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FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED]
For the fiscal year ended DECEMBER 31, 1995
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from __________________ to ________________________
Commission file number 0-18054
SUN SPORTSWEAR, INC.
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(Exact name of registrant as specified in its charter)
Washington 91-1132690
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(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
6520 South 190th Street, Kent, Washington 98032
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (206) 251-3565
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Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act: COMMON STOCK NO PAR
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
YES [ X ] NO [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K (subsection 229.405 of this chapter) is not contained herein,
and will not be contained, to the best of registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K. [ X ]
As of March 15, 1996, there were issued and outstanding 5,748,500 shares of
Common Stock, no par value.
The aggregate market value of Common Stock held by non-affiliates as of March
15, 1996 was $4,793,212 based on the average of the high and low prices of such
stock as reported by the NASDAQ National Market System.
DOCUMENTS INCORPORATED BY REFERENCE
<TABLE>
<CAPTION>
DOCUMENT ITEMS IN FORM 10-K
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<S> <C>
The Company's Proxy Statement to
Shareholders for its 1996 Annual Meeting Part III, Items 10-13
</TABLE>
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PART I
ITEM 1 - BUSINESS
Sun Sportswear, Inc. ("Sun" or the "Company") designs, sources,
prints, markets and sells an extensive array of imprinted, dyed and decorated
casual sportswear for men, women and children, including a variety of T-shirts,
sweatshirts and bottoms. The Company sells women's & girls' and men's & boys'
apparel bearing both proprietary and licensed designs to approximately 30
national and regional retail chains, including Wal-Mart, Target, Kmart,
Montgomery Ward, Sears, and JC Penney. The Company maintains an internal
graphics design department of approximately 48 artists and support personnel
and operates modern screen printing facilities in Kent, Washington (part of the
Seattle metropolitan area).
Sun, for its core product line, purchases blank T-shirts, sweatshirts,
sweatpants, tank tops, nightshirts and other similar garments from domestic and
foreign suppliers and screen prints designs onto those garments. Sun licenses
from third parties the rights to use or distribute certain characters and
trademarks, which have recently included Looney Tunes(C), joint Looney
Tunes(C)/Major League Baseball(R), Pocahontas((C) Disney), Lion King((C)
Disney), 101 Dalmatians((C) Disney), Garfield(R), Batman Forever((TM) and (C)
DC Comics), and Winnie the Pooh((C) Disney). Sun also creates proprietary art
designs based on concepts developed by its merchandising staff and updates
established designs and characters. Art design categories range from
recreational and outdoor to seasonal, regional and "attitude" themes. The
Company is a Washington corporation formed in 1981. Its principal executive
offices are located at 6520 South 190th Street, Kent, Washington 98032. Its
telephone number at that address is (206) 251-3565.
PRODUCTS
General. The Company designs, sources, prints, markets and sells an
extensive array of imprinted, dyed and decorated casual sportswear for adults
and children, including its core product line of screen printed T-shirts, tank
tops, sweatshirts and bottoms. Imprinted garments display either licensed or
proprietary designs and characters. Sun procures garments in a variety of
styles, including basic, pocket, long-sleeved and oversized T-shirts, as well
as tank tops, nightshirts, and sweatpants. In addition, the Company designs
and markets more detailed, fashion-oriented garments, some of which are also
imprinted. The more detailed, fashion-oriented garments include shorts, polo
shirts, women's leggings and casual skirts, and button-front baseball jerseys.
The Company's largest sales category in 1995 was women's and girls'
garments. Sales of those products represented approximately 69%, 59% and 34%
of total gross sales in 1995, 1994 and 1993, respectively. Gross sales of
women's and girls' products decreased to $67.0 million in 1995 from $69.4
million in 1994. Gross sales of men's and boys' products decreased to $29.8
million in 1995 from $48.2 million in 1994. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations - 1995 and 1994 -
Sales" below.
Design and Product Development. Sun continually monitors current
garment and art design trends through frequent visits to retailers and trade
shows, reviews of popular and trade publications, and other activities. The
product development process also involves production feasibility studies,
analysis and documentation of garment and art trends, as well as costing
structure and prototype preparation for customers and trade shows, and limited
test sales.
Sun's internal graphic design department of approximately 48 artists
and support personnel creates the art work for virtually all of the Company's
products, including designs incorporating licensed characters and trademarks
and original designs proprietary to the Company. Because retailers demand a
consistent flow of new merchandise, Sun creates over 2,000 new graphics
annually. Sun responds quickly to seasonal demands and
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trends involving popular characters and themes. Historically, market
acceptance of Sun's core screen printed products has largely depended upon the
basic appeal of their graphic designs.
Sun's 18 employees in its product design and merchandising department
participate in the design development process and determine the particular
shape, style, color and fabric content of garments. In addition Sun's
designers and merchandisers assist in designing decorative features, such as
embroidery, and incorporating the graphic designs into the garments.
Licensed Designs and Characters. Sun first introduced products
displaying characters and trademarks licensed or under distribution agreements
from third parties in August 1987. Characters and trademarks currently
licensed include Looney Tunes(C), joint Looney Tunes(C)/Major League
Baseball(R), Pocahontas((C) Disney), Lion King((C) Disney), 101 Dalmatians((C)
Disney), Garfield(R), Batman Forever((TM) and (C) DC Comics), and Winnie the
Pooh((C) Disney). The Company's artists typically create multiple variations
and refinements of a given trademark or character, including different
lettering, poses, activities or dress.
Sun acquires rights to use trademarks and characters only on specified
types of garments, pays each licensor royalties on products sold displaying the
licensed trademark or character, and typically guarantees a minimum royalty
that may approach $500,000 depending on the trademark or character. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations, 1995 versus 1994 - Gross Margins". Sun's royalty costs are
reflected in higher prices charged to Sun's customers for licensed products.
See "Note 2 to Financial Statements" below.
Licensed products accounted for approximately 82%, 75%, and 56% of the
Company's total gross sales in 1995, 1994 and 1993, respectively. The
Company's experience has been that some licenses quickly gain intense
popularity, but have relatively short sales cycles that can end quickly. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - 1995 and 1994 - Net Sales" below. The impact on income of
fluctuations in sales of licensed products can be magnified because licensed
products generally carry a higher gross margin. Sales and income are also
affected if licensed products offered by the Company's competitors become
unusually successful.
Sun believes that, because of its design and production capabilities
and its visibility in the industry, it is among the group of screen printing
apparel companies that can successfully compete for attractive licensing
opportunities. The Company has designated an executive officer as its director
of licensing, with responsibility for its licensing efforts, to help Sun
compete more effectively for new licensing opportunities. Sun intends to
pursue licensors that have new characters and marks, and anticipates that
licensed products will be a significant portion of the Company's annual sales
in the future. However, there can be no assurance that licensors will develop
or offer to Sun desirable arrangements, or that Sun will be able to retain such
licenses.
Proprietary Designs and Characters. Sun's artists create original
designs and characters that are proprietary to the Company and continually
update and refine successful designs. Proprietary designs are based on a wide
variety of themes, including "attitude", recreational, outdoor, wildlife,
western, sports, patriotic, humor and seasonal themes. Designs are executed
with different printing techniques and inks, which in the past have included
raised "puff" ink, glitter, "goop" ink and heat sensitive inks. Proprietary
products accounted for approximately 18%, 25% and 44% of the Company's total
gross sales in 1995, 1994 and 1993, respectively.
The level of copyright and trademark protection available to the
Company for proprietary designs and characters varies depending on a number of
factors, including the degree of originality and the distinctiveness of the
associated trademarks and designs. The Company has obtained or has applied for
federal registration of the Rude Dog(R), Surf Outlaw(R), EPIC(R), U.S.A.
Unique Sportswear Attitude(R), GUTS(R), GRRLS Rule(TM), Hangin' On The Rim(R)
and other trademarks for use on various types of apparel, and may seek
registration of other
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proprietary marks in the future. There can be no assurance, however, that
these applications will result in registrations.
Cut-and-Sewn Products. Sun has also developed the capability to offer
more detailed, fashion-oriented products, such as polo shirts, women's leggings
and casual skirts, and button-front baseball shirts, by becoming more involved
at the garment manufacturing stage through use of a process called
"cut-and-sew". With the "cut-and-sew" process, Sun is able to purchase fabric
and then have garments manufactured by contractors to patterns designed by the
Company. This capability allows Sun to offer a broader variety of garment
styles including garments that are "rotary printed", a printing technique that
involves printing a design on fabric before it is "cut-and-sewn". Some of
these "cut-and-sewn" products are screen printed by Sun, and others go directly
into Sun's product lines to complement the Company's offerings. Sales of
"cut-and-sewn" products accounted for 17%, 16% and 11% of gross sales for the
years ended December 31, 1995, 1994 and 1993, respectively. See "Production,
Cut-and-Sew Manufacturing" below.
SOURCING
Sun purchases fabric, trim, blank T-shirts and other garments for its
screen printed apparel from approximately 27 domestic and 8 international
suppliers. Approximately 71% of garments sold in 1995 were produced by
domestic suppliers and the remainder by international manufacturers. No
manufacturer supplied the Company with more than 18% of total garments sold
during 1995. Sun's foreign suppliers are currently located in Pakistan, Peru,
Honduras and Mexico.
The relative proportion of garments purchased from domestic and
foreign suppliers may vary over time depending, in part, on competitive factors
in the world economy. Generally, basic garments and garments requiring short
delivery times are purchased from domestic suppliers, while products that
require greater finishing detail or allow longer delivery times are purchased
overseas. Sun believes that its relationship with a number of active suppliers
in both the domestic and foreign markets will enable the Company to continue to
obtain a sufficient supply of garments to satisfy its requirements.
Generally, each supplier agrees to produce finished garments in
accordance with samples and specifications provided by Sun. No contractual
obligations exist between Sun and suppliers except on an order-by-order basis.
Company representatives regularly visit the facilities of both foreign and
domestic suppliers to ensure quality and compliance with Sun's specifications.
Sun also conducts quality control inspections of garments at its facilities,
which include testing for shrinkage, dye and finish consistency, color
fastness, size specification adherence, construction strength and uniformity.
Sun's arrangements with overseas suppliers are subject to the risks of
doing business abroad. Imports of garments are subject to bilateral textile
agreements between the United States and various foreign countries which impose
limitations on the amount of certain categories of merchandise that can be
imported from those countries into the United States.
The Company's future results could be adversely affected by additional
bilateral or unilateral trade restrictions, a loss of or significant change in
existing quotas resulting in a decrease in permissible imports, the imposition
of additional quotas, duties, taxes or other charges on imports, significant
fluctuations in the value of the dollar against foreign currencies, political
instability resulting in the disruption of trade from exporting countries or
restrictions on the transfer of funds. Imports of materials are also affected
by the cost of transportation into the United States.
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Sun operates under time constraints in producing and delivering
finished screen printed products. Although customers often place orders for
garment styles as long as 20 weeks in advance, customers generally select the
specific art designs to be printed on ordered garments every 30 days for
delivery within as few as two days following the design selection. This
limited lead time requires Sun to have blank garments available for printing on
short notice. Consequently, the Company maintains a substantial inventory of
blank stock and often orders blank garments substantially in advance of the
anticipated time of screen printing and shipment.
Sales of garments obtained from "package" suppliers accounted for 83%
of gross sales in 1995. "Package" suppliers produce or purchase the requisite
fabric and other materials and then perform dyeing and garment fabrication.
Sales of garments obtained from "cut-and-sew" suppliers accounted for
17% of gross sales in 1995. With "cut-and-sewn" garments, Sun purchases fabric
from various mills and hires "cut-and-sew" contractors to perform garment
fabrication. To minimize the risk of excess inventory, the Company generally
sources "cut-and-sewn" garments only after receipt of purchase orders from
customers. Sun purchases fabric for use in "cut-and-sew" operations primarily
from domestic suppliers. Several of these suppliers also provide blank
garments that Sun uses for its screen printed apparel. Sun uses approximately
19 domestic "cut-and-sew" contractors and 6 offshore "cut-and-sew" contractors.
PRODUCTION
General. Operations at the Company's production facilities in Kent,
Washington include art and design, merchandising, market research and
development, receipt and quality control inspection of incoming blank or dyed
garments, screen printing, decorating, the addition of customer price tickets
and hang tags to finished products, hangering or poly-bagging, packing and
shipment.
Sun believes its ability to respond quickly to changes in customer
requirements and to meet delivery schedules consistently is an important factor
in the Company's success. The Company has expanded its bar-coding capabilities
to assist in rapid stock control of its inventory. The Company is in the
process of implementing a computerized manufacturing information system (MRP
and MRPII) to make its product through-put more efficient. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations, 1995
and 1994, Addition of Integrated Management Information System" below. The
Company devotes substantial attention to preventive maintenance and employee
training for its printing equipment. Each press is operated by a group of
trained employees who work together as a team. The Company believes that this
approach contributes to the flexibility, quality and speed of its production
process.
Screen Printing. The screen printing process begins with the
preparation of a design by the Company's artists. Sun tests new designs for
printability and color dynamics, and produces sales and production samples.
Sun also stocks over 140 pigment colors and numerous ink bases, which allows
for in-house development of new ink applications and techniques. In the
printing process, screens are positioned in automatic printing presses where
inks are pressed through the screen in order to duplicate the design on the
garment. Garments bearing designs on different portions of the garment may
move through the printing process several times. Following printing, the
garments are dried, making the printed design permanent and washable. In 1995,
the cost of blank garments represented approximately 62% of the cost of
finished garments, with labor, ink and other production and licensing costs
accounting for the remaining 38%.
The Company has 15 automatic screen printing presses at its Kent
facility. The Company's screen printing presses have a projected maximum
annual capacity of approximately 26.7 million garments. In 1995, Sun sold
approximately 19 million garments, of which 17 million, or 91% were screen
printed. The Company's
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printing capacity in Kent includes two belt presses which permit a design to be
printed over an entire side of a garment ("overall print" designs), eleven
12-color "spot" printing presses, and two Ultimate presses which can print
either "spot" designs or "overall print" designs.
Sun has also used independent subcontractors to print garments during
peak production periods and believes that additional subcontractors are readily
available if needed in the future.
Sun operates equipment at its Kent facility that assists the Company
in placing garments on hangers prior to shipment. To meet customers' needs,
the Company also has the ability to affix price tags and other product
information and can ship garments poly-bagged or folded. These services reduce
the time required to prepare the garments for display and thereby enable
customers to stock their racks and shelves more quickly.
"Cut-and-Sew" Manufacturing. The "cut-and-sew" process involves Sun
purchasing finished fabric and hiring "cut-and-sew" contractors to cut the
fabric to specific patterns developed by Sun's merchandisers and sew the
component pieces to produce garments that may have greater complexity and
detail than package purchased blank garments.
In October 1993, Sun permanently closed its internal "cut-and-sew"
operations at its Johnson City, Tennessee facilities. See "Note 4 to
Financial Statements" below.
Labor. Sun generally increases or reduces the size of its warehouse,
screen printing and distribution labor force in connection with seasonal
production demands through the use of temporary labor. Sun generally hires
seasonal laborers from a regular pool, thereby increasing both the level of
experience and the loyalty of its workforce.
Regulations. The Company is subject to federal, state and local
environmental laws and regulations, including laws relating to employee
knowledge of, exposures to, and disposal of inks, dyes, photographic chemicals
and cleaning solvents. Sun believes that its operations comply with applicable
environmental laws and regulations. Although the Company continues to make
capital expenditures for environmental protection, it does not anticipate that
significant expenditures will be required to remain in compliance with
environmental requirements.
SALES AND MARKETING
The Company's marketing and sales efforts emphasize development and
maintenance of close relationships with customers, regular presentation of
samples and prototypes of new styles and designs, and responsiveness to
customer requirements. Sun's in-house marketing and sales efforts are
directed and implemented by management of the Company, including the Senior
Vice President - Sales and Merchandising, the Merchandising Managers and the
Design Managers. These individuals devote substantial time and attention to
direct dealings with customers, regularly make personal visits to their
headquarters and stores and participate in industry trade shows. Sales are
generally made by personal visits to customers by these managers and by sales
representatives, who typically meet with customers at least every 30 days to
take orders for particular designs and to show new designs and garments. Since
March 1992, all marketing and sales efforts have been conducted in-house.
The Company emphasizes customer service. The Company's 5 full-time
employees in its customer service areas coordinate orders and shipments and are
in daily contact with customers. The Company maintains an electronic data
interchange (EDI) capability through which customers using automated inventory
management systems may communicate orders electronically to the Company.
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The Company distributes garments to approximately 30 national and
regional retail chains in the United States, including Wal-Mart, Target, Kmart,
Montgomery Ward, Hills Department Stores, Sears, Kids `R Us, Venture and JC
Penney. Approximately 96% of the Company's gross sales in 1995 were made to
its ten largest customers. Gross sales to Wal-Mart, Target and Kmart
represented approximately 88% of total gross sales in 1995, approximately 88%
of total gross sales in 1994, and approximately 82% of total gross sales in
1993. For additional information concerning sales to major customers, see
"Note 9 of Notes to Financial Statements" below. Sun is not party to any
long-term, multiple-shipment agreements with its customers.
SEASONALITY
The Company's highest sales and heaviest production demands
historically occur in the first, second and fourth quarters of each year.
During the first, second and fourth quarters, spring and summer products -
which include T-shirts, tank tops, shorts and similar garments - and
back-to-school products are produced and sold. During the third and part of
the fourth quarter, winter season products - which include sweatshirts and long
sleeve T-shirts - and holiday products are produced and sold. See
"Management's Discussion & Analysis of Financial Conditions - 1995 and 1994 -
Quarterly Net Sales - Seasonality" below.
COMPETITION
The Company's strategy focuses on anticipating and meeting the demands
of customers with volume purchasing requirements. Sun believes that it is one
of the few screen printing companies capable of concurrently providing several
large customers with high volumes of screen printed products, together with the
variety of designs and styles required by those customers. The Company
believes, however, that other businesses possess the resources and familiarity
with Sun's customer base to enter into, and compete with the Company in its
principal market.
More generally, the Company's core screen printed products compete
with other printed apparel, including apparel displaying licensed characters
and the colors and symbols of professional sports teams and colleges and
universities; with branded apparel; with apparel from vertical mills such as
Hanes or Fruit of the Loom; and with a wide variety of other clothing suitable
for work, recreation or casual wear. Competitive factors include product
quality, price, ability to meet delivery requirements and other aspects of
customer service, changes in styles and consumer preferences, degree of
customer preference for a limited number of vendors, and the limited
availability of shelf and rack space.
The Company has developed a product merchandising and manufacturing
capability that enables it to complement and expand its core screen printed
product line by offering more detailed, fashion-oriented garments. See
"Business - Products" above. Producers of branded and other more
fashion-oriented garments include companies such as Cutler Sports Apparel,
Allison Manufacturing, Jerry Leigh Inc., Jem Sportswear and Heather Hill
Sportswear.
Some of the Company's competitors, including Hanes and Fruit of the
Loom, have greater financial, manufacturing and marketing resources than the
Company.
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BACKLOG
Sun typically receives information from customers concerning projected
purchases several months in advance of delivery, with written purchase orders
for particular garments being submitted shortly before shipment. In addition,
customers may cancel or reschedule orders with little or no penalty. Typically
the backlog of firm orders at any point in time represents less than 10% of
expected sales for the upcoming 12 months. For these reasons, Sun does not
believe that backlog at any one point in time is a meaningful indicator of
long-term future sales. At December 31, 1995, the Company's backlog of firm
orders was approximately $8.6 million, all of which the Company expects to fill
during 1996. At December 31, 1994, the Company's backlog of firm orders was
approximately $4.7 million.
EMPLOYEES
At December 31, 1995, the Company employed 508 full-time employees,
including 152 managerial, sales, creative art and clerical employees and 356
employees engaged in manufacturing, warehousing and distribution. None of the
Company's employees are covered by a collective bargaining agreement. The
Company believes that its employee relations are good.
RECENT DEVELOPMENTS
In February 1996, the company initiated a restructuring plan, that,
among other things, resulted in the combining of Sun's Women's and Girls'
Division and Men's and Boys' Division. Sandra L. Teufel assumed leadership of
the combined Women's/Girls' and Men's/Boys' operations, as Senior Vice
President - Sales and Merchandising. Ms. Teufel had most recently served as
Sun's Senior Vice President - Women's and Girls' Division. The restructuring
plan also resulted in the elimination of approximately 30 indirect positions
from the Company's workforce, including Kenneth R. Schrang's position as Senior
Vice President - Men's and Boys' Division.
EXECUTIVE OFFICERS OF THE REGISTRANT
The executive officers of the Company are listed below:
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NAME AGE POSITION
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Larry C. Mounger 58 Chairman of the Board
William S. Wiley 48 President and Chief Executive Officer
L. Kaye Counts 41 Executive Vice President and Chief Operating Officer
Sandra L. Teufel 41 Senior Vice President - Sales and Merchandising
Kevin C. James 38 Senior Vice President and Chief Financial Officer
</TABLE>
Larry C. Mounger was elected to the Board of Directors in April 1991
and has been Chairman of the Board since January 1993. Mr. Mounger served as
Chief Executive Officer and President from January 1993 to October 1995. Mr.
Mounger served as Chairman and Chief Executive Officer and other positions of
Pacific Trail
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from 1955 to 1993. Pacific Trail was an outerwear garment company located in
Seattle, Washington which designed, manufactured and marketed garments
throughout the United States. He is a past President of the National Apparel
and Textile Association.
William S. Wiley was appointed President and Chief Executive Officer
and elected to the Board of Directors in October 1995. Mr. Wiley was engaged
by the Company as a re-engineering consultant from January to October 1995.
Mr. Wiley was an active principal in Wiley, Pene & Company, a business
building/turnaround consulting firm from 1990 to 1995. From 1987 to 1990, Mr.
Wiley served as a consultant and manager in the business building/restructuring
consulting firm of Clyde, Hamstreet and Company. Mr. Wiley practiced law for
Gleaves, Swearingen, Larsen and Potter from 1975 to 1987, where he became
partner in 1980. From 1969 through 1972, Mr. Wiley served as a process and
operations engineer for Atlantic Richfield .
L. Kaye Counts has been Chief Operating Officer since December 1990
and became Executive Vice President in February 1994. Ms. Counts joined the
Company in June 1982 and served as a custom sales manager and plant manager
from June 1982 to March 1984, as operations manager from March 1984 to December
1986, then as Vice President Operations from December 1986 through February
1994. Prior to joining Sun, she was production coordinator from 1980 to 1982
for Sunrise Design, Inc., a custom screen printing business located in Seattle.
Sandra L. Teufel was appointed Senior Vice President - Sales and
Merchandising in February 1995. Ms. Teufel joined the Company in September
1988 and served as Merchandise Manager for the (then newly-formed) Women's and
Girls' Division until September 1992, and as Vice President - Women's and
Girls' Division from September 1992 until February 1995. Prior to joining Sun,
Ms. Teufel was a part-owner of Nothing but Fun, and Head Designer at Normandee
Rose from 1985 through 1988 (both are garment manufacturing companies based in
Seattle, Washington). Ms. Teufel served as Head Designer at Union Bay
Sportswear from 1981 to 1984 and as a Designer for Britannia Sportswear from
1977 to 1981.
Kevin C. James became Senior Vice President and Chief Financial
Officer in February 1994, and served as Vice President Finance of the Company
from March 1991 until February 1994. Prior to joining Sun, Mr. James served
from 1989 to 1991 as Vice President Finance and other positions for Fone
America, Inc., a telecommunications company located in Portland, Oregon. From
1983 to 1988, he served as Chief Financial Officer and other positions for
Klukwan, Inc., a diversified forest products company located in Juneau, Alaska.
From 1980 to 1983, Mr. James worked in public accounting.
ITEM 2 - PROPERTIES
Sun's headquarters and principal production operations are located in
a 230,000-square foot building in Kent, Washington, a suburb of Seattle. The
facility centralizes the Company's administrative, design, production and the
majority of its warehousing functions in one building. This facility has
allowed the installation of equipment that facilitates handling and hangering
of finished garments and equipment for on-site production of samples and
prototype garments. The lease for this facility provides for a rental of
$115,000 per month, plus insurance, taxes and other charges, and expires in
October 1999, with an option to renew for two consecutive five-year terms. The
Company also has a five year option to purchase the facility beginning in
October 1994, for a mutually agreeable fair market price. The Kent facility is
leased from an affiliate of David A. Sabey, who was formerly Chairman of the
Board of Directors and the majority shareholder of the Company.
The Company also leases a 51,500 square foot satellite warehouse in
Kent, Washington from an unrelated third party. The lease, which expires in
January 1997, provides for a rental of $14,800 per month, plus insurance, taxes
and other charges.
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The Company believes that its plants and equipment are maintained in
good operating condition and devotes substantial attention to preventive
maintenance of the equipment.
ITEM 3 - LEGAL PROCEEDINGS
As previously disclosed, a lawsuit is pending in the Supreme Court of
the State of New York, County of Oneida, the basis of which is a Complaint
filed on February 14, 1994 against Sun Sportswear, Inc.; E.R.O. Industries,
Inc.; Toys 'R Us, Inc.; Grace International Apparel, Inc.; and Bradlees
Department Store; by plaintiff Dustin Allen Pack. The 8 year-old plaintiff
allegedly caught fire while lying in a polyester slumber sack (manufactured by
E.R.O. Industries, Inc. and sold by Toys `R Us, Inc.), watching television and
playing with a butane lighter. He was allegedly wearing a flannel shirt
(manufactured by Grace International Apparel, Inc. and sold by Bradlees
Department Stores) over a T-shirt (manufactured by Sun Sportswear, Inc. and
sold by Bradlees Department Stores).
Plaintiff seeks compensatory damages of $150 million and punitive
damages of $50 million against all defendants under various tort law theories,
including false labeling and flammability of the slumber sack against its
manufacturer and for negligence against all defendants together. Sun has
tendered the defense of this suit to its insurance carrier, which is opposing
the suit vigorously. Sun believes its coverage is sufficient in the event it
is held liable for compensatory damages. While its coverage may not extend to
punitive damage awards, the Company believes there are no grounds for such
damages. Although it cannot predict with certainty the outcome of this suit,
the Company believes its disposition should not result in a material adverse
effect on the results of operations or the financial condition of the Company.
In July of 1995, Bradlees Department Stores filed for Chapter 11
protection. The effect of Bradlees Chapter 11 filing, if any, on this lawsuit
has not been determined at this time.
The only other legal proceedings to which the Company is a party
involve routine matters that are incidental to its business. The Company does
not believe that the resolution of these matters will have a material effect on
the results of operations or financial condition of the Company.
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
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PART II
ITEM 5 - MARKET PRICES AND DIVIDENDS ON COMMON STOCK
The Company's Common Stock, no par value, is traded over the counter
on The Nasdaq Stock Market under the symbol SSPW. The following table sets
forth the range of the high and low trade prices for the Company's Common
Stock:
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HIGH LOW
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CALENDAR YEAR 1994
First Quarter 8-1/2 5-1/2
Second Quarter 7 4-3/4
Third Quarter 5-7/8 3-1/2
Fourth Quarter 5-3/4 4-1/4
CALENDAR YEAR 1995
First Quarter 5-1/8 4-1/4
Second Quarter 4-1/2 3-3/4
Third Quarter 5 4-1/4
Fourth Quarter 4-5/8 2-9/16
</TABLE>
The NASDAQ quotations, above, reflect inter-dealer prices, without
retail mark-ups, mark-downs, or commission and may not necessarily represent
actual transactions.
As of March 15, 1996, the Common Stock of the Company was held by
approximately 125 shareholders of record, which encompassed approximately 1800
beneficial shareholders.
The present policy of the Company is to retain future earnings to
provide funds for the operation and expansion of its business. The Company has
not paid cash dividends since it became a public company in December 1989, and
does not plan to pay cash dividends in the foreseeable future.
11
<PAGE> 12
ITEM 6 - SELECTED FINANCIAL DATA
The following data, insofar as it relates to each of the years 1991 to
1995, has been derived from audited financial statements, including the balance
sheets at December 31, 1995 and 1994, the related statements of income and of
cash flows for each of the years in the periods ended December 31, 1995, 1994
and 1993, and notes thereto appearing elsewhere herein. The data should be
read in conjunction with the financial statements, related notes and other
financial information included herein.
<TABLE>
<CAPTION>
For the year ended December 31,
1995 1994 1993 1992 1991
---- ---- ---- ---- ----
(Amounts in thousands except per share data)
<S> <C> <C> <C> <C> <C>
Income Statement Data:
Proprietary sales $ 17,454 $ 28,923 $ 47,572 $ 59,996 $ 63,538
Licensed sales 79,335 88,665 60,365 12,836 9,589
Sales deductions (2,824) (4,375) (3,164) (2,187) (1,332)
-------- --------- --------- -------- --------
Net sales 93,965 113,213 104,773 70,645 71,795
Cost of goods sold 84,570 95,879 87,911 59,770 58,170
-------- --------- --------- -------- --------
Gross margin
9,395 17,334 16,862 10,875 13,625
-------- --------- --------- -------- --------
Operating expenses:
Selling 3,649 3,781 3,358 2,829 2,485
Design and pattern 2,492 2,527 2,298 1,987 1,934
General and administrative 7,691 6,712 5,656 5,844 5,533
Provision for doubtful
accounts and factoring fees 132 72 130 155 (134)
Manufacturing cessation -0- -0- 898 152 -0-
-------- --------- --------- -------- --------
13,964 13,092 12,340 10,967 9,818
-------- --------- --------- -------- --------
Operating (loss) income
(4,569) 4,242 4,522 (92) 3,807
-------- --------- --------- -------- --------
Other (income) expense:
Interest expense 1,267 677 519 483 605
Joint venture discontinuation -0- -0- -0- 259 -0-
Other, net (201) (112) (228) (52) (119)
-------- --------- --------- -------- --------
1066 565 291 690 486
-------- --------- --------- -------- --------
Income (loss) before
provision for income taxes (5,635) 3,677 4,231 (782) 3,321
Provision (benefit)
for income taxes
(1,899) 1,228 1,494 (265) 1,129
-------- --------- --------- -------- --------
Net (loss) income $ (3,736) $ 2,449 $ 2,737 $ (517) $ 2,192
======== ========= ========= ======== ========
Net (loss) income per share $ (0.65) $ 0.43 $ 0.49 $ (0.09) $ 0.39
</TABLE>
(continued)
12
<PAGE> 13
ITEM 6 - (CONTINUED)
<TABLE>
<CAPTION>
December 31,
1995 1994 1993 1992 1991
---- ---- ---- ---- ----
(Amounts in thousands)
<S> <C> <C> <C> <C> <C>
Balance Sheet Data:
Total assets
$ 47,315 $ 62,384 $ 42,247 $ 40,278 $ 36,089
Working capital 21,419 25,031 22,981 19,418 22,497
Notes payable 13,500 15,987 3,453 4,317 -0-
Current portion of long-term debt
246 377 2,656 3,259 949
Long-term debt
(less current portion) 109 338 617 -0- 3,059
Shareholders' equity 26,018 29,750 26,820 23,902 24,419
</TABLE>
13
<PAGE> 14
ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, the
percentage relationship of certain income statement items to net sales and the
dollar increase or decrease as a percentage of such items from period to
period.
<TABLE>
<CAPTION>
Dollar Increase
(Decrease) as a
Percentage
Year ended -------------------
December 31, 1994 1993
--------------------------------- to to
1995 1994 1993 1995 1994
---- ---- ---- --------------------
<S> <C> <C> <C> <C> <C>
Gross sales
Proprietary sales 18.6% 25.5% 45.4% (40)% (39)%
Licensed sales 84.4 78.3 57.6 (11) 47
Sales deductions (3.0) (3.8) (3.0) (35) 38
----- ----- -----
Net sales 100.0 100.0 100.0 (17) 8
Cost of goods sold 90.0 84.7 83.9 (12) 9
Gross margin 10.0 15.3 16.1 (46) 3
Operating expenses 14.9 11.5 11.8 7 6
Interest expense 1.3 0.6 0.5 87 30
Other (income) (0.2) (0.1) (0.2) 80 (51)
and expense
Provision (benefit)
for income taxes (2.0) 1.1 1.4 (255) (18)
----- ----- -----
Net (loss) income (4.0)% 2.2% 2.6% (253) (11)
===== ===== =====
</TABLE>
1995 VERSUS 1994, AND FUTURE OUTLOOK
NET SALES. Net sales for 1995 decreased 17% to $94.0 million from $113.2
million in 1994. The primary reason for this decrease was the sales decline
suffered by the Company in the second half of 1995 caused by the soft retail
environment, and decreases in the sales of men's and boys' products.
Gross sales of men's and boys' products decreased 38% to $29.8 million
in 1995 from $48.2 million in 1994. The Company believes this decrease was
primarily the result of the Major League Baseball strike, the non-renewal of
the Company's joint Looney Tunes(C)/National Football League(R) license and a
difficult retail sales environment.
Women's and girls' gross sales decreased by 3.5% to $67.0 million in
1995 from $69.4 million in 1994. The Company believes this decrease was due to
the soft retail environment in the second half of 1995.
Gross sales of licensed products decreased by 11% to $79.3 million in
1995 from $88.7 million in 1994. The decrease in licensed product sales was
primarily the result of a decrease in sales of garments bearing Looney
Tunes((C) Warner Bros.), joint Looney Tunes(C)/National Football League(R) and
Lion King((C) Disney) licensed
14
<PAGE> 15
designs. These licensed sales decreases were partially offset by an increase
in sales of garments bearing Pocahontas((C) Disney), 101 Dalmatians((C) Disney)
and Winnie the Pooh((C) Disney) designs.
Gross sales of proprietary products decreased by 40% to $17.4 million
in 1995 from $28.9 million in 1994. The Company believes this decrease was
primarily the result of the soft retail environment and strong competition from
garments bearing licensed characters and trademarks.
Gross sales to Sun's largest three customers decreased 18% in 1995
versus sales in 1994. Gross sales to Sun's other customers decreased 18% in
1995 versus 1994. These decreases were primarily the result of the factors
discussed above.
Sales deductions, consisting of sales returns, discounts and
allowances, decreased to $2.8 million in 1995 from $4.4 million in 1994. This
decrease was primarily due to decreases in the amount of product returns.
GROSS MARGIN. Gross margin as a percentage of net sales decreased to 10.0 %
in 1995 from 15.3% in 1994 (see "Note 1 to Financial Statements" above). This
decrease was primarily the result of four factors. First, the reduced overall
sales levels in 1995 had a disproportionate effect on gross margin due to the
diminished capacity to cover the Company's fixed costs. Second, in the last
half of 1995, the Company accrued over $2 million in one-time inventory
markdowns arising from expected losses on the sale of surplus inventory. The
Company believes these markdowns were necessary because of the sluggish retail
market and competitive selling pressures in the screenprint environment.
Third, 1995 margins were negatively impacted by efforts to reduce men's
inventory, including customer incentives and substitution of existing, higher
value inventory to fill customer orders for lower value product. The Company
is continuing its efforts to reduce inventory, and as a result of such
reduction efforts, the Company believes its gross margin will be negatively
impacted in the first half of 1996 by 1% to 2% of net sales (see "Liquidity and
Capital Resources" below). Fourth, in the third quarter of 1995, the Company
recorded over $350,000 in charges arising from minimum royalty commitments the
Company made (with regard to certain of its license contracts) which are not
anticipated to be recovered through licensed product sales. The Company
believes these reserves for unmet minimum royalty obligations were necessary
because of the overall sluggish retail market and competitive selling pressures
in the screenprint environment.
OPERATING EXPENSES. Operating expenses increased to $14.0 million (or 14.9%
of net sales) in 1995 from $13.1 million (or 11.6% of net sales) in 1994 (see
"Note 1 to Financial Statements - Reclassifications" below). This increase was
primarily attributable to an increase in general and administrative expenses.
General and administrative expenses increased to $7.7 million (or 8.2%
of net sales) in 1995 from $6.7 million (or 5.9% of net sales) in 1994. This
increase was primarily the result of added costs associated with the Company's
management information system (see "Addition of Integrated Management
Information System" below), and $747,000 in consulting costs associated with
the Company's ongoing re-engineering efforts to reduce its sourcing, printing
and distribution costs (see "Re-engineering Efforts" below).
INTEREST EXPENSE. Interest expense increased 87% to $1,267,000 in 1995 from
$677,000 in 1994 primarily as a result of higher borrowing levels and higher
interest rates in 1995.
NET (LOSS) INCOME. The Company experienced a net loss of $3.7 million for 1995
compared to net income of $2.4 million in 1994, as a result of the factors
described above.
RE-ENGINEERING EFFORTS. The Company believes it can reduce its sourcing,
printing and distribution costs, by re-engineering its operating processes. To
assist in these re-engineering efforts, in the first quarter of 1995 the
Company engaged re-engineering, sourcing and business development experts. The
Company incurred $747,000 in consulting expense in 1995, and believes it will
incur $50,000 in such expenses during 1996. The Company
15
<PAGE> 16
expects its per unit manufacturing and operating costs to decrease as a result
of these efforts beginning in 1996. As has been previously disclosed in the
Company's public documents, in October 1995 the Company appointed one of its
re-engineering consultants, William S. Wiley, as Chief Executive Officer,
President and Director.
ADDITION OF INTEGRATED MANAGEMENT INFORMATION SYSTEM. In order to decrease
manufacturing costs and decrease inventory levels, the Company acquired and
began installing an integrated management information system in 1994 (at a cost
of approximately $1.5 million). The Company expects to achieve operating
efficiencies as a result of this new system beginning in 1996.
NON-RENEWAL OF JOINT LOONEY TUNES(C)/NATIONAL FOOTBALL LEAGUE(R) LICENSE. The
National Football League(R) did not renew Sun's joint license for Looney Tunes
((C) Warner Bros.) characters combined with National Football League(R) team
trademarks (the sell-off period under this license expired June 30, 1995). The
National Football League indicated to the Company that the NFL did not renew in
order to strategically consolidate the number of licensees holding rights to
its properties. The Company believes its other Looney Tunes(C) and joint
Looney Tunes(C) licenses will not be affected by this action. Sales of Looney
Tunes(C)/National Football League(R) products were $1.8 million in 1995 and
$4.5 million in 1994.
1994 AND 1993
NET SALES. Net sales for 1994 increased 8.1% to $113.2 million from $104.8
million in 1993. The primary reason for that increase was the increase in
gross sales of licensed goods from $60.4 million in 1993 to $88.7 million
during 1994. The increase in licensed sales was primarily attributable to the
popularity of the Warner Bros.' Looney Tunes(C), joint Looney Tunes(C)/Major
League Baseball(R) and joint Looney Tunes(C)/National Football League(R)
licensed products, and the popularity of The Lion King ((C) Disney) licensed
products.
Partially offsetting the increase in licensed products was a decrease
in gross sales of proprietary products by 39.2% from $47.6 million in 1993 to
$28.9 million in 1994. The Company believes this decrease was the result of
increased competition from garments bearing licensed designs, and of the
overall sales decrease in men's and boys' products.
Gross sales of women's and girls' apparel increased 91% to $69.4
million in 1994 from $36.3 million in 1993. The Company believes this increase
was due to the strong design and merchandising abilities of this division,
coupled with a strong license portfolio, which resulted in strong sell-through
at retail.
Gross sales of men's and boys' products decreased 32% to $48.2 million
in 1994 from $71.2 million in 1993. The Company believes this decrease was
primarily attributable to reduced sales calling efforts and garment sourcing
issues caused by staff turnover that occurred in 1994, the Major League
Baseball(R) and National Hockey League(R) strikes, and a difficult retailing
environment in the last quarter of 1994.
Gross sales to Sun's largest three customers increased 16.2% in 1994
versus 1993. This increase was primarily the result of sales increases to
Sun's third largest customer in 1994. Gross sales to Sun's other customers
decreased 27.2% in 1994 versus 1993. This decrease was primarily the result of
decreases in sales of men's and boys' products.
Sales deductions, consisting of sales returns, discounts and
allowances, increased to $4.4 million in 1994 from $3.2 million in 1993. The
increase was primarily due to two factors. First, sales allowances increased
due to the higher sales levels in 1994. Second, one large order was returned
in the second quarter of 1994 due to distribution errors.
16
<PAGE> 17
GROSS MARGIN. Gross margin as a percentage of net sales decreased to 15.3% in
1994 from 16.1% in 1993. See "Liquidity and Capital Resources" below. This
decrease was primarily the result of the fact that sales of "cut-and-sewn"
products - which generally carried lower margins than package products - were
higher in the 1994 period, sales returns and allowances were higher in 1994
than in 1993, and distribution costs increased in 1994 due to expanded sales to
Sun's third largest customer (this customer had greater requirements for
product ticketing, hangering and packaging). The above factors were partially
offset by lower levels of sub-contract printing - which is less profitable
than in-house printing - in 1994 versus 1993; and higher levels of licensed
products sales - which generally carried higher margins than proprietary
products - in 1994 than in 1993.
OPERATING EXPENSES. Operating expenses increased to $13.1 million (or 11.6% of
net sales) in 1994 compared to $12.3 million (or 11.8% of net sales) for 1993.
This dollar increase was primarily attributable to increases in selling,
design-pattern, and general-administrative expenses in 1994. The 1994
increase was partially offset by $898,000 in charges recorded in 1993
associated with the closure of the Company's Johnson City, Tennessee
"cut-and-sew" facility. See "Note 4 to Financial Statements" below.
Selling expense increased to $3.8 million or 3.3% of net sales in 1994
from $3.4 million or 3.2% of net sales in 1993. The dollar increase was
primarily the result of the costs of additional personnel hired to support the
higher 1994 sales volume in the Women's and Girls' Division and non-recurring
severance payments.
Design and pattern expense increased to $2.5 million or 2.2% of net
sales in 1994 from $2.3 million or 2.2% of net sales in 1993. The dollar
increase was primarily due to "learning curve" costs associated with the
Company's computer-aided-design system.
General and administrative expense increased to $6.7 million or 5.9%
of net sales in 1994 from $5.7 million or 5.4% of net sales in 1993. This
increase was primarily the result of the start-up costs associated with the
Company's management information system (see "Addition of Integrated Management
Information System" above) and the costs of additional personnel hired to
support the higher 1994 sales volume in the Women's and Girls' Division.
INTEREST EXPENSE. Interest expense for 1994 was $676,000 versus $519,000 in
1993, as a result of higher borrowing levels and higher interest rates.
NET INCOME. Net income decreased to $2.4 million in 1994 from $2.7 million in
1993, as a result of the factors described above.
17
<PAGE> 18
QUARTERLY NET SALES-SEASONALITY
The Company's net sales fluctuate from quarter to quarter. Quarterly
net sales for 1995, 1994, and 1993 are set forth below.
<TABLE>
<CAPTION>
Net Sales
(Dollar amounts in thousands)
-----------------------------------------------------------------------------
1995 1994 1993
-----------------------------------------------------------------------------
Amount Percent Amount Percent Amount Percent
<S> <C> <C> <C> <C> <C> <C>
First Quarter $ 25,720 27.4% $ 27,224 24.0% $ 22,301 21.3%
Second Quarter 30,582 32.5 27,375 24.2 31,849 30.4
Third Quarter 16,225 17.3 26,634 23.6 24,434 23.3
Fourth Quarter 21,438 22.8 31,980 28.2 26,188 25.0
-------- ----- -------- ----- -------- -----
Total $ 93,965 100.0% $113,213 100.0% $104,772 100.0%
========= ===== ======== ===== ======== =====
</TABLE>
The Company's highest sales and heaviest production demands generally
occur in the first, second and fourth quarters of each year. During the first,
second and fourth quarters, spring and summer products - which include
T-shirts, tank tops, shorts and similar garments - and back-to-school products
are produced and sold. During the third and part of the fourth quarter, winter
season products - which include sweatshirts and long sleeve T-shirts - and
holiday products are produced and sold.
LIQUIDITY AND CAPITAL RESOURCES
The Company finances working capital needs primarily from "internally
generated funds" (which the Company defines as net income plus depreciation)
and short term borrowing under a credit agreement. At December 31, 1995, the
Company's Bank credit agreement provided for a line of credit facility
(including commercial and standby letters of credit) of up to $27,000,000. At
December 31, 1995, total outstanding commercial letters of credit were $919,245
and approximately $1.8 million was available for borrowing. The borrowing rate
for the revolving portion of the line was the prime rate or lower. All the
Company's assets, including accounts receivable and inventories, were pledged
as security for borrowings under the Bank credit agreement.
In February 1996, the Company replaced its Bank credit agreement with
a credit agreement provided by Heller Financial, Inc. The Heller credit
agreement provides for a line of credit (including commercial letters of
credit) of up to $24,000,000 and expires in February 1998. At March 15, 1996,
approximately $9.0 million was available for borrowing. The borrowing rate for
the revolving portion of the line is the prime rate. All the Company's assets,
including accounts receivable and inventories, are pledged as security for
borrowings under the Heller credit agreement. Under the agreement, the amount
borrowed at any time, together with letters of credit issued on behalf of the
Company, may not exceed 85% of eligible accounts receivable and 60% of eligible
inventory - up to $8.5 million. The Heller credit agreement requires
compliance with certain financial covenants principally relating to working
capital, tangible net worth, ratio of debt to equity, expenditures for fixed
assets, minimum earnings (before taxes, interest and depreciation), interest
coverage, restrictions on the payment of dividends and restrictions on the
incurrence of long-term debt. The Company is in compliance with the Heller
debt covenants.
Inventory levels decreased by $6,524,000 or 21.6% from December 31,
1994 to December 31, 1995, primarily as a result of the Company's concerted
efforts to operate its business with lower levels of inventory. The Company
believes there was over $3.6 million (net of inventory markdown reserves of
$4.5 million) of
18
<PAGE> 19
impaired surplus inventory on hand at December 31, 1995, which is expected to
be sold at little or no margin in the first half of 1996 (see "Management's
Discussion and Analysis of Financial Condition and Results of Operations, 1995
versus 1994 - Gross Margin", above).
Accounts receivable decreased by 46% to $13.1 million from December
31, 1994 to December 31, 1995 was a result of lower sales in the fourth quarter
of 1995 than in the fourth quarter of 1994.
The Company has an agreement with Heller Financial, Inc. that is
intended to transfer the collection risk to Heller for Sun's accounts
receivable for essentially all of its customers other than Target and Wal-Mart.
Under the agreement, Heller assumes 70% of the collection risk associated with
Kmart receivables (to a maximum of $4,000,000 in gross receivables) and 100% of
the collection risk associated with the Company's other covered receivables.
Heller receives a fee equal to .65% of the gross amount of Kmart receivables
and .55% of the gross amount of all other covered receivables for assuming such
collection risk.
Notes payable (borrowings under the Company's line of credit)
decreased $2.5 million or 15.6% and accounts payable decreased $8.0 million or
61.7% from December 31, 1994 to December 31, 1995. The net decrease in notes
payable and accounts payable was primarily the result of lower levels of
garment purchases in the fourth quarter of 1995 than in the fourth quarter of
1994.
During 1995, the Company purchased approximately $1.2 million of
machinery and equipment for production, warehouse, distribution and office use.
The Company anticipates that total expenditures for machinery and equipment
will be less than $1,000,000 during 1996.
Sun's primary ongoing cash needs are for working capital and capital
expenditures. The Company believes that its cash needs through the remainder
of 1996 will be met by internally generated funds and borrowings under its
Heller credit facility.
INFLATION
From time to time, Sun's suppliers of blank garments and materials
increase their prices. Further, Sun increases its employees' compensation
relative to increases in the cost of living. Sun's mass merchant customers
have historically sold Sun's more basic products at predetermined sales price
points, many of which have not risen during the last few years. Because Sun's
customers generally operate on a fixed markup percentage, their strategy of not
increasing their sales price points has made it difficult for the Company to
pass on any cost increases relative to its more basic products.
19
<PAGE> 20
ITEM 8 - FINANCIAL STATEMENTS
PAGE
----
Report of Independent Accountants 21
Financial Statements:
Balance Sheets as of December 31, 1995 and 1994 22-23
Statements of Income for the years
ended December 31, 1995, 1994 and 1993 24
Statements of Changes in Shareholders' Equity for the
years ended December 31, 1995, 1994 and 1993 25
Statements of Cash Flows for years
ended December 31, 1995, 1994 and 1993 26
Notes to Financial Statements 27-34
20
<PAGE> 21
Report of Independent Accountants
To The Board of Directors
and Shareholders of
Sun Sportswear, Inc.
In our opinion, the accompanying balance sheets and related statements of
income, of changes in shareholders' equity and of cash flows present, fairly,
in all material respects, the financial position of Sun Sportswear, Inc. at
December 31, 1995 and 1994, and the results of its operations and its cash
flows for each of the three years in the period ended December 31, 1995, in
conformity with generally accepted accounting principles. These financial
statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
generally accepted auditing standards which require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for the
opinion expressed above.
/s/ Price Waterhouse LLP
PRICE WATERHOUSE LLP
Seattle, Washington
February 23, 1996
21
<PAGE> 22
SUN SPORTSWEAR, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------------------
1995 1994
------------ ------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash $ 2,006,633 $ 1,217,171
Accounts receivable, net of
allowance for doubtful accounts
of $46,317 and $46,524,
respectively (Note 11) 13,102,275 24,424,834
Inventories, net (Note 3) 23,631,358 30,155,618
Prepaid expenses and other
current assets 959,872 596,919
Deferred income taxes (Note 9) 788,332 760,710
Federal income tax receivable 1,979,535 -0-
------------ ------------
Total current assets 42,468,005 57,155,252
EQUIPMENT AND LEASEHOLD IMPROVEMENTS, net:
(Note 4) 4,831,994 5,216,920
OTHER ASSETS: 15,107 11,943
------------ ------------
Total assets $ 47,315,106 $ 62,384,115
============ ============
</TABLE>
(continued)
See accompanying notes to financial statements
22
<PAGE> 23
SUN SPORTSWEAR, INC.
BALANCE SHEETS
(CONTINUED)
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------------------
1995 1994
------------- -------------
<S> <C> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Notes payable (Note 5) $ 13,500,000 $ 15,987,000
Accounts payable 4,985,953 13,038,144
Accrued royalties payable 1,753,745 1,720,536
Accrued wages and taxes payable 512,078 781,651
Accrued interest payable 51,263 53,813
Accrued income taxes payable -0- 166,059
Current portion of
long-term debt (Note 6) 245,652 376,636
------------- -------------
Total current liabilities 21,048,691 32,123,839
------------- -------------
NONCURRENT LIABILITIES:
Long-term debt,
net of current portion (Note 6) 92,354 338,005
Deferred income taxes (Note 9) 155,642 172,046
------------- -------------
Total noncurrent liabilities 247,996 510,051
------------- -------------
SHAREHOLDERS' EQUITY:
Common stock, no par value,
20,000,000 shares authorized;
5,748,500 shares at 12/31/95
and 5,747,125 shares at 12/31/94
issued and outstanding 21,618,339 21,613,691
Retained earnings 4,400,080 8,136,534
------------- -------------
Total shareholders' equity 26,018,419 29,750,225
------------- -------------
COMMITMENTS AND
CONTINGENCIES (Note 2 and Note 10)
Total liabilities and
shareholders' equity $ 47,315,106 $ 62,384,115
============= =============
</TABLE>
See accompanying notes to financial statements
23
<PAGE> 24
SUN SPORTSWEAR, INC.
STATEMENTS OF INCOME
<TABLE>
<CAPTION>
For the year ended December 31,
---------------------------------------------------------------
1995 1994 1993
----------- ----------- -----------
<S> <C> <C> <C>
Proprietary sales $17,454,421 $28,922,739 $47,571,508
Licensed sales 79,335,040 88,665,196 60,365,230
Sales deductions (2,824,136) (4,375,039) (3,164,246)
----------- ----------- -----------
Net sales (Note 8) 93,965,325 113,212,896 104,772,492
Cost of goods sold 84,569,855 95,878,764 87,910,600
----------- ----------- -----------
Gross margin 9,395,470 17,334,132 16,861,892
----------- ----------- -----------
Operating expenses:
Selling 3,649,256 3,781,116 3,357,862
Design and pattern 2,492,222 2,527,013 2,297,864
General and
administrative 7,690,321 6,712,365 5,655,760
Provision for doubtful
accounts and factoring
fees (Note 11) 132,284 71,586 130,264
Manufacturing
cessation (Note 4) -0- -0- 898,450
----------- ----------- -----------
13,964,083 13,092,080 12,340,200
----------- ----------- -----------
Operating (loss) income (4,568,613) 4,242,052 4,521,692
----------- ----------- -----------
Other (income) expense:
Interest expense 1,267,442 676,612 519,006
Other, net (200,981) (111,236) (227,903)
----------- ----------- -----------
1,066,461 565,376 291,103
----------- ----------- -----------
(Loss) income before provision
for income taxes (5,635,074) 3,676,676 4,230,589
(Benefit) provision for
income taxes (Note 9) (1,898,620) 1,228,000 1,494,000
----------- ----------- -----------
Net (loss) income $(3,736,454) $ 2,448,676 $ 2,736,589
=========== =========== ===========
(Loss) earnings per share: $(0.65) $ 0.43 $ 0.49
======= ====== ======
Weighted average shares 5,748,249 5,722,121 5,610,996
outstanding
</TABLE>
See accompanying notes to financial statements
24
<PAGE> 25
SUN SPORTSWEAR, INC.
STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
Common Stock
---------------------------------
Retained
Shares Amount earnings Total
--------- ------------ ------------ ------------
<S> <C> <C> <C> <C>
Balance,
December 31, 1992 5,609,000 $ 20,950,447 $ 2,951,269 $ 23,901,716
Exercise of stock options
including tax benefit of
$80,074 28,500 182,074 182,074
Net income for the
year ended
December 31, 1993 2,736,589 2,736,589
--------- ------------ ------------ ------------
Balance,
December 31, 1993 5,637,500 21,132,521 5,687,858 26,820,379
Exercise of stock options
including tax benefit of
$109,498 109,625 481,170 481, 170
Net income for the
year ended
December 31, 1994 2,448,676 2,448,676
--------- ------------ ------------ ------------
Balance,
December 31, 1994 5,747,125 21,613,691 8,136,534 29,750,225
Exercise of stock options,
-0- tax benefit 1,375 4,648 4,648
Net loss for the
year ended
December 31, 1995 (3,736,454) (3,736,454)
--------- ------------ ------------ ------------
Balance,
December 31, 1995 5,748,500 $ 21,618,339 $ 4,400,080 $ 26,018,419
========= ============ ============ ============
</TABLE>
See accompanying notes to financial statements
25
<PAGE> 26
SUN SPORTSWEAR, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
For the year ended December 31,
----------------------------------------------------------
1995 1994 1993
------------ ------------ ------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net (loss) income $ (3,736,454) $ 2,448,676 $ 2,736,589
Adjustments to reconcile net
income (loss) to net cash provided
by (used in) operating activities:
Depreciation and amortization 1,526,015 1,225,139 1,102,448
(Gain) loss on disposal
of equipment (18,054) 1,025 730,025
Decrease (increase) in
accounts receivable 11,322,559 (10,644,227) (1,840,415)
Decrease (increase) in inventories 6,524,260 (8,094,570) 20,180
(Increase) decrease in federal
income tax receivable,
accrued and deferred (2,189,620) 92,158 544,695
(Increase) decrease in other assets (366,117) (84,790) 273,505
(Decrease) increase in
accounts payable (6,754,384) 5,925,735 (1,801,897)
(Decrease) increase in
accrued liabilities (238,914) 938,153 375,318
------------ ------------ ------------
Net cash provided by (used in)
operating activities 6,069,291 (8,192,701) 2,140,448
------------ ------------ ------------
Cash flows from investing activities:
Capital expenditures (1,169,168) (1,953,218) (2,215,259)
Proceeds from sale of equipment 46,133 70,956 202,031
------------ ------------ ------------
Net cash used in investing activities (1,123,035) (1,882,262) (2,013,228)
------------ ------------ ------------
Cash flows from financing activities:
(Decrease) increase in outstanding
checks in excess of funds on deposit (1,297,807) 186,329 1,170,819
Net (repayments) borrowings
under line of credit agreement (2,487,000) 12,534,000 (864,000)
Proceeds from issuance of
long-term debt -0- -0- 923,052
Principal payments under
long-term debt (376,635) (2,558,454) (909,258)
Proceeds from issuance of common
stock for employee stock options 4,648 481,171 102,000
------------ ------------ ------------
Net cash (used in) provided by
financing activities (4,156,794) 10,643,046 422,613
------------ ------------ ------------
Net increase in cash 789,462 568,083 549,833
Cash at beginning of period 1,217,171 649,088 99,255
------------ ------------ ------------
Cash at end of period $ 2,006,633 $ 1,217,171 $ 649,088
============ ============ ============
SUPPLEMENTAL DISCLOSURE OF
CASH FLOW INFORMATION:
Cash paid during the period for:
Interest $ 1,269,992 $ 688,174 $ 541,360
Income taxes $ 291,000 $ 1,251,000 $ 1,462,000
</TABLE>
26
<PAGE> 27
SUN SPORTSWEAR, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 1 - OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES:
OPERATIONS
The Company is engaged in designing, sourcing, printing and wholesale
distributing of imprinted, dyed, and decorated casual apparel. Products
consist primarily of garments printed with designs which are subject to license
or distributor agreements with third parties, and proprietary designs developed
by the Company. Revenues from operations are principally generated in the
United States.
RECLASSIFICATIONS
Certain reclassifications have been made to prior year amounts
(including reclassification of distribution costs from "operating expenses" to
"cost of goods sold") to conform to the presentation of the December 31, 1995
financial statements.
INVENTORIES
Inventories are stated at the lower of cost or market, cost being
determined using the first-in, first-out (FIFO) method. Cost includes the
purchase price of unprinted garments, the cost of manufacturing "cut-and-sewn"
garments and the cost of production of printed garments.
EQUIPMENT AND LEASEHOLD IMPROVEMENTS
Furniture, vehicles, equipment and leasehold improvements are stated
at cost. Depreciation and amortization are computed using the straight-line
method over the estimated useful lives of the respective assets for furniture,
vehicles and equipment and over the lease term or useful life for leasehold
improvements.
ACCOUNTS PAYABLE
Outstanding checks in excess of funds on deposit of $1,003,000 and
$2,299,000 at December 31, 1995 and 1994, respectively, have been classified as
accounts payable.
ACCRUED ROYALTIES PAYABLE
Royalties are accrued when the related licensed garments are shipped.
Additionally, the Company periodically reviews its royalty agreements, which
contain guaranteed minimum payments, and accrues the amount of the guaranteed
minimum royalties not expected to be met by sales of the licensed product.
INCOME TAXES
The Company accounts for income taxes in accordance with Statement of
Financial Accounting Standards No. 109 (FAS 109), Accounting for Income Taxes.
Deferred taxes have been provided on income and expense items that are reported
in different periods for financial and tax reporting purposes.
REVENUE RECOGNITION
Sales are recognized when finished garments are shipped from the
Company's facilities.
SALES DEDUCTIONS
Sales discounts and allowances are accrued as sales are recorded.
Sales returns, the other component of sales deductions, are accrued when the
Company believes sales returns will occur.
27
<PAGE> 28
ESTIMATES BY MANAGEMENT
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
EARNINGS PER SHARE
Earnings per share has been computed based upon the weighted average
number of shares outstanding for all periods presented. Fully diluted earnings
per share does not differ materially from primary earnings per share.
NOTE 2 - COMMITMENTS:
The Company has historically leased office, warehouse and
manufacturing space in Kent, Washington from a company owned by David Sabey,
the majority shareholder until December 1992 (at which time Mr. Sabey divested
himself of all his shares in the Company). The current lease requires monthly
payments of $115,000 plus operating and maintenance expense of the facility.
Rent expense for leases with Sabey totaled $1,389,000, $1,386,000 and
$1,404,000 in 1995, 1994 and 1993 respectively. The Company has an option to
purchase the facility it presently occupies during the five year period October
6, 1994 through October 5, 1999 for a mutually agreeable fair market price.
This lease expires in 1999.
The Company also leases warehouse space in Kent, Washington from a
third party. The lease expires in January 1997. Rent expense for this third
party lease, and other expired leases, in 1995, 1994 and 1993 totaled $181,000,
$89,000 and $198,000, respectively.
Future minimum rent commitments under all operating leases for periods
after December 31, 1995 are as follows:
<TABLE>
<CAPTION>
Rent Commitments
----------------
<S> <C>
1996 $ 1,572,100
1997 1,380,000
1998 1,380,000
1999 1,035,000
-----------
$ 5,367,100
===========
</TABLE>
Sun acquires rights to use trademarks and characters on specified
types of garments, under license agreements from third parties. At December
31, 1995, the Company was party to approximately 52 such license agreements.
Under these license agreements, the Company pays royalties of between 4% and
14% of the sales price of products sold displaying the licensed character or
trademark. Royalty expense for Sun's license agreements totaled $9,004,513,
$9,354,684 and $6,350,413 in 1995, 1994 and 1993 respectively. These license
agreements typically require that the Company guarantee a minimum royalty
payment. Unmet guaranteed minimum royalty commitments under all licensing
agreements in place at December 31, 1995, are as follows:
<TABLE>
<CAPTION>
Royalty Commitments
-------------------
<S> <C>
1996 $ 920,000
1997 429,000
------------
$ 1,349,000
============
</TABLE>
At December 31, 1995, the Company had an allowance of $691,000 recorded on its
balance sheet primarily to cover 1996 and 1997 minimum royalty commitments
which are not anticipated to be recovered through licensed product sales. (See
"Note 11 - Valuation and Qualifying Accounts")
28
<PAGE> 29
NOTE 3 - INVENTORIES:
Inventories are composed of:
<TABLE>
<CAPTION>
December 31,
-------------------------------------
1995 1994
----------- -----------
<S> <C> <C>
Garments in process $ 2,244,781 $ 2,205,577
Unprinted finished garments 19,827,823 24,544,341
Printed finished garments 5,617,347 5,965,455
Supplies 407,064 521,000
Lower of cost or market allowance (4,465,657) (3,080,755)
----------- -----------
$23,631,358 $30,155,618
=========== ===========
</TABLE>
NOTE 4 - EQUIPMENT AND LEASEHOLD IMPROVEMENTS:
Equipment and leasehold improvements are summarized by major
classifications as follows:
<TABLE>
<CAPTION>
December 31,
Estimated -------------------------------------
useful lives 1995 1994
------------ ----------- -----------
<S> <C> <C> <C>
Production equipment 5-7 $ 3,658,352 $ 3,500,342
Leasehold improvements 5-10 1,271,542 1,157,422
Computer hardware and software 3-5 2,996,638 1,507,205
Furniture and fixtures 5 1,116,112 1,111,640
Distribution equipment 5-10 1,452,716 1,395,543
Warehouse equipment 5-7 395,797 338,507
Vehicles 5 12,417 27,317
----------- -----------
10,903,574 9,037,976
Construction in progress 509 922,373
LESS - Accumulated depreciation (6,072,089) (4,743,429)
----------- -----------
$ 4,831,994 $ 5,216,920
=========== ===========
</TABLE>
In October 1993, the Company permanently discontinued all operations,
including "cut-and-sew" garment manufacturing operations, at its Tennessee
facility which resulted in charges to operations for shutdown expense of
$898,000 during the year ended December 31, 1993.
NOTE 5 - NOTES PAYABLE:
Notes payable consist of the following:
<TABLE>
<CAPTION>
Interest rate at December 31,
December 31, -------------------------------
1995 1995 1994
---------------- ------------ ------------
<S> <C> <C> <C>
Bank line of credit, portion
Prime based 8.50% $ -0- $ 3,987,000
Bank line of credit, portion
LIBOR based 7.94% 13,500,000 12,000,000
------------ ------------
$ 13,500,000 $ 15,987,000
============ ============
</TABLE>
At December 31, 1995, the Company's Bank credit agreement provided for
a line of credit facility (including commercial and standby letters of credit)
of up to $27,000,000. At December 31, 1995, total
29
<PAGE> 30
outstanding commercial letters of credit were $919,245 and approximately $1.8
million was available for borrowing. The borrowing rate for the revolving
portion of the line was the prime rate or lower. All the Company's assets,
including accounts receivable and inventories, were pledged as security for
borrowings under the Bank credit agreement.
In February 1996, the Company replaced its Bank credit agreement with
a credit agreement provided by Heller Financial, Inc. The Heller credit
agreement provides for a line of credit (including commercial letters of
credit) of up to $24,000,000. The borrowing rate for the revolving portion of
the line is the prime rate and all the Company's assets, including accounts
receivable and inventories, are pledged as security for borrowings under the
Heller credit agreement. The Heller credit agreement requires compliance with
certain financial covenants principally relating to working capital, tangible
net worth, ratio of debt to equity, expenditures for fixed assets, minimum
earnings (before taxes, interest and depreciation), interest coverage,
restrictions on the payment of dividends and restrictions on the incurrence of
long-term debt.
The weighted average interest rate for the Bank line of credit was
8.06% for 1995 and 6.73% for 1994.
NOTE 6 - LONG-TERM DEBT:
Long-term debt consists of the following:
<TABLE>
<CAPTION>
Interest rate at December 31,
December 31, ---------------------------------
1995 1995 1994
--------------- ------------- -------------
<S> <C> <C> <C>
Notes payable to GE Capital
in monthly installments
of $25,694 Variable - 5.91% $ 338,006 $ 617,112
Other notes payable Various -0- 97,529
------------- -------------
338,006 714,641
LESS - Current installments (245,652) (376,636)
------------- -------------
Long-term debt $ 92,354 $ 338,005
============= =============
</TABLE>
The notes payable to GE Capital were paid off in February 1996.
NOTE 7 - CASH PROFIT SHARING, 401-K PROFIT SHARING PLAN, STOCK OPTION PLANS,
AND RETIREMENT BENEFITS:
The Company has a Cash Profit Sharing Plan for its employees ("Cash
Plan"). Under the Cash Plan, the Board of Directors determines, at its
discretion, a percentage of the Company's net profits to be distributed to
employees on an annual basis. The amount of the distribution to any employee
is based upon the employee's compensation level and in some instances, length
of service with the Company. The Cash Plan is administered by a committee of
senior management employees appointed by the Board of Directors. The amount
charged to expense under the Cash Plan totaled $94,000, $194,000 and $321,000
in 1995, 1994 and 1993, respectively.
Effective January 1, 1992, the Company established a 401-K profit
sharing plan for qualifying employees. Employee contributions to the 401-K
plan are matched by the Company dollar for dollar on the first $200 contributed
to the plan; then $.25 for every $1 up to 6.0% of the employee's gross
earnings. Employees are fully vested in the 401-K plan after three years of
service. The 401-K plan is administered by a non-related, third
30
<PAGE> 31
party. The amount charged to expense under the 401-K plan totaled $66,000,
$57,000 and $54,000 in 1995, 1994 and 1993, respectively.
In October 1989, the Board of Directors approved stock option plans
for Company employees and directors coincident with the completion of the
public offering of common stock of the Company. The plans provide for the
issuance of options to purchase common stock to employees and non-employee
directors of the Company, at an exercise price in most cases equal to the fair
market value at the date of grant. The maximum term of options granted is ten
years. Options to employees are granted at the discretion of the Compensation
Committee of the Board of Directors. Options granted to non-employee directors
are granted in accordance with a formula set forth in the director plan. A
total of 660,000 common stock shares have been reserved for issuance under
these plans.
Options granted and outstanding during the three years ended December
31, 1995 are:
<TABLE>
<CAPTION>
Director Plan Employee Plan
--------------------------- ----------------------------
Shares Price/Share Shares Price/Share
------- ------------ ------- -------------
<S> <C> <C> <C> <C>
Options at December 31, 1992 22,000 $6.00-$11.25 252,250 $3.25 - $6.25
Options granted 11,000 $3.75 173,750 $3.19 - $3.38
Options canceled (17,000) $6.00-11.25 (36,250) $3.25 - $6.25
Options exercised -0- - - (28,500) $3.25 - $4.50
------- -------
Options at December 31, 1993 16,000 $3.75-$6.00 361,250 $3.19 - $6.00
Options granted 2,000 $5.88 141,750 $4.38 - $5.88
Options canceled -0- (72,125) $3.19 - $6.00
Options exercised -0- (109,625) $3.25 - $4.50
------- -------
Options at December 31, 1994 18,000 $3.75-$6.00 321,250 $3.38 - $5.88
Options granted 2,000 $4.125 54,500 $4.125
Options canceled (1,000) $4.125 (8,875) $4.38 - $5.88
Options exercised -0- - - (1,375) $3.38
------- -------
Options at December 31, 1995 19,000 $3.75-$6.00 365,500 $3.25 - $5.88
======= ========
</TABLE>
Options outstanding under the Director Plan are subject to one year
vesting periods, carry a five year term, and at December 31, 1995, options for
18,000 shares were exercisable. Options outstanding under the Employee Plan
are subject to vesting periods of up to four years, carry a ten year term, and
at December 31, 1995, options for 268,541 shares were exercisable.
In October 1995, the Financial Accounting Standards Board issued SFAS
123, "Accounting for Stock-Based Compensation", which establishes financial
accounting and reporting standards for stock-based employee compensation plans
and for the issuance of equity instruments to acquire goods and services from
non-employees. The Company has not determined the method of adoption for the
year ended December 31, 1996.
NOTE 8 - INDUSTRY PROFILE AND MAJOR CUSTOMERS:
The Company operates almost exclusively in one industry, which is the
wholesale distribution of imprinted, dyed and decorated casual apparel. The
Company's customers consist of large retail mass merchants. A substantial
portion of the Company's customers' ability to honor their obligations is
dependent on the retail apparel economic sector.
31
<PAGE> 32
The Company has three major customers who are mass merchants. The
percentage of gross sales for each customer and the total percentage of gross
sales for the three customers are as follows:
<TABLE>
<CAPTION>
Percentage of gross sales Total percentage
for Kmart, Target and Wal- of gross sales for
Mart, respectively the three customers
For the year ended December 31,
<S> <C> <C>
1995 17%, 24% and 47% 88%
1994 19%, 29% and 40% 88%
1993 8%, 38% and 36% 82%
</TABLE>
NOTE 9 - INCOME TAXES:
In January 1993, the Company prospectively adopted Statement of
Financial Accounting Standards No. 109 (FAS 109), Accounting for Income Taxes.
FAS 109 is an asset and liability approach that requires the recognition of
deferred tax assets and liabilities for the expected future tax consequences of
events that have been recognized in the Company's financial statements or tax
returns. The impact of adopting FAS 109 was not significant to the Company.
The provision (benefit) for income taxes was as follows :
<TABLE>
<CAPTION>
For the year ended December 31,
------------------------------------------------
1995 1994 1993
----------- ----------- -----------
<S> <C> <C> <C>
Current $(1,854,594) $ 1,554,000 $ 1,299,668
Deferred (44,026) (326,000) 194,332
----------- ----------- -----------
$(1,898,620) $ 1,228,000 $ 1,494,000
=========== =========== ===========
</TABLE>
Deferred tax assets (liabilities) at December 31 comprised the following:
<TABLE>
<CAPTION>
1995 1994
--------- ---------
<S> <C> <C>
Inventory capitalization $ 463,749 $ 599,749
Allowance for doubtful accounts 15,748 15,818
Accrued expenses 39,116 42,774
Accrued royalties 235,077 102,369
Other 78,907 44,265
--------- ---------
Gross deferred tax assets 832,597 804,975
Less - Depreciation (199,907) (216,311)
--------- ---------
$ 632,690 $ 588,664
========= =========
</TABLE>
<TABLE>
<CAPTION>
1995 1994
--------- ---------
<S> <C> <C>
Net current deferred tax asset $ 788,332 $ 760,710
Net noncurrent deferred tax liability (155,642) (172,046)
--------- ---------
$ 632,690 $ 588,664
========= =========
</TABLE>
NOTE 10 - CONTINGENCIES
The only legal proceedings to which the Company is a party involve
routine matters that are incidental to its business. The Company does not
believe that the resolution of these matters will have a material effect on the
results of operations or financial condition of the Company.
32
<PAGE> 33
NOTE 11 - VALUATION AND QUALIFYING ACCOUNTS
Activity of the Company's allowance for doubtful accounts follows:
<TABLE>
<CAPTION>
For the year ended December 31,
-----------------------------------
1995 1994 1993
-------- -------- ---------
<S> <C> <C> <C>
Balance, beginning of the year $ 46,524 $ 88,000 $ 258,000
Provision for doubtful accounts -0- -0- -0-
Chargeoffs/collections (207) (41,476) (170,000)
-------- -------- ---------
Balance, end of the year $ 46,317 $ 46,524 $ 88,000
======== ======== =========
</TABLE>
During 1993, 1994 and 1995, the Company had an agreement with Heller
Financial, Inc. intended to transfer the collection risk to Heller for Sun's
accounts receivable for essentially all of its customers other than Target,
Kmart and Wal-Mart. Under the agreement, Heller assumed 100% of the collection
risk associated with the Company's covered receivables. Heller received a fee
equal to .55% of the gross amount of covered receivables for assuming such
collection risk. The amount charged to expense for factoring fees was $48,000,
$80,000 and $169,000 in 1995, 1994 and 1993, respectively. This agreement
expires in 1997.
In February 1996, Sun amended the risk-transfer agreement with Heller,
whereby Heller also assumes 70% of the collection risk associated with the
Kmart receivables for a fee equal to .65% of the gross amount of such
receivables.
Activity of the Company's lower of cost or market inventory reserves follows:
<TABLE>
<CAPTION>
For the year ended December 31,
-------------------------------------------
1995 1994 1993
----------- ----------- -----------
<S> <C> <C> <C>
Balance, beginning of the year $ 3,080,755 $ 1,501,876 $ 919,725
Accruals 3,773,078 2,470,097 895,360
Chargeoffs (2,388,176) (891,218) (313,209)
----------- ----------- -----------
Balance, end of the year $ 4,465,657 $ 3,080,755 $ 1,501,876
=========== =========== ===========
</TABLE>
Activity of the Company's unmet guaranteed minimum royalty reserves follows:
<TABLE>
<CAPTION>
For the year ended December 31,
------------------------------------
1995 1994 1993
--------- --------- --------
<S> <C> <C> <C>
Balance, beginning of the year $ 301,085 $ 147,333 $ -0-
Accruals 693,643 350,000 147,333
Chargeoffs (303,325) (196,248) -0-
--------- --------- --------
Balance, end of the year $ 691,403 $ 301,085 $147,333
========= ========= ========
</TABLE>
NOTE 12 - RELATED PARTY TRANSACTIONS
During 1995, Sun hired the consulting firm of Wiley, Pene and Company
to assist in the Company's re-engineering efforts. Wiley, Pene and Company was
paid $243,000 from March to October 1995 for its services. Wiley, Pene and
Company is owned by Robert Pene, a former director of Sun, who resigned from
the Company's Board of Directors in September 1995; and by William S. Wiley,
who was appointed as the Company's Chief Executive Officer, President and
Director in October 1995.
33
<PAGE> 34
NOTE 13 - SUMMARY OF QUARTERLY FINANCIAL INFORMATION (UNAUDITED):
Quarterly financial information for the years ended December 31, 1995
and 1994 is as follows:
<TABLE>
<CAPTION>
First Second Third Fourth
Quarter Quarter Quarter Quarter Total
------- ------- ------- ------- -----
1995
<S> <C> <C> <C> <C> <C>
Net sales $ 25,720,562 $30,581,505 $ 16,224,578 $ 21,438,680 $ 93,965,325
Cost of
goods sold 22,522,498 25,310,087 17,097,761 19,639,509 84,569,855
------------ ----------- ------------ ------------ ------------
Gross margin 3,198,064 5,271,418 (873,183) 1,799,171 9,395,470
Operating
expenses 3,627,428 3,662,095 3,504,743 3,169,817 13,964,083
Other expense 330,034 314,033 152,794 269,600 1,066,461
------------ ----------- ------------ ------------ ------------
(Loss) income
before provision
for income taxes (759,398) 1,295,290 (4,530,720) (1,640,246) (5,635,074)
(Benefit) provision
for income taxes (258,000) 440,000 (1,540,500) (540,120) (1,898,620)
------------ ----------- ------------ ------------ ------------
Net (loss) income $ (501,398) $ 855,290 $ (2,990,220) $ (1,100,126) $ (3,736,454)
============ =========== ============ ============ ============
Net (loss) income
per share $(0.09) $0.15 $(0 .52) $(0.19) $(0.65)
</TABLE>
<TABLE>
<CAPTION>
First Second Third Fourth
Quarter Quarter Quarter Quarter Total
------- ------- ------- ------- -----
1994
<S> <C> <C> <C> <C> <C>
Net sales $27,224,201 $27,374,640 $26,633,787 $31,980,268 $113,212,896
Cost of
goods sold 22,394,136 22,778,232 23,230,396 27,476,000 95,878,764
----------- ----------- ----------- ----------- ------------
Gross margin 4,830,065 4,596,408 3,403,391 4,504,268 17,334,132
Operating
expenses 3,304,038 3,373,498 3,129,524 3,285,020 13,092,080
Other expense 59,258 69,235 167,585 269,298 565,376
----------- ----------- ----------- ----------- ------------
Income before
provision for
income taxes 1,466,769 1,153,675 106,282 949,950 3,676,676
Provision for
income taxes 498,000 377,579 51,808 300,613 1,228,000
----------- ----------- ----------- ----------- ------------
Net income $ 968,769 $ 776,096 $ 54,474 $ 649,337 $ 2,448,676
=========== =========== =========== =========== ============
Net income
per share $0.17 $0.14 $0.01 $0.11 $0.43
</TABLE>
The sum of quarterly earnings per share will not necessarily equal the earnings
per share reported for the entire year, due to rounding.
34
<PAGE> 35
ITEM 9 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10 - DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
For certain information with respect to executive officers of Sun
Sportswear, Inc., see "Item I, Executive Officers" above. The other
information required by Part III, Item 10, is incorporated by reference from
Sun Sportswear, Inc.'s Proxy Statement relating to Sun Sportswear, Inc.'s 1996
Annual Meeting of Shareholders. Such Proxy Statement will be filed pursuant to
Regulation 14A within 120 days of December 31, 1995.
ITEM 11 - EXECUTIVE COMPENSATION
The information required by Part III, Item 11, is incorporated by
reference from Sun Sportswear, Inc.'s Proxy Statement relating to Sun
Sportswear, Inc.'s 1996 Annual Meeting of Shareholders. Such Proxy Statement
will be filed pursuant to Regulation 14A within 120 days of December 31, 1995.
ITEM 12 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by Part III, Item 12, is incorporated by
reference from Sun Sportswear, Inc.'s Proxy Statement relating to Sun
Sportswear, Inc.'s 1996 Annual Meeting of Shareholders. Such Proxy Statement
will be filed pursuant to Regulation 14A within 120 days of December 31, 1995.
ITEM 13 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by Part III, Item 13, is incorporated by
reference from Sun Sportswear, Inc.'s Proxy Statement relating to Sun
Sportswear, Inc.'s 1996 Annual Meeting of Shareholders. Such Proxy Statement
will be filed pursuant to Regulation 14A within 120 days of December 31, 1995.
PART IV
ITEM 14 - EXHIBITS, FINANCIAL STATEMENTS AND REPORTS ON FORM 8-K
1. FINANCIAL STATEMENTS
The following financial statements are filed as part of this form in
Part II, Item 8:
- Report of Independent Public Accountants
- Balance Sheets as of December 31, 1995 and 1994
- Statements of Income for the years ended December 31, 1995,
1994, and 1993
- Statements of Shareholders' Equity for the years ended December
31, 1995, 1994 and 1993
- Statements of Cash Flows for the years ended December 31, 1995,
1994 and 1993
- Notes to Financial Statements
2. EXHIBITS
The required exhibits are included at the back of this Form and are
described on the Exhibit Index immediately preceding the first such exhibit.
3. REPORTS ON FORM 8-K
Form 8-K was filed October 6, 1995.
35
<PAGE> 36
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15 (D) OF THE SECURITIES
EXCHANGE ACT OF 1934, THE REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED
ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN THE CITY OF
KENT, STATE OF WASHINGTON, ON MARCH 14, 1996.
SUN SPORTSWEAR, INC.
(REGISTRANT)
BY: /S/ WILLIAM S. WILEY
----------------------------
William S. Wiley,
President and
Chief Executive Officer
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934,
THIS REPORT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS, IN THE FOLLOWING
CAPACITIES AND ON THE DATES INDICATED.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ William S. Wiley Chief Executive Officer, March 14, 1996
- ---------------------------------- President and Director
William S. Wiley (Principal Executive Officer)
/s/ Larry C. Mounger Chairman of the Board March 14, 1996
- ----------------------------------
Larry C. Mounger
/s/ James H. Williams Director March 14, 1996
- ----------------------------------
James H. Williams
/s/ Paul R. Rollins, Jr. Director March 14, 1996
- ----------------------------------
Paul R. Rollins, Jr.
/s/ James A. Walsh Director March 14, 1996
- ----------------------------------
James A. Walsh
/s/ Kevin C. James Senior Vice President, March 14, 1996
- ---------------------------------- Chief Financial Officer
Kevin C. James (Principal Financial Officer)
/s/ Michael J. Sandhorst Controller March 14, 1996
- ---------------------------------- (Principal Accounting Officer)
Michael J. Sandhorst
</TABLE>
36
<PAGE> 37
1995 10-K
Index to Exhibits
<TABLE>
<CAPTION>
Exhibit No. Description Page
- ----------- ----------- ----
<S> <C> <C>
3.1 Restated Articles of Incorporation of the Registrant. *
10.1 1989 Employee Stock Option Plan of the Registrant. *
10.2.1 1989 Director Stock Option Plan of the Registrant, as amended. *95Q*
10.4 Industrial Lease, dated April 3, 1989,
between the Registrant and Sabey Corporation. *
10.9 Tax Claims and Access Agreement, dated as of October 6, 1989,
between the Registrant and David A. Sabey. *
10.12 Form of Indemnification Agreement between
the Company and its directors. *91*
10.18 Employment Agreement between Registrant and
Kevin James, Senior Vice President and Chief Financial Officer. *94* +
10.19 Employment Agreement between Registrant and
L. Kaye Counts, Executive Vice President and
Chief Operating Officer. *94* +
10.20 License Agreement between Registrant and
The Walt Disney Company for The Lion King(C) characters. *94*
10.21 License Agreement between Registrant and
The Walt Disney Company for Pocahontas(C) characters. *94*
10.23.1 Employment Agreement between Registrant and
Sandra L. Teufel, Senior Vice President -
Sales and Merchandising. 38-43+
10.25 License Agreement between Registrant and
The Walt Disney Company
for The Hunchback of Notre Dame(C) characters. 44-68
10.26 License Agreement between Registrant and
The Walt Disney Company for Winnie the Pooh(C) characters. 69-91
10.27 Credit Agreement, dated as of February 13, 1996,
between the Registrant and Heller Financial, Inc. 92-143
29 Proxy Statement to Shareholders for Sun's
1996 Annual Meeting of Shareholders. ++
</TABLE>
* Filed as an exhibit to Form S-1 Registration Statement
(No. 33-31688), and incorporated herein by reference.
*91* Filed as an exhibit to Form 10-K for the year
ended December 31, 1991 and incorporated herein by reference.
*94* Filed as an exhibit to Form 10-K for the year
ended December 31, 1994 and incorporated herein by reference.
*95Q* Filed as an exhibit to Form 10-Q for the quarter
ended June 30, 1995 and incorporated herein by reference.
++ To be filed within 120 days of December 31, 1995,
pursuant to General Instruction G to Form 10-K
+ Employment Contract for Named Executive Officer
__________________________________
37
<PAGE> 1
EXHIBIT 10.23.1
EMPLOYMENT AGREEMENT
EMPLOYMENT AGREEMENT ("Agreement"), dated as of January 1, 1996 and entered
into this 6th day of February, 1996 by and between SUN SPORTSWEAR, INC., a
Washington corporation ("Employer"), and SANDRA L. TEUFEL, a resident of Mercer
Island, Washington ("Employee").
AGREEMENTS
In consideration of the mutual promises and covenants set forth below, Employer
and Employee agree as follows:
1. Employment. Employer hereby employs Employee and Employee hereby
accepts employment with Employer in the Puget Sound area of Washington
State upon the terms and conditions set forth herein.
2. Term. The term of this Agreement shall begin on January 1, 1996 and
shall end on December 31, 1996, unless earlier terminated pursuant to
Paragraph 7 hereof.
3. Compensation. For all services rendered by Employee hereunder,
Employer agrees to pay and grant Employee and Employee agrees to
accept the following:
3.1 An annual base salary of two hundred fifty thousand dollars
($250,000) relating to Employee's duties as Senior Vice President of
Sales and Merchandising for the Women's and Men's Divisions of
Employer, payable at the times and in the manner set by Employer's
standard payroll policy;
3.2 An annual bonus as set forth on Exhibit A attached hereto and
by this reference incorporated herein.
4. Duties of Employee. Employee is employed as Senior Vice
President of Sales and Merchandising for the Women's and Men's
Divisions of Employer with such duties, responsibilities and
authority as are consistent with such position. Employee
shall report to the Chief Executive Officer and perform such
additional duties as are assigned to her by such Officer and/or
by the Board of Directors of Employer and which are within the
scope of duties and responsibilities normally performed by a
corporate officer in such position.
4.1 During the term of this Agreement, Employee shall devote her
full time, attention and efforts to the conduct of the business of
Employer and the performance of her duties hereunder. Employee shall
not engage in any other business activity, whether pursued for gain,
profit, or otherwise; provided that Employee shall not be prevented
from investing her personal assets in entities in a manner that will
not require her services to help conduct the affairs of such entities.
4.2 The parties have discussed the mutual importance to Employee
and Employer of development and succession planning in Employee's
Divisions. The parties therefore agree that Employee shall use her
best efforts to train, develop and strengthen her staff.
38
<PAGE> 2
5. Benefits. Employee shall be entitled to all rights and benefits for
which she is eligible under Employer's 401(k), health, life and
disability insurance plans to the extent Employer maintains any or all
such plans, provided that nothing herein shall obligate Employer to
establish or maintain any such plans.
6. Vacation. Employee shall be entitled to a total of four (4) weeks
vacation each year.
7. Termination and Extension. This Agreement may be terminated prior to
December 31, 1996 upon mutual agreement in writing and signed by both
parties. An extension of this Agreement continuing beyond December
31, 1996 may be mutually agreed to in a writing signed by both parties
prior to such date. Such extended agreement may contain such
additional and amended terms and conditions as are mutually agreed to
by both parties.
8. Nondisclosure of Confidential Information.
8.1 Employee will not, during or after the term of this Agreement,
directly or indirectly, except in the ordinary course of fulfilling
Employee's duties and responsibilities hereunder, use, disseminate, or
disclose to any person, firm, corporation or other business entity for
any purpose whatsoever, information disclosed to Employee or known by
Employee as a consequence of or through her employment hereunder,
which is not generally known in the industry in which Employer is or
may become engaged, about Employer's business or activities, including
without limitation, information about Employer's products, services,
procedures, pricing, research, development, inventions, manufacturing,
purchasing, accounting, engineering, marketing, merchandising or
selling.
8.2 Upon termination of this Agreement, Employee shall immediately
return to Employer all documents, records, files, notebooks, computer
disks, and similar repositories containing the information described
in Section 8.1 above, including copies thereof, then in Employee's
possession or under her control whether prepared by her or by others.
8.3 Employee agrees to keep the terms of this Agreement
confidential and not discuss any terms with any employee of Employer
other than its Chief Executive Officer, and with any person other than
the Chairman of the Compensation Committee of Employer, unless
disclosure is otherwise required by law.
8.4 So long as Employee is not in default under the terms of this
Agreement, should Employee be terminated by Employer prior to the
expiration of this Agreement, Employee shall be entitled to cash
severance pay on the date of termination in the amount of $62,500,
provided, however, no severance shall be due if the termination is for
cause as defined in Exhibit B, attached hereto and by this reference
made a part hereof.
9. Saving Provision. Employer and Employee agree that the nondisclosure
provisions set forth above, including, without limitation, the scope,
duration and geographic extent of such restrictions, are fair and
reasonably necessary for the protection of Employer's legitimate
business interests. In the event a court of competent jurisdiction
should decline to enforce any of such provisions, they shall be deemed
to be modified to restrict Employee to the maximum extent which the
court shall find enforceable.
39
<PAGE> 3
10. Injunctive Relief. Employee acknowledges that the breach or
threatened breach of any of the nondisclosure provisions or other
agreements contained in this Agreement would give rise to irreparable
injury to Employer, which injury would be inadequately compensable in
money damages. Employer may, therefore, seek and obtain a restraining
order or injunction prohibiting the breach or any threatened breach of
any provision, requirement or covenant of this Agreement, in addition
to and not in limitation of any other legal remedies which may be
available.
11. Miscellaneous.
11.1 All rights of Employer and Employee pursuant to this Agreement
shall survive termination of employment hereunder.
11.2 Any notice required to be given under this Agreement shall be
sufficient if in writing and delivered personally or sent by
registered or certified mail to Employee at her last known address and
to Employer at its principal office.
11.3 This Agreement contains the entire agreement between Employer
and Employee relating to the subject matter hereof and no modification
of this Agreement shall be valid unless made in writing and signed by
both parties.
11.4 No waiver by Employer of any default or breach by Employee of
any term, condition or covenant of this Agreement shall be deemed to
be a waiver of any subsequent default or breach of the same or any
other term, condition or covenant contained herein.
11.5 The rights and obligation of Employee hereunder are personal
and may not be assigned to any other person. This Agreement will bind
and benefit any successor of Employer, whether by merger, sale of
assets, reorganization or other form of acquisition, disposition or
business reorganization. In the event of Employee's death, any
benefits due or to become due under this Agreement, including
compensation, shall become a part of Employee's estate and shall be
distributed to her personal representative.
11.6 If Employer or Employee brings an action or other proceeding
against the other to enforce any of the terms or conditions of this
Agreement, the prevailing party in any such action or proceeding shall
be paid reasonable attorneys' fees and costs by the other party.
11.7 This Agreement shall be governed by and construed in
accordance with the laws of the State of Washington.
EXECUTED as of the day and year first above written.
<TABLE>
<S> <C>
EMPLOYER: EMPLOYEE:
- ---------- --------
By: /s/ William S. Wiley By: /s/ Sandra L. Teufel
-------------------- --------------------
William S. Wiley Sandra L. Teufel
Chief Executive Officer
Sun Sportswear, Inc.
By: /S/ Paul R. Rollins, Jr.
------------------------
Paul R. Rollins, Jr., Chairman
Compensation Committee
</TABLE>
40
<PAGE> 4
EXHIBIT A
The following sets forth the terms of the Incentive Compensation Plan referred
to in Paragraph 3.2 defining Employee's annual bonus, it being agreed by
Employer and Employee that Employee's annual bonus for 1996 shall be
determined, as follows:
I. Contribution Margin Criteria.
Employee shall receive as an annual bonus for 1996 for meeting the
"Consolidated Divisional Contribution Margin Criteria" bonus component four
percent (4%) of the amount by which the "Consolidated Divisional Contribution
Margin" exceeds $5,461,000, it being agreed that the maximum Employee can earn
under this Criteria I is $350,000, subject to the following conditions:
(i) The Women's and Men's Divisions shall have a 1996 "Consolidated Divisional
Contribution Margin" of $5,461,000 or greater before any bonus is due under
this Section I (which shall be calculated in accordance with the standard
method used by Employer to prepare its books and records).
(ii) The reserves referenced in Section II shall be deducted from the
"Consolidated Divisional Margin Contribution" for purposes of calculating the
bonus due hereunder, except that in no case shall the bonus due hereunder be
reduced below $50,000 as a result of such deduction.
II. Inventory Criteria.
A reserve shall be created based on the status of the Employer's inventories at
year end based on the following criteria:
(i) For inventory twelve months old and older, a reserve of 50% of
the cost thereof.
(ii) For inventory between nine and twelve months old, a reserve of
25% of the cost thereof.
41
<PAGE> 5
EXHIBIT B
For purposes of the Section 8.4, "cause" shall be defined as a material breach
by Employee of any term or condition of the Employment Agreement, a material
failure by Employee to perform her duties or to comply with Employer's policies
and regulations applicable to Employee, misconduct by Employee which is
materially detrimental to Employer, or acts of dishonesty by Employee or her
conviction of a felony. A material breach by Employee of any term or condition
of the Employment Agreement, and a material failure by Employee to perform her
duties or to comply with Employer's policies and regulations applicable to
Employee, shall not be regarded as "cause" as defined hereunder, unless and
until Employee is given written notice of such breach or failure within a
reasonable period of time following its discovery by Employer, and Employee
fails to cure the breach or correct the failure within ten (10) days
thereafter.
42
<PAGE> 1
EXHIBIT 10.25
The Walt Disney Company
500 South Buena Vista Street
Burbank, California 91521
July 14, 1995
Sun Sportswear, Inc.
6520 South 190th Street
Kent, WA 98032
Re: THE HUNCHBACK OF NOTRE DAME
Dear Sirs/Mesdames:
We hereby agree with you as follows:
1. MEANING OF TERMS As used in this Agreement:
A. "LICENSED MATERIAL" means the graphic representations of the
following:
THE HUNCHBACK OF NOTRE DAME characters,
but only such characters and depictions of such
characters as may be designated by us;
and designated still scenes from the motion picture identified
in Subparagraph 1.B. hereafter.
B. "TRADEMARKS" means "WALT DISNEY" and "DISNEY", the
representations of Licensed Material included in Subparagraph
1.A. above, and the logo of the following motion picture in
which Licensed Material included in Subparagraph 1.A above
appears:
THE HUNCHBACK OF NOTRE DAME
C. "ARTICLES" means the following items on or in connections with
which the Licensed Material and/or the Trademarks are
reproduced or used:
(1) Short sleeve t-shirts
(2) Long sleeve t-shirts
(3) Fleece sweatshirts
(4) Novelty knit tops
(5) Turtlenecks
(6) Knit shorts
(7) Knit bottoms
The Articles identified above as Articles Numbers 1 -
5 are to be manufactured in Girls' sizes 4 - 6 X and
7 - 16, Junior Girls' sizes 3 - 13 and Women's/Plus
sizes S, M, L, XL, XXL and XXXL. Articles Numbers 6
- 7 are to be manufactured in Junior Girls' sizes 3 -
13 and Women's/Plus sizes S, M, L, XL, XXL and XXXL.
44
<PAGE> 2
Articles Numbers 1 - 7 above may include spot
screens, four color process prints, allover prints,
garment dyes, rotary prints, and oversize graphics
but may not include embellishments or embroideries.
D. "MINIMUM PER ARTICLE ROYALTY" means for each Article identified
herein which is sold the sum indicated herein:
None.
E. PRINCIPAL TERM" means the period commencing July 3, 1995, and
ending December 31, 1997.
F. "TERRITORY" means the United States, United States PX's
wherever located, and United States territories and
possessions, excluding Puerto Rico, Guam, Commonwealth of
Northern Mariana Islands and Palau. However, if sales are
made to chain stores in the United States which have stores in
Puerto Rico, such chain stores may supply Articles to such
stores in Puerto Rico.
G. "ROYALTIES" means a royalty in the amounts set forth below in
Subparagraphs 1.G.(1)(a), (b), and (c) and Royalties shall be
further governed by the provisions contained in Subparagraphs
1.G.(2)-(5):
(1)(a) twelve percent (12%) of your Net Invoiced Billings to
authorized retailers for Articles shipped by you from
a location in the Territory for delivery to a
customer located in the Territory ("F.O.B. In
Sales"); or
(b) sixteen percent (16%) of your Net Invoiced Billings
to authorized retailers when your customer located in
the Territory bears the costs (e.g., shipping,
duties, and the like) of obtaining delivery in the
Territory of Articles manufactured outside the
Territory ("F.O.B. Out Sales"); or
(c) if a Minimum Per Article Royalty has been specified
in Subparagraph 1.D. above, and it would result in a
higher royalty to be paid for the Articles, you agree
to pay the higher royalty amount.
(2) The sums which we are paid as Royalties on any sales
to your Affiliates shall be no less than the sums
paid on sales to customers not affiliated with you,
and if such Affiliate is a reseller of the Articles,
the sale to such Affiliate shall not be counted as a
sale for Royalty calculation purposes; in such case,
the relevant sale for Royalty calculation purposes
shall be that of such Affiliate.
(3) All sales of Articles shipped to a customer outside
the Territory pursuant to a distribution permission
shall bear a
45
<PAGE> 3
Royalty at the rate for F.O.B. Out Sales. However,
sales of Articles to our Affiliates outside the
Territory shall bear a Royalty at the rate for F.O.B.
In Sales.
(4) Royalties payable shall be not less for each Article
sold than the Minimum Per Article Royalty, if such a
Royalty has been specified in Subparagraph 1.D. No
Royalties are payable on the mere manufacture of
Articles.
(5) The full Royalty percentage shall be payable on
close-out or other deep discount sales of Articles,
including sales to employees.
H. "NET INVOICED BILLINGS" means the following:
(1) actual invoiced billings (i.e., sales quantity
multiplied by your selling price) for Articles sold,
and all other receivable of any kind whatsoever,
received in payment for the Articles, whether
received by you or any Affiliate of yours, except as
provided in Subparagraphs 1.G.(2), and 1.H.(2), less
"Allowable Deductions" as hereinafter defined.
(2) The following are not part of Net Invoiced Billings:
invoiced charges for transportation of Articles
within the Territory which are separately identified
on the sales invoice, and taxes on the sale.
I. "ALLOWABLE DEDUCTIONS" means the following:
(1) volume discounts and other discounts separately
identified on your sales invoices as being applicable
to sales of Articles licensed hereunder or to
combined sales of such Articles and other products
not licensed by us, and post-invoice credits granted
and properly documented as applicable to sales of
Articles licensed hereunder or to combined sales of
such Articles and other products not licensed by us;
in the event that a post-invoice credit is issued
for combined sales of Articles and other products not
licensed by us, and you cannot document the portion
of the credit applicable to the Articles, you may
apply only a pro rata portion of the credit to the
Articles.
(2) The following are not Allowable Deductions, whether
granted on sales invoices or as post-invoice credits:
cash discounts granted as terms of payment; early
payment discounts; allowances or discounts relating
to advertising; mark down allowances; costs incurred
in manufacturing, importing, selling or advertising
Articles; freight costs incorporated in the selling
price; and uncollectible accounts.
46
<PAGE> 4
J. "ROYALTY PAYMENT PERIOD" means each calendar quarterly period
during the Principal Term and during any other term.
K. "ADVANCE" means the following sum(s) payable by the following
date(s) as an advance on Royalties to accrue in the following
period(s):
$87,500.00 payable upon your signing of this
Agreement for the period commencing July 3, 1995,
and ending December 31, 1997.
L. "GUARANTEE" means the following sum(s) which you guarantee to
pay as minimum Royalties on your cumulative sales in the
following period(s):
$350,000.00 for the period commencing July 3, 1995,
and ending December 31, 1997.
M. "SAMPLES" means six (6) samples of each stock keeping unit
("SKU") of each Article, from the first production run of each
supplier of each SKU of each Article.
N. "PROMOTION COMMITMENT" means the following sum(s) which you
agree to spend in the following way(s):
You agree to promote the Articles with in-store
signage, promotional programs, and trade and consumer
advertising during the Principal Term of this
Agreement. You further agree to spend an amount
equal to no less that $20,000.00 on the in-store
signage and promotional programs and an amount equal
to no less than $25,000.00 on the trade and consumer
advertising. The in-store signage, promotional
programs, trade and consumer advertising shall be
devoted exclusively to the Articles.
O. "MARKETING DATE" means the following date(s) by which the
following Article(s) shall be available for purchase by the
public at retail outlets authorized pursuant to Subparagraph
2.A.:
(1) By release date of the film, currently estimated to
be June 1996, for all Articles; provided, however,
that you are responsible for assuring that no
Articles shall be displayed to the general public,
either by you or by anyone else, or available for
consumer purchase prior to two (2) weeks before the
release date, and you agree that you shall be liable
to us for any damages which occur due to earlier
display or availability of Articles. In the event
that any of the Articles are displayed or available
prior to two (2) weeks before the release date of the
film, we may, in our absolute discretion, require
that you recall such Articles, and you shall be
responsible for
47
<PAGE> 5
accomplishing such recall and shall bear all costs
and expenses relating thereto.
(2) When the actual release date of the film is
determined, you shall be advised in writing of the
shipping date for Articles, and you may not ship any
Articles to any customer before the shipping date.
In the event you ship any Articles before the
shipping date, and any retailers display or make the
Articles available for consumer purchase prior to two
(2) weeks before the film release date, you shall
immediately pay us liquidated damages in the amount
of $50,000.00 for each such retailer.
(3) The remedies set forth in this Paragraph 1.0 are in
addition to any other remedies available to us.
P. "AFFILIATE" means, with regard to you, any corporation or
other entity which directly or indirectly controls, is
controlled by, or is under common control with you; with
regard to us, "Affiliate: means any corporation or other
entity which directly or indirectly controls, is controlled
by, or is under common control with us. "Control" of an
entity shall mean possession, directly or indirectly, of power
to direct or cause the direction of management or policies of
such entity, whether through ownership of voting securities,
by contract or otherwise.
2. RIGHTS GRANTED
A. In consideration for your promise to pay and your payment of
all Royalties, Advances and Guarantees required hereunder, we
grant you the non-exclusive right, during the Principal Term
and any extension thereof, and only within the Territory, to
reproduce the Licensed Material only on or in connection with
the Articles, to use the Trademarks, but only such Trademarks
and uses thereof as may be approved when the Articles are
approved and only on or in connection with the Articles, and
to manufacture, distribute for sale and sell the Articles
(other than by direct marketing methods, including but not
limited to direct mail and door-to-door solicitation). You
will sell the Articles only to mass market retailers
(including such retailers as Target, Toys R Us, WalMart and
Kmart), value-oriented department stores (including such
retailers as J.C. Penney Co., Inc., Sears, Montgomery Ward and
Mervyn's) and value-oriented specialty stores (including such
retailers as Kids R Us and Baby Superstores) in the Territory
for resale to the public in the Territory. You will not sell
the Articles to supermarkets, drug chains, food chains, other
retailers or to wholesalers. If there is a question as to
whether a particular customer falls within any of the
categories specified above, our determination shall be
binding. If you wish to sell the Articles to wholesalers for
resale to authorized retailers, you must notify us and
negotiate the applicable royalty rate for such sales, which
you acknowledge shall be higher royalty rate than
48
<PAGE> 6
the rate set forth in Subparagraphs 1.G.(1)(a) and (b) for
sales to retailers.
B. Unless we consent in writing, you shall not sell or otherwise
provide Articles for use as premiums (including those in
purchase-with-purchase promotions), promotions, give-aways,
fund-raisers, or entries in sweepstakes, or to customers for
resale by direct mail or other direct marketing methods,
including, without limitation, home shopping television
programs, or to customers for inclusion in another product,
unless such product has been licensed by us. However, nothing
contained herein shall preclude you from soliciting orders by
mail from those retailers authorized pursuant to Subparagraph
2.A. above, nor from selling to such authorized retailers
which sell predominantly at retail, but which include the
Articles in their mail order catalogs or otherwise sell
Articles by direct marketing methods as well as at retail. If
you wish to sell the Articles to other customers for resale
through mail order catalogs, you must obtain our prior written
consent in each instance.
C. Unless we consent in writing, you shall not give away or
donate Articles, except minor quantities of samples, not for
onward distribution, to your accounts or other persons for the
purpose of promoting Article sales.
D. Nothing contained herein shall preclude you from selling
Articles to us or to any Affiliate of ours, or to your or our
employees, subject to the payment to us of Royalties on such
sales.
E. We further grant you the right to reproduce the Licensed
Material and to use the Trademarks, only within the Territory,
on containers, packaging and display material for the
Articles, and in advertising for the Articles.
F. Nothing contained in this Agreement shall be deemed to imply
any restriction on your freedom and that of your customers to
sell the Articles at such prices as you or they shall
determine.
G. You recognize and acknowledge the vital importance to us of
the characters and other proprietary material we own and
create, and the association of the Disney name with them. In
order to prevent the denigration of our products and the value
of their association with the Disney name, and in order to
ensure the dedication of your best efforts to preserve and
maintain that value, you agree that, during the Principal Term
and any extension hereof, you will not manufacture or
distribute any merchandise embodying or bearing any artwork or
other representation which we determine, in our reasonable
discretion, is confusingly similar to our Disney characters or
other proprietary material.
49
<PAGE> 7
3. ADVANCE
A. You agree to pay the Advance, which shall be on account of
Royalties to accrue during the Principal Term only, and only
with respect to sales in the Territory; provided, however,
that if any part of the Advance is specified hereinabove as
applying to any period less than the Principal Term, such part
shall be on account of Royalties to accrue during such lesser
period only. If said Royalties should be less than the
Advance, no part of the Advance shall be repayable.
B. Royalties accruing during any sell-off period or extension of
the Principal Term shall not be offset against the Advance
unless otherwise agreed in writing. Royalties accruing during
any extension of the Principal Term or any other term shall be
offset only against an advance paid with respect to such
extended term.
C. In no event shall Royalties accruing by reason of any sales to
us or an Affiliate of ours or by reason of sales outside the
Territory pursuant to a distribution permission be offset
against the Advance or any subsequent advance.
4. GUARANTEE
A. You shall, with your statement for each Royalty Payment Period
ending on a date indicated in Subparagraph 1.L. hereof
defining "Guarantee," or upon termination if the Agreement is
terminated prior to the end of the Principal Term, pay us the
amount, if any, by which cumulative Royalties paid with
respect to sales in the Territory during any period or periods
covered by the Guarantee provision, or any Guarantee provision
contained in any agreement extending the term hereof, fall
short of the amount of the Guarantee for such period.
B. Advances applicable to Royalties due on sales in the period to
which the Guarantee relates apply towards meeting the
Guarantee.
C. In no event shall Royalties paid with respect of sales to us
or to any Affiliate of ours, or with respect to sales outside
the Territory pursuant to a distribution permission, apply
towards the meeting of the Guarantee of any subsequent
guarantee.
5. PRE-PRODUCTION APPROVALS
A. As early as possible, and in any case before commercial
production of any Article, you shall submit to us for our
review and written approval (to utilize such materials in
preparing a pre-production sample) all concepts, all
preliminary and proposed final artwork, and all three-
dimensional models which are to appear on or in the Article.
Thereafter, you shall submit to us for our written approval a
pre-production sample of each Article. We shall endeavor to
respond to such requests within a reasonable time, but such
approvals should be
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sought as early as possible in case of delays. In addition to
the foregoing, as early as possible, and in any case no later
than sixty (60) days following written conceptual approval,
you shall supply to us for our use for internal purposes, a
mock-up, prototype or pre-production sample of each style of
each Article on or in connection with which the Licensed
Material is used. You acknowledge that we may not approve
concepts or artwork submitted near the end of the Principal
Term.
B. Approval or disapproval shall lie solely in our discretion,
and any Article not so approved in writing shall be deemed
unlicensed and shall not be manufactured or sold. If any
unapproved Article is being sold, we may, together with other
remedies available to us, including but not limited to,
immediate termination of this Agreement, by written notice
require such Article to be immediately withdrawn from the
market. Any modification of an Article, including, but not
limited to, change of materials, color, design or size of the
representation of Licensed Material must be submitted in
advance for our written approval as if it were a new Article.
Approval of an Article which uses particular artwork does not
imply approval of such artwork for use with a different
Article. The fact that artwork has been taken from a Disney
publication or a previously approved Article does not mean
that its use will necessarily be approved in connection with
an Article licensed hereunder.
C. If you submit for approval artwork from an article or book
manufactured or published by another licensee of ours or of
any subsidiary of ours, you must advise us in writing of the
source of such artwork. If you fail to do so, any approval
which we may give for use by you of such artwork may be
withdrawn by giving you written notice thereof, and you may be
required by us not to sell Articles using such artwork.
D. Notwithstanding the above, as we rely primarily on you for the
consistent quality and safety of the Articles and their
compliance with applicable laws and standards, we will not
unreasonably object to any change in the design of an Article
or in the materials used in the manufacture of the Article or
in the process of manufacturing the Articles which you advise
us in writing is intended to make the Article safer or more
durable.
E. If we have supplied you with forms for use in applying for
approval of artwork, models, pre-production and production
samples of Articles, you shall use such forms when submitting
anything for our approval.
6. APPROVAL OF PRODUCTION SAMPLES
A. Before shipping an Article to any customer, you agree to
furnish to us, from the first production run of each supplier
of each of the Articles, for our approval of all aspects of
the Article in question, the number of Samples with packaging
which is hereinabove set forth, which shall conform to the
approved artwork, three-dimensional models and
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pre-production sample. Approval or disapproval of the artwork
as it appears on the Article, as well as of the quality of the
Article, shall lie in our sole discretion and may, among other
things, be based on unacceptable quality of the artwork or of
the Article as manufactured. Any Article not so approved
shall be deemed unlicensed, shall not be sold and, unless
otherwise agreed by us in writing, shall be destroyed. Such
destruction shall be attested to in a certificate signed by
one of your officers. Production samples of Articles for
which we have approved a pre-production sample shall be deemed
approved, unless within twenty (20) days of our receipt of
such production sample we notify you to the contrary.
B. You agree to make available at no charge a reasonable number
of additional samples of each Article as we may from time to
time reasonably request for the purpose of comparison with
earlier samples, or to test for compliance with applicable
laws, regulations and standards, and to permit us upon
reasonable request to inspect your manufacturing operations
and testing records (and those of your suppliers) for the
Articles.
C. It is specifically understood that we may disapprove an
Article or a production run of an Article because the quality
is unacceptable to us, and accordingly, we recommend that you
submit production samples to us for approval before committing
to a large original production run or to purchase a large
shipment from a new supplier.
D. No modification of an approved production sample shall be made
without our further prior written approval. Articles being
sold must conform in all respects to the approved production
sample. It is understood that if in our reasonable judgment
the quality of an Article originally approved has deteriorated
in later production runs, or if the Article has otherwise been
altered, we may, in addition to other remedies available to
us, by written notice require such Article to be immediately
withdrawn from the market.
E. The rights granted hereunder do not permit the sale of
"seconds" or "irregulars". All Articles not meeting the
standard of approved samples shall be destroyed or all
Licensed Material and Trademarks shall be removed or
obliterated therefrom.
F. Notwithstanding the above, as we rely primarily on you for the
consistent quality and safety of the Articles and their
compliance with applicable laws and standards, we will not
unreasonably object to any change in the design of an Article
or in the materials used in the manufacture of the Article or
in the process of manufacturing the Articles which you advise
us in writing is intended to make the Article safer or more
durable.
G. We shall have the right, by written notice to you, to require
modification of any Article approved by us under any previous
agreement between us
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pertaining to Licensed Material. Likewise, if the Principal
Term of this Agreement is extended by mutual agreement, we
shall have the right, by written notice to you, to require
modification of any Article approved by us under this
Agreement. It is understood that there is no obligation upon
either party to extend the Agreement.
H. If we notify you of a required modification under Subparagraph
6.G. with respect to a particular Article, such notification
shall advise you of the nature of the changes required, and
you shall not accept any order for any such Article until the
Article has been resubmitted to us with such changes and you
have received our written approval of the Article as modified.
However, you may continue to distribute your inventory of the
previously approved Articles until such inventory is exhausted
(unless such Articles are dangerously defective, as determined
by us).
I. Upon our request, you agree to give us written notice of the
first ship date for each Article.
7. APPROVAL OF PACKAGING, PROMOTIONAL MATERIAL AND
ADVERTISING
A. All containers, packaging, display material, promotional
material, catalogs, and all advertising, including, but not
limited to, television advertising and press releases, for
Articles must be submitted to us and receive our written
approval before use. To avoid unnecessary expense if changes
are required, our approval thereof should be procured when
such is still in rough or storyboard format. We shall
endeavor to respond to requests for approval within a
reasonable time. Approval or disapproval shall lie in our
sole discretion, and the use of unapproved containers,
packaging, display material, promotional material, catalogs or
advertising is prohibited. Whenever you shall prepare catalog
sheets or other printed matter containing illustrations of
Articles, you will furnish to us five (5) copies thereof when
they are published.
B. If we have supplied you with forms for use in applying for
approval of artwork, models, pre-production and production
samples of Articles, you shall use such forms when submitting
anything for our approval.
C. We have designed character artwork to be used by all licensees
in connection with the packaging of all merchandise using the
Licensed Material, and on hang tags and garment labels or such
merchandise. We will supply you with reproduction artwork
thereof, and you agree to use such artwork on the packaging of
the Articles, and on hang tags and garment labels which you
will have printed and attached to each Article at your cost.
We recommend that you source the hang tags and garment labels
from our authorized manufacturer of pre-approved hang tags and
garment labels, the name of which will be provided to you upon
request However, you may use another manufacturer for the
required hang tags and garment labels if the hang tags and
garment labels manufactured are
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of equivalent quality and are approved by us in accordance
with our usual approval process.
8. ARTWORK
You shall pay us, within thirty (30) days of receiving an invoice
therefor, for artwork done at your request by us or third parties
under contract to us in the development and creation of Articles,
display, packaging or promotional material (including any artwork
which in our opinion is necessary to modify artwork initially prepared
by you and submitted to us for approval, subject to your prior written
approval) at our then prevailing commercial art rates. Estimates of
artwork charges are available upon request. While you are not
obligated to utilize the services of our Art Department, you are
encouraged to do so in order to minimize delays which may occur if
outside artists do renditions of Licensed Material which we cannot
approve and to maximize the attractiveness of the Articles.
9. PRINT, RADIO OR TV ADVERTISING
You will obtain all approvals necessary in connection with print,
radio or television advertising, if any, which we may authorize. You
represent and warrant that all advertising and promotional materials
shall comply with all applicable laws and regulations. Our approval
of copy or storyboards for such advertising will not imply a
representation or belief by us that such copy or storyboards are
sufficient to meet any applicable code, standard, or other obligation.
This Agreement does not grant you any rights to use the Licensed
Material in animation. You may not use any animation or live action
footage from the motion picture from which the Licensed Material comes
without our prior written approval in each instance. In the event we
approve the use of film clips of the motion picture from which the
Licensed Material comes, for use in a television commercial, you shall
be responsible for any re-use fees which may be applicable, including
SAG payments for talent. No reproduction of the film clip footage
shall be made except for inclusion, as approved by us, in such
commercial and there shall be no modifications of the film clip
footage. All film clip footage shall be returned to us immediately
after its inclusion in such commercial. We shall have the right to
prohibit you from advertising the Articles by means of television
and/or billboards. Such right shall be exercised within our absolute
discretion, including without limitation for reasons of overexposure
of the Licensed Material.
10. LICENSEE NAME AND ADDRESS ON ARTICLES
A. Your name, trade name (or a trademark of yours which you have
advised us in writing that you are using) and your address (at
least city and state) will appear on permanently affixed
labeling on each Article or, if the Article is sold to the
public in packaging or a container, printed on such packaging
or a container so that the public can identify the supplier of
the Article. On soft goods "permanently affixed" shall mean
sewn on. RN numbers do not constitute a sufficient label
under this paragraph.
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B. You shall advise us in writing of all trade names or
trademarks you wish to use on Articles being sold under this
license. You may sell the Articles only under mutually agreed
upon trade names or trademarks.
11. COMPLIANCE WITH APPROVED SAMPLES AND APPLICABLE
LAWS AND STANDARDS
Each Article and component thereof distributed hereunder shall be of
good quality and free of defects in design, materials and workmanship,
and shall comply with all applicable laws, regulations and voluntary
industry standards and such specifications, if any, as may have been
specified in this Agreement, and shall conform to the Sample thereof
approved by us. Both before and after you put Articles on the market,
you shall follow reasonable and proper procedures for testing that
Articles comply with such laws, regulations, and standards, and shall,
upon reasonable notice, permit our designees to inspect testing,
manufacturing and quality control records and procedures and to test
the Articles for compliance. You shall also give due consideration to
any recommendations of ours that Articles exceed the requirements of
applicable laws, regulations and standards. Articles not complying
with applicable laws, regulations and voluntary standards shall be
deemed unapproved, even if previously approved by us, and shall not be
shipped unless and until they have been brought into full compliance
therewith.
12. DISNEY OWNERSHIP OF ALL RIGHTS IN LICENSED MATERIAL
You acknowledge that the copyrights and all other proprietary rights
in and to Licensed Material are exclusively owned by and reserved to
us. You shall neither acquire nor assert copyright ownership or any
other proprietary rights in Licensed Material or in any derivation,
adaptation, variation or name thereof. Without limiting the
foregoing, you hereby assign to us all your worldwide right, title and
interest in the Licensed Material and in any material objects
consisting of or incorporating drawings, paintings, animation cels, or
sculptures of Licensed Material, or other derivations, adaptations,
compilations, collective works, variations or names of Licensed
Material, heretofore or hereafter created by or for you or any
Affiliate of yours. All such new materials shall be included in the
definition of "Licensed Material" under this Agreement. If any third
party makes or has made any contribution to the creation of any new
materials which are included in the definition of Licensed Material
under this Paragraph 12, you agree to obtain from such party a full
assignment of rights so that the foregoing assignment by you shall
vest full rights to such new materials in us. The foregoing
assignment to us of material objects shall not include that portion of
your displays, catalogs or promotional material not containing
Licensed Material, or the physical items constituting the Articles,
unless such items are in the shape of the Licensed Material.
13. COPYRIGHT NOTICE
As a condition to the grant of rights hereunder, each Article and any
other matter containing Licensed Material shall bear a properly
located permanently
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affixed copyright notice in our name (e.g., "(C)Disney"), or such
other notice as we may notify to you in writing. You will comply with
such instructions as to form, location and content of the notice as we
may give from time to time. You will not, without our prior written
consent, affix to any Article or any other matter containing Licensed
Material a copyright notice in any other name. If through
inadvertence or otherwise a copyright notice on any Article or other
such matter should appear in your name or the name of a third party,
you hereby agree to assign to us the copyright represented by any such
copyright notice in your name and, upon request, cause the execution
and delivery to us of whatever documents are necessary to convey to us
that copyright represented by any such copyright notice. If by
inadvertence a proper copyright notice is omitted from any Article or
other matter containing Licensed Material, you agree at your expense
to use all reasonable efforts to correct the omission on all such
Articles or other matter in process of manufacture or in distribution.
You agree to advise us promptly and in writing of the steps being
taken to correct any such omission and to make the corrections on
existing Articles which can be located.
14. NON-ASSOCIATION OF OTHER FANCIFUL CHARACTERS WITH
LICENSED MATERIAL
To preserve our identification with our characters and to avoid
confusion of the public, you agree not to associate other characters
(other than such as constitute a trademark of yours) or licensed
properties with the Licensed Material or the Trademarks either on the
Articles or in their packaging, or, without our written permission, on
advertising, promotional or display materials.
15. ACTIVE MARKETING OF ARTICLES
You agree to manufacture (or have manufactured for you) and offer for
sale all the Articles and to exercise the rights granted herein. You
agree that by the Marketing Date applicable to a particular Article
or, in the absence of such a date being specified in Subparagraph
1.O., by six (6) months from the commencement of the Principal Term,
shipments to customers of such Article will have taken place in
sufficient time that such Article shall be available for purchase by
the public at the retail outlets authorized pursuant to Subparagraph
2.A. In any case in which such sales have not taken place or when the
Article is not then and thereafter available for purchase by the
public, we may either invoke our remedies under Paragraph 28, or
withdraw such Article from the list of Articles licensed in this
Agreement without obligation to you other than to give you written
notice thereof.
16. PROMOTION COMMITMENT
You agree to carry out the Promotion Commitment, if any, as defined in
Subparagraph 1.N.
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17. TRADEMARK RIGHTS AND OBLIGATIONS
A. All uses of the Trademarks by you hereunder shall inure to our
benefit You acknowledge that we are the exclusive owner of all
the Trademarks, and of any trademark incorporating all or any
part of a Trademark or any Licensed Material, and the
trademark rights created by such uses. Without limiting the
foregoing, you hereby assign to us all the Trademarks, and any
trademark incorporating all or any part of a Trademark or any
Licensed Material, and the trademark rights created by such
uses, together with the goodwill attaching to that part of the
business in connection with which such Trademarks or
trademarks are used. You agree to execute and deliver to us
such documents as we require to register you as a Registered
User or Permitted User of the Trademarks or such trademarks
and to follow our instructions for proper use thereof in order
that protection and/or registrations for the Trademarks and
such trademarks may be obtained or maintained.
B. You agree not to use any Licensed Material or Trademarks, or
any trademark incorporating all or any part of a Trademark or
of any Licensed Material, on any business sign, business
cards, stationery or forms (except as licensed herein), or to
use any Licensed Material or Trademark as the name of your
business or any division thereof, unless otherwise agreed by
us in writing.
C. Nothing contained herein shall prohibit you from using your
own trademarks on the Articles or your copyright notice on the
Articles when the Articles contain independent material which
is your property. Nothing contained herein is intended to
give us any rights to, and we shall not use, any trademark,
copyright or patent used by you in connection with the
Articles which is not derived or adapted from Licensed
Material, Trademarks, or other materials owned by us.
18. REGISTRATIONS
Except with our written consent, neither you nor any Affiliate of
yours will register or attempt in any country to register copyrights
in, or to register as a trademark, service mark, design patent or
industrial design, or business designation, any of the Licensed
Material, Trademarks or derivations or adaptations thereof, or any
word, symbol or design which is so similar thereto as to suggest
association with or sponsorship by us or any Affiliate of ours. In
the event of breach of the foregoing, you agree, at your expense and
at our request, immediately to terminate the unauthorized registration
activity and promptly to execute and deliver, or cause to be
delivered, to us such assignments and other documents as we may
require to transfer to us all rights to the registrations, patents or
applications involved.
19. UNLICENSED USE OF LICENSED MATERIALS
A. You agree that you will not use the Licensed Material, or the
Trademarks, or any other material the copyright to which is
owned by us
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in any way other than as herein authorized (or as is
authorized in any other written contract in effect between
us). In addition to any other remedy we may have, you agree
that the profits from any use thereof on products other than
the Articles (unless authorized by us in writing), and all
profits from the use of any other copyrighted material of ours
without written authorization, shall be payable to us.
B. You agree to give us prompt written notice of any unlicensed
use by third parties of Licensed Material or Trademarks, and
that you will not, without our written consent, bring or cause
to be brought any criminal prosecution, lawsuit or
administrative action for infringement, interference with or
violation of any rights to Licensed Material or Trademarks.
Because of the need for and the high costs of an effective
anti-piracy enforcement program, you agree to cooperate with
us, and, if necessary, to be named by us as a sole complainant
or co-complainant in any action against an infringer of the
Licensed Material or Trademarks and, notwithstanding any right
of yours to recover same, legal or otherwise, you agree to pay
to us, and hereby waive all claims to, all damages or other
monetary relief recovered in such action by reason of a
judgment or settlement whether or not such damages or other
monetary relief, or any part thereof, represent or are
intended to represent injury sustained by you as a licensee
hereunder; in any such action against an infringer, we agree
to reimburse you for reasonable expenses incurred at our
request, including reasonable attorney's fees if we have
requested you to retain separate counsel.
20. STATEMENTS AND PAYMENTS OF ROYALTIES
A. You agree to furnish to us by the 30th day after each Royalty
Payment Period full and accurate statements on statement forms
we designate for your use, showing all information requested
by such forms, including but not limited to, the quantities,
Net Invoiced Billings and applicable Royalty rate(s) of
Articles invoiced during the preceding Royalty Payment Period,
and the quantities and invoice value of Articles returned for
credit or refund in such period. At the same time you will
pay us all Royalties due on billings shown by such statement.
To the extent that any Royalties are not paid, you authorize
us to offset Royalties due against any sums which we or any
Affiliate of ours may owe to you or any Affiliate of yours.
No deduction or withholding from Royalties payable to us shall
be made by reason of any tax. Any applicable tax on the
manufacture, distribution and sale of the Articles shall be
borne by you.
B. The statement forms we designate for our use may be changed
from time to time, and you agree to use the most current form
we provide to you. You agree to fully comply with all
instructions supplied by us for completing such forms.
C. In addition to the other information requested by the
statement forms, your statement shall with respect to all
Articles report separately:
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(1) F.O.B. In Sales;
(2) F.O.B. Out Sales;
(3) sales of Articles outside the Territory pursuant to a
distribution permission (indicating the country
involved);
(4) your sales of Articles as a supplier to any of our or
our licensees or our Affiliates' licensees for the
Articles (which sales shall not generate Royalties
payable to us so long as such licensees are reselling
the Articles and paying us royalties on such
resales);
(5) sales of Articles to us or any Affiliate of ours;
(6) sales of Articles to your or our employees;
(7) sales of Articles under any brand or program
identified in Subparagraph 1.B. hereinabove.
D. Sales of items licensed under contracts with us other than
this Agreement shall not be reported on the same statement as
sales of Articles under this Agreement.
E. Your statements and payments shall be delivered to The Walt
Disney Company, P.O. Box 101947, Atlanta, Georgia 30392.
However, Advances should be mailed directly to the Contract
Administrator at 500 South Buena Vista Street, Burbank,
California 91521-6771. A copy of each statement must be sent
to us at 500 South Buena Vista Street, Burbank, California
91521-6771, to the attention of the Contract Administrator,
Consumer Products Division. If you wish to send statements
and payments by overnight courier, please use the following
address: The Walt Disney Company, Wachovia South Metro
Center, 3585 Atlanta Avenue, Hapeville, GA 30354, Attention
Peggy Morris, Reference Lock Box 101947.
21. ARTICLES RETURNED FOR CREDIT OR REFUND
Royalties reported on sales of Articles which have been returned to
you for credit or refund and on which a refund has been made or credit
memo issued may be credited against Royalties due. The credit shall
be taken in the Royalty Payment Period in which the refund is given or
credit memo issued. Unused credits may be carried forward, but in no
event shall you be entitled to a refund of Royalties.
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22. INTEREST
Royalties or any other payments due to us hereunder which are received
after the due date shall bear interest at the rate of 10% per annum
from the due date (or the maximum permissible by law if less than 10%)
23. AUDITS AND MAINTAINING RECORDS
You agree to keep accurate records of all transactions relating to
this Agreement and any prior agreement with us, including, without
limitation, shipments to you of Articles and components thereof,
inventory records, records of sales and shipments by you, and records
of returns, and to preserve such records for the lesser of seven (7)
years or two (2) years after the expiration or termination of this
Agreement. We or our representatives, shall have the right from time
to time, during your normal business hours, but only for the purpose
of confirming your performance hereunder, to examine and make extracts
from all such records, including the general ledger, invoices and any
other records which we reasonably deem appropriate to verify the
accuracy of your statements or your performance hereunder, including
records of your Affiliates if they are involved in activities which
are the subject of this Agreement. In particular, your invoices shall
identify the Articles separately from goods which are not licensed
hereunder. If in an audit of your records it is determined that there
is a short fall of five percent (5%) or more in Royalties reported for
any Royalty Payment Period, you shall upon request from us reimburse
us for the full out-of-pocket costs of the audit, including the costs
of employee auditors calculated at $60 per hour per person for travel
time during normal working hours and actual working time.
24. MANUFACTURE OF ARTICLES BY THIRD PARTY MANUFACTURERS
A. If you at any time desire to have Articles or components
thereof containing Licensed Material manufactured by a third
party, you must, as a condition to the continuation of this
Agreement, notify us of the name and address of such
manufacturer and the Articles or components involved and
obtain our prior written permission to do so. If we are
prepared to grant permission, we will do so if:
(1) In the case of manufacture outside the Territory:
(a) you and each of your manufacturers and any
submanufacturers sign a
Consent/Manufacturer's Agreement in a form
which we will furnish to you; and
(b) we receive all such agreements properly
signed; and
(2) In the case of manufacture in the Territory:
(a) upon our request, you cause each such
manufacturer to sign an agreement in a form
which we will furnish to you; and
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(b) we receive all such agreements properly
signed.
(A SAMPLE OF SAID AGREEMENT FORM IS AVAILABLE ON REQUEST.)
B. We will not normally require agreements from suppliers of
yours who are manufacturing in the Territory, but your
purchase of Articles from a third party manufacturer without
such agreements as are required hereunder being signed and
delivered to us shall be a violation of this Agreement. It is
not our policy to reveal the names of your suppliers to third
parties or to any division of ours involved with buying
products, except as may be necessary to enforce our contract
rights or protect our trademarks and copyrights.
C. If any such manufacturer utilizes Licensed Material or
Trademarks for any unauthorized purpose, you shall cooperate
fully in bringing such utilization to an immediate halt. If,
by reason of your not having supplied the above mentioned
agreements to us or not having given us the name of any
supplier, we make any representation or take any action and
are thereby subjected to any penalty or expense, you will
fully compensate us for any cost or loss we sustain.
25. INDEMNITY
A. You shall indemnify us during and after the term hereof
against all claims, liabilities (including settlements entered
into in good faith with your consent, not to be unreasonably
withheld) and expenses (including reasonable attorneys' fees)
arising out of your activities hereunder, or out of any defect
(whether obvious or hidden and whether or not present in any
sample approved by us) in an Article, or arising from personal
injury or any infringement of any rights of any other person
by the manufacture, sale, possession or use of Articles, or
their failure to comply with applicable laws, regulations and
standards. The parties indemnified hereunder shall include
The Walt Disney Company and its subsidiaries, and their
officers, directors, employees and agents. The indemnity
shall not apply to any claim or liability relating to any
infringement of the copyright of a third party caused by your
utilization of the Licensed Material and the Trademarks in
accordance with the provisions hereof.
B. We shall indemnify you during and after the term hereof
against all claims, liabilities (including settlements entered
into in good faith with our consent, not to be unreasonably
withheld) and expenses (including reasonable attorneys' fees)
arising out of any claim that your use of any representation
of the Licensed Material or the Trademarks approved in
accordance with the provisions of this Agreement infringes the
copyright of any third party or infringes any right granted by
us to such third party. You shall not, however, be entitled
to recover for lost profits.
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C. Additionally, if by reason of any claims referred to in
Subparagraph 25.B., you are precluded from selling any stock
of Articles or utilizing any materials in your possession or
which come into your possession by reason of any required
recall, we shall be obligated to purchase such Articles and
materials from you at their out-of-pocket cost to you,
excluding overheads, but we shall have no other responsibility
or liability with respect to such Articles or materials.
D. No warranty or indemnity is given with respect to any
liability or expense arising from any claim that use of the
Licensed Material or the Trademarks on or in connection with
the Articles hereunder or any packaging, advertising or
promotional material infringes on any trademark right of any
third party or otherwise constitutes unfair competition by
reason of any prior rights acquired by such third party other
than rights acquired from us. It is expressly agreed that it
is your responsibility to carry out such investigations as you
may deem appropriate to establish that Articles, packaging,
promotional and advertising material which are manufactured or
created hereunder, including any use made of the Licensed
Material and the Trademarks therewith, do not infringe such
right of any third party, and we shall not be liable to you if
such infringement occurs.
E. You and we agree to give each other prompt written notice of
any claim or suit which may arise under the indemnity
provisions set forth above. Without limiting the foregoing,
you agree to give us written notice of any product liability
claim made or suit with respect to any Article within seven
(7) days of your receipt of the claim.
26. INSURANCE
You shall maintain in full force and effect at all times while this
Agreement is in effect and for three years thereafter commercial
general liability insurance, including broad form coverage for
contractual liability, products liability and personal injury
liability (including bodily injury and death), waiving subrogation,
with minimum limits of no less than two million dollars (US
$2,000,000.00) per occurrence, and naming as additional insureds those
indemnified in Paragraph 25 hereof. You shall deliver to us a
certificate or certificates of insurance evidencing satisfactory
coverage and indicating that we shall receive written notice of
cancellation, non-renewal or of any material change in coverage at
least thirty (30) days prior to the effective date thereof. Your
insurance shall be carried by an insurer with a BEST rating of B + VII
or better. Compliance herewith in no way limits your indemnity
obligations, except to the extent that your insurance company actually
pays us amounts which you would otherwise pay us.
27. WITHDRAWAL OF LICENSED MATERIAL
You agree that we may, without obligation to you other than to give
you written notice thereof, withdraw from the scope of this Agreement
any Licensed Material which by the Marketing Date or, in the absence
of such a date being
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specified in Subparagraph 1.O., by six (6) months from the
commencement of the Principal Term, is not being used on or in
connection with the Articles. We may also withdraw any Licensed
Material or Articles the use or sale of which under this Agreement
would infringe or reasonably be claimed to infringe the rights of a
third party, other than rights granted by us, in which case our
obligations to you shall be limited to the purchase at cost of
Articles and other materials utilizing such withdrawn Licensed
Material which cannot be sold or used. In the case of any withdrawal
under the preceding sentence, the Advances and Guarantees shall be
adjusted to correspond to the time remaining in the Principal Term, or
the number of Articles remaining under the Agreement, at the date of
withdrawal.
28. TERMINATION
Without prejudice to any other right or remedy available to us:
A. If you fail to manufacture, sell and distribute the Articles,
or to furnish statements and pay Royalties as herein provided,
or if you otherwise breach the terms of this Agreement, and if
any such failure is not corrected within thirty (30) days
after we send you written notice thereof (or, in the case of
non-payment of Royalties within fifteen (15) days), we shall
have the right at any time to terminate this Agreement by
giving you written notice thereof.
B. We shall have the right at any time to terminate this
Agreement by giving you written notice thereof:
(1) if you deliver to any customer without our written
authorization merchandise containing representations
of Licensed Material or other material the copyright
or other proprietary rights to which are owned by us
other than Articles listed herein and approved in
accordance with the provisions hereof;
(2) if you deliver Articles outside the Territory or
knowingly sell Articles to a third party for delivery
outside the Territory, unless pursuant to a written
distribution permission or separate written license
agreement with us or any Affiliate of ours;
(3) if a breach occurs which is of the same nature, and
which violates the same provision of this Agreement,
as a breach of which we have previously given you
written notice;
(4) if you breach any material term of any other license
agreement between us, and we terminate such agreement
for cause;
(5) if you shall make any assignment for the benefit of
creditors, or file a petition in bankruptcy, or are
adjudged bankrupt, or become insolvent, or are placed
in the hands of a receiver, or
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if the equivalent of any such proceedings or acts
occurs, though known by some other name or term;
and/or
(6) if you are not permitted or are unable to operate
your business in the usual manner, or are not
permitted or are unable to provide us with assurance
satisfactory to us that you will so operate your
business, as debtor in possession or its equivalent,
or are not permitted, or are unable to otherwise meet
your obligations under this Agreement or to provide
us with assurance satisfactory to us that you will
meet such obligations.
29. RIGHTS AND OBLIGATIONS UPON EXPIRATION OR TERMINATION
A. Upon the expiration or termination of this Agreement, all
rights herein granted to you shall revert to us, and we shall
be entitled to retain all Royalties and other things of value
paid or delivered to us. You agree that the Articles shall be
manufactured during the Principal Term in quantities
consistent with anticipated demand therefor so as not to
result in an excessive inventory build-up immediately prior to
the end of the Principal Term. You agree that from the
expiration or termination of this Agreement you shall neither
manufacture nor have manufactured for you any Articles, that
you will deliver to us any and all artwork (including
animation cels and drawings) which may have been used or
created by you in connection with this Agreement, that you
will at our option either sell to us at cost or destroy or
efface any molds, plates and other items used to reproduce
Licensed Martial or Trademarks, and that except as hereinafter
provided, you will cease selling Articles. Any unauthorized
distribution of Articles after the expiration or termination
of this Agreement shall constitute copyright infringement.
B. If you have any unsold Articles in inventory on the expiration
or termination date, you shall provide us with a full
statement of the kinds and numbers of such unsold Articles and
shall thereupon, but only if such statement has been provided
to us and if you have fully complied with the terms of this
Agreement including the payment of all Royalties due and the
Guarantee, have the right for a limited period of three (3)
calendar months from such expiration or earlier termination
date to sell off and deliver such Articles. You shall furnish
us statements covering such sales and pay us Royalties in
respect of such sales. Such Royalties shall not be applied
against the Advance or towards meeting the Guarantee.
C. In recognition of our interest in maintaining a stable and
viable market for the Articles during and after the Principal
Term and any sell-off period, you agree to refrain from
"dumping" the Articles in the market during any sell-off
period granted to you. "Dumping" shall mean the distribution
of product at volume levels significantly above your prior
sales practices with respect to the Articles, and at price
levels so far below your prior sales practices with respect to
the Articles as to
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disparage the Articles; provided, however, that nothing
contained herein shall be deemed to restrict your ability to
set product prices at your discretion.
D. Except as otherwise agreed by us in writing, any inventory of
Articles in your possession or control after the expiration or
termination hereof and of any sell-off period granted
hereunder shall be destroyed, or all Licensed Material and
Trademarks removed or obliterated therefrom.
E. If we supply you with forms regarding compliance with this
Paragraph 29, you agree to complete, execute and return such
forms to us expeditiously.
30. WAIVERS
A waiver by either of us at any time of a breach of any provision of
this Agreement shall not apply to any breach of any other provision of
this Agreement, or imply that a breach of the same provision at any
other time has been or will be waived, or that this Agreement has been
in any way amended, nor shall any failure by either party to object to
conduct of the other be deemed to waive such party's right to claim
that a repetition of such conduct is a breach hereof.
31. PURCHASE OF ARTICLES BY US
If we wish to purchase Articles, you agree to sell such Articles to us
or any Affliliate of ours at as low a price as you charge for similar
quantities sold to your regular customers and to pay us Royalties on
any such sales.
32. NON-ASSIGNABILITY
A. You shall not voluntarily or by operation of law assign,
sub-license, transfer, encumber or otherwise dispose of all or
any part of your interest in this Agreement without our prior
written consent, to be granted or withheld in our absolute
discretion. Any attempted assignment, sub-license, transfer,
encumbrance or other disposal without such consent shall be
void and shall constitute a material default and breach of
this Agreement. "Transfer" within the meaning of this
Paragraph 32 shall include any merger or consolidation
involving your company or your parent (if any); any sale or
transfer of all or substantially all of your (or your parent)
company's assets; any transfer of your rights hereunder to a
division, business segment or other entity of yours other than
the one specifically referenced on page 1 hereof (or any sale
or attempted sale of Articles under a trademark or trade name
of such division, business segment or other entity); and any
transaction or series of related transactions resulting in the
transfer of thirty-three and one-third percent (33-1/3%) or
more of the voting stock of your (or your parent) company (or,
if your company is a partnership, thirty-three and one-third
percent (33-1/3%) or more of the profit and loss participation
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in your company, or the occurrence of any of the foregoing
with respect to any general partner of your company).
B. Our consent to any assignment of this Agreement or other
transfer as defined in Subparagraph 32.A. shall be subject to
such terms and conditions as we deem appropriate, including
payment of a transfer fee in the amount of ten percent (10%)
of Royalties earned for the Articles in the four (4) complete
calendar quarterly periods preceding the date you seek our
consent, but in no event less than $100,000.00. The foregoing
transfer fee shall not apply if this Agreement is assigned to
one of our Affiliates as part of a corporate reorganization
involving some or all of the entities existing in your
corporate structure when this Agreement is signed; provided,
however, that you must give us written notice of such
assignment and a description of the reorganization. If you
have more than one merchandise license agreement with us for
the Territory, and an event occurs which would trigger the
transfer fee provisions of this Paragraph 32, you need only
pay to us one transfer fee, equal to the greater of
$100,000.00 or ten percent (10%) of Royalties earned for all
Articles in the preceding four (4) complete calendar quarterly
periods under all of the merchandise license agreements for
the Territory. The provisions of this Subparagraph 32.B.
shall supersede any conflicting provisions on this subject in
any merchandise license agreement previously entered into
between you and us, including but not limited to, the
determination of the applicable four (4) complete calendar
quarterly periods to be used in the calculation of Royalties
earned.
C. Notwithstanding Subparagraphs 32.A. and B., you may, upon
written notice to us, unless we have objected within thirty
(30) days of receipt of such notice, sublicense your rights
hereunder to your Affiliates. You hereby irrevocably and
unconditionally guarantee that they will observe and perform
all of your obligations hereunder, including, without
limitation, the provisions governing approvals, and compliance
with approved samples, applicable laws and standards, and all
other provisions hereof, and that they will otherwise adhere
strictly to all of the terms hereof and act in accordance with
your obligations hereunder. Any involvement of an Affiliate
in the activities which are the subject of this Agreement
shall be deemed carried on pursuant to such a sublicense and
thus covered by such guarantee, but, unless notified to us and
not timely objected to, such involvement may be treated by us
as a breach of this Agreement.
33. RELATIONSHIP
This Agreement does not provide for a joint venture, partnership,
agency or employment relationship between us.
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34. CONSTRUCTION
The language of all parts of this Agreement shall in all cases be
construed as a whole, according to its fair meaning and not strictly
for or against any of the parties. Headings of paragraphs herein are
for convenience of reference only and are without substantive
significance.
35. MODIFICATIONS OR EXTENSIONS OF THIS AGREEMENT
Except as otherwise provided herein, this Agreement can only be
extended or modified by a writing signed by both parties.
36. NOTICES
All notices which either party is required or may desire to serve upon
the other party shall be in writing, addressed to the party to be
served at the address set forth on page 1 of this Agreement, and may
be served personally or by depositing the same addressed as herein
provided (unless and until otherwise notified), postage prepaid, in
the United States mail. Such notice shall be deemed served upon
personal delivery or upon the date of mailing; provided, however, that
we shall be deemed to have been served with a notice of a request for
approval of materials under this Agreement only upon our actual
receipt of the request and of any required accompanying materials.
Any notice sent to us hereunder shall be sent to the attention of
"Vice President, Licensing", unless we advise you in writing
otherwise.
37. MUSIC
Music is not licensed hereunder. Any charges, fees or royalties
payable for music rights or any other rights not covered by this
Agreement shall be additional to the Royalties and covered by separate
agreement.
38. PREVIOUS AGREEMENTS
This Agreement, and any confidentiality agreement you may have signed
pertaining to any of the Licensed Material, contains the entire
agreement between us concerning the subject matter hereof and
supersedes any pre-existing agreement and any oral or written
communications between us. However, if pursuant to any such
pre-existing agreement there was any agreement(s) in effect permitting
you to sell or distribute Articles outside the Territory or to cause
to be manufactured any Articles outside the Territory, such
agreement(s) shall be deemed to remain in effect to the extent that
they relate to Licensed Material and Articles licensed hereunder.
39. CHOICE OF LAW AND FORUM
This Agreement shall be deemed to be entered into in California and
shall be governed and interpreted according to the laws of the State
of California. Any legal actions pertaining to this Agreement shall
be commenced within the State of California and within either Los
Angeles or Orange Counties. The prevailing
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party shall be entitled to recover reasonable attorney's fees and
costs incurred therein.
40. EQUITABLE RELIEF
You acknowledge that we will have no adequate remedy at law if you
continue to manufacture, sell advertise, promote or distribute the
Articles upon the expiration or termination of this Agreement. You
acknowledge and agree that, in addition to any and all other remedies
available to us, we shall have the right to have any such activity by
you restrained equitable relief, including, but not limited to, a
temporary restraining order, a preliminary injunction, a permanent
injunction, or such other alternative relief as may be appropriate,
without the necessity of our posting any bond.
Please sign below under the word "Agreed". When signed by both parties this
shall constitute an agreement between us.
THE WALT DISNEY COMPANY
By: /s/ Doug Mangino
-------------------
Title: VP/DMM FILM ENTERTAINMENT LICENSING
-----------------------------------
Date: 9/11/95
--------
AGREED:
SUN SPORTSWEAR, INC.
By: /s/ Larry C. Mounger
---------------------
Title: President, C.E.O.
-----------------
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EXHIBIT 10.26
The Walt Disney Company
500 South Buena Vista Street
Burbank, California 91521
October 1, 1994
Sun Sportswear, Inc.
6520 South 190th Street
Kent, WA 98032
Re: WINNIE THE POOH
Dear Sirs/Mesdames:
We hereby agree with you as follows:
1. MEANING OF TERMS As used in this Agreement:
A. "LICENSED MATERIAL" means the graphic depictions of the following:
WINNIE THE POOH, CHRISTOPHER ROBIN,
EEYORE, KANGA, ROO, RABBIT, PIGLET,
OWL, GOPHER, AND TIGGER, ALL IN THE STYLE AS
DESIGNED BY US.
B. "TRADEMARKS" means "WALT DISNEY" and "DISNEY", the names for and
representations of Licensed Material included in Subparagraph 1.A.
above.
C. "ARTICLES" means the following items on or in connections with which the
Licensed Material and/or the Trademarks are reproduced or used:
1. Women's basic screen printed knit tops and bottoms
in sizes S, M, L, XL, XXL, XXXL and Maternity
2. Women's basic screen printed coordinates in sizes
S, M, L, XL, XXL, XXXL and Maternity
3. Girls' basic screen printed T-shirts in sizes 4 - 16
4. Girls' knit basic screen printed coordinates in sizes
7 - 16
5. Boys' basic screen printed knit tops and bottoms in
sizes 4 - 20
6. Boys' basic screen printed related knit separates in
sizes 4 - 20
7. Mens' basic screen printed knit tops and bottoms in
sizes S, M, L, XL AND XXL
D. "MINIMUM PER ARTICLE ROYALTY" means for each Article identified herein
which is sold the sum indicated herein:
None.
E. PRINCIPAL TERM" means the period commencing October 1, 1994, and ending
December 31, 1996.
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F. "TERRITORY" means the United States, United States PX's wherever
located, and United States territories and possessions, excluding Puerto
Rico. However, if sales are made to chain stores in the United States
which have stores in Puerto Rico, such chain stores may supply Articles
to such stores in Puerto Rico.
G. "ROYALTIES" means a copyright royalty in the amounts set forth below in
Subparagraphs 1.G.(1)(a), (b), and (c) and Royalties shall be further
governed by the provisions contained in Subparagraphs 1.G.(2)-(5):
(1)(a) ten percent (10%) of your Net Invoiced Billings to authorized
retailers for Articles shipped by you from a location in the
Territory for delivery to a customer located in the Territory
("F.O.B. In Sales"); or
(b) fourteen percent (14%) of your Net Invoiced Billings to
authorized retailers when your customer located in the
Territory bears the costs (e.g., shipping, duties, and the
like) of obtaining delivery in the Territory of Articles
manufactured outside the Territory ("F.O.B. Out Sales"); or
(c) if a Minimum Per Article Royalty has been specified in
Subparagraph 1.D. above, and it would result in a higher
royalty to be paid for the Articles, you agree to pay the
higher royalty amount.
(2) The sums which we are paid as Royalties on any sales to
Affiliates shall be no less than the sums paid on sales to
customers not affiliated with you, and if such Affiliate is a
reseller of the Articles, the sale to such customer shall not be
counted as a sale for Royalty calculation purposes; in such case,
the relevant sale for Royalty calculation purposes shall be that
of such Affiliate.
(3) All sales of Articles shipped to a customer outside the
Territory pursuant to a distribution permission shall bear a
Royalty at the rate for F.O.B. Out Sales.
(4) Royalties payable shall be not less for each Article sold than
the Minimum Per Article Royalty, if such a Royalty has been
specified in Subparagraph 1.D. No Royalties are payable on the
mere manufacture of Articles.
(5) The full Royalty percentage shall be payable on close-out or
other deep discount sales of Articles, including sales to
employees, except that no Royalty shall be payable on Articles
sold with our written permission at or below your acquisition cost
or your cost of manufacture, excluding overheads.
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H. "NET INVOICED BILLINGS" means the following:
(1) actual invoiced billings (i.e., sales quantity multiplied by
your selling price) for Articles sold, and all other receivable
of any kind whatsoever, received in payment for the Articles,
whether received by you or any parent, subsidiary or affiliate
of yours, except as provided in Subparagraphs 1.G.(2), and
1.H.(2), less "Allowable Deductions" as hereinafter defined.
(2) The following are not part of Net Invoiced Billings: invoiced
charges for transportation of Articles within the Territory
which are separately identified on the sales invoice, and taxes
on the sale.
I. "ALLOWABLE DEDUCTIONS" means the following:
(1) volume discounts and other discounts separately identified on
your sales invoices as being applicable to sales of Articles
licensed hereunder or to combined sales of such Articles and
other products not licensed by us, and post-invoice credits
granted and properly documented as applicable to sales of
Articles licensed hereunder or to combined sales of such
Articles and other products not licensed by us; in the event
that a post- invoice credit is issued for combined sales of
Articles and other products not licensed by us, and you cannot
document the portion of the credit applicable to the Articles,
you may apply only a pro rata portion of the credit to the
Articles.
(2) The following are not Allowable Deductions, whether granted on
sales invoices or as post-invoice credits: cash discounts
granted as terms of payment; early payment discounts;
allowances or discounts related to advertising; mark down
allowances; costs incurred in manufacturing, importing, selling
or advertising Articles; freight costs incorporated in the
selling price; and uncollectible accounts.
J. "ROYALTY PAYMENT PERIOD" means each calendar quarterly period during the
Principal Term and during any other term.
K. "ADVANCE" means the following sum(s) payable by the following date(s) as
an advance on Royalties to accrue in the following period(s):
$40,000.00 payable upon your signing of this Agreement for the
period commencing October 1, 1994, and ending December 31,
1996.
L. "GUARANTEE" means the following sum(s) which you guarantee to pay as
minimum Royalties on your cumulative sales in the following period(s):
$200,000.00 for the period commencing October 1, 1994, and
ending December 31, 1996.
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M. "SAMPLES" means six (6) samples of each stock keeping unit ("SKU") of
each Article, from the first production run of each supplier of each SKU
of each Article.
N. "PROMOTION COMMITMENT" means the following sum(s) which you agree
to spend in the following way(s):
None.
O. "MARKETING DATE" means the following date(s) by which the following
Article(s) shall be available for purchase by the public at retail outlets:
By January 1, 1995, for all Articles.
P. "AFFILIATE" means any corporation or other entity which directly or
indirectly controls, is controlled by or is under common control with
you. "Control" of an entity shall mean possession, directly or
indirectly, of power to direct or cause the direction of management or
policies of such entity, whether through ownership of voting securities,
by contract or otherwise.
2. RIGHTS GRANTED
A. In consideration for your promise to pay and your payment of all
Royalties, Advances and Guarantees required hereunder, we grant
you the non-exclusive right, during the Principal Term and any
extension thereof, and only within the Territory, to reproduce the
Licensed Material only on or in connection with the Articles, to
use the Trademarks, but only such Trademarks and uses thereof as
may be approved when the Articles are approved and only on or in
connection with the Articles, and to manufacture, distribute for
sale and sell (other than by direct marketing methods, including
buy not limited to direct mail and door-to-door solicitation) the
Articles only to mass market retailers (e.g., KMart, J.C. Penney,
Co., Inc., Sears, Roebuck and Co., and Target) in the Territory.
You will not sell the Articles to other retailers for resale to
the public in the Territory or to wholesalers. If there is a
questions as to whether a particular customer falls within the
category of a mass market retailer, our determination shall be
binding. If you wish to sell the Articles to wholesalers or
distributors for resale to retailers, you must notify us and
negotiate the applicable royalty rate for such sales, which you
acknowledge shall be a higher royalty rate than the rate set forth
in Subparagraphs 1.G.(1)(a) and (b) for sales to retailers.
B. Unless we consent in writing, you shall not sell or otherwise
provide Articles for use as premiums (including those in
purchase-with-purchase promotions), promotions, give-aways,
fund-raisers, or entries in sweepstakes, or to customers for
resale by direct mail or other direct marketing methods,
including, without limitation, home shopping television programs,
or to customers for inclusion in another product, unless such
product has been licensed by us. However, nothing
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contained herein shall preclude you from soliciting orders by mail
from mass market retailers, nor from selling to mass market
retailers which sell predominantly at retail, but which include
the Articles in their mail order catalogs or otherwise sell
Articles by direct marketing methods as well as at retail. If you
wish to sell the Articles to other customers for resale through
mail order catalogs, you must obtain our prior written consent in
each instance.
C. Unless we consent in writing, you shall not give away or donate
Articles, except minor quantities of samples, not for onward
distribution, to your accounts or other persons for the purpose of
promoting Article sales.
D. Nothing contained herein shall preclude you from selling Articles
to us or to any subsidiary of ours, or to your or our employees,
subject to the payment to us of Royalties on such sales.
E. We further grant you the right to reproduce the Licensed Material
and to use the Trademarks, only within the Territory, on
containers, packaging and display material for the Articles, and
in advertising for the Articles.
F. Nothing contained in this Agreement shall be deemed to imply any
restriction on your freedom and that of your customers to sell the
Articles at such prices as you or they shall determine.
G. You recognize and acknowledge the vital importance to us of the
characters and other proprietary material we own and create, and
the association of the Disney name with them. In order to prevent
the denigration of our products and the value of their association
with the Disney name, and in order to ensure the dedication of
your best efforts to preserve and maintain that value, you agree
that, during the Principal Term and any extension hereof, you will
not manufacture or distribute any merchandise embodying or bearing
any artwork or other representation which we determine, in our
reasonable discretion, is confusingly similar to our Disney
characters or other proprietary material.
3. ADVANCE
A. You agree to pay the Advance, which shall be on account of
Royalties to accrue during the Principal Term only, and only with
respect to sales in the Territory; provided, however, that if any
part of the Advance is specified hereinabove as applying to any
period less than the Principal Term, such part shall be on account
of Royalties to accrue during such lesser period only. If said
Royalties should be less than the Advance, no part of the Advance
shall be repayable.
B. Royalties accruing during any sell-off period or extension of the
Principal Term shall not be offset against the Advance unless
otherwise agreed in writing. Royalties accruing during any
extension of the
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Principal Term or any other term shall be offset only against an
advance paid with respect to such extended term.
C. In no event shall Royalties accruing by reason of any sales to us
or a subsidiary of ours or by reason of sales outside the
Territory pursuant to a distribution permission be offset against
the Advance or any subsequent advance.
4. GUARANTEE
A. You shall, with your statement for each Royalty Payment Period
ending on a date indicated in Subparagraph 1.L. hereof defining
"Guarantee," or upon termination if the Agreement is terminated
prior to the end of the Principal Term, pay us the amount, if any,
by which cumulative Royalties paid with respect to sales in the
Territory during any period or periods covered by the Guarantee
provision, or any Guarantee provision contained in any agreement
extending the term hereof, fall short of the amount of the
Guarantee for such period.
B. Advances applicable to Royalties due on sales in the period to
which the Guarantee relates apply towards meeting the Guarantee.
C. In no event shall Royalties paid with respect of sales to us or to
any subsidiary or affiliate of ours, or with respect to sales
outside the Territory pursuant to a distribution permission, apply
towards the meeting of the Guarantee or any subsequent guarantee.
5. PRE-PRODUCTION APPROVALS
A. As early as possible, and in any case before commercial production
of any Article, you shall submit to us for our review and written
approval (to utilize such materials in preparing a pre-production
sample) all concepts, all preliminary and proposed final artwork,
and all three-dimensional models which are to appear on or in the
Article. Thereafter, you shall submit to us for our written
approval a pre-production sample of each Article. We shall
endeavor to respond to such requests within a reasonable time, but
such approvals should be sought as early as possible in case of
delays. In addition to the foregoing, as early as possible, and
in any case no later than sixty (60) days following written
conceptual approval, you shall supply to us for our use for
internal purposes, a mock-up, prototype or pre-production sample
of each style of each Article on or in connection with which the
Licensed Material is used. You acknowledge that we may not
approve concepts or artwork submitted near the end of the
Principal Term.
B. Approval or disapproval shall lie solely in our discretion, and
any Article not so approved in writing shall be deemed unlicensed
and shall not be manufactured or sold. If any unapproved Article
is being sold, we may, together with other remedies available to
us, including but not limited to, immediate termination of this
Agreement, by written notice require such Article to be
immediately withdrawn from the market. Any
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modification of an Article, including, but not limited to, change
of materials, color, design or size of the representation of
Licensed Material must be submitted in advance for our written
approval as if it were a new Article. Approval of an Article
which uses particular artwork does not imply approval of such
artwork for use with a different Article. The fact that artwork
has been taken from a Disney publication or a previously approved
Article does not mean that its use will necessarily be approved in
connection with an Article licensed hereunder.
C. If you submit for approval artwork from an article or book
manufactured or published by another licensee of ours or of any
subsidiary of ours, you must advise us in writing of the source of
such artwork. If you fail to do so, any approval which we may
give for use by you of such artwork may be withdrawn by giving you
written notice thereof, and you may be required by us not to sell
Articles using such artwork.
D. Notwithstanding the above, as we rely primarily on you for the
consistent quality and safety of the Articles and their compliance
with applicable laws and standards, we will not unreasonably
object to any change in the design of an Article or in the
materials used in the manufacture of the Article or in the process
of manufacturing the Articles which you advise us in writing is
intended to make the Article safer or more durable.
E. If we have supplied you with forms for use in applying for
approval of artwork, models, pre-production and production samples
of Articles, you shall use such forms when submitting anything for
our approval.
6. APPROVAL OF PRODUCTION SAMPLES
A. Before shipping an Article to any customer, you agree to furnish
to us, from the first production run of each supplier of each of
the Articles, for our approval of all aspects of the Article in
question, the number of Samples with packaging which is
hereinabove set forth, which shall conform to the approved
artwork, three-dimensional models and pre-production sample.
Approval or disapproval of the artwork as it appears on the
Article, as well as of the quality of the Article, shall lie in
our sole discretion and may, among other things, be based on
unacceptable quality of the artwork or of the Article as
manufactured. Any Article not so approved shall be deemed
unlicensed, shall not be sold and, unless otherwise agreed by us
in writing, shall be destroyed. Such destruction shall be
attested to in a certificate signed by one of your officers.
Production samples of Articles for which we have approved a
pre-production sample shall be deemed approved, unless within
twenty (20) days of our receipt of such production sample we
notify you to the contrary.
B. You agree to make available at no charge a reasonable number of
additional samples of each Article as we may from time to time
reasonably request for the purpose of comparison with earlier
samples,
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or to test for compliance with applicable laws, regulations and
standards, and to permit us upon reasonable request to inspect
your manufacturing operations and testing records (and those of
your suppliers) for the Articles.
C. It is specifically understood that we may disapprove an Article or
a production run of an Article because the quality is unacceptable
to us, and accordingly, we recommend that you submit production
samples to us for approval before committing to a large original
production run or to purchase a large shipment from a new
supplier.
D. No modification of an approved production sample shall be made
without our further prior written approval. Articles being sold
must conform in all respects to the approved production sample.
It is understood that if in our reasonable judgment the quality of
an Article originally approved has deteriorated in later
production runs, or if the Article has otherwise been altered, we
may, in addition to other remedies available to us, by written
notice require such Article to be immediately withdrawn from the
market.
E. The rights granted hereunder do not permit the sale of "seconds"
or "irregulars". All Articles not meeting the standard of
approved samples shall be destroyed or all Licensed Material and
Trademarks shall be removed or obliterated therefrom.
F. Notwithstanding the above, as we rely primarily on you for the
consistent quality and safety of the Articles and their compliance
with applicable laws and standards, we will not unreasonably
object to any change in the design of an Article or in the
materials used in the manufacture of the Article or in the process
of manufacturing the Articles which you advise us in writing is
intended to make the Article safer or more durable.
G. We shall have the right, by written notice to you, to require
modification of any Article approved by us under any previous
agreement between us pertaining to Licensed Material. Likewise,
if the Principal Term of this Agreement is extended by mutual
agreement, we shall have the right, by written notice to you, to
require modification of any Article approved by us under this
Agreement. It is understood that there is no obligation upon
either party to extend the Agreement.
H. If we notify you of a required modification under Subparagraph
6.G. with respect to a particular Article, such notification
shall advise you of the nature of the changes required, and you
shall not accept any order for any such Article until the Article
has been resubmitted to us with such changes and you have received
our written approval of the Article as modified. However, you may
continue to distribute your inventory of the previously approved
Articles until such inventory is exhausted (unless such Articles
are dangerously defective, as determined by us.)
I. You agree to give us written notice of the first ship date for
each Article.
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7. APPROVAL OF PACKAGING, PROMOTIONAL MATERIAL AND
ADVERTISING
A. All containers, packaging, display material, promotional material,
catalogs, and all advertising, including, but not limited to,
television advertising and press releases, for Articles must be
submitted to us and receive our written approval before use. To
avoid unnecessary expense if changes are required, our approval
thereof should be procured when such is still in rough or
storyboard format. We shall endeavor to respond to requests for
approval within a reasonable time. Approval or disapproval shall
lie in our sole discretion, and the use of unapproved containers,
packaging, display material, promotional material, catalogs or
advertising is prohibited. Whenever you shall prepare catalog
sheets or other printed matter containing illustrations of
Articles, you will furnish to us five (5) copies thereof when they
are published.
B. If we have supplied you with forms for use in applying for
approval of artwork, models, pre-production and production samples
of Articles, you shall use such forms when submitting anything for
our approval.
C. We have designed character artwork to be used by all licensees in
connection with the hang tags and garment labels of all
merchandise using the Licensed Material. We will supply you with
reproduction artwork thereof, and you agree to use such artwork on
the hang tags and garment labels of the Articles, which you will
have printed and attached to each Article at your cost. We
recommend that you source the hang tags and garment labels from
our authorized manufacturer of pre-approved hang tags and garment
labels, the name of which will be provided to you upon request.
However, you may use another manufacturer for the required hang
tags and garment labels if the hang tags and garment labels
manufactured are of equivalent quality and are approved by us in
accordance with our usual approval process.
8. ARTWORK
You shall pay us, within thirty (30) days of receiving an invoice therefor,
for artwork done at your request by us or third parties under contract to
us in the development and creation of Articles, display, packaging or
promotional material (including any artwork which in our opinion is
necessary to modify artwork initially prepared by you and submitted to us
for approval, subject to your prior written approval) at our then
prevailing commercial art rates. Estimates of artwork charges are
available upon request. While you are not obligated to utilize the
services of our Art Department, you are encouraged to do so in order to
minimize delays which may occur if outside artists do renditions of
Licensed Material which we cannot approve and to maximize the
attractiveness of the Articles.
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9. PRINT, RADIO OR TV ADVERTISING
You will obtain all approvals necessary in connection with print,
radio or television advertising, if any, which we may authorize. You
represent and warrant that all advertising and promotional materials
shall comply with all applicable laws and regulations. Our approval
of copy or storyboards for such advertising will not imply a
representation or belief by us that such copy or storyboards are
sufficient to meet any applicable code, standard, or other obligation.
This Agreement does not grant you any rights to use the Licensed
Material in animation. You may not use any animation or live action
footage from the motion picture from which the Licensed Material comes
without our prior written approval in each instance. In the event we
approve the use of film clips of the motion picture from which the
Licensed Material comes, for use in a television commercial, you shall
be responsible for any re-use fees which may be applicable, including
SAG payments for talent. No reproduction of the film clip footage
shall be made except for inclusion, as approved by us, in such
commercial and there shall be no modifications of the film clip
footage. All film clip footage shall be returned to us immediately
after its inclusion in such commercial. We shall have the right to
prohibit you from advertising the Articles by means of television
and/or billboards. Such right shall be exercised within our sole
discretion, including without limitation for reasons of overexposure
of the Licensed Material.
10. LICENSEE NAME AND ADDRESS ON ARTICLES
A. Your name, trade name (or a trademark of yours which you have
advised us in writing that you are using) and your address (at
least city and state) will appear on permanently affixed labeling
on each Article or, if the Article is sold to the public in
packaging or a container, printed on such packaging or a container
so that the public can identify the supplier of the Article. On
soft goods "permanently affixed" shall mean sewn on. RN numbers
do not constitute a sufficient label under this paragraph.
B. You shall advise us in writing of all trade names or trademarks
you wish to use on Articles being sold under this license. You
may sell the Articles only under mutually agreed upon trade names
or trademarks.
11. COMPLIANCE WITH APPROVED SAMPLES AND APPLICABLE
LAWS AND STANDARDS
Each Article and component thereof distributed hereunder shall be of good
quality and free of defects in design, materials and workmanship, and shall
comply with all applicable laws, regulations and voluntary industry
standards and such specifications, if any, as may have been specified in
this Agreement, and shall conform to the Sample thereof approved by us.
Both before and after you put Articles on the market, you shall follow
reasonable and proper procedures for testing that Articles comply with such
laws, regulations, and standards, and shall, upon reasonable notice, permit
our designees to inspect testing, manufacturing and quality control records
and procedures and to test the Articles for compliance. You shall also
give due consideration to any
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recommendations of ours that Articles exceed the requirements of applicable
laws, regulations and standards. Articles not complying with applicable
laws, regulations and voluntary standards shall be deemed unapproved, even
if previously approved by us, and shall not be shipped unless and until
they have been brought into full compliance therewith.
12. DISNEY OWNERSHIP OF ALL RIGHTS IN LICENSED MATERIAL
You acknowledge that the copyrights and all other proprietary rights in and
to Licensed Material are exclusively owned by and reserved to us. You
shall neither acquire nor assert copyright ownership or any other
proprietary rights in Licensed Material or in any derivation, adaptation,
variation or name thereof. Without limiting the foregoing, you hereby
assign to us all your worldwide right, title and interest in the Licensed
Material and in any material objects consisting of or incorporating
drawings, paintings, animation cels, or sculptures of Licensed Material, or
other derivations, adaptations, compilations, collective works, variations
or names of Licensed Material, heretofore or hereafter created by or for
you or any parent, subsidiary or Affiliate of yours. All such new
materials shall be included in the definition of "Licensed Material" under
this Agreement. If any third party makes or has made any contribution to
the creation of any new materials which are included in the definition of
Licensed Material under this Paragraph 12, you agree to obtain from such
party a full assignment of rights so that the foregoing assignment by you
shall vest full rights to such new materials in us. The foregoing
assignment to us of material objects shall not include that portion of your
displays, catalogs or promotional material not containing Licensed
Material, or the physical items constituting the Articles, unless such
items are in the shape of the Licensed Material.
13. COPYRIGHT NOTICE
As a condition to the grant of rights hereunder, each Article and any other
matter containing Licensed Material shall bear a properly located
permanently affixed copyright notice in our name (e.g., "(C)Disney"), or
such other notice as we may notify to you in writing. You will comply with
such instructions as to form, location and content of the notice as we may
give from time to time. You will not, without our prior written consent,
affix to any Article or any other matter containing Licensed Material a
copyright notice in any other name. If through inadvertence or otherwise a
copyright notice on any Article or other such matter should appear in your
name or the name of a third party, you hereby agree to assign to us the
copyright represented by any such copyright notice in your name and, upon
request, cause the execution and delivery to us of whatever documents are
necessary to convey to us that copyright represented by any such copyright
notice. If by inadvertence a proper copyright notice is omitted from any
Article or other matter containing Licensed Material, you agree at your
expense to use all reasonable efforts to correct the omission on all such
Articles or other matter in process of manufacture or in distribution. You
agree to advise us promptly and in writing of the steps being taken to
correct any such omission and to make the corrections on existing Articles
which can be located.
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14. NON-ASSOCIATION OF OTHER FANCIFUL CHARACTERS WITH
LICENSED MATERIAL
To preserve our identification with our characters and to avoid
confusion of the public, you agree not to associate other characters
(other than such as constitute a trademark of yours) or licensed
properties with the Licensed Material or the Trademarks either on the
Articles or in their packaging, or, without our written permission, on
advertising, promotional or display materials.
15. ACTIVE MARKETING OF ARTICLES
You agree to manufacture (or have manufactured for you) and offer for
sale all the Articles and to exercise the rights granted herein. You
agree that by the Marketing Date applicable to a particular Article
or, in the absence of such a date being specified in Subparagraph
1.O., by six (6) months from the commencement of the Principal Term,
shipments to customers of such Article will have taken place in
sufficient time that such Article shall be available for purchase by
the public at the retail outlets authorized pursuant to Subparagraph
2.A. In any case in which such sales have not taken place or when the
Article is not then and thereafter available for purchase by the
public, we may either invoke our remedies under Paragraph 28, or
withdraw such Article from the list of Articles licensed in this
Agreement without obligation to you other than to give you written
notice thereof.
16. PROMOTION COMMITMENT
You agree to carry out the Promotion Commitment, if any, as defined in
Subparagraph 1.N.
17. TRADEMARK RIGHTS AND OBLIGATIONS
A. All uses of the Trademarks by you hereunder shall inure to our
benefit. You acknowledge that we are the exclusive owner of all
the Trademarks, and of any trademark incorporating all or any part
of a Trademark or any Licensed Material, and the trademark rights
created by such uses. Without limiting the foregoing, you hereby
assign to us all the Trademarks, and any trademark incorporating
all or any part of a Trademark or any Licensed Material, and the
trademark rights created by such uses, together with the goodwill
attaching to that part of the business in connection with which
such Trademarks or trademarks are used. You agree to execute and
deliver to us such documents as we require to register you as a
Registered User or Permitted User of the Trademarks or such
trademarks and to follow our instructions for proper use thereof
in order that protection and/or registrations for the Trademarks
and such trademarks may be obtained or maintained.
B. You agree not to use any Licensed Material or Trademarks, or any
trademark incorporating all or any part of a Trademark or of any
Licensed Material, on any business sign, business cards,
stationery or forms (except as licensed herein), or to use any
Licensed Material or
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Trademark as the name of your business or any division thereof,
unless otherwise agreed by us in writing.
C. Nothing contained herein shall prohibit you from using your own
trademarks on the Articles or your copyright notice on the
Articles when the Articles contain independent material which is
your property. Nothing contained herein is intended to give us
any rights to, and we shall not use, any trademark, copyright or
patent used by you in connection with the Articles which is not
derived or adapted from Licensed Material, Trademarks, or other
materials owned by us.
18. REGISTRATIONS
Except with our written consent, neither you, your parent, nor any
subsidiary or affiliate of yours will register or attempt in any country to
register copyrights in, or to register as a trademark, service mark, design
patent or industrial design, or business designation, any of the Licensed
Material, Trademarks or derivations or adaptations thereof, or any word,
symbol or design which is so similar thereto as to suggest association with
or sponsorship by us or any subsidiary of ours. In the event of breach of
the foregoing, you agree, at your expense and at our request, immediately
to terminate the unauthorized registration activity and promptly to execute
and deliver, or cause to be delivered, to us such assignments and other
documents as we may require to transfer to us all rights to the
registrations, patents or applications involved.
19. UNLICENSED USE OF LICENSED MATERIALS
A. You agree that you will not use the Licensed Material, or the
Trademarks, or any other material the copyright to which is owned
by us in any way other than as herein authorized (or as is
authorized in any other written contract in effect between us).
In addition to any other remedy we may have, you agree that the
profits from any use thereof on products other than the Articles
(unless authorized by us in writing), and all profits from the use
of any other copyrighted material of ours without written
authorization, shall be payable to us.
B. You agree to give us prompt written notice of any unlicensed use
by third parties of Licensed Material or Trademarks, and that you
will not, without our written consent, bring or cause to be
brought any criminal prosecution, lawsuit or administrative action
for infringement, interference with or violation of any rights to
Licensed Material or Trademarks. Because of the need for and the
high costs of an effective anti-piracy enforcement program, you
agree to cooperate with us, and, if necessary, to be named by us
as a sole complainant or co-complainant in any action against an
infringer of the Licensed Material or Trademarks and,
notwithstanding any right of yours to recover same, legal or
otherwise, you agree to pay to us, and hereby waive all claims to,
all damages or other monetary relief recovered in such action by
reason of a judgment or settlement whether or not such damages or
other monetary relief, or any part thereof, represent or are
intended to represent injury sustained by you as a licensee
hereunder; in any such action against an
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infringer, we agree to reimburse you for reasonable expenses
incurred at our request, including reasonable attorney's fees if
we have requested you to retain separate counsel.
20. STATEMENTS AND PAYMENTS OF ROYALTIES
A. You agree to furnish to us by the 30th day after each Royalty
Payment Period a full and accurate statement showing by Article,
with stock number and item description, the quantities, Net
Invoiced Billings and applicable Royalty rate(s) of Articles
invoiced during the preceding Royalty Payment Period, and the
quantities and invoice value of Articles returned for credit or
refund in such period. At the same time you will pay us all
Royalties due on billings shown by such statement. To the extent
that any Royalties are not paid, you authorize us to offset
Royalties due against any sums which we or any subsidiary of ours
may owe to you or any parent, subsidiary or Affiliate of yours.
No deduction or withholding from Royalties payable to us shall be
made by reason of any tax. Any applicable tax on the manufacture,
distribution and sale of the Articles shall be borne by you.
B. If we at any time so request, your statements shall be made on
statement forms which we shall provide, and you will fully comply
with the instructions supplied by us for completing such forms.
Except as otherwise agreed in writing, such statements shall
separately reflect the sales and applicable Royalties for each
individual Article. Apparel Articles shall be reported separately
by size range (e.g., "boys'", "girls'", "men's", etc.). Your
statements shall identify for each Article the character or other
Licensed Material used on each such Article or the motion picture
or television series from which such character derived. However,
Articles which differ only in that different characters or scenes
appear on them may be reported as a single Article if the
characters or scenes used on such Articles are from the same
motion picture or television series.
C. Your statement shall with respect to all Articles report separately:
(1) F.O.B. In Sales;
(2) F.O.B. Out Sales;
(3) sales of Articles outside the Territory pursuant to a
distribution permission (indicating the country involved);
(4) your sales of Articles as a supplier to any of our or our
Affiliates' licensees for the Articles (which sales shall
not generate Royalties payable to us so long as such
licensees are reselling the Articles and paying us
royalties on such resales);
(5) sales of Articles to us or any subsidiary of ours;
(6) sales of Articles to your or our employees;
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(7) sales of Articles under any brand or program identified in
Subparagraph 1.B. hereinabove.
D. Sales of items licensed under contracts with us other than this
Agreement shall not be reported on the same statement as sales of
Articles under this Agreement.
E. Your statements and payments shall be delivered to The Walt Disney
Company, P.O. Box 101947, Atlanta, Georgia 30392. However,
Advances should be mailed directly to the Contract Administrator
at 500 South Buena Vista Street, Burbank, California 91521-6880.
A copy of each statement must be sent to us at 500 South Buena
Vista Street, Burbank, California 91521-6880, to the attention of
the Contract Administrator, Consumer Products Division.
21. ARTICLES RETURNED FOR CREDIT OR REFUND
Royalties reported on sales of Articles which have been returned to you for
credit or refund and on which a refund has been made or credit memo issued
may be credited against Royalties due. The credit shall be taken in the
Royalty Payment Period in which the refund is given or credit memo issued.
Unused credits may be carried forward, but in no event shall you be
entitled to a refund of Royalties.
22. INTEREST
Royalties or any other payments due to us hereunder which are received
after the due date shall bear interest at the rate of 10% per annum from
the due date (or the maximum permissible by law if less than 10%).
23. AUDITS AND MAINTAINING RECORDS
You agree to keep accurate records of all transactions relating to this
Agreement and any prior agreement with us, including, without limitation,
shipments to you of Articles and components thereof, inventory records,
records of sales and shipments by you, and records of returns, and to
preserve such records for the lesser of seven (7) years or two (2) years
after the expiration or termination of this Agreement. We or our
representatives, shall have the right from time to time, during your
normal business hours, but only for the purpose of confirming your
performance hereunder, to examine and make extracts from all such records,
including the general ledger, invoices and any other records which we
reasonably deem appropriate to verify the accuracy of your statements or
your performance hereunder, including records of your parent, subsidiary
and affiliated companies, if they are involved in activities which are the
subject of this Agreement. In particular, your invoices shall identify the
Articles separately from goods which are not licensed hereunder. If in an
audit of your records it is determined that there is a short fall of five
percent (5%) or more in Royalties reported for any Royalty Payment Period,
you shall upon request from us reimburse us for the full out-of-pocket
costs of the audit, including the
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costs of employee auditors calculated at $60 per hour per person for travel
time during normal working hours and actual working time.
24. MANUFACTURE OF ARTICLES BY THIRD PARTY MANUFACTURERS
A. If you at any time desire to have Articles or components thereof
containing Licensed Material manufactured by a third party, you
must, as a condition to the continuation of this Agreement, notify
us of the name and address of such manufacturer and the Articles
or components involved and obtain our prior written permission to
do so. If we are prepared to grant permission, we will do so if:
(1) In the case of manufacture outside the Territory:
(a) you and each of your manufacturers and any
submanufacturers sign a Consent/Manufacturer's
Agreement in a form which we will furnish to you;
and
(b) we receive all such agreements properly signed;
and
(2) In the case of manufacture in the Territory:
(a) upon our request, you cause each such
manufacturer to sign an agreement in a form which
we will furnish to you; and
(b) we receive all such agreements properly signed.
(A SAMPLE OF SAID AGREEMENT FORM IS AVAILABLE ON REQUEST.)
B. We will not normally require agreements from suppliers of yours
who are manufacturing in the Territory, but your purchase of
Articles from a third party manufacturer without such agreements
as are required hereunder being signed and delivered to us shall
be a violation of this Agreement. It is not our policy to reveal
the names of your suppliers to third parties or to any division of
ours involved with buying products, except as may be necessary to
enforce our contract rights or protect our trademarks and
copyrights.
C. If any such manufacturer utilizes Licensed Material or Trademarks
for any unauthorized purpose, you shall cooperate fully in
bringing such utilization to an immediate halt. If, by reason of
your not having supplied the above mentioned agreements to us or
not having given us the name of any supplier, we make any
representation or take any action and are thereby subjected to any
penalty or expense, you will fully compensate us for any cost or
loss we sustain.
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25. INDEMNITY
A. You shall indemnify us during and after the term hereof against
all claims, liabilities (including settlements entered into in
good faith with your consent, not to be unreasonably withheld) and
expenses (including reasonable attorneys' fees) arising out of
your activities hereunder, or out of any defect (whether obvious
or hidden and whether or not present in any sample approved by us)
in an Article, or arising from personal injury or any infringement
of any rights of any other person by the manufacture, sale,
possession or use of Articles, or their failure to comply with
applicable laws, regulations and standards. The parties
indemnified hereunder shall include The Walt Disney Company and
its subsidiaries, and their officers, directors, employees and
agents. The indemnity shall not apply to any claim or liability
relating to any infringement of the copyright of a third party
caused by your utilization of the Licensed Material and the
Trademarks in accordance with the provisions hereof.
B. We shall indemnify you during and after the term hereof against
all claims, liabilities (including settlements entered into in
good faith with our consent, not to be unreasonably withheld) and
expenses (including reasonable attorneys' fees) arising out of any
claim that your use of any representation of the Licensed Material
or the Trademarks approved in accordance with the provisions of
this Agreement infringes the copyright of any third party or
infringes any right granted by us to such third party. You shall
not, however, be entitled to recover for lost profits.
C. Additionally, if by reason of any claims referred to in
Subparagraph 25.B., you are precluded from selling any stock of
Articles or utilizing any materials in your possession or which
come into your possession by reason of any required recall, we
shall be obligated to purchase such Articles and materials from
you at their out-of-pocket cost to you, excluding overheads, but
we shall have no other responsibility or liability with respect to
such Articles or materials.
D. No warranty or indemnity is given with respect to any liability or
expense arising from any claim that use of the Licensed Material
or the Trademarks on or in connection with the Articles hereunder
or any packaging, advertising or promotional material infringes on
any trademark right of any third party or otherwise constitutes
unfair competition by reason of any prior rights acquired by such
third party other than rights acquired from us. It is expressly
agreed that it is your responsibility to carry out such
investigations as you may deem appropriate to establish that
Articles, packaging, promotional and advertising material which
are manufactured or created hereunder, including any use made of
the Licensed Material and the Trademarks therewith, do not
infringe such right of any third party, and we shall not be liable
to you if such infringement occurs.
E. You and we agree to give each other prompt written notice of any
claim or suit which may arise under the indemnity provisions set
forth above.
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Without limiting the foregoing, you agree to give us written
notice of any product liability claim made with respect to any
Article within seven (7) days of your receipt of the claim.
26. INSURANCE
You shall maintain in full force and effect at all times while this
Agreement is in effect and for three years thereafter commercial general
liability insurance, including broad form coverage for contractual
liability, products liability and personal injury liability (including
bodily injury and death), waiving subrogation, with minimum limits of no
less than two million dollars (US $2,000,000.00) per occurrence, and naming
as additional insureds those indemnified in Paragraph 25 hereof. You shall
deliver to us a certificate or certificates of insurance evidencing
satisfactory coverage and indicating that we shall receive written notice
of cancellation, non-renewal or of any material change in coverage at least
thirty (30) days prior to the effective date thereof. Your insurance shall
be carried by an insurer with a BEST rating of B + VII or better.
Compliance herewith in no way limits your indemnity obligations, except to
the extent that your insurance company actually pays us amounts which you
would otherwise pay us.
27. WITHDRAWAL OF LICENSED MATERIAL
You agree that we may, without obligation to you other than to give you
written notice thereof, withdraw from the scope of this Agreement any
Licensed Material which by the Marketing Date or, in the absence of such a
date being specified in Subparagraph 1.O., by six (6) months from the
commencement of the Principal Term, is not being used on or in connection
with the Articles. We may also withdraw any Licensed Material or Articles
the use or sale of which under this Agreement would infringe or reasonably
be claimed to infringe the rights of a third party, other than rights
granted by us, in which case our obligations to you shall be limited to the
purchase at cost of Articles and other materials utilizing such withdrawn
Licensed Material which cannot be sold or used. In the case of any
withdrawal under the preceding sentence, the Advances and Guarantees shall
be adjusted to correspond to the time remaining in the Principal Term, or
the number of Articles remaining under the Agreement, at the date of
withdrawal.
28. TERMINATION
Without prejudice to any other right or remedy available to us:
A. If you fail to manufacture, sell and distribute the Articles, or
to furnish statements and pay Royalties as herein provided, or if
you otherwise breach the terms of this Agreement, and if any such
failure is not corrected within thirty (30) days after we send you
written notice thereof (or, in the case of non-payment of
Royalties within fifteen (15) days), we shall have the right at
any time to terminate this Agreement by giving you written notice
thereof.
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B. We shall have the right at any time to terminate this Agreement by
giving you written notice thereof:
(1) if you deliver to any customer without our written
authorization merchandise containing representations of
Licensed Material or other material the copyright or other
proprietary rights to which are owned by us other than
articles listed herein and approved in accordance with the
provisions hereof;
(2) if you deliver Articles outside the Territory or knowingly
sell Articles to a third party for delivery outside the
Territory, unless pursuant to a written distribution
permission or separate written license agreement with us
or any subsidiary of ours;
(3) if a breach occurs which is of the same nature, and which
violates the same provision of this Agreement, as a breach
of which we have previously given you written notice;
(4) if you breach any material term of any other license
agreement between us, and we terminate such agreement for
cause;
(5) if you shall make any assignment for the benefit of
creditors, or file a petition in bankruptcy, or are
adjudged bankrupt, or become insolvent, or are placed in
the hands of a receiver, or if the equivalent of any such
proceedings or acts occurs, though known by some other
name or term; and/or
(6) if you are not permitted or are unable to operate your
business in the usual manner, or are not permitted or are
unable to provide us with assurance satisfactory to us
that you will so operate your business, as debtor in
possession or its equivalent, or are not permitted, or are
unable to otherwise meet your obligations under this
Agreement or to provide us with assurance satisfactory to
us that you will meet such obligations.
29. RIGHTS AND OBLIGATIONS UPON EXPIRATION OR TERMINATION
A. Upon the expiration or termination of this Agreement, all rights
herein granted to you shall revert to us, and we shall be entitled
to retain all Royalties and other things of value paid or
delivered to us. You agree that the Articles shall be
manufactured during the Principal Term in quantities consistent
with anticipated demand therefor so as not to result in an
excessive inventory build-up immediately prior to the end of the
Principal Term. You agree that from the expiration or termination
of this Agreement you shall neither manufacture nor have
manufactured for you any Articles, that you will deliver to us any
and all artwork (including animation cels and drawings) which may
have been used or created by you in connection with this
Agreement, that you will at our option either sell to us at cost
or destroy or efface any molds, plates and
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other items used to reproduce Licensed Martial or Trademarks, and
that except as hereinafter provided, you will cease selling
Articles. Any unauthorized distribution of Articles after the
expiration or termination of this Agreement shall constitute
copyright infringement.
B. If you have any unsold Articles in inventory on the expiration or
termination date, you shall provide us with a full statement of
the kinds and numbers of such unsold Articles and shall thereupon,
but only if such statement has been provided to us and if you have
fully complied with the terms of this Agreement including the
payment of all Royalties due and the Guarantee, have the right for
a limited period of ninety (90) days from such expiration or
earlier termination date to sell off and deliver such Articles.
You shall furnish us statements covering such sales and pay us
Royalties in respect of such sales. Such Royalties shall not be
applied against the Advance or towards meeting the Guarantee.
C. In recognition of our interest in maintaining a stable and viable
market for the Articles during and after the Principal Term and
any sell-off period, you agree to refrain from "dumping" the
Articles in the market during any sell-off period granted to you.
"Dumping" shall mean the distribution of product at volume levels
significantly above your prior sales practices with respect to the
Articles, and at price levels so far below your prior sales
practices with respect to the Articles as to disparage the
Articles; provided, however, that nothing contained herein shall
be deemed to restrict your ability to set product prices at your
discretion.
D. Except as otherwise agreed by us in writing, any inventory of
Articles in your possession or control after the expiration or
termination hereof and of any sell-off period granted hereunder
shall be destroyed, or all Licensed Material and Trademarks
removed or obliterated therefrom.
E. If we supply you with forms regarding compliance with this
Paragraph 29, you agree to complete, execute and return such forms
to us expeditiously.
30. WAIVERS
A waiver by either of us at any time of a breach of any provision of this
Agreement shall not apply to any breach of any other provision of this
Agreement, or imply that a breach of the same provision at any other time
has been or will be waived, or that this Agreement has been in any way
amended, nor shall any failure by either party to object to conduct of the
other be deemed to waive such party's right to claim that a repetition of
such conduct is a breach hereof.
31. PURCHASE OF ARTICLES BY US
If we wish to purchase Articles, you agree to sell such Articles to us or
any subsidiary of ours at as low a price as you charge for similar
quantities sold to your regular customers and to pay us Royalties on any
such sales.
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32. NON-ASSIGNABILITY
A. You shall not voluntarily or by operation of law assign,
sub-license, transfer, encumber or otherwise dispose of all or
any part of your interest in this Agreement without our prior
written consent. Any attempted assignment, sub-license,
transfer, encumbrance or other disposal without such consent
shall be void and shall constitute a material default and
breach of this Agreement. "Transfer" within the meaning of
this Paragraph 32 shall include any merger or consolidation
involving your company or your parent (if any); any sale or
transfer of all or substantially all of your (or your parent)
company's assets; any transfer of your rights hereunder to a
division, business segment or other entity of yours other than
the one specifically referenced on page 1 hereof (or any sale
or attempted sale of Articles under a trademark or trade name
of such division, business segment or other entity); and any
transaction or series of related transactions resulting in the
transfer of thirty-three and one-third percent (33-1/3%) or
more of the voting stock of your (or your parent) company (or,
if your company is a partnership, thirty-three and one-third
percent (33-1/3%) or more of the profit and loss participation
in your company, or the occurrence of any of the foregoing
with respect to any general partner of your company).
B. However, you may, upon written notice to us, unless we have
objected within thirty (30) days of receipt of such notice,
sublicense your rights hereunder to your parent, subsidiary and
Affiliated companies. You hereby irrevocably and unconditionally
guarantee that they will observe and perform all of your
obligations hereunder, including, without limitation, the
provisions governing approvals, and compliance with approved
samples, applicable laws and standards, and all other provisions
hereof, and that they will otherwise adhere strictly to all of the
terms hereof and act in accordance with your obligations
hereunder. Any involvement of a parent, subsidiary or Affiliate
in the activities which are the subject of this Agreement shall be
deemed carried on pursuant to such a sublicense and thus covered
by such guarantee, but, unless notified to us and not timely
objected to, such involvement may be treated by us as a breach of
this Agreement.
33. RELATIONSHIP
This Agreement does not provide for a joint venture, partnership, agency or
employment relationship between us.
34. CONSTRUCTION
The language of all parts of this Agreement shall in all cases be construed
as a whole, according to its fair meaning and not strictly for or against
any of the parties. Headings of paragraphs herein are for convenience of
reference only and are without substantive significance.
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35. MODIFICATIONS OR EXTENSIONS OF THIS AGREEMENT
Except as otherwise provided herein, this Agreement can only be extended or
modified by a writing signed by both parties.
36. NOTICES
All notices which either party is required or may desire to serve upon the
other party shall be in writing, addressed to the party to be served at the
address set forth on page 1 of this Agreement, and may be served personally
or by depositing the same addressed as herein provided (unless and until
otherwise notified), postage prepaid, in the United States mail. Such
notice shall be deemed served upon personal delivery or upon the date of
mailing; provided, however, that we shall be deemed to have been served
with a notice of a request for approval of materials under this Agreement
only upon our actual receipt of the request and of any required
accompanying materials. Any notice sent to us hereunder shall be sent to
the attention of "Vice President, Licensing", unless we advise you in
writing otherwise.
37. MUSIC
Music is not licensed hereunder. Any charges, fees or royalties payable
for music rights or any other rights not covered by this Agreement shall be
additional to the Royalties and covered by separate agreement.
38. PREVIOUS AGREEMENTS
This Agreement, and any confidentiality agreement you may have signed
pertaining to any of the Licensed Material, contains the entire agreement
between us concerning the subject matter hereof and supersedes any
pre-existing agreement and any oral or written communications between us.
However, if pursuant to any such pre-existing agreement there was any
agreement(s) in effect permitting you to sell or distribute Articles
outside the Territory or to cause to be manufactured any Articles outside
the Territory, such agreement(s) shall be deemed to remain in effect to the
extent that they relate to Licensed Material and Articles licensed
hereunder.
39. CHOICE OF LAW AND FORUM
This Agreement shall be deemed to be entered into in California and shall
be governed and interpreted according to the laws of the State of
California. Any legal actions pertaining to this Agreement shall be
commenced within the State of California and within either Los Angeles or
Orange Counties. The prevailing party shall be entitled to recover
reasonable attorney's fees and costs incurred therein.
40. EQUITABLE RELIEF
You acknowledge that we will have no adequate remedy at law for your
failure to comply with the terms herewith, including your obligation to
cease the manufacture, sale, advertisement, promotion or distribution of
the Articles upon
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termination. Accordingly, in the event you fail to comply with the terms
of this Agreement, you acknowledge and agree that, in addition to any and
all other remedies available to us, we shall have the right to have any
breach by you of this Agreement remedied by equitable relief, including,
but not limited to, a temporary restraining order, a preliminary
injunction, a permanent injunction, or such other alternative relief as may
be appropriate without the necessity of our posting any bond or proving any
damages.
Please sign below under the word "Agreed". When signed by both parties this
shall constitute an agreement between us.
THE WALT DISNEY COMPANY
By: /s/ Doug Mangino
-------------------
Title: VP/DMM
-----------------
Date: 10/27/94
-----------------
AGREED:
SUN SPORTSWEAR, INC.
By: /s/ L. Kaye Counts
-------------------
Title: Executive Vice. Pres., COO
--------------------------
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EXHIBIT 10.27
LOAN AND SECURITY AGREEMENT
DATED AS OF FEBRUARY 13, 1996
between
SUN SPORTSWEAR, INC.,
as Borrower,
and
HELLER FINANCIAL, INC.,
as Lender
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LOAN AND SECURITY AGREEMENT
This LOAN AND SECURITY AGREEMENT is dated as of February 13, 1996
and entered into by and between SUN SPORTSWEAR, INC., a Washington corporation
("Borrower"), with its principal place of business at 6520 South 190th Street,
Kent, Washington 98032, and HELLER FINANCIAL, INC., a Delaware corporation
("Lender"), with offices at 505 North Brand Boulevard, Suite 1100, Glendale,
California 91203. All capitalized terms used herein are defined in Section 1
of this Agreement.
WHEREAS, Borrower and Lender are parties to that certain Inter-Credit
Agreement dated December 31, 1992, as amended;
WHEREAS, Borrower now desires that Lender extend a credit facility to
provide working capital financing and to provide funds for other general
corporate purposes; and
WHEREAS, Borrower desires to secure its obligations under the Loan
Documents by granting to Lender a security interest in and lien upon certain
of Borrower's property;
NOW, THEREFORE, in consideration of the premises and the
agreements, provisions and covenants herein contained, Borrower and Lender
agree as follows:
SECTION 1 DEFINITIONS
1.1 Certain Defined Terms. The following terms used in this
Agreement shall have the following meanings:
"Accounts" means all presently existing and hereafter created
accounts, 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, all
proceeds thereof, all guaranties and security therefor, and all goods and
rights represented thereby or arising therefrom including, but not limited
to, the right of stoppage in transit, replevin and reclamation.
"Affiliate" means any Person (other than Lender): (a) directly or
indirectly controlling, controlled by, or under common control with, Borrower;
(b) directly or indirectly owning or holding ten percent (10%) or more of any
equity interest in Borrower; or (c) ten percent (10%) or more of whose voting
stock or other equity interest is directly or indirectly owned or held by
Borrower. For purposes of this definition, "control" (including with
correlative meanings, 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 by contract or
otherwise.
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"Agreement" means this Loan and Security Agreement as it may be
amended, supplemented or otherwise modified from time to time.
"Approved Account" has the meaning set forth in the Inter-Credit
Agreement.
"Asset Disposition" means the disposition, whether by sale, lease,
transfer, loss, damage, destruction, condemnation or otherwise, of any or all
of the assets of Borrower or any of its Subsidiaries other than sales of
Inventory in the ordinary course of business.
"Assignment of Monies Agreement" means that certain Assignment of
Monies Due under Inter-Credit Agreement dated as of even date herewith among
Borrower, Heller and Lender and all other instruments, documents and agreements
executed in connection with the transactions contemplated thereby, all as
amended, restated, supplemented or modified from time to time.
"Bank Letters of Credit" means letters of credit issued by a bank
acceptable to Lender for the account of Borrower and supported by a Risk
Participation Agreement.
"Base Rate" means the variable rate of interest per annum equal to
the "reference rate", "prime rate", or other similar rate announced from time
to time by Bank of America National Trust and Savings Association (with
the understanding that any such rate may merely be a reference rate and may
not necessarily represent the lowest or best rate actually charged to any
customer by such bank).
"Borrower" has the meaning assigned to that term in the preamble to
this Agreement.
"Borrowing Base" has the meaning assigned to that term in subsection
2.1(A).
"Borrowing Base Certificate" means a certificate and assignment
schedule duly executed by an officer of Borrower appropriately completed
and in substantially the form of Exhibit A.
"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, California or Washington or is a day on which banking
institutions located in any such state are closed.
"Capital Expenditures" means all expenditures (including deposits)
for, or contracts for expenditures (excluding contracts for expenditures
under or with respect to Capital Leases, but including cash down payments for
assets acquired under Capital Leases) with respect to any fixed assets or
improvements, or for replacements, substitutions or additions thereto, which
have a useful life of more than one year, including the direct or indirect
acquisition of such assets by way of increased product or service charges,
offset items or otherwise.
"Capital Lease" means any lease of any property (whether real,
personal or mixed) that, in conformity with GAAP, should be accounted for as
a capital lease.
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"Cash Equivalents" means: (a) marketable direct obligations issued
or unconditionally guarantied 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 (6) months from the date of
acquisition thereof; (b) commercial paper maturing no more than six (6)
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 (6) 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 setoff rights in favor of such bank.
"Chargeback Interest" means interest owing by Borrower to Heller on
Accounts charged back to Borrower under the terms of the Inter-Credit
Agreement.
"Closing Certificate" means a certificate duly executed by the chief
executive officer or chief financial officer of Borrower in a form reasonably
acceptable to Lender
"Closing Date" means February 14, 1996.
"Collateral" has the meaning assigned to that term in subsection 2.7.
"Commitment" or "Commitments" means the commitment or commitments
of Lender to make Loans as set forth in subsection 2.l(A) and to provide
Lender Letters of Credit as set forth in subsection 2.1(E).
"Compliance Certificate" means a certificate duly executed by the
chief executive officer or chief financial officer of Borrower appropriately
completed and in substantially the form of Exhibit B.
"Default" means a condition or event that, after notice or lapse
of time or both, would constitute an Event of Default if that condition 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.
"Determination Period" means, (i) for the Fiscal Year ending in
1996, the period commencing on January 1, 1996 and ending on the last day of
the applicable fiscal quarter and (ii) for the Fiscal Year ending in 1997,
the four-quarter period ending on the last day of the applicable fiscal
quarter.
"EBITDA" means, for any period, without duplication, the total of
the following for Borrower and its Subsidiaries on a consolidated basis,
each calculated for such period: (1) net income determined in accordance with
GAAP; plus, to the extent included in the calculation of
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net income, (2) the sum of (a) income and franchise taxes paid or accrued; (b)
Interest Expenses, net of interest income, paid or accrued; (c) interest paid
in kind; (d) amortization and depreciation and (e) other non-cash charges
(excluding accruals for cash expenses made in the ordinary course of
business); less, to the extent included in the calculation of net income, (3)
the sum of (a) the income of any Person other than wholly-owned Subsidiaries
of Borrower in which Borrower or a wholly owned Subsidiary of Borrower has
an ownership interest unless such income is received by Borrower or such
wholly-owned Subsidiary in a cash distribution; (b) gains or losses from sales
or other dispositions of assets (other than Inventory in the normal course of
business); and (c) extraordinary or non-recurring gains, but not net of
extraordinary or non-recurring "cash" losses.
"Eligible Accounts" has the meaning assigned to that term in
subsection 2.1 (B).
"Eligible Inventory" has the meaning assigned to that term in
subsection 2.1 (B).
"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 (6) 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 or
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),
wherever located, including, without limitation, all 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 statute 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 a single employer within
the meaning of Section 414(b) and (c) of the IRC.
"Event of Default" means each of the events set forth in subsection
8.1.
"Facility Documents" means, collectively, the Loan Documents and the
Inter-Credit Agreement.
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"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.
"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,
reproductive toxicity or "EP 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 levels of polychlorinated
biphenyls in excess of fifty parts per million.
"Heller" means Heller Financial, Inc., in its capacity as a party to
the Inter-Credit Agreement.
"Heller Factoring Clients" means Persons (other than Borrower) who
have entered into factoring or inter-credit agreements with any of Heller's
offices.
"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; and (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 nonrecourse to the credit of that Person. Indebtedness
shall not include Borrower's guarantied royalty payments under licenses for
Intellectual Property.
"Intangible Assets" means all intangible assets (determined in
conformity with GAAP) including, without limitation, goodwill, trademarks,
trade names, licenses, organizational costs, deferred amounts, covenants not to
compete, unearned income and restricted funds.
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"Intellectual Property" means all present and future designs, art
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 (except to the extent that the grant of a security
interest thereon would violate the terms of any license), 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.
"Inter-Credit Agreement" means that certain Inter-Credit Agreement
dated December 31, 1992 between Heller and Borrower, as it may have been, or
may hereafter be, amended, supplemented or otherwise modified, and all other
instruments, documents and agreements executed by or on behalf of any Loan
Party and delivered to or for the benefit of Heller in connection therewith.
"Interest Coverage Ratio" means, for any period, the ratio of
Operating Cash Flow to Interest Expenses.
"Interest Expenses" means, without duplication, for any period, the
following, for Borrower and its Subsidiaries each calculated for such period:
interest expenses deducted in the determination of net income (excluding (i)
the amortization of fees and costs with respect to the transactions
contemplated hereunder on the Closing Date which have been capitalized as
transaction costs; and (ii) interest paid in kind).
"Interest Rate" has the meaning assigned to that term in subsection
2.2(A).
"Inventory" means all "inventory" (as defined in the UCC) now owned
or hereafter acquired by Borrower including, without limitation, finished
goods, raw materials, work in process and other materials and supplies used
or consumed in Borrower's business, and goods which are returned or
repossessed.
"Inventory Report" means a report duly executed by an officer of
Borrower appropriately completed and in substantially the form of Exhibit C.
"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.
"Ledger Debt" means indebtedness owing by Borrower to Heller as a
result of Heller's purchase of invoices evidencing sales to Borrower by Heller
Factoring Clients.
"Ledger Debt Interest" means interest owing by Borrower to Heller
with respect to any Ledger Debt under the terms of the Inter-Credit
Agreement.
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"Lender" means Heller Financial, Inc. together with its successors and
permitted assigns pursuant to subsection 9.1.
"Lender Letter of Credit" has the meaning assigned to that term
in subsection 2.1 (E).
"Lender's Account" means ABA No. 0710-0001-3, Account No. 51-19618
at First National Bank of Chicago, One First National Plaza, Chicago, IL
60670, Reference: Heller Financial, Inc. -- Western CAMG -- Sun Sportswear,
Inc.
"Lender's Depository Account" has the meaning assigned to that term
in subsection 5.6. "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 the issuing bank to the
extent not reimbursed; and (c) all unpaid interest, fees and expenses.
"Letter of Credit Reserve" means, at any time, an amount equal to
(a) the aggregate amount of Letter of Credit Liability with respect to all
Lender Letters of Credit outstanding at such time plus (b) the aggregate
amount theretofore paid by Lender under Lender Letters of Credit and not
debited to the Loan Account pursuant to subsection 2.1(E)(2) or otherwise
reimbursed by Borrower.
"Liabilities" shall have the meaning given that term in accordance
with GAAP and shall include Indebtedness.
"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 Revolving
Loan Commitment.
"Loan Documents" means this Agreement, the Assignment of Monies
Agreement, and all other instruments, documents and agreements executed by or
on behalf of Borrower and delivered concurrently herewith or at any time
hereafter to or for Lender in connection with the Loans and other
transactions contemplated by this Agreement, all as amended, restated,
supplemented or modified from time to time.
"Loan Party" means, collectively, Borrower, Borrower's Subsidiaries,
and any other Person (other than Lender or Heller) which is or becomes a
party to any Loan Document.
"Loan Year" means each period of twelve (12) consecutive months
commencing on the Closing Date and on each anniversary thereof.
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"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
Facility Document to which it is a party or Lender to enforce or collect any of
the Obligations.
"Maximum Revolving Loan Amount" has the meaning assigned to that term
in subsection 2.1(A).
"Net Worth" means, as of any date, the sum of the capital stock
and additional paid-in capital plus retained earnings (or minus accumulated
deficit) calculated in conformity with GAAP.
"Obligations" means all obligations, liabilities and indebtedness of
every nature of each Loan Party from time to time owed to Lender under the
Loan Documents including the principal amount of all debts, claims and
indebtedness (whether incurred before or after the Termination Date), 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.
"Operating Cash Flow" means, for any period, (a) EBITDA; less (b)
Capital Expenditures.
"Permitted Encumbrances" means the following types of Liens: (a)
Liens (other than Liens relating to Environmental Claims or ERISA) 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 thirty (30) days
delinquent; (c) Liens (other than any Lien imposed by ERISA) 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 Lender; (g) Liens in favor of Heller to secure
Borrower's obligations under the Inter-Credit Agreement; and (h) Liens set
forth on Schedule 1.1 (A).
"Person" means and includes natural persons, corporations, limited
partnerships, general partnerships, limited liability companies, 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.
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"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 and otherwise
consistent with Borrower's historical financial statements, together with
appropriate supporting details and a statement of underlying assumptions.
"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 stock dividend; (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 shares of any class of
stock of Borrower or any of its Subsidiaries now or hereafter outstanding;
(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 fees or
similar fees to any Affiliate, whether pursuant to a management agreement or
otherwise.
"Revolving Loan" means all advances made by Lender pursuant
to subsection 2.1(A) and any amounts added to the principal balance of the
Revolving Loan pursuant to this Agreement.
"Revolving Loan Commitment" means the commitment of Lender to make
the Revolving Loan and issue Lender Letters of Credit pursuant to subsection
2.1(E), in the aggregate not to exceed at anytime $24,000,000.00.
"Risk Participation Agreement" has the meaning assigned to that term
in subsection 2.1(E).
"Subsidiary" means, with respect to any Person, any corporation,
association or other business entity of which more than fifty percent (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.
"Tangible Net Worth" means, as of the date of determination, an
amount equal to: (a) Net Worth; less (b) Intangible Assets; less (c) prepaid
expenses; less (d) all obligations owed to such Person or any of its
Subsidiaries by any Affiliate of such Person or any of its Subsidiaries; and
less (e) all loans by such Person to its officers, stockholders or employees.
"Termination Date" means the date this Agreement is terminated as set
forth in subsection 2.5.
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"UCC" means the Uniform Commercial Code as in effect on the date
hereof in the State of California, as amended from time to time, and any
successor statute.
"Working Capital" means, for Borrower and its Subsidiaries on a
consolidated basis: (a) current assets; less (b) current liabilities; and less
(c) the amount of any obligations owed to Borrower or any of its Subsidiaries
by any Affiliate of Borrower or any of its Subsidiaries.
1.2 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 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 Lender 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 Lender, (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 certified
public accountants.
1.3 Other Definitional Provisions. References to "Sections",
"subsections", "Exhibits" and "Schedules" shall be to Sections,
subsections, Exhibits and Schedules, respectively, of this Agreement unless
otherwise specifically provided. Any of the terms defined in subsection
1.1 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 Persons; and all references to
statutes and related regulations shall include any amendments of same and any
successor statutes and regulations.
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SECTION 2 LOANS AND COLLATERAL
2.1 Loans.
(A) Revolving Loan. Subject to the terms and
conditions of this Agreement and in reliance upon the representations and
warranties of Borrower herein set forth, Lender agrees to lend to Borrower
from time to time an aggregate amount not to exceed at any time
$24,000,000.00 as reduced by Section 2.4(B). Amounts borrowed under this
subsection 2.1(A) 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. Lender shall have no obligation
to make advances under this subsection 2.1(A) to the extent any requested
advance would cause the balance of the Revolving Loan then outstanding (after
giving effect to any immediate application of the proceeds thereof) to
exceed the Maximum Revolving Loan Amount; provided that Lender may, in its
sole discretion, elect from time to time to make Loans in excess of the
Maximum Revolving Loan Amount or the Revolving Loan Commitment.
(1) "Maximum Revolving Loan Amount" means, as of any
date of determination, the lesser of (a) the Revolving Loan Commitment
minus the Letter of Credit Reserve and (b) the Borrowing Base minus the Letter
of Credit Reserve.
(2) "Borrowing Base" means, as of any date of
determination, an amount equal to the sum of (a) eighty-five percent (85%) of
Eligible Accounts plus (b) the lesser of (i) $8,500,000, and (ii) sixty
percent (60%) of Eligible Inventory less in each case such reserves as Lender
in its reasonable discretion elects to establish.
(B) Eligible Accounts and Eligible Inventory.
"Eligible Accounts" means, as at any date of determination, the
aggregate of all Accounts that Lender, in its reasonable judgment, deems to
be eligible for borrowing purposes. Without limiting the generality of
the foregoing, unless otherwise agreed by Lender, 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;
(2) Accounts which remain unpaid for more than sixty
(60) days after the due date specified in the original invoice or for more than
ninety (90) days after invoice date if no due date was specified;
(3) 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;
(4) Accounts due from a customer whose principal place
of business is located outside the United States of America unless such
Account is backed by a letter of credit, in form and substance acceptable to
Lender, and issued or confirmed by a bank that is
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organized under the laws of the United States of America or a State thereof,
that is acceptable to Lender, provided that such letter of credit has been
issued for the benefit of Lender or is assignable and has been duly assigned
and delivered to Lender as additional collateral;
(5) Accounts due from a customer which Lender has
notified Borrower does not have a satisfactory credit standing;
(6) Accounts with respect to which the customer 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 (31 U.S.C.
Section 3727) or any applicable statute or municipal ordinance of similar
purpose and effect;
(7) Accounts with respect to which the customer is an
Affiliate of Borrower or a director, officer, agent, stockholder or employee
of Borrower or any of its Affiliates;
(8) Accounts due from a customer if more than
twenty-five percent (25%) of the aggregate amount of Accounts of such
customer have at the time remained unpaid for more than sixty (60) days after
the due date or ninety (90) 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 customer (but only to the extent of
such dispute);
(10) Accounts evidenced by an "instrument" or "chattel
paper" (as defined in the UCC) not in the possession of Lender;
(11) Accounts with respect to which Lender does not have a
valid, first priority and fully perfected security interest;
(12) Accounts subject to any Lien except those in favor of
Lender;
(13) Accounts (other than Accounts purchased under the
Inter-Credit Agreement) with respect to which the customer is the subject of
any bankruptcy or other insolvency proceeding;
(14) Accounts due from (a) Wal-Mart Stores, Inc. its
Subsidiaries to the extent that such Accounts exceed in the aggregate an
amount equal to seventy percent (70%) of the aggregate of all Accounts at
said date; or (b) Dayton Hudson Corporation and its operating divisions and
Subsidiaries (including Target, Mervyn's, Dayton's, Hudson's, and Marshall
Field's) to the extent that such Accounts exceed in the aggregate an amount
equal to fifty percent (50%) of the aggregate of all Accounts at said date;
(c) Kmart Corporation and its Subsidiaries to the extent that such Accounts
exceed in the aggregate an amount equal to thirty percent (30%) of the
aggregate of all Accounts at such date; or (d) any other customer to the
extent that
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such Accounts exceed in the aggregate an amount equal to twenty percent (20%)
of the aggregate of all Accounts at said date;
(15) Accounts with respect to which the customer'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 customer is
located in Indiana, New Jersey, Minnesota, 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 no later than
sixty (60) days after the Closing Date and provided to Lender evidence of such
qualification or filing; and
(17) Accounts with respect to which the customer 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 unprinted finished goods Inventory owned by and in the possession of
Borrower and located in the United States of America that Lender, in its
reasonable credit judgment, deems to be eligible for borrowing purposes.
Without limiting the generality of the foregoing, unless otherwise agreed by
Lender, the following is not Eligible Inventory: (a) work-in-process; (b)
printed finished goods; (c) Inventory which Lender determines is unacceptable
for borrowing purposes due to age, quality, type, category and/or quantity,
including any Inventory for which at least twelve (12) months have elapsed
since Borrower's receipt of such Inventory; (d) Inventory with respect to
which Lender does not have a valid, first priority and fully perfected
security interest; (e) Inventory with respect to which there exists any Lien
in favor of any Person other than Lender; (f) 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); and (g)
Inventory located at any location other than Borrower's principal location and
its warehouse in Kent, Washington.
(C) Borrowing Mechanics. On any day when Borrower desires to
borrow under this subsection 2.1, Borrower shall give Lender telephonic
notice of the proposed borrowing by 11:00 a.m. (Los Angeles time). Lender
shall not incur any liability to Borrower for acting upon any telephonic
notice Lender 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 (C). Lender will
not make any advance pursuant to any telephonic notice unless Lender has also
received the most recent Borrowing Base Certificate and all other documents
required under subsection 5.1 (F) by 11:00 a.m. (Los Angeles time). Each
advance made to Borrower under the Revolving Loan shall be deposited
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by wire transfer in immediately available funds in such account as Borrower
may from time to time designate to Lender in writing. Unless payment is
otherwise timely made by Borrower, 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 a request by
Borrower for a Revolving Loan on the due date of, and in the amount required
to pay, such principal, accrued interest and fees, and the proceeds of each
such Revolving Loan if made by Lender shall be disbursed by Lender by way of
direct payment of the relevant obligation.
(D) Evidence of Revolving Loan Obligations. The advances
constituting the Revolving Loan shall be evidenced by this Agreement and
notations made from time to time by Lender in its books and records, including
computer records. Lender's books and records shall constitute presumptive
evidence, absent manifest error, of the accuracy of the information contained
therein. Failure by the Lender to make any such notation or record shall not
affect the obligations of Borrower to Lender with respect to the Revolving
Loans.
(E) Letters of Credit. Subject to the terms and conditions
of this Agreement and in reliance upon the representations and warranties
of Borrower herein set forth, the Revolving Loan Commitment may, in addition to
advances under the Revolving Loan, be utilized, upon the request of Borrower,
for (i) the issuance of letters of credit by Lender or (ii) the issuance by
Lender of a risk participation agreement (a "Risk Participation Agreement")
to a bank acceptable to Lender to induce the bank to issue Bank Letters of
Credit for the account of Borrower (each of (i) and (ii) above, a "Lender
Letter of Credit"). 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 outstanding principal balance of 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 Letter of
Credit Liability with respect to all Lender Letters of Credit outstanding
at any time shall not exceed $8,000,000.
(2) Reimbursement. Borrower shall be irrevocably and
unconditionally obligated forthwith without presentment, demand, protest or
other formalities of any kind, to reimburse Lender for any amounts paid by
Lender with respect to a Lender Letter of Credit including all fees, costs
and expenses paid by Lender to any bank that issues Bank Letters of Credit.
Borrower hereby authorizes and directs Lender, at Lender's option, to debit
Borrower's account (by increasing the principal balance of the Revolving
Loan) in the amount of any payment made by Lender with respect to any Lender
Letter of Credit. All amounts paid with respect to any Lender Letter of
Credit that are not immediately repaid by Borrower with the proceeds of a
Revolving Loan or otherwise shall bear interest at the Default Rate
applicable to Revolving Loans.
(3) Conditions of Issuance. In addition to all other
terms and conditions set forth in this Agreement, the issuance of any Lender
Letter of Credit shall be
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subject to the conditions precedent that the letter of credit which Borrower
requests be in such form, be for such amount, contain such terms and support
such transactions as are reasonably satisfactory to Lender. The expiration
date of each Lender Letter of Credit shall be on a date which is at least
thirty (30) days prior to the Termination Date.
(4) Request for Letters of Credit. Borrower shall
give Lender at least two (2) Business Days (or such lesser time as
acceptable to Lender) 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.
(F) Other Letter of Credit Provisions.
(1) Obligations Absolute. The obligation of Borrower
to reimburse Lender for payments made under any Lender Letter of Credit
shall be unconditional and irrevocable and shall be paid strictly in
accordance with the terms of this Agreement under all circumstances including
the following circumstances:
(a) any lack of validity or enforceability of
any Lender Letter of Credit or Bank 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, or Lender, on the one
hand, may at any time have against any beneficiary or transferee of any
Lender Letter of Credit or Bank Letter of Credit (or any Persons for whom any
such transferee may be acting), 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 letter
of credit);
(c) any draft, demand, certificate or any
other document presented under any Lender Letter of Credit or Bank Letter of
Credit which is forged, fraudulent, invalid or insufficient in any respect or
any statement therein being untrue or inaccurate in any respect;
(d) payment under any Lender Letter of Credit or
Bank 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 Lender under any
Lender Letter of Credit, 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 Lender Letter of Credit
complies on its face with any applicable requirements for a demand for payment
under such Lender Letter of Credit;
(e) any other circumstance or happening
whatsoever, which is similar to any of the foregoing; or
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(f) the fact that a Default or an Event of Default
shall have occurred and be continuing.
(2) Nature of Duties. As between Lender and Borrower,
Borrower assumes all risks of the acts and omissions of, or misuse of any
Lender Letter of Credit or Bank Letter of Credit by the beneficiary thereof.
In furtherance and not in limitation of the foregoing, Lender shall not 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 or Bank Letter of
Credit, even if it should in fact prove to be in any or all respects invalid,
insufficient, inaccurate, fraudulent or forged; provided that, in the case of
any payment by Lender under any Lender Letter of Credit, 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 Lender Letter of Credit complies on its face with any
applicable requirements for a demand for payment thereunder; (b) for the
validity or sufficiency of any instrument transferring or assigning or
purporting to transfer or assign any Lender Letter of Credit or Bank 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;
provided that, in the case of any payment by Lender under any Lender Letter of
Credit, 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 Lender Letter of Credit complies on its face
with any applicable requirements for a demand for payment thereunder; (c)
for failure of the beneficiary of any Lender Letter of Credit or Bank
Letter of Credit to comply fully with conditions required in order to
demand payment thereunder; provided that, in the case of any payment by
Lender under any Lender Letter of Credit, 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 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 Lender Letter of Credit or Bank Letter of Credit; (g) for the credit
of the proceeds of any drawing under any Lender Letter of Credit or Bank
Letter of Credit; and (h) for any consequences arising from causes beyond
the control of Lender. None of the above shall affect, impair, or prevent the
vesting of any of Lender's rights or powers hereunder.
(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 Lender under or in connection with any Lender
Letter of Credit, if taken or omitted in good faith, shall not put Lender
under any resulting liability to Borrower.
(G) Ledger Debt and Chargebacks. To the extent Borrower
does not pay (a) any Ledger Debt within five days (5) from its due date,
unless Lender has been notified that Borrower has alleged a dispute with
respect thereto or (b) any Chargeback Interest or (c) Ledger Debt Interest,
upon demand by Heller to Lender, Lender may, in its sole discretion, pay an
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amount equal to the amount of such Ledger Debt, Ledger Debt Interest or
Chargeback Interest to Heller or establish an additional reserve against the
Borrowing Base or the Maximum Loan Amount for any such unpaid Ledger Debt,
Ledger Debt Interest or Chargeback Interest. Borrower hereby authorizes and
directs Lender, at Lender's option, to debit Borrower's account (by
increasing the principal balance of the Revolving Loan) for any Ledger Debt,
Ledger Debt Interest or Chargeback Interest then due and payable, or to
establish a reserve against the Borrowing Base or the Maximum Loan Amount for
any unpaid Ledger Debt, Ledger Debt Interest or Chargeback Interest, all as
set forth on Heller's books and records. Such paid amounts shall, in the
absence of manifest or demonstrable error, be final and conclusive and binding
on all of the parties hereto. All amounts paid by Lender to Heller with
respect to any Ledger Debt, Ledger Debt Interest or Chargeback Interest
that are not immediately repaid by Borrower with the proceeds of a Revolving
Loan or otherwise shall bear interest at the Default Rate.
2.2 Interest
(A) Rate of Interest. 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
the Base Rate. After the occurrence and during the continuance of an Event
of Default, the Loans and all other Obligations shall, at Lender's option,
bear interest at a rate per annum equal to two percent (2.0%) plus the Base
Rate (the "Default Rate").
(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 the period during which it accrues and shall be payable monthly in
arrears on the first day of each month. Any publicly announced change in the
Base Rate shall result in an adjustment to the Base Rate on the day such
change takes effect.
(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 Lender shall not be permitted to collect,
any amount of interest in excess of the maximum amount of interest permitted
by 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 Loan Party shall be obligated to pay any Excess Interest; (3) any
Excess Interest that Lender may have received hereunder shall be, at 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 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 Obligations is
calculated
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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
Lender shall have received the amount of interest which 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.
2.3 Fees.
(A) Closing Fee. Borrower shall pay to Lender on the
Closing Date a closing fee in the amount of $25,000, which shall be fully
earned and non-refundable on such Closing Date.
(B) Letter of Credit Fees. Borrower shall reimburse
Lender for any and all fees and expenses, if any, paid by Lender to the
issuer of Bank Letters of Credit relating to Bank Letters of Credit.
(C) Prepayment Fees. If Borrower voluntarily prepays
the Obligations in full (other than voluntary prepayments of the Revolving
Loan which do not terminate the Revolving Loan Commitment) prior to the
Termination Date, Borrower at the time of prepayment shall pay to Lender, as
compensation for the costs of being prepared to make funds available to
Borrower under this Agreement, and not as a penalty, an amount equal to
$75,000.00 upon a prepayment during the first Loan Year and $37,500.00 upon a
prepayment during the second Loan Year.
(D) Audit and Appraisal Fees. Borrower agrees to pay
Lender an audit fee for each inspection equal to $500.00 per auditor per day
or any portion thereof, excluding all full days spent by Lender traveling to
or from Borrower's locations, and costs for appraisals required under
subsection 5.1(I), together in each case with out-of-pocket expenses
(provided, that unless a Default or Event of Default has occurred and is
continuing, such fees, costs and expenses shall not exceed $7,500 in any Loan
Year).
(E) Other Fees and Expenses. Borrower shall pay to
Lender, for its own account, all charges for returned items and all other
bank charges incurred by Lender, as well as Lender's standard wire transfer
charges for each wire transfer made under this Agreement.
2.4 Payments and Prepayments.
(A) Manner and Time of Payment. In its sole discretion,
Lender may charge interest and other amounts payable hereunder to the
Revolving Loan, all as set forth on Lender's books and records. If Lender
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
Lender hereunder shall, unless otherwise directed by Lender, be made in
accordance with subsection 5.6. Proceeds remitted to any Lender's Depository
Account shall be credited to the Obligations on the first Business Day
following the day such proceeds were received in Lender's Depository Account;
provided,
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however, for the purpose of calculating interest on the Obligations, such
funds shall be deemed received on the date such funds were received in such
account. Proceeds remitted to Lender's Account by wire transfer shall be
credited to the Obligations on the Business Day received. To compensate
Lender for collection clearance on all checks and other payments remitted
with respect to Accounts, Borrower shall pay to Lender each month, in
addition to interest, a collection clearance charge computed as follows:
(a) total collections on Accounts for the month, multiplied by (b) two (2)
days, multiplied by (c) the Base Rate, divided by (d) two hundred fifty (250)
days.
(B) Mandatory Prepayments.
(1) Overadvance. At any time that the principal
balance of the Revolving Loan exceeds the Maximum Revolving Loan Amount,
Borrower shall, upon demand by Lender, immediately repay the Revolving Loan
to the extent necessary to reduce the principal balance to an amount that is
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 $10,000 (it being understood that if the proceeds exceed $10,000, the
entire amount and not just the portion above $10,000 shall be subject to this
subsection 2.4(B)(2)), Borrower shall prepay the Obligations in an amount equal
to such proceeds.
(C) Voluntary Prepayments and Repayments. Borrower
may, at any time upon not less than three (3) Business Days' prior notice to
Lender and payment of any fee required under subsection 2.3(C) terminate
the Revolving Loan Commitment. Upon termination of the Revolving Loan
Commitment, Borrower shall cause Lender to be released from all liability
under any Lender Letters of Credit, or, at Lender's option, Borrower will
deposit cash collateral with Lender in an amount equal to one hundred five
percent (105%) of the Letter of Credit Liability that will remain outstanding
after prepayment or repayment.
(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 the second anniversary of the Closing Date (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 (other than contingent indemnification obligations as to
which no claim has been made) have been fully paid and satisfied, Lender shall
be entitled to retain security interests in and liens upon all Collateral.
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Even after payment of all Obligations hereunder, Borrower's obligation to
indemnify Lender in accordance with the terms hereof shall continue.
2.6 Statements. Lender shall render a monthly statement of
account to Borrower within twenty (20) days after the end of each month.
Such statement of account shall constitute an account stated unless Borrower
makes written objection thereto within thirty (30) days from the date such
statement is mailed to Borrower. Borrower promises to pay all of its
Obligations as such amounts become due or are declared due pursuant to the
terms of this Agreement.
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 Lender a continuing security interest, lien and mortgage in
and to all right, title and interest of Borrower in the following property of
Borrower, whether now owned or existing or hereafter acquired or arising and
regardless of where located (all being collectively referred to as the
"Collateral"): (A) Accounts, and all guaranties and security therefor, and
all goods and rights represented thereby or arising therefrom including the
right of stoppage in transit, replevin and reclamation; (B) Inventory; (C)
general intangibles (as defined in the UCC) (including rights to payments
under the Assignment of Monies Agreement); (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) Intellectual Property, including that listed on
Schedule 4.14; (I) all deposit accounts of Borrower maintained with any bank
or financial institution; (J) all cash and other monies and property of
Borrower in the possession or under the control of Lender or any
participant; (K) all books, records, ledger cards, files, correspondence,
computer programs, tapes, disks and related data processing software that at
any time evidence or contain information relating to any of the property
described above or are otherwise necessary or helpful in the collection
thereof or realization thereon; and (L) proceeds 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 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 Lender or any corporation controlling 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 Lender or any corporation controlling Lender and thereby
reducing the rate of return on Lender's or such corporation's capital as a
consequence of its obligations hereunder, then Borrower shall from time to
time within fifteen (15) days after notice and demand from Lender (together
with the certificate referred to in the next sentence) pay to Lender
additional amounts sufficient to compensate such Lender for such reduction.
A certificate as to the amount of such cost and showing the basis of the
computation of such cost
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submitted by 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 Lender by the
jurisdiction under the laws of which Lender is organized or doing business or
any political subdivision thereof and taxes imposed on its net income by the
jurisdiction of 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 Lender, then the sum payable hereunder shall be
increased as may be necessary so that, after making all required deductions,
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 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 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 Lender); or
(2) does or shall impose on 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 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 Lender, upon its demand, any additional amounts necessary
to compensate Lender, on an after-tax basis, for such additional cost or
reduced amount receivable, as determined by Lender with respect to this
Agreement or the other Loan Documents. If Lender becomes entitled to claim
any additional amounts pursuant to this subsection, it shall promptly notify
Borrower of the event by reason of which Lender has become so entitled. A
certificate as to any additional amounts payable pursuant to the foregoing
sentence submitted by Lender to Borrower shall, absent manifest error, be
final, conclusive and binding for all purposes.
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SECTION 3 CONDITIONS TO LOANS
3.1 Conditions to Loans. The obligations of Lender to make Loans
and to issue Lender Letters of Credit on the Closing Date and on each Funding
Date are subject to satisfaction of all of the conditions set forth below.
(A) Closing Deliveries. Lender shall have received,
in form and substance satisfactory to Lender, 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 Lender may at any time reasonably request.
Borrower and Heller shall have executed and delivered an amendment to the
Inter-Credit Agreement on terms and conditions acceptable to Heller.
(B) Security Interests. Lender shall have received
satisfactory evidence that all security interests and liens granted to Lender
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) Closing Date Availability. After giving effect to
the consummation of the transactions contemplated hereunder on the Closing
Date and the payment by Borrower of all costs, fees and expenses relating
thereto, the Maximum Revolving Loan Amount on the Closing Date shall exceed
the principal balance of the Revolving Loans plus the Letter of Credit Reserve
by at least $1,000,000.
(D) 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 Lender after the Closing Date and approved by
Lender.
(E) Fees. With respect to Loans or Lender Letters of
Credit to be made or issued on the Closing Date, Borrower shall have paid the
fees payable on the Closing Date referred to in subsection 2.3(A).
(F) No Default. No event shall have occurred and be
continuing or would result from the consummation of the requested borrowing
or notice requesting issuance of a Lender Letter of Credit that would
constitute an Event of Default or a Default.
(G) 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.
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(H) No Prohibition. No order, judgment or decree of
any court, arbitrator or governmental authority shall purport to enjoin or
restrain Lender from making any Loans or issuing any Lender Letters of Credit.
(I) 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 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
Lender, would reasonably be expected to have a Material Adverse Effect.
(J) No Material Adverse Change. There shall not have
occurred since December 1, 1995 any event or condition which, in the sole
determination of Lender, constitutes or could reasonably be expected to
constitute a Material Adverse Effect.
(K) Solvency. Lender shall have received, in form and
substance acceptable to it, evidence that Borrower's representation and
warranty in subsection 4.16 is true as of the Closing Date.
(L) Audit. Lender shall have completed its audit of
Borrower's business operations and Lender shall have determined that the
results thereof are acceptable.
(M) Consents. Lender shall have received, in form and
substance acceptable to it, all consents and approvals required for Borrower to
enter into and perform its obligations under the Loan Documents and the
Inter-Credit Agreement, including without limitation agreements from each of
Borrower's landlords permitting Lender access to the Inventory located in any
leased location or warehouse.
SECTION 4 BORROWER'S REPRESENTATIONS AND WARRANTIES
To induce Lender to enter into this Agreement, and to make Loans
and to issue Lender Letters of Credit, Borrower represents and warrants to
Lender that the following statements are and will be true, correct and
complete:
4.1 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 be reasonably 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 Facility
Document.
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(B) Capitalization. The authorized capital stock of
each of the Loan Parties is as set forth on Schedule 4.1(B). 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 and such shares were issued in compliance with all applicable state
and federal laws concerning the issuance of securities. The capital stock of
each of the Loan Parties is owned by the stockholders and in the amounts set
forth on Schedule 4.1(B). No shares of the capital stock of any Loan Party,
other than those described above, are issued and outstanding. There are no
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, except as set forth on Schedule 4.1(B).
4.2 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 Facility 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 Facility Document to which it is a party and the consummation
of the transactions contemplated by this Agreement and the other Facility
Documents by each Loan Party do not contravene and will not be in
contravention of 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. This Agreement is, and the other Facility
Documents when executed and delivered will be, 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.
4.3 Financial Condition. All financial statements concerning
Borrower and its Subsidiaries which have been or will hereafter be furnished
by Borrower and its Subsidiaries to Lender pursuant to this Agreement have
been or will be prepared in accordance with GAAP consistently applied
throughout the periods involved (except as disclosed therein) and do or will
present fairly the financial condition of the corporations covered thereby as
at the dates thereof and the results of their operations for the periods then
ended. The Projections delivered and to be delivered have been and will be
prepared by Borrower in light of the past operations of the business of
Borrower and its Subsidiaries, and such Projections represent and 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 prepared and delivered.
4.4 Indebtedness and Liabilities. As of the Closing Date,
neither Borrower nor any of its Subsidiaries has (a) any Indebtedness except
as reflected on the most recent financial statements delivered to Lender; or
(b) any Liabilities other than as reflected on the most recent financial
statements delivered to Lender or as incurred in the ordinary course of
business following the date of the most recent financial statements
delivered to Lender.
4.5 Account Warranties. Borrower represents, warrants and
covenants 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,
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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 or allowance stated on the invoice or, as to a specific
customer, as set forth on Schedule 4.5); Borrower is the lawful owner of the
Account and has the right to assign the same to Lender; the Account is free
of all security interests, liens and encumbrances other than those in favor of
Lender and in favor of Heller, and the Account is due and payable in
accordance with its terms.
4.6 Names. Schedule 4.6 sets forth all names, tradenames,
fictitious names and business names under which Borrower currently conducts
business or has at any time during the past five years conducted business.
4.7 Locations; FEIN. Schedule 4.7 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 locations of
Eligible Inventory, and such locations are Borrower's sole locations for its
business and the Collateral, other than Inventory in an amount not in
excess of $4,000,000 at any time located with contractors or subcontractors.
Borrower's federal employer identification number is set forth on the signature
page hereof.
4.8 Title to Properties; Liens. Borrower and each of its
Subsidiaries has good, sufficient and legal title, subject to Permitted
Encumbrances, to all its respective material properties and assets. Borrower
owns no real property. Except for Permitted Encumbrances, all such
properties and assets are free and clear of Liens. To the best knowledge of
Borrower after due inquiry, there are no actual, threatened or alleged
defaults with respect to any leases of real property under which Borrower or
any of its Subsidiaries is lessee or lessor which would have a Material Adverse
Effect.
4.9 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. No Loan Party has
received any opinion or memorandum or legal advice from legal counsel to the
effect that it is exposed to any liability which could reasonably be expected
to result in any Material Adverse Effect.
4.10 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 all taxes, assessments, fees and other
governmental charges upon such Persons and upon their respective properties,
assets, income and franchises which are shown on such returns as due and
payable have been paid when due and payable. As of the Closing Date, none of
the United States income tax returns of Borrower or any of its Subsidiaries
are under audit. No tax liens have been filed and no claims (except as
otherwise permitted by Section 5.9) are being asserted with respect to any
such taxes. The charges, accruals and reserves on the books of Borrower and
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each of its Subsidiaries in respect of any taxes or other governmental charges
are in accordance with GAAP.
4.11 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 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.
4.12 Employee Benefit Plans. Borrower, each of its Subsidiaries
and each ERISA Affiliate is 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 of its
Subsidiaries or any ERISA Affiliate which remains unsatisfied for any funding
obligation, taxes or penalties with respect to any Employee Benefit Plan.
4.13 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 4.13.
All licenses of Intellectual Property material to Borrower's business are in
full force and effect, and, to the knowledge of Borrower, no party to such
licenses is in default thereunder.
4.14 Broker's Fees. No broker's or finder's fee or commission
will be payable with respect to any of the transactions contemplated hereby.
4.15 Environmental Compliance. Each Loan Party has been and is
currently in compliance with all applicable Environmental Laws, including
obtaining and maintaining in effect all permits, licenses or other
authorizations required by applicable Environmental Laws. There are no
claims, liabilities, 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.
4.16 Solvency. As of and from and after the date of this
Agreement, Borrower: (a) owns and will own assets the fair salable value of
which are (i) greater than the total amount of its liabilities (including
contingent liabilities) and (ii) greater than the amount that will be required
to pay the probable liabilities of Borrower as they mature; (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. There is no material fact
known to Borrower that has or could have a Material Adverse Effect and that
has not been fully disclosed herein or in such other documents, certificates
and statements furnished to Lender for use in connection with the transactions
contemplated hereby.
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4.17 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 Facility Documents, or any other document,
certificate or written statement furnished to Lender or Heller by or on behalf
of any such Person for use in connection with the Facility 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. The Projections and pro forma financial information
contained in such materials are based upon good faith estimates and
assumptions believed by such Persons to be reasonable at the time made, it
being recognized by Lender that such projections as to future events are not
to be viewed as facts and that actual results during the period or periods
covered by any such projections may differ from the projected results.
There is no material fact known to Borrower that has had or will have a
Material Adverse Effect and that has not been disclosed herein or in such
other documents, certificates and statements furnished to Lender for use in
connection with the transactions contemplated hereby.
4.18 Insurance. Borrower and each of its Subsidiaries maintains
adequate insurance policies for public liability, property damage for its
business and properties, product liability, and business interruption, 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.
4.19 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 violation relating to any use, release,
storage, transport or disposal of any Hazardous Material, 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.
4.20 Bank Accounts. Schedule 4.20 sets forth the account
numbers and locations of all bank accounts of Borrower and its
Subsidiaries.
4.21 Subsidiaries. Borrower has no Subsidiaries.
4.22 Employee Matters. Except as set forth on Schedule 4.22, (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 4.22, neither Borrower nor any of its Subsidiaries is
subject to an employment contract.
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4.23 Governmental Regulation. None of the Loan Parties is, or
after giving effect to any loan will be, 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.
Borrower may, at any time and from time to time and subject
to subsection 5.13, amend any one or more of the Schedules referred in this
Section 4 and any representation or warranty 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 may
the Borrower amend any such Schedule if such amendment would reflect or
evidence a Default or Event of Default.
SECTION 5 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 and termination of all Lender Letters of Credit, unless Lender
shall otherwise give its prior written consent, Borrower shall perform, and
shall cause each of its Subsidiaries to perform, all covenants in this Section
5 applicable to such Person.
5.1 Financial Statements and Other Reports. Borrower will
maintain, and cause each of its Subsidiaries to maintain, a system of
accounting established and administered in accordance with sound business
practices to permit preparation of financial statements in conformity with
GAAP. Borrower will deliver to Lender the financial statements and other
reports described below (which shall be in addition to any reports required
by the Inter-Credit Agreement), and hereby authorizes Lender to deliver any of
the following to Heller:
(A) Monthly Financials. As soon as available and in
any event within twenty (20) 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 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) upon Lender's request, a schedule of outstanding
royalties payable under Borrower's license agreements for Intellectual
Property.
(B) Quarterly Financials. As soon as available and in
any event within forty-five (45) days after the end of each quarter of a
Fiscal Year, Borrower will deliver Borrower's Form 10Q as filed or to be
filed with the Securities and Exchange Commission (or any successor agency).
(C) 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
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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 a firm of independent certified public accountants selected by Borrower,
and acceptable to Lender, 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 such 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, if any and
(b) related consolidating statements of earnings of Borrower and its
Subsidiaries showing intercompany eliminations, if any.
(D) Accountants' Certification and Reports. Together
with each delivery of consolidated financial statements of Borrower and its
Subsidiaries pursuant to subsection 5.1(C), Borrower will deliver a written
statement by its independent certified public accountants (a) stating that
the examination has included a review of the terms of this Agreement as
same relate to accounting matters and (b) 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 independent public
accountants in connection with each annual, interim or special audit of the
financial statements of Borrower made by such accountants, including the
comment letter submitted by such accountants to management in connection with
their annual audit.
(E) Compliance Certificate. Together with the delivery
of each set of financial statements referenced in subparts (A), (B) and (C)
of this subsection 5.1, Borrower will deliver to Lender 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 Section 6.
(F) Borrowing Base Certificates. On the first
Business Day of each week and on each day on which Borrower makes a
borrowing hereunder, Borrower shall deliver to Lender a Borrowing Base
Certificate updated to reflect the most recent sales and collections of
Borrower since the last Borrowing Base Certificate.
(G) Reconciliation Reports, Inventory Reports and
Listings and Agings. Borrower will deliver to Lender, the reports
described on Exhibit C attached hereto, within the periods set forth on
such Exhibit. All such reports shall be in form and substance
satisfactory
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to Lender.
(H) Management Report. Together with each delivery of
financial statements of Borrower and its Subsidiaries pursuant to
subdivisions (A), (B) and (C) of this subsection 5.1, Borrower will deliver a
management report: (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 (or for the Fiscal Year then ended in the
case of year-end financials); (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 Lender pursuant to 5.1(P); and (3)
discussing the reasons for any significant variations from Borrower's
business plan and Projections. 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.
(I) Appraisals. From time to time, upon the request of
Lender, Borrower will obtain and deliver to Lender, at Borrower's expense,
appraisal reports in form and substance and from appraisers satisfactory to
Lender, stating the then current fair market and orderly liquidation values of
all or any portion of the Collateral; provided, however, so long as no Event
of Default is continuing, Lender 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, and subject to the limitations on fees payable
under subsection 2.3(D).
(J) Government Notices. Borrower will deliver to
Lender within three (3) Business Days 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.
(K) Events of Default, etc. Within three (3) Business
Days after any officer of Borrower obtains 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; (3) any Material Adverse Effect; or
(4) any termination or cancellation of any material license agreement for
Intellectual Property.
(L) Trade Names. Borrower and each of its Subsidiaries
will give Lender at least thirty (30) days advance written notice of any
change of name or of any new trade name or fictitious business name.
Borrower's use of any trade name or fictitious business name will be in
compliance with all laws regarding the use of such names.
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(M) Locations. Borrower will give Lender at least
thirty (30) days advance written notice of any change in Borrower's
principal place of business or any change in the location of its books and
records or the Collateral or of any new location for its books and records or
the Collateral; provided that Borrower shall only be required to update the
information on Borrower's contractors and subcontractors where Inventory
(other than Eligible Inventory) is located on a quarterly basis.
(N) Bank Accounts. Borrower will give Lender notice of
any new bank accounts Borrower intends to establish at least five (5) Business
Days prior to its opening same and shall deliver to Lender such agreements with
respect to such accounts as Lender may require.
(O) Litigation. Within three (3) Business Days after any
officer of Borrower or its Subsidiaries obtains knowledge of (1) the
institution of any action, suit, proceeding, governmental investigation or
arbitration against or directly affecting any Loan Party or any property of
any Loan Party not previously disclosed by Borrower to Lender or (2) 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 is reasonably likely to
have a Material Adverse Effect, Borrower will promptly give notice thereof
to Lender and provide such other information as may be reasonably available to
them to enable Lender and its counsel to evaluate such matter.
(P) Projections. As soon as available and in any event
no later than thirty (30) days prior to the end of each Fiscal Year of
Borrower, Borrower will deliver consolidated and consolidating Projections of
Borrower and its Subsidiaries for the forthcoming Fiscal Year, month by month.
(Q) Indebtedness Notices. Within three (3) Business
Days after receipt, Borrower shall deliver copies of all notices given or
received by Borrower and any of its Subsidiaries with respect to
noncompliance with any material term or condition related to any
Indebtedness, and shall promptly notify Lender of any potential or actual event
of default with respect to any Indebtedness.
(R) Landlord Notices. Borrower will deliver copies of
any notices received from any landlord (or give notice of any oral notice)
immediately upon receipt. In addition, Borrower shall deliver to Lender
each month evidence of payment of all amounts due under Borrower's lease at
6520 South 190th Street, Kent, Washington, or any other leased location
for which Lender has not received a landlord agreement in form and substance
acceptable to Lender.
(S) Other Information. With reasonable promptness,
Borrower will deliver such other information and data with respect to any Loan
Party, any Subsidiary of any Loan Party or the Collateral as Lender may
reasonably request from time to time.
5.2 Access to Accountants. Borrower authorizes Lender to discuss
the financial condition and financial statements of Borrower and its
Subsidiaries with Borrower's independent
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public accountants upon reasonable notice to Borrower of its intention to do
so, and authorizes such accountants to respond to all of Lender's inquiries.
5.3 Inspection. Borrower shall permit Lender and any authorized
representatives designated by Lender to visit and inspect any of the
properties of Borrower or any of its Subsidiaries, including its and their
financial and accounting records, and to make copies and take extracts
therefrom, and to discuss its and their affairs, finances and business with
its and their officers and independent public accountants, at such reasonable
times during normal business hours and as often as may be reasonably
requested. Borrower acknowledges that Lender intends to make such inspections
on at least a quarterly basis.
5.4 Collateral Records. Borrower shall keep full and accurate
books and records relating to the Collateral and shall mark such books and
records to indicate Lender's security interests in the Collateral.
5.5 Account Covenants; 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 5.6 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 except as set forth on Schedule 4.5 and no
returns will be accepted without Lender's prior written consent; provided,
that until Lender notifies Borrower to the contrary, Borrower may presume
consent. Borrower will immediately notify Lender 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. Lender 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 Lender, 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. Lender may notify account debtors to make
payments directly to Lender's Depository Account(s) or to Lender's Account;
provided, however, that unless a Default or Event of Default has occurred,
Lender agrees that it will not deliver such notification unless it
determines in its discretion that such action is necessary in order to
protect the value of the Collateral or to ensure collection of the Accounts.
5.6 Collection of Accounts and Payments. Borrower and Lender
shall establish lockboxes and depository accounts ("Lender's Depository
Accounts") with such banks as are acceptable to Lender to which all account
debtors shall 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. Borrower hereby agrees that all
payments received by Lender, whether by cash, check, wire transfer or any
other instrument, made to such Lender Depository Accounts or otherwise
received by Lender and whether on the Accounts or as proceeds of other
Collateral or otherwise will be the sole and exclusive property of Lender.
Borrower, and any of its Affiliates, employees, agents, or other Persons
acting for or in concert with Borrower, shall, acting as trustee for Lender,
receive, as the sole and exclusive property of Lender, any monies, checks,
notes, drafts or any other payments relating to and/or proceeds of Accounts or
other Collateral which come into the possession or under the control of
Borrower or any of Borrower's Affiliates, employees,
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agents or other Persons acting for or in concert with Borrower,and
immediately upon receipt thereof, Borrower or such Persons shall remit the
same or cause the same to be remitted, in kind, to the Lender Depository
Account or to Lender at its address set forth in subsection 9.6 below.
5.7 Endorsement. Borrower hereby constitutes and appoints
Lender and all Persons designated by Lender 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 5.6 above
and all proceeds of Collateral that come into Lender's possession or under
Lender's control. Both the appointment of Lender as Borrower's attorney
and Lender's rights and powers are coupled with an interest and are
irrevocable until payment in full and complete performance of all of the
Obligations.
5.8 Corporate Existence. Borrower will, and will cause each of
its Subsidiaries to, at all times preserve and keep in full force and effect
its corporate existence and all rights and franchises material to its
business. Borrower will promptly notify Lender of any change in its or its
Subsidiaries' ownership or corporate structure.
5.9 Payment of Taxes. Borrower will, and will cause each of
its Subsidiaries to, pay all taxes, assessments and other governmental
charges imposed upon it or any of its properties or assets or with respect to
any of its franchises, business, income or property before any penalty accrues
thereon 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.
5.10 Maintenance of Properties; Insurance. Borrower will
maintain or cause to be maintained in good repair, working order and
condition all material properties used in the business of Borrower and its
Subsidiaries and will make or cause to be made all appropriate repairs,
renewals and replacements thereof. Borrower will maintain or cause to be
maintained, with financially sound and reputable insurers, public liability
and property damage insurance 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 businesses and in amounts acceptable to
Lender. Borrower shall cause Lender to be named as loss payee on all
insurance policies relating to any Collateral and as additional insured
under all liability policies, in each case pursuant to appropriate
endorsements in form and substance satisfactory to Lender and shall
collaterally assign to Lender as security for the payment of the
Obligations all business interruption insurance of Borrower. 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).
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5.11 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.
5.12 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 Lender such instruments, certificates of title or
other documents as Lender 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. At Lender's request,
Borrower shall cause any Subsidiaries of Borrower promptly to guaranty the
Obligations and to grant to Lender security interests in the real,
personal and mixed property of such Subsidiary to secure the Obligations.
5.13 Collateral Locations. Borrower will keep the Collateral at
the locations specified on Schedule 4.7; provided that Borrower may keep no
more than $4,000,000 of Inventory with contractors or subcontractors. Except
as permitted by the foregoing sentence, with respect to any new location
(which in any event shall be within the continental United States), Borrower
will execute such documents and take such actions as Lender deems necessary
to perfect and protect the security interests of the Lender in the
Collateral prior to the transfer or removal of any Collateral to such new
location, and will obtain from the landlord of any leased location such
estoppel certificates and collateral access agreements as may be requested by
Lender, in form and substance acceptable to Lender.
5.14 Bailees. 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 Lender, notify such warehouseman, bailee,
agent or processor of the security interests in favor of Lender created
hereby and shall instruct such Person to hold all such Collateral for
Lender's account subject to Lender's instructions.
5.15 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 of 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.
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SECTION 6 FINANCIAL COVENANTS
Borrower covenants and agrees that so long as any of the Commitments
remain in effect and until 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 in this Section 6
applicable to such Person.
6.1 Tangible Net Worth. Borrower shall at all times maintain
Tangible Net Worth of at least $24,500,000.
6.2 Working Capital. Borrower shall at all times maintain Working
Capital of at least $19,000,000.
6.3 Minimum EBITDA. Borrower shall maintain EBITDA of at least
the amounts set forth below for the Determination Period ending on the last day
of each fiscal quarter set forth below.
<TABLE>
<CAPTION>
Minimum EBITDA
Amount for
Determination Period
------------------- --------------------
<S> <C>
3/96 $ 300,000
6/96 $1,050,000
9/96 $1,050,000
12/96 $1,750,000
3/97 $2,000,000
6/97 $2,500,000
9/97 $2,500,000
12/97 $3,000,000
</TABLE>
6.4 Ratio of Liabilities to Tangible Net Worth. The ratio of
(a) Borrower's Liabilities, on a consolidated basis, to (b) Borrower's
Tangible Net Worth shall at no time be greater than 1.15:1.
6.5 Capital Expenditure Limits. The aggregate amount of all
Capital Expenditures of Borrower and its Subsidiaries (excluding trade-ins
and excluding Capital Expenditures in respect of replacement assets to the
extent funded with casualty insurance proceeds) will not exceed $1,300,000 in
any Fiscal Year. In the event that Borrower or any of its Subsidiaries enters
into a Capital Lease or other contract with respect to fixed assets, for
purposes of
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calculating Capital Expenditures under this subsection only, the amount of the
Capital Lease or contract initially capitalized on Borrower's or any
Subsidiary's balance sheet prepared in accordance with GAAP shall be
considered expended in full on the date that Borrower or any of its
Subsidiaries enters into such Capital Lease or contract.
6.6 Interest Coverage Ratio. Borrower shall not permit the
Interest Coverage Ratio for each Determination Period ending on the last day
of each fiscal quarter set forth below to be less than the ratio set forth
below for such period.
<TABLE>
<CAPTION>
Interest Coverage
Determination Period Ratio for
Fiscal Quarter Ending Date Determination Period
-------------------------- --------------------
<S> <C>
3/96 not applicable
6/96 0.5 to 1
9/96 0.5 to 1
12/96 1.0 to 1
3/97 1.5 to 1
6/97 2.0 to 1
9/97 2.0 to 1
12/97 3.0 to 1
</TABLE>
6.7 Minimum Net Sales to Inventory Ratio. Borrower shall not
permit at the end of any month the ratio of (a) net sales of Inventory for
the prior twelve (12) month period ending on such date to (b) Inventory as
of such date to be less than 3.3 to 1 through and including December 31, 1996
or less than 3.6 to 1 thereafter.
SECTION 7 NEGATIVE COVENANTS
Borrower covenants and agrees that so long as any of the Commitments
remain in effect and until payment in full of all Obligations and termination
of all Lender Letters of Credit, unless Borrower has received the prior
written consent of Lender, 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 or
any agreement with respect to the factoring or sale of Accounts except: (a)
the Obligations; (b) intercompany Indebtedness, not to exceed $250,000
outstanding at any time in the aggregate, among Borrower and its Subsidiaries;
provided that such Indebtedness is subordinated in right of payment to the
Obligations; (c) liabilities under
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the Inter-Credit Agreement; (d) Indebtedness not to exceed $3,000,000 in the
aggregate at any time outstanding secured by purchase money Liens or under
capital leases. Except for Indebtedness described permitted in the preceding
sentence, Borrower will not, and will not permit any of its Subsidiaries to,
incur any Liabilities except for 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, if appropriate 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 paying 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 or the assets of such Person, except that Borrower and its
Subsidiaries may (i) sell Inventory in the ordinary course of business; (ii)
sell Accounts pursuant to the Inter-Credit Agreement; and (iii) 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 $500,000 and the aggregate
market value of assets sold or otherwise disposed of in any Fiscal Year does
not exceed $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 Section 6
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 the assets of such Person 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.
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(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) subject to subordination provisions, pay any indebtedness owed to
Borrower or any other Subsidiary; (3) make loans or advances to Borrower or
any other Subsidiary; or (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 $200,000 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 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, and to permit Borrower to pay expenses incurred in the
ordinary course of business.
7.6 Restriction on Fundamental Changes. (a) Enter into any
transaction of merger or consolidation; provided, however, that a Subsidiary
may merge into Borrower (so long as Borrower is the surviving corporation)
and any wholly-owned Subsidiary may merge with another wholly-owned
Subsidiary; (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; or (d) acquire
by purchase or otherwise all or any substantial part of the business or assets
of, or stock or other evidence of beneficial ownership of, any Person.
7.7 [intentionally omitted]
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
transactions in the ordinary course of and pursuant to the reasonable
requirements of Borrower's business and upon fair and reasonable terms
which are fully disclosed to Lender 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 Environmental Liabilities. (a) Violate any applicable
Environmental Law; (b) dispose of any Hazardous Materials (except in
accordance with applicable law) into or onto or from, any real property
owned, leased or operated by any Loan Party; or (c) permit any Lien imposed
pursuant to any Environmental Law to be imposed or to remain on any real
property owned, leased or operated by any Loan Party.
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7.10 Conduct of Business. From and after the Closing Date, engage
in any business other than businesses of the type engaged in by Borrower or
such Subsidiary on the Closing Date.
7.11 Compliance with ERISA. 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. Neither Borrower nor any Subsidiary shall fail to establish,
maintain and operate each Employee Benefit Plan in compliance in all material
respects with the provisions of ERISA, the IRC and all other applicable laws
and the regulations and interpretations thereof.
7.12 Tax Consolidations. File or consent to the filing of any
consolidated income tax return with any Person other than Borrower, or any of
its Subsidiaries.
7.13 Subsidiaries. Establish, create or acquire any new
Subsidiaries.
7.14 Fiscal Year. Change its Fiscal Year.
7.15 Press Release; Public Offering Materials. Disclose the
name of 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.
7.16 Bank Accounts. Establish any new bank accounts, or amend
or terminate any Blocked Account or lockbox agreement without Lender's
prior written consent.
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 and in the case of interest, such failure shall not be
cured within five (5) days of the applicable due date; 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 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 $25,000 or having an aggregate
principal amount in excess of $50,000 to become or be declared due prior to its
stated maturity; or
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(C) Breach of Certain Provisions. Failure of Borrower to
perform or comply with any term or condition contained in subsections 5.1(F),
(G), or (J) through (S) inclusive, 5.3, 5.5 or 5.6 or contained in Section 6 or
Section 7; 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 ten (10) days (or solely with respect to subsections
5.1(A), (B), (C), (D), (E), (H) or (I), five (5) days) after receipt by
Borrower of notice from Lender 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) [intentionally omitted]
(G) Involuntary Bankruptcy; Appointment of Receiver, etc.
(1) A court enters a decree or order for relief with respect to Borrower or any
of its Subsidiaries in an involuntary case under the Bankruptcy Code or 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 sixty (60) days unless dismissed, bonded or
discharged: (a) an involuntary case is commenced against Borrower or any of its
Subsidiaries, under any applicable bankruptcy, insolvency or other similar law
now or hereafter in effect; or (b) a decree or order of a court for the
appointment of a receiver, liquidator, sequestrator, trustee, custodian or
other officer having similar powers over Borrower or any of its Subsidiaries,
or over all or a substantial part of their respective property, is entered; or
(c) an interim receiver, trustee or other custodian is appointed without the
consent of Borrower or any of its Subsidiaries, for all or a substantial part
of the property of Borrower or any such Subsidiary; or
(H) Voluntary Bankruptcy; Appointment of Receiver, etc.
(1) An order for relief is entered with respect to Borrower or any of its
Subsidiaries or Borrower or any of its Subsidiaries commences a voluntary case
under the Bankruptcy Code or 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) Borrower or any of its Subsidiaries
makes any assignment for the benefit of creditors; or (3) the board of
directors of 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
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(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 ten (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 $25,000 or (2) an amount in the aggregate at any
time in excess of $50,000 (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 thirty (30) days or in any event later than five (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 twenty (20) days; or
(L) Solvency. Borrower ceases to be solvent (as
represented by Borrower in subsection 4.17) 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 more than thirty (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 party, or gives notice to such effect;
or
(O) Failure of Security. Lender 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 Lender to take any action within its control or
except for Inventory not in excess of $4,000,000 located at Borrower's
contractors or subcontractors; or
(P) Damage, Strike, Casualty. (1) Any material damage
to, or loss, theft or destruction of, any Collateral, whether or not insured,
and, if such damage is insured and Borrower has business interruption insurance
relating to such casualty, the passage of 60 days or (2) any strike, lockout,
labor dispute, embargo, condemnation, act of God or public enemy, or other
casualty which causes, for more than sixty (60) consecutive days if Borrower
has business interruption insurance which is applicable or fifteen (15)
consecutive days if no such
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insurance is applicable, 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 described in clauses (1) or (2) 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 have a Material Adverse Effect.
(R) Forfeiture. There is filed against Borrower 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 one hundred twenty (120) days; and (2) could result in the
confiscation or forfeiture of any material portion of the Collateral.
(S) Breach or Default under Inter-Credit Agreement.
(1) Failure of Borrower to pay when due any amounts under the Inter-Credit
Agreement or (2) the material breach by Borrower of any of the terms,
representations, covenants, conditions or provisions of the Inter-Credit
Agreement or (3) termination of the Inter-Credit Agreement.
8.2 Suspension of Commitments. Upon the occurrence of any Default
or Event of Default, notwithstanding any grace period or right to cure, Lender,
without notice or demand, may immediately cease making additional Loans and the
Commitments shall be suspended; 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, Lender
may, 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 Lender an amount equal to one hundred five
percent (105%) of the Letter of Credit Reserve to enable Lender 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 rights or remedies
available to Lender at law or in equity, Lender may 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) notify any or all obligors on the Accounts to make
all payments directly to Lender; (b) require Borrower to, and Borrower hereby
agrees that it will, at its expense and upon request
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of Lender forthwith, assemble all or part of the Collateral as directed by
Lender and make it available to Lender at a place to be designated by Lender
which is reasonably convenient to both parties; (c) without notice or demand or
legal process, enter upon any premises of Borrower and take possession of the
Collateral; and (d) without notice except as specified below, sell the
Collateral or any part thereof in one or more parcels at public or private
sale, at any of the Lender's offices or elsewhere, at such time or times, for
cash, on credit or for future delivery, and at such price or prices and upon
such other terms as Lender may deem commercially reasonable. Borrower agrees
that, to the extent notice of sale shall be required by law, at least ten (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, if permitted by law, 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 Lender. Lender 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. Lender 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. Lender 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 Lender as Borrower's attorney-in-fact with full authority in the
place and stead of Borrower and in the name of Borrower, Lender or otherwise,
from time to time in Lender's discretion while an Event of Default is
continuing to take any action and to execute any instrument that Lender 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 receipts 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 Lender may deem necessary or desirable
for the collection of any of the Collateral or otherwise to enforce the rights
of Lender 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 Lender as
Borrower's attorney and Lender's rights and powers are coupled with an interest
and are irrevocable until payment in full and complete performance of all of
the Obligations.
8.6 Limitation on Duty of Lender with Respect to Collateral.
Beyond the safe custody thereof, 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. Lender
shall be deemed to have exercised reasonable care in the custody and
preservation of the Collateral
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in its possession if the Collateral is accorded treatment substantially equal
to that which Lender accords its own property. Lender shall not 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 or other agent or bailee
selected by Lender 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 Lender from or on behalf of Borrower, and Borrower
hereby irrevocably agrees that Lender 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 Lender may deem advisable notwithstanding any
previous entry by Lender 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 Lender with
respect to this Agreement, the other Loan Documents or the Collateral; second,
to all fees due and owing to Lender; 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 Lender.
8.8 License of Intellectual Property. Borrower hereby assigns,
transfers and conveys to Lender, 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 Lender 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 Lender 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, without requirement that any monetary payment whatsoever be
made to Borrower by Lender.
8.9 Waivers, Non-Exclusive Remedies. No failure on the part of
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 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 are not
exclusive of any other remedies provided by law.
SECTION 9 MISCELLANEOUS
9.1 Assignments and Participations. Lender may assign its rights
and delegate its obligations under this Agreement and further may assign, or
sell participations in, all or any part of the Loans, the Commitments or any
other interest herein to an Affiliate or to another Person.
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In the case of an assignment authorized under this subsection 9.1, the assignee
shall have, to the extent of such assignment, the same rights, benefits and
obligations as it would if it were a Lender hereunder. Lender shall be
relieved of its obligations hereunder with respect to the Commitments or
assigned portion thereof. Borrower hereby acknowledges and agrees that any
assignment will give rise to a direct obligation of Borrower to the assignee
and that the assignee shall be considered to be a "Lender". Lender may furnish
any information concerning Borrower and its Subsidiaries in its possession from
time to time to assignees and participants (including prospective assignees and
participants).
9.2 Set Off. 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 of any Event of Default, Lender, each assignee of Lender's interest,
and each participant is hereby authorized by Borrower at any time or from time
to time, without notice to Borrower or to any other Person, any such notice
being hereby expressly waived, to set off and to appropriate and to apply any
and all balances held by it at any of its offices for the account of Borrower
or any of its Subsidiaries (regardless of whether such balances are then due to
Borrower or its Subsidiaries) and any other property at any time held or owing
by that Lender or assignee to or for the credit or for the account of Borrower
against and on account of any of the Obligations then outstanding; provided,
that no participant shall exercise such right without the prior written consent
of Lender.
Borrower hereby agrees, to the fullest extent permitted by law, that
any Lender, assignee or participant may exercise its right of setoff with
respect to amounts in excess of its pro rata share of the Obligations (or, in
the case of a participant, in excess of its pro rata participation interest in
the Obligations) and that such Lender, assignee or participant, as the case may
be, shall be deemed to have purchased for cash in the amount of such excess,
participations in each other Lender's or holder's share of the Obligations.
9.3 Expenses and Attorneys' Fees. Whether or not the transactions
contemplated hereby shall be consummated, Borrower agrees to promptly pay all
reasonable fees, costs and expenses incurred by Lender and Heller in connection
with any matters contemplated by or arising out of this Agreement or the other
Loan Documents or the Inter-Credit Agreement 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 (including
attorneys' fees, allocated costs of internal counsel and fees of environmental
consultants, accountants and other professionals retained by Lender) incurred
in connection with the examination, review, due diligence investigation,
documentation and closing of the financing arrangements evidenced by the Loan
Documents, subject to the limitations in Lender's proposal letter to Borrower
dated November 30, 1995; (b) following the Closing Date, fees, costs and
expenses (including attorneys' fees, allocated costs of internal counsel and
fees of environmental consultants, accountants and other professionals retained
by Lender) incurred in connection with any amendments, waivers, consents,
forbearances, and other modifications relating to the Facility Documents or any
subordination or intercreditor agreements or actions taken by Lender following
any Default; (c) fees, costs and expenses incurred in creating, perfecting and
maintaining perfection of Liens in favor of Lender not in excess of $1,000 per
year unless an
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Event of Default has occurred; (d) fees, costs and expenses incurred in
connection with forwarding to Borrower the proceeds of Loans including Lender's
standard wire transfer fee; (e) fees, costs, expenses and bank charges,
including bank charges for returned checks, incurred by 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) 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 the Inter-Credit Agreement or to collect any payments due
from Borrower or any other Loan Party under this Agreement or any other Loan
Document or the Inter-Credit Agreement 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.
9.4 Indemnity. In addition to the payment of expenses pursuant to
subsection 9.3, whether or not the transactions contemplated hereby shall be
consummated, Borrower agrees to indemnify, pay and hold Lender, and the
officers, directors, employees, agents, consultants, auditors, persons engaged
by Lender to evaluate or monitor the Collateral, affiliates and attorneys of
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 Lender, 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.
9.5 Amendments and Waivers. No amendment, modification,
termination or waiver of any provision of this Agreement or of the other Loan
Documents, or consent to any departure by Borrower therefrom, shall be
effective unless the same shall be in writing and signed by Lender and
Borrower. Each amendment, modification, termination or waiver shall be
effective only in the specific instance and for the specific purpose for which
it was given.
9.6 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. Los Angeles
time or, if not, on the next succeeding Business Day; (c) if delivered by
overnight courier, two (2) days after
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delivery to such courier properly addressed; or (d) if by U.S. Mail, four (4)
Business Days after depositing in the United States mail, with postage prepaid
and properly addressed.
If to Borrower: SUN SPORTSWEAR, INC.
6520 190th Street
Kent, Washington 98032
Attn: Chief Financial Officer
Telecopy No.: (206) 251-6133
If to Lender: HELLER FINANCIAL, INC.
Attn: CAMG Portfolio Manager
505 North Brand Boulevard
Glendale, California 91203
Telecopy No.: (818) 246-6380
With a copy to: HELLER FINANCIAL, INC.
Attn: Legal Department
505 North Brand Boulevard
Glendale, California 91203
Telecopy No.: (818) 548-4963
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 9.6.
9.7 Survival of 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 set forth in subsections 9.3 and 9.4 shall survive
the payment of the Loans and the termination of this Agreement.
9.8 Indulgence Not Waiver. No failure or delay on the part of
Lender in the exercise of any power, right or privilege 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.
9.9 Marshaling; Payments Set Aside. Lender shall not 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 Lender or 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
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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.
9.10 Entire Agreement. This Agreement, and the other Loan
Documents referred to herein embody the final, entire agreement among the
parties hereto and supersede any and 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. There are no oral agreements among the parties hereto.
9.11 Independence of Covenants. All covenants hereunder shall be
given independent effect so that if a particular action or condition is not
permitted by any of such covenants, the fact that it would be permitted by an
exception to, or be otherwise within the limitations of, another covenant shall
not avoid the occurrence of a Default or an Event of Default if such action is
taken or condition exists.
9.12 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 or of such provision or obligation in any other
jurisdiction.
9.13 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.
9.14 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.
9.15 Successors and Assigns. This Agreement shall be binding upon
and inure to the benefit of the parties hereto and their respective successors
and assigns except that Borrower may not assign its rights or obligations
hereunder without the prior written consent of Lender.
9.16 No Fiduciary Relationship; Limitation of Liabilities.
(A) No provision in this Agreement or in any of the other
Facility Documents and no course of dealing between the parties shall be deemed
to create any fiduciary duty by Lender to Borrower.
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(B) Neither Lender, nor any affiliate, officer, director,
shareholder, employee, attorney, or agent of 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
Facility Documents, or any of the transactions contemplated by this Agreement
or any of the other Facility Documents. Borrower hereby waives, releases, and
agrees not to sue Lender or any of 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 Facility Documents, or any of the transactions contemplated by
this Agreement or any of the transactions contemplated hereby.
9.17 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 LENDER'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 ACCEPTS FOR ITSELF AND IN CONNECTION WITH ITS PROPERTIES, GENERALLY
AND UNCONDITIONALLY, THE NON-EXCLUSIVE JURISDICTION OF THE AFORESAID COURTS AND
WAIVES ANY DEFENSE OF FORUM NON CONVENIENS, AND IRREVOCABLY AGREES TO BE BOUND
BY ANY FINAL JUDGMENT RENDERED THEREBY IN CONNECTION WITH THIS AGREEMENT, THE
OTHER LOAN DOCUMENTS OR THE OBLIGATIONS.
9.18 WAIVER OF JURY TRIAL. BORROWER AND 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 OR THE OTHER LOAN DOCUMENTS. BORROWER AND LENDER
ACKNOWLEDGE THAT THIS WAIVER IS A MATERIAL INDUCEMENT TO ENTER INTO A BUSINESS
RELATIONSHIP, THAT EACH HAS ALREADY 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 AND LENDER FURTHER
WARRANT AND REPRESENT THAT EACH HAS REVIEWED THIS WAIVER WITH ITS LEGAL
COUNSEL, AND THAT EACH KNOWINGLY AND VOLUNTARILY WAIVES ITS JURY TRIAL RIGHTS
FOLLOWING CONSULTATION WITH LEGAL COUNSEL.
9.19 Construction. Borrower and 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 and Lender.
9.20 Counterparts; Effectiveness. This Agreement and any
amendments, waivers, consents, or supplements may be executed in any number of
counterparts and by different parties
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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 but one and the same instrument. This Agreement shall become
effective upon the execution of a counterpart hereof by each of the parties
hereto.
9.21 No Duty. All attorneys, accountants, appraisers, and other
professional Persons and consultants retained by Lender shall have the right to
act exclusively in the interest of 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.
9.22 Confidentiality. Lender shall hold all nonpublic information
identified as such by Borrower, including Projections and open customer order
reports, 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 Lender is otherwise a creditor of Borrower, Lender may use the information
in connection with its other credits. Lender 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 9.22. If Lender discloses confidential information to
its accountants, lawyers or other advisors, it agrees to advise such Persons
that such information is confidential, but Lender shall have no responsibility
for such Persons. In no event shall 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 a assignee (or participant) it
shall return all materials furnished to it by Borrower in connection herewith.
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Witness the due execution hereof by the respective duly authorized
officers of the undersigned as of the date first written above.
HELLER FINANCIAL, INC. SUN SPORTSWEAR, INC.
By: /s/ David M. Reza By: /s/ Kevin James
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Name: David M. Reza Name: Kevin James
----------------------- ------------------------
Title: Senior Vice President Title: Senior VP & CFO
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FEIN: 91-1132620
------------------------
51
143
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from Form 10-K
for the year ended December 31, 1995 and is qualified in its entirety by
reference to such financial statements.
</LEGEND>
<CIK> 0000856711
<NAME> SUN SPORTSWEAR, INC.
<MULTIPLIER> 1
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> DEC-31-1995
<EXCHANGE-RATE> 1
<CASH> 2,006,633
<SECURITIES> 0
<RECEIVABLES> 13,148,592
<ALLOWANCES> 46,317
<INVENTORY> 23,631,358
<CURRENT-ASSETS> 42,468,005
<PP&E> 10,904,0830
<DEPRECIATION> 6,072,089
<TOTAL-ASSETS> 47,315,106
<CURRENT-LIABILITIES> 21,048,691
<BONDS> 247,996
0
0
<COMMON> 21,618,339
<OTHER-SE> 4,400,080
<TOTAL-LIABILITY-AND-EQUITY> 47,315,106
<SALES> 93,965,325
<TOTAL-REVENUES> 93,965,325
<CGS> 84,569,855
<TOTAL-COSTS> 98,533,938
<OTHER-EXPENSES> 1,066,461
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,267,442
<INCOME-PRETAX> (5,635,074)
<INCOME-TAX> (1,898,620)
<INCOME-CONTINUING> (3,736,454)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,736,454)
<EPS-PRIMARY> (0.65)
<EPS-DILUTED> (0.65)
</TABLE>
