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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
(MARK ONE)
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 (Fee Required) For the fiscal year ended January 2, 1999
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 (No Fee Required)
For the transition period from ____________ to ____________.
COMMISSION FILE NUMBER 1-11908
DEPARTMENT 56, INC.
(Exact name of registrant as specified in its charter)
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DELAWARE 13-3684956
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification
No.)
ONE VILLAGE PLACE 55344
6436 CITY WEST PARKWAY (Zip Code)
EDEN PRAIRIE, MN
(Address of principal executive
offices)
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(612) 944-5600
(Registrant's telephone number, including area code)
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
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NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
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Common Stock, par value $.01 per share New York Stock Exchange
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SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: NONE
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes _X_ No ___
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K / /.
The aggregate market value of the voting stock held by non-affiliates of the
registrant was approximately $548,024,131 as of March 26, 1999 (based on the
closing price of consolidated trading in the Common Stock on that date as
published in MICROSOFT INVESTOR). For purposes of this computation, shares held
by affiliates and by directors and officers of the registrant have been
excluded. Such exclusion of shares held by directors and officers is not
intended, nor shall it be deemed, to be an admission that such persons are
affiliates of the registrant.
Number of Shares of Common Stock, par value $.01 per share, outstanding as
of March 26, 1999: 17,972,645
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Company's Annual Report to Stockholders for the fiscal year
ended January 2, 1999 (the "1998 Annual Report") are incorporated by reference
in Parts II and IV. Portions of the Company's definitive Proxy Statement for the
1999 Annual Meeting of Stockholders filed with the Securities and Exchange
Commission concurrently with this Form 10-K (the "1999 Proxy Statement") are
incorporated by reference in Part III.
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PART I
ITEM 1. BUSINESS
GENERAL
Department 56, Inc. (including its direct and indirect subsidiaries,
"Department 56" or the "Company") is a leading designer, importer and
distributor of fine quality collectibles and other giftware products sold
through gift, home accessory and specialty retailers. The Company is best known
for its Village Series of collectible, handcrafted, lit ceramic and porcelain
houses, buildings and related accessories in the Original Snow Village
Collection and The Heritage Village Collection as well as its extensive line of
holiday and home decorative accessories, including its Snowbabies collectible
porcelain and pewter handpainted figurines.
The Company was incorporated in Delaware in 1992 to hold the equity of a
Minnesota corporation formed in 1984 under the name "Department 56, Inc.," which
has since changed its name to "D 56, Inc." and has continued as the Company's
principal operating subsidiary.
PRODUCTS
VILLAGE SERIES PRODUCTS. Department 56 is best known for its Village
Series, several series of collectible, handcrafted, lit ceramic and porcelain
houses, buildings and related accessories that depict nostalgic winter scenes.
The Company introduces new lit pieces, limited edition pieces, figurines and
other accessories each year to complement the collections. To allow for these
new introductions and to keep each series appropriately balanced, the Company
has traditionally retired a number of its existing pieces from production each
year. Retirement decisions are based on management's judgment as to, among other
things, expected consumer demand, whether a piece continues to fit the evolving
design characteristics of a series, manufacturing considerations and importantly
injecting an element of surprise.
The Company's Village Series products are comprised of two broad
collections: The Original Snow Village Collection and The Heritage Village
Collection. The Original Snow Village Collection, introduced in 1976, consists
of lit ceramic houses and accessories designed around a single "Main Street
U.S.A." theme. The Heritage Village Collection, introduced in 1984 and expanded
since that time, consists of lit porcelain houses and accessories designed
around several different village themes. By using porcelain for The Heritage
Village Collection products, the Company has been able to achieve a higher level
of detail, in a smaller scale product, than would have been possible by using
ceramic.
VILLAGE ACCESSORIES. Department 56 also produces a range of accessories for
its villages, including figurines, vehicles, landscaping, lighting and other
decorative items. The sale of accessories for its Village Series is an important
part of the Company's strategy to encourage the continued purchase of its
products. Accessories allow collectors to refresh their collections by changing
their displays and by creating personalized settings. Many of the accessories
can be used interchangeably between the various villages, although certain
accessories are designed uniquely for specific villages.
GENERAL GIFTWARE. The Company offers a wide range of other decorative
giftware and home accessory items, including the Company's Snowbabies and
Snowbunnies figurines, Christmas, Easter, and non-seasonal decorative items,
tableware, decorative tins, acrylics, "teddy bears" and other "plush" items, and
gift bags. Department 56 develops these decorative giftware and home accessories
both to satisfy specific consumer demand and to introduce new product concepts
that may develop into important product lines for the Company in the future.
Snowbabies figurines, originally introduced in 1987 as part of the Company's
general Christmas collection, rapidly became a popular product line and
subsequently have achieved their own collectible status. General Giftware
products are generally offered as a line of products developed around a central
design theme. The Company updates its product offerings twice a year and
currently maintains an aggregate of approximately 3,600 stock keeping units, of
which approximately 3,100 are General Giftware products.
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CUSTOMERS
The Company's principal customers (accounting for approximately 90% of its
sales) are approximately 20,000 independent gift retailers across the United
States. These retailers include approximately 1,500 independently owned Gold Key
and Showcase Dealers, who receive special recognition and qualify for improved
sales terms, and who must satisfy certain requirements, such as maintaining the
Company's products on display in an attractive setting for at least six months.
Approximately 10% of the Company's sales are made to department stores and mail
order houses. No single account represented more than 3% of the Company's sales
in fiscal 1998. The Company provides volume discounts to its customers with
respect to most of its products. The Company has generally had only limited
sales outside the United States. International sales were less than 3% of the
Company's sales in fiscal 1998.
As part of the Company's strategy of selective distribution, only
approximately 5,900 retailers receive the Company's Village Series and/or
Snowbabies products. Certain of the Company's lit Village Series products and
porcelain Snowbabies figurines have been sold on allocation for each of the last
eleven years and eight years, respectively. The Company periodically evaluates
and adjusts its distribution network, and reviews its dealership policies with a
view of optimizing both the Company's distribution strategy and the store-level
operations of its independent dealers.
MARKETING AND ADVERTISING
Department 56 sells its products through eight independently operated
wholesale showrooms and six corporate showrooms which cover the major giftware
market areas in the United States and Canada. The Company's headquarters in Eden
Prairie, Minnesota has a 13,000 square-foot atrium showroom where all of its
products, including retired Village Series lighted pieces and Snowbabies
figurines, are displayed. The Company also has a corporate showroom of
approximately 13,000 square feet at the Atlanta, Georgia gift mart, a corporate
showroom of approximately 10,300 square feet at the New York, New York gift
mart, a corporate showroom of approximately 7,500 square feet at the Chicago,
Illinois gift mart, a corporate showroom of approximately 6,600 square feet at
the Los Angeles, California gift mart, and a corporate showroom of approximately
4,300 square feet at the Fairfax, Virginia gift mart. In addition, the Company
sells through giftware shows throughout the United States. Tests have been
conducted of product sales through home television shopping and through
corporate gift programs. In May 1999, the Company plans to open a retail store
in the Mall of America outside Minneapolis so as to build brand visibility and
cultivate consumer awareness. The Company intends to maintain flexibility in its
marketing and distribution strategies in order to take advantage of
opportunities that may develop in the future.
The Company advertises its products to retailers principally through trade
journals, giftware shows and brochures, and provides merchandising and product
information to its collectible product dealers through a periodical newsletter.
It advertises to consumers through brochures, point of sale information and
seasonal advertisements in magazines and newspapers. The Company has also
expanded its consumer advertising through use of cooperative advertising with
its Gold Key Dealers using various media formats. In addition, the Company
publishes and sells a quarterly magazine, which contains product-related
articles and description of its product lines, to consumers and retailers, and
maintains an interactive consumer information center on an Internet web site.
Department 56 maintains a toll-free telephone line for collector questions and
participates in collector conventions. The Company also operates a collectors'
club to which consumers of its Snowbabies product line may subscribe for
exclusive product offerings and information.
DESIGN AND PRODUCTION
The Company has an ongoing program of new product development. Each year,
the Company introduces new products in its existing product lines and also
develops entirely new design concepts. The Company endeavors to develop new
products which, although not necessarily similar to the products currently
marketed by the Company, fit the Company's quality and pricing criteria and can
be distributed through the Company's existing marketing and distribution system.
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Department 56 believes that its relationships with its manufacturers, and
the quality of their craftsmanship, provide a competitive advantage and are a
significant contributor to the Company's success. The Company imports most of
its products from the Pacific Rim, primarily The People's Republic of China,
Taiwan (Republic of China) and The Philippines. The Company also imports a small
percentage of its products from sources in India, and occasionally from sources
in Europe (primarily Italy, England and Poland). In fiscal 1998, the Company
imported products from approximately 150 independent manufacturing sources. The
Company's single largest manufacturing source represented approximately 10% of
the Company's imports in fiscal 1998. The Company's emphasis on high quality
craftsmanship at affordable prices limits the sources from which the Company
chooses to obtain products. The Company has long-standing relationships with the
majority of its manufacturers (many for ten years or more) and often purchases
(typically on a year-to-year basis) a manufacturer's entire output for a year.
As a result of these relationships, the Company has experienced a low turnover
of its manufacturing sources.
The Company's wholly owned indirect subsidiary, Department 56 Trading Co.,
Ltd., the principal operations of which are based in Taiwan, sources many of the
Company's products in the Pacific Rim, monitors and coordinates production and
assists in the export of the Company's products to the United States. The
Company believes that this overseas subsidiary provides the Company with greater
product and quality control, at a lower cost, than would be available from a
third party trading company. The Company also purchases products, to a limited
extent, from selected independent trading companies operating in particular
geographic regions.
The design and manufacture of the Company's Village Series products are
complex processes. The path from final conception of the design idea to market
introduction typically takes approximately 12 months. Products other than the
Company's collectibles lines can generally be introduced within a few months
after a decision is made to produce the product. The Company's Village Series
products are principally composed of ceramic and porcelain clays and the
Company's other products are designed in a variety of media, including paper,
ceramic and porcelain.
DISTRIBUTION AND SYSTEMS
The products sold by the Company in the United States are generally shipped
by ocean freight from abroad and then by rail to the Company's two warehouse and
distribution centers, each located within 10 miles of the other in the southwest
quadrant of the Minneapolis/St. Paul metropolitan area. The Bloomington facility
is dedicated to the warehousing and distribution of Village Series lit pieces,
while the Eden Prairie facility handles all other products. Shipments from the
Company to its customers are handled by United Parcel Service or commercial
trucking lines. In January 1999, the Company entered into a letter of intent
with a design/build contractor to lease a proposed distribution center in
Minnesota. The Company plans to consolidate its distribution operations from the
existing two distribution centers and a storage facility into the proposed
distribution center by the end of 1999.
The Company utilizes Year-2000 compliant computer systems to maintain
efficient order processing from the time a product enters the Company's system
through shipping and ultimate payment collection from its customers. The Company
also uses handheld optical scanners and bar coded labels in accepting orders at
wholesale showrooms throughout the United States. In addition, uniform computer
and communication software systems allow on-line information access between the
Company's headquarters and its showrooms, and those systems generally provide
direct linkage with the Company's field salesforce. The Company believes its
complex yet efficient software for the processing and shipment of orders from
its central warehouse allows it to better serve its retail customer base.
BACKLOG AND SEASONALITY
The Company receives products, pays its suppliers and ships products
throughout the year, although the majority of shipments occur in the second and
third quarters of each year as retailers stock merchandise in anticipation of
the winter holiday season. The Company continues to ship merchandise until
mid-December each year. Accordingly, the Company's backlog typically is lowest
at the beginning of January. As of January 2, 1999, Department 56 had unfilled
wholesale orders of approximately $4.0
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million, compared to $4.6 million at January 3, 1998. All of the backlog is
scheduled to be shipped to customers during the current fiscal year.
Approximately 6% to 8% of the Company's total annual customer orders have been
cancelled in each of the last three years for a number of reasons, primarily
including customer credit considerations and inventory shortages.
Department 56 experiences a significant seasonal pattern in its working
capital requirements and operating results. During the first quarter of each of
the last three years, the Company received orders ranging from approximately 65%
to 71% of its annual orders for such year. The Company offers extended payment
terms to many of its customers for seasonal merchandise. Accordingly, the
Company collects a substantial portion of its accounts receivable in the fourth
quarter. Due to the seasonal pattern of shipping and accounts receivable
collection, the Company generally has had greater working capital needs in its
second and third quarters and has experienced greater cash availability in its
fourth quarter. The Company typically finances its operations through net cash
and marketable securities balances, internally generated cash flow and
short-term seasonal borrowings. As a result of the Company's sales pattern, the
Company has historically recorded a substantial portion of its revenues in its
second and third quarters. The Company expects this seasonal sales pattern to
continue for the foreseeable future.
TRADEMARKS AND OTHER PROPRIETARY RIGHTS
The Company owns twenty-two U.S. trademark registrations and has pending
U.S. trademark applications with respect to certain of its logos and brandnames.
In addition, the Company from time to time registers selected trademarks in
certain foreign countries.
Department 56 regards its trademarks and other proprietary rights as
valuable assets and intends to maintain and renew its trademarks and their
registrations and vigorously defend against infringement. The U.S. registrations
for the Company's trademarks are currently scheduled to expire or be cancelled
at various times between 2002 and 2008, but can be maintained and renewed
provided that the marks are still in use for the goods and services covered by
such registrations.
COMPETITION
Department 56 competes generally for the disposable income of consumers and,
in particular, with other producers of fine quality collectibles, specialty
giftware and home decorative accessory products. The collectibles area, in
particular, is affected by changing consumer tastes and interests. The giftware
industry is highly competitive, with a large number of both large and small
participants. The Company's competitors distribute their products through
independent gift retailers, department stores, televised home shopping networks
and mail order houses or through direct response marketing. The Company believes
that the principal elements of competition in the specialty giftware industry
are product design and quality, product and brand-name loyalty, product display
and price. The Company believes that its competitive position is enhanced by a
variety of factors, including the innovativeness, quality and enduring themes of
the Company's products, its reputation among retailers and consumers, its
in-house design expertise, its sourcing and marketing capabilities and the
pricing of its products. Some of the Company's competitors, however, are part of
large, diversified companies having greater financial resources and a wider
range of products than the Company.
RESTRICTIONS ON IMPORTS
The Company does not own or operate any manufacturing facilities and imports
most of its products from manufacturers in the Pacific Rim, primarily The
People's Republic of China, Taiwan and The Philippines. The Company also imports
a small percentage of its products from sources in India, and occasionally from
sources in Europe (primarily Italy, England and Poland).
The Company's ability to import products and thereby satisfy customer orders
is affected by the availability of, and demand for, quality production capacity
abroad. The Company competes with other importers of specialty giftware products
for the limited number of foreign manufacturing sources which can produce
detailed, high-quality products at affordable prices. The Company is subject to
the following
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risks inherent in foreign manufacturing: fluctuations in currency exchange
rates; economic and political instability; cost fluctuations and delays in
transportation; restrictive actions by foreign governments; nationalizations;
the laws and policies of the U.S. affecting importation of goods (including
duties, quotas and taxes); and foreign trade and tax laws. In particular, the
Company's costs could be adversely affected if the currencies of other countries
in which the Company sources product appreciate significantly relative to the
U.S. dollar.
Substantially all of the Company's products are subject to customs duties
and regulations pertaining to the importation of goods, including requirements
for the marking of certain information regarding the country of origin on the
Company's products. In the ordinary course of its business, from time to time,
the Company is involved in disputes with the U.S. Customs Service regarding the
amount of duty to be paid, the value of merchandise to be reported or other
customs regulations with respect to certain of the Company's imports, which may
result in the payment of additional duties and/or penalties, or which may result
in the refund of duties to the Company.
The United States and the countries in which the Company's products are
manufactured may, from time to time, impose new quotas, duties, tariffs or other
charges or restrictions, or adjust presently prevailing quotas, duty or tariff
levels, which could adversely affect the Company's financial condition or
results of operations or its ability to continue to import products at current
or increased levels. In particular, the Company's costs may be increased, or the
mix of countries from which it sources its products may be changed, in the
future if countries which are currently accorded "Most Favored Nation" status by
the United States cease to have such status or the United States imposes
retaliatory duties against imports from such countries. The Company cannot
predict what regulatory changes may occur or the type or amount of any financial
impact on the Company which such changes may have in the future.
In fiscal 1998, approximately 71% (as compared to approximately 65% in
fiscal 1997) of the Company's imports were manufactured in The People's Republic
of China, which is currently accorded "Most Favored Nation" status and generally
is not subject to U.S. retaliatory duties. Various commercial and legal
practices widespread in The People's Republic of China, including the handling
of intellectual properties, as well as certain political and military actions
taken or suggested by The People's Republic of China in relation to Taiwan and
residents of Hong Kong, are under review by the United States government and,
accordingly, the duty treatment of goods imported from The People's Republic of
China is subject to political uncertainties. To the extent The People's Republic
of China may cease to have "Most Favored Nation" status or its exports may be
subject to political retaliation, the cost of importing products from such
country would increase significantly, and the Company believes that there could
be a short-term adverse effect on the Company until alternative manufacturing
arrangements were obtained.
EMPLOYEES
As of January 2, 1999, the Company had 261 full-time employees in the United
States and 7 full-time employees in Taiwan. All of the Company's 77 U.S.-based
warehouse, shipping and receiving personnel employed as of that date are
represented by Local Union No. 638 of the Teamsters under a contract that
expires on December 31, 2001. The Company believes that its labor relations are
good and has never experienced a work stoppage.
ENVIRONMENTAL MATTERS
The Company is subject to various Federal, state and local laws and
regulations governing the use, discharge and disposal of hazardous materials.
Compliance with current laws and regulations has not had and is not expected to
have a material adverse effect on the Company's financial condition. It is
possible, however, that environmental issues may arise in the future which the
Company cannot now predict.
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ITEM 2. PROPERTIES
The Company owns a 67,000 square-foot facility in Eden Prairie, Minnesota,
which includes 57,000 square feet of office space. Its executive offices,
creative center and primary corporate showroom are located in this facility,
which is known as "One Village Place." The Company currently occupies
approximately 66,400 square feet of the facility and leases the remaining 600
square feet to others.
The Company leases a warehouse and distribution facility in Eden Prairie of
approximately 150,000 square feet. The current lease for this facility expires
on March 31, 2001 and is extendible at the Company's option for an additional
five years. The Company leases a warehouse and distribution facility in
Bloomington, Minnesota of approximately 159,000 square feet, the lease for which
expires on February 28, 2002. The Company also leases additional bulk storage
warehouse space of approximately 80,000 square feet in Eagan, Minnesota, the
lease for which expires on March 31, 2000 and is extendible at the Company's
option for an additional three months. However, the Company believes that one
distribution center would be more efficient and better support its growth
initiatives. Consequently, in January 1999, the Company entered into a letter of
intent with a design/build contractor to lease a proposed distribution center in
Minnesota. The Company plans to consolidate its distribution operations from the
existing two distribution centers and the storage facility into the proposed
distribution center by the end of 1999.
The Company also leases a corporate showroom of approximately 13,000 square
feet in the Atlanta, Georgia gift mart, a corporate showroom of approximately
10,300 square feet in the New York, New York gift mart, a corporate showroom of
approximately 7,500 square feet in the Chicago, Illinois gift mart, a corporate
showroom of approximately 6,600 square feet in the Los Angeles, California gift
mart and a corporate showroom of approximately 4,300 square feet in the Fairfax,
Virginia gift mart. These leases expire on December 31, 2006, December 31, 2005,
November 30, 1999, December 31, 2002, and December 31, 2003, respectively.
The Company leases approximately 10,200 square feet in the Mall of America
in Bloomington, Minnesota for a retail store planned to begin operations in May
1999. The lease for this space is slated to expire May 2009, but may be
terminated by the Company anytime after May 2002 in the event the Company
generally discontinues retail operations.
ITEM 3. LEGAL PROCEEDINGS
The Company is involved in various legal proceedings, claims and
governmental audits in the ordinary course of its business. In the opinion of
the Company's management, the ultimate disposition of these proceedings, claims
and audits will not have a material adverse effect on the financial position or
results of operations of the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of the Company's security holders during
the last quarter of the year ended January 2, 1999.
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ADDITIONAL ITEM. EXECUTIVE OFFICERS OF THE REGISTRANT
Set forth below are the executive officers of the Company as of the date
hereof. Unless otherwise indicated each executive officer of the Company holds
identical positions with D 56, Inc. Officers serve at the discretion of the
Board of Directors.
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NAME AGE POSITION(S) WITH THE COMPANY
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Susan E. Engel 52 Chairwoman of the Board and Chief Executive Officer
David W. Dewey 41 Executive Vice President -- Overseas Operations
Arete Passas 47 Executive Vice President -- Marketing
Mark R. Kennedy 41 Senior Vice President and Chief Financial Officer
David H. Weiser 39 Senior Vice President -- Legal/Human Resources,
General Counsel and Secretary
Brett D. Heffes 31 Vice President -- Corporate Development
Robert S. Rose 44 Vice President -- Distribution and Operations
Timothy J. Schugel 40 Vice President -- Finance and Sourcing Management,
and Principal Accounting Officer
Joan M. Serena 45 Senior Vice President -- Consumer & Dealer Marketing
Gregory G. Sorensen 36 Vice President -- Management Information Systems
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The principal occupations and positions for the past five years, and in
certain cases prior years, of each of the executive officers of the Company are
as follows:
Susan E. Engel has been Chairwoman of the Board of the Company and of D 56,
Inc. since September 18, 1997 and Chief Executive Officer of the Company and of
D 56, Inc. since November 13, 1996. Ms. Engel was President of the Company and
of D 56, Inc. from September 19, 1994 until September 18, 1997, and Chief
Operating Officer of the Company and of D 56, Inc. from September 19, 1994 until
November 13, 1996. Ms. Engel was a consultant to retail and consumer goods
companies from September 1993 until September 1994, and Chief Executive Officer
and President of Champion Products, Inc. (a manufacturer of athletic and active
sports apparel) from October 1991 to September 1993.
David W. Dewey has been Senior Vice President -- Overseas Operations of the
Company and of D 56, Inc. since January 1, 1997. He was Vice President --
Overseas Operations of the Company and of D 56, Inc. from April 22, 1993 until
January 1, 1997.
Arete Passas has been Executive Vice President -- Marketing of the Company
and of D 56, Inc. since September 14, 1998. She was Executive Vice President,
Marketing of Weekly Reader Corporation from November 1997 to September 1998. She
was a private consultant from May 1997 to November 1997. Ms. Passas was Vice
President, Games & Puzzles Division at Mattel, Inc. from October 1994 to April
1997. Prior to then she was Director of Marketing, Consumer Products Division at
James River Corporation from December 1992 through October 1994.
Mark R. Kennedy has been Senior Vice President of the Company and of D 56,
Inc. since January 1, 1997 and Chief Financial Officer of the Company and of D
56, Inc. since April 25, 1995. He was Vice President -- Administration of the
Company and of D 56, Inc. from April 25, 1995 until January 1, 1997. From
January 1995 until April 25, 1995, Mr. Kennedy was a private investor. Mr.
Kennedy was Senior Executive Vice President of Shopko Stores, Inc. (a "mass
market" department store chain) from June 1993 to January 1995.
David H. Weiser has been Senior Vice President -- Legal/Human Resources of
the Company and of D 56, Inc. since January 1, 1997. He has also been General
Counsel of the Company since April 22, 1993, General Counsel of D 56, Inc. since
March 15, 1993, and Secretary of the Company and of D 56, Inc. since
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February 1993. Mr. Weiser was Vice President of the Company from April 22, 1993
until January 1, 1997 and Vice President of D 56, Inc. from March 15, 1993 until
January 1, 1997.
Brett D. Heffes has been Vice President -- Corporate Development of the
Company and of D 56, Inc. since January 5, 1998. He was with Wessels, Arnold &
Henderson, a private investment bank, from May 1992 until January 1998, most
recently as Principal.
Robert S. Rose has been Vice President -- Distribution and Operations of the
Company and of D 56, Inc. since April 22, 1993.
Timothy J. Schugel has been Vice President -- Finance of the Company and of
D56, Inc. since April 10, 1995, and was Controller of the Company and of D 56,
Inc. from April 26, 1993 until April 10, 1995. He has also been Vice
President--Sourcing Management since August 6, 1998.
Joan M. Serena has been Senior Vice President -- Consumer & Dealer Marketing
since August 6, 1998. She was Vice President -- Consumer & Dealer Marketing of
the Company and of D 56, Inc. from January 1, 1997 to August 6, 1998. She was
Vice President -- Consumer & Retail Marketing of the Company and of D 56, Inc.
from October 20, 1995 until January 1, 1997. She was Vice President -- Consumer
Services of the Company and of D 56, Inc. from April 22, 1993 until October 20,
1995.
Gregory G. Sorensen has been Vice President -- Management Information
Systems of the Company and of D 56, Inc. since July 22, 1996. He was Vice
President of Information Systems of Tsumura International, Inc. (a distributor
of consumer soaps and toiletries) from October 1991 until July 12, 1996, and a
consultant to D 56, Inc. from July 12, 1996 until July 22, 1996.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Information required by this Item is included in Corporate and Stockholder
Information on page 29 of the 1998 Annual Report and Note 5 to Five Year Summary
on page 11 of the 1998 Annual Report, and such information is incorporated
herein by reference.
As of March 26, 1999, the number of holders of record of the Company's
Common Stock was 910.
ITEM 6. SELECTED FINANCIAL DATA
Information required by this Item is included in Five Year Summary on page
11 of the 1998 Annual Report, and such information is incorporated herein by
reference. See also the notes to the consolidated financial statements and
Management's Discussion and Analysis on pages 20 to 27 and 12 to 16
respectively, of the 1998 Annual Report, and such information is incorporated
herein by reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Information required by this Item is included in Management's Discussion and
Analysis on pages 12 to 16 of the 1998 Annual Report, incorporated herein by
reference.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Information required by this Item is included in Management's Discussion and
Analysis on page 15 of the 1998 Annual Report, and Note 1 to the consolidated
financial statements on page 21 of the 1998 Annual Report, incorporated herein
by reference.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Information required by this Item is included in the consolidated financial
statements of the Company for the years ended January 2, 1999, January 3, 1998
and December 28, 1996, the notes to the consolidated financial statements, and
the report of independent auditors thereon on pages 17 to 28 of the 1998 Annual
Report, and in the Company's unaudited quarterly financial data for the years
ended January 2, 1999 and January 3, 1998 on page 13 of the 1998 Annual Report,
incorporated herein by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
10
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information required by this Item concerning directors of the Company who
are nominated by the Company for re-election at the 1999 annual meeting of the
Company's stockholders is included in the 1999 Proxy Statement in the section
captioned "Item 1 -- Election of Directors," and such information is
incorporated herein by reference. Information required by this Item concerning
the executive officers of the Company is included in Part I, pages 8 and 9 of
this Annual Report on Form 10-K as permitted by General Instruction G(3) to Form
10-K. Information required by this Item concerning compliance with Section 16(a)
of the Securities Exchange Act of 1934 is included in the 1999 Proxy Statement
in the last paragraph of the section captioned "Security Ownership of Certain
Beneficial Owners and Management," and such information is incorporated herein
by reference.
ITEM 11. EXECUTIVE COMPENSATION
Information required by this Item is included in the 1999 Proxy Statement in
the section captioned "Further Information Concerning the Board of the Directors
and Committees -- Compensation Committee Interlocks and Insider Participation"
and "-- Director Compensation" and in the section captioned "Compensation of
Executive Officers" (other than the subsection thereof captioned "Compensation
Committee Report on Executive Compensation" and "Performance Graph"), and such
information (other than the subsections thereof captioned "Compensation
Committee Report on Executive Compensation" and "Performance Graph") is
incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information required by this Item is included in the 1999 Proxy Statement in
the section captioned "Security Ownership of Certain Beneficial Owners and
Management", and such information is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
See Note 9 to the consolidated financial statements on page 25 of the 1998
Annual Report.
11
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
<TABLE>
<CAPTION>
1998
FORM 10-K ANNUAL REPORT
(PAGE) (PAGE)
---------- -------------
<C> <S> <C> <C> <C> <C>
(a) 1. FINANCIAL STATEMENTS
Consolidated Balance Sheets at January 2, 1999 and January 3, 1998 17
For the years ended January 2, 1999, January 3, 1998 and December 28, 1996:
Consolidated Statements of Income 18
Consolidated Statements of Cash Flows 19
Consolidated Statements of Stockholders' Equity 20
Notes to Consolidated Financial Statements 20-27
Independent Auditors' Report for the years ended 28
January 2, 1999, January 3, 1998 and December 28, 1996
2. FINANCIAL STATEMENT SCHEDULES
Independent Auditors' Report 13
I. Condensed financial information 14-16
II. Valuation and qualifying accounts 17
</TABLE>
All other schedules have been omitted because they are not applicable, not
required or the information required is included in the consolidated financial
statements or notes thereto.
<TABLE>
<C> <S> <C> <C> <C> <C>
3. EXHIBITS
</TABLE>
The exhibits are listed in the accompanying Index to Exhibits on pages 19
and 20.
<TABLE>
<C> <S> <C> <C> <C> <C>
(b) Reports on Form 8-K
</TABLE>
A Current Report on Form 8-K, dated October 22, 1998, was filed reporting in
Item 5 thereof and containing no financial statements.
12
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
Department 56, Inc.:
We have audited the consolidated balance sheets of Department 56, Inc. and
subsidiaries (the "Company") as of January 2, 1999 and January 3, 1998 and the
related consolidated statements of income, cash flows and stockholders' equity
for the years ended January 2, 1999, January 3, 1998 and December 28, 1996, and
have issued our report thereon dated February 12, 1999, except for Note 4
thereto, as to which the date is March 19, 1999 (included in the Company's
Annual Report to Stockholders for the year ended January 2, 1999 and
incorporated herein by reference). Our audits also included the financial
statement schedules for the aforementioned periods listed in Item 14 of Form
10-K. These financial statement schedules are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statement schedules based on our audits. In our opinion, such
financial statement schedules, when considered in relation to the basic
consolidated financial statements taken as a whole, present fairly, in all
material respects, the information set forth therein.
Deloitte & Touche LLP
Minneapolis, Minnesota
March 19, 1999
13
<PAGE>
DEPARTMENT 56, INC.
(PARENT COMPANY ONLY)
SCHEDULE I -- CONDENSED FINANCIAL INFORMATION
BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
JANUARY 2, JANUARY 3,
1999 1998
---------- ----------
<S> <C> <C>
ASSETS
INVESTMENT IN SUBSIDIARIES................................................................ $ 173,427 $ 184,420
RECEIVABLE FROM SUBSIDIARIES.............................................................. 5,464 2,510
---------- ----------
$ 178,891 $ 186,930
---------- ----------
---------- ----------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES--
Accrued expenses........................................................................ $ 156 $ 275
STOCKHOLDERS' EQUITY:
Preferred stock, $.01 par value; authorized 20,000 shares; no shares issued............. -- --
Common Stock, $.01 par value; authorized 100,000 shares; issued and outstanding 21,900
and 21,765 shares, respectively....................................................... 219 218
Additional paid-in capital.............................................................. 48,295 44,645
Treasury stock, at cost; 3,876 and 2,199 shares, respectively........................... (113,302) (55,215)
Retained earnings....................................................................... 243,523 197,007
---------- ----------
Total stockholders' equity............................................................ 178,735 186,655
---------- ----------
$ 178,891 $ 186,930
---------- ----------
---------- ----------
</TABLE>
- ------------------------
Note: Investment in subsidiary is accounted for under the equity method of
accounting.
See notes to consolidated financial statements included in the
1998 Annual Report, incorporated by reference.
14
<PAGE>
DEPARTMENT 56, INC.
(PARENT COMPANY ONLY)
SCHEDULE I -- CONDENSED FINANCIAL INFORMATION (CONTINUED)
STATEMENTS OF INCOME
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR
YEAR ENDED YEAR ENDED ENDED
JANUARY 2, JANUARY 3, DECEMBER 28,
1999 1998 1996
----------- ----------- ------------
<S> <C> <C> <C>
Equity in earnings of subsidiaries......................................... $ 46,516 $ 43,216 $ 46,263
General and administrative expenses........................................ -- (435) (319)
----------- ----------- ------------
Net income................................................................. $ 46,516 $ 42,781 $ 45,944
----------- ----------- ------------
----------- ----------- ------------
</TABLE>
See notes to consolidated financial statements included in the
1998 Annual Report, incorporated by reference.
15
<PAGE>
DEPARTMENT 56, INC.
(PARENT COMPANY ONLY)
SCHEDULE I -- CONDENSED FINANCIAL INFORMATION (CONTINUED)
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR
YEAR ENDED YEAR ENDED ENDED
JANUARY 2, JANUARY 3, DECEMBER 28,
1999 1998 1996
----------- ----------- ------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income............................................................... $ 46,516 $ 42,781 $ 45,944
Adjustments to reconcile net income to net cash provided by (used in)
operating activities:
Equity in earnings of subsidiaries..................................... (46,516) (43,216) (46,263)
(Increase) decrease in receivable from subsidiaries.................... (2,954) (967) 28
Increase (decrease) in accrued expenses................................ (119) 50 (45)
Other.................................................................. 108 -- --
----------- ----------- ------------
Net cash used in operating activities................................ (2,965) (1,352) (336)
----------- ----------- ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Investment in subsidiaries............................................... (967) -- --
Dividends received from subsidiaries..................................... 59,173 55,094 --
----------- ----------- ------------
Net cash provided by investing activities.............................. 58,206 55,094 --
----------- ----------- ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from the exercise of common stock options....................... 2,846 1,473 336
Purchases of treasury stock.............................................. (58,087) (55,215) --
----------- ----------- ------------
Net cash provided by (used in) financing activities.................. (55,241) (53,742) 336
----------- ----------- ------------
NET CHANGE IN CASH AND CASH EQUIVALENTS.................................... -- -- --
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD........................... -- -- --
----------- ----------- ------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD................................. $ -- $ -- $ --
----------- ----------- ------------
----------- ----------- ------------
</TABLE>
See notes to consolidated financial statements included in the
1998 Annual Report, incorporated by reference.
16
<PAGE>
DEPARTMENT 56, INC.
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
(IN THOUSANDS)
<TABLE>
<CAPTION>
COLUMN B COLUMN C
----------- ------------- COLUMN E
COLUMN A BALANCE CHARGED TO COLUMN D -----------
- ---------------------------------------------------------------- BEGINNING COSTS AND ------------- BALANCE END
DESCRIPTION OF PERIOD EXPENSES DEDUCTIONS OF PERIOD
- ---------------------------------------------------------------- ----------- ------------- ------------- -----------
<S> <C> <C> <C> <C>
Year ended January 2, 1999:
Allowance for doubtful accounts............................... $ 5,160 $ 888 $ 869(a) $ 5,179
Allowance for obsolete and overstock inventory................ 4,385 2,907 2,463 4,829
Allowance for sales returns and credits....................... 7,897 8,657 8,825 7,729
----------- ------------- ------------- -----------
$ 17,442 $ 12,452 $ 12,157 $ 17,737
Year ended January 3, 1998:
Allowance for doubtful accounts............................... $ 5,014 $ 1,087 $ 941(a) $ 5,160
Allowance for obsolete and overstock inventory................ 2,942 3,447 2,004 4,385
Allowance for sales returns and credits....................... 5,249 8,752 6,104 7,897
----------- ------------- ------------- -----------
$ 13,205 $ 13,286 $ 9,049 $ 17,442
----------- ------------- ------------- -----------
----------- ------------- ------------- -----------
Year ended December 28, 1996:
Allowance for doubtful accounts............................... $ 4,329 $ 2,014 $ 1,329(a) $ 5,014
Allowance for obsolete and overstock inventory................ 3,604 867 1,529 2,942
Allowance for sales returns and credits....................... 2,555 11,585 8,891 5,249
----------- ------------- ------------- -----------
$ 10,488 $ 14,466 $ 11,749 $ 13,205
----------- ------------- ------------- -----------
----------- ------------- ------------- -----------
</TABLE>
- ------------------------
(a) Accounts determined to be uncollectible and charged against allowance
account, net of collections on accounts previously charged against
allowance account.
17
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
Department 56, Inc.
By: /s/ SUSAN E. ENGEL
-----------------------------------------
Susan E. Engel
CHAIRWOMAN OF THE BOARD
Date: April 2, 1999 AND CHIEF EXECUTIVE OFFICER
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE CAPACITY IN WHICH SIGNED DATE
- ---------------------------------------------------------- ------------------------------------- ---------------
<C> <S> <C>
/s/ SUSAN E. ENGEL Chairwoman of the Board, Chief April 2, 1999
---------------------------------------------- Executive Officer and Director
Susan E. Engel (Principal Executive Officer)
/s/ MARK R. KENNEDY Chief Financial Officer and April 2, 1999
---------------------------------------------- Senior Vice President
Mark R. Kennedy (Principal Financial Officer)
/s/ TIMOTHY J. SCHUGEL Vice President -- Finance and April 2, 1999
---------------------------------------------- Sourcing Management
Timothy J. Schugel Principal Accounting Officer
(Principal Accounting Officer)
/s/ JAY CHIAT April 2, 1999
---------------------------------------------- Director
Jay Chiat
/s/ MAXINE CLARK April 2, 1999
---------------------------------------------- Director
Maxine Clark
/s/ WM. BRIAN LITTLE April 2, 1999
---------------------------------------------- Director
Wm. Brian Little
/s/ GARY S. MATTHEWS April 2, 1999
---------------------------------------------- Director
Gary S. Matthews
/s/ STEVEN G. ROTHMEIER April 2, 1999
---------------------------------------------- Director
Steven G. Rothmeier
/s/ VIN WEBER April 2, 1999
---------------------------------------------- Director
Vin Weber
</TABLE>
18
<PAGE>
DEPARTMENT 56, INC.
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT DESCRIPTION
- --------- ---------------------------------------------------------------------------------------------------------
<C> <S>
3.1 Restated Certificate of Incorporation of the Company. (Incorporated herein by reference to Exhibit 3.1 of
Registrant's Quarterly Report on Form 10-Q for the quarter ended July 3, 1993. SEC File no. 1-11908)
3.2 Certificate of Designation, Preferences and Rights of Series A Junior Participating Preferred Stock of
the Company. (Incorporated herein by reference to Exhibit 1.1 of Registrant's Amendment No. 1, dated May
12, 1997, to Registration Statement on Form 8-A, dated April 23, 1997. SEC File no. 1-11908)
3.3 Restated By-Laws of the Company. (Incorporated herein by reference to Exhibit 3.2 of Registrant's
Registration Statement on Form S-1, No. 33-61514 and to Exhibits 1 and 2 of Registrant's Current Report
on Form 8-K dated February 15, 1996. SEC File no. 1-11908)
4.1 Specimen form of Company's Common Stock certificate. (Incorporated herein by reference to Exhibit 4.1 of
Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1994. SEC File no.
1-11908)
4.2 Rights Agreement (including Exhibits A, B and C thereto), dated as of April 23, 1997, between the Company
and ChaseMellon Shareholder Services, L.L.C., as Rights Agent. (Incorporated herein by reference to
Exhibit 1 of Registrant's Registration Statement on Form 8-A, dated April 23, 1997. SEC File no. 1-11908)
4.3 First Amendment, dated as of March 13, 1998, to Rights Agreement between the Company and ChaseMellon
Shareholder Services, L.L.C., as Rights Agent. (Incorporated herein by reference to Exhibit 1 to
Registrant's Amendment No. 2, dated March 16, 1998, to Registration Statement on Form 8-A, dated April
23, 1997. SEC File no. 1-11908)
4.4 Amendment No. 2 to Rights Agreement, dated as of February 25, 1999, between the Company and ChaseMellon
Shareholder Services, L.L.C., as Rights Agent. (Incorporated herein by reference to Exhibit 99.2 of
Registrant's Current Report on Form 8-K dated February 26, 1999, SEC File No. 1-11908)
10.1 Department 56, Inc. 1992 Stock Option Plan. (Incorporated herein by reference to Exhibit 10.1 of
Registrant's Registration Statement on Form S-1, No. 33-61514.)+
10.2 Form of Stock Option Agreement in connection with the 1992 Stock Option Plan. (Incorporated herein by
reference to Exhibit 10.2 of Registrant's Registration Statement on Form S-1, No. 33-61514.)+
10.3 Form of Outside Directors Stock Option Agreement. (Incorporated herein by reference to Exhibit 10.3 of
Registrant's Annual Report on Form 10-K for the fiscal year ended January 3, 1998. SEC File no. 1-11908)+
10.4 Lease, dated April 1, 1989, as amended, between Hoyt Properties, Inc. and the Company for the Eden
Prairie warehouse. (Incorporated herein by reference to Exhibit 10.7 of Registrant's Registration
Statement on Form S-1, No. 33-61514.)
10.5 Lease, dated December 8, 1993 as amended August 25, 1994, between Grantor Retained Income Trust of Robert
L. Johnson and the Company for the Bloomington warehouse. (Incorporated herein by reference to Exhibit
10.5 of Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1994. SEC File no.
1-11908), and Second Lease Amendment dated August 27, 1998.*
10.6 Letter of Intent, dated January 20, 1999, between the Company and Ryan Companies US, Inc., pertaining to
build-to-suit of proposed distribution center.*
10.7 Credit Agreement, dated as of March 19, 1999 among the Company, the Banks parties thereto, ABN Amro Bank
N.V. and The First National Bank of Chicago, as documentation agents, U.S. Bank National Association, as
managing agent, and The Chase Manhattan Bank, as administrative agent.*
</TABLE>
19
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT DESCRIPTION
- --------- ---------------------------------------------------------------------------------------------------------
10.8 Guarantee and Collateral Assignment, dated as of March 19, 1999, by the Company and certain of its direct
or indirect subsidiaries in favor of The Chase Manhattan Bank.*
<C> <S>
10.9 Form of Indemnification Agreement between the Company and its directors and executive officers.
(Incorporated herein by reference to Exhibit 10.24 of Registrant's Registration Statement on Form S-1,
No. 33-61514.)
10.10 Department 56, Inc. 1993 Stock Incentive Plan. (Incorporated herein by reference to Exhibit 10.25 of
Registrant's Registration Statement on Form S-1, No. 33-61514.)+
10.11 Department 56, Inc. 1995 Stock Incentive Plan. (Incorporated herein by reference to Exhibit 10.18 of
Registrant's Annual Report on Form 10-K for the fiscal year ended December 30, 1995. SEC File no.
1-11908)+
10.12 Department 56, Inc. 1997 Stock Incentive Plan. (Incorporated herein by reference to Exhibit 4.4 of
Registrant's Registration Statement on Form S-8, No. 333-41639.)+
10.13 Form of Stock Option Agreement in connection with Department 56, Inc. 1993 Stock Incentive Plan,
Department 56, Inc. 1995 Stock Incentive Plan, and Department 56, Inc. 1997 Stock Incentive Plan.
(Incorporated herein by reference to Exhibit 10.1 of Registrant's Quarterly Report on Form 10-Q for the
quarter ended July 3, 1993. SEC File no. 1-11908)+
10.14 Department 56, Inc. Annual Cash Incentive Program (Incorporated herein by reference to Exhibit 10.25 of
Registrant's Annual Report on Form 10-K for the year ended January 3, 1998. SEC File no. 1-11908)+
11.1 Computation of Earnings Per Share.*
13.1 Excerpts from Annual Report to Stockholders for fiscal year ended January 2, 1999.*
21.1 Subsidiaries of the Company.*
23.1 Independent Auditors' Consent*
27.1 Financial Data Schedule (accompanies EDGAR electronic format only)*
</TABLE>
- ------------------------
+ Management contract or compensatory plan
* Filed herewith
20
<PAGE>
SECOND LEASE AMENDMENT
THIS SECOND LEASE AMENDMENT (the "Amendment") is executed this 27th day
of August, 1998 by and between DUKE REALTY MINNESOTA, LLC, a Minnesota
limited liability company ("Landlord"), and D 56, INC., a Minnesota
corporation ("Tenant").
W I T N E S S E T H :
WHEREAS, Grantor Retained Income Trust of Robert L. Johnson, as predecessor
in interest to Landlord, and Tenant entered into a certain lease dated
December 8, 1993 as amended August 25, 1994 (collectively, the "Lease"),
whereby Tenant leased from Landlord certain premises consisting of
approximately 159,200 rentable square feet of space (the "Premises") located
in an office/warehouse building commonly known as Hampshire Distribution
Center, 10801 Hampshire Avenue South, Bloomington, Minnesota; and
WHEREAS, Landlord and Tenant desire to extend the Lease Term for a period of
thirty-six (36) months; and
WHEREAS, Landlord and Tenant desire to amend certain provisions of the Lease
to reflect such extension;
NOW, THEREFORE, in consideration of the foregoing premises, the mutual
covenants herein contained and each act performed hereunder by the parties,
Landlord and Tenant hereby enter into this Amendment.
1. AMENDMENT OF ARTICLE III. TERM. The Lease Term is hereby extended through
February 28, 2002.
2. AMENDMENT OF ARTICLE IV.A. RENT. Commencing March 1, 1999, Article IV.A.
of the Lease is hereby deleted and the following is substituted in lieu thereof:
Commencing March 1, 1999, Tenant shall pay to Landlord. without demand at
NW 7210, P.O. Box 1450, Minneapolis, Minnesota 55485-7210 or at such other
place as Landlord may from time to time designate in writing, an annual
base rental of Five Hundred One Thousand Four Hundred Eighty Dollars
($501,480.00) payable in advance in successive equal monthly installments
of Forty-one Thousand Seven Hundred Ninety Dollars ($41,790.00) each on the
first day of each month during the entire term hereof.
3. AMENDMENT OF ARTICLE XXII. NOTICES. Article XXII of the Lease is hereby
amended to provide for the following notice address for Landlord:
Landlord: Duke Realty Minnesota, LLC
1550 Utica Avenue South
St. Louis Park, MN 55416
4. AMENDMENT OF ARTICLE II OF ADDENDUM. RIGHT OF FIRST REFUSAL. Article II
of the Addendum of Lease Agreement is hereby deleted in its entirety and
shall be of no further force or effect.
5. AMENDMENT OF ARTICLE IV OF ADDENDUM. LEASING OF OTHER SPACE ON THE REAL
PROPERTY. Article IV of the Addendum to Lease Agreement is hereby deleted in
its entirety and shall be of no further force or effect.
6. TENANT'S REPRESENTATIONS AND WARRANTIES. The undersigned represents and
warrants to Landlord that (i) Tenant is duly organized, validly existing and
in good standing in accordance with the laws of the state under which it was
organized; (ii) all action necessary to authorize the execution of this
Amendment has been taken by Tenant; and (iii) the individual executing and
delivering this Amendment on behalf of Tenant has been authorized to do so,
and such execution and delivery shall bind Tenant. Tenant, at Landlord's
request, shall
<PAGE>
provide Landlord with evidence of such authority.
7. EXAMINATION OF AMENDMENT. Submission of this instrument for examination
or signature to Tenant does not constitute a reservation or option, and it is
not effective until execution by and delivery to both Landlord and Tenant.
8. DEFINITIONS. Except as otherwise provided herein, the capitalized terms
used in this Amendment shall have the definitions set forth in the Lease.
9. INCORPORATION. This Amendment shall be incorporated into and made a part
of the Lease, and all provisions of the Lease not expressly modified or
amended hereby shall remain in full force and effect.
IN WITNESS WHEREOF, the parties have caused this Amendment to be executed on
the day and year first written above.
LANDLORD:
DUKE REALTY MINNESOTA, LLC,
A Minnesota limited liability company
By: /s/ Robert H. Johnson
----------------------------------
Robert H. Johnson
Chief Manager
TENANT:
D 56, INC.,
A Minnesota corporation
By: /s/ Robert S. Rose
----------------------------------
Robert S. Rose
Vice President
<PAGE>
January 20, 1999
Mr. Mark Kennedy, Chief Financial Officer
Mr. Tim Schugel, Vice President Finance
Mr. Bob Rose, Vice President Distribution and Operations
Department 56, Inc.
One Village Place
6436 City West Parkway
Eden Prairie, MN 55344
RE: LETTER OF INTENT - DEPARTMENT 56, INC., A MINNESOTA CORPORATION
RYAN COMPANIES US. INC., A MINNESOTA CORPORATION
BUILD-TO-SUIT, ROGERS, MINNESOTA
Dear Mark:
I am pleased to present to you this Letter of Intent for a build-to-suit
distribution facility located in Rogers, Minnesota. I have reviewed the terms
of your January 18th, 1999 Letter of Intent and the following modified Letter
of Intent outlines the terms and conditions upon which Ryan Companies is
prepared to enter into a lease agreement.
LETTER OF INTENT
- -------------------------------------------------------------------------------
LANDLORD: Ryan Companies US, Inc. ("Ryan")
TENANT: Department 56, Inc. ("D56")
PREMISES: Outlot B. Rogers Industrial Park Second Addition,
site area equals 24.4 acres
SQUARE FOOTAGE: Office Area: 8,600 square feet
Warehouse Area: 325,100 square feet
Total: 333,700 square feet
TERM: 10 Years, 3 Months
COMMENCEMENT DATE: December 1, 1999
<PAGE>
Page 2
EXPIRATION DATE: FEBRUARY 28th, 2010
OCCUPANCY SCHEDULE: Phase I: July 1, 1999*
D56 Operational: December 1, 1999
*RYAN RECOGNIZES THAT PHASE I WILL BE READY FOR THE
INSTALLATION OF THE MEZZANINE AND RACKING SYSTEMS
BY JULY 1ST, 1999. RYAN AGREES THAT IF THE PHASE I
SPACE IS NOT READY AND THE DELAY IS DUE TO RYAN,
D56 SHALL BE GIVEN FREE GROSS RENT EQUAL TO THE
NUMBER OF DAYS THE LANDLORD WAS NOT ABLE TO DELIVER
RACKING BY JULY 1ST, 1999, WHICH AMOUNT WOULD BE
OFF-SET FROM THE RYAN SATISFACTION GUARANTEE OF
$300,000.00. RYAN AGREES THAT IN THE EVENT THE
FACILITY IS AVAILABLE PRIOR TO THE DECEMBER 1ST,
1999 DATE, D56 WILL BE ALLOWED TO OCCUPY THE
PREMISES FREE OF RENT AND OPERATING EXPENSES
BEGINNING NOVEMBER 1ST, 1999.
NET BASE RENTAL RATE: Months 1 - 60: $3.80 per square foot
Months 61 - 123: $4.20 per square foot
REAL ESTATE TAXES: Ryan represents that all off-site improvements
resulting from the project, are paid for by Ryan and
any levied or pending special assessments for
off-site improvements are paid by Ryan and are not to
be passed on to D56 with the exception of the
Wilfred Lane Extension. D56 acknowledges that
approximately $.07 psf will be assessed to the
property through real estate taxes, which is included
in the estimated $1.60 psf taxes payable in 2002.
PROJECT COSTS: The total project cost for the development of this
distribution facility is $12,598,000. Ryan represents
that the total project costs are sufficient to
construct a facility which meets or exceeds the
outline specifications from D56 dated December 22nd,
1998. In the event construction savings are realized,
the savings will be returned to D56 in the form of
reduced rent. The savings will be calculated using a
lease constant of 10%.
<PAGE>
Page 3
EXPANSION: D56 requires the ability to expand the building
during its occupancy. The size of the expansion(s)
will require maximum flexibility from Ryan. For any
expansions to the Premises, the entire Lease will be
extended so the remaining term will be a minimum of
5 years and D56 will have at least two additional
three-year renewal options with the renewal base
rental rate increasing 2% compounded annually.
Base Rent will be based on multiplying a lease
constant by the capital costs of the expansion. The
lease constant will be equal to a debt constant plus
50 basis points. The debt constant will be calculated
using a 20 year loan amortization and competitively
bid interest rate and loan amount at the time of the
expansion. If the resulting lease constant is greater
than 12%, then D56 shall have the right to purchase
the entire facility at the then fair market value to
be determined by the appraisal method.
For the purpose of calculating expansion base rent,
the capital cost of the expansion will be the soft
costs and hard costs of materials, labor for
building and site construction, and design, plus
a 6% construction management fee.
TERMINATION: Department 56 shall have the option to terminate
this lease based upon the following terms and
schedule:
Lease Term: 10 Years, 3 Months
<TABLE>
<CAPTION>
---------------------------------------------------------------
TERMINATION TERMINATION NOTICE TERMINATION
OPTION DATE (END OF): PRIOR FEE
------ -------------- ------ ---
<S> <C> <C> <C>
1 75th Month 10 Months Prior *9 Months
Written Notice. Base Rent
2 99th Month 10 Months Prior *7 Months
Written Notice. Base Rent
---------------------------------------------------------------
</TABLE>
<PAGE>
Page 4
In the event D56 expands the facility by an aggregate
amount of 50,000 square feet or more, the lease
termination schedule will adjust as follows:
<TABLE>
<CAPTION>
-------------------------------------------------------------------
EXPANSION TERMINATION TERMINATION DATE TERMINATION
TIME-FRAME OPTION END OF: FEE
END OF MONTH ------ ------- ---
------------
<S> <C> <C> <C>
15 to 27 1 7 Years, 3 Months *9 Months Base
(87 Months) Rent
39 to 51 2 9 Years, 3 Months *7 Months Base
(111 Months) Rent
-------------------------------------------------------------------
</TABLE>
* TERMINATION FEE DUE TO RYAN COMPANIES 5 FULL MONTHS
BEFORE TERMINATION DATE.
RENEWAL OPTION: D56 shall have five options to renew the Lease and
will provide Ryan with 9 months prior written notice.
Each renewal term will be for 3 years in length and
the renewal base rental rate will increase 2%
compounded annually over the previous increase in base
rent.
PURCHASE OPTION: D56 shall have the option to purchase the building
upon completion for $12,598,000 and after 24 months
of occupancy for $12,900,000. Such amounts shall be
adjusted by any construction cost savings as of the
completion date.
D56 shall have the Right of First Offer to purchase
the facility if the previous options are not
exercised. If Ryan elects to sell the facility, then
Ryan shall notify D56 of its intent to do so. The
process shall be as follows:
- Ryan provides D56 written notice of their intent
to sell the facility.
- D56 has seven business days to provide written
notice of their interest to purchase the
facility.
- If D56 elects to proceed with the purchase,
then Ryan and D56 will each select an
independent appraiser to establish
<PAGE>
Page 5
fair market value for the property. In the event
Ryan and D56 cannot agree to the fair market
value based on the appraisal reports, a third
appraiser will be appointed to determine the
fair market value. Each party will pay for their
respective appraisals. Cost of the third party's
appraisal will be split between D56 and Ryan
Companies. Both parties will use best efforts to
complete the process in 30 days.
- Ryan shall have fifteen days to agree with the
fair market value or propose a strike price at
which they will sell the property to D56.
- D56 shall have thirty days to decide whether or
not to purchase the property and enter into a
contract.
- If D56 enters into a contract, they shall have
ninety days to close on the property.
- If D56 elects not to purchase the property. Ryan
shall have one year to enter into a contract to
sell the property at or above the strike price.
- If Ryan does not sell the property on the above
terms, this Right of First Offer shall be
reinstated.
DEPARTMENT 56 CURRENT Ryan will assume the existing lease obligations in
LEASE OBLIGATIONS: Bloomington and Eden Prairie and amortize these
obligations at 9% over a 15-year term. In the event
any of the space is leased via a sub-lease
arrangement, the remaining amortization schedule will
be adjusted accordingly. If either of the Landlord's
secure a Tenant to replace and discharge D56 from
any further obligations under the lease, D56 will be
released from its obligations and the amortization
of their lease obligations will terminate accordingly.
If D56 exercises its early lease termination option,
D56 will be responsible for payment of the
unamortized portion of the remaining obligation.
TAX INCREMENT FINANCING: Ryan represents and warrants to D56 that there is
expected Tax Increment Financing available on this
project. Ryan will assume the responsibility of
obtaining the TIF assistance. Landlord guarantees
that D56 will receive, on a pay-as-you-go basis over
<PAGE>
Page 6
nine years, beginning Year 3 through Year 12, an
aggregate amount of $580,000. Ryan will be entitled
to the TIF in excess of that amount. D56 guarantees
that as of occupancy, they will have 60 full-time
jobs and that over the next 12 months they will
add 2 additional full-time jobs at $9.00 per hour.
D56 will cooperate to the fullest with Ryan Companies
to obtain tax increment financing assistance.
LANDLORD WARRANTY: Ryan represents that they will provide a 2 year
warranty on all aspects of the construction.
The parties acknowledge that this Letter of Intent is not intended to be a
lease or evidence of any lease; instead, this document sets forth preliminary
understandings of the parties and their intention to propose a final and
binding lease agreement.
Notwithstanding the foregoing, Ryan Companies and Department 56 agrees to
exclusively negotiate in good faith to consummate a lease based upon the
above conditions for the site located in Rogers, Minnesota.
Sincerely, AGREED AND ACCEPTED:
Department 56, Inc.
/s/ Timothy P. McShane
Timothy P. McShane By: /s/ Robert S. Rose
Vice President ------------------------------
Its: Vice President
------------------------------
<PAGE>
CREDIT AGREEMENT, dated as of March 19, 1999, among DEPARTMENT 56,
INC., a Delaware corporation (the "BORROWER"), the several banks and other
financial institutions or entities from time to time parties to this Agreement
(the "LENDERS"), ABN AMRO BANK N.V. and THE FIRST NATIONAL BANK OF CHICAGO, as
documentation agents (each, in such capacity, a "DOCUMENTATION AGENT", and
collectively, the "DOCUMENTATION AGENTS"), U.S. BANK NATIONAL ASSOCIATION as
managing agent (in such capacity, the "MANAGING AGENT"), and THE CHASE MANHATTAN
BANK ("CHASE"), as administrative agent for the Lenders (in such capacity,
together with any of its successors, the "ADMINISTRATIVE AGENT").
The parties hereto hereby agree as follows:
SECTION 1. DEFINITIONS
1.1 DEFINED TERMS. As used in this Agreement, the terms listed in
this Section 1.1 shall have the respective meanings set forth in this Section
1.1.
"ABR": for any day, a rate per annum (rounded upwards, if
necessary, to the next 1/16 of 1%) determined by the Administrative Agent equal
to the greater of (a) the Prime Rate in effect on such day, and (b) the Federal
Funds Effective Rate in effect on such day plus 1/2 of 1%. For purposes hereof:
"Prime Rate" shall mean the rate of interest per annum publicly announced from
time to time by the Reference Lender as its prime rate in effect at its
principal office in New York City (the Prime Rate not being intended to be the
lowest rate of interest charged by the Reference Lender in connection with
extensions of credit to debtors). Any change in the ABR due to a change in the
Prime Rate or the Federal Funds Effective Rate shall be effective as of the
opening of business on the effective day of such change in the Prime Rate or the
Federal Funds Effective Rate, respectively.
"ABR LOANS": Loans the rate of interest applicable to which is
based upon the ABR.
"ACCEPTANCE MARGIN": with respect to any Acceptance at any time,
the rate per annum determined pursuant to the Pricing Grid at such time.
"ACCEPTANCE OBLIGATIONS": at any time, an amount equal to the sum
of (a) the aggregate face amount of unmatured Acceptances and (b) the aggregate
amount of all unpaid Acceptance Reimbursement Obligations.
"ACCEPTANCE PARTICIPANTS": with respect to each Acceptance,
collectively, all the Working Capital Lenders other than the Accepting Bank.
"ACCEPTANCE RATE": the rate for any Acceptance financing equal to
the Acceptance Margin plus the discount rate, as determined from time to time by
the Accepting Bank in its sole and absolute discretion, as generally available
as the discount rate to other customers of the Accepting Bank for bankers'
acceptances of an amount comparable to the amount of such Acceptance and having
a tenor comparable to the tenor of such Acceptance.
"ACCEPTANCE REIMBURSEMENT OBLIGATIONS": the obligation of the
Borrower to reimburse the Accepting Bank pursuant to Section 3.14 for the face
amount of Acceptances.
"ACCEPTANCE REQUEST": an Acceptance Request, substantially in the
form of Exhibit H hereto, with appropriate insertions, or in such other form as
the Accepting Bank shall reasonably request.
<PAGE>
"ACCEPTANCE TERMINATION DATE": the earlier of March 19, 2001 and
the Working Capital Termination Date, and, if each Lender, in accordance with
then applicable law, is permitted on or after such date to extend the Acceptance
Termination Date to the earlier of March 19, 2003 and the Working Capital
Termination Date, then such date, and, if each Lender, in accordance with then
applicable law, is permitted on or after such date to extend the Acceptance
Termination Date to the Working Capital Termination Date, then the Working
Capital Termination Date.
"ACCEPTANCES": as defined in Section 3.9(a).
"ACCEPTING BANK": The Chase Manhattan Bank, together with any
successor, in its capacity as creator of any Acceptance.
"ADJUSTMENT DATE": as defined in the Pricing Grid.
"ADMINISTRATIVE AGENT": as defined in the preamble hereto.
"AFFILIATE": as to any Person, any other Person that, directly or
indirectly, is in control of, is controlled by, or is under common control with,
such Person. For purposes of this definition, "control" of a Person means the
power, directly or indirectly, either to (a) vote 10% or more of the securities
having ordinary voting power for the election of directors (or persons
performing similar functions) of such Person or (b) direct or cause the
direction of the management and policies of such Person, whether by contract or
otherwise.
"AGENTS": the collective reference to the Documentation Agents,
the Administrative Agent and the Managing Agent.
"AGGREGATE EXPOSURE": with respect to any Lender at any time, an
amount equal to the sum of (i) the amount of such Lender's 364-Day Commitment
then in effect or, after the 364-Day Commitment Period or if the 364-Day
Commitments have been terminated, the aggregate then unpaid principal amount of
such Lender's 364-Day Loans and (ii) the amount of such Lender's Working Capital
Commitment then in effect or, if the Working Capital Commitments have been
terminated, the amount of such Lender's Working Capital Extensions of Credit
then outstanding.
"AGGREGATE EXPOSURE PERCENTAGE": with respect to any Lender at any
time, the ratio (expressed as a percentage) of such Lender's Aggregate Exposure
at such time to the Aggregate Exposure of all Lenders at such time.
"AGREEMENT": this Credit Agreement, as amended, supplemented or
otherwise modified from time to time.
"APPLICABLE MARGIN": for each Type of Loan at any time, the rate
per annum determined pursuant to the Pricing Grid at such time.
"APPLICATION": an application, in such form as the Issuing Lender
may specify from time to time, requesting the Issuing Lender to open a Letter of
Credit.
<PAGE>
"ASSET SALE": any Disposition of property or series of related
Dispositions of property (excluding any such Disposition permitted by clause
(a), (b), (c) or (d) of Section 7.5) that yields gross proceeds to the Borrower
or any of its Subsidiaries (valued at the initial principal amount thereof in
the case of non-cash proceeds consisting of notes or other debt securities and
valued at fair market value in the case of other non-cash proceeds) in excess of
$500,000.
"ASSIGNEE": as defined in Section 10.6(c).
"ASSIGNMENT AND ACCEPTANCE": an Assignment and Acceptance,
substantially in the form of Exhibit E.
"ASSIGNOR": as defined in Section 10.6(c).
"AVAILABLE 364-DAY COMMITMENT": as to any 364-Day Lender at any
time, an amount equal to the excess, if any, of (a) such Lender's 364-Day
Commitment then in effect OVER (b) such Lender's 364-Day Loans then outstanding.
"AVAILABLE WORKING CAPITAL COMMITMENT": as to any Working Capital
Lender at any time, an amount equal to the excess, if any, of (a) such Lender's
Working Capital Commitment then in effect over (b) such Lender's Working Capital
Extensions of Credit then outstanding.
"BENEFITTED LENDER": as defined in Section 10.7(a).
"BOARD": the Board of Governors of the Federal Reserve System of
the United States (or any successor).
"BORROWER": as defined in the preamble hereto.
"BORROWING BASE": as defined in Section 2.4(a).
"BORROWING DATE": any Business Day specified by the Borrower as a
date on which the Borrower requests the relevant Lenders to make Loans
hereunder.
"BUSINESS": as defined in Section 4.17(b).
"BUSINESS DAY": a day other than a Saturday, Sunday or other day
on which commercial banks in New York City are authorized or required by law to
close, PROVIDED, that with respect to notices and determinations in connection
with, and payments of principal and interest on, Eurodollar Loans, such day is
also a day for trading by and between banks in Dollar deposits in the London
interbank eurodollar market.
"CAPITAL LEASE OBLIGATIONS": as to any Person, the obligations of
such Person to pay rent or other amounts under any lease of (or other
arrangement conveying the right to use) real or personal property, or a
combination thereof, which obligations are required to be classified and
accounted for as capital leases on a balance sheet of such Person under GAAP
and, for the purposes of this Agreement, the amount of such obligations at any
time shall be the capitalized amount thereof at such time determined in
accordance with GAAP.
"CAPITAL STOCK": any and all shares, interests, participations or
other equivalents (however designated) of capital stock of a corporation, any
and all equivalent ownership interests in a Person (other than a corporation)
and any and all warrants, rights or options to purchase any of the foregoing.
"CASH EQUIVALENTS": (a) marketable direct obligations issued by,
or unconditionally guaranteed by, the United States Government or issued by any
agency thereof and backed by the full faith and credit of the United States, in
each case maturing within one year from the date of acquisition; (b)
<PAGE>
certificates of deposit, time deposits, eurodollar time deposits or overnight
bank deposits having maturities of six months or less from the date of
acquisition issued by any Lender or by any commercial bank organized under the
laws of the United States or any state thereof having combined capital and
surplus of not less than $500,000,000; (c) commercial paper of an issuer rated
at least A-1 by S&P or P-1 by Moody's, or carrying an equivalent rating by a
nationally recognized rating agency, if both of the two named rating agencies
cease publishing ratings of commercial paper issuers generally, and maturing
within six months from the date of acquisition; (d) repurchase obligations of
any Lender or of any commercial bank satisfying the requirements of clause (b)
of this definition, having a term of not more than 30 days, with respect to
securities issued or fully guaranteed or insured by the United States
government; (e) securities with maturities of one year or less from the date of
acquisition issued or fully guaranteed by any state, commonwealth or territory
of the United States, by any political subdivision or taxing authority of any
such state, commonwealth or territory or by any foreign government, the
securities of which state, commonwealth, territory, political subdivision,
taxing authority or foreign government (as the case may be) are rated at least A
by S&P or A by Moody's; (f) securities with maturities of six months or less
from the date of acquisition backed by standby letters of credit issued by any
Lender or any commercial bank satisfying the requirements of clause (b) of this
definition; or (g) shares of money market mutual or similar funds which invest
exclusively in assets satisfying the requirements of clauses (a) through (f) of
this definition.
"CHANGE IN LAW": with respect to any Lender or the Accepting Bank,
subsequent to the date hereof, the adoption of any law, rule, regulation,
policy, guideline or directive (whether or not having the force of law) or any
change therein or in the interpretation or application thereof by any
Governmental Authority (including, without limitation, any Federal Reserve Bank
or bank examiner) applicable to such Lender, including, without limitation, the
issuance of any final rule, regulation or guideline by any regulatory agency
having jurisdiction over such Lender or Accepting Bank.
"CLOSING DATE": the date on which the conditions precedent set
forth in Section 5.1 shall have been satisfied, which date is no later than
March 31, 1999.
"CODE": the Internal Revenue Code of 1986, as amended from time to
time.
"COLLATERAL": all property of the Loan Parties, now owned or
hereafter acquired, upon which a Lien is purported to be created by any Security
Document.
"COMMERCIAL L/C": a commercial documentary Letter of Credit under
which the Issuing Lender agrees to make payments in Dollars for the account of
the Borrower, on behalf of the Borrower in respect of obligations of the
Borrower for the purposes described in subsection 4.16(c).
"COMMITMENT": as to any Lender, the sum of the 364-Day Commitment
and the Working Capital Commitment of such Lender.
"COMMITMENT FEE RATE": at any time, the rate per annum designated
as the Commitment Fee Rate on and determined pursuant to the Pricing Grid at
such time.
"COMMONLY CONTROLLED ENTITY": an entity, whether or not
incorporated, that is under common control with the Borrower within the meaning
of Section 4001 of ERISA or is part of a group that includes the Borrower and
that is treated as a single employer under Section 414 of the Code.
"COMPLIANCE CERTIFICATE": a certificate duly executed by a
Responsible Officer substantially in the form of Exhibit B.
<PAGE>
"CONFIDENTIAL INFORMATION MEMORANDUM": the Confidential
Information Memorandum dated February 1999 and furnished to the Lenders.
"CONSOLIDATED EBITDA": for any period, Consolidated Net Income for
such period plus, without duplication and to the extent reflected as a charge in
the statement of such Consolidated Net Income for such period, the sum of (a)
income tax expense, (b) interest expense, amortization or writeoff of debt
discount and debt issuance costs and commissions, discounts and other fees and
charges associated with Indebtedness (including the Loans), (c) depreciation and
amortization expense, (d) amortization of intangibles (including, but not
limited to, goodwill) and organization costs, (e) any extraordinary, unusual or
non-recurring non-cash expenses or losses (including, whether or not otherwise
includable as a separate item in the statement of such Consolidated Net Income
for such period, non-cash losses on sales of assets outside of the ordinary
course of business), PROVIDED, that the amounts referred to in this clause (e)
shall not, in the aggregate, exceed $5,000,000 for any fiscal year of the
Borrower, and (f) any other non-cash charges, and MINUS, to the extent included
in the statement of such Consolidated Net Income for such period, the sum of (a)
any extraordinary, unusual or non-recurring income or gains (including, whether
or not otherwise includable as a separate item in the statement of such
Consolidated Net Income for such period, gains on the sales of assets outside of
the ordinary course of business) and (b) any other non-cash income, all as
determined on a consolidated basis. For the purposes of calculating Consolidated
EBITDA for any period of four consecutive fiscal quarters (each, a "Reference
Period") pursuant to any determination of the Consolidated Leverage Ratio, if
during such Reference Period the Borrower or any Subsidiary shall have made a
Permitted Acquisition, Consolidated EBITDA for such Reference Period shall be
calculated after giving PRO FORMA effect thereto as if such Permitted
Acquisition occurred on the first day of such Reference Period.
"CONSOLIDATED INTEREST COVERAGE RATIO": for any period of four
consecutive fiscal quarters, the ratio of (a) Consolidated EBITDA for such
period to (b) Consolidated Interest Expense for such period.
"CONSOLIDATED INTEREST EXPENSE": for any period, total cash
interest expense (including that attributable to Capital Lease Obligations) of
the Borrower and its Subsidiaries for such period with respect to all
outstanding Indebtedness of the Borrower and its Subsidiaries (including all
commissions, discounts and other fees and charges owed with respect to letters
of credit and bankers' acceptance financing and net costs under Hedge Agreements
in respect of interest rates to the extent such net costs are allocable to such
period in accordance with GAAP).
"CONSOLIDATED LEVERAGE RATIO": for any period of four consecutive
fiscal quarters, the ratio of (a) Consolidated Total Debt as at the last day of
such period to (b) Consolidated EBITDA for such period.
"CONSOLIDATED NET INCOME": for any period, the consolidated net
income (or loss) of the Borrower and its Subsidiaries, determined on a
consolidated basis in accordance with GAAP; PROVIDED that there shall be
excluded (a) the income (or deficit) of any Person accrued prior to the date it
becomes a Subsidiary of the Borrower or is merged into or consolidated with the
Borrower or any of its Subsidiaries, (b) the income (or deficit) of any Person
(other than a Subsidiary of the Borrower) in which the Borrower or any of its
Subsidiaries has an ownership interest, except to the extent that any such
income is actually received by the Borrower or such Subsidiary in the form of
dividends or similar distributions and (c) the undistributed earnings of any
Subsidiary of the Borrower to the extent that the declaration or payment of
dividends or similar distributions by such Subsidiary is not at the time
permitted by the terms of any Contractual Obligation (other than under any Loan
Document) or Requirement of Law applicable to such Subsidiary.
<PAGE>
"CONSOLIDATED NET WORTH": at any date, all amounts that would, in
conformity with GAAP, be included on a consolidated balance sheet of the
Borrower and its Subsidiaries under stockholders' equity at such date.
"CONSOLIDATED SUBSIDIARY GUARANTOR": any Subsidiary Guarantor the
financial results of which would be required to be consolidated for federal
income tax purposes with the financial results of the Borrower.
"CONSOLIDATED TOTAL DEBT": at any date, the aggregate principal
amount of all Indebtedness of the Borrower and its Subsidiaries at such date,
determined on a consolidated basis in accordance with GAAP, provided that for
the purposes hereof, there shall be included in Consolidated Total Debt, in lieu
of the amount of Indebtedness outstanding under the Working Capital Facility on
such date, an amount of Indebtedness equal to (i) the average daily amount of
Total Working Capital Extensions of Credit for the period of four consecutive
fiscal quarters ending on such date (it being agreed that, for the purposes of
calculating such amount for any test period a portion of which is a period prior
to the Closing Date, the average daily amount of Total Working Capital
Extensions of Credit for such pre-Closing Date period shall be deemed to be the
average daily amount of total extensions of credit outstanding under the
revolving credit facility of the Existing Credit Agreement during such
pre-Closing Date period), plus, (ii) for the purpose of determining pro forma
compliance in respect of any Permitted Acquisition or Restricted Payment
pursuant to Sections 7.6(b) or 7.7(g), the amount by which Total Working Capital
Extensions of Credit increased as a result of such Permitted Acquisition or
Restricted Payment.
"CONTINGENT OBLIGATION": as to any Person any guarantee of payment
or performance by such Person of any Indebtedness or other obligation of any
other Person, or any agreement to provide financial assurance with respect to
the financial condition, or the payment of the obligations of, such other Person
(including, without limitation, purchase or repurchase agreements, reimbursement
agreements with respect to letters of credit or acceptances, indemnity
arrangements, grants of security interests to support the obligations of another
Person, keepwell agreements and take-or-pay or through-put arrangements) which
has the effect of assuring or holding harmless any third Person against loss
with respect to one or more obligations of such third Person; provided, however,
that the term Contingent Obligation shall not include endorsements of
instruments for deposit or collection in the ordinary course of business. The
amount of any Contingent Obligation of any Person shall be deemed to be the
lower of (a) an amount equal to the stated or determinable amount of the primary
obligation in respect of which such Contingent Obligation is made and (b) the
maximum amount for which such contingently liable Person may be liable pursuant
to the terms of the instrument embodying such Contingent Obligation, unless such
primary obligation and the maximum amount for which such contingently liable
Person may be liable are not stated or determinable, in which case the amount of
such Contingent Obligation shall be such contingently liable Person's maximum
reasonably anticipated liability in respect thereof as determined by the
Borrower in good faith.
"CONTINUING DIRECTORS": the directors of the Borrower on the
Closing Date and each other director, if, in each case, such other director's
nomination for election to the board of directors of the Borrower is recommended
by at least 66-2/3% of the then Continuing Directors.
"CONTRACTUAL OBLIGATION": as to any Person, any provision of any
security issued by such Person or of any agreement, instrument or other
undertaking to which such Person is a party or by which it or any of its
property is bound.
"DEFAULT": any of the events specified in Section 8, whether or
not any requirement for the giving of notice, the lapse of time, or both, has
been satisfied.
<PAGE>
"DISPOSITION": with respect to any property, any sale, lease, sale
and leaseback, assignment, conveyance, transfer or other disposition thereof.
The terms "DISPOSE" and "DISPOSED OF" shall have correlative meanings.
"DOCUMENTATION AGENT": as defined in the preamble hereto.
"DOLLARS" and "$": dollars in lawful currency of the United
States.
"DOMESTIC SUBSIDIARY": any Subsidiary of the Borrower organized
under the laws of any jurisdiction within the United States.
"DRAFT": a draft, substantially in the form of Exhibit J, or in
such other form as the Accepting Bank shall reasonably request.
"ELIGIBLE ACCOUNTS": the aggregate face amount of accounts of the
Borrower and its Subsidiaries outstanding from time to time, derived from the
business operations of the Borrower and its Subsidiaries, except those accounts
that (a) (i) in the case of accounts that are stated to be due in the month of
November or December in any year and are stated to be due more than 90 days from
the invoice date, are more than 60 days past due based upon the terms indicated
in the original invoice and (ii) in the case of all other accounts, are more
than 90 days past due based upon the terms indicated in the original invoice,
(b) are subject to any Lien, (c) are due to a Subsidiary of the Borrower any
outstanding capital stock of which is subject to a Lien in favor of a Person
other than the Administrative Agent for the ratable benefit of the Lenders, or
(d) are due from an Affiliate, the Borrower or a Subsidiary.
"ELIGIBLE INVENTORY": the aggregate book value of inventory
(including inventory in transit), whether now owned or hereafter acquired, to
which the Borrower and/or any of its Subsidiaries have taken title and which is
not (i) work-in-process, (ii) subject to any Lien or (iii) owned by a Subsidiary
of the Borrower any outstanding capital stock of which is subject to a Lien in
favor of a Person other than the Administrative Agent for the ratable benefit of
the Lenders, after adjusting for reserves for obsolescence, inventory
adjustments and damages (including, but not limited to, foreign exchange
adjustments).
"ENVIRONMENTAL LAWS": any and all foreign, Federal, state, local
or municipal laws, rules, orders, regulations, statutes, ordinances, codes,
decrees, requirements of any Governmental Authority or other Requirements of Law
(including common law) regulating, relating to or imposing liability or
standards of conduct concerning protection of human health or the environment,
as now or may at any time hereafter be in effect.
"ERISA": the Employee Retirement Income Security Act of 1974, as
amended from time to time.
"EUROCURRENCY RESERVE REQUIREMENTS": for any day as applied to a
Eurodollar Loan, the aggregate (without duplication) of the maximum rates
(expressed as a decimal fraction) of reserve requirements in effect on such day
(including basic, supplemental, marginal and emergency reserves under any
regulations of the Board or other Governmental Authority having jurisdiction
with respect thereto) dealing with reserve requirements prescribed for
eurocurrency funding (currently referred to as "Eurocurrency Liabilities" in
Regulation D of the Board) maintained by a member bank of the Federal Reserve
System.
"EURODOLLAR RATE": with respect to each Interest Period pertaining
to a Eurodollar Loan, the rate per annum determined by the Administrative Agent
to be equal to the rate for deposits in Dollars
<PAGE>
for a period equal to such Interest Period commencing on the first day of
such Interest Period appearing on Page 3750 of the Dow Jones Markets screen
as of 11:00 A.M., London time, two London Banking Days prior to the beginning
of such Interest Period which rate, for the avoidance of doubt, is commonly
referred to as the LIBO rate. In the event that such rate does not appear on
Page 3750 of the Dow Jones Markets screen (or otherwise on such screen), the
"EURODOLLAR RATE" shall be determined by the Administrative Agent by
reference to such other comparable publicly available service for displaying
eurodollar rates as may be selected by the Administrative Agent or, in the
absence of such availability, by reference to the rate at which the Reference
Lender is offered Dollar deposits at or about 11:00 A.M., London time, two
London Banking Days prior to the beginning of such Interest Period in the
London interbank eurodollar market for delivery on the first day of such
Interest Period for the number of days comprised therein and in an amount
comparable to the amount of such Eurodollar Loan outstanding during such
Interest Period.
"EURODOLLAR LOANS": Loans the rate of interest applicable to which
is based upon the Eurodollar Rate.
"EURODOLLAR TRANCHE": the collective reference to Eurodollar Loans
the then current Interest Periods with respect to all of which begin on the same
date and end on the same later date (whether or not such Loans shall originally
have been made on the same day).
"EVENT OF DEFAULT": any of the events specified in Section 8,
PROVIDED that any requirement for the giving of notice, the lapse of time, or
both, has been satisfied.
"EXCLUDED FOREIGN SUBSIDIARY": any Foreign Subsidiary in respect
of which the pledge of all of the Capital Stock of such Subsidiary as Collateral
would, in the good faith judgment of the Borrower, result in adverse tax
consequences to the Borrower.
"EXISTING CREDIT AGREEMENT": the Amended and Restated Credit
Agreement, dated as of February 17, 1995, among D56, Inc., the lenders and
agents parties thereto and The Chase Manhattan Bank (formerly Chemical Bank), as
Agent, Issuing Bank and Accepting Bank, as amended.
"FACILITY": each of the 364-Day Facility and the Working Capital
Facility.
"FEDERAL FUNDS EFFECTIVE RATE": for any day, the weighted average
of the rates on overnight federal funds transactions with members of the Federal
Reserve System arranged by federal funds brokers, as published on the next
succeeding Business Day by the Federal Reserve Bank of New York, or, if such
rate is not so published for any day that is a Business Day, the average,
rounded upward to the nearest 1/16th of 1% of the quotations for the day of such
transactions received by the Reference Lender from three federal funds brokers
of recognized standing selected by it.
"FOREIGN SUBSIDIARY": any Subsidiary of the Borrower that is not a
Domestic Subsidiary.
"FUNDING OFFICE": the office of the Administrative Agent specified
in Section 10.2 or such other office as may be specified from time to time by
the Administrative Agent as its funding office by written notice to the Borrower
and the Lenders.
"GAAP": generally accepted accounting principles in the United
States as in effect from time to time, except that for purposes of Section 7.1,
GAAP shall be determined on the basis of such principles in effect on the date
hereof and consistent with those used in the preparation of the most recent
audited financial statements delivered pursuant to Section 4.1(b). In the event
that any "Accounting Change" (as defined below) shall occur and such change
results in a change in the method of calculation of financial covenants,
standards or terms in this Agreement, then the Borrower and the Administrative
Agent
<PAGE>
agree to enter into negotiations in order to amend such provisions of this
Agreement so as to equitably reflect such Accounting Changes with the desired
result that the criteria for evaluating the Borrower's financial condition
shall be the same after such Accounting Changes as if such Accounting Changes
had not been made. Until such time as such an amendment shall have been
executed and delivered by the Borrower, the Administrative Agent and the
Required Lenders, all financial covenants, standards and terms in this
Agreement shall continue to be calculated or construed as if such Accounting
Changes had not occurred. "Accounting Changes" refers to changes in
accounting principles required by the promulgation of any rule, regulation,
pronouncement or opinion by the Financial Accounting Standards Board of the
American Institute of Certified Public Accountants or, if applicable, the SEC.
"GOVERNMENTAL AUTHORITY": any nation or government, any state or
other political subdivision thereof, any agency, authority, instrumentality,
regulatory body, court, central bank or other entity exercising executive,
legislative, judicial, taxing, regulatory or administrative functions of or
pertaining to government, any securities exchange and any self-regulatory
organization (including the National Association of Insurance Commissioners).
"GUARANTEE AND COLLATERAL AGREEMENT": the Guarantee and Collateral
Agreement to be executed and delivered by the Borrower and each Subsidiary
Guarantor, substantially in the form of Exhibit A, as the same may be amended,
supplemented or otherwise modified from time to time.
"GUARANTEE OBLIGATION": as to any Person (the "GUARANTEEING
PERSON"), any obligation of (a) the guaranteeing person or (b) another Person
(including any bank under any letter of credit) to induce the creation of which
the guaranteeing person has issued a reimbursement, counterindemnity or similar
obligation, in either case guaranteeing or in effect guaranteeing any
Indebtedness, leases, dividends or other obligations (the "PRIMARY OBLIGATIONS")
of any other third Person (the "PRIMARY OBLIGOR") in any manner, whether
directly or indirectly, including any obligation of the guaranteeing person,
whether or not contingent, (i) to purchase any such primary obligation or any
property constituting direct or indirect security therefor, (ii) to advance or
supply funds (1) for the purchase or payment of any such primary obligation or
(2) to maintain working capital or equity capital of the primary obligor or
otherwise to maintain the net worth or solvency of the primary obligor, (iii) to
purchase property, securities or services primarily for the purpose of assuring
the owner of any such primary obligation of the ability of the primary obligor
to make payment of such primary obligation or (iv) otherwise to assure or hold
harmless the owner of any such primary obligation against loss in respect
thereof; PROVIDED, HOWEVER, that the term Guarantee Obligation shall not include
endorsements of instruments for deposit or collection in the ordinary course of
business. The amount of any Guarantee Obligation of any guaranteeing person
shall be deemed to be the lower of (a) an amount equal to the stated or
determinable amount of the primary obligation in respect of which such Guarantee
Obligation is made and (b) the maximum amount for which such guaranteeing person
may be liable pursuant to the terms of the instrument embodying such Guarantee
Obligation, unless such primary obligation and the maximum amount for which such
guaranteeing person may be liable are not stated or determinable, in which case
the amount of such Guarantee Obligation shall be such guaranteeing person's
maximum reasonably anticipated liability in respect thereof as determined by the
Borrower in good faith.
"GUARANTORS": the collective reference to the Subsidiary
Guarantors.
"HEDGE AGREEMENTS": all interest rate swaps, caps or collar
agreements or similar arrangements providing for protection against fluctuations
in interest rates or currency exchange rates or the exchange of nominal interest
obligations, either generally or under specific contingencies.
"INDEBTEDNESS": of any Person at any date, without duplication,
(a) all indebtedness of such Person for borrowed money, (b) all obligations of
such Person for the deferred purchase price of
<PAGE>
property or services (other than current trade payables incurred in the
ordinary course of such Person's business), (c) all obligations of such
Person evidenced by notes, bonds, debentures or other similar instruments,
(d) all indebtedness created or arising under any conditional sale or other
title retention agreement with respect to property acquired by such Person
(even though the rights and remedies of the seller or lender under such
agreement in the event of default are limited to repossession or sale of such
property), (e) all Capital Lease Obligations of such Person, (f) all
obligations of such Person, contingent or otherwise, as an account party
under acceptance, letter of credit or similar facilities, (g) the liquidation
value of all redeemable preferred Capital Stock of such Person, (h) all
Guarantee Obligations of such Person in respect of obligations of the kind
referred to in clauses (a) through (g) above; (i) all obligations of the kind
referred to in clauses (a) through (h) above secured by (or for which the
holder of such obligation has an existing right, contingent or otherwise, to
be secured by) any Lien on property (including accounts and contract rights)
owned by such Person, whether or not such Person has assumed or become liable
for the payment of such obligation; and (j) for the purposes of Section 8(e)
only, all obligations of such Person in respect of Hedge Agreements.
"INSOLVENCY": with respect to any Multiemployer Plan, the
condition that such Plan is insolvent within the meaning of Section 4245 of
ERISA.
"INSOLVENT": pertaining to a condition of Insolvency.
"INTELLECTUAL PROPERTY": the collective reference to all rights,
priorities and privileges relating to intellectual property, whether arising
under United States, multinational or foreign laws or otherwise, including
copyrights, copyright licenses, patents, patent licenses, trademarks, trademark
licenses, technology, know-how and processes, and all rights to sue at law or in
equity for any infringement or other impairment thereof, including the right to
receive all proceeds and damages therefrom.
"INTEREST PAYMENT DATE": (a) as to any ABR Loan, the last day of
each March, June, September and December to occur while such Loan is outstanding
and the final maturity date of such Loan, (b) as to any Eurodollar Loan having
an Interest Period of three months or less, the last day of such Interest
Period, (c) as to any Eurodollar Loan having an Interest Period longer than
three months, each day that is three months, or a whole multiple thereof, after
the first day of such Interest Period and the last day of such Interest Period
and (d) as to any Loan (other than any Working Capital Loan that is an ABR
Loan), the date of any repayment or prepayment made in respect thereof.
"INTEREST PERIOD": as to any Eurodollar Loan, (a) initially, the
period commencing on the borrowing or conversion date, as the case may be, with
respect to such Eurodollar Loan and ending one, two, three or six months
thereafter, as selected by the Borrower in its notice of borrowing or notice of
conversion, as the case may be, given with respect thereto; and (b) thereafter,
each period commencing on the last day of the next preceding Interest Period
applicable to such Eurodollar Loan and ending one, two, three or six months
thereafter, as selected by the Borrower by irrevocable notice to the
Administrative Agent not less than three Business Days prior to the last day of
the then current Interest Period with respect thereto; PROVIDED that, all of the
foregoing provisions relating to Interest Periods are subject to the following:
(i) if any Interest Period would otherwise end on a day
that is not a Business Day, such Interest Period shall be extended to
the next succeeding Business Day unless the result of such extension
would be to carry such Interest Period into another calendar month in
which event such Interest Period shall end on the immediately preceding
Business Day;
<PAGE>
(ii) the Borrower may not select an Interest Period under a
particular Facility that would extend beyond the Scheduled Working
Capital Termination Date or beyond the date final payment is due on the
364-Day Loans, as the case may be; and
(iii) any Interest Period that begins on the last Business
Day of a calendar month (or on a day for which there is no numerically
corresponding day in the calendar month at the end of such Interest
Period) shall end on the last Business Day of a calendar month.
"INVESTMENTS": as defined in Section 7.7.
"ISSUING LENDER": The Chase Manhattan Bank, together with any
successor, in its capacity as issuer of any Letter of Credit.
"L/C OBLIGATIONS": at any time, an amount equal to the sum of (a)
the aggregate then undrawn and unexpired amount of the then outstanding Letters
of Credit and (b) the aggregate amount of drawings under Letters of Credit that
have not then been reimbursed pursuant to Section 3.5.
"L/C PARTICIPANTS": the collective reference to all the Working
Capital Lenders other than the Issuing Lender.
"L/C REIMBURSEMENT OBLIGATION": the obligation of the Borrower to
reimburse the Issuing Lender pursuant to Section 3.5 for amounts drawn under
Letters of Credit.
"LENDERS": as defined in the preamble hereto.
"LETTERS OF CREDIT": as defined in Section 3.1(a).
"LIEN": any mortgage, pledge, hypothecation, assignment, deposit
arrangement, encumbrance, lien (statutory or other), charge or other security
interest or any preference, priority or other security agreement or preferential
arrangement of any kind or nature whatsoever (including any conditional sale or
other title retention agreement and any capital lease having substantially the
same economic effect as any of the foregoing).
"LOAN": any loan made by any Lender pursuant to this Agreement.
"LOAN DOCUMENTS": this Agreement, the Security Documents and the
Notes.
"LOAN PARTIES": The Borrower and each Subsidiary of the Borrower
that is a party to a Loan Document.
"LONDON BANKING DAY": any day on which commercial banks are open
for international business (including dealings in Dollar deposits) in London.
"MAJORITY FACILITY LENDERS": with respect to either Facility, the
Majority Working Capital Facility Lenders, in the case of the Working Capital
Facility, or the Majority 364-Day Facility Lenders, in the case of the 364-Day
Facility, as applicable.
"MAJORITY 364-DAY FACILITY LENDERS": at any time, the holders of
more than 50% of the aggregate principal amount of the 364-Day Loans outstanding
at such time (or, during the 364-Day Commitment Period prior to any termination
of the 364-Day Commitments, the holders of more than 50% of the Total 364-Day
Commitments at such time).
<PAGE>
"MAJORITY WORKING CAPITAL FACILITY LENDERS": at any time, the
holders of more than 50% of the Total Working Capital Extensions of Credit
outstanding under such Facility at such time (or, prior to any termination of
the Working Capital Commitments, the holders of more than 50% of the Total
Working Capital Commitments at such time).
"MATERIAL ADVERSE EFFECT": a material adverse effect on (a) the
business, property, operations, condition (financial or otherwise) or prospects
of the Borrower and its Subsidiaries taken as a whole or (b) the validity or
enforceability of this Agreement or any of the other Loan Documents or the
rights or remedies of the Administrative Agent or the Lenders hereunder or
thereunder.
"MATERIAL SUBSIDIARY": any Subsidiary of the Borrower, (a) whose
total assets at the last day of the four consecutive fiscal quarters of the
Borrower for which Section 6.1 financial statements were most recently
delivered, were equal to or greater than 5% of the consolidated total assets of
the Borrower and its Subsidiaries at such date or (b) whose gross revenues for
such period were equal to or greater than 5% of the consolidated gross revenues
of the Borrower and its Subsidiaries for such period, in each case determined in
accordance with GAAP PROVIDED that if, at any time, the Subsidiaries that would
not be Material Subsidiaries pursuant to the foregoing constitute 10% of such
consolidated assets or revenues, a sufficient number of Subsidiaries shall be
designated by the Borrower as "Material Subsidiaries", and the actions taken
with respect thereto set forth in Section 6.9, so that the Subsidiaries that are
not Material Subsidiaries and Subsidiary Guarantors do not constitute 10% or
more of such consolidated assets or revenue.
"MATERIALS OF ENVIRONMENTAL CONCERN": any gasoline or petroleum
(including crude oil or any fraction thereof) or petroleum products,
polychlorinated biphenyls, urea-formaldehyde insulation, asbestos, pollutants,
contaminants, radioactivity, and any other substances or forces of any kind,
whether or not any such substance or force is defined as hazardous or toxic
under any Environmental Law, that is regulated pursuant to or could give rise to
liability under any Environmental Law.
"MOODY'S": Moody's Investors Service, Inc.
"MULTIEMPLOYER PLAN": a Plan that is a multiemployer plan as
defined in Section 4001(a)(3) of ERISA.
"NEGATIVE SECURITY EVENT": the occurrence of any of the following
events during a Positive Security Period, and the giving of notice to the
Borrower by the Administrative Agent that such event has occurred and, in the
case of clause (c), has been determined by the Required Lenders to constitute a
Negative Security Event: (a) the Borrower's unsecured long-term senior non
credit-enhanced debt is rated below BBB- by S&P or below Baa3 by Moody's, (b)
the Borrower's long-term senior unsecured non-credit-enhanced debt shall be
unrated by either S&P and Moody's or (c) an Event of Default shall occur and be
continuing; for purposes of this Agreement, the effectiveness of a Negative
Security Event shall continue from the occurrence thereof pursuant to this
definition until the occurrence thereafter of a Positive Security Event.
"NEGATIVE SECURITY PERIOD": shall mean (i) the period from the
Closing Date until the first occurrence of a Positive Security Event thereafter
and (ii) each period commencing upon the occurrence of a Negative Security Event
and ending upon the occurrence of a Positive Security Event.
"NET CASH PROCEEDS": (a) in connection with any Asset Sale,
Recovery Event or Subsidiary Stock Event, the proceeds thereof in the form of
cash and Cash Equivalents (including any such proceeds received by way of
deferred payment of principal pursuant to a note or installment receivable or
purchase price adjustment receivable or otherwise, but only as and when
received) of such Asset Sale,
<PAGE>
Recovery Event or Subsidiary Stock Event, net of attorneys' fees,
accountants' fees, investment banking fees, amounts required to be applied to
the repayment of Indebtedness secured by a Lien expressly permitted hereunder
on any asset that is the subject of such Asset Sale, Recovery Event or
Subsidiary Stock Event (other than any Lien pursuant to a Security Document)
and other customary fees and expenses actually incurred in connection
therewith and net of taxes paid or reasonably estimated to be payable as a
result thereof and (b) in connection with any issuance or sale of equity
securities or debt securities or instruments or the incurrence of loans, the
cash proceeds received from such issuance or incurrence, net of attorneys'
fees, investment banking fees, accountants' fees, underwriting discounts and
commissions and other customary fees and expenses actually incurred in
connection therewith.
"NON-EXCLUDED TAXES": as defined in Section 2.17(a).
"NON-U.S. LENDER": as defined in Section 2.17(d).
"NOTES": the collective reference to any promissory note
evidencing Loans.
"OBLIGATIONS": the unpaid principal of and interest on (including
interest accruing after the maturity of the Loans and Reimbursement Obligations
and interest accruing after the filing of any petition in bankruptcy, or the
commencement of any insolvency, reorganization or like proceeding, relating to
the Borrower, whether or not a claim for post-filing or post-petition interest
is allowed in such proceeding) the Loans and all other obligations and
liabilities of the Borrower to the Administrative Agent or to any Lender (or, in
the case of Hedge Agreements, any affiliate of any Lender), whether direct or
indirect, absolute or contingent, due or to become due, or now existing or
hereafter incurred, which may arise under, out of, or in connection with, this
Agreement, any other Loan Document, the Letters of Credit, the Acceptances, any
Hedge Agreement entered into with any Lender or any affiliate of any Lender or
any other document made, delivered or given in connection herewith or therewith,
whether on account of principal, interest, reimbursement obligations, fees,
indemnities, costs, expenses (including all reasonable and documented fees,
charges and disbursements of counsel to the Administrative Agent or to any
Lender that are required to be paid by the Borrower pursuant hereto) or
otherwise.
"OTHER TAXES": any and all present or future stamp or documentary
taxes or any other excise or property taxes, charges or similar levies arising
from any payment made hereunder or from the execution, delivery or enforcement
of, or otherwise with respect to, this Agreement or any other Loan Document.
"PARTICIPANT": as defined in Section 10.6(b).
"PBGC": the Pension Benefit Guaranty Corporation established
pursuant to Subtitle A of Title IV of ERISA (or any successor).
"PERMITTED ACQUISITION": any acquisition of property or series of
related acquisitions of property that (a) constitutes assets comprising all or
substantially all of an operating unit of a business or constitutes all or
substantially all of the common stock of a Person and (b) is permitted by and
consummated in compliance with the requirements of Section 7.7(g).
"PERSON": an individual, partnership, corporation, limited
liability company, business trust, joint stock company, trust, unincorporated
association, joint venture, Governmental Authority or other entity of whatever
nature.
<PAGE>
"PLAN": at a particular time, any employee benefit plan that is
covered by ERISA and in respect of which the Borrower or a Commonly Controlled
Entity is (or, if such plan were terminated at such time, would under Section
4069 of ERISA be deemed to be) an "employer" as defined in Section 3(5) of
ERISA.
"PLEDGED STOCK": as defined in the Guarantee and Collateral
Agreement.
"POSITIVE SECURITY EVENT": at any time after all 364-Day Loans
have been paid in full, all 364-Day Commitments have been terminated and all
Obligations under such Facility have been satisfied in full, the occurrence of
both of the following events: (a) the Borrower's unsecured long-term senior non
credit-enhanced debt is rated at least BBB- by S&P and at least Baa3 by Moody's
and (b) if a Negative Security Period is in effect and if an Event of Default
gave rise to such Negative Security Period (and the conditions in clause (a) are
also satisfied), the Required Lenders have determined that such Event of Default
shall no longer be continuing.
"POSITIVE SECURITY PERIOD": shall mean (i) each period commencing
upon the occurrence of a Positive Security Event and ending upon the occurrence
of a Negative Security Event and (ii) if the events specified in clause (a) of
the definition of Positive Security Event shall have occurred and are in effect
on the Closing Date, from the Closing Date until the first occurrence of a
Negative Security Event thereafter.
"PRICING GRID": the pricing grid attached hereto as Annex A.
"PRO FORMA CAPITALIZATION TABLE": as defined in Section 4.1(a).
"PROCEEDS": as defined in the Guarantee and Collateral Agreement.
"PROPERTIES": as defined in Section 4.17(a).
"RECOVERY EVENT": any settlement or payment in excess of $500,000
in respect of any property or casualty insurance claim (other than business
interruption insurance claims) or any condemnation proceeding relating to any
asset (other than assets constituting inventory) of the Borrower or any of its
Subsidiaries.
"REFERENCE LENDER": The Chase Manhattan Bank.
"REGISTER": as defined in Section 10.6(d).
"REGULATION U": Regulation U of the Board as in effect from time
to time.
"REIMBURSEMENT OBLIGATION": the collective reference to the L/C
Reimbursement Obligations and the Acceptance Reimbursement Obligations.
"REINVESTMENT DEFERRED AMOUNT": with respect to any Reinvestment
Event, that portion of the aggregate Net Cash Proceeds received by the Borrower
or any of its Subsidiaries in connection therewith that but for the delivery of
a Reinvestment Notice would have been required to be applied to the prepayment
of 364-Day Loans.
"REINVESTMENT EVENT": any Asset Sale, Recovery Event or Subsidiary
Stock Event in respect of which the Borrower has delivered a Reinvestment
Notice.
<PAGE>
"REINVESTMENT NOTICE": a written notice executed by a Responsible
Officer stating that no Event of Default has occurred and is continuing and that
the Borrower (directly or indirectly through a Subsidiary) intends and expects
to use all or a specified portion of the Net Cash Proceeds of an Asset Sale,
Recovery Event or Subsidiary Stock Event to acquire assets useful in the
Borrower's Business within 180 days.
"REINVESTMENT PREPAYMENT AMOUNT": with respect to any Reinvestment
Event, the Reinvestment Deferred Amount relating thereto less any amount
expended prior to the relevant Reinvestment Prepayment Date to acquire assets
useful in the Borrower's business.
"REINVESTMENT PREPAYMENT DATE": with respect to any Reinvestment
Event, the earlier of (a) the date occurring six months after such Reinvestment
Event and (b) the date on which the Borrower shall have determined not to
acquire assets useful in the Borrower's business with all or any portion of the
relevant Reinvestment Deferred Amount or, in the case of this clause (b) only,
such later dates as chosen by the Borrower to coincide with the end of one or
more Interest Periods so long as such later dates are not more than six months
after such Reinvestment Event.
"REORGANIZATION": with respect to any Multiemployer Plan, the
condition that such plan is in reorganization within the meaning of Section 4241
of ERISA.
"REPORTABLE EVENT": any of the events set forth in Section 4043(c)
of ERISA, other than those events as to which the thirty day notice period is
waived under PBGC Reg. ss. 4043.
"REQUIRED LENDERS": at any time, the holders of more than 50% of
the sum of (i) the Total 364-Day Commitments then in effect or, after the
364-Day Commitment Period or after the termination of the 364-Day Commitments,
aggregate unpaid principal amount of the 364-Day Loans then outstanding, and
(ii) the Total Working Capital Commitments then in effect or, if the Working
Capital Commitments have been terminated, the Total Working Capital Extensions
of Credit then outstanding.
"REQUIRED PREPAYMENT LENDERS": the Majority Facility Lenders in
respect of each Facility.
"REQUIREMENT OF LAW": as to any Person, the Certificate of
Incorporation and By-Laws or other organizational or governing documents of such
Person, and any law, treaty, rule or regulation or determination of an
arbitrator or a court or other Governmental Authority, in each case applicable
to or binding upon such Person or any of its property or to which such Person or
any of its property is subject.
"RESPONSIBLE OFFICER": the chief executive officer, president or
chief financial officer of the Borrower, but in any event, with respect to
financial matters, the chief financial officer of the Borrower.
"RESTRICTED PAYMENTS": as defined in Section 7.6.
"S&P": Standard & Poor's Ratings Group.
"SCHEDULED WORKING CAPITAL TERMINATION DATE": March 19, 2004.
"SEC": the Securities and Exchange Commission, any successor
thereto and any analogous Governmental Authority.
"SECURITY DOCUMENTS": the collective reference to the Guarantee
and Collateral Agreement, and all other security documents hereafter delivered
to the Administrative Agent granting a
<PAGE>
Lien on any property of any Person to secure the obligations and liabilities
of any Loan Party under any Loan Document.
"SECURITY PERFECTION DATE": the date that is five days after the
date that the Administrative Agent gives notice of the occurrence of a Negative
Security Event.
"SINGLE EMPLOYER PLAN": any Plan that is covered by Title IV of
ERISA, but that is not a Multiemployer Plan.
"SOLVENT": when used with respect to any Person, means that, as of
any date of determination, (a) the amount of the "present fair saleable value"
of the assets of such Person will, as of such date, exceed the amount of all
"liabilities of such Person, contingent or otherwise", as of such date, as such
quoted terms are determined in accordance with applicable federal and state laws
governing determinations of the insolvency of debtors, (b) the present fair
saleable value of the assets of such Person will, as of such date, be greater
than the amount that will be required to pay the liability of such Person on its
debts as such debts become absolute and matured, (c) such Person will not have,
as of such date, an unreasonably small amount of capital with which to conduct
its business, and (d) such Person will be able to pay its debts as they mature.
For purposes of this definition, (i) "debt" means liability on a "claim", and
(ii) "claim" means any (x) right to payment, whether or not such a right is
reduced to judgment, liquidated, unliquidated, fixed, contingent, matured,
unmatured, disputed, undisputed, legal, equitable, secured or unsecured or (y)
right to an equitable remedy for breach of performance if such breach gives rise
to a right to payment, whether or not such right to an equitable remedy is
reduced to judgment, fixed, contingent, matured or unmatured, disputed,
undisputed, secured or unsecured.
"STANDBY L/C": an irrevocable letter of credit under which the
Issuing Lender agrees to make payments in Dollars for the account of the
Borrower, on behalf of the Borrower or any Subsidiary thereof for purposes
described in subsection 4.16(d).
"SUBSIDIARY": as to any Person, a corporation, partnership,
limited liability company or other entity of which shares of stock or other
ownership interests having ordinary voting power (other than stock or such other
ownership interests having such power only by reason of the happening of a
contingency) to elect a majority of the board of directors or other managers of
such corporation, partnership or other entity are at the time owned, or the
management of which is otherwise controlled, directly or indirectly through one
or more intermediaries, or both, by such Person. Unless otherwise qualified, all
references to a "Subsidiary" or to "Subsidiaries" in this Agreement shall refer
to a Subsidiary or Subsidiaries of the Borrower.
"SUBSIDIARY GUARANTOR": each Subsidiary of the Borrower that is a
party to the Guarantee and Collateral Agreement as a guarantor thereunder (it
being understood that except as required by the definition of "Material
Subsidiary", Subsidiaries that are not Material Subsidiaries and Subsidiaries
that are Foreign Subsidiaries are not required by this Agreement to become
Subsidiary Guarantors, but may elect to do so).
"SUBSIDIARY STOCK EVENT": the sale or issuance of Capital Stock of
any Subsidiary of the Borrower.
"364-DAY COMMITMENT": as to any Lender, the obligation of such
Lender, if any, to make a 364-Day Loan to the Borrower hereunder in a principal
amount not to exceed the amount set forth under the heading "364-Day Commitment"
opposite such Lender's name on Schedule 1.1A or in the Assignment and Acceptance
pursuant to which such Lender became a party hereto, as the same may be changed
from time to time pursuant to the terms hereof.
<PAGE>
"364-DAY COMMITMENT PERIOD": the period from and including the
Closing Date to the 364-Day Termination Date.
"364-DAY FACILITY": the 364-Day Commitments and the 364-Day Loans
hereunder.
"364-DAY LENDER": each Lender that has a 364-Day Commitment or is
the holder of a 364-Day Loan.
"364-DAY LOANS": as defined in Section 2.1.
"364-DAY PERCENTAGE": as to any 364-Day Lender at any time, the
percentage which such Lender's 364-Day Commitment then constitutes of the Total
364-Day Commitments (or, at any time after the 364-Day Commitment Period or the
termination of the 364-Day Commitments, the percentage which the aggregate
principal amount of such Lender's 364-Day Loans then outstanding constitutes of
the aggregate principal amount of the 364-Day Loans then outstanding).
"364-DAY TERMINATION DATE": the 364th day following the Closing
Date.
"TOTAL 364-DAY COMMITMENTS": at any time, the aggregate amount of
the 364-Day Commitments then in effect. The original amount of the Total 364-Day
Commitments is $150,000,000.
"TOTAL WORKING CAPITAL COMMITMENTS": at any time, the aggregate
amount of the Working Capital Commitments then in effect. The original amount of
the Total Working Capital Commitments is $100,000,000.
"TOTAL WORKING CAPITAL EXTENSIONS OF CREDIT": at any time, the
aggregate amount of the Working Capital Extensions of Credit of the Working
Capital Lenders outstanding at such time.
"TRANSFEREE": any Assignee or Participant.
"TYPE": as to any Loan, its nature as an ABR Loan or a Eurodollar
Loan.
"UNIFORM COMMERCIAL CODE": the Uniform Commercial Code as from
time to time in effect in the State of New York.
"UNITED STATES": the United States of America.
"U.S. TAXES": as defined in Section 10.6(d).
"WORKING CAPITAL COMMITMENT": as to any Lender, the obligation of
such Lender, if any, to make Working Capital Loans, to participate in Letters of
Credit and to create or participate in Acceptances, in an aggregate principal
and/or face amount not to exceed the amount set forth under the heading "Working
Capital Commitment" opposite such Lender's name on Schedule 1.1A or in the
Assignment and Acceptance pursuant to which such Lender became a party hereto,
as the same may be changed from time to time pursuant to the terms hereof.
"WORKING CAPITAL COMMITMENT PERIOD": the period from and including
the Closing Date to the Scheduled Working Capital Termination Date; PROVIDED
that with respect to Acceptances, the "Working Capital Commitment Period" shall
be the period including the Closing Date to but not including the then
applicable Acceptance Termination Date.
<PAGE>
"WORKING CAPITAL EXTENSIONS OF CREDIT": as to any Working Capital
Lender at any time, an amount equal to the sum of (a) the aggregate principal
amount of all Working Capital Loans held by such Lender then outstanding, (b)
such Lender's Working Capital Percentage of the L/C Obligations then outstanding
and (c) such Lender's Working Capital Percentage of the Acceptance Obligations
then outstanding.
"WORKING CAPITAL FACILITY": the Working Capital Commitments and
the Working Capital Extensions of Credit.
"WORKING CAPITAL LENDER": each Lender that has a Working Capital
Commitment or that holds Working Capital Loans.
"WORKING CAPITAL LOANS": as defined in Section 2.4(a).
"WORKING CAPITAL PERCENTAGE": as to any Working Capital Lender at
any time, the percentage which such Lender's Working Capital Commitment then
constitutes of the Total Working Capital Commitments (or, at any time after the
Working Capital Commitments shall have expired or terminated, the percentage
which the aggregate principal amount of such Lender's Working Capital Extensions
of Credit then outstanding constitutes of the Total Working Capital Extensions
of Credit at such time).
"WORKING CAPITAL TERMINATION DATE": the earlier of (a) the
Scheduled Working Capital Termination Date and (b) the date on which the Working
Capital Loans shall be paid in full and the Working Capital Commitments
terminated.
1.2 OTHER DEFINITIONAL PROVISIONS. (a) Unless otherwise specified
therein, all terms defined in this Agreement shall have the defined meanings
when used in the other Loan Documents or any certificate or other document made
or delivered pursuant hereto or thereto.
(b) As used herein and in the other Loan Documents, and any
certificate or other document made or delivered pursuant hereto or thereto, (i)
accounting terms relating to the Borrower and its Subsidiaries not defined in
Section 1.1 and accounting terms partly defined in Section 1.1, to the extent
not defined, shall have the respective meanings given to them under GAAP, and
(ii) the words "include", "includes" and "including" shall be deemed to be
followed by the phrase "without limitation".
(c) The words "hereof", "herein" and "hereunder" and words of
similar import when used in this Agreement shall refer to this Agreement as a
whole and not to any particular provision of this Agreement, and Section,
Schedule and Exhibit references are to this Agreement unless otherwise
specified.
(d) The meanings given to terms defined herein shall be equally
applicable to both the singular and plural forms of such terms.
(e) Section headings are for ease of reference only, and shall not
be used in the interpretation of this Agreement.
SECTION 2. AMOUNT AND TERMS OF COMMITMENTS
2.1 364-DAY COMMITMENTS. Subject to the terms and conditions
hereof, each 364-Day Lender severally agrees to make loans ("364-DAY LOANS") to
the Borrower from time to time during the 364-Day Commitment Period in an
aggregate principal amount at any one time outstanding which does not
<PAGE>
exceed the amount of such Lender's 364-Day Commitment. During the 364-Day
Commitment Period the Borrower may use the 364-Day Commitments by borrowing,
prepaying the 364-Day Loans in whole or in part, and reborrowing, all in
accordance with the terms and conditions hereof. The 364-Day Loans may from
time to time be Eurodollar Loans or ABR Loans, as determined by the Borrower
and notified to the Administrative Agent in accordance with Sections 2.2 and
2.10.
2.2 PROCEDURE FOR 364-DAY LOAN BORROWING. (a) The Borrower may
borrow under the 364-Day Commitments during the 364-Day Commitment Period on any
Business Day, provided that the Borrower shall give the Administrative Agent
irrevocable notice (which notice must be received by the Administrative Agent
(a) prior to 12:00 Noon, New York City time, three Business Days prior to the
requested Borrowing Date, in the case of Eurodollar Loans, or (b) prior to 10:00
a.m., New York City time, the same Business Day as the requested Borrowing Date,
in the case of ABR Loans), specifying (i) the amount and Type of 364-Day Loans
to be borrowed, (ii) the requested Borrowing Date and (iii) in the case of
Eurodollar Loans, the respective amounts of each Eurodollar Tranche and the
respective lengths of the initial Interest Periods therefor. Any 364-Day Loans
made on the Closing Date shall initially be ABR Loans. Each borrowing under the
364-Day Commitments shall be in an amount equal to (x) in the case of ABR Loans,
$1,000,000 or a $1,000,000 multiple (or, if the then aggregate Available 364-Day
Commitments are less than $1,000,000 such lesser amount) and (y) in the case of
Eurodollar Loans, $5,000,000 or a whole multiple of $1,000,000 in excess
thereof. Upon receipt of any such notice from the Borrower, the Administrative
Agent shall promptly notify each 364-Day Lender thereof. Each 364-Day Lender
will make the amount of its PRO RATA share of each borrowing available to the
Administrative Agent for the account of the Borrower at the Funding Office prior
to 12:00 Noon, New York City time, on the Borrowing Date requested by the
Borrower in funds immediately available to the Administrative Agent. Such
borrowing will, as soon as practicable, be made available to the Borrower by the
Administrative Agent crediting the account of the Borrower on the books of such
office with the aggregate of the amounts made available to the Administrative
Agent by the 364-Day Lenders and in like funds as received by the Administrative
Agent.
(b) Any amount outstanding as of the 364-Day Termination Date
shall be repaid as set forth in Section 2.3.
2.3 REPAYMENT OF 364-DAY LOANS. The 364-Day Loan of each 364-Day
Lender shall mature and be payable in 4 consecutive annual installments,
commencing on March 19, 2001, each of which shall be in an amount equal to such
Lender's 364-Day Percentage of the amount equal to the percentage set forth
below opposite such installment of the aggregate amount of the 364-Day Loans
outstanding as of the 364-Day Termination Date (as each such installment may
have been reduced by application of prepayments thereto pursuant to Sections 2.8
and 2.9):
INSTALLMENT PERCENTAGE OF PRINCIPAL AMOUNT
----------- -------------------------------
March 19, 2001 15%
March 19, 2002 20%
March 19, 2003 25%
March 19, 2004 40%
2.4 WORKING CAPITAL COMMITMENTS. (a) Subject to the terms and
conditions hereof, each Working Capital Lender severally agrees to make working
capital loans ("WORKING CAPITAL LOANS") to the Borrower from time to time during
the Working Capital Commitment Period in an aggregate principal amount at any
one time outstanding which, when added to such Lender's Working Capital
Percentage of the sum of (i) the L/C Obligations then outstanding and (ii) the
Acceptance Obligations, does not exceed the amount of such Lender's Working
Capital Commitment. Notwithstanding the above, in no event shall
<PAGE>
any Working Capital Loan be made, Letter of Credit be issued or Acceptance be
created, if, after giving effect to such making, issuance or creation and the
use of proceeds thereof as irrevocably directed by the Borrower, the Total
Working Capital Extensions of Credit would exceed the greater of (A)
$30,000,000 and (B) the sum of 80% of the aggregate amount of all Eligible
Accounts and 50% of the aggregate amount of all Eligible Inventory as of the
date of the most recent certificate furnished to the Administrative Agent
pursuant to Section 5.1(k) or Section 6.2(g) (such greater amount, the
"Borrowing Base"). During the Working Capital Commitment Period the Borrower
may use the Working Capital Commitments by borrowing, prepaying the Working
Capital Loans in whole or in part, and reborrowing, all in accordance with
the terms and conditions hereof. The Working Capital Loans may from time to
time be Eurodollar Loans or ABR Loans, as determined by the Borrower and
notified to the Administrative Agent in accordance with Sections 2.5 and 2.10.
(b) The Borrower shall repay all outstanding Working Capital Loans
on the Scheduled Working Capital Termination Date.
2.5 PROCEDURE FOR WORKING CAPITAL LOAN BORROWING. The Borrower may
borrow under the Working Capital Facility during the Working Capital Commitment
Period on any Business Day, provided that the Borrower shall give the
Administrative Agent irrevocable notice (which notice must be received by the
Administrative Agent (a) prior to 12:00 Noon, New York City time three Business
Days prior to the requested Borrowing Date, in the case of Eurodollar Loans, or
(b) prior to 10:00 a.m., New York City time the same Business Day as the
requested Borrowing Date, in the case of ABR Loans), specifying (i) the amount
and Type of Working Capital Loans to be borrowed, (ii) the requested Borrowing
Date and (iii) in the case of Eurodollar Loans, the respective amounts of each
Eurodollar Tranche and the respective lengths of the initial Interest Periods
therefor. Any Working Capital Loans made on the Closing Date shall initially be
ABR Loans. Each borrowing under the Working Capital Commitments shall be in an
amount equal to (x) in the case of ABR Loans, $250,000 or a whole multiple
thereof (or, if the then aggregate Available Working Capital Commitments are
less than $250,000, such lesser amount) and (y) in the case of Eurodollar Loans,
$1,500,000 or a whole multiple of $500,000 in excess thereof. Upon receipt of
any such notice from the Borrower, the Administrative Agent shall promptly
notify each Working Capital Lender thereof. Each Working Capital Lender will
make the amount of its pro rata share of each borrowing available to the
Administrative Agent for the account of the Borrower at the Funding Office prior
to 12:00 Noon, New York City time, on the Borrowing Date requested by the
Borrower in funds immediately available to the Administrative Agent. Such
borrowing will, as soon as practicable, be made available to the Borrower by the
Administrative Agent crediting the account of the Borrower on the books of such
office with the aggregate of the amounts made available to the Administrative
Agent by the Working Capital Lenders and in like funds as received by the
Administrative Agent.
2.6 COMMITMENT FEES, ETC. (a) The Borrower agrees to pay to the
Administrative Agent for the account of each Working Capital Lender a commitment
fee for the period from and including the Closing Date to the last day of the
Working Capital Commitment Period, computed at the Commitment Fee Rate on the
average daily amount of the Available Working Capital Commitment of such Lender
during the period for which payment is made, payable quarterly in arrears at the
rates set forth in the Pricing Grid on Annex A; PROVIDED, HOWEVER, that if the
applicable Commitment Fee Rate changes during such period for which payment is
made, the commitment fee shall be calculated by applying the applicable
Commitment Fee Rate to the average daily amount of the Available Working Capital
Commitment during the portion of such period during which such Commitment Fee
Rate was in effect.
(b) The Borrower agrees to pay to the Administrative Agent for the
account of each 364-Day Lender a commitment fee for the period from and
including the Closing Date to the last day of the 364-Day Commitment Period,
computed at the Commitment Fee Rate on the average daily amount of the Available
364-Day Commitment of such Lender during the period for which payment is made,
payable
<PAGE>
quarterly in arrears at the rates set forth in the Pricing Grid on Annex A;
provided, however, that if the applicable Commitment Fee Rate changes during
such period for which payment is made, the commitment fee shall be calculated
by applying the applicable Commitment Fee Rate to the average daily amount of
the Available 364-Day Commitment during the portion of such period during
which such Commitment Fee Rate was in effect.
(c) The Borrower agrees to pay to the Administrative Agent the
fees in the amounts and on the dates previously agreed to in writing by the
Borrower and the Administrative Agent.
2.7 TERMINATION OR REDUCTION OF COMMITMENTS. (a) The Borrower
shall have the right, upon not less than three Business Days' notice to the
Administrative Agent, to terminate the Working Capital Commitments or, from time
to time, to reduce the amount of the Working Capital Commitments; PROVIDED that
no such termination or reduction of Working Capital Commitments shall be
permitted if, after giving effect thereto and to any prepayments of the Working
Capital Loans made on the effective date thereof, the Total Working Capital
Extensions of Credit would exceed the Total Working Capital Commitments. Any
such reduction shall be in an amount equal to $5,000,000, or a whole multiple
thereof, and shall reduce permanently the Working Capital Commitments then in
effect.
(b) The Borrower shall have the right, upon not less than three
Business Days' notice to the Administrative Agent, to terminate the 364-Day
Commitments or, from time to time, to reduce the amount of the 364-Day
Commitments; PROVIDED that no such termination or reduction of 364-Day
Commitments shall be permitted if, after giving effect thereto and to any
prepayments of the 364-Day Loans made on the effective date thereof, the
aggregate principal amount of 364-Day Loans then outstanding would exceed the
Total 364-Day Commitments. Any such reduction shall be in an amount equal to
$5,000,000, or a whole multiple thereof, and shall reduce permanently the
364-Day Commitments then in effect.
2.8 OPTIONAL PREPAYMENTS. The Borrower may at any time and from
time to time prepay the Loans, in whole or in part, without premium or penalty,
upon irrevocable notice delivered to the Administrative Agent at least three
Business Days prior thereto in the case of Eurodollar Loans and at least one
Business Day prior thereto in the case of ABR Loans, which notice shall specify
the date and amount of prepayment, whether such prepayment is under the Working
Capital Facility or the 364 Day Facility and whether the prepayment is of
Eurodollar Loans or ABR Loans; PROVIDED, that if a Eurodollar Loan is prepaid on
any day other than the last day of the Interest Period applicable thereto, the
Borrower shall also pay any amounts owing pursuant to Section 2.18(c). Upon
receipt of any such notice the Administrative Agent shall promptly notify each
relevant Lender thereof. If any such notice is given, the amount specified in
such notice shall be due and payable on the date specified therein, together
with (except in the case of Working Capital Loans that are ABR Loans and, during
the 364-Day Commitment Period, 364-Day Loans that are ABR Loans) accrued
interest to such date on the amount prepaid. Partial prepayments of Loans shall
be in an aggregate principal amount of at least $1,000,000 in the case of
364-Day Loans or at least $250,000 in the case of Working Capital Loans.
Optional prepayments with respect to the 364-Day Facility made after the 364-Day
Termination Date shall be applied first to the remaining balance of the next
scheduled principal installment of the 364-Day Loans and then to the remaining
installments of the 364-Day Loans on a PRO RATA basis, and may not be
reborrowed.
2.9 MANDATORY PREPAYMENTS AND COMMITMENT REDUCTIONS.
(a) Unless the Required Prepayment Lenders under the 364-Day
Facility shall otherwise agree, if on any date the Borrower or any of its
Subsidiaries shall receive Net Cash Proceeds from any Asset Sale, Recovery Event
or Subsidiary Stock Event that, when added to the aggregate amount of such Net
Cash Proceeds prior thereto in the same fiscal year of the Borrower, exceed
$20,000,000, then, unless
<PAGE>
a Reinvestment Notice shall be delivered in respect thereof, 75% of the
amount by which such aggregate Net Cash Proceeds received during such fiscal
year exceed $20,000,000 shall be applied on such date toward the prepayment
of the 364-Day Loans and the reduction of the 364-Day Commitments as set
forth in Section 2.9(b); PROVIDED, that on each Reinvestment Prepayment Date,
an amount equal to the Reinvestment Prepayment Amount with respect to the
relevant Reinvestment Event shall be applied toward the prepayment of the
364-Day Loans and the reduction of the 364-Day Commitments as set forth in
Section 2.9(b), and PROVIDED, FURTHER, in the case of any such required
prepayment in respect of which a Reinvestment Notice has not been delivered,
such prepayment may be made on a date subsequent to the date of receipt of
such Net Cash Proceeds chosen by the Borrower to coincide with the end of one
or more Interest Periods so long as such later date is not more than six
months after such date of receipt of such Net Cash Proceeds.
(b) Prior to the 364-Day Termination Date, the Total 364-Day
Commitments shall automatically be permanently reduced by the amount required to
be applied to prepayments and 364-Day Commitment reductions pursuant to Section
2.9(a). After the 364-Day Termination Date, prepayments required by Section
2.9(a) shall be applied first to the remaining balance of the next scheduled
principal installment of the 364-Day Loans and then to the remaining
installments of the 364-Day Loans on a pro rata basis, and may not be
reborrowed.
(c) Unless the Required Prepayment Lenders under the Working
Capital Facility shall agree otherwise, if on any date the Total Working Capital
Extensions of Credit exceeds the Borrowing Base then in effect as of the date of
the most recent certificate furnished to the Administrative Agent pursuant to
Section 5.1(k) or Section 6.2(g), the Working Capital Loans shall be repaid on
such date, and obligations in respect of Acceptances and Letters of Credit shall
be replaced or cash collateralized on such date as set forth below, to the
extent that the Total Working Capital Extensions of Credit exceeds such
Borrowing Base. If the aggregate principal amount of Working Capital Loans
outstanding on the date of any such required prepayment is less than the amount
of the excess of the Total Working Capital Extensions of Credit over such
Borrowing Base (because L/C Obligations and Acceptance Obligations constitute a
portion thereof), the Borrower shall, to the extent of the balance of such
excess, replace outstanding Letters of Credit and/or deposit, in respect of
outstanding L/C Obligations and Acceptance Obligations, an amount in cash in a
cash collateral account established with the Administrative Agent for the
benefit of the Lenders on terms and conditions satisfactory to the
Administrative Agent.
(d) The Borrower shall borrow and repay Working Capital Loans,
cause Acceptance Obligations to be created and repaid, and cause Letters of
Credit to be issued and expire, in such a way so that for at least 30
consecutive days annually during the period beginning November 1 and ending on
March 31 the Total Working Capital Extensions of Credit do not exceed
$30,000,000 for such 30-day period.
(e) Each prepayment of the Loans under Section 2.9 (except in the
case of Working Capital Loans that are ABR Loans and, during the 364-Day
Commitment Period, 364-Day Loans that are ABR Loans) shall be accompanied by
accrued interest to the date of such prepayment on the amount prepaid.
2.10 CONVERSION AND CONTINUATION OPTIONS. (a) The Borrower may
elect from time to time to convert Eurodollar Loans to ABR Loans by giving the
Administrative Agent at least two Business Days' prior irrevocable notice of
such election, provided that any such conversion of Eurodollar Loans may only be
made on the last day of an Interest Period with respect thereto. The Borrower
may elect from time to time to convert ABR Loans to Eurodollar Loans by giving
the Administrative Agent at least three Business Days' prior irrevocable notice
of such election (which notice shall specify the length of the initial Interest
Period therefor), PROVIDED that no ABR Loan under a particular Facility may be
converted into a Eurodollar Loan when any Event of Default has occurred and is
continuing and the Administrative Agent
<PAGE>
or the Majority Facility Lenders in respect of such Facility have determined
in its or their sole discretion not to permit such conversions. Upon receipt
of any such notice the Administrative Agent shall promptly notify each
relevant Lender thereof.
(b) Any Eurodollar Loan may be continued as such upon the
expiration of the then current Interest Period with respect thereto by the
Borrower giving irrevocable notice to the Administrative Agent, in accordance
with the applicable provisions of the term "Interest Period" set forth in
Section 1.1, of the length of the next Interest Period to be applicable to such
Loans, PROVIDED that no Eurodollar Loan under a particular Facility may be
continued as such when any Event of Default has occurred and is continuing and
the Administrative Agent has or the Majority Facility Lenders in respect of such
Facility have determined in its or their sole discretion not to permit such
continuations, and PROVIDED, FURTHER, that if the Borrower shall fail to give
any required notice as described above in this paragraph or if such continuation
is not permitted pursuant to the preceding proviso such Loans shall be
automatically converted to ABR Loans on the last day of such then expiring
Interest Period. Upon receipt of any such notice the Administrative Agent shall
promptly notify each relevant Lender thereof.
2.11 LIMITATIONS ON EURODOLLAR TRANCHES. Notwithstanding anything
to the contrary in this Agreement, all borrowings, conversions and continuations
of Eurodollar Loans hereunder and all selections of Interest Periods hereunder
shall be in such amounts and be made pursuant to such elections so that, (a)
after giving effect thereto, the aggregate principal amount of the Eurodollar
Loans comprising each Eurodollar Tranche shall be equal to $1,000,000 or a whole
multiple of $500,000 in excess thereof and (b) no more than twenty-five
Eurodollar Tranches shall be outstanding at any one time. If practicable, the
Borrower shall select Interest Periods so as not to require a principal payment
with respect to any Eurodollar Loan during an Interest Period for such Loan.
2.12 INTEREST RATES AND PAYMENT DATES. (a) Each Eurodollar Loan
shall bear interest for each day during each Interest Period with respect
thereto at a rate per annum equal to the Eurodollar Rate determined for such
Interest Period plus the Applicable Margin in effect from time to time.
(b) Each ABR Loan shall bear interest for each day at a rate per
annum equal to the ABR plus the Applicable Margin in effect from time to time.
(c) Notwithstanding the foregoing, if any principal of or interest
on any Loan or any fee or other amount payable by the Borrower hereunder is not
paid when due, whether at stated maturity, upon acceleration or otherwise, such
overdue amount shall, without limiting the rights of the Lenders under Section
8, bear interest, after as well as before judgment, at a rate per annum equal to
(i) in the case of overdue principal of any Loan, 2% plus the rate otherwise
applicable to such Loan as provided in the preceding paragraphs of this section
or (ii) in the case of any other amount, 2% plus the rate applicable to ABR
Loans as provided in paragraph (b) of the Section 2.12.
(d) Interest shall be payable in arrears on each Interest Payment
Date, PROVIDED that interest accruing pursuant to paragraph (c) of this Section
2.12 shall be payable from time to time on demand.
2.13 COMPUTATION OF INTEREST AND FEES. (a) Interest and fees
payable pursuant hereto shall be calculated on the basis of a 360-day year for
the actual days elapsed, except that, with respect to ABR Loans the rate of
interest on which is calculated on the basis of the Prime Rate, the interest
thereon shall be calculated on the basis of a 365- (or 366-, as the case may be)
day year for the actual days elapsed. The Administrative Agent shall as soon as
practicable notify the Borrower and the relevant Lenders of each determination
of a Eurodollar Rate. Any change in the interest rate on a Loan resulting from a
change in the ABR shall become effective as of the opening of business on the
day on which such change becomes
<PAGE>
effective. The Administrative Agent shall as soon as practicable notify the
Borrower and the relevant Lenders of the effective date and the amount of
each such change in interest rate.
(b) Each determination of an interest rate by the Administrative
Agent pursuant to any provision of this Agreement shall be conclusive and
binding on the Borrower and the Lenders in the absence of manifest error. The
Administrative Agent shall, at the request of the Borrower, deliver to the
Borrower a statement showing the quotations used by the Administrative Agent in
determining any interest rate pursuant to Section 2.12(a).
2.14 INABILITY TO DETERMINE INTEREST RATE. If prior to the first
day of any Interest Period:
(a) the Administrative Agent shall have reasonably determined
(which determination shall be conclusive and binding upon the Borrower) that, by
reason of circumstances affecting the relevant market, adequate and reasonable
means do not exist for ascertaining the Eurodollar Rate for such Interest
Period, or
(b) the Administrative Agent shall have received notice from
the Majority Facility Lenders in respect of the relevant Facility that the
Eurodollar Rate determined or to be determined for such Interest Period will
not adequately and fairly reflect the cost to such Lenders (as conclusively
certified by such Lenders) of making or maintaining their affected Loans
during such Interest Period, the Administrative Agent shall give telecopy or
telephonic notice thereof to the Borrower and the relevant Lenders as soon as
practicable thereafter. If such notice is given (x) any Eurodollar Loans
under the relevant Facility requested to be made on the first day of such
Interest Period shall be made as ABR Loans, (y) any Loans under the relevant
Facility that were to have been converted on the first day of such Interest
Period to Eurodollar Loans shall be continued as ABR Loans and (z) any
outstanding Eurodollar Loans under the relevant Facility shall be converted,
on the last day of the then-current Interest Period with respect to each such
Loan, to ABR Loans. The Administrative Agent shall withdraw such notice
promptly after it receives conclusive notice that the conditions giving rise
to the delivery of such notice cease to exist. Until such notice has been
withdrawn by the Administrative Agent, no further Eurodollar Loans under the
relevant Facility shall be made or continued as such, nor shall the Borrower
have the right to convert Loans under the relevant Facility to Eurodollar
Loans.
2.15 PRO RATA TREATMENT AND PAYMENTS. (a) Each borrowing by the
Borrower from the Lenders hereunder, each payment by the Borrower on account of
any commitment fee and any reduction of the Commitments of the Lenders shall be
made PRO RATA according to the respective 364-Day Percentages or Working Capital
Percentages, as the case may be, of the relevant Lenders.
(b) Each payment (including each prepayment) by the Borrower on
account of principal of and interest on the 364-Day Loans shall be made PRO RATA
according to the respective outstanding principal amounts of the 364-Day Loans
then held by the 364-Day Lenders.
(c) Each payment (including each prepayment) by the Borrower on
account of principal of and interest on the Working Capital Loans shall be made
PRO RATA according to the respective outstanding principal amounts of the
Working Capital Loans then held by the Working Capital Lenders.
(d) All payments (including prepayments) to be made by the
Borrower hereunder, whether on account of principal, interest, fees or
otherwise, shall be made without setoff or counterclaim and shall be made prior
to 12:00 Noon, New York City time, on the due date thereof to the Administrative
Agent, for the account of the Lenders, at the Funding Office, in Dollars and in
immediately available funds. The Administrative Agent shall distribute such
payments to the Lenders promptly upon receipt in
<PAGE>
like funds as received. If any payment hereunder (other than payments on the
Eurodollar Loans) becomes due and payable on a day other than a Business Day,
such payment shall be extended to the next succeeding Business Day. If any
payment on a Eurodollar Loan becomes due and payable on a day other than a
Business Day, the maturity thereof shall be extended to the next succeeding
Business Day unless the result of such extension would be to extend such
payment into another calendar month, in which event such payment shall be
made on the immediately preceding Business Day. In the case of any extension
of any payment of principal pursuant to the preceding two sentences, interest
thereon shall be payable at the then applicable rate during such extension.
(e) Unless the Administrative Agent shall have been notified in
writing by any Lender prior to a borrowing that such Lender will not make the
amount that would constitute its share of such borrowing available to the
Administrative Agent, the Administrative Agent may assume that such Lender is
making such amount available to the Administrative Agent, and the Administrative
Agent may, in reliance upon such assumption, make available to the Borrower a
corresponding amount. If such amount is not made available to the Administrative
Agent by the required time on the Borrowing Date therefor, such Lender shall pay
to the Administrative Agent, on demand, such amount with interest thereon at a
rate equal to the daily average Federal Funds Effective Rate for the period
until such Lender makes such amount immediately available to the Administrative
Agent. A certificate of the Administrative Agent submitted to any Lender with
respect to any amounts owing under this paragraph shall be conclusive in the
absence of manifest error. If such Lender's share of such borrowing is not made
available to the Administrative Agent by such Lender within three Business Days
of such Borrowing Date, the Administrative Agent shall also be entitled to
recover such amount with interest thereon at the rate per annum applicable to
ABR Loans under the relevant Facility, on demand, from the Borrower.
(f) Unless the Administrative Agent shall have been notified in
writing by the Borrower prior to the date of any payment being made hereunder
that the Borrower will not make such payment to the Administrative Agent, the
Administrative Agent may assume that the Borrower is making such payment, and
the Administrative Agent may, but shall not be required to, in reliance upon
such assumption, make available to the Lenders their respective PRO RATA shares
of a corresponding amount. If such payment is not made to the Administrative
Agent by the Borrower within three Business Days of such required date, the
Administrative Agent shall be entitled to recover, on demand, from each Lender
to which any amount which was made available pursuant to the preceding sentence,
such amount with interest thereon at the rate per annum equal to the daily
average Federal Funds Effective Rate. Nothing herein shall be deemed to limit
the rights of the Administrative Agent or any Lender against the Borrower.
Notwithstanding the provisions of Section 2.15(b) and (c), if, on any date on
which amounts are payable or past due under both Facilities, the aggregate
amount of payments received on such date is insufficient to pay all such amounts
in full, such payments shall be allocated among the 364-Day Lenders and the
Working Capital Lenders PRO RATA according to the respective amounts then
payable to them.
2.16 CHANGE IN LAW. (a) If any Change in Law:
(i) shall subject any Lender to any tax of any kind whatsoever
with respect to this Agreement, any Letter of Credit, any Application,
any Acceptance or any Eurodollar Loan made by it, or change the basis
of taxation of payments to such Lender in respect thereof (except for
Non-Excluded Taxes covered by Section 2.17 and changes in the rate of
tax on the overall net income of such Lender);
(ii) shall impose, modify or hold applicable any reserve, special
deposit, compulsory loan or similar requirement (including any
Eurocurrency Reserve Requirement) against assets held by, deposits or
other liabilities in or for the account of, advances, loans or other
extensions of credit by, or any other acquisition of funds by, any
office of such Lender; or
<PAGE>
(iii) shall impose on such Lender any other condition;
and the result of any of the foregoing is to increase the cost to such
Lender, by an amount that such Lender reasonably deems to be material,
of making, converting into, continuing or maintaining Eurodollar Loans
or issuing or participating in Letters of Credit or creating or
participating in Acceptances, or to reduce any amount receivable
hereunder in respect thereof, then, in any such case, the Borrower
shall promptly pay such Lender, upon its demand, any additional amounts
necessary to compensate such Lender for such increased cost or reduced
amount receivable. If any Lender becomes entitled to claim any
additional amounts pursuant to this paragraph, it shall promptly notify
the Borrower (with a copy to the Administrative Agent) of the event by
reason of which it has become so entitled.
(b) If any Lender shall have determined that any Change in Law
regarding capital adequacy shall have the effect of reducing the rate of return
on capital of such Lender (or any corporation controlling such Lender) as a
consequence of its obligations hereunder or under or in respect of any Letter of
Credit or Acceptance to a level below that which such Lender or such corporation
could have achieved but for such adoption, change or compliance (taking into
consideration such Lender's or such corporation's policies with respect to
capital adequacy) by an amount reasonably deemed by such Lender to be material,
then from time to time, after submission by such Lender to the Borrower (with a
copy to the Administrative Agent) of a written request therefor, the Borrower
shall pay to such Lender such additional amount or amounts as will compensate
such Lender for the portion of such reduction which is reasonably allocable to
this Agreement; PROVIDED that the Borrower shall not be required to compensate a
Lender pursuant to this paragraph for any amounts incurred more than three
months prior to the date that such Lender notifies the Borrower of such Lender's
intention to claim compensation therefor; and PROVIDED FURTHER that, if the
circumstances giving rise to such claim have a retroactive effect, then such
three-month period shall be extended to include the period of such retroactive
effect.
(c) A certificate as to any additional amounts payable pursuant to
this Section submitted by any Lender to the Borrower (with a copy to the
Administrative Agent) shall be conclusive in the absence of manifest error,
PROVIDED, HOWEVER, that such certificate shall be accompanied by a statement in
reasonable detail of the calculation of such amounts and the assumptions used in
making such calculations. In determining such amounts, such Lender may use any
reasonable averaging and attribution methods; PROVIDED, that such Lender shall
use commercially reasonable efforts to make such calculation on a basis
consistent with such Lender's treatment of similarly situated customers. The
obligations of the Borrower pursuant to this Section shall survive the
termination of this Agreement and the payment of the Loans and all other amounts
payable hereunder.
2.17 TAXES. (a) All payments made by the Borrower under this
Agreement shall be made free and clear of, and without deduction or withholding
for or on account of, any present or future income, stamp or other taxes,
levies, imposts, duties, charges, fees, deductions or withholdings, now or
hereafter imposed, levied, collected, withheld or assessed by any Governmental
Authority, excluding net income taxes and franchise taxes (imposed in lieu of
net income taxes) imposed on the Administrative Agent or any Lender as a result
of a present or former connection between the Administrative Agent or such
Lender and the jurisdiction of the Governmental Authority imposing such tax or
any political subdivision or taxing authority thereof or therein (other than any
such connection arising solely from the Administrative Agent or such Lender
having executed, delivered or performed its obligations or received a payment
under, or enforced, this Agreement or any other Loan Document). If any such
non-excluded taxes, levies, imposts, duties, charges, fees, deductions or
withholdings ("NON-EXCLUDED TAXES") or Other Taxes are required to be withheld
from any amounts payable to the Administrative Agent or any Lender hereunder,
the amounts so payable to the Administrative Agent or such Lender shall be
increased to the extent necessary to yield to the Administrative Agent or such
Lender (after payment of all Non-Excluded Taxes and Other Taxes) interest or any
such other amounts payable hereunder at the rates or in the amounts specified in
this
<PAGE>
Agreement, PROVIDED, HOWEVER, that the Borrower shall not be required to
increase any such amounts payable to any Lender with respect to any
Non-Excluded Taxes (i) that are attributable to such Lender's failure to
comply with the requirements of paragraph (d) or (e) of this Section or (ii)
that are United States withholding taxes imposed on amounts payable to such
Lender at the time the Lender becomes a party to this Agreement, except to
the extent that such Lender's assignor (if any) was entitled, at the time of
assignment, to receive additional amounts from the Borrower with respect to
such Non-Excluded Taxes pursuant to this paragraph.
(b) In addition, the Borrower shall pay any Other Taxes to the
relevant Governmental Authority in accordance with applicable law.
(c) Whenever any Non-Excluded Taxes or Other Taxes are payable by
the Borrower, as promptly as possible thereafter the Borrower shall send to the
Administrative Agent for its own account or for the account of the relevant
Lender, as the case may be, a certified copy of an original official receipt
received by the Borrower showing payment thereof. If the Borrower fails to pay
any Non-Excluded Taxes or Other Taxes when due to the appropriate taxing
authority or fails to remit to the Administrative Agent the required receipts or
other required documentary evidence, the Borrower shall indemnify the
Administrative Agent and the Lenders for any incremental taxes, interest or
penalties that may become payable by the Administrative Agent or any Lender as a
result of any such failure.
(d) Each Lender (or Transferee) that is not a United States person
as defined in Section 7701(a)(30) of the Code (a "NON-U.S. LENDER") shall
deliver to the Borrower and the Administrative Agent (or, in the case of a
Participant, to the Lender from which the related participation shall have been
purchased) two copies of either U.S. Internal Revenue Service Form 1001 or Form
4224, or, in the case of a Non-U.S. Lender claiming exemption from U.S. federal
withholding tax under Section 871(h) or 881(c) of the Code with respect to
payments of "portfolio interest", a statement substantially in the form of
Exhibit G and a Form W-8, or any subsequent versions thereof or successors
thereto, properly completed and duly executed by such Non-U.S. Lender claiming
complete exemption from (if possible), or a reduced rate of, U.S. federal
withholding tax on all payments by the Borrower under this Agreement and the
other Loan Documents. Such forms shall be delivered by each Non-U.S. Lender on
or before the date it becomes a party to this Agreement (or, in the case of any
Participant, on or before the date such Participant purchases the related
participation). In addition, each Non-U.S. Lender shall deliver such forms
promptly upon the obsolescence or invalidity of any form previously delivered by
such Non-U.S. Lender. Each Non-U.S. Lender shall promptly notify the Borrower at
any time it determines that it is no longer in a position to provide any
previously delivered certificate to the Borrower (or any other form of
certification adopted by the U.S. taxing authorities for such purpose).
Notwithstanding any other provision of this paragraph, a Non-U.S. Lender shall
not be required to deliver any form pursuant to this paragraph that such
Non-U.S. Lender is not legally able to deliver.
(e) A Lender that is entitled to an exemption from or reduction of
non-U.S. withholding tax under the law of the jurisdiction in which the Borrower
is located, or any treaty to which such jurisdiction is a party, with respect to
payments under this Agreement shall deliver to the Borrower (with a copy to the
Administrative Agent), at the time or times prescribed by applicable law or
reasonably requested by the Borrower, such properly completed and executed
documentation prescribed by applicable law as will permit such payments to be
made without withholding or at a reduced rate, provided that such Lender is
legally entitled to complete, execute and deliver such documentation and in such
Lender's judgment such completion, execution or submission would not materially
prejudice the legal position of such Lender.
(f) The agreements in this Section shall survive the termination
of this Agreement and the payment of the Loans and all other amounts payable
hereunder.
<PAGE>
2.18 INDEMNITY. The Borrower agrees to indemnify each Lender
and to hold each Lender harmless from any loss or expense that such Lender
may sustain or incur as a consequence of (a) default by the Borrower in
making a borrowing of, conversion into or continuation of Eurodollar Loans
after the Borrower has given a notice requesting the same in accordance with
the provisions of this Agreement, (b) default by the Borrower in making any
prepayment of or conversion from Eurodollar Loans after the Borrower has
given a notice thereof in accordance with the provisions of this Agreement or
(c) the making of a prepayment of Eurodollar Loans on a day that is not the
last day of an Interest Period with respect thereto. Such indemnification may
(to the extent such losses and expenses are actually incurred) include an
amount equal to the excess, if any, of (i) the amount of interest that would
have accrued on the amount so prepaid, or not so borrowed, converted or
continued, for the period from the date of such prepayment or of such failure
to borrow, convert or continue to the last day of such Interest Period (or,
in the case of a failure to borrow, convert or continue, the Interest Period
that would have commenced on the date of such failure) in each case at the
applicable rate of interest for such Loans provided for herein (excluding,
however, the Applicable Margin included therein, if any) OVER (ii) the amount
of interest (as reasonably determined by such Lender) that would have accrued
to such Lender on such amount by placing such amount on deposit for a
comparable period with leading banks in the interbank eurodollar market. A
certificate as to any amounts payable pursuant to this Section submitted to
the Borrower by any Lender shall be conclusive in absence of manifest error
and shall be accompanied by a statement in reasonable detail of losses and
expenses incurred, the assumptions used in calculating the amount thereof,
and the assumptions used in making such calculations. This covenant shall
survive the termination of this Agreement and the payment of the Loans and
all other amounts payable hereunder.
2.19 CHANGE OF LENDING OFFICE. Each Lender agrees that, upon
the occurrence of any event giving rise to the operation of Section 2.16 or
2.17(a) with respect to such Lender, it will, if requested by the Borrower,
use reasonable efforts (subject to overall policy considerations of such
Lender) to take actions (including, without limitation, designating another
lending office for any Loans affected by such event) with the object of
avoiding the consequences of such event; PROVIDED, that such action is made
on terms that, in the sole judgment of such Lender, cause such Lender and its
lending office(s) to suffer no economic, legal or regulatory disadvantage,
and PROVIDED, FURTHER, that nothing in this Section shall affect or postpone
any of the obligations of any Borrower or the rights of any Lender pursuant
to Section 2.16 or 2.17(a).
2.20 REPLACEMENT OF LENDERS. The Borrower shall be permitted to
replace any Lender that (a) requests reimbursement for amounts owing pursuant to
Section 2.16 or 2.17(a) or (b) defaults in its obligation to make Loans
hereunder, with a replacement financial institution; PROVIDED that (i) such
replacement does not conflict with any Requirement of Law, (ii) no Event of
Default shall have occurred and be continuing at the time of such replacement,
(iii) prior to any such replacement, such Lender shall have taken no action
under Section 2.19 so as to eliminate the continued need for payment of amounts
owing pursuant to Section 2.16 or 2.17(a), (iv) the replacement financial
institution shall purchase, at par, all Loans and other amounts owing to such
replaced Lender on or prior to the date of replacement, (v) the Borrower shall
be liable to such replaced Lender under Section 2.18 if any Eurodollar Loan
owing to such replaced Lender shall be purchased other than on the last day of
the Interest Period relating thereto, (vi) the replacement financial
institution, if not already a Lender, shall be reasonably satisfactory to the
Administrative Agent, (vii) the replaced Lender shall be obligated to make such
replacement in accordance with the provisions of Section 10.6 (provided that the
Borrower shall be obligated to pay the registration and processing fee referred
to therein), (viii) until such time as such replacement shall be consummated,
the Borrower shall pay all additional amounts (if any) required pursuant to
Section 2.16 or 2.17(a), as the case may be, and (ix) any such replacement shall
not be deemed to be a waiver of any rights that the Borrower, the Administrative
Agent or any other Lender shall have against the replaced Lender.
<PAGE>
2.21 INCREASE OF COMMITMENTS. (a) The Borrower may from time to
time during the 364-Day Commitment Period, in the case of the 364-Day
Commitments, and the Working Capital Commitment Period, in the case of the
Working Capital Commitments, by notice to the Administrative Agent, request that
either or both of the 364-Day Commitments and the Working Capital Commitments be
increased by an aggregate amount that is not less than $5,000,000 and will not
result in an increase in the aggregate amount of the Commitments for all Lenders
in excess of $50,000,000 under both Facilities after giving effect thereto,
PROVIDED that such increase may not be requested or become effective at any time
that a Default or Event of Default exists. Upon receipt of such notice, the
Administrative Agent will request the agreement of one or more existing or new
Lenders to increase or, in the case of new Lenders, provide, its or their
applicable Commitments in an aggregate amount equal to the increase so requested
by such Borrower. No Lender shall have any obligation to agree to any increase
of its commitments, and may decline any such request in its sole discretion.
(b) If one or more existing or new Lenders shall have agreed to
increase or provide its or their applicable Commitments pursuant to a request
made as described in the foregoing clause (a) in an aggregate amount not less
than $5,000,000, such increases and such new Commitments shall become effective
on a date mutually agreed upon among the Administrative Agent, the Borrower and
the Lenders providing such increase and/or such new Commitments and shall be
implemented pursuant to documentation consistent herewith and otherwise in form
and substance reasonably satisfactory to the Administrative Agent, providing,
among other things, for adjustments to cause the 364-Day Loans and the Working
Capital Loans of each Lender to correspond ratably to their respective 364-Day
Percentages and Working Capital Percentages, as applicable, after giving effect
to such increase (including, without limitation, by providing for prepaying and
reborrowing all then outstanding Loans of the affected Facility).
SECTION 3. LETTERS OF CREDIT AND ACCEPTANCES
3.1 L/C COMMITMENT. (a) Subject to the terms and conditions
hereof, the Issuing Lender, in reliance on the agreements of the other Working
Capital Lenders set forth in Section 3.4(a), agrees to issue letters of credit
("LETTERS OF CREDIT") for the account of the Borrower on any Business Day during
the Working Capital Commitment Period in such form as may be approved from time
to time by the Issuing Lender; PROVIDED that the Issuing Lender shall have no
obligation to issue any Letter of Credit if, after giving effect to such
issuance, (i) Section 2.4 would be violated or (ii) the aggregate amount of the
Available Working Capital Commitments would be less than zero. Letters of Credit
may be Commercial L/Cs or Standby L/Cs. Each Letter of Credit shall (i) be
denominated in Dollars and (ii) expire no later than the earlier of (x) the
first anniversary of its date of issuance and (y) the date that is five Business
Days prior to the Scheduled Working Capital Termination Date, PROVIDED that any
Letter of Credit with a one-year term may provide for the renewal thereof for
additional one-year periods (which shall in no event extend beyond the date
referred to in clause (y) above).
(b) The Issuing Lender shall not at any time be obligated to issue
any Letter of Credit hereunder if such issuance would conflict with, or cause
the Issuing Lender or any L/C Participant to exceed any limits imposed by, any
applicable Requirement of Law.
(c) The letters of credit issued under the Existing Credit
Agreement and listed on Schedule 3.1 hereto shall, effective as of the Closing
Date, be deemed for all purposes to be Letters of Credit issued hereunder.
3.2 PROCEDURE FOR ISSUANCE OF LETTER OF CREDIT. The Borrower may
from time to time request that the Issuing Lender issue a Letter of Credit by
delivering to the Issuing Lender at its address for notices specified herein an
Application therefor, completed to the satisfaction of the Issuing Lender, and
<PAGE>
such other certificates, documents and other papers and information as the
Issuing Lender may request. Upon receipt of any Application, the Issuing Lender
will process such Application and the certificates, documents and other papers
and information delivered to it in connection therewith in accordance with its
customary procedures and shall promptly issue the Letter of Credit requested
thereby (but in no event shall the Issuing Lender be required to issue any
Letter of Credit earlier than three Business Days after its receipt of the
Application therefor and all such other certificates, documents and other papers
and information relating thereto) by issuing the original of such Letter of
Credit to the beneficiary thereof or as otherwise may be agreed to by the
Issuing Lender and the Borrower. The Issuing Lender shall furnish a copy of such
Letter of Credit to the Borrower promptly following the issuance thereof. The
Issuing Lender shall promptly furnish to the Administrative Agent, which shall
in turn promptly furnish to the Lenders, notice of the issuance of each Letter
of Credit (including the amount thereof).
3.3 FEES AND OTHER CHARGES. (a) In lieu of any letter of credit
commissions and fees provided for in any Application relating to Standby L/Cs
(other than standard administrative, issuance, amendment and negotiation fees),
the Borrower agrees to pay the Administrative Agent, for the PRO RATA account of
the Working Capital Lenders, with respect to each Standby L/C, a Standby L/C fee
on the undrawn amount thereof for each day that such Standby L/C is outstanding
calculated at a rate per annum equal to the Applicable Margin for Eurodollar
Loans in effect for each such date, less 0.125%.
(b) In lieu of any letter of credit commissions and fees provided
for in any Application relating to Commercial L/Cs (other than standard
administrative, issuance, amendment and negotiation fees), the Borrower agrees
to pay the Administrative Agent, for the PRO RATA account of the Working Capital
Lenders, with respect to each Commercial L/C, a Commercial L/C fee on the
undrawn amount thereof for each day that such Commercial L/C is outstanding
calculated at a rate per annum equal to 0.50%.
(c) In addition, the Borrower shall pay to the Administrative
Agent for the account of the Issuing Lender a fronting fee in respect of each
Letter of Credit of 0.125% per annum on the undrawn amount thereof for each day
that such Letter of Credit is outstanding. All fees described in clauses (a),
(b) and (c) of this Section 3.3 shall be payable in arrears on the last day of
each March, June, September and December and on the Working Capital Termination
Date.
(d) In addition to the foregoing fees, the Borrower shall pay or
reimburse the Issuing Lender for such normal and customary costs and expenses as
are incurred or charged by the Issuing Lender in issuing, negotiating, effecting
payment under, amending or otherwise administering any Letter of Credit.
(e) In connection with any payment of fees, costs and expenses
pursuant to this subsection 3.3, the Administrative Agent agrees to provide to
the Borrower a statement of any such fees, costs and expenses so incurred;
PROVIDED that the failure by the Administrative Agent to provide the Borrower
with any such invoice shall not relieve the Borrower of its obligation to pay
such fees, costs and expenses.
3.4 L/C PARTICIPATIONS. (a) The Issuing Lender irrevocably agrees
to grant and hereby grants to each L/C Participant, and, to induce the Issuing
Lender to issue Letters of Credit hereunder, each L/C Participant irrevocably
agrees to accept and purchase and hereby accepts and purchases from the Issuing
Lender, on the terms and conditions hereinafter stated, for such L/C
Participant's own account and risk an undivided interest equal to such L/C
Participant's Working Capital Percentage in the Issuing Lender's obligations and
rights under each Letter of Credit issued hereunder and the amount of each draft
paid by the Issuing Lender thereunder. Each L/C Participant unconditionally and
irrevocably agrees with the Issuing Lender that, if a draft is paid under any
Letter of Credit for which the Issuing Lender is not reimbursed in full by the
Borrower in accordance with the terms of this Agreement, such L/C Participant
shall pay to the Issuing Lender upon demand at the Issuing Lender's address for
notices specified herein an
<PAGE>
amount equal to such L/C Participant's Working Capital Percentage of the
amount of such draft, or any part thereof, that is not so reimbursed.
(b) If any amount required to be paid by any L/C Participant to
the Issuing Lender pursuant to Section 3.4(a) in respect of any unreimbursed
portion of any payment made by the Issuing Lender under any Letter of Credit is
paid to the Issuing Lender within three Business Days after the date such
payment is due, such L/C Participant shall pay to the Issuing Lender on demand
an amount equal to the product of (i) such amount, times (ii) the daily average
Federal Funds Effective Rate during the period from and including the date such
payment is required to the date on which such payment is immediately available
to the Issuing Lender, times (iii) a fraction the numerator of which is the
number of days that elapse during such period and the denominator of which is
360. If any such amount required to be paid by any L/C Participant pursuant to
Section 3.4(a) is not made available to the Issuing Lender by such L/C
Participant within three Business Days after the date such payment is due, the
Issuing Lender shall be entitled to recover from such L/C Participant, on
demand, such amount with interest thereon calculated from such due date at the
rate per annum applicable to ABR Loans under the Working Capital Facility. A
certificate of the Issuing Lender submitted to any L/C Participant with respect
to any amounts owing under this Section shall be conclusive in the absence of
manifest error.
(c) Whenever, at any time after the Issuing Lender has made
payment under any Letter of Credit and has received from any L/C Participant its
pro rata share of such payment in accordance with Section 3.4(a), the Issuing
Lender receives any payment related to such Letter of Credit (whether directly
from the Borrower or otherwise, including proceeds of collateral applied thereto
by the Issuing Lender), or any payment of interest on account thereof, the
Issuing Lender will distribute to such L/C Participant its pro rata share
thereof; PROVIDED, HOWEVER, that in the event that any such payment received by
the Issuing Lender shall be required to be returned by the Issuing Lender, such
L/C Participant shall return to the Issuing Lender the portion thereof
previously distributed by the Issuing Lender to it.
3.5 REIMBURSEMENT OBLIGATION OF THE BORROWER. The Borrower agrees
to reimburse the Issuing Lender on each date on which the Issuing Lender
notifies the Borrower of the date and amount of a draft presented under any
Letter of Credit and paid by the Issuing Lender for the amount of (a) such draft
so paid and (b) any taxes, fees, charges or other costs or expenses incurred by
the Issuing Lender in connection with such payment (to the extent not
duplicative of taxes, fees, charges and other costs and expenses charged to the
Borrower pursuant to Section 3.3(d)). Each such payment shall be made to the
Issuing Lender at its address for notices specified herein in lawful money of
the United States and in immediately available funds. Interest shall be payable
on any and all amounts remaining unpaid by the Borrower under this Section 3.5
from the date such amounts become payable (whether at stated maturity, by
acceleration or otherwise) until payment in full at the rate set forth in (i)
until the second Business Day following the date of notification of the
applicable drawing, Section 2.12(b) and (ii) thereafter, Section 2.12(c).
3.6 OBLIGATIONS ABSOLUTE. Without limiting any right of the
Borrower to pursue any claims it may have against the Issuing Lender for breach
of its obligations hereunder or under applicable law, the Borrower's obligations
under this Section 3 shall be absolute and unconditional under any and all
circumstances and irrespective of any setoff, counterclaim or defense to payment
that the Borrower may have or have had against the Issuing Lender, any
beneficiary of a Letter of Credit or any other Person. The Borrower also agrees
with the Issuing Lender that the Issuing Lender shall not be responsible for,
and the Borrower's L/C Reimbursement Obligations under Section 3.5 shall not be
affected by, among other things, the validity or genuineness of documents or of
any endorsements thereon, even though such documents shall in fact prove to be
invalid, fraudulent or forged, or any dispute between or among the Borrower and
any beneficiary of any Letter of Credit or any other party to which such Letter
of Credit may be transferred or any claims whatsoever of the Borrower against
any beneficiary of such Letter of Credit or
<PAGE>
any such transferee. The Issuing Lender shall not be liable for any error,
omission, interruption or delay in transmission, dispatch or delivery of any
message or advice, however transmitted, in connection with any Letter of
Credit, except for errors or omissions found by a final and nonappealable
decision of a court of competent jurisdiction to have resulted from the gross
negligence or willful misconduct of the Issuing Lender. The Borrower agrees
that any action taken or omitted by the Issuing Lender under or in connection
with any Letter of Credit or the related drafts or documents, if done in the
absence of gross negligence or willful misconduct and in accordance with the
standards of care specified in the Uniform Commercial Code of the State of
New York, shall be binding on the Borrower and shall not result in any
liability of the Issuing Lender to the Borrower.
3.7 LETTER OF CREDIT PAYMENTS. If any draft shall be presented for
payment under any Letter of Credit, the Issuing Lender shall promptly notify the
Borrower of the date and amount thereof (it being agreed that the Issuing Lender
will use commercially reasonable efforts to give such notice not later than the
Business Day following such presentation, but failure to do so shall not affect
the obligations of the Borrower in respect thereof under this Section). Drawings
under any Letter of Credit shall be reimbursed by the Borrower (whether with its
own funds or with the proceeds of Working Capital loans) on the same business
day. The responsibility of the Issuing Lender to the Borrower in connection with
any draft presented for payment under any Letter of Credit shall, in addition to
any payment obligation expressly provided for in such Letter of Credit, be
limited to determining that the documents (including each draft) delivered under
such Letter of Credit in connection with such presentment are substantially in
conformity with such Letter of Credit.
3.8 APPLICATIONS. To the extent that any provision of any
Application related to any Letter of Credit is inconsistent with the provisions
of this Section 3, the provisions of this Section 3 shall apply.
3.9 ACCEPTANCES. (a) Subject to the terms and conditions hereof,
the Accepting Bank, in reliance on the agreements of the other Lenders set forth
in Section 3.11(a), agrees to create acceptances (the "ACCEPTANCES") in respect
of Drafts drawn on the Accepting Bank by the Borrower and discounted by the
Accepting Bank for the account of the Borrower on any Business Day during the
Working Capital Commitment Period; PROVIDED that the Accepting Bank shall have
no obligation to create any Acceptance, if (i) Section 2.4 would be violated
thereby or (ii) the aggregate amount of the Available Working Capital
Commitments would be less than zero. Concurrently with the creation of each
Acceptance, the Borrower requests that the Accepting Bank discount each related
Draft pursuant to Section 3.12.
(b) The Accepting Bank shall not at any time be obligated to
create an Acceptance hereunder if such creation would conflict with, or cause
the Accepting Bank or any Acceptance Participant to exceed any limits imposed
by, any applicable Requirement of Law or if such Acceptance does not comply with
applicable requirements of Section 13 of the Federal Reserve Act or the
regulations of the Board governing the creation and discounting of, and the
maintenance of reserves with respect to, bankers' acceptances.
3.10 PROCEDURE FOR CREATION OF ACCEPTANCES. (a) The Borrower may
from time to time request the creation of Acceptances hereunder by delivering to
the Accepting Bank at its address for notices specified herein on any Business
Day (i) an Acceptance Request, completed to the satisfaction of the Accepting
Bank and specifying, among other things, the date (which must be a Business
Day), maturity and amount of the Draft to be accepted, (ii) to the extent not
theretofore supplied to the Accepting Bank in accordance with Section 3.20, a
Draft to be drawn on the Accepting Bank, appropriately completed in accordance
with this Section 3.10 and (iii) such other certificates, documents and other
papers and information as the Accepting Bank may reasonably request.
<PAGE>
(b) Each Draft submitted by the Borrower for acceptance hereunder
shall be denominated in Dollars, shall be dated the date of acceptance of such
Draft by the Accepting Bank and shall be stated to mature on a Business Day not
fewer than 30 nor more than 180 days after the date thereof and, in any event,
not more than 90 days after the anticipated date of shipment specified in the
relevant Acceptance Request. No Acceptance created hereunder shall (i) be
created more than 30 days after the date of any shipments of goods to which such
Acceptance relates, (ii) have a tenor in excess of the period of time which is
usual and reasonably necessary to finance transactions of a similar character,
(iii) be in a face amount of less than $500,000 or (iv) be in a face amount
which, when taken together with all other Acceptances and other financings
relating to the shipment of goods to which such Acceptance relates, exceeds the
fair market value of such shipment.
(c) Subject to Section 3.10(d), not later than the close of
business at its address for notices specified herein on the Business Day
specified in an Acceptance Request, and upon fulfillment of the applicable
conditions set forth in Section 5, the Accepting Bank shall, in accordance with
such Acceptance Request, (i) complete the date, amount and maturity of each
Draft presented for acceptance (to the extent not completed by the Borrower),
(ii) accept such Drafts and (iii) upon such acceptance, discount such
Acceptances in accordance with Section 3.12.
(d) The acceptance and discounting of Drafts by the Accepting Bank
hereunder shall at all times be in the sole and absolute discretion of the
Accepting Bank.
3.11 ACCEPTANCE PARTICIPATIONS. (a) Effective in the case of each
Acceptance created by the Accepting Bank as of the date of the creation thereof,
the Accepting Bank agrees to allot and does allot, to itself and each other
Acceptance Participant, and each Acceptance Participant severally and
irrevocably agrees to take and does take in such Acceptance for such Acceptance
Participant's own account and risk, an undivided interest equal to such
Acceptance Participant's Working Capital Percentage in the Accepting Bank's
obligations and rights under each Acceptance created hereunder and the face
amount of each Acceptance created by the Accepting Bank. In the event that the
Accepting Bank is not reimbursed in full by the Borrower for the face amount of
any Acceptance in accordance with the terms of this Agreement, the Accepting
Bank will promptly notify each Acceptance Participant through the Administrative
Agent. Forthwith, upon its receipt of any such notice, each Acceptance
Participant will transfer to the Accepting Bank, in immediately available funds,
an amount equal to such Acceptance Participant's Working Capital Percentage of
the face amount of such Acceptance, or any part thereof, which is not so
reimbursed.
(b) If any amount required to be paid by any Acceptance
Participant to the Accepting Bank pursuant to Section 3.11(a) in respect of any
unreimbursed portion of any payment made by the Accepting Bank under any
Acceptance is paid to the Accepting Bank after the date such payment is due but
within three Business Days after the date such payment is due, such Acceptance
Participant shall pay to the Accepting Bank on demand an amount equal to the
product of (i) such amount, times (ii) the daily average Federal Funds Effective
Rate during the period from and including the date such payment is required to
the date on which such payment is immediately available to the Accepting Bank,
times (iii) a fraction the numerator of which is the number of days that elapse
during such period and the denominator of which is 360. If any such amount
required to be paid by any Acceptance Participant pursuant to Section 3.11(a) is
not in fact made available to the Accepting Bank by such Acceptance Participant
within three Business Days after the date such payment is due, the Accepting
Bank shall be entitled to recover from such Acceptance Participant, on demand,
such amount with interest thereon calculated from such due date at the rate per
annum applicable to ABR Loans hereunder. A certificate of the Accepting Bank
submitted to any Acceptance Participant with respect to any amounts owing under
this section shall be conclusive in the absence of manifest error.
<PAGE>
(c) Whenever, at any time after the Accepting Bank has made a
payment under any Acceptance and has received from any Acceptance Participant
its PRO RATA share of such payment in accordance with Section 3.11(a), the
Accepting Bank receives any payment on account of such Acceptance, the Accepting
Bank will distribute to such Acceptance Participant through the Administrative
Agent its PRO RATA share thereof in like funds as received; PROVIDED, HOWEVER,
that in the event that any such payment received by the Accepting Bank is
required to be returned, such Acceptance Participant will return to the
Accepting Bank, through the Administrative Agent, the portion thereof previously
distributed by the Accepting Bank to it in like funds as such payment is
required to be returned by the Accepting Bank.
3.12 DISCOUNT OF ACCEPTANCES. (a) The Accepting Bank agrees, on
the terms and conditions of this Agreement, that on any date on which it creates
an Acceptance hereunder, the Accepting Bank will discount such Acceptance at the
Acceptance Rate, by making available to the Borrower an amount in immediately
available funds equal to the face amount of each Acceptance created by the
Accepting Bank on such date less such discount and notify the Administrative
Agent that such Draft has been accepted and discounted by the Accepting Bank.
The Accepting Bank will then pay to the Administrative Agent for the account of
the Borrower an amount equal to the proceeds of such discounted Draft.
(b) Within three Business Days after any Acceptance is discounted
pursuant to Section 3.12(a), the Accepting Bank shall pay to each Acceptance
Participant an amount equal to such Acceptance Participant's Working Capital
Percentage of the amount equal to (i) the face amount of such Acceptance less
(ii) the sum of (x) the amount of proceeds paid in respect of the Draft relating
to such Acceptance and (y) .125% per annum on the face amount of such Acceptance
for the term thereof. The Accepting Bank shall retain an acceptance fee in
respect of each Acceptance calculated at the rate of 0.125% per annum on the
face amount of such Acceptance for the term thereof.
3.13 MANDATORY PREPAYMENT. (a) In the event that (i) there is a
Change in Law to the effect that any Acceptance or any bankers' acceptances
created in connection with a substantially similar facility (whether or not the
Borrower or any Lender is directly involved as a party) is or, in the case of an
already discounted Acceptance, becomes ineligible for reserve-free treatment
under Section 13 of the Federal Reserve Act or any other regulation or rule of
the Board and, as a result, any Lender maintains additional reserves, or (ii)
any legal or regulatory restriction is imposed on any Lender (including, without
limitation, any change in acceptance limits imposed on any Lender) which limits
or prevents such Lender from creating or participating in bankers' acceptances
or otherwise performing its obligations in respect of the Acceptances, then,
with the consent of the Required Lenders, the Administrative Agent may, or upon
the direction of the Majority Working Capital Facility Lenders, the
Administrative Agent shall, by notice to the Borrower in accordance with Section
10.2, demand prepayment of the affected Acceptances, in the case of clause (i)
above, and all outstanding Acceptances, in the case of clause (ii) above, and
the Accepting Bank shall have no further obligation to accept or discount Drafts
hereunder, PROVIDED, HOWEVER, that neither the Administrative Agent nor the
Majority Working Capital Facility Lenders shall be able to demand prepayment of
Acceptances or terminate their respective obligations to accept or discount
Drafts unless the Majority Working Capital Facility Lenders shall have
determined in good faith that there are no actions reasonably available to them
that could be taken by them to avoid the effect of such Change in Law,
including, without limitation, demanding reimbursement for any increase in costs
as a result of such Change in Law pursuant to Section 3.15, and that would not
in the opinion of the Majority Working Capital Facility Lenders be prejudicial
to them. Prior to any such prepayment, the Administrative Agent shall, to the
extent permitted by applicable law and to the extent it has actual knowledge of
any such event, give the Borrower reasonable notice of any event of the type
described in the preceding clause (i) or (ii). The Borrower agrees that it
shall, within two Business Days of its receipt of a notice of mandatory
<PAGE>
prepayment of the Acceptances, prepay all Acceptance Obligations in accordance
with the provisions of Section 3.13(b).
(b) Any prepayment of any Acceptance Obligation permitted to be
made pursuant hereto shall be made to the Accepting Bank and shall be in an
amount equal to the face amount of such Acceptance MINUS a prepayment discount
calculated by the Accepting Bank in accordance with its customary practice for
similar Acceptances and communicated to the Borrower; PROVIDED that, in the
event that the Borrower fails to make such prepayment as provided in this
Section 3.13(b), such Acceptance Obligation shall, subject to compliance with
the conditions therefor set forth in Section 5, be automatically converted into
Working Capital Loans in the amount of such prepayment. The Borrowing Date with
respect to such borrowing shall be the date of such prepayment.
(c) Except as otherwise provided herein, Acceptances may not be
prepaid prior to maturity.
3.14 PAYMENTS IN RESPECT OF ACCEPTANCES. The Borrower shall be
obligated, and hereby unconditionally agrees, to reimburse the Accepting Bank on
demand on the maturity date of each Acceptance or on such earlier date as the
Acceptance Obligations in respect thereof shall become or shall have been
declared due and payable in an amount equal to the face amount of such
Acceptance or, in the case of a prepayment under Section 3.13, MINUS a
prepayment discount calculated as set forth in Section 3.13(b). Each such
payment shall be made to the Accepting Bank at its address for notices specified
herein in lawful money of the United States of America and in immediately
available funds. Interest shall be payable on any and all amounts remaining
unpaid by the Borrower under this section from the date such amounts became
payable until payment in full at the rate which would be payable on any
outstanding ABR Loans which were then overdue.
3.15 ACCEPTANCE RESERVES. (a) If (i) any Change in Law shall
either (a) impose, modify or deem or make applicable any reserve, special
deposit, assessment or similar requirement against bankers' acceptances created
by the Accepting Bank or (b) impose on the Accepting Bank any other condition
regarding this Agreement or any Acceptance, and the result of any event referred
to in clause (a) or (b) above shall be to increase the cost to the Accepting
Bank of creating or maintaining any Acceptance (which increase in cost shall be
the result of the Accepting Bank's reasonable allocation of the aggregate of
such cost increases resulting from such events) or (ii) if any Acceptance
created hereunder shall not be "eligible" under the applicable regulations of
the Board or any successor, governing bankers' acceptances, then from time to
time following notice by the Accepting Bank to the Borrower, within 15 days
after demand by the Accepting Bank, the Borrower shall pay to the Accepting
Bank, as specified by the Accepting Bank, additional amounts which shall be
sufficient to compensate the Accepting Bank for any increased cost attributable
thereto, together with interest on each such amount from the date demanded until
payment in full thereof at a rate per annum equal to the ABR plus the Applicable
Margin for ABR Loans. A certificate submitted by the Accepting Bank to the
Borrower concurrently with any such demand by the Accepting Bank, shall be
conclusive, absent manifest error, as to the amount thereof; such certificate
shall be accompanied by a statement setting forth in reasonable detail the
calculation of such amounts and the assumptions used in making such
calculations.
(b) In the event that at any time after the date hereof any Change
in Law with respect to the Accepting Bank shall, in the Accepting Bank's
opinion, require that any Acceptance be treated as an asset or otherwise be
included for purposes of calculating the appropriate amount of capital to be
maintained by the Accepting Bank or any corporation controlling the Accepting
Bank, and such Change in Law shall have the effect of reducing the rate of
return on the Accepting Bank's or such corporation's capital, as the case may
be, as a consequence of the Accepting Bank's obligations under such Acceptance
to a level below that which the Accepting Bank or such corporation, as the case
may be, could have
<PAGE>
achieved but for such Change in Law (taking into account the Accepting Bank's
or such corporation's policies, as the case may be, with respect to capital
adequacy) by an amount deemed by the Accepting Bank to be material, then from
time to time following notice by the Accepting Bank to the Borrower of such
Change in Law, within 15 days after demand by the Accepting Bank, the
Borrower shall pay to the Accepting Bank such additional amount or amounts as
will compensate the Accepting Bank or such corporation, as the case may be,
for such reduction. If the Accepting Bank becomes entitled to claim any
additional amounts pursuant to this Section 3.15(b), it shall promptly notify
the Borrower of the event by reason of which it has become so entitled. A
certificate submitted by the Accepting Bank to the Borrower concurrently with
any such demand by the Accepting Bank, shall be conclusive, absent manifest
error, as to the amount thereof; such certificate shall be accompanied by a
statement setting forth in reasonable detail the calculation of such amounts
and the assumptions used in making such calculations.
(c) The Borrower agrees that the provisions of the foregoing
paragraphs (a) and (b) and the provisions of each Acceptance providing for
payment to the Accepting Bank in the event of the imposition or implementation
of, or increase in, any reserve, special deposit, capital adequacy or similar
requirement in respect of such Acceptance shall apply equally to each Acceptance
Participant in respect of its undivided interest in such Acceptance, as if the
references in such paragraphs and provisions referred to, where applicable, such
Acceptance Participant or any corporation controlling such Acceptance
Participant.
3.16 FURTHER ASSURANCES. The Borrower hereby agrees, from time to
time, to do and perform any and all acts and to execute any and all further
instruments reasonably requested by the Accepting Bank more fully to effect the
purposes of this Agreement and the creation of Acceptances hereunder, and
further agrees to execute any and all instruments reasonably requested by the
Accepting Bank in connection with the obtaining and/or maintaining of any
insurance coverage applicable to any Acceptances.
3.17 OBLIGATIONS ABSOLUTE. The payment obligations of the Borrower
under this Agreement with respect to Acceptances shall be unconditional and
irrevocable and shall be paid strictly in accordance with the terms of this
Agreement under all circumstances, including, without limitation, the following
circumstances:
(a) the existence of any claim, set-off, defense or other right
which the Borrower or any of its Subsidiaries may have at any time
against any transferee of any Acceptance, the Accepting Bank, the
Administrative Agent or any Lender, or any other Person, whether in
connection with this Agreement, any Loan Document, the transactions
contemplated herein, or any unrelated transaction;
(b) any statement or any other document presented in connection
with any Acceptance proving to be forged, fraudulent, invalid or
insufficient in any respect or any statement therein being untrue or
inaccurate in any respect; or
(c) any other circumstances or happening whatsoever, whether or
not similar to any of the foregoing, except for any such circumstances
or happening constituting gross negligence or wilful misconduct on the
part of the Accepting Bank.
3.18 ASSIGNMENTS. No Acceptance Participant's participation in any
Acceptance or any of its rights or duties hereunder shall be subdivided,
assigned or transferred (other than in connection with a transfer of part or all
of such Acceptance Participant's Commitment in accordance with Section 10.6(c))
without the prior written consent of the Accepting Bank and the Borrower. Such
consent may be given or withheld without the consent or agreement of any other
Acceptance Participant. Notwithstanding the
<PAGE>
foregoing, an Acceptance Participant may subparticipate its undivided
interest in any Acceptances without obtaining the prior written consent of
the Accepting Bank or the Borrower.
3.19 PARTICIPATIONS. Each Acceptance Participant's obligation to
purchase participating interests pursuant to Section 3.11 shall be absolute and
unconditional and shall not be affected by any circumstance, including, without
limitation, (a) any set-off, counterclaim, recoupment, defense or other right
which such Acceptance Participant may have against the Accepting Bank, the
Borrower or any other Person for any reason whatsoever; (b) the occurrence or
continuance of a Default or Event of Default; (c) any adverse change in the
condition (financial or otherwise) of the Borrower; (d) any breach of this
Agreement by the Borrower, the Administrative Agent or any other Lender or
Acceptance Participant; or (e) any other circumstance, happening or event
whatsoever, whether or not similar to any of the foregoing.
3.20 SUPPLY OF DRAFTS. To enable the Accepting Bank to create
Acceptances in the manner specified in this Section 3 the Borrower may provide
to the Accepting Bank, on the Closing Date and thereafter from time to time upon
request of the Administrative Agent or the Accepting Bank, such number of blank
Drafts conforming to the requirements hereof as the Administrative Agent or the
Accepting Bank may reasonably request, each duly executed on behalf of the
Borrower, and the Accepting Bank shall hold any such documents in safekeeping.
The Borrower and the Accepting Bank hereby agree that in the event that any
authorized signatory of the Borrower whose signature shall appear on any Draft
shall cease to have such authority at the time that an Acceptance is to be
created with respect thereto, such signature shall nevertheless be valid and
sufficient for all purposes as if such authority had remained in full force and
effect at the time of such creation.
3.21 DELIVERY OF CERTAIN DOCUMENTATION. Upon request by the
Administrative Agent or the Accepting Bank, the Borrower shall furnish to the
Administrative Agent or the Accepting Bank (a) a copy of the contract of sale or
any bill of lading, warehouse receipt, policy or certificate of insurance or
other document covering or otherwise relating to each shipment of goods
specified in the Acceptance Request relating to such Acceptance and (b) such
other documents or information as the Accepting Bank or the Administrative Agent
shall reasonably request with respect to the creation of such Acceptance.
3.22 NOTICE. The Administrative Agent shall notify the Federal
Reserve Bank of New York of the terms under which Acceptances may be made if
requested or required to do so by such institution.
3.23 USE OF PROCEEDS. The proceeds of the Acceptances shall be
used solely to finance the purchase of inventory of the Borrower in transactions
which fulfill the requirements of Section 13 of the Federal Reserve Act or the
regulations of the Board governing the creation and discounting of, and the
maintenance of reserves with respect to, bankers' acceptances.
SECTION 4. REPRESENTATIONS AND WARRANTIES
To induce the Administrative Agent and the Lenders to enter into
this Agreement and to make the Loans and issue or participate in the Letters of
Credit, and to induce the Accepting Bank to create and the Acceptance
Participants to participate in, the Acceptances, the Borrower hereby represents
and warrants to the Administrative Agent, the Issuing Lender, the Accepting Bank
and each Lender that:
4.1 FINANCIAL CONDITION. (a) The unaudited PRO FORMA
capitalization table of the Borrower and its consolidated Subsidiaries as at
January 2, 1999 (the "PRO FORMA CAPITALIZATION TABLE"), copies of which have
heretofore been furnished to each Lender, has been prepared giving effect (as if
such events had occurred on such date) to (i) the Loans to be made on the
Closing Date and the use of proceeds
<PAGE>
thereof and (ii) the payment of fees and expenses in connection with the
foregoing. The Pro Forma Capitalization Table has been prepared based on the
best information available to the Borrower as of the date of delivery
thereof, and presents fairly in all material respects on a PRO FORMA basis
the estimated capitalization of Borrower and its consolidated Subsidiaries as
at January 2, 1999, assuming that the events specified in the preceding
sentence had actually occurred at such date.
(b) The audited consolidated balance sheets of the Borrower and
its consolidated Subsidiaries as at December 28, 1996 and January 3, 1998, and
the related consolidated statements of income and of cash flows for the fiscal
years ended on such dates, reported on by and accompanied by an unqualified
report from Deloitte & Touche LLC present fairly the consolidated financial
condition of the Borrower and its consolidated Subsidiaries as at such date, and
the consolidated results of its operations and its consolidated cash flows for
the respective fiscal years then ended. The unaudited consolidated balance sheet
of the Borrower and its consolidated Subsidiaries as at October 1, 1998, and the
related unaudited consolidated statements of income and cash flows for the
nine-month period ended on such date, present fairly the consolidated financial
condition of the Borrower and its consolidated Subsidiaries as at such date, and
the consolidated results of its operations and its consolidated cash flows for
the nine-month period then ended (subject to normal year-end audit adjustments).
All such financial statements, including the related schedules and notes
thereto, have been prepared in accordance with GAAP applied consistently
throughout the periods involved (except as approved by the aforementioned firm
of accountants and disclosed therein). The Borrower and its consolidated
Subsidiaries do not have any material Guarantee Obligations, contingent
liabilities and liabilities for taxes, or any long-term leases or unusual
forward or long-term commitments, including any interest rate or foreign
currency swap or exchange transaction or other obligation in respect of
derivatives, that are not reflected in the most recent financial statements
referred to in this paragraph.
4.2 NO CHANGE. Since January 3, 1998, there has been no
development or event that has had or could reasonably be expected to have a
Material Adverse Effect.
4.3 CORPORATE EXISTENCE; COMPLIANCE WITH LAW. Each of the Borrower
and its Subsidiaries (a) is duly organized, validly existing and in good
standing under the laws of the jurisdiction of its organization, (b) has the
corporate power and authority, and the legal right, to own and operate its
property, to lease the property it operates as lessee and to conduct the
business in which it is currently engaged, (c) is duly qualified as a foreign
corporation and in good standing under the laws of each jurisdiction where its
ownership, lease or operation of property or the conduct of its business
requires such qualification and (d) is in compliance with all Requirements of
Law except to the extent that the failure to comply therewith could not, in the
aggregate, reasonably be expected to have a Material Adverse Effect.
4.4 CORPORATE POWER; AUTHORIZATION; ENFORCEABLE OBLIGATIONS. Each
Loan Party has the corporate power and authority, and the legal right, to make,
deliver and perform the Loan Documents to which it is a party and, in the case
of the Borrower, to borrow hereunder, to have Letters of Credit issued for its
account hereunder, and to have Acceptances created for its account hereunder.
Each Loan Party has taken all necessary corporate action to authorize the
execution, delivery and performance of the Loan Documents to which it is a party
and, in the case of the Borrower, to authorize the borrowings on the terms and
conditions of this Agreement, the issuance of Letters of Credit for its account
hereunder and the creation of Acceptances for its account hereunder. No consent
or authorization of, filing with, notice to or other act by or in respect of,
any Governmental Authority or any other Person is required in connection with
the borrowings hereunder or with the execution, delivery, performance, validity
or enforceability of this Agreement or any of the Loan Documents, except (i)
consents, authorizations, filings and notices described in Schedule 4.4, which
consents, authorizations, filings and notices have been obtained or made and are
in full force and effect and (ii) the filings referred to in Section 4.19. Each
Loan Document has been duly executed and delivered on behalf of each Loan Party
party thereto. This Agreement constitutes,
<PAGE>
and each other Loan Document upon execution will constitute, a legal, valid
and binding obligation of each Loan Party party thereto, enforceable against
each such Loan Party in accordance with its terms, except as enforceability
may be limited by applicable bankruptcy, insolvency, reorganization,
moratorium or similar laws affecting the enforcement of creditors' rights
generally and by general equitable principles (whether enforcement is sought
by proceedings in equity or at law).
4.5 NO LEGAL BAR. The execution, delivery and performance of this
Agreement and the other Loan Documents, the issuance of Letters of Credit, the
creation and discounting of Acceptances, the borrowings hereunder and the use of
the proceeds thereof will not violate any Requirement of Law or any Contractual
Obligation of the Borrower or any of its Subsidiaries and will not result in, or
require, the creation or imposition of any Lien on any of their respective
properties or revenues pursuant to any Requirement of Law or any such
Contractual Obligation (other than the Liens created by the Security Documents).
4.6 LITIGATION. Except as set forth in Schedule 4.9, no
litigation, investigation or proceeding of or before any arbitrator or
Governmental Authority is pending or, to the knowledge of the Borrower,
threatened by or against the Borrower or any of its Subsidiaries or against any
of their respective properties or revenues (a) with respect to any of the Loan
Documents, the borrowings hereunder and the use of the proceeds thereof, of any
drawings under a Letter of Credit or of the creation and discounting of any
Acceptance, or any of the transactions contemplated hereby or thereby, or (b)
that could reasonably be expected to have a Material Adverse Effect.
4.7 NO DEFAULT. Neither the Borrower nor any of its Subsidiaries
is in default under or with respect to any of its Contractual Obligations in any
respect that could reasonably be expected to have a Material Adverse Effect. No
Default or Event of Default has occurred and is continuing.
4.8 OWNERSHIP OF PROPERTY; LIENS. Each of the Borrower and its
Subsidiaries has title in fee simple to, or a valid leasehold interest in, all
its real property, and good title to, or a valid leasehold interest in, all its
other property, and none of such property is subject to any material Lien except
as permitted by Section 7.3.
4.9 INTELLECTUAL PROPERTY. Except as set forth in Schedule 4.9
hereto, (a) the Borrower and each of its Subsidiaries owns, or is licensed to
use, all Intellectual Property necessary for the conduct of its business as
currently conducted; (b) no material claim that could reasonably be expected to
result in a Material Adverse Effect has been asserted and is pending by any
Person challenging or questioning the use of any Intellectual Property or the
validity or effectiveness of any Intellectual Property, nor does the Borrower
know of any valid basis for any such claim; and (c) the use of Intellectual
Property by the Borrower and its Subsidiaries does not infringe on the rights of
any Person in any material respect.
4.10 TAXES. The Borrower and each of its Subsidiaries has filed or
caused to be filed all Federal, state and other material tax returns that are
required to be filed and has paid all taxes shown to be due and payable on said
returns or on any assessments made against it or any of its property and all
other material taxes, fees or other charges imposed on it or any of its property
by any Governmental Authority (other than any the amount or validity of that are
currently being contested in good faith by appropriate proceedings and with
respect to which reserves in conformity with GAAP have been provided on the
books of the Borrower or its Subsidiaries, as the case may be); no tax Lien has
been filed, and, to the knowledge of the Borrower, no claim is being asserted,
with respect to any such tax, fee or other charge except for Liens for
immaterial amounts affecting assets other than any Collateral.
4.11 FEDERAL REGULATIONS. No part of the proceeds of any Loans or
any drawing under a Letter of Credit or the creation and discounting of any
Acceptance will be used for "buying" or "carrying"
<PAGE>
any "margin stock" within the respective meanings of each of the quoted terms
under Regulation U as now and from time to time hereafter in effect or for
any purpose that violates the provisions of the Regulations of the Board. If
requested by any Lender or the Administrative Agent, the Borrower will
furnish to the Administrative Agent and each Lender a statement to the
foregoing effect in conformity with the requirements of FR Form G-3 or FR
Form U-1, as applicable, referred to in Regulation U.
4.12 LABOR MATTERS. Except as, in the aggregate, could not
reasonably be expected to have a Material Adverse Effect: (a) there are no
strikes or other labor disputes against the Borrower or any of its Subsidiaries
pending or, to the knowledge of the Borrower, threatened which could reasonably
be expected to have an Material Adverse Effect; (b) hours worked by and payment
made to employees of the Borrower and its Subsidiaries have not been in material
violation of the Fair Labor Standards Act or any other applicable Requirement of
Law dealing with such matters; and (c) all material payments due from the
Borrower or any of its Subsidiaries on account of employee health and welfare
insurance have been paid or accrued as a liability on the books of the Borrower
or the relevant Subsidiary.
4.13 ERISA. Neither a Reportable Event nor an "accumulated funding
deficiency" (within the meaning of Section 412 of the Code or Section 302 of
ERISA) has occurred during the five-year period prior to the date on which this
representation is made or deemed made with respect to any Single Employer Plan,
and each Single Employer Plan and, to the knowledge of the Borrower, any
Multiemployer Plan, has complied in all material respects with the applicable
provisions of ERISA and the Code. No termination of a Single Employer Plan has
occurred, and no Lien in favor of the PBGC or a Single Employer Plan has arisen,
during such five-year period. The present value of all accrued benefits under
each Single Employer Plan (based on those assumptions used to fund such Plans)
did not, as of the last annual valuation date prior to the date on which this
representation is made or deemed made, exceed the value of the assets of such
Plan allocable to such accrued benefits by a material amount. Neither the
Borrower nor any Commonly Controlled Entity has had a complete or partial
withdrawal from any Multiemployer Plan that has resulted or could reasonably be
expected to result in a material liability under ERISA, and neither the Borrower
nor any Commonly Controlled Entity would become subject to any material
liability under ERISA if the Borrower or any such Commonly Controlled Entity
were to withdraw completely from all Multiemployer Plans as of the valuation
date most closely preceding the date on which this representation is made or
deemed made. No such Multiemployer Plan is in Reorganization or Insolvent as a
result of which the Borrower or any Commonly Controlled Entity has incurred or
could reasonably be expected to incur a material liability.
4.14 INVESTMENT COMPANY ACT; OTHER REGULATIONS. No Loan Party is
an "investment company", or a company "controlled" by an "investment company",
within the meaning of the Investment Company Act of 1940, as amended. No Loan
Party is subject to regulation under any Requirement of Law (other than
Regulation X of the Board) that limits its ability to incur Indebtedness.
4.15 SUBSIDIARIES. Except as disclosed to the Administrative Agent
by the Borrower in writing from time to time after the Closing Date, (a)
Schedule 4.15 sets forth the name and jurisdiction of incorporation of each
Subsidiary and, as to each such Subsidiary, the percentage of each class of
Capital Stock owned by any Loan Party and (b) there are no outstanding
subscriptions, options, warrants, calls, rights or other agreements or
commitments (other than stock options granted to employees or directors and
directors' qualifying shares) of any nature relating to any Capital Stock of the
Borrower or any Subsidiary, except as created by the Loan Documents.
4.16 USE OF PROCEEDS. (a) The proceeds of the 364-Day Loans shall
be used for general corporate purposes including to finance permitted
acquisitions and share repurchases and to refinance the outstanding obligations
under the Existing Credit Agreement, (b) the proceeds of the Working Capital
Loans shall be used to finance the working capital needs, Letters of Credit,
Acceptances and for general
<PAGE>
corporate purposes of the Borrower and its Subsidiaries, (c) the Commercial
L/Cs shall be issued, and drawn upon, in connection with the importation or
exportation by the Borrower of goods in the ordinary course of business, (d)
the Standby L/Cs shall be issued, and drawn upon, in respect of obligations
of the Borrower or any of its Subsidiaries incurred pursuant to contracts
made or performances undertaken or to be undertaken or like matters relating
to contracts to which the Borrower or such Subsidiary is or proposes to
become a party in the ordinary course of the Borrower's or such Subsidiary's
business, including, without limiting the foregoing, for insurance purposes
or in respect of advance payments or as bid or performance bonds, (e) the
Acceptances shall be used by the Borrower in the ordinary course of business
in connection with the importation or exportation by the Borrower of goods
and for other customary purposes in the ordinary course of business.
4.17 ENVIRONMENTAL MATTERS. Except as, in the aggregate, could not
reasonably be expected to have a Material Adverse Effect:
(a) to the knowledge of the Borrower after due inquiry (but
subject to the qualification set forth below) the facilities and
properties owned, leased or operated by the Borrower or any of its
Subsidiaries (the "PROPERTIES") do not contain, and have not previously
contained, any Materials of Environmental Concern in amounts or
concentrations or under circumstances that constitute or constituted a
violation of, or could give rise to liability under, any applicable
Environmental Law;
(b) neither the Borrower nor any of its Subsidiaries has received
or is aware of any notice of violation, alleged violation,
non-compliance, liability or potential liability regarding
environmental matters or compliance with applicable Environmental Laws
with regard to any of the Properties or the business operated by the
Borrower or any of its Subsidiaries (the "BUSINESS"), nor does the
Borrower have knowledge or reason to believe that any such notice will
be received or is being threatened;
(c) to the knowledge of the Borrower after due inquiry (but
subject to the qualification set forth below) Materials of
Environmental Concern have not been transported or disposed of from the
Properties in violation of, or in a manner or to a location that could
give rise to liability under, any applicable Environmental Law, nor
have any Materials of Environmental Concern been generated, treated,
stored or disposed of at, on or under any of the Properties in
violation of, or in a manner that could give rise to liability under,
any applicable Environmental Law;
(d) no judicial proceeding or governmental or administrative
action is pending or, to the knowledge of the Borrower, threatened,
under any applicable Environmental Law to which the Borrower or any
Subsidiary is or will be named as a party with respect to the
Properties or the Business, nor are there any consent decrees or other
decrees, consent orders, administrative orders or other orders, or
other administrative or judicial requirements outstanding under any
applicable Environmental Law with respect to the Properties or the
Business;
(e) there has been no release or threat of release of Materials of
Environmental Concern at or from the Properties, or arising from or
related to the operations of the Borrower or any Subsidiary in
connection with the Properties or otherwise in connection with the
Business, in violation of or in amounts or in a manner that could give
rise to liability under Environmental Laws;
(f) the Properties and all operations at the Properties are in
compliance, and to the knowledge of the Borrower after due inquiry (but
subject to the qualification set forth below) have in the last five
years been in compliance, with all applicable Environmental Laws, and
to the knowledge of the Borrower after due inquiry (but subject to the
qualification set forth below) there
<PAGE>
is no contamination at, under or about the Properties or violation of
any applicable Environmental Law with respect to the Properties or
the Business; and
(g) neither the Borrower nor any of its Subsidiaries has assumed
any liability of any other Person under Environmental Laws.
Notwithstanding the qualifications of the foregoing representations as the
Borrower's knowledge in clauses (a), (c) and (f) above, in the event that a
condition exists that would have resulted in an Event of Default pursuant to
Section 8(b) but for such qualification, such Event of Default shall be deemed
to have occurred notwithstanding such qualification.
4.18 ACCURACY OF INFORMATION, ETC. The statements and information
contained in this Agreement, the other Loan Documents, the Confidential
Information Memorandum (except, in the case of certain financial information
contained therein, to the extent superseded by subsequent information delivered
to the Lenders prior to the Closing Date) and any other document, certificate or
statement furnished by or on behalf of any Loan Party to the Administrative
Agent or the Lenders, or any of them, for use in connection with the
transactions contemplated by this Agreement or the other Loan Documents, as of
the date such statements and information were or are so furnished (or, in the
case of the Confidential Information Memorandum, as of the date of this
Agreement), were or are true and correct in all material respects. Any
projections and PRO FORMA financial information contained in the materials
referenced above are based upon good faith estimates and assumptions believed by
management of the Borrower to be reasonable at the time made, it being
recognized by the Lenders that such financial information as it relates to
future events is not to be viewed as fact and that actual results during the
period or periods covered by such financial information may differ from the
projected results set forth therein by a material amount. As of the date hereof,
the representations and warranties contained in the Loan Documents are true and
correct in all material respects. There is no fact known to any Loan Party that
could reasonably be expected to have a Material Adverse Effect that has not been
expressly disclosed herein, in the other Loan Documents, in the Confidential
Information Memorandum or in any other documents, certificates and statements
furnished to the Administrative Agent and the Lenders for use in connection with
the transactions contemplated hereby and by the other Loan Documents.
4.19 SECURITY DOCUMENTS. (a) The Guarantee and Collateral
Agreement is effective to create in favor of the Administrative Agent, for the
benefit of the Lenders, a legal, valid and enforceable security interest in the
Collateral described therein and proceeds thereof. In the case of the Pledged
Stock described in the Guarantee and Collateral Agreement (i) referred to on
Schedule 2 of the Guarantee and Collateral Agreement and (ii) any items that
become Pledged Stock after the Closing Date that constitute Certificated
Securities (as defined in the Uniform Commercial Code) when stock certificates
representing such Pledged Stock are delivered to the Administrative Agent, the
Guarantee and Collateral Agreement shall constitute a fully perfected Lien on,
and security interest in, all right, title and interest of the Loan Parties in
such Collateral and the proceeds thereof, as security for the Obligations (as
defined in the Guarantee and Collateral Agreement), in each case prior and
superior in right to any other Person (except, in the case of Collateral other
than Pledged Stock, Liens permitted by Section 7.3, and subject, in the case of
Proceeds, to the applicable limitations under Section 9-306 of the Uniform
Commercial Code). In the case of the Pledged Stock of Department 56 Minnesota,
LLC, and any items that become Pledged Stock after the Closing Date that
constitute General Intangibles (as defined in the Uniform Commercial Code), when
financing statements specified on Schedule 4.19(a) in appropriate form are filed
in the offices specified on Schedule 4.19(a), the Guarantee and Collateral
Agreement shall constitute a fully perfected Lien on, and security interest in,
all right, title and interest of the Loan Parties in such Collateral and the
Proceeds thereof, as security for the Obligations (as defined in the Guarantee
and Collateral Agreement), in each case prior and superior in right to any other
Person (except, in the case of Collateral other than Pledged Stock, Liens
permitted by Section 7.3, and subject, in the case of Proceeds to the applicable
<PAGE>
limitations under Section 9-306 of the Uniform Commercial Code). Schedule
4.19(a) specifies the locations in which to file the financing statements
which may perfect a legal, valid and enforceable security interest granted
under the Guarantee and Collateral Agreement in the Investment Property (as
defined in the Guarantee and Collateral Agreement) pursuant to Sections 9-115
and 9-103(6)(f) of the Uniform Commercial Code.
4.20 SOLVENCY. Each Loan Party is, and after giving effect to the
incurrence of all Indebtedness and obligations being incurred in connection
herewith will be and will continue to be, Solvent.
4.21 YEAR 2000 MATTERS. Any material reprogramming required to
permit the proper functioning (but only to the extent that such proper
functioning would otherwise be impaired by the occurrence of the year 2000) in
and following the year 2000 of computer systems and other equipment containing
embedded microchips, in either case owned or operated by the Borrower or any of
its Subsidiaries or used by the Borrower and its Subsidiaries in the conduct of
their business (including any such systems and other equipment supplied by
others or with which the computer systems of the Borrower or any of its
Subsidiaries interface), and the testing of all such systems and other equipment
as so reprogrammed, will be substantially completed by June 30, 1999. The costs
to the Borrower and its Subsidiaries that have not been incurred as of the date
hereof for such reprogramming and testing and for the other reasonably
foreseeable consequences to them of any improper functioning of other computer
systems and equipment containing embedded microchips due to the occurrence of
the year 2000 could not reasonably be expected to result in a Default or Event
of Default or to have a Material Adverse Effect.
SECTION 5. CONDITIONS PRECEDENT
5.1 CONDITIONS TO INITIAL EXTENSION OF CREDIT. The agreement of
each Lender to make the initial extension of credit requested to be made by it
is subject to the satisfaction, prior to or concurrently with the making of such
extension of credit on the Closing Date of the following conditions precedent:
(a) CREDIT AGREEMENT; GUARANTEE AND COLLATERAL AGREEMENT. The
Administrative Agent shall have received (i) this Agreement, executed
and delivered by the Administrative Agent, the Borrower and each Person
listed on Schedule 1.1A, (ii) the Guarantee and Collateral Agreement,
executed and delivered by the Borrower and each Subsidiary Guarantor
and (iii) an Acknowledgement and Consent in the form attached to the
Guarantee and Collateral Agreement, executed and delivered by each
Issuer (as defined therein), if any, that is not a Loan Party.
In the event that this Agreement has not been duly executed and
delivered by each Person listed on Schedule 1.1A on the date scheduled
to be the Closing Date, the condition referred to in clause (i) above
shall nevertheless be deemed satisfied if on such date the Borrower and
the Administrative Agent shall have designated one or more Persons (the
"Designated Lenders") to assume, in the aggregate, all of the
Commitments that would have been held by the Persons listed on Schedule
1.1A (the "Non-Executing Persons") which have not so executed and
delivered this Agreement (subject to each such Designated Lender's
consent and its execution and delivery of this Agreement). Schedule
1.1A shall automatically be deemed to be amended to reflect the
respective Commitments of the Designated Lenders and the omission of
the Non-Executing Persons as Lenders hereunder.
(b) PRO FORMA CAPITALIZATION TABLE; FINANCIAL STATEMENTS. The
Lenders shall have received (i) the Pro Forma Capitalization Table of
the Borrower adjusted to give effect to the consummation of the
financings contemplated hereby as if such financings had occurred on
the
<PAGE>
date of such Pro Forma Capitalization Table, (ii) audited
consolidated financial statements of the Borrower for the 1996 and 1997
fiscal years and (iii) unaudited interim consolidated financial
statements of the Borrower for each quarterly period ended subsequent
to the date of the latest applicable financial statements delivered
pursuant to clause (ii) of this paragraph as to which such financial
statements are available, and such financial statements shall not, in
the reasonable judgment of the Lenders, reflect any material adverse
change in the consolidated financial condition of the Borrower, as
reflected in the financial statements or projections contained in the
Confidential Information Memorandum.
(c) APPROVALS. All governmental and third party approvals
necessary in connection with the continuing operations of the Borrower
and its Subsidiaries and the transactions contemplated hereby shall
have been obtained and be in full force and effect, and all applicable
waiting periods shall have expired without any action being taken or
threatened by any competent authority that would restrain, prevent or
otherwise impose adverse conditions on the financing contemplated
hereby.
(d) FEES. The Lenders and the Administrative Agent shall have
received all fees required to be paid, and all expenses for which
invoices have been presented (including the reasonable and documented
fees and expenses of legal counsel), on or before the Closing Date. All
such amounts will be paid with proceeds of Loans made on the Closing
Date and will be reflected in the funding instructions given by the
Borrower to the Administrative Agent on or before the Closing Date.
(e) CLOSING CERTIFICATE. The Administrative Agent shall have
received, with a counterpart for each Lender, a certificate of each
Loan Party, dated the Closing Date, substantially in the form of
Exhibit C, with appropriate insertions and attachments.
(f) LEGAL OPINIONS. The Administrative Agent shall have received
the following executed legal opinions:
(i) the legal opinion of Cleary, Gottlieb, Steen &
Hamilton, counsel to the Borrower and its Subsidiaries,
substantially in the form of Exhibit F-1; and
(ii) the legal opinion of David H. Weiser, General Counsel
of the Borrower and its Subsidiaries, substantially in the form of
Exhibit F-2.
(g) PLEDGED STOCK; STOCK POWERS. The Administrative Agent shall
have received the certificates representing the shares of Capital Stock
pledged pursuant to the Guarantee and Collateral Agreement, together
with an undated stock power for each such certificate executed in blank
by a duly authorized officer of the pledgor thereof.
(h) FILINGS, REGISTRATIONS AND RECORDINGS. Each document
(including any Uniform Commercial Code financing statement) required by
the Security Documents or under law or reasonably requested by the
Administrative Agent to be filed, registered or recorded in order to
create in favor of the Administrative Agent, for the benefit of the
Lenders, a perfected Lien on the Collateral described therein, prior
and superior in right to any other Person (other than with respect to
Liens expressly permitted by Section 7.3), shall be in proper form for
filing, registration or recordation.
(i) The Administrative Agent shall have received a copy of a
satisfactory business plan for the Borrower and its Subsidiaries for
the fiscal year 1999 through fiscal year 2003 and detailed written
financial assumptions.
<PAGE>
(j) No governmental inquiries, injunctions or restraining orders
shall then be pending or entered or any statute or rule proposed,
enacted or promulgated which (i) would enjoin or otherwise would have a
Material Adverse Effect on the Facilities or (ii) results or will
result in a Material Adverse Effect.
(k) BORROWING BASE CERTIFICATE. The Administrative Agent shall
have received, with a counterpart for each Lender, a certificate
substantially in the form of Exhibit D, dated the Closing Date,
executed and delivered by a duly authorized officer of the Borrower.
5.2 CONDITIONS TO EACH EXTENSION OF CREDIT. The agreement of each
Lender to make any extension of credit requested to be made by it on any date
(including its initial extension of credit) is subject to the satisfaction of
the following conditions precedent:
(a) REPRESENTATIONS AND WARRANTIES. Each of the representations
and warranties made by any Loan Party in or pursuant to the Loan
Documents shall be true and correct on and as of such date as if made
on and as of such date, except for representations and warranties
expressly stated to relate to an earlier date, in which case such
representations and warranties shall have been true and correct on such
earlier date.
(b) NO DEFAULT. No Default or Event of Default shall have occurred
and be continuing on such date or after giving effect to the extensions
of credit requested to be made on such date.
Each borrowing by, and each issuance of a Letter of Credit or creation of an
Acceptance on behalf of, the Borrower hereunder shall constitute a
representation and warranty by the Borrower as of the date of such extension of
credit that the conditions contained in this Section 5.2 have been satisfied (or
waived in accordance with the terms of this Agreement).
SECTION 6. AFFIRMATIVE COVENANTS
The Borrower hereby agrees that, so long as the Commitments remain
in effect, any Letter of Credit or Acceptance Obligation remains outstanding or
any Loan or other amount is owing to any Lender or the Administrative Agent
hereunder, the Borrower shall and shall cause each of its Subsidiaries to:
6.1 FINANCIAL STATEMENTS. Furnish to the Administrative Agent and
each Lender:
(a) as soon as available, but in any event within 90 days after
the end of each fiscal year of the Borrower, a copy of the audited
consolidated balance sheet of the Borrower and its consolidated
Subsidiaries as at the end of such year and the related audited
consolidated statements of income and of cash flows for such year,
setting forth in each case in comparative form the figures for the
previous year, reported on without a "going concern" or like
qualification or exception, or qualification arising out of the scope
of the audit, by Deloitte & Touche or other independent certified
public accountants of nationally recognized standing;
(b) as soon as available, but in any event not later than 45 days
after the end of each of the first three quarterly periods of each
fiscal year of the Borrower, the unaudited consolidated balance sheet
of the Borrower and its consolidated Subsidiaries as at the end of such
quarter and the related unaudited consolidated statements of income and
of cash flows for such quarter and the portion of the fiscal year
through the end of such quarter, setting forth in each case in
comparative form
<PAGE>
the figures for the previous year, certified by a Responsible Officer
as being fairly stated in all material respects (subject to normal
year-end audit adjustments); and
(c) as soon as practicable, and in any event within 40 days after
the end of each calendar month of each year (or, in the case of
December of each year, or March, June and September of each year,
together with the financial statements referred to in Section 6.1(a) or
6.1(b) for the applicable period), the unaudited consolidated balance
sheet of Borrower and its Subsidiaries as at the end of such month and
the related unaudited statements of income of the Borrower and its
Subsidiaries for such month and for the portion of the fiscal year of
the Borrower through such date, in the form and detail similar to those
customarily prepared by the Borrower's management for internal use as
in effect on or prior to the Closing Date and as furnished to the
Administrative Agent on or prior to the Closing Date, setting forth in
each case in comparative form the consolidated figures for the
corresponding fiscal month of the previous year, certified by the chief
financial officer, controller or treasurer of the Borrower as being
fairly stated in all material respects;
All such financial statements shall be complete and correct in all material
respects and shall be prepared in reasonable detail and in accordance with GAAP
applied consistently throughout the periods reflected therein and with prior
periods (except as approved by such accountants or officer, as the case may be,
and disclosed therein).
6.2 CERTIFICATES; OTHER INFORMATION. Furnish to the Administrative
Agent and each Lender (or, in the case of clause (h), to the relevant Lender):
(a) concurrently with the delivery of the consolidated financial
statements referred to in Section 6.1(a), a letter from the independent
certified public accountants reporting on such financial statements
stating that in making the examination necessary to express their
opinion on such financial statements no knowledge was obtained of any
Default or Event of Default, except as specified in such letter;
(b) concurrently with the delivery of the financial statements
referred to in Sections 6.1(a) and (b), a certificate of the chief
financial officer of the Borrower substantially in the form of Exhibit
B hereto (i) stating that, to the best of such officer's knowledge,
each of the Borrower and its Subsidiaries has observed or performed all
of its covenants and other agreements, and satisfied every condition,
contained in this Agreement, the Notes and the other Loan Documents to
be observed, performed or satisfied by it, and that such officer has
obtained no knowledge of any Default or Event of Default except as
specified in such certificate, (ii) showing in detail as of the end of
the related fiscal period the figures and calculations supporting such
statement in respect of Sections 7.1(a) through 7.1(c) (iii) if not
specified in the financial statements delivered pursuant to Section
6.1, specifying the aggregate amount of interest paid or accrued by the
Borrower and its Subsidiaries, and the aggregate amount of
depreciation, depletion and amortization charged on the books of the
Borrower and its Subsidiaries, during such accounting period and (iv)
listing all Contingent Obligations of the type described in Section
7.3(a) and all Indebtedness (other than Indebtedness hereunder) in each
case incurred since the date of the previous consolidated balance sheet
of the Borrower delivered pursuant to Section 6.1(a) or (b);
(c) concurrently with the financial statements referred to in
Sections 6.1(a) and (b), a management summary describing and analyzing
the performance of the Borrower and its Subsidiaries during the periods
covered by such financial statements;
<PAGE>
(d) promptly upon receipt thereof, copies of all final reports
submitted to the Borrower or to any of its Subsidiaries by independent
certified public accountants in connection with each annual, interim or
special audit of the books of the Borrower or any of its Subsidiaries
made by such accountants, including, without limitation, any final
comment letter submitted by such accountants to management in
connection with their annual audit;
(e) not later than 60 days after the beginning of each fiscal year
of the Borrower, a copy of the business plan for such fiscal year on a
consolidated basis as adopted by the Board of Directors of the
Borrower;
(f) promptly upon their becoming available, copies of all
financial statements, reports, notices and proxy statements sent or
made available generally by the Borrower or any of its Subsidiaries to
its shareholders and all regular and periodic reports and all final
registration statements and final prospectuses, if any, filed by the
Borrower or any of its Subsidiaries with any securities exchange or
with the SEC or any Governmental Authority succeeding to any of its
functions;
(g) within 20 Business Days after the last day of each month, a
fully completed certificate substantially in the form of Exhibit D with
respect to Eligible Accounts and Eligible Inventory as of such last day
of such month; and
(h) promptly, such additional financial and other information as
any Lender may from time to time reasonably request.
6.3 PAYMENT OF OBLIGATIONS. Pay, discharge or otherwise satisfy at
or before maturity or before they become delinquent, as the case may be, all its
material obligations of whatever nature, except where the amount or validity
thereof is currently being contested in good faith by appropriate proceedings
and reserves in conformity with GAAP with respect thereto have been provided on
the books of the Borrower or its Subsidiaries, as the case may be.
6.4 MAINTENANCE OF EXISTENCE; COMPLIANCE. (a) (i) Preserve, renew
and keep in full force and effect its corporate existence and (ii) take all
reasonable action to maintain all rights, privileges and franchises necessary or
desirable in the normal conduct of its business, except, in each case, as
otherwise permitted by Section 7.4 and except, in the case of clause (ii) above,
to the extent that failure to do so could not reasonably be expected to have a
Material Adverse Effect; and (b) comply with all Contractual Obligations and
Requirements of Law except to the extent that failure to comply therewith could
not, in the aggregate, reasonably be expected to have a Material Adverse Effect.
6.5 MAINTENANCE OF PROPERTY; INSURANCE. (a) Keep all property
useful and necessary in its business in good working order and condition,
ordinary wear and tear excepted and (b) maintain with financially sound and
reputable insurance companies insurance on all its property in at least such
amounts and against at least such risks (but including in any event public
liability, product liability and business interruption) as are usually insured
against in the same general area by companies engaged in the same or a similar
business.
6.6 INSPECTION OF PROPERTY; BOOKS AND RECORDS; DISCUSSIONS. (a)
Keep proper books of records and account in which full, true and correct entries
in conformity with GAAP and all Requirements of Law shall be made of all
dealings and transactions in relation to its business and activities and (b)
permit representatives of any Lender, at such Lender's expense, to visit and
inspect any of its properties and examine any of its books and records upon
reasonable notice to the Borrower; PROVIDED, that, for so long as no Event of
Default has occurred and is continuing, such requests and visitations (i) shall
be coordinated
<PAGE>
through the Administrative Agent, and (ii) shall not interfere
with or disrupt operations of the Borrower or its Subsidiaries, and (c) to
discuss the business, operations, properties and financial and other condition
of the Borrower and its Subsidiaries with officers and employees of the Borrower
and its Subsidiaries and with its independent certified public accountants at
any reasonable time.
6.7 NOTICES. Promptly give notice to the Administrative Agent and
each Lender of:
(a) the occurrence of any Default or Event of Default;
(b) any (i) default or event of default under any Contractual
Obligation of the Borrower or any of its Subsidiaries or (ii)
litigation, investigation or proceeding that may exist at any time
between the Borrower or any of its Subsidiaries and any Governmental
Authority, that in either case, if not cured or if adversely
determined, as the case may be, could reasonably be expected to have a
Material Adverse Effect;
(c) any litigation or proceeding affecting the Borrower or any of
its Subsidiaries in which the amount involved is $1,000,000 or more and
not covered by insurance or in which injunctive or similar relief is
sought that if not cured or if adversely determined, as the case may
be, could reasonably be expected to have a Material Adverse Effect;
(d) the following events, as soon as possible and in any event
within 30 days after the Borrower knows or has reason to know thereof:
(i) the occurrence of any Reportable Event with respect to any Plan, a
failure to make any required contribution to a Plan, the creation of
any Lien in favor of the PBGC or a Plan or any withdrawal from, or the
termination, Reorganization or Insolvency of, any Multiemployer Plan or
(ii) the institution of proceedings or the taking of any other action
by the PBGC or the Borrower or any Commonly Controlled Entity or any
Multiemployer Plan with respect to the withdrawal from, or the
termination, Reorganization or Insolvency of, any Plan; and
(e) any development or event that has had or could reasonably
be expected to have a Material Adverse Effect.
Each notice pursuant to this Section 6.7 shall be accompanied by a statement of
a Responsible Officer setting forth details of the occurrence referred to
therein and stating what action the Borrower or the relevant Subsidiary proposes
to take with respect thereto.
6.8 ENVIRONMENTAL LAWS. (a) Comply in all material respects with
all applicable Environmental Laws, and obtain and comply in all material
respects with and maintain, any and all material licenses, approvals,
notifications, registrations or permits required by applicable Environmental
Laws.
(b) Conduct and complete all investigations, studies, sampling and
testing, and all remedial, removal and other actions required under
Environmental Laws and promptly comply in all material respects with all lawful
orders and directives of all Governmental Authorities regarding Environmental
Laws.
6.9 ADDITIONAL COLLATERAL, ETC. If, after the date hereof, any
Material Subsidiary of the Borrower shall be formed, acquired or capitalized,
promptly deliver to the Administrative Agent, as applicable, (A) a stock
certificate or certificates evidencing all of the issued and outstanding shares
of capital stock of such Subsidiary held by Borrower or its Subsidiary, together
with undated stock powers covering each such certificate, duly executed in blank
by the Borrower or the Subsidiary that directly owns such capital stock, (B) a
supplement to the Guarantee and Collateral Agreement, executed by a duly
<PAGE>
authorized officer of the Borrower and such Subsidiary, pursuant to which the
capital stock of any such Subsidiary acquired or created is pledged thereunder
on the same terms as those provided in respect of pledges under the Guarantee
and Collateral Agreement on the Closing Date and pursuant to which any such
Subsidiary becomes a Subsidiary Guarantor thereunder on the same terms as those
provided in respect of pledges under the Guarantee and Collateral Agreement on
the Closing Date, pursuant to documentation satisfactory to the Administrative
Agent, (C) legal opinions with respect to the pledge of stock from the General
Counsel of the Borrower and/or such other counsel as are reasonably satisfactory
to the Administrative Agent, PROVIDED that the scope of such opinions shall be
no broader than the scope of the opinions of such counsel delivered on the
Closing Date, and (D) such other certificates, resolutions and documents as the
Administrative Agent may reasonably request; PROVIDED that if such Subsidiary is
a Subsidiary more than 65% of the assets of which are securities of foreign
companies (such determination to be made on the basis of fair market value) or
such Subsidiary is a Foreign Subsidiary, only 65% of the stock of such
Subsidiary shall be required to be pledged pursuant to this subsection;
PROVIDED, FURTHER, that no such Subsidiary shall be required to become a
Guarantor if it is a Foreign Subsidiary; and PROVIDED, FURTHER, that no such
capital stock shall be required to be pledged pursuant hereto during any
Positive Security Period. In addition, the Borrower shall from time to time
promptly take all necessary actions in the foregoing clauses (A) through (D)
with respect to Subsidiaries in order to comply with the definition of "Material
Subsidiary."
6.10 SECURITY EVENTS. If a Negative Security Event occurs during a
Positive Security Period, as promptly as practicable after the occurrence of
such Negative Security Event, and in any event on or before the Security
Perfection Date in respect thereof, take or cause to be taken the following
actions:
(i) take all actions required to grant a first priority
perfected security interest in all Capital Stock held by the Borrower
or any Material Subsidiary existing at such time that would have been
required to be pledged pursuant to Section 6.9 had a Negative Security
Period been in effect prior to the time of such Negative Security Event
and had such Capital Stock been acquired after the Closing Date and
thus been subject to such provisions, including all the actions
described in such Section 6.9 with respect to all such Capital Stock;
and
(ii) thereafter from time to time promptly take or cause to be
taken all such further actions as shall be reasonably requested by the
Administrative Agent in order to ensure that the provisions of the
Guarantee and Collateral Agreement are satisfied and the
representations and warranties therein with respect to the Collateral
that would comprise such Capital Stock and other items included in the
definition of Collateral in respect thereof are true and correct.
6.11 YEAR 2000 MATTERS. Any reprogramming required to permit the
proper functioning (but only to the extent that such proper functioning would
otherwise be impaired by the occurrence of the year 2000) in and following the
year 2000 of computer systems and other equipment containing embedded
microchips, in either case owned or operated by the Borrower or any of its
Subsidiaries or used or relied upon in the conduct of their business, and the
testing of all such systems and other equipment as so reprogrammed, is targeted
to be completed by June 30, 1999, except for such failures to reprogram as would
not, individually or in the aggregate, reasonably be expected to have a Material
Adverse Effect. The costs to the Borrower and its Subsidiaries that have not
been incurred as of the date hereof for such reprogramming and testing and for
the other reasonably foreseeable consequences to them of any improper
functioning of other computer systems and equipment containing embedded
microchips due to the occurrence of the year 2000 would not reasonably be
expected to result in a Default or an Event of Default or to have a "Material
Adverse Effect."
<PAGE>
SECTION 7. NEGATIVE COVENANTS
Borrower hereby agrees that, so long as the Commitments remain in
effect, any Letter of Credit or Acceptance Obligation remains outstanding or any
Loan or other amount is owing to any Lender or the Administrative Agent
hereunder, and the Borrower shall not, and shall not permit any of its
Subsidiaries to, directly or indirectly:
7.1 FINANCIAL CONDITION COVENANTS.
(a) Consolidated Interest Coverage Ratio. At the last day of any
fiscal quarter, permit the Consolidated Interest Coverage Ratio of the Borrower
for the period of four consecutive fiscal quarters ending on such day to be less
than 4.00 to 1.00.
(b) Consolidated Leverage Ratio. At the last day of any fiscal
quarter permit the Consolidated Leverage Ratio of the Borrower for the period of
four consecutive fiscal quarters ending on such day to be more than 2.75 to
1.00.
(c) Consolidated Net Worth. Permit Consolidated Net Worth at the
last day of any fiscal quarter to be less than the greater of (i) $140,000,000,
or (ii) 80% of Consolidated Net Worth for fiscal year ended January 4, 1999.
7.2 INDEBTEDNESS. Create, issue, incur, assume, become liable in
respect of or suffer to exist any Indebtedness, except:
(a) Indebtedness of any Loan Party pursuant to any Loan Document
or under the Letters of Credit or the Acceptances;
(b) Indebtedness of the Borrower to any Subsidiary Guarantor and
any Consolidated Subsidiary Guarantor (or any other Subsidiary if such
Indebtedness is subordinated to the Obligations on terms satisfactory
to the Administrative Agent) to the Borrower or any other Subsidiary;
(c) Guarantee Obligations incurred in the ordinary course of
business by the Borrower or any of its Subsidiaries of obligations of
any Consolidated Subsidiary Guarantor;
(d) Indebtedness outstanding on the date hereof and listed on
Schedule 7.2(d) and any refinancings, refundings, renewals or
extensions thereof (without increasing, or shortening the maturity of,
the principal amount thereof);
(e) additional Indebtedness of the Subsidiaries of the Borrower in
an aggregate principal amount which when added to the Indebtedness
permitted by Section 7.2(h) shall not exceed an amount equal to 20% of
Consolidated Net Worth calculated as of the end of the most recently
completed fiscal quarter for which financial statements have been
delivered pursuant to Section 6.1(a) or (b) at any one time
outstanding, so long as no Event of Default exists at the time of
incurrence thereof;
(f) unsecured Indebtedness of the Borrower so long as (i) the
Borrower, after giving PRO FORMA effect as if such Indebtedness had
been incurred on the first day of the most recently ended period of
four consecutive fiscal quarters of the Borrower for which Section 6.1
financial statements have been delivered, would be in compliance with
the financial covenants set forth in Section 7.1, (ii) at the time of
incurrence thereof no Default or Event of Default shall have
<PAGE>
occurred and be continuing or would result therefrom, (iii) the terms
of such Indebtedness, viewed as a whole are no more favorable to the
holders of such Indebtedness or burdensome on the Borrower or any
Subsidiary than the terms of any Loan Document (other than interest
rates which shall be at market rates), (iv) no principal payments on
such Indebtedness are required to be made on or prior to the
termination of this Facility and (v) such Indebtedness does not
constitute Indebtedness described in clause (h) of the definition
thereof.
(g) unsecured Guarantee Obligations of the Subsidiaries of the
Borrower in respect of Indebtedness permitted under Section 7.2(f), so
long as such Guarantee Obligations are pari passu with (or have
interests or rights that are inferior to pari passu with) the Guarantee
Obligations under any Loan Document and so long as the terms of such
Guarantee Obligations are no more favorable to the holders of such
Indebtedness or burdensome on the Borrower or any Subsidiary than the
terms of the Guarantee Obligations under any Loan Document.
(h) Indebtedness secured by a Lien pursuant to Section 7.3(i)
which when added to Indebtedness permitted under 7.2(e), shall not
exceed an amount equal to 20% of Consolidated Net Worth calculated as
of the end of the most recently completed fiscal quarter for which
financial statements have been delivered pursuant to Section 6.1(a) or
(b) at any one time outstanding.
(i) Indebtedness (including, without limitation, Capital Lease
Obligations) secured by Liens permitted by Section 7.3(j) PROVIDED that
the amount of such Indebtedness incurred in any fiscal year pursuant to
this clause (i) after the Closing Date does not exceed an aggregate
principal amount of the sum of (A) $5,000,000 and (B) the portion of
the amount permitted to be incurred pursuant to this clause (i) in the
fiscal years prior to such fiscal year to the extent not utilized to
incur Indebtedness pursuant to this clause (i) in any other fiscal year
prior to such current fiscal year;
7.3 LIENS. Create, incur, assume or suffer to exist any Lien upon
any of its property, whether now owned or hereafter acquired, except
for:
(a) Liens for taxes, assessments or other governmental charges
or levies not yet due or that are being contested in good faith by
appropriate proceedings, PROVIDED that adequate reserves with respect
thereto are maintained on the books of the Borrower or its
Subsidiaries, as the case may be, in conformity with GAAP;
(b) carriers', warehousemen's, mechanics', materialmen's,
repairmen's, custom's or other like Liens arising in the ordinary
course of business that are not overdue for a period of more than 30
days or that are being contested in good faith by appropriate
proceedings;
(c) pledges or deposits in connection with workers'
compensation, unemployment insurance and other social security
legislation;
(d) deposits (i) to secure Permitted Acquisitions so long as
the aggregate amount of any deposits at any time outstanding does not
exceed $3,000,000 and (ii) to secure the performance of bids, trade
contracts (other than for borrowed money), leases, statutory
obligations, surety and appeal bonds, performance bonds and other
obligations of a like nature incurred in the ordinary course of
business; (e) easements, rights-of-way, restrictions and other similar
encumbrances incurred in the ordinary course of business that, in the
aggregate, are not substantial in amount and that do not in
<PAGE>
any case materially detract from the value of the property subject
thereto or materially interfere with the ordinary conduct of the
business of the Borrower or any of its Subsidiaries;
(f) Liens in existence on the date hereof listed on Schedule
7.3(f), securing Indebtedness permitted by Section 7.2(d), PROVIDED
that no such Lien is spread to cover any additional property after the
Closing Date and that the amount of Indebtedness secured thereby is not
increased;
(g) Liens created pursuant to the Security Documents;
(h) Liens arising in the course of the Borrower conducting
ordinary commercial banking transactions, including repurchase
agreements;
(i) additional Liens securing Indebtedness (including, without
limitation, Capital Lease Obligations) of the Borrower and its
Subsidiaries which when added to Indebtedness permitted under Section
7.2(e) shall not exceed an amount equal to 20% of Consolidated Net
Worth calculated as of the end of the most recently completed fiscal
quarter for which financial statements pursuant to Sections 6.1(a) and
6.1(b) have been delivered at any one time outstanding, so long as (i)
no such Lien encumbers any Collateral and (ii) no Event of Default
exists at the time of the creation or incurrence of such Lien or would
result therefrom; and
(j) Liens securing Indebtedness of the Borrower or any
Subsidiary incurred pursuant to Section 7.2(i) to finance the
acquisition of fixed or capital assets constituting plant, property or
equipment, PROVIDED that (i) such Liens shall be created substantially
simultaneously with the acquisition of such fixed or capital assets,
and (ii) such Liens do not at any time encumber any property other than
the property financed by such Indebtedness;
PROVIDED, that, notwithstanding the foregoing, in no event shall any Lien be
created, incurred, assumed or suffered to exist that covers or affects any
Capital Stock or related asset or interest that would be Collateral if a
Negative Security Event were in effect and such item were subject to the
Guarantee and Collateral Agreement.
7.4 FUNDAMENTAL CHANGES. Enter into any merger, consolidation or
amalgamation, or liquidate, wind up or dissolve itself (or suffer any
liquidation or dissolution), or Dispose of, all or substantially all of its
property or business, except that:
(a) any Subsidiary of the Borrower may be merged or consolidated
with or into the Borrower (PROVIDED that the Borrower shall be the
continuing or surviving corporation) or with or into any Consolidated
Subsidiary Guarantor (PROVIDED that the Consolidated Subsidiary
Guarantor shall be the continuing or surviving corporation);
(b) any Subsidiary of the Borrower may Dispose of any or all of
its assets (upon voluntary liquidation or otherwise) to the Borrower or
any Consolidated Subsidiary Guarantor;
(c) the Borrower and its Subsidiaries may Dispose of any or all of
its or their assets in a transaction satisfying the requirements of
Section 7.5; and
(d) the Subsidiaries of the Borrower may enter into any merger,
consolidation or acquisition transaction meeting the requirements of
Section 7.7(g).
7.5 DISPOSITION OF PROPERTY. Dispose of any of its property,
whether now owned or hereafter acquired, or, in the case of any Subsidiary,
issue or sell any shares of such Subsidiary's Capital Stock to any Person,
except:
<PAGE>
(a) the Disposition of obsolete or worn out property in the
ordinary course of business;
(b) the sale of inventory in the ordinary course of business;
(c) Dispositions permitted by Section 7.4(b);
(d) the sale or issuance of any Subsidiary's Capital Stock to the
Borrower or any Consolidated Subsidiary Guarantor and, in the event
that the Borrower or such Consolidated Subsidiary Guarantor does not
own all of the applicable class of such Capital Stock, to any minority
holder of such Capital Stock on a pro rata basis based on the interests
of such holders immediately prior thereto; and
(e) Subsidiary Stock Events and Dispositions of any other property
(including, without limitation, Collateral) having a fair market value
not to exceed $100,000,000 in the aggregate cumulatively after the
Closing Date.
7.6 RESTRICTED PAYMENTS. Declare or pay any dividend (other than
dividends payable solely in common stock of the Person making such dividend) on,
or make any payment on account of, or set apart assets for a sinking or other
analogous fund for, the purchase, redemption, defeasance, retirement or other
acquisition of, any Capital Stock of the Borrower or any Subsidiary, whether now
or hereafter outstanding, or make any other distribution in respect thereof,
either directly or indirectly, whether in cash or property or in obligations of
the Borrower or any Subsidiary (collectively, "Restricted Payments"), except
that:
(a) any Subsidiary may make Restricted Payments (i) to the
Borrower or any Consolidated Subsidiary Guarantor and in the event
that, the Borrower or such Consolidated Subsidiary Guarantor does not
own all of the applicable Class of the Capital Stock in respect of
which such Restricted Payment is made, to the minority holders of such
Capital Stock, so long as such Restricted Payments shall be made pro
rata based on the interests of such holders immediately prior thereto,
or (ii) to any other Subsidiary and in the event that such Subsidiary
does not own all of the applicable class of the Capital Stock in
respect of which such Restricted Payment is made, to the minority
holders of such Capital Stock, so long as such Restricted Payments
shall be made pro rata based on the interests of such holders
immediately prior thereto, and so long as such Restricted Payments
received by such Subsidiary are, immediately upon receipt thereof, made
as Restricted Payments to the Borrower or any Consolidated Subsidiary
Guarantor in accordance with clause (i) above; and
(b) so long as no Default or Event of Default shall have occurred
and be continuing or would result therefrom, the Borrower may pay
dividends and redeem or repurchase its Capital Stock if, after giving
effect thereto, it would be in compliance with the financial covenants
set forth in Section 7.1, on a pro forma basis as of the last day of
the most recently completed fiscal quarter for which financial
statements have been delivered pursuant to Section 6.1(a) or (b).
7.7 INVESTMENTS. Make any advance, loan, extension of credit (by
way of guaranty or otherwise) or capital contribution to, or purchase any
Capital Stock, bonds, notes, debentures or other debt securities of, or any
assets constituting a business unit of, or make any other investment in, any
Person (all of the foregoing, "INVESTMENTS"), except:
(a) extensions of trade credit in the ordinary course of business;
<PAGE>
(b) investments in Cash Equivalents;
(c) Guarantee Obligations permitted by Section 7.2 and the
advances permitted by 7.2(b);
(d) loans and advances to employees and sales representatives of
the Borrower or any Subsidiary of the Borrower in the ordinary course
of business (including for travel, entertainment and relocation
expenses) in an aggregate amount for the Borrower or any Subsidiary of
the Borrower not to exceed $1,000,000 at any one time outstanding;
(e) Investments in assets useful in the business of the Borrower
and its Subsidiaries made by the Borrower or any of its Subsidiaries
with the proceeds of any Reinvestment Deferred Amount;
(f) Investments by the Borrower or any of its Subsidiaries in the
Borrower or any Person that, prior to and after such investment, is a
Consolidated Subsidiary Guarantor; and
(g) the Borrower or any Subsidiary may make Permitted
Acquisitions, and may create Subsidiaries to own, directly or
indirectly, the property acquired thereby; provided that (i) any
acquisition of Capital Stock results in the issuer thereof becoming a
Subsidiary (ii) any Material Subsidiary created or acquired in
connection therewith shall become a Subsidiary Guarantor and the
requirements of Section 6.9 shall be satisfied prior to or concurrently
with the consummation of such Permitted Acquisition, (iii) no Permitted
Acquisition shall be consummated unless, after giving pro forma effect
thereto as if such Permitted Acquisition had been made (and the related
Indebtedness incurred or assumed) on the first day of the most recent
period of four consecutive fiscal quarters ending prior thereto for
which financial statements have been delivered pursuant to Section
6.1(a) or (b), the Borrower and its Subsidiaries would have a
Consolidated Leverage Ratio of less than or equal to 2.50:1.00 and a
Consolidated Interest Coverage Ratio of greater than or equal to
4.25:1.00 during such period (as demonstrated, in the case of any
Permitted Acquisition the aggregate consideration for which exceeds
$10,000,000, by delivery to the Administrative Agent of a certificate
to such effect showing such calculation in reasonable detail), (iv) no
Default or Event of Default exists at the time thereof or would result
therefrom, and (v) such acquisition has not been opposed, or has been
approved, prior to the consummation thereof, by a majority of the board
of directors of the entity being acquired; and
(h) in addition to Investments otherwise expressly permitted by
this Section, Investments by the Borrower or any of its Subsidiaries in
an aggregate amount (valued at cost) not to exceed, at any time,
$10,000,000 plus 10% of the Consolidated Net Worth calculated as of the
end of the most recently completed fiscal quarter for which financial
statements have been delivered pursuant to Sections 6.1(a) and 6.1(b).
7.8 TRANSACTIONS WITH AFFILIATES. Enter into any transaction,
including any purchase, sale, lease or exchange of property, the rendering of
any service or the payment of any management, advisory or similar fees, with any
Affiliate (other than the Borrower or any Consolidated Subsidiary Guarantor)
unless such transaction is upon fair and reasonable terms no less favorable to
the Borrower or such Subsidiary, as the case may be, than it would obtain in a
comparable arm's length transaction with a Person that is not an Affiliate.
7.9 CHANGES IN FISCAL PERIODS. For financial reporting purposes,
permit the fiscal year of the Borrower to end on a day other than the Saturday
closest to the end of the calendar year, or change the Borrower's method of
determining fiscal quarters, except that the Borrower may, upon written notice
to the Administrative Agent, change the financial reporting convention specified
above to any other financial
<PAGE>
reporting convention reasonable acceptable to the Administrative Agent, in
which case the Borrower and the Administrative Agent will, and are hereby
authorized by the Lenders to, make any adjustments to this Agreement that are
necessary in order to reflect such change in financial reporting.
7.10 NEGATIVE PLEDGE CLAUSES. Enter into or suffer to exist or
become effective any agreement that prohibits or limits the ability of the
Borrower or any of its Subsidiaries to create, incur, assume or suffer to exist
any Lien upon any of its property or revenues, whether now owned or hereafter
acquired, other than (a) this Agreement and the other Loan Documents, (b) any
agreements governing any purchase money Liens or Capital Lease Obligations
otherwise permitted hereby (in which case, any prohibition or limitation shall
only be effective against the assets financed thereby) and (c) agreements
governing any indebtedness issued under 7.2(e), 7.2(f) or 7.2(h) that contain
limitations on Liens customary for such issuances, PROVIDED that in no event
shall any such agreement affect the Capital Stock of any Subsidiary.
7.11 CLAUSES RESTRICTING SUBSIDIARY DISTRIBUTIONS. Enter into or
suffer to exist or become effective any consensual encumbrance or restriction on
the ability of any Subsidiary of the Borrower to (a) make Restricted Payments in
respect of any Capital Stock of such Subsidiary held by, or pay any Indebtedness
owed to, the Borrower or any other Subsidiary of the Borrower, (b) make loans or
advances to, or other Investments in, the Borrower or any other Subsidiary of
the Borrower or (c) transfer any of its assets to the Borrower or any other
Subsidiary of the Borrower, except for such encumbrances or restrictions
existing under or by reason of (i) any restrictions existing under the Loan
Documents and (ii) any restrictions with respect to a Subsidiary imposed
pursuant to an agreement that has been entered into in connection with the
Disposition of all or substantially all of the Capital Stock or assets of such
Subsidiary.
7.12 LINES OF BUSINESS. Enter into any business, either directly
or through any Subsidiary, except for those businesses in which the Borrower and
its Subsidiaries are engaged on the date of this Agreement or that are
reasonably related thereto, including, without limitation, collectibles,
giftware and decorative accessories.
7.13 CONTINGENT OBLIGATIONS. Create, incur, assume or suffer to
exist any Contingent Obligation except:
(a) guarantees, if any, created pursuant to this Agreement;
(b) guarantees made in the ordinary course of its business by the
Borrower of the obligations of any of its Subsidiaries, PROVIDED those
obligations are otherwise permitted under this Agreement;
(c) Contingent Obligations described on Schedule 7.13;
(d) Contingent Obligations arising on account of the Letters of
Credit and Acceptances; and
(e) Contingent Obligations permitted by Section 7.2.
7.14 FOREIGN EXCHANGE AND HEDGE AGREEMENTS. Enter into any foreign
currency exchange contracts (other than foreign currency exchange contracts
entered into for the sole purpose of hedging with respect to the purchase or
sale by the Borrower or its Subsidiaries of inventory to be purchased or sold
for payments in foreign currencies in the ordinary course of their respective
businesses); or enter into any other Hedge Agreement other than in the ordinary
course of business to protect the Borrower and its Subsidiaries from interest
rate and currency fluctuations in respect of Indebtedness owed by them.
<PAGE>
SECTION 8. EVENTS OF DEFAULT
If any of the following events shall occur and be continuing:
(a) the Borrower shall fail to pay any principal of any Loan or
Reimbursement Obligation when due in accordance with the terms hereof;
or the Borrower shall fail to pay any interest on any Loan or
Reimbursement Obligation, or any other amount payable hereunder or
under any other Loan Document, within five days after any such interest
or other amount becomes due in accordance with the terms hereof; or
(b) any representation or warranty made or deemed made by any Loan
Party herein or in any other Loan Document or that is contained in any
certificate, document or financial or other statement furnished by it
at any time under or in connection with this Agreement or any such
other Loan Document shall prove to have been materially inaccurate in
any material respect on or as of the date made or deemed made; or
(c) any Loan Party shall default in the observance or performance
of any agreement contained in clause (i) or (ii) of Section 6.4(a)
(with respect to the Borrower only), Section 6.7(a) or Section 7 of
this Agreement or Sections 5.3(a), 5.3(b) and 5.6 of the Guarantee and
Collateral Agreement; or
(d) any Loan Party shall default in the observance or performance
of any other agreement contained in this Agreement or any other Loan
Document (other than as provided in paragraphs (a) through (c) of this
Section), and such default shall continue unremedied for a period of 30
days; or
(e) The Borrower or any of its Subsidiaries shall (i) default in
making any payment of any principal of any Indebtedness (including any
Guarantee Obligation, but excluding the Loans) on the scheduled or
original due date with respect thereto or within any applicable grace
period; or (ii) default in making any payment of any interest on any
such Indebtedness beyond the period of grace, if any, provided in the
instrument or agreement under which such Indebtedness was created; or
(iii) default in the observance or performance of any other agreement
or condition relating to any such Indebtedness or contained in any
instrument or agreement evidencing, securing or relating thereto, or
any other event shall occur or condition exist, the effect of which
default or other event or condition is to cause, or to permit the
holder or beneficiary of such Indebtedness (or a trustee or agent on
behalf of such holder or beneficiary) to cause, with the giving of
notice if required, such Indebtedness to become due prior to its stated
maturity or (in the case of any such Indebtedness constituting a
Guarantee Obligation) to become payable; PROVIDED, that a default,
event or condition described in clause (i), (ii) or (iii) of this
paragraph (e) shall not at any time constitute an Event of Default
unless, at such time, one or more defaults, events or conditions of the
type described in clauses (i), (ii) and (iii) of this paragraph (e)
shall have occurred and be continuing with respect to Indebtedness the
outstanding principal amount of which exceeds in the aggregate
$3,000,000; or
(f) (i) the Borrower or any of its Material Subsidiaries shall
commence any case, proceeding or other action (A) under any existing or
future law of any jurisdiction, domestic or foreign, relating to
bankruptcy, insolvency, reorganization or relief of debtors, seeking to
have an order for relief entered with respect to it, or seeking to
adjudicate it a bankrupt or insolvent, or seeking reorganization,
arrangement, adjustment, winding-up, liquidation, dissolution,
composition or other relief with respect to it or its debts, or (B)
seeking appointment of a receiver,
<PAGE>
trustee, custodian, conservator or other similar official for it or
for all or any substantial part of its assets, or the Borrower or
any of its Material Subsidiaries shall make a general assignment for
the benefit of its creditors; or (ii) there shall be commenced
against the Borrower or any of its Material Subsidiaries any case,
proceeding or other action of a nature referred to in clause (i)
above that (A) results in the entry of an order for relief or any
such adjudication or appointment or (B) remains undismissed,
undischarged or unbonded for a period of 60 days; or (iii) there
shall be commenced against the Borrower or any of its Material
Subsidiaries any case, proceeding or other action seeking issuance
of a warrant of attachment, execution, distraint or similar process
against all or any substantial part of its assets that results in
the entry of an order for any such relief that shall not have been
vacated, discharged, or stayed or bonded pending appeal within 60
days from the entry thereof; or (iv) the Borrower or any of its
Subsidiaries shall take any action in furtherance of, or indicating
its consent to, approval of, or acquiescence in, any of the acts set
forth in clause (i), (ii), or (iii) above; or (v) the Borrower or
any of its Material Subsidiaries shall generally not, or shall be
unable to, or shall admit in writing its inability to, pay its debts
as they become due; or
(g) (i) any Person shall engage in any "prohibited transaction"
(as defined in Section 406 of ERISA or Section 4975 of the Code)
involving any Plan, (ii) any "accumulated funding deficiency" (as
defined in Section 302 of ERISA), whether or not waived, shall exist
with respect to any Single Employer Plan or any Lien in favor of the
PBGC or a Plan shall arise on the assets of the Borrower or any
Commonly Controlled Entity, (iii) a Reportable Event shall occur with
respect to, or the PBGC shall commence proceedings to have a trustee
appointed, or a trustee shall be appointed, to administer or to
terminate, any Single Employer Plan, which Reportable Event or
commencement of proceedings or appointment of a trustee is reasonably
likely to result in the termination of such Plan for purposes of Title
IV of ERISA, (iv) any Single Employer Plan shall terminate for purposes
of Title IV of ERISA, (v) the Borrower or any Commonly Controlled
Entity shall or is reasonably likely to, incur any liability in
connection with a withdrawal from, or the Insolvency or Reorganization
of, a Multiemployer Plan or (vi) any other similar event or condition
shall occur or exist with respect to a Plan other than in the ordinary
course; and in each case in clauses (i) through (vi) above, such event
or condition, together with all other such events or conditions, if
any, could, in the reasonable judgment of the Required Lenders, be
expected to have a Material Adverse Effect; or
(h) one or more judgments or decrees shall be entered against the
Borrower or any of its Subsidiaries involving in the aggregate a
liability (not paid or fully covered by insurance as to which the
relevant insurance company has acknowledged coverage) of $3,000,000 or
more, and all such judgments or decrees shall not have been vacated,
discharged, stayed or bonded pending appeal within 60 days from the
entry thereof; or
(i) except to the extent that during the existence of a Positive
Security Event the Liens thereunder may be released in accordance with
the terms thereof, any of the Security Documents shall cease, for any
reason, to be in full force and effect, or any Loan Party or any
Affiliate of any Loan Party shall so assert, or any Lien created by any
of the Security Documents shall cease to be enforceable and of the same
effect and priority purported to be created thereby; or
(j) the guarantee contained in Section 2 of the Guarantee and
Collateral Agreement shall cease, for any reason, to be in full force
and effect or any Loan Party shall so assert; or
(k) (i) any "person" or "group" (as such terms are used in
Sections 13(d) and 14(d) of the Securities Exchange Act of 1934, as
amended (the "Exchange Act")), shall become, or obtain rights (whether
by means or warrants, options or otherwise) to become, the "beneficial
owner" (as defined in Rules 13(d)-3 and 13(d)-5 under the Exchange
Act), directly or indirectly, of more than
<PAGE>
30% of the outstanding common stock of the Borrower; (ii) the board
of directors of the Borrower shall cease to consist of a majority of
Continuing Directors; (iii) the Borrower shall cease to own and
control, of record and beneficially, directly, 100% of each class of
outstanding Capital Stock of D56, Inc. free and clear of all Liens
(except Liens created by the Guarantee and Collateral Agreement).
then, and in any such event, (A) if such event is an Event of Default specified
in clause (i) or (ii) of paragraph (f) above with respect to the Borrower,
automatically the Commitments shall immediately terminate and the Loans
hereunder (with accrued interest thereon) and all other amounts owing under this
Agreement and the other Loan Documents (including all amounts of L/C
Obligations, whether or not the beneficiaries of the then outstanding Letters of
Credit shall have presented the documents required thereunder and the
Acceptances, although contingent and unmatured) shall immediately become due and
payable, and (B) if such event is any other Event of Default, either or both of
the following actions may be taken: (i) with the consent of the Majority Working
Capital Facility Lenders, the Administrative Agent may, or upon the request of
the Majority Working Capital Facility Lenders, the Administrative Agent shall,
by notice to the Borrower declare the Working Capital Commitments to be
terminated forthwith, whereupon the Working Capital Commitments shall
immediately terminate; (ii) with the consent of the Majority 364-Day Facility
Lenders, the Administrative Agent may, or upon the request of the Majority
364-Day Facility Lenders, the Administrative Agent shall, by notice to the
Borrower declare the 364-Day Commitments to be terminated forthwith, whereupon
the 364-Day Commitments shall immediately terminate; and (iii) with the consent
of the Required Lenders, the Administrative Agent may, or upon the request of
the Required Lenders, the Administrative Agent shall, by notice to the Borrower,
declare the Loans hereunder (with accrued interest thereon) and all other
amounts owing under this Agreement and the other Loan Documents (including all
amounts of L/C Obligations, whether or not the beneficiaries of the then
outstanding Letters of Credit shall have presented the documents required
thereunder) and the Acceptances, although contingent and unmatured to be due and
payable forthwith, whereupon the same shall immediately become due and payable.
With respect to all Letters of Credit with respect to which presentment for
honor shall not have occurred at the time of an acceleration pursuant to this
paragraph and with respect to Acceptance Obligations, the Borrower shall at such
time deposit in a cash collateral account opened by the Administrative Agent an
amount equal to the aggregate then undrawn and unexpired amount of such Letters
of Credit and Acceptance Obligations. Amounts held in such cash collateral
account shall be applied by the Administrative Agent to the payment of drafts
drawn under such Letters of Credit and as Acceptances mature, and the unused
portion thereof after all such Letters of Credit shall have expired or been
fully drawn upon, and all Acceptances have matured, if any, shall be applied to
repay other obligations of the Borrower hereunder and under the other Loan
Documents. After all such Letters of Credit shall have expired or been fully
drawn upon, all Acceptances have matured, all Reimbursement Obligations shall
have been satisfied and all other obligations of the Borrower hereunder and
under the other Loan Documents shall have been paid in full, the balance, if
any, in such cash collateral account shall be returned to the Borrower (or such
other Person as may be lawfully entitled thereto). Except as expressly provided
above in this Section, presentment, demand, protest and all other notices of any
kind are hereby expressly waived by the Borrower.
<PAGE>
SECTION 9. THE AGENTS
9.1 APPOINTMENT. Each Lender hereby irrevocably designates and
appoints the Administrative Agent as the agent of such Lender under this
Agreement and the other Loan Documents, and each such Lender irrevocably
authorizes the Administrative Agent, in such capacity, to take such action on
its behalf under the provisions of this Agreement and the other Loan Documents
and to exercise such powers and perform such duties as are expressly delegated
to the Administrative Agent by the terms of this Agreement and the other Loan
Documents, together with such other powers as are reasonably incidental thereto.
Notwithstanding any provision to the contrary elsewhere in this Agreement, the
Administrative Agent shall not have any duties or responsibilities, except those
expressly set forth herein, or any fiduciary relationship with any Lender, and
no implied covenants, functions, responsibilities, duties, obligations or
liabilities shall be read into this Agreement or any other Loan Document or
otherwise exist against the Administrative Agent.
9.2 DELEGATION OF DUTIES. The Administrative Agent may execute any
of its duties under this Agreement and the other Loan Documents by or through
agents or attorneys-in-fact and shall be entitled to advice of counsel
concerning all matters pertaining to such duties. The Administrative Agent shall
not be responsible for the negligence or misconduct of any agents or attorneys
in-fact selected by it with reasonable care.
9.3 EXCULPATORY PROVISIONS. Neither any Agent nor any of their
respective officers, directors, employees, agents, attorneys-in-fact or
affiliates shall be (i) liable for any action lawfully taken or omitted to be
taken by it or such Person under or in connection with this Agreement or any
other Loan Document (except to the extent that any of the foregoing are found by
a final and nonappealable decision of a court of competent jurisdiction to have
resulted from its or such Person's own gross negligence or willful misconduct)
or (ii) responsible in any manner to any of the Lenders for any recitals,
statements, representations or warranties made by any Loan Party or any officer
thereof contained in this Agreement or any other Loan Document or in any
certificate, report, statement or other document referred to or provided for in,
or received by the Agents under or in connection with, this Agreement or any
other Loan Document or for the value, validity, effectiveness, genuineness,
enforceability or sufficiency of this Agreement or any other Loan Document or
for any failure of any Loan Party a party thereto to perform its obligations
hereunder or thereunder. The Agents shall not be under any obligation to any
Lender to ascertain or to inquire as to the observance or performance of any of
the agreements contained in, or conditions of, this Agreement or any other Loan
Document, or to inspect the properties, books or records of any Loan Party.
9.4 RELIANCE BY ADMINISTRATIVE AGENT. The Administrative Agent
shall be entitled to rely, and shall be fully protected in relying, upon any
instrument, writing, resolution, notice, consent, certificate, affidavit,
letter, telecopy, telex or teletype message, statement, order or other document
or conversation believed by it to be genuine and correct and to have been
signed, sent or made by the proper Person or Persons and upon advice and
statements of legal counsel (including counsel to the Borrower), independent
accountants and other experts selected by the Administrative Agent. The
Administrative Agent may deem and treat the payee of any Note as the owner
thereof for all purposes unless a written notice of assignment, negotiation or
transfer thereof shall have been filed with the Administrative Agent. The
Administrative Agent shall be fully justified in failing or refusing to take any
action under this Agreement or any other Loan Document unless it shall first
receive such advice or concurrence of the Required Lenders (or, if so specified
by this Agreement, all Lenders) as it deems appropriate or it shall first be
indemnified to its satisfaction by the Lenders against any and all liability and
expense that may be incurred by it by reason of taking or continuing to take any
such action. The Administrative Agent shall in all cases be fully protected in
acting, or in refraining from acting, under this Agreement and the other Loan
Documents in accordance with a request of the Required Lenders (or, if so
specified by this Agreement, all Lenders), and such
<PAGE>
request and any action taken or failure to act pursuant thereto shall be
binding upon all the Lenders and all future holders of the Loans.
9.5 NOTICE OF DEFAULT. The Administrative Agent shall not be
deemed to have knowledge or notice of the occurrence of any Default or Event of
Default hereunder unless the Administrative Agent has received notice from a
Lender, the Borrower referring to this Agreement, describing such Default or
Event of Default and stating that such notice is a "notice of default". In the
event that the Administrative Agent receives such a notice, the Administrative
Agent shall give notice thereof to the Lenders. The Administrative Agent shall
take such action with respect to such Default or Event of Default as shall be
reasonably directed by the Required Lenders (or, if so specified by this
Agreement, all Lenders); provided that unless and until the Administrative Agent
shall have received such directions, the Administrative Agent may (but shall not
be obligated to) take such action, or refrain from taking such action, with
respect to such Default or Event of Default as it shall deem advisable in the
best interests of the Lenders.
9.6 NON-RELIANCE ON AGENTS AND OTHER LENDERS. Each Lender
expressly acknowledges that neither the Agents nor any of their respective
officers, directors, employees, agents, attorneys-in-fact or affiliates have
made any representations or warranties to it and that no act by any Agent
hereinafter taken, including any review of the affairs of a Loan Party or any
affiliate of a Loan Party, shall be deemed to constitute any representation or
warranty by any Agent to any Lender. Each Lender represents to the Agents that
it has, independently and without reliance upon any Agent or any other Lender,
and based on such documents and information as it has deemed appropriate, made
its own appraisal of and investigation into the business, operations, property,
financial and other condition and creditworthiness of the Loan Parties and their
affiliates and made its own decision to make its Loans hereunder and enter into
this Agreement. Each Lender also represents that it will, independently and
without reliance upon any Agent or any other Lender, and based on such documents
and information as it shall deem appropriate at the time, continue to make its
own credit analysis, appraisals and decisions in taking or not taking action
under this Agreement and the other Loan Documents, and to make such
investigation as it deems necessary to inform itself as to the business,
operations, property, financial and other condition and creditworthiness of the
Loan Parties and their affiliates. Except for notices, reports and other
documents expressly required to be furnished to the Lenders by the
Administrative Agent hereunder, the Administrative Agent shall not have any duty
or responsibility to provide any Lender with any credit or other information
concerning the business, operations, property, condition (financial or
otherwise), prospects or creditworthiness of any Loan Party or any affiliate of
a Loan Party that may come into the possession of the Administrative Agent or
any of its officers, directors, employees, agents, attorneys-in-fact or
affiliates.
9.7 INDEMNIFICATION. The Lenders agree to indemnify each Agent in
its capacity as such (to the extent not reimbursed by the Borrower and without
limiting the obligation of the Borrower to do so), ratably according to their
respective Aggregate Exposure Percentages in effect on the date on which
indemnification is sought under this Section (or, if indemnification is sought
after the date upon which the Commitments shall have terminated and the Loans
shall have been paid in full, ratably in accordance with such Aggregate Exposure
Percentages immediately prior to such date), from and against any and all
liabilities, obligations, losses, damages, penalties, actions, judgments, suits,
costs, expenses or disbursements of any kind whatsoever that may at any time
(whether before or after the payment of the Loans) be imposed on, incurred by or
asserted against such Agent in any way relating to or arising out of, the
Commitments, this Agreement, any of the other Loan Documents or any documents
contemplated by or referred to herein or therein or the transactions
contemplated hereby or thereby or any action taken or omitted by such Agent
under or in connection with any of the foregoing; PROVIDED that no Lender shall
be liable for the payment of any portion of such liabilities, obligations,
losses, damages, penalties, actions, judgments, suits, costs, expenses or
disbursements that are found by a final and nonappealable decision of a court of
competent jurisdiction to have resulted from such Agent's gross negligence or
willful
<PAGE>
misconduct. The agreements in this Section shall survive the payment of the
Loans and all other amounts payable hereunder.
9.8 AGENT IN ITS INDIVIDUAL CAPACITY. Each Agent and its
affiliates may make loans to, accept deposits from and generally engage in any
kind of business with any Loan Party as though such Agent was not an Agent. With
respect to its Loans made or renewed by it, to any Letter of Credit issued or
participated in by it, to any Acceptance created by or participated in by it,
each Agent shall have the same rights and powers under this Agreement and the
other Loan Documents as any Lender and may exercise the same as though it were
not an Agent, and the terms "Lender" and "Lenders" shall include each Agent in
its individual capacity.
9.9 SUCCESSOR ADMINISTRATIVE AGENT. The Administrative Agent may
resign as Administrative Agent upon 10 days' notice to the Lenders and the
Borrower. If the Administrative Agent shall resign as Administrative Agent under
this Agreement and the other Loan Documents, then the Required Lenders shall
appoint from among the Lenders a successor agent for the Lenders, which
successor agent shall (unless an Event of Default under Section 8(a) or Section
8(f) with respect to the Borrower shall have occurred and be continuing) be
subject to approval by the Borrower (which approval shall not be unreasonably
withheld or delayed), whereupon such successor agent shall succeed to the
rights, powers and duties of the Administrative Agent, and the term
"Administrative Agent" shall mean such successor agent effective upon such
appointment and approval, and the former Administrative Agent's rights, powers
and duties as Administrative Agent shall be terminated, without any other or
further act or deed on the part of such former Administrative Agent or any of
the parties to this Agreement or any holders of the Loans. If no successor agent
has accepted appointment as Administrative Agent by the date that is 10 days
following a retiring Administrative Agent's notice of resignation, the retiring
Administrative Agent's resignation shall nevertheless thereupon become effective
and the Lenders shall assume and perform all of the duties of the Administrative
Agent hereunder until such time, if any, as the Required Lenders appoint a
successor agent as provided for above. After any retiring Administrative Agent's
resignation as Administrative Agent, the provisions of this Section 9 shall
inure to its benefit as to any actions taken or omitted to be taken by it while
it was Administrative Agent under this Agreement and the other Loan Documents.
9.10 DOCUMENTATION AGENTS AND MANAGING AGENT. The Documentation
Agents and the Managing Agent shall not have any duties or responsibilities
hereunder in their capacity as such.
9.11 ISSUING LENDER AS ISSUER OF LETTERS OF CREDIT. Each Lender
hereby acknowledges that the provisions of this Section 9 shall apply to the
Issuing Lender, in its capacity as issuer of the Letters of Credit, in the same
manner as such provisions are expressly stated to apply to the Administrative
Agent.
9.12 ACCEPTING BANK AS CREATOR OF ACCEPTANCES. Each Lender hereby
acknowledges that the provisions of this Section 9 shall apply to the Accepting
Bank, in its capacity as creator and discounter of the Acceptances, in the same
manner as such provisions are expressly stated to apply to the Administrative
Agent.
<PAGE>
SECTION 10. MISCELLANEOUS
10.1 AMENDMENTS AND WAIVERS. Neither this Agreement, any other
Loan Document, nor any terms hereof or thereof may be amended, supplemented or
modified except in accordance with the provisions of this Section 10.1. The
Required Lenders and each Loan Party party to the relevant Loan Document may,
or, with the written consent of the Required Lenders, the Administrative Agent
and each Loan Party party to the relevant Loan Document may, from time to time,
(a) enter into written amendments, supplements or modifications hereto and to
the other Loan Documents for the purpose of adding any provisions to this
Agreement or the other Loan Documents or changing in any manner the rights of
the Lenders or of the Loan Parties hereunder or thereunder or (b) waive, on such
terms and conditions as the Required Lenders or the Administrative Agent, as the
case may be, may specify in such instrument, any of the requirements of this
Agreement or the other Loan Documents or any Default or Event of Default and its
consequences; PROVIDED, HOWEVER, that no such waiver and no such amendment,
supplement or modification shall (i) forgive the principal amount or extend the
final scheduled date of maturity of any Loan, extend the scheduled date of any
amortization payment in respect of any Loan, reduce the stated rate of any
interest or fee payable hereunder or extend the scheduled date of any payment
thereof, or increase the amount or extend the expiration date of any Lender's
Commitment, in each case without the consent of each Lender directly affected
thereby; (ii) amend, modify or waive any provision of this Section 10.1 or
reduce any percentage specified in the definition of Required Lenders or
Required Prepayment Lenders, consent to the assignment or transfer by the
Borrower of any of its rights and obligations under this Agreement and the other
Loan Documents, release all or substantially all of the Collateral or release
any Subsidiary Guarantor that is a Material Subsidiary from its obligations
under the Guarantee and Collateral Agreement except as provided in 10.14, in
each case without the written consent of all Lenders; (iii) amend, modify or
waive any condition precedent to any extension of credit set forth in Section
5.2 (including in connection with any waiver of an existing Default or Event of
Default) without the written consent of the Majority Working Capital Facility
Lenders, in the case of any extension of credit under the Working Capital
Facility, or the Majority 364-Day Facility Lenders, in the case of any extension
of credit under the 364-Day Facility; (iv) amend, modify or waive any provision
of Section 2.15 without the consent of the Majority Facility Lenders in respect
of each Facility adversely affected thereby; (v) reduce the percentage specified
in the definition of Majority Facility Lenders with respect to any Facility
without the written consent of all Lenders under such Facility; (vi) amend,
modify or waive any provision of Section 9 without the written consent of the
Administrative Agent; or (vii) amend, modify or waive any provision of Section 3
without the written consent of the Issuing Lender, in the case of any such
matter affecting it, or the Accepting Bank, in the case of any such matter
affecting it. Any such waiver and any such amendment, supplement or modification
shall apply equally to each of the Lenders and shall be binding upon the Loan
Parties, the Lenders, the Administrative Agent and all future holders of the
Loans. In the case of any waiver, the Loan Parties, the Lenders and the
Administrative Agent shall be restored to their former position and rights
hereunder and under the other Loan Documents, and any Default or Event of
Default waived shall be deemed to be cured and not continuing; but no such
waiver shall extend to any subsequent or other Default or Event of Default, or
impair any right consequent thereon.
10.2 NOTICES. All notices, requests and demands to or upon the
respective parties hereto to be effective shall be in writing (including by
telecopy), and, unless otherwise expressly provided herein, shall be deemed to
have been duly given or made when delivered, or three Business Days after being
deposited in the mail, postage prepaid, or, in the case of telecopy notice, when
received, addressed as follows in the case of the Borrower and the
Administrative Agent, and as set forth in an administrative questionnaire
delivered to the Administrative Agent in the case of the Lenders, or to such
other address as may be hereafter notified by the respective parties hereto:
<PAGE>
The Borrower: DEPARTMENT 56, INC.
1 Village Place
6436 City West Parkway
Eden Prairie, Minnesota 55344
Attention: Mark Kennedy
Telecopy: 612-943-4490
Telephone: 612-943-4476
The Administrative Agent: THE CHASE MANHATTAN BANK
One Chase Manhattan Plaza
New York, New York
Attention: Andrew Stasiw
Telecopy: 212-552-5662
Telephone: 212-552-7909
with a copy to: CHASE SECURITIES INC.
10 South LaSalle Street
Chicago, IL 60603
Attention: Jonathan Twichell
Telecopy: 312-807-4550
Telephone: 312-807-4038
10.3 NO WAIVER; CUMULATIVE REMEDIES. No failure to exercise and no
delay in exercising, on the part of the Administrative Agent or any Lender, any
right, remedy, power or privilege hereunder or under the other Loan Documents
shall operate as a waiver thereof; nor shall any single or partial exercise of
any right, remedy, power or privilege hereunder preclude any other or further
exercise thereof or the exercise of any other right, remedy, power or privilege.
The rights, remedies, powers and privileges herein provided are cumulative and
not exclusive of any rights, remedies, powers and privileges provided by law.
10.4 SURVIVAL OF REPRESENTATIONS AND WARRANTIES. All
representations and warranties made hereunder, in the other Loan Documents and
in any document, certificate or statement delivered pursuant hereto or in
connection herewith shall survive the execution and delivery of this Agreement
and the making of the Loans and other extensions of credit hereunder.
10.5 PAYMENT OF EXPENSES AND TAXES. The Borrower agrees (a) to pay
or reimburse the Administrative Agent for all its reasonable and documented
out-of-pocket costs and expenses incurred in connection with the development,
preparation and execution of, and any amendment, supplement or modification to,
this Agreement and the other Loan Documents and any other documents prepared in
connection herewith or therewith, and the consummation and administration of the
transactions contemplated hereby and thereby, including the reasonable and
documented fees and disbursements of counsel to the Administrative Agent and
filing and recording fees and expenses, with statements with respect to the
foregoing to be submitted to the Borrower prior to the Closing Date (in the case
of amounts to be paid on the Closing Date) and from time to time thereafter on a
quarterly basis or such other periodic basis as the Administrative Agent shall
deem appropriate, (b) to pay or reimburse each Lender and the Administrative
Agent for all its reasonable and documented costs and expenses incurred in
connection with the enforcement or preservation of any rights under this
Agreement, the other Loan Documents and any such other documents, including the
reasonable and documented fees and disbursements of counsel to each Lender and
of counsel to the Administrative Agent, (c) to pay, indemnify, and hold each
Lender and the Administrative Agent harmless from, any and all recording and
filing fees and any and all liabilities with respect to, or resulting from any
delay in paying, stamp, excise and other taxes, if any, that may be
<PAGE>
payable or determined to be payable in connection with the execution and
delivery of, or consummation or administration of any of the transactions
contemplated by, or any amendment, supplement or modification of, or any
waiver or consent under or in respect of, this Agreement, the other Loan
Documents and any such other documents, and (d) to pay, indemnify, and hold
each Lender and the Administrative Agent and their respective officers,
directors, employees, affiliates, agents and controlling persons (each, an
"INDEMNITEE") harmless from and against any and all other liabilities,
obligations, losses, damages, penalties, actions, judgments, suits, and
reasonable and documented costs, expenses or disbursements of any kind or
nature whatsoever with respect to the execution, delivery, enforcement,
performance and administration of this Agreement, the other Loan Documents
and any such other documents, including any of the foregoing relating to the
use of proceeds of the Loans or the violation of, noncompliance with or
liability under, any Environmental Law applicable to the operations of the
Borrower, any of its Subsidiaries or any of the Properties and the reasonable
and documented fees and expenses of legal counsel in connection with claims,
actions or proceedings by any Indemnitee against any Loan Party under any
Loan Document (all the foregoing in this clause (d), collectively, the
"INDEMNIFIED LIABILITIES"), PROVIDED, that the Borrower shall have no
obligation hereunder to any Indemnitee with respect to Indemnified
Liabilities to the extent such Indemnified Liabilities are found by a final
and nonappealable decision of a court of competent jurisdiction to have
resulted from the gross negligence or willful misconduct of such Indemnitee.
Without limiting the foregoing, and to the extent permitted by applicable
law, the Borrower agrees not to assert and to cause its Subsidiaries not to
assert, and hereby waives and agrees to cause its Subsidiaries to so waive,
all rights for contribution or any other rights of recovery with respect to
all claims, demands, penalties, fines, liabilities, settlements, damages,
costs and expenses of whatever kind or nature, under or related to
Environmental Laws, that any of them might have by statute or otherwise
against any Indemnitee. All amounts due under this Section 10.5 shall be
payable not later than 30 days after written demand therefor. The agreements
in this Section 10.5 shall survive repayment of the Loans and all other
amounts payable hereunder.
10.6 SUCCESSORS AND ASSIGNS; PARTICIPATIONS AND ASSIGNMENTS. (a)
This Agreement shall be binding upon and inure to the benefit of the Borrower,
the Lenders, the Administrative Agent, all future holders of the Loans and their
respective successors and assigns, except that the Borrower may not assign or
transfer any of its rights or obligations under this Agreement without the prior
written consent of each Lender.
(b) Any Lender may, without the consent of the Borrower, in
accordance with applicable law, at any time sell to one or more banks, financial
institutions or other entities (each, a "PARTICIPANT") participating interests
in any Loan owing to such Lender, any Commitment of such Lender or any other
interest of such Lender hereunder and under the other Loan Documents. In the
event of any such sale by a Lender of a participating interest to a Participant,
such Lender's obligations under this Agreement to the other parties to this
Agreement shall remain unchanged, such Lender shall remain solely responsible
for the performance thereof, such Lender shall remain the holder of any such
Loan for all purposes under this Agreement and the other Loan Documents, and the
Borrower and the Administrative Agent shall continue to deal solely and directly
with such Lender in connection with such Lender's rights and obligations under
this Agreement and the other Loan Documents. In no event shall any Participant
under any such participation have any right to approve any amendment or waiver
of any provision of any Loan Document, or any consent to any departure by any
Loan Party therefrom, except to the extent that such amendment, waiver or
consent would reduce the principal of, or interest on, the Loans or any fees
payable hereunder, or postpone the date of the final maturity of the Loans, in
each case to the extent subject to such participation. The Borrower agrees that
if amounts outstanding under this Agreement and the Loans are due or unpaid, or
shall have been declared or shall have become due and payable upon the
occurrence of an Event of Default, each Participant shall, to the maximum extent
permitted by applicable law, be deemed to have the right of setoff in respect of
its participating interest in amounts owing under this Agreement to the same
extent as if the amount of its participating interest were owing directly to it
as a Lender under this
<PAGE>
Agreement, PROVIDED that, in purchasing such participating interest, such
Participant shall be deemed to have agreed to share with the Lenders the
proceeds thereof as provided in Section 10.7(a) as fully as if it were a
Lender hereunder. The Borrower also agrees that each Participant shall be
entitled to the benefits and subject to the obligations of Sections 2.16,
2.17 and 2.19 with respect to its participation in the Commitments and the
Loans outstanding from time to time as if it was a Lender; PROVIDED that, in
the case of Section 2.17, such Participant shall have complied with the
requirements of said Section and PROVIDED, FURTHER, that no Participant shall
be entitled to receive any greater amount pursuant to any such Section than
the transferor Lender would have been entitled to receive in respect of the
amount of the participation transferred by such transferor Lender to such
Participant had no such transfer occurred.
(c) Any Lender (an "ASSIGNOR") may, in accordance with applicable
law, at any time and from time to time assign to any Lender or any affiliate
thereof or, with the consent of the Borrower and the Administrative Agent
(which, in each case, shall not be unreasonably withheld or delayed), to an
additional bank, financial institution or other entity (an "ASSIGNEE") all or
any part of its rights and obligations under this Agreement pursuant to an
Assignment and Acceptance, executed by such Assignee, such Assignor and any
other Person whose consent is required pursuant to this paragraph, and delivered
to the Administrative Agent for its acceptance and recording in the Register;
PROVIDED that no such assignment to an Assignee (other than any Lender or any
affiliate thereof) shall be in an aggregate principal amount of less than
$5,000,000, and, after giving effect thereto, the assigning Lender shall have
commitments and Loans aggregating at least $5,000,000 (other than in the case of
an assignment of all of a Lender's interests under this Agreement), in each case
unless otherwise agreed by the Borrower and the Administrative Agent. Any such
assignment need not be ratable as among the Facilities. Upon such execution,
delivery, acceptance and recording, from and after the effective date determined
pursuant to such Assignment and Acceptance, (x) the Assignee thereunder shall be
a party hereto and, to the extent provided in such Assignment and Acceptance,
have the rights and obligations of a Lender hereunder with a Commitment and/or
Loans as set forth therein, and (y) the Assignor thereunder shall, to the extent
provided in such Assignment and Acceptance, be released from its obligations
under this Agreement (and, in the case of an Assignment and Acceptance covering
all of an Assignor's rights and obligations under this Agreement, such Assignor
shall cease to be a party hereto). Notwithstanding any provision of this Section
10.6, the consent of the Borrower shall not be required for any assignment that
occurs when an Event of Default pursuant to Section 8(f) shall have occurred and
be continuing with respect to the Borrower.
(d) The Administrative Agent shall, on behalf of the Borrower,
maintain at its address referred to in Section 10.2 a copy of each Assignment
and Acceptance delivered to it and a register (the "REGISTER") for the
recordation of the names and addresses of the Lenders and the Commitment of, and
the principal amount of the Loans owing to, each Lender from time to time. The
entries in the Register shall be conclusive, in the absence of manifest error,
and the Borrower, each other Loan Party, the Administrative Agent and the
Lenders shall treat each Person whose name is recorded in the Register as the
owner of the Loans and any Notes evidencing the Loans recorded therein for all
purposes of this Agreement. Any assignment of any Loan, whether or not evidenced
by a Note, shall be effective only upon appropriate entries with respect thereto
being made in the Register (and each Note shall expressly so provide). Any
assignment or transfer of all or part of a Loan evidenced by a Note shall be
registered on the Register only upon surrender for registration of assignment or
transfer of the Note evidencing such Loan, accompanied by a duly executed
Assignment and Acceptance, and thereupon one or more new Notes shall be issued
to the designated Assignee and the old Notes will be returned to the Borrower
marked "canceled".
(e) Upon its receipt of an Assignment and Acceptance executed by
an Assignor, an Assignee and any other Person whose consent is required by
Section 10.6(c), together with payment to the Administrative Agent of a
registration and processing fee of $4,000, the Administrative Agent shall (i)
<PAGE>
promptly accept such Assignment and Acceptance and (ii) record the information
contained therein in the Register on the effective date determined pursuant
thereto.
(f) For avoidance of doubt, the parties to this Agreement
acknowledge that the provisions of this Section 10.6 concerning assignments of
Loans and Notes relate only to absolute assignments and that such provisions do
not prohibit assignments creating security interests, including any pledge or
assignment by a Lender of any Loan or Note to any Federal Reserve Bank in
accordance with applicable law.
(g) The Borrower, upon receipt of written notice from the relevant
Lender, agrees to issue Notes to any Lender requiring Notes to facilitate
transactions of the type described in paragraph (f) above.
10.7 ADJUSTMENTS; SET-OFF. (a) Except to the extent that this
Agreement expressly provides for payments to be allocated to a particular Lender
or to the Lenders under a particular Facility, if any Lender (a "BENEFITTED
LENDER") shall receive any payment of all or part of the Obligations owing to
it, or receive any collateral in respect thereof (whether voluntarily or
involuntarily, by set-off, pursuant to events or proceedings of the nature
referred to in Section 8(f), or otherwise), in a greater proportion than any
such payment to or collateral received by any other Lender, if any, in respect
of the Obligations owing to such other Lender, such Benefitted Lender shall
purchase for cash from the other Lenders a participating interest in such
portion of the Obligations owing to each such other Lender, or shall provide
such other Lenders with the benefits of any such collateral, as shall be
necessary to cause such Benefitted Lender to share the excess payment or
benefits of such collateral ratably with each of the Lenders; PROVIDED, HOWEVER,
that if all or any portion of such excess payment or benefits is thereafter
recovered from such Benefitted Lender, such purchase shall be rescinded, and the
purchase price and benefits returned, to the extent of such recovery, but
without interest.
(b) In addition to any rights and remedies of the Lenders provided
by law, each Lender shall have the right, without prior notice to the Borrower,
any such notice being expressly waived by the Borrower to the extent permitted
by applicable law, upon any amount becoming due and payable by the Borrower
hereunder (whether at the stated maturity, by acceleration or otherwise), to set
off and appropriate and apply against such amount any and all deposits (general
or special, time or demand, provisional or final), in any currency, and any
other credits, indebtedness or claims, in any currency, in each case whether
direct or indirect, absolute or contingent, matured or unmatured, at any time
held or owing by such Lender or any branch or agency thereof to or for the
credit or the account of the Borrower, as the case may be. Each Lender agrees
promptly to notify the Borrower and the Administrative Agent after any such
setoff and application made by such Lender, PROVIDED that the failure to give
such notice shall not affect the validity of such setoff and application.
10.8 COUNTERPARTS. This Agreement may be executed by one or more
of the parties to this Agreement on any number of separate counterparts, and all
of said counterparts taken together shall be deemed to constitute one and the
same instrument. Delivery of an executed signature page of this Agreement by
facsimile transmission shall be effective as delivery of a manually executed
counterpart hereof. A set of the copies of this Agreement signed by all the
parties shall be lodged with the Borrower and the Administrative Agent.
10.9 SEVERABILITY. Any provision of this Agreement that is
prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction,
be ineffective to the extent of such prohibition or unenforceability without
invalidating the remaining provisions hereof, and any such prohibition or
unenforceability in any jurisdiction shall not invalidate or render
unenforceable such provision in any other jurisdiction.
<PAGE>
10.10 INTEGRATION. This Agreement and the other Loan Documents
represent the agreement of the Borrower, the Administrative Agent and the
Lenders with respect to the subject matter hereof, and there are no promises,
undertakings, representations or warranties by the Administrative Agent or any
Lender relative to subject matter hereof not expressly set forth or referred to
herein or in the other Loan Documents.
10.11 GOVERNING LAW. THIS AGREEMENT AND THE RIGHTS AND OBLIGATIONS
OF THE PARTIES UNDER THIS AGREEMENT SHALL BE GOVERNED BY, AND CONSTRUED AND
INTERPRETED IN ACCORDANCE WITH, THE LAW OF THE STATE OF NEW YORK.
10.12 SUBMISSION TO JURISDICTION; WAIVERS. The Borrower hereby
irrevocably and unconditionally:
(a) submits for itself and its property in any legal action or
proceeding relating to this Agreement and the other Loan Documents to
which it is a party, or for recognition and enforcement of any judgment
in respect thereof, to the non-exclusive general jurisdiction of the
courts of the State of New York, the courts of the United States for
the Southern District of New York, and appellate courts from any
thereof;
(b) consents that any such action or proceeding may be brought in
such courts and waives any objection that it may now or hereafter have
to the venue of any such action or proceeding in any such court or that
such action or proceeding was brought in an inconvenient court and
agrees not to plead or claim the same;
(c) agrees that service of process in any such action or
proceeding may be effected by mailing a copy thereof by registered or
certified mail (or any substantially similar form of mail), postage
prepaid, to the Borrower, as the case may be at its address set forth
in Section 10.2 or at such other address of which the Administrative
Agent shall have been notified pursuant thereto;
(d) agrees that nothing herein shall affect the right to effect
service of process in any other manner permitted by law or shall limit
the right to sue in any other jurisdiction; and
(e) waives, to the maximum extent not prohibited by law, any right
it may have to claim or recover in any legal action or proceeding
referred to in this Section any special, exemplary, punitive or
consequential damages.
10.13 ACKNOWLEDGEMENTS. The Borrower hereby acknowledges that:
(a) it has been advised by counsel in the negotiation, execution
and delivery of this Agreement and the other Loan Documents;
(b) neither the Administrative Agent nor any Lender has any
fiduciary relationship with or duty to the Borrower arising out of or
in connection with this Agreement or any of the other Loan Documents,
and the relationship between Administrative Agent and Lenders, on one
hand, and the Borrower, on the other hand, in connection herewith or
therewith is solely that of debtor and creditor; and
(c) no joint venture is created hereby or by the other Loan
Documents or otherwise exists by virtue of the transactions
contemplated hereby among the Lenders or among the Borrower and the
Lenders.
<PAGE>
10.14 RELEASES OF GUARANTEES AND LIENS. (a) Notwithstanding
anything to the contrary contained herein or in any other Loan Document, the
Administrative Agent is hereby irrevocably authorized by each Lender and, upon
the Borrower's request shall, take any action requested by the Borrower having
the effect of (A) releasing any Collateral during a Positive Security Period or
(B) releasing any Collateral or Guarantee Obligations (i) to the extent
necessary to permit consummation of any transaction not prohibited by any Loan
Document or that has been consented to in accordance with Section 10.1, (ii)
under the circumstances described in paragraph (b) below, or (iii) with respect
to a Material Subsidiary, if such Material Subsidiary becomes a Subsidiary that
is not a Material Subsidiary and is not required to be a Material Subsidiary to
satisfy the requirements of such definition and upon delivery to the
Administrative Agent of reasonably detailed calculations demonstrating that such
Subsidiary is not a Material Subsidiary and is not required to be a Material
Subsidiary in order to satisfy the requirements of such definition.
(b) At such time as the Loans, the Reimbursement Obligations and
the other obligations under the Loan Documents (other than obligations under or
in respect of Hedge Agreements) shall have been paid in full, the Commitments
have been terminated and no Letters of Credit shall be outstanding, the
Collateral shall be released from the Liens created by the Security Documents,
and the Security Documents and all obligations (other than those expressly
stated to survive such termination) of the Administrative Agent and each Loan
Party under the Security Documents shall terminate, all without delivery of any
instrument or performance of any act by any Person.
10.15 CONFIDENTIALITY. Each of the Administrative Agent and each
Lender agrees to keep confidential all non-public information provided to it by
any Loan Party pursuant to this Agreement that is designated by such Loan Party
as confidential; PROVIDED that nothing herein shall prevent the Administrative
Agent or any Lender from disclosing any such information (a) to the
Administrative Agent, any other Lender, (b) to any Transferee or prospective
Transferee that agrees to comply with the provisions of this Section, (c) to its
employees, directors, agents, attorneys, accountants and other professional
advisors or those of any of its affiliates who by their acceptance thereof are
deemed to be bound by the provisions of this Section, (d) upon the request or
demand of any Governmental Authority, (e) in response to any order of any court
or other Governmental Authority or as may otherwise be required pursuant to any
Requirement of Law, (f) if requested or required to do so in connection with any
litigation or similar proceeding, (g) that has been publicly disclosed, (h) to
the National Association of Insurance Commissioners or any similar organization
or any nationally recognized rating agency that requires access to information
about a Lender's investment portfolio in connection with ratings issued
<PAGE>
with respect to such Lender, or (i) in connection with the exercise of any
remedy hereunder or under any other Loan Document.
10.16 WAIVERS OF JURY TRIAL. THE BORROWER, THE ADMINISTRATIVE
AGENT AND THE LENDERS HEREBY IRREVOCABLY AND UNCONDITIONALLY WAIVE TRIAL BY JURY
IN ANY LEGAL ACTION OR PROCEEDING RELATING TO THIS AGREEMENT OR ANY OTHER LOAN
DOCUMENT AND FOR ANY COUNTERCLAIM THEREIN.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement
to be duly executed and delivered by their proper and duly authorized officers
as of the day and year first above written. DEPARTMENT 56, INC.
By: /s/ TIMOTHY J. SCHUGEL
Name: Timothy J. Schugel
Title: V.P. - Finance
THE CHASE MANHATTAN BANK, as Administrative
Agent and as a Lender
By: /s/ ROBERT ANASTASIO
Name: Robert Anastasio
Title: Vice President
ABN AMRO BANK N.V., as Co-Documentation
Agent and as a Lender
By: /s/ MARY L. HONDA
Name: Mary L. Honda
Title: Vice President
By: /s/ DARIN P. FISCHER
Name: Darin P. Fischer
Title: Assistant Vice President
THE FIRST NATIONAL BANK OF CHICAGO, as
Co-Documentation Agent and as a Lender
By: /s/ J. GARLAND SMITH
Name: J. Garland Smith
Title: First Vice President
<PAGE>
U.S. BANK NATIONAL ASSOCIATION, as Managing
Agent and as a Lender
By: /s/ MICHAEL J. REYMANN
Name: Michael J. Reymann
Title: Vice President
COMERICA BANK
By: /s/ TIMOTHY H. O'ROURKE
Name: Timothy H. O'Rourke
Title: Vice President
FIRSTAR BANK MILWAUKEE, N.A.
By: /s/ JASON R. HICKEY
Name: Jason R. Hickey
Title: Commercial Banking Officer
HARRIS TRUST AND SAVINGS BANK
By: /s/ ANDREW K. PETERSON
Name: Andrew K. Peterson
Title: Vice President
<PAGE>
M&I MARSHALL & ILSLEY BANK
By: /s/ ROBERT A. NIELSEN
Name: Robert A. Nielsen
Title: Asst. Vice President
THE FIFTH THIRD BANK
By: /s/ KEVIN J. WALTER
Name: Kevin J. Walter
Title: Corporate Banking Officer
NORWEST BANK MINNESOTA, N.A.
By: /s/ MOLLY S. VAN METRE
Name: Molly S. Van Metre
Title: Vice President
MICHIGAN NATIONAL BANK
By: /s/ DRAGA PALINCAS
Name: Draga Palincas
Title: Relationship Manager
WACHOVIA BANK
By: /s/ WALTER R. GILLIKIN
Name: Walter R. Gillikin
Title: Senior Vice President
<PAGE>
BANK HAPOALIM B.M.
By: /s/ CONRAD WAGNER
Name: Conrad Wagner
Title: First Vice President
By: /s/ SHAUN BREIDBART
Name: Shaun Breidbart
Title: Vice President
<PAGE>
GUARANTEE AND COLLATERAL AGREEMENT, dated as of March 19, 1999,
made by each of the signatories hereto (together with any other entity that may
become a party hereto as provided herein, the "GRANTORS"), in favor of THE CHASE
MANHATTAN BANK, as Administrative Agent (in such capacity, the "ADMINISTRATIVE
AGENT") for the banks and other financial institutions (the "LENDERS") from time
to time parties to the Credit Agreement, dated as of March 19, 1999 (as amended,
supplemented or otherwise modified from time to time, the "CREDIT AGREEMENT"),
among DEPARTMENT 56, INC. (the "BORROWER"), the Lenders and the Administrative
Agent.
W I T N E S S E T H :
WHEREAS, pursuant to the Credit Agreement, the Lenders have
severally agreed to make extensions of credit to the Borrower upon the terms and
subject to the conditions set forth therein;
WHEREAS, the Borrower is a member of an affiliated group of
companies that includes each other Grantor;
WHEREAS, the proceeds of the extensions of credit under the Credit
Agreement will be used in part to enable the Borrower to make valuable transfers
to one or more of the other Grantors in connection with the operation of their
respective businesses;
WHEREAS, the Borrower and the other Grantors are engaged in
related businesses, and each Grantor will derive substantial direct and indirect
benefit from the making of the extensions of credit under the Credit Agreement;
and
WHEREAS, it is a condition precedent to the obligation of the
Lenders to make their respective extensions of credit to the Borrower under the
Credit Agreement that the Grantors shall have executed and delivered this
Agreement to the Administrative Agent for the ratable benefit of the Lenders;
NOW, THEREFORE, in consideration of the premises and to induce the
Administrative Agent and the Lenders to enter into the Credit Agreement and to
induce the Lenders to make their respective extensions of credit to the Borrower
thereunder, each Grantor hereby agrees with the Administrative Agent, for the
ratable benefit of the Lenders, as follows:
SECTION 1. DEFINED TERMS
1.1 DEFINITIONS. (a) Unless otherwise defined herein, terms
defined in the Credit Agreement and used herein shall have the meanings given to
them in the Credit Agreement, and
<PAGE>
the following terms are used herein as defined in the New York UCC: Accounts,
Certificated Security, Chattel Paper, Documents, Equipment, Farm Products,
Instruments, Inventory, Investment Property and General Intangibles.
(b) The following terms shall have the following meanings:
"AGREEMENT": this Guarantee and Collateral Agreement, as the same
may be amended, supplemented or otherwise modified from time to time.
"BORROWER OBLIGATIONS": the collective reference to the unpaid
principal of and interest on the Loans and Reimbursement Obligations and all
other obligations and liabilities of the Borrower (including, without
limitation, interest accruing at the then applicable rate provided in the Credit
Agreement after the maturity of the Loans and Reimbursement Obligations and
interest accruing at the then applicable rate provided in the Credit Agreement
after the filing of any petition in bankruptcy, or the commencement of any
insolvency, reorganization or like proceeding, relating to the Borrower, whether
or not a claim for post-filing or post-petition interest is allowed in such
proceeding) to the Administrative Agent or any Lender (or, in the case of any
Hedge Agreement, any Affiliate of any Lender), whether direct or indirect,
absolute or contingent, due or to become due, or now existing or hereafter
incurred, which may arise under, out of, or in connection with, the Credit
Agreement, this Agreement, the other Loan Documents, any Letter of Credit, any
Acceptance, any Hedge Agreement or any other document made, delivered or given
in connection with any of the foregoing, in each case whether on account of
principal, interest, reimbursement obligations, fees, indemnities, costs,
expenses or otherwise (including, without limitation, all reasonable and
documented fees and disbursements of counsel to the Administrative Agent or to
the Lenders that are required to be paid by the Borrower pursuant to the terms
of any of the foregoing agreements).
"COLLATERAL": as defined in Section 3.
"COLLATERAL ACCOUNT": any collateral account established by the
Administrative Agent as provided in Section 6.2.
"FOREIGN SUBSIDIARY": any Subsidiary organized under the laws of
any jurisdiction outside the United States of America.
"FOREIGN SUBSIDIARY VOTING STOCK": the voting Capital Stock of any
Foreign Subsidiary.
"GUARANTOR OBLIGATIONS": with respect to any Guarantor, all
obligations and liabilities of such Guarantor which may arise under or in
connection with this Agreement (including, without limitation, Section 2) or any
other Loan Document to which such Guarantor is a party, in each case whether on
account of guarantee obligations,
<PAGE>
reimbursement obligations, fees, indemnities, costs, expenses or otherwise
(including, without limitation, all reasonable and documented fees and
disbursements of counsel to the Administrative Agent or to the Lenders that
are required to be paid by such Guarantor pursuant to the terms of this
Agreement or any other Loan Document).
"GUARANTORS": the collective reference to each Grantor other than
the Borrower.
"ISSUERS": the collective reference to each issuer of any Pledged
Stock.
"NEW YORK UCC": the Uniform Commercial Code as from time to time
in effect in the State of New York.
"OBLIGATIONS": (i) in the case of the Borrower, the Borrower
Obligations, and (ii) in the case of each Guarantor, its Guarantor Obligations.
"PLEDGED STOCK": the shares of Capital Stock listed on SCHEDULE 2,
together with any other shares, stock certificates, options or rights of any
nature whatsoever in respect of the Capital Stock of any Person that may be
issued or granted to, or held by, any Grantor while this Agreement is in effect
including, without limitation, any Investment Property and/or General
Intangibles comprising or arising out of any of the foregoing; provided that in
no event shall Foreign Subsidiary Voting Stock with more than 66% of the total
combined voting power of all classes of stock entitled to vote of any Foreign
Subsidiary be required to be pledged hereunder.
"PROCEEDS": all "proceeds" as such term is defined in Section
9-306(1) of the New York UCC and, in any event, shall include, without
limitation, all dividends or other income from the Pledged Stock, collections
thereon or distributions or payments with respect thereto.
"SECURITIES ACT": the Securities Act of 1933, as amended.
1.2 OTHER DEFINITIONAL PROVISIONS. (a) The words "hereof,"
"herein", "hereto" and "hereunder" and words of similar import when used in this
Agreement shall refer to this Agreement as a whole and not to any particular
provision of this Agreement, and Section and Schedule references are to this
Agreement unless otherwise specified.
(b) The meanings given to terms defined herein shall be equally
applicable to both the singular and plural forms of such terms.
(c) Where the context requires, terms relating to the Collateral
or any part thereof, when used in relation to a Grantor, shall refer to such
Grantor's Collateral or the relevant part thereof.
<PAGE>
SECTION 2. GUARANTEE
2.1 GUARANTEE. (a) Each of the Guarantors hereby, jointly and
severally, unconditionally and irrevocably, guarantees to the Administrative
Agent, for the ratable benefit of the Lenders and their respective successors,
indorsees, transferees and assigns, the prompt and complete payment and
performance by the Borrower when due (whether at the stated maturity, by
acceleration or otherwise) of the Borrower Obligations.
(b) Anything herein or in any other Loan Document to the contrary
notwithstanding, the maximum liability of each Guarantor hereunder and under the
other Loan Documents shall in no event exceed the amount which can be guaranteed
by such Guarantor under applicable federal and state laws relating to the
insolvency of debtors (after giving effect to the right of contribution
established in Section 2.2).
(c) Each Guarantor agrees that the Borrower Obligations may at any
time and from time to time exceed the amount of the liability of such Guarantor
hereunder without impairing the guarantee contained in this Section 2 or
affecting the rights and remedies of the Administrative Agent or any Lender
hereunder.
(d) The guarantee contained in this Section 2 shall remain in full
force and effect until all the Borrower Obligations and the obligations of each
Guarantor under the guarantee contained in this Section 2 shall have been
satisfied by payment in full, no Letter of Credit or Acceptance Obligation shall
be outstanding and the Commitments shall be terminated, notwithstanding that
from time to time during the term of the Credit Agreement the Borrower may be
free from any Borrower Obligations; PROVIDED, HOWEVER, that any Guarantor shall
be released from its obligations hereunder if such Guarantor pursuant to a
transaction permitted under the Credit Agreement, ceases to be a Subsidiary of
the Borrower.
(e) No payment made by the Borrower, any of the Guarantors, any
other guarantor or any other Person or received or collected by the
Administrative Agent or any Lender from the Borrower, any of the Guarantors, any
other guarantor or any other Person by virtue of any action or proceeding or any
set-off or appropriation or application at any time or from time to time in
reduction of or in payment of the Borrower Obligations shall be deemed to
modify, reduce, release or otherwise affect the liability of any Guarantor
hereunder which shall, notwithstanding any such payment (other than any payment
made by such Guarantor in respect of the Borrower Obligations or any payment
received or collected from such Guarantor in respect of the Borrower
Obligations), remain liable for the Borrower Obligations up to the maximum
liability of such Guarantor hereunder until the Borrower Obligations are paid in
full, no Letter of Credit or Acceptance Obligation shall be outstanding and the
Commitments are terminated.
2.2 RIGHT OF CONTRIBUTION. Each Guarantor hereby agrees that to
the extent that a Guarantor shall have paid more than its proportionate share of
any payment made hereunder, such Guarantor shall be entitled to seek and receive
contribution from and against any other Guarantor hereunder which has not paid
its proportionate share of such payment. Each Guarantor's right of contribution
shall be subject to the terms and conditions of Section 2.3. The
<PAGE>
provisions of this Section 2.2 shall in no respect limit the obligations and
liabilities of any Guarantor to the Administrative Agent and the Lenders, and
each Guarantor shall remain liable to the Administrative Agent and the
Lenders for the full amount guaranteed by such Guarantor hereunder.
2.3 NO SUBROGATION. Notwithstanding any payment made by any
Guarantor hereunder or any set-off or application of funds of any Guarantor by
the Administrative Agent or any Lender, no Guarantor shall be entitled to be
subrogated to any of the rights of the Administrative Agent or any Lender
against the Borrower or any other Guarantor or any collateral security or
guarantee or right of offset held by the Administrative Agent or any Lender for
the payment of the Borrower Obligations, nor shall any Guarantor seek or be
entitled to seek any contribution or reimbursement from the Borrower or any
other Guarantor in respect of payments made by such Guarantor hereunder, until
all amounts owing to the Administrative Agent and the Lenders by the Borrower on
account of the Borrower Obligations are paid in full, no Letter of Credit or
Acceptance Obligation shall be outstanding and the Commitments are terminated.
If any amount shall be paid to any Guarantor on account of such subrogation
rights at any time when all of the Borrower Obligations shall not have been paid
in full, such amount shall be held by such Guarantor in trust for the
Administrative Agent and the Lenders, segregated from other funds of such
Guarantor, and shall, forthwith upon receipt by such Guarantor, be turned over
to the Administrative Agent in the exact form received by such Guarantor (duly
indorsed by such Guarantor to the Administrative Agent, if required), to be
applied against the Borrower Obligations, whether matured or unmatured, in such
order as the Administrative Agent may determine.
2.4 AMENDMENTS, ETC. with respect to the Borrower Obligations.
Each Guarantor shall remain obligated hereunder notwithstanding that, without
any reservation of rights against any Guarantor and without notice to or further
assent by any Guarantor, any demand for payment of any of the Borrower
Obligations made by the Administrative Agent or any Lender may be rescinded by
the Administrative Agent or such Lender and any of the Borrower Obligations
continued, and the Borrower Obligations, or the liability of any other Person
upon or for any part thereof, or any collateral security or guarantee therefor
or right of offset with respect thereto, may, from time to time, in whole or in
part, be renewed, extended, amended, modified, accelerated, compromised, waived,
surrendered or released by the Administrative Agent or any Lender, and the
Credit Agreement and the other Loan Documents and any other documents executed
and delivered in connection therewith may be amended, modified, supplemented or
terminated, in whole or in part, as the Administrative Agent (or the Required
Lenders or all Lenders, as the case may be) may deem advisable from time to
time, and any collateral security, guarantee or right of offset at any time held
by the Administrative Agent or any Lender for the payment of the Borrower
Obligations may be sold, exchanged, waived, surrendered or released. Neither the
Administrative Agent nor any Lender shall have any obligation to protect,
secure, perfect or insure any Lien at any time held by it as security for the
Borrower Obligations or for the guarantee contained in this Section 2 or any
property subject thereto.
<PAGE>
2.5 GUARANTEE ABSOLUTE AND UNCONDITIONAL. Each Guarantor waives
any and all notice of the creation, renewal, extension or accrual of any of the
Borrower Obligations and notice of or proof of reliance by the Administrative
Agent or any Lender upon the guarantee contained in this Section 2 or acceptance
of the guarantee contained in this Section 2; the Borrower Obligations, and any
of them, shall conclusively be deemed to have been created, contracted or
incurred, or renewed, extended, amended or waived, in reliance upon the
guarantee contained in this Section 2; and all dealings between the Borrower and
any of the Guarantors, on the one hand, and the Administrative Agent and the
Lenders, on the other hand, likewise shall be conclusively presumed to have been
had or consummated in reliance upon the guarantee contained in this Section 2.
Each Guarantor waives diligence, presentment, protest, demand for payment and
notice of default or nonpayment to or upon the Borrower or any of the Guarantors
with respect to the Borrower Obligations. Each Guarantor understands and agrees
that the guarantee contained in this Section 2 shall be construed as a
continuing, absolute and unconditional guarantee of payment without regard to
(a) the validity or enforceability of the Credit Agreement or any other Loan
Document, any of the Borrower Obligations or any other collateral security
therefor or guarantee or right of offset with respect thereto at any time or
from time to time held by the Administrative Agent or any Lender, (b) any
defense, set-off or counterclaim (other than a defense of payment or
performance) which may at any time be available to or be asserted by the
Borrower or any other Person against the Administrative Agent or any Lender, or
(c) any other circumstance whatsoever (with or without notice to or knowledge of
the Borrower or such Guarantor) which constitutes, or might be construed to
constitute, an equitable or legal discharge of the Borrower for the Borrower
Obligations, or of such Guarantor under the guarantee contained in this Section
2, in bankruptcy or in any other instance. When making any demand hereunder or
otherwise pursuing its rights and remedies hereunder against any Guarantor, the
Administrative Agent or any Lender may, but shall be under no obligation to,
make a similar demand on or otherwise pursue such rights and remedies as it may
have against the Borrower, any other Guarantor or any other Person or against
any collateral security or guarantee for the Borrower Obligations or any right
of offset with respect thereto, and any failure by the Administrative Agent or
any Lender to make any such demand, to pursue such other rights or remedies or
to collect any payments from the Borrower, any other Guarantor or any other
Person or to realize upon any such collateral security or guarantee or to
exercise any such right of offset, or any release of the Borrower, any other
Guarantor or any other Person or any such collateral security, guarantee or
right of offset, shall not relieve any Guarantor of any obligation or liability
hereunder, and shall not impair or affect the rights and remedies, whether
express, implied or available as a matter of law, of the Administrative Agent or
any Lender against any Guarantor. For the purposes hereof "demand" shall include
the commencement and continuance of any legal proceedings.
2.6 REINSTATEMENT. The guarantee contained in this Section 2 shall
continue to be effective, or be reinstated, as the case may be, if at any time
payment, or any part thereof, of any of the Borrower Obligations is rescinded or
must otherwise be restored or returned by the Administrative Agent or any Lender
upon the insolvency, bankruptcy, dissolution, liquidation or reorganization of
the Borrower or any Guarantor, or upon or as a result of the appointment of a
receiver, intervenor or conservator of, or trustee or similar officer for, the
Borrower or any
<PAGE>
Guarantor or any substantial part of its property, or otherwise, all as
though such payments had not been made.
2.7 PAYMENTS. Each Guarantor hereby guarantees that payments
hereunder will be paid to the Administrative Agent without set-off or
counterclaim in Dollars at the office of the Administrative Agent located at 270
Park Avenue, New York, New York 10017.
SECTION 3. GRANT OF SECURITY INTEREST
Each Grantor hereby assigns and transfers to the Administrative
Agent, and hereby grants to the Administrative Agent, for the ratable benefit of
the Lenders, a security interest in, all Pledged Stock and Proceeds thereof now
owned or at any time hereafter acquired by such Grantor or in which such Grantor
now has or at any time in the future may acquire any right, title or interest
(collectively, the "COLLATERAL"), as collateral security for the prompt and
complete payment and performance when due (whether at the stated maturity, by
acceleration or otherwise) of such Grantor's Obligations.
SECTION 4. REPRESENTATIONS AND WARRANTIES
To induce the Administrative Agent and the Lenders to enter into
the Credit Agreement and to induce the Lenders to make their respective
extensions of credit to the Borrower thereunder, each Grantor hereby represents
and warrants to the Administrative Agent and each Lender that:
4.1 TITLE; NO OTHER LIENS. Except for the security interest
granted to the Administrative Agent for the ratable benefit of the Lenders
pursuant to this Agreement and the other Liens permitted to exist on the
Collateral by the Credit Agreement, such Grantor owns each item of the
Collateral free and clear of any and all Liens or claims of others. No financing
statement or other public notice with respect to all or any part of the
Collateral is on file or of record in any public office, except such as have
been filed in favor of the Administrative Agent, for the ratable benefit of the
Lenders, pursuant to this Agreement or as are permitted by the Credit Agreement.
4.2 PERFECTED FIRST PRIORITY LIENS. At all times during any
Negative Security Period, (a) in the case of the Pledged Stock described in this
Agreement, (i) referred to on Schedule 2 of this Agreement and (ii) any items
that become Pledged Stock after the Closing Date that constitute Certificated
Securities (as defined in the New York UCC) when stock certificates representing
such Pledged Stock are delivered to the Administrative Agent, this Agreement
shall constitute a fully perfected Lien on, and security interest in, all right,
title and interest of the Loan Parties in such Collateral and the proceeds
thereof, as security for the Obligations, in each case prior and superior in
right to any other Person (except, in the case of Collateral other than Pledged
Stock, Liens permitted by Section 7.3 of the Credit Agreement, and
<PAGE>
subject, in the case of Proceeds, to the applicable limitations under Section
9-306 of the New York UCC). In the case of the Pledged Stock of Department 56
Minnesota, LLC, and any items that become Pledged Stock after the Closing
Date that will constitute General Intangibles (as defined in the New York
UCC) when financing statements specified on Schedule 3 in appropriate form
are filed in the offices specified on Schedule 3, this Agreement shall
constitute a fully perfected Lien on, and security interest in, all right,
title and interest of the Loan Parties in such Collateral and the Proceeds
thereof, as security for the Obligations, in each case prior and superior in
any right to any other Person (except, in the case of Collateral other than
Pledged Stock, Liens permitted by Section 7.3 of the Credit Agreement, and
subject, in the case of Proceeds to the applicable limitations under Section
9-306 of the New York UCC). Schedule 3 specifies the locations in which to
file the financing statements which may perfect a legal, valid and
enforceable security interest granted under this Agreement in the Investment
Property pursuant to Sections 9-115 and 9-103(6)(f) of the New York UCC.
4.3 CHIEF EXECUTIVE OFFICE. On the date hereof, such Grantor's
jurisdiction of organization and the location of such Grantor's chief executive
office or sole place of business are specified on Schedule 4.
4.4 PLEDGED STOCK. At all times during any Negative Security
Period: (a) The shares of Pledged Stock pledged by such Grantor hereunder
constitute all the issued and outstanding shares of all classes of the Capital
Stock of each Issuer owned by such Grantor or, in the case of Foreign Subsidiary
Voting Stock, if less, Foreign Subsidiary Voting Stock with 66% of the total
combined voting power of all classes of stock entitled to vote of each relevant
Issuer.
(b) All the shares of the Pledged Stock have been duly and validly
issued and are fully paid and nonassessable.
(c) Such Grantor is the record and beneficial owner of, and has
good and marketable title to, the Pledged Stock pledged by it hereunder, free of
any and all Liens or options in favor of, or claims of, any other Person, except
the security interest created by this Agreement.
SECTION 5. COVENANTS
Each Grantor covenants and agrees with the Administrative Agent
and the Lenders that, from and after the date of this Agreement until the
Obligations shall have been paid in full, no Letter of Credit or Acceptance
Obligation shall be outstanding and the Commitments shall have terminated:
5.1 DELIVERY OF INSTRUMENTS, CERTIFICATED SECURITIES AND CHATTEL
PAPER. During the continuance of any Event of Default, if any amount payable
under or in connection with any of the Collateral shall be or become evidenced
by any Instrument, Certificated Security or Chattel Paper, such Instrument,
Certificated Security or Chattel Paper shall be immediately delivered to
<PAGE>
the Administrative Agent, duly indorsed in a manner satisfactory to the
Administrative Agent, to be held as Collateral pursuant to this Agreement.
5.2 PAYMENT OF OBLIGATIONS. Such Grantor will pay and discharge or
otherwise satisfy at or before maturity or before they become delinquent, as the
case may be, all material taxes, assessments and governmental charges or levies
imposed upon the Collateral or in respect of income or profits therefrom, as
well as all claims of any kind against or with respect to the Collateral, except
that no such charge need be paid if the amount or validity thereof is currently
being contested in good faith by appropriate proceedings, reserves in conformity
with GAAP with respect thereto have been provided on the books of such Grantor
and such proceedings could not reasonably be expected to result in the sale,
forfeiture or loss of any material portion of the Collateral or any interest
therein.
5.3 MAINTENANCE OF PERFECTED SECURITY INTEREST; FURTHER
DOCUMENTATION. At all times during any Negative Security Period: (a) Such
Grantor shall maintain the security interest created by this Agreement as a
perfected security interest having at least the priority described in Section
4.2 and shall defend such security interest against the claims and demands of
all Persons whomsoever.
(b) At any time and from time to time, upon the written request of
the Administrative Agent, and at the sole expense of such Grantor, such Grantor
will promptly and duly execute and deliver, and have recorded, such further
instruments and documents and take such further actions as the Administrative
Agent may reasonably request for the purpose of obtaining or preserving the full
benefits of this Agreement and of the rights and powers herein granted,
including, without limitation, (i) filing any financing or continuation
statements under the Uniform Commercial Code (or other similar laws) in effect
in any jurisdiction with respect to the security interests created hereby and
(ii) in the case of Pledged Stock, taking any actions necessary to enable the
Administrative Agent to obtain "control" (within the meaning of the applicable
Uniform Commercial Code) with respect thereto.
5.4 Changes in Locations, Name, etc. Such Grantor will not, except
upon 15 days' prior written notice to the Administrative Agent and delivery to
the Administrative Agent of all additional executed financing statements and
other documents reasonably requested by the Administrative Agent to maintain the
validity, perfection and priority of the security interests provided for herein:
(i) change its jurisdiction of organization or the location of its
chief executive office or sole place of business from that referred to
in Section 4.3; or
(ii) change its name, identity or corporate structure to such an
extent that any financing statement filed by the Administrative Agent
in connection with this Agreement would become misleading.
5.5 NOTICES. Such Grantor will advise the Administrative Agent and
the Lenders promptly, in reasonable detail, of:
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(a) any Lien (other than security interests created hereby or
Liens permitted under the Credit Agreement) on any of the Collateral which would
adversely affect the ability of the Administrative Agent to exercise any of its
remedies hereunder; and
(b) of the occurrence of any other event which could reasonably be
expected to have a material adverse effect on the aggregate value of the
Collateral, taken as a whole, or on the security interests created hereby.
5.6 PLEDGED STOCK. At all times during any Negative Security
Period: (a) If such Grantor shall become entitled to receive or shall receive
any stock certificate (including, without limitation, any certificate
representing a stock dividend or a distribution in connection with any
reclassification, increase or reduction of capital or any certificate issued in
connection with any reorganization), option or rights in respect of the Capital
Stock of any Issuer, whether in addition to, in substitution of, as a conversion
of, or in exchange for, any shares of the Pledged Stock, or otherwise in respect
thereof, such Grantor shall accept the same as the agent of the Administrative
Agent and the Lenders, hold the same in trust for the Administrative Agent and
the Lenders and deliver the same forthwith to the Administrative Agent in the
exact form received, duly indorsed by such Grantor to the Administrative Agent,
if required, together with an undated stock power covering such certificate duly
executed in blank by such Grantor and with, if the Administrative Agent so
requests, signature guaranteed, to be held by the Administrative Agent, subject
to the terms hereof, as additional collateral security for the Obligations. Any
sums paid upon or in respect of the Pledged Stock upon any liquidation or
dissolution of any Issuer not permitted under the Credit Agreement shall be paid
over to the Administrative Agent to be held by it hereunder as additional
collateral security for the Obligations. In case any property consisting of
ownership interests in any Person shall be distributed upon or with respect to
the Pledged Stock pursuant to the recapitalization or reclassification of the
capital of any Issuer or pursuant to the reorganization thereof, such property
so distributed shall, unless otherwise subject to a perfected security interest
in favor of the Administrative Agent, be delivered to the Administrative Agent
to be held by it hereunder as additional collateral security for the
Obligations. If any such property so distributed in respect of the Pledged Stock
shall be received by such Grantor, such Grantor shall, until such property is
delivered to the Administrative Agent, hold such property in trust for the
Lenders, segregated from other property of such Grantor, as additional
collateral security for the Obligations.
(b) Without the prior written consent of the Administrative Agent,
such Grantor will not (i) vote to enable, or take any other action to permit,
any Issuer to issue any stock or other equity securities of any nature or to
issue any other securities convertible into or granting the right to purchase or
exchange for any stock or other equity securities of any nature of any Issuer,
(ii) sell, assign, transfer, exchange, or otherwise dispose of, or grant any
option with respect to, the Pledged Stock or Proceeds thereof (except pursuant
to a transaction expressly permitted by the Credit Agreement), (iii) create,
incur or permit to exist any Lien or option in favor of, or any claim of any
Person with respect to, any of the Pledged Stock or Proceeds thereof, or any
interest therein, except for the security interests created by this Agreement or
(iv)
<PAGE>
enter into any agreement or undertaking restricting the right or ability of
such Grantor or the Administrative Agent to sell, assign or transfer any of
the Pledged Stock or Proceeds thereof.
(c) In the case of each Grantor which is an Issuer, such Issuer
agrees that (i) it will be bound by the terms of this Agreement relating to the
Pledged Stock issued by it and will comply with such terms insofar as such terms
are applicable to it, (ii) it will notify the Administrative Agent promptly in
writing of the occurrence of any of the events described in Section 5.6(a) with
respect to the Pledged Stock issued by it and (iii) the terms of Section 6.1(c)
shall apply to it, MUTATIS MUTANDIS, with respect to all actions that may be
required of it pursuant to Section 6.1(c) with respect to the Pledged Stock
issued by it.
SECTION 6. REMEDIAL PROVISIONS
6.1 PLEDGED STOCK. (a) Unless an Event of Default shall have
occurred and be continuing and the Administrative Agent shall have given notice
to the relevant Grantor of the Administrative Agent's intent to exercise its
corresponding rights pursuant to Section 6.1(b), each Grantor shall be permitted
to receive all cash dividends paid in respect of the Pledged Stock, in each case
paid in the normal course of business of the relevant Issuer and consistent with
past practice, to the extent permitted in the Credit Agreement, and to exercise
all voting and corporate rights with respect to the Pledged Stock; PROVIDED,
HOWEVER, that no vote shall be cast or corporate right exercised or other action
taken which would result in any violation of any provision of the Credit
Agreement, this Agreement or any other Loan Document.
(b) If an Event of Default shall occur and be continuing and the
Administrative Agent shall give notice of its intent to exercise such rights to
the relevant Grantor or Grantors, (i) the Administrative Agent shall have the
right to receive any and all cash dividends, payments or other Proceeds paid in
respect of the Pledged Stock and make application thereof to the Obligations in
such order as the Administrative Agent may determine, and (ii) if so elected by
the Administrative Agent, any or all of the Pledged Stock shall be registered in
the name of the Administrative Agent or its nominee, and the Administrative
Agent or its nominee may thereafter exercise (x) all voting, corporate and other
rights pertaining to such Pledged Stock at any meeting of shareholders of the
relevant Issuer or Issuers or otherwise and (y) any and all rights of
conversion, exchange and subscription and any other rights, privileges or
options pertaining to such Pledged Stock as if it were the absolute owner
thereof (including, without limitation, the right to exchange at its discretion
any and all of the Pledged Stock upon the merger, consolidation, reorganization,
recapitalization or other fundamental change in the corporate structure of any
Issuer, or upon the exercise by any Grantor or the Administrative Agent of any
right, privilege or option pertaining to such Pledged Stock, and in connection
therewith, the right to deposit and deliver any and all of the Pledged Stock
with any committee, depositary, transfer agent, registrar or other designated
agency upon such terms and conditions as the Administrative Agent may
determine), all without liability except to account for property actually
received by it, but the Administrative Agent shall have no duty to any Grantor
to exercise any such right, privilege or option and shall not be responsible for
any failure to do so or delay in so doing.
<PAGE>
(c) Each Grantor hereby authorizes and instructs each Issuer of
any Pledged Stock pledged by such Grantor hereunder to (i) comply with any
written instruction timely received by it from the Administrative Agent in
writing that (x) states that an Event of Default has occurred and is continuing
and (y) is otherwise in accordance with the terms of this Agreement and the
authority of a shareholder of the Issuer, without any other or further
instructions from such Grantor, and each Grantor agrees that each Issuer shall
be fully protected in so complying, and (ii) unless otherwise expressly
permitted hereby, pay any dividends or other payments with respect to the
Pledged Stock directly to the Administrative Agent.
6.2 PROCEEDS TO BE TURNED OVER TO ADMINISTRATIVE AGENT. If an
Event of Default shall occur and be continuing, and Grantor has been so notified
in writing by the Administrative Agent, all Proceeds received by any Grantor
consisting of cash, checks and other near-cash items shall be held by such
Grantor in trust for the Administrative Agent and the Lenders, segregated from
other funds of such Grantor, and shall, forthwith upon receipt by such Grantor,
be turned over to the Administrative Agent in the exact form received by such
Grantor (duly indorsed by such Grantor to the Administrative Agent, if
required). All Proceeds received by the Administrative Agent hereunder shall be
held by the Administrative Agent in a Collateral Account maintained under its
sole dominion and control. All Proceeds while held by the Administrative Agent
in a Collateral Account (or by such Grantor in trust for the Administrative
Agent and the Lenders) shall continue to be held as collateral security for all
the Obligations and shall not constitute payment thereof until applied as
provided in Section 6.3.
6.3 APPLICATION OF PROCEEDS. At such intervals as may be agreed
upon by the Borrower and the Administrative Agent, or, if an Event of Default
shall have occurred and be continuing, at any time at the Administrative Agent's
election, the Administrative Agent may apply all or any part of Proceeds held in
any Collateral Account in payment of due and payable Obligations in such order
as the Administrative Agent may elect, and any part of such funds which the
Administrative Agent elects not so to apply shall be paid over from time to time
by the Administrative Agent to the Borrower or to whomsoever may be lawfully
entitled to receive the same. Any balance of such Proceeds remaining after the
Obligations shall have been paid in full, no Letters of Credit shall be
outstanding and the Commitments shall have terminated shall be paid over to the
Borrower or to whomsoever may be lawfully entitled to receive the same.
6.4 CODE AND OTHER REMEDIES. If an Event of Default shall occur
and be continuing, the Administrative Agent, on behalf of the Lenders, may
exercise, in addition to all other rights and remedies granted to them in this
Agreement and in any other instrument or agreement securing, evidencing or
relating to the Obligations, all rights and remedies of a secured party under
the New York UCC or any other applicable law. Without limiting the generality of
the foregoing, the Administrative Agent, without demand of performance or other
demand, presentment, protest, advertisement or notice of any kind (except any
notice required by law referred to below) to or upon any Grantor or any other
Person (all and each of which demands, defenses, advertisements and notices are
hereby waived), may in such circumstances forthwith collect, receive,
appropriate and realize upon the Collateral, or any part thereof, and/or
<PAGE>
may forthwith sell, lease, assign, give option or options to purchase, or
otherwise dispose of and deliver the Collateral or any part thereof (or
contract to do any of the foregoing), in one or more parcels at public or
private sale or sales, at any exchange, broker's board or office of the
Administrative Agent or any Lender or elsewhere upon such terms and
conditions as it may deem advisable and at such prices as it may deem best,
for cash or on credit or for future delivery without assumption of any credit
risk. The Administrative Agent or any Lender shall have the right upon any
such public sale or sales, and, to the extent permitted by law, upon any such
private sale or sales, to purchase the whole or any part of the Collateral so
sold, free of any right or equity of redemption in any Grantor, which right
or equity is hereby waived and released. Each Grantor further agrees, at the
Administrative Agent's request, to assemble the Collateral and make it
available to the Administrative Agent at places which the Administrative
Agent shall reasonably select, whether at such Grantor's premises or
elsewhere. The Administrative Agent shall apply the net proceeds of any
action taken by it pursuant to this Section 6.4, after deducting all
reasonable costs and expenses of every kind incurred in connection therewith
or incidental to the care or safekeeping of any of the Collateral or in any
way relating to the Collateral or the rights of the Administrative Agent and
the Lenders hereunder, including, without limitation, reasonable attorneys'
fees and disbursements, to the payment in whole or in part of the
Obligations, in such order as the Administrative Agent may elect, and only
after such application and after the payment by the Administrative Agent of
any other amount required by any provision of law, including, without
limitation, Section 9-504(1)(c) of the New York UCC, need the Administrative
Agent account for the surplus, if any, to any Grantor. To the extent
permitted by applicable law, each Grantor waives all claims, damages and
demands it may acquire against the Administrative Agent or any Lender arising
out of the exercise by them of any rights hereunder. If any notice of a
proposed sale or other disposition of Collateral shall be required by law,
such notice shall be deemed reasonable and proper if given at least 15 days
before such sale or other disposition.
6.5 WAIVER; DEFICIENCY. Each Grantor waives and agrees not to
assert any rights or privileges which it may acquire under Section 9-112 of the
New York UCC. Each Grantor shall remain liable for any deficiency if the
proceeds of any sale or other disposition of the Collateral are insufficient to
pay its Obligations and the reasonable and documented fees and disbursements of
any attorneys employed by the Administrative Agent or any Lender to collect such
deficiency.
SECTION 7. THE ADMINISTRATIVE AGENT
7.1 ADMINISTRATIVE AGENT'S APPOINTMENT AS ATTORNEY-IN-FACT, ETC.
(a) Each Grantor hereby irrevocably constitutes and appoints the Administrative
Agent and any officer or agent thereof, with full power of substitution, as its
true and lawful attorney-in-fact with full irrevocable power and authority in
the place and stead of such Grantor and in the name of such Grantor or in its
own name, for the purpose of carrying out the terms of this Agreement, to take
any and all appropriate action and to execute any and all documents and
instruments which may be necessary or desirable to accomplish the purposes of
this Agreement, and, without limiting the
<PAGE>
generality of the foregoing, each Grantor hereby gives the Administrative
Agent the power and right, on behalf of such Grantor, without notice to or
assent by such Grantor, to do any or all of the following:
(i) in the name of such Grantor or its own name, or otherwise,
take possession of and indorse and collect any checks, drafts, notes,
acceptances or other instruments for the payment of moneys due with
respect to any other Collateral and file any claim or take any other
action or proceeding in any court of law or equity or otherwise deemed
appropriate by the Administrative Agent for the purpose of collecting
any and all such moneys due with respect to any other Collateral
whenever payable;
(ii) pay or discharge taxes and Liens levied or placed on or
threatened against the Collateral;
(iii) execute, in connection with any sale provided for in Section
6.4, any indorsements, assignments or other instruments of conveyance
or transfer with respect to the Collateral; and
(iv) (1) direct any party liable for any payment under any of the
Collateral to make payment of any and all moneys due or to become due
thereunder directly to the Administrative Agent or as the
Administrative Agent shall direct; (2) ask or demand for, collect, and
receive payment of and receipt for, any and all moneys, claims and
other amounts due or to become due at any time in respect of or arising
out of any Collateral; (3 sign and indorse any assignments,
verifications, notices and other documents in connection with any of
the Collateral; (4) commence and prosecute any suits, actions or
proceedings at law or in equity in any court of competent jurisdiction
to collect the Collateral or any portion thereof and to enforce any
other right in respect of any Collateral; (5) defend any suit, action
or proceeding brought against such Grantor with respect to any
Collateral; (6) settle, compromise or adjust any such suit, action or
proceeding and, in connection therewith, give such discharges or
releases as the Administrative Agent may reasonably deem appropriate;
and (7) generally, sell, transfer, pledge and make any agreement with
respect to or otherwise deal with any of the Collateral as fully and
completely as though the Administrative Agent were the absolute owner
thereof for all purposes, and do, at the Administrative Agent's option
and such Grantor's expense, at any time, or from time to time, all acts
and things which the Administrative Agent deems necessary to protect,
preserve or realize upon the Collateral and the Administrative Agent's
and the Lenders' security interests therein and to effect the intent of
this Agreement, all as fully and effectively as such Grantor might do.
Anything in this Section 7.1(a) to the contrary notwithstanding,
the Administrative Agent agrees that it will not exercise any rights under the
power of attorney provided for in this Section 7.1(a) unless an Event of Default
shall have occurred and be continuing.
<PAGE>
(b) If any Grantor fails to perform or comply with any of its
agreements contained herein, the Administrative Agent, at its option, but
without any obligation so to do, may perform or comply, or otherwise cause
performance or compliance, with such agreement.
(c) The expenses of the Administrative Agent incurred in
connection with actions undertaken as provided in this Section 7.1, together
with interest thereon at a rate per annum equal to the highest rate per annum at
which interest would then be payable on any category of past due ABR Loans under
the Credit Agreement, from the date of payment by the Administrative Agent to
the date reimbursed by the relevant Grantor, shall be payable by such Grantor to
the Administrative Agent on demand.
(d) Each Grantor hereby ratifies all that said attorneys shall
lawfully do or cause to be done by virtue hereof. All powers, authorizations and
agencies contained in this Agreement are coupled with an interest and are
irrevocable until this Agreement is terminated and the security interests
created hereby are released.
7.2 DUTY OF ADMINISTRATIVE AGENT. The Administrative Agent's sole
duty with respect to the custody, safekeeping and physical preservation of the
Collateral in its possession, under Section 9-207 of the New York UCC or
otherwise, shall be to deal with it in the same manner as the Administrative
Agent deals with similar property for its own account. Neither the
Administrative Agent, any Lender nor any of their respective officers,
directors, employees or agents shall be liable for failure to demand, collect or
realize upon any of the Collateral or for any delay in doing so or shall be
under any obligation to sell or otherwise dispose of any Collateral upon the
request of any Grantor or any other Person or to take any other action
whatsoever with regard to the Collateral or any part thereof. The powers
conferred on the Administrative Agent and the Lenders hereunder are solely to
protect the Administrative Agent's and the Lenders' interests in the Collateral
and shall not impose any duty upon the Administrative Agent or any Lender to
exercise any such powers. The Administrative Agent and the Lenders shall be
accountable only for amounts that they actually receive as a result of the
exercise of such powers, and neither they nor any of their officers, directors,
employees or agents shall be responsible to any Grantor for any act or failure
to act hereunder, except for their own gross negligence or willful misconduct.
7.3 EXECUTION OF FINANCING STATEMENTS. At all times during any
Negative Security Period, pursuant to Section 9-402 of the New York UCC and any
other applicable law, each Grantor authorizes the Administrative Agent to file
or record financing statements and other filing or recording documents or
instruments with respect to the Collateral without the signature of such Grantor
in such form and in such offices as the Administrative Agent determines
appropriate to perfect the security interests of the Administrative Agent under
this Agreement. A photographic or other reproduction of this Agreement shall be
sufficient as a financing statement or other filing or recording document or
instrument for filing or recording in any jurisdiction.
7.4 AUTHORITY OF ADMINISTRATIVE AGENT. Each Grantor acknowledges
that the rights and responsibilities of the Administrative Agent under this
Agreement with respect to any
<PAGE>
action taken by the Administrative Agent or the exercise or non-exercise by
the Administrative Agent of any option, voting right, request, judgment or
other right or remedy provided for herein or resulting or arising out of this
Agreement shall, as between the Administrative Agent and the Lenders, be
governed by the Credit Agreement and by such other agreements with respect
thereto as may exist from time to time among them, but, as between the
Administrative Agent and the Grantors, the Administrative Agent shall be
conclusively presumed to be acting as agent for the Lenders with full and
valid authority so to act or refrain from acting, and no Grantor shall be
under any obligation, or entitlement, to make any inquiry respecting such
authority.
SECTION 8. MISCELLANEOUS
8.1 AMENDMENTS IN WRITING. None of the terms or provisions of this
Agreement may be waived, amended, supplemented or otherwise modified except in
accordance with Section 10.1 of the Credit Agreement.
8.2 NOTICES. All notices, requests and demands to or upon the
Administrative Agent or any Grantor hereunder shall be effected in the manner
provided for in Section 10.2 of the Credit Agreement; provided that any such
notice, request or demand to or upon any Guarantor shall be addressed to such
Guarantor at its notice address set forth on Schedule 1.
8.3 NO WAIVER BY COURSE OF CONDUCT; CUMULATIVE REMEDIES. Neither
the Administrative Agent nor any Lender shall by any act (except by a written
instrument pursuant to Section 8.1), delay, indulgence, omission or otherwise be
deemed to have waived any right or remedy hereunder or to have acquiesced in any
Default or Event of Default. No failure to exercise, nor any delay in
exercising, on the part of the Administrative Agent or any Lender, any right,
power or privilege hereunder shall operate as a waiver thereof. No single or
partial exercise of any right, power or privilege hereunder shall preclude any
other or further exercise thereof or the exercise of any other right, power or
privilege. A waiver by the Administrative Agent or any Lender of any right or
remedy hereunder on any one occasion shall not be construed as a bar to any
right or remedy which the Administrative Agent or such Lender would otherwise
have on any future occasion. The rights and remedies herein provided are
cumulative, may be exercised singly or concurrently and are not exclusive of any
other rights or remedies provided by law.
8.4 ENFORCEMENT EXPENSES; INDEMNIFICATION. (a) Each Guarantor
agrees to pay or reimburse each Lender and the Administrative Agent for all its
costs and expenses incurred in collecting against such Guarantor under the
guarantee contained in Section 2 or otherwise enforcing or preserving any rights
under this Agreement and the other Loan Documents to which such Guarantor is a
party, including, without limitation, the reasonable and documented fees and
disbursements of counsel to each Lender and of counsel to the Administrative
Agent.
(b) Each Guarantor agrees to pay, and to save the Administrative
Agent and the Lenders harmless from, any and all liabilities with respect to, or
resulting from any delay in
<PAGE>
paying, any and all stamp, excise, sales or other
taxes which may be payable or determined to be payable with respect to any of
its Collateral or in connection with any of the transactions contemplated by
this Agreement.
(c) Each Guarantor agrees to pay, and to save the Administrative
Agent and the Lenders harmless from, any and all liabilities, obligations,
losses, damages, penalties, actions, judgments, suits, costs, expenses or
disbursements of any kind or nature whatsoever with respect to the execution,
delivery, enforcement, performance and administration of this Agreement to the
extent the Borrower would be required to do so pursuant to Section 10.5 of the
Credit Agreement.
(d) The agreements in this Section 8.4 shall survive repayment of
the Obligations and all other amounts payable under the Credit Agreement and the
other Loan Documents.
8.5 SUCCESSORS AND ASSIGNS. This Agreement shall be binding upon
the successors and assigns of each Grantor and shall inure to the benefit of the
Administrative Agent and the Lenders and their successors and assigns; provided
that no Grantor may assign, transfer or delegate any of its rights or
obligations under this Agreement without the prior written consent of the
Administrative Agent.
8.6 SET-OFF. Each Grantor hereby irrevocably authorizes the
Administrative Agent and each Lender at any time and from time to time while an
Event of Default shall have occurred and be continuing, without notice to such
Grantor or any other Grantor, any such notice being expressly waived by each
Grantor, to set-off and appropriate and apply any and all deposits (general or
special, time or demand, provisional or final), in any currency, and any other
credits, indebtedness or claims, in any currency, in each case whether direct or
indirect, absolute or contingent, matured or unmatured, at any time held or
owing by the Administrative Agent or such Lender to or for the credit or the
account of such Grantor, or any part thereof in such amounts as the
Administrative Agent or such Lender may elect, against and on account of the due
and payable obligations of such Grantor to the Administrative Agent or such
Lender hereunder, as the Administrative Agent or such Lender may elect, whether
or not the Administrative Agent or any Lender has made any demand for payment
and although such obligations, liabilities and claims may be contingent or
unmatured. The Administrative Agent and each Lender shall notify such Grantor
promptly of any such set-off and the application made by the Administrative
Agent or such Lender of the proceeds thereof, provided that the failure to give
such notice shall not affect the validity of such set-off and application. The
rights of the Administrative Agent and each Lender under this Section 8.6 are in
addition to other rights and remedies (including, without limitation, other
rights of set-off) which the Administrative Agent or such Lender may have.
8.7 COUNTERPARTS. This Agreement may be executed by one or more of
the parties to this Agreement on any number of separate counterparts (including
by telecopy), and all of said counterparts taken together shall be deemed to
constitute one and the same instrument.
<PAGE>
8.8 SEVERABILITY. Any provision of this Agreement which is
prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction,
be ineffective to the extent of such prohibition or unenforceability without
invalidating the remaining provisions hereof, and any such prohibition or
unenforceability in any jurisdiction shall not invalidate or render
unenforceable such provision in any other jurisdiction.
8.9 SECTION HEADINGS. The Section headings used in this Agreement
are for convenience of reference only and are not to affect the construction
hereof or be taken into consideration in the interpretation hereof.
8.10 INTEGRATION. This Agreement and the other Loan Documents
represent the agreement of the Grantors, the Administrative Agent and the
Lenders with respect to the subject matter hereof and thereof, and there are no
promises, undertakings, representations or warranties by the Administrative
Agent or any Lender relative to subject matter hereof and thereof not expressly
set forth or referred to herein or in the other Loan Documents.
8.11 GOVERNING LAW. THIS AGREEMENT SHALL BE GOVERNED BY, AND
CONSTRUED AND INTERPRETED IN ACCORDANCE WITH, THE LAW OF THE STATE OF NEW YORK.
8.12 SUBMISSION TO JURISDICTION; WAIVERS. Each Grantor hereby
irrevocably and unconditionally:
(a) submits for itself and its property in any legal action or
proceeding relating to this Agreement and the other Loan Documents to
which it is a party, or for recognition and enforcement of any judgment
in respect thereof, to the non-exclusive general jurisdiction of the
Courts of the State of New York, the courts of the United States of
America for the Southern District of New York, and appellate courts
from any thereof;
(b) consents that any such action or proceeding may be brought in
such courts and waives any objection that it may now or hereafter have
to the venue of any such action or proceeding in any such court or that
such action or proceeding was brought in an inconvenient court and
agrees not to plead or claim the same;
(c) agrees that service of process in any such action or
proceeding may be effected by mailing a copy thereof by registered or
certified mail (or any substantially similar form of mail), postage
prepaid, to such Grantor at its address referred to in Section 8.2 or
at such other address of which the Administrative Agent shall have been
notified pursuant thereto;
(d) agrees that nothing herein shall affect the right to effect
service of process in any other manner permitted by law or shall limit
the right to sue in any other jurisdiction; and
<PAGE>
(e) waives, to the maximum extent not prohibited by law, any right
it may have to claim or recover in any legal action or proceeding
referred to in this Section any special, exemplary, punitive or
consequential damages.
8.13 ACKNOWLEDGMENTS. Each Grantor hereby acknowledges that:
(a) it has been advised by counsel in the negotiation, execution
and delivery of this Agreement and the other Loan Documents to which it
is a party;
(b) neither the Administrative Agent nor any Lender has any
fiduciary relationship with or duty to any Grantor arising out of or in
connection with this Agreement or any of the other Loan Documents, and
the relationship between the Grantors, on the one hand, and the
Administrative Agent and Lenders, on the other hand, in connection
herewith or therewith is solely that of debtor and creditor; and
(c) no joint venture is created hereby or by the other Loan
Documents or otherwise exists by virtue of the transactions
contemplated hereby among the Lenders or among the Grantors and the
Lenders.
8.14 ADDITIONAL GRANTORS. Each Material Subsidiary of the Borrower
that is required to become a party to this Agreement pursuant to Section 6.9 of
the Credit Agreement shall become a Grantor for all purposes of this Agreement
upon execution and delivery by such Subsidiary of an Assumption Agreement in the
form of Annex 1 hereto.
8.15 RELEASES. (a) At such time as the Loans, the Reimbursement
Obligations and the other Obligations shall have been paid in full, the
Commitments have been terminated and no Letters of Credit shall be outstanding,
the Collateral shall be released from the Liens created hereby, and this
Agreement and all obligations (other than those expressly stated to survive such
termination) of the Administrative Agent and each Grantor hereunder shall
terminate, all without delivery of any instrument or performance of any act by
any party, and all rights to the Collateral shall revert to the Grantors. At the
request and sole expense of any Grantor following any such termination, the
Administrative Agent shall deliver to such Grantor any Collateral held by the
Administrative Agent hereunder, and execute and deliver to such Grantor such
documents as such Grantor shall reasonably request to evidence such termination.
(b) If any of the Collateral shall be sold, transferred or
otherwise disposed of by any Grantor in a transaction permitted by the Credit
Agreement, or if such Grantor becomes a Subsidiary that is not a Material
Subsidiary and is not required to be a Material Subsidiary to satisfy the
requirements of such definition and upon delivery to the Administrative Agent of
reasonably detailed calculations demonstrating that such Subsidiary is not a
Material Subsidiary and is not required to be a Material Subsidiary in order to
satisfy the requirements of such definition, then the Administrative Agent, at
the request and sole expense of such Grantor, shall execute and deliver to such
Grantor all releases or other documents reasonably necessary or desirable for
the release of the Liens created hereby on such Collateral. At the request and
sole
<PAGE>
expense of the Borrower, a Subsidiary Guarantor shall be released from its
obligations hereunder in the event that the Capital Stock of such Subsidiary
Guarantor shall be sold, transferred or otherwise disposed of in a
transaction permitted by the Credit Agreement; provided that the Borrower
shall have delivered to the Administrative Agent, at least ten Business Days
prior to the
<PAGE>
date of the proposed release, a written request for release identifying the
relevant Subsidiary Guarantor, together with a certification by the Borrower
stating that such transaction is in compliance with the Credit Agreement and the
other Loan Documents.
(c) During the existence of a Positive Security Period, the
Collateral shall be released from the Liens created hereby, and, at the request
and sole expense of any Grantor in such event, the Administrative Agent shall
deliver to such Grantor any Collateral held by the Administrative Agent
hereunder, and execute and deliver to such Grantor such documents as such
Grantor shall reasonably request to evidence such release.
8.16 WAIVER OF JURY TRIAL. EACH GRANTOR HEREBY IRREVOCABLY AND
UNCONDITIONALLY WAIVES TRIAL BY JURY IN ANY LEGAL ACTION OR PROCEEDING RELATING
TO THIS AGREEMENT OR ANY OTHER LOAN DOCUMENT AND FOR ANY COUNTERCLAIM THEREIN.
IN WITNESS WHEREOF, each of the undersigned has caused this
Guarantee and Collateral Agreement to be duly executed and delivered as of the
date first above written.
DEPARTMENT 56, INC.
By: /s/ Timothy J. Schugel
---------------------------------
Title: V.P. - Finance
D 56, INC.
By: /s/ Timothy J. Schugel
---------------------------------
Title: V.P. - Finance
CAN 56, INC.
By: /s/ Timothy J. Schugel
---------------------------------
Title: V.P. and Treasurer
<PAGE>
FL 56 INTERMEDIATE CORP.
By: /s/ Timothy J. Schugel
---------------------------------
Title: V.P. and Treasurer
<PAGE>
EXHIBIT 11.1
DEPARTMENT 56, INC.
COMPUTATION OF NET INCOME AND INCOME BEFORE EXTRAORDINARY ITEM
PER SHARE
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
Year Year Year
Ended Ended Ended
January 2, January 3, December 28,
1999 1998 1996
---- ---- ----
<S> <C> <C> <C>
BASIC:
Net Income $46,516 $42,781 $45,944
------- ------- -------
------- ------- -------
Weighted average number of common shares outstanding 18,676 20,744 21,560
Net Income per Common Share $ 2.49 $ 2.06 $ 2.13
------- ------- -------
------- ------- -------
ASSUMING DILUTION:
Net Income $46,516 $42,781 $45,944
------- ------- -------
------- ------- -------
Weighted average number of common shares outstanding 18,676 20,744 21,560
The number of shares resulting from the assumed
exercise of stock options reduced by the number
of shares which could have been purchased with the
proceeds from such exercise, using the average
market price during the period. 284 152 199
------- ------- -------
Weighted average number of common and
common equivalent shares 18,960 20,896 21,759
------- ------- -------
------- ------- -------
Net Income per Common Share Assuming Dilution $ 2.45 $ 2.05 $ 2.11
------- ------- -------
------- ------- -------
</TABLE>
<PAGE>
FIVE-YEAR SUMMARY
<TABLE>
<CAPTION>
Year Ended Year Ended Year Ended Year Ended Year Ended
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) Jan. 2, 1999(1) Jan. 3, 1998(1) Dec. 28, 1996(1) Dec. 30, 1995(1) Dec. 31, 1994(1)
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
STATEMENTS OF INCOME
Net sales $243,365 $219,496 $228,775 $252,047 $217,865
Cost of sales 100,782 94,040 95,190 110,008 98,480
- -----------------------------------------------------------------------------------------------------------------------------------
Gross profit 142,583 125,456 133,585 142,039 119,385
Operating expenses:
Selling, general and administrative(2) 56,648 49,772 47,853 45,017 41,831
Amortization of goodwill,
trademarks and other intangibles 4,926 4,577 4,577 4,577 4,577
- -----------------------------------------------------------------------------------------------------------------------------------
Total operating expenses 61,574 54,349 52,430 49,594 46,408
- -----------------------------------------------------------------------------------------------------------------------------------
Income from operations 81,009 71,107 81,155 92,445 72,977
Other expense (income):
Interest expense 4,817 4,362 6,063 9,582 12,629
Gain on sale of aircraft(3) - (2,882) - - -
Other, net (397) (1,086) (648) (439) (837)
- -----------------------------------------------------------------------------------------------------------------------------------
Income before income taxes
and extraordinary item 76,589 70,713 75,740 83,302 61,185
Provision for income taxes 30,073 27,932 29,796 33,737 25,086
- -----------------------------------------------------------------------------------------------------------------------------------
Income before extraordinary item 46,516 42,781 45,944 49,565 36,099
Extraordinary charge due to
refinancing of debt(4) - - - 1,312 -
- -----------------------------------------------------------------------------------------------------------------------------------
Net income $ 46,516 $ 42,781 $ 45,944 $ 48,253 $ 36,099
- -----------------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------------
Income before extraordinary item
per common share assuming dilution $ 2.45 $ 2.05 $ 2.11 $ 2.28 $ 1.67
Net income per common share assuming dilution $ 2.45 $ 2.05 $ 2.11 $ 2.22 $ 1.67
- -----------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
(In thousands, except per share amounts) Jan. 2, 1999 Jan. 3, 1998 Dec. 28, 1996 Dec. 30, 1995 Dec. 31, 1994
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA
Working capital $ 29,276 $ 40,857 $ 67,997 $ 36,015 $ 13,362
Total assets 233,283 259,695 285,733 259,085 239,680
Long-term debt, including current maturities 20,000 40,000 60,000 80,000 113,000
Total stockholders' equity(5) 178,735 186,655 196,757 150,286 100,305
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) THE YEARS ENDED DECEMBER 31, 1994, DECEMBER 30, 1995, DECEMBER 28, 1996, AND
JANUARY 2, 1999, WERE 52-WEEK PERIODS, AND THE YEAR ENDED JANUARY 3, 1998,
WAS A 53-WEEK PERIOD.
(2) SELLING, GENERAL AND ADMINISTRATIVE EXPENSES FOR THE YEAR ENDED DECEMBER 30,
1995, INCLUDED $2,872 OF NET CUSTOMS DUTIES REFUNDS AND RELATED INTEREST.
THE REFUNDS PERTAINED PRINCIPALLY TO CERTAIN MERCHANDISE IMPORTED INTO THE
UNITED STATES FROM 1989 TO 1994.
(3) SEE NOTE 6 TO THE CONSOLIDATED FINANCIAL STATEMENTS.
(4) DURING FEBRUARY 1995, THE COMPANY ENTERED INTO A CREDIT AGREEMENT AND
RECORDED AN EXTRAORDINARY CHARGE OF $1,312, NET OF INCOME TAXES, TO WRITE
OFF DEFERRED FINANCING COSTS.
(5) THE COMPANY HAS NOT DECLARED OR PAID DIVIDENDS ON ITS COMMON STOCK. THE
COMPANY DOES NOT ANTICIPATE PAYING DIVIDENDS IN THE FORESEEABLE FUTURE. AS
A HOLDING COMPANY, THE ABILITY OF THE COMPANY TO PAY CASH DIVIDENDS WILL
DEPEND UPON THE RECEIPT OF DIVIDENDS OR OTHER PAYMENTS FROM ITS
SUBSIDIARIES.
11
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
RESULTS OF OPERATIONS
- -------------------------------------------------------------------------------
COMPARISON OF RESULTS OF OPERATIONS 1998 TO 1997
NET SALES Net sales increased $23.9 million, or 11%, from $219.5 million in
1997 to $243.4 million in 1998. This increase was due principally to an
increase in volume. Sales of Village Series products increased 13% from 1997
to 1998, while General Giftware product sales increased 7% during the same
period. Village Series products continued to account for the most significant
portion of the Company's sales, 65% in 1998 versus 64% in 1997.
GROSS PROFIT Gross Profit increased $17.1 million, or 14%, between 1997 and
1998. Gross profit as a percentage of sales increased from 57.2% in 1997 to
58.6% in 1998, principally due to a change in the mix of product shipped
during 1998 as compared to 1997 and the benefit derived from selling directly
to the Canadian market.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES Selling, general and
administrative expenses increased $6.9 million, or 14%, between 1997 and 1998
principally due to a 45% increase in marketing expenses, a 19% increase in
distribution expenses and a 6% increase in administrative expenses. Selling,
general and administrative expenses as a percentage of sales was 23% in both
1997 and 1998.
INCOME FROM OPERATIONS Income from operations increased $9.9 million, or
14%, from 1997 to 1998 due to the factors described above. Operating margins
increased from 32% of net sales in 1997 to 33% of net sales in 1998.
INTEREST EXPENSE Interest expense increased $.5 million, or 10%, between
1997 and 1998 principally due to increased borrowings under the revolving
credit agreement, offset by a decrease in interest expense from the repayment
of $20 million of debt in December 1997. Borrowings under the revolving
credit agreement increased as a result of the timing of stock repurchases and
the increase in capital expenditures and acquisitions.
PROVISION FOR INCOME TAXES The effective income tax rate was 39.5% and 39.3%
during 1997 and 1998, respectively.
COMPARISON OF RESULTS OF OPERATIONS 1997 TO 1996
NET SALES Net sales decreased $9.3 million, or 4%, from $228.8 million in
1996 to $219.5 million in 1997. This decrease was due principally to a
decrease in volume.
<TABLE>
<CAPTION>
1998 1997 1996
- -----------------------------------------------------------------------------------------------------------------------------
% of % of % of
(IN MILLIONS, EXCEPT PER SHARE AMOUNTS) Dollars Net Sales Dollars Net Sales Dollars Net Sales
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net sales $243.4 100% $219.5 100% $228.8 100%
Gross profit 142.6 59 125.5 57 133.6 58
Selling, general and administrative expenses 56.6 23 49.8 23 47.9 21
Amortization of goodwill,
trademarks and other intangibles 4.9 2 4.6 2 4.6 2
Income from operations 81.0 33 71.1 32 81.2 35
Interest expense 4.8 2 4.4 2 6.1 3
Gain on sale of aircraft - - (2.9) (1) - -
Other, net (.4) - (1.1) (1) (.6) -
Income before income taxes 76.6 31 70.7 32 75.7 33
Provision for income taxes 30.1 12 27.9 13 29.8 13
Net income 46.5 19 42.8 19 45.9 20
Net income per common share assuming dilution 2.45 2.05 2.11
Operating cash flow(1) 88.7 81.7 88.1
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) OPERATING CASH FLOW REPRESENTS EARNINGS BEFORE INTEREST, INCOME TAXES,
DEPRECIATION AND AMORTIZATION. OPERATING CASH FLOW IS USED BY MANAGEMENT
AND CERTAIN INVESTORS AS AN INDICATOR OF A COMPANY'S HISTORICAL ABILITY
TO SERVICE DEBT. HOWEVER, OPERATING CASH FLOW IS NOT INTENDED TO
REPRESENT CASH FLOW FROM OPERATIONS FOR THE PERIOD, NOR HAS IT BEEN
PRESENTED AS AN ALTERNATIVE TO EITHER (i) OPERATING INCOME (AS DETERMINED
BY GAAP) AS AN INDICATOR OF OPERATING PERFORMANCE OR (ii) CASH FLOW FROM
OPERATING, INVESTING AND FINANCING ACTIVITIES (AS DETERMINED BY GAAP).
OPERATING CASH FLOW IS, THEREFORE, SUSCEPTIBLE TO VARYING CALCULATIONS
AND, AS PRESENTED, MAY NOT BE COMPARABLE TO OTHER SIMILARLY TITLED
MEASURES OF OTHER COMPANIES.
12
<PAGE>
Sales of Village Series products decreased 9% from 1996 to 1997, while
General Giftware product sales increased 7% during the same period. Village
Series products continued to account for the most significant portion of the
Company's sales, 64% in 1997 versus 67% in 1996.
GROSS PROFIT Gross Profit decreased $8.1 million, or 6%, between 1996 and
1997. Gross profit as a percentage of sales decreased from 58.4% in 1996 to
57.2% in 1997, principally due to a change in the mix of product shipped
during 1997 as compared to 1996.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES Selling, general and
administrative expenses increased $1.9 million, or 4%, between 1996 and 1997
principally due to a 20% increase in marketing expense and a 6% increase in
administrative expense, offset by a 7% decrease in commission expense.
Selling, general and administrative expenses as a percentage of sales
increased from approximately 21% in 1996 to approximately 23% in 1997.
INCOME FROM OPERATIONS Income from operations decreased $10.0 million, or
12%, from 1996 to 1997 due to the factors described above. Operating margins
decreased from 35% of net sales in 1996 to 32% of net sales in 1997.
INTEREST EXPENSE Interest expense decreased $1.7 million, or 28%, between
1996 and 1997 principally due to the repayment of $20 million of debt in
December 1996.
GAIN ON SALE OF AIRCRAFT During December 1997, the Company exercised its
purchase option under an aircraft lease agreement and subsequently sold the
aircraft to a former officer of the Company for $8.6 million, its appraised
value, recognizing a gain of $2.9 million.
PROVISION FOR INCOME TAXES The effective income tax rate was 39.3% and 39.5%
during 1996 and 1997, respectively.
SEASONALITY
Historically, principally due to the timing of wholesale trade shows early in
the calendar year and the limited supply of the Company's products, the
Company has received the majority of its total annual customer orders during
the first quarter of each year. The Company entered 65% and 66% of its total
annual customer orders for 1998 and 1997, respectively, during the first
quarter of each of those years. Cancellations of total annual customer orders
were approximately 7% and 8% in 1998 and 1997, respectively. The Company's
backlog was $4.0 million and $4.6 million at January 2, 1999 and January 3,
1998, respectively.
The Company shipped and recorded as net sales approximately 91% and 90% of
its annual customer orders in 1998 and 1997, respectively. Orders not shipped
in a particular year, net of cancellations, returns, allowances and cash
discounts, are carried into backlog for the following year and have
historically been orders for Spring and Easter products.
The Company receives products, pays its suppliers and ships products
throughout the year, although historically
<TABLE>
<CAPTION>
1998 1997
- -----------------------------------------------------------------------------------------------------------------------------------
(IN MILLIONS, EXCEPT PER SHARE AMOUNTS) 1st Qtr 2nd Qtr 3rd Qtr 4th Qtr Total 1st Qtr 2nd Qtr 3rd Qtr 4th Qtr Total
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Customer orders entered(1) $173.7 $50.0 $37.1 $ 7.7 $268.5 $160.6 $43.8 $34.3 $ 6.2 $244.9
Net sales 49.0 69.9 71.5 52.9 243.4 45.7 58.6 61.6 53.6 219.5
Gross profit 28.4 41.2 41.7 31.2 142.6 26.6 33.9 35.8 29.2 125.5
Selling, general and
administrative expenses 11.6 13.6 14.3 17.1 56.6 10.7 11.4 12.1 15.6 49.8
Amortization of goodwill,
trademarks and other intangibles 1.2 1.3 1.3 1.3 4.9 1.1 1.1 1.2 1.2 4.6
Income from operations 15.7 26.3 26.1 12.9 81.0 14.7 21.3 22.5 12.6 71.1
Net income 9.2 15.4 15.0 6.9 46.5 8.7 12.4 13.1 8.6 42.8
Net income per common
share assuming dilution(2) 0.47 0.80 0.81 0.38 2.45 0.40 0.59 0.63 0.42 2.05
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) CUSTOMER ORDERS ENTERED ARE ORDERS RECEIVED AND APPROVED BY THE COMPANY,
SUBJECT TO CANCELLATION FOR VARIOUS REASONS INCLUDING CREDIT CONSIDERATIONS,
INVENTORY SHORTAGES AND CUSTOMER REQUESTS.
(2) SEE NOTE 11 TO THE CONSOLIDATED FINANCIAL STATEMENTS.
13
<PAGE>
the majority of shipments occur in the second and third quarters as retailers
stock merchandise in anticipation of the holiday season. As a result of this
seasonal pattern, the Company generally records its highest sales during the
second and third quarters of each year. The Company expects this seasonal
pattern to continue for the foreseeable future. The Company can experience
fluctuations in quarterly sales growth and related net income compared with
the prior year due to the timing of receipt of product from suppliers and
subsequent shipment of product from the Company to customers, as well as the
timing of orders placed by customers. The Company is not managed to maximize
quarter-to-quarter results, but rather to achieve broader, long-term growth
objectives which are consistent with the Company's business strategy.
LIQUIDITY AND CAPITAL RESOURCES
In March 1999, the Company entered into a new credit agreement providing a
$100 million revolving credit facility and a $150 million revolver/term loan.
The $150 million revolver/term loan converts to a four-year term loan after
one year. The revolver/term loan will have annual amortization payments of
15%, 20%, 25% and 40% of the amount outstanding at conversion in March 2001,
2002, 2003 and 2004, respectively.
The Company used the proceeds of the revolver/term loan to refinance the
remaining $20 million term loan under its former credit agreement. In
connection therewith, the Company recorded $1,700,000 in deferred financing
fees, which will be amortized over the life of the credit agreement.
The revolving credit facility provides for borrowings of up to $100 million
including letters of credit. The letters of credit are issued primarily in
connection with inventory purchases. The credit agreement contains financial
and operating covenants, including restrictions on incurring indebtedness and
liens, selling property and paying dividends. In addition, the Company is
required to satisfy consolidated net worth, interest coverage ratio and
leverage ratio tests, in each case at the end of each fiscal quarter.
The Company believes that its internally generated cash flow and seasonal
borrowings under the revolving credit facility will be adequate to fund
operations and capital expenditures for the next twelve months.
Consistent with customary practice in the giftware industry, the Company
offers extended accounts receivable terms to many of its customers. This
practice has typically created significant working capital requirements in
the second and third quarters which the Company has generally financed with
available cash, internally generated cash flow and seasonal borrowings. The
Company's cash and cash equivalents balances peak in December, following the
collection in November and December of accounts receivable with extended
payment terms. The Company's bad debt experience relating to these accounts
receivable has not been material.
Accounts receivable increased from $23.0 million at January 3, 1998 to $26.2
million at January 2, 1999, principally due to the increase in net sales in
1998 as compared to 1997.
Capital expenditures were $6.8 million, $7.8 million and $1.5 million for
1998, 1997 and 1996, respectively. Included in 1997 capital expenditures is
$4.9 million in connection with the Company's exercise of a purchase option
under its aircraft lease agreement. See Note 6 to the Consolidated Financial
Statements. Included in 1998 capital expenditures is $4.1 million in
connection with the implementation of a new information system. The new
information system will significantly update the Company's current
information system capabilities and is expected to eliminate Year 2000 issues
for the Company's primary business systems.
During 1998, the Company acquired substantially all of the assets of the
independent sales representative organizations that represented the Company's
products in California and several surrounding western states and New York
and several surrounding eastern states. Also during 1998, the Company
acquired the inventory and certain other assets of its Canadian distributor.
The cost of these acquisitions was $4.7 million.
In January 1999, the Company entered into a letter of intent with a
contractor to lease a proposed distribution center in Minnesota. The Company
plans to consolidate its three current distribution centers into the proposed
distribution center by the end of 1999. The anticipated term of the lease
will be approximately ten years with options to renew the lease. The proposed
lease payments will approximate the combined lease payments of the Company's
three current distribution centers.
Operating cash flow, defined as earnings before interest, income tax,
depreciation and amortization expenses, increased $7.0 million, or 9%, from
$81.7 million in 1997 to $88.7 million in 1998. The increase was principally
due to the increase in net income.
14
<PAGE>
The Company has a stock repurchase program. In 1998, the Board of Directors
of the Company authorized the repurchase in open market and privately
negotiated transactions of up to an additional 1.5 million shares valid
through the end of the Company's 1999 fiscal year. The timing, prices and
amounts of shares repurchased will be determined at the discretion of the
Company's management and subject to continued compliance with the Company's
credit facilities. Under this program, the Company repurchased in the open
market 1.7 million shares during 1998 at a weighted-average price of $35 per
share. The Company is authorized to repurchase an additional 0.6 million
shares through the end of 1999.
YEAR 2000
On January 3, 1999, the Company substantially implemented a new integrated
computer system, which replaced its primary operating and financial computing
systems. The vendor of the core software program for the new integrated
system has indicated that this system will substantially address Year 2000
requirements, and the Company does not anticipate that it will experience any
material disruption to its transaction processing operations or financial or
accounting functions as a result of the failure of any of its systems to be
Year 2000 compliant. The Company is continuing to monitor and evaluate its
new and existing systems so that, in the event substantial non-compliance
with Year 2000 needs is detected, the remainder of 1999 can be utilized to
achieve necessary functionality.
Total expenditures (aside of internal labor costs) for implementation of the
new system is expected to be approximately $5 million, of which approximately
$4 million has been incurred as of January 2, 1999. Hardware, software and
certain project costs were capitalized and will be amortized over their
useful lives. All other costs were expensed as incurred.
The Company believes that the implementation of the new integrated computer
system will allow it to be substantially Year 2000 compliant. There can be no
assurance, however, that the systems of third parties on which the Company
relies will be Year 2000 compliant in a timely manner. As a precautionary
measure, the Company intends to develop contingency plans for all of its
systems that are not expected to be Year 2000 compliant by October 1999. A
variety of automated as well as manual fallback plans will be considered,
including the use of electronic spreadsheets, resetting system dates and
manual workarounds. An interruption of the Company's ability to conduct its
business due to a Year 2000 problem with a third party could have a material
adverse effect on the Company. The Company's product vendor and customer
bases are fragmented, and generally are not dependent on computer control or
systematization of their business operations. Management, therefore, believes
that the greatest risks presented by potential Year 2000 failures of third
parties are those which would affect the general economy or certain
industries, such as may occur if there were insufficient electric power or
other utilities needed for the Company's operations or manufacture of its
products or insufficient reliable means of transporting the Company's
products. While such failures could affect important operations of the
Company, either directly or indirectly, in a significant manner, the Company
cannot at present estimate either the likelihood or the potential cost of
such failures. The statements concerning future matters are "forward-looking
statements" and actual results may vary.
FOREIGN EXCHANGE
The dollar value of the Company's assets abroad is not significant.
Substantially all of the Company's sales are denominated in U.S. dollars and,
as a result, are not subject to changes in exchange rates.
The Company imports its product from manufacturers located in the Pacific
Rim, primarily China, Taiwan (Republic of China) and The Philippines. These
transactions are principally denominated in U.S. dollars, except for imports
from Taiwan which are principally denominated in New Taiwan dollars. The
Company, from time to time, will enter into foreign exchange contracts or
build foreign currency deposits as a partial hedge against currency
fluctuations. The Company intends to manage foreign exchange risks to the
extent possible and take appropriate action where warranted. The Company's
costs could be adversely affected if the currencies of the countries in which
the manufacturers operate appreciate significantly relative to the U.S.
dollar.
EFFECT OF INFLATION
The Company continually attempts to minimize any effect of inflation on
earnings by controlling its operating costs and selling prices. During the
past few years, the rate of inflation has been low and has not had a material
impact on the Company's results of operations.
RECENT DEVELOPMENTS
On February 24, 1999, the Company issued a press release stating in relevant
part: "Based on orders received to date ... we expect that the increase in
our full first quarter orders will be consistent with achieving our goal of
seven to nine
15
<PAGE>
percent sales growth and mid-teen earnings per share growth in 1999. Our
confidence is underscored by recent dealer feedback indicating that retail
sales for our collectible products grew in 1998 and inventory turnover
improved." The press release also noted that in January 1999, "the company
installed a new integrated enterprise-wide software system. While this new
system will be a valuable asset in facilitating future growth, the
installation has changed the timing of the receipt of orders from customers
and product shipping, thereby impacting comparability to prior years' levels.
However this should not impact full-year results."
The press release further stated: "Department 56 initiated a number of steps
in 1998 to help position the company for strong future growth, including
launching the first new Village line in five years, successfully broadening
existing lines and investing in new marketing and product development
resources. During [1999, the Company] will continue to invest our strong cash
flow in new growth opportunities, including launching new products, building
our brand through the opening of our first company-owned store at the Mall of
America in May, consolidating our warehouses into a new facility and
exploring attractive acquisition opportunities."
On Form 8-K dated February 26, 1999, the Company stated: "In addition to the
statements contained in the press release, the Company expects that its
effective income tax rate for fiscal year 1999 may decrease by up to 1
percentage point from the 39.3% rate experienced in fiscal year 1998."
The federal securities laws provide "safe harbor" status to certain
statements that go beyond historical information and which may provide an
indication of future results. Any conclusions or expectations drawn from the
statements in the press release or the Form 8-K or throughout this annual
report concerning matters that are not historical corporate financial results
are "forward-looking statements" that involve risks and uncertainties.
The Company's first quarter 1999 order expectations and sales expectations
for 1999 are based on the Company's current forecast of dealer orders and
planned sales at the retail store it plans to open in May 1999, and is
further dependent on the timing and extent of promotional and marketing
efforts undertaken by the Company as well as the timing and extent of product
receipts and shipments, the efficiency of information systems developed to
collect, compile and execute customer orders, and retailer and consumer
demand. Dealer orders are principally dependent on the amount, quality and
market acceptance of the new product introductions and retailer demand.
Dealer order patterns have historically varied in number, mix and timing, and
there can be no assurance that the order trend experience from January 3,
1999, through February 24, 1999, will continue. The Company's expectations
regarding earnings per share are based on the Company's sales expectations
and assume it will maintain its historical operating margin. The Company's
operating margin may be impacted by, amongst other factors, shifts in product
mix; exchange rate fluctuations with countries the Company imports from;
changes in ocean freight rates; and changes in the Company's historical
selling, general and administrative expense rate. Moreover, the statements in
the press release or the Form 8-K or throughout this annual report concerning
retail inventory levels, consumer demand and dealer expectations are based on
statistical research conducted by or for the Company, and assume that such
findings are correct and representative of market conditions as a whole.
Readers are cautioned that actual effective tax rates are dependent upon
numerous factors, and that the Company's expectation concerning the 1999
effective tax rate assumes realization of fiscal year 1999 sales expectations
and fiscal year 1999 operating margin assumptions referred to in the press
release. In addition, the factors which may impact sales, operating margin or
earnings stated in the press release can significantly impact the Company's
effective income tax rate.
If not mentioned above, other factors, including consumer acceptance of new
products; product development efforts; identifications and retention of
sculpting and other talent; completion of third party product manufacturing;
dealer reorders and order cancellations; control of operating expenses;
corporate cash flow application, including share repurchases; functionality
of information and operating systems; identification, completion and results
of acquisitions, investments and other strategic business initiatives; grants
of stock options or other equity equivalents; actual or deemed exercises of
stock options; and industry, general economic, regulatory, transportation and
international trade and monetary conditions, can significantly impact the
Company's sales, earnings and earnings per share. Actual results may vary
materially from forward-looking statements and the assumptions on which they
are based. The Company undertakes no obligation to update or publish in the
future any forward-looking statements.
16
<PAGE>
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) January 2, 1999 January 3, 1998
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 2,783 $ 37,361
Accounts receivable, net of allowances of $12,908 and $13,057, respectively 26,170 23,004
Inventories 18,287 18,070
Deferred taxes 6,704 6,303
Other current assets 3,957 3,008
- ---------------------------------------------------------------------------------------------------------------------------
Total current assets 57,901 87,746
Property and equipment, net 17,722 12,753
Goodwill, net of accumulated amortization of $25,862 and $21,683, respectively 141,528 143,491
Trademarks and other intangibles, net of accumulated amortization
of $3,097 and $2,349, respectively 16,003 15,551
Other assets 129 154
- ---------------------------------------------------------------------------------------------------------------------------
$ 233,283 $ 259,695
- ---------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt $ - $ 20,000
Accounts payable 11,100 9,973
Commissions payable 3,062 3,955
Other current liabilities 14,463 12,961
- ---------------------------------------------------------------------------------------------------------------------------
Total current liabilities 28,625 46,889
Deferred taxes 5,923 6,151
Long-term debt 20,000 20,000
Commitments and contingencies (Note 6)
STOCKHOLDERS' EQUITY:
Preferred stock, $.01 par value; authorized 20,000 shares; no shares issued - -
Common stock, $.01 par value; authorized 100,000 shares; issued and
outstanding 21,900 and 21,765 shares, respectively 219 218
Additional paid-in capital 48,295 44,645
Treasury stock, at cost; 3,876 and 2,199 shares, respectively (113,302) (55,215)
Retained earnings 243,523 197,007
- ---------------------------------------------------------------------------------------------------------------------------
Total stockholders' equity 178,735 186,655
- ---------------------------------------------------------------------------------------------------------------------------
$ 233,283 $ 259,695
- ---------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
17
<PAGE>
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Year Ended Year Ended Year Ended
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) January 2, 1999 January 3, 1998 December 28, 1996
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net sales $ 243,365 $ 219,496 $ 228,775
Cost of sales 100,782 94,040 95,190
- ----------------------------------------------------------------------------------------------------------------------------
Gross profit 142,583 125,456 133,585
Operating expenses:
Selling, general and administrative 56,648 49,772 47,853
Amortization of goodwill, trademarks and
other intangibles 4,926 4,577 4,577
- ----------------------------------------------------------------------------------------------------------------------------
Total operating expenses 61,574 54,349 52,430
- ----------------------------------------------------------------------------------------------------------------------------
Income from operations 81,009 71,107 81,155
Other expense (income):
Interest expense 4,817 4,362 6,063
Gain on sale of aircraft - (2,882) -
Other, net (397) (1,086) (648)
- ----------------------------------------------------------------------------------------------------------------------------
Income before income taxes 76,589 70,713 75,740
Provision for income taxes 30,073 27,932 29,796
- ----------------------------------------------------------------------------------------------------------------------------
Net income $ 46,516 $ 42,781 $ 45,944
- ----------------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------
Net income per common share $ 2.49 $ 2.06 $ 2.13
- ----------------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------
Net income per common share assuming dilution $ 2.45 $ 2.05 $ 2.11
- ----------------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
18
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended Year Ended Year Ended
(IN THOUSANDS) January 2, 1999 January 3, 1998 December 28, 1996
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 46,516 $ 42,781 $ 45,944
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation 2,385 2,031 1,721
Amortization of goodwill, trademarks and
other intangibles 4,926 4,577 4,577
Provision for uncollectible accounts receivable 888 1,087 2,014
Gain on sale of aircraft - (2,882) -
Compensation expense - common stock options - - 14
Deferred taxes (629) (2,774) (37)
Changes in assets and liabilities:
Accounts receivable (4,054) 11,512 (3,349)
Inventories 186 2,456 8,533
Other assets (961) (1,337) 502
Accounts payable 1,127 2,355 1,019
Commissions payable (893) (728) 212
Other current liabilities 2,582 4,882 (1,379)
- ---------------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 52,073 63,960 59,771
- ---------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (6,750) (7,829) (1,507)
Proceeds from sale of aircraft - 8,567 -
Acquisitions (4,660) - -
- ---------------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) investing activities (11,410) 738 (1,507)
- ---------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from the exercise of common stock options 2,846 1,473 336
Borrowings on revolving credit agreement 75,500 17,985 34,338
Principal payments on revolving credit agreement (75,500) (17,985) (34,338)
Purchases of treasury stock (58,087) (55,215) -
Principal payments on long-term debt (20,000) (20,000) (20,000)
- ---------------------------------------------------------------------------------------------------------------------------
Net cash used in financing activities (75,241) (73,742) (19,664)
- ---------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents (34,578) (9,044) 38,600
Cash and cash equivalents at beginning of period 37,361 46,405 7,805
- ---------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of period $ 2,783 $ 37,361 $ 46,405
- ---------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
</TABLE>
19
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Unearned
Additional Compensation Total
Common Stock Paid-In on Common Treasury Retained Stockholders'
(IN THOUSANDS) Shares Amount Capital Stock Options Stock Earnings Equity
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance as of December 30, 1995 21,546 $215 $41,803 $(14) $ - $108,282 $150,286
Net income - - - - - 45,944 45,944
Shares issued upon the exercise
of common stock options 38 1 512 - - - 513
Common stock options vested - - - 14 - - 14
- -------------------------------------------------------------------------------------------------------------------------------
Balance as of December 28, 1996 21,584 216 42,315 - - 154,226 196,757
Net income - - - - - 42,781 42,781
Shares issued upon the exercise
of common stock options 181 2 2,330 - - - 2,332
Shares repurchased (2,199) - - - (55,215) - (55,215)
- -------------------------------------------------------------------------------------------------------------------------------
Balance as of January 3, 1998 19,566 218 44,645 - (55,215) 197,007 186,655
Net income - - - - - 46,516 46,516
Shares issued upon the exercise
of common stock options 131 1 3,541 - - - 3,542
Shares repurchased (1,677) - - - (58,087) - (58,087)
Other 3 - 109 - - - 109
- -------------------------------------------------------------------------------------------------------------------------------
Balance as of January 2, 1999 18,023 $219 $48,295 $ - $(113,302) $243,523 $178,735
- -------------------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------------------
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
</TABLE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
1 SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES
BUSINESS The Company is engaged in the original design, importation and
wholesale distribution of specialty giftware products. The majority of the
Company's products are developed and designed by the Company's in-house creative
team and are manufactured for the Company by independently owned foreign
manufacturers located primarily in the Pacific Rim. The Company's customer base
and accounts receivable are primarily comprised of, and are due from, retail
stores of various sizes located throughout the United States and Canada.
PRINCIPLES OF CONSOLIDATION The accompanying consolidated financial statements
of the Company include the accounts of the Company and its subsidiaries. All
significant intercompany accounts and transactions have been eliminated in
consolidation.
FISCAL YEAR END The Company's policy is to end its fiscal year on the Saturday
closest to December 31. The years ended January 2, 1999, and December 28, 1996,
include 52 weeks, and the year ended January 3, 1998, includes 53 weeks.
CASH AND CASH EQUIVALENTS All highly liquid debt instruments with original
maturities of three months or less are considered to be cash equivalents and are
reported as cash and cash equivalents on the consolidated balance sheets.
INVENTORIES Inventories consist of finished goods and are stated at the lower of
average cost, which approximates first-in, first-out cost, or market value. The
Company records inventory at the date of taking title, which at certain times
during the year results in significant in-transit quantities, as inventory is
sourced primarily from China, Taiwan and other Pacific Rim countries. Each
period the Company provides for identified, unsalable and slow moving inventory.
20
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
PROPERTY AND EQUIPMENT Property and equipment are stated at cost. Depreciation
is computed on a straight-line method over the estimated useful lives of the
assets, ranging from 2 to 45 years.
Major improvements and replacements of property are capitalized. Maintenance,
repairs and minor improvements are expensed. Upon retirement or other
disposition of property, applicable cost and accumulated depreciation are
removed from the accounts. Any gains or losses are included in earnings.
GOODWILL Goodwill represents the excess of cost over the fair value of acquired
net assets of the Company at the acquisition date and is being amortized on a
straight-line basis over 30 to 40 years. The Company periodically evaluates the
recoverability of goodwill based on an analysis of estimated future undiscounted
cash flows.
TRADEMARKS AND OTHER INTANGIBLE ASSETS Trademarks and other intangible assets
acquired are being amortized on a straight-line basis over 3 to 40 years. The
Company periodically evaluates the recoverability of trademarks based on an
analysis of estimated future undiscounted cash flows.
REVENUE RECOGNITION Revenues are recognized when products are shipped, net of an
allowance for returns.
INCOME TAXES Deferred income taxes are recognized for the tax consequences in
future years of differences between the tax bases of assets and liabilities and
their financial reporting amounts at each year end based on enacted tax laws and
statutory tax rates applicable to the periods in which the differences are
expected to affect taxable income.
FOREIGN CURRENCY TRANSLATION The Company uses the United States dollar as the
functional currency of its foreign operations. Accordingly, translation gains
and losses resulting from the remeasurement of foreign operations' financial
statements are reflected in the accompanying statements of income.
FOREIGN EXCHANGE CONTRACTS The Company imports most of its products and, while
the majority of these purchases are denominated in U.S. dollars, some of the
purchases are denominated in foreign currency. In addition, the Company's sales
to Canada are denominated in Canadian dollars. To hedge its foreign exchange
exposure, the Company may enter into foreign exchange contracts. The foreign
exchange contracts reduce the Company's overall exposure to exchange rate
movements, since the gains and losses on these contracts offset gains and losses
on the transactions being hedged. Gains or losses on these contracts will be
recognized and included in cost of sales at the time the related inventory is
sold. The Company is exposed to credit risk to the extent of nonperformance by a
counterparty to the foreign currency contracts. However, the Company believes it
uses a strong financial counterparty in these transactions and that the
resulting credit risk under these hedging strategies is not significant.
FAIR VALUE OF FINANCIAL INSTRUMENTS The carrying amount of cash and cash
equivalents, accounts receivable, accounts payable and commissions payable
approximates fair value because of the short-term nature of these instruments.
Based on the borrowing rates currently available to the Company for bank loans
with similar terms and maturities, the Company also believes the carrying amount
of long-term debt approximates fair value. The fair value of the Company's
forward currency contracts is determined using the current spot rate. There were
no forward currency contracts outstanding at January 3, 1998, and January 2,
1999.
NET INCOME PER COMMON SHARE Net income per common share is calculated by
dividing net income by the weighted-average number of shares outstanding during
the period. Net income per common share assuming dilution reflects per share
amounts that would have resulted had the Company's outstanding stock options
been converted to common stock. See Note 11.
MANAGEMENT ESTIMATES The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
21
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
RECLASSIFICATIONS Certain reclassifications were made to the fiscal 1997 and
1996 consolidated financial statements in order to conform to the presentation
of the fiscal 1998 consolidated financial statements. These reclassifications
had no impact on net income or retained earnings as previously reported.
NEW ACCOUNTING STANDARDS In June 1997, the Financial Accounting Standards Board
("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 130,
REPORTING COMPREHENSIVE INCOME. Comprehensive income includes net income and
several other items that current accounting standards require to be recognized
outside of net income. This standard requires enterprises to display
comprehensive income and its components in financial statements; to classify
items of comprehensive income by their nature in financial statements; and to
display the accumulated balances of other comprehensive income in stockholders'
equity separately from retained earnings and additional paid-in capital. The
Company adopted SFAS No. 130 in fiscal 1998, and there were no items of other
comprehensive income for all periods presented.
In June 1997, the FASB issued SFAS No. 131, DISCLOSURE ABOUT SEGMENTS OF AN
ENTERPRISE AND RELATED INFORMATION, replacing SFAS No. 14 and its amendments.
This standard requires enterprises to report certain information about products
and services, activities in different geographic areas and reliance on major
customers, and to disclose certain operating segment information in their
financial statements. Operating segments are components of an enterprise for
which financial information is available and evaluated by the enterprise's chief
operating decision-maker in allocating resources and assessing performance. The
Company adopted SFAS No. 131 in fiscal 1998. The Company has determined that it
operates in one segment, specialty giftware. In addition, less than 3% of total
revenue is derived from customers outside the United States and less than 1% of
all long lived assets are located outside the United States. No customer
represents more than 3% of total revenue.
Effective January 4, 1998, the Company adopted Statement of Position (SOP) No.
98-1, ACCOUNTING FOR THE COSTS OF COMPUTER SOFTWARE DEVELOPED OR OBTAINED FOR
INTERNAL USE. SOP No. 98-1 provides guidance on accounting for costs associated
with computer software developed or obtained for internal use. Adoption of this
standard did not have a significant effect on the financial results of the
Company.
During 1998, the FASB issued SFAS No. 133, ACCOUNTING FOR DERIVATIVE INSTRUMENTS
AND HEDGING ACTIVITIES, which is effective for years beginning after June 15,
1999. The Company is currently evaluating the impact, if any, of this statement.
2 PROPERTY AND EQUIPMENT
Property and equipment is comprised of the following:
<TABLE>
<CAPTION>
Jan. 2, Jan. 3,
1999 1998
- ------------------------------------------------------------
<S> <C> <C>
Leasehold improvements $ 3,026 $ 1,253
Furniture and fixtures 2,585 1,758
Computer equipment 8,495 4,646
Other equipment 5,175 4,804
Building 6,764 6,288
Land 906 906
- -------------------------------------------------------------
- -------------------------------------------------------------
26,951 19,655
Less accumulated depreciation 9,229 6,902
- -------------------------------------------------------------
- -------------------------------------------------------------
Property and equipment, net $17,722 $12,753
- -------------------------------------------------------------
- -------------------------------------------------------------
</TABLE>
3 OTHER CURRENT LIABILITIES
Other current liabilities are comprised of the following:
<TABLE>
<CAPTION>
Jan. 2, Jan. 3,
1999 1998
- -----------------------------------------------------------
<S> <C> <C>
Accrued compensation
and benefits $4,698 $3,377
Income taxes payable 7,768 7,644
Deferred revenue 754 679
Accrued royalty fees 578 570
Other 665 691
- -----------------------------------------------------------
- -----------------------------------------------------------
$14,463 $12,961
- -----------------------------------------------------------
- -----------------------------------------------------------
</TABLE>
4 CREDIT AGREEMENT
Long-term debt is comprised of the following:
<TABLE>
<CAPTION>
Jan. 2, Jan. 3,
1999 1998
- -----------------------------------------------------------
<S> <C> <C>
Term loan $20,000 $40,000
Less current portion - 20,000
- -----------------------------------------------------------
- -----------------------------------------------------------
$20,000 $20,000
- -----------------------------------------------------------
- -----------------------------------------------------------
</TABLE>
22
<PAGE>
In March 1999, the Company entered into a new credit agreement providing a
$100 million revolving credit facility and a $150 million revolver/term loan.
The $150 million revolver/term loan converts to a four-year term loan after
one year. The revolver/term loan will have annual amortization payments of
15%, 20%, 25% and 40% of the amount outstanding at conversion in March 2001,
2002, 2003 and 2004, respectively.
The Company used the proceeds of the revolver/term loan to refinance the
remaining $20 million term loan under its former credit agreement. As of
January 2, 1999, the $20 million term loan has been classified as noncurrent
to reflect the refinancing. In connection therewith, the Company recorded
$1,700 in deferred financing fees, which will be amortized over the life of
the credit agreement.
The revolving line of credit provides for borrowings of up to $100,000, which
may be in the form of letters of credit, bankers acceptances and revolving
credit loans. The sum of the Company's revolving credit loans and bankers
acceptances may not exceed an aggregate of $30,000 during any one 30 consecutive
day period each calendar year. Borrowings under the credit agreement are subject
to certain borrowing base limitations (as defined). The revolving line of credit
provides for commitment fees of 0.25% to 0.50% per annum on the daily average of
the unused commitment.
The credit agreement allows the Company to choose between two interest rate
options in connection with its term loan and revolving credit loans. The
interest rate options are the Alternate Base Rate (as defined) or the Eurodollar
Rate (as defined) plus an applicable margin. The applicable margin ranges from
0.875% to 1.625% for Eurodollar Rate loans. The credit agreement expires March
19, 2004.
The credit agreement includes restrictions as to, among other things, the amount
of additional indebtedness, liens, contingent obligations, investments and
dividends. The credit agreement also requires maintenance of minimum levels of
interest coverage, net worth and maximum levels of leverage.
None of these restrictions are expected to have a material adverse effect on the
Company's ability to operate in the future. The Company has pledged the common
stock of its subsidiaries, direct and indirect, as collateral under the credit
agreement, and the Company and its subsidiaries, direct and indirect, have
guaranteed repayment of amounts borrowed under the credit agreement.
The Company paid interest of $4,859, $4,400 and $6,129 during the years ended
January 2, 1999, January 3, 1998, and December 28, 1996, respectively.
5 INCOME TAXES
The provision for income taxes consisted of the following:
<TABLE>
<CAPTION>
Year Year Year
Ended Ended Ended
Jan. 2, Jan. 3, Dec. 28,
1999 1998 1996
- ------------------------------------------------------------
<S> <C> <C> <C>
Current:
Federal $28,188 $28,225 $27,376
State 2,416 2,419 2,347
Foreign 98 62 110
Deferred (629) (2,774) (37)
- ------------------------------------------------------------
- ------------------------------------------------------------
$30,073 $27,932 $29,796
- ------------------------------------------------------------
- ------------------------------------------------------------
</TABLE>
The reconciliation between income tax expense based on statutory income tax
rates and the provision for income taxes per the consolidated statements of
income is as follows:
<TABLE>
<CAPTION>
Year Year Year
Ended Ended Ended
Jan. 2, Jan. 3, Dec. 28,
1999 1998 1996
- ------------------------------------------------------------
<S> <C> <C> <C>
Income taxes at federal
statutory rate $26,806 $24,750 $26,509
State income taxes, net
of federal income tax 1,915 1,768 1,893
Amortization of
goodwill 1,448 1,448 1,448
Other (96) (34) (54)
- ------------------------------------------------------------
Provision for
income taxes $30,073 $27,932 $29,796
- ------------------------------------------------------------
- ------------------------------------------------------------
</TABLE>
23
<PAGE>
The components of the net deferred tax asset were as follows:
<TABLE>
<CAPTION>
Jan. 2, Jan. 3,
1999 1998
- ------------------------------------------------------------
<S> <C> <C>
Deferred tax assets:
Accounts receivable
valuation allowances $ 4,793 $ 4,660
Inventory valuation allowances 1,638 1,469
Compensation expense -
common stock options 121 141
Accrued liabilities 400 264
Other 172 220
- ------------------------------------------------------------
Total deferred tax assets 7,124 6,754
Deferred tax liabilities:
Trademarks (5,739) (5,909)
Property and equipment (379) (440)
Other (225) (253)
- ------------------------------------------------------------
Total deferred tax liabilities (6,343) (6,602)
$ 781 $ 152
- ------------------------------------------------------------
- ------------------------------------------------------------
</TABLE>
The $781 net deferred tax asset at January 2, 1999, is presented as a net
deferred current asset of $6,704 and a net deferred noncurrent liability of
$5,923. The $152 net deferred tax asset at January 3, 1998, is presented as a
net deferred current asset of $6,303 and a net deferred noncurrent liability
of $6,151.
The Company paid income taxes of $29,829, $28,134 and $28,943 during the years
ended January 2, 1999, January 2, 1998, and December 28, 1996, respectively.
6 COMMITMENTS AND CONTINGENCIES
OPERATING LEASES The Company leases warehouse and office space, equipment and
showroom display facilities under renewable operating leases ranging from
three to twelve years in duration. In addition to the base rent, the Company
pays its proportionate share of taxes and special assessments and operating
expenses of the warehouse and showroom display facilities.
The following is a schedule of future annual minimum lease payments for
noncancelable operating leases as of January 2, 1999:
<TABLE>
<CAPTION>
<S> <C>
1999 $ 2,836
- -------------------------------------------------------------
2000 2,366
- -------------------------------------------------------------
2001 1,703
- -------------------------------------------------------------
2002 1,246
- -------------------------------------------------------------
2003 1,013
- -------------------------------------------------------------
Thereafter 3,273
- -------------------------------------------------------------
$12,437
- -------------------------------------------------------------
</TABLE>
The Company's rental expense was $2,533, $2,934 and $3,238 for the years
ended January 2, 1999, January 3, 1998, and December 28, 1996, respectively.
In January 1999, the Company entered into a letter of intent with a contractor
to lease a proposed distribution center in Minnesota. The Company plans to
consolidate its three current distribution centers into the proposed
distribution center by the end of 1999. The anticipated term of the lease will
be approximately ten years with options to renew the lease. The proposed lease
payments will approximate the combined lease payments of the Company's three
current distribution centers. The proposed lease payments are not included in
the schedule of future annual minimum lease payments above.
24
<PAGE>
During December 1997, the Company exercised its purchase option under an
aircraft lease agreement and subsequently sold the aircraft at its appraised
value to a former officer of the Company for $8,567, recognizing a gain of
$2,882.
LETTERS OF CREDIT The Company had outstanding standby and commercial letters of
credit amounting to $2,677 at January 2, 1999 relating primarily to purchase
commitments issued to foreign suppliers and vendors.
LEGAL PROCEEDINGS The Company is involved in various legal proceedings, claims
and governmental audits in the ordinary course of its business. In the opinion
of the Company's management, the ultimate disposition of these proceedings,
claims and audits will not have a material adverse effect on the financial
position or results of operations of the Company.
7 RETIREMENT PLAN
The Company has a profit sharing plan covering substantially all employees.
Contributions to this plan are at the discretion of the Board of Directors,
subject to certain limitations. Charges in respect to the Company's profit
sharing contributions were $1,025, $1,136 and $750 for the years ended
January 2, 1999, January 3, 1998, and December 28, 1996, respectively.
8 ACQUISITIONS
During 1998, the Company acquired substantially all of the assets of the
independent sales representative organizations that represented the Company's
products in California and several surrounding western states and New York and
several surrounding eastern states. Also during 1998, the Company acquired the
inventory and certain other assets of its Canadian distributor. The cost of
these acquisitions was $4.7 million, and was accounted for using the purchase
method of accounting. Goodwill recorded as a result of these transactions was
$3.4 million.
9 RELATED-PARTY TRANSACTIONS
In the ordinary course of business, the Company sells product to a floral and
nursery wholesaler and retailer, of which a former director of the Company is
an officer, director and stockholder. The Company had sales to this floral
and nursery business during the years ended January 2, 1999, January 3, 1998,
and December 28, 1996, of $1,448, $1,323 and $1,305, respectively.
During the years ended January 3, 1998, and December 28, 1996, the Company
paid $1,343 and $2,116 respectively, for aircraft management, transportation
and other expenses to an affiliate of a former director of the Company.
During 1997, the Company was reimbursed $467 by a former director and officer of
the corporation for use of the Company's aircraft.
On November 10, 1997, the Company purchased 250,000 shares of its common stock
from a former director and officer of the Company at a price per share equal to
the closing price in consolidated trading on that day.
25
<PAGE>
10 STOCKHOLDERS' EQUITY
STOCK-BASED COMPENSATION PLANS At January 2, 1999, the Company had four
stock-based compensation plans. Under the 1992, 1993, 1995 and 1997 stock
option plans, the Company may grant options to its directors, officers,
employees, consultants and advisors of the Company for up to 292,500,
1,000,000, 600,000 and 1,500,000 shares of common stock, respectively. All
employee options granted after the initial public offering have an exercise
price equal to the market value of the common stock at the date of grant,
generally have a term of 10 years, and generally are exercisable in equal
installments on each of the first, second and third anniversaries of the date
of the grant. At January 2, 1999, the shares available for granting under the
1992, 1993, 1995 and 1997 stock option plans were 7,333, 69,332, 88,651 and
1,022,572 shares, respectively.
A summary of the status of the Company's four stock option plans as of
January 2, 1999, January 3, 1998, and December 28, 1996, and changes during
the years ended on those dates is presented below:
<TABLE>
<CAPTION>
1998 1997 1996
Weighted- Weighted- Weighted-
Average Average Average
Stock Options Shares Exercise Price Shares Exercise Price Shares Exercise-Price
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of year 1,983,578 $26.25 1,291,908 $27.51 1,072,773 $31.73
Granted 97,000 31.87 806,000 23.07 433,350 20.48
Exercised (129,625) 21.90 (85,415) 13.53 (33,500) 9.36
Forfeited (226,596) 26.94 (28,915) 31.93 (180,715) 39.09
--------- --------- ---------
Outstanding at end of year 1,724,357 26.80 1,983,578 26.25 1,291,908 27.51
--------- --------- ---------
Options exercisable at end of year 1,085,026 28.95 798,258 30.43 536,583 28.09
Weighted-average fair value
of options granted during the year $14.89 $10.96 $10.75
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
The Company applies Accounting Principle's Board Opinion No. 25, ACCOUNTING
FOR STOCK ISSUED TO EMPLOYEES, and related interpretations in accounting for
its plans. Accordingly, no compensation cost has been recognized for options
granted since the initial public offering. Had compensation cost been
determined based on the fair value of the 1996, 1997 and 1998 stock option
grants consistent with the method of SFAS No. 123, ACCOUNTING FOR STOCK-BASED
COMPENSATION, the Company's net income and net income per common share
assuming dilution would have been reduced to the pro forma amounts indicated
below:
<TABLE>
<CAPTION>
1998 1997 1996
- ----------------------------------------------------------
<S> <C> <C> <C>
NET INCOME
As reported $46,516 $42,781 $45,944
Pro forma $44,223 $40,245 $43,410
NET INCOME PER COMMON SHARE ASSUMING DILUTION
As reported $2.45 $2.05 $2.11
Pro forma $2.33 $1.93 $2.00
- ----------------------------------------------------------
</TABLE>
In determining the preceding pro forma amounts under SFAS 123, the fair value
of each option grant is estimated on the date of grant using the
Black-Scholes option-pricing model with the following weighted-average
assumptions used for grants in 1998, 1997 and 1996, respectively: expected
volatility of 38, 38 and 46 percent; risk-free interest rates of 5.2 percent,
6.2 percent and 5.8 percent; expected lives of 6 years; and no expected
dividends. The effects of applying SFAS 123 in this pro forma disclosure are
not indicative of future compensation costs. SFAS 123 does not apply to
awards prior to 1995, and additional awards are anticipated.
26
<PAGE>
The following table summarizes information about the Company's stock option
plans at January 2, 1999:
<TABLE>
<CAPTION>
Number Weighted-Average Number
Range of Outstanding Remaining Weighted-Average Exercisable Weighted-Average
Exercise Prices at Jan. 2, 1999 Contractual Life Exercise Price at Jan. 2, 1999 Exercise Price
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$ 3.33 41,013 3.1 years $ 3.33 41,013 $ 3.33
18.00-21.47 907,830 7.9 20.94 403,583 20.70
21.48-37.75 775,514 6.8 34.90 640,430 35.79
--------- ---------
1,724,357 1,085,026
- ----------------------------------------------------------------------------------------------------------------------------
</TABLE>
In addition to stock options granted under the Company's stock option plans,
the Company granted options to purchase 30,000 shares of Common Stock to each
of four members of the Company's Board of Directors in December 1992. During
February 1993, the Company granted options to purchase 30,000 shares of
Common Stock to one member of the Board of Directors. These options are not
subject to a stock option plan. Such options are exercisable, have a term of
ten years from the date of grant, and have an exercise price of $3.33 per
share. During 1998, 1997 and 1996, members of the Board of Directors
exercised 2,000, 95,000 and 5,000 options, respectively. At January 2, 1999,
directors options to purchase 38,000 shares of Common Stock were exercisable
at $3.33 per share.
SHAREHOLDER RIGHTS PLAN In April 1997, the Company adopted a shareholder
rights plan. Under the shareholder rights plan, each shareholder received a
dividend of one preferred share purchase right for each share held of the
Company's common stock. Each right entitles the holder to purchase one
one-thousandth of a share of Series A Participating Preferred Stock at an
exercise price of $100, subject to adjustment, or at the discretion of the
Board of Directors of the Company, the right to purchase common stock of the
Company at a 50% discount. The rights become exercisable only upon the
occurrence of certain events involving a buyer acquiring 18.5% or greater
beneficial ownership in the Company's common stock or the announcement of a
tender offer or exchange offer which, if consummated, would give the buyer
beneficial ownership of an 18.5% or greater position in the Company.
Preferred share purchase rights owned by the buyer become null and void
following this occurrence. The rights will expire April 2007, and the Company
may redeem the rights at any time (prior to the occurrence of a specified
event) at a price of one cent per right. If the Company is acquired in a
merger or similar transaction after such an occurrence, all rights holders,
except the buyer, will have the right to purchase stock in the buyer at a 50%
discount.
11 INCOME PER COMMON SHARE
The following tables reconcile net income per common share and net income per
common share assuming dilution:
<TABLE>
<CAPTION>
1998 1997 1996
- --------------------------------------------------------------------
<S> <C> <C> <C>
Net income $46,516 $42,781 $45,944
Weighted-average
number of shares
outstanding 18,676,000 20,744,000 21,560,000
Net income per
common share $2.49 $2.06 $2.13
- --------------------------------------------------------------------
<CAPTION>
1998 1997 1996
- --------------------------------------------------------------------
<S> <C> <C> <C>
Net income $46,516 $42,781 $45,944
Weighted-average
number of shares
outstanding 18,676,000 20,744,000 21,560,000
Dilutive impact of
options outstanding 284,000 152,000 199,000
- --------------------------------------------------------------------
Weighted-average
number of shares and
potential dilutive
shares outstanding 18,960,000 20,896,000 21,759,000
Net income per
common share
assuming dilution $2.45 $2.05 $2.11
- --------------------------------------------------------------------
</TABLE>
Options to purchase 662,000 shares of common stock at exercise prices between
$34 and $38 per share were outstanding at January 2, 1999, but were not
included in the computation of net income per common share assuming dilution
because the options exercise prices were greater than the average market
price of the common stock.
27
<PAGE>
MANAGEMENT'S RESPONSIBILITY FOR
FINANCIAL REPORTING
Management is responsible for the preparation and accuracy of the
consolidated financial statements and other information included in this
report. The consolidated financial statements have been prepared in
conformity with generally accepted accounting principles using, where
appropriate, management's best estimates and judgments.
The Company maintains an internal control structure that is adequate to
provide reasonable assurance that the assets are safeguarded from loss or
unauthorized use. This structure produces records adequate for preparation of
financial information. We believe the Company's internal control structure is
effective, and the cost of the internal control structure does not exceed the
benefits obtained.
The Board of Directors reviews the financial statements and reporting
practices of the Company through its Audit Committee, which is composed
entirely of directors who are not officers or employees of the Company. The
Audit Committee meets with the independent auditors and management to discuss
audit scope and results and to consider internal control and financial
reporting matters. The independent auditors have direct unrestricted access
to the Audit Committee. The entire Board of Directors reviews the Company's
financial performance and financial plan.
/s/ Susan E. Engel
Susan E. Engel
Chairwoman and Chief Executive Officer
INDEPENDENT AUDITORS' REPORT
TO THE BOARD OF DIRECTORS AND
STOCKHOLDERS OF DEPARTMENT 56, INC.
We have audited the consolidated balance sheets of Department 56, Inc. and
subsidiaries (the "Company") as of January 2, 1999 and January 3, 1998 and
the related consolidated statements of income, cash flows and stockholders'
equity for the years ended January 2, 1999, January 3, 1998, and December 28,
1996. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of the Company at January 2, 1999
and January 3, 1998 and the results of its operations and its cash flows for
the years ended January 2, 1999, January 3, 1998, and December 28, 1996 in
conformity with generally accepted accounting principles.
/s/ Deloitte & Touche LLP
Minneapolis, Minnesota
February 12, 1999, except for Note 4 thereto, as to which
the date is March 19, 1999.
28
<PAGE>
CORPORATE AND STOCKHOLDER INFORMATION
BOARD OF DIRECTORS
SUSAN E. ENGEL (1),(5) GARY S. MATTHEWS (2)
CHAIRWOMAN AND PRESIDENT AND
CHIEF EXECUTIVE OFFICER CHIEF EXECUTIVE OFFICER
DEPARTMENT 56, INC. DERBY CYCLE CORPORATION
JAY CHIAT (3) STEVEN G. ROTHMEIER (1),(2),(4)
INVESTOR/CONSULTANT CHAIRMAN AND
CHIEF EXECUTIVE OFFICER
MAXINE CLARK (2),(3) GREAT NORTHERN CAPITAL
FOUNDER AND
CHIEF EXECUTIVE OFFICER VIN WEBER (3),(4),(5)
BUILD-A-BEAR WORKSHOP PARTNER
CLARK & WEINSTOCK INC.
WM. BRIAN LITTLE (1),(3),(5)
PRIVATE INVESTOR (1) MEMBER OF EXECUTIVE COMMITTEE
(2) MEMBER OF AUDIT COMMITTEE
(3) MEMBER OF COMPENSATION COMMITTEE
(4) MEMBER OF STOCK INCENTIVE COMMITTEE
(5) MEMBER OF NOMINATING COMMITTEE
OFFICERS
SUSAN E. ENGEL TIMOTHY J. SCHUGEL
CHAIRWOMAN AND CHIEF VICE PRESIDENT - FINANCE AND
EXECUTIVE OFFICER SOURCING MANAGEMENT
DAVID W. DEWEY JOAN M. SERENA
EXECUTIVE VICE PRESIDENT - SENIOR VICE PRESIDENT -
OVERSEAS OPERATIONS CONSUMER AND DEALER
MARKETING
BRETT D. HEFFES
VICE PRESIDENT - GREGORY G. SORENSEN
CORPORATE DEVELOPMENT VICE PRESIDENT - MANAGEMENT
INFORMATION SYSTEMS
MARK R. KENNEDY
SENIOR VICE PRESIDENT AND DAVID H. WEISER
CHIEF FINANCIAL OFFICER SENIOR VICE PRESIDENT -
LEGAL/HUMAN RESOURCES AND
YEH-HUANG LIN SECRETARY
VICE PRESIDENT -
D56 TRADING BRUCE R. WOLLAK
VICE PRESIDENT -
ARETE PASSAS D56 SALES
EXECUTIVE VICE PRESIDENT -
MARKETING
ROBERT S. ROSE
VICE PRESIDENT -
DISTRIBUTION AND OPERATIONS
STOCKHOLDER INFORMATION
CORPORATE OFFICES INDEPENDENT AUDITORS
One Village Place Deloitte & Touche LLP
6436 City West Parkway
Eden Prairie, MN 55344 STOCK LISTING
New York Stock Exchange
TRANSFER AGENT Symbol "DFS"
Chase Mellon
Shareholders Service ANNUAL MEETING
450 West 33rd Street 1:30 p.m.
New York, NY 10001 May 10, 1999
www.chasemellon.com Mall of America
Playhouse Theater
Bloomington, MN
DEPARTMENT 56, INC. MARKET PRICE (PER SHARE)
<TABLE>
<CAPTION>
1998 HIGH LOW
- -------------------------------------------
<S> <C> <C>
First Quarter $39.00 $26.63
- -------------------------------------------
Second Quarter $39.31 $32.19
- -------------------------------------------
Third Quarter $36.75 $26.25
- -------------------------------------------
Fourth Quarter $37.63 $22.94
- -------------------------------------------
<CAPTION>
1997 HIGH LOW
- -------------------------------------------
<S> <C> <C>
First Quarter $24.75 $16.88
- -------------------------------------------
Second Quarter $23.00 $17.25
- -------------------------------------------
Third Quarter $29.81 $21.00
- -------------------------------------------
Fourth Quarter $31.75 $27.44
- -------------------------------------------
</TABLE>
Copies of Department 56's annual report to the Securities and Exchange
Commission on Form 10-K may be obtained without charge by contacting Investor
Relations, Department 56, Inc., (612) 944-5600.
As of February 25, 1999, there were 913 record holders of the Company's
common stock.
CONSUMER INFORMATION
The dealer nearest you can be identified by calling our consumer information
line at 1-800-LIT-TOWN (1-800-548-8696) or by accessing our Web site at
www.D56.com. Our Web site also includes other consumer information.
"HARLEY-DAVIDSON" USED UNDER AUTHORITY OF THE HARLEY-DAVIDSON MOTOR COMPANY.
THE WIZARD OF OZ AND ALL RELATED CHARACTERS AND ELEMENTS ARE TRADEMARKS OF
TURNER ENTERTAINMENT CO.(C)1999. JUDY GARLAND AS DOROTHY FROM THE WIZARD OF OZ.
"MADELINE" PROPERTY AND CHARACTERS USED UNDER LICENSE OF MADELINE AND BARBARA
BEMELMANS, AND DIC ENTERTAINMENT, L.P.
"MCDONALD'S" USED UNDER LICENSE FROM MCDONALD'S CORPORATION.
"HERSHEY'S" USED UNDER LICENSE OF HERSHEY FOODS CORPORATION.
"FORD" USED UNDER LICENSE OF FORD MOTOR COMPANY.
<PAGE>
EXHIBIT 21.1
SUBSIDIARIES OF THE COMPANY
<TABLE>
<CAPTION>
Name of Subsidiary Jurisdiction
------------------ ------------
<S> <C>
Department 56 Retail, Inc. Minnesota
Department 56 Sales, Inc. Minnesota
Can 56, Inc. Minnesota
FL56 Intermediate Corp. Delaware
D 56, Inc. Minnesota
Department 56 Trading Co., Ltd. Delaware
Browndale Tanley Limited Hong Kong
</TABLE>
<PAGE>
EXHIBIT 23.1
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in Registration Statement
No. 33-95704, No. 33-79960, and No. 333-41639 of Department 56, Inc. and
subsidiaries on Form S-8 of our report on the consolidated financial statements
dated February 12, 1999, except for Note 4 thereto, as to which the date is
March 19, 1999, and our report dated March 19, 1999 on the financial statement
schedules, appearing in and incorporated by reference in this Annual Report on
Form 10-K of Department 56, Inc. and subsidiaries for the year ended January 2,
1999.
Deloitte & Touche LLP
Minneapolis, Minnesota
March 31, 1999
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JAN-02-1999
<PERIOD-END> JAN-02-1999
<CASH> 2,783
<SECURITIES> 0
<RECEIVABLES> 26,170
<ALLOWANCES> 0
<INVENTORY> 18,287
<CURRENT-ASSETS> 57,901
<PP&E> 17,722
<DEPRECIATION> 0
<TOTAL-ASSETS> 233,283
<CURRENT-LIABILITIES> 28,625
<BONDS> 20,000
0
0
<COMMON> 219
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 233,283
<SALES> 243,365
<TOTAL-REVENUES> 243,365
<CGS> 100,782
<TOTAL-COSTS> 100,782
<OTHER-EXPENSES> 61,574
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 4,817
<INCOME-PRETAX> 76,589
<INCOME-TAX> 30,073
<INCOME-CONTINUING> 46,516
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 46,516
<EPS-PRIMARY> 2.49
<EPS-DILUTED> 2.45
</TABLE>
