, respectively. The
Company's credit losses for the years ended December 31, 1996, 1997 and 1998
were $694,000, $908,000 and $102,000 million, respectively, and did not
significantly differ from management's expectations.
During 1997, no customer accounted for 10% or more of net sales. During
1998, the Company had one significant customer which accounted for 11.8% of net
sales. Sales to this customer during 1999 are not expected to continue at the
1998 level. The Company had one customer at December 31, 1997 which accounted
for 14.7% of trade accounts receivable and a different customer at December 31,
1998 which accounted for 12.6% of trade receivables.
The Company's operations are subject to the customary risks of doing
business abroad, including, but not limited to, currency fluctuations, custom
duties and related fees, various import controls and other monetary barriers,
restrictions on the transfer of funds, labor unrest and strikes and, in certain
parts of the world, political instability.
F-12
<PAGE> 95
SKECHERS U.S.A., INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
THREE-YEAR PERIOD ENDED DECEMBER 31, 1998
(9) BENEFIT PLAN
The Company has adopted a profit sharing plan covering all employees who
are 21 years of age and have completed one year of service. Employees may
contribute up to 15.0% of annual compensation. Company contributions to the plan
are discretionary and vest over a five-year period. The Company's contributions
to the plan amounted to $53,000, $93,000 and $242,000 for the years ended
December 31, 1996, 1997 and 1998, respectively.
(10) COMMITMENTS AND CONTINGENCIES
Leases
The Company leases facilities under operating lease agreements expiring
through December 2008. The leases are on an all-net basis, whereby the Company
pays taxes, maintenance and insurance. The Company also leases certain equipment
and automobiles under operating lease agreements expiring at various dates
through May 2002. Rent expense for the years ended December 31, 1996, 1997 and
1998 approximated $2.5 million, $3.0 million and $7.9 million, respectively.
The Company also leases certain property and equipment under capital lease
agreements requiring monthly installment payments through August 2002.
Future minimum lease payments under noncancellable leases at December 31,
1998 are as follows (in thousands):
<TABLE>
<CAPTION>
CAPITAL OPERATING
LEASES LEASES
------- -----------
<S> <C> <C>
Year ending December 31:
1999................................................ $ 749 $ 8,886
2000................................................ 749 8,854
2001................................................ 393 8,824
2002................................................ 215 8,541
2003................................................ -- 6,183
Thereafter.......................................... -- 18,487
------ -------
2,106 $59,775
=======
Less interest....................................... 440
------
$1,666
======
</TABLE>
Litigation
The Company is involved in litigation arising from the ordinary course of
business. Management does not believe that the disposition of these matters will
have a material effect on the Company's financial position or results of
operations.
Purchase Commitments
At December 31, 1998, the Company had product purchase commitments of
approximately $53 million.
F-13
<PAGE> 96
SKECHERS U.S.A., INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
THREE-YEAR PERIOD ENDED DECEMBER 31, 1998
(11) OFFERING COSTS
In 1996, the Board of Directors authorized the filing of a registration
statement for an initial public offering of the Kani division. Management
terminated this offering and charged to operations related offering costs of
$530,000.
In 1998, the Board of Directors authorized the filing of a registration
statement for an initial public offering of the Company. Management delayed this
offering and charged to operations related offering costs of $660,000 after
three months had elapsed.
(12) SUBSEQUENT EVENTS
The Company has resurrected its plans to offer and register equity
interests.
The Company was reincorporated in Delaware, whereby the existing California
corporation has been merged into a newly formed Delaware corporation and
pursuant to which each outstanding share of common stock of the existing
California corporation was exchanged for a share of $.001 par value Class B
common stock of the new Delaware corporation. In addition, pursuant to the
reincorporation merger, a 13,907 for 1 common stock split was authorized. The
amendment and stock split has been reflected retroactively in the accompanying
consolidated financial statements.
On April , 1999, the certificate of incorporation was amended and
restated such that the authorized capital stock of the Delaware corporation
consisted of 100,000,000 shares of Class A common stock, par value $.001 per
share, and 60,000,000 shares of Class B common stock, par value $.001 per share.
The Company has also authorized 10,000,000 shares of preferred stock, $.001 par
value per share.
The Class A common stock and Class B common stock has identical rights
other than with respect to voting, conversion and transfer. The Class A common
stock is entitled to one vote per share, while the Class B common stock is
entitled to ten votes per share on all matters submitted to a vote of
stockholders. The shares of Class B common stock are convertible at any time at
the option of the holder into shares of Class A common stock on a
share-for-share basis. In addition, shares of Class B common stock will be
automatically converted into a like number of shares of Class A common stock
upon any transfer to any person or entity which is not a permitted transferee.
F-14
<PAGE> 97
- ------------------------------------------------------
- ------------------------------------------------------
YOU MAY RELY ONLY ON THE INFORMATION CONTAINED IN THIS PROSPECTUS. WE HAVE NOT
AUTHORIZED ANYONE TO PROVIDE INFOR-
MATION DIFFERENT FROM THAT CONTAINED IN THIS PROSPECTUS. NEITHER THE DELIVERY OF
THIS PROSPECTUS NOR SALE OF CLASS A COMMON STOCK MEANS THAT INFORMATION
CONTAINED IN THIS PROSPECTUS IS CORRECT AFTER THE DATE OF THIS PROSPECTUS. THIS
PROSPECTUS IS NOT AN OFFER TO SELL OR SOLICITATION OF AN OFFER TO BUY THESE
SHARES OF CLASS A COMMON STOCK IN ANY CIRCUMSTANCES UNDER WHICH THE OFFER OR
SOLICITATION IS UNLAWFUL.
------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary.................... 3
Risk Factors.......................... 9
Use of Proceeds....................... 19
Prior S Corporation Status............ 19
Dividend Policy....................... 20
Capitalization........................ 21
Dilution.............................. 22
Selected Financial Data............... 23
Management's Discussion and Analysis
of Financial Condition and Results
of Operations....................... 25
Business.............................. 38
Management............................ 59
Certain Transactions.................. 69
Principal and Selling Stockholders.... 72
Description of Capital Stock.......... 73
Shares Eligible for Future Sale....... 76
Underwriting.......................... 79
Legal Matters......................... 80
Experts............................... 81
Additional Information................ 81
Index to Consolidated Financial
Statements.......................... F-1
</TABLE>
------------------
DEALER PROSPECTUS DELIVERY OBLIGATION:
UNTIL , 1999 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL
DEALERS THAT BUY, SELL OR TRADE THESE SHARES OF CLASS A COMMON STOCK, WHETHER OR
NOT PAR-
TICIPATING IN THIS OFFERING, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS IS IN
ADDITION TO THE DEALERS' OBLIGATION TO DELIVER A PROSPECTUS WHEN ACTING AS
UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
- ------------------------------------------------------
- ------------------------------------------------------
- ------------------------------------------------------
- ------------------------------------------------------
10,715,000 Shares
SKECHERS U.S.A., INC.
[LOGO]
Class A Common Stock
-------------------
PROSPECTUS
-------------------
BT ALEX. BROWN
PRUDENTIAL SECURITIES
, 1999
- ------------------------------------------------------
- ------------------------------------------------------
<PAGE> 98
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The Registrant estimates that expenses in connection with the offering
described in this registration statement, other than underwriting discounts and
commissions, will be as follows:
<TABLE>
<S> <C>
Securities and Exchange Commission registration fee......... $ 51,384
NASD filing fee............................................. 18,984
New York Stock Exchange listing fee......................... 300,000*
Printing expenses........................................... 400,000*
Accounting fees and expenses................................ 400,000*
Legal fees and expenses..................................... 400,000*
Directors' and Officers' Insurance.......................... 300,000*
Fees and expenses (including legal fees) for qualifications
under state securities laws............................... 5,000*
Transfer agent's fees and expenses.......................... 30,000*
Miscellaneous............................................... 94,632*
----------
Total............................................. $2,000,000*
==========
</TABLE>
- ---------------
* Estimated.
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 145 of the Delaware General Corporation Law permits the Registrant
to, and Article VIII of the Registrant's Amended and Restated Certificate of
Incorporation provides that the Registrant shall, indemnify each person who was
or is a party or is threatened to be made a party to any threatened, pending or
completed action, suit or proceeding, whether civil, criminal, administrative or
investigative, by reason of the fact that he is or was, or has agreed to become,
a director or officer of the Registrant, or is or was servicing, or has agreed
to serve, at the request of the Registrant, as a director, officer or trustee
of, or in a similar capacity with, another corporation, partnership, joint
venture, trust or other enterprise (including any employee benefit plan), or by
reason of any action alleged to have been taken or omitted in such capacity,
against all expenses (including attorneys' fees), judgments, fines and amounts
paid in settlement actually and reasonably incurred by him or on his behalf in
connection with such action, suit or proceeding and any appeal therefrom.
Pursuant to the Underwriting Agreement, the Company and the Selling
Stockholder have agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act of 1933, as amended.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
None.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(A) EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
- -------- ----------------------
<C> <S>
1.1* Form of Underwriting Agreement
2.1* Agreement of Reorganization and Plan of Merger
3.1* Certificate of Incorporation
3.2+ Bylaws
</TABLE>
II-1
<PAGE> 99
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
- -------- ----------------------
<C> <S>
4.1* Form of Specimen Class A Common Stock Certificate
5.1* Opinion of Freshman, Marantz, Orlanski, Cooper & Klein, a
law corporation
10.1+ Amended and Restated 1998 Stock Option, Deferred Stock and
Restricted Stock Plan
10.2* 1998 Employee Stock Purchase Plan
10.3* Form of Employment Agreement between the Registrant and
Robert Greenberg
10.4* Form of Employment Agreement between the Registrant and
Michael Greenberg
10.5* Form of Employment Agreement between the Registrant and
David Weinberg
10.6* Form of Indemnification Agreement between the Registrant and
its directors and executive officers
10.7* Form of Registration Rights Agreement between the
Registrant, the Greenberg Family Trust and Michael Greenberg
10.8* Tax Indemnification Agreement
10.9 Subordinated Promissory Note between the Registrant and the
Greenberg Family Trust, dated December 22, 1998
10.10 Amended and Restated Loan and Security Agreement between the
Registrant and Heller Financial, Inc., dated September 4,
1998
10.10(a) Term Loan A Note, dated September 4, 1998, between the
Registrant and Heller Financial, Inc.
10.10(b) Revolving Note dated September 4, 1998, between the
Registrant and Heller Financial, Inc.
10.10(c) First Amendment to Amended and Restated Loan and Security
Agreement, dated September 11, 1998
10.10(d) Second Amendment to Amended and Restated Loan and Security
Agreement, dated December 23, 1998.
10.11 Lease, dated April 15, 1998, between the Registrant and
Holt/Hawthorn and Victory Partners, regarding 228 Manhattan
Beach Boulevard, Manhattan Beach, California
10.12+ Commercial Lease Agreement, dated February 19, 1997, between
the Registrant and Richard and Donna Piazza, regarding 1110
Manhattan Avenue, Manhattan Beach, California
10.13+ Lease, dated June 12, 1998, between the Registrant and
Richard and Donna Piazza, regarding 1112 Manhattan Avenue,
Manhattan Beach, California
10.14+ Lease, dated November 21, 1997, between the Registrant and
The Prudential Insurance Company of America, regarding 1661
So. Vintage Avenue, Ontario, California
10.15+ Lease, dated November 21, 1997, between The Prudential
Insurance Company of America, regarding 1777 So. Vintage
Avenue, Ontario, California
10.16+ Commercial Lease, dated April 10, 1998, between the
Registrant and Proficiency Ontario Partnership, regarding
5725 East Jurupa Street, Ontario, California
10.17 Lease and Addendum, dated June 11, 1998, between the
Registrant and Dolores McNabb, regarding Suite 3 on the
first floor of the north building, Suite 9 on the first
floor of the south building at 904 Manhattan Avenue,
Manhattan Beach, California
10.18 Addendum to Lease, dated September 14, 1998, between the
Registrant and Dolores McNabb, regarding Suites 3, 4 and 5
on the second floor of the north building at 904 Manhattan
Avenue, Manhattan Beach, California
</TABLE>
II-2
<PAGE> 100
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
- -------- ----------------------
<C> <S>
10.19 Promissory Note between the Registrant and the Greenberg
Family Trust, dated December 22, 1998
21.1 Subsidiaries of the Registrant
23.1 Consent of KPMG LLP
23.2* Consent of Freshman, Marantz, Orlanski, Cooper & Klein
(contained in exhibit 5.1)
24.1+ Power of attorney
27 Financial Data Schedule
99.1+ Consent of Richard Siskind as Nominated Director
99.2 Consent of John Quinn as Nominated Director
</TABLE>
- ---------------
* To be filed by amendment
+ Previously filed
(B) SCHEDULES
Schedule II -- Valuation and Qualifying Accounts
ITEM 17. UNDERTAKINGS
(a) The undersigned registrant hereby undertakes to provide to the
Underwriters at the closing specified in the Underwriting Agreement certificates
in such denominations and registered in such names as required by the
Underwriters to permit prompt delivery to each purchaser.
(b) Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
the registrant pursuant to the foregoing provisions, 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 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.
(c) The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act
of 1933, 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 Securities Act shall be deemed to be part of this
registration statement as of the time it is declared effective.
(2) For the purpose of determining any liability under the Securities
Act of 1933, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new registration statement relating to
the securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.
II-3
<PAGE> 101
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused Amendment No. 1 to this Registration Statement to be signed on
its behalf by the undersigned, thereunto duly authorized, in the City of
Manhattan Beach, State of California on April 8, 1999.
SKECHERS U.S.A., INC.
By: /s/ ROBERT GREENBERG
------------------------------------
Robert Greenberg
Chairman of the Board
and Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, Amendment No. 1
to this Registration Statement has been signed by the following persons in the
capacity indicated on April 8, 1999.
<TABLE>
<CAPTION>
SIGNATURE TITLE
--------- -----
<C> <S>
* Chairman of the Board and Chief Executive
- -------------------------------------------------------- Officer (Principal Executive Officer)
Robert Greenberg
* President and Director
- --------------------------------------------------------
Michael Greenberg
/s/ DAVID WEINBERG Executive Vice President, Chief Financial
- -------------------------------------------------------- Officer and Director (Principal Financial
David Weinberg and Accounting Officer)
*By: /s/ DAVID WEINBERG
--------------------------------------------------
David Weinberg
Attorney-in-fact
</TABLE>
II-4
<PAGE> 102
SCHEDULE II
SKECHERS U.S.A., INC.
VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998
<TABLE>
<CAPTION>
BALANCE AT CHARGED TO DEDUCTIONS BALANCE
BEGINNING COSTS AND AND AT END
DESCRIPTIONS OF PERIOD EXPENSES WRITE-OFFS OF PERIOD
------------ ---------- ----------- ----------- ----------
<S> <C> <C> <C> <C>
As of December 31, 1996
Allowance for obsolescence.............. $ 988,000 $ 420,000 $ (500,000) $ 908,000
Allowance for doubtful accounts......... 366,000 623,000 (694,000) 295,000
Reserve for sales returns and
allowances........................... 806,000 5,517,000 (5,498,000) 825,000
As of December 31, 1997
Allowance for obsolescence.............. 908,000 554,000 (554,000) 908,000
Allowance for doubtful accounts......... 295,000 1,878,000 (908,000) 1,265,000
Reserve for sales returns and
allowances........................... 825,000 5,463,000 (5,563,000) 725,000
As of December 31, 1998
Allowance for obsolescence.............. 908,000 64,000 (465,000) 507,000
Allowance for doubtful accounts......... 1,265,000 702,000 (501,000) 1,466,000
Reserve for sales returns and
allowances........................... 725,000 10,840,000 (9,618,000) 1,947,000
</TABLE>
S-1
<PAGE> 103
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
- ------- ----------------------
<C> <S>
1.1* Form of Underwriting Agreement
2.1* Agreement of Reorganization and Plan of Merger
3.1* Certificate of Incorporation
3.2+ Bylaws
4.1* Form of Specimen Class A Common Stock Certificate
5.1* Opinion of Freshman, Marantz, Orlanski, Cooper & Klein, a
law corporation
10.1+ Amended and Restated 1998 Stock Option, Deferred Stock and
Restricted Stock Plan
10.2* 1998 Employee Stock Purchase Plan
10.3* Form of Employment Agreement between the Registrant and
Robert Greenberg
10.4* Form of Employment Agreement between the Registrant and
Michael Greenberg
10.5* Form of Employment Agreement between the Registrant and
David Weinberg
10.6* Form of Indemnification Agreement between the Registrant and
its directors and executive officers
10.7* Form of Registration Rights Agreement between the
Registrant, the Greenberg Family Trust and Michael Greenberg
10.8* Tax Indemnification Agreement
10.9 Subordinated Promissory Note between the Registrant and the
Greenberg Family Trust, dated December 22, 1998
10.10 Amended and Restated Loan and Security Agreement between the
Registrant and Heller Financial, Inc., dated September 4,
1998
10.10(a) Term Loan A Note, dated September 4, 1998, between the
Registrant and Heller Financial, Inc.
10.10(b) Revolving Note dated September 4, 1998, between the
Registrant and Heller Financial, Inc.
10.10(c) First Amendment to Amended and Restated Loan and Security
Agreement, dated September 11, 1998
10.10(d) Second Amendment to Amended and Restated Loan and Security
Agreement, dated December 23, 1998
10.11 Lease, dated April 15, 1998, between the Registrant and
Holt/Hawthorn and Victory Partners, regarding 228 Manhattan
Beach Boulevard, Manhattan Beach, California
10.12+ Commercial Lease Agreement, dated February 19, 1997, between
the Registrant and Richard and Donna Piazza, regarding 1110
Manhattan Avenue, Manhattan Beach, California
10.13+ Lease, dated June 12, 1998, between the Registrant and
Richard and Donna Piazza, regarding 1112 Manhattan Avenue,
Manhattan Beach, California
10.14+ Lease, dated November 21, 1997, between the Registrant and
The Prudential Insurance Company of America, regarding 1661
So. Vintage Avenue, Ontario, California
10.15+ Lease, dated November 21, 1997, between The Prudential
Insurance Company of America, regarding 1777 So. Vintage
Avenue, Ontario, California
10.16+ Commercial Lease, dated April 10, 1998, between the
Registrant and Proficiency Ontario Partnership, regarding
5725 East Jurupa Street, Ontario, California
10.17 Lease and Addendum, dated June 11, 1998, between the
Registrant and Dolores McNabb, regarding Suite 3 on the
first floor of the north building, Suite 9 on the first
floor of the south building at 904 Manhattan Avenue,
Manhattan Beach, California
</TABLE>
<PAGE> 104
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
- ------- ----------------------
<C> <S>
10.18 Addendum to Lease, dated September 14, 1998, between the
Registrant and Dolores McNabb, regarding Suites 3, 4 and 5
on the second floor of the north building at 904 Manhattan
Avenue, Manhattan Beach, California
10.19 Promissory Note between the Registrant and the Greenberg
Family Trust, dated December 22, 1998
21.1 Subsidiaries of the Registrant
23.1 Consent of KPMG LLP
23.2* Consent of Freshman, Marantz, Orlanski, Cooper & Klein
(contained in exhibit 5.1)
24.1+ Power of attorney
27 Financial Data Schedule
99.1+ Consent of Richard Siskind as Nominated Director
99.2 Consent of John Quinn as Nominated Director
</TABLE>
- ---------------
* To be filed by amendment
+ Previously filed
<PAGE> 105
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
SKECHERS U.S.A., INC.
---------------------------
EXHIBITS
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
---------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE> 1
EXHIBIT 10.9
SUBORDINATED PROMISSORY NOTE
$10,000,000.00 December 22, 1998
SKECHERS U.S.A., INC., a California corporation ("Borrower"), for value
received, promises to pay to the order of THE GREENBERG FAMILY TRUST, upon
demand the sum of TEN MILLION DOLLARS ($10,000,000).
Borrower also promises to pay interest monthly on the unpaid principal
amount evidenced hereby from the date hereof until paid at the prime rate.
Capitalized terms used herein and not otherwise defined shall have the meanings
assigned to such terms in that certain Subordination Agreement by and among
Heller Financial, Inc. ("Heller"), Robert Y. Greenberg and M. Susan Greenberg,
Trustees of The Greenberg Family Trust ("Payee") and Borrower (the
"Subordination Agreement").
This Note is the Subordinated Note issued pursuant to and entitled to the
benefits of the Subordination Agreement to which reference is hereby made for a
more complete statement of the terms and conditions under which the indebtedness
evidenced hereby are made and are to be repaid. All payments of principal and
interest in respect of this Note shall be made in accordance with the terms of
the Subordination Agreement.
1. Method of Payment. All payment of principal and interest in respect of
this Note shall be made in lawful money of the United States of America to the
Greenberg Family Trust, or at such other place as Payee may designate in writing
for such purpose.
2. Subordination. Anything in this Note to the contrary notwithstanding,
the indebtedness evidenced by this Note shall be subordinate and junior in right
of payment to the Senior Debt to the extent and in the manner set forth in the
Subordination Agreement.
3. Permitted Payments. This Note is subject to payment in accordance with
the Subordination Agreement.
4. No Waiver; Remedies not Exclusive. No failure or delay by Payee in
exercising any remedy, right, power or privilege under this Note shall operate
as a waiver of such remedy, right, power or privilege nor shall any single or
partial exercise of such remedy, right, power or privilege preclude any other or
further exercise of such remedy, right, power or privilege or the exercise of
any other remedy, right, power or privilege. No remedy, right, power or
privilege conferred upon or reserved to Payee is intended to be exclusive of any
other
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remedy, right, power or privilege provided or permitted by this Note or by law,
but each shall be cumulative and in addition to every other remedy, right, power
or privilege so provided or permitted and each may be exercised concurrently or
independently from time to time and as often as may be deemed expedient by
Payee.
5. Waiver of Notices and Demands. Borrower hereby waives diligence,
presentment, demand, protest, notices of protest, dishonor and nonpayment of
this Note and all other notices of every kind whatsoever.
6. Severability. Any provision of this Note which is prohibited or
unenforceable shall be ineffective to the extent of such prohibition or
unenforceability without invalidating the remaining provisions of this Note.
7. GOVERNING LAW. THIS NOTE SHALL BE GOVERNED BY AND CONSTRUED IN
ACCORDANCE WITH THE LAWS OF THE STATE OF CALIFORNIA.
IN WITNESS WHEREOF, Borrower has caused this Note to be duly executed
and delivered by its duly authorized officer.
SKECHERS U.S.A., INC.
a California corporation
Dated: December 22, 1998 By: /s/ DAVID WEINBERG
------------------------------------
David Weinberg
Chief Financial Officer
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EXHIBIT 10.10
AMENDED AND RESTATED LOAN AND SECURITY AGREEMENT
DATED AS OF SEPTEMBER 4, 1998
BETWEEN
SKECHERS U.S.A., INC.
AS BORROWER,
AND
HELLER FINANCIAL, INC.,
AS AGENT AND AS LENDER
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TABLE OF CONTENTS
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SECTION 1. DEFINITIONS AND ACCOUNTING TERMS............................... 1
1.1 Certain Defined Terms.......................................... 1
SECTION 2. LOANS AND COLLATERAL........................................... 1
2.1 Loans.......................................................... 1
(A)(1)Term Loan A.............................................. 1
(A)(2)Term Loan B.............................................. 1
(B) Revolving Loan........................................... 1
(C) Eligible Collateral...................................... 2
(D) Swingline Loan........................................... 4
(E) Borrowing Mechanics...................................... 4
(F) Notes.................................................... 5
(G) Letters of Credit........................................ 5
(1) Maximum Amount..................................... 5
(2) Reimbursement...................................... 5
(3) Request for Letters of Credit...................... 5
(H) Other Letter of Credit Provisions........................ 7
(1) Obligations Absolute............................... 7
(2) Nature of Lender's Duties.......................... 7
(3) Liability.......................................... 7
(I) Availability of a Lender's Pro Rata Share................ 7
2.2 Interest....................................................... 8
(A) Rate of Interest......................................... 8
(B) Computation and Payment of Interest...................... 8
(C) Interest Laws............................................ 9
(D) Conversion or Continuation............................... 9
2.3 Fees........................................................... 9
(A) Unused Line Fee.......................................... 9
(B) Overadvance Fee.......................................... 9
(C) Prepayment Fee........................................... 10
(D) Other Fees and Expenses.................................. 10
2.4 Payments and Prepayments....................................... 10
(A) Manner and Time of Payment............................... 10
(B) Mandatory Prepayments.................................... 10
(1) Overadvance........................................ 10
(2) Proceeds of Asset Dispositions..................... 10
(C) Voluntary Prepayments and Repayments..................... 10
(D) Payments on Business Days................................ 10
2.5 Term of this Agreement......................................... 10
2.6 Statements..................................................... 11
2.7 Grant of Security Interest..................................... 11
2.8 Capital Adequacy and Other Adjustments......................... 11
2.9 Taxes.......................................................... 11
(A) No Deductions............................................ 11
(B) Changes in Tax Laws...................................... 12
(C) Foreign Lenders.......................................... 12
2.10 Required Termination and Prepayment............................ 12
2.11 Optional Prepayment/Replacement of Agent or Lenders
in Respect of Increased Costs ............................... 13
2.12 Compensation................................................... 13
2.13 Booking of LIBOR Loans......................................... 13
2.14 Assumptions Concerning Funding of LIBOR Loans.................. 13
SECTION 3. CONDITIONS TO LOANS............................................ 14
SECTION 4. BORROWER'S REPRESENTATIONS, WARRANTIES......................... 14
4.1 Organization, Powers, Capitalization........................... 14
(A) Organization and Powers.................................. 14
(B) Capitalization........................................... 14
4.2 Authorization of Borrowing, No Conflict........................ 14
4.3 Financial Condition............................................ 14
4.4 Indebtedness and Liabilities................................... 14
4.5 Account Warranties and Covenants............................... 15
4.6 Names and Locations............................................ 15
4.7 Title to Properties; Liens..................................... 15
4.8 Litigation; Adverse Facts...................................... 15
4.9 Payment of Taxes............................................... 15
4.10 Performance of Agreements...................................... 16
4.11 Employee Benefit Plans......................................... 16
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4.12 Intellectual Property.......................................... 16
4.13 Broker's Fees.................................................. 16
4.14 Environmental Compliance....................................... 16
4.15 Solvency....................................................... 16
4.16 Disclosure..................................................... 16
4.17 Insurance...................................................... 16
4.18 Compliance with Laws........................................... 17
4.19 Bank Accounts.................................................. 17
4.20 Employee Matters............................................... 17
4.21 Governmental Regulation........................................ 17
4.22 Access to Accountants and Management........................... 17
4.23 Inspection..................................................... 17
4.24 Collateral Records............................................. 17
4.25 Account Covenant; Verification................................. 17
4.26 Collection of Accounts and Payments............................ 18
SECTION 5. REPORTING AND OTHER AFFIRMATIVE COVENANTS ..................... 18
5.1 Financial Statements and Other Reports......................... 18
5.2 Endorsement.................................................... 18
5.3 Maintenance of Properties...................................... 18
5.4 Compliance with Laws........................................... 18
5.5 Further Assurances............................................. 19
5.6 Additional Mortgaged Property.................................. 19
5.7 Use of Proceeds and Margin Security............................ 19
5.8 Bailee......................................................... 19
SECTION 6. FINANCIAL COVENANTS............................................ 19
SECTION 7. NEGATIVE COVENANTS............................................. 19
7.1 Indebtedness and Liabilities................................... 19
7.2 Guaranties..................................................... 19
7.3 Transfers, Liens and Related Matters........................... 19
(A) Transfers................................................ 19
(B) Liens.................................................... 20
(C) No Negative Pledges...................................... 20
(D) No Restrictions on Subsidiary Distributions to Borrower.. 20
7.4 Investments and Loans.......................................... 20
7.5 Restricted Junior Payments..................................... 20
7.6 Restriction on Fundamental Changes............................. 20
7.7 Bank Accounts.................................................. 20
7.8 Transactions with Affiliates................................... 20
7.9 Conduct of Business............................................ 21
7.10 Tax Consolidations............................................. 21
7.11 Subsidiaries................................................... 21
7.12 Fiscal Year; Tax Designation................................... 21
7.13 Press Release; Public Offering Materials....................... 21
SECTION 8. DEFAULT, RIGHTS AND REMEDIES................................... 21
8.1 Event of Default............................................... 21
(A) Payment.................................................. 21
(B) Default in Other Agreements.............................. 21
(C) Breach of Certain Provisions............................. 21
(D) Breach of Warranty....................................... 21
(E) Other Defaults Under Loan Documents...................... 21
(F) Change in Control........................................ 21
(G) Involuntary Bankruptcy; Appointment of Receiver, etc..... 22
(H) Voluntary Bankruptcy; Appointment of Receiver, etc....... 22
(I) Liens.................................................... 22
(J) Judgment and Attachments................................. 22
(K) Dissolution.............................................. 22
(L) Solvency................................................. 22
(M) Injunction............................................... 22
(N) Invalidity of Loan Documents............................. 22
(O) Failure of Security...................................... 22
(P) Damage, Strike, Casualty................................. 22
(Q) Licenses and Permits..................................... 23
(R) Forfeiture............................................... 23
8.2 Suspension of Commitments...................................... 23
8.3 Acceleration................................................... 23
8.4 Remedies....................................................... 23
8.5 Appointment of Attorney-in-Fact................................ 23
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8.6 Limitation on Duty of Agent with Respect to Collateral......... 24
8.7 Application of Proceeds........................................ 24
8.8 License of Intellectual Property............................... 24
8.9 Waivers, Non-Exclusive Remedies................................ 24
SECTION 9. AGENT.......................................................... 24
9.1 Agent.......................................................... 24
(A) Appointment.............................................. 24
(B) Nature of Duties......................................... 25
(C) Rights, Exculpation, Etc................................. 25
(D) Reliance................................................. 25
(E) Indemnification.......................................... 25
(F) Heller Individually...................................... 26
(G) Successor Agent.......................................... 26
(H) Collateral Matters....................................... 26
(1) Release of Collateral.............................. 26
(2) Execution of Releases.............................. 26
(3) Absence of Duty.................................... 27
(I) Agency for Perfection.................................... 27
(J) Exercise of Remedies..................................... 27
9.2 Notice of Default.............................................. 27
9.3 Action by Agent................................................ 27
9.4 Amendments, Waivers and Consents............................... 27
9.5 Assignments and Participations in Loans........................ 28
9.6 Set Off and Sharing of Payments................................ 29
9.7 Disbursement of Funds.......................................... 29
9.8 Settlements, Payments and Information.......................... 29
(A) Revolving Advances and Payments; Fee Payments............ 29
(B) Return of Payments....................................... 30
9.9 Dissemination of Information................................... 30
9.10 Discretionary Advances......................................... 30
SECTION 10. MISCELLANEOUS................................................. 30
10.1 Expenses and Attorneys' Fees................................... 30
10.2 Indemnity...................................................... 31
10.3 Notices........................................................ 31
10.4 Survival of Representations and Warranties
and Certain Agreements......................................... 32
10.5 Indulgence Not Waiver.......................................... 32
10.6 Marshaling; Payments Set Aside................................. 32
10.7 Entire Agreement............................................... 32
10.8 Severability................................................... 32
10.9 Lenders' Obligations Several; Independent Nature of
Lenders' Rights................................................ 32
10.10 Headings....................................................... 32
10.11 APPLICABLE LAW................................................. 32
10.12 Successors and Assigns......................................... 33
10.13 No Fiduciary Relationship; No Duty; Limitation of Liabilities.. 33
10.14 CONSENT TO JURISDICTION........................................ 33
10.15 WAIVER OF JURY TRIAL........................................... 33
10.16 Construction................................................... 33
10.17 Counterparts; Effectiveness.................................... 33
10.18 Confidentiality................................................ 34
SECTION 11. DEFINITIONS AND ACCOUNTING TERMS.............................. 34
11.1 Definitions.................................................... 34
11.2 Accounting Terms............................................... 42
11.3 Other Definitional Provisions.................................. 43
CONDITIONS RIDER........................................................... 45
(A) Closing Deliveries....................................... 45
(B) Security Interests....................................... 45
(C) Representations and Warranties........................... 45
(D) Fees..................................................... 45
(E) No Default............................................... 45
(F) Performance of Agreements................................ 45
(G) No Prohibition........................................... 45
(H) No Litigation............................................ 45
REPORTING RIDER............................................................ 46
(A) Monthly Financials....................................... 46
(B) Year-End Financials...................................... 46
(C) Accountants' Certification and Reports................... 46
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(D) Compliance Certificate................................... 46
(E) Borrowing Base Certificates, Registers and Journals...... 46
(F) Reconciliation Reports, Inventory Reports
and Listings and Agings ............................... 46
(G) Management Report........................................ 47
(H) Appraisals............................................... 47
(I) Government Notices....................................... 47
(J) Events of Default, etc................................... 47
(K) Projections.............................................. 47
(L) Other Information........................................ 47
FINANCIAL COVENANTS RIDER.................................................. 48
(A) Tangible Net Worth....................................... 48
(B) Working Capital.......................................... 48
(C) Ratio of Indebtedness to Tangible Net Worth.............. 48
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AMENDED AND RESTATED LOAN AND SECURITY AGREEMENT
THIS AGREEMENT is dated as of September 4, 1998, and entered into among
SKECHERS U.S.A., INC., a California corporation ("Borrower"), the financial
institution(s) listed on the signature pages hereof, and their respective
successors and Eligible Assignees (each individually a "Lender" and collectively
"Lenders") and HELLER FINANCIAL, INC., a Delaware corporation (in its individual
capacity, "Heller"), for itself as Lender and as agent. This Agreement amends
and restates the Loan and Security Agreement between Heller and Borrower
originally dated June 21, 1993 (as subsequently amended, the "Original
Agreement").
WHEREAS, Borrower desires that Lenders extend a credit facility to enable
Borrower to retire certain of its existing Indebtedness (including Indebtedness
incurred under the Original Agreement) and to provide working capital financing
and to provide funds for other general corporate purposes;
WHEREAS, to secure Borrower's obligations under the Loan Documents,
Borrower is granting to Agent, for benefit of Lenders, a security interest in
and lien upon certain of Borrower's property;
WHEREAS, The Greenberg Family Trust ("Guarantor") is willing to guaranty
certain of the Obligations of Borrower to Agent and Lenders under the Loan
Documents and to grant to Agent, for benefit of Lenders, a security interest in
the Guarantor Cash Collateral to secure such guaranty; and
WHEREAS, Skechers By Mail, Inc., a Delaware corporation ("Subsidiary
Guarantor") and a Subsidiary of Borrower, has also agreed to guaranty the
Obligations of Borrower to Agent under the Loan Documents;
NOW, THEREFORE, in consideration of the premises and the agreements,
provisions and covenants herein contained, Borrower, Agent and Lenders agree as
follows:
SECTION 1. DEFINITIONS AND ACCOUNTING TERMS
1.1 Certain Defined Terms. The capitalized terms and the accounting terms
used in this Agreement shall have the meanings set forth in Section 11 of this
Agreement:
SECTION 2. LOANS AND COLLATERAL
2.1 Loans.
(A)(1) Term Loan A. Each Lender, severally, agrees to lend to
Borrower, on the Closing Date, its Pro Rata Share of Term Loan A which is in the
aggregate amount of $2,775,000. Term Loan A shall be funded in one drawing.
Amounts borrowed under this subsection 2.1(A)(1) and repaid may not be
reborrowed. Borrower shall make principal payments in the amount of the
applicable Scheduled Installment of Term Loan A (or such lesser principal amount
as shall the be outstanding) on the dates set forth below.
"Scheduled Installment" of Term Loan A means a payment of $25,000 on
the first day of each month commencing October 1, 1998; provided, however, the
entire Term Loan A shall be due and payable on Termination Date.
(A)(2) Term Loan B. Each Lender, severally, agrees to lend to Borrower
on the Closing Date its Pro Rata Share of Term Loan B which is in the aggregate
amount of $13,250,000. Term Loan B shall be funded in one drawing. Amounts
borrowed under this subsection 2.1.(A)(2) and repaid may not be reborrowed.
Borrower shall pay the entire Term Loan B in a single installment on the earlier
of (i) the one year anniversary of the Closing Date, or (ii) the receipt by
Borrower of any proceeds of an initial public offering.
(B) Revolving Loan. Each Lender, severally, agrees to lend to Borrower
from time to time its Pro Rata Share of each Revolving Advance. The aggregate
amount of all Revolving Loan Commitments shall not exceed at any time
$120,000,000 as reduced by Section 2.4(B). Amounts borrowed under this
subsection 2.1(B) may be repaid and reborrowed at any time prior to the earlier
of (i) the termination of the Revolving Loan Commitment pursuant to subsection
8.3 or (ii) the Termination Date; provided, however, that Borrower shall reduce
the Revolving Loan to an amount not greater than the Cleanup Amount for at least
one Business Day each consecutive twenty one (21) day period. Except as
otherwise provided herein, no Lender shall have any obligation to make a
Revolving Advance to the extent such Revolving Advance would cause the Revolving
Loan (after giving effect to any immediate application of the proceeds thereof)
to exceed the Maximum Revolving Loan Amount.
(1) "Maximum Revolving Loan Amount" means, as of any date of
determination, the lesser of (a) the Revolving Loan Commitment(s) of all Lenders
less the Letter of Credit Reserve and (b) the Borrowing Base less (i) the Letter
of Credit Reserve, (ii) the unpaid amount of Term Loan A and Term Loan B plus
(iii) the amount of any outstanding Discretionary Advances; and
(2) "Borrowing Base" means, as of any date of determination, an
amount equal to the sum of (a) 85% of Eligible Accounts plus (b) the lesser of
(i) $55,000,000, and (ii) 60% of Eligible Inventory (excluding Eligible Retail
Inventory) plus (c) the lesser of (i) $2,000,000 and (ii) fifty percent (50%) of
the Eligible Retail Inventory plus (d) the Overadvance Amount; plus (e) the
amount of Guarantor Cash Collateral; and less in each case such reserves as
Agent in its reasonable discretion may elect to establish. Without limiting the
generality of the foregoing, commencing thirty (30) days following the Closing
Date, Agent may reserve from the Borrowing Base up to the amount of three
months' rent in respect of each leased warehouse where there is located Eligible
Inventory to the extent Agent has not received a Landlord Waiver and Consent in
respect of such location.
(3) "Cleanup Amount" means the Borrowing Base less (i) the Letter
of Credit Reserve, (ii) the amount of Guarantor Cash Collateral; (iii) the
Overadvance Amount; and (iv) the amount of any outstanding Discretionary
Advances.
(C) Eligible Collateral.
"Eligible Accounts" means, as at any date of determination, the
aggregate of all Accounts that Agent, in its reasonable credit judgment, deems
to be eligible for borrowing purposes. Without limiting the generality of the
foregoing, the Requisite Lenders may determine that the following Accounts are
not Eligible Accounts:
(1) Accounts which, at the date of issuance of the respective
invoice therefor, were payable more than sixty (60) days after the date of
issuance of such invoice, provided that thirty-five percent (35%) of the
aggregate amount of Accounts outstanding at any one time that contain dating of
more than sixty (60) but less than or equal to one hundred twenty (120) days
after the issuance of any such invoice would be eligible; provided, however,
that with respect to any one customer, Accounts that contains such dated terms
may not exceed ten percent (10%) of the aggregate amount of Accounts outstanding
at any one time from such customer;
(2) Accounts which remain unpaid for more than sixty (60) days
after the due date specified in the original invoice or for more than one
hundred twenty one (121) days after invoice date if no due date was specified;
(3) Accounts due from a customer whose principal place of
business is located outside the United States of America (other than Accounts
due from (i) Foot Locker Europe B.V. up to an aggregate outstanding amount of
$750,000 and (ii) Woolworth Canada, Inc. or its successor up to an aggregate
outstanding amount of $750,000), unless such Account is backed by a letter of
credit, in form and substance acceptable to Agent, and issued or confirmed by a
bank that is organized under the laws of the United States of America or a State
thereof, that has capital and surplus in excess of $250,000,000 and that is
acceptable to Agent, provided that such letter of credit has been delivered to
Agent as additional Collateral;
(4) Accounts which are otherwise eligible with respect to which
the account debtor is owed a credit by Borrower, but only to the extent of such
credit;
(5) Accounts due from an account debtor which Agent has notified
Borrower does not have a satisfactory credit rating;
(6) Accounts with payment terms in excess of sixty (60) days with
respect to which the account debtor is the United States of America, any state
or any municipality, or any department, agency or instrumentality thereof unless
Borrower has, with respect to such Accounts, complied with the Federal
Assignment of Claims Act of 1940 as amended (31 U.S.C. Section 3727 et seq) or
any applicable statute or municipal ordinance of similar purpose and effect;
(7) Accounts with respect to which the account debtor is an
Affiliate of Borrower or a director, officer, agent, stockholder or employee of
Borrower or any of its Affiliates (other than arms length Accounts owing by
Division Six Sports, Inc. so long as such company is a factoring client of
Heller);
(8) Accounts due from an account debtor if more than 25% of the
aggregate amount of Accounts of such account debtor have at the time remained
unpaid for more than sixty (60) days after due date or one hundred and twenty
(120) days after the invoice date if no due date was specified;
(9) Accounts with respect to which there is any unresolved
dispute with the respective account debtor (but only to the extent of such
dispute);
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(10) Accounts evidenced by an "instrument" or "chattel paper"
(as defined in the UCC) not in the possession of Agent, on behalf of Lenders;
(11) Accounts with respect to which Agent, on behalf of
Lenders, does not have a valid, first priority and fully perfected security
interest;
(12) Accounts subject to any lien except those in favor of
Agent, on behalf of Lenders;
(13) Accounts with respect to which the account debtor is the
subject of any bankruptcy or other insolvency proceeding;
(14) Accounts due from an account debtor to the extent that
such Accounts exceed in the aggregate an amount equal to thirty percent (30%) of
the aggregate of all Accounts at said date;
(15) Accounts with respect to which the account debtor's
obligation to pay is conditional or subject to a repurchase obligation or right
to return or with respect to which the goods or services giving rise to such
Account have not been delivered (or performed, as applicable) and accepted by
such account debtor, including progress billings, bill and hold sales,
guarantied sales, sale or return transactions, sales on approval or consignment
sales;
(16) Accounts with respect to which the account debtor is
located in New Jersey, or any other state denying creditors access to its courts
in the absence of a Notice of Business Activities Report or other similar
filing, unless Borrower has either qualified as a foreign corporation authorized
to transact business in such state or has filed a Notice of Business Activities
Report or similar filing with the applicable state agency for the then current
year;
(17) Accounts with respect to which the customer is owed a
credit balance by Borrower which remains unpaid for more than ninety (90) days
(but only to the extent of such credit);
(18) Any Account with respect to which the customer is a
Person to which Borrower is indebted, provided, however, that any such account
shall only be ineligible as to that portion of such account which is less than
or equal to the amount owed by Borrower to such Person; and
(19) Accounts with respect to which the account debtor is a
creditor of Borrower, provided, however, that any such Account shall only be
ineligible as to that portion of such Account which is less than or equal to the
amount owed by Borrower to such Person.
"Eligible Inventory" means, as at any date of determination, the
value (determined at the lower of cost or market on a first-in, first-out basis)
of all Inventory owned by Borrower and located in the United States of America
that Agent, in its reasonable credit judgment, deems to be eligible for
borrowing purposes. Without limiting the generality of the foregoing, the
Requisite Lenders may determine that the following is not Eligible Inventory:
(a) work-in-process that is not readily marketable in its current form; (b)
finished goods which do not meet the specifications of the purchase order for
such goods; (c) Inventory which Agent determines, is unacceptable for borrowing
purposes due to age, quality, type, category and/or quantity; (d) packaging,
shipping materials or supplies consumed in Borrower's business; (e) Inventory
with respect to which Agent, on behalf of Lenders, does not have a valid, first
priority and fully perfected security interest; (f) Inventory with respect to
which there exists any Lien in favor of any Person other than Agent, on behalf
of Lenders; (g) Inventory produced in violation of the Fair Labor Standards Act
and subject to the so-called "hot goods" provisions contained in Title 29 U.S.C.
215(a)(i) or any replacement statute; (h) Inventory located at any location not
scheduled by Borrower; and (i) any finished goods inventory styled with a turn
of greater than three hundred and sixty (360) days; provided, however, that any
such style shall remain eligible if open orders exist in respect of greater than
forty percent (40%) of the total such inventory on hand.
"Eligible Retail Inventory" means Eligible Inventory (a) which is
located at any of the Borrower's retail locations for which Borrower has used
its best commercial efforts to obtain for the benefit of Agent a Landlord Waiver
and consent executed by the lessor or landlord of such location and (b) the
proceeds of the sale of which are remitted by Borrower to a bank account or
accounts blocked or controlled by Agent.
"Swingline Lender" means Heller, or if Heller shall resign as
Swingline Lender, another lender selected by Agent and reasonably acceptable to
Borrower.
(D) Swingline Loan. Agent may convert any request by Borrower for a
Revolving Advance into a request for an Advance under the Swingline Loan. The
Swingline Loan shall be a Base Rate Loan and shall not exceed in the aggregate
at any time outstanding the Maximum Swingline Loan Amount. In the event that on
any Business Day Swingline Lender desires that all or any portion of the
Swingline Loan should be reduced in whole or in part, Swingline Lender shall
promptly notify Agent to that effect and indicate the portion of the Swingline
Loan to be reduced. Swingline Lender hereby agrees that it shall notify Agent to
reduce the Swingline Loan to $0 at least once every rolling, consecutive twenty
one (21) day period. Agent agrees to promptly transmit to Lenders the
information contained in each notice received by Agent from Swingline Lender and
shall concurrently notify Lenders of each Lender's Pro Rata Share of the
obligation to make a Revolving Advance to repay the Swingline Loan (or portion
thereof).
Each of the Lenders hereby unconditionally and irrevocably agrees to fund
to Agent for the benefit of Swingline Lender, in lawful money of the United
States and in same day funds, not later than 1:00 p.m. Central time on the
Business Day immediately following the Business Day of such Lender's receipt of
such notice from Agent (provided that if any Lender shall receive such notice at
or prior to 11:00 a.m. Central time on a Business Day, such funding shall be
made by such Lender on such Business Day), such Lender's Pro Rata Share of a
Revolving Advance (which Revolving Advance shall be a Base Rate Loan and shall
be deemed to be requested by Borrower) in the principal amount of such portion
of the Swingline Loan which is required to be paid to Swingline Lender under
this subsection 2.1(D) (regardless of whether the conditions precedent thereto
set forth in Section 3 and the Conditions Rider are then satisfied and whether
or not Borrower has provided a notice of borrowing under subsection 2.1(E) and
whether or not any Default or Event of Default exists or all or any of the Loans
have been accelerated, but subject to the other provisions of this subsection
2.1(D). The proceeds of any such Revolving Advance shall be immediately paid
over to Agent for the benefit of Swingline Lender for application applied by
Agent to the Swingline Loan.
In the event that an Event of Default shall occur and either (i) such
Event of Default is of the type described in subsection 8.1(G) or (H) hereof or
(ii) no further Revolving Advances are being made under this Agreement, so long
as any such Event of Default is continuing, then, each of the Lenders (other
than Swingline Lender) shall be deemed to have irrevocably, unconditionally and
immediately purchased from Swingline Lender such Lender's pro rata share of the
Swingline Loan outstanding as of the date of the occurrence of such Event of
Default. Each Lender shall effect such purchase by making available an amount
equal to its participation on the due date of such purchase in U.S. Dollars in
immediately available funds to Agent's Accounts for the benefit of Swingline
Lender. In the event any Lender fails to make available to Swingline Lender when
due the amount of such Lender's participation in the Swingline Loan, Swingline
Lender shall be entitled to recover such amount on demand from such Lender
together with interest at the Federal Funds Effective Rate. Each such purchase
by a Lender shall be made without recourse to Swingline Lender, without
representation or warranty of any kind, and shall be effected and evidenced
pursuant to documents reasonably acceptable to Swingline Lender. The obligations
of the Lenders under this subsection 2.1(D) shall be absolute, irrevocable and
unconditional, shall be made under all circumstances and shall not be affected,
reduced or impaired for any reason whatsoever.
(E) Borrowing Mechanics. (1) LIBOR Loans made on any Funding Date
shall be in an aggregate minimum amount of $500,000 and integral multiples of
$100,000 in excess of such amount. (2) On any day when Borrower desires an
advance under this subsection 2.1, Borrower shall give Agent telephonic notice
of the proposed borrowing by 11:00 a.m. Central time on the Funding Date of a
Base Rate Loan and three Business Days in advance of the Funding Date of a LIBOR
Loan, which notice (a "Notice of Borrowing") shall specify the proposed Funding
Date (which shall be a Business Day), whether such Loans shall consist of Base
Rate Loans or LIBOR Loans, and, for LIBOR Loans, the Interest Period applicable
thereto. Any such telephonic notice shall be confirmed in writing on the same
day. Neither Agent nor Lender shall incur any liability to Borrower for acting
upon any telephonic notice Agent believes in good faith to have been given by a
duly authorized officer or other person authorized to borrow on behalf of
Borrower or for otherwise acting in good faith under this subsection 2.1(E).
Neither Agent nor Lender will be required to make any advance pursuant to any
telephonic notice unless Agent has also received the most recent Borrowing Base
Certificate and all other documents required under Section 3 and the Reporting
Rider hereof by 11:00 a.m. Central time. Each Advance shall be deposited by wire
transfer in immediately available funds in such account as Borrower may from
time to time designate to Agent in writing. The becoming due of any amount
required to be paid under this Agreement or any of the other Loan Documents as
principal, accrued interest and fees shall be deemed irrevocably to be on
automatic request by Borrower for a Revolving Advance, which shall be a Base
Rate Loan on the due date of, and in the amount required to pay (as set forth on
Agent's books and records), such principal, accrued interest and fees.
(F) Notes. Borrower shall execute and deliver to each Lender with
appropriate insertions a Note to evidence such Lender's Commitments. In the
event of an assignment under subsection 9.5, Borrower shall, upon surrender of
the assigning Lender's Notes, issue new Notes to reflect the interest held by
the assigning Lender and its Eligible Assignee.
(G) Letters of Credit. The Revolving Loan Commitments, may, in
addition to Revolving Advances, be utilized, upon the request of Borrower, for
(i) the issuance of letters of credit by Agent; or with Agent's consent any
Lender, or (ii) issuance by Agent of risk participations to banks to induce such
banks to issue Bank Letters of Credit or bank acceptances ("Bank Acceptances")
for the account of Borrower (each of (i) and (ii) above a "Lender Letter of
Credit"). Each Lender shall be deemed to have purchased a participation in each
Lender Letter of Credit issued on behalf of Borrower in an amount equal to its
Pro Rata Share thereof. In no event shall any Lender Letter of Credit be issued
to the extent that the issuance of such Lender Letter of Credit would cause the
sum of the Letter of Credit Reserve (after giving effect to such issuance) plus
the Revolving Loan to exceed the lesser of (x) the Borrowing Base and (y) the
Revolving Loan Commitment.
(1) Maximum Amount. The aggregate amount of Bank Acceptances
outstanding at any time shall not exceed $9,000,000. The aggregate amount of
Letter of Credit Liability with respect to all Lender Letters of Credit
outstanding at any time shall not exceed $18,000,000.
(2) Reimbursement. Borrower shall be irrevocably and
unconditionally obligated forthwith without presentment, demand, protest or
other formalities of any kind, to reimburse Agent or the issuer for any amounts
paid with respect to a Lender Letter of Credit including all fees, costs and
expenses paid to any bank that issues a Bank Letter of
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Credit. Borrower hereby authorizes and directs Agent, at Agent's option, to
debit Borrower's account (by increasing the Revolving Loan) in the amount of any
payment made with respect to any Lender Letter of Credit. In the event that
Agent elects not to debit Borrower's account and Borrower fails to reimburse
Agent in full on the date of any payment under a Lender Letter of Credit, Agent
shall promptly notify each Lender of the unreimbursed amount of such payment
together with accrued interest thereon and each Lender, on the next Business
Day, shall deliver to Agent an amount equal to its respective participation in
same day funds. The obligation of each Lender to deliver to Agent an amount
equal to its respective participation pursuant to the foregoing sentence shall
be absolute and unconditional and such remittance shall be made notwithstanding
the occurrence or continuation of an Event of Default or Default or the failure
to satisfy any condition set forth in Section 3. In the event any Lender fails
to make available to Agent the amount of such Lender's participation in such
Lender Letter of Credit, Agent shall be entitled to recover such amount on
demand from such Lender together with interest at the Base Rate.
(3) Request for Letters of Credit. Borrower shall give Agent
at least one (1) Business Days prior notice specifying the date a Lender Letter
of Credit is to be issued, identifying the beneficiary and describing the nature
of the transactions proposed to be supported thereby. The notice shall be
accompanied by the form of the letter of credit being requested. Any letter of
credit which Borrower requests must be in such form, be for such amount, contain
such terms and support such transactions as are reasonably satisfactory to
Agent. The expiration date of each Lender Letter of Credit shall be on a date
which is at least 30 days prior to the Termination Date, unless otherwise agreed
to by Agent.
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(H) Other Letter of Credit Provisions.
(1) Obligations Absolute. The obligation of Borrower to
reimburse Agent or any Lender for payments made under, and other amounts payable
in connection with, any Lender Letter of Credit shall be unconditional and
irrevocable and shall be paid under all circumstances strictly in accordance
with the terms of this Agreement including, without limitation, the following
circumstances:
(a) any lack of validity or enforceability of any Lender
Letter of Credit, or any other agreement;
(b) the existence of any claim, set-off, defense or
other right which Borrower, any of its Affiliates, Agent or any Lender, on the
one hand, may at any time have against any beneficiary or transferee of any
Lender Letter of Credit (or any Persons for whom any such transferee may be
acting), Agent, any Lender or any other Person, on the other hand, whether in
connection with this Agreement, the transactions contemplated herein or any
unrelated transaction (including any underlying transaction between Borrower or
any of its Affiliates and the beneficiary of the Lender Letter of Credit);
(c) any draft, demand, certificate or any other document
presented under any Lender Letter of Credit is alleged to be forged, fraudulent,
invalid or insufficient in any respect or any statement therein being untrue or
inaccurate in any respect; or
(d) payment under any Lender Letter of Credit against
presentation of a demand, draft or certificate or other document which does not
comply with the terms of such Lender Letter of Credit; provided that, in the
case of any payment by Agent or a Lender under any Lender Letter of Credit,
Agent or such Lender has not acted with gross negligence or willful misconduct
(as determined by a court of competent jurisdiction) in determining that the
demand for payment under such Letter of Credit complies on its face with any
applicable requirements for a demand for payment under such Lender Letter of
Credit.
(2) Nature of Lender's Duties. As between any Lender that
issues a Lender Letter of Credit (an "Issuing Lender"), on the one hand, and all
Lenders on the other hand, all Lenders assume all risks of the acts and
omissions of, or misuse of any Lender Letter of Credit by the beneficiary
thereof. In furtherance and not in limitation of the foregoing, neither Agent
nor any Issuing Lender shall be responsible: (a) for the form, validity,
sufficiency, accuracy, genuineness or legal effect of any document by any party
in connection with the application for and issuance of any Lender Letter of
Credit, even if it should in fact prove to be in any or all respects invalid,
insufficient, inaccurate, fraudulent or forged; (b) for the validity or
sufficiency of any instrument transferring or assigning or purporting to
transfer or assign any Lender Letter of Credit or the rights or benefits
thereunder or proceeds thereof, in whole or in part, which may prove to be
invalid or ineffective for any reason; (c) for failure of the beneficiary of any
Lender Letter of Credit to comply fully with conditions required in order to
demand payment thereunder; provided that, in the case of any payment under any
such Lender Letter of Credit, any Issuing Lender has not acted with gross
negligence or willful misconduct (as determined by a court of competent
jurisdiction) in determining that the demand for payment under any such Lender
Letter of Credit complies on its face with any applicable requirements for a
demand for payment thereunder; (d) for errors, omissions, interruptions or
delays in transmission or delivery of any messages, by mail, cable, telegraph,
telex or otherwise, whether or not they be in cipher; (e) for errors in
interpretation of technical terms; (f) for any loss or delay in the transmission
or otherwise of any document required in order to make a payment under any such
Lender Letter of Credit; (g) for the credit of the proceeds of any drawing under
any such Lender Letter of Credit; and (h) for any consequences arising from
causes beyond the control of Agent or any Lender as the case may be.
(3) Liability. In furtherance and extension of and not in
limitation of, the specific provisions herein above set forth, any action taken
or omitted by Agent or any Lender under or in connection with any Lender Letter
of Credit, if taken or omitted in good faith, shall not put Agent or any Lender
under any resulting liability to Borrower or any other Lender.
(I) Availability of a Lender's Pro Rata Share.
(1) Unless Agent receives written notice from a Lender on or
prior to any Funding Date that such Lender will not make available to Agent as
and when required such Lender's Pro Rata Share of any requested Loan or Advance,
Agent may assume that each Lender will make such amount available to Agent in
immediately available funds on the Funding Date and Agent may (but shall not be
so required), in reliance upon such assumption, make available to Borrower on
such date a corresponding amount.
(2) A Defaulting Lender shall pay interest at the Federal
Funds Effective Rate plus fifty basis points on the Defaulted Amount from the
Business Day following the applicable Funding Date of such Defaulted Amount
until the date such Defaulted Amount is paid to Agent. A notice of Agent
submitted to any Lender with respect to amounts owing under this subsection
shall be conclusive, absent manifest error. If such amount is not paid when due
to Agent, Agent, at its option, may notify Borrower of such failure to fund and,
upon demand by Agent, Borrower shall pay the unpaid amount to Agent for Agent's
account, together with interest thereon for each day elapsed since the date of
such borrowing, at a rate per annum equal to the interest rate applicable at the
time to the Loan made by the other Lenders on such Funding Date. The failure of
any Lender to make available any portion of its Commitment on any Funding Date
or to fund its participation in a Lender Letter of Credit or Swingline Loan
shall not relieve any other Lender of any obligation hereunder to fund such
Lender's Commitment on such Funding Date or to fund any such participation, but
no Lender shall be responsible for the failure of any other Lender to honor its
Commitment on any Funding Date or to fund any participation to be funded by any
other Lender.
(3) Agent shall not be obligated to transfer to a Defaulting
Lender any payment made by Borrower to Agent or any amount otherwise received by
Agent for application to the Obligations nor shall a Defaulting Lender be
entitled to the sharing of any interest, fees or payments hereunder.
(4) For purposes of voting or consenting to matters with
respect to (i) the Loan Documents or (ii) any other matter concerning the Loans,
a Defaulting Lender shall be deemed not to be a "Lender" and such Lender's
Commitments and outstanding Loans and Advances shall be deemed to be zero.
2.2 Interest.
(A) Rate of Interest. Term Loan A, Term Loan B, and any Swingline
Loan shall be Base Rate Loans. Revolving Loans may be Base Rate Loans or LIBOR
Loans, subject to the terms hereof. The Loans and all other Obligations shall
bear interest from the date such Loans are made or such other Obligations become
due to the date paid at a rate per annum equal to (i) in the case of Base Rate
Loans and Obligations for which no other interest rate is specified, the Base
Rate plus (a) 0.25% with respect to the Revolving Loan, Swingline Loan and other
Obligations for which no other interest rate is specified, (b) 1.0% with respect
to Term Loan A and (c) 0.25% with respect to Term Loan B; and (ii) in the case
of LIBOR Loans, LIBOR plus 2.75% (collectively, the "Interest Rate"). Subject to
the provisions of subsection 2.1(E), Borrower shall designate to Agent whether a
Loan shall be a Base Rate or LIBOR Rate Loan at the time a Notice of Borrowing
is given pursuant to subsection 2.1(E). Such designation by Borrower may be
changed from time to time pursuant to subsection 2.2(D). If on any day a Loan or
a portion of any Loan is outstanding with respect to which notice has not been
delivered to Agent in accordance with the terms of this Agreement specifying the
basis for determining the rate of interest or if LIBOR has been specified and no
LIBOR quote is available, then for that day that Loan or portion thereof shall
bear interest determined by reference to the Base Rate.
After the occurrence and during the continuance of an Event of Default (i)
the Loans and all other Obligations shall, at the option of Requisite Lenders,
bear interest at a rate per annum equal to 2% plus the applicable Interest Rate
(the "Default Rate"), (ii) each LIBOR Loan shall automatically convert to a Base
Rate Loan at the end of any applicable Interest Period and (iii) no Loans may be
converted to LIBOR Loans.
(B) Computation and Payment of Interest. Interest on the Loans
and all other Obligations shall be computed on the daily principal balance on
the basis of a 360 day year for the actual number of days elapsed. In computing
interest on any Loan, the date of funding of the Loan or the first day of an
Interest Period applicable to such Loan or, with respect to a Base Rate Loan
being converted from a LIBOR Loan, the date of conversion of such LIBOR Loan to
such Base Rate Loan, shall be included; and the date of payment of such Loan or
the expiration date of an Interest Period applicable to such Loan, or with
respect to a Base Rate Loan being converted to a LIBOR Loan, the date of
conversion of such Base Rate Loan to such LIBOR Loan, shall be excluded;
provided that if a Loan is repaid on the same day on which it is made, one day's
interest shall be paid on that Loan. Interest on Base Rate Loans and all other
Obligations other than LIBOR Loans shall be payable to Agent for benefit of
Lenders monthly in arrears on the first day of each month, on the date of any
prepayment of Loans, and at maturity, whether by acceleration or otherwise.
Interest on LIBOR Loans shall be payable to Agent for benefit of Lenders ninety
days after the commencement of any Interest Period for such Loan, on the last
day of the applicable Interest Period for such Loan, on the date of any
prepayment of the Loan, and at maturity, whether by acceleration or otherwise.
(C) Interest Laws. Notwithstanding any provision to the
contrary contained in this Agreement or any other Loan Document, Borrower shall
not be required to pay, and neither Agent nor any Lender shall be permitted to
collect, any amount of interest in excess of the maximum amount of interest
permitted by applicable law ("Excess Interest"). If any Excess Interest is
provided for or determined by a court of competent jurisdiction to have been
provided for in this Agreement or in any other Loan Document, then in such
event: (1) the provisions of this subsection shall govern and control; (2)
neither Borrower nor any other Loan Party shall be obligated to pay any Excess
Interest; (3) any Excess Interest that Agent or any Lender may have received
hereunder shall be, at such Lender's option, (a) applied as a credit against the
outstanding principal balance of the Obligations or accrued and unpaid interest
(not to exceed the maximum amount permitted by law), (b) refunded to the payor
thereof, or (c) any combination of the foregoing; (4) the interest rate(s)
provided for herein shall be automatically reduced to the maximum lawful rate
allowed from time to time under applicable law (the "Maximum Rate"), and this
Agreement and the other Loan Documents shall be deemed to have been and shall
be, reformed and modified to reflect such reduction; and (5) neither Borrower
nor any Loan Party shall have any action against Agent or any Lender for any
damages arising out of the payment or collection of any Excess Interest.
Notwithstanding the foregoing, if for any period of time interest on any
Obligation is calculated at the Maximum Rate rather than the applicable rate
under this Agreement, and thereafter such applicable rate becomes less than the
Maximum Rate, the rate of interest payable on such Obligations shall remain at
the Maximum Rate until each Lender shall have received the amount of interest
which such Lender would have received during such period on such Obligations had
the rate of interest not been limited to the Maximum Rate during such period.
(D) Conversion or Continuation. Subject to the provisions of
this subsection 2.2, Borrower shall have the option to (1) convert at any time
all or any part of outstanding Loans equal to $500,000 and integral multiples of
$100,000 in excess of that amount from Base Rate Loans to LIBOR Loans or (2)
upon the expiration of any Interest Period applicable to a
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LIBOR Loan, to (a) continue all or any portion of such LIBOR Loan equal to
$500,000 and integral multiples of $100,000 in excess of that amount as a LIBOR
Loan or (b) convert all or any portion of such LIBOR Loan to a Base Rate Loan.
The succeeding Interest Period(s) of such continued or converted Loan commence
on the last day of the Interest Period of the Loan to be continued or converted;
provided that no outstanding Loan may be continued as, or be converted into, a
LIBOR Loan, when any Event of Default or Default has occurred and is continuing.
Borrower shall deliver a notice of conversion/continuation in
the form of Exhibit "F" hereto to Agent no later than 11:00 a.m. (Central time)
at least 3 Business Days in advance of the proposed conversion/continuation date
("Notice of Conversion/Continuation"). A Notice of Conversion/Continuation shall
certify: (1) the proposed conversion/continuation date (which shall be a
Business Day); (2) the amount of the Loan to be converted/continued; (3) the
nature of the proposed conversion/continuation; (4) in the case of conversion
to, or a continuation of, a LIBOR Loan, the requested Interest Period; and (5)
that no Default or Event of Default has occurred and is continuing or would
result from the proposed conversion/continuation.
In lieu of delivering the Notice of Conversion/Continuation,
Borrower may give Agent telephonic notice by the required time of any proposed
conversion/continuation under this subsection 2.2(D); provided that such notice
shall be promptly confirmed in writing by delivery of a Notice of
Conversion/Continuation to Agent on or before the proposed
conversion/continuation date.
Neither Agent nor any Lender shall incur any liability to
Borrower in acting upon any telephonic notice referred to above that Agent
believes in good faith to have been given by an officer or other person
authorized to act on behalf of Borrower or for otherwise acting in good faith
under this subsection 2.2(D).
2.3 Fees.
(A) Unused Line Fee. Borrower shall pay to Agent, for the
benefit of Lenders, a fee in an amount equal to the Revolving Loan Commitment
less the sum of (i) the average daily balance of each of the Revolving Loan and
the Swingline Loan plus, (ii) the average daily face amount of the Letter of
Credit Reserve during the preceding month, multiplied by 0.25% per annum, such
fee to be calculated on the basis of a 360 day year for the actual number of
days elapsed and to be payable monthly in arrears on the first day of each month
following the Closing Date.
(B) Other Fees and Expenses. Borrower shall pay to Agent, for
Agent's own account, such other fees and charges as set forth in Agent's Fee
Letter.
2.4 Payments and Prepayments.
(A) Manner and Time of Payment. In its sole discretion, Agent
may elect to honor the automatic requests by Borrower for Revolving Advances for
all principal, interest, fees and any other amounts due hereunder on their
applicable due dates pursuant to subsection 2.1, and the proceeds of each such
Advance, if made, shall be applied as a direct payment of the relevant
Obligation. If Agent elects to bill Borrower for any amount due hereunder, such
amount shall be immediately due and payable with interest thereon as provided
herein. All payments made by Borrower with respect to the Obligations shall be
made without deduction, defense, setoff or counterclaim. All payments to Agent
hereunder shall, unless otherwise directed by Agent, be made to Agent's Account
or in accordance with subsection 4.26. Proceeds remitted to Agent's Account
shall be credited to the Obligations on the Business Day such proceeds were
received.
(B) Mandatory Prepayments.
(1) Overadvance. At any time that the sum of the
Revolving Loan and Swingline Loan exceeds the Maximum Revolving Loan Amount,
Borrower shall, immediately repay the Revolving Loan and/or Swingline Loan to
the extent necessary to reduce the aggregate principal balance to an amount
equal to or less than the Maximum Revolving Loan Amount.
(2) Proceeds of Asset Dispositions. Immediately upon
receipt by Borrower or any of its Subsidiaries of proceeds of any Asset
Disposition (in one or a series of related transactions), which proceeds exceed
$5,000 (it being understood that if the proceeds exceed $5,000, the entire
amount and not just the portion above $5,000 shall be subject to this subsection
2.4(B)(2), Borrower shall prepay the Obligations in an amount equal to such
proceeds. All such prepayments shall first be applied in payment of Scheduled
Installments of Term Loan A in inverse order of maturity and, at any time after
Term Loan A shall have been repaid in full, such payments shall be applied as a
permanent reduction of the Revolving Loan Commitment. If Borrower reasonably
expects the proceeds of any Asset Disposition to be reinvested within 180 days
to repair or replace such assets with like assets, Borrower shall deliver the
proceeds to Agent to be applied to the Revolving Loan and Agent shall establish
a reserve against available funds for borrowing purposes under the Revolving
Loan for such amount, until such time as such proceeds have been re-borrowed or
applied to other Obligations as set forth herein. Borrower may, so long as no
Default or Event of Default shall have occurred and be continuing, reborrow such
proceeds only for such repair or replacement. If Borrower fails to reinvest such
proceeds within 180 days, Borrower hereby authorizes Lenders to make a Revolving
Advance to repay the Obligations in the manner set forth in this subsection
2.4(B)(2).
(C) Voluntary Prepayments and Repayments. Except as provided
in subsection 2.4(B), Borrower's Obligations may only be prepaid or repaid in
full and not in part. Borrower may, at any time upon not less than three
Business Days prior notice to Agent, prepay the Term Loans or terminate the
Revolving Loan Commitment; provided, however, the Revolving Loan Commitment may
not be terminated by Borrower until all Loans are paid in full. Upon termination
of the Revolving Loan Commitment, Borrower shall cause Agent and each Lender to
be released from all liability under any Lender Letters of Credit or, at Agent's
option, Borrower will deposit cash collateral with Agent in an amount equal to
105% of the Letter of Credit Liability that will remain outstanding after such
termination.
(D) Payments on Business Days. Whenever any payment to be made
hereunder shall be stated to be due on a day that is not a Business Day, the
payment may be made on the next succeeding Business Day and such extension of
time shall be included in the computation of the amount of interest or fees due
hereunder.
2.5 Term of this Agreement. This Agreement shall be effective until
December 31, 2002 (the "Original Term") and shall automatically renew from year
to year thereafter (each such year a "Renewal Term") unless terminated by (a)
Borrower giving to Agent or (b) any Lender giving to Borrower and Agent not less
than 60 days prior written notice of its intention to terminate at the end of
the Original Term or at the end of any Renewal Term (the "Termination Date").
The Commitments shall (unless earlier terminated) terminate upon the earlier of
(i) the occurrence of an event specified in subsection 8.3 or (ii) the
Termination Date. Upon termination in accordance with subsection 8.3 or on the
Termination Date, all Obligations shall become immediately due and payable
without notice or demand. Notwithstanding any termination, until all Obligations
have been fully paid and satisfied, agent, on behalf of Lenders, shall be
entitled to retain security interests in and liens upon all Collateral, and even
after payment of all Obligations hereunder, Borrower's obligation to indemnify
Agent and each Lender in accordance with the terms hereof shall continue.
2.6 Statements. Agent shall render a monthly statement of account to
Borrower within 20 days after the end of each month. Such statement of account
shall constitute an account stated unless Borrower makes written objection
thereto within 30 days from the date such statement is mailed to Borrower. Agent
shall record in its books and records, including computer records, the principal
amount of the Loan[s] owing to each Lender from time to time. Agent's books and
records including computer records, shall constitute presumptive evidence,
absent manifest error, of the accuracy of the information contained therein.
Failure by Agent to make any such notation or record shall not affect the
obligations of Borrower[s] to Lenders with respect to the Loans.
2.7 Grant of Security Interest. To secure the payment and performance of
the Obligations, including all renewals, extensions, restructurings and
refinancings of any or all of the Obligations, Borrower hereby grants to Agent,
on behalf of Lenders, a continuing security interest, lien and mortgage in and
to all right, title and interest of Borrower in all of Borrower's personal and
real property, whether now owned or existing or hereafter acquired or arising
and regardless of where located (all being collectively referred to as the
"Collateral") including, without limitation, (A) Accounts, and all guaranties
and security therefor, and all goods and rights represented thereby or arising
therefrom including the rights of stoppage in transit, replevin and reclamation;
(B) Inventory; (C) general intangibles (as defined in the UCC); (D) documents
(as defined in the UCC) or other receipts covering, evidencing or representing
goods; (E) instruments (as defined in the UCC): (F) chattel paper (as defined in
the UCC): (G) Equipment; (H) investment property (as defined in the UCC)
including, without limitation, all securities (certificated and uncertificated)
security accounts, security entitlements, commodity contracts and commodity
accounts; (I) Intellectual Property; (J) all deposit accounts of Borrower
maintained with any bank or financial institution; (K) all cash and other monies
and property of Borrower in the possession or under the control of Agent, any
Lender or any participant; (L) all books, records, ledger cards, files,
correspondence, computer programs, tapes, disks and related data processing
software that any time evidence or contain information relating to any of the
property described above or are otherwise necessary or helpful in the collection
thereof or realization thereon; and (M) proceeds and products of all or any of
the property described above, including, without limitation, the proceeds of any
insurance policies covering any of the above described property.
2.8 Capital Adequacy and Other Adjustments. In the event Agent or any
Lender shall have determined that the adoption after the date hereof of any law,
treaty, governmental (or quasi-governmental) rule, regulation, guideline or
order regarding capital adequacy, reserve requirements or similar requirements
or compliance by Agent or such Lender or any corporation controlling Agent or
such Lender with any request or directive regarding capital adequacy, reserve
requirements or similar requirements (whether or not having the force of law and
whether or not failure to comply therewith would be unlawful) from any central
bank or governmental agency or body having jurisdiction does or shall have the
effect of increasing the amount of capital, reserves or other funds required to
be maintained by Agent or such Lender or any corporation controlling Agent or
such Lender and thereby reducing the rate of return on Agent's or such Lender's
or such corporation's capital as a consequence of its obligations hereunder,
then Borrower shall within 15 days after notice and demand from such Lender
(with a copy to Agent) or Agent (together with the certificate referred to in
the next sentence) pay to Agent or such Lender additional amounts sufficient to
compensate Agent or such Lender for such reduction. A certificate as to the
amount of such cost and showing the basis of the computation of such cost
submitted by Agent or any Lender to Borrower shall, absent manifest error, be
final, conclusive and binding for all purposes.
2.9 Taxes.
(A) No Deductions. Any and all payments or reimbursements made
hereunder shall be made free and clear of and without deduction for any and all
taxes, levies, imposts, deductions, charges or withholdings, and all liabilities
with respect thereto; excluding, however, the following: taxes imposed on the
net income of any Lender or Agent by the jurisdiction under the laws of which
Agent or such Lender is organized or doing business or any political subdivision
thereof and taxes imposed on its net income by the jurisdiction of Agent's or
such Lender's applicable lending office or any political subdivision thereof
(all such taxes, levies, imposts, deductions, charges or withholdings and all
liabilities with respect thereto excluding such taxes imposed on net income,
herein "Tax Liabilities"). If Borrower shall be required by law to deduct any
such Tax Liabilities from or in respect of any sum payable hereunder to Agent or
any Lender, then the sum payable hereunder shall be
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<PAGE> 11
increased as may be necessary so that, after making all required deductions,
Agent or such Lender receives an amount equal to the sum it would have received
had no such deductions been made.
(B) Changes in Tax Laws. In the event that, subsequent to the
Closing Date, (i) any changes in any existing law, regulation, treaty or
directive or in the interpretation or application thereof, (ii) any new law,
regulation, treaty or directive enacted or any interpretation or application
thereof, or (iii) compliance by Lender with any request or directive (whether or
not having the force of law) from any governmental authority, agency or
instrumentality:
(1) does or shall subject Agent or any Lender to any tax
of any kind whatsoever with respect to this Agreement, the other Loan Documents
or any Loans made or Lender Letters of Credit issued hereunder, or change the
basis of taxation of payments to Agent or such Lender of principal, fees,
interest or any other amount payable hereunder (except for net income taxes, or
franchise taxes imposed in lieu of net income taxes, imposed generally by
federal, state or local taxing authorities with respect to interest or
commitment or other fees payable hereunder or changes in the rate of tax on the
overall net income of Agent or such Lender); or
(2) does or shall impose on Agent or any Lender any
other condition or increased cost in connection with the transactions
contemplated hereby or participations herein; and the result of any of the
foregoing is to increase the cost to Agent or such Lender of issuing any Lender
Letter of Credit or making or continuing any Loan hereunder, as the case may be,
or to reduce any amount receivable hereunder; then, in any such case, Borrower
shall promptly pay to Agent or such Lender, upon its demand, any additional
amounts necessary to compensate Agent or such Lender, on an after-tax basis, for
such additional cost or reduced amount receivable, as determined by Agent or
such Lender with respect to this Agreement or the other Loan Documents. If Agent
or any Lender becomes entitled to claim any additional amounts pursuant to this
subsection, it shall promptly notify Borrower of the event by reason of which
Agent or such Lender has become so entitled (with any such Lender concurrently
notifying Agent). A certificate as to any additional amounts payable pursuant to
the foregoing sentence submitted by Agent or any Lender to Borrower shall,
absent manifest error, be final, conclusive and binding for all purposes.
(C) Foreign Lenders. Each Lender organized under the laws of a
jurisdiction outside the United States (a "Foreign Lender") as to which payments
to be made under this Agreement are exempt from United States withholding tax or
are subject to United States withholding tax at a reduced rate under an
applicable statute or tax treaty shall provide to Borrower and Agent (i) a
properly completed and executed Internal Revenue Service Form 4224 or Form 1001
or other applicable form, certificate or document prescribed by the Internal
Revenue Service of the Untied States certifying as to such Foreign Lender's
entitlement to such exemption or reduced rate of withholding with respect to
payments to be made to such Foreign Lender under this Agreement, (a "Certificate
of Exemption"), or (ii) a letter from any such Foreign Lender stating that it is
not entitled to any such exemption or reduced rate of withholding (a "Letter of
Non-Exemption"). Prior to becoming a Lender under this Agreement and within 15
days after a reasonable written request of Borrower or Agent from time to time
thereafter, each Foreign Lender that becomes a Lender under this Agreement shall
provide a Certificate of Exemption or a Letter of Non-Exemption to Borrower and
Agent.
If a Foreign Lender is entitled to an exemption with respect
to payments to be made to such Foreign Lender under this Agreement (or to a
reduced rate of withholding) and does not provide a Certificate of Exemption to
Borrower and Agent within the time periods set forth in the preceding paragraph,
Borrower shall withhold taxes from payments to such Foreign Lender at the
applicable statutory rates and Borrower shall not be required to pay any
additional amounts as a result of such withholding; provided, however, that all
such withholding shall cease upon delivery by such Foreign Lender of a
Certificate of Exemption to Borrower and Agent.
2.10 Required Termination and Prepayment. If on any date any Lender shall
have reasonably determined (which determination shall be final and conclusive
and binding upon all parties) that the making or continuation of its LIBOR Loans
has become unlawful or impossible by compliance by Lender in good faith with any
law, governmental rule, regulation or order (whether or not having the force of
law and whether or not failure to comply therewith would be unlawful), then, and
in any such event, that Lender shall promptly give notice (by telephone
confirmed in writing) to Borrower and Agent of that determination. Subject to
prior withdrawal of a Notice of Borrowing or a Notice of Conversion/Continuation
or prepayment of LIBOR Loans as contemplated by subsection 2.12, the obligation
of Lender to make or maintain its LIBOR Loans during any such period shall be
terminated at the earlier of the termination of the Interest Period then in
effect or when required by law and Borrower shall no later than the termination
of the Interest Period in effect at the time any such determination pursuant to
this subsection 2.10 is made or, earlier when required by law, repay or prepay
LIBOR Loans together with all interest accrued thereon or convert LIBOR Loans to
Base Rate Loans.
2.11 Optional Prepayment/Replacement of Agent or Lenders in Respect of
Increased Costs. Within 15 days after receipt by Borrower of written notice and
demand from Agent or any Lender (an "Affected Lender") for payment of additional
costs as provided in subsection 2.8 or subsection 2.9, Borrower may, at its
option, notify Agent and such Affected Lender of its intention to do one of the
following:
(a) Borrower may obtain, at Borrower's expense, a replacement
Lender ("Replacement Lender") for such Affected Lender, which Replacement
Lender shall be reasonably satisfactory to Agent. In the event Borrower obtains
a Replacement Lender within 90 days following notice of its intention to do so,
the Affected Lender shall sell and assign its Loans and Commitments to such
Replacement Lender provided, that Borrower has reimbursed such Affected Lender
for its increased costs for which it is entitled to reimbursement under this
Agreement through the date of such sale and assignment; or
(b) Borrower may prepay in full all outstanding obligations
owed to such Affected Lender and terminate such Affected Lender's Commitments.
Borrower shall, within 90 days following notice of its intention to do so,
prepay in full all outstanding Obligations owed to such Affected Lender,
including such Affected Lender's increased costs for which it is entitled to
reimbursement under this Agreement through the date of such prepayment and
terminate such Affected Lender's Commitments.
2.12 Compensation. Borrower shall compensate a Lender, upon written
request by such Lender (which request shall set forth in reasonable detail the
basis for requesting such amounts and which shall, absent manifest error, be
conclusive and binding upon all parties hereto), for all reasonable losses,
expenses and liabilities including, without limitation, any loss sustained by
such Lender in connection with the re-employment of such funds: (i) if for any
reason (other than a default by Lender) a borrowing of any LIBOR Loan does not
occur on a date specified therefor in a Notice of Borrowing, a Notice of
Conversion/Continuation or a telephonic notice for borrowing or
Conversion/Continuation; (ii) if any prepayment of any of its LIBOR Loans occurs
on a date that is not the last day of an Interest Period applicable to that
Loan; (iii) if any prepayment of any of its LIBOR Loans is not made on any date
specified in a notice of prepayment given by Borrower; or (iv) as a consequence
of any other default by Borrower to repay its LIBOR Loans when required by the
terms of this Agreement; provided that during the period while any such amounts
have not been paid, Lender shall reserve an equal amount from amounts otherwise
available to be borrowed under the Revolving Loan Commitment.
2.13 Booking of LIBOR Loans. Each Lender may make, carry or transfer LIBOR
Loans at, to, or for the account of, any of its branch offices or the office of
an affiliate of Lender.
2.14 Assumptions Concerning Funding of LIBOR Loans. Calculation of all
amounts payable to Lender under subsection 2.12 shall be made as though each
Lender had actually funded its relevant LIBOR Loan through the purchase of a
LIBOR deposit bearing interest at LIBOR in an amount equal to the amount of that
LIBOR Loan and having maturity comparable to the relevant Interest Period and
through the transfer of such LIBOR deposit from an offshore office to a domestic
office in the United States of America; provided, however, that each Lender may
fund each of its LIBOR Loans in any manner it sees fit and the foregoing
assumption shall be utilized only for the calculation of amounts payable under
subsection 2.12.
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SECTION 1. CONDITIONS TO LOANS
The obligations of Agent and each Lender to make Loans and the obligation
of Agent or any Lender to issue Lender Letters of Credit on the Closing Date and
on each Funding Date are subject to satisfaction of all of the terms and
conditions set forth in this Agreement and in the Conditions Rider attached
hereto and the accuracy of all the representations and warranties of Borrower
and the other Loan Parties set forth herein and in the other Loan Documents.
SECTION 2. BORROWER'S REPRESENTATIONS, WARRANTIES
AND CERTAIN COVENANTS
To induce Agent and each Lender to enter into the Loan Documents, to make
and to continue to make Loans and to issue and to continue to issue Lender
Letters of Credit, Borrower represents, warrants and covenants to Agent and each
Lender that the following statements are and will be true, correct and complete
and, unless specifically limited, shall remain so for so long as any of the
Commitments hereunder shall be in effect and until payment in full of all
Obligations.
2.1 Organization, Powers, Capitalization.
(A) Organization and Powers. Each of the Loan Parties is a
corporation duly organized, validly existing and in good standing under the laws
of its jurisdiction of incorporation and qualified to do business in all states
where such qualification is required except where failure to be so qualified
could not reasonably be expected to have a Material Adverse Effect. Each of the
Loan Parties has all requisite corporate power and authority to own and operate
its properties, to carry on its business as now conducted and proposed to be
conducted and to enter into each Loan Document.
(B) Capitalization. The authorized capital stock of each of the Loan
Parties and its respective Subsidiaries is as set forth on Schedule 4.1(B)
including, all preemptive or other outstanding rights, options, warrants,
conversion rights or similar agreements or understandings for the purchase or
acquisition from any Loan Party of any shares of capital stock or other
securities of any such entity. All issued and outstanding shares of capital
stock of each of the Loan Parties are duly authorized and validly issued, fully
paid, nonassessable, free and clear of all Liens [other than those in favor of
Agent for the benefit of Lenders,] and such shares were issued in compliance
with all applicable state and federal laws concerning the issuance of
securities. Each Loan Party will promptly notify Lender of any change in its
ownership or corporate structure.
2.2 Authorization of Borrowing, No Conflict. Borrower has the corporate
power and authority to incur the Obligations and to grant security interests in
the Collateral. On the Closing Date, the execution, delivery and performance of
the Loan Documents by each Loan Party signatory thereto will have been duly
authorized by all necessary corporate and shareholder action. The execution,
delivery and performance by each Loan Party of each Loan Document to which it is
a party and the consummation of the transactions contemplated by the Loan
Documents by each Loan Party do not contravene any applicable law, the corporate
charter or bylaws of any Loan Party or any agreement or order by which any Loan
Party or any Loan Party's property is bound. The Loan Documents are the legally
valid and binding obligations of the applicable Loan Parties respectively, each
enforceable against the Loan Parties, as applicable, in accordance with their
respective terms.
2.3 Financial Condition. All financial statements concerning Borrower and
its Subsidiaries furnished by or on behalf of Borrower or its Subsidiaries to
Agent or any Lender pursuant to this Agreement have been prepared in accordance
with GAAP consistently applied throughout the periods involved (except as
disclosed therein) and present fairly the financial condition of Persons covered
thereby as at the dated thereof and the results of their operations for the
periods then ended. The Projections delivered by Borrower will be prepared in
light of the past operations of the business of Borrower and its Subsidiaries,
and such Projections will represent the good faith estimate of Borrower and its
senior management concerning the most probable course of its business as of the
date such Projections are delivered.
2.4 Indebtedness and Liabilities. As of the Closing Date, Borrower does
not have (a) any Indebtedness except as reflected on the most recent financial
statements delivered to Agent and Lenders; or (b) any Liabilities other than as
reflected on the most recent financial statements delivered to Agent and Lenders
or as incurred in the ordinary course of business following the date of the most
recent financial statements delivered to Agent and Lenders. Borrower shall
promptly deliver copies of all notices given or received by Borrower and any of
its Subsidiaries with respect to noncompliance with any term or condition
related to any Indebtedness, and shall promptly notify Agent of any potential or
actual Event of Default with respect to any Indebtedness.
2.5 Account Warranties and Covenants. Except as otherwise disclosed to
Agent in writing, as to each Account that, at the time of its creation, the
Account is a valid, bona fide account, representing an undisputed indebtedness
incurred by the named account debtor for goods actually sold and delivered or
for services completely rendered; there are no setoffs, offsets or
counterclaims, genuine or otherwise, against the Account; the Account does not
represent a sale to an Affiliate or a consignment, sale or return or a bill and
hold transaction; no agreement exists permitting any deduction or discount
(other than the discount stated on the invoice); Borrower is the lawful owner of
the Account and has the right to assign the same to Agent, for the benefit of
Lenders; the Account is free of all security interests, liens and encumbrances
other than those in favor of Agent, on behalf of Lenders, and the Account is due
and payable in accordance with its terms. Borrower shall, at its own expense:
(a) cause all invoices evidencing Accounts and all copies thereof to bear a
notice that such invoices are payable to the lockboxes established in accordance
with subsection 4.26 and (b) use its best efforts to assure prompt payment of
all amounts due or to become due under the Accounts. No credits or allowances
will be issued, granted or allowed by Borrower to customers and no returns will
be accepted without Agent's prior written consent; provided, that until Agent
notifies Borrower to the contrary, Borrower may presume consent. Borrower will
immediately notify Agent in the event that a customer alleges any dispute or
claim with respect to an Account or of any other circumstances known to Borrower
that may impair the validity or collectibility of an Account. Agent shall have
the right, at any time or times hereafter, to verify the validity, amount or any
other matter relating to an Account, by mail, telephone or in person. After the
occurrence of a Default or an Event of Default, Borrower shall not, without the
prior consent of Agent, adjust, settle or compromise the amount or payment of
any Account, or release wholly or partly any customer or obligor thereof, or
allow any credit or discount thereon.
2.6 Names and Locations. Schedule 4.6 sets forth all names, trade names,
fictitious names and business names under which Borrower currently conducts
business or has at any time during the past five years conducted business and
the name of any entity which Borrower has acquired in whole or in part or from
whom Borrower has acquired a significant amount of assets within the past five
years and sets forth the location of Borrower's principal place of business, the
location of Borrower's books and records, the location of all other offices of
Borrower and all Collateral locations, and such locations are Borrower's sole
locations for its business and the Collateral. Borrower and each of its
Subsidiaries will give Agent at least 30 days advance written notice of: (a) any
change of name or of any new trade name or fictitious business name, (b) change
of principal place of business, (c) any change in the location of such party's
books and records or the Collateral, or (d) any new location for such Person's
books and records or the Collateral.
2.7 Title to Properties; Liens. Borrower and each of its Subsidiaries has
good, sufficient and legal title, to all of its respective material properties
and assets, in each case, free and clear of all Liens except Permitted
Encumbrances.
2.8 Litigation; Adverse Facts. There are no judgments outstanding against
any Loan Party or affecting any property of any Loan Party nor is there any
action, charge, claim, demand, suit, proceeding, petition, governmental
investigation or arbitration now pending or, to the best knowledge of Borrower
after due inquiry, threatened against or affecting any Loan Party or any
property of any Loan Party which could reasonably be expected to result in any
Material Adverse Effect. Promptly upon any officer of Borrower or its
Subsidiaries obtaining knowledge of (a) the institution of any action, suit,
proceeding, governmental investigation or arbitration against or affecting any
Loan Party or any property of any Loan Party not previously disclosed by
Borrower to Agent or (b) any material development in any action, suit,
proceeding, governmental investigation or arbitration at any time pending
against or affecting any Loan Party or any property of any Loan Party which
could reasonably be expected to have a material Adverse Effect, Borrower will
promptly give notice thereof to Agent and provide such other information as may
be reasonably available to them to enable Agent and its counsel to evaluate such
matter.
2.9 Payment of Taxes. All material tax returns and reports of Borrower and
each of its Subsidiaries required to be filed by any of them have been timely
filed and are complete and accurate in all material respects. All taxes,
assessments, fees and other governmental charges which are due and payable by
Borrower and each of its Subsidiaries have been paid when due; provided that no
such tax need be paid if Borrower or one of its Subsidiaries is contesting same
in good faith by appropriate proceedings promptly instituted and diligently
conducted and if Borrower or such Subsidiary has established appropriate
reserves as shall be required in conformity with GAAP. As of the Closing Date,
none of the income tax returns of Borrower or any of its Subsidiaries are under
audit and Borrower shall promptly notify Agent in the event that any of
Borrower's or any of its Subsidiaries' tax returns become the subject of an
audit. No tax liens have been filed against Borrower or any of its Subsidiaries.
The charges, accruals and reserves on the books of Borrower and each of its
Subsidiaries in respect of any taxes or other governmental charges are in
accordance with GAAP. Borrower's federal tax identification number is 954376145.
2.10 Performance of Agreements. None of the Loan Parties and none of their
respective Subsidiaries is in default in the performance, observance or
fulfillment of any of the obligations, covenants or conditions contained in any
material contractual obligation of any such Person, and no condition exists
that, with the giving of notice or the lapse of time or both, would constitute
such a default.
2.11 Employee Benefit Plans. Borrower, each of its Subsidiaries and each
ERISA Affiliate is in compliance, and will continue to remain in compliance, in
all material respects with all applicable provisions of ERISA, the IRC and all
other applicable laws and the regulations and interpretations thereof with
respect to all Employee Benefit Plans. No material liability has been incurred
by Borrower, any Subsidiaries or any ERISA Affiliate which remains unsatisfied
for any funding obligation, taxes or penalties with respect to any Employee
Benefit Plan. Neither Borrower nor any of its Subsidiaries shall establish any
new Employee Benefit Plan or amend any existing Employee Benefit Plan if the
liability or increased liability resulting from such establishment or amendment
is material.
2.12 Intellectual Property. Borrower and each of its Subsidiaries owns, is
licensed to use or otherwise has the right to use, all Intellectual Property
used in or necessary for the conduct of its business as currently conducted, and
all such Intellectual Property is identified on Schedule 4.12. Borrower's
existing licensing agreements in respect of its Intellectual Property are
identified on Schedule 4.12(A).
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2.13 Broker's Fees. No broker's or finder's fee or commission will be
payable with respect to any of the transactions contemplated hereby.
2.14 Environmental Compliance. Each Loan Party is in compliance with all
applicable Environmental Laws. There are no claims, liabilities, Liens,
investigations, litigation, administrative proceedings, whether pending or
threatened, or judgments or orders relating to any Hazardous Materials asserted
or threatened against any Loan Party or relating to any real property currently
or formerly owned, leased or operated by any Loan Party.
2.15 Solvency. From and after the date of this Agreement, Borrower: (a)
owns assets the fair salable value of which are greater than the total amount of
its liabilities (including contingent liabilities); (b) has capital that is not
unreasonably small in relation to its business as presently conducted or any
contemplated or undertaken transaction; and (c) does not intend to incur and
does not believe that it will incur debts beyond its ability to pay such debts
as they become due.
2.16 Disclosure. No representation or warranty of Borrower, any of its
Subsidiaries or any other Loan Party contained in this Agreement, the financial
statements, the other Loan Documents, or any other document, certificate or
written statement furnished to Agent or any Lender by or on behalf of any such
Person for use in connection with the Loan Documents contains any untrue
statement of a material fact or omitted, omits or will omit to state a material
fact necessary in order to make the statements contained herein or therein not
misleading in light of the circumstances in which the same were made. There is
no material fact known to Borrower that has had or could have a Material Adverse
Effect and that has not been disclosed herein or in such other documents,
certificates and statements furnished to Agent or any Lender for use in
connection with the transactions contemplated thereby.
2.17 Insurance. Borrower and each of its Subsidiaries maintains adequate
insurance policies for public liability, property damage, product liability, and
business interruption with respect to its business and properties and the
business and properties of its Subsidiaries against loss or damage of the kinds
customarily carried or maintained by corporations of established reputation
engaged in similar business and in amounts acceptable to Agent. Borrower shall
cause Agent, for itself and on behalf of Lenders, to be named as loss payee on
all insurance policies relating to any Collateral and shall cause each Lender to
be named as additional insured under all liability policies, in each case
pursuant to appropriate endorsements in form and substance satisfactory to Agent
and shall collaterally assign to Agent, for itself and on behalf of Lenders, as
security for the payment of the Obligations all business interruption insurance
of Borrowers. No notice of cancellation has been received with respect to such
policies and Borrower and each of its Subsidiaries is in compliance with all
conditions contained in such policies. Borrower shall apply any proceeds
received from any policies of insurance relating to any Collateral to the
Obligations as set forth in Subsection 2.4(B). In the event Borrower fails to
provide Agent with evidence of the insurance coverage required by this
Agreement, Agent may, but is not required to, purchase insurance at Borrower's
expense to protect Agent's and the Lenders' interests in the Collateral. This
insurance may, but need not, protect Borrower's interests. The coverage
purchased by Agent may not pay any claim made by Borrower or any claim that is
made against Borrower in connection with the Collateral. Borrower may later
cancel any insurance purchased by Agent, but only after providing Agent with
evidence that Borrower has obtained insurance as required by this Agreement. If
Agent purchases insurance for the Collateral, Borrower will be responsible for
the costs of that insurance, including interest thereon and other charges
imposed on Agent in connection with the placement of the insurance, until the
effective date of the cancellation or expiration of the insurance, and such
costs may be added to the Obligations. The costs of the insurance may be more
than the cost of insurance Borrower is able to obtain on its own.
2.18 Compliance with Laws. Neither Borrower nor any of its Subsidiaries is
in violation of any law, ordinance, rule, regulation, order, policy, guideline
or other requirement of any domestic or foreign government or any
instrumentality or agency thereof, having jurisdiction over the conduct of its
business or the ownership of its properties, including, without limitation, any
Environmental Law, which violation would subject Borrower or any of its
Subsidiaries, or any of their respective officers to criminal liability or have
a Material Adverse Effect and no such violation has been alleged.
2.19 Bank Accounts. Schedule 4.19 sets forth the account numbers and
locations of all bank accounts of Borrower and its Subsidiaries. Borrower shall
not establish any new bank accounts, or amend or terminate any Blocked Account
or lockbox agreement without Agent's prior written consent.
2.20 Employee Matters. Except as set forth on Schedule 4.20, (a) no Loan
Party nor any of such Loan Party's employees is subject to any collective
bargaining agreement, (b) no petition for certification or union election is
pending with respect to the employees of any Loan Party and no union or
collective bargaining unit has sought such certification or recognition with
respect to the employees of any Loan Party and (c) there are no strikes,
slowdowns, work stoppages or controversies pending or, to the best knowledge of
Borrower after due inquiry, threatened between any Loan Party and its respective
employees, other than employee grievances arising in the ordinary course of
business, which could reasonably be expected to have, either individually or in
the aggregate, a Material Adverse Effect. Except as set forth on Schedule 4.20,
neither Borrower nor any of its Subsidiaries is subject to an employment
contract.
2.21 overnmental Regulation. None of the Loan Parties is subject to
regulation under the Public Utility Holding Company Act of 1935, the Federal
Power Act or the Investment Company Act of 1940 or to any federal or state
statute or regulation limiting its ability to incur indebtedness for borrowed
money.
2.22 Access to Accountants and Management. Borrower authorizes Agent and
Lenders to discuss the financial condition and financial statements of Borrower
and its Subsidiaries with Borrower's Accountants upon reasonable notice to
Borrower of its intention to do so, and authorizes Borrower's Accountants to
respond to all of Agent's inquiries. Agent and each Lender may, with the consent
of Agent, which will not be unreasonably denied, confer with Borrower's
management directly regarding Borrower's business, operations and financial
condition.
2.23 Inspection. Borrower shall permit Agent and any authorized
representatives designated by Agent to visit and inspect any of the properties
of Borrower or any of its Subsidiaries, including their financial and accounting
records, and, in conjunction with such inspection, to make copies and take
extracts therefrom, and to discuss their affairs, finances and business with
their officers and Borrower's Accountants, at such reasonable times during
normal business hours and as often as may be reasonably requested. Each Lender
may with the consent of Agent, which will not be unreasonably denied, accompany
Agent on any such visit or inspection.
2.24 Collateral Records. Borrower shall keep full and accurate books and
records relating to the Collateral and shall mark such books and records to
indicate Agent's security interests in the Collateral, for the benefit of
Lenders.
2.25 Account Covenant; Verification. Borrower shall, at its own expense:
(a) cause all invoices evidencing Accounts and all copies thereof to bear a
notice that such invoices are payable to the lockboxes established in accordance
with subsection 4.26 and (b) use its best efforts to assure prompt payment of
all amounts due or to become due under the Accounts. No discounts, credits or
allowances will be issued, granted or allowed by Borrower to customers and no
returns will be accepted without Agent's prior written consent; provided, that
until Agent notifies Borrower to the contrary, Borrower may presume consent.
Borrower will promptly notify Agent in the event that a customer alleges any
dispute or claim with respect to an Account or of any other circumstances known
to Borrower that may impair the validity or collectibility of an Account. Agent
shall have the right, at any time or times hereafter, to verify the validity,
amount or any other matter relating to an Account, by mail, telephone or in
person. After the occurrence of a Default or an Event of Default, Borrower shall
not, without the prior consent of Agent, adjust, settle or compromise the amount
or payment of any Account, or release wholly or partly any customer or obligor
thereof, or allow any credit or discount thereon.
2.26 Collection of Accounts and Payments. Agent shall establish lockboxes
and blocked accounts (collectively, "Blocked Accounts") with such banks
("Collecting Banks") as are acceptable to Agent (subject to irrevocable
instructions acceptable to Agent as hereinafter set forth) to which Borrower
shall instruct all account debtors to directly remit all payments on Accounts
and in which Borrower will immediately deposit all payments made for Inventory
or other payments constituting proceeds of Collateral in the identical form in
which such payment was made, whether by cash or check. The Collecting Banks
shall acknowledge and agree, in a manner satisfactory to Agent, that all
payments made to the Blocked Accounts are the sole and exclusive property of
Agent, for the benefit of Lenders, and that the Collecting Banks have no right
to setoff against the Blocked Accounts and that all such payments received will
be promptly transferred to Agent's Account. Borrower hereby agrees that all
payments made to such Blocked Accounts or otherwise received by Agent and
whether on the Accounts or as proceeds of other Collateral or otherwise will be
the sole and exclusive property of Agent, for the benefit of Lenders. Borrower
shall irrevocably instruct each Collecting Bank to promptly transfer all
payments or deposits to the Blocked Accounts in to Agent's Account. If Borrower,
or any of its Affiliates, employees, agents or other Persons acting for or in
concert with Borrower, shall receive any monies, checks, notes, drafts or any
other payments relating to and/or proceeds of Accounts or other Collateral,
Borrower or such Persons shall hold such instrument or funds in trust for Agent
and immediately upon receipt thereof, shall remit the same or cause the same to
be remitted, in kind, to the Blocked Accounts or to Agent at its address set
forth in subsection 10.3 below.
Borrower may amend any one or more of the Schedules referred in this
Section 4 (subject to prior notice to Agent, as applicable) and any
representation, warranty, or covenant contained herein which refers to any such
Schedule shall from and after the date of any such amendment refer to such
Schedule as so amended; provided however, that in no event shall the amendment
of any such Schedule constitute a waiver by Agent and Lenders of any Default or
Event of Default that exists notwithstanding the amendment of such Schedule.
SECTION 5. REPORTING AND OTHER AFFIRMATIVE COVENANTS
Borrower covenants and agrees that, so long as any of the Commitments
hereunder shall be in effect and until payment in full of all Obligations,
Borrower shall perform, and shall cause each of its Subsidiaries to perform, all
covenants in this Section 5.
5.1 Financial Statements and Other Reports. Borrower will deliver to Agent
and each Lender (unless specified to be delivered solely to Agent) the financial
statements and other reports contained in the Reporting Rider attached hereto.
5.2 Endorsement. Borrower hereby constitutes and appoints Agent and all
Persons designated by Agent for that purpose as Borrower's true and lawful
attorney-in- fact, with power to endorse Borrower's name to any of the items of
payment or proceeds described in subsection 4.26 above and all proceeds of
Collateral that come into Agent's possession or under Agent's control. Both the
appointment of Agent as Borrower's attorney and Agent's rights and powers are
coupled with an interest and are irrevocable until payment in full and complete
performance of all of the Obligations.
5.3 Maintenance of Properties. Borrower will maintain or cause to be
maintained in good repair, working order and condition all material properties
used in the
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business of Borrower and its Subsidiaries and will make or cause to be made all
appropriate repairs, renewals and replacements thereof.
5.4 Compliance with Laws. Borrower will, and will cause each of its
Subsidiaries to, comply with the requirements of all applicable laws, rules,
regulations and orders of any governmental authority as now in effect and which
may be imposed in the future in all jurisdictions in which Borrower or any of
its Subsidiaries is now doing business or may hereafter be doing business, other
than those laws the noncompliance with which would not have a Material Adverse
Effect;
5.5 Further Assurances. Borrower shall, and shall cause each of its
Subsidiaries to, from time to time, execute such guaranties, financing or
continuation statements, documents, security agreements, reports and other
documents or deliver to Agent such instruments, certificates of title,
mortgages, deeds of trust, or other documents as Agent at any time may
reasonably request to evidence, perfect or otherwise implement the guaranties
and security for repayment of the Obligations provided for in the Loan
Documents.
5.6 Additional Mortgaged Property. Borrower shall as promptly as possible
(and in any event within 60 days after such designation) deliver to Agent a
fully executed mortgage, in form and substance satisfactory to Agent together
with title insurance policies and surveys on any Additional Mortgaged Property
designated by Agent.
5.7 Use of Proceeds and Margin Security. Borrower shall use the proceeds
of all Loans for proper business purposes (as described in the recitals to this
Agreement) consistent with all applicable laws, statutes, rules and regulations.
No portion of the proceeds of any Loan shall be used by Borrower or any of its
Subsidiaries for the purpose of purchasing or carrying margin stock within the
meaning of Regulation G or Regulation U, or in any manner that might cause the
borrowing or the application of such proceeds to violate Regulation T or
Regulation X or any other regulation of the Board of Governors of the Federal
Reserve System or to violate the Exchange Act.
5.8 Bailee. If any Collateral is at any time in the possession or control
of any warehouseman, bailee or any of Borrower's agents or processors, Borrower
shall, upon the request of Agent, notify such warehouseman, bailee, agent or
processor of the security interests in favor of Agent, for the benefit of
Lenders, created hereby and shall instruct such Person to hold all such
Collateral for Agent's account subject to Agent's instructions.
SECTION 6. FINANCIAL COVENANTS
Borrower covenants and agrees that so long as any of the Commitments
remain in effect and until indefeasible payment in full of all Obligations and
termination of all Lender Letters of Credit, Borrower shall comply with and
shall cause each of its Subsidiaries to comply with all covenants contained in
the Financial Covenant Rider.
SECTION 7. NEGATIVE COVENANTS
Borrower covenants and agrees that so long as any of the Commitments
remain in effect and until indefeasible payment in full of Obligations and
termination of all Lender Letters of Credit, Borrower shall not and will not
permit any of its Subsidiaries to:
7.1 Indebtedness and Liabilities. Directly or indirectly create, incur,
assume, guaranty, or otherwise become or remain directly or indirectly liable,
on a fixed or contingent basis, with respect to any Indebtedness except: (a) the
Obligations; (b) Indebtedness under Capital Leases not to exceed $12,000,000
outstanding at any time in the aggregate; and (c) Indebtedness existing on the
Closing Date and identified on Schedule 7.1. Borrower will not, and will not
permit any of its Subsidiaries to, incur any Liabilities except for Indebtedness
permitted herein and trade payables and normal accruals in the ordinary course
of business not yet due and payable or with respect to which Borrower or any of
its Subsidiaries is contesting in good faith the amount or validity thereof by
appropriate proceedings and then only to the extent that Borrower or any of its
Subsidiaries has established adequate reserves therefor under GAAP.
7.2 Guaranties. Except for endorsements of instruments or items of payment
for collection in the ordinary course of business, guaranty, endorse, or
otherwise, in any way become or be responsible for any obligations of any other
Person, whether directly or indirectly by agreement to purchase the indebtedness
of any other Person or through the purchase of goods, supplies or services, or
maintenance of working capital or other balance sheet covenants or conditions,
or by way of stock purchase, capital contribution, advance or loan for the
purpose of payment or discharging any indebtedness or obligation of such other
Person or otherwise.
7.3 Transfers, Liens and Related Matters.
(A) Transfers. Sell, assign (by operation of law or otherwise) or
otherwise dispose of, or grant any option with respect to any of the Collateral,
except that Borrower and its Subsidiaries may (i) sell inventory in the ordinary
course of business; and (ii) make Asset Dispositions if all of the following
conditions are met: (1) the market value of assets sold or otherwise disposed of
in any single transaction or series of related transactions does not exceed
$1,000,000 and the aggregate market value of assets sold or otherwise disposed
of in any Fiscal Year does not exceed $2,500,000; (2) the consideration received
is at least equal to the fair market value of such assets; (3) the sole
consideration received is cash; (4) the net proceeds of such Asset Disposition
are applied as required by subsection 2.4(B); (5) after giving effect to the
sale or other disposition of the assets included within the Asset Disposition
and the repayment of the Obligations with the proceeds thereof, Borrower is in
compliance on a pro forma basis with the covenants set forth in the Financial
Covenant Rider recomputed for the most recently ended month for which
information is available and is in compliance with all other terms and
conditions contained in this Agreement; and (6) no Default or Event of Default
shall then exist or result from such sale or other disposition.
(B) Liens. Except for Permitted Encumbrances, directly or indirectly
create, incur, assume or permit to exist any Lien on or with respect to any of
the Collateral or any proceeds, income or profits therefrom.
(C) No Negative Pledges. Enter into or assume any agreement (other
than the Loan Documents) prohibiting the creation or assumption of any Lien upon
its properties or assets, whether now owned or hereafter acquired.
(D) No Restrictions on Subsidiary Distributions to Borrower. Except
as provided herein, directly or indirectly create or otherwise cause or suffer
to exist or become effective any consensual encumbrance or restriction of any
kind on the ability of any such Subsidiary to: (1) pay dividends or make any
other distribution on any of such Subsidiary's capital stock owned by Borrower
or any Subsidiary of Borrower; (2) pay any indebtedness owed to Borrower or any
other Subsidiary; (3) make loans or advances to Borrower or any other
Subsidiary; (4) transfer any of its property or assets to Borrower or any other
Subsidiary.
7.4 Investments and Loans. Make or permit to exist investments in or loans
to any other Person, except: (a) Cash Equivalents; and (b) loans and advances to
employees for moving, entertainment, travel and other similar expenses in the
ordinary course of business in an aggregate outstanding amount not in excess of
$1,000,000 at any time.
7.5 Restricted Junior Payments. Directly or indirectly declare, order,
pay, make or set apart any sum for any Restricted Junior Payment, except that:
(a) Tax Distributions which may be paid in multiple installments based on
estimates of Borrower's taxable income to allow its shareholders to meet their
tax obligations in a timely manner (including without limitation estimated tax
obligations) less any loss, deduction or credit from such shareholders' income
attributable to such shareholders' ownership interest in Borrower for the
previous tax year; (b) Subsidiaries of Borrower may make Restricted Junior
Payments with respect to their common stock to the extent necessary to permit
Borrower to pay the Obligations, to make Restricted Junior Payments permitted
under clause (c) below, and to permit Borrower to pay expenses incurred in the
ordinary course of business; and (c) Borrower may make distributions and/or
dividends to its shareholders without limitation provided that (i) Borrower
shall have first given Agent notice of its intention to make such payment and
(ii) Borrower shall be in compliance with the terms and conditions of the Loan
Documents both prior to making such payment and after giving effect to such
payment (including Borrower's compliance with the financial covenants calculated
through the date of such payment) and shall have delivered a Compliance
Certificate to Agent demonstrating such compliance, not later than two (2)
Business Days before making such payment.
7.6 Restriction on Fundamental Changes. (a) Enter into any transaction of
merger or consolidation; (b) liquidate, wind-up or dissolve itself (or suffer
any liquidation or dissolution); (c) convey, sell, lease, sublease, transfer or
otherwise dispose of, in one transaction or a series of transactions, all or any
substantial part of its business or assets, or the capital stock of any of its
Subsidiaries, whether now owned or hereafter acquired; (d) acquire by purchase
or otherwise all or any substantial part of the business or assets of, or stock
or other beneficial ownership of, any Person or (e) issue any capital stock in
Borrower other than through the public markets; provided however, that Borrower
may reincorporate in Delaware, either by merger or roll-up, in conjunction with
any initial public offering of Borrower upon (a) thirty (30) days prior written
notice to Agent and (b) Borrower's execution of all security and documents
required by Agent in order to protect the Lenders' liens, security interests and
other rights and benefits under the Loan Documents.
7.7 Bank Accounts. Establish any new bank accounts, or attempt to amend or
terminate any Blocked Account or lockbox agreement without Agent's prior written
consent.
7.8 Transactions with Affiliates. Directly or indirectly, enter into or
permit to exist any transaction (including the purchase, sale or exchange of
property or the rendering of any service) with any Affiliate or with any
officer, director or employee of any Loan Party, except for Tax Distributions
permitted in subsection 7.5 and except for transactions in the ordinary course
of Borrower's business and upon fair and reasonable terms which are fully
disclosed to Agent and Lenders and which are no less favorable to Borrower than
it would obtain in a comparable arm's length transaction with an unaffiliated
Person.
7.9 Conduct of Business. From and after the Closing Date, engage in any
business other than businesses of the type engaged in by Borrower or any
Subsidiary on the Closing Date.
7.10 Tax Consolidations. File or consent to the filing of any consolidated
income tax return with any Person other than any other Borrower or any of their
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Subsidiaries, provided that in the event Borrower files a consolidated return
with any such Person, Borrower's contribution with respect to taxes as a result
of the filing of such consolidated return shall not be greater, nor the receipt
of tax benefits less, than they would have been had Borrower not filed a
consolidated return with such Person.
7.11 Subsidiaries. Establish, create or acquire any new Subsidiaries.
7.12 Fiscal Year; Tax Designation. Change its Fiscal Year; or elect to be
designated as an entity other than a sub-chapter S corporation as defined in
IRC; provided, however, that Borrower may elect to be designated as a
sub-chapter C corporation in connection with an initial public offering
permitted by this Agreement.
7.13 Press Release; Public Offering Materials. Disclose the name of Agent
or any Lender in any press release or in any prospectus, proxy statement or
other materials filed with any governmental entity relating to a public offering
of the capital stock of any Loan Party except as may be required by law;
provided, however, that Borrower may disclose the name of Heller Financial, Inc.
in conjunction with any prospectus or other document relating to an initial
offering of the capital stock of Borrower.
SECTION 8. DEFAULT, RIGHTS AND REMEDIES
8.1 Event of Default. "Event of Default" shall mean the occurrence or
existence of any one or more of the following:
(A) Payment. Failure to make payment of any of the Obligations
when due; or
(B) Default in Other Agreements. (1) Failure of Borrower or any of
its Subsidiaries to pay when due any principal or interest on any Indebtedness
(other than the Obligations) or (2) breach or default of Borrower or any of its
Subsidiaries with respect to any Indebtedness (other than the Obligations); if
such failure to pay, breach or default entitles the holder to cause such
Indebtedness having an individual principal amount in excess of $100,000 or
having an aggregate principal amount in excess of $250,000 to become or be
declared due prior to its stated maturity; or
(C) Breach of Certain Provisions. Failure of Borrower to perform
or comply with any term or condition contained in the Reporting Rider, Section
5.1 or contained in the Financial Covenants Rider or the failure to perform or
comply with any other term or condition of Section 7 which, by its nature, is
not curable; or
(D) Breach of Warranty. Any representation, warranty, certification
or other statement made by any Loan Party in any Loan Document or in any
statement or certificate at any time given by such Person in writing pursuant or
in connection with any Loan Document is false in any material respect on the
date made; or
(E) Other Defaults Under Loan Documents. Borrower or any other Loan
Party defaults in the performance of or compliance with any term contained in
this Agreement or the other Loan Documents and such default is not remedied or
waived within 10 days after receipt by Borrower of notice from Agent, or
Requisite Lenders, of such default (other than occurrences described in other
provisions of this subsection 8.1 for which a different grace or cure period is
specified or which constitute immediate Events of Default); or
(F) Change in Control. Robert Y. Greenberg and M. Susan Greenberg
together cease to beneficially own and control, directly or indirectly, at least
25% of the issued and outstanding shares of each class of capital stock of
Borrower entitled (without regard to the occurrence of any contingency) to vote
for the election of a majority of the members of the board of directors of
Borrower.
(G) Involuntary Bankruptcy; Appointment of Receiver, etc. (a) A
court enters a decree or order for relief with respect to any Guarantor,
Borrower or any of its Subsidiaries in an involuntary case under any applicable
bankruptcy, insolvency or other similar law now or hereafter in effect, which
decree or order is not stayed or other similar relief is not granted under any
applicable federal or state law; or (2) the continuance of any of the following
events for 60 days unless dismissed, bonded or discharged: (a) an involuntary
case is commenced against any Guarantor, Borrower or any of its Subsidiaries,
under any applicable bankruptcy, insolvency or other similar law now or
hereafter in effect; or (b) a receiver, liquidator, sequestrator, trustee,
custodian or other fiduciary having similar powers over any Guarantor, Borrower
or any of its Subsidiaries, or over all or a substantial part of their
respective property, is appointed; or
(H) Voluntary Bankruptcy; Appointment of Receiver, etc. (1) Any
Guarantor, Borrower or any of its Subsidiaries commences a voluntary case under
any applicable bankruptcy, insolvency or other similar law now or hereafter in
effect, or consents to the entry of an order for relief in an involuntary case
or to the conversion of an involuntary case to a voluntary case under any such
law or consents to the appointment of or taking possession by a receiver,
trustee or other custodian for all or a substantial part of its property; or (2)
any Guarantor, Borrower or any of its Subsidiaries makes any assignment for the
benefit of creditors; or (3) the board of directors of any Guarantor, Borrower
or any of its Subsidiaries adopts any resolution or otherwise authorizes action
to approve any of the actions referred to in this subsection 8.1(H); or
(I) Liens. Any lien, levy or assessment is filed or recorded with
respect to or otherwise imposed upon all or any part of the Collateral or the
assets of Borrower or any of its Subsidiaries by the United States or any
department or instrumentality thereof or by any state, county, municipality or
other governmental agency (other than Permitted Encumbrances) and such lien,
levy or assessment is not stayed, vacated, paid or discharged within 10 days; or
(J) Judgment and Attachments. Any money judgment, writ or warrant of
attachment, or similar process involving (1) an amount in any individual case in
excess of $100,000 or (2) an amount in the aggregate at any time in excess of
$250,000 (in either case not adequately covered by insurance as to which the
insurance company has acknowledged coverage) is entered or filed against
Borrower or any of its Subsidiaries or any of their respective assets and
remains undischarged, unvacated, unbonded or unstayed for a period of 30 days,
but in any event not later than 5 days prior to the date of any proposed sale
thereunder; or
(K) Dissolution. Any order, judgment or decree is entered against
Borrower or any of its Subsidiaries decreeing the dissolution or split up of
Borrower or that Subsidiary and such order remains undischarged or unstayed for
a period in excess of 20 days, but in any event not later than 5 days prior to
the date of any proposed dissolution or split up; or
(L) Solvency. Borrower ceases to be solvent (as represented by
Borrower in subsection 4.15) or admits in writing its present or prospective
inability to pay its debts as they become due; or
(M) Injunction. Borrower or any of its Subsidiaries is enjoined,
restrained or in any way prevented by the order of any court or any
administrative or regulatory agency from conducting all or any material part of
its business and such order continues for 30 days; or
(N) Invalidity of Loan Documents. Any of the Loan Documents for any
reason, other than a partial or full release in accordance with the terms
thereof, ceases to be in full force and effect or is declared to be null and
void, or any Loan Party denies that it has any further liability under any Loan
Documents to which it is a party, or gives notice to such effect; or
(O) Failure of Security. Agent, on behalf of Lenders, does not have
or ceases to have a valid and perfected first priority security interest in the
Collateral (subject to Permitted Encumbrances), in each case, for any reason
other than the failure of Agent or any Lender to take any action within its
control; or
(P) Damage, Strike, Casualty. Any material damage to, or loss, theft
or destruction of, any Collateral, whether or not insured, or any strike,
lockout, labor dispute, embargo, condemnation, act of God or public enemy, or
other casualty which causes, for more than 15 consecutive days, the cessation or
substantial curtailment of revenue producing activities at any facility of
Borrower or any of its Subsidiaries if any such event or circumstance could
reasonably be expected to have a Material Adverse Effect.
(Q) Licenses and Permits. The loss, suspension or revocation of, or
failure to renew, any license or permit now held or hereafter acquired by
Borrower or any of its Subsidiaries, if such loss, suspension, revocation or
failure to renew could reasonably be expected to have a Material Adverse Effect.
(R) Forfeiture. There is filed against Borrower or any Guarantor any
civil or criminal action, suit or proceeding under any federal or state
racketeering statute (including, without limitation, the Racketeer Influenced
and Corrupt Organization Act of 1970), which action, suit or proceeding (1) is
not dismissed within 120 days; and (2) could reasonably be expected to result in
the confiscation or forfeiture of any material portion of the Collateral.
(S) Guarantor Cash Collateral. Guarantor fails to deposit the
Guarantor Cash Collateral with Agent on the Closing Date.
8.2 Suspension of Commitments. Upon the occurrence of any Default or Event
of Default, notwithstanding any grace period or right to cure, Agent may or upon
demand by Requisite Lenders shall, without notice or demand, immediately cease
making [or restrict the amount of] additional Loans and the Commitments shall be
suspended [or restricted]; provided that, in the case of a Default, if the
subject condition or event is waived or cured within any applicable grace or
cure period, the Commitments shall be reinstated.
8.3 Acceleration. Upon the occurrence of any Event of Default described in
the foregoing subsections 8.1(G) or 8.1(H), all Obligations shall automatically
become immediately due and payable, without presentment, demand, protest or
other requirements of any kind, all of which are hereby expressly waived by
Borrower, and the Commitments shall thereupon terminate. Upon the occurrence and
during the continuance of any other Event of Default, Agent may, and upon demand
by Requisite Lenders shall, by written notice to Borrower, (a) declare all or
any portion of the Obligations to be, and the same shall forthwith become,
immediately due and payable and the Commitments shall thereupon terminate and
(b) demand that Borrower immediately deposit with Agent an amount
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equal to 105% of the Letter of Credit Reserve to enable Agent or any Lender that
has issued any Lender Letter of Credit to make payments under the Lender Letters
of Credit when required and such amount shall become immediately due and
payable.
8.4 Remedies. If any Event of Default shall have occurred and be
continuing, in addition to and not in limitation of any other rights or remedies
available to Agent and Lenders at law or in equity, Agent may and shall upon the
request of Requisite Lenders exercise in respect of the Collateral, in addition
to all other rights and remedies provided for herein or otherwise available to
it, all the rights and remedies of a secured party on default under the UCC
(whether or not the UCC applies to the affected Collateral) and may also (a)
require Borrower to, and Borrower hereby agrees that it will, at its expense and
upon request of Agent forthwith, assemble all or part of the Collateral as
directed by Agent and make it available to Agent at a place to be designated by
Agent which is reasonably convenient to both parties; (b) withdraw all cash in
the Blocked Accounts and apply such monies in payment of the Obligations in the
manner provided in subsection 8.7; and (c) without notice or demand or legal
process, enter upon any premises of Borrower and take possession of the
Collateral. Borrower agrees that, to the extent notice of sale of the Collateral
or any part thereof shall be required by law, at least 10 days notice to
Borrower of the time and place of any public sale or the time after which any
private sale is to be made shall constitute reasonable notification. At any sale
of the Collateral (whether public or private), if permitted by law, Agent or any
Lender may bid (which bid may be, in whole or in part, in the form of
cancellation of indebtedness) for the purchase of the Collateral or any portion
thereof for the account of Agent or such Lender. Agent shall not be obligated to
make any sale of Collateral regardless of notice of sale having been given.
Borrower shall remain liable for any deficiency. Agent may adjourn any public or
private sale from time to time by announcement at the time and place fixed
therefor, and such sale may, without further notice, be made at the time and
place to which it was so adjourned. To the extent permitted by law, Borrower
hereby specifically waives all rights of redemption, stay or appraisal which it
has or may have under any law now existing or hereafter enacted. Agent shall not
be required to proceed against any Collateral but may proceed against Borrower
directly.
8.5 Appointment of Attorney-in-Fact. Borrower hereby constitutes and
appoints Agent as Borrower's attorney-in-fact with full authority in the place
and stead of Borrower and in the name of Borrower, Agent or otherwise, from time
to time in Agent's discretion while an Event of Default is continuing to take
any action and to execute any instrument that Agent may deem necessary or
advisable to accomplish the purposes of this Agreement, including: (a) to ask,
demand, collect, sue for, recover, compound, receive and give acquittance and
receipt for moneys due and to become due under or in respect of any of the
Collateral; (b) to adjust, settle or compromise the amount or payment of any
Account, or release wholly or partly any customer or obligor thereunder or allow
any credit or discount thereon; (c) to receive, endorse, and collect any drafts
or other instruments, documents and chattel paper, in connection with clause (a)
above; (d) to file any claims or take any action or institute any proceedings
that Agent may deem necessary or desirable for the collection of or to preserve
the value of any of the Collateral or otherwise to enforce the rights of Agent
and Lenders with respect to any of the Collateral; and (e) to sign and endorse
any invoices, freight or express bills, bills of lading, storage or warehouse
receipts, assignments, verifications and notices in connection with Accounts and
other documents relating to the Collateral. The appointment of Agent as
Borrower's attorney and Agent's rights and powers are coupled with an interest
and are irrevocable until indefeasible payment in full and complete performance
of all of the Obligations.
8.6 Limitation on Duty of Agent with Respect to Collateral. Beyond the
safe custody thereof, Agent and each Lender shall have no duty with respect to
any Collateral in its possession or control (or in the possession or control of
any agent or bailee) or with respect to any income thereon or the preservation
of rights against prior parties or any other rights pertaining thereto. Agent
shall be deemed to have exercised reasonable care in the custody and
preservation of the Collateral in its possession if the Collateral is accorded
treatment substantially equal to that which Agent accords its own property.
Neither Agent nor any Lender shall be liable or responsible for any loss or
damage to any of the Collateral, or for any diminution in the value thereof, by
reason of the act or omission of any warehouseman, carrier, forwarding agency,
consignee, broker or other agent or bailee selected by Borrower or selected by
Agent in good faith.
8.7 Application of Proceeds. Upon the occurrence and during the
continuance of an Event of Default, (a) Borrower irrevocably waives the right to
direct the application of any and all payments at any time or times thereafter
received by Agent from or on behalf of Borrower, and Borrower hereby irrevocably
agrees that Agent shall have the continuing exclusive right to apply and to
reapply any and all payments received at any time or times after the occurrence
and during the continuance of an Event of Default against the Obligations in
such manner as Agent may deem advisable notwithstanding any previous entry by
Agent upon any books and records and (b) the proceeds of any sale of, or other
realization upon, all or any part of the Collateral shall be applied: first, to
all fees, costs and expenses incurred by or owing to Agent with respect to this
Agreement, the other Loan Documents or the Collateral; second, to all fees,
costs and expenses incurred by or owing to any Lender with respect to this
Agreement, the other Loan Documents or the Collateral; third, to accrued and
unpaid interest on the Obligations; fourth, to the principal amounts of the
Obligations outstanding; and fifth, to any other indebtedness or obligations of
Borrower owing to Agent or any Lender.
8.8 License of Intellectual Property. Borrower hereby assigns, transfers
and conveys to Agent, for the benefit of Lenders, effective upon the occurrence
of any Event of Default hereunder, the non-exclusive right and license to use
all Intellectual Property owned or used by Borrower together with any goodwill
associated therewith, all to the extent necessary to enable Agent to realize on
the Collateral and any successor or assign to enjoy the benefits of the
Collateral. This right and license shall inure to the benefit of all successors,
assigns and transferees of Agent and its successors, assigns and transferees,
whether by voluntary conveyance, operation of law, assignment, transfer,
foreclosure, deed in lieu of foreclosure or otherwise. Such right and license is
granted free of charge.
8.9 Waivers, Non-Exclusive Remedies. No failure on the part of Agent or
any Lender to exercise, and no delay in exercising and no course of dealing with
respect to, any right under this Agreement or the other Loan Documents shall
operate as a waiver thereof; nor shall any single or partial exercise by Agent
or any Lender of any right under this Agreement or any other Loan Document
preclude any other or further exercise thereof or the exercise of any other
right. The rights in this Agreement and the other Loan Documents are cumulative
and shall in no way limit any other remedies provided by law.
SECTION 9. AGENT
9.1 Agent.
(A) Appointment. Each Lender hereto and, upon obtaining an interest
in any Loan, any participant, transferee or other assignee of any Lender
irrevocably appoints, designates and authorizes Heller as Agent to take such
actions or refrain from taking such action as its agent on its behalf and to
exercise such powers hereunder as are delegated by the terms hereof, together
with such powers as are reasonably incidental thereto. Neither the Agent nor any
of its directors, officers, employees or agents shall be liable for any action
so taken except as expressly provided herein. The provisions of this subsection
9.1 are solely for the benefit of Agent and Lenders and neither Borrower nor any
Loan Party shall have any rights as a third party beneficiary of any of the
provisions hereof. Agent may perform any of its duties hereunder, or under the
Loan Documents, by or through its agents or employees.
(B) Nature of Duties. Agent shall have no duties, obligations or
responsibilities except those expressly set forth in this Agreement or in the
Loan Documents. The duties of Agent shall be mechanical and administrative in
nature. Agent shall not have by reason of this Agreement a fiduciary, trust or
agency relationship with or in respect of any Lender, Borrower or any Loan
Party. Each Lender shall make its own appraisal of the credit worthiness of
Borrower, and shall have independently taken whatever steps it considers
necessary to evaluate the financial condition and affairs of Borrower, and Agent
shall have no duty or responsibility, either initially or on a continuing basis,
to provide any Lender with any credit or other information with respect thereto,
whether coming into its possession before the Closing Date or at any time or
times thereafter, provided that Agent shall provide any Lender with copies of
any notice, report or other document provided to the Agent by the Borrower and
requested by such Lender pursuant to this Agreement. If Agent seeks the consent
or approval of any Lenders to the taking or refraining from taking any action
hereunder, then Agent shall send notice thereof to each Lender. Agent shall
promptly notify each Lender any time that the applicable percentage of Lenders
have instructed Agent to act or refrain from acting pursuant hereto.
(C) Rights, Exculpation, Etc. Neither Agent nor any of its officers,
directors, employees or agents shall be liable to any Lender for any action
taken or omitted by them hereunder or under any of the Loan Documents, or in
connection herewith or therewith, except that Agent shall be obligated on the
terms set forth herein for performance of its express obligations hereunder, and
except that Agent shall be liable with respect to its own gross negligence or
willful misconduct. Agent shall not be liable for any apportionment or
distribution of payments made by it in good faith and if any such apportionment
or distribution is subsequently determined to have been made in error, the sole
recourse of any Lender to whom payment was due but not made, shall be to recover
from other Lenders any payment in excess of the amount to which they are
determined to be entitled (and such other Lenders hereby agree to return to such
Lender any such erroneous payments received by them). In performing its
functions and duties hereunder, Agent shall exercise the same care which it
would in dealing with loans for its own account, but Agent shall not be
responsible to any Lender for any recitals, statements, representations or
warranties herein or for the execution, effectiveness, genuineness, validity,
enforceability, collectibility, or sufficiency of this Agreement or any of the
Loan Documents or the transactions contemplated thereby, or for the financial
condition of any Loan Party. Agent shall not be required to make any inquiry
concerning either the performance or observance of any of the terms, provisions
or conditions of this Agreement or any of the Loan Documents or the financial
condition of any Loan Party, or the existence or possible existence of any
Default or Event of Default. Agent may at any time request instructions from
Lenders with respect to any actions or approvals which by the terms of this
Agreement or of any of the Loan Documents Agent is permitted or required to take
or to grant, and Agent shall be entitled to refrain from taking any action or to
withhold any approval and shall not be under any liability whatsoever to any
Person for refraining from any action or withholding any approval under any of
the Loan Documents until it shall have received such instructions from the
applicable percentage of the Lenders. Without limiting the foregoing, no Lender
shall have any right of action whatsoever against Agent as a result of Agent
acting or refraining from acting under this Agreement or any of the other Loan
Documents in accordance with the instructions of the applicable percentage of
the Lenders and notwithstanding the instructions of Lenders, Agent shall have no
obligation to take any action if it, in good faith, believes that such action
exposes Agent to any liability.
(D) Reliance. Agent shall be under no duty to examine, inquire into,
or pass upon the validity, effectiveness or genuineness of this Agreement, any
other Loan Document, or any instrument, document or communication furnished
pursuant hereto or in connection herewith. Agent shall be entitled to rely upon
and assume that any written notices, statements, certificates, orders or other
documents or any telephone message or other communication (including any
writing, telex, telecopy or telegram) are genuine, valid, effective and correct
and to have been signed, sent or made by the proper Person, and with respect to
all matters pertaining to this Agreement or any of the Loan Documents and its
duties hereunder or thereunder. Agent shall be entitled to rely upon the advice
of legal counsel, independent accountants, and other experts selected by Agent
in its sole discretion.
(E) Indemnification. Each Lender, in proportion to its Pro Rata
Share, severally, agrees to reimburse and indemnify Agent for and against any
and all liabilities, obligations, losses, damages, penalties, actions,
judgments, suits, costs, expenses, advances or disbursements of any kind or
nature whatsoever which may be imposed on, incurred by, or asserted against
Agent in any way relating to or arising out of this Agreement or any of the Loan
Documents or any action taken or omitted by Agent under this Agreement or any of
the Loan Documents; provided, however, that no Lender shall be liable for any
portion of such liabilities, obligations, losses, damages, penalties, actions,
judgments, suits, costs, expenses, advances or disbursements resulting from
Agent's gross negligence or willful misconduct as determined by a court of
competent jurisdiction. The obligations of Lenders under this subsection 9.1(E)
shall survive the payment in full of the Obligations and the
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termination of this Agreement.
(F) Heller Individually. With respect to its Commitments and the
Loans made by it, Heller shall have and may exercise the same rights and powers
hereunder and is subject to the same obligations and liabilities as and to the
extent set forth herein for any other Lender. The terms "Lenders" or "Requisite
Lenders"; or any similar terms shall, unless the context clearly otherwise
indicates, include Heller in its individual capacity as a Lender. Heller may
lend money to, and generally engage in any or other business with any Loan Party
as if it were not acting as Agent pursuant hereto.
(G) Successor Agent.
(1) Resignation. Agent may resign from the performance of all
its functions and duties hereunder at any time by giving at least 30 Business
Days' prior written notice to Borrower and the Lenders. Such resignation shall
take effect upon the acceptance by a successor Agent of appointment as provided
below.
(2) Appointment of Successor. Upon any such notice of
resignation pursuant to clause (G)(1) above, Requisite Lenders shall, upon
receipt of Borrower's prior consent which shall not unreasonably be withheld,
appoint a successor Agent. If a successor Agent shall not have been so appointed
within said 30 Business Day period, the retiring Agent, upon notice to Borrower,
shall then appoint a successor Agent who shall serve as Agent until such time,
as Requisite Lenders appoint a successor Agent as provided above.
(3) Successor Agent. Upon the acceptance of any appointment as
Agent under the Loan Documents 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 Agent, and the retiring Agent shall be discharged
from its duties and obligations under the Loan Documents. After any retiring
Agent's resignation as Agent under the Loan Documents, the provisions of this
Section 9 shall inure to its benefit as to any actions taken or omitted to be
taken by it while it was Agent under the Loan Documents.
(H) Collateral Matters.
(1) Release of Collateral. Lenders hereby irrevocably
authorize Agent, at its option and in its discretion, to release any Lien
granted to or held by Agent upon any property covered by this Agreement or the
Loan Documents (i) upon termination of the Commitments and upon final and
indefeasible payment in full in cash and satisfaction of all Obligations and
termination of this Agreement; (ii) constituting property being sold or disposed
of in accordance with this Agreement if Borrower certifies to Agent that the
sale or disposition is made in compliance with the provisions of this Agreement
(and Agent may rely in good faith conclusively on any such certificate, without
further inquiry); or (iii) constituting property leased to Borrower under a
lease which has expired or been terminated in a transaction permitted under this
Agreement or is about to expire and which has not been, and is not intended by
Borrower to be, renewed or extended. In addition during any Fiscal Year Agent
may release Collateral having a book value of not more than $200,000 in the
aggregate. Without limiting any of the foregoing, each Lender agrees to confirm
in writing, upon request by Borrower, the authority to release any property
covered by this Agreement or the Loan Documents conferred upon Agent under this
subsection.
(2) Execution of Releases. So long as no Event of Default is
then continuing, upon confirmation from the requisite percentage (as set forth
in subsection 9.1(H)(1) above) of Lenders, of Agent's authority to release any
Collateral, and upon at least 10 Business Days prior written request by
Borrower, Agent shall, and is hereby irrevocably authorized by Lenders to,
execute such documents as may be necessary to evidence the release of the Liens
upon such Collateral; provided, however, that (i) Agent shall not be required to
execute any such document on terms which, in Agent's opinion, would expose Agent
to liability or create any obligation or entail any consequence other than the
release of such Liens without recourse or warranty, and (ii) such release shall
not in any manner discharge, affect or impair the Obligations or any Liens
granted to Agent on behalf of Lenders upon (or obligations of any Loan Party, in
respect of), all interests retained by any Loan Party, including, without
limitation, the proceeds of any sale, all of which shall continue to constitute
part of the property covered by this Agreement or the Loan Documents, and (iii)
such release is not consistent with the terms of this Agreement.
(3) Absence of Duty. Agent shall have no obligation whatsoever
to any Lender or any other Person to assure that the property covered by this
Agreement or the Loan Documents exists or is owned by Borrower or is cared for,
protected or insured or has been encumbered or that the Liens granted to Agent
on behalf of Lenders 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
Agent in this Agreement or in any of the Loan Documents, it being understood and
agreed that in respect of the property covered by this Agreement or the Loan
Documents or any act, omission or event related thereto, Agent may act in any
manner it may deem appropriate, in its discretion, given Agent's own interest in
property covered by this Agreement or the Loan Documents as one of the Lenders
and that Agent shall have no duty or liability whatsoever to any of the other
Lenders.
(I) Agency for Perfection. Each Lender hereby appoints each other
Lender as agent for the purpose of perfecting Lenders' security interest in
Collateral which, in accordance with Article 9 of the Uniform Commercial Code in
any applicable jurisdiction, can be perfected only by possession. Should any
Lender (other than Agent) obtain possession of any such Collateral, such Lender
shall notify Agent thereof, and, promptly upon Agent's request therefor, shall
deliver such Collateral to Agent or in accordance with Agent's instructions. The
Agent may file such proofs of claim or documents as may be necessary or
advisable in order to have the claims of the Agent and the Lenders (including
any claim for the reasonable compensation, expenses, disbursements and advances
of the Agent and the Lenders, their respective agents, financial advisors and
counsel), allowed in any judicial proceedings relative to Borrower and/or its
Subsidiaries, or any of their respective creditors or property, and shall be
entitled and empowered to collect, receive and distribute any monies, securities
or other property payable or deliverable on any such claims. Any custodian in
any judicial proceedings relative to Borrower and/or its Subsidiaries is hereby
authorized by each Lender to make payments to the Agent and, in the event that
the Agent shall consent to the making of such payments directly to the Lenders,
to pay to the Agent any amount due for the reasonable compensation, expenses,
disbursements and advances of the Agent, its agents, financial advisors and
counsel, and any other amounts due the Agent. Nothing contained in this
Agreement or the other Loan Documents shall be deemed to authorize the Agent to
authorize or consent to or accept or adopt on behalf of any Lender any plan of
reorganization, arrangement, adjustment or composition affecting the Loans, or
the rights of any holder thereof, or to authorize the Agent to vote in respect
of the claim of any Lender in any such proceeding, except as specifically
permitted herein.
(J) Exercise of Remedies. Each Lender agrees that it will not have
any right individually to enforce or seek to enforce this Agreement or any Loan
Document or to realize upon any collateral security for the Loans, it being
understood and agreed that such rights and remedies may be exercised only by
Agent.
9.2 Notice of Default. In the event that the Agent or any Lender shall
acquire actual knowledge, or shall have been notified of any Event of Default,
the Agent or such Lender shall promptly notify the Lenders and the Agent.
9.3 Action by Agent.
The Agent shall be entitled to use its discretion with respect to
exercising or refraining from exercising any rights which may be vested in it
by, and with respect to taking or refraining from taking any action or actions
which it may be able to take under or in respect of, this Agreement, unless the
Agent shall have been instructed by either the Requisite Lenders or all of the
Lenders required for an action hereunder (as applicable) to exercise or refrain
from exercising such rights or to make or refrain from taking such action. The
Agent shall incur no liability under or in respect of this Agreement with
respect to anything which it may do or refrain from doing in the reasonable
exercise of its judgment or which may seem to it to be necessary or desirable in
the circumstances, except for its gross negligence or willful misconduct. Agent
shall not be liable to the Lenders or to any Lender in acting or refraining from
acting under this Agreement in accordance with the instructions of the Requisite
Lenders, or all of the Lenders, as the case may be, and any action taken or
failure to act pursuant to such instructions shall be binding on all Lenders.
9.4 Amendments, Waivers and Consents.
(A) Except as otherwise provided herein, no amendment, modification,
termination or waiver of any provision of this Agreement or any other Loan
Document, or consent to any departure by any Loan Party therefrom, shall in any
event be effective unless the same shall be in writing and signed by Requisite
Lenders or Agent at the request of Requisite Lenders, as applicable; provided,
that no amendment, modification, termination, waiver or consent shall, unless in
writing and signed by all Lenders, do any of the following: (i) increase any of
the Commitments; (ii) reduce the principal amount of any Loan or reduce the rate
of interest on or fees payable with respect to any Loan or Letter of Credit;
(iii) change the terms or amount of the Swingline Loan; (iv) change the
definition of Borrowing Base, Eligible Accounts, Eligible Inventory or Eligible
Retail Inventory; (v) change the sub-limits for Letters of Credit and
Acceptances, Eligible Inventory and Eligible Retail Inventory; provided,
however, that Agent shall have the discretion to increase the Borrowing Base
sublimit for Eligible Retail Inventory to a maximum of $4,000,000 without the
consent of any Lender so long as no Default or Event of Default shall have
occurred and be continuing; (vi) change the Letter of Credit Reserve Account;
(vii) reduce the principal amount of any Loan or reduce the rate of interest on
or reduce any fees payable with respect to any Loan or Letter of Credit; (viii)
postpone the schedule date of payment of the principal amount of any Loan or
Letter of Credit or extend the scheduled due date for all or any portion of the
principal of the Loans or any interest or any fees payable or reduce the amount
of, waive or excuse any such payment, or postpone the schedule date of
expiration of the Commitment thereunder or make any determination or grant any
consent thereunder; (ix) amend the definition of the term "Requisite Lenders";
(x) release Collateral except as provided in subsection 9.1(H); (xi) amend or
waive this subsection 9.4; (xi) increase by more than five percent the
percentages contained in the definition of Borrowing Base so long as no Default
or Event of Default shall have occurred and be continuing; or (xii) amend or
waive any Event of Default in respect of subsection 8.1(F); provided, further,
that no amendment, modification, termination, waiver or consent affecting the
rights or duties of Agent under any Loan Document shall in any event be
effective, unless in writing and signed by Agent, in addition to the Lenders
required to take such action, and provided, further, that no amendment,
modification, waiver or consent of any provision relating to the Swingline Loan
shall be effective unless in writing and signed by Swingline Lender;
(B) Each amendment, modification, termination, waiver or consent
shall be effective only in the specific instance and for the specific purpose
for which it was given. No amendment, modification, termination or waiver shall
be required for Agent to take additional Collateral;
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(C) Each Lender grants Agent the right to purchase all, but not less
than all, of such Lender's Commitment, in the event Agent requests the consent
of a Lender and such consent is denied. In such circumstances, Agent may, at its
option, require such Lender to assign its interest in the Loans to Agent or
Agent's designee for a price equal to the then outstanding principal amount
thereof plus accrued and unpaid interest and fees due such Lender, which
interest and fees will be paid when collected from Borrower;
Notwithstanding anything in this subsection 9.4, Agent and Borrower, without the
consent of either Requisite Lenders or all Lenders, may execute amendments to
this Agreement and the Loan Documents which consist solely of the making of
typographical corrections.
9.5 Assignments and Participations in Loans.
(A) Each Lender may assign its rights and delegate its obligations
under this Agreement to an Eligible Assignee; provided, that (a) prior to the
occurrence of an Event of Default which is continuing such Lender shall first
obtain the written consent of Agent and Borrower, which shall not be
unreasonably withheld (unless such assignment is required by operation of law),
(b) the amount of Commitments and Loans of the assigning Lender being assigned
shall in no event be less than the lesser of (i) $15,000,000 or (ii) the entire
amount of the Commitments and Loans of such assigning Lender and (c)(i) each
such assignment shall be of a pro rata portion of all such assigning Lender's
Loans and Commitments hereunder, and (ii) the parties to such assignment shall
execute and deliver to Agent for acceptance and recording a Assignment and
Assumption Agreement together with (x) a processing and recording fee of $3,500
payable to Agent and (y) each of the Notes originally delivered to the assigning
Lender. Upon receipt of all of the foregoing, Agent shall notify Borrower of
such assignment and Borrower shall comply with its obligations under the last
sentence of subsection 2.1(G). To the extent of an assignment authorized under
this subsection 9.5, upon Agent's receipt and acceptance of the Assignment and
Acceptance Agreement and Agent's receipt of the recording fee set forth above,
the assignee shall be considered to be a "Lender" hereunder and Borrower hereby
acknowledges and agrees that any assignment will give rise to a direct
obligation of Borrower to the assignee. The assigning Lender shall be relieved
of its obligations hereunder with respect to the assigned portion of its
Commitment.
(B) Each Lender may sell participations in all or any part of any
Loans made by it to another Person identified as of June 21, 1998 to Borrower;
provided, that any such participation shall be in a minimum amount of
$5,000,000, and provided, further, that all amounts payable by Borrower
hereunder shall be determined as if that Lender had not sold such participation
and the holder of any such participation shall not be entitled to require such
Lender to take or omit to take any action hereunder except action directly
effecting (a) any reduction in the principal amount or an interest rate on any
Loan in which such holder participates; (b) any extension of the Termination
Date or the date fixed for any payment of interest payable with respect to any
Loan in which such holder participates; and (c) any release of substantially all
of the Collateral. Borrower hereby acknowledges and agrees that the participant
under each participation shall for purposes of subsections 2.8, 2.9, 2.10, 9.6
and 10.2 be considered to be a "Lender". No such participant shall sell, pledge,
assign, sub-participate or otherwise transfer its rights or duties under its
participation agreement, without the prior written consent of Agent and
Borrower; except to a parent, subsidiary or affiliate of Participant upon prior
written notice to Agent and no such sale, pledge, assignment, sub-participation
or other transfer shall release Participant from its obligations and liabilities
under the Participation Agreement.
(C) Except as otherwise provided in subsection 9.5(A) no Lender
shall, as between Borrower and that Lender, be relieved of any of its
obligations hereunder as a result of any sale, assignment, transfer or
negotiation of, or granting of participation in, all or any part of the Loans or
other Obligations owed to such Lender. Each Lender may furnish any information
concerning Borrower and its Subsidiaries in the possession of that Lender from
time to time to Eligible Assignees and participants (including prospective
assignees and participants) provided that the Persons obtaining such information
agrees to maintain the confidentiality of such information to the extent
required by subsection 10.18.
(D) Notwithstanding any other provision set forth in this Agreement,
any Lender may at any time create a security interest in all or any portion of
its rights under this Agreement or the other Loan Documents in favor of any
Federal Reserve Bank in accordance with Regulation A of the Board of Governors
of the Federal Reserve System.
9.6 Set Off and Sharing of Payments. In addition to any rights now or
hereafter granted under applicable law and not by way of limitation of any such
rights, upon the occurrence and during the continuance of any Event of Default,
each Lender is hereby authorized by Borrower at any time or from time to time,
with reasonably prompt subsequent notice to Borrower or to any other Person (any
prior or contemporaneous notice being hereby expressly waived) to set off and to
appropriate and to apply any and all (a) balances held by such Lender at any of
its offices for the account of Borrower or any of its Subsidiaries (regardless
of whether such balances are then due to Borrower or its Subsidiaries), and (b)
other property at any time held or owing by such Lender to or for the credit or
for the account of Borrower or any of its Subsidiaries, against and on account
of any of the Obligations which are not paid when due; except that no Lender
shall exercise any such right without the prior written consent of Agent. Any
Lender which has exercised its right to set off shall purchase for cash (and the
other Lenders shall sell) participations in each such other Lender's Pro Rata
Share of the Obligations as would be necessary to cause such Lender to share
such excess with each other Lender in accordance with their respective Pro Rata
Shares. Borrower agrees, to the fullest extent permitted by law, that (a) any
Lender may exercise its right to set off with respect to amounts in excess of
its Pro Rata Share of the Obligations and may sell participations in such excess
to other Lenders, and (b) any Lender so purchasing a participation in the Loans
made or other Obligations held by other Lenders may exercise all rights of
set-off, bankers' lien, counterclaim or similar rights with respect to such
participation as fully as if such Lender were a direct holder of Loans and other
Obligations in the amount of such participation.
9.7 Disbursement of Funds. Agent may, on behalf of Lenders, disburse funds
to Borrower for Loans requested. Each Lender shall reimburse Agent on demand for
all funds disbursed on its behalf by Agent, or if Agent so requests, each Lender
will remit to Agent its Pro Rata Share of any Loan or Advance before Agent
disburses same to Borrower. If Agent elects to require that funds be made
available prior to disbursement to Borrower, Agent shall advise each Lender by
telephone, telex or telecopy of the amount of such Lender's Pro Rata Share of
such requested Loan no later than (a) 10:00 a.m. (Central time) two Business
Days prior to the Funding Date applicable thereto for LIBOR Loans and (b) by
1:00 p.m. Central time on the Funding Date for Base Rate Loans, and each such
Lender shall pay Agent such Lender's Pro Rata Share of such requested Loan, in
same day funds, by wire transfer to Agent's account not later than 12:00 p.m.
Central time on such Funding Date for LIBOR Loans and 3:00 p.m. Central time for
Base Rate Loans.
9.8 Settlements, Payments and Information.
(A) Revolving Advances and Payments; Fee Payments.
(1) Payments of principal in respect of the Term Loans will be
settled on the Business Day received in accordance with the provisions of
Section 2. The Revolving Loan may fluctuate from day to day through Agent's
disbursement of funds to, and receipt of funds from, Borrower. In order to
minimize the frequency of transfers of funds between Agent and each Lender
notwithstanding terms to the contrary set forth in Section 2 and subsection 9.7,
Revolving Advances and repayments (except as set forth in subsection 2.1(E)) may
be settled according to the procedures described in this subsection 9.8.
Notwithstanding these procedures, each Lender's obligation to fund its Pro Rata
Share of Advances made by Agent to Borrower will commence on the date such
Advances are made by Agent. Such payments will be made by such Lender without
set-off, counterclaim or reduction of any kind.
(2) Once each week for the Revolving Loan or more frequently
(including daily), if Agent so elects (each such day being a "Settlement Date"),
Agent will advise each Lender by 12:00 noon Central time as to Base Rate Loans
and 3:00 p.m. Central time as to LIBOR Loans by telephone, telex, or telecopy of
the amount of each such Lender's Pro Rata Share of the Revolving Loan. In the
event payments are necessary to adjust the amount of such Lender's share of the
Revolving Loan to such Lender's Pro Rata Share of the Revolving Loan, the party
from which such payment is due will pay the other, in same day funds, by wire
transfer to the other's account not later than 3:00 p.m. Central time on the
Settlement Date.
(3) On the first Business Day of each month ("Interest
Settlement Date"), Agent will advise each Lender by telephone, telefax or
telecopy of the amount of interest and fees charged to and collected from
Borrower for the preceding month. Provided that such Lender has made all
payments required to be made by it under this Agreement, Agent will pay to such
Lender, by wire transfer to such Lender's account (as specified by such Lender
on the signature page of this Agreement as amended by such Lender from time to
time after the date hereof or in the applicable Assignment and Assumption
Agreement) not later than 2:00 p.m. Central time on the Interest Settlement Date
such Lender's share of such interest and such Lender's Pro Rata Share of such
fees.
(B) Return of Payments
(1) If Agent pays an amount to a Lender under this Agreement
in the belief or expectation that a related payment has been or will be received
by Agent from Borrower and such related payment is not received by Agent, then
Agent will be entitled to recover such amount from such Lender without set-off,
counterclaim or deduction of any kind.
(2) If Agent determines at any time that any amount received
by Agent under this Agreement must be returned to Borrower or paid to any other
person pursuant to any solvency law or otherwise, then, notwithstanding any
other term or condition of this Agreement, Agent will not be required to
distribute any portion thereof to any Lender. In addition, each Lender will
repay to Agent on demand any portion of such amount that Agent has distributed
to such Lender, together with interest at such rate, if any, as Agent is
required to pay to Borrower or such other Person, without set-off, counterclaim
or deduction of any kind.
9.9 Dissemination of Information. Agent will provide Lenders with any
information received by Agent from Borrower which is required to be provided to
a Lender hereunder; provided, however, that Agent shall not be liable to Lenders
for any failure to do so, except to the extent that such failure is attributable
to Agent's gross negligence or willful misconduct.
9.10 Discretionary Advances. Agent may, in its sole discretion following
an Event of Default which is continuing, make Revolving Advances on behalf of
Lenders in an aggregate amount of not more than $250,000 irrespective of any
limitations set forth in the Borrowing Base for the purpose of preserving or
protecting the Collateral or for incurring any costs associated with collection
or enforcing rights or remedies against the Collateral or incurred in any action
to enforce this Agreement or any other Loan Document ("Discretionary Advances").
SECTION 10. MISCELLANEOUS
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10.1 Expenses and Attorneys' Fees. Whether or not the transactions
contemplated hereby shall be consummated, Borrower agrees to promptly pay all
fees, costs and expenses incurred in connection with any matters contemplated by
or arising out of this Agreement or the other Loan Documents including the
following, and all such fees, costs and expenses shall be part of the
Obligations, payable on demand and secured by the Collateral: (a) fees, costs
and expenses incurred by Agent (including attorneys' fees, allocated costs of
internal counsel and fees of environmental consultants, accountants and other
professionals retained by Agent) incurred in connection with the examination,
review, due diligence investigation, documentation and closing of the financing
arrangements evidenced by the Loan Documents; (b) fees, costs and expenses
incurred by Agent (including attorneys' fees, allocated costs of internal
counsel and fees of environmental consultants, accountants and other
professionals retained by Agent) incurred in connection with the review,
negotiation, preparation, documentation, execution, syndication, and
administration of the Loan Documents, the Loans, and any amendments, waivers,
consents, forbearances and other modifications relating thereto or any
subordination or intercreditor agreements; (c) fees, costs and expenses incurred
by Agent or any Lender in creating, perfecting and maintaining perfection of
Liens in favor of Agent, on behalf of Lenders; (d) fees, costs and expenses
incurred by Agent in connection with forwarding to Borrower the proceeds of
Loans including Agent's or any Lenders' standard wire transfer fee; (e) fees,
costs, expenses and bank charges, including bank charges for returned checks,
incurred by Agent or any Lender in establishing, maintaining and handling lock
box accounts, blocked accounts or other accounts for collection of the
Collateral; (f) fees, costs, expenses (including attorneys' fees and allocated
costs of internal counsel) of Agent or any Lender and costs of settlement
incurred in collecting upon or enforcing rights against the Collateral or
incurred in any action to enforce this Agreement or the other Loan Documents or
to collect any payments due from Borrower or any other Loan Party under this
Agreement or any other Loan Document or incurred in connection with any
refinancing or restructuring of the credit arrangements provided under this
Agreement, whether in the nature of a "workout" or in connection with any
insolvency or bankruptcy proceedings or otherwise.
10.2 Indemnity. In addition to the payment of expenses pursuant to
subsection 10.1, whether or not the transactions contemplated hereby shall be
consummated, Borrower agrees to indemnify, pay and hold Agent and each Lender,
and the officers, directors, employees, agents, consultants, auditors, persons
engaged by Agent or any Lender, to evaluate or monitor the Collateral,
affiliates and attorneys of Agent, Lender and such holders (collectively called
the "Indemnitees") harmless from and against any and all liabilities,
obligations, losses, damages, penalties, actions, judgments, suits, claims,
costs, expenses and disbursements of any kind or nature whatsoever (including
the fees and disbursements of counsel for such Indemnitees in connection with
any investigative, administrative or judicial proceeding commenced or
threatened, whether or not such Indemnitee shall be designated a party thereto)
that may be imposed on, incurred by, or asserted against that Indemnitee, in any
manner relating to or arising out of this Agreement or the other Loan Documents,
the consummation of the transactions contemplated by this Agreement, the
statements contained in the commitment letters, if any, delivered by Agent or
any Lender, Agent's and each Lender's agreement to make the Loans hereunder, the
use or intended use of the proceeds of any of the Loans or the exercise of any
right or remedy hereunder or under the other Loan Documents (the "Indemnified
Liabilities"); provided that Borrower shall have no obligation to an Indemnitee
hereunder with respect to Indemnified Liabilities arising from the gross
negligence or willful misconduct of that Indemnitee as determined by a court of
competent jurisdiction.
10.3 Notices. Unless otherwise specifically provided herein, all notices
shall be in writing addressed to the respective party as set forth below and may
be personally served, telecopied or sent by overnight courier service or United
States mail and shall be deemed to have been given: (a) if delivered in person,
when delivered; (b) if delivered by telecopy, on the date of transmission if
transmitted on a Business Day before 4:00 p.m. Central time or, if not, on the
next succeeding Business Day; (c) if delivered by overnight courier, two days
after delivery to such courier properly addressed; or (d) if by U.S. Mail, four
Business Days after depositing in the United States mail, with postage prepaid
and properly addressed.
If to Borrower: SKECHERS U.S.A., INC.
228 Manhattan Beach Boulevard Suite 200
Manhattan Beach, CA 90266
Attn: David Weinberg
Telecopy No.: (310) 318-5019
If to Agent or HELLER FINANCIAL, INC.
to Heller: 505 N. Brand Boulevard
Glendale, CA 91203
Attn: CAMG Portfolio Manager
Telecopy No.: (818) 409-1846
With a copy to: HELLER FINANCIAL, INC.
505 N. Brand Boulevard
Glendale, CA 91203
Attn: CAMG Portfolio Manager
Telecopy No.: (818) 246-6380
If to any Lender: Its address indicated on the signature page
hereto, in an Assignment and Assumption Agreement or in a notice to Agent and
Borrower or to such other address as the party addressed shall have previously
designated by written notice to the serving party, given in accordance with this
subsection 10.3.
10.4 Survival of Representations and Warranties and Certain Agreements.
All agreements, representations and warranties made herein shall survive the
execution and delivery of this Agreement and the making of the Loans hereunder.
Notwithstanding anything in this Agreement or implied by law to the contrary,
the agreements of Borrower and Lender set forth in subsections 10.1, 10.2, 10.6,
10.11, 10.14, and 10.15 (Borrower's agreement to pay fees, agreement to
indemnify Lender, the reinstatement of Obligations, agreement as to choice of
law and jurisdiction and Borrower's and Lender's waiver of a jury trial) shall
survive the payment of the Loans and the termination of this Agreement.
10.5 Indulgence Not Waiver. No failure or delay on the part of Agent, any
Lender or any holder of any Note in the exercise of any power, right or
privilege hereunder or under any Note shall impair such power, right or
privilege or be construed to be a waiver of any default or acquiescence therein,
nor shall any single or partial exercise of any such power, right or privilege
preclude other or further exercise thereof or of any other right, power or
privilege.
10.6 Marshaling; Payments Set Aside. Neither Agent nor any Lender shall be
under any obligation to marshal any assets in favor of any Loan Party or any
other party or against or in payment of any or all of the Obligations. To the
extent that any Loan Party makes a payment or payments to Agent and/or any
Lender or Agent and/or any Lender enforces its security interests or exercise
its rights of setoff, and such payment or payments or the proceeds of such
enforcement or setoff or any part thereof are subsequently invalidated, declared
to be fraudulent or preferential, set aside and/or required to be repaid to a
trustee, receiver or any other party under any bankruptcy law, state or federal
law, common law or equitable cause, then to the extent of such recovery, the
Obligations or part thereof originally intended to be satisfied, and all Liens,
rights and remedies therefor, shall be revived and continued in full force and
effect as if such payment had not been made or such enforcement or setoff had
not occurred.
10.7 Entire Agreement. This Agreement and the other Loan Documents embody
the entire agreement among the parties hereto and supersede all prior
commitments, agreements, representations, and understandings, whether written or
oral, relating to the subject matter hereof, and may not be contradicted or
varied by evidence of prior, contemporaneous, or subsequent oral agreements or
discussions of the parties hereto.
10.8 Severability. The invalidity, illegality or unenforceability in any
jurisdiction of any provision in or obligation under this Agreement or the other
Loan Documents shall not affect or impair the validity, legality or
enforceability of the remaining provisions or obligations under this Agreement,
or the other Loan Documents.
10.9 Lenders' Obligations Several; Independent Nature of Lenders' Rights.
The obligation of each Lender hereunder is several and not joint and neither
Agent nor any Lender shall be responsible for the obligation or Commitment of
any other Lender hereunder. In the event that any Lender at any time should fail
to make a Loan as herein provided, the Lenders, or any of them, at their sole
option, may make the Loan that was to have been made by the Lender so failing to
make such Loan. Nothing contained in any Loan Document and no action taken by
Agent or any Lender pursuant hereto or thereto shall be deemed to constitute
Lenders to be a partnership, an association, a joint venture or any other kind
of entity. The amounts payable at any time hereunder to each Lender shall be a
separate and independent debt, and, provided Agent fails or refuses to exercise
any remedies against Borrower after receiving the direction of the Requisite
Lenders, each Lender shall be entitled to protect and enforce its rights arising
out of this Agreement and it shall not be necessary for any other Lender to be
joined as an additional party in any proceeding for such purpose.
10.10 Headings. Section and subsection headings in this Agreement are
included herein for convenience of reference only and shall not constitute a
part of this Agreement for any other purpose or be given any substantive effect.
10.11 APPLICABLE LAW. THIS AGREEMENT SHALL BE GOVERNED BY, AND SHALL BE
CONSTRUED AND ENFORCED IN ACCORDANCE WITH, THE INTERNAL LAWS OF THE STATE OF
CALIFORNIA, WITHOUT REGARD TO CONFLICTS OF LAWS PRINCIPLES.
10.12 Successors and Assigns. This Agreement shall be binding upon and
inure to the benefit of the parties hereto and their respective successors and
assigns, provided, however, Borrower may not assign its rights or obligations
hereunder without the written consent of Lenders; provided, further, however,
that Borrower may assign its rights in conjunction with an initial public
offering provided that Borrower complies with Subsection 7.6.
10.13 No Fiduciary Relationship; No Duty; Limitation of Liabilities.
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(A) No provision in this Agreement or in any of the other Loan
Documents and no course of dealing between the parties shall be deemed to create
any fiduciary duty by Agent or any Lender to Borrower.
(B) All attorneys, accountants, appraisers, and other
professional Persons and consultants retained by Agent or any Lender shall have
the right to act exclusively in the interest of Agent or such Lender and shall
have no duty of disclosure, duty of loyalty, duty of care, or other duty or
obligation of any type or nature whatsoever to Borrower or any of Borrower's
shareholders or any other Person.
(C) Neither Agent nor any Lender, nor any affiliate, officer,
director, shareholder, employee, attorney, or agent of Agent or any Lender shall
have any liability with respect to, and Borrower hereby waives, releases, and
agrees not to sue any of them upon, any claim for any special, indirect,
incidental, or consequential damages suffered or incurred by Borrower in
connection with, arising out of, or in any way related to, this Agreement or any
of the other Loan Documents, or any of the transactions contemplated by this
Agreement or any of the other Loan Documents. Borrower hereby waives, releases,
and agrees not to sue Agent or any Lender or any of Agent's or any Lender's
affiliates, officers, directors, employees, attorneys, or agents for punitive
damages in respect of any claim in connection with, arising out of, or in any
way related to, this Agreement or any of the other Loan Documents, or any of the
transactions contemplated by this Agreement or any of the transactions
contemplated hereby.
10.14 CONSENT TO JURISDICTION. BORROWER HEREBY CONSENTS TO THE
JURISDICTION OF ANY STATE OR FEDERAL COURT LOCATED WITHIN THE COUNTY OF LOS
ANGELES, STATE OF CALIFORNIA AND IRREVOCABLY AGREES THAT, SUBJECT TO AGENT'S
ELECTION, ALL ACTIONS OR PROCEEDINGS ARISING OUT OF OR RELATING TO THIS
AGREEMENT OR THE OTHER LOAN DOCUMENTS SHALL BE LITIGATED IN SUCH COURTS.
BORROWER EXPRESSLY SUBMITS AND CONSENTS TO THE JURISDICTION OF THE AFORESAID
COURTS AND WAIVES ANY DEFENSE OF FORUM NON CONVENIENS. BORROWER HEREBY WAIVES
PERSONAL SERVICE OF ANY AND ALL PROCESS AND AGREES THAT ALL SUCH SERVICE OF
PROCESS MAY BE MADE UPON BORROWER BY CERTIFIED OR REGISTERED MAIL, RETURN
RECEIPT REQUESTED, ADDRESSED TO BORROWER, AT THE ADDRESS SET FORTH IN THIS
AGREEMENT AND SERVICE SO MADE SHALL BE COMPLETE 10 DAYS AFTER THE SAME HAS BEEN
POSTED.
10.15 WAIVER OF JURY TRIAL. BORROWER, AGENT AND EACH LENDER HEREBY WAIVE
THEIR RESPECTIVE RIGHTS TO A JURY TRIAL OF ANY CLAIM OR CAUSE OF ACTION BASED
UPON OR ARISING OUT OF THIS AGREEMENT AND THE OTHER LOAN DOCUMENTS. BORROWER,
AGENT AND EACH LENDER ACKNOWLEDGE THAT THIS WAIVER IS A MATERIAL INDUCEMENT TO
ENTER INTO A BUSINESS RELATIONSHIP, THAT EACH HAS RELIED ON THE WAIVER IN
ENTERING INTO THIS AGREEMENT AND THE OTHER LOAN DOCUMENTS AND THAT EACH WILL
CONTINUE TO RELY ON THE WAIVER IN THEIR RELATED FUTURE DEALINGS. BORROWER, AGENT
AND EACH LENDER
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WARRANT AND REPRESENT THAT EACH HAS HAD THE OPPORTUNITY OF
REVIEWING THIS JURY WAIVER WITH LEGAL COUNSEL, AND THAT EACH KNOWINGLY AND
VOLUNTARILY WAIVES ITS JURY TRIAL RIGHTS.
10.16 Construction. Borrower, Agent and each Lender each acknowledge that
it has had the benefit of legal counsel of its own choice and has been afforded
an opportunity to review this Agreement and the other Loan Documents with its
legal counsel and that this Agreement and the other Loan Documents shall be
construed as if jointly drafted by Borrower, Agent and each Lender.
10.17 Counterparts; Effectiveness. This Agreement and any amendments,
waivers, consents, or supplements may be executed via telecopier or facsimile
transmission in any number of counterparts and by different parties hereto in
separate counterparts, each of which when so executed and delivered shall be
deemed an original, but all of which counterparts together shall constitute one
and the same instrument. This Agreement shall become effective upon the
execution of a counterpart hereof by each of the parties hereto.
10.18 Confidentiality. Agent and Lenders shall hold all nonpublic
information obtained pursuant to the requirements hereof and identified as such
by Borrower in accordance with such Person's customary procedures for handling
confidential information of this nature and in accordance with safe and sound
business practices and in any event may make disclosure to such of its
respective affiliates, officers, directors, employees, agents and
representatives as need to know such information in connection with the Loans.
If any Lender or its respective affiliates is otherwise a creditor of a
Borrower, such Lender may use the information in connection with its other
creditors. Agent and Lenders may also make disclosure reasonably required by a
bona fide offeree or assignee (or participation), or as required or requested by
any Governmental Authority or representative thereof, or pursuant to legal
process, or to its accountants, lawyers and other advisors, and shall require
any such offeree or assignee (or participant) to agree (and require any of its
offerees, assignees or participants to agree) to comply with this Section 10.18.
In no event shall Agent or any Lender be obligated or required to return any
materials furnished by Borrower; provided, however, each offeree shall be
required to agree that if it does not become an assignee (or participant) it
shall return all materials furnished to it by Borrower in connection herewith.
SECTION 11. DEFINITIONS AND ACCOUNTING TERMS
11.1 Definitions. The following terms used in this Agreement shall have
the following meanings:
"Accounts" means all "accounts" (as defined in the UCC), accounts
receivable, contract rights and general intangibles relating thereto, notes,
drafts and other forms of obligations owed to or owned by Borrower arising or
resulting from the sale of goods or the rendering of services, whether or not
earned by performance.
"Additional Mortgaged Property" means all real property owned or leased by
Borrower or its Subsidiaries in which Agent requires a mortgage to secure the
Obligations after the Closing Date.
"Advance" shall mean an advance under the Swingline Loan or Revolving
Loan.
"Affiliate" means any Person (other than Agent or any Lender): (a)
directly or indirectly controlling, controlled by, or under common control with,
any Loan party; (b) directly or indirectly owning or holding 5% or more of any
equity interest in Borrower; (c) 5% or more of whose stock or other equity
interest having ordinary voting power for the election of directors or the power
to direct or cause the direction of management, is directly or indirectly owned
or held by Borrower; or (d) which has a senior officer who is also a senior
officer of Borrower. For purposes of this definition, "control" (including with
correlative meaning, the terms "controlling", "controlled by" and "under common
control with") means the possession directly or indirectly of the power to
direct or cause the direction of the management and policies of a Person,
whether through the ownership of voting securities or other equity interest, or
by contract or otherwise.
"Agent" means Heller in its capacity as agent for the Lenders under the
Loan Documents and any successor in such capacity appointed pursuant to
subsection 9.1(G).
"Agent's Account" means ABA No. 0710-0001-3, Account No. 52-98695 at First
National Bank of Chicago, One First National Plaza, Chicago, IL 60670,
Reference: Heller Business Credit for the benefit of Skechers U.S.A., Inc.
"Agent's Fee Letter" means that certain letter agreement between Agent and
Borrower dated September 4, 1998 in respect to certain fees payable to Agent in
respect of administering this Agreement.
"Agreement" means this Loan and Security Agreement, as it may be amended,
restated, supplemented or otherwise modified form time to time.
"Asset Disposition" means the disposition by Borrower or any of its
Subsidiaries, whether by sale, lease, transfer loss, damage, destruction,
condemnation or otherwise, of any or all of the computer and material handling
equipment that was purchased utilizing the proceeds of Term Loan A.
"Assignment and Assumption Agreement" shall mean an Assignment and
Assumption Agreement substantially in the form of Exhibit A.
"Bank Letter of Credit" means each letter of credit issued by a bank
acceptable to and approved by Agent for the account of Borrower and supported by
a risk participation agreement issued by Agent.
"Base Rate" means a variable rate of interest per annum equal to the
higher of (a) the rate of interest from time to time published by the Board of
Governors of the Federal Reserve System as the "Bank Prime Loan" rate in Federal
Reserve Statistical Release H.15(519) entitled "Selected Interest Rates" or any
successor publication of the Federal Reserve System reporting the Bank Prime
Loan rate or its equivalent or the prime commercial lending rate in effect from
time to time as announced by The Chase Manhattan Bank, N.A., and two other
referenced institutions, prime commercial, or (b) the Federal Funds Effective
Rate, as published by the Federal Reserve Bank of New York, plus one-half of one
percent (0.50%). In the event the Board of Governors of the Federal Reserve
System ceases to publish a Bank Prime Loan rate or its equivalent, the term
"Base Rate" shall mean a variable rate of interest per annum equal to the
highest of the "prime rate", "reference rate", "base rate", or other similar
rate announced from time to time by any of the three largest banks located in
New York City, New York (the understanding that any such rate may merely be
reference rate and may not necessarily represent the lowest or best rate
actually charged to any customer by any such bank).
"Base Rate Loans" means Loans bearing interest at rates determined by
reference to the Base Rate.
"Borrower's Accountants" means the independent certified public
accountants selected by Borrower and its Subsidiaries and reasonably acceptable
to Agent, which selection shall not be modified during the term of this
Agreement without Agent's prior written consent.
"Borrowing Base" has the meaning assigned to that term in subsection
2.1(B)(2).
"Borrowing Base Certificate" means a certificate and schedule duly
executed by an officer of Borrower appropriately completed and in substantially
the form of Exhibit B.
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"Business Day" means any day excluding Saturday, Sunday and any day which
is a legal holiday under the laws of the States of Illinois, Pennsylvania or
California, or is a day on which banking institutions located in any such state
are closed, or for the purposes of LIBOR Loans only, a day on which commercial
banks are open for dealings in Dollar deposits in the London, England (U.K.)
market.
"Cash Equivalents" means: (a) 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; (b)
commercial paper maturing no more than six months from the date issued and, at
the time of acquisition, having a rating of at least A-1 from Standard & Poor's
Corporation or at least P-1 from Moody's Investors Service, Inc.; and (c)
certificates of deposit or bankers' acceptances maturing within six months from
the date of issuance thereof issued by, or overnight reverse repurchase
agreements from any commercial bank organized under the laws of the United
States of America, or any state thereof or the District of Columbia, having
combined capital and surplus of not less than $250,000,000 and not subject to
set off rights in favor of such bank.
"Closing Date" means September 4, 1998.
"Collateral" has the meaning assigned to that term in subsection 2.7.
"Commitment" or "Commitments" means the commitment or commitments of
Lenders to make Loans as set forth in subsections 2.1(A) and/or 2.1(B) and to
provide Lender Letters of Credit as set forth in subsection 2.1(H).
"Compliance Certificate" means a certificate duly executed by the chief
executive officer or chief financial officer of Borrower appropriately completed
and in substantially in the form of Exhibit B.
"Default" means a condition, act or event that, after notice or lapse of
time or both, would constitute an Event of Default if that condition, act or
event were not cured or removed within any applicable grace or cure period.
"Default Rate" has the meaning assigned to that term in subsection 2.2.
"Defaulted Amount" means, with respect to any Lender at any time, any
amount required to be paid by such Lender to the Agent or any other Lender
hereunder or under any other Loan Document which has not been so paid.
"Defaulting Lender" means, at any time, any Lender that owes a Defaulted
Amount.
"Discretionary Advance" has the meaning assigned to such term in
subsection 9.10.
"Eligible Assignee" shall mean (a) a commercial bank, savings bank or a
commercial finance company, in each case organized under the laws of the United
States, or any state thereof, and having a combined capital and surplus of at
least $100,000,000 (or $250,000,000 in the case of an assignment of a Revolving
Loan Commitment); (b) a commercial bank organized under the laws of any other
country which is a member of the Organization for Economic Cooperation and
Development (the "OECD"), or a political subdivision of any such country, and
having a combined capital and surplus of at least $100,000,000 (of $250,000,000
in the case of an assignment of a Revolving Loan Commitment); provided that such
bank is acting through a branch or agency located in the country in which it is
organized or another country which is also a member of the OECD; (c) any other
entity which is an "accredited investor" (as defined in Regulation D under the
Securities Act) which extends credit or buys loans as one of its businesses,
including but not limited to, insurance companies, mutual funds and lease
financing companies, and (d) a Person that is primarily engaged in the business
of lending that is (i) a Subsidiary of a Lender, (ii) a Subsidiary of a Person
of which a Lender is a Subsidiary, or (iii) a Person of which a Lender is a
Subsidiary; provided, however, that no Affiliate of Borrower shall be an
Eligible Assignee.
"Employee Benefit Plan" means any employee benefit plan within the meaning
of Section 3(3) of ERISA which (a) is maintained for employees of any Loan Party
or any ERISA Affiliate or (b) has at any time within the preceding six years
been maintained for the employees of any Loan Party or any current or former
ERISA Affiliate.
"Environmental Claims" means claims, liabilities, investigations,
litigation, administrative proceedings, judgments or orders relating to
Hazardous Materials.
"Environmental Laws" means any present or future federal, state or local
law, rule, regulation or order relating to pollution, waste, disposal of the
protection of human health or safety, plant life or animal life, natural
resources or the environment.
"Equipment" means all "equipment" (as defined in the UCC), all furniture,
furnishings, fixtures, machinery, motor vehicles, trucks, trailers, vessels,
aircraft and rolling stock and all parts thereof and all additions and
accessions thereto and replacements therefor.
"ERISA" means the Employee Retirement Income Security Act of 1974, as
amended from time to time, and any successor statues and all rules and
regulations promulgated thereunder.
"ERISA Affiliate", as applied to any Loan Party, means any Person who is a
member of a group which is under common control with any Loan Party, who
together with any Loan Party is treated as single employer within the meaning of
Section 414(b) and (c) of the IRC.
"Federal Funds Effective Rate" means, for any day, 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 on the
immediately following Business Day by the Board of Governors of the Federal
Reserve System as the Federal Funds Rate or Federal Reserve Statistical Release
H.15(519) entitled "Selected Interest Rates" or any successor publication of the
Federal Reserve System reporting the Federal Funds Effective Rate or its
equivalent or, if such rate is not published for any Business Day, the average
of the quotations for the day of the requested Loan received by Agent from three
Federal funds brokers of recognized standing selected by Agent.
"Fiscal Month" means each month of each Fiscal Year.
"Fiscal Year" means each twelve month period ending on the last day of
December in each year.
"Funding Date" means the date of each funding of a Loan or issuance of a
Lender Letter of Credit.
"GAAP" means generally accepted accounting principles set forth in the
opinions and pronouncements of the Accounting Principles Board of the American
Institute of Certified Public Accountants and statements and pronouncements of
the Financial Accounting Standards Board that are applicable to the
circumstances as of the date of determination.
"Guarantor" has the meaning ascribed to such term in the Recitals.
"Guarantor Cash Collateral" means $13,250,000 pledged by Guarantor under
the Cash Collateral Pledge Agreement to secure its obligations to Agent pursuant
to the Guaranty.
"Guaranty" means the Guaranty of Borrower's Obligations executed by
Guarantor.
"Hazardous Material" means all or any of the following: (a) substances
that are defined or listed in, or otherwise classified pursuant to, any
Environmental Laws or regulations as "hazardous substances", "hazardous
materials", "hazardous wastes", "toxic substances" or any other formulation
intended to define, list or classify substances by reason of deleterious
properties such as ignitability, corrosivity, reactivity, carcinogenicity, or
toxicity; (b) oil, petroleum or petroleum derived substances, natural gas,
natural gas liquids or synthetic gas and drilling fluids, produced waters and
other wastes associated with the exploration, development or production of crude
oil, natural gas or geothermal resources; (c) any flammable substances or
explosives or any radioactive materials; and (d) asbestos in any form or
electrical equipment which contains any oil or dielectric fluid containing
polychlorinated biphenyls.
"Indebtedness", as applied to any Person, means without duplication: (a)
all indebtedness for borrowed money; (b) obligations under leases which in
accordance with GAAP constitute Capital Leases; (c) notes payable and drafts
accepted representing extensions of credit whether or not representing
obligations for borrowed money; (d) any obligation owed for all or any part of
the deferred purchase price of property or services if the purchase price is due
more than six months from the date the obligation is incurred or is evidenced by
a note or similar written instrument; (e) all indebtedness secured by any Lien
on any property or asset owned or held by that Person regardless of whether the
indebtedness secured thereby shall have been assumed by that Person or is non
recourse to the creditor of that Person; (f) obligations in respect of letters
of credit and (g) any advances under any factoring arrangement.
"Intangible Assets" means all intangible assets (determined in conformity
with GAAP) including, without limitation, goodwill, Intellectual Property,
licenses, organizational costs, deferred amounts, covenants not to compete,
unearned income and restricted funds.
"Intellectual Property" means all present and future designs, patents,
patent rights and applications therefor, trademarks and registrations or
applications therefor, trade names, inventions, copyrights and all applications
and registrations therefor, software or computer programs, license rights, trade
secrets, methods, processes, know-how, drawings, specifications, descriptions,
and all memoranda, notes and records with respect to any research and
development, whether now owned or hereafter acquired, all goodwill associated
with any of the foregoing and proceeds of all of the foregoing, including,
without limitation, proceeds of insurance policies thereon.
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"Interest Determination Date" for a LIBOR Loan will be the second London
Banking Day preceding the beginning of the next Interest Period elected by
Borrower.
"Interest Period" means relative to any LIBOR Loan, the period beginning
on (and including) the date on which such LIBOR Loan is made or continued as, or
converted into, a LIBOR Loan pursuant to subsection 2.2(D), and shall end on
(but exclude) the day which numerically corresponds to such date one, two or
three months thereafter (or, if the applicable month has no numerically
corresponding day, on the last Business Day of such month), in either case as
Borrower may select in its relevant notice pursuant to subsection 2.2; provided,
however:
(a) the initial Interest Period for any LIBOR Loan shall commence on
the Funding Date of such Loan;
(b) in the case of successive Interest Periods, each successive
Interest Period shall commence on the day on which the immediately preceding
Interest Period expires;
(c) if an Interest Period expiration date is not a Business Day,
such Interest Period shall expire on the next succeeding Business Day; provided
that if any Interest Period expiration date is not a Business Day but is a day
of the month after which no further Business Day occurs in such month, such
Interest Period shall expire on the immediately preceding Business Day;
(d) any Interest Period that begins on the last Business Day of a
calendar month (or on a day for which there is no numerically corresponding day
in the calendar month at the end of such Interest Period) shall, subject to part
(e) below, end on the last Business Day of a calendar month;
(e) no Interest Period shall extend beyond the Termination Date;
(f) no Interest Period may extend beyond a scheduled principal
payment date unless the sum of (A) the aggregate principal amount of Loans that
are Base Rate Loans or that have Interest Periods expiring on or before such
date and (B) the amount by which the Maximum Revolving Loan Amount is greater
than the total outstanding Revolving Loan on the date such Interest Period is
being requested, equals or exceeds (ii) the principal amount required to be paid
on the Loans on such scheduled principal payment date; and
(g) there shall be no more than five (5) Interest Periods relating
to LIBOR Loans outstanding at any time.
"Inventory" means all "inventory" (as defined in the UCC), including,
without limitation, finished goods, raw materials, work in process and other
materials and supplies used or consumed in a Person's business, and goods which
are returned or repossessed.
"IRC" means the Internal Revenue Code of 1986, as amended from time to
time, and any successor statute and all rules and regulations promulgated
thereunder.
"Landlord Waiver and Consent" means an agreement in form and substance
satisfactory to Agent permitting Agent access to Borrower's retail locations
following a default and the agreement of such landlord as to the priority right
of Agent in any Inventory located thereat.
"Lender Letter of Credit" has the meaning assigned to that term in
subsection 2.1(G).
"Letter of Credit Liability" means, all reimbursement and other
liabilities of Borrower or any of its Subsidiaries with respect to each Lender
Letter of Credit, whether contingent or otherwise, including: (a) the amount
available to be drawn or which may become available to be drawn; (b) all amounts
which have been paid or made available by any Lender issuing a Lender Letter of
Credit or any bank issuing a Bank Letter of Credit to the extent not reimbursed;
and (c) all unpaid interest, fees and expenses related thereto.
"Letter of Credit Reserve" means, at any time, an amount equal to (a) 50%
of the aggregate amount of Letter of Credit Liability with respect to all Lender
Letters of Credit outstanding at such time plus, without duplication, (b) the
aggregate amount theretofore paid by Agent or any Lender under Lender Letters of
Credit and not debited to the Loan Account pursuant to subsection 2.1(G)(2) or
otherwise reimbursed by Borrower.
"Liabilities" shall have the meaning given that term in accordance with
GAAP and shall include Indebtedness.
"LIBOR" means, for each Interest Period, a rate determined in accordance
with the following provisions:
(a) LIBOR will be either: (i) the rate for deposits in U.S. dollars for
the relevant Interest Period commencing on the second London Banking Day
immediately following that Interest Determination Date, that appears on the
Telerate Page 3750 as of 11:00 a.m., London time, on that Interest Determination
Date ("LIBOR Telerate") or (ii) the arithmetic mean of the offered rates for
deposits in U.S. dollars for the relevant Interest Period commencing on the
second London Banking Day immediately following that Interest Determination
Date, that appear on the Reuters Screen LIBOR Page as of 11:00 a.m. London time,
on that Interest Determination Date, if at least two such offered rates appear
on the Reuters Screen LIBO Page ("LIBOR Reuters"). "Reuters Screen LIBO Page"
means the display designated as page "LIBO" on the Reuters Monitor Money Rates
Service (or such other page as may replace the LIBO page on that service for the
purpose of displaying London interbank offered rates of major banks). "Telerate
Page 3750" means the display designated as page "3750" on the Telerate Services
(or such other page as may replace the 3750 page on that service or such other
service or services as may be nominated by the British Bankers' Association for
the purpose of displaying London interbank offered rates for U.S. dollar
deposits). If neither LIBOR Reuters nor LIBOR Telerate is specified, LIBOR will
be determined as if LIBOR Telerate had been specified. If fewer than two offered
rates appear on the Reuters Screen LIBO Page, or if no rate appears on the
Telerate Page 3750, as applicable, LIBOR in respect of that Interest
Determination Date will be determined as if the parties had specified the rate
described in (b) below.
(b) With respect to an Interest Determination Date on which fewer than two
offered rates appear on the Reuters Screen LIBO Page, as specified in (a)(ii)
above, or on which no rate appears on Telerate Page 3750, as specified in (a)(i)
above, as applicable, LIBOR will be determined on the basis of the rates at
which deposits in U.S. dollars for the relevant Interest Period are offered at
approximately 11:00 a.m. London time, on that Interest Determination Date by
four major banks in the London interbank market selected by Agent ("Reference
Banks") to prime banks in the London interbank market commencing on the second
London Banking Day immediately following that Interest Determination Date and in
a principal amount equal to an amount of not less than $1,000,000 that is
representative for a single transaction in such market at such time. Agent will
request the principal London office of each of the Reference Banks to provide a
quotation of its rate. If at least two such quotations are provided, LIBOR in
respect of that Interest Determination Date will be the arithmetic mean of such
quotations. If fewer than two quotations are provided, LIBOR in respect of that
Interest Determination Date will be the arithmetic mean of the rates quoted at
approximately 11:00 a.m. New York City time, on that Interest Determination Date
by three major banks in the City of New York selected by Agent for loans in U.S.
dollars to leading European banks for the relevant Interest Period commencing on
the second London Banking Day immediately following that Interest Determination
Date and in a principal amount equal to an amount of not less than $1,000,000
that is representative for a single transaction in such market at such time;
provided, however, that if the banks selected as aforesaid by Agent are not
quoting as mentioned in this sentence, LIBOR with respect to such Interest
Determination Date will be the rate of LIBOR in effect on such date.
The rate determined by either (a) or (b) shall be divided by a number
equal to 1.0 minus the aggregate (but without duplication) of the rates
(expressed as a decimal fraction) of reserve requirements in effect on the day
which is two (2) Business Days prior to the beginning of such Interest Period
(including, without limitation, basic, supplemental, marginal, special emergency
or other reserves under any regulations of the Board of Governors of the Federal
Reserve System or other governmental authority having jurisdiction with respect
thereto, as now and from time to time in effect) for Eurocurrency funding
(currently referred to as "Eurocurrency Liabilities" in Regulation D of such
Board) which are required to be maintained by a member bank of the Federal
Reserve System (such rate to be adjusted to the nearest (1/16 of 1%) or, if
there is not a nearest (1/16 of 1%), to the next higher (1/16 of 1%).
"LIBOR Loans" means at any time that portion of the Loans bearing interest
at rates determined by reference to LIBOR.
"Lien" means any lien, mortgage, pledge, security interest, charge or
encumbrance of any kind, whether voluntary or involuntary, (including any
conditional sale or other title retention agreement, any lease in the nature
thereof, and any agreement to give any security interest).
"Loan" or "Loans" means an advance or advances under the Term Loan
Commitment, the Swingline Loans or the Revolving Loan Commitment.
"Loan Documents" means this Agreement, the Guaranty, the Subsidiary
Guaranty, the Cash Collateral Pledge Agreement and all other documents,
instruments and agreements executed by or on behalf of Borrower, Borrower's
Subsidiaries or any Guarantor and delivered concurrently herewith or at any time
hereafter to or for Agent or any Lender in connection with the Loans, any Lender
Letter of Credit, and any other transaction contemplated by this Agreement, all
as amended, restated, supplemented or modified from time to time.
"Loan Party" means each of Borrower, Borrower's Subsidiaries, any
Guarantor and any other Person (other than Agent or any Lender) which is or
becomes a party to any Loan Document.
"Loan Year" means each period of 12 consecutive months commencing on the
Closing Date and on each anniversary thereof.
"London Banking Day" means any day on which dealings in deposits in U.S.
dollars are transacted in the London Interbank market.
"Material Adverse Effect" means a material adverse effect upon (a) the
business, operations, prospects, properties, assets or condition (financial or
otherwise) of any Loan Party on an individual basis or taken as a whole or (b)
the ability of any Loan Party to perform its obligations under any Loan Document
to which it is a party or of Agent or any Lender to enforce or collect any of
the Obligations.
"Maximum Revolving Loan Amount" has the meaning assigned to that term in
subsection 2.1(B)(1).
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<PAGE> 24
"Maximum Swingline Loan Amount" means at any time the lesser of (i)
$2,000,000, (ii) the Revolving Loan Commitments of all Lenders at such time and
(iii) that amount which is the Borrowing Base at such time, less the sum of (x)
the Revolving Loan at such time, (y) the Term Loans at such time and (z) the
Letter of Credit Reserve at such time.
"Net Worth" means, as of any date, the sum of the capital stock and
additional paid-in capital plus retained earnings (or less accumulated deficit)
calculated in conformity with GAAP.
"Notes" means the Revolving Note, the Term Notes and the Swingline Note.
"Notice of Borrowing" means a Notice duly executed by an authorized
representative of Borrower appropriately completed and in the form of Exhibit E.
"Notice of Conversion/Continuation" has the meaning assigned to that term
in subsection 2.2(D).
"Obligations" means all obligations, liabilities and indebtedness of every
nature of each Loan Party from time to time owed to Agent or to any Lender under
the Loan Documents (whether incurred before or after the Termination Date)
including the principal amount of all debts, claims and indebtedness, accrued
and unpaid interest and all fees, costs and expenses, whether primary,
secondary, direct, contingent, fixed or otherwise, heretofore, now and/or from
time to time hereafter owing, due or payable including, without limitation, all
interest, fees, cost and expenses accrued or incurred after the filing of any
petition under any bankruptcy or insolvency law.
"Overadvance Amount" means $2,000,000.
"Permitted Encumbrances" means the following types of Liens: (a) Liens
(other than Liens relating to Environmental Claims for taxes, assessments or
other governmental charges not yet due and payable; (b) statutory Liens of
landlords, carriers, warehousemen, mechanics, materialmen and other similar
liens imposed by law, which are incurred in the ordinary course of business for
sums not more than 30 days delinquent; (c) Liens incurred or deposits made in
the ordinary course of business in connection with workers' compensation,
unemployment insurance and other types of social security, statutory
obligations, surety and appeal bonds, bids, leases, government contracts, trade
contracts, performance and return-of-money bonds and other similar obligations
(exclusive of obligations for the payment of borrowed money; (d) easements,
rights-of-way, restrictions, and other similar charges or encumbrances not
interfering in any material respect with the ordinary conduct of the business of
any Loan Party or any of its Subsidiaries; (e) Liens for purchase money
obligations, provided that (i) the purchase of the asset subject to any such
Lien is permitted under subsection 6.5, (ii) the Indebtedness secured by any
such Lien is permitted under subsection 7.1, and (iii) such Lien encumbers only
the asset so purchased; (f) Liens in favor of Agent, on behalf of Lenders, and
(g) Liens securing not more than $2,500,000 in lease purchase debt on specified
equipment as set forth on Schedule 11.1.A.
"Person" means and includes natural persons, corporations, limited
partnerships, general partnerships, limited liability companies, limited
liability partnerships, joint stock companies, joint ventures, associations,
companies, trusts, banks, trust companies, land trusts, business trusts or other
organizations, whether or not legal entities, and governments and agencies and
political subdivisions thereof.
"Pro Rata Share" means (a) with respect to matters relating to a
particular Commitment of a Lender, the percentage obtained by dividing (i) such
Commitment of that Lender by (ii) all such Commitments of all Lenders and (b)
with respect to all other matters, the percentage obtained by dividing (i) the
Total Loan Commitment of a Lender by (ii) the Total Loan Commitments of all
Lenders, in either case as such percentage may be adjusted by assignments
permitted pursuant to subsection 9.5; provided, however, if any Commitment is
terminated pursuant to the terms hereof, then "Pro Rata Share" means the
percentage obtained by dividing (x) the aggregate amount of such Lender's
outstanding Loans related to such Commitment by (y) the aggregate amount of all
outstanding Loans related to such Commitment.
"Projections" means Borrower's forecasted consolidated and consolidating;
(a) balance sheets; (b) profit and loss statements; (c) cash flow statements;
and (d) capitalization statements, all prepared on a division by division and
Subsidiary by Subsidiary basis consistent with Borrower's historical financial
statements and based upon good faith estimates and assumptions by Borrower
believed to be reasonable at the time made, together with appropriate supporting
details and a statement of underlying assumptions.
"Requisite Lenders" means Lenders, (other than a Defaulting Lender),
holding or being responsible of 51% or more of the sum of (a) outstanding Loans,
(b) outstanding Letter of Credit Liability and (c) unutilized Commitments of all
Lenders which are not Defaulting Lenders.
"Restricted Junior Payment" means: (a) any dividend or other distribution,
direct or indirect, on account of any shares of any class of stock of Borrower
or any of its Subsidiaries now or hereafter outstanding, except a dividend
payable solely with shares of the class of stock on which such dividend is
declared; (b) any payment or prepayment of principal of, premium, if any, or
interest on, or any redemption, conversion, exchange, retirement, defeasance,
sinking fund or similar payment, purchase or other acquisition for value, direct
or indirect, of any Indebtedness owing to any Affiliate or in respect of any
shares of any class of stock of Borrower or any of its Subsidiaries now or
hereafter outstanding, or the issuance of a notice of an intention to do any of
the foregoing; (c) any payment made to retire, or to obtain the surrender of,
any outstanding warrants, options or other rights to acquire shares of any class
of stock of Borrower or any of its Subsidiaries now or hereafter outstanding;
and (d) any payment by Borrower or any of its Subsidiaries of any management,
consulting or similar fees to any Affiliate, whether pursuant to a management
agreement or otherwise.
"Revolving Advance" means each advance made by Lender(s) pursuant to
subsection 2.1(B).
"Revolving Loan" means the outstanding balance of all Revolving Advances
and any amounts added to the principal balance of the Revolving Loan pursuant to
this Agreement.
"Revolving Loan Commitment" means (a) as to any Lender, the commitment of
such Lender to make Revolving Advances pursuant to subsection 2.1(B), and to
purchase participations in Lender Letters of Credit pursuant to subsection
2.1(G) and without duplication to purchase participation in the Swingline Loan
pursuant to subsection 2.1(D) in the aggregate amount set forth on the signature
page of this Agreement opposite such Lender's signature or in the most recent
Assignment and Assumption Agreement, if any, executed by such Lender and (b) as
to all Lenders, the aggregate commitment of all Lenders to make Revolving
Advances and to purchase participations in Lender Letters of Credit.
"Revolving Note" means each promissory note of Borrower in form and
substance reasonably acceptable to Agent, issued to evidence the Revolving Loan
Commitments.
"Scheduled Installment" has the meaning assigned to that term in
subsection 2.1(A).
"Subsidiary" means, with respect to any Person, any corporation,
association or other business entity of which more than 50% of the total voting
power of shares of stock (or equivalent ownership
or controlling interest) entitled (without regard to the occurrence of any
contingency) to vote in the election of directors, managers or trustees thereof
is at the time owned or controlled, directly or indirectly, by that Person or
one or more of the other subsidiaries of that Person or a combination thereof.
"Subsidiary Guarantor" has the meaning ascribed to such term in the
Recitals.
"Subsidiary Guaranty" means the Continuing Guaranty of Borrower's
Obligations executed by Subsidiary Guarantor.
"Swingline Advance" means each advance made by Swingline Lender pursuant
to subsection 2.1(D).
"Swingline Lender" means Heller, or if Heller shall resign as Swingline
Lender, another Lender selected by Agent and reasonably acceptable to Borrower.
"Swingline Loan" means the outstanding balance of all Swingline Advances
and any amounts added to the principal balance of the Swingline Loan pursuant to
this Agreement.
"Swingline Note" means the promissory note of Borrower in form and
substance acceptable to Agent, issued to evidence the Swingline Loan.
"Tangible Net Worth" of any Person means as of any date, an amount equal
to: (a) Net Worth of such Person; less (b) Intangible Assets of such Person;
less (c) prepaid expenses of such Person in excess of $250,000; less (d) all
obligations owed to such Person by any Affiliate of such Person or any of its
Subsidiaries; and less (e) all loans by such Person to its officers,
stockholders, Subsidiaries or employees (determined in each case in conformity
with GAAP) plus (f) the unpaid amount of Term Loan B.
"Tax Distributions" means, for so long as Borrower is a Subchapter S
corporation, dividends declared and paid by Borrower to its shareholders with
respect to any tax year in which Borrower earns taxable income in an amount
equal to the product of (a) income related to such person's ownership interest
in Borrower multiplied by (b) the sum of the highest effective individual
federal and state income tax rates in a state in which such shareholder resides
which were applicable in such year.
"Term Loans" means the unpaid balance of the term loans made pursuant to
subsection 2.1(A).
"Term Loan A" means the advances made pursuant to subsection 2.1(A)(1).
"Term Loan B" means the advances made pursuant to subsection 2.1(A)(2).
"Term Loan Commitment" means (a) as to any Lender, the commitment of such
Lender to make its Pro Rata share of the Term Loans in the maximum aggregate
amount set forth on the signature page of this Agreement opposite such Lender's
signature or in the most recent Assignment and Assumption Agreements, if any,
executed by such Lender and (b) as to all Lenders, the aggregate commitment of
all Lenders to make the Term Loans.
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<PAGE> 25
"Term Note" means the promissory notes of Borrower in form and substance
acceptable to Agent, issued to evidence the Term Loan Commitment.
"Total Loan Commitment" means as to any Lender the aggregate commitments
of such Lender with respect to its Revolving Loan Commitment and Term Loan
Commitment.
"UCC" means the Uniform Commercial Code as in effect on the date hereof in
the State of Illinois, as amended from time to time, and any successor statute.
"Working Capital" means as to any Person: (a) current assets; less (b)
current liabilities; and less (c) the amount of any obligations owed to such
Person or any of its Subsidiaries by any Affiliate of such Person or any of its
Subsidiaries.
11.2 Accounting Terms. For purposes of this Agreement, all accounting
terms not otherwise defined herein shall have the meanings assigned to such
terms in conformity with GAAP. Financial statements and other information
furnished to Agent or any Lender pursuant to subsection 5.1 shall be prepared in
accordance with GAAP (as in effect at the time of such preparation) on a
consistent basis. In the event any "Accounting Changes" (as defined below) shall
occur and such changes affect financial covenants, standards or terms in this
Agreement, then Borrower and Lenders agree to enter into negotiations in order
to amend such provisions of this Agreement so as to equitably reflect such
accounting Changes with the desired result that the criteria for evaluating the
financial condition of Borrower shall be the same after such Accounting Changes
as if such Accounting Changes had not been made, and until such time as such an
amendment shall have been executed and delivered by Borrower and Requisite
Lenders, (A) all financial covenants, standards and terms in this Agreement
shall be calculated and/or construed as if such Accounting Changes had not been
made, and (B) Borrower shall prepare footnotes to each Compliance Certificate
and the financial statements required to be delivered hereunder that show the
differences between the financial statements delivered (which reflect such
Accounting Changes) and the basis for calculating financial covenant compliance
(without reflecting such Accounting Changes). "Accounting Changes" means(a)
changes in accounting principles required by GAAP and implemented by Borrower;
and (b) changes in accounting principles recommended by Borrower's Accountants.
All such adjustments resulting from expenditures made subsequent to the Closing
Date (including, but not limited to, capitalization of costs and expenses or
payment of pre-Closing Date liabilities) shall be treated as expenses in the
period the expenditures are made and deducted as part of the calculation of
EBITDA in such period.
11.3 Other Definitional Provisions. References to "Sections,"
"subsections," "Riders," "Exhibits," "Schedules", and "Addendums" shall be to
Sections, subsections, Riders, Exhibits, Schedules and Addendums, respectively,
of this Agreement unless otherwise specifically provided. Any of the terms
defined in subsection 11.1 may, unless the context otherwise requires, be used
in the singular or the plural depending on the reference. In this Agreement,
words importing any gender include the other genders; the words "including,"
"includes" and "include" shall be deemed to be followed by the words "without
limitation"; references to agreements and other contractual instruments shall be
deemed to include subsequent amendments, assignments, and other modifications
thereto, but only to the extent such amendments, assignments and other
modifications are not prohibited by the terms of this Agreement or any other
Loan Document; references to Persons include their respective permitted
successors and assigns or, in the case of governmental Persons, Persons
succeeding to the relevant functions of such
11.4 Persons; and all references to statutes and related regulations shall
include any amendments of same and any successor statutes and regulations.
Witness the due execution hereof by the respective duly authorized
officers of the undersigned as of the date first written above.
SKECHERS U.S.A., INC.
By: /s/ David Weinberg
---------------------
Title: Chief Financial
Officer
-------------------
FEIN:
-------------------
HELLER FINANCIAL, INC.
By: /s/ Nora Bose
---------------------
Title: Assistant Vice
President
------------------
Revolving Loan Commitment:
$120,000,000
Term Loan A Commitment:
$2,775,000
Term Loan B Commitment:
$13,250,000
19
<PAGE> 26
RIDERS
A. Conditions Rider
B. Reporting Rider
C. Financial Covenants Rider
EXHIBITS:
A. Borrowing Base Certificate
B. Compliance Certificate
C. Inventory Report
D. Reconciliation Report
E. Notice of Borrowing
F. Notice of Conversion/Continuation
SCHEDULES:
3.1(A) List of Closing Documents
4.1(B) Capitalization of Loan Parties
4.6 Business and Trade Names (Present and Past Five Years); Location of
Principal Place of Business, Books and Records and Collateral
4.12 Intellectual Property
4.12(A) Licensing Agreements
4.19 Bank Accounts
4.20 Employee Matters
7.1 Indebtedness
7.11 Subsidiaries
11.1. A Other Liens
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<PAGE> 27
CONDITIONS RIDER
This Conditions Rider is attached to and made a part of that certain
Amended and Restated Loan and Security Agreement dated as of September 4, 1998
and entered into among Borrower, Agent and Lenders.
(A) Closing Deliveries. Agent shall have received, in form and
substance satisfactory to Agent and Lenders, all documents, instruments and
information identified on Schedule 3.1(A) and all other agreements, notes,
certificates, orders, authorizations, financing statements, mortgages and other
documents which Agent may at any time reasonably request.
(B) Security Interests. Agent and Lenders shall have received
satisfactory evidence that all security interests and liens granted to Agent for
the benefit of Lenders pursuant to this Agreement or the other Loan Documents
have been duly perfected and constitute first priority liens on the Collateral,
subject only to Permitted Encumbrances.
(C) Representations and Warranties. The representations and
warranties contained herein and in the Loan Documents shall be true, correct and
complete in all material respects on and as of that Funding Date to the same
extent as though made on and as of that date, except for any representation or
warranty limited by its terms to a specific date and taking into account any
amendments to the Schedules or Exhibits as a result of any disclosures made by
Borrower to Agent after the Closing Date and approved by Agent.
(D) Fees. With respect to Loans or Lender Letters of Credit to be
made or issued on the Closing Date, Borrower shall have paid all fees due to
Agent, Lender or any participant of any Lender and payable on the Closing Date.
(E) No Default. No event shall have occurred and be continuing or
would result from funding a Loan or issuing a Lender Letter of Credit requested
by Borrower that would constitute an Event of Default or a Default.
(F) Performance of Agreements. Each Loan Party shall have performed
in all material respects all agreements and satisfied all conditions which any
Loan Document provides shall be performed by it on or before that Funding Date.
(G) No Prohibition. No order, judgment or decree of any court,
arbitrator or governmental authority shall purport to enjoin or restrain Agent
or any Lender from making any Loans or issuing any Lender Letters of Credit.
(H) No Litigation. There shall not be pending or, to the knowledge
of Borrower, threatened, any action, charge, claim, demand, suit, proceeding,
petition, governmental investigation or arbitration by, against or affecting any
Loan Party or any of its Subsidiaries or any property of any Loan Party or any
of its Subsidiaries that has not been disclosed to Agent by Borrower in writing,
and there shall have occurred no development in any such action, charge, claim,
demand, suit, proceeding, petition, governmental investigation or arbitration
that, in the opinion of Agent, would reasonably be expected to have a Material
Adverse Effect.
(I) Initial Funding Date. Solely in respect of the initial funding
of Loans, Borrower's tax assumptions, capital, organization, ownership and legal
structure must be satisfactory to Agent and not impair the ability of the Agent
to enforce any claims against the Collateral; all Collateral must be freely
pledgeable as collateral security for the Loans subject to Borrower's reasonable
commercial efforts to obtain, where applicable, landlord consents and
warehouseman waivers in accordance with procedures to be determined by mutual
agreement of Agent and Borrower.
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<PAGE> 28
REPORTING RIDER
This Reporting Rider is attached and made a part of that certain Amended
and Restated Loan and Security Agreement, dated as of September 4, 1998 and
entered into among Borrower, Agent and Lenders.
(A) Monthly Financials. As soon as available and in any event within
forty-five (45) days after the end of each month, Borrower will deliver (1) the
consolidated and consolidating balance sheet of Borrower and its Subsidiaries as
at the end of such month and the related consolidated and consolidating
statements of income, stockholders' equity and cash flow for such month and for
the period from the beginning of the then current Fiscal Year to the end of such
month, and (2) a schedule of the outstanding Indebtedness for borrowed money of
Borrower and its Subsidiaries describing in reasonable detail each such debt
issue or loan outstanding and the principal amount and amount of accrued and
unpaid interest with respect to each such debt issue or loan.
(B) Year-End Financials. As soon as available and in any event
within ninety (90) days after the end of each Fiscal Year, Borrower will
deliver: (1) the consolidated balance sheet of Borrower and its Subsidiaries as
at the end of such year and the related consolidated statements of income,
stockholders' equity and cash flow for such Fiscal Year; (2) a schedule of the
outstanding Indebtedness of Borrower and its Subsidiaries describing in
reasonable detail each such debt issue or loan outstanding and the principal
amount and amount of accrued and unpaid interest with respect to each such debt
issue or loan; and (3) a report with respect to the financial statements from
Borrower's Accountants, which report shall be unqualified as to going concern
and scope of audit of Borrower and its Subsidiaries and shall state that (a)
such consolidated financial statements present fairly the consolidated financial
position of Borrower and its Subsidiaries as at the dates indicated and the
results of their operations and cash flow for the periods indicated in
conformity with GAAP applied on a basis consistent with prior years and (b) that
the examination by Borrower's Accountants in connection with such consolidated
financial statements has been made in accordance with generally accepted
auditing standards; and (4) copies of the consolidating financial statements of
Borrower and its Subsidiaries, including (a) consolidating balance sheets of
Borrower and its Subsidiaries as at the end of such Fiscal Year showing
intercompany eliminations and (b) related consolidating statements of income of
Borrower and its Subsidiaries showing intercompany eliminations.
(C) Accountants' Certification and Reports. Together with each
delivery of consolidated financial statements of Borrower and its Subsidiaries
pursuant to paragraph (C) above, Borrower will deliver a written statement by
Borrower's Accountants (1) stating that the examination has included a review of
the terms of this Agreement as same relate to accounting matters and (2) stating
whether, in connection with the examination, any condition or event that
constitutes a Default or an Event of Default has come to their attention and, if
such a condition or event has come to their attention, specifying the nature and
period of existence thereof. Promptly upon receipt thereof, Borrower will
deliver copies of all significant reports submitted to Borrower by Borrower's
Accountants in connection with each annual, interim or special audit of the
financial statements of Borrower made by Borrower's Accountants, including the
comment letter submitted by Borrower's Accountants to management in connection
with their annual audit.
(D) Compliance Certificate. Together with the delivery of each set
of financial statements referenced in paragraphs (A), (B) and (C) above,
Borrower will deliver a Compliance Certificate, together with copies of the
calculations and work-up employed to determine Borrower's compliance or
noncompliance with the financial covenants set forth in the Financial Covenants
Rider.
(E) Borrowing Base Certificates, Registers and Journals. On the
first Business Day of each week, Borrower shall deliver to Agent: (1) a
Borrowing Base Certificate in the form of Exhibit A updated to reflect the most
recent sales and collections of Borrower and an assignment schedule of all
Accounts created by Borrower; (2) an invoice register or sales journal
describing all sales of Borrower, in form and substance satisfactory to Agent,
and, if Agent so requests, copies of invoices evidencing such sales and proofs
of delivery relating thereto; (3) a cash receipts journal; and (4) an adjustment
journal, setting forth all adjustments to Borrower's accounts receivable.
(F) Reconciliation Reports, Inventory Reports and Listings and
Agings. On the Closing Date and on the first Business Day of each week
thereafter, Borrower will deliver to Agent: (1) an aged trial balance of all
then existing Accounts; and (2) an Inventory Report duly executed by an officer
of Borrower and substantially in the form of Exhibit C as of the last day of the
previous week. On the first Business Day of each week and five (5) days after
the last day of each month, and from time to time upon the request of Agent,
Borrower will deliver to Agent: (1) a reconciliation report duly executed by the
chief executive officer of chief financial officer of Borrower and substantially
in the form of Exhibit D as at the last day of such period; (2) an aged trial
balance of all then existing accounts payable; and (3) a detailed inventory
listing and cover summary report. All such reports shall be in form and
substance satisfactory to Agent.
(G) Management Report. Together with each delivery of financial
statements of Borrower and its Subsidiaries pursuant to paragraphs (A) and (B)
above, Borrower will deliver a management report (to the extent provided to
Borrower): (1) describing the operations and financial condition of Borrower and
its Subsidiaries for the month then ended and the portion of the current Fiscal
Year then elapsed; (2) setting forth in comparative form the corresponding
figures for the corresponding periods of the previous Fiscal Year and the
corresponding figures from the most recent Projections for the current Fiscal
Year delivered to Lenders pursuant to paragraph (L) below; and (3) discussing
the reasons for any significant variations. The information above shall be
presented in reasonable detail and shall be certified by the chief financial
officer of Borrower to the effect that such information fairly presents the
results of operations and financial condition of Borrower and its Subsidiaries
as at the dates and for the periods indicated.
(H) Appraisals. From time to time, upon the request of Agent,
Borrower will obtain and deliver to Agent, at Borrower's expense, appraisal
reports in form and substance and from appraisers satisfactory to Agent, stating
the then current fair market and orderly liquidation values of all or any
portion of the Collateral; provided, however, so long as no Default or Event of
Default is continuing, Agent shall not request an appraisal as to any particular
category of Collateral to be performed more than once every Loan Year at
Borrower's expense.
(I) Government Notices. Borrower will deliver to Agent promptly
after receipt copies of all notices, requests, subpoenas, inquiries or other
writings received from any governmental agency concerning any Employee Benefit
Plan, the violation or alleged violation of any Environmental Laws, the storage,
use or disposal of any Hazardous Material, the violation or alleged violation of
the Fair Labor Standards Act or Borrower's payment or non-payment of any taxes
including any tax audit.
(J) Events of Default, etc. Promptly (but in any event not later
than three (3) Business Days) upon any officer of Borrower obtaining knowledge
of any of the following events or conditions, Borrower shall deliver a
certificate of Borrower's chief executive officer specifying the nature and
period of existence of such condition or event and what action Borrower has
taken, is taking and proposes to take with respect thereto: (1) any condition or
event that constitutes an Event of Default or Default; (2) any notice of default
that any Person has given to Borrower or any of its Subsidiaries or any other
action taken with respect to a claimed default; or (3) any Material Adverse
Effect.
(K) Projections. As soon as available and in any event not later
than each April 30 and October 31, Borrower will deliver consolidated and
consolidating Projections of Borrower and its Subsidiaries for the forthcoming
twelve (12) months on a month to month basis.
(L) Other Information. With reasonable promptness, Borrower will
deliver such other information and data as Agent may reasonably request from
time to time.
22
<PAGE> 29
FINANCIAL COVENANTS RIDER
This Financial Covenants Rider is attached and made a part of that certain
Amended and Restated Loan and Security Agreement, dated as of September 4, 1998
and entered into among Borrower, Agent & Lenders.
(A) Tangible Net Worth. Prior to June 30, 1998, Borrower shall
maintain Tangible Net Worth of at least $13,000,000. On or after June 30, 1998,
Borrower shall maintain Tangible Net Worth of at least $20,000,000 as at the end
of each Fiscal Month.
(B) Working Capital. Prior to June 30, 1998, Borrower shall maintain
Working Capital as at the end of each Fiscal Month of at least $10,000,000. On
and after June 30, 1998, Borrower shall maintain Working Capital of at least
$14,000,000 as at the end of each Fiscal Month.
(C) Ratio of Indebtedness to Tangible Net Worth. As at the end of
each Fiscal Month, the ratio of (a) Borrower's Indebtedness, on a consolidated
basis, to (b) Borrower's Tangible Net Worth shall not be greater than 4.0:1.0.
23
<PAGE> 1
EXHIBIT 10.10(a)
TERM LOAN A NOTE
----------------
$2,775,000 SEPTEMBER 4, 1998
FOR VALUE RECEIVED, the undersigned, SKECHERS U.S.A., INC., a California
corporation ("Company"), hereby unconditionally promises to pay to the order of
HELLER FINANCIAL, INC., a Delaware corporation ("Agent") as Agent for the
Lenders under that certain Amended and Restated Loan and Security Agreement
dated September 4, 1998 (the "Loan Agreement"), at Agent's office located at 505
North Brand Boulevard, Glendale, California 91203, or at such other place as the
holder of this Note may from time to time designate in writing, in lawful money
of the United States of America and in immediately available funds, the
principal sum of TWO MILLION SEVEN HUNDRED SEVENTY-FIVE THOUSAND AND NO/100
DOLLARS ($2,775,000.00), payable in accordance with the terms of the Loan
Agreement.
Capitalized terms used herein and not otherwise defined herein shall have the
meanings assigned to them in the Loan Agreement.
This Note is the Term Loan A Note referred to in the Loan Agreement and is
issued to evidence Term Loan A made to Company under the Loan Agreement. This
Note is entitled to the benefits of the Loan Agreement to which reference is
hereby made for a more complete statement of the terms, conditions and covenants
under which this Note is made and is to be repaid, including, but not limited
to, those related to acceleration of the indebtedness represented hereby upon
the occurrence of a default or event of default or upon the termination of the
Loan Agreement.
Company promises to pay interest on the outstanding unpaid principal amount
hereof from the date hereof until payment in full hereof at a rate per annum
equal to the Base Rate plus one quarter of one percent (0.25%). Interest shall
be computed on the daily principal balance on the basis of a 360-day year for
the actual number of days elapsed in the period during which it accrues and
shall be payable by Company or charged to Company's account at the end of each
month. Any publicly announced decrease or increase in the Base Rate shall result
in an adjustment to the interest rate on the next business day.
In no event shall the total interest received by Agent on the principal amount
of Company's obligations under this Note pursuant to the terms hereof exceed the
maximum rate permitted by applicable law (the "Maximum Rate") and in the event
excess interest ("Excess Interest") is determined by a court of competent
jurisdiction to have been paid, (a) at Agent's option, such Excess Interest
shall be applied as a credit against the outstanding principal balance of such
obligations or accrued but unpaid interest (not to exceed the maximum amount
permitted by law), refunded to Company or any combination thereof, (b) the
interest rate shall be automatically reduced to the Maximum Rate, and Company
shall not have any action against Agent for any damages arising out of the
payment or collection of Excess Interest.
Notwithstanding the foregoing, if for any period of time interest on any of
Company's obligations under this Note is calculated at the Maximum Rate rather
than the applicable rate under this Note, and thereafter such applicable rate
becomes less than the Maximum Rate, the rate of interest payable on such
obligations shall remain at the Maximum Rate until Agent shall have received the
amount of interest which Agent would have received during such period on such
obligations had the rate of interest not been limited to the Maximum Rate during
such period.
To secure the payment of the principal and interest of this Note and all
renewals and extensions of the same or any part thereof and any and all other
obligations now or hereafter owing or to become owing from Company to Agent,
howsoever created, arising, evidenced or acquired by Agent, whether direct or
contingent,
1
<PAGE> 2
Company has granted and given to Agent a general and continuing lien and
security interest in certain of Company's assets as listed and described in the
various agreements by and between Company and Agent, all as amended from time to
time, including, without limitation, the Loan Agreement (collectively called the
"Agreements") to which reference is made for a statement of the nature and
extent of the security and protection afforded, the rights of Agent and the
rights and obligations of Company, together with all other and sundry grants and
pledges of security heretofore and hereafter given (collectively called the
"Collateral"), with full power and authority to Agent to transfer, assign,
pledge or replace the same in whole or in part. In case of exchange of, or
substitution for, or addition to the Collateral, the provisions hereof shall
extend to such exchanged, substituted, or additional Collateral. Upon payment of
this Note, Agent may nevertheless retain the Collateral hereby pledged to secure
the payment of other obligations of Company to Agent, if any, for which the same
is pledged. Agent is expressly released from all obligation or liability: (a) to
protect, collect, demand payment of, protest or enforce the Collateral; (b) to
take any action whatsoever in regard to the Collateral or any part thereof; or
(c) for any loss of or depreciation in the value of the Collateral.
Company hereby waives demand, presentment, protest, notice of demand, dishonor,
presentment, protest, nonpayment and all other notices in connection with this
Note. Subject to the Loan Agreement, Company also waives all rights to notice
and hearing of any kind upon the occurrence of a default or an event of default
prior to the exercise by Agent of its rights to repossess the Collateral
without judicial process or to replevy, attach or levy upon the Collateral
without notice or hearing.
If this Note is collected by or through an attorney-at-law, all costs of
collection, including reasonable attorneys' fees, shall be payable by the
undersigned.
THIS NOTE SHALL BE INTERPRETED AND THE RIGHTS AND LIABILITIES OF THE PARTIES
HERETO DETERMINED IN ACCORDANCE WITH THE INTERNAL LAWS (AS OPPOSED TO CONFLICTS
OF LAW PROVISIONS) AND DECISIONS OF THE STATE OF CALIFORNIA. Whenever possible
each provision of this Note shall be interpreted in such manner as to be
effective and valid under applicable law, but if any provision of this Note
shall be prohibited by or invalid under applicable law, such provision shall be
ineffective to the extent of such prohibition or invalidity, without
invalidating the remainder of such provision or the remaining provisions of this
Note. Whenever in this Note reference is made to Agent or Company, such
reference shall be deemed to include, as applicable, a reference to their
respective successors and assigns. The provisions of this Note shall be binding
upon and shall inure to the benefit of such successors and assigns. Company's
successors and assigns shall include, without limitation, a receiver, trustee or
debtor in possession of or for Company.
WITNESS the signature of the undersigned, as of the date first above written.
SKECHERS U.S.A., INC.
By: /s/ DAVID WEINBERG
------------------------------------
David Weinberg
Title: Chief Financial Officer
---------------------------------
<PAGE> 1
EXHIBIT 10.10(b)
REVOLVING NOTE
FOR VALUE RECEIVED, the undersigned, SKECHERS U.S.A., INC., a California
corporation ("Company"), hereby unconditionally promises to pay to the order of
HELLER FINANCIAL, INC., a Delaware corporation ("Agent") as Agent for the
Lenders under that certain Amended and Restated Loan and Security Agreement
dated September 4, 1998 (the "Loan Agreement"), at Agent's office located at 505
North Brand Boulevard, Glendale, California 91203, or at such other place as the
holder of this Revolving Note may from time to time designate in writing, in
lawful money of the United States of America and in immediately available funds,
the principal amount of all "Revolving Loans" under the Loan Agreement, payable
in accordance with the terms of the Loan Agreement.
Capitalized terms used herein and not otherwise defined herein shall have the
meanings assigned to them in the Loan Agreement.
This Note is the Revolving Note referred to in the Loan Agreement and is issued
to evidence Revolving Loans made to Company under the Loan Agreement. This
Revolving Note is entitled to the benefits of the Loan Agreement to which
reference is hereby made for a more complete statement of the terms, conditions
and covenants under which this Revolving Note is made and is to be repaid,
including, but not limited to, those related to acceleration of the indebtedness
represented hereby upon the occurrence of a default or event of default or upon
the termination of the Loan Agreement.
Company promises to pay interest on the outstanding unpaid principal amount
hereof from the date hereof until payment in full hereof at a rate per annum
equal to the Base Rate plus one quarter of one percent (0.25%). Interest shall
be computed on the daily principal balance on the basis of a 360-day year for
the actual number of days elapsed in the period during which it accrues and
shall be payable by Company or charged to Company's account at the end of each
month. Any publicly announced decrease or increase in the Base Rate shall result
in an adjustment to the interest rate on the next business day.
In no event shall the total interest received by Agent on the principal amount
of Company's obligations under this Revolving Note pursuant to the terms hereof
exceed the maximum rate permitted by applicable law (the "Maximum Rate") and in
the event excess interest ("Excess Interest") is determined by a court of
competent jurisdiction to have been paid, (a) at Agent's option, such Excess
Interest shall be applied as a credit against the outstanding principal balance
of such obligations or accrued but unpaid interest (not to exceed the maximum
amount permitted by law), refunded to Company or any combination thereof, (b)
the interest rate shall be automatically reduced to the Maximum Rate, and
Company shall not have any action against Agent for any damages arising out of
the payment or collection of Excess Interest.
Notwithstanding the foregoing, if for any period of time interest on any of
Company's obligations under this Revolving Note is calculated at the Maximum
Rate rather than the applicable rate under this Revolving Note, and thereafter
such applicable rate becomes less than the Maximum Rate, the rate of interest
payable on such obligations shall remain at the Maximum Rate until Agent shall
have received the amount of interest which Agent would have received during such
period on such obligations had the rate of interest not been limited to the
Maximum Rate during such period.
To secure the payment of the principal and interest of this Revolving Note and
all renewals and extensions of the same or any part thereof and any and all
other obligations now or hereafter owing or to become owing from Company to
Agent, howsoever created, arising, evidenced or acquired by Agent, whether
direct or contingent, Company has granted and given to Agent a general and
continuing lien and security interest in certain of Company's assets as listed
and described in the various agreements by and between Company and Agent, all as
amended from time to time, including, without limitation, the Loan Agreement
(collectively called the "Agreements") to which reference is made for a
statement of the nature and extent of the security and protection afforded, the
rights of Agent and the rights and
1
<PAGE> 2
obligations of Company, together with all other and sundry grants and pledges of
security heretofore and hereafter given (collectively called the "Collateral"),
with full power and authority to Agent to transfer, assign, pledge or replace
the same in whole or in part. In case of exchange of, or substitution for, or
addition to the Collateral, the provisions hereof shall extend to such
exchanged, substituted, or additional Collateral. Upon payment of this Revolving
Note, Agent may nevertheless retain the Collateral hereby pledged to secure the
payment of other obligations of Company to Agent, if any, for which the same is
pledged. Agent is expressly released from all obligation or liability: (a) to
protect, collect, demand payment of, protest or enforce the Collateral; (b) to
take any action whatsoever in regard to the Collateral or any part thereof; or
(c) for any loss of or depreciation in the value of the Collateral.
Company hereby waives demand, presentment, protest, notice of demand, dishonor,
presentment, protest, nonpayment and all other notices in connection with this
Revolving Note. Subject to the Loan Agreement, Company also waives all rights to
notice and hearing of any kind upon the occurrence of a default or an event of
default prior to the exercise by Agent of its rights to repossess the Collateral
without judicial process or to replevy, attach or levy upon the Collateral
without notice or hearing.
If this Revolving Note is collected by or through an attorney-at-law, all costs
of collection, including reasonable attorneys' fees, shall be payable by the
undersigned.
THIS REVOLVING NOTE SHALL BE INTERPRETED AND THE RIGHTS AND LIABILITIES OF THE
PARTIES HERETO DETERMINED IN ACCORDANCE WITH THE INTERNAL LAWS (AS OPPOSED TO
CONFLICTS OF LAW PROVISIONS) AND DECISIONS OF THE STATE OF CALIFORNIA. Whenever
possible each provision of this Revolving Note shall be interpreted in such
manner as to be effective and valid under applicable law, but if any provision
of this Revolving Note shall be prohibited by or invalid under applicable law,
such provision shall be ineffective to the extent of such prohibition or
invalidity, without invalidating the remainder of such provision or the
remaining provisions of this Revolving Note. Whenever in this Revolving Note
reference is made to Agent or Company, such reference shall be deemed to
include, as applicable, a reference to their respective successors and assigns.
The provisions of this Revolving Note shall be binding upon and shall inure to
the benefit of such successors and assigns. Company's successors and assigns
shall include, without limitation, a receiver, trustee or debtor in possession
of or for Company.
WITNESS the signature of the undersigned, as of the date first above written.
SKECHERS U.S.A., INC.
By: /s/ David Weinberg
--------------------------
Title: CFO
-----------------------
2
<PAGE> 1
EXHIBIT 10.10(c)
FIRST AMENDMENT TO AMENDED AND RESTATED
LOAN AND SECURITY AGREEMENT
This First Amendment of Amended and Restated Loan and Security
Agreement (this "Amendment") is made as of September 11, 1998 by and between
SKECHERS U.S.A., INC., a California corporation ("Borrower") and HELLER
FINANCIAL, INC., a Delaware corporation, ("Agent") as Agent for the Lenders
under that certain First Amended and Restated Loan and Security Agreement dated
September 4, 1998 (the "Loan and Security Agreement"). All capitalized terms
used herein and not otherwise defined shall have the meanings assigned to such
terms in the Loan and Security Agreement.
Whereas, Borrower and Agent entered into the Loan and Security
Agreement; and
Whereas, Borrower and Agent desire to amend certain terms of the Loan
and Security Agreement as set forth below;
Now, therefore, for good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties hereto agree as
follows:
SECTION 1. AMENDMENT
The first paragraph of subsection 2.1(B) and the entirety of subsection
2.1(B)(1) are deleted in their entirety and are replaced with the following:
"(B) Revolving Loan: Each Lender, severally, agrees to lend to
Borrower from time to time its Pro Rata Share of each Revolving
Advance. The aggregate amount of all Revolving Loan Commitments
shall not exceed at any time $120,000,000 as reduced by
sub-section 2.4(B). Amounts borrowed under this subsection
2.1(B) may be repaid and reborrowed at any time prior to the
earlier of (i) the termination of the Revolving Loan Commitment
pursuant to subsection 8.3 or (ii) the Termination Date;
provided, however, that Borrower shall reduce the Revolving Loan
to an amount not greater than the Cleanup Amount for at least
one Business Day each consecutive twenty-one (21) day period.
Except as otherwise provided herein, no Lender shall have any
obligation to make a Revolving Advance to the extent such
Revolving Advance would cause the Revolving Loan (after giving
effect to any immediate application of the proceeds thereof) to
exceed the Maximum Revolving Loan Amount.
<PAGE> 2
(1) 'Maximum Revolving Loan Amount' means, as of any date
of determination, the lesser of (a) the Revolving Loan
Commitment(s) of all Lenders less (i) the Letter of Credit
Reserve, (ii) the unpaid amount of Term Loan A, and (iii)
unpaid amount of Term Loan B and (b) the Borrowing Base
less (i) the Letter of Credit Reserve (ii) the unpaid
amount of Term Loan A and Term Loan B plus (iii) the
amount of any outstanding Discretionary Advances; and"
SECTION 2. RATIFICATION OF AGREEMENT
Except as expressly set forth in this Amendment, the terms, provisions
and conditions of the Loan and Security Agreement and the other Loan Documents
are unchanged, and said agreements, as amended, shall remain in full force and
effect and are hereby confirmed and ratified.
SECTION 3. COUNTERPARTS; EFFECTIVENESS
This Amendment may be executed in any number of counterparts, and all
such counterparts taken together shall be deemed to constitute one and the same
instrument. Signature pages may be detached from counterpart documents and
reassembled to form duplicative executed originals. This Amendment shall become
effective as of the date hereof upon the execution of the counterparts hereof by
Borrower and Agent.
SECTION 4. GOVERNING LAW
THIS AMENDMENT SHALL BE GOVERNED BY, AND SHALL BE CONSTRUED AND ENFORCED
IN ACCORDANCE WITH, THE LAWS OF THE STATE OF CALIFORNIA.
Witness the execution hereof by the respective duly authorized officers
of the undersigned as of the date first above written.
HELLER FINANCIAL, INC., AS AGENT SKECHERS U.S.A., INC.
By: /s/ NORA BOSE By: /s/ DAVID WEINBERG
----------------------------- -------------------------------
Title: AVP Title: CFO
--------------------------- ----------------------------
<PAGE> 1
EXHIBIT 10.10(d)
SECOND AMENDMENT TO LOAN AND SECURITY AGREEMENT
This Second Amendment to that certain Amended and Restated Loan and
Security Agreement ("Amendment") is made and entered into as of December 23,
1998 by and between Skechers U.S.A., Inc. ("Borrower") and Heller Financial,
Inc., as Agent and as Lender ("Agent").
WHEREAS, Agent and Borrower are parties to a certain Amended and
Restated Loan and Security Agreement, dated September 4, 1998 and all amendments
thereto (the "Agreement"); and
WHEREAS, Borrower has informed Agent that it intends to repay Term Loan
B in full and requests that Agent cancel the Guaranty and release the cash
collateral pledged to Lender by Guarantor pursuant to the Cash Collateral Pledge
Agreement; and
WHEREAS, Borrower has further requested that Agent consent to Borrower's
incurrence of indebtedness in the amount of $13,250,000 from Guarantor, which
indebtedness shall be evidenced by a subordinated promissory note in the amount
of $10,000,000 which indebtedness shall be subordinated to Agent pursuant to the
terms of a subordination agreement and a promissory note in the amount of
$3,250,000 (the "Greenberg Note") which note shall not be subordinated; and
WHEREAS, Agent and Lenders have agreed to cancel the Guaranty and
release the cash collateral pledged by Guarantor, and Agent and Lenders have
further agreed to the incurrence by Borrower of $13,250,000 of indebtedness; and
WHEREAS, the parties desire to amend the Agreement as hereinafter set
forth;
NOW THEREFORE, in consideration of the mutual conditions and agreements
set forth in the Agreement and this Amendment, and other good and valuable
consideration, the receipt and sufficiency of which are hereby acknowledged, the
parties hereto hereby agree as follows:
1. DEFINITIONS. Capitalized terms used in this Amendment, unless
otherwise defined herein, shall have the meaning ascribed to such term in the
Agreement.
2. AMENDMENTS. Subject to the conditions set forth the below, the
Agreement is amended as follows:
(a) The definition of "Tangible Net Worth" is amended by
deleting the definition of "Tangible Net Worth" in its entirety and inserting
the following in lieu thereof:
"Tangible Net Worth" of any Person means as of any date, an
amount equal to: (a) Net Worth of such Person; less (b)
Intangible Assets of such Person; less (c) prepaid expenses of
such Person in excess of $250,000; less (d) all obligations owed
to such Person by any Affiliate of such Person or any of its
Subsidiaries; and less (e) all loans by such Person to its
officers, stockholders, Subsidiaries or employees (determined in
each case in conformity with GAAP) plus (f) the outstanding
amount of Subordinated Debt.
(b) The definition of "Loan Documents" is amended by
deleting the definition of "Loan Documents" in its entirety and inserting the
following in lieu thereof:
<PAGE> 2
"Loan Documents" means this Agreement, the Subsidiary Guaranty,
the Subordination Agreement and all other documents, instruments
and agreements executed by or on behalf of Borrower, Borrower's
Subsidiaries or any Subsidiary Guaranty or any Guarantor and
delivered concurrently herewith or at any time hereafter to or
for Agent or any Lender in connection with the Loans, any Agent
Letter of Credit, and any other transaction contemplated by this
Agreement, all as amended, restated, supplemented or modified
from time to time.
(c) Section 11.1 is amended by inserting the following
definitions of "Subordination Agreement," "Greenberg Note" and "Subordinated
Debt" in the proper alphabetical order in Section 11.1 of the Agreement:
"Greenberg Note" means that certain promissory note evidencing
the obligations of Borrower to the Greenberg Family Trust in the
original principal amount of $3,250,000 dated December 22,
1998.
"Subordination Agreement" means that certain subordination
agreement dated as of December 23, 1998 by and among, Agent,
Borrower and Robert Y. Greenberg and Susan M. Greenberg,
Trustees of the Greenberg Family Trust dated May 3, 1988, as
amended from time to time.
"Subordinated Debt" means the indebtedness incurred by Borrower
pursuant to that certain subordinated promissory note dated
December 22, 1998 in the original principal amount of
$10,000,000 in favor of Robert Y. Greenberg and Susan M.
Greenberg, Trustees of the Greenberg Family Trust dated May 3,
1988 as amended.
(d) The first sentence of subsection 7.1 is amended by
deleting the same in its entirety and inserting the following in lieu thereof:
"Directly or indirectly create, incur, assume, guaranty, or
otherwise become or remain directly or indirectly liable, on a
fixed or contingent basis, with respect to any Indebtedness
except: (a) the Obligations; (b) Indebtedness under Capital
Leases not to exceed $12,000,000 outstanding at any time in the
aggregate; (c) Indebtedness existing on the Closing Date and
identified on Schedule 7.1; (d) the Subordinated Debt; and (e)
the indebtedness outstanding under the Greenberg Note.
(e) Subsection 7.5(c) is amended by deleting the same in
its entirety and inserting the following in lieu thereof:
"Borrower may make distributions and or dividends to its
shareholders provided that (i) Borrower shall have first given
Agent notice of its intention to make such distribution or
dividend and (ii) Borrower shall be in compliance with the terms
and conditions of the Loan Documents both prior to making such
distribution or dividend and after giving effect to such
distribution or dividend (including Borrower's compliance with
the financial covenants calculated through the date of such
payment) and Borrower shall have delivered a Compliance
Certificate to Agent demonstrating such compliance, not later
than two (2) Business Days before making such distribution or
dividend. Borrower may make principle payments on the
Subordinated Debt in accordance with the Subordination Agreement
2
<PAGE> 3
provided that (i) Borrower shall have paid in full the Greenberg
Note; (ii) Borrower shall have first given Agent notice of its
intention to make such payment and (iii) Borrower shall be in
compliance with the terms and conditions of the Loan Documents
both prior to making such payment and after giving effect to
such payment (including Borrower's compliance with the financial
covenants calculated through the date of such payment) and
Borrower shall have delivered a Compliance Certificate to Agent
demonstrating such compliance, not later than two (2) Business
Days before making such payment."
3. CONDITIONS. The effectiveness of this Amendment is subject to
the following conditions precedent (unless specifically waived in writing by
Agent):
(a) There shall have occurred no material adverse change in
the business, operations, financial condition, profits or prospects of Borrower,
or in the Collateral;
(b) Borrower shall have executed and delivered such other
documents and instruments as Agent may require;
(c) All corporate proceedings taken in connection with the
transactions contemplated by this Amendment and all documents, instruments and
other legal matters incident thereto shall be satisfactory to Agent and its
legal counsel;
(d) No Default or Event of Default shall have occurred and
be continuing.
(e) Borrower shall have repaid in full Term Loan B.
4. CORPORATE ACTION. The execution, delivery, and performance of
this Amendment has been duly authorized by all requisite corporate action on the
part of Borrower and this Amendment has been duly executed and delivered by
Borrower.
5. SUCCESSORS AND ASSIGNS. This Amendment shall be binding upon and
inure to the benefit of the parties hereto and their respective successors and
assigns.
6. SEVERABILITY. Any provision of this Amendment held by a court of
competent jurisdiction to be invalid or unenforceable shall not impair or
invalidate the remainder of this Amendment and the effect thereof shall be
confined to the provision so held to be invalid or unenforceable.
7. COUNTERPARTS. This Amendment may be executed in one or more
counterparts, each of which shall constitute an original, but all of which taken
together shall be one and the same instrument.
8. RATIFICATION. The terms and provisions set forth in this
Amendment shall modify and supersede all inconsistent terms and provisions of
the Agreement and, except as expressly modified and superseded by this
Amendment, the terms and provisions of the Agreement are ratified and confirmed
and shall continue in full force and effect.
9. REFERENCES. Any reference to the Agreement contained in any Loan
Document, or any other notice, request, certificate, or other document executed
concurrently with or after the execution and delivery of this Amendment shall be
deemed to include this Amendment, unless the context shall otherwise require.
9
<PAGE> 4
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be
duly executed under seal and delivered by their respective duly authorized
officers on the date first written above.
HELLER FINANCIAL, INC., as Agent
and as Lender
By: /s/ NORA BOSE
--------------------------------------
Name: Nora Bose
------------------------------------
Title: AVP
-----------------------------------
SKECHERS U.S.A., INC.
ATTEST:
/s/ PHILIP G. PACCIONE
- ----------------------------------- By: /s/ DAVID WEINBERG
Secretary --------------------------------------
Name: David Weinberg
------------------------------------
Title: CfO
-----------------------------------
CONSENT AND REAFFIRMATION
The undersigned Subsidiary Guarantor of the obligations of Borrower at
any time owing hereby (i) acknowledges receipt of a copy of the foregoing Second
Amendment to Loan and Security Agreement; (ii) consents to Borrower's execution
and delivery thereof; (iii) agrees to be bound thereby; and (iv) affirms that
nothing contained therein shall modify in any respect whatsoever its guaranty of
the obligations and reaffirms that such guaranty is and shall remain in full
force and effect. Although Guarantor has been informed of the matters set forth
herein and has acknowledged and agreed to same, Guarantor understands that Agent
has no obligation to inform the Guarantor of such matters in the future or to
seek Guarantor's acknowledgment or agreement to future amendments or waivers,
and nothing herein shall create such a duty.
IN WITNESS WHEREOF, the undersigned Guarantor has executed this Consent
and Reaffirmation on and as of the date of such Second Amendment to the Loan and
Security Agreement.
SKECHERS BY MAIL, INC.,
a Delaware corporation
By: /s/ DAVID WEINBERG
--------------------------------------
Name: David Weinberg
------------------------------------
Title: CFO
-----------------------------------
4
<PAGE> 1
[CB COMMERCIAL LETTERHEAD]
EXHIBIT 10.11
ARTICLE ONE: BASIC TERMS
This Article One contains the Basic Terms of this Lease between the
Landlord and Tenant named below. Other Articles, Sections and Paragraphs of the
Lease referred to in this Article One explain and define the Basic Terms and are
to be read in conjunction with the Basic Terms.
Section 1.01. DATE OF LEASE: April 15, 1998
Section 1.02. LANDLORD (INCLUDE LEGAL ENTITY): Holt/Hawthorn, a California
limited partnership and Victory Partners, a California limited partnership, as
tenants in common
Address of Landlord: c/o The Holt Company, 462 Stevens Avenue, Suite 105,
Solana Beach, CA 92075
Section 1.03. TENANT (INCLUDE LEGAL ENTITY): Skechers USA, Inc., a
California corporation.
Address of Tenant: 228 Manhattan Beach Boulevard, Suite 200, Manhattan, CA
Section 1.04. PROPERTY: (include street address, approximate square footage
and description) 228 Manhattan Beach Boulevard, Manhattan Beach, CA
Approximately 28,000 square foot freestanding building plus underground parking
area.
Section 1.05. LEASE TERM: 10 years -0- months beginning on March 1, 1998 or
such other date as is specified in this Lease, and ending on February 29, 2008
Section 1.06. PERMITTED USES: (See Article Five) (See Addendum Section 17.)
Section 1.07. TENANT'S GUARANTOR: (If none, so state) None
Section 1.08. BROKERS: (See Article Fourteen)(If none, so state)
Landlord's Broker: None
Tenant's Broker: None
Section 1.09. COMMISSION PAYABLE TO LANDLORD'S BROKER: (See Article
Fourteen) $ None
Section 1.10. INITIAL SECURITY DEPOSIT: (See Section 3.03) $ (See Addendum
Section 25)
Section 1.11. VEHICLE PARKING SPACES ALLOCATED TO TENANT: (See Addendum
Section 18)
Section 1.12. RENT AND OTHER CHARGES PAYABLE BY TENANT:_________________
(a) BASE RENT: Fifty two thousand six hundred fifty seven Dollars
($52,657.00) per month for the first twelve months, as provided in Section 3.01,
and shall be increased on the first day of the thirteenth month and after the
Commencement Date, (i) as provided in Section 3.02, then annually
(b) OTHER PERIODIC PAYMENTS: (i) Real Property Taxes above the "Base Real
Property Taxes" (See Section 4.02); (ii) Utilities (See Section 4.03); (iii)
Increased Insurance Premiums above "Base Premiums" (See Section 4.04); (iv)
Impounds for Tenant's Share of Insurance Premiums and Property Taxes (See
Section 4.07); (v) Maintenance, Repairs and Alterations (See Article Six).
Section 1.13. COSTS AND CHARGES PAYABLE BY LANDLORD: (a) Base Real Property
Taxes (See Section 4.02); (b) Base Insurance Premiums (See Section 4.04(c); (c)
Maintenance and Repair (See Article Six).
Section 1.14. LANDLORD'S SHARE OF PROFIT ON ASSIGNMENT OR SUBLEASE: (See
Section 9.05) None percent (-0-%) of the Profit (the "Landlord's Share").
Section 1.15. RIDERS: The following Riders are attached to and made a part
of this Lease: (If none, so state) Addendum Sections 16 through 25
Exhibit A - Subordination, Non-Disturbance and Attornment Agreement - Sample
Exhibit B - Tenant Estoppel Certificate - Sample Addendum Sections 26 through 40
ARTICLE TWO: LEASE TERM
Section 2.01. Lease of Property For Lease Term, Landlord leases the
Property to Tenant and Tenant leases the property from Landlord for the
Lease Term. The Lease Term is for the period stated in Section 1.05 above and
shall begin and end on the dates specified in Section 1.05 above, unless the
beginning or end of the Lease Term is changed under any provision of this Lease.
The Commencement Date shall be the date specified in Section 1.05 above for the
beginning of the Lease Term, unless advanced or delayed under any provision of
this Lease.
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(Single-Tenant Gross Form)
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Section 2.04. HOLDING OVER. Tenant shall vacate the Property upon the
expiration or earlier termination of this Lease. Tenant shall reimburse Landlord
for and indemnify Landlord against all damages which Landlord incurs from
Tenant's delay in vacating the Property. If Tenant does not vacate the Property
upon the expiration or earlier termination of the Lease and Landlord thereafter
accepts rent from Tenant, Tenant's occupancy of the Property shall be a
"month-to-month" tenancy, subject to all of the terms of this Lease applicable
to a month-to-month tenancy, except that the Base Rent then in effect shall be
increased by twenty-five percent (25%).
ARTICLE THREE: BASE RENT
Section 3.01. TIME AND MANNER OF PAYMENT. Upon execution of this Lease,
Tenant shall pay Landlord the Base Rent in the amount stated in Paragraph
1.12(a) above for the first month of the Lease Term. On the first day of the
second month of the Lease Term and each month thereafter, Tenant shall pay
Landlord the Base Rent, in advance, without offset, deduction or prior demand.
The Base Rent shall be payable at Landlord's address or at such other place as
Landlord may designate in writing.
Section 3.02. COST OF LIVING INCREASES. The Base Rent shall be increased on
each date (the "Rental Adjustment Date") stated in Paragraph 1.12(a) above in
accordance with the increase in the United States Department of Labor, Bureau of
Labor Statistics, Consumer Price Index for All Urban Consumers (all items for
the geographical Statistical Area in which the Property is located on the basis
of 1982-1984 = 100) (the "Index") as follows:
(a) The Base Rent (the "Comparison Base Rent") in effect immediately before
each Rental Adjustment Date shall be increased by the percentage that the Index
has increased from the date (the "Comparison Date") on which payment of the
Comparison Base Rent began through the month in which the applicable Rental
Adjustment Date occurs. The Base Rent shall not be reduced by reason of such
computation. Landlord shall notify Tenant of each increase by a written
statement which shall include the Index for the applicable Comparison Date, the
Index for the applicable Rental Adjustable Date, the percentage increase between
those two Indices, and the new Base Rent. Any increase in the Base Rent provided
for in this Section 3.02 shall be subject to a minimum increase of 2% and a
maximum increase of 4%.
(b) Tenant shall pay the new Base Rent from the applicable Rental
Adjustment Date until the next Rental Adjustment Date. Landlord's notice may be
given after the applicable Rental Adjustment Date of the increase, and Tenant
shall pay Landlord the accrued rental adjustment for the months elapsed between
the effective date of the increase and Landlord's notice of such increase within
ten (10) days after Landlord's notice. If the format or components of the Index
are materially changed after the Commencement Date, Landlord shall substitute an
index which is published by the Bureau of Labor Statistics or similar agency and
which is most nearly equivalent to the Index in effect on the Commencement Date.
The substitute index shall be used to calculate the increase in the Base Rent
unless Tenant objects to such index in writing within fifteen (15) days after
receipt of Landlord's notice. If Tenant objects, Landlord and Tenant shall
submit the selection of the substitute index for binding arbitration in
accordance with the rules and regulations of the American Arbitration
Association at its office closest to the Property. The costs of arbitration
shall be borne equally by Landlord and Tenant.
Section 3.03. SECURITY DEPOSIT: INCREASES.
(a) Upon the execution of this Lease, Tenant shall deposit with Landlord a
cash Security Deposit in the amount set forth in Section 1.10 above. Landlord
may apply all or part of the Security Deposit to any unpaid rent or other
charges due from Tenant or to cure any other defaults of Tenant. If Landlord
uses any part of the Security Deposit, Tenant shall restore the Security Deposit
to its full amount within ten (10) days after Landlord's written request.
Tenant's failure to do so shall be a material default under this Lease. No
interest shall be paid on the Security Deposit. Landlord shall not be required
to keep the Security Deposit separate from its other accounts and no trust
relationship is created with respect to the Security Deposit.
(b) Each Time the Base Rent is increased, Tenant shall deposit additional
funds with Landlord sufficient to increase the Security Deposit to an amount
which bears the same relationship to the adjusted Base Rent as the initial
Security Deposit bore to the initial Base Rent.
Section 3.04. TERMINATION: ADVANCE PAYMENTS. Upon termination of this Lease
under Article Seven (Damage or Destruction), Article Eight (Condemnation) or any
other termination not resulting from Tenant's default, and after Tenant has
vacated the Property in the manner required by this Lease, Landlord shall refund
or credit to Tenant (or Tenant's successor) the unused portion of the Security
Deposit, any advance rent or other advance payments made by Tenant to Landlord,
and any amounts paid for real property taxes and other reserves which apply to
any time periods after termination of the Lease.
ARTICLE FOUR: OTHER CHARGES PAYABLE BY TENANT
Section 4.01. ADDITIONAL RENT. All charges payable by Tenant other than
Base Rent are called Additional Rent. Unless this Lease provides otherwise.
Tenant shall pay all Additional Rent then due with the next monthly installment
of Base Rent. The term rent shall mean Base Rent and Additional Rent.
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of the Society of Industrial
and Office Realtors, Inc. /s/ [Initials Illegible]
(Single-Tenant Gross Form)
<PAGE> 3
Section 4.02. Property Taxes.
(a) REAL PROPERTY TAXES. Landlord shall pay the "Base Real Property
Taxes" on the Property during the Lease Term. Base Real Property Taxes are
real property taxes applicable to the Property as shown on the tax bill for the
most recent tax fiscal year ending prior to the Commencement Date. Tenant shall
pay Landlord the amount, if any, by which the real property taxes during the
Lease Term exceed the Base Real Property Taxes. Subject to Paragraph 4.02(c),
Tenant shall make such payments within fifteen (15) days after receipt of
Landlord's statement showing the amount and computation of such increase.
Landlord shall reimburse Tenant for any real property taxes paid by Tenant
covering any period of time prior to or after the Lease Term.
(b) DEFINITION OF "REAL PROPERTY TAX." "Real property tax" means: (i) any
fee, license fee, license tax, business license fee, commercial rental tax,
levy, charge, assessment, penalty or tax imposed by any taxing authority
against the Property; (ii) any tax on the Landlord's right to receive, or the
receipt of, rent or income from the Property or against Landlord's business of
leasing the Property; (iii) any tax or charge for fire protection, streets,
sidewalks, road maintenance, refuse or other services provided to the Property
by any governmental agency; (iv) any tax imposed upon this transaction or based
upon a re-assessment of the Property due to a change of ownership, as defined by
applicable law, or other transfer of all or part of Landlord's interest in the
Property; and (v) any charge or fee replacing any tax previously included
within the definition of real property tax. "Real property tax" does not,
however, include Landlord's federal or state income, franchise, inheritance or
estate taxes.
(c) JOINT ASSESSMENT. If the Property is not separately assessed, Landlord
shall reasonably determine Tenant's share of the real property tax payable by
Tenant under Paragraph 4.02(a) from the assessor's worksheets or other
reasonably available information. Tenant shall pay such share to Landlord within
fifteen (15) days after receipt of Landlord's written statement.
(d) PERSONAL PROPERTY TAXES.
(i) Tenant shall pay all taxes charged against trade fixtures,
furnishings, equipment or any other personal property belonging to Tenant.
Tenant shall try to have personal property taxed separately from the
Property.
(ii) If any of Tenant's personal property is taxed with the Property,
Tenant shall pay Landlord the taxes for the personal property within
fifteen (15) days after Tenant receives a written statement from Landlord
for such personal property taxes.
Section 4.03. UTILITIES. Tenant shall pay, directly to the appropriate
supplier the cost of all natural gas, heat, light, power, sewer service,
telephone, water, refuse disposal and other utilities and services supplied to
the Property. However, if any services or utilities are jointly metered with
other property, Landlord shall make a reasonable determination of Tenant's
proportionate share of the cost of such utilities and services and Tenant shall
pay such share to Landlord within fifteen (15) days after receipt of Landlord's
written statement.
Section 4.04. INSURANCE POLICIES.
(a) LIABILITY INSURANCE. During the Lease Term, Tenant shall maintain a
policy of commercial general liability insurance (sometimes known as broad form
comprehensive general liability insurance) insuring Tenant against liability
for bodily injury, property damage (including loss of use of property) and
personal injury arising out of the operation, use or occupancy of the property.
Tenant shall name Landlord as an additional insured under such policy. The
initial amount of such insurance shall be One Million Dollars ($1,000,000) per
occurrence and shall be subject to periodic increase based upon inflation,
increased liability awards, recommendation of Landlord's professional insurance
advisers and other relevant factors. The liability insurance obtained by Tenant
under this Paragraph 4.04(a) shall (i) be primary and non-contributing; (ii)
contain cross-liability endorsements; and (iii) insure Landlord against
Tenant's performance under Section 5.05, if the matters giving rise to the
indemnity under Section 5.05 arise from the negligence of Tenant. The amount
and coverage of such insurance shall not limit Tenant's liability nor relieve
Tenant of any other obligation under this Lease. Landlord may also obtain
comprehensive public liability insurance in an amount and with coverage not
less than $2 Million Combined Single Limit determined by Landlord insuring
Landlord against liability arising out of ownership, operation, use or
occupancy of the Property. The policy obtained by Landlord shall not be
contributory and shall not provide primary insurance.
(b) PROPERTY INCOME INSURANCE. During the Lease Term, Landlord shall
maintain policies of insurance covering loss of or damage to the Property in the
full amount of its replacement value. Such policy shall contain an Inflation
Guard Endorsement and shall provide protection against all perils included
within the classification of fire, extended coverage, vandalism, malicious
mischief, special extended perils (all risk), sprinkler leakage and any other
perils which Landlord deems reasonably necessary. Landlord shall have the right
to obtain flood and earthquake insurance if required by any lender holding a
security interest in the Property. Landlord shall not obtain insurance for
Tenant's fixtures or equipment or building improvements installed by Tenant on
the Property.
(c) PAYMENT OF PREMIUMS.
(i) Landlord shall pay the "Base Premiums" for the insurance policies
maintained by Landlord under Paragraph 4.04(b). If the Property has been
previously fully occupied, the "Base Premiums" are the insurance premiums
paid during or applicable to the last twelve (12) months of such prior
occupancy. If the Property has not been previously fully occupied or has
been occupied for less than twelve (12) months, the Base Premiums are the
lowest annual premiums reasonably obtainable for the required insurance for
the Property as of the Commencement Date, with a carrier rated B+ or
better.
(ii) Tenant shall pay Landlord the amount, if any, by which the
insurance premiums for all policies maintained by Landlord under Paragraph
4.04(b) have increased over the Base Premiums, whether such increases
result from the nature of Tenant's occupancy, any act or omission of
Tenant, the requirement of any lender referred to in Article Eleven
(Protection of Lenders), the increased value of the Property or general
rate increases. However, if Landlord substantially increases the amount of
insurance carried or the percentage of insured value after the period
during which the Base Premiums were calculated, Tenant shall only pay
Landlord the amount of increased premiums which would have been charged by
the
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(Single-Tenant Gross Form)
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insurance carrier if the amount of insurance or percentage or insured
value had not been substantially increased by Landlord. This adjustment in
the amount due from Tenant shall be made only once during the Lease Term.
Thereafter, Tenant shall be obligated to pay the full amount of any
additional increases in the insurance value. Tenant shall pay Landlord the
increases over the Base Premiums within fifteen (15) days after receipt by
Tenant of a copy of the premium statement or other evidence of the amount
due. If the insurance policies maintained by Landlord cover improvements
or real property other than the Property, Landlord shall also deliver to
Tenant a statement of the amount of the premiums applicable to the
Property showing, in reasonable detail, how such amount was computed. If
the Lease Term expires before the expiration of the insurance period.
Tenant's liability shall be pro rated on an annual basis.
GENERAL INSURANCE PROVISIONS
(i) Any insurance which Tenant is required to maintain under this
Lease shall include a provision which requires the insurance carrier to
give Landlord not less than fifteen (15) days' written notice prior to any
cancellation or modification of such coverage.
(ii) If Tenant fails to deliver any policy, certificate or renewal to
Landlord required under this Lease within the prescribed time period or if
any such policy is cancelled or modified during the Lease Term without
Landlord's consent, Landlord may obtain such insurance, in which case
Tenant shall reimburse Landlord for the cost of such insurance within
fifteen (15) days after receipt of a statement that indicates the cost of
such insurance.
(iii) Tenant shall maintain all insurance required under this Lease
with companies holding a "General Policy Rating" of A-12 or better, as set
forth in the most current issue of "Best Key Rating Guide". Landlord and
Tenant acknowledge the insurance markets are rapidly changing and that
insurance in the form and amounts described in this Section 4.04 may not
be available in the future. Tenant acknowledges that the insurance
described in this Section 4.04 is for the primary benefit of Landlord and
Tenant.
(iv) Unless prohibited under any applicable insurance policies
maintained, Landlord and Tenant each hereby waive any and all rights of
recovery against the other, or against the officers, employees, agents or
representatives of the other, for loss of or damage to its property or the
property of others under its control, if such loss or damage is covered by
any insurance policy in force (whether or not described in this Lease) at
the time of such loss or damage. Upon obtaining the required policies of
insurance, Landlord and Tenant shall give notice to the insurance carriers
of this mutual waiver of subrogation.
Section 4.05. LATE CHARGES. Tenant's failure to pay rent promptly may
cause Landlord to incur unanticipated costs. The exact amount of such costs are
impractical or extremely difficult to ascertain. Such costs may include, but are
not limited to, processing and accounting charges and late charges which may be
imposed on Landlord by any ground lease, mortgage or trust deed encumbering the
Property. Therefore, if Landlord does not receive any rent payment within ten
(10) days after it becomes due, Tenant shall pay Landlord a late charge equal to
five percent (5%) of the overdue amount. The parties agree that such late charge
represents a fair and reasonable estimate of the costs Landlord will incur by
reason of such late payment.
Section 4.06. INTEREST ON PAST DUE OBLIGATIONS. Any amount owed by Tenant
to Landlord which is not paid when due shall bear interest at the rate of ten
percent (10%) per annum from the due date of such amount. However, interest
shall not be payable on late charges to be paid by Tenant under this Lease. The
payment of interest on such amounts shall not excuse or cure any default by
Tenant under this Lease. If the interest rate specified in this Lease is higher
than the rate permitted by law, the interest rate is hereby decreased to the
maximum legal interest rate permitted by law.
Section 4.07. IMPOUND FOR INSURANCE PREMIUMS AND REAL PROPERTY TAXES. If
requested by any ground lessor or lender to whom Landlord has granted a security
interest in the Property, or if Tenant is more than ten (10) days late in the
payment of rent more than once in any consecutive twelve (12)-month period,
Tenant shall pay Landlord a sum equal to one-twelfth (1/12) of the annual real
property taxes and insurance premiums payable by Tenant under this Lease,
together with each payment of Base Rent. Landlord shall hold such payments in a
non-interest bearing impound account. If unknown, Landlord shall reasonably
estimate the amount of real property taxes and insurance premiums when due.
Tenant shall pay any deficiency of funds in the impound account to Landlord
upon written request. If Tenant defaults under this Lease, Landlord may apply
any funds in the impound account to any obligation then due under this Lease.
ARTICLE FIVE: USE OF PROPERTY
Section 5.01. PERMITTED USES. Tenant may use the Property only for the
Permitted Uses set forth in Section 1.06 above.
Section 5.02. MANNER OF USE. Tenant shall not cause or permit the Property
to be used in any way which constitutes a violation of any law, ordinance or
governmental regulation or order, which materially interferes with the rights
of other tenants of Landlord, or which constitutes a nuisance or waste. Tenant
shall obtain and pay for all permits, including a Certificate of Occupancy,
required for Tenant's occupancy of the Property and shall promptly take all
actions necessary to comply with all applicable statutes, ordinances, rules,
regulations, orders and requirements regulating the use by Tenant of the
Property, including the Occupational Safety and Health Act.
Section 5.03. HAZARDOUS MATERIALS. As used in this Lease, the term
"Hazardous Material" means any flammable items, explosives, radioactive
materials, hazardous or toxic substances, material or waste or related
materials, defined as or included in the definition of "hazardous substances,"
"hazardous wastes," "hazardous materials," or "toxic substances" now or
subsequently regulated under any applicable federal, state or local laws or
regulations, including [copy illegible] DDT, printing inks, acids, pesticides,
ammonia compounds and other chemical products, asbestos, [copy illegible]
materials which are subsequently found to have adverse effects on the
environment or the health and safety of persons. Tenant shall not cause or
permit any Hazardous Material to be generated, produced, brought upon, used,
stored, treated or disposed of in or about the Property by Tenant, its agents,
employees, contractors, sublessees or invitees without the prior written consent
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of Landlord. Landlord shall be entitled to take into account such other factors
or facts as Landlord may reasonably determine to be relevant in determining
whether to grant or withhold consent to Tenant's proposed activity with respect
to Hazardous Material. In no event, however, shall Landlord be required to
consent to the installation or use of any storage tanks on the Property.
Section 5.04. SIGNS AND AUCTIONS. Tenant shall not place any new signs on
the Property without Landlord's prior written consent. Tenant shall not conduct
or permit any auctions or sheriff's sales at the Property.
Section 5.05. INDEMNITY. Tenant shall indemnify Landlord against and hold
Landlord harmless from any and all costs, claims or liability arising from: (a)
Tenant's use of the Property; (b) the acts or omissions of Tenant's Tenant done
in or about the Property, including any contamination of the Property or any
other property resulting from the presence or use of Hazardous Material caused
by Tenant; (c) any breach or default in the performance of Tenant's obligations
under this Lease; (d) any misrepresentation or breach of warranty by Tenant
under this Lease; or (e) other acts or omissions of Tenant. Tenant shall defend
Landlord against any such cost, claim or liability at Tenant's expense with
counsel reasonably acceptable to Landlord or, if tenant fails to do so, at
Landlord's election. Tenant shall reimburse Landlord for any legal fees or costs
incurred by Landlord in connection with any such claim. Tenant hereby waives all
claims in respect thereof against Landlord, except for any claim arising out of
Landlord's gross negligence or willful misconduct. As used in this Section, the
term "Tenant" and landlord shall include their respective employees, agents,
contractors and invitees, if applicable.
Section 5.06. LANDLORD'S ACCESS. Landlord or its agents may enter the
Property at all reasonable times to show the Property to potential buyers,
investors or tenants or other parties; to do any other act or to inspect and
conduct tests in order to monitor Tenant's compliance with all applicable
environmental laws and all laws governing the presence and use of Hazardous
Material; or for any other purpose Landlord deems reasonably necessary. Landlord
shall give Tenant reasonable prior notice of such entry, except in the case of
an emergency. Landlord may place customary "For Sale" or "For Lease" signs on
the Property.
Section 5.07. QUIET POSSESSION. If Tenant pays the rent and complies with
all other terms of this Lease, Tenant may occupy and enjoy the Property for the
full Lease Term, subject to the provisions of this Lease, and Landlord thereby
grants Tenant quiet possession of the property.
ARTICLE SIX: CONDITION OF PROPERTY; MAINTENANCE, REPAIRS AND ALTERATIONS
Section 6.01. EXISTING CONDITIONS SUBJECT TO LANDLORD'S REPRESENTATIONS AND
WARRANTIES SET FORTH HEREIN. Tenant accepts the Property in its condition as of
the execution of the Lease, subject to all recorded matters, laws, ordinances,
and governmental regulations and orders. Except as provided herein, Tenant
acknowledges that neither Landlord nor any agent of Landlord has made any
representation as to the condition of the Property or the suitability of the
Property for Tenant's intended use. Tenant represents and warrants that Tenant
has made its own inspection of and inquiry regarding the condition of the
Property and subject to Landlord's representations and warranties set forth
herein. Is not relying on any representations of Landlord or any Broker with
respect thereto. If Landlord or Landlord's Broker has provided a Property
Information Sheet or other Disclosure Statement regarding the Property, a copy
is attached as an exhibit to the Lease. (See Addendum Section 19)
Section 6.02. EXEMPTION OF LANDLORD FROM LIABILITY EXCEPT FOR LANDLORD'S
NEGLIGENCE OR BREACH OF WARRANTIES OR REPRESENTATIONS. Landlord shall not be
liable for any damage or injury to the person, business (or any loss of income
therefrom), goods, wares, merchandise or other property of Tenant, Tenant's
employees, invitees, customers or any other person in or about the Property,
whether such damage or injury is caused by or results from: (a) fire, steam,
electricity, water, gas or rain; (b) the breakage, leakage, obstruction or other
defects of pipes, sprinklers, wires, appliances, plumbing, air conditioning or
lighting fixtures or any other cause; (c) conditions arising in or about the
Property or from other sources or places; or (d) any act or omission of any
other tenant of Landlord. Landlord shall not be liable for any such damage or
injury even though the cause of or the means of repairing such damage or injury
are not accessible to Tenant. The provisions of this Section 6.02 shall not,
however, exempt Landlord from liability for Landlord's negligence or willful
misconduct or as otherwise covered by its insurance.
Section 6.03. LANDLORD'S OBLIGATIONS. Subject to the provisions of Article
Seven (Damage or Destruction) and Article Eight (Condemnation), and except for
damage caused by any act or omission of Tenant, or Tenant's employees, agents,
contractors or invitees, Landlord shall keep the foundation, roof and structural
portions of exterior walls of the improvements on the Property in good order,
condition and repair. However, Landlord shall not be obligated to maintain or
repair windows, doors, plate glass or the surfaces of walls. Landlord shall not
be obligated to make any repairs under this Section 6.03 until a reasonable time
after receipt of a written notice from Tenant of the need for such repairs.
Tenant waives the benefit of any present or future law which might give Tenant
the right to repair the Property at Landlord's expense or to terminate the Lease
because of the condition of the Property. (See addendum Section 20)
Section 6.04. TENANT'S OBLIGATIONS.
(a) Except as provided in Article Seven (Damage or Destruction) and Article
Eight (Condemnation), Tenant shall keep all portions of the Property (including
nonstructural, interior, and landscaped areas if any, systems and equipment) in
good order, condition and repair (including interior repainting and refinishing,
as needed). If any portion of the Property or any system or equipment in the
Property which Tenant is obligated to repair cannot be fully repaired or
restored, Tenant shall promptly replace such portion of the Property or system
or equipment in the Property, regardless of whether the benefit of such
replacement extends beyond the Lease Term; but if the benefit or useful life of
such replacement extends beyond the Lease Term (as such term may be extended by
exercise of any options), the useful life of such replacement shall be prorated
over the remaining portion of the Lease Term (as extended), and Tenant shall be
liable only for that portion of the cost which is applicable to the Lease Term
(as extended). Tenant shall maintain a preventive maintenance contract providing
for the regular inspection and maintenance of the heating and air conditioning
system by a licensed heating and air conditioning contractor. Landlord shall
have the right, upon written notice to Tenant, to undertake the responsibility
for preventive maintenance of the heating and air conditioning system at
Tenant's expense. In addition, Tenant shall, at Tenant's expense, repair any
damage to the roof, foundation or structural portions of walls caused by
Tenant's acts or omission beyond normal. It is the intention of Landlord and
[copy illegible] times during the Lease Term. Tenant shall maintain the Property
in attractive, first-class and fully operative condition.
(b) Each party shall fullfil all of its obligations under this Section
6.04 at its sole expense. If either party fails to maintain, repair or replace
the Property as required by this Section 6.04, the other party may, upon
ten (10) days prior notice (except
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that not notice shall be required in the case of an emergency), enter the
Property and perform such maintenance or repair (including replacement, as
needed) on behalf of the other party. In such case, the defaulting party shall
reimburse the non-defaulting party for all costs incurred in performing such
maintenance or repair immediately upon demand.
Section 6.05. ALTERATIONS, ADDITIONS, AND IMPROVEMENTS. (See Addendum
Section 21)
(a) Tenant shall not make any alterations, additions, or improvements to
the Property without Landlord's prior written consent, except for non-structural
alterations which do not exceeded Ten Thousand Dollars ($10,000) in cost
cumulatively over the Lease Term and which are not visible from the outside of
any building of which the Property is part. Landlord may require Tenant to
provide demolition and/or lien and completion bonds in form and amount
satisfactory to Landlord if Tenant's financial status deteriorates below its
status as of the Commencement Date. Tenant shall promptly remove any
alterations, additions, or improvements constructed in violation of this
Paragraph 6.05(a) upon Landlord's written request. All alterations, additions,
and improvements shall be done in a good and workmanlike manner, in conformity
with all applicable laws and regulations, and by a contractor approved by
Landlord. Upon completion of any such work, Tenant shall provide Landlord with
"as built" plans, copies of all construction contracts, and proof of payment for
all labor and materials.
(b) Tenant shall pay when due all claims for labor and material furnished
to the Property. Tenant shall give Landlord at least twenty (20) days' prior
written notice of the commencement of any work on the Property, regardless of
whether Landlord's consent to such work is required. Landlord may elect to
record and post notices of non-responsibility on the Property.
Section 6.06. CONDITION UPON TERMINATION. Upon the termination of the
Lease, Tenant shall surrender the Property to Landlord, broom clean and in the
same condition as received except for ordinary wear and tear which Tenant was
not otherwise obligated to remedy under any provision of this Lease. However,
Tenant shall not be obligated to repair any damage which Landlord is required to
repair under Article Seven (Damage or Destruction). All alterations, additions
and improvements which Landlord has not required Tenant to remove which Tenant
has not elected to remove shall become Landlord's property and shall be
surrendered to Landlord upon the expiration or earlier termination of the Lease,
except that Tenant may remove any of Tenant's machinery or equipment which can
be removed without material damage to the Property. Tenant shall repair, at
Tenant's expense, any damage to the Property caused by the removal of any such
machinery or equipment. In no event, however, shall Tenant remove any of the
following materials or equipment (which shall be deemed Landlord's property)
without Landlord's prior written consent: any power wiring or power panels;
lighting or lighting fixtures; wall coverings; drapes, blinds or other window
coverings; carpets or other floor coverings; heaters, air conditioners or any
other heating or air conditioning equipment; fencing or security gates; or other
similar building operating equipment and decorations.
ARTICLE SEVEN: DAMAGE OR DESTRUCTION
Section 7.01. PARTIAL DAMAGE TO PROPERTY.
(a) Tenant shall notify Landlord in writing immediately upon the occurrence
of any damage to the Property. If the Property is only partially damaged (i.e.,
less than fifty percent (50%) of the Property is untenantable as a result of
such damage or less than fifty percent (50%) of Tenant's operations are
materially impaired) and if the proceeds received by Landlord from the insurance
policies described in Paragraph 4.04(b) are sufficient to pay for the necessary
repairs or if Tenant is willing to make up the difference, this Lease shall
remain in effect and Landlord shall repair the damage as soon as reasonably
possible. Landlord may elect (but is not required) to repair any damage to
Tenant's fixtures, equipment, or improvements.
(b) If the insurance proceeds received by Landlord are not sufficient to
pay the entire cost of repair, or if the cause of the damage is not covered by
the insurance policies which Landlord maintains under Paragraph 4.04(b), or if
Tenant is willing to make up the difference, Landlord may elect either to (i)
repair the damage as soon as reasonably possible, in which case this Lease shall
remain in full force and effect, or (ii) terminate this Lease as of the date the
damage occurred. Landlord shall notify Tenant within thirty (30) days after
receipt of notice of the occurrence of the damage whether Landlord elects to
repair the damage or terminate the Lease. If Landlord elects to repair the
damage, Tenant shall pay Landlord the "deductible amount" (if any) under
Landlord's Insurance policies and, if the damage was due to an act or omission
of Tenant, or Tenant's employees, agents, contractors or invitees, the
difference between the actual cost of repair and any insurance proceeds received
by Landlord. If Landlord elects to terminate the Lease, Tenant may elect to
continue this Lease in full force and effect, in which case Tenant shall repair
any damage to the Property and any building in which the Property is located.
Tenant shall pay the cost of such repairs, except that upon satisfactory
completion of such repairs, Landlord shall deliver to Tenant any insurance
proceeds received by Landlord for the damage repaired by Tenant. Tenant shall
give Landlord written notice of such election within ten (10) days after
receiving Landlord's termination notice.
(c) If the damage to the Property occurs during the last six (6) months of
the Lease Term and such damage will require more than thirty (30) days to
repair, either Landlord or Tenant may elect to terminate this Lease as of the
date the damage occurred, regardless of the sufficiency of any insurance
proceeds. The party electing to terminate this Lease shall give written
notification to the other party of such election within thirty (30) days after
Tenant's notice to Landlord of the occurrence of the damage.
Section 7.02. SUBSTANTIAL OR TOTAL DESTRUCTION. If the Property is
substantially or totally destroyed by any cause whatsoever (i.e., the damage to
the Property is greater than partial damage as described in Section 7.01),and
regardless of whether Landlord receives any insurance proceeds, this Lease shall
terminate as of the date the destruction occurred. Notwithstanding the preceding
sentence, if the Property can be rebuilt within six (6) months after the date of
destruction, Landlord may elect to rebuild the Property at Landlord's own
expense, in which case this Lease shall remain in full force and effect.
Landlord shall notify Tenant of such election within thirty (30) days after
Tenant's notice of the occurrence of total or substantial destruction. If
Landlord so elects, Landlord shall rebuild the Property at Landlord's sole
expense, except that if the destruction was caused by an act or omission of
Tenant, Tenant shall pay Landlord the difference between the actual cost of
rebuilding and any insurance proceeds received by Landlord.
Section 7.03 TEMPORARY [COPY ILLEGIBLE] restores the Property pursuant to
the provisions of this Article Seven, any rent payable during the period of such
damage, repair and/or restoration shall be reduced according to the degree,if
any, to which Tenant's use of the Property is impaired. Except
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of the Society of Industrial
and Office Realtors, Inc. /s/ [Initials Illegible]
(Single-Tenant Gross Form)
<PAGE> 7
for such possible reduction in Base Rent, and insurance premiums and real
property taxes. Tenant shall not be entitled to any compensation, reduction, or
reimbursement from Landlord as a result of any damage, destruction, repair, or
restoration of or to the Property.
Section 7.04 WAIVER. Tenant waives the protection of any statute,
code or judicial decision which grants a tenant the right to terminate a lease
in the event of the substantial or total destruction of the leased property.
Tenant agrees that the provisions of Section 7.02 above shall govern the rights
and obligations of Landlord and Tenant in the event of any substantial or total
destruction to the Property.
ARTICLE EIGHT: CONDEMNATION
If all or any portion of the Property is taken under the power of
eminent domain or sold under the threat of that power (all of which are called
"Condemnation"), this Lease shall terminate as to the part taken or sold on the
date the condemning authority takes title or possession, whichever occurs
first. If more than twenty percent (20%) of the floor area of the building in
which the Property is located, or which is located on the Property, is taken,
either Landlord or Tenant may terminate this Lease as of the date the
condemning authority takes title or possession, by delivering written notice to
the other within ten (10) days after receipt of written notice of such taking
(or in the absence of such notice, within ten (10) days after the condemning
authority takes title or possession). If neither Landlord nor Tenant terminates
this Lease, this Lease shall remain in effect as to the portion of the Property
not taken, except that the Base Rent and Additional Rent shall be reduced in
proportion to the reduction in the floor area of the Property. Any Condemnation
award or payment shall be distributed in the following order: (a) first, to any
ground lessor, mortgagee or beneficiary under a deed of trust encumbering the
Property, the amount of its interest in the Property; (b) second, to Tenant,
only the amount of any award specifically designated for loss of or damage to
Tenant's trade fixtures or removable personal property; and (c) third, to
Landlord, the remainder of such award, whether as compensation for reduction in
the value of the leasehold, the taking of the fee, or otherwise. If this Lease
is not terminated, Landlord shall repair any damage to the Property caused by
the Condemnation, except that Landlord shall not be obligated to repair any
damage for which Tenant has been reimbursed by the condemning authority. If the
severance damages received by Landlord are not sufficient to pay for such
repair, Landlord shall have the right to either terminate this Lease or make
such repair at Landlord's expense.
ARTICLE NINE: ASSIGNMENT AND SUBLETTING
Section 9.01. LANDLORD'S CONSENT REQUIRED. No portion of the Property
or of Tenant's interest in this Lease may be acquired by any other person or
entity, whether by sale, assignment, mortgage, sublease, transfer, operation of
law, or act of Tenant, without Landlord's prior written consent, except as
provided in Section 9.02 below. Landlord has the right to grant or withhold its
consent as provided in Section 9.05 below. Any attempted transfer without
consent shall be void and shall constitute a breach of this Lease. If Tenant is
a partnership, any cumulative transfer of more than twenty percent (20%) of the
partnership interests shall require Landlord's consent. If Tenant is a
corporation, any change in the ownership of a controlling interest of the
voting stock of the corporation shall require Landlord's consent.
Section 9.02. TENANT AFFILIATE. Tenant may assign this Lease or
sublease the Property, without Landlord's consent, to any corporation which
controls, is controlled by or is under common control with Tenant, or to any
corporation resulting from the merger of or consolidation with Tenant
("Tenant's Affiliate"). In such case, any Tenant's Affiliate shall assume in
writing all of Tenant's obligations under this Lease.
Section 9.03. NO RELEASE OF TENANT. No transfer permitted by this
Article Nine, whether with or without Landlord's consent, shall release Tenant
or change Tenant's primary liability to pay the rent and to perform all other
obligations of Tenant under this Lease. Landlord's acceptance of rent from any
other person is not a waiver of any provision of this Article Nine. Consent to
one transfer is not a consent to any subsequent transfer. If Tenant's
transferee defaults under this Lease, Landlord may proceed directly against
Tenant without pursuing remedies against the transferee. Landlord may consent
to subsequent assignments or modifications of this Lease by Tenant's
transferee, without notifying Tenant or obtaining its consent. Such action
shall not relieve Tenant's liability under this Lease.
Section 9.05. LANDLORD'S CONSENT.
(a) Tenant's request for consent to any transfer described in Section
9.01 shall set forth in writing the details of the proposed transfer, including
the name, business and financial condition of the prospective transferee,
financial details of the proposed transfer (e.g., the term of and the rent and
security deposit payable under any proposed assignment or sublease), and any
other information Landlord deems relevant. Landlord shall have the right to
withhold consent, if reasonable, or to grant consent, based on the following
factors: (i) the business of the proposed assignee or subtenant and the
proposed use of the Property; (ii) the net worth and financial reputation of
the proposed assignee or subtenant; (iii) Tenant's compliance with all of its
obligations under the Lease; and (iv) such other factors as Landlord may
reasonably deem relevant. If Landlord objects to a proposed assignment solely
because of the net worth and/or financial reputation of the proposed assignee,
Tenant may nonetheless sublease (but not assign), all or a portion of the
Property to the proposed transferee, but only on the other terms of the
proposed transfer.
(b) If Tenant assigns or subleases, the following shall apply:
(i) Tenant shall pay to Landlord as Additional Rent under the
Lease the Landlord's Share (stated in Section 1.14) of the Profit
(defined below) on such transaction as and when received by Tenant,
unless Landlord gives written notice to [COPY ILLEGIBLE] Landlord's
share shall be paid by the assignee or subtenant to Landlord directly.
The "Profit" means (A) all amounts paid to Tenant for such assignment or
sublease, including "key" money, monthly rent in excess of the monthly
rent payable under the Lease, and all fees and other consideration paid
for the assignment or sublease, including fees under any collateral
agreements, less (B) costs and expenses directly incurred by Tenant in
connection with the execution and performance of such assignment or
sublease for real estate broker's commissions and
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of the Society of Industrial
and Office Realtors, Inc. /s/ [Initials Illegible]
(Single-Tenant Gross Form)
<PAGE> 8
costs of renovation or construction or tenant improvements required under
such assignment or sublease. Tenant is entitled to recover such costs and
expenses before Tenant is obligated to pay the Landlord's Share to
Landlord. The Profit in the case of a sublease of less than all the
Property is the rent allocable to the subleased space as a percentage on a
square footage basis.
(ii) Tenant shall provide Landlord a written statement certifying all
amounts to be paid from any assignment or sublease of the Property within
thirty (30) days after the transaction documentation is signed, and
Landlord may inspect Tenant's books and records to verify the accuracy of
such statement. On written request, Tenant shall promptly furnish to
Landlord copies of all the transaction documentation, all of which shall be
certified by Tenant to be complete, true and correct. Landlord's receipt
of Landlord's Share shall not be a consent to any further assignment or
subletting. The breach of Tenant's obligation under this Paragraph
9.05(b) shall be a material default of the Lease.
Section 9.06. NO MERGER. No merger shall result from Tenant's sublease of
the Property under this Article Nine, Tenant's surrender of this Lease or the
termination of this Lease in any other manner. In any such event, Landlord may
terminate any or all subtenancies or succeed to the interest of Tenant as
sublandlord under any or all subtenancies.
ARTICLE TEN: DEFAULTS; REMEDIES
Section 10.01. COVENANTS AND CONDITIONS. Tenant's performance of each of
Tenant's obligations under this Lease is a condition as well as covenant.
Tenant's right to continue in possession of the Property is conditioned upon
such performance. Time is of the essence in the performance of all covenants
and conditions.
Section 10.02. DEFAULTS. Tenant shall be in material default under this
Lease:
(a) If Tenant abandons the Property or if Tenant's vacation of the
Property results in the cancellation of any insurance described in Section
4.04; for a period of five (5) days after written notice from Landlord;
(b) If Tenant fails to pay rent or any other charge when due; for a
period of five (5) days after written notice from Landlord.
(c) If Tenant fails to perform any of Tenant's non-monetary obligations
under this Lease for a period of thirty (30) days after written notice from
Landlord; provided that if more than thirty (30) days are required to complete
such performance, Tenant shall not be in default if Tenant commences such
performance within the thirty (30)-day period and thereafter diligently pursues
its completion. However, Landlord shall not be required to give such notice if
Tenant's failure to perform constitutes a non-curable breach of this Lease. The
notice required by this Paragraph is intended to satisfy any and all notice
requirements imposed by law on Landlord and is not in addition to any such
requirement.
(d) (i) If Tenant makes a general assignment or general arrangement for
the benefit of creditors; (ii) if a petition for adjudication of bankruptcy or
for reorganization or rearrangement is filed by or against Tenant and is not
dismissed within thirty (30) days; (iii) if a trustee or receiver is appointed
to take possession of substantially all of Tenant's assets located at the
Property or of Tenant's interest in this Lease and possession is not restored
to Tenant within sixty (60) days; or (iv) if substantially all of Tenant's
assets located at the Property or of Tenant's interest in this Lease is
subjected to attachment, execution of other judicial seizure which is not
discharged within sixty (60) days. If a court of competent jurisdiction
determines that any of the acts described in this subparagraph (d) is not a
default under this Lease, and a trustee is appointed to take possession (or if
Tenant remains a debtor in possession) and such trustee or Tenant transfers
Tenant's interest hereunder, then Landlord shall receive, as Additional Rent,
the excess, if any, of the rent (or any other consideration) paid in connection
with such assignment or sublease over the rent payable by Tenant under this
Lease.
(e) If any guarantor of the Lease revokes or otherwise terminates, or
purports to revoke or otherwise terminate, any guaranty of all or any portion
of Tenant's obligations under the Lease. Unless otherwise expressly provided,
no guaranty of the Lease is revocable.
Section 10.03. REMEDIES. On the occurrence of any material default by
Tenant, Landlord may, at any time thereafter, with or without notice or demand
and without limiting Landlord in the exercise of any right or remedy which
Landlord may have:
(a) Terminate Tenant's right to possession of the Property by any lawful
means, in which case this Lease shall terminate and Tenant shall immediately
surrender possession of the Property to Landlord. In such event, Landlord shall
be entitled to recover from Tenant all damages incurred by Landlord by reason
of Tenant's default, including (i) the worth at the time of the award of the
unpaid Base Rent, Additional Rent and other charges which Landlord had earned
at the time if the termination; (ii) the worth at the time of the award of the
amount by which the unpaid Base Rent, Additional Rent and other charges which
Landlord would have earned after termination until the time of the award
exceeds the amount of such rental loss that Tenant proves Landlord could have
reasonably avoided; (iii) the worth at the time of the award of the amount by
which the unpaid Base Rent, Additional Rent and other charges which Tenant
would have paid for the balance of the Lease Term after the time of award
exceeds the amount of such rental loss that Tenant proves Landlord could have
reasonably avoided; and (iv) any other amount necessary to compensate Landlord
for all the detriment proximately caused by Tenant's failure to perform its
obligations under the Lease or which in the ordinary course of things would be
likely to result therefrom, including, but not limited to, any costs or
expenses Landlord incurs in maintaining or preserving the Property after such
default, the cost of recovering possession of the Property, expenses of
reletting, including necessary renovation or alteration of the Property,
Landlord's reasonable attorneys' fees incurred in connection therewith, and any
real estate commission paid or payable. As used in subparts (i) and (ii) above,
the "worth at the time of the award" is computed by allowing interest on unpaid
amounts at the rate of ten percent (10%) per annum, or such lesser amount as
may then be the maximum lawful rate. As used in subpart (iii) above, the "worth
at the time of the award" is computed by discounting such amount at the
discount rate of the Federal Reserve Bank of San Francisco at the time of the
award, plus one percent (1%). If Tenant has abandoned the Property, Landlord
shall have the option of (i) retaking possession of the Property and recovering
from Tenant the amount specified in this Paragraph 10.03(a), or (ii) proceeding
under Paragraph 10.03(b);
(b) Maintain Tenant's right to possession, in which case this Lease shall
continue in effect whether or not Tenant has abandoned the Property, in such
event, Landlord shall be entitled to enforce all of Landlord's rights and
remedies under this Lease, including the right to recover the rent as it
becomes due;
(c) Pursue any other remedy now or hereafter available to Landlord under
the laws or judicial decisions of the state in which the Property is located.
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of the Society of Industrial
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(Single-Tenant Gross Form)
<PAGE> 9
Section 10.04. REPAYMENT OF "FREE" RENT. If this Lease provides for a
postponement of any monthly rental payments, a period of "free" rent or other
rent concession, such postponed rent or "free" rent is called the "Abated Rent".
Tenant shall be credited with having paid all of the Abated Rent on the
expiration of the Lease Term only if Tenant has fully, faithfully, and
punctually performed all of Tenant's obligations hereunder, including the
payment of all rent (other than the Abated Rent) and all other monetary
obligations and the surrender of the Property in the physical condition required
by this Lease. Tenant acknowledges that its right to receive credit for the
Abated Rent is absolutely conditioned upon Tenant's full, faithful and punctual
performance of its obligations under this Lease. If Tenant defaults and does not
cure within any applicable grace period, the Abated Rent shall immediately
become due and payable in full and this Lease shall be enforced as if there were
no such rent abatement or other rent concession. In such case Abated Rent shall
be calculated based on the full initial rent payable under this Lease.
Section 10.05. AUTOMATIC TERMINATION. Notwithstanding any other term or
provision hereof to the contrary, the Lease shall terminate on the occurrence
of any act which affirms the Landlord's intention to terminate the Lease as
provided in Section 10.03 hereof, including the filing of an unlawful detainer
action against Tenant. On such termination, Landlord's damages for default
shall include all costs and fees, including reasonable attorneys' fees that
Landlord incurs in connection with the filing, commencement, pursuing and/or
defending of any action in any bankruptcy court or other court with respect to
the Lease; the obtaining of relief from any stay in bankruptcy restraining any
action to evict Tenant; or the pursuing of any action with respect to
Landlord's right to possession of the Property. All such damages suffered
(apart from Base Rent and other rent payable hereunder) shall constitute
pecuniary damages which must be reimbursed to Landlord prior to assumption of
the Lease by Tenant or any successor to Tenant in any bankruptcy or other
proceeding.
Section 10.06 CUMULATIVE REMEDIES. Landlord's exercise of any right or
remedy shall not prevent it from exercising any other right or remedy.
ARTICLE ELEVEN: PROTECTION OF LENDERS (See Addendum Section 22.)
Section 11.01. SUBORDINATION. Landlord shall have the right to subordinate
this Lease to any ground lease, deed of trust or mortgage encumbering the
Property, any advances made on the security thereof and any renewals,
modifications, consolidations, replacements or extensions thereof, whenever
made or recorded. Tenant shall cooperate with Landlord and any lender which is
acquiring a security interest in the Property or the Lease. Tenant shall
execute such further documents and assurances as such lender may require,
provided that Tenant's obligations under this Lease shall not be increased in
any material way (the performance of ministerial acts shall not be deemed
material), and Tenant shall not be deprived of its rights under this Lease.
Tenant's right to quiet possession of the Property during the Lease Term shall
not be disturbed if Tenant pays the rent and performs all of Tenant's
obligations under this Lease and is not otherwise in default. If any ground
lessor, beneficiary or mortgagee elects to have this Lease prior to the lien of
its ground lease, deed of trust or mortgage and gives written notice thereof to
Tenant, this Lease shall be deemed prior to such ground lease, deed of trust or
mortgage whether this Lease is dated prior or subsequent to the date of said
ground lease, deed of trust or mortgage or the date of recording thereof.
Section 11.02. ATTORNMENT. If Landlord's interest in the Property is
acquired by any ground lessor, beneficiary under a deed of trust, mortgagee,or
purchaser at a foreclosure sale, Tenant shall attorn to the transferee of or
successor to Landlord's interest in the Property and recognize such transferee
or successor as Landlord under this Lease. Tenant waives the protection of any
statute or rule of law which gives or purports to give Tenant any right to
terminate this Lease or surrender possession of the Property upon the transfer
of Landlord's interest.
Section 11.03. SIGNING OF DOCUMENTS. Tenant shall sign and deliver any
instrument or documents reasonably necessary or appropriate to evidence any such
attornment or subordination or agreement to do so. If Tenant fails to do so
within ten (10) days after written request, Landlord may execute and deliver any
such instrument or document.
Section 11.04. ESTOPPEL CERTIFICATES.
(a) Upon Landlord's written request, Tenant shall execute, acknowledge and
deliver to Landlord a written statement certifying to the extent accurate: (i)
that none of the terms or provisions of this Lease have been changed (or if
they have been changed, stating how they have been changed); (ii) that this
Lease has not been cancelled or terminated; (iii) the last date of payment of
the Base Rent and other charges and the time period covered by such payment;
(iv) that Landlord is not in default under this Lease (or, if Landlord is
claimed to be in default, stating why); and (v) such other representations or
information with respect to Tenant or the Lease as Landlord may reasonably
request or which any prospective purchaser or encumbrancer of the Property may
require. Tenant shall deliver such statement to Landlord within ten (10) days
after Landlord's request. Landlord may give any such statement by Tenant to any
prospective purchaser or encumbrancer of the Property. Such purchaser or
encumbrancer may rely conclusively upon such statement as true and correct.
(See Addendum Section 22)
(b) If Tenant does not deliver such statement to Landlord within such ten
(10)-day period, Landlord, and any prospective purchaser or encumbrancer, may
conclusively presume and rely upon the following facts to the extent not
otherwise known to Landlord: (i) that the terms and provisions of this Lease
have not been changed except as otherwise represented by Landlord; (ii) that
this Lease has not been cancelled or terminated except as otherwise represented
by Landlord; (iii) that not more than one month's Base Rent or other charges
have been paid in advance; and (iv) that Landlord is not in default under the
Lease. In such event, Tenant shall be stopped from denying the truth of such
facts.
Section 11.05. TENANT'S FINANCIAL CONDITION. Within ten (10) days after
written request from Landlord, Tenant shall deliver to Landlord such financial
statements as Landlord reasonably requires to verify the net worth of Tenant or
any assignee, subtenant, or guarantor of Tenant. In addition, Tenant shall
deliver to any lender designated by Landlord any financial statements required
by such lender to facilitate the financing or refinancing of the Property.
Tenant represents and warrants to Landlord that each such financial statement is
a true and accurate statement as of the date of such statement. All financial
statements shall be confidential and shall be used only for the purposes set
forth in this Lease.
ARTICLE TWELVE. LEGAL COSTS
Section 12.01. LEGAL PROCEEDINGS. If Tenant or Landlord shall be in breach
or default under this Lease, such party (the "Defaulting Party") shall
reimburse the other party (the "Nondefaulting Party") upon demand for any
reasonable costs or expenses that the Nondefaulting Party incurs in connection
with any breach or default of the Defaulting Party under this lease, whether or
not suit is commenced or judgment entered. Such costs shall include legal fees
and costs incurred for the negotiation of a settlement, enforcement of rights
or otherwise. Furthermore if any action for breach of or to enforce the
provisions of this lease is commenced, the court in such action shall award to
the party in whose favor a judgment is entered, a reasonable sum as attorneys'
fees and costs. The losing party in such action shall pay such attorneys' fees
and costs.
1988 Southern California Chapter 9 Initials /s/ [Initials Illegible]
of the Society of Industrial
and Office Realtors, Inc. /s/ [Initials Illegible]
(Single-Tenant Gross Form)
<PAGE> 10
Section 12.02. LANDLORD'S CONSENT. Tenant shall pay Landlord's
reasonable actual attorneys' fees incurred in connection with Tenant's request
for Landlord's consent under Article Nine (Assignment and Subletting), or in
connection with any other act which Tenant proposes to do and which requires
Landlord's consent.
ARTICLE THIRTEEN: MISCELLANEOUS PROVISIONS
Section 13.01. NON-DISCRIMINATION. Tenant promises, and it is a condition
to the continuance of this Lease, that there will be no discrimination against,
or segregation of, any person or group of persons on the basis of race, color,
sex, creed, national origin or ancestry in the leasing, subleasing,
transferring, occupancy, tenure or use of the Property or any portion thereof.
Section 13.02. LANDLORD'S LIABILITY; CERTAIN DUTIES.
(a) As used in this Lease, the term "Landlord" means only the current
owner or owners of the fee title to the Property or the leasehold estate under a
ground lease of the Property at the time in question. Each Landlord is obligated
to perform the obligations of Landlord under this Lease only during the time
such Landlord owns such interest or title. Any Landlord who transfers its title
or interest is relieved of all liability with respect to the obligations of
Landlord under this Lease to be performed on or after the date of transfer.
However, each Landlord shall deliver to its transferee all funds that Tenant
previously paid if such funds have not yet been applied under the terms of this
Lease.
(b) Tenant shall give written notice of any failure by Landlord to perform
any of its obligations under this Lease to Landlord and to any ground lessor,
mortgagee or beneficiary under any deed of trust encumbering the Property whose
name and address have been furnished to Tenant in writing. Landlord shall not be
in default under this Lease unless Landlord (or such ground lessor, mortgagee or
beneficiary) fails to cure such non-performance within thirty (30) days after
receipt of Tenant's notice. However, if such non-performance reasonably requires
more than thirty (30) days to cure, Landlord shall not be in default if such
cure is commenced within such thirty (30)-day period and thereafter diligently
pursued to completion.
(c) Notwithstanding any term or provision herein to the contrary, the
liability of Landlord for the performance of its duties and obligations under
this Lease is limited to Landlord's interest in the Property, and neither the
Landlord nor its partners, shareholders, officers or other principals shall have
any personal liability under this Lease.
Section 13.03. SEVERABILITY. A determination by a court of competent
jurisdiction that any provision of this Lease or any part thereof is illegal or
unenforceable shall not cancel or invalidate the remainder of such provision or
this Lease, which shall remain in full force and effect.
Section 13.04. INTERPRETATION. The captions of the Articles or Sections
of this Lease are to assist the parties in reading this Lease and are not a part
of the terms or provisions of this Lease. Whenever required by the context of
this Lease, the singular shall include the plural and the plural shall include
the singular. The masculine, feminine and neuter genders shall each include the
other. In any provision relating to the conduct, acts or omissions of Tenant,
the term "Tenant" shall include Tenant's agents, employees, contractors,
invitees, successors or others using the Property with Tenant's expressed or
implied permission.
Section 13.05. INCORPORATION OF PRIOR AGREEMENTS; MODIFICATIONS. This
Lease is the only agreement between the parties pertaining to the lease of the
Property and no other agreements are effective. All amendments to this Lease
shall be in writing and signed by all parties. Any other attempted amendment
shall be void.
Section 13.06. NOTICES. All notices required or permitted under this
Lease shall be in writing and shall be personally delivered or sent by certified
mail, return receipt requested, postage prepaid. Notices to Tenant shall be
delivered to the address specified in Section 1.03 above, except that upon
Tenant's taking possession of the Property, the Property shall be Tenant's
address for notice purposes. Notices to Landlord shall be delivered to the
address specified in Section 1.02 above. All notices shall be effective upon
delivery. Either party may change its notice address upon written notice to the
other party.
Section 13.07. WAIVERS. All waivers must be in writing and signed by the
waiving party. Landlord's failure to enforce any provision of this Lease or its
acceptance of rent shall not be a waiver and shall not prevent Landlord from
enforcing that provision or any other provision of this Lease in the future. No
statement on a payment check from Tenant or in a letter accompanying a payment
check shall be binding on Landlord. Landlord may, with or without notice to
Tenant, negotiate such check without being bound to the conditions of such
statement.
Section 13.08. NO RECORDATION. Tenant shall not record this Lease without
prior written consent from Landlord. However, either Landlord or Tenant may
require that a "Short Form" memorandum of this Lease executed by both parties be
recorded. The party requiring such recording shall pay all transfer taxes and
recording fees.
Section 13.09. BINDING EFFECT: CHOICE OF LAW. This Lease binds any party
who legally acquires any rights or interest in this Lease from Landlord or
Tenant. However, Landlord shall have no obligation to Tenant's successor unless
the rights or interests of Tenant's successor are acquired in accordance with
the terms of this Lease. The laws or the state in which the [COPY HERE IS
MISSING].
Section 13.10. CORPORATE AUTHORITY; PARTNERSHIP AUTHORITY. If Tenant is a
corporation, each person signing this Lease on behalf of Tenant represents and
warrants that he has full authority to do so and that this Lease binds the
corporation. Within thirty (30) days after this Lease is signed, Tenant shall
deliver to Landlord a certified copy of a resolution of Tenant's Board of
1988 Southern California Chapter 10 Initials /s/ [Initials Illegible]
of the Society of Industrial
and Office Realtors, Inc. /s/ [Initials Illegible]
(Single-Tenant Gross Form)
<PAGE> 11
Directors authorizing the execution of the Lease or other evidence of such
authority reasonably acceptable to Landlord. If Tenant is a partnership, each
person or entity signing this Lease for Tenant represents and warrants that he
or it is a general partner of the partnership, that he or it has full authority
to sign for the partnership and that this Lease binds the partnership and all
general partners of the partnership. Tenant shall give written notice to
Landlord of any general partner's withdrawal or addition. Within thirty (30)
days after this Lease is signed, Tenant shall deliver to Landlord a copy of
Tenant's recorded statement of partnership or certificate of limited
partnership.
Section 13.11. JOINT AND SEVERAL LIABILITY. All parties signing this Lease
as Tenant shall be jointly and severally liable for all obligations of Tenant.
Section 13.12. FORCE MAJEURE. If Landlord or Tenant cannot perform any of
its obligations due to events beyond its control, the time provided for
performing such obligations shall be extended by a period of time equal to the
duration of such events. Events beyond a party's control include, but are not
limited to, acts of God, war, civil commotion, labor disputes, strikes, fire,
flood or other casualty, shortages of labor or material, government regulation
or restriction and weather conditions.
Section 13.13. EXECUTION OF LEASE. This Lease may be executed in
counterparts and, when all counterpart documents are executed, the counterparts
shall constitute a single binding instrument. Landlord's delivery of this Lease
to Tenant shall not be deemed to be an offer to lease and shall not be binding
upon either party until executed and delivered by both parties.
Section 13.14. SURVIVAL. All representations and warranties of Landlord
and Tenant shall survive the termination of this Lease.
ARTICLE FOURTEEN: BROKERS
ARTICLE FIFTEEN: COMPLIANCE
The parties hereto agree to comply with all applicable federal, state and
local laws, regulations, codes, ordinances and administrative orders having
jurisdiction over the parties, property of the subject matter of this Agreement,
including, but not limited to, the 1964 Civil Rights Act and all amendments
thereto, the Foreign Investment In Real Property Tax Act, the Comprehensive
Environmental Response Compensation and Liability Act, and The Americans With
Disabilities Act.
ADDITIONAL PROVISIONS MAY BE SET FORTH IN A RIDER OR RIDERS ATTACHED HERETO
OR IN THE BLANK SPACE BELOW. IF NO ADDITIONAL PROVISIONS ARE INSERTED, PLEASE
DRAW A LINE THROUGH THE SPACE BELOW.
See attached Addendum.
1988 Southern California Chapter 11 Initials /s/ [Initials Illegible]
of the Society of Industrial
and Office Realtors, Inc. /s/ [Initials Illegible]
(Single-Tenant Gross Form)
<PAGE> 12
Landlord and Tenant have signed this Lease at the place and on the dates
specified adjacent to their signatures below and have initialled all Riders
which are attached to or incorporated by reference in this Lease.
"LANDLORD"
Signed on , 19 (1) Hold/Hawthorne, a California L.P. and
------------------ -- -----------------------------------------
at . (2) Victory Partners, a California L.P.
------------------------------- -----------------------------------------
(1) By: [SIGNATURE ILLEGIBLE]
-------------------------------------
ITS: GENERAL PARTNERS
-------------------------------------
(2) BY: [SIGNATURE ILLEGIBLE]
-------------------------------------
ITS: GENERAL PARTNERS
-------------------------------------
"TENANT"
Signed on , 19 Skechers, USA, Inc.
------------------ -- -----------------------------------------
at . a California Corporation
------------------------------- -----------------------------------------
By: /s/ DAVID WEINBERG
-------------------------------------
ITS:
-------------------------------------
BY:
-------------------------------------
ITS:
-------------------------------------
IN ANY REAL ESTATE TRANSACTION, IT IS RECOMMENDED THAT YOU CONSULT WITH
A PROFESSIONAL, SUCH AS A CIVIL ENGINEER, INDUSTRIAL HYGIENIST OR OTHER PERSON
WITH EXPERIENCE IN EVALUATING THE CONDITION OF THE PROPERTY, INCLUDING THE
POSSIBLE PRESENCE OF ASBESTOS, HAZARDOUS MATERIALS AND UNDERGROUND STORAGE
TANKS.
THIS PRINTED FORM LEASE HAS BEEN DRAFTED BY LEGAL COUNSEL AT THE
DIRECTION OF THE SOUTHERN CALIFORNIA CHAPTER OF THE SOCIETY OF INDUSTRIAL AND
OFFICE REALTORS(R), INC. NO REPRESENTATION OR RECOMMENDATION IS MADE BY THE
SOUTHERN CALIFORNIA CHAPTER OF THE SOCIETY OF INDUSTRIAL AND OFFICE REALTORS,
INC.(R), ITS LEGAL COUNSEL, THE REAL ESTATE BROKERS NAMED HEREIN, OR THEIR
EMPLOYEES OR AGENTS, AS TO THE LEGAL SUFFICIENCY, LEGAL EFFECT OR TAX
CONSEQUENCES OF THIS LEASE OR OF THIS TRANSACTION. LANDLORD AND TENANT SHOULD
RETAIN LEGAL COUNSEL TO ADVISE THEM ON SUCH MATTERS AND SHOULD RELY UPON THE
ADVICE OF SUCH LEGAL COUNSEL.
1988 Southern California Chapter 12 Initials /s/ [Initials Illegible]
of the Society of Industrial
and Office Realtors, Inc. /s/ [Initials Illegible]
(Single-Tenant Gross Form)
<PAGE> 13
EXHIBIT "A"
SUBORDINATION, NON-DISTURBANCE AND ATTORNMENT AGREEMENT
THE SUBORDINATION, NON-DISTURBANCE AND ATTORNMENT AGREEMENT (the
"Agreement") is made as of the ___day of _______, 19__ by and between
_____________, a _______________, and its successor and/or assigns, having an
address at __________________ _______________________ ("Lender") and
_______________, having an address at ___________________________ ("Tenant").
RECITALS:
A. Lender is the present owner and holder of a certain mortgage
and security agreement (the "Security Instrument") dated _________________,
19__, given by Landlord (defined below) to Lender which encumbers the leased fee
estate of Landlord in certain premises described in Exhibit A attached hereto
(the "Property") and which secures the payment of certain indebtedness owed by
Landlord to Lender evidenced by a certain promissory note dated ___________,
19__, given by Landlord to Lender (the "Note");
B. Tenant is the holder of a leasehold estate in a portion of the
Property under and pursuant to the provisions of a certain lease dated
____________, 19__, between _________ __________________, as Landlord
("Landlord") and Tenant, as tenant (the "Lease"); and
C. Tenant has agreed to subject and subordinate the Lease to the
Security Instrument and to the lien thereof and Lender has agreed to grant
non-disturbance to Tenant under the Lease on the terms and conditions
hereinafter set forth.
AGREEMENT:
For good and valuable consideration, Tenant and Lender agree as follow:
1. SUBORDINATION. Tenant agrees that the Lease and all of the
terms, covenants and provisions thereof and all rights, remedies and options of
Tenant thereunder are and shall at all times continue to be subject and
subordinate in all respects to the Security Instrument and to the lien thereof
including without limitation all renewals, increases, modifications, spreaders,
consolidations, replacements and extensions thereof and to all sums secured
thereby with the same force and effect as if the Security Instrument had been
executed, delivered and recorded prior to the execution and delivery of the
Lease.
2. NON DISTURBANCE. Lender agrees that if any action or proceeding
is commenced by Lender for the foreclosure of the Security Instrument or the
sale of the Property, Tenant shall not be named as a party therein unless such
joinder shall be required by law, provided, however, such joinder shall not
result in the termination of the Lease or disturb the Tenant's possession or
use of the premises demised thereunder, and the sale of the Property in any
such action or proceeding and the exercise by Lender of any of its other rights
under the Note or the Security Instrument shall be made subject to all rights
of Tenant under the Lease, provided that at the time of the commencement of any
such action or proceeding or at the time of any such sale or exercise of any
such other rights (a) the term of the Lease shall have commenced pursuant to
the provisions thereof, (b) Tenant shall be in possession of the premises
demised under the Lease, (c) the Lease shall be in full force and effect and
(d) Tenant shall not be in default under any of the terms, covenants or
conditions of the Lease or of this Agreement on Tenant's part to be observed or
performed.
3. ATTORNMENT. Lender and Tenant agree that if Lender shall
become the owner of the Property by reason of the foreclosure of the Security
Instrument or the acceptance of a deed or assignment in lieu of foreclosure or
otherwise, and the conditions set forth in Section 2 above have been met at the
time Lender becomes owner of the Property, the Lease shall not be terminated or
affected thereby but shall continue in full force and effect as a direct lease
between Lender and Tenant upon all of the terms, covenants and conditions set
forth in the Lease and in that event, Tenant agrees to attorn to Lender and
Lender agrees to accept such attornment, provided, however, that the provisions
of the Security Instrument shall govern with respect to the disposition of any
casualty insurance proceeds or condemnation awards and Lender shall not be (a)
obligated to complete any construction work acquired to be done by Landlord
pursuant to the provisions of the Lease or to reimburse Tenant for any
construction work done by Tenant, (b) liable (i) for Landlord's failure to
perform any of its obligations under the Lease which have accrued prior to the
date on which Lender shall become the owner of the Property, or (a) for any act
or omission of Landlord, whether prior to or after such foreclosure or sale;
(c) required to make any repairs to the Property or to the premises demised
under the Lease required as a result of fire, or other casualty or by reason
of condemnation unless Lender shall be obligated under the Lease as a result of
fire, or other casualty or by reason of condemnation unless Lender shall be
obligated under the Lease to make such repairs and shall have received
sufficient casualty insurance proceeds or condemnation awards to finance the
completion of such repairs; (d) required to make any capital improvements to
the Property or to the premises demised under the Lease which Landlord may have
agreed to make, but had not completed, or to perform or provide any services
not related to possession or quiet enjoyment of the premises demised under the
Lease; (e) subject to any offsets, defenses, abatements or counterclaims which
shall have accrued to Tenant against Landlord prior to the date upon which
Lender shall become the owner of the Property; (f) liable for the return of
rental security deposits, if any, paid by Tenant to Landlord in accordance with
the Lease unless such sums are actually received by Landlord; (g) bound by any
payment of rents, additional rents or other sums which Tenant may have paid
more than one (1) month in advance to any prior Landlord unless (i) such sums
are actually received by Lender or (ii) such prepayment shall have been
expressly approved of by Lender, (h) bound to make any payment to Tenant which
was required under the Lease, or otherwise, to be made prior to the time Lender
succeeded to Landlord's interest; (i) bound by any agreement amending,
modifying or terminating the Lease made without Lender's prior written consent
prior to the time Lender succeeded to Landlord's interest or (j) bound by any
assignment of the Lease or sublease of the Property, or any portion thereof,
made prior to the time Lender succeeded to Landlord's interest other than if
pursuant to the provisions of the Lease.
<PAGE> 14
4. NOTICE TO TENANT. After notice is given to Tenant by Lender that the
Landlord is in default under the Note and the Security Instrument and that the
rentals under the Lease should be paid to Lender pursuant to the terms of the
assignment of leases and rents executed and delivered by Landlord to Lender in
connection therewith. Tenant shall thereafter pay to Lender or as directed by
the Lender, all rentals and all other monies due or to become due to Landlord
under the Lease and Landlord hereby expressly authorizes Tenant to make such
payments to Lender and hereby releases and discharges Tenant from any liability
to Landlord on account of any such payments.
5. LENDER'S CONSENT. Tenant shall not, without obtaining the prior
written consent of Lender, (a) enter into any agreement amending, modifying or
terminating the Lease, (b) prepay any of the rents, additional rents or other
sums due under the Lease for more than one (1) month in advance of the due dates
thereof; (c) voluntarily surrender the premises demised under the Lease or
terminate the Lease without cause or shortcut the term thereof, or (d) assign
the Lease or sublet the premises demised under the Lease or any part thereof
other than pursuant to the provisions of the Lease; and any such amendment,
modification, termination, prepayment, voluntary surrender, assignment or
subletting, without Lender's prior consent, shall not be binding upon Lender.
6. REPRESENTATIONS AND WARRANTIES. Tenant hereby represents and warrants
to Lender that as of the date hereof (a) Tenant is the owner and holder of the
tenant's interest under the Lease; (b) the Lease has not been modified or
amended; (c) the Lease is in full force and effect and the term thereof
commenced on May 1, 1988, pursuant to the premises thereof; (d) the premises
demised under the Lease have been completed and Tenant has taken possession of
the same on a rent paying basis; (e) neither Tenant nor Landlord is in default
under or in breach of any of the terms, covenants or provisions of the Lease and
Tenant to the best of its knowledge knows of no event which but for the passage
of time or the giving of notice or both would constitute an event of default or
breach by Tenant or Landlord under the Lease; (f) neither Tenant nor Landlord
has commenced any action or given or received any notice for the purpose of
terminating the Lease; (g) all rents, additional rents and other sums due and
payable under the Lease have been paid in full and no rents, additional rents or
other sums due and payable under the Lease have been paid in full and no rents,
additional rents or other sums payable under the Lease have been paid for more
than one (1) month in advance of the due dates thereof; (h) there are no
offsets or defenses to the payment of the rents, additional rents, or other sums
payable under the Lease, (i) Tenant has no option or right of first refusal to
purchase the premises demised under the Lease or any portion thereof or any
right or option for additional space with respect to the premises demised; (j)
no action, whether voluntary or otherwise, is pending against Tenant under the
bankruptcy, insolvency or similar laws of the United States or any state
thereof, and (k) Tenant has deposited the security deposit set forth in the
Lease with Landlord.
7. ENVIRONMENTAL COVENANTS AND INDEMNITY. Tenant covenants and agree
that the Premises shall not be used for any activities involving, directly or
indirectly, the use, generation, treatment, storage, or disposal of any
hazardous or toxic chemical, material, substance or waste. Tenant covenants and
agrees to indemnify and hold Landlord harmless from any and all costs, expenses,
losses, actions, suits, claims, judgments, and any other liability whatsoever in
connection with a breach by Tenant of any federal, state of local environmental
protection laws and regulations.
8. LENDER TO RECEIVE NOTICES. Tenant shall provide Lender with copies of
all written notices sent to Landlord pursuant to the Lease simultaneously.
Tenant shall notify Lender of any default by Landlord under the Lease which
would entitle Tenant to cancel the Lease or to an abatement of the rents,
additional rents or other sums payable thereunder, and agrees that,
notwithstanding any provisions of the Lease to the contrary, no notice of
cancellation thereof or of such an abatement shall be effective and shall have
failed within sixty (60) days after receipt of such notice to cure such default,
or if such default cannot be cured within sixty (60) days, have failed within
sixty (60) days after receipt of such notice to commence and thereafter
diligently pursue any action necessary to cure such default.
9. NOTICES. All notices or other written communications hereunder shall
be deemed to have been properly given (i) upon delivery, if delivered in person
or by facsimile transmission with receipt acknowledged by the recipient thereof,
(ii) one (1) Business Day (hereinafter defined) after having been deposited for
overnight delivery with any reputable overnight courier service, or (iii) three
(3) Business Days after having been deposited in any post office or mail
depository regularly maintained by the U.S. Postal Service and sent by
registered or certified mail, postage prepaid, return receipt requested,
addressed as follows:
If to Tenant: ________________________________
________________________________
________________________________
Attention:______________________
Facsimile No.:__________________
If to Lender: ________________________________
________________________________
________________________________
________________________________
Attention:______________________
________________________________
With a copy to:
________________________________
________________________________
________________________________
________________________________
Attention:______________________
Facsimile No.:__________________
2
<PAGE> 15
or addressed as such party may from time to time designate by written notice to
the other parties. For purposes of this Section 8, the term "Business Day" shall
mean a day on which commercial banks are not authorized by law to close in New
York, New York.
Either party by notice to the other may designate additional or
different addresses for subsequent notices or communications.
10. JOINT AND SEVERAL LIABILITY. If Tenant consists of more than one
person, the obligations and liabilities of each such person hereunder shall be
joint and several. This Agreement shall be binding upon and inure to the benefit
of Lender and Tenant and their respective successors and assigns.
11. DEFINITIONS. The term "Lender" as used herein shall include the
successors and assigns of Lender and any person, party or entity which shall
become the owner of the Property by reason of a foreclosure of the Security
Instrument or the acceptance of a deed or assignment in lieu of foreclosure or
otherwise. The term "Landlord" as used herein shall mean and include the present
landlord under the Lease and such landlord's predecessors and successors in
interest under the Lease, but shall not mean or include Lender. The term
"Property" as used herein shall mean the Property, the improvements now or
hereafter located thereon and the estates therein encumbered by the Security
Instrument.
12. NO ORAL MODIFICATIONS. This Agreement may not be modified in any
manner or terminated except by the an instrument in writing executed by the
parties hereto.
13. GOVERNING LAW. This Agreement shall be governed, construed, applied
and enforced in accordance with the laws of the state where the Property is
located and the applicable laws of the United States of America.
14. INAPPLICABLE PROVISIONS. If any term, covenant or condition of this
Agreement is held to be invalid, illegal or unenforceable in any respect, this
Agreement shall be construed without such provision.
15. DUPLICATE ORIGINALS; COUNTERPARTS. This Agreement may be executed in
any number of duplicate originals and each duplicate original shall be deemed to
be an original. This Agreement may be executed in several counterparts, each of
which counterparts shall be deemed an original instrument and all of which
together shall constitute a single Agreement. The failure of any party hereto to
execute this Agreement, or any counterpart hereof, shall not relieve the other
signatories from their obligations hereunder.
16. NUMBER AND GENDER. Whenever the context may require, any pronouns
used herein shall include the corresponding masculine, feminine or neuter forms,
and the singular form of nouns and pronouns shall include the plural and vice
versa.
17. TRANSFER OF LOAN. Lender may sell, transfer and deliver the Note and
assign the Security Instrument, this Agreement and the other documents executed
in connection therewith to one or more Investors (as defined in the Security
Instrument) in the secondary mortgage market. In connection with such sale,
Lender may retain or assign responsibility for servicing the loan, including the
Note, the Security Instrument, this Agreement and the other documents executed
in connection therewith, or may delegate some or all of such responsibility
and/or obligations to a servicer including, but not limited to, any subservicer
or master servicer, on behalf of the Investors. All references to Lender herein
shall refer to and include any such servicer to the extent applicable.
18. FURTHER ACTS. Tenant will, at the cost of Tenant, and without
expense to Lender, do, execute, acknowledge and deliver all and every such
further acts and assurances as Lender shall, from time to time, require, for the
better assuring and confirming unto Lender the property and rights hereby
intended now or hereafter so to be, or for carrying out the intention or
facilitating the performance of the terms of this Agreement or for filing,
registering or recording this Agreement, or for complying with all applicable
laws.
19. SOLE DISCRETION OF LENDER. Wherever pursuant to this Agreement (a)
Lender exercises any right given to it to approve or disapprove, (b) any
arrangement or term is to be satisfactory to Lender, or (c) any other decision
or determination is to be made by Lender, the decision of Lender to approve or
disapprove, all decisions that arrangements or terms are satisfactory or not
satisfactory and all other decisions and determinations made by Lender, shall be
in the sole and absolute discretion of Lender and shall be final and conclusive,
except as may be otherwise expressly and specifically provided herein.
IN WITNESS WHEREOF, Lender and Tenant have duly executed this Agreement
as of the date first above written.
LENDER: TENANT:
By:_______________________________ By:_________________________________
Its:______________________________ Its:________________________________
3
<PAGE> 16
EXHIBIT A
Legal Description of Property
<PAGE> 17
EXHIBIT A
LEGAL DESCRIPTION
Lots 13, 14, 15 and 16 in Block 67 of Manhattan Beach Division No. 2, in the
City of Manhattan Beach, County of Los Angeles, State of California, as per map
recorded in Book 1, Pages 95 and 96 of Maps, in the Office of the County
Recorder of said County.
<PAGE> 18
EXHIBIT "B"
ESTOPPEL CERTIFICATE
TO: __________________________
__________________________
__________________________
__________________________
1. The undersigned ______________________ (Tenant) and
______________________ (Landlord) entered into a written lease dated
______________________, in which Landlord leased to Tenant and Tenant leased
from Landlord premises in the building located at 228 Manhattan Beach Blvd.,
Manhattan Beach, CA (Premises). The Premises is part of the parcel of real
property described in Lease Article _____ (Real Property). The Lease has been
amended, modified, and supplemented as follows: ______________________ . The
Lease, as amended, modified and supplemented, is referred in this Certificate as
the "Lease."
2. Under the Lease, Tenant has leased the Premises and has paid to
Landlord a security deposit of $ ____________. The term of the Lease began on
____________ and the expiration date of the Lease is ____________, subject to
any options to extend identified in Section 3 of this Exhibit. Tenant has paid
base rent through ____________. The next payment of base rent in the amount of
$____________ is due on ____________. Tenant is required to pay ____% of the
direct expenses (as defined in Lease Article ____) for the Real Property, in
excess of direct expenses for base year ____________.
3. The Lease provides for one (1) option to extend the term of the
Lease for five (5) years. The rental rate for the extension term is as follows:
____________.
Except as expressly provided in the Lease, Tenant has no right or option
to renew or extend the term of the Lease, and no preferential right to purchase
all or any part of the Premises or Real Property.
4. There are no oral or written amendments, modifications, or
supplements to the Lease except as stated in Section 1 of this Certificate. A
true, correct and complete copy of the Lease, including all amendments,
modifications, and supplements, is attached to this Certificate. The Lease, as
amended, modified and supplemented, is in full force and effect and represents
the entire agreement between Landlord and Tenant pertaining to the Premises and
the Real Property.
5. All space and improvements leased by Tenant have been completed and
furnished in accordance with the provisions of the Lease, and Tenant has
accepted and taken possession of the Premises. All contributions required to be
paid by Landlord to date for improvements to the Premises have been paid in
full.
6. Landlord is not in default in the performance of any of the terms or
provisions of the Lease. Tenant is not in default in the performance of any of
the terms or provisions of the Lease and has not assigned, transferred, or
hypothecated the Lease or any interest in the Lease or subleased all or part of
the Premises.
7. There are no setoffs or credits against rent payable under the Lease.
No free periods or rental abatements, rebates or concessions have been granted
to Tenant.
8. Tenant has no actual or constructive knowledge of any processing,
use, storage, disposal, release, threat of release, generation, or treatment of
any hazardous or toxic material or substance on, onto, under, above or from the
Premises or the Real Property except as follows: _______________________________
________________________________________________________________________.
9. There are no pending actions, voluntary or involuntary, under any
bankruptcy or insolvency laws of the United States or any state against Tenant
or any guarantor of Tenant's obligations under the Lease.
This Certificate is given to (Lender) with the understanding that it or
its assignee shall rely on it in connection with the acquisition of the Real
Property or the making of a loan secured by the Real Property. Following that
(acquisition/loan), Tenant agrees that the Lease shall remain in full force and
effect and shall bind and inure to the benefit of the Lender and its
successor-in-interest.
LENDER: TENANT:
By:_______________________________ By:_________________________________
Its:______________________________ Its:________________________________
<PAGE> 19
ADDENDUM
Addendum to Industrial Real Estate - Single Tenant Facility Lease
("Lease") by and between Holt/Hawthorne, a California limited partnership and
Victory Partners, a California limited partnership, as tenants in common
(collectively "Landlord") and Skechers USA, Inc., a California corporation
("Tenant"), dated for reference purposes only April 15, 1998 for the property
located at 228 Manhattan Beach Blvd., in the City of Manhattan Beach, County of
Los Angeles, State of California (the "Premises"). The terms herein shall have
the definitions as set forth in the Lease. The parties intend and agree that the
provisions of this Addendum shall supersede any inconsistent or conflicting
provisions of the Lease, and are as follows:
16. ASSIGNMENT OF LEASES:
Pursuant to the Assignment of Leases executed concurrently with this
Lease by Landlord, Landlord assigns to Tenant and Tenant assumes all rights,
obligations and liabilities of the Landlord under the Lease identified in the
Assignment of Lease: Laura C. Moore dba ICAAN Galleries (collectively
"Subtenant"). Tenant hereby agrees to hold harmless and indemnify Landlord
against any and all claims, suits, costs and liability arising out of the
assignment to Tenant of the Lease referenced above and in the Assignment of
Lease, including but not limited to any breach, default or omission by Tenant in
acting as Landlord to Subtenant from and after the Effective Date of this Lease.
17. PERMITTED USES: (See Section 1.06)
Tenant shall use the Premises for general offices purposes.
Notwithstanding the foregoing, the space formerly occupied by Subtenant Rachel
Gerber dba The Daily Bread (& Bagel), can be used as a retail outlet for baked
goods, coffee products and beverages, and the space currently occupied by
Subtenant Laura C. Moore dba ICAAN Galleries can be used for an art gallery and
retail store.
18. PARKING: (See Section 1.11)
Tenant shall have non-exclusive use of all portions of the parking area
with other tenants of building and their customers. If there are no other
tenants, Tenant shall have exclusive use thereof.
Only Operable Vehicles shall be allowed in the parking area. Operable
Vehicles are vehicles which are in good working order and in a non-derelict or
non-vandalized condition. For illustration, vehicles with flat tires, leaks,
inoperable engines, or broken windows shall not be allowed in the parking area.
Tenant shall use parking spaces for the sole purpose of parking. Unless
otherwise instructed, every person using the parking area is required to park
and lock his own vehicle. Landlord shall not be responsible for any damage to
vehicles, injury to persons or loss of property.
Tenant is solely responsible for any and all maintenance, upkeep,
repairs or replacement of the gate providing access to and from the parking
area.
19. EXISTING CONDITIONS: (See Section 6 01)
Section 6.01 of the Lease is augmented as follows:
The Premises are currently being occupied under the terms of Standard
Office Lease dated, for reference purposes, January 5, 1994 ("Existing Lease"),
and by other tenants, in suites 101, 101B, 102, 103, 105, 201, 305 and 306,
whose leases have already or will expire prior to the Effective Date of this
Lease. The term of the Existing Lease extends to June 30, 1998. The Existing
Lease contains no provision for extension of the term. This Lease has been
negotiated to replace the Existing Lease as of the Commencement Date hereof.
Except as hereinafter set forth, Landlord is making no representations or
warranties concerning the condition of the Premises and/or its compliance with
Applicable Laws, and the Premises are delivered to Tenant in an "as is"
condition. It is expressly understood and agreed by Tenant that Tenant, at its
sole cost and expense, shall make any and all Alterations to the Premises, if
necessary, to place it in compliance with the Americans with Disabilities Act
and any other law, statue, ordinance or directive concerning or relating to
handicapped accessibility in or to the Premises ("Accessibility Laws") and,
except as hereinabove set forth, Landlord has made no representations, covenants
or warranties concerning the compliance of the Premises with any Accessibility
Laws. Any Alternations, Trade Fixtures or Utility Installations shall be at
Tenant's sole cost and expense and subject to the provisions in this Lease. It
is also expressly understood and agreed by Tenant that any change, modification,
repair or alteration to the Premises which is required under any applicable law,
ordinance, statute or regulation as a result of
<PAGE> 20
Tenant undertaking any Alterations or Utility Installations shall be made by
Tenant, as Tenant's sole cost and expense.
20. LANDLORD'S OBLIGATIONS: (See Section 6.03)
Section 6.03 of the Lease is augmented as follows:
The cost of repair to the roof, if caused by penetration of the roof by
Tenant, Tenant's employees, agents or subcontractors, shall be borne solely by
Tenant.
Notwithstanding anything to the contrary contained in this Lease,
Landlord agrees that it shall, at its expense, within a reasonable period of
time following execution of this Lease, repair the HVAC system to certification
as fully operational by a subcontractor licensed and qualified in the State of
California to provide repair and maintenance services to HVAC systems. With the
exception of the repair contemplated in this Section 20, the obligation to
maintain and repair the HVAC system, and any and all costs incurred thereby,
remain solely with Tenant.
21. ALTERATIONS, ADDITIONS AND IMPROVEMENTS: (See Section 6.05)
Section 6.05(a) is augmented by adding the following:
Prior to beginning any such work, Tenant shall provide Landlord with
copies of any and all construction plans and drawings, and any other documents
required by Landlord to approve or disapprove Tenant's plans for the alteration
or improvement. Tenant shall reimburse Landlord for all costs and expenses
(including, without limitation, any architect or engineer fees) incurred by
Landlord in approving or disapproving Tenant's plans for alterations or
improvements. Landlord's consent shall not be unreasonably withheld.
22. SUBORDINATION, NON-DISTURBANCE, ATTORNMENT: (See Article Eleven)
Sections 11.01 and 11.02 of the Lease are amplified as follows:
Tenant agrees that, upon the written request of Landlord or a Lender in
connection with the sale, financing or refinancing of the Premises, Tenant shall
execute a Subordination, Non-Disturbance and Attornment Agreement similar in
form and content to the form attached to this Lease as Exhibit "A," and such
other documents or provisions reasonably required by Lender or Landlord.
Section 11.04 of the Lease is amplified as follows:
Tenant agrees that, upon the written request of Landlord or a Lender in
connection with the sale, financing or refinancing of the Premises, Tenant shall
execute an Estoppel Certificate similar in form and content to the form attached
to this Lease as Exhibit "B," and such other documents or provisions reasonably
required by Lender or Landlord.
23. OPTION TO EXTEND:
Landlord hereby grants to Tenant one (1) option to extend the Original
Term for a period of sixty (60) months ("Option Term") commencing on the
expiration of the Original Term. The option to extend shall be on the same terms
and conditions as the Original Term with the exception of the monthly Base Rent
which shall be determined as set forth below, but which in no event shall be
less than the Base Rent Payable by Tenant for the last month of the Original
Term.
The initial monthly Base Rent payable during the Option Term shall be
the current fair market rental for comparable properties within a four (4) mile
radius of the Premises or the rent payable for the last month of the Original
Term of this Lease, whichever is greater. The "current fair market rental" shall
mean the applicable monthly Base Rent for premises leased with terms similar to
this Lease, including a term of five (5) years, taking into account all monetary
concessions amortized over the Option Term provided that (i) no consideration
shall be given to the fact that Landlord is or is not required to pay any or is
paying a lower brokerage commission in connection with tenant's exercise of the
Option; and (ii) in considering tenant improvements or allowances provided for
such comparable space, the value of the existing improvements in the Premises as
of the date hereof shall be deducted therefrom (such value to be based upon the
age of quality of the improvements and the fact that these improvements are
specifically suitable to Tenant).
2
<PAGE> 21
The current fair market rentals shall be mutually determined by the
parties. If within thirty (30) days after Tenant gives written notice of its
exercise of its option is hereinabove set forth, the parties are unable to agree
on the fair market rental, said rental shall be determined by arbitration in the
following manner:
(a) Landlord and Tenant shall each appoint, within fifteen (15) days
after the thirty (30) day period, one (1) arbitrator who shall, by profession,
be an MAI real estate appraiser, and who shall have been active for at least
five (5) years in the appraisal of commercial and industrial properties in the
area.
(b) The two arbitrators supplied shall agree upon and appoint, within
fifteen (15) days of the date of the appointment of the last supplied
arbitrator, a third arbitrator who shall be similarly qualified.
(c) The three (3) arbitrators shall reach a decision within thirty (30)
days of the appointment of the third arbitrator, and notify Landlord and Tenant
thereof.
(d) The decision of the majority of the three (3) arbitrators shall be
binding upon Landlord and Tenant. The failure of a majority of said arbitrators
to reach an agreement shall result in the fair market rental rate being
determined by averaging the appraisal of each arbitrator, ignoring for purposes
of such averaging any portion of the high and the low appraisal which is more
than ten percent (10%) in excess of or less than the middle appraisal.
(e) If either Landlord or Tenant fails to appoint an arbitrator within
the time period set forth in subparagraph (a), above, the arbitrator appointed
by one of them shall reach a decision, notify Landlord and Tenant thereof, and
such arbitrator's decision shall be binding upon Landlord and Tenant.
(f) If the two (2) arbitrators fail to agree upon an appoint a third
arbitrator, both arbitrators shall be dismissed and the matter to be decided
shall be forthwith submitted to arbitration under the provisions of the American
Arbitration Association.
(g) All costs of arbitration shall be paid by Landlord and Tenant
equally.
(h) If the initial Base Rent is not determined prior to the
commencement of the Option Term, Tenant shall pay monthly Base Rent to Landlord
in an amount equal to the Base Rent payable by Tenant for the last month of the
Original Term of this Lease, and within ten (10) days after the determination
of the initial Base Rent for the Option Term, Tenant shall pay to Landlord any
underpayment of Base Rent.
Commencing month thirteen (13) of the Option Term and annually on the
same month thereafter, the monthly Base Rent shall be increased by an amount
equal to the monthly Base Rent payable during the month immediately preceding
the increase times the percentage increase in the "Consumer Price Index for All
Urban Consumers, All Items, Los Angeles, Long Beach, Riverside, 1982-1984 = 100"
(the "Index"). The increase in the Index is determined by taking the index for
the month immediately preceding the month the increase is to take effect, and
dividing it by the base Index figure which is the figure for the same month for
the previous year. The Base Rent shall be increased by the proportion so
determined. In no event, however, shall the monthly Base Rent be decreased from
that payable for the month immediately preceding the increase.
Should the United States Department of Labor readjust the above
described Consumer Price Index, then such change shall be taken into account and
reflected in all adjustments. Should the official reports of the United States
Labor Department be unavailable for the relevant period at the time that any
adjustment hereunder it to become effective, Tenant shall pay the unadjusted
rental until the statistical information for the adjustment is available, and
within ten (10) days from written notice by Landlord to Tenant of the
adjustment, Tenant shall pay to Landlord the adjusted amount of the rent due and
payable.
If the described Index shall no longer be published, another Index
generally recognized as authoritative shall be substituted by agreement of the
parties. If they are unable to agree within thirty(30) days after demand by
either party, the substitute index shall, on the application of either party, be
selected by the chief officer of the San Francisco Regional Office of the Bureau
of Labor Statistics or its successor if selection by such officer, cannot be
obtained, the adjustment shall be made by mutual agreement or by arbitration
under the provision of the American Arbitration Association.
24. HAZARDOUS MATERIALS: (See Section 5.03)
Section 5.03 of the Lease is augmented as follows:
3
<PAGE> 22
If Tenant knows, or has reasonable cause to believe, that a Hazardous
Material has come to be located in, on, under or about the Premises, other than
as previously consented to by Landlord, Tenant shall immediately give written
notice of such fact to Landlord, and provide Landlord with a copy of any report,
notice, claim or other documentation which it has concerning the presence of
such Hazardous Material.
Tenant shall promptly, at Tenant's expense, take all investigatory
and/or remedial action reasonably recommended, whether or not formally ordered
or required, for the cleanup of any contamination of, and for the maintenance,
security and/or monitoring of the Premises or neighboring properties, that was
caused or materially contributed to by Tenant, or pertaining to or involving any
Hazardous Material brought onto the Premises during the term of this Lease, by
or for Tenant, its agents, employees, or contractors.
Tenant shall indemnify, defend and hold Landlord, its agents, employees
and lenders, if any, harmless from and against any and all loss of rents and/or
damages, liabilities, judgments, claims, expenses, penalties, and attorneys' and
consultants' fees arising out of or involving any Hazardous Material brought
onto the Premises by or for Tenant, its agents, employees, or contractors.
25. SECURITY DEPOSIT:
Section 1.10 of the Lease is augmented as follows:
Landlord is holding for the benefit of Tenant a security deposit of
$33,334.25, which will be applied in satisfaction of the Security Deposit
required under this Lease.
SEE ADDITIONAL PROVISIONS ATTACHED HERETO.
LANDLORD: TENANT:
Holt/Hawthorne, a California limited Skechers USA, Inc., a California
partnership corporation
By: [SIGNATURE ILLEGIBLE] By: /s/ DAVID WEINBERG
--------------------------------- ---------------------------------
Its: GENERAL PARTNER Its: CFO
-------------------------------- --------------------------------
Victory Partners, a California
limited partnership
By: [SIGNATURE ILLEGIBLE]
---------------------------------
Its: GENERAL PARTNER
--------------------------------
4
<PAGE> 23
ADDENDUM TO INDUSTRIAL REAL ESTATE LEASE
BY AND BETWEEN
VICTORY PARTNERS; HOLT/HAWTHORN ("LANDLORD")
AND SKECHERS U.S.A., INC. ("TENANT")
RE: 228 MANHATTAN BEACH BLVD., MANHATTAN BEACH, CALIFORNIA
("PROPERTY")
This Addendum is attached to and made a part of the Industrial Real
Estate Lease by and between the above-named Landlord and Tenant (the "Lease").
26. COMPLIANCE WITH COVENANTS, RESTRICTIONS AND REQUIREMENTS. Landlord
represents to Tenant that it is the owner of the Property and that to the best
of Landlord's knowledge the Property complies with all applicable covenants,
conditions and restrictions of record and applicable building codes, regulating
statutes, ordinances and Laws in effect on the Commencement Date of the Lease;
provided, that such representation does not apply to the use to which Tenant
will put the Property or to any alterations to be made by Tenant. To the extent
that the Property is required to be altered or repaired as a result of its
non-compliance with applicable covenants, conditions and restrictions of record
or applicable building codes, regulating statutes, ordinances or Laws in effect
on the Commencement Date of the Lease (and such noncompliance does not arise
from uses to which Tenant has put the Property or to any alterations made by
Tenant), then the cost of such alterations and repairs shall be paid as follows:
Tenant shall pay the initial Ten Thousand Dollars ($10,000.00) and Landlord
shall pay the remainder. The person signing this Lease for Landlord represents
that he/she has full power and authority to do so.
27. HAZARDOUS MATERIAL LIABILITY. Tenant shall not have any liability
for, (i) any Hazardous Materials brought onto the Property or the land of which
they are located ("Land") prior to the Commencement Date, unless Tenant, its
agents, employees or contractors brought them ("Pre-Commencement Hazardous
Material Conditions"), or (ii) any effects arising out of or caused by any such
Pre-Commencement Hazardous Material Condition, including, without limitation,
any contamination or injury to person, property or the environment or any
liabilities or costs associated with the investigation, removal, remediation,
restoration and/or abatement thereof, or of any actual or suspected
contamination therein involved, regardless of whether the effects of such
Pre-Commencement Hazardous Material Condition are known as of the Commencement
Date or arise and/or are discovered at any time after the Commencement Date. All
liabilities relating to any Hazardous Materials which are created or brought
onto the Property from and after the Commencement Date by persons, entities or
instrumentalities other than Tenant or its agents, employees, invitees,
licensees, subtenants and contractors shall not be the responsibility of Tenant.
Landlord hereby represents and warrants to Tenant that Landlord has not
received any written notice of any Hazardous Material contamination on or in the
Property or the Land requiring or ordering any investigation to be taken
pursuant to a state or federal environmental response or remediation statute.
Landlord shall indemnify and save Tenant, its officers, directors,
employees, visitors, contractors, agents and representatives harmless against
and from any and all claims, demands, losses, costs, fines and liability,
including all attorneys' fees, arising out of any Hazardous Material
contamination of the Property or Land caused by Landlord, its agents, employees
or contractors. This indemnification shall not include or cover any claim,
demand, loss, cost, fine or liability, including any attorneys' fees, arising
out of any Hazardous Material contamination caused by Tenant, its agents,
employees, invitees, licensees, subtenants or contractors.
28. MUTUAL INDEMNIFICATION. Tenant agrees to defend, with counsel
reasonably satisfactory to Landlord, indemnify and hold harmless, Landlord, its
agents, employees, officers, directors, shareholders, partners, members and
representatives (collectively "Landlord") from and
Landlord's Initials: /s/ [Initials Illegible]
Tenant's Initials: /s/ [Initials Illegible]
1
<PAGE> 24
against any and all loss, cost, action, liability, damage or expense, including
but not limited to, penalties, fines, attorneys' fees or costs (collectively
"Claims"), to any person, property or entity resulting from the following: (i)
the negligence or wilful misconduct of Tenant, its agents, employees or
contractors; (ii) Tenant's default or breach of any of the terms and conditions
of this Lease; and (iii) any occurrences within the Premises, not resulting from
the negligence or wilful misconduct of Landlord, its agents, employees or
contractors.
Landlord agrees to defend, with counsel reasonably satisfactory to
Tenant, indemnify and hold harmless, Tenant, its agents, employees, officers,
directors, shareholders, partners, members and representatives (collectively
"Tenant") from and against any and all loss, cost, action, liability, damage or
expense, including but not limited to, penalties, fines, attorneys' fees or
costs (collectively "Claims"), to any person, property or entity resulting from
the following: (i) the negligence or wilful misconduct of Landlord, its agents,
employees or contractors; (ii) Landlord's default or breach of any of the terms
and conditions of this Lease; and (iii) any occurrences within the Premises, not
resulting from the negligence or wilful misconduct of Tenant, its agents,
employees or contractors.
Notwithstanding the foregoing, however, because Landlord is required to
maintain property insurance on the Building, and because of the existence of
waivers of subrogation set forth in this Lease, Landlord hereby agrees to
defend, indemnify and hold Tenant harmless on any Claims to the extent such
Claim is covered by such insurance, even if resulting from the negligent acts,
omissions or misconduct of Tenant or those of its agents, employees or
contractors. Similarly, since Tenant must carry insurance to cover its personal
property within the Premises, and because of the waivers of subrogation set
forth in this Lease, Tenant hereby agrees to defend, indemnify and hold Landlord
harmless from any Claims to the extent any such Claim is covered by such
insurance, even if resulting from the negligent acts, omissions or misconduct of
Landlord or those of its agents, employees or contractors. The provisions of
this section shall survive the expiration or sooner termination of the Lease
with respect to any occurrences, Claims or liabilities occurring prior to such
expiration or termination.
29. WAIVER OF SUBROGATION. Without affecting any other rights or
remedies, Tenant and Landlord ("Waiving Party") each hereby releases and
relieves the other, and waives their entire right to recover damages (whether in
contract or in tort) against the other, for loss of or damage to the Waiving
Party's property arising out of or incident to the perils required to be insured
against under Section 4.04. The effect of such releases and waivers of the right
to recover damages shall not be limited by the amount of insurance carried or
required, or by any deductible applicable thereto. If insurance policies cannot
be obtained with a waiver of subrogation, the parties are relieved of the
obligation to obtain such a waiver hereunder.
30. NON-DISTURBANCE. Landlord agrees to cooperate with Tenant and to use
good faith efforts to assist Tenant in obtaining a non-disturbance agreement
from any current or future mortgagee or ground lessor of the Property. Nothing
contained herein shall be construed as a promise or guaranty on the part of
Landlord that Tenant shall in fact be able to obtain such a non-disturbance
agreement.
31. TENANT'S COMPLIANCE WITH LAW. Anything in this Lease to the contrary
notwithstanding, in the event of a change in an applicable law that requires
Tenant to make any alterations, repairs or restorations to the Property, and the
costs and expenses with regard to such alterations, maintenance or restoration
are in excess of Seventy-five Thousand Dollars ($75,000) and if the nature of
the required alterations, repairs or restorations is such that Tenant cannot use
twenty-five percent (25%) or more of the Premises for their intended purpose,
and Landlord is unwilling to make such alterations, repairs or restorations,
then Tenant shall have the right to terminate this Lease on sixty (60) days
written notice to Landlord. If the nature of the alterations, repairs or
restorations is such that less than twenty-five percent (25%) of the Premises is
not usable, and Landlord is unwilling to make such alterations, repairs or
restorations, Tenant shall not have the right to terminate the Lease, but rent
shall be equitably abated effective as of the date of such limited use to take
into account the loss of the unusable portion of the Premises.
Landlord's Initials: /s/ [Initials Illegible]
Tenant's Initials: /s/ [Initials Illegible]
2
<PAGE> 25
32. RENT ABATEMENT. In the event that Tenant is unable to use all or
part of the Property as a result of fire, flood, vandalism, act of God or other
casualty, or as a result of the negligence or wilful misconduct of Landlord, its
agents or employees, then Tenant shall be entitled to an equitable abatement of
its base and additional rent hereunder in proportion to the degree the Property
is rendered unusable; provided, however, Tenant shall be entitled to no such
rent abatement for inability to use the Property resulting from the negligence
or willful misconduct of Tenant its agents or employees. Additionally, in the
event Landlord recovers proceeds under any rental loss insurance resulting from
Tenant's inability to use the Property, then Tenant's rent due hereunder shall
abate to the extent of Landlord's recovery. If Tenant has paid said rent to
Landlord prior to Landlord's recovery, then Landlord shall reimburse Tenant
within thirty (30) days of its receipt of said insurance proceeds, or of
Tenant's demand therefor.
33. Real Estate Taxes. If any general or special assessment is levied
and assessed against the Property and Landlord can elect to either pay the
assessment in full or allow the assessment to go to bond, then if Landlord pays
the assessment in full, Tenant shall pay to Landlord each time a payment of real
property taxes is made a sum equal to that which would have been payable (as
both principal and interest) had Landlord allowed the assessment to go to bond.
Additionally, notwithstanding the provisions of Section 4.02, Real Property
Taxes shall not include any inheritance, estate, succession, transfer, gift,
franchise, corporation, income or profit tax or capital levy that may be imposed
upon Landlord, but shall include any increased assessment arising from change of
ownership.
34. NOTICES. In addition to the service requirement for notices called
for herein, whenever Landlord is required to provide Tenant with a notice of
default or a breach of any provision of this Lease, Landlord agrees to serve an
additional copy of said notice upon Tenant's home office and Tenant's counsel by
facsimile transmission as follows:
Skechers USA, Inc.
Attention: Roger Moss/Mark Nason
Facsimile: (310) 318-5019
Baker, Burton & Lundy, P.C.
Attention: Kent Burton
Facsimile: (310) 376-7483
Service shall be deemed completed upon confirmation of transmission. Said
facsimile numbers may be changed by Tenant by providing written notice thereof
to Landlord.
35. LANDLORD REPAIRS. Whenever Landlord is required to make repairs to
the Property, Landlord agrees to use good faith efforts to cause a minimum of
interference to Tenant's operation of its business from the Property.
36. CONDEMNATION. Notwithstanding the provisions of ARTICLE 8, any award
for the taking of all or any part of the Property under the power of eminent
domain or any payment made under threat of the exercise of such power shall be
the property of Landlord, except that Tenant shall be entitled to any
compensation separately awarded to Tenant for Tenant's relocation expenses, the
depreciated value of Tenant's alterations, additions and improvements and for
loss of Tenant's equipment or business.
37. ASSIGNMENT.
A. Notwithstanding the provisions of ARTICLE 9, no consent from
Landlord shall be required for the assignment of this Lease under the following
circumstances, each of which shall be considered a "Permitted Assignment":
(i) the transfer of stock of Tenant to members of the
immediate family of a shareholder of Tenant, to a living trust for
estate-planning purposes, or by will or intestacy; or
Landlord's Initials: /s/ [Initials Illegible]
Tenant's Initials: /s/ [Initials Illegible]
3
<PAGE> 26
(ii) Tenant sells or offers for sale its voting stock to
the public in accordance with the qualifications or registration requirements of
the State of California and the Security Act of 1933, as amended.
B. Additionally, during the term hereof, Tenant shall have the
ability to sublet any of the suites or offices to a subtenant with Landlord's
prior written consent, which shall not be unreasonably withheld or denied,
provided that the following provisions are met:
(i) the subtenant agrees to assume all relevant
obligations of Tenant hereunder, as to its particular suite location;
(ii) irrespective of said sublease, Tenant shall remain
fully liable for all obligations hereunder, and said sublease shall not serve to
release Tenant from any of such obligations;
(iii) the subleases are entered into on an arm's-length
basis, with tenants of reasonable financial stability and credit-worthiness, and
at fair market rents; and
(iv) the subtenant agrees to comply with all Hazardous
Material provisions of the Lease, as amended.
38. ESTOPPEL. At any time and from time to time, either party, upon
request of the other party, will execute, acknowledge and deliver an instrument,
stating, if the same be true, that this Lease is a true and exact copy of the
Lease between the parties hereto, that there are no amendments hereto (or
stating what amendments there may be), that the Lease is then in full force and
effect and that, to the best of its knowledge, there are no offsets, defenses or
counterclaims with respect to the payment of rent reserved hereunder or in the
performance of the other terms, covenants and conditions hereof on the part of
Tenant or Landlord, as the case may be, to be performed under this Lease, and
that as of such date no default has been declared hereunder by either party or
if a default has been declared, such instrument shall specify same. Such
instrument will be executed by the other party and delivered to the requesting
party within fifteen (15) days of receipt.
39. TENANT'S PROPERTY. Tenant shall retain title to, and shall have the
opportunity to remove, upon termination of this Lease, all of Tenant's displays,
signage and shelving, and Tenant's lighting, sound, alarm and communication
systems, provided that Tenant shall repair any damages caused by the removal
thereof, at its sole expense.
40. CONSENTS. Whenever Landlord's consent is called for herein, such
consent shall not be unreasonably withheld.
41. SECURITY DEPOSIT. Tenant shall be entitled to apply the security
deposit to the next due installment(s) of rent in the event of the occurrence of
any of the following events: (i) the making by Landlord of any general
arrangement or assignment for the benefit of creditors; or (ii) Landlord's
becoming a "debtor" as defined in 11 USC Section 101 or any successor statute
thereto (unless, in the case of a petition filed against Landlord, same is
dismissed within 60 days).
LANDLORD: TENANT:
Holt/Hawthorne, a California Limited Skechers USA Inc., a California
Partnership Corporation
By: [SIGNATURE ILLEGIBLE] By: /s/ DAVID WEINBERG
--------------------------------- ---------------------------------
Its: GENERAL PARTNER Its: CFO
-------------------------------- --------------------------------
Victory Partners, a California
limited partnership
By: [SIGNATURE ILLEGIBLE]
---------------------------------
Its: GENERAL PARTNER
--------------------------------
4
<PAGE> 1
EXHIBIT 10.17
THIS LEASE, dated this 11th day of JUNE, 1998 by and between DOLORES
L. MC NABB (hereinafter "Landlord"), and SKECHERS USA, INC. a California
Corporation (hereinafter "Tenant").
W I T N E S S E T H:
ARTICLE 1. PREMISES LEASED.
In consideration of the rent and other charges herein specified to be
paid and the covenants and conditions to be observed and performed by Tenant,
Landlord does hereby lease to Tenant and Tenant does hereby lease from Landlord
those premises hereinafter referred to as "said premises," within the office
building commonly known and designated as Office #3 on the 1st floor of the
North Building and Office #9 on the 1st floor of the South Building, 904
Manhattan Avenue, Manhattan Beach California.
ARTICLE 2. TERM OF LEASE AND DELIVERY OF PREMISES.
The term of this Lease shall be for Five (5) years commencing on the 1st
day of July, 1998, and ending on the 30 day of June 2003. OPTIONS TO EXTEND --
See Paragraph A on Exhibit "A" attached hereto.
If Landlord, for any reason whatsoever, cannot deliver possession of
the said premises to Tenant within ___ days after the commencement of the term
hereof, this Lease shall not be void or voidable, nor shall Landlord be liable
to Tenant for any loss or damage resulting therefrom, but in that event all
rent shall be abated during the period between the commencement of the said
term and the time when Landlord delivers possession.
ARTICLE 3. RENT.
See Exhibit "A"
ARTICLE 4. USE.
Said premises shall be occupied and used by Tenant solely for the
purposes of conducting therein the business stated in Exhibit "A". In addition
thereto:
A. No use shall be made or permitted of said premises or any part thereof, nor
acts done which shall constitute a nuisance or unreasonable annoyance to other
tenants in the office park complex nor which shall violate, make inoperative or
increase the existing rate of any insurance policy held by or for the benefit
of Landlord.
<PAGE> 2
B. Tenant shall at all times comply with all governmental rules,
regulations, ordinances, statutes and laws now in force or which may hereafter
be enforced pertaining to said premises and to Tenant's use thereof, and a
finding of guilty by a competent court for any violation thereof shall be
conclusively deemed a default under this paragraph.
ARTICLE 5. LANDLORD SERVICES.
Landlord will provide services during reasonable hours of generally
recognized business days, to be determined by Landlord, and subject to the rules
and regulations as set forth in Exhibit "A", as follows:
A. Heat and air-conditioning during the customary hours as stipulated in
the Rules and Regulations.
B. Electric current for ordinary lighting requirements and for ordinary
business appliances such as typewriters and adding machines. Landlord shall not
be required to furnish electrical power to operate electrical motors of larger
than fractional horsepower. Landlord shall make additional charges for service
if Tenant has greater than normal requirements for such services.
C. Tenant shall pay for all water, gas, electricity, light, power and other
utilities supplied to the Premises, together with any taxes thereon. If any such
services are not separately metered to Tenant, Tenant shall pay a reasonable
proportion to be determined by Landlord of all charges jointly metered with
other premises.
Replacement of fluorescent tubes in the standard lighting fixtures installed in
the premises by Landlord shall be provided as required and billed to Tenant.
Landlord, however, shall not be liable for failure to furnish any of the
foregoing where such failure is caused by conditions beyond the control of
Landlord or by accidents, repairs or strikes; nor shall such failure constitute
an eviction; nor shall Landlord be liable under any circumstances except where
caused by Landlord's negligence, for loss or damage to property however
occurring through or in connection with or incidental to the furnishing of any
of the foregoing.
ARTICLE 6. PARKING. SEE EXHIBIT "A"
Landlord agrees at its own expense to construct and maintain, or cause to
be constructed and maintained, an automobile parking area and to maintain and
operate, or cause to be maintained and operated, said automobile parking area
during the term of this Lease for the benefit and use of Tenant, its employees,
customers and patrons and for other tenants and occupants of the office complex.
Wherever the words "automobile parking area" are used in this Lease, it is
intended that the same shall include the automobile parking stalls, driveways,
entrances and exits and sidewalks, pedestrian passageways in conjunction
therewith and other areas designated for parking. Landlord shall keep said
automobile parking area in a neat, clean and orderly condition, landscaped, and
shall repair any damage to the facilities thereof. Nothing contained herein
shall be deemed to create liability upon Landlord for any damage to motor
vehicles of customers or employees or from loss of property from within such
motor vehicles, unless caused by the negligence of Landlord, its agents,
servants and employees. Landlord shall also have the right to establish, and
from time to time change, alter and amend, and to enforce against all users of
said automobile parking area such reasonable rules and regulations (tenant, its
employees, customers and patrons from parking within specific portions
therefrom) as may be deemed necessary and advisable for the proper and efficient
operation and maintenance of said automobile parking area. The rules and
regulations herein provided shall include, without limitation, the hours during
which the automobile parking area shall be open for use.
Landlord shall at all times during the term of this Lease have the sole and
exclusive control of the automobile parking area, and may at any time and from
time to time during the term hereof exclude and restrain any person from use or
occupancy thereof; excepting, however, bona fide customers, patrons and
service-suppliers of Tenant and other tenants of Landlord who make use of said
area in accordance with any rules and regulations established by Landlord from
time to time with respect thereto. The rights of Tenant referred to in this
Article shall at all times be subject to the rights of Landlord and the other
tenants of Landlord, to use the same in common with Tenant, and it shall be the
duty of Tenant to keep all of said area free and clear of any obstruction
created or permitted by Tenant or resulting from Tenant's operations and to
permit the use of any of said area only for normal parking and ingress and
egress by said customers, patrons and service-suppliers to and from the office
park complex.
Tenant shall assume sole responsibility for satisfying the requirements of
the Environmental Protection Agency, or similar agencies, with respect to their
proportionate share of the parking areas.
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ARTICLE 7. ALTERATIONS AND REPAIRS.
Tenant shall not make or suffer to be made any alterations, additions or
improvements to or of said premises or any part thereof without the written
consent of Landlord first had and obtained and any alterations, additions or
improvements to or of said premises, except movable furniture and trade
fixtures, shall at once become a part of the realty and belong to Landlord. In
the event Landlord consents to the making of any alteration, additions or
improvements to said premises by Tenant, the same shall be made by Tenant at
Tenant's sole cost and expense and any contractor or person selected by Tenant
to make the same must first be approved of in writing by Landlord. Upon the
expiration or sooner termination of the term, Tenant shall, upon demand by
Landlord, at Tenant's sole cost and expense, forthwith and with all due
diligence remove any alterations, additions or improvements made by Tenant,
designated by Landlord to be removed, and Tenant shall forthwith and with all
due diligence at its sole cost and expense, repair any damage caused by such
removal.
By entry hereunder, Tenant accepts the premises as being in good, sanitary
order, condition and repair. Tenant shall at Tenant's sole cost and expense keep
said premises and every part thereof including glass in good condition and
repair, damage thereto by fire, earthquake, act of God or the elements excepted,
Tenant hereby waiving all rights to make repairs at the expense of Landlord as
provided by any law, statute or ordinance now or hereafter in effect. Tenant
shall, upon the expiration or sooner termination of the term hereof, surrender
said premises to Landlord in the same condition as when received, ordinary wear
and tear and damage by fire, earthquake, act of God or the elements excepted. It
is specifically understood and agreed that Landlord has no obligation and has
made no promises to alter, remodel, improve, repair, decorate or paint said
premises or any part thereof and that no representations respecting the
conditions of said premises or the building of which said premises are a part
have been made by Landlord to Tenant except as specifically herein set forth.
SEE EXHIBIT "A"
ARTICLE 8. CHANGES OR ALTERATIONS BY LANDLORD.
Landlord reserves the right at any time and from time to time without the
same constituting an actual or constructive eviction and without incurring any
liability to Tenant therefor or otherwise affecting Tenant's obligations under
this Lease, to make such changes, alterations, additions, improvements, repairs
or replacements in or to the office complex (including said premises if required
so to do by any law or regulation) and the fixtures and equipment thereof, as
well as in or to the plenum area (air space above the ceiling), and stairways
thereof, as Landlord may deem necessary or desirable, and to change the
arrangement or location of entrances or passageways, doors and corridors,
provided, however, that there be no unreasonable obstruction of the right of
access to, or unreasonable interference with the use and enjoyment of said
premises by Tenant.
ARTICLE 9. LANDLORD'S NONLIABILITY.
Landlord shall not be liable for any loss or damage to the goods, wares,
merchandise and other property of Tenant in, upon or about said premises or for
any injury to the person (including death) of Tenant or its employees, agents
subtenants or invitees or other persons, caused by any use thereof, or arising
from any accident or fire or other casualty thereon or from any other cause
whatsoever, unless caused by Landlord's negligence, nor shall Landlord be liable
for any such loss, damage or injury occurring anywhere in the office park
complex and caused by the act or neglect of Tenant, its agents or employees; and
Tenant hereby waives on its behalf all claims against Landlord for any such
loss or injury and hereby agrees to indemnify and save Landlord harmless from
all liability for any such loss, damage or injury and in the event action is
brought against Landlord on account of such loss, damage or liability and
Landlord elects not to accept Tenant's proffered defense of such action, Tenant
shall nevertheless pay the cost of Landlord's reasonable attorney's fees
incurred in connection therewith.
ARTICLE 10. INSURANCE.
All insurance provided for herein shall name Landlord as an additional
insured as its interest may appear. Policies will provide a 30-day written
notice to Landlord in the event of cancellation by Tenant's insurance company.
Tenant agrees to maintain statutory Workmen's Compensation Insurance and
comprehensive public liability insurance with the following minimum limits:
combined single limit coverage of not less than $1,000,000 with respect
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to personal injury, death or property damage resulting from any one occurrence;
the minimum limits shall not, however, limit the liability of Tenant hereunder.
It shall be Tenant's responsibility to maintain full "ALL RISK" insurance
on its property and rental value and glass insurance on said premises.
It shall be Landlord's responsibility to insure said premises against fire
and extended coverage damage.
So long as their respective insurers so permit, Tenant and Landlord hereby
mutually waive their respective rights of recovery against each other for any
loss insured by fire, extended coverage and other property insurance policies
existing for the benefit of the respective party. Each party shall obtain any
special endorsements, if required by their insurer, to evidence compliance with
the aforementioned waiver.
Certificates of insurance stating the above will be provided to Landlord by
Tenant.
ARTICLE 11. ASSIGNMENT AND SUBLETTING.
A. Tenant shall not transfer or assign this Lease, or any right or interest
hereunder, nor sublet said premises or any part thereof, without the prior
written consent (which consent shall not be unreasonably withheld) and approval
of Landlord provided, however, that such consent shall not be unreasonably
withheld so long as (i) the proposed assignee or sublessee is as financially and
morally responsible as Tenant and (ii) evidence satisfactory to Landlord is
offered to show that the proposed assignee or sublessee is likely to conduct on
said premises a business of a quality substantially equal to that conducted by
Tenant. No transfer or assignment, whether voluntary or involuntary, by
operation of law, under legal process or proceedings, by receivership, in
bankruptcy, or otherwise, and no subletting shall be valid or effective without
such prior written consent and approval. Should Tenant attempt to make or suffer
to be made any such transfer, assignment or subletting, except as aforesaid, or
should any of Tenant's rights under this Lease be sold or otherwise transferred
by or under court order or legal process or otherwise, or should Tenant be
adjudged insolvent or bankrupt, then and in any of the foregoing events Landlord
may, at its option, terminate this Lease forthwith by written notice thereof to
Tenant. Should Landlord consent to any such transfer, assignment or subletting,
such consent shall not constitute a waiver of any of the restrictions of this
Article and the same shall apply to each successive transfer, assignment or
subletting hereunder, if any.
B. If Tenant hereunder is a corporation, an unincorporated association, or
a partnership, the transfer, assignment or hypothecation of any stock or
interest in such corporation, association or partnership in the aggregate in
excess of Forty-nine per cent (49%) shall be deemed an assignment within the
meaning and provisions of this Article; provided, however, a transfer or
assignment of any such stock or interest by a shareholder or member to his
spouse, children or grandchildren is excepted from the foregoing provision.
ARTICLE 12. RIGHT OF ENTRY.
Landlord reserves and shall at any time and at all times have the right to
enter upon said premises to inspect the same, and perform any service to be
provided by Landlord to Tenant hereunder, to submit said premises to prospective
purchasers or tenants, to post notices of nonresponsibility, and to alter,
improve or repair said premises and any portion of the building of which said
premises are a part, without abatement of rent, and may for that purpose erect
scaffolding and other necessary structures where reasonably required by the
character of the work to be performed, always providing the entrance to said
premises shall not be blocked thereby, and further providing that the business
of Tenant shall not be interfered with unreasonably. Tenant hereby waives any
claim for damages for any injury or inconvenience to or interference with
Tenant's business, any loss of occupancy or quiet enjoyment of said premises,
and any other loss occasioned thereby. For each of the aforesaid purposes,
Landlord shall at all times have and retain a key with which to unlock all of
the doors in, upon and about said premises, excluding Tenant's vaults and safes,
and Landlord shall have the right to use any and all means which Landlord may
deem proper to open said doors in an emergency, in order to obtain entry to said
premises, and any entry to the premises obtained by Landlord by any of said
means, or otherwise, shall not under any circumstances, be construed or deemed
to be a forcible or unlawful entry into, or a detainer of, said premises, or an
eviction of Tenant from said premises or any portion thereof.
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ARTICLE 13. BANKRUPTCY-INSOLVENCY.
Tenant agrees that in the event all or substantially all of Tenant's assets
are placed in the hands of a receiver or trustee, and such receivership or
trusteeship continues for a period of 30 days, or should Tenant make an
assignment for the benefit of creditors or be adjudicated a bankrupt, or should
Tenant institute any proceedings under the Bankruptcy Act or under any amendment
thereof which may hereafter be enacted, or under any other act relating to the
subject of bankruptcy wherein Tenant seeks to be adjudicated a bankrupt, or to
be discharged of its debts, or to effect a plan of liquidation, composition or
reorganization, or should any involuntary proceeding be filed against the Tenant
under any such bankruptcy laws and Tenant consents thereto or acquiesces therein
by pleading or default, then this Lease or any interest in and to said premises
shall not become an asset in any of such proceedings and, in any such event and
in addition to any and all rights or remedies of Landlord hereunder, or by law
provided, it shall be lawful for Landlord to declare the Term hereof ended and
to re-enter said premises and take possession thereof and remove all persons
therefrom, and Tenant shall have no further claim thereon or hereunder.
ARTICLE 14. LIENS.
Tenant shall not permit to be enforced against said premises, or any part
thereof, any mechanics', materialmen's, contractors' or other liens arising
from, or any claims for damages growing out of, any work of repair or alteration
as herein authorized or otherwise arising (except from the actions of Landlord),
and Tenant shall pay or cause to be paid all of said liens and claims before any
action is brought to enforce the same against Landlord or said premises; and
Tenant agrees to indemnify and hold Landlord and said premises free and harmless
from all liability for any and all such liens and claims and all costs and
expenses in connection therewith. Tenant shall give Landlord no less than 20
days prior notice in writing before commencing construction of any kind on the
premises so that Landlord may post notices of nonresponsibility.
ARTICLE 15. LANDLORD PAYING CLAIMS.
Should Tenant fail to pay and discharge, when due and payable, any tax or
assessment, or any premium or other charge in connection with any insurance
policy or policies which Tenant is obligated to pay, or any lien or claim for
labor or material employed or used in, or any claim for damages arising out of
the repair, alterations, maintenance and use of said premises, as provided in
this Lease, after 10 days written notice from Landlord, the Landlord may, at its
option, and without waiving or releasing Tenant from any of Tenant's obligations
hereunder, pay any such tax, assessment, lien, claim, insurance premium or
charge, or settle or discharge any action therefor or satisfy any judgment
thereon. All costs, expenses and other sums, incurred or paid by Landlord in
connection therewith, together with interest at the rate of 10% per annum on
such costs, expenses and sums from the date incurred or paid by Landlord, shall
be deemed to be additional rent hereunder and shall be paid by Tenant with and
at the same time as the next installment of rent hereunder, and any default
therein shall constitute a breach of the covenants and conditions of this Lease.
ARTICLE 16. DESTRUCTION OF PREMISES.
A. In the event the building of which said premises are a part is damaged
by fire, or perils covered by insurance, the Landlord shall:
1) In the event of total destruction, within a period of 90 days
thereafter, commence repair, reconstruction and restoration of said building and
prosecute the same diligently to completion, in which event this Lease shall
continue in full force and effect; or within said 90 day period elect not to so
repair, reconstruct or restore said building, in which event this Lease shall
cease and terminate. In either event, Landlord shall give the Tenant written
notice of its intention within said 90 day period. In the event Landlord elects
not to restore said building, this Lease shall be deemed to have terminated as
of the date of such total destruction.
2) In the event of partial destruction of the building to an extent
not exceeding 25% of the full insurable value thereof and if the damage thereto
is such that the building may be repaired, reconstructed or restored within a
period of 90 days from the date of the happening of such casualty and Landlord
will receive insurance proceeds sufficient to cover the costs of such repairs,
Landlord shall commence and proceed diligently with the work of repair,
reconstruction and restoration and the Lease shall continue in full force and
effect; or if such work
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of repair, reconstruction and restoration is such as to require a period longer
than 90 days or exceed 25% of the full insurable value thereof, or if said
insurance proceeds will not be sufficient to cover the cost of such repairs,
Landlord may either elect to so repair, reconstruct and restore and the Lease
shall continue in full force and effect, or Landlord may elect not to repair,
reconstruct and restore and the Lease shall in such event terminate. Under any
of the conditions of this subparagraph, Landlord shall give written notice to
Tenant of its intention within the period of 90 days. In the event Landlord
elects not to restore said building, this Lease shall be deemed to have
terminated as of the date of such partial destruction.
B. Upon any termination of this Lease under any of the provisions of
this Article, the parties shall be released thereby without further obligation
to the other coincident with the surrender of possession of the premises to
Landlord except for items which have theretofore accrued and are then unpaid.
C. In the event of repair, reconstruction and restoration as herein
provided, the rental provided to be paid under this Lease shall be abated
proportionately in the ratio which the Tenant's use of said premises is
impaired during the period of such repair, reconstruction or restoration.
Tenant shall not be entitled to any compensation or damages for loss in the use
of the whole or any part of said premises and/or any inconvenience or annoyance
occasioned by any such damage, repair, reconstruction or restoration.
D. Tenant shall not be released from any of its obligations under this
Lease except to the extent and upon the conditions expressly stated in this
Article. Notwithstanding anything to the contrary contained in this Article,
should Landlord be delayed or prevented from repairing or restoring said
damaged premises within one (1) year after the occurrence of such damage or
destruction by reason of acts of God, war, governmental restrictions, inability
to procure the necessary labor or materials, or other cause beyond the control
of Landlord, Landlord shall be relieved of its obligation to make such repairs
or restoration and Tenant shall be released from its obligations under this
Lease as of the end of said one (1) year period.
E. In the event that damage is due to any other cause than set forth in
Paragraph A above, Landlord may elect to terminate this Lease.
F. It is understood that if Landlord is obligated to or elects to repair
or restore as herein provided, Landlord shall be obligated to make repairs or
restoration only of those portions of said building and said premises which
were originally provided at Landlord's expense; and the repair and restoration
of items not provided at Landlord's expense shall be the obligation of Tenant.
ARTICLE 17. LATE PAYMENTS.
SEE EXHIBIT "A"
ARTICLE 18. REMEDIES.
Should Tenant at any time be in default hereunder with respect to any
rental payments or other charges payable by Tenant hereunder, and should such
default continue for a period of 10 days after written notice from Landlord, or
should Tenant be in default in performance of any other of its promises,
covenants or agreements herein contained (other than any breach under the
Article entitled "Assignment and Subletting" for which immediate notice of
termination may be given) and should such default continue for 30 days after
written notice thereof from Landlord to Tenant specifying the particulars of
such default, or should Tenant vacate or abandon the premises, this Lease shall
remain in full force and effect, provided, however, that in any of such events
and in addition to any or all other rights or remedies of Landlord hereunder or
by the law provided, it shall be, at the option of Landlord:
A. The right of Landlord to declare the term hereof ended and to re-enter
said premises and take possession thereof and remove all persons therefrom, and
Tenant shall have no further claim thereon or thereunder; or
B. The right of Landlord, even though it may have brought an action to
collect rent and other charges without terminating this Lease, to thereafter
elect to terminate this Lease and all of the rights of Tenant in or to said
premises; or
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C. The right of Landlord, without terminating this Lease, to begin an
action or actions to collect rent and other charges hereunder which are from
time to time past due and unpaid; it being understood that the bringing of such
action or actions shall not terminate this Lease unless notice of termination
is given.
Should Landlord elect to terminate this Lease, Landlord shall be
entitled to recover from the Tenant as damages: (i) the worth at the time of
award of the amount by which the unpaid rent for the balance of the term after
the time of award exceeds the amount of such rental loss for the same period
that Tenant proves could be reasonably avoided, (ii) the cost of recovering
said premises to the condition required in the Article entitled "Removal" and
(iii) such other amounts as are provided for in Section 1951.2 of the
California Civil Code.
If Landlord shall elect to re-enter said premises, Landlord shall not
be liable for damages by reason of such re-entry.
Notwithstanding any other provision of this Article, Landlord agrees
that if the default complained of, other than for the payment of monies, is of
such a nature that the same cannot be cured within the 30 day period specified
above, then such default shall be deemed to be cured if the Tenant within such
period shall have commenced the curing thereof and shall continue thereafter
with all due diligence to cause such curing and does so complete the same with
the use of such diligence.
All rights, options and remedies of Landlord contained in this Lease
shall be construed and held to be cumulative, and no one of them shall be
exclusive of the other, and Landlord shall have the right to pursue any one or
all of such remedies or any other remedy or relief which may be provided by
law, whether or not stated in this Lease. No waiver of any default of Tenant
hereunder shall be implied from any acceptance by Landlord of any rent or
other payments due hereunder or any omission by Landlord to take any action on
account of such default if such default persists or is repeated, and no express
waiver shall affect default other than as specified in said waiver. The consent
or approval by Landlord to or of any act by Tenant requiring Landlord's consent
or approval shall not be deemed to waive or render unnecessary Landlord's
consent or approval to or of any subsequent similar acts by Tenant.
ARTICLE 19. SECURITY DEPOSIT.
Tenant has deposited with Landlord the sum in the attached Exhibit "A"
as security for the full performance of the provisions of this Lease. If
Tenant defaults in any particular, Landlord may use or retain the whole or any
part of the security in lieu of any sum due to Landlord including repair of
damages or cleaning of the premises upon termination, or to defray any expense
or damage reasonably incurred by reason of the default, and Tenant shall on
demand pay to Landlord a like sum as additional security. If Tenant is not in
default at the termination of this Lease, Landlord shall return the deposit to
Tenant and may do this by either paying this sum to Tenant or crediting it
against the last payment(s) of rent. Landlord's obligation respecting the
deposit is that of a debtor, not a trustee; the fund may be commingled or
dissipated, or both, and no interest shall accrue thereon.
ARTICLE 20. ATTORNEY'S FEES.
In the event that any action shall be instituted by either of the
parties hereto for the enforcement of any of its rights or remedies in and
under this Lease, the party in whose favor judgment shall be rendered shall be
entitled to recover from the other party all costs incurred by said prevailing
party in said action, including reasonable attorney's fees to be fixed by the
court therein.
ARTICLE 21. REMOVAL.
A. Personal Property. Upon the expiration of the Term of this Lease,
or upon any earlier termination of this Lease, Tenant shall quit and surrender
possession of the said premises to Landlord in the same condition as upon
delivery of possession to Tenant hereunder, reasonable wear and tear and damage
by fire, acts of God, the elements and unavoidable casualty excepted. Before
surrendering possession of said premises as aforesaid, Tenant shall, without
expense to Landlord, remove or cause to be removed from sold premises all
signs, furnishings, equipment, trade fixtures, merchandise and other personal
property placed therein, and all rubbish and debris, and Tenant shall repair
all damage to said premises resulting from such removal. If requested by
Landlord, Tenant shall
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execute, acknowledge and deliver to Landlord an instrument in writing releasing
and quitclaiming to Landlord all right, title and interest of Tenant in and to
said premises by reason of this Lease or otherwise. If Tenant fails to remove
any of its signs, furnishings, equipment, trade fixtures, merchandise, or other
personal property within 10 days after the expiration or termination of this
Lease, then Landlord may, at its sole option (i) treat Tenant as a holdover, in
which event the provisions of the Article of this Lease regarding Holding Over
shall apply; (ii) deem any or all of such items abandoned and the sole property
of Landlord, or (iii) remove any or all of such items and dispose of same in any
manner or store same for Tenant, in which event the expense of such disposition
or storage shall be borne by Tenant and shall be immediately due and payable.
B. Fixtures, Equipment and Improvements. All fixtures, equipment,
improvements and appurtenances attached to or built into said premises prior to
or during the Term, whether by Landlord at its expense or at the expense of
Tenant or both, shall be and remain part of said premises and shall not be
removed by Tenant at the end of the Term unless otherwise expressly provided for
in this Lease. Such fixtures, equipment, improvements and appurtenances shall
include but not be limited to: all floor coverings, drapes, paneling, molding,
doors, vaults (exclusive of vault doors), plumbing systems, electrical systems,
lighting systems, cooling systems, ventilating systems, sprinkling systems,
silencing equipment, communication systems, all fixtures and outlets for the
systems mentioned above and for all telephone, radio, telegraph and television
purposes, and any special flooring or ceiling installations.
ARTICLE 22. PAYMENTS AND NOTICES.
A. Payment of Rent. The rent specified herein shall be paid to Landlord
or such other person or persons or at such other address or addresses as
Landlord hereafter may designate by written notice to Tenant. Payment of rent to
any person or persons so designated by Landlord shall exonerate Tenant from all
responsibility therefor or for the proper distribution thereof.
B. Notices. Any notice or demands which may or must be given by either
party to the other hereunder shall be deemed to have been duly given when made
by personal service or in writing and deposited for mailing by United States
mail, postage prepaid, addressed as follows or to such other place as the
parties may hereafter in writing direct:
To Landlord: At the address set forth on the signature page of this Lease.
To Tenant: At the address set forth on the signature page of this Lease.
ARTICLE 23. EMINENT DOMAIN.
A. Definition of terms. The term "total taking" as used in this Article
means the taking of the entire premises under the power of eminent domain or a
taking of so much of said premises as to prevent or substantially impair the
conduct of Tenant's business therein. The term "partial taking" means the taking
of a portion only of said premises which does not constitute a total taking as
above defined.
B. Total Taking. If during the term hereof, there shall be a total taking
by public authority under the power of eminent domain, then the leasehold estate
of Tenant in and to said premises shall cease and terminate as of the date
actual physical possession thereof shall be so taken.
C. Partial Taking. If during said term there shall be a partial taking of
said premises, this Lease shall terminate as to the portion of said premises
taken upon the date upon which actual possession of said premises is taken
pursuant to said eminent domain proceedings, but said Lease shall continue in
force and effect as to the remainder of said premises. The minimum guaranteed
rental payable by Tenant for the balance of said term shall be abated in the
ratio that the square footage of floor area of said premises taken bears to the
total floor area of said premises at the time of such taking.
D. Taking of Parking Area. In the event that there shall be a taking of
the parking area such that Landlord can no longer comply with applicable
municipal parking ordinances or similar regulations of other public agencies,
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Landlord may substitute therefor reasonably equivalent parking in a location
reasonably close to said premises; provided that if Landlord fails to make
such substitution within a reasonable time following such taking, Tenant may,
at its option, terminate this Lease by notice to Landlord. If this Lease is
not so terminated by Tenant, there shall be no reduction, change or abatement
of any rent or other charge payable by Tenant hereunder and this Lease shall
continue in full force and effect.
E. Allocation of Award. All compensation and damages awarded for the
taking of said premises, or any portion or portions thereof, shall, except as
otherwise herein provided, belong to and be the sole property of Landlord, and
Tenant shall not have any claim or be entitled to any award for the diminution
in value of its leasehold hereunder or for the value of any unexpired term of
this Lease; provided, however, Tenant shall be entitled to any award that may
be made for the taking of or injury to or on account of any cost or loss Tenant
may sustain in the removal of Tenant's merchandise, fixtures, equipment and
furnishings.
F. Effect of Termination. If this Lease is terminated, in whole or in
part, pursuant to any of the provisions of this Article, all rentals and other
charges payable by Tenant to Landlord hereunder and attributable to the
premises taken, shall be paid up to the date upon which actual physical
possession shall be taken by the condemnor, and the parties shall thereupon be
released from all further liability in relation thereto.
G. Voluntary Sales. A voluntary sale by Landlord to any public body
or agency having the power of eminent domain, either under threat of
condemnation or while condemnation proceedings are pending, shall be deemed to
be a taking under the power of eminent domain for the purposes of this Article.
ARTICLE 24. HOLDING OVER.
This Lease shall terminate and become null and void without further
notice upon the expiration of the Term herein specified, and any holding over
by Tenant after such expiration shall not constitute a renewal hereof, or give
Tenant any rights under this Lease, except as otherwise herein provided, it
being understood and agreed that this Lease cannot be renewed, extended or in
any manner modified except in writing signed by both parties hereto; provided,
however, that nothing in this Article shall be construed to alter or impair the
provisions of Article 21 hereof. If Tenant shall hold over for any period
after the expiration of said Term, Landlord may, at its option, exercised by
written notice to Tenant, treat Tenant as a tenant from month-to-month
commencing on the 1st day following the expiration of this Lease and subject to
the terms and conditions herein contained except that the Basic Rental portion
of the monthly rental, which shall be payable in advance, shall be 150% of said
Basic Rental applicable to the date of expiration. If Tenant fails to
surrender the premises upon the expiration of this Lease despite demand to do
so by Landlord, Tenant shall indemnify and hold Landlord harmless from all loss
or liability, including without limitation, any claims made by any succeeding
Tenant founded on or resulting from such failure to surrender.
ARTICLE 25. SUBORDINATION AND STATEMENT OF TENANT.
The rights of Tenant under this Lease are and shall be subject to and
subordinate to all present and future ground or underlying Leases and
amendments thereto, the declaration and recording of covenants, conditions and
restrictions relating to the office complex and operation thereof, and the
lien of any mortgage and/or any deed of trust or other encumbrance which now
exists or may hereafter affect said premises together with all renewals,
modifications, consolidations, replacements or extensions thereof; Tenant
covenants and agrees that it will execute without further consideration any and
all instruments desired by Landlord subordinating in the manner requested by
Landlord this Lease; provided that any lienor or encumbrancer relying on such
subordination or such additional agreements will covenant with Tenant that this
Lease shall remain in full force and effect, and Tenant shall not be disturbed
in the event of sale or foreclosure so long as Tenant is not in default
hereunder. Tenant agrees to attorn to the successor in interest of Landlord
following any transfer of such interest either voluntarily or by operation of
law and to recognize such successor as Landlord under this Lease. However, if
Landlord so elects, this Lease shall be deemed prior in lien to any mortgage,
deed of trust or other encumbrance upon or including the premises regardless of
date of recording and Tenant will execute a statement in writing to such effect
at Landlord's request. Landlord is hereby irrevocably appointed and authorized
as agent and attorney-in-fact of Tenant to execute all
-9-
<PAGE> 10
subordination instruments in the event Tenant fails to execute said instruments
within five (5) days after notice from Landlord demanding the execution thereof.
Statement of Tenant. Tenant shall, at any time and from time to time, upon
not less than ten (10) days prior written notice by Landlord, execute,
acknowledge, and deliver to Landlord a statement in writing certifying that this
Lease is unmodified and in full force and effect (or, if there has been any
modification thereof, that the same is in full force and effect as modified and
stating the modification or modifications) and that Landlord is not in default,
except as specified in such statement, in regard to any of its covenants or
obligations under this Lease, and further setting forth the dates to which all
sums payable as rental hereunder have been paid in advance, if any, and such
other statements relating to delivery and acceptance of the premises as
Landlord's lender, lienor, encumbrancer or purchaser may require.
ARTICLE 26. TRANSFER BY LANDLORD.
The term "landlord" as used in this Lease, so far as covenants or
obligations on the part of Landlord are concerned, shall mean and include only
the owner or owners at the time in question of the fee ownership or prime
leasehold estate in said premises, and in the event of any transfer or
transfers of the title to said premises, Landlord herein named (and in case of
any subsequent transfers or conveyances, and then grantor), except as
hereinafter provided, shall be automatically freed and relieved from and after
the date of such transfer or conveyance, of all personal liability as respects
the performance of any covenants or obligations on the part of Landlord
contained in this Lease thereafter to be performed; provided that any funds in
which Tenant has an interest which are in the hands of such Landlord or the
then grantor at the time of such transfer shall be turned over to the grantee,
and any amount then due and payable to Tenant by Landlord or the then grantor
under any provisions of this Lease shall be paid to Tenant. It is intended
hereby that the covenants and obligations contained in this Lease on the part
of Landlord, shall, subject to the foregoing, be binding on Landlord, its
successors and assigns, only during and in respect of their respective
successive periods of ownership.
ARTICLE 27. MODIFICATIONS FOR LENDER.
If, in connection with obtaining financing for the office park complex,
the lender shall request reasonable modifications in this Lease as a condition
to such financing, Tenant will not unreasonably withhold, delay or defer its
consent thereto, provided that such modifications do not increase the
obligations of Tenant hereunder or materially adversely affect the leasehold
interest hereby created.
ARTICLE 28. INABILITY TO PERFORM.
This Lease and the obligations of Tenant to pay rent hereunder and to
keep, observe and perform all of the other terms, covenants, conditions,
provisions and agreements of this Lease on the part of Tenant to be kept,
observed or performed shall in no way be affected, impaired or excused because
Landlord is unable to fulfill any of its obligations under this Lease or to
supply, or is delayed in supplying any service expressly or impliedly to be
supplied or is unable to supply, or is delayed in supplying any equipment or
fixtures, if Landlord is prevented or delayed from doing so by reason of strike
or labor troubles, unavailability of materials or any other cause beyond the
control of Landlord.
ARTICLE 29. SURRENDER OR CANCELLATION.
The voluntary or other surrender of this Lease by Tenant, or a mutual
cancellation thereof, shall not work a merger, and shall, at the option of
Landlord, terminate all or any existing subleases or may, at the option of
Landlord, operate as an assignment to Landlord of any or all of such subleases.
ARTICLE 30. RULES OR REGULATIONS.
Tenant agrees to obey the rules and regulations in Exhibit "A" as well as
such reasonable rules and regulations as may be hereafter adopted by Landlord
for the safety, care and cleanliness of the office park complex and said
premises and the preservation of good order thereon. Landlord shall not be
responsible to Tenant for the non-performance by any other Tenant or occupant
of the office park complex of any of said rules and regulations.
ARTICLE 31. SCOPE AND AMENDMENT.
This Lease is and shall be considered to be the only agreement between the
parties hereto. All negotiations and
-10-
<PAGE> 11
oral agreements acceptable to both parties are included herein. No amendment or
other modification of this Lease shall be effective unless in writing.
ARTICLE 32. SAFETY AND HEALTH.
Tenant covenants at all times during the Term of this Lease to comply with
the requirements of the Occupational Safety and Health Act of 1970, 29 U.S.C.
Section 651 et seq and any analogous legislation in California (collectively,
the "Act,"), to the extent that the Act applies to said premises and any
activities thereon and without limiting the generality of the foregoing, Tenant
covenants to maintain all working areas, all machinery, structures, electrical
facilities and the like upon said premises in any condition that fully complies
with the requirements of the Act, including such requirements as would be
applicable with respect to agents, employees or contractors of Landlord who may
from time to time be present upon said premises, and Tenant agrees to indemnify
and hold harmless Landlord from any liability, claims or damages arising as a
result of a breach of the foregoing covenant and from all costs, expenses and
charges arising therefrom including, without limitation, attorneys' fees and
court costs incurred by Landlord in connection therewith, which indemnity shall
survive the expiration or termination of this Lease.
ARTICLE 33. MISCELLANEOUS.
Time is of the essence of this Lease. The Article headings therein are
used only for the purpose of convenience and shall not be deemed to contain or
limit the subject matter of the Articles hereof, nor to be considered in the
construction thereof. Each and all of the obligations, covenants, conditions
and restrictions of this Lease shall inure to the benefit of and be binding
upon and enforceable against, as the case may require, the successors and
assigns of Landlord, and subject to the restrictions against assignments and
subletting in this Lease contained, any authorized assignee, transferee,
sublessee and other successor in interest of Tenant.
In this Lease the neuter gender includes the feminine and masculine and
the singular number includes the plural wherever the context so requires.
The term "Tenant" as used in this Lease shall mean and include each person
who executes this Lease, jointly and severally, and the act of or notice from,
or notice or refund to, or the signature of, any one or more of such persons,
with respect to the tenancy or this Lease, including, but not limited to, any
renewal, extension, expiration, termination or modification of this Lease,
shall be binding upon each and all of the persons executing this Lease as
Tenant with the same force and effect as if each and all of them had so acted
or so given or received such notice or refund or so signed.
IN WITNESS WHEREOF, the parties hereto have caused this Lease to be
executed on the date hereinafter set forth, following their respective
signatures.
SKECHERS USA, INC., a California corp.
--------------------------------------
By /s/ DOLORES L. MCNABB By /s/ ROGER A. MOSS
------------------------------- -----------------------------------
By DOLORES L. MCNABB By ROGER A. MOSS
------------------------------- -----------------------------------
Date June 11, 1998 Date June 11, 1998
----------------------------- ---------------------------------
Address: P.O. BOX 10001 Address: 228 Manhattan Beach Boulevard
------------------------- -----------------------------
TORRANCE, CA 90505 Manhattan Beach, CA 90266
Attn: Real Estate Department
- ---------------------------------- --------------------------------------
"Landlord" "Tenant"
ALL RENTS ARE DUE ON OR BEFORE THE 1ST OF EACH MONTH AND MAILED TO:
D.L. MC NABB
P.O. BOX 10001
TORRANCE, CA 90505
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<PAGE> 12
ADDENDUM TO LEASE
FOR PREMISES COMMONLY KNOWN AND DESIGNATED AS:
OFFICE #3, FIRST FLOOR OF THE NORTH BUILDING
OFFICE #9, FIRST FLOOR OF THE SOUTH BUILDING
904 MANHATTAN AVENUE
MANHATTAN BEACH, CALIFORNIA
This Addendum to Lease executed on June 11, 1998 by and between
DOLORES MCNABB, as Landlord, and SKECHERS USA, INC., as Tenant, is an integral
part of said Lease as if fully set forth therein.
A. OPTION TO EXTEND LEASE TERM.
So long as Tenant has fully performed all the obligations on its part to be
performed, Landlord hereby grants to Tenant three consecutive options to extend
this lease for five (5) years each, on the same terms and conditions as are
contained herein except as to increases in real estate taxes as hereinafter
provided. It is contemplated that Tenant's occupancy shall be continuous;
therefore, in the event Tenant fails to exercise any of the options granted
herein, the remaining options shall immediately expire and be of no further
force or effect. The parties specifically acknowledge that the Lease rent terms
provide for annual increases of 3%. Such increases shall continue to be applied
annually during each and every option exercised hereunder.
Tenant shall exercise each such option by delivering written notice to
Landlord at least six (6) months, but not more than twelve (12) months, prior to
the end of each five (5) year term. TIME IS OF THE ESSENCE in regard to the
delivery of the notice. In the event Tenant fails to deliver written notice as
herein provided, the options granted herein shall expire and be of no further
force or effect.
B. RENT.
Tenant shall pay to Landlord rent, free from all claims, demands or
set-offs against Landlord of any kind or character whatsoever, except as
otherwise expressly provided to the contrary, in advance, in the amount of
$430,040.04, payable on the first day of each month as follows:
<TABLE>
<S> <C>
July 1, 1998 to June 30, 1999 $6,750.00 per month
July 1, 1999 to June 30, 2000 $6,952.50 per month
July 1, 2000 to June 30, 2001 $7,161.08 per month
July 1, 2001 to June 30, 2002 $7,375.91 per month
July 1, 2002 to June 30, 2003 $7,597.18 per month
</TABLE>
LATE PAYMENTS: In the event that Tenant shall fail to pay to Landlord
within 5 days of the date when due, any payment owing to Landlord pursuant to
the terms of this lease, Tenant shall pay Landlord a late charge in the amount
of ten percent (10%) of the rent payment then due in addition to said rent.
SQUARE FOOTAGE DISCLAIMER: The parties hereto hereby acknowledge that
during the negotiations for this Lease, the parties discussed the rent as a
function of an amount per square feet of rentable space. Prior to the execution
of this Lease, Tenant has had the opportunity to inspect the space and satisfy
itself as to the size and suitability of the space for its intended purposes.
The parties hereto hereby agree the above dollar figures of rent shall be due
and payable regardless of the actual square feet in the demised premises and
Tenant acknowledges that Landlord makes no representation or warranty as to the
actual size of the premises. Any discussions concerning a rental per square foot
of space is superceded by this provision.
C. USE.
The sole permitted use of the premises shall be commercial office and
related activities.
<PAGE> 13
D. REAL ESTATE TAXES - OPTION PERIODS.
Upon the exercise of the options hereinabove provided for, Tenant agrees to
pay during the term of each such option period, or periods, as the case may be,
its pro rata share of any increase in real estate taxes and assessments levied
or imposed against the real property of which the demised premises are a part
over and above the taxes imposed on said real property during the fifth year of
the original term of this Lease (the base year). The parties hereto acknowledge
and agree that Tenant occupies approximately 40% of the building and agree that
for purposes of this provision that Tenant shall pay 40% of any such increase.
Landlord shall provide Tenant with a copy of the tax bill for the fifth year
(the base year) of the initial term along with a copy of the tax bill for each
year during any option period that Tenant continues in possession under this
Lease. Tenant shall pay to Landlord one half of its pro rata share (40%) of such
increase on or before December 10 of each year and the remaining on half of its
pro rata share (40%) on or before April 10 of each year.
E. AIR CONDITIONING REPAIR AND MAINTENANCE.
Landlord has provided an air conditioner for Office #9 on the first floor
of the south building and an air conditioner that services both Office #3 on the
first floor of the north building and the space occupied by Optical Outlet.
Tenant hereby agrees that it will pay any and all costs related to the repair
and maintenance of both of said air conditioners. Further, the parties
acknowledge that the air conditioner servicing Office #9 is on the electrical
meter for that office and Tenant shall pay for such electrical. The air
conditioner servicing Office #3 and Optical Outlet is on Landlord's house meter.
Further, the gas servicing said Office #3 is not separately metered. The parties
hereby agree that a reasonable estimate of the monthly electrical and gas costs
for Office #3 is $175.000. Tenant hereby agrees to pay to Landlord $175.00 per
month as reimbursement for such costs. Each year during the term of this Lease,
such monthly amount shall be increased by 3% to reflect the anticipated general
increase in costs. In the event electrical costs are increased substantially for
any reason that makes the above sum unrealistic, as increased annually, the
parties agree such sum shall be increased in an amount that reflects such
substantial increase in such costs. Tenant may, at its discretion, elect to
install separate meters for the gas and electric, at its sole and exclusive
expense, and pay the utility costs for Office #3 directly. Tenant acknowledges
that concurrent with the installation of the electrical meter, it would also
have to install a separate air conditioner in order to isolate the expenses to
said Office #3.
Air conditioning to Office #3 shall be provided between the hours of 7:30
A.M. and 5:30 P.M. Monday through Friday of each week.
F. SECURITY DEPOSIT.
Tenant shall pay Landlord on execution of this Lease the sum of $10,000.00
as a security deposit in accordance with the provisions of Paragraph 19 of the
Lease.
G. PARKING.
Landlord hereby grants to Tenant the exclusive use of three (3) parking,
the location of which will be designated by Landlord.
H. RULES AND REGULATIONS.
The Rules and regulations attached hereto are hereby incorporated by this
reference as if fully set forth herein and shall be an integral part of this
Lease.
I. ASSIGNMENT.
Notwithstanding the provisions of Paragraph 11 of the Lease, no consent
from Landlord shall be required for the assignment of this Lease under the
following circumstances, each of which shall be considered a Permitted
Assignment:
(1) the transfer of stock of Tenant to members of the immediate
family of a shareholder of Tenant, to a living trust for
estate-planning purposes, or by will or intestacy; or,
<PAGE> 14
(2) Tenant sells or offers for sale its voting stock to the public
in accordance with the qualifications or registration
requirements of the State of California and the Security Act of
1933, as amended.
H. TENANT'S RIGHT TO TERMINATE IN THE EVENT OF DESTRUCTION OF THE
PREMISES
Notwithstanding the provisions of Paragraph 16. DESTRUCTION OF PREMISES of
the Lease, in the event Landlord cannot complete the repairs and return
possession to Tenant within a period of six (6) months, Tenant shall have the
option of terminating this Lease. Notice of such election to terminate shall be
given by Tenant to Landlord within ten (10) days of Tenant's receipt of written
notice from Landlord that the repair period is projected to exceed six (6)
months. In the event Tenant fails to so notify Landlord in writing, this right
to terminate shall expire.
I. MUTUAL INDEMNIFICATION
Tenant agrees to defend, with counsel reasonably satisfactory to Landlord,
indemnify and hold harmless, Landlord, its agents, employees, officers,
directors, shareholders, partners, members and representatives (collectively
"Landlord") from and against any and all loss, cost, action, liability, damage
or expense, including but not limited to, penalties, fines, attorneys' fees or
costs (collectively "claims"), to any person, property or entity resulting from
the following: (i) the negligence or wilful misconduct of Tenant, its agents,
employees or contractors; (ii) Tenant's default or breach of any of the terms
and conditions of this Lease; and (iii) any occurrences within the Premises, not
resulting from the negligence or wilful misconduct of Landlord, its agents,
employees or contractors.
Landlord agrees to defend, with counsel reasonably satisfactory to Tenant,
indemnify and hold harmless, Tenant, its agents, employees, officers, directors,
shareholders, partners, members and representatives (collectively "Tenant") from
and against any and all loss, cost, action, liability, damage or expense,
including but not limited to, penalties, fines, attorneys' fees or costs
(collectively "claims"), to any person, property or entity resulting from the
following: (i) the negligence or wilful misconduct of Landlord, its agents,
employees or contractors; (ii) Landlord's default or breach of any of the terms
and conditions of this Lease; and (iii) any occurrences within the Premises, not
resulting from the negligence or wilful misconduct of Tenant, its agents,
employees or contractors.
Notwithstanding the foregoing, however, because Landlord is required to
maintain property insurance on the Building, and because of the existence of
waivers of subrogation set forth in this Lease, Landlord hereby agrees to
defend, indemnify and hold Tenant harmless on any Claims to the extent such
claim is covered by such insurance, even if resulting from the negligent acts,
omissions or misconduct of Tenant or those of its agents, employees or
contractors. Similarly, since Tenant must carry insurance to cover its personal
property within the premises, and because of the waivers of subrogation set
forth n this Lease, Tenant hereby agrees to defend, indemnify and hold Landlord
harmless from any claims to the extent any such claim is covered by such
insurance, even if resulting from the negligent acts, omissions or misconduct of
Landlord or those of its agents, employees or contractors. The provisions of
this section shall survive the expiration or sooner termination of the Lease
with respect to any occurrences, claims or liabilities occurring prior to such
expiration or termination.
LANDLORD TENANT
DOLORES MCNABB SKECHERS USA, INC.,
a California corporation
/s/ DOLORES MCNABB by /s/ ROGER A. MOSS
- ------------------------- -------------------------
by Roger A. Moss
-------------------------
<PAGE> 15
RULES AND REGULATIONS
1
No sign, placard, picture, advertisement, name or notice shall be
inscribed, displayed or printed or affixed on or to any part of the outside or
inside of any building without the written consent of Landlord first had and
obtained, and Landlord shall have the right to remove any such sign, placard,
picture, advertisement, name or notice without notice to and at the expense of
Tenant.
All signs or lettering on doors or buildings shall conform to uniform
specifications and standards established by Landlord and shall be printed,
painted and affixed by Landlord, and billed to Tenant.
Tenant shall not place anything or allow anything to be placed near the
glass of any window, door, partition or wall which may appear unsightly from
outside said premises; provided, however, that Landlord is to furnish and
install a building standard window drapery at all exterior windows.
2
Tenant shall not obtain for use upon the premises ice, drinking water,
towel and other similar services or accept barbering or bootblacking services
on the premises, except from persons authorized by Landlord and at the hours
and under regulations fixed by Landlord.
3
The bulletin board or directory of the building, if any, will be provided
exclusively for the display of the name and location of Tenant only, and
Landlord reserves the right to exclude any other names therefrom.
4
The sidewalks, halls, passages, entrances, and stairways shall not be
obstructed or used by Tenant for any purpose other than for ingress and egress.
The halls, passages, exits, entrances, stairways, balconies and roofs are not
for the use of the general public and Landlord shall in all cases retain the
right to control and prevent access thereto by all persons whose presence in the
judgment of Landlord shall be prejudicial to the safety, character, reputation
and interests of the premises and tenants, provided that nothing herein
contained shall be construed to prevent such access to persons with whom
Tenant normally deals in the ordinary course of Tenant's business unless such
persons are engaged in illegal activities. Neither Tenant nor employees or
invitees of Tenant shall go upon the roof of any building.
5
Tenant shall not alter any lock nor install any new or additional locks or
any bolts on any door of said premises.
6
The toilet rooms, urinals, wash bowls and other apparatus shall not be
used for any purpose other than that for which they were constructed and no
foreign substance of any kind whatsoever shall be thrown therein. The expense
of any breakage, stoppage or damage resulting from the violation of this rule
shall be borne by Tenant.
7
Tenant shall not overload the floor of said premises or mark, drive nails
(normal decorating excepted), screw or drill into the partitions, woodwork or
plaster or in any way deface said premises.
8
No equipment of any kind shall be brought into any building without the
consent of Landlord, and any moving of furniture, freight and equipment into or
out of any building shall be done at such time and in such manner as Landlord
shall designate. Landlord shall have the right to prescribe the weight, size
and position of all safes and other heavy equipment brought into any building
and also the times and manner of moving the same in and out of the building.
Safes or other heavy objects shall, if considered necessary by Landlord, stand
on wood strips of such thickness as is necessary to properly distribute the
weight. Landlord will not be responsible for loss of or damage to any such safe
or property from any cause and all damage done to the building by moving or
maintaining any such safe or other property shall be repaired at the expense of
Tenant.
9
Cleaning of carpets and windows shall be the responsibility of Tenant
shall be paid by Tenant.
Page 1 of 3
<PAGE> 16
10
Tenant shall not use, keep or permit to be used or kept, any foul or
noxious gas or substance in said premises, or permit or suffer said premises
to be occupied or used in a manner offensive or objectionable to Landlord or
other occupants of any building by reason of noise, odors and/or vibrations, or
interfere in any way with the other tenants or those having business therein,
nor shall any animals or birds be brought in or kept in or about said premises.
11
Tenant shall not use, keep or permit to be used any of the areas within
the office complex in any manner which shall cause litter and/or defacing of
the building, other improvements or landscaping. Tenant agrees that as far as
is practical and reasonable, to require its employees and invitees to conform
to the rules and regulations set out herein and any additional rules and
regulations which are hereafter adopted.
12
All pedestrian traffic within the office complex shall be limited to
paved streets and sidewalks and areas specifically designated or approved by
Landlord for such uses, e.g., lunch areas, etc.
13
Said premises shall not be used for the storage of merchandise, for
washing clothes, for lodging or cooking in conjunction therewith, or for any
improper, objectionable or immoral purposes.
14
Tenant shall not use or keep in said premises or the building any
kerosene, gasoline or inflammable or combustible fluid or material, or use any
method of heating or air conditioning other than that supplied or approved in
writing by Landlord.
15
Landlord will direct electricians as to where and how telephone and
telegraph wires are to be introduced. No boring or cutting for wires will be
allowed without the consent of Landlord. The location of telephones, call
boxes and other office equipment affixed to said premises shall be subject to
the approval of Landlord. Landlord reserves the right to enter upon said
premises for the purpose of installing additional electrical wiring and/or
other utilities for benefit of Tenant or adjoining tenants.
16
Tenant, upon termination of the tenancy, shall deliver to Landlord the
keys to offices and rooms which shall have been furnished Tenant or which
Tenant shall have had made, and in the event of loss of any keys so furnished,
Tenant shall pay Landlord therefor.
17
Tenant shall not lay linoleum, tile, carpet or other similar floor
covering so that the same shall be affixed to the floor of said premises in any
manner except as approved by Landlord. The expense of repairing any damage
resulting from a violation of this rule or removal of any floor covering shall
be borne by Tenant.
18
If deemed necessary by Landlord, access on Saturdays, Sundays and legal
holidays, and on other days between the hours of 6:00 p.m. and 8:00 a.m. the
following day, to the office complex, or to the halls, corridors, or stairways
in any of the buildings, or to said premises may be refused unless the person
seeking access is known to the person or employee in charge, has a pass, or is
properly identified. Landlord shall in no case be liable for damages for any
error with regard to the admission to or exclusion from the office complex of
any person. In case of invasion, mob, riot, public excitement, or other
commotion, Landlord reserves the right to prevent access to the office complex
during the continuance of the same by closing the doors or otherwise, for the
safety of the tenants and protection of property.
Page 2 of 3
<PAGE> 17
19
Tenant shall see that the doors of said premises are closed and securely
locked before leaving the building. Tenant must observe strict care and caution
to assure that all water faucets or water apparatus are entirely shut off before
Tenant or Tenant's employees leave said premises, and that all electrical
switches shall likewise be shut off to prevent waste or damage.
20
Landlord reserves the right to exclude or expel from the office park
complex any person who, in the judgment of Landlord, is intoxicated or under the
influence of liquor or drugs, or who shall in any manner do any act in violation
of any of the rules and regulations.
21
No vending machine or machines of any description shall be installed,
maintained or operated upon said premises without the written consent of
Landlord.
22
Landlord shall have the right, exercisable without notice and without
liability to Tenant, to change the name and the street address of the building
of which said premises are a part.
23
The parking areas within the office complex shall be used solely for
passenger type vehicles during normal office hours and the parking of trucks,
trailers, recreational vehicles and campers is specifically prohibited. No
vehicle of any type shall be stored within the parking area at any time. In the
event that a vehicle is disabled, it shall be removed within 48 hours. There
shall be no "For Sale" or other advertising signs on or about any parked
vehicle. All vehicles shall be parked in the designated parking areas in
conformance with all signs and other markings.
24
Tenant shall not place any improvements or movable objects including
antennaes, outdoor furniture, etc. in the parking areas, landscaped area or
other areas outside of said premises, or on the roof of said premises.
25
"Office complex" refers to the entire office building development of
Landlord.
26
Landlord reserves the right to make such other rules and regulations as in
its judgment may be for the safety, care and cleanliness of said premises and
the office complex for the preservation of good order therein. Tenant agrees to
abide by all such rules and regulations hereinabove stated and any additional
rules and regulations which are adopted.
Page 3 of 3
<PAGE> 1
EXHIBIT 10.18
ADDENDUM TO LEASE
FOR PREMISES COMMONLY KNOWN AND DESIGNATED AS:
OFFICES #3, 4, AND 5, SECOND FLOOR OF THE NORTH BUILDING
904 MANHATTAN AVENUE,
MANHATTAN BEACH, CALIFORNIA
This Addendum to Lease executed on September __, 1998, by and between
DOLORES MCNABB, as Landlord, and SKECHERS USA, INC., as Tenant, is an integral
part of said Lease as if full set forth therein.
A. OPTION TO EXTEND LEASE TERM.
So long as Tenant has fully performed all the obligations on its part to
be performed, Landlord hereby grants to Tenant two (2) consecutive options to
extend this lease for five (5) years each, on the same terms and conditions as
are contained herein except as to increases in real estate taxes as hereinafter
provided. It is contemplated that Tenant's occupancy shall be continuous;
therefore, in the event Tenant fails to exercise any of the options granted
herein, the remaining options shall immediately expire and be of no further
force or effect. The parties specifically acknowledge that the Lease rent
terms provide for annual increases of 3%. Such increases shall continue to be
applied annually during each and every option exercised hereunder.
Tenant shall exercise each such option by delivering written notice to
Landlord at least six (6) months, but not more than twelve (12) months, prior
to the end of each five (5) year term. TIME IS OF THE ESSENCE in regard to the
delivery of the notice. In the event Tenant fails to deliver written notice as
herein provided, the options granted herein shall expire and be of no further
force or effect.
B. RENT.
Tenant shall pay to Landlord rent, free from all claims, demands or
set-offs against Landlord of any kind or character whatsoever, except as
otherwise expressly provided to the contrary, in advance, in the amount of
$167,945.82, payable $3,375 on execution of this lease and thereafter on the
first day of each month as follows:
November 1, 1998 to September 30, 1999 $2250.00 per month
October 1, 1999 to September 30, 2000 $2317.50 per month
October 1, 2000 to September 30, 2001 $2387.00 per month
October 1, 2001 to September 30, 2002 $2458.61 per month
October 1, 2002 to September 30, 2003 $2532.37 per month
October 1, 2003 to June 30, 2004 $2608.34 per month
LATE PAYMENTS: In the event that Tenant shall fail to pay to Landlord
within 5 days of the date when due, any payment owing to Landlord pursuant to
the terms of this lease, Tenant shall pay Landlord a late charge in the amount
of ten percent (10%) of the rent payment then due in addition to said rent.
SQUARE FOOTAGE DISCLAIMER: The parties hereto hereby acknowledge that
during the negotiations for this Lease, the parties discussed the rent as a
function of an amount per square feet of rentable space. Prior to the execution
of this Lease, Tenant has had the opportunity to inspect the space and satisfy
itself as to the size and suitability of the space for its intended purposes.
The parties hereto hereby agree the above dollar figures of rent shall be due
and payable regardless of the actual square feet in the demised premises and
Tenant acknowledges that Landlord makes no representation or warranty as to the
actual size of the premises. Any discussions concerning a rental per square
foot of space is superceded by this provision.
C. USE.
The sole permitted use of the premises shall be commercial office and
related activities.
<PAGE> 2
D. REAL ESTATE TAXES-OPTION PERIODS.
Upon the exercise of the options hereinabove provided for,
Tenant agrees to pay during the term of each such option period, or periods, as
the case may be, its pro rata share of any increase in real estate taxes and
assessments levied or imposed against the real property of which the demised
premises are a part over an above the taxes imposed on said real property
during the fifth year of the original term of this Lease (the base year). The
parties hereto acknowledge and agree that Tenant occupies approximately 12.5%
of the building and agree that for purposes of this provision that Tenant shall
pay 12.5% of any such increase. Landlord shall provide Tenant with a copy of
the tax bill for the sixth year (the base year) of the initial term along with
a copy of the tax bill for each year during any option period that Tenant
continues in possession under this Lease. Tenant shall pay to Landlord one half
of its pro rata share (12.5%) of such increase on or before December 10 of each
year and the remaining on half of its pro rata share (12.5%) on or before April
10 of each year.
E. AIR CONDITIONING REPAIR AND MAINTENANCE.
Landlord has provided an air conditioner that services Offices 1, 2, 3,
4 and 5 on the second floor of the north building. Tenant hereby agrees that it
will pay any and all costs related to the repair and maintenance of said air
conditioner. Further, the parties hereby the air conditioner servicing Offices
1 through 5 is on Landlord's house meter and the gas servicing said Offices is
not separately metered. The parties hereby agree that a reasonable estimate of
the monthly electrical and gas costs for Office #3, 4, and 5 is $175.00. Tenant
hereby pay to Landlord $175.00 per month as reimbursement for such costs. Each
year during the term of this Lease, such monthly amount shall be increased by
3% to reflect the anticipated general increase in costs. In the event
electrical costs are increased substantially for any reason that makes the
above sum unrealistic, as increased annually, the parties agree such sum shall
be increased in an amount that reflects such substantial increase in such
costs. Tenant may, at its discretion, elect to install separate meters for the
gas and electric, at its sole and exclusive expense, and pay the utility costs
for Offices 3, 4, and 5 directly. Tenant acknowledges that concurrent with the
installation of the electrical meter, it would also have to install a separate
air conditioner in order to isolate the expenses to said Offices #3, 4, and 5.
Air Conditioning to Offices #3, 4 and 5 shall be provided between the
hours of 7:30 A.M. and 5:30 P.M. Monday through Friday or each week.
F. SECURITY DEPOSIT
Tenant shall pay Landlord on execution of this Lease the sum of
$4,500.00 as a security deposit in accordance with the provisions of Paragraph
19 of the Lease.
G. PARKING
Landlord hereby grants to Tenant the exclusive use of one (1) parking,
the location of which will be designated by Landlord.
H. RULES AND REGULATIONS
The Rules and regulations attached hereto are hereby incorporated by
this reference as if fully set forth herein and shall be an integral part of
this Lease.
I. ASSIGNMENT
Notwithstanding the provisions of Paragraph 11 of the Lease, no consent
from Landlord shall be required for the assignment of this Lease under the
following circumstances, each of which shall be considered a Permitted
Assignment:
(1) the transfer of stock of Tenant to members of the
immediate family of a shareholder of Tenant, to a living
trust for estate-planning purposes,or by will or
intestacy; or,
(2) Tenant sells or offers for sale its voting stock to the
public in accordance with the qualifications or
registration requirements of the State of California and
the Security Act of 1933, as amended.
<PAGE> 3
H. TENANT'S RIGHT TO TERMINATE IN THE EVENT OF DESTRUCTION OF THE
PREMISES
Notwithstanding the provisions of Paragraph 16. DESTRUCTION OF PREMISES
of the Lease, in the event Landlord cannot complete the repairs and return
possession to Tenant within a period of six (6) months, Tenant shall have the
option of terminating this Lease. Notice of such election to terminate shall
be given by Tenant to Landlord within ten (10) days of Tenant's receipt of
written notice from Landlord that the repair period is projected to exceed six
(6) months. In the event Tenant fails to so notify Landlord in writing, this
right to terminate shall expire.
I. MUTUAL INDEMNIFICATION
Tenant Agrees to defend, with counsel reasonably satisfactory to
Landlord, indemnify and hold harmless, Landlord, its agents, employees,
officers, directors, shareholders, partners, members and representatives
(collectively "Landlord") from and against any and all loss, cost, action
liability, damage or expense, including but not limited to, penalties, fines,
attorneys' fees or costs (collectively "claims"), to any person, property or
entity resulting from the following: (i) the negligence or wilful misconduct of
Tenant, its agents, employees or contractors; (ii) Tenant's default or breach
of any of the terms and conditions of this Lease; and (iii) any occurrences
within the Premises, not resulting from the negligence or wilful misconduct of
Landlord, its agents, employees or contractors.
Landlord agrees to defend, with counsel reasonably satisfactory to
Tenant, indemnify and hold harmless, Tenant, its agents, employees, officers,
directors, shareholders, partners, members and representatives (collectively
"Tenant") from and against any and all loss, cost, action, liability, damage or
expense, including but not limited to, penalties, fines, attorneys' fees or
costs (collectively "claims"), to any person, property or entity resulting from
the following: (i) the negligence or wilful misconduct of Landlord, its agents,
employees or contracts; (ii) Landlord's default or breach of any of the terms
and conditions of this Lease; and (iii) any occurrences within the Premises,
not resulting from the negligence or wilful misconduct of Tenant, its agents,
employees or contractors.
Notwithstanding the foregoing, however, because Landlord is required to
maintain property insurance on the Building, and because of the existence of
waivers of subrogation set forth in this Lease, Landlord hereby agrees to
defend, indemnify and hold Tenant harmless on any Claims to the extent such
claim is covered by such insurance, even if resulting from the negligent acts,
omissions or misconduct of Tenant or those of its agents, employees or
contractors. Similarly, since Tenant must carry insurance to cover its personal
property within the premises, and because of the waivers of subrogation set
forth n this Lease, Tenant hereby agrees to defend, indemnify and hold Landlord
harmless from any claims to the extent any such claim is covered by such
insurance, even if resulting from the negligent acts, omissions or misconduct of
Landlord or those of its agents, employees or contractors. The provisions of
this section shall survive the expiration or sooner termination of the Lease
with respect to any occurrences, claims or liabilities occurring prior to such
expiration or termination.
LANDLORD TENANT
DOLORES MCNABB SKECHERS USA, INC.,
a California corporation
/s/ DOLORES L. MCNABB by: /s/ DAVID WEINBERG
--------------------------- ---------------------------
Date: September 10, 1998 by: David Weinberg, CFO
---------------------------
Date: September 14, 1998
<PAGE> 4
RULES AND REGULATIONS
1
No sign, placard, picture, advertisement, name or notice shall be
inscribed, displayed or printed or affixed on or to any part of the outside or
inside of any building without the written consent of Landlord first had and
obtained, and Landlord shall have the right to remove any such sign, placard,
picture, advertisement, name or notice without notice to and at the expense of
Tenant.
All signs or lettering on doors or buildings shall conform to uniform
specifications and standards established by Landlord and shall be printed,
painted and affixed by Landlord, and billed to Tenant.
Tenant shall not place anything or allow anything to be placed near the
glass of any window, door, partition or wall which may appear unsightly from
outside said premises; provided, however, that Landlord is to furnish and
install a building standard window drapery at all exterior windows.
2
Tenant shall not obtain for use upon the premises ice, drinking water,
towel and other similar services or accept barbering or bootblacking services on
the premises, except from persons authorized by Landlord and at the hours and
under regulations fixed by Landlord.
3
The bulletin board or directory of the building, if any, will be provided
exclusively for the display of the name and location of Tenant only, and
Landlord reserves the right to exclude any other names therefrom.
4
The sidewalks, halls, passages, entrances, and stairways shall not be
obstructed or used by Tenant for any purpose other than for ingress and egress.
The halls, passages, exits, entrances, stairways, balconies and roofs are not
for the use of the general public and Landlord shall in all cases retain the
right to control and prevent access thereto by all persons whose presence in the
judgment of Landlord shall be prejudicial to the safety, character, reputation
and interests of the premises and tenants, provided that nothing herein
contained shall be construed to prevent such access to persons with whom Tenant
normally deals in the ordinary course of Tenant's business unless such persons
are engaged in illegal activities. Neither Tenant nor employees or invitees of
Tenant shall go upon the roof of any building.
5
Tenant shall not alter any lock nor install any new or additional locks or
any bolts on any doors of said premises.
6
The toilet rooms, urinals, wash bowls and other apparatus shall not be used
for any purpose other than that for which they were constructed and no foreign
substance of any kind whatsoever shall be thrown therein. The expense of any
breakage, stoppage or damage resulting from the violation of this rule shall be
borne by Tenant.
7
Tenant shall not overload the floor of said premises or mark, drive nails
(normal decorating excepted), screw or drill into the partitions, woodwork or
plaster or in any way deface said premises.
8
No equipment of any kind shall be brought into any building without the
consent of Landlord, and any moving of furniture, freight and equipment into or
out of any building shall be done at such time and in such manner as Landlord
shall designate. Landlord shall have the right to prescribe the weight, size and
position of all safes and other heavy equipment brought into any building and
also the times and manner of moving the same in and out of the building. Safes
or other heavy objects shall, if considered necessary by Landlord, stand on wood
strips of such thickness as is necessary to properly distribute the weight.
Landlord will not be responsible for loss of or damage to any such safe or
property from any cause and all damage done to the building by moving or
maintaining any such safe or other property shall be repaired at the expense of
Tenant.
9
Cleaning of carpet and windows shall be the responsibility of Tenant and
shall be paid by Tenant.
Page 1 of 3
<PAGE> 5
10
Tenant shall not use, keep or permit to be used or kept, any foul or
noxious gas or substance in said premises, or permit or suffer said premises to
be occupied or used in a manner offensive or objectionable to Landlord or other
occupants of any building by reason of noise, odors and/or vibrations, or
interfere in any way with the other tenants or those having business therein,
nor shall any animals or birds be brought in or kept in or about said premises.
11
Tenant shall not use, keep or permit to be used any of the areas within the
office complex in any manner which shall cause litter and/or defacing of the
buildings, other improvements or landscaping. Tenant agrees that as far as is
practical and reasonable, to require its employees and invitees to conform to
the rules and regulations set out herein and any additional rules and
regulations which are hereafter adopted.
12
All pedestrian traffic within the office complex shall be limited to paved
streets and sidewalks and areas specifically designated or approved by Landlord
for such uses, e.g., lunch areas, etc.
13
Said premises shall not be used for the storage of merchandise, for washing
clothes, for lodging or cooking in conjunction therewith, or for any improper,
objectionable or immoral purposes.
14
Tenant shall not use or keep in said premises or the building any kerosene,
gasoline or inflammable or combustible fluid or material, or use any method of
heating or airconditioning other than that supplied or approved in writing by
Landlord.
15
Landlord will direct electricians as to where and how telephone and
telegraph wires are to be introduced. No boring or cutting for wires will be
allowed without the consent of Landlord. The location of telephones, call boxes
and other office equipment affixed to said premises shall be subject to the
approval of Landlord. Landlord reserves the right to enter upon said premises
for the purpose of installing additional electrical wiring and/or other
utilities for benefit of Tenant or adjoining tenants.
16
Tenant, upon termination of the tenancy, shall deliver to Landlord the keys
to offices and rooms which shall have been furnished Tenant or which Tenant
shall have had made, and in the event of loss of any keys so furnished, Tenant
shall pay Landlord therefor.
17
Tenant shall not lay linoleum, tile, carpet or other similar floor covering
so that the same shall be affixed to the floor of said premises in any manner
except as approved by Landlord. The expense of repairing any damage resulting
from a violation of this rule or removal of any floor covering shall be borne by
Tenant.
18
If deemed necessary by Landlord, access on Saturdays, Sundays and legal
holidays, and on other days between the hours of 6:00 p.m. and 8:00 a.m. the
following day, to the office complex, or to the halls, corridors, or stairways
in any of the buildings, or to said premises may be refused unless the person
seeking access is known to the person or employee in charge, has a pass, or is
properly identified. Landlord shall in no case be liable for damages for any
error with regard to the admission to or exclusion from the office complex of
any person. In case of invasion, mob, riot, public excitement, or other
commotion, Landlord reserves the right to prevent access to the office complex
during the continuance of the same by closing the doors or otherwise, for the
safety of the tenants and protection of property.
Page 2 of 3
<PAGE> 6
19
Tenant shall see that the doors of said premises are closed and securely
locked before leaving the building. Tenant must observe strict care and
caution to assure that all water faucets or water apparatus are entirely shut
off before Tenant or Tenant's employees leave said premises, and that all
electrical switches shall likewise be shut off to prevent waste or damage.
20
Landlord reserves the right to exclude or expel from the office park
complex any person who, in the judgment of Landlord, is intoxicated or under the
influence of liquor or drugs, or who shall in any manner do any act in violation
of any of the rules and regulations.
21
No vending machine or machines of any description shall be installed,
maintained or operated upon said premises without the written consent of
Landlord.
22
Landlord shall have the right, exercisable without notice and without
liability to Tenant, to change the name and the street address of the building
of which said premises are a part.
23
The parking areas within the office complex shall be used solely for
passenger type vehicles during normal office hours and the parking of trucks,
trailers, recreational vehicles and campers is specifically prohibited. No
vehicle of any type shall be stored within the parking areas at any time. In the
event that a vehicle is disabled, it shall be removed within 48 hours. There
shall be no "For Sale" or other advertising signs on or about any parked
vehicle. All vehicles shall be parked in the designated parking areas in
conformance with all signs and other markings.
24
Tenant shall not place any improvements or movable objects including
antennaes, outdoor furniture, etc. in the parking areas, landscaped area or
other areas outside of said premises, or on the roof of said premises.
25
"Office complex" refers to the entire office building development of
Landlord.
26
Landlord reserves the right to make such other rules and regulations as in
its judgment may be for the safety, care and cleanliness of said premises and
the office complex for the preservation of good order therein. Tenant agrees to
abide by all such rules and regulations hereinabove stated and any additional
rules and regulations which are adopted.
Page 3 of 3
<PAGE> 1
EXHIBIT 10.19
PROMISSORY NOTE
$3,250,000 December 22, 1998
FOR VALUE RECEIVED, the undersigned, SKECHERS USA, INC., a California
corporation ("Maker"), promises to pay, in lawful money of the United States of
America, to the order of Robert Y. Greenberg and M. Susan Greenberg, Trustees of
the Greenberg Family Trust ("Holder"), dated May 3, 1988, at Hidden Hills,
California, the total unpaid principal amount and all accrued interest thereon
advanced by Holder from time to time to or for the benefit of or at the request
of Maker from and after the date hereof. No advance shall be made under this
Note, if as a result of such advance the total principal amount advanced would
exceed at any one time the amount of Three Million Two Hundred Fifty Thousand
Dollars ($3,250,000). The unpaid principal amount of the advances made under
this Note shall bear interest at the prime rate, with the total unpaid principal
amount advanced and all accrued interest due thereon all due and payable on
demand.
This note is subject to prepayment, in whole or in part, at any time
without penalty or bonus.
It is expressly understood that this Note is solely a corporate
obligation of the Maker and that any and all personal liability, either at
common law or in equity, or by constitution or statute, of, and any and all
rights and claims against, every stockholder, officer, or director, as such,
past, present or future, are expressly waived and released by the Holder as a
part of the consideration for the issuance hereof.
<PAGE> 2
This Note is entered into the State of California, and the laws of that
State shall govern all matters pertaining to this Note. Any action brought under
this Note shall be brought in the State of California.
The Maker promises to pay interest after maturity (whether by demand or
otherwise, and before as well as after judgment) at the prime interest rate and
after such maturity on balances, if any, then outstanding.
Maker hereby waives presentment, demand, notice, protest and all other
demands and notices in connection with the delivery, acceptance, performance,
default or enforcement of this Note.
Maker further agrees, in case suit is instituted to collect this Note
or any portion thereof, to pay all costs of collection, other costs, and such
additional sum for attorney's fees as the court may judge reasonable in such
suit.
SKECHERS USA, INC.
a California corporation
By: /s/ DAVID WEINBERG
--------------------------------------
David Weinberg
Chief Financial Officer
<PAGE> 1
EXHIBIT 21.1
SUBSIDIARIES OF THE REGISTRANT
Skechers By Mail, Inc.
<PAGE> 1
EXHIBIT 23.1
INDEPENDENT AUDITORS' REPORT ON SCHEDULE AND CONSENT
The following consent is in the format that will be signed when the transactions
referred to in Note 12 of the Notes to Consolidated Financial Statements have
been consummated.
KPMG LLP
The Board of Directors
Skechers U.S.A., Inc.
The audits referred to in our report dated March 12, 1998, except for Note 12
which is as of April __, 1999, included the related financial statement schedule
for each of the years in the three-year period ended December 31, 1998, included
in the registration statement on Form S-1 of Skechers U.S.A., Inc. This
financial statement schedule is the responsibility of the Company's management.
Our responsibility is to express an opinion on this financial statement schedule
based on our audits. In our opinion, such financial statement schedule, when
considered in relation to the basic consolidated financial statements taken as a
whole, presents fairly in all material respects the information set forth
therein.
We consent to the use of our reports included herein and to the reference to our
firm under the headings "Selected Financial Data" and "Experts" in the
prospectus.
Los Angeles, California
April 8, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM BALANCE
SHEETS AND THE STATEMENTS OF EARNINGS FILED AS PART OF THE COMPANY'S
REGISTRATION STATEMENT ON FORM S-1 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<EXCHANGE-RATE> 1
<CASH> 10,942
<SECURITIES> 0
<RECEIVABLES> 52,629
<ALLOWANCES> 3,413
<INVENTORY> 65,390
<CURRENT-ASSETS> 128,164
<PP&E> 20,587
<DEPRECIATION> 5,391
<TOTAL-ASSETS> 146,284
<CURRENT-LIABILITIES> 105,058
<BONDS> 13,550
0
0
<COMMON> 2
<OTHER-SE> 27,674
<TOTAL-LIABILITY-AND-EQUITY> 146,284
<SALES> 372,680
<TOTAL-REVENUES> 372,680
<CGS> 218,100
<TOTAL-COSTS> 121,444
<OTHER-EXPENSES> 239
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 8,631
<INCOME-PRETAX> 25,121
<INCOME-TAX> 650
<INCOME-CONTINUING> 24,471
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 24,471
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
<PAGE> 1
EXHIBIT 99.2
CONSENT OF NOMINATED DIRECTOR
The undersigned hereby consents to his nomination to serve on the Board of
Directors of SKECHERS U.S.A., INC. and to all references to said nomination
included in or made a part of this Registration Statement.
/s/ JOHN J. QUINN
--------------------------------------
John J. Quinn
April 8, 1999
