<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
---------------------
(Mark One)
[X] Quarterly report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the quarterly period ended November 29, 1997 or
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the transition
period from ____ to ____
Commission File Number 0-19402
VANS, INC.
(Exact Name of Registrant as Specified in its Charter)
Delaware 33-0272893
(State or Other Jurisdiction (I.R.S. Employer
of Incorporation or Organization) Identification No.)
15700 Shoemaker Avenue
Santa Fe Springs, California 90670-5515
(Address of Principal Executive Offices) (Zip Code)
(562) 565-8267
(Registrant's Telephone Number, Including Area Code)
Not applicable
(Former Name, Former Address and Formal Fiscal Year,
if Changed Since Last Report)
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 report(s), and (2) has been subject to such filing
requirements for the past 90 days. YES [X] NO [ ]
Indicate the number of shares outstanding of each of the registrant's classes of
common stock, as of the latest practicable date: 13,363,598 shares of Common
Stock, $.001 par value, as of January 9, 1998.
<PAGE> 2
PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
VANS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
NOVEMBER 29, 1997 AND MAY 31, 1997
<TABLE>
<CAPTION>
NOVEMBER 29, MAY 31,
1997 1997
------------- -------------
<S> <C> <C>
ASSETS
Current assets:
Cash $ 7,915,495 $ 15,350,175
Accounts receivable, net of allowance for doubtful accounts of
$1,451,889 and $1,399,589 at November 29, 1997 and May 31, 31,394,393 24,390,794
1997, respectively
Inventories 32,776,411 25,098,695
Prepaid expenses 2,999,874 2,960,435
------------- -------------
Total current assets 75,086,173 67,800,099
Property, plant and equipment, net 14,445,069 13,346,452
Property held for lease 4,857,522 4,953,522
Excess of cost over the fair value of net assets acquired, net
of accumulated amortization of $34,038,000 and $33,580,138 at
November 29, 1997 and May 31, 1997, respectively 18,277,026 17,862,389
Other assets, net 4,445,270 1,861,808
------------- -------------
Total Assets $ 117,111,060 $ 105,824,270
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Short-term borrowings $ 6,000,631 $ 3,684,419
Accounts payable 5,352,667 4,906,192
Accrued payroll and related expenses 2,359,484 2,047,509
Accrued interest 31,000 --
Income taxes payable 2,470,732 3,763,727
------------- -------------
Total current liabilities 16,214,514 14,401,847
------------- -------------
Deferred income taxes 1,752,235 1,636,605
Capital lease obligation 205,852 222,605
Long term debt 1,705,539 258,594
------------- -------------
Total Liabilities 19,878,140 16,519,651
------------- -------------
Minority interest 694,944 1,022,893
Stockholders' equity:
Common stock, $.001 par value, 20,000,000 shares authorized,
13,355,820 and 13,166,947 shares issued and outstanding at
November 29, 1997 and May 31, 1997, respectively 13,355 13,167
Cumulative foreign translation adjustment 64,020 123,919
Additional paid-in capital 102,590,688 101,113,448
Stock subscriptions -- (4,500)
Accumulated deficit (6,130,087) (12,964,308)
------------- -------------
Total Shareholders' Equity 96,537,976 88,281,726
------------- -------------
Total Liabilities & Stockholders' Equity $ 117,111,060 $ 105,824,270
============= =============
</TABLE>
2
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VANS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
THIRTEEN WEEKS ENDED NOVEMBER 29, 1997 AND NOVEMBER 30, 1996
<TABLE>
<CAPTION>
THIRTEEN WEEKS ENDED
NOVEMBER 29, NOVEMBER 30,
1997 1996
------------ ------------
<S> <C> <C>
Net sales $ 44,202,974 $ 37,104,812
Cost of sales 26,793,308 23,140,725
------------ ------------
Gross profit 17,409,666 13,964,087
Operating expenses:
Selling and distribution 8,136,639 6,543,320
Marketing, advertising and promotion 3,425,243 2,535,030
General and administrative 1,780,285 1,489,928
Provision for doubtful accounts 148,551 167,623
Amortization of intangibles 228,931 190,645
------------ ------------
Total operating expenses 13,719,649 10,926,546
------------ ------------
Earnings from operations 3,690,017 3,037,541
Interest income 125,650 117,039
Interest expense (83,329) (106,982)
Other income 1,065,584 889,007
------------ ------------
Earnings before income taxes and minority interest 4,797,922 3,936,605
Income tax expense 1,622,063 1,519,530
Minority interest 292,192 --
------------ ------------
Net earnings $ 2,883,667 $ 2,417,075
============ ============
Net earnings per share $ 0.21 $ 0.18
============ ============
Weighted average common and common equivalent shares
(note 3) 13,947,952 13,682,071
</TABLE>
3
<PAGE> 4
VANS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
TWENTY-SIX WEEKS ENDED NOVEMBER 29, 1997 AND NOVEMBER 30, 1996
<TABLE>
<CAPTION>
TWENTY-SIX WEEKS ENDED
NOVEMBER 29, NOVEMBER 30,
1997 1996
------------ ------------
<S> <C> <C>
Net sales $ 98,158,169 $ 81,060,993
Cost of sales 58,980,308 49,545,510
------------ ------------
Gross profit 39,177,861 31,515,483
Operating expenses:
Selling and distribution 17,007,952 13,481,647
Marketing, advertising and promotion 8,760,406 6,480,773
General and administrative 3,489,356 3,024,183
Provision for doubtful accounts 276,051 406,508
Amortization of intangibles 457,862 381,290
------------ ------------
Total operating expenses 29,991,627 23,774,401
------------ ------------
Earnings from operations 9,186,234 7,741,082
Interest income 237,431 218,875
Interest expense (150,854) (298,991)
Other income 1,840,855 1,327,512
------------ ------------
Earnings before income taxes and minority interest 11,113,666 8,988,478
Income tax expense 3,844,249 3,489,760
Minority interest 435,196 --
------------ ------------
Net earnings $ 6,834,221 $ 5,498,718
============ ============
Net earnings per share $ 0.49 $ 0.40
============ ============
Weighted average common and common equivalent shares
(note 3) 13,880,993 13,664,040
</TABLE>
4
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VANS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
TWENTY-SIX WEEKS ENDED NOVEMBER 29, 1997 AND NOVEMBER 30, 1996
<TABLE>
<CAPTION>
TWENTY-SIX WEEKS ENDED
NOVEMBER 29, NOVEMBER 30,
1997 1996
------------ ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings $ 6,834,221 $ 5,498,718
Adjustments to reconcile net earnings to net cash
provided by ( used in) operating activities:
Depreciation and amortization 2,016,917 1,657,742
Minority share of income 435,196 --
Provision for losses on accounts receivable and sales returns 276,051 658,259
Changes in assets and liabilities:
Accounts receivable (7,279,648) (3,242,808)
Inventories (7,677,716) (5,281,409)
Deferred income 115,630 --
taxes
Prepaid expenses (39,437) 971,301
Other assets (1,593,785) 196,461
Accounts payable 229,444 163,530
Accrued payroll and related expenses 311,975 (417,394)
Accrued workers' compensation -- (403,386)
Restructuring costs -- (298,531)
Accrued interest 31,000 75,165
Income taxes payable (1,292,995) 1,786,288
------------ ------------
Net cash provided by (used in) operating activities (7,633,147) 1,363,936
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, plant and equipment (2,561,672) (955,449)
Investments in other companies and intangibles (1,501,991) --
------------ ------------
Net cash used in investing activities (4,063,663) (955,449)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds (payments) on short term borrowings 2,316,212 (3,532,027)
Payments on capital lease obligations (16,753) (11,323)
Proceeds from long term debt 1,446,945 --
Consolidated subsidiary dividends paid to minority (309,023) --
shareholders
Proceeds from issuance of common stock, net 884,648 1,840,513
------------ ------------
Net cash provided by (used in) financing activities 4,322,029 (1,702,837)
Effect of exchange rate on cash (59,899) --
------------ ------------
Net decrease in cash and cash equivalents (7,434,680) (1,294,350)
Cash and cash equivalents, beginning of period 15,350,175 14,233,352
------------ ------------
Cash and cash equivalents, end of period $ 7,915,495 $ 12,939,002
============ ============
SUPPLEMENTAL CASH FLOW INFORMATION - AMOUNTS PAID FOR:
Interest $ 49,739 $ 204,187
Income taxes $ 5,058,900 $ 2,463,090
NON-CASH INVESTING AND FINANCING ACTIVITIES:
Increase in investment in consolidated subsidiary
Fair value of net assets acquired $ 96,929 $ --
Stock issued $ 597,280 $ --
Consolidated subsidiary dividend payable to minority shareholder $ 217,031
</TABLE>
5
<PAGE> 6
VANS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. Vans, Inc., a Delaware corporation (the "Company"), is the successor to Van
Doren Rubber Company, Inc., a California corporation that was founded in 1966
("VDRC"). VDRC was merged with and into the Company in connection with the
Company's initial public offering of common stock in August 1991.
The condensed consolidated financial statements included herein are unaudited
and reflect all adjustments which are, in the opinion of management,
necessary for a fair presentation of the results of the interim periods
presented. The results of operations for the current interim periods are not
necessarily indicative of results to be expected for the current year.
Certain amounts in the prior period financial statements have been
reclassified to conform to the current period presentation.
2. Inventories are comprised of the following:
<TABLE>
<CAPTION>
NOVEMBER 29, 1997 MAY 31, 1997
----------------- ------------
<S> <C> <C>
Raw materials $ 2,278,195 $ 1,743,660
Work-in-process 291,969 32,796
Finished goods 31,182,850 24,067,041
------------ ------------
33,753,014 25,843,497
Less: Valuation allowance (976,603) (744,802)
------------ ------------
$ 32,776,411 $ 25,098,695
============ ============
</TABLE>
3. Primary earnings per share approximate fully diluted earnings per share for
the thirteen weeks and twenty-six weeks ended November 29, 1997 and November
30, 1996.
4. During Q2 Fiscal 1997, the Company acquired a 51% interest in Global
Accessories Limited., an international distributor based in the United
Kingdom ("Global"). The purchase price of $2,811,000 consisted of the
issuance of 170,000 shares of the Company's common stock and related
acquisition costs in exchange for 51% of the common shares of Global. The
excess of the cost over the fair value of the net assets acquired (based on
the Company's preliminary purchase price allocation) is reflected as excess
of cost over the fair value of net assets acquired in the accompanying
condensed consolidated balance sheets. During Q2 Fiscal 1998, the Company
acquired an additional 9% of the common shares of Global to bring the total
investment to 60%. The purchase price of $597,280 consisted of the issuance
of 37,330 shares of the Company's common stock. The excess of the cost over
the fair value of the net assets acquired is reflected as excess of cost over
the fair value of net assets acquired in the November 29, 1997 condensed
consolidated balance sheet.
6
<PAGE> 7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following discussion contains forward-looking statements that involve risk
and uncertainties. The Company's actual results could differ materially from
those discussed herein. Factors that could cause or contribute to such
differences include, but are not limited to, those discussed hereunder, as well
as those discussed under the caption "Certain Considerations" on pages 9 to 12
of the Company's Annual Report on Form 10-K for the year ended May 31, 1997,
which is filed with the Securities and Exchange Commission.
OVERVIEW
The Company is a leading designer, manufacturer and distributor of high quality
stylish-casual and active-casual footwear and clothing, as well as performance
footwear for enthusiast sports such as skateboarding, snowboarding, surfing,
wakeboarding, BMX racing, and mountain bike racing, under the brand name
"VANS"*. The Company is the successor to Van Doren Rubber Company, Inc., a
California corporation that was founded in 1966 ("VDRC"). VDRC was acquired by
the Company in February 1988 in a series of related transactions for a total
cost (including assumed liabilities) of $74.4 million. VDRC was merged with and
into the Company in August 1991 at the time of the Company's initial public
offering.
On November 20, 1996, the Company acquired 51% of the outstanding common
shares of Global Accessories Limited ("Global"), the Company's exclusive
distributor for the United Kingdom, in a stock-for-stock transaction. During Q2
Fiscal 1998, the Company acquired another 9% of the Global common shares in
exchange for Common Stock of the Company. The remaining 40% of the Global common
shares is expected to be acquired by the Company over the next four years. The
results of Global are consolidated in the Company's financial statements.
In addition, the Company has established a subsidiary in Mexico, Vans
Latinoamericana (Mexico), S.A. de C.V. ("Vans Latinoamericana"), and a
subsidiary in Argentina, Vans Argentina S.A. ("Vans Argentina"). The results of
these subsidiaries are also consolidated in the Company's financial statements.
All significant intercompany balances and transactions have been eliminated in
consolidation.
RESULTS OF OPERATIONS
THIRTEEN-WEEK PERIOD ENDED NOVEMBER 29, 1997 ("Q2 FISCAL 1998") VERSUS THE
THIRTEEN-WEEK PERIOD ENDED NOVEMBER 30, 1996 ("Q2 FISCAL 1997")
NET SALES
Net sales for Q2 Fiscal 1998 increased 19.1% to $44,203,000, compared to
$37,105,000 for the same period in Fiscal 1997. The sales increase was primarily
driven by increases in the Company's international and retail sales channels, as
discussed below.
Sales to the Company's wholesale accounts on a worldwide basis increased 17.0%
to $34,021,000 during Q2 Fiscal 1998, compared to $29,071,000 during Q2 Fiscal
1997. Within the Company's wholesale business, sales to national accounts
decreased 2.0% during Q2 Fiscal 1998 to $19,288,000, compared to $19,685,000 for
the comparable period of Fiscal 1997, primarily as a result of the continued
softening of the market for athletic footwear in the United States. Sales to
international distributors through the Company's Hong Kong subsidiary, Vans Far
East Limited ("VFEL"), increased 57.0% to $14,733,000 for Q2 Fiscal 1998,
compared to $9,386,000 for the same period a year ago. Increased sales to Japan
and Central and South American countries were the principal reasons for the
increase. The Company anticipates that sales to international distributors,
including exports from the Company's Vista, California manufacturing facility
(the "Vista Facility") to key countries, such as Japan, could be lower in the
second half of Fiscal 1998 primarily due to the weakening of the Japanese and
Asian Pacific economies.**
Sales through the Company's 92-store retail chain increased 26.7% to $10,182,000
in Q2 Fiscal 1998 from $8,034,000 for Q2 Fiscal 1997. Comparable store sales
(sales at stores open one year or more) were up 17.8% for the quarter.
- ---------------------
* VANS is a registered trademark of Vans, Inc.
** Note: The marked sentence is a forward-looking statement. The Company's
actual results could differ materially. Important factors which could cause
or contribute to such differences include, but are not limited to: (i) the
relative strength of the Japanese and Asian Pacific economies; and (ii)
fluctuations in the currencies of such countries, as compared to the U.S.
dollar.
GROSS PROFIT
7
<PAGE> 8
Gross profit increased 24.7% to $17,410,000 in Q2 Fiscal 1998 from
$13,964,000 in the same period of Fiscal 1997. As a percentage of net sales,
gross profit increased to 39.4% for Q2 Fiscal 1998 from 37.6% for the same
period of Fiscal 1997. The increase in gross profit as a percentage of net sales
was primarily due to: (i) increased sales of the Company's higher-margin
imported footwear; (ii) improved margins on sales of snowboard boots; and (iii)
higher capacity utilization at the Vista Facility. Since a significant
percentage of the Vista Facility's production is for the Japanese market, the
Company's capacity utilization at the Vista Facility could be adversely affected
in the second half of Fiscal 1998 due to the weakening of the Japanese economy.*
In that regard, on January 12, 1998, the Company downsized the Vista Facility by
165 employees in order to better align production with current and anticipated
orders for production at such Facility.
The Company also anticipates that its gross profit may be favorably
impacted in the second half of Fiscal 1998 due to the weakening of the
South Korean currency, where a large percentage of the Company's manufacturing
occurs.*
EARNINGS FROM OPERATIONS
Earnings from operations increased 21.5% to $3,690,000 in Q2 Fiscal 1998
from $3,038,000 in the same period of Fiscal 1997. Operating expenses in Q2
Fiscal 1998 increased to $13,720,000 from $10,927,000 in Q2 Fiscal 1997,
primarily due to a $1,593,000 increase in selling and distribution expense and
an $890,000 increase in marketing, advertising and promotion expenses, each as
discussed below. As a percentage of net sales, operating expenses increased
slightly to 31.0% from 29.4%, on a period-to-period basis.
Selling and distribution. Selling and distribution expenses increased
24.4% to $8,137,000 in Q2 Fiscal 1998 from $6,543,000 in Q2 Fiscal 1997,
primarily due to: (i) the inclusion of operating costs related to the Company's
subsidiaries which were not included in the Q2 Fiscal 1997 consolidated
financial statements; (ii) increased personnel costs, rent expense and other
operating costs associated with the continued expansion of the Company's retail
division; and (iii) increased commission expense resulting from a shift in mix
within the national sales channel from department and national retail accounts
to independent retailers.
Marketing, advertising and promotion. Marketing, advertising and
promotion expenses increased 35.1% to $3,425,000 in Q2 Fiscal 1998 from
$2,535,000 in Q2 Fiscal 1997, primarily due to: (i) the Company's continued
support of sales growth through increased television and print advertising; (ii)
increased royalty expense related to footwear, snowboard boots and clothing
which bear licensed athletic names and logos; and (iii) an increased number of
athletes who are paid to endorse the Company's products.
General and administrative. General and administrative expenses
increased 19.5% from $1,490,000 in Q2 Fiscal 1997 to $1,780,000 in Q2 Fiscal
1998, but was flat as a percentage of net sales, on a period-to-period basis.
The increase was primarily due to: (i) the addition of rent expense associated
with the Company's new corporate offices and distribution center in Santa Fe
Springs, California (the "Santa Fe Springs Facility"); and (ii) increased legal
fees associated with the worldwide protection of the Company's trademarks.
Provision for doubtful accounts. The amount that was provided for bad
debt expense in Q2 Fiscal 1998 was $149,000 versus $168,000 in Q2 Fiscal 1997,
due to continued improvements in the management of past due accounts, and the
satisfactory settlement of three outstanding claims.
INTEREST INCOME
Interest income is primarily derived from the investment of a portion of
the net proceeds from the Company's May 1996 public offering of common stock
(the "Offering"), and the investment of surplus operating cash. See " -
Liquidity and Capital Resources."
INTEREST EXPENSE
Interest expense decreased to $83,000 in Q2 Fiscal 1998 from $107,000 in
Q2 Fiscal 1997 due to the Company's use of operating capital to finance its
snowboard boot line, which was financed by a third party through the end of Q3
Fiscal 1997.
- ---------------------
* Note: The marked sentences are forward-looking statements. The Company's
actual results could differ materially. Important factors which could cause
or contribute to differences in the capacity utilization of the Vista
Facility include, but are not limited to: (i) the relative strength of the
Japanese economy; and (ii) the ability of the Company to develop other
business for the Vista Facility. Additionally, the Company's gross profit
could be unfavorably impacted by the strengthening of currencies of
foreign countries in which it manufactures products, or the closing of
factories which produce such products.
OTHER INCOME
Other income increased 19.9% to $1,066,000 in Q2 Fiscal 1998 from
$889,000 in the same period of Fiscal 1997, primarily due to an
8
<PAGE> 9
increase in royalties from the licensing of the Company's trademarks,
principally to the Company's Japanese distributor, and the receipt of rental
income from leased properties which formerly housed the Company's corporate
offices and distribution center. Other income may be adversely impacted in
the second half of fiscal 1998, due to the weakening of the Japanese
economy. (See "Gross Profit" above.)
INCOME TAX EXPENSE
Income tax expense increased to $1,622,000 in Q2 Fiscal 1998 from
$1,520,000 for Q2 Fiscal 1997 as a result of the increased earnings discussed
above.
MINORITY INTEREST
Minority interest related to Global, Vans Latinoamericana and Vans
Argentina, none of which were included in the Company's consolidated financial
statements for Q2 Fiscal 1997.
TWENTY-SIX WEEK PERIOD ENDED NOVEMBER 29, 1997 ("FISCAL 1998 SIX MONTHS") VERSUS
THE TWENTY-SIX WEEK PERIOD ENDED NOVEMBER 30, 1996 ("FISCAL 1997 SIX MONTHS")
NET SALES
Net Sales for the Fiscal 1998 Six Months increased 21.1% to $98,158,000,
compared to $81,061,000 for the same period in Fiscal 1997. The sales increase
was primarily driven by increased sales through the Company's international and
retail sales channels, as discussed below.
Sales to the Company's wholesale accounts on a worldwide basis increased
19.2% to $75,227,000 for the Fiscal 1998 Six Months from $63,103,000 for the
same period a year ago. Within the Company's wholesale business, sales to
national accounts increased approximately 1.0% during the Fiscal 1998 Six Months
to $43,038,000, compared to $42,735,000 for the same period a year ago. National
sales were affected by the continued softening of the market for athletic
footwear in the United States. Sales to international distributors through VFEL
increased 58.0% to $32,189,000 for the Fiscal 1998 Six Months, as compared to
$20,368,000 for the same period a year ago, primarily due to increased sales to
Japan, France and Mexico.
Sales through the Company's 92-store retail chain increased 27.7% to
$22,931,000 from $17,958,000 for the same period a year ago. Comparable store
sales (sales at stores open one year or more) were up 19.0% for the period.
GROSS PROFIT
Gross profit increased 24.3% to $39,178,000 in the Fiscal 1998 Six
Months from $31,515,000 in the same period of Fiscal 1997. As a percentage of
net sales, gross profit increased to 39.9% for the Fiscal 1998 Six Months from
38.9% for the same period of Fiscal 1997. The increase in gross profit was
primarily due to: (i) increased sales through the Company's retail stores; (ii)
a shift in the mix within the national sales channel from department and
national retail accounts to independent retailers; (iii) improved margins on
sales of snowboard boots; and (iv) higher capacity utilization at the Vista
Facility.
EARNINGS FROM OPERATIONS
Earnings from operations increased 18.7% to $9,186,000 in the Fiscal
1998 Six Months from $7,741,000 in the same period of Fiscal 1997. Operating
expenses in the Fiscal 1998 Six Months increased to $29,992,000 from $23,774,000
in the same period a year ago, primarily due to a $3,526,000 increase in selling
and distribution expense and a $2,280,000 increase in marketing, advertising and
promotion expenses, each as discussed below. As a percentage of sales, operating
expenses increased from 29.3% to 30.6%, on a period-to-period basis.
9
<PAGE> 10
Selling and distribution. Selling and distribution expenses increased
26.2% to $17,008,000 in the Fiscal 1998 Six Months from $13,482,000 in the same
period a year ago, primarily due to: (i) the inclusion of operating costs
related to the Company's subsidiaries which were not included in the Fiscal 1997
Six Months consolidated financial statements; (ii) costs associated with
increased personnel to support the Company's sales growth and the addition of
the Company's apparel division; (iii) increased personnel costs, rent expense
and other operating costs associated with the continued expansion of the
Company's retail division; (iv) increases in travel and other operating costs
related to the higher sales volume discussed above; and (v) increased commission
expense resulting from a continued shift in mix within the national sales
channel from department and national retail accounts to independent retailers.
Marketing, advertising and promotion. Marketing, advertising and
promotion expenses increased 35.2% to $8,760,000 in the Fiscal 1998 Six Months
from $6,481,000 in the same period a year ago, primarily due to: (i) costs
associated with the Vans Warped Tour '97; (ii) the Company's continued support
of sales growth through increased television and print advertising; (iii)
increased royalty expense related to footwear, snowboard boots and clothing
which bear licensed athlete names and logos; and (iv) an increased number of
athletes who are paid to endorse the Company's products.
General and administrative. General and administrative expenses
increased 15.4% to $3,489,000 in the Fiscal 1998 Six Months from $3,024,000 in
the same period a year ago, primarily due to: (i) the addition of rent expense
associated with the new Santa Fe Springs Facility; (ii) increased personnel to
support the Company's sales growth; (iii) increased legal fees associated with
the worldwide protection of the Company's trademarks; and (iv) increased
depreciation expense associated with new equipment and tenant improvements at
the Santa Fe Springs Facility.
Provision for doubtful accounts. The amount that was provided for bad
debt expense in the Fiscal 1998 Six Months decreased to $276,000 from $407,000
in the same period a year ago due to improvements in the management of past due
accounts.
INTEREST INCOME
Interest income was derived primarily from the investment of a portion
of the net proceeds of the Offering and the investment of surplus cash. See " -
Liquidity and Capital Resources."
INTEREST EXPENSE
Interest expense decreased to $151,000 in the Fiscal 1998 Six Months
from $299,000 in the same period a year ago, due to the Company's use of
operating capital to finance its snowboard boot line, which was financed by a
third party through Q3 Fiscal 1997.
OTHER INCOME
Other income increased 38.7% to $1,841,000 for the Fiscal 1998 Six
Months from $1,328,000 for the same period a year ago, primarily due to an
increase in royalties from the licensing of the Company's trademarks, and the
receipt of rental income from leased properties which formerly housed the
Company's corporate offices and distribution center.
INCOME TAX EXPENSE
Income tax expense increased to $3,844,000 during the Fiscal 1998 Six
Months from $3,490,000 for the same period in Fiscal 1997 as a result of the
higher earnings discussed above.
MINORITY INTEREST
Minority interest related to Global, Vans Latinoamericana and Vans
Argentina, none of which were included in the Company's consolidated financial
statements for the six-month period ended November 30, 1996.
LIQUIDITY AND CAPITAL RESOURCES
CASH FLOWS
The Company finances its operations with a combination of cash flows from
operations and borrowings. On May 24, 1996, the Company completed the Offering.
The Company obtained net proceeds of $47.7 million from the Offering. Of such
amount, $25.4
10
<PAGE> 11
million was utilized to repay the Company's 9.6% Senior Notes due August 1, 1999
(including a $1.5 million makewhole amount resulting from the prepayment of such
Notes), and $8.1 million was utilized to repay debt under a secured bank line of
credit. The balance of the net proceeds was utilized for general corporate
purposes.
The Company experienced an outflow of cash from operating activities of
$7,633,000 during the Fiscal 1998 Six Months, compared to an inflow of
$1,364,000 for the Fiscal 1997 Six Months. Cash used in operations was primarily
the result of increases in accounts receivable, inventories and other assets and
a decrease in income taxes payable. These uses of cash were offset by the
Company's earnings. The cash provided by operations in the Fiscal 1997 Six
Months was primarily the result of earnings, decreases in prepaid expenses and
other assets, along with an increase in taxes payable.
The Company incurred a net cash outflow from investing activities of
$4,064,000 for the Fiscal 1998 Six Months, compared to a net cash outflow of
$955,000 in the Fiscal 1997 Six Months. These outflows were primarily due to
tenant improvements at the Santa Fe Springs Facility and capital expenditures
related to new retail store openings. Cash used in investing activities for the
same period a year ago was primarily related to new retail store openings,
improvements made to the Company's former corporate headquarters, and upgrades
to the Company's distribution and shipping software system.
The Company incurred a net cash inflow from financing activities of
$4,322,000 for the Fiscal 1998 Six Months, compared to a net cash outflow of
$1,703,000 for the same period in Fiscal 1997, primarily due to short-term
borrowings under the Line of Credit (defined below) and proceeds from long-term
debt incurred by Vans Latinoamericana. See "Borrowings," below. Cash used in
financing activities for the same period a year ago was primarily related to
payments on short-term borrowings.
Accounts receivable, net of allowance for doubtful accounts, increased
28.7% to $31,394,000 at November 29, 1997 from $24,391,000 at May 31, 1997. This
increase was primarily due to the increase in sales during Q2 Fiscal 1998, as
discussed above, and the timing of such sales. Inventories increased 30.6% from
$25,099,000 to $32,776,000 during the same period due to: (i) an increased
average cost of finished goods resulting from a product mix shift to include
higher-cost imported shoes and snowboard boots; (ii) an increased number of
finished goods held for sale at the Company's retail stores to support increased
sales and the opening of six new stores in the last seven weeks of Q2 Fiscal
1998; (iii) an increased number of wholesale finished goods held to support
increased wholesale sales levels; and (iv) the addition of inventories related
to the acquisition of Global and the establishment of Vans Latinoamericana and
Vans Argentina.
BORROWINGS
The Company has a line of credit (the "Line of Credit") with Bank of the
West (the "Bank") which was extended two years as of October 31, 1997. The Line
of Credit permits the Company to borrow up to the lesser of (i) a formula based
on eligible accounts receivable and inventory, or (ii) $20.0 million. The Line
of Credit, as extended, is unsecured; however, if certain events of default
occur by the Company under the agreement establishing the Line of Credit (the
"Loan Agreement"), the Bank may obtain a security interest in the Company's
accounts receivable and inventory. The Company pays interest on the debt
incurred under the Line of Credit at the prime rate established by the Bank from
time to time, plus a percentage which varies depending on the Company's ratio of
debt to earnings before interest, taxes, depreciation, and amortization (the
"Debt to EBITDA Ratio"). The Company has the option to pay interest at the LIBOR
rate plus a percentage which varies with the Company's Debt to EBITDA Ratio.
Under the Loan Agreement, the Company must maintain certain financial covenants
and is prohibited from paying dividends or making any other distribution without
the Bank's consent. All amounts under the Line of Credit are due and owing on
November 1, 1999. At November 29, 1997, the Company had $3,000,000 drawn down
under the Line of Credit.
Vans Latinoamericana maintains a two year 12% note payable to Tavistock,
a 49.99% owner of such company. The loan by Tavistock is in accordance with the
shareholders' agreement requiring Tavistock to provide operating capital, on an
as-needed basis, in the form of a loan to Vans Latinoamericana. The borrowings,
as defined in the shareholders' agreement, maintains that the rate of interest
is not to exceed 12% and the term of the loan is not to exceed four years. The
loan is secured by the assets of Vans Latinoamericana. At November 29, 1997,
Vans Latinoamericana had a $1,581,000 outstanding balance under this facility.
CURRENT CASH POSITION
The Company's cash position was $7,916,000 as of November 29, 1997,
compared to $15,350,000 at May 31, 1997. The Company's cash position was, in
fiscal years 1995 and 1996, adversely impacted by increased working capital
requirements caused by the rapid sales growth of imported footwear. There are
greater timing differences between the payment for imported goods and the
receipt of cash from sales of such goods than if produced domestically.
Additionally, because payment terms in the ski and snow industry are longer than
the
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Company's traditional footwear distribution channels, there are even greater
timing differences between payment for the Company's line of snowboard boots and
the receipt of cash from sales of such boots. Finally, the Company's cash
position at November 29, 1997 reflects the elimination, in March 1997, of a
financing arrangement for the Company's snowboard boots which existed through
the end of Q3 Fiscal 1997.
Notwithstanding the foregoing, for the next 24 months, the Company
believes that cash from operations, together with borrowings under the Line of
Credit, should be sufficient to meet its working capital needs.*
CAPITAL EXPENDITURES
In the remainder of Fiscal 1998, the Company plans to open six retail
stores at an estimated aggregate cost of $450,000 - $600,000, and remodel four
existing retail stores at an estimated aggregate cost of $400,000 - $500,000.
The new store additions will consist primarily of factory outlet stores and will
be opened at various times throughout the fiscal year. At the same time, the
Company will continue to evaluate and close non-performing stores.
During Q4 Fiscal 1997, the Company completed the move of its corporate
offices to the Santa Fe Springs Facility. In the first month of Fiscal 1998, the
Company relocated its distribution center to the same Facility. The Company
incurred capital expenditures of approximately $1.0 million in Q1 Fiscal 1998
relating to new equipment and certain tenant improvements for such Facility. The
Company anticipates that it will make additional capital expenditures of
approximately $100,000 for such Facility during the balance of Fiscal 1998.
The Company continues to explore other projects which may involve
capital expenditures. While it is still too early to estimate the depth of such
expenditures, the Company does not anticipate a significant increase in the
level of capital expenditures for the balance of Fiscal 1998. The Company
intends to utilize cash generated from operations and funds drawn down under the
Line of Credit to fulfill its capital expenditure requirements for the balance
of Fiscal 1998.
RECENT ACCOUNTING PRONOUNCEMENTS
In February 1997, the Financial Accounting Standards Board ("FASB")
issued Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings
Per Share." SFAS No. 128 specifies new standards designed to improve the
earnings per share ("EPS") information provided in financial statements by
simplifying the existing computational guidelines, revising the disclosure
requirements and increasing the comparability of EPS data on an international
basis. Some of the changes made to simplify the EPS computations include: (a)
eliminating the presentation of primary EPS and replacing it with basic EPS,
with the principal difference being that the common stock equivalents are not
considered in computing basic EPS, (b) eliminating the modified treasury stock
method and the three percent materiality provision, and (c) revising the
contingent share provisions and the supplemental EPS data requirements. SFAS No.
128 also makes a number of changes to existing disclosure requirements. SFAS No.
128 is effective for financial statements issued for periods ending after
December 15, 1997, including interim periods. Management has not yet determined
the impact of SFAS No. 128.
In June 1997, the FASB issued Statement of Financial Accounting
Standards No. 130, "Reporting Comprehensive Income" ("SFAS 130"). SFAS 130
establishes standards for the reporting and display of comprehensive income and
its components (revenues, expenses, gains and losses) in a full set of
general-purpose financial statements. SFAS 130 requires all items that are
required to be recognized under accounting standards as components of
comprehensive income to be reported in a financial statement that is displayed
with the same prominence as other financial statements. SFAS 130 does not
require a specific format for that financial statement but requires that an
enterprise display an amount representing total comprehensive income for the
period covered by that financial statement. SFAS 130 requires an enterprise to
(a) classify items of other comprehensive income by their nature in a financial
statement and (b) display the accumulated balance of other comprehensive income
separately from retained earnings and additional paid-in capital in the equity
section of a statement of financial position. SFAS 130 is effective for fiscal
years beginning after December 15, 1997. Management has not yet determined
whether the adoption of SFAS 130 will have a material impact on the Company's
combined financial position or results of operations.
- ----------------------------------
* Note: The marked sentence is a forward-looking statement. The Company's
actual results could differ materially. Important factors that could cause
or contribute to such differences include: (i) the Company's rate of growth;
(ii) the Company's product mix between imported footwear, snowboard boots
and domestically-produced footwear; (iii) the Company's ability to
effectively manage its inventory levels; (iv) timing differences in payment
for the Company's foreign-sourced product, which are discussed above; (v)
the increased utilization of letters of credit for purchases of
foreign-sourced product; and (vi) timing differences in payment for product
which is
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sourced from countries which have longer shipping lead times, such as China.
In June 1997, the FASB issued Statement of Financial Accounting
Standards No. 131, "Disclosures about Segments of an Enterprise and Related
Information" ("SFAS 131"). SFAS 131 establishes standards for public business
enterprises to report information about operating segments in annual financial
statements and requires that those enterprises report selected information about
operating segments in interim financial reports issued to shareholders. It also
establishes standards for related disclosures about products and services,
geographic areas and major customers. SFAS 131 requires, among other items, that
a public business enterprise report a measure of segment profit or loss, certain
specific revenue and expense items and segment assets, information about the
revenues derived from the enterprise's products or services, and major
customers. SFAS 131 also requires that the enterprise report descriptive
information about the way that the operating segments were determined and the
products and services provided by the operating segments. SFAS 131 is effective
for financial statements for periods beginning after December 15, 1997. In the
initial year of application, comparative information for earlier years is to be
restated. SFAS 131 need not be applied to interim financial statements in the
initial year of its application, but comparative information for interim periods
in the initial year of application is to be reported in financial statements for
interim periods in the second year of application. Management has not yet
determined whether the adoption of SFAS 131 will have a material impact on the
Company's segment reporting.
SEASONALITY
Historically, the Company's business has been moderately seasonal, with
the largest percentage of sales realized in the first fiscal quarter (June
through August), the so-called "back to school" months. In addition, because
snowboarding is a winter sport, sales of the Company's snowboard boots have
historically been strongest in the first and second fiscal quarters. As the
Company increases its international sales and experiences changes in product
mix, it believes that future quarterly results may vary from historical trends.
In addition to seasonal fluctuations, the Company's operating results fluctuate
quarter-to-quarter as a result of the timing of holidays, weather, timing of
shipments, product mix, cost of materials and the mix between wholesale and
retail channels. Because of such fluctuations, the results of operations of any
quarter are not necessarily indicative of the results that may be achieved for a
full fiscal year or any future quarter. In addition, there can be no assurance
that the Company's future results will be consistent with past results or the
projections of securities analysts.
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PART II
OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS
On October 22, 1997, the Company held its Annual Meeting of
Stockholders. The following matters were voted on at the meeting: (i) the
election of directors; (ii) a proposal to amend the Restated Certificate of
Incorporation to provide for a classified Board of Directors; (iii) a proposal
to adopt the Vanstastic Employee Stock Option Plan; (iv) a non-binding
resolution to re-ratify and re-approve the Company's Stockholder Rights Plan;
and (v) the ratification and approval of KPMG Peat Marwick LLP as the Company's
independent auditors for Fiscal 1998.
The results of the voting on these matters (including the names of all
persons elected as directors) are set forth below:
<TABLE>
<CAPTION>
VOTES AGAINST/ BROKER-NON
PROPOSAL VOTES FOR WITHHELD ABSTENTIONS VOTES
-------- ---------- -------------- ----------- -----------
<S> <C> <C> <C> <C>
Proposal No. 1 - Election of Directors
Nominees
--------
* Walter E. Schoenfeld 11,799,130 112,351 0 0
* Gary H. Schoenfeld 11,791,930 119,551 0 0
* George E. McCown 11,798,730 112,751 0 0
* David E. De Leeuw 11,798,630 112,851 0 0
* Philip H. Schaff, Jr 11,797,830 113,651 0 0
* Wilbur J. Fix 11,798,430 113,051 0 0
* James R. Sulat 11,798,530 112,951 0 0
* Kathleen M. Gardarian 11,798,630 112,851 0 0
* Lisa M. Douglas 11,798,330 113,151 0 0
Proposal No. 2 - Amendment to
Restated Certificate of Incorporation
re Classified Board 5,435,628 2,749,911 14,123 5,003,739
Proposal No. 3 - Vanstastic
Employee Stock Option Plan 11,378,314 159,429 24,805 1,640,853
Proposal 4 - Stockholder
Rights Plan 5,720,700 2,793,884 14,738 4,674,079
Proposal No. 5 - Ratification of
KPMG Peat Marwick LLP as
Independent Auditors for Fiscal 1998 11,871,974 29,891 9,616 1,291,920
</TABLE>
ITEM 5. OTHER MATTERS
Second Phase of Global Acquisition. Effective as of September 30, 1997,
the Company completed the second phase of the acquisition of Global. The Company
acquired 9% of the common shares of Global held by the shareholders of Global,
in exchange for the issuance of an aggregate of 37,330 shares of the Common
Stock of the Company. See Note 4 of "Notes to Condensed Consolidated Financial
Statements."
Executive Officer Changes. Effective as of October 29, 1997, Scott
Brabson joined the Company as Vice President - Sourcing.
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<PAGE> 15
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
10.1 Vanstastic Employee Stock Option Plan
10.2 Amended and Restated Loan and Security Agreement, dated as of October
31, 1997, by and between the Registrant and Bank of the West
10.3 Employment Agreement, dated as of October 29, 1997, by and between the
Registrant and Scott Brabson
27 Financial Data Schedule
(b) Reports on 8-K.
The Company filed no Reports on Form 8-K during the three-month period ended
November 29, 1997.
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SIGNATURES
Pursuant to the requirements 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.
VANS, INC.
(Registrant)
Date: January 13, 1997 By: /s/ Gary H. Schoenfeld
-----------------------------------
GARY H. SCHOENFELD
President and Chief
Executive Officer
Date: January 13, 1997 By: /s/ Kyle B. Wescoat
-----------------------------------
KYLE B. WESCOAT
Vice President and
Chief Financial Officer (Principal
Financial and Accounting Officer)
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<PAGE> 17
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT PAGE NO.
- ------- --------
<S> <C> <C>
10.1 Vanstastic Employee Stock Option Plan
10.2 Amended and Restated Loan and Security Agreement, dated as of October
31, 1997, by and between the Registrant and Bank of the West
10.3 Employment Agreement, dated as of October 29, 1997, by and between the
Registrant and Scott Brabson
27 Financial Data Schedule
</TABLE>
17
<PAGE> 1
EXHIBIT 10.1
VANS, INC.
VANSTASTIC EMPLOYEE STOCK OPTION PLAN
ARTICLE I - PURPOSE OF PLAN
1.1 PURPOSE OF PLAN. The purpose of the Vans, Inc. Vanstastic Employee Stock
Option Plan is to serve as a performance incentive and to encourage the
ownership of Vans, Inc. Common Stock by officers and other key employees of the
Company so that the person to whom the Option is granted may acquire a
proprietary interest in the success of the Company, and to encourage such person
to remain in the employ of the Company. This Plan shall consist of grants of
incentive stock options and non-statutory stock options.
ARTICLE II - DEFINITIONS
2.1 AWARD: means Options granted hereunder.
2.2 BOARD: means the Board of Directors of Vans, Inc.
2.3 BOARD DIRECTOR: means a member of the Board.
2.4 CODE: means the Internal Revenue Code of 1986, as amended. Reference in this
Plan to any section of the Code shall be deemed to include any amendments or
successor provisions to such section and any regulations promulgated thereunder.
2.5 COMMITTEE: means the Compensation Committee of the Board, consisting of not
less than two (2) members of the Board, who are appointed by the Board and who
shall be "Non-Employee Directors,'" as such term is defined under Rule
16b-3(b)(3)(i) under the Exchange Act. The requirement that an administrator of
the Plan be a "Non-Employee Director" shall not apply if it is no longer
required by law and the Board or Committee expressly declares that such
requirement shall not apply.
2.6 COMPANY: means Vans, Inc., or any successors as described in Article Xl and
any subsidiary of the Company of which the Company owns, directly or indirectly,
greater than fifty percent (50%) of its voting capital stock (a "Subsidiary").
2.7 DATE OF DISABILITY: means the date on which a Participant is classified as
Disabled.
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2.8 DISABILITY OR DISABLED: means the classification of a Participant as
"Disabled" pursuant to along-term disability plan of the Company, if any, or
successor to such plan (or, if there is no such plan, as determined by the
Committee), provided that the participant meets the requirements of Section
22(e)(3) of the Code.
2.9 EFFECTIVE DATE: means July 22, 1997.
2.10 ELIGIBLE EMPLOYEE: means any employee of the Company (including any such
employee as a Board Director or Officer of the Company), and any employee of any
Subsidiary who satisfies all of the requirements of Article Vl.
2.11 EXCHANGE ACT: means the Securities Exchange Act of 1934, as amended.
2.12 FAIR MARKET VALUE: means the fair market value of the Stock as determined
by the Committee; provided, however, that (i) if the Stock is admitted to
trading on a national securities exchange, or the NASDAQ National Market System,
on the date the Option is granted, Fair Market Value shall be the closing price
for such shares on the date such Option is granted, or (ii) if the Stock is not
admitted to trading on a national securities exchange on the date the Option is
granted but the Stock is admitted to quotation on the National Association of
Securities Dealers Automated Quotation system on the data the Option is granted,
Fair Market Value shall be the average of the highest bid and lowest asked
prices of the stock on such system on the date of such grant.
2.13 INCENTIVE STOCK OPTION: means an Option that is an incentive stock option
within the meaning of Section 422 of the Code and that is granted under Article
Vll.
2.14 INSIDER: means an officer or director of the Company within the meaning of
Section 16 of the Exchange Act.
2.15 NONSTATUTORY STOCK OPTION: means an Option that is not an Incentive Stock
Option and that is granted under Article Vll.
2.16 OFFICER: means an executive officer of the Company as so designated by the
Board.
2.17 OPTION: means an Incentive Stock Option or a Nonstatutory Stock Option
granted under Article Vll.
2.18 PARTICIPANT: means an Eligible Employee who has been granted an Award under
this Plan.
2.19 PLAN: means this Vans, Inc. Vanstastic Employee Stock Option Plan.
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<PAGE> 3
2.20 RETIREMENT: means termination of employment on or after the date an
Eligible Employee retires from the Company.
2.21 RETIREMENT DATE: is the employee's date of Retirement from the Company.
2.22 STOCK: means Common Stock of Vans, Inc., par value $.001 per share.
2.23 STOCK OPTION AGREEMENT: means an agreement with respect to Options, as
described in Article Vlll.
2.24 TERMINATION: means resignation or discharge from employment with the
Company, except in the event of death, Disability, or Retirement.
2.25 VESTED OPTION: means, at any date, an Option that a Participant is then
entitled to exercise pursuant to the terms of the Plan and an applicable Stock
Option Agreement.
ARTICLE III - EFFECTIVE DATE AND DURATION
3.1 EFFECTIVE DATE. Subject to adoption by the Board and approval by a majority
of the Stock voting at any meeting of the stockholders of the Company, this Plan
shall be effective as of the Effective Date.
3.2 PERIOD FOR GRANTS OF AWARDS. Awards may be made as provided herein for a
period of ten (10) years after the Effective Date.
3.3 TERMINATION. This Plan may be terminated as provided in Article Xll, but
shall continue in effect until all matters relating to the payment and/or
exercise of Awards and the administration of the Plan have been settled in its
sole and absolute discretion.
ARTICLE IV - ADMINISTRATION
4.1 ADMINISTRATION. This Plan shall be administered by the Committee until such
time as the Board revokes or terminates the Committee's authority to administer
this Plan. Until such time, all questions of interpretation and application of
this Plan, or of the terms and conditions pursuant to which Awards are granted,
exercised, or forfeited under the provisions hereof, shall be subject to the
determination of the Committee. Such determination shall be final and binding
upon all parties affected thereby. It is contemplated that the management of the
Company or the Board will recommend Awards granted hereunder to the Committee,
and that the Committee
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<PAGE> 4
will determine whether to accept such recommendations in its sole and absolute
discretion.
ARTICLE V - GRANT OF AWARDS AND LIMITATION
OF NUMBER OF SHARES OF STOCK AWARDED
5.1 GRANTS OF AWARDS; NUMBER OF SHARES. The Committee may, from time to time,
grant Awards of Options to one or more Eligible Employees in its sole and
absolute discretion; provided, however, that:
(i) Subject to any adjustment pursuant to Article X or Article Xl,
the aggregate number of shares of Stock subject to Awards under
this Plan may not exceed 400,000 shares of Stock;
(ii) The maximum number of shares of Stock that shall be issuable
upon the exercise of any and all Options granted to any one
Participant during any fiscal year of the Company shall be
150,000 shares;
(iii) To the extent that an Award lapses or the rights of the
Participant to whom it was granted terminate, or to the extent
that the Award is canceled by mutual agreement of the Committee
and the participant (which cancellation opportunities may be
offered by the Committee to Participants from time to time),
any shares of Stock subject to such Award shall again be
available for the grant of an Award hereunder;
(iv) Shares of Stock ceasing to be subject to an Award because of
the exercise of an Option shall no longer be available for the
grant of an Award hereunder; and
(v) In general, in the sole and absolute discretion of the
Committee, Options shall be awarded in an amount equal to the
applicable percentage of an Eligible Employee's compensation,
where the applicable percentage equals 15% for an Eligible
Employee who carries the title "Director (a "Company
Director")," 20% for an Officer, and 10% for an Eligible
Employee who is neither an Officer nor a Company Director.
In determining the size of Awards, the Committee may take into account
recommendations by the Board or the Company's management, a participant's
responsibility level, performance, potential, and cash compensation level, the
Fair Market Value of the Stock at the time of Awards, and such other
considerations as it deems appropriate.
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<PAGE> 5
ARTICLE VI - ELIGIBILITY
6.1 ELIGIBLE INDIVIDUALS. All employees of the Company (including Officers or
employees who are members of the Board, but excluding Board Directors who are
not Officers or employees of the Company), and any subsidiary of the Company,
shall be eligible to be granted Awards hereunder at the sole discretion of the
Committee upon completion of twelve (12) months of employment with the Company
which includes at least one thousand four hundred (1,400) hours of service
during such period. Subject to the provisions of this Plan, the Committee shall
from time to time select from such Eligible Employees those to whom Awards shall
be granted (including the right to select all of such Eligible Employees) and
determine the size of the Awards. A participant may hold more than one Option at
any one time. No Officer or employee of the Company shall have any right to be
granted an Award under this Plan, as all Awards granted hereunder are granted in
the sole and absolute discretion of the Committee, as provided herein.
ARTICLE VII - OPTIONS
7.1 GRANTS OF OPTIONS. Awards shall be granted to Participants in the form of
Options to purchase Stock.
7.2 TYPE OF OPTION. The Committee may choose to grant a Participant who is an
Eligible Employee either Incentive Stock Options or Nonstatutory Stock Options
or both, subject to the limitations contained herein.
7.3 INCENTIVE STOCK OPTION DOLLAR LIMITATIONS. If the Committee grants Incentive
Stock Options, the Aggregate Fair Market Value (determined as of the date Option
is granted) of any such Options plus any Incentive Stock Options granted under
any other plans of the Company that shall be first exercisable by any one
Participant during any one calendar year shall not exceed $100,000, or such
other dollar limitations as may be provided in the Code.
ARTICLE VIII - TERMS AND CONDITIONS OF STOCK
OPTION AGREEMENTS
8.1 STOCK OPTION AGREEMENTS. Awards shall be evidenced by Stock Option
Agreements in such form as the Committee shall, from time to time, approve. Such
Stock Option Agreements, which need not be identical, shall comply with and be
subject to the following terms and conditions:
(a) Medium of Payment. Upon exercise of the Option, the Option
price shall be payable either (i) in United States dollars in
cash or by certified check, bank draft, or money order payable
to the order of the Company,
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or (ii) in the discretion of the Committee, through the delivery
of shares of Stock with a Fair Market Value equal to the total
Option price (including, if applicable, shares of stock acquired
through the exercise of the Option in question), or (iii)
according to a deferred payment or other arrangement, or (iv) by
a combination of the methods described in (i), (ii) and (iii),
or in any other form of legal consideration that may be
acceptable to the Committee; provided, however, that in the case
of an Option price that is paid by an insider in whole or in
part by the delivery of shares of Stock, the Stock acquired in
the exercise of such Option shall not be disposed of by the
insider for a six (6) month period commencing on the date on
which the Insider last purchased Stock (including the Stock
tendered in connection with such exercise).
(b) Number of Shares. The Stock Option Agreement shall state the
total number of whole shares to which it pertains subject to
Article 5.1(iv) above.
(c) Option Price. With respect to all Options granted hereunder,
the Option price shall be not less than the Fair Market Value of
such shares on the date of the granting of the Option. With
respect to Incentive Stock Options, the Option price shall be
not less than one hundred ten percent (110%) of the Fair Market
Value of such shares on the date of the granting of the of such
amount if the Option is granted to an individual owning stock
possessing more than ten percent (10%) of the total combined
voting power of all classes of stock of Vans, Inc.
(d) Term of Options. Unless a shorter term is required pursuant to
rules governing Incentive Stock Options, each Option granted
under this Plan shall expire, if not properly exercised, ten
(10) years from the date the Option is granted.
(e) Date of Exercise. Subject to subsection (d) of this Section, an
Option that becomes a Vested Option may be exercised in whole
or in part at any time thereafter. Options that are awarded
hereunder shall become exercisable as Vested Options, as
follows:
(i) The aggregate number of shares of Stock subject to
any Award shall be divided in to five (5) equal
installments. The first installment shall become
Vested Options one (1) year from the date of
such Award; the second installment shall become
Vested Options two (2) years from the date of
such Award; the third installment shall become
Vested Options three (3) years from the date of
such Award; the fourth installment shall become
Vested Options four (4) years from the date of
such Award; and the fifth and final installment
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shall become Vested Options five (5) years from
the date of such Award.
(ii) Except as otherwise provided hereunder, the
Committee may in its discretion accelerate the
time at which an Option granted hereunder may be
exercised; provided however, that in the event
of any such acceleration with respect to an
Option by an Insider, at least six (6) months
shall elapse from the date of such acceleration
to the later of the date of exercise of the
Option or the disposition of the Stock acquired
by exercising the Option.
(iii) Notwithstanding the preceding, all Options that are
awarded to a participant hereunder shall become
Vested Options Upon the Participant's Retirement,
Disability, or Death.
(f) Forfeiture or Exercise of Option. If a Participant ceases
employment with the Company, all Options held by him or her that
are not Vested Options shall terminate. If a Participant
terminates employment with the Company or a Subsidiary for any
reason prior to exercise of the Participant's Vested Options,
such Vested Options shall be forfeited if not exercised within
ninety (90) days following the date his or her employment
terminated. For this purpose, a leave of absence for any reason
shall be considered a termination of service if such Eligible
Employee fails to return to service by the earlier of the date
the leave was to have ended or nine (9) months following the
date the leave began. Upon a Participant's Retirement,
Disability or Death, the Participant, or the Participant's
estate, personal representative, or beneficiary (as applicable)
shall have the right to exercise Vested Options within eighteen
(18) months from the date of Retirement, Disability or Death (or
such shorter period as the Code or the terms of the particular
Stock Option Agreement may require).
(g) Agreement as to Sale of Securities. If, at the time of the
exercise of any Option, in the opinion of counsel for the
Company, it is necessary or desirable, in order to comply with
any applicable laws or regulations relating to the sale of
securities, that the Participant exercising the Option shall
agree to purchase the shares that are subject to the Option for
investment only and not with any present intention to resell the
same and that the Participant will dispose of such shares only
in compliance with such laws and regulations, the Participant
will, upon the request of the Company, execute and deliver to
the Company an agreement to such effect.
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(h) Minimum Number of Shares. The minimum number of shares of Stock
with respect to which an Option may be exercised at any one time
shall be ten (10) shares, unless the number is the total number
at the time available for exercise under the Award.
(i) Required Amendments. Each Award shall be subject to any
provision necessary to assure compliance with federal and state
securities laws.
(j) Limitation of Participant Rights. A participant shall not be
deemed to be the holder of, or to have any of the rights of a
holder with respect to, any shares of Stock subject to an Option
unless and until the Option shall have been exercised pursuant
to the terms thereof, the Company shall have issued and
delivered the shares to the Participant, and the Participant's
name shall have been entered as a stockholder of record on the
books of Vans, Inc. Thereafter, the Participant shall have full
voting, dividend, and other ownership rights with respect to
such shares of stock.
8.2 MODIFICATION OF STOCK OPTION AGREEMENTS. The Committee shall have the
discretion to modify or amend the terms of any Stock Option Agreement, including
but not limited to the extension, modification or acceleration of Vesting of a
particular Option.
ARTICLE IX - GRANTS IN SUBSTITUTION
FOR OPTIONS GRANTED BY OTHER CORPORATION
9.1 SUBSTITUTE AWARDS. Awards may be granted under this Plan from time to time
in substitution for similar awards held by employees of corporations who become
or are about to become employees of the Company as the result of a merger or
consolidation of the employing corporation with the Company, or the acquisition
by the Company of the assets of the employing corporation, or the acquisition by
the Company of fifty percent (50%) or more of the stock of the employing
corporation causing it to become a subsidiary of the Company. Subject to the
procurement of the approval of the stockholders of the Company as may be
required for the Plan to satisfy the requirements of Rule 16b-3 under the
Exchange Act, the terms and conditions of the substitute Awards so granted may
vary from the terms and conditions set forth in this Plan to such extent as the
Committee at the time of the grant may deem appropriate to conform in whole or
in part, to the provisions of the options in substitution for which they are
granted.
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ARTICLE X - CHANGES IN CAPITAL STRUCTURE
10.1 CAPITAL STRUCTURE CHANGES.
(a) In the event of any change in the number of issued shares of
Stock resulting from a subdivision or consolidation of shares or
other capital adjustment, or the payment of a stock dividend or
other increase or decrease of such shares, appropriate
adjustments shall be made by the Committee with respect to
outstanding Awards and the aggregate number of shares of Stock
that may be awarded pursuant to this Plan. Additions to Awards
issued as a result of any such change shall bear the same
restrictions and carry the same terms as the Awards to which
they relate.
(b) In the event of a change in the Stock which is limited to a
change in the designation thereof to "capital stock" or other
similar designation, or in par value to no par value, without
increase or decrease in the number of issued shares, the shares
resulting from any such change shall be deemed to be Stock
within the meaning of this Plan.
ARTICLE XI - COMPANY SUCCESSORS
11.1 IN GENERAL
(a) If the Company shall be the surviving or resulting corporation
in any merger, sale of assets or sale of stock, consolidation,
or corporate reorganization (including a reorganization in which
the holders of Stock receive securities of another corporation),
any Award granted hereunder shall pertain to and apply to the
securities to which a holder of Stock would have been entitled.
The Committee shall make such appropriate determinations and
adjustments as it deems necessary so as to preserve
substantially the rights and benefits, both as to number of
shares and otherwise, of Participants under this Plan.
(b) If the Company shall not be the surviving corporation in any
merger, sale of assets or sale of stock, consolidation, or
corporate reorganization (including a reorganization in which
the holders of Stock receive securities of another corporation)
involving the Company, the successor corporation shall be
required to assume any Options outstanding under this Plan or
issue substitute Options so as to preserve substantially the
rights and benefits of the participants under this Plan. In the
event any surviving corporation shall refuse to assume any
Options, or to substitute similar Options for those Options
outstanding under this Plan, then, with respect to Options held
by Eligible Employees, the dates of exercise of such Options
shall be accelerated so that such Options are fully Vested
Options.
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ARTICLE XII - AMENDMENT OR TERMINATION OF PLAN
12.1 AMENDMENTS AND TERMINATION. The Plan shall terminate unless renewed by
action of the Board and, if applicable, the stockholders, on the tenth (10th)
anniversary of the Effective Date of the Plan. The Board may at any time and
from time to time otherwise alter, amend, suspend, or terminate this Plan in
whole or in part; provided, however, that (i) no such action may be taken
without stockholder approval that (a) materially increases the benefits accruing
to Participants hereunder, (b) increases the number of securities that may be
issued pursuant to this Plan (except as provided in Sections 10.1 and 11.1), (c)
materially extends the periods for granting Awards hereunder, (d) materially
modifies the requirements as to eligibility for participation hereunder; or (e)
is required to satisfy Section 422(b) of the Code or Rule 16b-3 under the
Exchange Act, and (ii) no such action may be taken, without the consent of the
Participant to whom any Award shall have been granted, which adversely affects
the rights of such Participant concerning such Award, except as such termination
or amendment of this Plan is required by statute, or rules and regulations
promulgated thereunder, or as otherwise permitted hereunder.
ARTICLE XIII - MISCELLANEOUS PROVISIONS
13.1 NONTRANSFERABILITY. Except by the laws of descent and distribution, and as
provided herein, no benefit provided hereunder shall be subject to alienation,
assignment, or transfer by a Participant (or by any person entitled to such
benefit pursuant to the terms of this Plan), nor shall it be subject to
attachment or other legal process of whatever nature, and any attempted
alienation, assignment, attachment, or transfer shall be void and of no effect
whatsoever and, upon any such attempt, the benefit shall terminate and be of no
force or effect. During a Participant's lifetime, Options granted to the
Participant shall be exercisable only by the Participant. Shares of Stock shall
be delivered only into the hands of the Participant or death beneficiary
entitled to receive the same or into the hands of the Participant's authorized
legal representative. Notwithstanding anything to the contrary contained herein,
any Option granted hereunder may, at the discretion of the Committee, permit the
transferability, for no consideration, of such Option to any or all of the
following: (i) any member of the "immediate family" of the optionee (as such
term is hereinafter defined); (ii) a trust for the benefit of the optionee or a
member of the immediate family of the optionee; or (iii) a partnership, the sole
partners of whom are the optionee and/or members of the immediate family of the
optionee. For purposes of this Section 13.1, the term "immediate family" means
the spouse, stepchildren, in-laws, and lineal ascendants and descendants of the
optionee.
13.2 NO EMPLOYMENT RIGHT Neither this Plan nor any action taken hereunder shall
be construed as giving any right to any individual to be retained as an officer
or employee of the Company.
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13.3 TAX WITHHOLDING. The Company shall have the right to deduct from all Awards
paid any federal, state, local, or employment taxes that it deems are required
by law to be withheld with respect to such payments. The Participant receiving
Stock pursuant to the exercise of an Option may be required to pay to the
Company an amount required to be withheld with respect to such Stock. At the
request of a Participant, or as required by law, such sums as may be required
for the payment of any estimated or accrued income tax liability may be withheld
and paid over the governmental entity entitled to receive the same.
13.4 FRACTIONAL SHARES. Awards shall only be granted and Vested Options may only
be exercised with respect to whole shares of stock. In the event a cashless
exercise would result in a fractional share, such fractional shares shall be
eliminated at the time of payment or payout by rounding down for fractions of
less than one half (1/2) and rounding up for fractions of equal to or greater
than one half (1/2). No cash settlements shall be made with respect to
fractional shares eliminated by rounding.
13.5 GOVERNMENT AND OTHER REGULATIONS. The obligation of the Company to make
payment of Awards in Stock or otherwise shall be subject to all applicable laws,
rules, and regulations, and to such approvals by any government agencies as may
be deemed necessary or appropriate by the Committee. If Stock awarded hereunder
may in certain circumstances be exempt from registration under the Securities
Act of 1933, the Company may restrict its transfer in such manner as it deems
advisable to ensure such exempt status. The Plan is intended to comply with Rule
16b-3 under the Exchange Act. Any provision inconsistent with such Rule shall be
inoperative and shall not affect the validity of the Plan. The Plan shall be
subject to any provision necessary to assure compliance with federal and state
securities laws.
13.6 RELIANCE ON REPORTS. Each member of the Board or the Committee shall be
fully justified in relying or acting in good faith upon any report made by the
independent public accountants of the Company, and upon any other information
furnished in connection with this Plan. In no event shall any person who is or
shall have been a member of the Board or the Committee be liable for any
determination made or other action taken, or any omission to act in reliance
upon any such report or information, or for any action taken, including the
furnishing of information, or failure to act, if in good faith.
13.7 GOVERNING LAW. All matters relating to this Plan or to Awards granted
hereunder shall be governed by the laws of the state of California, without
regard to the principles of conflict of laws thereof, except to the extent
preempted by the laws of the United States.
13.8 RELATIONSHIP TO OTHER BENEFITS. No payment under this Plan shall be taken
into account in determining any benefits under any pension, retirement, profit
sharing, or group insurance plan of the Company.
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13.9 EXPENSES. The expenses of implementing and administering this Plan shall be
borne by the Company.
13.10 TITLES AND HEADINGS. The titles and headings of the Articles and Sections
in this Plan are for convenience of reference only, and in the event of any
conflict, the text of this Plan, rather than such titles or headings, shall
control.
13.11 USE OF PROCEEDS. Proceeds from the sale of Stock pursuant to Options
granted under this Plan shall constitute general funds of the Company.
13.12 NON-EXCLUSIVITY OF PLAN. Neither the adoption of this Plan by the Board
nor the submission of this Plan to the stockholders of the Company for approval
shall be construed as creating any limitations on the power of the Board to
adopt such other incentive arrangements as it may deem desirable, including,
without limitation, the granting of stock Options other than under this Plan,
and such arrangements may be applicable either generally or only in specific
cases.
* * * * * * * * * * * * * * * * *
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EXHIBIT 10.2
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VANS, INC.
AMENDED AND RESTATED LOAN AND SECURITY AGREEMENT
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<TABLE>
<CAPTION>
TABLE OF CONTENTS
Page
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<S> <C> <C> <C>
1. DEFINITIONS AND CONSTRUCTION....................................................... 1
1.1 Definitions................................................................. 1
1.2 Accounting Terms............................................................ 14
2. LOAN, LETTERS OF CREDIT AND TERMS OF PAYMENT....................................... 14
2.1 Advances.................................................................... 14
2.2 Letters of Credit........................................................... 15
2.3 Repayment of Overadvance.................................................... 16
2.4 Interest Rates, Payments, and Calculations.................................. 16
2.5 LIBOR Advance Termination................................................... 17
2.6 Crediting Payments.......................................................... 17
2.7 Depository Account.......................................................... 18
2.8 Application of Principal Payments........................................... 18
2.9 Fees........................................................................ 18
2.10 Additional Costs............................................................ 19
2.11 LIBOR Indemnity............................................................. 19
2.12 Term........................................................................ 20
2.13 Termination................................................................. 20
3. CONDITIONS OF LOANS................................................................ 21
4. CREATION OF SECURITY INTEREST...................................................... 21
4.1 Grant of Security Interest.................................................. 21
4.2 Delivery of Additional Documentation Required............................... 21
4.3 Right to Inspect............................................................ 21
4.4 Negative Pledge............................................................. 21
5. REPRESENTATIONS AND WARRANTIES..................................................... 21
5.1 Due Organization and Qualification.......................................... 21
5.2 Due Authorization; No Conflict.............................................. 22
5.3 No Prior Encumbrances....................................................... 22
5.4 Bona Fide Eligible Accounts................................................. 22
5.5 Merchantable Inventory...................................................... 22
5.6 Name; Location of Chief Executive Office.................................... 22
5.7 Litigation.................................................................. 22
5.8 No Material Adverse Change in Financial Statements.......................... 22
5.9 Solvency.................................................................... 23
5.10 Regulatory Compliance....................................................... 23
5.11 Environmental Condition..................................................... 23
5.12 Taxes....................................................................... 23
5.13 Permitted Investments....................................................... 24
5.14 Government Consents......................................................... 24
5.15 Full Disclosure............................................................. 24
6. AFFIRMATIVE COVENANTS.............................................................. 24
6.1 Good Standing............................................................... 24
6.2 Government Compliance....................................................... 24
6.3 Financial Statements, Reports, Certificates................................. 24
6.4 Inventory................................................................... 25
6.5 Taxes ..................................................................... 26
6.6 Insurance................................................................... 26
6.7 Further Assurances.......................................................... 26
</TABLE>
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<TABLE>
<S> <C> <C> <C>
7. NEGATIVE COVENANTS................................................................. 26
7.1 Change in Business.......................................................... 26
7.2 Mergers or Acquisitions..................................................... 26
7.3 Indebtedness................................................................ 27
7.4 Encumbrances................................................................ 27
7.5 Distributions............................................................... 27
7.6 Current Ratio............................................................... 27
7.7 Quick Ratio................................................................. 27
7.8 Interest Coverage Ratio..................................................... 27
7.9 Adjusted Consolidated Tangible Net Worth.................................... 27
7.10 Working Capital............................................................. 27
7.11 Leverage Ratio.............................................................. 28
7.12 Quarterly Losses............................................................ 28
7.13 Investments................................................................. 28
7.14 Transactions with Affiliates................................................ 28
7.15 Inventory................................................................... 28
7.16 Subordinated Debt........................................................... 28
7.17 Compliance.................................................................. 28
8. EVENTS OF DEFAULT.................................................................. 29
8.1 Payment Default............................................................. 29
8.2 Covenant Default............................................................ 29
8.3 Material Adverse Effect..................................................... 29
8.4 Attachment.................................................................. 29
8.5 Insolvency.................................................................. 29
8.6 Other Agreements............................................................ 30
8.7 Judgments................................................................... 30
8.8 Misrepresentations.......................................................... 30
9. BANK'S RIGHTS AND REMEDIES......................................................... 30
9.1 Rights and Remedies......................................................... 30
9.2 Power of Attorney........................................................... 31
9.3 Accounts Collection......................................................... 32
9.4 Bank Expenses............................................................... 32
9.5 Bank's Liability for Collateral............................................. 32
9.6 Remedies Cumulative......................................................... 32
9.7 Demand; Protest; Application................................................ 32
10. NOTICES............................................................................ 33
11. CHOICE OF LAW AND VENUE; JURY TRIAL WAIVER......................................... 33
12. GENERAL PROVISIONS................................................................. 34
12.1 Successors and Assigns...................................................... 34
12.2 Indemnification............................................................. 34
12.3 Time of Essence............................................................. 34
12.4 Severability of Provisions; Headings........................................ 34
12.5 Amendments; Integration..................................................... 34
12.6 Counterparts................................................................ 34
12.7 Survival.................................................................... 34
12.8 Confidentiality............................................................. 35
12.9 No Novation................................................................. 35
</TABLE>
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THIS AMENDED AND RESTATED LOAN AND SECURITY AGREEMENT (the "Agreement")
is entered into as of October 31, 1997, by and between BANK OF THE WEST ("Bank")
and VANS, INC. ("Borrower"), and amends and restates the Existing Loan Agreement
(hereinafter defined).
RECITALS
WHEREAS, Bank and Borrower wish to amend and restate the Amended and
Restated Loan and Security Agreement, dated as of December 2, 1996, by and
between Borrower and Bank (the "Existing Loan Agreement"); and
WHEREAS, Borrower has requested certain changes to the credit facility
extended under the Existing Loan Agreement and Bank has agreed to such requests,
to the extent and manner set forth herein;
NOW, THEREFORE, IT IS AGREED THAT:
DEFINITIONS AND CONSTRUCTION
Definitions. As used herein, the following terms shall have the
following definitions:
"Account Debtor" means the Person who is obligated on or under an
Account.
"Accounts" means all presently existing and hereafter arising accounts,
contract rights, and all other forms of obligations owing to Borrower arising
out of the sale or lease of goods or the rendering of services by Borrower,
whether or not earned by performance, and any and all credit insurance,
guaranties, and other security therefor.
"Adjusted Committed Line" means, at any date, the Committed Line, less
(i) the sum of the aggregate undrawn face amount of the Letters of Credit
outstanding and the aggregate drawn but unreimbursed Letters of Credit on such
date and (ii) the sum of the Reserves on such date.
<PAGE> 5
Page 5
"Adjusted Consolidated Tangible Net Worth" means at any date as of which
the amount thereof shall be determined, the consolidated total assets of
Borrower and the Subsidiaries minus, without duplication, (i) the sum of any
amounts attributable to (a) goodwill, (b) intangible items such as unamortized
debt discount and expense, patents, trade and service marks and names,
copyrights and research and development expenses except prepaid expenses, and
(c) all reserves not already deducted from assets, and (ii) Total Liabilities.
"Advance" or "Advances" means an advance under the Revolving Facility.
"Affiliate" means, with respect to any Person, any Person that owns or
controls directly or indirectly such Person, any Person that controls or is
controlled by or is under common control with such Person, and each of such
Person's senior executive officers, directors, and partners.
"Bank Expenses" means all: reasonable costs or expenses (including
reasonable attorneys' fees and expenses) incurred in connection with the
preparation, negotiation, administration, and enforcement of the Loan Documents;
and Bank's reasonable attorneys' fees and expenses incurred in amending,
enforcing or defending the Loan Documents, whether or not suit is brought.
"Borrower's Books" means all of Borrower's books and records regarding
Accounts, including: ledgers and records concerning the Collateral (other than
Borrower's Books) and all computer programs, or tape files, and the related
equipment containing such information and, in any event, related solely to the
Collateral.
"Borrowing Base" means as of any date the sum of (i) eighty percent
(80%) of the aggregate face amount of Eligible Accounts as of such date;
provided that if Dilution equals or exceeds seven and one-half percent (7.5%) at
any time, Bank may, in its discretion, implement appropriate Reserves to reflect
such increased Dilution, and (ii) the lesser of (A) forty percent (40%) of the
value of Eligible Inventory at such time (valued
<PAGE> 6
Page 6
at the lower of cost or fair market value, on a FIFO basis, in
accordance with GAAP), and (B) Nine Million Dollars ($9,000,000).
"Business Day" means any day that is not a Saturday, Sunday, or other
day on which banks in the State of California are authorized or required to
close.
"Cash Equivalents" means as of any date the net current cash value of
obligations issued or guaranteed by the United States of America then held by
Borrower.
"Closing Date" means July 1, 1995.
"Code" means the California Uniform Commercial Code.
"Collateral" means (i) the Accounts, (ii) the Depository Account, as
defined in Section 2.7 hereof, (iii) the Negotiable Collateral, (iv) the
Inventory, (v) Borrower's Books, and (vi) all claims, rights and interests in
any of the foregoing and all proceeds thereof.
"Committed Line" means Twenty Million Dollars ($20,000,000).
"Consolidated Current Assets" means, as of any applicable date, all
amounts that should, in accordance with GAAP, be included as current assets on
the consolidated balance sheet of Borrower and the Subsidiaries as at such date.
"Consolidated Current Liabilities" means, as of any applicable date, all
amounts that should, in accordance with GAAP, be included as current liabilities
on the consolidated balance sheet of Borrower and the Subsidiaries, as at such
date, plus, to the extent not already included therein, all outstanding Advances
made under this Agreement, including all Indebtedness that is payable upon
demand or within one year from the date of determination thereof unless such
Indebtedness is renewable or extendable at the option of Borrower or any
Subsidiary to a date more than one year from the date of determination.
<PAGE> 7
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"Consolidated Interest Charges" means, for any period, the aggregate
amount accrued (determined in accordance with GAAP on a consolidated basis after
eliminating inter-company items) of all interest (whether or not actually paid)
during such period in respect of Indebtedness of Borrower and the Subsidiaries,
including, without limitation, (a) all fees paid during such period for the
purchase of interest rate protection products, amortized appropriately over the
terms of the applicable Indebtedness, (b) amortized discount in respect of
Indebtedness issued at a discount, and (c) imputed interest on capital lease
obligations.
"Consolidated Net Income" means, for any period, the net income (or
deficit) of Borrower and the Subsidiaries for such period (taken as a cumulative
whole) after deducting, without duplication, operating expenses, provisions for
all taxes and reserves (including reserves for deferred income taxes) and all
other proper deductions, all determined in accordance with GAAP on a
consolidated basis, after eliminating all inter-company items in accordance with
GAAP and after deducting portions of income properly attributable to outside
minority interests, if any, in the stock and surplus of any Subsidiary;
provided, however, that there shall be excluded from Consolidated Net Income:
(i) the income (or deficit) of any Person, other than a Subsidiary, in which
Borrower or any Subsidiary has an ownership interest, except to the extent that
any such income has been actually received by Borrower or such Subsidiary in the
form of cash dividends or similar distributions, (ii) any aggregate net gain or
losses during such period arising from the sale, exchange or other disposition
of capital assets (such term to include all fixed assets, whether tangible or
intangible, and all securities), (iii) any portion of the net income of a
Subsidiary which is unavailable (whether by law, agreement or otherwise) for the
payment of dividends to Borrower or another Subsidiary, (iv) the income (or
deficit) of any other Person accrued prior to the date it becomes a Subsidiary
or is merged or consolidated with a Subsidiary, (v) any write up (less any
non-cash write down) of any asset, other than Inventory adjustments made in
accordance with GAAP, (vi) any net gain from the collection of the proceeds of
life insurance policies, (vii) any gain or loss, or the extinguishment under
GAAP of any Indebtedness of Borrower or any Subsidiary arising from the
acquisition of any securities of Borrower or any Subsidiary, (viii) any deferred
credit representing the excess of equity in
<PAGE> 8
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any Subsidiary at the date of acquisition over the cost of the Investment in
such Subsidiary, (ix) in the case of any merger or consolidation of Borrower
into another Person, other than a Subsidiary, any earnings of such Person prior
to the consummation of such merger or consolidation, (x) any portion of the net
earnings of Borrower or any Subsidiary which cannot be freely converted into
United States dollars, and (xi) any portion of net earnings (or loss) of
Borrower or any Subsidiary which results from foreign currency translation as
determined in accordance with GAAP.
"Consolidated Quick Assets" means as of any date the sum of (i)
Borrower's cash as of such date, (ii) Cash Equivalents as of such date, and
(iii) Borrower's accounts receivable as of such date, all as determined in
accordance with GAAP.
"Contingent Obligation" means, as applied to any Person, any direct or
indirect liability, contingent or otherwise, of that Person with respect to (i)
any indebtedness, lease, dividend, letter of credit or other obligation of
another, including, without limitation, any such obligation directly or
indirectly guaranteed, endorsed, co-made or discounted or sold with recourse by
that Person, or in respect of which that Person is otherwise directly or
indirectly liable; (ii) any obligations with respect to undrawn letters of
credit issued for the account of that Person; and (iii) all obligations arising
under any interest rate, currency or commodity swap agreement, interest rate cap
agreement, interest rate collar agreement, or other agreement or arrangement
designated to protect a Person against fluctuation in interest rates, currency
exchange rates or commodity prices; provided, however, that the term "Contingent
Obligation" shall not include endorsements for collection or deposit in the
ordinary course of business. The amount of any Contingent Obligation shall be
deemed to be an amount equal to the stated or determined amount of the primary
obligation in respect of which such Contingent Obligation is made or, if not
stated or determinable, the maximum reasonably anticipated liability in respect
thereof as determined by such Person in good faith; provided, however, that such
amount shall not in any event exceed the maximum amount of the obligations under
the guarantee or other support arrangement.
"Daily Balance" means the amount of the Obligations owed
<PAGE> 9
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at the end of a given day.
"Debt/EBITDA Ratio" means with respect to the last day of any fiscal
quarter of Borrower the ratio of (i) all Obligations outstanding as of such day,
to (ii) aggregate EBITDA for the four (4) fiscal quarters ending as of such day.
"Dilution" means, with respect to any period, the percentage obtained by
dividing (a) the sum of non-cash credits against Accounts for such period, plus
pending or probable, but not yet applied, non-cash credits against Accounts for
such period, as reasonably determined by Bank, by (b) gross invoiced sales of
Borrower for such period.
"EBIT" means, with respect to any fiscal quarter of Borrower,
Consolidated Net Income for such fiscal quarter plus taxes and interest expense
deducted in determining Consolidated Net Income for such fiscal quarter, plus
the pre-tax increase in LIFO reserves or minus the pre-tax decrease in LIFO
reserves, and minus dividends paid or accrued and withdrawals paid or accrued to
shareholders or other Affiliates not deducted in determining Consolidated Net
Income for such fiscal quarter.
"EBITDA" means, with respect to any fiscal quarter of Borrower,
Consolidated Net Income for such fiscal quarter plus interest expense, taxes,
depreciation and amortization deducted in determining Consolidated Net Income
for such fiscal quarter, plus the pre-tax increase in LIFO reserves or minus the
pre-tax decrease in LIFO reserves, and minus dividends paid or accrued and
withdrawals paid or accrued to shareholders or other Affiliates not deducted in
determining Consolidated Net Income for such fiscal quarter.
"Eligible Accounts" means those Accounts (i) which are due and payable
within ninety (90) days from the original date of invoice, and (ii), commencing
on the Trigger Date, have been validly assigned to Bank and comply in all
material respects with all of the terms, conditions, warranties and
representations made to Bank hereunder and the other Loan Documents; but
Eligible Accounts shall not include the following:
<PAGE> 10
Page 10
(a) Accounts with respect to which the Account Debtor is
an officer, director, employee, or agent of Borrower or an
Affiliate of Borrower;
(b) Accounts with respect to which goods are placed on
consignment, guaranteed sale, bill-and-hold, repurchase or
return, or other terms by reason of which the payment of the
Account Debtor may be conditional;
(c) Accounts arising from progress billings, invoices for
deposits, and rebills of amounts previously credited to the
extent of credits issued more than fifteen (15) days prior to
such rebill;
(d) Accounts with respect to which the Account Debtor is
not domiciled in the United States of America or Canada (unless
such Account is fully secured by an irrevocable letter of credit
acceptable to Bank and assigned to Bank or fully insured for
commercial and political risks under insurance policies
acceptable to Bank and for which Bank has been designated loss
payee);
(e) Accounts with respect to which the sale is on an
installment sale, lease or other extended payment basis, except
for Accounts for which Sears Roeback, Shoe Carnival, Just for
Feet, Sports Odyssee, Famous Footwear, Genesco, Track n' Trail
and Gadzooks are the Account Debtors, which may be due and
payable within one hundred twenty (120) days from the original
date of invoice;
(f) Accounts with respect to which the Account Debtor is a
governmental agency or authority unless such agency or authority
is the United States of America or any department, agency or
instrumentality of the United States, and Borrower complies with
the Assignment of Claims Act of 1940, as amended (31 U.S.C.
Section 203 et seq.);
(g) All Accounts owing by any Account Debtor if fifty
percent (50%) or more of the Accounts due from such Account
<PAGE> 11
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Debtor are deemed not to be Eligible Accounts hereunder;
(h) Accounts with respect to which the Account Debtor is
an Affiliate of, or has common officers or directors with,
Borrower;
(i) Accounts with respect to which Bank does not for any
reason, commencing on the Trigger Date, have a perfected first
priority Lien;
(j) Accounts with respect to which Borrower is or may
become liable to the Account Debtor for goods sold or services
rendered by the Account Debtor to Borrower, to the extent of
Borrower's existing or potential liability to such Account
Debtor;
(k) Accounts with respect to which the Account Debtor has
disputed any liability, or the Account Debtor has made any claim
with respect to any other Account due, or the Account is
otherwise subject to any right of setoff, deduction, breach of
warranty or other defense, dispute or counterclaim by the Account
Debtor;
(l) that portion of the Accounts owed by any single
Account Debtor which exceeds ten percent (10%) of all of the
Accounts, except that with respect to the Sports Authority,
Mervyns, Shoe Carnival, Sears Roeback, Just for Feet, Famous
Footwear, or Kinney Shoe Corp., the ineligible portion of the
Accounts of either such Account Debtor shall be that portion
which exceeds fifteen percent (15%) of all the Accounts;
(m) that portion of any Accounts representing late fees,
service charges or interest, but only to the extent of such
portion;
(n) Accounts of an Account Debtor where the Account Debtor
is located in New Jersey or Minnesota unless Borrower (1) with
respect to such state, has received a Certificate of Authority to
do business and is in good standing in such state, or (2) has
filed a Notice of Business Activities Report with the New Jersey
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Division of Taxation or the Minnesota Department of Revenue, as
applicable, for the then current year;
(o) Accounts owed by any Account Debtor which is insolvent
or is the subject of an Insolvency Proceeding;
(q) that portion of any Accounts represented by contract
rights, documents, instruments, chattel paper or general
intangibles; and
(r) all Accounts of an Account Debtor whose
creditworthiness is not satisfactory to Bank in its reasonable
credit judgment due to Bank's reasonable belief of jeopardy of
insolvency of such Account Debtor or impairment of such Account
Debtor's ability to timely pay its Accounts, based on information
available to Bank. References to percentages of all Accounts are
based on dollar amount of Accounts and not number of Accounts.
"Eligible Inventory" means that portion of Inventory consisting of raw
materials normally and currently used in Borrower's business, and finished goods
held for sale by Borrower, normally and currently saleable in the ordinary
course of Borrower's business, and which at all times pertinent hereto is of
good and merchantable quality, free from material defects, which is located at
the locations described in Section 7.15 hereof and, commencing on the Trigger
Date, as to which Bank has a perfected first priority Lien.
"ERISA" means the Employment Retirement Income Security Act of 1974, as
amended, and the regulations thereunder.
"Eurodollar Banking Day" means any Business Day on which commercial
banks are open for international business (including dealing in dollar deposits)
in London, England and New York, New York.
"GAAP" means generally accepted accounting principles as from time to
time set forth in the opinions of the Accounting Principles Board
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of the American Institute of Certified Public Accountants and in statements by
the Financial Accounting Standards Board or in such opinions and statements of
such other entities as shall be approved by a significant segment of the
accounting profession in the United States.
"Indebtedness" means (a) all indebtedness for borrowed money or the
deferred purchase price of property or services, including without limitation
reimbursement and other obligations with respect to surety bonds and letters of
credit, (b) all obligations evidenced by notes, bonds, debentures or similar
instruments, (c) all capital lease obligations and (d) all Contingent
Obligations.
"Insolvency Proceeding" means any proceeding commenced by or against any
person or entity under any provision of the United States Bankruptcy Code, as
amended, or under any other bankruptcy or insolvency law, including assignments
for the benefit of creditors, formal or informal moratoria, compositions,
extension generally with its creditors, or proceedings seeking reorganization,
arrangement, or other relief.
"Inventory" means all present and future inventory in which Borrower has
any interest, including any returns upon any accounts or other proceeds,
including insurance proceeds, resulting from the sale or disposition of any of
the foregoing and any documents of title representing any of the above, and
Borrower's Books relating to any of the foregoing.
"Investment" means any beneficial ownership of (including stock,
partnership interest or other securities) any Person, or any loan, advance or
capital contribution to any Person.
"IRC" means the Internal Revenue Code of 1986, as amended, and the
regulations thereunder.
"Letter of Credit" has the meaning specified in Section 2.2(a) hereof.
"LIBOR Advance" has the meaning specified in Section 2.4(a)(ii) hereof.
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"LIBOR Interbank Offered Rate" means with respect to any LIBOR Period
the rate per annum (rounded upward, if necessary, to the next higher 1/100th of
1%) at which the Bank's New York branch, which for purposes hereof shall be
deemed the New York branch of Banque Nationale de Paris, would offer a deposit
in Dollars to major banks in the New York interbank Eurodollar market at
approximately 11:00 a.m., New York time, two (2) Eurodollar Banking Days prior
to the commencement of such LIBOR Period and in an amount substantially equal to
the aggregate amount of the LIBOR Advance scheduled to be outstanding during
such LIBOR Period.
"LIBOR Margin" means as of any date (i) if the Debt/EBITDA Ratio as of
the last day of fiscal quarter ended immediately prior to such date was equal to
or less than 1.00 to 1.00, 1.875%, (ii) if the Debt/EBITDA Ratio as of the last
day of fiscal quarter ended immediately prior to such date was greater than 1.00
to 1.00 but equal to or less than 1.50 to 2.00, 2.00%, (iii) if the Debt/EBITDA
Ratio as of the last day of fiscal quarter ended immediately prior to such date
was greater than 2.00 to 1.00 but equal to or less than 2.50 to 1.00, 2.25%,
(iv) if the Debt/EBITDA Ratio as of the last day of fiscal quarter ended
immediately prior to such date was greater than 2.50 to 1.00 but equal to or
less than 3.00 to 1.00, 2.50%, or (v) if the Debt/EBITDA Ratio as of the last
day of fiscal quarter ended immediately prior to such date was greater than 3.00
to 1.00, 2.75%.
"LIBOR Period" has the meaning specified in Section 2.4(a)(ii) hereof.
"LIBOR Rate" means with respect to any LIBOR Advance the rate per annum
(rounded upwards, if necessary, to the next higher 1/100th of 1%) determined by
Bank to be equal to (A) the quotient of (1) the London Interbank Offered Rate
for such LIBOR Advance for the LIBOR Period with respect thereto divided by (2)
one minus the Reserve Requirement for such LIBOR Period, plus (B) the LIBOR
Margin as of the first day of the LIBOR Period for such LIBOR Advance.
"Lien" means any mortgage, lien, deed of trust, security interest or
other encumbrance.
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"Loan Documents" means, collectively, this Agreement, any note or notes
executed by Borrower, and any other agreement entered into between Borrower and
Bank in connection with this Agreement, all as amended or extended from time to
time.
"Material Adverse Effect" means a material adverse effect on (i) the
business operations or condition of Borrower and the Subsidiaries taken as a
whole, (ii) the ability of Borrower to repay the Obligations or otherwise
perform its obligations under the Loan Documents, (iii) the validity or
enforceability of the Loan Documents, or (iv) the rights and remedies of Bank
under the Loan Documents.
"Maturity Date" means November 1, 1999.
"Negotiable Collateral" means all of Borrower's present and future
letters of credit of which it is a beneficiary, notes, drafts, instruments,
securities, documents of title, and chattel paper, which relate to any of the
Accounts described in clause (i) of the definition of Collateral.
"Obligations" means all debt, principal, interest, Bank Expenses and
other amounts owed to the Bank by Borrower pursuant to this Agreement or any
other agreement, whether absolute or contingent, due or to become due, now
existing or hereafter arising (including all interest accruing after the
commencement of an Insolvency Proceeding).
"Periodic Payments" means all installments or similar recurring payments
that Borrower may now or hereafter become obligated to pay to Bank pursuant to
the terms and provisions of any instrument, or agreement now or hereafter in
existence between Borrower and Bank.
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"Permitted Indebtedness" means:
(a) Indebtedness of Borrower in favor of Bank arising hereunder or any
other Loan Document;
(b) Subordinated Debt;
(c) Indebtedness of Borrower incurred after the date hereof, to the
extent that such Indebtedness is not described in any other clause of this
definition and to the extent that the aggregate principal amount of such
Indebtedness does not exceed Five Million Dollars ($5,000,000);
(d) Indebtedness of Borrower to trade creditors incurred in the ordinary
course of business; and
(e) Indebtedness that is secured by Liens described in clause (c) of the
definition of Permitted Liens.
"Permitted Investments" means:
(a) investments satisfying the investment objectives and investment
criteria set forth in Borrower's Investment Policy, as in effect on the date
hereof and attached hereto as Exhibit B; and
(b) an equity investment in another Person to the extent that (i) the
aggregate dollar amount of such investment does not exceed One Million Dollars
($1,000,000) and (ii) the aggregate dollar amount of such investment, when
aggregated with all other investments described in this clause (b) made during
the same fiscal year, does not exceed Five Million Dollars ($5,000,000).
"Permitted Liens" means the following:
(a) Any Liens arising hereunder or the other Loan Documents;
(b) Liens for taxes, fees, assessments or other
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governmental charges or levies, either not delinquent or being contested in good
faith by appropriate proceedings, provided the same have no priority over any of
Bank's security interests;
(c) Liens (i) upon or in any equipment acquired or held by Borrower or
any of the Subsidiaries to secure the purchase price of such equipment or
indebtedness incurred solely for the purpose of financing the acquisition of
such equipment, or (ii) existing on such equipment at the time of its
acquisition, provided that the Lien is confined solely to the property so
acquired and improvements thereon, and the proceeds of such equipment;
(d) Liens consisting of leases or subleases and licenses and sublicenses
granted to others in the ordinary course of Borrower's or a Subsidiary's
business not interfering in any material respect with the business of Borrower
or such Subsidiary and any interest or title of a lessor or licensor under any
lease or license, as applicable;
(e) Liens securing claims or demands of materialmen, mechanics,
carriers, warehousemen, landlords and other like Persons imposed without action
of such parties, provided that the payment thereof is not yet required;
(f) Liens incurred or deposits made in the ordinary course of Borrower's
or a Subsidiary's business in connection with worker's compensation,
unemployment insurance, social security and other like laws;
(g) Liens arising from judgments, decrees or attachments in
circumstances not constituting an Event of Default;
(h) Easements, reservations, rights-of-way, restrictions, minor defects
or irregularities in title and other similar charges or encumbrances affecting
real property not interfering in any material respect with the ordinary conduct
of Borrower's or a Subsidiary's business;
(i) Liens in favor of customs and revenue authorities arising as a
matter of law to secure payment of customs duties in connection with the
importation of goods;
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(j) Liens that are not prior to Bank's security interest which
constitute rights of set-off of a customary nature;
(k) Liens securing Indebtedness of Borrower described in clause (c) of
the definition of Permitted Indebtedness, to the extent that such Liens are not
against any of the Collateral (whether or not the Trigger Date has occurred);
and
(l) Liens incurred in connection with the extension, renewal or
refinancing of the indebtedness secured by Liens of the type described in
clauses (a) through (k) above, provided that any extension, renewal or
replacement Lien shall be limited to the property encumbered by the existing
Lien and the principal amount of the indebtedness being extended, renewed or
refinanced does not increase.
"Person" means any individual, sole proprietorship, limited liability
company, partnership, joint venture, trust, unincorporated organization,
association, corporation, institution, public benefit corporation, firm, joint
stock company, estate, entity or governmental agency.
"Potential Default" means any event which through the passage of time,
service of notice or both, would mature into an Event of Default.
"Prime Interest Rate" means as of any date the sum of (i) the Prime Rate
as of such date and (ii) the Prime Rate Margin as of such date.
"Prime Rate" means the variable rate of interest, per annum, most
recently announced by Bank, as its "prime rate," whether or not such announced
rate is the lowest rate available from Bank.
"Prime Rate Margin" means as of any date (i) if the Debt/EBITDA Ratio as
of the last day of fiscal quarter ended immediately prior to such date was equal
to or less than 2.00 to 1.00, 0%, (ii) if the Debt/EBITDA Ratio as of the last
day of fiscal quarter ended immediately prior to such date was greater than 2.00
to 1.00 but equal to or less than 2.50
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to 1.00, .25%, (iii) if the Debt/EBITDA Ratio as of the last day of fiscal
quarter ended immediately prior to such date was greater than 2.50 to 1.00 but
equal to or less than 3.00 to 1.00, .50%, or (iv) if the Debt/EBITDA Ratio as of
the last day of fiscal quarter ended immediately prior to such date was greater
than 3.00 to 1.00, .75%.
"Reserve Requirement" means for any LIBOR Advance and any related LIBOR
Period the rate on the day of pricing at which reserves (including any marginal,
supplemental or emergency reserves) are required to be maintained during such
LIBOR Period under Regulation D by Bank against "Eurocurrency Liabilities" (as
such term is used in Regulation D), but without the benefit or credit of
proration, exemptions, or offsets that might otherwise be available to Bank from
time to time under Regulation D. Without limiting the effect of the foregoing,
the Reserve Requirement shall reflect any other reserves required to be
maintained by Bank by reason of any Regulatory Change against (a) any category
of liabilities which includes deposits by reference to which the LIBOR Rate is
to be determined hereunder or (b) any category of extensions of credit or other
assets that include any LIBOR Advance.
"Reserves" means the reserves consistent with the definition of Eligible
Accounts and the definition of Eligible Inventory, the Currency Reserve, as
defined in Section 2.2(d) hereof, and such other reserves, deductions or
adjustments Bank, in its reasonable credit judgment, deems necessary to reflect
items reimbursable to Bank hereunder which have been incurred or are anticipated
but not yet paid, any breaches of the warranties, representations or covenants
of Borrower hereunder, or any Events of Default or Potential Defaults; provided
that Bank shall retain all of its other rights and remedies hereunder, the other
Loan Documents and by law.
"Regulation D" means Regulation D of the Board of Governors of the
Federal Reserve System, as the same may be amended or supplemented from time to
time.
"Regulatory Change" means, as to Bank, any change after the Closing Date
in United States federal, state or foreign laws or regulations (including
Regulation D) or the adoption or making after such date of any
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interpretations, directives or requests applying to a class of banks including
Bank of or under any United States federal, state, or foreign laws or
regulations (whether or not having the force of law) by any court or
governmental or monetary authority charged with the interpretation or
administration thereof.
"Responsible Officer" means any of the Chief Executive Officer, the
Chief Financial Officer or the Corporate Controller of Borrower.
"Revolving Facility" means the facility under which Borrower may request
Bank to issue cash advances, as specified in Section 2.1 hereof.
"Subordinated Debt" means any debt incurred by Borrower that is
subordinated to the Obligations on terms reasonably acceptable to Bank.
"Subsidiary" means any corporation or partnership in which (i) any
general partnership interest or (ii) more than fifty percent (50%) of the stock
of which by the terms thereof ordinary voting power to elect the Board of
Directors, managers or trustees of the entity shall, at the time as of which any
determination is being made, be owned by Borrower, either directly or through an
Affiliate.
"Total Liabilities" means at any date as of which the amount thereof
shall be determined, all obligations that should, in accordance with GAAP be
classified as liabilities on the consolidated balance sheet of Borrower,
including in any event all Indebtedness.
"Trigger Date" means the first date after November 1, 1997, on which any
of the following occur:
(a) an Event of Default, as defined in Section 8.1, Section 8.3, Section
8.4, Section 8.5, Section 8.6, Section 8.7, or Section 8.8; and
(b) Borrower fails or neglects to perform, keep, or
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observe any term, provision, condition, covenant or agreement contained in this
Agreement or any of the other Loan Documents, or in any other persent or future
agreement between Borrower and Bank (other than the payment terms described in
Section 8.1) and such failure, in the case of breaches that are curable (the
parties acknowledge that financial covenant breaches are not curable), continues
for forty-five (45) days; for non-curable breaches, the Trigger Date shall occur
as of the date of breach; for curable breaches, the Trigger Date shall occur as
of the expiration of the forty-five (45) days period described above.
"Working Capital" means as of any date Consolidated Current Assets as of
such date less Consolidated Current Liabilities as of such date.
Accounting Terms. All accounting terms not specifically defined herein
shall be construed in accordance with GAAP and all calculations made hereunder
shall be made in accordance with GAAP. When used herein, the terms "financial
statements" shall include the notes and schedules thereto.
LOAN, LETTERS OF CREDIT AND TERMS OF PAYMENT
Advances. Subject to the terms and provisions hereof, including, without
limitation, that no Event of Default or Potential Default has occurred and is
continuing, upon Borrower's request, made at any time and from time to time
during the term hereof, Bank shall make Advances up to the Adjusted Committed
Line, so long as the Borrowing Base formula is not in effect. While the
Borrowing Base formula is in effect, Bank shall make Advances up to (A) the
lesser of (i) the Borrowing Base and (ii) the Committed Line, minus (B) the sum
of (i) the sum of the aggregate undrawn face amount of the Letters of Credit
outstanding and the aggregate drawn but unreimbursed Letters of Credit and (ii)
the sum of the Reserves; provided, however, that in no event shall Advances
based on Eligible Inventory exceed fifty percent (50%) of the aggregate dollar
amount of the Advances outstanding. Availability under the immediately preceding
sentence during a calendar month shall be determined based on Eligible Accounts
and Eligible Inventory as of the last day of the immediately preceding calendar
month.
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The Borrowing Base formula shall be in effect commencing on each and
every date on which Borrower delivers to Bank financial statements that show
that as of the last day of the most recently completed fiscal quarter of
Borrower the Debt/EBITDA Ratio exceeded 2.00 to 1.00 and shall cease to be in
effect on the first date thereafter that Borrower delivers to Bank financial
statements that show that as of the last day of the most recently completed
fiscal quarter of Borrower the Debt/EBITDA Ratio did not exceed 2.00 to 1.00.
Whenever Borrower desires an Advance, it shall notify Bank by facsimile
transmission or telephone no later than 3:00 p.m. California time, on the
Business Day that the Advance is to be made. Each such notification shall be
promptly confirmed by a Payment/Advance Form in substantially the form of
Exhibit A hereto. Bank is authorized to make Advances hereunder, based upon
instructions received from a Responsible Officer, or without instructions if in
Bank's discretion such Advances are necessary to meet Obligations which have
become due and remain unpaid. Bank shall be entitled to rely on any telephonic
notice given by a person who Bank reasonably believes to be a Responsible
Officer, and Borrower shall indemnify and hold Bank harmless for any damages or
loss suffered by Bank as a result of such reliance. Bank shall credit the amount
of Advances made under this Section 2.1 to Borrower's deposit account.
The Revolving Facility shall terminate on the Maturity Date, at which
time all Advances under this Section 2.1 and other amounts due hereunder shall
be immediately due and payable.
Letters of Credit.
Issuance. Subject to the terms and conditions hereof, Bank agrees to
issue or cause to be issued for Borrower's account (A) sight documentary letters
of credit, (B) usance documentary letters of credit with a final maturity or
payment date of not more than one hundred twenty (120) days from acceptance date
and (C) standby letters of credit (the "Letters of Credit") in an aggregate face
amount not to exceed (i) the Adjusted Committed Line minus (ii) the then
outstanding principal balance of the Advances provided that the face amount of
outstanding Letters of Credit
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(including drawn but unreimbursed Letters of Credit) shall not in any case
exceed Twenty Million Dollars ($20,000,000), unless the Borrowing Base formula
is in effect, in which case the aggregate face amount of the Letters of Credit
may not exceed (i) the lesser of the Committed Line or the Borrowing Base, minus
(ii) the then outstanding principal balance of the Advances and the Reserves.
Each such sight Letter of Credit shall have an expiry date no later than one
hundred twenty (120) days after the Maturity Date. Each such usance Letter of
Credit shall have a final maturity or payment date no later than one hundred
twenty (120) days after the Maturity Date. All such Letters of Credit shall be,
in form and substance, acceptable to Bank in its sole discretion and shall be
subject to the terms and conditions of Bank's form of application and letter of
credit agreement.
Expenses. Borrower shall pay Bank for all of Bank's handling fees, as
set forth in Exhibit C hereto, for each Letter of Credit issued, including, but
not limited to, issuance, negotiation and amendment fees.
Indemnity. Borrower shall indemnify, defend and hold Bank harmless from
any loss, cost, expense or liability, including, without limitation, reasonable
attorneys' fees, arising out of or in connection with any Letters of Credit.
Reimbursement; Currency Reserve.
Borrower may request that Bank issue a Letter of Credit
payable in a currency other than United States Dollars. If demand for payment is
made under any such Letter of Credit, Bank shall treat such demand as an Advance
of the equivalent of the amount thereof (plus cable charges) in United States
currency at the then prevailing rate of exchange in San Francisco, California,
for sales of such other currency for cable transfer to the country of which it
is the currency.
Upon the issuance of any Letter of Credit payable in a
currency other than United States Dollars, Bank shall create a reserve against
fluctuations in currency exchange rates (the "Currency Reserve"), in an amount
equal to ten percent (10%) of the face amount of
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such Letter of Credit. The amount of the Currency Reserve may be amended by Bank
from time to time to account for fluctuations in the exchange rate. The Currency
Reserve for a Letter of Credit shall remain in effect so long as such Letter of
Credit remains outstanding or reimbursement due with respect thereto.
Repayment of Overadvance. If, at any time while the Borrowing Base
formula is in effect and for any reason, the outstanding Advances plus (i) the
sum of the aggregate undrawn face amount of the Letters of Credit and (ii) the
drawn but unreimbursed Letters of Credit exceed the Borrowing Base, less the sum
of the Reserves, Borrower shall, upon telephonic or other notice from Bank, pay
to Bank, in cash, the amount of such excess (such amount the "Overadvance"), and
prior to such repayment such Overadvance shall bear interest at the per annum
rate of the Prime Interest Rate plus two percent (2%); provided, however, that
if the Overadvance exists as of the date that the Borrowing Base formula is
imposed as a result of the Debt/EBITDA Ratio exceeding 2.00 to 1.00, Borrower
shall have thirty (30) days from the date that the Borrowing Base formula is
imposed to pay the full amount of such Overadvance.
Interest Rates, Payments, and Calculations.
Interest Rate.
Prime Interest Rate. Except as set forth in Section
2.4(a)(ii) and Section 2.4(b), all Advances shall bear interest, on the average
Daily Balance, at a rate equal to the Prime Interest Rate.
LIBOR Rate. At any time during the term hereof, and
from time to time during the term hereof, Borrower may elect to have all or a
portion of the Advances (such portion of the Advances a "LIBOR Advance") bear
interest, on the average Daily Balances owing, at a rate per annum equal to the
LIBOR Rate. The LIBOR Rate may take effect only on the first Eurodollar Banking
Day of a calendar month and shall end on the numerically corresponding day in
the first, third, sixth, or twelfth calendar month thereafter (the "LIBOR
Period"). The election shall be effected by Borrower giving Bank irrevocable
written notice not less than three (3)
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Business Days prior to the first day of the calendar month for which the
election is made and shall be with respect to the portion of the Advances
principal outstanding equal to an integral multiple of One Hundred Thousand
Dollars ($100,000) and shall not be less than Five Hundred Thousand Dollars
($500,000). In the notice, Borrower shall indicate whether the LIBOR Period is
to be one (1) month, three (3) months, six (6) months, or twelve (12) months.
Borrower may not elect a LIBOR Period that would expire after the Maturity Date.
Default Rate. All Obligations shall bear interest, from and
after the occurrence of an Event of Default, at a rate equal to two (2)
percentage points above the interest rate applicable thereto immediately prior
to the occurrence of the Event of Default.
Payments. Interest hereunder shall be due and payable in
arrears on the last calendar day of each month during the term hereof. Bank may,
at its option, charge such interest, all Bank Expenses, and all Periodic
Payments against any of Borrower's deposit accounts or against the Committed
Line, in which case those amounts shall thereafter accrue interest at the Prime
Interest Rate then applicable hereunder. Any interest not paid when due shall be
compounded by becoming a part of the Obligations, and such interest shall
thereafter accrue interest at the Prime Interest Rate then applicable hereunder.
Computation. If the Prime Rate or the Prime Rate Margin is
changed from time to time hereafter, the Prime Interest Rate hereunder with
respect to Advances outstanding which do not constitute LIBOR Advances shall be
increased or decreased effective as of 12:01 a.m. on the day the Prime Rate or
the Prime Rate Margin, as applicable, is changed, by an amount equal to such
change in the Prime Rate or the Prime Rate Margin, as applicable. All interest
chargeable under the Loan Documents shall be computed on the basis of a three
hundred sixty (360) day year for the actual number of days elapsed.
LIBOR Advance Termination. If any Regulatory Change or other
circumstances relating to the interbank Eurodollar markets shall, at any time,
in Bank's reasonable determination (which determination shall be
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conclusive), make it unlawful or impractical for Bank to fund or maintain,
during any LIBOR Period, the portion of the Advances which have been designated
a LIBOR Advance for that LIBOR Period, or to continue such funding or to
determine or charge interest rates based upon LIBOR, Bank shall give Borrower
notice of such circumstances and:
(i) In the case of a LIBOR Period in progress, Borrower shall, if
requested by Bank, promptly pay any interest which had accrued
prior to such request and the date of such request shall be
deemed to be the last day of the term of the LIBOR Period; and
(ii) No LIBOR Period may be designated thereafter until Bank
determines that such would be practical.
Crediting Payments. Bank's receipt of any wire transfer of funds,
check, or other item of payment shall be immediately applied to conditionally
reduce Obligations, but shall not be considered a payment on account until (A)
the date that such payment constitutes immediately available federal funds and
is made to the appropriate deposit account of Bank or (B) the date that such
check or other item of payment is honored when presented for payment.
Notwithstanding anything to the contrary contained herein, any wire transfer or
payment received by Bank after 2:00 p.m. California time shall be deemed to have
been received by Bank as of the opening of business on the immediately following
Business Day. Whenever any payment to Bank under the Loan Documents would
otherwise be due (except by reason of acceleration) on a date that is not a
Business Day, such payment shall instead be due on the next Business Day, and
additional fees or interest, as the case may be, shall accrue and be payable for
the period of such extension.
Depository Account. If the Debt/EBITDA Ratio as of the last day
of any fiscal quarter was greater than 2.00 to 1.00, then, during the period
commencing thirty (30) days after such date and terminating as of the date that
the Debt/EBITDA Ratio as of the last day of a subsequent fiscal quarter was less
than 2.00 to 1.00, Borrower shall maintain a depository account ("Depository
Account") with Bank. If Borrower receives any payments from any Account Debtor
while the Depository Account requirement is in effect under this section, it
agrees that all such payments
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shall be the Bank's sole and exclusive property and that it shall hold such
payments in trust as Bank's trustee and immediately deliver them to the
Depository Account.
Application of Principal Payments. If on the date a principal
payment is made with respect to the Advances, interest is calculated both on the
basis of the Prime Interest Rate and the LIBOR Rate, then such payment shall be
applied first to the Advances principal for which interest is calculated on the
basis of the Prime Interest Rate (the "Prime Interest Rate Principal"). Only
when the Prime Interest Rate Principal is fully paid shall the principal payment
be applied to the LIBOR Advance(s) principal. If more than one LIBOR Advance is
outstanding, the principal amount shall be applied to the LIBOR Advances in the
order of maturity, with the LIBOR Advances with the shortest time to maturity
paid first.
Fees. Borrower shall pay to Bank the following:
Unused Facility Fee. An unused facility fee (the "Unused
Facility Fee") on the first day of each calendar month equal to the quotient of
the Unused Facility Fee Percentage and the amount by which the Committed Line
exceeds the sum of (i) the average daily balance of the Advances for the
immediately preceding calendar month and (ii) the aggregate average daily
undrawn face amount of the Letters of Credit outstanding and the aggregate
average daily unreimbursed amount of the Letters of Credit for the immediately
preceding calendar month. The Unused Facility Fee Percentage on an Unused
Facility Fee payment date shall be (i) one-eighth of one percent (.125%) per
annum (computed on the basis of a year of three hundred sixty (360) days for the
actual number of days elapsed) if the Debt/EBITDA Ratio as shown on the most
recent financial statements delivered by Borrower to Bank was equal to or less
than 1.50 to 1.00, (ii) one-quarter of one percent (.25%) per annum (computed on
the basis of a year of three hundred sixty (360) days for the actual number of
days elapsed) if the Debt/EBITDA Ratio as shown on the
most recent financial statements delivered by Borrower to Bank was greater than
1.50 to 1.00 but equal to less than 2.50 to 1.00, and (iii) three-eighths of one
percent (.375%) per annum (computed on the basis of a year of three hundred
sixty (360) days for the actual number of days elapsed) if the Debt/EBITDA Ratio
as shown on the
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most recent financial statements delivered by Borrower to Bank was greater than
2.50 to 1.00;
Financial Examination and Appraisal Fees. Bank's customary
fees and reasonable out-of-pocket expenses for Bank's audits of Accounts, and
for each appraisal of Collateral (whether or not the Trigger Date has occurred)
and financial analysis and examination of Borrower performed from time to time
by Bank or its agents; and
Bank Expenses. Upon the date hereof, all Bank Expenses
incurred through the date hereof, including reasonable attorneys' fees and
expenses.
Additional Costs. If any law, regulation, treaty or
official directive or the interpretation or application thereof by any court or
any governmental authority charged with the administration thereof or the
compliance with any guideline or request of any central bank or other
governmental authority (whether or not having the force of law):
subjects Bank to any tax with respect to payments of
principal or interest or any other amounts payable hereunder by Borrower or
otherwise with respect to the transactions contemplated hereby (except for taxes
on Bank's overall net income imposed by the United States of America or any
political subdivision thereof);
imposes, modifies or deems applicable any deposit
insurance, reserve, special deposit or similar requirement against assets held
by, or deposits in or for the account of, or loans by, Bank; or
imposes upon Bank any other condition with respect to its
performance hereunder,
and the result of any of the foregoing is to increase the cost to Bank, reduce
the income receivable by Bank or impose any expense upon Bank with respect to
any loans hereunder, Bank shall notify Borrower thereof. Borrower agrees to pay
to Bank the amount of such increase in cost, reduction in income or additional
expense as and when such cost, reduction or expense is incurred or
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determined, upon Bank's presentation of a statement of the amount and setting
forth Bank's calculation thereof, all in reasonable detail, which statement
shall be deemed true and correct absent manifest error.
LIBOR Indemnity. Borrower shall indemnify Bank and hold Bank harmless
from, and reimburse Bank on demand for, all losses and expenses which Bank
sustains or incurs as a result of (i) any payment of a LIBOR Advance prior to
the last day of the LIBOR Period therefor for any reason, including termination
hereof, whether pursuant to Section 2.13 hereof or the occurrence of an Event of
Default for any reason, (ii) any termination of a LIBOR Period in accordance
with Section 2.5 hereof, or (iii) any failure by Borrower, for any reason, to
borrow any portion of a LIBOR Advance. This indemnification and hold harmless
requirement shall include, without limitation, all losses and expenses arising
from interest and fees that Bank pays to lenders of funds it obtained in order
to fund the Advances on the basis of the LIBOR Rate(s) and all losses incurred
in liquidating or re-deploying deposits from which such funds were obtained and
loss of profit for the period after termination. A written statement by Bank to
Borrower of such losses and expenses shall be conclusive and binding, absent
manifest error, for all purposes. This covenant shall survive the expiration or
termination hereof.
Term. This Agreement shall become effective upon the Closing Date and
shall continue in full force and effect for a term ending on the date that all
Obligations have been satisfied. Notwithstanding the foregoing, Bank shall have
the right to terminate its obligation to make Advances and to issue Letters of
Credit hereunder immediately and without notice upon the occurrence and during
the continuance of an Event of Default. On the date of termination, all
Obligations shall become immediately due and payable in cash or by wire
transfer. Notwithstanding termination, if the Trigger Date has occurred, Bank
shall retain its Lien on the Collateral to secure satisfaction of such
Obligations until all Obligations have been satisfied.
Termination. Subject to the terms of this section, Borrower may, at any
time, on ten (10) days' written notice prior to the end of any month, and
without payment of any premium or penalty, prepay in full the Advances and
terminate this Agreement by paying to Bank, in cash or by a
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wire transfer of immediately available funds, the Obligations. If any Letters of
Credit are outstanding on the effective date of termination, Borrower shall
deliver to Bank cash collateral in an amount equal to the aggregate undrawn face
amount of such Letters of Credit plus the projected amount of all fees
associated therewith.
CONDITIONS OF LOANS. Bank's obligation to make each Advance
and to issue each Letter of Credit is subject to the following conditions:
timely receipt by Bank of the Borrowing Certificate as provided
in Section 2.1; and
the representations and warranties contained in Section 5 shall
be true and correct in all material respects on and as of the date of such
Borrowing Certificate and on the effective date of each Advance or Letter of
Credit issuance, as applicable, as though made at and as of each such date, Bank
shall have timely received the statements, reports and certificates specified in
Section 6.3, and no Event of Default or Potential Default shall have occurred
and be continuing, or would exist immediately after giving effect to such
Advance or Letter of Credit issuance, as applicable. The making of each Advance
and the issuance of each Letter of Credit shall be deemed to be a representation
and warranty by Borrower on the date of such Advance or Letter of Credit
issuance as to the accuracy of the facts referred to in this Section 3(b).
CREATION OF SECURITY INTEREST AS OF THE TRIGGER DATE
Grant of Security Interest. Borrower grants to Bank, effective as of the
Trigger Date, a continuing security interest in all presently existing and
hereafter acquired or arising Collateral in order to secure prompt repayment of
any and all Obligations and in order to secure prompt performance by Borrower of
each of its covenants and duties under the Loan Documents. Such security
interest shall constitute as of the Trigger Date a valid, first priority
security interest in the Collateral existing on the Trigger Date, and will
constitute a valid, first priority security interest in Collateral
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acquired after the Trigger Date.
Delivery of Additional Documentation Required. Borrower shall from time
to time, commencing as of the Trigger Date, execute and deliver to Bank, at
Bank's request, all Negotiable Collateral, all financing statements and other
documents that Bank may reasonably request, in form satisfactory to Bank, to
perfect and continue perfected Bank's Liens in the Collateral and in order to
fully consummate all of the transactions contemplated under the Loan Documents.
Right to Inspect. Bank (through any of its officers, employees, or
agents) shall have the right from time to time, commencing on the Closing Date,
to inspect Borrower's Books and to make copies thereof and to check, test, and
appraise the Collateral in order to verify Borrower's financial condition or the
amount, condition of, or any other matter relating to, the Collateral.
Negative Pledge. Borrower acknowledges that under Section 7.4 hereof it
is prohibited from granting, or suffering to exist, any Lien, other than a
Permitted Lien, against the Collateral. In furtherance of such prohibition,
Borrower hereby agrees that it will not grant, or suffer to exist, any Lien with
respect to any of its personal property that comes within the definition of
Collateral other than Permitted Liens without obtaining the Bank's prior written
consent, given in its sole discretion, to such Lien, and that the Bank may take,
and the Borrower will cooperate in, such actions as the Bank deems necessary to
give notice to other Persons of this Lien prohibition with respect to Borrower's
personal property that comes within the definition of Collateral.
REPRESENTATIONS AND WARRANTIES
Borrower represents and warrants as follows:
Due Organization and Qualification. Each of Borrower and each
Subsidiary is a corporation duly existing and in good standing under the laws of
its state of incorporation and qualified and licensed to do business in, and is
in good standing in, any state in which the conduct of its business or its
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ownership of property requires that it be so qualified.
Due Authorization; No Conflict. The execution, delivery, and performance
of the Loan Documents are within Borrower's powers, have been duly authorized,
and are not in conflict with nor constitute a breach of any provision contained
in Borrower's Restated Certificate of Incorporation or Restated Bylaws, nor, to
the best of Borrower's knowledge, will they constitute an event of default under
any material agreement to which Borrower is a party or by which Borrower is
bound. Borrower is not in default under any agreement to which it is a party or
by which it is bound, which default could have a Material Adverse Effect.
No Prior Encumbrances. Borrower has good and indefeasible title to the
Collateral, free and clear of Liens, except for Permitted Liens.
Bona Fide Eligible Accounts. The Accounts are bona fide existing
obligations of Borrower's Account Debtors, created by the sale or lease of
goods, the licensing of rights, or the rendition of services to Account Debtors
in the ordinary course of Borrower's business, and unconditionally owed to
Borrower. The property giving rise to such Accounts has been delivered to the
Account Debtor or to the Account Debtor's agent for immediate shipment to and
unconditional acceptance by the Account Debtor.
Merchantable Inventory. Substantially all Inventory is in all material
respects of good quality, free from all material defects, and salable, either as
current merchandise or close-out items.
Name; Location of Chief Executive Office. During the five (5) year
period ending on the Closing Date, Borrower has not done business under any name
other than that specified on the signature page hereof and the names MDV
Holdings, Inc. and Van Doren Rubber Company, Inc. As of the date hereof,
Borrower's chief executive office is located at the address indicated in Section
10 hereof.
Litigation. There are no actions or proceedings pending by or against
Borrower or any Subsidiary before any court or administrative
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agency in which an adverse decision could have a Material Adverse Effect or a
material adverse effect on Borrower's interest or, commencing as of the Trigger
Date, Bank's Lien in the Collateral. Borrower does not have knowledge of any
such pending or threatened actions or proceedings.
No Material Adverse Change in Financial Statements. All consolidated
financial statements related to Borrower that Borrower has delivered to Bank
fairly present in all material respects Borrower's consolidated financial
condition as of the date thereof and Borrower's consolidated results of
operations for the period then ended. There has not been a material adverse
change in the consolidated financial condition of Borrower since the date of the
most recent of such financial statements submitted to Bank.
Solvency. Borrower is solvent and able to pay its debts (including trade
debts) as they mature.
Regulatory Compliance. Borrower and each Subsidiary has met ERISA's
minimum funding requirements with respect to any employee benefit plans subject
to ERISA. No event has occurred resulting from Borrower's failure to comply with
ERISA that is reasonably likely to result in Borrower's incurring any liability
that could have a Material Adverse Effect. Neither Borrower nor any Subsidiary
has withdrawn from, and no termination or partial termination has occurred with
respect to, any deferred compensation plan, and neither Borrower nor any
Subsidiary has withdrawn from any multi-employer plan under ERISA. Borrower is
not an "investment company" or a company "controlled" by an "investment company"
within the meaning of the Investment Company Act of 1940. Borrower is not
engaged principally, or as one of the important activities, in the business of
extending credit for the purpose of purchasing or carrying margin stock (within
the meaning of Regulations G, T and U of the Board of Governors of the Federal
Reserve System). Borrower has complied with all the provisions of the Federal
Fair Labor Standards Act to the extent that non-compliance with such provisions
could have a Material Adverse Effect or a material adverse effect on the
Collateral or, commencing as of the Trigger Date, the priority of the Bank's
Lien on the Collateral. Borrower has complied with all statutes, laws,
ordinances, and government rules and regulations to which it is subject,
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non-compliance with which could have a Material Adverse Effect or a material
adverse effect on the Collateral or, commencing on the Trigger Date, the
priority of Bank's Lien on the Collateral.
Environmental Condition. None of Borrower's or any Subsidiary's
properties or assets has ever been used by Borrower or any Subsidiary or, to the
best of Borrower's knowledge, by previous owners or operators, in the disposal
of, or to produce, store, handle, treat, release, or transport, any hazardous
waste or hazardous substance other than in accordance with applicable law; to
the best of Borrower's knowledge, none of Borrower's properties or assets has
ever been designated or identified in any manner pursuant to any environmental
protection statute as a hazardous waste or hazardous substance disposal site, or
a candidate for closure pursuant to any environmental protection statute; no
Lien arising under any environmental protection statute has attached to any
revenues or to any real or personal property owned by Borrower or any
Subsidiary; and neither Borrower nor any Subsidiary has received a summons,
citation, notice, or directive from the Environmental Protection Agency or any
other federal or state governmental agency concerning any action or omission by
Borrower or any Subsidiary relating to the release or disposal of hazardous
waste or hazardous substances.
Taxes. Borrower and each Subsidiary has filed or caused to be filed all
tax returns required to be filed, and has paid, or has made adequate provision
for the payment of, all taxes reflected therein.
Permitted Investments. Borrower does not have any Investment other than
(i) Permitted Investments and (ii) stock, partnership interest and other equity
securities of each Subsidiary disclosed to and approved by Bank as of the date
hereof.
Government Consents. Borrower and each Subsidiary has obtained all
consents, approvals and authorizations of, made all declarations or filings
with, and given all notices to, all governmental authorities that are necessary
for the continued operation of Borrower's business as currently conducted.
Full Disclosure. No representation, warranty or other
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statement made by Borrower in any certificate or written statement furnished to
Bank contains any untrue statement of a material fact or omits to state a
material fact necessary in order to make the statements contained in such
certificates or statements not misleading.
AFFIRMATIVE COVENANTS
Borrower covenants and agrees that, until payment in full of all
Obligations, and for so long as Bank is committed to make an Advance or issue a
Letter of Credit hereunder, Borrower shall do all of the following:
Good Standing. Borrower shall maintain its and each of the Subsidiaries'
corporate existence and good standing in its jurisdiction of incorporation and
maintain qualification in each jurisdiction in which the failure to so qualify
could have a Material Adverse Effect. Borrower shall maintain, and shall cause
each of the Subsidiaries to maintain, to the extent consistent with prudent
management of Borrower's business, in force all licenses, approvals and
agreements, the loss of which could have a Material Adverse Effect.
Government Compliance. Borrower shall meet, and shall cause each
Subsidiary to meet, ERISA's minimum funding requirements with respect to any
employee benefit plans subject to ERISA. Borrower shall comply, and shall cause
each Subsidiary to comply, with all statutes, laws, ordinances and government
rules and regulations to which it is subject, noncompliance with which could
have a Material Adverse Effect or a material adverse effect on the Collateral
or, commencing on the Trigger Date, the priority of Bank's Lien on the
Collateral.
Financial Statements, Reports, Certificates. Borrower shall maintain a
standard system of accounting in accordance with GAAP. Borrower shall deliver to
Bank: (a) within five (5) days upon becoming available, but in any event within
fifty (50) days after the end of Borrower's fiscal quarter, the report on Form
10-Q filed or required to be filed with the Securities and Exchange Commission
and a Compliance Certificate signed by a Responsible Officer in form and
substance acceptable to Bank; (b) within five (5) days upon becoming available,
but in any event within ninety-five (95)
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days after the end of Borrower's fiscal year, the report on Form 10-K filed or
required to be filed with the Securities and Exchange Commission; (c) promptly
upon receipt of notice thereof, a report of any legal actions pending or
threatened against Borrower or any Subsidiary that could result in damages or
costs to Borrower or any Subsidiary of Five Hundred Thousand Dollars ($500,000)
or more; (d) promptly upon their becoming available (and in any event within
five (5) Business Days thereafter), copies of (i) all financial statements,
reports, notices, proxy statements and other information that Borrower sends or
generally makes available to any class of its security holders or that any
Subsidiary sends or generally makes available to any class of its security
holders, (ii) all regular and periodic reports and all registration statements,
forms and prospectuses that Borrower or any Subsidiary files with any securities
exchange or with the Securities and Exchange Commission, to the extent that such
documents are not already required to be delivered under clauses (a) and (b) of
this Section 6.3, and (iii) all press releases and other statements that
Borrower or any Subsidiary makes generally available to the public concerning
material developments in the business of Borrower or any Subsidiary; (e) within
fifteen (15) days after the end of each calendar month after the Closing Date
during which the Borrowing Base formula is in effect, (i) a detailed aged trial
balance of the Accounts, in form and substance satisfactory to Bank, in its sole
discretion, including, without limitation, the names and addresses of all
Account Debtors, (ii) a detailed accounts payable aging, in form and substance
satisfactory to Bank, in its sole discretion, (iii) an inventory report, in form
and substance satisfactory to Bank, in its sole discretion, and (iv) a backlog
report, in form and substance satisfactory to Bank, in its sole discretion; and
(f) such budgets, sales projections, operating plans or other financial
information as Bank may reasonably request from time to time.
Bank shall have a right from time to time hereafter to conduct a field
exam and to audit Accounts and Inventory at Borrower's expense, provided that
such audits will be conducted no more often than once every six (6) months,
unless an Event of Default has occurred and is continuing, in which case Bank
may conduct such audits, at Borrower's expense, as frequently as Bank deems
appropriate.
Bank may destroy or otherwise dispose of any documents delivered to
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Bank six (6) months after Bank's receipt thereof.
Inventory. Borrower shall keep all Inventory in good and marketable
condition, free from all material defects. Returns and allowances, if any, as
between Borrower and its Account Debtors shall be on the same basis and in
accordance with the usual customary practices of Borrower, as they exist at the
time of the Closing Date. Borrower shall promptly notify Bank of all returns and
recoveries and of all disputes and claims, where the return, recovery, dispute
or claim involves more than One Hundred Thousand Dollars ($100,000).
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Taxes. Borrower shall make, and shall cause each Subsidiary to make, due
and timely payment or deposit of all material federal, state, and local taxes,
assessments, or contributions required of it by law, and shall execute and
deliver to Bank, on demand, appropriate certificates attesting to the payment or
deposit thereof; and Borrower shall make, and shall cause each Subsidiary to
make, timely payment or deposit of all material tax payments and withholding
taxes required of it by applicable laws, including, but not limited to, those
laws concerning F.I.C.A., F.U.T.A., state disability, and local, state, and
federal income taxes, and will, upon request, furnish Bank with proof
satisfactory to Bank indicating that Borrower or a Subsidiary has made such
payments or deposits; provided that Borrower or a Subsidiary need not make any
payment if the amount or validity of such payment is contested in good faith by
appropriate proceedings and is reserved against (to the extent required by
GAAP).
Insurance. Borrower, at its expense and with such companies as are
reasonably acceptable to Bank, shall maintain business interruption and
liability insurance and fire, theft and other hazard insurance which covers the
Collateral, which insurance shall be in such amounts as are ordinarily carried
by other owners in similar businesses conducted in the locations where
Borrower's business is conducted on the date hereof. All such liability
insurance policies shall show Bank as an additional insured or loss payee, as
applicable, and shall specify that the insurer must give at least twenty (20)
days' notice to Bank before canceling its policy for any reason. Borrower shall
deliver to Bank certified copies of such policies of insurance and evidence of
the payments of all premiums therefor.
Further Assurances. At any time and from time to time Borrower shall
execute and deliver such further instruments and take such further action as may
reasonably be requested by Bank to effect the purposes hereof.
NEGATIVE COVENANTS
Borrower covenants and agrees that, until payment in full of all
Obligations, and for so long as Bank is committed to make an Advance or issue a
Letter of Credit hereunder, Borrower will not do any of the following:
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Change in Business. Suspend or go out of business, engage in any
business, or permit any of the Subsidiaries to engage in any business, other
than the businesses currently engaged in by Borrower and any business
substantially similar or related thereto (or incidental thereto). Borrower will
not, without thirty (30) days' prior written notification to Bank, relocate its
chief executive office.
Mergers or Acquisitions. Merge or consolidate, or permit any of the
Subsidiaries to merge or consolidate, with or into any other business
organization, or acquire, or permit any of the Subsidiaries to acquire, all or a
substantial portion of the capital stock or property of another Person or sell
or otherwise dispose of all or substantially all of its assets; provided,
however, that Borrower may, upon prior notice to Bank, but without obtaining
Bank's consent, merge or consolidate with or into another business organization
or acquire, or permit any of the Subsidiaries to acquire, all or a substantial
portion of the capital stock, assets, or property of another Person if no Event
of Default then exists and no Event of Default would exist upon the closing of
merger, consolidation or acquisition.
Indebtedness. Create, incur, assume or be or remain liable with respect
to any Indebtedness, or permit any Subsidiary so to do, other than Permitted
Indebtedness.
Encumbrances. Create, incur, assume or suffer to exist any Lien with
respect to any of its property, or assign or otherwise convey any right to
receive income, including the sale of any Accounts, or permit any of the
Subsidiaries so to do, except for Permitted Liens.
Distributions. Pay any dividends or make any other distribution or
payment on account of or in redemption, retirement or purchase of any capital
stock other than the purchase of Borrower's stock from former employees,
consultants or agents of Borrower.
Current Ratio. Permit the ratio of Consolidated Current Assets to
Consolidated Current Liabilities to be less than 2.50 to 1.00 as of the last day
of any fiscal quarter of Borrower.
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Quick Ratio. Permit the ratio of Consolidated Quick Assets to
Consolidated Current Liabilities to be less than 1.50 to 1.00 on the last day of
any fiscal quarter of Borrower.
Interest Coverage Ratio. Permit the ratio of EBIT to Consolidated
Interest Charges to be less than 3.00 to 1.00, on the last day of any fiscal
quarter, with the ratio for each such date determined for the period of the four
(4) fiscal quarters of Borrower ended on such date.
Adjusted Consolidated Tangible Net Worth. Permit, on the last day of any
fiscal quarter of Borrower, Adjusted Consolidated Tangible Net Worth to be less
than the Minimum Amount for such fiscal quarter. For purposes of this Section
7.9, the "Minimum Amount" shall be (i) for the fiscal quarter ending December
31, 1996, Fifty Million Dollars ($50,000,000), and (ii) for each fiscal quarter
thereafter, the sum of the Minimum Amount for the immediately preceding fiscal
quarter plus seventy-five percent (75%) (zero percent (0%), in the case of a
deficit) of Consolidated Net Income for such immediately preceding fiscal
quarter.
Working Capital. Permit, on the last day of any fiscal quarter of
Borrower, Working Capital to be less than Thirty Million Dollars ($30,000,000).
Leverage Ratio. Permit, on the last day of any fiscal quarter of
Borrower, the ratio of Total Liabilities to Adjusted Consolidated Tangible Net
Worth to be more than .50 to 1.00.
Quarterly Losses. Permit Consolidated Net Income in any fiscal quarter
of Borrower to be less than zero.
Investments. Directly or indirectly acquire or own, or make any
Investment in or to any Person, or permit any of the Subsidiaries so to do,
other than Permitted Investments.
Transactions with Affiliates. Directly or indirectly enter into or
permit to exist any material transaction with any Affiliate of Borrower
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except for (i) transactions that are in the ordinary course of Borrower's
business, upon fair and reasonable terms that are no less favorable to Borrower
than would be obtained in an arm's length transaction with a nonaffiliated
Person, and (ii) payment to MDC Management Company of compensation in connection
with the rendering by MDC Management Company to Borrower of consulting and
financial services, provided that the compensation paid by Borrower to MDC
Management Company in respect thereof does not exceed Three Hundred Fifty
Thousand Dollars ($350,000) for any fiscal year of Borrower.
Inventory. Store the Inventory with a bailee, warehouseman, or similar
party unless Bank has received a pledge of the warehouse receipt covering such
Inventory. Except for Inventory sold in the ordinary course of business and
except for such other locations as Bank may approve in writing, which approval
shall not be unreasonably withheld, conditioned or delayed, Borrower shall keep
the Inventory only at the location set forth in Section 10 hereof, Borrower's
Vista plant, Borrower's retail stores and such other locations of which Borrower
gives Bank prior written notice and as to which Borrower signs and files a
financing statement where needed to perfect Bank's security interest.
Subordinated Debt. Make any payment in respect of any Subordinated Debt,
or permit any of the Subsidiaries to make any such payment, except in compliance
with any applicable subordination agreement or with the terms of such
Subordinated Debt, or amend any provision contained in any documentation
relating to the Subordinated Debt without Bank's prior written consent, which
approval shall not be unreasonably withheld, conditioned or delayed.
Compliance. Become an "investment company" or controlled by an
"investment company," within the meaning of the Investment Company Act of 1940,
or become principally engaged in, or undertake as one of its important
activities, the business of extending credit for the purpose of purchasing or
carrying margin stock, or use the proceeds of any Advance for such purpose. Fail
to meet ERISA's minimum funding requirements, permit a Reportable Event or
Prohibited Transaction, as such terms are defined in ERISA, to occur, permit any
condition to exist that would entitle any Person
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to obtain a decree adjudicating that any plan under ERISA must be terminated,
fail to comply with the Federal Fair Labor Standards Act in any way which could
have a Material Adverse Effect or violate any law or regulation, which violation
could have a Material Adverse Effect or a material adverse effect on the
Collateral or, commencing on the Trigger Date, the priority of Bank's Lien on
the Collateral, or permit any of the Subsidiaries to do any of the foregoing.
EVENTS OF DEFAULT
Any one or more of the following events shall constitute an Event of
Default hereunder:
Payment Default. If Borrower fails to pay (i) any interest or principal
Obligations when due and payable or (ii) any Obligations, other than interest
and principal Obligations, within five (5) days of the date due and payable;
Covenant Default. If Borrower fails or neglects to perform, keep, or
observe any other term, provision, condition, covenant, or agreement contained
herein, in any of the Loan Documents, or in any other present or future
agreement between Borrower and Bank;
Material Adverse Effect. If there occurs an event that has a Material
Adverse Effect or, commencing on the Trigger Date, a material impairment of the
value or priority of Bank's Lien against the Collateral;
Attachment. If all or any portion of Borrower's assets is attached,
seized, subjected to a writ or distress warrant, or is levied upon, or comes
into the possession of any trustee, receiver or person acting in a similar
capacity and such attachment, seizure, writ or distress warrant or levy has not
been removed, discharged or rescinded within thirty (30) days, or if Borrower is
enjoined, restrained, or in any way prevented by court order from continuing to
conduct all or any part of its business affairs, or if a judgment or other claim
becomes a Lien upon any portion of Borrower's assets, or if a notice of Lien,
levy, or assessment is filed of record with respect to any of Borrower's assets
by the United States Government, or any department,
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agency, or instrumentality thereof, or by any state, county, municipal, or
governmental agency, and the same is not paid within ten (10) days after
Borrower receives notice thereof; provided that Bank shall not be required to
make any Advances or issue any Letters of Credit during such cure period;
Insolvency. If an Insolvency Proceeding is commenced by Borrower, or if
an Insolvency Proceeding is commenced against Borrower and is not dismissed or
stayed within sixty (60) days; provided that Bank shall not be required to make
any Advances or issue any Letters of Credit prior to the dismissal of such
Insolvency Proceeding;
Other Agreements. If there is a default in any agreement to which
Borrower is a party with a third party or parties resulting in a right by such
third party or parties, whether or not exercised, to accelerate the maturity of
any Indebtedness if such default could have a Material Adverse Effect;
Judgments. If a judgment or judgments for the payment of money in an
amount, individually or in the aggregate, which could have a Material Adverse
Effect shall be rendered against Borrower and shall remain unsatisfied and
unstayed for a period of thirty (30) days (provided that no Advances will be
made prior to the satisfaction or stay of such judgment); or
Misrepresentations. If a material misrepresentation or misstatement
exists now or hereafter in any warranty or representation set forth herein or in
any certificate delivered to Bank by any Responsible Officer pursuant to this
Agreement or to induce Bank to enter into this Agreement or any other Loan
Document.
BANK'S RIGHTS AND REMEDIES
Rights and Remedies. Upon the occurrence and during the continuance of
an Event of Default, Bank may, at its election, without notice of its election
and without demand, do any one or more of the following, all of which are
authorized by Borrower:
Declare all Obligations, whether evidenced by this
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Agreement, by any of the other Loan Documents, or otherwise, immediately due and
payable (provided that upon the occurrence of an Event of Default described in
Section 8.5 all Obligations shall become immediately due and payable without any
action by Bank);
Cease making Advances, issuing Letters of Credit or
otherwise extending credit to or for the benefit of Borrower hereunder or under
any other agreement between Borrower and Bank;
Commencing on the Trigger Date, settle or adjust disputes
and claims directly with Account Debtors for amounts, upon terms and in whatever
order that Bank reasonably considers advisable;
Make such payments and do such acts as Bank considers
necessary or reasonable to protect its Lien on the Collateral, to the extent
that such Lien exists. Commencing on the Trigger Date, Borrower agrees to make
the Collateral available to Bank as Bank designates. Borrower authorizes Bank to
enter the premises where the Collateral is located, to take and maintain
possession of the Collateral, or any part of it, and to pay, purchase, contest,
or compromise any Lien which in Bank's determination appears to be prior or
superior to its Lien and to pay all expenses incurred in connection therewith.
With respect to any of Borrower's owned premises, Borrower hereby grants Bank a
license to enter into possession of such premises and to occupy the same,
without charge, for up to one hundred twenty (120) days in order to exercise any
of Bank's rights or remedies provided herein, at law, in equity, or otherwise;
Without notice to Borrower set off and apply to the
Obligations any and all (i) balances and deposits of Borrower held by Bank, or
(ii) indebtedness at any time owing to or for the credit or the account of
Borrower held by Bank;
Commencing on the Trigger Date, ship, reclaim, recover,
store, finish, maintain, repair, prepare for sale, advertise for sale, and sell
(in the manner provided for herein) the Collateral. Bank is hereby granted,
effective as of the Trigger Date, a license or other right, solely pursuant to
the provisions of this Section 9.1, to use, without charge,
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Borrower's labels, patents, copyrights, rights of use of any name, trade
secrets, trade names, trademarks, service marks, and advertising matter, or any
property of a similar nature, as it pertains to the Collateral, in completing
production of, advertising for sale, and selling any Collateral and, in
connection with Bank's exercise of its rights under this Section 9.1, Borrower's
rights under all licenses and all franchise agreements shall inure to Bank's
benefit, and Bank shall not be obligated to pay any compensation to Borrower or
any other Person in connection with the exercise of such rights;
Commencing on the Trigger Date, sell the Collateral at either a public
or private sale, or both, by way of one or more contracts or transactions, for
cash or on terms, in such manner and at such places (including, without
limitation, Bank's or Borrower's premises) as Bank determines is reasonable;
Commencing on the Trigger Date, Bank may credit bid and purchase at any
public sale; and
Any deficiency that exists after disposition of the Collateral on or
after the Trigger Date as provided above shall be paid immediately by Borrower.
Power of Attorney. Borrower hereby irrevocably appoints Bank (and any of
Bank's designated officers, employees or agents) as Borrower's true and lawful
attorney, with the power, commencing on the Trigger Date, to: (a) send requests
for verification of Accounts or notify Account Debtors of Bank's Lien against
the Accounts, provided that at the time of the verification request or
notification an Event of Default has occurred and is continuing; (b) endorse
Borrower's name on any checks or other forms of payment or security that may
come into Bank's possession which constitute proceeds of any of the Collateral;
(c) sign Borrower's name on any invoice or bill of lading relating to any
Account, drafts against Account Debtors, schedules and assignments of Accounts,
verifications of Accounts, and notices to Account Debtors; and (d) during the
continuance of an Event of Default, settle and adjust disputes and claims
respecting the accounts directly with Account Debtors for amounts and upon terms
which Bank determines to be reasonable; provided Bank may exercise such power of
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attorney to sign the name of Borrower on any of the documents described in
Section 4.2 regardless of whether an Event of Default is continuing. The Bank's
appointment as Borrower's attorney in fact, and each and every one of Bank's
rights and powers, being coupled with an interest, is irrevocable until all of
the Obligations are fully satisfied and Bank's obligation to make Advances and
issue Letters of Credit hereunder is terminated or expires.
Accounts Collection. Provided that the Trigger Date has occurred, Bank
may, at any time during the continuance of an Event of Default, notify any
Person owing funds to Borrower which constitute part of the Collateral of Bank's
Lien against such funds. Commencing as of the Trigger Date, Borrower shall
collect all amounts owing to Borrower which constitute part of the Collateral
for Bank, receive in trust all payments as Bank's trustee, and immediately
deliver such payments to Bank in their original form as received from the
Account Debtor, with proper endorsements for deposit.
Bank Expenses. If Borrower fails to pay any amounts or furnish any
required proof of payment due to third persons or entities, as required under
the terms hereof, then Bank may do any or all of the following: (a) make payment
of the same or any part thereof; (b) set up such Reserves as Bank deems
necessary to protect it from the exposure created by such failure; or (c) obtain
and maintain insurance policies of the type described in Section 6.6 hereof, and
take any action with respect to such policies as Bank deems prudent. Any amounts
so paid or deposited by Bank shall constitute Bank Expenses, shall be
immediately due and payable, and shall bear interest at the Prime Interest Rate
then in effect. Any payments made by Bank shall not constitute an agreement by
Bank to make similar payments in the future or a waiver by Bank of any Event of
Default.
Bank's Liability for Collateral. So long as Bank complies with
reasonable banking practices, Bank shall not in any way or manner be liable or
responsible for any diminution in the value of any Collateral.
Remedies Cumulative. Bank's rights and remedies hereunder, the other
Loan Documents, and by law shall be cumulative. Bank shall have all other rights
and remedies not inconsistent herewith as provided
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under the Code, by law, or in equity. No exercise by Bank of one right or remedy
shall be deemed an election, and no waiver by Bank of any Event of Default on
Borrower's part shall be deemed a continuing waiver. No delay by Bank shall
constitute a waiver, election, or acquiescence by it. No waiver by Bank shall be
effective unless in writing.
Demand; Protest; Application. Borrower waives demand, protest, notice of
protest, notice of default or dishonor, notice of payment and nonpayment, notice
of any default, nonpayment at maturity, release, compromise, settlement,
extension, or renewal of accounts, documents, instruments, chattel paper, and
guarantees at any time held by Bank on which Borrower may in any way be liable.
Borrower waives any right to direct the application of any amount received by
Bank.
NOTICES
Unless otherwise provided herein, all notices or demands by any party
relating to this Agreement or any other Loan Document shall be in writing and
(except for financial statements and other informational documents, which may be
sent by first-class mail, postage prepaid) shall be personally delivered or sent
by a recognized, overnight delivery service or by certified mail, postage
prepaid, return receipt requested, or by facsimile to Borrower or Bank, as the
case may be, at its address set forth below:
If to Borrower: Vans, Inc.
15700 Shoemaker Avenue
Sante Fe Springs, CA 90670
Attn: Craig E. Gosselin, Esq.,
Vice President and General Counsel
FAX: (562) 565-8402
If to Bank: Bank of the West
1450 Treat Blvd.
Walnut Creek, CA 94596
Attn: Mr. Dale J. Kobsar
FAX: (510) 930-5635
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Either party may change its address for notices by written notice given in the
foregoing manner to the other.
CHOICE OF LAW AND VENUE; JURY TRIAL WAIVER
This Agreement shall be governed by, and construed in accordance with,
the internal laws of the State of California, without regard to conflicts of law
principles. Each of Borrower and Bank hereby submits to the exclusive
jurisdiction of the state and Federal courts located in the County of San
Francisco, State of California. BORROWER AND BANK EACH HEREBY WAIVE THEIR
RESPECTIVE RIGHTS TO A JURY TRIAL OF ANY CLAIM OR CAUSE OF ACTION BASED UPON OR
ARISING OUT OF ANY OF THE LOAN DOCUMENTS OR ANY OF THE TRANSACTIONS CONTEMPLATED
THEREIN, INCLUDING CONTRACT CLAIMS, TORT CLAIMS, BREACH OF DUTY CLAIMS, AND ALL
OTHER COMMON LAW OR STATUTORY CLAIMS. EACH PARTY RECOGNIZES AND AGREES THAT THE
FOREGOING WAIVER CONSTITUTES A MATERIAL INDUCEMENT FOR IT TO ENTER INTO THIS
AGREEMENT. EACH PARTY REPRESENTS AND WARRANTS THAT IT HAS REVIEWED THIS WAIVER
WITH ITS LEGAL COUNSEL AND THAT IT KNOWINGLY AND VOLUNTARILY WAIVES ITS JURY
TRIAL RIGHTS FOLLOWING CONSULTATION WITH LEGAL COUNSEL.
GENERAL PROVISIONS
Successors and Assigns. This Agreement shall bind and inure to the
benefit of the respective successors and permitted assigns of each of the
parties; provided, however, that neither this Agreement nor any rights hereunder
may be assigned by Borrower without Bank's prior written consent, which may be
granted or withheld in Bank's sole discretion. Bank shall have the right without
the consent of or notice to Borrower to sell, transfer, negotiate, or grant
participations in all or any part of, or any interest in, Bank's obligations,
rights and benefits hereunder.
Indemnification. Borrower shall defend, indemnify and hold harmless Bank
and its officers, employees, and agents against: (a) all
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obligations, demands, claims, and liabilities claimed or asserted by any other
party in connection with the transactions contemplated by this Agreement; and
(b) all losses or Bank Expenses in any way suffered, incurred, or paid by Bank
as a result of or in any way arising out of, following, or consequential to
transactions between Bank and Borrower whether hereunder, or otherwise
(including without limitation reasonable attorneys fees and expenses), except
for losses caused by Bank's gross negligence or willful misconduct.
Time of Essence. Time is of the essence for the performance of all
obligations set forth herein.
Severability of Provisions; Headings. Each provision of this Agreement
shall be severable from every other provision of this Agreement for the purpose
of determining the legal enforceability of any specific provision. Headings are
set forth herein for convenience only.
Amendments; Integration. This Agreement cannot be changed or terminated
orally. All prior agreements, understandings, representations, warranties, and
negotiations between the parties hereto with respect to the subject matter
hereof, if any, are merged into this Agreement and the Loan Documents.
Counterparts. This Agreement may be executed in any number of
counterparts and by different parties on separate counterparts, each of which,
when executed and delivered, shall be deemed to be an original, and all of
which, when taken together, shall constitute but one and the same Agreement.
Survival. All covenants, representations and warranties made herein
shall continue in full force and effect so long as any Obligations remain
outstanding. Borrower's obligations to indemnify Bank with respect to the
expenses, damages, losses, costs and liabilities described in Section 12.2 shall
survive until all applicable statute of limitations periods with respect to
actions that may be brought against Bank have run.
Confidentiality. Bank shall not disclose to any third party any
Confidential Information disclosed to Bank pursuant to the Loan
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Documents, except that (i) the Bank may disclose Confidential Information to a
third party to the extent compelled by law, subpoena, civil investigative
demand, interrogatories or similar legal process, and (ii) Bank may disclose
Confidential Information to a potential transferee of or participant in the Loan
Documents, provided that the potential transferee or participant agrees to be
bound by the same confidentiality obligations as Bank under this section. For
purposes hereof, Confidential Information is information disclosed by Borrower
to Bank pursuant to the Loan Documents that is not information which (i) becomes
generally available to the public, other than as a result of disclosure by Bank,
(ii) was available on a non-confidential basis prior to its disclosure to Bank
by Borrower, or (iii) becomes available to Bank on a non-confidential basis from
a source other than Borrower.
No Novation. This Amended and Restated Loan and Security Agreement is
not intended to be, and shall not be construed to create, a novation or accord
and satisfaction, and, except as otherwise provided herein, the Loan and
Security Agreement, as executed and delivered on July 1, 1995, and amended and
restated prior to the execution hereof, shall remain in full force and effect.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed as of the date first above written.
VANS, INC.
By:
Title:
By:
Title:
BANK OF THE WEST
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By:
Dale J. Kobsar
Regional Vice President
<PAGE> 1
EXHIBIT 10.3
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT ( "Agreement" herein) is entered into
as of November 1, 1997, by and between VANS, INC., a Delaware corporation (the
"Company"), and SCOTT BRABSON ("Employee").
1. Employment and Duties. The Company hereby employs Employee as
Vice President - Sourcing of the Company on the terms and subject to the
conditions contained in this Agreement. Employee shall be responsible for
managing and supervising all aspects of the Company's product - sourcing
operations. Employee hereby accepts such employment and agrees to perform in
good faith and to the best of Employee's ability all services which may be
required of Employee hereunder, to do what is asked of him, and to be available
to render services at all times and places in accordance with such directions,
requests, rules and regulations made by the Company in connection with
Employee's employment. Employee hereby acknowledges and understands the duties
and services that are expected of him hereunder, and he hereby represents that
he has the experience and knowledge to perform such duties and services.
Employee shall, during the term hereof, devote Employee's full time and energy
to performing his duties. Employee shall report to the President and Chief
Executive Officer. Employee shall be based at the Company's corporate offices.
Employee understands, however, that Employee may be required to travel within
and out of the State of California to discharge his duties hereunder.
2. Term of Employment. The term of this Agreement shall commence
as of the date hereof and shall terminate on October 31, 2000, unless sooner
terminated as provided herein. This Agreement does not give Employee any
enforceable right to employment beyond this term, and Employee agrees that he
shall have no rights hereunder thereafter. AS PROVIDED FURTHER IN PARAGRAPH 11.1
BELOW, THIS AGREEMENT CONSTITUTES AN EMPLOYMENT AT-WILL THAT MAY BE TERMINATED
AT ANY TIME BY COMPANY OR EMPLOYEE, WITH OR WITHOUT CAUSE, NOTWITHSTANDING THE
THREE - YEAR TERM OF THIS AGREEMENT. IF EMPLOYEE IS TERMINATED WITHOUT CAUSE
DURING THE TERM HEREOF, OR AFTER A "CHANGE IN MANAGEMENT OR CONTROL," AS DEFINED
IN PARAGRAPH 11.5 BELOW, OR TERMINATES THIS AGREEMENT FOR "GOOD REASON," AS
DEFINED IN PARAGRAPH 11.3 BELOW, EMPLOYEE'S SOLE REMEDY SHALL BE THE
COMPENSATION SET FORTH IN PARAGRAPH 11.4 BELOW.
Initial /s/ Initial /s/
----------- -----------
Representative Employee
of the Company
<PAGE> 2
3. Salary Compensation. As salary compensation for Employee's
services hereunder and all the rights granted hereunder by Employee to the
Company, the Company shall pay Employee a gross salary of $170,000 per annum.
Employee's salary shall be payable in bi-weekly increments in accordance with
the Company's payroll practices for salaried employees, upon the condition that
Employee fully and faithfully performs Employee's services hereunder in
accordance with the terms and conditions of this Agreement. The Company shall
deduct and withhold from the compensation payable to Employee hereunder any and
all amounts required to be deducted or withheld by the Company under the
provisions of any statute, regulation, ordinance, or order and any and all
amendments hereinafter enacted requiring the withholding or deducting from
compensation payable to employees.
4. Expense Reimbursement. Employee shall be reimbursed by the
Company for all traveling, hotel, entertainment and other expenses that are
properly and necessarily incurred by Employee, pursuant to the Company's
policies on the same.
5. Death or Disability of Employee.
5.1 General. In the event of Employee's death or
"disability" (as such term is defined in Paragraph 5.2 hereof) while in the
employ of the Company, this Agreement, and the compensation due to Employee
pursuant to Paragraph 3 hereof, shall terminate upon the date of death or
disability and the Company shall thereafter be required to make payments only to
Employee, as provided in Paragraph 11.2 hereof. If Employee shall recover from
such disability prior to the expiration date of the Agreement, this Agreement
and Employee's employment hereunder shall be reinstated for the balance of the
term of this Agreement.
5.2 Definition of Disability. Employee shall be deemed
disabled if, in the sole opinion of the Company, Employee is unable to
substantially perform the services required of Employee hereunder for a period
in excess of 60 consecutive work days or 60 work days during any 90 work day
period. In such event, Employee shall be deemed disabled as of such 60th
workday.
6. Restrictive Covenant. During the term of this
Agreement, Employee shall (i) devote his full time and energy solely and
exclusively to the performance of his duties described herein; (ii) not directly
or indirectly provide services to or through any company or firm except the
Company unless otherwise instructed by the Company; (iii) not directly or
indirectly own, manage, operate, join, control, contribute to, or participate in
the ownership, management, operation or control of or be employed by or
connected in any manner with any enterprise which is engaged in any business
competitive with or similar to that of the Company; and (iv) not render any
services of
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any kind or character for Employee's own account of for any other person, firm
or corporation without first obtaining the Company's consent in writing;
provided, however, Employee shall have the right to perform such incidental
services as are necessary in connection with Employee's (a) private passive
investments where he is not obligated or required to, and shall not in fact,
devote any managerial efforts, as long as such investments are not in companies
which are in competition in any way with the Company; or (b) charitable or
community activities, or in trade or professional organizations, provided that
such incidental services do not interfere with the performance of Employee's
services hereunder.
7. Non-Solicitation. Employee shall not, during the full term of
this Agreement and for a period of one (1) year thereafter, for himself or on
behalf of any other person, partnership, corporation or entity, directly or
indirectly, or by action in concert with others, solicit, induce, suggest or
encourage any person known to him to be an employee of the Company or any
affiliate of the Company to terminate his or her employment or other contractual
relationship with the Company or any of its affiliates.
8. Trade Secrets and Related Matters
8.1 Definitions. For purpose of this Section 8:
(a) "Records" means files, accounts, records,
log books, documents, drawings, sketches, designs, diagrams, models, plans,
blueprints, specifications, manuals, books, forms, notes, reports, memoranda,
studies, surveys, software, flow charts, data, computer programs, listing of
source code, calculations, recordings, catalogues, compilations of information,
correspondence, confidential data of customers and all copies, abstracts or
summaries of the foregoing in any storage medium, as well as instruments, tools,
storage devices, disks, equipment and all other physical items related to the
business of the Company (other than merely personal items of a general
professional nature), whether of a public nature or not, and whether prepared by
Employee or not.
(b) "Trade Secrets" means confidential business
or technical information or trade secrets of the Company which Employee acquires
while employed by the Company, whether or not conceived of, developed or
prepared by Employee or at his direction and includes:
(i) Any information or compilation of
information concerning the Company's financial position, financing, purchasing,
accounting, marketing, merchandising, sales, salaries, pricing, investments,
costs, profits, plans for future development, employees, prospective employees,
research, development, formulae, patterns, inventions, plans, specifications,
devices, products, procedures, processes, operations, techniques, software,
computer programs or data;
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<PAGE> 4
(ii) Any information or compilation of
information concerning the identity, plans, requirements, preferences, practices
and methods of doing business on specific customers, suppliers, prospective
customers and prospective suppliers of the Company;
(iii) Any other information or "know how" which
is related to any product, process, service, business or research of the
Company; and
(iv) Any information which the Company acquires
from another party and treats as its proprietary information or designates as
"Confidential," whether or not owned or developed by the Company.
Notwithstanding the foregoing, "Trade Secrets" do not include any of the
following:
(i) Information which is publicly known or which
is generally employed by the trade, whether on or after the date that Employee
first acquires the information;
(ii) General information or knowledge which
Employee would have learned in the course of similar work elsewhere in the
trade; or
(iii) Information which Employee can prove was
known by Employee before the commencement of Employee's engagement by the
Company;
8.2 Acknowledgments. Employee acknowledges that:
(a) Employee's relationship with the Company will
be a confidential relationship in which Employee will have access to and may
create Trade Secrets.
(b) The Company uses the Trade Secrets in its
business to obtain a competitive advantage over its competitors who do not know
or use that information.
(c) The protection of the Trade Secrets against
unauthorized disclosure or use is of critical importance in maintaining the
competitive position of the Company.
8.3 Protection of Trade Secrets. Employee shall not at
any time, without the prior written consent of the Company, which may be
withheld by it in its sole and absolute discretion, disclose any Trade Secret in
any way except to employees of the Company, and shall not use any Trade Secret
in any way except in connection with his or her duties to the Company.
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<PAGE> 5
8.4 Records.
(a) Ownership. All Records are and shall remain
the exclusive property of the Company.
(b) Return of Records. At the termination of
this Agreement, Employee shall promptly return to the Company all records in
Employee's possession or over which Employee has control.
8.5 Prohibited Use of Trade Secrets. During the term of
this Agreement and for 12 months following termination of this Agreement,
Employee shall not undertake any employment or consulting relationship (the "New
Activity") if the loyal and complete fulfillment of his or her duties in the New
Activity would inherently call upon Employee to reveal any Trade Secret.
9. Ownership of Material and Ideas. Employee agrees that all material,
ideas, and inventions pertaining to the business of the Company or of any client
of the Company, including but not limited to, all patents and copyrights thereon
and renewals and extensions thereof, trademarks and trade names, and the names,
addresses and telephone numbers of customers, distributors and sales
representatives of the Company, belong solely to the Company. Employee hereby
assigns any rights he may have to any such property to the Company, and agrees
to execute and deliver any documents which evidence such assignment.
10. Employee Plans, etc. Employee shall be entitled to
participate, to the same extent as most other officers of the Company, in any
bonus compensation plan, stock purchase or stock option plan, group life
insurance plan, group medical insurance plan and other compensation or employee
benefit plans (collectively, "Plans") which are generally available to a
majority of the other officers of the Company during the term hereof and for
which Employee shall qualify. Employee further understands, however, that the
Board of Directors, or such committee or person or persons designated by the
Board of Directors, shall determine in its sole discretion (i) whether any Plans
are made available to a majority of the officers of the Company; (ii) whether
one or more Plans are adopted solely for the Chief Executive Officer and/or one
or more (but not a majority) of the officers of the Company; (iii) whether one
or more Plans are made available to a majority of the officers; and (iv) the
amounts payable or the benefits provided thereunder to each participant in whole
or in part. Employee agrees and acknowledges that he has no vested interest in
the continuance of any Plan, and that no Plan in existence on the date of the
Agreement has acted as a material inducement to Employee in entering into this
Agreement. Notwithstanding anything to the contrary contained in this Section10:
(i) Employee shall be entitled to receive yearly bonus under the Company's Bonus
Plan, up to thirty percent (30%) of his gross salary on the date each such Plan
commences; (ii) One-half of Employee's bonus for fiscal year ending May 31, 1998
shall be guaranteed; and (iii) the Company shall recommend to the Compensation
Committee of the Board of Directors
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that Employee receive a grant of an incentive stock option for 25,000 shares,
vesting over a five-year period.
11. Termination.
11.1 "At Will" Employment. This Agreement, and Employee's
employment, is at will, and the Company may, with or without notice, terminate
this Agreement and all of the Company's obligations hereunder with or without
"Cause." Employee may also terminate this Agreement at any time, for any reason,
upon the giving of thirty (30) days' written notice to the Company; provided,
however, the Company may waive all or any portion of such notice period in its
sole and absolute discretion. Termination by the Company for "Cause" means
termination due to (i) Employee's conviction of a felony ( which, through the
lapse of time or otherwise is not subject to appeal); (ii) Employee's material
refusal, failure or neglect without proper cause to perform adequately his
obligations under this Agreement or follow the instructions of his
supervisor(s); (iii) any negligence or willful misconduct by Employee; (iv)
Employee's material breach of any of his fiduciary obligations as an executive
officer of the Company; (v) Employee's material failure to adhere to the code of
conduct and rules set forth in the Company's Employee Handbook, as amended or in
existence from time to time; (vi) the death or disability of Employee; or (vii)
the voluntary termination by Employee of his employment, except for "Good
Reason" (as defined in Paragraph 11.3 hereof).
11.2 Termination for Cause. Upon termination for Cause, the Company
shall only be required to pay Employee (i) accrued salary compensation due to
Employee as compensation for services rendered hereunder and not previously
paid; (ii) accrued vacation pay; and (iii) any appropriate business expenses
incurred by Employee in connection with his duties hereunder and approved
pursuant to Section 4 hereof, all through the date of termination. Employee
shall not be entitled to any severance compensation; bonus compensation, whether
"vested" or unvested; or any other compensation, benefits or reimbursement of
any kind.
11.3 Termination for "Good Reason." Employee may terminate this
Agreement for "Good Reason" (as hereinafter defined) upon thirty (30) days
written notice to the Company. The term "Good Reason" means (i) Employee is not
appointed or is removed from the position of Vice President - Sourcing without
Cause during the term of this Agreement; or (ii) without Employee's consent, a
majority of the duties defined in Section 1 hereof are removed from Employee's
responsibilities. The term Good Reason does not include a situation where
certain of the duties defined in Section 1 hereof are removed from Employee's
responsibilities and are replaced with duties which have greater responsibility
and/or authority than the duties which are removed. Unless Employee terminates
this Agreement within thirty (30) days of learning from any source that the
Company has acted so as to provide Good Reason for Employee to terminate this
Agreement, and gives thirty (30) days' written notice of
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such termination, Employee's right to receive severance compensation pursuant to
Paragraph 11.4 for such event shall be forever lost.
11.4 Severance Compensation. In the event (i) Employee terminates
this Agreement for Good Reason in accordance with Paragraph 11.3 hereof; (ii)
Employee is terminated for any reason (except death or disability) upon, or
within six months following, a "Change in Management or Control (as such term is
defined in Paragraph 11.5 hereof);" or (iii) Employee is terminated without
Cause, the Company shall be obligated to pay severance compensation to Employee
in an amount equal to his salary compensation (at the rate payable at the time
of such termination) for a period of the lesser of (i) the remaining portion of
the term of this Agreement, or (ii) six (6) months from the date of termination;
provided, however, if Employee is employed by a new employer, or as a consultant
during such period, the severance compensation payable to Employee hereunder
shall be reduced by the amount of compensation that Employee actually receives
from the new employer, or as a consultant. However, Employee shall have a duty
to inform the Company that he has obtained such new employment, and the failure
to do so is a material breach of this Agreement. In such event, the Company
shall be entitled to (i) cease all payments to Employee under this Paragraph
11.4; and (ii) recover any unauthorized payments to Employee in an action for
breach of contract. Notwithstanding anything else in this Agreement to the
contrary, solely in the event of a termination upon or following a Change in
Management or Control, the amount of severance compensation paid to Employee
hereunder shall not include any amount that the Company is prohibited from
deducting for federal income tax purposes by virtue of Section 280G of the
Internal Revenue Code of 1986, as amended, or any successor provision. In
addition to the foregoing severance compensation, the Company shall pay Employee
(i) all compensation for services rendered hereunder and not previously paid;
(ii) accrued vacation pay; and (iii) any appropriate business expenses incurred
by Employee in connection with his duties hereunder and approved pursuant to
Section 4 hereof, all through the date of termination. Employee shall not be
entitled to any bonus compensation, whether vested or unvested; or any other
compensation, benefits or reimbursement of any kind.
11.5 Definition of "Change in Management or Control." The term
"Change in Management or Control" means (i) the time that the Company first
determines that any person and all other persons who constitute a group (within
the meaning of Section 13(d)(3) of the Securities Exchange Act of 1934
("Exchange Act")) have acquired direct or indirect beneficial ownership (within
the meaning of Rule 13d-3 under the Exchange Act) of twenty percent (20%) or
more of the Company's outstanding securities, unless a majority of the
"Continuing Directors" (as such term is hereinafter defined) approves the
acquisition not later than ten (10) business days after the Company makes that
determination, or (ii) the first day on which a majority of the members of the
Company's Board of Directors are not "Continuing Directors." The term
"Continuing Directors" means, as of any date of determination, any member of the
Board of Directors of the Company who (i) was a member of that Board of
Directors on the date of this Agreement, (iii) has been a member of that Board
of Directors for the
7
<PAGE> 8
two years immediately preceding such date of determination, or (iv) was
nominated for election or elected to the Board of Directors with the affirmative
vote of the greater of (x) a majority of the Continuing Directors who were
members of the Board at the time of such nomination or election, or (y) at least
four Continuing Directors.
11.6 Exclusive Remedy. The payments referred to in this Section
11 shall be exclusive and shall be the only remedy available to Employee for
termination of his employment with the Company, regardless of the circumstances,
reasons or motivation for any such termination. If Employee gives notice of
termination of this Agreement, or if it becomes known that this Agreement will
otherwise terminate in accordance with its provisions, the Company may, in its
sole discretion, relieve Employee of his duties under this Agreement or assign
Employee other duties and responsibilities to be performed until the termination
becomes effective.
12. Services Unique. It is agreed that the services to be
rendered by Employee hereunder are of a special, unique, unusual, extraordinary
and intellectual character which gives them a peculiar value, the loss of which
cannot be reasonably or adequately compensated in damages in an action at law
and that a breach by Employee of any of the provisions contained herein will
cause the Company irreparable injury and damage. Employee expressly agrees that
the Company shall be entitled to injunctive or other equitable relief to prevent
a breach hereof. Resort to any such equitable relief shall not be construed as a
waiver of any of the rights or remedies which the Company may have against
Employee for damages or otherwise.
13. Key Man Life Insurance. During the term of this Agreement,
the Company may at any time effect insurance on Employee's life and/or health in
such amounts and in such form as the Company may in its sole discretion decide.
Employee shall not have any interest in such insurance, but shall, if the
Company requests, submit to such medical examinations, supply such information
and execute such documents as may be required in connection with, or so as to
enable the Company to effect, such insurance.
14. Vacation. Employee shall have the right during each one year
period of the term of this Agreement to take an aggregate of three weeks of
vacation, with pay, at such times as are mutually convenient to Employee and to
the Company.
15. Notices. Any and all notices, demands or other communications
required or desired to be given hereunder by any party shall be in writing and
shall be validly given or made to another party if given by personal delivery,
telex, facsimile, telegram or if deposited in the United States mail, certified
or registered, postage prepaid, return receipt requested. If such notice, demand
or other communication is given by personal delivery, telex, facsimile or
telegram, service shall be conclusively deemed made at the time of such personal
service. If such notice, demand or other communication is given by mail, such
notice shall be conclusively deemed given forty-eight (48) hours after the
deposit thereof in the United States mail addressed to the
8
<PAGE> 9
party to whom such notice, demand or other communication is to be given as
hereinafter set forth:
To the Company: VANS, INC.
15700 Shoemaker Avenue
Santa Fe Springs, California 90670
Attn: General Counsel
562/565-8402 - facsimile
To Employee: SCOTT BRABSON
(at the address set forth below his signature)
Any party hereto may change his or its address for the purpose of receiving
notices, demands and other communications as herein provided by a written notice
given in the manner aforesaid to the other party or parties hereto.
16. Applicable Law and Severability. This Agreement shall, in all
respects, be governed by the laws of the State of California applicable to
agreements executed and to be wholly performed within the State of California.
Nothing contained herein shall be construed so as to require the commission of
any act contrary to law, and wherever there is any conflict between any
provision contained herein and any present or future statute, law, ordinance or
regulation contrary to which the parties have no legal right to contract, the
latter shall prevail but the provision of this Agreement which is affected shall
be curtailed and limited only to the extent necessary to bring it within the
requirements of the law.
17. Attorneys' Fees. In the event any action is instituted by a
party to enforce any of the terms and provisions contained herein, the
prevailing party in such action shall be entitled to such reasonable attorneys'
fees, costs and expenses as may be fixed by the Court.
18. Modifications or Amendments. No amendment, change or
modification of this Agreement shall be valid unless in writing and signed by
all of the parties hereto. Further, any amendment, change or modification of
this Agreement (including but not limited to the at-will nature of this
Agreement as set forth in Section 2 and Paragraph 11.1 hereof) must be approved
in advance by the Board of Directors of Company and reflected in the minutes of
such Board's meetings or in an action by unanimous written consent.
19. Successors and Assigns. All of the terms and provisions
contained herein shall inure to the benefit of and shall be binding upon the
parties hereto and their respective heirs, personal representatives, successors
and assigns.
9
<PAGE> 10
20. Entire Agreement. This Agreement constitutes the entire
understanding and agreement of the parties with respect to the subject matter of
this Agreement, and any and all prior agreements, understandings or
representations are hereby terminated and canceled in their entirety and are of
no further force or effect.
21. Counterparts. This Agreement may be executed in counterparts.
22. Arbitration of Employment Disputes. Any dispute or
controversy arising out of this Agreement or the employment relationship between
Employee and the Company shall, at any time following the termination of
Employee's employment, be submitted to final and binding arbitration that shall
comply with the applicable arbitration rules of Judicial Arbitration and
Mediation Service ("JAMS")/Endispute, and judgment upon the award rendered by
the arbitrator may be entered in any court having jurisdiction thereof.
Provided, however, that this agreement to arbitrate does not effect any action
by the Company to enforce its rights to protect trade secrets or confidential
information through an action for injunctive relief. The cost of arbitration
(including reasonable attorneys' fees) shall be borne by the losing party. The
arbitration shall occur in Orange, California and the parties hereby consent to
the jurisdiction of the arbitrator and to service of process. EMPLOYEE HEREBY
UNDERSTANDS THAT, BY SIGNING THIS AGREEMENT, HE IS AGREEING TO HAVE ANY CLAIM
HEREUNDER DECIDED BY NEUTRAL ARBITRATION AND IS GIVING UP THE RIGHT TO A JURY OR
COURT TRIAL.
23. Survival of Certain Provisions. Sections 7,8,9, and 22 of
this Agreement shall survive the termination hereof.
IN WITNESS WHEREOF, the parties hereto have duly executed this
Agreement as of the day and year first above written.
EMPLOYEE: THE COMPANY:
VANS, INC.,
a Delaware corporation
/s/ SCOTT BRABSON By: /s/ GARY SCHOENFELD
- --------------------------- -------------------------
Scott Brabson Gary Schoenfeld
President and CEO
- --------------------------- -------------------------
Address Title
10
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